**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 March 2007**

** **

**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-_____)

 

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:  March 6, 2007

 

EXHIBITS

 

| Exhibit Number |                                                                                                                            |   | Page   |
|----------------|---------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|           |                                                                                                                            |   |   |
|           | Announcement date March 6, 2007                                                                                                 |   |   |
|           |                                                                                                                            |   |   |
| 1.1            | Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Year Ended December 31, 2006 |   | 44     |
|           |                                                                                                                            |   |   |
| 1.2            | Auditor’s Opinion                                                                                                          |   | 2      |
|           |                                                                                                                            |   |   |
| 1.3            | Consolidated Financial Statements as at December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004     |   | 104    |

 

 

Exhibit 1.1

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Year Ended December 31, 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 audited consolidated financial statements for alist of these subsidiaries, including a description of their respective principalbusiness activities).*

* *

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

* *

*Thefinancial information appearing in this report and in the accompanying auditedconsolidated 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 auditedconsolidated financial statements were made based on the exchange rate of Php49.045to US$1.00, the volume weighted average exchange rate at December 31, 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**

* *

| ** ** | **December 31,** | ** ** | **Increase (Decrease)** |  
 

**2006**

 

**2005**

** **

**Amount**

** **

**%**

 
(in millions, except for operational data, exchange rates and earnings per common share)

 

 

 

 

 

 

 

 
** **

 

 

 

 

 

 

 

 
**Consolidated Balance Sheets**

 

 

 

 

 

 

 

 
Total assets

Php244,883

 

Php250,197

 

(Php5,314)

 

(2)

 
Property, plant and equipment 

164,693

 

176,974

 

(12,281)

 

(7)

 
Cash and cash equivalents and short-term investments

26,080

 

32,809

 

(6,729)

 

(21)

 
Total equity

104,313

 

74,369

 

29,944

 

40

 
Notes payable and long-term debt

80,159

 

103,544

 

(23,385)

 

(23)

 
Net debt(1) to equity ratio

0.52x

 

0.95x

 

–

 

–

 
** **

** **

** **

**Years Ended December 31,**

** **

**Increase (Decrease)**

 

**2006**

 

**2005**

** **

**Amount**

** **

**%**

 

 

**Consolidated Statements of Income**

** **

** **

** **

** **

** **

** **

** **

Revenues and other income

Php133,843

 

Php126,044

 

Php7,799

 

6

Expenses

91,654

 

87,429

 

4,225

 

5

Income before income tax

42,189

 

38,615

 

3,574

 

9

Net income attributable to equity holders of PLDT

35,116

 

34,112

 

1,004

 

3

Net income

35,320

 

34,479

 

841

 

2

Net income margin

26%

 

27%

 

–

 

–

Earnings per common share – basic

187.91

 

189.96

 

(2.05)

 

(1)

**Consolidated Statements of Cash Flows**

 

 

 

 

 

 

 

Net cash provided by operating activities

70,186

 

76,213

 

(6,027)

 

(8)

Net cash used in investing activities

36,126

 

11,694

 

24,432

 

209

*Capital expenditures*

*21,111*

* *

*14,990*

* *

*6,121*

* *

*41*

Net cash used in financing activities

45,722

 

60,794

 

(15,072)

 

(25)

**Operational Data**

** **

** **

** **

** **

** **

** **

** **

Number of cellular subscribers

24,175,384

 

20,408,621

 

3,766,763

 

18

Number of fixed line subscribers(2)

1,776,647

 

1,842,507

 

(65,860)

 

(4)

Number of broadband subscribers

264,649

 

117,586

 

147,063

 

125

*Fixed Line*

*133,159*

* *

*88,811*

* *

*44,348*

* *

*50*

*Wireless*

*131,490*

* *

*28,775*

* *

*102,715*

* *

*357*

Number of employees

28,219

 

18,926

 

9,293

 

49

*Fixed Line*

*8,711*

* *

*9,197*

* *

*(486)*

* *

*(5)*

*Wireless*

*5,358*

* *

*5,137*

* *

*221*

* *

*4*

*Information and Communications Technology*

*14,150*

* *

*4,592*

* *

*9,558*

* *

*208*

 

**Exchange Rates**

**Php per US$**

 

** **

 

 

 

 

December 31, 2006

Php49.045

 

 

December 31, 2005

53.062

 

 

December 31, 2004

56.341

 

 

______________

* *

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

*(2)     **Previously set forth asnumber of fixed lines in service.  The 2005 figures were restated to reflectthe effect of the change in parameters used to align with the PLDT Group’spolicy on subscriber count with the planned use of an integrated billing systemfor our subscribers.*

 

**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,Bonifacio Communications Corporation and PLDT Global Corporation, or PLDTGlobal, which together account for approximately 4% of our consolidated fixedline subscribers; 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 under *ePLDTVentus*, including Parlance Systems, Inc., or Parlance, and Vocativ Systems,Inc., or Vocativ; business process outsourcing, or BPO, provided by SPiTechnologies, Inc., or SPi (consolidated on July 11, 2006); Internet access andgaming services provided by ePLDT’s subsidiaries, Infocom Technologies, Inc.,or Infocom, Digital Paradise, Inc., or Digital Paradise, Digital ParadiseThailand, 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 accompanyingaudited consolidated financial statements. 

** **

We registered totalrevenues and other income of Php133,843 million in 2006, an increase of Php7,799million, or 6%, as compared to Php126,044 million in 2005, primarily due to anincrease in our service revenues and other income by Php4,078 million and Php4,066million, respectively.  Other income in 2006 included a net reversal of a provisionfor onerous contract amounting to Php3,529 million as a result of an amendmentto the Air Time Purchase Agreement.  Please see *Note 23 –Provisions**and Contingencies* to the accompanying auditedconsolidated financial statements for further discussion.

 

Expenses increased byPhp4,225 million, or 5%, to Php91,654 million in 2006 from Php87,429 million in2005, largely resulting from increases in compensation and benefits, assetimpairment, depreciation and amortization, and professional and othercontracted services, partly offset by lower provisions, cost of sales and taxesand licenses.

 

Net incomeattributable to equity holders of PLDT increased by Php1,004 million, or 3%, toPhp35,116 million in 2006 from Php34,112 million in 2005.  However, basicearnings per common share decreased to Php187.91 in 2006 from Php189.96 in 2005due to an increase in the weighted average number of common shares outstandingfrom 172.1 million in 2005 to 184.5 million in 2006.

 

**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 years ended December 31, 2006 and 2005.  Most of our revenues are derivedfrom our operations within the Philippines.

** **

 

**Wireless**

** **

** **

** **

**Fixed Line**

** **

** **

** **

**ICT**

** **

 

** **

**Inter-segment Transactions**

** **

**Total**

** **

** **

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the year ended December 31, 2006**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

Php81,546

 

 

 

Php54,219

 

 

 

Php7,220

 

 

 

(Php9,142)

 

Php133,843

 

 

Service

78,383

 

 

 

49,134

 

 

 

6,543

 

 

 

(8,920)

 

125,140

 

 

Non-service

2,457

 

 

 

79

 

 

 

553

 

 

 

(122)

 

2,967

 

 

Equity share in net income of associates

–

 

 

 

–

 

 

 

–

 

 

 

–

 

–

 

 

Other income

706

 

 

 

5,006

 

 

 

124

 

 

 

(100)

 

5,736

 

 

Expenses

44,692

 

 

 

48,535

 

 

 

7,569

 

 

 

(9,142)

 

91,654

 

 

Income (loss) before income tax

36,854

 

 

 

5,684

 

 

 

(349)

 

 

 

–

 

42,189

 

 

Net income (loss) for the period

30,376

 

 

 

5,255

 

 

 

(311)

 

 

 

–

 

35,320

 

 

Net income (loss) attributable to  equity holders of PLDT

30,096

 

 

 

5,253

 

 

 

(233)

 

 

 

–

 

35,116

 

 

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the year ended December 31, 2005**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

79,158

 

 

 

49,990

 

 

 

3,438

 

 

 

(6,542)

 

126,044

 

 

Service

74,677

 

 

 

49,663

 

 

 

2,953

 

 

 

(6,231)

 

121,062

 

 

Non-service

3,036

 

 

 

41

 

 

 

351

 

 

 

(116)

 

3,312

 

 

Equity share in net income of associates

–

 

 

 

–

 

 

 

7

 

 

 

–

 

7

 

 

Other income

1,445

 

 

 

286

 

 

 

127

 

 

 

(195)

 

1,663

 

 

Expenses

40,694

 

 

 

49,897

 

 

 

3,380

 

 

 

(6,542)

 

87,429

 

 

Income (loss) before income tax

38,464

 

 

 

93

 

 

 

58

 

 

 

–

 

38,615

 

 

Net income (loss) for the period

33,664

 

 

 

769

 

 

 

46

 

 

 

–

 

34,479

 

 

Net income (loss) attributable to  equity holders of PLDT

33,222

 

 

 

768

 

 

 

122

 

 

 

–

 

34,112

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Increase (Decrease)**

**Amount**

** **

**%**

 

**Amount**

 

**%**

 

**Amount**

 

**%**

 

**Amount**

 

**Amount**

 

**%**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

Php2,388

 

3

 

Php4,229

 

8

 

Php3,782

 

110

 

(Php2,600)

 

Php7,799

 

6

Service

3,706

 

5

 

(529)

 

(1)

 

3,590

 

122

 

(2,689)

 

4,078

 

3

Non-service

(579)

 

(19)

 

38

 

93

 

202

 

58

 

(6)

 

(345)

 

(10)

Equity share in net income of associates

–

 

–

 

–

 

–

 

(7)

 

(100)

 

–

 

(7)

 

(100)

Other income

(739)

 

(51)

 

4,720

 

1,650

 

(3)

 

(2)

 

95

 

4,073

 

245

Expenses

3,998

 

10

 

(1,362)

 

(3)

 

4,189

 

124

 

(2,600)

 

4,225

 

5

Income (loss) before income tax

(1,610)

 

(4)

 

5,591

 

6,012

 

(407)

 

(702)

 

–

 

3,574

 

9

Net income (loss) for the period

(3,288)

 

(10)

 

4,486

 

583

 

(357)

 

(776)

 

–

 

841

 

2

Net income (loss) attributable to  equity holders of PLDT

(3,126)

 

(9)

 

4,485

 

584

 

(355)

 

(291)

 

–

 

1,004

 

3

* *

**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 years ended December 31, 2006 and 2005 by service segment:

 

** **

**Years Ended December 31,**

 
** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 
** **

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

**(in millions)**

 

 
Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php75,605

 

93

 

Php72,409

 

91

 

Php3,196

 

4

Wireless broadband, satellite, VSAT and others

2,778

 

3

 

2,268

 

3

 

510

 

22

 

78,383

 

96

 

74,677

 

94

 

3,706

 

5

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

2,457

 

3

 

3,036

 

4

 

(579)

 

(19)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

706

 

1

 

1,445

 

2

 

(739)

 

(51)

 

 

 

 

 

 

 

 

 

 

 

 

Total Wireless Revenues and Other Income

Php81,546

 

100

 

Php79,158

 

100

 

Php2,388

 

3

 

*Service Revenues*

 

Our wireless servicerevenues increased by Php3,706 million, or 5%, to Php78,383 million in 2006compared to Php74,677 million in the same period in 2005, mainly as a result ofthe growth of Smart’s and Piltel’s subscriber base, an increase ininternational inbound revenues and a reduction in domestic interconnectioncosts due to a shift from off-network to on-network voice and data usage.  As apercentage of our total wireless revenues and other income, service revenuescontributed 96% and 94% in 2006 and 2005, respectively. 

 

*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 2006 amounted to Php75,605 million, an increase of Php3,196million, or 4%, from Php72,409 million in 2005.  Cellular service revenuesaccounted for 96% and 97% of our wireless service revenues in 2006 and 2005,respectively.  

 

As at December 31 , 2006, Smart and Piltel cellular subscribers totaled 24,175,384, an increaseof 3,766,763, or 18%, over their combined cellular subscriber base of 20,408,621as at December 31, 2005.  Prepaid subscribers accounted for 99% of our totalsubscriber base as at December 31, 2006 and 2005.  Prepaid and postpaid subscriberstotaled 23,856,821 and 318,563 as at December 31, 2006, reflecting net subscriber activations of 3,728,278 and 38,485, respectively, in 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.

 

Smartcontinues to offer products and services that provide value to itssubscribers.  In 2005, Smart launched a series of promotions to test the marketdemand for fixed rate or “bucket” plans for voice and text.  Under a servicebranded as *Smart 258*, subscribers had the option to register for unlimitedon-network voice calling or text messaging.  *Smart 258* hassince been modified a number of times, with variations involving changes inload denominations and periods of network availability. The promotion offeredunlimited on-network texting, carrying denominations of Php15, Php30 and Php60with corresponding expiration periods of one, two and four days.  Bucketpricing promotions have now become a key driver for subscriber activations andusage stimulation.

 

In 2006, Smart has focused onsegmenting its market by offering sector-specific, value-driven packages suchas *All Text* – a new variety of top-up service providing a fixed numberof messages with prescribed validity periods.  Current offerings include *AllText 10 Bonus*, with a suggested retail price of Php12, which includes 15messages without expiration and *All Text 20*, which includes 100on-network messages for Php20, with a validity period of one day.  *All Text*also has a voice counterpart in *All Talk 20* which is a call packageallowing three calls of up to three minutes each for local on-network calls,valid for one day.  Other voice offerings include: (a) the *Flat Rate Call*promotion, which allows a subscriber to make an on-network call of up to threeminutes for Php10 or extend the call to five minutes for Php15; and (b) *TipidTalk*, a call package which allows a subscriber to make four calls of up to30 seconds each for local on-network calls, valid for one day for Php10 andanother variant allowing four calls of up to 15 seconds each for localon-network calls, valid for one day for Php5.50.  *All Text 20*, *AllText 10 Bonus, All Talk 20*and*Tipid Talk* are now permanentofferings, while the *Flat Rate Call* promotion is valid until March 3,2007.  On January 18, 2007, Smart introduced *LAHATxt*, a top-up service whichoffers a bundle of text messages available to all networks.  *LAHATxt 35*is available to all Smart prepaid subscribers and provides for 100 textmessages to all networks for Php35 with a one day validity period.  On theother hand, *Talk ‘N Text* subscribers have *LAHATxt 20* which allowsa subscriber to make 50 text messages to all networks for Php20, also valid forone day.  

 

Smartlikewise has in place various promotions to stimulate international usage.  InJune 2006, *Smart IDD Libre Text Abroad* was launched wherein subscribersearned one free international text for every minute of IDD calling.  In October2006, this was replaced by *International Budget Text* packages.  Thesepackages, which have a limited duration and a varying number of allowablemessages, enable subscribers to send international text to pre-registeredrecipients of the subscriber’s choice on supported overseas carriers.  

 

Smartexpanded its roster of services with the commercial launch of its 3G servicesin May 2006.  These services include video calling, video streaming, high-speedInternet browsing and downloading of special 3G content, offered at ratessimilar to those of 2G services. 

 

The following table summarizes key measures of ourcellular business as at and for the years ended December 31, 2006 and 2005:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

**(in millions)**

 

 

 

 

 

 

 

 

 

Cellular service revenues 

Php75,605

 

Php72,409

 

Php3,196

 

4

 

 

 

 

 

 

 

 

*By component*

*73,893*

* *

*70,507*

* *

*3,386*

* *

*5*

Voice 

35,221

 

35,444

 

(223)

 

(1)

Data

38,672

 

35,063

 

3,609

 

10

* *

* *

* *

* *

* *

* *

* *

* *

*By service type*

*73,893*

* *

*70,507*

* *

*3,386*

* *

*5*

Prepaid

68,846

 

66,023

 

2,823

 

4

Postpaid

5,047

 

4,484

 

563

 

13

* *

* *

* *

* *

* *

* *

* *

* *

*Others*(1)

*1,712*

* *

*1,902*

* *

*(190)*

* *

*(10)*

______________

 

 

 

 

 

 

 

* *

*(1)    **Refers to othernon-subscriber-related revenues consisting primarily of inbound internationalroaming fees, revenues from Smart’s public calling offices, revenues fromWolfpac and Smart Money Holdings Corporation and a small number of leased linecontracts.*

 

 

**December 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

 

 

Cellular subscriber base 

24,175,384

 

20,408,621

 

3,766,763

 

18

Prepaid 

23,856,821

 

20,128,543

 

3,728,278

 

19

Smart 

16,882,442

 

15,144,118

 

1,738,324

 

11

Piltel

6,974,379

 

4,984,425

 

1,989,954

 

40

Postpaid

318,563

 

280,078

 

38,485

 

14

 

** **

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

 

Systemwide traffic volumes (in millions)

 

 

 

 

 

 

 

Calls (in minutes) 

5,667

 

5,467

 

200

 

4

Domestic

3,437

 

3,741

 

(304)

 

(8)

International

2,230

 

1,726

 

504

 

29

Inbound

2,065

 

1,557

 

508

 

33

Outbound

165

 

169

 

(4)

 

(2)

 

 

 

 

 

 

 

 

Text messages

238,362

 

95,959

 

142,403

 

148

Standard

32,052

 

40,781

 

(8,729)

 

(21)

Bucket-Priced

203,669

 

52,373

 

151,296

 

289

Value-Added Services

2,641

 

2,805

 

(164)

 

(6)

* *

*VoiceServices*

 

Cellular revenues fromvoice services, which include all voice traffic and voice value-added servicessuch as voice mail and international roaming, decreased by Php223 million, or 1%,to Php35,221 in 2006 from Php35,444 million in 2005 primarily due to a decreasein domestic voice revenues partially offset by an increase in internationalinbound revenue and a decrease in interconnection expense.  The decline indomestic voice revenue may be attributed to increased competition in voicepromotions as well as the re-channeling of calls to international inbound as aresult of continued efforts to curb by-pass activities.  The decrease ininterconnection expense resulted from increased on-net voice usage broughtabout by bucket-priced promotions designed to encourage on-net voice services.

 

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

 

*Data Services*

 

Cellularrevenues from data services, whichinclude all text messaging-related services as well as value-added services,increased by Php3,609 million, or 10%, to Php38,672 million in 2006 from Php35,063million in 2005.  Cellular data services accounted for 51% of cellular servicerevenues in 2006 as compared to 48% in 2005.  

 

The following table shows the breakdown of cellulardata revenues for the years ended December 31, 2006 and 2005:

* *

** **

**Years Ended December 31,**

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

**(in millions)**

 

 

** **

** **

** **

** **

** **

** **

** **

Text messaging

 

 

 

 

 

 

 

Domestic 

Php32,763

 

Php29,110

 

Php3,653

 

13

Standard

21,709

 

25,580

 

(3,871)

 

(15)

Bucket-Priced

11,054

 

3,530

 

7,524

 

213

International

1,640

 

1,698

 

(58)

 

(3)

 

34,403

 

30,808

 

3,595

 

12

 

 

 

 

 

 

 

 

Value-added services

 

 

 

 

 

 

 

Non-Zed(1)

2,474

 

2,290

 

184

 

8

*Smart Zed*TM 

335

 

523

 

(188)

 

(36)

*Smart Money*

68

 

84

 

(16)

 

(19)

Mobile Banking

5

 

5

 

–

 

–

Roaming SMS, Pasaload, MMS and WAP**

1,387

 

1,352

 

35

 

3

 

4,269

 

4,254

 

15

 

–

Total 

Php38,672

 

Php35,062

 

Php3,610

 

10

_________________

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

 

Textmessaging-related services contributed revenues of Php34,403 million in 2006,an increase of Php3,595 million, or 12%, compared to Php30,808 million in 2005,and accounted for 89% and 88% of the total cellular data revenues in 2006 and2005, respectively.  The increase in revenues from text messaging-related services resulted mainly from the *Smart 258 UnlimitedText* promotion and its variant bucket-priced text promotional offerings.Text messaging revenues from the various bucket plans totaled Php11,054million.  Value-added services, whichcontributed revenues of Php4,269 million in 2006, increased by Php15 millionfrom Php4,254 million in 2005, primarily due to higher usage of *Non-Zed*and roaming SMS services, partially offset by decreased usage of *Smart Zed*and *Smart Money*services in 2006 as compared to 2005.  The decline in *SmartZed* usage was primarily due to increased competition from other content providerswhile the decline in *Smart Money* revenue was on account of reduced usageof *Smart Money* by dealers as a settlement tool for load transactions.

* *

Standardtext messages totaled 32,052 million in 2006, a decrease of 8,729 million, or 21%,from 40,781 million in 2005 mainly due to a shift to bucket-priced textservices.  Bucket-priced text**messages in 2006 totaled 203,669 million, an increaseof 151,296 million, or 289%, as compared to 52,373 million in 2005. 

 

*Subscriber Base, ARPU and Churn Rates*

* *

Prepaid subscribers accounted for approximately 99%of our 24,175,384 subscribers as at December 31, 2006, while postpaid subscribers accounted for the remaining 1%.  The cellular prepaid subscriber base grewby 19% to 23,856,821 as at December 31, 2006 from 20,128,543 as at December 31,2005, whereas the postpaid subscriber base increased by 14% to 318,563 as at December31, 2006 from 280,078 as at December 31, 2005.  

 

Our net subscriber activations for the years ended December 31 , 2006 and 2005 were as follows:

** **

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

 

Prepaid

3,728,278

 

1,194,805

 

2,533,473

 

212

Smart

1,738,324

 

822,830

 

915,494

 

111

Piltel

1,989,954

 

371,975

 

1,617,979

 

435

** **

 

 

 

 

 

 

 

Postpaid

38,485

 

5,584

 

32,901

 

589

 

 

 

 

 

 

 

 

Total

3,766,763

 

1,200,389

 

2,566,374

 

214

 

Revenues attributable to our cellular prepaidservice amounted to Php68,846 million in 2006, a 4% increase over the Php66,023million earned in 2005.  Prepaid service revenues in 2006 and 2005 accounted for93% and 94%, respectively, of voice and data revenues.  Revenues attributableto Smart’s postpaid service amounted to Php5,047 million in 2006, a 13%increase over the Php4,484 million earned in 2005, and accounted for 7% and 6%of voice and data revenues in 2006 and 2005, respectively.

 

The following table summarizes our cellular ARPUs forthe years ended December 31, 2006 and 2005:

 

 

**Years Ended December 31,**

 

**Gross**

** **

**Increase (Decrease)**

** **

**Net**

 

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

**2006**

** **

**2005**

 

**Amount**

 

**%**

 

 

Prepaid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Smart

Php339

Php357

 

(Php18)

 

(5)

 

Php289

 

Php294

 

(Php5)

 

(2)

Piltel

226

257

 

(31)

 

(12)

 

194

 

212

 

(18)

 

(8)

Prepaid – Blended

308

332

 

(24)

 

(7)

 

263

 

274

 

(11)

 

(4)

Postpaid – Smart

1,904

1,869

 

35

 

2

 

1,407

 

1,368

 

39

 

3

Prepaid and Postpaid Blended

330

353

 

(23)

 

(7)

 

278

 

289

 

(11)

 

(4)

 

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

 

Prepaid service revenues consist mainly of charges forsubscribers' actual usage of their loads.  Gross monthly ARPU for Smart prepaidsubscribers in 2006 was Php339, a decrease of 5%, compared to Php357 in 2005.The average outbound domestic and international voice revenue per subscriberdeclined in 2006 compared to 2005, but was offset by an increase in the averagetext messaging revenue and inbound international revenue per subscriber.  On anet basis, ARPU in 2006 was Php289, a decrease of 2%, compared to Php294 in 2005.Gross monthly ARPU for *Talk ‘N Text* subscribers in 2006 was Php226, adecrease of 12%, compared to Php257 in 2005.The decline was primarily attributable to the decrease in the average domesticoutbound local voice revenue per subscriber as well as the average domesticinbound revenue per subscriber partly offset by an increase in the average textmessaging revenue per subscriber.  On anet basis, ARPU in 2006 decreased by 8% to Php194 from Php212 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 Php1,904 while net monthly ARPUincreased by 3% to Php1,407 in 2006 as compared to Php1,869 and Php1,368 in2005, respectively.  Prepaid and postpaid monthly gross blended ARPU was Php330in 2006, a decrease of 7%, compared to Php353 in 2005.  Monthly net blendedARPU decreased by 4% to Php278 in 2006 as compared to Php289 in 2005.

 

Our quarterly prepaid and postpaid ARPUsfor the years ended December 31, 2006 and 2005 were as follows:

*** ***

 

**Prepaid**

** **

**Postpaid**

 

**Smart**

** **

**Piltel**

** **

**Smart**

 

**Gross**

** **

**Net**

** **

**Gross**

** **

**Net**

** **

**Gross**

** **

**Net**

** **

 

**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

Fourth Quarter

332

 

286

 

213

 

184

 

1,939

 

1,425

** **

 

 

 

 

 

 

 

 

 

 

 

**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 postpaid subscribers,divided by the average of the number of subscribers at the beginning and at theend of a month, all divided by the number of months in the same period.

 

Werecognize a prepaid cellular subscriber as an active subscriber when thatsubscriber activates and uses the SIM card in the subscriber’s handset, whichcontains pre-stored air time.  The pre-stored air time, equivalent to Php1 plus50 free SMS, can only be used upon purchase or reload of air time of anyvalue.  Subscribers can reload their air time by purchasing prepaid “call andtext” 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 becounted as a subscriber.  The rationale for this change stems from ourobservance of “SIM-swapping” activities in the market.  “SIM-swapping” refersto the promotional activity wherein subscribers can exchange their currentprepaid SIM card for another operator’s SIM card at no cost to the subscriber.We believe that these activities have given rise to a situation where certainsubscribers swap their SIM cards between mobile operators upon full usage ofthe pre-stored air time, which may result in our subscriber base reflecting acertain number of transient subscribers at any one point in time.  In May 2005,we terminated our “SIM swapping” promotions; as a result, our churn ratesincreased in the third and fourth quarters of 2005, but leveled off beginning inthe first quarter of 2006.  

 

For Smartprepaid, the average monthly churn rate for 2006 was 3.1% compared to 4.0% in2005, while the average monthly churn rate for *Talk ‘N Text* subscriberswas 3.3% in 2006 compared to 5.5% in 2005.  

 

The average monthlychurn rate for Smart's postpaid subscribers for 2006 was 1.2% compared to 2.0%in 2005.  Smart's policy is to redirect outgoing calls to an interactive voiceresponse system if the postpaid subscriber's account is either 45 days overdueor the subscriber has exceeded the prescribed credit limit.  If the subscriberdoes not make a payment within 44 days of redirection, the account isdisconnected.  Within this 44-day period, a series of collection activities areimplemented, involving the sending of a collection letter, call-out remindersand collection messages via text 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 2006 amounted toPhp2,778 million, an increase of Php510 million, or 22%, from Php2,268 millionin 2005 principally due to the growth in our wireless broadband business.

 

Smart Broadband offers a number of wirelessbroadband services and had 121,867 subscribers as at December 31, 2006.  *SmartBro*,the fixed wireless broadband service of Smart linked to Smart’s wirelessbroadband-enabled base stations, allows people to connect to the Internet usingan outdoor aerial antenna installed in a subscriber’s home.  Wireless broadbandrevenues contributed Php823 million in 2006, increasing by Php610 million, or 286%,from Php213 million in 2005.

 

Wealso offer *PLDT WeRoam*, a wireless broadband service offering, runningon Smart’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 world and national WiFi roaming access.  Principally targeted to thecorporate market, the service had 9,623 subscribers as at December 31, 2006 and contributed Php76 million in our data revenues, an increase of Php36 million, or90%, from Php40 million in 2005.  

 

*Non-service Revenues*

 

Our wireless non-service revenues consist of:

 

•           proceeds from sales of cellularhandsets; and

 

•           proceeds from sales of cellularSIM-packs.

 

Our wireless non-service revenues decreased by Php579million, or 19%, to Php2,457 million in 2006 as compared to Php3,036 million in2005 primarily due to lower handset sales as activations were driven more bySIM-pack sales in 2006.  

 

*Other Income*
 

Allother income/gains such as rental income and which do not fall under serviceand non-service revenues are included under this classification.  Our wirelessbusiness segment generated other income of Php706 million in 2006, a decreaseof Php739 million, or 51%, as compared to Php1,445 million in 2005 largely dueto the reversal of prior years’ provision for NTC fees to align with theassessments received in 2005.

 

*Expenses*
 

Expenses associatedwith our wireless business in 2006 amounted to Php44,692 million, an increaseof Php3,998 million, or 10%, from Php40,694 million in 2005.  A significantportion of this increase was attributable to higher rent, asset impairment, financingcosts and compensation and benefits, which was partially offset by lower costof sales and taxes and licenses.  As a percentage of our total wirelessrevenues and other income, expenses associated with our wireless businessaccounted for 55% and 51% in 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 2006 as compared to 95% and 5%,respectively, in 2005.

 

The following table summarizes the breakdown of ourwireless-related expenses for the years ended December 31, 2006 and 2005 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php10,752

 

24

 

Php10,156

 

25

 

Php596

 

6

Rent

7,887

 

18

 

5,592

 

14

 

2,295

 

41

Compensation and benefits(1)

5,041

 

11

 

4,249

 

11

 

792

 

19

Cost of sales

4,887

 

11

 

6,148

 

15

 

(1,261)

 

(21)

Maintenance

3,646

 

8

 

3,655

 

9

 

(9)

 

–

Selling and promotions

3,013

 

7

 

3,418

 

8

 

(405)

 

(12)

Professional and other contracted services

1,831

 

4

 

1,656

 

4

 

175

 

11

Financing costs

1,700

 

4

 

513

 

1

 

1,187

 

231

Asset impairment

1,391

 

3

 

–

 

–

 

1,391

 

100

Taxes and licenses

1,018

 

2

 

1,544

 

4

 

(526)

 

(34)

Communication, training and travel

891

 

2

 

960

 

2

 

(69)

 

(7)

Provisions

829

 

2

 

575

 

1

 

254

 

44

Insurance and security services

797

 

2

 

947

 

2

 

(150)

 

(16)

Amortization of intangible assets

312

 

1

 

244

 

1

 

68

 

28

Other expenses

697

 

1

 

1,037

 

3

 

(340)

 

(33)

Total 

Php44,692

 

100

 

Php40,694

 

100

 

Php3,998

 

10

__________

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

 

Depreciationand amortization charges increased by Php596 million, or 6%, to Php10,752million in 2006, principally due to an increase in our depreciable asset base mainlybroadband and 3G network, and customer-deployed equipment.  For furtherdetails, see *Note 8 – Property, Plant and Equipment* to the accompanyingaudited consolidated financial statements.

 

Rent expensesincreased by Php2,295 million, or 41%, to Php7,887 million on account of anincrease in domestic fiber optic network, or DFON, facilities leased by Smartfrom PLDT, as well as higher satellite transmission and site rental expenses.As at December 31, 2006, we had 4,377 GSM cell sites and 6,099 base stations,compared with 4,305 GSM cell sites and 5,982 base stations as at December 31 , 2005.

 

Compensation andbenefits expenses increased by Php792 million, or 19%, to Php5,041 million,primarily due to higher accrued bonuses, pension benefits, long-term incentive plancosts and other employee benefits of Smart.  Smart’s employee headcount increasedby 219, or 4%, to 5,306 in 2006 as compared to 5,087 in 2005.  For furtherdiscussion on our long-term incentive plan, please see *Note 21 –EmployeeBenefits* to the accompanying audited consolidated financial statements.

 

Costof sales decreased by Php1,261 million, or 21%, to Php4,887 million due to adecrease in the 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 years ended December 31, 2006 and 2005 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

Cost of cellular handsets and SIM-packs sold

Php4,688

 

Php5,905

 

(Php1,217)

 

(21)

Cost of satellite air time and terminal units

199

 

243

 

(44)

 

(18)

 

Php4,887

 

Php6,148

 

(Php1,261)

 

(21)

 

Maintenance expenses decreasedby Php9 million to Php3,646 million mainly on account of lower repairs andmaintenance costs for network facilities and motor vehicles which offset higherexpenses for electricity and power generation as well as higher maintenanceexpense for IT hardware and software.

 

Selling and promotionexpenses decreased by Php405 million, or 12%, to Php3,013 million due to lowercommission, and advertising and promotions expenses as well as a decrease inprinting costs of prepaid cards.

 

Professionaland other contracted services increased by Php175 million, or 11%, to Php1,831million, primarily due to increased call center, contracted service, marketresearch, consultancy and technical service fees.

 

Financing costs increasedby Php1,187 million, or 231%, to Php1,700 million in 2006 from Php513 millionin 2005 due to the combined results of: (1) lower foreign exchange gainsrecognized in 2006 as a result of lower dollar-denominated debt balances; and(2) higher amortization of debt discount brought about by the prepayment ofPiltel’s debt in 2006.  These increasing effects were partially offset by: (1)lower interest expense owing to lower debt balances; (2) higher capitalizedinterest and interest income; and (3) gain on derivative transactions in 2006as against a loss on derivative transactions in 2005.  The breakdown of ourfinancing costs for our wireless business for the years ended December 31 , 2006 and 2005 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

Accretion on financial liabilities – net

Php3,105

 

Php2,560

 

Php545

 

21

Interest on loans and related items

1,634

 

1,799

 

(165)

 

(9)

Dividends on preferred stock subject to mandatory redemption

130

 

251

 

(121)

 

(48)

Financing charges

37

 

52

 

(15)

 

(29)

Loss (gain) on derivative transactions – net

(39)

 

118

 

(157)

 

(133)

Capitalized interest 

(248)

 

(85)

 

(163)

 

(192)

Interest income

(1,197)

 

(1,135)

 

(62)

 

(5)

Foreign exchange gains – net

(1,722)

 

(3,047)

 

1,325

 

43

 

Php1,700

 

Php513

 

Php1,187

 

231

 

Assetimpairment of Php1,391 million in 2006 represents the reduction in value ofMabuhay Satellite’s Agila II satellite given the difficulty in generating cashflows with the satellite nearing its end-of-life and other events affecting itsbusiness.

 

Taxesand licenses decreased by Php526 million, or 34%, to Php1,018 million,primarily due to a decrease in Smart’s licenses and business-related taxes.  

 

Communication,training and travel expenses decreased by Php69 million, or 7%, to Php891million due to lower mailing and courier, training, communication and localtravel expenses, partially offset by higher freight and hauling chargesincurred in 2006.

 

Provisions increasedby Php254 million, or 44%, to Php829 million primarily due to an increase in theprovision for subscriber and carrier receivables coupled with the reversal of theprovision for non-trade receivables booked in 2005, partially offset by lowerlevel of write-down of slow-moving handsets to net realizable values.  Thebreakdown of provisions for the years ended December 31, 2006 and 2005 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

Doubtful accounts

Php627

 

Php253

 

Php374

 

148

Write-down of inventories to net realizable values 

202

 

322

 

(120)

 

(37)

 

Php829

 

Php575

 

Php254

 

44

 

Insurance and securityservices decreased by Php150 million, or 16%, to Php797 million, primarily dueto the decrease in site security expenses and lower amortization charges onprepaid insurance contracts.

 

Amortizationof intangible assets increased by Php68 million, or 28%, to Php312 millionmainly due to an increase in the amount of intangible assets recognized followingthe purchase of an additional 20% investment in Wolfpac. 

 

Otherexpenses decreased by Php340 million, or 33%, to Php697 million primarily dueto various lower business and operational-related expenses such as bankcharges, representation expenses and a loss on share swap in 2005.

