**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

 

FORM 20-F

 

**[  ]****REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OF THE SECURITIESEXCHANGE ACT OF 1934**

**OR**

** **

**[X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the fiscal year endedDecember 31, 2005**

** **

**OR**

** **

**[  ]           TRANSITION REPORT PURSUANT TO SECTION13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the transition periodfrom _________ to _________**

** **

**OR**

** **

**[  ]           SHELL COMPANY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 – Date of event requiringthis shell company report __________**

** **

**Commission file number1-03006**

** **

**Philippine Long Distance Telephone Company**

(Exact name of Registrant as specified in its charter)

 

**Republic of the Philippines**

(Jurisdiction of incorporation or organization)

 

**Ramon****Cojuangco Building**

**Makati Avenue**

**Makati City****, Philippines**

(Address of principal executive or organization)

 

Securities registered or to be registered pursuant toSection 12(b) of the Act.

 

| Title of each class                                                                                                        | Name of each exchange

on which registered |
|----------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|
| Common Capital Stock, Par Value Five Philippine Pesos Per Share                                                            | New York Stock Exchange*                   |
| American Depositary Shares, evidenced by American Depositary Receipts, each representing one share of Common Capital Stock | New York Stock Exchange                    |

 

**    Registered on the New York Stock Exchange not for trading but only in connection with the registration ofAmerican Depositary Shares pursuant to the requirements of such stock exchange*.

* *

Securities registered or to be registered pursuant toSection 12(g) of the Act.

 

None

 

Securities for which there is a reporting obligationpursuant to Section 15(d) of the Act.

 

| 9.250% Notes due 2006  |   | 10.500% Notes due 2009 |
|------------------------|--------|------------------------|
| 7.850% Notes due 2007  |   | 11.375% Notes due 2012 |
| 10.625% Notes due 2007 |   | 8.350% Notes due 2017  |

 

Indicate the number ofoutstanding shares of each of the issuer’s classes of capital or common stockas at the close of the period covered by the annual report.

 

| As at December 31, 2005:                                                               |
|----------------------------------------------------------------------------------------|
| 180,789,003 shares of Common Capital Stock, Par Value Five Philippine Pesos Per Share  |
| 451,589,551 shares of Serial Preferred Stock, Par Value Ten Philippine Pesos Per Share |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act:       Yes [√]      No [    ]

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934:    Yes [   ]     No [√]

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days:  Yes [√]   No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filed.  See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

LargeAccelerated Filer [√]            Accelerated Filer [  ]Non-Accelerated Filer [   ]

 

Indicateby check mark which financial statement item the registrant has elected tofollow:  Item 17    Item 18 [√]

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act):   Yes [   ]No [√]

TABLE OF CONTENTS
 

 

 

CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT

 

 

 

FORWARD-LOOKING STATEMENTS

 

 

 

PART I

 

 

 

 

Item 1.

Identity of Directors, Senior Management and Advisors

 

 

Item 2.

Offer Statistics and Expected Timetable

 

 

Item 3.

Key Information

 

 

 

Selected Financial Data

 

 
 

 

Capital Stock

 

 

 

Dividends Declared

 

 

 

Dividends Paid

 

 

 

Exchange Rates

 

 

 

Risk Factors

 

 

Item 4.

Information on the Company

 

 

 

Overview

 

 

 

Historical Background and Development

 

 

 

Organization

 

 

 

Strengths

 

 

 

Strategy

 

 

 

Wireless

 

 

 

Fixed Line

 

 

 

Information and Communications Technology

 

 

 

Wireless Network Infrastructure

 

 

 

Fixed Line Network Infrastructure

 

 

 

Interconnection Agreements

 

 

 

Licenses and Regulation

 

 

 

Competition

 

 

 

Environmental Matters

 

 

 

Intellectual Property Rights

 

 

 

Properties

 

 

Item 4A.

Unresolved Staff Comments

 

 

Item 5.

Operating and Financial Review and Prospects

 

 

 

Overview

 

 

 

Critical Accounting Policies

 

 

 

Results of Operations

 

 

 

Liquidity and Capital Resources

 

 

 

Impact of Inflation and Changing Prices

 

 

 

Other Information

 

 

Item 6.

Directors, Senior Management and Employees

 

 

 

Directors, Key Officers and Advisors

 

 

 

Terms of Office

 

 

 

Family Relationships

 

 

 

Compensation of Key Management Personnel of the PLDT Group

 

 

 

Executive Stock Option Plan

 

 

 

Share Ownership

 

 

 

Audit, Nomination, Executive Compensation and Finance Committees

 

 

 

Employees and Labor Relations

 

 

 

Pension and Retirement Benefits

 

 

 

Legal Proceedings

 

 

Item 7.

Major Shareholders and Related Party Transactions

 

 

 

Related Party Transactions

 

 

Item 8.

Financial Information

 

 

 

Consolidated Statements and Other Financial Information

 

 

 

Legal Proceedings

 

 

 

Dividend Distribution Policy

 

 

Item 9.

The Offer and Listing

 

 

 

Common Capital Stock and Amercian Depositary Receipts (“ADRs”)

 

 

Item 10.

Additional Information

 

 

 

Articles of Incorporation and By-Laws

 

 

 

Material Contracts

 

 

 

Exchange Controls and Other Limitations Affecting Securities Holders

 

 

 

Taxation

 

 

 

Documents on Display

 

 

Item 11.

Quantitative and Qualitative Disclosures About Market Risks

 

 

 

Liquidity Risk Management

 

 

 

Foreign Exchange Risk Management

 

 

 

Interest Rate Risk Management

 

 

Item 12.

Description of Securities Other than Equity Securities

 

PART II

 

 

 

 

Item 13.

Defaults, Dividend Arrearages and Delinquencies

 

 

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

 

 

Item 15.

Controls and Procedures

 

 

Item 16A.

Audit Committee Financial Expert

 

 

Item 16B.

Code of Business Conduct and Ethics

 

 

Item 16C.

Principal Accountant Fees and Services

 

 

Item 16D.

Exemption from the listing Standards for Audit Committees

 

 

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchaser

 

PART III

 

 

 

 

Item 17.

Financial Statements

 

 

Item 18.

Financial Statements

 

 

Item 19.

Exhibits

 

EXHIBIT INDEX

 

 

 

CERTIFICATION

 

 

 

 

CERTAIN CONVENTIONS AND TERMS USED IN THISREPORT

 

Unlessthe context indicates or otherwise requires, references to “we,” “us,” “our” or“PLDT Group” mean Philippine Long Distance Telephone Company and itsconsolidated subsidiaries, and references to “PLDT” mean Philippine LongDistance Telephone Company, not including its consolidated subsidiaries (see *Note2 –Basis of Consolidated Financial Statements Preparation*to theaccompanying consolidated financial statements in Item 18 for a list of thesesubsidiaries, including a description of their respective principal businessactivities).

 

Anydiscrepancies in any table between totals and the sums of the amounts listedare due to rounding.

 

Allreferences to the “Philippines” contained in this report mean the Republic ofthe Philippines and all references to the “U.S.” or the “United States” are to the United States of America.

 

Inthis report, unless otherwise specified or the context otherwise requires, allreferences to “pesos,” “Philippine peso” or “Php” are to the lawful currency ofthe Philippines, all references to “dollars,” “U.S. dollars” or “US$” are tothe lawful currency of the United States, all references to “Japanese yen,”“JP¥” or “¥” are to the lawful currency of Japan, and all references to “Euro”or “€” are to the lawful currency of the European Union.  Unless otherwiseindicated, translations of peso amounts into U.S. dollars in this report weremade based on the volume weighted average exchange rate quoted through thePhilippine Dealing System, which was Php53.062 to US$1.00 on December 31, 2005.  On June 28, 2006, the volume weighted average exchange rate quoted wasPhp53.514 to US$1.00.

 

Inthis report, each reference to:

 

•        ACeS Philippines means ACeSPhilippines Cellular Satellite Corporation, our wholly-owned subsidiary;

 

•        AIL means ACeS InternationalLimited;

 

•        Airborne Access means AirborneAccess Corporation, a 51%-owned subsidiary of ePLDT;

 

•        ARPU means average monthly revenueper user;

 

•        BCC or BonifacioCommunications Corporation, our 75%-owned subsidiary;

 

•        BSP means Bangko Sentral ngPilipinas;

 

•        Clark Telecom means PLDT ClarkTelecom, Inc., our wholly-owned subsidiary;

 

•        Digital Paradise means DigitalParadise, Inc., a 69.15%-owned subsidiary of ePLDT;

 

•        DoCoMo means NTTDoCoMo, Inc.;

 

•        DSL means digital subscriber line;

 

•        ePLDT means ePLDT, Inc., ourwholly-owned subsidiary;

 

•        ePLDT Ventus means ePLDT Ventus,Inc., a wholly-owned subsidiary of ePLDT carrying the umbrella brand name forePLDT’s call center business, including Vocativ and Parlance;

 

•        First Pacific means First PacificCompany Limited;

 

•        GAAP means generally acceptedaccounting principles;

 

•        GSM means global system for mobilecommunications;

 

•        Infocom means Infocom Technologies,Inc., a 99.6%-owned subsidiary of ePLDT;

 

•        Mabuhay Satellite means MabuhaySatellite Corporation, our 67%-owned subsidiary;

 

•        Maratel means PLDT-Maratel, our97.5%-owned subsidiary;

 

•        netGames means netGames, Inc., a60%-owned subsidiary of ePLDT;

 

•        NTC means the NationalTelecommunications Commission of the Philippines;

 

•        NTT means Nippon Telegraph andTelephone Corporation;

 

•        NTT Communications means NTTCommunications Corporation, a wholly-owned subsidiary of Nippon Telegraph andTelephone Corporation of Japan;

 

•        NTTC-UK means NTT CommunicationsCapital (UK) Ltd., a wholly-owned subsidiary of NTT Communications;

 

•        PAPTELCO means PhilippineAssociation of Private Telephone Companies;

 

•        Parlance means Parlance Systems,Inc., a wholly-owned subsidiary of ePLDT;

 

•        Piltel means Pilipino TelephoneCorporation, a 92.1%-owned subsidiary of Smart; 

 

•        PLDT Beneficial Trust Fund meansthe beneficial trust fund created by PLDT to pay the benefits under the PLDTEmployees’ Benefit Plan;

 

•        PLDT Global means PLDT GlobalCorporation, our wholly-owned subsidiary;

 

•        SEC means thePhilippine Securities and Exchange Commission;

 

•        SIM meanssubscriber identification module;

 

•        SMS means shortmessaging service;

 

•        Smart means Smart Communications,Inc., our wholly-owned subsidiary;

 

•        Smart Broadband means SmartBroadband, Inc. (formerly Meridian Telekoms, Inc.), our wireless broadbandprovider and a wholly-owned subsidiary of Smart; 

 

•        Subic Telecom means SubicTelecommunications Company, Inc., our wholly-owned subsidiary;

 

•        Telesat means Telesat, Inc., our94.4%-owned subsidiary;

 

•        VAS means value-added service;

 

•        Vocativ means Vocativ Systems,Inc., a wholly-owned subsidiary of ePLDT; 

 

•        VSAT means very small apertureterminal; 

 

•        WAP means wireless applicationprotocol;

 

•        W-CDMA means wireless-codedivision multiple access; and

 

•        Wolfpac means Wolfpac Mobile,Inc., our wireless content operator and a wholly-owned subsidiary of Smart.

 

FORWARD-LOOKING STATEMENTS

 

Some information in this report may containforward-looking statements within the meaning of Section 27A of the U.S.Securities Act of 1933, as amended, and Section 21E of the U.S. SecuritiesExchange Act of 1934, as amended.  We have based these forward-lookingstatements on our current beliefs, expectations and intentions as to facts,actions and events that will or may occur in the future.  Such statementsgenerally are identified by forward-looking words such as “believe,” “plan,”“anticipate,” “continue,” “estimate,” “expect,” “may,” “will” or other similarwords.

 

Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement.  We have chosen these assumptions orbases in good faith.  Theseforward-looking statements are subject to risks, uncertainties and assumptions,some of which are beyond our control.  In addition, these forward-lookingstatements reflect our current views with respect to future events and are nota guarantee of future performance.  Actual results may differ materially frominformation contained in the forward-looking statements as a result of a numberof factors, including, without limitation, the risk factors set forth inItem 3. “Key Information – Risk Factors.”  When considering forward-looking statements, you should keepin mind the description of risks and other cautionary statements in thisreport.  

 

Youshould also keep in mind that any forward-looking statement made by us in thisreport or elsewhere speaks only as at the date on which we made it.  New risksand uncertainties come up from time to time, and it is impossible for us topredict these events or how they may affect us.  We have no duty to, and do notintend to, update or revise the statements in this report after the datehereof.  In light of these risks and uncertainties, you should keep in mindthat actual results may differ materially from any forward-looking statementmade in this report or elsewhere.

 

PART I

 

Item 1.        Identity ofDirectors, Senior Management and Advisors

 

Not applicable.

 

Item 2.        OfferStatistics and Expected Timetable

 

Notapplicable.

 

Item 3.        Key Information

 

SelectedFinancial Data

 

Theselected consolidated financial information below should be read in conjunctionwith, and is qualified in its entirety by reference to, our consolidatedfinancial statements, including the notes, included elsewhere in this report.The consolidated financial statements have been prepared and presented inconformity with U.S. GAAP.

 

Priorto the filing of our Annual Report on Form 20-F in respect of the year endedDecember 31, 2002, the consolidated financial statements included in our AnnualReports on Form 20-F filed with the U.S. Securities and Exchange Commission, orU.S. SEC, were prepared in conformity with Philippine GAAP.  Philippine GAAPvaries in certain significant respects from U.S. GAAP.  A description of thesignificant differences between U.S. GAAP and Philippine GAAP and aquantitative reconciliation of such differences in the net loss andstockholders’ equity to U.S. GAAP was disclosed in a note to our previouslyfiled consolidated financial statements.

 

 

**Consolidated Financial Data**

 

**Years Ended December 31,**

 

**2005**

**2005**(1)

**2004**

**2003**

**2002**

**2001**

 

(in millions, except operating income per share, earnings per common share, ratio of earnings to fixed charges and dividends declared per common share)

*Amounts in conformity with U.S. GAAP:*

 

 

 

 

 

 

**Statements of Operating Data:**

 

 

 

 

 

 

Operating Revenues 

Php123,335

US$2,324

Php121,173

Php111,200

Php93,831

Php80,294

Service

120,348

2,268

114,904

100,486

81,686

67,279

Non-service

2,987

56

6,269

10,714

12,145

13,015

Operating Expenses

74,821

1,410

72,634

77,821

81,802

88,288

Operating Income (Loss)

48,514

914

48,539

33,379

12,029

(7,994)

Operating income (loss) per share

 

 

 

 

 

 

Basic

263.81

4.97

266.73

179.04

55.47

(59.52)

Diluted

255.15

4.81

252.20

165.37

52.23

(59.52)

Net income (loss)

40,603

765

28,101

11,045

(6,158)

(27,782)

Earnings per common share(2)

 

 

 

 

 

 

Basic

217.84

4.11

146.32

47.20

(52.08)

(176.85)

Diluted

211.93

3.99

145.30

45.72

(52.08)

(176.85)

**Balance Sheets Data:**

 

 

 

 

 

 

Cash and cash equivalents

30,064

567

27,321

19,372

10,974

4,276

Total assets

269,220

5,074

279,041

276,362

269,387

284,877

Total long-term debt - net of current portion

93,516

1,762

131,377

160,464

171,283

169,870

Total debt(3)

112,313

2,117

159,455

186,407

191,668

196,561

Total liabilities(4)

176,491

3,326

215,145

236,630

240,622

249,563

Total stockholders’ equity

79,595

1,500

48,079

24,746

16,413

24,472

**Other Data:**

 

 

 

 

 

 

Depreciation and amortization 

27,855

525

20,098

21,812

17,566

16,218

Ratio of earnings to fixed charges(5)

5.7x

5.7x

4.1x

2.0x

–

–

Net cash provided by operating activities

64,969

1,224

62,860

42,582

39,722

20,113

Net cash used in investing activities

13,080

247

24,764

20,021

17,167

29,376

Net cash used in financing activities

48,159

908

30,078

14,135

15,954

3,841

Dividends declared to common shareholders

9,624

181

–

–

–

202

Dividends declared per common share(6)

56.00

1.06

–

–

–

1.20

_____________

 

*(1)    **We maintain our accounts inPhilippine peso.  For convenience, the peso financial information as at and forthe year ended December 31, 2005, has been translated into U.S. dollars at theexchange rate of Php53.062 to US$1.00, the rate quoted through the PhilippineDealing System as at December 31, 2005.  This translation should not beconstrued as a representation that the Philippine peso amounts represent, orhave been or could be converted into, U.S. dollars at that rate or any otherrate.*

* *

*(2)    **In 2002 and 2001 ourconvertible preferred shares were deemed anti-dilutive based on a calculationof the required dividends on preferred shares for each series of convertiblepreferred shares divided by the number of equivalent common shares assumingsuch preferred shares were converted into common shares and compared againstthe basic earnings per share.  Since the amount of dividends on preferredshares over the equivalent number of common shares were greater than the basicearnings per share, the amounts for basic and diluted earnings per share arethe same.*

* *

*(3)    **Total debt represents currentportion of long-term debt, long-term debt—net of current portion and notespayable.*

* *

*(4)    **Total liabilities on aconsolidated basis represent the difference between total assets and minorityinterest in consolidated subsidiaries, preferred stock subject to mandatoryredemption and stockholders’ equity.*

* *

*(5)    **For purposes of this ratio,“Earnings” consist of income before provision for income tax (excluding PLDT’sshare in undistributed income of less than 50% owned affiliates) and fixedcharges (excluding capitalized interest).  “Fixed charges” consist of interest(including capitalized interest, discounts and other financing costs) on allindebtedness, amortization of deferred financing costs and the estimatedfinancing component of rent expense (i.e., one-third of rent expense).*

* *

*Dueto PLDT’s net losses in 2002 and 2001, the coverage ratio on a consolidatedbasis was less than 1.0x in these years.  In order to achieve a coverage ratioof 1.0x, we would have had to generate additional consolidated earnings ofPhp2,463 million and Php30,126 million for each of the years ended December 31,2002 and 2001, respectively.*

* *

*(6)    **The most recent cashdividend declaration made by PLDT on its common stock in 2005 was on November 8, 2005 at Php21 per common share to holders of record as at November 28, 2005 which was paid on December 28, 2005.  For more information, please see “DividendsDeclared” table below.*

 

Capital Stock

 

Thefollowing table summarizes PLDT’s capital stock outstanding as at December 31, 2005, 2004 and 2003.

 

 

**December 31,**

 

2005

** **

**2004**

** **

**2003**

 

(in millions)

Serial Preferred Stock

 

 

 

 

 

10% Cumulative Convertible Preferred Stocks

 

 

 

 

 

A to EE

Php4,073

 

Php4,091

 

Php4,099

Series III

–

 

46

 

46

Convertible Preferred Stocks Subject to Mandatory Redemption

 

 

 

 

 

Series V(1)

2

 

22

 

26

Series VI(1)

44

 

47

 

47

Series VII(1)

38

 

38

 

38

Cumulative Non-convertible Redeemable Preferred Stock

 

 

 

 

 

Series IV

360

 

360

 

360

 

Php4,517

 

Php4,604

 

Php4,616

Common Stock

Php904

 

Php851

 

Php847

___________

*(1)   Preferred stock subject to mandatory redemptionin 2008 and 2009 (see Note 14 – Preferred Stock Subject to Mandatory Redemptionto the accompanying consolidated financial statements in Item 18 for furtherdiscussion).*

 

Dividends Declared

 

The table sets forth dividend declarationson shares of PLDT’s common stock in 2005, which were the first cash dividenddeclarations on shares of PLDT’s common stock since April 2001:

 

** **

**Date**

**Amount**

**Class**

**Declaration**

**Record**

**Payable**

**Per Share**

**Total**

 

 

 

 

 

(in million pesos)

 

 

 

 

 

 

**Common Stock**

March 1, 2005

March 31, 2005

May 12, 2005

Php14.00

2,384

** **

May 5, 2005

June 3, 2005

July 14, 2005

21.00

3,598

** **

November 8, 2005

November 28, 2005

December 28, 2005

21.00

3,642

 

Inaddition, on February 27, 2006, PLDT declared cash dividend of Php28 per shareto common shareholders of record as of March 20, 2006 which was paid on April 20, 2006.

** **

Ourcurrent policy is to declare and pay dividends taking into consideration theinterests of our shareholders as well as our working capital, capital expendituresand debt servicing requirements.  Also taken into consideration are our abilityto meet loan covenant requirements and the required prior written consents ofcertain creditors and preferred stockholders (for stock dividends), undercertain conditions, in the declaration and payment of dividends as discussed in*Note 12 – Interest-bearing Financial Liabilities*and *Note**15 –Stockholders’ Equity* to the accompanying consolidated financial statementsin Item 18.  The retention of earnings is necessary to meet the fundingrequirements of our business expansion and development programs.Unappropriated retained earnings of PLDT include undistributed earningsrepresenting accumulated equity in the net earnings of our subsidiaries, whichare not available for distribution as dividends until received in the form ofdividends from such subsidiaries (see *Note 15 – Stockholders’ Equity* tothe accompanying consolidated financial statements in Item 18).  Dividends aregenerally paid in Philippine pesos.  In the case of shareholders residingoutside the Philippines, PLDT's transfer agent in Manila, which acts as thedividend-disbursing agent, converts the peso dividends into U.S. dollars at theprevailing exchange rates, and remits the dollar proceeds abroad, net of withholdingtax.

 

Dividends Paid

 

Asummary of dividends paid per share of PLDT's common stock stated in bothPhilippine peso and U.S. dollars follows:

 

 

**In Philippine Peso**

** **

**In U.S. Dollars**

2001

 

 

 

January 15

1.20

 

0.023

April 16

1.20

 

0.024

2002

–

 

–

2003

–

 

–

2004

–

 

–

2005

 

 

 

May 12

14.00

 

0.264

July 14

21.00

 

0.396

December 28

21.00

 

0.396

2006 (through June 28, 2006)

28.00

 

0.528

 

(*Note*:   *Dividends on PLDT's common stockwere declared and paid in Philippine peso.  For the convenience of the reader,the peso dividends are translated into U.S. dollars based on exchange rates onthe respective dates of dividend payments).*

 

Exchange Rates

** **

ThePhilippine government does not administratively fix the exchange rate betweenthe Philippine peso and the U.S. dollar.  Since August 1, 1992, a marketaverage rate has been determined daily in inter-bank trading using thePhilippine Dealing System, known as the “Philippine Dealing System ReferenceRate.”  The Philippine Dealing System is a specialized off-floor direct dealingservice for the trading of Philippine pesos-U.S. dollars by member banks of theBankers Association of the Philippines and BSP, the central bank of the Philippines.  All members of the Bankers Association of the Philippines are required tomake their Philippine peso-U.S. dollar trades through this system, which wasestablished by Telerate Financial Information Network of Hong Kong.

 

Thefollowing shows the exchange rates between the Philippine peso and the U.S.dollar, expressed in pesos per U.S. dollar, for the periods indicated, based onthe volume-weighted average exchange rate for each business day in each of theperiods presented:

 

 

**Year Ended December 31,**

** **

**Period End**

** **

**Average****(1)**

** **

**High****(2)**

** **

**Low****(3)**

 

 

 

 

 

 

 

 

2001

Php51.690

 

Php51.009

 

Php47.550

 

Php55.013

2002

53.254

 

51.583

 

49.336

 

53.841

2003

55.586

 

54.215

 

52.021

 

55.767

2004

56.341

 

56.044

 

55.142

 

56.443

2005

53.062

 

55.085

 

53.062

 

56.321

2006 (through June 28, 2006)

53.514

 

52.039

 

50.963

 

53.514

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

*(1)   Simple average of exchange rates for the period.*

*(2)   Highest exchange rate for the period.*

*(3)   Lowest exchange rate for the period.*

 

 

**Month**

 

**Period End**

** **

**Average****(1)**

** **

**High****(2)**

** **

**Low****(3)**

2005

 

 

 

 

 

 

 

December

Php53.062

 

Php55.085

 

Php53.062

 

Php56.321

2006

 

 

 

 

 

 

 

January

52.167

 

52.576

 

52.167

 

52.903

February

51.725

 

51.795

 

51.499

 

52.097

March

51.158

 

51.194

 

50.963

 

51.484

April 

51.777

 

51.394

 

50.997

 

51.889

May

52.820

 

52.175

 

51.389

 

52.920

June (through June 28, 2006)

53.514

 

53.152

 

52.694

 

53.514

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

*(1)   Simple average of exchange rates for the month.*

*(2)   Highest exchange rate for the month.*

*(3)   Lowest exchange rate for the month.*

 

This report contains conversionsof Philippine peso amounts into U.S. dollars for your convenience.  Unlessotherwise specified, these conversions were made at the exchange rate as at December 31, 2005 of Php53.062 to US$1.00.  You should not assume that such peso amountsrepresent such U.S. dollar amounts or could have been or could be convertedinto U.S. dollars at the rate indicated, or at any particular rate.  As at June28, 2006, the exchange rate quoted through the Philippine Dealing System wasPhp53.514 to US$1.00.

 

Risk Factors

 

***Risks Relating to Us***

* *

*We face competition from well-establishedtelecommunications operators and may face competition from new entrants thatmay adversely affect our business, results of operations, financial conditionand prospects*

 

The Philippine government hasliberalized the Philippine telecommunications industry and opened up thePhilippine telecommunications market to new entrants.  Including us, there are nine major local exchangecarriers, seven international gateway facility providers and five cellularservice providers in the country.  Many new entrants into the Philippinetelecommunications market have entered into strategic alliances with foreigntelecommunications companies, which provide them access to technological and fundingsupport as well as service innovations and marketing strategies.  Consequently,we are facing increasing competition in major segments of thetelecommunications industry, particularly data and other network servicessegments.  We cannot assure you that thenumber of providers of telecommunication services will not further increase orthat competition for telecommunications customers will not lead our cellularand fixed line subscribers to switch to other operators or lead us to increaseour marketing expenditures or reduce our rates, resulting in a reduction in ourprofitability.

 

Competition in the cellular telecommunications industry in the Philippines is based primarily on factors such as network coverage, quality of service andprice.  Recently, competition has increased as operators sought to develop andmaintain market shares and to attract new subscribers.  Our principal cellularcompetitors, Globe Telecom, Inc., or Globe, and Digitel TelecommunicationsPhilippines, Inc., or Digitel, through its cellular service, *Sun Cellular,*haveintroduced aggressive marketing campaigns and promotions.  In the future, thegovernment may allocate further frequencies and award additional cellulartelecommunications licenses, which would further increase competition.

 

As a result of competitive pressures, Smart has notincreased its cellular rates since November 1998.  Moreover, the level ofcompetition requires Smart to continuously innovate its products and to conductpromotions, which may affect its cellular revenues and revenue growth.  Forexample, in order to test the market demand for fixed rate or “bucket” plansfor voice and text services and in response to similar types of promotionslaunched by its competitors, Smart launched in March 2005 the *Smart 258 UnlimitedCall and Text* promotions pursuant to which Smart and *Talk ‘N Text*prepaid subscribers had the option to avail themselves of unlimited on-network(Smart-to-Smart) voice calls or unlimited on-network (Smart-to-Smart) textmessages at a fixed rate. 

In June 2005, Globe was awarded a license by the NTC toinstall fixed lines nationwide.  The expanded franchise allows Globe toincrease its fixed line coverage which was previously limited by its designatedservice areas.  In addition, Globe and other fixed line operators, such asDigitel and Bayan Telecommunications Philippines, Inc., or Bayantel, haverecently become more aggressive in lowering rates for national long distancecalls, international long distance calls and other data services including DSL.We have likewise introduced promotions and new pricing plans which effectivelylower the prices for international long distance calls and DSL.

In December 2005, the NTC awarded licenses covering thirdgeneration, or 3G, cellular services to existing cellular operators Smart,Globe, Digitel and to a new entrant, Connectivity Unlimited ResourcesEnterprises, or CURE.  The recent introduction of 3G cellular services in the Philippines may also lead to increased competition and may require Smart to incur additionalmarketing expenses in order to compete more effectively against the other 3Goperators.  

There can be noassurance that incurring additional marketing expenses for these promotions andresponding to rate pressures and the potential loss of customers will not havea material adverse effect on our financial performance.

 

Rapid changes in telecommunications technology mayadversely affect the economics of our existing businesses and the value of ourassets, increase our required capital expenditures and create new competition
 

Thetelecommunications sector has been characterized recently by rapidtechnological changes.  We cannot assure you that these developments will notresult in competition from providers of new services or the need to make substantialcapital expenditures to upgrade our facilities.  Furthermore, in 2005, the NTCissued the licenses covering 3G cellular services to four operators, including Smart,and we have made significant expenses in the roll out of these services.  Weare also currently upgrading to a next generation, all-IP, network and rollingout a wireless broadband network in order to expand our capability to providebroadband services.  These projects require significant capital expenditures overthe next few years.

 

Our future success will depend, in part, on ourability to anticipate or adapt to such changes and to offer services that meetcustomer demands on a competitive and timely basis.  We may be unable to obtainnew technologies on a timely basis or on satisfactory terms or implement themin an appropriate or effective manner.  Future development of new technologies,services or standards could require significant changes to our business modelwhich could necessitate new investments.  In addition, new products and servicesmay be expensive to develop and may result in increased competition.  Suchstrategic initiatives and technological developments could require us to incursignificant additional capital expenditures.  There can be no assurance that wewould be able to adopt and successfully implement new technologies.  Inaddition, there can be no assurance on how emerging and future technologicalchanges will affect our operations or the competitiveness of our services.

* *

*Our results of operationshave been, and may continue to be, adversely affected by competition ininternational long distance service*

 

The international long distancebusiness was historically one of our major sources of revenue.  However, due tocompetition and the steep decline in international settlement rates that arepaid to us by foreign telecommunications carriers for termination ofinternational calls on our network, revenues generated from our internationallong distance business have overall declined in recent years.  

 

Weanticipate that revenues from international long distance and internationaldata services, including our services, will continue to decline in the future,due primarily to:

 

•        increasedcompetition from other domestic and international telecommunications services providers;

 

•        advances intechnology;

 

•        alternativeproviders offering Internet telephony, or VoIP, and broadband capacity; and 

 

•        unauthorizedtraffic termination and bypass routings by international simple resaleoperators.

 

Wecannot assure you that these declines will not materially and adversely affectour financial performance.

 

Netsettlement payments between PLDT and other foreign telecommunications carriersfor origination and termination of international call traffic between the Philippines and other countries have been our predominant source of foreign currencyrevenues.  However, in U.S. dollar terms, these payments have been declining inrecent years.  Continued decline in our foreign currency revenues couldincrease our exposure to risks from declines in the value of the Philippinepeso against the U.S. dollar.  We cannot assure you that we will be able toachieve adequate increases in our other revenues to make up for any adverseimpact of a further decline in our net settlement payments.

* *

*Our debt instruments contain restrictive covenants which require us tomaintain certain financial tests and our substantial indebtedness could impairour ability to fulfill our financial obligations, service our other debt andcarry out new financings or pay dividends*

 

As at December 31, 2005, we had consolidated total indebtedness of approximately Php112,313 million (US$2,117million), and a consolidated ratio of debt to equity (total debt on aconsolidated basis divided by total equity) of 1.41x.  Our existing debt instrumentscontain covenants which, among other things, require PLDT to maintain certainfinancial ratios calculated on the basis of Philippine GAAP on a consolidatedand non-consolidated basis, limit our ability to incur indebtedness, makeinvestments, incur expenditures and pay dividends.  Financial statementsprepared in conformity with Philippine GAAP differ in some material respectsfrom financial statements prepared in conformity with U.S. GAAP.  For adescription of some of these covenants, see “Item 5.  Operating and FinancialReview and Prospects — Liquidity and Capital Resources — Financing Activities —Debt Financing — Debt Covenants.”

 

Oursubstantial indebtedness and the requirements and limitations imposed by ourdebt covenants could have important consequences.  For example, they could:

 

•        require us todedicate a substantial portion of our cash flow to payments on ourindebtedness, thereby reducing the availability of our cash flow to fundworking capital, capital expenditures and other general corporate requirements;

 

•        limit ourability to refinance our debt obligations or incur new debt;

 

•        limit ourability to incur capital expenditure; and

 

•        limit theavailability and amount of dividend payments to our common shareholders.

 

 

Theprincipal factors that can negatively affect our ability to comply with thefinancial ratios and other financial tests under our debt instruments aredepreciation of the peso relative to the U.S. dollar, poor operatingperformance of PLDT and our consolidated subsidiaries, impairment or similarcharges in respect of investments of other long-lived assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expense.  Since approximately 98% of our total debts were denominatedin foreign currencies, principally in U.S. dollars, many of these financialratios and other tests are negatively affected by any weakening of the peso.The peso has been subject to significant fluctuations in recent years.  From2002 to 2004, the peso has generally been depreciating from a high of Php49.336on May 20, 2002 to a low of Php56.443 on October 14, 2004.  In 2005, the peso fluctuated significantly from a low of Php56.321 on July 8 to a high ofPhp53.062 on December 29.  While the peso appreciated as at December 31, 2005,we cannot assure you that the peso will not depreciate and be subject tosignificant fluctuations going forward.

 

Wehave maintained compliance with all of our financial ratios and covenants, asmeasured under Philippine GAAP, under our loan agreements and other debtinstruments.  However, if negative factors adversely affect the financialratios, we may be unable to maintain compliance with these ratios and covenantsor be unable to incur new debt.  Inability to comply with our financial ratiosand covenants or raise new financing could result in a declaration of defaultand acceleration of some or all of our indebtedness.  The terms of some of ourdebt instruments have no minimum amount for cross-default.

 

If we are unable to meet our debtservice obligations or comply with our debt covenants, we could be forced torestructure or refinance our indebtedness, seek additional equity capital orsell assets.  An inability to effect these measures successfully could resultin a declaration of default and an acceleration of some or all of ourindebtedness.

 

Inaddition, we may have difficulty meeting debt payment obligations if we do notcontinue to receive cash dividends from Smart.

 

*Creditors of our subsidiaries will have superior claims to our subsidiaries’cash flow and assets*

 

A growing portion of ourconsolidated operating revenues and cash flow from operations is derived fromour subsidiaries, particularly Smart.  Smart and some of our other subsidiarieshave significant internal cash requirements for debt service, capitalexpenditures and operating expenses and so may be financially unable to pay anydividends to PLDT.  In addition, some of our subsidiaries are subject tocovenants that restrict them from distributing cash to PLDT except under certaincircumstances.  In particular, Smart is subject to loan covenants that restrictits ability to distribute cash to PLDT.  Although Smart received consents underits relevant loans that permitted it to make dividend payments to PLDT sinceDecember 2002, we cannot assure you that PLDT will continue to receivedividends or other distributions, or otherwise be able to derive liquidity fromSmart or any other subsidiary or investee in the future.

 

Creditorsof our subsidiaries will have prior claims to our subsidiaries’ assets and cashflows.  We and our creditors will effectively be subordinated to the existingand future indebtedness and other liabilities, including trade payables, of oursubsidiaries, except that we may be recognized as a creditor on loans we havemade to subsidiaries.  If we are recognized as a creditor of a subsidiary, ourclaim will still be subordinated to any indebtedness secured by assets of thesubsidiary and any indebtedness of the subsidiary otherwise deemed senior to theindebtedness we hold. 

 

*Our businesses require substantial capital investment, which we may notbe able to finance*

* *

Our projects under development and the continuedmaintenance and improvement of our networks and services, including Smart’sprojects, networks and services, require substantial ongoing capitalinvestment.  Our consolidated capital expenditures in 2005 and 2004 totaledPhp15,864 million and Php19,268 million, respectively.  Our 2006 budget forconsolidated capital expenditures is approximately Php19,759 million, of whichapproximately Php9,300 million is budgeted to be spent by PLDT, approximatelyPhp8,635 million is budgeted to be spent by Smart and the balance represents thebudgeted capital spending of our other subsidiaries.  PLDT’s capital spendingis intended principally to finance the continued build-out and upgrade of itsdata and Internet protocol infrastructures and for its fixed line data servicesand the maintenance of its network. ****Smart’s capital spending is focusedon expanding and upgrading its transmission network facilities to meetincreased demand for cellular services.  

 

Futurestrategic initiatives could require us to incur significant additional capitalexpenditures.  We may be required to finance a portion of our future capital expendituresfrom external financing sources, which have not yet been fully arranged.  Wecannot assure you that financing for new projects will be available on termsacceptable to us or at all.  If we cannot complete our development programs andother capital projects, our growth, results of operations and financialcondition could be materially and adversely affected. ****

 

*Our financial position could be materially and adversely affected ifthe peso significantly fluctuates against the U.S. dollar*

 

Substantially all of our indebtedness and relatedinterest expense, a substantial portion of our capital expenditures and aportion of our expenses are denominated in U.S. dollars and other foreigncurrencies, but a significant portion of our revenues is denominated in pesos.As at December 31, 2005, 98% of our total consolidated indebtedness wasdenominated in U.S. dollars and other foreign currencies.  As at December 31, 2005, approximately 53% of our consolidated debts were unhedged.  Adepreciation of the peso against the U.S. dollar increases the amount of ourdebt obligations and operating and interest expenses in peso terms.  In theevent that the peso depreciates against the U.S. dollar, we may be unable togenerate enough funds through operations (such as by raising our service rates,including through adjustments to rates for local exchange service based onmovements in the peso-to-dollar exchange rate) and other means to offset theresulting increase in our obligations in peso terms.  Further, these changescould cause us not to be in compliance with the financial covenants imposed byour lenders under certain loan agreements and other indebtedness.

 

On the other hand,approximately 35% of our consolidated service revenues are either denominatedin U.S. dollars or is linked to the U.S. dollar.  In this respect, anappreciation of the peso against the U.S. dollar reduces our revenues in pesoterms and reduces our cash flow from operations.  

 

Duringthe last decade, the peso has generally depreciated against most foreigncurrencies.  In addition, during this period, the Philippine economy has also,from time to time, experienced periods of concentrated peso devaluation andlimited availability of foreign currency.  Since June 30, 1997, when the BSP announced that it would let market forces determine the value of the peso, the pesohas experienced a significant decline against the U.S. dollar.  It depreciatedfrom Php26.376 to US$1.00 on June 30, 1997, to Php56.341 to US$1.00 as at December 31, 2004 but appreciated to Php53.062 to US$1.00 as at December 31, 2005.  The peso has also been subject to significant fluctuations.  The peso declined byapproximately 1% against the U.S. dollar to Php56.341 to US$1.00 as at December 31, 2004 from Php55.586 to US$1.00 as at December 31, 2003 and appreciated by approximately 6% against the U.S. dollar to Php53.062 to US$1.00 as at December 31, 2005 from 56.341 to US$1.00 as at December 31, 2004.  In 2005, the peso appreciated to a high of Php53.062 on December 29, 2005 after depreciating to a low of Php56.321 on July 8, 2005.  While the peso appreciated as at December 31,2005, we cannot assure you that the peso will not depreciate and be subject tosignificant fluctuations going forward.

 

The peso may again be subject to significantfluctuations and may depreciate due to a range of factors, including:

•        political andeconomic developments affecting the Philippines;

•        the volatility ofregional currencies, particularly the Japanese yen;

•        any interest rateincreases by the Federal Reserve Bank of the United States;

•        higher demand forU.S. dollars by both banks and domestic businesses to service their maturingU.S. dollar obligations; and

•        foreign exchangetraders covering their short U.S. dollar positions.

 

*The cellular telecommunications industry may not continue to grow*

 

The majority of our consolidated revenues is currently derived fromcellular services.  As a result, we depend on the continued development andgrowth of the cellular telecommunications industry.  The cellular penetrationrate in the Philippines is estimated to have reached approximately 41%.  Assuch, our cellular business is expected to grow at a slower rate as penetrationrate increases and Smart moves further into the lower-income segments of the Philippinecellular services market.  Growth of the cellular services market depends onmany factors beyond our control, including the continued introduction of newand enhanced cellular devices, the price levels of cellular handsets, consumerpreferences and the amounts of disposable income of existing and potentialsubscribers.  Any economic, technological or other developments resulting in areduction in demand for cellular services may harm our business.

* *

Our businesses depend on the reliability of our network infrastructure,which is subject to physical, technological and other risks
 

We depend to a significant degree on an uninterruptedoperation of our network to provide our services.  We also depend on robustinformation technology systems to enable us to conduct our operations.  Thedevelopment and operation of telecommunications networks are subject tophysical, technological and other risks, which may cause interruptions inservice or reduced capacity for customers.  These risks include:

 

•        physicaldamage;

 

•        power loss;

 

•        capacitylimitation;

 

•        cable theft;

 

•        softwaredefects; and

 

•        breaches ofsecurity by computer viruses, break-ins or otherwise.

 

While we are taking initiativesto prevent and/or mitigate the occurrence of the above risks including thepreparation of a disaster recovery plan that aims to allow restoration ofservice at the soonest possible time from occurrence of an accident, we cannotassure you that the occurrence of any of these risks will not have a materialand adverse effect on our ability to provide services to our customers.

 

*A significant number ofPLDT’s shares are held by three separate shareholders, which may not act in theinterests of other shareholders or stakeholders in PLDT*

* *

Affiliates of First Pacificdirectly or indirectly own approximately 31.36% of PLDT’s common stock as at December 31, 2005.  This is the largest block of PLDT’s common stock that is directly orindirectly under common ownership.  NTT Communications, which owned 14% ofPLDT’s common stock as at December 31, 2005, transferred on March 14, 2006 approximately 12.6 million shares of PLDT’s common stock, representing approximately7% of the outstanding shares of PLDT’s common stock, to DoCoMo pursuant to astock sale and purchase agreement dated January 31, 2006.  NTT Communications is a wholly-owned subsidiary, and DoCoMo a majority-owned subsidiary of NTT.  Inconnection with this transaction, First Pacific and certain of its affiliates,or the FP Parties, NTT Communications, DoCoMo and PLDT entered into a CooperationAgreement, dated January 31, 2006, or the Cooperation Agreement, pursuant towhich, among other things, certain rights of NTT Communications under the StockPurchase and Strategic Investment Agreement dated September 28, 1999 and theShareholders Agreement dated March 24, 2000 were extended to DoCoMo.  As aresult, NTT Communications and DoCoMo, in coordination with each other, havecontractual veto rights over a number of major decisions and transactions thatPLDT could make or enter into, including:  

* *

•        capital expenditures in excess ofUS$50 million;

* *

•        any investments, if the aggregateamount of all investments for the previous 12 months is greater than US$25million in the case of all investments to any existing investees and US$100million in the case of all investments to any new or existing investees,determined on a rolling monthly basis;

 

•        any investments in a specificinvestee, if the cumulative value of all investments made by us in thatinvestee is greater than US$10 million in the case of an existing investee andUS$50 million in the case of a new investee;

 

•        issuance of common stock or stockthat is convertible into common stock;

 

•        new business activities other thanthose we currently engage in;

 

•        merger or consolidation; and

 

•        the provision of financial supportto Piltel in excess of that remaining available under the PLDT Letter ofSupport, or LOS.

 

Moreover, as a result of theShareholders Agreement, the Cooperation Agreement and their respectivestockholdings, the FP Parties, NTT Communications and/or DoCoMo are able toinfluence our actions and corporate governance, including:

* *

•        elections of PLDT’s directors; and

 

•        approval of major corporateactions, which require the vote of common stockholders.

 

The FP Parties, NTTCommunications and/or DoCoMo may exercise control over these decisions andtransactions in a manner that could be contrary to your interests.

 

*If a major shareholder sells its interest in PLDT, the transaction mayresult in an event of default*

* *

If First Pacific or NTTCommunications sells all or a portion of its equity interest in PLDT, incertain circumstances, such sale may give rise to an obligation for PLDT tomake an offer to purchase or prepay its outstanding debt under its US$100million 10.625% notes due 2007 and its US$250 million 11.375% notes due 2012,its JP¥9,760 million loan agreement with Japan Bank for InternationalCooperation, or JBIC, (formerly known as the Export-Import Bank of Japan), and mayresult in a default under certain of Smart’s loan agreements.  As at December 31, 2005, Php18,234 million in principal amount of PLDT’s indebtednessis directly subject to a change in control, offer to purchase or prepayrequirement and Php3,867 million in principal amount of Smart’s indebtedness issubject to an event of default in the event of a change in control of PLDT.  IfPLDT fails to complete a required change in control offer to purchase or prepaythe affected debts, all of its debt could become immediately due and payable asa result of various cross-default provisions.  

 

*The franchise of Smart may be revoked due to its failure to conduct apublic offering of its shares*

 

Smart has publiclystated that it believes that it had ten years from the commencement of itsoperations, or until August 2004, to conduct a public offering of its sharesrequired under the Public Telecommunications Policy Act, or R.A. No. 7925.  AsSmart has not conducted a public offeringof its shares, the PhilippineCongress may revoke the franchise of Smart for its failure to comply with therequirement under R.A. 7925 on the public offering of its shares.  A quowarranto case may also be filed against Smart by the Office of the SolicitorGeneral of the Philippines for the revocation of the franchise of Smart on theground of violation of R.A. 7925.  In September 2004, Senate Bill No. 1675 wasfiled seeking to amend Section 21 of R.A. 7925.  The bill seeks to declare thata telecommunications entity shall be deemed to have complied with therequirement of making a public offering of its shares if two-thirds of itsoutstanding voting stock are owned and controlled, directly or indirectly, by alisted company.  The bill is currently pending in the Philippine Senate.  However, we cannot assure you that suchbill will be enacted and that the franchise of Smart will not be revoked due toSmart’s failure to timely conduct a public offering of its shares.

 

*Our business issignificantly affected by governmental laws and regulations, includingregulations in respect of our franchises, rates and taxes*

 

We operate our business underfranchises, each of which is subject to amendment, termination or repeal by thePhilippine Congress.  Additionally, PLDT operates pursuant to variousprovisional authorities and certificates of public convenience and necessity,or CPCNs, which are granted by the NTCand expire between now and 2028.  Some of PLDT’s CPCNs and provisionalauthorities have already expired.  However, PLDT filed applications forextension of these CPCNs and provisional authorities prior to their respectiveexpiration dates and is therefore entitled to continue to conduct its businessunder its existing CPCNs and provisional authorities pending the NTC’sdecisions on these extensions.  Smart also operates its cellular, internationallong distance, national long distance and global mobile personal communicationsvia satellite services pursuant to CPCNs, which will expire upon the expirationof its franchise.  Smart’s franchise is due to expire on March 27, 2017, 25 years after the date on which its current franchise was granted.  Smart operatesinternational private leased circuits under a provisional authority, whichexpired on May 6, 2003.  Smart applied for an extension of this provisionalauthority prior to its expiration.  Because PLDT and Smart filed theapplications for extension on a timely basis, we expect that these extensionswill be granted.  However, we cannot assure you that the NTC will grant theseextensions.  If a CPCN has not been issued, the NTC may permit an operator toprovide services pursuant to a provisional authority.  Provisional authoritiesare typically granted for a period of 18 months.  The Philippine RevisedAdministrative Code of 1987 provides that if the grantee of a license orpermit, such as a CPCN or provisional authority, has made timely and sufficientapplication for the extension thereof, the existing CPCN or provisionalauthority will not expire until the application is finally decided upon by theadministrative agency concerned.  However, we cannot assure you that ourfranchises, CPCNs and provisional authorities will be renewed.  For adescription of our licenses, see Item 4. “Information on the Company – Licensesand Regulation.”

 

The NTC also regulates the rateswe are permitted to charge for services that have not yet been deregulated, suchas local exchange services.  We cannot assure you that the NTC will not imposeadditional obligations on us that could lead to the revocation of our licensesif not adhered to and/or reduction in our total operating revenues orprofitability.  In addition, the NTC could adopt changes to the regulationsgoverning our interconnection with other telecommunications companies or therates and terms upon which we provide services to our customers that could havea material and adverse effect on our results of operations.

 

Inthe first quarter of 2005, House Bill No. 926 was filed and is now pending inthe House of Representatives of the Philippines.  The proposed billprovides for the cancellation of the currency exchange rate mechanism pursuantto which utility companies, including us, are permitted to adjust our monthlylocal exchage service rates according to changes in the peso-to-U.S. dollarexchange rate.  If this bill is passed into law or if the NTC issues guidelinesto change the basis of the currency exchange rate mechanism, our ability togenerate U.S. dollar linked revenues from our local exchange business could beadversely affected.  A decline in our foreign currency-linked revenues couldincrease our exposure to risks from declines in the value of the Philippinepeso against the U.S. dollar.

 

We are also subject to anumber of national and local taxes.  On May 24, 2005, the President signed into law Republic Act No. 9337, or R.A. 9337, amending certain sections ofthe National Internal Revenue Code which became effective on November 1, 2005.  In particular, the following amendments may negatively impact our profitability:

 

•     increase of theincome tax rate for corporations from 32% to 35% effective November 1, 2005;

•     increase invalue-added tax, or VAT, rate from 10% to 12% effective February 1, 2006; 

•     limited claim ofinput tax credits to 70% of output tax; and

•     input tax on capitalgoods spread evenly over 5 years or estimated useful life, whichever isshorter.

There can be no assurancethat the increase in taxes will not have a material adverse effect on our revenues,profitability and cash flows.  In addition, there can be no assurance thatwe will not be subject to new and/or additional taxes and that we will be ableto impose additional charges or fees on our customers to compensate for theimposition of such taxes. 

 

Moreover, thePhilippine Congress is considering five bills which were filed prior to thesigning into law of R. A. 9337.  Each of the proposed bill, if passed byCongress and enacted into law, would impose a 7% or 10% tax on the grossreceipts of cellular operators.  The proposed taxes would apply to bothcellular calls and cellular data revenues and prohibit cellular operators fromimposing additional charges or fees to compensate for the imposition of theproposed taxes.  In addition, several bills have also been submitted forconsideration by Congress, each of which, if passed by Congress and enactedinto law, would impose a franchise tax at a rate of 7% or 5% tax on grossreceipts of all telecommunications companies in lieu of the currentlyapplicable 10% VAT.  We cannot assure you that we would be able to imposeadditional charges or fees to compensate for the imposition of such taxes.

* *

The NTC may implementproposed changes in existing regulations and introduce new regulations whichmay result in increased competition and may have negative implications for ourrevenues and profitability

 

On June 16, 2000, the NTC issued Memorandum Circular No. 13-6-2000 proposing that cellular operators, including Smart and Piltel, be required, among otherthings:

 

•        to bill theirsubscribers for cellular calls on a six-second pulse basis instead of thecurrent per minute basis; 

 

•        not to billcalls directed to recorded voice messages; and 

 

•        to extend theexpiration date of prepaid cards from the current two months to two years.

 

Alongwith the other Philippine cellular operators, Smart sought and obtained from a Quezon City trial court, a preliminary injunction restraining the implementation of thismemorandum circular.  The NTC appealed the issuance of the injunction to theCourt of Appeals which, on October 9, 2001, annulled the preliminaryinjunction, ruling that the NTC had jurisdiction over the matter.  On January 10, 2002, the Court of Appeals denied the cellular operators’ motion to annul andreverse the decision of the Court of Appeals.  On February 22, 2002, Smart filed an appeal with the Supreme Court arguing that the appellate court had erred inruling that the NTC, and not the trial court, had jurisdiction over its case.On September 2, 2003, the Supreme Court upheld Smart’s appeal, reversing andsetting aside the decision of the Court of Appeals and affirming that the Quezon City trial court could hear and decide the case.  The case was remanded to the Quezon City trial court for continuation of the proceedings.  The NTC filed a motion forreconsideration on September 29, 2003 which was denied with finality by theSupreme Court on November 13, 2003.  The Supreme Court stated that “consideringthat the basic issues have already been passed upon and there is no substantialargument to warrant a modification of this court’s decision, the court resolvesto deny consideration with finality.”

 

In December 2005, the NTC issued a consultativedocument on the development of competition policy framework for the informationcommunications sector.  The consultative paper contains 11 questions whichcover the following key areas:

 

•        a review of market trends deemed to impinge on current and futurestate of competition in the sector;

 

•        an exploration of major policies that may change the balance ofmarket power, hence the nature and degree of competition;

 

•        an assessment of the quality of current regulation, identifyingmajor handicaps of the NTC; and

 

•        a discussion of the urgent tasks for the NTC to effectivelygovern a dynamic and complex industry.

 

The NTC invitedpublic comment from industry stakeholders and other interested parties inrelation to the issues raised in the paper.  On January 31, 2006, PLDT submitted a comprehensive response to the consultative paper.  

 

Therecan be no assurance that the NTC will not impose changes to the currentregulatory framework which may lead to increased competition.  Any such changesmay have an adverse effect on PLDT’s business, results of operations andprospects.

 

*If we are unable to install and maintain telecommunications facilitiesand equipment in a timely manner, we may not be able to keep up with ourprincipal competitors, which may have negative implications for our revenue andprofitability*

 

Our business requires the regular installation of new,and the maintenance of existing, telecommunications transmission and otherfacilities and equipment, which are being undertaken.  The installation andmaintenance of these facilities and equipment are subject to risks anduncertainties relating to:

 

•        shortages ofequipment, materials and labor;

 

•        work stoppagesand labor disputes;

 

•        interruptionsresulting from inclement weather and other natural disasters;

 

•        unforeseenengineering, environmental and geological problems; and

 

•        unanticipatedcost increases.

 

Anyof these factors could give rise to delays or cost overruns in the installationof new facilities or equipment or could prevent us from properly maintainingthe equipment used in our networks, and could have a material and adverseeffect on our results of operations and financial condition.

* *

*Failure to achieve and maintain effective internalcontrol over financial reporting in accordance with Section**404 of theSarbanes-Oxley Act of 2002 couldadversely impact investor confidence and the market price of our common sharesand ADSs*

 

Pursuant to Section 404 of theSarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 20-F forthe fiscal year ending December 31,2006, we will be required to include a report by our management on our internalcontrol over financial reporting in our Annual Reports on Form 20-F thatcontains an assessment by management of the effectiveness of our internalcontrol over financial reporting.  Inaddition, our independent registered public accounting firm must attest to andreport on management’s assessment of the effectiveness of our internal controlover financial reporting. 

 

We cannot assure you as to our management’s, or ourindependent registered public accounting firm’s, conclusion as of December 31, 2006 withrespect to the effectiveness of our internal control over financing reporting.There is a risk that neither our management nor our independent registeredpublic accounting firm will be able to conclude as of December 31, 2006 that our internal control overfinancial reporting is effective.  Evenif our management concludes that our internal control over financial reportingis effective, our independent registered public accounting firm may disagree.  If our independent registered public accountingfirm is not satisfied with our internal control over financial reporting or thelevel at which our internal control over financial reporting is documented,designed, operated or reviewed, or if the independent registered publicaccounting firm interprets the requirements, rules or regulations differentlyfrom us, then it may decline to attest to our management’s assessment or mayissue an adverse opinion.  Any ofthese possible outcomes could result in an adverse reaction in the financialmarketplace due to a loss of investor confidence in the reliability of ourconsolidated financial statements, which ultimately could negatively impact themarket prices of our common shares and ADSs. 

 

Moreover, internal control over financial reportingmay not prevent or detect misstatements because of its inherent limitations,including the possibility of human error, the circumvention or overriding ofcontrols, or fraud. Therefore, even effective internal control over financialreporting can provide only reasonable assurance with respect to the preparationand fair presentation of financial statements.  If we fail tomaintain the adequacy of our internal control over financial reporting,including any failure to implement required new or improved controls, or if weexperience difficulties in their implementation, our business and operatingresults could be harmed, we could fail to meet our reporting obligations andthere could be a material adverse effect on the market prices of our commonshares and ADSs.

*** ***

*We may not be successfulin our acquisitions of and investments in other companies and businesses, andmay therefore be unable to implement fully our business strategy*

 

Aspart of our growth strategy, we may from time to time make acquisitions andinvestments in companies or businesses, which may or may not be significant.The success of our acquisitions and investments depends on a number of factors,including:
- our ability to identify suitable opportunities for investment or acquisition; 
- our ability to reach an acquisition or investment agreement on terms that are satisfactory to us or at all; 
- the extent to which we are able to exercise control over the acquired company; 
- the economic, business or other strategic objectives and goals of the acquired company compared to those of ours; and 
- our ability to successfully integrate the acquired company or business with us. 

 

Any of our contemplated acquisitions and investmentsmay not be consummated due to reasons or factors beyond our control.  Even ifany contemplated acquisitions and investments are consummated, we may not beable to realize any or all of the anticipated benefits of such acquisitions andinvestments.  Moreover, if we are unsuccessful in our contemplated acquisitionsand investments, we may not be able to implement fully our business strategy tomaintain or grow certain of our businesses.

 

***Risks Relating to the Philippines***

 

*PLDT’s business may beaffected by political or social or economic instability in the Philippines*

* *

On May 10, 2004, the Philippines held a presidential election which resulted in a victory by theincumbent President Arroyo who successfully retained her post.  Shortly afterthe elections, allegations of irregularities in the presidential elections,such as stolen ballots and vote buying intensified.  The Philippine Congresscommenced an inquiry into a wire tapped audio tape which contains aconversation allegedly between President Gloria Macapagal-Arroyo and acommissioner of the Commission on Elections discussing the vote count on thepresidential election. On June 27, 2005, President Gloria Macapagal-Arroyopublicly stated that she did speak to a commissioner of the Commission onElections in order to protect her votes, but not to influence the outcome ofthe election.  Impeachment complaints based on allegations of culpableviolation of the Constitution, graft and corruption and betrayal of publictrust were filed against President Arroyo with the Philippine Congress.  OnSeptember 6, 2005, the Philippine Congress voted to reject the impeachmentcomplaints against President Arroyo.  

 

Recently, coup d’etatattempts against the administration of President Arroyo have been reported.  OnFebruary 24, 2006, President Arroyo declared a state of emergency allowing forwarrantless arrests and a temporary take-over of privately-owned utilitycompanies.  On March 3, 2006, President Arroyo lifted the state of emergency.

 

The Philippines has also experienced periods of slow growth, high inflation and significant devaluationof the peso.  The Philippine government is also facing a fiscal deficit whichit is aiming to eliminate by 2008 by implementing a number of economicreforms.  

 

Thefiscal deficit position of the Philippine government and the ongoing politicaluncertainty has resulted in increased concerns about the political and economicstability of the country.  This, in turn, has resulted in the volatility of thepeso against the dollar.  There can be no assurance that the politicalenvironment in the Philippines will be stable or that the current or any futuregovernment will adopt economic policies conducive to sustained economic growthor which do not impact adversely on the current regulatory environment fortelecommunications or other companies.  

 

*If foreign exchange controls were to be imposed, our ability to meetour foreign currency payment obligations could be adversely affected*

 

Approvalfrom or registration with the BSP for the issuance and guarantee of foreigncurrency-denominated borrowings is not required in order to make our foreigncurrency payment obligations legally valid and binding.  However, receivingthis approval and registration will enable a borrower to access the bankingsystem to obtain foreign currency to service its debt obligations rather thanusing other sources of foreign currency, for example, foreign currency revenuestreams.

 

The Philippine government has, in the past, institutedrestrictions on the conversion of the peso into foreign currency and the use offoreign exchange received by Philippine companies to pay foreigncurrency-denominated obligations.  The Monetary Board of the BSP has statutoryauthority, with the approval of the President of the Philippines, during aforeign exchange crisis or in times of national emergency, to:

 

•        suspend temporarily or restrictsales of foreign exchange;

 

•        require licensing of foreignexchange transactions; or

 

•        require the delivery of foreignexchange to the BSP or its designee banks.

 

Wecannot assure you that foreign exchange controls will not be imposed in thefuture.  If imposed, these restrictions could materially and adversely affectour ability to obtain foreign currency to service our foreign currencyobligations.

 

*The occurrence of natural catastrophes may materially disrupt ouroperations*

* *

The Philippines has experienced a number of majornatural catastrophes over the years including typhoons, volcanic eruptions andearthquakes that may materially disrupt and adversely affect our businessoperations.  There can be no assurance that the insurance coverage PLDTmaintains for these risks will adequately compensate it for all damages andeconomic losses resulting from natural catastrophes.

 

Item 4.        Informationon the Company

 

Overview

 

Weare the leading national telecommunications services provider in the Philippines.  Through our three principal business groups — wireless, fixed line, andinformation and communications technology, or ICT, we offer a wide range oftelecommunications services to over 22 million wireless and fixed linesubscribers in the Philippines across the nation's most extensive fiber opticbackbone and fixed line, cellular and satellite networks.

 

Weare the leading fixed line services provider in the Philippines withapproximately 62% of the total reported fixed lines in service nationwide as at December 31, 2005.  Smart, our wholly-owned subsidiary, is the leadingcellular services provider in the country, with approximately 45% of totalreported cellular subscribers as at December 31, 2005.  Piltel, Smart’s 92.1%-owned subsidiary, had approximately 14% of total reported cellular subscribersas at December 31, 2005.  Our involvement in the ICT sectors are primarilythrough our equity interests in various entities, including *ePLDT Ventus*,a wholly-owned subsidiary of ePLDT carrying the umbrella brand for our callcenter business in the Philippines.

 

Our common shares are listed andtraded on the Philippine Stock Exchange, or PSE, and our American DepositaryShares evidenced by American Depositary Receipts, or ADRs, are listed andtraded on the New York Stock Exchange in the United States.  We had a marketcapitalization of approximately Php359,140 million (US$6,799 million) as at May 31, 200 6, representing one of the largest market capitalizations amongPhilippine-listed companies.  For the year ended December 31, 2005, we hadconsolidated operating revenues of Php123,335 million (US$2,324 million). 

 

Ourprincipal executive offices are located at the Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines and our telephone number is (632) 816-8556.Our website address is *www.pldt.com.ph*.  The contents of our website arenot a part of this annual report.

 

Historical Background and Development

 

PLDTwas incorporated under the old Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following the merger of four telephonecompanies under common U.S. ownership.  Under its amended Articles ofIncorporation, PLDT’s corporate term is limited through 2028.  In 1967,effective control of PLDT was sold by General Telephone and ElectronicsCorporation (a major shareholder since PLDT’s incorporation) to a group ofFilipino businessmen.  In 1981, in furtherance of the then existing policy ofthe Philippine government to integrate the Philippine telecommunicationsindustry, PLDT purchased substantially all of the assets and liabilities of theRepublic Telephone Company which at that time was the second largest telephonecompany in the Philippines.  In 1998, First Pacific, through its Philippine andother affiliates, acquired a significant interest in PLDT.  On March 24, 2000, NTT Communications, through NTTC-UK, became PLDT’s strategic partner withapproximately 15% economic and voting interest in the issued common capital stockof PLDT.  Simultaneous with NTT Communications’ investment in PLDT, we acquired100% of Smart.  On March 14, 2006, DoCoMo acquired from NTT Communications approximately7% of PLDT’s outstanding common shares, with NTT Communications retainingownership of approximately 7% of PLDT’s common shares.

 

PLDT’s original franchise wasgranted in 1928 for an initial period of 50 years and was subsequently extendeduntil 2028.  The amended franchise (R.A. 7082), which became effective on August 24, 1991, also broadened PLDT’s franchise to permit PLDT to provide virtually everytype of telecommunications service.  PLDT’s franchise covers the business ofproviding basic and enhanced telecommunications services in and between theprovinces, cities and municipalities in the Philippines and between thePhilippines and other countries and territories including mobile, cellular,wired or wireless telecommunications system, fiber optics, multi-channeltransmission distribution systems and their value-added services such as butnot limited to transmission of voice, data, facsimile, control signals, audioand video, information services bureau and all other telecommunications systemstechnologies, as are at present available or can be made available throughtechnical advances or innovations in the future.  

 

Since the implementation of itsSubscriber Investment Plan, or SIP, in 1973 pursuant to Presidential Decree No.217, which, until April 21, 2003, required telephone subscribers to purchaseshares of PLDT's preferred stock, PLDT has developed a broad base of publicownership with approximately 2,193,525 common and preferred shareholders of record as at December 31, 2005.  Approximately 2,176,980 of these shareholders are Philippine personsrepresenting approximately 86% of PLDT's outstanding common and preferredshares.  For purposes of the percentages described in this paragraph, all theADSs evidenced by American Depositary Receipts, or ADRs, are considered to beheld of record in the United States.  As approved by the NTC, the purchase ofPLDT preferred shares by PLDT subscribers pursuant to the SIP became optionalstarting April 22, 2003.  

 

Our consolidated capitalexpenditures amounted to Php15,864 million, Php19,268 million and Php17,943 million in 2005, 2004 and 2003, respectively.  Of these amounts, Php6,389million, Php3,917 million and Php6,100 million were attributable to PLDT for2005, 2004 and 2003, respectively, while Php8,785 million, Php14,721 millionand Php11,305 million were spent by Smart for 2005, 2004 and 2003,respectively.  The remaining balances were spent by our other subsidiaries,principally ePLDT and its subsidiaries.

 

Organization

 

As at May 31, 2006,our three largest shareholders were First Pacific, a Hong Kong-based investmentand management company engaged in consumer, telecommunications and propertybusinesses, which, through its Philippine and other affiliates, beneficiallyowned 31.36% of our common shares, NTT Communications, a wholly-ownedsubsidiary of NTT of Japan, which beneficially owned approximately 7% of ourcommon shares, and DoCoMo, a majority-owned subsidiary of NTT, which owned approximately7% of PLDT’s common shares following its acquisition of such equity interest in PLDT from NTTCommunications on March 14, 2006 which reduced NTT Communications’ ownership inPLDT’s common shares from approximately 14% to approximately 7%.

 

PLDT and the following subsidiaries were allincorporated in the Philippines, except for PLDT Global, which was incorporatedin the British Virgin Islands:

 

**Name of Subsidiary/Investee**

**Principal Activity**

**Percentage of Ownership**

**2005**

**2004**

2003

** **

 

 

 

 

**Wireless**

 

 

 

 

Smart and subsidiaries

Cellular mobile services

100.0

100.0

100.0

Telesat

Satellite communications services

94.4

94.4

94.4

ACeS Philippines 

Satellite phone services

100.0

100.0

100.0

Mabuhay Satellite

Satellite communications services

67.0

67.0

67.0

 

 

 

 

 

**Fixed Line**

 

 

 

 

Clark Telecom

Telecommunications services

100.0

100.0

100.0

Subic Telecom

Telecommunications services

100.0

100.0

100.0

Smart-NTT Multimedia, Inc.

Data and network services

100.0

100.0

100.0

PLDT Global and subsidiaries

Telecommunications services

100.0

100.0

100.0

PLDT-Maratel

Telecommunications services

97.5

97.5

97.5

BCC

Telecommunications, infrastructure and related value-added services

75.0

75.0

75.0

 

 

 

 

 

**Information and Communications Technology**

 

 

 

 

ePLDT and subsidiaries

Information and communications infrastructure for Internet-based services, e-commerce, call centers and IT-related services

100.0

100.0

100.0

* *

OnSeptember 2, 2004, Smart entered into a sale and purchase agreement to acquire100% of Smart Broadband, a company primarily engaged in providing wirelessbroadband and data services to small and medium-scale enterprises in thePhilippines, for a total consideration of US$45 million of which payments ofUS$11 million and US$7 million were made in 2004 and US$4 million in January2005; the balance of US$23 million was paid on March 7, 2006.  The acquisitionaims to strengthen Smart’s position in the wireless data segment and is in linewith Smart’s overall strategy of providing the widest range of innovativewireless services.

 

On July 2, 2004, Smart and PLDT entered into a deed of sale of shares under whichSmart acquired from PLDT approximately 59.3 million shares of Piltel Class I,Series K Convertible Preferred Stock for approximately Php2,066 million.  Smartconverted 4.825 million of said shares into approximately 820.250 million Piltelcommon shares on July 9, 2004 and the balance of 54,467,720 shares wereconverted into 9,259,512,400 Piltel common shares on December 23, 2004.  On April 25, 2005, PLDT and Smart entered into a subscription and assignmentagreement under which PLDT assigned and transferred to Smart all of its 767million shares of Piltel common stock in exchange for 11 million of Smart'spreferred shares.  As a result of the foregoing transactions, Smart'sshareholdings in Piltel now represent 92.1% of Piltel's outstanding commonshares and PLDT ceased to own any shares of Piltel's common stock.

 

On May 25, 2006, we announced that ePLDT and SPI Tech, L.P. enteredinto a non-binding letter of interest in respect of a potential acquisition byePLDT of 100% of SPI Technologies, Inc., or SPI, one of the leadingpure-play business process outsourcing, or BPO, companies and independent BPOservice providers in the world.  We currently expect to use internallygenerated cash funds to finance the possible acquisition by ePLDT of SPI.  Webelieve that the possible acquisition of SPI would solidify ePLDT’s position asone of the largest full service BPO companies.  However, there is noobligation on the parties to negotiate definitive transaction documents and there is noassurance whether and on which terms the possible acquisition of SPI will beimplemented and, if implemented, whether we will be able to realize any orall of the currently anticipated benefits of such acquisition.

 

***Wireless***

 

We provide cellular, satellite, VSAT, wirelessbroadband and other services through our various subsidiaries in the wirelessbusiness segment.  Revenues from our wireless business accounted for 59%, 59%and 57% of our total operating revenues for the years ended December 31, 2005,2004 and 2003, respectively.  In 2005, 2004 and 2003, cellular service revenuesaccounted for 96%, 97% and 97%, respectively, of our wireless business servicerevenues. 

 

Weprovide cellular services (including handset sales), through Smart and itssubsidiary, Piltel.  Smart is the leading cellular services provider in the Philippines, with 15,424,196 subscribers as at December 31, 2005, representing an estimated market share of approximately 45%.  Piltel, a reseller of Smart's GSM networkwith its own branding, had 4,984,425 subscribers as at December 31, 2005, representing an estimated market share of approximately 14%.  In 2005, the combinednumber of Smart's and Piltel's subscribers increased by 1,200,389, or 6%, to20,408,621.  As at December 31, 2005, cellular penetration in the Philippines reached approximately 41%, which was nearly ten times the country's fixed linepenetration, although the existence of subscribers owning multiple SIMs haslikely overstated this penetration rate to a certain extent.

 

Smart'sand Piltel's cellular subscriber gains were predominantly attributable to theirrespective prepaid services.  Approximately 99% of Smart’s and all of Piltel’s cellularsubscribers were prepaid as at December 31, 2005.  The predominance of prepaidservice reflects one of the distinguishing characteristics of the Philippinecellular market.  The growth in our prepaid service has enabled us to increaseand broaden our subscriber base rapidly while controlling credit risk andreducing billing and administrative costs on a per-subscriber basis.  

 

Ourcellular subscriber growth has also been driven by text messaging.  Textmessaging is extremely popular in the Philippines, particularly on the prepaidplatform, as it provides a convenient and inexpensive alternative to voice ande-mail based communications.  During 2005, our text messaging systems handledover 43,586 million standard outbound text messages with another 52,374 millionmessages generated by the unlimited text offerings.  This compares to 40,953million standard outbound text messages in 2004; unlimited text services werenot yet available in 2004.

 

Smart'sNokia-provided cellular network is the most extensive in the Philippines, covering substantially all of Metro Manila and most of the other major populationcenters in the Philippines.  Its dual-band GSM network allows it to deploy highcapacity 1800 MHz base transceiver stations, or BTS, in dense urban areas whileits 900 MHz BTS can be much more economically deployed in less denselypopulated provincial areas.  With 5,982 GSM base stations as of the end ofDecember 2005, Smart’s cellular network covers approximately 82% of all townsand municipalities in the Philippines, accounting for over 99% of thepopulation.  Piltel’s services are also supported on the network.

 

***Fixed Line***

 

Weare the leading fixed line operator in the Philippines.  Our fixed linebusiness group offers local exchange, international long distance, nationallong distance, data and other network and miscellaneous services.  We had approximately2.1 million fixed lines in service as at December 31, 2005.  Revenues from our fixed line services accounted for 40% of our consolidated operating revenuesin 2005.

 

Our5,400-kilometer long digital fiber optic backbone is supported by an extensivedigital microwave backbone.  We are in the process of installing an additional1,000-kilometer fiber optic link to accommodate the increasing demand forhigher-capacity voice, data and video services.  Our fixed line network reachesall of the major cities and municipalities in the Philippines, with aconcentration in the Metropolitan Manila area.  Our network offers thecountry's most extensive connections to international networks through threeinternational gateway switching exchanges, satellite systems and variousregional submarine cable systems in which we have interests.

 

***Information and Communications Technology***

 

Throughour wholly-owned subsidiary, ePLDT, we provide broad-based integrated ICTservices focusing on infrastructure and services for Internet applications,Internet protocol-based solutions and multimedia content delivery.  ePLDT'sprincipal activities are the operation of an Internet data center under thebrand name *VitroTM*, call center and Internet and gaming businesses.  Asthe newest business in the PLDT group, revenues from our ICT services accountedfor approximately 3% of our total operating revenues in 2005.

 

Strengths

 

Webelieve our business is characterized by the following competitive strengths:

 

•        *Recognized Brands*.  PLDT andSmart are strong and widely recognized brand names in the Philippines.  We have built the PLDT brand name for over 75 years as the leading telecommunicationsprovider in the Philippines.  Smart is recognized in the Philippines as an innovative provider of high-quality cellular services.  Piltel's *Talk ‘N Text*brand, which is provided using Smart’s network, has also gained significantrecognition.

 

•        *Leading Market Shares*.  With over 22million fixed line and cellular subscribers as at December 31, 2005, we have the leading market position in both fixed line and cellular markets in the Philippines.  

 

•        *Diversified Revenue Sources*.  As a resultof the continued growth of cellular service in the country, approximately 62%of our consolidated operating revenues in 2005 were derived from our wirelessbusiness segment.  Fixed line revenues, which represented 40% of our consolidatedoperating revenues in 2005 and 2004, have remained stable over the past threeyears despite pressures on traditional fixed line voice revenues, resultingfrom increases in our fixed line data and other network services.  We continueto identify and develop new revenue sources from our cellular, fixed line andICT businesses.

 

•        *Advanced Integrated Network*.  With one ofthe most advanced and extensive telecommunications networks in the Philippines, we are able to offer a wide array of communications services.  We areenhancing the capabilities of our fixed line and wireless networks to allow usto better exploit this competitive strength and achieve higher levels ofnetwork efficiency in providing voice and data services.  In addition, we havecommenced upgrading of our fixed line network to Next Generation Network, or NGN,and the rolling out of 3G and wireless broadband in order to increase broadbandsubscribers, and expand our data/broadband capabilities.

 

•        *Innovative Products andServices*.  We have successfully introduced a number of innovativeand award-winning cellular products and services, including *Smart Load*and*Pasa Load.**Smart Load* is an “over-the-air” electronic loadingfacility designed to make reloading of air time credits more convenient for,and accessible, to consumers.  *Pasa Load*(the term “pasa” means“transfer” in the vernacular), is a derivative service of *Smart Load*that allows load transfers to other *Smart Buddy* and *Talk ‘N Text*subscribers.

 

•        *Strong Strategic Relationship*.  We haveimportant strategic relationships with NTT Communications, DoCoMo and FirstPacific.  The technological support, international experience and managementexpertise made available to us through these strategic relationships enhanceour market leadership and ability to provide and cross-sell a more completerange of products and services.

 

Strategy

 

Thekey elements of our business strategy are:

 

•        *Build on our leading positionsin the fixed line and wireless businesses*.  We plan to build on ourposition as the leading provider of fixed line service in the Philippines by continuing to launch new products and services to increase subscriber value andutilization of our existing facilities and equipment at reduced cost.  We plan tobuild on our position as the leading wireless service provider in the Philippines by continuing to introduce new products and services to increase oursubscribers' use of our network for both voice and data, as well as theirreliance on our services.  We are currently upgrading our fixed line facilitiesto a NGN and also rolling out a 3G network based on a W-CDMA technology as wellas expanding our DSL and wireless broadband facilities.  Our operating targetis to continue growth in profitability by increasing our revenues whilecontrolling our costs.

 

•        *Capitalize on our strength asan integrated provider of telecommunications services*.  We offer the broadest range of telecommunicationsservices among all operators in the Philippines.  We plan to capitalize on thisposition to maximize revenue opportunities by bundling and cross-selling ourproducts and services.  In addition, we are currently developing convergentproducts which feature the combined benefits of providing voice and data, andfixed line, wireless and ICT services utilizing our network and businessplatforms.  We are also lowering our costs by integrating operations of ourdifferent businesses.

 

•        *Strengthen our leading positionin the data market*.  Using our fixed line business, we are committed tofurther develop, enhance and lead our fastest growing business segment – dataand other network services.  Consistent with our strategy of introducinginnovative products and services using advanced technology, we have launchedvarious products and services that address different market needs.  

 

•        *Strengthen our financialposition*.  We are working to increase our cash flow available fordebt reduction and dividends by containing our operating costs, managingcapital expenditures and generating cash returns from our investments insubsidiaries.  Since December 2002, Smart has been regularly paying dividendsto PLDT to supplement PLDT’s cash flows available for debt reduction.   Thecash flows generated by our businesses have increased significantly in recentyears which has allowed us to substantially reduce our levels of indebtedness andalso restore the payment of dividends to our shareholders.  In 2005, we repaid US$714million of debts and paid common dividends aggregating Php9,587 million.  We currentlyexpect that a greater proportion of our free cash flow in succeeding years may beutilized for the payment of common dividends while continuing to service ourmaturing debt obligations.

** **

**Business**

** **

Wireless

 

Weprovide cellular, satellite, VSAT, wireless broadband and other servicesthrough our wireless business segment.  

 

*Cellular Service*

** **

*Overview*

** **

Ourcellular business, which we provide through Smart and Piltel to over 20 millionsubscribers, approximately 99% of whom are prepaid subscribers, is focused onproviding wireless voice communications, wireless data communications(primarily through text messaging) and a variety of other value-added services,such as (a) *Mobile Banking* (banking services delivered over the cellularnetwork); (b) *Smart zedTM*; (c) *Smart Money*; and (d) international roaming, as well as other value-added services developed onSmart’s and Piltel’s own platform.  Smart services approximately five millionsubscribers of Piltel on its GSM network through a facilities service agreementwith Piltel, under the brand name *Talk ‘N Text*.

 

Thefollowing table summarizes key measures of Smart’s and Piltel’s cellularbusiness as at and for the years ended December 31, 2005, 2004 and 2003:

 

 

**Years Ended December 31,**

 

**2005**

**2004**

**2003**

Systemwide cellular subscriber base

20,408,621

19,208,232

12,947,197

Smart

15,424,196

14,595,782

10,080,112

Prepaid

15,144,118

14,321,288

9,831,135

Postpaid

280,078

274,494

248,977

Piltel(1)

4,984,425

4,612,450

2,867,085

Growth rate of cellular subscribers

6%

48%

51%

Smart

6%

45%

48%

Piltel(1)

8%

61%

62%

Cellular revenues (in millions)

Php74,229

Php72,532

Php63,298

Service

71,518

66,421

52,750

Non-service

 

 

 

Handset sales 

2,711

6,111

10,548

Percentage of cellular revenues to total operating revenues 

57%

58%

56%

_____________

 

*(1)      **Represents Talk ‘N Text, aprepaid service provided by Piltel using Smart’s network. Piltel’s revenue isnet of service fees payable to Smart for using Smart’s network.  Piltel doesnot offer postpaid service.*

* *

*ServicePlans*.  Smart and its service brands are strong and widelyrecognized brand names in the Philippines.  Smart’s approach has been tomethodically segment the market and tailor services and content appropriate toeach particular niche.  An example ofSmart’s successful market segmentation strategy is *Talk ‘N Text*, thebrand carried by Smart’s subsidiary, Piltel.  *Talk ‘N Text* is aimed atthe lower-income markets with the objective of serving as a flanker brandagainst competition.  Capitalizing on the Filipino’s love for pop culture, *Talk‘N Text* extensively uses local celebrities as its endorsers and thevernacular in its advertising and promotional campaigns.  With almost fivemillion subscribers, *Talk ‘N Text* has the third-largest GSM subscriberbase in the Philippines.

 

*SmartInfinity* is a premium postpaid plantargeting affluent individuals 35 years and above who are highly mobile locallyand internationally.  It offers a round-the-clock dedicated personal conciergeservice, international assistance services, premium handset packages andexclusive lifestyle content.  *addict mobile* is a postpaid plan targetingprimarily 18-35 year olds in the higher and middle-income markets.  It offersexclusive multimedia content to subscribers and features personalized means forInternet surfing, allowing subscribers to apply their allocated free creditstowards their choice of data and value-added services.  

 

*TextMessaging Service and Other Value-added Services*.  ThePhilippine cellular market is one of the most text messaging-intensive marketsin the world, totaling approximately a billion text messages per day.  Textmessaging is extremely popular in the Philippines, particularly on the prepaidplatform, as it provides a convenient and inexpensive alternative to voice ande-mail based communications.  Text messaging also utilizes less networkcapacity than voice, thereby increasing network efficiency.

 

Textmessaging has been one of the key drivers for our cellular subscriber growth.  Strongvolume growth in text messaging contributed significantly to our cellularrevenue growth in 2005.  During 2005, our text messaging systems handled over43,586 million standard outbound text messages with another 52,374 millionmessages generated by the unlimited text offerings.  This compares to 40,953million standard outbound text messages in 2004; unlimited text services werenot yet available in 2004.

 

We currently expect that the recent awarding of a 3Glicense to Smart will further enhance its current selection of voice to dataservices, including text messaging.  We currently believe the success of textmessaging is a strong indicator of future data potential in this market.  

 

We have been using diversified and innovative productsand services as a competitive advantage in gaining and retaining market shareas well as improving profitability.  Smart has diversified its wireless datarevenues beyond text messaging and is well ahead of other players in the marketin terms of enhanced data services.  Its catalog of innovations include the award-winning*Smart Money* (a mobile cash card) and *Smart Load* (an over-the-airelectronic loading facility), both of which were honored by the World GSMCongress in 2001 and 2004, respectively, as “Most Innovative Service forConsumers.”  *Smart Load* has revolutionized the mobile industry in Asia with its adaptation of the “sachet” concept in consumer goods to air time reloads.The concept has since been emulated by other Asian operators and is regionallyreferred to as “micro prepaid reloads.”  Smart subsequently introduced *PasaLoad*, a derivative service of *Smart Load*, which allows for air timeload transfers between subscribers.  Smart also offers the followingvalue-added cellular services:

 

•              *Mobile Banking*, launched in collaboration with various banks, allowssubscribers to execute certain banking transactions, such as balance inquiriesand transfers, over their mobile telephones; 

 

•              *Smart Money*, launched in conjunction with MasterCard, enablessubscribers to pay for their purchases by transferring money from their bankaccounts to their *Smart Money* cards as well as reload their prepaidcards electronically; and

 

•              *Smart Padala,*one of the many innovative initiatives from our *SmartMoney*platform*,*is the first cash remittance service through textand is faster and cheaper than traditional remittance arrangements.  It waslaunched initially as an international remittance service for overseas Filipinoworkers but is now available for domestic remittances as well.

 

We also offer value-added services such as voice mail,information-on-demand, which is a service that allows subscribers to orderinformation from our content providers whenever desired, mobile banking and *TextMail*,which is a service that allows subscribers to send and receive text messagesthrough their personal computers and location-based services.  In addition,Smart has a number of interactive activities, such as text games and chatservices, developed on its own platforms.

 

Dueto the high level of text messaging service usage, we believe that the Philippinemarket is well suited for text-based informational and e-commerce services.  Ourcurrent approach is to continue maximizing our GSM, or 2G, services and alsooffer General Packet Radio Service, or GPRS or 2.5G, to serve increased demandfor bandwidth-intensive applications.  GPRS allows data transfer at an averagespeed of up to 115 kilobits per second.  In addition, we have upgraded ournetwork to Enhanced Data for GSM Evolution, or EDGE.  EDGE is a technology thatis expected to further increase the speed and data capability of our GSMnetwork.  On December 29, 2005, Smart was awarded a 3G license by the NTC afterbeing ranked highest by the NTC in garnering a perfect score on a 30-pointgrading system designed to gauge the capability of telecommunication operatorsto effectively provide extensive 3G services.  As a result of the ranking,Smart received the largest radio frequency allocation of 15 MHz as well asfirst choice of frequency spectrum.  Smart chose the 1920-1935 MHz and2110-2125 MHz spectrum, the range that would best enable it to rapidly deployits 3G network nationwide and at the same time offer the highest quality of 3Gservice.

 

On February 14, 2006, Smart rolled out its 3G network in selected key cities nationwide, making video calling,video streaming, high speed Internet browsing and special 3G content downloadson its 3G network available on a free trial basis, thus making Smart the firstmobile operator in the Philippines to offer 3G services to the public.  Smartis continuing to extend the reach of its 3G network in various cities andmunicipalities nationwide, further improving coverage in major urban centersand selected provincial areas.

 

*Ratesand Discounts*

 

Our current policy is torecognize a prepaid subscriber as “active” only when the subscriber activatesand uses the SIM card and reloads at least once during the month of initialactivation or in the immediate succeeding month.  A prepaid cellular subscriberis disconnected if the subscriber does not reload within four months after thefull usage or expiry of the last reload.

 

*Smart Buddy* and *Talk ‘N Text* prepaid cards are sold indenominations of Php300, Php500 and Php1,000, which include 33, 83 and 250 freetext messages, respectively.  The stored value of a prepaid card remains validfor a period of two months from the time a subscriber activates the card.  Theintroduction of our “over-the-air” electronic loading facility *Smart Load*in 2003 made reloading of air time credits more convenient for, and accessibleto, consumers.  *Smart Load’s* over-the-air reloads have evolved torespond to market needs and are now being offered in the followingdenominations and corresponding expiration periods:

 

**Denomination**

**Load Expiry**

**Equivalent Values**

Php10

–

10 text messages

Php20

–

20 text messages

Php30

3 days

30 text messages or 3 local call minutes

Php60

6 days

60 text messages or 6 local minutes

Php115

12 days

115 text messages or 13 local call minutes

Php200

30 days

200 text messages plus 30 free text messages or 25 local call minutes

Php300

60 days

300 text messages plus 33 free text messages or 40 local call minutes

 

*SmartLoad* was followed by *Pasa Load*,a derivative service allowing prepaid subscribers to transfer even smallerdenominations to other prepaid subscribers.  *Pasa Load* comes indenominations of Php2, Php5, Php10 and Php15, all carrying a one-day loadexpiry.  *Smart Buddy* subscribers who reload other *Smart Buddy* or *Talk‘N Text* subscribers via *Pasa Load* are charged Php1.00.

 

*Smart Buddy*subscribers are charged Php6.50 per minute for callsto *Smart Buddy* and *Talk ‘N Text* subscribers and Php7.50 perminute terminating to other cellular or fixed line networks.  *Talk ‘N Text*callsto *Talk ‘N Text*subscribers are charged Php5.50 per minute while callsto *Smart Buddy* and other cellular and fixed line subscribers are chargedPhp6.50 per minute.

 

*Smart Gold* has the following flat rate andconsumable plans: 

 

•        Flat Rate plans (regular plans) areavailable with monthly service fees ranging from Php500 to Php8,000 with varyingamounts of free air time and text messages and different rates beyond the freeminutes and text messages, depending on the monthly service fee.  Monthlyservice fees for these plans are applicable only to local calls and textmessages.  All other services are billed on top of the monthly service fee; and

 

•        Consumable plans are availablewith monthly service fees ranging from Php800 to Php8,000 with differentamounts of free text messages and different rates beyond the free minutes andtext messages.  Subscribers to these plans may apply their monthly service feesto all voice calls, text messages (both local and international) andvalue-added services.

 

*addictmobile* has the following flat rateand consumable plans:

 

•        Flat Rate plans (regular plans) areavailable with monthly fees ranging from Php500 to Php3,500 with varyingamounts of free air time and free data and different rates beyond the free airtime and data, depending on the monthly service fee; and

 

•        Consumable plans are availablewith monthly service fees ranging from Php800 to Php5,000 with differentamounts of free data and text messages.  Subscribers to these plans may applytheir monthly service fees to voice calls, text messages (both local andinternational) and value-added services.

 

*addictmobile* subscribers are allowed toapply their allocated free credits on their choice of data and value-addedservices.

 

Smartis permitted to adjust its cellular air time and national direct dial ratesaccording to changes in the peso-to-U.S. dollar exchange rate.  Under theauthorization granted to Smart by the NTC, Smart is permitted to increase andis required to decrease its air time and national direct dial rates by 1% forevery Php0.25 change in the exchange rate relative to a base rate of Php24.726to US$1.00.  However, Smart has not implemented any foreign currencyadjustments to its rates since November 4, 1998 because of the concern thatincreased rates may result in decreased usage by its subscribers or switchingto other cellular services providers by its subscribers.

 

AllSmart subscribers pay an internationaldirect dialing rate of US$0.40 per minute.  This rate applies to 201destinations, including the United States, Hong Kong, Japan, Singapore, the United Kingdom and the United Arab Emirates.  Smart charges US$0.98 per minutefor 27 other destinations such as Afghanistan and Cuba and US$2.18 per minutefor another ten destinations such as East Timor and the Falkland Islands.  

 

Charges for point-to-point text messages beyond theallotted free text messages are as follows:

 

•              for *Smart Buddy* and *amp*subscribers, Php1.00 per message; and

 

•              for *Smart Gold, addict mobile*and *Smart Infinity*subscribers, Php0.50 or Php1.00 per message,depending on air time plan, as listed in the table above.

 

*Smart Buddy, Smart Gold* and *addict mobile*subscribers pay the same charges for SMS-based value-added services, asfollows:

 

•              Php15.00 per message forinternational text for *Smart Buddy* and *amp* subscribers andPhp10.00 per message for international text under the *Smart Gold* plansand for *addict mobile* and *Smart Infinity* subscribers;

 

•              Php2.50 per message for e-text andinformation-on-demand services, such as news, stock and entertainment updates;

 

•              Php15.00 for downloading ringtones and logos; 

 

•              Php2.50 per *Mobile**Banking*and *Smart Money* transaction, such as balance inquiry and fund transfer;and

 

•              Php10.00 per subscription oflogos, ringtones:  Php5.00 per logo or ringtone for *addict mobile* and *SmartKid*.

 

For multimedia messaging service, or MMS, and wirelessapplication protocol, or WAP, services, the charges are as follows:

 

•              Php1 per MMS for MMS among allSmart subscribers and Php2 per MMS for Smart-to-other networks;

 

•              Php15.00 per download of pictures,greeting cards, polyphonic ring tones;

 

•              Php5.00 per MMS for e-text andinformation-on-demand services (such as news, stock and entertainment updates);

 

•              Php5.00/Php15.00 for downloadingvia Smart WAP portal (depends on the type of service, if info-based, Php5.00for allbrands; if personalization-based (logo or ringtones) Php15.00 perdownload for all brands); and

 

•              Php10.00 per 30 minutes whensurfing outside the Smart WAP portal.

 

Forvoice mail retrieval, all Smart subscribers are charged Php6.50 per minute.

 

Piltel’s*Talk ’N Text* prepaid cards are sold in the same denominations as *SmartBuddy*prepaid cards.  *Talk ‘N Text* offers a flat rate of Php5.50 perminute for *Talk ‘N Text* to*Talk ‘N Text*calls andvoice mail retrieval and Php6.50 for *Talk‘N Text*-to-other cellular and fixed line networks, and offer US$0.40per minute for international dialing calls to all destinations.  *Talk ‘NText*subscribers are charged Php1.00 for a regular text message in excessof free text allocations while for value-added services, such as logo and ringtone downloads are charged within a range of Php2.50 to Php15.00 per message.  Mobilegames range from Php30.00 to Php50.00 per game download.

 

Beginningin March 2005, Smart launched a series of promotions, under the brand *Smart258 Unlimited Call and Text,* to test the market demand for fixedrate or “bucket” plans for voice and text services.  Under these promotions,Smart and *Talk ‘N Text* prepaid subscribers had the option, for theduration of the promotion, to register for unlimited on-network(Smart-to-Smart) voice calls or unlimited on-network (Smart-to-Smart) textmessaging service.  

 

Thecurrent *Smart 258***promotion has the followingfeatures: 

 

•        Unlimited Text – Php15, Php30 andPhp60 denominations with expiry periods of one, two and four days,respectively, with unlimited on-network text all day service; and

 

•        Text and Call Combo – Php20 loaddenomination with unlimited text on-network for one day and a call with amaximum duration of five minutes and valid within 24 hours. 

 

OnAugust 23, 2005, Smart also introduced a flat rate promotion which allows Smartand *Talk ‘N Text* prepaid subscribers to make a call to another Smart or*Talk ‘N Text* subscriber of up to three minutes for Php10, or extend up tofive minutes for a flat rate of Php15.  The flat rate promotion was relaunchedon February 11, 2006 and has been extended until July 10, 2006.  

 

On April 23, 2006, Smart introduced a new variety oftop-ups – *Smart Load* “All Text,” which allows 10 and 20 messages withoutexpiration for a suggested retail price of Php12 and Php23, respectively.  On May 1, 2006, the number of messages allocated for the 10-message load was increased to15.  This promotion offering the additional five messages has been extendeduntil June 30, 2006.

 

On April 1, 2006, Smart rolled-out *Smart Click*,a chain of mobile Internet cafés.  *Smart Click* Internet cafés arecurrently housed in air-conditioned 40-foot container vans and designed toprovide remote communities with high-speed, wireless Internet accessnationwide.  *Smart Click* has established 18 mobile Internet cafés to-dateand plans to open at least 80 branches. 

 

OnFebruary 14, 2006, Smart launched its 3G service on a free-trial basis.Subscribers using Smart’s network with 3G handsets in selected key areas couldavail of services such as video calling, video streaming, high-speed Internetbrowsing and special 3G content downloading under Smart’s 3G network.

 

On May 1, 2006, Smart unveiled new and expanded 3G services and announced as well thecommercial rates of its 3G services.  Under the introductory pricing schemethat took effect on May 1, Smart 3G rates are aligned with existing 2G rateswhile some services remain free of charge.

 

•        Smart-to-Smart video calls remainfree of charge while international video calls, initially available in threecountries, are priced similarly to a regular IDD call at US$0.40 per minute;

 

•        all 3G video and audio streamingare charged a Php15 access fee for every 30 minutes plus a separate fee forcontent;

 

•        3G Internet and WAP browsing arepriced at Php10 for every 30 minutes;

 

•        downloads of 3G content such asvideo clip, ringtones, visual ringers and games range from Php20 to Php50 perdownload; and

 

•        Php1 per MMS for MMS among allSmart subscribers and Php2 for Smart-to-other networks.

 

Wesell our cellular services primarily through a network of independent dealersthat generally have their own retail networks, direct sales forces andsub-dealers.  We currently have 15 major dealers, ten of whom are exclusive.These dealers include major distributors of cellular handsets and focus on telecommunicationsoutlets.  Account managers from our dealer sales force manage our dealernetwork and regularly update these dealers on our upcoming marketingstrategies, promotional campaigns and product development.  With theintroduction of *Smart Load* in May 2003, Smart moved into a new mode ofdistribution.  These over-the-air reloads, which were based on the “sachet”marketing concept of consumer goods such as shampoo and ketchup, required adistribution network more comparable to those of soft drink and beerdistributors.  Starting with just 50,000 outlets when it was launched, *SmartLoad*’s distribution network now encompasses over 700,000 retail agents, 80%of which are micro businesses (e.g., neighborhood stores, individuals acting asroving agents).  These micro-retailers must be affiliated with any of Smart’s tenauthorized consumer distributors.  With the prepaid reloading distributionnetwork now extended to corner store and individual retailer levels and minimumreloading denominations down to Php10, Smart’s prepaid service becomes evenmore affordable to subscribers, thus attracting new customers in previouslyunderserved segments of the market.

 

Forprepaid services, we grant discounts to dealers for prepaid phone kits, airtime cards and over-the-air reloads sold.  Smart and Piltel compensate dealers withPhp800 in cash per prepaid phone kit sold.  An additional 1% discount based onthe suggested retail price is given on cash purchases.  Air time cards andover-the-air reloads are sold to distributors at volume discounts determined bythe value of the cards purchased by the distributors.  Discounts given for airtime cards sold range from 9.5% to 10% while commissions on over-the-airreloads range from 2.5% to 5%.  Air time cards cannot be returned or refundedand normally expire within six to 12 months after release from the Smartwarehouse.

