**SECURITIES AND EXCHANGE COMMISSION**

**Washington****, D.C.****20549**

** **

**FORM 6 -K**

** **

**Report of Foreign Private Issuer**

** **

**Pursuant to Rule 13a-16 or 15d-16**

**Of the Securities Exchange Act of 1934**

** **

**For the month of August 2006, whichincludes financial statements for the six months ended June 30, 2006**

** **

**Commission File Number 1-03006**

** **

**Philippine Long Distance Telephone Company**

(Exact Name of Registrant as specified in its Charter)

 

**Ramon****Cojuangco Building**

**Makati Avenue**

**Makati****City**

**Philippines**

(Address of principal executive offices)

 

(Indicate by check mark whether the registrant filesor will file annual reports under cover of Form 20-F or Form 40-F.)

 

| Form 20-F:  √ | Form 40-F: |
|---------------------|------------|

 

(Indicate by check mark whether by furnishing theinformation contained in this form, the registrant is also thereby furnishingthe information to the commission pursuant to Rule 12g3-2(b) under theSecurities Exchange Act 1934.)

 

| Yes: | No: √ |
|------|-------------|

 

(If “Yes” is marked, indicate below the file numberassigned to the registrant in connection with Rule 12g3-2(b):  82-_____)

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Six Months Ended June 30, 2006

* *

*Inthe following discussion and analysis of our financial condition and results ofoperations, unless the context indicates or otherwise requires, references to“we,” “us,” “our” or “PLDT Group” mean the Philippine Long Distance TelephoneCompany and its consolidated subsidiaries, and references to “PLDT” mean thePhilippine Long Distance Telephone Company, not including its consolidatedsubsidiaries (see Note 2 – Summary of Significant Accounting Policies andPractices to the accompanying unaudited consolidated financial statements for alist of these subsidiaries, including a description of their respectiveprincipal business activities).*

* *

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the accompanying unauditedconsolidated financial statements and the related notes.  Our financialstatements, and the financial information discussed below, have been preparedin accordance with Philippine generally accepted accounting principles, orPhilippine GAAP, which differ in certain significant respects from generallyaccepted accounting principles in the United States.*

* *

*Thefinancial information appearing in this report and in the accompanying unauditedconsolidated financial statements is stated in Philippine pesos.  Allreferences to “pesos,” “Philippine pesos” or “Php” are to the lawful currencyof the Philippines; all references to “U.S. dollars,” “US$” or “dollars” 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 thelawful currency of the European Union**.  Translations of Philippine pesoamounts into U.S. dollars in this report and in the accompanying unauditedconsolidated financial statements were made based on the exchange rate of Php53.220to US$1.00, the volume weighted average exchange rate at June 30, 2006 quotedthrough the Philippine Dealing System.*

* *

*Someinformation in this report may contain forward-looking statements within themeaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E ofthe U.S. Securities Exchange Act of 1934.  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, and we believe that they are reasonable in all materialrespects.  However, we caution you that forward-looking statements and assumedfacts or bases almost always vary from actual results, and the differencesbetween the results implied by the forward-looking statements and assumed factsor bases and actual results can be material, depending on the circumstances.When considering forward-looking statements, you should keep in mind thedescription of risks and cautionary statements in this report.  You should alsokeep in mind that any forward-looking statement made by us in this report orelsewhere speaks only as at the date on which we made it.  New risks anduncertainties come up from time to time, and it is impossible for us to predictthese events or how they may affect us.  We have no duty to, and do not intendto, update or revise the forward-looking statements in this report after thedate hereof.  In light of these risks and uncertainties, any forward-lookingstatement made in this report or elsewhere might not occur.*

* *

**Financial Highlights and Key Performance Indicators**

* *

| ** **                                                                               | **June 30,**                  | ** ** | **December 31,**        | ** ** | **Increase (Decrease)** |
|------------------------------------------------------------------------------------------|-------------------------------|------------|-------------------------|------------|-------------------------|
|                                                                                     | **2006**                      |       | **2005**                | ** ** | **Amount**              | ** ** | **%** |
| (in millions, except for operational data, exchange rates and earnings per common share) | (Unaudited)                   |       | (Audited)               |       |                    |   |   |
| **Consolidated Balance Sheets**                                                          |                          |       |                    |       |                    |   |   |
| Total assets                                                                             | Php244,771                    |       | Php249,713              |       | (Php4,942)              |   | (2) |
| Property, plant and equipment                                                            | 173,832                       |       | 176,974                 |       | (3,142)                 |   | (2) |
| Cash and cash equivalents and short-term investments                                     | 29,138                        |       | 32,810                  |       | (3,672)                 |   | (11) |
| Total equity                                                                             | 85,870                        |       | 74,369                  |       | 11,501                  |   | 15 |
| Interest-bearing financial liabilities                                                   | 101,642                       |       | 116,616                 |       | (14,974)                |   | (13) |
| *Notes payable and long-term debt*                                                       | *90,691*                      | * *   | *103,544*               | * *   | *(12,853)*              | * * | *(12)* |
| Net debt to equity ratio(1)                                                              | 0.72x                         |       | 0.95x                   |       | –                  |   | – |
| ** **                                                                               | ** **                    |
| ** **                                                                               | **Six Months Ended June 30,** | ** ** | **Increase (Decrease)** |
|                                                                                     | **2006**                      |       | **2005**                | ** ** | **Amount**              | ** ** | **%** |
|                                                                                     | (Unaudited)                   |
| **Consolidated Statements of Income**                                                    | ** **                    | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** |
| Revenues and other income                                                                | Php62,361                     |       | Php61,138               |       | Php1,223                |   | 2 |
| Expenses                                                                                 | 43,736                        |       | 39,103                  |       | 4,633                   |   | 12 |
| Income before income tax                                                                 | 18,625                        |       | 22,035                  |       | (3,410)                 |   | (15) |
| Net income attributable to equity holders of PLDT                                        | 15,306                        |       | 16,520                  |       | (1,214)                 |   | (7) |
| Net income                                                                               | 15,639                        |       | 16,552                  |       | (913)                   |   | (6) |
| Net income margin                                                                        | 25%                           |       | 27%                     |       | –                  |   | – |
| Earnings per common share – basic                                                   | 83.02                         |       | 92.44                   |       | (9.42)                  |   | (10) |
| **Consolidated Statements of Cash Flows**                                                |                          |       |                    |       |                    |   |   |
| Net cash provided by operating activities                                                | 33,601                        |       | 35,151                  |       | (1,550)                 |   | (4) |
| Net cash used in investing activities                                                    | 13,898                        |       | 2,220                   |       | 11,678                  |   | 526 |
| *Capital expenditures*                                                                   | *12,385*                      | * *   | *7,012*                 | * *   | *5,373*                 | * * | *77* |
| Net cash used in financing activities                                                    | 23,943                        |       | 24,528                  |       | (585)                   |   | (2) |
| **Operational Data**                                                                     | ** **                    | ** ** | ** **              | ** ** | ** **              | ** ** | ** ** |
| Number of cellular subscribers                                                           | 22,465,156                    |       | 20,789,469              |       | 1,675,687               |   | 8 |
| Number of fixed lines in service                                                         | 2,070,721                     |       | 2,137,813               |       | (67,092)                |   | (3) |
| Number of broadband subscribers                                                          | 173,693                       |       | 66,877                  |       | 106,816                 |   | 160 |
| *Fixed Line*                                                                             | *115,867*                     | * *   | *64,824*                | * *   | *51,043*                | * * | *79* |
| *Wireless*                                                                               | *57,826*                      | * *   | *2,053*                 | * *   | *55,773*                | * * | *2,717* |
| Number of employees                                                                      | 20,618                        |       | 18,649                  |       | 1,969                   |   | 11 |
| *Fixed Line*                                                                             | *9,149*                       | * *   | *9,582*                 | * *   | *(433)*                 | * * | *(5)* |
| *Wireless*                                                                               | *5,189*                       | * *   | *5,156*                 | * *   | *33*                    | * * | *1* |
| *ICT*                                                                                    | *6,280*                       | * *   | *3,911*                 | * *   | *2,369*                 | * * | *61* |

 

| **Exchange Rates** | **Php per US$** |   | **Php per JP¥** |
|--------------------|-----------------|--------|---------------------|
|               |            |   |                |
| June 30, 2006      | Php53.220       |   | Php0.4650           |
| December 31, 2005  | 53.062          |   | 0.4504              |
| June 30, 2005      | 56.177          |   | 0.5067              |
| December 31, 2004  | 56.341          |   | 0.5495              |

______________

* *

*(1)    **Net debt is derived bydeducting cash and cash equivalents and short-term investments from long-termdebt.*

 

**Overview**

 

We are the largest andmost diversified telecommunications company in the Philippines.  We haveorganized our business into three main segments:

 

•           *Wireless**—***wirelesstelecommunications services provided by Smart Communications, Inc., or Smart,and Pilipino Telephone Corporation, or Piltel, our cellular service providers; SmartBroadband, Inc., or Smart Broadband (formerlyknown as Meridian Telekoms, Inc., or Meridian), our wireless broadbandprovider; Wolfpac Mobile, Inc., or Wolfpac, our wireless content operator,Mabuhay Satellite Corporation, or Mabuhay Satellite, ACeS Philippines CellularSatellite Corporation, or ACeS Philippines, and Telesat, Inc., or Telesat, oursatellite and very small aperture terminal, or VSAT, operators;**

 

•           *Fixed Line**—***fixed linetelecommunications services are primarily provided through PLDT.  We alsoprovide fixed line services through PLDT’s subsidiaries PLDT Clark Telecom,Inc., Subic Telecommunications Company, Inc., PLDT-Maratel, Inc., Piltel andBonifacio Communications Corporation, which together account for approximately3% of our consolidated fixed lines in service, and PLDT Global Corporation, orPLDT Global; and

 

•           *Information and CommunicationsTechnology**—***informationand communications infrastructure and services for Internet applications, Internetprotocol-based solutions and multimedia content delivery provided by PLDT’ssubsidiary ePLDT, Inc., or ePLDT; call center services provided under oneumbrella brand name *ePLDT Ventus*, including Parlance Systems, Inc., orParlance and Vocativ Systems, Inc., or Vocativ; Internet access and gamingservices provided by ePLDT’s subsidiaries, Infocom Technologies, Inc. orInfocom, Digital Paradise, Inc., or Digital Paradise, Digital ParadiseThailand, Ltd., or Digital Paradise Thailand, netGames, Inc., or netGames, AirborneAccess Corporation, or Airborne Access and Level Up!, Inc., or Level Up!; ande-commerce, and IT-related services provided by other investees of ePLDT, asdiscussed in *Note 9 – Investments in Associates* to the accompanying unauditedconsolidated financial statements. 

** **

We registered totalrevenues and other income of Php62,361 million in the first half of 2006, an increaseof Php1,223 million, or 2%, as compared to Php61,138 million in the same periodin 2005 primarily due to an increase in our service revenues and other incomeof Php1,097 million and Php165 million, respectively, partially offset by a declinein our non-service revenues of Php39 million.  

 

Expenses increased byPhp4,633 million, or 12%, to Php43,736 million in the first half of 2006 fromPhp39,103 million in the same period in 2005, largely resulting from increasesin depreciation and amortization, and financing costs partly offset by lowercost of sales.

 

As a result of theforegoing, net income attributable to equity holders of PLDT decreased by Php1,214million, or 7%, to Php15,306 million in the first half of 2006 from Php16,520million in the same period in 2005.  Consequently, basic earnings per common sharedecreased by 10% to Php83.02 in the first half of 2006 from Php92.44 in thesame period in 2005.

 

**Results of Operations**

** **

The table below shows the contribution by each of ourbusiness segments to our revenues and other income, expenses and net income forthe six months ended June 30, 2006 and 2005.  Most of our revenues are derivedfrom our operations within the Philippines.

** **

|                                                    | **Wireless** | ** ** | ** ** | ** ** | **Fixed Line** | ** ** | ** ** | ** ** | **ICT**    | ** ** |   | ** ** | **Inter-segment Transactions** | ** ** | **Total**  | ** ** | ** ** |
|---------------------------------------------------------|--------------|------------|------------|------------|----------------|------------|------------|------------|------------|------------|--------|------------|--------------------------------|------------|------------|------------|------------|
| **(in millions)**                                       |         |       |       |       |           |       |       |       |       |       |   |       |                           |       |       |       |       |
| **For the six months ended  June 30, 2006**(Unaudited)  |         |       |       |       |           |       |       |       |       |       |   |       |                           |       |       |       |       |
| Revenues and other income                               | Php39,912    |       |       |       | Php24,318      |       |       |       | Php2,011   |       |   |       | (Php3,880)                     |       | Php62,361  |       |       |
| Service                                                 | 38,591       |       |       |       | 24,053         |       |       |       | 1,812      |       |   |       | (3,816)                        |       | 60,640     |       |       |
| Non-service                                             | 1,188        |       |       |       | 36             |       |       |       | 172        |       |   |       | (13)                           |       | 1,383      |       |       |
| Equity share in net income of associates                | –       |       |       |       | –         |       |       |       | 3          |       |   |       | –                         |       | 3          |       |       |
| Other income                                            | 133          |       |       |       | 229            |       |       |       | 24         |       |   |       | (51)                           |       | 335        |       |       |
| Expenses                                                | 21,658       |       |       |       | 24,022         |       |       |       | 1,936      |       |   |       | (3,880)                        |       | 43,736     |       |       |
| Income before income tax                                | 18,254       |       |       |       | 296            |       |       |       | 75         |       |   |       | –                         |       | 18,625     |       |       |
| Net income for the period                               | 15,301       |       |       |       | 251            |       |       |       | 87         |       |   |       | –                         |       | 15,639     |       |       |
| Net income attributable to  equity holders of PLDT      | 14,927       |       |       |       | 251            |       |       |       | 128        |       |   |       | –                         |       | 15,306     |       |       |
| ** **                                              |         |       |       |       |           |       |       |       |       |       |   |       |                           |       |       |       |       |
| **For the six months ended  June 30, 2005** (Unaudited) |         |       |       |       |           |       |       |       |       |       |   |       |                           |       |       |       |       |
| Revenues and other income                               | 37,831       |       |       |       | 24,336         |       |       |       | 1,587      |       |   |       | (2,616)                        |       | 61,138     |       |       |
| Service                                                 | 36,483       |       |       |       | 24,235         |       |       |       | 1,328      |       |   |       | (2,503)                        |       | 59,543     |       |       |
| Non-service                                             | 1,291        |       |       |       | –         |       |       |       | 215        |       |   |       | (84)                           |       | 1,422      |       |       |
| Equity share in net income of associates                | –       |       |       |       | –         |       |       |       | 3          |       |   |       | –                         |       | 3          |       |       |
| Other income                                            | 57           |       |       |       | 101            |       |       |       | 41         |       |   |       | (29)                           |       | 170        |       |       |
| Expenses                                                | 20,305       |       |       |       | 19,896         |       |       |       | 1,518      |       |   |       | (2,616)                        |       | 39,103     |       |       |
| Income before income tax                                | 17,526       |       |       |       | 4,440          |       |       |       | 69         |       |   |       | –                         |       | 22,035     |       |       |
| Net income for the period                               | 13,330       |       |       |       | 3,159          |       |       |       | 63         |       |   |       | –                         |       | 16,552     |       |       |
| Net income attributable to  equity holders of PLDT      | 13,279       |       |       |       | 3,158          |       |       |       | 83         |       |   |       | –                         |       | 16,520     |       |       |
|                                                    |         |       |       |       |           |       |       |       |       |       |   |       |                           |       |       |       |       |
| **Increase (Decrease)**                                 | **Amount**   | ** ** | **%**      |       | **Amount**     |       | **%**      |       | **Amount** |       | **%**  |       | **Amount**                     |       | **Amount** |       | **%**      |
|                                                    |         |       |       |       |           |       |       |       |       |       |   |       |                           |       |       |       |       |
| Revenues and other income                               | Php2,081     |       | 6          |       | (Php18)        |       | –     |       | Php424     |       | 27     |       | (Php1,264)                     |       | Php1,223   |       | 2          |
| Service                                                 | 2,108        |       | 6          |       | (182)          |       | (1)        |       | 484        |       | 36     |       | (1,313)                        |       | 1,097      |       | 2          |
| Non-service                                             | (103)        |       | (8)        |       | 36             |       | 100        |       | (43)       |       | (20)   |       | 71                             |       | (39)       |       | (3)        |
| Other income                                            | 76           |       | 133        |       | 128            |       | 127        |       | (17)       |       | (41)   |       | (22)                           |       | 165        |       | 97         |
| Expenses                                                | 1,353        |       | 7          |       | 4,126          |       | 21         |       | 418        |       | 28     |       | (1,264)                        |       | 4,633      |       | 12         |
| Income before income tax                                | 728          |       | 4          |       | (4,144)        |       | (93)       |       | 6          |       | 9      |       | –                         |       | (3,410)    |       | (15)       |
| Net income for the period                               | 1,971        |       | 15         |       | (2,908)        |       | (92)       |       | 24         |       | 38     |       | –                         |       | (913)      |       | (6)        |
| Net income attributable to  equity holders of PLDT      | 1,648        |       | 12         |       | (2,907)        |       | (92)       |       | 45         |       | 54     |       | –                         |       | (1,214)    |       | (7)        |
|                                                         |              |            |            |            |                |            |            |            |            |            |        |            |                                |            |            |            |            |  |  |

* *

**Wireless**

* *

Revenues and Other Income
 

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

 

The following table summarizes our service andnon-service revenues and other income from our wireless business for the six monthsended June 30, 2006 and 2005 by service segment:

 

** **

**Six Months Ended June 30,**

 
** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 
** **

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

**(in millions)**

(Unaudited)

 
Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php37,076

 

93

 

Php35,233

 

93

 

Php1,843

 

5

Wireless broadband, satellite, VSAT and others

1,515

 

4

 

1,250

 

3

 

265

 

21

 

38,591

 

97

 

36,483

 

96

 

2,108

 

6

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

1,188

 

3

 

1,291

 

4

 

(103)

 

(8)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

133

 

–

 

57

 

–

 

76

 

133

 

 

 

 

 

 

 

 

 

 

 

 

Total Wireless Revenues and Other Income

Php39,912

 

100

 

Php37,831

 

100

 

Php2,081

 

6

 

*Service Revenues*

 

Our wireless servicerevenues increased by Php2,108 million, or 6%, to Php38,591 million in thefirst half of 2006 compared to Php36,483 million in the same period in 2005,mainly as a result of the growth of Smart’s and Piltel’s subscriber base, anincrease in international inbound revenues and reductions in domestic interconnectioncosts due to a shift from off-network to on-network voice and data usage.  As apercentage of our total wireless revenues and other income, service revenues increasedto 97% in the first half of 2006 compared to 96% in the same period in 2005. 

 

*Cellular Service*

 

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 content costs and discountsgiven 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 servicerevenues in the first half of 2006 amounted to Php37,076 million, an increaseof Php1,843 million, or 5%, from Php35,233 million in the same period in 2005.Cellular service revenues accounted for 96% and 97% of our wireless service revenuesin the first half of 2006 and 2005, respectively.  

 

As at June 30, 2006,Smart and Piltel cellular subscribers reached 22,465,156, an increase of 1,675,687,or 8%, over their combined cellular subscriber base of 20,789,469 as at June 30,2005.  Prepaid subscribers accounted for 99% of our total subscriber base as atJune 30, 2006 and 2005.  Prepaid and postpaid subscribers totaled 22,168,122and 297,034 as at June 30, 2006, reflecting net subscriber activations of 2,039,579and 16,956, respectively, in the first half of 2006.  

 

Smartmarkets nationwide cellular communications services under the brand names *SmartBuddy, Smart Gold,**addict mobile,**addict mobile prepaid*, or *amp*,*Smart Infinity*and*Smart Kid prepaid.  Smart Buddy, amp*and *SmartKid prepaid* are prepaid services while *Smart Gold, Smart Infinity*and *addict mobile* are postpaid services, which are all provided throughSmart's digital network.  Piltel marketsits cellular prepaid service under the brand name *Talk ‘N Text* which isprovided through Smart’s network.

 

BeginningMarch 11, 2005, Smart launched a series of promotions to test the market demandfor fixed rate or “bucket” plans for voice and text services.  Under a servicebranded as *Smart 258*, Smart and *Talk ‘N Text* subscribers had the optionto register for unlimited on-network(Smart-to-Smart) voice calls or unlimited on-network (Smart-to-Smart) textmessaging service.  Since launch, the promotion has taken on several variationsinvolving changes in load denominations, the periods of network availability(peak/off-peak) as well as a “double text” variation.

 

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 valid within 24 hours. 

 

 

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

 

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.Commercial rates were introduced on May 1, 2006 along with new and expanded 3Gservices.  As at June 30, 2006, we offered the following rates for our service:

 

•        Smart-to-Smart video calls arecharged Php6.50 per call (same as voice calls) while international video calls,initially available in three countries, are priced similarly to a regular IDDcall 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 clips, 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.

 

On April 1, 2006,Smart rolled out *Smart Click*, a chain of mobile Internet cafés.  *SmartClick* Internet cafés are currently housed in air-conditioned 40-footcontainer vans and designed to provide remote communities with high-speed,wireless Internet access nationwide.  *Smart Click* has established 18mobile Internet cafés to-date. 

 

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.  OnMay 1, 2006, the number of messages allocated for the 10-message load wasincreased to 15.  This promotion offering the additional five messages has beenextended until June 30, 2006.

 

OnJune 25, 2006, Smart launched another variety of top-ups called *Unli*(shortfor “unlimited”).  *Unli* allows for unlimited on-network texting withoutneed for registration.  The *Unli 30* has a Php30 load denomination withan expiration period of two days.  The *Unli 40* load denomination offersunlimited on-network texting plus five additional on-network/off-network SMSand two three-minute Smart-to-Smart calls and is also valid for two days.

 

The following table summarizes key measures of ourcellular business as at and for the six months ended June 30, 2006 and 2005:

 

** **

**Six Months Ended June 30,**

** **

** **

** **

** **

** **

**Increase**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

**(in millions)**

(Unaudited)

 

 

 

 

 

 

 

 

Cellular service revenues 

Php37,076

 

Php35,233

 

Php1,843

 

5

 

 

 

 

 

 

 

 

*By component*

*36,096*

* *

*34,331*

* *

*1,765*

* *

*5*

Voice 

17,343

 

16,890

 

453

 

3

Data

18,753

 

17,441

 

1,312

 

8

* *

* *

* *

* *

* *

* *

* *

* *

*By service type*

*36,096*

* *

*34,331*

* *

*1,765*

* *

*5*

Prepaid

33,693

 

32,224

 

1,469

 

5

Postpaid

2,403

 

2,107

 

296

 

14

* *

* *

* *

* *

* *

* *

* *

* *

*Others*(1)

*980*

* *

*902*

* *

*78*

* *

*9*

______________

 

 

 

 

 

 

 

* *

*(1)    **Refers to othernon-subscriber-related revenues consisting primarily of inbound internationalroaming fees, revenues from Smart’s public calling offices and payphonebusinesses, revenues from Wolfpac and Smart Money Holdings Corporation and asmall number of leased line contracts.*

 

 

**June 30,**

** **

** **

** **

** **

** **

**Increase**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Cellular subscriber base 

22,465,156

 

20,789,469

 

1,675,687

 

8

Prepaid 

22,168,122

 

20,521,216

 

1,646,906

 

8

Smart 

16,107,431

 

15,556,780

 

550,651

 

4

Piltel

6,060,691

 

4,964,436

 

1,096,255

 

22

Postpaid

297,034

 

268,253

 

28,781

 

11

 

** **

 

**Six Months Ended June 30,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**(1)

** **

**Amount**

** **

**%**

 

(Unaudited)

Systemwide traffic volumes (in millions)

 

 

 

 

 

 

 

Calls (in minutes) 

2,832

 

2,647

 

185

 

7

Domestic  

1,769

 

1,912

 

(143)

 

(7)

International

1,063

 

735

 

328

 

45

Inbound

982

 

649

 

333

 

51

Outbound

81

 

86

 

(5)

 

(6)

 

 

 

 

 

 

 

 

Text messages 

 

 

 

 

 

 

 

Standard

18,008

 

20,778

 

(2,770)

 

(13)

*258* Unlimited 

91,851     

 

13,829

 

78,022

 

564

__________

*(1)   Smart 258**Unlimited Call and Text promotion was launched onMarch 11, 2005.*

* *

*VoiceServices*

 

Cellular revenues fromvoice services, which include all voice traffic and voice value-added servicessuch as voice mail and international roaming, increased by Php453 million toPhp17,343 million in the first half of 2006 from Php16,890 million in the sameperiod in 2005 primarily due to an increase in international inbound revenuepartly offset by a decrease in domestic voice revenues.  The decline indomestic voice revenue may be attributed to the shift of certain subscribers tobucket plans or unlimited text service due to its economic advantages.

 

Air time rates for postpaid subscribers vary depending on thetype of postpaid plan selected by subscribers.  

 

*Data Services*

 

Cellularrevenues from data services, whichinclude all text messaging-related services as well as value-added services,increased by Php1,312 million, or 8%, to Php18,753 million in the first half of2006 from Php17,441 million in the same period in 2005.  Cellular data servicesaccounted for 51% of cellular service revenues in the first half of 2006,compared to 50% in the same period in 2005.  

 

The following table shows the breakdown of cellulardata revenues for the six months ended June 30, 2006 and 2005:

* *

** **

**Six Months Ended June 30,**

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

** **

** **

** **

** **

** **

** **

** **

Text messaging

 

 

 

 

 

 

 

Domestic 

Php16,235

 

Php14,832

 

Php1,403

 

9

Standard 

10,854

 

13,749

 

(2,895)

 

(21)

*258* Unlimited

5,381

 

1,083

 

4,298

 

397

International

853

 

856

 

(3)

 

–

 

17,088

 

15,688

 

1,400

 

9

 

 

 

 

 

 

 

 

Value-added services

 

 

 

 

 

 

 

Non-Zed(1)

1,135

 

1,138

 

(3)

 

–

*Smart Zed*TM 

185

 

287

 

(102)

 

(36)

*Smart Money*

31

 

47

 

(16)

 

(34)

Mobile Banking

3

 

2

 

1

 

50

Roaming SMS and WAP**

311

 

279

 

32

 

11

 

1,665

 

1,753

 

(88)

 

(5)

Total 

Php18,753

 

Php17,441

 

Php1,312

 

8

_________________

*(1)   Value-added servicesdeveloped by Smart on its own platform.*

 

Textmessaging-related services contributed revenues of Php17,088 million in thefirst half of 2006, an increase of Php1,400 million, or 9%, compared to Php15,688million in the same period in 2005, and accounted for 91% and 90% of the totalcellular data revenues in the first half of 2006 and 2005, respectively.  Theincrease in revenues from text messaging-related services resulted mainly from theongoing *Smart 258**Unlimited Text***promotion and an increase in*Pasa Load* transactions.  Text messaging revenues from the *Smart**258*promotions totaled Php5,381 million.  Value-added services, which contributedrevenues of Php1,665 million in the first half of 2006, decreased by Php88million from Php1,753 million in the same period in 2005 primarily due to decreasedusage of *Smart Zed* and *Smart Money*services, partially offset by higherusage of roaming SMS and WAP in the first half of 2006 as compared to the sameperiod in 2005.  The decline in *Smart Zed* usage was due to increasedcompetition from other content providers while the recent restriction on textbroadcasting imposed by the NTC to all cellular operators resulted in a declinein both *Zed* and non-Zed revenues.

* *

Standardtext messages totaled 18,008 million in the first half of 2006, a decrease of 2,770million, or 13%, from 20,778 million in the same period in 2005 due to a shiftto unlimited texting service.  *Smart258* messages in the first half of 2006 totaled 91,851million, an increase of 78,022 million as compared to 13,829 million in thesame period in 2005.  

* *

*Subscriber Base, ARPU and Churn Rates*

* *

Prepaid subscribers accounted for approximately 99%of our 22,465,156 subscribers as at June 30, 2006, while postpaid subscribersaccounted for the remaining 1%.  The cellular prepaid subscriber base grew by 8%to 22,168,122 as at June 30, 2006 from 20,521,216 as at June 30, 2005, whereas thepostpaid subscriber base increased by 11% to 297,034 as at June 30, 2006 from 268,253as at June 30, 2005.  

 

Our net subscriber activations (reductions) for the sixmonths ended June 30, 2006 and 2005 were as follows:

** **

 

**Six Months Ended June 30,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

Prepaid

2,039,579

 

1,587,478

 

452,101

 

28

Smart

963,313

 

1,235,492

 

(272,179)

 

(22)

Piltel

1,076,266

 

351,986

 

724,280

 

206

** **

 

 

 

 

 

 

 

Postpaid

16,956

 

(6,241)

 

23,197

 

372

 

 

 

 

 

 

 

 

Total

2,056,535

 

1,581,237

 

475,298

 

30

 

Revenues attributable to our cellular prepaidservice amounted to Php33,693 million in the first half of 2006, a 5% increaseover the Php32,224 million earned in the same period in 2005.  Prepaid servicerevenues in the first half of 2006 and 2005 accounted for 93% and 94%,respectively, of voice and data revenues.  Revenues attributable to Smart’spostpaid service amounted to Php2,403 million in the first half of 2006, a 14% increaseover the Php2,107 million earned in the same period in 2005 and accounted for 7%and 6% of voice and data revenues in the first half of 2006 and 2005,respectively.

 

The following table summarizes our cellular ARPUs forthe six months ended June 30, 2006 and 2005:

 

 

**Six Months Ended June 30,**

 

**Gross**

** **

**Increase (Decrease)**

** **

**Net**

 

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

**2006**

** **

**2005**

 

**Amount**

 

**%**

 

(Unaudited)

Prepaid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Smart

Php350

Php357

 

(Php7)

 

(2)

 

Php294

 

Php292

 

Php2

 

1

Piltel

239

266

 

(27)

 

(10)

 

204

 

216

 

(12)

 

(6)

Prepaid – Blended

321

335

 

(14)

 

(4)

 

271

 

274

 

(3)

 

(1)

Postpaid – Smart

1,893

1,831

 

62

 

3

 

1,400

 

1,308

 

92

 

7

Prepaid and Postpaid Blended

342

355

 

(13)

 

(4)

 

286

 

287

 

(1)

 

–

 

ARPU is computed foreach month by dividing the revenues for the relevant services for the month bythe average of the number of subscribers at the beginning and at the end of themonth.  Gross monthly ARPU is computed by dividing the revenues for therelevant services, gross of dealer discounts and allocated content-providercosts, including interconnection income but excluding inbound roaming revenues,by the average number of subscribers.  Net monthly ARPU, on the other hand, iscalculated based on revenues net of dealer discounts and allocatedcontent-provider costs and interconnection income net of interconnectionexpense.  ARPU for any period of more than one month is calculated as thesimple average of the monthly ARPUs in that period.

 

Prepaidservice revenues consist mainly of charges for subscribers' actual usage oftheir loads.  Gross monthly ARPU for Smart prepaid subscribers in the first halfof 2006 was Php350, a decrease of 2%, compared to Php357 in the same period in2005.  The average outbound local and international voice revenue persubscriber declined in the first half of 2006 compared to the same period in2005, but was offset by an increase in the average text messaging revenue andinbound international revenue per subscriber.  On a net basis, ARPU in thefirst half of 2006 increased by 1% to Php294 from Php292 in the same period in2005 due to lower domestic interconnection expense resulting from increasedon-network voice and text usage.  Gross monthly ARPU for *Talk ‘N Text*subscribers in the first half of 2006 was Php239, a decrease of 10% compared toPhp266 in the same period in 2005.  Thedecline was attributable to the decrease in the average outbound local voicerevenue per subscriber as well as the average inbound revenue per subscriberpartly offset by an increase in the average text messaging revenue persubscriber.  On a net basis, ARPU in thefirst half of 2006 decreased by 6% to Php204 from Php216 in the same period in 2005.

 

Monthly ARPU forSmart’s postpaid services is calculated in a manner similar to that of prepaidservice, except that the revenues consist mainly of monthly service fees andcharges on usage in excess of the monthly service fees.  

 

Gross monthly ARPU forpostpaid subscribers increased by 3% to Php1,893 while net monthly ARPUincreased by 7% to Php1,400 in the first half of 2006 as compared to Php1,831and Php1,308 in the same period in 2005, respectively.  Prepaid and postpaidmonthly gross blended ARPU was Php342 in the first half of 2006, a decrease of 4%compared to Php355 in the same period in 2005.  Monthly net blended ARPU remainedstable at Php286 in the first half of 2006 compared to Php287 in the sameperiod in 2005.

 

Our quarterly prepaid and postpaid ARPUsfor the six months ended June 30, 2006 and 2005 were as follows:

*** ***

 

**Prepaid**

** **

**Postpaid**

 

**Smart**

** **

**Piltel**

** **

**Smart**

 

**Gross**

** **

**Net**

** **

**Gross**

** **

**Net**

** **

**Gross**

** **

**Net**

** **

(Unaudited)

**2006**

 

 

 

 

 

 

 

 

 

 

 

First Quarter

Php356

 

Php294

 

Php245

 

Php207

 

Php1,867

 

Php1,386

Second Quarter

344

 

294

 

234

 

202

 

1,920

 

1,414

** **

 

 

 

 

 

 

 

 

 

 

 

**2005**

 

 

 

 

 

 

 

 

 

 

 

First Quarter

Php356

 

Php289

 

Php269

 

Php220

 

Php1,767

 

Php1,257

Second Quarter

357

 

294

 

262

 

212

 

1,896

 

1,360

Third Quarter

343

 

285

 

234

 

194

 

1,889

 

1,389

Fourth Quarter

370

 

308

 

261

 

220

 

1,923

 

1,467

 

Churn, or the rate at which existing subscribers havetheir service cancelled in a given period, is computed based on total disconnectionsin the period, net of reconnections in the case of postpaid subscribers,divided by the average of the number of subscribers at the beginning and at theend of a month, all divided by the number of months in the same period.

 

Priorto June 2004, a prepaid cellular subscriber was recognized as an activesubscriber when that subscriber activated and used the SIM card in the handset,which contained pre-stored air time.  The pre-stored air time, which can beused for both voice and text, was reduced from Php100 to Php50 in April 2004.In May 2005, this was changed to Php1 plus 50 free SMS which could only be usedupon purchase or reload of air time of any value.  Subscribers can reload theirair time by purchasing prepaid “call and text” cards; by purchasing additionalair time “over the air” via *Smart**Load* or *Smart Load* “AllText”; and by receiving loads of Php2, Php5, Php10 and Php15 via *Pasa**Load*,or through their handsets using *Smart Money*.  Reloads have validityperiods ranging from one day to two months, depending on the amount reloaded.A prepaid cellular subscriber is disconnected if the subscriber does not reloadwithin four months after the full usage or expiry of the last reload.  Ourcurrent policy is to recognize a prepaid subscriber as “active” only when thesubscriber activates and uses the SIM card and reloads at least once during themonth of initial activation or in the immediate succeeding month.  For example,if a customer activated a SIM card in April but had not reloaded by May 31,this customer would not be counted as a subscriber.  The rationale for thischange stems from our observance of “SIM-swapping” activities in the market.  “SIM-swapping”refers to the promotional activity wherein subscribers can exchange theircurrent prepaid SIM card for another operator’s SIM card at no cost to thesubscriber.  We believe that these activities have given rise to a situationwhere certain subscribers swap their SIM cards between mobile operators uponfull usage of the pre-stored air time, which may result in our subscriber basereflecting a certain number of transient subscribers at any one point in time.In May 2005, we terminated our “SIM swapping” promotions; as a result, ourchurn rates increased in the third and fourth quarters of 2005 but tapered offbeginning the first quarter of 2006.  

 

For Smartprepaid, the average monthly churn rate for the first half of 2006 was 2.9%compared to 3.4% in the same period in 2005, while the average monthly churnrate for *Talk ‘N Text* subscribers was 3.3% in the first half of 2006compared to 4.6% in the same period in 2005.  

 

The average monthlychurn rate for Smart's postpaid subscribers for the first half of 2006 was 1.3%compared to 2.3% in the same period in 2005.  Smart's policy is to redirectoutgoing calls to an interactive voice response system if the postpaidsubscriber's account is either 45 days overdue or the subscriber has exceededthe prescribed credit limit.  If the subscriber does not make a payment within44 days of redirection, the account is disconnected.  Within this 44-dayperiod, a series of collection activities are implemented, involving thesending of a collection letter, call-out reminders and collection messages viatext messaging.