 

Provision for Income Tax
 

Provisionfor income tax increased by Php1,678 million, or 35%, to Php6,478 million in2006 from Php4,800 million in 2005.  In 2006, the effective tax rate for ourwireless business was 18% as compared to 12% in 2005 due to differences in thenet movement of deferred tax assets.  For 2006, the net movement in deferredtax assets primarily pertains to deferred tax assets recognized in relation tothe benefit to be derived from the disposal of certain of Piltel’s assets withthe lifting of certain mortgage trust indenture restrictions resulting from thefull prepayment of Piltel’s restructured debt on December 4, 2006.  Please see *Note6 – Income Tax*to the accompanying audited consolidated financial statementsfor further discussion.

 

Net Income
 

Our wireless business segment recorded a net incomeof Php30,376 million in 2006, a decrease of Php3,288 million, or 10%, over Php33,664million registered in 2005 as the increase in our cellular revenues was morethan offset by an increase in operating expenses and higher provision forincome tax.

 

Fixed Line
 

***Revenues and OtherIncome***

*** ***

Our fixed linebusiness provides local exchange service, international and national longdistance services, data and other network services, and miscellaneousservices.  Total fixed line revenues generated from our fixed line business in2006 totaled Php54,219 million, an increase of Php4,229 million, or 8%, fromPhp49,990 million in 2005.  

 

The following table summarizes revenues from ourfixed line business for the years ended December 31, 2006 and 2005 by service segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

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

 

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php16,923

 

31

 

Php18,519

 

37

 

(Php1,596)

 

(9)

International long distance

9,933

 

18

 

12,245

 

24

 

(2,312)

 

(19)

National long distance

6,921

 

13

 

7,233

 

14

 

(312)

 

(4)

Data and other network

13,725

 

26

 

10,399

 

21

 

3,326

 

32

Miscellaneous

1,632

 

3

 

1,267

 

3

 

365

 

29

 

49,134

 

91

 

49,663

 

99

 

(529)

 

(1)

Non-Service Revenues

79

 

–

 

41

 

–

 

38

 

93

Other Income

5,006

 

9

 

286

 

1

 

4,720

 

1,650

Total Fixed Line Revenues and Other Income

Php54,219

 

100

 

Php49,990

 

100

 

Php4,229

 

8

 

Service Revenues
 

*Local Exchange Service*

 

Our local exchange service revenues consist of: 

 

•           flat monthly fees for our postpaidand fixed charges for our bundled and data 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 years ended December 31 , 2006 and 2005:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

 

 

Total local exchange service revenues (in millions)

Php16,923

 

Php18,519

 

(Php1,596)

 

(9)

Number of fixed line subscribers

1,776,647

 

1,842,507

 

(65,860)

 

(4)

Number of fixed line employees

8,711

 

9,197

 

(486)

 

(5)

Number of fixed line subscribers per employee

212

 

193

 

19

 

10

 

Revenues from ourlocal exchange service decreased by Php1,596 million, or 9%, to Php16,923million in 2006 from Php18,519 million in 2005.  The decrease was primarily dueto a 4% decline in the number of fixed line subscribers and the appreciation ofthe peso which required us to make downward adjustments in our monthly localservice rates.  The percentage contribution of local exchange revenues to ourtotal fixed line service revenues decreased to 34% in 2006 as compared to 37%in 2005.

 

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 charged 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 purchasing callcards that are sold in denominations of Php500, Php300 and Php150.  All salesof prepaid cards, whether through dealers or through PLDT's business offices,are non-refundable.

 

In May 2006, PLDT launched *Pwede!Card*, a convergent product made possible by our NGN capability.  *Pwede!Card* is the first reloadable PIN-based prepaid card that provides access toa range of voice and Internet services at affordable rates.  *Pwede! Card*is applicable to a host of fixed line and wireless services including local,domestic and international long distance calls, text messaging, payphones andprepaid Internet service.

 

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 inclusiveof a Php30 load balance that can be used for outgoing calls and a Php115 accesscharge for incoming calls. 

 

Pursuant to a currency exchange rate adjustment mechanismauthorized by the Philippine National Telecommunications Commission, or theNTC, we adjust our postpaid monthly local service rates upward or downward by1% for every Php0.10 change in the peso-to-dollar exchange rate relative to abase rate of Php11.00 to US$1.00.  In 2006, we implemented eight downwardadjustments and three upward adjustments in our monthly local service rates,while there were six downward adjustments and three upward adjustments in2005.  The average Philippine peso to U.S. dollar rate factored in our monthlylocal service rates in 2006 was Php51.53 to US$1.00, compared to an average ofPhp55.21 to US$1.00 in 2005.  This change in the average peso-to-dollar ratetranslated to a peso appreciation of 7%, which resulted in a net decrease ofapproximately 6% in our average monthly local service rates in 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 years ended December 31 , 2006 and 2005:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

 

 

Total international long distance service revenues (in millions)

Php9,933
 

Php12,245

 

(Php2,312)

 

(19)

Inbound

8,378

 

10,203

 

(1,825)

 

(18)

Outbound

1,555

 

2,042

 

(487)

 

(24)

 

 

 

 

 

 

 

 

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

2,177

 

2,266

 

(89)

 

(4)

Inbound

1,984

 

2,117

 

(133)

 

(6)

Outbound

193

 

149

 

44

 

30

Inbound-outbound call ratio

10.3:1

 

14.2:1

 

–

 

–

 

Our totalinternational long distance service revenues decreased by Php2,312 million, or 19%,to Php9,933 million in 2006 from Php12,245 million in 2005, primarily due tothe peso appreciation, a decrease in average termination rates for inboundcalls and a decline in inbound call volumes largely as a result of alternativemeans of communications such as e-mailing, texting and Internet telephony.  Thepercentage contribution of international long distance service revenues to ourtotal fixed line service revenues decreased to 20% in 2006 from 25% in 2005.

 

Ourrevenues from inbound international long distance service decreased by Php1,825million, or 18%, to Php8,378 million due to a decrease in inbound trafficvolume by 133 million minutes to 1,984 million minutes in 2006 coupled with adecrease in average termination rates.In addition, the appreciation of the Philippine peso to the U.S. dollar withaverage rates of Php51.332 in 2006 and Php55.085 in 2005 contributed to thedecrease in our inbound international long distance revenues in peso terms,since settlement charges for inbound calls are billed in U.S. dollars or inspecial drawing rights, an established method of settlement among internationaltelecommunications carriers using values based on a basket of foreigncurrencies that are translated into pesos at the time of billing.

 

Ourrevenues from outbound international long distance service decreased by Php487million, or 24%, to Php1,555 million in 2006 primarily due to a decline inaverage revenue per minute as a result of a lower average collection rate withthe introduction of low-rate services such as *PLDT ID-DSL* and *BudgetCard*, and the peso appreciation in 2006, which more than offset theincrease in outbound international call volumes in 2006.

 

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

 

Toaddress the market’s demand for low-priced international calls, PLDT modifiedthe *Budget Card*, a prepaid call card, offering a reduced IDD rate ofPhp5 per 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 destination,and now has 100 overseas destinations.  *Budget Cards* are sold indenominations of Php200 and Php100, which must be consumed within 30 days fromfirst 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 years ended December 31, 2006 and2005:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php6,921

 

Php7,233

 

(Php312)

 

(4)

National long distance call volumes (in million minutes)

2,251

 

2,348

 

(97)

 

(4)

 

Our national longdistance service revenues decreased by Php312 million, or 4%, to Php6,921million in 2006 from Php7,233 million in 2005, primarily due to a decrease incall volumes coupled with lower average revenue per minute in 2006 due to thechange in mechanics in our Php10 per call promotion.  In 2005, the Php10 percall promotion was open to all PLDT Group fixed line subscribers nationwidewhile in 2006, the Php10 per call service was made available only to registeredPLDT subscribers for a monthly service fee.  Accordingly, the percentagecontribution of national long distance revenues to our fixed line servicerevenues accounted for 14% and 15% in 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 aflat rate of Php10 for unlimited calls terminating from PLDT to PLDT and Smartand *Talk ‘N Text*subscribers for a Php50 monthly service fee. 

 

PLDTlimited the Php10 per call service for Smart and *Talk ‘N Text* to subscriberswho registered on or before February 24, 2006.  PLDT fixed line subscribers,however, can still register and avail themselves of the unlimited Php10 percall service for national long distance calls within the PLDT network.

 

Data and Other NetworkServices
 

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 information about our data and other network servicerevenues for the years ended December 31, 2006 and 2005:

 

** **

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

**Increase**

** **

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Data and other network service revenues

 

Php13,725

 

Php10,399

 

Php3,326

 

32

Number of DSL broadband subscribers

 

133,159

 

88,811

 

44,348

 

50

Number of PLDT Vibe narrowband subscribers

 

297,250

 

266,703

 

30,547

 

11

 

In2006, our data and other network services posted revenues of Php13,725 million,an increase of Php3,326 million, or 32%, from Php10,399 million in 2005,primarily due to increases in leased lines, IP-based and switched-based dataservices, particularly Diginet and DFON rental, *PLDT DSL* and *PLDTVibe* services.  The revenue contribution of this service segment to ourfixed line service revenues increased to 28% in 2006 from 21% in 2005.

 

IP-based products include *PLDT**DSL* (*myDSL andBizDSL*), *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,* 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.  

 

*DSL* contributed revenues of Php3,132 million in 2006, an increaseof Php754 million, or 32%, from Php2,378 million in 2005, primarily due to anincrease in the number of subscribers.  *DSL* reached 133,159 subscribersas at December 31, 2006 compared with 88,811 subscribers in the same period in2005.  *DSL*offers a number of packages with speeds and monthly feesvarying from 256 kbps at Php999 per month to up to 1 Mbps at Php3,000 per month.  

 

*PLDTVibe* revenues increased by Php106million, or 38%, to Php387 million in 2006 from Php281 million in 2005,primarily due to an increase in subscribers.  As at December 31, 2006, *PLDT Vibe*registered users totaled 297,250,of which 100,362 were exclusive postpaid users, 182,968 were exclusive prepaidusers, and 13,920 were both postpaid and prepaid users.  As at December 31 , 2005, *PLDT Vibe* registered users totaled 266,703, of which 97,016 wereexclusive postpaid users, 149,973 were exclusive prepaid users, and 19,714 wereboth 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 thecorporate market using PLDT’s traditional bandwidth offerings – Fibernet,Arcstar, Acacia, I-Gate, Diginet, BRAINS, among others – continues to provideus with a stable revenue source.  Through Diginet, we also provide Smart’sincreasing fiber optic and leased line data requirements, which are includedunder our national data services.  Diginet revenues increased by Php2,335million, or 53%, to Php6,771 million in 2006 as compared to Php4,436 in 2005mainly due to Smart’s DFON rental of Php4,940 million and Php3,062 million in2006 and 2005, respectively.

* *

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 in the Philippines that makes wireless cashier point-of-sale and wireless card terminalspossible.  Retailers will now be able to reach out to a bigger market in areaswhere physical connections are unavailable and expand the banking system withwireless automated teller machines.

* *

Miscellaneous
 

Miscellaneous service revenues are derived mostlyfrom directory advertising and facilities rental.  In 2006, these revenuesincreased by Php365 million, or 29%, to Php1,632 million from Php1,267 millionin 2005.  The improvement was mainly due to an increase in rental income,primarily from co-location charges on account of an increase in the number of co-locationsites, coupled with an increase in facility management fees.  The percentagecontribution of miscellaneous service revenues to our total fixed line servicerevenues was 3% in 2006 and 2005.

 

*Non-service Revenues*

 

Non-service revenues increased by Php38 million, or 93%,to Php79 million in 2006 from Php41 million in 2005 primarily due to proceeds fromcomputer sales in relation to our DSL promotion.

 

*Other Income*

 

All other income/gainssuch as rental income and gain on disposal of property, which do not fall underservice and non-service revenues are included under this classification.  In2006, our fixed line business segment registered an increase in other income ofPhp4,720 million to Php5,006 million from Php286 million in 2005.  Other incomeincreased in 2006 largely due to the following: (1) a net reversal of aprovision for onerous contract amounting to Php3,529 million related to thechange in the Air Time Purchase Agreement with ACeS International Limited, or AIL(please see *Note 23 – Provisions and Contingencies* to the accompanyingaudited consolidated financial statements for further discussion); (2) gain onsale of fixed assets, other property and materials in the aggregate amount of Php658million; and (3) gain relating to a refund from Manila Electric Company, or Meralco,of Php194 million recorded at fair value in 2006 (payable by Meralco over fouryears.) 

 

Expenses
 

Expenses related to our fixed line business totaledPhp48,535 million in 2006, a decrease of Php1,362 million, or 3%, as comparedto Php49,897 million in 2005.  The decrease was primarily due to lower provisions,financing costs and rent, partially offset by higher compensation and benefits andmaintenance expense.  

 

The following table shows the breakdown of our totalfixed line-related expenses for the years ended December 31, 2006 and 2005 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php20,406

 

42

 

Php20,251

 

41

 

Php155

 

1

Compensation and benefits(1)

10,298

 

21

 

8,541

 

17

 

1,757

 

21

Financing costs

7,271

 

15

 

8,581

 

17

 

(1,310)

 

(15)

Maintenance

3,553

 

7

 

3,309

 

7

 

244

 

7

Selling and promotions

1,736

 

4

 

1,567

 

3

 

169

 

11

Rent

1,579

 

3

 

1,712

 

3

 

(133)

 

(8)

Professional and other contracted services

1,082

 

2

 

1,023

 

2

 

59

 

6

Taxes and licenses

659

 

2

 

625

 

1

 

34

 

5

Communication, training and travel

507

 

1

 

447

 

1

 

60

 

13

Insurance and security services

498

 

1

 

628

 

1

 

(130)

 

(21)

Cost of sales

159

 

–

 

53

 

–

 

106

 

200

Provisions

92

 

–

 

2,297

 

5

 

(2,205)

 

(96)

Other expenses

695

 

2

 

863

 

2

 

(168)

 

(19)

Total 

Php48,535

 

100

 

Php49,897

 

100

 

(Php1,362)

 

(3)

____________

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

 

Depreciationand amortization charges increased by Php155 million, or 1%, to Php20,406million due to the higher depreciation ofour regular asset base from additionalcompleted projects.  

 

Compensation and benefits expenses increased by Php1,757million, or 21%, to Php10,298 million, primarily due to the effect ofcollective bargaining agreement-related increases in salaries and benefits, andan increase in incentive plan-related accruals, partially offset by a reductionin the number of fixed line employees due to PLDT’s manpower rightsizingprogram.  For further discussion on our long-term incentive plan, please see *Note21 – Employee Benefits* to the accompanying audited consolidated financialstatements.

 

Financing costsdecreased by Php1,310 million, or 15%, to Php7,271 million largely due to lowerinterest on loans and related items owing to lower debt balances in 2006 as comparedto 2005.  This decreasing effect was partially offset by: (1) lower foreignexchange gains recorded in 2006 as a result of lower foreign currency debtlevels; and (2) higher hedge costs.  The breakdown of financing costs for ourfixed line business for the years ended December 31, 2006 and 2005 is as follows: 

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

Interest on loans and related items

Php6,254

 

Php9,058

 

(Php2,804)

 

(31)

Hedge costs

1,446

 

1,234

 

212

 

17

Loss (gain) on derivative transactions – net

447

 

510

 

(63)

 

(12)

Accretion on financial liabilities – net

206

 

322

 

(116)

 

(36)

Financing charges

14

 

150

 

(136)

 

(91)

Capitalized interest

(301)

 

(419)

 

118

 

28

Foreign exchange gains – net

(354)

 

(1,889)

 

1,535

 

81

Interest income

(441)

 

(385)

 

(56)

 

(15)

 

Php7,271

 

Php8,581

 

(Php1,310)

 

(15)

 

Maintenance expenses increasedby Php244 million, or 7%, to Php3,553 million, primarily due to highermaintenance costs for foreign cable and wire facilities as more operating andmaintenance-related restorations were incurred in 2006 as compared to 2005.  

 

Selling and promotionexpenses increased by Php169 million, or 11%, to Php1,736 million, primarily asa result of an increase in PLDT’s promotional activities in relation to variousproducts and services, such as PLDT’s *Pwede!* campaign, coupled withhigher public relations expense in 2006.

 

Rentexpenses decreased by Php133 million, or 8%, to Php1,579 million due to loweroffice and building rentals, and a decrease in transponder lease charges,partially offset by an increase in international and domestic leased circuitscharges.

 

Professional and othercontracted services increased by Php59 million, or 6%, to Php1,082 millionprimarily due to higher contracted services and bill printing fees in 2006.

 

Taxesand licenses increased by Php34 million, or 5%, to Php659 million, mainly onaccount of higher business-related taxes incurred in 2006 as compared to 2005.

 

Communication,training and travel expenses increased by Php60 million, or 13%, to Php507million due to an increase in local and foreign travel and training in 2006 ascompared to 2005.

 

Insuranceand security services decreased by Php130 million, or 21%, to Php498 million,primarily due to lower premiums on property all-risk, industrial all-risk andindustrial fire insurance as well as lower security services due to a decreasein number of contracted security guards.

 

Costof sales increased by Php106 million, or 200%, to Php159 million in 2006 due tothe computer-bundled sales in relation to our DSL promotion and *WeRoam*subscriptions.

 

Provisions decreased by Php2,205 million, or 96%, toPhp92 million primarily on account of an improvement in collection rates in2006 compared to 2005 and the consequent reversal of provisions with the changein realizability of certain receivable accounts specifically identified and previouslyprovided for.  The breakdown of provisions for our fixed line business for the yearsended December 31, 2006 and 2005 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

Doubtful accounts

Php45

 

Php1,944

 

(Php1,899)

 

(98)

Write-down of inventories to net realizable value

9

 

157

 

(148)

 

(94)

Onerous contracts and assessments

38

 

196

 

(158)

 

(81)

 

Php92

 

Php2,297

 

(Php2,205)

 

(96)

 

Otherexpenses decreased by Php168 million, or 19%, to Php695 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 Php429 million in 2006 as compared to a benefit from income taxof Php676 million in 2005 primarily due to net movement in deferred tax assetsowing to higher foreign exchange differentials realized in 2005.

 

Net Income 
 

In 2006, our fixedline business segment contributed a net income of Php5,255 million, an increaseof Php4,486 million, or 583%, as compared to Php769 million in 2005 mainly as aresult of an increase in other income and a 3% decrease in fixed line-relatedexpenses, particularly provisions and financing costs.  

 

Information and Communications Technology
 

***Revenues and Other Income***
 

Our information andcommunications technology, or ICT, business is conducted by ePLDT and itssubsidiaries.  

*** ***

OnJuly 11, 2006, ePLDT acquired a 100% equityinterest in SPi Technologies, Inc., or SPi, and its direct and indirectPhilippine and offshore subsidiaries.  SPi is the second largest pure-play BPO service provider and the ninth largest independent BPO service provider worldwide.  It has operations in 19 locations in North America, Europeand Asia.  On August 11, 2006, SPi acquired 100% of CyMed, Inc., a leadingmedical transcription company based in Richmond, Virginia.  

 

On February 16, 2006, ePLDT acquired a 60% equity interest in Level Up!, a leading publisherof online games in the Philippines.  The acquisition of Level Up!, togetherwith netGames, ePLDT’s online gaming subsidiary, will strengthen ePLDT’s onlinegaming business in the Philippines.

 

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

 

In2006, our information and communications technology business generated revenuesof Php7,220 million, an increase of Php3,782 million, or 110%, from Php3,438million in 2005.  This increase was largely due to the consolidation of SPi andLevel Up! and the continued increase of our call center revenues.  Goingforward, we currently expect revenues from our call center and BPO businessesto continue to contribute significantly to our information and communicationstechnology revenues in light of the growing demand for our call center and BPO services.

 

The following table summarizes revenues from ourinformation and communications technology business for the years ended December 31 , 2006 and 2005 by service segment:

 

** **

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php2,624

 

36

 

Php1,944

 

57

 

Php680

 

35

BPO

2,580

 

36

 

–

 

–

 

2,580

 

100

Internet and gaming 

796

 

11

 

556

 

16

 

240

 

43

*Vitro*ä data center

428

 

6

 

376

 

11

 

52

 

14

Others

115

 

1

 

77

 

2

 

38

 

49

 

6,543

 

90

 

2,953

 

86

 

3,590

 

122

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point Product Sales

553

 

8

 

351

 

10

 

202

 

58

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

124

 

2

 

127

 

4

 

(3)

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

Equity in net income of associates

–

 

–

 

7

 

–

 

(7)

 

(100)

 

 

 

 

 

 

 

 

 

 

 

 

Total ICT Revenues and Other Income

Php7,220

 

100

 

Php3,438

 

100

 

Php3,782

 

110

 

*Service Revenues*

 

Servicerevenues generated by our information and communications technology segmentamounted to Php6,543 million in 2006, an increase of Php3,590 million, or 122%,as compared to Php2,953 million in 2005 primarily as a result of theconsolidation of SPi and Level Up! and the continued growth of our call centerbusiness. 

 

*Call**Center*

 

We are focused on developingour call center business which capitalizes on the availability ofEnglish-speaking college graduates in the Philippines with a strongcustomer service orientation.  ePLDT has established one umbrella brand name, *ePLDTVentus*, for all of its call center businesses, including Vocativ andParlance.  *Ventus* provides offshore contact center outsourcing solutionsspecializing in inbound customer care.  Vocativ provides customer and technicalsupport to its clients in the Philippines, United States and the United Kingdom, while Parlance provides exclusive customer support and billing requirements to oneof the largest direct-to-home satellite television providers in the United States.  In total, we own and operate approximately 5,600 seats with 5,130 customerservice representatives, or CSRs, as at December 31, 2006 compared toapproximately 3,350 seats with 3,625 CSRs as at December 31, 2005.  In 2006, *ePLDT Ventus* launched two new sitesbringing our total call center site count to seven as at December 31, 2006.  

 

Call center revenues consist of:

 

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

 

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

 

•              service income for e-mailhandling, web chat, web co-browsing, data entry and BPO based on transactionvolume.

 

Revenues related to our call center business increasedby Php680 million, or 35%, to Php2,624 million in 2006 from Php1,944 million in2005 primarily due to the combined effects of the following:

 

•              an increase in programs beinghandled by Vocativ from 2005 brought about by the acquisition of additionalclients in 2006, as Ventus entered into an alliance with one of India’s leadingBPO companies to serve their voice requirements; 

 

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

 

•              an increased call volume handledby Ventus due to the expansion of our domestic call center group, whichcurrently serves internal (Smart) and external (credit card companies) clients;

 

•              the expansion of Vocativ’s existingTaguig facility by 530 seats from approximately 1,190 seats in 2005 toapproximately 1,720 seats in 2006;

 

•              the expansion of Ventus’ existing Iloilo facility by 130 seats from approximately 370 seats in 2005 to approximately 500seats in 2006; 

 

•              the expansion of Ventus’ back-up/overflowMakati facility by 220 seats from approximately 80 seats in 2005 toapproximately 300 seats in 2006, which provided capacity for seasonalrequirements of Iloilo-based programs;

 

•              the commencement of operations atthe 820-seat Ventus Pasig call center in August 2006; and

 

•              the commencement of operations atthe 780-seat Parlance Libertad call center in September 2006.

 

Call center revenuesaccounted for 40% and 66% of total information and communications technologyservice revenues in 2006 and 2005, respectively.

* *

*Businessprocess outsourcing*

*** ***

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. 

 

Weprovide our BPO services primarily through SPi and its subsidiaries, which weacquired on July 11, 2006.  In 2006, BPO contributed revenues of Php2,580 million,primarily from SPi services, and accounted for 39% of service revenues of ourinformation and communications technology business in 2006.

* *

*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.  In addition, Infocom, through its CustomerService Outsourcing Group, handles PLDT group’s nationwide technical helpdeskoperations;

 

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

 

•              a 60% interest in netGames, apublisher for Massively Multi-player Online Games 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 approximately 80% of the online gaming market.  LevelUp! was acquired on May 1, 2006;

 

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

 

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

 

Internet service revenues consist of: 

 

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

 

•              monthly service fees from postpaidcorporate and consumer subscribers including: (1) charges for Internet usage in excess of allocated free plan Internet hours;(2) one-time installation and activation fees; and (3) fees for value addedservices including e-mail and web hosting services;

 

•              one-time fees generated from thereselling of Internet-related solutions such as security solutions and domainregistration; 

 

•              franchise and royalty fees for *Netopia*Internet cafés, including a one-time subscription fee and monthly recurringfranchise fees based on certain conditions in 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 businesses increased by Php240 million, or 43%, to Php796 million in2006 from Php556 million in 2005 primarily due to the consolidation of AirborneAccess and Level Up! in October 2005 and May 2006, respectively, which resultedin additional revenues of Php13 million and Php139 million, respectively.  OurInternet business revenues accounted for 12% and 19% of service revenues of ourinformation and communications technology business in 2006 and 2005,respectively.

 

*Vitro*ä data center

 

ePLDToperates an Internet data center under the brand name *Vitro*ä which provides co-location services, server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting andwebhosting, shared applications, data disaster recovery and business continuityservices, intrusion detection, and security services such as firewalls andmanaged 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 2006, *Vitro*ä contributedrevenues of Php428 million, an increase of Php52 million, or 14%, from Php376 millionin 2005, primarily due to an increase in co-location revenues and serverhosting.  *Vitro*ä revenues accounted for 7% and 13% of service revenuesof our information and communications technology business in 2006 and 2005,respectively.

 

*Others*

 

Otherrevenues consist of:

 

•              fees generated from the issuanceof digital certificates and licenses; and 

 

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

 

Revenuesfrom other businesses related to our information and communications technologysegment increased by Php38 million, or 49%, to Php115 million in 2006 from Php77million in 2005, largely due to IT helpdesk/contact center services renderedcoupled with an increase in the number of digital certificates sold.

 

Pleaserefer to *Note 9 – Investments**in Associates* to the accompanyingaudited consolidated financial statements for further discussion on ePLDT’sother information and communications technology services.

 

*Non-service Revenues*

 

Non-servicerevenues consist of sales generated from reselling certain software licenses,server solutions, networking products, storage products and data securityproducts.  In 2006, non-service revenues generated by our information and communications technologybusiness increased by Php202 million, or 58%, to Php553 million as compared toPhp351 million in 2005, primarily due to higher revenues from sales ofnetworking 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 decreased to Php124 million in 2006 from Php127million in 2005 primarily due to Infocom’s sale of its *NOW* cableInternet business in 2005; no similar transaction was recorded in 2006.  

 

*Equity Share in Net Income of Associates*

 

ePLDT’s equity share in net income of associatesamounted to Php7 million in 2005 due to ePLDT’s share in the earnings of itsunconsolidated subsidiary, ePDS, Inc.

* *
*Expenses*
 

Expenses associatedwith our information and communications technology business totaled Php7,569million in 2006, an increase of Php4,189 million, or 124%, from Php3,380million in 2005 primarily due to the consolidation of SPi and Level Up!resulting in an increase in compensation and benefits, and professional andother contracted services.  We currently expect these expenses to besignificantly higher going forward as a result of the full year consolidationof SPi and Level Up!.  As a percentage of our information and communicationstechnology revenues, expenses related to our information and communicationstechnology business were 105% and 98% for 2006 and 2005, respectively.  

 

The following table shows the breakdown of our totalinformation and communications technology-related expenses for the years ended December 31 , 2006 and 2005 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php3,033

 

40

 

Php1,351

 

40

 

Php1,682

 

125

Professional and other contracted services

888

 

12

 

82

 

2

 

806

 

983

Depreciation and amortization

712

 

9

 

415

 

12

 

297

 

72

Cost of sales

476

 

6

 

300

 

9

 

176

 

59

Rent

462

 

6

 

362

 

11

 

100

 

28

Asset impairment

427

 

6

 

26

 

1

 

401

 

1,542

Maintenance

373

 

5

 

283

 

8

 

90

 

32

Selling and promotions

350

 

5

 

120

 

4

 

230

 

192

Communication, training and travel

276

 

4

 

98

 

3

 

178

 

182

Amortization of intangible assets

136

 

2

 

–

 

–

 

136

 

100

Equity share in net losses of associates

74

 

1

 

–

 

–

 

74

 

100

Financing costs

73

 

1

 

39

 

1

 

34

 

87

Taxes and licenses

71

 

1

 

36

 

1

 

35

 

97

Provisions

64

 

1

 

54

 

2

 

10

 

19

Insurance and security services

34

 

–

 

14

 

–

 

20

 

143

Other expenses

120

 

1

 

200

 

6

 

(80)

 

(40)

Total 

Php7,569

 

100

 

Php3,380

 

100

 

Php4,189

 

124

____________

 

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

 

Compensationand benefits increased by Php1,682 million, or 125%, to Php3,033 millionlargely due to the increased number of employees and corresponding salaries andemployee benefits resulting from the expansion of our call center businessesand the consolidation of SPi and Level Up! in 2006.  ePLDT’s employee headcountincreased by 9,558, or 208% to 14,150 in 2006 from 4,592 in 2005.  

 

Professionaland other contracted services increased by Php806 million to Php888 millionprimarily due to services sub-contracted by SPi from third parties related toits BPO services.

 

Depreciation andamortization charges increased by Php297 million, or 72%, to Php712 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.  

 

Cost of sales increased by Php176 million, or 59%, toPhp476 million primarily due to an increase in the cost of point products soldin 2006.

 

Rentexpenses increased by Php100 million, or 28%, to Php462 million primarily dueto the opening of two additional call center sites in 2006 which led toincreased rental of leased circuits.

 

Assetimpairment increased by Php401 million to Php427 million primarily due to theimpairment of ePLDT’s notes receivable from Technology Support Services, Inc.Please see *Note 12 – Notes Receivable*to the accompanying auditedconsolidated financial statements for further discussion.

 

Maintenance expenses increasedby Php90 million, or 32%, to Php373 million primarily due to higherhosting-related costs incurred in 2006 as compared to 2005 partially offset byVitro’s lower hardware and server maintenance costs.

 

Selling and promotionexpenses increased by Php230 million, or 192%, to Php350 million mainly due tohigher advertising and marketing spending of netGames and Level Up!.

 

Communication,training and travel expenses increased by Php178 million, or 182%, to Php276million, primarily due to the increased cost of phone lines, bandwidth andinformation system charges, coupled with the increase in foreign and localtravel costs incurred by our call center and BPO businesses. 

 

Anamortization of intangible assets amounting to Php136 million was recognized in2006 in relation to the acquisition of SPi and Level Up!.  See *Note 11 –Goodwill and Intangible Assets* to theaccompanying audited consolidated financial statements for further discussion.  

 

ePLDT’sequity share in net losses of associates amounted to Php74 million in 2006, primarilydue to ePLDT’s share in net losses of its SPi’s associate.

 

Financingcosts increased by Php34 million, or 87%, to Php73 million, primarily due tothe consolidation of SPi in July 2006.

 

Taxesand licenses increased by Php35 million, or 97%, to Php71 million due to higherbusiness-related taxes accrued and paid in 2006 as compared to 2005.

 

Provisionsincreased by Php10 million, or 19%, to Php64 million mainly due to anticipateduncollectible accounts specifically identified in 2006.

 

Insurance and securityservices increased by Php20 million, or 143%, to Php34 million, primarily dueto higher premium costs and an increase in the value of assets insured in 2006as compared to 2005.

 

Other expensesdecreased by Php80 million, or 40%, to Php120 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 Php38 million in2006 primarily due to the recognition of deferred tax assets pertaining to accruedpension cost, net operating loss carry-over and allowance for doubtful accounts,as compared to a provision for income tax of Php12 million in 2005.

 

*Net Income*
 

In 2006, ourinformation and communications technology business segment registered a net lossof Php311 million as against a net income of Php46 million in 2005 mainly as aresult of a 124% increase in ICT-related expenses and the recent opening of twocall centers, partly offset by the increase in ICT revenues mainly from ourcall center business and the consolidation of SPi. 

 

**Liquidityand Capital Resources**

 

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

 

 

**Years Ended December 31,**

 

**2006**

 

**2005**

** **

 

**(in millions)**

 

 

 

**Cash Flows**

 

 

 

Net cash provided by operating activities

Php70,186

 

Php76,213

Net cash used in investing activities

36,126

 

11,694

*Capital expenditures*

*21,111*

* *

*14,990*

Net cash used in financing activities

45,722

 

60,794

Net increase (decrease) in cash and cash equivalents

(12,306)

 

2,738

 

** **

 

** **

 

**December 31,**

 

**2006**

 

**2005**

**(in millions)**

 

**Capitalization**

 

 

 

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

 

 

 

Long-term debt

Php63,771

 

Php84,860

Obligations under capital lease

106

 

344

Preferred stock subject to mandatory redemption

1,369

 

11,974

 

65,246

 

97,178

 

 

 

 

Current portion of interest-bearing financial liabilities: 

 

 

 

Notes payable

205

 

–

Long-term debt maturing within one year

16,183

 

18,684

Obligations under capital lease maturing within one year

924

 

754

 

17,312

 

19,438

Total interest-bearing financial liabilities

82,558

 

116,616

Total equity

104,313

 

74,369

 

Php186,871

 

Php190,985

** **

 

 

 

**Other Financial Data**

 

 

 

Total assets

Php244,883

 

Php250,197

Property, plant and equipment - net

164,693

 

176,974

Cash and cash equivalents

17,753

 

30,059

 

As at December 31 , 2006, our consolidated cash and cash equivalents totaled Php17,753 million.Principal sources of consolidated cash and cash equivalents in 2006 were cashflows from operating activities amounting to Php70,186 million and drawingsfrom Smart’s and ePLDT’s debt facilities aggregating Php9,724 million.  Thesefunds were used principally for capital outlays of Php21,111 million, totaldebt principal payments of Php30,259 million and investments of Php11,187 million.

 

***Operating Activities***

 

Our consolidated netcash flows from operating activities decreased by Php6,027 million, or 8%, toPhp70,186 million in 2006, from Php76,213 million in 2005.

 

A significant portionof our cash flow is generated by our wireless business, which contributedapproximately 58% and 59% of our service revenues in 2006 and 2005,respectively.  Revenues from our fixed line and information and communicationstechnology services accounted for 37% and 5%, respectively, of our servicerevenues in 2006 compared to 39% and 2%, respectively, in 2005. 

 

Cash flows from operating activities of our wirelessbusiness amounted to Php38,053 million in 2006, a decrease of Php8,493 million,or 18%, compared to Php46,546 million in 2005.  However, cash flows fromoperating activities of our fixed line business increased to Php29,720 millionin 2006, compared to Php28,864 million in 2005.  The overall decrease in ourcash flows from operating activities was primarily due to an increase inworking capital requirements with the settlement of various current liabilitiespartially offset by higher collections of accounts receivable.  Our wireless businesssegment accounted for 54% of our cash flows from operating activities while ourfixed line segment accounted for 42% in 2006.  We believe that our continuingstrong cash flows from operating activities on a consolidated basis will allowus to defray our current liabilities despite our current ratio being less than1:1 as at December 31, 2006. 

 

UntilApril 2006, Smart was subject to loan covenants that restrict its ability topay dividends, redeem preferred shares, make distributions to PLDT or otherwiseprovide funds to PLDT or any associate without the consent of its lenders.Smart was able to obtain waivers from Finnvera and certain of its lenders foreach of the dividend payments made by Smart to PLDT in March 2006, 2005, 2004,2003 and 2002 aggregating Php7,000 million, Php19,717 million, Php16,100million, Php6,166 million and Php1,540 million, respectively.  In 2005, Smartredeemed 380.8 million preferred shares previously issued to PLDT at aredemption price of Php13.875 per share, or a total redemption priceaggregating to Php5,283 million. 