 

*Satellite, VSAT, Wireless Broadband and Other Services*

* *

*Overview*

 

We currently provide satellite,VSAT, wireless broadband and other services through Mabuhay Satellite andTelesat, ACeS Philippines, our satellite phone service provider; SmartBroadband, our wireless broadband provider; and Wolfpac, our wireless contentoperator.

 

*MabuhaySatellite*

 

Mabuhay Satellite, incorporated on November 10, 1994, is engaged in the control and operation of Agila II, the Philippines' first communicationsatellite.  Agila II commenced commercial operations in January 1998.  Mabuhay Satellite leases satellite space segments in both theC and Ku bands on the Agila II satellite.  ThroughAgila II satellite, Mabuhay Satellite also offers Internet backbone access, video and data broadcasting, and bandwidth-on-demand,facilitating communication links between telecommunications, broadcast andother public utility companies operating in the Asia-Pacific region. 

 

In February 2001, MabuhaySatellite received a certification from the U.S. Federal CommunicationsCommission, or FCC, for its Agila II satellite, establishing it as the firstAsian satellite on the FCC’s “Permitted Space Station” list.  Agila II joinssix other non-U.S. satellites on the select list.  The granting of thecertification indicates that Agila II satellite fully complies with the FCC’stechnical requirements and allows U.S.-owned and operated earth stations in Hawaii to access Agila II.

 

*Telesat*

 

Telesat operates a nationwide communications satellitenetwork using VSAT technology.  Telesat offers voice, facsimile and datatransmission services throughout the Philippines, including areas that areunderserved or unserved by local fixed line operators.  In 2005, Telesatgenerated revenues of Php214 thousand and posted a net loss of Php42 million.

 

Using VSAT technology, we also provide the followingservices:

 

•              point-to-multipoint datatransmission services, usually for intercompany communication for corporatecustomers;

 

•              private point-to-point services;and

 

•              connectivity for the cell sites ofour wireless network in outlying locations.

 

Welease transponder capacity on Agila II satellite to provide VSAT services.

 

*ACeS Philippines*

 

ACeS Philippines owns approximately 20.23% of AIL.AIL aims to develop and implement a satellite-based communications system toprovide services to users in the Asia-Pacific region through the Garuda Isatellite, or ACeS System and ACeS Service.  AIL has entered intointerconnection agreements and roaming service agreements with PLDT and othermajor telecommunications operators that will allow ACeS service subscribers toaccess GSM terrestrial cellular systems in addition to the ACeS system.  Further,AIL has an Air Time Purchase Agreement, or ATPA, with National ServiceProviders, or NSP, in Asia, including PLDT.  For further discussion regardingthe ATPA, please see *Note 16 – Related Party Transactions* and *Note 21–**Contractual Obligations and Commercial Commitments*to theaccompanying consolidated financial statements in Item 18.

 

Aspart of the consolidation process of the PLDT Group’s wireless business, ACeSPhilippines’ operations has been integrated into Smart.  This operationalintegration effectively gives Smart the widest service coverage in thePhilippines through the combination of ACeS Philippines satellite phone serviceand Smart’s cellular service.

 

*Smart Broadband*

* *

SmartBroadband is engaged in providing wireless broadband and data services toresidential consumers as well as small and medium-scale enterprises in the Philippines.  As of December 31, 2005, Smart Broadband had 25,428 wireless broadbandsubscribers, of which 21,759 residential subscribers are under the brand name *SmartWiFi*.  *Smart WiFi* aims to strengthen Smart’s position in thewireless data segment and complements PLDT’s *myDSL* service in areaswhere the latter is not available.  In April 2006, this service was relaunchedas *Smart Bro*. 

 

*Wolfpac*

* *

Wolfpacis primarily engaged in the business of consumer mobile applications softwaredevelopment and consumer mobile content development and other allied services.Wolfpac is one of the leading content providers and the only Philippine contentprovider to have been nominated twice at the annual GSM Congress for successesin application developments.  Wolfpac generated revenues of Php197 million andposted a net income of Php108 million in 2005.  It aims to provide Smart tohave a direct link to the content development community, a key differentiatorin wireless communication service.  The company has various agreements withthird parties for musical compositions, original sound recordings, originalmovies, caller ringtunes and other services.

 

*Revenues*

 

Our satellite, VSAT, wireless broadband and otherservice revenues consists of:

 

•        lease payments from the rental ofMabuhay Satellite’s C-band and Ku-band transponders; 

 

•        revenues generated from Telesat’snationwide satellite network; 

 

•        revenues generated from ACeS Philippines’satellite phone service;

 

•        revenues generated from SmartBroadband’s wireless broadband and data services; and 

 

•        revenues generated from Wolfpacfor wireless data content.

 

*Rates*

 

Mabuhay Satellite leases itstransponders to third parties at average annual rates of approximately US$0.9million and approximately US$0.7 million for its C-band and Ku-bandtransponders, respectively.  Telesat provides its VSAT services on a cost plusmark-up basis.  ACeS Service mobile subscribers are charged Php13.84 per minutefor local and cell-to-cell calls and for national direct dial services, whileresidential subscribers are charged a peak-hour rate of Php13.00 per minute andan off-peak hour rate of Php8.00 per minute for domestic calls regardless ofdestination.  For ACeS System public calling offices, callers are chargedPhp4.50 and Php7.00 per minute for calls terminating to fixed line and cellularnetworks, respectively.  Rates for international long distance calls, dependingon the country of termination, ranging from US$0.35 per minute for frequentlycalled countries to US$0.85 per minute for less frequently called countries.

 

Smart Broadband offers itswireless broadband and data services for residential consumers as well as smalland medium-scale enterprises.  The wireless broadband service for residentialconsumers is branded as *Smart Bro* and offers a maximum speed of 384 kbpsfor Php988 per month.  Monthly service fees for corporate data services rangefrom Php2,200 to Php48,000 depending on the connection speed requirements.

 

WolfPac generates revenues fromSMS subscriptions, institutional services and downloadable contents.  Thesubscription price for the SMS subscription and institutional services ispegged at Php2.50 per SMS, while downloadable contents range from Php10.00 toPhp45.00.

 

FixedLine

 

Weprovide local exchange, international long distance, national long distance,data and other network and miscellaneous services under our fixed line businesssegment.

 

*Local Exchange Service*

 

*Overview*

 

Ourlocal exchange service, which consists of our basic voice telephony business,is provided primarily through PLDT.  

 

The following table summarizes key measures of ourlocal exchange service segment as at and for the years ended December 31, 2005, 2004 and 2003:

 

 

**Years Ended December 31,**

 

**2005**

** **

**2004**

** **

**2003**

 

 

 

 

 

 

Number of fixed lines in service (at year-end)

2,113,799

 

2,152,027

 

2,185,951

Net additions (reductions)

(38,228)

 

(33,924)

 

(2,661)

Growth rate 

(2%)

 

(2%)

 

–

Number of fixed line employees (at year-end)

9,197

 

9,692

 

10,518

Number of fixed lines in service per employee

230

 

222

 

208

Consolidated local exchange service revenues (in millions)

Php20,229

 

Php20,606

 

Php20,728

Growth rate

(2%)

 

(1%)

 

(3%)

Local exchange service revenues as a percentage of total service revenues

16%

 

17%

 

20%

 

We also provide local exchange services through oursubsidiaries Clark Telecom, Subic Telecom, Maratel and Piltel.  Together, thesesubsidiaries account for approximately 3% of our consolidated fixed lines inservice.

 

Weregularly adjust our rates and introduce new products and services in an effortto increase our number of subscribers, improve our churn management efforts andminimize our credit risk exposure.  Since 1999, we have launched a prepaidfixed line service, introduced additional value-added services, introducedinitiatives aimed at increasing subscription in areas where we have excesscapacity and reduced our installation fees, as described below in the "—Rates" section.

 

Initially intended as an alternative affordabletelephone service for consumers under difficult economic conditions, ourprepaid fixed line services now form an important part of PLDT’s overall churnand credit risk exposure management and subscriber retention strategy.

 

*Rates*

 

Asof December 31, 2005, basic monthly charges for our local exchange service inthe Metropolitan Manila area were Php645.01 for a single-party residential lineand Php1,344.14 for a single business line.  Monthly charges vary according tothe type of customer (business or residential) and location, with charges forurban customers generally being higher than those for rural/provincialcustomers.  Occasionally, we launch promotions waiving or offering discounts oninstallation charges to encourage subscriber take-up.  Regular installationcharges amount to Php1,999 for residential customers and Php3,500 for businesscustomers.  Other than basic monthly charges, we do not charge our postpaidsubscribers for local calls.

 

Pursuantto a currency exchange rate mechanism authorized by the NTC, we adjust ourmonthly local exchange service rates according to changes in the peso-to-U.S.dollar exchange rate.  Under the authorization granted to us by the NTC, we arepermitted to increase and are required to decrease these rates by 1% for everyPhp0.10 change in the exchange rate relative to a base exchange rate of Php11to US$1.00.  During 2005, we implemented three upward and six downwardadjustments in our monthly local exchange service rates.

 

Inthe first quarter of 2005, House Bill No. 926 was filed and is now pending inthe House of Representatives of the Philippines.  The proposed bill providesfor the cancellation of the currency exchange rate mechanism currently inplace.  If this bill is passed into law or if the NTC issues guidelines tochange the basis of the currency exchange rate mechanism, our ability togenerate U.S. dollar linked revenues from our local exchange business could beadversely affected. 

 

Effective January 1, 2003, local access charges for cellular subscribers’ calls thatterminate to our fixed line subscribers increased from Php2.00 per minute toPhp2.50 per minute, and was further increased to Php3.00 per minute effective January 1, 2004.

 

A prepaid fixed line subscriber is recognized as anactive subscriber when that subscriber activates and uses a prepaid call card.Prepaid fixed line subscribers can reload their accounts by purchasing callcards that are sold in denominations of Php500, Php300 and Php150.  Reloads arevalid for two months for the Php500 and Php300 card.  The lower denominationPhp150 card, launched in September 2003, has an account life of 15 days.  Aprepaid fixed line subscriber is disconnected if that subscriber does notreload within one month for the Php500 card, four months for the Php300 cardand 15 days for the Php150 card after the expiry of the last reload.  All salesof prepaid cards, whether through dealers or through PLDT’s business offices,are non-refundable.  Our prepaid fixed line customers do not pay a basic monthlycharge and are charged based on usage.  The international and national longdistance rates we charge to our prepaid fixed line customers are similar to therates we charge to our postpaid customers.  Prepaid fixed line customers arecharged based on usage at a rate of Php1.00 per minute for local calls.  For adescription of these rates, see “— International Long Distance Service — Rates”and “— National Long Distance Service — Rates.”  Prepaid phone kits, eachcontaining Php500 worth of pre-stored call credits, are sold for Php1,900 perunit.

 

*International Long Distance Service*

 

*Overview*

 

Our international long distanceservice consists of voice and packet-based voice services that go through ourinternational gateway facilities.  We also generate international long distancerevenues through access charges paid to us by other Philippinetelecommunications carriers for incoming international voice calls thatterminate to our local exchange network.  Our packet-based voice services aretransmitted over our existing traditional circuits: voice over internetprotocol, or VOIP; network of a consortium of dominant carriers in Asia; asynchronous transfer mode, or ATM; and Internet protocol global backbone of PLDTGlobal.

 

Thefollowing table shows certain information about our international long distancebusiness as at and for the years ended December 31, 2005, 2004 and 2003:

 

 

**Years Ended December 31,**

 

**2005**

**2004**

**2003**

 

 

 

 

Total call volumes (million minutes)

2,226

2,348

2,286

Growth rate

(5%)

3%

(19%)

Inbound call volumes (million minutes)

2,079

2,192

2,128

Growth rate

(5%)

3%

(20%)

Outbound call volumes (million minutes)

147

156

158

Growth rate

(6%)

(1%)

(8%)

Inbound-outbound call ratio

14.1:1

14.1:1

13.5:1

Total international long distance service revenues (in millions)

Php12,245

Php12,804

Php12,767

Growth rate

(4%)

–

20%

International long distance service revenues as a percentage of total service revenues

10%

11%

12%

 

Internationallong distance service historically has been a major source of our revenue.However, due to the steep decline in inbound termination and collection ratesand intense competition, revenues derived from our international long distanceservice had been declining through the end of 2002.  We adopted a two-prongedinitiative in early 2000 with respect to inbound international service to tryto address this issue.  First, we lowered our inbound termination rates at thattime; by reducing our rates, we reduced the incentive for unauthorized traffictermination and bypass routings by toll bypass operators, and therefore wereable to recover some lost traffic; and secondly, we intensified our efforts toidentify and contain unauthorized traffic termination and bypass through moreeffective monitoring of our international trunks, leased lines and localnetwork.  International simple resale operation occurs when a company rents aninternational leased line from a Philippine international gateway operator,aggregates traffic outside the Philippines and carries and terminates this trafficat the local public switch telephone network in the Philippines.  Thistermination of other unauthorized and international simple resale can be usedto bypass the local access charge system and is illegal in the Philippines.  In 2005, the appreciation of the peso contributed to the decline in ourinternational inbound revenues since settlement charges are billed in U.S.dollars or special drawing rights.

 

We are more selective in accepting incoming trafficfrom new and startup carriers, particularly second and third tier internationalcarriers.  In addition, we adopted a policy requiring prepayment from certainsecond and third tier international carriers as a prerequisite for acceptingtheir incoming traffic.  

 

Weare also pursuing a number of other initiatives to further strengthen ourinbound business.  Through PLDT Global, we aggregate inbound call traffic tothe Philippines at our points of presence and, using our capacity in submarinecable systems connected to each point of presence, transmit calls to ournetwork.  PLDT Global is also enhancing the presence of PLDT in otherinternational markets by offering new products and services such asinternational prepaid cards, SMS transit and other global bandwidth services.We believe these strategies will help us maximize the use of our existinginternational facilities and develop alternative sources of revenue.

 

Tostimulate call volume growth and prevent further erosion in our share ofoutbound international call traffic, we have introduced a number of marketinginitiatives, including substantial cuts in international direct dialing rates,innovative pricing packages for large accounts and loyalty programs for somecustomers.

 

Thetable below sets forth the net settlement amounts for international callshandled by PLDT, by country, for the years ended December 31, 2005, 2004 and 2003:

 

 

**Net Settlement**

 

**Years Ended December 31,**

 

2005

2004

2003

 

 

(in millions)

 

 

 

 

 

United States

USS$75

US$75

US$52

Japan

25

17

12

Saudi Arabia

21

18

15

United Arab Emirates

17

13

10

Italy

16

16

14

Canada

11

10

15

Hong Kong

10

7

9

Taiwan

5

6

4

Korea

5

2

2

Kuwait

4

4

2

PLDT Global

3

38

52

United Kingdom

3

1

4

Others

20

21

28

Total

US$215

US$228

US$219

 

*Rates*

* *

Weadopted the U.S. FCC accounting rate benchmark of US$0.38 per minute forinbound international calls in 2000, which represented a settlement rate ofUS$0.19 per minute, for international long distance traffic between the Philippines and the United States.  Termination rates for inbound calls from the United States continued to decline through the end of 2002 to levels below the U.S. FCC benchmarkaccounting rate under pressure from unauthorized terminations and bypassoperations.  Termination rates for inbound calls from other countries have alsobeen declining generally.  At the end of 2002, a substantial portion of PLDT’sinternational inbound traffic terminating on its fixed line network was chargedan average termination rate of approximately US$0.08 per minute.  PLDTincreased its termination rates with carriers accounting for a substantialportion of its international inbound traffic terminating on its fixed linenetwork to US$0.12 per minute effective February 1, 2003 (see Item 8. “–– Legal Proceedings — Investigation by U.S. Department of Justice” and *Note 25 –Other Matters – Investigation by U.S. Department of Justice* to theaccompanying consolidated financial statements in Item 18 for furtherdiscussion).

 

Ratesfor outbound international long distance calls are based on type of service,whether operator-assisted or direct-dialed.  Our rates are quoted in U.S.dollars and are billed in pesos.  The peso amounts are determined at the timeof billing.  We charge a flat rate of US$0.40 per minute to retail customers fordirect-dialed calls, applicable to all call destinations at any time on any dayof the week.

 

OnSeptember 15, 2005, we introduced *PLDT ID-DSL*, a service that allowsoverseas calls for registered *myDSL* plan subscribers using a regularPLDT fixed line or a voice pad dialer for as low as US$0.10 per minute orUS$0.08 per minute, respectively, depending on the subscribers’ DSLplan/package.  

 

Toaddress the market’s demand for low-priced international calls, PLDT modifiedthe *Budget Card*, a prepaid call card, offering a reduced internationaldirect dialing, or IDD, rate of Php5 per minute, as a promotional offerstarting September 24, 2005, for calls to 89 overseas destinations includingthe United States, Canada, Japan and China*.**Budget Cards* aresold in denominations of Php200 and Php100, which must be consumed within 30days from first use.  Beginning March 4, 2006, *Budget Card* has beenfurther modified to Php3, Php5 and Php8 per minute calls depending on thedestination and now has 100 overseas destinations, including Saudi Arabia and other Middle East countries.

 

*National Long DistanceService*

 

*Overview*

 

Ournational long distance services are provided primarily through PLDT.  Thisservice consists of voice services for calls made by our fixed line customersoutside of their local service areas within the Philippines and access chargespaid to us by other telecommunications carriers for calls carried through ourbackbone network and/or terminating to our fixed line customers.

 

The following table shows our national long distancecall volumes and revenues as at and for the years ended December 31, 2005, 2004and 2003:

 

 

Years Ended December 31,

 

**2005**

**2004**

**2003**

 

 

 

 

Total call volumes (million minutes)

1,904

1,853

2,016

Growth rate

3%

(8%)

(8%)

Total national long distance service revenues (in millions)

Php5,254

Php6,736

Php6,561

Growth rate

(22%)

3%

(16%)

National long distance service revenue as a percentage of total service revenues

4%

6%

6%

 

Cellularsubstitution and the widespread availability and growing popularity ofalternative, more economical, non-voice means of communications, particularlye-mailing and cellular text messaging, have negatively affected our nationallong distance call volumes.  The integration of some of our local exchanges intoa single local calling area, as approved by the NTC, has also negativelyaffected our national long distance call volumes, and consequently, ourrevenues.  Because of this integration, calls between two exchanges locatedwithin the same province are no longer considered national long distance callsbut are treated as local calls.

 

Asubstantial portion of our national long distance calls were direct-dialedcalls.  Operator-assisted calls are charged based on a minimum of three minutesplus operator charges, while direct-dialed calls are charged on a less costlyper minute basis.

 

*Rates*

 

Ratesfor national long distance calls are based on type of service, such as whetherthe call is operator-assisted or direct-dialed.  In line with its move towardsrate simplification, PLDT simplified these rates to a flat rate of Php4.50 perminute effective November 2, 2001.  At the same time, PLDT simplified its ratesfor calls terminating to cellular subscribers from a range of Php10.00 perminute to Php16.00 per minute to a uniform rate of Php13.75 per minute.  Effective March 1, 2003, PLDT increased the rate for callsterminating to other local exchange carriers from a flat rate of Php4.50 per minute to Php5.00per minute.  In addition, NDD callsoriginating from and terminating to PLDT was also adjusted to Php5.00 per minute from a flat rate of Php4.50 per minute effective June 8, 2003.  

 

OnFebruary 14, 2005, we launched a Php10 per call promotion to any PLDT fixed linesubscriber nationwide and to all Smart and *Talk ‘N Text* subscribers.This promotion was launched with the objective of determining a more effectivetariff structure that would stimulate fixed line usage.  Under the promotion,NDD calls between any PLDT fixed line subscriber nationwide and to all Smartand *Talk ‘N Text* subscribers are charged Php10 per call instead of beingcharged on a per minute basis.  

 

On May 12, 2005, PLDT began offering the Php10 per call promotion with an additional Php5 percall exceeding the first three minutes for the same unlimited talktime to Smartand *Talk ‘N Text* subscribers.  PLDT to PLDT NDD calls below theequivalent Php10 toll usage are charged based on the regular rate per minute.On August 12, 2005, PLDT ceased offering the Php10 per call promotion to Smart and*Talk ‘N Text* subscribers.  

 

BeginningSeptember 12, 2005, PLDT charges an optional Php20 add-on monthly service feefor PLDT fixed line subscribers who may want to continue to avail of the Php10per call promotion for calls within the PLDT network. 

 

InJanuary 2006, PLDT launched the *10-10-10* promo.  This promo offers unlimited calling time terminating PLDT to PLDT for a Php50 monthly servicefee.  PLDT capped the Php10 per call service to Smart and *Talk ‘N Text*subscribers to those who registered on or before February 24, 2006.  

 

Wecontinue to evaluate the present rate structure of fixed line from per minutetoll charges to single rate for unlimited calls.  This is envisioned to make fixedline rates competitive with VOIP rates and to revitalize interest in fixed lineusage.  Currently, various pricing models are being studied in respect of thisnew rate plan.

 

PLDTcurrently has interconnection arrangement with the majority of other localexchange carriers, pursuant to which the originating carrier pays: (1) ahauling charge of Php0.50 per minute for short-haul traffic or Php1.25 perminute for long-haul traffic to the carrier owning the backbone network; and(2) an access charge of Php1.00 per minute to the terminating carrier.  PLDTstill maintains revenue-sharing arrangements with a few other local exchangecarriers, whereby charges are generally apportioned 30% for the originatingentity, 40% for the backbone owner and the remaining 30% for the terminatingentity.  For more information on these interconnection arrangements, see Item 5."Operating and Finacial Review and Prospects — Results of Operations —2005 Compared to 2004 — Operating Revenues — Fixed Line — National LongDistance Service."

 

*Data and Other Network Services*

 

Our data and other network service revenues includecharges for leased lines, IP-based, packet-based and switched-based services.These services are used for domestic and international communications such asprivate networking, broadband and narrowband internet-based data communications,and packet-based communication.  

 

Thefollowing table shows our data and other network service revenues for the yearsended December 31, 2005, 2004 and 2003:

 

 

Years Ended December 31,

 

**2005**

**2004**

**2003**

 

 

 

 

Total data and other network service revenues (in millions)

Php10,394

Php7,114

Php5,978

Growth rate

46%

19%

7%

Data and other network service revenue as a percentage of total service revenues

9%

6%

6%

 

Ourdata and other network services in 2005 posted revenues of Php10,394 million,an increase of Php3,280 million, or 46%, from Php7,114 million in 2004,primarily due to increases in leased lines, IP-based and switched-based dataservices, particularly Diginet, *PLDT DSL* and *PLDT Vibe* services,respectively.  The revenue contribution of this service segment to our fixedline service revenues increased to 21% in 2005 from 15% in 2004.

 

Internet-based products are bannered by *PLDT**DSL* (*myDSL and BizDSL*), *PLDT Vibe* and I-Gate.  *PLDT**DSL*broadband Internet service is targeted forheavy individual internet users as well as for small and medium enterprises,while*PLDT Vibe,* or PLDT’s dial-up/narrowband Internetservice, is targeted for light to medium residential or individual internetusers.  I-Gate, our dedicated leased line Internet access service, on the otherhand, is targeted to enterprises and value-added service providers.  

 

*PLDTDSL*, which contributed revenues ofPhp2,345 million during 2005 increased by Php932 million, or 66%, from Php1,413million in 2004.  *PLDT DSL* has reached 88,811 subscribers as at December 31, 2005 compared with 48,289 subscribers in 2004.  PLDT offers a number of *DSL*packages with speeds and monthly fees varying from 256 kbps at Php999 permonth to up to 1 Mbps at Php3,000 per month.  

 

*PLDT Vibe*revenues increased by Php18 million, or 7%, to Php282 million in 2005 from Php264million in 2004.  As at December 31, 2005, the number of PLDT’s fixed line subscribers for *PLDT Vibe*stoodat 382,115, of which 136,279 were exclusive postpaid users, 222,234 wereexclusive prepaid users, and 23,602 were both postpaid and prepaid users.  Asat December 31, 2004, *PLDT Vibe* subscribers totaled 305,210, of which127,292 were exclusive postpaid users, 155,243 were exclusive prepaid users,and 22,675 were both postpaid and prepaid users. 

 

The continued growth in data services revenues can beattributed to several product offerings.  The steady demand for dedicatedconnectivity or private networking from the corporate market using PLDT’straditional bandwidth offerings – Fibernet, Arcstar, Acacia, I-Gate, Diginet,BRAINS, among others – continues to provide us with a stable revenue source.Through Diginet, we provide Smart’s increasing fiber optic and leased line datarequirements, which are included under our national data services.  

* *

Weintroduced *PLDT WeRoam*, a wireless broadband service offering running onSmart's nationwide wireless network (using GPRS, EDGE and WiFi technologies)and PLDT's extensive IP infrastructure.  *PLDT WeRoam* providesworkers and remote offices, of large, medium and small businesses, withcontinuous wireless data connectivity, wherever the users may be, to theircorporate headquarters’ Intranet and/or the global Internet.  Some of therecent enhancements to the service are the inclusion of international roamingin key roaming countries all over the globe and national WiFi roaming access.Principally targeted to the corporate market, the service has experienced atake-up rate of more than 7,500 contracted customers as at March 31, 2006.  

* *

InJune 2005, the *PLDT Innolab* in Manila was further expanded inpartnership with the leading technology companies in the country.  The PLDTInnolab is a first-of-its-kind innovation and testing center for the Philippinetelecommunications industry.  With the expanded Innovation Laboratory, moreclients as well as people from the academe and government can now beaccommodated and can experience more live industry services.

 

Alsoin June 2005, *F.A.S.Track*, an application-based service that tracks thewhereabouts of a company’s field assets through GPS and GSM technology wasintroduced.  *F.A.S.Track* allows near real-time and simultaneousmonitoring of fleet vehicles and field personnel virtually connecting mobilecompany assets in the field to the main office through the use of digital mapsand statistical data.

 

InJune 2006, we introduced *Shops.Work UnPlugged*, or SWUP, to address theneed of retailers and banks for real-time wireless data communication.  SWUP isthe first bundled service making wireless cashier point-of-sale and wirelesscard terminals possible.  Retailers are now enabled to reach out to a biggermarket in areas where physical connections are unavailable and to expand thebanking system with wireless automated teller machines, or ATMs.

 

Information andCommunications Technology

 

Weconduct our information and communications technology businesses through ourwholly-owned subsidiary ePLDT.  ePLDT is a broad-based integrated informationand communications technology company, focusing on infrastructure and solutionsfor Internet applications, Internet protocol-based solutions and multimediacontent delivery.  ePLDT's principal businesses are the operation of: (a) callcenters through the umbrella brand name *ePLDT**Ventus*; (b) an Internet data center under the brand name *Vitro*TM;and (c) Internet and gaming through Infocom, netGames, Digital Paradise,Digital Paradise Thailand, Ltd., or Digital Paradise Thailand, and AirborneAccess.

 

*Infrastructures and Services*

* *

*Call Centers*

 

Weare focused on developing our call center business which capitalizes on theavailability of English-speaking college graduates in the Philippines with a strong customer service orientation.  ePLDT now uses one umbrella brand name, *ePLDTVentus*, for all of its call center businesses, including Vocativ andParlance.  Vocativ provides customer and technical support to its clients inthe Philippines, U.S. and U.K., while Parlance provides the exclusive customersupport and billing requirements to one of the largest direct-to-home satellitetelevision providers in the U.S.  In aggregate, we own and operate 3,690 seatswith 3,842 customer service representatives, or CSRs, as of March 31, 2006 compared to 2,174 seats with 2,378 CSRs as of March 31, 2005.  In 2005, ePLDT had four call centers in Metro Manila and one in Iloilo.  We currently expectto open two additional call centers in the second half of 2006.  

 

ePLDT sold itsentire 51% interest in Contact World, Inc. on June 30, 2003 and assigned its receivables from the same to Service Zone, Inc., a U.S.-based call centeroperator, for a total consideration of US$700,000. 

 

*Data**Center*

 

ePLDToperates *VitroTM*, one of the Philippines’ first internet data centers.The Philippine Board of Investments, or BOI, granted *VitroTM* pioneerstatus, which entitles it to tax and other governmental incentives.  *VitroTM*is a CISCO-certified co-location service provider.  *VitroTM* providesco-location, web and server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting andwebhosting, shared applications, data disaster recovery and business continuityservices, intrusion detection and internet protocol security services, as wellas firewall and managed firewall services.

 

*Internet and Gaming*

 

ePLDT’s internet and gaming business is conductedthrough several subsidiaries.  ePLDT’s equity interests in, and a briefdescription of the businesses of, these subsidiaries are as follows:

 

•        a 99.6% interest in Infocom, oneof the country’s leading Internet service providers.  Infocom offers consumerprepaid internet access under the name of *WarpSpeed*and *Speed Tipid*,and postpaid internet access, dedicated dial-up and multi-user dial-up,corporate leased lines and broadband internet access through *DSL* or *NOW*cable internet, as well as web consulting, development and hosting.  The *NOW*cable internet brand was sold on February 1, 2005;

 

•        a 69.15% interest in Digital Paradise,an Internet café business, which assumed the assets and brand of NetopiaComputer Technologies, Inc., under the brand *Netopia*.  *Netopia* isnow one of the largest and fastest growing Internet café chains in the countrywith over 180 branches and over 8,200 work stations.  Digital Paradise offershigh-speed internet services, including internet advertising, gaming and printing;

 

•        a 60% interest in Level Up!, aleading publisher of online games in the Philippines with about 80% of theonline gaming market;

 

•        a 60% interest in netGames, Inc.,or netGames, a publisher for Massively Multiplayer Online Game, or MMOG, in the Philippines.  netGames, which was incorporated on June 21, 2004, is the Philippine licensee of Khan Online, the country’s first full 3D online game.netGames commenced full commercial operations in February 2005;

 

•        a 51% interest in Digital Paradise Thailand, an affiliate of Digital Paradise offering similar services in Thailand; 

 

•        a 51% interest in Airborne Access,the country’s leading operator of WiFi hotspots, which provides wirelessinternet access in hotspots equipped with Airborne Access WiFi access points;and

 

•        a 20% interest in Philweb, acompany primarily engaged in Internet-based gaming, which offers Internetsports betting and Internet casino in partnership with the Philippine Amusementand Gaming Corporation.

 

*OtherInvestments*

 

ePLDTalso currently holds equity interests in the following entities:

 

•        mySecureSign, Inc., a wholly-ownedsubsidiary of ePLDT and an affiliate of VeriSign, Inc., which issues VeriSigndigital certificates in the Philippines for e-commerce transactions;

 

•        iPlus Intelligent Network, Inc.,or iPlus, a wholly-owned subsidiary of ePLDT, which provides IT helpdesk/contact center services and terminals forcredit, debit and cash card transactions;

 

•        22.5% interest in StradcomInternational Holdings, the parent company of Stradcom Corporation, which hasan existing concession agreement with the Philippine government for themodernization of the Philippine Land Transportation Office, including thecomputerization of driver’s license issuance, vehicle registration and trafficadjudication systems; and

 

•        19.17% interest in BayanTradeDotcom, Inc., or BayanTrade, ane-procurement joint venture established together with six of the Philippines’ leading conglomerates.  Initial shareholding in BayanTrade was originally20.5%, which was subsequently diluted to 19.17% in August 2004 due to an equitycall to which ePLDT did not subscribe.

 

As part of our growth strategy, we may from time totime make acquisitions and investments in companies or businesses, which may ormay not be significant.  For example, on May 25, 2006, we announced thatePLDT and SPI Tech, L.P. entered into a non-binding letter of interest inrespect of a potential acquisition by ePLDT of 100% of SPI, one of the leadingpure-play BPO companies and independent BPO service providers in the world.  We believe thatthe possible acquisition of SPI would solidify ePLDT’s position as one of thelargest full service BPO companies.  For more information about the possibleacquisition, see “Item 4. Information on theCompany—Organization.”****

 

Wireless NetworkInfrastructure

 

*Cellular*

 

ThroughSmart, we operate a digital GSM network.  To meet the growing demand forcellular services, Smart has implemented an extensive deployment program forits GSM network covering substantially all of Metro Manila and most of theother population centers in the Philippines.  In 2005, Smart has 37 mobileswitching centers, 47 text messaging service centers and 5,982 base stations inoperation after having added 679 base stations to its nationwide cellular networkin 2005.  As of December 31, 2005, Piltel have six active cell sites. 

 

Smart has an operating spectrum of 7.5 MHz in the 900 bandsupporting both its GSM and previously its ETACS network and 20 MHz in the 1800band for GSM and 15 MHz in the 3G band for W-CDMA.  Its dual-band GSM networkallows it to efficiently deploy high capacity 1800 MHz base transceiverstations in dense urban areas, while its 900 MHz base transceiver stations canbe much more economically deployed in potentially high growth, but less denselypopulated provincial areas.  The 3G network revolutionizes mobile technology by providingmore capacity, faster data rates and richer data and video applications.  Itsinitial deployment is seen as feasible in urban areas where there is a demandfor mobile broadband applications and where 3G mobile units are more likely tobe available.  Spectrum constraintswill not affect the Smart’s expansion plans for GSM in the foreseeable future.Piltel, on the other hand, has an operating spectrum of 11.5 MHz out of the12.5 MHz allocated in the 800 MHz band. 

 

Due to its access to PLDT’s network assets, Smart has beenable to achieve significant capital expenditure savings, which are understoodto be significantly less, on a per net addition basis, than its currentcompetitors.  This translates into an improved ability to price competitivelyand target the mass market subscriber base in the Philippines, while retainingprofitability.  Based on existing equipment purchase contracts, Smart expectsincremental capital expenditure per net additional subscriber to amount to lessthan US$50. 

 

Thecoming years will see continued increases in coverage (particularly indoor), aswell as new types of BTS for outdoor, street level and commercial officecoverage.  Smart has introduced the Nokia *ConnectSite*GSM system forwider coverage and increased efficiencies in underserved areas of the Philippines.  The new base station equipment called *ConnectSite* can be up to 25%more efficient than traditional outdoor cell sites.  Smart is one of the veryfirst operators in the world to adopt this solution.

 

Smartwas awarded a 3G license by the NTC on December 29, 2005.  Smart received the largest radio frequency allocation of 15 MHz as well as first choice of frequencyspectrum.  Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrum, the rangethat would best enable it to rapidly deploy its 3G network nationwide and atthe same time offer the highest quality of 3G service.  Smart has commenced its3G network roll-out and continues to extend the reach of its 3G network invarious cities and municipalities nationwide, further improving coverage inmajor urban centers and selected provincial areas. 

 

Smartand Piltel have been co-locating their cell sites where their base stations areinstalled.  As of December 31, 2005, 23 of Smart's mobile switching centers and183 of Smart's cell sites are housed in PLDT’s fixed line complexes while 243of Smart’s cell sites are co-located with Piltel.  These operational synergieshave allowed Smart to reduce switch installation time from three months to fiveweeks.

 

*Satellite, VSAT, Wireless Broadband and Other Services*

 

MabuhaySatellite controls and operates the Agila II satellite, which has 30 C-bandtransponders and 24 Ku-band transponders covering the Asia-Pacific region, theIndian subcontinent and Hawaii.  Of the 54 transponders, six have restrictedusage due to satellite interference.  Through Agila II, Mabuhay Satelliteoffers internet service, video and data broadcasting, and bandwidth-on-demand,facilitating communication links between telecommunications, broadcast andother public utility companies operating in the Asia-Pacific region.  InDecember 2000, Agila II joined the U.S. FCC's "Permitted SpaceStation" list, which permits U.S. owned and operated earth stations inHawaii to access Agila II for transpacific telecommunications, data, video and Internet-over-satellitetraffic and vice versa.

 

ACeS Philippines manages, controls and operates its own satellite gateway andother ground infrastructure, including a 13-meter feeder-link C-band earthstation, beam congruency antenna and equipment that serve as the primaryinterface between the ACeS system and other telecommunications networks.  Ituses the Garuda I satellite to provide digital voice services to ACeSPhilippines’ mobile and fixed terminal users within the Asian service area.

 

Telesatoperates a national communications satellite network using VSAT technology toprovide voice, facsimile, video and data transmission services to areas in thecountry that are still underserved or unserved by local telephone operators.Telesat leases transponder capacity from Agila II to provide VSAT services suchas multipoint-to-multipoint and point-to-multipoint data transmission services,private point-to-point service, and connectivity for the cell sites of ourcellular network in outlying locations.

 

SmartBroadband operates a nationwide broadband wireless Internet data services.  Itis operating in the 2.4, 3.5 and 5.7 Ghz spectrum, supporting its WiFi, Canopyand eventually WiMax services, respectively.  It offers fixed wirelessbroadband Internet connectivity to both residential and corporate clients.  Italso maintains and operates WiFi hotspots installations that serve mobileInternet users.  More than 1,700 of Smart’s base stations are now wirelessbroadband-capable, covering most of the key cities and the other populatedcenters in the country.  These are strategically co-located in Smart’s cellularbase stations that allow it to reach as many subscribers as possible, in thefastest possible way.  For its backbone, it uses the nationwide PLDT and Smartfiber optic and IP backbone that provide substantial bandwidth capacity toutilize and to grow on demand.

 

FixedLine Network Infrastructure

 

*Domestic*

 

Ourdomestic telephone network includes installed telephones and other equipment oncustomers’ premises, local access lines connecting customers to exchanges,referred to as “outside plant,” inter-office lines connecting exchanges, andlong distance transmission equipment.

 

The following table gives some basic measures of thedevelopment of our domestic telephone network as at December 31, 2005, 2004 and 2003:

 

 

**As at December 31,**

 

**2005**

**2004**

**2003**

 

 

 

 

Number of central office exchanges

183

183

183

Number of fixed lines in service

2,113,799

2,152,027

2,185,951

Employees per 10,000 local exchanges in service

44

45

48

 

Wehave our own 5,400 kilometer domestic fiber optic backbone, the country's firsttelecommunications network using fiber optics in delivering voice, video, data,and other broadband and multimedia services nationwide.  Our fiber opticnetwork employs synchronous digital hierarchy technology to improve networkperformance and reduce operating costs.  Our network is composed of in-land andsubmarine cable installations and is configured in six self-healing rings andan extension link, allowing route delivery even in the event of link failures.It has an initial transmission speed of 2.5 gigabits per second and isconnected directly to five existing international submarine cable systems.Upon completion of an additional 1,000-kilometer optic link, which is expectedto occur by the end of July 2006, we will have seven self-healing rings toaccommodate the increasing demand for higher-capacity data, voice and videoservice.  We use *CS PLDT*, a cable ship which we lease from NTT WorldEngineering Marine Corporation pursuant to a five-year Chartered ArrangementMaintenance Contract to maintain the 2,400 kilometers of submarine cable comprisingthe submerged portion of our domestic fiber optic network, or DFON.

*** ***

Weare currently upgrading our fixed line facilities to NGN, a broad term forcertain emerging computer network technology that can encompass voice, data andvideo where all information is efficiently transmitted via digital packets ofdata.  It is a platform for more services made available to our fixed linesubscribers.

 

*International*

 

Weprovide international network services using our three international gatewayswitching exchanges.  As at December 31, 2005, our international long distancefacilities allow direct correspondence with 50 countries/ territories(representing 95 correspondents) and can reach 360 foreign destinations (viadirect and transited routes including breakouts) worldwide.  We also owninterests in submarine and satellite systems, through which we route most ofour international traffic.

 

Thetable below shows the submarine cable systems in which we have interests andthe countries or territories they link:

 

**Cable System**

**Countries Being Linked**

 

 

G-P

Guam and the Philippines

Asia-Pacific Cable Network

Korea, Japan, Hong Kong, Taiwan, Australia, Philippines, Singapore, Malaysia, Indonesia and Thailand

Asia-Pacific Cable Network 2

Philippines, Hong Kong, Japan, Korea, Malaysia, Singapore, China and Taiwan

Transpacific Cable No. 5

Guam, Japan, Hawaii and the U.S. Mainland

SEA-ME-WE-3

Japan, Korea, China, Taiwan, Hong Kong, Macau, Philippines, Vietnam, Cambodia, Brunei, Malaysia, Singapore, Indonesia, Australia, Thailand, Myanmar, Sri Lanka, India, Pakistan, United Arab Emirates, Oman, Djibouti, Saudi Arabia, Egypt, Cyprus, Turkey, Greece, Italy, Morocco, Portugal, France, UK, Belgium and Germany

SEA-ME-WE-2

13 countries in South East Asia, the Middle East and Western Europe, including Singapore, Indonesia, India, Saudi Arabia, Egypt, Italy, Turkey and France

Asia Pacific

Hong Kong, Japan, Singapore, Malaysia and Taiwan

PacRim East 

Hawaii and New Zealand

M-T 

Malaysia and Thailand 

C-J 

China and Japan 

North Pacific

Japan, Alaska and the U.S. Mainland

Americas Cable 1

U.S. Mainland, U.S. Virgin Islands, Brazil, Trinidad and Venezuela

China-U.S. Cable

Japan, China, Taiwan, Korea, Guam and U.S. Mainland

Columbus II Cable

U.S. Mainland, Italy, U.S. Virgin Islands, Mexico, Portugal and Spain

FLAG Cable

Japan, Korea, China, Hong Kong, Malaysia, Thailand, India, United Arab Emirates, Saudi Arabia, Egypt, Italy, Spain and UK

MAT 2 Cable

Italy and Spain

RIOJA Cable

Spain, UK, Belgium and the Netherlands

RJK Cable

Russia, Japan and Korea

Southern Cross Cable

U.S. Mainland, Hawaii, Fiji, Australia and New Zealand

TAT 10 Cable

Germany and the Netherlands

TAT 12/13 Cable

U.S. Mainland, UK and France

TVH Cable

Thailand, Vietnam and Hong Kong

EAC Cable

Japan, Hong Kong, Korea, Taiwan, Singapore and the Philippines

PC-1 and Japan-U.S. Cable and TGN

Japan and the U.S.

 

On June 1, 2006, a consortium of major international telecommunication operators- AiTi of Brunei Darrusalam, CATTelecom (Thailand), PLDT (Philippines), REACH (Hong Kong), StarHub (Singapore), Telekom Malaysia (Malaysia) and VNPT (Vietnam) - signed a memorandum of agreement to build an underseacable linking Southeast Asia andthe U.S.  The proposed *Asia-AmericaGateway* willspan 20,000 kilometers and will use the latest dense wavelengthdivision multiplexing, or DSDM, technologies.  It is currently expected that the Asia-AmericaGateway will be ready for servicein 2008.

 

InterconnectionAgreements

 

Sincethe issuance of Executive Order No. 59 in 1993, which requiresnon-discriminatory interconnection of Philippine carriers' networks, we haveentered into bilateral interconnection arrangements with other Philippine fixedline and cellular carriers.  

 

Underan interconnection agreement among Smart, PLDT and Globe local callsoriginating from PLDT and terminating to the cellular networks of Smart andGlobe, Smart and Globe charged PLDT a rate of Php4.50 per minute effective January 1, 2002.  Effective January 1, 2004, calls terminating to cellular subscribersoriginating from fixed line subscribers have been charged a termination rate ofPhp4.00 per minute, a decrease from the previous Php4.50 per minute.  

 

Effective January 1, 2003, local access for cellular operators, including Smart, whichterminate calls to PLDT’s fixed line network increased from Php2.00 per minuteto Php2.50 per minute, which further increased to Php3.00 per minute effective January 1, 2004.

 

Undera separate agreement between PLDT and PAPTELCO, PLDT is the transit facility providerbetween Smart, Globe, other local exchange carriers, or LEC, operators andPAPTELCO.  PAPTELCO is comprised of 49 LEC, and operating in 150 majortelephone exchanges nationwide.  Transit traffic is a service by PLDT to Smart,Globe, other LEC operators and PAPTELCO members where PAPTELCO members have nodirect interconnection with either Smart, Globe and other LEC operators.

 

Effective February 1, 2003, international calls terminating to PLDT’s fixed line networkwere charged a termination rate of an average of approximately US$0.12 perminute compared to the previous rate of US$0.08 per minute.  Also,international calls terminating to Smart’s cellular network were charged atermination rate of US$0.16 per minute, an increase from the previous terminationrate of US$0.12 per minute.

 

Effective January 1, 2002, Smart charged a termination rate of Php4.00 per minute forcalls originating from/terminating to another cellular operator’s network.  ForSMS originating from Smart and terminating on other operators’ cellular networkand for SMS originating from other operators and terminating on Smart’scellular network, the charge is Php0.35 per message.

 

Licenses andRegulation

 

PLDTand Smart provide telecommunications services pursuant to legislative franchises,which will expire, in the case of PLDT, on November 28, 2028, in the case of Smart, on March 27, 2017 and, in the case of Piltel, on May 14, 2019.  A franchise holder is required to obtain operating authority from the NTC to providespecific telecommunications services.  These approvals may take the form of aCPCN or, while an application for a CPCN is pending, a provisional authority tooperate.  Provisional authorities are typically granted for a period of 18months.  The Philippine Revised Administrative Code of 1987 provides that ifthe grantee of a license or permit, such as a CPCN or provisional authority,has made timely and sufficient application for the extension thereof, theexisting CPCN or provisional authority will not expire until the application isfinally decided upon by the administrative agency concerned.

 

PLDToperates its business pursuant to a number of provisional authorities andCPCNs, the terms of which will expire at various times between now and 2028.PLDT's CPCNs to provide services to most of the Metropolitan Manila area, Davao and other Philippine cities expired in 2003.  Although some of PLDT's CPCNs andprovisional authorities have already expired, PLDT filed timely applicationsfor extension of these CPCNs and provisional authorities prior to theirrespective expiration dates and is therefore entitled to continue to conductits business under its existing CPCNs and provisional authorities pending theNTC’s decision on these extensions.  We currently expect that the NTC willgrant these extensions; however, we cannot assure you that this will occur.The period of validity of some of PLDT’s CPCNs which expired on November 28,2003, coterminous with the term of its previous franchise under Republic ActNo. 6146, has been extended further by the NTC to November 28, 2028,coterminous with PLDT’s current franchise under Republic Act No. 7082. Motionsto extend the period of validity of the other CPCNs to November 28, 2028 are now pending with the NTC.  See Item 3. "Key Information –– Risks factors —Risks Relating to Us — Our business is significantly affected by governmentallaws and regulations, including regulations in respect of our franchises, ratesand taxes."  

 

Smartoperates its cellular, international long distance and national long distanceservices pursuant to CPCNs, the terms of which will expire upon the expirationof its franchise.  On August 26, 2002, Smart was granted a CPCN to install,operate and maintain nationwide global mobile personal communications via satellitewhich will also expire upon expiration of its franchise.  Smart’s provisionalauthority to establish, install, maintain, lease and operate an internationalprivate leased circuit expired on May 6, 2003.  Prior to its expiration, Smart filed for an extension of this provisional authority.  On July 22, 2002, Smart was granted separate CPCNs to operate a cellular mobile telephonesystem and an international gateway facility.  

 

On December 29, 2005, Smart was awarded a 3G license by the NTC after being rankedhighest by the NTC in garnering a perfect score on a 30-point grading systemdesigned to gauge the capability of telecommunication operators to effectivelyprovide extensive 3G services.  As a result, Smart received the largest radiofrequency allocation of 15 MHz as well as first choice of frequency spectrum.Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrum. 

 

Under theterms of the 3G license, Smart is required to:

 

•        begin installation and rollout of a3G network no later than 18 months from date of award;

•        start commercial operations nolater than 30 months from date of award; and

•        cover at least 80% of provincialcapitals and 80% of chartered cities within five years.

 

Smart is alsorequired to pay annual license fees of Php115 million based on the 15 MHzawarded to the Company.

 

Piltel is authorized toprovide virtually every type of telecommunications service, including thetransmission of voice, data facsimile, audio and video and informationservices, in and between provinces, cities and municipalities throughout the Philippines.  The franchise, which was last amended on May 14, 1992, will expire on May 14, 2019 and may be extended by a legislative act of the Philippine Congress.

 

The following table sets forth the spectrum system,licensed frequency and bandwidth used by Smart, Piltel and Smart Broadband:

 

**Carrier**

**Spectrum System**

**Frequency Assignment**

**Bandwidth**

 

 

 

 

Smart

ETACS/GSM 900

897.5-905/942.5-950 MHz

7.5 MHz

 

GSM 1800

1725-1730/1820-1825 MHz

5.0 MHz

 

 

1730-1732.5/1825-1827.5 MHz

2.5 MHz

 

 

1735-1740/1830-1835 MHz

5.0 MHz

 

 

1745-1750/1840-1845 MHz

5.0 MHz

 

 

1780-1782.5/1875-1877.5 MHz

2.5 MHz

 

3G (W-CDMA)

1920-1935/2110-2125 MHz

15.0 MHz

 

 

 

 

Piltel

AMPS/CDMA

824-835/869-880 MHz

11.0 MHz

 

 

845-846.5/890-891.5 MHz

1.5 MHz

 

 

 

 

Smart Broadband

Wireless broadband

2400-2483.5 MHz

72 MHz

 

 

3400-3590 MHz

45 MHz

 

 

5470-5850 MHz

44 MHz

 

Operators of international gateway facilities andcellular telephone operators, pursuant to Executive Order No. 109, are requiredto install a minimum number of local exchange lines.  Of these new lines,operators are required to install one rural exchange line for every ten urbanexchange lines installed.  Smart and Piltel were required to install 700,000and 400,000 lines, respectively, and each has received a certificate ofcompliance from the NTC.

 

We are required to pay various permits, regulation andsupervision fees to the NTC.  PLDT and Smart are currently engaged in disputeswith the NTC over some of the assessed fees.  For more information on thedisputes involving PLDT and Smart, see “Item 8. Financial Information – LegalProceedings – Taxation – NTC Fees.”

 

OnMay 27, 1998, Smart filed an Urgent Ex Parte Motion and Manifestation regardingthe permit fee in the amount of approximately Php113 million assessed by theNTC for CPCN 93-482, pertaining to Smart’s Integrated Local Exchange TelephoneService, Domestic Toll Service and Private Line Service.  Smart contended thatthe fee should have been calculated on the basis of the actual local exchangecarrier project cost, and that therefore the fee should be Php70 million.Although the NTC has not yet resolved this issue, Smart has already paid Php50million in respect of this assessment as of the date of filing this annualreport.

 

In a letter dated April 12, 2005, the NTC requested that Smart pay the following fees in respect of its CPCNs and provisionalauthorities:

 

**Case No.**

**Fee**

 

 

93-482

Php62,510,950

94-220

878,830

96-248

6,815,500

Total

Php70,205,280

 

Piltelhas been assessed by the NTC for deficiency supervision and regulation fees.The total amount assessed was Php1,306 million, including penalties amountingto Php501 million, as of December 31, 2003.  Piltel protested the assessmentsin good faith.  On December 8, 2004, the Department of Justice, or DOJ, issuedan opinion in response to the query of the NTC on whether the latter canrecompute the supervision and regulation fees due from Piltel and whether itcan validly impose penalties and surcharges in view of the pending protest ofPiltel over the NTC’s computation of the supervision and regulation fees.  TheDOJ ruled that the NTC could recompute Piltel’s supervision and regulation feesto exclude subscriptions issued by virtue of a debt rehabilitation scheme.Likewise, the DOJ ruled that the imposition of surcharges and penaltiesconstitutes deprivation of property without due process of law because the NTCmust first pass upon the protests of Piltel before it can impose such penaltiesand surcharges.

 

In adecision received by Piltel on February 8, 2005, the NTC recomputed thesupervision and regulation fees due from Piltel.  Pursuant to the saiddecision, Piltel was required to pay supervision and regulation fees in theamount of approximately Php550 million and Php9 million, respectively.  Theforegoing amounts were tendered by Piltel to the NTC, and received by the NTC,on February 11, 2005.

 

Inan assessment dated August 4, 2005, the NTC required Piltel to pay supervisionand regulation fees of Php81 million for the year 2005.  The assessment, whichwas paid on September 30, 2005 already reflects the new computation based onthe above DOJ ruling.  Consequently, Piltel adjusted its accrual for NTCsupervision and regulation fees to reflect the latest assessment.

 

In order to diversify the ownership base of publicutilities, the Public Telecommunications Policy Act (R.A. 7925) requires a telecommunications entity with regulated types ofservices, such as Smart and Piltel, to make a public offering through the stockexchanges representing at least 30% of its aggregate common shares by the laterof the following:

 

•        the fifth anniversary of the datethe law became effective; and

 

•        the fifth anniversary of the dateof the entity’s commencement of commercial operations.

 

PLDTand Piltel have complied with this requirement.  The Philippine government hasgranted franchises to other telecommunications companies requiring a publicoffering within ten years from the later of their commencement of operations orthe date on which the franchise was granted.  Because R.A. 7925 provides thatany advantage granted under existing franchises automatically becomes part ofpreviously granted telecommunications franchises, Smart believes that thisten-year period is generally also applicable to Smart.  As Smart has notconducted a public offering of its shares by August 2004, the PhilippineCongress may revoke the franchise of Smart for failure to comply with therequirement under R.A. 7925 to conduct a public offering of its shares byAugust 2004.  A *quo warranto* case may also be filed against Smart by theOffice of the Solicitor General of the Philippines on the ground of violationof R.A. 7925 for the failure of Smart to conduct a public offering of itsshares by August 2004.  However, Smart believes that it did not violate theterms of its franchise by not conducting an initial public offering by August2004.  Smart believes that it should be deemed to have complied with therequirement of making a public offering of its shares since PLDT owns 100% of theoutstanding shares of Smart.  The purpose of R.A. 7925 in requiringtelecommunications companies to make a public offering of their shares, whichis to broaden public ownership in telecommunications entities, is alreadyrealized in PLDT, being a publicly listed company, owning 100% of Smart.Moreover, Smart believes that the period stated in R.A. 7925 and in the otherlegislative franchises within which to conduct a public offering and listing ofshares of stock of telecommunications companies should be deemed as merelydirectory and not mandatory.  The DOJ has rendered an opinion that thethree-year period fixed under the  Downstream Oil Industry Deregulation Act of1998 (R.A. 8479) for the conduct of the initial public offering of shares inentities engaged in the oil refinery business should be regarded as merelydirectory.  Smart believes that this DOJ opinion should also apply to theperiod for the conduct of initial public offering of telecommunicationscompanies.  In September 2004,Senate Bill No. 1675 was filed seeking to amend Section 21 of R.A. 7925.  Thebill seeks to declare that a telecommunications entity shall be deemed to havecomplied with the requirement of making a public offering of its shares iftwo-third of its outstanding voting stock are owned and controlled directly orindirectly, by a listed company.  The bill is currently pending in thePhilippine Senate.  PLDT regularlyevaluates various strategic options with respect to its capital structure.

 

ThePhilippine Congress is considering five bills, each of which, if passed byCongress and enacted into law, would impose a 7% or 10% tax on the grossreceipts of cellular operators.   The proposed taxes would apply to bothcellular calls and cellular data revenues and prohibit cellular operators fromimposing additional charges or fees to compensate for the imposition of theproposed taxes.  In addition, several bills have also been submitted, forconsideration by Congress, to impose a franchise tax at a rate of 7% or 5% taxon gross receipts of all telecommunications companies in lieu of the 10% valueadded tax.  

 

Competition

 

Theenactment of the R.A. 7925 of the Philippines in March 1995 consolidated thegovernment's various policy issuances governing the telecommunications industryand reaffirmed, among other things, the policy of liberalizing the industry andopening up the telecommunications market to new entrants.  Including us, thereare nine major local exchange carriers, 11 international gateway facilityproviders, and six cellular service providers in the country, including onewhich has not yet commenced operations.  Many new entrants into the Philippinetelecommunications market have entered into strategic alliances with foreigntelecommunications companies, which provide them access to technological andfunding support as well as service innovations and marketing strategies.Consequently, we are facing increasing competition in major segments of thetelecommunications industry, particularly cellular, fixed line and data and othernetwork services segments.

 

Cellular Service

 

Thereare presently six operating service providers, namely Smart, Piltel, Globe,Islacom, Digitel and Express Telecom.  Globe acquired Islacom (now known as *Innove*)to form into one operating group while Smart and Piltel, both being part of thePLDT Group, formed another operating group.  These two operating groups share approximately95% of the Philippine cellular market.  The third active operator, Digitel,commenced its cellular service, *Sun Cellular*, on March 29, 2003 and is estimated to have approximately 5% of the cellular market as of December 31, 2005.  In December 2005, theNTC awarded 3G licenses to existing cellular operators Smart, Globe, Digiteland to a new entrant CURE.  The NTC has yet to award a fifth license to anotheroperator.

 

Competition in the cellular industry has intensifiedwith the availability of affordably priced handsets offering a range of newfunctions and the introduction by competitors of new and improved plans forpostpaid subscribers, reduced rates per minute and aggressive marketing andpromotional strategies.  The principal bases of competition are price,including handset cost, quality of service, geographic coverage andattractiveness of packaged services.  Smart's network leads the industry interms of coverage with 5,982 base stations as of December 31, 2005. 

 

InOctober 2004, *Sun Cellular* launched its “24/7” service whereby itsprepaid subscribers were offered unlimited calls and text messaging within the *SunCellular* network over a certain period for a fixed fee (e.g. Php100 for 10days and Php250 for 30 days of unlimited calls and text messaging).On March 15, 2005, the Php250 monthly fee was increased to Php350while the duration of Php100 service was shortened to seven days.  *SunCellular* postpaid subscribers can utilize a similar feature by addingPhp350 per month to their monthly service fee.  The launch of *Sun Cellular’s“24/7”* promotion brought out a market segment that is attracted to “bucket”plans for voice and text services.  On March 8, 2005, Touch Mobile, a prepaidGSM service offering of *Innove*, launched its “Todo Tawag, Todo Text”promo wherein Touch Mobile subscribers have the option to avail of unlimitedlocal calls and text messaging among Touch Mobile subscribers.  The promotioncovers local voice calls and text messaging only between Touch Mobilesubscribers for Php150 with a validity of 15 days.  On March 11, 2005, Smart launched “*Smart 258*”, a promotion open to all Smart and *Talk‘N Text* prepaid subscribers who wish to avail of unlimited on-network voicecalls and unlimited on-network text messaging.  On March 22, 2005, Globe launched its own unlimited call and text promotion wherein Globe subscriberscould call and text other Globe subscribers for a fee of Php300. While most ofthe “bucket” priced plans currently available in the market are being offeredon promotional bases, Smart, Globe and Sun Cellular continue to launch otherservices which are designed to encourage incremental usage from existingsubscribers and also to attract new subscribers.  On December 18, 2005, Touch Mobile unveiled a new promotional rate of Php0.75 per message sentexclusively for Touch Mobile subscribers only.  On December 17, 2005, Globe introduced its Php0.10 per second call rate exclusively for its prepaid andpostpaid subscribers.

 

Cellular operators are also competing actively against each other inlaunching innovative products and value-added services.  The growing range ofcellular products and services now include text messaging, multi-mediamessaging, voice mail, text mail, international roaming, information-on-demand,mobile banking, e-commerce, mobile data and cellular Internet access.

 

On February 14, 2006, Smart opened its 3G network in selected keycities nationwide, making video calling, video streaming, high speed Internetbrowsing and special 3G content downloads on its 3G network available on a freetrial basis to subscribers with 3G handsets.  Globe launched its 3G service on April 30, 2006.

 

Consistent with industry practice and Smart’s churn management efforts,Smart "locks" the handsets it sells to its subscribers, renderingthem incompatible with SIM cards issued by competitors and preventingsubscribers from swapping the existing SIM for a SIM of a competing operator.However, subscribers may have their handsets “unlocked” by unauthorizedparties, for a nominal fee, and purchase new SIM cards from competingoperators.  “Unlocking” does not involve significant cost.  Switching toanother cellular operator would, however, result in a change of thesubscriber’s cellular telephone number.

 

FromOctober 2003 to May 2005, “SIM-swapping” became a prevalent promotionalactivity in the Philippine cellular industry.  In “SIM-swapping” promotions,prepaid cellular subscribers had the ability to switch from one cellularoperator to another by simply exchanging their current prepaid SIM card foranother operator’s SIM card with a certain amount of preloaded air time creditsat no cost.  These “SIM-swapping” activities gave rise to a situation wherecertain subscribers regularly swapped their SIM card between cellular operatorsupon full use of the pre-stored air time. As a result, our cellular subscriberbase contained a certain number of transient subscribers at any one point intime.  In May 2005, we terminated our “SIM-swapping” promotions which led to anincrease in our churn rates beginning in the third quarter of 2005 andcontinuing on to the first half of 2006.  

 

*Local Exchange Service*

 

Theconcerted nationwide local exchange line build-out by various players, asmandated by the Philippine government, significantly increased the number offixed lines in service in the country and resulted in wider access to basictelephone service.  The growth of the fixed line market, however, remained weakdue to the surge in demand for cellular services and in the past, the generalsluggishness of the national economy.  Nevertheless, we have sustained ourleading position in the fixed line market on account of PLDT's extensivenetwork in key cities nationwide.  In most areas, we face one or twocompetitors.  Our principal competitors in the local exchange market areDigitel, BayanTel and Globe.  In June 2005, Innove Communication, awholly-owned subsidiary of Globe, was granted a national franchise by the NTCto provide fixed line service nationwide.

 

Overthe past couple of years, however, competition among local exchange operatorshas reduced as certain operators have faced financial difficulties or haveshifted strategic focus away from the fixed line business to cellularservices.  On the other hand, we are facing increasing competition fromcellular operators mainly due to substitution of cellular services for fixedline services.   

 

*International LongDistance Service*

 

Includingus, there are 11 international gateway facility operators in the country.While we have so far been able to maintain a leadership position in this highlycompetitive segment of the industry, in recent years, our market share hasreduced largely as a result of: (1) competition from other internationalgateway facility operators and international simple resale operators; (2) anincrease in inbound and outbound international long distance calls terminatingto and originating from the growing number of cellular subscribers; and (3) thepopularity of alternative and cheaper means of long distance communications,such as text messaging, e-mailing and Internet telephony, further heighteningthe competition.

 

Withrespect to inbound calls into the Philippines, we adopted the U.S. FCCbenchmark accounting rate of US$0.38 per minute for inbound international callswhich represented a settlement rate of US$0.19 per minute, one year ahead ofthe target date of January 1, 2001.  This provided us with increased flexibilityto terminate more U.S. traffic into the Philippines, minimize unauthorizedtraffic termination through international simple resale operations and recovertraffic lost due to bypass routings.  We have also established, through ourwholly-owned subsidiary PLDT Global, presence in key cities overseas toidentify and capture Philippine terminating traffic at its source, maximize theuse of our international facilities and develop alternative sources ofrevenue.  Effective February 1, 2003, after lengthy negotiations withapproximately 100 telecommunications operators around the world, we increasedthe termination rate with carriers accounting for a substantial portion of ourinternational inbound traffic terminating on its fixed line network to an averageof approximately US$0.12 per minute.  Prior to the increase in terminationrates, a substantial portion of PLDT’s international inbound trafficterminating on its fixed line network was charged an average termination rateof approximately US$0.08 per minute.  See Item 5. “Operating and FinancialReview and Prospects –– Results of Operations –– 2005 Compared to 2004 ––Consolidated Operating Revenues –– Fixed Line –– International Long Distance,” andItem 3.  “Risks Factors –– Risks Relating to Us –– Our results of operationshave been, and may continue to be, adversely affected by competition ininternational long distance service” and *Note 25 –– Other Matters*to theaccompanying consolidated financial statements in Item 18 for furtherdiscussion.  

 

With respect to outbound callsfrom the Philippines, we compete for market share through our local exchangeand cellular businesses, which are the origination points of outboundinternational calls.  We have also introduced a number of marketing initiativesto stimulate growth of outbound call volumes, including tariff reductions andvolume discounts for large corporate subscribers.  *Sun Cellular* andGlobe have also launched new pricing schemes to grow their outbound callvolumes.

 

*National Long DistanceService*

 

Our national longdistance service business has been negatively affected by the growing number ofcellular subscribers in the Philippines and the widespread availability andgrowing popularity of alternative economical non-voice methods of communication,particularly text messaging and e-mail.  In addition, various Internet serviceproviders have launched voice services via the net to their subscribersnationwide.

 

While national longdistance call volumes have been declining, we have remained a leading providerof national long distance service in the Philippines due to our significantsubscriber base and ownership of the Philippines’ most extensive DFON.  Inorder to mitigate the decline of our national long distance revenues, we haverenegotiated the interconnection agreements with the cellular operators toprovide the fixed line business a more equitable access charge arrangement forcalls between fixed line and cellular subscribers.

 

On January 5, 2005, *Globelines* launched a plan that offered all its subscribers freeNDD calls nationwide.  Digitel's flat rate for Sun-to-Sun calls was positionednot only as a strong alternative to other cellular services, but also as areplacement to the fixed line.  On February 14, 2005, PLDT launched its Php10per call promotion to any PLDT fixed line subscriber nationwide and to allSmart and *Talk ‘N Text* subscribers.  On May 12, 2005, PLDT began offering the Php10 per call promotion with an additional Php5 per call for the sameunlimited talktime to Smart and *Talk ‘N Text* subscribers.  On August 12, 2005, PLDT ceased offering the Php10 per call promotion to Smart and *Talk ‘NText* subscribers.  Beginning September 12, 2005, PLDT charged an optionalPhp20 add-on monthly service fee for PLDT fixed line subscribers who may wantto continue to avail of the Php10 per call promotion for calls within the PLDTnetwork.  Beginning January 2006, the Php10 per call has been made permanentwith a Php50 optional monthly service fee for those who may want to avail ofthe service.  The promotion introduces a shift from the “per minute charging.”The promotion allows PLDT fixed line subscriber access to over 22 million PLDT,Smart and *Talk ‘N Text* subscribers at a lower rate.  PLDT capped thePhp10 per call service to Smart and *Talk ‘N Text* subscribers to thosewho registered on or before February 24, 2006.  PLDT fixed line subscribers,however, can still register and avail of the unlimited Php10 per call servicefor national long distance calls within the PLDT network.

 

Dataand Other Network Services

 

Anotherrapidly growing segment of the industry is the market for data and othernetwork services.  The growth is spurred by the significant growth inconsumer/retail narrowband and broadband Internet access, enterprise resourceplanning applications, call centers, business process outsourcing, on-line gaming andother e-services that drive the need for broadband and Internet-protocol basedsolutions both here and abroad.  Our major competitors in this area areGlobe/Innove, BayanTel, Eastern Telecoms and Digitel.  The principal bases ofcompetition in data services market are coverage, price, customer service andquality of service.

 

Environmental Matters

 

Wehave not been subject to any material fines or legal or regulatory actioninvolving non-compliance with environmental regulations of the Philippines.  We are not aware that we are not in compliance in any material respect withrelevant environmental protection regulations.

 

Intellectual Property Rights

 

We do not own any material intellectual propertyrights apart from our brand names and logos.  We are not dependent on patents,licenses or other intellectual property which are material to our business orresults of operations, other than licenses to use the software that accompany mostof our equipment purchases.

 

Properties

 

We own four office buildingslocated in Makati City and own and operate 183 exchanges nationwide, of which61 are located in the Metropolitan Manila area.  The remaining 122 exchangesare located in small cities and municipalities outside Metropolitan Manilaarea.  We also own radio transmitting and receiving equipment used forinternational and domestic communications.  As at December 31, 2005, we had 4,305 cellular cell sites and 5,982 base stations.

 

Asof December 31, 2005, our principal properties, excluding property underconstruction, consisted of the following, based on book values:

 

•        39% consisted of cable and wire facilities,including our DFON, subscriber cable facilities, inter-office trunking and tollcable facilities;

 

•        23% consisted of central officeequipment, including three international gateway facilities, six pure nationaltoll exchanges and 15 combined local and toll exchanges;

 

•        19% consisted of cellularfacilities;

 

•        11% consisted of land and improvementsand buildings, which we acquired to house our telecommunications equipment,personnel, inventory and/or fleet;

 

•        5% consisted of vehicles,furniture and other work equipment; and

 

•        3% consisted of communicationssatellite. 

 

Formore information on these properties, see *Note 7 – Property, Plant andEquipment* to the accompanying consolidated financial statements in Item18.  These properties are located in areas being served by our exchanges.  Inour opinion, these properties are in good condition, except for ordinary wearand tear, and are adequately insured.

 

The majority of our connecting lines are above or underpublic streets and properties owned by others.

 

PLDT's and Smart’s properties are free from anymortgage, charge, pledge, lien or encumbrance.  However, substantial propertiesof Piltel and Mabuhay Satellite and a portion of ePLDT’s property are subjectto liens.

 

PLDTGroup has various long-term lease contracts, the bulk of which have lease termsranging from two to ten years covering certain offices, warehouses,telecommunications equipment locations and various office equipment.

 

Item4A.     Unresolved Staff Comments

 

None.

 

Item 5.        Operating and Financial Review andProspects

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our audited consolidatedfinancial statements (and the related notes) as at December 31, 2005 and 2004and for the years ended December 31, 2005, 2004 and 2003 included elsewhere inthis report.  This discussion contains forward-looking statements that reflectour current views with respect to future events and our future financialperformance.  These statements involve risks and uncertainties, and our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of particular factors such as those set forth under"Forward-Looking Statements" and “Item 3. Key Information — RiskFactors" and elsewhere in this report.  Our audited consolidated financialstatements, and the financial information discussed below, have been preparedin accordance with U.S. GAAP.  For convenience, certain peso financialinformation in the following discussions has been translated to U.S. dollars atthe exchange rate at December 31, 2005 of Php53.062 to US$1.00, as quotedthrough the Philippine Dealing System.*

 

Overview

 

We are the largest and most diversifiedtelecommunications company in the Philippines.  We have organized our businessinto three main segments which serve as the basis for management’s decision toallocate resources and evaluate operating performance:

 

•        *Wireless* — wirelesstelecommunications services provided by Smart and Piltel, our cellular serviceproviders; Smart Broadband, our wireless broadband provider; Wolfpac, ourwireless content operator; and Mabuhay Satellite, ACeS Philippines and Telesat,our satellite, VSAT, wireless broadband and other services operators;

 

•        *Fixed Line* — fixed linetelecommunications services are primarily provided through PLDT.  We alsoprovide fixed line services through PLDT’s subsidiaries PLDT Clark Telecom,Subic Telecom, Maratel, Piltel and BCC, which together account forapproximately 3% of our consolidated fixed lines in service, and PLDT Global;and

 

 

•        *Information and CommunicationsTechnology* — information and communications infrastructure andservices for internet applications, internet protocol-based solutions andmultimedia content delivery provided by PLDT’s subsidiary ePLDT; call centerservices provided under one umbrella brand name *ePLDT Ventus*, includingParlance and Vocativ; Internet access and gaming services provided by ePLDT’ssubsidiaries, Infocom, Digital Paradise, Digital Paradise Thailand, netGames,Airborne Access and Level Up!; and e-commerce and IT-related services providedby other investees of ePLDT, as discussed in *Note 8 – Investments*to theaccompanying consolidated financial statements in Item 18.

 

Keyperformance indicators and drivers that our management uses for the managementof our business include, among others, the general economic conditions in the Philippines, our subscriber base, traffic volumes, and interconnection arrangements.

 

**Wireless**
 

Our wireless business providescellular, satellite, VSAT, wireless broadband and other services, with cellularservices contributing about 96% and satellite, VSAT, wireless broadband andother services contributing 4% of our wireless service revenues as at December 31, 2005.  Rapid growth in the cellular market has resulted in a change in ourrevenue composition and sources of our revenue growth.  Starting 2003, cellularservice has been our major revenue source surpassing fixed line revenues byfive percentage points.  As at December 31, 2005, Smart and Piltel, whichoffers service using Smart’s network, had the largest and third largestcellular subscriber bases, respectively, in the Philippines.  In addition,Smart’s and Piltel’s subscribers increased by 6% in 2005, which waslower than the increases in Smart’s and Piltel’s subscriber base of 48% and 51%in 2004 and 2003, respectively.  As of December 31, 2005, our aggregate systemwide cellular subscribers outnumbered our fixed linein service by more than 9 to 1.  Cellulardata services, which include all text messaging and text-related servicesranging from ordinary text to value-added services, contributed significantlyto our revenue increase.  Cellular service revenues accounted for 57%, 56% and 51%of our total service revenues for 2005, 2004 and 2003, respectively.

 

**Fixed Line**
 

Ourfixed line business provides local exchange service, international and nationallong distance services, data and other network services and miscellaneousservices.  Until 2003, fixed line service has been our major revenue sourcecontributing 56% and 69% of our consolidated service revenues in 2002 and 2001,respectively.  Although relatively stable in absolute terms, our fixed linerevenues’ contribution to total operating revenues have declined to 42% in2003, 39% in 2004 and 38% in 2005, largely due to the substantial growth in ourwireless business.  Local exchange revenues have declined slightly owing toshift in subscriber preference from postpaid to prepaid service.  National longdistance revenues have also been declining largely due to a drop in callvolumes and an increase in the proportion of calls subject to revenue sharingwith other carriers.  Mitigating these declines was the steady growth of ourdata and other network services over the recent years.  Recognizing the growthpotential of the data and other network services segment, we have putconsiderable emphasis on the development of new packet-switched, data-capableand internet-based networks.  International long distance revenues haveincreased its contribution to the overall fixed line revenues in 2003, 2004 and2005 on account of an increase in our average termination rates implemented in2003.

 

**Information and CommunicationsTechnology**
* *

Ourinformation and communications technology business is conducted through ourwholly-owned subsidiary, ePLDT.  ePLDT’s principal businesses are the operationof an Internet data center under the brand name *VitroTM*; threewholly-owned call centers under an umbrella brand *ePLDT Ventus*, andInfocom, an ISP.  As a percentage of our total service revenues, ourinformation and communications technology service revenues increased to 3% in2005 from 2% in 2004 and 2003.

 

On May 25, 2006, we announced that ePLDT and SPI Tech,L.P. entered into a non-binding letter of interest in respect of a potentialacquisition by ePLDT of 100% of SPI, one of the leading pure-play BPO companiesand independent BPO service providers in the world. For more information aboutthe possible acquisition, see “Item 4. Information on theCompany—Organization.”

 

CriticalAccounting Policies

 

Ourconsolidated financial statements are prepared in accordance with U.S. GAAP,which requires management to make estimates and assumptions that affect amountsreported in our consolidated financial statements and related notes.  Inpreparing these consolidated financial statements, we have made our bestestimates and judgments of certain amounts, giving due consideration tomateriality.

 

Webelieve the following represent our critical accounting policies under U.S.GAAP.  The impact and any associated risks relating to these policies in ourbusiness operations are discussed elsewhere in this section.

* *

*Revenue Recognition*

 

Ourrevenue recognition policies require us to make use of estimates andassumptions that may affect the reported amounts of our revenues andreceivables.  While we believe that our judgments and assumptions areappropriate and reasonable, significant changes in our judgments andassumptions may materially affect our reported amounts of our revenues andreceivables.

 

Ouragreements with domestic and foreign carriers for inbound and outbound trafficsubject to settlements require traffic reconciliations before actual settlementis done, which may not be the actual volume of traffic as measured by us.Initial recognition of revenues is based on our observed traffic adjusted byour normal experience adjustments, which historically have not been material inour consolidated financial statements.  Differences between the amountsinitially recognized and actual settlements are taken up in the accounts uponreconciliation.  However, there is no assurance that such use of estimates maynot result to material adjustments in future periods.

 

Revenuesunder a multiple element arrangement specifically applicable to our wirelessbusiness are split into separately identifiable components and recognized whenthe related components are delivered in order to reflect the substance of thetransaction.  The fair value of components is determined using verifiableobjective evidence.  Revenue for handset sales is quantified and identifiedseparately using the residual value method from our cellular service revenue. 

 

*Estimating Useful Lives ofProperty, Plant and Equipment*

 

Weestimate the useful lives of our property, plant and equipment based on theperiod over which our assets are expected to be available for use.  Theestimated useful lives of our property, plant and equipment are reviewedperiodically and are updated if expectations differ from previous estimates dueto physical wear and tear, technical or commercial obsolescence and legal orother limits on the use of our assets.  In addition, our estimation of theuseful lives of our property, plant and equipment is based on our collectiveassessment of industry practice, internal technical evaluation and experiencewith similar assets.  It is possible, however, that future results ofoperations could be materially affected by changes in our estimates broughtabout by changes in factors mentioned above.  The amounts and timing ofrecorded expenses for any period would be affected by changes in these factorsand circumstances.  A reduction in theestimated useful lives of our property, plant and equipment would increase ourrecorded operating expenses and decrease our noncurrent assets.  Total carryingvalues of property, plant and equipment amounted to Php173,007 million and Php186,095million as at December 31, 2005 and 2004, respectively.

 

Asset Impairment 

 

U.S. GAAP requires that animpairment review be performed when certain impairment indicators are present.The impairment review first compares the future undiscounted cash flowsexpected to be generated from the continued use and ultimate disposition of theassets with the book value of the assets.  If these cash flows are notsufficient to recover the book value of the assets, an impairment charge isrecognized based on the comparison between the discounted value of these cashflows and the book value of the assets.  In addition, our projections forfuture cash flows are generally less during periods of reduced cash flow.  As aresult, an impairment charge is more likely to occur during a period when our operatingresults are already otherwise depressed.

 

Purchaseaccounting requires extensive use of accounting estimates and judgments toallocate the purchase price to the fair market values of the assets andliabilities purchased.  Our business acquisitions typically result in goodwill,which is also subject to a periodic impairment test.  Determining the fairvalue of property, plant and equipment, investments and intangible assetsrequires us to make estimates and assumptions, such as the determination of futurecash flows expected to be generated from the continued use and ultimatedisposition of such assets, that can materially affect our consolidatedfinancial statements.  Future events could cause us to conclude that property,plant and equipment, investments and intangible assets associated with anacquired business is impaired.  Any resulting impairment loss could have amaterial adverse impact on our financial condition and results of operations.

 

The determination of theestimated future cash flows involves significant judgment and estimations.While we believe that our assumptions are appropriate and reasonable,significant changes in our assumptions may materially affect our assessment ofrecoverable values and may lead to future additional impairment changes.

* *

Totalcarrying values of goodwill and other intangible assets as at December 31, 2005and 2004 amounted to Php16,875 million and Php16,561 million, respectively.

* *

Financial Assets and Liabilities

 

U.S. GAAP requires that we carrycertain of our financial assets and liabilities at fair value, which requiresextensive use of accounting estimates and judgment.  While significantcomponents of fair value measurement were determined using verifiable objectiveevidence (e.g., foreign exchange rates, interest rates, volatility rates), thefair value would differ if we utilized different valuation methodology.  Anychanges in fair value of these financial assets and liabilities would affectdirectly our profit and loss and equity.

 

Total fair value of financial assets andliabilities as at December 31, 2005 amounted to Php42,717 million and Php149,593million, respectively, while total fair value of financial assets andliabilities as at December 31, 2004 amounted to Php43,273 million and Php198,249million, respectively.

* *

*Estimating Allowance for Doubtful Accounts*

 

We estimate the allowance for doubtful accounts relatedto our trade receivables based on two methods.  The amounts calculated usingeach of these methods are combined to determine the total amount we reserve.First, we evaluate specific accounts where we have information that certaincustomers are unable to meet their financial obligations.  In these cases, weuse judgment, based on the best available facts and circumstances, includingbut not limited to, the length of our relationship with the customer and thecustomer’s current credit status based on third party credit reports and knownmarket factors, to record specific reserves for customers against amounts dueto reduce our receivables to amounts that we expect to collect.  These specificreserves are re-evaluated and adjusted as additional information receivedaffects the amounts estimated.  Second, a provision is established as a certainpercentage of operating revenues based on the aging profile of receivables.This percentage is based on a collective assessment of historical collection,write-off experience, current economic trends, changes in our customer paymentterms and other factors that may affect our ability to collect payments. 

 

Full allowance is provided forreceivables from permanently disconnected subscribers and carriers.  Suchpermanent disconnections generally occur within 105 days from due date.Partial allowance is provided for active subscribers and carriers based on theage status of receivables.

 

Theamounts and timing of recorded expenses for any period would differ if we madedifferent judgments or utilized different estimates.  An increase in ourallowance for doubtful accounts would increase our recorded expenses anddecrease our current assets.  Provisionfor doubtful accounts amounted to Php2,251 million, Php3,955 million andPhp4,092 million for the years ended December 31, 2005, 2004 and 2003, respectively.  Trade and other receivables, net of allowance for doubtful accounts,amounted to Php7,113 million and Php7,524 million as at December 31, 2005 and2004, respectively.

 

*Investments*

* *

Thevarious interests that we hold in companies are accounted for under threemethods:  consolidation, equity method and cost method.  The method ofaccounting applied to investments involves an evaluation of the significantterms of the investments that explicitly grant or suggest evidence of controlor significant influence over the operations of the investees.  Consolidatedinvestments include our controlled subsidiaries.  Investments in businesseswhich we do not control but have the ability to exercise significant influenceover their operating and financial policies are accounted for using the equitymethod.  Investments in businesses which we do not have the ability to exercisesignificant influence over operating and financial policies are accounted forusing the cost method.

 

*Pension Cost and Other Retirement Benefits*

 

Thedetermination of our obligation and cost for pension and other retirementbenefits is dependent on our selection of certain assumptions used by actuariesin calculating such amounts.  Those assumptions are described in *Note 17 –Employee Benefits*to the accompanying consolidated financial statements inItem 18, and include among others, discount rates, expected returns on planassets and rates of compensation increase.  In accordance with U.S. GAAP,actual results that differ from our assumptions are accumulated and amortizedover future periods and therefore, generally affect our recognized expense andrecorded obligation in such future periods.  While we believe that ourassumptions are reasonable and appropriate, significant differences in ouractual experience or significant changes in our assumptions may materiallyaffect our pension and other retirement obligations.  Unrecognized net actuarial loss as at December 31,2005 and 2004 amounted to Php116 million and Php89 million, respectively.  Theaccrued benefit cost as at December 31, 2005 and 2004 amounted to Php2,142million and Php2,128 million, respectively.

 

Deferred Tax Assets

 

We review the carrying amounts of our deferred taxassets at each balance sheet date and recognize a valuation allowance to theextent that it is no longer probable that sufficient taxable profit will beavailable to allow all or part of the deferred tax assets to be utilized.However, there is no assurance that we will generate sufficient taxable profitto allow all or part of our deferred tax assets to be utilized.  Significantchanges in our judgments and assumptions may materially affect the reportedamounts of our valuation allowance and the carrying amounts of our deferred taxassets.

 

Asat December 31, 2005 and 2004, our deferred tax assets amounted to Php23,405million and Php20,027 million, respectively, net of valuation allowanceamounting to Php5,857 million and Php13,663 million, respectively.

 

*Legal Contingencies*

* *

Weare currently involved in various legal proceedings.  Our estimate of theprobable costs for the resolution 

of these claims has beendeveloped in consultation with outside counsel handling our defense in thesematters and is based upon an analysis of potential results.  We currently donot believe these proceedings will have a material adverse effect on ourconsolidated financial statements.  It is possible, however, that futureresults of operations could be materially affected by changes in our estimatesor in the effectiveness of our strategies relating to these proceedings.  See“Item 8. Financial Information — Legal Proceedings — Taxation.”  

 

Impact of RecentlyIssued Accounting Pronouncements

 

In November 2005, the Financial Accounting Standards Boardissued Staff Position, or FSP, 115-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments.”  FSP 115-1 providesguidance for determining when an investment is considered impaired, whetherimpairment is other-than-temporary, and measurement of an impairment loss.  Aninvestment is considered impaired if the fair value of the investment is lessthan its cost.  Please see *Note 3 – Summary of Significant AccountingPolicies and Practices* to the accompanying consolidated financialstatements in Item 18 for further discussion.

 

Results of Operations

 

We have reclassified certain accounts in 2004 and 2003to conform with our 2005 financial statement presentation.

 

The following table shows thecontribution by each of our business segments to our consolidated operatingrevenues, expenses and net income (loss) for each of the years ended December 31, 2005, 2004 and 2003.  Most of our revenues are derived from our operationswithin the Philippines.  Our revenues derived from outside the Philippines consist primarily of revenues from incoming international calls to the Philippines.

 

 

**Wireless**

** **

**Fixed Line**

** **

**ICT**

** **

**Inter-segment**

**Transactions**

** **

**Total**

 

(in millions)

For the year ended December 31, 2005

** **

** **

** **

** **

** **

** **

** **

** **

** **

Operating Revenues 

Php76,906

 

Php49,472

 

Php3,305

 

(Php6,348)

 

Php123,335

Service

74,195

 

49,431

 

2,953

 

(6,231)

 

120,348

Non-service

2,711

 

41

 

352

 

(117)

 

2,987

Operating Expenses

39,436

 

38,832

 

3,253

 

(6,700)

 

74,821

Net Income 

35,830

 

4,660

 

113

 

–

 

40,603

For the year ended December 31, 2004

 

 

 

 

 

 

 

 

 

Operating Revenues 

74,764

 

48,546

 

2,401

 

(4,538)

 

121,173

Service

68,653

 

48,546

 

2,080

 

(4,375)

 

114,904

Non-service

6,111

 

–

 

321

 

(163)

 

6,269

Operating Expenses

41,598

 

32,027

 

3,035

 

(4,026)

 

72,634

Net Income (Loss) 

27,559

 

1,241

 

(699)

 

–

 

28,101

For the year ended December 31, 2003

 

 

 

 

 

 

 

 

 

Operating Revenues 

65,183

 

46,820

 

1,783

 

(2,586)

 

111,200

Service

54,635

 

46,820

 

1,467

 

(2,436)

 

100,486

Non-service

10,548

 

–

 

316

 

(150)

 

10,714

Operating Expenses

46,264

 

32,303

 

2,272

 

(3,018)

 

77,821

Net Income (Loss) 

13,275

 

(1,902)

 

(328)

 

–

 

11,045

 

**2005 Compared to 2004**

 

**On a Consolidated Basis**

 

***Consolidated OperatingRevenues***

** **

Largelydriven by the growth of our wireless business, our consolidated operatingrevenues for 2005 increased by Php2,162 million, or 2%, to Php123,335 millionin 2005 from Php121,173 million in 2004.  This increase was lower than the increase in ourconsolidated operating revenues in 2004, primarily due to the reduced growth ofour cellular subscriber base in 2005 compared to 2004.  The revenue contribution of our wireless businessaccounted for 62% of our consolidated operating revenues for 2005 and 2004.

** **

The following table shows the breakdown of ourconsolidated operating revenues for the years ended December 31, 2005 and 2004 by business segment:

** **

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php76,906

 

62

 

Php74,764

 

62

 

Php2,142

 

3

Fixed line

49,472

 

40

 

48,546

 

40

 

926

 

2

Information and communications technology 

3,305

 

3

 

2,401

 

2

 

904

 

38

Inter-segment revenues

(6,348)

 

(5)

 

(4,538)

 

(4)

 

(1,810)

 

40

Total

Php123,335

 

100

 

Php121,173

 

100

 

2,162

 

2

 

***Consolidated Operating Expenses***

 

Our consolidated operating expenses in 2005 increasedby Php2,187 million, or 3%, to Php74,821 million from Php72,634 million in 2004.The increase was primarly due to higher operating expenses associated with ourfixed line business and our information and communications technology business,partially offset by a decrease in operating expenses associated with ourwireless business.  As a percentage of our consolidated operating revenues,consolidated operating expenses increased to 61% from 60% in 2004.

 

The following table shows the breakdown of ourconsolidated operating expenses for the years ended December 31, 2005 and 2004 by business segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php39,436

 

53

 

Php41,598

 

57

 

(Php2,162)

 

(5)

Fixed line

38,832

 

52

 

32,027

 

44

 

6,805

 

21

Information and communications technology 

3,253

 

4

 

3,035

 

4

 

218

 

7

Inter-segment revenues

(6,700)

 

(9)

 

(4,026)

 

(5)

 

(2,674)

 

66

Total

Php74,821

 

100

 

Php72,634

 

100

 

Php2,187

 

3

 

***Consolidated Operating Income***

 

Our consolidated operating income in 2005 was Php48,514million, a decrease of Php25 million compared to Php48,539 million in 2004 as aresult of a 3% increase in our consolidated operating expenses which more thanoffset the 2% increase in our consolidated operating revenues.

 

***Consolidated Financing Costs***

 

Financingcosts on a consolidated basis decreased by Php11,873 million, or 69%, to Php5,224million primarily due to higher foreign exchange gains pertaining to theforeign exchange revaluation of the carrying values of financial liabilitiesbecause the level of peso appreciation was higher in 2005 as compared to 2004and lower interest expense and related items owing to lower debt balances in2005 compared with 2004.

 

***Consolidated InterestIncome***

 

Interestincome on a consolidated basis increased by Php515 million, or 55%, to Php1,457million in 2005 from Php942 million in 2004 mainly attributable to higheraverage cash balances.

 

***Consolidated Other Income- Net***

 

Other income on aconsolidated basis totaled Php1,016 million in 2005, a decrease of Php1,514million, or 60%, compared to Php2,530 million in 2004.  The decrease was mainlydue to the recognition of a gain on debt restructuring transaction conducted bySmart in 2004 pertaining to a wireless business with no similar gain in 2005.  

 

***Consolidated I******ncome Before Income Tax, Cumulative Effect of Changein Accounting Policy and Minority Interest in Net Loss (Income) of ConsolidatedSubsidiaries***

 

Our income before income tax, cumulativeeffect of change in accounting policy and minority interest in net loss(income) of consolidated subsidiaries in 2005 was Php45,770 million, anincrease of Php10,930 million, or 31%, from Php34,840 million in 2004,primarily due to the significant decline in our financing costs owing tosubstantial foreign exchange gains recognized in 2005.

 

***Provision for Income Tax***

 

Provisionfor income tax decreased by Php1,977 million, or 29%, to Php4,849 million in2005 compared to Php6,826 million in 2004 mainly due to lower non-tax deductible charges and the net movement in deferred tax assets as previously unrecognized deferred tax assets weretaken-up in 2005 with the increased likelihood that Smart and Piltel would beable to realize the future tax benefits on these assets.  We currently expectthat our effective corporate tax rate will be higher going forward than inprevious years due to the expiration of Smart’s income tax holiday.

 

***Consolidated Net Income***

 

As aresult, our consolidated net income in 2005 was Php40,603 million, an increaseof Php12,502 million, or 44%, compared to Php28,101 million in 2004.  Thefollowing table shows the breakdown of our consolidated net income (loss) forthe years ended December 31, 2005 and 2004 by business segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php35,830

 

88

 

Php27,559

 

98

 

Php8,271

 

30

Fixed line

4,660

 

12

 

1,241

 

4

 

3,419

 

276

Information and communications technology 

113

 

–

 

(699)

 

(2)

 

812

 

116

Total

Php40,603

 

100

 

Php28,101

 

100

 

Php12,502

 

44

 

**On Business Segment Basis**

 

**Wireless**

* *

*Operating Revenues*
 

Our wireless business segment offers cellular servicesas well as satellite, VSAT, wireless broadband and other services.

 

Thefollowing table summarizes our total operating service and non-service revenuesfrom our wireless business for the years ended December 31, 2005 and 2004 by service segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php71,518

 

93

 

Php66,421

 

89

 

Php5,097

 

8

Satellite, VSAT, wireless broadband and others

2,677

 

3

 

2,232

 

3

 

445

 

20

 

74,195

 

96

 

68,653

 

92

 

5,542

 

8

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

2,711

 

4

 

6,111

 

8

 

(3,400)

 

(56)

Total Wireless Operating Revenues 

Php76,906

 

100

 

Php74,764

 

100

 

Php2,142

 

3

 

ServiceRevenues

 

Our wireless service revenues increased by Php5,542million, or 8%, to Php74,195 million in 2005 compared to Php68,653 million in2004 mainly as a result of the continued growth of Smart’s and Piltel’ssubscriber base.  However, thegrowth in Smart’s and Piltel’s subscriber base in 2005 was lower thanthe increases in Smart’s and Piltel’s subscriber base of 48% and 51% in 2004and 2003, respectively.  As apercentage of our total wireless operating revenues, wireless service revenuesincreased to 96% in 2005 from 92% in 2004. 

 

*Cellular Service*

 

Unless otherwise indicated, the financial data andoperating metrics cited in the cellular service section reflect theconsolidated results of our cellular subsidiary, Smart and its subsidiary,Piltel.

 

Our cellular service revenues consist of:

 

•        revenues derived from actual usageof the network by prepaid subscribers and any unused peso value of expiredprepaid cards or electronic air time loads, net of discounts given to dealers; 

 

•        monthly service fees from postpaidsubscribers, including: (1) charges for calls in excess of allocated free localcalls; (2) toll charges for national and international long distance calls; (3)charges for text messages of our service customers in excess of allotted freetext messages; and (4) charges for value-added services, net of related contentprovider costs;

 

•        revenues generated from incomingcalls and messages to our subscribers, net of interconnection expenses; feesfrom reciprocal traffic from international correspondents; and revenues frominbound international roaming calls for the service; and

 

•        other charges, including those forreconnection and migration. 

 

Our cellular service revenues in 2005 amounted to Php71,518million, an increase of Php5,097 million, or 8%, from Php66,421 million in2004.  Cellular service revenues accounted for 93% and 89% of our totalwireless operating revenues in 2005 and 2004, respectively.  The increase incellular service revenues was primarily due to the continued growth of Smart’sand Piltel’s subscriber base.  As at December 31, 2005, the combined cellular subscribers of Smart and Piltel reached 20,408,621, an increase of 1,200,389, or6%, over their combined cellular subscriber base of 19,208,232 as at December 31, 2004.  Prepaid and postpaid net subscriber activations totaled 1,194,805 and5,584, respectively, in 2005.  However,the growth in Smart’s and Piltel’s subscriber base in 2005 was lower than the increases in Smart’s and Piltel’ssubscriber base of 48% and 51% in 2004 and 2003, respectively.

 

The table below shows our cellular subscribers base asat December 31, 2005 and 2004:

 

 

**As at December 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Cellular subscriber base 

20,408,621

 

19,208,232

 

1,200,389

 

6

Prepaid 

20,128,543

 

18,933,738

 

1,194,805

 

6

Smart 

15,144,118

 

14,321,288

 

822,830

 

6

Piltel

4,984,425

 

4,612,450

 

371,975

 

8

Postpaid

280,078

 

274,494

 

5,584

 

2

 

Of our 20,408,621 subscribers as at December 31, 2005, prepaid subscribers accounted for approximately 99% while postpaidsubscribers accounted for the remaining 1%.  Our cellular prepaid subscriberbase grew by 6% to 20,128,543 as at December 31, 2005 from 18,933,738 as atDecember 31, 2004, whereas our postpaid subscriber base increased by 2% to280,078 as at December 31, 2005 from 274,494 as at December 31, 2004.  Smart’sprepaid and postpaid net subscriber activations totaled 822,830 and 5,584,respectively, in 2005, or a quarterly average addition of 205,707 prepaid and1,396 postpaid subscribers.  On the other hand, Piltel’s prepaid subscribersincreased by 8% to 4,984,425 as at December 31, 2005 from 4,612,450 as atDecember 31, 2004, or a quarterly average addition of 92,994 subscribers.  Postpaidsubscribers as at December 31, 2005 were higher than as at December 31, 2004 primarily due to increased net activations in the last two quarters of 2005.

