**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 November 2006, whichincludes financial statements for the nine months ended September 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 ANDANALYSIS OF 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Nine Months Ended September 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 accompanyingunaudited consolidated 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 ofPhp50.249 to US$1.00, the volume weighted average exchange rate at September 30, 2006 quoted through 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**

* *

| ** ** | **September 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

Php245,663

 

Php249,713

 

(Php4,050)

 

(2)

 
Property, plant and equipment 

170,051

 

176,974

 

(6,923)

 

(4)

 
Cash and cash equivalents and short-term investments

21,380

 

32,810

 

(11,430)

 

(35)

 
Total equity

95,900

 

74,369

 

21,531

 

29

 
Interest-bearing financial liabilities

86,956

 

116,616

 

(29,660)

 

(25)

 
*Notes payable and long-term debt*

*83,906*

* *

*103,544*

* *

*(19,638)*

* *

*(19)*

 
Net debt to equity ratio(1)

0.65x

 

0.95x

 

–

 

–

 
** **

** **

** **

**Nine Months Ended September 30,**

** **

**Increase (Decrease)**

 

**2006**

 

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

**Consolidated Statements of Income**

** **

** **

** **

** **

** **

** **

** **

Revenues and other income

Php95,400

 

Php92,562

 

Php2,838

 

3

Expenses

65,902

 

59,904

 

5,998

 

10

Income before income tax

29,498

 

32,658

 

(3,160)

 

(10)

Net income attributable to equity holders of PLDT

25,744

 

24,755

 

989

 

4

Net income

26,367

 

24,783

 

1,584

 

6

Net income margin

28%

 

27%

 

–

 

–

Earnings per common share – basic

138.71

 

138.15

 

0.56

 

–

**Consolidated Statements of Cash Flows**

 

 

 

 

 

 

 

Net cash provided by operating activities

56,018

 

55,111

 

907

 

2

Net cash used in investing activities

25,134

 

4,578

 

20,556

 

449

*Capital expenditures*

*16,872*

* *

*9,556*

* *

*7,316*

* *

*77*

Net cash used in financing activities

41,763

 

44,770

 

(3,007)

 

(7)

**Operational Data**

** **

** **

** **

** **

** **

** **

** **

Number of cellular subscribers

22,929,431

 

20,788,745

 

2,140,686

 

10

Number of fixed lines in service

2,075,941

 

2,131,861

 

(55,920)

 

(3)

Number of broadband subscribers

219,601

 

89,884

 

129,717

 

144

*Fixed Line*

*126,679*

* *

*77,393*

* *

*49,286*

* *

*64*

*Wireless*

*92,922*

* *

*12,491*

* *

*80,431*

* *

*644*

Number of employees

26,610

 

18,912

 

7,698

 

41

*Fixed Line*

*9,110*

* *

*9,494*

* *

*(384)*

* *

*(4)*

*Wireless*

*5,328*

* *

*5,065*

* *

*263*

* *

*5*

*ICT*

*12,172*

* *

*4,353*

* *

*7,819*

* *

*180*

 

**Exchange Rates**

**Php per US$**

 

** **

 

 

 

 

September 30, 2006

Php50.249

 

 

December 31, 2005

53.062

 

 

September 30, 2005

55.977

 

 

December 31, 2004

56.341

 

 

______________

* *

*(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;Smart Broadband, 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,Internet protocol-based solutions and multimedia content delivery provided byPLDT’s subsidiary ePLDT, Inc., or ePLDT; call center services provided underone umbrella brand name *ePLDT Ventus*, including Parlance Systems, Inc.,or Parlance and Vocativ Systems, Inc., or Vocativ; business processoutsourcing, or BPO, provided by SPi Technologies, Inc., or SPi; Internetaccess and gaming services provided by ePLDT’s subsidiaries, InfocomTechnologies, Inc., or Infocom, Digital Paradise, Inc., or Digital Paradise,Digital Paradise Thailand, Ltd., or Digital Paradise Thailand, netGames, Inc.,or netGames, Airborne Access Corporation, or Airborne Access, Level Up!, Inc.,or Level Up!; and e-commerce, and IT-related services provided by other investees of ePLDT, asdiscussed in *Note 9 – Investments in Associates* to the accompanyingunaudited consolidated financial statements. 

** **

We registered totalrevenues and other income of Php95,400 million in the first nine months of2006, an increase of Php2,838 million, or 3%, as compared to Php92,562 millionin the same period in 2005 primarily due to an increase in our service revenuesand other income of Php2,317 million and Php514 million, respectively.  

 

Expenses increased byPhp5,998 million, or 10%, to Php65,902 million in the first nine months of 2006from Php59,904 million in the same period in 2005, largely resulting fromincreases in depreciation and amortization, compensation and benefits, andprofessional and other contracted services, partly offset by lower provisions,cost of sales and financing costs.

 

Net incomeattributable to equity holders of PLDT increased by Php989 million, or 4%, toPhp25,744 million in the first nine months of 2006 from Php24,755 million inthe same period in 2005.  Consequently, basic earnings per common shareincreased to Php138.71 in the first nine months of 2006 from Php138.15 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 nine months ended September 30, 2006 and 2005.  Most of our revenues arederived from our operations within the Philippines.

** **

 

**Wireless**

** **

** **

** **

**Fixed Line**

** **

** **

** **

**ICT**

** **

 

** **

**Inter-segment Transactions**

** **

**Total**

** **

** **

 
**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the nine months ended  September 30, 2006**(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

Php60,488

 

 

 

Php36,629

 

 

 

Php4,146

 

 

 

(Php5,863)

 

Php95,400

 

 

Service

58,016

 

 

 

35,901

 

 

 

3,788

 

 

 

(5,702)

 

92,003

 

 

Non-service

1,842

 

 

 

71

 

 

 

339

 

 

 

(92)

 

2,160

 

 

Equity share in net income of associates

–

 

 

 

–

 

 

 

1

 

 

 

–

 

1

 

 

Other income

630

 

 

 

657

 

 

 

18

 

 

 

(69)

 

1,236

 

 

Expenses

31,655

 

 

 

35,982

 

 

 

4,128

 

 

 

(5,863)

 

65,902

 

 

Income before income tax

28,833

 

 

 

647

 

 

 

18

 

 

 

–

 

29,498

 

 

Net income for the period

25,757

 

 

 

587

 

 

 

23

 

 

 

–

 

26,367

 

 

Net income attributable to  equity holders of PLDT

25,098

 

 

 

586

 

 

 

60

 

 

 

–

 

25,744

 

 

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the nine months ended  September 30, 2005** (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

57,648

 

 

 

36,847

 

 

 

2,423

 

 

 

(4,356)

 

92,562

 

 

Service

54,984

 

 

 

36,696

 

 

 

2,100

 

 

 

(4,094)

 

89,686

 

 

Non-service

1,999

 

 

 

–

 

 

 

248

 

 

 

(94)

 

2,153

 

 

Equity share in net income of associates

–

 

 

 

–

 

 

 

5

 

 

 

–

 

5

 

 

Other income

665

 

 

 

151

 

 

 

70

 

 

 

(168)

 

718

 

 

Expenses

30,307

 

 

 

31,644

 

 

 

2,309

 

 

 

(4,356)

 

59,904

 

 

Income before income tax

27,341

 

 

 

5,203

 

 

 

114

 

 

 

–

 

32,658

 

 

Net income for the period

20,928

 

 

 

3,746

 

 

 

109

 

 

 

–

 

24,783

 

 

Net income attributable to  equity holders of PLDT

20,858

 

 

 

3,745

 

 

 

152

 

 

 

–

 

24,755

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Increase (Decrease)**

**Amount**

** **

**%**

 

**Amount**

 

**%**

 

**Amount**

 

**%**

 

**Amount**

 

**Amount**

 

**%**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

Php2,840

 

5

 

(Php218)

 

(1)

 

Php1,723

 

71

 

(Php1,507)

 

Php2,838

 

3

Service

3,032

 

6

 

(795)

 

(2)

 

1,688

 

80

 

(1,608)

 

2,317

 

3

Non-service

(157)

 

(8)

 

71

 

100

 

91

 

37

 

2

 

7

 

–

Equity share in net income of associates

–

 

–

 

–

 

–

 

(4)

 

(80)

 

–

 

(4)

 

 

(80)

Other income

(35)

 

(5)

 

506

 

335

 

(52)

 

(74)

 

99

 

518

 

72

Expenses

1,348

 

4

 

4,338

 

14

 

1,819

 

79

 

(1,507)

 

5,998

 

10

Income before income tax

1,492

 

5

 

(4,556)

 

(88)

 

(96)

 

(84)

 

–

 

(3,160)

 

(10)

Net income for the period

4,829

 

23

 

(3,159)

 

(84)

 

(86)

 

(79)

 

–

 

1,584

 

6

Net income attributable to  equity holders of PLDT

4,240

 

20

 

(3,159)

 

(84)

 

(92)

 

(61)

 

–

 

989

 

4

* *

**Wireless**

* *

Revenues and Other Income
 

Our wireless business segment offers cellularservices as 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 ninemonths ended September 30, 2006 and 2005 by service segment:

 

** **

**Nine Months Ended September 30,**

 
** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 
** **

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

**(in millions)**

(Unaudited)

 
Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php56,086

 

93

 

Php53,416

 

93

 

Php2,670

 

5

Wireless broadband, satellite, VSAT and others

1,930

 

3

 

1,568

 

3

 

362

 

23

 

58,016

 

96

 

54,984

 

96

 

3,032

 

6

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

1,842

 

3

 

1,999

 

3

 

(157)

 

(8)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

630

 

1

 

665

 

1

 

(35)

 

(5)

 

 

 

 

 

 

 

 

 

 

 

 

Total Wireless Revenues and Other Income

Php60,488

 

100

 

Php57,648

 

100

 

Php2,840

 

5

 

*Service Revenues*

 

Our wireless servicerevenues increased by Php3,032 million, or 6%, to Php58,016 million in thefirst nine months of 2006 compared to Php54,984 million in the same period in2005, mainly as a result of the growth of Smart’s and Piltel’s subscriber base,an increase in international inbound revenues and a reduction in domesticinterconnection costs due to a shift from off-network to on-network voice anddata usage.  As a percentage of our total wireless revenues and other income,service revenues contributed 96% in the first nine months of 2006 and 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 nine months of 2006 amounted to Php56,086 million, anincrease of Php2,670 million, or 5%, from Php53,416 million in the same periodin 2005.  Cellular service revenues accounted for 97% of our wireless servicerevenues in the first nine months of 2006 and 2005.  

 

As at September 30, 2006, Smart and Piltel cellular subscribers totaled 22,929,431, an increaseof 2,140,686, or 10%, over their combined cellular subscriber base of20,788,745 as at September 30, 2005.  Prepaid subscribers accounted for 99% ofour total subscriber base as at September 30, 2006 and 2005.  Prepaid andpostpaid subscribers totaled 22,618,675 and 310,756 as at September 30, 2006, reflecting net subscriber activations of 2,490,132 and 30,678, respectively, inthe first nine months 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.

 

Smart continues to offer products and services thatprovide value to its subscribers.  In 2005, Smart launched a series ofpromotions to test the market demand for fixed rate or “bucket” plans for voiceand text. Under a service branded as *Smart258*, subscribers had theoption to register for unlimited on-network voice calling or text messaging.  *Smart 258* has since been modified a number of times, with variations involvingchanges in load denominations and periods of network availability. The currentpromotion offers unlimited on-network texting, carrying denominations of Php15,Php30 and Php60 with corresponding expiration periods of one, two and fourdays. Bucket pricing promotions have now become a key driver for subscriberactivations and usage stimulation.

 

For 2006, Smart has focused on segmenting its marketby offering sector-specific, value-driven packages such as *All Text* – anew variety of top-up providing a fixed number of messages with prescribedvalidity periods. Current offerings include *All Text 10 Bonus*, with asuggested retail price of Php12, which gives 15 messages without expiration.  *AllText 20*, on the other hand, provides for 100 on-network messages with avalidity period of one day. For voice, the flat rate call promotion allows asubscriber to make an on-network call of up to three minutes for Php10 orextend the call to five minutes for Php15.  *All Text 10 Bonus* and *AllText 20*are valid until October 31 and November 9, 2006, respectively, while the flat rate call promotion is valid until November 10, 2006.

 

Smart likewise has in place various promotions tostimulate international usage.  In June 2006, *Smart IDD Libre Text Broad*was launched wherein subscribers earned one free international text for everyminute of IDD calling.  In October 2006, this was replaced by *InternationalBudget Text* packages.  These packages, which have limited duration andvarying number of allowable messages, enable subscribers to send internationaltext to pre-registered recipients of the subscriber’s choice on supportedoverseas carriers.  

 

Smart expanded its roster of services with thecommercial launch of its 3G services in May 2006. These services include videocalling, video streaming, high-speed Internet browsing and downloading ofspecial 3G content, offered at rates similar to those of 2G services. 

 

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

 

** **

**Nine Months Ended September 30,**

** **

** **

** **

** **

** **

**Increase**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

**(in millions)**

(Unaudited)

 

 

 

 

 

 

 

 

Cellular service revenues 

Php56,086

 

Php53,416

 

Php2,670

 

5

 

 

 

 

 

 

 

 

*By component*

*54,608*

* *

*51,947*

* *

*2,661*

* *

*5*

Voice 

26,168

 

26,158

 

10

 

–

Data

28,440

 

25,789

 

2,651

 

10

* *

* *

* *

* *

* *

* *

* *

* *

*By service type*

*54,608*

* *

*51,947*

* *

*2,661*

* *

*5*

Prepaid

50,921

 

48,695

 

2,226

 

5

Postpaid

3,687

 

3,252

 

435

 

13

* *

* *

* *

* *

* *

* *

* *

* *

*Others*(1)

*1,478*

* *

*1,469*

* *

*9*

* *

*1*

______________

 

 

 

 

 

 

 

* *

*(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.*

 

 

**September 30,**

** **

** **

** **

** **

** **

**Increase**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Cellular subscriber base 

22,929,431

 

20,788,745

 

2,140,686

 

10

Prepaid 

22,618,675

 

20,509,986

 

2,108,689

 

10

Smart 

16,238,917

 

15,502,827

 

736,090

 

5

Piltel

6,379,758

 

5,007,159

 

1,372,599

 

27

Postpaid

310,756

 

278,759

 

31,997

 

11

 

** **

 

**Nine Months Ended September 30,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

Systemwide traffic volumes (in millions)

 

 

 

 

 

 

 

Calls (in minutes) 

4,208

 

3,998

 

210

 

5

Domestic  

2,578

 

2,804

 

(226)

 

(8)

International

1,630

 

1,194

 

436

 

37

Inbound

1,509

 

1,067

 

442

 

41

Outbound

121

 

127

 

(6)

 

(5)

 

 

 

 

 

 

 

 

Text messages

178,420

 

60,438

 

117,982

 

195

Standard

23,053

 

28,891

 

(5,838)

 

(20)

Bucket Promos

152,654

 

28,723

 

123,931

 

431

Value-Added Services

2,713

 

2,824

 

(111)

 

(4)

*VoiceServices*

 

Cellular revenues fromvoice services, which include all voice traffic and voice value-added servicessuch as voice mail and international roaming, remained flat at Php26,168million in the first nine months of 2006 compared to Php26,158 million in thesame period in 2005 primarily due to an increase in international inboundrevenue and a decrease in interconnection expense, offset by a decrease indomestic voice revenues.  The decline in domestic voice revenue may beattributed to the re-channeling of calls to international inbound as a resultof continued efforts to curb by-pass activities while the decrease ininterconnection expense resulted from a shift to on-net voice usage broughtabout by various promotions.

 

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, increasedby Php2,651 million, or 10%, to Php28,440 million in the first nine months of2006 from Php25,789 million in the same period in 2005.  Cellular data servicesaccounted for 51% of cellular service revenues in the first nine months of 2006as compared to 48% in the same period in 2005.  

 

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

* *

** **

**Nine Months Ended September 30,**

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

** **

** **

** **

** **

** **

** **

** **

Text messaging

 

 

 

 

 

 

 

Domestic 

Php24,156

 

Php21,429

 

Php2,727

 

13

Standard

14,389

 

19,289

 

(4,900)

 

(25)

Bucket Promos

9,767

 

2,140

 

7,627

 

356

International

1,250

 

1,258

 

(8)

 

(1)

 

25,406

 

22,687

 

2,719

 

12

 

 

 

 

 

 

 

 

Value-added services

 

 

 

 

 

 

 

Non-Zed(1)

1,714

 

1,642

 

72

 

4

*Smart Zed*TM 

254

 

405

 

(151)

 

(37)

*Smart Money*

47

 

68

 

(21)

 

(31)

Mobile Banking

3

 

4

 

(1)

 

(25)

Roaming SMS, Pasaload, MMS and WAP**

1,016

 

983

 

33

 

3

 

3,034

 

3,102

 

(68)

 

(2)

Total 

Php28,440

 

Php25,789

 

Php2,651

 

10

_________________

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

 

Textmessaging-related services contributed revenues of Php25,406 million in thefirst nine months of 2006, an increase of Php2,719 million, or 12%, compared toPhp22,687 million in the same period in 2005, and accounted for 89% and 88% ofthe total cellular data revenues in the first nine months of 2006 and 2005,respectively.  The increase in revenues from text messaging-related services resulted mainly from the ongoing *Smart 258Unlimited Text* promotion and its variant bucket-priced text promotionalofferings.  Text messaging revenues from the various bucket promotions totaledPhp9,767 million.  Value-added services, which contributed revenues of Php3,034 million in the first nine months of2006, decreased by Php68 million, from Php3,102 million in the same period in2005 primarily due to decreased usage of *Smart Zed* and *Smart Money*services,partially offset by higher usage of roaming SMS and WAP in the first ninemonths of 2006 as compared to the same period in 2005.  The decline in *SmartZed* usage was due to increased competition from other content providers whilethe decline in *Smart Money* revenue was on account of reduced usage of *SmartMoney* by dealers as a settlement tool for load transactions.

* *

Standard text messages totaled 23,053 million in thefirst nine months of 2006, a decrease of 5,838 million, or 20%, from 28,891million in the same period in 2005 mainly due to a shift to bucket-priced textservices.  Bucket-priced text**messages in the first nine months of 2006 totaled152,654 million, an increase of 123,931 million as compared to 28,723 millionin the same period in 2005. 

 

*Subscriber Base, ARPU and Churn Rates*

* *

Prepaid subscribers accounted for approximately 99%of our 22,929,431 subscribers as at September 30, 2006, while postpaid subscribers accounted for the remaining 1%.  The cellular prepaid subscriber base grewby 10% to 22,618,675 as at September 30, 2006 from 20,509,986 as at September30, 2005, whereas the postpaid subscriber base increased by 11% to 310,756 asat September 30, 2006 from 278,759 as at September 30, 2005.  

 

Our net subscriber activations for the nine monthsended September 30, 2006 and 2005 were as follows:

** **

 

**Nine Months Ended September 30,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

Prepaid

2,490,132

 

1,576,248

 

913,884

 

58

Smart

1,094,799

 

1,181,539

 

(86,740)

 

(7)

Piltel

1,395,333

 

394,709

 

1,000,624

 

254

** **

 

 

 

 

 

 

 

Postpaid

30,678

 

4,265

 

26,413

 

619

 

 

 

 

 

 

 

 

Total

2,520,810

 

1,580,513

 

940,297

 

59

 

Revenues attributable to our cellular prepaidservice amounted to Php50,921 million in the first nine months of 2006, a 5%increase over the Php48,695 million earned in the same period in 2005.  Prepaidservice revenues in the first nine months of 2006 and 2005 accounted for 93%and 94%, respectively, of voice and data revenues.  Revenues attributable toSmart’s postpaid service amounted to Php3,687 million in the first nine monthsof 2006, a 13% increase over the Php3,252 million earned in the same period in2005 and accounted for 7% and 6% of voice and data revenues in the first ninemonths of 2006 and 2005, respectively.

 

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

 

 

**Nine Months Ended September 30,**

 

**Gross**

** **

**Increase (Decrease)**

** **

**Net**

 

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

**2006**

** **

**2005**

 

**Amount**

 

**%**

 

(Unaudited)

Prepaid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Smart

Php341

Php352

 

(Php11)

 

(3)

 

Php290

 

Php290

 

Php–

 

–

Piltel

231

255

 

(24)

 

(9)

 

197

 

209

 

(12)

 

(6)

Prepaid – Blended

312

329

 

(17)

 

(5)

 

265

 

270

 

(5)

 

(2)

Postpaid – Smart

1,893

1,850

 

43

 

2

 

1,401

 

1,335

 

66

 

5

Prepaid and Postpaid Blended

333

349

 

(16)

 

(5)

 

280

 

284

 

(4)

 

(1)

 

ARPU is computed for each month by dividing therevenues for the relevant services for the month by the average of the numberof subscribers at the beginning and at the end of the month.  Gross monthlyARPU is computed by dividing the revenues for the relevant services, gross ofdealer discounts and allocated content-provider costs, includinginterconnection income but excluding inbound roaming revenues, by the averagenumber of subscribers.  Net monthly ARPU, on the other hand, is calculatedbased on revenues net of dealer discounts and allocated content-provider costsand interconnection income net of interconnection expense.  ARPU for any periodof more than one month is calculated as the simple average of the monthly ARPUsin that period.

 

Prepaidservice revenues consist mainly of charges for subscribers' actual usage oftheir loads.  Gross monthly ARPU for Smart prepaid subscribers in the firstnine months of 2006 was Php341, a decrease of 3%, compared to Php352 in thesame period in 2005.  The average outbound domestic and international voicerevenue per subscriber declined in the first nine months of 2006 compared tothe same period in 2005, but was offset by an increase in the average textmessaging revenue and inbound international revenue per subscriber.  On a netbasis, ARPU in the first nine months of 2006 and 2005 remained flat at Php290.Gross monthly ARPU for *Talk ‘N Text* subscribers in the first nine monthsof 2006 was Php231, a decrease of 9%, compared to Php255 in the same period in 2005.  The declinewas attributable to the decrease in the average domestic outbound local voicerevenue per subscriber as well as the average domestic inbound revenue persubscriber partly offset by an increase in the average text messaging revenueper subscriber.  On a net basis, ARPU inthe first nine months of 2006 decreased by 6% to Php197 from Php209 in the sameperiod 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 2% to Php1,893 while net monthly ARPUincreased by 5% to Php1,401 in the first nine months of 2006 as compared toPhp1,850 and Php1,335 in the same period in 2005, respectively.  Prepaid andpostpaid monthly gross blended ARPU was Php333 in the first nine months of2006, a decrease of 5%, compared to Php349 in the same period in 2005.  Monthlynet blended ARPU decreased by 1% to Php280 in the first nine months of 2006 ascompared to Php284 in the same period in 2005.

 

Our quarterly prepaid and postpaid ARPUsfor the nine months ended September 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

Third Quarter

323

 

280

 

213

 

184

 

1,891

 

1,403

** **

 

 

 

 

 

 

 

 

 

 

 

**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 totaldisconnections in the period, net of reconnections in the case of postpaidsubscribers, divided by the average of the number of subscribers at the beginningand at the end of a month, all divided by the number of months in the sameperiod.

 

Werecognize a prepaid cellular subscriber as an active subscriber when thatsubscriber activated and used the SIM card in the handset, which containedpre-stored air time.  The pre-stored air time equivalent to Php1 plus 50 freeSMS, can only be used upon purchase or reload of air time of any value.Subscribers can reload their air time by purchasing prepaid “call and text”cards; by purchasing additional air time “over the air” via *Smart**Load*or *Smart Load* “All Text”; and by receiving loads of Php2, Php5, Php10and Php15 via *Pasa**Load*, or through their handsets using *SmartMoney*.  Reloads have validity periods ranging from one day to two months,depending on the amount reloaded.  A prepaid cellular subscriber isdisconnected if the subscriber does not reload within four months after thefull usage or expiry of the last reload.  Our current policy is to recognize aprepaid subscriber as “active” only when the subscriber activates and uses theSIM card and reloads at least once during the month of initial activation or inthe immediate succeeding month.  For example, if a customer activated a SIMcard in April but had not reloaded by May 31, this customer would not be countedas a subscriber.  The rationale for this change stems from our observance of“SIM-swapping” activities in the market.  “SIM-swapping” refers to thepromotional activity wherein subscribers can exchange their current prepaid SIMcard for another operator’s SIM card at no cost to the subscriber.  We believethat these activities have given rise to a situation where certain subscribersswap their SIM cards between mobile operators upon full usage of the pre-storedair time, which may result in our subscriber base reflecting a certain numberof transient subscribers at any one point in time.  In May 2005, we terminatedour “SIM swapping” promotions; as a result, our churn rates increased in thethird and fourth quarters of 2005 but tapered off beginning the first quarterof 2006.  

 

For Smartprepaid, the average monthly churn rate for the first nine months of 2006 was3.2% compared to 3.7% in the same period in 2005, while the average monthlychurn rate for *Talk ‘N Text* subscribers was 3.5% in the first nine monthsof 2006 compared to 4.5% in the same period in 2005.  

 

The average monthlychurn rate for Smart's postpaid subscribers for the first nine months of 2006was 1.2% compared to 2.1% in the same period in 2005.  Smart's policy is toredirect outgoing 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 fromwireless broadband, satellite, VSAT and other services consist mainly ofwireless broadband service revenues for Smart Broadband, rentals received forthe lease of Mabuhay Satellite’s transponders and Telesat’s VSAT facilities toother companies, charges for ACeS Philippines’ satellite phone service andservice revenues generated from a PLDT Global subsidiary’s mobile virtualnetwork operations.  Gross revenues from these services for the first ninemonths of 2006 amounted to Php1,930 million, an increase of Php362 million, or23%, from Php1,568 million in the same period in 2005 principally due to thegrowth in our wireless broadband business.

 

Smart Broadband offers a number of wirelessbroadband services with 92,922 subscribers as at September 30, 2006.  *SmartBro*, the fixed wireless broadband service of Smart linked to Smart’swireless broadband-enabled base stations, allows people to connect to theInternet using an outdoor aerial antenna installed in a subscriber’s home.Wireless broadband revenues contributed Php341 million in the first threequarters of 2006, increasing by Php231 million, or 210%, from Php110 million inthe same period in 2005.

 

*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 Php157 million, or 8%, to Php1,842million in the first nine months of 2006 as compared to Php1,999 million in thesame period in 2005 primarily due to lower handset sales.  In the first ninemonths 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 Php630million in the first nine months of 2006, a decrease of Php35 million, or 5%,as compared to Php665 million in the same period in 2005.

 

*Expenses*
 

Expenses associatedwith our wireless business in the first nine months of 2006 amounted toPhp31,655 million, an increase of Php1,348 million, or 4%, from Php30,307million in the same period in 2005.  A significant portion of this increase wasattributable to higher rent, compensation and benefits, and depreciation andamortization partially offset by lower cost of sales and selling andpromotions.  As a percentage of our total wireless revenues and other income,expenses associated with our wireless business accounted for 52% and 53% in thefirst nine months of 2006 and 2005, respectively.