 

*Wireless Broadband, Satellite, VSAT and Other Services*

 

Our revenues from wirelessbroadband, satellite, VSAT and other services consist mainly of wirelessbroadband service revenues for Smart Broadband, rentals received for the leaseof Mabuhay Satellite's transponders and Telesat's VSAT facilities to othercompanies, charges for ACeS Philippines’ satellite phone service and servicerevenues generated from a PLDT Global subsidiary’s mobile virtual networkoperations.  Smart Broadband offers a number of wireless broadband serviceswith 57,826 subscribers as at June 30, 2006, including 54,165 *SmartBro* subscribers.*SmartBro*, the fixed wireless broadband service of Smart linked to Smartwireless broadband-enabled base stations, allows people to connect to theInternet using an outdoor aerial antenna installed in a subscriber’s home.  

 

Gross revenues fromthese services for the first half of 2006 amounted to Php1,515 million, an increaseof Php265 million, or 21%, from Php1,250 million in the same period in 2005 principallydue to the growth in our wireless broadband business.

 

*Non-service Revenues*

 

Our wireless non-service revenues consist of:

 

•           proceeds from sales of cellularhandsets; and

 

•           proceeds from sales of cellularSIM-packs.

 

Ourwireless non-service revenues decreased by Php103 million, or 8%, to Php1,188million in the first half of 2006 as compared to Php1,291 million in the sameperiod in 2005, primarily due to lower handset sales.  In the first half of 2006,activations were driven more by SIM-pack sales.  

 

*Other Income*
 

All other income/gainssuch as rental income and gains on short-term financial investments, which donot fall under service and non-service revenues, are included under thisclassification.  Our wireless business segment generated other income of Php133million in the first half of 2006, an increase of Php76 million, or 133%, ascompared to Php57 million in the same period in 2005.

 

*Expenses*
 

Expenses associatedwith our wireless business in the first half of 2006 amounted to Php21,658million, an increase of Php1,353 million, or 7%, from Php20,305 million in thesame period in 2005.  A significant portion of this increase was attributableto higher rent, financing costs and compensation and benefits partially offsetby lower cost of sales and selling and promotions.  As a percentage of ourtotal wireless revenues and other income, expenses associated with our wirelessbusiness remained flat at 54% in the first half of 2006 and 2005.

 

Cellular businessexpenses accounted for 95% of our wireless business expenses, while wirelessbroadband, satellite, VSAT and other business expenses accounted for theremaining 5% of our wireless business expenses in the first half of 2006 ascompared to 96% and 4%, respectively, in the same period in 2005.

 

The following table summarizes the breakdown of ourwireless-related expenses for the six months ended June 30, 2006 and 2005 andthe percentage of each expense item to the total:

 

 

**Six Months Ended June 30,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php5,195

 

24

 

Php4,970

 

25

 

Php225

 

5

Rent

3,427

 

16

 

2,255

 

11

 

1,172

 

52

Cost of sales

2,383

 

11

 

3,271

 

16

 

(888)

 

(27)

Financing costs

2,264

 

10

 

1,279

 

6

 

985

 

77

Compensation and benefits(1)

2,202

 

10

 

1,890

 

9

 

312

 

17

Maintenance

1,795

 

8

 

1,617

 

8

 

178

 

11

Selling and promotions

1,329

 

6

 

1,702

 

8

 

(373)

 

(22)

Professional and other contracted services

864

 

4

 

701

 

4

 

163

 

23

Taxes and licenses

552

 

3

 

667

 

3

 

(115)

 

(17)

Communication, training and travel

446

 

2

 

491

 

2

 

(45)

 

(9)

Insurance and security services

422

 

2

 

492

 

3

 

(70)

 

(14)

Provisions

284

 

1

 

437

 

2

 

(153)

 

(35)

Amortization of intangible assets

137

 

1

 

139

 

1

 

(2)

 

(1)

Other expenses

358

 

2

 

394

 

2

 

(36)

 

(9)

Total 

Php21,658

 

100

 

Php20,305

 

100

 

Php1,353

 

7

__________

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

 

Depreciationand amortization charges increased by Php225 million, or 5%, to Php5,195 millionin the first half of 2006 principally due to an increase in the depreciableasset base of the broadband business and additional depreciation provided forcertain equipment amounting to Php352 million and Php240 million for the first halfof 2006 and 2005, respectively.  The useful lives of these certain equipment havebeen shortened due to network and equipment upgrade.  For further details, see *Note8 – Property, Plant and Equipment* to the accompanying unauditedconsolidated financial statements.

 

Rent expensesincreased by Php1,172 million, or 52%, to Php3,427 million on account of anincrease in domestic fiber optic network, or DFON, facilities leased by Smart fromPLDT and site rental expense.  As at June 30, 2006, we had 4,357 GSM cell sitesand 6,060 base stations, compared with 4,148 GSM cell sites and 5,573 basestations as at June 30, 2005.

 

Costof sales decreased by Php888 million, or 27%, to Php2,383 million due to adecrease in volume of phone kits sold and the termination of SIM-swappingactivities in May 2005.  The breakdown of cost of sales for our wirelessbusiness for the six months ended June 30, 2006 and 2005 is as follows:

 

** **

**Six Months Ended June 30,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Cost of cellular handsets and SIM-packs sold

Php2,284

 

Php3,149

 

(Php865)

 

(27)

Cost of satellite air time and terminal units

99

 

122

 

(23)

 

(19)

 

Php2,383

 

Php3,271

 

(Php888)

 

(27)

 

Financing costs in the first half of 2006 amounted to Php2,264million, an increase of Php985 million, or 77%, from Php1,279 million in thesame period in 2005 due to the combined results of: (1) foreign exchange lossesrecognized in the first half of 2006 compared to foreign exchange gainsrecognized in the same period in 2005; and (2) higher amortization of discountsbrought about by the prepayment of Piltel’s debt in June 2006, partially offsetby lower loss on derivatives recorded in the first half of 2006 as compared tothe same period in 2005.  The breakdown of our financing costs for our wirelessbusiness for the six months ended June 30, 2006 and 2005 is as follows:

 

** **

**Six Months Ended June 30,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Accretion on financial liabilities – net

Php1,735

 

Php1,374

 

Php361

 

26

Interest on loans and related items

899

 

905

 

(6)

 

(1)

Foreign exchange losses (gains) – net

205

 

(778)

 

983

 

126

Dividends on preferred stock subject to mandatory redemption

93

 

132

 

(39)

 

(30)

Financing charges

31

 

48

 

(17)

 

(35)

Loss on derivative transactions – net

29

 

148

 

(119)

 

(80)

Capitalized interest 

(143)

 

(7)

 

(136)

 

1,943

Interest income

(585)

 

(543)

 

42

 

8

 

Php2,264

 

Php1,279

 

Php985

 

77

 

Compensation andbenefits expenses increased by Php312 million, or 17%, to Php2,202 millionprimarily due to higher accrued bonuses and employee benefits and higherlong-term incentive costs of Smart.  Smart’s employee headcount increased by30, or 1%, to 5,135 in the first half of 2006 compared to 5,105 in the sameperiod in 2005.

 

Maintenance expensesincreased by Php178 million, or 11%, to Php1,795 million, mainly on account ofhigher expenses for electricity and power generation, higher repairs andmaintenance costs for network facilities and information technology equipment.

 

Selling and promotion expenses decreased by Php373million, or 22%, to Php1,329 million due to efficient media spending andtermination of certain media contracts.

 

Professionaland other contracted services increased by Php163 million, or 23%, to Php864 million primarily due to increased call center, legal, contractedservice, market research and technical service fees.

 

Taxesand licenses decreased by Php115 million, or 17%, to Php552 million primarily dueto a decrease in Smart’s business-related taxes.  

 

Communication,training and travel expenses decreased by Php45 million, or 9%, to Php446million due to lower mailing and courier, training, communication and localtravel expenses incurred in the first half of 2006.

 

Insurance and securityservices decreased by Php70 million, or 14%, to Php422 million primarily due tothe decrease in site security expenses and lower amortization charges onprepaid insurance contracts.

 

Provisions decreased by Php153 million, or 35%, toPhp284 million primarily due to a decrease in write-down of slow-movinghandsets to net realizable values.  The breakdown of provisions for the six monthsended June 30, 2006 and 2005 is as follows:

 

** **

**Six Months Ended June 30,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Doubtful accounts

Php98

 

Php112

 

(Php14)

 

(13)

Write-down of inventories to net realizable value 

186

 

325

 

(139)

 

(43)

 

Php284

 

Php437

 

(Php153)

 

(35)

 

Amortizationof intangible assets decreased by Php2 million, or 1%, to Php137 million mainlydue to a reduction in the amount of intangible assets booked by Smart from thepurchase of Smart Broadband following the finalization by an independentappraiser of the valuation work on the intangible assets in December 2005. 

 

Otherexpenses decreased by Php36 million, or 9%, to Php358 million due to lower variousbusiness and operational-related expenses such as office supplies expense.

 

Provision for Income Tax
 

Provisionfor income tax decreased by Php1,243 million, or 30%, to Php2,953 million in thefirst half of 2006 from Php4,196 million in the same period in 2005.  In thefirst half of 2006, the effective tax rate for our wireless business was 16%compared to 24% in the same period in 2005 due to differences in the netmovement of deferred tax assets. 

 

Net Income
 

Our wireless businesssegment recorded a net income of Php15,301 million in the first half of 2006,an increase of Php1,971 million, or 15%, over Php13,330 million registered in thesame period in 2005 primarily due to the growth in our cellular service revenuesand lower provision for income tax, partly offset by an increase in operatingexpenses.

 

Fixed Line
 

***Revenues and Other Income***

*** ***

Our fixed line business provides local exchangeservice, international and national long distance services, data and othernetwork services, and miscellaneous services.  Total fixed line revenuesgenerated from our fixed line business in the first half of 2006 totaled Php24,318million, a decrease of Php18 million from Php24,336 million in the same periodin 2005.  

 

The following table summarizes revenues from ourfixed line business for the six months ended June 30, 2006 and 2005 by servicesegment:

 

 

**Six Months Ended June 30,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase********(Decrease)**

 

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php8,587

 

35

 

Php9,247

 

38

 

(Php660)

 

(7)

International long distance

5,051

 

21

 

6,253

 

26

 

(1,202)

 

(19)

National long distance

3,504

 

14

 

3,519

 

14

 

(15)

 

–

Data and other network

6,242

 

26

 

4,589

 

19

 

1,653

 

36

Miscellaneous

669

 

3

 

627

 

3

 

42

 

7

 

24,053

 

99

 

24,235

 

100

 

(182)

 

(1)

Non-Service Revenues

36

 

–

 

–

 

–

 

36

 

100

Other Income

229

 

1

 

101

 

–

 

128

 

127

Total Fixed Line Revenues and Other Income

Php24,318

 

100

 

Php24,336

 

100

 

(Php18)

 

–

 

Service Revenues
 

*Local Exchange Service*

 

Our local exchange service revenues consist of: 

 

•           flat monthly fees for our postpaidand fixed charges for our bundled services; 

 

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

 

•           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. 

 

The following table summarizes key measures of ourlocal exchange service business as at and for the six months ended June 30,2006 and 2005:

 

 

**Six Months Ended June 30,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Total local exchange service revenues (in millions)

Php8,587

 

Php9,247

 

(Php660)

 

(7)

Number of fixed lines in service

2,070,721

 

2,137,813

 

(67,092)

 

(3)

Number of fixed line employees

9,149

 

9,582

 

(433)

 

(5)

Number of fixed lines in service per employee

226

 

223

 

3

 

1

 

Revenues from ourlocal exchange service decreased by Php660 million, or 7%, to Php8,587 millionin the first half of 2006 from Php9,247 million in the same period in 2005.The decrease was primarily due to a 3% decline in the number of fixed lines inservice and the appreciation of the peso which required us to make downwardadjustments in our monthly local service rates.  The percentage contribution oflocal exchange revenues to our fixed line service revenues decreased to 35% in thefirst half of 2006 compared to 38% in the same period in 2005.

 

Fixedline net reduction in the first half of 2006 was 43,078 compared to a net reductionof 14,214 in the same period in 2005.  In the first half of 2006, prepaid andpostpaid fixed lines in service declined by 37,493 and 5,585, respectively.  Asat June 30, 2006, postpaid and prepaid fixed line subscribers totaled 1,785,312and 285,409, which accounted for approximately 86% and 14%, respectively, of ourtotal fixed lines in service.

 

Initially intended asan affordable alternative telephone service for consumers under difficulteconomic conditions, our prepaid fixed line services**now form animportant part of our overall churn and credit risk exposure management andsubscriber retention strategy.  Prepaid**subscribers are charged based onusage at a rate of Php1.00 per minute for local calls, but the rates forprepaid and postpaid fixed line subscribers for national and international longdistance calls are the same.  A prepaid fixed line subscriber is recognized asan active subscriber when that subscriber activates and uses a prepaid callcard.  Prepaid fixed line subscribers can reload their accounts by purchasingcall cards that are sold in denominations of Php500, Php300 and Php150.  Allsales of prepaid cards, whether through dealers or through PLDT's businessoffices, are non-refundable.

 

InJuly 2006, PLDT launched the *Telepwede*, a new brand of our prepaid fixedline service.  *Telepwede*subscribersare charged Php2 per local call (for an unlimited duration) and Php5 perhour for Internet connection.  *Telepwede*subscribers can reload for aslow as Php145 per month which is inclusive of a Php30 load balance that can beused for outgoing calls and a Php115 access charge for incoming calls. 

 

Pursuant to a currencyexchange rate adjustment mechanism authorized by the Philippine NationalTelecommunications Commission, or the NTC, we adjust our postpaid monthly local service rates upward ordownward by 1% for every Php0.10 change in the peso-to-dollar exchange raterelative to a base rate of Php11.00 to US$1.00.  During the first half of2006, we implemented four downward and two upward adjustments in our monthlylocal service rates, while there were four downward adjustments for the sameperiod in 2005.  The average Philippine peso to U.S. dollar rate factored inour monthly local service rates in the first half of 2006 was Php51.97 toUS$1.00, compared to an average of Php54.94 to US$1.00 in the same period in2005.  This change in the average peso-to-dollar rate translated to a pesoappreciation of 5%, which resulted in an average net decrease of approximately 5%in our monthly local service rates in the first half of 2006. 

 

*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 revenuesrepresenting 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 six months ended June30, 2006 and 2005:

 

** **

**Six Months Ended June 30,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Total international long distance service revenues (in millions)

Php5,051
 

Php6,253

 

(Php1,202)

 

(19)

Inbound

4,265

 

5,289

 

(1,024)

 

(19)

Outbound

786

 

964

 

(178)

 

(18)

 

 

 

 

 

 

 

 

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

1,031

 

1,156

 

(125)

 

(11)

Inbound

939

 

1,085

 

(146)

 

(13)

Outbound

92

 

71

 

21

 

30

Inbound-outbound call ratio

10.2:1

 

15.3:1

 

–

 

–

 

Our totalinternational long distance service revenues decreased by Php1,202 million, or 19%,to Php5,051 million in the first half of 2006 from Php6,253 million in the sameperiod in 2005 due to the peso appreciation, decrease in average terminationrates for inbound calls and decline in call volumes largely as a result ofalternative means of communications such as e-mailing, texting and Internettelephony.  The percentage contribution of international long distance servicerevenues to our fixed line service revenues decreased to 21% in the first half of2006 from 26% in the same period in 2005.

 

Ourrevenues from inbound international long distance service decreased by Php1,024million, or 19%, to Php4,265 million due to a decrease in inbound trafficvolume by 146 million minutes to 939 million minutes in the first half of 2006.  In addition, the appreciation of the peso to theU.S. dollar with average rates of Php52.061 during the first half of 2006 and Php54.835during the same period in 2005 contributed to the decrease in our inboundinternational long distance revenues in peso terms since settlement charges forinbound calls are billed in U.S. dollars or in special drawing rights, anestablished method of settlement among international telecommunicationscarriers using values based on a basket of foreign currencies that aretranslated into pesos at the time of billing.

 

Ourrevenues from outbound international long distance service decreased by Php178million, or 18%, to Php786 million in the first half of 2006 primarily due to adecline in average revenue per minute as a result of lower average collectionrate with the introduction of low-rate services such as *PLDT ID-DSL* and themodified *Budget Card*, and the peso appreciation in the first half of 2006.

 

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’ DSL plan/package.

 

Toaddress the market’s demand for low-priced international calls, PLDT modifiedthe *Budget Card*, a prepaid call card, offering a reduced IDD rate of Php5per minute, as a promotional offer starting September 24, 2005, for calls to 89overseas destinations including the United States, Canada, Japan and China*.*  Beginning March 4, 2006, *Budget Card* has been further modified to Php3,Php5 and Php8 per minute calls depending on the destination and now has 100overseas destinations, including Saudi Arabia and other Middle East countries.*Budget Cards* are sold in denominations of Php200 and Php100, which mustbe consumed within 30 days from first use.

 

National Long Distance Service
 

Our national long distance service revenues consistof: 

 

•              per minute charges for calls made byour 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; 

 

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

 

•              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.

 

The following table shows our national long distanceservice revenues and call volumes for the six months ended June 30, 2006 and2005:

 

** **

**Six Months Ended June 30,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php3,504

 

Php3,519

 

(Php15)

 

–

National long distance call volumes (in million minutes)

1,122

 

1,235

 

(113)

 

(9)

 

Our national longdistance service revenues decreased by Php15 million to Php3,504 million in thefirst half of 2006 from Php3,519 million in the same period in 2005 due to a decreasein call volumes partially offset by a higher average revenue per minute in 2006due to the change in mechanics in our Php10 per call promotion.  In 2005, thePhp10 per call promotion was open to all PLDT Group fixed line subscribersnationwide; in 2006, the Php10 per call service was made available only toregistered PLDT subscribers for a monthly service fee.  Accordingly, the percentagecontribution of national long distance revenues to our fixed line servicerevenues accounted for 14% in the first half of 2006 and 2005.

 

OnFebruary 14, 2005, we launched a Php10 per call promotion to PLDT landlinesubscribers nationwide and for calls to PLDT, Smart and *Talk ‘N Text*subscribers.  This promotion was launched with the objective of determining amore effective tariff structure that would stimulate landline usage.  Under thepromotion, NDD calls between any PLDTlandline subscriber nationwide or to all Smart and *Talk 'N Text*subscribers were charged Php10 per call instead of being charged on a perminute basis.  

 

OnMay 12, 2005, PLDT began offering the Php10 per call promotion with anadditional Php5 per call for the same unlimited talktime to Smart and *Talk‘N Text* subscribers.  PLDT to PLDT NDD calls below the equivalent Php10 tollusage were charged based on the regular rate per minute.  On August 12, 2005,PLDT ceased offering the Php10 per call promotion to calls terminating to Smartand *Talk ‘N Text* subscribers.  

 

BeginningSeptember 12, 2005, PLDT charged an optional Php20 add-on monthly service fee forPLDT landline subscribers who may want to continue to avail themselves of thePhp10 per call promotion for calls within our network. 

 

InJanuary 2006, PLDT launched the *10-10-10* promotion.  This promotionoffers a flat rate of Php10 for unlimited calls terminating PLDT to PLDT andSmart and *Talk ‘N Text*subscribers for a Php50 monthly service fee. 

 

PLDTcapped the Php10 per call service to Smart and *Talk ‘N Text* subscribersto those who registered on or before February 24, 2006.  PLDT fixed linesubscribers, however, can still register and avail of the unlimited Php10 percall service for national long distance calls within the PLDT network.

 

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 datacommunications, and packet-based communication.  

 

Thefollowing table shows salient information about our data and other networkservice revenues for the six months ended June 30, 2006 and 2005:

 

** **

** **

**Six Months Ended June 30,**

** **

** **

** **

** **

** **

** **

**Increase**

** **

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

**(in millions)**

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Data and other network service revenues

 

Php6,242

 

Php4,589

 

Php1,653

 

36

Number of PLDT DSL broadband subscribers

 

109,245

 

63,902

 

45,343

 

71

Number of PLDT Vibe narrowband subscribers

 

425,761

 

364,123

 

61,638

 

17

 

Ourdata and other network services in the first half of 2006 posted revenues ofPhp6,242 million, an increase of Php1,653 million, or 36%, from Php4,589million in the same period in 2005 primarily due to increases in leased lines,IP-based and switched-based data services, particularly Diginet, *PLDT DSL*and *PLDT Vibe* services, respectively.  The revenue contribution of thisservice segment to our fixed line service revenues increased to 26% in thefirst half of 2006 from 19% in the same period in 2005.

 

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 ofPhp1,500 million during the first half of 2006 increased by Php449 million, or 43%,from Php1,051 million in the same period in 2005.  *PLDT DSL* has reached 109,245subscribers as at June 30, 2006 compared with 63,902 subscribers in the sameperiod in 2005.  PLDT offers a number of *DSL*packages with speeds andmonthly fees varying from 256 kbps at Php999 per month to up to 1 Mbps atPhp3,000 per month.  

 

*PLDTVibe* revenues increased by Php56million, or 41%, to Php192 million in the first half of 2006 from Php136million in the same period in 2005.  Asat June 30, 2006, the number of PLDT’s fixed line subscribers for *PLDT Vibe*stoodat 425,761, of which 152,149 were exclusive postpaid users, 246,963 were exclusiveprepaid users, and 26,649 were both postpaid and prepaid users.  As at June 30,2005, *PLDT Vibe* subscribers totaled 364,123, of which 143,088 were exclusivepostpaid users, 196,232 were exclusive prepaid users, and 24,803 were bothpostpaid and prepaid users.  

 

The continued growthin data 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.  Through Diginet, we provide Smart’sincreasing fiber optic and leased line data requirements, which are includedunder our national data services.  Diginet contributed Php2,826 million in ourdata revenues in the first half of 2006, increasing by Php1,074 million, or 61%,from Php1,752 million in the same period in 2005.

* *

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.   Some of the recentenhancements to the service are the inclusion of international roaming in keyroaming countries all over the globe and national WiFi roaming access.Principally targeted to the corporate market, the service had 6,622 subscribersas at June 30, 2006.  

* *

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 solution that makes wireless cashier point-of-sale andwireless card terminals possible.  Retailers will now be able to reach out to abigger market in areas where physical connections are unavailable and expandthe banking system with wireless automated teller machines, or ATMs.

* *

Miscellaneous
 

Miscellaneous servicerevenues are derived mostly from directory advertising and facilities rental.In the first half of 2006, these revenues increased by Php42 million, or 7%, toPhp669 million from Php627 million in the same period in 2005.  The improvementwas mainly due to an increase in co-location charges from more co-locationsites coupled with an increase in rent income on duct utilization and cablerestoration.  The percentage contribution of miscellaneous service revenues toour fixed line service revenues was 3% in the first half of 2006 and 2005.

 

*Non-service Revenues*

 

Non-servicerevenues of Php36 million recognized under our fixed line business representproceeds of computer sales in the first half of 2006 in relation to our DSLpromo.

 

*Other Income*

 

All other income/gainssuch as rental income, gain on disposal of property, which do not fall underservice and non-service revenues are included under this classification.  In thefirst half of 2006, our fixed line business segment registered an increase inother income of Php128 million, or 127%, to Php229 million in the first half of2006 from Php101 million in the same period in 2005 primarily due to higherrental income, income from disposal of materials, and higher service and facilityfees.  

 

Expenses
 

Expenses related to our fixed line business in thefirst half of 2006 totaled Php24,022 million, an increase of Php4,126 million,or 21%, compared to Php19,896 million in the same period in 2005.  The increasewas primarily due to higher depreciation and amortization, compensation andbenefits, and financing costs partially offset by lower provisions and maintenanceexpenses.  

 

The following table shows the breakdown of our totalfixed line-related expenses for the six months ended June 30, 2006 and 2005 andthe percentage of each expense item to the total:

 

 

**Six Months ended June 30,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php10,038

 

42

 

Php5,704

 

29

 

Php4,334

 

76

Compensation and benefits(1)

4,560

 

19

 

3,977

 

20

 

583

 

15

Financing costs

3,876

 

16

 

3,537

 

18

 

339

 

10

Maintenance

1,611

 

7

 

1,718

 

8

 

(107)

 

(6)

Selling and promotions

975

 

4

 

866

 

4

 

109

 

13

Rent

827

 

3

 

860

 

4

 

(33)

 

(4)

Provisions

485

 

2

 

1,550

 

8

 

(1,065)

 

(69)

Professional and other contracted services

469

 

2

 

432

 

2

 

37

 

9

Taxes and licenses

343

 

2

 

330

 

2

 

13

 

4

Insurance and security services

265

 

1

 

329

 

2

 

(64)

 

(19)

Communication, training and travel

239

 

1

 

215

 

1

 

24

 

11

Cost of sales

77

 

–

 

–

 

–

 

77

 

100

Other expenses

257

 

1

 

378

 

2

 

(121)

 

(32)

Total 

Php24,022

 

100

 

Php19,896

 

100

 

Php4,126

 

21

____________

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

* *

 

Depreciationand amortization charges increased by Php4,334 million, or 76%, to Php10,038million mainly due to the effect of our change in estimated useful lives ofcertain property and equipment in line withour upgrade to the next-generationnetwork which resulted in increaseddepreciation charges of Php3,882 million for the first half of 2006, and higherdepreciation of our regular asset base fromadditional completed projects.  Please see *Note 8 – Property, Plant andEquipment* to the accompanying unaudited consolidated financial statementsfor further discussion.

 

Compensation andbenefits expenses increased by Php583 million, or 15%, to Php4,560 millionprimarily due to the effect of the collective bargaining agreement-related increasesin salaries and benefits and an increase in incentive plan-related accrualspartially offset by a reduction in headcount due to PLDT’s MRP.

 

Financing costs increasedby Php339 million, or 10%, to Php3,876 million due to lower derivatives and foreignexchange gains recorded in the first half of 2006 compared to the same periodin 2005 and higher hedge costs partially offset by lower interest on loans andrelated items owing to lower debt balances in the first half of 2006 comparedto the same period in 2005.  The breakdown of financing costs for our fixedline business for the six months ended June 30, 2006 and 2005 is as follows:

 

** **

**Six Months ended June 30,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Interest on loans and related items

Php3,449

 

Php4,737

 

(Php1,288)

 

(27)

Hedge costs

746

 

557

 

189

 

34

Accretion on financial liabilities – net

88

 

135

 

(47)

 

(35)

Financing charges

8

 

26

 

(18)

 

(69)

Gain on derivative transactions – net

(6)

 

(926)

 

920

 

(99)

Foreign exchange gains – net

(7)

 

(603)

 

596

 

(99)

Capitalized interest

(159)

 

(196)

 

37

 

(19)

Interest income

(243)

 

(193)

 

(50)

 

26

 

Php3,876

 

Php3,537

 

Php339

 

10

 

Maintenance expensesdecreased by Php107 million, or 6%, to Php1,611 million primarily due to lowermaintenance costs for foreign cable and wire facilities as more operating andmaintenance-related restorations were incurred in the first half of 2005 ascompared to the same period in 2006.  

 

Selling and promotionexpenses increased by Php109 million, or 13%, to Php975 million primarily as aresult of an increase in PLDT’s promotional activities in relation to variousproducts and services, such as PLDT’s *Pwede!* campaign, partially offsetby lower commissions paid in the first half of 2006.

 

Rentexpenses decreased by Php33 million, or 4%, to Php827 million due to lower officeand building rentals, and decrease in transponder lease charges partiallyoffset by an increase in international leased circuits and rental chargesoccupied by various equipments.

 

Provisionsdecreased by Php1,065 million, or 69%, to Php485 million primarily on accountof a lower provision by PLDT for anticipated uncollectible accounts fromvarious specifically identified domestic telecommunications carriers which wereprovided for in 2005.  The breakdown of provisions for our fixed line business for the sixmonths ended June 30, 2006 and 2005 is as follows:

 

** **

**Six Months Ended June 30,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Doubtful accounts

Php336

 

Php1,414

 

(Php1,078)

 

(76)

Onerous contracts and assessments

149

 

136

 

13

 

10

 

Php485

 

Php1,550

 

(Php1,065)

 

(69)

 

Professional and othercontracted services increased by Php37 million, or 9%, to Php469 millionprimarily due to an increase in facility management fees and collection agencyfees, partially offset by lower advisory and legal fees in the first half of2006 for various services. 

 

Taxesand licenses increased by Php13 million, or 4%, to Php343 million mainly onaccount of higher NTC supervision and license fees, and other business-relatedtaxes paid in the first half of 2006 as compared to the same period in 2005.

 

Insuranceand security services decreased by Php64 million, or 19%, to Php265 millionprimarily 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 increased by Php24 million, or 11%, to Php239 milliondue to an increase in local and foreign travel and training in the first half of2006 as compared to the same period in 2005.

 

Costof sales of computers amounting to Php77 million were recognized in the first halfof 2006 in relation to our DSL promo.  No similar charges were incurred in thesame period in 2005.

 

Otherexpenses decreased by Php121 million, or 32%, to Php257 million due to loweroffice supplies consumption and printing costs resulting from PLDT’s continuingcost-containing activities.

 

Provision for Income Tax
 

Provisionfor income tax amounted to Php45 million in the first half of 2006 as comparedto Php1,281 million in the same period in 2005, a decrease of Php1,236 million,or 96% primarily due to lower income subject to tax.

 

Net Income 
 

In the first half of2006, our fixed line business segment contributed a net income of Php251million, a decrease of Php2,908 million, or 92%, as compared to Php3,159million in the same period in 2005 mainly as a result of a 21% increase in fixedline-related expenses, particularly depreciation and amortization.  

 

Information andCommunications Technology
 

***Revenues and Other Income***
 

Our information andcommunications technology business is conducted by ePLDT and its subsidiaries.

 

In thefirst half of 2006, our information and communications technology businessgenerated revenues of Php2,011 million, an increase of Php424 million, or 27%,from Php1,587 million in the same period in 2005.  Going forward, we expectrevenues from our call center business to continue to contribute significantlyto our information and communications technology revenues with the growingdemand for our call center services.

 

The following table summarizes revenues from ourinformation and communications technology business for the six months ended June30, 2006 and 2005 by service segment:

 

** **

**Six Months Ended June 30,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php1,237

 

61

 

Php836

 

53

 

Php401

 

48

Internet and gaming 

340

 

17

 

287

 

18

 

53

 

18

*Vitro*ä data center

175

 

9

 

173

 

11

 

2

 

1

Others

60

 

3

 

32

 

2

 

28

 

88

 

1,812

 

90

 

1,328

 

84

 

484

 

36

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point Product Sales

172

 

9

 

215

 

13

 

(43)

 

(20)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

24

 

1

 

41

 

3

 

(17)

 

(41)

 

 

 

 

 

 

 

 

 

 

 

 

Equity share in net income of associates

3

 

–

 

3

 

–

 

–

 

–

 

 

 

 

 

 

 

 

 

 

 

 

Total ICT Revenues and Other Income

Php2,011

 

100

 

Php1,587

 

100

 

Php424

 

27

 

*Service Revenues*

 

Servicerevenues generated by our information and communications technology segmentamounted to Php1,812 million in the first half of 2006, an increase of Php484million, or 36%, as compared to Php1,328 million in the same period in 2005primarily as a result of the continued growth of our call center business. 

 

*Call**Center*

 

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 approximately4,660 seats with 3,500 customer service representatives, or CSRs, as at June 30,2006 compared to approximately 3,180 seats with 2,550 CSRs as at June 30, 2005. In 2006, ePLDT launched two new sitesbringing its total call center sites to seven as at June 30, 2006.  

 

Call center revenues consist of:

 

•              inbound calls for customer care,product inquiries, sales and technical support based on active minutes,billable hours and full-time equivalents;

 

•              outbound calls for sales andcollections based on active minutes, billable hours and full-time equivalents;and 

 

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

 

Revenues related to our call center business in thefirst half of 2006 increased by Php401 million, or 48%, to Php1,237 millionfrom Php836 million in the same period in 2005 primarily due to the combinedeffects of the following:

 

•              Vocativ’s upward price adjustmentfor calls and an increase in programs being handled; 

 

•              an upward price adjustment byParlance for its inbound and outbound projects, coupled with an increase in thenumber of registered minutes for inbound projects and hours for outboundprojects; 

 

•              expansion of existing Parlance andVocativ facilities by 560 and 100 seats, respectively, from approximately 1,230and 1,300 in the first half of 2005 to approximately 1,790 and 1,400 in thesame period in 2006;

 

•              commencement of Ventus operationsin Iloilo in March 2005; and

 

•              continuous ramp up of CSRs by 950,or 37%, from a total of approximately 2,550 in the first half of 2005 to approximately3,500 in the same period in 2006.

 

Call center revenues accounted for 68% and 63% oftotal information and communications technology service revenues in the first halfof 2006 and 2005, respectively.

* *

*Internet and gaming*

 

ePLDT has also invested in a number of othere-commerce and Internet-related businesses, which include:

 

•              a 99.6% interest in Infocom, an Internetservice provider offering consumer prepaid and postpaid Internet access,corporate leased lines, dedicated dial-up, multi-user dial-up, broadband Internetaccess through DSL, web consulting and development, hosting and othervalue-added services; 

 

•              a 75% interest in Digital Paradise,an Internet café business with the brand *Netopia*; 

 

•              a 60% interest in netGames, apublisher for Massively Multi-player Online Game in the Philippines and thePhilippine licensee of Khan Online, Pangya and Flyff, and the owner ofJuanworld, a community gaming portal;

 

•              a 60% interest in Level Up!, a leading publisher of online gamesin the Philippines with about 80% of the online gaming market.  Level Up! wasacquired on May 1, 2006;

 

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

 

•              a 51% interest in Digital Paradise Thailand, an affiliate of Digital Paradise, offering similar products andservices with four branches in Bangkok, Thailand. 

 

Internet service revenues consist of: 

 

•              revenues derived from actual usageof the Internet access network by prepaid subscribers and any unused peso valueof expired prepaid cards or electronic Internet time loads, net of discountsgiven to 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 including e-mail and webhosting services;

 

•              one-time fees generated fromresellership of Internet-related solutions such as security solutions anddomain registration; 

 

•              franchise and royalty fees for *Netopia*Internet cafés, including a one-time subscription fee and monthly recurringfranchise fees based on certain conditions on the franchise agreement; 

 

•              revenues from community access ofcomputers and desktop publishing based on actual usage, net of discounts givento users; and 

 

•              online gaming revenues from uniquesubscribers, including one-time sale of gaming cards and electronic pins, andtop-up fees upon actual consumption of gaming credits or after expiration ofany unused peso value thereof.

 

Revenues from our Internetbusiness in the first half of 2006 increased by Php53 million, or 18%, to Php340million from Php287 million in the same period in 2005 primarily due to theconsolidation of Airborne Access and Level Up! in October 2005 and May 2006,respectively, which resulted to additional revenues of Php6 million and Php39million, respectively.  Our Internet business revenues accounted for 19% and 22%of service revenues from information and communications technology business in thefirst half of 2006 and 2005, respectively.

 

*Vitro*ä data center

 

ePLDToperates an Internet data center under the brand name *Vitro*ä which 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.  

 

*Vitro*ä 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; and 

 

•              installation charges or one-timefees associated with the set-up of services and professional services ofVitro’s certified professionals.

 

In the first half of 2006, *Vitro*ä contributed revenues of Php175 million, an increase of Php2 million,or 1%, from Php173 million in the same period in 2005 primarily due to anincrease in co-location revenues and server hosting.  *Vitro*ä revenues accounted for 10% and 13% of service revenues from our informationand communications technology business in the first half of 2006 and 2005,respectively.

 

*Others*

 

Other revenues consist of:

 

•              fees generated for issuance ofdigital certificates and licenses; and 

 

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

 

Revenues from other businesses related to ourinformation and communications technology segment in the first half of 2006increased to Php60 million from Php32 million in the same period in 2005largely due to IT helpdesk/contact center services rendered coupled with anincrease in the number of digital certificates sold.

 

Pleaserefer to *Note 9 – Investments**in Associates* to the accompanying unauditedconsolidated financial statements for further discussion on ePLDT’s other informationand communications technology services.

 

*Non-service Revenues*

 

Non-servicerevenues consist of sales generated from reselling certain software licenses,server solutions, networking products, storage products and data securityproducts.  In the first half of 2006, non-service revenues generated by ourinformation and communications technology business decreased by Php43 million,or 20%, to Php172 million compared to Php215 million in the same period in 2005primarily due to lower revenues from sales of networking equipment and softwarelicenses.

 

*Other Income*
 

All other income/gainswhich do not fall under service and non-service revenues are included underthis classification.  Other income generated from our information andcommunications technology business segment decreased to Php24 million in thefirst half of 2006 from Php41 million in the same period in 2005 primarily due toInfocom’s sale of its *NOW* cable Internet business in the first half of 2005;no similar transaction was incurred in the same period in 2006.  

 

*Equity Share in Net Incomeof Associates*

 

Equityshare in net income of associates amounted to Php3 million in the first half of2006 and 2005 due to share in the earnings of its unconsolidated subsidiaries,ePDS, Inc. and Philweb Corporation, or Philweb.  ePLDT acquired a 20% interest inPhilweb in June 2006.