 

Paymentsmade by Smart to PLDT after April 2006 did not require prior creditor consentas all loan facilities that contain such restrictions have already beenrepaid.  In March 2007, June 2006 and September 2006, dividend paymentsreceived from Smart amounted to Php8,000 million, Php7,000 million and Php6,600million, respectively.  In addition, Smart redeemed 392 million preferredshares at a total redemption price of Php5,441 million in June 2006.

 

Investing Activities 
 

Net cash used ininvesting activities amounted to Php36,126 million in 2006, an increase of Php24,432million, or 209%, compared to Php11,694 million in 2005.  This was primarily aresult of: (1) an increase in capital expenditures by Php6,121 million; (2)payments for purchase of investments by Php10,939 million in relation to the purchaseof the following in 2006: (a) a 100% equity interest in SPi and CyMed aggregatingPhp8,847 million; (b) the final settlement of the acquisition of SmartBroadband of Php1,201 million; (c) the purchase of a 60% equity interest inLevel Up! of Php347 million; (d) the acquisition of approximately 25.5% equityinterest in Philweb for Php637 million; and (e) the acquisition of theremaining 20% equity in Wolfpac for Php30 million; and (3) the increase inshort-term investments by Php6,710 million in 2006 as compared to a decrease in2005 mainly due to Smart’s increased investment in money market placements withover 90 days maturity in 2006 compared to the maturity of Smart’s prepaidforward exchange contracts in 2005.

 

Our consolidatedcapital expenditures in 2006 totaled Php21,111 million, an increase of Php6,121million, or 41%, from Php14,990 million in 2005 primarily due to PLDT’s,Smart’s and ePLDT’s higher capital spending.  Smart's capital spending of Php10,545million in 2006 was used primarily to rollout its 3G network, further upgradeits core and transmission network facilities and expand its wireless broadbandfacilities, to increase capacity and coverage in respect of basic and advancedwireless services.  PLDT's capital spending of Php8,902 million was principallyused to finance the expansion of its fixed line data and IP-based networkservices.  ePLDT and its subsidiaries’ capital spending of Php1,530 million wasprimarily used to fund its continued call center expansion.  The balancerepresented other subsidiaries’ capital spending.  Consolidated capitalexpenditures in 2005 amounted to Php14,990 million, of which Php8,786 million,Php5,500 million and Php620 million were attributable to Smart, PLDT and ePLDT,respectively.

 

***Financing Activities***

 

On a consolidated basis, we used net cash of Php45,722million for financing activities, net of loan drawings by Smart, in 2006, adecrease of Php15,072 million, or 25%, compared to Php60,794 million in 2005.The net cash used in financing activities in 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 itscommon and preferred stockholders.  

 

Debt Financing 
 

Additions to our consolidated long-term debt in 2006totaled Php9,724 million mainly from Smart's drawings related to the financingof its Phases 8 and 9 GSM facilities.  Payments in respect of principal andinterest of our total debt amounted to Php30,259 million and Php7,498 million,respectively, in 2006, of which Php16,593 million and Php6,123 million wereattributable to PLDT, respectively.

 

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

 

** **

**December 31,**

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

**(in millions)**

** **

** **

** **

** **

** **

** **

** **

U.S. Dollar Debt:

 

 

 

 

 

** **

 

Export Credit Agencies-Supported Loans

Php14,981

 

Php23,126

 

(Php8,145)

** **

(35)

Fixed Rate Notes

40,972

 

52,354

 

(11,382)

** **

(22)

Term Loans

18,611

 

14,288

 

4,323

** **

30

Restructured Loans

–

 

4,767

 

(4,767)

** **

(100)

Satellite Acquisition Loans

2,083

 

3,040

 

(957)

** **

(31)

 

76,647

 

97,575

 

(20,928)

** **

(21)

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

808

 

1,576

 

(768)

** **

(49)

Term Loans

2,499

 

166

 

2,333

** **

1,405

Restructured Loans

–

 

379

 

(379)

** **

(100)

 

3,307

 

2,121

 

1,186

** **

56

 

Php79,954

 

Php103,544

 

(Php23,590)

** **

(23)

 

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

 

Our long-term debtdecreased by Php23,590 million, or 23%, to Php79,954 million as at December 31,2006, 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 29% to Php52,443 million by December 31 , 2006.  In addition, the debt levels of Smart, Mabuhay and ePLDT decreased by6%, 31% and 65%, respectively, to Php25,371 million, Php2,083 million and Php57million, respectively, as at December 31, 2006 due to amortizations andprepayments during 2006.  

 

On October 16, 2006, Smart signed a U.S. Dollar Term Loan Facility withMetropolitan Bank and Trust Company to finance the related Phase 9 GSM Facilityfor an amount of US$50 million.  As at December 31, 2006, this facilityremained undrawn.  Please see *Note 17 – Interest-bearing FinancialLiabilities*to the accompanying audited consolidated financial statementsfor a detailed discussion of our long-term debt.

 

The scheduled maturities of our outstandingconsolidated long-term debt at nominal values as at December 31, 2006 are asfollows:  

 

**Year**

** **

**US$ Loans**

** **

**Peso Loans**

** **

**Total**

 

 

 
2007

 

US$327

 

Php16,032

 

Php289

 

Php16,321

2008

 

147

 

7,211

 

555

 

7,766

2009

 

294

 

14,429

 

556

 

14,985

2010 

 

71

 

3,471

 

1,366

 

4,837

2011

 

15

 

728

 

555

 

1,283

2012 and onwards

 

830

 

40,715

 

–

 

40,715

 

 

US$1,684

 

Php82,586

 

Php3,321

 

Php85,907

 

Approximately Php45,192million principal amount of our consolidated outstanding long-term debt as at December 31 , 2006 is scheduled to mature over the period from 2007 to 2011.  Of thisamount, Php26,009 million was attributable to PLDT, Php17,043 million to Smartand the remainder to Mabuhay Satellite, Maratel and ePLDT.

 

OnJune 5, 2006, Piltel made a partial voluntary prepayment of principal under itsPeso bank facility, U.S. Dollar bank facility, various Trade Creditorfacilities and Notes Indenture.  The voluntary prepayment was made in lieu ofdepositing Excess Cash Flow from the operations of Piltel’s business into aSinking Fund Account.  The aggregate voluntary prepayment amount was Php9,325million (Php6,393 to Smart and Php2,932 million to third party creditors) orUS$176 million (US$121 million to Smart and US$55 million to third partycreditors,) which was applied proportionally to the various debt facilities asset out in the Intercreditor Agreement dated June 4, 2001 (the “IntercreditorAgreement.”)

 

OnDecember 4, 2006, Piltel prepaid the outstanding balance of its principal debtunder its Peso bank facility, U.S. Dollar bank facility, Peso Term Note facility,various Trade Creditor Facilities and Notes Indenture in the aggregate amountof Php11,631 million (Php8,061 million to Smart and Php3,570 million to thirdparty creditors) or US$233 million (US$161 million to Smart and US$72 millionto third party creditors.)  Piltel obtained approval from the Bangko Sentral ngPilipinas to source dollar payment from authorized agent banks.  Please see *Note17 – Interest-bearing financial liabilities* to the accompanying auditedconsolidated financial statements for further discussion.

 

*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 audited consolidated financial statementsfor a detailed discussion of our covenants.

 

Financing Requirements
 

Webelieve that our available cash, including cash flow from operations, willprovide sufficient liquidity to fund our projected operating, investment, capitalexpenditures and debt service requirements for the next 12 months.  

 

As a result of our improving cash flows and reduceddebt levels, we restored the payment of dividends in May 2005 and currentlyintend to gradually increase our dividend payout ratio in succeeding years aswe improve our leverage ratios.For 2006, our dividend payout ratio was 60%which we currently intend to increase to 70% in 2007.

 

*CreditRatings*****

 

Noneof our existing indebtedness contains provisions under which credit rating downgradeswould trigger a default, changes in applicable interest rates or other similarterms 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

 

On November 3, 2006, Moody’s affirmed PLDT’s Ba2 senior unsecured foreign currency rating andchanged its outlook to stable from negative.  The rating action was prompted bythe change in outlook on the Philippines Ba3 country ceiling for foreigncurrency bonds to stable from negative.  On July 18, 2006, Moody’s upgraded PLDT’s local currency corporate family rating from Ba1 to Baa3 with a positiveoutlook.  

 

On August 18, 2006, Fitch upgraded PLDT’s long-term foreign currency IDR to “BB+” from “BB”with a stable outlook, at the same time upgrading PLDT’s global bonds and seniornotes to “BB+” from “BB” and affirmed PLDT’s long-term local currency IDR of“BBB-” with a positive outlook.  Following the licensing of Fitch to provideNational ratings in the Philippines, Fitch assigned PLDT a National long-termrating of “AAA(ph1)” with a stable outlook.  The ratings action follows Fitch’sannouncement that it has upgraded the Country Ceiling on the Republic of the Philippines to “BB+” from “BB.”

 

On August 30, 2006, Standard & Poor’s Ratings Services affirmed its ‘BB+’ foreign currencyrating on PLDT with stable outlook.  At the same time, the rating on PLDT’sSeries III Preferred Stock has been withdrawn as the preferred stock have beenfully converted into common equity.  

 

*EquityFinancing*

 

PLDT raised Php62million and Php275 million from the exercise by certain officers and executivesof stock options in 2006 and 2005, respectively.  In addition, through oursubscriber investment plan, or SIP, which provides postpaid fixed linesubscribers the opportunity to buy shares of our 10% cumulative convertiblepreferred stock as part of the upfront payments collected from subscribers,PLDT was able to raise Php4 million and Php10 million in 2006 and 2005,respectively.  

 

Cashdividend payments in 2006 amounted to Php14,897 million, of which Php14,447million and Php450 million were paid to common and preferred shareholders, respectively,compared to Php10,972 million, of which Php9,587 million and Php1,385 millionwere paid to common and preferred shareholders, respectively, in 2005.  

 

The following table sets forth dividend payments onshares of PLDT’s common stock for 2006 and 2005:

 

** **

** **

**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, 2006

 

50.00

 

9,346

 

 

March 6, 2007

 

March 20, 2007

 

April 20, 2007

 

50.00

 

9,428

 

As at December 31, 2006,there were 188.4 million PLDTcommon shares outstanding compared to 180.8 million common shares outstandingas at December 31, 2005.

 

***Contractual Obligations and Commercial Commitments***

 

*Contractual Obligations*

 

The following table discloses our consolidatedcontractual obligations outstanding as at December 31, 2006: 

 

 

**Payments Due by Period**

 

**Total**

** **

**Within 1 year**

** **

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

** **

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

** **

**After 5 years**

 

(Audited)

**(in millions)**

 

 

 

 

 

 

 

 

 

Long-term debt (1)

Php85,907

 

Php16,321

 

Php22,751

 

Php6,120

 

Php40,715

Long-term lease obligations:

 

 

 

 

 

 

 

 

 

Operating lease

3,420

 

571

 

1,158

 

823

 

868

Capital lease

1,572

 

1,523

 

48

 

1

 

–

Unconditional purchase obligations(2)

834

 

25

 

49

 

172

 

588

Other long-term obligations

1,629

 

–

 

1,629

 

–

 

–

Total contractual obligations

Php93,362

 

Php18,440

 

Php25,635

 

Php7,116

 

Php42,171

___________

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

* *

*(2)    **Based on the amended 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 audited consolidated financialstatements.

* *

*Long-termOperating 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 December 31, 2006, PLDT’s aggregate remaining obligation under these contracts amounted to approximately Php6million.

 

***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 no additionalmaintenance charge.  PLDT may purchase maintenance services upon expiration ofthe first year for a fee of 15% of the current published license fee.  As at December 31 , 2006, PLDT’s aggregate remaining obligation under this agreement wasapproximately 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 equipments.  Inparticular, Smart has lease obligations amounting to Php3,053 million as at December31, 2006 in respect of office and cell site rentals with over 3,000 lessorsnationwide, PLDT has lease obligations aggregating Php100 million as at December31, 2006, ePLDT has lease obligations aggregating Php238 million as at December31, 2006 in respect of certain office space rentals and PLDT Global has lease obligations aggregating Php13million as at December 31, 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 audited consolidated financial statements.

 

*UnconditionalPurchase Obligations*

 

***AirTime Purchase Agreement with AIL*****.**As discussed in *Note 20 – Related PartyTransactions*to the accompanying audited consolidated financial statements,PLDT is a party to a Founder National Service Provider, or NSP, Air TimePurchase Agreement entered into with AIL in March 1997, which was amended inDecember 1998, under which PLDT was granted the exclusive right to sell AILservices as NSP in the Philippines.  In exchange, the Air Time PurchaseAgreement required PLDT to purchase from AIL a minimum of US$5 million worth ofair time annually over ten years commencing on January 1, 2002, the purporteddate of commercial operations of the Garuda I Satellite.  In the event that AIL’s aggregate billed revenue isless than US$45 million in any given year, the Air Time Purchase Agreement alsostates that PLDT has to make supplemental air time purchase payments not toexceed US$15 million per year during the ten-year term.

 

In March 2003, PLDT,together with the other founder NSPs, entered into a Standstill Agreement withAIL.  Under the Standstill Agreement, payments made to AIL under the Air TimePurchase Agreement were based on billings of actual usage pending finalagreement on the terms of the proposed amendment to the Air Time Purchase Agreement.

 

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.

 

On June 21, 2004, AILalso sent PLDT a letter citing PLDT in default under the Air Time PurchaseAgreement for non-payment of outstanding amounts and for repudiation of itsobligations thereunder.  PLDT maintains, however, that the termination of theStandstill Agreement and reinstatement of the terms under the original Air TimePurchase 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.

 

The Air Time PurchaseAgreement provides that the NSPs obligations to make minimum or supplementalair time purchase payments remain in effect until all indebtedness incurred byAIL to finance the AIL System has been repaid.  AIL indebtedness consists of(1) loans with several financial institutions (the “Banks”) under the CreditAgreement dated March 12, 1997, as amended from time to time, the latest ofwhich was on December 30, 1998 under the Amended and Restated Credit Agreementsigned with the Banks; and (2) amounts owing to Martin Marietta OverseasCorporation under the Spacecraft Contract dated August 28, 1995, as amended onDecember 30, 1998. 

 

On September 1, 2006,AIL, PT Asia Cellular Satellite and Inmarsat reached an agreement to pool theirresources to develop product and service offerings in the Asian region, foundedon their respective mobile satellite communications networks, with (a) Inmarsatperforming the role of satellite and network operator and wholesale product andservices developer and (b) AIL performing the role of wholesale and retaildistributor of products and services.

 

Inmarsat operates aconstellation of geostationary satellites that extend mobile phone, fax anddata communications to nearly every part of the world through the services itoffers to end users through its established chain of distribution partners andsatellite communications service providers.

 

PLDT likewise signed aGateway Services Agreement with Inmarsat, whereby PLDT committed to providegateway infrastructure in Subic Bay up to a maximum amount of US$5 million.  Inexchange, PLDT will earn US$0.015 per minute for interconnection services to beprovided to Inmarsat distribution partners for traffic going through the gatewayfacility in Subic Bay.

 

OnSeptember 1, 2006, AIL and PT Asia Cellular Satellite signed a Term Sheet, orBanks Term Sheet, with a majority of the banks which will be used as the basisfor further good faith negotiations between the parties thereto with a view toentering into an agreement further amending the Amended and Restated CreditAgreement with AIL’s bank creditors.

 

Underthe Banks Term Sheet, a majority of the banks agreed, subject to satisfactionof certain conditions, among other things, to amend the Founder NSP Air TimePurchase Agreement and to re-denominate AIL debt into non-interest bearing subordinated convertible bondsmaturing in 2015; to amortize a senior term loan with a final maturity onAugust 1, 2013 and a junior term loan with payments on August 1, 2014 and 2015.

 

Pursuantto the business collaboration arrangements between AIL and Inmarsat, onSeptember 1, 2006, Inmarsat made the first payment of US$4 million to AIL whichwas used to repay principal and interest payable to the banks in accordancewith the Banks Term Sheet.

 

OnFebruary 1, 2007, PLDT (through ACeS Philippines) signed an agreement topurchase LMGT Holdings (ACeS), Inc., or LMGT, and Martin Marietta OverseasCorporation’s, or MMOC, 50% equity and debt interest in AIL, for US$750,000 inaccordance with a notice of proposed transfer issued by LMGT dated December 22,2006 pursuant to a right of first refusal under the AIL Shareholders’Agreement.

** **

As at December 31,2006, PLDT’s aggregate remaining minimum obligation under the amended Air TimePurchase Agreement was approximately Php834 million.****

 

*OtherLong-term Obligations*

 

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

 

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

 

Asat December 31, 2006, 2,675,393 shares of Series V Convertible Preferred Stockand 4,419,916 shares of Series VI Convertible Preferred Stock and all 3,842,000shares of Series VII Convertible Preferred Stock had been voluntarily convertedto PLDT common shares.  As at December 31, 2006, 46,047 shares of Series V and 875,188shares of Series VI Convertible Preferred Stocks remained outstanding.  Theaggregate value of the put option based on outstanding shares as at December 31,2006 was Php1,629 million, which is puttable on June 4, 2008, if all of theoutstanding shares of Series V and VI Convertible Preferred Stocks would be mandatorilyconverted and all the underlying shares of common stock would be put to PLDT atthat time.  The market value of the underlying shares of common stock was Php2,349million, based on the market price of PLDT common shares of Php2,550.00 pershare as at December 31, 2006.

 

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

 

*Commercial Commitments*

 

As at December 31 , 2006, our outstanding commercial commitments, in the form of letters ofcredit, amounted to Php1,546 million.  These commitments will expire within oneyear.

 

**Quantitativeand Qualitative Disclosures about Market Risk****s**

 

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 currently intend to use internally generatedfunds and proceeds 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 December 31 , 2006, the Philippine peso had appreciated by 8% against the U.S. dollar toPhp49.045 to US$1.00 from Php53.062 to US$1.00 as at December 31, 2005.  As at December 31, 2005, likewise, the peso appreciated by 6% to Php53.062 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 the 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 and hedges wecarry.  As at December 31, 2006, consolidated foreign currency denominated debtamounted to Php76,647 million, a reduction from Php101,423 million as at December31, 2005.  As such, we recognized foreign exchange gains of Php2,008 millionand Php4,906 million in 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 December 31, 2006, approximately 96% 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 43% of our consolidated debts, or 31%net of our U.S. dollar cash balances as at December 31, 2006), and interestexpense on our debt in Philippine peso terms.  In addition, many of ourfinancial ratios and other financial tests are affected by the movements in thePhilippine peso to U.S. dollar exchangerate.

 

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 for as either cash flow hedgesor transactions 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 December 31, 2006, PLDT’s outstanding forward foreign exchangecontracts, principal-only long-term cross-currency swap contracts and currencyoption contracts amounted to US$202 million; US$550 million; and US$174million, respectively.  Smart had no outstanding forward foreign exchangecontracts as at December 31, 2006. 

 

For further discussions of these contracts, see *Note24 – Financial Assets and Liabilities – Derivative Financial Instruments*tothe accompanying audited 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 December 31, 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 audited 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 and Changing Prices**

** **

Inflation can be a significant factor in thePhilippine economy, and we are continually seeking ways to minimize itsimpact.  In recent periods, we do not believe inflation has had a materialimpact on our operations.  The average inflation rate in the Philippines in 2006 was 6.2%, compared to 7.6% in 2005.

** **

**OTHER INFORMATION**

 

***Smart’s Fixed Rate Corporate Notes Issue***

*** ***

On February 15, 2007, Smart issued Php5 billionunsecured fixed rate corporate notes, made up of Series A notes amounting toPhp3.8 billion and Series B notes amounting to Php1.2 billion with five and tenyear terms, respectively.  Series A were priced at 5.625%, while Series B werepriced at 6.500%.  Funds raised from the issuance of these notes will be usedprimarily for Smart’s capital expenditures for network improvement andexpansion.

 

*Related Party Transactions*
 

*Cooperation Agreement with First Pacific and certain affiliates, or FPParties, 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 toNTT DoCoMo, Inc, or DoCoMo, pursuant to a Stock Sale and Purchase Agreementdated January 31, 2006 between NTT Communications and DoCoMo, the FP Parties,NTT Communications and DoCoMo entered into a Cooperation Agreement, datedJanuary 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.

 

Keyprovisions of the Cooperation Agreement pertain to, among other things,restrictions on the ownership of shares of PLDT by NTT Communications andDoCoMo, competition, business cooperation, additionalrights of DoCoMo, change in control and termination.  See *Note 20 – RelatedParty Transactions* to the accompanying audited consolidated financialstatements for further details.

 

*Integrated i-mode ServicesPackage Agreement between DoCoMo and Smart –*An 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 a 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 December 31, 2006 amounted to Php53million.

 

*Advisory ServicesAgreement between DoCoMo and PLDT* –– AnAdvisory Services Agreement was entered into by DoCoMo and PLDT on June 5,2006, in accordance with the Cooperation Agreement between PLDT and DoCoMo.Pursuant to the agreement, DoCoMo will provide the services of certain keypersonnel in connection with certain aspects of the business of PLDT andSmart.  Also, the agreement governs the terms and conditions of theappointments and the corresponding fees related thereto.  The initial licensefee paid as at December 31, 2006 amounted to Php12 million.  Outstandingliability under this agreement amounted to Php32 million as at December 31,2006.

 

*Other Agreements with NTTCommunications and/or its Affiliates*—Under certain agreements, (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 telecommunicationsservices.  Total fees under these agreements totaled Php184 million and Php256million for the years ended December 31, 2006 and 2005, respectively.  PLDT’soutstanding obligations under these agreements amounted to Php18 million andPhp23 million as at December 31, 2006 and 2005, respectively.

 

*Agreements between Smartand Asia Link B.V*., *or ALBV* — Undercertain agreements, ALBV undertakes to provide technical support services andassistance in the operations and maintenance of Smart’s cellular business.Total fees under these agreements totaled Php591 million and Php567 million forthe years ended December 31, 2006 and 2005, respectively.  Outstandingobligations of Smart under these agreements amounted to Php128 million and Php194million as at December 31, 2006 and 2005, respectively.  ALBV is a subsidiaryof the First Pacific Group.

 

*Agreements relating toinsurance companies* — Gotuaco delRosario and Associates, or Gotuaco, acts as the broker for certain insurancecompanies to cover certain insurable properties of the PLDT Group.  Insurancepremiums are remitted to Gotuaco and the broker’s fees are settled betweenGotuaco and the insurance companies.  In addition, PLDT has an insurance policywith Malayan Insurance Co., Inc., or Malayan, wherein premiums are directlypaid to Malayan.  Total insurance expenses paid under these agreements amountedto Php360 million and Php468 million for the years ended December 31, 2006 and 2005, respectively.  Two directors of PLDT have a direct/indirect interest in orserve as a director/officer of Gotuaco and Malayan.

 

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

 

 
****
 

 

 

**INDEPENDENT AUDITORS’ REPORT**

 

 

 

The Stockholders and the Board of Directors

Philippine Long Distance Telephone Company

Ramon Cojuangco Building

Makati Avenue, Makati City, Philippines

 

 

Wehave audited the accompanying financial statements of Philippine LongDistance Telephone Company and Subsidiaries, whichcomprise the consolidated balance sheets as atDecember 31, 2006 and 2005, and the consolidated statements of income, consolidated statementsof changes in equity and consolidatedstatements of cash flows for each of the three years in the period endedDecember 31, 2006, and a summary of significant accounting policies andother explanatory notes.

**Management’s Responsibility for the Financial Statements**

Management is responsible for the preparation and fairpresentation of these financial statements in accordance with PhilippineFinancial Reporting Standards.  This responsibility includes: designing,implementing and maintaining internal control relevant to the preparation andfair presentation of financial statements that are free from material misstatement,whether due to fraud or error; selecting and applying appropriate accountingpolicies; and making accounting estimates that are reasonable in thecircumstances.

**Auditors’ Responsibility**

Our responsibility is to express an opinion on these financialstatements based on our audits.  We conducted our audits in accordance withPhilippine Standards on Auditing.  Those standards require that we comply withethical requirements and plan and perform the audit to obtain reasonableassurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain auditevidence about the amounts and disclosures in the financial statements.  Theprocedures selected depend on the auditor’s judgment, including the assessmentof the risks of material misstatement of the financial statements, whether dueto fraud or error.  In making those risk assessments, the auditor considersinternal control relevant to the entity’s preparation and fair presentation ofthe financial statements in order to design audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the entity’s internal control.  An audit alsoincludes evaluating the appropriateness of accounting policies used and thereasonableness of accounting estimates made by management, as well asevaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained issufficient and appropriate to provide a basis for our audit opinion.

 

 

 

**Opinion**

In our opinion, the financial statements present fairly, inall material respects,**the financial position of Philippine LongDistance Telephone Company and Subsidiaries as ofDecember 31, 2006 and 2005, and its financial performance and its cash flows foreach of the three years in the period ended December 31, 2006 inaccordance with Philippine Financial Reporting Standards.

 

 

SYCIP GORRES VELAYO & CO.

 

 

 

 

**/s/**Betty C. Siy-Yap

BETTY C. SIY-YAP

Partner

CPA Certificate No. 57794

SEC Accreditation No. 0098-A

Tax Identification No. 102-100-627

PTR No. 4181272, January 2,2006, Makati City

 

March 6, 2007
****
 
****
Exhibit 1.3

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

AS AT DECEMBER 31, 2006 AND 2005

AND FOR THE THREE YEARS ENDED DECEMBER 31, 2006, 2005AND 2004

** **

AND

REPORT OF INDEPENDENT AUDITORS
****
**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

CONSOLIDATEDBALANCE SHEETS

**December 31, 2006 and 2005**

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

** **

** **

**2006**

 

2005

**ASSETS**

**Noncurrent Assets**

** **

** **

** **

Property, plant and equipment (Notes 2, 3, 8 and 17)

**164,693**

 

176,974

Investments in associates (Notes 2, 9 and 17)

**651**

 

15

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

**116**

 

109

Investment properties (Notes 2, 3 and 10)

**587**

 

701

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

**12,999**

 

3,049

Deferred income tax assets (Notes 2 and 6)

**19,658**

 

15,457

Derivative assets (Notes 2 and 24)

**434**

 

2,648

Notes receivable (Notes 2, 12 and 24)

**–**

 

346

Prepayments - net of current portion

**843**

 

1,062

Advances and refundable deposits - net of current portion (Notes 2 and 20)

**1,935**

 

1,141

Total Noncurrent Assets 

**201,916**

 

201,502

**Current Assets**

** **

 

 

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

**17,753**

 

30,059

Short-term investments (Notes 2 and 24)

**8,327**

 

2,750

Trade and other receivables (Notes 2, 3, 14 and 24)

**9,938**

 

7,856

Inventories and supplies (Notes 2 and 15)

**1,230**

 

1,548

Derivative assets (Notes 2 and 24)

**47**

 

37

Current portion of prepayments

**5,519**

 

5,001

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

**153**

 

1,444

Total Current Assets 

**42,967**

 

48,695

 

**244,883**

 

250,197

 

** **

 

 

**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-442,375,057 shares as at December 31, 2006 and 443,343,035 shares  as at December 31, 2005

**4,424**

 

4,433

Common stock, Php5 par value, authorized-234,000,000 shares; issued and  outstanding-188,434,695 shares as at December 31, 2006 and 180,789,003 shares  as at December 31, 2005

**942**

 

904

Stock options issued (Note 21)

**40**

 

67

Equity portion of convertible preferred stock (Note 17)

**9**

 

49

Capital in excess of par value

**66,574**

 

53,918

Retained earnings (Note 7)

**32,784**

 

12,583

Cumulative translation adjustments (Note 24)

**(2,018)**

 

1,253

                Total Equity Attributable to Equity Holders of PLDT

**102,755**

 

73,207

**Minority interest**

**1,558**

 

1,162

Total Equity

**104,313**

 

74,369

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANYAND SUBSIDIARIES**

** **

CONSOLIDATEDBALANCE SHEETS (*continued*)

**December 31, 2006 and 2005**

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

 

** **

**2006**

 

2005

**Noncurrent Liabilities**

** **

 

 

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

**65,246**

 

97,178

Deferred income tax liabilities (Notes 2 and 6)

**478**

 

49

Derivative liabilities (Notes 2 and 24)

**6,872**

 

5,777

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

**–**

 

3,966

Pension and other employee benefits (Notes 2, 3 and 21)

**2,982**

 

4,252

Customers’ deposits

**2,204**

 

2,215

Other noncurrent liabilities (Notes 2, 3, 8, 14 and 18)

**7,581**

 

7,600

Total Noncurrent Liabilities

**85,363**

 

121,037

**Current Liabilities**

** **

 

 

Accounts payable (Notes 2 and 24)

**11,684**

 

15,966

Accrued expenses and other current liabilities (Notes 2, 3, 17, 19 and 20)

**19,157**

 

13,306

Unearned revenues (Note 2)

**3,274**

 

2,656

Derivative liabilities (Notes 2 and 24)

**108**

 

192

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

**446**

 

408

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

**17,312**

 

19,438

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

**788**

 

746

Income tax payable (Notes 2 and 6)

**2,438**

 

2,079

Total Current Liabilities

**55,207**

 

54,791

 

**244,883**

 

250,197

* *

*See accompanying Notes toConsolidated Financial Statements.*

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

 

**CONSOLIDATED STATEMENTS OF INCOME**

**For the Years Ended December 31, 2006, 2005 and 2004**

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

** **

** **

**2006**

2005

2004

**INCOME**

** **

 

 

Service revenues

**125,140**

121,062

115,206

Non-service revenues (Note 5)

**2,967**

3,312

6,269

Equity share in net income of associates

**–**

7

–

Other income (Notes 4 and 5)

**5,736**

1,663

4,729

 

**133,843**

126,044

126,204

**EXPENSES**

** **

 

** **

Depreciation and amortization (Notes 4 and 8)

**31,870**

30,822

21,405

Compensation and benefits (Notes 5 and 21)

**18,371**

14,136

12,025

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

**9,044**

9,133

19,264

Maintenance (Note 20)

**6,891**

6,705

5,671

Cost of sales (Notes 5, 20 and 22)

**5,522**

6,501

11,352

Selling and promotions

**5,067**

5,093

5,478

Professional and other contracted services (Notes 5 and 20)

**3,298**

2,464

2,228

Rent (Note 22)

**2,275**

2,086

1,907

Asset impairment (Notes 3, 5, 8, 9 and 11)

**1,818**

26

1,412

Taxes and licenses (Note 23)

**1,748**

2,205

1,997

Communication, training and travel

**1,481**

1,465

1,310

Insurance and security services (Note 20)

**1,254**

1,523

1,644

Provisions (Notes 3, 5, 14, 15, 20, 22 and 23)

**985**

2,926

4,851

Amortization of intangible assets (Note 11)

**448**

244

155

Equity in net losses of associates

**74**

–

74

Other expenses (Note 20)

**1,508**

2,100

2,499

 

**91,654**

87,429

93,272

**INCOME BEFORE INCOME TAX**

**42,189**

38,615

32,932

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

**6,869**

4,136

4,973

**NET INCOME FOR THE YEAR**

**35,320**

34,479

27,959

**ATTRIBUTABLE TO:**

** **

 

 

Equity holders of PLDT

**35,116**

34,112

28,031

Minority interest

**204**

367

(72)

** **

**35,320**

34,479

27,959

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

** **

 

 

Basic

**187.91**

189.96

156.14

Diluted

**187.81**

185.72

154.51

* *

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

* *

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

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN EQUITY**

**For the Years EndedDecember 31, 2006, 2005 and 2004**

**(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, 2004**

**4,505**

**847**

**286**

**523**

**49,633**

**(36,982)**

**549**

**19,361**

**771**

**20,132**

Changes in equity:

 

 

 

 

 

 

 

 

 

 

Income for the year

**–**

**–**

**–**

**–**

**–**

28,031

–

28,031

(72)

27,959

Currency translation differences (Note 24)

**–**

**–**

**–**

**–**

**–**

**–**

17

17

8

25

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

**–**

**–**

**–**

**–**

**–**

**–**

(5)

(5)

–

(5)

Net gain on cash flow hedges  (Note 24)

**–**

**–**

**–**

**–**

**–**

**–**

(199)

(199)

–

(199)

Total income and expense for the year recognized directly to equity

**–**

**–**

**–**

**–**

**–**

**–**

(187)

(187)

8

(179)

**Total income and expense for the year**

** **

** **

** **

** **

** **

**28,031**

**(187)**

**27,844**

**(64)**

**27,780**

**Cash dividends (Note 7)**

**–**

**–**

**–**

**–**

**–**

**(1,527)**

**–**

**(1,527)**

**–**

**(1,527)**

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

**(8)**

**2**

**–**

**(75)**

**445**

**–**

**–**

**364**

**–**

**364**

**Exercised shares**

**–**

**2**

**(114)**

**–**

**386**

** **

** **

**274**

**–**

**274**

**Cancelled options shares**

**–**

**–**

**(5)**

**–**

**5**

**–**

**–**

**–**

**–**

**–**

**Cost of share-based payments**

**–**

**–**

**14**

**–**

**–**

**–**

**–**

**14**

**–**

**14**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**150**

**150**

**Balances at December 31, 2004**

**4,497**

**851**

**181**

**448**

**50,469**

**(10,478)**

**362**

**46,330**

**857**

**47,187**

**Balances at January 1, 2005**

**4,497**

**851**

**181**

**448**

**50,469**

**(10,478)**

**362**

**46,3****30**

**857**

**47,18****7**

Changes in equity:

 

 

 

 

 

 

 

 

 

 

Income for the year

–

–

–

–

–

34,112

–

34,112

367

34,479

Currency translation differences (Note 24)

–

–

–

–

–

–

(62)

(62)

(36)

(98)

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

–

–

–

–

–

–

4

4

–

4

Net gain on cash flow hedges  (Note 24)

–

–

–

–

–

–

949

949

–

949

Total income and expense for the year recognized directly to equity

–

–

–

–

–

–

891

891

(36)

855

**Total income and expense for the year**

**–**

**–**

**–**

**–**

**–**

**34,112**

**891**

**35,003**

**331**

**35,334**

**Cash dividends (Note 7)**

**–**

**–**

**–**

**–**

**–**

**(11,051)**

**–**

**(11,051)**

**–**

**(11,051)**

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

**(64)**

**51**

**–**

**(399)**

**3,062**

**–**

** **

**2,650**

**–**

**2,650**

**Exercised shares**

**–**

**2**

**(113)**

**–**

**386**

**–**

**–**

**275**

**–**

**275**

**Cancelled options shares**

**–**

**–**

**(1)**

**–**

**1**

**–**

**–**

**–**

**–**

**–**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**(26)**

**(26)**

**Balances at December 31, 2005**

**4,433**

**904**

**67**

**49**

**53,918**

**12,583**

**1,253**

**73,207**

**1,162**

**74,369**

 

 

 

 

 

 

 

 

 

 

 

**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 year

–

–

–

–

–

35,116

–

35,116

204

35,320

Currency translation differences (Note 24)

–

–

–

–

–

–

(766)

(766)

(45)

(811)

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

–

–

–

–

–

–

5

   5

–

   5

Net loss on cash flow hedges  (Note 24)