 

Cellular businessexpenses accounted for 98% of our wireless business expenses, while wirelessbroadband, satellite, VSAT and other business expenses accounted for theremaining 2% of our wireless business expenses in the first nine months of 2006as compared to 96% and 4%, respectively, in the same period in 2005.

 

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

 

 

**Nine Months Ended September 30,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php7,948

 

25

 

Php7,354

 

24

 

Php594

 

8

Rent

5,157

 

16

 

3,696

 

12

 

1,461

 

40

Compensation and benefits(1)

3,928

 

13

 

2,907

 

10

 

1,021

 

35

Cost of sales

3,600

 

11

 

4,805

 

16

 

(1,205)

 

(25)

Maintenance

2,688

 

9

 

2,516

 

8

 

172

 

7

Selling and promotions

2,032

 

6

 

2,325

 

8

 

(293)

 

(13)

Financing costs

1,845

 

6

 

1,870

 

6

 

(25)

 

(1)

Professional and other contracted services

1,332

 

4

 

1,001

 

3

 

331

 

33

Taxes and licenses

754

 

2

 

963

 

3

 

(209)

 

(22)

Communication, training and travel

632

 

2

 

714

 

2

 

(82)

 

(11)

Insurance and security services

620

 

2

 

733

 

3

 

(113)

 

(15)

Provisions

397

 

1

 

490

 

2

 

(93)

 

(19)

Amortization of intangible assets

236

 

1

 

267

 

1

 

(31)

 

(12)

Other expenses

486

 

2

 

666

 

2

 

(180)

 

(27)

Total 

Php31,655

 

100

 

Php30,307

 

100

 

Php1,348

 

4

__________

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

 

Depreciation and amortization charges increased byPhp594 million, or 8%, to Php7,948 million in the first nine months of 2006principally due to an increase in our depreciable asset base and additionaldepreciation provided for certain equipment amounting to Php527 million andPhp360 million for the first nine months of 2006 and 2005, respectively.  Theuseful lives of certain of these equipment have been shortened due to networkand equipment upgrade.  For further details, see *Note 8 – Property, Plantand Equipment* to the accompanying unaudited consolidated financialstatements.

 

Rent expensesincreased by Php1,461 million, or 40%, to Php5,157 million on account of anincrease in domestic fiber optic network, or DFON, facilities leased by Smartfrom PLDT, higher satellite transmission and site rental expenses.  As at September 30, 2006, we had 4,365 GSM cell sites and 6,079 base stations, compared with4,236 GSM cell sites and 5,831 base stations as at September 30, 2005.

 

Compensation andbenefits expenses increased by Php1,021 million, or 35%, to Php3,928 millionprimarily due to higher accrued bonuses, employee benefits and long-termincentive costs of Smart.  Smart’s employee headcount increased by 259, or 5%,to 5,274 in the first nine months of 2006 as compared to 5,015 in the sameperiod in 2005.

 

Costof sales decreased by Php1,205 million, or 25%, to Php3,600 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 nine months ended September 30, 2006 and 2005 is as follows:

 

** **

**Nine Months Ended September 30,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Cost of cellular handsets and SIM-packs sold

Php3,454

 

Php4,623

 

(Php1,169)

 

(25)

Cost of satellite air time and terminal units

146

 

182

 

(36)

 

(20)

 

Php3,600

 

Php4,805

 

(Php1,205)

 

(25)

 

Maintenance expensesincreased by Php172 million, or 7%, to Php2,688 million mainly on account ofhigher expenses for electricity and power generation and higher repairs andmaintenance costs for network and office facilities.

 

Selling and promotionexpenses decreased by Php293 million, or 13%, to Php2,032 million due to lowerspend on billboards, events, merchandising, premium items and prepaid cardprinting costs.

 

Financing costs in thefirst nine months of 2006 amounted to Php1,845 million, a decrease of Php25million, or 1%, from Php1,870 million in the same period in 2005 due to thecombined results of: (1) higher foreign exchange gains recognized in the firstnine months of 2006 primarily as a result of the appreciation of the Philippinepeso to the U.S. dollar  from December 31, 2005 to September 30, 2006; (2) again on derivatives in the first nine months of 2006 as against a loss onderivatives recognized in the same period in 2005; (3) lower interest expense,net of capitalized interest; and (4) higher interest income recorded in the first nine months of 2006 ascompared to the same period in 2005.  These decreasing effects were partiallyoffset by higher amortization of debt discounts brought about by the prepaymentof Piltel’s debt in 2006.  The breakdown of our financing costs for ourwireless business for the nine months ended September 30, 2006 and 2005 is as follows:

 

** **

**Nine Months Ended September 30,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Accretion on financial liabilities – net

Php2,887

 

Php2,014

 

Php873

 

43

Interest on loans and related items

1,274

 

1,373

 

(99)

 

(7)

Foreign exchange gains – net

(1,322)

 

(1,049)

 

(273)

 

(26)

Dividends on preferred stock subject to mandatory redemption

113

 

196

 

(83)

 

(42)

Financing charges

33

 

50

 

(17)

 

(34)

Loss (gain) on derivative transactions – net

(24)

 

141

 

(165)

 

(117)

Capitalized interest 

(205)

 

(43)

 

(162)

 

377

Interest income

(911)

 

(812)

 

(99)

 

12

 

Php1,845

 

Php1,870

 

(Php25)

 

(1)

 

Professionaland other contracted services increased by Php331 million, or 33 %, to Php1,332 million primarily due to increased call center, legal, contractedservice, market research, management and technical service fees.

 

Taxesand licenses decreased by Php209 million, or 22%, to Php754 million primarilydue to a decrease in Smart’s business-related taxes.  

 

Communication,training and travel expenses decreased by Php82 million, or 11%, to Php632million due to lower mailing and courier, training, communication and localtravel expenses incurred in the first nine months of 2006.

 

Insurance and securityservices decreased by Php113 million, or 15%, to Php620 million primarily dueto the decrease in site security expenses and lower amortization charges onprepaid insurance contracts.

 

Provisions decreased by Php93 million, or 19%, toPhp397 million primarily due to a decrease in write-down of slow-movinghandsets to net realizable values.  The breakdown of provisions for the ninemonths ended September 30, 2006 and 2005 is as follows:

 

** **

**Nine Months Ended September 30,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Doubtful accounts

Php208

 

Php149

 

Php59

 

40

Write-down of inventories to net realizable values 

189

 

341

 

(152)

 

(45)

 

Php397

 

Php490

 

(Php93)

 

(19)

 

Amortizationof intangible assets decreased by Php31 million, or 12%, to Php236 millionmainly due to a reduction in the amount of intangible assets booked by Smartfrom the purchase of Smart Broadband following the finalization by anindependent appraiser of the valuation work on the intangible assets inDecember 2005. 

 

Otherexpenses decreased by Php180 million, or 27%, to Php486 million due to lowervarious business and operational-related expenses such as office supplies expense.

 

Provision for Income Tax
 

Provision for income tax decreased by Php3,337million, or 52%, to Php3,076 million in the first nine months of 2006 fromPhp6,413 million in the same period in 2005.  In the first nine months of 2006,the effective tax rate for our wireless business was 11% as compared to 23% inthe same period in 2005 due to differences in the net movement of deferred taxassets.  For 2006, the net movement in deferred tax assets pertains to deferredtax assets recognized in relation to the benefit that would be derived from thedisposal of certain of Piltel’s assets with the expected lifting of theMortgage Trust Indenture restrictions resulting from the full prepayment of itsrestructured debt on December 4, 2006.  Please see *Note 6 – Income Tax***and*Note 8 – Property, Plant and Equipment* to the accompanying unauditedconsolidated financial statements for further discussion.

 

Net Income
 

Our wireless business segment recorded a net incomeof Php25,757 million in the first nine months of 2006, an increase of Php4,829million, or 23%, over Php20,928 million registered in the same period in 2005primarily due to the growth in our cellular service revenues and lowerprovision for income tax partly offset by an increase in operating expenses.

 

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 nine months of 2006 totaledPhp36,629 million, a decrease of Php218 million, or 1%, from Php36,847 millionin the same period in 2005.  

 

The following table summarizes revenues from ourfixed line business for the nine months ended September 30, 2006 and 2005 by service segment:

 

 

**Nine Months Ended September 30,**

 

** **

** **

** **

** **

** **

** **

** **

** **

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

 

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php12,862

 

35

 

Php13,907

 

38

 

(Php1,045)

 

(8)

International long distance

7,434

 

20

 

9,369

 

25

 

(1,935)

 

(21)

National long distance

5,117

 

14

 

5,329

 

15

 

(212)

 

(4)

Data and other network

9,420

 

26

 

7,162

 

19

 

2,258

 

32

Miscellaneous

1,068

 

3

 

929

 

3

 

139

 

15

 

35,901

 

98

 

36,696

 

100

 

(795)

 

(2)

Non-Service Revenues

71

 

–

 

–

 

–

 

71

 

100

Other Income

657

 

2

 

151

 

–

 

506

 

335

Total Fixed Line Revenues and Other Income

Php36,629

 

100

 

Php36,847

 

100

 

(Php218)

 

(1)

 

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 nine months ended September 30, 2006 and 2005:

 

 

**Nine Months Ended September 30,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Total local exchange service revenues (in millions)

Php12,862

 

Php13,907

 

(Php1,045)

 

(8)

Number of fixed lines in service

2,075,941

 

2,131,861

 

(55,920)

 

(3)

Number of fixed line employees

9,110

 

9,494

 

(384)

 

(4)

Number of fixed lines in service per employee

228

 

225

 

3

 

1

 

Revenues from ourlocal exchange service decreased by Php1,045 million, or 8%, to Php12,862million in the first nine months of 2006 from Php13,907 million in the sameperiod in 2005.  The decrease was primarily due to a 3% decline in the numberof fixed lines in service and the appreciation of the peso which required us tomake downward adjustments in our monthly local service rates.  The percentagecontribution of local exchange revenues to our total fixed line servicerevenues decreased to 35% in the first nine months of 2006 as compared to 38%in the same period in 2005.

 

Fixedline net reduction in the first nine months of 2006 was 37,858 compared to anet reduction of 20,166 in the same period in 2005.  In the first nine monthsof 2006, prepaid and postpaid fixed lines in service declined by 19,438 and18,420, respectively.  As at September 30, 2006, postpaid and prepaid fixedline subscribers totaled 1,772,477 and 303,464, which accounted forapproximately 85% and 15%, respectively, of our total 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 *Telepwede*, a new brand of our prepaid fixedline service.  *Telepwede*subscribers are charged Php2 per local call(for an unlimited duration) and Php5 per hour for Internet connection.  *Telepwede*subscribers can reload for as low as Php145 per month which is inclusive ofa Php30 load balance that can be used for outgoing calls and a Php115 accesscharge for incoming calls. 

 

Pursuant to a currencyexchange rate adjustment mechanism authorized by the Philippine NationalTelecommunications Commission, or the NTC, we adjust our postpaid monthly localservice rates upward or downward by 1% for every Php0.10 change in thepeso-to-dollar exchange rate relative to a base rate of Php11.00 to US$1.00.During the first nine months of 2006, we implemented six downward adjustmentsand three upward adjustments in our monthly local service rates, while therewere four downward adjustments and three upward adjustments for the same periodin 2005.  The average Philippine peso to U.S. dollar rate factored in ourmonthly local service rates in the first nine months of 2006 was Php52.03 toUS$1.00, compared to an average of Php55.15 to US$1.00 in the same period in2005.  This change in the average peso-to-dollar rate translated to a pesoappreciation of 6%, which resulted in an average net decrease of approximately5% in our monthly local service rates in the first nine months 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 nine months ended September 30, 2006 and 2005:

 

** **

**Nine Months Ended September 30,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Total international long distance service revenues (in millions)

Php7,434
 

Php9,369

 

(Php1,935)

 

(21)

Inbound

6,220

 

8,043

 

(1,823)

 

(23)

Outbound

1,214

 

1,326

 

(112)

 

(8)

 

 

 

 

 

 

 

 

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

1,582

 

1,741

 

(159)

 

(9)

Inbound

1,442

 

1,634

 

(192)

 

(12)

Outbound

140

 

107

 

33

 

31

Inbound-outbound call ratio

10.3:1

 

15.3:1

 

–

 

–

 

Our totalinternational long distance service revenues decreased by Php1,935 million, or21%, to Php7,434 million in the first nine months of 2006 from Php9,369 millionin the same period in 2005 due to the peso appreciation, a decrease in averagetermination rates for inbound calls and a decline in call volumes largely as aresult of alternative means of communications such as e-mailing, texting andInternet telephony.  The percentage contribution of international long distanceservice revenues to our total fixed line service revenues decreased to 20% inthe first nine months of 2006 from 25% in the same period in 2005.

 

Ourrevenues from inbound international long distance service decreased by Php1,823million, or 23%, to Php6,220 million due to a decrease in inbound trafficvolume by 192 million minutes to 1,442 million minutes in the first nine monthsof 2006.  In addition, the appreciationof the Philippine peso to the U.S. dollar with average rates of Php51.832during the first nine months of 2006 and Php55.244 during the same period in2005 contributed to the decrease in our inbound international long distancerevenues in peso terms since settlement charges for inbound calls are billed inU.S. dollars or in special drawing rights, an established method of settlementamong international telecommunications carriers using values based on a basketof foreign currencies that are translated into pesos at the time of billing.

 

Ourrevenues from outbound international long distance service decreased by Php112 million,or 8%, to Php1,214 million in the first nine months of 2006 primarily due to a declinein average revenue per minute as a result of lower average collection rate withthe introduction of low-rate services such as *PLDT ID-DSL* and themodified *Budget Card*, and the peso appreciation in the first nine monthsof 2006.

 

OnSeptember 15, 2005, we introduced *PLDT ID-DSL*, a service that allowsoverseas calls for registered *myDSL* plan subscribers using a regular PLDTfixed line or a voice pad dialer for as low as US$0.10 per minute or US$0.08per 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 89 overseas destinations including the United States, Canada, Japan and China*.*  Beginning March 4, 2006, *Budget Card* has been furthermodified to Php3, Php5 and Php8 per minute calls depending on the destinationand now has 100 overseas destinations, including Saudi Arabia and other Middle East countries.  *Budget Cards* are sold in denominations of Php200 and Php100,which must be consumed within 30 days from first use.

 

National Long Distance Service
 

Our national long distance service revenues consistof: 

 

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

 

•              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 nine months ended September 30, 2006and 2005:

 

** **

**Nine Months Ended September 30,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php5,117

 

Php5,329

 

(Php212)

 

(4)

National long distance call volumes (in million minutes)

1,688

 

1,827

 

(139)

 

(8)

 

Our national longdistance service revenues decreased by Php212 million, or 4%, to Php5,117million in the first nine months of 2006 from Php5,329 million in the sameperiod in 2005 due to a decrease in call volumes partially offset by a higheraverage revenue per minute in 2006 due to the change in mechanics in our Php10per call promotion.  In 2005, the Php10 per call promotion was open to all PLDTGroup fixed line subscribers nationwide while in 2006, the Php10 per callservice was made available only to registered PLDT subscribers for a monthlyservice fee.  Accordingly, the percentage contribution of national longdistance revenues to our fixed line service revenues accounted for 14% and 15%in the first nine months of 2006 and 2005, respectively.

 

InFebruary 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 subscribers nationwide or to all Smart and *Talk 'N Text*subscribers were charged Php10 per call instead of being charged on a perminute basis.  

 

InJanuary 2006, PLDT launched the *10-10-10* promotion where we charge a flat rate of Php10 for unlimited calls terminating PLDT to PLDT and Smart 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 line subscribers, however, can still register and avail of the unlimited Php10 per callservice 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 nine months ended September 30, 2006 and 2005:

 

** **

** **

**Nine Months Ended September 30,**

** **

** **

** **

** **

** **

** **

**Increase**

** **

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

**(in millions)**

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Data and other network service revenues

 

Php9,420

 

Php7,162

 

Php2,258

 

32

Number of PLDT DSL broadband subscribers

 

118,679

 

76,059

 

42,620

 

56

Number of PLDT Vibe narrowband subscribers

 

422,135

 

370,821

 

51,314

 

14

 

Ourdata and other network services in the first nine months of 2006 postedrevenues of Php9,420 million, an increase of Php2,258 million, or 32%, fromPhp7,162 million in the same period in 2005 primarily due to increases inleased lines, IP-based and switched-based data services, particularly Diginet, *PLDTDSL* and *PLDT Vibe* services, respectively.  The revenue contributionof this service segment to our fixed line service revenues increased to 26% inthe first nine months 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* contributed revenues of Php2,299million during the first nine months of 2006, an  increase of Php627 million,or 38%, from Php1,672 million in the same period in 2005.  *PLDT DSL*reached 118,679 subscribers as at September 30, 2006 compared with 76,059subscribers in the same period in 2005.  *PLDT DSL*offers a number ofpackages with speeds and monthly fees varying from 256 kbps at Php999 per monthto up to 1 Mbps at Php3,000 per month.  

 

*PLDTVibe* revenues increased by Php81million, or 39%, to Php288 million in the first nine months of 2006 from Php207million in the same period in 2005.  Asat September 30, 2006, the number of PLDT’s fixed line subscribers accessing *PLDTVibe*stood at 422,135, of which 148,392 were exclusive postpaid users,256,196 were exclusive prepaid users, and 17,547 were both postpaid and prepaidusers.  As at September 30, 2005, *PLDT Vibe* subscribers totaled 370,821,of which 136,734 were exclusive postpaid users, 209,530 were exclusive prepaidusers, and 24,557 were both postpaid 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 the corporatemarket using PLDT’s traditional bandwidth offerings – Fibernet, Arcstar,Acacia, I-Gate, Diginet, BRAINS, among others – continues to provide us with astable revenue source.  Through Diginet, we also provide Smart’s increasingfiber optic and leased line data requirements, which are included under ournational data services.  Diginet contributed Php4,247 million in our datarevenues in the first nine months of 2006, increasing by Php1,458 million, or52%, from Php2,789 million in the same period in 2005.

* *

Wealso offer *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 recent enhancements to theservice are the inclusion of international roaming in key roaming countries allover the globe and national WiFi roaming access.  Principally targeted to thecorporate market, the service had 8,000 subscribers as at September 30, 2006 and contributed Php56 million in our data revenues, an increase of Php43 million,or 331%, from Php13 million in the same period in 2005.  

* *

InJune 2006, we introduced *Shops.Work UnPlugged*, or *SWUP*, toaddress the need of retailers and banks for real-time wireless datacommunication.  *SWUP* is the first bundled solution that makes wirelesscashier point-of-sale and wireless card terminals possible.  Retailers will nowbe able to reach out to a bigger market in areas where physical connections areunavailable and expand the banking system with wireless automated tellermachines, or ATMs.

* *

Miscellaneous
 

Miscellaneous servicerevenues are derived mostly from directory advertising and facilities rental.In the first nine months of 2006, these revenues increased by Php139 million,or 15%, to Php1,068 million from Php929 million in the same period in 2005.The improvement was mainly due to an increase in rent income primarily fromco-location charges on account of more co-location sites coupled with anincrease in facility management fees.  The percentage contribution ofmiscellaneous service revenues to our total fixed line service revenues was 3%in the first nine months of 2006 and 2005.

 

*Non-service Revenues*

 

Non-service revenues of Php71 million recognized underour fixed line business represent proceeds of computer sales in the first ninemonths of 2006 in relation to our DSL promo.

 

*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.  Inthe first nine months of 2006, our fixed line business segment registered anincrease in other income of Php506 million, or 335%, to Php657 million fromPhp151 million in the same period in 2005 primarily due to higher rentalincome, income from disposal of property and materials, and gain on sale offixed assets.  

 

Expenses
 

Expenses related to our fixed line business in thefirst nine months of 2006 totaled Php35,982 million, an increase of Php4,338million, or 14%, as compared to Php31,644 million in the same period in 2005.The increase was primarily due to higher depreciation and amortization, andcompensation and benefits partially offset by lower provisions and financingcosts.  

 

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

 

 

**Nine Months ended September 30,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php15,248

 

42

 

Php8,998

 

28

 

Php6,250

 

69

Compensation and benefits(1)

7,519

 

21

 

6,216

 

20

 

1,303

 

21

Financing costs

5,331

 

15

 

6,218

 

20

 

(887)

 

(14)

Maintenance

2,442

 

7

 

2,587

 

8

 

(145)

 

(6)

Selling and promotions

1,345

 

4

 

1,329

 

4

 

16

 

1

Rent

1,202

 

3

 

1,289

 

4

 

(87)

 

(7)

Professional and other contracted services

682

 

2

 

721

 

2

 

(39)

 

(5)

Taxes and licenses

491

 

2

 

592

 

2

 

(101)

 

(17)

Provisions

478

 

1

 

2,265

 

7

 

(1,787)

 

(79)

Insurance and security services

388

 

1

 

504

 

2

 

(116)

 

(23)

Communication, training and travel

369

 

1

 

338

 

1

 

31

 

9

Cost of sales

113

 

–

 

–

 

–

 

113

 

100

Other expenses

374

 

1

 

587

 

2

 

(213)

 

(36)

Total 

Php35,982

 

100

 

Php31,644

 

100

 

Php4,338

 

14

____________

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

* *

 

Depreciationand amortization charges increased by Php6,250 million, or 69%, to Php15,248million mainly due to the effect of the change in estimated useful lives ofcertain property and equipment in linewith our upgrade to the next-generationnetwork which resulted in increaseddepreciation charges of Php6,105 million for the first nine months of 2006, andhigher depreciation of our regular asset base from additional completed projects.  Please see *Note 8 – Property,Plant and Equipment* to the accompanying unaudited consolidated financialstatements for further discussion.

 

Compensation and benefits expenses increased byPhp1,303 million, or 21%, to Php7,519 million primarily due to the effect ofthe collective bargaining agreement-related increases in salaries and benefitsand an increase in incentive plan-related accruals partially offset by areduction in headcount due to PLDT’s manpower rightsizing program.

 

Financing costsdecreased by Php887 million, or 14%, to Php5,331 million largely due to lower intereston loans and related items owing to lower debt balances in the first ninemonths of 2006 compared to the same period in 2005.  This decreasing effect waspartially offset by: (1) a loss on derivatives recognized in the first ninemonths of 2006 compared to gain on derivatives recognized in the same period in2005; (2) higher hedge costs; and (3) lower foreign exchange gains recorded inthe first nine months of 2006 due to lower debt levels in the first nine monthsof 2006 as compared to the same period in 2005.  The breakdown of financingcosts for our fixed line business for the nine months ended September 30, 2006 and 2005 is as follows: 

 

** **

**Nine Months ended September 30,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Interest on loans and related items

Php4,826

 

Php7,003

 

(Php2,177)

 

(31)

Hedge costs

1,090

 

889

 

201

 

23

Accretion on financial liabilities – net

156

 

195

 

(39)

 

(20)

Loss (gain) on derivative transactions – net

175

 

(578)

 

753

 

130

Financing charges

11

 

31

 

(20)

 

(65)

Capitalized interest

(223)

 

(305)

 

82

 

(27)

Foreign exchange gains – net

(331)

 

(730)

 

399

 

(55)

Interest income

(373)

 

(287)

 

(86)

 

30

 

Php5,331

 

Php6,218

 

(Php887)

 

(14)

 

Maintenance expensesdecreased by Php145 million, or 6%, to Php2,442 million primarily due to lowermaintenance costs for foreign cable and wire facilities as more operating andmaintenance-related restorations were incurred in the first nine months of 2005as compared to the same period in 2006.  

 

Selling and promotionexpenses increased by Php16 million, or 1%, to Php1,345 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 nine months of 2006.

 

Rentexpenses decreased by Php87 million, or 7%, to Php1,202 million due to lower officeand building rentals, and a decrease in transponder lease charges partiallyoffset by an increase in international leased circuits and rental chargesoccupied by various equipments.

 

Professional and othercontracted services decreased by Php39 million, or 5%, to Php682 millionprimarily due to lower advisory and legal fees complemented by a decrease infacility management fees and payment facility fees in the first nine months of2006.

 

Taxesand licenses decreased by Php101 million, or 17%, to Php491 million mainly onaccount of lower business-related taxes incurred in the first nine months of2006 as compared to the same period in 2005.

 

Provisions decreased by Php1,787 million, or 79%, toPhp478 million primarily on account of a lower provision by PLDT for anticipateduncollectible accounts from various specifically identified domestictelecommunications carriers which were provided for in 2005.  The breakdownof provisions for our fixed line business for the nine months ended September 30, 2006 and 2005 is as follows:

 

** **

**Nine Months Ended September 30,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Doubtful accounts

Php492

 

Php1,915

 

(Php1,423)

 

(74)

Write-down of inventories to net realizable value

–

 

153

 

(153)

 

(100)

Onerous contracts and assessments

(14)

 

197

 

(211)

 

(107)

 

Php478

 

Php2,265

 

(Php1,787)

 

(79)

 

Insuranceand security services decreased by Php116 million, or 23%, to Php388 millionprimarily due to lower premiums on property all-risk, industrial all-risk andindustrial fire insurance complemented by lower security services due to adecrease in number of contracted security guards.

 

Communication,training and travel expenses increased by Php31 million, or 9%, to Php369million due to an increase in local and foreign travel and training in thefirst nine months of 2006 as compared to the same period in 2005.

 

Costof sales of computers amounting to Php113 million were recognized in the firstnine months of 2006 in relation to our DSL promo.  No such charges wereincurred in the same period in 2005.

 

Otherexpenses decreased by Php213 million, or 36%, to Php374 million due to loweroffice supplies consumption and printing costs resulting from PLDT’s continuingcost-containing activities.

 

Provision for Income Tax
 

Provision for incometax amounted to Php60 million in the first nine months of 2006 as compared toPhp1,457 million in the same period in 2005, a decrease of Php1,397 million, or96%, primarily due to lower income subject to tax.

 

Net Income 
 

In the first ninemonths of 2006, our fixed line business segment contributed a net income ofPhp587 million, a decrease of Php3,159 million, or 84%, as compared to Php3,746million in the same period in 2005 mainly as a result of a 14% increase infixed line-related expenses, particularly depreciation and amortization.  

 

Information and Communications Technology
 

***Revenues and Other Income***
 

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

*** ***

On July 11, 2006, ePLDT acquired 100% of SPiTechnologies, Inc., or SPi, and its direct and indirect Philippine and offshoresubsidiaries.  SPi is the second largest pure-play BPO and theninth largest independent BPO service provider worldwide.  It has operations in 19 locations in North America,Europe and Asia.  On August 11, 2006, SPi acquired 100% of CyMed, Inc., a leadingmedical transcription company based in Richmond, Virginia. 

 

Forfurther discussion, see *Note 2 – Summary of Accounting Policies andPractices – Basis of Preparation*to the accompanying unaudited consolidatedfinancial statements.

