##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended: March 31, 2006
 Or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 333-85503
 Telecomunicaciones de Puerto Rico, Inc.
  Commonwealth of Puerto Rico
    
    66-0566178(STATE OR OTHER JURISDICTION OF
    
    (IRS EMPLOYER IDENTIFICATION NO.)INCORPORATION OR ORGANIZATION)1515 FD Roosevelt AvenueGuaynabo, Puerto Rico
    
    00968(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
    
    (ZIP CODE)
 787-792-6052
   þ o
  o o þ
  o þ
    1




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##### 



INDEX
 Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
  
 Part I. Financial InformationItem 1.
    
    Financial Statements (Unaudited)
    
    
    3Consolidated Balance SheetsMarch 31, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations Three Months Ended March 31, 2006
and 2005
    
    
    4Consolidated Statements of Changes in Shareholders EquityThree
Months Ended March 31, 2006 and Year Ended December 31, 2005
    
    
    5Consolidated Statements of Cash FlowsThree Months Ended March 31, 2006
and 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    42Item 4.
    
    Controls and Procedures
    
    
    43Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    44Item 1A.
    
    Risk Factors
    
    
    44Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3.
    
    Defaults Upon Senior Securities
    
    
    44Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    44Item 5.
    
    Other Information
    
    
    44Item 6.
    
    Exhibits
    
    
    44Signatures
    
    
    45Exhibit Index
    
    
    46Share and Publication Rights Purchase AgreementCertification of Principal Executive OfficerCertification of Principal Financial OfficerCertification Pursuant to Section 906
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PART I            FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Balance Sheets
 (Unaudited)March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    249,904
    
    
    $
    55,086Accounts receivable, net of allowance for doubtful accounts
of $83,180 and $106,090 in 2006 and 2005, respectively
    
    
    234,008
    
    
    
    227,629Deferred income tax
    
    
    24,103
    
    
    
    18,324Inventory and supplies, net
    
    
    35,424
    
    
    
    47,431Prepaid expenses
    
    
    24,047
    
    
    
    20,571Total current assets
    
    
    567,486
    
    
    
    369,041PROPERTY, PLANT AND EQUIPMENT, net
    
    
    1,313,923
    
    
    
    1,351,510GOODWILL
    
    
    126,927
    
    
    
    126,927INTANGIBLES, net
    
    
    207,050
    
    
    
    209,357DEFERRED INCOME TAX
    
    
    193,651
    
    
    
    205,853OTHER ASSETS
    
    
    96,855
    
    
    
    115,271TOTAL ASSETS
    
    $
    2,505,892
    
    
    $
    2,377,959LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    400,005
    
    
    $
    452,042Other current liabilities
    
    
    200,019
    
    
    
    172,961Total current liabilities
    
    
    600,024
    
    
    
    625,003LONG-TERM DEBT, excluding current portion
    
    
    299,140
    
    
    
    299,812PENSION AND OTHER POST-EMPLOYMENT BENEFITS
    
    
    574,021
    
    
    
    563,395OTHER NON-CURRENT LIABILITIES
    
    
    124,541
    
    
    
    136,345Total liabilities
    
    
    1,597,726
    
    
    
    1,624,555MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
    
    
    17,253
    
    
    
    16,555SHAREHOLDERS EQUITY:Common stock
    
    
    705,516
    
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    (26,042
    )Retained earnings
    
    
    382,750
    
    
    
    228,877Accumulated other comprehensive loss, net of taxes
    
    
    (171,311
    )
    
    
    (171,502
    )Total shareholders equity
    
    
    890,913
    
    
    
    736,849TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    2,505,892
    
    
    $
    2,377,959
 The accompanying notes are an integral part of these financial statements.
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##### Table of Contents



Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Operations
 For the Three Months endedMarch 31,2006
    
    
    2005(Unaudited)REVENUES:Local services
    
    $
    157,764
    
    
    $
    149,249Access services
    
    
    53,838
    
    
    
    65,782Long distance services
    
    
    17,207
    
    
    
    17,271Cellular services
    
    
    85,015
    
    
    
    65,655Directory services and other
    
    
    183,418
    
    
    
    14,386Total revenues
    
    
    497,242
    
    
    
    312,343OPERATING COSTS AND EXPENSES:Cost of services and sales
    
    
    92,713
    
    
    
    75,527Selling, general and administrative expenses
    
    
    140,757
    
    
    
    128,344Depreciation and amortization
    
    
    62,087
    
    
    
    61,849Total operating costs and expenses
    
    
    295,557
    
    
    
    265,720OPERATING INCOME
    
    
    201,685
    
    
    
    46,623OTHER INCOME (EXPENSE):Interest expense, net
    
    
    (12,048
    )
    
    
    (11,088
    )Equity income from joint venture
    
    
    665
    
    
    
    863Gain on sale of interest in joint venture
    
    
    27,619
    
    
    
    Minority interest in consolidated subsidiary
    
    
    (698
    )
    
    
    (661
    )Total other income (expense), net
    
    
    15,538
    
    
    
    (10,886
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    217,223
    
    
    
    35,737INCOME TAX EXPENSE
    
    
    47,791
    
    
    
    13,749NET INCOME
    
    $
    169,432
    
    
    $
    21,988
 The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Changes in Shareholders Equity
 AccumulatedOtherCommon
    
    
    Deferred ESOP
    
    
    Retained
    
    
    ComprehensiveStock
    
    
    Compensation
    
    
    Earnings
    
    
    Loss
    
    
    TotalBALANCE DECEMBER 31, 2004
    
    $
    704,386
    
    
    $
    (25,172
    )
    
    $
    210,956
    
    
    $
    (166,705
    )
    
    $
    723,465Dividends paid
    
    
    
    
    
    
    
    
    
    
    (61,467
    )
    
    
    
    
    
    
    (61,467
    )Release of ESOP shares
    
    
    1,130
    
    
    
    1,130
    
    
    
    
    
    
    
    
    
    
    
    2,260Advance to ESOP
    
    
    
    
    
    
    (2,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,000
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    79,388
    
    
    
    
    
    
    
    79,388Other comprehensive loss, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,797
    )
    
    
    (4,797
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,591BALANCE DECEMBER 31, 2005
    
    
    705,516
    
    
    
    (26,042
    )
    
    
    228,877
    
    
    
    (171,502
    )
    
    
    736,849(UNAUDITED)Dividends declared
    
    
    
    
    
    
    
    
    
    
    (15,559
    )
    
    
    
    
    
    
    (15,559
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    169,432
    
    
    
    
    
    
    
    169,432Other comprehensive income, net of taxes:Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    191Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,623BALANCE MARCH 31, 2006
    
    $
    705,516
    
    
    $
    (26,042
    )
    
    $
    382,750
    
    
    $
    (171,311
    )
    
    $
    890,913
 The accompanying notes are an integral part of these financial statements.
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Telecomunicaciones de Puerto Rico, Inc. and Subsidiaries
 
 Consolidated Statements of Cash Flows
 For the Three Months Ended March 31,2006
    
    
    2005(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    169,432
    
    
    $
    21,988Adjustments to reconcile net income to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    62,087
    
    
    
    61,849Provision for uncollectible accounts
    
    
    12,172
    
    
    
    12,997Deferred income tax expense
    
    
    6,423
    
    
    
    8,438Employee retirement benefits expense
    
    
    27,875
    
    
    
    24,700Equity income from joint venture
    
    
    (665
    )
    
    
    (863
    )Gain on sale of interest in joint venture
    
    
    (27,619
    )
    
    
    Minority interest in consolidated subsidiary
    
    
    698
    
    
    
    661Changes in assets and liabilities:Accounts receivable
    
    
    (18,551
    )
    
    
    (14,237
    )Inventory and supplies
    
    
    12,007
    
    
    
    5,104Prepaid expenses and other assets
    
    
    15,663
    
    
    
    (5,204
    )Other current and non-current liabilities
    
    
    125
    
    
    
    (25,977
    )Pension and other post-employment benefits
    
    
    (17,249
    )
    
    
    (104,529
    )Net cash provided by (used in) operating activities
    
    
    242,398
    
    
    
    (15,073
    )CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    (22,194
    )
    
    
    (27,000
    )Net proceed from sale of interest in joint venture
    
    
    26,651
    
    
    
    Net cash provided by (used in) investing activities
    
    
    4,457
    
    
    
    (27,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments of short-term debt, including
capital leases
    
    
    (52,037
    )
    
    
    (40
    )Net cash used in financing activities
    
    
    (52,037
    )
    
    
    (40
    )NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    194,818
    
    
    
    (42,113
    )CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD
    
    
    55,086
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    
    249,904
    
    
    
    21,233
 The
    
    accompanying notes are an integral part of these financial statements.
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TELECOMUNICACIONES DE PUERTO RICO, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1.
    