 

Our quarterly net subscriber activations (reductions)over the eight quarters in 2005 and 2004 are as follows:

 

 

**Prepaid**

** **

**Postpaid**

** **

**Total**

 

**Smart**

** **

**Piltel**

** **

**Smart**

** **

** **

 

** **

** **

** **

** **

** **

** **

** **

**2005**

 

 

 

 

 

 

 

First Quarter

920,885

 

129,753

 

(6,357)

 

1,044,281

Second Quarter

314,607

 

222,233

 

116

 

536,956

Third Quarter

(53,953)

 

42,723

 

10,506

 

(724)

Fourth Quarter

(358,709)

 

(22,734)

 

1,319

 

(380,124)

**2004**

 

 

 

 

 

 

 

First Quarter

1,162,301

 

218,038

 

16,866

 

1,397,205

Second Quarter

1,207,542

 

468,772

 

7,691

 

1,684,005

Third Quarter

797,686

 

635,978

 

10,445

 

1,444,109

Fourth Quarter

1,322,624

 

422,577

 

(9,485)

 

1,735,716

 

Satellite,VSAT, Wireless Broadband and Other Services

 

Our revenues from satellite, VSAT,wireless broadband and other services consist mainly of rentals received forthe lease of Mabuhay Satellite’s transponders and Telesat’s VSAT facilities toother companies and wireless broadband service revenues from Smart Broadband,charges for ACeS Philippines’ satellite phone service and service revenues fromPLDT Global subsidiary’s mobile virtual network operations.  Smart Broadband offersa number of wireless broadband services with 25,428 subscribers as of December 31, 2005, including 21,759 *Smart WiFi* subscribers.  

 

Gross service revenues from these services for 2005amounted to Php2,677 million, an increase of Php445 million, or 20%, from Php2,232million in 2004.  This increase was primarily due to the growth in our wirelessbroadband business.

* *

*Non-service Revenues*

 

Ourwireless non-service revenues consist of:

 

•        proceeds from sale of cellularhandsets; and

 

•        proceeds from sale of cellularSIM-packs.

 

Our wireless non-service revenues decreased by Php3,400million, or 56%, to Php2,711 million in 2005 as compared to Php6,111 millionin 2004 mainly attributable to lower handset sales due to the fact thatactivations in 2005 were primarily driven by more SIM-pack sales and SIM-swapactivities up to May 2005.  

 

*Operating Expenses*
 

Operating expenses associated with ourwireless business in 2005 amounted to Php39,436 million, a decrease of Php2,162million, or 5%, from Php41,598 million in 2004.  A significant portion of thisdecrease was mainly attributable to decreases in costs of cellular handsets andSIM-packs sold and selling and promotion, partially offset by higher rent, and professionaland other contracted sevices.  As a percentage of our total wireless operatingrevenues, operating expenses associated with our wireless business decreased to51% in 2005 from 56% in 2004.   

 

Cellular business expenses accounted for 94% whilesatellite, VSAT, wireless broadband and other business expenses accounted for 6%of our wireless business expenses in 2005, compared to 93% and 7%,respectively, in 2004.

*** ***

The following table summarizes our wireless-relatedexpenses for the years ended December 31, 2005 and 2004 and the percentage ofeach expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**

 

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php9,200

 

23

 

Php10,082

 

24

 

(Php882)

 

(9)

Costs of cellular handsets and SIM-packs sold

5,827

 

15

 

10,599

 

25

 

(4,772)

 

(45)

Rent

5,577

 

14

 

4,156

 

10

 

1,421

 

34

Compensation and benefits(1)

4,245

 

11

 

3,195

 

8

 

1,050

 

33

Repairs and maintenance

3,667

 

9

 

2,597

 

6

 

1,070

 

41

Selling and promotions

3,124

 

8

 

4,261

 

10

 

(1,137)

 

(27)

Professional and other contracted services

1,608

 

4

 

472

 

1

 

1,136

 

241

Taxes and licenses

1,538

 

4

 

1,214

 

3

 

324

 

27

Cost of satellite air time

1,008

 

3

 

1,299

 

3

 

(291)

 

(22)

Communication, training and travel

960

 

2

 

791

 

2

 

169

 

21

Insurance and security services

947

 

2

 

937

 

2

 

10

 

1

Provision for inventory obsolescence

322

 

1

 

213

 

1

 

109

 

51

Provision for doubtful accounts

253

 

1

 

204

 

1

 

49

 

24

Amortization of intangible assets

189

 

1

 

93

 

–

 

96

 

103

Asset impairment 

–

 

–

 

430

 

1

 

(430)

 

(100)

Other operating expenses

971

 

2

 

1,055

 

3

 

(84)

 

(8)

Total 

Php39,436

 

100

 

Php41,598

 

100

 

(Php2,162)

 

(5)

__________

* *

*(1)  Includes salaries andbenefits, incentive plan, pension and manpower rightsizing program, or MRP,costs.*

*** ***

Depreciation and amortization charges decreased by Php882 million,or 9%, to Php9,200 million substantially due to a decrease in thedepreciable asset base as certain of our wireless assets were fully depreciatedby the end of 2005.

 

Costsof cellular handsets and SIM-packs sold decreased by Php4,772 million, or 45%,to Php5,827 million as activations in 2005 were primarily driven by moreSIM-pack sales and SIM-swap activities compared to handset sales in 2004.

 

Rentexpenses increased by Php1,421 million, or 34%, to Php5,577 million on accountof an increase in the number of DFON facilities leased by Smart from PLDT andsite rental expense.  As at December 31, 2005, we had 4,305 cell sites and5,982 base stations, compared with 3,951 cell sites and 5,303 base stations asat December 31, 2004.

 

Compensationand benefits increased by Php1,050 million, or 33%, to Php4,245 millionprimarily due to salary increases and higher long-term incentive costs of Smart.  Onthe other hand, Smart's employee headcount decreased by 3% to 5,087 as at December31, 2005 from 5,239 as at December 31, 2004.  

 

Repairsand maintenance expenses increased by Php1,070 million, or 41%, to Php3,667million mainly on account of higher repairs and maintenance costs, and highersite electricity and power generation expenses due to, and in line with, thecontinued growth in the number of cell sites and other network facilities.  

 

Sellingand promotion expenses decreased by Php1,137 million, or 27%, to Php3,124million due to efficient media spending and termination of certain mediacontracts in 2005.  

 

Professionaland other contracted services increased by Php1,136 million, or 241%, toPhp1,608 million mainly as a result of increased legal, technical service, and callcenter and payment facilities fees.

*** ***

Taxesand licenses increased by Php324 million, or 27%, to Php1,538 million mainlydue to an increase in Smart’s business-related taxes.  

 

Costof satellite air time decreased by Php291 million, or 22%, to Php1,008 milliondue to a change in the basis of recognizing air time cost.  In 2004, satelliteair time cost was accrued at a fixed amount per month based on the paymentschedule in a standstill agreement in consideration for unlimited air timeaccess.  In 2005, upon the termination of the standstill agreement, air timecost was reverted to the original charging rate on a per minute basis.  Thiswas agreed to be the basis of air time cost until a new agreement isfinalized.  

 

Communication,training and travel increased by Php169 million, or 21%, to Php960 million dueto higher local travel and training costs, as well as an increase in delivery,freight and hauling expenses incurred in 2005.

 

Insuranceand security services increased by Php10 million, or 1%, to Php947 million mainly due to the increase in our number of cell sitesand in the amount of network equipment insured as a result of, and in linewith, the continued growth and expansion of our network.

 

Provision for inventory obsolescence increased byPhp109 million, or 51%, to Php322 million, primarily due to slow sales of handsetsrelating to ACeS Philippines in 2005.

 

Provision for doubtful accounts increased by Php49million, or 24%, to Php253 million in 2005 mainly due to a net reversal ofprovisions for carrier accounts in 2004 following subsequent collections fromsuch carrier accounts.

 

Amortization of intangible assets increased by Php96 million, or 103%,to Php189 million in 2005, primarily due to the full year effect of the amortizationof intangibles incurred in acquiring equity interests in Smart Broadband andWolfpac by Smart in 2004. 

 

Noimpairment charges were recognized in 2005.  Asset impairment charges amountedto Php430 million in 2004 due to impairment losses recognized in respect ofMabuhay Satellite’s investment in an investee company. 

 

Otheroperating expenses decreased by Php84 million, or 8%, to Php971 million due to a decreasein various business and operational-related expenses such as office suppliesexpense.

 

***Operating Income***

 

Operating income from our wireless business amounted to Php37,470million in 2005, an increase of Php4,304 million, or 13%, from Php33,166million in 2004, which was primarily due to increased revenues, mainly from ourcellular services, complemented by lower operating expenses.  

 

***Financing Costs***

*** ***

Financingcosts associated with our wireless business changed by Php2,974 million, or 130%,to a financing gain of Php689 million in 2005, primarily due to higher foreignexchange gains as a result of the 6% and 18% level of appreciation of the Philippinepeso to the U.S. dollar and Japanese yen, respectively, from December 31, 2004to December 31, 2005.  Foreign exchange losses recorded in 2004 with the pesodepreciation of 1% against the U.S. dollar, aggravated by the peso depreciationwith approximately 8% against the Japanese yen from December 31, 2004 and December 31, 2005.  In addition, lower debt balances in 2005 also contributed todecreased interest expense on loans.  The breakdown of our financing costs forour wireless business for the years ended December 31, 2005 and 2004 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php1,037

 

Php1,082

 

(Php45)

 

(4)

Accretion on financial liabilities

248

 

884

 

(636)

 

(72)

(Gain) loss on derivative transactions – net

118

 

(7)

 

125

 

1,786

Financing charges

52

 

1

 

51

 

5,100

Capitalized interest

(85)

 

(98)

 

13

 

(13)

Foreign exchange losses (gain) – net

(2,059)

 

423

 

(2,482)

 

(587)

 

(Php689)

 

Php2,285

 

(Php2,974)

 

(130)

 

***Interest Income***

 

Interest income generated by our wireless businessamounted to Php1,057 million in 2005, an increase of Php333 million, or 46%,compared to Php724 million in 2004 mainly attributable to Smart’s higheraverage cash balances.

 

*Other Income - net*
 

Our wireless business segment generated other income -net of Php1,292 million in 2005, a decrease of Php638 million, from Php1,930million in 2004.  This decrease was primarily a result of a Php2,820 milliongain on a debt restructuring transaction conducted by Smart in 2004 pertainingto our wireless business.  See *Note 12 – Interest-bearing FinancialLiabilities – Term Loans – US$283 Million Term Loan Facility, or Debt ExchangeFacility*to the accompanying consolidated financial statement in Item 18.

*** ***

***Income Before IncomeTax, Cumulative Effect of Change in Accounting Policy and Minority Interest inNet Income (Loss) of Consolidated Subsidiaries***

*** ***

Incomebefore income tax, cumulative effect of change in accounting policy andminority interest in net income (loss) of consolidated subsidiaries increasedby Php7,045 million, or 21%, to Php40,508 million in 2005 compared to Php33,463million in 2004, mainly due to a 3% increase in wireless operating revenues,principally from our cellular business, resulting from the continued cellularsubscriber growth, as well as a decrease in our wireless business expenses of 5%in 2005.

 

***Provision for IncomeTax***

 

Provision for income tax decreased by Php1,682million, or 28%, to Php4,285 million in 2005 from Php5,967 million in 2004 mainlydue to lower non-tax deductible charges andthe net movement in deferred tax assets as previously unrecognized deferred taxassets were taken-up in 2005 with the increased likelihood that Smart andPiltel would be able to realize the future tax benefits on these assets.  Wecurrently expect that our effective corporate tax rate will be higher goingforward than in previous years due to the expiration of Smart’s income taxholiday. 

 

***Net Income***

 

Ourwireless business segment recorded a net income of Php35,830 million in 2005,an increase of Php8,271 million, or 30%, over Php27,559 million registered in2004 primarily due to the 6% growth in our cellular subscriber base,complemented by a 5% decrease in wireless expenses.

 

Fixed Line
 

***Operating Revenues***

*** ***

Our fixed line business provides local exchangeservice, international and national long distance services, data and othernetwork services, and miscellaneous services.  Operating revenues generatedfrom our fixed line business for 2005 totaled Php49,472 million, an increase ofPhp926 million, or 2%, from Php48,546 million in 2004.  This increase was primarily due to higher revenuesgenerated from data and other network services, and miscellaneous revenues, whichwas partially offset by decreased revenues from national long distanceservices, international long distance services and local exchange service.  Asa percentage of our total operating revenues, fixed line revenues decreased to 38%in 2005 from 39% in 2004, principally due to the continued growth of ourwireless business.  

 

The following table summarizes total operatingrevenues from our fixed line business for the years ended December 31, 2005 and2004, respectively, by service segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php20,229

 

40

 

Php20,606

 

42

 

(Php377)

 

(2)

International long distance

12,245

 

25

 

12,804

 

26

 

(559)

 

(4)

National long distance

5,254

 

11

 

6,736

 

14

 

(1,482)

 

(22)

Data and other network

10,394

 

21

 

7,114

 

15

 

3,280

 

46

Miscellaneous

1,309

 

3

 

1,286

 

3

 

23

 

2

 

49,431

 

100

 

48,546

 

100

 

885

 

2

Non-Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets

41

 

–

 

–

 

–

 

41

 

100

Total Fixed Line Operating Revenues 

Php49,472

 

100

 

Php48,546

 

100

 

Php926

 

2

 

*Service Revenues*
 

*Local Exchange Service*

 

Our local exchange service revenues consist of: 

 

•        flat monthly fees for our postpaidservice; 

 

•        installation charges and otherone-time fees associated with the establishment of customer service;

 

•        fixed charges paid by othertelephone companies, charges retained by PLDT for calls terminating to cellularsubscribers within the local area, and local access charges paid by cellularoperators for calls by cellular subscribers that terminate to our localexchange network;

 

•        revenues from usage of prepaidcards for calls within the local area and any unused peso value of expiredprepaid cards; and

 

•        charges for special features,including bundled value-added services such as call waiting, call forwarding,multi-party conference calling, speed calling and caller ID. 

 

Thefollowing table summarizes key measures of our local exchange service businesssegment as at and for the years ended December 31, 2005 and 2004, respectively:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated local exchange service revenues (in millions)

Php20,229

 

Php20,606

 

(Php377)

 

(2)

Number of fixed lines in service

2,113,799

 

2,152,027

 

(38,228)

 

(2)

Number of fixed line employees

9,197

 

9,692

 

(495)

 

(5)

Number of fixed lines in service per employee

230

 

222

 

8

 

4

 

Revenues from our local exchange service in 2005decreased by Php377 million, or 2%, to Php20,229 million from Php20,606 millionin 2004.  The decrease was primarily due to a 2% decline in the number of fixedlines in service and the appreciation of the peso against U.S. dollars whichrequired us to make downward adjustments in our monthly local service rates, whichwas partially offset by adjustments in our monthly local service rates.  Thepercentage contribution of local exchange revenues to our total fixed lineservice revenues decreased to 40% in 2005 from 42% in 2004.

 

Fixed line netreductions in 2005 were 38,228 as compared to 33,924 in 2004.  While fixed lineadditions totaled 7,706 for postpaid fixed line services, prepaid fixed linesin service declined by 45,934 in 2005.  As at December 31, 2005, postpaid andprepaid fixed line subscribers totaled 1,790,897 and 322,902, respectively,which accounted for approximately 85% and 15%, respectively, of our total fixedlines in service.

 

Pursuant to a currency exchange rate adjustmentmechanism authorized by the NTC, we adjust our monthly local service ratesupward or downward by 1% for every Php0.10 change in the peso-to-U.S. dollarexchange rate relative to a base rate of Php11.00 to US$1.00.  During 2005, weimplemented six downward and three upward adjustments in our monthly localservice rates compared to six upward and one downward adjustments in 2004.  Theaverage peso-to-U.S. dollar rate in 2005 was Php55.085 to US$1.00, compared tothe average of Php56.044 to US$1.00 in 2004.  This change in the averagepeso-to-U.S. dollar rate translated to a peso appreciation of 2%, whichresulted in an average net decrease of 1% in our monthly local service rates in2005. 

 

*International Long Distance Service*

 

Our international long distance service revenues,which we generate through our international gateway facilities, consist of:

 

•        inbound call revenues representingsettlements from foreign telecommunications carriers for inbound internationalcalls, virtual transit and hubbing service and reverse charged calls such asreceived collect and home country direct service;

 

•        access charges paid to us by otherPhilippine telecommunications carriers for terminating inbound internationalcalls to our local exchange network; and

 

•        outbound call revenues representing amounts billed to our customers (other than our cellularcustomers) for outbound international calls, net of amounts payable to foreigntelecommunications carriers for terminating calls in their territories.

 

The following table shows information about ourinternational fixed line long distance business for the years ended December 31, 2005 and 2004, respectively:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total international long distance service revenues (in millions)

Php12,245

 

Php12,804

 

(Php559)

 

(4)

Inbound

10,203

 

10,452

 

(249)

 

(2)

Outbound

2,042

 

2,352

 

(310)

 

(13)

 

 

 

 

 

 

 

 

International call volumes (in million minutes, except call ratio)

2,226

 

2,348

 

(122)

 

(5)

Inbound

2,079

 

2,192

 

(113)

 

(5)

Outbound

147

 

156

 

(9)

 

(6)

Inbound-outbound call ratio

14.1:1

 

14.1:1

 

–

 

–

 

Our total international long distance service revenuesdecreased by Php559 million, or 4%, to Php12,245 million in 2005 from Php12,804million in 2004 primarily due to the peso appreciation coupled with thedecrease in call volumes largely as a result of alternative means ofcommunications such as e-mailing, texting and Internet telephony.  Thepercentage contribution of international long distance service revenues to ourfixed line service revenues decreased to 25% in 2005 from 26% in 2004.

 

Ourrevenues from inbound international long distance service decreased by Php249million due to a decrease in inbound traffic volume by 113 million minutes to2,079 million minutes in 2005.  In addition, the 2% appreciation in the averagevalue of peso to U.S. dollar to Php55.085 during 2005 from Php56.044 during2004 contributed to the decrease in our inbound international long distancerevenues in peso terms since settlement charges for inbound calls are billed inU.S. dollars or in special drawing rights, an established method of settlementamong international telecommunications carriers using values based on a basketof foreign currencies that are translated into pesos at the time of billing.

 

Our revenues from outbound international long distance calls in2005 decreased by Php310 million, or 13%, to Php2,042 million from Php2,352 million in2004.  The decrease resulted from lower conversion rates used as averagebilling rates were Php55.30 and Php55.98 in 2005 and 2004, respectively.

 

Our outbound international long distance call volumes declined by6% to 147 million minutes in 2005 from 156 million minutes in 2004, primarilydue to cellular substitution (subscribers opting to use cellular forinternational outbound calls) and the popularity of alternative means ofcommunications such as e-mailing, international text messaging and internettelephony.

 

*National Long Distance Service*

*** ***

Our national long distance servicerevenues consist of:

*** ***

•        per minute charges for calls madeby our fixed line customers outside of the local service areas but within thePhilippines, net of interconnection charges payable for calls carried throughthe backbone network of, and/or terminating to the customer of, anothertelecommunications carrier; and

 

•        access charges received from othertelecommunications carriers for calls carried through our backbone networkand/or terminating to our customers.

 

The following table shows our nationallong distance service revenues and call volumes for the years ended December31, 2005 and 2004, respectively:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php5,254

 

Php6,736

 

(Php1,482)

 

(22)

National long distance call volumes (in million minutes)

1,904

 

1,853

 

51

 

3

 

Our national long distance service revenues decreasedby Php1,482 million, or 22%, to Php5,254 million in 2005 from Php6,736 millionin 2004 as a result of: (1) a decrease in average revenue per minute due to ourfixed rate per call promotion starting February 14, 2005; and (2) theintegration of local exchanges into a single calling area, which resulted incalls between two exchanges located within the same province no longer beingconsidered as national long distance calls, but rather as local calls.Accordingly, the percentage contribution of national long distance revenues toour fixed line service revenues decreased to 11% in 2005 compared to 14% in2004.

 

OnFebruary 14, 2005, we launched a Php10 per call promotion to PLDT fixed linesubscribers nationwide and for calls to Smart and *Talk ‘N Text*subscribers.  This promotion was launched with the objective of determining amore effective tariff structure that would stimulate fixed line usage.  Underthe promotion, NDD calls between any PLDT fixed line subscribers nationwide or fromany PLDT fixed line subscribers nationwide to any Smart and *Talk ‘N Text*subscribers were charged Php10 per call instead of being charged on a perminute basis.  

 

On May 12, 2005, PLDT began offering the Php10 per call promotion with an additional Php5 percall for the same unlimited talktime to Smart and *Talk ‘N Text*subscribers.  PLDT to PLDT NDD calls below the equivalent Php10 toll usage werecharged based on the regular rate per minute.  On August 12, 2005, PLDT ceased offering the Php10 per call promotion to calls terminating to Smart and *Talk ‘NText* subscribers.  

 

BeginningSeptember 12, 2005, PLDT charged an optional Php20 add-on monthly service feefor PLDT fixed line subscribers who may want to continue to avail themselves ofthe Php10 per call promotion for calls within our network. 

 

InJanuary 2006, PLDT launched the *10-10-10* promotion.  This promotion offers a flat rate of Php10 for unlimited calls of any PLDT fixed line subscribersnationwide to PLDT, Smart and *Talk ‘N Text*subscribers for a Php50monthly service fee.  

 

Ournational long distance call volumes increased by approximately 3% to 1,904million minutes in 2005 from 1,853 million minutes in 2004.  This was mainlydue to the Php10 per call promotion offered to PLDT fixed line subscribersnationwide.  

 

The integration ofsome of our local exchanges into a single local calling area, as approved bythe NTC, also negatively affected our national long distance call volumes, andconsequently, our revenues.  Because of this integration, calls between twoexchanges located within the same province are no longer considered nationallong distance calls but are treated as local calls.

 

*Data and Other Network Services*

 

Our data and other network services in 2005 generated revenuesof Php10,394 million, an increase of Php3,280 million, or 46%, from Php7,114million in 2004, which was primarily due to increases in revenues generated in leasedlines and IP-based data services, particularly Diginet and DSL.  The revenuecontribution of this service segment to our fixed line service revenuesincreased to 21% in 2005 from 15% in 2004.

 

Data and other network services we currently provideinclude leased lines, IP-based, packet-based and switch-based services.  Theseservices are used for domestic and international communications such as privatenetworking, broadband and narrowband Internet-based data communications, andpacket-based communication.  

 

Ofour total revenues generated in data and other network services in 2005, leasedlines accounted for 55%, IP-based services accounted for 29%, packet-basedservices accounted for 11% and switched-based services accounted for theremaining 5%, compared to 56%, 25%, 13% and 6%, respectively, in 2004.  Thesepercentage increases indicate a continuing demand for broadband services,particularly the high bandwidth clear data requirements of business processoutsourcing companies, or BPOs, and call centers.  We expect this trend tocontinue due to growth in the areas of e-commerce, online services and BPOsparticularly among call centers, medical transcription, animation and sharedservices.

 

The continued growth indata services revenues can be attributed to several product offerings.  Thesteady demand for dedicated connectivity or private networking from thecorporate market using PLDT’s traditional bandwidth offerings – Fibernet,Arcstar, Acacia, I-Gate, Diginet, BRAINS, among others – continues to provideus with a stable revenue source.  In addition, we provide Smart’s increasingfiber optic and leased line data requirements, which are included under ournational data services.

 

*Miscellaneous*

 

Miscellaneous service revenues are derived mostly fromdirectory advertising and facilities rental.  In 2005, these revenues increasedby Php23 million, or 2%, to Php1,309 million from Php1,286 million in 2004.The improvement was mainly due to an increase in co-location charges from moreco-location sites coupled with an increase in rent income on duct utilizationand cable restoration.  The percentage contribution of miscellaneous servicerevenues to our fixed line service revenues was 3% in 2005 and 2004.

 

*Operating Expenses*
 

Operatingexpenses related to our fixed line business in 2005 totaled Php38,832 million,an increase of Php6,805 million, or 21%, compared to Php32,027 million in2004.  The increase was primarily due to higher depreciation and amortizationand higher selling and promotions expenses which were partially offset by lowerprovision for doubtful accounts expense.

 

The following table sets forth the breakdown of ourtotal fixed line-related expenses for the years ended December 31, 2005 and 2004, respectively, and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php18,240

 

47

 

Php9,677

 

30

 

Php8,563

 

88

Compensation and benefits(1)

8,261

 

22

 

7,921

 

25

 

340

 

4

Repairs and maintenance

3,297

 

9

 

3,211

 

10

 

86

 

3

Provision for doubtful accounts

1,944

 

5

 

3,751

 

12

 

(1,807)

 

(48)

Rent

1,727

 

4

 

1,746

 

5

 

(19)

 

(1)

Selling and promotions

1,535

 

4

 

1,159

 

4

 

376

 

32

Professional and other contracted services

1,039

 

3

 

1,060

 

3

 

(21)

 

(2)

Taxes and licenses

942

 

2

 

820

 

3

 

122

 

15

Insurance and security services

628

 

2

 

700

 

2

 

(72)

 

(10)

Communication, training and travel

447

 

1

 

449

 

1

 

(2)

 

–

Provision for inventory obsolescence

157

 

–

 

361

 

1

 

(204)

 

(57)

Cost of Sales

53

 

–

 

–

 

–

 

53

 

100

Asset impairment 

–

 

–

 

365

 

1

 

(365)

 

(100)

Other operating expenses

562

 

1

 

807

 

3

 

(245)

 

(30)

Total 

Php38,832

 

100

 

Php32,027

 

100

 

Php6,805

 

21

____________

*(1)  Includes salaries andbenefits, incentive plan, pension and MRP costs.*

 

Depreciationand amortization charges increased by Php8,563 million, or 88%, to Php18,240million mainly due to the effect of our change in estimated useful lives ofcertain property, plant and equipment in line with our continuous networkupgrade and expansion, which resulted in increased depreciation charges for2005, and higher depreciation of our regular asset base primarily resultingfrom additional completed projects.

 

Compensation and benefits expenses increased by Php340million, or 4%, to Php8,261 million primarily due to the effect of thecollective bargaining agreement-related increases in salaries and benefits andan increase in incentive plan-related accruals, partially offset by a reductionin headcount due to PLDT’s manpower rightsizing program.

 

Repairsand maintenance expenses increased by Php86 million, or 3%, to Php3,297 millionprimarily due to higher maintenance costs for foreign cable and wire facilitiesas more operating and maintenance-related restorations were incurred in 2005 ascompared to 2004.  

 

Provisionfor doubtful accounts decreased by Php1,807 million, or 48%, to Php1,944million, primarily on account of a lower provision by PLDT for anticipateduncollectible accounts from various specifically identified domestictelecommunications carriers which were provided for in 2004. 

 

Rent expenses decreased by Php19 million, or 1%, toPhp1,727 million due to a decrease in international leased circuits and rentalcharges occupied by various equipments, partially offset by higher rentals forbundled sales/value added service units.

 

Selling and promotion expenses increased by Php376million, or 32%, to Php1,535 million, primarily as a result of an increase inPLDT’s promotional activities in relation to various products and services,partially offset by lower commissions paid in 2005.

 

Professional and other contracted services decreasedby Php21 million, or 2%, to Php1,039 million primarily due to lower advisoryand legal fees in 2005 for various services, partially offset by an increase infacility management fees and collection agency fees. 

 

Taxesand licenses increased by Php122 million, or 15%, to Php942 million mainly onaccount of higher NTC supervision and license fees, fringe benefit taxes inrespect of our stock option plan and other business-related taxes paid in 2005as compared to 2004.

 

Insuranceand security services decreased by Php72 million, or 10%, to Php628 million,primarily due to lower premiums on property all-risk, industrial all-risk andindustrial fire insurance, partially offset by higher security services due toa rate increase for contracted security guards.

 

Communication,training and travel expenses decreased by Php2 million to Php447 million due toa decrease in mailing, courier and delivery services, as well as a decrease inlocal travel and training in 2005 as compared to 2004.

 

Provisionfor inventory obsolescence decreased by Php204 million, or 57%, to Php157million primarily on account of lower inventory obsolescence owing to slow-movingitems determined in 2005 as compared to 2004.

 

Costof sales amounting to Php53 million were recognized in 2005 in relation to ourDSL promotion.  No similar charges were incurred in 2004.

 

Assetimpairment amounted to Php365 million in 2004 owing to an impairment of a fixedline subsidiary’s facilities; no impairment charge was recognized in 2005.

 

Otheroperating expenses decreased by Php245 million, or 30%, to Php562 million dueto lower office supplies consumption and printing costs resulting from PLDT’scontinuing cost-containing activities.

 

***Operating Income***

 

Operating income from our fixedline service amounted to Php10,640 million in 2005, a decrease of Php5,879million, or 36%, from Php16,519 million in 2004, which was primarily due to an increasein fixed line-related expenses particularly increased depreciation, which morethan offset the 2% increase in fixed line-related revenues.

 

***Financing Costs***

 

Financingcosts decreased by Php8,962 million, or 60%, to Php5,859 million due to: (1)the strengthening of the peso relative to the U.S. dollar and Japanese yenresulting in foreign exchange gains in 2005 as compared to foreign exchangelosses recorded during 2004; (2) lower interest payments on loans and relateditems owing to lower debt balances in 2005 as compared to 2004; and (3) lowerrecorded loss on derivatives in 2005 as compared to 2004.  

 

The breakdown of our financing costs for our fixedline business for the years ended December 31, 2005 and 2004 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php9,058

 

Php10,634

 

(Php1,576)

 

(15)

Foreign exchange losses (gains) –  net

(6,167)

 

2,356

 

(8,523)

 

(362)

Hedge costs

1,234

 

1,011

 

223

 

22

Loss on derivative transactions – net

1,683

 

871

 

812

 

93

Capitalized interest

(419)

 

(497)

 

(78)

 

(16)

Accretion on financial liabilities

320

 

301

 

19

 

6

Financing charges

150

 

145

 

5

 

3

 

Php5,859

 

Php14,821

 

(Php8,962)

 

(60)

 

***Interest Income***

*** ***

Interestincome generated by our fixed line business amounted to Php385 million in 2005,an increase of Php137 million, or 55%, compared to Php248 million in 2004mainly attributable to PLDT’s higher average cash balances in 2005.

*** ***

***Other Income - Net***

 

All other income/gains such asrental income, gain on disposal of property, which do not fall under servicerevenues are included under this classification.  In 2005, our fixed linebusiness segment registered a decrease in other income of Php35 million, or 47%,to Php39 million from Php74 million in 2004.

 

***Income Before IncomeTax, Cumulative Effect of Change in Accounting Policy and Minority Interest inNet Income of Consolidated Subsidiaries***

*** ***

Ourfixed line business segment registered an income before income tax, cumulativeeffect of change in accounting policy and minority interest in net income ofconsolidated subsidiaries of Php5,205 million in 2005, an increase of Php3,185million, or 158% compared to Php2,020 million in 2004, primarily resulting fromlower fixed line business-related expenses, particularly financing costscoupled with an increase in fixed line-related revenues, partially offset byhigher depreciation and amortization.  

 

*Provision for Income Tax*
 

Provisionfor income tax amounted to Php544 million in 2005 as compared to Php800 millionin 2004 due to taxable losses of PLDT owing to higher realized foreign exchangegains in 2005 and the effect of tax rate adjustment.

 

*Net Income*
 

In 2005, our fixed line businesssegment registered a net income of Php4,660 million, an increase of Php3,419million, or 276%, compared to Php1,241 million in 2004.  The increase wasprimarily due to a slight increase in fixed line operating revenues andsignificantly lower financing costs, partially offset by higher fixed lineoperating expenses particularly increased depreciation and amortization.  

 

Information and Communications Technology
 

**Operating Revenues**
 

Our information and communications technology businessis conducted by ePLDT, a wholly-owned subsidiary of PLDT.  

 

In2005, our information and communications technology business generated operatingrevenues of Php3,305 million, an increase of Php904 million, or 38%, from Php2,401million in 2004, primarily due to the growth in our call center business.  Therevenues of our information and communications technology business accountedfor 3% and 2% of our total operating revenues in 2005 and 2004, respectively.ePLDT’s call center business contributed revenues of Php1,944 million, Internetand gaming contributed revenues of Php556 million and *VitroTM* contributedrevenues of Php376 million, representing 66%, 19% and 13%, respectively, of thetotal service revenues from our information and communications technologybusiness in 2005, compared to 62%, 27% and 8%, respectively, in 2004.  Goingforward, we expect revenues from our call center and Internet and gamingbusinesses to continue to contribute significantly to our information andcommunications technology revenues with the growing demand for call centerservices.

 

The following table summarizes our total operatingrevenues from our information and communications technology business for theyears ended December 31, 2005 and 2004 by service segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php1,944

 

59

 

Php1,283

 

54

 

Php661

 

52

Internet and gaming business

556

 

17

 

569

 

24

 

(13)

 

(2)

*VitroTM* data center

376

 

11

 

173

 

7

 

203

 

117

Others

77

 

2

 

55

 

2

 

22

 

40

 

2,953

 

89

 

2,080

 

87

 

873

 

42

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point-of-product sales

352

 

11

 

321

 

13

 

31

 

10

Total ICT Operating Revenues

Php3,305

 

100

 

Php2,401

 

100

 

Php904

 

38

 

*Service Revenues*

 

Service revenues generated by our information andcommunications technology business amounted to Php2,953 million in 2005, anincrease of Php873 million, or 42%, from Php2,080 million in 2004.  This wasprimarily a result of the continued growth of our call center and Internet andgaming businesses.

 

*Call**Center*

 

Call center revenues consist of:

 

•        inbound calls for customer care,product inquiries, sales and technical support based on active minutes;

 

•        outbound calls for sales andcollections based on active minutes; and 

 

•        service income for e-mailhandling, web chat, web co-browsing, data entry and business processoutsourcing based on transaction volume.

 

Revenues related to our call center business in 2005increased by Php661 million, or 52%, to Php1,944 million from Php1,283 million in 2004, primarily due to the combinedeffects of the following: (1) Vocativ’s upward price adjustment for voice andVoIP, and an increase in programs being handled; (2) an upward price adjustmentby Parlance for its inbound and outbound projects, coupled with an increase inthe number of registered minutes for inbound projects and hours for outboundprojects; and (3) commencement of Ventus operations in Iloilo in March 2005.

 

Callcenter revenues accounted for 66% and 62% of our total information andcommunications technology service revenues in 2005 and 2004, respectively.

* *

*Internet and gaming*

 

Internet and gaming service revenuesconsist of: 

 

•        revenues derived from actual usageof internet access network by prepaid subscribers and any unused peso value ofexpired prepaid cards or electronic internet time loads, net of discounts givento dealers; 

 

•        monthly service fees from postpaidcorporate and consumer subscribers, including (1) charges for internet usage inexcess of allocated free plan internet hours; (2) one-time installation andactivation fees; and (3) fees for value added services such as additionalmailbox accounts;

 

•        monthly service fees on valueadded services, including e-mail and web hosting services;

 

•        one-time fees generated fromreselling internet-related solutions such as security solutions and domain registration;and

 

•        share in revenues of text, voiceand internet messages for cellular, fixed line and internet-based content andapplications.

 

Revenues from our Internet and gaming business in 2005decreased by Php13 million, or 2%, to Php556 million from Php569 million in2004, primarily due to a decrease in Infocom’s revenues in 2005, which waspartially offset by the consolidation of Digital Paradise in June 2004.  OurInternet and gaming business revenues accounted for 19% and 27% of servicerevenues from information and communications technology business in 2005 and2004, respectively.

 

*VitroTM*datacenter

 

ePLDToperates an Internet data center under the brand name *Vitro*ä.  Granted pioneer status as an Internet data center by the BOI, *Vitro*ä provides co-location services, server hosting, hardware and softwaremaintenance services, website development and maintenance services, webcastingand webhosting, shared applications, data disaster recovery and businesscontinuity services, intrusion detection, and security services such asfirewall and managed firewall.

 

*VitroTM* revenues consist of:

 

•        monthly service fees derived fromco-location services, server hosting, hardware and software maintenanceservices, website development and maintenance services, web hosting, datarecovery security services and other value added services;

 

•        installation charges and otherone-time fees associated with the set-up; and 

 

•        monthly service fees or one-timefees generated from professional services of Vitro’s certified professionals.

 

In2005, *Vitro*ä contributed revenues of Php376 million, an increaseof Php203 million, or 117%, from Php173 million in 2004, primarily due to anincrease in co-location revenues, server hosting and other services.  *Vitro*ä revenues accounted for 13% and 8% of service revenues from ourinformation and communications technology business in 2005 and 2004,respectively.

 

*Others*

 

Other revenues consist of:

 

•        fees generated for issuance ofdigital certificates; and 

 

•        revenues derived from IThelpdesk/contact center solutions and terminals for credit, debit and creditcard transactions.

 

Revenuesfrom other businesses related to our information and communications technologysegment in 2005 increased to Php77 million from Php55 million in 2004 largelydue to IT helpdesk/contact center services rendered coupled with an increase inthe number of digital certificates sold.

 

Pleaserefer to *Note 8 – Investments* to the accompanying consolidated financialstatements in Item 18 for further discussion on ePLDT’s other information andcommunications technology services.

 

*Non-service Revenues*

 

Non-servicerevenues consist of sales generated from reselling certain Microsoft licenses,server solutions, networking products, storage products and data securityproducts.  In 2005, non-service revenues generated by our information andcommunications technology business increased by Php31 million, or 10%, to Php352million compared to Php321 million in 2004, primarily due to higher revenuesfrom sales of networking equipment and Microsoft licenses.

 

***Operating Expenses***

 

Expenses associated with our informationand communications technology business totaled Php3,253 million in 2005, anincrease of Php218 million, or 7%, from Php3,035 million in 2004, primarily dueto an increase in cash expenses, particularly compensation and benefits, partlyoffset by an impairment provision recognized in 2004.  As a percentage of ourinformation and communications technology revenues, expenses related to ourinformation and communications technology business were at 98% and 126% for2005 and 2004, respectively.  

 

The following table shows the breakdown of our totalinformation and communications technology-related expenses for the years ended December 31, 2005 and 2004, respectively, and the percentage of each expense item to thetotal:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php1,352

 

42

 

Php900

 

30

 

Php452

 

50

Selling and promotions

421

 

13

 

291

 

10

 

130

 

45

Depreciation and amortization

415

 

13

 

339

 

11

 

76

 

22

Rent

362

 

11

 

366

 

12

 

(4)

 

(1)

Repairs and maintenance

283

 

9

 

316

 

11

 

(33)

 

(10)

Communication, training and travel

98

 

3

 

70

 

2

 

28

 

40

Professional and other contracted services

82

 

2

 

67

 

2

 

15

 

22

Provision for doubtful accounts

54

 

2

 

–

 

–

 

54

 

100

Taxes and licenses

36

 

1

 

21

 

1

 

15

 

71

Amortization of intangibles

15

 

1

 

–

 

 

 

15

 

100

Insurance and security services

14

 

–

 

7

 

–

 

7

 

100

Asset impairment 

11

 

–

 

617

 

20

 

(606)

 

(98)

Provision for inventory obslescence

–

 

–

 

3

 

–

 

(3)

 

(100)

Other operating expenses

110

 

3

 

38

 

1

 

72

 

189

Total 

Php3,253

 

100

 

Php3,035

 

100

 

Php218

 

7

____________

 

*(1)   Includes salaries andbenefits, incentive plan, pension and MRP costs.*

 

Compensationand benefits increased by Php452 million, or 50%, to Php1,352 million, mainlydue to the expansion of our call center and Internet and gaming businesses,which resulted in an increase in headcount coupled with an increase insalaries, bonuses and various incentives of employees.

 

Sellingand promotion expenses increased by Php130 million, or 45%, to Php421 millionmainly as a result of the commercial release of *Khan Online* in February2005 following the commencement of netGames’ commercial operations.Furthermore, Vitro’s increase in sales of software products in 2005 as comparedto 2004 resulted in higher selling and marketing expenses.  

 

Depreciation and amortization charges increased byPhp76 million, or 22%, to Php415 million, primarily due to an increase in thedepreciable asset base in relation to the expansion of our call center andInternet and gaming businesses.

 

Rent expenses decreased by Php4 million, or 1%, toPhp362 million, primarily due to a decline in Vitro’s lease of hostingequipment for use in its Bureau of Internal Revenue project and the expansionof our call center and Internet and gaming businesses.   

 

Repairs and maintenance expenses decreased by Php33million, or 10%, to Php283 million, primarily due to Vitro’s lower hardwaremaintenance costs related to its IBM and CISCO equipments partially offset byhigher hosting-related costs incurred in 2005 as compared to 2004.

 

Communication,training and travel expenses increased by Php28 million, or 40%, to Php98million due to the increased cost of bandwidth and information system charges,coupled by the increase in telecommunications costs incurred by our call centerbusiness for its outbound calls.  Furthermore, CSR trainings for our callcenters during 2005 contributed higher foreign travel and training costscompared to 2004.  

 

Professionaland other contracted services increased by Php15 million, or 22%, to Php82million, primarily due to an increase in consultancy, legal and audit fees in2005.

 

Provision  for doubtful accounts amounted to Php54million in 2005 primarily due to specifically identified doubtful accountspertaining to Infocom as of the end of 2005. No provision was provided for in2004.

 

Taxesand licenses increased by Php15 million, or 71%, to Php36 million, mainly onaccount of documentary stamp taxes paid by ePLDT and Ventus in their issuanceof additional capital stock in 2005 as compared to 2004.

 

Amortization of intangibles amounted to Php15 millionin 2005 due to impairment of goodwill of ePLDT’s investment in *Netopia*.

 

Insurance and security services increased by Php7million, or 100%, to Php14 million primarily due to higher premium costs and anincrease in the assets insured in 2005 as compared to 2004.

 

Asset impairment amounted to Php11 million, a decreaseof Php606 million, or 98%, primarily due to the recognition of an impairmentprovision in relation to an investee company in 2004. 

 

Provisionfor inventory obsolescence amounted to Php3 million in 2004 mainly pertainingto maintenance-related inventory items of Infocom.

 

Other operating expenses increased by Php72 million,or 189%, to Php110 million mainly due to recognition of royalty fees to *KhanOnline* in 2005 and an increase in other business-related costs.

 

***Financing Costs***

 

Financing costs increased by Php15 million, or 38%, toPhp54 million, primarily due to higher foreign exchange losses fromdollar-denominated receivables in 2005 as compared to 2004.

 

*Provisionfor Income Tax*
Provision for income tax amounted to Php20 millionin 2005, a decrease of Php39 million, or 66%, as compared to Php59 million in2004, primarily due to lower reversal of Infocom’s recorded deferred income taxasset in 2005 as compared to 2004.

 

*NetIncome (Loss**)*
In2005, our information and communications technology business segment registereda net income of Php113 million compared to a net loss of Php699 million postedin 2004 mainly on account of the higher net income contribution of our callcenter business and impairment provision recognized in 2004, partially offsetby Infocom’s operating loss in 2005 and Digital Paradise’s high operating costsdue to its ongoing expansion.

 

**2004 Compared to 2003**

 

**On a Consolidated Basis**

 

*Consolidated Operating Revenues*

** **

Largely driven by the continued strong growth of our wirelessbusiness, particularly Smart’s cellular business, our consolidated operatingrevenues for 2004 increased by Php9,973 million, or 9%, to Php121,173 million from Php111,200million in 2003.  The revenue contribution of our wireless business accountedfor 62% of our consolidated operating revenues for 2004, compared to 59% in2003.  

** **

The following table shows the breakdown of ourconsolidated operating revenues for the years ended December 31, 2004 and 2003 by business segment:

** **

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php74,764

 

62

 

Php65,183

 

59

 

Php9,581

 

15

Fixed line

48,546

 

40

 

46,820

 

42

 

1,726

 

4

Information and communications technology 

2,401

 

2

 

1,783

 

1

 

618

 

35

Inter-segment revenues

(4,538)

 

(4)

 

(2,586)

 

(2)

 

(1,952)

 

75

Total

Php121,173

 

100

 

Php111,200

 

100

 

Php9,973

 

9

* *

***ConsolidatedOperating Expenses***

 

Ourconsolidated operating expenses in 2004 decreased by Php5,187 million, or 7%,to Php72,634 million from Php77,821 million in 2003.  The decrease was primarilydue to lower operating expenses associated with our wireless and fixed linebusinesses, partially offset by an increase in operating expenses associatedwith our information and communications technology business.  As a percentageof our consolidated operating revenues, consolidated operating expensesdecreased to 60% in 2004 from 70% in 2003. 

** **

The following table shows the breakdown of ourconsolidated operating expenses for the years ended December 31, 2004 and 2003 by business segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase/(Decrease)**

 

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 
Wireless 

Php41,598

 

57

 

Php46,264

 

59

 

(Php4,666)

 

(10)

Fixed line

32,027

 

44

 

32,303

 

42

 

(276)

 

(1)

Information and communications technology 

3,035

 

4

 

2,272

 

3

 

763

 

34

Inter-segment expenses

(4,026)

 

(5)

 

(3,018)

 

(4)

 

(1,008)

 

33

Total

Php72,634

 

100

 

Php77,821

 

100

 

(Php5,187)

 

(7)

** **

***Consolidated OperatingIncome***

*** ***

Ourconsolidated operating income in 2004 was Php48,539 million, an increase of Php15,160million, or 45%, compared to Php33,379 million in 2003 as a result of anincrease in our consolidated operating revenues, complemented by a decrease inour consolidated operating expenses.  

*** ***

***Consolidated Financing Costs***

*** ***

Financingcosts on a consolidated basis decreased by Php7,686 million, or 31%, toPhp17,097 million primarily due to lower foreign exchange losses pertaining tothe foreign exchange revaluation of the carrying values of financialliabilities because the level of peso depreciation was lower in 2004 ascompared to 2003 and also because of lower foreign denominated debt balances in2004 compared to 2003 and lower interest expense and related items owing tolower debt balances in 2004 compared with 2003.  

*** ***

***Consolidated Interest Income***

 

Interest income on a consolidated basis increased byPhp429 million, or 84%, to Php942 million in 2004 from Php513 million in 2003mainly attributable to higher average cash balances.

 

***Consolidated OtherIncome - Net***

 

Other income on aconsolidated basis totaled Php2,530 million in 2004, an increase of Php1,731million, or 217%, compared to Php799 million in 2003.  The increase was mainlydue to a gain on a debt exchange restructuring transaction conducted by Smartin 2004 pertaining to the wireless business. There was no similar gain of thesame nature in 2003.   

 

***Consolidated I******ncomeBefore Income Tax, Cumulative Effect of Change in Accounting Policy andMinority Interest in Net Loss (Income) of Consolidated Subsidiaries***

 

Our income before income tax, cumulativeeffect of change in accounting policy and minority interest in net loss(income) of consolidated subsidiaries in 2004 was Php34,840 million, anincrease of Php25,020 million, or 255%, from Php9,820 million in 2003.

 

***Provision for (Benefitfrom) Income Tax***

 

Provision for income tax amountedto Php6,826 million in 2004 compared to a benefit from income tax of Php1,400million in 2003 due to a tax loss position, as non-tax deductible charges werehigher in 2003.

 

In2004 and 2003, our effective corporate tax rate on a consolidated basis was 20%and 14%, respectively.  Our effective corporate tax rate was lower than the 32%statutory corporate tax rate due to the following:  our income was alreadysubjected to a final tax; our income was already subjected to a lower tax rate;and our equity in net income of our subsidiaries, which had already beensubjected to tax and was therefore no longer subject to income tax.  Oureffective tax rate increased in 2004 primarily due to the expiration in May2004 of the three-year income tax holiday granted to Smart.  

 

***Consolidated Net Income (Loss)***

 

Asa result, our consolidated net income in 2004 was Php28,101 million, anincrease of Php17,056 million, or 154%, compared to Php11,045 million in 2003.The following table shows the breakdown of our consolidated net income (loss)for the years ended December 31, 2004 and 2003 by business segment: 

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php27,559

 

98

 

Php13,275

 

120

 

Php14,284

 

108

Fixed line

1,241

 

4

 

(1,902)

 

(17)

 

3,143

 

165

Information and communications technology 

(699)

 

(2)

 

(328)

 

(3)

 

(371)

 

113

Total

Php28,101

 

100

 

Php11,045

 

100

 

Php17,056

 

154

 

**On Business Segment Basis**

 

**Wireless**

* *

*Operating Revenues*
 

Our wireless business segment offers cellular servicesas well as satellite, VSAT, and other services.

 

The following table summarizes our totaloperating service and non-service revenues from our wireless business for theyears ended December 31, 2004 and 2003 by service segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php66,421

 

89

 

Php52,750

 

81

 

Php13,671

 

26

Satellite, VSAT and others

2,232

 

3

 

1,885

 

3

 

347

 

18

 

68,653

 

92

 

54,635

 

84

 

14,018

 

26

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

6,111

 

8

 

10,548

 

16

 

(4,437)

 

(42)

Total Wireless Operating Revenues 

Php74,764

 

100

 

Php65,183

 

100

 

Php9,581

 

15

 

ServiceRevenues

 

Our wireless service revenues increasedby Php14,018 million, or 26%, to Php68,653 million in 2004 compared toPhp54,635 million in 2003 mainly as a result of the continued growth of Smart’sand Piltel’s subscriber base.  Accordingly, as a percentage of our totalwireless operating revenues, wireless service revenues increased to 92% in 2004from 84% in 2003. 

 

*Cellular Service*

 

Our cellular service revenues in 2004 amounted to Php66,421million, an increase of Php13,671 million, or 26%, from Php52,750 million in2003.  Cellular service revenues accounted for 89% and 81% of our totalwireless operating revenues in 2004 and 2003, respectively.  The increase incellular service revenues was primarily due to the continued growth of Smart’sand Piltel’s subscriber base.  As at December 31, 2004, the combined cellular subscribers of Smart and Piltel reached 19,208,232, an increase of 6,261,035, or48%, over their combined cellular subscriber base of 12,947,197 as at December 31, 2003.  Prepaid and postpaid net subscriber activations totaled 6,235,518 and25,517, respectively, in 2004, or a quarterly average addition of 1,558,880prepaid and 6,379 postpaid subscribers.

 

The table below shows our cellular subscribers base asat December 31, 2004 and 2003:

* *

 

**As at December 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Cellular subscriber base 

19,208,232

 

12,947,197

 

6,261,035

 

48

Prepaid 

18,933,738

 

12,698,220

 

6,235,518

 

49

Smart 

14,321,288

 

9,831,135

 

4,490,153

 

46

Piltel

4,612,450

 

2,867,085

 

1,745,365

 

61

Postpaid

274,494

 

248,977

 

25,517

 

10

*** ***

Of our 19,208,232 subscribers as at December 31, 2004, prepaid subscribers accounted for approximately 99% while postpaidsubscribers accounted for the remaining 1%.  Our cellular prepaid subscriberbase grew by 49% to 18,933,738 as at December 31, 2004 from 12,698,220 as atDecember 31, 2003, whereas our postpaid subscriber base increased by 10% to274,494 as at December 31, 2004 from 248,977 as at December 31, 2003.  Smart’sprepaid and postpaid net subscriber activations totaled 4,490,153 and 25,517,respectively, in 2004, or a quarterly average addition of 1,122,538 prepaid and6,379 postpaid subscribers.  On the other hand, Piltel’s prepaid subscribersincreased by 61% to 4,612,450 as at December 31, 2004 from 2,867,085 as atDecember 31, 2003, or a quarterly average addition of 436,341 subscribers.

 

Our quarterly net subscriber activations (reductions)over the eight quarters in 2004 and 2003 are as follows:

*** ***

 

**Prepaid**

** **

**Postpaid**

** **

**Total**

 

**Smart**

** **

**Piltel**

** **

**Smart**

** **

** **

**2004**

 

 

 

 

 

 

 

First Quarter

1,162,301

 

218,038

 

16,866

 

1,397,205

Second Quarter

1,207,542

 

468,772

 

7,691

 

1,684,005

Third Quarter

797,686

 

635,978

 

10,445

 

1,444,109

Fourth Quarter

1,322,624

 

422,577

 

(9,485)

 

1,735,716

 

 

 

 

 

 

 

 

**2003**

 

 

 

 

 

 

 

First Quarter

527,158

 

205,086

 

36,963

 

769,207

Second Quarter

744,251

 

241,630

 

9,331

 

995,212

Third Quarter

858,723

 

319,528

 

8,816

 

1,187,067

Fourth Quarter

1,051,965

 

327,221

 

17,219

 

1,396,405

*** ***

Satellite, VSAT and Other Services

 

Our revenues from satellite, VSAT and other servicesconsist mainly of rentals received for the lease of Mabuhay Satellite'stransponders and Telesat's VSAT facilities to other companies and charges forACeS Philippines’ satellite phone service.  Gross service revenues from theseservices for 2004 amounted to Php2,232 million, an increase of Php347 million,or 18%, from Php1,885 million in 2003.

* *

*Non-service Revenues*

 

Our wireless non-service revenues decreased by Php4,437million, or 42%, to Php6,111 million in 2004 as compared to Php10,548million in 2003 mainly attributable to lower handset sales due to the fact thatactivations in 2004 were primarily driven by more SIM-pack sales and SIM-swapactivities.  

 

*OperatingExpenses*
 

Operating expenses associated with our wirelessbusiness in 2004 amounted to Php41,598 million, a decrease of Php4,666 million,or 10%, from Php46,264 million in 2003.  A significant portion of this decreasewas mainly attributable to decreases in costs of cellular handsets andSIM-packs sold and depreciation and amortization, partially offset by higherrent and selling and promotions expenses.  As a percentage of our totalwireless operating revenues, operating expenses associated with our wirelessbusiness decreased to 56% in 2004 from 71% in 2003.   

 

Cellular business expenses accounted for 93% whilesatellite, VSAT and other business expenses accounted for 7% of our wirelessbusiness expenses in 2004, compared to 94% and 6%, respectively, in 2003.

*** ***

The following table summarizes ourwireless-related expenses for the years ended December 31, 2004 and 2003 and the percentage of each expense item to the total:

*** ***

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2004**

 

**%**

 

**2003**

 

**%**

** **

**Amount**

** **

**%**

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Costs of cellular handsets and SIM-packs sold

Php10,599

 

25

 

Php15,790

 

34

 

(Php5,191)

 

(33)

Depreciation and amortization

10,082

 

24

 

12,183

 

26

 

(2,101)

 

(17)

Selling and promotions

4,261

 

10

 

3,305

 

7

 

956

 

29

Rent

4,156

 

10

 

2,235

 

5

 

1,921

 

86

Compensation and benefits(1)

3,195

 

8

 

3,682

 

8

 

(487)

 

(13)

Repairs and maintenance

2,597

 

6

 

2,051

 

4

 

546

 

27

Cost of satellite air time

1,299

 

3

 

1,919

 

4

 

(620)

 

(32)

Taxes and licenses

1,214

 

3

 

1,142

 

3

 

72

 

6

Insurance and security services

937

 

2

 

756

 

2

 

181

 

24

Communication, training and travel

791

 

2

 

619

 

1

 

172

 

28

Professional and other contracted services

472

 

1

 

743

 

2

 

(271)

 

(36)

Asset impairment 

430

 

1

 

288

 

1

 

142

 

49

Provision for inventory obsolescence

213

 

1

 

87

 

–

 

126

 

145

Provision for doubtful accounts

204

 

1

 

72

 

–

 

132

 

183

Amortization of intangible assets

93

 

–

 

766

 

2

 

(673)

 

(88)

Other operating expenses

1,055

 

3

 

626

 

1

 

429

 

69

Total 

Php41,598

 

100

 

Php46,264

 

100

 

(Php4,666)

 

(10)

__________

* *

*(1)   Includes salaries and benefits, incentive plan,pension and MRP costs.*

 

Costsof cellular handsets and SIM-packs sold decreased by Php5,191 million, or 33%,to Php10,599 million as activations in 2004 were primarily driven more bySIM-pack sales and SIM-swap activities compared to handset sales in 2003.

*** ***

Depreciation and amortization charges decreased by Php2,101million, or 17%, to Php10,082 million substantially due to a decrease in thedepreciable asset base as certain of our wireless assets were fully depreciatedby the end of 2004.

 

Sellingand promotion expenses increased by Php956 million, or 29%, to Php4,261 milliondue to advertising and promotions costs incurred to attract new subscriptions,as well as to retain our existing subscriber base.  

 

Rentexpenses increased by Php1,921 million, or 86%, to Php4,156 million on accountof an increase in the number of transmission links and higher cell site andoffice space rentals for the increased number of cell sites, wireless centersand space requirements for increased personnel, primarily related to theincrease in the number of our subscribers.  As at December 31, 2004, we had 3,951 cell sites and 5,303 base stations, compared with 2,920 cell sites and 3,904base stations as at December 31, 2003.

 

Compensation and benefits decreased by Php487 million,or 13%, to Php3,195 million primarily due to a higher accrual in 2003 of a long-term incentive benefits ofmanagers and executives of Smart covering the period 2000 to 2004, partiallyoffset by an increase in headcount andincreased salaries, benefits and performance bonuses of Smart’s employees.  Smart'semployee headcount increased by 8% to 5,239 as at December 31, 2004 from 4,870 as at December 31, 2003.  

 

Repairsand maintenance expenses increased by Php546 million, or 27%, to Php2,597million mainly on account of higher repairs and maintenance costs, and highersite utility expenses due to, and in line with, the continued growth in thenumber of cell sites and other network facilities.  

 

Cost of satellite air time decreased by Php620million, or 32%, to Php1,299 million due to the change in the basis ofrecognizing air time cost.  In 2003, satellite air time cost was accrued at afixed amount per month based on the payment schedule in a standstill agreementin consideration for unlimited air time access.  In 2004, upon the terminationof the standstill agreement, air time cost was reverted to the originalcharging rate on a per minute basis.  This was agreed to be the basis of airtime cost until a new agreement is finalized.  

*** ***

Taxesand licenses increased by Php72 million, or 6%, to Php1,214 million mainly dueto an increase in Smart’s business-related permits and licenses.  

 

Insuranceand security services increased by Php181 million, or 24%, to Php937 million mainly due to the increase in our number of cell sitesand in the amount of network equipment insured as a result of the continuedgrowth and expansion of our network.

 

Communication,training and travel increased by Php172 million, or 28%, to Php791 million dueto higher local training and travel costs, as well as increased delivery,freight and hauling expenses incurred in 2004.

 

Professionaland other contracted services decreased by Php271 million, or 36%, to Php472million mainly as a result of decreased legal and consultancy fees primarilyincurred in connection with transactions conducted by  Smart in 2004, partiallyoffset by increased bill collection service fees in line with the growth of oursubscriber base.

 

Assetimpairment charges increased by Php142 million, or 49%, to Php430 million dueto impairment losses recognized in respect of Mabuhay Satellite’s investment inan investee company amounting to Php430 million as compared to Piltel’s recognitionof asset impairment amounting to Php288 million in 2003.

 

Provision for inventory obsolescence increased byPhp126 million, or 145%, to Php213 million, primarily due to slow movinghandsets relating to ACeS Philippines in 2004.

 

Provision for doubtful accounts increased by Php132million, or 183%, to Php204 million in 2004 mainly due to an increase ofspecifically identified uncollectible subscriber accounts of Smart.

 

Amortization of intangible assets decreased by Php673 million, or 88%,to Php93 million in 2004 mainly due to the amortization of a customer list ofPhp766 million in 2003.  The amortization expense of Php93 million in 2004represents amortization of intangibles incurred in acquiring equity interestsin Smart Broadband and Wolfpac by Smart; no similar charges were incurred in2003. 

 

Other operating expenses increased by Php429 million, or 69%, to Php1,055 milliondue to various business and operational-related expenses such as facility usagefees and office supplies expenses.

 

***Operating Income***

 

Operating income from our wireless business amounted to Php33,166million in 2004, an increase of Php14,247 million, or 75%, from Php18,919million in 2003, primarily due to increased revenues, mainly from our cellularservices, complemented by lower operating expenses.  

 

***Financing Costs***

*** ***

Financing costs associated with our wireless businessdecreased by Php1,848 million, or 45%, to Php2,285 million in 2004, primarilydue to lower foreign exchange losses, because the level of depreciation of thepeso was higher in 2003 compared to 2004, and lower interest expense on loansresulting from lower debt balances in 2004 as compared to 2003.  

 

The breakdown of our financing costs forour wireless business for the years ended December 31, 2004 and 2003 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php1,082

 

Php1,375

 

(Php293)

 

(21)

Accretion on financial liabilities

884

 

449

 

435

 

97

Foreign exchange losses – net

423

 

2,139

 

(1,716)

 

(80)

Financing charges

1

 

32

 

(31)

 

(97)

(Gain) loss on derivative transactions – net

(7)

 

165

 

(172)

 

(104)

Capitalized interest

(98)

 

(27)

 

(71)

 

263

 

Php2,285

 

Php4,133

 

(Php1,848)

 

(45)

*** ***

***Interest Income***

 

Interest income generated by our wirelessbusiness amounted to Php724 million in 2004, an increase of Php356 million, or97%, compared to Php368 million in 2003 mainly attributable to Smart’s higheraverage cash balances.

 

*Other Income - Net*
 

Our wireless business segment generated other income -net of Php1,930 million in 2004, an increase of Php1,843 million, from Php87million in 2003.  This increase was primarily a result of a Php2,816 milliongain on a debt restructuring transaction conducted by Smart in 2004 pertainingto our wireless business.  

*** ***

***Income Before IncomeTax, Cumulative Effect of Change in Accounting Policy and Minority Interest inNet Income (Loss) of Consolidated Subsidiaries***

*** ***

Incomebefore income tax, cumulative effect of change in accounting policy andminority interest in net income (loss) of consolidated subsidiaries increasedby Php18,300 million, or 121%, to Php33,463 million in 2004 compared to Php15,163million in 2003, mainly due to a 15% increase in wireless operating revenues,principally from our cellular business, resulting from the continued cellularsubscriber growth, as well as a decrease in our wireless business expenses of 10%in 2004.

 

***Provisionfor Income Tax***

 

Provision for income tax increased by Php4,295million, or 257%, to Php5,967 million in 2004 from Php1,672 million in 2003 asSmart’s income tax holiday expired in 2004.  

 

Smart's three-year income tax holiday, which expiredin May 2004, applied to the incremental income generated from its GSM networkexpansion.  The income tax holiday was computed by applying the exemption rateagainst the income tax derived from GSM operations.  The exemption rate wascomputed by dividing the incremental GSM revenues by eligible GSM revenues(both gross of interconnection revenues) where the incremental GSM revenueswere derived by deducting the base figure prescribed by the BOI (Smart’s grossrevenue in 2000) from the total GSM revenues.  After adjusting fornon-deductible items and unrealized and realized foreign exchange losses,Smart’s net taxable income was multiplied by the statutory corporate income taxrate of 32% and the exemption rate.  The resulting figure was the income taxthat was deducted from the income tax due on GSM revenues with the differencebeing the income tax due for the period.  

 

***Net Income***

 

Our wireless business segment recorded a net income ofPhp27,559 million in 2004, an increase of Php14,284 million, or 108%, over Php13,275million registered in 2003 due primarily to the 48% growth in our cellularsubscriber base, complemented by an 10% decrease in wireless expenses.

 

Fixed Line
 

***Operating Revenues***

*** ***

Our fixed line business provides local exchangeservice, international and national long distance services, data and othernetwork services, and miscellaneous services.  Operating revenues generatedfrom our fixed line business for 2004 totaled Php48,546 million, an increase ofPhp1,726 million, or 4%, from Php46,820 million in 2003.  This increase was primarily due to higher revenuesgenerated from data and other network services, national long distanceservices, international long distance services and miscellaneous revenues,partially offset by decreased revenues from local exchange service.  As apercentage of our total operating revenues, fixed line revenues decreased to 39%in 2004 from 41% in 2003, principally due to the continued growth of ourwireless business.  

 

The following table summarizes totaloperating revenues from our fixed line business for the years ended December 31, 2004 and 2003 by service segment:

*** ***

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php20,606

 

42

 

Php20,728

 

44

 

(Php122)

 

(1)

International long distance

12,804

 

26

 

12,767

 

27

 

37

 

–

National long distance

6,736

 

14

 

6,561

 

14

 

175

 

3

Data and other network

7,114

 

15

 

5,978

 

13

 

1,136

 

19

Miscellaneous

1,286

 

3

 

786

 

2

 

500

 

64

Total Fixed Line Operating Revenues 

Php48,546

 

100

 

Php46,820

 

100

 

Php1,726

 

4

 

*Service Revenues*
 

*Local Exchange Service*

 

The following table summarizes key measures of ourlocal exchange service business segment as at and for the years ended December 31, 2004 and 2003:

*** ***

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated local exchange service revenues (in millions)

Php20,606

 

Php20,728

 

(Php122)

 

(1)

Number of fixed lines in service

2,152,027

 

2,185,951

 

(33,924)

 

(2)

Number of fixed line employees

9,692

 

10,518

 

(826)

 

(8)

Number of fixed lines in service per employee

222

 

208

 

14

 

7

*** ***

Revenues from our local exchange service in 2004decreased by Php122 million, or 1%, to Php20,606 million from Php20,728 millionin 2003.  The decrease was primarily due to the (1) shift in subscriberpreference from postpaid to prepaid services, which generate lower averagerevenue per subscriber, and (2) decline in installation revenues due to apromotion which waived installation cost of subscribers in an effort tostimulate subscriber growth, partially offset by adjustments in our monthlylocal service rates.  The percentage contribution of local exchange revenues toour total fixed line service revenues decreased to 42% in 2004 from 44% in2003.

 

Fixed line netreductions in 2004 were 33,924 as compared to 2,661 in 2003.  While fixed lineadditions totaled 11,532 for prepaid fixed line services, postpaid fixed linesin service declined by 45,456 in 2004.  As at December 31, 2004, postpaid and prepaid fixed line subscribers totaled 1,783,191 and 368,836, respectively,which accounted for approximately 83% and 17%, respectively, of total fixedlines in service.

 

Pursuant to a currency exchange rate adjustmentmechanism authorized by the NTC, we adjust our monthly local service ratesupward or downward by 1% for every Php0.10 change in the peso-to-dollarexchange rate relative to a base rate of Php11.00 to US$1.00.  During 2004, weimplemented six upward and one downward adjustments in our monthly localservice rates compared to 11 upward and three downward adjustments in 2003.The average peso-to-dollar rate in 2004 was Php56.044 to US$1.00, compared tothe average of Php54.215 to US$1.00 in 2003.  This change in the averagepeso-to-dollar rate translated to a peso depreciation of 3%, which resulted inan average net increase of 1.5% in our monthly local service rates in 2004. 

 

*International Long Distance Service*

 

Thefollowing table shows information about our international fixed line longdistance business for the years ended December 31, 2004 and 2003:

*** ***

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total international long distance service revenues (in millions)

Php12,804

 

Php12,767

 

Php37

 

–

Inbound

10,452

 

10,614

 

(162)

 

(2)

Outbound

2,352

 

2,153

 

199

 

9

 

 

 

 

 

 

 

 

International call volumes (in million minutes, except call ratio)

2,348

 

2,286

 

62

 

3

Inbound

2,192

 

2,128

 

64

 

3

Outbound

156

 

158

 

(2)

 

(1)

Inbound-outbound call ratio

14.1:1

 

13.5:1

 

–

 

–

*** ***

Our total international long distance service revenues increasedby Php37million, to Php12,804 million in 2004 from Php12,767 million in 2003 primarily due to an increase inoutbound international long distance revenues.  The percentage contribution ofinternational long distance service revenues to our total fixed line operatingrevenues decreased to 26% in 2004 from 27% in 2003.

 

Our revenues from inbound international long distance calls in2004 decreased by Php162 million to Php10,452million from Php10,614 million in 2003primarily due to the change in call mix in favor of transit calls with lowerhubbing rates.

 

Our inbound international long distance call volumes in 2004increased by 3% to 2,192 million minutes from 2,128 million minutes in 2003,largely due to an increase in transit calls.

 

Our revenues from outbound internationallong distance calls in 2004 increased by Php199 million, or 9%, to Php2,352million from Php2,153 million in 2003.  Theincrease resulted from higher conversion rates used as average billing rateswere Php55.98 and Php54.04 in 2004 and 2003, respectively, and a change in callmix in favor of traffic utilizing least cost routes.

 

Our outbound international long distance call volumes declined by1% to 156 million minutes in 2004 from 158 million minutes in 2003, primarilydue to cellular substitution (subscribers opting to use cellular forinternational outbound calls) and the popularity of alternative means ofcommunications such as e-mailing, international text messaging and internettelephony.

 

*National Long Distance Service*

*** ***

The following table shows our nationallong distance service revenues and call volumes for the years ended December31, 2004 and 2003:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php6,736

 

Php6,561

 

Php175

 

3

National long distance call volumes (in million minutes)

1,853

 

2,016

 

(163)

 

(8)

 

Our national longdistance service revenues increased by Php175 million, or 3%, to Php6,736 million in 2004 from Php6,561 millionin 2003 as a result of increased national direct dial, or NDD, rates and morebeneficial interconnection agreements with cellular operators.  The percentagecontribution of national long distance revenues to our total fixed line servicerevenues was 14% for 2004 and 2003.

*** ***

Our national longdistance call volumes, however, decreased by approximately 8% to 1,853 millionminutes in 2004 from 2,016 million minutes in 2003.  Cellular substitution andthe widespread availability and growing popularity of alternative non-voicemeans of communications, particularly cellular text messaging and e-mailing,have negatively affected call volumes.

*** ***

*Data and Other Network Services*

 

In2004, our data and other network services posted revenues of Php7,114 million,an increase of Php1,136 million, or 19%, from Php5,978 million in 2003.  Therevenue contribution of this service segment to our total fixed line servicerevenues increased to 15% in 2004 from 13% in 2003.

 

Of our total revenues from data and other network servicesin 2004, leased lines accounted for 56%, IP-based services accounted for 25%, packet-basedservices accounted for 13% and switch-based services accounted for theremaining 6%, compared to 62%, 17%, 15% and 6%, respectively, in 2003.  Thesepercentage changes indicate a continuing shift in data and other networkrevenues from traditional bandwidth services to broadband/IP-based services.  

 

*Miscellaneous*

 

Miscellaneous service revenues are derived mostly from directoryadvertising and facilities rental.  In 2004, these revenues increased by Php500 million,or 64%, to Php1,286 million from Php786 million in 2003.  The improvement was mainly due toan increase in co-location charges from more co-location sites coupled with anincrease in rent income on duct utilization and cable restoration.Miscellaneous service revenues accounted for approximately 3% of our totalfixed line service revenues in 2004 and 2% in 2003.

 

*Operating Expenses*
 

Operatingexpenses related to our fixed line business in 2004 totaled Php32,027 million,a decrease of Php276 million, or 1%, compared to Php32,303 million in 2003.The decrease was primarily due to compensation and benefits as a result ofPLDT’s MRP and lower cost of satellite air time and asset impairment charges.As a percentage of our total fixed line operating revenues, fixed line-relatedexpenses decreased to 66% in 2004, compared to 69% in 2003.

 

The following table shows thebreakdown of our total fixed line-related expenses for the years ended December 31, 2004 and 2003 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2004**

 

**%**

 

**2003**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php9,677

 

30

 

Php9,315

 

29

 

Php362

 

4

Compensation and benefits(1)

7,921

 

25

 

8,971

 

28

 

(1,050)

 

(12)

Provision for doubtful accounts

3,751

 

12

 

3,950

 

12

 

(199)

 

(5)

Repairs and maintenance

3,211

 

10

 

3,081

 

10

 

130

 

4

Rent

1,746

 

5

 

1,909

 

6

 

(163)

 

(9)

Selling and promotions

1,159

 

4

 

1,055

 

3

 

104

 

10

Professional and other contracted services

1,060

 

3

 

471

 

1

 

589

 

125

Taxes and licenses

820

 

3

 

991

 

3

 

(171)

 

(17)

Insurance and security services

700

 

2

 

762

 

2

 

(62)

 

(8)

Communication, training and travel

449

 

1

 

905

 

3

 

(456)

 

(50)

Asset impairment 

365

 

1

 

–

 

–

 

365

 

100

Provision for inventory obsolescence

361

 

1

 

152

 

1

 

209

 

138

Other operating expenses

807

 

3

 

741

 

2

 

66

 

9

Total 

Php32,027

 

100

 

Php32,303

 

100

 

(Php276)

 

(1)

____________

* *

*(1) **Includes salaries and benefits, incentive plan, pensionand MRP costs.*

* *

Depreciation and amortization charges increased by Php362 million,or 4%, to Php9,677 million mainly due to higher depreciation of ourregular asset base primarily resulting from additional completed projects.

 

Compensationand benefits decreased by Php1,050 million, or 12%, to Php7,921 million mainlydue to a 7% reduction in headcount due to PLDT’s MRP in 2003, when MRP cost ofPhp1,560 million was recognized consequently; in 2004, MRP cost amounted toPhp553 million.  This decreasing effect was partially offset by collectivebargaining agreement-related increases in salaries and benefits of PLDTemployees.  

 

Provisionfor doubtful accounts decreased by Php199 million, or 5%, to Php3,751 millionprimarily on account of lower provisions by PLDT for anticipated uncollectibleaccounts from various specifically identified domestic telecommunicationscarriers.  PLDT makes provisions for anticipated uncollectible accounts basedon the aging profile of its accounts receivables.  PLDT’s provision fordoubtful accounts in 2004 and 2003 was equivalent to 8% of its servicerevenues.  

 

Repairs and maintenance expenses increased by Php130million, or 4%, to Php3,211 million primarily owing to the expiration of warrantiesfor certain plant facilities and higher maintenance costs of computer andperipherals in relation to charges for software support agreements for certainsystems in 2004 as compared in 2003, partially offset by lower maintenancecosts of the domestic fiber optic network due to more remedial works done in2003 than in 2004.

 

Rent expenses decreased by Php163 million, or 9%, toPhp1,746 million due to a decrease in international leased circuits and rentalfor bundled sales/value added service units expense.

 

Selling and promotion expenses increased by Php104million, or 10%, to Php1,159 million mainly as a result of an increase inPLDT’s promotional activities in relation to various products and services,partially offset by reduced corporate public relations expenses.

 

Professional and other contracted services increasedby Php589 million, or 125%, to Php1,060 million as a result of higher legalfees in 2004 for various services, partially offset by a decrease in number ofconsultants in line with PLDT’s cost management efforts, coupled with adecrease in collection agency fees on account of lower final accounts subjectfor collection.

 

Taxesand licenses decreased by Php171 million, or 17%, to Php820 million mainly onaccount of lower business-related taxes paid in 2004 as compared to 2003.

 

Insuranceand security services decreased by Php62 million, or 8%, to Php700 millionprimarily due to lower premiums on property all-risk, industrial all-risk andindustrial fire insurance and lower number of contracted security guards.

 

Communication, training andtravel decreased by Php456 million, or 50%, to Php449 million due to lowermailing, courier and delivery services, as well as a decrease in local traveland training in 2004 as compared to 2003.

 

Assetimpairment amounted to Php365 million in 2004 due to impairment of Piltel’sE.O. 109 facilities amounting to Php1,438 million. 

 

Provision for inventoryobsolescence increased by Php209 million, or 138%, to Php361 primarily onaccount of higher inventory obsolescence owing to slow-moving items determinedin 2004 as compared to 2003.

 

Otheroperating expenses increased by Php66 million, or 9%, to Php807 million due tohigher contracted costs for technical and helpdesk resources and relatedcomputer and maintenance and in-house systems development, partially offset bylower office supplies consumption and printing costs resulting from PLDT’scontinuing cost-containing activities.

 

***Operating Income***

 

Operating income from our fixedline service amounted to Php16,519 million in 2004, an increase of Php2,002million, or 14%, from Php14,517 million in 2003 due to increased revenuesprimarily relating to our data and other network services as well as loweroperating expenses.  

 

***FinancingCosts***

 

Financing costs associated withour fixed line business decreased by Php5,769 million, or 28%, to Php14,821million primarily due to lower interest expense and related items owing tolower debt balances in 2004 compared with 2003 and lower foreign exchangelosses pertaining to: (1) the foreign exchange revaluation of the carryingvalues of financial liabilities because the level of peso depreciation washigher in 2003 as compared to 2004 and (2) designation and documentation ofcertain hedged items as hedged instruments to qualify for hedge accounting fromJuly 2004 onwards.  

 

Thebreakdown of our financing costs for our fixed line business for the yearsended December 31, 2004 and 2003 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php10,634

 

Php10,894

 

(Php260)

 

(2)

Foreign exchange losses – net

2,356

 

7,525

 

(5,169)

 

(69)

Hedge costs

1,011

 

1,054

 

(43)

 

(4)

Loss on derivative transactions – net

871

 

1,466

 

(595)

 

(41)

Accretion on financial liabilities

301

 

280

 

21

 

8

Financing charges

145

 

231

 

(86)

 

(37)

Capitalized interest

(497)

 

(860)

 

363

 

(42)

 

Php14,821

 

Php20,590

 

(Php5,769)

 

(28)

*** ***

***Interest Income***

*** ***

Interestincome generated by our fixed line business amounted to Php248 million in 2004,an increase of Php110 million, or 80%, compared to Php138 million in 2003mainly attributable to PLDT’s higher average cash balances.

*** ***

***Other Income - Net***

 

Allother income/gains such as rental income, gain on disposal of property, whichdo not fall under service revenues are included under this classification.  In2004, our fixed line business segment registered a decrease in other income ofPhp950 million, or 93%, to Php74 million in 2004 from Php1,024 million in 2003.

 

***Income (Loss) Before Income Tax, Cumulative Effect of Change inAccounting Policy and Minority Interest in Net Income of ConsolidatedSubsidiaries***

*** ***

Our fixed line business segment registered an incomebefore income tax, cumulative effect of change in accounting policy andminority interest in net income of consolidated subsidiaries of Php2,020million in 2004 compared to a loss of Php4,911 million in 2003, primarilyresulting from a substantial decrease in fixed line business-related expenses,particularly financing costs and compensation and benefits.  

 

*Provision for (Benefitfrom) Income Tax*
 

Provisionfor income tax amounted to Php800 million in 2004 as compared to benefit fromincome tax of Php3,008 million in 2003 due to a tax loss position in 2003 asnon-tax deductible charges were higher in 2003.

 

*Net Income (Loss)*
 

In 2004, our fixed line businesssegment registered a net income of Php1,241 million, compared to a net loss of Php1,902million in 2003.  The change was primarily due to an increase in fixed lineoperating revenues as well as a decrease in fixed line-related expenses,particularly compensation and benefits, communication, training and travel andlower financing costs.  

 

Information andCommunications Technology
 

**Operating Revenues**
 

In2004, our information and communications technology business generatedoperating revenues of Php2,401 million, an increase of Php618 million, or 35%,from Php1,783 million in 2003.  These revenues accounted for 2% of our totaloperating revenues in 2004 and 2003.  ePLDT’s call center business contributedrevenues of Php1,283 million, Internet and gaming contributed revenues ofPhp569 million, *VitroTM* contributed revenues of Php173 million and otherbusinesses contributed Php55 million representing 62%, 27%, 8% and 3%,respectively, of the total service revenues from our information andcommunications technology business in 2004, compared to 63%, 26%, 8% and 3% in2003.  

 

The following table summarizesour total operating revenues from our information and communications technologybusiness for the years ended December 31, 2004 and 2003 by service segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase**

** **

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php1,283

 

54

 

Php927

 

52

 

Php356

 

38

Internet and gaming business

569

 

24

 

380

 

21

 

189

 

50

*VitroTM* data center

173

 

7

 

120

 

7

 

53

 

44

Others

55

 

2

 

40

 

2

 

15

 

38

 

2,080

 

87

 

1,467

 

82

 

613

 

42

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point of Product Sales

321

 

13

 

316

 

18

 

5

 

2

Total ICT Operating Revenues

Php2,401

 

100

 

Php1,783

 

100

 

Php618

 

35

 

*Service Revenues*

 

Service revenues generated by our information andcommunications technology business amounted to Php2,080 million in 2004, anincrease of Php613 million, or 42%, from Php1,467 million in 2003.  This wasprimarily a result of the continued growth of our call center and Internet andgaming businesses.

 

*Call**Center*

 

Revenues related to our call center business in 2004increased by Php356 million, or 38%, to Php1,283 million from Php927 million in 2003, primarily due to the combinedeffects of the following: (1) Vocativ’s upward price adjustment for voice andVoIP, and an increase in programs being handled; and (2) an upward priceadjustment by Parlance for its inbound and outbound projects, coupled with anincrease in the number of registered minutes.

 

Callcenter revenues accounted for 62% and 63% of our total information andcommunications technology service revenues in 2004 and 2003, respectively.

* *

*Internet and gaming*

 

Revenues from our internet and gaming business for2004 increased by Php189 million, or 50%, to Php569 million from Php380 millionin 2003 primarily due to the consolidation of Digital Paradise in June 2004.Our Internet and gaming revenues accounted for 27% and 26% of total servicerevenues from information and communications technology business in 2004 and2003, respectively.

 

*VitroTM*datacenter

 

In2004, *VitroTM* contributed revenues of Php173 million, an increase of Php53million, or 44%, from Php120 million in 2003, primarily due to an increase inco-location revenues, server hosting and other services.  *VitroTM*revenues accounted for 8% of total service revenues from information andcommunications technology business in 2004 and 2003.

 

*Others*

 

Revenues from other businesses related to ourinformation and communications technology segment in 2004 increased by Php15million, or 38%, to Php55 million from Php40 million in 2003 largely due to IThelpdesk/contact center services rendered coupled with an increase in number ofdigital certificates sold.

 

*Non-service Revenues*

 

Non-servicerevenues consist of sales generated from reselling Microsoft software licensesand Cisco hardware equipment.  In 2004, non-service revenues generated by ourinformation and communications technology business increased by Php5 million,or 2%, to Php321 million prompted by higher point of product sales of Ciscoequipment and Microsoft licenses.

 

***Operating Expenses***

 

Operatingexpenses associated with our information and communications technology businesstotaled Php3,035 million in 2004, an increase of Php763 million, or 34%, fromPhp2,272 million in 2003, primarily due to an increase in compensation andbenefits, selling and promotions and asset impairment charge.  However, as apercentage of our information and communications technology operating revenues,operating expenses related to our information and communications technologybusiness decreased to 126% in 2004 from 127% in 2003.  

 

Thefollowing table shows the breakdown of our total information and communicationstechnology-related operating expenses for the years ended December 31, 2004 and 2003 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2004**

 

**%**

 

**2003**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php900

 

30

 

Php533

 

23

 

Php367

 

69

Asset impairment 

617

 

20

 

387

 

17

 

230

 

59

Rent

366

 

12

 

337

 

15

 

29

 

9

Depreciation and amortization

339

 

11

 

314

 

14

 

25

 

8

Repairs and maintenance

316

 

11

 

184

 

8

 

132

 

72

Selling and promotions

291

 

10

 

35

 

2

 

256

 

731

Professional and other contracted services 

67

 

2

 

66

 

3

 

1

 

2

Communication, training and travel

70

 

2

 

41

 

2

 

29

 

71

Taxes and licenses

21

 

1

 

18

 

1

 

3

 

17

Insurance and security services

7

 

–

 

10

 

–

 

(3)

 

(30)

Provision for inventory obsolescence

3

 

–

 

12

 

–

 

(9)

 

(75)

Provision for doubtful accounts

–

 

–

 

70

 

3

 

(70)

 

(100)

Other operating expenses

38

 

1

 

265

 

12

 

(227)

 

(86)

Total 

Php3,035

 

100

 

Php2,272

 

100

 

Php763

 

34

____________

 

(1)   Includes salaries and benefits, incentive plan,pension and MRP costs.

 

Compensation and benefits increased by Php367 million, or 69%, to Php900 millionmainly due to the expansion of our call center facilities and consolidation ofDigital Paradise which resulted in an increase in headcount coupled with an increasein salaries, bonuses and various incentives of employees.

 

Asset impairment increased by Php230 million, or 59%,to Php617 million due to an impairment provision recognized in 2004 in relationto an investee company.  In 2003, we retired certain equipment with net bookvalues aggregating Php387 million primarily as a result of the abandonment of areloadable chip-based cash card project.

 

Rent expense increased by Php29 million, or 9%, toPhp366 million due to the consolidation of Digital Paradise with the opening ofseveral *Netopia* branches countrywide and abroad in 2004.  

 

Depreciation and amortization charges increased byPhp25 million, or 8%, to Php339 million primarily due to an increase indepreciable asset base in relation to the expansion of our call center businesssegment.

 

Repairs and maintenance expenses increased by Php132million, or 72%, to Php316 million primarily due to a change in maintenanceagreement for higher annual maintenance in respect of our digital certificatebusiness.

 

Selling and promotion expenses increased by Php256million, or 731%, to Php291 million mainly as a result of increased advertisingand promotions expense by *Netopia*.

 

Professionaland other contracted services increased by Php1 million, or 2%, to Php67 milliondue to higher consultancy and legal fees in 2004 as compared to 2003.

 

Communication,training and travel increased by Php29 million, or 71%, to Php70 million primarilydue to the consolidation of Digital Paradise in June and backbilling of ePLDT’stelephone charges pertaining to the periods 2002 to 2004.

 

Taxesand licenses increased by Php3 million, or 17%, to Php21 million mainly onaccount of higher business-related taxes paid in 2004 as compared to 2003.

 

Insuranceand security services decreased by Php3 million, or 30%, to Php7 millionprimarily due to the divestment of Contact World, with high insurance andsecurity costs in 2003.

 

Provisionfor inventory obsolescence decreased by Php9 million, or 75%, mainly pertainingto maintenance-related inventory items of Infocom.

 

Provision for doubtful accounts decreased by Php70million, or 100%, primarily due to specifically identified uncollectiblesubscriber accounts of Infocom already provided for in 2003.

 

Other operating expenses decreased by Php227 million,or 86%, to Php38 million in line with our over-all cost containmentinitiatives.

 

*Operating Loss*

 

Our information and communications technologybusiness registered an operating loss of Php634 million in 2004, an increase ofPhp145 million, or 30%, compared to Php489 million in 2003 mainly due to higheroperating expenses mainly from the call center business in 2004 compared to2003.

 

*Financing Costs*

 

Financing costs associated with our information andcommunications technology business, composed primarily of interest on loans andrelated expenses, decreased by Php21 million, or 35%, to Php39 millionprimarily due to lower interest expense on loans as debt balances declined in2004 as compared to 2003.

 

***InterestIncome***

 

Ourinformation and communications technology business generated an interest incometotaling Php18 million in 2004, an increase of Php11 million, or 157%, comparedto Php7 million in 2003 mainly attributable to Vitro’sTM higheraverage cash balances.

 

*Other Income - Net*
 

All other income/gains which do not fall underservice and non-service revenues are included under this classification.  Otherincome generated from our information and communications technology businesssegment declined by 88% to Php14 million in 2004 from Php120 million in 2003due to a gain on the divestment of Contact World, Inc., a call center facility,in 2003.  

 

***Loss Before Income Tax, Cumulative Effect of Change in AccountingPolicy and Minority Interest in Net Income of Consolidated Subsidiaries***

*** ***

Our information and communications technology businessrecorded a loss before income tax***,***cumulative effect of change inaccounting policy and minority interest in net income of consolidatedsubsidiaries amounting to Php643 million in 2004 compared to Php432 million in2003.  The increase in net loss was mainly due to a substantial increase ininformation and communications technology-related expenses of 34%, as well asan 88% decline in other income.

 

*Provision for (Benefitfrom) Income Tax*
 

Provision for income tax amounted to Php59 millionin 2004 an increase of Php123 million, or 192%, as compared to the benefit fromincome tax of Php64 million recognized in 2003.  This was principally due toInfocom’s reversal of recorded deferred income tax asset of Php64 million in 2004.

 

*Net Loss*
 

In 2004, our information andcommunications technology business segment registered a net loss of Php699million, an increase of Php371 million, or 113%, compared to a net loss ofPhp328 million posted in 2003.  This reflects the recorded increase in netasset impairment charges and a reported net loss of Php116 million by Infocomin 2004 compared to the net income of Php20 million in 2003, partially offsetby the increase in net income contribution of our call center business.

 

Liquidity and Capital Resources

 

The following table shows our consolidated cash flows,capitalization and other selected financial data as at and for the years ended December 31, 2005, 2004 and 2003:

** **

 

Years Ended December 31,

 

**2005**

**2004**

**2003**

 

(in millions)

Cash Flows

 

 

 

Net cash provided by operating activities

Php64,969

Php62,860

Php42,582

Net cash used in investing activities

13,080

24,764

20,021

Capital expenditures

15,864

19,268

17,943

Net cash used in financing activities

48,159

30,078

14,135

Effect of exchange rate changes on cash and cash equivalents

(987)

(69)

(28)

Net increase in cash and cash equivalents

2,743

7,949

8,398

 

 

 

December 31,

 

**2005**

** **

**2004**

 

(in millions)

Capitalization

 

 

 

Cash and cash equivalents

Php30,064

 

Php27,321

Short-term debt

 

 

 

Notes payable

–

 

58

Current portion of long-term debt

18,797

 

28,020

Long-term debt – net of current portion

93,516

 

131,377

Total debt

112,313

 

159,455

Stockholders’ equity

79,595

 

48,079

Total capitalization

Php191,908

 

Php207,534

 

Asat December 31, 2005, consolidated cash and cash equivalents amounted to Php30,064million.  Our principal sources of consolidated cash in 2005 were cash flowsfrom operating activities amounting to Php64,969 million, drawings fromexisting long-term credit facilities totaling Php10,797 million, and net equityfunds raised through PLDT's SIP amounting to Php334 million.  These funds wereused principally for capital expenditures of Php15,864 million (includingcapitalized interest of Php504 million) and total debt principal repayments ofPhp48,236 million.

 

Principal sources of consolidatedcash in 2004 and 2003 were cash flows from operating activities amounting toPhp62,860 million and Php42,582 million, respectively; drawings from long-termand short-term credit facilities amounting to Php15,187 million and Php457million, respectively, in 2004, and Php17,507 million and Php3,135 million,respectively in 2003; and equity funds raised through the issuance of capitalstock amounting to Php281 million in 2004.  These funds were used principallyfor capital expenditures of Php19,268 million (including capitalized interestof Php595 million) and payments of long-term and short-term debt totaling toPhp44,109 million in 2004; and capital expenditures of Php17,943 million(including capitalized interest of Php887 million) and payments of long-termand short-term debt totaling to Php33,246 million and equity funds raisedthrough the issuance of capital stock amounting to Php94 million in 2003.

 

***Operating Activities***

 

Ona consolidated basis, net cash flows from operating activities in 2005 amountedto Php64,969 million, an increase of Php2,109 million, or 3%, from Php62,860million in 2004 and an increase of Php20,278 million, or 48% from Php42,582million in 2003.

 

Agrowing portion of our consolidated cash flow is generated by our wireless anddata businesses.  The revenue contribution of these businesses has grown significantlyover the last three years with wireless business contributing 59%, in 2005, 57%in 2004 and 53% in 2003, and data business contributing an average of 8% in 2005,6% in 2004 and 2003 of our total service revenues.  Revenues from our localexchange service accounted for approximately 16% of our total service revenuesin 2005, down from 17% in 2004 and from 20% in 2003.

 

Cash flows from operating activities of our wirelessbusiness in 2005 accounted for 70% of our consolidated cash flows from operatingactivities owing to the growth of our cellular subscriber base and serviceusage.  Our fixed line business contributed 29% to our consolidated cash flowsfrom operating activities in 2005 with improved collection efficiency and lowercash expenses in line with our cost-containment efforts.  

 

While Smart is subject to loancovenants that restrict its ability to pay dividends, redeem preferred shares,make distributions to PLDT or otherwise provide funds to PLDT or any associatewithout the consent of its lenders, Smart has been able to obtain waivers fromFinnvera and certain of its lenders for each of the dividend payments made bySmart to PLDT in 2004 and 2003 aggregating Php16,100 million and Php6,166million, respectively.  Smart has also obtained the necessary consents from itslenders to make similar distributions to PLDT in 2005, amounting to about Php20,000million, of which dividends amounting to Php6,000 million, Php8,000 million,Php3,225 million and Php2,492 million were paid by Smart to PLDT in March,June, September and December 2005, respectively.  In September and December2005, Smart redeemed 200 million and 180.8 million preferred shares,respectively, previously issued to PLDT at a redemption price of Php13.875 pershare, or a total redemption price aggregating to Php5,283 million.

 

***Investing Activities***

 

Ournet cash used in investing activities in 2005 amounted to Php13,080 million, adecrease of Php11,684 million, or 47%, compared to Php24,764 million in 2004and an increase of Php4,743 million, or 24%, from Php20,021 million in 2003.The decrease in 2005 resulted from a decline in capital expenditures by Php3,404million and a decrease in short-term investments of Php3,418 million largelydue to the maturity in 2004 of Smart’s prepaid forward exchange contracts ofPhp3,873 million.  The increase in 2004 was primarily the result of higher aggregatecapital spending.  

 

Ourconsolidated capital expenditures in 2005 totaled Php15,864 million, a decreaseof Php3,404 million, or 18%, from Php19,268 million in 2004 primarily due toSmart’s and PLDT’s lower capital spending.  Smart's capital spending of Php8,785million in 2005 was used to roll-out its 3G network and further expand andupgrade its transmission network facilities to increase capacity and coveragein respect of basic and advanced cellular services.  PLDT's capital spending ofPhp6,389 million was principally used to finance the expansion of its fixedline data and IP-based network services.  ePLDT and its subsidiaries’ capitalspending of Php605 million was used to primarily fund its *Vitro*TM,Digital Paradise and call center business operations.  The balances were spentby other subsidiaries mainly PLDT Global, Mabuhay Satellite and Maratel.  In2004, consolidated capital expenditures amounted to Php19,268 million, of whichPhp14,735 million, Php3,917 million, Php500 million and Php80 million wereattributable to Smart, PLDT, ePLDT and PLDT Global, respectively.  The balancerepresented other subsidiaries’ capital spending.  The increase in ourconsolidated capital expenditures in 2004 of Php1,325 million, or 7%, waslargely attributable to PLDT and Smart.  PLDT's capital expenditures were principallyused to finance the continued build-out of its data and broadband/IPinfrastructure while Smart’s capital spending was principally used to financethe expansion of its GSM and transmission facilities due to the increasingnumber of its subscriber base and network coverage.

 

During 2005, we made certainstrategic investments aggregating Php248 million to strengthen our position inthe wireless and information and communications technology segments.  Ofthe Php248 million investment, Php238 million represented Smart's partialpayment of its investment in a wireless broadband and data service company, andPhp10 million pertained to ePLDT's investment in convertible debt securities ofa company engaged in a systems integration of Internet and mobile telephonegaming project.

 

As part of our growth strategy, we may from time totime,make acquisitions and investments in companies or businesses, which may or maynot be significant.  For example, on May 25, 2006, we announced that ePLDT and SPI Tech,L.P. entered into a non-binding letter of interest in respect of a potentialacquisition by ePLDT of 100% of SPI, one of the leading pure-play BPO companiesand independent BPO service providers in the world. We believe that thepossible acquisition of SPI would solidify ePLDT’s position as one of thelargest full service BPO companies.  For more information about the possibleacquisition, see “Item 4. Information on theCompany—Organization.”****

 

For 2006, we anticipate increasingthe level of our capital expenditures and equity investments.  Our 2006 budgetfor consolidated capital expenditures is approximately Php19,759 million, ofwhich approximately Php9,300 million is budgeted to be spent by PLDT for itsfixed line data and network services and approximately Php8,635 million isbudgeted to be spent by Smart for further expansion and upgrading of itsdigital network.

 

***Financing Activities***

 

On aconsolidated basis, we used net cash of Php48,159 million for financingactivities in 2005, compared to Php30,078 million in 2004 and Php14,135 millionin 2003.  The net cash used in financing activities in 2005, 2004 and 2003 wasmainly attributable to debt repayments and interest payments by PLDT in linewith its ongoing debt reduction program and, in 2005, dividend paymentsdistributed to common and preferred stockholders.  

 

*Debt Financing*

 

Additions to our consolidated long-termdebt in 2005 totaled Php10,797 million from Smart’s drawings related to therefinancing of its Phase 5A/5B loan facilities.  Payments in respect ofprincipal of our long-term debt amounted to Php47,849 million in 2005, of whichPhp34,700 million and Php12,182 million were attributable to PLDT and Smart,respectively.