 

Inthe first nine months of 2006, our information and communications technologybusiness generated revenues of Php4,146 million, an increase of Php1,723million, or 71%, from Php2,423 million in the same period in 2005.  Goingforward, we expect revenues from our call center and business processoutsourcing businesses to continue to contribute significantly to ourinformation and communications technology revenues in light of the growingdemand for our call center services.

 

The following table summarizes revenues from ourinformation and communications technology business for the nine months ended September 30, 2006 and 2005 by service segment:

 

** **

**Nine Months Ended September 30,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php1,920

 

46

 

Php1,361

 

56

 

Php559

 

41

Business process outsourcing

930

 

23

 

–

 

–

 

930

 

100

Internet and gaming 

561

 

14

 

422

 

18

 

139

 

33

*Vitro*ä data center

287

 

7

 

269

 

11

 

18

 

7

Others

90

 

2

 

48

 

2

 

42

 

88

 

3,788

 

92

 

2,100

 

87

 

1,688

 

80

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point Product Sales

339

 

8

 

248

 

10

 

91

 

37

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

18

 

–

 

70

 

3

 

(52)

 

(74)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in net income of associates

1

 

–

 

5

 

–

 

(4)

 

(80)

 

 

 

 

 

 

 

 

 

 

 

 

Total ICT Revenues and Other Income

Php4,146

 

100

 

Php2,423

 

100

 

Php1,723

 

71

 

*Service Revenues*

 

Servicerevenues generated by our information and communications technology segmentamounted to Php3,788 million in the first nine months of 2006, an increase ofPhp1,688 million, or 80%, as compared to Php2,100 million in the same period in2005 primarily as a result of the continued growth of our call center businessand the consolidation of SPi and Level Up!. 

 

*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 has established one umbrella brandname, *ePLDT Ventus*, for all of its call center businesses, includingVocativ and Parlance.  Vocativ provides customer and technical support to itsclients in the Philippines, U.S. and U.K., while Parlance provides theexclusive customer support and billing requirements to one of the largestdirect-to-home satellite television providers in the U.S.  In aggregate, we ownand operate approximately 5,130 seats with 4,010 customer servicerepresentatives, or CSRs, as at September 30, 2006 compared to approximately3,320 seats with 3,040 CSRs as at September 30, 2005.  In 2006, *ePLDT Ventus* launched two new sitesbringing our total call center sites to seven as at September 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-mail handling,web chat, web co-browsing, data entry and BPO based on transaction volume.

 

Revenues related to our call center business in thefirst nine months of 2006 increased by Php559 million, or 41%, to Php1,920million from Php1,361 million in the same period in 2005 primarily due to thecombined effects of the following:

 

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

 

•              an increase in the number ofregistered minutes for Parlance’s inbound projects and hours for outboundprojects; 

 

•              the expansion of Vocativ’s Taguigexisting facility by 450 seats from approximately 1,160 in the first ninemonths of 2005 to approximately 1,610 in the same period in 2006;

 

•              the expansion of Ventus’ Iloiloexisting facility by 80 seats from approximately 370 seats in the first ninemonths of 2005 to approximately 450 seats in the same period in 2006; and

 

•              the commencement of Ventus Pasigcall center operations in August 2006. 

 

Call center revenuesaccounted for 51% and 65% of total information and communications technologyservice revenues in the first nine months of 2006 and 2005, respectively.

* *

*Businessprocess outsourcing, or BPO*

*** ***

BPOrevenues consist of:

 

•             editorial and content productionservices to the scholarly scientific, technical and medical (SSTM) journalpublishing industry;

 

•             digital content conversionservices to information incentive organizations such as online and traditionalpublishers, libraries, educational institutions, Global 1,000 corporations andgovernment agencies worldwide;

 

•             pre-press project managementservices to book publishers;

 

•             litigation support services whichinvolve conventional coding and electronic discovery support services forinternational law firms, corporate counsels and government agencies; and

 

•             conversion services of medicalrecord/data from handwritten or speech format to electronic format. 

 

Inthe first nine months of 2006, BPO contributed revenues of Php930 millionmainly from SPi services and accounted for 24% of service revenues of ourinformation and communications technology business in the first nine months of2006.

* *

*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, anInternet service provider offering consumer prepaid and postpaid Internetaccess, corporate leased lines, dedicated dial-up, multi-user dial-up,broadband Internet access through DSL, web consulting and development, hostingand other value-added services; 

 

•              a 75% interest in DigitalParadise, 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 discounts givento dealers; 

 

•              monthly service fees from postpaidcorporate and consumer subscribers including: (1) charges for Internet usage in excess of allocated free plan Internet hours;(2) one-time installation and activation fees; and (3) fees for value added servicesincluding e-mail and web hosting 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 ourInternet business in the first nine months of 2006 increased by Php139 million,or 33%, to Php561 million from Php422 million in the same period in 2005primarily due to the consolidation of Airborne Access and Level Up! in October2005 and May 2006, respectively, which resulted to additional revenues of Php8million and Php88 million, respectively.  Our Internet business revenuesaccounted for 15% and 20% of service revenues of our information andcommunications technology business in the first nine months 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 andsoftware maintenance services, website development and maintenance services,webcasting and webhosting, shared applications, data disaster recovery andbusiness continuity services, intrusion detection, and security services suchas firewalls and managed firewalls.  

 

*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 nine months of 2006, *Vitro*ä contributed revenues of Php287 million, an increase of Php18 million,or 7%, from Php269 million in the same period in 2005 primarily due to an increasein co-location revenues and server hosting.  *Vitro*ä revenues accounted for 8% and 13% of service revenues of ourinformation and communications technology business in the first nine months of2006 and 2005, respectively.

 

*Others*

 

Otherrevenues 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 our informationand communications technology segment in the first nine months of 2006increased to Php90 million from Php48 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 accompanyingunaudited consolidated financial statements for further discussion on ePLDT’sother information and communications technology services.

 

*Non-service Revenues*

 

Non-service revenues consist of sales generated fromreselling certain software licenses, server solutions, networking products,storage products and data security products.  In the first nine months of 2006,non-service revenues generated by our information and communications technologybusiness increased by Php91 million, or 37%, to Php339 million as compared toPhp248 million in the same period in 2005 primarily due to higher revenues fromsales of networking equipment and software licenses.

 

*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 Php18 million in thefirst nine months of 2006 from Php70 million in the same period in 2005primarily due to Infocom’s sale of its *NOW* cable Internet business inthe first nine months of 2005; no similar transaction was incurred in the sameperiod in 2006.  

 

*Equity Share in Net Income of Associates*

 

ePLDT’s equity share in net income of associatesamounted to Php1 million in the first nine months of 2006, a decrease of Php4million, or 80%, compared to Php5 million in the same period in 2005 due toshare in the losses of its unconsolidated subsidiaries, ePDS, Inc. and PhilwebCorporation, or Philweb.

* *
*Expenses*
 

Expenses associatedwith our information and communications technology business totaled Php4,128million in the first nine months of 2006, an increase of Php1,819 million, or79%, from Php2,309 million in the same period in 2005 primarily due to theconsolidation of SPi and Level Up! resulting in an increase in compensation andbenefits, professional and other contracted services, and selling andpromotions.  As a percentage of our information and communications technologyrevenues, expenses related to our information and communications technologybusiness were at 99% and 95% for the first nine months of 2006 and 2005,respectively.  

 

The following table shows the breakdown of our totalinformation and communications technology-related expenses for the nine monthsended September 30, 2006 and 2005 and the percentage of each expense item tothe total:

 

 

**Nine Months Ended September 30,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php1,738

 

42

 

Php941

 

41

 

Php797

 

85

Selling and promotions

498

 

12

 

241

 

10

 

257

 

107

Depreciation and amortization

463

 

11

 

304

 

13

 

159

 

52

Professional and other contracted services

416

 

10

 

22

 

1

 

394

 

1,791

Rent

356

 

9

 

224

 

10

 

132

 

59

Maintenance

258

 

6

 

266

 

12

 

(8)

 

(3)

Communication, training and travel

170

 

4

 

64

 

3

 

106

 

166

Financing costs

54

 

1

 

10

 

–

 

44

 

440

Taxes and licenses

43

 

1

 

93

 

4

 

(50)

 

(54)

Insurance and security services

21

 

1

 

19

 

1

 

2

 

11

Amortization of intangible assets

19

 

1

 

–

 

–

 

19

 

100

Provisions

(3)

 

–

 

2

 

–

 

(5)

 

(250)

Other expenses

95

 

2

 

123

 

5

 

(28)

 

(23)

Total 

Php4,128

 

100

 

Php2,309

 

100

 

Php1,819

 

79

____________

 

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

 

Compensationand benefits increased by Php797 million, or 85%, to Php1,738 million largelydue to the increased headcount and corresponding salaries and employee benefitsresulting from the expansion of our call center businesses and theconsolidation of SPi and Level Up! in the first nine months of 2006.  Inaddition, the amount accrued for the long-term incentive plan was higher in2006 as compared to the same period in 2005.

 

Selling and promotionexpenses increased by Php257 million, or 107%, to Php498 million mainly due toan increase in the cost of point products sold in 2006 and higher advertisingand marketing spending of netGames and Level Up!.

 

Depreciation andamortization charges increased by Php159 million, or 52%, to Php463 millionprimarily due to an increase in the depreciable asset base in relation to theexpansion of our call center businesses and the consolidation of SPi in July2006.  

 

Professionaland other contracted services increased by Php394 million to Php416 million primarilydue to sub-contractor services availed by SPi from third parties related to itsBPO services.

 

Rentexpenses increased by Php132 million, or 59%, to Php356 million primarily dueto the opening of two additional call center sites during the first nine monthsof 2006 which led to increased rental of leased circuits.

 

Maintenance expensesdecreased by Php8 million, or 3%, to Php258 million primarily due to Vitro’slower hardware and server maintenance costs partially offset by higherhosting-related costs incurred in the first nine months of 2006 as compared tothe same period in 2005.

 

Communication,training and travel expenses increased by Php106 million, or 166%, to Php170million due to the increased cost of phone lines, bandwidth and informationsystem charges, coupled with the increase in foreign and local travel costsincurred by our call center and BPO businesses. 

 

Financingcosts increased by Php44 million, or 440%, to Php54 million primarily due tothe consolidation of SPi.

 

Taxesand licenses decreased by Php50 million, or 54%, to Php43 million due to lowerbusiness-related taxes accrued and paid in the first nine months of 2006 ascompared to the same period in 2005.

 

Insurance and securityservices increased by Php2 million, or 11%, to Php21 million primarily due tohigher premium costs and an increase in the value of assets insured in thefirst nine months of 2006 as compared to the same period in 2005.

 

Anamortization of intangible assets amounting to Php19 million was booked in thefirst nine months of 2006 in relation to the acquisition of SPi and Level Up!.See *Note 11 – Goodwill and Intangible Assets* to the accompanying unaudited consolidated financialstatements for further discussion.  

 

Provisionsamounted to negative Php3 million in the first nine months of 2006 as against aprovision of Php2 million in the same period in 2005 due to reversals made oncurrent bad debt allowance levels based on latest collection experience.

 

Other expenses decreasedby Php28 million, or 23%, to Php95 million mainly due to lower business-relatedcosts as part of our cost-cutting measures.

 

*Provision for (Benefit from) Income Tax*
 

Benefit from income tax amounted to Php5 million inthe first nine months of 2006 primarily due to the recognition of deferred taxassets pertaining to net operating loss carry-over and allowance for doubtfulaccounts as compared to a provision for income tax of Php5 million in the sameperiod in 2005.

 

*Net Income*
 

In the first ninemonths of 2006, our information and communications technology business segmentregistered a net income of Php23 million, a decrease of Php86 million, or 79%,as compared to Php109 million in the same period in 2005 mainly as a result ofa 79% increase in ICT-related expenses which more than offset the increase inICT revenues. 

 

**Liquidity and Capital Resources**

 

The following table shows our consolidated cash flowsfor the nine months ended September 30, 2006 and 2005 as well as consolidatedcapitalization and other selected financial data as at September 30, 2006 and December 31, 2005:

 

 

**Nine Months Ended September 30,**

 

**2006**

 

**2005**

** **

(Unaudited)

**(in millions)**

 

 

 

**Cash Flows**

 

 

 

Net cash provided by operating activities

Php56,018

 

Php55,111

Net cash used in investing activities

25,134

 

4,578

Capital expenditures

16,872

 

9,556

Net cash used in financing activities

41,763

 

44,770

Net increase (decrease) in cash and cash equivalents

(11,400)

 

5,571

 

** **

 

** **

 

**September 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

Php64,253

 

Php84,860

Obligations under capital lease

202

 

381

Preferred stock subject to mandatory redemption

1,989

 

11,974

 

66,444

 

97,215

 

 

 

 

Current portion of interest-bearing financial liabilities: 

 

 

 

Notes payable

188

 

–

Long-term debt maturing within one year

19,465

 

18,684

Obligations under capital lease maturing within one year

859

 

717

 

20,512

 

19,401

Total interest-bearing financial liabilities

86,956

 

116,616

Total equity

95,900

 

74,369

 

Php182,856

 

Php190,985

** **

 

 

 

**Other Financial Data**

 

 

 

Total assets

Php245,663

 

Php249,713

Property, plant and equipment - net

170,051

 

176,974

Cash and cash equivalents

18,664

 

30,064

 

As at September 30, 2006, our consolidated cash and cash equivalents totaled Php18,664 million.Principal sources of consolidated cash and cash equivalents in the first ninemonths of 2006 were cash flows from operating activities amounting to Php56,018million and drawings from Smart’s and ePLDT’s debt facilities aggregatingPhp5,011 million.  These funds were used principally for capital outlays ofPhp16,872 million, total debt principal payments of Php23,430 million andinvestments of Php10,727 million.

 

***Operating Activities***

 

Our consolidated netcash flows from operating activities in the first nine months of 2006 increasedby Php907 million, or 2%, to Php56,018 million, from Php55,111 million in thesame period in 2005.

 

A significant portion of our cash flow is generatedby our wireless business, which contributed approximately 59% of our servicerevenues in the first nine months of 2006 and 2005.  Revenues from our fixedline and information and communications technology services accounted for 37% and4%, respectively, of our service revenues in the first nine months of 2006compared to 39% and 2%, respectively, in the same period in 2005. 

 

Cash flows from operating activities of our wirelessbusiness amounted to Php29,206 million in the first nine months of 2006, adecrease of Php2,548 million, or 8%, compared to Php31,754 million in the sameperiod in 2005.  Cash flows from operating activities of our fixed linebusiness also decreased to Php16,024 million in the first nine months of 2006,compared to Php22,674 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 liabilitiescomplemented by higher billings of accounts receivable.  Our wireless businesssegment accounted for 52% of our cash flows from operating activities while ourfixed line segment accounted for 29% in the first nine months of 2006.  Webelieve that 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 September 30, 2006. 

 

Smartis subject to loan covenants that restrict its ability to pay dividends, redeempreferred shares, make distributions to PLDT or otherwise provide funds to PLDTor any associate without the consent of its lenders.  However, Smart has 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 Php20,600 million, Php19,717 million, Php16,100 million, Php6,166 millionand Php1,540 million, respectively.  In September and December 2005, Smartredeemed 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.  In addition, Smartredeemed 392 million preferred shares at a total redemption price of Php5,441million in June 2006.  During the first nine months of 2006, dividend paymentsreceived from Smart amounted to Php20,600 million, of which Php7,000 millionwas paid in March 2006, Php7,000 million was paid in June 2006 and Php6,600million was paid in September 2006.

 

Investing Activities 
 

Net cash used ininvesting activities in the first nine months of 2006 amounted to Php25,134million, an increase of Php20,556 million, or 449%, compared to Php4,578million in the same period in 2005.  This was primarily a result of: (1) anincrease in capital expenditures by Php7,316 million; and (2) payments forpurchase of investments by Php10,489 million in relation to the purchase of thefollowing in 2006 : (a) a 100% interest in SPi and CyMed aggregating Php8,870million; (b) the final settlement of the acquisition of Smart Broadband ofPhp1,201 million; (c) the purchase of a 60% investment in Level Up! of Php381million; and (d) the acquisition of approximately 25.5% equity interest inPhilweb for Php428 million.

 

Our consolidatedcapital expenditures in the first nine months of 2006 totaled Php16,872million, an increase of Php7,316 million, or 77%, from Php9,556 million in thesame period in 2005 primarily due to PLDT’s, Smart’s and ePLDT’s higher capitalspending.  Smart's capital spending of Php9,163 million in the first ninemonths of 2006 was used to rollout its 3G network, further upgrade its core andtransmission network facilities and expand its wireless broadband facilities,to increase capacity and coverage in respect of basic and advanced wirelessservices.  PLDT's capital spending of Php6,881 million was principally used tofinance the expansion of its fixed line data and IP-based network services.ePLDT and its subsidiaries’ capital spending of Php737 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 Php9,556 million, of which Php4,888 million,Php4,143 million and Php473 million were attributable to Smart, PLDT and ePLDT,respectively.

 

***Financing Activities***

 

On a consolidated basis, we used net cash ofPhp41,763 million for financing activities, net of loan drawings by Smart, inthe first nine months of 2006, a decrease of Php3,007 million, or 7%, comparedto Php44,770 million in the same period in 2005.  The net cash used in financingactivities in the first nine months of 2006 was mainly utilized for debtrepayments and interest payments by PLDT and Piltel in line with their ongoingdebt reduction programs and dividend payments distributed by PLDT to its commonand preferred stockholders.  

 

Debt Financing 
 

Additions to our consolidated long-term debt in thefirst nine months of 2006 totaled Php5,011 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 Php23,430 million andPhp5,281 million, respectively, in the first nine months of 2006, of whichPhp14,739 million and Php4,293 million were attributable to PLDT, respectively.

 

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

 

** **

**September 30,**

** **

**December 31,**

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

(Unaudited)

 

(Audited)

 

 

 

 

**(in millions)**

** **

** **

** **

** **

** **

** **

** **

U.S. Dollar Debt:

 

 

 

 

 

** **

 

Export Credit Agencies-Supported Loans

Php16,703

 

Php23,126

 

(Php6,423)

** **

(28)

Fixed Rate Notes

42,356

 

52,354

 

(9,998)

** **

(19)

Term Loans

17,227

 

14,288

 

2,939

** **

21

Restructured Loans

3,319

 

4,767

 

(1,448)

** **

(30)

Satellite Acquisition Loans

2,245

 

3,040

 

(795)

** **

(26)

 

81,850

 

97,575

 

(15,725)

** **

(16)

Japanese Yen Debt:

 

 

 

 

 

** **

 

JBIC’s Overseas Investment Loan

–

 

3,139

 

(3,139)

** **

(100)

Export Credit Agency-Supported Loan

–

 

709

 

(709)

** **

(100)

 

–

 

3,848

 

(3,848)

** **

(100)

Philippine Peso Debt:

 

 

 

 

 

** **

 

Peso Fixed Rate Corporate Notes

1,578

 

1,576

 

2

** **

–

Term Loans

22

 

166

 

(144)

** **

(87)

Restructured Loans

268

 

379

 

(111)

** **

(29)

 

1,868

 

2,121

 

(253)

** **

(12)

 

Php83,718

 

Php103,544

 

(Php19,826)

** **

(19)

 

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

 

Our long-term debtdecreased by Php19,826 million, or 19%, to Php83,718 million as at September30, 2006 largely due to debt amortizations and prepayments in line with PLDT’sefforts to reduce its overall debt level and also due to the appreciation ofthe peso.  PLDT’s debt was reduced by 24% to Php55,553 million by September 30, 2006.  PLDT repaid in full, all of the outstanding amounts related to itsJBIC loan amounting to Php2,385 million in September 2006.  In addition, thedebt levels of Smart decreased by 4%, to Php25,850 million (including Piltel’sdebt of Php3,633 million), while Mabuhay and ePLDT decreased by 26% and 58%, toPhp2,245 million and Php70 million, respectively, as at September 30, 2006 dueto amortizations and prepayments during 2006.  

 

Asat September 30, 2006, Smart had several committed dollar-denominated andpeso-denominated long-term credit facilities.  On July 31, 2006, Smart signed aUSD Term Loan Facility for US$44.2 million with Finnish Export Credit Plc topartly finance the related Phase 9 GSM equipment and services contracts.  Thefacility will be drawn on November 10, 2006 for the full amount of US$44.2million.  On August 14, 2006, Smart signed a Peso Term Loan Facility withMetropolitan Bank and Trust Company to finance the related Phase 9 GSM facilityfor an amount of Php2.5 billion.  On October 16, 2006, Smart signed a USD TermLoan Facility with Metropolitan Bank and Trust Company to finance the relatedPhase 9 GSM Facility for an amount of US$50 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 outstandingunaudited consolidated long-term debt at nominal values as at September 30, 2006 are as follows:  

 

**Year**

** **

**US$ Loans**

** **

**Peso Loans**

** **

**Total**

 

 

 
** **

 

 

 

 

 

 

 

 

2006(1)

 

US$104

 

Php5,250

 

Php1,049

 

Php6,299

2007

 

318

 

15,965

 

11

 

15,976

2008

 

139

 

6,978

 

–

 

6,978

2009

 

294

 

14,756

 

–

 

14,756

2010 

 

63

 

3,150

 

810

 

3,960

2011 and onwards

 

836

 

42,016

 

–

 

42,016

 

 

US$1,754

 

Php88,115

 

Php1,870

 

Php89,985

________________

*(1)    **October 1, 2006 throughDecember 31, 2006.*

 

ApproximatelyPhp47,969 million principal amount of our consolidated outstanding long-termdebt as at September 30, 2006 is scheduled to mature over the period from 2006to 2010.  Of this amount, Php28,494 million was attributable to PLDT, Php17,161million to Smart (including Piltel’s debt of Php3,633 million) and theremainder to Mabuhay Satellite, Maratel and ePLDT.

 

Inaddition to Piltel’s voluntary prepayment of its loan facilities in June 2006,Piltel submitted another voluntary prepayment notice for the remaining balanceof its restructured debt on October 25, 2006.  The prepayment is anticipated tobe completed on December 4, 2006 and, as such, all of Piltel’s restructureddebt were recognized as current and payable in 2006.

 

*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.

 

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% which we intend toincrease to 70% in 2007.

 

*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

Stable

 

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

 

OnNovember 3, 2006, Moody’s affirmed PLDT’s Ba2 senior unsecured foreign currencyrating and changed its outlook to stable from negative.  The rating action wasprompted by the change in outlook on the Philippines Ba3 country ceiling forforeign currency bonds to stable from negative.  On July 18, 2006, Moody’supgraded PLDT’s local currency corporate family rating from Ba1 to Baa3 with apositive outlook.  The upgrade has been prompted by continued improvements inPLDT’s credit profile, that it enjoys a lowly geared balance sheet, 65% sharein revenue terms of the market where only one major competitor is present andhas sufficient flexibility to be able to invest its free cash flows intoupgrading its technology base.

 

On August 18, 2006, Fitch upgraded PLDT’s long-termforeign currency IDR to “BB+” from “BB” with a stable outlook, at the same timeupgrading PLDT’s global bonds and senior notes to “BB+” from “BB” and affirmedPLDT’s long-term local currency IDR of “BBB-” with a positive outlook.Following the licensing of Fitch to provide National ratings in the Philippines, Fitch assigned PLDT a National long-term rating of “AAA(ph1)” with a stableoutlook.  The ratings action follows Fitch’s announcement that it has upgradedthe Country Ceiling on the Republic of the Philippines to “BB+” from “BB.”

 

OnAugust 30, 2006, Standard & Poor’s Ratings Services affirmed its ‘BB+’foreign currency rating on PLDT with stable outlook.  At the same time, therating on PLDT’s Series III Preferred Stock has been withdrawn as the preferredstock have been fully converted into common equity.  The rating reflects PLDT’sleading market position and its improving financial profile.

 

*EquityFinancing*

 

PLDT raised Php57million and Php255 million from the exercise by certain officers and executivesof stock options in the first nine months of 2006 and 2005, respectively.  Inaddition, through our subscriber investment plan, or SIP, which providespostpaid fixed line subscribers the opportunity to buy shares of our 10%cumulative convertible preferred stock as part of the upfront paymentscollected from subscribers, PLDT was able to raise Php2 million in the firstnine months of 2006 and 2005.  

 

Cashdividend payments in the first nine months of 2006 amounted to Php14,847million, of which Php14,446 million and Php401 million were paid to common andpreferred shareholders, respectively, compared to Php6,989 million, of whichPhp5,962 million and Php1,027 million were paid to common and preferredshareholders, 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 nine months ended September 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

 

 

August 8, 2006

 

August 21, 2006

 

September 21, 2005

 

50.00

 

9,346

 

Asat September 30, 2006, there were 188,008,846 PLDT common shares outstanding.

 

***Contractual Obligations and Commercial Commitments***

 

*Contractual Obligations*

 

The following table discloses our consolidatedcontractual obligations outstanding as at September 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)

Php89,985

 

Php19,625

 

Php22,539

 

Php6,107

 

Php41,714

Long-term lease obligations:

 

 

 

 

 

 

 

 

 

Operating lease

3,553

 

607

 

1,093

 

861

 

992

Capital lease

1,617

 

1,024

 

148

 

18

 

427

Unconditional purchase obligations(2)

10,327

 

5,052

 

2,010

 

2,010

 

1,256

Other long-term obligations

2,424

 

–

 

2,424

 

–

 

–

Total contractual obligations

Php107,906

 

Php26,307

 

Php28,214

 

Php8,996

 

Php44,389

___________

*(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 September 30, 2006, PLDT’s aggregate remaining obligation under these contracts amounted to approximatelyPhp9 million.

 

***LicenseAgreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius****.*PLDTentered into a license agreement with Mobius pursuant to which Mobius hasgranted PLDT a non-exclusive, non-assignable and non-transferable license forthe use of computer software components.  Under this agreement, Mobius is alsorequired to provide maintenance services for a period of one year at noadditional maintenance charge.  PLDT may purchase maintenance services uponexpiration of the first year for a fee of 15% of the current published licensefee.  As at September 30, 2006, PLDT’s aggregate remaining obligation underthis agreement was approximately Php10 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 Php3,152 million as atSeptember 30, 2006 in respect of office and cell site rentals with over 3,000lessors nationwide, PLDT has lease obligations aggregating Php102 million as atSeptember 30, 2006, ePLDT has lease obligations aggregating Php272 million asat September 30, 2006 in respect of certain office space rentals and PLDT Global has lease obligations aggregating Php8million as at September 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, in March1997, which was amended in December 1998, under which PLDT was granted theexclusive right to sell AIL services in the Philippines.  In exchange, the AirTime Purchase Agreement required PLDT to purchase from AIL a minimum of US$5million 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 billed revenue is less than US$45 million in anygiven year, the Air Time Purchase Agreement also states that PLDT has to makesupplemental air time purchase payments not to exceed US$15 million per yearduring 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 ofACeS 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 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 this matter. See *Note 20 – Related Party Transactions* and *Note 23 – Provisionsand Contingencies* to the accompanying unaudited consolidated financialstatements for further details relating to the Air Time Purchase Agreement withAIL.