    Business / Corporate StructureTelecomunicaciones de Puerto Rico, Inc., a Puerto Rico corporation (weor the Company), holds
100% of the common stock of Puerto Rico Telephone Company, Inc. (PRTC), PRT Larga Distancia,
Inc. (PRTLD), and Datacom Caribe, Inc. (Datacom). The Company holds a 67% interest in
Coqui.net Corporation (Coqui.net), in which Popular, Inc., one of our shareholders, holds the
remaining 33% interest. The Company also held a 24% interest in Verizon Information Services
Puerto Rico, Inc. S en C. (VISI), in which GTE Holdings (Puerto Rico) LLC, our majority
shareholder, held a 36% interest. On March 31, 2006, the Company sold its equity interest in
the Puerto Rico directory operation and its right to receive 35% of the revenues from the
publication of directory advertising. The Company will continue sharing data for the
publication of directories under a new amended publishing agreement, and will also offer billing
and collection services for the directory advertising sales to its service subscribers.
Directory publishing revenues were generated through VISI until March 31, 2006. As incumbent
local exchange carrier for the island of Puerto Rico, we provide both wireline and wireless
services (the latter using the Verizon Wireless brand name). The Companys off-island long
distance service is provided by PRTLD and its Internet access service is provided by Coqui.net.GTE Corporation (GTE), through its subsidiary GTE Holdings (Puerto Rico) LLC, acquired a 40%
interest in and management control over the Company on March 2, 1999 from Puerto Rico Telephone
Authority (PRTA), an entity of the Commonwealth of Puerto Rico (the Acquisition). In
connection with the Acquisition, Popular, Inc. acquired a 10% interest in the Company. GTE and
Bell Atlantic Corporation merged on June 30, 2000 to form Verizon Communications Inc.
(Verizon). On January 25, 2002, GTE Holdings (Puerto Rico) LLC and Popular, Inc. acquired an
additional 12% and 3% interest in the Company, respectively, by exercising an option each had
held since the Acquisition. Verizon and Popular, Inc. acquired the additional ownership
interest from PRTA Holdings Corp., a subsidiary of the PRTA (PRTA Holdings). Verizon and
Popular, Inc. paid PRTA Holdings $138 million and $34 million, respectively, for a total of $172
million in cash for the additional 3,750,000 shares at a $45.9364 per share price established in
a share option agreement entered into at the time of the Acquisition. As a result, Verizon owns
52%, Popular owns 13%, PRTA owns 28% and the Employee Stock Ownership Plan (ESOP) owns 7% of
the outstanding capital stock of the Company. The Company is an affiliate of Verizon, which
consolidates the Companys financial results with its own financial results.2. Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for interim financial information and the
rules and regulations of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles for annual financial statements have been condensed or
omitted pursuant to such rules and regulations. Management believes the financial statements
include all adjustments and recurring accruals necessary to present fairly the results of its
operations and financial condition for the interim periods shown. The results for the interim
periods are not necessarily indicative of results for the full year. The Consolidated Balance
Sheet at December 31, 2005 was derived from audited financial statements and should be read in
conjunction with the notes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.Impairment or Disposal of Long-lived AssetsAssets are assessed for impairment when changes in circumstances indicate that their carrying
values are not recoverable in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Losses are recognized in circumstances where impairment exists,
at the amount by which the carrying value of assets exceeds fair value. Fair value is determined
based on quoted market prices, if not available, the estimate of fair value is based on
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various valuation techniques, including a discounted value of estimated future cash flows and
fundamental analysis.Goodwill and Other IntangiblesGoodwillGoodwill is the excess of the acquisition cost of businesses over the fair value of the
identifiable net assets acquired. SFAS No. 142 Goodwill and Other Intangible Assets no longer
permits the amortization of goodwill and other indefinite-lived intangible assets acquired in a
business combination. Impairment testing for goodwill is performed at least annually unless
indicators of impairment exist according the SFAS No. 142. The impairment test for goodwill uses
a two-step approach, which is performed at the reporting unit level. Step one compares the fair
value of the reporting unit (calculated using a discounted cash flow method) to its carrying
value. If the carrying value exceeds the fair value, there is a potential impairment and step
two must be performed. Step two compares the carrying value of the reporting units goodwill to
its implied fair value (i.e., fair value of reporting unit less the fair value of the units
assets and liabilities, including identifiable intangible assets). If the carrying value of
goodwill exceeds its implied fair value, the excess is required to be recorded as an impairment.
The Company is currently undergoing its annual evaluation of goodwill using the fair value
approach for each reporting unit to determine if there is an impairment exposure and the impact
it would have on the Companys results of operations for 2006.Indefinite Life Intangible AssetsThe indefinite life intangible assets are those intangibles not subject to amortization and
consist principally of wireline concessions and FCC cellular licenses.A significant portion of the intangible assets are cellular licenses that provide wireless
operations with the exclusive right to utilize designated radio frequency spectrum to provide
cellular communication services. While licenses are issued for only a fixed time, generally ten
years, such licenses are subject to renewal by the Federal Communications Commission (FCC).
Renewals of licenses have occurred routinely and at nominal cost. Moreover, we have determined
that there are currently no legal, regulatory, contractual, competitive, economic or other
factors that limit the useful life of the wireless licenses. As a result, we treat the wireless
licenses as an indefinite-lived intangible asset under the provisions of SFAS No. 142.We have tested the indefinite life intangible assets for impairment at least annually unless
indicators of impairment exist. We began using the direct value approach in 2005 to perform the
annual impairment test on the indefinite life intangible assets in accordance with a September
29, 2004 Staff Announcement from the staff of the Securities and Exchange Commission (SEC), Use
of the Residual Method to Value Acquired Assets Other Than Goodwill. The direct value approach
determines fair value using estimates of future cash flows associated specifically with the
licenses. Previously, we used a residual method, which determined the fair value of the business
by estimating future cash flows of the operations. The fair value of aggregate licenses was
determined by subtracting from the fair value of the business the fair value of all of the other
net tangible and intangible (primarily recognized and unrecognized customer relationship
intangible assets) assets of our operations. We determined the fair value of the customer
relationship intangible assets based on the average customer acquisition costs. Under either the
direct method or the residual method, if the fair value of the aggregated licenses was less than
the aggregated carrying amount of the licenses, an impairment would have been recognized. The
Company is currently undergoing its annual evaluation of the indefinite life intangible assets
using the direct value approach for each reporting unit to determine if there is an impairment
exposure and the impact it would have on the Companys results of operations for 2006.Definite Life Intangible AssetsThe definite life intangible assets are those intangibles assets subject to amortization and
consist principally of trade names and software licenses. The Company amortizes trade names and
software licenses on a straight-line basis over 25 and 5 years, respectively.For information related to the breakdown of the carrying amount of goodwill as well as the major
components of the other intangible assets, see Note 5 and 6.
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ReclassificationsReclassifications of prior periods data have been made to conform to the current periods
presentation.3.
    
    Gain on sale of interest in joint ventureIn February 2006, the Company signed an agreement to sell its participation in the Companys
equity interest in the Puerto Rico directory operation for $23 million and the Companys right to
receive 35% of the revenues from the publication of directory advertising for $167 million. The
transaction closed on March 31, 2006. The net pretax gain from the sale of the Companys equity
interest was $28 million and the net pretax gain from the sale of the Companys right was $158
million and is included in Directory services and other. Both transactions are included in the
three months ended March 31, 2006 consolidated statement of operations. The proceeds will be
used to pay dividends and long-term debt. The Company will continue sharing data for the
publication of directories under a new amended publishing agreement, and will also offer billing
and collection services for the directory advertising sales to its service subscribers.4.
    
    Property, Plant and EquipmentProperty, plant and equipment consist of:
 Remaining Useful
    
    
    March 31,
    
    
    December 31,Lives (Yrs)
    
    
    2006
    
    
    2005(In thousands)Current
    
    
    PreviousOutside plant
    
    
    9.0
    
    
    
    9.0
    
    
    $
    2,207,047
    
    
    $
    2,198,892Central office and transmission equipment
    
    
    3.8
    
    
    
    3.8
    
    
    
    1,289,131
    
    
    
    1,282,713Equipment and other
    
    
    2.7
    
    
    
    2.7
    
    
    
    272,740
    
    
    
    273,245Buildings
    
    
    14.6
    
    
    
    14.6
    
    
    
    326,693
    
    
    
    324,988Land
    
    
    N/A
    
    
    
    N/A
    
    
    
    25,500
    
    
    
    25,500Gross plant in service
    
    
    
    
    
    
    
    
    
    
    4,121,111
    
    
    
    4,105,338Less: accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    2,822,598
    
    
    
    2,772,489Net plant in service
    
    
    
    
    
    
    
    
    
    
    1,298,513
    
    
    
    1,332,849Construction in progress
    
    
    
    
    
    
    
    
    
    
    15,410
    
    
    
    18,661Total
    
    
    
    
    
    
    
    
    
    $
    1,313,923
    
    
    $
    1,351,510
 5.
    