* *
*Expenses*
 

Expenses associatedwith our information and communications technology business totaled Php1,936million in the first half of 2006, an increase of Php418 million, or 28%, fromPhp1,518 million in the same period in 2005, primarily due to an increase in compensationand benefits, depreciation and amortization, and selling and promotions.  As apercentage of our information and communications technology revenues, expensesrelated to our information and communications technology business were at 96% forthe first half of 2006 and 2005.  

 

The following table shows the breakdown of our totalinformation and communications technology-related expenses for the six monthsended June 30, 2006 and 2005 and the percentage of each expense item to thetotal:

 

 

**Six Months Ended June 30,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php855

 

44

 

Php625

 

41

 

Php230

 

37

Depreciation and amortization

252

 

13

 

187

 

12

 

65

 

35

Selling and promotions

234

 

12

 

205

 

14

 

29

 

14

Rent

228

 

12

 

208

 

14

 

20

 

10

Maintenance

139

 

7

 

149

 

10

 

(10)

 

(7)

Communication, training and travel

75

 

4

 

38

 

2

 

37

 

97

Professional and other contracted services

50

 

2

 

39

 

3

 

11

 

28

Taxes and licenses

19

 

1

 

18

 

1

 

1

 

6

Insurance and security services

10

 

1

 

5

 

–

 

5

 

100

Amortization of intangible assets

3

 

–

 

–

 

–

 

3

 

100

Provisions

1

 

–

 

–

 

–

 

1

 

100

Financing costs

(5)

 

–

 

8

 

1

 

(13)

 

(163)

Other expenses

75

 

4

 

36

 

2

 

39

 

108

Total 

Php1,936

 

100

 

Php1,518

 

100

 

Php418

 

28

____________

 

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

 

Compensationand benefits increased by Php230 million, or 37%, to Php855 million largely dueto the expansion of our call center businesses and the consolidation of LevelUp! and Airborne Access in the first half of 2006, which resulted to an increasein headcount thereby causing an increase in salaries, bonuses and variousincentives of employees.

 

Depreciation andamortization charges increased by Php65 million, or 35%, to Php252 millionprimarily due to an increase in the depreciable asset base in relation to theexpansion of our call center businesses.  

 

Selling and promotion expenses increased by Php29million, or 14%, to Php234 million mainly due to an increase in advertising andmarketing spending and the consolidation of Level Up! and Airborne Access inthe first half of 2006 as compared to the same period in 2005.  

 

Rentexpenses increased by Php20 million, or 10%, to Php228 million primarily due tothe opening of two additional call center sites during the first half of 2006which led to increased rental of leased circuits.

 

Maintenance expenses decreasedby Php10 million, or 7%, to Php139 million primarily due to Vitro’s lower hardwaremaintenance costs partially offset by higher hosting-related costs incurred in thefirst half of 2006 as compared to the same period in 2005.

 

Communication,training and travel expenses increased by Php37 million, or 97%, to Php75million due to the increased cost of phone lines, bandwidth and informationsystem charges, coupled by the increase in telecommunications costs incurred byour call center business for its outbound calls.  

 

Professionaland other contracted services increased by Php11 million, or 28%, to Php50 million primarily due to an increase in consultancy, legal and audit feesin the first half of 2006 as compared to the same period in 2005.

 

Taxesand licenses increased by Php1 million, or 6%, to Php19 million due to higher business-relatedtaxes paid in the first half of 2006 as compared to the same period in 2005.

 

Insurance and securityservices increased by Php5 million, or 100%, to Php10 million primarily due tohigher premium costs and an increase in the assets insured in the first half of2006 as compared to the same period in 2005.

 

Amortizationof intangible assets amounted to Php3 million in the first half of 2006 inconnection with the acquisition of Level Up!.  See *Note 11 – Goodwill andIntangible Assets* to the accompanyingunaudited consolidated financial statementsfor further discussion.  No similar charges were booked in the same period in2005.

 

Provisionsamounted to Php1 million in the first half of 2006 representing certaindoubtful customer accounts.  No similar provisions were recorded in the sameperiod in 2005.

 

Financing costsamounted to a negative Php5 million in the first half of 2006 primarily due to anet interest income balance in 2006 brought about by a decrease in interest expenseon loans on account of lower debt balances in the first half of 2006.

 

Other expenses increasedby Php39 million, or 108%, to Php75 million mainly due to higher royalty feeson licenses paid by our Internet and gaming businesses, and increase in otherbusiness-related costs.

 

*Provision for (Benefit from) Income Tax*
 

Benefit from income tax amounted to Php12 million in thefirst half of 2006 primarily due to the recognition of deferred tax assetspertaining to accrued pension costs, net operating loss carry-over andallowance for doubtful accounts as compared to a provision for income tax ofPhp6 million in the same period in 2005.

 

*Net Income*
 

In the first half of2006, our information and communications technology business segment registereda net income of Php87 million, an increase of Php24 million, or 38%, as comparedto Php63 million in the same period in 2005 mainly as a result of a 27%increase in ICT-related revenues. 

 

**Liquidity and Capital Resources**

 

The following table shows our consolidated cash flowsfor the six months ended June 30, 2006 and 2005 as well as consolidatedcapitalization and other selected financial data as at June 30, 2006 and December31, 2005:

 

 

**Six Months Ended June 30,**

 

**2006**

 

**2005**

** **

(Unaudited)

**(in millions)**

 

 

 

**Cash Flows**

 

 

 

Net cash provided by operating activities

Php33,601

 

Php35,151

Net cash used in investing activities

13,898

 

2,220

Capital expenditures

12,385

 

7,012

Net cash used in financing activities

23,943

 

24,528

Net increase (decrease) in cash and cash equivalents

(4,098)

 

8,308

 

** **

 

** **

 

**June 30,**

** **

**December 31,**

 

**2006**

 

**2005**

** **

(Unaudited)

 

(Audited)

**(in millions)**

 

**Capitalization**

 

 

 

Long-term portion of interest-bearing financial liabilities –  net of current portion:

 

 

 

Long-term debt

Php72,410

 

Php84,860

Obligations under capital lease

269

 

381

Preferred stock subject to mandatory redemption

9,854

 

11,974

 

82,533

 

97,215

 

 

 

 

Current portion of interest-bearing financial liabilities: 

 

 

 

Long-term debt maturing within one year

18,281

 

18,684

Obligations under capital lease maturing within one year

828

 

717

 

19,109

 

19,401

Total interest-bearing financial liabilities

101,642

 

116,616

Total equity

85,870

 

74,369

 

Php187,512

 

Php190,985

** **

 

 

 

**Other Financial Data**

 

 

 

Total assets

Php244,771

 

Php249,713

Property, plant and equipment - net

173,832

 

176,974

Cash and cash equivalents

25,966

 

30,064

 

As at June 30, 2006,our consolidated cash and cash equivalents totaled Php25,966 million.Principal sources of consolidated cash and cash equivalents in the first half of2006 were cash flows from operating activities amounting to Php33,601 millionand drawings from Smart’s debt facilities aggregating Php3,435 million.  Thesefunds were used principally for capital outlays of Php12,385 million, totaldebt principal payments of Php17,954 million and interest payments of Php3,977million.

 

***Operating Activities***

 

Our consolidated netcash flows from operating activities in the first half of 2006 decreased by Php1,550million, or 4%, to Php33,601 million, from Php35,151 million in the same periodin 2005.

 

A significant portion of our cash flow is generatedby our wireless business, which contributed revenues of approximately 60% and 59%of our service revenues in the first half of 2006 and 2005, respectively.Revenues from our fixed line and information and communications technologyservices accounted for 37% and 3%, respectively, of our service revenues in thefirst half of 2006 compared to 39% and 2%, respectively, in the same period in2005. 

 

Cash flows from operating activities of our wirelessbusiness amounted to Php17,226 million in the first half of 2006, a decrease ofPhp3,533 million, or 17%, compared to Php20,759 million in the same period in2005 partially offset by an increase in our fixed line business which contributedPhp14,699 million in the first half of 2006, an increase of Php540 million, or 4%,compared to Php14,159 million in the same period in 2005.  The overall decreasein our cash flows from operating activities was due to an increase in workingcapital requirements with the settlement of various current liabilities complementedby higher billings of accounts receivable.  Our wireless business segmentaccounted for 52% of our cash flows from operating activities while our fixedline segment accounted for 44% in the first half of 2006.  We currently believethat our continuing strong cash flows from operating activities on aconsolidated basis will allow us to defray our current liabilities despite ourcurrent ratio being less than 1:1 as at June 30, 2006. 

 

WhileSmart is subject to loan covenants that restrict its ability to pay dividends,redeem preferred shares, make distributions to PLDT or otherwise provide fundsto PLDT or any associate without the consent of its lenders, Smart had beenable to obtain waivers from Finnvera and certain of its lenders for each of thedividend payments made by Smart to PLDT in 2006, 2005, 2004, 2003 and 2002aggregating Php14,000 million, Php19,717 million, Php16,100 million, Php6,166million and Php1,540 million, respectively.  In September and December 2005,Smart redeemed 200 million and 180.8 million preferred shares, respectively,previously issued to PLDT at a redemption price of Php13.875 per share, or atotal redemption price aggregating to Php5,283 million.  During the first halfof 2006, dividend payments received from Smart amounted to Php14,000 million,of which Php7,000 million was paid in March 2006 and another Php7,000 millionwas paid in June 2006.

 

Investing Activities 
 

Net cash used ininvesting activities in the first half of 2006 amounted to Php13,898 million, anincrease of Php11,678 million, or 526%, compared to Php2,220 million in thesame period in 2005.  This was primarily a result of an increase in capitalexpenditures by Php5,373 million, payments for purchase of investments inrelation to the final settlement of Smart Broadband’s acquisition, the purchaseof a 60% investment in Level Up! and a 20% equity interest in Philweb of Php1,201million, Php346 million and Php427 million, respectively, and the increase in short-terminvestments by Php4,271 million in the first half of 2006 as compared to thedecrease in the first half of 2005 mainly due to maturity of Smart’s prepaidforward exchange contracts in 2005.

 

Our consolidatedcapital expenditures in the first half of 2006 totaled Php12,385 million, an increaseof Php5,373 million, or 77%, from Php7,012 million in the same period in 2005primarily due to PLDT’s, Smart’s and ePLDT’s higher capital spending.  Smart'scapital spending of Php6,025 million in the first half of 2006 was used to roll-outits 3G network and further expand and upgrade its transmission networkfacilities to increase capacity and coverage in respect of basic and advancedcellular services.  PLDT's capital spending of Php5,765 million was principallyused to finance the expansion of its fixed line data and IP-based networkservices.  ePLDT and its subsidiaries’ capital spending of Php520 million was primarilyused to fund its call center expansion.  The balance represented othersubsidiaries’ capital spending.  Consolidated capital expenditures in the sameperiod in 2005 amounted to Php7,012 million, of which Php3,569 million, Php3,118million and Php305 million were attributable to Smart, PLDT and ePLDT,respectively.  The balance represented other subsidiaries’ capital spending.

 

***Financing Activities***

 

On a consolidated basis, we used net cash of Php23,943million for financing activities, net of loan drawings by Smart, in the first halfof 2006, a decrease of Php585 million, or 2%, compared to Php24,528 million in thesame period in 2005.  The net cash used in financing activities in the first halfof 2006 was mainly attributable to debt repayments and interest payments byPLDT and Piltel in line with our ongoing debt reduction program and dividendpayments distributed by PLDT to its common and preferred stockholders.  

 

Debt Financing 
 

Additions to our consolidated long-term debt in thefirst half of 2006 totaled Php3,446 million mainly from Smart's drawingsrelated to the financing of its Phase 8 loan facilities.  Payments in respectof principal and interest of our total debt amounted to Php17,954 million andPhp3,977 million, respectively, in the first half of 2006, of which Php11,395million and Php3,250 million were attributable to PLDT, respectively.

 

The following table shows our long-term debt,including current portion, as at June 30, 2006 and December 31, 2005:

 

** **

**June 30,**

** **

**December 31,**

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

 

(Audited)

 

 

 

 

**(in millions)**

** **

** **

** **

** **

** **

** **

** **

U.S. Dollar Debt:

 

 

 

 

 

** **

 

Export Credit Agencies-Supported Loans

Php19,088

 

Php23,126

 

(Php4,038)

** **

(17)

Fixed Rate Notes

44,838

 

52,354

 

(7,516)

** **

(14)

Term Loans

16,971

 

14,288

 

2,683

** **

19

Restructured Loans

2,720

 

4,767

 

(2,047)

** **

(43)

Satellite Acquisition Loans

2,655

 

3,040

 

(385)

** **

(13)

 

86,272

 

97,575

 

(11,303)

** **

(12)

Japanese Yen Debt:

 

 

 

 

 

** **

 

JBIC’s Overseas Investment Loan

2,593

 

3,139

 

(546)

** **

(17)

Export Credit Agency-Supported Loan

–

 

709

 

(709)

** **

(100)

 

2,593

 

3,848

 

(1,255)

** **

(33)

Philippine Peso Debt:

 

 

 

 

 

** **

 

Peso Fixed Rate Corporate Notes

1,577

 

1,576

 

1

** **

–

Term Loans

34

 

166

 

(132)

** **

(80)

Restructured Loans

215

 

379

 

(164)

** **

(43)

 

1,826

 

2,121

 

(295)

** **

(14)

 

Php90,691

 

Php103,544

 

(Php12,853)

** **

(12)

 

Fora complete discussion of long-term debt, see *Note 17 – Interest-bearingFinancial Liabilities*to the accompanying unaudited consolidated financialstatements.

 

Our long-term debtdecreased by Php12,853 million, or 12%, to Php90,691 million as at June 30, 2006largely due to debt amortizations and prepayments in line with PLDT’s effortsto reduce its overall debt level and also due to the appreciation of the peso.PLDT’s debt was reduced by 15% to Php62,305 million by June 30, 2006.  Inaddition, the debt levels of Smart decreased by 4%, to Php25,697 million(including Piltel’s debt of Php2,984 million), while Mabuhay and ePLDT decreasedby 13% and 79%, to Php2,655 million and Php34 million, respectively, as at June30, 2006 due to amortizations and prepayments during 2006.  

 

Asat June 30, 2006, PLDT had no undrawn committed long-term credit facilities.  OnAugust 8, 2005, Smart signed a US$30 million commercial facility with NordicInvestment Bank to partly finance the related Phase 8 GSM equipment andservices contracts.  The facility was drawn in July 2006.  On August 10, 2005,Smart signed a US$70 million loan facility with Finnish Export Credit Ltd. forits GSM Phase 8 financing.  Smart opted to utilize only a total of US$66.79million which was drawn on February 15, 2006 and March 13, 2006 for US$10.02million and US$56.77 million, respectively.  The balance of US$3.2 million wascancelled.  After the first repayment on March 1, 2006, US$66 million remainedoutstanding as at June 30, 2006.  Smart also had available facilities under its€50 million Framework Agreement with Bayerische Hypo-und VereinsbankAktiengesellschaft up to a maximum aggregate amount of €44 million.  Please see*Note 17 – Interest-bearing Financial Liabilities*to the accompanying unauditedconsolidated financial statements for a detailed discussion of our long-termdebt.

 

The scheduled maturities of our outstanding unauditedconsolidated long-term debt at nominal values as at June 30, 2006 are asfollows:  

 

**Year**

** **

**US$ Loans**(1)

** **

**JP¥ Loans**(2)

** **

**Peso Loans**

** **

**Total**

 

 

**(in millions)**

** **

 

 

 

 

 

 

 

 

 

 

 

 

2006(3)

 

US$79

 

Php4,211

 

JP¥1,394

 

Php648

 

Php793

 

Php5,652

2007

 

345

 

18,379

 

2,788

 

1,297

 

36

 

19,712

2008

 

124

 

6,602

 

1,394

 

648

 

24

 

7,274

2009

 

281

 

14,948

 

–

 

–

 

24

 

14,972

2010 

 

63

 

3,337

 

–

 

–

 

834

 

4,171

2011 and onwards

 

872

 

46,416

 

–

 

–

 

170

 

46,586

 

 

US$1,764

 

Php93,893

 

JP¥5,576

 

Php2,593

 

Php1,881

 

Php98,367

________________

*(1)       **The exchange rate used wasPhp53.220 to US$1.00.*

*(2)       **The exchange rate used wasPhp0.4650 to JP**¥1.00.*

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

 

Approximately Php51,781million principal amount of our consolidated outstanding long-term debt as at June30, 2006 is scheduled to mature over the period from 2006 to 2010.  Of thisamount, Php33,669 million was attributable to PLDT, Php15,424 million to Smart (includingPiltel’s debt of Php1,378 million) and the remainder to Mabuhay Satellite,Maratel and ePLDT.

 

*DebtCovenants*

 

Ourdebt instruments contain restrictive covenants, including covenants that couldprohibit us from paying dividends on common stock under certain circumstances,and require us to comply with specified financial ratios and other financialtests, calculated in conformity with accounting principles generally acceptedin the Philippines, at relevant measurement dates, principally at the end ofeach quarterly period.  We have compliedwith all of our maintenance financial ratios as required under our loancovenants and other debt instruments.  In addition, we are required to complywith certain financial ratios for the incurrence of capital expenditures inexcess of US$10 million and incurrence of indebtedness.

 

Please see *Note 17 – Interest-bearing FinancialLiabilities*to the accompanying unaudited consolidated financial statementsfor a detailed discussion of our covenants.

 

Financing Requirements
 

We believe that our available cash, including cashflow from operations, will provide sufficient liquidity to fund our projectedoperating, investment, capital expenditures and debt service requirements forthe next 12 months.  

 

Since 2002, we have been utilizing internallygenerated cash, particularly from our cellular business, to reduce our overalllevel of indebtedness.  In line with this objective, we have managed ourcapital expenditures, reduced our investments and suspended dividend paymentsto common shareholders from April 2001.  As a result of our improving cashflows and reduced debt levels, we restored the payment of dividends in May 2005and currently intend to gradually increase our dividend payout ratio insucceeding years as we improve our leverage ratios.  For2006, we are targeting a dividend payout ratio of 60%.

 

*CreditRatings*****

 

Noneof our existing indebtedness contains provisions under which credit ratingdowngrades would trigger a default, changes in applicable interest rates orother similar terms and conditions.  

 

PLDT’scurrent credit ratings are as follows:

 

**Rating Agency**

**Credit Rating**

** **

**Outlook**

 

 

 

 

Standard and Poor’s

Foreign Currency Senior Unsecured Debt Rating

BB+

Stable

 

 

 

 

Moody’s Investor Service

Foreign Currency Senior Unsecured Debt Rating

Ba2

Negative

 

Local Currency Corporate Family Rating

Baa3

Positive

 

 

 

 

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 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.

 

OnJuly 18, 2006, Moody’s upgraded PLDT’s local currency corporate family ratingfrom Ba1 to Baa3 with a positive outlook.  The upgrade has been prompted bycontinued improvements in PLDT’s credit profile, that it enjoys a lowly gearedbalance sheet, 65% share in revenue terms of the market where only one majorcompetitor is present and has flexibility significant enough to invest its freecash flows into upgrading its technology base.

 

On February 20, 2006, Fitch Ratings has revised itsoutlook on PLDT’s long-term foreign currency from negative to stable.  PLDT’slong-term foreign currency, global bonds and senior notes has been affirmed at“BB” and convertible preferred stock at “B+.”  The revision in outlook reflectsthat of the outlook of the Republic of the Philippines as foreign currency andsenior debt instrument ratings are constrained by the sovereign foreigncurrency rating.  At the same time, PLDT’s long-term local currency rating hasbeen affirmed at “BB+” with a stable outlook.

 

OnJune 7, 2006, Fitch Ratings upgraded PLDT’s long-term local currency IssuerDefault Rating, or IDR, to “BBB-” from “BB+” with a positive outlook.  At thesame time, 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 provide Nationalratings in the Philippines, Fitch assigned PLDT a National long-term rating of“AAA(ph1)” with a stable outlook.

 

*EquityFinancing*

 

PLDT raised Php43 millionand Php131 million from the exercise by certain officers and executives ofstock options in the first half of 2006 and 2005, respectively.  In addition,through our subscriber investment plan, or SIP, which provides postpaid fixedline subscribers the opportunity to buy shares of our 10% cumulativeconvertible preferred stock as part of the upfront payments collected fromsubscribers, PLDT was able to raise Php3 million and Php2 million in the firsthalf of 2006 and 2005, respectively.  

 

Cashdividend payments in the first half of 2006 amounted to Php5,334 million, ofwhich Php5,099 million and Php235 million were paid to common and preferredshareholders, respectively, compared to Php2,963 million, of which Php2,372million and Php591 million were paid to common and preferred shareholders,respectively, in the same period in 2005.  

 

The following table sets forth dividend payments onshares of PLDT’s common stock for the year 2005 and for the six months endedJune 30, 2006:

 

** **

** **

**Date**

** **

**Amount**

**Class**

** **

**Declaration**

** **

**Record**

** **

**Paid**

** **

**Per Share**

** **

**Total**

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

March 1, 2005

 

March 31, 2005

 

May 12, 2005

 

Php14.00

 

Php2,384

 

 

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

 

 

February 27, 2006

 

March 20, 2006

 

April 20, 2006

 

28.00

 

5,059

 

As atJune 30, 2006, there were 182,820,644 PLDT common shares outstanding.

 

***Contractual Obligations and Commercial Commitments***

 

*Contractual Obligations*

 

The following table discloses our consolidated contractualobligations outstanding as at June 30, 2006: 

 

 

**Payments Due by Period**

 

**Total**

** **

**Within 1 year**

** **

**2****-****3 years**

** **

**4****-****5 years**

** **

**After 5 years**

 

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

Long-term debt (1)

Php98,367

 

Php18,449

 

Php26,537

 

Php9,163

 

Php44,218

Long-term lease obligations:

 

 

 

 

 

 

 

 

 

Operating lease

3,435

 

606

 

1,067

 

815

 

947

Capital lease

1,670

 

1,001

 

223

 

19

 

427

Unconditional purchase obligations(2)

10,815

 

4,961

 

2,129

 

2,129

 

1,596

Other long-term obligations

12,389

 

–

 

5,115

 

7,274

 

–

Total contractual obligations

Php126,676

 

Php25,017

 

Php35,071

 

Php19,400

 

Php47,188

___________

*(1)    **Before deducting unamortizeddebt discount and debt issuance costs.*

* *

*(2)    **Based on the original AirTime Purchase Agreement with AIL.*

* *

*Long-term Debt*

* *

For a discussion of our long-term debt, see *Note 17 – Interest-bearing Financial Liabilities*to the accompanying unaudited consolidated financialstatements.

* *

*Long-term Operating Lease Obligations*

 

***DigitalPassage Service Contracts***.****PLDThas existing Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento 25 years expiring at various dates.  As at June 30, 2006, PLDT’s aggregateremaining obligation under these contracts amounted to approximately Php12million.

 

***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 June 30, 2006, PLDT’s aggregate remaining obligation under thisagreement was approximately Php20 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 Php3,171 million as at June30, 2006 in respect of office and cell site rentals with over 3,000 lessorsnationwide, PLDT has lease obligations aggregating Php100 million as at June 30,2006, and ePLDT has lease obligations aggregating Php132 million as at June 30, 2006 in respect of certain office space rentals.

 

*Long-term Capital Lease Obligation*s

 

For a discussion of our long-term capital leaseobligations, see *Note 17 –Interest-bearing Financial Liabilities*tothe accompanying unaudited consolidated financial statements.

 

*UnconditionalPurchase Obligations*

 

***AirTime Purchase Agreement with AIL***.PLDT is a party to a Founder NSP, or National Service Provider, Air TimePurchase Agreement entered into with ACeS International Limited, or AIL, inMarch 1997, which was amended in December 1998, under which PLDT was grantedthe exclusive right to sell AIL services in the Philippines.  In exchange, theAir Time Purchase Agreement required PLDT to purchase from AIL a minimum ofUS$5 million worth of air time annually over ten years commencing on January 1,2002, the purported date of commercial 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. 

 

PLDT and the otherfounder NSPs are endeavoring to amend the Air Time Purchase Agreement due tothe occurrence of partial satellite loss, changes in the primary business of ACeSand 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.

 

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 deadline set in the Standstill Agreement for thenegotiation of a revised Air Time Purchase Agreement.  Negotiations arecontinuing with the relevant parties towards an amicable settlement of thismatter.  See *Note 20 – Related Party Transactions* and *Note 23 –Provisions and Contingencies* to the accompanying unaudited consolidatedfinancial statements for further details relating to the Air Time PurchaseAgreement with AIL.

 

As at June 30, 2006,PLDT’s aggregate remaining minimum obligation under the original Air TimePurchase Agreement was approximately Php10,815 million.  

 

*OtherLong-term Obligations*

 

***MandatoryConversion and Purchase of Shares***.As discussed in *Note 17 – Interest-bearing Financial Liabilities*to theaccompanying unaudited consolidated financial statements, as at June 30, 2006,PLDT had issued a total of 3 million shares of Series V Convertible PreferredStock, 5 million shares of Series VI Convertible Preferred Stock and 4 millionshares of Series VII Convertible Preferred Stock in exchange for a total of 58million shares of Series K Class I Convertible Preferred Stock of Piltel,pursuant to the debt restructuring 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 JP¥4,071.89 per share,respectively.

 

Asat June 30, 2006, 2,668,962 shares of Series V Convertible Preferred Stock and 2,681,644shares of Series VI Convertible Preferred Stock had been converted to PLDTcommon shares.  As at June 30, 2006, 52,478 shares of Series V, 2,613,460shares of Series VI and 3,842,000 shares of Series VII Convertible PreferredStocks remained outstanding.  The aggregate value of the put option based onoutstanding shares as at June 30, 2006 was Php12,389 million, of which Php5,115million is puttable on June 4, 2008 and Php7,274 million on June 4, 2009, ifall of the outstanding shares of Series V, VI and VII Convertible PreferredStocks were mandatorily converted and all the underlying shares of common stockwere put to PLDT.  The market value of the underlying shares of common stockwas Php11,910 million, based on the market price of PLDT common shares of Php1,830per share as at June 30, 2006.

 

Please refer to *Note 17 – Interest-bearingFinancial Liabilities*to the accompanying unaudited consolidated financialstatements for further discussion.

 

*Commercial Commitments*

 

As at June 30, 2006,our outstanding commercial commitments, in the form of letters of credit,amounted to Php1,836 million.  These commitments will expire within one year.

 

**Quantitative andQualitative Disclosures about Market Risks**

 

Our operations areexposed to various risks, including liquidity risk, foreign exchange risk andinterest rate risk.  The importance of managing these risks has significantlyincreased in light of considerable change and continuing volatility in both thePhilippine and international financial markets.  With a view to managing theserisks, we have incorporated financial risk management functions in ourorganization, particularly in our treasury operations and equity issues andsales of certain assets.

 

Liquidity Risk Management
 

We seek to manage our liquidity profile to be ableto finance our capital expenditures and service our maturing debts.  To coverour financing requirements, we intend to use internally generated funds andproceeds from debt and equity issues and sales of certain assets. 

 

As part of our liquidityrisk management program, we regularly evaluate our projected and actual cashflow information and continuously assess conditions in the financial marketsfor opportunities to pursue fund-raising initiatives.  These initiatives mayinclude bank loans, export credit agency-guaranteed facilities, and debtcapital and equity market issues.

 

***ForeignExchange Risk Management***

 

As at June 30, 2006,the Philippine peso had depreciated by Php0.158 against the U.S. dollar to Php53.220to US$1.00 from Php53.062 to US$1.00 as at December 31, 2005.  As at June 30,2005, on the other hand, the peso appreciated by Php0.164 to Php56.177 toUS$1.00 from Php56.341 to US$1.00 as at December 31, 2004.  As at June 30, 2006,the Philippine peso had depreciated by 3% against the Japanese yen to Php0.4650to JP¥1 from Php0.4504 to JP¥1 as at December 31, 2005.  On the other hand, asat June 30, 2005, the peso appreciated by 8% to Php0.5067 to JP¥1 from Php0.5495to JP¥1 as at December 31, 2004.  The revaluation of our foreign-currencydenominated assets and liabilities is recognized as foreign exchange gains or lossesas at balance sheet date.  Since substantially all of our indebtedness isdenominated in U.S. dollars and Japanese yen, the depreciation of the peso hasresulted to the recognition of foreign exchange losses.  The extent of foreignexchange gains or losses is largely dependent on the amount of foreign currencydebt we carry.  As at June 30, 2006, consolidated foreign currencydebt-denominated amounted to Php88,865 million, a reduction from Php101,423million last December 31, 2005.  As such, we recognized foreign exchange loss ofPhp195 million in the first half of 2006 as compared to foreign exchange gainsof Php1,382 million recorded in the same period in 2005.  

 

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.

* *

As at June 30, 2006, approximately 98% of our totalconsolidated debts were denominated in foreign currencies, principally in U.S.dollars.  Of our foreign currency-denominated debts, 3% are in Japanese yen ona consolidated basis and the balance in U.S. dollars.  Thus, a weakening of thePhilippine peso against the U.S. dollar or Japanese yen will increase both theprincipal amount of our unhedged foreign currency-denominated debts(representing 50% of our consolidated debts, or 35% net of our U.S. dollar cashbalances as at June 30, 2006), and interest expense on our debt in peso terms.In addition, 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 substantially drops from its current level, we may beunable to maintain compliance with these ratios, which could result inacceleration of some or all of our indebtedness.  For further information onour loan covenants, see “Liquidity and Capital Resources – Financing Activities– Covenants” above and *Note 17 – Interest-bearing Financial Liabilities*tothe accompanying unaudited consolidated financial statements.

 

To manage our foreign exchangerisks, stabilize cash flows, and improve investment and cash flow planning, weenter into forward foreign exchange contracts, foreign currency swap contracts,currency option contracts and other hedging products aimed at reducing and/ormanaging the adverse impact of changes in foreign exchange rates on ouroperating results and cash flows.  However, these hedges do not cover all ofour exposure to foreign exchange risks.

 

Specifically,we use forward foreign exchange contracts, foreign currency swap contracts andcurrency option contracts to manage the foreign currency risk associated withour foreign currency-denominated loans.  In order to manage hedge costs ofthese contracts, we utilize structures that include credit-linkage with PLDT asthe reference entity, a 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 June 30, 2006, PLDT’s outstanding forward foreign exchangecontracts, principal-only long-term cross-currency swap contracts and currencyoption contracts amounted to US$158 million and JP¥1,516 million; US$550million; and US$175 million, respectively.  Smart has no outstanding forwardforeign exchange contracts as at June 30, 2006. 

 

For further discussions of these contracts, see *Note24 – Financial Assets and Liabilities – Derivative Financial Instruments*tothe accompanying unaudited consolidated financial statements.

 

***Interest Rate RiskManagement***

 

On a limited basis, weenter into interest rate swap agreements in order to manage our exposure tointerest rate fluctuations.  As at June 30, 2006, PLDT’s outstanding interestrate swap contracts amounted to US$63 million.  For further discussions ofthese contracts, see *Note 24 – Financial Assets and Liabilities – DerivativeFinancial Instruments*to the accompanying unaudited consolidated financialstatements.

 

Wemake use of hedging instruments and structures solely for reducing or managing financialrisks associated with our liabilities and not for trading or speculative purposes.

** **

**Impact of Inflation andChanging Prices**

** **

Inflation can be asignificant factor in the Philippine economy, and we are continually seekingways to minimize its impact.  In recent periods, we do not believe inflationhas had a material impact on our operations.  The average inflation rate in the Philippines in the first half of 2006 was 7.1%, compared to 8.3% in the sameperiod in 2005.

** **

**PART II – OTHER INFORMATION**

** **

***PLDT launched fiber optic link to Baguio City***

** **

On July 28, 2006, we launched the first DFON link connecting Baguio City to PLDT’s nationwide fiber optic network.  The fiber optic link has a capacityof 10 gigabit per second of transmission bandwidth equivalent to 120,960simultaneous voice calls.  It will support the city’s growing demand for voice,data and video traffic and would further boost Baguio’s tourism industry andICT potential.

 

***ePLDT’s Acquisition ofSPi Technologies***

** **

On July 11, 2006, ePLDT completed the acquisition of 100% ofSPi and its direct and indirect Philippine and offshore subsidiaries for atotal consideration of US$135.34 million from SPi’s sole shareholder, SPi TechL.P., or SPi Tech.  The acquisition of SPi, combined with *ePLDT Ventus*,creates the largest full service business process outsourcing in the Philippines.  As part of the transaction, ePLDT also acquired a US$7 million debt owedby SPi to SPi Tech at face value.  In addition, ePLDT advanced US$16.43million to SPi in order for SPi to fully pay its debt owed to DBS Bank Singapore.  ePLDT intends to have this debt refinanced by SPi in due course.

 

***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 80% equity interest in Wolfpac inOctober 2003.  The remaining 20% equity interest in Wolfpac was paid in July2006.

 

*Related Party Transactions*
 

*Cooperation Agreement with the First Pacific, or FP, Parties, NTTCommunications 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 Communications underthe Stock Purchase and Strategic Investment Agreement dated September 28, 1999, as amended and the Shareholders Agreement dated March 24,2000, 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.

 

Key provisions of the Cooperation Agreement pertainto, among other things: restriction on ownership of shares of PLDT by NTTCommunications and DoCoMo, limitation on competition, business cooperation, additional rights of DoCoMo, change in control and termination. Please see *Note 20 – Related Party Transactions* to the accompanyingunaudited consolidated financial statements for further details.

 

*Integrated i-mode ServicesPackage Agreement between DoCoMo and Smart –*the Integrated i-mode ServicePackage Agreement was entered into by Smart and DoCoMo on February 15, 2006,under which DoCoMo agreed to grant Smart, on an exclusive basis within the territoryof the Philippines for a period of five years, an integrated i-mode servicepackage including non-transferable license to use the licensed materials andthe i-mode brand, as well as implementation support and assistance andpost-commercial launch support from DoCoMo.  Pursuant to this agreement, Smartis required to pay an initial license fee and running royalty fees based on therevenue arising from i-mode subscription fees and data traffic.  The initiallicense fee paid as at June 30, 2006 amounted to US$1 million or Php53 million.

 

*Advisory Services Agreement between DoCoMo and PLDT* – the Advisory Services Agreement was entered into byDoCoMo and PLDT on June 5, 2006, in accordance with the Cooperation Agreementbetween PLDT and DoCoMo.  Pursuant to the agreement, DoCoMo will provide the servicesof certain key personnel in connection with certain aspects of the business ofPLDT and Smart.  Also, the agreement governs the terms and conditions of theappointments and the corresponding fees related thereto.

 

*Other Agreements with NTTCommunications and/or its Affiliates*—agreements under which (1) NTT Communications provides advisory services for various business areas ofPLDT; (2) NTT World Engineering Marine Corporation provides maintenance servicesto PLDT’s DFON; (3) PLDT is licensed to market managed data and other servicesusing NTT Communications’ Arcstar brand; and (4) PLDT and NTT Communicationsagreed to cooperative arrangements for conventional internationaltelecommunication services.  Total fees under these agreements totaled Php100 millionand Php114 million for the six months ended June 30, 2006 and 2005,respectively.  PLDT’s outstanding obligations under these agreements amountedto Php40 million and Php23 million as at June 30, 2006 and December 31, 2005,respectively.

 

*Agreements between Smartand Asia Link B.V*. — agreements underwhich Asia Link undertakes to provide technical support services and assistancein the operations and maintenance of Smart’s cellular business.  Total fees underthese agreements totaled Php299 million and Php278 million for the six months endedJune 30, 2006 and 2005, respectively.  Outstanding obligations of Smart underthe Technical Service Agreement amounted to Php30 million and Php194 million asat June 30, 2006 and December 31, 2005, respectively.  Asia Link is asubsidiary of the First Pacific Group.

 

*Agreements relating toinsurance companies* — Gotuaco delRosario and Associates, or Gotuaco, acts as the broker for certain insurancecompanies to cover certain insurable properties of the PLDT Group.  Insurancepremiums are remitted to Gotuaco and the broker’s fees are settled betweenGotuaco and the insurance companies.  In addition, PLDT has an insurance policywith Malayan Insurance Co., Inc., or Malayan, wherein premiums are directlypaid to Malayan.  Total insurance expenses paid under these agreements amountedto Php189 million and Php268 million for the six months ended June 30, 2006 and2005, respectively.  Two directors of PLDT have a direct/indirect interest inor serve as a director/officer of Gotuaco and Malayan.

 

For a more detailed discussion of the related partytransactions enumerated above, see *Note 20 –Related Party Transactions*to the accompanying**unaudited**consolidated financial statements.