 

As at September 30,2006, PLDT’s aggregate remaining minimum obligation under the original Air TimePurchase Agreement was approximately Php10,327 million.  

 

*OtherLong-term Obligations*

 

***MandatoryConversion and Purchase of Shares***.As discussed in *Note 17 – Interest-bearing Financial Liabilities*to theaccompanying unaudited consolidated financial statements, PLDT had issued atotal of 3 million shares of Series V Convertible Preferred Stock, 5 millionshares of Series VI Convertible Preferred Stock and 4 million shares of SeriesVII Convertible Preferred Stock in exchange for a total of 58 million shares ofSeries K Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel adopted in June 2001.  

 

Eachshare of Series V, VI and VII Convertible Preferred Stock is convertible at anytime at the option of the holder into one PLDT common share.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stocks and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to PLDTcommon shares.  Under a put option exercisable for 30 days, holders of commonshares received on mandatory conversion of the Series V, VI and VII ConvertiblePreferred Stocks will be able to require PLDT to purchase such PLDT commonshares for Php1,700 per share, US$36.132 per share, and JP¥4,071.89 per share,respectively.

 

Asat September 30, 2006, 2,675,393 shares of Series V Convertible Preferred Stockand 4,003,361 shares of Series VI Convertible Preferred Stock and all 3,842,000shares of Series VII Convertible Preferred Stock had been converted to PLDTcommon shares.  As at September 30, 2006, 46,047 shares of Series V and1,291,743 shares of Series VI Convertible Preferred Stocks remainedoutstanding.  The aggregate value of the put option based on outstanding sharesas at September 30, 2006 was Php2,424 million, which is puttable on June 4,2008, if all of the outstanding shares of Series V and  VI  ConvertiblePreferred Stocks were mandatorily converted and all the underlying shares ofcommon stock were put to PLDT.  The market value of the underlying shares ofcommon stock was Php3,037 million, based on the market price of PLDT commonshares of Php2,270 per share as at September 30, 2006.

 

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

 

*Commercial Commitments*

 

As at September 30, 2006, our outstanding commercial commitments, in the form of letters ofcredit, amounted to Php1,361 million.  These commitments will expire within oneyear.

 

**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 ourliquidity 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 RiskManagement***

 

As at September 30, 2006, the Philippine peso had appreciated by 5% against the U.S. dollar toPhp50.249 to US$1.00 from Php53.062 to US$1.00 as at December 31, 2005.  As at September 30, 2005, likewise, the peso appreciated by 1% to Php55.977 toUS$1.00 from Php56.341 to US$1.00 as at December 31, 2004.  The revaluation of our foreign-currency denominated assets and liabilities is recognizedas foreign exchange gains or losses as at balance sheet date.  Sincesubstantially all of our indebtedness is denominated in U.S. dollars, theappreciation or depreciation of the Philippine peso results in the recognitionof foreign exchange gains or losses.  The extent of foreign exchange gains orlosses is largely dependent on the amount of foreign currency debt we carry.As at September 30, 2006, consolidated foreign currency debt-denominatedamounted to Php81,850 million, a reduction from Php101,423 million lastDecember 31, 2005.  As such, we recognized foreign exchange gains of Php1,601million and Php1,779 million in the first nine months of 2006 and 2005,respectively.  

 

Whilea certain percentage of our revenues is either linked to or denominated in U.S.dollars, substantially all of our indebtedness and related interest expense, asubstantial portion of our capital expenditures and a portion of our operatingexpenses are denominated in foreign currencies, mostly in U.S. dollars.

* *

Asat September 30, 2006, approximately 98% of our total consolidated debts weredenominated in foreign currencies, principally in U.S. dollars.  Thus, astrengthening or weakening of the Philippine peso against the U.S. dollar willdecrease or increase both the principal amount of our unhedged foreigncurrency-denominated debts (representing 50% of our consolidated debts, or 38%net of our U.S. dollar cash balances as at September 30, 2006), and interestexpense on our debt in peso terms.  In addition, many of our financial ratiosand other financial tests are affected by the movements in the Philippinepeso to U.S. dollar exchange rate.

 

To manage our foreignexchange risks, stabilize cash flows, and improve investment and cash flowplanning, we enter into forward foreign exchange contracts, foreign currencyswap contracts, currency option contracts and other hedging products aimed atreducing and/or managing the adverse impact of changes in foreign exchangerates on our operating results and cash flows.  However, these hedges do notcover 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 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 directly as income or expense for theperiod.  As at September 30, 2006, PLDT’s outstanding forward foreign exchangecontracts, principal-only long-term cross-currency swap contracts and currencyoption contracts amounted to US$143 million; US$550 million; and US$175million, respectively.  Smart has no outstanding forward foreign exchangecontracts as at September 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 Risk Management***

 

On a limited basis, we enter into interest rate swapagreements in order to manage our exposure to interest rate fluctuations.  Asat September 30, 2006, PLDT’s outstanding interest rate swap contracts amountedto US$63 million.  For further discussions of these contracts, see *Note 24 –Financial Assets and Liabilities – Derivative Financial Instruments*to theaccompanying unaudited consolidated financial statements.

 

Wemake use of hedging instruments and structures solely for reducing or managingfinancial risks associated with our liabilities and not for trading orspeculative 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 nine months of 2006 was 6.8%, compared to 7.9% inthe same period in 2005.

** **

**OTHER INFORMATION**

 

***ePLDT acquired an additionalstake in Philweb***

 

On October 2, 2006, ePLDT acquired anadditional 8,037,692,308 shares of Philweb at Php0.026 per share for anaggregate amount of Php209 million.  This represents an additional 6.2% of theoutstanding shares of Philweb, raising ePLDT’s equity interest to 25.5%.Philweb is primarily engaged in Internet-based gaming, with agreements for Internetsports betting and Internet casino with the Philippine Amusement and GamingCorporation.  The investment will enable ePLDT to gain a firm hold onlegitimate gaming content for PLDT group’s mobile business as well as its wiredand wireless broadband services.

*** ***

***SPi acquired 100% of CyMed, Inc., or CyMed***

 

On August 11, 2006, ePLDT, through its subsidiary SPi,acquired 100% of CyMed for an aggregate amount of US$35 million inclusive ofcertain debt obligations.  CyMed currently provides medical transcriptionservices and has been recognized by numerous industry and communityassociations for superior business operations and profitable growth andpositions SPi as the third largest company in the outsourced medicaltranscription industry. 

 

*Related Party Transactions*
 

*Cooperation Agreement with the First Pacific and certain affiliates, orFP Parties, NTT Communications and DoCoMo*

 

Inconnection with the transfer by NTT Communications Corporation, or NTTCommunications, of approximately 12.6 million shares of PLDT’s common stock to NTTDoCoMo, Inc, or DoCoMo, pursuant to the Stock Sale and Purchase Agreement datedJanuary 31, 2006 between NTT Communications and DoCoMo, the First PacificCompany Limited and certain affiliates, or FP Parties, NTT Communications andDoCoMo entered into a Cooperation Agreement, dated January 31, 2006.  Under theCooperation Agreement, the relevant parties extended certain rights of NTTCommunications under the Stock Purchase and Strategic Investment Agreementdated 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 theterritory of the Philippines for a period of five years, an integrated i-modeservice package including non-transferable license to use the licensedmaterials and the i-mode brand, as well as implementation support andassistance and post-commercial launch support from DoCoMo.  Pursuant to thisagreement, Smart is required to pay an initial license fee and running royaltyfees based on the revenue arising from i-mode subscription fees and datatraffic.  The initial license fee paid as at September 30, 2006 amounted toUS$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 theservices of certain key personnel in connection with certain aspects of thebusiness of PLDT and Smart.  Also, the agreement governs the terms andconditions of the appointments 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) PLDT is licensed to market managed data and other services using NTTCommunications’ Arcstar brand; and (3) PLDT and NTT Communications agreed tocooperative arrangements for conventional international telecommunicationservices.  Total fees under these agreements totaled Php144 million and Php185million for the nine months ended September 30, 2006 and 2005, respectively.PLDT’s outstanding obligations under these agreements amounted to Php19 millionand Php23 million as at September 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 feesunder these agreements totaled Php398 million and Php383 million for the ninemonths ended September 30, 2006 and 2005, respectively.  Outstandingobligations of Smart under the Technical Service Agreement amounted to Php154million and Php194 million as at September 30, 2006 and December 31, 2005,respectively.  Asia Link is a subsidiary of the First Pacific Group.

 

*Agreements relating to insurance companies* — Gotuaco del Rosario and Associates, 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 paid under these agreements amounted to Php283 million and Php386million for the nine months ended September 30, 2006 and 2005, respectively.Two directors of PLDT have a direct/indirect interest in or serve as adirector/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:  November 7, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

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

AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND2005 (UNAUDITED)

** **

 

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

** **

CONSOLIDATEDBALANCE SHEETS

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

** **

** **

**September 30, 2006**

 

December 31, 2005

** **

**(Unaudited)**

 

(Audited)

**ASSETS**

**Noncurrent Assets**

** **

** **

** **

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

**170,051**

 

176,974

Investments in associates (Notes 2, 9 and 17)

**451**

 

15

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

**113**

 

109

Investment properties (Notes 2 and 10)

**672**

 

701

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

**12,244**

 

3,049

Deferred income tax assets (Notes 2 and 6)

**20,345**

 

15,457

Derivative assets (Notes 2 and 24)

**711**

 

2,648

Notes receivable (Notes 2, 12 and 24)

**346**

 

346

Prepayments - net of current portion

**944**

 

1,062

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

**1,097**

 

1,070

Total Noncurrent Assets 

**206,974**

 

201,431

**Current Assets**

** **

 

 

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

**18,664**

 

30,064

Short-term investments (Notes 2 and 24)

**2,716**

 

2,746

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

**11,953**

 

7,113

Inventories and supplies (Notes 2 and 15)

**1,265**

 

1,548

Derivative assets (Notes 2 and 24)

**44**

 

37

Current portion of prepayments

**3,785**

 

5,259

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

**262**

 

1,515

Total Current Assets 

**38,689**

 

48,282

 

**245,663**

 

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-442,675,465 shares as at September 30, 2006 and 443,343,035 shares  as at December 31, 2005

**4,427**

 

4,433

Common stock, Php5 par value, authorized-234,000,000 shares; issued and  outstanding-188,008,846 shares as at September 30, 2006 and 180,789,003 shares  as at December 31, 2005

**940**

 

904

Stock options issued (Note 21)

**43**

 

67

Equity portion of convertible preferred stock (Note 17)

**9**

 

49

Capital in excess of par value

**65,845**

 

53,918

Retained earnings (Note 7)

**23,548**

 

12,583

Cumulative translation adjustments (Note 24)

**(673)**

 

1,253

                Total Equity Attributable to Equity Holders of PLDT

**94,139**

 

73,207

**Minority interest**

**1,761**

 

1,162

Total Equity

**95,900**

 

74,369

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

CONSOLIDATEDBALANCE SHEETS (*continued*)

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

 

** **

**September 30, 2006**

 

December 31, 2005

** **

**(Unaudited)**

 

(Audited)

**Noncurrent Liabilities**

** **

 

 

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

**66,444**

 

97,215

Deferred income tax liabilities (Notes 2 and 6)

**20**

 

49

Derivative liabilities (Notes 2 and 24)

**5,739**

 

5,777

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

**3,924**

 

3,966

Pension and other employee benefits (Notes 2 and 21)

**3,006**

 

4,252

Customers’ deposits

**2,210**

 

2,215

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

**6,163**

 

7,600

Total Noncurrent Liabilities

**87,506**

 

121,074

**Current Liabilities**

** **

 

 

Accounts payable (Notes 2 and 24)

**16,277**

 

15,482

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

**18,525**

 

13,306

Unearned revenues (Note 2)

**3,079**

 

2,656

Derivative liabilities (Notes 2 and 24)

**91**

 

192

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

**436**

 

408

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

**20,512**

 

19,401

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

**697**

 

746

Income tax payable (Notes 2 and 6)

**2,640**

 

2,079

Total Current Liabilities

**62,257**

 

54,270

 

**245,663**

 

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)**

** **

** **

**Nine Months Ended September 30,**

**Three Months Ended September 30,**

 

**2006**

2005

**2006**

2005

 

(Unaudited)

**INCOME**

** **

 

 

 

Service revenues

**92,003**

89,686

**31,364**

30,144

Non-service revenues (Note 5)

**2,160**

2,153

**696**

731

Equity share in net income (loss) of associates

**1**

5

**(2)**

2

Other income (Notes 4 and 5)

**1,236**

718

**900**

547

 

**95,400**

92,562

**32,958**

31,424

**EXPENSES**

** **

 

** **

 

Depreciation and amortization (Notes 4 and 8)

**23,659**

16,656

**8,175**

5,795

Compensation and benefits (Notes 5 and 21)

**13,184**

10,060

**5,568**

3,568

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

**7,230**

8,098

**1,096**

3,273

Maintenance (Note 20)

**4,890**

4,972

**1,604**

1,652

Selling and promotions

**3,851**

3,885

**1,246**

1,116

Cost of sales (Notes 5, 20 and 22)

**3,713**

4,805

**1,254**

1,534

Professional and other contracted services (Note 20)

**2,227**

1,572

**987**

453

Rent (Note 22)

**1,769**

1,505

**622**

551

Taxes and licenses (Note 23)

**1,288**

1,648

**374**

633

Communication, training and travel

**1,038**

1,116

**365**

372

Insurance and security services (Note 20)

**973**

1,203

**313**

378

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

**872**

2,757

**102**

770

Amortization of intangible assets (Note 11)

**255**

267

**115**

128

Other expenses (Notes 5 and 20)

**953**

1,360

**265**

579

 

**65,902**

59,904

**22,086**

20,802

**INCOME BEFORE INCOME TAX**

**29,498**

32,658

**10,872**

10,622

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

**3,131**

7,875

**145**

2,392

**NET INCOME FOR THE PERIOD**

**26,367**

24,783

**10,727**

8,230

**ATTRIBUTABLE TO:**

** **

 

** **

 

Equity holders of PLDT

**25,744**

24,755

**10,439**

8,235

Minority interest

**623**

28

**288**

(5)

** **

**26,367**

24,783

**10,727**

8,230

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

** **

 

 

 

Basic

**138.71**

138.15

**55.69**

45.71

Diluted

**138.58**

132.10

**55.58**

44.22

* *

*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**

**47,186**

Income for the period

–

–

–

–

–

24,755

–

24,755

28

24,783

Currency translation differences (Note 24)

–

–

–

–

–

–

(6)

(6)

(3)

(9)

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

–

–

–

–

–

–

5

   5

–

   5

Net gain on cash flow hedges (Note 24)

–

–

–

–

–

–

85

  85

–

  85

Total income and expense for the period recognized directly to equity

–

–

–

–

–

–

  84

  84

(3)

  81

**Total income and expense for the period**

**–**

**–**

**–**

**–**

**–**

**24,755**

**84**

**24,839**

**25**

**24,864**

**Cash dividends**

**–**

**–**

**–**

**–**

**–**

**(7,051)**

**–**

**(7,051)**

**–**

**(7,051)**

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

**(14)**

**7**

**–**

**(265)**

**1,784**

**–**

** **

**1,512**

**–**

**1,512**

**Exercised shares**

**–**

**2**

**(106)**

**–**

**359**

**–**

**–**

**255**

**–**

**255**

**Cancelled options shares**

**–**

**–**

**(1)**

**–**

**–**

**–**

**–**

**(1)**

**–**

**(1)**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**(11)**

**(11)**

**Balances at September 30, 2005 (Unaudited)**

**4,483**

**860**

**74**

**183**

**52,612**

**7,225**

**446**

**65,883**

**871**

**66,754**

 

 

 

 

 

 

 

 

 

 

 

**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

–

–

–

–

–

25,744

–

25,744

623

26,367

Currency translation differences (Note 24)

–

–

–

–

–

–

(69)

(69)

(32)

(101)

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

–

–

–

–

–

–

5

   5

–

   5

Net loss on cash flow hedges (Note 24)

–

–

–

–

–

–

(1,862)

(1,862)

–

(1,862)

Total income and expense for the period recognized directly to equity

–

–

–

–

–

–

(1,926)

(1,926)

(32)

(1,958)

**Total income and expense for the period**

**–**

**–**

**–**

**–**

**–**

**25,744**

**(1,926)**

**23,818**

**591**

**24,409**

**Cash dividends**

**–**

**–**

**–**

**–**

**–**

**(14,779)**

**–**

**(14,779)**

**–**

**(14,779)**

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

**(6)**

**36**

**–**

**(40)**

**11,846**

**–**

**–**

**11,836**

**–**

**11,836**

**Exercised shares (Note 21)**

**–**

**–**

**(24)**

**–**

**81**

**–**

**–**

**57**

**–**

**57**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**8**

**8**

**Balances at September 30, 2006 (Unaudited)**

**4,427**

**940**

**43**

**9**

**65,845**

**23,548**

**(673)**

**94,139**

**1,761**

**95,900**

* *

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

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in million pesos)**

 

** **

**Nine Months Ended September 30,**

** **

**2006**

2005

** **

(Unaudited)

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

Income before income tax

**29,498**

32,658

Adjustments for:

** **

 

Depreciation and amortization (Note 8)

**23,659**

16,656

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

**5,685**

8,048

Accretion on financial liabilities - net (Note 5)

**3,045**

2,209

Provision for doubtful accounts (Note 5)

**697**

2,066

Amortization of intangible assets (Note 11)

**255**

267

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

**189**

494

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

**151**

(437)

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

**113**

196

Equity share in net income of associates

**(1)**

(5)

Provisions for onerous contracts and assessments (Note 5)

**(14)**

197

Interest income (Note 5)

**(1,297)**

(1,109)

Foreign exchange gains - net (Note 5)

**(1,601)**

(1,779)

Others

**(751)**

74

Operating income before working capital changes

**59,628**

59,535

Decrease (increase) in:

** **

 

Trade and other receivables

**(1,405)**

585

Inventories and supplies

**202**

(517)

Prepayments

**571**

(723)

Advances and refundable deposits

**1,238**

(1,290)

Increase (decrease) in:

** **

 

Accounts payable

**(3,360)**

(15)

Accrued expenses and other current liabilities

**1,086**

3,831

Unearned revenues

**398**

(807)

Pension and other employee benefits

**3,262**

1,229

Net cash generated from operations

**61,620**

61,828

Income taxes paid

**(5,602)**

(6,717)

Net cash provided by operating activities

**56,018**

55,111

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

Additions to property, plant and equipment

**(16,444)**

(9,208)

Proceeds from disposal of property, plant and equipment

**792**

234

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

**(428)**

(348)

Payments for purchase of investments - net of cash acquired

**(10,727)**

(238)

Proceeds from sale of investment properties

**26**

11

Payments for purchase of investments-available-for sale

**–**

(4)

Increase in short-term investments

**41**

3,873

Decrease (increase) in investments in notes receivable

**90**

(60)

Interest received

**1,311**

1,052

Decrease in advances and refundable deposits

**205**

110

Net cash used in investing activities

**(25,134)**

(4,578)

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

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

(in million pesos)

 

** **

**Nine Months Ended September 30,**

** **

**2006**

2005

** **

(Unaudited)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

Proceeds from availment of long-term debt

**5,011**

5,471

Payments of long-term debt

**(23,366)**

(35,479)

Payments of debt issuance costs

**(21)**

(133)

Proceeds from notes payable

**129**

199

Payments of notes payable

**(64)**

(254)

Payments of obligations under capital lease

**(145)**

(131)

Interest paid - net of capitalized portion

**(5,281)**

(7,880)

Settlements of derivatives

**(1,778)**

(483)

Cash dividends paid

**(14,847)**

(6,989)

Proceeds from issuance of capital stock

**59**

257

Increase (decrease) in:

** **

 

Customers’ deposits

**12**

(41)

Other noncurrent liabilities

**(1,472)**

693

Net cash used in financing activities

**(41,763)**

(44,770)

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

**(521)**

(192)

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

**(11,400)**

5,571

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

**30,064**

27,321

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

**18,664**

32,892

* *

*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 under Philippine Financial Reporting Standards.

 

Our unaudited consolidated financial statementsinclude, in our opinion, adjustments consisting only of normal recurringadjustments, necessary to present fairly the results of operations for theinterim periods.  The results of operations for the nine months ended September30, 2006 are not necessarily indicative of the results of operations that maybe expected for 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).

 

**Name of Subsidiary**

**Place of Incorporation**

**Principal Activity**

**Percentage of Ownership**

**Direct**

**Indirect**

** **

 

 

** **

**Wireless**

Smart

Philippines

Cellular mobile services

100.0

–

Wolfpac Mobile, Inc., or Wolfpac 

Philippines

Mobile applications developer and  service provider

–

100.0

Smart Broadband, Inc., or Smart Broadband (formerly Meridian Telekoms, Inc., or Meridian)

Philippines

Internet broadband and distributor

–

100.0

Pilipino Telephone Corporation, or Piltel

Philippines

Providing cellular and fixed line services

–

92.1

Telesat, Inc., or Telesat

Philippines

Satellite communications services

94.4

–

ACeS Philippines Cellular Satellite  Corporation, or ACeS Philippines

Philippines

Satellite phone services

88.5

11.5

Mabuhay Satellite Corporation, or  Mabuhay Satellite

Philippines

Satellite communications services

67.0

–

** **

 

 

 

 

**Fixed Line**

PLDT Clark Telecom, Inc., or  Clark Telecom

Philippines

Telecommunications services

100.0

–

Subic Telecommunications Company, Inc.,  or Subic Telecom

Philippines

Telecommunications services

100.0

–

PLDT Global Corporation, or PLDT Global

British Virgin Islands

Telecommunications services

100.0

–

Smart-NTT Multimedia, Inc., or SNMI

Philippines

Data and network services

100.0

–

PLDT-Maratel, Inc., or Maratel

Philippines

Telecommunications services

97.5

–

Bonifacio Communications Corporation,  or BCC

Philippines

Telecommunications, infrastructure  and related value-added services

75.0

–

** **

 

 

 

 

**Information and Communications Technology**

ePLDT, Inc.

Philippines

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

100.0

–

Vocativ Systems, Inc., or Vocativ

Philippines

Call center services

–

100.0

Parlance Systems, Inc., or Parlance

Philippines

Call center services

–

100.0

ePLDT Ventus, or Ventus

Philippines

Call center services

–

100.0

SPi Technologies, Inc., or SPi

Philippines

Business process outsourcing, or  BPO, services

–

100.0

Infocom Technologies, Inc., or Infocom

Philippines

Internet services

–

99.6

Digital Paradise, Inc. (formerly Netopia Computer Technologies, Inc.), or Digital Paradise

Philippines

Internet access services

–

75.0

Level Up!, (Philippines), Inc., or Level Up!

Philippines

Publisher of online games

–

60.0

netGames, Inc., or netGames

Philippines

Publisher of online games

–

60.0

Digital Paradise Thailand

Thailand

Internet access services

–

51.0

Airborne Access Corporation, or  Airborne Access

Philippines

Wireless internet services

–

51.0

 

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.

 

Weprepare our unaudited consolidated financial statements using uniformaccounting policies for like transactions and other events with similarcircumstances.  Intercompany balances and transactions, including intercompanyprofits and unrealized profits and losses, are eliminated.

 

Minority interests represent the equity interests inPiltel, Wolfpac, Level Up!, Telesat, Mabuhay Satellite, Maratel, BCC, DigitalParadise, Digital Paradise Thailand, netGames, Infocom, and Airborne Access,not held by the PLDT Group.

 

***Smart’s20% Acquisition of******Wolfpac***

 

On May8, 2006, Smart signed a share purchase agreement to acquire the remaining 20%equity interest in Wolfpac, a company engaged in the business of consumermobile applications software development and content development.  Smartacquired an 80% equity interest in Wolfpac in October 2003.  The remaining 20%equity interest in Wolfpac was paid in July 2006.

 

***ePLDT’sAcquisition of Level Up!***

 

OnFebruary 16, 2006, ePLDT acquired a 60% equity interest in Level Up!, a leadingpublisher of online games in the Philippines with about an 80% share of theonline gaming market.  The acquisition of Level Up!, together with netGames,ePLDT’s online gaming subsidiary, will strengthen the position of ePLDT as thedominant online gaming company in the country.

 

In August 2006, the Shareholders Agreement and SharePurchase Agreement between ePLDT and Level Up! were amended reflecting theremoval of earn-out and price adjustment provisions thereby fixing theacquisition for 60% of Level Up! at the original purchase price of US$7million.

 

***ePLDT’s Acquisition of SPi***

*** ***

On July 11, 2006, ePLDT acquired 100% of SPi and itsdirect and indirect Philippine and offshore subsidiaries for a totalconsideration of US$135 million in cash.As part of the transaction, ePLDT alsoacquired a US$7 million debt owed by SPi to SPi Tech at face value.  Inaddition, ePLDT advanced US$16 million to SPi in order for SPi to fully pay itsdebt owed to DBS Bank-Singapore.

 

***SPi’s Acquisition of CyMed, Inc., or CyMed***

*** ***

On August 11, 2006, SPi acquired 100% of CyMed for anaggregate purchase price of US$35 million inclusive of certain debtobligations.  CyMed is a leading medical transcriptioncompany based in Richmond, Virginia.  It provides medical transcriptionservices and technology products and currently serves over 400 healthcaresystems, independent hospitals, and government-affiliated clinics across the United States.

 

***Investmentsin Associates***

 

Investments in associates in which we exercisesignificant influence and which are neither a subsidiary nor a joint venture ofthe PLDT Group are accounted for under the equity method of accounting.  Underthe equity method, our investments in associates are carried in theconsolidated balance sheets at cost plus post-acquisition changes in our sharein net assets of the associates.  After application of the equity method, wedetermine whether it is necessary to recognize any additional impairment losswith respect to our net investment in the associate.  The consolidatedstatements of income reflect our shares of the results of operations of theassociate.  Where there has been a change recognized directly in the equity ofthe associate, we recognize our share in any such change and disclose this,when applicable, in our consolidated 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, PLDT Global, Digital Paradise Thailand, SPi and certain of its subsidiaries) is the Philippine peso.  Transactions inforeign currencies are initially recorded in the functional currency rateruling at the date of the transaction.  Monetary assets and liabilitiesdenominated in foreign currencies are translated at the functional currencyrate of exchange ruling at the balance sheet date.  All differences are takento the consolidated statements of income except for foreign exchange lossesthat qualify as capitalizable borrowing costs during the construction period.For income tax purposes, exchange gainsor losses are treated as taxable income or deductible expenses in the periodsuch are realized.

 

Thefunctional currency of Mabuhay Satellite, PLDT Global, Digital Paradise Thailand, SPi and certain of itssubsidiaries is the U.S. dollar.  As atthe 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, arestated at cost less accumulated depreciation and amortization and anyimpairment in value.  Land is stated at cost 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.