–

–

–

–

–

–

(2,510)

(2,510)

–

(2,510)

Total income and expense for the year recognized directly to equity

–

–

–

–

–

–

(3,271)

(3,271)

(45)

(3,316)

**Total income and expense for the year**

**–**

**–**

**–**

**–**

**–**

**35,116**

**(3,271)**

**31,845**

**159**

**32,004**

**Cash dividends (Note 7)**

**–**

**–**

**–**

**–**

**–**

**(14,915)**

**–**

**(14,915)**

**–**

**(14,915)**

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

**(9)**

**38**

**–**

**(40)**

**12,567**

**–**

**–**

**12,556**

**–**

**12,556**

**Exercised shares (Note 21)**

**–**

**–**

**(27)**

**–**

**89**

**–**

**–**

**62**

**237**

**299**

**Balances at December 31, 2006**

**4,42****4**

**94****2**

**4****0**

**9**

**66,574**

**32,784**

**(2,018)**

**102,755**

**1,558**

**104,313**

* *

*See accompanying Notes to Consolidated Financial Statements.*

* *
**
**PHILIPPINE LONG DISTANCETELEPHONE COMPANY AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Years Ended December 31, 2006, 2005 and 2004**

**(in million pesos)**

 

** **

**2006**

2005

2004

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

Income before income tax

**42,189**

38,615

32,932

Adjustments for:

** **

 

 

Depreciation and amortization (Note 8)

**31,870**

30,822

21,405

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

**7,360**

10,377

11,853

Accretion on financial liabilities - net (Note 5)

**3,314**

2,882

3,412

Asset impairment (Note 5)

**1,818**

26

1,412

Provision for doubtful accounts (Note 5)

**736**

2,251

3,955

Amortization of intangible assets (Note 11)

**448**

244

155

Loss on derivative transactions - net (Note 5)

**405**

628

864

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

**211**

479

577

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

**130**

251

284

Equity share in net (income) loss of associates

**74**

(7)

74

Provisions for onerous contracts and assessments (Note 5)

**38**

196

319

Interest income (Note 5)

**(1,654)**

(1,535)

(942)

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

**(2,008)**

(4,906)

2,636

Gain on reversal of provision for onerous contracts (Notes 20, 22 and 23)

**(3,529)**

–

–

Gain on debt exchange and debt restructuring transactions (Note 5)

**–**

–

(4,419)

Others

**(1,059)**

(317)

704

Operating income before working capital changes

**80,343**

80,006

75,221

Decrease (increase) in:

** **

 

 

Trade and other receivables

**(1,900)**

(1,036)

2,290

Inventories and supplies

**474**

509

7

Prepayments

**(1,685)**

(3,293)

119

Advances and refundable deposits

**1,337**

(240)

(873)

Increase (decrease) in:

** **

 

 

Accounts payable

**(6,072)**

6,466

2,614

Accrued expenses and other current liabilities

**1,849**

2,457

1,560

Unearned revenues

**574**

(250)

(213)

Pension and other employee benefits

**3,528**

1,316

(750)

Net cash generated from operations

**78,448**

85,935

79,975

Income taxes paid

**(8,262)**

(9,722)

(5,478)

Net cash provided by operating activities

**70,186**

76,213

74,497

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

Additions to property, plant and equipment

**(20,562)**

(14,486)

(20,567)

Proceeds from disposal of property, plant and equipment

**735**

912

112

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

**(549)**

(504)

(595)

Payments for purchase of investments - net of cash acquired (Note 11)

**(11,187)**

(248)

(1,366)

Additions to investment properties

**–**

–

(3)

Proceeds from disposal of investment properties

**72**

11

–

Increase (decrease) in short-term investments

**(5,508)**

1,202

(2,212)

Decrease (increase) in investments in notes receivable

**–**

(60)

(286)

Interest received

**1,481**

1,408

954

Decrease(increase) in advances and refundable deposits

**(608)**

71

24

Net cash used in investing activities

**(36,126)**

(11,694)

(23,939)

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANYAND SUBSIDIARIES**

** **

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

**For the Years Ended December 31, 2006, 2005 and 2004**

(in million pesos)

 

** **

**2006**

2005

2004

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

 

Proceeds from availment of long-term debt

**9,724**

5,471

12,131

Payments of long-term debt

**(30,108)**

(44,323)

(39,548)

Payments of debt issuance costs

**(34)**

(133)

–

Proceeds from notes payable

**212**

329

502

Payments of notes payable

**(151)**

(387)

(2,457)

Payments of obligations under capital lease

**(195)**

(38)

(136)

Interest paid - net of capitalized portion

**(7,498)**

(10,545)

(12,310)

Proceeds from (settlements of) derivatives

**(2,304)**

(1,645)

(210)

Cash dividends paid

**(14,913)**

(10,972)

(1,456)

Proceeds from issuance of capital stock

**66**

285

281

Increase (decrease) in:

** **

 

 

Customers’ deposits

**(1)**

42

(4)

Other noncurrent liabilities

**(520)**

1,122

667

Net cash used in financing activities

**(45,722)**

(60,794)

(42,540)

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

**(644)**

(987)

(69)

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

**(12,306)**

2,738

7,949

**CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**

**30,059**

27,321

19,372

**CASH AND CASH EQUIVALENTS AT END OF YEAR**

**17,753**

30,059

27,321

* *

*Seeaccompanying Notes to Consolidated Financial Statements.*

* *

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

 

**NOTES TO 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.

 

On December 28, 2006, PLDTissued a notice of its intent to delist the ADSs from NYSE Arca (but willcontinue and maintain the listing of the ADSs on the NYSE) since there is noadditional advantage in having dual listing of the ADS, on both the NYSE andNYSE Arca.  The delisting from NYSE Arca will eliminate duplicativeadministrative burdens and costs.  The actual delisting from the NYSE Arca isexpected to be effective sometime in the first half of 2007.

 

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.

 

Our consolidated financial statements as at December31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004 wereapproved and authorized for issuance by the Board of Directors on March 6,2007.

 

 

 

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

 

**Basisof Preparation**

 

Ourconsolidated financial statements have been prepared under the historical costconvention as modified by the revaluation of derivative financial instruments,available-for-sale financial assets and investment properties that have been measuredat fair values.  The carrying values of recognized assets and liabilities thatare hedged items in fair value hedges, and are otherwise carried at cost, areadjusted to record changes in the fair values attributable to the risks thatare being hedged.

 

Ourconsolidated financial statements are presented in Philippine pesos and allvalues are rounded to the nearest million except when otherwise indicated.

 

**Statementof Compliance**

 

Ourconsolidated financial statements have been prepared in compliance withaccounting principles generally accepted in the Philippines as set forth underPhilippine Financial Reporting Standards, or PFRS.  PFRS include statementsnamed PFRS and Philippine Accounting Standards, or PAS, and interpretationsissued by the Philippine Accounting Standards Council.

 

**Changesin Accounting Policies**

 

Theaccounting policies adopted are consistent with those of the previous financialyear except as follows:

 

Wehave adopted the following new and amended PFRS and International FinancialReporting Interpretations Committee, or IFRIC, interpretations during theyear.  Our adoption of these revised standards and interpretations did not haveany effect on our financial statements.  Our adoption, however, gave rise toadditional disclosures on the following:

 

•        PAS 19 – Amendment – EmployeeBenefits;

•        PAS 21 – Amendment – The Effectsof Changes in Foreign Exchange Rates;

•        PAS 39 – Amendment – FinancialInstruments: Recognition and Measurement;

•        PFRS 6 – Exploration for andEvaluation of Mineral Resources;

•        IFRIC 4 – Determining Whether anArrangement Contains a Lease;

•        IFRIC 5 – Rights to InterestsArising from Decommissioning, Restoration and Environmental RehabilitationFunds; and

•        IFRIC 6 – Liabilities arising fromParticipating in a Specific Market – Waste Electrical and Electronic Equipment.

 

The principal effects of our adoption of the abovestandards are as follows:

 

***PAS 19, “Employee Benefits”.***  As of January 1, 2006, we adopted the amendments toPAS 19.  As a result, additional disclosures are made providing informationabout trends in the assets and liabilities in the defined benefit plans and theassumptions underlying the components of the defined benefit cost.  This changehas resulted in additional disclosures but has not had any recognition ormeasurement impact, as we chose not to apply the new option offered torecognize actuarial gains and losses outside of the consolidated statements ofincome.

 

***PAS 21, “The Effects of Changes in Foreign ExchangeRates”.***As of January 1, 2006,we adopted the amendments to PAS 21.  As a result, all exchange differencesarising from a monetary item that forms part of our net investment in a foreignoperation are recognized in a separate component of equity in the consolidatedfinancial statements regardless of the currency in which the monetary item isdenominated.  The adoption has had no significant impact on our consolidatedfinancial statements as at December 31, 2006 and 2005.

 

***PAS39, “Financial Instruments: Recognition and Measurement”.***There******were three amendments to PAS 39issued in 2005 that became effective for financial years beginning on or afterJanuary 1, 2006.

 

*Amendmentfor financial guarantee contracts* –amended the scope of PAS 39 to require financial guarantee contracts that arenot considered to be insurance contracts to be recognized initially at fairvalue and to be re-measured at the higher of the amount determined inaccordance with *PAS 37*, *“Provisions, Contingent Liabilities andContingent Assets,”* and the amount initially recognized less, whenappropriate, cumulative amortization recognized in accordance with *PAS 18,“Revenue”*.  This amendment did not have an effect on our consolidatedfinancial statements.

 

*Amendmentfor hedges of forecast intragroup transactions* – amended PAS 39 to permit the foreign currency riskof a highly probable intragroup forecast transaction to qualify as the hedgeditem in a cash flow hedge, provided that the transaction is denominated in acurrency other than the functional currency of the entity entering into thattransaction and that the foreign currency risk will affect the consolidatedstatements of income.  As we currently have no such transactions, the amendmentdid not have an effect on our consolidated financial statements.

 

*Amendmentfor the fair value option* – amendedPAS 39 to restrict the use of the option to designate any financial asset orany financial liability to be measured at fair value through the consolidatedstatements of income.  As we have not previously used this option, theamendment did not have an effect on our consolidated financial statements.

 

***PFRS6, “Exploration for and Evaluation of Mineral Resources”.***PFRS 6 permits an entity to develop an accountingpolicy for exploration and evaluation assets without specifically consideringthe requirements of *PAS 8, Accounting Policies, Changes in AccountingEstimates and Errors*.  As we are not into exploration of mineral resources,this standard has had no impact on the consolidated financial statements.

 

***IFRIC4, “Determining Whether an Arrangement Contains a Lease”.***We adopted IFRIC Interpretation 4 as of January 1,2006, which provides guidance in determining whether arrangements contain alease to which lease accounting must be applied.  Upon adoption of thestandard, we reviewed all of the outstanding contracts and agreements anddetermined the change in accounting policy had no significant impact on us asat December 31, 2006 and 2005. 

 

***IFRIC 5, “Rights to Interests Arising fromDecommissioning, Restoration and Environmental Rehabilitation Funds”.***IFRIC Interpretation 5 establishes the accountingtreatment for funds established to help finance decommissioning for the PLDTGroup’s assets.  As we do not currently operate on a country where such fundsexist, this interpretation has had no impact on the consolidated financialstatements.

 

***IFRIC 6, “Liabilities arising from Participating in aSpecific Market – Waste Electrical and Electronic Equipment”.***IFRIC Interpretation 6 established the recognitiondate for liabilities arising from the European Union Directive relating to thedisposal of Waste Electrical and Electronic Equipment.  As we do not have wasteelectrical and electronic equipment and is not a member of the European Union,this interpretation has had no impact on our consolidated financial statements.

 
****
**Basis of Consolidation**

 

Our consolidated financial statements include thefinancial statements of PLDT and those of the following significant subsidiaries(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

–

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

Philippines

Internet broadband and distributor

–

100.0

Wolfpac Mobile, Inc., or Wolfpac 

Philippines

Mobile applications developer and  service provider

–

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  ClarkTel

Philippines

Telecommunications services

100.0

–

Subic Telecommunications Company, Inc.,  or SubicTel

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, and Subsidiaries

Philippines

Business process outsourcing, or  BPO, services

–

100.0

Infocom Technologies, Inc., or Infocom

Philippines

Internet services

–

99.6

netGames, Inc., or netGames

Philippines

Publisher of online games

–

80.0

 

 

 

 

 

 

 

 

 

 

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

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 consolidated financial statements using uniform accounting policiesfor like transactions and other events with similar circumstances.Intercompany balances and transactions, including intercompany profits andunrealized 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***

 

OnMay 8, 2006, Smart signed a share purchase agreement to acquire the remaining20% 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 acquired in July 2006.

 

***ePLDT’s Acquisition of Level Up!***

 

On February 16, 2006, ePLDT acquired a 60% equityinterest in Level Up!, a leading publisher of online games in the Philippines.  The acquisition of Level Up!, together with netGames, ePLDT’s online gamingsubsidiary, will strengthen ePLDT’s online gaming business in the Philippines.

 

Post- closing condition were completed on April 30,2006 and in August 2006, the Shareholders Agreement and Share PurchaseAgreement between ePLDT and Level Up! were amended to reflect the removal ofearn-out and price adjustment provisions thereby fixing the acquisition for 60%of Level Up! at the original purchase price of US$7 million.

 

***ePLDT’s Acquisition of SPi***

*** ***

OnJuly 11, 2006, ePLDT acquired a 100% equity interest in SPi and its direct andindirect Philippine and offshore subsidiaries for a total cash consideration ofUS$135 million.  As part of the transaction, ePLDT also acquired a US$7 milliondebt owed by SPi to the seller at face value.  In addition, ePLDT advancedUS$16 million to SPi in order for SPi to fully pay its debt owed to DBS Bank Singapore.  ePLDT currently intends to have this debt refinanced by SPi in due course.

 

SPiis the second largest pure-play business process outsourcing, or BPO, serviceprovider and the ninth largest independent BPO service provider worldwide.  Ithas operations in 19 locations in North America, Europe and Asia.  Itscustomers include Fortune 100 companies, non-profit organizations andgovernment agencies in the financial services, healthcare, legal and publishingmarkets.  SPi services these customers onsite, and from facilities in the Philippines, India, U .S., China and Vietnam.

 

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

*** ***

OnAugust 11, 2006, SPi in turn acquired 100% of the equity interest in CyMed foran aggregate purchase price of US$35 million, inclusive of certain debtobligations.

 

CyMed is a leading medical transcription company basedin Richmond, Virginia, United States of America (USA).  It provides medicaltranscription services and technology products through proprietary processesbased on Six Sigma quality management principles.  The company currently servesover 400 healthcare systems, independent hospitals, and government-affiliatedclinics across the USA.  CyMed employs 650 U.S.-based staff members and hasoffices in the States of Virginia, Tennessee and Ohio.

 

***Investmentsin Associates***

 

Investmentin associates is accounted for using the equity method of accounting.  Anassociate is an entity in which we have significant influence and which isneither a subsidiary nor a joint venture.

 

Underthe equity method, the investment in the associate is carried in the balancesheet at cost plus post acquisition changes in our share of net assets of theassociate.  Goodwill relating to an associate is included in the carryingamount of the investment and is not amortized.  The statements of incomereflects the share of the results of operations of the associate.  Where therehas been a change recognized directly in the equity of the associate, werecognize our share in any change and disclose this, when applicable, in ourstatement of changes in equity.  Profits and losses resulting from ourtransactions with and among our associates are eliminated to the extent of theinterest in the associate.

 

Ourreporting dates and that of our associates are identical and our associate’saccounting policies conform to those used by us for like transactions andevents in similar circumstances.

 

***Foreign Currency Translation***

 

The functional and presentation currency of the PLDTGroup (except for Mabuhay Satellite, PLDT Global, Digital Paradise Thailand and SPi and certain of its subsidiaries) is the Philippine peso.  Transactions inforeign currencies are initially recorded in the functional currency rate prevailingat the date of the transaction.  Monetary assets and liabilities denominated inforeign currencies are translated at the functional currency rate of exchange prevailingat the balance sheet date.  All differences are taken to the consolidatedstatements of income except for foreign exchange losses that qualify ascapitalizable borrowing costs during the construction period.  For income taxpurposes, exchange gains or losses aretreated as taxable income or deductible expenses in the year such exchangegains or losses are realized.

 

Thefunctional currency of Mabuhay Satellite, PLDT Global, SPi and certain of its subsidiaries is the U.S. dollar and Digital Paradise Thailand is the Thai Baht.  As at the reporting date, the assets andliabilities of these subsidiaries are translated into the presentation currencyof the PLDT Group at the rate of exchange prevailing at the balance sheet date,and income and expenses of these subsidiaries are translated at the weightedaverage exchange rate for the year.  The exchange differences arising ontranslation are taken directly to a separate component of equity as cumulativetranslation adjustments.  On disposal of these subsidiaries, the amount ofdeferred cumulative translation adjustments recognized in equity relating tosubsidiaries are recognized in the consolidated statements of income. 

 

***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 year 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 statements of income ofsuch period.

 

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

 

The usefullives and depreciation and amortization method are reviewed periodically toensure that the periods and method of depreciation and amortization areconsistent with the expected pattern of economic benefits from items ofproperty, plant and equipment.  

 

Property under construction is stated at cost.  Thisincludes cost of construction, plant and equipment and other direct costs.Property under construction is not depreciated until such time that therelevant assets are completed and available for their intended 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 year they are incurred or realized.

 

***AssetRetirement Obligations***

 

Weare legally required under various lease agreements to dismantle theinstallations on leased sites and restore such sites to their originalcondition at the end of the lease contract term.  We recognized the fair valueof the liability for these obligations and capitalized the present value ofthese costs as part of the balance of the related property and equipmentaccounts, which are being depreciated on a straight-line basis over the usefullives of the related assets or the contract periods, whichever is shorter.

 

***InvestmentProperties***

 

Initially, investment properties are measured at cost includingtransaction costs.  The carrying amount includes the cost of replacing part ofan existing investment property at the time that cost is incurred if therecognition criteria are met; and excludes the costs of day to day servicing ofan investment property.  Subsequent to initial recognition, investmentproperties are stated at fair value, which reflects market conditions at thebalance sheet date.  Gains or losses arising from changes in the fair values ofinvestment properties are included in the consolidated statements of income inthe year in which they arise.  

 

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 year of retirement or disposal.

 

***Business Combinations and Goodwill***

 

Business combinations are accounted for using theacquisition accounting method.  This involves recognizing identifiable assets(including previously unrecognized intangible assets) and liabilities(including contingent liabilities and excluding future restructuring) of ouracquired business at fair value.

 

Goodwillacquired in a business combination is initially measured at cost, such cost,being the excess of the cost of the business combination over our interest inthe net fair value of the acquiree’s identifiable assets, liabilities andcontingent liabilities.  Following initial recognition, goodwill is measured atcost less any accumulated impairment losses.  For the purpose of impairmenttesting, goodwill acquired in a business combination is, from the acquisitiondate, allocated to each of our cash generating units, or groups of our cashgenerating units, that are expected to benefit from the synergies of thecombination, irrespective of whether our other assets or liabilities areassigned to those units or groups of units.  Each unit or group of units towhich the goodwill is allocated:  (1) represents our lowest level at which thegoodwill is monitored for internal management purposes; and (2) is not largerthan a segment based on either our primary or secondary reporting formatdetermined in accordance with *PAS 14, “Segment Reporting”*.

 

Wheregoodwill forms part of a cash-generating unit (group of cash generating units)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 this circumstance is measured based on the relativevalues of the operation disposed of and the portion of the cash-generating unitretained.

 

Whensubsidiaries are sold, the difference between the selling price and the netassets plus cumulative translation differences and unamortized goodwill isrecognized in the consolidated statements of income.

 

***IntangibleAssets***

 

Intangibleassets acquired separately are measured on initial recognition at cost.  Thecost of intangible assets acquired from business combinations is initiallyrecognized at fair value as at the date of acquisition.  Following initialrecognition, intangible assets are carried at cost less any accumulatedamortization and any accumulated impairment loss.  The useful lives ofintangible assets are assessed at the individual asset level as having either afinite or indefinite life.

 

Intangible assets with finite lives are amortized over the usefuleconomic life using the straight-line method and assessed for impairmentwhenever there is an indication that the intangible assets may be impaired.  Ata minimum, the amortization period and the amortization method for anintangible asset with a finite useful life is reviewed at each financial year end.Changes in the expected useful life or the expected pattern of consumption offuture economic benefits embodied in the asset are accounted for by changingthe amortization period, as appropriate, and treated as changes in accountingestimates.  The amortization expense on intangible assets with finite lives isrecognized in the consolidated statements of income in the expense categoryconsistent with the function of the intangible asset.

 

Intangible assets with indefinite useful lives aretested for impairment annually either individually or at the cash-generatingunit level.  Such intangible assets are not amortized.  The useful life of anintangible asset with an indefinite life is reviewed annually to determinewhether indefinite life assessment continues to be supportable.  If not, thechange in the useful life assessment from indefinite to finite is made on aprospective basis.

 

Gains or losses arising from derecognition of anintangible asset are measured as the difference between the net disposalproceeds and the carrying amount of the asset and are recognized in theconsolidated statements of income when the asset is derecognized.

 

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

 

***Impairmentof Non-Financial Assets***

 

Weassess at each reporting date whether there is an indication that an asset maybe impaired.  If any such indication exists, or when the annual impairmenttesting for an asset is required, we make an estimate of the asset’srecoverable amount.  An asset’s recoverable amount is the higher between anasset’s or cash-generating unit’s fair value less costs to sell or its value inuse and is determined for an individual asset, unless the asset does notgenerate cash inflows that are largely independent from those of other assetsor groups of assets.  Where the carrying amount of an asset exceeds itsrecoverable amount, the asset is considered impaired and is written down to itsrecoverable amount.  In assessing the value in use, the estimated future cashflows are discounted to their present value using a pre-tax discount rate thatreflects current market assessments of the time value of money and the risksspecific to the asset.  In determining fair value less costs to sell, anappropriate valuation model is used.  These calculations are corroborated byvaluation multiples, quoted share prices for publicly traded subsidiaries or otheravailable fair value indicators.

 

Impairmentlosses of continuing operations are recognized in the statements of income inthose expense categories consistent with the function of the impaired asset,except for property previously revalued where the revaluation was taken toequity.  In this case the impairment is also recognized in equity up to theamount of any previous revaluation.

 

Forassets excluding goodwill, an assessment is made at each reporting date as towhether there is any indication that previously recognized impairment lossesmay no longer exist or may have decreased.  If such indication exists, we makean estimate of recoverable amount.  A previously recognized impairment loss isreversed only if there has been a change in the estimates used to determine theasset’s recoverable amount since the last impairment loss was recognized.  Ifthis is the case, the carrying amount of the asset is increased to itsrecoverable amount.  That increased amount cannot exceed the carrying amountthat would have been determined, net of depreciation, had no impairment lossbeen recognized for the asset in prior years.  Such reversal is recognized inthe consolidated statements of income.  After such a reversal, the depreciationcharged is adjusted in future years to allocate the asset’s revised carryingamount, less any residual value, on a systematic basis over its remaininguseful life.

 

The following criteria are also applied in assessingimpairment of specific assets:

 

*Goodwill*

 

Goodwillis reviewed for impairment, annually or more frequently if events or changes incircumstances indicate that the carrying value may be impaired.

 

Impairmentis determined for goodwill by assessing the recoverable amount of thecash-generating unit (or group of cash-generating units), to which the goodwillrelates.  Where the recoverable amount of the cash-generating unit (or group ofcash-generating units) is less than the carrying amount of the cash-generatingunit (group of cash-generating units) to which goodwill has been allocated, animpairment loss is recognized.  Impairment losses relating to goodwill cannotbe reversed in future periods.  We perform an impairment test of goodwillannually.

 

*IntangibleAssets*

 

Intangibleassets with indefinite useful lives are tested for impairment annually eitherindividually or at the cash generating unit level, as appropriate.

 

*Associates*

*** ***

After application of the equity method, we determinewhether it is necessary to recognize an additional impairment loss of ourinvestment in associates.  We determine at each balance sheet date whetherthere is any objective evidence that our investment in an associate isimpaired.  If this is the case, we calculate the amount of impairment as beingthe difference between the fair value of the associate and the acquisition costand recognize the amount in the consolidated statements of income.

 

***Research and Development Costs***

 

Research and development costs are expensed asincurred.

 

***Cash and Cash Equivalents***

 

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

 

***Tradeand Other Receivables***

 

Trade and other receivables are stated at facevalue, net of an allowance for any doubtful accounts.

 

***Allowance for Doubtful Accounts***

 

ThePLDT Group’s accounting policy in evaluating any impairment of receivable isdiscussed under impairment of financial assets section of this Note.Consequently, allowance for doubtful accounts is maintained at a levelconsidered adequate to provide for uncollectible receivables.  The level ofallowance is based on historical collections, write-off experience, currenteconomic trends, changes in our customer payment terms and other factors thatmay affect our ability to collect payments.  An evaluation of the receivables,designed to identify potential charges to the allowance, is performed on acontinuous basis during the year.

 

*Subscribers*.Full allowance is provided for receivables from permanently disconnectedsubscribers.  Permanent disconnections are made after a series of collectionsteps following non-payment by subscribers.  Such permanent disconnectionsgenerally occur within 105 days from the date of payment was due.  Partialallowance is provided for active subscribers based on the historical lossexperience and aging profile of the receivable.

 

*Trafficsettlement receivables - net*.  Fullallowance is provided for carrier accounts which are considered over-due andafter a review of the status of settlement with other carriers.

 

***Inventories and Supplies***

 

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

 

Cost is determined using the moving average method.Net realizable value is the estimated selling price in the ordinary course ofthe business less the estimated cost to sell.

 

***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.

 

***Convertible Preferred Stock***

 

*Peso-denominated*

 

The component of our convertible preferred stock thatexhibits characteristics of a liability is recognized as a liability in thebalance sheet, net of transaction costs.  The corresponding dividends on thoseshares are charged as interest expense in the statements of income.  Onissuance of our convertible preferred stock, the fair value of the liabilitycomponent is determined using a market rate for an equivalent non-convertiblebond and this amount is carried as a long-term liability on the amortized costbasis until extinguished on conversion or redemption.

 

Theremainder of the proceeds are allocated to the conversion option that isrecognized and included in the equity section of the consolidated balancesheets net of transaction costs.  The carrying amount of the conversion optionis not re-measured in subsequent years.

 

Transaction costs are apportioned between theliability and equity components of the convertible preferred stock based on theallocation of proceeds to the liability and equity components when theinstruments are first recognized.

 

*Foreigncurrency-denominated*

 

Wetreated the Series VI and VII Convertible Preferred Stock as debt instrumentswith embedded call options.  The fair value of embedded call options as ofissuance date was bifurcated and thereafter accounted for separately at fairvalue through profit and loss.  The residual amount was assigned as a liabilitycomponent and accreted to the redemption amount up to the call option dateusing the effective interest rate method.

 

***Provisions***

 

We recognize provisions when we have present obligations, legal orconstructive, as a result of past events, and when it is probable that anoutflow of resources embodying economic benefits will be required to settle theobligation and a reliable estimate can be made of the amount of theobligation.  Where we expect some or all of a provision to be reimbursed, thereimbursement is recognized as a separate asset but only when the reimbursementis virtually certain.  The expense relating to any provision is presented inthe consolidated statements of income net of any reimbursements.  If the effectof the time value of money is material, provisions are discounted using acurrent pre-tax rate that reflects, where appropriate, the risks specific tothe liability.  Where discounting is used, the increase in the provision due tothe passage of time is recognized as additional provisions.

 

***RetirementBenefits***

 

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

 

Thedefined benefit asset or liability comprises the present value of the definedbenefit obligation less past service cost not yet recognized and less the fairvalue of plan assets out of which the obligations are to be settled directly.The value of any asset is restricted to the sum of any past service cost notyet recognized and the present value of any economic benefits available in theform of refunds from the plan or reductions in the future contributions to theplan.

 

***Share-Based PaymentTransactions***

 

Certainof our employees (including directors) receive remuneration in the form of share-basedpayment transactions, whereby employees render services in exchange for sharesor rights over shares (“equity-settled transactions”).

 

*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 set forth in *Note 21 – Employee Benefits*.  In valuingequity-settled transactions, no account is taken of any performance conditions,other than conditions linked to the price of the shares of PLDT (“marketconditions”).

 

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

 

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

 

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

 

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 ofoperations for the year.

 

***Leases***

 

Thedetermination of whether an arrangement is or contains a lease is based on thesubstance of the arrangement at the inception date of whether the fulfillmentof the arrangement is dependent on the use of a specific asset or assets or thearrangement conveys a right to use the asset.  A reassessment is made after theinception date of the lease only if the following criteria apply: (1) there isa change in the contractual terms, other than a renewal or extension of thearrangement; (2) a renewal option is exercised or an extension granted, unlessthe term of the renewal or extension was initially included in the lease term;(3) there is a change in the determination of whether fulfillment is dependenton a specified asset; or (4) there is a substantial change to the asset.

 

Wherea reassessment is made, lease accounting commence or ceases, as the case maybe, from the date when the change in circumstances gave rise to thereassessment for scenarios (1), (3) or (4) and at the date of renewal orextension period for scenario (2).

 

Forarrangements entered into prior to January 1, 2005, the date of inception isdeemed to be January 1, 2005 in accordance with the transitional requirementsof IFRIC 4.

 

Leaseobligations having provisions for bargain purchase options, ownership transferat the end of the lease term, or where the present value of minimum leasepayments approximate the fair market value of the property, are capitalized.Any initial direct costs of the lessee are added to the amount capitalized.The related obligations are recognized as liabilities.  Finance lease paymentsare apportioned between the finance charges and reduction of the leaseliability so as to achieve a constant rate of interest on the remaining balanceof the liability.  Finance charges are carried in the consolidated statements ofincome.

 

A financelease gives rise to a depreciation expense for the asset as well as a borrowingcost for each year.  Finance charges are charged directly to current operationsin the year such finance charges are incurred.  The depreciation policy forleased assets is consistent with that for depreciable assets that are owned.

 

Capitalizedleased assets are depreciated over the shorter of the estimated useful life ofthe asset or the lease term, if there is no reasonable certainty we will obtainownership of the leased asset at the end of the lease term.

 

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 the consolidatedstatements of income on a straight-line basis over the lease term.  For incometax reporting purposes, expenses that should have been incurred under a leaseagreement are considered as deductible expenses.

 

***RevenueRecognition***

 

Revenuesfor services are stated at amounts invoiced to customers, excluding value-addedtax, or VAT.  We provide wireless communication, fixed line communication, andinformation and communications technology services.  We provide such servicesto mobile, business, residential and payphone customers.  Revenues representthe value of fixed consideration that have been received or are receivable.Revenues are recognized when there is evidence of an arrangement,collectibility is reasonably assured, and the delivery of the product orservice has occurred.  In certain circumstances, revenue is split intoseparately identifiable components and recognized when the related componentsare delivered in order to reflect the substance of the transactions.  The valueof components 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 provideour customers with the right to a refund.

 

*Service revenues*

 

*Subscriptions*

 

We provide telephone and data communication servicesunder prepaid and postpaid payment arrangements.  Revenues, including fees forinstallation and activation, are accrued upon subscription.

 

*Air time, traffic and value-added services*

 

Prepaidservice revenues collected in advance are deferred and recognized based on theearlier of actual usage or upon expiration of the usage period.Interconnection revenues for call termination, call transit, and network usageare recognized in the year the traffic occurs.  Revenues related to local, longdistance, network-to-network, roaming and international call connectionservices are recognized when the call is placed or connection is provided, netof amounts payable to other telecommunication carriers for terminating calls intheir territories.  Revenues related to products and value-added services arerecognized upon delivery of the product or service.

 

*Business Process Outsourcing, or BPO*

 

Where applicable, supplemental revenuesare recognized depending on service levels or achievement of certainperformance measurement targets.  We recognize these supplemental revenues onlyafter it has achieved the required measurement targets.  When these servicelevels or performance measurement targets are not achieved, we grant service creditsas a reduction in fees.  Advance customer receipts that have not beenrecognized as revenue in accordance with its stated policies are recorded asadvances from customers and presented as a liability in the consolidated balancesheets.  If the fee is not fixed or determinable, revenue is not recognized onthose arrangements until the customer payment is received.  For arrangementsrequiring specific customer acceptance, revenue recognition is deferred untilthe earlier of the end of the deemed acceptance period or until written noticeof acceptance is received from the customer.  Revenue on services rendered tocustomers whose ability to pay is in doubt at the time of performance ofservices is also not recorded.  Rather, revenue is recognized from these customersas payment is received.

* *

*Incentives*

* *

We record insignificant commission expenses 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.

 

*Interest*

 

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

 

***Income Taxes***

 

*Current tax*

 

Current tax assets and liabilities for the current andprior years are measured at the amount expected to be recovered from or paid tothe taxation authorities.  The tax rates and tax laws used to compute theamount are those that are enacted or substantively enacted as at the balancesheet date.

 

*Deferred tax*

 

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

 

Deferredincome tax liabilities are recognized for all taxable temporary differencesexcept: (1) when the deferred tax liability arises from the initial recognitionof goodwill or 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 and (2) with respect to taxable temporarydifferences associated with investments in subsidiaries, associates andinterests in joint ventures, where the timing of the reversal of the temporarydifferences can be controlled and it is possible that the temporary differenceswill not reverse in the foreseeable future.  Deferred income tax assets arerecognized for all deductible temporary differences, carryforward of unused taxcredits from excess minimum corporate income tax, or MCIT, and unused taxlosses, to the extent that it is probable that taxable profit will be availableagainst which the deductible temporary differences and carryforward of unusedtax credits and unused tax losses can be utilized except: (1) when the deferredtax asset relating to the deductible temporary difference arises from theinitial recognition of an asset or liability in a transaction that is not abusiness combination and, at the time of the transaction, affects neither theaccounting profit nor taxable profit or loss and (2) with respect to deductibletemporary differences associated with investments in subsidiaries, associatesand interests in joint ventures, deferred tax assets are recognized only to theextent that is probable that the temporary differences will reverse in theforeseeable future and taxable profit will be available against which thetemporary differences can be utilized.

 

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 are reviewed at each balancesheet date and reduced to the extent that it is no longer probable thatsufficient taxable profit will be available to allow all or part of thedeferred income tax asset to be utilized.  Unrecognized deferred income taxassets are reassessed at each balance sheet date and are recognized to theextent that it has become probable that future taxable profit will allow thedeferred tax asset to be recovered.

 

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

 

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

 

Deferred tax assets and deferred tax liabilities areoffset, if a legally enforceable right exists to offset deferred tax assetsagainst deferred tax liabilities and the deferred taxes relate to the sametaxable entity and the same taxation authority.

 

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

 

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

 

DilutedEPS is calculated in the same manner assuming that, at the beginning of the yearor at the time of issuance during the year, all outstanding options areexercised and convertible preferred shares are converted to common shares, andappropriate adjustments to net income are effected for the related expenses andincome on preferred shares.  Outstanding stock options will have a dilutiveeffect under the treasury stock method only when the average market price ofthe underlying common share during the year 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.As such, the diluted EPS will be calculated by dividing net income attributableto common shareholders (net income, adding back any dividends and/or othercharges recognized in the year related to the dilutive convertible preferredshares classified as liability, less dividends on non-dilutive preferred sharesexcept for 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.