SIGNATURES

 

 

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

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:  August 8, 2006

 
********
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

AS AT JUNE 30, 2006 (UNAUDITED) AND DECEMBER 31, 2005(AUDITED)

AND FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005(UNAUDITED)

** **

 

** **
****
**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

CONSOLIDATEDBALANCE SHEETS

**(in million pesos, except par value and share amounts)**

** **

** **

**June 30, 2006**

 

December 31, 2005

** **

**(Unaudited)**

 

(Audited)

**ASSETS**

**Noncurrent Assets**

** **

** **

** **

Property, plant and equipment (Notes 2, 8 and 17)

**173,832**

 

176,974

Investments in associates (Notes 2, 9 and 17)

**445**

 

15

Investments-available-for-sale (Notes 2 and 24)

**111**

 

109

Investment properties (Notes 2 and 10)

**691**

 

701

Goodwill and intangible assets (Notes 2, 3 and 11)

**3,312**

 

3,049

Deferred income tax assets (Notes 2 and 6)

**18,059**

 

15,457

Derivative assets (Notes 2 and 24)

**1,081**

 

2,648

Notes receivable (Notes 2, 12 and 24)

**346**

 

346

Prepayments - net of current portion

**1,036**

 

1,062

Advances and refundable deposits - net of current portion (Note 2)

**1,400**

 

1,070

Total Noncurrent Assets 

**200,313**

 

201,431

**Current Assets**

** **

 

 

Cash and cash equivalents (Notes 2, 13 and 24)

**25,966**

 

30,064

Short-term investments (Notes 2 and 24)

**3,172**

 

2,746

Trade and other receivables (Notes 2, 14 and 24)

**7,844**

 

7,113

Inventories and supplies (Notes 2 and 15)

**2,662**

 

1,548

Derivative assets (Notes 2 and 24)

**15**

 

37

Current portion of prepayments

**4,581**

 

5,259

Current portion of advances and refundable deposits (Notes 2 and 20)

**218**

 

1,515

Total Current Assets 

**44,458**

 

48,282

 

**244,771**

 

249,713

 

** **

 

 

**EQUITY AND LIABILITIES**

**Equity****Attributable to Equity Holders of PLDT**(Notes 2, 7 and 16)

** **

 

 

Preferred stock, Php10 par value, authorized-822,500,000 shares; issued and  outstanding-442,966,220 shares as at June 30, 2006 and 443,343,035 shares  as at December 31, 2005

**4,430**

 

4,433

Common stock, Php5 par value, authorized-234,000,000 shares; issued and  outstanding-182,820,644 shares as at June 30, 2006 and 180,789,003 shares  as at December 31, 2005

**914**

 

904

Stock options issued (Note 21)

**48**

 

67

Equity portion of convertible preferred stock (Note 17)

**10**

 

49

Capital in excess of par value

**57,202**

 

53,918

Retained earnings (Note 7)

**22,773**

 

12,583

Cumulative translation adjustments (Note 24)

**(1,006)**

 

1,253

                Total Equity Attributable to Equity Holders of PLDT

**84,371**

 

73,207

**Minority interest**

**1,499**

 

1,162

Total Equity

**85,870**

 

74,369

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

CONSOLIDATEDBALANCE SHEETS (*continued*)

(in million pesos, except par value and share amounts)

 

** **

**June 30, 2006**

 

December 31, 2005

** **

**(Unaudited)**

 

(Audited)

**Noncurrent Liabilities**

** **

 

 

Interest-bearing financial liabilities - net of current portion (Notes 2, 8, 17, 22 and 24)

**82,533**

 

97,215

Deferred income tax liabilities (Notes 2 and 6)

**39**

 

49

Derivative liabilities (Notes 2 and 24)

**5,918**

 

5,777

Provisions for onerous contracts and assessments - net of current portion  (Notes 20, 22 and 23)

**4,096**

 

3,966

Pension and other employee benefits (Notes 2 and 21)

**5,544**

 

4,252

Customers’ deposits

**2,205**

 

2,215

Other noncurrent liabilities (Notes 2, 8, 14 and 18)

**8,852**

 

7,600

Total Noncurrent Liabilities

**109,187**

 

121,074

**Current Liabilities**

** **

 

 

Accounts payable (Notes 2 and 24)

**11,295**

 

15,482

Accrued expenses and other current liabilities (Notes 2, 17, 19 and 20)

**13,097**

 

13,306

Unearned revenues (Note 2)

**3,353**

 

2,656

Derivative liabilities (Notes 2 and 24)

**66**

 

192

Current portion of provisions for onerous contracts and assessments  (Notes 20, 22 and 23)

**427**

 

408

Current portion of interest-bearing financial liabilities (Notes 2, 8, 17, 22 and 24)

**19,109**

 

19,401

Dividends payable (Notes 2, 7, 17 and 24)

**546**

 

746

Income tax payable (Notes 2 and 6)

**1,821**

 

2,079

Total Current Liabilities

**49,714**

 

54,270

 

**244,771**

 

249,713

* *

*See accompanying Notes toUnaudited Consolidated Financial Statements.*

* *
****
**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF INCOME**

**(in million pesos, except per share amounts)**

** **

** **

**Six Months Ended June 30,**

**Three Months Ended June 30,**

 

**2006**

2005

**2006**

2005

 

(Unaudited)

**INCOME**

** **

 

 

 

Service revenues

**60,640**

59,543

**30,662**

30,268

Non-service revenues (Note 5)

**1,383**

1,422

**674**

607

Equity share in net income of associates

**3**

3

**1**

1

Other income (Notes 4 and 5)

**335**

170

**205**

118

 

**62,361**

61,138

**31,542**

30,994

**EXPENSES**

** **

 

** **

 

Depreciation and amortization (Notes 4 and 8)

**15,485**

10,861

**7,818**

5,305

Compensation and benefits (Notes 5 and 21)

**7,616**

6,492

**3,972**

3,406

Financing costs (Notes 5, 8, 17 and 24)

**6,135**

4,824

**5,134**

4,545

Maintenance (Note 20)

**3,286**

3,320

**1,632**

1,776

Selling and promotions

**2,524**

2,770

**1,267**

1,318

Cost of sales (Notes 5, 20 and 22)

**2,460**

3,271

**1,225**

1,267

Professional and other contracted services (Note 20)

**1,239**

1,120

**655**

663

Rent (Note 22)

**1,146**

954

**600**

324

Taxes and licenses (Note 23)

**914**

1,015

**363**

451

Provisions (Notes 4, 5, 14, 15, 20, 22 and 23)

**770**

1,987

**532**

1,379

Communication, training and travel

**673**

744

**311**

392

Insurance and security services (Note 20)

**659**

825

**325**

414

Amortization of intangible assets (Note 11)

**140**

139

**72**

68

Other expenses (Notes 5 and 20)

**689**

781

**283**

365

 

**43,736**

39,103

**24,189**

21,673

**INCOME BEFORE INCOME TAX**

**18,625**

22,035

**7,353**

9,321

**PROVISION FOR INCOME TAX** (Notes 2 and 6)

**2,986**

5,483

**477**

2,008

**NET INCOME FOR THE PERIOD**

**15,639**

16,552

**6,876**

7,313

**ATTRIBUTABLE TO:**

** **

 

** **

 

Equity holders of PLDT

**15,306**

16,520

**6,725**

7,303

Minority interest

**333**

32

**151**

10

** **

**15,639**

16,552

**6,876**

7,313

**Earnings Per Common Share** (Note 7)

** **

 

 

 

Basic

**83.02**

92.44

36.28

40.51

Diluted

**83.00**

87.88

36.28

40.51

* *

*See accompanying Notes to**Unaudited Consolidated Financial Statements.*

* *

* *
**
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN EQUITY**

**(in million pesos)**

** **

 

**Preferred Stock**

**Common Stock**

**Stock Options Issued**

**Equity Portion of Convertible Preferred Stock**

**Capital in Excess of  Par Value**

**Retained Earnings (Deficit)**

**Cumulative Translation Adjustments**

**Equity Attributable to Equity Holders of PLDT**

**Minority Interest**

**Total  Equity**

**Balances at January 1, 2005**

**4,497**

**851**

**181**

**448**

**50,469**

**(10,479)**

**362**

**46,329**

**857**

**47,18****6**

Income for the period

–

–

–

–

–

16,520

–

16,520

32

16,552

Currency translation differences (Note 24)

–

–

–

–

–

–

(2)

(2)

–

(2)

Net gains on available-for-sale financial assets  (Note 24)

–

–

–

–

–

–

6

6

–

6

Net loss on cash flow hedges (Note 24)

–

–

–

–

–

–

(500)

(500)

–

(500)

Total income and expense for the period recognized directly to equity

–

–

–

–

–

–

(496)

(496)

–

(496)

**Total income and expense for the period**

**–**

**–**

**–**

**–**

**–**

**16,520**

**(496)**

**16,024**

**32**

**16,056**

**Cash dividends**

**–**

**–**

**–**

**–**

**–**

**(6,682)**

**–**

**(6,682)**

**–**

**(6,682)**

**Issuance of capital stock - net (Note 16)**

**(10)**

**5**

**–**

**(187)**

**1,230**

**–**

** **

**1,038**

**–**

**1,038**

**Exercised shares**

**–**

**1**

**(57)**

**–**

**187**

**–**

**–**

**131**

**–**

**131**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**(7)**

**(7)**

**Balances at June 30, 2005**

**4,4****87**

**85****7**

**124**

**261**

**51,886**

**(641)**

**(134)**

**56,840**

**882**

**57,722**

 

 

 

 

 

 

 

 

 

 

 

**Balances at January 1, 2006**

**4,433**

**904**

**67**

**49**

**53,918**

**12,583**

**1,253**

**73,207**

**1,162**

**74,369**

Changes in equity:

 

 

 

 

 

 

 

 

 

 

Income for the period

–

–

–

–

–

15,306

–

15,306

333

15,639

Currency translation differences (Note 24)

–

–

–

–

–

–

3

3

2

5

Net gains on available-for-sale financial assets  (Note 24)

–

–

–

–

–

–

3

3

–

3

Net loss on cash flow hedges (Note 24)

–

–

–

–

–

–

(2,265)

(2,265)

–

(2,265)

Total income and expense for the period recognized directly to equity

–

–

–

–

–

–

(2,259)

(2,259)

2

(2,257)

**Total income and expense for the period**

**–**

**–**

**–**

**–**

**–**

**15,****306**

**(2,259)**

**13,047**

**335**

**13,382**

**Cash dividends**

**–**

**–**

**–**

**–**

**–**

**(5,116)**

**–**

**(5,116)**

**–**

**(5,116)**

**Issuance of capital stock - net (Note 16)**

**(3)**

**10**

**–**

**(39)**

**3,222**

**–**

**–**

**3,190**

**–**

**3,190**

**Exercised shares (Note 21)**

**–**

**–**

**(19)**

**–**

**62**

**–**

**–**

******43**

**–**

**43**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**2**

**2**

**Balances at June 30, 2006**

**4,43****0**

**9****14**

**48**

**10**

**57,202**

**22,773**

**(****1,006)**

**84,371**

**1,499**

**85,870**

* *

*See accompanying Notes to Unaudited Consolidated Financial Statements.*
**
**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in million pesos)**

 

** **

**Six Months Ended June 30,**

** **

**2006**

2005

** **

(Unaudited)

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

Income before income tax

**18,625**

22,035

Adjustments for:

** **

 

Depreciation and amortization (Note 8)

**15,485**

10,861

Interest on loans and related items - net of capitalized interest (Note 5)

**4,053**

5,453

Accretion on financial liabilities - net (Note 5)

**1,823**

1,509

Provision for doubtful accounts (Note 5)

**435**

1,526

Foreign exchange loss (gains) - net (Note 5)

**195**

(1,382)

Write-down of inventories to net realizable values (Note 5)

**186**

325

Provisions for onerous contracts and assessments (Note 5)

**149**

136

Amortization of intangible assets (Note 11)

**140**

139

Dividends on preferred stock subject to mandatory redemption (Note 5)

**93**

132

Loss (gain) on derivative transactions - net (Note 5)

**23**

(778)

Equity share in net income of associates

**(3)**

(3)

Interest income (Note 5)

**(837)**

(741)

Others

**(20)**

63

Operating income before working capital changes

**40,347**

39,275

Decrease (increase) in:

** **

 

Trade and other receivables

**(1,115)**

466

Inventories and supplies

**(1,215)**

(463)

Prepayments

**(560)**

(554)

Advances and refundable deposits

**1,298**

(260)

Increase (decrease) in:

** **

 

Accounts payable

**(4,401)**

(1,872)

Accrued expenses and other current liabilities

**916**

1,888

Unearned revenues

**658**

(252)

Pension and other employee benefits

**1,289**

794

Net cash generated from operations

**37,217**

39,022

Income taxes paid

**(3,616)**

(3,871)

Net cash provided by operating activities

**33,601**

35,151

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

Additions to property, plant and equipment

**(12,083)**

(6,809)

Proceeds from disposal of property, plant and equipment

**300**

301

Interest paid – capitalized to property, plant and equipment (Notes 5 and 8)

**(302)**

(203)

Payments for purchase of investments

**(1,977)**

(238)

Proceeds from sale of investment properties

**13**

–

Payments for purchase of investments-available-for sale

**–**

(4)

Increase (decrease) in short-term investments

**(425)**

3,846

Investments in notes receivable

**–**

(60)

Interest received

**810**

747

Decrease (increase) in advances and refundable deposits

**(234)**

200

Net cash used in investing activities

**(13,898)**

(2,220)

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS (*continued*)**

(in million pesos)

 

** **

**Six Months Ended June 30,**

** **

**2006**

2005

** **

(Unaudited)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

Proceeds from availment of long-term debt

**3,446**

5,471

Payments of long-term debt

**(17,826)**

(22,187)

Payments of debt issuance costs

**(3)**

(133)

Proceeds from notes payable

**129**

251

Payments of notes payable

**(128)**

(254)

Payments of obligations under capital lease

**(89)**

(43)

Interest paid - net of capitalized portion

**(3,977)**

(5,542)

Settlements of derivatives

**(1,405)**

(660)

Cash dividends paid

**(5,334)**

(2,963)

Proceeds from issuance of capital stock

**46**

133

Increase (decrease) in:

** **

 

Customers’ deposits

**1**

(30)

Other noncurrent liabilities

**1,197**

1,429

Net cash used in financing activities

**(23,943)**

(24,528)

**EFFECT OF EXCHANGE RATE CHANGES ON CASH AND  CASH EQUIVALENTS**

**142**

(95)

**NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**

**(4,098)**

8,308

**CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**

**30,064**

27,321

**CASH AND CASH EQUIVALENTS AT END OF PERIOD**

**25,966**

35,629

* *

*Seeaccompanying Notes to Unaudited Consolidated Financial Statements.*

* *

 
****
**PHILIPPINE LONG DISTANCE TELEPH****ONE COMPANY AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**1.       ****CorporateInformation**

 

ThePhilippine Long Distance Telephone Company, or PLDT, or Parent Company, wasincorporated under the old Corporation Law of the Philippines (Act 1459, asamended) on November 28, 1928, following the merger of four telephone companiesunder common ownership by United States entities.  In 1967, effective controlof PLDT was sold by General Telephone and Electronics Corporation (a major shareholder since PLDT’s incorporation) to a group of Filipinobusinessmen.  In 1981, in furtherance of the then existing policy of thePhilippine government to integrate the Philippine telecommunications industry,PLDT purchased substantially all of the assets and liabilities of the RepublicTelephone Company, which at that time was the second largest telephone companyin the Philippines.  In 1998, First Pacific Company Limited, or First Pacific,through its Philippine and other affiliates, acquired a significant interest inPLDT.  On March 24, 2000, NTT Communications Corporation, or NTTCommunications, through NTT Communications Capital (UK) Ltd., became PLDT’sstrategic partner with approximately 15% economic and voting interest in theissued common stock of PLDT.  Simultaneous with NTT Communications’ investmentin PLDT, we acquired 100% of Smart Communications, Inc., or Smart.  On March 14,2006, NTT DoCoMo, Inc., or DoCoMo, acquired from NTT Communications 7% ofPLDT’s outstanding common shares held by NTT Communications; NTT Communicationsretained a 7% equity shareholding.

 

Thecommon shares of PLDT are listed and traded on the Philippine Stock Exchange,or PSE, and prior to October 19, 1994, were listed and traded on the AmericanStock Exchange and the Archipelago Exchange (then the Pacific Exchange) in the United States.  On October 19, 1994, an American Depositary Receipt, or ADR, facility wasestablished, pursuant to which Citibank N.A., as the depositary, issued ADRsevidencing American Depositary Shares, or ADSs, with each ADS representing onePLDT common share with a par value of Php5 per share.  JP Morgan Chase Bank wasappointed as successor depositary for PLDT’s ADR facility effective February 10, 2003.  The ADSs are listed on the New York Stock Exchange, or NYSE, and on theNYSE Arca (formerly Archipelago Exchange) in the United States and are tradedon the NYSE.

 

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-yearperiod through 2028.  Under its amended charter (Republic Act No. 7082), whichbecame effective on August 24, 1991, PLDT is authorized to provide virtuallyevery type of telecommunications service, both within the Philippines andbetween the Philippines and other countries.

 

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.

 

Ourregistered office address is Ramon Cojuangco Building, Makati Avenue, Makati City , Philippines.

 

 

 

 

 

**2.       ****Summary ofSignificant Accounting Policies and Practices**

 

**Basis of Preparation**

 

Our unaudited consolidated financial statements havebeen prepared under the historical cost convention as modified by therevaluation of derivative financial instruments, available-for-sale financialassets and investment properties that have been measured at fair values.  Thecarrying values of recognized assets and liabilities that are hedged items infair value hedges, and are otherwise carried at cost, are adjusted to recordchanges in the fair values attributable to the risks that are being hedged.

 

Our unaudited consolidated financial statements havebeen prepared in conformity with accounting principles generally accepted inthe Philippines as set forth in the Philippine Financial Reporting Standards.

 

Our unaudited consolidated financial statementsinclude, in our opinion, all adjustments consisting only of normal recurringadjustments, necessary to present fairly the results of operations for the interimperiods.  The results of operations for the six months ended June 30, 2006 arenot necessarily indicative of the results of operations that may be expectedfor the full year.

 

Our unaudited consolidated financial statements arepresented in Philippine pesos and all values are rounded to the nearest millionexcept when otherwise indicated.

 

**Basis of Consolidation**

 

Our unaudited consolidated financial statementsinclude the financial statements of PLDT and those of the followingsubsidiaries (collectively, the PLDT Group), which were all incorporated in thePhilippines except for PLDT Global Corporation, or PLDT Global, (which was incorporatedin the British Virgin Islands) and Digital Paradise Thailand Ltd., or DigitalParadise Thailand, a 51% owned subsidiary of ePLDT (which was incorporated inThailand).

 

**Name of Subsidiary**

**Principal Activity**

**Percentage of Ownership**

** **

 

** **

**Wireless**

 

** **

Smart and subsidiaries

Cellular mobile 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 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

 

Subsidiariesare consolidated from the date when control is transferred to the PLDT Groupand cease to be consolidated from the date when control is transferred out ofthe PLDT Group.

 

We prepare our unaudited consolidated financialstatements using uniform accounting policies for like transactions and otherevents with similar circumstances.  Intercompany balances and transactions,including intercompany profits and unrealized profits and losses, areeliminated.

 

Minority interests represent the equity interests inPiltel, Wolfpac Mobile, Inc., or Wolfpac, Telesat, Mabuhay Satellite, Maratel,BCC, Digital Paradise, Inc., or Digital Paradise, Digital Paradise Thailand, netGames, Inc., or netGames, Infocom Technologies, Inc., or Infocom, and AirborneAccess Corporation, or Airborne Access, not held by the PLDT Group.

 

***ePLDT’sAcquisition of Level Up!, Inc. or 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 of LevelUp!, together with netGames, ePLDT’s online gaming subsidiary, will strengthenthe position of ePLDT as the dominant online gaming company in the country.

 

***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 Wolfpac inOctober 2003.  The remaining 20% equity interest in Wolfpac was paid in July2006.

 

***ePLDT’s Acquisition of SPi Technologies, Inc., or SPi***

*** ***

On July 11, 2006, ePLDT completed the acquisition of100% of SPi and its direct and indirect Philippine and offshore subsidiaries fora total consideration of US$135.34 million from SPi’s sole shareholder, SPi TechL.P., or SPi Tech.  The acquisition of SPi, combined with ePLDT Ventus, createsthe largest full service business processoutsourcing in the Philippines.  As partof the transaction, ePLDT also acquired a US$7 million debt owed by SPi to SPiTech at face value.  In addition, ePLDT advanced US$16.43 million to SPi inorder for SPi to fully pay its debt owed to DBS Bank Singapore.  ePLDT intendsto have this debt refinanced by SPi in due course.  

 

***Investmentsin Associates***

 

Investments in associates in which we exercise significant influence andwhich are neither a subsidiary nor a joint venture of the PLDT Group areaccounted for under the equity method of accounting.  Under the equity method,our investments in associates are carried in the consolidated balance sheets atcost plus post-acquisition changes in our share in net assets of theassociates.  After application of the equity method, we determine whether it isnecessary to recognize any additional impairment loss with respect to our netinvestment in the associate.  The consolidated statements of income reflect ourshares of the results of operations of the associate.  Where there has been achange recognized directly in the equity of the associate, we recognize ourshare in any such change and disclose this, when applicable, in ourconsolidated statement of equity.

 

Ourreporting dates and that of our associates are identical and our associates’accounting policies conform to those we use for like transactions and events insimilar circumstances.

 

***Foreign Currency Translation***

 

The functional and presentation currency of the PLDTGroup (except for Mabuhay Satellite and PLDT Global) is the Philippine peso.Transactions in foreign currencies are initially recorded in the functionalcurrency rate ruling at the date of the transaction.  Monetary assets andliabilities denominated in foreign currencies are translated at the functionalcurrency rate of exchange ruling at the balance sheet date.  All differencesare taken to the consolidated statements of income except for foreign exchangelosses that qualified as capitalizable borrowing costs during the constructionperiod.  For income tax purposes,exchange gains or losses are treated as taxable income or deductible expensesin the period such are realized.

 

Thefunctional currency of Mabuhay Satellite and PLDT Global is the U.S. dollar.As at the reporting date, the assets and liabilities of these subsidiaries aretranslated into the presentation currency of the PLDT Group at the rate ofexchange prevailing at the balance sheet date and, its income and expenses aretranslated at the weighted average exchange rate for the period.  The exchangedifferences arising on retranslation are taken directly to a separate componentof equity as cumulative translation adjustments.  On disposal of these subsidiaries,the deferred cumulative amount of translation adjustments recognized in equityrelating to subsidiaries shall be recognized in the consolidated statement ofincome. 

** **

***Property,Plant and Equipment***

 

Property,plant and equipment, except for land, are stated at cost less accumulateddepreciation and amortization and any impairment in value.  Land is stated atcost less any impairment in value.

 

The initial costof property, plant and equipment comprises its purchase price and any costsdirectly attributable in bringing the asset to its working condition andlocation for its intended use.  Expenditures incurred after the assets havebeen put into operation, such as repairs and maintenance and overhaul costs,are normally charged to income in the period the costs are incurred.  In situations where it canbe clearly demonstrated that the expenditures have resulted in an increase inthe future economic benefits expected to be obtained from the use of an item ofproperty, plant and equipment beyond its originally assessed standard ofperformance, the expenditures are capitalized as additional costs of property,plant and equipment.  Cost also includes asset retirement obligation, intereston borrowed funds used during the construction period and qualified borrowingcosts from foreign exchange losses related to foreign currency-denominatedliabilities used to acquire such qualifying assets.  When assets are sold orretired, their costs and accumulated depreciation, amortization and impairmentlosses, if any, are eliminated from the accounts and any gain or loss resultingfrom their disposal is included in the consolidated statement of income of suchperiod.

 

Depreciation and amortization are calculated on astraight-line basis over the estimated useful lives of the assets.

 

Theuseful lives and depreciation and amortization method are reviewed periodicallyto ensure that the periods and method of depreciation and amortization areconsistent with the expected pattern of economic benefits from items ofproperty, plant and equipment.  

 

Propertyunder construction is stated at cost.  This includes cost of construction,plant and equipment and other direct costs.  Property under construction is notdepreciated until such time that the relevant assets are completed and put intooperational use.

 

***Borrowing Costs***

 

Borrowing costs are capitalized if they are directlyattributable to the acquisition, construction or production of a qualifyingasset.  Capitalization of borrowing costs commences when the activities forintended use are in progress and expenditures and borrowing costs are beingincurred.  Borrowing costs are capitalized until the assets are ready for theirintended use.  If the resulting carrying amount of the asset exceedsits recoverable amount, an impairment loss is recognized.  Borrowing costsinclude interest charges and other costs incurred in connection with theborrowing of funds, as well as exchange differences arising from foreigncurrency borrowings used to finance these projects to the extent that they areregarded as an adjustment to interest cost.  

 

Allother borrowing costs are expensed as incurred.

 

Borrowingcosts are treated as deductible expenses for income tax reporting purposes inthe period they are incurred or realized.

 

***Asset Retirement Obligations***

 

The netpresent value of legal and constructive obligations associated with theretirement of an item of property, plant and equipment that resulted from theacquisition, construction or development and the normal operation of property,plant and equipment is recognized in the period in which it is incurred.

 

***InvestmentProperties***

 

Initially,investment properties are measured at cost including transaction costs.  Thecarrying amount includes the cost of replacing part of an existing investmentproperty at the time that cost is incurred if the recognition criteria are met;and excludes the costs of day to day servicing of an investment property.Subsequent to initial recognition, investment properties are stated at fairvalue, which reflects market conditions at the balance sheet date.  Gains orlosses arising from changes in the fair values of investment properties areincluded in the consolidated statement of income in the period in which theyarise.  

 

Investmentproperties are derecognized when they have either been disposed of or when theinvestment property is permanently withdrawn from use and no future benefit isexpected from its disposal.  Any gain and loss on the retirement or disposal ofan investment property is recognized in the consolidated statement of income inthe period of retirement or disposal.

 

***Goodwill***

 

Goodwillis initially measured at the excess of the acquisition cost over the fair valueof identifiable assets, liabilities and contingent liabilities.  Followinginitial recognition, goodwill is measured at cost less any accumulatedimpairment loss.  Goodwill is no longer amortized but reviewed for impairment,annually or more frequently if events or changes in circumstances indicate thatthe carrying value may be impaired.

 

As at acquisition date, any goodwill acquired is allocated to each of thecash-generating units expected to benefit from the combination’s synergies.Impairment is determined by assessing the recoverable amount of thecash-generating unit, to which the goodwill relates.  Where the recoverableamount of the cash-generating unit is less than the carrying amount, animpairment loss is recognized.  Where goodwill forms part of a cash-generatingunit and part of the operation within that unit is disposed of, the goodwillassociated with the operation disposed of is included in the carrying amount ofthe operation when determining the gain or loss on disposal of the operation.Goodwill disposed of in such circumstance is measured on the basis of therelative values of the operation disposed of and the portion of thecash-generating unit retained.

 

***IntangibleAssets***

 

Intangibleassets acquired separately are measured on initial recognition.  The cost ofintangible assets acquired from business combinations is initially recognizedat fair value as at the date of acquisition.  Following initial recognition,intangible assets are carried at cost less any accumulated amortization and anyaccumulated impairment loss.  The useful lives of intangible assets areassessed at the individual asset level as having either a finite or indefinitelife.

 

Intangibleassets with finite lives are amortized over the useful economic life using thestraight-line method and assessed for impairment whenever there is anindication that the intangible assets may be impaired.  At a minimum, theamortization period and the amortization method for an intangible asset with afinite useful life is reviewed at each financial period-end.  Changes in theexpected useful life or the expected pattern of consumption of future economicbenefits embodied in the asset are accounted for by changing the amortizationperiod, as appropriate, and treated as changes in accounting estimates.

 

Intangibleassets with indefinite useful lives are tested for impairment annually eitherindividually or at the cash-generating unit level.  Such intangible assets arenot amortized.  The useful life of an intangible asset with an indefinite lifeis reviewed annually to determine whether indefinite life assessment continuesto be supportable.  If not, the change in the useful life assessment fromindefinite to finite is made on a prospective basis.

 

Gainsor losses arising from derecognition of an intangible asset are measured as thedifference between the net disposal proceeds and the carrying amount of theasset and are recognized in the consolidated statement of income when the assetis derecognized.

 

Intangible assets created within the business are notcapitalized and expenditure is charged against operations in the period inwhich the expenditure is incurred.

 

***AssetImpairment***

 

Property,plant and equipment, investments, goodwill and other long-lived assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  Whenever thecarrying amount of an asset exceeds its recoverable amount, an impairment lossis recognized in the consolidated statements of income.  The recoverable amountis the higher of an asset’s net selling price or value in use.  The net sellingprice is the amount obtainable from the sale of an asset in an arm’s-lengthtransaction while value in use is the present value of estimated future cashflows expected to arise from the continuing use of an asset or from itsdisposal at the end of its useful life.  Recoverable amounts are estimated forindividual assets or, if these are not possible, for the cash-generating unitto which the asset belongs.  Reversal of impairment losses recognized in prior periodsis recorded as income when there is an indication that the impairment lossesrecognized for the asset no longer exist or have decreased.  However, theincreased carrying amount of an asset due to a reversal of an impairment lossis recognized to the extent it does not exceed the carrying amount that wouldhave been determined had the impairment loss not been recognized for that assetin prior periods.

 

***Researchand Development Costs***

 

Researchand development costs are expensed as incurred.

 

***Cash and Cash Equivalents***

 

Cashincludes cash on hand and in banks.  Cash equivalents are short-term, highlyliquid investments that are readily convertible to known amounts of cash withoriginal maturities of three months or less from the date of acquisition andthat are subject to an insignificant risk of change in value.

 

***Tradeand Other Receivables***

 

Trade and otherreceivables are stated at face value, net of allowance for doubtful accounts.

 

***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 period.

 

*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 which include, among otherthings, cellular phone units, materials, spare parts, terminal units andaccessories, are valued at the lower of cost and net realizable value.

 

Cost is determined using the moving average method.Net realizable value is the current replacement cost.

 

***Interest-bearing Financial Liabilities***

 

Allloans and borrowings are initially recognized at the fair value of theconsideration received less directly attributable transaction costs.

 

After initial recognition, interest-bearing loans andborrowings are subsequently measured at amortized cost using the effectiveinterest method.

 

Gainsand losses are recognized in the statements of income when the liabilities arederecognized as well as through the amortization process.

 

***FinancialAssets and Liabilities***

 

Werecognize a financial asset or a financial liability in our consolidatedbalance sheets when we become a party to the contractual provisions governingsuch financial asset or financial liability and derecognize a financial assetwhen and only when our contractual rights to the cash flows underlying suchfinancial asset have already expired which is normally the case when theinstrument is sold, or all the cash flows attributable to such financial assetare passed through to an independent third party.  A financial liability (or apart of a financial liability) is derecognized when the obligation isextinguished.  In the case of a regular way purchase or sale of financialassets, recognition and derecognition, as applicable, are done using settlementdate accounting.

*** ***

Financialassets or financial liabilities are recognized initially at fair value.Transaction costs are included in the initial measurement of all financialassets and liabilities, except for financial instruments measured at fair valuethrough profit and loss.  Fair value is determined by reference to thetransaction price or other market prices.  If such market prices are not reliablydeterminable, the fair value of the consideration is estimated as the sum ofall future cash payments or receipts, discounted using the prevailing marketrates of interest for similar instruments with similar maturities.

 

Afterinitial recognition, the following financial assets and liabilities aremeasured at amortized cost using the effective interest rate method:  (a) loansand receivables; (b) held-to-maturity investments; and (c) financialliabilities other than liabilities measured at fair value through profit andloss.

 

Investmentsin unquoted equity securities and derivatives linked thereon are measured atcost.

 

Amortizationsof discounts and premiums are taken directly to net profit or loss for theperiod.  Changes in the fair value of financial assets and liabilities measuredat fair value of (a) all derivatives (except for those eligible for hedgeaccounting); (b) other items intended to be actively traded; and (c) any itemdesignated as held “at fair value through profit and loss” at origination, aretaken directly to net profit or loss for the period.  Changes in the fair valueof available-for-sale securities are recognized in equity, except for theforeign exchange fluctuations on available-for-sale debt securities and theinterest component which is taken directly to net profit or loss for the periodbased on the asset’s effective yield.  Impairment determined foravailable-for-sale financial assets are also recognized in net profit or lossfor the period.

 

Financial assets and liabilities include financialinstruments which may be a primary instrument,such as receivables, payables and equity securities, or a derivativeinstrument, such as financial options, futures and forwards, interest rateswaps and currency swaps.

 

Financialinstruments are classified as a financial liability or as equity, in accordancewith the substance of the contractual arrangement underlying such financialinstruments.  Financial instruments that contain both liability and equityelements are classified separately as financial assets, financial liabilitiesor equity instruments.  Interests, dividends, gains and losses relating to afinancial instrument or a component that is a financial liability, are reportedas expense or income.  Distributions to holders of financial instrumentsclassified as equity are charged directly to equity, net of any related incometax benefits.  Financial instruments are offset when we have a legallyenforceable right to offset and we intend to settle either on a net basis or torealize the asset and settle the liability simultaneously. 

 

We usederivative financial instruments such as long-term currency swaps, foreigncurrency options, interest rate swaps and forward currency contracts to hedgeour risks associated with foreign currency and interest rate fluctuations.Such derivative financial instruments are stated at fair value.

 

Ourcriteria for a derivative instrument to be classified as a hedge include: (1) thatthe hedge transaction is expected to be highly effective in achieving offsettingchanges in fair value or cash flows attributable to the hedged risk, (2) that theeffectiveness of the hedge can be reliably measured, (3) that there is adequatedocumentation of the hedging relationships at the inception of the hedge, and(4) for cash flow hedges, that the forecast transaction that is the subject ofthe hedge must be highly probable and must present an exposure to variations incash flows that could ultimately affect profit or loss.

 

Forpurposes of hedge accounting, hedges are classified as either fair value hedgeswhere they hedge the exposure to changes in the fair value of a recognizedasset or liability and firm commitment; or cash flow hedges where they hedgeexposure to variability in cash flows that is either attributable to aparticular risk associated with a recognized asset or liability or a forecastedtransaction.

 

Inrelation to fair value hedges which meet the conditions for special hedgeaccounting, any gain or loss from re-measuring the hedging instrument at fairvalue is recognized immediately in the consolidated statements of income.  Anygain or loss on the hedged item attributable to the hedged risk is adjustedagainst the carrying amount of the hedged item and recognized in theconsolidated statements of income.

 

Inrelation to cash flow hedges, the portion of the gain or loss on the hedginginstrument that is determined to be an effective hedge is recognized directlyin equity and the ineffective portion is recognized in net profit or loss.  Thegains or losses that are accumulated in equity are transferred to theconsolidated statement of income in the same period in which the hedged itemaffects the net profit or loss.

 

Forderivatives that do not qualify for hedge accounting, any gains or lossesarising from changes in fair value are taken directly to net profit or loss forthe period.

 

Hedgeaccounting is discontinued when the hedging instrument expires or is sold,terminated or exercised, or no longer qualifies for hedge accounting.  At thatpoint in time, any cumulative gains or losses on the hedging instrumentrecognized in equity are kept in equity until the forecast transaction occurs.If the forecast transaction is no longer expected to occur, any net cumulativegains or losses previously recognized in equity are transferred to net profitor loss for the period.

 

***Provisions***

 

Werecognize provisions when we have present obligations, legal or constructive,as a result of past events, if it is probable that an outflow of resourcesembodying economic benefits will be required to settle the obligation and areliable estimate can be made of the amount of the obligation.  If the effectof the time value of money is material, provisions are determined bydiscounting the expected future cash flows at a pre-tax rate that reflectscurrent market assessments of the time value of money and, where appropriate,the risks specific to the liability.  Where discounting is used, the increasein the provision due to the passage of time is recognized as additionalprovisions.  Where we expect some or all of a provision to be reimbursed, thereimbursement is recognized.

 

***RetirementBenefits***

 

We havefunded, retirement plans, administered by our respective Fund’s Trustees,covering permanent employees.  Retirement costs are actuarially determinedusing the projected unit credit of accrued benefit valuation method.  Thismethod reflects services rendered by employees to the date of valuation andincorporates assumptions concerning employees’ projected salaries.  Retirementcosts include current service cost plus amortization of past service cost,experience adjustments and changes in actuarial assumptions.  Past service costis recognized as an expense on a straight-line basis over the average perioduntil the benefits become vested.  Actuarial gains and losses are recognized asincome or expense when the net cumulative unrecognized actuarial gains andlosses at the end of the previous reporting period exceeded 10% of the higherof the defined benefit obligation and the fair value of plan assets at thatdate.  These gains and losses are recognized over the expected averageremaining working lives of the employees participating in the plan.

 

***Share-Based Payment Transactions***

 

Certain of our employees (including directors) receiveremuneration in the form of share-based payment transactions, whereby employeesrender services in exchange for shares or rights over shares (“equity-settledtransactions”).