 

The useful lives and depreciation and amortizationmethod are reviewed periodically to ensure that the periods and method ofdepreciation and amortization are consistent with the expected pattern ofeconomic benefits from items of property, plant and equipment.  

 

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***

 

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

 

***Investment Properties***

 

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.

 

Asat 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***

 

Tradeand other receivables are stated at face value, net of allowance for doubtfulaccounts.

 

***Allowance for Doubtful Accounts***

 

Allowance for doubtfulaccounts is maintained at a level considered adequate to provide foruncollectible 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 frompermanently disconnected subscribers.  Permanent disconnections are made aftera series of collection steps following non-payment by subscribers.  Suchpermanent disconnections generally occur within 105 days from due date.Partial allowance is provided for active subscribers based on the historicalloss experience and aging profile of the receivable.

 

*Traffic settlement receivables - net*.  Full allowance is provided for carrier accountswhich are over 360 days past due and after a review of the status of settlementwith other carriers.

 

***Inventoriesand Supplies***

 

Inventoriesand supplies which include, among other things, cellular phone units,materials, spare parts, terminal units and accessories, are valued at the lowerof 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 consolidated statements of income when theliabilities are derecognized 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 notreliably determinable, the fair value of the consideration is estimated as thesum of all future cash payments or receipts, discounted using the prevailingmarket rates 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) financial liabilitiesother than liabilities measured at fair value through profit and loss.

 

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 thereon which is taken directly to net profit or loss forthe period based on the asset’s effective yield.  Impairment determined foravailable-for-sale financial assets is 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. 

 

Weuse derivative 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)that the hedge transaction is expected to be highly effective in achievingoffsetting changes in fair value or cash flows attributable to the hedged risk;(2) that the effectiveness of the hedge can be reliably measured; (3) thatthere is adequate documentation of the hedging relationships at the inceptionof the hedge, and (4) for cash flow hedges, that the forecast transaction thatis the subject of the hedge must be highly probable and must present anexposure to variations in cash flows that could ultimately affect profit orloss.

 

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***

 

Wehave funded, 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”).

 

Thecost of equity-settled transactions is recognized, together with acorresponding increase in equity, over the period in which the performanceconditions are fulfilled, ending on the date on which the relevant employeesbecome fully entitled to the award (“vesting date”).  The cumulative expense recognizedfor equity-settled transactions at each reporting date until the vesting datereflects the extent to which the vesting period has expired and the number ofawards that will ultimately vest, in the opinion of PLDT’s Board of Directors,at that date, based on the best available estimate.

 

Noexpense is recognized for awards that do not ultimately vest, except for awardswhere vesting is conditional upon a market condition, which are treated asvesting irrespective of whether or not the market condition is satisfied,provided that all 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.

 

Wherean equity-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 andadvisors render services during the vesting period.  We measure our liability,initially and at each reporting date until settled, at the fair value of theSARs, by applying 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 of operationsfor the period.

 

***Leases***

 

Lease obligations having provisions for bargainpurchase options, ownership transfer at the end of the lease term, or where 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.

 

Afinance lease gives rise to a depreciation expense for the asset as well as aborrowing cost for each period.  Finance charges are charged directly tocurrent operations in the period such are incurred.  The depreciation policyfor leased assets is consistent with that for depreciable assets that areowned.  

 

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 line communication services,and information and communications technology services.  We provide suchservices to mobile, business, residential and payphone customers.  Revenuesrepresent the value of fixed consideration that have been received or arereceivable.  Revenues are recognized when there is evidence of an arrangement,collectibility is reasonably assured and the delivery of the product or servicehas occurred.  In certain circumstances, revenue is split into separatelyidentifiable components and recognized when the related components aredelivered in order to reflect the substance of the transactions.  The value ofcomponents is determined using verifiable objective evidence.  Under certainarrangements where the above criteria are met but there is uncertaintyregarding the outcome of the transaction for which service was rendered,revenue is recognized only to the extent of expenses incurred for rendering theservice and such amount is determined to be recoverable.  We do not provide ourcustomers 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.

 

*Business Process Outsourcing, or BPO*

 

Where applicable, supplemental revenues are recognizeddepending on service levels or achievement of certain performance measurementtargets.  We recognize these supplemental revenues only after it has achievedthe required measurement targets.  When these service levels or performancemeasurement targets are not achieved, we grant service credits as a reductionin fees.  Advance customer receipts that have not been recognized as revenue inaccordance with its stated policies are recorded as advances from customer andpresented as a liability in the consolidated balance sheets.  If the fee is notfixed or determinable, revenue is not recognized on those arrangements untilthe customer payment is received.  For arrangements requiring specific customeracceptance, revenue recognition is deferred until the earlier of the end of thedeemed acceptance period or until written notice of acceptance is received fromthe customer.  Revenue on services rendered to customers whose ability to payis in doubt at the time of performance of services is also not recorded.  Rather,revenue is recognized from these customers as payment is received.

* *

*Incentives*

* *

We record insignificant commission expense based onthe number of new subscriber connections initiated by certain dealers.  Allother cash incentives provided to dealers and customers are recorded as areduction of revenue.  Product-based incentives provided to dealers andcustomers as part of a transaction are accounted for as multiple elementarrangements and recognized when earned.

 

*Non-servicerevenues*

 

*Handsetand equipment sales*

 

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

 

*Others*

 

Interestincome is recognized as it accrues on a time proportion basis taking intoaccount the principal amount outstanding and the effective interest rate.

 

***Income Taxes***

 

*Current tax*

 

Current tax assets and liabilities for the current andprior periods are measured at the amount expected to be recovered from or paidto the tax authority.  The tax rates and tax laws used to compute the amountare those that are enacted or substantively enacted as at the balance sheetdate.

 

*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.

 

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

 

***EarningsPer Common Share, or EPS***

 

BasicEPS is calculated by dividing the net income for the period attributable tocommon shareholders (net income adjusted for dividends on all series ofpreferred shares except for dividends on preferred stock subject to mandatoryredemption) by the weighted average number of common shares outstanding duringthe period, after giving retroactive effect to any stock dividend declarations.

 

DilutedEPS is calculated in the same manner assuming that, at the beginning of theperiod or at the time of issuance during the period, all outstanding optionsare exercised and convertible preferred shares are converted to common sharesand appropriate adjustments to net income are effected for the related expensesand income 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**

 

Ourunaudited consolidated financial statements prepared in Philippine GAAP requiremanagement to make estimates and assumptions that affect amounts reported inour unaudited consolidated financial statements and related notes.  Inpreparing our unaudited consolidated financial statements, we have made our bestestimates 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.

 

*Estimatinguseful lives of property, plant and equipment*

 

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 toPhp170,051 million and Php176,974 million as at September 30, 2006 and December31, 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 carrying values of goodwill and intangibleassets as at September 30, 2006 and December 31, 2005 amounted to Php12,244million and Php3,049 million, respectively.  There are no impairment lossesrecognized for the nine months ended September 30, 2006 and 2005.

 

*Asset impairment*

 

Philippine GAAP requires that an impairment review beperformed when certain impairment indicators are present.  In the case ofgoodwill, at a minimum, such asset is subject to a yearly impairment test andwhenever there is an indication that such asset may be impaired.  This requiresan estimation of the value in use of the cash-generating units to which thegoodwill is allocated.  Estimating the value in use requires us to make anestimate of the expected future cash flows from the cash generating unit and tochoose a suitable discount rate in order to calculate the present value ofthose cash flows.

 

Determining the fair values of property, plant andequipment, investments and intangible assets, which requires the determinationof future cash flows expected to be generated from the continued use andultimate disposition of such assets, requires us to make estimates andassumptions that can materially affect our unaudited consolidated financialstatements.  Future events could cause us to conclude that property, plant andequipment, investments and intangible assets associated with an acquiredbusiness are impaired.  Any resulting impairment loss could have a materialadverse impact on our financial condition and results of operations.

 

The preparation of estimated future cash flowsinvolves significant judgments and estimations.  While we believe that ourassumptions are appropriate and reasonable, significant changes in ourassumptions may materially affect our assessment of recoverable values and maylead to future additional impairment charges under Philippine GAAP.  

 

*Investment properties*

 

We have adopted the fair value approach in determiningthe carrying value of our investment properties.  We have opted to rely onindependent appraisers to determine the fair values of our investmentproperties, and such fair values were determined based on recent prices ofsimilar properties, with adjustments to reflect any changes in economicconditions since the date of those transactions.  The amounts and timing ofrecorded changes in fair value for any period would differ if we made differentjudgments and estimates or utilized a different basis for determining fairvalue.

 

Total carrying values of investment properties as atSeptember 30, 2006 and December 31, 2005 amounted to Php672 million and Php701million, respectively.

 

*Deferredtax assets*

 

We review the carrying amounts of deferred tax assetsat each balance sheet date and reduce these to the extent that they are nolonger probable that sufficient taxable profit will be available to allow allor part of the deferred tax assets to be utilized.  However, there is noassurance that we will generate sufficient taxable profit to allow all or partof our deferred tax assets to be utilized.  

 

Total unrecognized deferred tax assets as at September30, 2006 amounted to Php268 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 andjudgments.  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.

 

Totalfair value of financial assets and liabilities as at September 30, 2006 amountedto Php34,547 million and Php116,866 million, respectively, while the total fairvalue of financial assets and liabilities as at December 31, 2005 amounted toPhp43,063 million and Php148,848 million, respectively.  

 

*Estimatingallowance for doubtful accounts*

 

Weestimate the allowance for doubtful accounts related to our trade receivablesbased on two methods.  The amounts calculated using each of these methods arecombined to determine the total amount we reserve.  First, we evaluate specificaccounts where we have information that certain customers are unable to meettheir financial obligations.  In these cases, we use judgment, based on thebest available facts and circumstances, including but not limited to, thelength of our relationship with the customer and the customer’s current creditstatus based on third party credit reports and known market factors, to recordspecific reserves for customers against amounts due to reduce our receivablesto amounts that we expect to collect.  These specific reserves are re-evaluatedand adjusted as additional information received affects the amounts estimated.Second, a general provision is established as a certain percentage of operatingrevenues based on the aging profile of receivables.  This percentage is basedon a collective assessment of historical collection, write-off experience,current economic trends, changes in our customer payment terms and otherfactors that may affect our ability to collect payments.  Full allowance isprovided for receivables from permanently disconnected subscribers andcarriers.  Such permanent disconnections generally occur within 105 days fromdue date.  Partial allowance is provided for active subscribers and carriersbased 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 Php697 million and Php2,066 million for thenine months ended September 30, 2006 and 2005, respectively.  Trade and otherreceivables, net of allowance for doubtful accounts, amounted to Php11,953million and Php7,113 million as at September 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 ourunaudited consolidated financial statements.  Differences between the amountsinitially recognized and actual settlements are taken up in the accounts uponreconciliation.  However, there is no assurance that such use of estimates willnot result in material adjustments 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.  

 

Undercertain arrangements with our BPO services, if there is uncertainty regardingthe outcome of the transaction for which service was rendered, revenue isrecognized only to the extent of expenses incurred for rendering the serviceand such amount is determined to be recoverable.

 

*Pensionand other retirement benefits*

 

Thedetermination of our obligation and cost for pension and other retirementbenefits is dependent on our selection of certain assumptions used by actuariesin calculating such amounts.  Those assumptions are described in Note 21 –Employee Benefits and include, among other things, discount rates, expectedreturns on plan assets and rates of compensation increase.  In conformity withPhilippine 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.While we believe that our assumptions are reasonable and appropriate,significant differences in our actual experience or significant changes in ourassumptions may materially affect our pension and other retirementobligations.  

 

Unrecognizednet actuarial gain as at September 30, 2006 amounted to Php162 million.  Theaccrued benefit cost as at September 30, 2006 and December 31, 2005 amounted toPhp2,893 million and Php2,275 million, respectively.

 

*LegalContingencies*

 

Weare currently involved in various legal proceedings.  Our estimate of theprobable 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 Php4,360 million andPhp4,374 million as at September 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 expensesrelating to transactions with other components of PLDT), whose operatingresults are regularly reviewed by the enterprise’s chief operating decisionmaker to make decisions about how resources are to be allocated to the segmentand assess their performances, and for which discrete financial information isavailable.  The accounting policies of the reportable segments are the same asthose described in Note 2 – Summary of Significant Accounting Policies andPractices.

 

Wehave organized our business into three main segments:

 

•        Wireless — wireless telecommunications services provided through our cellularservice providers namely, Smart and Piltel; Smart Broadband, 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 and Vocativ; BPO services provided by SPi and its subsidiaries;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 September 30, 2006 and December 31, 2005 and results ofoperations of our reportable segments for the nine months ended September 30,2006 and 2005 are as follows:

 

 

**Wireless**

**Fixed Line**

**Information and Communications Technology**

**Inter-segment Transactions**

**Total**

 

(in million pesos)

* *

* *

 

 

 

 

*As at and for the nine months ended September 30, 2006 (Unaudited)*

**Income**

 

 

 

 

 

Service revenues

58,016

35,901

3,788

(5,702)

92,003

Non-service revenues

1,842

71

339

(92)

2,160

Equity share in net income of associates

–

–

1

–

   1

Other income

630

657

18

(69)

1,236

Segment income

60,488

36,629

4,146

(5,863)

95,400

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income before income tax

28,833

647

18

–

29,498

Provision for (benefit from) income tax

3,076

60

(5)

–

3,131

Net income for the period

25,757

 587

  23

–

26,367

** **

 

 

 

 

 

Assets

 

 

 

 

 

Segment assets

83,346

184,245

19,419

(61,692)

225,318

Deferred income tax assets

6,096

14,195

54

–

20,345

Total assets

89,442

198,440

19,473

(61,692)

245,663

 

 

 

 

 

 

Other segment information 

 

** **

** **

** **

** **

Capital expenditures

9,152

6,983

737

–

16,872

Depreciation and amortization

7,948

15,248

463

–

23,659

Provisions

397

478

(3)

–

 872

Interest on loans and related items -  net of capitalized interest

1,069

4,603

13

–

5,685

Interest income

911

373

13

–

1,297

* *

 

* *

* *

* *

* *

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

* *

**Income**

 

 

 

 

 

Service revenues

54,984

36,696

2,100

(4,094)

89,686

Non-service revenues

1,999

–

248

(94)

2,153

Equity share in net income of associates

–

–

5

–

   5

Other income

665

151

70

(168)

 718

Segment income

57,648

36,847

2,423

(4,356)

92,562

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income before income tax

27,341

5,203

114

–

32,658

Provision for income tax

6,413

1,457

5

–

7,875

Net income for the period

20,928

3,746

 109

–

24,783

** **

 

 

 

 

 

**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

4,916

4,167

473

–

9,556

Depreciation and amortization

7,354

8,998

304

–

16,656

Provisions

490

2,265

2

–

2,757

Interest on loans and related items -  net of capitalized interest

1,330

6,698

20

–

8,048

Interest income

812

287

10

–

1,109

 

 

 

**5.   Income and Expenses**

 

*Non-service Revenues*

 

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited) 

 

(in million pesos)

Sale of computers, cellular handsets and SIM-packs

**1,913**

 

1,999

Point-of-product sales

**247**

 

154

 

**2,160**

 

2,153

* *

*Compensation and Benefits*

* *

** **

**Nine Months Ended September 30,**

** **

**2006**

 

2005

** **

(Unaudited)

 

(in million pesos)

Salaries and benefits

**9,643**

 

8,242

Incentive plans (Note 21)

**2,677**

 

866

Pension (Note 21)

**760**

 

592

Manpower rightsizing program

**104**

 

360

 

**13,184**

 

10,060

* *

*FinancingCosts*

* *

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Interest on loans and related items

**6,113**

 

8,396

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

**3,045**

 

2,209 

Hedge costs (Note 24)

**1,090**

 

889

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

**151**

 

(437)

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

**113**

 

196

Financing charges (Note 7)

**44**

 

81

Capitalized interest (Notes 2 and 8)

**(428)**

 

(348)

Interest income

**(1,297)**

 

(1,109)

Foreign exchange gains - net (Notes 17 and 24)

**(1,****601)**

 

(1,779)

 

**7,230**

 

8,098

* *

*Cost of Sales*

* *

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Cost of computers, cellular handsets and SIM-packs sold

**3,567**

 

4,623

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

**146**

 

182

 

**3,713**

 

4,805

* *

*Professional and Other Service Fees*

* *

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Technical and consultancy fees

**1,306**

 

1,053

Contracted services

**711**

 

310

Legal and audit fees

**158**

 

161

Others

**52**

 

48

 

**2,227**

 

1,572

* *

* *

*Provisions*

* *

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Doubtful accounts (Note 14)

**697**

 

2,066

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

**189**

 

494

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

**(14)**

 

197

 

**872**

 

2,757

* *

* *

 

**6.   Income Tax**

* *

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

* *

 

**September 30,  2006 (Unaudited)**

** **

December 31, 2005 (Audited)

 

(in million pesos)

Net assets

**20,345**

** **

15,457

Net liabilities

**20**

** **

49

* *

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

* *

 

**September 30,  2006 (Unaudited)**

** **

December 31, 2005 (Audited)

 

(in million pesos)

Net assets

 

** **

 

Asset impairment

**6,441**

** **

3,127

Accumulated provision for doubtful accounts

**5,014**

** **

5,085

Net operating loss carryover, or NOLCO

**4,994**

** **

3,926

Unrealized foreign exchange losses

**3,581**

** **

6,885

Pension and other employee benefits

**2,427**

** **

1,409

Unearned revenues

**2,167**

** **

2,524

Derivative instruments

**1,488**

** **

464

Provision for unrealized assets

**1,374**

** **

769

Unamortized past service costs

**913**

** **

1,032

MCIT

**484**

** **

526

Accumulated write-down of inventories to net realizable values

**363**

** **

337

Asset retirement obligation - net of capitalized asset

**180**

** **

157

Leases

**156**

** **

153

Executive stock option plan

**95**

** **

104

Excess of fair value over cost of investment properties

**(91)**

** **

(90)

Preferred stock subject to mandatory redemption

**(160)**

** **

(1,034)

Intangibles and fair value adjustments on assets acquired

**(417)**

** **

(483)

Capitalized taxes and duties 

**(463)**

** **

(516)

Gain on debt exchange and debt restructuring transactions

**(1,711)**

** **

(2,601)

Capitalized foreign exchange differential

**(1,819)**

** **

(1,721)

Undepreciated capitalized interest charges

**(4,739)**

** **

(4,664)

Others

**68**

** **

68

 

**20,345**

** **

15,457

 

 

 

 

Net liabilities

 

** **

 

Unearned revenues

**(1)**

** **

–

Provision for doubtful accounts

**(5)**

** **

(5)

Unrealized foreign exchange gains

**(14)**

** **

(44)

 

**(20)**

** **

(49)

 

Provisionfor corporate income tax consists of:

 

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Current

**7,222**

 

6,500

Deferred

**(4,091)**

 

1,375

 

**3,131**

 

7,875

 

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

 

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Provision for corporate income tax at the applicable statutory tax rates

**10,324**

 

10,451

Tax effects of:

** **

 

 

Non-deductible expenses 

**65**

 

222

Loss (income) subject to lower tax rate

**(176)**

 

219

Income subject to final tax

**(433)**

 

(635)

Income not subject to tax

**(1,095)**

 

(75)

Net movement in deferred income tax

**(5,554)**

 

(2,305)

Equity share in net income of investees

**–**

 

(2)

Actual provision for corporate income tax

**3,131**

 

7,875

 

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.

 

InJune 2006, ePLDT applied for pioneer status for its new projects which include *Vitro*TMvalue-added services and additional capacity of the Data Center.  If approved,the Company will be entitled to another six-year income tax holiday incentive.The application is pending final approval by the BOI.

 

Parlance is registered with the BOI as a new IT export service firm inthe field of customer interaction center on a pioneer status.  Under thisregistration, Parlance shall be entitled to certain tax incentives like ITH forsix years starting June 2002.  Parlance is required to comply with specificterms and conditions stated in its BOI registration.

 

iPlus Intelligent Network, Inc., or iPlus, is a wholly-owned subsidiary of ePLDT and is registeredwith the BOI as a new IT service firm in the field of application serviceprovider on a pioneer status.  Under such registration, iPlus is entitled to asix-year ITH incentive from the actual start of commercial operations until January 1, 2009.

 

Vocativ is registered with the Philippine Economic Zone Authority, orPEZA, as an Ecozone Export Enterprise to develop and operate a call centerbusiness that serves overseas clients by providing customer relationshipmanagement services.  As a registered enterprise, Vocativ is entitled tocertain tax and non-tax incentives which include, among other things, tax andduty-free importations, exemption from local tax and ITH for four years fromstart of commercial operations.  After the ITH period, Vocativ is liable for afinal tax, in lieu of all taxes after the expiration of its incentives.  Thefinal tax is computed at 5% of gross income less allowable deductions asdefined under R.A. No. 7916, “The Special Economic Zone Act of 1995,” and shallbe paid and remitted in accordance 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 of customerinteraction center on a pioneer status.  Under this registration, ePLDT Ventusshall 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.

 

Two ofePLDT Ventus’ call center projects are registered with the BOI as a new ITexport service firm in the field of customer interaction center on a pioneerstatus.  Under this registration, ePLDT Ventus’ Iloilo and Pasig call centerprojects shall be entitled to certain tax incentives such as an ITH for sixyears starting March 2005 and August 2006, respectively.  In relation to this,ePLDT Ventus is required to comply with specific terms and conditions stated inthe 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.

 

Level Up! is originally registered with the BOI as anew IT service firm in the field of application service provider on anon-pioneer status.  Under such registration, Level Up! is entitled to certaintax incentives, which includes a four-year ITH from January 2003 and tax creditfor taxes on duties on materials used in export products for ten years startingJanuary 2003.  On April 2004, the BOI approved Level Up!’s request forupgrading its status from non-pioneer to pioneer in connection with its ITservice activity in the field of application service provider for entertainmentand educational project.  Accordingly, the ITH period was extended from four tosix years.

 

In September 2006, PEZA approved SPi’s application for registration asEcozone Information Technology Enterprise to provide IT enabled services withemphasis on the creation of electronic discovery, presentation of content in electronicinformation formats, data analysis, capture, abstracting and data processing,design, development and implementation of healthcare documentation solutions.  Asa registered enterprise, SPi is entitled to certain tax and non-tax incentiveswhich include, among other things, tax and duty-free importations, exemptionfrom local tax and ITH for four years.  After the ITH period, SPi is liable fora final tax, in lieu of all taxes after the expiration of its incentives.  Thefinal tax is computed at 5% of gross income less allowable deductions asdefined under R.A. No. 7916, “The Special Economic Zone Act of 1995,” and shallbe paid and remitted in accordance with the amendments contained in R.A. No.8748, as follows: (a) 3% to the National Government; and (b) 2% which shall bedirectly remitted by the business establishments to the treasurer’s office ofthe municipality or city where the enterprise is located.

 

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 nine months ended September 30, 2006 and 2005amounted to Php157 million and Php168 million, respectively.

 

On May 24,2005, the President signed into law Republic Act No. 9337 (the “Act”), whichtook effect on November 1, 2005.  The Act, among others, introduced thefollowing 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.

 

In2006, the net movement in deferred tax assets pertains to deferred tax assetsrecognized in relation to the benefit that would be derived from the disposalof certain of Piltel’s assets with the expected lifting of the MTI restrictionsresulting from the full repayment of Pitel’s restructured debt on December 4,2006.  For further discussion, please see *Note 17 – Interest-bearingFinancial Liabilities*.

 

Ourdeferred income tax assets have been recorded to the extent that such deferredtax assets are expected to be utilized against sufficient future taxableprofit.  We had unrecognized deferred tax assets of Php268 million largelypertaining to asset impairment as at September 30, 2006.

 

Ourunaudited consolidated unutilized NOLCO as at September 30, 2006 is detailed asfollows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2003

2006

6

2004

2007

34

2005

2008

11,229

2006

2009

3,040

 

 

14,309

 

 

 

Tax benefit at 35%

 

5,008

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

 

(14)

 

 

4,994

 

Thebenefit of MCIT amounting to Php484 million as at September 30, 2006 can beclaimed as deductions against income tax payable until 2008.

 

 

 

**7.   Earnings Per Common Share**

 

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

 

** **

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

**Basic**

**Diluted**

 

Basic

Diluted

 

(Unaudited) 

 

(in million pesos)

Net income attributable to equity holders of PLDT

**25,744**

**25,744**

 

24,755

24,755

Dividends on preferred shares

**(342)**

**(37)**

 

(1,136)

(37)

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

**–**

**–**

** **

**–**

81

Accretion of preferred stock subject to mandatory redemption

**–**

**–**

** **

**–**

354

Foreign exchange gain on preferred stock subject to mandatory redemption

–

**–**

 

–

(635)

Net income applicable to common shares

**25,402**

**25,707**

 

23,619

24,518

 

 

 

 

 

 

 

(in thousands, except per share amounts)

 

** **

 

 

 

 

Outstanding common shares at beginning of period

**180,789**

**180,789**

 

170,214

170,214

Effect of issuance of common shares during the period

**2,342**

**2,342**

 

750

750

Average incremental number of shares under ESOP  during the period

** **

**92**

 

–

73

Common shares equivalent of preferred shares deemed dilutive:

** **

** **

 

 

 

Preferred Stock Series A to FF (Note 16)

–

**2,284**

 

–

2,817

Preferred Stock Series III (Note 16)

–

**–**

 

–

7,907

Preferred Stock Series VII (Note 17)

–

**–**

 

–

3,842

Weighted average number of common shares for the period

**183,131**

**185,507**

 

170,964

185,603

Earnings per common share

**Php138.71**

**Php138.58**

 

Php138.15

Php132.10

 

**Dividends Declared For TheNine Months Ended September 30, 2006 (Unaudited)**

 

** **

**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

–

 

August 28, 2006

September 27, 2006

October 15, 2006

4.675

1

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

 

August 28, 2006

September 27, 2006

October 15, 2006

0.09925

9

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

 

August 28, 2006

September 27, 2006

October 15, 2006

10.179725

6

Charged to income

 

 

 

 

  86

 

 

 

 

 

 

**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

–

Series A, I, R, W, AA and BB

July 11, 2006

August 1, 2006

August 31, 2006

1.00

128

Series B, F, Q, V and Z

August 8, 2006

September 1, 2006

September 29, 2006

1.00

90

Series E, K, O and U

August 28, 2006

September 27, 2006

October 31, 2006

1.00

45

 

 

 

 

 

 283

 

 

 

 

 

 

**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

 

July 11, 2006

August 10, 2006

September 15, 2006

–

12

 

 

 

 

 

  36

 

 

 

 

 

 

**Common Stock**

February 27, 2006

March 20, 2006

April 20, 2006

Php28.00

5,080

** **

August 8, 2006

August 21, 2006

September 21, 2006

50.00

9,380

Charged to retained earnings

 

 

 

 

14,779

 

****Dividendsare declared based on total amount paid up.*

 

 

 

**8.   Property, Plant andEquipment**

 

Thisaccount 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

(41,262)

(46,259)

(29,410)

(5,196)

(21,056)

(6,083)

(5,048)

(249)

–

(154,563)

Net book value

66,519

36,094

31,621

14,543

6,867

4,477

2,870

2,189

11,794

176,974

**Nine Months Ended September 30, 2006 (Unaudited)**

Net book value at beginning of period

66,519

36,094

31,621

14,543

6,867

4,477

2,870

2,189

11,794

176,974

Additions/Transfers – net

3,945

1,490

6,336

384

1,959

–

1,079

–

1,800

16,993

Disposals/Retirements

(19)

(158)

(182)

(71)

(62)

–

(2)

(4)

(264)

(762)

Translation differences charged directly to cumulative translation adjustments

(13)

99

–

280

297

(222)

9

20

35

 505

Depreciation and amortization

(3,985)

(8,657)

(5,665)

(977)

(3,198)

(469)

(691)

(17)

–

(23,659)

Net book value at end of period

66,447

28,868

32,110

14,159

5,863

3,786

3,265

2,188

13,365

170,051

**September 30, 2006 (Unaudited)**

Cost

111,730

83,731

66,894

20,330

30,444

10,052

8,908

2,456

13,365

347,910

Accumulated depreciation and amortization

(45,283)

(54,863)

(34,784)

(6,171)

(24,581)

(6,266)

(5,643)

(268)

–

(177,859)

Net book value

66,447

28,868

32,110

14,159

5,863

3,786

3,265

2,188

13,365

170,051

** **

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 nine months ended September 30, 2006 and 2005 were as follows:

** **

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Interest

**428**

 

348

Foreign exchange gains

**239**

 

201

** **

As at September30, 2006 and December 31, 2005, the undepreciated capitalized net foreignexchange losses which qualified as borrowing costs amounted to Php3,579 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 Php6,350 million and Php360 million for the nine months endedSeptember 30, 2006 and 2005, respectively, due to a change in the estimateduseful lives of certain of our network assets owing to continuing networkupgrade and expansion.