    GoodwillFollowing is a breakdown of goodwill.
 Carrying ValueMarch 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Wireline (PRTC)
    
    $
    102,731
    
    
    $
    102,731Dial-up Internet (Coqui.net)
    
    
    24,196
    
    
    
    24,196Total
    
    $
    126,927
    
    
    $
    126,927
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6.
    
    Intangibles
 Carrying ValueMarch 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Indefinite Life:Wireline concession
    
    $
    85,120
    
    
    $
    85,120FCC Cellular licenses
    
    
    23,855
    
    
    
    23,855Total Indefinite Life
    
    $
    108,975
    
    
    $
    108,975
 March 31, 2006
    
    
    December 31, 2005(In thousands)Cost
    
    
    Acc. Amort
    
    
    Book Value
    
    
    Cost
    
    
    Acc. Amort
    
    
    Book ValueDefinite Life:Wireline trade name
    
    $
    48,400
    
    
    $
    13,702
    
    
    $
    34,698
    
    
    $
    48,400
    
    
    $
    13,218
    
    
    $
    35,182Software licenses
    
    
    131,102
    
    
    
    67,725
    
    
    
    63,377
    
    
    
    126,720
    
    
    
    61,520
    
    
    
    65,200Total Definite Life
    
    $
    179,502
    
    
    $
    81,427
    
    
    $
    98,075
    
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    100,382Plus: Total Indefinite Life
    
    
    
    
    
    
    
    
    
    
    108,975
    
    
    
    
    
    
    
    
    
    
    
    108,975Total
    
    $
    179,502
    
    
    $
    81,427
    
    
    $
    207,050
    
    
    $
    175,120
    
    
    $
    74,738
    
    
    $
    209,357
 Intangible asset amortization expense was $7 million and $5 million for the three months
ended March 31, 2006 and 2005, respectively. The following table presents expected amortization
expense of existing intangible assets as of March 31, 2006 and for each of the following years
(in thousands):
 Aggregate amortization expense:For the three months ended March 31, 2006
    
    
    
    
    
    $
    6,689Expected amortization expense:For the remainder of 2006
    
    
    
    
    
    
    14,110For the years ending December 31,
    
    
    2007
    
    
    
    18,7582008
    
    
    
    14,3432009
    
    
    
    9,3932010 and thereafter
    
    
    41,471
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7.
    
    Other assetsOther assets consist of:
 March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Deferred activation and installation costs
    
    $
    50,670
    
    
    $
    68,422Notes receivable-equipment sales
    
    
    1,409
    
    
    
    1,995Deferred pension asset
    
    
    41,729
    
    
    
    41,729Deferred financing costs, net
    
    
    1,134
    
    
    
    1,359Other assets
    
    
    1,913
    
    
    
    1,766Total
    
    $
    96,855
    
    
    $
    115,271
 Customer activation fees, along with the related costs up to but not exceeding the activation
fees, are deferred and amortized over the customer relationship period, as required by Staff
Accounting Bulletin SAB 104. During the three months ended March 31, 2006, the customer
relationship period was reviewed and changed to 4 years from 5 years for wireline customers and
to 2 years from 3 years for wireless customers. However, customer activation fees are subject to
additional consideration when wireless handsets are sold to the customers at a discount and
recorded as equipment sales revenue. For the three months ended March
31, 2006, this change in estimate resulted in an increase of $15
million in activation and installation revenues and a corresponding
in activation and installation expenses by the same amount. This
change in estimate does not impact operating income nor net income.8.
    
    Pension PlanThe Company has noncontributory pension plans for full-time employees, which are tax qualified as
they meet Employee Retirement Income Security Act of 1974 (the ERISA) requirements. The
Company realizes tax deductions when contributions are made to the trusts. The trusts invest in
equity and fixed income securities to meet benefit obligations.The pension benefit is composed of two elements. First, an employee receives an annuity at
retirement when they reach the rule of 85 (age plus years of service). The annuity is calculated
by applying a percentage times years of service to the last three years of salary. The second
element is a lump sum based on years of service, up to a maximum of nine months of salary for
hourly employees and twelve months of salary for salaried employees.There are separate trusts for the annuity and the lump sum benefits. Furthermore, annuity
benefit trusts plans are segregated by the three employee groups: UIET union, HIETEL union, and
management employees. The Company also provides health care and life insurance benefits to
retirees.The components of the net pension and other post-employment benefit expenses for the
quarters ended March 31, 2006 and 2005 are presented below.
 Pension and Lump Sum Benefits
    
    
    Post-Retirement Benefits(In thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    
    6,559
    
    
    $
    5,714
    
    
    $
    1,985
    
    
    $
    1,556Interest cost
    
    
    19,299
    
    
    
    18,259
    
    
    
    9,214
    
    
    
    8,218Expected return on plan assets
    
    
    (19,474
    )
    
    
    (18,135
    )
    
    
    
    
    
    
    Amortization of unrecognized:Transition obligation
    
    
    90
    
    
    
    90
    
    
    
    551
    
    
    
    551Prior service cost (benefit)
    
    
    912
    
    
    
    783
    
    
    
    (2,306
    )
    
    
    (2,463
    )Actuarial loss, net
    
    
    5,922
    
    
    
    5,562
    
    
    
    5,120
    
    
    
    4,579Total
    
    $
    13,308
    
    
    $
    12,273
    
    
    $
    14,564
    
    
    $
    12,441
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##### Table of Contents



Cash FlowsOur estimate of the amount and timing of required qualified pension trust contributions for
2006 is approximately $102 million. We anticipate approximately $1 million in contributions to
the non-qualified pension plans and approximately $24 million to the other post-retirement
benefit plans in 2006. As of March 31, 2006, we have contributed approximately $11 million to
the qualified pension trust and approximately $6 million to the other post-retirement benefit
plan. We have sufficient liquid resources to fund the remainder of the contribution.9.
    
    Deferred ESOP CompensationThe Employee Stock Ownership Plan (ESOP) acquired a 3% interest in the Company in 1999, which
was financed by 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.During year 2005, the ESOP entered into a new loan agreement amounting $2.0 million with the
Company to finance the ESOPs acquisition of Company stock. Also, during 2000 and 2001,
subsequent to ESOPs commencement, the ESOP entered into various loan agreements amounting to
$4.9 million with the Company to finance the ESOPs acquisition of Company stock from former
employees.Salaried, regular, full and part-time employees of the Company actively employed on March 2, 1999
were eligible to receive a portion of the Initial Grant of the Companys stock. Employees that
were not actively employed on March 2, 1999 were also eligible to receive the Initial Grant
provided that they met the following condition:Employees who were on short-term disability, workers compensation, Family and Medical Care Leave
Act (FMLA) leave, layoff with recall rights, or other Company approved leave of absence; and the
employees returned to active employment with the Company as soon as they were eligible to do so
and within 180 days after March 2, 1999.Compensation expense is recorded based on the release of shares at market value, which is based
on an independent appraisal performed annually. The release of shares, based upon the per share
price established at the Acquisition, amounted to $1 million for December 31, 2005 and 2004,
respectively, which is reflected as a reduction of deferred ESOP compensation in equity.10.
    
    Other Current LiabilitiesOther current liabilities consist of:
 March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Accounts payable
    
    $
    29,292
    
    
    $
    43,719Accrued expenses
    
    
    91,124
    
    
    
    74,805Employee benefit accruals
    
    
    46,099
    
    
    
    39,991Carrier payables
    
    
    11,152
    
    
    
    7,812Taxes
    
    
    4,638
    
    
    
    730Interest
    
    
    17,713
    
    
    
    5,904Total
    
    $
    200,018
    
    
    $
    172,961
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11.
    