 

***Investments and Other Financial Assets and Liabilities***

 

Financialassets and liabilities within the scope of PAS 39 are classified as eitherfinancial assets and liabilities at fair value through profit or loss, loansand receivables, held-to-maturity investments, and available-for-sale financialassets, as appropriate.  We determine the classification of our financialassets and liabilities after initial recognition and, where allowed andappropriate, re-evaluates this designation at each balance sheet date.  Whenfinancial assets and liabilities are recognized initially, they are measured atfair value, plus, in the case of investments not at fair value through profitor loss, directly attributable transaction costs.  The fair value of investmentsthat are actively traded in organized financial markets is determined byreference to quoted market bid prices at the close of business on the balancesheet date.  For investments where there is no active market, fair value isdetermined using valuation techniques.  Such techniques include using recentarm’s length market transactions; reference to the current market value ofanother instrument which is substantially the same; discounted cash flowanalysis or other valuation models.

 

Allregular way purchases and sales of financial assets are recognized on the tradedate, which is the date that we commit to purchase the asset.  Regular waypurchases or sales are purchases or sales of financial assets that requiredelivery of assets with the period generally established by regulation orconvention in the marketplace.

 

*Financial assets and liabilities at fair value throughprofit or loss*

 

Financialassets and liabilities at fair value through profit or loss includes financialassets and liabilities held for trading and financial assets and liabilitiesdesignated upon initial recognition as at fair value through profit and loss.

 

Financialassets and liabilities are classified as held for trading if they are acquiredfor the purpose of selling in the near term.  Derivatives, including separatedembedded derivatives are also classified as held for trading unless they aredesignated as effective hedging instruments or a financial guarantee contract.Gains or losses on investments or liabilities held for trading are recognizedin profit and loss.

 

Where acontract contains one or more embedded derivatives, the entire hybrid contractmay be designated as a financial asset and financial liability at fair valuethrough profit or loss, except where the embedded derivative does notsignificantly modify the cash flows or it is clear that separation of theembedded derivative is prohibited.

 

Financialassets and liabilities may be designated at initial recognition as at fairvalue through profit or loss if the following criteria are met: (i) thedesignation eliminates or significantly reduces the inconsistent treatment thatwould otherwise arise from measuring the assets and liabilities or recognizinggains or losses on them on a different basis; or (ii) the assets and liabilitiesare part of a group of financial assets which are managed and their performanceevaluated on a fair value basis, in accordance with a documented riskmanagement strategy; or (iii) the financial assets and liabilities contains anembedded derivative that would need to be separately recorded.

 

*Held-to-maturityinvestments*

 

Held-to-maturity investments are non-derivativefinancial assets which carry fixed or determinable payments and fixedmaturities and which we have the positive intention and ability to hold tomaturity.  After initial measurement held to maturity investments are measuredat amortized cost.  This cost is computed as the amount initially recognizedminus principal repayments, plus or minus the cumulative amortization using theeffective interest method of any difference between the initially recognizedamount and the maturity amount, less allowance for impairment.  Thiscalculation includes all fees and points paid or received between parties tothe contract that are an integral part of the effective interest rate,transaction costs and all other premiums and discounts.  Gains and losses arerecognized in the statements of income when the investments are derecognized orimpaired, as well as through the amortization process.

 

*Loansand receivables*

 

Loans and receivables are non-derivative financialassets with fixed or determinable payments that are not quoted in an activemarket.  After initial measurement, loans and receivables are subsequentlycarried at amortized cost using the effective interest method less anyallowance for impairment.  Amortized cost is calculated taking into account anydiscount or premium on acquisition and includes fees that are an integral partof the effective interest rate and transaction costs.  Gains and losses arerecognized in the statements of income when the loans and receivables arederecognized or impaired, as well as through the amortization process.

* *

*Available-for-sale financial investments*

 

Available-for-salefinancial assets are those non-derivative financial assets that are designatedas available-for-sale or are not classified in any of the three precedingcategories.  After initial measurement, available for sale financial assets aremeasured at fair value with unrealized gain or loss being recognized directlyin equity in the cumulative translation adjustments except when the financialasset is impaired.  When the investment is disposed of, the cumulative gain orloss previously recorded in equity is recognized in the statements of income.Interest earned or paid on the investments is reported as interest income orexpense using the effective interest rate.  Dividends earned on investments arerecognized in the statements of income when the right of payment has beenestablished.

 

Weconsider whether a contract contains an embedded derivative when the entityfirst becomes a party to it.  The embedded derivatives are separated from thehost contract which is not measured at fair value through profit or loss whenthe analysis shows that the economic characteristics and risks of embeddedderivatives are not closely related to those of the host contract.

 

***Impairment of financial assets***

 

We assessat each balance sheet date whether a financial asset or group of financialassets is impaired.

 

*Assetscarried at amortized cost*

 

Ifthere is objective evidence that an impairment loss on loans and receivablescarried at amortized cost has been incurred, the amount of the loss is measuredas the difference between the asset’s carrying amount and the present value ofestimated future cash flows (excluding future expected credit losses that havenot been incurred) discounted at the financial asset’s original effectiveinterest rate (i.e. the effective interest rate computed at initialrecognition).  The carrying amount of the asset is reduced through use of anallowance account.  The amount of the loss is recognized in profit or loss.

 

Wefirst assess whether objective evidence of impairment exists individually forfinancial assets that are individually significant, and individually orcollectively for financial assets that are not individually significant.  If itis determined that no objective evidence of impairment exists for anindividually assessed financial asset, whether significant or not, the asset isincluded in a group of financial assets with similar credit riskcharacteristics and that group of financial assets is collectively assessed forimpairment.  Assets that are individually assessed for impairment and for whichan impairment loss is or continues to be recognized are not included in acollective assessment of impairment.

 

If,in a subsequent period, the amount of the impairment loss decreases and thedecrease can be related objectively to an event occurring after the impairmentwas recognized, the previously recognized impairment loss is reversed.  Anysubsequent reversal of an impairment loss is recognized in profit or loss, tothe extent that the carrying value of the asset does not exceed its amortizedcost at the reversal date.

 

Inrelation to trade receivables, a provision for impairment is made when there isobjective evidence (such as the probability of insolvency or significantfinancial difficulties of the debtor) that we will not be able to collect allof the amounts due under the original terms of the invoice.  The carryingamount of the receivable is reduced through use of an allowance account.Impaired debts are derecognized when they are assessed as uncollectible.

 

*Available-for-sale financial**investments*

 

If an available-for-sale asset is impaired, an amountcomprising the difference between its cost (net of any principal payment andamortization) and its current fair value, less any impairment loss previouslyrecognized in the statements of income, is transferred from equity to the statementsof income.  Reversals in respect of equity instruments classified as availablefor sale are not recognized in the statements of income.  Reversals ofimpairment losses on debt instruments are reversed through the statements ofincome, if the increase in fair value of the instrument can be objectivelyrelated to an event occurring after the impairment loss was recognized in thestatements of income.

 

***Derecognition of Financial Assets and Liabilities***

 

*Financial assets*

 

Afinancial asset (or, where applicable, a part of a financial asset or part of agroup of similar financial assets) is derecognized when:  (1) the rights toreceive cash flows from the asset have expired; (2) we retain the right toreceive cash flows from the asset, but have assumed an obligation to pay themin full without material delay to a third party under a “pass through”arrangement; or (3) we have transferred our right to receive cash flows fromthe asset and either (a) have transferred substantially all the risks andrewards of the asset, or (b) have neither transferred nor retainedsubstantially all the risks and rewards of the asset, but have transferredcontrol of the asset.

 

Wherewe have transferred our right to receive cash flows from an asset and haveneither transferred nor retained substantially all the risks and rewards of theasset nor transferred control of the asset, the asset is recognized to theextent of our continuing involvement in the asset.  Continuing involvement thattakes the form of a guarantee over the transferred asset is measured at thelower of the original carrying amount of the asset and the maximum amount ofconsideration that we could be required to repay.

 

Where continuing involvement takes the form of awritten and/or purchased option (including a cash settled option or similarprovision) on the transferred asset, the extent of our continuing involvementis the amount of the transferred asset that we may repurchase, except that inthe case of a written put option (including a cash settled option or similarprovision) on an asset measured at fair value, the extent of our continuinginvolvement is limited to the lower of the fair value of the transferred assetand the option exercise price.

 

*Financialliabilities*

 

Afinancial liability is derecognized when the obligation under the liability isdischarged or cancelled or expires.

 

Wherean existing financial liability is replaced by another from the same lender onsubstantially different terms, or the terms of an existing liability aresubstantially modified, such an exchange or modification is treated as aderecognition of the original liability and the recognition of a new liability,and the difference in the respective carrying amounts is recognized in thestatements of income.

 

***Derivative Financial Instruments and Hedging***

 

Weuse derivative financial instruments such as long-term currency swaps, foreigncurrency options, forward currency contracts and interest rate swaps to hedgeour risks associated with interest rate and foreign currency fluctuations.  Suchderivative financial instruments are initially recognized at fair value on thedate on which a derivative contract is entered into and are subsequentlyre-measured at fair value.  Derivatives are carried as assets when the fairvalue is positive and as liabilities when the fair value is negative.

 

Anygains or losses arising from changes in fair value on derivatives during theyear that do not qualify for hedge accounting are taken directly to thestatements of income.

 

Thefair value of forward currency contracts is calculated by reference to currentforward exchange rates for contracts with similar maturity profiles.  The fairvalue of long-term currency swaps, foreign currency options and interest rateswap contracts is determined by reference to market values for similarinstruments.

 

Forthe purpose of hedge accounting, hedges are classified as: (1) fair valuehedges when hedging the exposure to changes in the fair value of a recognizedasset or liability or an unrecognized firm commitment (except for foreigncurrency risk); or (2) cash flow hedges when hedging exposure to variability incash flows that is either attributable to a particular risk associated with arecognized asset or liability or a highly probable forecast transaction or theforeign currency risk in an unrecognized firm commitment; or (3) hedges of anet investment in a foreign operation.

 

At the inception of a hedge relationship, we formallydesignate and document the hedge relationship to which we wish to apply hedgeaccounting and the risk management objective and strategy for undertaking thehedge.  The documentation includes identification of the hedging instrument,the hedged item or transaction, the nature of the risk being hedged and how theentity will assess the hedging instrument’s effectiveness in offsetting theexposure to changes in the hedged item’s fair value or cash flows attributableto the hedged risk.  Such hedges are expected to be highly effective inachieving offsetting changes in fair value or cash flows and are assessed on anongoing basis to determine that they actually have been highly effectivethroughout the financial reporting periods for which they are designated.

 

Hedgeswhich meet the strict criteria for hedge accounting are accounted for asfollows:

 

*Fairvalue hedges*

 

Thechange in the fair value of a hedging derivative is recognized in thestatements of income.  The change in the fair value of the hedged itemattributable to the risk hedged is recorded as part of the carrying value ofthe hedged item and is also recognized in profit or loss.

 

Forfair value hedges relating to items carried at amortized cost, the adjustmentto carrying value is amortized through the statements of income over theremaining term to maturity.  Any adjustment to the carrying amount of a hedgedfinancial instrument for which the effective interest rate method is used isamortized through the statements of income.

 

Amortizationmay begin as soon as an adjustment exists, beginning no later than when thehedged item ceases to be adjusted for changes in its fair value attributable tothe risk being hedged.

 

Ifthe hedge item is derecognized, the unamortized fair value is recognizedimmediately in the statements of income.

 

Whenan unrecognized firm commitment is designated as a hedged item, the subsequentcumulative change in the fair value of the firm commitment attributable to thehedged risk is recognized as an asset or liability with a corresponding gain orloss recognized in the statements of income.  The changes in the fair value ofthe hedging instrument are also recognized in the statements of income.

* *

*Cash flow hedges*

 

The effective portion of the gain or loss on thehedging instrument is recognized directly in equity, while any ineffectiveportion is recognized immediately in the statements of income.

 

Amountstaken to equity are transferred to the statements of income when the hedgedtransaction affects the statements of income, such as when the hedged financialincome or financial expense is recognized or when a forecast sale occurs.Where the hedged item is the cost of a non-financial asset or non-financialliability, the amounts taken to equity are transferred to the initial carryingamount of the non-financial asset or liability.

 

Ifthe forecast transaction or firm commitment is no longer expected to occur,amounts previously recognized in equity are transferred to the statements ofincome.  If the hedging instrument expires or is sold, terminated or exercisedwithout replacement or rollover, or if its designation as a hedge is revoked,amounts previously recognized in equity remain in equity until the forecasttransaction or firm commitment occurs.

 

*Hedges of a net investment*

 

Hedges of a net investment in a foreign operation,including a hedge of a monetary item that is accounted for as part of the netinvestment, are accounted for in a way similar to cash flow hedges.  Gains orlosses on the hedging instrument relating to the effective portion of the hedgeare recognized directly in equity while any gains or losses relating to theineffective portion are recognized in the statements of income.  On disposal ofthe foreign operation, the cumulative value of any such gains or lossesrecognized directly in equity is transferred to the statements of income.

 

**New Accounting Standards Subsequent to 2006**

 

The Financial Reporting Standard Council has approvedthe adoption as part of PFRS of the following amendments to PAS/PFRS andPhilippine Interpretations, which will be effective subsequent to the fiscalyear ended December 31, 2006:

 

***IFRIC7, “Applying the Restatement Approach under PAS 29, Financial Reporting inHyperinflationary Economies”.*** TheInterpretation requires that when a country becomes hyperinflationary, PAS 29must be applied as if the country had always been hyperinflationary and itprovides guidance on calculating deferred taxes and comparatives.  As we do notoperate in a hyperinflationary economy, we do not expect a material impact to ourconsolidated financial statements when this standard is adopted in 2007.

 

***IFRICInterpretation 8, “Scope of PFRS 2, Share-based Payment”.***  The Interpretation clarifies that PFRS 2,Share-based Payment, applies to share-based payment transactions in which theentity cannot specifically identify some or all of the goods or servicesreceived.  If the value of the identifiable consideration received (if any)appears to be less than the fair value of the equity instruments granted or theliability incurred, this is an indication other consideration (i.e.unidentifiable goods or services) has been (or will be) received which shouldbe measured in accordance with PFRS 2.  This becomes effective for financialyears beginning on or after May 1, 2006.  We will adopt this Interpretation inour 2007 consolidated financial statements and we are currently evaluating anyeffect that the adoption of this Interpretation may have on our consolidated financialposition and results of operations.

 

***IFRIC Interpretation 9, “Reassessment of EmbeddedDerivatives”.***  The Interpretationclarifies when an entity should reassess whether an embedded derivative needsto be separated from the host contract after the initial hybrid contract isrecognized.  It concludes that reassessment is prohibited unless there is achange in the terms of the contract that significantly modifies the cash flowsthat otherwise would be required under the contract, in which case reassessmentis required.  This becomes effective for financial years beginning on or afterJune 1, 2006.  We will adopt this Interpretation in our 2007 consolidatedfinancial statements and we are currently evaluating any effect that theadoption of this Interpretation may have on our consolidated financial positionand results of operations.

 

***IFRICInterpretation 10, “Interim Financial Reporting and Impairment”.***  The Interpretations states that any such impairmentlosses recognized in an interim financial statement must not be reversed insubsequent interim or annual financial statements.  This becomes effective for financialyears beginning on or after November 1, 2006.  We will adopt thisInterpretation in our 2007 consolidated financial statements and we arecurrently evaluating any effect that the adoption of this Interpretation mayhave on our consolidated financial position and results of operations.

 

***IFRIC 11, “IFRS 2, Group and Treasury ShareTransactions”.***This******Interpretationaddresses issues whether transactions should be accounted for as equity-settledor as cash-settled under PFRS 2 and issues the concerning share-based paymentarrangement involving entities within the same group.  We will assess impact onour consolidated financial statements when the standard is adopted in 2007.

 

***TheAmendments to PAS 1, “Presentation of Financial Statements - CapitalDisclosures”.***  This amendmentrequires us to make new disclosures to enable users of the financial statementsto evaluate our objectives, policies and processes for managing capital.  Wewill adopt the amendment to PAS in 2007.

 

***PFRS 7, “Financial Instruments - Disclosures”.***  This introduces new disclosures to improveinformation about our financial statements and the nature and extent of risksarising from financial instruments.  The revised disclosures on financialinstruments provided by this standard will be included on our consolidatedfinancial statements when the amendment to the standard is adopted in 2007.

 

***IFRIC Interpretation 12, “Service ConcessionArrangements”.*** This will becomeeffective on January 1, 2008.  This interpretation, which covers contractualarrangements arising from entities providing public services, is not relevantto our current operations.

 

***PFRS8, “Operating Segments”.***Thiswill be effective on January 1, 2009 and will replace *PAS 14, “SegmentReporting”,* and adopts a management approach to reporting segmentinformation.  The requirements of this standard will be included on ourconsolidated financial statements when the standard is adopted.

 

We expectthat the adoption of the pronouncements listed above and effective subsequentto 2006 will have no significant impact on our consolidated financialstatements in the period of initial application.

 

 

 

**3.   Management’s Use of Estimates and Judgments**

 

Our consolidated financial statements prepared underPFRS require management to make estimates and assumptions that affect amountsreported in our consolidated financial statements and related notes.  Inpreparing our 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 consolidated financial statements.

 

*Estimatinguseful lives of property, plant and equipment*

 

We estimate the useful lives of our property, plant and equipment basedon the periods over which our assets are expected to be available for use.  Ourestimation of the useful lives of our property, plant and equipment is based onour collective assessment of industry practice, internal technical evaluationand experience with similar assets.  The estimated useful lives of ourproperty, plant and equipment are reviewed at least annually and are updated ifexpectations differ from previous estimates due to physical wear and tear,technical or commercial obsolescence and legal or other limitations on the useof our 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.  

 

A reduction in the estimated useful lives of our property, plant andequipment would increase our recorded operating expenses and decrease ournoncurrent assets.  Total carrying values of property, plant and equipmentamounted to Php164,693 million and Php176,974 million as at December 31, 2006and 2005, respectively.

 

*Goodwill andintangible assets*

 

Purchase accounting requires extensive use of accounting estimates andjudgments to allocate the purchase price to the fair market values of theacquiree’s identifiable assets and liabilities at the acquisition date.  Italso requires the acquiree to recognize goodwill.  Our business acquisitionshave resulted in goodwill and intangible assets, which are subject to aperiodic impairment test and amortization, respectively, see *Note 11 –Goodwill and Intangible Assets*.  

 

Total carrying values of goodwill and intangible assets as at December 31,2006 and 2005 amounted to Php12,999 million and Php3,049 million,respectively.  Impairment losses recognized for the year ended December 31,2006 amounted to Php50 million and none for the year ended December 31, 2005and 2004.

 

*Assetimpairment*

 

PFRS requires that an impairment review be performed when certainimpairment indicators are present.  In the case of goodwill, at a minimum, suchasset is subject to a yearly impairment test and whenever there is anindication that such asset may be impaired.  This requires an estimation of thevalue in use of the cash-generating units to which the goodwill is allocated.Estimating the value in use requires us to make an estimate of the expectedfuture cash flows from the cash generating unit and to choose a suitablediscount rate in order to calculate the present value of those cash flows.

 

Determining the fair values of property, plant and equipment, investmentsand intangible assets, which requires the determination of future cash flowsexpected to be generated from the continued use and ultimate disposition ofsuch assets, requires us to make estimates and assumptions that can materiallyaffect our consolidated financial statements.  Future events could cause us toconclude that property, plant and equipment, investments and intangible assetsassociated with an acquired business are impaired.  Any resulting impairmentloss could have a material adverse impact on our financial condition andresults of operations.

 

Thepreparation of estimated future cash flows involves significant judgments andestimations.  While we believe that our assumptions are appropriate andreasonable, significant changes in our assumptions may materially affect ourassessment of recoverable values and may lead to future additional impairmentcharges under PFRS.  Total impairment charges for the years ended December 31,2006, 2005 and 2004 amounted to Php1,818 million, Php26 million and Php1,412million, respectively.

 

*Investmentproperties*

 

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

 

Total carrying valuesof investment properties as at December 31, 2006 and 2005 amounted to Php587 million and Php701 million, respectively.

 

*Deferred tax assets*

 

We review the carryingamounts of deferred tax assets at each balance sheet date and reduce these tothe extent that it is no longer probable that sufficient taxable profit will beavailable to allow all or part of the deferred tax assets to be utilized.However, there is no assurance that we will generate sufficient taxable profitto allow all or part of our deferred tax assets to be utilized.  

 

Total unrecognizeddeferred tax assets as at December 31, 2006 and 2005 amounted to Php299 millionand Php5,615 million, respectively.

 

*Financialassets and liabilities*

 

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

 

Total fair value of financial assets and liabilities asat December 31, 2006 amounted to Php36,615 million and Php109,355 million,respectively, while the total fair value of financial assets and liabilities asat December 31, 2005 amounted to Php43,805 million and Php149,332 million,respectively.  

 

*Estimatingallowance for doubtful accounts*

 

We estimate the allowance for doubtful accounts related to our tradereceivables based on two methods.  The amounts calculated using each of thesemethods are combined to determine the total amount we reserve.  First, weevaluate specific accounts where we have information that certain customers areunable to meet their financial obligations.  In these cases, we use judgment,based on the best available facts and circumstances, including but not limitedto, the length of our relationship with the customer and the customer’s currentcredit status based on third party credit reports and known market factors, torecord specific reserves for customers against amounts due to reduce ourreceivables to amounts that we expect to collect.  These specific reserves arere-evaluated and adjusted as additional information received affects theamounts estimated.  Second, a general provision is established as a certainpercentage of operating revenues based on the aging profile of receivables.This percentage is based on a collective assessment of historical collection,write-off experience, current economic trends, changes in our customer paymentterms and other factors that may affect our ability to collect payments.  Fullallowance is provided for receivables from permanently disconnected subscribersand carriers.  Such permanent disconnections generally occur within 105 daysfrom the date of payment was due.  Partial allowance is provided for activesubscribers and carriers based on the age status of receivables.

 

Theamounts and timing of recorded expenses for any period would differ if we madedifferent judgments or utilized different estimates.  An increase in ourallowance for doubtful accounts would increase our recorded operating expensesand decrease our current assets.  

 

Provisionfor doubtful accounts amounted to Php736 million, Php2,251 million and Php3,955million for the years ended December 31, 2006, 2005 and 2004, respectively.Trade and other receivables, net of allowance for doubtful accounts, amountedto Php9,938 million and Php7,856 million as at December 31, 2006 and 2005,respectively, see *Note 14 – Trade and Other Receivables*.

 

*AssetRetirement Obligation*

*** ***

Assetretirement obligations are recognized in the period in which they are incurredif a reasonable estimate of fair value can be made. This requires an estimationof the cost to restore/dismantle on a per square meter basis, depending on thelocation, and is based on the best estimate of the expenditure required tosettle the obligation at the balance sheet date, discounted using a pre-taxrate that reflects the current market assessment of the time value of moneyand, where appropriate, the risk specific to the liability.  Total provisionfor asset retirement obligations amounted to Php831 million and Php752 million as atDecember 31, 2006 and 2005, respectively, see *Note 8 – Property, Plant andEquipment* and *Note 18 – Other Noncurrent Liablities*.

 

*Revenue recognition*

 

Ourrevenue recognition policies require us to make use of estimates andassumptions that may affect the reported amounts of our revenues andreceivables.  

 

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

 

Revenues under a multiple element arrangement specifically applicable toour wireless business are split into separately identifiable components andrecognized when the related components are delivered in order to reflect thesubstance of the transaction.  The fair value of components is determined usingverifiable objective evidence.  Revenue for handset sales has been quantifiedand identified separately using the residual value method from our cellularservice revenue.  

 

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 increases.  In conformity withPFRS, actual results that differ from our assumptions are recognized as incomeor expense when the net cumulative unrecognized actuarial gains and losses atthe end of the previous reporting period exceed 10% of the higher of thedefined benefit obligation and the fair value of plan assets at that date.  Whilewe believe that our assumptions are reasonable and appropriate, significantdifferences in our actual experience or significant changes in our assumptionsmay materially affect our pension and other retirement obligations.  

 

Unrecognizednet actuarial gain as at December 31, 2006 and 2005 amounted to Php4,657million and Php162 million, respectively.  The accrued benefit cost as atDecember 31, 2006 and 2005 amounted to Php2,888 million and Php2,275 million,respectively.

 

*Share-Based Payment Transactions*

 

Our LTIPgrants share appreciation rights, or SARs, to our eligible key executives andadvisors.  Under the LTIP, we recognize the services we receive from theeligible key executives and advisors, and our liability to pay for thoseservices, as the eligible key executives and advisors render services duringthe vesting period.  We measure our liability, initially and at each reportingdate until settled, at the fair value of the SARs, by applying an option valuationmodel, taking into account the terms and conditions on which the SARs weregranted, and the extent to which the eligible key executives and advisors haverendered service to date.  We recognize any changes in fair value at eachreporting date until settled, in the results of operations for the year. Theassumptions and estimates are described in *Note 21 – Employee Benefits*and include, among others, annual stock volatility, risk free interest rate,remaining life, and the fair value of common stock.  While management believesthat the assumptions and estimates used are reasonable and appropriate,significant differences in our actual experience or significant changes in theassumptions may materially affect the stock compensation costs charged to operations.The fair value of the LTIP recognized as an expense for the years endedDecember 31, 2006, 2005 and 2004 amounted to Php3,150 million, Php1,214 millionand Php631 million, respectively.  As at December 31, 2006 and 2005, total LTIPliability amounted to Php5,030 million and Php1,880 million, respectively, see *Note21 – Employee Benefits*.

 

*LegalContingencies*

 

We arecurrently involved in various legal proceedings.  Our estimate of the probablecosts for the resolution of these claims has been developed in consultationwith outside counsel handling our defense in these matters and is based upon ananalysis of potential results.  We currently do not believe these proceedingswill have a material adverse effect on our consolidated financial statements.It is possible, however, that future results of operations could be materiallyaffected by changes in our estimates or in the effectiveness of our strategiesrelating to these proceedings, see *Note 23 – Provisions and Contingencies.*

 

Outstandingprovisions to cover these contingencies amounted to Php446 million and Php4,374million as at December 31, 2006 and 2005, respectively.  As discussed, theamendment of the Air Time Purchase Agreement reversed the provision for onerouscontract.

 

*Determination of Functional Currency*

* *

Based onthe economic substance of the underlying circumstances relevant to the PLDT Group,the functional and presentation currency of the PLDT Group (except for MabuhaySatellite, PLDT Global, Digital Paradise Thailand and SPi and certain of itssubsidiaries) is the Philippine peso.  Transactions in foreign currencies areinitially recorded in the functional currency rate prevailing at the date ofthe transaction.  Monetary assets and liabilities denominated in foreigncurrencies are translated at the functional currency rate of exchange prevailingat the balance sheet date.  All differences are taken to the consolidatedstatements of income except for foreign exchange losses that qualify ascapitalizable borrowing costs during the construction period.  For income taxpurposes, exchange gains or losses are treated as taxable income or deductibleexpenses in the year such gains or losses are realized.

 

Thefunctional currency of Mabuhay Satellite, PLDT Global, SPi and certain of itssubsidiaries is the U.S. dollar and Digital Paradise Thailand is the Thai Baht.As at the reporting date, the assets and liabilities of these subsidiaries aretranslated into the presentation currency of the PLDT Group at the rate ofexchange prevailing at the balance sheet date and its income and expenses aretranslated at the weighted average exchange rate for the year.  The exchangedifferences arising on translation are taken directly to a separate componentof equity as cumulative translation adjustments.  On disposal of thesesubsidiaries, the amount of deferred cumulative translation adjustmentsrecognized in equity relating to subsidiaries is recognized in the consolidatedstatements of income. 

 

Thefunctional currencies of the Group are the currency of the primary economicenvironment in which each entity operates.  It is the currency that mainlyinfluences the revenue from and cost of rendering services.  

 

 

 

**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 decision-makerto make decisions about how resources are to be allocated to the segment andassess 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*.

 

We have organized our business into three mainsegments:

 

•        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; ClarkTel,SubicTel, Maratel, Piltel, BCC and PLDT Global, which together account forapproximately 3% of our consolidated fixed line 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 (consolidated on July 11,2006) and its subsidiaries; internet access and gaming services provided byePLDT’s subsidiaries Infocom, Digital Paradise, Digital Paradise Thailand,netGames, Airborne Access and Level Up!; and e-commerce and IT-related servicesprovided by other investees of ePLDT, as described in *Note 9 – Investmentsin Associates*.

 

Transferprices between business segments are set on an arm’s length-basis in a mannersimilar to transactions with third parties.  Segment revenue, segment expenseand segment result include transfers between business segments.  Thesetransfers are eliminated in consolidation.

 

Thesegment assets and results of operations of our reportable segments as at and forthe years ended December 31, 2006, 2005 and 2004 are as follows:

 

 

**Wireless**

**Fixed Line**

**Information and Communications Technology**

**Inter-segment Transactions**

**Total**

 

(in million pesos)

* *

* *

 

 

 

 

*As at and for the year ended December 31, 2006*

**Income**

 

 

 

 

 

Service revenues

78,383

49,134

6,543

(8,920)

125,140

Non-service revenues

2,457

79

553

(122)

2,967

Other income

706

5,006

124

(100)

5,736

Segment income

81,546

54,219

7,220

(9,142)

133,843

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income (loss) before income tax

36,854

5,684

(349)

–

42,189

Provision for (benefit from) income tax

6,478

429

(38)

–

6,869

Net income (loss) for the year

30,376

5,255

(311)

–

35,320

** **

 

 

 

 

 

Assets and liabilities

 

 

 

 

 

Segment assets

86,905

183,873

20,422

(65,975)

225,225

Deferred income tax assets

4,991

14,608

59

–

19,658

Total assets

91,896

198,481

20,481

(65,975)

244,883

 

 

 

 

 

 

Segment liabilities

48,751

91,192

6,521

(6,372)

140,092

Deferred income tax liabilities

6

–

472

–

 478

Total liabilities

48,757

91,192

6,993

(6,372)

140,570

 

 

** **

** **

** **

** **

Other segment information

 

** **

** **

** **

** **

Capital expenditures

10,529

9,052

1,530

–

21,111

Depreciation and amortization

10,752

20,406

712

–

31,870

Provisions

829

92

64

–

 985

Asset impairment

1,391

–

427

–

1,818

Interest on loans and related items -  net of capitalized interest

1,386

5,953

21

–

7,360

Interest income

1,197

441

16

–

1,654

* *

 

* *

* *

* *

* *

*As at and for the year ended December 31, 2005*

* *

**Income**

 

 

 

 

 

Service revenues

74,677

49,663

2,953

(6,231)

121,062

Non-service revenues

3,036

41

351

(116)

3,312

Equity share in net income of associates

–

–

7

–

   7

Other income

1,445

286

127

(195)

1,663

Segment income

79,158

49,990

3,438

(6,542)

126,044

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income before income tax

38,464

93

58

–

38,615

Provision for (benefit from) income tax

4,800

(676)

12

–

4,136

Net income for the year

33,664

 769

  46

–

34,479

** **

 

 

 

 

 

**Assets****and liabilities**

 

 

 

 

 

Segment assets

97,643

185,140

4,355

(52,398)

234,740

Deferred income tax assets

2,022

13,430

5

–

15,457

Total assets

99,665

198,570

4,360

(52,398)

250,197

 

 

 

 

 

 

Segment liabilities

57,527

124,620

3,599

(9,967)

175,779

Deferred income tax liabilities

44

–

5

–

  49

Total liabilities

57,571

124,620

3,604

(9,967)

175,828

** **

** **

** **

** **

 

** **

** **

** **

** **

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

8,827

5,543

620

–

14,990

Depreciation and amortization

10,156

20,251

415

–

30,822

Provisions

575

2,297

54

–

2,926

Asset impairment

–

–

26

–

  26

Interest on loans and related items -  net of capitalized interest

1,714

8,639

24

–

10,377

Interest income

1,135

385

15

–

1,535

 

 

 

 

 

 

*As at and for the year ended December 31, 2004*

 

 

 

 

 

**Income**

 

 

 

 

 

Service revenues

69,015

48,486

2,080

(4,375)

115,206

Non-service revenues

6,111

–

321

(163)

6,269

Other income

4,597

324

14

(206)

4,729

Segment income

79,723

48,810

2,415

(4,744)

126,204

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income (loss) before income tax

31,703

1,852

(623)

–

32,932

Provision for income tax

4,316

585

72

–

4,973

Net (loss) income for the year

27,387

1,267

(695)

–

27,959

 

 

 

 

 

 

**Assets****and liabilities**

 

 

 

 

 

Segment assets

93,962

198,090

3,716

(43,694)

252,074

Deferred income tax assets

8

12,660

9

–

12,677

Total assets

93,970

210,750

3,725

(43,694)

264,751

 

 

 

 

 

 

Segment liabilities

59,688

163,733

3,524

(10,663)

216,282

Deferred income tax liabilities

1,282

–

–

–

1,282

Total liabilities

60,970

163,733

3,524

(10,663)

217,564

** **

 

 

 

 

 

**Other segment information**

 

 

 

 

 

Capital expenditures

14,742

5,903

517

–

21,162

Depreciation and amortization

10,940

10,125

340

–

21,405

Provisions

417

4,431

3

–

4,851

Asset impairment

430

365

617

–

1,412

Interest on loans and related items -  net of capitalized interest

1,656

10,202

43

(48)

11,853

Interest income

724

248

18

(48)

 942

 

 

 

**5.   Income and Expenses**

 

*Non-service Revenues*

 

 

**2006**

2005

2004

 

(in million pesos)

Sale of computers, cellular handsets and SIM-packs

**2,536**

3,077

6,111

Point-product sales

**431**

235

158

 

**2,967**

3,312

6,269

* *

*Other Income*

* *

 

**2006**

2005

2004

 

(in million pesos)

Gain on reversal of provision for onerous contracts  (Notes 20, 22 and 23)

**3,529**

–

–

Gain on debt exchange and debt restructuring transactions

**–**

–

4,419

Miscellaneous income

**2,207**

1,663

310

 

**5,736**

1,663

4,729

* *

*Compensation and Benefits*

* *

** **

**2006**

2005

2004

 

(in million pesos)

Salaries and benefits

**13,773**

11,688

10,110

Incentive plan (Notes 3 and 21)

**3,150**

1,214

631

Pension (Note 21)

**1,003**

776

718

Manpower rightsizing program

**445**

458

566

 

**18,371**

14,136

12,025

* *

*FinancingCosts*

* *

 

**2006**

2005

2004

 

(in million pesos)

Interest on loans and related items

**7,909**

10,881

12,448

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

**3,314**

2,882

3,412

Hedge costs (Note 24)

**1,446**

1,234

1,011

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

**405**

628

864

Dividends on preferred stock subject to mandatory redemption  (Note 7)

**130**

251

284

Financing charges

**51**

202

146

Capitalized interest (Notes 2 and 8)

**(549)**

(504)

(595)

Interest income

**(1,654)**

(1,535)

(942)

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

**(2,008)**

(4,906)

2,636

 

**9,044**

9,133

19,264

* *

Interestexpense for short-term borrowing for the years ended December 31, 2006, 2005and 2004 amounted to Php10 million, Php2million and Php5 million, respectively.