 

Property,plant and equipment include the following amounts for capitalized leases as at September30, 2006 and December 31, 2005:

 

** **

**September 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

**338**

**908**

**1,246**

293

719

1,012

 

**109**

**174**

**283**

  68

 320

 388

 

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

 

 

**September 30, 2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Asset retirement obligations at beginning of period

**752**

 

638

Accretion expenses

**65**

 

79

Additional liability recognized during the period

**16**

 

63

Settlement of obligations

**(49)**

 

(28)

Asset retirement obligations at end of period (Note 18)

**784**

 

 752

 

 

 

**9.   Investments in Associates**

 

This account consists of:

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

ACeS International Limited, or AIL

**1,614**

 

1,614

Mabuhay Space Holdings Limited

**960**

 

1,013

Stradcom International Holdings, Inc.

**616**

 

616

Philweb Corporation

**428**

 

–

BayanTrade Dotcom, Inc.

**97**

 

97

SPi Jinan Content Conversion Co. Ltd.

**8**

 

–

ePDS, Inc.

**6**

 

6

 

**3,729**

 

3,346

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

**3,278**

 

3,331

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

**451**

 

  15

 

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

 

As at September 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 the settlement agreement, Mabuhay Satellite and SS/Lshall proceed to dissolve the joint venture under a separate agreement, forwhich each of the parties shall receive title over such number of transpondersowned by the joint venture in proportion to their respective interests.  On thebasis of the joint venture dissolution, we recognized an impairment provisionin respect of our investment in MSHL of Php431 million in 2004.

 

***Investmentof ePLDT in Stradcom International Holdings, Inc., or SIHI***

 

ePLDT has a 22.5%interest in convertible securities of SIHI, the parent company of StradcomCorporation, which has an existing concession agreement with the PhilippineGovernment for the modernization of the Philippine Land Transportation Office,including the computerization of driver’s license issuance, vehicleregistration and traffic adjudication systems.  SIHI has been incurring lossesfrom the start of operations due to Stradcom Corporation’s continuous lossesand consistent excess of current liabilities over current assets.  On thisbasis, we recognized an impairment provision in respect of our investment inSIHI of Php616 million in 2004.

 

StradcomCorporation is currently undertaking the issuance of Asset-Backed Bondsamounting to Php1.6 billion intended for debt refinancing and general corporatepurposes, including working capital and investments.

 

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

 

InMay 2006, ePLDT subscribed to newly issued common shares of Philweb, aninternet-based gaming company, equivalent to 20% of the total outstandingcapital stock at a price of Php0.020 per share or an aggregate amount of Php502million.  Of the total subscription price, Php427 million was paid by ePLDT onclosing date.  The portion of the unpaid subscription price amounting to Php25million shall be paid by ePLDT at the same time as the Philweb majoritystockholder pays the remaining unpaid portion of the subscription pursuant to ageneral call on subscription to be made by Philweb’s board of directors.  Thebalance of Php50 million shall be paid upon the lapse of the post-closing priceadjustment periods.  The unpaid subscription of Php75 million was recorded aspart of accrued expenses and othercurrent liabilities in the balance sheet.

 

InOctober 2006, ePLDT acquired additional 8,037,692,308 shares of Philweb at aprice of Php0.026 per share or an aggregate amount of Php209 million.  Thisrepresents an additional 6.2% of the outstanding shares of Philweb, raisingePLDT’s total equity stake to 25.5%.

 

***Investment of ePLDT in BayanTrade Dotcom, Inc., orBayanTrade***

 

BayanTrade was incorporated and registered with theSecurities and Exchange Commission, or SEC, on August 8, 2000 to provide:  (a)business-to-business electronic purchasing marketplace to link buyers andsuppliers of good services over the Internet; (b) electronic cataloguepurchasing facilities over the Internet to buyers and suppliers; (c) link-upwith similar horizontal markets and vertical markets across the Asia-PacificRegion and the world; and (d) such facilitating services incidental to thebusiness.  BayanTrade is an e-procurement joint venture established togetherwith six of the Philippines’ leading conglomerates.  ePLDT’s initialshareholding in BayanTrade was 20.5%, which was subsequently diluted to 19.17%in August 2004 due to an equity call 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 does laser printing andenveloping services for statements, bills and invoices, and other value-addedservices for 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 September 30, 2006 and December 31, 2005 and for the nine months ended September30, 2006 and 2005.

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Noncurrent assets

**1,390**

 

1,388

Current assets

**1,260**

 

652

Capital deficiency

**(9,792)**

** **

(10,787)

Noncurrent liabilities

**10,390**

 

11,242

Current liabilities

**2,052**

 

1,585

 

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Revenues

**624**

 

412

Revenues less cost of revenues

**483**

 

318

Expenses

**390**

 

276

Net loss

**(321)**

 

(188)

 

 

 

**10. InvestmentProperties**

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Balance at beginning of period

**701**

 

743

Disposals

**(29)**

 

(15)

Net loss from fair value adjustments

**–**

 

(27)

Balance at end of period

**672**

 

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:

 

 

**September 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

**9,145**

**305**

**9,450**

8

–

   8

Balance at end of period

**11,087**

**2,296**

**13,383**

1,942

1,991

3,933

 

** **

** **

** **

 

 

 

Accumulated amortization and impairment:

** **

** **

** **

 

 

 

Balance at beginning of period

**(438)**

**(446)**

**(884)**

(438)

(181)

(619)

Additions

**–**

**(255)**

**(255)**

–

(265)

(265)

Balance at end of period

**(438)**

**(701)**

**(1,139)**

(438)

(446)

(884)

Net balance

**10,649**

**1,595**

**12,244**

1,504

1,545

3,049

 

Intangible assets include a technology applicationwith an estimated useful life of three years arising from the acquisition ofWolfpac and certain intangible assets arising from the acquisition of SmartBroadband in 2004.  In December 2005, an independent appraiser completed thevaluation work for certain of Smart Broadband’s intangible assets anddetermined goodwill amounting to Php1,415 million at the time of acquisition.Smart Broadband’s intangible asset composition and estimated useful lives wererevised as follows:

 

Licenses

18 years

Spectrum

15 years

Technology

5 years

Customer base

3 years

 

Theacquisition of the remaining 20% equity investment in Wolfpac on May 8, 2006resulted in additional intangibles of Php46 million.

 

In2006, ePLDT acquired a 60% equity interest in Level Up!, to strengthen itson-line gaming business.  The fair value of Level Up!’s net assets, determinedprovisionally, was assessed to be equal to its book value, which resulted ingoodwill amounting to Php348 million at the time of acquisition.  Intangibleassets pertaining to Level Up!’s customer base was provisionally determined atPhp55 million with an estimated useful life of three years.

 

Inrelation to ePLDT’s acquisition of Philweb, intangible assets pertaining toPhilweb’s contracts were provisionally determined at Php297 million with anestimated useful life of ten years. 

 

ePLDT’s acquisition of SPi resulted in total goodwillof Php9 billion including goodwill pertaining to SPi’s acquisition of Cymedwhich was provisionally determined to be Php1 billion.

 

 

 

**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 anagreement whereby ePLDT granted a seven-year zero-coupon loan to FAME amountingto US$3.1 million.  Upon maturity of the loan, which is at the end of seven (7)years from issuance, ePLDT may require FAME to redeem or pay the loan at aredemption value amounting to US$6.1 million.  At any time during the life ofthe outstanding loan, ePLDT may convert the loan into 20% of the totaloutstanding capital stock of FAME.

 

On August 20, 2004, FAME changed its corporate name toTSSI.

 

On September 14, 2004, ePLDT entered into a secondagreement with TSSI whereby ePLDT would granted another seven-year zero couponloan to TSSI amounting to US$3.1 million with the same terms and features asthe first loan.  As at September 30, 2006, the aggregate loans of ePLDT to TSSIamounted to US$6.2 million.

 

As at September 30, 2006, ePLDT has not yet convertedits investment in debt securities into TSSI’s shares of stock. TSSI is asystems integrator for the internet and a mobile telephone gaming project.

 

The debt instrument was initially recorded at fairvalue computed as the present value of estimated future cash flows andsubsequently measured at amortized cost at effective yield.

 

 

 

**13. Cash and Cash Equivalents**

 

This account consists of:

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Cash on hand and in banks

**3,386**

 

6,496

Temporary cash investments

**15,278**

 

23,568

 

**18,664**

 

30,064

 

Cash in banks earns interest at prevailing bankdeposit rates.  Temporary cash investments are made for varying periods of upto two months depending on our immediate cash requirements, and earn interestat the prevailing short-term deposit rates.  Due to the short-term nature ofsuch transactions, the carrying value approximates the fair value of ourtemporary cash investments.

 

 

 

**14. Tradeand Other Receivables**

 

Thisaccount consists of receivables from:

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Customers and carriers

**25,150**

 

24,475

Others (Notes 20, 22 and 23) 

**4,167**

 

1,184

 

**29,317**

 

25,659

Less allowance for doubtful accounts

**17,364**

 

18,546

 

**11,953**

 

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.  

 

OnOctober 10, 2002, PLDT entered into a Receivables Purchase Deed, or RPD, with aforeign financial institution, or the Purchaser, under which PLDT agreed (1) tosell its receivables from certain eligible foreign carriers for an advancepayment of US$50 million, of which, US$5 million remains outstanding as atSeptember 30, 2006, and (2) to service, administer and collect the receivableson behalf of the Purchaser.  Under the RPD, the Purchaser has no recourseagainst PLDT should an eligible carrier fail or refuse to settle theassigned/purchased receivables, except when PLDT commits a breach of its representationsand warranties under the RPD.

 

Sale of receivables under the RPD amounted to US$4 million(Php213 million) and US$9 million (Php504 million) for the nine months endedSeptember 30, 2006 and 2005, respectively.  Loss on sale of receivables under theRPD amounted to US$1 million (Php22 million) and US$1 million (Php60 million)for the nine months ended September 30, 2006 and 2005, respectively.

 

 

 

**15. Inventoriesand Supplies**

 

This account consists of:

 

 

**September 30,  2006 (Unaudited)**

 

December 31,  2005 (Audited)

 

(in million pesos)

Terminal and cellular phone units:

** **

 

 

At net realizable value

**768**

 

806

At cost

**1,047**

 

1,024

Spare parts and supplies:

** **

 

 

At net realizable value

**316**

 

493

At cost

**1,210**

 

1,376

Others:

** **

 

 

At net realizable value

**181**

 

249

At cost

**181**

 

249

At lower of cost or net realizable value

**1,265**

 

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

–

–

–

–

2

–

–

Conversion

–

–

–

–

(8)

7

36

Balance at September 30, 2006 (Unaudited)

 407

–

  36

 443

Php4,427

 188

Php940

 

***PreferredStock***

 

Thepreferred stock is non-voting, except as specifically provided by law, and ispreferred as to liquidation.

 

The Series A to FF 10% Cumulative Convertible Preferred Stocks earncumulative dividends at an annual rate of 10%.  After the lapse of one (1) yearfrom the last day of the year of issuance of a particular series of 10%Cumulative Convertible Preferred Stock, any holder of such series may convertall or any of the shares of 10% Cumulative Convertible Preferred Stock held byhim into fully paid and non-assessable shares of Common Stock of PLDT, at aconversion price equivalent to 10% below the average of the high and low dailysales price of a share of Common Stock on the PSE, or if there shall have beenno such sales on the PSE on any day, the average of the bid and the askedprices of a share of Common Stock of PLDT at the end of such day on suchExchange, in each such case averaged over a period of 30 consecutive tradingdays prior to the conversion date, but in no case shall the conversion price beless than the price set by the Board of Directors which, as at September 30,2006, was Php5.00 per share.  The number of shares of Common Stock issuable atany time upon conversion of one share of subscriber investment plan, or SIP,Cumulative Convertible Preferred Stock shall be determined by dividing Php10.00by the then applicable conversion 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 such effectivedate utilized in calculating the conversion price of the shares presented forconversion.

 

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 SIP Series FF and GG underSection 10.2 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 foreach share 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 preferentialdividends on the shares of Series III Convertible Preferred Stock, calculateddown to and including the mandatory conversion date.

 

In November2005, PLDT issued 710,891 shares of common stock on account of the voluntaryconversion of 415,023 shares of Series III Convertible Preferred Stock.

 

As at December 19, 2005, all of the outstanding shares of Series IIIConvertible Preferred 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:

 

 

**September 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)

**64,253**

 

84,860

Obligations under capital lease (Notes 8 and 24)

**202**

 

381

Preferred stock subject to mandatory redemption (Note 24)

**1,989**

 

11,974

 

**66,444**

 

97,215

 

** **

 

 

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

** **

** **

** **

Notes payable

**188**

** **

**–**

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

**19,465**

 

18,684

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

**859**

 

717

 

**20,512**

 

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:

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Long-term debt

**6,267**

 

8,829

Obligations under capital lease (Note 8)

**556**

 

602

Preferred stock subject to mandatory redemption

**435**

 

3,916

Total unamortized debt discount

**7,258**

 

13,347

 

Thefollowing table describes all changes to unamortized debt discount as atSeptember 30, 2006 and December 31, 2005.

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Unamortized debt discount at beginning of period

**13,347**

 

18,581

Revaluations

**(473)**

 

(1,114)

Additions during the period

**34**

 

198

Settlements and conversions during the period

**(2,605)**

 

(1,436)

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

**(3,045)**

 

(2,882)

Unamortized debt discount at end of period

**7,258**

 

13,347

 

**Long-termDebt**

 

Long-term debt consists of:

 

**Description**

**Interest Rates**

**September 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$208**

**Php10,474**

US$254

Php13,489

Finnvera, plc, or Finnvera

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

**69**

**3,456**

105

5,552

Nippon Export and Investment Insurance  of Japan, or NEXI

US$ LIBOR + 1%

**37**

**1,868**

49

2,612

Others

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

**18**

**905**

28

1,473

 

 

**332**

**16,703**

 436

23,126

Fixed Rate Notes

7.85% - 11.375%

**843**

**42,356**

987

52,354

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

2.25% and US$ LIBOR + 1%

**173**

**8,690**

165

8,748

GSM Network Expansion Facilities

4.49% - 4.515% and US$ LIBOR + .815% - 3.25%

**160**

**8,037**

86

4,562

Others

US$ LIBOR + 0.40% and 1.75% - 8.9%

**10**

**500**

18

978

Restructured Loans

US$ LIBOR + 1%

**66**

**3,319**

90

4,767

Satellite Acquisition Loans

5.66% and US$ LIBOR + 1.75% and 2.75%

**45**

**2,245**

57

3,040

 

 

**US$****1,629**

**81,850**

US$1,839

97,575

 

 

** **

** **

 

 

*Japanese Yen Debt:*

 

** **

** **

 

 

JBIC’s Overseas Investment Loan, or OIL

2.125%

**JP¥****–**

**–**

JP¥6,970

3,139

Export Credit Agency-Supported Loan –  NEXI Supported Loan

JP¥ LIBOR + 1.70%

**–**

**–**

1,573

709

** **

 

**JP¥****–**

**–**

JP¥8,543

3,848

** **

 

** **

** **

 

 

*Philippine Peso Debt:*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

15% - 15.816%

** **

**1,578**

 

1,576

Term Loan:

 

** **

** **

 

 

Secured Term Loans

24% and 90-day PHIBOR + 3%

** **

**22**

 

166

Restructured Loans

91-day T-Bill rate + 1%

** **

**268**

 

379

 

 

** **

**1,868**

 

2,121

 

 

** **

**83,718**

 

103,544

Less portion maturing within one year

 

** **

**19,465**

 

18,684

Total long-term debt 

 

** **

**Php64,253**

 

Php84,860

 

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

 

The scheduled maturities of our outstandingconsolidated long-term debt at nominal values as at September 30, 2006 are asfollows:

 

*** ***

**U.S. Dollar Loans**

**Php Loans**

**Total**

** **

**In U.S. Dollar**

**In Php**

**In Php**

**In Php**

** **

(in millions)

**Year**

 

 

 

 

2006(1)

104

5,250

1,049

6,299

2007

318

15,965

11

15,976

2008

139

6,978

–

6,978

2009

294

14,756

–

14,756

2010

63

3,150

810

3,960

2011 and onwards

836

42,016

–

42,016

 

1,754

88,115

1,870

89,985

 

*(1)**October 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 fürWiederaufbau, or KfW*

 

KfW, a German state-owned development bank, is PLDT’slargest single creditor.  As at September 30, 2006, we owed US$208 millionaggregate principal amount of debt to KfW, as follows:

 
- US$159 million provided under various export credit agency-backed facilities, of which US$49 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$49 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.

 

OnJanuary 25, 2002, PLDT signed two loan agreements with KfW, which provided PLDTwith a US$149 million facility to refinance in part the repayment installmentsunder its existing loans from KfW due from January 2002 to December 2004.  Thefacility is composed of a nine-year loan, inclusive of a three-yeardisbursement period and a two-year grace period during which no principal ispayable.  It partly enjoys the guarantee of HERMES, the export credit agency ofthe Federal Republic of Germany.  We have drawn US$140 million (Php7,033million) under this facility as at September 30, 2006.  PLDT waived furtherdisbursements under this refinancing facility effective September 1, 2004.  Thus, the undrawn portion of US$9 million was cancelled.

 

Ofthe amounts outstanding under these KfW loans, US$7 million will mature in2006, US$72 million will mature in 2007, US$55 million will mature in 2008,US$43 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.

* *

*Finnvera, plc, or Finnvera*

 

As at September 30, 2006, US$69 million principalamount of Smart’s debt was provided by various banks under an export creditagency-backed facility in connection with Smart’s GSM expansion program.  Thisfacility is covered by guaranty from Finnvera, the Finnish export creditagency, for 100% of political and commercial risk for the refinancing facilityof GSM Phases 5A and 5B.  This is the only remaining outstanding facility guaranteedunder Finnvera.  Other Finnvera-guaranteed GSM loan facilities were alreadyfully paid in the aggregate amount of US$16.5 million for GSM Phases 3 and 4loan facilities on April 28, 2006, and in the aggregate amount of US$5.8million for GSM Phases 1 and 2 loan facilities 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$19million will mature in 2007, US$20 million will mature in 2008, US$20 millionwill mature in 2009 and US$10 million will mature in 2010.  Principalamortization on this loan is payable in equal semi-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 September 30, 2006 was US$37million.

 

*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 September 30, 2006.Smart, likewise, obtained loans guaranteed by the export credit agencies of Norway and Italy amounting to US$3 million.  Of the amounts outstanding under these loans, US$4 millionwill mature in 2006, US$10 million will mature in 2007, US$2 million willmature in 2008, US$1 million will mature in 2009 and US$1 million will maturein 2010.

 

*Fixed Rate Notes*

 

PLDT has the following non-amortizing fixed rate notesoutstanding as at September 30, 2006 and December 31, 2005:

 

**Principal Amount**

**Interest Rate**

**Maturity Date**

**September 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

** **

** **

** **

(in millions)

US$300,000,000

8.350%

March 6, 2017

**US$296**

**Php14,877**

US$296

Php15,700

US$250,000,000

11.375%

May 15, 2012

**244**

**12,246**

243

12,902

US$175,000,000

10.500%

April 15, 2009

**174**

**8,746**

174

9,223

US$110,068,000

7.850%

March 6, 2007

**110**

**5,525**

138

7,320

US$  19,310,000

10.625%

May 15, 2007

**19**

**962**

21

1,105

US$112,168,000

9.250%

June 30, 2006

**–**

**–**

115

6,104

 

 

 

**US$****843**

**Php42,356**

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.  Inparticular, Smart paid an amount in cash of US$1.5 million, or Php84 millionand issued new debt of US$283.2 million, or Php15,854 million, at fair value ofPhp8,390 million, net of debt discount amounting to Php7,464 million.  As at September30, 2006, unamortized discount amounted to Php5,544 million.

 

Thebreakdown of the total amount of Smart debt issued to participating Piltelcreditors 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 Finnvera and Finnish Export Credit, plc, or FEC, as the lenderwith ABN AMRO Bank, Banque National de Paribas, Calyon, DBS Bank and SumitomoMitsui Banking Corporation as the Lead Arrangers.  The full amount of thefacility was drawn in November 22, 2004, of which US$73 million remainedoutstanding as at September 30, 2006.  The loan is payable over five years inten equal semi-annual payments starting May 2005 with final repayment inNovember 2009.  

 

OnJune 8, 2001, Smart signed its GSM Phase 5A financing comprised of US$195million loans, of which US$30 million is owed to Nordic Investment Bank, orNIB, US$15 million to Nederlandse Financierings-Maatschappij VoorOntwikkelingslanden N.V., or FMO, of the Netherlands and US$150 millionsupported by Finnvera.   The NIB loan balance of US$12.0 million was prepaid infull on December 8, 2005, and the FMO loan balance of US$4.09 million wasprepaid in full on March 1, 2006.

 

On August 8, 2005, Smart signed a US$30 millioncommercial facility with NIB to partly finance the related Phase 8 GSMequipment and services contracts.  The facility is a 5-year term loan payablesemi-annually in ten equal installments commencing six months from the firstdrawdown date at a floating rate of US$ LIBOR plus .815% margin per annum.  Thefacility was drawn on July 11, 2006 for the full amount of US$30 million at afloating interest of 6.445% (5.63% Libor + .815% per annum margin).  The firstinstallment payment will commence on January 11, 2007.  The US$ 30 millionremains outstanding as of September 30, 2006. 

 

OnAugust 10, 2005, Smart signed a loan facility for its GSM Phase 8 financing inthe amount of US$70 million.  The facility was awarded to the Bank of TokyoMitsubishi Ltd., Mizuho Corporate Bank Ltd, Standard Chartered Bank and SumitomoMitsui Banking Corporation as the Lead Arrangers, with FEC as the Lender.Smart opted to utilize only a total of US$67 million which was drawn inFebruary 15, 2006 and March 13, 2006 for US$10 million and US$57 millionrespectively.  The balance of US$3 million was cancelled.  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.  As at September 30, 2006, the US$59 million remainsoutstanding.

 

OnJuly 31, 2006, Smart signed a U.S. Dollar Term Loan Facility for US$44.2 millionto partly finance the related Phase 9 GSM equipment and services contracts.The Lender is FEC with ABN AMRO Bank N.V., Standard Chartered Bank and SumitomoMitsui Banking Corporation and Mizuho Corporate Bank, Ltd. as the LeadArrangers.  The facility is a 5-year term loan payable in 10 equal semi-annualinstallments commencing six months from the drawdown date at a CIRR Fixed rateof 4.05% per annum.  The facility will be drawn on November 10, 2006 for thefull amount of US$44 million.

* *

*OtherTerm Loan*

* *

On December 1, 2001, CyMed availed of 6-yearnon-interest bearing advances from certain officers of the company to fund itsoperating expenses which include salaries and other incidental expenses.  Theoutstanding balance of this loan as at September 30, 2006 amounted to Php46million which will mature on December 31, 2006.  SPi purchased its investmentin CyMed on August 2006.

* *

*Undrawn Facilities*

 

On August 14, 2006, Smart signed a Peso Term LoanFacility with Metropolitan Bank and Trust Company to finance the related Phase9 GSM facility for an amount of Php2.5 billion.  The facility is a 5 year loan payable in 18 equal consecutive quarterly installments commencingon the third quarter from the date of the first drawdown.  Interest rate isfloating at 3-month MART plus .75% per annum margin.

 

On October 16, 2006, Smart signed a U.S. Dollar TermLoan Facility with Metropolitan Bank and Trust Company to finance the relatedPhase 9 GSM Facility for an amount of US$50 million.  The facility is a 5 yearloan payable in 18 equal and consecutive quarterly installments commencing onthe third quarter from the date of the first drawdown.  Interest rate isfloating at 3-month LIBOR plus .75% per annum margin.

 

*Restructured Loans*

 

On June 4, 2001, Piltel completed the restructuring ofapproximately Php41 billion of indebtedness and other claims owed to banks,trade creditors, bondholders and preferred shareholders, representing 98% ofits total liabilities as at that date.