    DebtDebt consists of:
 March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Senior notesDue May 15, 2006 at 6.65%
    
    
    399,996
    
    
    
    399,990Due May 15, 2009 at 6.80%
    
    
    299,935
    
    
    
    299,929Commercial paper
    
    
    
    
    
    
    52,000Deferred derivative and Interest rate swap
    
    
    (791
    )
    
    
    (107
    )Capital leases
    
    
    5
    
    
    
    42Total
    
    
    699,145
    
    
    
    751,854Less short-term debt
    
    
    400,005
    
    
    
    452,042Long-term debt
    
    $
    299,140
    
    
    $
    299,812
 The senior notes and term credit facilities are unsecured and non-amortizing. PRTC is the
guarantor of these debt instruments. The senior notes indentures and term credit facility
agreements do not contain dividend restrictions.The Company had a $400 million commercial paper program with maturities not to exceed 364 days,
backed by a working capital facility. As of February 28, 2006, the Company decreased the
commercial paper program to $275 million.On March 1, 2005, the Company entered into an unsecured, $400 million 364-day revolving credit
facility. Amounts borrowed under this facility are guaranteed by PRTC, and bear interest at the
applicable LIBOR rate plus a margin or at the base rate; which is the higher of the base rate
publicly announced by the administrative agent from time to time or the Federal Funds rate plus
0.5%, plus a margin. The Company is also required to pay a quarterly facility fee on commitments
under the facility and a quarterly utilization fee on borrowed amounts that exceed 50% of the
commitments under the facility. Accrued interest on Eurodollar rate borrowings is payable based
on elected intervals of one, two, three or six months or other interest period as the Company may
select, subject to certain conditions. Accrued interest on base rate borrowings is payable
quarterly. This facility 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 maintains certain financial ratios. Upon the occurrence of a default
or an event of default, the lenders have various remedies or rights, which may include
termination of the lenders obligations to make advances and declare all borrowed amounts and
interest thereon immediately due and payable. The intended purpose of this facility is for
working capital purposes and serves as backstop facility for the commercial paper program. This
facility matured on February 28, 2006, on which date the Company entered into a replacement
facility.The replacement facility consists of two related, unsecured credit facilities, a $275 million
revolving credit facility maturing on February 28, 2009, and a $275 million term credit facility,
which is available to be drawn in one borrowing at any time until May 1, 2006 and will mature on
February 28, 2011. At the option of the Company, the maximum amount which may be borrowed under
the revolving credit facility may be increased at any time prior to maturity to $300 million, and
the amount which may be borrowed under the term credit facility may be increased at any time
until May 1, 2006 to $300 million. Amounts borrowed under these facilities are guaranteed by
PRTC, and bear interest at the applicable LIBOR rate plus margins applicable to each facility 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 margins applicable to each
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. The Company
is also required to pay a quarterly facility fee on commitments under the revolving credit
facility, irrespective of usage, and a commitment fee on commitments under the term credit
facility until utilized. The revolving credit facility and the term credit facility contain
covenants, including negative covenants and
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##### Table of Contents



financial ratios, and events of default which are substantially the same as those which existed
under the 364-day facility that was replaced. The revolving credit facility is for working
capital purposes and serves as backstop facility for the commercial paper program. The term
credit facility was drawn by $275 million on May 1, 2006
and proceeds were used to repay the
senior notes maturing on May 15, 2006. On May 15, 2006, the
Company repaid the senior notes
due on that date, for a total amount of $425 million, including principal, interest and interest
rate swap.The Company also had an undrawn $40 million working capital credit facility with Banco Popular de
Puerto Rico, an affiliate of Popular, Inc. that was scheduled to mature on June 30, 2006.
Amounts outstanding under this facility bore interest at a rate of 40 basis points over LIBOR.
This facility also served as additional backstop for the commercial paper program. This facility
was cancelled as of February 28, 2006 by mutual agreement of the parties. No balance was
outstanding under this facility as of the cancellation date.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 April
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. As of May 15, 2006, the total interest payable due, regarding the swap, is $1
million.Aggregate maturities of the senior notes and term credit facilities are as follow:
 AmountYear
    
    (In thousands)2006
    Senior note
    $
    400,0002009
    Senior note
    
    300,000Total
    
    $
    700,000
 Currently, the Company is in compliance with all debt covenant agreements and with the financial
ratios as specified in term facilities.12.
    
    Other Non-Current LiabilitiesOther non-current liabilities consist of:
 March 31,
    
    
    December 31,2006
    
    
    2005(In thousands)Deferred activation and installation revenues
    
    $
    50,670
    
    
    $
    68,422Customer deposits
    
    
    26,229
    
    
    
    26,297Other liabilities
    
    
    47,642
    
    
    
    41,626Total
    
    $
    124,541
    
    
    $
    136,345
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13.
    
    Shareholders EquityCommon StockCommon stock consists of fifty million authorized shares, no par value, of which twenty five
million shares were outstanding at March 31, 2006 and December 31, 2005.Accumulated Other Comprehensive LossThe accumulated other comprehensive loss represents unrecognized losses, other than unrecognized
prior service costs which are reflected as an other asset, associated with the hourly employee
pension fund, since the accumulated benefit obligation exceeds the fair value of plan assets.The accumulated other comprehensive loss amount as of December 31, 2005 has been adjusted in the
amount of $5 million in order to reflect the after-tax amount in accordance with the provisions
of SFAS No.130, Reporting Comprehensive Income.DividendsTo the extent funds are legally, the Companys shareholders agreement requires the payment of
dividends equal to at least 50% of consolidated net income to be paid in the following quarter.Declared dividends for financial reporting purposes were the following:
 2006
    
    
    2005(In thousands)
    
    
    (In thousands)4th Quarter
    
    $
    
    
    
    4th Quarter
    
    
    27,1443rd Quarter
    
    
    
    
    
    3rd Quarter
    
    
    16,2002nd Quarter
    
    
    
    
    
    2nd Quarter
    
    
    14,8751st Quarter
    
    
    15,559
    
    
    1st Quarter
    
    
    3,248Total
    
    $
    15,559
    
    
    Total
    
    $
    61,467
 The senior notes indentures and credit facility agreements do not contain dividend restrictions.
The Company declared legal dividends of approximately $16 million during 2006 and paid and
declared legal dividends of $63 million during 2005. However, the legal dividends were adjusted
for the dividends of the ESOP unallocated shares by $2 million during 2005, only for financial
reporting purposes. Dividend corresponding to the consolidated net income for the first quarter
ended March 31, 2006 is expected to be declared in the second quarter 2006.
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##### Table of Contents



14.
    
    Fair Value of Financial InstrumentsThe carrying amounts and fair values of the Companys financial instruments at March 31,
2006 and December 31, 2005 are as follows:
 March 31,
    
    December 31,2006
    
    2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value(In thousands)Assets:Cash and cash equivalents
    
    $
    249,904
    
    
    $
    249,904
    
    
    $
    55,086
    
    
    $
    55,086Accounts receivable
    
    
    234,008
    
    
    
    234,008
    
    
    
    227,629
    
    
    
    227,629Liabilities:Other current liabilities
    
    $
    200,018
    
    
    $
    200,018
    
    
    $
    172,961
    
    
    $
    172,961Short-term debt
    
    
    400,005
    
    
    
    400,649
    
    
    
    452,042
    
    
    
    454,172Long-term debt, including interest rate swap
    
    
    299,140
    
    
    
    304,095
    
    
    
    299,812
    
    
    
    308,883
 15.
    
    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, and Internet access;
    
    Access services to long distance carriers, competitive local exchange carriers, and
wireless operators for originating and terminating calls on the Companys network;
    
    Long distance services including direct dial on-island and off-island, operator assisted
calls, and prepaid calling card;
    
    Directory publishing rights services; and
    
    Telecommunication equipment sales and billing and collection services to competing long
distance operators in Puerto Rico.
 The Wireless segment consists of:
 
    
    Postpaid and Prepaid services; and
    
    Wireless equipment sales.
 16




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##### Table of Contents



Segment results for the Company are as follows:
 For the Three MonthsEnded March 31,2006
    
    
    2005(In
thousands)Wireline:Revenues-Local services
    
    $
    162,591
    
    
    $
    152,428Access services
    
    
    54,921
    
    
    
    67,417Long distance services
    
    
    17,660
    
    
    
    17,588Directory services and other
    
    
    183,529
    
    
    
    14,488Total revenues
    
    $
    418,701
    
    
    $
    251,921Operating income
    
    $
    188,286
    
    
    $
    46,614Wireless:Revenues-Cellular services
    
    $
    85,818
    
    
    $
    66,562Total revenues
    
    $
    85,818
    
    
    $
    66,562Operating income
    
    $
    13,399
    
    
    $
    9Consolidated:Revenues for reportable segments
    
    $
    504,519
    
    
    $
    318,484Elimination of intersegment revenues
    
    
    (7,277
    )
    
    
    (6,141
    )Consolidated revenues
    
    $
    497,242
    
    
    $
    312,343Operating income (loss)
    
    $
    201,685
    
    
    $
    46,623
 As of
    
    
    As ofMarch 31,
    
    
    December 31,2006
    
    
    2005AssetsWireline assets
    
    $
    2,496,882
    
    
    $
    2,331,252Wireless assets
    
    
    435,480
    
    
    
    422,557Segment assets
    
    $
    2,932,362
    
    
    $
    2,753,809Elimination of intersegment assets
    
    
    (426,470
    )
    
    
    (375,850
    )Consolidated assets
    
    $
    2,505,892
    
    
    $
    2,377,959
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##### Table of Contents



16.
    