 

*Equity-settledtransactions*

 

Thecost of equity-settled transactions with employees is measured by reference tothe fair value of the stock options at the date at which they are granted.Fair value is determined using an option-pricing model, further details ofwhich are given in *Note 21 – Employee Benefits*.  In valuingequity-settled transactions, no account is taken of any performance conditions,other than conditions linked to the price of the shares of PLDT (“marketconditions”).

 

The cost of equity-settled transactions is recognized,together with a corresponding increase in equity, over the period in which theperformance conditions are fulfilled, ending on the date on which the relevantemployees become fully entitled to the award (“vesting date”).  The cumulativeexpense recognized for equity-settled transactions at each reporting date untilthe vesting date reflects the extent to which the vesting period has expiredand the number of awards that will ultimately vest, in the opinion of PLDT’sBoard of Directors, at that date, based on the best available estimate.

 

No expenseis recognized for awards that do not ultimately vest, except for awards wherevesting is conditional upon a market condition, which are treated as vestingirrespective of whether or not the market condition is satisfied, provided thatall other performance conditions are satisfied.

 

Where the terms of an equity-settled award aremodified, an expense, at a minimum, is recognized as if the terms had not beenmodified.  An expense is recognized for any increase in the value of thetransactions as a result of the modification, as measured at the date ofmodification.

 

Where anequity-settled award is cancelled, it is treated as if it had vested on thedate of cancellation, and any expense not yet recognized for the award isrecognized immediately.  However, if a new award is substituted for thecancelled award, and designated as a replacement award on the date that it isgranted, the cancelled and new awards are treated as if they were modificationsof the original award, as described in the previous paragraph.

 

The dilutive effect of outstanding options isreflected as additional share dilution in the computation of earnings pershare, see *Note 7 – Earnings Per Common Share*.

 

*Cash-settledtransactions*

 

OurLong-Term Incentive Plan, or LTIP, grants share appreciation rights, or SARs,to our eligible key executives and advisors.  Under the LTIP, we recognize theservices we receive from the eligible key executives and advisors, and ourliability to pay for those services, as the eligible key executives and advisorsrender services during the vesting period.  We measure our liability, initiallyand at each reporting date until settled, at the fair value of the SARs, byapplying an option valuation model, taking into account the terms andconditions on which the SARs were granted, and the extent to which the eligiblekey executives and advisors have rendered service to date.  We recognize anychanges in fair value at each reporting date until settled, in the results ofoperations for the period.

 

***Leases***

 

Lease obligations having provisions for bargainpurchase options, ownership transfer at the end of the lease term, or thepresent value of minimum lease payments, approximate the fair market value ofthe property, are capitalized.  Any initial direct costs of the lessee areadded to the amount capitalized.  The related obligations are recognized asliabilities.  Finance lease payments are apportioned between the financecharges and reduction of the lease liability so as to achieve a constant rateof interest on the remaining balance of the liability.

 

A financelease gives rise to a depreciation expense for the asset as well as a borrowingcost for each period.  Finance charges are charged directly to currentoperations in the period such are incurred.  The depreciation policy for leasedassets is consistent with that for depreciable assets that are owned.  

 

Leases where the lessor retains substantially all therisks and benefits of ownership of the asset are classified as operatingleases.  Operating lease payments are recognized as an expense in theconsolidated statements of income on a straight-line basis over the leaseterm.  For income tax reporting purposes, expenses that should have beenincurred under a lease agreement are considered as deductible expenses.

 

***Revenue Recognition***

 

Revenuesfor services are stated at amounts invoiced to customers, excluding value-addedtax, or VAT.  We provide wireless communication services, fixed linecommunication services, and information and communications technologyservices.  We provide such services to mobile, business, residential andpayphone customers.  Revenues represent the value of fixed consideration thathave been received or are receivable.  Revenues are recognized when there isevidence of an arrangement, 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*

 

Weprovide telephone and data communication services under prepaid and postpaidpayment arrangements.  Revenues, including fees for installation andactivation, are accrued upon subscription.

 

*Air time, traffic and value-added services*

 

Prepaid service revenues collected in advance aredeferred and recognized based on the earlier of actual usage or upon expirationof the usage period.  Interconnection revenues for call termination, calltransit, and network usage are recognized in the period the traffic occurs.Revenues related to local, long distance, network-to-network, roaming andinternational call connection services are recognized when the call is placedor connection is provided, net of amounts payable to other telecommunicationcarriers for terminating calls in their territories.  Revenues related toproducts and value-added services are recognized upon delivery of the productor service.

 

*Directory services*

 

Revenues related to published directory services arerecognized on a pro rata basis over the period in which the publicationexpires, which is generally 12 months.  Telephone-based directory servicerevenues are recognized when the service is provided.

 

*Incentives*

 

Werecord insignificant commission expense based on the number of new subscriberconnections initiated by certain dealers.  All other cash incentives providedto dealers and customers are recorded as a reduction of revenue.  Product-basedincentives provided to dealers and customers as part of a transaction areaccounted for as multiple element arrangements and recognized when earned.

 

*Non-servicerevenues*

 

*Handsetand equipment sales*

 

Salesof cellular handsets and communication equipment are recognized upon deliveryto the customer.

 

*Others*

 

Interest income is recognized as it accrues on a timeproportion basis taking into account the principal amount outstanding and theeffective interest rate.

 

***IncomeTaxes***

 

*Current tax*

 

Currenttax assets and liabilities for the current and prior periods are measured atthe amount expected to be recovered from or paid to the tax authority.  The taxrates and tax laws used to compute the amount are those that are enacted orsubstantively enacted as at the balance sheet date.

 

*Deferred tax*

 

Deferred income tax is provided using the balancesheet liability method on all temporary differences at the balance sheet datebetween the tax bases of assets and liabilities and their carrying amounts forfinancial reporting purposes.

 

Deferredincome tax liabilities are recognized for all taxable temporary differences.Deferred income tax assets are recognized for all deductible temporary differences,carryforward of unused tax credits from excess minimum corporate income tax, orMCIT, and unused tax losses, to the extent that it is probable that taxableprofit will be available against which the deductible temporary differences andcarryforward of unused tax credits and unused tax losses can be utilized.Deferred income tax, however, is not recognized when it arises from the initialrecognition of an asset or liability in a transaction that is not a businesscombination and, at the time of the transaction, affects neither the accountingprofit nor taxable profit or loss.

 

Deferredtax liabilities are not provided on non-taxable temporary differencesassociated with investments in domestic subsidiaries and associates.  Withrespect to investments in other subsidiaries and associates, deferred taxliabilities are recognized except when the timing of the reversal of thetemporary difference can be controlled and it is probable that the temporarydifference will not reverse in the foreseeable future.

 

Thecarrying amount of deferred income tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the deferred incometax asset to be utilized.  Unrecognized deferred income tax assets arereassessed at each balance sheet date and are recognized to the extent that ithas become probable that future taxable profit will allow the deferred taxasset to be recovered.

 

Deferredincome tax assets and liabilities are measured at the tax rates that areexpected to apply in the period when the asset is realized or the liability issettled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted as at the balance sheet date.

 

Income taxrelating to items recognized directly in equity is included in the relatedequity account and not in the consolidated statements of income.

 

***Earnings Per Common Share, or EPS***

 

Basic EPS is calculated by dividing the net income forthe period attributable to common shareholders (net income adjusted fordividends on all series of preferred shares except for dividends on preferredstock subject to mandatory redemption) by the weighted average number of commonshares outstanding during the period, after giving retroactive effect to anystock dividend declarations.

 

DilutedEPS is calculated in the same manner assuming that, at the beginning of the periodor at the time of issuance during the period, all outstanding options areexercised and convertible preferred shares are converted to common shares andappropriate adjustments to net income are effected for the related expenses andincome on preferred shares.  Outstanding stock options will have a dilutiveeffect under the treasury stock method only when the average market price ofthe underlying common share during the period exceeds the exercise price of theoption.  

 

Wherethe effect of the assumed conversion of the preferred shares and the exerciseof all outstanding options have an anti-dilutive effect, basic and diluted EPSare stated at the same amount.

 

Ifthe required dividends to be declared on each series of convertible preferredshares divided by the number of equivalent common shares, assuming suchconvertible preferred shares are converted to common shares, would decrease thebasic EPS, then such convertible preferred shares would be deemed dilutive.  Assuch, the diluted EPS will be calculated by dividing net income attributable tocommon shareholders (net income, adding back any dividends and/or other chargesrecognized in the period related to the dilutive convertible preferred sharesclassified as liability, less dividends on non-dilutive preferred shares exceptfor dividends on preferred stock subject to mandatory redemption) by theweighted average common shares including the common share equivalent arisingfrom the conversion of the dilutive convertible preferred shares.

 

 

 

**3.   Management’sUse of Estimates and Judgments**

 

Our unaudited consolidated financial statements prepared in PhilippineGAAP require management to make estimates and assumptions that affect amountsreported in our unaudited consolidated financial statements and related notes.In preparing our unaudited consolidated financial statements, we have made ourbest estimates and judgments of certain amounts, giving due consideration tomateriality.  We believe the following represents a summary of thesesignificant estimates and judgments and related impacts and associated risks toour unaudited consolidated financial statements.

 

*Estimating useful lives of property, plant andequipment*

 

Weestimate the useful lives of our property, plant and equipment based on theperiods over which our assets are expected to be available for use.  Theestimated useful lives of our property, plant and equipment are reviewed atleast annually and are updated if expectations differ from previous estimatesdue to physical wear and tear, technical or commercial obsolescence and legalor other 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 of operationscould be materially affected by changes in our estimates brought about bychanges in the factors mentioned above.  The amounts and timing of recordedexpenses for any period would be affected by changes in these factors andcircumstances.  

 

Areduction in the estimated useful lives of our property, plant and equipmentwould increase our recorded operating expenses and decrease our noncurrentassets.  Total carrying values of property, plant and equipment amounted to Php173,832million and Php176,974 million as at June 30, 2006 and December 31, 2005,respectively.

 

*Goodwill and intangible assets*

 

Purchaseaccounting requires extensive use of accounting estimates and judgments toallocate the purchase price to the fair market values of the acquiree’s identifiableassets and liabilities at the acquisition date.  It also requires the acquireeto recognize goodwill.  Our business acquisitions have resulted in goodwill andintangible assets, which are subject to a periodic impairment test andamortization, respectively.  

 

Total carryingvalues of goodwill and intangible assets as at June 30, 2006 and December 31,2005 amounted to Php3,312 million and Php3,049 million, respectively.  Thereare no impairment losses recognized for the six months ended June 30, 2006 and2005.

 

*Assetimpairment*

 

Philippine GAAP requires that an impairment review be performed whencertain impairment indicators are present.  In the case of goodwill, at aminimum, such asset is subject to a yearly impairment test and whenever thereis an indication that such asset may be impaired.  This requires an estimationof the value in use of the cash-generating units to which the goodwill isallocated.  Estimating the value in use requires us to make an estimate of theexpected future cash flows from the cash generating unit and to choose asuitable discount rate in order to calculate the present value of those cashflows.

 

Determining the fair values of property, plant and equipment, investmentsand intangible assets, which requires the determination of future cash flowsexpected to be generated from the continued use and ultimate disposition ofsuch assets, requires us to make estimates and assumptions that can materiallyaffect our unaudited consolidated financial statements.  Future events could causeus to conclude that property, plant and equipment, investments and intangibleassets associated with an acquired business are impaired.  Any resultingimpairment loss could have a material adverse impact on our financial conditionand results of operations.

 

The preparation of estimated future cash flows involves significantjudgments and estimations.  While we believe that our assumptions areappropriate and reasonable, significant changes in our assumptions maymaterially affect our assessment of recoverable values and may lead to futureadditional impairment charges under Philippine GAAP.  

 

*Investment properties*

 

We haveadopted the fair value approach in determining the carrying value of ourinvestment properties.  We have opted to rely on independent appraisers todetermine the fair values of our investment properties, and such fair values weredetermined based on recent prices of similar properties, with adjustments to reflect any changes in economic conditions sincethe date of those transactions.  The amounts and timing of recorded changes infair value for any period would differ if we made different judgments andestimates or utilized a different basis for determining fair value.

 

Total carryingvalues of investment properties as at June 30, 2006 and December 31, 2005 amountedto Php691 million and Php701 million, respectively.

 

*Deferred tax assets*

 

We review thecarrying amounts of deferred tax assets at each balance sheet date and reduce theseto the extent that they are no longer probable that sufficient taxable profitwill be available to allow all or part of the deferred tax assets to beutilized.  However, there is no assurance that we will generate sufficienttaxable profit to allow all or part of our deferred tax assets to be utilized.

 

Total unrecognized deferred tax assets as at June30, 2006 amounted to Php2,896 million.

 

*Financialassets and liabilities*

 

PhilippineGAAP requires that we carry certain of our financial assets and liabilities atfair value, which requires extensive use of accounting estimates and judgments.In addition, certain liabilities acquired through debt exchange andrestructuring are required to be carried at fair value at the time of the debtexchange and restructuring, see *Note**24 – Financial Assets and Liabilities*.While significant components of fair value measurement were determined usingverifiable objective evidence (i.e., foreign exchange rates, interest rates,volatility rates), the amount of changes in fair value would differ if weutilized a different valuation methodology.  Any change in fair value of thesefinancial assets and liabilities would directly affect our profit and loss andequity.

 

Total fairvalue of financial assets and liabilities as at June 30, 2006 amounted to Php38,535million and Php127,072 million, respectively, while the total fair value offinancial assets and liabilities as at December 31, 2005 amounted to Php43,063million and Php148,848 million, respectively.  

 

*Estimatingallowance for doubtful accounts*

 

We estimate the allowance for doubtful accounts related to our tradereceivables based on two methods.  The amounts calculated using each of thesemethods are combined to determine the total amount we reserve.  First, weevaluate specific accounts where we have information that certain customers areunable to meet their financial obligations.  In these cases, we use judgment,based on the best available facts and circumstances, including but not limitedto, the length of our relationship with the customer and the customer’s currentcredit status based on third party credit reports and known market factors, torecord specific reserves for customers against amounts due to reduce ourreceivables to amounts that we expect to collect.  These specific reserves arere-evaluated and adjusted as additional information received affects theamounts estimated.  Second, a general 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.  Fullallowance is provided for receivables from permanently disconnected subscribersand carriers.  Such permanent disconnections generally occur within 105 daysfrom due date.  Partial allowance is provided for active subscribers andcarriers based on the age 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 operating expensesand decrease our current assets.  

 

Provisionfor doubtful accounts amounted to Php435 million and Php1,526 million for the sixmonths ended June 30, 2006 and 2005, respectively.  Trade and otherreceivables, net of allowance for doubtful accounts, amounted to Php7,844million and Php7,113 million as at June 30, 2006 and December 31, 2005,respectively.

 

*Revenue recognition*

 

Ourrevenue recognition policies require us to make use of estimates andassumptions that may affect the 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 are not material to our unauditedconsolidated financial statements.  Differences between the amounts initiallyrecognized and actual settlements are taken up in the accounts upon reconciliation.However, there is no assurance that such use of estimates will not result in materialadjustments in future periods.

 

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

 

*Pensionand other retirement benefits*

 

The determination of our obligation and cost for pension and otherretirement benefits is dependent on our selection of certain assumptions usedby actuaries in calculating such amounts.  Those assumptions are described in *Note21 – Employee Benefits* and include, among other things, discount rates,expected returns on plan assets and rates of compensation increase.  In conformitywith Philippine GAAP, actual results that differ from our assumptions are recognizedas income or expense when the net cumulative unrecognized actuarial gains andlosses at the end of the previous reporting period exceed 10% of the higher ofthe defined benefit obligation and the fair value of plan assets at that date.  Whilewe believe that our assumptions are reasonable and appropriate, significantdifferences in our actual experience or significant changes in our assumptionsmay materially affect our pension and other retirement obligations.  

 

Unrecognized net actuarial gain as at June 30, 2006 amounted to Php162million.  The accrued benefit cost as at June 30, 2006 and December 31, 2005amounted to Php2,675 million and Php2,275 million, respectively.

 

*LegalContingencies*

 

We are currently involved in various legal proceedings.  Our estimate ofthe probable costs for the resolution of these claims has been developed inconsultation with outside counsel handling our defense in these matters and isbased upon an analysis of potential results.  We currently do not believe theseproceedings will have a material adverse effect on our unaudited consolidatedfinancial statements.  It is possible, however, that future results ofoperations could be materially affected by changes in our estimates or in theeffectiveness of our strategies relating to these proceedings, see *Note 23 –Provisions and Contingencies.*

 

Outstandingprovisions to cover these contingencies amounted to Php4,536 million and Php4,374million as at June 30, 2006 and December 31, 2005, respectively.

 

 

 

**4.   Segment Information**

 

Operatingsegments are components of PLDT that engage in business activities from whichthey may earn revenues and incur expenses (including revenues and expenses relatingto transactions with other components of PLDT), whose operating results areregularly reviewed by the enterprise’s chief operating decision maker to makedecisions about how resources are to be allocated to the segment and assesstheir performances, and for which discrete financial information is available.The accounting policies of the reportable segments are the same as thosedescribed in *Note 2 – Summary of Significant Accounting Policies andPractices*.

 

We have organized our business into three mainsegments:

 

•        Wireless — wireless telecommunications services provided through our cellularservice providers namely, Smart and Piltel, Smart Broadband, Inc., or SmartBroadband (formerly Meridian Telekoms, Inc., or Meridian), our wirelessbroadband provider; Wolfpac, our wireless content operator, and satellite andvery small aperture terminal, or VSAT, operators, namely PLDT’s subsidiariesMabuhay Satellite, ACeS Philippines and Telesat;

 

•        Fixed Line — fixed line telecommunications services are primarily provided throughPLDT.  We also provide fixed line services through PLDT’s subsidiaries; ClarkTelecom, Subic Telecom, Maratel, Piltel, BCC and PLDT Global, which togetheraccount for approximately 3% of our consolidated fixed lines service revenues; 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 Systems, Inc., or Parlance and Vocativ Systems, Inc., or Vocativ;internet access and gaming services provided by ePLDT’s subsidiaries Infocom,Digital Paradise, Digital Paradise Thailand, netGames, Airborne Access andLevel Up!; and e-commerce and IT-related services provided by other investeesof ePLDT, as described in *Note 9 – Investments in Associates*.

 

Thesegment assets as at June 30, 2006 and December 31, 2005 and results of operationsof our reportable segments for the six months ended June 30, 2006 and 2005 areas follows:

 

 

**Wireless**

**Fixed Line**

**Information and Communications Technology**

**Inter-segment Transactions**

**Total**

 

(in million pesos)

* *

* *

 

 

 

 

*As at and for the six months ended June 30, 2006 (Unaudited)*

**Income**

 

 

 

 

 

Service revenues

38,591

24,053

1,812

(3,816)

60,640

Non-service revenues

1,188

36

172

(13)

1,383

Equity share in net income of associates

–

–

3

–

   3

Other income

133

229

24

(51)

 335

Segment income

39,912

24,318

2,011

(3,880)

62,361

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income before income tax

18,254

296

75

–

18,625

Provision for (benefit from) income tax

2,953

45

(12)

–

2,986

Net income for the period

15,301

 251

  87

–

15,639

** **

 

 

 

 

 

Assets

 

 

 

 

 

Segment assets

88,555

186,314

6,228

(54,385)

226,712

Deferred income tax assets

3,661

14,379

19

–

18,059

Total assets

92,216

200,693

6,247

(54,385)

244,771

 

 

 

 

 

 

Other segment information 

 

** **

** **

** **

** **

Capital expenditures

6,016

5,849

520

–

12,385

Depreciation and amortization

5,195

10,038

252

–

15,485

Provisions

284

485

1

–

 770

Interest on loans and related items -  net of capitalized interest

756

3,290

7

–

4,053

Interest income

585

243

9

–

 837

* *

 

* *

* *

* *

* *

*As at December 31, 2005 (Audited) and for the six months ended June 30, 2005 (Unaudited**)*

* *

**Income**

 

 

 

 

 

Service revenues

36,483

24,235

1,328

(2,503)

59,543

Non-service revenues

1,291

–

215

(84)

1,422

Equity share in net income of associates

–

–

3

–

   3

Other income

57

101

41

(29)

 170

Segment income

37,831

24,336

1,587

(2,616)

61,138

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income before income tax

17,526

4,440

69

–

22,035

Provision for income tax

4,196

1,281

6

–

5,483

Net income for the period

13,330

3,159

  63

–

16,552

** **

 

 

 

 

 

**Assets**

 

 

 

 

 

Segment assets

97,159

185,140

4,355

(52,398)

234,256

Deferred income tax assets

2,022

13,430

5

–

15,457

Total assets

99,181

198,570

4,360

(52,398)

249,713

 

 

 

 

 

 

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

3,577

3,129

306

–

7,012

Depreciation and amortization

4,970

5,704

187

–

10,861

Provisions

437

1,550

–

–

1,987

Interest on loans and related items -  net of capitalized interest

898

4,541

14

–

5,453

Interest income

543

193

5

–

 741

 

 

 

**5.   Income and Expenses**

 

*Non-service Revenues*

 

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited) 

 

(in million pesos)

Sale of computers, cellular handsets and SIM-packs

**1,224**

 

1,291

Point-of-product sales

**159**

 

131

 

**1,383**

 

1,422

* *

*Compensation and Benefits*

* *

** **

**Six Months Ended June 30,**

** **

**2006**

 

2005

** **

(Unaudited)

 

(in million pesos)

Salaries and benefits

**6,122**

 

5,455

Incentive plans (Note 21)

**933**

 

610

Pension (Note 21)

**499**

 

384

Manpower rightsizing program

**62**

 

43

 

**7,616**

 

6,492

* *

*FinancingCosts*

* *

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Interest on loans and related items

**4,355**

 

5,656

Accretion on financial liabilities - net (Notes 2, 17 and 24)

**1,823**

 

1,509

Hedge costs (Note 24)

**746**

 

557

Foreign exchange loss (gains) - net (Notes 17 and 24)

**195**

 

(1,382)

Dividends on preferred stock subject to mandatory redemption (Note 17)

**93**

 

132

Financing charges (Note 7)

**39**

 

74

Loss (gain) on derivative transactions - net (Notes 2 and 24)

**23**

 

(778)

Capitalized interest (Notes 2 and 8)

**(302)**

 

(203)

Interest income

**(837)**

 

(741)

 

**6,135**

 

4,824

* *

*Cost of Sales*

* *

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Cost of computers, cellular handsets and SIM-packs sold

**2,361**

 

3,149

Cost of satellite air time and terminal units (Notes 20 and 22)

**99**

 

122

 

**2,460**

 

3,271

* *

*Provisions*

* *

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Doubtful accounts (Note 14)

**435**

 

1,526

Write-down of inventories to net realizable values (Note 15)

**186**

 

325

Onerous contracts and assessments (Notes 20, 22 and 23)

**149**

 

136

 

**770**

 

1,987

* *

* *

 

**6.   Income Taxes**

* *

The netcomponents of deferred income tax recognized in the consolidated balance sheetsare as follows:

* *

 

**June 30,  2006 (Unaudited)**

** **

December 31, 2005 (Audited)

 

(in million pesos)

Net assets

**18,059**

** **

15,457

Net liabilities

**39**

** **

49

* *

Thecomponents of net deferred tax assets and liabilities are as follows:

* *

 

**June 30,  2006 (Unaudited)**

** **

December 31, 2005 (Audited)

 

(in million pesos)

Net assets

 

** **

 

Unrealized foreign exchange losses

**5,179**

** **

6,885

Accumulated provision for doubtful accounts

**5,089**

** **

5,085

Net operating loss carryover, or NOLCO

**5,001**

** **

3,926

Asset impairment

**4,124**

** **

3,127

Unearned revenues

**2,413**

** **

2,524

Pension and other employee benefits

**1,794**

** **

1,409

Derivative instruments

**1,485**

** **

464

Unamortized past service costs

**956**

** **

1,032

Provision for unrealized assets

**852**

** **

769

MCIT

**526**

** **

526

Accumulated write-down of inventories to net realizable values

**372**

** **

337

Asset retirement obligation - net of capitalized asset

**180**

** **

157

Leases

**107**

** **

153

Executive stock option plan

**75**

** **

104

Excess of fair value over cost of investment properties

**(93)**

** **

(90)

Intangibles and fair value adjustments on assets acquired

**(442)**

** **

(483)

Capitalized taxes and duties 

**(481)**

** **

(516)

Preferred stock subject to mandatory redemption

**(537)**

** **

(1,034)

Capitalized foreign exchange differential

**(1,802)**

** **

(1,721)

Gain on debt exchange and debt restructuring transactions

**(2,157)**

** **

(2,601)

Undepreciated capitalized interest charges

**(4,649)**

** **

(4,664)

Others

**67**

** **

68

 

**18,059**

** **

15,457

 

 

 

 

Net liabilities

 

** **

 

Unearned revenues

**(1)**

** **

–

Provision for doubtful accounts

**(5)**

** **

(5)

Unrealized foreign exchange gains

**(33)**

** **

(44)

 

**(39)**

** **

(49)

 

Provisionfor corporate income tax consists of:

 

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Current

**4,616**

 

5,003

Deferred

**(1,630)**

 

480

 

**2,986**

 

5,483

 

Thereconciliation between the provision for income tax at the applicable statutorytax rates and the actual provision for corporate income tax is as follows:

 

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Provision for corporate income tax at the applicable statutory tax rates

**6,518**

 

7,051

Tax effects of:

** **

 

 

Non-deductible expenses 

**222**

 

244

Loss (income) subject to lower tax rate

**2**

 

(164)

Income subject to final tax

**(303)**

 

(228)

Income not subject to tax

**(685)**

 

(61)

Net movement in deferred income tax

**(2,768)**

 

(1,359)

Actual provision for corporate income tax

**2,986**

 

5,483

 

MabuhaySatellite and Subic Telecom are registered as Subic Bay Freeport Enterpriseswhile Clark Telecom is registered as a Clark Special Economic Zone Enterpriseunder R.A. No. 7227, otherwise known as the Bases Conversion and DevelopmentAct of 1992, or the Act.  As registrants, Mabuhay Satellite, Subic Telecom andClark Telecom are entitled to all the rights, privileges and benefitsestablished thereunder including tax and duty-free importation of capitalequipment and a special income tax rate of 5% of gross income, as defined inthe Act.

 

OnDecember 22, 2000, the Philippine Board of Investments, or BOI, approvedePLDT’s registration as a new information technology, or IT, service firm inthe field of services related to its internet data center on a pioneer status.As such, ePLDT enjoys, among other incentives, a six-year income tax holiday,or ITH, from January 2001.

 

Parlanceis registered with the BOI as a new IT export service firm in the field ofcustomer interaction center on a pioneer status.  Under this registration,Parlance shall be entitled to certain tax incentives like ITH for six yearsstarting June 2002.  Parlance is required to comply with specific terms andconditions stated in its BOI registration.

 

iPlusIntelligent 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 until January 1, 2009.

 

Vocativ isregistered with the Philippine Economic Zone Authority, or PEZA, as an EcozoneExport Enterprise to develop and operate a call center business that servesoverseas clients by providing customer relationship management services.  As aregistered enterprise, Vocativ is entitled to certain tax and nontax incentiveswhich include, among other things, tax and duty-free importations, exemptionfrom local tax and ITH for four years from start of commercial operations.After the ITH period, Vocativ is liable for a final tax, in lieu of all taxesafter the expiration of its incentives.  The final tax is computed at 5% ofgross income less allowable deductions as defined under R.A. No. 7916, “TheSpecial 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 the business establishments to thetreasurer’s office of the municipality or city where the enterprise is located.

 

On December 5, 2005, Vocativ received approval from PEZA for the adjustment of the start ofcommercial operations, effectively extending the ITH expiration to the end ofMarch 2006.  As at June 30, 2006, PEZA approved ITH extension for another yearwhich effectively extends ITH expiration in April 2007.

 

mySecureSign,Inc., or mSSI, is a wholly-owned subsidiary of ePLDT and is registered with theBOI as a new IT service firm in the field of services related to public keyinfrastructure on a pioneer status. Under such registration, mSSI enjoys, amongother incentives, a six-year ITH from August 1, 2001 or actual start of commercial operations, whichever comes first.  mSSI started commercial operations on January 1, 2002.

 

ePLDT Ventusis registered with the BOI as a new IT export service firm in the field ofcustomer interaction center on a pioneer status.  Under this registration, ePLDTVentus shall be entitled to certain tax incentives such as an ITH for six yearsstarting March 2005.  In relation to this, ePLDT Ventus is required to complywith specific terms and conditions stated in the BOI registration.

 

Digital Paradise is registeredwith the BOI as a new IT service firm in the field of community access on anon-pioneer status.  Under the provisions of the registration, Digital Paradise’ssales generated from its own community access activity and franchise fees shallbe entitled to ITH for a period of four years beginning December 2002.

 

LevelUp! is originally registered with the BOI as a new IT service firm in the fieldof application service provider on a non-pioneer status.  Under suchregistration, Level Up! is entitled to certain tax incentives, which includes afour-year ITH from January 2003 and tax credit for taxes on duties on materialsused in export products for ten years starting January 2003.  On April 2004,the BOI approved Level Up!’s request for upgrading its status from non-pioneerto pioneer in connection with its IT service activity in the field ofapplication service provider for entertainment and educational project.  Accordingly,the ITH period was extended from four to six years.

 

 

Wolfpac isregistered with the BOI as a new operator of service provider applications.Under the terms of its registration, it is entitled to certain tax and non-taxincentives which include, among other things, ITH for four years from February2004.

 

SmartBroadband has three registered activities with the BOI on a pioneer status,namely: (i) new operator of telecommunications systems (inter-exchange carrierfor data services); (ii) a new information technology service firm in the fieldof providing internet services; and (iii) new operator of telecommunicationsfacilities (nationwide broadband wireless access).  Under the terms of theseregistrations, Smart Broadband is entitled to certain tax and non-taxincentives which include, among other things, an ITH for six years fromFebruary 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 six months ended June 30, 2006 and 2005 amountedto Php125 million and Php43 million, respectively.

 

On May 24, 2005, the President signed into lawRepublic Act No. 9337 (the “Act”), which took effect on November 1, 2005.  TheAct, among others, introduced the following changes:

 

a.      Regular corporate income tax ratefor domestic corporations and resident/ non-resident foreign corporationsincreased to 35% (from 32%) beginning November 1, 2005 and the rate will bereduced to 30% beginning January 1, 2009.  The regular corporate income taxrate shall be applied by multiplying the number of months covered by the newrate with the taxable income of the corporation during the period, divided bytwelve months.

 

b.      VAT rate increased from 10% to 12%effective February 1, 2006.

 

c.      Input VAT on capital goods shouldbe spread evenly over the useful life or sixty months, whichever is shorter, ifthe acquisition cost, excluding the VAT component thereof, exceeds one millionpesos.

 

InputVAT credit in every quarter shall not exceed 70% of the output VAT whentaxpayer is in an excess input VAT position.

 

Ourdeferred income tax assets have been recorded to the extent that such deferredtax assets are expected to be utilized against sufficient future taxable profit.We had unrecognized deferred tax asset of Php2,896 million largely pertainingto asset impairment as at June 30, 2006.

 

Our unaudited consolidated unutilized NOLCO as atJune 30, 2006 is detailed as follows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2003

2006

6

2004

2007

35

2005

2008

11,229

2006

2009

3,059

 

 

14,329

 

 

 

Tax benefit at 35%

 

5,015

Unrecognized deferred income tax assets as at June 30, 2006 (Unaudited)

 

(14)

 

 

5,001

 

Our unaudited consolidated MCIT as at June 30, 2006is detailed as follows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2003

2006

42

2005

2008

484

 

 

 526

 

 

 

**7.   Earnings Per Common Share**

 

The following table presents informationnecessary to calculate the earnings per common share:

 

** **

**Six Months Ended June 30,**

 

**2006**

 

2005

 

**Basic**

**Diluted**

 

Basic

Diluted

 

(Unaudited) 

 

(in million pesos)

Net income attributable to equity holders of PLDT

**15,306**

**15,306**

 

16,520

16,520

Dividends on preferred shares

**(228)**

**(228)**

 

(756)

(24)

Dividends on preferred stock subject to mandatory redemption  charged to interest expense for the period

**–**

**–**

** **

**–**

54

Accretion of preferred stock subject to mandatory redemption

**–**

**–**

** **

**–**

235

Foreign exchange gain on preferred stock subject to mandatory redemption

–

**–**

 

–

(478)

Net income applicable to common shares

**15,078**

**15,078**

 

15,764

16,307

 

 

 

 

 

 

 

(in thousands, except per share amounts)

 

** **

 

 

 

 

Outstanding common shares at beginning of period

**180,789**

**180,789**

 

170,468

170,468

Effect of issuance of common shares during the period

**823**

**823**

 

64

64

Average incremental number of shares under ESOP during the period

–

**40**

 

–

66

Common shares equivalent of preferred shares deemed dilutive:

** **

** **

 

 

 

Preferred Stock Series A to FF (Note 16)

–

**–**

 

–

3,219

Global Depositary Shares/Preferred Stock Series III (Note 16)

–

**–**

 

–

7,908

Preferred Stock Series VII (Note 17)

–

**–**

 

–

3,842

Weighted average number of common shares for the period

**181,612**

**181,652**

 

170,532

185,567

Earnings per common share

**Php83.02**

**Php83.00**

 

Php92.44

Php87.88

 

**Dividends Declared For The Six Months Ended June 30,2006**

 

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**

 

 

 

 

 

(in million pesos)

**Preferred Stock Subject to  Mandatory Redemption**

 

 

 

 

 

Series V

February 27, 2006

March 17, 2006

April 15, 2006

Php4.675

1

 

June 13, 2006

June 28, 2006

July 15, 2006

4.675

–

Series VI

February 27, 2006

March 17, 2006

April 15, 2006

US$0.09925

20

 

June 13, 2006

June 28, 2006

July 15, 2006

0.09925

14

Series VII

February 27, 2006

March 17, 2006

April 15, 2006

JPY10.179725

17

 

June 13, 2006

June 28, 2006

July 15, 2006

10.179725

18

Charged to income

 

 

 

 

  70

 

 

 

 

 

 

**10% Cumulative Convertible  Preferred Stock**

 

 

 

 

 

Series CC

January 31, 2006

February 28, 2006

March 31, 2006

Php1.00

17

Series DD

January 31, 2006

February 15, 2006

February 28, 2006

1.00

3

Series EE

March 28, 2006

April 27, 2006

May 31, 2006

1.00

–

 

 

 

 

 

  20

 

 

 

 

 

 

**Cumulative Non-Convertible Redeemable Preferred Stock**

 

 

 

 

 

Series IV*

January 31, 2006

February 23, 2006

March 15, 2006

–

12

 

May 9, 2006

May 26, 2006

June 15, 2006

–

12

 

 

 

 

 

  24

 

 

 

 

 

 

**Common Stock**

February 27, 2006

March 20, 2006

April 20, 2006

Php28.00

5,072

Charged to retained earnings

 

 

 

 

5,116

 

****Dividends aredeclared based on total amount paid up.*

** **

** **

 

**8.   Property, Plant andEquipment**

** **

This account consists of:

** **

** **

**Cable and wire facilities**

**Central office equipment**

**Cellular facilities**

**Buildings**

**Vehicles, furniture, and other work equipment**

**Communications satellite**

**Information origination/ termination equipment**

**Land and**

**land improvements**

**Property under construction**

**Total**

** **

(in million pesos)

**At December 31, 2005 (Audited)**

Cost

107,781

82,353

61,031

19,739

27,923

10,560

7,918

2,438

11,794

331,537

Accumulated depreciation and amortization

(42,180)

(45,337)

(29,410)

(5,145)

(21,065)

(6,083)

(5,083)

(260)

–

(154,563)

Net book value

65,601

37,016

31,621

14,594

6,858

4,477

2,835

2,178

11,794

176,974

**Six Months Ended June 30, 2006 (Unaudited)**

Net book value at beginning of period

65,601

37,016

31,621

14,594

6,858

4,477

2,835

2,178

11,794

176,974

Additions/Transfers – net

1,321

(72)

4,443

342

1,068

–

555

–

5,025

12,682

Disposals/Retirements

(15)

(38)

(63)

–

(15)

–

(2)

–

(206)

(339)

Translation differences charged directly to cumulative translation adjustments

(20)

15

–

–

(2)

7

–

–

–

–

Depreciation and amortization

(2,473)

(4,540)

(3,998)

(572)

(3,307)

(314)

(267)

(14)

–

(15,485)

Net book value at end of period

64,414

32,381

32,003

14,364

4,602

4,170

3,121

2,164

16,613

173,832

**June 30, 2006 (Unaudited)**

Cost

94,197

73,639

65,199

17,398

23,230

10,589

7,677

2,308

16,613

310,850

Accumulated depreciation and amortization

(29,783)

(41,258)

(33,196)

(3,034)

(18,628)

(6,419)

(4,556)

(144)

–

(137,018)

Net book value

64,414

32,381

32,003

14,364

4,602

4,170

3,121

2,164

16,613

173,832

** **

Substantially all our telecommunications equipment ispurchased from outside the Philippines.  Our significant sources of financingfor such purchases are foreign loans requiring repayment in currencies otherthan Philippine pesos, principally in U.S. dollars (see *Note 17 – Interest-bearingFinancial Liabilities*).  Interest, using an average capitalization rate of9%, and net foreign exchange losses capitalized to property, plant andequipment qualified as borrowing costs for the six months ended June 30, 2006 and 2005 were as follows:

** **

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Interest

**302**

 

203

Foreign exchange loss (gains)

**106**

 

(156)

** **

As at June30, 2006 and December 31, 2005, the undepreciated capitalized net foreignexchange losses which qualified as borrowing costs amounted to Php4,338 millionand Php4,276 million, respectively.