* *

*Cost of Sales*

* *

 

**2006**

2005

2004

 

(in million pesos)

Cost of computers, cellular handsets and SIM-packs sold

**4,847**

5,958

10,839

Cost of point-product-sales

**476**

300

230

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

**199**

243

283

 

**5,522**

6,501

11,352

* *

*Professional and Other ContractedService Fees*

* *

 

**2006**

2005

2004

 

(in million pesos)

Technical and consultancy fees

**1,881**

1,419

1,650

Contracted services

**1,125**

470

403

Legal and audit fees

**224**

508

132

Others

**68**

67

43

 

**3,298**

2,464

2,228

* *

*Asset Impairment*

 

 

**2006**

2005

2004

 

(in million pesos)

Property, plant and equipment (Note 8)

**1,400**

26

365

Notes receivable (Note 12)

**346**

–

–

Intangibles (Note 11)

**50**

–

–

Investments in associates (Note 9)

**4**

–

1,047

Other assets

**18**

–

–

 

**1,818**

 26

1,412

* *

*Provisions*

* *

 

**2006**

2005

2004

 

(in million pesos)

Doubtful accounts (Note 14)

**736**

2,251

3,955

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

**211**

479

577

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

**38**

196

319

 

**985**

2,926

4,851

* *

* *

 

**6.   Income Tax**

* *

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

* *

 

**2006**

** **

2005

 

(in million pesos)

Net assets

**19,658**

** **

15,457

Net liabilities

**478**

** **

49

* *

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

* *

 

**2006**

** **

2005

 

(in million pesos)

Net assets

 

** **

 

Asset impairment

**5,432**

** **

3,127

Net operating loss carryover, or NOLCO

**4,983**

** **

3,926

Accumulated provision for doubtful accounts

**4,746**

** **

5,085

Unrealized foreign exchange losses

**2,632**

** **

6,885

Pension and other employee benefits

**2,568**

** **

1,409

Unearned revenues

**2,076**

** **

2,524

Derivative instruments

**1,878**

** **

464

MCIT

**983**

** **

526

Unamortized past service costs

**871**

** **

1,032

Provision for unrealized assets

**704**

** **

769

Accumulated write-down of inventories to net realizable values

**321**

** **

337

Leases

**304**

** **

153

Asset retirement obligation - net of capitalized asset

**191**

** **

157

Executive stock option plan

**106**

** **

104

Excess of fair value over cost of investment properties

**(49)**

** **

(90)

Preferred stock subject to mandatory redemption

**(109)**

** **

(1,034)

Intangibles and fair value adjustments on assets acquired

**(391)**

** **

(483)

Capitalized taxes and duties 

**(446)**

** **

(516)

Capitalized foreign exchange differential

**(988)**

** **

(1,721)

Gain on debt exchange and debt restructuring transactions

**(1,650)**

** **

(2,601)

Undepreciated capitalized interest charges

**(4,607)**

** **

(4,664)

Others

**103**

** **

68

 

**19,658**

** **

15,457

 

 

 

 

Net liabilities

 

** **

 

Unrealized foreign exchange gains

**(6)**

** **

(49)

Accumulated provision for doubtful accounts

**(45)**

** **

–

Excess of fair value over cost of investment properties

**(48)**

** **

–

Intangible assets

**(378)**

** **

–

Others

**(1)**

** **

–

 

**(478)**

** **

(49)

 

Provisionfor corporate income tax consists of:

 

 

**2006**

2005

2004

 

 

 

(in million pesos)

Current

**10,033**

8,583

7,354

Deferred

**(3,164)**

(4,447)

(2,381)

 

**6,869**

4,136   

4,973

 

The reconciliation between the provision for income tax at the applicablestatutory tax rates and the actual provision for corporate income tax is as follows:

 

 

**2006**

2005

2004

 

(in million pesos)

Provision for corporate income tax at the applicable statutory tax rates

**14,766**

12,549

10,538

Tax effects of:

** **

 

 

Non-deductible expenses

**753**

204

1,252

Equity share in net loss (income) of investees

**–**

(2)

24

Income(loss) subject to lower tax rate

**(208)**

6

58

Income subject to final tax

**(550)**

(496)

(201)

Loss (income) not subject to tax

**(2,360)**

283

(2,213)

Net movement in deferred income tax

**(5,532)**

(8,408)

(4,485)

Actual provision for corporate income tax

**6,869**

4,136

4,973

 

MabuhaySatellite and SubicTel are registered as Subic Bay Freeport Enterprises while ClarkTelis registered as a Clark Special Economic Zone Enterprise under Republic Act No.9337, or R.A. No. 7227, otherwise known as the Bases Conversion and DevelopmentAct of 1992.  As registrants, Mabuhay Satellite, SubicTel and ClarkTel areentitled to all the rights, privileges and benefits established thereunderincluding tax and duty-free importation of capital equipment and a specialincome tax rate of 5% of gross income, as defined in the R.A. No. 7227.

 

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, starting January 2001.

 

OnOctober 31, 2006, the BOI approved ePLDT’s application for pioneer status forits new projects which included *Vitro*TM value-added services andadditional capacity of the Data Center, which entitles the company to anothersix-year income tax holiday incentive.  The coverage period of the new ITH isyet to be disclosed by the BOI.

 

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

 

iPlusIntelligent Network, Inc., or iPlus, is a wholly-ownedsubsidiary of ePLDT and is registered with the BOI as a new IT service firmin the field of application service provider on a pioneer status.  Under suchregistration, iPlus is entitled to a six-year ITH incentive from the actualstart 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 an 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 must bepaid and remitted in accordance with the amendments contained in R.A. No. 8748,as follows: (a) 3% to the Philippine Government; and (b) 2% which will 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 adjustmentof the start of commercial operations, effectively extending the ITH expirationto the end of March 2006.  On June 30, 2006, PEZA approved an ITH extension foranother year which effectively extends the ITH expiration to 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 the actual start ofcommercial operations, whichever comes first.  mSSI started commercialoperations on January 1, 2002.

 

ePLDT Ventusis registered with the BOI as a new IT export service firm in the field ofcustomer interaction center on a pioneer status.  Under this registration, ePLDTVentus is 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 are entitled to certain tax incentives such as an ITH for six yearsstarting March 2005 and August 2006, respectively.  In relation to this, ePLDTVentus is required to comply with specific terms and conditions stated in theBOI registration.

 

Digital Paradiseis registered with the BOI as a new IT service firm in the field of communityaccess on a non-pioneer status.  Under the provisions of the registration, Digital Paradise’ssales generated from its own community access activity and franchise fees areentitled to an ITH for a period of four years beginning December 2002.  OnDecember 2006, the BOI approved Digital Paradise’s application for a statusupgrade from non-pioneer to pioneer, accordingly extending the ITH period foranother two years starting January 2007.

 

Level Up! was 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 a taxcredit for taxes on duties on materials used in export products for ten yearsstarting January 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.

 

InSeptember 2006, PEZA approved SPi’s application for registration as an ecozoneinformation technology enterprise to provide IT enabled services with emphasison 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 an ITH for four years.  After the ITH period, SPi is liablefor a final tax, in lieu of all taxes after the expiration of its incentives.The final 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 will bepaid and remitted in accordance with the amendments contained in R.A. No. 8748,as follows: (a) 3% to the Philippine Government; and (b) 2% which will bedirectly remitted by the business establishments to the treasurer’s office ofthe municipality or city where the enterprise is located.

 

Wolfpac is registered with the BOI as a new operator of service providerapplications.  Under the terms of its registration, it is entitled to certaintax and non-tax incentives which include, among other things, an ITH for fouryears starting February 2004.

 

SmartBroadband has three registered activities with the BOI on a pioneer status,namely: (i) a new operator of telecommunications systems (inter-exchangecarrier for data services); (ii) new information technology service firm in thefield of providing internet services; and (iii) a new operator oftelecommunications facilities (nationwide broadband wireless access).  Underthe terms of these registrations, Smart Broadband is entitled to certain taxand non-tax incentives which include, among other things, an ITH for six yearsfrom February 2001, August 2001 and July 2005, respectively.

 

Incomederived from non-registered activities with the BOI is subject to the normalincome tax rate enacted as at the balance sheet date.

 

Consolidatedtax incentives that we availed ourselves of for the years ended December 31,2006, 2005 and 2004 amounted to Php114 million, Php235 million and Php2,208 million,respectively.

 

On May 24,2005, the president of the Philippines signed into law Republic Act No. 9337,or R.A. No. 9337, which took effect on November 1, 2005.  R.A. No. 9337, amongothers, introduced the following changes:

 

a.      The regular corporate income taxrate for domestic corporations and resident/non-resident foreign corporationsincreased to 35% (from 32%) beginning November 1, 2005 and will be reduced to30% beginning January 1, 2009.  The regular corporate income tax rate is appliedby multiplying the number of months covered by the new rate with the taxableincome of the corporation during the period, divided by twelve months.

 

b.      The VAT rate increased from 10% to12% effective February 1, 2006.

 

c.      The input VAT on capital goodsshould be spread evenly over the useful life or sixty months, whichever isshorter, if the acquisition cost, excluding the VAT component thereof, exceedsone million pesos.

 

In2006, the net movement in deferred tax assets primarily pertains to deferredtax assets recognized in relation to the benefit that would be derived from thedisposal of certain Piltel assets with the expected lifting of a mortgage trustindenture, or MTI, restrictions resulting from the full repayment of Pitel’srestructured debt on December 4, 2006.  For further discussion, please see *Note17 – Interest-bearing Financial 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 Php299 million andPhp5,615 million largely pertaining to asset impairment as at December 31, 2006and 2005, respectively.

 

Our consolidated unutilized NOLCO as at December 31,2006 is as follows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2004

2007

26

2005

2008

11,222

2006

2009

3,020

 

 

14,268

 

 

 

Tax benefit

 

4,994

Unrecognized deferred income tax assets from NOLCO as at  December 31, 2006

 

(11)

 

 

4,983

 

Our consolidated MCIT as at December 31, 2006 is asfollows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2005

2008

484

2006

2009

499

 

 

 983

 

 

 

**7.   Earnings Per Common Share**

 

The following table presents information necessaryto calculate the earnings per common share:

 

** **

**2006**

2005

2004

 

**Basic**

**Diluted**

Basic

Diluted

Basic

Diluted

 

(in million pesos)

Net income attributable to equity holders of PLDT

**35,116**

**35,116**

34,112

34,112

28,031

28,031

Dividends on preferred shares

**(455)**

**(455)**

(1,426)

(49)

(1,529)

(49)

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

**–**

**–**

–

230

–

–

Accretion of preferred stock subject to mandatory redemption

**–**

**–**

–

1,233

–

–

Foreign exchange gain on preferred stock subject  to mandatory redemption

–

**–**

–

(1,536)

–

–

Net income applicable to common shares

**34,661**

**34,661**

32,686

33,990

26,502

27,982

 

 

 

(in thousands, except per share amounts)

 

** **

** **

 

 

 

 

Outstanding common shares at beginning of year

**180,789**

**180,789**

170,214

170,214

169,476

169,476

Effect of issuance of common shares during the year

**3,667**

**3,667**

1,855

1,855

252

252

Average incremental number of shares under ESOP  during the year

**–**

**98**

–

94

–

155

Common shares equivalent of preferred shares deemed dilutive:

** **

** **

 

 

 

 

Preferred Stock Series A to FF (Note 16)

–

–

–

2,617

–

3,305

Preferred Stock Series III (Note 16)

–

–

–

–

–

7,908

Preferred Stock Series VI (Note 17)

–

–

–

4,399

–

–

Preferred Stock Series VII (Note 17)

–

–

–

3,842

–

–

Weighted average number of common shares for the year

**184,456**

**184,554**

172,069

183,021

169,728

181,096

Earnings per common share

**Php187.91**

**Php187.81**

Php189.96

Php185.72

Php156.14

Php154.51

 

**DividendsDeclared For The Year Ended December 31, 2006**

 

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**

 

 

 

 

 

(in million pesos)

**Preferred Stock Subject to  Mandatory Redemption**

 

 

 

 

 

Series V

February 27, 2006

March 17, 2006

April 15, 2006

Php4.675

1

 

June 13, 2006

June 28, 2006

July 15, 2006

4.675

–

 

August 28, 2006

September 27, 2006

October 15, 2006

4.675

1

 

December 12, 2006

December 28, 2006

January 15, 2007

4.675

–

Series VI

February 27, 2006

March 17, 2006

April 15, 2006

US$0.09925

20

 

June 13, 2006

June 28, 2006

July 15, 2006

0.09925

14

 

August 28, 2006

September 27, 2006

October 15, 2006

0.09925

9

 

December 12, 2006

December 28, 2006

January 15, 2007

0.09925

4

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

 

 

 

 

  90

 

 

 

 

 

 

**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

Series C, D, J, T and X

October 2, 2006

October 26, 2006

November 29, 2006

1.00

58

Series G, N, P and S

November 7, 2006

December 7, 2006

December 29, 2006

1.00

26

Series H, L, M and Y

December 12, 2006

January 3, 2007

January 31, 2007

1.00

40

 

 

 

 

 

 407

 

 

 

 

 

 

**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

–

13

 

November 7, 2006

November 24, 2006

December 15, 2006

–

12

 

 

 

 

 

  49

 

 

 

 

 

 

**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

9,379

Charged to retained earnings

 

 

 

 

14,915

 

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

 

**DividendsDeclared After December 31, 2006**

 

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**

 

 

 

 

 

(in million pesos)

**10% Cumulative Convertible Preferred Stock**

 

 

 

 

 

Series CC

January 30, 2007

February 28, 2007

March 30, 2007

Php1.00

16

Series DD

January 30, 2007

February 15, 2007

February 28, 2007

1.00

3

 

 

 

 

 

19

**Cumulative Non-Convertible Redeemable Preferred Stock**

 

 

 

 

 

Series IV*

January 30, 2007

February 23, 2007

March 15, 2007

–

12

** **

 

 

 

 

  31

 

 

 

 

 

 

**Common Stock**

March 6, 2007

March 20, 2007

April 20, 2007

Php50.00

9,428

 

 

 

 

 

9,459

 

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

 

 

 

**8.   Property, Plant andEquipment**

 

This account consists of:

 

** **

**Cable and wire facilities**

**Central office equipment**

**Cellular facilities**

**Buildings**

**Vehicles, furniture, and other network equipment**

**Communications satellite**

**Information origination/ termination equipment**

**Land and**

**land improvements**

**Property under construction**

**Total**

** **

(in million pesos)

**At December 31, 2005**

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

**Year Ended December 31, 2006**

Net book value at beginning of year

66,519

36,094

31,621

14,543

6,867

4,477

2,870

2,189

11,794

176,974

Additions/Transfers – net

4,900

3,277

6,562

603

2,593

–

1,351

85

1,084

20,455

Disposals/Retirements

(38)

(158)

(104)

(75)

(89)

–

(2)

(4)

(223)

(693)

Translation differences charged directly to cumulative translation adjustments

1

(35)

–

(7)

(2)

(311)

–

–

–

(354)

Acquisition through business combination

–

(13)

–

273

1,269

–

1

20

31

1,581

Reclassification

2

882

(890)

8

(2)

–

–

–

–

–

Impairment losses recognized during the year

–

(3)

–

(6)

–

(1,391)

–

–

–

(1,400)

Depreciation and amortization

(5,356)

(12,941)

(6,459)

(1,189)

(4,407)

(619)

(880)

(19)

–

(31,870)

Net book value at end of year

66,028

27,103

30,730

14,150

6,229

2,156

3,340

2,271

12,686

164,693

** **

**At December 31, 2006**

Cost

112,621

85,395

63,620

20,389

31,680

9,834

9,141

2,540

12,686

347,906

Accumulated depreciation and amortization

(46,593)

(58,292)

(32,890)

(6,239)

(25,451)

(7,678)

(5,801)

(269)

–

(183,213)

Net book value

66,028

27,103

30,730

14,150

6,229

2,156

3,340

2,271

12,686

164,693

 

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 years ended December 31, 2006, 2005 and 2004 were as follows:

 

 

**2006**

2005

2004

 

(in million pesos)

Interest

**549**

504

595

Foreign exchange gains (losses)

**521**

(607)

74

 

As atDecember 31, 2006, 2005 and 2004, the undepreciated capitalized net foreignexchange losses which qualified as borrowing costs amounted to Php2,646million, Php4,276 million and Php5,528 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

Communications satellite

15 years

Information origination and termination equipment

5 – 15 years

Land improvements

10 years

Vehicles, furniture and other network equipment

3 – 10 years

Cellular facilities

3 – 10 years

 

We recognized additional depreciation and amortizationcharges of Php8,624 million, Php7,806 million and Php2,297 million in2006, 2005 and 2004, respectively, due to a change in the estimated usefullives of certain of our network assets owing to continuing network upgrade andexpansion.

 

*AssetImpairment Review*

 

Piltelcarries out annual impairment tests on its fixed line assets based on the netpresent value, or NPV, of future cash flows from the continued use of theseassets.  For the impairment review in 2006, a discount factor of 6.25% on apre-tax basis was used for both E.O. 109 and RTS, applied on cash flowprojections from 2007 until such year when the assets are fully depreciated.Cash flow assumptions for E.O. 109 averaged Php64 million per year from 2007 to2017 and Php271 million per year for RTS from 2007 to 2013.  The resulting NPVof the total cash flow projections was higher than the carrying value of boththe E.O. 109 and RTS assets.

 

Managementbelieves that due to Mabuhay Satellite’s difficulty in generating cash flowswith the satellite nearing its end-of-life and other events affecting itsbusiness, Mabuhay Satellite’s Aguila 2 transponders is considered impaired.This is impairment review is based on the net present value of future cashflows from the continued use of this asset using the discount factor of 10% asapplied on cash flow projections from 2007 until 2010.  An impairment loss ofPhp1,391 million was applied to the carrying value of this satellite as atDecember 31, 2006.

 

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

 

** **

**2006**

2005

 

**Central office equipment**

**Vehicles, furniture and other network equipment**

**Total**

Central office equipment

Vehicles, furniture and other network equipment

Total

 

(in million pesos)

Cost

**455**

**1,082**

**1,537**

361

1,039

1,400

Less accumulated depreciation

**352**

**908**

**1,260**

293

719

1,012

 

**103**

**174**

**277**

  68

 320

 388

 

The following table summarizes all changes to the liabilitieson asset retirement obligations as at December 31, 2006 and 2005:

 

 

**2006**

 

2005

 

(in million pesos)

Asset retirement obligations at beginning of year

**752**

 

638

Accretion expenses

**87**

 

79

Additional liability recognized during the year

**45**

 

63

Settlement of obligations

**(53)**

 

(28)

Asset retirement obligations at end of year (Note 18)

**831**

 

 752

 

 

 

**9.   Investments in Associates**

 

This account consists of:

 

 

**2006**

 

2005

 

(in million pesos)

ACeS International Limited, or AIL

**1,614**

 

1,614

Mabuhay Space Holdings Limited

**937**

 

1,013

Stradcom International Holdings, Inc.

**616**

 

616

Philweb Corporation

**712**

 

–

BayanTrade Dotcom, Inc.

**97**

 

97

SPi Luxembourg S.a.r.l.

**14**

 

–

ePDS, Inc.

**6**

 

6

 

**3,996**

 

3,346

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

**3,345**

 

3,331

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

**651**

 

  15

 

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

 

As at December 31, 2006, ACeS Philippines had 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, amongother things, 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 various otherbanks signed a 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 a full impairment provision inrespect of our investment in AIL amounting to Php1,614million in 2003.

 

OnSeptember 1, 2006, AIL and PT Asia Cellular Satellite signed a Term Sheet, or BanksTerm Sheet, with a majority of the banks that will be used as the basis forfurther good faith negotiations between the parties thereto with a view toentering into an agreement further amending the Amended and Restated CreditAgreement with AIL’s bank creditors.

 

Under the Banks Term Sheet, a majority of the banksagreed, subject to satisfaction of certain conditions, among other things, toamend the Founder NSP Air Time Purchase Agreement and to re-denominate AIL debtinto non-interest bearing subordinated convertible bonds maturing in 2015; to amortizea senior term loan with a final maturity on August 1, 2013 and a junior term loanwith payments on August 1, 2014 and 2015.

 

Pursuantto the business collaboration arrangements between AIL and Inmarsat, onSeptember 1, 2006, Inmarsat made the first payment of US$4 million to AIL whichwas used to pay principal and interest payable to the banks in accordance withthe Banks Term Sheet.

 

OnFebruary 1, 2007, PLDT (through ACeS Philippines) signed an agreement topurchase LMGT Holdings (ACeS), Inc., or LMGT, and Martin Marietta OverseasCorporation’s, or MMOC, 50% equity and debt interest in AIL, for US$750,000 inaccordance with a notice of proposed transfer issued by LMGT dated December 22,2006 pursuant to a right of first refusal under the AIL Shareholders’Agreement.

 

***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 to the Agila II Satellite.  Under the terms of the JVA, SS/L isrequired to convey title to the additional payload service to MSHL inconsideration for SS/L’s 35% equity interest in MSHL, and Mabuhay Satellite isrequired to pay SS/L US$19 million for a 65% equity interest in MSHL.

 

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 offset the lease chargesdue from SS/L and its receivables from Loral Skynet Network Services, Inc.(formerly known as the Loral Cyberstar, Inc.), among other things, for a fulland final settlement of the arbitration decision.  The agreement wassubsequently approved by Mabuhay Satellite’s creditors in March 2004.

 

In accordance with thesettlement agreement, Mabuhay Satellite and SS/L shall proceed to dissolve thejoint venture under a separate agreement, for which each of the parties will receivetitle over a number of transponders owned by the joint venture in proportion totheir respective interests.  On the basis of the joint venture dissolution, werecognized an impairment provision in respect of our investment in MSHL ofPhp431 million in 2004.

 

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

 

ePLDT has a 22.5% interestin convertible securities of SIHI, the parent company of Stradcom Corporation,which has an existing concession agreement with the Philippine Government forthe modernization of the Philippine Land Transportation Office, including thecomputerization of driver’s license issuance, vehicle registration and trafficadjudication systems.  SIHI has been incurring losses from the start ofoperations due to Stradcom Corporation’s continuous losses and recurring excessof current liabilities over current assets.  On this basis, we recognized animpairment provision in respect of our investment in SIHI of Php616 million in2004.

 

Stradcom Corporation is currently undertaking theissuance of Asset-Backed Bonds amounting to Php1.6 billion intended for debtrefinancing and general corporate purposes, including working capital andinvestments.

 

***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 of Philweb at a price of Php0.020 per share or an aggregateamount of Php502 million.  Of the total subscription price, Php427 million waspaid by ePLDT on the closing date.  The portion of the unpaid subscriptionprice amounting to Php25 million will be paid by ePLDT at the same time as thePhilweb majority stockholders pay the remaining unpaid portion of thesubscription pursuant to a general call on subscription to be made by Philweb’sboard of directors.  The balance of Php50 million will be paid upon the lapseof certain post-closing price adjustment periods.  The unpaid subscription ofPhp75 million was recorded as part of accruedexpenses and other current liabilities in the balance sheet.

 

InOctober 2006, ePLDT acquired an 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% as at December 31, 2006.

 

Philwebis primarily engaged in internet-based gaming, through its appointment asPrincipal Technology Service Provider under the Marketing Consultancy Agreementfor Internet Sports Betting and Internet Casino with the Philippine Amusementand Gaming Corporation, or PAGCOR.  As of the end of December 2006, Philweboffers Internet Sports Betting in over 230 PAGCOR Internet Sports BettingStations and over 40 Internet Casino Stations nationwide.

 

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

 

BayanTrade was incorporated and registered with the PhilippineSecurities and Exchange Commission, or PSEC, on August 8, 2000 to provide:  (a)a business-to-business electronic purchasing marketplace to link buyers andsuppliers of goods 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) 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.

 

***Investment of ePLDT in ePDS, Inc., or ePDS***

 

On June 30, 2003, ePLDT signed a joint ventureagreement with DataPost Pte Ltd., or DataPost, a subsidiary of Singapore Post,and G3 Worldwide ASPAC, or Spring, pursuant to which the parties formed ePDS, abills printing company which does laser printing and enveloping services forstatements, bills and invoices, and other value-added services - for companiesin the Philippines.  ePLDT has a 50% interest in ePDS, while DataPost has a 30%interest.  Spring, the largest international mail services provider, owns theremaining 20%.  ePDS has an initial paid-up capital of 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 PSEC in June 2006.

 

Thefollowing table presents summarized financial information in conformity with PFRSfor equity investees for which we have significant influence as at December 31,2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004.

 

 

**2006**

2005

 

(in million pesos)

Noncurrent assets

**1,333**

1,388

Current assets

**1,122**

652

Capital deficiency

**(9,618)**

(10,787)

Noncurrent liabilities

**10,029**

11,242

Current liabilities

**2,044**

1,585

 

 

**2006**

2005

2004

 

(in million pesos)

Revenues

**624**

774

1,299

Revenues less cost of revenues

**483**

615

1,013

Expenses

**390**

472

592

Net (loss) income 

**(321)**

471

(19)

 

 

 

**10. Investment Properties**

 

 

**2006**

 

2005

 

(in million pesos)

Balance at beginning of year

**701**

 

743

Disposals

**(112)**

 

(15)

Net loss from fair value adjustments

**(2)**

 

(27)

Balance at end of year

**587**

 

701

 

Investmentproperties are stated at fair values, which has been determined based on thelatest valuations performed by an independent firm of appraisers, which is anindustry specialist in valuing these types of investment properties.  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 goodwill and intangible assets during theperiods are as follows:

 

 

**2006**

2005

 

**Goodwill**

**Intangible assets**

**Total**

Goodwill

Intangible assets

Total

 

(in million pesos)

Cost:

 

 

 

 

 

 

Balance at beginning of year

**1,942**

**1,991**

**3,933**

1,934

1,991

3,925

Additions during the year

**8,720**

**1,551**

**10,271**

8

–

   8

Translation adjustments

**137**

**20**

**157**

–

–

–

Balance at end of year

**10,799**

**3,562**

**14,361**

1,942

1,991

3,933

 

** **

** **

** **

 

 

 

Accumulated amortization and impairment:

** **

** **

** **

 

 

 

Balance at beginning of year

**438**

**446**

**884**

438

181

 619

Amortization during the year

**–**

**448**

**448**

–

265

 265

Impairment during the year

**–**

**50**

**50**

–

–

–

Translation adjustments

**–**

**(20)**

**(20)**

–

–

–

Balance at end of year

**438**

**924**

**1,362**

 438

 446

 884

Net balance

**10,361**

**2,638**

**12,999**

1,504

1,545

3,049

 

*Smart’s acquisition of Wolfpac*

 

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 Php1,416 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

 

*ePLDT’sacquisition of Level Up!*

 

OnFebruary 16, 2006, ePLDT entered into a sale and purchase agreement to acquire60% of Level Up!, a leading publisher of online games in the Philippines, for a total consideration of Php383 million.  Post-closing conditions were completed onApril 30, 2006.  In August 2006, the Shareholders Agreement and Share PurchaseAgreement between ePLDT and Level Up! were amended to reflect the removal ofearn-out and price adjustment provisions thereby fixing the acquisition for 60%of Level Up! at the aforementioned original purchase price.  As at purchasedate, the net cash outflow on acquisition was Php348 million, representing cashpayments of Php383 million net of cash acquired from Level Up! of Php35 million,and incidental cost of Php2 million.

 

The purchase consideration has been allocated to theassets and liabilities on the basis of fair values.  The fair values of theidentifiable acquired assets and liabilities of Level Up! as of April 30, 2006,are as follows:

 

 

(in million pesos)

Cash and cash equivalents

35

Trade and other receivables

8

Inventories and supplies

1

Prepayments and other current assets

20

Property, plant and equipment

129

Intangible assets

185

Goodwill

597

Other noncurrent assets

7

 

982

Accounts payable

21

Accrued and other current liabilities

66

Unearned revenues

38

Due to related parties

110

Capital lease liability

49

Deferred tax liability

60

 

344

Minority interest

255

Net assets acquired

383

 

Intangible assets, as determined by an independentappraiser, pertaining to Level Up!’s game license agreements for Ragnarok, ROSEOnline, RF Online and Freestyle amounted to Php185 million with an estimatedremaining useful life of 5.67 years.  Level Up! was accounted for in theconsolidated financial statements using the purchase method of accounting,which resulted in goodwill amounting to Php597 million in 2006.  Goodwillpertains to assembled workforce and other unidentified intangible assets thatdid not qualify as intangible assets *under PAS 38, “Intangible Assets”*.As of December 2006, ePLDT has provided impairment in value of its intangble assetsin Level Up! amounting to Php50 million, representing a write-down of suchintangible assets to recoverable amounts using the value in use approach.Value in use was based on the discounted cash flow projections using the mostrecent financial forecast approved by our management.

 

*ePLDT’s acquisition of SPi*

 

OnJuly 10, 2006, ePLDT entered into a sale and purchase agreement to acquire 100%of SPi and its direct and indirect Philippine and offshore subsidiaries for atotal consideration of US$135 million in cash.  As part of the transaction,ePLDT also acquired a US$7 million debt owed by SPi to the seller at facevalue.  In addition, ePLDT advanced US$16million to SPi in order for SPi to fully pay its debt owed to DBS Bank Singapore.  As at December 31, 2006, the net cashoutflow on acquisition was Php8,162 million, representing cash payments ofPhp8,247 million net of cash acquired from SPi of Php85 million, and incidentalcost of Php90 million.

 

SPiis the second largest pure-play BPO Company and the ninth largest independentBPO service provider worldwide.  It has operations in 19 locations in NorthAmerica, Europe and Asia.  Its customers include Fortune 100 companies,non-profit organizations and government agencies in the financial services,healthcare, legal and publishing markets.  

 

The purchase consideration has been allocated to theassets and liabilities on the basis of fair values at the date of acquisition.The fair values of the identifiable acquired assets and liabilities of SPi atthe time of acquisition are as follows:

 

 

In U.S. Dollar

In Php Equivalent(1)

 

(in millions)

Cash and cash equivalents

1

85

Trade and other receivables

13

714

Prepayments and other current assets

4

214

Property, plant and equipment

19

999

Other noncurrent assets

1

34

Intangible assets

18

956

Goodwill

130

 6,798

 

186

9,800

Accounts payable

2

118

Short-term borrowings

2

129

Accrued and other current liabilities

16

821

Other noncurrent liabilities

1

45

Deferred income tax liability

7

350

 

28

1,463

Net assets

158

8,337

 

*(1)**Converted toPhilippine Peso using the exchange rate at the time of purchase.*

 

Intangibleassets, as determined by an independent appraiser, amounted to Php956 million relatingto SPi’s customer relationships and self-developed software with estimatedremaining useful lives of 7 and 4 years, respectively. Intangible assets werefully consolidated to ePLDT.

 

SPi was accounted for in the consolidated financialstatements using the purchase method of accounting, which resulted in goodwillamounting to Php6,798 million, of which Php3,557 million was SPi’s existinggoodwill prior to ePLDT’s acquisition.  Goodwill pertains to the assembledworkforce of SPi and other unidentified intangible assets that did not qualifyas intangible assets under PAS 38.

 

*ePLDT’s acquisition of CyMed*

 

OnAugust 11, 2006, ePLDT, through its direct subsidiary SPi, entered into a saleand purchase agreement to acquire 100% of CyMed for an aggregate purchase priceof US$35 million inclusive of certain debt obligations.  CyMed is a leadingmedical transcription company based in Richmond, Virginia that provides medicaltranscription services and technology products through proprietary processesbased on Six Sigma quality management principles. The company currently servesover 400 healthcare systems, independent hospitals, and government-affiliatedclinics across the United States.  CyMed employs 650 US-based staff members andhas offices in Virginia, Tennessee and Ohio.  As at August 15, 2006, the netcash outflow related to this acquisition was Php1,773 million, representingcash payments of Php1,830 million and cash acquired from CyMed amounting toPhp57 million.  Total cash payments include purchase price consideration ofPhp1,715 million, working capital amounts and other net debt adjustmentstotaling Php102 million and incidental cost of Php13 million.

 

The purchase consideration has been allocated to theassets and liabilities on the basis of fair values at the date of acquisition.The fair values of the identifiable acquired assets and liabilities of CyMed atthe time of acquisition, assessed to be equal to their book values, are asfollows:

 

 

 

In U.S. Dollar

In Php Equivalent(1)

 

(in millions)

Cash and cash equivalents

1

57

Trade and other receivables

3

148

Prepayments and other current assets

1

20

Property, plant and equipment

1

39

Intangible assets

7

364

Goodwill

27

1,325

Deferred income tax

1

30

Notes receivable

2

108

 

43

2,091

Accounts payable and other current liabilities

2

72

Long-term debt

4

189

 

6

261

Net assets

37

1,830

* *

*(1)**Converted toPhilippine Peso using the exchange rate at the time of purchase.*

 

CyMedhas been accounted for in the consolidated financial statements using thepurchase method of accounting, which resulted in goodwill amounting to Php1,325million, of which Php110 million was Cymed’s existing goodwill prior to ePLDT’sacquisition.  Goodwill pertains to assembled workforce of CyMed and otherunidentified intangible assets that did not qualify as intangible assets underIAS 38.

 

Intangibleassets pertaining to Cymed’s customer relationship was determined at Php337million with an estimated useful life of 5 years.  Intangible assets was valuedby an independent appraiser.

 

Other intangible assets consist of:

 

 

**December 31, 2006**

 

December 31, 2005

 

Gross

Net

 

Gross

Net

 

Carrying Amount

Accumulated Depreciation

 

 

Carrying Amount

Accumulated Depreciation

 

 

(in million pesos)

Customer list

1,617

(172)

1,445

 

109

(48)

  61

Spectrum

1,205

(187)

1,018

 

1,205

(107)

1,098

Technology application

601

(471)

 130

 

544

(281)

 263

Licenses

139

(94)

  45

 

133

(10)

 123

 

3,562

(924)

2,638

 

1,991

(446)

1,545

 

Thefuture amortization of other intangible assets as at December 31, 2006 are asfollows: 

 

 

(in million pesos)

2007

691

2008

303

2009

289

2010

257

2011

255

2012 and onwards

843

Balance at end of year

2,638

 

***Impairment Testing of Goodwill***

 

*Goodwill from Smart Broadband Acquisition*

 

The test for recoverability of Smart’s goodwill was appliedto an asset group, representing the lowest level for which identifiable cashflows are largely independent of the cash flows of other groups of assets andliabilities.

 

Althoughrevenue streams may be segregated between Smart and SBI through subscribersavailing themselves of their respective cellular and wireless broadbandservices, the cost items and cash flows are difficult to carve out, largely dueto the significant portion of shared and common-used networks/platforms.  Inthe case of SBI, it provides broadband wireless access to its subscribers usingSmart’s cellular base stations and fiber optic and IP backbone.  With thecommon use of wireless assets with Smart in providing wireless services, thelowest asset group for Smart Broadband for which cash flows are clearlyidentified from other groups of assets will be Smart’s wireless businesssegment.

 

Ourwireless business segment has been our largest revenue and cash flowcontributor since 2003.  As such, there is no impairment of our wirelessbusiness segment.  As at December 31, 2006, the recoverable amount of thissegment is determined on the basis of value in use calculations using cash flowprojections based on the financial budgets approved by Smart’s Managementcovering a 5-year period from 2007 to 2011.  The pre-tax discount rate appliedto cash flow projections is 10.6% and cash flows beyond the 5-year period aredetermined using a 2.5% growth rate that is the same as the long-term averagegrowth rate for the telecommunications industry.