 

Ourconsolidated indebtedness as at December 31, 2005 was Php112,313 million, lowerby Php47,142 million, or 30%, compared to Php159,455 million as at December 31,2004 mainly due to the reductions of Php36,910 million and Php9,016 million inPLDT’s and Smart’s indebtedness, respectively.  PLDT’s non-consolidatedindebtedness decreased by 33%, from Php110,938 million as at December 31, 2004 to Php74,028 million as at December 31, 2005, due to debt payments in line with our thrust to reduce PLDT’s overall indebtedness.  Smart’sindebtedness as at December 31, 2005 stood at Php35,079 million, a decrease of 20%from Php44,095 million as at December 31, 2004.  On July 2, 2004, Smartacquired from Piltel’s creditors US$289 million, or 69.4%, in the aggregate ofPiltel’s total outstanding restructured debt at that time, in exchange forUS$283.2 million, or Php15,854 million in July 2, 2004, in new debt of Smartand US$1.5 million, or Php84 million, in cash.  Please see *Note 12 –Interest-bearing Financial Liabilities*to the accompanying consolidatedfinancial statements in Item 18 for further details.

 

On October 6, 2005, PLDT commenced a solicitation of consents from holders of its outstanding11.375% Notes due 2012, or the 2012 Notes, to amend certain covenants under the2012 Notes relating to the limitation on restricted payments and the limitationon indebtedness.  In addition, PLDT commenced a cash tender offer for the aggregateprincipal amount of US$71,986,000 of its 10.625% Notes due 2007, or the 2007Notes, outstanding and a related solicitation of consents to effect identicalamendments to the 2007 Notes.

 

PLDTreceived the requisite consents to effect the amendments to both the 2007 Notesand the 2012 Notes, which give PLDT greater flexibility to make certainrestricted payments, including payment of dividends to holders of PLDT’s commonstock, and reduce PLDT’s permitted leverage ratio pursuant to the terms of thenotes.  At the conclusion of the cash tender offer, holders of approximatelyUS$50.9 million principal amount of the 2007 Notes representing approximately71% of the outstanding 2007 Notes tendered their 2007 Notes.  As a result, an aggregate principal amount of the 2007Notes of approximately US$21.1 million remained outstanding as of December 31,2005.  Please see *Note 12 – Interest-bearing Financial Liabilities*to theaccompanying consolidated financial statements in Item 18 for a more detaileddiscussion of the consent solicitation for the 2012 Notes and the cash tenderoffer and consent solicitation for the 2007 Notes.

 

Asat December 31, 2005, PLDT had no undrawn committed long-term creditfacilities.  The JP¥3,095 million undrawn portion of the JP¥5,615 millionsyndicated term loan facility supported by Nippon Export and InvestmentInsurance of Japan, or NEXI, and US$4 million undrawn portion of the US$12million term loan facility extended by DEG-Deutsche Investitions-undEntwicklungsgesellschaft mbH, or DEG, were cancelled at our request on December3, 2004 and September 26, 2004, respectively.  In addition, PLDT also waivedfurther disbursements from the US$149 million Kreditanstalt fur Wiederaufbaurefinancing facility effective September 1, 2004, thus, cancelling the undrawnportion of US$9 million.  All outstanding amounts under the JP¥5,615 millionsyndicated term loan facility supported by NEXI and the US$12 million term loanfacility extended by DEG were repaid in full on June 13 and June 16, 2006,respectively.  As at December 31, 2005, Smart had undrawn facilities of US$30million pursuant to the commercial facility with Nordic Investment Bank and theUS$70 million loan facility with Finnish Export Credit Ltd., signed on August8, 2005 and August 10, 2005, respectively, for its GSM Phase 8 financing.These facilities are expected to be drawn in the second half of 2006.  As at December 31, 2005, Smart also had available facilities under its €50 millionFramework Agreement with Bayerische Hypo-und Vereinsbank Aktiengesellschaft upto a maximum aggregate amount of €44 million.

 

Thescheduled maturities of our outstanding consolidated long-term debt as at December 31, 2005 are as follows:

 

**Year**

** **

**US$ Loans**(1)

** **

**JP¥ Loans**(2)

** **

**Peso Loans**

** **

**Total**

 

 

(in millions)

** **

 

 

 

 

 

 

 

 

 

 

 

 

2006(3)

 

US$308

 

Php16,328

 

JP¥3,418

 

Php1,539

 

Php930

 

Php18,797

2007

 

347

 

18,418

 

3,418

 

1,540

 

35

 

19,993

2008

 

110

 

5,839

 

1,709

 

770

 

24

 

6,633

2009

 

266

 

14,121

 

–

 

–

 

25

 

14,146

2010 

 

48

 

2,552

 

–

 

–

 

834

 

3,386

2011 and onwards

 

923

 

48,978

 

–

 

–

 

380

 

49,358

 

 

US$2,002

 

Php106,236

 

JP¥8,545

 

Php3,849

 

Php2,228

 

Php112,313

*____________*

*(1)        The exchangerate used was Php53.062 to US$1.00.*

*(2)        The exchangerate used was Php0.4504 to JP¥1.00.*

*(3)        January 1, 2006 to December 31, 2006.*

 

Approximately Php62,955 million principal amount ofour consolidated outstanding long-term debt as at December 31, 2005 isscheduled to mature over the period from 2006 to 2010.  Of this amount, Php44,877million was attributable to PLDT, Php14,872 million to Smart, and the remainderto Mabuhay Satellite, Maratel, ePLDT and Piltel.

 

See *Note 12 – Interest-bearingFinancial Liabilities* to the accompanying consolidated financial statementsin Item 18 for an overview of our indebtedness. 

 

*Debt Covenants*

 

Our debt instruments containrestrictive covenants, including covenants that could prohibit us from payingdividends on common stock under certain circumstances, and require us to complywith specified financial ratios and other financial tests, calculated inconformity with accounting principles generally accepted in the Philippines, at relevant measurement dates, principally at the end of each quarterlyperiod.  We have maintained compliance with all of our maintenance financialratios as required under our loan covenants and other debt instruments.However, if negative factors adversely affect our financial ratios, we may beunable to maintain compliance with these ratios and covenants or be unable toincur new debt.  Under some of our loan agreements, certain of our financialratios have become more restrictive in 2005 and will continue to become morerestrictive in increments thereafter, which will make it more difficult forPLDT to maintain compliance with such ratios in the future.  Inability tocomply with our financial ratios and covenants or raise new financing couldresult in a declaration of default and acceleration of some or all of ourindebtedness.  The terms of some of our debt instruments have no minimum amountfor cross-default.  In addition, we are required to comply with certainfinancial ratios for the incurrence of capital expenditures in excess of US$10million and incurrence of indebtedness.   

 

Inparticular, under our JP¥9,760 million loan agreement with JBIC, we arerequired to obtain prior written consent of JBIC for capital expenditures inexcess of US$10 million, unless, among other things, our current ratio,calculated on a non-consolidated basis and after taking into account suchexpenditures, will not be less than 0.90:1.  As at March 31, 2006, our current ratio, as calculated under our debt covenants on a non-consolidated basis,was 1.51:1.  We currently believe that our current ratio is unlikely to be lessthan 0.90:1 due to a smaller current portion of our long-term debt goingforward.  As a result, we believe that our financial ratios currently do notmaterially limit our ability to incur our budgeted capital expenditures or toobtain additional financings.

 

Theprincipal factors that can negatively affect our ability to comply with thesefinancial ratios and other financial tests are depreciation of the pesorelative to the U.S. dollar, poor operating performance of PLDT and ourconsolidated subsidiaries, impairment or similar charges in respect ofinvestments of other long-lived assets that may be recognized by PLDT and itsconsolidated subsidiaries and increases in our interest expense.  Interestexpenses may increase as a result of various factors including issuance of newdebt, the refinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the Philippine peso, the lowering of PLDT’s credit ratings orthe credit ratings of the Philippines, increase in reference interest rates,and general market conditions.  Since approximately 98% of our total debts weredenominated in foreign currencies, principally in U.S. dollars, many of thesefinancial ratios and other tests are negatively affected by any weakening ofthe peso.  The peso has been subject to significant fluctuations in recentyears.  From 2002 to 2004, the peso has generally been depreciating from a highof Php49.336 on May 20, 2002 to a low of Php56.443 on October 14, 2004.  In 2005, the peso fluctuated significantly from a low of Php56.321 on July 8 to ahigh of Php53.062 on December 29.  As at December 31, 2005, the peso hadappreciated by 5.8% to Php53.062 to US$1.00, from Php56.341 to US$1.00 as atDecember 31, 2004.  

 

PLDT’sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of itsfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other investees in assisting PLDT in complying with non-consolidatedcovenants or covenants that are calculated without giving effect to the resultsof PLDT’s investees.

 

PLDT’s debt instruments contain anumber of other negative covenants that, subject to certain exceptions andqualifications, restrict PLDT’s ability to take certain actions withoutlenders’ approval, including: (a) incurring additional indebtedness; (b)prepaying other debt; (c) making investments; (d) extending loans; (e) extendingguarantees or assuming the obligations of other persons; (f) paying dividendsor other distributions or redeeming, repurchasing or otherwise acquiring sharesof PLDT’s capital stock; (g) disposing of all or substantially all of itsassets or of assets in excess of specified thresholds of its tangible networth; (h) entering into management contracts providing for the management ofits business or operations by a third party; (i) creating any lien or securityinterest; (j) permitting set-off against amounts owed to PLDT; (k) merging orconsolidating with any other company; (l) entering into transactions with stockholders and affiliates; and (m)entering into sale and leaseback transactions. 

 

Further,certain of PLDT’s debt instruments contain provisions wherein PLDT may berequired to repurchase or prepay certain indebtedness in case of change incontrol of PLDT or if the ownership of our shares of common stock held by NTTCommunications falls below a certain threshold.

 

Moreover,certain of PLDT’s debt instruments restrict PLDT from declaring or distributingdividends to common stockholders.  In particular, under certain loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, (ii) if after giving effectto such action the current ratio would be less than 0.90:1 or (iii) in anamount greater than PLDT’s net income after taxes during the fiscal year towhich such payment or distribution relates.

 

Incase of a change in control of PLDT, PLDT may be required to repurchase orprepay certain indebtedness.  Under the terms of the 10.625% Notes due 2007 and11.375% Notes due 2012, we are required to offer to purchase all outstandingnotes due 2007 and notes due 2012 for cash at a price of 101% of their principalamounts plus accrued interest in the event that (1) the aggregate of NTTCommunications’ and First Pacific’s direct and indirect voting interest inPLDT's outstanding capital stock having voting rights falls below 35% of suchcapital stock, (2) any person or, in certain instances, group of persons, whichis not controlled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT’s outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stockand (3) if a rating agency at such time maintains a rating on either series ofnotes, the rating agency downgrades its credit rating on the series within 90days (or more, in certain circumstances) following notice of the occurrence ofthe events specified in (1) and (2) above.

 

Underthe terms of our JP¥9,760 million loan from JBIC, in the event of any proposedsale or transfer of PLDT’s stock that would result in NTT Communicationsholding less than 14.95% of PLDT’s voting stock, we will be required to prepay,immediately upon effectiveness of such sale or transfer, all principaloutstanding under the loan, together with accrued interest.  However,prepayment will not be required if, following such sale or transfer, (1) NTT Communications continues to have prior approval rights with respect toall matters as to which NTT Communications has approval rights under the stockpurchase agreement pursuant to which it acquired its shares in PLDT, or (2)JBIC, in its sole discretion, determines that NTT Communications’ participationin the expansion of Smart’s GSM network capacity to extend PLDT’s cellularbusiness in Smart would not be reduced below its level of participation as atthe date of the loan agreement.

 

PLDT’s debt instruments also contain customary andother default provisions that permit the lender to accelerate amounts due orterminate their commitments to extend additional funds under the debtinstruments. These default provisions include: (a) cross-defaults and cross-accelerationsthat permit a lender to declare a default if PLDT is in default under anotherdebt instrument; in some cases, the cross-default provision is triggered upon apayment or other default permitting the acceleration of PLDT’s debt, whether ornot the defaulted debt is accelerated.  In other cases, the cross-defaultprovision requires the defaulted loan to be accelerated.  In some debtinstruments, the cross-default provision will be triggered only if theprincipal amount of the defaulted indebtedness exceeds a threshold amountspecified in these debt instruments; (b) failure by PLDT to meet certainfinancial ratio covenants referred to above; (c) the occurrence of any materialadverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender; (d) the revocation, termination or amendment of any of thepermits or franchises of PLDT in any manner unacceptable to the lender; (e) the abandonment, termination or amendment of the project financed by a loanin a manner unacceptable to the lender; (f) the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and (g) other typical events of default, including the commencement of bankruptcy,insolvency, liquidation or winding up proceedings by PLDT.

 

Smart’s debt instruments contain certainrestrictive covenants, including covenants that prohibit Smart from payingdividends, redeeming preferred stock, making distributions to PLDT or otherwiseproviding funds to PLDT or any affiliate without the consent of its lendersunder its Phases 1, 2 and 3 facilities.  Also, Smart’s debt instruments containcertain restrictive covenants that require Smart to comply with specified financialratios and other financial tests at semi-annual measurement dates.  Thefinancial tests under Smart’s loan agreements include compliance with a debt toequity ratio of not more than 1.50:1 and a debt service coverage ratio of notless than 1.50:1.  Smart has maintained compliance with all of its financialcovenants.  The agreements also contain customary and other default provisionsthat permit the lender to accelerate amounts due under the loans or terminatetheir commitments to extend additional funds under the loans.  These defaultprovisions include: (a) cross-defaults and cross-accelerations that permit alender to declare a default if Smart is in default under another loanagreement.  These cross-default provisions are triggered upon a payment orother default permitting the acceleration of Smart debt, whether or not thedefaulted debt is accelerated; (b) failure by Smart to comply with certainfinancial ratio covenants; (c) any reduction in PLDT’s ownership of Smart’sshares below 51%; (d) any reduction in First Pacific’s and Metro PacificCorporation’s collective direct and/or indirect ownership of PLDT’s commonstock below 17.5% of the total common stock outstanding; and (e) the occurrenceof any material adverse change in circumstances that the lender reasonablybelieves materially impairs Smart’s ability to perform its obligations underits loan agreements.

 

Asat December 31, 2005, Piltel was not in compliance with the terms ofconvertible bonds with principal amount of US$0.7 million (approximately US$0.9million redemption price at the option of the holders).  Piltel may not be ableto restructure or otherwise pay the claims of its unrestructured debt.However, default on and acceleration of Piltel’s unrestructured indebtednessdoes not create a cross-default under Piltel’s restructured indebtedness or anyindebtedness of PLDT or Smart.

 

The Credit and Omnibus Agreements of Mabuhay Satelliteimposes several negative covenants.  In particular, these covenants, amongother things, restrict material changes in Mabuhay Satellite’s nature ofbusiness and ownership structure, any lien upon or with respect to any of itsassets or to any right to receive income, acquisition of capital stock,declaration and payment of dividends, merger, consolidation and sale withanother entity and incurring or guaranteeing additional long-term debt beyondprescribed amounts.

 

ePLDT’sloan agreement imposes negative covenants which, among other things, restrictePLDT in regard to payment of cash dividends or any other income or any capitaldistribution to PLDT, voluntary suspension of its entire business operationsfor a period of 60 consecutive days, dissolution of its legal existence, andcreation of any encumbrances on the shares pledged.  One of ePLDT’s loan agreementsalso requires ePLDT to comply with specified financial ratios and otherfinancial tests at quarterly measurement dates.  The agreement also containscustomary and other default provisions that permit the lender to accelerateamounts due under the loan or terminate their commitments to extend additionalfunds under the loan.  As at December 31, 2005, ePLDT has complied with all ofits financial covenants.

 

*Financing Requirements*

 

Webelieve that our available cash, including cash flow from operations, willprovide sufficient liquidity to fund our projected operating, investment,capital expenditures and debt service requirements for the next 12 months.  

 

Since2002, we have been utilizing internally generated cash, particularly from our wirelessbusiness, to reduce our overall level of indebtedness.  In line with thisobjective, we have managed our capital expenditures, reduced our investmentsand suspended dividend payments to common shareholders from April 2001 to2004.  As a result of our improving cash flows and reduced debt levels, we haverestored the payment of common dividends in May 2005 and currently intend togradually increase our dividend payout ratio in succeeding years as we expectto improve our leverage ratios.

 

*CreditRatings*

 

None of our existing indebtedness containsprovisions under which credit rating downgrades would trigger a default,changes in applicable interest rates or other similar terms and conditions.  

 

**Rating Agency**

**Credit Rating**

** **

**Outlook**

 

 

 

 

Moody’s Investor Service

Foreign Currency Senior Unsecured Debt Rating

Ba2

Negative

 

Local Currency Corporate Family Rating

Ba1

Positive

 

 

 

 

Standard and Poor’s

Foreign Currency Senior Unsecured Debt Rating

BB+

Stable

 

 

 

 

Fitch

Long-term Foreign Currency Rating

BB

Stable

 

Long-term Local Currency Rating

BB+

Stable

 

Long-term Foreign Currency Issuer Default Rating

BB

Stable

 

Long-term Local Currency Issuer Default Rating

BBB-

Positive

 

National Long-term Rating

AAA(ph1)

Stable

 

On June 7, 2006, Fitch Ratings upgraded PLDT’s long-term local currency Issuer DefaultRating, or IDR, to “BBB-“ from “BB+” with a positive outlook.  At the sametime, Fitch affirmed PLDT’s long-term foreign currency IDR of “BB” with astable outlook, reflecting the outlook on the Republic of the Philippines’ long-term foreign currency IDR of “BB.”  Following the licensing of Fitch to provideNational ratings in the Philippines, Fitch assigned PLDT a National long-termrating of “AAA(ph1)” with a stable outlook.

 

On March 29, 2006, Moody’s Investor Service, orMoody’s, placed the Ba1 local currency corporate family rating of PLDT onreview for possible upgrade.  At the same time, Moody’s affirmed PLDT’s Ba2foreign currency senior unsecured ratings, with a negative outlook.

 

On February 20, 2006, Fitch Ratings revised its outlook on PLDT’s long-term foreign currencyfrom negative to stable.  PLDT’s long-term foreign currency, global bonds andsenior notes were affirmed at “BB” and convertible preferred stock at “B+.”The revision in outlook reflects that of the outlook of the Republic of the Philippines as foreign currency and senior debt instrument ratings are constrained by thesovereign foreign currency rating.  At the same time, PLDT’s long-term localcurrency rating has been affirmed at “BB+” with a stable outlook.

 

*Off-balance Sheet Arrangements*

* *

There are nooff-balance sheet arrangements that have or are reasonably likely to have any current orfuture effect on our financial position, resultsof operations, cash flows, changes in stockholders’equity, liquidity, capitalexpenditures or capital resources that are material to investors.

 

*Equity Financing*

* *

PLDT raised Php275 million and Php274 million from theexercise by certain officers and executives of stock options in 2005 and 2004,respectively.  In addition, through our subscriber investment plan, or SIP,which provides postpaid fixed line subscribers the opportunity to buy shares ofour 10% cumulative convertible preferred stock as part of the upfront paymentscollected from subscribers, PLDT was able to raise Php59 million, Php7 millionand Php94 million in 2005, 2004 and 2003, respectively.  

* *

Cash dividend payments in 2005 amounted to Php11,173million, of which Php9,587 million and Php1,586 million were paid to common andpreferred shareholders, respectively, compared to Php1,692 million in 2004, allof which were paid to preferred shareholders of PLDT.  On March 1, 2005, PLDT declared cash dividends of Php14 per common share to holders of record as at March 31, 2005, which were paid on May 12, 2005.  This was the first cash dividenddeclaration to common shareholders in four years since April 2001.  Inaddition, on each of May 5, 2005 and November 8, 2005, PLDT declared cash dividends of Php21 per common share to holders of record as at June 3, 2005 and November 28, 2005 paid on July 14, 2005 and December 28, 2005, respectively.  On February 27, 2006, PLDT declared cash dividends of Php28 per common share to holdersof record as at March 20, 2006 paid on April 20, 2006.

 

Asat December 19, 2005, all of the 4,616,200 outstanding shares of PLDT’s SeriesIII Convertible Preferred Stock were mandatorily converted into common sharesat 1.7129 common shares for every Series III Convertible Preferred Stock resultingin the issuance of 7,907,032 common shares of PLDT.  See *Note 15 – Stockholders’Equity* to the accompanying consolidated financial statements in Item 18 forfurther discussion.  

 

Asat December 31, 2005, PLDT has 180,789,003 common shares outstanding.

 

***Contractual Obligations and Commercial Commitments***

 

*Contractual Obligations*

 

Thefollowing table discloses our contractual obligations outstanding as at December 31, 2005:

 

 

**Long-term debt**

** **

**Long-term lease obligations**

** **

**Unconditional purchase  obligations**(1)

** **

**Other long-term obligations**

** **

**Total**

**Operating**

** **

**Capital**

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

2006

Php18,797

 

Php631

 

Php895

 

Php4,969

 

Php–

 

Php25,292

2007

19,993

 

605

 

341

 

1,061

 

–

 

22,000

2008

6,633

 

486

 

14

 

1,061

 

–

 

8,194

2009

14,146

 

463

 

7

 

1,062

 

8,844

 

24,522

2010

3,386

 

392

 

8

 

1,061

 

7,046

 

11,893

2011 and onwards

49,358

 

1,059

 

435

 

3,184

 

–

 

54,036

Total

Php112,313

 

Php3,636

 

Php1,700

 

Php12,398

 

Php15,890

 

Php145,937

*____________*

*(1)   Based on the original Air TimePurchase Agreement with AIL.*

* *

*Long-termDebt Obligations*

 

Fordiscussion of our long-term debt obligations, see *Note 12 – Interest-bearingFinancial Liabilities* to the accompanying consolidated financial statementsin Item 18.

 

*Long-termOperating Lease Obligations*

 

***Digital Passage Service Contracts.***   PLDT has existing Digital Passage Service Contractswith foreign telecommunication administrations for several dedicated circuitsto various destinations for ten to 25 years expiring at various dates.  As at December 31, 2005, PLDT’s aggregate remaining obligation under these contracts amounted toapproximately Php17 million.

 

***LicenseAgreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius****.*PLDTentered into a license agreement with Mobius pursuant to which Mobius hasgranted PLDT a non-exclusive, non-assignable and non-transferable license forthe use of computer software components.  Under this agreement, Mobius is alsorequired to provide maintenance services for a period of one year at noadditional maintenance charge.  PLDT may purchase maintenance services uponexpiration of the first year for a fee of 15% of the current published licensefee.  As at December 31, 2005, PLDT’s aggregate remaining obligation under thisagreement was approximately Php30 million.

 

***OtherLong-term Operating Lease Obligations***.   The PLDT Group has various long-term lease contracts for periodsranging from two to ten years covering certain offices, warehouses, cell sites,telecommunication equipment locations and various office equipment.  Inparticular, Smart has lease obligations aggregating Php3,272 million as at December 31, 2005 in respect of office and cell site rentals with over 3,000 lessorsnationwide, PLDT has lease obligations aggregating Php119 million as at December 31, 2005, and ePLDT has lease obligations aggregating Php198 million as at December 31, 2005 in respect of certain office space rentals.

 

*Long-term Capital Lease Obligations*

 

For a discussion of our long-term capital leaseobligations, see *Note 12 – Interest-bearing Financial Liabilities* to theaccompanying consolidated financial statements in Item 18.

 

*Unconditional PurchaseObligations*

 

***Airtime Purchase Agreement with AIL***.PLDT is a party to a Founder NSP Air Time Purchase Agreement entered into withAIL in March 1997, which was amended in December 1998, under which PLDT wasgranted the exclusive right to sell AIL services in the Philippines.  Inexchange, the Air Time Purchase Agreement required PLDT to purchase from AIL aminimum of US$5 million worth of air time annually over ten years commencing onJanuary 1, 2002, the date of commercial operations of the Garuda I Satellite.  

 

In the event AIL’s aggregate billing revenue is lessthan US$45 million in any given year, the Air Time Purchase Agreement statesthat PLDT has to make supplemental air time purchase payments not to exceedUS$15 million per year during the ten-year term.

 

PLDTand the other founder NSPs are endeavoring to amend the Air Time PurchaseAgreement due to the occurrence of partial satellite loss, changes in theprimary business of ACeS and other events affecting the business.

 

InMarch 2003, PLDT, together with the other founder NSPs, entered into aStandstill Agreement with AIL suspending the application and enforcement of theminimum and supplemental air time payments under the original Air Time PurchaseAgreement.  The parties agreed that AIL shall provide PLDT and the otherfounder shareholders, with unlimited use of air time for the year 2003 inexchange for a fixed fee in the amount of US$3.8 million for PLDT.  Moreover,PLDT was also obliged to purchase from AIL 13,750 satellite phone units in 2003at US$395 F.O.B. per unit, subject to quarterly price adjustments.  The partiesto the Standstill Agreement also agreed to negotiate in good faith and usetheir best efforts to reach an agreement on a revised Air Time PurchaseAgreement before November 15, 2003 that would cover, among other things, theamended minimum and supplemental air time payment provisions subject to theapproval of AIL’s creditors.  

 

OnFebruary 10, 2004, notwithstanding the ongoing negotiations, AIL advised PLDTof the termination of the Standstill Agreement and the reinstatement of theterms under the original Air Time Purchase Agreement effective January 1, 2002following the lapse of the November 15, 2003 deadline set in the StandstillAgreement for the negotiation of a revised Air Time Purchase Agreement.Negotiations are continuing with the relevant parties towards an amicablesettlement of this matter.  See *Note 16 – Related Party Transactions* and*Note 22 – Provisions and Contingencies*to the accompanying consolidatedfinancial statements in Item 18 for further discussion.  

 

Asat December 31, 2005, PLDT’s aggregate remaining minimum obligation under theoriginal Air Time Purchase Agreement was approximately Php11,120 million.  

 

***LicensePurchase Agreement with I-Contact Solutions Pte. Ltd****.*  On April 2, 2003, iPlus, a wholly-owned subsidiary of ePLDT and the Philippines’ pioneer in IP-based IT response center, entered into an application services provider,or ASP, and reseller contract with I-Contact Solutions Pte. Ltd., or I-Contact,of Singapore.  Under the agreement, iPlus will purchase licenses of the CosmoCallUniverseTM IP-based contact center services.  CosmoCall Universe supportsmulti-channel customer interactions including telephone, web chat, web voice,web video, web collaboration, e-mail and voicemail in one high capacity, highavailability, multi-tenant platform.  CosmoCall Universe is a complete, unifiedcontact center suite that includes ACD, IVR, CTI, predictive dialing,multimedia recording and a complement of other management applications.  Theaggregate value of these licenses is US$2.1 million and these licenses will bedelivered quarterly over a two-year period.  Further to the agreement,I-Contact will appoint iPlus as the exclusive reseller and ASP for thePhilippine market and will provide iPlus with necessary support in terms ofsales, marketing, and technical services.  Effective March 30, 2004, I-Contact agreed to amend the agreement and waived all financial obligations andcommitted seats requirement over the two-year period.  iPlus will pay all itsremaining obligations pertaining only to the 300 seats delivered by I-Contact.

 

***Sale******and Purchase Agreement with******Smart Broadband**.*For a discussion of our sale and purchase agreementwith Smart Broadband with a remaining obligation of Php1,278 million as atDecember 31, 2005, see *Note 9 – Goodwill and Other Intangible Assets*to the accompanyingconsolidated financial statements in Item 18.

 

*Other Long-term Obligations*

 

***Mandatory Conversion and Purchase of Shares***.   As at December 31, 2005, PLDT had issued a totalof 3 million shares of Series V Convertible Preferred Stock, 5 million shares ofSeries VI Convertible Preferred Stock and 4 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58 million shares ofSeries K Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel adopted in June 2001.  

 

Eachshare of Series V, VI and VII Convertible Preferred Stock is convertible at anytime at the option of the holder into one PLDT common share.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stocks and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to PLDTcommon shares.  Under a put option exercisable for 30 days, holders of commonshares received on mandatory conversion of the Series V, VI and VII ConvertiblePreferred Stocks will be able to require PLDT to purchase such PLDT commonshares for Php1,700 per share, US$36.132 per share, and JPY4,071.89 pershare, respectively.  

 

As at December 31, 2005, 2,480,553 shares of Series VConvertible Preferred Stock and 896,190 shares of Series VI ConvertiblePreferred Stock had been converted to PLDT common shares.  As at December 31, 2005, 240,887 shares of Series V, 4,398,914 shares of Series VI and 3,842,000shares of Series VII Convertible Preferred Stocks remained outstanding.  Theaggregate value of the put option based on outstanding shares as at December31, 2005 was Php15,890 million, of which Php8,844 million is puttable on June4, 2008 and Php7,046 million on June 4, 2009, if all of the outstanding sharesof Series V, VI and VII Convertible Preferred Stocks were mandatorily convertedand all the underlying common shares were put to PLDT.  The market value of theunderlying shares of common stock was Php15,564 million, based on the marketprice of PLDT common shares of Php1,835 per share as at December 31, 2005.

 

Commercial Commitments

 

As at December 31, 2005, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php1,493 million.These commitments will expire within one year.

 

Impact of Inflation and Changing Prices

 

Inflationcan be a significant factor in the Philippine economy, and we are continuallyseeking ways to minimize its impact.  In recent periods, we do not believeinflation has had a material impact on our operations.  The average inflationrate in the Philippines in 2005 was 7.6%, compared to 6.0% in 2004.

 

Other Information

 

*ePLDT’s ProposedAcquisition of SPI Technologies*

 

On May 25, 2006, we announcedthat ePLDT and SPI Tech, L.P. entered into a non-binding letter of interest inrespect of a potential acquisition by ePLDT of 100% of SPI, one of the leadingpure-play BPO companies and independent BPO service providers in the world. Formore information about the possible acquisition, see “Item 4. Information on the Company—Organization.”****

 

*Smart’s 20% Acquisition of WolfPac*

 

On May 8, 2006, Smart signed a share purchaseagreement to acquire the remaining 20% equity interest in Wolfpac, a companyengaged in the business of consumer mobile applications software developmentand content development.  Smart acquired an 80% equity interest in Wolfpacin October 2003.

 
*ePLDT’s Investment in Philweb*

 

On May 5, 2006, ePLDT and Philweb Corporation, or Philweb, signed an investmentagreement and subscription agreement for ePLDT to invest in and subscribe tonewly issued common shares equivalent to 20% of Philweb’s outstanding commonstock for an aggregate amount of Php502.4 million.  Philweb is primarilyengaged in Internet-based gaming and is currently expected to enable the PLDTGroup to gain a firm hold on legitimate gaming content for the PLDT Group’scellular, fixed line and wireless broadband businesses thereby increasing thePLDT Group’s usage of its various network resources. 

 
*Launch of Pwede! Card*

 
On May 5, 2006, PLDT and Smart launched the *Pwede! Card*, a convergent product madepossible by our NGN capability.  *Pwede! Card* is the firstreloadable PIN-based prepaid card that provides access to a variety of voiceand Internet services at affordable rates.  *Pwede! Card* isapplicable to a host of fixed line and wireless services including local,domestic and international long distance calls, text messaging, payphones andprepaid Internet connection.

 

*ePLDT’s Acquisition of Level Up!*

 

On February 16, 2006, ePLDT acquired a 60% equityinterest in Level Up!, a leading publisher of online games in the Philippines with about an 80% share of the online gaming market.  The acquisition ofLevel Up!, together with netGames, ePLDT’s online gaming subsidiary, willstrengthen the position of ePLDT as the dominant online gaming company in thecountry.

 

*Strategic PartnershipAmong PLDT, NTT Communications and DoCoMo*

 

Inconnection with the Stock Sale and Purchase Agreement dated January 31, 2006between NTT Communications and DoCoMo, pursuant to which DoCoMo on March 14,2006 acquired from NTT Communications approximately 12.6 million common sharesof PLDT, representing approximately 7% of the outstanding shares of PLDT’scommon stock, PLDT, the FP Parties, NTT Communications and DoCoMo entered intoa Cooperation Agreement, dated January 31, 2006.  Under the CooperationAgreement, the relevant parties extended certain rights of NTT Communicationsthereunder to DoCoMo and agreed to enter into certain strategic businessrelationships in the field of mobile communication services.  For moreinformation about the Cooperation Agreement, see “Item 7. Major Shareholdersand Related Party Transactions – Related Party Transactions – CooperationAgreement with DoCoMo.”

 

Item 6.        Directors,Senior Management and Employees

** **

Directors, Key Officers and Advisors

 

The names, ages, positions and periods of service ofthe directors (including independent directors), key officers and advisors ofPLDT as at May 31, 2006 are as follows:

 

** **

**Name**

** **

** **

**Age**

** **

** **

**Position(s)**

** **

**Period during which individual has served as such**

Manuel V. Pangilinan

 

59

 

Director 

 

November 24, 1998 to present

 

 

 

 

Chairman of the Board 

 

February 19, 2004 to present

Napoleon L. Nazareno

 

56

 

Director

 

November 24, 1998 to present

 

 

 

 

President and Chief

 

February 19, 2004 to present

 

 

 

 

Executive Officer 

 

 

Antonio O. Cojuangco

 

54

 

Director

 

April 21, 1982 to present

Helen Y. Dee

 

61

 

Director

 

June 18, 1986 to present

Corazon S. de la Paz 

 

65

 

Director

 

September 25, 2001 to present

Albert F. del Rosario

 

66

 

Director

 

November 24, 1998 to present

Ray C. Espinosa

 

49

 

Director

ePLDT President

 

November 24, 1998 to present

July 1, 2000 to present

Rev. Fr. Bienvenido F. Nebres, S.J. 

 

65

 

Independent Director

 

November 24, 1998 to present

Pedro E. Roxas

 

50

 

Independent Director

 

March 1, 2001 to present

Oscar S. Reyes 

 

60

 

Independent Director

 

April 5, 2005 to present

Tatsu Kono(1)

 

53

 

Director

 

March 28, 2006 to present

Shigeru Yoshida

 

56

 

Director

 

March 31, 2004 to present

Teresita T. Sy-Coson(2)

 

55

 

Independent Director

 

June 8, 2004 to present

Ma. Lourdes C. Rausa-Chan

 

52

 

Corporate Secretary

Senior Vice President, Corporate Affairs and Legal Services Head

 

November 24, 1998 to present

January 5, 1999 to present

Anabelle L. Chua

 

45

 

Treasurer

 

February 1, 1999 to present

 

 

 

 

Senior Vice President 

Corporate Finance and  Treasury Head

 

February 26, 2002 to present 

March 1, 1998 to present

Rene G. Bañez

 

51

 

Senior Vice President Chief Governance Officer

 

January 25, 2005 to present

October 5, 2004 to present

George N. Lim

 

53

 

Senior Vice President  Network Services Head

 

February 26, 1999 to present

February 1, 2003 to present

Claro Carmelo P. Ramirez

 

46

 

Senior Vice President 

 

July 1, 1999 to present

 

 

 

 

Retail Business Head

 

February 1, 2003 to June 15, 2004

 

 

 

 

International and Carrier  Business Head

 

June 16, 2004 to December 4, 2005

 

 

 

 

Consumer Affairs Head

 

December 5, 2005 to present

Victorico P. Vargas

 

54

 

Senior Vice President Human Resources Head

 

February 15, 2000 to present 

Rosalie R. Montenegro

 

57

 

Senior Vice President Call Center Business Head

 

July 10, 2000 to present

February 1, 2003 to present

Alfredo S. Panlilio

 

42

 

Senior Vice President

 

May 8, 2001 to present

 

 

 

 

International and Carrier Business Head

 

February 1, 2003 to June 15, 2004

 

 

 

 

PLDT Global Corporation President

 

June 16, 2004 to present

Ernesto R. Alberto

 

45

 

Senior Vice President  Corporate Business Head

 

May 15, 2003 to present

 

Menardo G. Jimenez, Jr.

 

43

 

Senior Vice President

 

December 9, 2004 to present

 

 

 

 

Corporate Communications and Public Affairs Head

 

December 1, 2001 to June 15, 2004

 

 

 

 

Retail Business Head

 

June 16, 2004 to present

Jun R. Florencio

 

50

 

Senior Vice President

 

June 14, 2005 to present

 

 

 

 

Audit and Assurance Head 

 

September 1, 2000 to February 15, 2006

 

 

 

 

Internal Audit and Fraud Risk Management Head

 

February 16, 2006 to present

Celso T. Dimarucut

 

44

 

First Vice President

 

January 31, 2003 to present

 

 

 

 

Financial Reporting and Control Head

 

August 16, 2000 to present

Christopher H. Young

 

47

 

Chief Financial Advisor 

 

November 24, 1998 to present

Donald J. Rae

 

43

 

Chief Operations Advisor of Smart

 

January 1, 1999 to present

Rolando G. Peña

 

44

 

Network Services Head of Smart

 

September 1, 1994 to present

Ramoncito S. Fernandez

 

49

 

Administration and Materials Management Head of Smart 

 

June 16, 2000 to present

George H. Tan

 

46

 

ePLDT Chief Finance Officer

 

September 15, 2000 to present

__________

*(1)    **Mr. Kono was elected to fillthe vacancy resulting from Mr. Haruhiko Yamada’s resignation on March 27,2006.  Mr. Yamada was elected on August 4, 2005 to replace Mr. Sadao Maki andhad served on the board until March 27, 2006.*

*(2)    **All of the incumbentdirectors/independent directors, except for Ms. Teresita T. Sy-Coson, have beenre-elected at the annual meeting of shareholders held on June 13, 2006.  Mr.Alfred Vy Ty was elected as independent director in lieu of Ms. Teresita T.Sy-Coson who was not seeking re-election in order to focus on her variousduties under the SM Group of Companies.*

 

Under the Shareholders Agreemententered into among First Pacific, NTT Communications and NTTC-UK on September 28, 1999, as amended by the Cooperation Agreement dated January 31, 2006, NTT Communications is entitled to nominate two directors to the PLDT board of directorsand First Pacific and its affiliates are entitled to nominate six directors.The Shareholders Agreement also entitles NTT Communications to nominate twodirectors to the board of directors of Smart and, subject to specifiedconditions, one member to the board of directors of all other PLDTsubsidiaries.  As a result of the Cooperation Agreement, in respect of NTTCommunications’ right to nominate two directors to each of the board ofdirectors of PLDT and Smart, respectively, NTT Communications and the FPParties agreed to vote as a PLDT shareholder, lobby the directors of PLDT andotherwise use reasonable efforts to procure a shareholders’ vote in favor ofreplacing on each of the board of directors of PLDT and Smart, respectively,one NTT Communications nominee with one DoCoMo nominee.  Under the ShareholdersAgreement, NTT Communications is also entitled to appoint members or advisorsof certain PLDT management and board committees, including the audit,governance and nomination, executive compensation and finance committeesdescribed below under “— Audit, Governance and Nomination, ExecutiveCompensation and Finance Committees,” and as a result of the CooperationAgreement, the FP Parties and NTT Communications agreed to use reasonableefforts to procure that DoCoMo be entitled to appoint one individual, who maybe replaced at any time, to attend any board committee of PLDT as a member,advisor or observer.  Upon NTT Communications, DoCoMo and their subsidiariesowning in the aggregate 20% or more of the shares of PLDT’s common stock andfor as long as NTT Communications, DoCoMo and their subsidiaries continue toown in the aggregate 17.5% of the shares of PLDT’s common stock thenoutstanding, DoCoMo will be entitled to nominate one additional DoCoMo nomineeto the board of directors of each of PLDT and Smart.   Under the ShareholdersAgreement and the Cooperation Agreement, each party has agreed, under certaincircumstances, to vote its shares of common stock in favor of the nomineesdesignated by the other parties. For more information about the CooperationAgreement, see “ Item 7. Major Shareholders and Related Party Transactions –Related Party Transactions – Cooperation Agreement with the FP Parties, NTTCommunications and DoCoMo.”

 

The business address of Donald J.Rae, Ramoncito S. Fernandez and Rolando G. Peña is Smart Tower II, Ayala Avenue, Makati City, Philippines and the business address of George H. Tan is L.V. Locsin Building, 6752 Ayala Avenue, Makati City.  The business address of each ofthe other directors, key officers and advisors identified above is the Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

 

The following is a brief description of the businessexperience during the past five years of each of our directors, key officersand advisors.

** **

**Mr.Manuel V. Pangilinan** is the chairmanof our board and the managing director of First Pacific.  He assumed thechairmanship of our board in February 2004 after serving as president and chiefexecutive officer for over five years since November 1998.  During hispresidency, he led the successful transformation of PLDT from a traditionalplain old telephony service (voice) into a convergent voice, data, video(multi-media) service.  He is the chairman of the Governance and NominationCommittee of PLDT.  He is also the chairman of the boards of Smart, Piltel,ePLDT and Metro Pacific Corporation, and the president commissioner of P.T.Indofood Sukses Makmur tbk.  He also holds directorships in PhilippineTelecommunications Investment Corporation, Negros Navigation Co., Inc., MetroAsia Link Holdings, Inc., Enterprise Investments Holdings, Inc. and severalproperty development and management companies.  He founded and was the ManagingDirector of First Pacific from 1981 and served as its executive chairman fromFebruary 1999 until he was re-appointed as managing director in June 2003.  In2005, he was named “Management Man of the Year,” a prestigious award that theManagement Association of the Philippines bestows on individuals in thebusiness community or government for attaining unquestioned distinction in thepractice of management and for contributing to the country’s progress.  He waschosen for, among his other achievements, engineering the turnaround of PLDTand Piltel through a disciplined convergence strategy consisting ofconsolidation, diversification and expansion, spearheading PLDT’s emergence asone of Asia’s most recognized, admired, innovative and best performingtelecommunication companies, spurring investor interest in the Philippines bybringing First Pacific and other foreign investors into the Philippines, beingan exemplary Filipino capable of effective and ethical leadership and ofcompeting with the best in the international business community, and for an outstandingcareer that spans business, academe, charitable, non-government, arts andculture, sports and health organizations.  

 

**Mr.Napoleon L. Nazareno** is the president and chief executive officer of PLDTeffective February 19, 2004 and concurrently the president and chief executiveofficer of Smart and Piltel.  He is the chairman of the board of WolfpacMobile, Inc., Smart Broadband, Inc. (formerly Meridian Telekoms, Inc.,) I-ContactsCorporation and the president of ACeS Philippines.  He also holds directorshipsin Philippine Telecommunications Investment Corporation and some subsidiariesof PLDT, namely, ePLDT and Mabuhay Satellite.  His business experience spansover 30 years and cuts across a broad range of industries, namely, packaging,bottling, petrochemicals, real estate and, in the last decade,telecommunications and information technologies.  In November 2004, Mr.Nazareno was appointed by President Gloria Macapagal-Arroyo as Private SectorRepresentative of the Public-Private Sector Task Force for the Development ofGlobally Competitive Philippine Service Industries.  He was voted Best ChiefExecutive Officer in the Philippines at the 2004 and 2005 Best-ManagedCompanies and Corporate Governance Polls conducted by *Asiamoney,*one of Asia’s most influential magazines.  

 

**Mr.Antonio O. Cojuangco** is the president and chief executive officer of thetelevision network ABC-5, the chairman of the Bank of Commerce, Bank ofCommerce Investment Corporation and CAP Life Insurance Corporation.  He is amember of the Finance Committee of PLDT.  He is a director of C&OInvestment Realty Corporation, Kuok Phil. Properties, Inc. and PhilippineTelecommunications Investment Corporation.  He served as chairman of the boardof PLDT from November 1998 to February 2004 and as president and chiefexecutive officer of PLDT for over 12 years until November 1998.  

 

**Ms.Helen Y. Dee** is the chairperson and president and/or chiefexecutive officer of Hydee Management & Resources, Inc. and House ofInvestments, Inc. Tameena Resources, Inc., Grepalife Asset ManagementCorporation and Grepalife Fixed Income Fund Corporation.  She is alsochairperson of Landev Corporation, Manila Memorial Park, Inc., MapuaInformation Technology Center, Inc., Hi-Eisai Pharmaceuticals, Inc. UniversalMalayan Reinsurance Corporation and Lifetime Plans, Inc.  She is the presidentof Moira Management, Inc., Equitas Insurance Brokers, Inc. and YGC CorporateServices, Inc.  She is the vice chairperson of Zurich Insurance (Taipei) Ltd. and also sits on the boards of EEI Corporation, Pan Malayan Management andInvestment Corp., Petro Energy Resources Corp., Nippon Life Insurance Co.,South Western Cement Corp., Seafront Resources Corp., Malayan Insurance Co.Inc., MICO Equities, Inc., Hermoza Ecozone Development Corporation. and LaFuneraria Paz, Inc.

 

**Ms.Corazon S. de la Paz** is the vicechairperson of the Social Security Commission and the president and chiefexecutive officer of the Social Security System.  She has been electedpresident of the International Social Security Association, an associationbased in Geneva, Switzerland, to serve as such for a three-year term commencingin September 2004.  She is also the chairman of the Finance Committee and anadvisor to the Audit Committee of the board of directors of PLDT.  Until June 30, 2001, she was the senior partner and the chairperson of Joaquin Cunanan &Co., a member firm of PricewaterhouseCoopers Worldwide.  She is a director ofSan Miguel Corporation, Philex Mining Corporation, Republic Glass Holding Corp.,PCI Leasing and Finance, Inc., PCI Capital Corporation, Equitable Cardnetwork,Inc., and Ionics Inc.  She is also a trustee of several educational andnon-profit organizations.

 

**Mr.Albert F. del Rosario** is the Philippine Ambassador Plenipotentiary andExtraordinary to the United States of America.  He is the chairman of the boardof Gotuaco del Rosario and Associates, Inc. and Philippine IndocoilCorporation, the vice chairman of the board of Asia Traders InsuranceCorporation, and the president of ADR Holdings, Inc. and ARS ReinsuranceBrokers, Inc.  He is a director of First Pacific and a Commissioner of P.T.Indofoods Sakses Makmur Tbk.  He is also the chairman of the Board of Trusteesof the PLDT Beneficial Trust Fund and the Executive Compensation Committee ofthe Board of Directors of PLDT.  Mr. del Rosario also sits on the boards ofInfrontier (Philippines) Inc., Philippine Telecommunications InvestmentCorporation, Smart Communications Holdings, Inc., LMG Chemicals Corporation,Pacific Plaza Condominium Corporation, Pacific Plaza Towers CondominiumCorporation and Six Harmonies Holdings, Inc.   

 

**Atty.Ray C. Espinosa** is the president of ePLDT, Wolfpac and Philippine HomeCable Holdings, Inc. He is the chairman of the subsidiaries of ePLDT, namelyParlance, Vocativ, Ventus, ePDS, Inc., mySecureSign, Inc., iPlus IntelligentNetworks, Inc., Infocom, Sidera Technologies, Inc., Digital Paradise andnetGames, Inc.  He is a member of the boards of BayanTrade Dotcom, Inc., CyberBay Corporation, Nation Broadcasting Corporation, Enterprise InvestmentHoldings, Inc, Unilink Communications Corporation and some of its subsidiaries,Netopia Computer Technologies, Inc., and Stradcom Corporation.  He isvice-chairman of PLDT Beneficial Trust Fund.  Until June 30, 2000, he was a partner and member of the executive committee of the law firm SyCip SalazarHernandez & Gatmaitan.

** **

**Rev.Fr. Bienvenido F. Nebres, S.J.** is the president of the Ateneo de Manila Universityand a member of the boards of trustees of the Asian Institute of Management andseveral other private educational institutions.  He is the chairman of theAudit Committee and a member of the Governance and Nomination Committee of theboard of directors of PLDT.  

 

**Mr.Pedro E. Roxas** is the chairman and/or chief executive officer ofvarious business organizations in the fields of agri-business, sugarmanufacturing and real estate development including Roxas Holdings, Inc., CADPGroup Corp., Club Punta Fuego, Roxaco Land Corporation, Roxas & Company,Inc. and Jade Orient Sugar Corp.  He holds directorships in BDO Private Bank, BatangasAssets Corporation and Hawaiian Philippine Sugar Co.  Mr. Roxas is a trusteeand/or officer of several non-profit organizations.  He serves as a member ofthe Audit Committee and Executive Compensation Committee of the Board ofDirectors of PLDT. 

 

**Mr. Oscar S. Reyes** is the Chairman****of Unicapital Securities, Inc., Actron Industries, Inc. and Link Edge,Inc.  He serves as a member of the Audit, Governance and Nomination and ExecutiveCompensation Committees of the Board of Directors of PLDT.  He also holdsdirectorships in Bank of the Philippine Islands, CEOs, Inc., DMCI Holdings,Inc., Level Up!, Inc., Manila Water Corporation, Universal Robina Corporation,Sunlife of Canada (Philippines) and of other private corporations.  He was amember of the Advisory Board of PLDT for four years until April 2005.  Mr.Reyes was the Country Chairman of the Shell Companies in the Philippines from 1997 to 2001 and concurrently the Managing Director of Shell PhilippinesExploration B.V. until 2002.  From 2002 to 2004, he served as the ManagementAdviser of Shell Philippines Exploration B.V. and as CEO Adviser of PilipinasShell Petroleum Corporation.  

** **

**Mr.Shigeru Yoshida** is a vice president for System Integration andInternational Network Service Business of NTT Worldwide TelecommunicationsCorporation, or NTT Worldwide.  From 2001 to 2003, he was the vice president ofthe Solutions Division and led the strategic planning and project developmentof “e-Japan” system integration, a governmental program to enhance Japanesenational IT infrastructure.  He headed the Business Users, Consumers and OfficeBusiness Division and managed the sales activity of Arcstar network andinternational telephone service from 2000 to 2001.  Prior to that, he worked atthe business communications headquarters of NTT Worldwide and headed the globalprivate network sales activities for big customers.  He is an advisor to theAudit Committee and Finance Committee and a member of the ExecutiveCompensation Committee and Governance and Nomination Committee of the Board ofDirectors of PLDT.

 

**Mr.Tatsu Kono** joined DoCoMo in 2000 in theposition of executive director of the Global Investment Group.  In 2003, Mr.Kono assumed his present position as Managing Director of DoCoMo’s CorporateSales Department, Corporate Marketing Division.  Prior to joining DoCoMo, heheld various positions in Kokusai Denshin Denwa Co., Ltd., from 1989 to 2000.  

 

**Ms.Teresita T. Sy-Coson**is the presidentof Shoe Mart, Inc., or SM, a company engaged in department store operations andthe executive vice president and director of SM Prime Holdings, Inc., a malldeveloper and operator.  She is the executive chairman of Supervalue, Inc., thechairman of Banco de Oro Universal Bank, the vice chairman of SM InvestmentsCorporation and a director of First Asia Realty Development Corporation.  She hasworked with the SM Group of Companies for over 30 years.  She is a member ofthe Finance Committee and the Governance and Nomination Committee of the Boardof Directors of PLDT.  She also holds directorships in Asia-Pacific ComputerTechnology Center, Inc., BDO Capital Insurance Brokers, First Asia RealtyDevelopment Corp. and other private institutions. 

 

**Mr. AlfredVy Ty******is the vice chairman of Toyota Motor PhilippinesCorporation, the president of Federalland, Inc. and Asia Pacific Top ManagementInternational Resources Corp., the general manager of ASPAC, Shanghai and theCorporate Secretary of Metropolitan Bank and Trust Corporation.  He is also adirector of Mirant Global Corporation.  He obtained his Bachelor of ScienceDegree in Business Administration from the University of Southern California.

 

**Atty.Ma. Lourdes C. Rausa-Chan**is seniorvice president for corporate and legal affairs and the general counsel andcorporate secretary of PLDT. She was the group vice president for legalaffairs, and the corporate secretary of some subsidiaries, of Metro PacificCorporation prior to joining PLDT in November 1998.  She served as a directorof PLDT from March 2000 to February 2001 and from June to December 2002.  Ms.Rausa-Chan also serves as corporate secretary of several subsidiaries of PLDT.

 

**Ms.Anabelle L.****Chua** is the treasurer of PLDT and senior vice president forPLDT’s corporate finance and treasury sector.  She concurrently serves as the chieffinancial officer of Smart.  She was a vice president at Citibank, N.A. whereshe worked for ten years prior to her appointment as first vice president inMarch 1998, as treasurer in February 1999 and as a senior vice president on February 26, 2002.  She has over 15 years of work experience in the areas of corporatefinance, treasury, financial control and credit risk management.  Ms. Chua iscurrently a director of the Philippine Stock Exchange, Inc., Smart, Piltel,ePLDT and several subsidiaries of ePLDT.  She is also a member of the board oftrustees of the PLDT Beneficial Trust Fund.  

 

**Mr.Rene G. Bañez**is the chief governanceofficer of PLDT.  He served as Commissioner of the Philippine Bureau ofInternal Revenue from February 2001 to August 2002.  Prior to that, he was the headof support services and tax management group of PLDT from January 1999 toJanuary 2001.  He served as group vice president for tax affairs of MetroPacific Corporation for three years until December 1998.  He is a non-votingmember of the Governance and Nomination Committee of the Board of Directors ofPLDT.

 

**Mr.George N. Lim** is senior vice president for the network servicesgroup of PLDT.  He has over 25 years of work experience in telecommunicationsmanagement.  Prior to his appointment as head of Network Services in February2003, he served as head of network development and provisioning from February1999 and as head of marketing from December 1993.  He is a director of somesubsidiaries of PLDT and Philippine Home Cable Holdings, Inc.  

 

**Mr.Claro Carmelo P. Ramirez** is senior vice president for consumer affairseffective in December 2005.   He headed the retail business group of PLDT from February2003 until his appointment as international and carrier business group head inJune 2004.  He has over 20 years of work experience in the field of marketing.He worked as associate director for Colgate Palmolive Company, Global BusinessDevelopment in New York, and as marketing director for Colgate Palmolive Argentina, S.A.I.C.  Prior to his appointment as a senior vice president of PLDT in July1999, he was the marketing director of Colgate Palmolive Philippines, Inc.  Heis a director of some subsidiaries of PLDT.

 

**Mr.Victorico P. Vargas** is senior vice president for human resources of PLDT.He has over 20 years of work experience in various industries (insurance,consumer goods, real estate, banking and finance, and telecommunications/IT) inthe area of human resource management.  Prior to joining PLDT in February 2000,he was the country human resources director of Citibank N.A., Manila, and spenttwo years outside the Philippines as country human resources director ofCitibank, N.A., Bangkok.  He is a director of some subsidiaries of PLDT and isa non-voting member of the Governance and Nomination Committee of the Board ofDirectors of PLDT.

 

**Ms.Rosalie R. Montenegro** concurrently serves as president of Vocativ, Parlanceand Ventus which are wholly-owned subsidiaries of ePLDT, engaged in the callcenter business.  Prior to her appointment as a senior vice president in July2000, she served as consumer banking head of ABN-AMRO Savings Bank and as vicepresident for remote banking of ABN-AMRO Consumer Bank, Singapore RegionalOffice from 1997 to 1999.  She was vice president for global consumer banking(CitiPhone banking) and service quality director of Citibank N.A. from 1985 to1996 servicing both banking and the credit cards businesses.  Ms. Montenegro holds directorships in somesubsidiaries of PLDT and ePLDT.

 

**Mr.Alfredo S. Panlilio** was senior vice president for the international andcarrier business group and previously head of the corporate business group ofPLDT.  He is currently the president of PLDT Global Corp.  He has over 15 yearsof work experience in the field of business development and informationtechnology.  He held management positions at IBM Philippines, Inc. and was thevice president for business development of the Lopez Communications Group(ABS-CBN Broadcasting, BayanTel and SKYCable) prior to joining PLDT in July1999.  Mr. Panlilio is also a director of some subsidiaries of PLDT and PLDTGlobal.

 

**Mr.Ernesto R. Alberto** is senior vice president for the corporate businessgroup of PLDT.  He has over 20 years of work experience in the area ofcorporate banking, relationship management and business development.  Prior tojoining PLDT in May 2003, he was a vice president and the group head of thenational corporate group of Citibank N.A., Manila from 1996 to 2003, andpreviously served as vice president and group head of the relationshipmanagement group of Citytrust Banking Corporation.  Mr. Alberto is a directorof some subsidiaries of PLDT.

 

**Mr.Menardo G. Jimenez, Jr.** is senior vice president for the retail business groupof PLDT.  He managed various broadcasting and production companies in radio,television and stage-theater prior to his appointment as corporate communicationsand public affairs head of PLDT in December 2001.  His business experiencespans more than 20 years in film and cinema, theater, television advertising,publishing, broadcasting, education and, recently, in the telecommunicationssector.  In 1998, Mr. Jimenez was given the Ten Outstanding Young Men (TOYM)Award in Manila for Multi-Media Achievement.  In 1999, he received his TenOutstanding Young Persons (TOYP) of the World Award for Cultural Achievement in Cannes, France.  He recently won the first CEO (Communications Excellence inOrganizations) Awards given by the International Association of BusinessCommunicators.

 

**Mr.Jun R. Florencio** is the senior vice president for PLDT’s internal audit andfraud risk management group effective February 16, 2006.  He has over 20 years of work experience in the areas of external and internal audit, creditmanagement, information technology, financial management and controllership.He joined the Company in April 1999 and served as the financial reporting and controlhead up to March 2000, then as audit and assurance head until February 15,****2006and held various positions in the finance organization of EasternTelecommunications and was the financial controller of Smart for four years untilMarch 1999.

 

**Mr.Celso T. Dimarucut** is the first vice president for PLDT’s financialreporting and control sector. Prior to joining PLDT, he was a vice presidentand the controller of Piltel and had previously served as the group financialcontroller for domestic subsidiaries of Metropolitan Bank and Trust Company.He specialized in audit, tax and business advisory services for ten yearshaving worked with an Indonesian firm Prasetio, Utomo & Co. for three yearsand with SGV & Co. for seven years.  He also serves as director ortreasurer of several of PLDT’s subsidiaries.

 

**Mr.Christopher H. Young**, our chieffinancial advisor, worked in PricewaterhouseCoopers in London and Hong Kongfrom 1979 until 1987, at which time he joined First Pacific in Hong Kong as group financial controller.  He joined Metro Pacific Corporation in 1995 asfinance director, a position he held until he joined us in November 1998.

 

**Mr.Donald J. Rae**, the chief operationsadvisor to Smart, served as the chief operating officer for TimeTelecommunications Sdn. Bhd. in Malaysia prior to joining Smart in January 1999.He also spent over ten years with Deloitte & Touche Consulting specializingin the Asian telecommunications sector.

 

**Mr.Rolando G. Peña**is the head of networkservices division of Smart.  He was firstvice president for technical operations group at Digitel, where he worked forfive years prior to his appointment as a director for Smart’s local exchange carrierservices in September 1994.  He held various positions in EasternTelecommunications Philippines, Inc. from 1982 until 1989.  He has over 22 yearsof experience in telecommunications operations, regional business and technicaland operations support.  He sits in the boards of Smart, Piltel, Wolfpac,Netopia, Smart Broadband and Mabuhay Satellite.  

** **

**Mr.Ramoncito S. Fernandez**is the head ofadministration and materials managementdivision of Smart.  He is also a member of theboard of directors of Smart, Piltel, I-Contact and Wolfpac.  Until June 2000,he was the executive vice president in charge of marketing, sales and logisticsof Starpack Philippines Corporation.  He has over 15 years of experience in materialsmanagement, industrial marketing and sales. 

** **

**Mr.George H. Tan**is the senior vicepresident - group chief finance officer for ePLDT effective August 16, 2004.  He is in charge of the overall financial management of the ePLDT groupof companies currently comprised of ePLDT, Parlance, Vocativ, Ventus, Infocom,mySecureSign, iPlus, Digital Paradise, netGames and ePDS. He also has oversightresponsibility over ePLDT's equity investments in Stradcom, Bayantrade and TechnologySupport Services, Inc., formerly First Advance Multi-Media EntertainmentCorporation.  He manages the accounting, finance, treasury and administrativesupport at ePLDT. He is actively involved in investment analysis and decisions,cost control and management, product costing and pricing of Vitro products andservices, fund raising activities, financial analysis and business reviews.  Priorto joining ePLDT in September 2000, Mr. Tan served as an executive vice presidentand chief finance officer with William, Gothong & Aboitiz, Inc., the Philippines’ largest inter-island shipping company, from 1998 to 1999.

** **

Terms of Office

** **

Thedirectors of PLDT are elected each year to serve until the next annual meetingof shareholders and until their successors are elected and qualified.  The termof office of all officers is coterminous with that of the board of directorsthat elected or appointed them.

** **

FamilyRelationships

** **

None of the directors andofficers of PLDT, except for Eriberto B. Gesalta and Elisa B. Gesalta who aresiblings, has any family relationships up to the fourth civil degree either byconsanguinity or affinity.

** **

Compensation of Key Management Personnel of the PLDTGroup

** **

Theaggregate compensation paid to our key officers, directors and advisors named above,as a group, for 2005 amounted to approximately Php299 million.  

** **

Eachof the directors, including the members of the advisory board of PLDT, isentitled to a director's fee in the amount of Php125,000 for each meeting ofthe board attended, except Manuel V. Pangilinan, who has waived his right toreceive a director's fee.  Each of the members or advisors of the audit,executive compensation, governance and nomination and finance committees isentitled to a fee in the amount of Php50,000 for each committee meetingattended.

** **

There are no agreements betweenPLDT Group and any of its directors and key officers and advisors providing forbenefits upon termination of employment, except for such benefits to which theymay be entitled under PLDT's retirement plan.

** **

Long-termIncentive Plan

 

On August 3, 2004, the Board of Directors approved the establishment ofthe Long Term Incentive Plan, or LTIP, covering a four-year period ofperformance commencing on January 1, 2004 and ending on December 31, 2007, or the Performance Cycle.

 

The LTIP is a cash plan that is intended to provide meaningful,contingent, financial incentive compensation for eligible executives, officersand advisors of the PLDT and its subsidiaries, who are consistent performersand contributors to the achievement of the long-term strategic plans andobjectives, as well as the functional strategy and goals of the PLDT Group.

 

Payment of awards under the LTIP is contingent upon the achievement ofthe PLDT common share price target and cumulative consolidated net profittarget of the PLDT Group by the end of the Performance Cycle, as approved bythe Board of Directors.

 

If the share price and profit objectives are met, the cost of the LTIP,before taxation, for the four-year Performance Cycle will be approximatelyPhp3.6 billion, which amount will represent less than 3% of the cumulativeconsolidated net profit target for the Performance Cycle.

 

The LTIP is administered by the Executive Compensation Committee whichhas the authority to determine (a) eligibility and identity of participants;(b) the award attributable to each participant based on the participant’sannual base compensation and taking into account such participant’s seniority,responsibility level, performance potential, tenure with the PLDT Group, jobdifficulty and such other measures as the Committee deems appropriate; (c) thelevel of achievement of the performance objectives; and (d) the actual awardpayable to each participant based on the level of achievement of theperformance objectives.

** **

Executive Stock Option Plan

** **

On April 27, 1999 and December 10, 1999, the board of directors andstockholders, respectively, of PLDT approved the executive stock option plancovering a total of 1,289,745 shares of common stock and the amendment of theseventh article of the Articles of Incorporation of PLDT denying thepre-emptive right of holders of common stock to subscribe for any issue of the1,289,745 shares of common stock pursuant to the executive stock option plan.

 

Stock options that were granted pursuant to the executive stock optionplan to management executives and advisors/consultants of PLDT became fullyvested on December 10, 2004.  An option holder may exercise his option topurchase that number of vested shares of common stock underlying his option, inwhole or in part, at the price at Php814 per share, subject to adjustment uponthe occurrence of specific events described in the executive stock optionplan.  The option exercise period is until December 9, 2009.  The option holder is required to give written notice of exercise to the executivecompensation committee, indicating the number of vested shares to be purchased,accompanied by payment in cash of the full amount of the purchase price forthose shares.

 

**Share Ownership******

** **

Thefollowing table sets forth information regarding ownership of our common stock,preferred stock and executive stock options as at May 31, 2006 by ourcontinuing directors, key officers and advisors.  Each individual below ownsless than 1% of our outstanding common shares and less than 1% of our preferredshares. 

** **

**Name of Owner**

**Shares of**

**Common Stock**

**Shares of**

**Preferred Stock**

**Shares of Common Stock Underlying Executive**

**Stock Options****(1)**

 

 

 

 

Manuel V. Pangilinan

211,779

360

–

Napoleon L. Nazareno

6,427

495

–

Antonio O. Cojuangco

4

4,060

–

Helen Y. Dee

22,055**(2)**

180

–

Corazon S. de la Paz

12,125,010**(3)**

–

–

Albert F. del Rosario

100,025

1,560

–

Ray C. Espinosa

11,201

–

22,042

Tatsu Kono

100

–

–

Rev. Fr. Bienvenido F. Nebres, S.J 

1,188**(4)**

–

–

Oscar S. Reyes

1

360

–

Pedro E. Roxas

1

540

–

Teresita T. Sy-Coson

101

1,060

–

Shigeru Yoshida

10

–

–

Ma. Lourdes C. Rausa-Chan

577

350

2,202

Anabelle L. Chua

2,540

–

11,738

Rene G. Bañez

–

540

–

George N. Lim

–

360

9,256

Claro Carmelo P. Ramirez

5,996

–

10,000

Victorico P. Vargas 

3,000

180

2,878

Rosalie R. Montenegro 

–

–

–

Alfredo S. Panlilio 

1

–

–

Ernesto R. Alberto

–

–

–

Menardo G. Jimenez, Jr.

22

–

–

Jun R. Florencio

15

530

1,788

Celso T. Dimarucut

1,500

460

11,518

Florentino D. Mabasa, Jr.

–

–

 

Eriberto B. Gesalta

1,302

180

–

Ramon B. Rivera, Jr.

–

–

6,817

Emiliano R. Tanchico, Jr.

1,539

–

 

Ricardo M. Sison

200

180

5,700

Miguela F. Villanueva

–

–

 

Cesar M. Enriquez

–

–

 

Raymond S. Relucio

–

–

2,552

Richard N. Ferrer

3,680

180

 

Nerissa S. Ramos

–

–

1,588

Ramon Alger P. Obias

2,531

–

–

Alfredo B. Carrera

350

–

–

Christopher H. Young

55,313(5)

–

–

Donald J. Rae

–

–

–

Rolando G. Peña

–

–

–

Ramoncito S. Fernandez

120

–

–

George H. Tan

–

530

–

_____________

 

*(1)    **As at May 31, 2006, under PLDT’s ESOP, options to purchase 88,079**shares of common stock for the key officers listed inthe table above remain unexercised.  No options have been granted tonon-executive directors.  All outstanding options are exercisable at anexercise price of Php814 per share and have an expiration date of December 10,2009.  All outstanding options were fully vested as at December 10, 2004.*

*(2)    **Includes 21,957 PLDT commonshares registered in the name of Hydee Management and Resources, Inc.  Aschairperson and president of Hydee Management & Resources, Inc., Ms. Deemay exercise voting rights in respect and may be considered to have beneficialownership of these shares.*

*(3)    **Includes 5,024,789 PLDTcommon shares registered in the name of Social Security System and****7,100,220****PLDT common shares held of record by PCD Nominee Corporation.  Ms. De laPaz, as president and chief executive officer of the Social Security System,may exercise voting rights in respect of these shares and may be considered tohave beneficial ownership of these shares.*

*(4)    **Includes 386 shares of PLDT’scommon stock registered in the name of Ateneo de Manila University and 800 sharesof PLDT’s common stock held of record by PCD Nominee Corporation.  As Presidentof the Ateneo de Manila University, Rev. Fr. Nebres may exercise voting rightsin respect of these shares and may be considered to have beneficial ownershipof these shares*.

*(5)    **The total PLDT common shareshave been lodged with the Philippine Central Depository, Inc.*

* *

Theaggregate number of common and preferred shares directly and indirectly ownedby directors, key officers and advisors listed above as at May 31, 2006 were 12,556,588and 12,105, respectively, or 6.905189%  and 0.001694% of PLDT’s outstanding commonand preferred shares, respectively. 

 

Board of Directors

* *

At least four of our directors,namely, Rev. Fr. Bienvenido F. Nebres, S.J., Oscar S. Reyes, Pedro E. Roxas andAlfred Vy Ty, are independent directors who are not officers or employees ofPLDT or any of its subsidiaries, and are free from any business or otherrelationship with PLDT or any of its subsidiaries which could, or couldreasonably be perceived to, materially interfere with the exercise ofindependent judgment in carrying out their responsibilities as directors.  The independence standards/criteria are provided in ourBy-Laws and Manual on Corporate Governance pursuant to which, in general, adirector may not be deemed independent if such director is, or in the past fiveyears had been, employed in an executive capacity by us or any companycontrolling, controlled by or under common control with us or he is, or withinthe past five years had been, retained as a professional adviser by us or anyof our related companies, or he is not free from any business or otherrelationships with us which could, or could reasonably be perceived, tomaterially interfere with his exercise of independent judgment in carrying outhis responsibilities as a director.

 

Mr. Alfred VyTy was elected at the annualmeeting of shareholders held on June 13, 2006 asindependent director in lieu of Ms. Teresita T. Sy-Coson who was not seeking re-election in order to focus on her variousduties under the SM Group of Companies.  All other directors werere-elected at such annual meeting of shareholders.

 

Audit, Governanceand Nomination, Executive Compensation and Finance Committees

 

Our board of directors isauthorized under the by-laws to create committees, as it may deem necessary.We currently have four board committees, namely, the audit, governance andnomination, executive compensation and finance committees, the purpose of whichis to assist our board of directors.  Each of these committees has aboard-approved written charter that provides for such committee’s composition,membership qualifications, functions and responsibilities, conduct of meetings,and reporting procedure to the board of directors.

 

*AuditCommittee*

 

Our audit committee is composedof three members all of whom are independent directors, namely, Fr. Bienvenido F. Nebres, S.J., who chairs the committee, Mr. Pedro E. Roxasand Mr. Oscar S. Reyes.  Mr. Shigeru Yoshida and Ms. Corazon S. de la Paz, who arenon-independent members of our board of directors and Mr. Roberto R. Romuloserve as advisors to the audit committee.  All of the members of our auditcommittee are financially literate and Ms. Corazon de la Paz is an accountingand financial management expert.

 

Asprovided for in the audit committee charter, the purposes of the auditcommittee are to assist our board of directors:

 

•        in its oversight of PLDT’saccounting and financial reporting principles and policies and internal auditcontrols and procedures;

 

•        in its oversight of the integrityof PLDT’s financial statements and the independent audit thereof;

 

•        in its oversight of PLDT’scompliance with legal and regulatory requirements; 

 

•        in its oversight of the externalauditor’s qualifications and independence; and

 

•        in its oversight of theperformance of the internal auditing organization and the external auditors.

 

Tocarry its direct responsibility for the appointment, setting of compensation,retention and removal of the external auditors, the audit committee has thefollowing duties and powers:

 

•        to review and evaluate thequalifications, performance and independence of the external auditors and the leadpartner of the external auditors;

 

•        to select and appoint the externalauditors and to remove or replace the external auditors;

 

•        to review and approve inconsultation with the head of the internal auditing organization and the chieffinancial advisor the fees charged by the external auditors for audit andnon-audit services;

 

•        to pre-approve all audit andnon-audit services to be provided by and all fees to be paid to the externalauditors;

 

•        to ensure that the externalauditors prepare and deliver annually the statement as to independence andauditors’ statement, to discuss with the external auditors any relationships orservices disclosed in such statements that may impact the objectivity, independenceor quality of services of our external auditors and to take appropriate actionin response to such statements to satisfy itself of the external auditor’sindependence;

 

•        to ensure that the externalauditors or the lead partner of the external auditors is rotated at least onceevery five (5) years; 

 

•        to have separate sessionsperiodically, with management, with the internal audit organization and withthe external auditors, where deemed appropriate, to surface issues warrantingthe attention of the audit committee; and

 

•        to resolve disagreements betweenmanagement and the external auditors regarding financial reporting. 

 

Theaudit committee also has the authority to retain or obtain advice from specialcounsel or other experts or consultants in the discharge of theirresponsibilities without the need for board approval.

 

*Governance and Nomination Committee*

 

Our governance and nomination committee is composed offive voting and two non-voting members.  Three of the voting members areindependent directors namely, Fr. Bienvenido F. Nebres, S.J., Mr. Alfred Vy Ty andMr. Oscar S. Reyes.  Mr. Alfred Vy Ty replaced Ms. Teresita Sy-Coson, followinghis election as independent director at the annual shareholders meeting held onJune 13, 2006.  Mr. Manuel V. Pangilinan who serves as chairman and Mr. ShigeruYoshida are the other voting members and Mr. Victorico P. Vargas and Mr. ReneG. Bañez are the non-voting members. 

 

Theprincipal functions and responsibilities of our governance and nomination committeeare:

 

1.       To develop and recommend to the boardfor approval and oversee the implementation of corporate governance principlesand policies;

 

2.       To review and evaluate thequalifications of the persons nominated for election as directors (includingindependent directors) or other positions requiring board appointment;

 

3.       To identify the qualified nomineesand recommend that the board select and recommend such qualified nominees forelection as directors/independent directors at the annual meeting ofshareholders; and

 

4.       To provide an assessment on our board’seffectiveness in the process of replacing or appointing new directors ormembers of the board committees.

 

*Executive CompensationCommittee*

 

Our executive compensationcommittee is composed of five members, all of whom are regular members of ourboard of directors.  Three of these five members are independent directors,namely Mr. Pedro E. Roxas, Mr. Oscar S. Reyes and Mr. Alfred Vy Ty, and two are non-independent directors,namely Mr. Albert F. del Rosario, who is chairman of the executive compensationcommittee, and Mr. Shigeru Yoshida.  Mr. Alfred Vy Ty replaced Ms. Teresita Sy-Coson, following his election as independent director at theannual shareholders meeting held on June 13, 2006.  

 

The principal functions and responsibilities of our executivecompensation committee are:

 

1.       To provide guidance to and assistour board of directors in developing a compensation philosophy or policyconsistent with our culture, strategy and control environment;

 

2.      To oversee the development andadministration of our compensation programs; and

 

3.       To review and approve corporategoals and objectives relevant to the compensation of our chief executive officer,evaluate the performance of our chief executive officer in light of those goalsand objectives, and set the compensationlevel of our chief executive officer based on such evaluation.

 

*Finance Committee*

 

Ourfinance committee is composed of five members, three of whom are regularmembers of our board of directors.  Ms. Corazon S. de la Paz, who chairs thecommittee, Mr. Antonio O. Cojuangco and Mr. Alfred Vy Ty are regular members ofour board of directors.  Mr. Alfred Vy Ty replaced Ms. Teresita Sy-Coson,following his election as independent director at the annual shareholdersmeeting held on June 13, 2006.  Mr. Christopher H. Young, our chief financialadvisor and Mr. Amado S. Bagatsing comprise the fourth and fifth members.  Mr.Shigeru Yoshida, who is a non-independent member of our board of directors,serves as an advisor to the committee.

 

Theprincipal function of our finance committee is to consider and approve ourloans, funding and financing requirements involving amounts of US$3 million orabove but less than US$5 million.

 

Directors’ Involvement in LegalProceedings

 

Our chairman,Mr. Manuel V. Pangilinan, in his capacity as Chairman of the Board of MetroPacific Corporation, a stockholder of Metro Tagaytay Land Company, Inc., orMTLCI, and four (4) other individuals are respondents in I.S. 04-A-1057 foralleged violation of Article 315(1)(b)(“estafa”) of the Revised Penal Codefiled by Mr. Vicente A. Tuason on behalf of Universal Leisure Club, Inc., orULCI, and Mr. Jose L. Merin on behalf of Universal Rightfield PropertyHoldings, Inc., or URPHI.  

 

Inthe complaint-affidavit, Messrs. Tuason and Merin alleged that, in violation ofthe trust reposed by ULCI and certain contractual commitments andrepresentations, MTLCI, with the participation and/or conformity of therespondents, misappropriated and converted Php139 million that ULCI entrustedfor the purpose of incorporating Golf Land Co., Inc., or GLCI, a corporation tobe wholly-owned by MTLCI and to which a property of MTLCI was to be transferredin exchange for shares in GLCI.  Said GLCI shares were then supposed to be transferredto ULCI.

 

Basedon his counsel’s advice, Mr. Pangilinan cannot be held liable for violatingArticle 315(1)(b) of the Revised Penal Code because no document or otherevidence has been presented to prove that Mr. Pangilinan actually participatedin the negotiation, preparation, approval, execution and/or implementation ofthe agreement/contract upon which the claims of the complainants arepurportedly based, much less that Mr. Pangilinan, with abuse of trust andconfidence, misappropriated any amounts paid by ULCI to MTLCI.

 

On March 25, 2004, Mr. Pangilinan submitted his counter-affidavit in I.S. No. 04-A-1057.  Ina Joint Resolution dated June 7, 2004, the City Prosecution Office of Makatidismissed all charges in the Estafa case against Mr. Pangilinan.

 

On November 16, 2004, ULCI, through Messrs. Tuason and Merin, filed with the DOJ aPetition for Review dated November 6, 2004 contesting the Resolution of theCity Prosecution Office.  Thereafter, complainants and respondents includingMr. Pangilinan filed a *Joint Motion to Dismiss* (with prejudice) thecharges and counter-charges subject to the investigation before the DOJ whichMotion is currently pending.

 

Employees and Labor Relations

 

Asof December 31, 2005, we had 18,926 employees within the PLDT Group.  PLDT had9,013 employees at the end of 2005, of which 46% were rank-and-file employees,50% were management/supervisory staff and 4% were executives.  This numberrepresents a decrease of 463 employees, or approximately 5%, from the stafflevel as of the end of 2004, mainly as a result of the ongoing manpowerrightsizing program.  From a peak of 20,312 at the end of 1994, PLDT’s numberof employees has declined by 11,299, or 56%, by the end of 2005.  As of December 31, 2004, we had 18,433 and 9,476 employees under the PLDT Group and PLDT,respectively. 

 

PLDThas three employee unions, the members of which in aggregate represent 38% ofthe employees of the PLDT Group.  We consider our relationship with ourrank-and-file employees’ union, our supervisors' union and our salessupervisors' union to be good.

 

On March 8, 2005, PLDT and PLDTSales Supervisors’ Union, or PSSU, concluded and signed a new three-yearCollective Bargaining Agreement, or CBA, covering the period from January 1,2005 to December 31, 2007.  This CBA provides each member monthly salaryincreases of 8% of basic pay or Php2,000, whichever is higher, for the firstyear; 10% of basic pay or Php2,700, whichever is higher, for the second year;and another 10% of basic pay or Php2,400, whichever is higher, for the thirdyear.  Other highlights of this CBA are improvements of existing benefits and aone-time signing bonus of Php33,000, including a Php3,000 goodwill bonus, foreach member of PSSU.  Furthermore, a Php4,000 one-time clothing accessoryallowance was also provided.

 

On January 20, 2005, PLDT and *Gabay ng Unyon sa Telekomunikasyon ngmga Superbisor*, or GUTS, our supervisors’ union, concluded and signed a newthree-year CBA covering the period from January 1, 2005 to December 31, 2007.This CBA provides each member monthly salary increases of 8% of basic pay orPhp2,000, whichever is higher, for 2005; 10% of basic pay or Php2,700,whichever is higher, for 2006; and another 10% of basic pay or Php2,400,whichever is higher, for 2007.  Other highlights of this CBA are improvementsof existing benefits and a one-time signing bonus of Php33,000, including aPhp3,000 goodwill bonus, for each member of GUTS.

 

On February 13, 2004, PLDT and the *Manggagawa ng Komunikasyon saPilipinas*, or MKP, our rank-and-file employees’ union, concluded and signeda new three-year CBA covering the period from November 9, 2003 to November 8,2006.  This CBA provides each member a signing bonus equivalent to one monthsalary plus Php10,000; monthly salary increases of Php1,800, Php1,850 andPhp2,450 for the first year, second year and third year, respectively; anincrease in monthly relay station allowance from Php500 to Php600; an increasein per diem from Php500 to Php570; a food station allowance of Php650 percovered employee; an increase in yearly Christmas gift certificate fromPhp6,000 to Php7,000; an increase in the amount of coverage under the grouplife insurance plan from Php400,000 to Php500,000; and an additionalcontribution of Php1 million to the Educational Loan Fund.  Other highlights ofthis CBA include emergency loan eligibility, an emergency case hospitalizationclause and additional benefits under the medical hospitalization plan forsingle members’ dependents.

 

In connection with the separation from service in 2002 of 322 employeeswho were engaged in operator-assisted call-handling units, due to redundancies,MKP brought an unfair labor practice case before the National Labor RelationsCommission, or NLRC, assailing the legality of the implemented redundancy.  On October 28, 2005, the NLRC dismissed the unfairlabor practice case ruling in favor of the validity of the redundancy.

 

Pension and Retirement Benefits

 

*Defined Benefit Plans*

* *

We have defined benefit pension plans, covering substantially all ofour employees, except Smart’s, which require contributions to be made to a separateadministrative fund.

 

PLDT has a trusteed, non-contributory defined benefit plan covering allpermanent and regular employees.  The benefit plan provides benefits uponnormal retirement beginning at age 65, early retirement beginning at age 50 orcompletion of at least 30 years of credited service, voluntary resignation withcompletion of at least 15 years of credited service, total and physicaldisability, death and involuntary separation.  Benefits are based on theemployee's final monthly basic salary and length of service.

 

The normal retirement benefit is equal to a percentage of the finalmonthly basic salary per year of credited service.  The percentage is 100% forthose with less than 15 years of service at retirement and 125% for those with15 years of service at retirement.  Thereafter, the percentage increases by 5%for every additional year of credited service up to a maximum of 200%.  Earlyretirement benefit is equal to the accrued normal retirement benefit based onsalary and service at the date of early retirement.

 

Inthe event the benefit plan's assets were insufficient to pay the requiredretirement benefits, PLDT would be obligated to fund the amount of theshortfall.  In addition, claims of PLDT's employees for retirement benefitsthat have accrued would rank above the claims of all other creditors of PLDT,in the event of PLDT's bankruptcy or liquidation.

 

Formore information about the benefit plan, see *Note 17 – Employee Benefits*tothe accompanying consolidated financial statements in Item 18.

 

Item 7.        Major Shareholders and Related PartyTransactions

 

The following table sets forth information regardingownership of shares of PLDT’s common stock as at May 31, 2006 of allshareholders known to us to beneficially own 5% or more of PLDT shares ofcommon stock.  All shares of PLDT's common stock have one vote per share.  

 

Name of Beneficial Owner

Name and Address of Record Owner and Relationship with Issuer

Citizenship

Title of Class

**Number of Shares Held**

**% of Class**

 

 

 

 

 

 

First Pacific(3)

Philippine Telecommunications Investment Corp.(1) 12/F Ramon Cojuangco

Philippine 

Common

26,034,263

14.32

24/F Two Exchange Square  8 Connaught Place, Central, 

Hong Kong

Building, Makati Avenue, Makati City 

Corporation

 

 

 

 

 

 

 

 

 

 

Metro Pacific Resources, Inc.(2)

Philippine 

Common

17,112,534

9.41

 

c/o Corporate Secretary

Corporation

 

 

 

 

18th Floor Liberty Center 

 

 

 

 

 

104 H.V. Dela Costa St.

 

 

 

 

 

Salcedo Village, Makati City

 

 

 

 

 

 

 

 

 

 

PCD Nominee Corporation(4)

See Footnote 4 below

Philippine

Common

72,125,189

39.66

G/F MSE Building

6767 Ayala Avenue, Makati City

 

Corporation

 

 

 

 

 

 

 

 

 

FMR Corp.(5)

See Footnote 5 below

U.S.

Common

9,100,890

5.00

82 Devonshire Street

 

Corporation

 

 

 

Boston, Massachusetts 02109

 

 

 

 

 

 

 

 

 

 

 

NTT Communications(6)

Same as Record Owner

Japanese 

Common

12,633,487

6.95

1-1-6 Uchisaiwai-Cho

I-Chome, Chiyoda-ku

Tokyo 100-8019, Japan

 

Corporation

 

 

 

 

 

 

 

 

 

NTT DoCoMo, Inc.(7)

Same as Record Owner

Japanese 

Common

12,633,486

6.95

41st Floor, Sanno Park Tower

 

Corporation

 

 

 

2-11-1 Nagata-cho

 

 

 

 

 

Chiyoda-ku, Tokyo 100-6150

 

 

 

 

 

Japan

 

 

 

 

 

 

 

 

 

 

 

J. P. Morgan (Hong Kong) Nominees Limited(8)

See Footnote 8 below

HongKong Corporation

Common

29,921,268

16.45

20/F Chater House 

 

 

 

 

 

8 Connaught Place, Central, Hong Kong

 

 

 

 

 

 

 

 

 

 

 

Social Security System(9)

Same as Record Owner

Philippine

Common

12,125,009

6.67

East Avenue, Diliman, Quezon City

 

Corporation

 

 

 

 

 

 

 

 

 

*(1)    **Pursuant to a resolutionadopted by the Board of Directors of Philippine Telecommunications InvestmentCorporation, or PTIC, a copy of which had been furnished to PLDT, the Presidentof PTIC, Mr. Manuel V. Pangilinan, has the continuing authority to representPTIC at any and all meetings of the stockholders of a corporation in which PTICowns of record or beneficially any shares of stock or other voting security,and to sign and deliver, in favor of any person he may deem fit, a proxy orother power of attorney, with full power of delegation and substitution,authorizing his designated proxy or attorney-in-fact to vote any and all sharesof stock and other voting securities owned of record or beneficially by PTIC atany and all meetings of the stockholders of the corporation issuing such sharesof stock or voting securities.*

* *

*(2)    **Based on the resolutions ofthe Board of Directors of Metro Pacific Resources, Inc., or MPRI, copies ofwhich had been furnished to PLDT, Mr. Manuel V. Pangilinan has been appointedas proxy or duly authorized representative of MPRI to represent and vote thePLDT common shares of MPRI in the Annual Meeting of Stockholders of PLDT.*

* *

*(3)    **First Pacific has a 24.76%economic interest and 31.36% voting interest in PLDT based on the PLDT commonshareholdings of the intermediate holding companies PTIC, MPRI, Larouge B.V.(which holds 8,479,805 shares of PLDT common stock lodged with the PhilippineDepository and Trust Co.) and Semilion Enterprises, Inc. (which holds ADRsevidencing ADSs representing 5,408,346 shares of PLDT common stock).*

* *

*(4)    **Registered owner of sharesheld by participants in the Philippine Depositary and Trust, Co., or PDTC, aprivate company organized to implement an automated book entry system ofhandling securities transactions in the Philippines.  Under the PDTCprocedures, when an issuer of a PDTC-eligible issue will hold a stockholders’meeting, the PDTC shall execute a pro-forma proxy in favor of its participantsfor the total number of shares in their respective principal securities accountas well as for the total number of shares in their client securities account.For the shares held in the principal securities account, the participantconcerned is appointed as proxy with full voting rights and powers asregistered owner of such shares.  For the shares held in the client securitiesaccount, the participant concerned is appointed as proxy, with the obligationto constitute a sub-proxy in favor of its clients with full voting and otherrights for the number of shares beneficially owned by such clients.  Based onthe information provided by PDTC to PLDT, none of the owners of the PLDT commonshares registered under the name of PCD Nominee Corporation, or PCD, owns morethan 5% of PLDT’s outstanding common stock as at May 31, 2006, except TheHongkong and Shanghai Banking Corporation, or HSBC, and Standard Chartered Bankwhich own approximately 18.81% and 5.88%, respectively, of PLDT’s outstandingcommon stock as at May 31, 2006.  The Company has no knowledge if anybeneficial owner of the shares under the HSBC Clients account and StandardChartered Bank own more than 5% of PLDT’s outstanding common stock as at May 31,2006.*

* *

*PCD account also includes 7,100,220 shares beneficiallyowned by the Social Security System, 8,479,805 shares beneficially owned byLarouge B.V., and9,100,890 sharesbeneficially owned by FMR Corp., or FMR.  Please refer to footnotes 3, 5and 9.*

* *

*(5)    **According to the Schedule 13G of FMR filed with theSecurities and Exchange Commission on February 14, 2006, FMR,**through subsidiaries, beneficially owned 9,847,130shares of PLDT’s common stock as of December 31, 2005.**Accordingto this Schedule 13G, some or all of these shares of PLDT’s common stock mayinclude shares of common stock represented by ADSs.  According to subsequentfilings of FMR with the Philippine SEC, FMR, through subsidiaries, beneficiallyowned 9,100,890 shares of PLDT’s common stock as of June 16, 2006.*

 

*(6)    **Based on publicly available information, NTTCommunications is a wholly-owned subsidiary of NTT.  Based on a certificationsigned by a duly authorized officer of NTT Communications, a copy of which hadbeen furnished to PLDT, Mr. Kenji Sato is authorized to execute for and onbehalf of NTT Communications, endorsements, transfers and other mattersrelating to the PLDT shares of common stock held by NTT Communications.  On March 14, 2006, NTT Communications transferred to DoCoMo approximately 12.6 million sharesof PLDT’s common stock, representing approximately 7% of PLDT’s outstandingshares of common stock, pursuant to the Stock Sale and Purchase Agreement dated January 31, 2006 between NTT Communications and DoCoMo.*

* *

*(7)    **DoCoMo completed the acquisition of 12,633,486 sharesof PLDT common stock from NTT Communications on March 14, 2006.  Based on publiclyavailable information, DoCoMo is a majority-owned and publicly tradedsubsidiary of NTT.  Based on acertification signed by a duly authorized officer of DoCoMo, a copy of whichhad been furnished to PLDT, Mr. Toshinari Kunieda or Mr. Matsuo Yamamoto, isauthorized to execute for and on behalf of DoCoMo, endorsements, transfers andother matters relating to the PLDT shares of common stock held by DoCoMo.*

* *

*(8)    **Holds shares as nominee of JPMorgan Chase Bank,successor depositary under the Common Stock Deposit Agreement, dated October14, 1994, as amended on February 10, 2003, between JPMorgan Chase Bank and theholders of ADRs evidencing ADSs representing shares of common stock of theCompany (the “Deposit Agreement.”)  Under the Deposit Agreement, if  the depositarydoes not receive voting instructions from a holder of ADRs, such holder will bedeemed to have instructed the depositary to provide a discretionary proxy to aperson designated by PLDT for the purpose of exercising the voting rightspertaining to the shares of common stock represented by such holder of ADRs,except that no discretionary proxy will be given with respect to any matter asto which substantial opposition exists or which materially and adverselyaffects the rights of the holders of such ADRs.  This account includes sharesunderlying the ADSs beneficially owned by FMR.  This also includes 5,408,346shares of common stock underlying the ADSs owned by Semilion Enterprises, Inc.Please refer to footnote 3.*

* *

*(9)    **Consists of 5,024,789 shares registered in the name ofthe Social Security System and 7,100,220 shares held of record by PCD NomineeCorporation.  Ms. Corazon S. de la Paz, as President and Chief ExecutiveOfficer of the Social Security System, may exercise the voting rights in respectof these shares.*

 

As at May 31, 2006, approximately86.31% of the outstanding capital stock of PLDT was registered in the names ofPhilippine persons.

 

Related Party Transactions

 

*Cooperation Agreement withthe FP Parties, NTT Communications and DoCoMo*

 

Inconnection with the transfer by NTT Communications of approximately 12.6million shares of PLDT’s common stock to DoCoMo pursuant to the Stock Sale andPurchase Agreement dated January 31, 2006 between NTT Communications andDoCoMo, the FP Parties, NTT Communications and DoCoMo entered into aCooperation Agreement, dated January 31, 2006.  Under the CooperationAgreement, the relevant parties extended certain rights of NTT Communicationsthereunder to DoCoMo, including:

 

•        certain contractual veto rights overa number of major decisions or transactions, as set forth above under “Item 3.Key Information – Risk Factors – Risks Relating to Us – A significant number ofPLDT’s shares are held by three separate shareholders, which may not act in theinterests of other shareholders or stakeholders in PLDT”; and

 

•        rights relating to therepresentation on the board of directors of PLDT and Smart, respectively, andany committees thereof, as described above under “Item 6. Directors, SeniorManagement and Employees – Directors, Key Officers and Advisors”.

 

Moreover, key provisions of theCooperation Agreement pertain to, among other things:

 

•        *Restriction on Ownership ofShares of PLDT by NTT Communications and DoCoMo.* Each of NTT Communications and DoCoMo have agreed notto beneficially own, directly or indirectly, in the aggregate with theirrespective subsidiaries and affiliates, more than 21% of then issued andoutstanding shares of PLDT’s common stock.  If such event does occur, the FPParties, as long as they own in the aggregate not less than 21% of then issuedand outstanding shares of PLDT’s common stock, have the right to terminatetheir respective rights and obligations under the Cooperation Agreement, theShareholders Agreement and the StockPurchase and Strategic Investment Agreement.

 

•        *Limitation on Competition.*  NTT Communications, DoCoMo and their respectivesubsidiaries are prohibited from investing in excess of certain thresholds inbusinesses competing with PLDT in respect of customers principally located inthe Philippines and from using their assets in the Philippines in suchbusinesses. Moreover, if PLDT, Smart or any of Smart’s subsidiaries intends toenter into any contractual arrangement relating to certain competingbusinesses, PLDT is required to provide, or to use reasonable efforts toprocure that Smart or any of Smart’s subsidiaries provide NTT Communicationsand DoCoMo with the same opportunity to enter into such agreement with PLDT orSmart or Smart’s subsidiaries, as the case may be.  

 

•        *Business Cooperation.*  PLDT and DoCoMo agreed in principle to collaboratewith each other on the business development, roll-out and use of a W-CDMAmobile communication network.  In addition, PLDT agreed, to the extent of thepower conferred by its direct or indirect shareholding in Smart, to procurethat Smart will (i) become a member of a strategic alliance group forinternational roaming and corporate sales and services and (ii) enter into abusiness relationship concerning preferred roaming and inter-operator tariffdiscount with DoCoMo.  

 

•        *Additional Rights of DoCoMo.* Upon NTT Communications, DoCoMo and theirsubsidiaries owning in the aggregate 20% or more of the shares of PLDT’s commonstock and for as long as NTT Communications, DoCoMo and their subsidiariescontinue to own in the aggregate 17.5% of the shares of PLDT’s common stockthen outstanding, DoCoMo will be entitled to certain additional rights underthe Cooperation Agreement.

 

•        *Change in Control.*  Each of NTTCommunications, DoCoMo and the FP Parties agreed that to the extent permissibleunder applicable laws and regulations of the Philippines and otherjurisdictions, subject to certain conditions, to cast its vote as a shareholderin support of any resolution proposed by the board of directors of PLDT for thepurpose of safeguarding PLDT from any Hostile Transferee.  A "HostileTransferee" is defined under the Cooperation Agreement to mean any person(other than NTTC, DoCoMo, First Pacific or any of their respective affiliates)determined to be so by the PLDT board of directors and includes, withoutlimitation, a person who announces an intention to acquire, seeking to acquireor acquires 30% or more of PLDT common shares then issued and outstanding fromtime-to-time or having (by itself or together with itself) acquired 30% or moreof the PLDT common shares announces an intention to acquire, seeking to acquireor acquires a further 2% of such PLDT common shares (a) at a price per sharewhich is less than the fair market value as determined by the board ofdirectors of PLDT as advised by a professional financial advisor, (b) which issubject to conditions which are subjective or which could not reasonably besatisfied, (c) without making an offer for all PLDT common shares not held byit and/or its affiliates and/or persons who, pursuant to an agreement orunderstanding (whether formal or informal), actively cooperate to obtain orconsolidate control over PLDT, (d) whose offer for the PLDT common shares isunlikely to succeed or (e) whose intention is otherwise not bona fide; providedthat, no person will be deemed a Hostile Transferee unless prior to making suchdetermination, the board of directors of PLDT has used reasonable efforts todiscuss with NTT Communications and DoCoMo in good faith whether such personshould be considered a Hostile Transferee.  Forinformation as to certain provisions of PLDT’s Amended By-Laws that may have the effect of preventing a change incontrol of PLDT, see “Item 10. Additional Information – Articles of Incorporations and By-Laws – Change ofControl”.