** **

The consolidated useful lives of the assets areestimated as follows:

** **

Buildings

25 years

Central office equipment

15 – 20 years

Cable and wire facilities 

10 – 25 years

Information origination and termination equipment

5 – 15 years

Communications satellite

15 years

Vehicles, furniture and other work equipment

3 – 10 years

Cellular facilities

3 – 10 years

Land improvements

10 years

 

We recognized additional depreciation and amortizationcharges of Php4,233 million and Php240 million for the six months ended June30, 2006 and 2005, respectively, due to a change in the estimated useful livesof certain of our network assets owing to continuing network upgrade andexpansion.

 

Property,plant and equipment includes the following amounts for capitalized leases as atJune 30, 2006 and December 31, 2005:

 

** **

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

 

**Central office equipment**

**Vehicles, furniture and other network equipment**

**Total**

Central office equipment

Vehicles, furniture and other network equipment

Total

 

(in million pesos)

Cost

**447**

**1,082**

**1,529**

361

1,039

1,400

Less accumulated depreciation

**331**

**852**

**1,183**

293

719

1,012

 

**116**

**230**

**346**

  68

 320

 388

 

Thefollowing table summarizes all changes to the asset retirement obligations asat June 30, 2006 and December 31, 2005:

 

 

**June 30, 2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Asset retirement obligations at beginning of period

**752**

 

638

Accretion expenses

**43**

 

79

Additional liability recognized during the period

**14**

 

63

Settlement of obligations

**(4)**

 

(28)

Asset retirement obligations at end of period (Note 18)

**805**

 

 752

 

 

 

**9.   Investments in Associates**

 

This account consists of:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

ACeS International Limited, or AIL

**1,614**

 

1,614

Mabuhay Space Holdings Limited

**1,017**

 

1,013

Stradcom International Holdings, Inc.

**616**

 

616

Philweb Corporation

**427**

 

–

BayanTrade Dotcom, Inc.

**97**

 

97

ePDS, Inc.

**6**

 

6

 

**3,777**

 

3,346

Less accumulated impairment losses and equity share in net losses of associates

**3,332**

 

3,331

Total cost and accumulated impairment losses and equity share in net losses of associates

**445**

 

  15

 

***Investment of ACeS Philippines in AIL***

 

As at June 30, 2006, ACeS Philippines has a 20%investment in AIL, a company incorporated under the laws of Bermuda.  AIL ownsthe Garuda I Satellite and the related system control equipment in Batam, Indonesia.

 

InDecember 1998, AIL and its 95% owned subsidiary, PT Asia Cellular Satellite,entered into an Amended and Restated Credit Agreement, or Amended Agreement, toamend the original Credit Agreement entered into by PT Asia Cellular Satelliteand its bank creditors in 1997.  Under the Amended Agreement, AIL has, amongothers, assigned to the banks as collateral all of its tangible properties,including the Garuda I Satellite, the system control facilities and systemcontrol equipment.  On September 30, 2002, PT Asia Cellular Satellite, AIL, asguarantor, P.T. Bank Internasional Indonesia, as security agent, and variousbanks signed the Rescheduling Agreement, which amended the terms of the Amendedand Restated Credit Agreement dated December 29, 1998, moving the principalrepayment dates to agreed periods with the final maturity date on January 31,2012, see *Note 20 – Related Party Transactions*.

 

AIL has incurred recurring significant operatinglosses, negative operating cash flows, and significant levels of debt.  Thefinancial condition of AIL was partly due to the National Service Providers’,or NSPs, inability to generate the amount of revenues originally expected asthe growth in subscriber numbers have been significantly lower than budgeted.These factors raise substantial doubt about AIL’s ability to continue as agoing concern.  On this basis, we recognized an impairment provision in respectof our investment in AIL amounting to Php1,614million in 2003.

 

***Investmentof Mabuhay Satellite in Mabuhay Satellite Space Holdings Limited, or MSHL***

 

In 1996, MabuhaySatellite entered into a Joint Venture Agreement, or JVA, with SpaceSystems/Loral Inc., or SS/L, to form MSHL for the purpose of providinghigh-power Ku-Band satellite transmission services using the payload which wasadded by SS/L aboard Agila II.  Under the terms of the JVA, SS/L is required toconvey title to the additional payload service to MSHL in consideration forSS/L’s 35% equity interest in MSHL and Mabuhay Satellite is required to paySS/L US$19 million for a 65% equity interest in MSHL.

 

In 2000, SS/L filed a Notice of Default and Termination against MabuhaySatellite arising from the latter’s alleged failure to amicably resolve itsunpaid obligation to SS/L under the JVA.  In 2002, the arbitration panel handeddown its decision and provided for payment by Mabuhay Satellite to SS/L of theprincipal amount of US$10 million plus accrued interest at 9% per annum.  OnJune 30, 2003, Mabuhay Satellite and SS/L concluded a US$15 million settlementagreement under which Mabuhay Satellite leased two transponders under atransponder agreement on a life-term basis to SS/L and had offset the leasecharges due from SS/L and its receivables from Loral Skynet Network Services,Inc. (formerly known as the Loral Cyberstar, Inc.), among others, for a fulland final settlement of the arbitration decision.  The agreement wassubsequently approved by Mabuhay Satellite’s creditors in March 2004.

 

In accordance with thesettlement agreement, Mabuhay Satellite and SS/L shall proceed to dissolve thejoint venture under a separate agreement, for which each of the parties shallreceive title over such number of transponders owned by the joint venture inproportion to their respective interests.  On the basis of the joint venturedissolution, we recognized an impairment provision in respect of our investmentin MSHL of Php431 million in 2004.

 

***Investment of ePLDT in Stradcom InternationalHoldings, Inc., or SIHI***

 

ePLDT has a 22.5% interestin convertible securities of SIHI, the parent company of Stradcom Corporation,which has an existing concession agreement with the Philippine Government forthe modernization of the Philippine Land Transportation Office, including thecomputerization of driver’s license issuance, vehicle registration and trafficadjudication systems.  SIHI has been incurring losses from the start ofoperations due to Stradcom Corporation’s continuous losses and consistentexcess of current liabilities over current assets.  On this basis, werecognized an impairment provision in respect of our investment in SIHI ofPhp616 million in 2004.

 

***Investmentof ePLDT in Philweb Corporation, or Philweb***

 

InMay 2006, ePLDT subscribed to newly issued common shares of Philweb equivalentto 20% of the total outstanding capital stock at a price of Php2 centavos pershare or an aggregate amount of Php502 million.  Of the total subscriptionprice, Php427 million was paid by ePLDT on closing date.  The portion of theunpaid subscription price amounting to Php25 million shall be paid by ePLDT atthe same time as the Philweb majority stockholder pays the remaining unpaidportion of the subscription pursuant to a general call on subscription to bemade by Philweb’s board of directors.  The balance of Php50 million shall bepaid upon the lapse of the post-closing price adjustment periods.

 

Philwebis primarily engaged in internet-based gaming, through its appointment asPrincipal Technology Service Provider under the Marketing Consultancy Agreementfor Internet Sports Betting and Internet Casino with the Philippine Amusementand Gaming Corporation, or PAGCOR.  As of end April 2006, Philweb offersInternet Sports Betting in over 230 PAGCOR Internet Sports Betting Stations andover 40 Internet Casino Stations nationwide.  Philweb is the first Philippineinternet company to be listed on the PSE.

 

***Investmentof ePLDT in BayanTrade Dotcom, Inc., or BayanTrade***

 

BayanTradewas incorporated and registered with the Securities and Exchange Commission, orSEC, on August 8, 2000 to provide:  (a) business-to-business electronicpurchasing marketplace to link buyers and suppliers of good services over theInternet; (b) electronic catalogue purchasing facilities over the Internet tobuyers and suppliers; (c) link-up with similar horizontal markets and verticalmarkets across the Asia-Pacific Region and the world; and (d) such facilitatingservices incidental to the business.  BayanTrade is an e-procurement jointventure established together with six of the Philippines’ leadingconglomerates.  ePLDT’s 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.

 

InSeptember 2005, ePLDT received 4,794,615 bonus warrants from BayanTrade whichentitles ePLDT to purchase 2,794,615 common shares at a price of Php0.50 pershare at any time on or before  August 31, 2010.

 

***Investmentof ePLDT in ePDS, Inc., or ePDS***

 

On June 30, 2003, ePLDT signed a JVA with DataPost Pte Ltd., or DataPost, a subsidiary ofSingapore Post, and G3 Worldwide ASPAC, or Spring, pursuant to which theparties formed ePDS, a bills printing company which will do laser printing andenveloping services for statements, bills and invoices, and other value-addedservices to companies in the Philippines.  ePLDT has a 50% interest in ePDS,while DataPost has a 30% interest.  Spring, the largest international mailservices provider, owns the remaining 20%.  ePDS has an initial paid-up capitalof Php11 million.

 

In October 2005, ePDS’ Board of Directors approved thedeclaration of a 100% stock dividend on its common stock equivalent to Php11million.  The stock dividends were issued from the increase in authorizedcapital stock of ePDS which was approved by the SEC in June 2006.

 

***Summarized Financial Information of Equity Investees***

 

Thefollowing table presents summarized financial information in conformity withPhilippine GAAP for equity investees for which we have significant influence asat June 30, 2006 and December 31, 2005 and for the six months ended June 30,2006 and 2005.

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Noncurrent assets

**1,471**

 

1,388

Current assets

**1,066**

 

652

Capital deficiency

**(10,360)**

** **

(10,787)

Noncurrent liabilities

**11,105**

 

11,242

Current liabilities

**1,792**

 

1,585

 

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Revenues

**353**

 

412

Revenues less cost of revenues

**267**

 

318

Expenses

**238**

 

276

Net loss

**(231)**

 

(188)

 

 

 

**10. Investment Properties**

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Balance at beginning of period

**701**

 

743

Disposals

**(10)**

 

(15)

Net loss from fair value adjustments

**–**

 

(27)

Balance at end of period

**691**

 

701

 

Investmentproperties are stated at fair values, which has been determined based on thelatest valuations performed by an independent firm of appraisers.  Thevaluation undertaken was based on an open market value, supported by marketevidence in which assets could be exchanged between a knowledgeable willingbuyer and a knowledgeable willing seller in an arm’s-length transaction at thedate of valuation, in accordance with international valuation standards.

 

 

 

**11. Goodwill and Intangible Assets**

 

Movements in the goodwill and intangible assets duringthe periods are as follows:

 

 

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

 

**Goodwill**

**Intangible assets**

**Total**

Goodwill

Intangible assets

Total

 

(in million pesos)

Cost:

 

 

 

 

 

 

Balance at beginning of period

**1,942**

**1,991**

**3,933**

1,934

1,991

3,925

Additions

**348**

**55**

**403**

8

–

   8

Balance at end of period

**2,290**

**2,046**

**4,336**

1,942

1,991

3,933

 

** **

** **

** **

 

 

 

Accumulated amortization and impairment:

** **

** **

** **

 

 

 

Balance at beginning of period

**(438)**

**(446)**

**(884)**

(438)

(181)

(619)

Additions

**–**

**(140)**

**(140)**

–

(265)

(265)

Balance at end of period

**(438)**

**(586)**

**(1,024)**

(438)

(446)

(884)

Net balance

**1,852**

**1,460**

**3,312**

1,504

1,545

3,049

 

Intangible assets include technology application withan estimated useful life of three years arising from the acquisition of Wolfpacand certain intangible assets arising from the acquisition of Smart Broadbandin 2004.  In December 2005, an independent appraiser completed the valuationwork for certain of Smart Broadband’s intangible assets and determined goodwillamounting to Php1,415 million at the time of acquisition.  Smart Broadband’sintangible asset composition and estimated useful lives were revised asfollows:

 

Licenses

18 years

Spectrum

15 years

Technology

5 years

Customer base

3 years

 

In 2006, ePLDT acquired a 60% equity interest in LevelUp!, to strengthen our on-line gaming business.  Fair value of Level Up!’s netassets, determined provisionally, was assessed to be equal to its book value,which resulted in goodwill amounting to Php348 million at the time ofacquisition.  Intangible assets pertaining to Level Up!’s customer base wasprovisionally determined at Php55 million with an estimated useful life ofthree years.

 

 

 

**12. Notes Receivable**

 

***Investment of ePLDT in Debt Securities of TechnologySupport Services, Inc., or TSSI (formerly First Advance Multi-MediaEntertainment Corp., or FAME)***

 

On June 1, 2004, ePLDT and FAME entered into an agreement whereby ePLDT would grant a seven-yearzero-coupon loan to FAME amounting to US$3.1 million.  Upon maturity of theloan, which is at the end of seven (7) years from issuance, ePLDT may requireFAME to redeem or pay the loan at a redemption value amounting to US$6.1million.  At any time during the life of the outstanding loan, ePLDT mayconvert the loan into 20% of the total outstanding capital stock of FAME.

 

OnAugust 20, 2004, FAME changed its corporate name to TSSI.

 

On September 14, 2004, ePLDT entered into a second agreement with TSSI whereby ePLDT wouldgrant another seven-year zero coupon loan to TSSI amounting to US$3.1 millionwith the same terms and features as the first loan.  As at December 31, 2005, the aggregate loans of ePLDT to TSSI amounted to US$6.2 million.

 

As at June30, 2006, ePLDT has not yet converted its investment in debt securities into TSSI’sshares of stock. TSSI is a systems integrator for the internet and mobiletelephone gaming project.

 

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.

 

 

 

**13. Cash and Cash Equivalents**

 

This account consists of:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Cash on hand and in banks

**2,928**

 

6,496

Temporary cash investments

**23,038**

 

23,568

 

**25,966**

 

30,064

 

Cash inbanks earn interest at prevailing bank deposit rates.  Temporary cash investmentsare made for varying periods of up to two months depending on our immediatecash requirements, and earn interest at the prevailing short-term depositrates.  Due to the short-term nature of such transactions, the carrying valueapproximates the fair value of our temporary cash investments.

 

 

 

**14. Trade and Other Receivables**

 

This account consists of receivables from:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Customers and carriers

**23,955**

 

24,475

Others (Notes 20, 22 and 23) 

**1,377**

 

1,184

 

**25,332**

 

25,659

Less allowance for doubtful accounts

**17,488**

 

18,546

 

**7,844**

 

7,113

 

Receivablesfrom carriers represent receivables arising from interconnection agreementswith other telecommunications carriers.  The aforementioned receivable balancesare shown net of related payables to the same telecommunications carriersbecause an established right of offset exists.  

 

On October10, 2002, PLDT entered into a Receivables Purchase Deed, or RPD, with a foreignfinancial institution, or the Purchaser, under which PLDT agreed (1) to sellits receivables from certain eligible foreign carriers for an advance paymentof US$50 million, of which, US$7 million remains outstanding as at June 30, 2006,and (2) to service, administer and collect the receivables on behalf of thePurchaser.  Under the RPD, the Purchaser has no recourse against PLDT should aneligible carrier fail or refuse to settle the assigned/purchased receivables,except when PLDT commits a breach of its representations and warranties underthe RPD.

 

Sale of receivables under the RPD amounted to US$3 million (Php152 million) and US$6million (Php338 million) for the six months ended June 30, 2006 and 2005,respectively.  Loss on sale of receivables under the RPD amounted to US$0.34million (Php17 million) and US$0.67 million (Php37 million) for the six monthsended June 30, 2006 and 2005, respectively.

 

 

 

**15. Inventoriesand Supplies**

 

This account consists of:

 

 

**June 30,  2006 (Unaudited)**

 

December 31,  2005 (Audited)

 

(in million pesos)

Terminal and cellular phone units:

** **

 

 

At net realizable value

**759**

 

806

At cost

**1,058**

 

1,024

Spare parts and supplies:

** **

 

 

At net realizable value

**1,720**

 

493

At cost

**2,622**

 

1,376

Others:

** **

 

 

At net realizable value

**183**

 

249

At cost

**183**

 

249

At lower of cost or net realizable value

**2,662**

 

1,548

 

 

 

**16. Equity**

 

Themovement of PLDT’s capital account follows:

 

** **

**Preferred Stock** – Php10 par value

** **

** **

**Series  A to FF**

**III**

**IV**

**Total Preferred Stock**

** **

** **

**Common Stock** – Php5 par value

** **

**No. of Shares**

** **

**Amount**

** **

**No. of Shares**

**Amount**

** **

(in millions)

**Authorized**

 

 

** **

823

Php8,230

234

Php1,170

**Outstanding**

** **

 

** **

** **

** **

 

 

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 (Audited)

 407

–

  36

 443

Php4,433

 181

Php904

 

 

 

 

 

 

 

 

Balance at January 1, 2006

 407

–

  36

 443

Php4,433

 181

Php904

Issuance

–

–

–

–

1

–

–

Conversion

–

–

–

–

(4)

2

10

Balance at June 30, 2006 (Unaudited)

 407

–

  36

 443

Php4,430

 183

Php914

*** ***

***Preferred Stock***

 

The preferred stock is non-voting, except asspecifically provided by law, and is preferred as to liquidation.

 

The SeriesA to FF 10% Cumulative Convertible Preferred Stocks earn cumulative dividendsat an annual rate of 10%.  After the lapse of one (1) year from the last day ofthe year of issuance of a particular series of 10% Cumulative ConvertiblePreferred Stock, any holder of such series may convert all or any of the sharesof 10% Cumulative Convertible Preferred Stock held by him into fully paid andnon-assessable shares of Common Stock of PLDT, at a conversion price equivalentto 10% below the average of the high and low daily sales price of a share ofCommon Stock on the PSE, or if there shall have been no such sales on the PSEon any day, the average of the bid and the asked prices of a share of CommonStock 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 by theBoard of Directors which, as at June 30, 2006, was Php5.00 per share.  Thenumber of shares of Common Stock issuable at any time upon conversion of oneshare of subscriber investment plan, or SIP.  Cumulative Convertible PreferredStock shall be determined by dividing Php10.00 by the then applicableconversion price.

 

In case the shares of Common Stock at anytime outstanding shall besubdivided into a greater or consolidated into a lesser number of shares, thenthe minimum conversion price per share of Common Stock shall be proportionatelydecreased or increased, as the case may be, and in the case of a stockdividend, such price shall be proportionately decreased, provided, however,that in every case the minimum conversion price shall not be less than the parvalue per share of Common Stock.  In the event the relevant effective date forany such subdivision or consolidation of shares or stock dividend occurs duringthe period of 30 trading days preceding the presentation of any shares of 10%Cumulative Convertible Preferred Stock for conversion, a similar adjustmentshall be made in the sales prices applicable to the trading days prior to sucheffective date utilized in calculating the conversion price of the sharespresented 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.

 

On December 6, 2005, the Board of Directors designated 100,000 shares of serial preferredstock as Series GG 10% Cumulative Convertible Preferred Stock for issuancethroughout 2006.  Confirmation of exemption of this transaction under Section10.2 of the Securities Regulation Code is still pending with the SEC.

 

TheSeries III Convertible Preferred Stock earns cumulative dividends at an annualrate of US$3.50 a share payable quarterly, free and clear of Philippinewithholding taxes.  It is convertible into Common Stock at the option of theholder at any time, at the conversion price of US$29.19 per share of CommonStock (equivalent to a conversion ratio of 1.7129 shares of Common Stock for eachshare of Series III Convertible Preferred Stock, each share of Series IIIConvertible Preferred Stock being valued for this purpose at its referenceamount of US$50 a share), subject to adjustment in certain events, and is notredeemable.

 

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 into shares of PLDT Common Stock.  Theconditions for mandatory conversion under the terms of the Series III PreferredStock have been satisfied, including: (i) that the average closing price of PLDT’s ADSs for the 30-day period endingseven days prior to the date in which notice of the mandatory conversion wasgiven was above US$29.19 a share (ii) that there were no dividends in arrearson any shares of the Series III Convertible Preferred Stock, and (iii) thatPLDT had sufficient distributable reserves to pay the fixed preferential dividendson the shares of Series III Convertible Preferred Stock, calculated down to andincluding the mandatory conversion date.

 

InNovember 2005, PLDT issued 710,891 shares of common stock on account of thevoluntary conversion of 415,023 shares of Series III Convertible PreferredStock.

 

Asat December 19, 2005, all of the outstanding shares of Series III ConvertiblePreferred Stock were mandatorily converted into PLDT Common Stock (the“Mandatory Conversion Date”) wherein each share of Series III ConvertiblePreferred Stock was converted into 1.7129 shares of Common 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.

 

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.

 

 

 

**17. Interest-bearingFinancial Liabilities**

 

Thisaccount consists of the following:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

**Long-term portion of interest-bearing financial liabilities -  net of current portion:**

** **

 

 

Long-term debt (Note 24)

**72,410**

 

84,860

Obligations under capital lease (Notes 8 and 24)

**269**

 

381

Preferred stock subject to mandatory redemption (Note 24)

**9,854**

 

11,974

 

**82,533**

 

97,215

 

** **

 

 

**Current portion of interest-bearing financial liabilities:**

** **

** **

** **

Long-term debt maturing within one year (Note 24)

**18,281**

 

18,684

Obligations under capital lease maturing within one year (Notes 8 and 24)

**828**

 

717

 

**19,109**

 

19,401

 

Unamortizeddebt discount, representing debt issuance costs and any difference between thefair value of consideration given or received on initial recognition, includedin the financial liabilities are as follows:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Long-term debt

**7,676**

 

8,829

Obligations under capital lease (Note 8)

**573**

 

602

Preferred stock subject to mandatory redemption

**2,535**

 

3,916

Total unamortized debt discount

**10,784**

 

13,347

 

Thefollowing table describes all changes to unamortized debt discount as at June30, 2006 and December 31, 2005.

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Unamortized debt discount at beginning of period

**13,347**

 

18,581

Revaluations

**643**

 

(1,114)

Additions during the period

**100**

 

198

Settlements and conversions during the period

**(1,483)**

 

(1,436)

Accretion during the period charged to interest expense (Note 5)

**(1,823)**

 

(2,882)

Unamortized debt discount at end of period

**10,784**

 

13,347

 

**Long-termDebt**

 

Long-term debt consists of:

 

**Description**

**Interest Rates**

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

 

 

(in millions)

*U.S. Dollar Debt:*

** **

** **

** **

** **

** **

Export Credit Agencies-Supported Loans:

** **

** **

** **

** **

** **

Kreditanstalt für Wiederaufbau, or KfW

5.65% - 7.58% and US$ LIBOR + 0.55% - 2.5%

**US$224**

**Php11,912**

US$254

Php13,489

Finnish Export Credit, plc, or Finnvera

7.53% - 7.75% and US$ LIBOR + 0.05%

**79**

**4,184**

105

5,552

Nippon Export and Investment Insurance  of Japan, or NEXI

US$ LIBOR + 1%

**37**

**1,971**

49

2,612

Others

5.83% - 6.60% and US$ LIBOR + 0.15% - 1.60% and GOVCO’s cost + 0.20%

**19**

**1,021**

28

1,473

 

 

**359**

**19,088**

 436

23,126

Fixed Rate Notes

7.85% - 11.375%

**842**

**44,838**

987

52,354

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

2.25% and US$ LIBOR + 1%

**170**

**9,040**

165

8,748

GSM Network Expansion Facilities

4.49% - 4.515% and US$ LIBOR + 3.25%

**137**

**7,318**

86

4,562

Others

US$ LIBOR + 0.40% - 3.625%

**12**

**613**

18

978

Restructured Loans

US$ LIBOR + 1%

**51**

**2,720**

90

4,767

Satellite Acquisition Loans

US$ LIBOR + 1.75% and 5.6%

**50**

**2,655**

57

3,040

 

 

**US$****1,621**

**86,272**

US$1,839

97,575

 

 

** **

** **

 

 

*Japanese Yen Debt:*

 

** **

** **

 

 

JBIC’s Overseas Investment Loan, or OIL

2.125%

**JP¥****5,576**

**2,593**

JP¥6,970

3,139

Export Credit Agency-Supported Loan –  NEXI Supported Loan

JP¥ LIBOR + 1.70%

**–**

**–**

1,573

709

** **

 

**JP¥****5,576**

**2,593**

JP¥8,543

3,848

** **

 

** **

** **

 

 

*Philippine Peso Debt:*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

15% - 15.816%

** **

**1,577**

 

1,576

Term Loan:

 

** **

** **

 

 

Secured Term Loans

12.83% - 24% and 90-day  PHIBOR + 3%

** **

**34**

 

166

Restructured Loans

91-day T-Bill rate + 1%

** **

**215**

 

379

 

 

** **

**1,826**

 

2,121

 

 

** **

**90,691**

 

103,544

Less portion maturing within one year

 

** **

**18,281**

 

18,684

Total long-term debt 

 

** **

**Php72,410**

 

Php84,860

 

*Note:Amounts presented are net of unamortized debt discount and debt issuance costs.*

 

Thescheduled maturities of our outstanding consolidated long-term debt at nominalvalues as at June 30, 2006 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(1)

79

4,211

1,394

648

793

5,652

2007

345

18,379

2,788

1,297

36

19,712

2008

124

6,602

1,394

648

24

7,274

2009

281

14,948

–

–

24

14,972

2010

63

3,337

–

–

834

4,171

2011 and onwards

872

46,416

–

–

170

46,586

 

1,764

93,893

5,576

2,593

1,881

98,367

 

*(1)**July 1, 2006through December 31, 2006*

 

***U.S.Dollar Debt:***

* *

*ExportCredit Agencies-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’slargest single creditor.  As at June 30, 2006, we owed US$224 million aggregateprincipal amount of debt to KfW, as follows:

 
- US$173 million provided under various export credit agency-backed facilities, of which US$63 million was in connection with our expansion and service improvement programs and US$110 million in connection with the US$149 million refinancing facility discussed below; and

 
- US$51 million provided for the 15% downpayment portion and credit facilities without guarantee/insurance cover from the export credit agencies, of which US$30 million was in connection with the US$149 million refinancing facility discussed in the following paragraphs.

 

On January 25, 2002, PLDT signed two loan agreementswith KfW, which provided PLDT with a US$149 million facility to refinance inpart the repayment installments under its existing loans from KfW due fromJanuary 2002 to December 2004.  The facility is composed of a nine-year loan,inclusive of a three-year disbursement period and a two-year grace periodduring which no principal is payable.  It partly enjoys the guarantee ofHERMES, the export credit agency of the Federal Republic of Germany.  We havedrawn US$140 million (Php7,449 million) under this facility as at June 30, 2006.PLDT waived further disbursements 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$22 million will mature in2006, US$72 million will mature in 2007, US$55 million will mature in 2008,US$44 million will mature in 2009 and US$31 million will mature in 2010.Principal amortizations on these loans are generally payable in equalsemi-annual installments.

 

*FinnishExport Credit, plc, or Finnvera*

 

Asat June 30, 2006, US$80 million principal amount of Smart’s debt was providedby various banks under an export credit agency-backed facility in connectionwith Smart’s GSM expansion program.  This facility is covered by guaranty fromFinnvera, the Finnish export credit agency, for 100% of political andcommercial risk for the refinancing facility of GSM Phases 5A and 5B.  This isthe only remaining outstanding facility guaranteed under Finnvera.  OtherFinnvera Guaranteed GSM loan facilities were already fully paid in theaggregate amount of US$16.50 million for GSM Phases 3 and 4 loan facilities onApril 28, 2006, and aggregate of US$5.8 million for GSM Phases 1 and 2 loanfacilities on October 31, 2005.

 

TheUS$100 million refinancing facility was obtained on February 11, 2005 inrelation to Smart’s GSM Phases 5A and 5B loans which were prepaid last March 1,2005 with outstanding balances of US$60 million and US$41 million,respectively, at the time of prepayment.  This refinancing facility is payablesemi-annually over five years starting September 1, 2005 with final repaymentdue in March 2010.  The principal benefit of refinancing the Phase 5 loan wasthe savings from a lower interest margin on the refinancing facility.

 

Ofthe amount outstanding under the remaining Finnvera guaranteed loan, US$10million will mature in 2006, US$20 million will mature in 2007, US$20 millionwill mature in 2008, US$20 million will mature in 2009 and US$10 million willmature in 2010.  Principal amortization on this loan is payable in equalsemi-annual installments.

 

*NipponExport and Investment Insurance of Japan, or NEXI*

 

OnNovember 28, 2002, Smart signed a US$100 million term loan facility supportedby NEXI, of which US$60 million was drawn on November 28, 2003 and US$40million on April 5, 2004.  This loan is payable semi-annually over four yearsin eight equal installments starting May 28, 2004 with final repayment due inNovember 2007.  The outstanding balance as at June 30, 2006 was US$38 million.

 

*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 and Australia, in the aggregate outstanding principal amount of US$15 million as at June 30, 2006.Smart, likewise, obtained loans guaranteed by the export credit agencies of Norway and Italy amounting to US$4 million.  Of the amounts outstanding under these loans, US$6million will mature in 2006, US$9 million will mature in 2007, US$2 millionwill mature in 2008, US$1 million will mature in 2009 and US$1 million willmature in 2010.

 

*FixedRate Notes*

 

PLDThas the following non-amortizing fixed rate notes outstanding as at June 30,2006 and December 31, 2005:

 

**Principal Amount**

**Interest Rate**

**Maturity Date**

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

** **

** **

** **

(in millions)

US$300,000,000

8.350%

March 6, 2017

**US$296**

**Php15,753**

US$296

Php15,700

US$250,000,000

11.375%

May 15, 2012

**243**

**12,960**

243

12,902

US$175,000,000

10.500%

April 15, 2009

**174**

**9,259**

174

9,223

US$110,068,000

7.850%

March 6, 2007

**110**

**5,849**

138

7,320

US$ 19,310,000

10.625%

May 15, 2007

**19**

**1,017**

21

1,105

US$112,168,000

9.250%

June 30, 2006

**–**

**–**

115

6,104

 

 

 

**US$****842**

**Php44,838**

US$987

Php52,354

 

*Term**Loans*

* *

*US$283Million Term Loan Facility, or Debt Exchange Facility*

* *

OnJuly 2, 2004, Smart acquired from Piltel’s creditors approximately US$289million, or 69.4%, in the aggregate of Piltel’s outstanding restructured debtat that time, in exchange for Smart debt and a cash payment by Smart.  In particular,Smart paid an amount in cash of US$1.5 million, or Php84 million and issued newdebt of US$283.2 million, or Php15,854 million, at fair value of Php8,390million, net of debt discount amounting to Php7,464 million.  As at June 30,2006, unamortized discount amounted to Php6,347 million.

 

The breakdown of the total amount of Smart debtissued to participating Piltel creditors is as follows:

 

•        2007 Facility in the amount ofUS$0.2 million payable in full in December 2007;

•        2008 Facility in the amount ofUS$2.9 million payable in full in December 2008; and

•        2014 Facility in the amount ofUS$280.1 million payable in full in June 2014.

 

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$73 million remained outstanding as at June30, 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 GSM Phase 5A financing comprised of US$195 millionloans, of which US$30 million is owed to Nordic Investment Bank, or NIB, US$15million to Nederlandse Financierings-Maatschappij Voor OntwikkelingslandenN.V., or FMO, of the Netherlands and US$150 million to Finnvera.   The NIB loanbalance of US$12.0 million was prepaid in full on December 8, 2005, and the FMOloan balance of US$4.09 million was prepaid in full on March 1, 2006.

 

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 was drawnon July 11, 2006 for the full amount of US$30 million.  The first installment paymentwill commence on January 2007. 

 

On August 10, 2005, Smart signed a loan facility forits GSM Phase 8 financing in the amount of US$70 million.  The facility wasawarded to the Bank of Tokyo Mitsubishi Ltd., Mizuho Corporate Bank Ltd,Standard Chartered Bank and Sumitomo Mitsui Banking Corporation as the LeadArrangers, with Finnish Export Credit Ltd., as the Lender on Record.  Smartopted to utilize only a total of US$67 million which was drawn in February 15,2006 and March 13, 2006 for US$10 million and US$57 million respectively.  Thebalance of US$3 million was canceled.  After the first repayment on March 1, 2006,US$66 million remained outstanding as at June 30, 2006.  The facility is a5-year term loan payable in 10 equal semi-annual installments with finalrepayment on September 1, 2010.  Interest is payable semi-annually at a fixedrate of 4.515% per annum.  

 

*RestructuredLoans*

 

On June 4,2001, Piltel completed the restructuring of approximately Php41 billion ofindebtedness and other claims owed to banks, trade creditors, bondholders andpreferred shareholders, representing 98% of its total liabilities as at thatdate.

 

Asa result of the restructuring, 50% of the financial debt of each participatingcreditor was released in consideration for the allotment of Piltel Series KClass I Convertible Preferred Stock, which shares were immediately andmandatorily converted into PLDT Convertible Preferred Stock.  One PLDT SeriesV, VI or VII Convertible Preferred Stock was issued for every five (5) PiltelSeries K Class I Convertible Preferred Stock.  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 theirparticipation in the Conversion Notes Facility and in a single Tranche Pesoloan, or the Term Notes Facility, respectively.

 

Additionalcreditors participated in the debt restructuring plan, such that onlyconvertible bonds with principal amount of US$0.7 million (approximately US$0.9million redemption price at the option of the holders) remain unrestructured.

 

Piltel’s residual long-term debt to third partiesconsists of:

 

**Description**

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

** **

(in millions)

**Restructured debts**

** **

** **

** **

** **

Philippine Pesos

** **

** **

** **

 

10 year Tranche B

** **

**Php110**

 

Php190

15 year Tranche C

** **

**105**

 

189

 

** **

**215**

 

379

U.S. Dollars

** **

** **

 

 

10 year Tranche B

**US$5**

**235**

US$8

400

15 year Tranche C

**4**

**224**

7

395

15 year Conversion Notes Facility

**43**

**2,261**

75

3,972

 

**US$****52**

**2,720**

US$90 

4,767

Total

** **

**2,935**

 

5,146

**Unrestructured debt**

** **

** **

 

 

U.S. Dollars

** **

** **

 

 

Convertible bonds

**US$1**

**49**

US$1

49

Total

** **

**2,984**

 

5,195

Less portion maturing within one year

** **

**316**

 

103

 

** **

**Php2,668**

 

Php5,092

 

The following is a summary of the key economic termsrelating to the restructuring of the financial debt taking the form of TrancheB Loan, Tranche C Loan, Term Notes 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** – Philippine 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 theterms of Piltel’s debt restructuring plan, PLDT issued a Letter of Support, orLOS, for the benefit of Piltel and its creditors under which PLDT has agreed tocover any funding shortfalls of Piltel up to a maximum amount of US$150 millionless all amounts paid or committed to be paid to or on behalf of Piltel or anyof its subsidiaries or affiliates on or after March 23, 2000. Under the LOS,PLDT is required to provide funding to Piltel in the event that the cash flowsfrom Piltel’s operations fall short of the amount required by it to dischargein full 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 June 30, 2006 and December 31, 2005, the remainingundrawn balance available under the PLDT LOS was US$50 million, approximatelyPhp2,672 million and Php2,666 million, due to prior investments made from March23, 2000 to December 31, 2002 aggregating to US$100 million through PLDT’ssubscription to Series J Class I preferred shares of Piltel.

 

Piltel’srestructured obligations are secured by substantially all present and futureassets of Piltel under the Mortgage TrustIndenture, or MTI, dated June 4, 2001 between Piltel and Chase Manhattan Bankas security agent for the creditors, which established the securityarrangements relating to the restructured debts.  The participating creditors(other than the participating holders of the Peso Term Notes Facility) willshare equally in first ranking security, while non-participating creditors andthe participating holders of the Peso Term Notes Facility will share equally insecond ranking security created under the MTI.  Such mortgage was approved byat least two-thirds of Piltel’s stockholders at its annual meeting on April 18,2001 and by the NTC on May 18, 2001.