    Condensed Consolidating InformationThe following summarizes the unaudited condensed consolidating financial information as of March
31, 2006 and December 31, 2005 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.
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##### Table of Contents



Condensed Consolidating Balance Sheets
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    135
    
    
    $
    228,324
    
    
    $
    21,445
    
    
    $
    
    
    
    $
    249,904Intercompany accounts receivable
    
    
    464,293
    
    
    
    46,735
    
    
    
    66,487
    
    
    
    (577,515
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    233,584
    
    
    
    424
    
    
    
    
    
    
    
    234,008Deferred income tax
    
    
    
    
    
    
    24,070
    
    
    
    33
    
    
    
    
    
    
    
    24,103Inventory and supplies, net
    
    
    
    
    
    
    35,423
    
    
    
    1
    
    
    
    
    
    
    
    35,424Prepaid expenses
    
    
    
    
    
    
    23,308
    
    
    
    739
    
    
    
    
    
    
    
    24,047Total current assets
    
    
    464,428
    
    
    
    591,444
    
    
    
    89,129
    
    
    
    (577,515
    )
    
    
    567,486PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,305,698
    
    
    
    8,225
    
    
    
    
    
    
    
    1,313,923GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    309,541
    
    
    
    24,436
    
    
    
    
    
    
    
    333,977DEFERRED INCOME TAX
    
    
    
    
    
    
    193,285
    
    
    
    1,243
    
    
    
    (877
    )
    
    
    193,651INVESTMENT IN SUBSIDIARIES
    
    
    874,818
    
    
    
    
    
    
    
    
    
    
    
    (874,818
    )
    
    
    OTHER ASSETS
    
    
    300,611
    
    
    
    97,677
    
    
    
    
    
    
    
    (301,433
    )
    
    
    96,855TOTAL ASSETS
    
    $
    1,639,857
    
    
    $
    2,497,645
    
    
    $
    123,033
    
    
    $
    (1,754,643
    )
    
    $
    2,505,892LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    400,000
    
    
    $
    400,005
    
    
    $
    
    
    
    $
    (400,000
    )
    
    $
    400,005Intercompany accounts payable
    
    
    31,898
    
    
    
    102,071
    
    
    
    49,704
    
    
    
    (183,673
    )
    
    
    Other current liabilities
    
    
    17,005
    
    
    
    173,453
    
    
    
    8,732
    
    
    
    829
    
    
    
    200,019Total current liabilities
    
    
    448,903
    
    
    
    675,529
    
    
    
    58,436
    
    
    
    (582,844
    )
    
    
    600,024LONG-TERM DEBT, excluding current portion
    
    
    299,140
    
    
    
    299,927
    
    
    
    
    
    
    
    (299,927
    )
    
    
    299,140OTHER NON-CURRENT LIABILITIES
    
    
    1,091
    
    
    
    693,412
    
    
    
    1,109
    
    
    
    2,950
    
    
    
    698,562Total liabilities
    
    
    749,134
    
    
    
    1,668,868
    
    
    
    59,545
    
    
    
    (879,821
    )
    
    
    1,597,726MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,253
    
    
    
    17,253SHAREHOLDERS EQUITY:Common stock, Additional paid in capital and Treasury stock
    
    
    705,516
    
    
    
    646,785
    
    
    
    41,143
    
    
    
    (687,928
    )
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,042
    )Retained earnings
    
    
    382,750
    
    
    
    353,303
    
    
    
    22,345
    
    
    
    (375,648
    )
    
    
    382,750Accumulated other comprehensive loss
    
    
    (171,501
    )
    
    
    (171,311
    )
    
    
    
    
    
    
    171,501
    
    
    
    (171,311
    )Total shareholders equity
    
    
    890,723
    
    
    
    828,777
    
    
    
    63,488
    
    
    
    (892,075
    )
    
    
    890,913TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,639,857
    
    
    $
    2,497,645
    
    
    $
    123,033
    
    
    $
    (1,754,643
    )
    
    $
    2,505,892
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Condensed Consolidating Balance Sheets
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    135
    
    
    $
    31,130
    
    
    $
    23,821
    
    
    $
    
    
    
    $
    55,086Intercompany accounts receivable
    
    
    504,484
    
    
    
    46,610
    
    
    
    54,995
    
    
    
    (606,089
    )
    
    
    Accounts receivable, net
    
    
    
    
    
    
    227,804
    
    
    
    (175
    )
    
    
    
    
    
    
    227,629Deferred income tax
    
    
    718
    
    
    
    17,573
    
    
    
    33
    
    
    
    
    
    
    
    18,324Inventory and supplies, net
    
    
    
    
    
    
    47,430
    
    
    
    1
    
    
    
    
    
    
    
    47,431Prepaid expenses
    
    
    
    
    
    
    19,814
    
    
    
    757
    
    
    
    
    
    
    
    20,571Total current assets
    
    
    505,337
    
    
    
    390,361
    
    
    
    79,432
    
    
    
    (606,089
    )
    
    
    369,041PROPERTY, PLANT AND EQUIPMENT, net
    
    
    
    
    
    
    1,342,915
    
    
    
    8,595
    
    
    
    
    
    
    
    1,351,510GOODWILL AND OTHER INTANGIBLES, net
    
    
    
    
    
    
    311,819
    
    
    
    24,465
    
    
    
    
    
    
    
    336,284DEFERRED INCOME TAX
    
    
    
    
    
    
    207,038
    
    
    
    (33
    )
    
    
    (1,152
    )
    
    
    205,853INVESTMENT IN SUBSIDIARIES
    
    
    720,227
    
    
    
    
    
    
    
    
    
    
    
    (720,227
    )
    
    
    OTHER ASSETS
    
    
    300,978
    
    
    
    115,542
    
    
    
    
    
    
    
    (301,249
    )
    
    
    115,271TOTAL ASSETS
    
    $
    1,526,542
    
    
    $
    2,367,675
    
    
    $
    112,459
    
    
    $
    (1,628,717
    )
    
    $
    2,377,959LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Short-term debt
    
    $
    452,000
    
    
    $
    452,042
    
    
    $
    
    
    
    $
    (452,000
    )
    
    $
    452,042Intercompany accounts payable
    
    
    32,136
    
    
    
    86,430
    
    
    
    41,370
    
    
    
    (159,936
    )
    
    
    Other current liabilities
    
    
    5,745
    
    
    
    161,143
    
    
    
    5,793
    
    
    
    280
    
    
    
    172,961Total current liabilities
    
    
    489,881
    
    
    
    699,615
    
    
    
    47,163
    
    
    
    (611,656
    )
    
    
    625,003LONG-TERM DEBT, excluding current portion
    
    
    299,812
    
    
    
    299,917
    
    
    
    
    
    
    
    (299,917
    )
    
    
    299,812OTHER NON-CURRENT LIABILITIES
    
    
    
    
    
    
    695,273
    
    
    
    1,383
    
    
    
    3,084
    
    
    
    699,740Total liabilities
    
    
    789,693
    
    
    
    1,694,805
    
    
    
    48,546
    
    
    
    (908,489
    )
    
    
    1,624,555MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,555
    
    
    
    16,555SHAREHOLDERS EQUITY:Common stock, Additional paid in
capital and Treasury stock
    
    
    705,516
    
    
    
    645,298
    
    
    
    41,143
    
    
    
    (686,441
    )
    
    
    705,516Deferred ESOP compensation
    
    
    (26,042
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,042
    )Retained earnings
    
    
    228,877
    
    
    
    199,074
    
    
    
    22,770
    
    
    
    (221,844
    )
    
    
    228,877Accumulated other comprehensive loss
    
    
    (171,502
    )
    
    
    (171,502
    )
    
    
    
    
    
    
    171,502
    
    
    
    (171,502
    )Total shareholders equity
    
    
    736,849
    
    
    
    672,870
    
    
    
    63,913
    
    
    
    (736,783
    )
    
    
    736,849TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    1,526,542
    
    
    $
    2,367,675
    
    
    $
    112,459
    
    
    $
    (1,628,717
    )
    
    $
    2,377,959
 20




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    152,189
    
    
    $
    7,976
    
    
    $
    (2,401
    )
    
    $
    157,764Access services
    
    
    
    
    
    
    54,722
    
    
    
    
    
    
    
    (884
    )
    
    
    53,838Long distance services
    
    
    
    
    
    
    7,798
    
    
    
    9,894
    
    
    
    (485
    )
    
    
    17,207Cellular services
    
    
    
    
    
    
    85,335
    
    
    
    
    
    
    