 

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’sresidual long-term debt to third parties consists of:

 

**Description**

**September 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

** **

(in millions)

**Restructured debts**

** **

** **

** **

** **

Philippine Pesos

** **

** **

** **

 

10 year Tranche B

** **

**Php136**

 

Php190

15 year Tranche C

** **

**132**

 

189

 

** **

**268**

 

379

U.S. Dollars

** **

** **

 

 

10 year Tranche B

**US$6**

**279**

US$8

400

15 year Tranche C

**5**

**270**

7

395

15 year Conversion Notes Facility

**55**

**2,770**

75

3,972

 

**US$****66**

**3,319**

US$90 

4,767

Total

** **

**3,587**

 

5,146

**Unrestructured debt**

** **

** **

 

 

U.S. Dollars

** **

** **

 

 

Convertible bonds

**US$1**

**46**

US$1

49

Total

** **

**3,633**

 

5,195

Less portion maturing within one year

** **

**3,633**

 

103

 

** **

**Php–**

 

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 September 30, 2006 and December 31, 2005, theremaining undrawn balance available under the PLDT LOS was US$50 million,approximately Php2,525 million and Php2,666 million, due to prior investmentsmade from March 23, 2000 to December 31, 2002 aggregating to US$100 millionthrough PLDT’s subscription 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 million toSmart and US$55 million to third party creditors), which was appliedproportionately to the various debt facilities as set out in the Intercreditor Agreement,or ICA, dated 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 ICA agreed to the amendment of Clause 25 of the ICA to allow the amendmentof any term of the MTI and the release and sale of certain properties or assetsfrom the security interests 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 MTI, pursuant to which Piltel is allowed to sell or dispose of certaincategories of assets or properties with the consent of the Majority BankCreditors, the Majority Trade Creditors and the Trustee, provided, however thatfor as long as Avenue Asia holds majority of Piltel’s Conversion Notes, theprior consent of Avenue Asia will be required for (i) any sale or dispositionof any of the real properties of Piltel, and (ii) any sale or disposition ofassets to Smart, PLDT or any of its affiliates.

 

On October 25, 2006, Piltel submitted to Metrobank, assecurity agent, a notice to voluntarily prepay its debts under the ICA.  The prepayment will be made on December 4, 2006, in the aggregate amount of US$233million of which US$161 million is owed to Smart and US$72 million to thirdparty creditors.  This would bring Pitel’s restructured debts to zero.

 

In anticipation of the full prepayment on December 4,2006, Piltel brought its long-term debts to their nominal amounts byrecognizing as expense the unamortized debt discount of Php763 million.

 

*Satellite**Acquisition Loans*

 

Mabuhay Satellite has an existing Credit Agreementwith the Export-Import Bank of the United States, or Ex-Im Bank, to finance aportion of the cost of purchasing the Agila II Satellite.  In 2004, Ex-Im Bankof the United States approved, in principle, the re-profiling of MabuhaySatellite’s US$42 million debt with them by extending the maturity of the loanby 11⁄2 years to July 15, 2007 and reducing the interest rate by 1% to 5.6%.  Therevised repayment terms have been approved by the majority of the localcreditor banks.  As at September 30, 2006, the remaining outstanding loanamounted to US$10 million (Php524 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 September 30,2006 had an aggregate stated value not exceeding US$11 million (Php554 million)in favor of U.S. Ex-Im Bank, as security under the Credit Agreement and a termloan to Mabuhay Satellite in the aggregate amount of US$34 million (Php1,721million), which will mature on various dates from 2006 to 2007. 

 

Mabuhay Satellite has constituted in favor of theBanks: (a) a first mortgage on its leasehold rights under a lease agreemententered into with the Subic Bay Metropolitan Authority and the components ofthe satellite system; (b) an assignment of its rights under its purchasecontract for the satellite system; (c) an assignment of its rights under thetransponder lease contracts to be entered into with its shareholders and otherparties and the revenues therefrom; and (d) an assignment of the applicableproceeds of insurance to be taken on the satellite system.

* *

Asat September 30, 2006, the Banks have approved Mabuhay’s request to extend thematurity of the loan under the Omnibus Agreement by two years to October 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.  All outstanding amounts related tothis loan were repaid in full on September 21, 2006.

 

*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 all outstanding amounts were repaid in full on June 13, 2006.

 

***Philippine Peso Debt:***

* *

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

* *

In connection with PLDT’s service improvement andexpansion programs, PLDT has entered into two loan agreements, pursuant to eachof which PLDT issued fixed rate corporate notes in three tranches.  Interest oneach tranche is payable semi-annually.

* *

Underthe first loan agreement, PLDT borrowed an aggregate amount of Php1,500 million, of which Php230million matured on November 11, 2002, Php500million matured on November 9, 2004 and Php770million 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.

* *

*TermLoans*

* *

*Secured**Term Loans*

* *

*Php150Million**Term Loan Facility*

* *

OnMarch 4, 2002, ePLDT entered into a three-year loan facility with PhilippineBank of Communications amounting to Php150 million.  The loan facility wasfully drawn on December 31, 2002 and payable in seven quarterly installments,with a grace period of one year, beginning year 2003.  The quarterly principalpayments of Php15 million started in June 2003 with a balloon payment of Php45million in March 2005.  Interest on this loan was equivalent to 91-day T-billrate plus 4% per annum payable quarterly in arrears.  The loan was secured byePLDT’s deed of assignment of receivables of a subsidiary from a foreigncustomer and an investment in an associate with an original cost of Php629million.  This loan was fully paid as at March 31, 2005.

* *

*Php100Million Term Loan Facility*

* *

OnMarch 15, 2004, ePLDT entered into a three-year term loan facility with AsiaUnited 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 be repaidin nine equal quarterly installments starting March 2005 with final repaymentin March 2007.  Interest on the loan is equivalent to 90-day PHIBOR plus 3% perannum payable quarterly in arrears.  The loan is secured by a Mortgage TrustIndenture Agreement, or MTIA, dated March 15, 2004, with Asia United Bank –Trust and Investments Group, on a parcel of land with a carrying value ofPhp279 million as at December 31, 2004.  As at September 30, 2006, theoutstanding balance of this loan amounted to Php22 million, of which Php11million will mature by the end of 2006 and the balance in March 2007.

* *

*Php149 Million Term Loan Facility*

* *

In January 2003, Vocativ, a wholly-owned call centersubsidiary of ePLDT, was granted a 5-year Php150 million term loan facility byAsia United Bank.  Pending completion of the required documentation, the bankhas extended the same amount as a bridge facility.  The bridge facility isrenewable every 90 days until such time that the term loan documentation iscompleted.  In July 2004, the said documentation has been completed.  Under thenew terms of the Loan, Vocativ agreed to pay the remaining principal of Php149million in 14 equal quarterly installments starting April 2006 with finalrepayment in July 2009.  Interest on the loan is equivalent to 90-day PHIBORplus 3% per annum payable quarterly in arrears.  The loan is secured by aMortgage Participation Certificate against the MTIA between ePLDT and AsiaUnited Bank Corporation – Trust and Investments Group dated March 15, 2004 on aparcel of land, which excludes the buildings and improvements.  In 2005,Vocativ partially prepaid the Loan amounting to Php40 million. In 2006, Vocativprepaid the remaining balance of Php89 million and Php20 million in January andApril, respectively.

 

*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 relevantmeasurement dates, principally at the end of each quarterly period.  We havecomplied with all of our maintenance financial ratios as required under ourloan covenants and other debt instruments.

 

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,the lowering of PLDT’s credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions.  Sinceapproximately 98% of 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’s debt instruments contain a number of othernegative covenants that, subject to certain exceptions and qualifications,restrict PLDT’s ability to take certain actions without lenders’ approval,including: (a) incurring additional indebtedness; (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, repurchasingor otherwise acquiring shares of PLDT’s capital stock; (g) disposing of all orsubstantially all of its assets or of assets in excess of specified thresholdsof its tangible net worth; (h) creating any lien or security interest; (i)permitting set-off against amounts owed to PLDT; (j) merging or consolidatingwith any other company; (k) entering into transactions with stockholders andaffiliates; and (l) entering into sale and leaseback transactions. 

 

Further,certain of PLDT’s debt instruments contain provisions wherein PLDT may berequired to repurchase or prepay certain indebtedness in case of change incontrol of PLDT.

 

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 toabove; (c) the occurrence of any material adverse change in circumstances thata lender 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 ofdefault, including the commencement of bankruptcy, insolvency, liquidation orwinding 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 includecompliance with a debt to equity ratio of not more than 1.50:1 and a debtservice coverage ratio of not less than 1.50:1.  Smart has maintainedcompliance with all of its financial covenants.  The agreements also containcustomary and other default provisions that permit the lender to accelerateamounts due under the loans or terminate their commitments to extend additionalfunds under the loans.  These default provisions include: (a) cross-defaultsand cross-accelerations that permit a lender to declare a default if Smart isin default under another loan agreement.  These cross-default provisions aretriggered upon a payment or other default permitting the acceleration of Smartdebt, whether or not the defaulted debt is accelerated; (b) failure by Smart tocomply with certain financial ratio covenants; (c) any reduction in PLDT’sownership of Smart’s shares below 51%; (d) any reduction in First Pacific’s andMetro Pacific Corporation’s collective direct and/or indirect ownership ofPLDT’s common stock below 17.5% of the total common stock outstanding; and (e)the occurrence of any material adverse change in circumstances that the lenderreasonably believes materially impairs Smart’s ability to perform itsobligations under its loan agreements.

 

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

 

TheCredit and Omnibus Agreements of Mabuhay Satellite impose 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 September 30, 2006, ePLDT was incompliance with all of its financial covenants.

 
****
**ObligationsUnder Capital Lease**

 

Thefuture minimum payments for capitalized leases are as follows as at September30, 2006:

 

**Year**

**(Unaudited)**

 

(in million pesos)

2006

745

2007

380

2008

36

2009

12

2010

8

2011 and onwards

436

Total minimum lease payments

1,617

Less amount representing interest

556

Present value of net minimum lease payments

1,061

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

859

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

 202

 

*Municipal Telephone Projects*

 

In1993, 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 September 30,2006, PLDT’s aggregate remaining obligation under this agreement wasapproximately Php858 million.  In case of cancellation, PLDT is liable to payPhp100 million under 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 to theDOTC the quarterly installments under the lease agreement.  Due to the failureof 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 September 30, 2006, the net bookvalue of the telecommunications system in Bohol, including PLDT’s additionalcapital expenditure relating to the telecommunications system, andcorresponding capital lease obligation amounted to Php27 million and Php735million, respectively.

 

Piltel alsoentered into an agreement for the financial lease of the PalawanTelecommunications System of the MunicipalTelephone Public Office with the DOTC on September 3, 1994.  The MunicipalTelephone Public Office Contract is a 30-year contract for Piltel to leasefacilities for public call office stations in the Palawan area, with revenuesgoing to Piltel.  In consideration, Piltel pays the DOTC an escalating annuallease fee.  As at September 30, 2006, Piltel’s aggregate remaining obligationunder this agreement was approximately Php477 million.

 

*Other Long-term Capital Lease Obligations*

 

The PLDT Group has various long-term lease contractsfor a period of three years covering various office equipment.  In particular, PLDT,Smart and ePLDT have capital lease obligations aggregating Php282 million as atSeptember 30, 2006 in respect of office equipment.

 

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:

 

 

**September 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

**(224)**

**(4,630)**

**(5,543)**

**(10,397)**

(2,083)

(507)

–

(2,590)

Accretion

**12**

**445**

**282**

**739**

252

782

451

1,485

Revaluation

**–**

**(207)**

**(120)**

**(327)**

–

(394)

(1,142)

(1,536)

Balance at end of period

**60**

**1,929**

**–**

**1,989**

272

6,321

5,381

11,974

 

PLDThad issued 3 million shares of Series V Convertible Preferred Stock, 5 millionshares of Series VI Convertible Preferred Stock and 4 million shares of SeriesVII Convertible Preferred Stock in exchange for Series K Class I ConvertiblePreferred Stock of Piltel, pursuant to the debt restructuring plan of Pilteladopted in June 2001.  Shares of Series V, VI and VII Convertible PreferredStock are entitled to receive annual dividends of Php18.70 per share, US$0.397per share and JP¥40.7189 per share, respectively.  Each share of Series V, VIand VII Convertible Preferred Stock is convertible at any time at the option ofthe holder into one PLDT common share.  On the date immediately following theseventh anniversary of the issue date of the Series V and Series VI ConvertiblePreferred Stock and on the eighth anniversary of the issue date of the SeriesVII Convertible Preferred Stock, the remaining outstanding shares under theseseries will be mandatorily converted into PLDT common shares.  Under a putoption exercisable for 30 days, holders of common shares received on mandatoryconversion of the Series V, VI and VII Convertible Preferred Stock will be ableto require PLDT to purchase such PLDT common shares for Php1,700 per share,US$36.132 per share, and JPY4,071.89 per share, respectively.

 

The Series V Convertible Preferred Stock wasdesignated as compound instrument consisting of liability and equitycomponents.  The fair value of the Convertible Preferred Stock was determinedat issue date, of which the fair value of the liability component as at date ofissuance is recorded as “Preferred Stock Subject to Mandatory Redemption” andis included under the “Interest-bearing Financial Liabilities” account in theconsolidated balance sheets.  The residual amount was assigned as the equitycomponent.

 

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*.  Theresidual amount was assigned as liability components and recorded as “PreferredStock Subject to Mandatory Redemption” and is included under the“Interest-bearing Financial Liabilities” account in the consolidated balancesheets.

 

Thedifference between the amount designated as liability components of the SeriesV, VI and VII Convertible Preferred Stock at issue date and the aggregateredemption value is accreted over the period up to the put option date usingthe effective interest rate method.  Accretions added to “Preferred StockSubject to Mandatory Redemption” and charged to interest as at September 30,2006 and 2005 amounted to Php739 million and Php818 million, respectively.

 

“PreferredStock Subject to Mandatory Redemption” amounted to Php1,989 million andPhp11,974 million as at September 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 September 30, 2006 andDecember 31, 2005, 10,520,754 shares and 3,376,743 shares, respectively, of theConvertible Preferred Stock have been converted into PLDT common shares.  On August 18, 2006, all 3,842,000shares of Series VII Convertible Preferred Stock have been converted into PLDTcommon shares.  The outstanding shares of Series V and VI ConvertiblePreferred Stock as at September 30, 2006 were 46,047 and 1,291,743,respectively.  The aggregate redemption value of the outstanding Series V andVI Convertible Preferred Stock amounted to Php2,424 million and Php15,890million as at September 30, 2006 and December 31, 2005, respectively.

 

Thecorresponding dividends on these shares charged as interest expense amounted toPhp113 million and Php196 million for the nine months ended September 30, 2006and 2005, respectively.

 

**NotesPayable**

 

In2006, SPi obtained unsecured dollar-denominated short-term notes payable from variouslocal commercial banks amounting to US$3.7 million.  Interest on the notesrange from 7.4% to 9.2% of the outstanding balance per annum and the notes arepayable within an average of 150 days from availment date.  The outstandingbalance of Php188 million as at September 30, 2006 will mature in various datesfrom October 2006 to February 2007.

 

 

 

**18. Other Noncurrent Liabilities**

 

This account consists of:

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Accrual of capital expenditures under long-term financing

**5,057**

 

5,769

Asset retirement obligations (Note 8)

**784**

 

752

Prepayments received under receivable purchase facility (Note 14)

**232**

 

976

Unearned revenues

**84**

 

71

Others

**6**

 

32

 

**6,163**

 

7,600

 

 

 

**19. Accrued Expenses and Other CurrentLiabilities**

 

This account consists of:

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Accrued employee benefits (Note 21)

**7,555**

 

1,760

Accrued utilities and related expenses

**6,868**

 

5,559

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

**2,371**

 

2,003

Accrued taxes and related expenses

**838**

 

760

Payable in installment purchase of equity investment

**–**

 

1,278

Others

**893**

 

1,946

 

**18,525**

 

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 Service Provider,or Founder NSP, Air Time Purchase Agreement with PT Asia Cellular Satellite, asamended in December 1998 and as assigned and transferred to AIL, under whichPLDT 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 13,750 satellitephone units in 2003 at US$395 F.O.B. per unit, subject to quarterly priceadjustments.  The parties to the Standstill Agreement also agreed to negotiatein good faith and use their best efforts to reach an agreement on a revised AirTime Purchase Agreement before November 15, 2003 that would cover, among otherthings, the amended minimum and supplemental air time payment provisionssubject 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 September 30,2006, PLDT’s outstanding payables under the original Air Time PurchaseAgreement was Php3,924 million.  See *Note 22 – Contractual Obligations andCommercial Commitments* and *Note 23 – Provisions and Contingencies*forfurther discussion.

 

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 datedDecember 29, 1998, PT Asia Cellular Satellite agreed to assign and transfer toAIL of PT Asia Cellular Satellite’s rights under the Founder NSP Air TimePurchase Agreement 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 various banks.

 

On September 30, 2002, PT Asia Cellular Satellite,AIL, as guarantor, P.T. Bank Internasional Indonesia, as security agent, andvarious other banks signed a Rescheduling Agreement, which amended the terms ofthe Amended and Restated Credit Agreement dated December 29, 1998, moving theprincipal repayment dates to agreed periods with the final maturity date onJanuary 30, 2012.

 

*b.   Transactions with MajorStockholders, Directors and Officers*

 

Transactions to which PLDT or any of its subsidiariesis a party, in which a director or key officer or owner of more than 10% of theoutstanding common stock of PLDT, or any member of the immediate family of adirector or key officer or owner of more than 10% of the outstanding commonstock of PLDT had a direct or indirect material interest, as at September 30,2006 (unaudited) and December 31, 2005 (audited) and for the nine months endedSeptember 30, 2006 and 2005 (unaudited) are as follows:

 

*1.   Cooperation Agreement with theFirst Pacific and certain affiliates, or FP Parties, NTT Communications andDoCoMo*

 

In connection with the transfer by NTT Communicationsof approximately 12.6 million shares of PLDT’s common stock to DoCoMo pursuantto a Stock Sale and Purchase Agreement dated January 31, 2006 between NTTCommunications and DoCoMo, First Pacific and certain affiliates, or the FPParties, NTT Communications and DoCoMo entered into a Cooperation Agreement,dated January 31, 2006.  Under the Cooperation Agreement, the relevant partiesextended certain rights of NTT Communications under the Stock Purchase andStrategic Investment Agreement dated September 28, 1999, as amended and theShareholders 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*

 

TheIntegrated i-mode Service Package Agreement was entered into by Smart andDoCoMo on February 15, 2006, under which DoCoMo agreed to grant Smart, on anexclusive basis within the territory of the Philippines for a period of fiveyears, an integrated i-mode service package including non-transferable licenseto use the licensed materials and the i-mode brand, as well as implementationsupport and assistance and post-commercial launch support from DoCoMo. Pursuantto this agreement, Smart is required to pay an initial license fee and runningroyalty fees based on the revenue arising from i-mode subscription fees anddata traffic.  The initial license fee paid as at September 30, 2006 amountedto US$1 million or Php53 million.

 

*3.   Advisory Services Agreement between DoCoMo andPLDT*

 

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 theservices of certain key personnel in connection with certain aspects of thebusiness of PLDT and Smart.  Also, the agreement governs the terms andconditions of the appointments and the corresponding fees related thereto.

 

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

 

PLDT is a party to the following agreements with NTTCommunications and/or its affiliates:

 

•        *Advisory Services Agreement*.   On March 24, 2000, PLDT entered into an agreementwith NTT Communications, as amended on March 31, 2003 and March 31, 2005, underwhich NTT Communications provides PLDT with technical, marketing and otherconsulting services for various business areas of PLDT starting April 1, 2000;

 

•        *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 for conventionalinternational telecommunications services to enhance their respectiveinternational businesses.

 

Total fees under these agreements amounted to Php144million and Php185 million for the nine months ended September 30, 2006 and2005, respectively.  As at September 30, 2006 and December 31, 2005,outstanding obligations of PLDT amounted to Php19 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.  InJanuary 2004, the agreement was amended, reducing the technical service fees tobe paid by Smart to ALBV to 1% of net revenues effective January 1, 2004.  OnFebruary 18, 2004, Smart and ALBV entered into a renewal of the technicalservice agreement extending the effectivity of the terms of the agreement toFebruary 23, 2008.  Furthermore, in view of the acquisition by Smart of PiltelSeries K Class I Convertible Preferred Stock held by PLDT, the parties agreedto make the consolidated net revenues of Smart the basis for the computation ofthe 1% royalty payable by Smart to ALBV, effective January 1, 2005.

 

Smart also has an existing Services Agreement withALBV for a period of 25 years starting January 1, 1999, which shallautomatically expire unless renewed by mutual agreement of both parties.  Underthe agreement, ALBV provides advice and assistance to Smart in sourcing capitalequipment and negotiating with international suppliers, arranging internationalfinancing and other services therein consistent with and for the furtherance ofthe objectives of the services.  Service agreement fees were paid for the whole25-year period.

 

ALBV is a subsidiary of the First Pacific Group.

 

Total fees under these agreements amounted to Php398million and Php383 million for the nine months ended September 30, 2006 and2005, respectively.  Outstanding obligations of Smart under these agreementsamounted to Php154 million and Php194 million as at September 30, 2006 andDecember 31, 2005, respectively.

 

*6.   Agreements relating to insurance companies.*  Gotuaco del Rosario and Associates, or Gotuaco, actsas 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 Php283 million and Php386 millionfor the nine months ended September 30, 2006 and 2005, respectively.  Twodirectors of PLDT have a direct/indirect interests in or serve as adirector/officer of Gotuaco and Malayan.

 

***Compensation of KeyManagement Personnel of the PLDT Group***

 

PLDT Group’s compensation of key management personnelby benefit type follows:

 

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Short-term employee benefits

**464**

 

422

Share-based payments (Note 21)

**812**

 

859

Post-employment benefits

**26**

 

22

 

**1,302**

 

1,303

 

Each of the directors, including the members of theadvisory board of PLDT, is entitled to a director’s fee in the amount ofPhp125,000 for each meeting of the board attended, except Manuel V. Pangilinan,who has waived his right to receive a director’s fee.  Each of the members oradvisors of the audit, executive compensation, governance and nomination andfinance committees is entitled to a fee in the amount of Php50,000 for eachcommittee 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, approvedthe establishment of an ESOP and the amendment of the Seventh Article of theArticles of Incorporation of PLDT denying the pre-emptive right of holders ofcommon stock to subscribe for any issue of up to 1,289,745 common stockpursuant to the ESOP.  The ESOP covers management executives, which includeofficers with rank of Vice President up to the President, executives with therank of Manager up to Assistant Vice President, and advisors/consultantsengaged by PLDT.  The ESOP seeks to motivate option holders to achieve PLDT’sgoals, reward option holders for the creation of shareholder value, align theoption holders’ interests with those of the stockholders of PLDT and retain theoption holders to serve the long-term interests of PLDT.  The ESOP isadministered by the Executive Compensation Committee of the Board ofDirectors.  About 1.3 million shares of common stock of PLDT had been reservedas underlying shares of options under the ESOP in 1999.

 

Movements in the number of stock options outstandingunder the ESOP are as follows:

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

Balance at beginning of period

**197,500**

 

536,589

Exercised shares*

**(70,709)**

 

(335,605)

Cancellations/forfeitures

**–**

 

(3,484)

Balance at end of period

**126,791**

 

197,500

 

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

 

As at September30, 2006, options covering a total of 743,059 shares had been exercised bycertain 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 interest rate,expected life of option, exercise share price of Php814 and a weighted averageshare price of Php870 for the 1999 Grant and of Php315 for the 2002 Grant as atvaluation date.  Total fair value of shares granted amounted to Php359 millionas at September 30, 2006 and December 31, 2005.  There was no fair value ofoptions recognized as an expense for the nine months ended September 30, 2006and 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 was originallya four-year cash-settled share based plan covering the period January 1, 2004to December 31, 2007.  The payment was intended to be made at the end of theplan period (without interim payments) contingent upon the achievement of anapproved target increase in PLDT’s common share price by the end of the planperiod and a cumulative consolidated net income target for the plan period.The target increase in the PLDT base share price, which was the average of theclosing prices of PLDT shares ten trading days before or after December 31,2003, was approximately 15% per annum compounded for the plan period.  

 

On August 28, 2006,PLDT’s Board of Directors approved, in principle, the broad outline of the PLDTGroup’s strategic plans for 2007 to 2009 focusing on the development of newrevenue streams to drive future growth while protecting the existing corecommunications business.  To ensure the proper execution of the three-yearplan, particularly with respect to the manpower resources being committed tosuch plans, a new LTIP, upon endorsement of the Executive CompensationCommittee, was approved by the Board to cover the 2007-2009 plan.  As a resultof the establishment of the new LTIP, the Board also approved the early vestingof the current LTIP by the end of 2006.

 

The fair value of theLTIP was estimated using an option pricing model, which considered annual stockvolatility, risk-free interest rate, remaining life of option and share pricePhp2,270.00 as at September 30, 2006.  Incentive cost per share as at September30, 2006 and December 31, 2005 amounted to Php1,344.74 and Php1,044.01,respectively.  The fair value of the LTIP recognized as an expense for the ninemonths ended September 30, 2006 and 2005 amounted to Php2,677 million andPhp866 million, respectively.

 

Movements in the numberof share appreciation rights outstanding under the LTIP are as follows:

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

Balance at beginning of period

**3,884,406**

 

3,685,959

Cancellations/forfeitures

**(117,007)**

 

(294,982)

Awards

**–**

 

493,429

Balance at end of period

**3,767,399**

 

3,884,406

 

***Pension***

 

*Defined Benefit Plans*

 

We have defined benefit pension plans, coveringsubstantially our permanent and regular employees, excluding those of Smart andits subsidiary, I-Contacts, Inc., which require contributions to be made toseparate administrative funds.

 

Our actuarial valuationis done on an annual basis.  Based on the latest actuarial valuation, theactual present value of accrued liabilities, net of pension cost and averageassumptions 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

677

Contributions

(59)

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

2,893

 

Net pension cost was computed as follows:

 

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Components of net periodic benefit cost:

** **

 

 

Service cost

**376**

 

337

Interest cost

**670**

 

517

Actual return on plan assets

**(406)**

 

(357)

Amortization of unrecognized net transition obligation

**37**

 

42

Recognition of transitional liability

**–**

 

3

Net periodic benefit cost

**677**

 

542

 

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

 

Discount rate

** **

12%

Rate of increase in compensation

** **

9%

Expected rate of return on plan assets

** **

10%

 

As at September 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 Php1,955 million,which represent about 32% of said beneficial trust fund’s net assets availablefor plan benefits.

*** ***

TheBoard of Trustees of the beneficial trust fund adopts an investment approach ofmixed equity and fixed income investments to maximize the long-term return ofplan assets.  The investment portfolio has been structured to achieve theobjective of regular income with capital growth and out-performance ofbenchmarks.  A majority of the investment portfolio consists of fixed incomedebt securities and various equity securities while the remaining portionconsists of multi-currency investments.

 

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

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Unaudited)

Investments in equity securities

**45%**

 

44%

Investments in debt and fixed income securities

**29%**

 

28%

Investments in real estate

**11%**

 

13%

Investments in mutual funds

**8%**

 

7%

Investments in temporary placements

**7%**

 

8%

 

**100%**

 

100%

 

PLDTexpects to make approximately Php558 million of cash contributions to its pensionplan 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.

 

The allocation of the fair value of plan assets for Smartas at September 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 Php117 million of cash contributions to its pensionplan in 2006.