 

Piltel likewise agreed to pay into a dedicated account(a Sinking Fund Account) the amount by which (a) earnings before interest, tax, depreciation and amortization, andexceptional items for a financial year is greater than (b) 200% 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 willeither pay into the Sinking Fund Account established at the end of that year anamount equal to any over-projection of capital expenditure or will be entitledto withdraw funds, if any, equal to any under-projection.  Any credit balancein the Sinking Fund Account after two financial years will be used to prepayall participating creditors on a pro rata basis.

 

On June 5, 2006, Piltel made a partial voluntaryprepayment of principal under its Philippine peso facility, U.S. dollarfacilities, Japanese yen facility and conversion notes facility.  The voluntaryprepayment was made in lieu of depositing the Excess Cash Flow from theoperations of Piltel’s business into a Sinking Fund Account.  The aggregatevoluntary prepayment amount was Php9,325 million (Php6,393 million to Smart andPhp2,932 million to third party creditors) or US$176 million (US$ 121 millionto Smart and US$55 million to third party creditors), which was appliedproportionally to the various debt facilities as set out in the Intercreditor Agreementdated June 4, 2001.

 

On July 7, 2006, Piltel, PLDT and JPMorgan Chase Bank,N.A. (Manila Branch), as Security Agent on behalf of the Finance Parties underthe Intercreditor Agreement (ICA), agreed to the amendment of Clause 25 of theICA to allow the amendment of any term of the Mortage Trust Indenture (MTI) andthe release and sale of certain properties or assets from the securityInterests created by the MTI upon the instructions of the CreditorRepresentatives.  On the same date, and following the effectivity of theamendment of the ICA, Piltel and the Security Agent, executed the Amendment tothe Mortgage Trust Indenture, pursuant to which Piltel is allowed to sell ordispose of certain categories of assets or properties with the consent of theMajority Bank Creditors, the Majority Trade Creditors and the Trustee,provided, however that for as long as Avenue Asia holds majority of Piltel’sConversion Notes, the prior consent of Avenue Asia will be required for (i) anysale or disposition of any of the real properties of Piltel, and (ii) any saleor disposition of assets to Smart, PLDT or any of its affiliates.

 

*Satellite**Acquisition Loans*

 

MabuhaySatellite has an existing Credit Agreement with the Export-Import Bank of the United States, or Ex-Im Bank, to finance a portion of the cost of purchasing the Agila IISatellite.  In 2004, Ex-Im Bank of the United States approved, in principle,the re-profiling of Mabuhay Satellite’s US$42 million debt with them byextending the maturity of the loan by 11⁄2 years to July 15, 2007 and reducingthe interest rate by 1% to 5.6%.  The revised repayment terms have beenapproved by the majority of the local creditor banks.  As at June 30, 2006, theremaining outstanding loan amounted to US$16 million (Php833 million).

 

Mabuhay Satellite also has an existing OmnibusAgreement with a syndicate of local banks, or the Banks, which includesissuance of irrevocable standby Letters of Credit which as at June 30, 2006 hasan aggregate stated value not exceeding US$17 million (Php879 million) in favorof U.S. Ex-Im Bank, as security under the Credit Agreement and a term loan toMabuhay Satellite in the aggregate amount of US$34 million (Php1,822 million),which will mature on various dates from 2006 to 2007. 

 

MabuhaySatellite has constituted in favor of the Banks: (a) a first mortgage on itsleasehold rights under a lease agreement entered into with the Subic BayMetropolitan Authority and the components of the satellite system; (b) anassignment of its rights under its purchase contract for the satellite system;(c) an assignment of its rights under the transponder lease contracts to beentered into with its shareholders and other parties and the revenuestherefrom; and (d) an assignment of the applicable proceeds of insurance to betaken on the satellite system.

* *

Asat June 30, 2006, the Banks have approved Mabuhay’s request to extend thematurity of the Satellite’s loan under the Omnibus Agreement by two years toOctober 20, 2009, with a 1% increase in the margin on the deferred amount.

*** ***

***JapaneseYen Debt:***

* *

*JBICJP¥9,760 Million Overseas**Investment**Term Loan*

 

OnJuly 26, 2002, PLDT signed a loan agreement with JBIC for a credit facility ofJP¥9,760 million under JBIC’s OIL program.  The loan, which was drawn on July31, 2002, is being amortized semi-annually beginning March 21, 2005 and willmature on March 21, 2008.

 

*NEXI Supported JP¥5,615 Million**Syndicated Term Loan Facility*

 

On June 11, 2003, PLDTsigned a JP¥5,615 million syndicated term loan facility supported by NEXI, ofwhich JP¥2,520 million was drawn and all outstanding amounts were repaid infull on June 13, 2006.

 

***PhilippinePeso Debt:***

* *

*Php2,**770**Million Peso Fixed Rate Corporate Notes*

* *

Inconnection with PLDT’s service improvement and expansion programs, PLDT hasentered into two loan agreements, pursuant to each of which PLDT issued fixedrate corporate notes in three tranches.  Interest on each tranche is payablesemi-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.

* *

*Term Loans*

* *

*Secured**Term Loans*

* *

*Php150 Million**Term Loan Facility*

* *

On March 4, 2002, ePLDT entered into a three-year loanfacility with Philippine Bank of Communications amounting to Php150 million.The loan facility was fully drawn on December 31, 2002 and payable in sevenquarterly installments, with a grace period of one year, beginning year 2003.The quarterly principal payments of Php15 million started in June 2003 with aballoon payment of Php45 million in March 2005.  Interest on this loan wasequivalent to 91-day T-bill rate plus 4% per annum payable quarterly inarrears.  The loan was secured by ePLDT’s deed of assignment of receivables ofa subsidiary from a foreign customer and an investment in an associate with anoriginal cost of Php629 million.  This loan was fully paid as at March 31,2005.

* *

*Php100Million Term Loan Facility*

* *

OnMarch 15, 2004, ePLDT entered into another three-year term loan facility withAsia United Bank amounting to Php100 million for the payment of its outstandingshort-term bank loan facility and for other working capital requirements.  Theloan facility was fully drawn as at December 31, 2004.  The loan is to berepaid in nine equal quarterly installments starting March 2005 with finalrepayment in March 2007.  Interest on the loan is equivalent to 90-day PHIBORplus 3% per annum payable quarterly in arrears.  The loan is secured by aMortgage Trust Indenture Agreement, or MTIA, on a parcel of land with acarrying value of Php279 million as at December 31, 2004.  As at June 30, 2006,the outstanding balance of this loan amounted to Php33 million which willmature within the first quarter of 2007.

* *
**
*Php149Million Term Loan Facility*

* *

InJanuary 2006, Vocativ, a wholly-owned call center subsidiary of ePLDT,partially prepaid Php89 million out of its outstanding five-year term loanfacility of Php109 million with Asia United Bank for the payment of itsadditional capital expenditures and working capital requirements.  Under theterms of the loan, principal payment is to be paid 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 Certificateagainst the MTIA between ePLDT and Asia United Bank Corporation – Trust andInvestments Group dated March 15, 2004 on a parcel of land, which excludes thebuildings and improvements.  The remaining balance of Php20 million waspre-terminated in April 2006.

 

*Debt Covenants*

 

Our debt instruments contain restrictive covenants,including covenants that could prohibit us from paying dividends on commonstock under certain circumstances, and require us to comply with specifiedfinancial ratios and other financial tests, calculated in conformity withaccounting principles generally accepted in the Philippines, at relevant measurementdates, principally at the end of each quarterly period.  We have complied withall of our maintenance financial ratios as required under our loan covenantsand other debt instruments.  In addition, we are required to comply withcertain financial ratios for the incurrence of capital expenditures in excessof US$10 million and incurrence of indebtedness.

 

The principal factors that can negatively affect ourability to comply with these financial ratios and other financial tests aredepreciation of the Philippine peso relative to the U.S. dollar, poor operatingperformance of PLDT and its 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 expense 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, thelowering of PLDT’s credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions.  Sinceapproximately 98% of PLDT’s total consolidated debts are denominated in foreigncurrencies, principally in U.S. dollars, many of these financial ratios andother tests are negatively affected by any weakening of the peso.

 

PLDT’sdebt instruments contain a number of other negative covenants that, subject tocertain exceptions and qualifications, restrict PLDT’s ability to take certainactions without lenders’ approval, including: (a) incurring additionalindebtedness; (b) prepaying other debt; (c) making investments; (d) extending loans; (e) extending guarantees or assuming the obligations ofother persons; (f) paying dividends or other distributions or redeeming,repurchasing or otherwise acquiring shares of PLDT’s capital stock; (g)disposing of all or substantially all of its assets or of assets in excess ofspecified thresholds of its tangible net worth; (h) entering into managementcontracts providing for the management of its business or operations by a thirdparty; (i) creating any lien or security interest; (j) permitting set-off against amounts owed to PLDT; (k) merging orconsolidating with any other company; (l) entering into transactions withstockholders and affiliates; and (m) entering into sale and leasebacktransactions. 

 

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.

 

PLDT’sdebt instruments also contain customary and other default provisions thatpermit the lender to accelerate amounts due or terminate their commitments toextend additional funds under the debt instruments. These default provisionsinclude: (a) cross-defaults and cross-accelerations that permit a lender todeclare a default if PLDT is in default under another debt instrument; in somecases, the cross-default provision is triggered upon a payment or other defaultpermitting the acceleration of PLDT’s debt, whether or not the defaulted debtis accelerated.  In other cases, the cross-default provision requires thedefaulted loan to be accelerated.  In some debt instruments, the cross-defaultprovision will be triggered only if the principal amount of the defaultedindebtedness exceeds a threshold amount specified in these debt instruments; (b)failure by PLDT to meet certain financial ratio covenants referred to above;(c) the occurrence of any material adverse change in circumstances that alender reasonably believes materially impairs PLDT’s ability to perform itsobligations under its debt instrument with the lender; (d) the revocation,termination or amendment of any of the permits or franchises of PLDT in anymanner unacceptable to the lender; (e) the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender; (f) the nationalization or sustained discontinuance of all or asubstantial 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’sdebt instruments contain certain restrictive covenants that require Smart tocomply with specified financial ratios and other financial tests at semi-annualmeasurement dates.  The financial tests under Smart’s loan agreements include compliancewith a debt to equity ratio of not more than 1.50:1 and a debt service coverageratio of 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.

 

Asat June 30, 2006, Piltel was not in compliance with the terms of convertiblebonds with principal amount of US$0.7 million (approximately US$0.9 millionredemption price at the option of the holders).  Piltel may not be able torestructure or otherwise pay the claims of its unrestructured debt.  However,default on and acceleration of Piltel’s unrestructured indebtedness does notcreate a cross-default under Piltel’s restructured indebtedness or anyindebtedness of PLDT or Smart.

 

The Creditand Omnibus Agreements of Mabuhay Satellite imposes several negativecovenants.  In particular, these covenants, among other things, restrictmaterial changes in Mabuhay Satellite’s nature of business and ownershipstructure, any lien upon or with respect to any of its assets or to any rightto receive income, acquisition of capital stock, declaration and payment ofdividends, merger, consolidation and sale with another entity and incurring orguaranteeing additional long-term debt beyond prescribed 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 loanagreements also requires ePLDT to comply with specified financial ratios andother financial tests at quarterly measurement dates.  The agreement alsocontains customary and other default provisions that permit the lender toaccelerate amounts due under the loan or terminate their commitments to extendadditional funds under the loan.  As at June 30, 2006, ePLDT was in compliancewith all of its financial covenants.

 

**Obligations Under Capital Lease**

 

Thefuture minimum payments for capitalized leases are as follows as at June 30,2006:

 

**Year**

**(Unaudited)**

 

(in million pesos)

2006

798

2007

380

2008

36

2009

12

2010

8

2011 and onwards

436

Total minimum lease payments

1,670

Less amount representing interest

573

Present value of net minimum lease payments

1,097

Less obligations under capital lease maturing within one year (Note 8)

828

Long-term portion of obligations under capital lease (Note 8)

 269

 

*Municipal Telephone Projects*

 

In 1993,PLDT entered into two lease agreements with the Philippine Department ofTransportation and Communications, or DOTC, covering telecommunicationsfacilities in the province of Bohol and Batangas established under theMunicipal Telephone Act.  Under these agreements, PLDT was granted theexclusive right to provide telecommunications management services, to expandservices, and to promote the use of the DOTC-contracted facilities in certaincovered areas for a period of 15 years.  Title to the properties shall betransferred to PLDT upon expiration of the lease term.  As at June 30, 2006,PLDT’s aggregate remaining obligation under this agreement was approximatelyPhp858 million.  In case of cancellation, PLDT is liable to pay Php100 millionunder each of the two contracts as liquidated damages.

 

On June 1, 2004, PLDT served the DOTC a notice of termination of thelease agreement in respect of the telecommunications system in Bohol whichstate of deterioration, obsolescence and disrepair has made it impossible forPLDT to continue managing, operating, and maintaining the system.  Since 2002,PLDT has been advising the DOTC of the need to review the viability of thesystem as it has infused more than Php200 million for upgrades and maintenanceto keep the system operable.  Further, the enactment of PublicTelecommunications Policy Act, or R.A. No. 7925, which negated the DOTC’swarranty to grant PLDT the exclusive right to provide telecommunicationservices in the areas stipulated, prevented PLDT from achieving the originallyprojected profitability, thereby rendering it impossible for PLDT to continuefulfilling its obligation under the lease agreement.  Although severaldiscussions have been held since then, no mutually acceptable agreement hasbeen reached.  On June 30, 2004, the DOTC advised PLDT that the request fortermination of the lease agreement in Bohol has been referred to the Departmentof Justice, or DOJ, as government agencies are required to refer allinterpretation of contracts and agreements to the DOJ secretary asattorney-general of the national government.  On May 5, 2005, PLDT received a letter from the DOTC stating that PLDT is in default for failure to remit tothe DOTC the quarterly installments under the lease agreement.  Due to thefailure of the parties to amicably settle their dispute, on September 28, 2005, PLDT demanded that the dispute be referred to arbitration and that the partiesagree on the composition of the arbitration committee.  In response, the DOTC, in a letter dated October 17, 2005,informed PLDT that pursuant to Executive Order No. 269, series of 2004, datedJanuary 12, 2004, the existing communications programs and projects implementedby DOTC were transferred to the Commission on Information and CommunicationsTechnology, or CICT, and that the DOTC had forwarded to CICT PLDT’s letterdated September 28, 2005.  In a letter dated March 24, 2006, the CICT informedPLDT that the CICT poses no objection on PLDT’s stated intentions andpreference to refer the unresolved and outstanding issues to the PhilippineDispute Resolution Center, Inc., or PDRCI, per the arbitration clause of thelease agreement.  On June 27, 2006, a Request for Arbitration dated June 1,2006 was filed by PLDT with the PDRCI.  The DOTC has not yet filed its Answerto the said Request for Arbitration.  As at June 30, 2006, the net book valueof the telecommunications system in Bohol, including PLDT’s additional capitalexpenditure relating to the telecommunications system, and correspondingcapital lease obligation amounted to Php21 million and Php735 million,respectively.

 

*OtherLong-term Capital Lease Obligations*

 

ThePLDT Group has various long-term lease contracts for a period of three yearscovering various office equipment.  In particular, Smart and Piltel havecapital lease obligations aggregating Php290 million as at June 30, 2006 inrespect 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.

 

**Preferred Stock Subject to Mandatory Redemption**

 

The movements of PLDT’s preferred stock subject tomandatory redemption follow:

 

 

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

 

**Series V**

**Series VI**

**Series VII**

**Total**

Series V

Series VI

Series VII

Total

 

(in million pesos)

Balance at beginning of period

**272**

**6,321**

**5,381**

**11,974**

2,103

6,440

6,072

14,615

Conversion

**(216)**

**(2,672)**

**–**

**(2,888)**

(2,083)

(507)

–

(2,590)

Accretion

**9**

**367**

**220**

**596**

252

782

451

1,485

Revaluation

**–**

**(9)**

**181**

**172**

–

(394)

(1,142)

(1,536)

Balance at end of period

**65**

**4,007**

**5,782**

**9,854**

272

6,321

5,381

11,974

 

Asat June 30, 2006, 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 JPY4,071.89 per share, respectively.

 

TheSeries V Convertible Preferred Stock was designated as compound instrument consistingof liability and equity components.  The fair value of the ConvertiblePreferred Stock was determined at issue date, of which the fair value of theliability component as at date of issuance is recorded as “Preferred StockSubject to Mandatory Redemption” and is included under the “Interest-bearingFinancial Liabilities” account in the consolidated balance sheets.  Theresidual amount was assigned as the equity component.

 

Thecost of each foreign currency component Convertible Preferred Stock Series VIand VII, was designated as debt instrument with embedded call options.  Thefair value of the Convertible Preferred Stock was determined at issue date, ofwhich the fair value of embedded call options was bifurcated and accounted forseparately, see Note 2 – Summary of Significant Accounting Policies andPractices and Note 24 – Financial Assets and Liabilities.  The residual amountwas assigned as liability components and recorded as “Preferred Stock Subjectto Mandatory Redemption” and is included under the “Interest-bearing FinancialLiabilities” account in the consolidated balance sheets.

 

Thedifference between the amount designated as liability components of the SeriesV, VI and VII Convertible Preferred Stock at issue date and the aggregate redemptionvalue is accreted over the period up to the put option date using the effectiveinterest rate method.  Accretions added to “Preferred Stock Subject toMandatory Redemption” and charged to interest as at June 30, 2006 and 2005amounted to Php596 million and Php818 million, respectively.

 

“PreferredStock Subject to Mandatory Redemption” amounted to Php9,854 million andPhp11,974 million as at June 30, 2006 and December 31, 2005, respectively,after revaluation of Series VI and VII Convertible Preferred Stock to theexchange rates at balance sheet dates and after giving effect to the aboveaccretions, conversions and additional issuances.  As at June 30, 2006 andDecember 31, 2005, 5,350,606 shares and 3,376,743 shares, respectively, of theConvertible Preferred Stock have been converted into PLDT common shares.  Theoutstanding shares of Series V, VI and VII Convertible Preferred Stock as atJune 30, 2006 were 52,478, 2,613,460 and 3,842,000, respectively.  Theaggregate redemption value of the outstanding Series V, VI and VII ConvertiblePreferred Stock amounted to Php12,389 million and Php15,890 million as at June30, 2006 and December 31, 2005, respectively.

 

Thecorresponding dividends on these shares charged as interest expense amounted toPhp93 million and Php132 million for the six months ended June 30, 2006 and2005, respectively.

 

 

 

**18. OtherNoncurrent Liabilities**

 

Thisaccount consists of:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Accrual of capital expenditures under long-term financing

**7,656**

 

5,769

Asset retirement obligations (Note 8)

**805**

 

752

Prepayments received under receivable purchase facility (Note 14)

**307**

 

976

Unearned revenues

**70**

 

71

Others

**14**

 

32

 

**8,852**

 

7,600

 

 

 

**19. AccruedExpenses and Other Current Liabilities**

 

This account consists of:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Accrued utilities and related expenses

**7,163**

 

5,559

Accrual for payment for unused sick leave and other employee benefits

**2,069**

 

1,760

Accrued interest and other related costs (Notes 17 and 20)

**2,016**

 

2,003

Accrued taxes and related expenses

**1,114**

 

760

Payable in installment purchase of equity investment

**–**

 

1,278

Others

**735**

 

1,946

 

**13,097**

 

13,306

 

 

 

**20. Related Party Transactions**

 

*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 purported date of commercialoperations of the Garuda I Satellite.

 

In the event that PT Asia Cellular Satellite’saggregate billing revenue is less than US$45 million in any given year, the AirTime Purchase Agreement states that PLDT has to make supplemental air timepurchase payments not to exceed US$15 million per year during the ten-yearterm.

 

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 ongoingnegotiations, AIL advised PLDT of the termination of the Standstill Agreementand the reinstatement of the terms under the original Air Time PurchaseAgreement effective January 1, 2002, following the lapse of the November 15,2003 deadline set in the Standstill Agreement for the negotiation of a revisedAir Time Purchase Agreement.  Negotiations are continuing with the relevantparties towards an amicable settlement of this matter.  As at June 30, 2006,PLDT’s outstanding payables under the original Air Time Purchase Agreement wasPhp4,096 million.  See *Note 22 – Contractual Obligations and CommercialCommitments* and *Note 23 – Provisions and Contingencies*for furtherdiscussion.

 

PLDT also entered into a Founder NSP OperatingAgreement with PT Asia Cellular Satellite on March 12, 1997, under which PLDTmay:

 

•        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.

 

Under an Assignment and Assumption Agreement dated December 29, 1998, PT Asia Cellular Satellite agreed to assign and transfer to AIL of PTAsia Cellular Satellite’s rights under the Founder NSP Air Time PurchaseAgreement and Founder 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 MajorStockholders, Directors and Officers*

 

Transactions to which PLDT or any of its subsidiaries isa party, in which a director or key officer or owner of more than 10% of the outstandingcommon stock of PLDT, or any member of the immediate family of a director orkey officer or owner of more than 10% of the outstanding common stock of PLDThad a direct or indirect material interest, as at June 30, 2006 (unaudited) andDecember 31, 2005 (audited) and for the six months ended June 30, 2006 and 2005(unaudited) are as follows:

 

*1.   Cooperation Agreement with the First PacificParties, or 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 Communications underthe Stock Purchase and Strategic Investment Agreement dated September 28, 1999,as amended and the Shareholders Agreement dated March 24, 2000, 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 has 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 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 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 NTT Communications, DoCoMo, First Pacific or any of theirrespective affiliates) determined to be so by the PLDT board of directors andincludes, without limitation, a person who announces an intention to acquire,seeking to acquire or acquires 30% or more of PLDT common shares then issuedand outstanding from time-to-time or having (by itself or together with itself)acquired 30% or more of the PLDT common shares announces an intention toacquire, seeking to acquire or acquires a further 2% of such PLDT common shares(a) at a price per share which is less than the fair market value as determinedby the board of directors of PLDT as advised by a professional financialadvisor, (b) which is subject to conditions which are subjective or which couldnot reasonably be satisfied, (c) without making an offer for all PLDT commonshares not held by it and/or its affiliates and/or persons who, pursuant to anagreement or understanding (whether formal or informal), actively cooperate toobtain or consolidate control over PLDT, (d) whose offer for the PLDT commonshares is unlikely to succeed or (e) whose intention is otherwise not bonafide; provided that, no person will be deemed a Hostile Transferee unless priorto making such determination, the board of directors of PLDT has usedreasonable efforts to discuss with NTT Communications and DoCoMo in good faithwhether such person should be considered a Hostile Transferee.

 

•        *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.

 

*2.   Integrated i-mode Services Package Agreementbetween DoCoMo and Smart*

 

The Integrated i-mode Service Package Agreement wasentered into by Smart and DoCoMo on February 15, 2006, under which DoCoMoagreed to grant Smart, on an exclusive basis within the territory of thePhilippines for a period of five years, an integrated i-mode service packageincluding non-transferable license to use the licensed materials and the i-modebrand, as well as implementation support and assistance and post-commerciallaunch support from DoCoMo. Pursuant to this agreement, Smart is required to payan initial license fee and running royalty fees based on the revenue arisingfrom i-mode subscription fees and data traffic.  The initial license fee paidas at June 30, 2006 amounted to US$1 million or Php53 million.

 

*3.   AdvisoryServices Agreement between DoCoMo and PLDT*

 

TheAdvisory Services Agreement was entered into by DoCoMo and PLDT on June 5,2006, in accordance with the Cooperation Agreement between PLDT and DoCoMo.Pursuant to the Agreement, DoCoMo will provide the services of certain keypersonnel in connection with certain aspects of the business of PLDT andSmart.  Also, the agreement governs the terms and conditions of theappointments and the corresponding fees related thereto.

 

*4.   Other Agreements with NTT Communications and/orits Affiliates*

 

PLDT is a party to the following agreements with NTT Communicationsand/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;

 

•        *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.

 

Total fees under these agreements amounted to Php100million and Php114 million for the six months ended June 30, 2006 and 2005,respectively.  As at June 30, 2006 and December 31, 2005, outstanding obligationsof PLDT amounted to Php40 million and Php23 million, respectively.

 

*5.   Agreement between Smart and Asia Link B.V., orALBV.*Smart has an existingTechnical Assistance Agreement with ALBV for the latter to provide technicalsupport services and assistance in the operations and maintenance of cellularbusiness for a period of five years, subject to renewal upon mutual agreementbetween the parties.  The agreement provides for quarterly payments oftechnical service 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 by Smart to ALBV to 1% of netrevenues effective January 1, 2004.  On February 18, 2004, Smart and ALBV entered into a renewal of the technical service agreement extending the effectivity ofthe terms 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 servicestherein consistent with and for the furtherance of the objectives of theservices.  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 Php299 million and Php278 million forthe six months ended June 30, 2006 and 2005, respectively.  Outstandingobligations of Smart under these agreements amounted to Php30 million andPhp194 million as at June 30, 2006 and December 31, 2005, respectively.

 

*6.   Agreements relating to insurancecompanies.*  Gotuaco del Rosario andAssociates, or Gotuaco, acts as the broker for certain insurance companies to cover certain insurableproperties of the PLDT Group.  Insurance premiums are remitted to Gotuaco andthe broker’s fees are settled between Gotuaco and the insurance companies.  Inaddition, PLDT has an insurance policy with Malayan Insurance Co., Inc., orMalayan, wherein premiums are directly paid to Malayan.  Total insuranceexpenses under these agreements amounted to Php189 million and Php268 millionfor the six months ended June 30, 2006 and 2005, respectively.  Two directorsof PLDT have a direct/indirect interests in or serve as a director/officer ofGotuaco and Malayan.

 

***Compensationof Key Management Personnel of the PLDT Group***

 

PLDT Group’scompensation of key management personnel by benefit type follows:

 

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Short-term employee benefits

**374**

 

323

Share-based payments (Note 21)

**282**

 

190

Post-employment benefits

**17**

 

15

 

**673**

 

 528

 

Each of the directors,including the members of the advisory board of PLDT, is entitled to adirector’s fee in the amount of Php125,000 for each meeting of the boardattended, except Manuel V. Pangilinan, who has waived his right to receive adirector’s fee.  Each of the members or advisors of the audit, executivecompensation, governance and nomination and finance committees is entitled to afee in the amount of Php50,000 for each committee meeting attended.

 

There are no agreements between PLDT Group and any ofits key management personnel providing for benefits upon termination ofemployment, except for such benefits to which they may be entitled under PLDTGroup’s retirement and incentive plans.

 

 

 

**21. Employee Benefits**

 

***Executive Stock Option Plan, or ESOP***

 

On April 27, 1999 and December 10, 1999, the Board of Directors and stockholders,respectively, approved the establishment of an ESOP 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 upto 1,289,745 common stock pursuant to the ESOP.  The ESOP covers managementexecutives, which include officers with rank of Vice President up to thePresident, executives with the rank of Manager up to Assistant Vice President,and advisors/consultants engaged by PLDT.  The ESOP seeks to motivate optionholders to achieve PLDT’s goals, reward option holders for the creation ofshareholder value, align the option holders’ interests with those of thestockholders of PLDT and retain the option holders to serve the long-terminterests of PLDT.  The ESOP is administered by the Executive CompensationCommittee of the Board of Directors.  About 1.3 million shares of common stockof PLDT had been reserved as underlying shares of options under the ESOP in1999.

 

Movements in the number ofstock options outstanding under the ESOP are as follows:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

Balance at beginning of period

**197,500**

 

536,589

Exercised shares*

**(54,504)**

 

(335,605)

Cancellations/forfeitures

**–**

 

(3,484)

Balance at end of period

**142,996**

 

197,500

 

****Based on date ofpayment of exercised shares.*

 

As at June 30, 2006, options covering a total of 726,854 shares had been exercisedby certain officers and executives at an exercise price of Php814 per share.

 

Thefair value of the ESOP plan was estimated at the date of grant using an optionpricing model, which considered annual stock volatility, risk-free interestrate, expected life of option, exercise share price of Php814 and a weightedaverage share price of Php870 for the 1999 Grant and of Php315 for the 2002Grant as at valuation date.  Total fair value of shares granted amounted toPhp359 million as at June 30, 2006 and December 31, 2005.  There was no fairvalue of options recognized as an expense for the six months ended June 30,2006 and 2005.

*** ***

***LTIP***

 

On August 3, 2004,PLDT’s Board of Directors approved the establishment of the LTIP for eligiblekey executive officers and advisors of PLDT and its subsidiaries, which isadministered by the Executive Compensation Committee.  The LTIP is a four-yearcash plan covering the period January 1, 2004 to December 31, 2007.  The LTIPawards payment at the end of the four-year period (without interim payments) iscontingent upon the achievement of an approved target increase in PLDT’s commonshare price by the end of the plan period and a cumulative consolidated netincome target for the plan period.  The target increase in the PLDT base shareprice, which is the average of the closing prices of PLDT shares ten tradingdays before or after December 31, 2003, is approximately 15% per annumcompounded for the plan period.

 

The fairvalue of the LTIP was estimated using an option pricing model, which consideredannual stock volatility, risk-free interest rate, remaining life of option andshare price Php1,830.00 as at valuation date.  Incentive cost per share as atJune 30, 2006 and December 31, 2005 amounted to Php915.95 and Php1,044.01,respectively.  The fair value of the options recognized as an expense for thesix months ended June 30, 2006 and 2005 amounted to Php933 million and Php610million, respectively.

 

Movements in the number ofstock options outstanding under the LTIP are as follows:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

Balance at beginning of period

**3,884,406**

 

3,685,959

Awards

**–**

 

493,429

Cancellations/forfeitures

**(104,212)**

 

(294,982)

Balance at end of period

**3,780,194**

 

3,884,406

 

***Pension***

 

*Defined Benefit Plans*

 

We have defined benefit pension plans, coveringsubstantially all of our permanent and regular employees, excluding those ofSmart and its subsidiary, I-Contacts, Inc., which require contributions to bemade to separate administrative funds.

 

Ouractuarial valuation is done on an annual basis.  Based on the latest actuarialvaluation, the actual present value of accrued liabilities, net of pension costand average assumptions used in developing the valuation are as follows:

 

 

(in million pesos)

Benefit obligation as at December 31,2005

7,652

Fair value of plan assets as at December 31, 2005

5,154

Funded status

2,498

Unrealized net transition obligation

(61)

Unrecognized net actuarial gain

(162)

Accrued benefit cost as at December 31, 2005 (Audited)

2,275

Accrual of pension cost during the period

445

Contributions

(45)

Accrued benefit cost as at June 30, 2006 (Unaudited)

2,675

 

Net pension cost was computed as follows:

 

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Components of net periodic benefit cost:

** **

 

 

Service cost

**245**

 

223

Interest cost

**447**

 

345

Actual return on plan assets

**(270)**

 

(238)

Amortization of unrecognized net transition obligation

**23**

 

30

Net periodic benefit cost

**445**

 

360

 

The unaudited weighted average assumptions used todetermine pension benefits as at June 30, 2006 are as follows:

 

Discount rate

** **

12%

Rate of increase in compensation

** **

9%

Expected rate of return on plan assets

** **

10%

 

As at June 30, 2006, the assets of the beneficialtrust fund established for the PLDT pension plan include investments in sharesof stock of PLDT and Piltel with fair values aggregating Php1,641 million,which represent about 29% of said beneficial trust fund’s net assets availablefor plan benefits.

*** ***

The Board of Trustees of the beneficial trust fundadopts an investment approach of mixed equity and fixed income investments tomaximize the long-term return of plan assets.  The investment portfolio hasbeen structured to achieve the objective of regular income with capital growthand out-performance of benchmarks.  A majority of the investment portfolio consistsof fixed income debt securities and various equity securities while theremaining portion consists of multi-currency investments.

 

Theallocation of the fair value of the beneficial trust fund’s assets for the PLDTpension plan follows:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

Investments in equity securities

**41%**

 

37%

Investments in debt and fixed income securities

**30%**

 

40%

Investments in real estate

**12%**

 

13%

Investments in mutual funds

**8%**

 

6%

Investments in temporary placements

**9%**

 

4%

 

**100%**

 

100%

 

PLDTexpects to make approximately Php558 million of cash contributions to itspension plan in 2006.

 

*DefinedContribution Plan*

 

Smartmaintains a trustee-managed, tax-qualified, multi-employer plan coveringsubstantially all permanent and regular employees.  The plan has a definedcontribution format wherein Smart’s obligation is limited to a specifiedcontribution to the plan.  It is being financed by the participating companies(Smart and its subsidiary, I-Contacts, Inc.) and employee contribution isoptional.

 

Theallocation of the fair value of plan assets for Smart as at June 30, 2006(unaudited) and as at December 31, 2005 (audited) follows:

 

Investments in debt securities

** **

 

71%

Investments in equity securities

** **

 

24%

Others

** **

 

5%

 

** **

 

100%

 

Smartexpects to make approximately Php97 million of cash contributions to itspension plan in 2006.

 

*PensionBenefit Cost*

 

Totalpension benefit cost follows:

 

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Expense recognized for defined benefit plans

**445**

 

360

Expense recognized for defined contribution plans

**54**

 

24

Total

**499**

 

384

 

 

 

**22. Contractual Obligations and CommercialCommitments**

 

***Contractual Obligations***

 

The following table discloses our unaudited consolidatedcontractual obligations outstanding as at June 30, 2006:

 

 

**Payments Due by Period**

 

**Total**

**Within 1 year**

**2****-3**

**years**

**4****-5**

**years**

**After 5 years**

 

(in million pesos)

 

 

 

 

 

 

Long-term debt(1)

98,367

18,449

26,537

9,163

44,218

Long-term lease obligations: 

 

 

 

 

 

Operating lease

3,435

606

1,067

815

947

Capital lease

1,670

1,001

223

19

427

Unconditional purchase obligations(2)

10,815

4,961

2,129

2,129

1,596

Other long-term obligations

12,389

–

5,115

7,274

–

**Total contractual obligations**

**126,676**

**25,017**

**35,071**

**19,400**

**47,188**

 

*(1)**Before deductingunamortized debt discount and debt issuance costs.*

*(2)**Based on theoriginal Air Time Purchase Agreement with AIL.*

 

*Long-termDebt*

 

Fora discussion of our long-term debt, see *Note 17*– *Interest-bearingFinancial Liabilities*.

 

*Long-termOperating Lease Obligations*

 

DigitalPassage Service Contracts.   PLDT has existing Digital Passage ServiceContracts with foreign telecommunication administrations for several dedicatedcircuits to various destinations for ten to 25 years expiring at variousdates.  As at June 30, 2006, PLDT’s aggregate remaining obligation under thesecontracts amounted to approximately Php12 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 June 30, 2006, PLDT’s aggregate remainingobligation under this agreement was approximately Php20 million.

 

*OtherLong-term Operating Lease Obligations*.The PLDT Group has various long-term lease contracts for periods ranging fromtwo to ten years covering certain offices, warehouses, cell sitestelecommunication equipment locations and various office equipment.  Inparticular, Smart has lease obligations aggregating Php3,171 million as at June30, 2006 in respect of office and cell site rentals with over 3,000 lessorsnationwide, PLDT has lease obligations aggregating Php100 million as at June30, 2006, and ePLDT has lease obligations aggregating Php132 million as at June30, 2006 in respect of certain office space rentals.

 

*Long-term Capital Lease Obligations*

 

For a discussion of our long-term capital leaseobligations, see *Note 17 – Interest-bearing Financial Liabilities*.

 

*UnconditionalPurchase Obligations*

 

*AirTime Purchase Agreement with AIL.*Asdiscussed in *Note 20 – 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 TimePurchase Agreement required PLDT to purchase from AIL a minimum of US$5 millionworth of air time annually over ten years commencing on January 1, 2002, thepurported date of commercial 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.

 

On February 10, 2004, notwithstanding the ongoingnegotiations, AIL advised PLDT of the termination of the Standstill Agreementand the reinstatement of the terms under the original Air Time PurchaseAgreement effective January 1, 2002 following the lapse of the November 15,2003 deadline set in the Standstill Agreement for the negotiation of a revisedAir Time Purchase Agreement.  Negotiations are continuing with the relevantparties towards an amicable settlement of this matter.  See *Note 20 – RelatedParty Transactions* and *Note 23 – Provisions and Contingencies*forfurther details relating to the Air Time Purchase Agreement with AIL.

 

As at June 30, 2006, PLDT’s aggregate remaining minimum obligation under the originalAir Time Purchase Agreement was approximately Php10,815 million.

 

*OtherLong-term Obligations*

 

*MandatoryConversion and Purchase of Shares*.As discussed in *Note 17 – Interest-bearing Financial Liabilities*, as at June30, 2006, PLDT had issued a total of 3 million shares of Series V ConvertiblePreferred Stock, 5 million shares of Series VI Convertible Preferred Stock and4 million shares of Series VII Convertible Preferred Stock in exchange for atotal of 58 million shares of Series K Class I Convertible Preferred Stock ofPiltel, pursuant to the debt restructuring plan of Piltel adopted in June 2001.