    (320
    )
    
    
    85,015Directory and other services and sales
    
    
    
    
    
    
    192,074
    
    
    
    384
    
    
    
    (9,040
    )
    
    
    183,418Total revenues
    
    
    
    
    
    
    492,118
    
    
    
    18,254
    
    
    
    (13,130
    )
    
    
    497,242OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    (5
    )
    
    
    289,274
    
    
    
    19,418
    
    
    
    (13,130
    )
    
    
    295,557OPERATING INCOME (LOSS)
    
    
    5
    
    
    
    202,844
    
    
    
    (1,164
    )
    
    
    
    
    
    
    201,685OTHER INCOME, NET
    
    
    168,661
    
    
    
    15,895
    
    
    
    346
    
    
    
    (169,364
    )
    
    
    15,538INCOME (LOSS) BEFORE INCOME TAX EXPENSE
    
    
    168,666
    
    
    
    218,739
    
    
    
    (818
    )
    
    
    (169,364
    )
    
    
    217,223INCOME TAX EXPENSE (BENEFIT)
    
    
    (766
    )
    
    
    48,949
    
    
    
    (392
    )
    
    
    
    
    
    
    47,791NET INCOME (LOSS)
    
    $
    169,432
    
    
    $
    169,790
    
    
    $
    (426
    )
    
    $
    (169,364
    )
    
    $
    169,432
 21




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Condensed Consolidating Statements of Operations
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedREVENUES:Local services
    
    $
    
    
    
    $
    143,949
    
    
    $
    7,857
    
    
    $
    (2,557
    )
    
    $
    149,249Access services
    
    
    
    
    
    
    67,120
    
    
    
    
    
    
    
    (1,338
    )
    
    
    65,782Long distance services
    
    
    
    
    
    
    7,019
    
    
    
    10,617
    
    
    
    (365
    )
    
    
    17,271Cellular services
    
    
    
    
    
    
    65,655
    
    
    
    
    
    
    
    
    
    
    
    65,655Directory and other services and sales
    
    
    
    
    
    
    16,382
    
    
    
    365
    
    
    
    (2,361
    )
    
    
    14,386Total revenues
    
    
    
    
    
    
    300,125
    
    
    
    18,839
    
    
    
    (6,621
    )
    
    
    312,343OPERATING COSTS AND EXPENSES:Total operating costs and expenses
    
    
    
    
    
    
    259,846
    
    
    
    12,496
    
    
    
    (6,621
    )
    
    
    265,720OPERATING INCOME
    
    
    
    
    
    
    40,279
    
    
    
    6,343
    
    
    
    
    
    
    
    46,623OTHER INCOME (EXPENSE), NET
    
    
    21,988
    
    
    
    (10,395
    )
    
    
    176
    
    
    
    (22,654
    )
    
    
    (10,886
    )INCOME BEFORE INCOME TAX EXPENSE
    
    
    21,988
    
    
    
    29,884
    
    
    
    6,519
    
    
    
    (22,654
    )
    
    
    35,737INCOME TAX EXPENSE
    
    
    
    
    
    
    11,279
    
    
    
    2,470
    
    
    
    
    
    
    
    13,749NET INCOME
    
    $
    21,988
    
    
    $
    18,605
    
    
    $
    4,049
    
    
    $
    (22,654
    )
    
    $
    21,988
 22




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Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    271,382
    
    
    $
    (28,984
    )
    
    $
    242,398CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (22,151
    )
    
    
    (43
    )
    
    
    (22,194
    )Net proceed from sale of interest in joint venture
    
    
    
    
    
    
    
    
    
    
    26,651
    
    
    
    26,651Net cash provided by (used in) investing activities
    
    
    
    
    
    
    (22,151
    )
    
    
    26,608
    
    
    
    4,457CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments of short-term debt, including
capital leases
    
    
    (52,000
    )
    
    
    (37
    )
    
    
    
    
    
    
    (52,037
    )Borrowings/(repayment) intercompany loans
    
    
    52,000
    
    
    
    (52,000
    )
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    
    
    
    
    (52,037
    )
    
    
    
    
    
    
    (52,037
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    
    
    
    
    197,194
    
    
    
    (2,376
    )
    
    
    194,818CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    135
    
    
    
    31,130
    
    
    
    23,821
    
    
    
    55,086CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    135
    
    
    $
    228,324
    
    
    $
    21,445
    
    
    $
    249,904
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Condensed Consolidating Statements of Cash Flows
 Guarantor
    
    
    Non-Guarantor
    
    
    TotalParent
    
    
    Subsidiary
    
    
    Subsidiaries
    
    
    ConsolidatedCASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    
    $
    
    
    
    $
    (18,066
    )
    
    $
    2,993
    
    
    $
    (15,073
    )CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, including removal costs
    
    
    
    
    
    
    (26,967
    )
    
    
    (33
    )
    
    
    (27,000
    )Net cash used in investing activities
    
    
    
    
    
    
    (26,967
    )
    
    
    (33
    )
    
    
    (27,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net
repayments of short-term debt, including capital leases
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Borrowings/(repayment) intercompany loans
    
    
    149
    
    
    
    (149
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    149
    
    
    
    (189
    )
    
    
    
    
    
    
    (40
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    149
    
    
    
    (45,222
    )
    
    
    2,960
    
    
    
    (42,113
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    (149
    )
    
    
    44,657
    
    
    
    18,838
    
    
    
    63,346CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    
    
    
    $
    (565
    )
    
    $
    21,798
    
    
    $
    21,233
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##### Table of Contents



17.
    
    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 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 for more information
regarding legal and regulatory matters.Regulatory activity at the federal and local levels has been primarily directed at meeting
challenges in maintaining support for local exchange rates and Universal Service while affecting
the rate rebalancing and regulatory restructuring required by an increasingly competitive
environment. Among the regulatory issues are: rate rebalancing, intercarrier compensation and
insular relief.We continue to meet the wholesale requirements of new competitors and have signed agreements with
various wireless and wireline carriers. These agreements permit them to purchase unbundled
network elements, to resell retail services, and to interconnect their networks with ours.
 25




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
    
    
    Revenue Growth  Our emphasis is on revenue transformation, devoting more resources from
traditional markets, where we have been experiencing access line erosion, to higher growth
markets such as wireless and broadband, including digital subscriber lines (DSL), as well
as expanded data services to enterprise markets. For the quarter ended March 31, 2006, our
wireless and broadband services increased by 20% compared to the same
period in 2005.For the quarter ended March 31, 2006, revenues from the growth of
wireless areas, in particular post-paid cellular services increased
by 27% compared to the same period in 2005. This increase was
driven by the net increase of approximately 85,000 post-paid
wireless customers as of March 31, 2006 compared to those customers
as of March 31, 2005. The data and broadband services revenues for
the quarter ended March 31, 2006 increased by 3% compared to the
same period in 2005. This increase was driven by strong DSL revenue
growth. As of March 31, 2006, the DSL customers were higher by
approximately 38,000 compared to those customers as of March 31,
2005.Operational Efficiency  While focusing resources on growth markets, we are continually
challenging our management team to reduce expenses, particularly through technology-assisted
productivity improvements. The Company has significantly reduced workforce levels compared
to the same period in 2005, which we expect will provide future benefits. At March 31,
2006, the Company had approximately 4,883 full-time employees compared to 5,110 at March 31,
2005.
    
    Capital Allocation  Capital spending has been, and will continue to be, directed toward
growth markets, such as High-speed wireless data or Evolution Data Optimized (EV-DO)
technologies. Replacement of the TDMA network and expanded services offered to enterprise
markets are some examples of areas of capital spending which support these growth markets.
    