 

The calculation of value in use for Smart’s wirelessbusiness segment was based on the following assumptions: (a) usage revenues -usage revenues for 2007 were based on the annualized actual year-to-dateresults available at the time the budget was prepared in 2006; (b) usagerevenues were assumed to grow at an average rate of 5% per annum from 2007 to2011; (c) average capital expenditures per year were assumed at Php8.6 billionfrom 2007 to 2011; (d) the discount rate used was the weighted average cost ofcapital; and (e) the growth rate used for cash flows beyond the budget period wasbased on published industry research.

 

*Goodwillfrom SPI Acquisition and its Subsidiary Cymed*

 

Thegoodwill acquired through the SPi, and CyMed transactions was allocated to eachof the cash generating units of those businesses namely, healthcare, litigationand publishing, for impairment testing.

 

Asat December 31, 2006, we determined that there would be no impairment lossrecognized for each of the cash generating units since the recoverable amountexceeded the carrying amount of the individual assets.  The recoverable amount ofgoodwill was determined using the value in use approach. Value in use was basedon the cash flow projections of the most recent financial budgets/forecastsapproved by management, which management believes are reasonable and aremanagement’s best estimate of the range of economic conditions that will existover the remaining useful life of the asset.

 

Indetermining the appropriate discount rate to be applied, our weighted averagecost of capital was used and adjusted for the: (a) difference in currency; and(b) specific risks associated with the assets or business of a cash generatingunit.

 

Managementassessed the reasonableness of the assumptions by examining the causes ofdifferences between actual 2006 cash flow and budgeted/projected cash flows,with a particular emphasis on the observed trends towards the last quarter of2006.

*** ***

 

 

**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 andFAME entered into an agreement whereby ePLDT granted a seven-year zero-couponloan to FAME amounting to US$3.1 million.  Upon maturity of the loan, which isat the end of seven years from issuance, ePLDT may require FAME to redeem orpay the loan at a redemption value amounting to US$6.1 million.  At any timeduring the life of the outstanding loan, ePLDT may convert the loan into 20% ofthe total outstanding capital stock of FAME.

 

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

 

OnSeptember 14, 2004, ePLDT entered into a second agreement with TSSI wherebyePLDT granted another seven-year zero coupon loan to TSSI amounting to US$3.1million with the same terms and features as the first loan.  As at December 31,2006, the aggregate loans of ePLDT to TSSI amounted to US$6.2 million.

 

TSSIhas been incurring losses from the start of operations due to delays in itsprojects.  On this basis, we recognized a full impairment provision in respectof our notes receivable from TSSI amounting to Php346 million.

 

 

 

**13. Cashand Cash Equivalents**

 

This account consists of:

 

 

**2006**

 

2005

 

(in million pesos)

Cash on hand and in banks

**4,299**

 

6,496

Temporary cash investments

**13,454**

 

23,563

 

**17,753**

 

30,059

 

Cash inbanks earns interest at prevailing bank deposit rates.  Temporary cashinvestments are made for varying periods of up to two months depending on ourimmediate cash requirements, and earn interest at the prevailing short-termdeposit rates.  Due to the short-term nature of such transactions, the carryingvalue approximates the fair value of our temporary cash investments.

 

 

 

**14. Trade and Other Receivables**

 

This account consists of receivables from:

 

 

**2006**

 

2005

 

(in million pesos)

Customers and carriers

**24,324**

 

25,222

Others (Notes 20, 22 and 23) 

**2,384**

 

1,159

 

**26,708**

 

26,381

Less allowance for doubtful accounts

**16,770**

 

18,525

 

**9,938**

 

7,856

 

Movementsin the allowance for doubtful accounts are as follows:

 

 

**2006**

2005

2004

 

(in million pesos)

Balance at beginning of year

**18,525**

18,070

14,307

Provision for the year

**736**

2,251

3,955

Business combinations

**71**

–

–

Translation adjustments

**(24)**

(16)

–

Reversal

**(654)**

(11)

–

Write-offs

**(1,884)**

(1,769)

(192)

Balance at end of year

**16,770**

18,525

18,070

 

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

 

On October 10, 2002, PLDT entered into a ReceivablesPurchase Deed, or RPD, with a foreign financial institution, or the Purchaser,under which PLDT agreed (1) to sell its receivables from certain eligibleforeign carriers for an advance payment of US$50 million, of which US$3 millionand US$20 million remained outstanding as at December 31, 2006 and 2005,respectively, and (2) to service, administer and collect the receivables onbehalf of the Purchaser.  Under the RPD, the Purchaser has no recourse againstPLDT should an eligible carrier fail or refuse to settle the assigned/purchasedreceivables, except when PLDT commits a breach of its representations andwarranties under the RPD.

 

Sale of receivables under the RPD amounted to US$6 million (Php272 million) and US$11million (Php586 million) for the years ended December 31, 2006 and 2005,respectively.  Loss on sale of receivables under the RPD amounted to US$0.5million (Php27 million) for the year ended December 31, 2006 and US$1 million(Php75 million) for the years ended December 31, 2005 and 2004.

 

 

 

**15. Inventories and Supplies**

 

This account consists of:

 

 

**2006**

 

2005

 

(in million pesos)

Terminal and cellular phone units:

** **

 

 

At net realizable value

**556**

 

806

At cost

**719**

 

1,024

Spare parts and supplies:

** **

 

 

At net realizable value

**513**

 

493

At cost

**1,397**

 

1,376

Others:

** **

 

 

At net realizable value

**161**

 

249

At cost

**161**

 

249

At lower of cost or net realizable value

**1,230**

 

1,548

 

 

 

**16. Equity**

 

Themovement of PLDT’s capital account for 2004, 2005 and 2006 was:

 

** **

**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, 2004

410

5

36

 451

Php4,505

169

Php847

Issuance

1

–

–

   1

9

–

2

Conversion

(2)

–

–

(2)

(17)

1

2

Balance at December 31, 2004

 409

   5

  36

 450

Php4,497

 170

Php851

 

 

 

 

 

 

 

 

Balance at January 1, 2005

 409

   5

  36

 450

Php4,497

 170

Php851

Issuance

–

–

–

–

3

1

2

Conversion

(2)

(5)

–

(7)

(67)

10

51

Balance at December 31, 2005

 407

–

  36

 443

Php4,433

 181

Php904

 

 

 

 

 

 

 

 

Balance at January 1, 2006

 407

–

  36

 443

Php4,433

 181

Php904

Issuance

–

–

–

–

2

–

–

Conversion

(1)

–

–

(1)

(11)

8

38

Balance at December 31, 2006

 406

–

  36

 442

Php4,424

189

Php942

 

***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 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 daily salesprice of a share of Common Stock on the PSE, or if there have been no suchsales on the PSE on any day, the average of the bid and the asked prices of ashare of Common Stock of PLDT at the end of such day on such Exchange, in eachsuch case averaged over a period of 30 consecutive trading days prior to theconversion date, but in no case shall the conversion price be less than theprice set by the Board of Directors which, as at December 31, 2006, was Php5.00per share.  The number of shares of Common Stock issuable at any time uponconversion of one share of the subscriber investment plan, or SIP, or the 10% CumulativeConvertible Preferred Stock is determined by dividing Php10.00 by the thenapplicable conversion price.

 

In casethe shares of Common Stock at anytime outstanding are subdivided into a greateror consolidated into a lesser number of shares, then the minimum conversionprice per share of Common Stock will be proportionately decreased or increased,as the case may be, and in the case of a stock dividend, such price will beproportionately decreased, provided, however, that in every case the minimumconversion price shall not be less than the par value per share of CommonStock.  In the event the relevant effective date for any such subdivision orconsolidation of shares or stock dividend occurs during the period of 30trading days preceding the presentation of any shares of 10% CumulativeConvertible Preferred Stock for conversion, a similar adjustment will be madein the sales prices applicable to the trading days prior to such effective dateutilized 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.

 

OnDecember 6, 2005, the Board of Directors designated 100,000 shares of serialpreferred stock as Series GG 10% Cumulative Convertible Preferred Stock forissuance throughout 2006.

 

OnJanuary 30, 2007, the Board of Directors designated 150,000 shares of serialpreferred stock as Series HH 10% Cumulative Preferred Stock for issuancethroughout December 2009.

 

Confirmationof exemption of SIP Series FF, GG and HH under Section 10.2 of the SecuritiesRegulation Code is still pending with the SEC.

 

OnOctober 24, 2005, PLDT issued to JPMorgan, as depositary, and to the holders ofthe Series III Convertible Preferred Stock a notice of mandatory conversion ofall of its outstanding 4,616,200 Series III Convertible Preferred Stock 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.

 

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

 

As atDecember 19, 2005, as a result of PLDT’s issuance of a notice of mandatoryconversion, all of the outstanding shares of Series III Convertible PreferredStock were voluntarily and mandatorily converted into shares of PLDT CommonStock wherein each share of Series III Convertible Preferred Stock wasconverted into 1.7129 shares of Common Stock.  A total of 7,907,032 shares ofPLDT’s Common Stock were issued as a result of the voluntary and mandatoryconversions of all of the Series III Convertible Preferred Stock.

 

TheSeries IV Cumulative Non-Convertible Redeemable Preferred Stock earnscumulative dividends at an annual rate of 13.5% based on the paid-upsubscription price.  It is redeemable at the option of PLDT at any time oneyear after subscription and at the actual amount paid for such stock, plusaccrued dividends.  On February 26, 2002, the Board of Directors called for thepayment of a portion of the balance of the subscription price of the Series IVCumulative Non-Convertible Redeemable Preferred Stock amounting to Php72million, which was paid on March 5, 2002.  On March 22, 2002, PLDT redeemed 60million shares out of the 360 million subscribed shares of its Series IVCumulative Non-Convertible Preferred Stock and paid Php72 million, representingthe redemption price plus unpaid dividends up to the date of redemption.

 

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-bearing Financial Liabilities**

 

This account consists of the following:

 

 

**2006**

 

2005

 

(in million pesos)

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

** **

 

 

Long-term debt (Note 24)

**63,771**

 

84,860

Obligations under capital lease (Notes 8 and 24)

**106**

 

344

Preferred stock subject to mandatory redemption (Note 24)

**1,369**

 

11,974

 

**65,246**

 

97,178

 

** **

 

 

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

** **

** **

** **

Notes payable

**205**

** **

**–**

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

**16,183**

 

18,684

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

**924**

 

754

 

**17,312**

 

19,438

 

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:

 

 

**2006**

 

2005

 

(in million pesos)

Long-term debt

**5,953**

 

8,829

Obligations under capital lease (Note 8)

**542**

 

602

Preferred stock subject to mandatory redemption

**260**

 

3,916

Total unamortized debt discount

**6,755**

 

13,347

 

The following table describes all changes tounamortized debt discount as at December 31, 2006 and 2005.

 

 

**2006**

 

2005

 

(in million pesos)

Unamortized debt discount at beginning of year

**13,347**

 

18,581

Revaluations

**(595)**

 

(1,114)

Additions during the year

**50**

 

198

Settlements and conversions during the year

**(2,733)**

 

(1,436)

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

**(3,314)**

 

(2,882)

Unamortized debt discount at end of year

**6,755**

 

13,347

 

**Long-term Debt**

 

Long-term debt consists of:

 

**Description**

**Interest Rates**

**2006**

2005

 

 

(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% in 2006 and 5.65% - 8.03% and US$ LIBOR + 0.55% - 2.5% in 2005

**US$201**

**Php9,877**

US$254

Php13,489

Finnvera, Plc, or Finnvera

7.53% - 7.75% and US$ LIBOR + 0.05% in 2006 and 6.36% - 7.75% and US$ LIBOR + 0.05% - 1.425% in 2005

**69**

**3,381**

105

5,552

Nippon Export and Investment Insurance  of Japan, or NEXI

US$ LIBOR + 1% in 2006 and  in 2005

**25**

**1,215**

49

2,612

Others

5.83% - 6.60% and US$ LIBOR + 0.15% - 1.60% and GOVCO’s cost + 0.20% in 2006 and 5.83% - 7.89% and US$ LIBOR + 0.15% -  4.3% in 2005

**10**

**508**

28

1,473

 

 

**305**

**14,981**

 436

23,126

Fixed Rate Notes

7.85% - 11.375% in 2006 and 2005

**835**

**40,972**

987

52,354

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

2.25% and US$ LIBOR + 1% in 2006 and 2005

**176**

**8,615**

165

8,748

GSM Network Expansion Facilities

4.49% - 4.70%, US$ LIBOR  + 0.815% - 3.25% in 2006 and 4.49% and US$ LIBOR + 3.25% 

in 2005 

**194**

**9,509**

86

4,562

Others

US$ LIBOR + 0.40% - 3.625% and 1.75% - 10% in 2006 and US$ LIBOR + 0.40% - 3.625% and 1.75% in 2005

**10**

**487**

18

978

Restructured Loans

US$ LIBOR + 1% in 2006 and 2005

**–**

**–**

90

4,767

Satellite Acquisition Loans

5.66% and US$ LIBOR + 1.75% - 2.75% in 2006 and 5.66% and US$ LIBOR + 1.75% in 2005

**42**

**2,083**

57

3,040

 

 

**US$****1,562**

**76,647**

US$1,839

97,575

 

 

** **

** **

 

 

*Japanese Yen Debt:*

 

** **

** **

 

 

JBIC’s Overseas Investment Loan, or OIL

2.125% in 2006 and 2005

**JP¥****–**

**–**

JP¥6,970

3,139

Export Credit Agency-Supported Loan –  NEXI Supported Loan

JP¥ LIBOR + 1.70% in 2006 and 2005

**–**

**–**

1,573

709

** **

 

**JP¥****–**

**–**

JP¥8,543

3,848

** **

 

** **

** **

 

 

*Philippine Peso Debt:*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

15% - 15.816% in 2006 and 14% - 15.816% in 2005

** **

**808**

 

1,576

Term Loans:

 

** **

** **

 

 

Secured Term Loans

24% - 28% and 90-day PHIBOR  + 3% in 2006 and 24% and 90-day PHIBOR + 3% in 2005

** **

**11**

 

166

Other Unsecured Term Loans

MART1 + 0.75% in 2006

** **

**2,488**

–

–

Restructured Loans

91-day T-Bill rate + 1% in 2006 and 2005

** **

**–**

 

379

 

 

** **

**3,307**

 

2,121

 

 

** **

**79,954**

 

103,544

Less portion maturing within one year

 

** **

**16,183**

 

18,684

Total long-term debt 

 

** **

**Php63,771**

 

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 December 31, 2006 are asfollows:

 

*** ***

**U.S. Dollar Loans**

**Php Loans**

**Total**

**Year**

**In U.S. Dollar**

**In Php**

**In Php**

**In Php**

** **

(in millions)

2007

327

16,032

289

16,321

2008

147

7,211

555

7,766

2009

294

14,429

556

14,985

2010

71

3,471

1,366

4,837

2011

15

728

555

1,283

2012 and onwards

830

40,715

–

40,715

 

1,684

82,586

3,321

85,907

 

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

 

*Export Credit Agencies-Supported Loans*

 

In order to obtain imported components for our networkinfrastructure in connection with our expansion and service improvement programs,we obtained loans extended and/or guaranteed by various export creditagencies.  These financings account for a significant portion of ourindebtedness.

 

*Kreditanstalt für Wiederaufbau, or KfW*

 

KfW, a German state-owned development bank, is PLDT’slargest single creditor.  As at December 31, 2006, we owed US$201 millionaggregate principal amount of debt to KfW, as follows:

 
- US$153 million provided under various export credit agency-backed facilities, of which US$43 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$48 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 (Php6,864million) under this facility as at December 31, 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$72 million will mature in2007, US$55 million will mature in 2008, US$43 million will mature in 2009 andUS$31 million will mature in 2010.  Principal amortizations on these loans aregenerally payable in equal semi-annual installments.

 

*Finnvera, Plc, or Finnvera*

 

As at December 31, 2006, US$70 million (US$69 net of unamortizeddiscount of US$1.1 million) or Php3,433 million (Php3,381 million net ofunamortized discount of Php52 million) principal amount of Smart’s debt wasprovided by various banks under an export credit agency-backed facility inconnection with Smart’s GSM expansion program.  This facility is covered by a guarantyfrom Finnvera, the Finnish export credit agency, for 100% of political andcommercial risk for the refinancing facility of GSM Phases 5A and 5B.  This isthe only remaining outstanding facility guaranteed by Finnvera.  Other Finnvera-guaranteedGSM loan facilities were already fully paid in the aggregate amount of US$16.5million for GSM Phases 3 and 4 loan facilities on April 28, 2006, and in the aggregateamount of US$5.8 million 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 was thesavings from a lower interest margin on the refinancing facility.

 

Of the amount outstanding under the remaining Finnveraguaranteed loan, US$20 million will mature in 2007, US$20 million will maturein 2008, US$20 million will mature in 2009 and US$10 million will mature in2010.  Principal amortization on this loan is payable in equal semi-annualinstallments.

 

*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 December 31, 2006 was US$25million.

 

*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 and Italy, in the aggregateoutstanding principal amount of US$8 million as at December 31, 2006.  Smart,likewise, obtained loans guaranteed by the export credit agencies of Norway and Italy amounting to US$2 million.  Of the amounts outstanding under these loans, US$9million will mature in 2007 and US$1 million will mature in 2008.

 

*Fixed Rate Notes*

 

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

 

**Principal Amount**

**Interest Rate**

**Maturity Date**

**2006**

 2005

** **

** **

** **

(in millions)

US$300,000,000

8.350%

March 6, 2017

**US$296**

**Php14,523**

US$296

Php15,700

US$250,000,000

11.375%

May 15, 2012

**244**

**11,963**

243

12,902

US$167,000,000

10.500%

April 15, 2009

**166**

**8,149**

174

9,223

US$110,068,000

7.850%

March 6, 2007

**110**

**5,396**

138

7,320

US$ 19,310,000

10.625%

May 15, 2007

**19**

**941**

21

1,105

US$112,168,000

9.250%

June 30, 2006

**–**

**–**

115

6,104

 

 

 

**US$835**

**Php40,972**

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.  

 

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

 

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

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

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

 

As at December 31, 2006, outstanding balance of theseloans amounted to US$283.2 million (US$175.6 million net of unamortizeddiscount of US$107.6 million) or Php13,892 million (Php8,615 million net ofunamortized discount of Php5,278 million).

 

Interest for the above facilities is payable every quarter at a floatingrate of three months US$ LIBOR plus 1.00% for the 2007 and 2008 facilities, anda fixed rate of 2.25% per annum for the 2014 facility.  Furthermore, a portionof the 2014 facility amounting to US$144 million has a variable yield optionwhereby the creditors have an option to elect for an early repayment at adiscount either in December 2007 at 52.5% of the relevant debt amount or inDecember 2008 at 57.5% of the relevant debt amount.

 

*GSM**Network Expansion Facilities*

 

On September 13, 2004, Smart signed a US$104 million 5-year term loanfacility to finance the related Phase 7 GSM Equipment and services.  The facilitywas awarded to ABN AMRO Bank, Banque National de Paribas, Calyon, DBS Bank andSumitomo Mitsui Banking Corporation as the Lead Arrangers with Finnish ExportCredit, Plc as the Lender.  The full amount of the facility was drawn onNovember 22, 2004, of which US$62 million and US$ 83 million remainedoutstanding as at December 31, 2006 and 2005, respectively.  The loan ispayable over five years in ten equal semi-annual payments starting May 2005with final repayment in November 2009.  

 

On June 8, 2001, Smart signed its GSM Phase 5A financing comprised ofUS$195 million loans, of which US$30 million is owed to Nordic Investment Bank,or NIB, US$15 million to Nederlandse Financierings-Maatschappij VoorOntwikkelingslanden N.V., or FMO, of the Netherlands and US$150 million supportedby Finnvera.   The NIB loan balance of US$12.0 million was prepaid in full onDecember 8, 2005, and the FMO loan balance of US$4.09 million was prepaid infull 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 0.815% margin per annum.The facility was drawn on July 11, 2006 for the full amount of US$30 million ata floating interest of 6.445% (5.63% Libor + .815% per annum margin).  Thefirst installment payment will commence on January 11, 2007.  The full US$30million amount remained outstanding as at December 31, 2006.

 

OnAugust 10, 2005, Smart signed a loan facility for its GSM Phase 8 financing inthe amount of US$70 million.  The facility was awarded to the Bank of TokyoMitsubishi Ltd., Mizuho Corporate Bank Ltd, Standard Chartered Bank andSumitomo Mitsui Banking Corporation as the Lead Arrangers, with FEC as theLender.  Smart opted to utilize only a total of US$67 million which was drawnin February 15, 2006 and March 13, 2006 for US$10 million and US$57 million,respectively.  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 December 31, 2006, US$59 million remainedoutstanding.

 

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.  TheLender 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 was drawn on November 10, 2006 for the fullamount of US$44.2 million.  The first installment will commence on January 16,2007 with final repayment on July 15, 2011.  As at December 31, 2006, theUS$44.2 million loan remains outstanding.

 

*OtherTerm Loan*

* *

On December 1, 2001, CyMed availed itself of a 6-yearnon-interest bearing advances from certain officers of the company to fund itsoperating expenses, including salaries and other incidental expenses.  Theoutstanding balance of this loan as at December 31, 2006 amounted to US$0.8 million,which is payable quarterly until December 31, 2009.

 

*Undrawn Facilities*

 

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 0.75% per annum margin.

 

*Restructured Loans*

 

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

 

Asa result of the restructuring, 50% of the financial debt of each participatingcreditor was released in consideration for the allotment of Piltel Series KClass I Convertible Preferred Stock, which shares were immediately andmandatorily converted into PLDT Convertible Preferred Stock.  One PLDT SeriesV, VI or VII Convertible Preferred Stock was issued for every five (5) PiltelSeries K Class I Convertible Preferred Stock.  Approximately half of theremaining 50% of all participating creditors’ (except for bondholders andpreferred shareholders) financial debt became their participation in a TrancheB Loan in the same currency as their previous financial debt, and the otherhalf became their participation in a Tranche C Loan also in the same currencyas their 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.

 

Additional creditors participated in the debtrestructuring plan, such that only convertible bonds with principal amount ofUS$0.7 million remain unrestructured and presented as part of current portionof interest-bearing financial liabilities.

 

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

 

**Description**

**2006**

2005

** **

(in millions)

**Restructured debts**

** **

** **

** **

** **

Philippine Pesos

** **

** **

** **

 

10 year Tranche B

** **

**Php**–

 

Php190

15 year Tranche C

** **

**–**

 

189

 

** **

**–**

 

379

U.S. Dollars

** **

** **

 

 

10 year Tranche B

**US$**–

**–**

US$8

400

15 year Tranche C

**–**

**–**

7

395

15 year Conversion Notes Facility

**–**

**–**

75

3,972

 

**US$****–**

**–**

US$90 

4,767

Total

** **

**–**

 

5,146

**Unrestructured debt**

** **

** **

 

 

U.S. Dollars

** **

** **

 

 

Convertible bonds

**US$1**

**45**

US$1

49

Total

** **

**45**

 

5,195

Less portion maturing within one year

** **

**45**

 

103

 

** **

**Php–**

 

Php5,092

 

On June 5,2006, Piltel made a partial voluntary prepayment of principal under its Peso bankfacility, U.S. dollar bank facility, various Trade Creditor Facilities andNotes Indenture.  The voluntary prepayment was made in lieu of depositingExcess Cash Flow from the operations of Piltel’s business into a Sinking FundAccount.  The aggregate voluntary prepayment amount was Php9,325 million (Php6,393million to Smart and Php2,932 million to third party creditors) or US$176million (US$121 million to Smart and US$55 million to third party creditors),which was applied proportionally to the various debt facilities as set out inthe Intercreditor Agreement dated June 4, 2001 or the Intercreditor Agreement.

 

OnDecember 4, 2006, Piltel prepaid the outstanding balance of its restructured principaldebt under its Peso bank facility, U.S. Dollar bank facility, Peso Term Notefacility, various Trade Creditor Facilities and Notes Indenture in theaggregate amount of Php11,631 million (Php8,061 million to Smart and Php3,570million to third party creditors) or US$233 million (US$161 million to Smartand US$72 million to third party creditors).  Piltel obtained approval from theBangko Sentral ng Pilipinas to source dollar payment from authorized agentbanks.

 

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

 

Piltel’srestructured obligations were secured by substantially all present and futureassets of Piltel under the MTI dated June 4, 2001 between Piltel and JPMorganChase Bank, N.A. (Manila Branch) Bank as Security Agent for the creditors,which established the security arrangements relating to the restructureddebts.  The participating creditors (other than the participating holders ofthe Peso Term Notes Facility) shared equally in first ranking security, whilenon-participating creditors and the participating holders of the Peso Term Notefacility shared equally in second ranking security created under the MTI.  Suchmortgage was approved by at least two-thirds of Piltel’s stockholders at itsannual meeting on April 18, 2001 and by the NTC on May 18, 2001.

 

On July 7,2006, Piltel, PLDT and JPMorgan Chase Bank, N.A. (Manila Branch), as SecurityAgent on behalf of the Finance Parties under the Intercreditor Agreement,agreed to certain amendments thereto to allow the amendment of any term of theMTI and the release and sale of certain properties or assets from the securityinterests created by the MTI upon the instructions of the creditorrepresentatives.  On the same date, and following the effectivity of theamendment of the Intercreditor Agreement, Piltel and JP Morgan Chase Bank, N.A.,executed an Amendment to the MTI, pursuant to which Piltel is allowed to sellor dispose of certain categories of assets or properties with the consent ofthe Majority Bank Creditors, the Majority Trade Creditors and the Trustee underthe MTI, provided, however that for as long as Avenue Asia holds a majority ofPiltel’s Conversion Notes, prior consent of Avenue Asia will be required for(i) any sale or disposition of any of the real properties of Piltel, and (ii)any sale or disposition of assets to Smart, PLDT or any of its affiliates.

 

AlthoughPiltel fully paid its restructured debts on December 4, 2006, the MTI remainsin effect for holders of convertible bonds due 2006 issued by PIHC andguaranteed by Piltel who did not participate in the debt restructuring plan.However, since the bondholders who did not participate in the debtrestructuring plan did not accept the stipulations in their favor granting thema security interest under the MTI, Piltel and the Security Agent can revoke andwithdraw such stipulations.  Following such revocation and withdrawal of thestipulations in the MTI in favor of the non-accepting bondholders, Piltel andthe Security Agent can terminate the MTI and release all assets of Piltel whichwere used as security for the restructured debts under the MTI.

 

 

*Satellite**Acquisition Loans*

 

MabuhaySatellite has an existing Credit Agreement with the Export-Import Bank of the United States, or Ex-Im Bank, to finance a portion of the cost of purchasing the Agila IISatellite.  In 2004, Ex-Im Bank approved, in principle, the re-profiling ofMabuhay Satellite’s US$42 million debt with them by extending the maturity ofthe loan by 11⁄2 years to July 15, 2007 and reducing the interest rate by 1% to5.6%.  The revised repayment terms have been approved by the majority of thelocal creditor banks.  As at December 31, 2006, the remaining outstanding loanamounted to US$10 million (Php511 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 December 31, 2006had an aggregate stated value not exceeding US$11 million (Php527 million) infavor of Ex-Im Bank, as security under the Credit Agreement and a term loan toMabuhay Satellite in the aggregate amount of US$32 million (Php1,572 million),which will mature on various dates from 2006 to 2007. 

 

MabuhaySatellite has constituted in favor of the Banks: (a) a first mortgage on its leaseholdrights under a lease agreement entered into with the Subic Bay MetropolitanAuthority and the components of the satellite system; (b) an assignment of itsrights under its purchase contract for the satellite system; (c) an assignmentof its rights under the transponder lease contracts to be entered into with itsshareholders and other parties and the revenues therefrom; and (d) anassignment of the applicable proceeds of insurance to be taken on the satellitesystem.

* *

Asat December 31, 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.

*** ***

***Japanese Yen Debt:***

* *

*JBIC JP¥9,760 Million Overseas**Investment**Term Loan*

 

On July 26, 2002, PLDT signed a loan agreement withJBIC for a credit facility of JP¥9,760 million under JBIC’s OIL program.  Alloutstanding amounts related to this 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 matured 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.

 

*Php5 Billion Peso Fixed Rate Corporate Notes*

 

OnFebruary 15, 2007, Smart issued Php5 billion unsecured fixed rate corporatenotes, made up of Series A notes amounting to Php3.8 billion and Series B notesamounting to Php1.2 billion with five and ten year terms, respectively.  SeriesA notes were priced at 5.625%, while Series B notes were priced at 6.500%.  Fundsraised from the issuance of these notes will be used primarily for Smart’scapital expenditures for network improvement and expansion.

* *

*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 in 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 berepaid in nine equal quarterly installments starting March 2005 with finalrepayment in March 2007.  Interest on the loan is equivalent to 90-day PHIBORplus 3% per annum payable quarterly in arrears.  The loan is secured by aMortgage Trust Indenture Agreement, or MTIA, dated March 15, 2004, with AsiaUnited Bank – Trust and Investments Group, on a parcel of land with a carryingvalue of Php279 million as at December 31, 2004.  As at December 31, 2006, theoutstanding balance of this loan amounted to Php11 million which will mature inMarch 2007.

* *

*Php149Million Term Loan Facility*

* *

InJanuary 2006, Vocativ, a wholly-owned call center subsidiary of ePLDT,partially prepaid Php89 million out of its outstanding five-year term loanfacility of Php109 million with Asia United Bank for the payment of itsadditional capital expenditures and working capital requirements.  Under theterms of the loan, principal payment is to be paid in 14 equal quarterlyinstallments starting April 2006 with final repayment in July 2009.  Intereston the loan is equivalent to 90-day PHIBOR plus 3% per annum payable quarterlyin arrears.  The loan is secured by a Mortgage Participation Certificate againstthe MTIA between ePLDT and Asia United Bank Corporation – Trust and InvestmentsGroup dated March 15, 2004 on a parcel of land, which excludes the buildingsand improvements.  The remaining balance of Php20 million was pre-terminated inApril 2006.

 

*Unsecured**Term Loans*

* *

*Php2,500  Million**Term Loan Facility*

 

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 Php2,500 million.  The facility is a 5 yearloan payable in 18 equal consecutive quarterly installments commencing on thethird quarter from the date of the first drawdown.  Interest rate is floatingat 3-month MART plus 0.75% per annum margin.  The facility was drawn onDecember 10, 2006 for the full amount of Php2,500 million at a floatinginterest of 6.0232% (5.2732% three months MART1 + 0.75% per annum margin).  Thefirst installment will commence on September 11, 2007 with final repayment onDecember 9, 2011.  The full amount of Php2,500 million (Php2,488 million net ofunamortized discount of Php12 million) was outstanding as at December 31, 2006.

 

*Debt Covenants*

 

Our debt instruments contain restrictive covenants,including covenants that could prohibit us from paying dividends on commonstock under certain circumstances, and require us to comply with specifiedfinancial ratios and other financial tests, calculated in conformity withaccounting principles generally accepted in the Philippines, at 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 96% of PLDT’s total consolidated debts are denominated in foreigncurrencies, principally in U.S. dollars, many of these financial ratios andother tests are negatively affected by any weakening of the peso.

 

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

 

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

 

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 1.5:10, a debt toEBITDA ratio of not more than 3:1 and a debt service coverage ratio of not lessthan 1.50:1.  Smart has maintained compliance with all of its financialcovenants.  The agreements also contain customary and other default provisionsthat permit the lender to accelerate amounts due under the loans or terminatetheir commitments to extend additional funds under the loans.  These defaultprovisions include: (a) cross-defaults and cross-accelerations that permit alender to declare a default if Smart is in default under another loanagreement.  These cross-default provisions are triggered upon a payment or otherdefault permitting the acceleration of Smart debt, whether or not the defaulteddebt is accelerated; (b) failure by Smart to comply with certain financialratio covenants; (c) any reduction in PLDT’s ownership of Smart’s shares below51%; (d) any reduction in First Pacific’s and Metro Pacific Corporation’scollective direct and/or indirect ownership of PLDT’s common stock below 17.5%of the total common stock outstanding; and (e) the occurrence of any materialadverse change in circumstances that the lender reasonably believes materiallyimpairs Smart’s ability to perform its obligations under its loan agreements.

 

Asat December 31, 2006 convertible bonds with a principal amount of US$0.7million had fallen due for payment and had not been paid.  These bondsrepresent the sole unrestructured borrowings of Piltel.  Piltel’s failure toredeem the convertible bonds when they fell due does not cause a default underthe debt arrangements of any other member of the PLDT group.  Piltel is workingto identify the holders of the convertible bonds so that it can finalizeredemption arrangements.

 

The Creditand Omnibus Agreements of Mabuhay Satellite impose several negative covenantswhich, among other things, restrict material changes in Mabuhay Satellite’snature of business and ownership structure, any lien upon or with respect toany of its assets or to any right to receive income, acquisition of capitalstock, declaration and payment of dividends, merger, consolidation and salewith another entity and incurring or guaranteeing additional long-term debtbeyond prescribed amounts.

 

ePLDT’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 December 31, 2006, ePLDT was incompliance with all of its financial covenants.

 

**Obligations Under Capital Lease**

 

Thefuture minimum payments for capitalized leases as at December 31, 2006 are asfollows:

 

**Year**

(in million pesos)

2007

1,523

2008

38

2009

10

2010 and onwards

1

Total minimum lease payments

1,572

Less amount representing interest

542

Present value of net minimum lease payments

1,030

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

924

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

 106

 

*Municipal Telephone Projects*

 

In 1993,PLDT entered into two lease agreements with the Philippine Department ofTransportation and Communications, or DOTC, covering telecommunicationsfacilities in the province of Bohol and Batangas established under theMunicipal Telephone Act.  Under these agreements, PLDT was granted the exclusiveright to provide telecommunications management services, to expand services,and to promote the use of the DOTC-contracted facilities in certain coveredareas for a period of 15 years.  Title to the properties shall be transferredto PLDT upon expiration of the lease term.  As at December 31, 2006, PLDT’saggregate remaining obligation under this agreement was approximately Php858 million.In case of cancellation, PLDT is liable to pay Php100 million under each of thetwo 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 PLDT has infused more than Php200 million for upgrades andmaintenance to 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 as attorney-generalof the national government.  On May 5, 2005, PLDT received a letter from theDOTC stating that PLDT is in default for failure to remit to the DOTC thequarterly installments under the lease agreement.  Due to the failure of theparties to amicably settle their dispute, on September 28, 2005, PLDT demanded that the dispute be referred to arbitration and that the parties agree onthe composition of the arbitration committee.  In response, the DOTC, in aletter dated October 17, 2005, informed PLDT that pursuant to Executive OrderNo. 269, series of 2004, dated January 12, 2004, the existing communicationsprograms and projects implemented by DOTC were transferred to the Commission onInformation and Communications Technology, or CICT, and that the DOTC hadforwarded to CICT PLDT’s letter dated September 28, 2005.  In a letter datedMarch 24, 2006, the CICT informed PLDT that the CICT poses no objection onPLDT’s stated intentions and preference to refer the unresolved and outstandingissues to the Philippine Dispute Resolution Center, Inc., or PDRCI, per thearbitration clause of the lease agreement.  On June 27, 2006, a Request forArbitration dated June 1, 2006 was filed by PLDT with the PDRCI.  On November15, 2006, DOTC has filed its Answer to the said Request for Arbitration.  As atDecember 31, 2006, the net book value of the telecommunications system inBohol, including PLDT’s additional capital expenditure relating to thetelecommunications system, and corresponding capital lease obligation amounted toPhp21 million and Php735 million, 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 December 31, 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 in the aggregate amount of Php237million as at December 31, 2006 in respect of office equipment.