 

Each share of Series V, VI and VII ConvertiblePreferred Stock is convertible at any time at the option of the holder into onePLDT common share.  On the date immediately following the seventh anniversaryof the issue date of the Series V and Series VI Convertible Preferred Stocksand on the eighth anniversary of the issue date of the Series VII ConvertiblePreferred Stock, the remaining outstanding shares under these series will be mandatorilyconverted to PLDT common shares.  Under a put option exercisable for 30 days,holders of common shares received on mandatory conversion of the Series V, VIand VII Convertible Preferred Stocks will be able to require PLDT to purchasesuch PLDT common shares for Php1,700 per share, US$36.132 per share, and JPY4,071.89per share, respectively.  

 

As at June30, 2006, 2,668,962 shares of Series V Convertible Preferred Stock and 2,681,644shares of Series VI Convertible Preferred Stock had been converted to PLDTcommon shares.  As at June 30, 2006, 52,478 shares of Series V, 2,613,460shares of Series VI and 3,842,000 shares of Series VII Convertible PreferredStocks remained outstanding.  The aggregate value of the put option based onoutstanding shares as at June 30, 2006 was Php12,389 million, of which Php5,115million is puttable on June 4, 2008 and Php7,274 million on June 4, 2009, ifall of the outstanding shares of Series V, VI and VII Convertible PreferredStocks were mandatorily converted and all the underlying common shares were putto PLDT.  The market value of the underlying shares of common stock was Php11,910million, based on the market price of PLDT common shares of Php1,830.00 pershare as at June 30, 2006.

 

***Commercial Commitments***

 

Asat June 30, 2006, our outstanding commercial commitments, in the form ofletters of credit, amounted to Php1,836 million.  These commitments will expirewithin one year.

 

 

 

**23. Provisionsand 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 in ourunaudited consolidated financial statements as at June 30, 2006.

 

*NTC supervision and regulation fees, or SRF*

 

Since 1976, PLDT has received assessments from NTC forpermit, SRF and other charges pursuant to Section 40 of Commonwealth Act 146,otherwise known as the Public Service Act.  As at June 30, 2006, PLDT had paid,since 1994, a total amount of Php1,960 million in SRF, of which Php1,724million was paid under protest.

 

PLDT is contesting the manner by which theseassessments were calculated and the basis for such calculations.  The case isnow with the Supreme Court and upon the rules and practice of court, stands submitted for decision.

 

Smartand Piltel have similarly received assessments from NTC for permit, SRF andother charges which were paid under protest.  Total payments by Smart amountedto Php122 million each in 2005 and 2004.  On February 11, 2005, based on theNTC’s deficiency recomputation, Piltel paid the amount of Php559 million inrespect of NTC fees for the period from 1992 to 2004.  On September 30, 2005,Piltel paid SRF of Php81 million representing amounts due for 2005.

 

*Local business andfranchise 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 LocalGovernment Code of 1991, or R.A. No. 7160, which took effect on January 1, 1992, extended to local government units, or LGUs, 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 local franchise and businesstaxes exemption privileges to other franchise holders subsequent to theeffectivity of R.A. No. 7160, implicitly restored its local franchise andbusiness taxes exemption privilege under Section 12 of R.A. No. 7082, or thePLDT Franchise pursuant to Section 23 thereof or the quality of treatmentclause. 

 

To confirm this position, PLDT sought and obtained on June 2, 1998 a ruling from the Bureau of Local Government Finance, or BLGF, of thePhilippine 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 virtueof the BLGF Ruling, PLDT stopped paying local franchise and business taxesstarting with the fourth quarter of 1998 and has filed with certain LGUs claimsfor tax refund covering the period from the second quarter of 1995 to the thirdquarter of 1998.  PLDT has received assessments for local franchise andbusiness taxes from several cities and provinces following PLDT’s decision tostop payment of local franchise and business taxes.  

 

Followinga decision of the Supreme Court on March 25, 2003, a judgment in the amount of Php4 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.  Pursuant to the said decision, PLDT has voluntarilypaid the total amount of Php15 million for the period from the fourth quarterof 1998 until December 31, 2003, which includes the Php4 million subject of thecase.  The said amount constitutes only the basic franchise tax due for thesaid period, excluding surcharges and interest  which PLDT is asking the Cityof Davao, through the local council, to waive.  PLDT believes, based on theopinion of its legal counsel, that PLDT is not liable for surcharges andinterest considering that the legal issue involved was a difficult one andPLDT’s non-payment of the said taxes was made in good faith.  On August 2, 2005, the local Sanggunian passed a resolution denying PLDT’s request forabatement of surcharges and penalties and directing the city treasurer toupdate PLDT’s liability and immediately collect the same.  Accordingly, on August 26, 2005, the city treasurer issued an assessment to PLDT in the amount of Php12million.  In order to maintain and preserve its good standing and relationshipwith the City of Davao, PLDT has paid the surcharges and penalties as at December 31, 2005.

 

Although PLDT believes that it is not liable to pay localfranchise and business taxes, PLDT has entered into compromise settlements withseveral LGUs, including the City of Makati, in order to maintain andpreserve its good standing and relationship with these LGUs.  Under thesecompromise settlements, which have mostly been approved by the relevant courts,PLDT has paid a total amount of Php565 million for local franchise tax coveringprior periods up to the end of 2005 as at June 30, 2006.

 

PLDT nolonger had contested assessments from LGUs for franchise taxes as at June 30,2006.

 

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.

 

Smart has,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’s exemption under its legislative franchise which took effect after theeffective date of R.A. No. 7160.

 

Smart has recently been declared exempt from payment of localfranchise tax to the City of Makati in a decision dated August 3, 2004 bythe Regional Trial Court of Makati.  The City of Makati has filed a Motion forExtension to file a Petition for Review with the Court of Appeals.  However, onJune 9, 2005, the Court of Appeals dismissed the appeal filed by the City of Makati.

 

The RTC ofIloilo has likewise ruled in a decision dated January 19, 2005 that Smart isexempt from payment of local franchise tax to the City of Iloilo.  The City of Iloilo has filed an appeal directly with the Supreme Court which remains pending.

 

*Piltel’sBureau of Internal Revenue, or BIR, Assessment*

 

Piltel received thefollowing assessment notices from the BIR:

 

**Year**

**Tax Assessment Type**

**Basic**

**Interest**

**Total**

 

 

(in million pesos)

1998

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

 

On December 12, 2005, Piltel filed a collective application for acompromise settlement with the BIR for the deficiency tax assessments arisingfrom taxable years 1998, 1999 and 2001, citing “reasonable doubt as to thevalidity of the tax assessments” as a basis.  The prescribed minimum percentageof compromise settlement for such basis is 40% of the basic assessed tax.

 

On January 27, 2006, Piltel received the favorable recommendation andapproval from the BIR on the said application for a compromise settlement. OnJanuary 31, 2006, Piltel settled the total amount of Php114 million, which isequivalent to 40% of the basic taxes per final assessment notices received, toeffect the immediate cancellation of the tax assessments.  On February 24,2006, the BIR accepted Piltel’s application for compromise settlement of incometax and VAT for the years 1998 and 1999 and income taxes and VAT for the year2001, and accordingly, issued a certificate of availment on the said date.

 

*Enhanced Voluntary Assessment Program, or EVAP,Availment*

 

In 2005, the BIR launched a program called EVAP, whichgrants taxpayers, who availed of the program, the privilege of last priority inaudit.  The program covers all types of internal revenue taxes which can beavailed of on a per tax type basis and required the payment of a certainpercentage increase in the said tax compared with the base year or theestablished fixed minimum EVAP payment, whichever is higher.

 

PLDTavailed of the program and paid a total of Php6 million for VAT and income taxfor taxable year 2004 and VAT and withholding tax for taxable year 2002.

 

Onthe other hand, Maratel availed of the EVAP for income tax for the taxable year2004, Subic Telecom availed of the program for its income tax, withholding taxand percentage tax for taxable year 2002, while Clark Telecom availed of theprogram for its income tax for both taxable years 2003 and 2004.  The totalpayment of Maratel, Subic Telecom and Clark Telecom amounted to Php800,000.  Smart’sEVAP availment, for which Php53 million was paid, covered the income tax forthe taxable years 2003 and 2004, the VAT for the taxable year 2002, theoverseas communications tax for the year 2002, and the withholding taxes forthe taxable years 2002 to 2004.  Meanwhile, Piltel’s EVAP availment, whichinvolved payment of Php3 million, covered the income tax for the taxable year2003 and the expanded withholding tax for the taxable years 2003 and 2004.  Bothcompanies still await the issuance of an EVAP certificate of qualification fromthe BIR.

 

PLDTand these subsidiaries are awaiting for the EVAP Certificate of Qualificationto be issued by the BIR.

 

Smart’sEVAP availment, for which Php53 million was paid, covered the income tax forthe taxable years 2003 and 2004, the VAT for the taxable year 2002, theoverseas communications tax for the year 2002, and the withholding taxes forthe taxable years 2002 to 2004, while Piltel’s EVAP availment, which involvedpayment of Php3 million, covered the income tax for the taxable year 2003 andthe expanded withholding tax for the taxable years 2003 and 2004.

 

*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 and transferredto AIL, under which PLDT was granted the exclusive right to sell ACeS servicesin the Philippines.  The Air Time Purchase Agreement required PLDT to purchasefrom PT Asia Cellular Satellite at least US$5 million worth of air timeannually over ten years, commencing on January 1, 2002, the purported date of thestart of commercial operations, and to make supplemental air time purchasepayments not to exceed US$15 million per year during the ten-year term in theevent revenues generated are less than US$45 million in any given year.  Underthe Air Time Purchase Agreement, the air time payment obligations remain ineffect until all indebtedness incurred by AIL has been fully repaid.  See *Note20 – Related Party Transactions* and *Note 22 – Contractual Obligations and Commercial Commitments* fordetailed discussion of the terms of the agreement.

 

PLDT and the other founder NSPs are endeavoring to amend the Air TimePurchase Agreement due to the occurrence of partial satellite loss, changes inthe primary business of ACeS and other events affecting the business.

 

In March2003, PLDT, together with the other founder NSPs, entered into a StandstillAgreement with AIL.  Payments made to AIL under the Air Time Purchase Agreementbased on billings of actual usage and the Standstill Agreement amounted to US$2million and US$1 million for the second quarters of 2005 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 atJune 30, 2006, PLDT’s outstanding payables under the original Air Time PurchaseAgreement were approximately Php4,096 million.  Negotiations are continuingwith the relevant parties towards an amicable settlement of this matter.

 

On June21, 2004, AIL also sent PLDT a letter citing PLDT in default under the Air TimePurchase Agreement for non-payment of outstanding amounts and for repudiationof its obligations thereunder.  PLDT maintains, however, that the terminationof the Standstill Agreement and reinstatement of the terms under the originalAir Time Purchase Agreement are premature, considering that the discussions ornegotiations on the terms of the proposed revised Air Time Purchase Agreementwere still pending between the parties, such that it is highly inequitable forAIL to have unilaterally decided to invoke the provisions of the StandstillAgreement and declared PLDT in default.  Furthermore, PLDT maintains its position that the Air Time Purchase Agreement has been rendered ineffectiveby various events, circumstances and technical problems encountered in theoperation of the business of AIL.  The substantial changes in the circumstancesunder which AIL must operate, changes which were not contemplated by theparties at the time the commitments were made, have rendered the commitmentsunder the Air Time Purchase Agreement unrealistic and the performance of thesame impossible.

 

Asat June 30, 2006, PLDT’s aggregate remaining minimum obligation under theoriginal Air Time Purchase Agreement was approximately Php10,815 million.

 

Wemade a reasonable estimate of the amount necessary in the event such obligationwould be settled and have made the appropriate provisions in our unaudited consolidatedfinancial statements as at June 30, 2006 with due consideration of AIL’sexisting indebtedness and of PLDT’s share as one of the founder NSPs.  

 

 

 

**24. Financial Assets and Liabilities**

 

Ourfinancial assets and liabilities are recognized initially at fair value.Transaction costs (debt issuance costs) are included in the initial measurementof all financial assets and liabilities except those classified as financialinstruments measured at fair value through profit and loss.  Subsequent toinitial recognition, assets and liabilities are either valued at amortized costusing the effective interest rate method or at fair value depending onclassification.

 

Thefollowing table sets forth the carrying values and estimated fair values of ourfinancial assets and liabilities recognized as at June 30, 2006 and December31, 2005.  There are no material unrecognized financial assets and liabilitiesas at June 30, 2006 and December 31, 2005.

 

** **

**Carrying Value**

**Fair Value**

** **

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

**June 30, 2006 (Unaudited)**

December 31 , 2005 (Audited)

 

(in million pesos)

**Noncurrent Financial Assets**

** **

 

 

 

Investments-available-for-sale

**111**

109

**111**

109

Derivative assets

**1,081**

2,648

**1,081**

2,648

Notes receivable

**346**

346

**346**

346

Total noncurrent financial assets

**1,538**

3,103

**1,538**

3,103

**Current Financial Assets**

** **

 

** **

 

Cash and cash equivalents

**25,966**

30,064

**25,966**

30,064

Short-term investments

**3,172**

2,746

**3,172**

2,746

Trade and other receivables

**7,844**

7,113

**7,844**

7,113

Derivative assets

**15**

37

**15**

37

Total current financial assets

**36,997**

39,960

**36,997**

39,960

**Total Financial Assets**

**38,535**

43,063

**38,535**

43,063

** **

** **

 

** **

 

**Noncurrent Financial Liabilities**

** **

 

** **

 

Long-term debt - net of current portion*

**72,410**

84,860

**77,963**

92,811

Obligations under capital lease*

**269**

381

**269**

381

Preferred stock subject to mandatory redemption*

**9,854**

11,974

**11,054**

14,053

Derivative liabilities

**5,918**

5,777

**5,918**

5,777

Total noncurrent financial liabilities

**88,451**

102,992

**95,204**

113,022

**Current Financial Liabilities**

** **

 

** **

 

Accounts payable

**11,295**

15,482

**11,295**

15,482

Derivative liabilities

**66**

192

**66**

192

Current portion of long-term debt*

**18,281**

18,684

**19,679**

19,435

Obligations under capital lease*

**828**

717

**828**

717

Total current financial liabilities

**30,470**

35,075

**31,868**

35,826

**Total Financial Liabilities**

**118,921**

138,067

**127,072**

148,848

 

*    *Included under “Interest-bearing Financial Liabilities”in the consolidated balance sheets.*

 

Thefollowing methods and assumptions were used to estimate the fair value of eachclass of financial instrument for which it is practicable to estimate suchvalue:

 

Interest-bearing Financial Liabilities:

 

*Long-term debt:*Fair value is based on the following:

 

**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 a stock option valuation model.

 

Derivative instruments:

 

*Forward foreign exchange contracts and bifurcatedforeign currency forwards:* The fairvalues were determined using forward exchange market rates at the balance sheetdate.

 

*Foreigncurrency options:*  The fair valueswere computed using an option pricing model.

 

*Foreigncurrency and interest rate swaps:*  The fair values were computed as thepresent value of estimated future cash flows.

 

*Bifurcated equity**call**options:*  The fair values were computed using anoption pricing model.

 

Due to theshort-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.

 

*Financialassets and liabilities carried at amortized cost*

 

Unamortizeddebt discount, representing debt issuance cost and any difference between thefair value of consideration given or received on initial recognition, includedin following financial liabilities amounted to Php10,784 million and Php13,347million as at June 30, 2006 and December 31, 2005, respectively, see *Note 17– Interest-bearing Financial Liabilities*.

 

*Financialassets and liabilities carried at fair value*

 

Thefollowing financial assets and liabilities were carried at fair value as at June30, 2006 and December 31, 2005.

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Investments-available-for-sale

**111**

 

109

Derivative instruments

**(4,888)**

 

(3,284)

 

**(4,777)**

 

(3,175)

 

*Derivative Financial Instruments*

 

Ourderivative financial instruments are accounted for as either cash flow hedgesor transactions not designated as hedges.  Cash flow hedges refer to thosetransactions that hedge our exposure to variability in cash flows attributableto a particular risk associated with a recognized asset or liability. Changesin the fair value of these instruments representing effective hedges arerecognized as cumulative translation adjustments in equity until the hedgeditem is recognized in earnings.  For transactions that are not designated ashedges, any gains or losses arising from the changes in fair value arerecognized directly to income for the period.

 

The tablebelow sets out the information about our derivative financial instruments as atJune 30, 2006 and December 31, 2005:

 

** **

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

 

** **

 

**Maturity**

**Notional**

**Mark-to-market Gain (Loss)**

Notional

Mark-to-market Gain (Loss)

 

 

(in millions)

***PLDT***

** **

** **

 

 

 

** **

** **

 

 

Cash flow hedges:

** **

** **

 

 

Long-term currency swaps

** **

** **

 

 

 

2017

**US$300**

**(Php934)**

US$300

Php417

 

2012

**250**

**(1,309)**

250

(428)

 

** **

** **

 

 

Long-term foreign currency options

2009

**175**

**(609)**

175

301

 

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Long-term foreign currency options

**175**(1)

**185**

175(1)

(270)

 

** **

** **

 

 

Short-term currency options

**JPY1,516**

**(17)**

JPY151

(2)

 

** **

** **

 

 

Interest rate swap

**US$63**

**(968)**

US$125

(1,569)

 

** **

** **

 

 

Forward foreign exchange contracts

**US$158**

**(8)**

220

(169)

 

**JPY1,516**

**(6)**

JPY1,282

7

 

** **

** **

 

 

Bifurcated equity call options

**6 shares**

**(1,215)**

8 shares

(1,597)

 

** **

**(Php4,881)**

 

(Php3,310)

***Smart***

 

** **

 

* *

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Bifurcated embedded derivatives

**US$16**

**(7)**

US$9

26

Net liabilities

** **

**(Php4,888****)**

 

(Php3,284)

 

*(1)**Non-hedgedportion of 2009 long-term foreign currency options based on the same notionalamount as the hedged portion.*

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Presented as:

** **

 

 

Noncurrent assets

**1,081**

 

2,648

Current assets

**15**

 

37

Noncurrent liabilities

**(5,918)**

 

(5,777)

Current liabilities

**(66)**

 

(192)

Net liabilities

**(4,888)**

 

(3,284)

 

Cumulativetranslation adjustments as at June 30, 2006 and December 31, 2005 consists of:

 

 

**June 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Cumulative translation adjustments at beginning of period

**1,253**

 

362

Movements of cumulative translation adjustments:

** **

 

 

Deferred income tax effects on cash flow hedges

**983**

 

(427)

Currency translation differences

**3**

 

(62)

Net gain on available-for-sale financial assets

**3**

 

4

Net gain on cash flow hedges removed from cumulative translation adjustments and taken to profit or loss

**(115)**

 

2,390

Net loss on cash flow hedges

**(3,133)**

 

(1,014)

 

**(2,259)**

 

 891

Cumulative translation adjustments at end of period

**(1,006)**

 

1,253

 

Analysis of gain on derivative transactions for thesix months ended June 30, 2006 and 2005 are as follows:

 

 

**Six Months Ended June 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Net mark-to-market loss at end of period

**(4,888)**

 

(2,519)

Net mark-to-market loss at beginning of period

**(3,284)**

 

(2,964)

Net change

**(1,604)**

 

 445

Net loss charged to cumulative translation adjustments

**3,133**

 

867

Settlements, accretion and conversion

**(1,552)**

 

(534)

Net gain (loss) on derivative transactions

**(23)**

 

 778

 

***PLDT***

*** ***

***CashFlow Hedges***

 

*Long-termCurrency Swaps*

*** ***

PLDTentered into long-term principal-only currency swap agreements with variousforeign counterparties to hedge the currency risk on its fixed rate notesmaturing in 2009, 2012 and 2017.  As at June 30, 2006 and December 31, 2005,these long-term currency swaps have an aggregate notional amount of US$550million.  Under the swaps, PLDT effectively exchanges the principal of its U.S.dollar-denominated fixed rate notes into peso-denominated loan exposures atagreed swap exchange rates.  The agreed swap exchange rates are reset to thelowest U.S. dollar/Philippine peso spot exchange rate during the term of theswaps, subject to a minimum exchange rate.  In March and April 2004, PLDTentered into amendments to keep the lowest reset exchange rate and unwind thedownward resettable feature of US$550 million of its long-term principal-onlycurrency swap agreements in order to lower the running hedging cost of theswaps.  As at June 30, 2006 and December 31, 2005, the outstanding swapcontracts have an agreed average swap exchange rate of Php50.76.

 

In orderto manage hedge costs, these swaps included a credit-linkage feature with PLDTas the reference entity.  The specified credit events include bankruptcy, failureto pay, obligation acceleration, moratorium/repudiation, and restructuring ofPLDT bonds or all or substantially all of PLDT’s obligations.  Upon theoccurrence of any of these credit events, subject to agreed threshold amountswhere applicable, the obligations to both PLDT and its counterparty under theswap contracts terminate without further settlements to either party, includingany mark-to-market value of the swaps.  As at June 30, 2006 and December 31,2005, US$725 million of PLDT’s long-term currency swaps/options have beenstructured to include credit-linkage with PLDT as the reference entity.  Thesemi-annual fixed or floating swap cost payments that PLDT is required to maketo its counterparties averaged about 5.30% and 4.50% per annum as at June 30,2006 and December 31, 2005, respectively.  As cash flow hedges, any movementsin the fair value of these instruments will be taken as a cumulativetranslation adjustment under equity in our consolidated balance sheets.

 

*Long-termForeign Currency Options*

 

To managehedging costs, the currency swap agreement relating to the 2009 fixed ratenotes 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 plus the excess above the agreed thresholdrate.  On the other hand, if on maturity, the Philippine peso to US$1.00 spotexchange rate is lower than the exchange rate of Php52.50 to US$1.00, PLDT willhave the option to purchase at the prevailing Philippine peso to U.S. dollarspot exchange rate.  In July 2004, PLDT and its counterparty, agreed tore-document and re-classify the transaction into long-term currency optioncontracts.  The net semi-annual floating hedge cost payments that PLDT isrequired to pay under these transactions was approximately 6.53% and 5.68% perannum as at June 30, 2006 and December 31, 2005, respectively.

 

The optioncurrency contract relating to PLDT’s option to purchase U.S. dollar at Php52.50to US$1.00 or prevailing spot rate at maturity, whichever is lower, qualifiesas a cash flow hedge.  The option currency contract relating to thecounterparty’s option to purchase foreign currency from PLDT at Php90.00 toUS$1.00 is not designated as a hedge.  Please refer to discussion below (undertransactions not designated as hedges).

 

***Transactions Not Designated as Hedges***

 

Due to the amounts of PLDT’s foreign currency hedgingrequirements and the large interest differential between the Philippine pesoand the U.S. dollar, the costs to book long-term hedges can be significant.  Inorder to manage such hedging costs, PLDT utilizes structures that includecurrency option contracts, and fixed-to-floating coupon-only swaps that may notqualify for hedge accounting. 

 

*Long-termForeign Currency Options*

 

Withreference to the above-mentioned hedge on PLDT’s 2009 fixed rate notes, PLDTsimultaneously sold a currency option contract with the same notional amount ofUS$175 million with the same maturity that gives the counterparty a right topurchase foreign currency at Php90.00 to US$1.00.  Together with the long-termcurrency option contract classified under cash flow hedges, PLDT has theobligation to purchase U.S. dollars at an exchange rate of Php52.50 to US$1.00plus the excess above the agreed threshold rate.  In exchange for thiscondition, the overall net hedging cost for the transaction is reduced.

 
**
*Short-termCurrency Options*

 

PLDTentered into short-term U.S. dollar subsidized forward contracts to partiallyhedge PLDT’s fixed rate notes due June 2006.  In order to reduce overall nethedging cost for the transactions, these forward contracts have been structuredto include the sale of currency call option contracts that give thecounterparty the right to purchase foreign currency at an agreed exchange rate. PLDT effectively has the obligation to buy U.S. dollars at a subsidizedforward rate plus any excess above the agreed threshold rate should thePhilippine peso to U.S. dollars spot exchange rate on the maturity date settlebeyond that agreed threshold.  PLDT’s subsidized forward contracts amounting toUS$62 million matured on June 29, 2006.  As at June 30, 2006, there are no outstandingsubsidized forward contracts.

 

PLDTalso entered into short-term Japanese yen currency option contracts to hedgeour other short-term foreign currency obligations.

* *

*Interest Rate Swap*

* *

A portionof PLDT’s currency swap agreements to hedge its 2017 fixed rate notes carryfixed rate swap cost payments.  To effectively lower the running cost of suchswap agreements, PLDT, in April 2003, entered into an agreement to swap thecoupon 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/US$1.00.  Below this level, a reduced fixed coupon rate of3% 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 JPY strengthens below the agreedthreshold will be 8.375%.  Both swap agreements include a credit-linkagefeature with PLDT as the reference entity.

 

In March 2006, the interest rate and overlay swapagreements were partially terminated to effectively lower the outstandinginterest rate swap notional amount to US$62.5 million.  Since changes in fairvalues have already been recognized as profit and loss in prior periods, thecorresponding liability settled by PLDT amounted to Php804 million. 

 

*ForwardForeign Exchange Contracts*

 

PLDTentered into short-term U.S. dollar and Japanese yen forward foreign exchangecontracts to hedge short-term foreign currency obligations.

 

*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 June 30, 2006.

* *
**
*BifurcatedEquity Call Options*

 

Pursuantto Piltel’s debt restructuring plan, PLDT issued its Series VI and VIIConvertible Preferred Stock, see *Note 17 – Interest-bearing FinancialLiabilities*.  Each share of Series VI and VII Convertible Preferred Stockis convertible at any time at the option of the holder into one share of PLDT’scommon stock.  On the date immediately following the seventh anniversary of theissue date of the Series VI Convertible Preferred Stock and on the eighthanniversary of the issue date of the Series VII Convertible Preferred Stock,the remaining outstanding shares under these series will be mandatorily convertedinto shares of PLDT common stock.  For 30 days thereafter, the holders of thesemandatorily converted shares of common stock have the option to sell suchshares of common stock back to PLDT for US$36.132 per share and JPY4,071.89per share for Series VI and VII, respectively.  As at June 30, 2006 andDecember 31, 2005, the net negative mark-to-market value of these embedded calloptions amounted to Php1,215 million and Php1,597 million, respectively.

* *

***Smart***

* *

Smart’s embeddedderivatives were also bifurcated from prepaid forwards.  As at June 30, 2006and December 31, 2005, outstanding contracts included service contracts withvarious contractors and suppliers covering handset importations payable in U.S.dollars.

* *

Smart’sother embedded derivatives were bifurcated from service and purchasecontracts.  As at June 30, 2006 and December 31, 2005, outstanding contractsincluded a service contract with foreign equipment suppliers and varioussuppliers covering handset importations payable in U.S. dollars.

 

**Financial Risk Management Objectives and Policies**

* *

The mainpurpose of our financial instruments is to fund our operations.  We also enterinto derivative transactions, the purpose of which is to manage the currencyrisks and interest rate risks arising from our operations and our sources offinancing.  It is, and has been throughout the year under review, our policythat no trading in financial instruments shall be undertaken.

* *

Themain risks arising from our financial instruments are liquidity risk, foreignexchange risk, interest rate risk and credit risk.  Our Board reviews andapproves policies for managing each of these risks. These risks are summarizedbelow.  We also monitor the market price risk arising from all financialinstruments.  Our accounting policies in relation to derivatives are set out in*Note 2 – Summary of Significant Accounting Policies and Practices*.

* *

***LiquidityRisk***

* *

We seek tomanage our liquidity profile to be able to finance our capital expenditures andservice our maturing debts.  To cover our financing requirements, we intend touse internally generated funds and proceeds from debt and equity issues andsales of certain assets. 

 

As part ofour liquidity risk management program, we regularly evaluate our projected andactual cash flow information and continuously assess conditions in thefinancial markets for opportunities to pursue fund-raising initiatives.  Theseinitiatives may include bank loans, export credit agency-guaranteed facilities,and debt capital and equity market issues.

* *
******
***Foreign Exchange Risk***

* *

The following table shows our consolidated foreigncurrency-denominated monetary assets and liabilities and their peso equivalentsas at June 30, 2006 and December 31, 2005:

* *

** **

**June 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

** **

**U.S. Dollar**

**Php Equivalent**(1)

U.S. Dollar

Php Equivalent(2)

 

(in millions)

**Noncurrent Financial Assets**

** **

 

** **

** **

Derivative assets

**US$20**

**Php1,081**

US$50

Php2,648

Notes receivable

**6**

**346**

6

346

Total noncurrent financial assets

**26**

**1,427**

  56

2,994

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**252**

**13,413**

248

13,160

Short-term investments

**51**

**2,702**

51

2,731

Trade and other receivables

**264**

**14,062**

139

7,371

Derivative assets

**–**

**15**

1

37

Total current financial assets

**567**

**30,1****92**

 439

23,299

**Total Financial Assets**

**US$****593**

**Php31,619**

US$495

Php26,293

** **

** **

** **

 

 

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities – net of current portion

**US$1,526**

**Php81,196**

US$1,809

Php95,953

Derivative liabilities

**111**

**5,918**

109

5,777

Total noncurrent financial liabilities

**1,637**

**87,114**

1,918

101,730

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**55**

**2,902**

42

2,227

Accrued expenses and other current liabilities

**59**

**3,151**

68

3,587

Derivative liabilities

**1**

**66**

3

192

Current portion of interest-bearing financial liabilities

**328**

**17,459**

319

16,946

Total current financial liabilities

**443**

**23,578**

 432

22,952

**Total Financial Liabilities**

**US$****2,080**

**Php110,692**

US$2,350

Php124,682

 

*(1)**The exchangerate used was Php**53.220 to US$1.00.*

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

 

Intranslating the foreign currency-denominated monetary assets and liabilitiesinto peso amounts, the exchange rates used were Php53.220 to US$1.00 and Php53.062to US$1.00, the Philippine peso-U.S. dollar exchange rates as at June 30, 2006and December 31, 2005, respectively.

 

As at August7, 2006, the peso-dollar exchange rate was Php51.383 to US$1.00.  Using thisexchange rate, our consolidated net foreign currency-denominated liabilities asat June 30, 2006 would have decreased by Php2,732.

 

While acertain 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.

 

As at June 30, 2006, approximately98% of our total consolidated debts were denominated in foreign currenciesprincipally in U.S. dollars.  Of our foreign currency-denominated debts, 3% arein Japanese yen on a consolidated basis and the balance in U.S. dollars.  Thus,a weakening of the Philippine peso against the U.S. dollar or Japanese yen willincrease both the principal amount of our unhedged foreign currency-denominateddebts (representing 50% of our consolidated debts, or 35% net of our U.S.dollar cash balances as at June 30, 2006), and interest expense on our debt inPhilippine peso terms.  In addition, many of our financial ratios and otherfinancial tests will be negatively affected.  If, among other things, the valueof the Philippine peso against the U.S. dollar substantially drops from itscurrent level, we may be unable to maintain compliance with these ratios, whichcould result in acceleration of some or all of our indebtedness.  For furtherinformation on our loan covenants, see *Note 17 – Interest-bearing FinancialLiabilities*.

 

To manageour foreign exchange risks, stabilize cash flows, and improve investment andcash flow planning, we enter into forward foreign exchange contracts, foreigncurrency swap contracts, currency option contracts 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.  

 

***InterestRate Risk***

 

On alimited 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.

 

Thefollowing tables set out the carrying amount, by maturity, of our financialinstruments that are exposed to interest rate risk:

** **

**SixMonths Ended June 30, 2006 (Unaudited)**

** **

** **

 

 

 

 

 

 

 

**Discount/**

** **

 

** **

** **

 

 

 

 

 

 

 

**Debt**

** **

** **

** **

 

 

 

 

**Over 5**

**In U.S.**

 

**Issuance Cost**

**Carrying Value**

**Fair Value**

**In U.S.**

** **

** **

**Below 1 year**

**1-2 years**

**2 – 3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**In Php**

**In Php**

**Dollar**

**In Php**

** **

 

 

 

 

 

 

 

**(in millions)**

**Liabilities:**

 

 

 

 

 

 

 

** **

** **

 

** **

Long-term Debt

 

 

 

 

 

 

 

** **

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

129

–

175

–

550

 854

45,470

632

44,838

934

49,718

Interest rate

7.85% to  10.625%

–

10.50%

–

8.35% to 11.375%

–

–

–

–

–

–

US$ Fixed Loans (in millions)

59

54

41

32

280

 466

24,817

6,093

18,724

370

19,657

Interest rate

4.49% to 7.75%

4.49% to 7.58%

4.49% to 6.66%

4.49% to 4.52%

2.25%

–

–

–

–

–

–

Japanese Yen (in millions)

25

24

–

–

–

  49

2,593

–

2,593

49

2,595

Interest rate

2.125%

2.125%

–

–

–

–

–

–

–

–

–

Philippine Peso (in millions)

15

–

–

15

–

  30

1,580

2

1,578

33

1,765

Interest rate

12.83% to 15.816%

–

–

15%

–

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

118

132

72

121

1

 444

23,606

896

22,710

444

23,606

 

Interest rate

 

GOVCO’s Cost + 0.20%; 0.05% to 3.25% over LIBOR

 

GOVCO’s Cost + 0.20%; 0.05% to 2.50% over LIBOR

 

0.05% to 2.50% over LIBOR

 

0.05% to 2.50% over LIBOR

 

1% over LIBOR

 

–

 

–

 

–

 

–

 

–

 

–

Japanese Yen (in millions)

–

–

–

–

–

–

–

–

–

–

–

Interest rate

–

–

–

–

–

–

–

–

–

–

–

Philippine Peso (in millions)

1

–

–

4

–

   5

301

53

 248

5

301

Interest rate

1% over 91-day T-bill rate; 90-day PHIBOR + 3%

–

–

1% over 91-day T-bill rate

–

–

–

–

–

–

–

 

 

 

 

 

 

**1,848**

**98,367**

**7,676**

**90,691**

**1,835**

**97,642**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$63 million)

–

–

–

–

–

(18)

(968)

–

–

(18)

(968)

Japanese Yen (JPY7,519 million)

–

–

–

–

–

–

–

–

–

–

–

Fixed Rate on US$ notional 

–

–

–

–

–

–

–

–

–

–

–

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, 2005 (Audited)**

** **

** **

 

 

 

 

 

 

 

**Discount/**

** **

 

** **

** **

 

 

 

 

 

 

 

**Debt**

** **

** **

** **

 

 

 

 

**Over 5**

**In U.S.**

 

**Issuance Cost**

**Carrying Value**

**Fair Value**

**In U.S.**

** **

** **

**Below 1 year**

**1-2 years**

**2 – 3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**In Php**

**In Php**

**Dollar**

**In Php**

** **

 

 

 

 

 

 

 

**(in millions)**

**Liabilities:**

 

 

 

 

 

 

 

** **

** **

 

** **

Long-term Debt

 

 

 

 

 

 

 

** **

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

115

160

–

175

550

1,000

53,040

686

52,354

1,108

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

6,356

17,095

327

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

–

3,139

59

3,158

Interest rate

2.125%

2.125%

2.125%

–

–

–

–

–

–

–

–

Philippine Peso (in millions)

17

1

–

15

–

  33

1,746

4

1,742

37

1,961

Interest rate

11% to 24%

11% to 24%

–

15.0%

–

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

129

143

79

117

94

 562

29,806

1,679

28,127

562

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

1

 708

13

709

Interest rate

1.70% over LIBOR

1.70% over LIBOR

1.70% over LIBOR

–

–

–

–

–

–

–

–

Philippine Peso (in millions)

–

–

–

2

7

   9

482

103

 379

9

482

Interest rate

–

–

–

1% over 91-day T-bill rate 

1% over 91-day T-bill rate

–

–

–

–

–

–

 

 

 

 

 

 

**2,118**

**112,373**

**8,829**

**103,544**

**2,115**

**112,246**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$125 million)

–

–

–

–

–

(30)

(1,569)

–

–

(30)

(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

 

 

–

–

–

–

 

Fixed ratefinancial 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.  Financial instruments that are not subject tointerest rate risk were not included in the above tables.

 
***Credit Risk***

 
We trade only with recognized, creditworthy thirdparties.  It is our policy that all customers who wish to trade on credit termsare subject to credit verification procedures.  In addition, receivablebalances are monitored on an ongoing basis to reduce our exposure to bad debts.

 

With respect to credit risk arising from our financialassets, which comprise cash and cash equivalents, trade and other receivables,notes receivable and certain derivative instruments, our exposure to creditrisk arises from default of the counterparty, with a maximum exposure equal tothe carrying amount of these instruments.

 

We haveno significant concentrations of credit risk.

 

 

**25. Reclassification of Accounts**

 

Certain accounts in December 31, 2005 auditedconsolidated financial statements were reclassified to conform with the June30, 2006 unaudited consolidated financial statements presentation.