    Cash Flow Generation  The financial statements reflect the emphasis of management on
using cash provided by our operating and investing activities to significantly reduce debt
and to fund our pension plans.
  26




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27




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CONSOLIDATED RESULTS OF OPERATIONS
  CONSOLIDATED REVENUES
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % Change(In millions)Local
    
    $
    158
    
    
    $
    149
    
    
    
    6
    %Network Access
    
    
    54
    
    
    
    66
    
    
    
    (18
    )Long Distance
    
    
    17
    
    
    
    17
    
    
    
    Cellular
    
    
    85
    
    
    
    66
    
    
    
    29Directory and other
    
    
    183
    
    
    
    14
    
    
    
    1,207Consolidated revenues
    
    $
    497
    
    
    $
    312
    
    
    
    59
    CONSOLIDATED OPERATING EXPENSES
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % Change(In millions)Cost of services and sales
    
    $
    93
    
    
    $
    76
    
    
    
    22
    %Selling, general and administrative expenses
    
    
    141
    
    
    
    128
    
    
    
    10Total consolidated operating expenses
    
    $
    234
    
    
    $
    204
    
    
    
    15
    28




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##### Table of Contents



OTHER CONSOLIDATED RESULTS
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % Change(In millions)Depreciation and amortization
    
    $
    62
    
    
    $
    62
    
    
    
    Interest expense and others
    
    
    12
    
    
    
    11
    
    
    
    9Equity income in joint venture
    
    
    (1
    )
    
    
    (1
    )
    
    
    Gain on sale of interest in joint venture
    
    
    (28
    )
    
    
    
    
    
    
    Minority interest in consolidated subsidiary
    
    
    1
    
    
    
    1
    
    
    
    Income tax expense
    
    
    48
    
    
    
    14
    
    
    
    243Total Other Consolidated Results
    
    $
    94
    
    
    $
    87
    
    
    
    8
 Depreciation and amortization expense
  Interest expense, net
  Equity income from joint venture
  Gain on sale of interest in joint venture
  Minority interest in consolidated subsidiary
  Income taxes
  29




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##### Table of Contents



SEGMENT RESULTS OF OPERATIONS
   
    
    Local services, including basic voice, telephone and telecommunications equipment
rentals, value-added services, high-speed data services, and Internet access;
    
    Long distance services including direct dial on-island and off-island, operator assisted
calls, and prepaid calling card;
    
    Access services to long distance carriers, competitive local exchange carriers, and
wireless operators for originating and terminating calls on the Companys network;
    
    Directory publishing rights services; and
    
    Telecommunication equipment sales and billing and collection services to competing long
distance operators in Puerto Rico.
  
    
    Postpaid and prepaid services; and
    
    Wireless equipment sales.
 30




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##### Table of Contents



WIRELINE REVENUES
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % Change(In millions)Local
    
    $
    163
    
    
    $
    152
    
    
    
    7
    %Network Access
    
    
    55
    
    
    
    67
    
    
    
    (18
    )Long Distance
    
    
    18
    
    
    
    18
    
    
    
    Directory and Other
    
    
    184
    
    
    
    14
    
    
    
    1,214Total Wireline
    
    $
    419
    
    
    $
    252
    
    
    
    66
 OPERATING DATA
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % ChangeAccess Lines in Service (000s):Residential
    
    
    826
    
    
    
    881
    
    
    
    (6
    )%Business
    
    
    265
    
    
    
    280
    
    
    
    (5
    )Total
    
    
    1,091
    
    
    
    1,161
    
    
    
    (6
    )
  Local Services
  Network Access
  Long Distance
  31




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Directory and Other
  WIRELINE EXPENSES AND CHARGES
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % Change(In millions)Cost of services and sales
    
    $
    64
    
    
    $
    52
    
    
    
    23
    %Selling, general and administrative expenses
    
    
    114
    
    
    
    101
    
    
    
    13Total Wireline
    
    $
    178
    
    
    $
    153
    
    
    
    16
  Cost of services and sales
  Selling, general and administrative expenses
  32




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WIRELESS REVENUES
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % Change(In millions)Postpaid Cellular
    
    $
    67
    
    
    $
    52
    
    
    
    29
    %Prepaid Cellular
    
    
    4
    
    
    
    4
    
    
    
    Wireless Service Revenues
    
    
    71
    
    
    
    56
    
    
    
    27Wireless Equipment and Other
    
    
    14
    
    
    
    10
    
    
    
    40Total Wireless
    
    $
    85
    
    
    $
    66
    
    
    
    29
 OPERATING DATA
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % ChangeCellular Customers (000s):Postpaid
    
    
    398
    
    
    
    314
    
    
    
    27
    %Prepaid
    
    
    105
    
    
    
    101
    
    
    
    4Total
    
    
    503
    
    
    
    415
    
    
    
    21Postpaid Cellular Average Revenue Per Unit (ARPU)
    
    $
    52
    
    
    $
    55
    
    
    
    (5
    )%Prepaid Cellular ARPU
    
    
    13
    
    
    
    14
    
    
    
    (7
    )Combined Cellular ARPU
    
    
    44
    
    
    
    45
    
    
    
    (2
    )
  Wireless Service Revenues
  Wireless Equipment and other
  33




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WIRELESS EXPENSES AND CHARGES
 For the Three Months Ended March 31,2006
    
    
    2005
    
    
    % Change(In millions)Cost of services and sales
    
    $
    30
    
    
    $
    26
    
    
    
    15
    %Selling, general and administrative expenses
    
    
    32
    
    
    
    31
    
    
    
    3Total Wireless
    
    $
    62
    
    
    $
    57
    
    
    
    9
  Cost of services and sales
  Selling, general and administrative expenses
  34




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 CONSOLIDATED FINANCIAL CONDITION
 For the Three Months Ended March 31,2006
    
    2005
    
    Change(In millions)Cash flows from (used in):Operations
    
    $
    242
    
    
    $
    (15
    )
    
    $
    257Investing
    
    
    4
    
    
    
    (27
    )
    
    
    31Financing
    
    
    (52
    )
    
    
    
    
    
    
    (52
    )
          35




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36




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##### Table of Contents



REGULATORY AND OTHER MATTERS
 REGULATORY AND COMPETITIVE TRENDS
   RATE REBALANCING
    TOUCHTONE CHARGES
     37




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##### Table of Contents



CTI ASSET TRANSFER
   PRICE CAP REGULATION
    HIGH COST SUPPORT FOR INSULAR RELIEF
  38




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MUNICIPAL RIGHT OF WAY FEES
  Right of Way Litigations
    
    StatusUS District Court:1. PRTC v. Municipality of Caguas
    
    PRTCs challenge of Caguas ordinance is stayed pending resolution of the Guayanilla case.2. PRTC v. Municipality of Guayanilla
    
    Federal District Court found the ordinance violative of Section 253. Guayanillas
appeal is pending before the First Circuit Court of Appeals.3. PRTC v. Municipality of Ponce
    
    Declaratory judgment action filed in federal and local court on November 22 and November
28, 2005, respectively. Ponce was served with summons.4. PRTC v. Municipality San Juan
    
    The case was dismissed when San Juan withdrew its ordinance.5. PRTC v. Municipality of Vega Baja
    
    Declaratory judgment action filed in federal and local court on February 22, 2006. Vega
Baja was served with summons.6. PRTC v. Municipality of Cataño
    
    Declaratory judgment action filed in federal and local court on February 28, 2006.
Cataño served with summons.7. PRTC v. Municipality of Utuado
    
    Declaratory judgment action filed in federal and local court on March 24, 2006. Pending
summons.
 INTERCONNECTION DISPUTE
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
     CRITICAL ACCOUNTING POLICIES
 General
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Allowance for Doubtful Accounts
  Deferred Taxes
     Property, Plant and Equipment and Depreciation
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Fair ValueAssuming 100 Basis PointCarrying Amount
    
    
    Fair Value
    
    
    Increase
    
    
    Decrease(In thousands)March 31, 2006:Senior notes
    
    $
    699,931
    
    
    $
    705,530
    
    
    $
    696,691
    
    
    $
    714,663Interest rate swap
    
    
    (1,092
    )
    
    
    (1,092
    )
    
    
    (1,464
    )
    
    
    (720
    )Total
    
    $
    698,839
    
    
    $
    704,438
    
    
    $
    695,227
    
    
    $
    713,943December 31, 2005:Senior notes
    
    $
    699,919
    
    
    $
    711,120
    
    
    $
    700,558
    
    
    $
    722,038Interest rate swap
    
    
    (1,080
    )
    
    
    (1,080
    )
    
    
    (1,446
    )
    
    
    (713
    )Total
    
    $
    698,839
    
    
    $
    710,040
    
    
    $
    699,112
    
    
    $
    721,325
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ITEM 4. CONTROLS AND PROCEDURES
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
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SIGNATURES
   By:
    
    /s/ Cristina M. LambertName:
    
    Cristina M. LambertTitle:
    
    President and Chief Executive OfficerDate:
    
    May 15, 2006By:
    
    /s/ Héctor HoussayName:
    
    Héctor HoussayTitle:
    
    Vice President Finance and Chief Financial OfficerDate:
    
    May 15, 2006By:
    
    /s/ Rafael OtañoName:
    
    Rafael OtañoTitle:
    
    ControllerDate:
    
    May 15, 2006
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EXHIBIT INDEX
 EXHIBITNUMBER
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 3.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).3.2
    
    Certificate of Amendment to the Certificate of Incorporation
of Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 3.2 of the Companys Annual Report on
Form 10-K for the year ended December 31, 1999 (File
333-85503)).3.3
    
    By-Laws of Telecomunicaciones de Puerto Rico, Inc.
(Incorporated by reference to Exhibit 3.4 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).4.1
    