 

•        *Termination.*  If NTT Communications, DoCoMo or their respectivesubsidiaries cease to own, in the aggregate, full legal and beneficial title toat least 10% of the shares of PLDT’s common stock then issued and outstanding,their respective rights and obligations under the Cooperation Agreement and theShareholders Agreement will terminate and the Strategic Arrangements (asdefined in the Stock Purchase and Strategic Investment Agreement) willterminate.  If the FP Parties and their respective subsidiaries cease to have,directly or indirectly, effective voting power in respect of shares of PLDT’scommon stock representing at least 18.5% of the shares of PLDT’s common stockthen issued and outstanding, their respective rights and obligations under theCooperation Agreement, the Stock Purchase and Strategic Investment Agreement,and the Shareholders Agreement will terminate.

 

*Integrated i-mode ServicesPackage Agreement between DoCoMo and Smart*

 

TheIntegrated i-mode Service Package Agreement was entered into by Smart andDoCoMo on February 15, 2006, under which DoCoMo agreed to grant Smart, on anexclusive basis within the territory of the Philippines for a period of fiveyears, an integrated i-mode service package including non-transferable licenseto use the licensed materials and the i-mode brand, as well as implementationsupport and assistance and post-commercial launch support from DoCoMo.  Pursuantto this agreement, Smart is required to pay an initial license fee and runningroyalty fees based on the revenue arising from i-mode subscription fees anddata traffic.

 

*Other Agreements with NTT Communications and/or its Affiliates*

 

PLDT is a party to the following agreements with NTTCommunications and/or its affiliates:

 

•        *AdvisoryServices Agreement.*On March 24, 2000, PLDT entered into an agreement with NTTCommunications, as amended on March 31, 2003 and March 31, 2005, under which NTT Communications provides PLDT with technical, marketing and other consultingservices for various business areas of PLDT starting April 1, 2000.  Under theCooperation Agreement, PLDT agreed to use reasonable efforts to procure that,with respect to the Advisory Services Agreement, PLDT and Smart, will receiveat a minimum the specified aggregate number of advisors entitled to be providedby NTT Communications and DoCoMo in accordance with the timetable set out inthe Cooperation Agreement;

 

•        *ArcstarLicensing Agreement and Arcstar Service Provider Agreement.*On March 24, 2000, PLDT entered into an agreement with NTT Worldwide Telecommunications Corporation under whichPLDT markets managed data and other services under NTT Communications’“Arcstar” brand to its corporate customers in the Philippines.  PLDT alsoentered into a Trade Name and Trademark Agreement with NTT Communications underwhich PLDT has been given the right to use the tradename “Arcstar” and itsrelated trademark, logo and symbols, solely for the purpose of PLDT’smarketing, promotional and sales activities for the Arcstar services within thePhilippines; and

 

•        *ConventionalInternational Telecommunications Services Agreement.*  On March 24, 2000, PLDT entered into an agreement with NTT Communications under which PLDT and NTTCommunications agreed to cooperative arrangements for conventionalinternational telecommunications services to enhance their respectiveinternational businesses.  

 

Total fees under these agreementsamounted to Php256 million, Php336 million and Php289 million for the yearsended December 31, 2005, 2004 and 2003, respectively.  As at December 31, 2005 and 2004, outstanding obligations of PLDT amounted to Php23 million andPhp49 million, respectively.

* *

*Air Time Purchase Agreement between PLDT and PT Asia Cellular Satelliteand Related Agreements*

 

In March 1997, PLDT entered into a Founder NSP AirTime Purchase Agreement with PT Asia Cellular Satellite, as amended in December1998 and as assigned and transferred to AIL, under which PLDT was granted theexclusive right to sell ACeS services in the Philippines.  In exchange, the AirTime Purchase Agreement required PLDT to purchase from PT Asia CellularSatellite at least US$5 million worth of air time annually over ten years,commencing on January 1, 2002, the date of commercial operations.

 

Inthe event PT Asia Cellular Satellite’s aggregate billing revenue is less thanUS$45 million in any given year, the Air Time Purchase Agreement states thatPLDT has to make supplemental air time purchase payments not to exceed US$15million per year during the ten-year term.

* *

PLDTand the other founder NSPs are endeavoring to amend the Air Time PurchaseAgreement due to the occurrence of partial satellite loss, changes in theprimary business of ACeS and other events affecting the business.

** **

InMarch 2003, PLDT, together with the other founder NSPs, entered into aStandstill Agreement with AIL suspending the application and enforcement of theminimum and supplemental air time payments under the original Air Time PurchaseAgreement.  The parties agreed that AIL shall provide PLDT and the otherfounder shareholders, with unlimited use of air time for the year 2003 inexchange for a fixed fee in the amount of US$3.8 million for PLDT.  Moreover,PLDT was also obliged to purchase from AIL 13,750 satellite phone units for theyear 2003 at US$395 F.O.B. per unit, subject to quarterly price adjustment.The parties to the Standstill Agreement also agreed to negotiate in good faithand use their best efforts to reach an agreement on a revised Air Time PurchaseAgreement before November 15, 2003 that would cover, among other things, theamended minimum and supplemental air time payment provisions subject to theapproval of AIL’s creditors.

* *

On February 10, 2004,notwithstanding the ongoing negotiations, AIL advised PLDT of the terminationof the Standstill Agreement and the reinstatement of the terms under theoriginal Air Time Purchase Agreement effective January 1, 2002, following thelapse of the November 15, 2003 deadlineset in the Standstill Agreement for the negotiation of a revised Air TimePurchase Agreement.  Negotiations are continuing with the relevant partiestowards an amicable settlement of this matter.  

 

As at December 31, 2005 and 2004, PLDT’s outstanding payables under the original Air Time Purchase Agreementwas Php3,493 million and Php2,728 million, respectively.  Total fees under thisagreement amounted to Php1,008 million, Php1,299 million and Php1,919 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.  As at December 31, 2005, PLDT’s aggregate remaining minimum obligation under the original AirTime Purchase Agreement was approximately Php11,120 million.  See *Note 21 –Contractual Obligations and Commercial Commitments* and *Note 22 –Provisions and Contingencies* to the accompanying consolidated financialstatements in Item 18 for further details relating to the Air Time PurchaseAgreement with AIL.  

* *

PLDTalso entered into a Founder NSP Operating Agreement with PT Asia CellularSatellite on March 12, 1997, under which PLDT may:

* *

•        authorizedistributors to resell ACeS services in the Philippines upon prior approvalfrom PT Asia Cellular Satellite; and

 

•        appointagents to solicit and bill PLDT’s or its authorized distributors’ subscribersfor ACeS services and to sell terminals on behalf of PLDT.

* *

Under an Assignment and Assumption Agreement dated December 29, 1998, PT Asia Cellular Satellite agreed to assign and transfer to AIL all ofPT Asia Cellular Satellite’s rights under the Founder NSP Air Time PurchaseAgreement and Founder NSP Operating Agreement.

* *

Underan Acknowledgment of Assignment of the Air Time Purchase Agreement entered intoon December 29, 1998, by and among PLDT, P.T. Bank Internasional Indonesiaand AIL, PLDT consented to the assignment by AIL of the Founder NSP Air timePurchase Agreement to P.T. Bank Internasional Indonesia, as security agent, forthe benefit of the secured parties under the Security Agreement dated December29, 1998, which was executed in connection with the Amended and Restated CreditAgreement dated December 29, 1998 among PT Asia Cellular Satellite, AIL, P.T.Bank Internasional Indonesia and various banks.

* *

On September 30, 2002, PT AsiaCellular Satellite, AIL, as guarantor, P.T. Bank International Indonesia, assecurity agent, and various other banks signed a Rescheduling Agreement, whichamended the terms of the Amended and Restated Credit Agreement dated December29, 1998, moving the principal repayment dates to agreed periods with the finalmaturity date on January 30, 2012.

* *

*Agreementbetween Smart and Asia Link B.V*.*,or ALBV*

Smart has an existing TechnicalAssistance Agreement with ALBV for the latter to provide technical supportservices and assistance in the operations and maintenance of cellular businessfor a period of five years, subject to renewal upon mutual agreement betweenthe parties.  The agreement provides for quarterly payments of technicalservice fees equivalent to 2% of the net revenues of Smart.  In January 2004,the agreement was amended, reducing the technical service fees to be paid bySmart to ALBV to 1% of net revenues effective January 1, 2004.

 

On February 18, 2004, Smart and ALBV entered into a renewal of the technical serviceagreement extending the effectivity of the terms of the agreement to February 23, 2008.  Furthermore, in view of the acquisition by Smart of Piltel Series KClass I Convertible Preferred Stock held by PLDT, the parties agreed to makethe consolidated net revenues of Smart the basis for the computation of the 1%royalty payable by Smart to ALBV, effective from January 1, 2005.  

 

Smart also has an existingServices Agreement with ALBV for a period of 25 years starting January 1, 1999, which shall automatically expire unless renewed by mutual agreement ofboth parties.  Under the agreement, ALBV provides advice and assistance toSmart in sourcing capital equipment and negotiating with internationalsuppliers, arranging international financing and other services thereinconsistent with and for the furtherance of the objectives of the services.Service Agreement fees were paid for the whole 25-year period.

 

ALBVis a subsidiary of the First Pacific Group.

 

Total fees under these agreements amountedto Php567 million, Php507 million and Php429 million for the years ended December 31, 2005, 2004 and 2003, respectively.  Outstanding obligations of Smart underthe Technical Service Agreement amounted to Php194 million and Php267 millionas at December 31, 2005 and 2004, respectively.

 

*Agreements relating to insurance companies*

Gotuaco del Rosario and Associates, or Gotuaco, actsas the broker for certain insurance companies to cover certain properties ofthe PLDT Group.  Insurance premiums are remitted to Gotuaco and the broker’sfees are settled between Gotuaco and the insurance companies.  In addition,PLDT has an insurance policy with Malayan Insurance Co., Inc., or Malayan,wherein premiums are paid directly to Malayan.  Total insurance expenses underthese agreements amounted to Php468 million, Php488 million and Php565 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.  Twodirectors of PLDT have a direct/indirect interest in or serve asdirector/officer of Gotuaco and Malayan.

There have been no loans between PLDT and any related party during theperiod beginning January 1, 2004 through the date of filing of this annualreport.

 

Except for the transactions described above, there were no othermaterial transactions during the last two years, nor are there any materialtransactions currently proposed, to which PLDT was or is to be a party, inwhich a director or key officer or owner of more than 10% of the common sharesof PLDT, or any member of the immediate family of a director or key officer orowner of more than 10% of the common shares of PLDT had or is to have a director indirect material interest.  In the ordinary course of business, PLDT hastransactions with other companies in which some of such persons may have aninterest.

 

Nodirector or officer of PLDT or associate of any such director or officer wasindebted to PLDT at any time during the period from January 1, 2004 through the date of filing of this annual report.

 

Item 8.        Financial Information

** **

ConsolidatedStatements and Other Financial Information

 

Consolidatedfinancial statements are set forth under “Item 18. Financial Statements.”

 

Legal Proceedings

 

Except as disclosed in thefollowing paragraphs, neither PLDT nor any of its subsidiaries is a party to,and none of their respective property is subject to, any pending legalproceedings which PLDT considers to be potentially material to its and itssubsidiaries’ business.

 

*Victor C. Fernandez*

* *

On December 9, 1999, a holder of preferred shares of stock of PLDT, Victor C.Fernandez, filed a petition against certain directors of PLDT questioning,among other things, the validity of the resolutions of the board of directorsof PLDT then authorizing the acquisition of Smart.  Fernandez's application fora restraining order to enjoin the holding of the PLDT stockholders' meeting on December 10, 1999 was denied by the Philippine SEC.  At the shareholder’s meeting, thestockholders approved the resolutions passed by the board of directorsauthorizing the acquisition of Smart.  On June 20, 2000, Fernandez's application for a writ of preliminary injunction was denied.

 

Inthe proceedings before the Makati Court to which the case was transferred, thetransactions subject of the suit were limited to PLDT’s acquisition of Smartand NTT’s entry into PLDT (the “Questioned Transactions”), and the issues to beresolved were limited to whether or not the Questioned Transactions violate theconstitutional limitations on foreign equity in public utilities, the ForeignInvestments Act and the Anti-Dummy Law and would result in a monopoly. 

 

TheMakati Court in its decision dated February 21, 2002 (the “Decision”), heldthat the Questioned Transactions “resulting from resolutions which have beenapproved by PLDT’s stockholders and government regulatory agencies, such as theNTC and the SEC, are valid and legal” and thus dismissed the petition ofFernandez.  On April 14, 2003, Fernandez filed with the Supreme Court apetition for review on certiorari seeking a review of the Decision (the“Petition”).  On May 22, 2003, Fernandez filed a Motion to refer the Petitionto the Supreme Court *En Banc*(the*“*Motion for Referral to SC*En Banc*”)*.*

* *

Subsequently,the Supreme Court, in a resolution dated June 9, 2003, denied the Petition and, in a resolution dated July 9, 2003, also denied the Motion for Referral to SC *EnBanc*.  On July 22, 2003, Fernandez filed a Motion for Reconsideration ofthe resolution denying the Petition (the “Motion for Reconsideration”), and ina Manifestation and Motion dated August 15, 2003, moved for a reconsiderationof the resolution denying the Motion for Referral to the SC *En Banc*.  

 

On August 8, 2003, the Makati Court scheduled the presentation of evidencepertaining to each of the counterclaims of the respondent directors for moraland exemplary damages.  In an Order dated February 27, 2004, (the “Order”), theMakati Court dismissed respondent directors’ counterclaims for moral andexemplary damages and attorney’s fees citing the lack of clear and convincingevidence to show malice or bad faith on the part of Fernandez in respect of thefiling of the case.  The respondent directors filed their motion forreconsideration of the Order on March 24, 2004 which the Makati Court denied ina resolution dated June 2, 2004.  Respondent directors filed an appeal with theCourt of Appeals assailing the validity of the Order by the Makati Court whichappeal remains pending.

 

On November 22, 2004, the Supreme Court’s Second Division denied with finalityFernandez’s Motion for Reconsideration, and Motion for Referral to SC *EnBanc.*

 

On January 4, 2005, Fernandez filed with the Supreme Court a second motion for reconsideration of the SupremeCourt’s resolution denying the Petition and a motion for leave to file andadmit second motion for reconsideration of the Supreme Court’s resolutiondenying the Motion for Referral to SC *En Banc*.  Both motions were deniedby the Supreme Court on January 31, 2005 and April 11, 2005, respectively. Thereafter, the Supreme Court issued an Entry of Judgment certifying that itsresolution dated June 9, 2003 denying Fernandez’s Petition became final andexecutory on December 21, 2004.  The Entry of Judgment puts to rest all legalissues regarding PLDT’s acquisition of Smart and the entry of NTTCommunications into PLDT. 

 

Taxation

 

Wehave made a reasonable estimate of the amount necessary to pay or settle anycontested assessment in the event of an unfavorable judgment against us andhave made the appropriate provisions in our consolidated financial statementsas at December 31, 2005 aggregating Php742 million in respect of the following:

* *

*National Internal Revenue Taxes*

* *

PLDT has filed various cases against the Commissionerof the Bureau of Internal Revenue for refunds and/or tax credit of:

 

•        erroneously paid value-added taxes, compensating taxes, advancesales taxes and other internal revenue taxes on PLDT's importation of variousequipment, machinery and spare parts; and

 

•        erroneously paid withholding tax on separation pay of employeeswho availed of the benefits under the Manpower Reduction Program. 

 

In the case of the claim for refund of erroneouslypaid value-added taxes, compensating taxes, advance sales taxes and otherinternal revenue taxes on PLDT’s importation of various equipment, machineryand spare parts, the Supreme Court, on December 15, 2005, rendered a decisionpartially granting the claim for refund or tax credit certificates and orderingthe Commissioner of Internal Revenue to issue a Tax Credit Certificate or torefund to PLDT approximately Php95 million representing erroneously collectedadvance sales tax and compensating tax.

 

The case of the claim for refund of erroneouslypaid withholding tax on separation pay is currently still pending in theSupreme Court.

* *

*NTC supervision and regulation fees, or SRF*

* *

Since1994, following the NTC's rejection of PLDT's formal protest against theassessments by the NTC of permit, supervision and regulation fees, PLDT and theNTC have been involved in legal proceedings before the Court of Appeals and theSupreme Court.  The basis of these legal proceedings is the NTC's inclusion ofstock dividends and capital in excess of the par value of stock in computingthese fees, and the NTC's assessment of administrative fees for the increase inPLDT's authorized capital stock even in the absence of NTC's performance ofregulatory services.  As at December 31, 2005, PLDT has paid a total amount ofPhp1,960 million in supervision and regulation fees of which Php1,724 millionwere paid under protest.  See *Note 22 – Provisions and Contingencies* tothe accompanying consolidated financial statements in Item 18 for furtherdiscussion.

 

*Localbusiness and franchise tax assesments*

* *

PLDTis presently a party to several cases involving the issue of exemption of PLDTfrom local franchise and business taxes.  PLDT believes, based on the opinionof its legal counsel, that it is exempt from payment of local franchise andbusiness taxes.

 

TheLocal Government Code of 1991, or R.A. No. 7160, which took effect on January 1, 1992, extended to local government units, or LGUs, the power to tax businesseswithin their territorial jurisdiction granted under Batas Pambansa No. 337 andwithdrew tax exemptions previously granted to franchise grantees under Section12 of R.A. No. 7082.

 

PLDTbelieves, based on the opinion of its legal counsel, that R.A. No. 7925, whichtook effect on March 16, 1995, and the grant of similar local franchise andbusiness taxes exemption privileges to other franchise holders subsequent tothe effectivity of R.A. No. 7160, implicitly restored its local franchise andbusiness taxes exemption privilege under Section 12 of R.A. No. 7082, or the PLDTFranchise, pursuant to Section 23 thereof, or the equality of treatment clause.

 

Toconfirm this position, PLDT sought and obtained on June 2, 1998 a ruling from the Bureau of Local Government Finance, or BLGF, of the Philippine Department ofFinance, which ruled that PLDT is exempt from the payment of local franchiseand business taxes imposable by LGUs under R.A. No. 7160.

 

Byvirtue of the BLGF Ruling, PLDT stopped paying local franchise and businesstaxes starting with the fourth quarter of 1998 and has filed with certain LGUsclaims for tax refund covering the period from the second quarter of 1995 tothe third quarter of 1998.  PLDT has received assessments for local franchiseand business taxes from several cities and provinces following PLDT’s decisionto stop payment of local franchise and business taxes.  

 

Following a decision of the Supreme Court on March 25, 2003, a judgment in the amount of Php4 million against PLDT involving the Cityof Davao became final and executory on April 9, 2003, pursuant to which PLDT was declared not exempt from the local franchise tax.  Although PLDT believes thatit is not liable to pay local franchise and business taxes, PLDT has enteredinto compromise settlements with several LGUs in order to maintain and preserveits good standing and relationship with these LGUs.  Under these compromisesettlements, which have been approved by the relevant courts, PLDT has paid atotal amount of Php505 million as at December 31, 2005 in full payment forlocal franchise tax covering up to the end of 2004.  

 

PLDTcontinues to contest the remaining assessments amounting to approximatelyPhp3.7 million as at December 31, 2005, a number of which were based on thegross revenues of PLDT derived from its operations within the entire Philippines.  PLDT claims that assuming that it is liable for local franchise tax, R.A. No.7160 provides that local franchise tax shall be based on the gross receipts ofthe preceding year received or collected for services rendered within thejurisdiction of the taxing authority.  Therefore, the use by some LGUs of grossrevenues as the basis for computation of franchise tax is in gross violation ofthe law because it pertains to all income earned regardless of whether it wasreceived or not, unlike gross receipts which are essentially the amount ofmoney or its equivalent actually or constructively received.  Moreover, grossrevenues refer to all income earned by PLDT within and outside the jurisdictionof the local taxing authority, thus, the use thereof as a basis of computationwill exceptionally overstate the local franchise tax.  As at December 31, 2005, there are two cases pending in the Supreme Court.  The motions forreconsideration of the two other unfavorable decisions of the Supreme Courthave been denied with finality.

 

PLDTcurrently expects that going forward it will pay local franchise and businesstaxes on an annual basis and based on the gross receipts received or collectedfor services rendered within the jurisdiction of the respective taxingauthority.  

 

Smarthas, likewise, received assessments for local franchise and business taxes fromcertain cities and provinces in the aggregate amount of Php313 million, whichSmart continues to contest.  Smart believes, based on the opinion of its legalcounsel, that Smart is not liable to pay the local franchise and business taxesby virtue of: (i) the opinion issued by the BLGF dated August 13, 1998; and (ii) Smart’sexemption under its legislative franchise which took effect after the effectivedate of R.A. No. 7160.

 

Smart has recently been declared exempt from paymentof local franchise tax to the City of Makati in a decision dated August 3, 2004 by the Makati Regional Trial Court, or RTC.  The City of Makati has filedtheir motion for reconsideration and Smart has filed its opposition to thatmotion for reconsideration. 

 

Piltel also received assessments from the localgovernment of the City of Makati in the aggregate amount of Php45 millioncovering the period from 1999 to 2001.  Piltel has formally protested theassessments, based on: (1) Piltel’s belief that the opinion rendered by the BLGF for Smart shouldlikewise hold true for Piltel; and (2) the effective date of the legislativefranchise of Piltel (R.A. No. 7293) which came after the effectivity of R.A.No. 7160.  The franchise tax prescribed under Section 137 of the LocalGovernment Code is deemed part of the Piltel franchise (the later law) whichstates, among other things, that Piltel shall pay only a franchise taxequivalent to 3% of all gross annual receipts of the business transacted underits franchise and such percentage shall be in lieu of all taxes on thefranchise or earnings thereof.

 

Piltel’sprotest of the assessments was denied by the City of Makati on December 18, 2001.  Piltel then filed a petition with the Makati RTC appealing the localfranchise business taxes.  On December 10, 2002, the Makati RTC rendered itsjudgment granting Piltel’s petition and enjoining the City of Makati fromassessing and collecting any further annual local franchise business taxes fromPiltel.  The City of Makati filed its motion for reconsideration of thisjudgment with the Makati RTC, which was subsequently denied.  On April 1, 2003, the City of Makati filed a Petition for Review with the Court of Appeals.On July 12, 2004, the Court of Appeals rendered a decision upholding the MakatiRTC that Piltel is exempt from payment of the local franchise tax.

 

TheCity of Makati appealed to the Supreme Court, which issued a resolution dated October 13, 2004 denying with finality the appeal of the City of Makati on the grounds oftechnicality.  The Supreme Court ruled, however, that the petition failed tosufficiently show that the Court of Appeals committed any reversible error inthe questioned judgment to warrant the exercise of the discretionary appellatejurisdiction of the Supreme Court.

 

*Piltel’s Bureau of Internal Revenue Assessment*

 

Piltelfiled applications for compromise settlements with the BIR for the deficiencytax assessments of 1998 and 1999, citing as basis for the compromise settlementits financial incapacity on account of networth and earnings deficit.  On June 22, 2005, however, Piltel received a letter from the BIR dated May 9, 2005 denying the applications for compromise settlements.  

 

On June 16, 2005, Piltel filed an administrative protest against the 2001deficiency income tax and VAT assessments arising from a letter notice.  TheBIR granted the request for reconsideration by virtue of the tax verificationnotice dated June 29, 2005, which was received by Piltel on July 1, 2005.  In its letter dated August 30, 2005, which Piltel received on September 19, 2005, the BIR issued its final decision on the disputed assessment, whichdenied the administrative protest filed by Piltel. On October 19, 2005, Piltel filed a petition for review with the Court of Tax Appeals relating to thistax assessment.  On December 12, 2005, Piltel filed a collective applicationfor compromise settlement with the BIR for the deficiency tax assessmentsarising from taxable years 1998, 1999 and 2001, citing “reasonable doubt as tothe validity of the tax assessments” as basis.  The prescribed minimumpercentage of compromise settlement for such basis is 40% of the basic assessedtax.  On January 27, 2006, Piltel received the favorable recommendation andapproval from the BIR on the said application for compromise settlement.  On January 31, 2006, Piltel settled the total amount of Php113.9 million, which is equivalentto 40% of the basic taxes per final assessment notices received, to effect theimmediate cancellation of the tax assessments.

 

OnFebruary 24, 2006, the BIR accepted Piltel’s application for compromisesettlement of Income Tax and VAT for the years 1998 and 1999 and income tax andVAT for the year 2001, and accordingly, issued a Certificate of Availment onthe said date.

 

Piltelalso availed of the BIR’s Enhanced Voluntary Assessment Program, or EVAP, on December 29, 2005.  EVAP grants last priority in audit for taxpayers paying the requiredincrease in tax payment from the base year or the minimum EVAP payment,whichever is higher.  Piltel’s EVAP availment, which involved payment of Php3million, covered the income tax for the taxable year 2003 and the expandedwithholding tax for the taxable years 2003 and 2004.  Piltel currently expectsthe BIR to issue an EVAP Certificate of Qualification.

 

*U.S.**Federal Communications Commission, or FCC, Ruling versus PhilippineTelecommunications Companies*

Effective as at February 1, 2003, PLDT stoppedterminating traffic sent directly by each of AT&T and MCI because PLDT’stermination rate agreements with AT&T and MCI lapsed in December 2002without either agreeing with PLDT on any provisional arrangement or finalagreement on new termination rates. In separate orders dated February 7 and 26,2003, the NTC confirmed that “absent any provisional or interim agreement” with U.S. carriers, there would be no provision of termination services between theparties “who are thereby encouraged to seek other routes or options toterminate traffic to the Philippines.”  Upon petitions of AT&T and MCI, onMarch 10, 2003, the International Bureau of the U.S. FCC issued an Order whichdirected all facilities-based carriers subject to U.S. FCC jurisdiction tosuspend payments for termination services to Philippine carriers, includingPLDT, Smart and Subic Telecom, until such time as the U.S. FCC issues a PublicNotice that AT&T’s and MCI’s circuits on the U.S.–Philippine route werefully restored.  The Order also removed the Philippines from the list of U.S.–internationalroutes approved for the provision of International Simple Resale, or ISR.  Inresponse to the International Bureau’s Order, the NTC issued a Memorandum Orderdated March 12, 2003, directing all affected Philippine carriers “(1) not toaccept terminating traffic via direct circuits from U.S. facilities-basedcarriers who do not pay Philippine carriers for services rendered; and (2) totake all measures necessary to collect payments for services rendered in orderto preserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”

On October 17, 2003, based on negotiationsbetween the NTC and the U.S. FCC to resolve the issue regarding terminationrates, the NTC, in the expectation that the U.S. FCC would fully lift the March10, 2003 Order, lifted its March 12, 2003 Order and directed all Philippinecarriers to immediately accept terminating traffic via direct circuits fromU.S. facilities-based carriers at mutually acceptable final or interimtermination rates and other terms and conditions agreed upon by the parties.

On November 17, 2003, after Smart reachedinterim agreements with each of AT&T and MCI on September 30 and November12, 2003, respectively, the International Bureau of the U.S. FCC lifted itsMarch 10, 2003 Order with respect to Smart and ordered the U.S. carriers toresume making payments to Smart.

On January 15, 2004, after PLDT reached interimagreements with each of MCI and AT&T and reopened its circuits with thesecarriers on November 12, 2003 and January 9, 2004, respectively, theInternational Bureau of the U.S. FCC lifted its March 10, 2003 Order also withrespect to PLDT and ordered the U.S. carriers to resume making payments toPLDT.

OnMay 13, 2004, the U.S. FCC partially dismissed and partially deniedapplications by Philippine carriers, including PLDT, and certain U.S. carriersfor review of the March 10, 2003 Order of the International Bureau of the U.S.FCC.  In particular, the U.S. FCC affirmed the March 10, 2003 Order’s finding that “Philippine carriers engaged in collective action to “whipsaw” AT&T andMCI.” The U.S. FCC stated, however, that the findings of the March 10, 2003Order were not findings under the U.S. anti-trust laws and that the U.S. DOJindependently “investigating the possibility of anticompetitive practices amongPhilippine carriers under its authority pursuant to U.S. anti-trust laws.”  TheU.S. FCC also upheld the March 10, 2003 Order in respect of the suspension ofpayments for termination services to the Philippine carriers pendingrestoration of the circuits.  In addition, the U.S. FCC denied a request tomodify the March 10, 2003 Order of the International Bureau of the U.S. FCC torestore the Philippines to the list of U.S.-international routes approved forthe provision of ISR.  The U.S. FCC stated that it was dismissing this requestas moot because of the U.S. FCC’s recently adopted International SettlementsPolicy Reform Order which eliminated ISR policies.  

 

Althoughnot included in the initial list of countries exempted from the U.S. FCC’sInternational Settlements Policy, or ISP, the U.S. FCC identified theU.S.–Philippines route as eligible for being removed from the ISP in accordancewith its newly established procedures for doing so.  Under this procedure, theU.S. FCC asked for public comment on the removal of the Philippines from the ISP.  In comments filed in June and July 2004, removal was supported by severalPhilippine and U.S. carriers, including AT&T and MCI, and was opposed byone U.S. carrier, International Access, Inc.  In November 2004, the U.S. FCCexempted a number of additional countries from the ISP, but not the Philippines.  Instead, the U.S. FCC stated that it would rule separately regarding the Philippines after reviewing the issues raised by International Access, Inc.  

 

OnJuly 6, 2004, PLDT filed with the U.S. FCC a petition for reconsideration ofthe U.S. FCC’s May 13, 2004 Order on the grounds that the order should havevacated as moot the International Bureau’s March 10, 2003 Order.

 

Ina decision dated August 15, 2005, the U.S. FCC: (1) denied PLDT’s petition forreconsideration of the May 13, 2004 Order with respect to the finding that PLDTand other Philippine carriers, in raising their rates for termination ofinternational calls from the U.S., “whipsawed” AT&T and MCI; and (2)removed the U.S.-Philippines route from the restrictions of the U.S. FCC’s ISPas applied to the termination of such traffic from the U.S.  In so doing, theU.S. FCC also found that separate allegations made by International Access,Inc. against PLDT failed to demonstrate competitive concerns regarding theU.S.-Philippines route that would warrant retaining the restrictions of theISP.

 

Investigationby U.S. Department of Justice 

 

In January 2004, PLDT received a grand jury subpoenaseeking documents and a PLDT employee was subpoenaed to testify before thegrand jury in connection with a criminal investigation being conducted by theU.S. DOJ with respect to alleged anti-trust violations relating to theprovision of international termination services in the Philippines.  The U.S. DOJ has also requested testimony and documents from Smart in connection withthis investigation.  Further, in March 2004, PLDT (U.S.) Ltd., a subsidiary ofPLDT Global, received a grand jury subpoena seeking documents, in response towhich PLDT (U.S.) Ltd. produced documents.  InFebruary 2005, two former employees of PLDT (U.S.) Ltd. testified before thegrand jury in the U.S. DOJ matter.  A PLDT employee was also scheduled toreappear for testimony in February, but his appearance was postponed.  On May 11, 2005, the U.S. DOJ informed PLDT’s legalcounsel in Washington D.C., Covington & Burling, that the U.S. DOJ has terminatedits anti-trust investigation relating to termination rate increases implementedin early 2003 by certain Philippine long distance carriers including PLDT andthat no enforcement action will be taken.  See*Note**25 – Other Matters (e)* to the accompanying consolidated financial statementsin Item 18.

 

Dividend Distribution Policy

 

In2005 and 2004, PLDT declared cash dividends of Php1,628 million and Php1,529million, respectively, solely for its preferred shareholders.  In addition, onMarch 1, 2005, PLDT declared a cash dividend at Php14 per common share toholders of record as at March 31, 2005, which was paid on May 12, 2005,constituting the first cash dividend declaration to common shareholders sinceMarch 2001.  This was followed by cash dividend declarations made by PLDT onits common stock on May 5, 2005 at Php21 per common share to holders of recordas at June 3, 2005, which was paid on July 14, 2005, on November 8, 2005, atPhp21 per common share to holders of record as of November 28, 2005, which waspaid on December 28, 2005, and on February 27, 2006 at Php28 per common shareto holders of record as of March 20, 2006, which was paid on April 20, 2006.

 

Ourcurrent policy is to declare and pay dividends taking into consideration theinterests of our shareholders as well as our working capital, capitalexpenditures and debt servicing requirements.  Also taken into considerationare our ability to meet loan covenant requirements and the required priorwritten consents of certain creditors and preferred stockholders (for stockdividends), under certain conditions, in the declaration and payment ofdividends as discussed in *Note 12 – Interest-bearing Financial Liabilities*and*Note**15 – Stockholders’ Equity* to the accompanying consolidatedfinancial statements in Item 18.  The retention of earnings is necessary tomeet the funding requirements of our business expansion and developmentprograms.  Unappropriated retained earnings of PLDT include undistributedearnings representing accumulated equity in the net earnings of oursubsidiaries, which are not available for distribution as dividends untilreceived in the form of dividends from such subsidiaries (see *Note 15 – Stockholders’Equity* to the accompanying consolidated financial statements in Item 18).Dividends are generally paid in Philippine pesos.  In the case of shareholdersresiding outside the Philippines, PLDT's transfer agent in Manila, which actsas the dividend-disbursing agent, converts the peso dividends into U.S. dollarsat the prevailing exchange rates and remits the dollar proceeds abroad, net ofwithholding tax.

 

Item 9.        The Offer andListing

** **

Common Capital Stock and American Depositary Shares (“ADSs”)

 

Thecommon shares of PLDT are listed and traded on the PSE.  On October 19, 1994, an ADR facility was established, pursuant to which Citibank, N.A., asthe depositary, issued ADRs evidencing ADSs, with each ADS representing onePLDT common share with a par value of Php5 per share.  Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary of PLDT’sADR facility.  The facility was established in accordance with a Common StockDeposit Agreement dated October 19, 1994, as amended on February 10, 2003 between the Depositary and the holders of the ADRs.  The ADSs have been listed andare traded on the New York Stock Exchange, or NYSE, in the United States under the symbol “PHI”.  

 

In 2005, a total of37.8 million shares of PLDT's common capital stock were traded on thePhilippine Stock Exchange.  During the same year, the volume of trading was54.7 million ADSs on the New York Stock Exchange.

 

As of May 31, 2006, approximately 11,538 stockholderswere Philippine persons and held approximately 38% of PLDT’s common capitalstock.  In addition, as of May 31, 2006, there was a total of over 36 millionADSs outstanding, substantially all of which PLDT believes were held in the United States by 398 holders.

 

High and low sales prices for PLDT’s common shares onthe Philippine Stock Exchange and ADSs on the New York Stock Exchange for eachof the five most recent fiscal years, each full quarterly period during the twomost recent fiscal years, and each month in the most recent six months were asfollows:

 

 

**Philippine Stock Exchange**

 

**New York****Stock  Exchange**

 

**High**

 

**Low**

 

**High**

 

**Low**

2006

 

 

 

 

 

 

 

First Quarter

Php1,930.00

 

Php1,675.00

 

US$38.09

 

US$32.20

January

1,860.00

 

1,730.00

 

36.07

 

32.20

February

1,895.00

 

1,675.00

 

36.80

 

33.00

March

1,930.00

 

1,775.00

 

38.09

 

34.40

Second Quarter (through June 28, 2006) 

2,295.00

 

1,700.00

 

43.99

 

32.15

April

2,050.00

 

1,920.00

 

40.17

 

37.49

May

2,295.00

 

1,940.00

 

43.99

 

36.28

June (through June 28, 2006)

2,020.00

 

1,700.00

 

39.25

 

32.15

2005

Php1,860.00

 

Php1,310.00

 

US$34.35

 

US$23.50

First Quarter

1,495.00

 

1,310.00

 

27.75

 

23.50

Second Quarter

1,645.00

 

1,330.00

 

30.07

 

24.10

Third Quarter

1,715.00

 

1,520.00

 

30.59

 

27.28

Fourth Quarter

1,860.00

 

1,630.00

 

34.35

 

28.88

December

1,835.00

 

1,730.00

 

34.35

 

31.72

2004

Php1,505.00

 

Php810.00

 

US$27.03

 

US$14.38

First Quarter

1,050.00

 

810.00

 

18.60

 

14.38

Second Quarter

1,165.00

 

960.00

 

21.20

 

16.97

Third Quarter

1,450.00

 

1,150.00

 

25.72

 

20.90

Fourth Quarter

1,505.00

 

1,215.00

 

27.03

 

21.83

2003

990.00

 

265.00

 

17.79

 

4.85

2002

565.00

 

209.00

 

11.30

 

3.85

2001

1,060.00

 

332.50

 

20.75

 

6.55

 

On October 24, 2005,PLDT issued to JPMorgan, as depositary, and to the holders of the Series IIIConvertible Preferred Stock a notice of mandatory conversion of all of itsoutstanding 4,616,200 Series III Convertible Preferred Stock into shares ofPLDT common stock, with each share of Series III Convertible Preferred Stockconvertible to 1.7129 shares of Common Stock.  The Series III Convertible Preferred Stock had been issued in 1994 inconnection with a Global Depositary Receipt, or GDR, facility, pursuant towhich GDRs evidencing Global Depositary Shares, or GDS, were issued, with eachGDS representing one share of Series III Convertible Preferred Stock of PLDT.  As of the date of the issuance of the notice ofmandatory conversion, the conditions for mandatory conversion under the termsof the Series III Preferred Stock had been satisfied, including: (i) that theaverage closing price of PLDT’s ADSs for the 30-day period ending seven daysprior to the date in which notice of the mandatory conversion was given wasabove US$29.19; (ii) that there were no dividends in arrears on any shares ofthe Series III Convertible Preferred Stock; and (iii) that PLDT had sufficientdistributable reserves to pay the fixed preferential dividends on the shares ofSeries III Convertible Preferred Stock, calculated down to and including themandatory conversion date.

 

InNovember 2005, PLDT issued 710,891 shares of PLDT common stock on account ofthe voluntary conversion of 415,023 shares of Series III Convertible PreferredStock.  On December 19, 2005, the mandatory conversion date, all of theoutstanding shares of Series III Convertible Preferred Stock were mandatorilyconverted into shares of PLDT common stock.  A total of 7,907,032 shares ofPLDT common stock were issued as a result of the voluntary and mandatoryconversions of all the Series III Convertible Preferred Stock.  

 

Item 10.     Additional Information

** **

Articles ofIncorporation and By-Laws

 

Thefollowing summarizes certain provisions of PLDT's Articles of Incorporation andBy-Laws and applicable Philippine law.  This summary is qualified in itsentirety by reference to the Corporation Code of the Philippines (the“Corporation Code”) and PLDT's Articles of Incorporation and By-Laws.  Informationon where investors can obtain copies of the Articles of Association and By-Lawsis described under the heading “Documents Available.”

 

*Purpose of PLDT*

 

PLDT'sArticles of Incorporation have been filed with the Philippine SEC and PLDT hasbeen issued Philippine SEC Reg. No. 55.  The Second Article of PLDT's Articlesof Incorporation provides that the purposes for which PLDT was formed are toinstall, maintain, and operate any and all kinds of equipment forcommunications; to install, maintain, operate or lease telephone lines andsystems, and to purchase, sell and deal in all kinds of products which may becombined with the building, installing and operation of those systems and linesand in general, to engage in any and all acts and business which may benecessary or convenient, in the furtherance of such lines of communication andbusiness.

 

*Directors*

 

PLDT'sAmended By-Laws provide that the Board of Directors shall consist of thirteenmembers, each of whom must hold at least one share of stock of PLDT in his ownname and possess the minimum qualifications and have none of thedisqualifications provided in the By-Laws.  There are no provisions in PLDT'sAmended Articles of Incorporation or Amended By-laws with respect to (a) adirector's power to vote on a proposal, arrangement or contract in which thedirector is materially interested; (b) the directors' power, in the absence ofan independent quorum, to vote compensation to themselves or any members oftheir body; (c) borrowing powers exercisable by the directors and how suchborrowing powers can be varied; or (d) retirement or non-retirement ofdirectors under an age limit requirement.

 

Description of PLDT Capital Stock

* *

*Authorized Capital Stock*

 

The authorized capital stock ofPLDT is Php9,395 million divided into two classes consisting of 234 millionshares of Common Capital Stock with a par value of Php5 per share (the “CommonStock”) and 822.5 million shares of serial Preferred Stock with a par value ofPhp10 per share (the “Preferred Stock”).

 

*Common Stock*

 

Setout below is a statement of the dividend, voting, pre-emption and other rightsof the holders of Common Stock as set out in the Articles of Incorporationand/or By-Laws of PLDT:

 

(a)    After the requirements withrespect to preferential dividends on the serial Preferred Stock shall have beenmet and after PLDT shall have complied with all the requirements, if any, withrespect to the setting aside of sums as purchase, retirement or sinking funds,the holders of the Common Stock shall be entitled to receive such dividends asmay be declared from time to time by the Board of Directors out of fundslegally available therefor.

 

(b)    After distribution in full of thepreferential amounts to be distributed to the holders of serial Preferred Stockin the event of the voluntary or involuntary liquidation, dissolution,distribution of assets or winding up of PLDT, the holders of Common Stock shallbe entitled to receive all the remaining assets of PLDT of whatever kindavailable for distribution to stockholders ratably in proportion to the numberof Common Stock held by them, respectively.

 

(c)    Except as may be otherwiserequired by law, or by the Articles of Incorporation of PLDT, each holder ofCommon Stock shall have one vote in respect of each share of such stock held byhim on all matters to be voted upon by the stockholders, and the holders ofCommon Stock shall have the exclusive right to vote for the election ofdirectors and for all other purposes.  At every election of directors, a holderof Common Stock is entitled to vote such shares of Common Stock held by him foras many persons as there are directors to be elected, or to cumulate saidshares and give one candidate as many votes as the number of directors to beelected multiplied by the number of his shares shall equal, or to distributesuch votes on the same principle among as many candidates as he shall thinkfit.

 

In addition to the foregoingrights, the Corporation Code provides for other stockholders' rightsgenerally.  These include:

 

(a)    Appraisal right or the right of adissenting stockholder to demand payment of the fair value of his shares ofstock in the following instances:  (a) in case any amendment to the articles ofincorporation has the effect of changing or restricting the rights of any stockholdersor class of shares, or of authorizing preferences in any respect superior tothose of outstanding shares of any class, or of extending or shortening theterm of corporate existence; (b) in case of sale, lease, exchange, transfer,mortgage, pledge or other disposition of all or substantially all of thecorporate property and assets of the corporation; (c) in case of merger orconsolidation; and (d) in case of investment of funds of the corporation in anyother corporation or business or for any purpose other than the primary purposefor which it was organized, except where the investment by the corporation isreasonably necessary to accomplish its primary purpose as stated in itsarticles of incorporation.

 

(b)    The right to approve certaincorporate acts, such as:  (a) election of directors; (b) removal of directors;(c) extension or shortening of the corporate term; (d) increase or decrease ofcapital stock, and incurring, creating or increasing bonded indebtedness; (e)sale or other disposition of all or substantially all of the corporate assets;(f) investment of corporate funds in any other corporation or business or forany purpose other than the primary purpose for which it was organized exceptwhere the investment is reasonably necessary to accomplish its primary purposeas stated in the corporation’s articles of incorporation; (g) declaration ofstock dividend; (h) entering into a management contract with anothercorporation; (i) plan of merger or consolidation; and (j) voluntary dissolutionof the corporation by shortening the corporate term.

 

(c)    The right to inspect at reasonablehours on business days the records of all business transactions of thecorporation and the minutes of any meeting; however, the stockholders' right toinspect corporate records and books is not an absolute right so that thecorporation may deny said right on the basis of impropriety of the purpose ormotive of the stockholder.

 

(d)    The right to be furnished the mostrecent financial statements of the corporation, within ten days from receipt bythe corporation of a written request from a stockholder.  The same right existsat the annual meeting of stockholders at which the Board of Directors mustpresent to the stockholders a financial report of the operations of thecorporation for the preceding year which shall include financial statementsduly signed and certified by an independent certified public accountant.

 

*Restrictionson Foreign Ownership*

 

TheConstitution of the Republic of the Philippines (Section 11, Article XII)states that no franchise, certificate, or any other form of authorization forthe operation of a public utility shall be granted except to citizens of thePhilippines or to corporations or associations organized under the laws of thePhilippines at least 60% of whose capital is owned by such citizens.

 

Whilethe Articles of Incorporation and By-Laws of PLDT do not contain any specificrestriction on the sale, assignment or transfer of shares that would violatethe aforecited ownership requirement, the Articles of Incorporation of PLDTprovide that the Board of Directors shall have full power and authority toauthorize (whether by adoption of amendments to the By-Laws of PLDT or ofresolutions, the promulgation of rules or regulations or otherwise) the takingby said corporation of all such actions as the Board of Directors may deemnecessary or appropriate to ensure compliance by said corporation with anyapplicable provision of the Constitution of the Republic of the Philippines orany other applicable law, treaty, rule or regulation relating to the ownershipof securities of said corporation by citizens of the Philippines, aliens orother persons or group of persons.

 

*Meetings*

* *

TheCorporation Code requires corporations to hold an annual meeting ofstockholders and to send notice thereof to stockholders.  Under PLDT's By-Laws,the annual meeting of stockholders shall be held at the principal office of thecorporation, or at such other place designated by the Board of Directors in thecity or municipality where the principal office of the corporation is located,on the second Tuesday in June of each year.  In the annual meeting, the Boardof Directors shall be elected and such other business may be transacted asshall come before the meeting.  At least fifteen (15) business days written orprinted notice of the date, time and place of holding every annualstockholders' meeting shall be given by the Secretary or by an AssistantSecretary by personal delivery or by mail to each stockholder at his or herlast known place of residence or business.  Special meetings of stockholdersmay be called at any time by the President or three (3) of the Directors or bya number of stockholders representing two-thirds (2/3) of the subscribedcapital stock.  Notice in writing of such meeting stating the date, time orplace thereof, shall be given to each stockholder by the Secretary or AssistantSecretary or, in case of his absence, inability, refusal or neglect to act,then by the President, Directors or stockholders calling said meeting, bypersonal delivery or by mail to each stockholder at his or her last known placeof residence, at least fifteen (15) business days before the date fixed for themeeting.

 

TheBy-Laws of PLDT provide that each share of common stock which has voting rightson any matter under consideration may be represented at any meeting ofstockholders by the holder thereof or by his attorney duly authorized by proxyin writing on forms prescribed by the Board of Directors which shall befurnished to a stockholder upon his request.  Unless otherwise provided in theproxy, it shall be valid only for the meeting in respect of which such proxywas issued.  Proxies must be filed with the Secretary, Assistant Secretary ortransfer agent of PLDT at least two (2) days before the day of the meeting.Any proxy filed with the Secretary, Assistant Secretary or transfer agent ofthe corporation may be revoked by the stockholder concerned either in aninstrument in writing duly presented to the Secretary, Assistant Secretary ortransfer agent of the corporation at least two (2) days before the day of themeeting or by his personal presence at the meeting.  The decision of theSecretary on the validity of proxies shall be final and binding until andunless set aside by a court of competent jurisdiction.  As provided in theCorporation Code, unless otherwise provided in the proxy, it shall be validonly for the meeting for which it is intended and no proxy shall be valid andeffective for a period longer than five (5) years at any one time.

 

TheBy-Laws of PLDT also provide that at any meeting of the stockholders, personsrepresenting, in person or by proxy, a majority of the shares issued andoutstanding and entitled to vote at said meeting shall constitute a quorum forthe transaction of any business, except as otherwise provided by law, andexcept that a lesser number may adjourn the meeting.

 

*Issuesof Shares*

* *

TheBoard of Directors of PLDT has the power to authorize the issue and sale ofauthorized but unissued shares of Common Stock of said corporation for suchconsideration as it shall determine, provided that such consideration shall notbe less than the par value of such shares and, provided further, that suchissue and sale is not otherwise prohibited under applicable laws.

 

Underthe Securities Regulation Code of the Philippines (R.A. No. 8799), or SRC, nosecurities except of a class exempt under the provisions thereof or unless soldin any transaction exempt under any of the provisions thereof, shall be sold oroffered for sale or distribution to the public unless such securities shallhave been registered and permitted to be sold pursuant to the SRC.

 

*Transfer of Shares*

* *

Theshares of Common Stock may be transferred by delivery of certificate(s)endorsed by the shareholder named in the certificate or his duly authorizedattorney or representative.  No transfer, however, shall be valid, except asbetween the parties, until the transfer is recorded in the stock and transferbooks of PLDT maintained by Hongkong and Shanghai Banking Corporation, thestock transfer agent of PLDT for the Common Stock.

 

Philippinelaw does not require transfers of Common Stock to be effected on the PSE, butany off-exchange transfers will subject the transferor to a capital gains taxthat may be significantly greater than the stock transfer tax applicable totransfers effected on the PSE.  All transfers of shares of Common Stock on thePSE must be effected through a licensed broker in the Philippines.

 

*Share Certificates*

* *

Certificates representing fully paid shares of CommonStock are issued in such denominations as stockholders may request, except thatcertificates will not be issued for any fractional part of a share or anyundivided interest in any share.

 

*Dividends*

* *

Under the Corporation Code, the Board of Directors maydeclare dividends on the Common Stock out of the unrestricted retained earningswhich may be payable in cash, in property or in stock to all stockholders onthe basis of outstanding shares held by them.  The declaration of stock dividendsrequires the approval of the stockholders of PLDT representing not less thantwo-thirds of the outstanding capital stock of PLDT.  If a stock dividend wouldrequire an increase in the authorized capital stock, Philippine SEC approvalwould be required.  Common Stock issued as stock dividends should be registeredwith and licensed by the Philippine SEC and listed on the PSE.

 

The Corporation Code requires aPhilippine corporation with retained earnings in excess of 100% of its paid-incapital to declare and distribute as dividends the amount of such surplus.Notwithstanding this general requirement, a Philippine corporation may retainall or any portion of such surplus in the following cases:  (i) when justifiedby definite corporate expansion projects or programs approved by the board ofdirectors; or (ii) when the corporation is prohibited under any loan agreementwith any financial institution or creditor, whether local or foreign, fromdeclaring dividends without its/his consent, and such consent has not yet beensecured; or (iii) when it can be clearly shown that such retention is necessaryunder special circumstances relevant to the corporation, such as when there isa need for special reserve for probable contingencies.

 

PLDThas entered into certain loan and credit agreements, which restrict thedeclaration and payment of dividends by PLDT.  In particular, under certain loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, (ii) if after giving effectto such action the current ratio would be less than 0.90:1 or (iii) in anamount greater than PLDT’s net income after taxes during the fiscal year towhich such payment or distribution relates.  For the year 2001, PLDT declaredcash dividends on outstanding shares of Common Stock in the amount ofapproximately Php202 million.  On March 1, 2005, PLDT declared a cash dividend at Php14 per common share to holders ofrecord as at March 31, 2005, which was paid on May 12, 2005, constituting the first cash dividend declaration to common shareholders since March 2001.  Thiswas followed by cash dividend declarations made by PLDT on its common stock onMay 5, 2005 at Php21 per common share to holders of record as at June 3, 2005,which was paid on July 14, 2005, and on February 27, 2006 at Php28 per commonshare to holders of record as of March 20, 2006, which was paid on April 20,2006.

 

*Preferred Stock*

 

Preferred Stock may be issuedfrom time to time in one or more series as the Board of Directors may determine.The Board of Directors is authorized to establish and designate the title andnumber of shares of each series and to fix the terms thereof, includingdividend rate, redemption and sinking fund provisions, conversion rights andthe amount to be received upon liquidation, provided that the amounts payableupon redemption or liquidation may not be more than 110%, nor less than 100%,of par value, plus in each such case accrued and unpaid dividends.  Except asotherwise provided by law, the holders of Preferred Stock are not entitled tovote for the election of directors or for any other purpose; provided, however,that PLDT may not change the rights of the holders of any series of PreferredStock in any manner prejudicial to the holders thereof without the affirmativevote of the holders of a majority of the shares of such series.  No suchapproval is needed to increase the number of shares of Preferred Stock (up tothe number from time to time authorized by the Articles) or to authorizeclasses of shares ranking on a parity with the Preferred Stock.

 

*Issued and Outstanding Preferred Stock*

 

The series of Preferred Stock and the number of sharesissued and outstanding under each series as at May 31, 2006 are as follows:****

 

**Series**

**No. of Shares**

Series A to FF 10% Cumulative Convertible

406,961,650

Series IV Cumulative Non-Convertible Redeemable

36,000,000

Series V Cumulative Convertible Redeemable

52,478

Series VI Cumulative Convertible Redeemable

3,588,105

Series VII Cumulative Convertible Redeemable

3,842,000

 

TheSeries A to FF 10% Cumulative Convertible Preferred Stock are entitled toreceive cumulative dividends at the rate of 10% per annum; redeemable at theoption of PLDT, at par value plus accrued dividends, five years after the yearof issuance; convertible to shares of Common Stock a year after the year ofshare issuance, at a price equivalent to 10% below the average market price ofthe Common Stock at the PSE over a period of 30 consecutive trading days beforethe conversion date; and entitled to be paid an amount equal to the par valueof the shares plus accrued and unpaid dividends thereon to the date fixed forsuch payment in the event of a voluntary or involuntary liquidation,dissolution, distribution of assets or winding up of the affairs of thecorporation.

 

TheSeries IV Cumulative Non-Convertible Redeemable Preferred Stock are entitled toreceive cumulative dividends at the rate of 13.5% per annum based on thepaid-up subscription price.  It is redeemable at the option of PLDT one year atany time after subscription at an amount equal to the par value of such sharesso redeemed or if such shares are not yet fully paid, the actual amount paid,plus accrued and unpaid dividends thereon; and in the event of a voluntary orinvoluntary liquidation, dissolution or winding up of affairs of PLDT, shall beentitled to be paid an amount equal to the par value of such shares or if suchshares are not yet fully paid, the actual amount paid, plus an amount equal tothe dividends accrued thereon to the date fixed for payment.  The outstandingshares of Series IV Cumulative Non-Convertible Redeemable Preferred Stock havenot been fully paid.

 

Sharesof Series V, VI and VII Convertible Preferred Stock are entitled to receiveannual dividends of Php18.70 per share, US$0.397 per share and JPY40.7189per share, respectively.  Each share of Series V, VI and VII PLDT ConvertiblePreferred Stock is convertible at any time at the option of the holder into oneshare of PLDT Common Stock.  In the event of any voluntary or involuntaryliquidation, dissolution or winding up of PLDT, the holders of the Series V, VIand VII Convertible Preferred Stock are entitled to receive out of the assetsof PLDT available for distribution to the shareholders of PLDT, before anydistribution of assets is made to holders of shares of Common Stock or anyother shares of stock of PLDT ranking as to such distribution junior to theSeries V, VI and VII Convertible Preferred Stock, liquidating distributions inthe amount of Php11 per share plus accrued and unpaid dividends.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stock and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted into sharesof PLDT Common Stock at a conversion rate of one share of Common Stock for eachshare of Series V, VI or VII Convertible Preferred Stock subject to adjustmentsin certain events.  Under a put option exercisable for 30 days, holders ofshares of Common Stock received on mandatory conversion will be able to requirePLDT to purchase such shares of Common Stock for Php1,700 per share, US$36.132per share and JP¥4,071.89 per share, for Series V, VI and VII ConvertiblePreferred Stock, respectively.

 

Asat December 31, 2005, 2,480,553 shares of Series V Convertible Preferred Stockand 896,190 shares of Series VI Convertible Preferred Stock had been convertedto PLDT common shares.  As at December 31, 2005, 240,887 shares of Series V,4,398,914 shares of Series VI and 3,842,000 shares of Series VII ConvertiblePreferred Stocks remained outstanding.  The aggregate value of the put optionbased on outstanding shares as at December 31, 2005 was Php15,890 million, ofwhich Php8,844 million is puttable on June 4, 2008 and Php7,046 million on June4, 2009, if all of the outstanding shares of Series V, VI and VII ConvertiblePreferred Stocks were mandatorily converted and all the underlying commonshares were put to PLDT.  The market value of the underlying shares of commonstock was Php15,564 million, based on the market price of PLDT common shares ofPhp1,835 per share as at December 31, 2005.

 

*Change in Control*

 

ArticleV, Section 1 of PLDT's Amended By-Laws may have the effect of preventing achange in control of PLDT.  This section provides that any person who isengaged in any business that competes with or is antagonistic to that of PLDTor its subsidiaries is ineligible for nomination or election to the Board ofDirectors.

 

Under the Cooperation Agreement, each of NTTCommunications, DoCoMo and the FP Parties agreed that to the extent permissibleunder applicable laws and regulations of the Philippines and other jurisdictions,subject to certain conditions, it shall cast its vote as a PLDT shareholder insupport of any resolution proposed by the PLDT board of directors for thepurpose of safeguarding PLDT from any Hostile Transferee. See “Item 7. MajorShareholders and Related Party Transactions — Related Party Transactions — Cooperation Agreement with the FP Parties, NTT Communications andDoCoMo”.

 

Material Contracts

 

Wehave entered into the following contract within the two years preceding thedate of this annual report which is or may be material:

 

The Cooperation Agreement, dated January 31, 2006, entered into by and among PLDT, First Pacific, Metro PacificCorporation, Metro Asia Link Holdings, Inc., Metro Pacific Resources, Inc.,Larouge B.V., Metro Pacific Assets Holdings, Inc., NTT Communications andDoCoMo. 

 

Exchange Controls and Other LimitationsAffecting Securities Holders

 

In Circular No. 1389 dated November 10, 1993, as amended by Circular No. 224 dated January 26, 2000, of the BSP, foreign investments in the shares of stock of Philippine companies listed in the PSE may beregistered either with the BSP or with an investor’s designated custodianbank.  The foreign investments in listed shares of stock, which are dulyregistered with the BSP or with a custodian bank duly designated by the foreigninvestor, are entitled to full and immediate capital repatriation and dividendand interest remittance privileges.  Without the need to obtain prior BSPapproval, commercial banks are authorized to sell and to remit the equivalentforeign exchange (at the exchange rate prevailing at the time of actualremittance) representing sales and divestment proceeds or dividends of a dulyregistered foreign equity investment upon presentation of a BSP RegistrationDocument (“BSRD”) together with other supporting documents.  The BSRD is issuedby the BSP or the custodian bank upon registration of the foreign investmentand serves as the authority to repatriate such divestment and sales proceeds orremittance of cash dividends.  Effective April 3, 2000, only pre-numbered BSRD forms, printed on BSP security paper may be used and issued as proof ofregistration of foreign investments in accordance with existing BSP rules.  Theremitting commercial bank must submit to the BSP a statement of remittancetogether with the supporting documents within two banking days from date ofactual remittance.  Foreign investments not duly registered with the BSP orwith the investor's designated custodian bank are not entitled to repatriationand remittance privileges through the banking system except capitalrepatriation or dividend remittance of direct foreign equity investments madeprior to March 15, 1973 when BSP registration was not yet required.  The BSPshould be notified of the transfer of sale of foreign investments in equity orsecurities already registered with the BSP, in order that the registration ofthe foreign investment may be transferred in the name of the transferee orpurchaser.

 

Cashdividends on PLDT's stock are paid in Philippine peso, except dividends on theSeries VI Convertible Preferred Stock, which are paid in U.S. dollars and onthe Series VII Convertible Preferred Stock, which are paid in Japanese yen.PLDT’s Transfer Agent and Dividend Paying Agent for its Series VI and VIIConvertible Preferred Stock, Hongkong and Shanghai Banking Corporation,converts and remits in the particular foreign currency, at the prevailingexchange rate, cash dividends due to holders of the Series VI and VIIConvertible Preferred Stock.  PLDT's Transfer Agent for its common stock, TheHongkong and Shanghai Banking Corporation, (which also acts as dividend payingagent) converts and remits in U.S. dollars, at the prevailing exchange rate,cash dividends due all common shareholders residing outside the Philippines.Under the above-mentioned regulations, PLDT has been able to remit the cashdividends due to shareholders residing outside the Philippines.  As at December 31, 2005, approximately 86% of PLDT’s outstanding shares of common and preferredstock were held by Philippine persons.  For certain restrictions on thedeclaration and payment of dividends by PLDT, see *Note 14 – Preferred StockSubject to Mandatory Redemption* and *Note 15 – Stockholders’ Equity*to the accompanying consolidated financial statements in Item 18.

 

Principalof and interest on PLDT's 9.25% Notes due 2006, 7.85% Notes due 2007, 8.35%Notes due 2017, 10.5% Notes due 2009, 10.625% Notes due 2007 and 11.375% Notesdue 2012 are payable in U.S. dollars which may be purchased from the localbanking system either pursuant to the registration of such Notes with the BSPor otherwise pursuant to specific BSP approval of such payment.  Such principaland interest may also be paid utilizing PLDT's own dollar resources withoutnecessity of BSP approval.  The BSP, with the approval of the President of the Philippines, may, however, restrict the availability of foreign exchange during an exchangecrisis, when an exchange crisis is imminent, or in times of national emergency.

 

Taxation

 

Thefollowing is a description of the material Philippine and United States federalincome tax consequences to United States Holders (as defined below) of owningshares of Common Stock and ADSs.  It applies to you only if you hold your CommonStock or ADSs as capital assets for tax purposes.  This section does not applyto you if you are a member of a special class of holders subject to specialrules, including a dealer in securities, a trader in securities that elects touse a mark-to-market method of accounting for securities holdings, a tax-exemptorganization, a life insurance company, a person liable for alternative minimumtax, a person that actually or constructively owns 10% or more of PLDT’s votingstock, a person that holds Common Stock or ADSs as part of a straddle or ahedging or conversion transaction, or a United States Holder (as defined below)whose functional currency is not the U.S. dollar.

 

Thissection is based on the United States Internal Revenue Code of 1986, as amended(the “U.S. Tax Code”), its legislative history, existing and proposedregulations, published rulings and court decisions, and the laws of thePhilippines including the Philippine National Internal Revenue Code of 1997(the “Philippine Tax Code”) all as currently in effect, as well as on theConvention Between the Philippines and the United States (the“Philippines-United States Tax Treaty”).  These laws are subject to change,possibly on a retroactive basis.  In addition, this section is based in part onthe representations of the Depositary and the assumption that each obligationin the Deposit Agreement and any related agreement will be performed accordingto its terms.

 

You are a United States Holder if you are a beneficial owner of CommonStock or ADSs and you are a citizen or resident of the United States, adomestic corporation, an estate whose income is subject to United Statesfederal income tax regardless of its source, or a trust if a United Statescourt can exercise primary supervision over the trust’s administration and oneor more United States persons are authorized to control all substantialdecisions of the trust.

** **

In general,taking into account the earlier assumptions, for United States federal incometax purposes, if you hold ADRs evidencing ADSs, you will be treated as theowner of the shares represented by those ADRs.  Exchanges ofshares for ADRs, and ADRs for shares, generally will not be subject to United States federal income tax.

** **

This discussion addresses only United States federal income taxation and Philippine income taxation, estate and donor’staxation, stock transaction taxation and documentary stamp taxes.

** **

*Philippine Taxation*

 

*Taxes on Exchange of ADSs for Common Stock*

 

Philippine capital gains or stock transaction taxesand documentary stamp taxes may be payable upon the transfer of shares ofCommon Stock to a holder of ADRs to a holder of GDRs.  See “Capital Gains Taxand Stock Transaction Tax” and “Documentary Stamp Taxes.”

 

*Taxationof Dividends*

 

Underthe Philippine Tax Code, dividends paid by a Philippine corporation to citizensof the Philippines and resident aliens in the Philippines are subject to afinal withholding tax of 10% while those paid to non-resident aliens engaged intrade or business within the Philippines are subject to a final withholding taxof 20%.  Dividends paid to non-resident aliens not engaged in trade or businesswithin the Philippines are subject to a final withholding tax of 25%. Dividendspaid by a Philippine corporation to other Philippine corporations or toresident non-Philippine corporations are not subject to tax.  Dividends paid tonon-resident non-Philippine corporations not engaged in a trade or business inthe Philippines by Philippine corporations shall be subject to a finalwithholding tax of 15%, subject to the condition that the country in which thenon-resident non-Philippine corporation is domiciled either (i) allows a credit against the tax due from the non-resident non-Philippinecorporation taxes deemed to have been paid in the Philippines equivalent to 20%effective November 1, 2005 (which represents the difference between the regularincome tax on non-resident non-Philippine corporations of 35% effective November1, 2005 and the 15% tax on dividends) (this condition is not satisfied in thecase of corporations domiciled in the United States if such corporations ownless than 10% of the voting stock of PLDT) or (ii) imposes no income taxes ondividends received by such non-resident non-Philippine corporations fromPhilippine corporations (this condition is not satisfied in the case ofcorporations domiciled in the United States).  If neither of the foregoingconditions are met, the dividends paid to the non-resident non-Philippinecorporation shall be subject to the regular income tax rate of 35% effective November1, 2005.  Under rulings issued by Philippine tax authorities, Hong Kong isviewed as falling within clause (ii) and, thus, companies that are organized inHong Kong that are not engaged in trade or business in the Philippines may beentitled to the benefit of the 15% rate.  Such rulings, however, were basedupon the laws of Hong Kong as in effect at the time such rulings were issued,and any subsequent changes in the relevant laws of Hong Kong may affect thevalidity of such rulings.  PLDT reserves the right to change the rate at whichit makes payments of withholding tax whenever it deems it appropriate underapplicable law.

 

Ifthe holder of Common Stock is a non-resident foreign partnership, which istreated as a corporation for Philippine tax purposes, dividends on the CommonStock should be subject to a final withholding tax of 35% effective November 1,2005.  Cede & Co., the partnership nominee of Depository Trust Company(“DTC”), should qualify as a non-resident foreign partnership that would betreated as a corporation for Philippine tax purposes.

 

Incertain circumstances where the holder holds Common Stock, a tax treaty ratemay be applicable with respect to the Philippine withholding tax.  Forinstance, holders under such circumstances and as to which thePhilippines-United States Tax Treaty would be applicable would be eligible fora treaty rate of 25% (or 20% in certain instances).  The 20% treaty rate isgenerally not applicable in the case of non-resident non-Philippinecorporations domiciled in the United States which own less than 10% of thevoting stock of PLDT.  Holders are required, however, to establish to thePhilippine taxing authorities their eligibility for such treaty rate.Philippine tax authorities have prescribed, through an administrative issuance,procedures for availment of tax treaty relief.  PLDT intends to pay withholdingtax at the reduced treaty rate in respect of shares the registered holder ofwhich is Cede & Co., on the basis that Cede & Co. is a resident of the United States for purposes of the Philippines-United States Tax Treaty.  PLDT reserves theright to change the rate at which it makes payments of withholding tax wheneverit deems it appropriate under applicable law.

 

*Capital Gains Tax and Stock Transaction Tax*

 

The Philippine Tax Code provides that gain from thesale of shares of stock in a Philippine corporation shall be treated as derivedentirely from sources within the Philippines, regardless of where the sharesare sold.  Subject to applicable tax treaty rates, the rate of tax on suchgain, where the share is not disposed of through the Philippine Stock Exchange,is a final tax of 5% for gains not exceeding Php100,000 and a final tax of 10%for gains in excess of that amount.  The rate is the same for both non-residentindividuals and non-resident non-Philippine corporations.  While this tax isnot collected through withholding, the Philippine Tax Code prohibits a transferfrom being recorded on the books of the corporation unless the Philippine Commissionerof Internal Revenue certifies that the tax has been paid or certain otherconditions are met.  

 

The sale of shares which arelisted in and sold through the PSE are subject to the stock transaction taximposed at the rate of 1/2 of 1% of the gross selling price.  This tax isrequired to be collected and paid to the government by the selling stockbrokeron behalf of his client.  Sales of shares other than through a Philippine stockexchange will be subject to Philippine capital gains tax in the manner describedabove.

 

Underthe Philippines-United States Tax Treaty, gains derived by a United Statesresident from the sale of shares of stock of a Philippine corporation will notbe subject to Philippine tax, either capital gains tax or stock transaction tax,unless the shares are those of a corporation over 50% of the assets of whichconsist of real property interests located in the Philippines.  PLDT doesnot believe that it currently is such a corporation.

 

*Documentary Stamp Taxes*

 

The Philippines imposes a documentary stamp tax upontransfers of shares of stock issued by a Philippine corporation at a rate ofPhp1.50 on each Php200, or fractional part thereof, of the par value of theshares.  The documentary stamp tax is collectible wherever the document ismade, signed, issued, accepted or transferred, when the obligation or rightarises from Philippine sources or the property is situated in the Philippines.  Effective March 20, 2004, the documentary stamp tax rate upon transfer ofshares of stock issued by a Philippine corporation is Php0.75 on each Php200,or fractional part thereof, of the par value of the shares.  However, theimposition of documentary stamp tax on secondary transfer of shares of stock ofa Philippine Corporation which is listed and traded through the facilities ofthe Philippine Stock Exchange is suspended for a period of five years countedfrom the same effective date.  

 

*Estateand Donor's Taxes*

 

Sharesof stock issued by a corporation organized or constituted in accordance withPhilippine law are deemed to have a Philippine situs and their transfer by wayof succession or donation is subject to Philippine estate and gift taxes.  Thetransfer of shares of stock by a deceased individual to his heirs by way ofsuccession, whether such an individual was a citizen of the Philippines or analien, regardless of residence, will be subject to Philippine estate tax atprogressive rates ranging from 5% to 20% if the net estate is over Php200,000.Individual and corporate shareholders, whether or not citizens or residents ofthe Philippines, who transfer the Equity Securities by way of gift or donationwill be liable for Philippine donor’s tax on such transfers at progressiverates ranging from 2% to 15%, if the net gifts made during the calendar yearexceed Php100,000.  The rate of tax with respect to net gifts made to astranger, who is not a brother, sister, spouse, ancestor, lineal descendant orrelative by consanguinity in the collateral line within the fourth degree ofrelationship of the donor, is a flat rate of 30%. Estate and gift taxes willnot be collected in respect of intangible personal property such as the EquitySecurities:

 

•        if the deceased at the time ofdeath, or the donor at the time of donation, was a citizen and resident of a foreigncountry which at the time of his death or donation did not impose a transfertax of any character in respect of intangible personal property of citizens ofthe Philippines not residing in that foreign country, or

 

•        if the laws of the foreign countryof which the deceased or the donor was a citizen and resident at the time ofhis death or donation allow a similar exemption from transfer or death taxes ofevery character or description in respect of intangible personal property ownedby citizens of the Philippines not residing in that foreign country.

 

Sharesof stock of a deceased shareholder or shares that have been donated may not betransferred on the books of the corporation without a certificate from thePhilippine Commissioner of Internal Revenue that the applicable estate ordonor's taxes have been paid.  In the case of ADRs, however, there is nocorresponding requirement, unless a transfer of the ADRs would also entail achange in the registration of the underlying shares.

 

*United States**Federal Taxation*

 

For United States federal income tax purposes, UnitedStates Holders of ADRs will be treated as the owners of the underlying sharesof Common Stock.  Deposits and withdrawals by United States Holders of sharesof Common Stock in exchange for ADRs will not be subject to United States federal income tax.

 

*Taxation of Dividends*

 

Underthe United States federal income tax laws, and subject to the passive foreigninvestment company, or PFIC, rules discussed below, if you are a United StatesHolder, the gross amount of any dividend we pay out of our current oraccumulated earnings and profits (as determined for United States federalincome tax purposes) is subject to United States federal income taxation.  Ifyou are a non-corporate United States Holder, dividends paid to you in taxableyears beginning before January 1, 2011 that constitute qualified dividendincome will be taxable to you at a maximum tax rate of 15% provided that, inthe case of Common Stock or ADSs, you hold the Common Stock or ADSs for morethan 60 days during the 121-day period beginning 60 days before the ex-dividenddate.  Dividends we pay with respect to the Common Stock or ADSs generally willbe qualified dividend income.

 

Youmust include any Philippine tax withheld from the dividend payment in thisgross amount even though you do not in fact receive it.  The dividend istaxable to you when you, in the case of Common Stock, or the Depositary, in thecase of ADSs, receive the dividend, actually or constructively.  The dividendwill not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations.The amount of the dividend distribution that you must include in your income asa United States Holder will be the U.S. dollar value of the Philippine pesopayments made, determined at the spot Philippine peso/U.S. dollar rate on thedate the dividend distribution is includible in your income, regardless ofwhether the payment is in fact converted into U.S. dollars.  Generally, anygain or loss resulting from currency exchange fluctuations during the periodfrom the date you include the dividend payment in income to the date youconvert the payment into U.S. dollars will be treated as ordinary income orloss and will not be eligible for the special tax rate applicable to qualifieddividend income.  The gain or loss generally will be income or loss fromsources within the United States for foreign tax credit limitation purposes.Distributions in excess of current and accumulated earnings and profits, asdetermined for United States federal income tax purposes, will be treated as anon-taxable return of capital to the extent of your basis in the Common Stockor ADSs and thereafter as capital gain. 

 

Subjectto certain limitations, the Philippine tax withheld in accordance with the Philippines-United States Tax Treaty and paid over to the Philippines will be creditable againstyour United States federal income tax liability.  Special rules apply indetermining the foreign tax credit limitation with respect to dividends thatare subject to the maximum 15% tax rate.

 

Dividendswill be income from sources outside the United States.  Dividends paid in taxable years beginning beforeJanuary 1, 2007 generally will be “passive” or “financial services” income, anddividends paid in taxable years beginning after December 31, 2006 will,depending on your circumstances, be “passive” or “general” income which, ineither case, is treated separately from other types of income for purposes ofcomputing the foreign tax credit allowable to you.

* *

*Sale**or Other Disposition of Equity Securities*

 

A United States Holder willrecognize capital gain or loss upon the sale of Common Stock or ADSs in an amount equal to the differencebetween such United States Holder's basis in the Common Stock or ADSs and theamount realized upon the sale.  Such gain or loss generally will be long-termcapital gain or loss if, at the time of sale, exchange or retirement, the CommonStock or ADSs have been held for more than one year.  Capital gain of anon-corporate U.S. holder that is recognized in taxable years beginning on orafter May 6, 2003 and before January 1, 2011 is generally taxed at a maximumrate of 15% where the property is held for more than one year.  Generally, anysuch gain or loss will be treated as realized income or loss from sourceswithin the United States for foreign tax credit limitation purposes.  UnitedStates Holders may not be eligible to credit against their United States federal income tax liability amounts paid in respect of the Philippine stocktransaction tax.  See “— Philippine Taxation — Capital Gains Tax and StockTransaction Tax.”

 

TheU.S. Tax Code does not authorize a comparable credit for foreign gift ordonor's taxes such as those imposed by the Philippines.  See “— PhilippineTaxation — Estate and Donor's Taxes.”

 

*PassiveForeign Investment Company Rules*

 

Webelieve that the Common Stock or ADSs should not be treated as stock of a PFICfor United States federal income tax purposes, but this conclusion is a factualdetermination that is made annually and thus may be subject to change.  If wewere to be treated as a PFIC, unless the Common Stock or ADSs are “marketablestock” and a United States Holder elects to be taxed annually on amark-to-market basis with respect to the Common Stock or ADSs, gain realized onthe sale or other disposition of your Common Stock or ADSs would in general notbe treated as capital gain.  Instead, if you are a United States Holder, youwould be treated as if you had realized such gain and certain "excessdistributions" ratably over your holding period for the Common Stock orADSs and would be taxed at the highest tax rate in effect for each such year towhich the gain was allocated, together with an interest charge in respect ofthe tax attributable to each such year.  In addition, dividends that youreceive from us will not be eligible for the special tax rates applicable toqualified dividend income if we are a PFIC either in the taxable year of thedistribution or the preceding taxable year, but instead will be taxable atrates applicable to ordinary income.

 

Documents on Display

 

We are subject to the informational requirements ofthe Exchange Act, and file reports and other information with the Commission,as required by this act.  Reports and other information filed by us with theCommission may be inspected and copied at the Commission’s Public ReferenceRoom at 100 F Street, N.E., Washington, D.C. 20549.  The public may obtaininformation on the operation of the Commission’s Public Reference Room bycalling the Commission in the United States at 1-800-SEC-0330.  The Commissionalso maintains a website that contains reports, proxy statements and otherinformation regarding registrants that file electronically with theCommission.  Copies of this material may be obtained by mail from the publicreference section of the Commission, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.  These reports and other information may also be inspectedat the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005, on which the American Depositary Shares representing our CommonStock are listed.

 

Item 11.     Quantitativeand Qualitative Disclosures about Market Risks

** **

Ouroperations are exposed to various risks, including liquidity risk, foreign exchangerisk and interest rate risk.  The importance of managing these risks hassignificantly increased in light of considerable change and continuing volatilityin the Philippine and international financial markets.  With a view to managingthese risks, we have incorporated financial risk management functions in ourorganization, particularly in our treasury operations.  

 

Liquidity RiskManagement

 

We seek to manage our liquidity profile to be able tofinance our capital expenditures and service our maturing debts.  To cover ourfinancing requirements, we intend to use internally generated funds andproceeds from debt. 

 

Aspart of our liquidity risk management program, we regularly evaluate ourprojected and actual cash flow information and continuously assess conditionsin the financial markets for opportunities to pursue fund-raising initiatives.These initiatives may include bank loans, export credit agency-guaranteedfacilities, and debt capital and equity market issues.

 

Foreign Exchange Risk Management

 

As at December 31, 2005, the Philippine peso hadappreciated by 6% against the U.S. dollar to Php53.062 to US$1.00 fromPhp56.341 to US$1.00 as at December 31, 2004.  As at December 31, 2004, on theother hand, the peso depreciated by 1% to Php56.341 to US$1.00 from Php55.586to US$1.00 as at December 31, 2003.  As at December 31, 2005, the Philippine peso had appreciated by 18% against the Japanese yen to Php0.4504 to JP¥1from Php0.5495 to JP¥1 as at December 31, 2004.  On the other hand, as at December 31, 2004, the peso depreciated by 6% to Php0.5495 to JP¥1 from Php0.5193 to JP¥1as at December 31, 2003.  As such, we recognized foreign exchange gains of Php8,196million in 2005 as compared to foreign exchange losses of Php2,776 millionrecorded in 2004.  

 

The following table shows our consolidated foreigncurrency-denominated monetary assets and liabilities and their peso equivalentsas at December 31, 2005 and 2004:

 

** **

**2005**

2004

** **

**U.S. Dollar**

**Php Equivalent**(1)

U.S. Dollar

Php Equivalent(2)

 

(in millions)

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**US$244**

**Php12,957**

US$248

Php13,902

Short-term investments

**55**

**2,934**

73

4,090

Trade and other receivables

**139**

**7,371**

146

8,229

Derivative assets

**1**

**37**

6

335

Total current financial assets

**439**

**23,299**

473

26,556

** **

** **

 

** **

** **

**Noncurrent Financial Assets**

** **

 

** **

** **

Derivative assets

**50**

**2,648**

73

4,116

Notes receivable

**6**

**346**

5

286

Total noncurrent financial assets

**56**

**2,994**

  78

4,402

**Total Financial Assets**

**US$****495**

**Php26,293**

US$551

Php30,958

** **

** **

** **

 

 

** **

** **

** **

 

 

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**US$42**

**Php2,227**

US$32

Php1,754

Accrued expenses and other current liabilities

**68**

**3,587**

82

4,599

Derivative liabilities

**3**

**192**

10

473

Interest-bearing financial liabilities

**337**

**17,867**

483

27,195

Total current financial liabilities

**450**

**23,873**

607

34,021

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities – net of current portion

**1,738**

**92,218**

2,292

129,108

Derivative liabilities

**109**

**5,777**

105

6,930

Preferred stock subject to mandatory redemption

**221**

**11,702**

222

12,512

Total noncurrent financial liabilities

**2,068**

**109,697**

2,619

148,550

**Total Financial Liabilities**

**US$2,518**

**Php133,570**

US$3,226

Php182,571

 

*(1)**The exchangerate used was Php**53.062 to US$1.00.*

*(2)**The exchangerate used was Php56.341 to US$1.00.*

 

While a certain percentage of our revenues is eitherlinked to or denominated in U.S. dollars, substantially all of our indebtednessand related interest expense, a substantial portion of our capital expendituresand a portion of our operating expenses are denominated in foreign currencies,mostly in U.S. dollars.

* *

As at December 31, 2005, approximately 98% of our total consolidated debts were denominated in foreigncurrencies, principally in U.S. dollars.  Of our foreign currency-denominateddebts 3% are in Japanese yen, and the balance in U.S. dollars.  Thus, aweakening of the Philippine peso against the U.S. dollar or Japanese yen willincrease both the principal amount of our unhedged foreign currency-denominateddebts (representing 53% of our consolidated debts,or 44% net of our U.S. dollar cash balances as at December 31, 2005), and interest expense on our debt in peso terms.  Inaddition, many of our financial ratios and other financial tests will benegatively affected.  If, among other things, the value of the Philippine pesoagainst the U.S. dollar drops from its current level, we may be unable tomaintain compliance with these ratios, which could result in acceleration ofsome or all of our indebtedness.  For further information on our loancovenants, see “Item 5. Operating and Financial Review and Prospects —Liquidity and Capital Resources — Financing Activities — Debt Financing —Covenants” above and *Note 12 – Interest-bearing Financial Liabilities* tothe accompanying consolidated financial statements in Item 18.

* *

Tomanage our foreign exchange risks, stabilize cash flows, and improve investmentand cash flow planning, we enter into forward foreign exchange contracts,foreign currency swap contracts, currency options and other hedging productsaimed at reducing and/or managing the adverse impact of changes in foreignexchange rates on our operating results and cash flows.  However, these hedgesdo not cover all of our exposure to foreign exchange risks.

 

Specifically,we use forward foreign exchange contracts, foreign currency swap contracts andcurrency option contracts to manage the foreign exchange risk associated withour foreign currency-denominated loans. In order to manage hedge costs of thesecontracts, we utilize structures that include credit-linkage with PLDT as thereference entity, combination of currency option contracts, and fixed tofloating coupon only swap agreements.  Accounted as either cash flow hedges ortransactions not designated as hedges, changes in the fair value of theseinstruments are recognized as cumulative translation adjustments in equityuntil the hedged item is recognized in earnings or directly to income for theperiod.  As at December 31, 2005, PLDT’s outstanding forward foreign exchangecontracts, principal-only long-term cross-currency swap contracts and currencyoption contracts amounted to US$220 million and JP¥1,282 million; US$550million; and US$175 million, respectively.  Smart has no outstanding forwardforeign exchange contracts as at December 31, 2005.

 

Interest Rate Risk Management

 

Ona limited basis, we enter into interest rate swap agreements in order to manageour exposure to interest rate fluctuations.  We make use of hedging instrumentsand structures solely for reducing or managing financial risks associated withour liabilities and not for trading or speculative purposes.

 

The table below sets out thecarrying amount, by maturity, of our financial instruments that are exposed tointerest rate risk for the years ended December 31, 2005 and 2004.  Financial instruments that are not subject to interest rate risk were not included in thetable:

 

Year Ended December 31, 2005

 

** **

 

 

 

 

**Over 5**

**In U.S.**

 

**Fair Value**

** **

**Below 1 year**

**1-2 years**

**2 – 3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**In Php**

** **

 

 

 

 

 

**(in millions)**

 

** **

**Liabilities:**

 

 

 

 

 

 

 

** **

Long-term Debt

 

 

 

 

 

 

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

US$ Notes (in millions)

115

159

–

175

549

998

52,980

58,780

Interest rate

9.25%

7.85% to 10.625%

–

10.50%

8.35% and 11.375%

–

–

–

US$ Fixed Loans (in millions)

64

45

31

22

280

442

23,451

17,350

Interest rate

4.49% to 7.75%

4.49% to 7.58%

4. 49% to 7.58%

4.49% to 5.65%

2.25%

–

–

–

Japanese Yen (in millions)

23

24

12

–

–

59

3,139

3,158

Interest rate

2.125%

2.125%

2.125%

–

–

–

–

–

Philippine Peso (in millions)

15

 

–

15

–

30

1,580

1,795

Interest rate

15.816% to 24%

 

–

15.0%

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

129

143

79

117

94

562

29,806

29,806

Interest rate

GOVCO’s Cost + 0.20%; 0.05% to 3.625% over LIBOR

GOVCO’s Cost + 0.20%; 0.05% to 3.625% over LIBOR

0.05% to 3.625% over LIBOR

.05% to 2.5% over LIBOR

1% over LIBOR

–

–

–

Japanese Yen (in millions)

5

5

3

–

–

13

709

709

Interest rate

1.70% over LIBOR

1.70% over LIBOR

1.70% over LIBOR

–

–

–

–

–

Philippine Peso (in millions)

3

–

–

2

7

12

648

648

Interest rate

1% over 91-day T-bill rate; 90-day PHIBOR + 3%

–

–

1% over 91-day T-bill rate 

1% over 91-day T-bill rate

–

–

–

 

 

 

 

 

 

**2,11****6**

**112,313**

**112,246**

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

U.S. Dollar (US$125 million)

–

–

–

–

–

(30)

(1,569)

(1,569)

Japanese Yen (JPY15,037 million)

–

–

–

–

–

–

–

–

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

11.375%

–

–

–

Variable Rate on JPY notional

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

 

 

–

 

YearEnded December 31, 2004

 

** **

 

 

 

 

**Over 5**

**In U.S.**

 

**Fair Value**

** **

**Below 1 year**

**1-2 years**

**2-3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**In Php**

** **

 

 

 

 

 

**(in millions)**

 

** **

**Liabilities:**

 

 

 

 

 

 

 

** **

Long-term Debt

 

 

 

 

 

 

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

US$ Notes (in millions)

110

130

272

175

549

1,236

69,652

73,662

Interest rate

9.875%

9.250%

7.85% to 10.625%

10.5%

8.35% to 11.375%

–

–

–

US$ Fixed Loans (in millions)

125

93

51

58

280

 607

34,190

32,452

Interest rate

4.49% to 8.03%

4.49% to 7.95%

4.49% to 7.95%

4.49% to 7.58%

2.25%

–

–

–

Japanese Yen (in millions)

27

27

27

14

–

  95

5,363

5,414

Interest rate

2.125%

2.125%

2.125%

2.125%

–

–

–

–

Philippine Peso (in millions)

14

14

 

–

14

42

2,371

2,537

Interest rate

11.18% to 24%

11.6% to 24%

 

–

15%

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

212

213

139

117

132

 813

45,832

45,832

Interest rate

GOVCO’s Cost + 0.20%; 0.15% to 4.3% over LIBOR

GOVCO’s Cost + 0.20%; 0.15% to 4.3% over LIBOR

GOVCO’s Cost + 0.20%; 0.15% to 4.3% over LIBOR

0.15% to 4.3% over LIBOR

0.5% to 2.5% over LIBOR

–

–

–

Japanese Yen (in millions)

6

6

6

4

–

  22

1,212

1,212

Interest rate

1.7% over JPY LIBOR 

1.7% over JPY LIBOR 

1.7% over JPY LIBOR 

1.7% over JPY LIBOR

–

–

–

–

Philippine Peso (in millions)

2

2

1

2

7

14

777

777

Interest rate

1% to 4% over 91-T-bill rate; 90-day PHIBOR + 3%

1% over 91-day T-bill rate; 90-day PHIBOR + 3%

1% over 91-day T-bill rate; 90-day PHIBOR + 3%

1% over 91-day T-bill rate; 90-day PHIBOR + 3%

1% over 91-day T-bill rate

–

–

–

 

 

 

 

 

 

**2,8****29**

**159,****397**

**161,886**

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

U.S. Dollar (US$125 million)

–

–

–

–

–

(62)

(3,468)

(3,468)

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

11.375%

–

–

–

Variable Rate on JPY notional

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

–

–

–

 

Item 12.     Description of Securities Other thanEquity Securities

 

Not Applicable.

 

PART II

 

Item 13.     Defaults, Dividend Arrearages andDelinquencies

 

Piltelhas experienced significant financial difficulties in recent years.  It hasrestructured substantially all of its debts in accordance with its debtrestructuring plan, which was signed on June 4, 2001.  In June and October 2002, more creditors of Piltel agreed to participate in its restructuring plan on thesame terms.  As at December 31, 2005, total restructured long-term debt ofPiltel amounted to Php6,787 million, with maturities of up to June 14, 2016.As at December 31, 2005, Piltel had an aggregate principal amount of Php49million of unrestructured debt.

 

As at December 31, 2005, Piltelis not in compliance with the terms of convertible bonds with principal amountof US$0.7 million (approximately US$0.9 million redemption price at the optionof the holders).  Accordingly, the amount was presented as part of currentportion of interest-bearing financial liabilities.  See *Note 12 –Interest-bearing Financial Liabilities* to the accompanying consolidatedfinancial statements in Item 18.

 

TheSeries C, Class I Preferred Stock of Piltel, is entitled to annual cumulativecash dividends of Php0.20 per share (10% on the par value per share).  Piltelis in arrears with payments of dividends with respect to the Series C, Class IPreferred Stock in the amount of Php1 million for the years ended December 31,2005, 2004, 2003 and 2002.  As at the date of this annual report on Form 20-F,the total arrearage with respect to the Series C, Class I Preferred Stock ofPiltel amounted to approximately Php6 million.  

 

Item 14.     MaterialModifications to the Rights of Security Holders and Use of Proceeds

 

None.

 

Item 15.     Controls andProcedures

** **

Our management, with theparticipation of our principal executive officer and principal financialofficer, carried out an evaluation on the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of theSecurities Exchange Act of 1934, as amended) as at December 31, 2005.  Based onthis evaluation, our chief executive officer and principal financial officerconcluded that our disclosure controls and procedures were effective as at December 31, 2005.

 

During 2005, no change to ourinternal control over financial reporting occurred that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

Item 16A. Audit Committee Financial Expert

 

Ourboard of directors has determined that currently none of the members of theAudit Committee is an audit committee financial expert as defined under theapplicable rules of the U.S. SEC issued pursuant to Section 407 of theSarbanes-Oxley Act of 2002.  However, our board of directors believes that theaudit committee members along with its advisors, possess sufficient financialknowledge and experience.  Our board of directors has appointed one of ournon-independent directors, Ms. Corazon de la Paz, as Audit Committee advisor torender advice on complex financial reporting or accounting issues that may beraised in our Audit Committee’s evaluation of our financial statements andother related matters.  Formerly the Chairman and a Senior Partner of JoaquinCunanan & Company (a member firm of PricewaterhouseCoopers Worldwide), Ms. Corazonde la Paz, is a certified public accountant and possesses in depth knowledge ofaccounting principles (including U.S. GAAP), internal controls and proceduresfor financial reporting and audit committee functions, as well as extensiveexperience in overseeing or actively supervising the preparation, audit,analysis or evaluation of financial statements and in addressing complex andgeneral financial reporting, accounting and audit issues.

 

Item 16B.  Code of Business Conduct and Ethics

 

On March 30, 2004, our board of directors approved andadopted our Code of Business Conduct and Ethics, or Code of Ethics, that setsout our business principles and standards of behavior and businessrelationships.

 

It is our declared objective thatall our actions and those of our directors, officers and employees must, at alltimes, be consistent with the principles of accountability, integrity, fairnessand transparency.

 

Our Code of Ethics providesstandards to foster honest and ethical behavior including the following:

 

1.       Compliance with applicable laws,rules and regulations;

 

2.       Ethical handling of conflicts ofinterest, corporate opportunities and confidential information;

 

3.       Protection and proper use of ourassets;

 

4.       Fair dealing with our employees,customers, service providers, suppliers and competitors;

 

5.       Compliance with our reporting anddisclosure obligations to the relevant regulators and the investors;

 

6.       Compliance with our disclosure andfinancial reporting controls and procedures;

 

7.       Assessment and management of risksinvolved in our business endeavours; and

 

8.       Adoption of international bestpractices of good corporate governance in the conduct of our business.

 

*Corporate Governance*

 

OurCode of Ethics has been adopted to strengthen the implementation of our CorporateGovernance Manual, or Governance Manual, which was adopted and approved by ourboard of directors in September 2002.  Our Governance Manual seeks toinstitutionalize the principles of good governance which our board of directorsand management believe to be a necessary component of sound businessmanagement.

 

OurGovernance Manual conforms with the requirements of the Code of CorporateGovernance, or Philippine SEC Governance Code, that was promulgated by thePhilippine Securities and Exchange Commission, or Philippine SEC, under thePhilippine SEC Memorandum Circular No. 2, Series of 2002, on April 5, 2002, inline with the Philippine Government’s policy to promote corporate governancereform aimed to raise investor confidence, develop capital market and helpachieve sustained growth for the Philippine corporate sector and the economy.

 

In compliance with the Philippine SEC Governance Codeand consistent with the relevant provisions of the Securities Regulation Codeand Corporation Code of the Philippines, our Governance Manual covers thefollowing key areas:

 

1.       The qualifications and grounds fordisqualification for directorship;

 

2.       The requirement that at least twoor twenty percent of the members of our board of directors, whichever islesser, must be independent directors and the standards/criteria for thedetermination of independent directors;

 

3.       The duties and responsibilities ofour board of directors and the individual directors;

 

4.       Our board committees,specifically, the nomination committee, audit committee and executivecompensation committee, the composition and the principal duties andresponsibilities of such committees;

 

5.       The role of our chairman inensuring compliance with the corporate governance principles;

 

6.       The role of our president/chiefexecutive officer in ensuring that our organizational and procedural controlsare adequate and effective to ensure reliability and integrity of financial andoperational information, effectiveness and efficiency of operations,safeguarding of assets and compliance with laws, rules, regulations andcontracts;

 

7.       The duties and responsibilities ofour corporate secretary/assistant corporate secretary in terms of the supportservices that they need to provide our board in upholding sound corporategovernance;

 

8.       The duties and responsibilities ofthe head of our internal audit organization that would provide our board ofdirectors, management and shareholders with reasonable assurance that our keyorganizational and procedural controls are appropriate, adequate, effective andreasonably complied with;

 

9.       The functions of our independentauditors that would reasonably ensure an environment of sound corporategovernance as reflected in our financial records and reports; the requirementthat non-audit work of the independent auditors should not conflict with theirfunction as independent auditors; the requirement to rotate, at least onceevery five years, the independent auditors or the lead partner assigned tohandle the independent audit of our financial statements;

 

10.    Our commitment to respect andpromote shareholders’ rights such as voting right, pre-emptive right,inspection right, dividend right, appraisal right, and right to receiveinformation about the background, business experience, compensation andshareholdings of our directors and officers and their transactions with us;

 

11.    The requirement to appoint acompliance officer and the duties and responsibilities of such complianceofficer including the establishment of an evaluation system to determine andmeasure compliance with the provisions of our Governance Manual; and

 

12.    The penalties for violations ofour Governance Manual.

 

Wehave summarized in our website the differences between our corporate governmentpractices and those required of U.S. listed companies under NYSE Section303A.11.  Please refer to:

 

http://www.pldt.com.ph/download/pldt-corpgov_manual.pdfOR http://www.pldt.com.ph/cgov/downloads/pldt-corpgov_manual.pdf

http://www.pldt.com.ph/download/pldt-code_ethics.pdfOR http://www.pldt.com.ph/cgov/downloads/Code%20of%20Ethics(BD_APPRVD)-03.30,04

http://www.pldt.com.ph/download/pldt-disclosure.pdfOR http://www.pldt.com.ph/cgov/downloads/NYSE-PLDT_CG-DISC-07.01.pdf

* *

*Chief Corporate Governance Officer*

 

Our chief governance officer is responsible formonitoring compliance with, interpreting and deciding any issues arising from,investigating and determining violations and recommending the disciplinaryactions against violators of our Governance Manual and Code of Ethics.

 

*Board Committees*

 

Wehave four board committees namely, the governance and nomination, audit,executive compensation and finance committees.  Each committee has a board-approved written charter that provides for such Committee’s composition,membership qualifications, functions and responsibilities, conduct of meetings,and reporting procedure to the board.  See “Item 6. Directors, SeniorManagement and Employees –– Audit, Governance and Nomination, ExecutiveCompensation and Finance Committees” for further details.