 

*Pension Benefit Cost*

 

Total pension benefit cost follows:

 

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Expense recognized for defined benefit plans

**677**

 

542

Expense recognized for defined contribution plans

**83**

 

50

Total

**760**

 

592

 

 

 

**22. Contractual Obligations and CommercialCommitments**

 

***Contractual Obligations***

 

The following table discloses our unauditedconsolidated contractual obligations outstanding as at September 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)

89,985

19,625

22,539

6,107

41,714

Long-term lease obligations: 

 

 

 

 

 

Operating lease

3,553

607

1,093

861

992

Capital lease

1,617

1,024

148

18

427

Unconditional purchase obligations(2)

10,327

5,051

2,010

2,010

1,256

Other long-term obligations

2,424

–

2,424

–

–

**Total contractual obligations**

**107,906**

**26,307**

**28,214**

**8,996**

**44,389**

 

*(1)**Beforededucting unamortized debt discount and debt issuance costs.*

*(2)**Basedon the original 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 hasexisting Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento 25 years expiring at various dates.  As at September 30, 2006, PLDT’saggregate remaining obligation under these contracts amounted to approximately Php9million.

 

*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 September 30, 2006, PLDT’s aggregateremaining obligation under this agreement was approximately Php10 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 Php3,152 million as at September30, 2006 in respect of office and cell site rentals with over 3,000 lessorsnationwide, PLDT has lease obligations aggregating Php102 million as at September30, 2006, ePLDT has lease obligations aggregating Php272 million as at September30, 2006 in respect of certain office space rentals and PLDT Global has lease obligationsaggregating Php8 million as at September 30, 2006 in respect of certain officespace 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 billed revenue is less than US$45 million in anygiven year, the Air Time Purchase Agreement also states that PLDT has to makesupplemental air time purchase payments not to exceed US$15 million per yearduring the ten-year term.

 

PLDTand the other founder NSPs are endeavoring to amend the Air Time Purchase Agreementdue to the occurrence of partial satellite loss, changes in the primarybusiness of ACeS and other events affecting the business.

 

InMarch 2003, PLDT, together with the other founder NSPs, entered into aStandstill Agreement with AIL suspending the application and enforcement of theminimum and supplemental air time payments under the original Air Time PurchaseAgreement.  The parties agreed that AIL shall provide PLDT and the otherfounder shareholders, with unlimited use of air time for the year 2003 inexchange for a fixed fee in the amount of US$3.8 million for PLDT.  Moreover,PLDT was also obliged to purchase from AIL 13,750 satellite phone units in 2003at US$395 F.O.B. per unit, subject to quarterly price adjustments.  The partiesto the Standstill Agreement also agreed to negotiate in good faith and usetheir best efforts to reach an agreement on a revised Air Time PurchaseAgreement before November 15, 2003 that would cover, among other things, theamended minimum and supplemental air time payment provisions subject to theapproval of AIL’s creditors.

 

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 –Related Party Transactions* and *Note 23 – Provisions and Contingencies*forfurther details relating to the Air Time Purchase Agreement with AIL.

 

Asat September 30, 2006, PLDT’s aggregateremaining minimum obligation under the original Air Time Purchase Agreement wasapproximately Php10,327 million.

 

*OtherLong-term Obligations*

 

*MandatoryConversion and Purchase of Shares*.As discussed in *Note 17 – Interest-bearing Financial Liabilities*, as at September30, 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.

 

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 30days, holders of common shares received on mandatory conversion of the SeriesV, VI and VII Convertible Preferred Stocks will be able to require PLDT topurchase such PLDT common shares for Php1,700 per share, US$36.132 per share,and JPY4,071.89 per share, respectively.

 

Asat September 30, 2006, 2,675,393 shares of Series V Convertible PreferredStock, 4,003,361 shares of Series VI Convertible Preferred Stock and 3,842,000shares of Series VII Convertible Preferred Stock had been converted to PLDTcommon shares.  As at September 30, 2006, 46,047 shares of Series V and1,291,743 shares of Series VI Convertible Preferred Stocks remainedoutstanding.  The aggregate value of the put option based on outstanding sharesas at September 30, 2006 was Php2,424 million which is puttable on June 4,2008, if all of the outstanding shares of Series V and VI Convertible PreferredStocks were mandatorily converted and all the underlying common shares were putto PLDT.  The market value of the underlying shares of common stock wasPhp3,037 million, based on the market price of PLDT common shares of Php2,270per share as at September 30, 2006.

 

***Commercial Commitments***

 

Asat September 30, 2006, our outstanding commercial commitments, in the form ofletters of credit, amounted to Php1,361 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 September 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 September 30, 2006, PLDT hadpaid, since 1994, a total amount of Php2,219 million in SRF, of which Php1,956million 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.

 

*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.  

 

Following a decision of the Supreme Court on March 25, 2003, a judgmentin the amount of Php4 million against PLDT involving the City of Davao became final and executory on April 9, 2003, pursuant to which PLDT was declared notexempt from the local franchise tax.  Pursuant to the said decision, PLDT hasvoluntarily paid the total amount of Php15 million for the period from the fourthquarter of 1998 until December 31, 2003, which includes the Php4 millionsubject of the case.  The said amount constitutes only the basic franchise taxdue for the said period, excluding surcharges and interest  which PLDT isasking the City of Davao, through the local council, to waive.  PLDT believes,based on the opinion of its legal counsel, that PLDT is not liable forsurcharges and interest considering that the legal issue involved was adifficult one and PLDT’s non-payment of the said taxes was made in good faith.On August 2, 2005, the local Sanggunian passed a resolution denying PLDT’srequest for abatement of surcharges and penalties and directing the citytreasurer to update PLDT’s liability and immediately collect the same.Accordingly, on August 26, 2005, the city treasurer issued an assessment toPLDT in the amount of Php12 million.  In order to maintain and preserve itsgood standing and relationship with the City of Davao, PLDT has paid thesurcharges and penalties as at December 31, 2005.

 

Although PLDT believes that it isnot liable to pay local franchise and business taxes, PLDT has entered intocompromise settlements with several LGUs, including the City of Makati, in order to maintain and preserve its good standing and relationship with theseLGUs.  Under these compromise settlements, which have mostly been approved bythe relevant courts, PLDT has paid a total amount of Php583 million for localfranchise tax covering prior periods up to the end of 2005 as at September 30,2006.

 

PLDT nolonger had contested assessments from LGUs for franchise taxes as at September30, 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, paid for local franchise and business taxes from certain cities andprovinces in the aggregate amount of Php313 million, which Smart continues tocontest.  Smart believes, based on the opinion of its legal counsel, that Smartis not liable to pay the local franchise and business taxes by virtue of (i)the opinion issued by the BLGF dated August 13, 1998; and (ii) Smart’sexemption under its legislative franchise which took effect after the effectivedate of R.A. No. 7160.

 

Smart was declared exempt from payment of local franchise taxto the City of Makati in a decision dated August 3, 2004 by the RegionalTrial Court of Makati.  The City of Makati filed a Motion for Extension to filea Petition for Review with the Court of Appeals.  However, on June 9, 2005, theCourt 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 filed an appeal directly with the Supreme Court which remains pending.

 

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

 

Piltelreceived the following 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

 

OnDecember 12, 2005, Piltel filed a collective application for a compromisesettlement with the BIR for the deficiency tax assessments arising from taxableyears 1998, 1999 and 2001, citing “reasonable doubt as to the validity of thetax assessments” as a basis.  The prescribed minimum percentage of compromisesettlement for such basis is 40% of the basic assessed tax.

 

On January27, 2006, Piltel received the favorable recommendation and approval from theBIR on the said application for a compromise settlement. On January 31, 2006,Piltel settled the total amount of Php114 million, which is equivalent to 40%of the basic taxes per final assessment notices received, to effect theimmediate cancellation of the tax assessments.  On February 24, 2006, the BIRaccepted Piltel’s application for compromise settlement of income tax and VATfor the years 1998 and 1999 and income taxes and VAT for the year 2001, andaccordingly, issued a Certificate of Availment on the said date.

 

*EnhancedVoluntary Assessment Program, or EVAP, Availment*

 

In2005, the BIR launched a program called EVAP, which grants taxpayers, whoavailed of the program, the privilege of last priority in audit.  The programcovers all types of internal revenue taxes which can be availed of on a per taxtype basis and required the payment of a certain percentage increase in thesaid tax compared with the base year or the established fixed minimum EVAPpayment, 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.

 

On theother 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.  OnAugust 2, 2006, Smart received its EVAP Certificate of Qualification, or CQ, forthe privilege of last priority in audit covering the abovementioned taxes fortaxable year 2002.  Both companies still await the issuance of the CQ from theBIR for taxable years 2003 and 2004.

 

Withthe exception of Subic Telecom whose EVAP CQ was issued on September 13, 2006,PLDT and these other subsidiaries are awaiting for the EVAP CQ to be issued bythe BIR.

 

*AirTime Purchase Agreement with AIL*

 

InMarch 1997, PLDT entered into a Founder NSP Air Time Purchase Agreement with PTAsia Cellular Satellite as amended in December 1998 and as assigned andtransferred to AIL, under which PLDT was granted the exclusive right to sellACeS services in the Philippines.  The Air Time Purchase Agreement requiredPLDT to purchase from PT Asia Cellular Satellite at least US$5 million worth ofair time annually over ten years, commencing on January 1, 2002, the purporteddate of the start of commercial operations, and to make supplemental air timepurchase payments not to exceed US$15 million per year during the ten-year termin the event revenues generated are less than US$45 million in any given year.Under the Air Time Purchase Agreement, the air time payment obligations remainin effect 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 atSeptember 30, 2006, PLDT’s outstanding payables under the original Air TimePurchase Agreement were approximately Php3,924 million.  Negotiations arecontinuing with the relevant parties towards an amicable settlement of thismatter.

 

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 September 30, 2006, PLDT’s aggregate remaining minimum obligation under theoriginal Air Time Purchase Agreement was approximately Php10,327 million.

 

We made a reasonable estimate of the amount necessaryin the event such obligation would be settled and have made the appropriateprovisions in our unaudited consolidated financial statements as at September30, 2006 with due consideration of AIL’s existing indebtedness and of PLDT’sshare 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 September 30, 2006 andDecember 31, 2005.  There are no material unrecognized financial assets andliabilities as at September 30, 2006 and December 31, 2005.

 

** **

**Carrying Value**

**Fair Value**

** **

**September 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

**September 30, 2006 (Unaudited)**

December 31, 2005 (Audited)

 

(in million pesos)

**Noncurrent Financial Assets**

** **

 

 

 

Investments-available-for-sale

**113**

109

**113**

109

Derivative assets

**711**

2,648

**711**

2,648

Notes receivable

**346**

346

**346**

346

Total noncurrent financial assets

**1,170**

3,103

**1,170**

3,103

**Current Financial Assets**

** **

 

** **

 

Cash and cash equivalents

**18,664**

30,064

**18,664**

30,064

Short-term investments

**2,716**

2,746

**2,716**

2,746

Trade and other receivables

**11,953**

7,113

**11,953**

7,113

Derivative assets

**44**

37

**44**

37

Total current financial assets

**33,377**

39,960

**33,377**

39,960

**Total Financial Assets**

**34,547**

43,063

**34,547**

43,063

** **

** **

 

** **

 

**Noncurrent Financial Liabilities**

** **

 

** **

 

Long-term debt - net of current portion*

**64,253**

84,860

**70,937**

92,811

Obligations under capital lease*

**202**

381

**202**

381

Preferred stock subject to mandatory redemption*

**1,989**

11,974

**2,238**

14,053

Derivative liabilities

**5,739**

5,777

**5,739**

5,777

Total noncurrent financial liabilities

**72,183**

102,992

**79,116**

113,022

**Current Financial Liabilities**

** **

 

** **

 

Accounts payable

**16,277**

15,482

**16,277**

15,482

Notes payable

**188**

–

**188**

–

Derivative liabilities

**91**

192

**91**

192

Current portion of long-term debt*

**19,465**

18,684

**20,335**

19,435

Obligations under capital lease*

**859**

717

**859**

717

Total current financial liabilities

**36,880**

35,075

**37,750**

35,826

**Total Financial Liabilities**

**109,063**

138,067

**116,866**

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.

 

*Foreign currency and interest rate swaps:*  The fair values werecomputed as the present value of estimated future cash flows.

 

*Bifurcated equity call options:*The fair values were computedusing an option pricing model.

 

Due to the short-term nature of the transactions, the fair value of cashand cash equivalents, short-term investments, trade and other receivables,notes payable and accounts payable approximate the carrying amounts as of thebalance sheet date.

 

*Financial assets and liabilities carried at amortized cost*

 

Unamortized debt discount, representing debt issuance cost and anydifference between the fair value of consideration given or received on initialrecognition, included in following financial liabilities amounted to Php7,258million and Php13,347 million as at September 30, 2006 and December 31, 2005,respectively, see *Note 17 – Interest-bearing Financial Liabilities*.

* *

*Financial assets and liabilities carried at fair value*

 

The following financial assets and liabilities were carried at fair valueas at September 30, 2006 and December 31, 2005.

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Investments-available-for-sale

**113**

 

109

Derivative instruments

**(5,075)**

 

(3,284)

 

**(4,962)**

 

(3,175)

 

*DerivativeFinancial Instruments*

 

Our derivative financial instruments are accounted for as either cashflow hedges or transactions not designated as hedges.  Cash flow hedges referto those transactions that hedge our exposure to variability in cash flowsattributable to a particular risk associated with a recognized asset orliability. Changes in the fair value of these instruments representingeffective hedges are recognized as cumulative translation adjustments in equityuntil the hedged item is recognized in earnings.  For transactions that are notdesignated as hedges, any gains or losses arising from the changes in fairvalue are recognized directly to income for the period.

 

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

 

** **

**September 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**

**(Php1,703)**

US$300

Php417

 

2012

**250**

**(1,846)**

250

(428)

 

** **

** **

 

 

Long-term foreign currency options

2009

**175**

**(863)**

175

301

 

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Long-term foreign currency options

**175**(1)

**178**

175(1)

(270)

 

** **

** **

 

 

Short-term currency options

**US$7**

**(6)**

JPY151

(2)

 

** **

** **

 

 

Interest rate swap

**US$63**

**(572)**

US$125

(1,569)

 

** **

** **

 

 

Forward foreign exchange contracts

**US$143**(2)

**(53)**

220

(169)

 

**–**

**–**

JPY1,282

7

 

** **

** **

 

 

Bifurcated equity call options

**1 share**

**(253)**

8 shares

(1,597)

 

** **

**(Php5,118)**

 

(Php3,310)

***Smart***

 

** **

 

* *

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Bifurcated embedded derivatives

**US$1**

**43**

US$9

26

Net liabilities

** **

**(Php5,075****)**

 

(Php3,284)

 

*(1)**Non-hedged portion of 2009 long-term foreigncurrency options based on the same notional amount as the hedged portion.*

*(2)**Includes the forward leg of the short-term currencyoptions.*

* *

 

 

**September 30,  2006 (Unaudited)**

 

December 31, 2005 (Audited)

 

(in million pesos)

Presented as:

** **

 

 

Noncurrent assets

**711**

 

2,648

Current assets

**44**

 

37

Noncurrent liabilities

**(5,739)**

 

(5,777)

Current liabilities

**(91)**

 

(192)

Net liabilities

**(5,075)**

 

(3,284)

 

Cumulative translation adjustments as at September30, 2006 and December 31, 2005 consists of:

 

 

**September 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

**810**

 

(427)

Currency translation differences

**(69)**

 

(62)

Net gain on available-for-sale financial assets

**5**

 

4

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

**2,039**

 

2,390

Net loss on cash flow hedges

**(4,711)**

 

(1,014)

 

**(1,926)**

 

 891

Cumulative translation adjustments at end of period

**(673)**

 

1,253

 

Analysis of gain on derivative transactions forthe nine months ended September 30, 2006 and 2005 are as follows:

 

 

**Nine Months Ended September 30,**

 

**2006**

 

2005

 

(Unaudited)

 

(in million pesos)

Net mark-to-market loss at end of period

**(5,075)**

 

(2,271)

Net mark-to-market loss at beginning of period

**(3,284)**

 

(2,965)

Net change

**(1,791)**

 

 694

Net loss charged to cumulative translation adjustments

**4,711**

 

152

Settlements, accretion and conversion

**(3,071)**

 

(409)

Net gain (loss) on derivative transactions

**(151)**

 

 437

 

***PLDT***

*** ***

***CashFlow Hedges***

 

*Long-term Currency Swaps*

*** ***

PLDT entered into long-term principal-only currency swap agreements withvarious foreign counterparties to hedge the currency risk on its fixed ratenotes maturing in 2009, 2012 and 2017.  As at September 30, 2006 and December31, 2005, these long-term currency swaps have an aggregate notional amount ofUS$550 million.  Under the swaps, PLDT effectively exchanges the principal ofits U.S. dollar-denominated fixed rate notes into peso-denominated loanexposures at agreed swap exchange rates.  The agreed swap exchange rates arereset to the lowest U.S. dollar/Philippine peso spot exchange rate during theterm of the swaps, subject to a minimum exchange rate.  In March and April2004, PLDT entered into amendments to keep the lowest reset exchange rate andunwind the downward resettable feature of US$550 million of its long-termprincipal-only currency swap agreements in order to lower the running hedgingcost of the swaps.  As at September 30, 2006 and December 31, 2005, theoutstanding swap contracts have an agreed average swap exchange rate of Php50.76.

 

In order to manage hedge costs, these swaps included a credit-linkagefeature with PLDT as the reference entity.  The specified credit events includebankruptcy, failure to pay, obligation acceleration, moratorium/repudiation,and restructuring of PLDT bonds or all or substantially all of PLDT’sobligations.  Upon the occurrence of any of these credit events, subject to agreedthreshold amounts where applicable, the obligations to both PLDT and itscounterparty under the swap contracts terminate without further settlements toeither party, including any mark-to-market value of the swaps.  As at September30, 2006 and December 31, 2005, US$725 million of PLDT’s long-term currencyswaps/options have been structured to include credit-linkage with PLDT as thereference entity.  The semi-annual fixed or floating swap cost payments thatPLDT is required to make to its counterparties averaged about 5.20% and 4.50%per annum as at September 30, 2006 and December 31, 2005, respectively.  Ascash flow hedges, any movements in the fair value of these instruments will betaken as a cumulative translation adjustment under equity in our consolidatedbalance sheets.

 

*Long-termForeign Currency Options*

 

To manage hedging costs, the currency swap agreement relating to the 2009fixed rate notes has been structured to include currency option contracts.  Ifthe Philippine 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 6.1% and 5.68% perannum as at September 30, 2006 and December 31, 2005, respectively.

 

The option currency contract relating to PLDT’s option to purchase U.S.dollar at Php52.50 to US$1.00 or prevailing spot rate at maturity, whichever islower, qualifies as a cash flow hedge.  The option currency contract relating tothe counterparty’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-term Foreign Currency Options*

 

With reference to the above-mentioned hedge on PLDT’s 2009 fixed ratenotes, PLDT simultaneously sold a currency option contract with the samenotional amount of US$175 million with the same maturity that gives thecounterparty a right to purchase foreign currency at Php90.00 to US$1.00.Together with the long-term currency option contract classified under cash flowhedges, PLDT has the obligation to purchase U.S. dollars at an exchange rate ofPhp52.50 to US$1.00 plus the excess above the agreed threshold rate.  Inexchange for this condition, the overall net hedging cost for the transactionis reduced.

 

*Short-term Currency 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 exchangerate.  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 September 30, 2006, there are nooutstanding subsidized forward contracts.

 

PLDTalso entered into short-term U.S. dollar and Japanese yen currency optioncontracts to hedge our other short-term foreign currency obligations.  As atSeptember 30, 2006, the outstanding U.S. dollar currency option contractsamounted to US$7 million with an average exchange rate of US$51.45.  PLDT’sJapanese yen currency option contracts amounting to JPY5,410 millionmatured on September 21, 2006.  As at September 30, 2006, there are no outstandingJapanese yen currency option contracts.

 

*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. 

 

*Forward Foreign Exchange Contracts*

 

PLDT entered into short-term U.S. dollar and Japaneseyen forward foreign exchange contracts to hedge short-term foreign currencyobligations.  There are no outstanding JPY forward foreign exchange contractsas at September 30, 2006.

 

*Bifurcated Embedded Derivatives*

 

Derivative instruments include derivatives (or derivative-likeprovisions) embedded in non-derivative contracts.  PLDT’s outstandingbifurcated embedded derivative transactions as at December 31, 2004 coveredservice contracts denominated in U.S. dollars paid out to a Japanese company inApril 2005.  There are no outstanding bifurcated embedded derivativetransactions as at September 30, 2006.

 

*Bifurcated Equity Call Options*

 

Pursuant to Piltel’s debt restructuring plan, PLDT issued its Series VIand VII Convertible Preferred Stock, see *Note 17 – Interest-bearingFinancial Liabilities*.  Each share of Series VI and VII ConvertiblePreferred Stock is convertible at any time at the option of the holder into oneshare of PLDT’s common stock.  On the date immediately following the seventhanniversary of the issue date of the Series VI Convertible Preferred Stock andon the eighth anniversary of the issue date of the Series VII ConvertiblePreferred Stock, the remaining outstanding shares under these series will bemandatorily converted into shares of PLDT common stock.  For 30 daysthereafter, the holders of these mandatorily converted shares of common stockhave the option to sell such shares of common stock back to PLDT for US$36.132per share and JPY4,071.89 per share for Series VI and VII,respectively.  On August 18, 2006, all 3,842,000 shares of Series VII shareswere converted to PLDT common stock.  As at September 30, 2006 and December 31,2005, the net negative mark-to-market value of these embedded call options amountedto Php253 million and Php1,597 million, respectively.

* *

***Smart***

* *

Smart’sembedded derivatives were also bifurcated from prepaid forwards.  As atSeptember 30, 2006 and December 31, 2005, outstanding contracts includedservice contracts with various contractors and suppliers covering handsetimportations payable in U.S. dollars.

* *

Smart’sother embedded derivatives were bifurcated from service and purchasecontracts.  As at September 30, 2006 and December 31, 2005, outstandingcontracts included a service contract with foreign equipment suppliers andvarious suppliers 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***

 

Weseek to manage our liquidity profile to be able to finance our capitalexpenditures and service our maturing debts.  To cover our financingrequirements, we intend to use internally generated funds and proceeds fromdebt and equity issues and sales of certain assets. 

 

Aspart of our liquidity risk management program, we regularly evaluate ourprojected and actual cash flow information and continuously assess conditionsin the financial markets for opportunities to pursue fund-raising initiatives.These initiatives may include bank loans, export credit agency-guaranteedfacilities, and debt capital and equity market issues.

* *

***Foreign Exchange Risk***

* *

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

* *

** **

**September 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$14**

**Php711**

US$50

Php2,648

Notes receivable

**7**

**346**

6

346

Total noncurrent financial assets

**21**

**1,057**

  56

2,994

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**186**

**9,330**

248

13,160

Short-term investments

**52**

**2,621**

51

2,731

Trade and other receivables

**226**

**11,382**

139

7,371

Derivative assets

**1**

**44**

1

37

Total current financial assets

**465**

**23,377**

 439

23,299

**Total Financial Assets**

**US$****486**

**Php24,434**

US$495

Php26,293

** **

** **

** **

 

 

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities – net of current portion

**US$1,300**

**Php65,347**

US$1,809

Php95,953

Derivative liabilities

**114**

**5,739**

109

5,777

Total noncurrent financial liabilities

**1,414**

**71,086**

1,918

101,730

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**108**

**5,445**

42

2,227

Accrued expenses and other current liabilities

**70**

**3,500**

68

3,587

Derivative liabilities

**2**

**91**

3

192

Current portion of interest-bearing financial liabilities

**371**

**18,638**

319

16,946

Total current financial liabilities

**551**

**27,674**

 432

22,952

**Total Financial Liabilities**

**US$****1,965**

**Php98,760**

US$2,350

Php124,682

 

*(1)**The exchangerate used was Php**50.249 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 Php50.249 to US$1.00 and Php53.062to US$1.00, the Philippine peso-U.S. dollar exchange rates as at September 30,2006 and December 31, 2005, respectively.

 

As at November6, 2006, the peso-dollar exchange rate was Php49.801 to US$1.00.  Using thisexchange rate, our consolidated net foreign currency-denominated liabilities asat September 30, 2006 would have decreased by Php663 million.

 

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 atSeptember 30, 2006, approximately 98% of our total consolidated debts weredenominated in foreign currencies, principally in U.S. dollars.  Thus, a strengtheningor weakening of the Philippine peso against the U.S. dollar will decrease orincrease both the principal amount of our unhedged foreign currency-denominateddebts (representing 50% of our consolidated debts, or 38% net of our U.S.dollar cash balances as at September 30, 2006), and interest expense on ourdebt in Philippine peso terms.  In addition, many of our financial ratios andother financial tests are affected by the movements in the Philippine peso toU.S. dollar exchange rate.

 

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.  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 directly as income or expense for theperiod.

 

***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:

 

**NineMonths Ended September 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

42,931

575

42,356

957

48,117

Interest rate

7.85% to  10.625%

–

10.50%

–

8.35% to 11.375%

–

–

–

–

–

–

US$ Fixed Loans (in millions)

62

48

38

25

280

 453

22,775

5,601

17,174

370

18,604

Interest rate

1.75% to 8.9%

4.49% to 8.9%

4.49% to 6.66%

4.49% to 4.515%

2.25%

–

–

–

–

–

–

Philippine Peso (in millions)

16

–

–

16

–

  32

1,580

2

1,578

37

1,852

Interest rate

12.83% to 24%

–

–

15%

–

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

178

102

86

80

–

 446

22,409

89

22,320

446

22,409

Interest rate

GOVCO’s Cost + 0.20%; 0.05% to 2.75% over LIBOR

GOVCO’s Cost + 0.20%; 0.05% to 2.75% over LIBOR

0.05% to 2.75% over LIBOR

0.05% to 2.75% over LIBOR

–

–

–

–

–

–

–

Philippine Peso (in millions)

6

–

–

–

–

   6

290

–

 290

6

290

Interest rate

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

–

–

–

–

–

–

–

–

–

–

 

 

 

 

 

 

**1,791**

**89,985**

**6,267**

**83,718**

**1,816**

**91,272**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$63 million)

11.375%

11.375%

11.375%

11.375%

11.375%

11

572

–

–

11

572

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.

 

***CreditRisk***

 

We tradeonly with recognized, creditworthy third parties.  It is our policy that allcustomers who wish to trade on credit terms are subject to credit verificationprocedures.  In addition, receivable balances are monitored on an ongoing basisto reduce our exposure to bad debts.

 

Withrespect to credit risk arising from our financial assets, which comprise cashand cash equivalents, trade and other receivables, notes receivable and certainderivative instruments, our exposure to credit risk arises from default of thecounterparty, with a maximum exposure equal to the carrying amount of theseinstruments.

 

We have nosignificant concentrations of credit risk.

 

 

 

**25. Reclassification of Accounts**

 

Certain accounts in December 31, 2005 auditedconsolidated financial statements were reclassified to conform with theSeptember 30, 2006 unaudited consolidated financial statements presentation.

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