    Trust Indenture dated as of May 20, 1999 between
Telecomunicaciones de Puerto Rico, Inc. and The Bank of New
York. (Incorporated by reference to Exhibit 4.1 of the
Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.1
    
    Shareholders Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc., GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority
and the shareholders of Telecomunicaciones de Puerto Rico,
Inc., who shall from time to time be parties thereto as
provided therein. (Incorporated by reference to Exhibit 10.5
of the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.2
    
    Non-Competition Agreement, dated as of March 2, 1999, by and
among Telecomunicaciones de Puerto Rico, Inc, GTE Holdings
(Puerto Rico) LLC, GTE International Telecommunications
Incorporated, Popular, Inc., Puerto Rico Telephone Authority,
and the Government Development Bank for Puerto Rico.
(Incorporated by reference to Exhibit 10.9 of the Companys
Registration Statement filed on Form S-4, as amended (File
333-85503)).10.3
    
    Trust Agreement of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc., dated as of March 2,
1999, by and between U.S. Trust, National Association and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.12 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.4
    
    ESOP Loan Agreement, dated as of March 2, 1999, by and
between the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.13 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.5
    
    Pledge Agreement, dated as of March 2, 1999, by and between
the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.15 of the Companys Registration
Statement filed on Form S-4, as amended (File 333-85503)).10.6
    
    Tag Along Agreement, dated as of March 2, 1999, by and among
GTE Holdings (Puerto Rico) LLC, GTE International
Telecommunications Incorporated, and the Trust of the
Employee Stock Ownership Plan of Telecomunicaciones de Puerto
Rico, Inc. (Incorporated by reference to Exhibit 10.16 of
the Companys Registration Statement filed on Form S-4, as
amended (File 333-85503)).10.7
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Merrill Lynch Money Markets Inc., as
Dealer for notes with maturities up to 240 days; Merrill
Lynch, Pierce, Fenner & Smith Incorporated, as Dealer for
notes with maturities over 270 days up to 365 days.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.25 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).
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EXHIBITNUMBER
    
    DESCRIPTION10.8
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Salomon Smith Barney Inc., as Dealer.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.26
of the Companys Annual Report on Form 10-K for the year
ended December 31, 2000 (File 333-85503)).10.9
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Banc of America Securities LLC.
Concerning notes to be issued pursuant to an Issuing and
Paying Agency Agreement dated as of November 9, 2000 between
the Issuer and The Chase Manhattan Bank, as Issuing and
Paying Agent. (Incorporated by reference to Exhibit 10.27 of
the Companys Annual Report on Form 10-K for the year ended
December 31, 2000 (File 333-85503)).10.10
    
    Commercial Paper Dealer Agreement 4(2) Program among
Telecomunicaciones de Puerto Rico, Inc., as Issuer; Puerto
Rico Telephone Company, Inc. and Celulares Telefónica, Inc.,
as Guarantors; and Popular Securities, Inc., as Dealer for
notes with maturities up to 365 days. Concerning notes to be
issued pursuant to an Issuing and Paying Agency Agreement
dated as of November 9, 2000 between the Issuer and The Chase
Manhattan Bank, as Issuing and Paying Agent. (Incorporated
by reference to Exhibit 10.28 of the Companys Annual Report
on Form 10-K for the year ended December 31, 2000 (File
333-85503)).10.11
    
    Issuing and Paying Agency Agreement dated as of November 9,
2000, by and among Telecomunicaciones de Puerto Rico, Inc.,
as Issuer, Puerto Rico Telephone Company and Celulares
Telefónica, Inc., as Guarantors, and The Chase Manhattan
Bank, as Issuing and Paying Agent. (Incorporated by
reference to Exhibit 10.29 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2000 (File
333-85503)).10.12
    
    Letter Amendment, to the March 2, 1999 Shareholders
Agreement, dated as of May 25, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., GTE Holdings (Puerto
Rico) LLC, GTE International Telecommunications Incorporated,
Popular, Inc., and the Puerto Rico Telephone Authority.
(Incorporated by reference to Exhibit 10.25 of the Companys
Quarterly Report on Form 10-Q for the period ended June 30,
2001 (File 333-85503)).10.13
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc.,
as Guarantors, and Bank of America, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.27 of the Companys
Quarterly Report on Form 10-Q for the period ended September
30, 2001 (File 333-85503)).10.14
    
    ISDA Master Agreement, dated August 29, 2001, by and among
Telecomunicaciones de Puerto Rico, Inc., as the Counterparty,
Puerto Rico Telephone Company and Celulares Telefónica, Inc.,
as Guarantors, and Citibank, N.A., as the Bank.
(Incorporated by reference to Exhibit 10.28 of the Companys
Quarterly Report on Form 10-Q for the period ended September
30, 2001 (File 333-85503)).10.15
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of
Telephone Company Employees effective from January 1, 2004
until December 31, 2008. Approved on April 15, 2004.
(Incorporated by reference to Exhibit 10.29 of the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (File 333-85503)).10.16
    
    $40,000,000 working capital revolving credit agreement dated
as of June 30, 2004, among Telecomunicaciones de Puerto Rico,
Inc., as Borrower, Puerto Rico Telephone Company, Inc., as
Guarantor and Banco Popular de Puerto Rico, as Lender and
Administrative Agent. (Incorporated by reference to Exhibit
10.30 of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.17
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2003
until January 17, 2006. Approved on February 13, 2003.
English Version. (Incorporated by reference to Exhibit 10.31
of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).
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EXHIBITNUMBER
    
    DESCRIPTION10.18
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Brotherhood of
Telephone Company Employees effective from January 1, 2004
until December 31, 2008. Approved on April 15, 2004.
English Version. (Incorporated by reference to Exhibit 10.32
of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.19
    
    $30,000,000 1-Year term credit agreement dated as of May 17,
2004, among Telecomunicaciones de Puerto Rico, Inc., as
Borrower, Puerto Rico Telephone Company, Inc., as Guarantor
and Banco Bilbao Vizcaya Argentaria Puerto Rico, as
Administrative Agent. (Incorporated by reference to Exhibit
10.33 of the Companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File 333-85503)).10.20
    
    364-Day Credit Agreement dated as of March 1, 2005, among
Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor, the Initial
Lenders named therein, Citibank, N.A., as Administrative
Agent, Banco Bilbao Vizcaya Argentaria Puerto Rico and Bank
of Nova Scotia, as Syndication Agents, and Banco Popular de
Puerto Rico and Firstbank Puerto Rico, as Co-documentation
Agents. (Incorporated by reference to Exhibit 10.34 of the
Companys Annual Report on Form 10-K for the year ended
December 31, 2004 (File 333-85503)).10.21
    
    First amendment dated June 30, 2005 to the $40,000,000
revolving credit agreement dated as of June 30, 2004, among
Telecomunicaciones de Puerto Rico, Inc., as Borrower, Puerto
Rico Telephone Company, Inc., as Guarantor and Banco Popular
de Puerto Rico, as Lender and Administrative Agent.
(Incorporated by reference to Exhibit 10.23 of the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30,
2005 (File 333-85503)).10.22
    
    Collective Bargaining Agreement between the Puerto Rico
Telephone Company and the Independent Union of Telephone
Employees of Puerto Rico effective from January 18, 2006
until January 17, 2011. Approved on October 20, 2005.
(Incorporated by reference to Exhibit 10.24 of the Companys
Quarterly Report on Form 10-Q for the quarter ended September
30, 2005 (File 333-85503)).10.23
    
    $600,000,000 Credit Agreement dated as of February 28, 2006,
among Telecomunicaciones de Puerto Rico, Inc., as Borrower,
Puerto Rico Telephone Company, Inc., as Guarantor, the
Initial Lenders named therein, Citibank, N.A., as
Administrative Agent, Banco Bilbao Vizcaya Argentaria Puerto
Rico and Scotiabank of Puerto Rico, as Co-Syndication Agents,
and Banco Popular de Puerto Rico and The Bank of
Tokyo-Mitsubishi UFG, LTD., New York Branch, as
Co-documentation Agents. (Incorporated by reference to
Exhibit 10.23 of the Companys Annual Report on Form 10-K for
the year ended December 31, 2005 (File 333-85503)).10.24
    
    ESOP Loan Agreement dated as of November 4, 2005, by and
between the Trust of the Employee Stock Ownership Plan of
Telecomunicaciones de Puerto Rico, Inc. and
Telecomunicaciones de Puerto Rico, Inc. (Incorporated by
reference to Exhibit 10.24 of the Companys Annual Report on
Form 10-K for the year ended December 31, 2005 (File
333-85503)).10.25
    
    Share and publication rights purchase agreement dated as of
February 28, 2006 by an d between PRTC Directories, Inc.,
Puerto Rico Telephone Company, Inc. and CII Acquisition Corp
(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