 

*Internal AuditOrganization*

 

Wehave an internal audit organization that determines whether our network or riskmanagement, control and governance processes are adequate and functioning toensure that:

 

1.       Risks are appropriately identifiedand managed;

 

2.       Significant financial, managerial,and operating information are accurate, reliable, and timely;

 

3.       Employees’ actions are incompliance with policies, standards, procedures, and applicable laws andregulations;

 

4.       Resources are acquiredeconomically, used efficiently, and adequately protected;

 

5.       Programs, plans and objectives areachieved;

 

6.       Quality and continuous improvementare fostered in our control process;

 

7.       Significant legislative orregulatory issues impacting us are recognized and addressed appropriately; and

 

8.       Interaction with various governancegroups occurs as needed.

 

To ensure independence, the headof our internal audit organization reports functionally to our audit committeeand administratively to our president and chief executive officer.  He isaccountable to management and our audit committee in the discharge of hisduties and is required to:

 

1.       Provide annually an assessment onthe adequacy and effectiveness of our processes for controlling our activitiesand managing our risks;

 

2.       Report significant issues relatedto the processes of controlling our activities, including potentialimprovements to those processes, and provide information concerning suchissues;

 

3.       Periodically provide informationon the status and results of the annual audit plan and the sufficiency of ourinternal audit organization’s resources; and

 

4.       Coordinate with and provideoversight of other control and monitoring functions (risk management,compliance, security, legal, ethics, environmental, external audit).

 

Our internal audit organizationhas a charter that has been approved by our audit committee.  It seeks tocomply with the Standards for the Professional Practice of Internal Auditing ofThe Institute of Internal Auditors in the discharge of its scope of work andresponsibilities.

 

*Policy on Employee Disclosure of QuestionableAccounting or Auditing Matters*

 

We have a written policy on thehandling of employees’ complaints or disclosures about irregularities regardingaccounting, internal controls and auditing matters and the protection againstretaliation for those employees who make such complaints or disclosures.

 

Anyemployee may submit a complaint or disclosure of the above nature, in writing,to the Audit Committee or, verbally, to the internal audit organization, ineither case, through the head of our internal audit organization.

 

The head of our internal auditorganization facilitates the investigation of these complaints or disclosuresand ensures the appropriate reporting to our audit committee on the results ofthe investigations and the prompt referrals of findings to the appropriateunits concerned.  Our committee on employee discipline is responsible forevaluating and approving the appropriate disciplinary action against erringemployees with the rank of assistant vice president or lower while our corporategovernance officer jointly with our corporate secretary are responsible forevaluating and recommending to our president/chief executive officer theappropriate disciplinary action against erring officers with the rank of vicepresident or higher.

 

Thepublic may obtain information on our Code of Ethics, Corporate GovernanceGuidelines and Charters of our Board Committees.  We undertake to provide acopy, without charge, to any person requesting for such copy from our chief governanceofficer, Rene G. Banez*,*with e-mail address*rgbanez@pldt.com.ph*ortelephone number +632-816-8917.  We also maintain a website at *www.pldt.com.ph*whereinreports filed by us and other information may be accessed.

 

Item 16C.  Principal Accountant Fees and Services

 

The following tablesummarizes the fees paid for services billed by our external auditors for thefiscal years ended December 31, 2005 and 2004:

 

 

**2005**

** **

**2004**

 

(in millions)

 

 

 

 

Audit Fees

Php38.1

 

Php29.4

Tax Fees

1.0

 

5.3

All Other Fees

10.5

 

4.3

**Total**

**Php49.6**

** **

**Php39.0**

 

*Audit Fees*.  This category includes the auditof our annual financial statements, review of interim financial statements andservices that are normally provided by the independent auditors in connectionwith statutory and regulatory filings or engagements for those fiscal years.  

 

*Tax Services*.  This category includes tax compliance, tax advice andtax planning services performed by our independent auditors.

 

*All Other Fees*.  This category consists primarilyof fees for consultation with respect to our IAS adoption, Sarbanes-Oxley Act404 compliance initiatives, risk management review in respect of Smart’sinformation infrastructure and due diligence review for certain projects.

 

The fees presented above includesout-of-pocket expenses incidental to our independent auditors’ work, whichamounts do not exceed 5% of the agreed-upon engagement fees.

 

Our Audit Committee pre-approves all audit and non-auditservices as these are proposed or endorsed before these services are performedby our independent auditors.    

 

Item 16D.  Exemptionfrom the listing Standards for Audit Committees

 

Not applicable.

 

Item 16E.   Purchasesof Equity Securities by the Issuer and Affiliated Purchaser

 

Not applicable.

PARTIII

 

Item17.     Financial Statements 

 

Not applicable.

 

Item 18.     Financial Statements

 

Indexto Financial Statements

 

 

**Page**

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AUDITED ANNUAL FINANCIAL STATEMENTS

 

Report of Independent Auditors

150

Balance Sheets as at December 31, 2005 and 2004

151

Statements of Income for the Years Ended December 31, 2005, 2004 and 2003

152

Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2005, 2004 and 2003

153

Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003

154

Notes to Financial Statements

155

** **

Item 19.     Exhibits

** **

See Item 18 above for detailsof the financial statements filed as part of this annual report.

** **

Exhibitsto this report:

** **

1(a).

Articles of Incorporation (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

1(b).

By-Laws (as amended on June 28, 2005)

 

 

2.

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4.

Material Contracts

 

 

6.

Computation of Earnings per Share

 

 

7.

Calculation of Ratio of Earnings to Fixed Charges

 

 

8.

Subsidiaries

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

 

SIGNATURE

 

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf.

 

 

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

 

 

 

 

 

 

 

 

 

By:

 

                /s/ Ma. Lourdes C. Rausa-Chan

 

 

MA. LOURDES C. RAUSA-CHAN

 

 

Senior Vice President, Corporate Affairs and Legal

 

 

Services Head and Corporate Secretary

 

 

 

Date:  June 29, 2006
****
EXHIBIT INDEX

** **

Exhibit Number

**Description of Exhibit**

 

 

1(a)

Articles of Incorporation (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

1(b)

By-Laws (as amended on June 28, 2005) 

 

 

2

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to `furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4(a)

Stock Purchase and Strategic Investment Agreement, dated September 28, 1999, by and among PLDT, First Pacific Limited, Metro Pacific Corporation, Metro Pacific Asia Link Holdings, Inc., Metro Pacific Resources, Inc. and NTT Communications Corporation (incorporated by reference to PLDT's Form 6-K for the month of September 1999 [2])

 

 

4(b)

Executive Stock Option Plan (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

4(c)

Master Restructuring Agreement, dated June 21, 2000, as amended on December 12, 2000 and December 19, 2000, between Piltel, Piltel (Cayman) Limited, PLDT, The Chase Manhattan Bank, as escrow agent, Metropolitan Bank and Trust Company, as administrative agent and the creditors named therein (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

4(d)

The Cooperation Agreement, dated January 31, 2006, entered into by and among PLDT, First Pacific, Metro Pacific Corporation, Metro Asia Link Holdings, Inc., Metro Pacific Resources, Inc., Larouge B.V., Metro Pacific Assets Holdings, Inc., NTT Communications and DoCoMo (incorporated by reference to Schedule 13D/A (Amendment No.2) filed with the United States Securities and Exchange Commission by Nippon Telegraph and Telephone Corporation and NTT Communications Corporation on January 31, 2006) 

 

 

6

Computation of Earnings per Share

 

 

7

Calculation of Ratio of Earnings to Fixed Charges 

 

 

8

Subsidiaries 

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

** **
****
**EXHIBIT 1(b)**

 

 

Adopted January

Amended April

Amended January

Amended April

Amended April

Amended July

Amended May

Amended January

Amended July

Amended January

Amended January

Amended June

Amended July

Amended April

Amended January

Amended March

Amended February

Amended February

Amended March

Amended February

Amended January

**Amended June**

 

10,

26,

05,

16,

15,

26,

08,

27,

25,

10,

30,

25,

11,

18,

25,

29,

24,

29,

29,

26,

25,

**28**,

 

1938

1939

1940

1947

1953

1955

1962

1964

1966

1968

1968

1968

1969

1979

1983

1983

1998

2000

2001

2003

2005

**2005**

 

 

PHILIPPINELONG DISTANCE TELEPHONE COMPANY

 

AMENDEDBY - LAWS

ARTICLEI

OFFICE
 

*          Section1.  The principal office of the corporation shall be in Metro Manila, Philippines.

(*Amendedon June 25, 1968 and February 29, 2000)

 

ARTICLE ii
MEETINGS

 

*          Section1.  The annual meeting of the stockholders shall be held at the principaloffice of the corporation or at such other place designated by the Board ofDirectors in the city or municipality where the principal office of thecorporation is located on the second Tuesday in June of each year, at 4 o’clock P.M. The Board of Directors may, for good cause, postpone the annual meeting ofstockholders to a reasonable date. 

 

Written or printed notice of every annual stockholders’ meeting, whichnotice shall state the date, time and place of the meeting and the purpose orpurposes for which the meeting is called, shall be given by the Secretary or bythe Assistant Secretary to each stockholder.  Such notice may be delivered tothe stockholders personally, or enclosed in an envelope with the postagethereon fully prepaid, addressed to each stockholder at his or her last knownplace of residence or business, and posted at a Post Office in the Philippines or in the United States of America.  Such delivery or mailing of notice must be made atleast fifteen (15) business days before the date fixed for the meeting.  Nopublication of notice of any regular or special meeting of stockholders in thepublic newspapers shall be required.

(*Amended on July 26, 1955, February 24, 1998 and March 29, 2001)

 

*          Section 2.Special meetings of the stockholders may be called at any time by the Presidentor three (3) of the Directors or by any number of stockholders representingtwo-thirds (2/3) of the subscribed capital stock.  Notice in writing of suchmeeting, stating the date, time and place thereof, and the purpose or purposesfor which such meeting is called shall be given to each stockholder by theSecretary or Assistant Secretary or in case of his absence, inability, refusalor neglect to act, then by the President, Directors or stockholders calling thesaid meeting.  Such notice may be delivered to the stockholders personally orenclosed in an envelope and addressed, with the postage thereon fully prepaid,to each stockholder at his or her last known place of residence or business andposted at a Post Office in the Philippines or the United States of America.Such delivery or mailing of notice must be made at least fifteen (15) businessdays before the date fixed for the meeting and the statement of service by suchdelivery or mailing shall be entered upon the minutes of meeting and the saidminutes upon being read and approved at a subsequent meeting of thestockholders shall be conclusive on the question of service.

(*Amendedon July 26, 1955, February 24, 1998 and March 29, 2001)

 

*          Section3.  Every meeting of the stockholders shall be presided by the President or, inhis absence, by a chairman to be chosen by the stockholders representing amajority of the shares of the corporation issued and outstanding and entitledto vote present or duly represented at said meeting.  The Secretary or, in hisabsence, the Assistant Secretary, shall act as secretary of every meeting butif neither the Secretary nor the Assistant Secretary is present, the chairmanof the meeting shall appoint a secretary of the meeting.

(*Newprovision adopted on March 29, 2001)

 

*          Section4.  A meeting of the Board of Directors shall be held promptly after theadjournment of the annual meeting of the stockholders; subsequent regularmeetings shall be held monthly on the last Tuesday of each month at 9:30 A. M.,at the office of the corporation in Metro Manila, Philippines or such othertime and place in or outside the Philippines as the Board of Directors may fromtime to time determine.  Special meetings may be called by the Presidentwhenever he may think proper, and he shall forthwith call such meetingswhenever requested in writing to do so by any three (3) Directors.  Suchmeetings shall be called for a date not later than seven (7) days from the dateof such request.  Notice in writing of every special meeting of the Board ofDirectors, stating the date and place thereof and the purpose or purposes forwhich the meeting is called, shall be given to each Director by the Secretaryor Assistant Secretary, or in case of his absence, inability, refusal orneglect to act, by any person appointed for that purpose by the President orthree (3) of the Directors.  Such notice may be delivered to each Directorpersonally, by telegraph, facsimile, e-mail, or other means of written orprinted communication generally accepted and used by the business community asat present available or be made available through technical advances orinnovations in the future, at least twenty-four (24) hours previous to the timefixed for the meeting, or may be given by enclosing a notice in an envelope,with the postage thereon fully prepaid, addressed to each Director at his lastknown place of residence or business and posted at least three (3) days beforethe date fixed for the meeting.  Service of notice, by delivery, telegraph,facsimile, e-mail, or other means of written or printed communication generallyaccepted and used by the business community as at present available or be madeavailable through technical advances or innovations in the future, shall beentered upon the minutes of the meeting, and said minutes, upon being read andapproved at a subsequent meeting of the Board, shall be conclusive upon thequestion of service.  Notice of regular meetings of the Board of Directors ishereby dispensed with.

(*Amendedon January 5, 1940, May 8, 1962, January 30, 1968,

July 11, 1969, February 24, 1998, February 29, 2000 and March 29, 2001)

 

*          Section 5.   Everymeeting of the Board of Directors shall be presided by the Chairman of theBoard or, in his absence, the President, or in his absence, by any Directorchosen by majority of the members of the Board present at such meeting at whichthere is a quorum.  The Secretary or, in his absence, the Assistant Secretary,shall act as secretary of every meeting but if neither the Secretary nor theAssistant Secretary is present, the chairman of the meeting shall appoint asecretary of the meeting.

(*Newprovision adopted on March 29, 2001)

 

*          Section 6.  If anyregular meeting of stockholders or Board of Directors provided for herein shallfall on a legal holiday, then such meeting shall be held on the next succeedingbusiness day at the same hour; but special meetings of the stockholders orDirectors may be held upon a holiday with the same force and effect as if heldupon a business day.

(*Amendedon March 29, 2001)

 

*          Section7.  Meetings of the stockholders shall be held at the principal office of thecorporation or at such other place designated by the Board of Directors in thecity or municipality where the principal office of the corporation is located.Meetings of the Board of Directors shall be held at the principal office of thecorporation or at such other place in or outside the Philippines as the Board,from time to time, may determine.

(*Amendedon May 8, 1962, July 11, 1969, February 29, 2000 and March 29, 2001)

 

ARTICLEIII

QUORUM ANDVOTING REQUIREMENTS
 

*          Section1.  At any meeting of the stockholders, persons representing, in person or byproxy, a majority of the shares of the corporation issued and outstanding andentitled to vote at the said meeting shall constitute a quorum for thetransaction of any business, except as otherwise provided by law.  In theabsence of a quorum, the President or, in his absence, any person entitled topreside or act as secretary of the meeting shall have the power to adjourn themeeting from time to time until the requisite number of shares to constitute aquorum is present or represented. When a meeting of the stockholders isadjourned to another time or place, it shall not be necessary to give notice ofthe adjourned meeting if the time and place to which the meeting is adjournedare announced at the meeting at which the adjournment was taken.  At thereconvened meeting, any business may be transacted that could have beentransacted on the original date of the meeting.

(*Amendedon March 29, 1983 and March 29, 2001)

 

*          Section 2.  At anymeeting of the stockholders at which there is quorum, all matters approved bythe stockholders representing a majority of the issued and outstanding sharesof the corporation entitled to vote present in person or by proxy at such meetingshall be valid as a corporate act, except for such matters which require thevote of the stockholders representing a higher percentage of the outstandingshares as prescribed by statute or these By-Laws.

(*Newprovision adopted on March 29, 2001)

*          Section3.  Each stockholder is entitled to one vote for each share of stock held byhim, where such stock has voting rights on the matter under consideration, andsuch stock may be represented by the holder thereof or by his attorney dulyauthorized by proxy executed in writing on forms prescribed by the Board ofDirectors which shall be furnished to a stockholder upon his request.  Unlessotherwise provided in the proxy, it shall be valid only for the meeting inrespect of which such proxy was issued.  Proxies must be filed with theSecretary, Assistant Secretary or transfer agent of the corporation at leasttwo (2) days before the day of the meeting.  Any proxy filed with the Secretary,Assistant Secretary or transfer agent of the corporation may be revoked by thestockholder concerned either in an instrument in writing duly presented to theSecretary, Assistant Secretary or transfer agent of the corporation at leasttwo (2) days before the day of the meeting or by his personal presence at themeeting.  The decision of the Secretary on the validity of proxies shall befinal and binding until and unless set aside by a court of competentjurisdiction.

(*Amendedon March 29, 1983, February 24, 1998 and March 29, 2001)

 

*          Section4.  At every election of Directors, each holder of stock which has votingrights for the election of Directors is entitled to one vote for each share ofsuch stock held by him for as many persons as there are Directors to beelected, or to cumulate said shares and give one (1) candidate as many votes asthe number of Directors multiplied by the number of his share shall equal, orto distribute such votes on the same principle among as many candidates as heshall think fit.

(*Amended on March 29, 1983, February 24, 1998 and March 29, 2001)

 

*          Section 5.  TheBoard of Directors shall have the power to close the stock transfer books ofthe corporation for the following periods:  (a) not exceeding sixty (60) dayspreceding the date of any meeting of stockholders or the date for the allotmentof rights or the date when any change or conversion or exchange of capitalstock shall go into effect or a date in connection with obtaining the consentof stockholders for any purpose; and (b) not exceeding forty five (45) dayspreceding the date of payment of any dividend; provided, however, that in lieuof closing the stock transfer books as aforesaid, the Board of Directors mayfix in advance a date as follows:  (a) not exceeding sixty (60) days precedingthe date for any meeting of stockholders or the date for the allotment ofrights, or the date when any change or conversion or exchange of capital stockshall go into effect, or a date in connection with obtaining such consent; and(b) not exceeding forty five (45) days preceding the date of payment of anydividend; as a record date for the determination of the stockholders entitledto notice of, and to vote at, any such meeting, and any adjournment thereof, orto any such allotment of rights, or to exercise the rights in respect of anysuch change, conversion or exchange of capital stock, or to give such consent,or entitled to receive payment of any such dividend, and in such case, suchstockholders, and only such stockholders as shall be stockholders of record onthe date so fixed, shall be entitled to such notice of, and to vote at, suchmeeting, and any adjournment thereof, or to receive such allotment of rights,or to exercise such rights, or to give such consent, or to receive payment ofsuch dividend, as the case may be, notwithstanding any transfer of any stock onthe books of the corporation after any such record date fixed as aforesaid.

(*Amendedon July 26, 1955, February 24, 1998 and March 29, 2001)

 

*          Section 6.  At anymeeting of the Board of Directors, a majority of the number of the Directors asspecified in the Articles of Incorporation shall constitute a quorum for thetransaction of business.  In the absence of a quorum, a majority of theDirectors present may adjourn any meeting from time to time until a quorum behad.  Notice of any adjourned meeting need not be given.

(*Newprovision adopted on March 29, 2001)

 

*          Section 7.  At any meeting of the Board of Directors atwhich there is a quorum, all matters approved by at least a majority of theDirectors present at such meeting shall be valid as a corporate act, except forsuch matters which require the vote of majority of all the members of the Boardas prescribed by statute or these By-Laws.  

(*New provision adopted on March 29, 2001)

ARTICLE IV
CAPITALSTOCK

 

*          Section1.  The certificate of stock shall be in such form and device as may beprescribed by the Board of Directors from time to time.

(*Amendedon April 15, 1953)

 

*          Section2.  The person, firm or corporation in whose name the stock stands on the booksof the corporation, whether individually or as trustee, pledgee, or otherwise,may be recognized and treated by the corporation as the absolute owner of thestock, and the corporation shall in no event be obliged to deal with or torecognize the rights or interests of other persons in such stock or in any partthereof.

(*Amendedon April 15, 1953)

 

*          Section3.  Certificates shall be issued in the manner prescribed by law to eachstockholder, showing the number of shares to which he is entitled; and saidcertificates, and the shares named therein shall be transferable only upon thebooks of the corporation by the shareholder named in the certificate, or hisduly authorized attorney or representative.  The Board of Directors shallappoint one or more registration agents of the corporation and no certificatefor any share of stock shall be delivered to any stockholder until there isendorsed thereon a certificate of one of the registrars, showing suchcertificate to have been duly registered.

(*Amendedon April 15, 1953)

 

*          Section4.  No new certificates of any share shall be issued until the old certificate,representing the same, has been surrendered and cancelled; provided, however,that in case of lost, stolen or destroyed certificates of stock, the followingprocedure shall be followed for the issuance by the corporation of newcertificates in lieu of those lost, stolen or destroyed:

 

(a)The registered owner of certificates of stock in this corporation or his legalrepresentative shall file an affidavit, in triplicate, with this corporationsetting forth, if possible, the circumstances as to how, when and where saidcertificates were lost, stolen or destroyed, the number of shares representedby each certificate and the serial number of the certificates.  He shall submitsuch other information and evidence which he may deem necessary.

 

(b)After verifying the affidavit and other information and evidence with the booksof this corporation, this corporation shall publish a notice, in a newspaper ofgeneral circulation in the Philippines published in the place where thiscorporation has its principal office, once a week for three (3) consecutive weeks, at the expense of the registered owner of thecertificates of stock which have been lost, stolen or destroyed.  The noticeshall state the name of this corporation, the name of the registered owner andthe serial number of said certificates, and the number of shares represented byeach certificate, and that after the expiration of one (1) year from the dateof the last publication, if no contest has been presented to this corporationregarding said certificates of stock, the right to make such contest shall bebarred and this corporation shall cancel in its books the certificates of stockwhich have been lost, stolen or destroyed and issue in lieu thereof newcertificates of stock, unless the registered owner files a bond or othersecurity in lieu thereof as may be required running for a period of one (1)year for a sum and in such forms and with such sureties as may be satisfactoryto the Board of Directors, in which case a new certificate may be issued evenbefore the expiration of the one (1) year period provided herein:  Provided,That if a contest has been presented to this corporation or if an action ispending in court regarding the ownership of said certificates of stock whichhave been lost, stolen or destroyed, the issuance of the new certificates ofstock in lieu thereof shall be suspended until final decision by the courtregarding the ownership of said certificates of stock.

(*Amendedon April 15, 1953 and January 25, 2005)

 

*          Section5.  Certificates of stock shall be signed by the President or Vice Presidentand the Secretary or an Assistant Secretary of the corporation and sealed withthe corporate seal; provided, however, that where any such certificate issigned by a transfer agent and by a registrar, the signatures of any suchPresident, Vice President, Secretary or Assistant Secretary and the seal of thecorporation upon such certificate may be facsimiles, engraved or printed.  Incase any officer or officers who have signed, or whose facsimile signature orsignatures have been used on, any such certificate or certificates shall ceaseto be such officer or officers of the corporation, whether because of death,resignation or otherwise, before such certificate or certificates have beendelivered by the corporation, such certificate or certificates may neverthelessbe adopted by the corporation and be issued and delivered as though the personor persons who signed such certificate or certificates or whose facsimilesignature or signatures have been used thereon had not ceased to be suchofficer or officers of the corporation.  A transfer agent of the corporationmay sign certificates of stock by facsimile signature provided the use thereofis permitted by the stock exchange on which the corporation’s stock is listedand by the corporation’s other transfer agents.

(*Amendedon April 15, 1953, July 26, 1955 and July 11, 1969)

 

*          Section6.  The corporation shall not issue any stock certificate evidencing, eithersingly, or with other shares, any fractional part of a share, or any undividedinterest in any share.

(*Amendedon April 15, 1953)

 

ARTICLEV

DIRECTORS

 

*          Section1.  The Board of Directors shall consist of thirteen (13) members, each of whommust hold at least one (1) share of the stock of the corporation in his ownname on the books of the corporation.  Directors shall be elected from amongthe stockholders at their annual meeting or at any meeting held in lieu thereoffor that purpose.  Each Director shall hold office until the annual meeting ofstockholders held next after his election and until his successor shall havebeen elected and qualified, except in case of death, resignation,disqualification or removal from office.

 

Thereshall be at least two (2) Independent Directors or such Independent Directorsas shall constitute at least twenty percent (20%) of the members of the Boardof Directors, whichever is lesser.  An “Independent Director” is a directorindependent of management and who, apart from his fees and shareholdings, isfree from any business or other relationship with the corporation which could,or could reasonably be perceived to, materially interfere with his exercise ofindependent judgment in carrying out his responsibilities as a director of thecorporation and includes, among other persons, one who:

 

(a)        is not a director or officerof the corporation or any of its related companies or any of its substantialshareholders (other than as an Independent Director of any of the foregoing);

 

(b)        is not a substantialshareholder of the corporation or any of its related companies or any of itssubstantial shareholders;

 

(c)        is not a relative of any director, officeror substantial shareholder of the corporation, or any of its related companiesor any of its substantial shareholders.  For this purpose, “relatives” includesspouse, parent, child, brother, sister, and the spouse of such child, brotheror sister;

 

(d)        is not acting as a nominee or representativeof any director, or officer or substantial shareholder of the corporation, orany of its related companies or any of its substantial shareholders;

 

(e)        has not been employed in any executivecapacity by the corporation, or any of its related companies or any of itssubstantial shareholders within the last five (5) years;

 

(f)        is not retained, or within the last five (5)years has not been retained, as a professional adviser by the corporation, orany of its related companies or any of its substantial shareholders, eitherpersonally or through his firm;

 

(g)        has not engaged and does not engage in anytransaction with the corporation or with any of its related companies or withany of its substantial shareholders, whether by himself or with other persons orthrough a firm of which he is a partner or a company of which he is a directoror substantial shareholder, other than the transactions which are conducted atarm’s length and are immaterial;

** **

(h)        is not employed as an officer or executiveof another entity where any of the corporation’s officers or executives serveson that entity’s Compensation Committee; or

 

(i)         is not affiliated with or employed by or,within the last five (5) years, has not been affiliated with or employed by thecorporation’s present or former external auditors or their affiliates.

** **

When used in relation to a Company,“related company” means another company which is: (i) its holding company, (ii)its subsidiary, or (iii) a subsidiary of its holding company; and “substantialshareholder” means any person who is directly or indirectly the beneficialowner of more than ten percent (10%) of any class of its equity security.

 

  A Director or any person nominated forelection to the Board of Directors must possess the following minimum qualificationsas determined by the Nomination Committee or any other committee constituted bythe Board of Directors that, by its charter as approved by the Board ofDirectors, is vested with the duties and responsibilities of a nominationcommittee:

 

(a)        at least a college graduate,or in the absence of such college degree or formal education, sufficientexperience in managing a business;

 

(b)        at least twenty-one (21) years old;

 

(c)        provenintegrity and probity; and

 

(d)        assiduousness in the performance of duties. 

** **

No person shall qualifyor be eligible for nomination or election to the Board of Directors if he isengaged in any business that competes with or is antagonistic to that of thecorporation or its subsidiaries.  Without limiting the generality of theforegoing, a person shall be deemed to be so engaged:

 

(i)                 If he is an employee, officer, manager or controlling person, or theowner (either of record or beneficially) of ten per cent (10%) or more of anyoutstanding class of shares, of any corporation (other than one in which thiscorporation owns at least thirty per cent (30%) of the capital stock) or entityengaged in a business that the Board of Directors, by at least a majority vote,determines to be competitive or antagonistic to that of this corporation or anyof its subsidiaries; or

 

(ii)               If he is an employee, officer, manager or controlling person, or theowner (either of record or beneficially) of ten per cent (10%) or more of anyoutstanding class of shares, of any corporation or entity engaged in any lineof business of this corporation or any of its subsidiaries, when in thejudgmentof the Board of Directors, by at least a majority vote, the laws againstcombinations and restraint of trade shall be violated by such person’smembership in the Board of Directors; or

 

(iii)              If the Board of Directors, in the exercise of its judgment in goodfaith, determines, by at least a majority vote, that he is a nominee of anyperson set forth in (i) and (ii) above.

 

In determining whether or not a person is acontrolling person, beneficial owner, or the nominee of another, the Board ofDirectors may take into account such factors as business and familyrelationships.
 
In addition, no person shall qualify or be eligiblefor nomination or election to the Board of Directors if he is suffering fromany of the following grounds for disqualification:
 

(a)        convictionby final judgment of an offense involving moral turpitude or similar fraudulentacts or transgressions;

 

(b)        conviction by final judgment of an offensepunishable by imprisonment for a period exceeding six (6) years, or a violationof the Corporation Code committed within five (5) years prior to the date of election as a director;

 

(c)        judicialdeclaration of bankruptcy or insolvency;

 

(d)        final finding by the PhilippineSecurities and Exchange Commission (Commission) or a Philippine court oradministrative body or other regulatory authority of competent jurisdiction ofhaving willfully violated, or willfully aided, abetted, counseled, induced orprocured the violation of, any provision of the Securities Regulations Code,the Corporation Code or any other laws administered by the Commission or BangkoSentral ng Pilipinas (BSP), or any rule, regulation or order of the Commissionor BSP; and
 
(e)        final finding by a foreign court oradministrative body or other regulatory authority of competent jurisdiction ofhaving committed the acts listed in the preceding clause (d) in violation ofthe applicable laws, rules or regulations of the relevant foreign jurisdiction.
 
            Exceptas otherwise provided in the preceding paragraphs, the Nomination Committee orany other committee constituted by the Board of Directors that, by its charteras approved by the Board of Directors, is vested with the duties andresponsibilities of a nomination committee shall have the power and authorityto evaluate and decide whether any person nominated for election as a Directorhas all the qualifications and none of the disqualifications specified in thepreceding paragraphs.  The Nomination Committee or any other committeeconstituted by the Board of Directors that, by its charter as approved by theBoard of Directors, is vested with the duties and responsibilities of anomination committee shall also have the power and authority to determine such****other criteria for qualification and disqualification of Directors orpersons nominated for election to the Board of Directors, including grounds fortemporary disqualification of Directors.

 
For the proper implementation of this provisions of this Section, all nominations for election of directors by the stockholders shallbe submitted in writing to the Board of Directors through the President and theSecretary at this corporation’s principal place of business at least sixty (60)working days before the regular or special meeting of stockholders for thepurpose of electing directors.
(*Amendedon May 8, 1962, February 29, 2000 and March 29, 2001, February 26, 2003 and January 25, 2005)
 

*          Section2.  In case of any vacancy in the Board of Directors for any cause or reasonwhatsoever, other than removal by the stockholders or by expiration of the termof office, the vacancy may be filled by the vote of at least a majority of theremaining Directors then in office, if still constituting a quorum.  A Directorso elected to fill a vacancy shall hold office for the unexpired term of hispredecessor in office.  Any vacancy in the Board of Directors resulting fromthe removal of a director by the stockholders in the manner provided by law maybe filled by election at the same meeting at which the removal took place or atany annual or special meeting of stockholders called for the purpose aftergiving notice as prescribed in these By-Laws.

(*Amendedon May 8, 1962, January 10, 1968 and March 29, 2001)

 

*          Section3.  The Board of Directors may create an Executive Committee to be composed ofnot less than three (3) members of the Board of Directors to be appointed bythe Board of Directors.  Such committee shall, except as may otherwise beprovided by law, have and exercise all the powers of the Board of Directorsduring the intervals between the meetings of the full Board.  Such committeemay prescribe rules for its governance; its meetings may be held at such placewithin the Philippines as it may determine or authorize, and majority of themembers of said committee at any meeting shall constitute a quorum.  Inaddition to taking action at a meeting, the Executive Committee may validly actupon the written consent of a majority of its members.  At each meeting of theBoard of Directors, the acts and proceedings of the Executive Committee sincethe preceding meeting of the Board of Directors shall be submitted for suchaction thereon as the Board may deem proper.

 (*Amendedon May 8, 1962, January 10, 1968 and March 29, 2001)

 

*          Section 4.  Thecorporation will not speculate in its own or constituent companies’ securities,or permit similar speculations by any of its constituent companies.

 

*          Section 5.  The Board of Directors may create committees andother bodies it may deem necessary or advisable in respect of the affairs ofthe corporation.  The membership, powers, duties, functions andresponsibilities of such committees and bodies shall be prescribed by the Boardof Directors.  The members of such committees and bodies shall be appointed bythe Board of Directors for a term co-terminus with that of the Board ofDirectors that appoints them unless sooner terminated or removed.

(*Newprovision effective February 24, 1998)

 

ARTICLEVI

OFFICERS

 

*          Section1.  The officers of the corporation shall be a President, a Senior Executive Vice****President, one or more Executive Vice Presidents, one or more SeniorVice Presidents, one or more First Vice Presidents, one or more VicePresidents, a Treasurer, one or more Assistant Treasurers, a Secretary, one ormore Assistant Secretaries, a Controller, and one or more AssistantControllers, all of whom shall be elected by the Board of Directors. 

 

Immediatelyafter the election of the Directors at the annual or special meeting called forsuch purpose, the Board of Directors shall elect the officers of thecorporation.  The Board may also, in its discretion, elect a Chairman of theBoard.  Any two (2) or more positions may be held concurrently by the sameperson, except that no one shall act as Chairman or President and Treasurer orSecretary at the same time.

(*Amendedon May 8, 1962, January 27, 1964, July 25, 1966,

April 18, 1979, January 25, 1983, March 29, 2001 and January 25, 2005)

 

            Section2.  The Board of Directors may appoint or elect such other officers as it shalldeem advisable, who shall, respectively, have such authority and perform suchduties as may be prescribed from time to time by the Board of Directors.

 

*          Section3.  The term of office of all officers shall be co-terminus with that of theBoard of Directors that elects or appoints them except in case of death,resignation, disqualification or removal from office.  

(*New provision adopted on March 29, 2001)

 

*          Section4.  If any of the officers becomes vacant by reason of death, resignation,failure to qualify, disqualification, removal from office or for any othercause, the Board of Directors may elect a successor who shall hold office forthe unexpired term of his predecessor in office.

(*Newprovision adopted on March 29, 2001)

 

ARTICLEVII

CHAIRMAN OF THEBOARD, PRESIDENT, SENIOR EXECUTIVE VICE PRESIDENT, EXECUTIVE VICE PRESIDENTS,SENIOR VICE PRESIDENTS, FIRST VICE PRESIDENTS, AND VICE PRESIDENTS

 

*          Section1.  Chairman of the Board.  The Chairman of the Board (if there be one)shall preside at all meetings of the Board of Directors.  He shall alsoexercise such powers and perform such duties as the Board of Directors mayassign to him.

(*Amendedon April 26, 1939, April 16, 1947 and March 29, 2001)

 

*          Section2.  President.  The President, who must be a director, shall be thechief executive officer of the corporation.  He shall have general care,supervision and management of the business and affairs of the corporation,subject to the control of the Board of Directors.  He shall exercise suchfunctions and perform all duties incident to the office of the President andsuch other duties as may, from time to time, be assigned to him by the Board oras prescribed in these By-Laws.  He shall see that all orders and resolutions ofthe Board are carried into effect, subject, however, to the right of the Boardto delegate any specific powers, except such as may be by statute exclusivelyconferred on the President, to any other officer or officers of thecorporation.  He shall preside at all the meetings of the stockholders and, inthe absence of the Chairman of the Board, preside at the meetings of the Boardof Directors.

(*Amended on April 26, 1939, April 16, 1947, April 15, 1953 and March 29, 2001)

 

*          Section3.  The Senior Executive Vice President, Executive Vice Presidents, SeniorVice Presidents, First Vice Presidents, and Vice Presidents.  In the caseof absence or disability of the President, the Senior Executive Vice Presidentshall act as President and in case of his absence or disability, the Boardshall designate any of the Executive Vice Presidents to act as President, andperform the duties and exercise the powers of the President.  The SeniorExecutive Vice President, Executive Vice Presidents, Senior Vice Presidents, FirstVice Presidents and Vice Presidents shall perform such duties as the Boardshall, from time to time, prescribe.

(*Amended on April 26, 1969, January 27, 1964,

April 18, 1979 and January 25, 1983)

 

ARTICLE VIII
SECRETARYAND ASSISTANT SECRETARY

 

*          Section1.  The Secretary shall make full and faithful record of the proceedings of allmeetings of the stockholders, Board of Directors and Executive Committee inbooks to be kept for that purpose.  He shall give or cause to be given allnecessary notice of and materials for all meetings, have custody of thecorporate seal and affix it when authorized, preserve and keep all materialcontracts, papers and documents, and keep or cause to be kept a list of allstockholders.  The Secretary shall act as inspector at the election ofDirectors and, as such, determine the number of shares of stock outstanding andentitled to vote, the shares of stock represented at the meeting, the existenceof a quorum, the validity and effect of proxies, and receive votes, ballots andconsents, hear and determine all challenges and questions arising in connectionwith the right to vote, count and tabulate votes, ballots, consents, determinethe results and do such acts as are proper to conduct the election or vote.The Secretary may assign the exercise or performance of any or all of theforegoing duties, powers and functions to any other person or persons, subjectalways to his supervision and control.  The Secretary shall generally performsuch services and duties as are incident to his office and as the Board ofDirectors or the President may, from time to time, prescribe or assign to him.

(*Amendedon March 29, 2001)

 

*          Section 2.  In theabsence or disability of the Secretary, the Assistant Secretary shall act inhis place and perform his duties.  The Assistant Secretary shall also performsuch other duties as may, from time to time, be delegated to him by theSecretary and as the Board of Directors or the President may prescribe orassign to him.

(*Newprovision adopted on March 29, 2001)

 

ARTICLE IX

TREASURER AND ASSISTANT TREASURER

 

*          Section 1.  The Treasurer shall be the chief fiscal officerof the corporation.  He shall discharge such duties and have such powers as theBoard of Directors or the President may prescribe or assign to him.

(*Amendedon March 29, 2001)

 

*          Section 2.  In the absence or disability of theTreasurer, the Assistant Treasurer shall act in his place and perform hisduties.  The Assistant Treasurer shall also perform such other duties as may,from time to time, be delegated to him by the Treasurer and as the Board ofDirectors or the President may prescribe or assign to him.

(*Newprovision adopted on March 29, 2001)

 

 ARTICLEX

INDEMNIFICATIONOF DIRECTORS/OFFICERS

 

This corporation shall indemnify every director or officer,his heirs, executors and administrators against all costs and expensesreasonably incurred by such person in connection with any civil, criminal,administrative or investigative action, suit or proceeding (other than anaction by this corporation) to which he may be, or is made, a party by reasonof his being or having been a director or officer of this corporation, exceptin relation to matters as to which he shall be finally adjudged in such action,suit or proceeding, to be liable for gross negligence, misconduct, or breach offiduciary duty.

 

Inthe event of a settlement or compromise, indemnification shall be provided onlyin connection with such matters covered by the settlement as to which thiscorporation is advised by counsel that the person to be indemnified did notcommit a breach of duty as such director or officer.

 

Theamount payable by way of indemnity shall be determined and paid only pursuantto a resolution adopted by a majority of all of the members of the Board ofDirectors.

 

The costs and expenses incurred in defending theaforementioned action, suit or proceeding may be paid by this corporation inadvance of the final disposition of such action, suit or proceeding, asauthorized in the manner provided for in the preceding paragraph, upon receiptof an undertaking by or on behalf of the director or officer to repay suchamount, unless it shall ultimately be determined that he is entitled to beindemnified by this corporation as authorized in this Article.

(*New provision adopted on March 29, 2001)

 

*ARTICLE XI

INDEPENDENT AUDITOR
 

***          Section 1.**The Audit Committee constituted by the Board ofDirectors shall**be directly responsible for the appointment, compensation,retention, removal or termination of engagement and oversight of**theIndependent Auditor**, including resolving disagreements between managementand the Independent Auditor regarding financial reporting and approving allaudit engagement fees and terms.**

**(Amended on June 28, 2005)**

** **

***          Section 2.  At the regular meeting of theAudit Committee immediately preceding the annual meeting of the stockholders ofthe corporation, the Audit Committee shall appoint the Independent Auditor.  Incase of resignation, removal or termination of engagement of the IndependentAuditor, the Audit Committee shall, as soon as practicable, select and appointa replacement.**

**(*Newprovision adopted on June 28, 2005)**

** **

***          Section3.  The Independent Auditor or the lead, engagement or coordinating auditpartner having the primary responsibility for the audit or reviewing the auditof the corporation’s financial accounts shall be rotated after five (5) yearsof service (with time of service counted from January 1, 2003) for a time outperiod of at least five (5) years.**

**(*Newprovision adopted on June 28, 2005)**

** **

***          Section4.  The Independent Auditor shall report directly to the Audit Committee.**

**(*Newprovision adopted on June 28, 2005)**

 

ARTICLEXII

BANKINGAND CONTRACTS

 

*          Section1.  All moneys belonging to the corporation shall be deposited in such bank orbanks as may be, from time to time, designated by the Board of Directors andshall be withdrawn only on checks of the corporation signed by suchofficer/officers of the corporation or by such person/persons as may be, fromtime to time, designated by the Board of Directors.  Promissory notes, bills ofexchange, trade acceptances, drafts and other negotiable instruments shall besigned and/or drawn in the name of the corporation by such officer/officers ofthe corporation or by such person/persons as may be, from time to time,designated by the Board of Directors.

(*Amendedon January 25, 2005)

 

*          Section2.  All contracts, instruments or documents pertaining to transactions orcorporate actions authorized by the Board of Directors shall be signed in thename of the corporation by such officer/officers of the corporation or by suchperson/persons as may be, from time to time, designated by the Board ofDirectors.  In the absence of any specific designation by the Board ofDirectors, such contracts, instruments or documents shall be signed in the nameof the corporation by the President, or by any officer/officers orexecutive/executives of the corporation or any person/persons duly authorizedby the President.  Contracts, instruments or documents to be entered into inthe ordinary course of business of the corporation which do not require theapproval of the Board of Directors may be signed by the President or by anyofficer/officers or executive/executives of the corporation or anyperson/persons duly designated by the President, or by such officer/officers orexecutive/executives of the corporation or any person/persons duly authorizedfor such purpose under administrative orders approved by the President and ineffect at the relevant time.

(*Amendedon March 29, 2001 and January 25, 2005)

 

ARTICLE XIII

FISCAL YEAR
 

*          Section1.  The fiscal year in the business of the corporation shall be the calendaryear, extending from January first to December thirty-first inclusive, in eachyear.

 

*          Section 2.  The corporation shall submit to the stockholdersat least fifteen (15) business days prior to the annual meeting, a financialreport of the operations of the corporation for the preceding****year,which shall include financial statements, duly signed and certified by thecorporation’s Independent Auditor. 

(*Amendedon February 24, 1998, March 29, 2001, July 16, 2002 and January 25, 2005)

 

ARTICLE XIV

SEAL

 

Section 1.  The corporate seal ofthis corporation shall bear upon its face, in a circle, the words “PHILIPPINELONG DISTANCE TELEPHONE COMPANY”, and within the circle a desk telephoneinstrument and the words and figures, “INCORPORATED 1928”.

(*Amendedon March 29, 2001)

 

ARTICLE XV

AMENDMENTS

 

*          Section 1.  The owners of the majority of the subscribedcapital stock may, at a regular or special meeting duly called for the purpose,amend or repeal these By-Laws, or adopt new By-laws.  The owners of two-thirdsof the subscribed capital stock may delegate to the Board of Directors thepower to amend or repeal these By-Laws or to adopt new By-Laws; provided,however, that any such power so delegated to the Board of Directors shall beconsidered as revoked whenever a majority of the stockholders shall so vote ata regular or special meeting called for the purpose.

(* Amended on April 15, 1953)

 

*          Section2.  All By-Laws and amendments thereto adopted shall be certified by a majorityof the Directors and by the Secretary or Assistant Secretary, and entered inthe book of By-Laws.  Whenever any amendment or new By-Law is adopted, it shallbe entered in the book of By-Laws with the original By-Laws.  If any By-Law isrepealed, the fact of repeal with the date of the meeting at which the repealwas enacted, or written assent was filed, shall be stated in said book.

(*Amendedon March 29, 2001)

 

Thefollowing notation is FOR GUIDANCE ONLY and does not constitute a partof the By-Laws of Philippine Long Distance Telephone Company.

 

            NOTE:Under the provisions of Section 1 of ARTICLE XV (formerly Article XIV) of theBy-Laws of Philippine Long Distance Telephone Company, the owners of two-thirdsof the subscribed capital stock may delegate to the Board of Directors thepower to amend, repeal or adopt new By-Laws.  Under the authority given by saidsection of the By-Laws, the stockholders under date of April 15, 1953 delegated to the Board the power to amend, repeal or adopt new By-Laws.

 
****
**EXHIBIT 6**

 

PHILIPPINE LONG DISTANCETELEPHONE COMPANY

Computationof Operating Income and Earnings Per Share

For the years 2001through 2005

 

** **

**2005**

**2005****(1)**

**2004**

**2003**

**2002**

**2001**

** **

**(in millions, except net operating income (loss) per common share)**

**1. Operating income (loss) per share**

** **

** **

** **

** **

** **

** **

Basic

 

 

 

 

 

 

Operating income (loss) 

Php48,514

US$914

Php48,539

Php33,379

Php12,029

(Php7,994)

Deduct:  Dividends on preferred stock

1,677

32

1,764

1,739

1,645

1,503

Accretion of redemption value of preferred stock subject to mandatory conversion

1,443

27

1,503

1,309

1,004

542

Operating income (loss) applicable to common shareholders

Php45,394

US$855

Php45,272

Php30,331

Php9,380

(Php10,039)

Diluted

 

 

 

 

 

 

Operating income (loss) 

Php48,514

US$914

Php48,539

Php33,379

Php12,029

(Php7,994)

Deduct:  Dividends on preferred stock

70

1

49

49

1,036

1,503

Accretion of redemption value of preferred stock subject to mandatory conversion

1,746

33

–

1,309

1,004

542

Operating income (loss) applicable to common shareholders

Php46,698

US$880

Php48,490

Php32,021

Php9,989

(Php10,039)

Basic

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

170,214

 

169,476

169,361

168,895

168,498

Effect of issuance of common shares during the year

1,855

 

252

52

200

162

 

172,069

 

169,728

169,413

169,095

168,660

Diluted

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

170,214

 

169,476

169,361

168,895

168,498

Effect of issuance of common shares during the year

1,855

 

252

52

200

162

Weighted average number of shares under ESOP during the year(3)

94

 

155

–

–

–

Common share equivalent of preferred shares deemed dilutive

10,858

 

22,381

24,222

22,160

–

 

183,021

 

192,264

193,635

191,255

168,660

 

 

 

 

 

 

 

Operating income (loss) per share 

 

 

 

 

 

 

Basic

Php263.81

US$4.97

Php266.73

Php179.04

Php55.47

(Php59.52)

Diluted

255.15

4.81

252.20

165.37

52.23

(59.52)

 

** **

** **

** **

** **

** **

** **

 

**(in millions, except earnings per common share)**

**2. Earnings per share(2)**

** **

** **

** **

** **

** **

** **

Basic

 

 

 

 

 

 

Net income (loss) after cumulative effect of change in accounting policy

Php40,603

US$765

Php28,101

Php11,045

(Php6,158)

(Php27,782)

Deduct:  Dividends on preferred stock 

1,677

32

1,764

1,739

1,645

1,503

               Accretion to redemption value of preferred stock subject to mandatory conversion

1,443

27

1,503

1,309

1,004

542

Net income (loss) attributable  to common shareholders

Php37,483

US$706

Php24,834

Php7,997

(Php8,807)

(Php29,827)

Diluted

 

 

 

 

 

 

Net income (loss) after cumulative effect of change in accounting policy

Php40,603

US$765

Php28,101

Php11,045

(Php6,158)

(Php27,782)

Deduct:  Dividends on preferred stock 

70

1

285

1,485

1,645

1,503

               Accretion to redemption value of preferred stock subject to mandatory conversion

1,746

33

1,503

1,309

1,004

542

Net income (loss) applicable to common shareholders

Php38,787

US$731

Php26,313

Php8,251

(Php8,807)

(Php29,827)

Basic

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

170,214

 

169,476

169,361

168,895

168,498

Effect of issuance of common shares during the year

1,855

 

252

52

200

162

 

172,069

 

169,728

169,413

169,095

168,660

Diluted

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

170,214

 

169,476

169,361

168,895

168,498

Effect of issuance of common shares during the year

1,855

 

252

52

200

162

Weighted average number of shares under ESOP during the year(3)

94

 

155

–

–

–

Common share equivalent of preferred shares deemed dilutive:

10,858

 

11,213

11,069

–

–

 

183,021

 

181,096

180,482

169,095

168,660

Earnings per share(2) 

 

 

 

 

 

 

Basic

Php217.84

Php4.11

Php146.32

Php47.20

(Php52.08)

(Php176.85)

Diluted

211.93

3.99

145.30

45.72

(52.08)

(176.85)

 

*(1)    The PLDT Group maintains its accounts in Philippinepeso.  For convenience, the peso financial information as at and for the yearended December 31, 2005 has been translated into U.S. dollars at the exchangerate of Php53.062 to US$1.00, the peso-dollar rate as quoted through thePhilippine Dealing System as at December 31, 2005.*

 

*(2)    Our convertible preferred stocks were deemedanti-dilutive for the years ended December 31, 2002 and 2001.   Since the amount of preferred dividends over the equivalent number of common stocks weregreater than the basic earnings per share, the amounts reported for the yearsended December 31, 2002 and 2001  basic and diluted earnings per common sharewere the same.*

 

*(3)    The dilutive effect of the outstanding optionsis reflected as additional share dilution in the computation of earnings percommon share, see Note 20 – Earnings per Common Share.*

**EXHIBIT 7**

* *

* *

* *

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

**Calculation of Ratio of Earnings to Fixed Charges**

For the years 2001 through2005

 

 

**2005**

**2005****(1)**

**2004**

**2003**

**2002**

**2001**

 

**(in millions, except ratio of earnings (loss) to fixed charges)**

 

 

 

 

 

 

 

Earnings (a)

Php57,668

US$1,087

Php49,155

Php24,168

Php11,320

(Php13,117)

Fixed charges – (b)

 

 

 

 

 

 

Fixed charges excluding amortization of capitalized interest

Php10,759

US$203

Php12,805

Php12,747

Php14,177

Php15,839

Capitalized interest, net of amortization

(635)

(12)

(915)

(714)

(394)

1,170

 

Php10,124

US$191

Php11,890

Php12,033

Php13,783

Php17,009

Ratio (a/b) (2)

5.7

5.7

4.1

2.0

–

–

_____________

 

*(1)    **PLDT maintains its accountsin Philippine peso.  For convenience, the peso financial information as at andfor the year ended December 31, 2005 has been translated into U.S. dollars atthe exchange rate of Php53.062 to US$1.00, the peso-dollar rate as quotedthrough the Philippine Dealing System as at December 31, 2005.*

* *

*(2)    **For purposes of this ratio,“Earnings” consist of income before provision for income tax (excluding PLDT’sshare in undistributed income of less than 50%-owned affiliates) and fixedcharges (excluding capitalized interest).  “Fixed charges” consist of interest(including capitalized interest, discounts and other financing costs) on allindebtedness, amortization of deferred financing costs and the estimatedfinancing component of rent expense (i.e., one-third of rent expense).*

* *

*Due to PLDT’s net losses in 2002 and 2001, the coverageratio on a consolidated basis was less than 1.0x in all of these two years.  Inorder to achieve a coverage ratio of 1.0x, we would have had to generateadditional consolidated earnings of Php2,463 million and Php30,126 million forthe two years ended December 31, 2002 and 2001, respectively.*

* *
******
** **

**EXHIBIT 8**

 

SUBSIDIARIES
 

Name of Subsidiary

** **

Jurisdiction

** **

**Principal Activity**

** **

**Percentage of Ownership (As at December 31, 2005)**

 

 

 

 

 

 

 

Wireless

 

 

 

 

 

 

Smart Communications, Inc. and subsidiaries 

 

Philippines

 

Cellular mobile and telecommunications services

 

100.0

 

 

 

 

 

 

 

Telesat, Inc.

 

Philippines

 

Satellite communications services

 

94.4

 

 

 

 

 

 

 

ACeS Philippines Cellular Satellite Corporation

 

Philippines

 

Satellite phone services 

 

100.0

 

 

 

 

 

 

 

Mabuhay Satellite Corporation (formerly Mabuhay Phiilippines Satellite Corporation)

 

Philippines

 

Satellite communications services

 

67.0

 

 

 

 

 

 

 

Fixed Line

 

 

 

 

 

 

PLDT Clark Telecom, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Subic Telecommunications

Company, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Smart-NTT Multimedia, Inc.

 

Philippines

 

Data and network services

 

100.0

 

 

 

 

 

 

 

PLDT Global and subsidiaries

 

British Virgin Islands

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

PLDT-Maratel, Inc. (formerly Maranao Telephone Company, Inc.)

 

Philippines

 

Telecommunications services

 

97.5

 

 

 

 

 

 

 

Bonifacio Communications Corporation

 

Philippines

 

Telecommunications, infrastructure and related value-added services

 

75.0

 

 

 

 

 

 

 

Information and Communications Technology

 

 

 

 

 

 

ePLDT, Inc. and subsidiaries

 

Philippines

 

Information and communications infrastructure for internet-based services, e-commerce, call centers and IT-related services

 

100.0

**Exhibit 12.1**

** **

CERTIFICATION

** **

I, Napoleon L. Nazareno, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company;

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as at, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) for the Company and have:

 

a)      Designed such disclosure controls and procedures, or caused suchdisclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Company, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;
b)      [Omitted pursuant to the guidance of Release No. 33-8238 (June 5, 2003), Release No. 33-8392 (February 24, 2004) and Release No. 33-8545 (March 2, 2005)];
c)      Evaluated the effectiveness of the Company's disclosure controls andprocedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as at the end of the period coveredby this report based on such evaluation; and
d)      Disclosed in this report any change in the Company’s internal controlover financial reporting that occurred during the period covered by the annualreport that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting; and
5.       The Company’s other certifyingofficers and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the Company’s auditors and the auditcommittee of the Company’s board of directors (or persons performing theequivalent functions):

 

a)      All significant deficiencies andmaterial weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect theCompany's ability to record, process, summarize and report financialinformation; and

 

b)      Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the Company’s internal control over financial reporting.

 

 

Date:  June 29, 2006

 

/s/  Napoleon L. Nazareno

Napoleon L. Nazareno

President and Chief Executive Officer

(Principal Executive Officer)

 
****
**Exhibit 12.2**

** **

**CERTIFICATION**

** **

I,Anabelle L. Chua, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company;

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as at, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) for the Company and have:

 

a)     Designed such disclosurecontrols and procedures, or caused such disclosure controls and procedures tobe designed under our supervision, to ensure that material information relatingto the Company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisreport is being prepared;
b)    [Omitted pursuant to theguidance of Release No. 33-8238 (June 5, 2003), Release No.33-8392 (February 24, 2004) and Release No. 33-8545 (March 2, 2005)];
c)     Evaluated the effectiveness ofthe Company's disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls andprocedures, as at the end of the period covered by this report based on suchevaluation; and
d)    Disclosed in this report anychange in the Company’s internal control over financial reporting that occurredduring the period covered by the annual report that has materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting; and
5.       The Company’s other certifyingofficer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the Company’s auditors and theaudit committee of the Company’s board of directors (or persons performing theequivalent functions):

 

a)     All significant deficiencies and materialweaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the Company's abilityto record, process, summarize and report financial information; and

 

b)    Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theCompany’s internal control over financial reporting.

 

 

Date:June 29, 2006

 

/s/  Anabelle L. Chua

Anabelle L. Chua

Senior Vice President and Treasurer

(Principal Financial Officer)

** **
****
**Exhibit13.1**

** **

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. §1350, I, Napoleon L. Nazareno, President and Chief Executive Officer ofPhilippine Long Distance Telephone Company, hereby certify, to my knowledge,that our annual report on Form 20-F for the year ended December 31, 2005 (the“Report”) fully complies with the requirements of Section 13(a) or 15(d), asapplicable, of the Securities Exchange Act of 1934, and that the informationcontained in the Report fairly presents, in all material respects, ourfinancial condition and results of operations.

 

 

Date:  June 29, 2006

 

 

 

 

 

/s/  Napoleon L. Nazareno

 

 

 

Napoleon L. Nazareno

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

The foregoingcertification is being furnished solely pursuant to 18 U.S.C. § 1350 and is notbeing filed as part of the Report or as a separate disclosure document.

 

 

**Exhibit 13.2**

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. §1350, I, Anabelle L. Chua, Senior Vice President and Treasurer of PhilippineLong Distance Telephone Company, hereby certify, to my knowledge, that ourannual report on Form 20-F for the year ended December 31, 2005 (the “Report”)fully complies with the requirements of Section 13(a) or 15(d), as applicable,of the Securities Exchange Act of 1934, and that the information contained inthe Report fairly presents, in all material respects, our financial conditionand results of operations.

 

 

Date:  June 29, 2006

 

 

 

 

 

/s/  Anabelle L. Chua

 

 

 

Anabelle L. Chua

Senior Vice President and Treasurer

 

 

 

(Principal Financial Officer)

The foregoingcertification is being furnished solely pursuant to 18 U.S.C. § 1350 and is notbeing filed as part of the Report or as a separate disclosure document.

 

**Report of IndependentRegistered Public Accounting Firm**

 

 

 

The Board of Directors andthe Stockholders of

Philippine Long DistanceTelephone Company

 

 

 

We have audited the accompanying consolidated balancesheets of Philippine Long Distance Telephone Company and subsidiaries as ofDecember 31, 2005 and 2004, and the related consolidated statements of income,changes in stockholders’ equity, and cash flows for each of the three years inthe period ended December 31, 2005.  These financial statements are theresponsibility of the Company's management.  Our responsibility is to expressan opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  We were not engaged toperform an audit of the Company’s internal control over financial reporting.Our audit included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectivenessof the Company's internal control over financial reporting. Accordingly, weexpress no such opinion.  An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Philippine Long Distance Telephone Company andsubsidiaries as of December 31, 2005 and 2004, and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2005, in conformity with United States generally acceptedaccounting principles.

 

 

 

 

 

 

 

/s/ Sycip Gorres Velayo &Co.

 

Makati City, Philippines

June 13, 2006

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

**DECEMBER 31, 2005 AND 2004**

**(in million pesos, except par value and share amounts)**

 

 

 

**2005**

2004

**ASSETS**

**Current Assets**

** **

 

Cash and cash equivalents (Notes 4 and 23)

**30,064**

27,321

Short-term investments (Note 23)

**2,746**

3,873

Trade and other receivables - net (Notes 5 and 23) 

**7,113**

7,524

Inventories and supplies - net (Note 6)

**1,548**

2,140

Deferred income tax assets - net (Note 19)

**9,866**

10,331

Derivative assets (Note 23)

**37**

335

Prepaid expenses

**5,259**

3,422

Other current assets

**1,628**

1,972

Total Current Assets

**58,261**

56,918

**Noncurrent Assets**

** **

 

Property, plant and equipment - net (Note 7)

**173,007**

186,095

Investments - net (Note 8)

**361**

294

Investments-available-for-sale (Note 23)

**109**

104

Goodwill and other intangible assets - net (Note 9)

**16,875**

16,561

Deferred income tax assets - net (Note 19)

**13,583**

9,696

Derivative assets (Note 23)

**2,648**

4,116

Other noncurrent assets - net (Note 10)

**4,376**

5,257

Total Noncurrent Assets

**210,959**

222,123

 

**269,220**

279,041

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

** **

 

Accounts payable (Note 23)

**15,482**

8,987

Accrued expenses and other current liabilities (Notes 11, 16 and 23) (Due to related parties amounted to Php1,156 in 2005 and Php3,270 in 2004)

**15,986**

14,763

Unearned revenues

**3,125**

3,218

Derivative liabilities (Note 23)

**192**

473

Current portion of interest-bearing financial liabilities (Notes 7, 12, 21 and 23)

**19,513**

28,503

Dividends payable (Notes 20 and 23)

**746**

652

Income tax payable (Note 19)

**2,080**

1,976

Total Current Liabilities

**57,124**

58,572

**Noncurrent Liabilities**

** **

 

Interest-bearing financial liabilities – net of current portion (Notes 7, 12, 21 and 23)

**93,897**

131,978

Derivative liabilities (Note 23)

**5,777**

6,930

Deferred income tax liabilities (Note 19)

**44**

–

Pension and other employee benefits (Note 17)

**3,943**

2,669

Customers’ deposits

**2,214**

2,174

Remaining excess of debt forgiven over value of consideration given - net (Notes 12 and 14)

**5,071**

5,834

Deferred credits and other noncurrent liabilities (Notes 13 and 21)

**8,421**

6,988

Total Noncurrent Liabilities

**119,367**

156,573

**Minority Interest in Consolidated Subsidiaries**

**1,130**

861

**Preferred Stock Subject to Mandatory Redemption**(Notes 14 and 23)

**12,004**

14,956

**Stockholders’ Equity** (Notes 15 and 20)

** **

 

Preferred stock, Php10 par value, authorized - 822,500,000 shares: 

** **

 

Series A to EE (issued and outstanding - 407,343,035 shares in 2005 and  409,065,857 shares in 2004)

**4,073**

4,091

Series III (issued and outstanding - 4,616,200 shares in  2004)

**–**

46

Series IV (issued and outstanding - 36,000,000 shares)

**360**

360

Common stock, Php5 par value, authorized - 234,000,000 shares; issued and outstanding - 180,789,003  shares in 2005 and 170,213,722 shares in 2004

**904**

851

Capital in excess of par value

**78,873**

75,396

Accumulated deficit (Note 20)

**(5,288)**

(33,197)

Accumulated other comprehensive income

**673**

532

Total Stockholders’ Equity

**79,595**

48,079

 

**269,220**

279,041

Seeaccompanying Notes to Consolidated Financial Statements.
****
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF INCOME
**FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**(in million pesos, except per share amounts)**

 

** **

**2005**

2004

2003

**OPERATING REVENUES**(Notes 17, 18 and 24)

** **

** **

** **

Service revenues

**120,348**

114,904

100,486

Non-service revenues

**2,987**

6,269

10,714

 

**123,335**

121,173

111,200

**OPERATING EXPENSES**(Note 18)

** **

 

 

Depreciation and amortization (Notes 7 and 24)

**27,855**

20,098

21,812

Compensation and employee benefits (Notes 17 and 18)

**13,852**

12,016

13,185

Repairs and maintenance (Note 16) (Total transactions with related parties amounted to Php640, Php111 and  Php68 in 2005, 2004 and 2003, respectively)

**6,705**

5,671

4,931

Cost of computers, cellular handsets and SIM-packs sold

**5,880**

10,599

15,790

Selling and promotions (Note 16) (Total transactions with related parties amounted to Php29, Php32 and  Php26 in 2005, 2004 and 2003, respectively)

**5,068**

5,708

4,394

Taxes and licenses (Note 22)

**2,516**

2,055

2,147

Professional and other contracted services (Note 16) (Total transactions with related parties amounted to Php147, Php694 and  Php616 in 2005, 2004 and 2003, respectively)

**2,432**

2,187

1,176

Provision for doubtful accounts (Notes 5 and 24)

**2,251**

3,955

4,092

Rent (Note 16) (Total transactions with related parties amounted to Php8, Php6 and  Php7 in 2005, 2004 and 2003, respectively)

**2,086**

2,160

2,166

Insurance and security services (Note 16) (Total transactions with related parties amounted to Php467, Php534 and  Php581 in 2005, 2004 and 2003, respectively)

**1,523**

1,644

1,528

Communication, training and travel

**1,465**

1,310

1,565

Cost of satellite air time (All are transactions with related parties) (Notes 16 and 21) 

**1,008**

1,299

1,919

Provision for inventory obsolescence (Notes 6 and 24)

**479**

577

251

Amortization of intangible assets (Note 9)

**204**

93

766

Asset impairment (Notes 7, 8, 18 and 24)

**11**

1,412

675

Other operating expenses 

**1,486**

1,850

1,424

 

**74,821**

72,634

77,821

OPERATING INCOME

**48,514**

48,539

33,379

**FINANCING COSTS** (Notes 18 and 24)

**(3,423)**

(16,233)

(23,152)

**INTEREST INCOME** (Note 24)

**1,457**

942

513

**EQUITY SHARE IN NET INCOME (LOSSES) OF ASSOCIATES**

**7**

(74)

(88)

**LOSS****ON****DERIVATIVE TRANSACTIONS –**net (Note 23)

**(1,801)**

(864)

(1,631)

**OTHER INCOME**- net (Note 18)

**1,016**

2,530

799

INCOME BEFORE INCOME TAX, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY AND MINORITY INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES 

**45,770**

34,840

9,820

**BENEFIT FROM (PROVISION FOR) INCOME TAX**(Notes 19 and 24)

**(4,849)**

(6,826)

1,400

**INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY  AND MINORITY INTEREST IN NET****LOSS****(INCOME) OF CONSOLIDATED SUBSIDIARIES**

**40,921**

28,014

11,220

**CUMULATIVE EFFECT ON PRIOR YEARS (UP TO DECEMBER 31, 2002) OF ADOPTING  SFAS 143, “ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS”** - net of tax effect  (Note 3)

**–**

–

(61)

**INCOME BEFORE MINORITY INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES**

**40,921**

28,014

11,159

**MINORITY INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES**

**(318)**

87

(114)

**NET INCOME**

**40,603**

28,101

11,045

**DIVIDENDS AND ACCRETION OF PREFERRED STOCK**(Note 20)

**(3,120)**

(3,267)

(3,048)

**NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS**(Note 20)

**37,483**

24,834

7,997

**Earnings Per Common Share**(Note 20)

** **

 

 

Basic earnings per common share before cumulative effect of change in accounting policy

**217.84**

146.32

47.56

Cumulative effect of change in accounting policy

**–**

–

(0.36)

Basic earnings per common share

**217.84**

 146.32

  47.20

Diluted earnings per common share before cumulative effect of change in accounting policy

**211.93**

145.30

46.06

Cumulative effect of change in accounting policy

**–**

–

(0.34)

Diluted earnings per common share

**211.93**

 145.30

  45.72

*Seeaccompanying Notes to Consolidated Financial Statements.*
**
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

**FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**(in million pesos)**

** **

 

**Preferred Stock**

**Common Stock**

**Capital in  Excess of  Par Value**

**Accumulated Deficit**

**Accumulated Other Comprehensive Income**

**Total**

Balances as at January 1, 2003

4,474

847

74,324

(66,016)

2,784

16,413

Comprehensive income:

 

 

 

 

 

 

Net income for the year

–

–

–

11,045

–

11,045

Translation gains

–

–

–

–

120

 120

Net comprehensive income

–

–

–

11,045

 120

11,165

Cash dividends (Note 20)

–

–

–

(1,751)

–

(1,751)

Accretion to redemption value of preferred stock subject to mandatory redemption (Note 20)

–

–

–

(1,309)

–

(1,309)

Issuance of capital stock – net (Note 15)

31

–

196

–

–

 227

Balances as at December 31, 2003

4,505

 847

74,520

(58,031)

2,904

24,745

Comprehensive income (loss):

 

 

 

 

 

 

Net income for the year

–

–

–

28,101

–

28,101

Translation losses

–

–

–

–

(2,168)

(2,168)

Net loss on available-for-sale financial assets

–

–

–

–

(5)

(5)

Others

–

–

–

–

(199)

(199)

Net comprehensive income (loss)

–

–

–

28,101

(2,372)

25,729

Cash dividends (Note 20)

–

–

–

(1,764)

–

(1,764)

Accretion to redemption value of preferred stock subject to mandatory redemption (Note 20)

–

–

–

(1,503)

–

(1,503)

Issuance of capital stock – net (Note 15)

(8)

4

876

–

–

 872

Balances as at December 31, 2004

4,497

 851

75,396

(33,197)

 532

48,079

Comprehensive income:

 

 

 

 

 

 

Net income for the year

–

–

–

40,603

–

40,603

Translation losses

–

–

–

–

(63)

(63)

Net income on available-for-sale financial assets

–

–

–

–

5

   5

Others

–

–

–

–

199

 199

Net comprehensive income

–

–

–

40,603

 141

40,744

Cash dividends (Note 20)

–

–

–

(11,251)

–

(11,251)

Accretion to redemption value of preferred stock subject to mandatory redemption (Note 20)

–

–

–

(1,443)

–

(1,443)

Issuance of capital stock – net (Note 15)

(64)

53

3,477

–

–

3,466

**Balances as at December 31, 2005**

**4,433**

**904**

**78,873**

**(5,288)**

**673**

**79,595**

*Seeaccompanying Notes to Consolidated Financial Statements.*

** **
****
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS
**FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003**

**(in million pesos)**

** **

** **

 

**2005**

2004

2003

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

Net income 

**40,603**

28,101

11,045

Adjustments to reconcile net income to net cash provided by operating activities:

** **

 

 

Depreciation and amortization (Notes 7 and 24)

**27,855**

20,098

21,812

Provision for doubtful accounts (Notes 5 and 24)

**2,251**

3,955

4,092

Accretion on financial liabilities (Note 18)

**568**

1,185

729

Loss on derivative instruments (Note 18)

**490**

617

1,616

Provision for inventory obsolescence (Notes 6 and 24)

**479**

577

251

Minority interest in net income (loss) of consolidated subsidiaries

**318**

(87)

114

Amortization of intangible assets (Note 9)

**204**

93

766

Loss (gain) on disposal of property and equipment

**160**

155

(463)

Asset impairment (Notes 7, 8 and 18)

**11**

1,412

675

Equity share in net losses (income) of associates

**(7)**

74

88

Benefit from deferred income tax (Note 19)

**(3,734)**

(531)

(3,731)

Unrealized foreign exchange losses (gains)

**(8,196)**

2,882

11,527

Gain on debt exchange and debt restructuring transactions (Note 18)

**–**

(2,816)

–

Others

**(360)**

478

(1,345)

Operating cash flows before working capital changes 

**60,642**

56,193

47,176

Changes in assets and liabilities, net of effect from purchase of subsidiaries: 

** **

 

 

Decrease (increase) in:

** **

 

 

Trade and other receivables

**(2,315)**

2,305

(4,364)

Inventories and supplies

**509**

(9)

1,576

Prepaid expenses and other current assets

**(1,867)**

(1,279)

306

Increase (decrease) in:

** **

 

 

Accounts payable

**6,756**

1,848

(3,231)

Accrued expenses and other current liabilities

**1,116**

2,844

3,215

Unearned revenues

**110**

(343)

787

Income tax payable

**103**

2,367

(280)

Deferred credits and other noncurrent liabilities

**(85)**

(1,066)

(2,603)

Net cash provided by operating activities

**64,969**

62,860

42,582

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

Additions to property, plant and equipment

**(15,864)**

(19,268)

(17,943)

Proceeds from disposal of property and equipment

**912**

112

226

Payments for purchase of investments – net of cash acquired

**(248)**

(1,276)

(197)

Cash receipts (disbursements) for lease deposits and other noncurrent assets

**974**

(1,834)

(404)

Decrease (increase) in short-term investments

**1,206**

(2,212)

(1,661)

Increase in investments in debt securities

**(60)**

(286)

–

Cash of disposed subsidiary

**–**

–

(93)

Proceeds from disposal of investments

**–**

–

51

Net cash used in investing activities

**(13,080)**

(24,764)

(20,021)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

 

Payments of long-term borrowings

**(47,849)**

(41,697)

(31,548)

Proceeds from long-term borrowings

**10,797**

15,187

17,507

Repayments of notes payable

**(387)**

(2,412)

(1,698)

Dividends paid

**(11,173)**

(1,692)

(1,603)

Proceeds from notes payable

**329**

457

3,135

Proceeds from issuance of capital stock

**334**

281

94

Increase (decrease) in capital lease liabilities

**(38)**

(134)

98

Debt issuance costs paid

**(172)**

(68)

(120)

Net cash used in financing activities

**(48,159)**

(30,078)

(14,135)

**EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS**

**(987)**

(69)

(28)

**NET INCREASE IN CASH AND CASH EQUIVALENTS**

**2,743**

7,949

8,398

**CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**

**27,321**

19,372

10,974

**CASH AND CASH EQUIVALENTS AT END OF YEAR**

**30,064**

27,321

19,372

*See accompanying Notes to Consolidated FinancialStatements.*

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

 

**1.      ****CorporateInformation**

 

ThePhilippine Long Distance Telephone Company, or PLDT, was incorporated under theold Corporation Law of the Philippines (Act 1459, as amended) on November 28,1928, following the merger of four telephone companies under common United States ownership.  Under its amended Articles of Incorporation, PLDT’s corporateterm is limited through 2028.  In 1967, effective control of PLDT was sold byGeneral Telephone and Electronics Corporation (a major stockholder since PLDT’sincorporation) to a group of Filipino businessmen.  In 1981, in furtherance ofthe then existing policy of the Philippine government to integrate thePhilippine telecommunications industry, PLDT purchased substantially all of theassets and liabilities of the Republic Telephone Company, which at that timewas the second largest telephone company in the Philippines.  In 1998, FirstPacific Company Limited, or First Pacific, through its Philippine and otheraffiliates, acquired a significant interest in PLDT.  On March 24, 2000, NTTCommunications Corporation, or NTT Communications, through NTT CommunicationsCapital (UK) Ltd., became PLDT’s strategic partner with approximately 15%economic and voting interest in the issued common stock of PLDT.  Simultaneouswith NTT Communications’ investment in PLDT, we acquired 100% of SmartCommunications, Inc., or Smart.  On March 14, 2006, NTT DoCoMo, Inc., orDoCoMo, acquired from NTT Communications approximately 7% of PLDT’s outstandingcommon shares, with NTT Communications retaining ownership of approximately 7%of PLDT’s common shares.

 

Thecommon shares of PLDT are listed and traded on the Philippine Stock Exchange,or PSE.  On October 19, 1994, an American Depositary Receipts, or ADRs,facility was established, pursuant to which Citibank N.A., as the depositary,issued ADRs evidencing American Depositary Shares, or ADSs, with each ADSrepresenting one PLDT common share with a par value of Php5.  EffectiveFebruary 10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositaryfor PLDT’s ADR facility.  The facility was established in accordance with aCommon Stock Deposit Agreement dated October 19, 1994, as amended on February10, 2003 between the depositary and holders of the ADRs.  The ADSs have beenlisted and traded on the New York Stock Exchange, or NYSE, in the United States under the symbol “PHI”.

 

PLDT’scharter, like those of all other Philippine corporations, was initially limitedto a period of 50 years but has since been extended twice for 25 years each,the last extension being for an additional 25-year period to 2028.  Under itsamended charter (Republic Act No. 7082), which became effective on August 24,1991, PLDT is authorized to provide virtually every type of telecommunicationsservice, both within the Philippines and between the Philippines and othercountries.

 

PLDToperates under the jurisdiction of the Philippine National TelecommunicationsCommission, or NTC, which jurisdiction extends, among other things, toapproving major services offered by PLDT and certain rates charged by PLDT. 

 

PLDThas three employee unions. The three unions are in aggregate composed of 7,160members as at December 31, 2005.  The union members represent 38% of the totalregular employees of PLDT and Subsidiaries, or PLDT Group, on a consolidatedbasis as at December 31, 2005.

 

Ourregistered office address is Ramon Cojuangco Building, Makati Avenue, Makati City , Philippines.

 

 

 

**2.        ****Basis ofConsolidated Financial Statements Preparation**

 

Ourconsolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America, orU.S. GAAP.

 

Our consolidated financial statements include thefinancial statements of PLDT and those of the following subsidiaries, whichwere all incorporated in the Philippines except for PLDT Global Corporation, orPLDT Global, (incorporated in the British Virgin Islands) and Digital ParadiseThailand Ltd., or Digital Paradise Thailand, a 51% owned subsidiary of ePLDT,Inc., or ePLDT, (incorporated in Thailand).

 

**Name of Subsidiary**

**Principal Activity**

**Percentage of Ownership**

**Wireless**

 

 

Smart Communications, Inc., or Smart  and subsidiaries

Cellular mobile and telecommunications services 

100.0

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services 

100.0

Telesat, Inc., or Telesat

Satellite communications services

94.4

Mabuhay Satellite Corporation, or  Mabuhay Satellite

Satellite communications services 

67.0

**Fixed Line**

 

 

PLDT Clark Telecom, Inc., or  Clark Telecom

Telecommunications services

100.0

Subic Telecommunications Company, Inc.,  or Subic Telecom

Telecommunications services

100.0

PLDT Global Corporation, or PLDT Global, and subsidiaries

Telecommunications services

100.0

Smart-NTT Multimedia, Inc., or SNMI

Data and network services

100.0

PLDT-Maratel, Inc., or Maratel

Telecommunications services

97.5

Bonifacio Communications Corporation,  or BCC

Telecommunications, infrastructure and related value-added services

75.0

**Information and Communications  Technology**

 

 

ePLDT and subsidiaries

Information and communications  infrastructure for internet-based  services, e-commerce, call centers and IT-related services

100.0

 

The method of accounting applied to investments, whetherconsolidated, equity or cost, involves an evaluation of all significant termsof the investments that explicitly grant or suggest evidence of control orsignificant influence over the operations of the investee.  The consolidatedfinancial statements include our controlled subsidiaries. Investments inbusinesses which we do not control, but we have the ability to exercisesignificant influence over operating and financial policies, are accounted forusing the equity method.  Investments in which we do not have the ability toexercise significant influence over operating and financial policies areaccounted for using the cost method.  Equity and cost method investments areincluded in the “Investments” account in our consolidated balance sheets.  

 

Ourconsolidated financial statements are prepared using uniform accountingpolicies for like transactions and events with similar circumstances.Intercompany balances and transactions, including intercompany profits andunrealized profits and losses, are eliminated.

 

Minorityinterests represent the equity interests in Wolfpac Communications, Inc., orWolfpac, Smart Broadband, Inc., or Smart Broadband (formerly Meridian Telekoms,Inc., or Meridian), Telesat, Mabuhay Satellite, Maratel, BCC, Digital Paradise,Inc., or Digital Paradise, Digital Paradise Thailand, netGames, Inc., ornetGames, Infocom Technologies, Inc., or Infocom, and Airborne AccessCorporation, or Airborne Access, not held by the PLDT Group.

 

 

 

**3.         ****Summary of SignificantAccounting Policies and Practices**

 

Oursignificant accounting policies and practices are discussed below to facilitatethe understanding of our consolidated financial statements:

 

***Revenue Recognition***

 

Revenue for services is stated at amounts invoiced tocustomers and excludes value-added tax.  We provide wireless communicationservices, fixed line communication services, and information and communicationstechnology services.  We provide such services to mobile, business, residentialand payphone customers.  Revenue, which excludes value-added tax, or VAT,represents the value of fixed consideration that has been received or isreceivable.  Revenue is recognized when there is evidence of an arrangement,the fee is fixed or determinable, collectibility is reasonably assured and thedelivery of the product or service has occurred.  In certain circumstances,revenue is split into separately identifiable components and recognized whenthe related components are delivered in order to reflect the substance of thetransactions.  The value of components is determined using verifiable objectiveevidence.  We do not provide our customers with the right to a refund.

 

*Servicerevenues*

 

*Subscriptions.*We provide telephone and datacommunication services under postpaid and prepaid payment arrangements.Revenue includes fees for installation and activation.  Installation andactivation-related fees and the corresponding costs, not exceeding theactivation revenue, are deferred and recognized over the expected averageperiods of customer relationship for fixed line and cellular service.  Postpaidservice arrangements include subscription fees, typically fixed monthly fees,which are recognized over the subscription period on a pro rata basis. 

 

*Air time, traffic and value-added services.*Prepaid service revenue collected in advance isdeferred and recognized based on the earlier of actual usage or upon expirationof the usage period.  Payphone service revenue is recognized when the serviceis provided.  Interconnection revenue for call termination, call transit, andnetwork usage are recognized in the year the traffic occurs.  Revenues relatedto local, long distance, network-to-network, roaming and international callconnection services are recognized when the call is placed or the connection isprovided, net of amounts payable to other telecommunication carriers forterminating calls in their territories.  Revenue related to products andvalue-added services is recognized upon delivery of the product or service.

 

*Directoryservices.*Revenue related topublished directory services is recognized on a pro rata basis over the periodin which the publication expires, which is generally 12 months.Telephone-based directory service revenue is recognized when the service isprovided.

 

*Incentives.*We record insignificant commissionexpense based on the number of new subscriber connections initiated by certaindealers.  All other cash incentives provided to dealers and customers arerecorded as a reduction against revenue.  Product-based incentives provided todealers and customers as part of a transaction are accounted for as multipleelement arrangements and recognized when earned.

 

*Non-servicerevenues*

 

*Handsetand equipment sales.*Sales ofcellular handsets and communication equipment are recognized upon delivery tothe customer.

 

*Interestincome*

 

Interestincome is recognized on a time proportion basis taking into account theprincipal amount outstanding and the effective interest rate.

 

*Otherincome*

 

Otherincome is recognized when the delivery of the product or service has occurred.

 

***Cash and Cash Equivalents***

 

Cash includes cash on hand and in banks.  Cashequivalents are short-term, highly liquid investments that are readilyconvertible to known amounts of cash with original maturities of three monthsor less from the date of acquisition and that are subject to an insignificantrisk of change in value.

 

***Trade and Other Receivables***

 

Tradeand other receivables are stated at face value, net of allowance for doubtfulaccounts.

 

***Allowance for Doubtful Accounts***

 

Allowancefor doubtful accounts is maintained at a level considered adequate to providefor uncollectible receivables.  The level of allowance is based on historicalcollections, write-off experience, current economic trends, changes in ourcustomer payment terms and other factors that may affect our ability to collectpayments.  An evaluation of the receivables, designed to identify potentialcharges to the allowance, is performed on a continuous basis during the year.

 

*Subscribers*.Full allowance is provided for receivables from permanently disconnectedsubscribers.  Permanent disconnections are made after a series of collectionsteps following non-payment by subscribers.  Such permanent disconnectionsgenerally occur within 105 days from due date.  Partial allowance is providedfor active subscribers based on the historical loss experience and agingprofile of the receivable.

 

*Trafficsettlement receivables – net*.  Fullallowance is provided for carrier accounts which are over 360 days past due andafter a review of the status of settlement with other carriers.

 

***Inventories and Supplies***

 

Inventories and supplies arevalued at the lower of cost or market value.  These are items of cellular phoneunits, materials, spare parts, terminal units and accessories.  Cost isdetermined using the moving average method.  

 

Allowance for inventoryobsolescence is set for the difference between cost and market value ofinventories.

 

***Property, Plant and Equipment***

 

Property, plant and equipment,except for land, are stated at cost less accumulated depreciation andamortization and any impairment in value.  Land is stated at cost less anyimpairment in value.

 

The initial cost of property,plant and equipment comprises its purchase price and any costs directly attributablein bringing the asset to its working condition and location for its intendeduse, plus the estimated value of asset retirement obligations.  Expendituresincurred after the assets have been put into operation, such as repairs andmaintenance and overhaul costs, are normally charged to income in the year thecosts are incurred.  In situations where it can be clearly demonstrated thatthe expenditures have resulted in an increase in the future economic benefitsexpected to be obtained from the use of an item of property, plant andequipment beyond its originally assessed standard of performance, theexpenditures are capitalized as additional costs of property, plant andequipment.  Cost also includes interests on borrowed funds used during theconstruction period.  When assets are sold or retired, their costs andaccumulated depreciation, amortization and impairment losses, if any, areeliminated from the accounts and any gain or loss resulting from their disposalis included in the consolidated statement of income of such period.

 

Depreciationand amortization are calculated on a straight-line basis over the followingestimated useful lives of the assets:

 

** **

**Estimated Useful Lives**

 

 

Buildings

25 – 40 years

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Communications satellite

15 years

Information origination and termination equipment

5 – 15 years

Cellular facilities

10 years

Land improvements

10 years

Vehicles, furniture and other work equipment

3 – 10 years

 

The useful lives and depreciation and amortizationmethod are reviewed periodically to ensure that the periods and method ofdepreciation and amortization are consistent with the expected pattern ofeconomic benefits from items of property, plant and equipment.

 

Property under construction is stated at cost.  Thisincludes cost of construction, plant and equipment and other direct costs.Property under construction is not depreciated until such time that therelevant assets are completed and put into operational use.

 

Interest and other costs incurred in connection withthe borrowing of funds are capitalized during the construction of plant andequipment as part of the cost of acquiring assets, see*Note 7 – Property,Plant and Equipment.*

 

***Impairment of Assets***

 

EffectiveJanuary 1, 2002, in conformity with Statement of Financial AccountingStandards, or SFAS 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” long-lived assets, except goodwill and intangible assetswith indefinite lives, assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Assets, which are held and used in operations, would besubjected to impairment test if the carrying amount of the asset exceeded theundiscounted future net cash flows, without interest charges, expected toresult from the use of the asset.  If an impairment exists, the amount of theimpairment recorded is based on the fair value of the assets.  Assets, whichare to be disposed of, would be impaired to the extent the carrying amount ofthe asset exceeds fair value less disposal costs.  The PLDT Group considersrelevant cash flows, estimated future operating results, trends and otheravailable information in assessing whether the carrying values of assets arerecoverable.

 

***Asset Retirement Obligations***

 

UnderSFAS 143, “Accounting for Asset Retirement Obligations,” the fair value oflegal obligations associated with the retirement of a tangible long-lived assetthat resulted from the acquisition, construction or development and the normaloperation of a long-lived asset is required to be recognized in the period inwhich it is incurred.  SFAS 143 is effective for fiscal years beginning afterJune 15, 2002.  The PLDT Group adopted this Statement in 2003.  Previously, thePLDT Group has not been recognizing amounts related to asset retirementobligations.  Under SFAS 143, the PLDT Group recognizes asset retirementobligations in the period in which they are incurred if a reasonable estimateof a fair value can be made.  The related asset retirement costs arecapitalized as part of the carrying amount of the corresponding long-livedasset.

 

ThePLDT Group is legally required under various lease agreements to dismantle theinstallations and restore the leased sites at the end of the lease contractterm.  The PLDT Group recognized the fair value of the liability for theseobligations and capitalized the present value of these costs as part of thebalance of the related property and equipment accounts, which are beingdepreciated on a straight-line basis over the useful lives of the relatedassets or the contract periods, whichever is shorter.

 

Thecumulative effect of the change on prior years resulted in a charge to incomeof Php61 million (net of income taxes of Php29 million) (Php0.36 per share),which is included in the consolidated net income for the year ended December31, 2003.  The effect of the change for the year ended December 31, 2003 was todecrease income before cumulative effect of the change in accounting policy byPhp111 million (Php0.66 per share).

 

Thefollowing table summarizes the changes to the liabilities on asset retirementobligations for the years ended December 31, 2005 and 2004:

 

 

**2005**

2004

 

(in million pesos)

Asset retirement obligations at beginning of year

**638**

395

Additional liability recognized during the year

**63**

177

Settlement of obligations

**(28)**

–

Accretion expenses

**79**

66

Asset retirement obligations at end of year (Note 13)

**752**

 638

 

***Goodwill and Other Intangible Assets***

 

Goodwillis the excess of the acquisition cost of a business, including investmentsaccounted for using the equity method, over the fair value of the identifiablenet tangible and intangible assets acquired.  Goodwill is recorded at the fairvalue less any impairment.  Goodwill is reviewed annually (or more frequentlyunder various conditions) for impairment using the fair value approach.Intangible assets that do not have indefinite lives are amortized over theiruseful lives and reviewed for impairment in conformity with SFAS 144.  Otherthan goodwill, we have no indefinite-lived intangibles.

 

***Debt Issuance Costs***

 

Issuancecosts, underwriting fees and related expenses incurred in connection with theissuance of debt instruments are deferred and amortized using the effectiveinterest rate method over the terms of the instruments.  Unamortized debtissuance costs are charged to operations when the related debt is extinguished.

 

***Borrowing Costs***

 

Borrowingcosts are generally expensed as incurred.  Borrowing costs are capitalized ifthey are incurred during the acquisition, construction or production of aqualifying asset and such costs could have been avoided if expenditures for theassets have not been made.  Capitalization of borrowing costs commences whenthe activities to prepare the asset are in progress and expenditures andborrowing costs are being incurred.  Borrowing costs are capitalized until theassets are ready for their intended use.  If the resulting carrying amount ofthe asset exceeds its recoverable amount, an impairment loss is recognized.Borrowing costs include interest charges and other costs incurred in connectionwith the borrowing of funds, excluding exchange differences arising fromforeign currency borrowings used to finance these projects.

 

***Retirement Costs***

 

Wehave funded noncontributory retirement plans, administered by the respectivecompanies’ Trustee, covering permanent and regular employees.  Retirement costsare actuarially determined using the projected unit credit of accrued benefitvaluation method.  This method reflects services rendered by employees to thedate of valuation and incorporates assumptions concerning employees’ projectedsalaries.  

 

***Stock-Based Compensation***

 

We have historically accounted for stock-basedemployee compensation plans under Accounting Principles Board, or APB, OpinionNo. 25, “Accounting for Stock Issued to Employees,” and related interpretations,and followed the disclosure-only provisions of SFAS 123, “Accounting forStock-Based Compensation”.

 

UnderAPB Opinion No. 25, compensation cost is measured at the intrinsic value, whichis the difference between market price and exercise price, if any, on themeasurement date.  Under SFAS 123, compensation cost is calculated based on thefair value of the options granted.  Fair value is determined using anacceptable option-pricing model based on certain management assumptions.Compensation expense is recognized over the performance period.

 

Proforma information regarding net income (loss) and earnings per share isrequired by SFAS 123.  This information is required to be determined as if PLDThad accounted for its employee stock options (including shares issued under theEmployee Stock Purchase Plan, or ESPP) and long-term incentive plan, or LTIP,using the fair value method.  Under SFAS 123, employee stock options are valuedat the grant date using the Black-Scholes valuation model, and this compensationcost is recognized ratably over the vesting period.  Had compensation expensefor PLDT’s stock option plan, stock purchase plan and LTIP been determinedbased on the fair value at the grant date of awards for years 2005, 2004 and2003, consistent with the provision of SFAS 123, PLDT’s net income in 2005would have increased whereas in 2004 and 2003 would have decreased.  The proforma amounts are indicated below:

 

** **

**2005**

2004

2003

 

**Basic**

**Diluted**

Basic

Diluted

Basic

Diluted

 

(in million pesos, except per share amounts)

Net income attributable to common shareholders (Note 20)

**37,483**

**38,787**

24,834

26,313

7,997

8,251

Add:  Total stock-based employee compensation expense included in net income

**824**

**824**

239

239

14

14

Deduct:  Total stock-based employee compensation expense determined under fair value based method

**(823)**

**(823)**

(331)

(331)

(51)

(51)

Pro forma net income attributable to common shareholders

**37,484**

**38,788**

24,742

26,221

7,960

8,214

Earnings per common share:

****

As reported

**217.84**

**211.93**

146.32

145.30

47.20

45.72

Pro forma

**217.84**

**211.93**

145.77

144.79

46.99

45.51

 

Thedilutive effect of outstanding options is reflected as additional sharedilution in the computation of earnings per common share, see *Note 20 –Earnings Per Common Share*.

 

***Leases***

 

Leaseobligations having provisions for bargain purchase options and ownershiptransfer at the end of the lease term, witha lease term equal to 75% or more of the estimated economic life of the leasedproperty, or lease obligations where the present value at the beginning of thelease term of the minimum lease payments (excluding executory costs and taxesto be paid or paid by the lessor and including any profit thereon) equals orexceeds 90% of the fair value of the leased property, are capitalized.  The related obligations arerecognized as liabilities.  Minimum leasepayments are allocated between thefinance charges and reduction of the lease liability so as to achieve aconstant periodic rate of interest on the remaining balance of theliability.

 

Acapital lease gives rise to a depreciation expense for the asset, as well as aborrowing cost for each period.  Finance charges are charged directly tocurrent operations.  The depreciation policy for leased assets is consistentwith that for depreciable assets that are owned.  

 

Leaseswhere the lessor retains substantially all the risks and benefits of ownershipof the asset are classified as operating leases.  Initial direct costs incurredin negotiating an operating lease are deferred and amortized on a straight-linemethod over the lease term on the same bases as the lease income.  Operatinglease payments are recognized as an expense in the consolidated statements ofincome on a straight-line basis over the lease term.  For income tax reportingpurposes, expenses that should have been incurred under lease agreement areconsidered as deductible expenses.

 

Operatinglease expense amounted to Php2,086 million, Php2,160 million and Php2,166million in 2005, 2004 and 2003, respectively.

 

***Advertising and Promotion Expenses***

 

Advertising and promotions are expensed as incurred.Advertising and promotion expenses amounted to Php4,160 million, Php5,002million and Php2,982 million in 2005, 2004 and 2003, respectively. 

 

***Repairs and Maintenance Expenses***

 

Repairsand maintenance are expensed as incurred.  Repairs and maintenance expensesamounted to Php6,705 million, Php5,671 million and Php4,931 million in 2005,2004 and 2003, respectively. 

 

***Foreign Currency Transactions and Translations***

 

Foreach entity in the PLDT Group, transactions in foreign currencies are recordedin the functional currency of the entity by applying to the foreign currencyamount at the spot exchange rate prevailing at the transaction date.  Foreignexchange gains or losses arising on the spot settlements or restatement of monetaryitems at rates different from those at which they were initially recordedduring the period or presented in the previous consolidated financialstatements are recorded in the consolidated statement of income in the periodin which they arise.

 

Certainsubsidiaries of our consolidated group have functional currencies differentfrom our reporting currency.  The assets and liabilities of such entities aretranslated to our reporting currency using exchange rates at the balance sheetdate and the statement of income accounts are translated using the weightedaverage rate for the period.  The resulting translation adjustments arerecorded as a component of accumulated other comprehensive income.

 

***Derivatives and Hedging Instruments***

 

TheCompany recognizes all derivatives on the consolidated balance sheet at fairvalue.  Derivatives that are not designated as hedges are recognized at fairvalue through earnings.  If the derivative is a hedge, depending on the natureof the hedge, and to the extent of the hedge’s effectiveness, changes in thefair value of derivatives are either offset against the change in fair value ofhedged assets, liabilities, or firm commitments through earnings or recognizedin other comprehensive income until the hedged item is recognized in earnings.The ineffective portion of a derivative’s change in fair value will beimmediately recognized in earnings.  The PLDT Group enters into derivativesthat are meant to be economic hedges of identified underlying instruments andare marked to market directly through earnings.

 

***Income Taxes***

 

Deferred income tax is provided using the liabilitymethod.  Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to: (a) temporary differences between the financialreporting bases of assets and liabilities and their related tax bases and (b)carryforward benefits of net operating loss carryover, or NOLCO, and minimumcorporate income tax, or MCIT.  Deferred tax assets and liabilities aremeasured using the tax rates applicable to taxable income in the years in whichthose temporary differences are expected to be recovered or settled, and thecarryforward benefits of NOLCO and MCIT are expected to be applied.  Avaluation allowance is provided for deferred tax assets when it is more likelythan not that some or all of the deferred tax assets will not be realized inthe future.

 

***Earnings Per Common Share, or EPS***

 

BasicEPS is calculated by dividing the net income or loss for the year attributableto common shareholders by the weighted average number of common sharesoutstanding during the year, after giving retroactive effect to any stockdividend declarations.

 

DilutedEPS is calculated in the same manner assuming that, at the beginning of theyear or at the time of issuance during the year, all outstanding options areexercised and convertible preferred shares are converted to common shares.Outstanding stock options will have a dilutive effect under the treasury stockmethod only when the average market price of the underlying common share duringthe period exceeds the exercise price of the option.  

 

Wherethe effect of the assumed conversion of the preferred shares and the exerciseof all outstanding options is anti-dilutive, basic and diluted EPS are statedat the same amount.

 

***Management’s Use ofEstimates***

 

Thepreparation of our consolidated financial statements in conformity with U.S.GAAP, requires us to make estimates and assumptions that affect the reportedamounts of our assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements, and thereported amounts of revenues and expenses during the period reported.  Actualresults could differ from those estimates.

 

Examplesof significant estimates include the allowance for doubtful accounts, inventoryobsolescence, depreciation rate, impairment of intangibles, investments andother long-lived assets, valuation allowance on deferred tax assets, pensionbenefit assumptions, asset retirement obligation measurement, stock optionvaluation and purchase price allocation.

 

***Concentrations***

 

ThePLDT Group’s results of operations and financial performance and condition maybe influenced by the general political situation in the Philippines.  The Philippines experienced several *coup d’état* attempts against the governmentadministration between 1986 and 1989, and in July 2003.  Political conditionsin the Philippines were generally stable during the 1990’s.  In the past fouryears, an increasing number of kidnappings, criminal and terrorist activitieshave occurred in Mindanao, principally led by the extremist “Abu Sayyaf” group,which reportedly has ties to the Al-Qaeda terrorist network.  There were seriesof bombing incidents in key cities in Mindanao, including Davao City.  The armed conflict between the Philippine military and the communist Moro IslamicLiberation Front also continues in Mindanao.

 

ThePLDT Group’s results of operations may be negatively affected by slow ornegative growth rates and economic instability in the Philippines and in Asia.  In the past, the Philippines has experienced periods of slow or negativegrowth, high inflation, significant devaluation of the peso, imposition ofexchange controls, debt restructuring and electricity shortages and blackouts.From mid-1997 to 1999, the economies of a number of Asian countries experiencedsignificant downturns.  The regional economic turbulence affected thePhilippine economy in a number of ways, including the depreciation of the peso,increases in interest rates, increases in unemployment and inflation, increasedvolatility and a decline in prices in the domestic stock market, thedowngrading of the Philippines’ local currency rating and the ratings outlookfor the Philippine banking sector and the reduction of foreign currencyreserves.  

 

Asat December 31, 2005, other than the concentration of our wireless services onprepaid subscribers, we do not have any significant concentration of businesstransacted with a particular supplier, lender or former affiliate that could,if suddenly adversely impacted, severely impact our operations.  We also do nothave a concentration of available sources or other rights that could, ifsuddenly eliminated, severely impact our operations.  We invest our cash and cashequivalents with various high-quality financial institutions.

 

***Impact of Recently Issued Accounting Pronouncements***

 

In February 2006, the Financial Accounting StandardsBoard, or FASB, issued FAS 155, “Accounting for Certain Hybrid FinancialInstruments,” an amendment to FAS 133 and FAS 140.  FAS 155 permits an entityto elect fair value remeasurement for any hybrid financial instrument (withchanges in fair value recognized in earnings) if the hybrid instrument containsan embedded derivative that would otherwise be required to be bifurcated andaccounted for separately under FAS 133.  The election to measure the hybridinstrument at fair value is made on an instrument-by-instrument basis and isirreversible.  The statement will be effective for all financial instrumentsacquired, issued, or subject to a remeasurement event occurring after thebeginning of an entity’s fiscal years beginning after September 15, 2006, withearlier adoption permitted as of the beginning of fiscal year, provided thatfinancial statements for any interim period of that fiscal year have not beenissued.

 

We are currently in the process ofevaluating any effect of the adoption of FAS 155 will have on our consolidatedfinancial statements.

 

In November 2005, the FASB issued Staff Position, orFSP, 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Applicationto Certain Investments.”  FSP 115-1 provides guidance for determining when aninvestment is considered impaired, whether impairment is other-than-temporary,and measurement of an impairment loss.  An investment is considered impaired ifthe fair value of the investment is less than its cost. 

 

If after evaluating all available evidence and therealizable value of an investment, its impairment is determined to be other-than-temporary,an impairment loss should be recognized equal to the difference between theinvestment’s cost and its fair value.  FSP 115-1 nullifies certain provisionsof Emerging Issues Task Force, or EITF, Issue No. 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments,” while retaining thedisclosure requirements of EITF 03-1.  FSP 115-1 is effective for reportingperiods beginning after December 15, 2005.

 

We are currently in the process ofevaluating any effect of the adoption of FSP 115-1 will have on ourconsolidated financial statements.

 

In May 2005, the FASB issued SFAS 154,“Accounting Changes and Error Corrections,” a replacement of APB Opinion No.20, “Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in InterimFinancial Statements”.  SFAS 154 applies to all voluntary changes in accountingprinciples and changes the requirements for accounting for and reporting of achange in accounting principle.  SFAS 154 carries forward many provisions ofAPB Opinion No. 20 without change, including the provisions related to thereporting of a change in accounting estimate, a change in reporting entity, andthe correction of an error.  SFAS 154 carries forward the provisions of SFAS 3that govern reporting accounting changes in interim financial statements.  Itrequires retrospective application to prior periods’ financial statements of avoluntary change in accounting principle unless it is impracticable.  APBOpinion No. 20 previously required that most voluntary changes in accountingprinciple be recognized by including in net income of the period of the changethe cumulative effect of changing to the new accounting principle.  SFAS 154requires that a change in method of depreciation, amortization or depletion forlong-lived, nonfinancial assets be accounted for as a change in accountingestimate that is affected by a change in accounting principle.  APB Opinion No.20 previously required that such a change be reported as a change in accountingprinciple.

 

SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.Earlier application is permitted for accounting changes and corrections oferrors made occurring in fiscal years beginning after June 1, 2005.

 

We are currently in the process ofevaluating any effect of the adoption of SFAS 154 will have on our consolidatedfinancial statements.

 

In March 2005, the U.S. Securities and ExchangeCommission, or U.S. SEC, issued Staff Accounting Bulletin, or SAB, 107,“Share-Based Payment,” providing guidance on option valuation methods, theaccounting for income tax effects of share-based payment arrangements uponadoption of SFAS 123 (R), and the disclosures in Management’s Discussion and Analysisof Financial Condition and Results of Operations subsequent to the adoption.We will provide SAB 107 required disclosures upon adoption of SFAS 123 (R) onJanuary 1, 2006.

 

OnDecember 16, 2004, the FASB issued SFAS 123 (revised 2004), or SFAS 123 (R),“Share-Based Payment,” which is a revision of SFAS 123.  SFAS 123 (R)supersedes APB Opinion No. 25 and related interpretations amend SFAS 95,“Statement of Cash Flows”.  Generally, the approach in SFAS 123 (R) is similarto the approach described in SFAS 123.  However, SFAS 123 (R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the statement of income based on their fair values on thedate of grant.  Pro forma disclosure is no longer an alternative. 

 

SFAS123 (R) must be adopted no later than the beginning of the fiscal yearbeginning after June 15, 2005.  Early adoption is permitted in periods in whichfinancial statements have not yet been issued.  

 

SFAS123 (R) permits public companies to adopt its requirements using one of twomethods:

 

1.  A “modified prospective” method inwhich compensation cost is recognized beginning with the effective date (a)based on the requirements of SFAS 123 (R) for all share-based payments grantedafter the effective date and (b) based on the requirements of SFAS 123 for allawards granted to employees prior to the effective date of SFAS123 (R) that remain unvested on the effective date.

 

2.  A “modified retrospective” methodwhich includes the requirements of the modified prospective method describedabove, but also permits entities to restate based on the amounts previouslyrecognized under SFAS 123 for purposes of pro forma disclosureseither (a) all prior periods presented or (b) prior interim periods of the yearof adoption.

 

We are currently in the process of evaluating any effect of theadoption of SFAS 123 (R) will have on our consolidated financial statements.

 

InNovember 2004, the FASB issued SFAS 151, “Inventory Costs,” an amendment ofAccounting Research Bulletin, or ARB, No. 43, Chapter 4.  SFAS 151 amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage).  Among other provisions, the new rulerequires that items such as idle facility expense, excessive spoilage, doublefreight, and rehandling costs be recognized as current-period chargesregardless of whether they meet the criterion of “so abnormal” as stated in ARBNo. 43.  Additionally, SFAS 151 requires that the allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities.  SFAS 151 is effective for fiscal years beginningafter June 15, 2005.  The PLDT Group does not expect the adoption of SFAS 151to have a material effect on its results of operations or financial condition.

 

InDecember 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets,” anamendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions”.SFAS 153 eliminates the exception from fair value measurement for nonmonetaryexchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29and replaces it with an exception for exchanges that do not have commercialsubstance.  SFAS 153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange.  SFAS 153 is effective for thefiscal periods beginning after June 15, 2005.  The PLDT Group does not expectthe adoption of SFAS 153 to have a material effect on its results of operationsor financial condition.

 

 

 

**4.         ****Cashand Cash Equivalents**

 

This account consists of:

 

 

**2005**

2004

 

(in million pesos)

Cash on hand and in banks

**6,496**

4,750

Temporary investments

**23,568**

22,571

 

**30,064**

27,321

 

Cashin banks earns interest at the prevailing bank deposit rates.  Temporary investmentsare made for varying periods of up to onemonth depending on our immediate cash requirements, and earn interest at theprevailing short-term deposit rates.

 

 

 

**5.         ****Tradeand Other Receivables**

 

Thisaccount consists of receivables from:

 

 

**2005**

2004

 

(in million pesos)

Customers and carriers

**24,475**

24,912

Others

**1,184**

680

 

**25,659**

25,592

Less allowance for doubtful accounts

**18,546**

18,068

 

**7,113**

7,524

 

Movements in the allowance for doubtful accounts areas follows:

 

 

**2005**

2004

2003

 

(in million pesos)

Balance at beginning of year

**18,068**

14,214

10,750

Provision for the year

**2,251**

3,955

4,092

Write-offs

**(1,773)**

(101)

(628)

Balance at end of year

**18,546**

18,068

14,214

 

Receivables from carriers represent receivablesarising from interconnection agreements with other telecommunicationscarriers.  The aforementioned receivable balances are shown net of relatedpayables to the same telecommunications carriers because an established rightof offset exists.

 

Unbilled receivables of Php631 million and Php557 millionin 2005 and 2004, respectively, represent recognized revenue for servicesrendered to fixed line and wireless subscribers that have not been billed atthe balance sheet dates. The unbilled amounts are billed upon completion of thecorresponding subscribers’ billing cycles.

 

OnOctober 10, 2002, PLDT entered into a Receivables Purchase Deed, or RPD, with aforeign financial institution, or the Purchaser, under which PLDT agreed (1) tosell its receivables from certain eligible foreign carriers for an advancepayment of US$50 million, of which, US$20 million remains outstanding as atDecember 31, 2005, and (2) to service, administer and collect the receivableson behalf of the Purchaser.  Under the RPD, the Purchaser has no recourse against PLDT should an eligible carrier failor refuse to settle the assigned/purchased receivables, except when PLDTcommits a breach of its representations and warranties under the RPD.

 

Sale of receivables under the RPD amounted to US$11million (Php586 million) and US$10 million (Php576 million) for the years endedDecember 31, 2005 and 2004, respectively.  Loss on sale of receivables underthe RPD amounted to US$1 million (Php75 million) for the years ended December31, 2005 and 2004.

 

 

 

**6.         ****Inventoriesand Supplies**

 

Thisaccount consists of:

 

 

**2005**

2004

 

(in million pesos)

Spare parts and supplies 

**1,393**

984

Terminal and cellular phone units 

**1,002**

1,895

Others

**253**

395

 

**2,648**

3,274

Less allowance for inventory obsolescence

**1,100**

1,134

 

**1,548**

2,140

 

Movementsin the allowance for inventory obsolescence are as follows:

 

 

**2005**

2004

2003

 

(in million pesos)

Balance at beginning of year

**1,134**

729

614

Provision for the year

**479**

577

251

Write-offs

**(513)**

(172)

(136)

Balance at end of year

**1,100**

1,134

 729

 

Spare parts and supplies issued to various projects,included as part of property under construction shown under *Note 7 –Property, Plant and Equipment*, amounted to Php1,970 million and Php2,277million in 2005 and 2004, respectively.  

 

 

 

**7.         ****Property,Plant and Equipment**

 

This account consists of:

 

 

**2005**

2004

 

(in million pesos)

Cable and wire facilities

**102,988**

98,433

Central office equipment

**76,423**

70,174

Cellular facilities

**55,841**

58,778

Vehicles, furniture and other work equipment

**28,391**

27,492

Buildings

**19,409**

18,974

Communications satellite

**6,036**

11,185

Information origination and termination equipment

**1,834**

1,705

Land and land improvements

**3,113**

2,860

 

**294,035**

289,601

Less accumulated depreciation and amortization

**133,025**

113,347

 

**161,010**

176,254

Property under construction

**11,997**

9,841

 

**173,007**

186,095

 

Interestcapitalized for the years ended December 31, 2005, 2004 and 2003 amounted toPhp504 million, Php595 million and Php887 million, respectively.

 

In2005 and 2003, assets impaired consist of assets of wireless and informationand communications technology segments.  Assets impaired in 2004 consist ofassets of the wireless and fixed line segments.  When impairment charges arerecognized, a new cost basis for the assets is established.

 

In2004, certain assets with net book values aggregating Php365 million wereimpaired.  These assets relate primarily to certain international facilityequipment of PLDT Global and Subic Telecom in relation to our strategicdirection to functionally integrate our international fixed line business.

 

In2003, ePLDT and certain of its subsidiaries recognized impairment lossesamounting to Php362 million representing the write-down of certain computerequipment and peripherals following the abandonment of a reloadable chip-basedcash card project, and certain software and computer equipment following achange in software platforms and applications.  The recoverable amounts werebased on value in use and were determined at the cash-generating unit level.In determining value in use for the cash-generating unit, the cash flows werediscounted at a nominal rate of 11% on a pre-tax basis.

 

Property,plant and equipment includes the following amounts for capitalized leases as atDecember 31, 2005 and 2004:

 

** **

**December 31, 2005**

 

December 31, 2004

 

**Central office equipment**

**Vehicles, furniture and other work equipment**

** **

** **

** **

**Total**

 

Central office equipment

Vehicles, furniture and other work equipment

 

 

 

Total

 

(in million pesos)

Cost

**361**

**1,039**

**1,400**

 

361

863

1,224

Less accumulated depreciation

**293**

**719**

**1,012**

 

269

410

679

 

**68**

**320**

**388**

 

  92

 453

 545

 

Depreciationexpense for assets reported under capitalized leases amounted to Php333million, Php282 million and Php110 million in 2005, 2004 and 2003,respectively.

 

In2005 and 2004, PLDT and Smart changed the estimated useful lives of certainnetwork assets owing to continuing network expansion and upgrade.

 

Belowis the pro forma financial information assuming no changes in accounting estimateswere made during 2005 and 2004:

 

** **

**2005**

2004

** **

(in million pesos, except  per share amounts)

Net income

** **

** **

As reported

**40,603**

28,101

Pro forma

**45,872**

30,319

Earnings per common share – basic

** **

 

As reported

**217.84**

146.32

Pro forma

**248.46**

159.38

Earnings per common share – diluted

** **

 

As reported

**211.93**

145.30

Pro forma

**240.72**

157.55

 

Under the terms of certain loan agreements, PLDT maynot create, incur, assume, permit or suffer to exist any mortgage, pledge, lienor other encumbrance or security interest over the whole or any part of itsassets or revenues or suffer to exist any obligation as lessee for the rentalor hire of real or personal property in connection with any sale and leasebacktransaction.

 

 

 

**8.         ****Investments**

 

This account consists of:

 

 

**2005**

2004

 

(in million pesos)

Investments in shares of stock:

** **

 

Acquisition cost

**3,409**

3,412

Less accumulated equity in net losses

**3,394**

3,404

 

**15**

   8

At equity:

** **

 

Mabuhay Space Holdings Limited, or MSHL

**–**

–

Others

**15**

8

 

**15**

   8

At cost:

** **

 

Stradcom International Holdings, Inc., or SIHI

**–**

–

Others

**–**

–

 

**–**

–

 

**15**

   8

Investments in debt security

**346**

286

 

**361**

 294

 

***Investment of ACeS Philippines in ACeS International Limited, or AIL***

 

Asat December 31, 2005, ACeS Philippines had a 20.23% investment in AIL, acompany incorporated under the laws of Bermuda.  AIL owns the Garuda ISatellite and the related system control equipment in Batam, Indonesia.

 

In December 1998, AIL and its 95% owned subsidiary, PTAsia Cellular Satellite, entered into an Amended and Restated Credit Agreement,or Amended Agreement, to amend the original Credit Agreement entered into by PTAsia Cellular Satellite and its bank creditors in 1997.  Under the AmendedAgreement, AIL has, among others, assigned to the banks as collateral all ofits intangible properties, including the Garuda I Satellite, the system controlfacilities and system control equipment.  On September 30, 2002, PT AsiaCellular Satellite, AIL, as guarantor, P.T. Bank International Indonesia, assecurity agent, and various banks signed the Rescheduling Agreement, whichamended the terms of the Amended and Restated Credit Agreement dated December29, 1998, moving the principal repayment dates to agreed periods with the finalmaturity date on January 31, 2012.

 

***Investment of Mabuhay Satellite in MSHL***

 

OnJuly 18, 1996, Mabuhay Satellite entered into a Joint Venture Agreement, orJVA, with Space Systems/Loral Inc., or SS/L, to form MSHL for the purpose ofproviding high-power Ku-Band satellite transmission services using the payloadservice which was added by SS/L aboard Agila II.  Under the terms of the JVASS/L is required to convey title to the additional payload service to MSHL inconsideration for SS/L’s 35% equity interest in MSHL and Mabuhay Satellite isrequired to pay SS/L US$19 million for a 65% equity interest in MSHL.

 

In2000, SS/L filed a Notice of Default and Termination against Mabuhay Satellitearising from the Mabuhay Satellite’s alleged failure to amicably resolve itsalleged unpaid obligation to SS/L under the JVA.  In 2002, the arbitrationpanel handed down its decision and provided for payment by Mabuhay Satellite toSS/L of the principal amount of US$10 million plus accrued interest at 9% perannum.  On June 30, 2003, Mabuhay Satellite and SS/L concluded a settlementagreement whereby Mabuhay Satellite will lease two (2) transponders under atransponder agreement on a full-time basis to SS/L and offset the lease chargesfrom Loral Skynet Network Services, Inc. (formerly Loral Cyberstar, Inc., anaffiliate of SS/L), among others, for a full and final settlement of thearbitration decision.  The settlement agreement provides that notwithstandingany provision therein to the contrary, the settlement agreement, and thetransponder agreement may terminate upon failure by Mabuhay Satellite, withinnine months from the execution of the settlement agreement or such other periodas the parties may agree upon, to secure the consent of the Philippinecreditors of Mabuhay Satellite pursuant to the Omnibus Credit and SecurityAgreement, or Omnibus Agreement, dated December 14, 1995, as amended, betweenMabuhay Satellite and such creditors.  Under the Omnibus Agreement, approval ofcreditors holding at least 51% of the outstanding principal amount of the loanobligations of Mabuhay Satellite is required for purposes of transfer ordisposition of any collateral under the Omnibus Agreement.  As at December 31,2003, the consent of the said creditors had not been obtained, hence, thetransaction, which would have resulted in a net gain of Php175 million, was notrecognized by Mabuhay Satellite in 2003.  On March 18, 2004, the majority ofthe creditors has given their consent to the settlement agreement andtherefore, the related gain was recognized in 2004.

 

***Investm******ent in SIHI***

 

ePLDThas a 22.5% interest in convertible securities of SIHI, the parent company ofStradcom Corporation, or Stradcom, which has an existing concession agreementwith the Philippine Government for the modernization of the Philippine LandTransportation Office, including the computerization of driver’s licenseissuance, vehicle registration and traffic adjudication systems.  SIHI has beenincurring losses from the start of operations due to Stradcom’s continuouslosses and recurring excess of current liabilities over current assets.  Inaddition, Stradcom is in default with respect to certain provisions of its loancovenants.  On this basis, we recognized an impairment provision in respect ofour investment in SIHI of Php616 million in 2004.

 

***Summarized Financial Information of Equity Investees***

 

The following table presents summarizedfinancial information in conformity with U.S. GAAP for equity investees forwhich we have significant influence as at December 31, 2005 and 2004 and forthe years ended December 31, 2005, 2004 and 2003.

 

 

**2005**

2004

 

(in million pesos)

Current assets

**652**

638

Noncurrent assets

**1,388**

1,648

Current liabilities

**1,585**

1,444

Noncurrent liabilities

**11,242**

12,100

Capital deficiency

**(10,787)**

(11,258)

 

 

**2005**

2004

2003

 

 (in million pesos)

Revenues

**774**

1,299

1,182

Revenues less cost of revenues

**615**

1,013

600

Expenses

**472**

592

758

Net loss

**471**

19

926

 

***Investment of ePLDT inDebt Securities of Technology Support Services, Inc. (formerly First AdvanceMulti-Media Entertainment Corp., or FAME)***

 

On June 1, 2004, ePLDT and FAME entered into anagreement whereby ePLDT would grant a seven-year zero-coupon loan to FAMEamounting to US$3.1 million.  Upon maturity of the loan, which is at the end ofseven (7) years from issuance, ePLDT may require FAME to redeem or pay the loanat a redemption value amounting to US$ 6,041,000.  At any time during the lifeof the outstanding loan, ePLDT may convert the loan into 20% of the totaloutstanding capital stock of FAME.

 

On August 20, 2004, FAME changed itscorporate name into TSSI.

 

On September 14, 2004, ePLDT entered intoa second agreement with TSSI whereby ePLDT would grant another seven-year zerocoupon loan to TSSI amounting to US$3.1 million with the same terms andfeatures as the first loan.  As at December 31, 2005, the aggregate loans ofePLDT to TSSI amounted to US$6.2 million.

 

As at December 31, 2005, ePLDT has notyet converted its investment in debt securities into TSSI’s shares of stock.TSSI is a systems integrator for the internet and mobile telephone gamingproject.

 

Thedebt instrument was initially recorded at fair value computed as the presentvalue of estimated future cash flows and subsequently measured at amortizedcost at effective yield.

 

 

** **

**9.         ****Goodwilland Other Intangible Assets**

** **

This account consists of:

** **

 

**2005**

2004

 

(in million pesos)

Goodwill

**24,419**

24,736

Other intangible assets

**3,779**

2,959

 

**28,198**

27,695

Less accumulated amortization

**11,323**

11,134

 

**16,875**

16,561

 

Movementsin accumulated amortization of goodwill and other intangible assets are asfollows:

 

 

**2005**

2004

2003

 

 (in million pesos)

Balance at beginning of year

**11,134**

11,041

10,275

Amortization

**189**

93

766

Balance at end of year

**11,323**

11,134

11,041

 

Thecustomers list included in other intangible assets was fully amortized as atDecember 31, 2003.

 

Movements of the net carrying value of goodwill perreportable segments are as follows:

 

 

**Wireless**

**Fixed Line**

Information and Communications Technology

**Total**

 

(in million pesos)

Balances as at December 31, 2002

14,768

426

97

15,291

Additions during the year

173

–

–

 173

Balances as at December 31, 2003

14,941

 426

  97

15,464

Additions during the year

1,019

–

90

1,109

Reclassification during the year

(173)

–

–

(173)

Balances as at December 31, 2004

15,787

 426

 187

16,400

Additions during the year

133

–

12

 145

Impairment during the year

–

–

(15)

(15)

Reclassification during the year

(448)

–

–

(448)

**Balances as at December 31, 2005**

**15,472**

**426**

**184**

**16,082**

 

Asubstantial portion of goodwill is related to the wireless business segment dueto our acquisition of Smart and Smart Broadband (formerly Meridian Telekoms,Inc.).  In December 2005, we completed our transitional and annual evaluationof the goodwill value in conformity with SFAS 142 and consistent with ourincrease in wireless subscribers and revenues, there is no impairment in thegoodwill value.

 

On September 2, 2004, Smart entered into a sale andpurchase agreement to acquire 100% of Smart Broadband, a company primarilyengaged in providing wireless broadband and data services to small andmedium-scale enterprises in the Philippines, for a total consideration of US$45million of which payments of US$11 million and US$7 million for an equityinterest of 40% in Smart Broadband were made in 2004 and payment of US$4million for an additional equity interest of 9% was made in January 2005.  Thebalance of US$23 million in respect of the remaining 51% equity interest in SmartBroadband was paid on March 7, 2006.  As at December 31, 2005, the net cashoutflow on acquisition was Php1,227 million, representing cash payments ofPhp1,294 million, cash acquired from Smart Broadband of Php5 million and costdirectly related to business combination of Php62 million.

 

Thepurchase consideration has been allocated to the assets and liabilities on thebasis of fair values at the date of acquisition.  The fair values of theidentifiable acquired assets and liabilities of Smart Broadband at the time ofacquisition are as follows:

 

 

(in million pesos)

Cash and cash equivalents

1

Trade and other receivables

11

Inventories and supplies

3

Prepayments

2

Other current assets

3

Property, plant and equipment

61

Goodwill

571

Intangible assets

670

 

1,322

Accrued and other current liabilities

(48)

Notes payable

(5)

Deferred income tax liabilities

(214)

 

(267)

Net assets

1,055

 

SmartBroadband has been accounted for in the consolidated financial statements usingthe purchase method of accounting, which resulted in goodwill amounting toPhp571 million in 2004 and additional goodwill of Php133 million in 2005.  

 

SmartBroadband’s intangible asset compositionand estimated useful lives were as follows:

 

Licenses

18 years

Spectrum

15 years

Technology

5 years

Customer list

3 years

 

Other intangible assets consist of:

 

 

**2005**

 

2004

 

Gross

Net

 

Gross

Net

 

Carrying Amount

Accumulated Depreciation

 

 

Carrying Amount

Accumulated Depreciation

 

 

(in million pesos)

Spectrum

591

(50)

 541

 

–

–

–

Technology application

365

(204)

 161

 

254

(93)

 161

Licenses

66

(5)

  61

 

–

–

–

Customer list

2,758

(2,728)

  30

 

2,705

(2,705)

–

 

3,780

(2,987)

 793

 

2,959

(2,798)

 161

 

The future amortization of otherintangible assets as at December 31, 2005 are as follows:

 

 

(in million pesos)

2006

162

2007

78

2008

66

2009

58

2010

43

2011 and onwards

386

 

 793

 

 

 

**10.    Other Noncurrent Assets**

 

Thisaccount consists of:

 

 

**2005**

2004

 

(in million pesos)

Telephone instruments - net

**2,420**

3,317

Debt issuance costs - net

**733**

751

Refundable deposits

**516**

490

Others

**707**

699

 

**4,376**

5,257

 

 

 

**11.    Accrued Expenses andOther Current Liabilities**

 

Thisaccount consists of:

 

 

**2005**

2004

 

(in million pesos)

Accrued utilities and related expenses

**5,214**

4,096

Accrued satellite air time cost and provisions (Notes 21 and 22)

**3,827**

2,954

Accrued interests and other related costs

**2,003**

2,235

Accrual for payment for unused sick leave and other employee benefits

**1,759**

1,595

Accrued taxes and related expenses

**834**

1,708

Others

**2,349**

2,175

 

**15,986**

14,763

 

Over the past years, PLDT hasbeen implementing its manpower rightsizing program, or MRP, in line with itscontinuing effort to reduce the cost base of its fixed line business.  The MRPcost charged to operations for the years ended December 31, 2005, 2004 and 2003amounted to Php458 million, Php566 million and Php1,565 million, including aloss on settlement of Php117 million, primarily representing charges relatingto 440, 745 and 1,862 PLDT employees affected by the program, respectively;unrecognized past service costs, which are normally amortized over theestimated remaining average working lives of employees, in respect of employeeswho availed of the MRP are recognized as loss on settlement.  The decision toimplement the MRP was anchored on the challenges being faced by the fixed linebusiness as significant changes in technology, increasing competition, andshifting market preferences to cellular use have reshaped the future of thefixed line business.  The MRP was implemented under the Labor Code of the Philippines, as amended, and is in compliance with all other relevant labor laws and regulations inthe Philippines.

 

Movements in the accrued MRP cost accounts, includedunder accrual for payment for unused sick leave and other employee benefitsduring the years, are as follows:

 

8

**2005**

2004

2003

 

                   (in million pesos)

Balance at beginning of year

**48**

16

87

Cost for the year (Notes 18 and 24)

**458**

566

1,565

Payments

**(481)**

(534)

(1,636)

Balance at end of year

**25**

  48

  16

 

 

 

12.    Interest-bearing Financial Liabilities

 

Thisaccount consists of the following:

 

 

**2005**

2004

 

(in million pesos)

 

** **

 

**Interest-bearing financial liabilities maturing within one year**

** **

 

Long-term debt maturing within one year 

**18,797**

28,020

Obligations under capital lease maturing within one year (Note 7)

**716**

425

Notes payable:

** **

 

Bank loans 

**–**

58

 

**19,513**

28,503

 

** **

 

**Long-term portion of interest-bearing financial liabilities**

** **

 

Long-term debt

**93,516**

131,377

Obligations under capital lease (Note 7)

**381**

601

 

**93,897**

131,978

 

***Long-term Debt***

 

Long-term debt consists of:

 

**Description**

**Interest Rates**

**2005**

2004

 

 

(in millions)

*U.S. Dollar Debt:*

 

 

 

 

 

Export Credit Agencies-Supported Loans:

 

 

 

 

 

Kreditanstalt für Wiederaufbau, or KfW

5.65% - 8.03% and US$ LIBOR + 0.55% - 2.5%

**US$254**

**Php13,489**

US$351

Php19,793

Finnish Export Credit or Finnvera

6.36% - 7.75% and US$ LIBOR + 0.05% and 1.30% - 1.425%

**107**

**5,651**

162

9,128

Nippon Export and Investment Insurance  of Japan, or NEXI

US$ LIBOR +1%

**50**

**2,653**

75

4,226

Japan Bank for International Cooperation,  or JBIC/Co-financing Banks

6.56% - 7.95% and US$ LIBOR + 0.65% - 1.55%

**–**

**–**

44

2,459

Others

5.83% - 7.89% and US$ LIBOR + 0.15% - 4.30% and GOVCO’s cost + 0.20%

**28**

**1,478**

104

5,878

 

 

**439**

**23,271**

 736

41,484

Fixed Rate Notes

7.85% - 11.375%

**998**

**52,980**

1,236

69,652

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

2.25% and US$ LIBOR + 1%

**283**

**15,030**

283

15,959

GSM Network Expansion Facilities

4.49% and US$ LIBOR + 3.25%

**87**

**4,632**

126

7,089

Nederlandse Financierings-Maatschappij  Voor Ontwikkelingslanden N.V., or FMO

US$ LIBOR + 1.95% - 2.05%

**–**

**–**

51

2,862

Others

5.83% and US$ LIBOR + 0.40% - 3.625%

**19**

**978**

33

1,863

Restructured Loans

US$ LIBOR + 1%

**119**

**6,305**

119

6,702

Satellite Acquisition Loans

US$ LIBOR + 1.75% and 5.6%

**57**

**3,040**

72

4,064

 

 

**US$****2,002**

**106,236**

US$2,656

149,675

 

 

** **

** **

 

 

* *

 

** **

** **

 

 

* *

 

** **

** **

 

 

*Japanese Yen Debt:*

 

** **

** **

 

 

JBIC’s Overseas Investment Loan, or OIL

2.125%

**JP¥6,970**

**3,139**

JP¥9,760

5,363

Export Credit Agency-Supported Loan:   NEXI Supported Loan

JP¥ LIBOR + 1.70%

**1,575**

**710**

2,205

1,212

** **

 

**JP¥****8,545**

**3,849**

JP¥11,965

6,575

** **

 

** **

** **

 

 

*Philippine Peso Debt:*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

14% - 15.816%

**–**

**1,580**

–

1,680

Term Loans:

 

** **

** **

 

 

JBIC 4 Program

11.18%

**–**

**–**

–

680

Secured Term Loans

11.6% - 24% and 91-day T-Bill  + 4%; 90-day PHIBOR + 3%

**–**

**166**

–

305

Restructured Loans

91-day T-Bill + 1%

**–**

**482**

–

482

 

 

**–**

**2,228**

–

3,147

 

 

** **

**112,313**

 

159,397

Less portion maturing within one year

 

** **

**18,797**

 

28,020

Long-term debt - net of current portion

 

** **

**Php93,516**

 

Php131,377

 

The scheduled maturities of our outstandingconsolidated long-term debt as at December 31, 2005 are as follows:

 

 

**U.S. Dollar Loans**

**JP****Y****Loans**

**Php Loans**

**Total**

 

**In U.S. Dollar**

**In Php**

**In JP****Y**

**In Php**

**In Php**

**In Php**

** **

(in millions)

**Year**

** **

 

 

 

 

 

2006

308

16,328

3,418

1,539

930

18,797

2007

347

18,418

3,418

1,540

35

19,993

2008

110

5,839

1,709

770

24

6,633

2009

266

14,121

–

–

25

14,146

2010

48

2,552

–

–

834

3,386

2011 and onwards

923

48,978

–

–

380

49,358

 

2,002

106,236

8,545

3,849

2,228

112,313

 

*U.S. Dollar Debt:*

* *

*Export CreditAgencies-Supported Loans*

 

Inorder to obtain imported components for our network infrastructure inconnection with our expansion and service improvement programs, we obtainedloans extended and/or guaranteed by various export credit agencies.  Thesefinancings account for a significant portion of our indebtedness.

 

*Kreditanstalt für Wiederaufbau, or KfW*

 

KfW,a German state-owned development bank, is PLDT’s largest single creditor.  Asat December 31, 2005, we owed US$254 million aggregate principal amount of debtto KfW, as follows:

 

•      US$196 million provided undervarious export credit agency-backed facilities, of which US$86 million was inconnection with our expansion and service improvement programs and US$110million in connection with the US$149 million refinancing facility discussedbelow; and

 

•       US$58 million provided for the 15% downpaymentportion and credit facilities without guarantee/insurance cover from the exportcredit agencies, of which US$30 million was in connection with the US$149million refinancing facility discussed in the following paragraphs.

 

OnJanuary 25, 2002, PLDT signed two loan agreements with KfW, which provided PLDTwith a US$149 million facility to refinance in part the repayment installmentsunder its existing loans from KfW due from January 2002 to December 2004.  Thefacility is composed of a nine-year loan, inclusive of a three-yeardisbursement period and a two-year grace period during which no principal ispayable.  It partly enjoys the guarantee of HERMES, the export credit agency ofthe Federal Republic of Germany.  We have drawn US$140 million (Php7,426million) under this facility as at December 31, 2005.  PLDT waived furtherdisbursements under this refinancing facility effective September 1, 2004.Thus, the undrawn portion of US$9 million was cancelled.

 

Ofthe amounts outstanding under these KfW loans, US$51 million of our KfW loanswill mature in 2006, US$73 million will mature in 2007, US$55 million willmature in 2008, US$44 million will mature in 2009 and US$31 million will maturein 2010.  Principal amortizations on these loans are generally payable in equalsemi-annual installments.

 

*FinnishExport Credit plc, or Finnvera*

 

Asat December 31, 2005, US$107 million aggregate principal amount of Smart’sdebts were provided by various banks under export credit agency-backedfacilities in connection with Smart’s GSM expansion programs.  These facilitiesare covered by guarantees from Finnvera, the Finnish export credit agency, for95% of political risk and 50% of commercial risk for the GSM Phases 3 and 4loan facilities and 100% of political and commercial risk for the refinancingfacility of GSM Phases 5A and 5B.  Final repayment in the aggregate amount ofUS$5.8 million for GSM Phases 1 and 2 loan facilities was made on October 31,2005.

 

A US$100 million refinancing facility was obtained onFebruary 11, 2005 in relation to Smart’s GSM Phases 5A and 5B loans which wereprepaid last March 1, 2005 with outstanding balances of US$60 million and US$41million, respectively, at the time of prepayment.  This refinancing facility ispayable semi-annually over five years starting September 1, 2005 with finalrepayment due in March 2010.  The principal benefit of refinancing the Phase 5loan was the savings from a lower interest margin on the refinancing facility.

 

Ofthe amounts outstanding under these Finnvera guaranteed loans, US$37 millionwill mature in 2006, US$20 million will mature in 2007, US$20 million willmature in 2008, US$20 million will mature in 2009 and US$10 million will maturein 2010.  Principal amortization on these loans are generally payable in equalsemi-annual installments.

 

*NipponExport and Investment Insurance of Japan, or NEXI*

 

On November 28, 2002, Smart signed a US$100 million term loan facility supported by NEXI, ofwhich US$60 million was drawn on November 28, 2003 and US$40 million on April 5, 2004.  This loan is payable semi-annually over four years in eight equalinstallments starting May 28, 2004 with final repayment due in November 2007.The outstanding balance as at December 31, 2005 was US$50 million.

 

*JapanBank for International Cooperation, or JBIC/Co-financing Banks*

 

Asat December 31, 2005, PLDT has fully paid its U.S. dollar loans with JBIC(formerly the Export-Import Bank of Japan) and the co-financing banks.

 

*OtherExport Credit Agency Supported Loans*

 

PLDThas also obtained loans extended and/or guaranteed by other export creditagencies, including the Export-Import Bank of the United States, and therespective export credit agencies of France, Italy, Israel, Sweden and Australia, in the aggregate outstanding principal amount of US$23 million as at December 31, 2005.  Smart, likewise, obtained loans guaranteed by the export creditagencies of Norway and Italy amounting to US$5 million.  Of the amountsoutstanding under these loans, US$14 million will mature in 2006, US$8 millionwill mature in 2007, US$4 million will mature in 2008, US$1 million will maturein 2009 and US$1 million will mature in 2010.

 

*Fixed Rate Notes*

 

PLDT has the following non-amortizing fixed rate notesoutstanding as at December 31, 2005 and 2004:

 

Principal

Interest

**Maturity**

** **

** **

**Amount**

**Rate**

**Date**

2005

2004

 
** **

** **

** **

(in millions)

 
US$300,000,000

8.350%

March 6, 2017

**US$299**

**Php15,874**

US$299

Php16,852

 
US$250,000,000

11.375%

May 15, 2012

**250**

**13,265**

250

14,085

 
US$138,308,000

7.850%

March 6, 2007

**138**

**7,339**

184

10,362

 
US$175,000,000

10.500%

April 15, 2009

**175**

**9,272**

175

9,841

 
US$115,169,000

9.250%

June 30, 2006

**115**

**6,110**

130

7,310

 
US$110,557,000

9.875%

August 1, 2005

**–**

**–**

110

6,229

 
US$  21,110,000

10.625%

May 15, 2007

**21**

**1,120**

88

4,973

 
 

 

 

**US$****998**

**Php52,980**

US$1,236

Php69,652

 

***Consent Solicitation for 2012 Notes and Tender Offer and ConsentSolicitation for 2007 Notes***

 

OnOctober 6, 2005, PLDT commenced a solicitation of consents from holders of itsoutstanding 11.375% Notes due 2012, or the 2012 Notes, to amend certaincovenants under the 2012 Notes relating to the limitation on restrictedpayments and the limitation on indebtedness.  In addition, PLDT commenced acash tender offer for the aggregate principal amount of US$71,986,000 of its10.625% Notes due 2007, or the 2007 Notes, outstanding and a relatedsolicitation of consents to effect identical amendments to the 2007 Notes.

 

Theconsent solicitation for the 2012 Notes expired on October 27, 2005, and thetender offer and consent solicitation for the 2007 Notes expired on November 4,2005.  At the expirations, PLDT had received and accepted for payment:

 

a)      consents from holders ofUS$219,576,000 principal amount of the 2012 Notes representing approximately87.83% of the US$250,000,000 aggregate principal amount of the 2012 Notesoutstanding;

 

b)      consents from holders ofUS$65,421,000 principal amount of the 2007 Notes (including the tendered 2007 Notes),representing approximately 90.88% of the US$71,986,000 aggregate principalamount of the 2007 Notes outstanding; and

 

c)      tenders by holders ofUS$50,876,000 of the principal amount of the 2007 Notes.

 

PLDTreceived the requisite consents to effect the amendments to both the 2007 Notesand the 2012 Notes, which give PLDT greater flexibility to make certainrestricted payments, including payment of dividends to holders of PLDT’s commonstock, and reduce PLDT’s permitted leverage ratio pursuant to the terms of thenotes.

 

OnNovember 8, 2005, PLDT paid an aggregate of:

 

a)      US$1,097,880 with respect toconsents delivered by the 2012 noteholders, or a consent fee of US$5 for eachUS$1,000 principal amount of the 2012 Notes;

 

b)      US$72,725 with respect to consentsdelivered by non-tendering the 2007 noteholders, or a consent fee of US$5 foreach US$1,000 principal amount of the 2007 Notes not tendered; and

 

c)      US$55,836,160 (comprising oftender consideration of US$55,582,030 and related consent fees of US$254,130)with respect to the tenders by 2007 noteholders, or US$1,097.50 for eachUS$1,000 principal amount of the 2007 Notes tendered, representing (i) tenderoffer consideration of US$1,092.50 and (ii) consent payment of US$5, plusaccrued and unpaid interest on the principal amount of the tendered 2007 Notesup to, but not including, the settlement date. 

 

Asat November 8, 2005, the aggregate principal amount of the 2007 Notesoutstanding was US$21,110,000.

 

*Term Loans*

 

*US$283 Million Term Loan Facility, or Debt ExchangeFacility*

 

On July 2, 2004, Smart acquired from Piltel’screditors approximately US$289 million, or 69.4%, in the aggregate of Piltel’s totaloutstanding restructured debt at that time, in exchange for Smart debt and acash payment by Smart.  In particular, Smart paid an amount in cash of US$1.5million, or Php84 million, and issued new debt of US$283.2 million, orPhp15,854 million in July 2004.

* *

The breakdown of the total amount of Smart debt issuedto participating Piltel creditors is as follows:

 

•      2007 Facility in the amountof US$0.2 million payable in full in December 2007;

•      2008 Facility in the amountof US$2.9 million payable in full in December 2008; and

•      2014 Facility in the amountof US$280.1 million payable in full in June 2014.

 

As at July 2, 2004, the estimatedfuture cash flows for the Smart newly issued debt amounted to Php19,507million, as determined using undiscounted cash flows.  The difference betweenthe sum of future cash flows for newly issued debt of Php19,507 million andcash settlement of Php84 million, and the Php22,211 million Piltel cancelleddebt was recognized as gain on debt restructuring in the 2004 consolidatedstatement of income.  The total gain from the debt restructuring amounted toPhp2,620 million (Php15.44 per share) including the gain of Php241 million fromthe cash settled debt of Piltel.  The difference between the future cash flowsof the newly issued debt of Php19,507 million and the value of new debt ofPhp15,854 million was deferred and presented as part of “Remaining excess ofdebt forgiven over value of consideration given” account in the consolidatedbalance sheets in conformity with the accounting for troubled debtrestructuring.  Thereafter, interest incurred on the new debt is recorded as anoffset against “Remaining excess of debt forgiven over value of considerationgiven”.  Total interest incurred related to the new debt for the years endedDecember 31, 2005 and 2004 amounted to Php398 million and Php199 million,respectively.  As at December 31, 2005 and 2004, the balance of “Remainingexcess of debt forgiven over value of consideration given” account for thisrestructuring amounted to Php3,056 million and Php3,454 million, respectively,after giving effect to the above interest expense.

 

Interestfor the above facilities is payable every quarter at a floating rate of threemonths US$ LIBOR plus 1.00% for the 2007 and 2008 facilities, and a fixed rateof 2.25% per annum for the 2014 facility.  Furthermore, a portion of the 2014facility amounting to US$144 million has a variable yield option whereby thecreditors have an option to elect for an early repayment at a discount eitherin December 2007 at 52.5% of the relevant debt amount or in December 2008 at57.5% of the relevant debt amount.

 

*GSM Network Expansion Facilities*

 

OnSeptember 13, 2004, Smart signed a US$104 million 5-year term loan facilitysupported by Finnish Export Credit Ltd. as the lender with ABN AMRO Bank,Banque National de Paribas, Calyon, DBS Bank and Sumitomo Mitsui BankingCorporation as the Lead Arrangers.  The full amount of the facility was drawnin November 22, 2004, of which US$83 million remained outstanding as at March31, 2006.  The loan is payable over five years in ten equal semi-annualpayments starting May 2005 with final repayment in November 2009.  

 

On June 8, 2001, Smart signed its GSMPhase 5A financing comprised of US$195 million loans, of which US$30 million isowed to Nordic Investment Bank, or NIB, US$15 million to NederlandseFinancierings-Maatschappij Voor Ontwikkelingslanden N.V., or FMO, of theNetherlands and US$150 million to Finnvera.   The NIB loan balance of US$12.0million was prepaid in full on December 8, 2005, and the FMO loan balance ofUS$4.09 million was prepaid in full on March 1, 2006.

* *

*UndrawnFacilities*

* *

On August 8, 2005, Smart signed a US$30 millioncommercial facility with NIB to partly finance the related Phase 8 GSMequipment and services contracts.  The facility is a 5-year term loan payablesemi-annually in 10 equal installments commencing six months from the firstdrawdown date at a floating rate of US$ LIBOR plus .815% margin per annum withan option to fix the rate prior to the drawdown date.  The facility is expectedto be drawn in the third quarter of 2006.

 

OnAugust 10, 2005, Smart signed a loan facility for its GSM Phase 8 financing inthe amount of US$70 million.  The facility was awarded to the Bank of TokyoMitsubishi Ltd., Mizuho Corporate Bank Ltd, Standard Chartered Bank andSumitomo Mitsui Banking Corporation as the Lead Arrangers, with Finnish ExportCredit Ltd., as the Lender on Record.  Smart opted to utilize only a total ofUS$67 million which was drawn in February 15, 2006 and March 13, 2006 for US$10million and US$57 million, respectively.  The balance of US$3 was canceled.After a partial repayment on March 1, 2006, US$66 million remained outstandingas at March 31, 2006.  The facility is a 5-year term loan with final repaymenton September 1, 2010.  Interest is payable semi-annually at a fixed rate of4.515% per annum.  

 

*Local**ExchangeTransfer Loans*

 

Inconnection with the transfer to PLDT of Smart’s local exchange business, PLDTentered into loan agreements with Nederlandse Financierings-Maatschappij VoorOntwikkelingslanden N.V., or FMO, of the Netherlands, Exportkreditnamden, orEKN, of Sweden and Export Credits Guarantee Department, or ECGD, of the UnitedKingdom for loans in the principal amounts of US$135 million, US$36 million andUS$27 million, respectively.  The FMO loan with original final maturity ofSeptember 1, 2007 was prepaid in full on March 1, 2005.  The ECGD and EKNloans, both with original final maturity on December 31, 2007, were prepaid infull on June 30, 2005.

 

*US$12 Million Term Loan Facility*

 

On May 29, 2003, PLDT obtained a US$12 million term loanfacility from DEG-Deutsche Investitions und Entwicklungsgesellschaft mbH, orDEG.  As of December 31, 2005, this loan had an outstanding balance of US$4million.  The US$4 million undrawn portion of the US$12 million term loanfacility was cancelled pursuant to a request by PLDT to DEG effective September26, 2004.  The outstanding balance of this loan was repaid in full on June 16,2006.

 

*Restructured Loans*

 

On June 4, 2001, Piltel completed the restructuring ofapproximately Php41 billion of indebtedness and other claims owed to banks,trade creditors, bondholders and preferred shareholders, representing 98% ofits total liabilities as at that date.

 

As aresult of the restructuring:

 

a.       50% of the financial debt of eachparticipating creditor was released in consideration for the allotment ofPiltel Series K Class I Convertible Preferred Stock.  One (1) Piltel Series KClass I Convertible Preferred Stock was exchanged for every Php340 worth ofdebt (converted into Pesos at an exchange rate of Php47.05 = US$1.00 fordollar-denominated debt and Php1.00 = JP¥2.39522 for yen-denominated debt),which shares were immediately and mandatorily converted into PLDT ConvertiblePreferred Stock.  One PLDT Series V, VI or VII Convertible Preferred Stock wasissued for every five (5) Piltel Series K Class I Convertible Preferred Stock.

 

b.      Approximately half of theremaining 50% of all participating creditors’ (except for bondholders andpreferred shareholders) financial debt became their participation in a TrancheB Loan in the same currency as their previous financial debt and the other halfbecame their participation in a Tranche C Loan also in the same currency astheir previous financial debt.  In the case of bondholders and preferredshareholders, the remaining 50% of their financial debt became a participationin the Conversion Notes Facility and in a single Tranche Peso loan, or the TermNotes Facility, respectively.

 

Piltel’sresidual long-term debt to third parties that was not exchanged in the debtexchange offer conducted by Smart in 2004 consists of:

 

**Description**

**2005**

2004

 

(in millions)

**Restructured debts**

** **

** **

** **

** **

Philippine Pesos

** **

** **

** **

 

10 year Tranche B

** **

**Php241**

 

Php241

15 year Tranche C

** **

**241**

 

241

 

** **

**482**

 

482

U.S. Dollars

** **

** **

 

 

10 year Tranche B

**US$10**

**515**

US$10

548

15 year Tranche C

**10**

**515**

10

548

15 year Conversion Notes Facility

**99**

**5,275**

99

5,606

 

**US$****119**

**6,305**

US$119

6,702

Total

** **

**6,787**

 

7,184

 

** **

** **

 

 

**Unrestructured debt**

** **

** **

 

 

U.S. Dollars

** **

** **

 

 

Convertible bonds

**US$1**

**49**

US$1

52

Total

** **

**6,836**

 

7,236

Less current portion

** **

**120**

 

59

 

** **

**Php6,716**

 

Php7,177

 

Thefollowing is a summary of the key economic terms relating to the restructuringof the financial debt taking the form of Tranche B Loan, Tranche C Loan, TermNotes Facility and Conversion Notes Facility.

 

 

**Tranche B Loans**

**Tranche C Loans**

**Term Notes Facility**

**Conversion Notes Facility**

Final maturity

10 years from June 4, 2001

15 years from June 4, 2001

15 years plus 10 days from June 4, 2001

15 years from June 4, 2001

Amortization

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 3 to 9  –  0.10%

Years 3 and 4  –  0.10%

Years 3 to 14  –  0.10%

Years 3 and 4  –  0.10%

 

Year 10  –  99.30%

Year 5  –  2.00%

Year 15  –  98.80%

Year 5  –  1.05%

 

 

Years 6 to 14  –  10.00%

 

Years 6 to 9  –  5.05%

 

 

Year 15  –  7.80%

 

Year 10  –  54.65%

 

 

 

 

Years 11 to 14  –  5.00%

 

 

 

 

Year 15  –  3.90%

Interest rate

 

**Peso facility** – Philippines 91-day treasury bill rate, or T-Bill Rate, or the average of the 91-day T-Bill Rate and the 90-day Philippine inter-bank offered rate, or PHIBOR, if 90-day PHIBOR is different from the T-Bill Rate by more than 2.50%, plus 1.00% p.a.

 

**U.S. dollar facilities** – London interbank rate for U.S. dollar deposits, or LIBOR, for three-month U.S. dollar deposits plus 1.00% p.a.

 

**Yen facility** – LIBOR interbank rate for Yen deposits for three-month deposits plus 1.00% p.a.

181-day T-Bill Rate or the average of the 181-day T-Bill Rate and the 6-months PHIBOR, if 6-months PHIBOR is different from the T-Bill Rate by more than 2.50%, plus 1.00% p.a.

LIBOR for three-month deposits plus 1.00% p.a.

 

Interest payment dates

Quarterly in arrears

Semi-annually

 

Under the terms of Piltel’s debtrestructuring plan, PLDT issued a Letter of Support, or LOS, for the benefit ofPiltel and its creditors under which PLDT has agreed to cover any fundingshortfalls of Piltel up to a maximum amount of US$150 million less all amountspaid or committed to be paid to or on behalf of Piltel or any of itssubsidiaries or affiliates on or after March 23, 2000.  Under the LOS, PLDT isrequired to provide funding to Piltel in the event that the cash flow fromPiltel’s operations falls short of the amount required by it to discharge infull its obligations to any creditor of Piltel and all its operating andfinancing subsidiaries and affiliates.  PLDT is subject to contractualrestrictions limiting the amount of financial support it can provide to Piltelup to US$150 million.  As at December 31, 2005 and 2004, the remaining undrawnbalance available under the PLDT LOS was US$50 million, approximately Php2,666million (2005) and Php2,831 million (2004), due to prior investments made fromMarch 23, 2000 to December 31, 2002 aggregating to US$100 million throughPLDT’s subscription to Series J Class I preferred shares of Piltel.  There hasbeen no drawdown under the LOS in 2005 and 2004.

 

Piltel’srestructured obligations are secured by substantially all present and futureassets of Piltel under the mortgage trust indenture, or MTI, dated June 4, 2001between Piltel and Chase Manhattan Bank as security agent for the creditors,which established the security arrangements relating to the restructureddebts.  The participating creditors (other than the participating holders ofthe Peso Term Note Facility) will share equally in first ranking security,while non-participating creditors and the participating holders of the PesoTerm Note Facility will share equally in second ranking security created underthe MTI.  Such mortgage was approved by at least two-thirds of Piltel’sstockholders at its annual meeting on April 18, 2001 and the NTC on May 18,2001.

 

Piltellikewise agreed to pay into a dedicated account (a Sinking Fund Account) theamount by which earnings before interest, tax, depreciation and amortization,and exceptional items for a financial year is greater than 200 percent of theprojected debt service costs and permitted capital expenditure for thefollowing financial year (the Excess Cash flow).  The money in that SinkingFund Account will be used (before any drawings are made under the LOS) to fundcash flow deficiencies of Piltel.  Also, if actual capital expenditure for afinancial year differs from the projected capital expenditure, Piltel will eitherpay into the Sinking Fund Account established at the end of that year an amountequal to any over-projection of capital expenditure or will be entitled towithdraw funds, if any, equal to any under-projection.  Any credit balance in theSinking Fund Account after two financial years will be used to prepay allparticipating creditors on a pro rata basis.  On June 5, 2006, Piltel made apartial voluntary prepayment under its Philippine peso facility, U.S. dollarfacilities, Japanese yen facility and notes indenture.  The amount of thevoluntary prepayment is equivalent to the excess cash flow from the operationsof Piltel’s business.  The voluntary prepayment was made in lieu of depositingthose funds into a Sinking Fund Account.  The aggregate voluntary prepaymentamount was Php9,454 million, or US$179 million, which was appliedproportionally to the various debt facilities as set out in the intercreditoragreement dated June 4, 2001.

 

*Satellite Acquisition Loans*

 

Mabuhay Satellite has an existing CreditAgreement with the Export-Import Bank of the United States, or Ex-Im Bank, tofinance a portion of the cost of purchasing the Agila II Satellite.  In 2003,Ex-Im Bank of the United States approved, in principle, the re-profiling ofMabuhay Satellite’s US$42 million debt with them by extending the maturity ofthe loan by 11⁄2 years to July 15, 2007 and reducing the interest rate by 1% to5.6%.  The revised repayment terms have been approved by the majority of thelocal creditor banks.

 

Mabuhay Satellite also has an existingOmnibus Agreement with a syndicate of local banks, or the Banks, which includesissuance of irrevocable standby Letters of Credit with an aggregate statedvalue not exceeding US$21 million (Php1,107 million) in favor of U.S. Ex-ImBank, as security under the Credit Agreement and a term loan to MabuhaySatellite in the aggregate amount of US$36 million (Php1,934 million), whichwill mature on various dates from 2006 to 2007. 

 

Mabuhay Satellite has constituted in favor of theBanks: (a) a first mortgage on its leasehold rights under a lease agreemententered into with the Subic Bay Metropolitan Authority and the components ofthe satellite system; (b) an assignment of its rights under its purchasecontract for the satellite system; (c) an assignment of its rights under thetransponder lease contracts to be entered into with its shareholders and otherparties and the revenues therefrom; and (d) an assignment of the applicableproceeds of insurance to be taken on the satellite system.

* *

Asof the date of this report, Mabuhay Satellite and the Banks are undernegotiations for the extension of maturity dates in respect of the existingOmnibus Agreement.

 

*Japanese Yen Debt:*

 

*JBIC JP¥9,760 Million Overseas**Investment**Term Loan*

 

On July 26, 2002, PLDT signed a loan agreement with JBIC for a credit facility of JP¥9,760million under JBIC’s OIL program.  The loan, which was drawn on July 31, 2002, is being amortized semi-annually beginning March 21, 2005 and will mature on March 21, 2008.

 

*NEXI Supported JP¥5,615 Million**Syndicated Term Loan Facility*

 

On June 11, 2003, PLDT signed a JP¥5,615million syndicated term loan facility supported by NEXI, of which JP¥2,520 million was drawn and JP¥1,575 million was outstanding as atDecember 31, 2005.  The undrawn balance of JP¥3,095 million was cancelled atthe end of the Availability Period on December 3, 2004.  All outstanding amounts under this facility supported by NEXI were repaid in full on June 13, 2006.

 

*Philippine Peso Debt:*

 

*Php2,**770**Million Peso Fixed Rate Corporate Notes*

 

In connection with PLDT’s service improvement andexpansion programs, PLDT has entered into two loan agreements, pursuant to eachof which PLDT issued fixed rate corporate notes in three tranches.  Interest oneach tranche is payable semi-annually.

 

Under the first loan agreement, PLDT borrowed anaggregate amount of Php1,500 million, of whichPhp230 million matured on November 11, 2002, Php500 million matured on November 9, 2004 and Php770 million will mature on November 9, 2006.

 

Underthe second loan agreement, PLDT borrowed an aggregate amount of Php1,270 million, of which Php360million matured on June 9, 2003, Php100million matured on June 9, 2005 and Php810million will mature on June 9, 2010.

 

*JBIC 4 Program of the Development Bank of the Philippines*

 

Inconnection with the Asia Pacific Cable Network 2 project, PLDT entered into aloan agreement on September 28, 2000 with Citibank, N.A., as facility agent,and a syndicate of banks in the aggregate principal amount of Php1,700 million.The loan, which was funded under the JBIC Facility for Private SectorDevelopment of the Development Bank of the Philippines and amortized in 15quarterly installments matured and was paid on October 26, 2005.

 

*Secured Term Loans*

 

*Php150 Million**Term Loan Facility*

 

OnMarch 4, 2002, ePLDT entered into a three-year loan facility with PhilippineBank of Communications amounting to Php150 million.  The loan facility wasfully drawn on December 31, 2002 and payable in seven quarterly installments,with a grace period of one year, beginning year 2003.  The quarterly principalpayments of Php15 million started in June 2003 with a balloon payment of Php45million in March 2005.  Interest on this loan was equivalent to 91-day T-billrate plus 4% per annum payable quarterly in arrears.  The loan was secured byePLDT’s deed of assignment of receivables of a subsidiary from a foreigncustomer and an investment in an associate with an original cost of Php629million.  This loan was fully paid as at March 31, 2005.  The investment in this associate has been fullyprovided for as disclosed in *Note 8 – Investments*.

 

*Php100 Million Term Loan Facility*

 

On March 15, 2004, ePLDT entered intoanother three-year term loan facility with Asia United Bank amounting to Php100million for the payment of its outstanding short-term bank loan facility andfor other working capital requirements.  The loan facility was fully drawn asat December 31, 2004.  The loan is to be repaid in nine equal quarterlyinstallments starting March 2005 with final repayment in March 2007.  Intereston the loan is equivalent to 90-day PHIBOR plus 3% per annum payable quarterlyin arrears.  The loan is secured by a Mortgage Trust Indenture Agreement, orMTIA, on a parcel of land with a carrying value of Php279 million as atDecember 31, 2004.  As at December 31, 2005, the outstanding balance of thisloan amounted to Php56 million, of which Php44 million will mature in the lastquarter of 2006.

 

*Php149Million Term Loan Facility*

 

Asat December 31, 2005, Vocativ, a wholly-owned call center subsidiary of ePLDT,had an outstanding five-year term loan facility of Php109 million with AsiaUnited Bank for the payment of its additional capital expenditures and workingcapital requirements.  The loan is to be repaid in 14 equal quarterlyinstallments starting April 2006 with final repayment in July 2009.  Intereston the loan is equivalent to 90-day PHIBOR plus 3% per annum payable quarterlyin arrears.  The loan is secured by a Mortgage Participation Certificate againstthe MTIA between ePLDT and Asia United Bank Corporation – Trust and InvestmentsGroup dated March 15, 2004 on a parcel of land, which excludes the buildingsand improvements.  In 2005, Vocativ prepaid Php40 million of the loan.

 

*Unsecured Term Loans*

 

*Php1,000Million Term Loan Facility*

 

OnJune 14, 2001, Smart signed its GSM Phase 5A financing of Php1,000 million termloan.  The outstanding balance under this facility of Php467 million wasprepaid on June 28, 2004.

 

Debt Covenants

 

Our debt instruments containrestrictive covenants, including covenants that could prohibit us from payingdividends on common stock under certain circumstances, and require us to complywith specified financial ratios and other financial tests, calculated inconformity with accounting principles generally accepted in the Philippines, at relevant measurement dates, principally at the end of each quarterlyperiod.  We have maintained compliance with all of our maintenance financialratios as required under our loan covenants and other debt instruments.However, if negative factors adversely affect our financial ratios, we may beunable to maintain compliance with these ratios and covenants or be unable toincur new debt.  The terms of some of our debt instruments have no minimumamount for cross-default.  In addition, we are required to comply with certainfinancial ratios for the incurrence of capital expenditures in excess of US$10million and incurrence of indebtedness.   

 

Inparticular, under our JP¥9.760B loan agreement with JBIC, we are required toobtain prior written consent of JBIC for capital expenditures in excess ofUS$10 million, unless, among other things, our current ratio, calculated on anon-consolidated basis and after taking into account such expenditures, willnot be less than 0.90:1.  As at March 31, 2006, our current ratio as calculatedunder our debt covenants on a non-consolidated basis, was 1.51:1.  We currentlybelieve that our current ratio is unlikely to be less than 0.90:1 due to asmaller current portion of our long-term debt going forward.  As a result, webelieve that our financial ratios currently do not materially limit our abilityto incur our budgeted capital expenditures or to obtain additional financings.

 

Theprincipal factors that can negatively affect our ability to comply with thefinancial ratios and other financial tests under our debt instruments aredepreciation of the Philippine peso relative to the U.S. dollar, poor operatingperformance of PLDT and our consolidated subsidiaries, impairment or similarcharges in respect of investments or other long-lived assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expenses.  Interest expenses may increase as a result of variousfactors including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the Philippine peso,the lowering of PLDT’s credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions.  Sinceapproximately 98% of our total consolidated debts were denominated in foreigncurrencies, principally in U.S. dollars, many of these financial ratios andother tests are negatively affected by any weakening of the peso.  The peso hasbeen subject to significant fluctuations in recent years.  From 2002 to 2004,the peso has generally been depreciating from a high of Php49.336 on May 20, 2002 to a low of Php56.443 on October 14, 2004.  In 2005, the peso fluctuatedsignificantly from a low of Php56.321 on July 8 to a high of Php53.062 onDecember 29.  As at December 31, 2005, the peso had appreciated by 5.8% toPhp53.062 to US$1.00, from Php56.341 to US$1.00 as at December 31, 2004.

 

PLDT’sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of itsfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other investees in assisting PLDT in complying with non-consolidatedcovenants or covenants that are calculated without giving effect to the resultsof PLDT’s investees.

 

PLDT’s debt instruments contain anumber of other negative covenants that, subject to certain exceptions andqualifications, restrict PLDT’s ability to take certain actions withoutlenders’ approval, including: (a) incurring additional indebtedness; (b)prepaying other debt; (c) making investments; (d) extending loans; (e)extending guarantees or assuming the obligations of other persons; (f) payingdividends or other distributions or redeeming, repurchasing or otherwiseacquiring shares of PLDT’s capital stock; (g) disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth; (h) entering into management contracts providing for themanagement of its business or operations by a third party; (i) creating anylien or security interest; (j) permitting set-off against amounts owed to PLDT;(k) merging or consolidating with any other company; (l) entering into transactions with stockholders and affiliates; and (m)entering into sale and leaseback transactions. 

 

Further,certain of PLDT’s debt instruments contain provisions wherein PLDT may berequired to repurchase or prepay certain indebtedness in case of change incontrol of PLDT or if the ownership of our shares of common stock held by NTTCommunications falls below a certain threshold.

 

Moreover,certain of PLDT’s debt instruments restrict PLDT from declaring or distributingdividends to common stockholders.  In particular, under certain loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, (ii) if after giving effectto such action the current ratio would be less than 0.90:1 or (iii) in anamount greater than PLDT’s net income after taxes during the fiscal year towhich such payment or distribution relates.

 

Incase of a change in control of PLDT, PLDT may be required to repurchase orprepay certain indebtedness.  Under the terms of the 10.625% Notes due 2007 and11.375% Notes due 2012, we are required to offer to purchase all outstandingnotes due 2007 and notes due 2012 for cash at a price of 101% of theirprincipal amounts plus accrued interest in the event that (1) the aggregate ofNTT Communications’ and First Pacific’s direct and indirect voting interest inPLDT's outstanding capital stock having voting rights falls below 35% of suchcapital stock, (2) any person or, in certain instances, group of persons, whichis not controlled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT’s outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stockand (3) if a rating agency at such time maintains a rating on either series ofnotes, the rating agency downgrades its credit rating on the series within 90days (or more, in certain circumstances) following notice of the occurrence ofthe events specified in (1) and (2) above.

 

Underthe terms of our JP¥9,760 million loan from JBIC, in the event of any proposedsale or transfer of PLDT’s stock that would result in NTT Communicationsholding less than 14.95% of PLDT’s voting stock, we will be required to prepay,immediately upon effectiveness of such sale or transfer, all principaloutstanding under the loan, together with accrued interest.  However,prepayment will not be required if, following such sale or transfer, (1) NTT Communications continues to have prior approval rights with respect toall matters as to which NTT Communications has approval rights under the stockpurchase agreement pursuant to which it acquired its shares in PLDT, or (2)JBIC, in its sole discretion, determines that NTT Communications’ participationin the expansion of Smart’s GSM network capacity to extend PLDT’s cellularbusiness in Smart would not be reduced below its level of participation as atthe date of the loan agreement.

 

PLDT’s debt instruments also contain customary andother default provisions that permit the lender to accelerate amounts due orterminate their commitments to extend additional funds under the debtinstruments. These default provisions include: (a) cross-defaults andcross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument; in some cases, the cross-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated.  In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments; (b) failure by PLDT tomeet certain financial ratio covenants referred to above; (c) the occurrence ofany material adverse change in circumstances that a lender reasonably believesmaterially impairs PLDT’s ability to perform its obligations under its debtinstrument with the lender; (d) the revocation, termination or amendment of anyof the permits or franchises of PLDT in any manner unacceptable to the lender;(e) the abandonment, termination or amendment of the project financed by a loanin a manner unacceptable to the lender; (f) the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and (g)other typical events of default, including the commencement of bankruptcy,insolvency, liquidation or winding up proceedings by PLDT.

 

Smart’s debt instruments containcertain restrictive covenants, including covenants that prohibit Smart frompaying dividends, redeeming preferred stock, making distributions to PLDT orotherwise providing funds to PLDT or any affiliate without the consent of itslenders under its Phases 1, 2 and 3 facilities.  Also, Smart’s debt instrumentscontain certain restrictive covenants that require Smart to comply with specifiedfinancial ratios and other financial tests at semi-annual measurement dates.The financial tests under Smart’s loan agreements include compliance with adebt to equity ratio of not more than 1.50:1 and a debt service coverage ratioof not less than 1.50:1.  Smart has maintained compliance with all of itsfinancial covenants.  The agreements also contain customary and other defaultprovisions that permit the lender to accelerate amounts due under the loans orterminate their commitments to extend additional funds under the loans.  Thesedefault provisions include: (a) cross-defaults and cross-accelerations thatpermit a lender to declare a default if Smart is in default under another loanagreement.  These cross-default provisions are triggered upon a payment orother default permitting the acceleration of Smart debt, whether or not thedefaulted debt is accelerated; (b) failure by Smart to comply with certainfinancial ratio covenants; (c) any reduction in PLDT’s ownership of Smart’sshares below 51%; (d) any reduction in First Pacific’s and Metro PacificCorporation’s collective direct and/or indirect ownership of PLDT’s commonstock below 17.5% of the total common stock outstanding; and (e) the occurrenceof any material adverse change in circumstances that the lender reasonablybelieves materially impairs Smart’s ability to perform its obligations underits loan agreements.

 

As at December 31, 2005, Piltelwas not in compliance with the terms of convertible bonds with principal amountof US$0.7 million (approximately US$0.9 million redemption price at the optionof the holders).  Piltel may not be able to restructure or otherwise pay theclaims of its unrestructured debt.  However, default on and acceleration ofPiltel’s unrestructured indebtedness does not create a cross-default underPiltel’s restructured indebtedness or any indebtedness of PLDT or Smart.

 

The Credit and Omnibus Agreementsof Mabuhay Satellite imposes several negative covenants.  In particular, thesecovenants, among other things, restrict material changes in Mabuhay Satellite’snature of business and ownership structure, any lien upon or with respect toany of its assets or to any right to receive income, acquisition of capitalstock, declaration and payment of dividends, merger, consolidation and salewith another entity and incurring or guaranteeing additional long-term debtbeyond prescribed amounts.

 

ePLDT’s loan agreement imposesnegative covenants which, among other things, restrict ePLDT in regard topayment of cash dividends or any other income or any capital distribution toPLDT, voluntary suspension of its entire business operations for a period of 60consecutive days, dissolution of its legal existence, and creation of anyencumbrances on the shares pledged.  One of ePLDT’s loan agreements alsorequires ePLDT to comply with specified financial ratios and other financialtests at quarterly measurement dates.  The agreement also contains customaryand other default provisions that permit the lender to accelerate amounts due underthe loan or terminate their commitments to extend additional funds under theloan.  As at December 31, 2005, ePLDT was in compliance with all of itsfinancial covenants.

 

**Obligations Under Capital Lease**

 

Thefuture minimum payments for capitalized leases are as follows as at December31, 2005:

 

Year

(in million pesos)

2006

895

2007

341

2008

14

2009

7

2010

8

2011 and onwards

435

Total minimum lease payments

1,700

Less amount representing interest

603

Present value of net minimum lease payments

1,097

Less capital lease maturing within one year (Note 7)

716

Long-term portion of obligations under capital lease

381

 

*Municipal Telephone Projects*

 

In1993, PLDT entered into two lease agreements with the Philippine Department of Transportation andCommunications, or DOTC, covering telecommunications facilities in the province of Bohol and Batangas established under the Municipal Telephone Act.  Underthese agreements, PLDT was granted the exclusive right to providetelecommunications management services, to expand services, and to promote theuse of the DOTC-contracted facilities in certain covered areas for a period of15 years.  Title to the properties shall be transferred to PLDT upon expirationof the lease term.  As at December 31, 2005, PLDT’s aggregate remainingobligation under this agreement was approximately Php858 million.  In case ofcancellation, PLDT is liable to pay Php100 million under each of the twocontracts as liquidated damages.

 

On June 1, 2004, PLDT served theDOTC a notice of termination of the lease agreement in respect of thetelecommunications system in Bohol which state of deterioration, obsolescenceand disrepair has made it impossible for PLDT to continue managing, operating,and maintaining the system.  Since 2002, PLDT has been advising the DOTC of theneed to review the viability of the system as it has infused more than Php200million for upgrades and maintenance to keep the system operable.  Further, theenactment of Public Telecommunications Policy Act, or R.A. No. 7925, whichnegated the DOTC’s warranty to grant PLDT the exclusive right to providetelecommunication services in the areas stipulated, prevented PLDT fromachieving the originally projected profitability, thereby rendering itimpossible for PLDT to continue fulfilling its obligation under the leaseagreement.  Although several discussions have been held since then, no mutuallyacceptable agreement has been reached.  On June 30, 2004, the DOTC advised PLDTthat the request for termination of the lease agreement in Bohol has beenreferred to the Department of Justice, or DOJ, as government agencies arerequired to refer all interpretation of contracts and agreements to the DOJsecretary as attorney-general of the national government.  On May 5, 2005, PLDTreceived a letter from the DOTC stating that PLDT is in default for failure toremit to the DOTC the quarterly installments under the lease agreement.  Due tothe failure of the parties to amicably settle their dispute, on September 28,2005, PLDT demanded that the dispute be referred to arbitration and that theparties agree on the composition of the arbitration committee.  PLDT has notreceived any response from the DOTC.  As at December 31, 2005, the net bookvalue of the telecommunications system in Bohol, including PLDT’s additionalcapital expenditure relating to the telecommunications system, andcorresponding capital lease obligation amounted to Php28 million and Php735million, respectively.

 

*Other Long-term CapitalLease Obligations*

 

The PLDT Group has various long-term lease contractsfor a period of three years covering various office equipment.  In particular,Smart and Piltel have capital lease obligations aggregating Php818 million asat December 31, 2005 in respect of office equipment and facilities.

 

Underthe terms of certain loan agreements and other debt instruments, PLDT may notcreate, incur, assume or permit or suffer to exist any mortgage, pledge, lienor other encumbrance or security interest over the whole or any part of itsassets or revenues or suffer to exist any obligation as lessee for the rentalor hire of real or personal property in connection with any sale and leasebacktransaction.

 

**Notes Payable**

 

This account consists ofPhilippine peso and U.S. dollar-denominated short-term bank loans and trustreceipts at weighted average interest rates, or WAIR, of 11.75% at December 31,2004 for Philippine peso borrowings, and 2.78% at December 31, 2004 for U.S.dollar borrowings.  The loan facility was fully paid in 2005.

 

 

 

**13.    Deferred Credits and Other NoncurrentLiabilities**

 

This account consists of:

 

 

**2005**

2004

 

(in million pesos)

Accrual of capital expenditures under long-term financing 

**5,769**

3,970

Advance payment under a receivables purchase facility (Note 5)

**976**

1,644

Liabilities on asset retirement obligations (Note 3)

**752**

638

Others

**924**

736

 

**8,421**

6,988

 

 

 

**14.    Preferred Stock Subjectto Mandatory Redemption**

 

Asat December 31, 2005, PLDT had issued 3 million shares of Series V ConvertiblePreferred Stock, 5 million shares of Series VI Convertible Preferred Stock and 4 million sharesof Series VII Convertible Preferred Stock in exchange for Series K Class IConvertible Preferred Stock of Piltel, pursuant to the debt restructuring planof Piltel adopted in June 2001.  Shares of Series V, VI and VII ConvertiblePreferred Stock are entitled to receive annual dividends of Php18.70 per share,US$0.397 per share and JP¥40.7189 per share, respectively.  Each share ofSeries V, VI and VII Convertible Preferred Stock is convertible at any time atthe option of the holder into one PLDT common share.  On the date immediatelyfollowing the seventh anniversary of the issue date of the Series V and SeriesVI Convertible Preferred Stock and on the eighth anniversary of the issue dateof the Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted into PLDT common shares.Under a put option exercisable for 30 days, holders of common shares receivedon mandatory conversion of the Series V, VI and VII Convertible Preferred Stockwill be able to require PLDT to purchase such PLDT common shares for Php1,700per share, US$36.132 per share, and JP¥4,071.89 per share, respectively.  Dueto the foreign currency component of the call option embedded in the Series VIand VII Convertible Preferred Stock, such call options were bifurcated andaccounted for separately in conformity with SFAS 133, as amended, see *Note23* – *Financial Assets and Liabilities*.  The aggregate fair value ofthe issued Series V, VI and VII Convertible Preferred Stock as at date ofissuance – net of the bifurcated option values – is shown under the “PreferredStock Subject to Mandatory Redemption” account in the consolidated balancesheets.

 

As at June 4, 2001, the aggregatefair value of the issued Series V, VI and VII Convertible Preferred Stock(inclusive of the option values) amounted to Php10,165 million, as determinedusing an independent party’s valuation model.  The remaining difference betweenthis aggregate fair value amount and the Php20,080 million Piltel restructureddebt was deferred and presented as part of “Remaining excess of debt forgivenover value of consideration given” account in the consolidated balance sheetsin conformity with the accounting for troubled debt restructuring, such that nogain was recorded on the restructuring.  Thereafter, interest incurred on theremaining restructured debt is recorded as an offset against remaining excessof debt forgiven over the value of consideration given.  Total interestincurred related to the restructured debt for the years ended December 31,2005, 2004 and 2003 amounted to Php365 million, Php473 million and Php688million, respectively.  As at December 31, 2005 and 2004, the remaining excessof debt forgiven over the value of consideration given balance amounted toPhp2,015 million and Php2,380 million, respectively, after giving effect to theabove interest expense, cancellation of Piltel debt through Smart acquisitionfrom Piltel’s creditors of the 69.4% of outstanding restructured Piltel debt,see *Note 12 – Interest-bearing Financial Liabilities,* and the additionalissuances in 2004 and 2003 of convertible preferred shares to restructurePiltel’s debt.

 

The difference between the aggregate fair value of theSeries V, VI and VII Convertible Preferred Stock at issue date (net of thebifurcated option values for Series VI and VII) and the aggregate redemptionvalue is accreted over the period up to the call option date using theeffective interest rate method.  Accretions added to “Preferred stock subjectto mandatory redemption” and charged against accumulated deficit for the yearsended December 31, 2005 and 2004 amounted to Php1,443 million and Php1,503million, respectively.  Unaccreted balance as at December 31, 2005 and 2004amounted to Php3,886 million and Php7,060 million, respectively.

 

“PreferredStock Subject to Mandatory Redemption” amounted to Php12,004 million and Php14,956million as at December 31, 2005 and 2004, respectively, after revaluation ofSeries VI and VII Convertible Preferred Stock to the exchange rates at balancesheet dates and after giving effect to the above accretions, conversions andadditional issuances.  As at December 31, 2005 and 2004, 3,376,743 shares and1,060,940 shares, respectively, of the Convertible Preferred Stock have beenconverted into PLDT common shares.  The outstanding shares of Series V, VI andVII Convertible Preferred Stock as at December 31, 2005 were 240,887, 4,398,914and 3,842,000, respectively.  The aggregate redemption value of the outstandingSeries V, VI and VII Convertible Preferred Stock amounted to Php15,890 millionand Php22,016 million as at December 31, 2005 and 2004, respectively.

 

 

 

**15.    Stockholders’ Equity**

 

Themovement of PLDT’s capital account follows:

 

** **

**Preferred Stock** – Php10 par value

** **

 

**Series  A to EE**

**III**

**IV**

** **

** **

** **

**Common Stock** –Php5 par value

 

**No. of Shares**

**Total Preferred Stock**

**Amount**

**No. of Shares**

**Amount**

** **

(in million shares and pesos)

**Authorized**

 

 

** **

823

Php8,230

234

Php1,170

**Outstanding**

** **

 

** **

** **

** **

 

 

Balance at January 1, 2003

407

5

36

448

Php4,474

169

Php847

Issuance

5

–

–

5

52

–

–

Conversion

(2)

–

–

(2)

(21)

–

–

Balance at December 31, 2003

 410

   5

  36

 451

Php4,505

 169

Php847

 

 

 

 

 

 

 

 

Balance at January 1, 2004

 410

   5

  36

 451

Php4,505

 169

Php847

Issuance

1

–

–

   1

9

–

2

Conversion

(2)

–

–

(2)

(17)

1

2

Balance at December 31, 2004

 409

   5

  36

 450

Php4,497

 170

Php851

 

 

 

 

 

 

 

 

Balance at January 1, 2005

 409

   5

  36

 450

Php4,497

 170

Php851

Issuance

–

–

–

–

3

1

2

Conversion

(2)

(5)

–

(7)

(67)

10

51

**Balance at December 31, 2005**

**407**

**–**

**36**

**443**

**Php4,433**

**181**

**Php904**

 

***Preferred Stock***

 

Thepreferred stock is non-voting, except as specifically provided by law, and ispreferred as to liquidation.

 

TheSeries A to FF 10% Cumulative Convertible Preferred Stocks earn cumulativedividends at an annual rate of 10%.  After the lapse of one (1) year from thelast day of the year of issuance of a particular series of 10% CumulativeConvertible Preferred Stock, any holder of such series may convert all or any ofthe shares of 10% Cumulative Convertible Preferred Stock held by him into fullypaid and non-assessable shares of Common Stock of PLDT, at a conversion priceequivalent to 10% below the average of the high and low daily sales price of ashare of Common Stock on the PSE, or if there shall have been no such sales onthe PSE on any day, the average of the bid and the asked prices of a share ofCommon Stock of PLDT at the end of such day on such Exchange, in each such caseaveraged over a period of 30 consecutive trading days prior to the conversiondate, but in no case shall the conversion price be less than the price set bythe Board of Directors which, as at December 31, 2005, was Php5.00 per share.The number of shares of Common Stock issuable at any time upon conversion ofone share of subscriber investment plan, or SIP.  Cumulative ConvertiblePreferred Stock shall be determined by dividing Php10.00 by the then applicableconversion price.

 

In case the shares of Common Stock at anytimeoutstanding shall be subdivided into a greater or consolidated into a lessernumber of shares, then the minimum conversion price per share of Common Stockshall be proportionately decreased or increased, as the case may be, and in thecase of a stock dividend, such price shall be proportionately decreased,provided, however, that in every case the minimum conversion price shall not beless than the par value per share of Common Stock.  In the event the relevanteffective date for any such subdivision or consolidation of shares or stockdividend occurs during the period of 30 trading days preceding the presentationof any shares of 10% Cumulative Convertible Preferred Stock for conversion, asimilar adjustment shall be made in the sales prices applicable to the tradingdays prior to such effective date utilized in calculating the conversion priceof the shares presented for conversion.

 

Incase of any other reclassification or change of outstanding shares of CommonStock, or in case of any consolidation or merger of PLDT with or into anothercorporation, the Board of Directors shall make such provisions, if any, foradjustment of the minimum conversion price and the sales price utilized incalculating the conversion price as the Board of Directors, in it solediscretion, shall be deemed appropriate.

 

AtPLDT’s option, the Series A to FF 10% Cumulative Convertible Preferred Stocksare redeemable at par value plus accrued dividends five years after the year ofissuance.

 

OnJanuary 27, 2004, the Board of Directors designated 1 million shares of serialpreferred stock as Series EE 10% Cumulative Convertible Preferred Stock forissuance throughout 2004, which is an exempt transaction under Section 10.2 ofthe SRC as confirmed by Philippine SEC on March 22, 2004.

 

OnDecember 9, 2004, the Board of Directors designated 500,000 shares of serialpreferred stock as Series FF 10% Cumulative Convertible Preferred Stock forissuance throughout 2005.  Confirmation of exemption of these transactionsunder Section 10.2 of the SRC is still pending with the Philippine SEC.

 

OnDecember 6, 2005, the Board of Directors designated 100,000 shares of serialpreferred stock as Series GG 10% Cumulative Convertible Preferred Stock forissuance throughout 2006.  Confirmation of exemption of this transaction underSection 10.2 of the SRC is still pending with the Philippine SEC.

 

OnOctober 24, 2005, PLDT issued to JPMorgan, as depositary, and to the holders ofthe Series III Convertible Preferred Stock a notice of mandatory conversion ofall of its outstanding 4,616,200 Series III Convertible Preferred Stock intoshares of PLDT common stock, with each share of Series III ConvertiblePreferred Stock convertible to 1.7129 shares of Common Stock.  The Series IIIConvertible Preferred Stock had been issued in 1994 in connection with a GlobalDepositary Receipt, or GDR, facility, pursuant to which GDRs evidencing GlobalDepositary Shares, or GDS, were issued, with each GDS representing one share ofSeries III Convertible Preferred Stock of PLDT.  As of the date of the issuanceof the notice of mandatory conversion, the conditions for mandatory conversionunder the terms of the Series III Preferred Stock had been satisfied,including: (i) that the average closing price of PLDT’s ADSs for the 30-dayperiod ending seven days prior to the date in which notice of the mandatoryconversion was given was above US$29.19, (ii) that there were no dividends inarrears on any shares of the Series III Convertible Preferred Stock, and (iii)that PLDT had sufficient distributable reserves to pay the fixed preferentialdividends on the shares of Series III Convertible Preferred Stock, calculateddown to and including the mandatory conversion date.

 

InNovember 2005, PLDT issued 710,891 shares of PLDT common stock on account ofthe voluntary conversion of 415,023 shares of Series III Convertible PreferredStock.

 

On December19, 2005, the mandatory conversion date, all of the 4,616,200 outstandingshares of PLDT’s Series III Convertible Preferred Stock were mandatorilyconverted into shares of PLDT common stock.  A total of 7,907,032 shares ofPLDT’s common stock were issued as a result of the voluntary and mandatoryconversions of all the Series III Convertible Preferred Stock.

 

The Series IV Cumulative Non-Convertible RedeemablePreferred Stock earns cumulative dividends at an annual rate of 13.5% based onthe paid-up subscription price.  It is redeemable at the option of PLDT at anytime one year after subscription and at the actual amount paid for such stock,plus accrued dividends.  On February 26, 2002, the Board of Directors calledfor the payment of a portion of the balance of the subscription price of theSeries IV Cumulative Non-Convertible Redeemable Preferred Stock amounting toPhp72 million, which was paid on March 5, 2002.  On March 22, 2002, PLDTredeemed 60 million shares out of the 360 million subscribed shares of itsSeries IV Cumulative Non-Convertible Preferred Stock and paid Php72 million,representing the redemption price plus unpaid dividends up to the date ofredemption.

 

Theshares of preferred stock, except shares of Series V, VI and VII PLDTConvertible Preferred Stock, redeemed or converted into common stock shallrevert to and form part of the unissued preferred stock, and may be reissued inany other series that the Board of Directors may, from time to time, establishand designate.

 

The provisions of certain subscription agreementsinvolving preferred stock have an effect on the ability of PLDT to, withoutwritten consent, sell certain assets and pay cash dividends unless alldividends for all past quarterly dividend periods have been paid and provisionhas been made for the currently payable dividends.

 

 

 

**16.    Related Party Transactions**

 

Thefollowing is a summary of related party accounts with affiliates presented aspart of our consolidated balance sheets as of December 31, 2005 and 2004 andconsolidated statements of income for the years ended December 31, 2005, 2004,and 2003:

 

 

 

**2005**

2004

 

(in million pesos)

Consolidated Balance Sheets

 

*** ***

*** ***

Accrued expenses and other current liabilities

** **

**1,156**

3,270

 

 

 

 

**2005**

2004

2003

 

(in million pesos)

Consolidated Statements of Income

** **

 

 

Cost of satellite air time

**1,008**

1,299

1,919

Repairs and maintenance expenses

**640**

111

68

Insurance and security services

**467**

534

581

Professional and other contracted services

**147**

694

616

Selling and promotions

**29**

32

26

Rent

**8**

6

7

 

*a.   Air Time Purchase Agreementbetween PLDT and AIL and Related Agreements*

* *

In March 1997, PLDT entered into a National ServiceProvider, or Founder NSP, Air Time Purchase Agreement with PT Asia CellularSatellite, as amended in December 1998 and as assigned and transferred to AIL,under which PLDT was granted the exclusive right to sell ACeS services in the Philippines.  In exchange, the Air Time Purchase Agreement required PLDT to purchase fromPT Asia Cellular Satellite at least US$5 million worth of air time annuallyover ten years, commencing on January 1, 2002, the date of commercialoperations.

 

In the event that PT Asia Cellular Satellite’s aggregate billingrevenue is less than US$45 million in any given year, the Air Time PurchaseAgreement states that PLDT has to make supplemental air time purchase paymentsnot to exceed US$15 million per year during the ten-year term.

 

PLDT and the other founder NSPs are endeavoring toamend the Air Time Purchase Agreement due to the occurrence of partialsatellite loss, changes in the primary business of ACeS and other eventsaffecting the business.

 

In March 2003, PLDT, together with the other founderNSPs, entered into a Standstill Agreement with AIL suspending the applicationand enforcement of the minimum and supplemental air time payments under theoriginal Air Time Purchase Agreement.  The parties agreed that AIL shallprovide PLDT and the other founder shareholders, with unlimited use of air timefor the year 2003 in exchange for a fixed fee in the amount of US$3.8 millionfor PLDT.  Moreover, PLDT was also obliged to purchase from AIL 13,750satellite phone units in 2003 at US$395 F.O.B. per unit, subject to quarterlyprice adjustments.  The parties to the Standstill Agreement also agreed tonegotiate in good faith and use their best efforts to reach an agreement on arevised Air Time Purchase Agreement before November 15, 2003 that would cover,among other things, the amended minimum and supplemental air time paymentprovisions subject to the approval of AIL’s creditors.

 

On February 10, 2004, notwithstanding the ongoing negotiations, AILadvised PLDT of the termination of the Standstill Agreement and the reinstatementof the terms under the original Air Time Purchase Agreement effective January1, 2002, following the lapse of the November 15, 2003 deadline set in theStandstill Agreement for the negotiation of a revised Air Time PurchaseAgreement.  Negotiations are continuing with the relevant parties towards anamicable settlement of this matter.

 

As at December 31, 2005 and 2004, PLDT’s outstandingpayables under the original Air Time Purchase Agreement was Php3,493 millionand Php2,728 million, respectively.  Total fees under this agreement amountedto Php1,008 million, Php1,299 million and Php1,919 million for the years ended December 31, 2005, 2004 and 2003,respectively.  See *Note 21 – Contractual Obligations and CommercialCommitments* and *Note 22 – Provisions and Contingencies*for furtherdiscussion.

 

PLDT also entered into a Founder NSP Operating Agreement with PT AsiaCellular Satellite on March 12, 1997, under which PLDT may:

 

•        authorize distributors to resellACeS services in the Philippines upon prior approval from PT Asia Cellular Satellite; and

 

•        appoint agents to solicit and billPLDT’s or its authorized distributors’ subscribers for ACeS services and tosell terminals on behalf of PLDT.

 

Underan Assignment and Assumption Agreement dated December 29, 1998, PT AsiaCellular Satellite agreed to assign and transfer to AIL of PT Asia CellularSatellite’s rights under the Founder NSP Air Time Purchase Agreement andFounder NSP Operating Agreement.

 

Under an Acknowledgment of the Assignment of Air TimePurchase Agreement entered into on December 29, 1998, by and among PLDT, P.T.Bank Internasional Indonesia and AIL, PLDT consented to the assignment by AILof the Founder NSP Air Time Purchase Agreement to P.T. Bank InternasionalIndonesia, as security agent, for the benefit of the secured parties under theSecurity Agreement dated December 29, 1998, which was executed in connectionwith the Amended and Restated Credit Agreement dated December 29, 1998 among PTAsia Cellular Satellite, AIL, P.T. Bank Internasional Indonesia and variousbanks.

 

OnSeptember 30, 2002, PT Asia Cellular Satellite, AIL, as guarantor, P.T. BankInternasional Indonesia, as security agent, and various other banks signed aRescheduling Agreement, which amended the terms of the Amended and RestatedCredit Agreement dated December 29, 1998, moving the principal repayment datesto agreed periods with the final maturity date on January 30, 2012.

 

*b.   Transactions with**Major**Stockholders, Directors and Officers*

 

Transactions to which PLDT or any of its subsidiariesare a party, in which a director or key officer or owner of more than 10% ofthe outstanding common stock of PLDT, or any member of the immediate family ofa director or key officer or owner of more than 10% of the outstanding commonstock of PLDT had a direct or indirect material interest, as at December 31,2005 and 2004 and for the three years ended December 31, 2005, 2004 and 2003are as follows:

 

*1.**Cooperation**Agreement with the FP Parties, NTT Communications and DoCoMo*

 

In connection with the transfer by NTT Communicationsof approximately 12.6 million shares of PLDT’s common stock to DoCoMo pursuantto the Stock Sale and Purchase Agreement dated January 31, 2006 between NTTCommunications and DoCoMo, the FP Parties, NTT Communications and DoCoMoentered into a Cooperation Agreement, dated January 31, 2006.  Under theCooperation Agreement, the relevant parties extended certain rights of NTTCommunications thereunder to DoCoMo, including:

 

•        certain contractual veto rightsover a number of major decisions or transactions; and

 

•        rights relating to therepresentation on the board of directors of PLDT and Smart, respectively, andany committees thereof.

 

Moreover, key provisions of the Cooperation Agreementpertain to, among other things:

 

•        *Restriction on Ownership ofShares of PLDT by NTT Communications and DoCoMo.* Each of NTT Communications and DoCoMo have agreed notto beneficially own, directly or indirectly, in the aggregate with theirrespective subsidiaries and affiliates, more than 21% of then issued andoutstanding shares of PLDT’s common stock.  If such event does occur, the FPParties, as long as they own in the aggregate not less than 21% of then issuedand outstanding shares of PLDT’s common stock, have the right to terminatetheir respective rights and obligations under the Cooperation Agreement, theShareholders Agreement and the StockPurchase and Strategic Investment Agreement.

 

•        *Limitation on Competition.*  NTT Communications, DoCoMo and their respectivesubsidiaries are prohibited from investing in excess of certain thresholds inbusinesses competing with PLDT in respect of customers principally located inthe Philippines and from using their assets in the Philippines in suchbusinesses. Moreover, if PLDT, Smart or any of Smart’s subsidiariesintends to enter into any contractual arrangement relating to certain competingbusinesses, PLDT is required to provide, or to use reasonable efforts toprocure that Smart or any of Smart’s subsidiaries provide NTT Communications andDoCoMo with the same opportunity to enter into such agreement with PLDT orSmart or Smart’s subsidiaries, as the case may be.  

 

•        *Business Cooperation.*  PLDT and DoCoMo agreed in principle to collaboratewith each other on the business development, roll-out and use of a W-CDMAmobile communication network.  In addition, PLDT agreed, to the extent of thepower conferred by its direct or indirect shareholding in Smart, to procure that Smart will (i) become amember of a strategic alliance group for international roaming and corporatesales and services and (ii) enter into a business relationship concerningpreferred roaming and inter-operator tariff discount with DoCoMo.

 

•        *Additional Rights of DoCoMo.* Upon NTT Communications, DoCoMo and theirsubsidiaries owning in the aggregate 20% or more of the shares of PLDT’s commonstock and for as long as NTT Communications, DoCoMo and their subsidiariescontinue to own in the aggregate 17.5% of the shares of PLDT’s common stockthen outstanding, DoCoMo will be entitled to certain additional rights underthe Cooperation Agreement.

 

•        *Change in Control.*  Each of NTTCommunications, DoCoMo and the FP Parties agreed that to the extent permissibleunder applicable laws and regulations of the Philippines and otherjurisdictions, subject to certain conditions, to cast its vote as a shareholderin support of any resolution proposed by the board of directors of PLDT for thepurpose of safeguarding PLDT from any Hostile Transferee.  A “HostileTransferee” is defined under the Cooperation Agreement to mean any person(other than NTTC, DoCoMo, First Pacific or any of their respective affiliates)determined to be so by the PLDT board of directors and includes, withoutlimitation, a person who announces an intention to acquire, seeking to acquireor acquires 30% or more of PLDT common shares then issued and outstanding fromtime-to-time or having (by itself or together with itself) acquired 30% or moreof the PLDT common shares announces an intention to acquire, seeking to acquireor acquires a further 2% of such PLDT common shares (a) at a price per sharewhich is less than the fair market value as determined by the board ofdirectors of PLDT as advised by a professional financial advisor, (b) which issubject to conditions which are subjective or which could not reasonably besatisfied, (c) without making an offer for all PLDT common shares not held byit and/or its affiliates and/or persons who, pursuant to an agreement orunderstanding (whether formal or informal), actively cooperate to obtain orconsolidate control over PLDT, (d) whose offer for the PLDT common shares isunlikely to succeed or (e) whose intention is otherwise not bona fide; providedthat, no person will be deemed a Hostile Transferee unless prior to making suchdetermination, the board of directors of PLDT has used reasonable efforts todiscuss with NTT Communications and DoCoMo in good faith whether such personshould be considered a Hostile Transferee.

 

•        *Termination.*  If NTT Communications, DoCoMo or their respective subsidiariescease to own, in the aggregate, full legal and beneficial title to at least 10%of the shares of PLDT’s common stock then issued and outstanding, theirrespective rights and obligations under the Cooperation Agreement and theShareholders Agreement will terminate and the Strategic Arrangements (asdefined in the Stock Purchase and Strategic Investment Agreement) willterminate.  If the FP Parties and their respective subsidiaries cease to have,directly or indirectly, effective voting power in respect of shares of PLDT’scommon stock representing at least 18.5% of the shares of PLDT’s common stockthen issued and outstanding, their respective rights and obligations under theCooperation Agreement, the Stock Purchase and Strategic Investment Agreement,and the Shareholders Agreement will terminate.

 

*2.   Integrated i-**mode**Services Package Agreement between DoCoMo and Smart*

 

TheIntegrated i-mode Service Package Agreement was entered into by Smart andDoCoMo on February 15, 2006, under which DoCoMo agreed to grant Smart, on anexclusive basis within the territory of the Philippines for a period of fiveyears, an integrated i-mode service package including non-transferable licenseto use the licensed materials and the i-mode brand, as well as implementationsupport and assistance and post-commercial launch support from DoCoMo. Pursuantto this agreement, Smart is required to pay an initial license fee and runningroyalty fees based on the revenue arising from i-mode subscription fees anddata traffic.

 

*3.**Other**Agreementswith NTT Communications and/or its Affiliates*

 

PLDT is a party to the followingagreements with NTT Communications and/or its affiliates:

 

•        *Advisory Services Agreement*.   On March 24, 2000, PLDT entered into an agreementwith NTT Communications, as amended on March 31, 2003 and March 31, 2005, underwhich NTT Communications provides PLDT with technical, marketing and otherconsulting services for various business areas of PLDT starting April 1, 2000.Under the Cooperation Agreement, PLDT agreed to use reasonable efforts toprocure that, with respect to the Advisory Services Agreement, PLDT and Smart,will receive at a minimum the specified aggregate number of advisors entitledto be provided by NTT Communications and DoCoMo in accordance with thetimetable set out in the Cooperation Agreement;

 

•        *Arcstar Licensing Agreement andArcstar Service Provider Agreement.*OnMarch 24, 2000, PLDT entered into an agreement with NTT WorldwideTelecommunications Corporation under which PLDT markets managed data and otherservices under NTT Communications’ “Arcstar” brand to its corporate customersin the Philippines.  PLDT also entered into a Trade Name and TrademarkAgreement with NTT Communications under which PLDT has been given the right touse the tradename “Arcstar” and its related trademark, logo and symbols, solelyfor the purpose of PLDT’s marketing, promotional and sales activities for theArcstar services within the Philippines; and

 

•         *Conventional InternationalTelecommunications Services Agreement*.On March 24, 2000, PLDT entered into an agreement with NTT Communications underwhich PLDT and NTT Communications agreed to cooperative arrangements forconventional international telecommunications services to enhance theirrespective international businesses.

 

Totalfees under these agreements amounted to Php256 million, Php336 million andPhp289 million for the years ended December 31, 2005, 2004 and 2003,respectively.  As at December 31, 2005 and 2004, outstanding obligations ofPLDT amounted to Php23 million and Php49 million, respectively.

 

*4.   Agreement between Smart and Asia Link B.V., or ALBV*

* *

Smarthas an existing Technical Assistance Agreement with ALBV for the latter toprovide technical support services and assistance in the operations andmaintenance of cellular business for a period of five years, subject to renewalupon mutual agreement between the parties.  The agreement provides forquarterly payments of technical service fees equivalent to 2% of the netrevenues of Smart.  In January 2004, the agreement was amended, reducing thetechnical service fees to be paid by Smart to ALBV to 1% of net revenueseffective January 1, 2004.  On February 18, 2004, Smart and ALBV entered into arenewal of the technical service agreement extending the effectivity of theterms of the agreement to February 23, 2008.  Furthermore, in view of theacquisition by Smart of Piltel Series K Class I Convertible Preferred Stockheld by PLDT, the parties agreed to make the consolidated net revenues of Smartthe basis for the computation of the 1% royalty payable by Smart to ALBV,effective from January 1, 2005.  

 

Smartalso has an existing Services Agreement with ALBV for a period of 25 yearsstarting January 1, 1999, which shall automatically expire unless renewed bymutual agreement of both parties.  Under the agreement, ALBV provides adviceand assistance to Smart in sourcing capital equipment and negotiating withinternational suppliers, arranging international financing and other services thereinconsistent with and for the furtherance of the objectives of the services.Service agreement fees were paid for the whole 25-year period.

 

ALBVis a subsidiary of the First Pacific Group.

 

Totalfees under these agreements amounted to Php567 million, Php507 million andPhp429 million for the years ended December 31, 2005, 2004 and 2003,respectively.  Outstanding obligations of Smart under the Technical ServiceAgreement amounted to Php194 million and Php267 million as at December 31, 2005and 2004, respectively.

 

*5.   Agreements relating to insurancecompanies*

 

Gotuaco del Rosario and Associates, or Gotuaco, actsas the broker for certain insurance companies to cover certain properties ofthe PLDT Group.  Insurance premiums are remitted to Gotuaco and the broker’sfees are settled between Gotuaco and the insurance companies.  In addition,PLDT has an insurance policy with Malayan Insurance Co., Inc., or Malayan,wherein premiums are directly paid to Malayan.  Total insurance expenses underthese agreements amounted to Php468 million, Php488 million and Php565 millionfor the years ended December 31, 2005, 2004 and 2003, respectively.  Twodirectors of PLDT have a direct/indirect interests in or serve as adirector/officer of Gotuaco and Malayan.

 

 

 

**17.    Employee Benefits**

 

***Share-Based Payment***

*** ***

*Executive Stock Option Plan, or ESOP*

 

Stock options granted under the ESOP vest over fiveyears and have a maximum contractual life of ten years from the date of grant.The exercise price of the options granted under the ESOP shall not be lowerthan the average of the closing price of our common stock on the PSE for 30calendar days immediately preceding the date of grant.

 

Thestock options granted under the ESOP shall vest, beginning two years from thegrant date at a per year rate of 25% of the options granted.

 

The number of shares reserved under the ESOP shouldnot exceed 1.2% of the total issued common shares of PLDT, and the number ofshares reserved for issuance under the ESOP is increased to include any sharesof PLDT’s common stock issuable upon exercise of options granted under the ESOPthat expire or lapse for any reason without having been exercised in full. 

 

TheESOP will terminate on December 10, 2009, unless PLDT’s Board of Directorsterminates it earlier. 

 

OnDecember 10, 1999, PLDT granted 1,289,745 options to purchase shares of PLDT’scommon stock under the ESOP.  Stock option activity under the ESOP for theyears ended December 31, 2005, 2004 and 2003 is summarized below:

 

 

**Weighted Average Exercise Price Per Share**

**2005**

2004

2003

Balance at beginning of year

Php814

**536,589**

900,118

1,226,395

Exercised shares

814

**(335,605)**

(336,745)

–

Cancelled

814

**(3,484)**

(26,784)

(326,277)

Balance at end of year

Php814

**197,500**

536,589

900,118

 

Allthe above grants under the ESOP were made to executives of PLDT and alloutstanding stock options became fully vested in December 2004.

 

Thenumber of options exercisable at December 31, 2005 and 2004 were 197,500 sharesand 536,589 shares, respectively.

 

Inconformity with the provisions of SFAS 123, the fair value of each option isestimated using the Black-Scholes valuation model with the followingassumptions for grants under the ESOP during the year ended December 31, 1999:volatility of 71.3%, risk-free interest rate of 8.94% at the date of grant andan expected term of five years.

 

Theweighted average per share fair value of common stock options granted in 2002was Php582.59.  The remaining weighted average contractual life was five yearsas at December 31, 2004.

 

*LTIP*

 

On August 3, 2004, PLDT’s Board of Directors approved the establishmentof the LTIP for eligible key executives, officers and advisors of PLDT and itssubsidiaries, which is administered by the Executive Compensation Committee.The LTIP is a four-year cash plan covering the period from January 1, 2004 toDecember 31, 2007.  The LTIP awards payment at the end of the four-year period(without interim payments) is contingent upon the achievement of an approvedtarget increase in PLDT’s common share price by the end of the plan period anda cumulative consolidated net income target for the plan period.  The targetincrease in the PLDT base share price, which is the average of the closingprices of PLDT shares ten trading days before or after December 31, 2003, isapproximately 15% per annum compounded for the plan period.

 

The compensation cost from LTIPwas measured using the variable accounting method under APB Opinion No. 25since the plan is a variable plan.  The accounting for variable plans requiresthat an estimate of compensation expense be recognized and updated at eachaccounting period until the measurement date.  The final measurement ofcompensation expense is not determinable until both the number of shares andthe exercise price per share are known.  The LTIP cost, including cost foradvisors (presented under professional and other service fees in the statementsof income), recognized as an expense for the year ended December 31, 2005 and2004 amounted to Php1,224 million and Php378 million, respectively.

 

Movements in the number of outstanding LTIP awards areas follows:

 

 

**2005**

2004

Balance at beginning of year

**3,685,959**

–

Awards

**493,429**

3,685,959

Cancellations/forfeitures

**(294,982)**

–

Balance at end of year

**3,884,406**

3,685,959

 

Inconformity with SFAS 123, the fair value of each award was estimated usingpricing model, which considered annual stock volatility of 34.8%, risk-freeinterest rate of 9.086%, remaining life of the award and weighted average shareprice Php1,835 as at December 31, 2005.  Incentive cost per award as atDecember 31, 2005 and 2004 amounted to Php1,044.01 and Php716.81, respectively.

 

***Pension***

 

*PLDT*

 

PLDT has a trustee-managed, non-contributory definedbenefit plan, or Benefit Plan, providing for retirement and death benefits and service terminal pay tosubstantially all permanent and regular employees.  The Benefit Plan providesbenefits upon normal retirement beginning at age 65, early retirement beginningat age 50 or completion of at least 30 years of credited service, voluntaryseparation beginning at age 40 or completion of at least 15 years of creditedservice, total and physical disability, death and involuntary separation.Benefits under the Benefit Plan are based on the employee’s final monthly basicsalary and length of service.

 

Inconformity with SFAS 132, “Employers’ Disclosures about Pensions and Other PostretirementBenefits,” the following table sets forth the Plan’s funded status and pensionamounts recognized as at December 31, 2005, 2004 and 2003 based on the latestactuarial valuation dated February 2006:

*** ***

 

**2005**

2004

2003

 

(in million pesos)

Change in benefit obligation:

 

** **

** **

Benefit obligation at beginning of year

**6,864**

5,971

7,984

Service cost

**427**

382

515

Interest cost

**684**

535

716

Benefits paid

**(495)**

(18)

(17)

Actuarial loss (gain)

**121**

679

(1,227)

Curtailment

**–**

116

274

Settlement

**–**

(801)

(2,274)

Benefit obligation at end of year

**7,601**

6,864

5,971

 

** **

 

 

Change in plan assets:

** **

 

 

Fair value of plan assets at beginning of year

**4,448**

3,927

2,915

Employer’s contribution

**633**

883

2,703

Actual return on plan assets

**568**

457

600

Settlement

**–**

(801)

(2,274)

Benefits paid

**(495)**

(18)

(17)

Fair value of plan assets at end of year

**5,154**

4,448

3,927

Funded status

**(2,447)**

(2,416)

(2,044)

Unrealized net transition obligation

**189**

199

229

Unrecognized net actuarial loss (gain)

**116**

89

(498)

Accrued benefit cost

**(2,142)**

(2,128)

(2,313)

 

** **

 

 

Components of net periodic benefit cost:

** **

 

 

Service cost

**427**

382

515

Interest cost

**684**

535

716

Expected return on plan assets

**(540)**

(376)

(303)

Amortizations of:

** **

 

 

Unrecognized net transition obligation

**10**

10

13

Unrecognized actuarial loss

**–**

–

2

Net periodic benefit cost

**581**

 551

 943

*** ***

The accumulated benefitobligations amounted to Php1,946 million, Php2,868 million and Php4,330 millionas at December 31, 2005, 2004 and 2003, respectively.

 

The significant assumptions used in determining theactuarial present value of the projected benefit obligations as at December 31,2005, 2004 and 2003 are as follows:

*** ***

 

**2005**

2004

2003

Weighted average assumptions:

 

 

 

Discount rate

**11%**

10%

9%

Expected return on plan assets

**10%**

10%

9%

Rate of compensation increase

**8%**

7%

6%

*** ***

Theallocation of the fair value of plan assets for PLDT follows:

*** ***

 

**2005**

2004

2003

Investments in debt and fixed income securities

**40%**

41%

44%

Investments in equity securities

**37%**

33%

36%

Investments in real estate

**13%**

16%

15%

Investments in mutual funds

**6%**

2%

2%

Investments in temporary placements

**4%**

8%

3%

 

**100%**

100%

100%

*** ***

Asat December 31, 2005, our plan assets include investments in shares of stock ofPLDT and Piltel with a total fair values aggregating Php1,643 million, whichrepresent about 29% of our beneficial trust fund’s net assets available forplan benefits (31% in 2004 and 36% in 2003).

*** ***

Movements of shares of stock of PLDT and Piltel heldby the plan during 2005 are as follows:

*** ***

 

**PLDT**

Piltel

** **

**Common Shares**

Preferred Shares

**Common Shares**

Numbers of shares held by the plan as at January 1, 2005

661,643

36,000,000

19,958,760

Purchases during the year

–

–

–

Sales during the year

–

–

–

Number of shares held by the plan as at December 31, 2005

661,643

36,000,000

19,958,760

*** ***

Dividendsreceived by the plan from PLDT for the years ended December 31, 2005, 2004 and2003 amounted to Php86 million, Php47 million and Php51 million, respectively.

*** ***

PLDT expects to makeapproximately Php558 million of cash contributions to its pension plan in 2006.

*** ***

The table below presents the expected compulsoryretirement benefits of PLDT to be paid out of the fund for the next ten years:

*** ***

**Year**

(in million pesos)

2006

62

2007

102

2008

124

2009

145

2010

211

2011 and onwards

2,781

*** ***

*Smart*

*** ***

Smart has a trustee-managed, tax-qualified providentplan, or Provident Plan, providing for retirement, death or service terminalpay to substantially all permanent and regular employees.  Under the ProvidentPlan, Smart contributes to the provident fund for the credit of each member’sPersonal Retirement Account, or PRA, a percentage of such member’s monthlysalary.  Net earnings of the Provident Fund are credited every nine months tothe PRAs of the members based on their proportionate share in the total valueof the Provident Fund as at the end of the preceding period.

*** ***

InOctober 2003, Smart’s Board of Directors approved enhancements to theretirement plan.  The enhanced retirement plan gives a member the option tocontribute to the fund up to a maximum of 10% of his monthly salary.  On top ofits current contribution, Smart will provide an additional contribution of upto 50% of the member’s contribution, depending on his tenure in the company.

*** ***

Anybenefit payable under the Provident Plan shall be in lieu of or in compliancewith, but not in addition to, the payment of similar benefits Smart is requiredto pay to its employees under existing or future laws, employment contracts orcollective bargaining agreements, it being understood that the employee shallbe entitled only to the higher of the Provident Plan or other availablebenefits, but not to both.

*** ***

Theallocation of the fair value of plan assets for Smart follows:

*** ***

 

**2005**

2004

2003

Investments in debt securities

**76%**

78%

86%

Investments in equity securities

**23%**

20%

12%

Others

**1%**

2%

2%

 

**100%**

100%

100%

*** ***

Smartexpects to make approximately Php97 million of cash contribution to its pensionplan in 2006.

*** ***

The table below presents the expected compulsoryretirement benefits of Smart to be paid out of the fund for the next ten years:

*** ***

**Year**

(in million pesos)

2006

10

2007

13

2008

17

2009

28

2010

43

2011 and onwards

319

*** ***

ThePLDT Group adopts an investment approach of mixed equity and fixed incomeinvestments to maximize the long-term return of plan assets.  The investmentportfolio has been structured to achieve the objective of regular income withcapital growth and out-performance of benchmarks.  A majority of the investmentportfolio consists of fixed income debt securities and various equitysecurities, while the remaining portion consists of multi-currency investments.

 

SFAS87 requires the use of an average rate of earnings expected on funds investedor to be invested, considering returns being earned by plan assets in the fundand rates of return expected to be available for reinvestment.  Dueconsideration was given not only to historical performance of plan investments,but also to the current investment mix and anticipated rates of return.   Thus,the expected rate of return on assets was set at 10% per annum.

 

 

 

**18.    Operating Revenues andExpenses**

 

*Service Revenues*

 

 

**2005**

2004

2003

 

(in million pesos)

Wireless services

** **

 

 

Cellular

**71,502**

65,818

52,750

VSAT

**1,961**

1,958

897

Fixed lines

** **

 

 

Local exchange

**20,210**

20,606

20,728

International long distance

**12,240**

12,804

12,767

National long distance

**5,232**

6,736

6,561

Data and other network

**6,001**

4,433

5,112

Miscellaneous

**441**

535

328

Information and communications technology

**2,761**

2,014

1,343

 

**120,348**

114,904

100,486

 

*Non-service Revenues*

 

 

**2005**

2004

2003

 

(in million pesos)

Sale of computers, cellular handsets and SIM-packs

**2,752**

6,111

10,548

Point-of-product sales

**235**

158

166

 

**2,987**

6,269

10,714

 

*Compensation and Benefits*

 

 

**2005**

2004

2003

 

(in million pesos)

Salaries and benefits

**11,465**

10,307

11,603

Incentive plans (Note 17)

**1,195**

308

38

Pension and other benefits (Note 17)

**734**

835

(21)

MRP (Note 11)

**458**

566

1,565

 

**13,852**

12,016

13,185

 

*Asset Impairment*

 

 

**2005**

2004

2003

 

(in million pesos)

Investments (Note 8)

**–**

1,047

–

Property, plant and equipment (Note 7)

**11**

365

675

 

**11**

1,412

675

 

*FinancingCosts*

 

 

**2005**

2004

2003

 

(in million pesos)

Interest on loans and related items (Note 24)

**10,119**

11,710

12,321

Financing charges (Note 23)

**1,436**

1,157

1,317

Accretion on financial liabilities - net (Notes 12 and 23)

**568**

1,185

729

Capitalized interest (Notes 7 and 24)

**(504)**

(595)

(887)

Foreign exchange losses (gain) - net (Notes 12 and 23)

**(8,196)**

2,776

9,672

 

**3,423**

16,233

23,152

 

*Other Income - Net*

 

 

**2005**

2004

2003

 

(in million pesos)

Gain on debt exchange and debt restructuring transactions  (Php16.59 per share) (Note 12)

**–**

2,816

–

Miscellaneous income (expense) - net

**1,016**

(286)

799

 

**1,016**

2,530

799

 

 

 

19.    Income Taxes

 

Thenet current and noncurrent components of deferred tax assets (liabilities) recognizedin the consolidated balance sheets follow:

 

**2005**

2004

 

(in million pesos)

Net current deferred income tax assets

**9,866**

10,331

Net noncurrent deferred income tax assets

**13,583**

9,696

Net noncurrent deferred income tax liabilities

**(44)**

–

 

The components of the consolidated netdeferred tax assets and liabilities are as follows:

 

 

**2005**

2004

 

(in million pesos)

Current assets:

** **

 

Allowance for doubtful accounts

**5,531**

5,603

Unearned revenues – others

**798**

1,848

Unearned prepaid card revenues 

**781**

848

MCIT

**526**

359

Provision for unrealizable assets

**423**

452

Allowance for inventory obsolescence 

**337**

353

Past service pension cost

**170**

192

Capital lease

**157**

181

Executive stock option plan

**104**

–

Derivative instruments

**67**

151

NOLCO

**14**

1,072

Others

**1,458**

1,073

 

**10,366**

12,132

Current liabilities:

** **

 

Unrealized gains on financial instruments

**(13)**

(107)

Fair value adjustment on investments

**(27)**

–

 

**10,326**

12,025

Less valuation allowance

**460**

1,694

Net current assets

**9,866**

10,331

Noncurrent assets:

** **

 

Asset impairment

**6,771**

7,180

Unrealized foreign exchange losses

**6,414**

13,011

NOLCO

**3,926**

–

Excess of debt forgiven over value of consideration given

**1,636**

1,867

Unrealized losses on derivative instruments

**1,487**

2,217

Unearned revenues – others

**1,388**

779

Past service pension cost

**861**

956

Accrued pension cost

**783**

711

LTIP

**520**

113

Deferred charges

**283**

311

Asset retirement obligations

**157**

104

Accelerated depreciation

**1,753**

1,410

 

**25,979**

28,659

Less valuation allowance

**5,397**

11,969

 

**20,582**

16,690

Noncurrent liabilities:

** **

 

Intangible assets

**(210)**

(51)

Capitalized taxes and duties - net of amortization

**(516)**

(583)

Financial instruments

**(794)**

(1,316)

Fixed assets componentization

**(815)**

–

Capitalized interest charges - net of amortization

**(4,664)**

(5,044)

 

**(6,999)**

(6,994)

Net noncurrent assets

**13,583**

9,696

Noncurrent liabilities

** **

 

Unrealized foreign exchange losses

**44**

–

 

Provision for (benefit from) income tax consists of:

 

 

**2005**

2004

2003

 

(in million pesos)

Current

**8,583**

7,357

2,331

Deferred

**(3,734)**

(531)

(3,731)

 

**4,849**

6,826

(1,400)

 

Mabuhay Satellite and Subic Telecom are registered asSubic Bay Freeport Enterprises while Clark Telecom is registered as a ClarkSpecial Economic Zone Enterprise under R.A. No. 7227, otherwise known as theBases Conversion and Development Act of 1992, or the Act.  As registrants,Mabuhay Satellite, Subic Telecom and Clark Telecom are entitled to all therights, privileges and benefits established thereunder including tax andduty-free importation of capital equipment and a special income tax rate of 5%of gross income, as defined in the Act.

 

On December 22, 2000, the Philippine Board ofInvestments, or BOI, approved ePLDT’s registration as a new informationtechnology, or IT, service firm in the field of services related to itsinternet data center on a pioneer status.  As such, ePLDT enjoys, among otherincentives, a six-year income tax holiday, or ITH, from January 2001.

 

Parlance Systems, Inc., or Parlance, is registeredwith the BOI as a new IT export service firm in the field of customerinteraction center on a pioneer status.  Under this registration, Parlanceshall be entitled to certain tax incentives like ITH for six years startingJune 2002.  Parlance is required to comply with specific terms and conditionsstated in its BOI registration.

 

iPlus Intelligent Network, Inc., or iPlus, is a wholly-owned subsidiary of ePLDT and is registeredwith the BOI as a new IT service firm in the field of application serviceprovider on a pioneer status.  Under such registration, iPlus is entitled to asix-year ITH incentive from the actual start of commercial operations untilJanuary 1, 2009.

 

Vocativ Systems, Inc., or Vocativ, is registered withthe Philippine Economic Zone Authority, or PEZA, as an Ecozone ExportEnterprise to develop and operate a call center business that serves overseasclients by providing customer relationship management services.  As aregistered enterprise, Vocativ is entitled to certain tax and non-taxincentives which include, among other things, tax and duty-free importations,exemption from local tax and ITH for four years from start of commercialoperations.  After the ITH period, Vocativ is liable for a final tax, in lieuof all taxes after the expiration of its incentives.  The final tax is computedat 5% of gross income less allowable deductions as defined under R.A. No. 7916,“The Special Economic Zone Act of 1995,” and shall be paid and remitted inaccordance with the amendments contained in R.A. No. 8748, as follows: (a) 3%to the National Government; and (b) 2% which shall be directly remitted by thebusiness establishments to the treasurer’s office of the municipality or citywhere the enterprise is located.

 

On December 5, 2005, Vocativ receivedapproval from PEZA for the adjustment of the start of commercial operations,effectively extending the ITH expiration to the end of March 2006.  Anapplication for an ITH extension for another two years is pending approval fromPEZA as at March 31, 2006.

 

mySecureSign, Inc., or mSSI, is awholly-owned subsidiary of ePLDT and is registered with the BOI as a new ITservice firm in the field of services related to public key infrastructure on apioneer status. Under such registration, mSSI enjoys, among other incentives, asix-year ITH from August 1, 2001 or actual start of commercial operations,whichever comes first.  mSSI started commercial operations on January 1, 2002.

 

ePLDT Ventus, Inc., or ePLDT Ventus, isregistered with the BOI as a new IT export service firm in the field ofcustomer interaction center on a pioneer status.  Under this registration,Ventus shall be entitled to certain tax incentives such as an ITH for six yearsstarting March 2005.  In relation to this, Ventus is required to comply withspecific terms and conditions stated in the BOI registration.

 

On May 3, 2001, the BOI awarded Smart pioneer statusfor its GSM expansion projects, entitling it to a three-year ITH which expiredon May 2, 2004.  The tax incentive was utilized by Smart on the basis ofincremental income generated from such expansion projects.  In addition, onJuly 12, 2001, the BOI awarded Smart pioneer status for its paymentinfrastructure projects, entitling it to enjoy a six-year ITH.  In this case,the tax incentive is availed for the entire taxable income from the projects.The BOI registration for this projects was cancelled effective September 14,2004, which resulted in the termination of all incentives granted to Smartunder such registration.

 

Wolfpac is registered with the BOI as anew operator of service provider applications.  Under the terms of itsregistration, it is entitled to certain tax and non-tax incentives whichinclude, among other things, ITH for four years from February 2004.

 

Smart Broadband has three registered activities with the BOI on apioneer status, namely: (i) new operator of telecommunications systems(inter-exchange carrier for data services); (ii) new information technologyservice firm in the field of providing internet services; and (iii) newoperator of telecommunications facilities (nationwide broadband wirelessaccess).  Under the terms of these registrations, Smart Broadband isentitled to certain tax and non-tax incentives which include, among otherthings, an ITH for six years from February 2001, August 2001 and July 2005,respectively.

 

Incomederived from non-registered activities with the BOI is subject to the normalincome tax rate enacted as at the balance sheet date.

 

Consolidatedtax incentives availed for the years ended December 31, 2005, 2004 and 2003amounted to Php235 million, Php2,208 million and Php6,425 million,respectively.

 

The balance of NOLCO as at December 31, 2005 may beused by the particular entities that incurred the losses as deductions against theirfuture taxable income as follows:

 

**Year Incurred**

**Expiry Date**

(in million pesos)

2003

December 31, 2006

4

2004

December 31, 2007

87

2005

December 31, 2008

11,229

Total NOLCO

** **

11,320

 

Our MCIT as at December 31, 2005is detailed as follows:

 

**Year Incurred**

**Expiry Date**

(in million pesos)

2003

December 31, 2006

42

2005

December 31, 2008

484

Total NOLCO

** **

 526

 

The reconciliation between the provision for (benefitfrom) income tax at the applicable statutory tax rate and the actual provision for (benefit from) incometax follows:

 

 

**2005**

2004

2003

 

(in million pesos)

Provision for income tax at the applicable statutory tax rates

**14,875**

11,149

3,123

Tax effects of:

** **

 

 

Tax exempt income and non-deductible expenses

**445**

3,731

2,695

Results of operations subject to income tax holiday and  other non-taxable income

**(1,234)**

(1,316)

(6,089)

Equity share in net losses (income) of associates

**(2)**

24

28

Differences between statutory tax rate and special tax rate  of certain subsidiaries

**(1,507)**

(835)

(490)

Changes in valuation allowance

**(7,728)**

(5,927)

(667)

Actual provision for (benefit from) income tax

**4,849**

6,826

(1,400)

 

 

** **

**20.    Earnings Per Common Share**

 

Thefollowing table presents information necessary to calculate the earnings pershare:

 

** **

**2005**

2004

2003

 

**Basic**

**Diluted**

Basic

Diluted

Basic

Diluted

 

(in million pesos, except per share amounts)

Net income before cumulative effect of change in  accounting policy

**40,603**

**40,603**

28,101

28,101

11,106

11,106

Cumulative effect of change in accounting policy

**–**

**–**

–

–

(61)

(61)

Dividends on preferred stock

**(1,677)**

**(70)**

(1,764)

(285)

(1,739)

(1,485)

Accretion to redemption value of Preferred Stock Subject to Mandatory Redemption and foreign exchange revaluation

**(1,443)**

**(1,746)**

(1,503)

(1,503)

(1,309)

(1,309)

Net income attributable to common shareholders

**37,483**

**38,787**

24,834

26,313

7,997

8,251

 

(in thousand shares)

Outstanding common shares at beginning of year

**170,214**

**170,214**

169,476

169,476

169,361

169,361

Effect of issuance of common shares during the year

**1,855**

**1,855**

252

252

52

52

Average incremental number of shares under ESOP  during the year

**–**

**94**

–

155

–

–

Common shares equivalent of preferred shares deemed dilutive:

** **

** **

 

 

 

 

      10% Cumulative Convertible Preferred Stock (Note 14)

**–**

**2,617**

–

3,305

–

–

      Preferred Stock Series III (Note 14)

**–**

**–**

–

7,908

–

–

      Preferred Stock Series V (Note 14)

**–**

**–**

–

–

–

2,576

      Preferred Stock Series VI (Note 14)

**–**

**4,399**

–

–

–

4,651

      Preferred Stock Series VII (Note 14)

**–**

**3,842**

–

–

–

3,842

Weighted average number of common shares for the year

**172,069**

**183,021**

169,728

181,096

169,413

180,482

Earnings per common share before cumulative effect of  change in accounting policy

**Php217.84**

**Php211.93**

Php146.32

Php145.30

Php47.56

Php46.06

Cumulative effect of change in accounting policy

**–**

**–**

–

–

(0.36)

(0.34)

Earnings per common share

**Php217.84**

**Php211.93**

Php146.32

Php145.30

Php47.20

Php45.72

 

SeriesV, VI and VII Convertible Preferred Stock were deemed dilutive based on acalculation of the required dividends on these preferred shares divided by thenumber of equivalent common shares, assuming such preferred shares areconverted into common shares and compared against the basic EPS.  Since the amountof dividends on the Series V, VI and VII Convertible Preferred Stock over itsequivalent number of common shares decreased the basic EPS, these convertiblepreferred stocks were deemed dilutive.  

 

**Dividends Declared For the Years Ended December 31, 2005, 2004 and 2003**

 

** **

**2005**

**2004**

**2003**

**Class**

**Per Share**

**Total**

**Per Share**

**Total**

**Per Share**

**Total**

 

 

(in million pesos)

 

(in million pesos)

 

(in million pesos)

**Preferred Stocks Subject to  Mandatory Redemption**

 

 

 

 

 

 

Series V

Php4.675

21

Php4.675

48

Php4.675

48

Series VI

US$0.09925

102

US$0.09925

106

US$0.09925

113

Series VII

JPY10.179725

78

JPY10.179725

82

JPY10.179725

93

 

 

 201

 

 236

 

 254

 

 

 

 

 

 

 

**10% Cumulative Convertible  Preferred Stocks**

 

 

 

 

 

 

Series CC

Php1.00

17

Php1.00

17

Php1.00

17

Series DD

1.00

3

1.00

2

1.00

–

Series A, I, R, W, AA and BB

1.00

129

1.00

130

1.00

130

Series B, F, Q, V and Z

1.00

91

1.00

91

1.00

91

Series E, K, O and U

1.00

44

1.00

45

1.00

45

Series C, D, J, T and X

1.00

58

1.00

58

1.00

58

Series G, N, P and S

1.00

27

1.00

27

1.00

27

Series H, L, M and Y

1.00

40

1.00

40

1.00

40

 

 

 409

 

 410

 

 408

 

 

 

 

 

 

 

**Convertible Preferred Stocks**

 

 

 

 

 

 

Series III

US$1.029412

968

US$1.029412

1,070

US$1.029412

1,040

 

 

 

 

 

 

 

**Cumulative Non-Convertible Redeemable Preferred Stocks**

 

 

 

 

 

 

Series IV*

 

49

 

48

 

49

 

 

 

 

 

 

 

Common Stock

Php14.00

2,384

Php–

–

Php–

–

 

21.00

3,598

–

–

–

–

 

21.00

3,642

–

–

–

–

 

 

9,624

 

–

 

–

Charged to retained earnings

 

11,251

 

1,764

 

1,751

* *

****Dividendsare declared based on total amounts, not per share amounts.*

 

**Dividends DeclaredSubsequent to December 31, 2005**

 

** **

**Date**

** **

**Amounts**

**Class**

**Approved**

**of Record**

**Payable**

** **

**Per Share**

**Total**

 

 

 

 

 

 

(in million pesos)

**Preferred Stocks Subject to  Mandatory Redemption**

 

 

 

 

 

 

Series V

February 27, 2006

March 17, 2006

April 15, 2006

 

Php4.675

1

Series VI

February 27, 2006

March 17, 2006

April 15, 2006

 

US$0.09925

23

Series VII

February 27, 2006

March 17, 2006

April 15, 2006

 

JPY10.179725

18

 

 

 

 

 

 

  42

 

 

 

 

 

 

 

Common Stock

February 27, 2006

March 20, 2006

April 20, 2006

 

Php28.00

5,062

 

 

 

 

 

 

5,104

 

 

 

21.    Contractual Obligations and CommercialCommitments

 

***Contractual Obligations***

 

The following table discloses the PLDT Group’scontractual obligations outstanding as at December 31, 2005: 

 

 

** **

**Long-term lease obligations**

**Unconditional purchase**

**Other long-term**

** **

**Year**

**Long-term debt**

**Operating**

**Capital**

**obligations****(1)**

**obligations**

**Total**

 

(in million pesos)

2006

18,797

631

895

4,969

–

25,292

2007

19,993

605

341

1,061

–

22,000

2008

6,633

486

14

1,061

–

8,194

2009

14,146

463

7

1,062

8,844

24,522

2010

3,386

392

8

1,061

7,046

11,893

2011 and onwards

49,358

1,059

435

3,184

–

54,036

Total 

112,313

3,636

1,700

12,398

15,890

145,937

 

*(1)**Basedon the original Air Time Purchase Agreement with AIL.*

 

*Long-termDebt Obligations*

 

Fordiscussion of our long-term debt obligations*,* see*Note 12 –Interest-bearing Financial Liabilities.*

 

*Long-termOperating Lease Obligations*

 

*Digital Passage Service Contracts*.   PLDT hasexisting Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento 25 years expiring at various dates.  As at December 31, 2005, PLDT’saggregate remaining obligation under these contracts amounted to approximatelyPhp17 million.

 

*LicenseAgreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius.*PLDT entered into a license agreement with Mobiuspursuant to which Mobius has granted PLDT a non-exclusive, non-assignable andnon-transferable license for the use of computer software components.  Underthis agreement, Mobius is also required to provide maintenance services for aperiod of one year at no additional maintenance charge.  PLDT may purchasemaintenance services upon expiration of the first year for a fee of 15% of thecurrent published license fee.  As at December 31, 2005, PLDT’s aggregateremaining obligation under this agreement was approximately Php30 million.

 

*Other Long-term Operating Lease Obligations*.   The PLDT Group has various long-term leasecontracts for periods ranging from two to ten years covering certain offices,warehouses, cell sites telecommunication equipment locations and various officeequipment.  In particular, Smart has lease obligations aggregating Php3,272 millionas at December 31, 2005 in respect of office and cell site rentals with over3,000 lessors nationwide, PLDT has lease obligations aggregating Php119 millionas at December 31, 2005, and ePLDT has lease obligations aggregating Php198million as at December 31, 2005 in respect of certain office space rentals.

 

*Long-termCapital Lease Obligations.*

 

Fora discussion of our long-term capital lease obligations, see *Note 12 –Interest-bearing Financial Liabilities*.

 

*UnconditionalPurchase Obligations*

 

*AirTime Purchase Agreement with AIL.*Asdiscussed in *Note 16 – Related Party Transactions*, PLDT is a party to aFounder NSP Air Time Purchase Agreement entered into with AIL in March 1997,which was amended in December 1998, under which PLDT was granted the exclusiveright to sell AIL services in the Philippines.  In exchange, the Air Time PurchaseAgreement required PLDT to purchase from AIL a minimum of US$5 million worth ofair time annually over ten years commencing on January 1, 2002, the date ofcommercial operations of the Garuda I Satellite.

 

Inthe event that AIL’s aggregate billing revenue is less than US$45 million inany given year, the Air Time Purchase Agreement also states that PLDT has tomake supplemental air time purchase payments not to exceed US$15 million peryear during the ten-year term.

 

PLDTand the other founder NSPs are endeavoring to amend the Air Time PurchaseAgreement due to the occurrence of partial satellite loss, changes in theprimary business of ACeS and other events affecting the business.

 

In March 2003, PLDT, together with the other founderNSPs, entered into a Standstill Agreement with AIL suspending the applicationand enforcement of the minimum and supplemental air time payments under theoriginal Air Time Purchase Agreement.  The parties agreed that AIL shallprovide PLDT and the other founder shareholders, with unlimited use of air timefor the year 2003 in exchange for a fixed fee in the amount of US$3.8 millionfor PLDT.  Moreover, PLDT was also obliged to purchase from AIL 13,750satellite phone units in 2003 at US$395 F.O.B. per unit, subject to quarterlyprice adjustments.  The parties to the Standstill Agreement also agreed tonegotiate in good faith and use their best efforts to reach an agreement on arevised Air Time Purchase Agreement before November 15, 2003 that would cover,among other things, the amended minimum and supplemental air time paymentprovisions subject to the approval of AIL’s creditors.

 

OnFebruary 10, 2004, notwithstanding the ongoing negotiations, AIL advised PLDTof the termination of the Standstill Agreement and the reinstatement of theterms under the original Air Time Purchase Agreement effective January 1, 2002following the lapse of the November 15, 2003 deadline set in the StandstillAgreement for the negotiation of a revised Air Time Purchase Agreement.Negotiations are continuing with the relevant parties towards an amicablesettlement of this matter.  See *Note 16 – Related Party Transactions* and*Note 22 – Provisions and Contingencies*for further details relating tothe Air Time Purchase Agreement with AIL.  As at December 31, 2005, PLDT’saggregate remaining minimum obligation under the original Air Time PurchaseAgreement was approximately Php11,120 million.

 

*LicensePurchase Agreement with I-Contact Solutions Pte. Ltd.*  On April 2, 2003, iPlus, a wholly-owned subsidiaryof ePLDT and the Philippines’ pioneer in IP-based IT response center, enteredinto an application services provider, or ASP, and reseller contract withI-Contact Solutions Pte. Ltd., or I-Contact, of Singapore.  Under theagreement, iPlus will purchase licenses of the CosmoCall Universe TM IP-basedcontact center services.  CosmoCall Universe supports multi-channel customerinteractions including telephone, web chat, web voice, web video, webcollaboration, e-mail and voicemail in one high capacity, high availability,multi-tenant platform.  CosmoCall Universe is a complete, unified contactcenter suite that includes ACD, IVR, CTI, predictive dialing, multimediarecording and a complement of other management applications.  The aggregatevalue of these licenses is US$2.1 million and these licenses will be deliveredquarterly over a two-year period.  Further to the agreement, I-Contact will appoint iPlus as the exclusive reseller and ASP for thePhilippine market and will provide iPlus with necessary support in terms ofsales, marketing, and technical services.  Effective March 30, 2004, I-Contactagreed to amend the agreement and waived all financial obligations andcommitted seats requirement over the two-year period.  iPlus will pay all itsremaining obligations pertaining only to the 300 seats delivered by I-Contact.

 

*Sale**and Purchase Agreement with**Smart Broadband**.*For a discussion of oursale and purchase agreement with SmartBroadband with a remaining obligation ofPhp1,278 million as at December 31, 2005, see *Note 9 – Goodwill and OtherIntangible Assets*.

 

*Other Long-term Obligations*

 

*Mandatory Conversion and Purchase of Shares*.   As discussed in *Note 14 – Preferred StockSubject to Mandatory Redemption*, as at December 31, 2005, PLDT had issued atotal of 3 million shares of Series V Convertible Preferred Stock, 5 millionshares of Series VI Convertible Preferred Stock and 4 million shares of SeriesVII Convertible Preferred Stock in exchange for a total of 58 million shares ofSeries K Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel adopted in June 2001.

 

Eachshare of Series V, VI and VII Convertible Preferred Stock is convertible at anytime at the option of the holder into one PLDT common share.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stocks and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to PLDTcommon shares.  Under a put option exercisable for 30 days, holders of commonshares received on mandatory conversion of the Series V, VI and VII ConvertiblePreferred Stocks will be able to require PLDT to purchase such PLDT commonshares for Php1,700 per share, US$36.132 per share, and JPY4,071.89 pershare, respectively.  

 

Asat December 31, 2005, 2,480,553 shares of Series V Convertible Preferred Stockand 896,190 shares of Series VI Convertible Preferred Stock had been convertedto PLDT common shares.  As at December 31, 2005, 240,887 shares of Series V,4,398,914 shares of Series VI and 3,842,000 shares of Series VII ConvertiblePreferred Stocks remained outstanding.  The aggregate value of the put optionbased on outstanding shares as at December 31, 2005 was Php15,890 million, ofwhich Php8,844 million is puttable on June 4, 2008 and Php7,046 million on June4, 2009, if all of the outstanding shares of Series V, VI and VII ConvertiblePreferred Stocks were mandatorily converted and all the underlying commonshares were put to PLDT.  The market value of the underlying shares of commonstock was Php15,564 million, based on the market price of PLDT common shares ofPhp1,835 per share as at December 31, 2005.

 

***Commercial Commitments***

 

As at December 31, 2005, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php1,493 million.These commitments will expire within one year.

 

 

 

**22.    Provisions and Contingencies**

 

Asdiscussed below, we currently expect that going forward, we will pay localfranchise taxes on an annual basis and based on the gross receipts received orcollected for services rendered within the jurisdiction of the respectivetaxing authority.  For this reason, we have made the appropriate provisions inour consolidated financial statements as at December 31, 2005.

 

*NTC supervision and regulation fees, or SRF*

 

Since1976, PLDT has received assessments from NTC for permit, SRF and other chargespursuant to Section 40 of Commonwealth Act 146, otherwise known as the PublicService Act.  As at December 31, 2005, PLDT had paid, since 1994, a totalamount of Php1,960 million in SRF, of which Php1,724 million was paid underprotest.

 

PLDTis contesting the manner by which these assessments were calculated and thebasis for such calculations.  The case is now with the Supreme Court and uponthe rules and practice of court, stands submitted for decision.

 

Smart and Piltel have similarly received assessmentsfrom NTC for permit, SRF and other charges which were paid under protest.Total payments by Smart amounted to Php122 million each in 2005 and 2004.  OnFebruary 11, 2005, based on the NTC’s deficiency recomputation, Piltel paid theamount of Php559 million in respect of NTC fees for the period from 1992 to2004.  On September 30, 2005, Piltel paid SRF of Php81 million representingamounts due for 2005.

 

*Local business and franchise tax assessments*

 

PLDT is presently a party to several cases involvingthe issue of exemption of PLDT from local franchise and business taxes.  PLDTbelieves, based on the opinion of its legal counsel, that it is exempt frompayment of local franchise and business taxes. 

 

The Local Government Code of 1991, or R.A. No. 7160,which took effect on January 1, 1992, extended to local government units, orLGUs, power to tax businesses within their territorial jurisdiction grantedunder Batas Pambansa No. 337 and withdrew tax exemptions previously granted tofranchise grantees under Section 12 of R.A. No. 7082. 

 

PLDTbelieves, based on the opinion of its legal counsel, that R.A. No. 7925, whichtook effect on March 16, 1995, and the grant of local franchise and businesstaxes exemption privileges to other franchise holders subsequent to the effectivityof R.A. No. 7160, implicitly restored its local franchise and business taxesexemption privilege under Section 12 of R.A. No. 7082, or the PLDT Franchisepursuant to Section 23 thereof or the quality of treatment clause. 

 

To confirm this position, PLDT sought and obtained onJune 2, 1998 a ruling from the Bureau of Local Government Finance, or BLGF, ofthe Philippine Department of Finance, which ruled that PLDT is exempt from thepayment of local franchise and business taxes imposable by LGUs under R.A. No.7160.

 

By virtue of the BLGF Ruling, PLDT stopped payinglocal franchise and business taxes starting with the fourth quarter of 1998 andhas filed with certain LGUs claims for tax refund covering the period from thesecond quarter of 1995 to the third quarter of 1998.  PLDT has receivedassessments for local franchise and business tax from several cities andprovinces following PLDT’s decision to stop payment of local franchise andbusiness taxes.  

 

Followinga decision of the Supreme Court on March 25, 2003, a judgment in the amount ofPhp4 million against PLDT involving the City of Davao became final andexecutory on April 9, 2003, pursuant to which PLDT was declared not exempt fromthe local franchise tax.

 

AlthoughPLDT believes that it is not liable to pay local franchise and business taxes,PLDT has entered into compromise settlements with several LGUs, including theCity of Makati, in order to maintain and preserve its good standing andrelationship with these LGUs.  Under these compromise settlements, which havemostly been approved by the relevant courts, PLDT has paid a total amount ofPhp505 million as at December 31, 2005 for local franchise tax covering up tothe end of 2004.

 

PLDTcontinues to contest the remaining assessments amounting to Php3.7 million asat December 31, 2005, a number of which were based on the gross revenues ofPLDT derived from its operations within the entire Philippines.  PLDT claimsthat assuming that it is liable for local franchise tax, R.A. No. 7160 providesthat local franchise tax shall be based on the gross receipts of the precedingyear received or collected for services rendered within the jurisdiction of thetaxing authority.  Therefore, the use by some LGUs of gross revenues as thebasis for computation of franchise tax is in violation of the law because itpertains to all income earned regardless of whether it was received or not,unlike gross receipts which are essentially the amount of money or itsequivalent actually or constructively received.  Moreover, gross revenues referto all income earned by PLDT within and outside the jurisdiction of the localtaxing authority; thus, the use thereof as a basis of computation willoverstate the franchise tax.  As at December 31, 2005, there are two casespending in the Supreme Court.  The motions for reconsideration of the two otherunfavorable decisions of the Supreme Court have been denied with finality.

 

PLDT currently expects that going forward it will paylocal franchise and business taxes on an annual basis and based on the grossreceipts received or collected for services rendered within the jurisdiction ofthe respective taxing authority.

 

Smart has, likewise, received assessments for localfranchise and business taxes from certain cities and provinces in the aggregateamount of Php313 million, which Smart continues to contest.  Smart believes,based on the opinion of its legal counsel, that it is not liable to pay thelocal franchise and business taxes by virtue of (i) the opinion issued by theBLGF dated August 13, 1998; and (ii) Smart’s exemption under its legislativefranchise which took effect after the effective date of R.A. No. 7160.

 

Smart has recently beendeclared exempt from payment of local franchise tax to the City of Makati in a decisiondated August 3, 2004 by the Makati Regional Trial Court, or RTC.  The City of Makati has filed a Motion for Extension to file a Petition for Review with the Court ofAppeals.  However, on June 9, 2005, the Court of Appeals dismissed the appealfiled by the City of Makati.

 

The RTC of Iloilo has likewise ruled in a decisiondated January 19, 2005 that Smart is exempt from payment of local franchise taxto the City of Iloilo.  The City of Iloilo has filed an appeal directly withthe Supreme Court which remains pending.

 

*Piltel’s Bureau of Internal Revenue, or BIR,Assessment*

 

Piltel received the following assessment notices fromthe BIR:

 

**Year**

**Tax Assessment Type**

**Basic**

**Interest**

**Total**

 

 

(in million pesos)

1998

Value Added Tax, or VAT

85.8

68.7

 154.5

 

Overseas Communications Tax

31.8

25.5

  57.3

 

Income Tax

12.4

9.4

  21.8

 

Administrative Penalties

0.1

–

   0.1

 

 

 

 

 

1999

VAT

94.5

67.8

 162.3

 

Income Tax

22.7

13.8

  36.5

 

 

 

 

 

2001

VAT

56.2

35.1

  91.3

 

Income Tax

13.4

8.9

  22.3

 

Piltel filed applications for compromisesettlements with the BIR for the deficiency tax assessments of 1998 and 1999,citing as basis for the compromise settlement its financial incapacity onaccount of networth and earnings deficit.  On June 22, 2005, however, Piltelreceived a letter from the BIR dated May 9, 2005 denying the applications forcompromise settlements.  

 

On June 16, 2005, Piltel filed anadministrative protest against the 2001 deficiency income tax and VATassessments arising from a letter notice.  The BIR granted the request forreconsideration by virtue of the tax verification notice dated June 29, 2005,which was received by Piltel on July 1, 2005.  In its letter dated August 30,2005, which Piltel received on September 19, 2005, the BIR issued its finaldecision on the disputed assessment, which denied the administrative protestfiled by Piltel.  On October 19, 2005, Piltel filed a petition for review withthe Court of Tax Appeals relating to this tax assessment.

 

On December 12, 2005, Piltel filed a collectiveapplication for a compromise settlement with the BIR for the deficiency taxassessments arising from taxable years 1998, 1999 and 2001, citing “reasonabledoubt as to the validity of the tax assessments” as a basis.  The prescribedminimum percentage of compromise settlement for such basis is 40% of the basicassessed tax.  On January 27, 2006, Piltel received the favorablerecommendation and approval from the BIR on the said application for acompromise settlement.  On January 31, 2006, Piltel settled the total amount ofPhp114 million, which is equivalent to 40% of the basic taxes per finalassessment notices received, to effect the immediate cancellation of the taxassessments.  On February 24, 2006, the BIR accepted Piltel’s application forcompromise settlement of income tax and VAT for the years 1998 and 1999 andincome taxes and VAT for the year 2001, and accordingly, issued a certificateof availment on the said date.

 

*Enhanced Voluntary Assessment Program, or EVAP,Availment*

 

In 2005, the BIR launched a programcalled EVAP, which grants taxpayers, who availed of the program, the privilegeof last priority in audit.  The program covers all types of internal revenuetaxes which can be availed of on a per tax type basis and required the paymentof a certain percentage increase in the said tax compared with the base year orthe established fixed minimum EVAP payment, whichever is higher.

 

PLDT availed of the program and paid a total of Php6million for VAT and income tax for taxable year 2004 and VAT and withholdingtax for taxable year 2002.

 

On the other hand, Maratel availed of the EVAP forincome tax for the taxable year 2004, Subic Telecom availed of the program forits income tax, withholding tax and percentage tax for taxable year 2002, whileClark Telecom availed of the program for its income tax for both taxable years2003 and 2004.  The total payment of Maratel, Subic Telecom and Clark Telecomamounted to Php800,000.  Smart’s EVAP availment, for which Php53 million waspaid, covered the income tax for the taxable years 2003 and 2004, the VAT forthe taxable year 2002, the overseas communications tax for the year 2002, andthe withholding taxes for the taxable years 2002 to 2004, while Piltel’s EVAPavailment, which involved payment of Php3 million, covered the income tax forthe taxable year 2003 and the expanded withholding tax for the taxable years2003 and 2004.

 

PLDT and these subsidiaries are awaitingfor the EVAP Certificate of Qualification to be issued by the BIR.

 

*AirTime Purchase Agreement with AIL*

 

InMarch 1997, PLDT entered into a Founder NSP Air Time Purchase Agreement with PTAsia Cellular Satellite as amended in December 1998 and as assigned andtransferred to AIL, under which PLDT was granted the exclusive right to sellACeS services in the Philippines.  The Air Time Purchase Agreement requiredPLDT to purchase from PT Asia Cellular Satellite at least US$5 million worth ofair time annually over ten years, commencing on January 1, 2002, the date ofcommercial operations, and to make supplemental air time purchase payments notto exceed US$15 million per year during the ten-year term in the event revenuesgenerated are less than US$45 million in any given year.  Under the Air TimePurchase Agreement, the air time payment obligations remain in effect until allindebtedness incurred by AIL has been fully repaid.  See *Note 16 – RelatedParty Transactions* and *Note 21 – Contractual Obligations and CommercialCommitments* for detailed discussion of the terms of the agreement.

 

PLDTand the other founder NSPs are endeavoring to amend the Air Time PurchaseAgreement due to the occurrence of partial satellite loss, changes in theprimary business of ACeS and other events affecting the business.

 

InMarch 2003, PLDT, together with the other founder NSPs, entered into aStandstill Agreement with AIL.  Payments made to AIL under the Air TimePurchase Agreement based on billings of actual usage and the StandstillAgreement amounted to US$2 million and US$1 million for the second quarters of2005 and 2004, respectively.

 

OnFebruary 10, 2004, notwithstanding the ongoing negotiations, AIL advised PLDTof the termination of the Standstill Agreement and the reinstatement of theterms under the original Air Time Purchase Agreement effective January 1, 2002following the lapse of the November 15, 2003 deadline set in the StandstillAgreement for the negotiation of a revised Air Time Purchase Agreement.  As atDecember 31, 2005, PLDT’s outstanding payables under the original Air TimePurchase Agreement were approximately Php3,827 million.  Negotiations arecontinuing with the relevant parties towards an amicable settlement of thismatter.  See *Note 16 – Related Party Transactions*and*Note 21 –Contractual Obligations and Commercial Commitments* for further discussion.

 

OnJune 21, 2004, AIL also sent PLDT a letter citing PLDT in default under the AirTime Purchase Agreement for non-payment of outstanding amounts and forrepudiation of its obligations thereunder.  PLDT maintains, however, that thetermination of the Standstill Agreement and reinstatement of the terms underthe original Air Time Purchase Agreement are premature, considering that thediscussions or negotiations on the terms of the proposed revised Air TimePurchase Agreement were still pending between the parties, such that it ishighly inequitable for AIL to have unilaterally decided to invoke theprovisions of the Standstill Agreement and declared PLDT in default.Furthermore, PLDT maintains its position that the Air Time Purchase Agreementhas been rendered ineffective by various events, circumstances and technicalproblems encountered in the operation of the business of AIL.  The substantialchanges in the circumstances under which AIL must operate, changes which werenot contemplated by the parties at the time the commitments were made, haverendered the commitments under the Air Time Purchase Agreement unrealistic andthe performance of the same impossible.

 

Asat December 31, 2005, PLDT’s aggregate remaining minimum obligation under theoriginal Air Time Purchase Agreement was approximately Php11,120 million.

 

Wemade a reasonable estimate of the amount necessary in the event such obligationwould be settled and have made the appropriate provisions in our consolidatedfinancial statements as at December 31, 2005 with due consideration of AIL’sexisting indebtedness and of PLDT’s share as one of the founder NSPs.  

 

*PLDT’sLOS to Piltel*

 

Under the terms of Piltel’s debt restructuring plan,PLDT issued a Letter of Support, or LOS, for the benefit of Piltel and itscreditors under which PLDT has agreed to cover any funding shortfalls of Piltelup to a maximum amount of US$150 million less all amounts paid or committed tobe paid to or on behalf of Piltel or any of its subsidiaries or affiliates onor after March 23, 2000.  Under the LOS, PLDT is required to provide funding toPiltel in the event that the cash flow from Piltel’s operations falls short ofthe amount required by it to discharge in full its obligations to any creditorof Piltel and all its operating and financing subsidiaries and affiliates.PLDT is subject to contractual restrictions limiting the amount of financialsupport it can provide to Piltel up to US$150 million.  As at December 31, 2005and 2004, the remaining undrawn balance available under the PLDT LOS was US$50million, approximately Php2,666 million (2005) and Php2,831 million (2004), dueto prior investments made from March 23, 2000 to December 31, 2002 aggregatingto US$100 million through PLDT’s subscription to Series J Class I preferredshares of Piltel.  There has been no drawdown under the LOS in 2005 and 2004.

 

 

 

**23.    Financial Assets andLiabilities**

 

Our financial assets andliabilities are recognized initially at fair value.  Transaction costs (debtissuance costs) are included in the initial measurement of all financial assetsand liabilities except those classified as financial instruments measured atfair value through profit and loss.  Subsequent to initial recognition, assetsand liabilities are either valued at amortized cost using the effectiveinterest rate method or at fair value depending on classification.

 

The following table sets forththe carrying values and estimated fair values of our financial assets andliabilities recognized as at December 31, 2005 and 2004.  There are no materialunrecognized financial assets and liabilities as at December 31, 2005 and 2004.

 

** **

**Carrying Value**

**Fair Value**

 

**2005**

2004

**2005**

2004

 

(in million pesos)

**Current Financial Assets**

** **

 

 

 

Cash and cash equivalents

**30,064**

27,321

**30,064**

27,321

Short-term investments

**2,746**

3,873

**2,746**

3,873

Trade and other receivables

**7,113**

7,524

**7,113**

7,524

Derivative assets

**37**

335

**37**

335

Total current financial assets

**39,960**

39,053

**39,960**

39,053

**Noncurrent Financial Assets**

** **

 

** **

 

Investments - available-for-sale(1)

**109**

104

**109**

104

Derivative assets

**2,648**

4,116

**2,648**

4,116

Total noncurrent financial assets

**2,757**

4,220

**2,757**

4,220

**Total Financial Assets**

**42,717**

43,273

**42,717**

43,273

** **

** **

 

** **

 

**Current Financial Liabilities**

** **

 

** **

 

Obligations under capital lease(2)

**716**

425

**716**

425

Notes payable(2)

**–**

58

**–**

58

Accounts payable

**15,482**

8,987

**15,482**

8,987

Derivative liabilities

**192**

473

**192**

473

Current portion of long-term debt(2)

**18,797**

28,020

**19,435**

29,083

Dividends payable

**746**

652

**746**

652

Total current financial liabilities

**35,933**

38,615

**36,571**

39,678

**Noncurrent Financial Liabilities**

** **

 

** **

 

Long-term debt – net of current portion(2)

**93,516**

131,377

**92,811**

132,803

Obligations under capital lease(2)

**381**

601

**381**

601

Derivative liabilities

**5,777**

6,930

**5,777**

6,930

Preferred stock subject to mandatory redemption

**12,004**

14,956

**14,053**

18,237

Total noncurrent financial liabilities

**111,678**

153,864

**113,022**

158,571

**Total Financial Liabilities**

**147,611**

192,479

**149,593**

198,249

 

*(1)**Pertains to investments in club shares.*

*(2)**Included under “Interest-bearing Financial Liabilities”in the consolidated balance sheets.*

 

The following methods and assumptions were used toestimate the fair value of each class of financial instrument for which it ispracticable to estimate such value:

 

Interest-bearingFinancial Liabilities:

 

*Long-termdebt:* Fair value is based on thefollowing:

 

**Debt Type**

**Fair Value Assumptions**

Fixed Rate Loans:

U.S. dollar notes/convertible debt

Other loans in all other currencies

 

Quoted market price.

Estimated fair value is based on the discounted value of future cash flows using the applicable LIBOR and MART1 rates for similar types of loans.

Variable Rate Loans

The carrying value approximates fair value because of recent and regular repricing based on market conditions.

 

*Preferredstock subject to mandatory redemption:*The fair values were determined using an independent third party valuationmodel.

 

Derivativeinstruments:

 

*Forwardforeign exchange contracts and bifurcated foreign currency forwards:* The fair values were determined using forwardexchange market rates at the balance sheet date.

 

*Foreigncurrency options:*  The fair valueswere computed using an option pricing model.

 

*Foreigncurrency and interest rate swaps:*The fair values were computed as the present value of estimated future cashflows.

 

*Bifurcatedequity call options:*  The fair valueswere computed using an option pricing model.

 

Dueto the short-term nature of the transactions, the fair value of cash and cashequivalents, short-term investments, trade and other receivables, notes payableand accounts payable approximate the carrying amounts as of the balance sheetdate.

 

*Derivative Financial Instruments*

 

Ourderivative financial instruments are accounted for under non-hedge accounting.Changes in the fair value of these instruments are recognized directly toincome for the period.

 

The table below sets out theinformation about our derivative financial instruments as at December 31, 2005and 2004:

* *

* *

**2005**

2004

* *

* *

 

**Maturity**

**Notional Amount**

**Mark-to-market Gain (Loss)**

Notional Amount

Mark-to-market Gain (Loss)

 

(in millions)

***PLDT***

** **

** **

 

 

Long-term currency swaps

** **

** **

 

 

 

2017

**US$300**

**Php417**

US$300

Php748

 

2012

**250**

**(428)**

250

282

 

 

** **

** **

 

 

Long-term foreign currency bought call options

2009

**175**

**301**

175

672

 

** **

** **

 

 

Short-term foreign currency bought call options

**–**

**–**

76

(198)

 

** **

** **

 

 

Long-term foreign currency sold call options

**175**(1)

**(270)**

175(1)

(22)

 

** **

** **

 

 

Short-term foreign currency sold call options

**–**

**–**

76(2)

117

 

**JP****Y****151**

**(2)**

JPY–

–

 

** **

** **

 

 

Interest rate swap

**US$125**

**(1,569)**

125

(3,468)

 

** **

** **

 

 

Forward foreign exchange contracts

**220**

**(169)**

87

6

 

**JP****Y****1,282**

**7**

JPY14

1

 

** **

** **

 

 

Bifurcated embedded derivatives

**US$–**

**–**

US$1

(1)

 

** **

** **

 

 

Bifurcated equity call options

**8 shares**

**(1,597)**

9 shares

(1,026)

 

** **

**(3,310)**

 

(2,889)

***Smart***

** **

** **

 

* *

Forward foreign exchange contracts

**US$–**

**–**

US$69

(77)

Bifurcated embedded derivatives

**9**

**26**

19

14

 

** **

**26**

 

(63)

Net liabilities

** **

**(Php3,284)**

 

(Php2,952)

* *

*(1)**Sold call options of 2009 long-term foreigncurrency options based on the same notional amount as the long-term foreigncurrency bought      call options.*

*(2)**Sold call options of short-term foreign currencyoptions based on the same notional amount as the short-term foreign currencybought call       options.*

* *

 

**2005**

2004

 

(in million pesos)

Presented as:

** **

 

Current assets

**37**

335

Noncurrent assets

**2,648**

4,116

Current liabilities

**(192)**

(473)

Noncurrent liabilities

**(5,777)**

(6,930) 

Net liabilities

**(3,284)**

(2,952)

* *

Analysis of loss on derivative transactions for theyears ended December 31, 2005, 2004 and 2003 are as follows:

* *

 

**2005**

2004

2003

 

(in million pesos)

Net mark-to-market loss at end of year

**(3,284)**

(2,952)

(2,205)

Net mark-to-market loss at beginning of year

**(2,953)**

(2,205) 

(637)

Net change

**(331)**

(747)

(1,568)

Settlements and accretion

**(1,405)**

(328)

–

Gain (loss) on contracts entered into and terminated during the year

**(65)**

211

(63)

Net loss on derivative transactions

**(1,801)**

(864)

(1,631)

* *

***PLDT***

* *

*Long-term Currency Swaps*

* *

PLDT entered into long-term principal-only currencyswap agreements with various foreign counterparties intended as economic hedgesof the currency risk on its fixed rate notes maturing in 2009, 2012 and 2017.As at December 31, 2005 and 2004, these long-term currency swaps have anaggregate notional amount of US$550 million.  Under these long-term currencyswaps, PLDT effectively exchanges the principal of its U.S. dollar-denominatedfixed rate notes into peso-denominated loan exposures at agreed swap exchangerates.  The agreed swap exchange rates are reset to the lowest U.S.dollar/Philippine Peso spot exchange rate during the term of the swaps, subjectto a minimum exchange rate.  In March and April 2004, PLDT entered intoamendments to keep the lowest reset exchange rate and unwind the downwardresettable feature of US$550 million of its long-term principal-only currencyswap agreements in order to lower the running hedging cost of the swaps.  As atDecember 31, 2005 and 2004, the outstanding swap contracts have an averageexchange rate of Php50.76.

 

Inorder to manage hedge costs, these swaps included a credit-linkage feature withPLDT as the reference entity.  The specified credit events include bankruptcy,failure to pay, obligation acceleration, moratorium/repudiation, andrestructuring of PLDT bonds or all or substantially all of PLDT’s obligations.Upon the occurrence of any of these credit events, subject to agreed thresholdamounts where applicable, the obligations to both PLDT and its counterpartyunder the swap contracts terminate without further settlements to either party,including any mark-to-market value of the swaps.  In March 2004, PLDT amendedan additional US$150 million of the long-term currency swaps to include thiscredit-linkage feature.  As at December 31, 2005 and 2004 , US$725 million ofPLDT’s long-term currency swaps/options have been structured to includecredit-linkage with PLDT as the reference entity.  The semi-annual fixed orfloating swap cost payments that PLDT is required to make to its counterpartiesaveraged to about 4.50% and 2.95% per annum as at December 31, 2005 and 2004,respectively.

 

*Long-termForeign Currency Bought Call Options*

 

Tomanage hedging costs, the currency swap agreement relating to the 2009 fixedrate notes has been structured to include currency option contracts.  If thePhilippine peso to U.S. dollar spot exchange rate on maturity date settlesbeyond Php90.00 to US$1.00, PLDT will have to purchase U.S. dollar at anexchange rate of Php52.50 to US$1.00 in addition to the excess above the agreedthreshold rate.  On the other hand, if on maturity, the Philippine peso toUS$1.00 spot exchange rate is lower than the exchange rate of Php52.50 toUS$1.00, PLDT will have the option to purchase at the prevailing Philippinepeso to U.S. dollar spot exchange rate.  In July 2004, PLDT and itscounterparty agreed to re-document and re-classify the transaction intolong-term currency option contracts.  The net semi-annual floating hedge costpayments that PLDT is required to pay under these transactions wasapproximately 5.68% and 3.94% per annum as at December 31, 2005 and 2004,respectively.

 

Theoption currency contract relating to PLDT’s option to purchase U.S. dollar atPhp52.50 to US$1.00 or the prevailing spot rate at maturity, whichever islower, is entered into in tandem with an option currency contract relating tothe counterparty’s option to purchase foreign currency from PLDT at Php90.00 toUS$1.00.  See discussion below under – *Long-term Foreign Currency Sold CallOptions*.

 

*Short-term Foreign Currency Bought Call Options*

 

PLDT utilized structures incorporating currencyoptions to hedge the maturing principal on its fixed rate notes due June 2004and August 2005.  Under the terms of the contracts, PLDT will have the optionto purchase U.S. dollars at an agreed Philippine peso to U.S. dollar spotexchange rate or the prevailing spot rate at maturity, whichever is lower.

 

*Long-termForeign Currency Sold Call Options*

 

With reference to theabove-mentioned hedge on the PLDT’s 2009 fixed rate notes, PLDT simultaneouslysold a currency option contract with the same notional amount of US$175 millionwith the same maturity that gives the counterparty a right to purchase foreigncurrency at Php90.00 to US$1.00.  Together with the bought call long-term currencyoption contract, PLDT has the obligation to purchase U.S. dollars at anexchange rate of Php52.50 to US$1.00 plus the excess above the agreed thresholdrate.  In exchange for this condition, the overall net hedging cost for thetransaction is reduced.

 

*Short-termForeign Currency Sold Call Options*

 

Inorder to manage hedge costs, currency option contracts that hedge PLDT’s fixedrate notes due June 2004 and August 2005 have features similar to those of thelong-term currency option contracts.  PLDT simultaneously sold currency optioncontracts with the same notional amounts with the same maturity.  Together withthe bought call short-term currency option contracts, PLDT has the obligationto buy U.S. dollar at the agreed strike price plus the excess above the agreedthreshold rate should the Philippine peso to U.S. dollar spot exchange rate onthe maturity date settle beyond that agreed threshold.  In exchange for thiscondition, the overall net hedging cost for the transactions is reduced.

* *

PLDT also entered into short-termU.S. dollar subsidized and accumulating forwards and Japanese yen currencyoption contracts to hedge other short-term foreign currency obligations.

* *

*InterestRate Swap*

 

Aportion of PLDT’s currency swap agreements to hedge its 2017 fixed rate notescarry fixed rate swap cost payments.  To effectively lower the running cost ofsuch swap agreements, PLDT, in April 2003, entered into an agreement to swapthe coupon on US$125 million of its 2012 fixed rate notes into a floating rateJapanese yen amount.  Under this agreement, PLDT is entitled to receive a fixedcoupon rate of 11.375%, provided the Japanese yen to U.S. dollar exchange ratestays above JP¥99.90 to US$1.00.  Below this level, a reduced fixed coupon rateof 3% will be due to PLDT.  In order to mitigate the risk of the Japanese yenstrengthening below the agreed threshold, PLDT, in December 2003, entered intoan overlay swap transaction to effectively lower the portion of the couponindexed to the U.S. dollar to Japanese yen rate to 3% such that the fixedcoupon rate due to PLDT when the JP¥ strengthens below the agreed thresholdwill be 8.375%.  Both swap agreements include a credit-linkage feature withPLDT as the reference entity.

 

*Forward Foreign Exchange Contracts*

 

PLDT entered into short-term U.S. dollar and Japaneseyen forward foreign exchange contracts to hedge short-term foreign currencyobligations.

 

*BifurcatedEmbedded Derivatives*

 

Derivativeinstruments include derivatives (or derivative-like provisions) embedded innon-derivative contracts.  PLDT’s outstanding bifurcated embedded derivativetransactions as at December 31, 2004 covered service contracts denominated inU.S. dollars paid out to a Japanese company in April 2005.  There are nooutstanding bifurcated embedded derivative transactions as at December 31,2005.

 

*Bifurcated Equity Call Options*

 

Pursuant to Piltel’s debt restructuring plan, PLDTissued its Series VI and VII Convertible Preferred Stock, see *Note 14 –Preferred Stock Subject to Mandatory Redemption*.  Each share of Series VIand VII Convertible Preferred Stock is convertible at any time at the option ofthe holder into one share of PLDT’s common stock.  On the date immediatelyfollowing the seventh anniversary of the issue date of the Series VI ConvertiblePreferred Stock and on the eighth anniversary of the issue date of the SeriesVII Convertible Preferred Stock, the remaining outstanding shares under theseseries will be mandatorily converted into shares of PLDT common stock.  For 30days thereafter, the holders of these mandatorily converted shares of commonstock have the option to sell such shares of common stock back to PLDT forUS$36.132 per share and JPY4,071.89 per share for Series VI and VII,respectively.  As at December 31, 2005 and 2004, the net negativemark-to-market value of these embedded call options amounted to Php1,597million and Php1,027 million, respectively.

 

***Smart***

 

Smartuses forward exchange contracts to hedge foreign currency-denominated assets,liabilities and firm commitments.  These forward contracts have maturitiesranging from one to six months.

 

Cash deposits, presented as prepayment for forwardpurchase contract under “Short-term investments”, amounting to Php3,873 millioncollateralize certain of the forward exchange contracts outstanding as atDecember 31, 2004.  There were no outstanding prepaid forwards as at December31, 2005.  The embedded foreign currency derivatives bifurcated from theseprepaid forwards are presented as derivative assets or derivative liabilities.

 

Smart’s other embeddedderivatives were bifurcated from service and purchase contracts.  As atDecember 31, 2005 and 2004, outstanding contracts included a service contractwith a foreign equipment supplier and various suppliers covering handsetimportations payable in U.S. dollars.

 

**Financial Risk ManagementObjectives and Policies**

 

Themain purpose of our financial instruments is to fund our operations.  We alsoenter into derivative transactions, the purpose of which is to manage thecurrency risks and interest rate risks arising from our operations and oursources of financing.  It is, and has been throughout the year under review,our policy that no trading in financial instruments shall be undertaken.

 

Themain risks arising from our financial instruments are liquidity risk, foreign exchangerisk, interest rate risk and credit risk.  Our Board of Directors reviews and approvespolicies for managing each of these risks.  Our policies for managing theserisks are summarized below.  We also monitor the market price risk arising fromall financial instruments.  Our accounting policies in relation to derivativesare set out in *Note 3 – Summary of Significant Accounting Policies andPractices*.

 

***Liquidity Risk***

 

Weseek to manage our liquidity profile to be able to finance our capitalexpenditures and service our maturing debts.  To cover our financingrequirements, we intend to use internally generated funds and proceeds fromdebt and equity issues and sales of certain assets. 

 

Aspart of our liquidity risk management program, we regularly evaluate ourprojected and actual cash flow information and continuously assess conditionsin the financial markets for opportunities to pursue fund-raising initiatives.These initiatives may include bank loans, export credit agency-guaranteedfacilities, and debt capital and equity market issues.

* *

***Foreign Exchange Risk***

 

Thefollowing table shows our consolidated foreign currency-denominated monetaryassets and liabilities and their peso equivalents as at December 31, 2005 and2004:

 

** **

2005

2004

** **

**U.S. Dollar**

**Php Equivalent****(1)**

U.S. Dollar

Php Equivalent(2)

 

(in millions)

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**US$244**

**Php12,957**

US$248

Php13,902

Short-term investments

**55**

**2,934**

73

4,090

Trade and other receivables

**139**

**7,371**

146

8,229

Derivative assets

**1**

**37**

6

335

Total current financial assets

**439**

**23,299**

 473

26,556

**Noncurrent Financial Assets**

** **

** **

 

 

Derivative assets

**50**

**2,648**

73

4,116

Notes receivable

**6**

**346**

5

286

Total noncurrent financial assets

**56**

**2,994**

  78

4,402

**Total Financial Assets**

**US$****495**

**Php26,293**

US$551

Php30,958

** **

** **

** **

** **

** **

 

 

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**US$42**

**Php2,227**

US$32

Php1,754

Accrued expenses and other current liabilities

**68**

**3,587**

82

4,599

Derivative liabilities

**3**

**192**

10

473

Interest-bearing financial liabilities

**337**

**17,867**

483

27,195

Total current financial liabilities

**450**

**23,873**

 607

34,021

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities - net of current portion

**1,738**

**92,218**

2,292

129,108

Derivative liabilities

**109**

**5,777**

105

6,930

Preferred stock subject to mandatory redemption

**221**

**11,702**

222

12,512

Total noncurrent financial liabilities

**2,068**

**109,697**

2,619

148,550

**Total Financial Liabilities**

**US$****2,518**

**Php133,570**

US$3,226

Php182,571

* *

*(1)**The exchange rate used was Php53.062 to US$1.00.*

*(2)**The exchange rate used was Php56.341 to US$1.00.*

 

In translating the foreign currency-denominatedmonetary assets and liabilities into peso amounts, the exchange rates used werePhp53.062 to US$1.00 and Php56.341 to US$1.00, the Philippine peso-U.S. dollarexchange rates as at December 31, 2005 and 2004, respectively.

 

Asat June 28, 2006, the peso-dollar exchange rate was Php53.514 to US$1.00.Using this exchange rate, our consolidated net foreign currency-denominatedliabilities as at December 31, 2004 would have increased by Php914 million.

 

Whilea certain percentage of our revenues is either linked to or denominated in U.S.dollars, substantially all of our indebtedness and related interest expense, asubstantial portion of our capital expenditures and a portion of our operatingexpenses are denominated in foreign currencies, mostly in U.S. dollars.

 

Asat December 31, 2005, approximately 98% of our total consolidated debts weredenominated in foreign currencies, principally in U.S. dollars.  Of our foreigncurrency-denominated debts, 3% are in Japanese yen, and the balance in U.S.dollars.  Thus, a weakening of the Philippine peso against the U.S. dollar orJapanese yen will increase both the principal amount of our unhedged foreigncurrency-denominated debts (representing 53% of our consolidated debts, or 44%net of our U.S. dollar cash balances as at December 31, 2005), and interestexpense on our debt in peso terms.  In addition, many of our financial ratiosand other financial tests will be negatively affected.  If, among other things,the value of the Philippine peso against the U.S. dollar substantially dropsfrom its current level, we may be unable to maintain compliance with theseratios, which could result in acceleration of some or all of our indebtedness.For further information on our loan covenants, see *Note 12 –Interest-bearing Financial Liabilities*.

 

Tomanage our foreign exchange risks, stabilize cash flows, and improve investmentand cash flow planning, we enter into forward foreign exchange contracts,foreign currency swap contracts, currency options and other hedging productsaimed at reducing and/or managing the adverse impact of changes in foreignexchange rates on our operating results and cash flows.  However, these hedgesdo not cover all of our exposure to foreign exchange risks.

 

Specifically,we use forward foreign exchange contracts, foreign currency swap contracts andcurrency option contracts to manage the foreign exchange risk associated withour foreign currency-denominated loans.  

 

***Interest Rate Risk***

 

On a limited basis, we enter into interest rate swapagreements in order to manage our exposure to interest rate fluctuations.  Wemake use of hedging instruments and structures solely for reducing or managingfinancial risks associated with our liabilities and not for trading orspeculative purposes.

 

Fixedrate financial instruments are subject to fair value interest rate risk whilefloating rate financial instruments are subject to cash flow interest raterisk.  

 

Repricingof floating rate financial instruments is mostly done on intervals of threemonths or six months.  Interest on fixed rate financial instruments is fixeduntil maturity of instrument.

 

***Credit Risk***

 

Wetrade only with recognized, creditworthy third parties.  It is our policy thatall customers who wish to trade on credit terms are subject to creditverification procedures.  In addition, receivable balances are monitored on anongoing basis to reduce our exposure to bad debts.

 

Withrespect to credit risk arising from our other financial assets, which comprisecash and cash equivalents, certain derivative instruments, our exposure tocredit risk arises from default of the counterparty, with a maximum exposureequal to the carrying amount of these instruments.

 

Wehave no significant concentrations of credit risk.

 

 

 

24.    Reportable Segments 

* *

Operating segments are components of PLDT that engagein business activities from which it may earn revenues and incur expenses(including revenues and expenses relating to transactions with other componentsof PLDT), whose operating results are regularly reviewed by the enterprise’schief operating decision maker to make decisions about resources to beallocated to the segment and assess its performance, and for which discretefinancial information is available.  The accounting policies of the reportablesegments are the same as those described in *Note 3 – Summary of Significant Accounting Policies and Practices*.

 

Wehave organized our business into three main segments:

 

•        Wireless — wireless telecommunications services provided through our cellularservice providers, Smart and Piltel, SmartBroadband (formerly Meridian Telekoms, Inc.),our wireless broadband provider; Wolfpac, our wireless content operator; andsatellite and VSAT operators, namely PLDT’s subsidiaries Mabuhay Satellite,ACeS Philippines and Telesat;

 

•        Fixed Line — fixed line telecommunications services primarily provided throughPLDT.  We also provide fixed line services through PLDT’s subsidiaries ClarkTelecom, Subic Telecom, Maratel, Piltel and BCC which together account forapproximately 3% of our consolidated fixed lines in service, and PLDT Global;and

 

•        Information and CommunicationsTechnology — information and communications infrastructure and services for internet applications, internetprotocol-based solutions and multimedia content delivery provided by PLDT’ssubsidiary ePLDT; call center services provided under one umbrella brand nameePLDT Ventus, including Parlance and Vocativ; internet access and gamingservices provided by ePLDT’s subsidiaries, Infocom Technologies, Inc., DigitalParadise, Digital Paradise Thailand, netGames and Airborne Access; ande-commerce and IT-related services provided by other investees of ePLDT, asdescribed in *Note 8 - Investments*.

 

The results of the reportable segments are deriveddirectly from the PLDT Group’s management reporting system. The results arebased on the PLDT Group’s method of internal reporting.  The segment assets and results of operations of ourreportable segments as at and for the years ended December 31, 2005, 2004 and2003 reported under U.S. GAAP are as follows:

 

 

**Wireless**

**Fixed Line**

**Information and Communications Technology**

**Inter-segment Transactions**

**Total**

 

(in million pesos)

* *

* *

 

 

 

 

*As at and for the year ended December 31, 2005*

* *

 

 

 

**Revenues**

 

 

 

 

 

Service

74,195

49,431

2,953

(6,231)

120,348

Non-service

2,711

41

352

(117)

2,987

Segment revenues

76,906

49,472

3,305

(6,348)

123,335

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income

37,470

10,640

52

352

48,514

Income before income tax, cumulative effect of change in accounting policy and minority interest in net income of consolidated subsidiaries

40,508

5,205

57

–

45,770

Provision for income tax

(4,285)

(544)

(20)

–

(4,849)

Net income for the year before cumulative effect of change in accounting policy and minority interest in net income of consolidated subsidiaries

36,223

4,661

  37

–

40,921

** **

 

 

 

 

 

Assets

 

 

 

 

 

Segment assets

95,303

188,996

4,355

(42,883)

245,771

Deferred income tax assets

6,735

16,715

(1)

–

23,449

Total assets

102,038

205,711

4,354

(42,883)

269,220

 

 

 

 

 

 

Investments – at equity

–

–

15

–

  15

Goodwill

15,472

426

184

–

16,082

** **

 

** **

** **

** **

** **

Other segment information 

 

** **

** **

** **

** **

Capital expenditures

8,827

6,432

605

–

15,864

Depreciation and amortization

9,200

18,240

415

–

27,855

Provision for doubtful accounts

253

1,944

54

–

2,251

Provision for inventory obsolescence

322

157

–

–

 479

Asset impairment

–

–

11

–

  11

MRP

131

327

–

–

 458

Interest on loans and related items – net of capitalized interest

952

8,639

24

–

 

9,615

Interest income

1,057

385

15

–

1,457

* *

 

* *

* *

* *

* *

*As at and**for the year ended December 31, 2004*

* *

* *

**Revenues**

 

 

 

 

 

Service

68,653

48,546

2,080

(4,375)

114,904

Non-service

6,111

–

321

(163)

6,269

Segment revenues

74,764

48,546

2,401

(4,538)

121,173

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income (loss)

33,166

16,519

(634)

(512)

48,539

Income (loss) before income tax, cumulative effect of change in accounting policy and minority interest in net loss (income) of consolidated subsidiaries

33,463

2,020

(643)

–

34,840

Provision for income tax

(5,967)

(800)

(59)

–

(6,826)

Net income (loss) for the year before cumulative effect of change in accounting policy and minority interest in net loss (income) of consolidated subsidiaries

27,496

1,220

(702)

–

28,014

**Assets**

 

 

 

 

 

Segment assets

89,869

196,300

3,716

(30,871)

259,014

Deferred income tax assets

3,164

16,846

17

–

20,027

Total assets

93,033

213,146

3,733

(30,871)

279,041

 

 

 

 

 

 

Investments – at equity

–

–

8

–

8

Goodwill

15,787

426

187

–

16,400

 

 

 

 

 

 

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

14,742

4,026

500

–

19,268

Depreciation and amortization

10,082

9,677

339

–

20,098

Provision for doubtful accounts

204

3,751

–

–

3,955

Provision for inventory obsolescence

213

361

3

–

 577

Asset impairment

430

365

617

–

1,412

MRP

13

553

–

–

 566

Interest on loans and related items – net of capitalized interest

984

10,137

42

(48)

11,115

Interest income

724

248

18

(48)

 942

 

 

 

 

 

 

*As at and**for the year ended December 31, 2003*

* *

* *

* *

* *

**Revenues**

 

 

 

 

 

Service

54,635

46,820

1,467

(2,436)

100,486

Non-service

10,548

–

316

(150)

10,714

Segment revenues

65,183

46,820

1,783

(2,586)

111,200

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income (loss)

18,919

14,517

(489)

432

33,379

Income (loss) before income tax, cumulative effect of change in accounting policy and minority interest in net loss (income) of consolidated subsidiaries

15,163

(4,911)

(432)

–

9,820

Benefit from (provision for) income tax

(1,672)

3,008

64

–

1,400

Net income (loss) for the year before cumulative effect of change in accounting policy and minority interest in net loss (income) of consolidated subsidiaries

13,491

(1,903)

(368)

–

11,220

** **

 

 

 

 

 

**Assets**

 

 

 

 

 

Segment assets

86,696

190,510

3,040

(24,594)

255,652

Deferred income tax assets

3,092

17,546

74

–

20,712

Total assets

89,788

208,056

3,114

(24,594)

276,364

 

 

 

 

 

 

Investments – at equity

763

–

54

–

817

Goodwill

14,941

426

97

–

15,464

 

 

 

 

 

 

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

11,372

6,393

178

–

17,943

Depreciation and amortization

12,183

9,315

314

–

21,812

Provision for doubtful accounts

72

3,950

70

–

4,092

Provision for inventory obsolescence

87

152

12

–

 251

Asset impairment

288

–

387

–

 675

MRP

–

1,560

5

–

1,565

Interest on loans and related items – net of capitalized interest

1,348

10,034

52

–

11,434

Interest income

368

138

7

–

 513

 

 

 

25.    Other Matters

 

a.     Supplemental Disclosures of Cash Flow Information

 

 

**2005**

2004

2003

 

 (in million pesos)

Cash paid during the year for:

 

 

 

Income tax 

**9,722**

5,478

2,453

Interest:  

** **

 

 

    Capitalized to property, plant and equipment

**504**

595

887

Charged to operations

**10,929**

12,310

11,777

Interest income received

**1,408**

954

484

 

** **

 

 

Supplemental schedule of noncash investing and financing activities:

** **

 

 

Preferred stock subject to mandatory redemption issued

**–**

125

152

Long-term debt restructured

**–**

170

208

 

b.   InterconnectionAgreements

 

PLDThas existing interconnection agreements with nine International GatewayFacilities, or IGF operators, six Inter Exchange Carriers, or IXCs, six CellularMobile Telephone Systems, or CMTS operators, 70 LECs (including members of thePhilippine Association of Private Telephone Companies, Inc.), and 12 paging andtrunk radio operators.  These interconnection agreements include provisions forsettlement and payment of charges.  Settlements with interconnecting IGFoperators and CMTS operators for local calls are in the form of accesscharges.  Settlement with interconnecting IXCs and LECs for toll calls arebased on hauling and access charges, and to some extent, revenue sharing.Settlement also involves payment of access charges, but settlement for tollcalls is on a revenue-sharing basis.  LEC to LEC interconnection with haulingfrom one service area to another service area is settled based on trunk charges,while overlay LEC to LEC interconnection in a given service area is withoutcharges.  Paging and trunk radio interconnection settlements are based on fixedcharges.  

 

c.       Proposed Metering of Local Exchange Service

 

Theproposed metering of PLDT’s local exchange service has been temporarilysuspended for further review by the NTC.

 

d.       U.S. Federal Communications Commission, orFCC, Ruling versus Philippine Telecommunications Companies

 

Effectiveas at February 1, 2003, PLDT stopped terminating traffic sent directly by eachof AT&T and MCI, because PLDT’s termination rate agreements with AT&Tand MCI lapsed in December 2002 without either agreeing with PLDT on anyprovisional arrangement or final agreement on new termination rates.  In separateorders dated February 7 and 26, 2003, the NTC confirmed that “absent anyprovisional or interim agreement” with U.S. carriers, there would be noprovision of termination services between the parties “who are therebyencouraged to seek other routes or options to terminate traffic to the Philippines.”  Upon petitions of AT&T and MCI, on March 10, 2003, the InternationalBureau of the U.S. FCC issued an Order which directed all facilities-basedcarriers subject to U.S. FCC jurisdiction to suspend payments for terminationservices to Philippine carriers, including PLDT, Smart and Subic Telecom, untilsuch time as the U.S. FCC issued a Public Notice that AT&T’s and MCI’scircuits on the U.S.-Philippine route were fully restored.  The Order alsoremoved the Philippines from the list of U.S.-international routes approved forthe provision of International Simple Resale, or ISR.  In response to theInternational Bureau’s Order, the NTC issued a Memorandum Order dated March 12,2003, directing all affected Philippine carriers “(1) not to accept terminatingtraffic via direct circuits from U.S. facilities-based carriers who do not payPhilippine carriers for services rendered; and (2) to take all measuresnecessary to collect payments for services rendered in order to preserve theviability, efficiency, sustained growth and development and continuedcompetitiveness of the Philippine telecommunications industry.”

 

OnOctober 17, 2003, based on negotiations between the NTC and the U.S. FCC toresolve the issue regarding termination rates, the NTC, in the expectation thatthe U.S. FCC would fully lift the March 10, 2003 Order, lifted its March 12,2003 Order and directed all Philippine carriers to immediately acceptterminating traffic via direct circuits from U.S. facilities-based carriers atmutually acceptable final or interim termination rates and other terms andconditions agreed upon by the parties.

 

OnNovember 17, 2003, after Smart reached interim agreements with each of AT&Tand MCI on September 30 and November 12, 2003, respectively, the InternationalBureau of the U.S. FCC lifted its March 10, 2003 Order with respect to Smartand ordered the U.S. carriers to resume making payments to Smart.

 

On January 15, 2004, after PLDT reached interimagreements with each of MCI and AT&T and reopened its circuits with thesecarriers on November 12, 2003 and January 9, 2004, respectively, theInternational Bureau of the U.S. FCC lifted its March 10, 2003 Order also withrespect to PLDT and ordered the U.S. carriers to resume making payments toPLDT.

 

OnMay 13, 2004, the U.S. FCC partially dismissed and partially deniedapplications by Philippine carriers, including PLDT, and certain U.S. carriersfor review of the March 10, 2003 Order of the International Bureau of the U.S.FCC.  In particular, the U.S. FCC affirmed the March 10, 2003 Order’s findingthat “Philippine carriers engaged in collective action to “whipsaw” AT&Tand MCI.” The U.S. FCC stated, however, that the findings of the March 10, 2003Order were not findings under the U.S. anti-trust laws and that the U.S.Department of Justice is independently “investigating the possibility ofanticompetitive practices among Philippine carriers under its authoritypursuant to U.S. anti-trust laws.”  The U.S. FCC also upheld the March 10, 2003Order in respect of the suspension of payments for termination services to thePhilippine carriers pending restoration of the circuits.  In addition, the U.S.FCC denied a request to modify the March 10, 2003 Order of the InternationalBureau of the U.S. FCC to restore the Philippines to the list ofU.S.-international routes approved for the provision of ISR.  The U.S. FCCstated that it was dismissing this request as moot because of the U.S. FCC’srecently adopted International Settlements Policy Reform Order which eliminatedISR policies.

 

Althoughnot included in the initial list of countries exempted from the U.S. FCC’sInternational Settlements Policy, or ISP, the U.S. FCC identified theU.S.-Philippines route as eligible for being removed from the ISP in accordancewith its newly established procedures for doing so.  Under this procedure, theU.S. FCC asked for public comment on the removal of the Philippines from the ISP.  In comments filed in June and July 2004, removal was supported by severalPhilippine and U.S. carriers, including AT&T and MCI, and was opposed byone U.S. carrier, International Access, Inc.  In November 2004, the U.S. FCCexempted a number of additional countries from the ISP, but not the Philippines.  Instead, the U.S. FCC stated that it would rule separately regarding the Philippines after reviewing the issues raised by International Access, Inc.

 

OnJuly 6, 2004, PLDT filed with the U.S. FCC a petition for reconsideration ofthe U.S. FCC’s May 13, 2004 Order on the grounds that the order should havevacated as moot the International Bureau’s March 10, 2003 Order.

 

In a decision dated August 15, 2005, the U.S. FCC: (1)denied PLDT’s petition for reconsideration of the May 13, 2004 Order withrespect to the finding that PLDT and other Philippine carriers, in raisingtheir rates for termination of international calls from the U.S., “whipsawed”AT&T and MCI; and (2) removed the U.S.-Philippines route from therestrictions of the U.S. FCC’s ISP as applied to the termination of suchtraffic from the U.S.  In so doing, the U.S. FCC also found that separateallegations made by International Access, Inc. against PLDT failed todemonstrate competitive concerns regarding the U.S.-Philippines route thatwould warrant retaining the restrictions of the ISP.

 

e.   Investigation by U.S. Department of Justice

 

InJanuary 2004, PLDT received a grand jury subpoena seeking documents and a PLDTemployee was subpoenaed to testify before the grand jury in connection with acriminal investigation being conducted by the U.S. Department of Justice, orU.S. DOJ, with respect to alleged anti-trust violations relating to theprovision of international termination services in the Philippines.  The U.S. DOJ has also requested testimony and documents from Smart in connection withthis investigation.  Further, in March 2004, PLDT (U.S.) Ltd., a subsidiary ofPLDT Global, received a grand jury subpoena seeking documents, in response towhich PLDT (U.S.) Ltd. produced documents.  In February 2005, two formeremployees of PLDT (U.S.) Ltd. testified before the grand jury in the U.S. DOJmatter.  A PLDT employee was also scheduled to reappear for testimony inFebruary, but his appearance has been postponed.  On May 11, 2005, the U.S. DOJinformed our legal counsel in Washington, D.C., Covington & Burling, thatthe U.S. DOJ has terminated its anti-trust investigation relating totermination rate increases implemented in early 2003 by certain Philippine longdistance carriers including PLDT and that no enforcement action will be taken.

 

f.    Employeesand Labor Relations

 

Asat December 31, 2005, we had 18,926 employees within the PLDT Group.  PLDT had 9,013employees at the end of 2005, of which 46% were rank and file employees, 50%were management/supervisory staff and 4% were executives.  This numberrepresents a decrease of 463 employees, or approximately 5%, from the stafflevel as at the end of 2004, mainly as a result of the ongoing MRP.  From apeak of 20,312 at the end of 1994, PLDT’s number of employees has declined by 11,299,or 56%, by the end of 2005.  As at December 31, 2004, we had 18,433 and 9,476 employeesunder the PLDT Group and PLDT, respectively.  

 

PLDThas three employee unions, the members of which in the aggregate represent 38%of the employees of the PLDT Group.  We consider our relationship with ourrank-and-file employees’ union, our supervisors’ union and our salessupervisors’ union to be good.

 

On March 8, 2005, PLDT and PLDT Sales Supervisors’Union, or PSSU, concluded and signed a new three-year Collective BargainingAgreement, or CBA, covering the period from January 1, 2005 to December 31,2007.  This CBA provides each member monthly salary increases of 8% of basicpay or Php2,000, whichever is higher, for the first year; 10% of basic pay orPhp2,700, whichever is higher, for the second year; and another 10% of basicpay or Php2,400, whichever is higher, for the third year.  Other highlights ofthis CBA were improvements of existing benefits and a one-time signing bonus ofPhp33,000, including a Php3,000 goodwill bonus, for each member of PSSU.Furthermore, a Php4,000 one-time clothing allowance was also provided under theCBA.  

 

On January 20, 2005, PLDT and *Gabay ng Unyon saTelekomunikasyon ng mga Superbisor*, or GUTS, our supervisors’ union,concluded and signed a new three-year CBA covering the period from January 1,2005 to December 31, 2007.  This CBA provides each member monthly salaryincreases of 8% of basic pay or Php2,000, whichever is higher, for 2005; 10% ofbasic pay or Php2,700, whichever is higher, for 2006; and another 10% of basicpay or Php2,400, whichever is higher, for 2007.  Other highlights of this CBA areimprovements of existing benefits and a one-time signing bonus of Php33,000,including a Php3,000 goodwill bonus, for each member of GUTS.

 

OnFebruary 13, 2004, PLDT and the *Manggagawa ng Komunikasyon sa Pilipinas*,or MKP, our rank-and-file employees’ union, concluded and signed a newthree-year CBA covering the period from November 9, 2003 to November 8, 2006.This CBA provides each member a signing bonus equivalent to one month salaryplus Php10,000; monthly salary increases of Php1,800, Php1,850 and Php2,450 forthe first year, second year and third year, respectively; an increase inmonthly relay station allowance from Php500 to Php600; an increase in per diemfrom Php500 to Php570; a food station allowance of Php650 per covered employee;an increase in yearly Christmas gift certificate from Php6,000 to Php7,000; anincrease in the amount of coverage under the group life insurance plan fromPhp400,000 to Php500,000; and an additional contribution of Php1 million to theEducational Loan Fund.  Other highlights of this CBA include emergency loaneligibility, an emergency case hospitalization clause and additional benefitsunder the medical hospitalization plan for single members’ dependents.

 

Inconnection with the separation from service in 2002 of 322 employees who wereengaged in operator-assisted call-handling units, due to redundancies, MKPbrought an unfair labor practice case before the National Labor RelationsCommission, or NLRC, assailing the legality of the implemented redundancy.  OnOctober 28, 2005, the NLRC dismissed the unfair labor practice case ruling infavor of the validity of the redundancy.

 

g.   ePLDT’s Acquisition ofLevel Up!

 

OnFebruary 16, 2006, ePLDT acquired a 60% equity interest in Level Up!, a leadingpublisher of online games in the Philippines with about an 80% share of theonline gaming market.  The acquisition of Level Up!, together withnetGames, ePLDT’s online gaming subsidiary, will strengthen the position ofePLDT as the dominant online gaming company in the country.

 

h.   ePLDT’sInvestment in Philweb

 

On May 5, 2006, ePLDT and Philweb Corporation, orPhilweb, signed an investment agreement and subscription agreement for ePLDT toinvest in and subscribe to newly issued common shares equivalent to 20% ofPhilweb’s outstanding common stock for an aggregate amount of Php502.4million.  Philweb is primarily engaged in Internet-based gaming and iscurrently expected to enable the PLDT Group to gain a firm hold on legitimategaming content for the PLDT Group’s cellular, fixed line and wireless broadbandbusinesses thereby increasing the PLDT Group’s usage of its various network resources.

 

i.    ePLDT’sProposed Acquisition of SPI Technologies

 

On May 25, 2006, we announced that ePLDT and SPI Tech,L.P. entered into a non-binding letter of interest in respect of a potentialacquisition by ePLDT of 100% of SPI Technologies, Inc., or SPI, one of theleading pure-play business process outsourcing, or BPO, companies andindependent BPO service providers in the world.  We currently expect to useinternally generated cash funds to finance the possible acquisition by ePLDT ofSPI.  We believe that the possible acquisition of SPI would solidify ePLDT’sposition as one of the largest full service BPO companies.   However, there is no obligation on the parties to negotiatedefinitive transaction documents and thereis no assurance whether and on which terms the possible acquisition of SPI willbe implemented and, if implemented, whether we will be able to realize any or all of the currently anticipatedbenefits of such acquisition.

 

 

 

**26.    Changes in Presentationof Comparative Consolidated Financial Statements**

 

We have reclassified certainaccounts in 2004 and 2003 consolidated financial statements to conform with our2005 consolidated financial statements presentation.