 

Underthe terms of certain loan agreements and other debt instruments, PLDT may not create,incur, assume or permit or suffer to exist any mortgage, pledge, lien or otherencumbrance or security interest over the whole or any part of its assets orrevenues or suffer to exist any obligation as lessee for the rental or hire ofreal or personal property in connection with any sale and leasebacktransaction.

 

**PreferredStock Subject to Mandatory Redemption**

 

Themovements of PLDT’s preferred stock subject to mandatory redemption for 2006and 2005 are as follows:

 

 

**2006**

2005

 

**Series V**

**Series VI**

**Series VII**

**Total**

Series V

Series VI

Series VII

Total

 

(in million pesos)

Balance at beginning of year

**272**

**6,321**

**5,381**

**11,974**

2,103

6,440

6,072

14,615

Conversion

**(224)**

**(5,253)**

**(5,543)**

**(11,020)**

(2,083)

(507)

–

(2,590)

Accretion

**13**

**481**

**282**

**776**

252

782

451

1,485

Revaluation

**–**

**(241)**

**(120)**

**(361)**

–

(394)

(1,142)

(1,536)

Balance at end of year

**61**

**1,308**

**–**

**1,369**

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 beable to require PLDT to purchase such PLDT common shares for Php1,700 pershare, US$36.132 per share, and JPY4,071.89 per share, respectively.

 

TheSeries V Convertible Preferred Stock was designated as a compound instrumentconsisting of liability and equity components.  The fair value of theConvertible Preferred Stock was determined on the issue date, of which the fairvalue of the liability component as at date of issuance is recorded as“Preferred Stock Subject to Mandatory Redemption” and is included under the“Interest-bearing Financial Liabilities” account in the consolidated balancesheets.  The residual amount was assigned as the equity component.

 

Thecost of each foreign currency component of the Convertible Preferred StockSeries VI and VII, was designated as a debt instrument with embedded calloptions.  The fair value of the Convertible Preferred Stock was determined onthe issue date, of which the fair value of embedded call options was bifurcatedand accounted for separately, see *Note 2 – Summary of Significant AccountingPolicies and Practices*and*Note 24 – Financial Assets and Liabilities*.The residual 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.

 

The difference between the amount designated as liability components ofthe Series V, VI and VII Convertible Preferred Stock at issue date and theaggregate redemption value is accreted over the period up to the put optiondate using the effective interest rate method.  Accretions added to “PreferredStock Subject to Mandatory Redemption” and charged to interest as at December31, 2006, 2005 and 2004 amounted to Php776 million, Php1,485 million andPhp1,556 million, respectively.

 

“Preferred Stock Subject to Mandatory Redemption” amounted to Php1,369million and Php11,974 million as at December 31, 2006 and 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 December 31, 2006 and2005, 10,937,309 shares and 3,376,743 shares, respectively, of the ConvertiblePreferred Stock have been voluntarily converted into PLDT common shares.  On August 18, 2006, all 3,842,000 sharesof Series VII Convertible Preferred Stock have been voluntarily converted intoPLDT common shares.  The outstanding shares of Series V and VI ConvertiblePreferred Stock as at December 31, 2006 were 46,047 and 875,188, respectively.The aggregate redemption value of the outstanding Series V and VI ConvertiblePreferred Stock amounted to Php1,629 million and Php15,890 million as at December31, 2006 and 2005, respectively.

 

Thecorresponding dividends on these shares charged as interest expense amounted toPhp130 million, Php251 million and Php284 million for the years ended December31, 2006, 2005 and 2004, respectively.

 

**Notes Payable**

 

In 2006,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 are payablewithin an average of 150 days from the availment date.  The outstanding balanceof Php205 million as at December 31, 2006 will mature in various months in 2007.

 

 

 

**18. Other Noncurrent Liabilities**

 

This account consists of:

 

 

**2006**

 

2005

 

(in million pesos)

Accrual of capital expenditures under long-term financing

**5,646**

 

5,769

Asset retirement obligations (Note 8)

**831**

 

752

Prepayments received under receivable purchase facility (Note 14)

**205**

 

976

Unearned revenues

**63**

 

71

Others

**836**

 

32

 

**7,581**

 

7,600

 

 

**19. Accrued Expenses and Other CurrentLiabilities**

 

This account consists of:

 

 

**2006**

 

2005

 

(in million pesos)

Accrued utilities and related expenses

**8,078**

 

5,559

Accrued employee benefits (Note 21)

**7,474**

 

1,760

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

**1,768**

 

2,003

Accrued taxes and related expenses

**754**

 

760

Payable in installment purchase of equity investment (Note 11)

**–**

 

1,278

Others

**1,083**

 

1,946

 

**19,157**

 

13,306

 

 

 

**20. RelatedParty Transactions**

 

*a.   Air Time Purchase Agreement between PLDT and AILand Related Agreements*

 

PLDTis a party to a Founder NSP Air Time Purchase Agreement entered into with AILin March 1997, which was amended in December 1998, under which PLDT was grantedthe exclusive right to sell AIL services as NSP in the Philippines.  Inexchange, the Air Time Purchase Agreement required PLDT to purchase from AIL aminimum of US$5 million worth of air time annually over ten years commencing onJanuary 1, 2002, the purported date of commercial operations of the Garuda ISatellite.  In the event that AIL’s aggregate billed revenue is less than US$45million in any given year, the Air Time Purchase Agreement also states thatPLDT has to make supplemental air time purchase payments not to exceed US$15million per year during the ten-year term.

 

In March 2003, PLDT, together with the other founderNSPs, entered into a Standstill Agreement with AIL.  Under the StandstillAgreement, payments made to AIL under the Air Time Purchase Agreement werebased on billings of actual usage pending final agreement on the terms of theproposed amendment to the Air Time Purchase Agreement.

 

On September 1, 2006, AIL, PT Asia Cellular Satelliteand Inmarsat reached an agreement to pool their resources to develop productand service offerings in the Asian region, founded on their respective mobilesatellite communications networks, with (a) Inmarsat performing the role ofsatellite and network operator and wholesale product and services developer and(b) the AIL performing the role of wholesale and retail distributor of productsand services.

 

PLDT,likewise, signed a Gateway Services Agreement with Inmarsat, whereby PLDTcommitted to provide gateway infrastructure in Subic Bay up to a maximum amountof US$5 million.  In exchange, PLDT will earn US$0.015 per minute forinterconnection services to be provided to Inmarsat distribution partners fortraffic going through the gateway facility in Subic Bay.

 

OnSeptember 1, 2006, AIL and PT Asia Cellular Satellite signed a Term Sheet, or BanksTerm Sheet, with a majority of the banks that will be used as the basis forfurther good faith negotiations between the parties thereto with a view toentering into an agreement further amending the Amended and Restated CreditAgreement with AIL’s bank creditors.

 

Under the Banks Term Sheet, a majority of the banksagreed, subject to satisfaction of certain conditions, among other things, toamend the Founder NSP Air Time Purchase Agreement and to re-denominate AIL debtinto non-interest bearing subordinated convertible bonds maturing in 2015; to amortizea senior term loan with a final maturity on August 1, 2013 and a junior term loanwith bullet payments on August 1, 2014 and 2015.

 

Pursuant to the business collaboration arrangementsbetween AIL and Inmarsat, on September 1, 2006, Inmarsat made the first paymentof US$4 million to AIL which was used to pay principal and interest payable tothe banks in accordance with the Banks Term Sheet.

 

On February 1, 2007, PLDT (through ACeS Philippines)signed an agreement to purchase LMGT and MMOC’s 50% equity and debt interest inAIL, respectively for US$750,000 in accordance with a notice of proposed transferissued by LMGT dated December 22, 2006 pursuant to a right of first refusalunder the AIL Shareholders’ Agreement.

 

*b.   Transactions with Major Stockholders, Directorsand Officers*

 

Transactionsto which PLDT or any of its subsidiaries is a party, in which a director, keyofficer or owner of more than 10% of the outstanding common stock of PLDT, orany member of the immediate family of a director, key officer or owner of morethan 10% of the outstanding common stock of PLDT had a direct or indirectmaterial interest, as at December 31, 2006 and 2005 and for the three years endedDecember 31, 2006, 2005 and 2004 are as follows:

 

*1.   Cooperation Agreement with FirstPacific and certain affiliates, or FP Parties, NTT Communications and DoCoMo*

 

In connection with the transfer by NTT Communicationsof approximately 12.6 million shares of PLDT’s common stock to DoCoMo pursuantto a Stock Sale and Purchase Agreement dated January 31, 2006 between NTTCommunications and DoCoMo, the FP Parties, NTT Communications and DoCoMoentered into a Cooperation Agreement, dated January 31, 2006.  Under theCooperation Agreement, the relevant parties extended certain rights of NTTCommunications under the Stock Purchase and Strategic Investment Agreementdated September 28, 1999, as amended, and the Shareholders Agreement datedMarch 24, 2000, to DoCoMo, including:

 

•        certain contractual veto rightsover a number of major decisions or transactions; and

 

•        rights relating to the representationon the board of directors of PLDT and Smart, respectively, and any committeesthereof.

 

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 discounts 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 ServicesPackage Agreement between DoCoMo and Smart*

 

An Integrated i-mode Service Package Agreement wasentered into by Smart and DoCoMo on February 15, 2006, under which DoCoMoagreed to grant Smart, on an exclusive basis within the territory of thePhilippines for a period of five years, an integrated i-mode service packageincluding a non-transferable license to use the licensed materials and thei-mode brand, as well as implementation support and assistance andpost-commercial launch support from DoCoMo. Pursuant to this agreement, Smartis required to pay an initial license fee and running royalty fees based on therevenue arising from i-mode subscription fees and data traffic.  The initiallicense fee paid as at December 31, 2006 amounted to Php53 million.

 

*3.   Advisory ServicesAgreement between DoCoMo and PLDT*

 

An AdvisoryServices Agreement was entered into by DoCoMo and PLDT on June 5, 2006, inaccordance with the Cooperation Agreement between PLDT and DoCoMo.  Pursuant tothe Agreement, DoCoMo will provide the services of certain key personnel inconnection with certain aspects of the business of PLDT and Smart.  Also, theagreement governs the terms and conditions of the appointments and thecorresponding fees related thereto.  The initial license fee paid as at December31, 2006 amounted to Php12 million.  Outstanding liability under this agreementamounted to Php32 million as at December 31, 2006.

 

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

 

PLDT is a party to the following agreements with NTT Communicationsand/or its affiliates:

 

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

 

•        *Arcstar Licensing Agreement andArcstar Service Provider Agreement.*OnMarch 24, 2000, PLDT entered into an agreement with NTT WorldwideTelecommunications Corporation under which PLDT markets managed data and otherservices under NTT Communications’ “Arcstar” brand to its corporate customersin the Philippines.  PLDT also entered into a Trade Name and TrademarkAgreement with NTT Communications under which PLDT has been given the right touse the tradename “Arcstar” and its related trademark, logo and symbols, solelyfor the purpose of PLDT’s marketing, promotional and sales activities for theArcstar services within the Philippines; and

 

•        *Conventional InternationalTelecommunications Services Agreement*.On March 24, 2000, PLDT entered into an agreement with NTT Communications underwhich PLDT and NTT Communications agreed to cooperative arrangements forconventional international telecommunications services to enhance theirrespective international businesses.

 

Total fees under these agreements amounted to Php184million, Php256 million and Php336 million for the years ended December 31,2006, 2005 and 2004, respectively.  As at December 31, 2006 and 2005,outstanding obligations of PLDT amounted to Php18 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 Technical AssistanceAgreement extending the effectivity of the terms thereof to February 23, 2008.Furthermore, in view of the acquisition by Smart of Piltel Series K Class IConvertible Preferred Stock held by PLDT, the parties agreed to make theconsolidated net revenues of Smart the basis for the computation of the 1% technicalservice fees payable by Smart to ALBV, effective January 1, 2005.

 

Smartalso has an existing Services Agreement with ALBV for a period of 25 years startingJanuary 1, 1999, which will automatically expire unless renewed by mutualagreement of both parties.  Under the agreement, ALBV provides advice andassistance to Smart in sourcing capital equipment and negotiating withinternational suppliers, arranging international financing and other servicestherein consistent with and for the furtherance of the objectives of theservices.  Service agreement fees were paid for the whole 25-year period.

 

ALBVis a subsidiary of the First Pacific Group.

 

Totalfees under these agreements amounted to Php591 million, Php567 and Php507million for the years ended December 31, 2006, 2005 and 2004, respectively.Outstanding obligations of Smart under these agreements amounted to Php128million and Php194 million as at December 31, 2006 and 2005, respectively.Outstanding prepaid management fees as at December 31, 2006 and 2005 amountedto Php869 million and Php920 million, respectively.

 

*6.   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 under these agreements amounted to Php360 million, Php468 million andPhp488 million for the years ended December 31, 2006, 2005 and 2004,respectively.  Two directors of PLDT have a direct/indirect interests in orserve as a director/officer of Gotuaco and Malayan.

 

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

 

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

 

 

**2006**

2005

2004

 

(in million pesos)

Short-term employee benefits

**698**

591

436

Share-based payments (Note 21)

**978**

372

228

Post-employment benefits

**30**

29

21

 

**1,706**

 992

 685

 

Each of the directors,including the members of the advisory board of PLDT, is entitled to adirector’s fee in the amount of Php125,000 for each meeting of the boardattended.  Each of the members or advisors of the audit, executivecompensation, governance and nomination and finance committees is entitled to afee in the amount of Php50,000 for each committee meeting attended.

 

There are no agreementsbetween PLDT Group and any of its key management personnel providing forbenefits upon termination of employment, except for such benefits to which theymay be entitled under PLDT Group’s retirement and incentive plans.

 

 

 

**21. Employee Benefits**

 

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

 

On April 27, 1999 and December 10, 1999, the Board of Directors and stockholders,respectively, approved the establishment of an ESOP and the amendment of theSeventh Article of the Articles of Incorporation of PLDT denying thepre-emptive right of holders of common stock to subscribe for any issue of upto 1,289,745 common stock pursuant to the ESOP.  The ESOP covers managementexecutives, which include officers with rank of Vice President up to thePresident, executives with the rank of Manager up to Assistant Vice President,and advisors/consultants engaged by PLDT.  The ESOP seeks to motivate optionholders to achieve PLDT’s goals, reward option holders for the creation ofshareholder value, align the option holders’ interests with those of the stockholdersof PLDT, and retain the option holders to serve the long-term interests ofPLDT.  The ESOP is administered by the Executive Compensation Committee of theBoard of Directors.  About 1.3 million shares of common stock of PLDT had beenreserved as underlying option shares under the ESOP in 1999.

*** ***

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

*** ***

 

**2006**

 

2005

Balance at beginning of year

**197,500**

 

536,589

Exercised shares*

**(78,466)**

 

(335,605)

Cancellations/forfeitures

**–**

 

(3,484)

Balance at end of year

**119,034**

 

197,500

 

****Basedon date of payment of exercised shares.*

*** ***

As at December31, 2006, options covering a total of 750,816 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 interestrate, expected life of option, exercise share price of Php814, and a weightedaverage share price of Php870 for the 1999 Grant and of Php315 for the 2002Grant as at valuation date.  Total fair value of shares granted amounted to Php359million as at December 31, 2006 and 2005.  No fair value of options were recognizedas an expense for the years ended December 31, 2006 and 2005.

*** ***

***LTIP***

*** ***

On August 3, 2004, PLDT’s Board of Directors approvedthe establishment of the LTIP for eligible key executive officers and advisorsof PLDT and its subsidiaries, which is administered by the ExecutiveCompensation Committee.  The LTIP was originally a four-year cash-settled sharebased plan covering the period January 1, 2004 to December 31, 2007.  Thepayment was intended to be made at the end of the plan period (without interimpayments) contingent upon the achievement of an approved target increase inPLDT’s common share price by the end of the plan period and a cumulativeconsolidated net income target for the plan period.  The target increase in thePLDT base share price, which was the average of the closing prices of PLDTshares ten trading days before or after December 31, 2003, was approximately15% 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 of Directors to cover the 2007-2009 plan.As a result of the establishment of the new LTIP, the Board of Director alsoapproved the early vesting of the current LTIP by the end of 2006.

 

The fairvalue of the LTIP was estimated using an option pricing model, which consideredannual stock volatility, risk-free interest rates, the remaining life of optionsand the share price capped at Php2,300.00 as at December 31, 2006.  Incentivecost per share as at December 31, 2006 and 2005 amounted to Php1,350.00 andPhp1,044.01, respectively.  The fair value of the LTIP recognized as an expensefor the years ended December 31, 2006, 2005 and 2004 amounted to Php3,150million, Php1,214 million and Php631 million, respectively.  As at December 31,2006 and 2005, total LTIP liability amounted to Php5,030 million and Php1,880 million,respectively.

 

Movements in the number of share appreciation rightsoutstanding under the LTIP are as follows:

 

 

**2006**

 

2005

Balance at beginning of year

**3,884,406**

 

3,685,959

Cancellations/forfeitures

**(140,449)**

 

(294,982)

Awards

**–**

 

493,429

Balance at end of year

**3,743,957**

 

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.

 

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

 

 

**2006**

2005

2004

 

(in million pesos)

Change in benefit obligation:

** **

 

 

Benefit obligation at beginning of year

**7,652**

6,924

6,008

Service cost

**478**

689

401

Interest cost

**895**

453

539

Benefits paid

**(594)**

(495)

(819)

Actuarial loss (gain)

**4,827**

81

787

Liabilities of newly acquired subsidiaries

**56**

–

8

Benefit obligation at end of year

**13,314**

7,652

6,924

 

** **

 

 

Change in plan assets:

** **

 

 

Fair value of plan assets at beginning of year

**5,154**

4,449

3,928

Actual return on plan assets

**541**

475

376

Employer’s contribution

**320**

633

883

Benefits paid

**(590)**

(495)

(819)

Actual gains on plan assets

**343**

92

81

Fair value of plan assets at end of year

**5,768**

5,154

4,449

Funded status

**7,546**

2,498

2,475

Unrealized net transition obligation

**(1)**

(61)

(120)

Unrecognized net actuarial gain

**(4,657)**

(162)

(176)

Accrued benefit cost

**2,888**

2,275

2,179

 

** **

 

 

Components of net periodic benefit cost:

** **

 

 

Service cost

**479**

453

401

Interest cost

**895**

689

539

Actual return on plan assets

**(541)**

(475)

(376)

Amortizations of unrecognized net transition obligation

**58**

59

60

Net periodic benefit cost

**891**

 726

 624

 

Theweighted average assumptions used to determine pension benefits as at December31, 2006 and 2005 are as follows:

 

 

**2006**

2005

Discount rate

**8%**

12%

Rate of increase in compensation

**9%**

9%

Expected rate of return on plan assets

**10%**

10%

 

As at December 31, 2006, the assets of the beneficialtrust fund established for the PLDT pension plan include investments in sharesof stocks of PLDT and Piltel with fair values aggregating Php2,185 million,which represent about 35% of such beneficial trust fund’s net assets availablefor plan benefits.

 

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

 

The allocation of the fair value of the beneficialtrust fund’s assets for the PLDT pension plan follows:

 

 

**2006**

2005

2004

Investments in equity securities

**52%**

44%

33%

Investments in debt and fixed income securities

**23%**

28%

41%

Investments in real estate

**10%**

13%

16%

Investments in mutual funds

**8%**

7%

2%

Investments in temporary placements

**7%**

8%

8%

 

**100%**

100%

100%

 

PLDTcurrently expects to make approximately Php509 million of cash contributions toits pension plan in 2007.

 

*DefinedContribution Plan*

 

Contributions to the plan are made based on the employee’syears of tenure and range from 5% to 10% of the employee’s monthly salary.Additionally, employee has an option to make a personal contribution to thefund, at an amount not exceeding 10% of his monthly salary.  The employer thenprovides an additional contribution to the fund ranging from 10% to 50% of theemployee’s contribution based on the latter’s years of tenure.

 

ThePlan’s investment portfolio seeks to achieve regular income and long-termcapital growth and consistent performance over its own portfolio benchmark.  Inorder to attain this objective, the trustee’s mandate is to invest in adiversified portfolio of bonds and equities, both domestic and international.The portfolio mix is kept at 60% to 90% for fixed income securities while 10%to 40% is allotted to equity securities.

 

Theallocation of the fair value of plan assets for Smart as at December 31, 2006and 2005 follows:

 

 

**2006**

2005

2004

Investments in debt securities

**68%**

76%

78%

Investments in equity securities

**29%**

23%

20%

Others

**3%**

1%

2%

 

**100%**

100%

100%

 

Smartcurrently expects to make approximately Php109 million of cash contributions toits pension plan in 2007.

 

*PensionBenefit Cost*

 

Totalpension benefit cost follows:

 

 

**2006**

2005

2004

 

(in million pesos)

Expense recognized for defined benefit plans

**891**

726

624

Expense recognized for defined contribution plans

**112**

50

94

Total

**1,003**

776

718

 

 

 

**22. Contractual Obligations and CommercialCommitments**

 

***Contractual Obligations***

 

The following table discloses our consolidatedcontractual obligations outstanding as at December 31, 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)

85,907

16,321

22,751

6,120

40,715

Long-term lease obligations: 

 

 

 

 

 

Operating lease

3,420

571

1,158

823

868

Capital lease

1,572

1,523

48

1

–

Unconditional purchase obligations(2)

 834

25

49

172

588

Other long-term obligations

1,629

–

1,629

–

–

**Total contractual obligations**

**93,362**

**18,440**

**25,635**

**7,116**

**42,171**

 

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

*(2)**Basedon the Amended 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 December 31, 2006, PLDT’saggregate remaining obligation under these contracts amounted to approximately Php6million.

 

*License Agreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius.*PLDT enteredinto a license agreement with Mobius pursuant to which Mobius has granted PLDTa non-exclusive, non-assignable and non-transferable license for the use ofcomputer software components.  Under this agreement, Mobius is also required toprovide maintenance services for a period of one year at no additionalmaintenance charge.  PLDT may purchase maintenance services upon expiration ofthe first year for a fee of 15% of the current published license fee.  As at December31, 2006, PLDT’s aggregate remaining obligation under this agreement wasapproximately 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 amounting to Php3,053 million as at December31, 2006 in respect of office and cell site rentals with over 3,000 lessorsnationwide, PLDT has lease obligations amounting to Php100 million as at December31, 2006, ePLDT has lease obligations amounting to Php238 million as at December31, 2006 in respect of certain office space rentals and PLDT Global has lease obligationsamounting to Php13 million as at December 31, 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 as NSP 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.

 

InMarch 2003, PLDT, together with the other founder NSPs, entered into aStandstill Agreement with AIL.  Under the Standstill Agreement, payments madeto AIL under the Air Time Purchase Agreement were based on billings of actualusage pending final agreement on the terms of the proposed amendment to the AirTime Purchase Agreement.

 

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 revised AirTime Purchase Agreement.

 

OnJune 21, 2004, AIL also sent PLDT a letter citing PLDT in default under the Air Time Purchase Agreement for non-payment of outstanding amounts and forrepudiation of its obligations thereunder.  PLDT maintains, however, that thetermination of the Standstill Agreement and reinstatement of the terms underthe original Air Time Purchase Agreement are premature, considering that thediscussions or negotiations on the terms of the proposed revised Air Time Purchase Agreement were still pending between the parties, such that itis highly inequitable for AIL to have unilaterally decided to invoke theprovisions of the Standstill Agreement and declared PLDT in default.

 

The Air Time Purchase Agreement provides that the NSP’sobligations to make minimum orsupplemental air time purchase payments remain in effect until allindebtedness incurred by AIL to finance the AIL System has been repaid.  AILindebtedness consists of (1) loans with several financial institutions (the “Banks”)under the Credit Agreement dated March 12, 1997, as amended from time to time,the latest of which was on December 30, 1998 under the Amended and RestatedCredit Agreement signed with the Banks; and (2) amounts owing to MMOC under theSpacecraft Contract dated August 28, 1995, as amended on December 30, 1998. 

 

OnSeptember 1, 2006, AIL, PT Asia Cellular Satellite and Inmarsat reached anagreement to pool their resources to develop powerful and novel product andservice offerings in the Asian region, founded on their respective mobilesatellite communications networks, with (a) Inmarsat performing the role ofsatellite and network operator and wholesale product and services developer and(b) AIL performing the role of wholesale and retail distributor of products andservices.

 

Inmarsat operates a constellation of geostationarysatellites that extend mobile phone, fax and data communications to nearlyevery part of the world through the services it offers to end users through itsestablished chain of distribution partners and satellite communications serviceproviders.

 

PLDTlikewise signed a Gateway Services Agreement with Inmarsat, whereby PLDTcommitted to provide gateway infrastructure in Subic Bay up to a maximum amountof US$5,000,000.  In exchange, PLDT will earn US$0.015 per minute forinterconnection services to be provided to Inmarsat distribution partners fortraffic going through the gateway facility in Subic Bay.

 

Asat December 31, 2006, PLDT’s aggregateremaining minimum obligation under the amended Air Time Purchase Agreement wasapproximately Php834 million.

 

*OtherLong-term Obligations*

 

*MandatoryConversion and Purchase of Shares*.As discussed in *Note 17 – Interest-bearing Financial Liabilities*, as at December31, 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 remaining outstandingshares under these series will be mandatorily converted to PLDT common shares.Under a put option exercisable for 30 days, holders of common shares receivedon mandatory conversion of the Series V, VI and VII Convertible Preferred Stockswill be able to require PLDT to purchase such PLDT common shares for Php1,700per share, US$36.132 per share, and JPY4,071.89 per share,respectively.  

 

As at December31, 2006, 2,675,393 shares of Series V Convertible Preferred Stock, 4,419,916 sharesof Series VI Convertible Preferred Stock and 3,842,000 shares of Series VIIConvertible Preferred Stock had been voluntarily converted to PLDT commonshares.  As at December 31, 2006, 46,047 shares of Series V and 875,188 sharesof Series VI Convertible Preferred Stocks remained outstanding.  The aggregatevalue of the put option based on outstanding shares as at December 31, 2006 wasPhp1,629 million which is puttable on June 4, 2008, if all of the outstandingshares of Series V and VI Convertible Preferred Stocks were mandatorilyconverted and all the common shares were put to PLDT at that time.  The marketvalue of the underlying shares of common stock was Php2,349 million, based onthe market price of PLDT common shares of Php2,550.00 per share as at December31, 2006.

 

***Commercial Commitments***

 

Asat December 31, 2006, our outstanding commercial commitments, in the form ofletters of credit, amounted to Php1,546 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 ourconsolidated financial statements as at December 31, 2006.

 

*NTCsupervision and regulation fees, or SRF*

 

Since1976, PLDT has received assessments from NTC for permit, SRF and other chargespursuant to Section 40 of Commonwealth Act 146, otherwise known as the PublicService Act.  As at December 31, 2006, PLDT had paid, since 1994, a totalamount of Php2,219 million in SRF, of which Php1,956 million was paid underprotest.

 

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 and franchise tax assessments*

 

PLDT is presently a party to several cases involvingthe issue of exemption of PLDT from local franchise and business taxes.  PLDTbelieves, based on the opinion of its legal counsel, that it is exempt frompayment of local franchise and business taxes. 

 

The LocalGovernment Code of 1991, or Republic Act (RA) 7160, which took effect onJanuary 1, 1992, extended to local government units, or LGUs, the power to taxbusinesses within their territorial jurisdiction granted under Batas Pambansa337, and withdrew tax exemptions previously granted to franchise grantees underSection 12 of RA 7082. 

 

PLDTbelieves, based on the opinion of its legal counsel, that RA 7925 which tookeffect on March 16, 1995, and the grant of local franchise and business taxesexemption privileges to other franchise holders subsequent to the effectivityof RA 7160, implicitly restored its local franchise and business taxesexemption privilege under Section 12 of RA 7082, or the PLDT Franchise pursuantto Section 23 thereof or the quality of treatment clause. 

 

To confirm this position, PLDT sought and obtained onJune 2, 1998 a ruling from the Bureau of Local Government Finance, or BLGF, ofthe Philippine Department of Finance, which ruled that PLDT is exempt from thepayment of local franchise and business taxes imposable by LGUs under RA 7160.

 

By virtueof the BLGF Ruling, PLDT stopped paying local franchise and business taxesstarting with the fourth quarter of 1998 and has filed with certain LGUs claimsfor tax refund covering the period from the second quarter of 1995 to the thirdquarter of 1998.  PLDT has received assessments for local franchise andbusiness taxes from several cities and provinces following PLDT’s decision tostop payment of local franchise and business taxes.  

 

Followinga decision of the Supreme Court on March 25, 2003, a judgment in the amount ofPhp4 million against PLDT involving the City of Davao became final andexecutory on April 9, 2003, pursuant to which PLDT was declared not exempt fromthe local franchise tax.  Pursuant to the said decision, PLDT has voluntarilypaid the total amount of Php15 million for the period from the fourth quarterof 1998 until December 31, 2003, which includes the Php4 million subject of thecase.  The said amount constitutes only the basic franchise tax due for thesaid period, excluding surcharges and interest  which PLDT is asking the Cityof Davao, through the local council, to waive.  PLDT believes, based on theopinion of its legal counsel, that PLDT is not liable for surcharges andinterest considering that the legal issue involved was a difficult one andPLDT’s non-payment of the said taxes was made in good faith.  On August 2, 2005, the local Sanggunian passed a resolution denying PLDT’s request forabatement of surcharges and penalties and directing the city treasurer toupdate PLDT’s liability and immediately collect the same.  Accordingly, on August 26, 2005, the city treasurer issued an assessment to PLDT in the amount of Php12million.  In order to maintain and preserve its good standing and relationshipwith the City of Davao, PLDT has paid the surcharges and penalties as at December 31, 2005.

 

AlthoughPLDT believes that it is not liable to pay local franchise and business taxes,PLDT has entered into compromise settlements with several LGUs, including theCity of Makati, in order to maintain and preserve its good standing andrelationship with these LGUs.  Under these compromise settlements, which havemostly been approved by the relevant courts, PLDT has paid a total amount ofPhp590 million for local franchise tax covering prior periods up to the end of2005 as at December 31, 2006.

 

PLDT no longer had contested assessments from LGUsfor franchise taxes as at December 31, 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 haspaid local business and franchise tax to certain cities and provinces in theaggregate amount of Php313 million under protest.  The Smart’s legal postion isthat it is not liable to pay the local franchise tax by virtue of its legislativefranchise under RA 7294 which took effect after the effective date of the LocalGovernment Code of 1991 or RA 7160.

 

TheRegional Trial Court, or RTC, of Makati has declared Smart exempt from paymentof local franchise tax to the City of Makati in a decision entitled *SmartCommunications Inc. vs. City of Makati*(Civil Cases No. 02-249 &02-725, August 3, 2004) dated August 3, 2004.  The City of Makati filed aMotion for Extension to file a Petition for Review with the Court of Appeals.However, on June 9, 2005, the Court of Appeals dismissed the appeal filed bythe 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’s Bureau of Internal Revenue, or BIR,Assessment*

 

Piltel received the following assessment noticesfrom 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 the compromisesettlement for such basis is 40% of the basic assessed tax.

 

On January 27, 2006, Piltel received the favorable recommendation andapproval from the BIR on the said application for a compromise settlement.  OnJanuary 31, 2006, Piltel settled the total amount of Php114 million, which isequivalent to 40% of the basic taxes per final assessment notices received, toeffect the immediate cancellation of the tax assessments.  On February 24, 2006,the BIR accepted Piltel’s application for compromise settlement of income taxand VAT for the years 1998 and 1999, and income taxes and VAT for the year 2001,and issued the Certificate of Availment on the said date.

 

*EnhancedVoluntary Assessment Program, or EVAP, Availment*

 

In2005, the BIR launched the EVAP which grants taxpayers, who availed themselves ofthe program and are qualified, the privilege of the last priority in BIR auditand investigation.  The EVAP apply to all internal revenue taxes covering thetaxable year ending December 31, 2004 and all prior years, including one-timetransactions such as estate tax, donor's tax, capital gains tax, expandedwithholding tax and documentary stamp tax on the transfer, sale, exchange, ordisposition of assets, and shall likewise cover taxpayers enjoying preferentialtax treatment.  A taxpayer who has availed of the EVAP and is qualified toavail shall not be audited except upon prior authorization and approval of theCommissioner of Internal Revenue when there is strong evidence or finding ofunderstatement in the payment of a taxpayer’s correct tax liability by morethan 30% as supported by a written report of the appropriate office stating indetail the facts and the law on which such finding is based: Provided, however,that any EVAP payment should be allowed as tax credit against the deficiencytax due, if any, in case the concerned taxpayer has been subjected to taxaudit. 

 

PLDTavailed itself of the program and paid a total of Php6 million for VAT andincome tax for taxable year 2004, and VAT and withholding tax for taxable year2002.

 

Maratelavailed itself of the EVAP for income tax for the taxable year 2004, SubicTelavailed the program for its income tax, withholding tax and percentage tax for taxableyear 2002 and ClarkTel availed of the program for its income tax for bothtaxable years 2003 and 2004.  The total payment of Maratel, SubicTel and ClarkTelamounted to Php800,000.  Smart’s EVAP availment, for which Php53 million waspaid, covered the income tax for the taxable years 2002 and 2004, the VAT forthe taxable year 2002, the overseas communications tax for the year 2002, andthe withholding taxes for the taxable years 2002, 2003 and 2004.  Meanwhile,Piltel’s EVAP availment, which involved payment of Php3 million, covered theincome tax for the taxable year 2003 and the expanded withholding tax for thetaxable years 2003 and 2004.  On August 2, 2006, Smart received its Certificateof Qualification, or CQ, for the EVAP availment for income tax, VAT, OCT andwithholding taxes for taxable year 2002.

 

Withthe exception of SubicTel and ClarkTel whose EVAP CQ were issued on September13, 2006 and December 10, 2006, respectively, PLDT and other subsidiaries areawaiting the EVAP CQ to be issued by the BIR.

 

*ImprovedVoluntary Assessment Program, or IVAP, Availment*

 

In2006, the BIR launched the IVAP which similarly grants taxpayers who availed themselvesof the program and are qualified, the privilege of the last priority in BIRaudit and investigation.  The IVAP applies to all internal revenue taxescovering the taxable year ending December 31, 2005 and fiscal year ending onany day not later than June 30 2006 and all prior years, including one-timetransactions such as estate tax, donor’s tax, capital gains tax, expandedwithholding tax and documentary stamp tax on the transfer, sale, exchange, ordisposition of assets, and shall likewise cover taxpayers enjoying preferentialtax treatment.  Unlike the EVAP, however, where the taxpayers only enjoy theprivilege of last priority in audit, with the IVAP, taxpayers who availedthemselves of the same will no longer be subject to tax audit except only inthe case of fraud manifested through understatement of the correct taxliability by more than 30%.

 

Smartavailed itself of the IVAP for the income tax and VAT for the taxable year 2005and paid a total amount of Php40 million to the BIR.

 

Maratelavailed itself of the IVAP for the taxable years 2004 and 2005 for its income,VAT, percentage and withholding taxes, while SubicTel availed itself of theprogram for the taxable year 2004 for its income and value added taxes only andfor the taxable year 2005, for its income, VAT and withholding taxes.  ClarkTelavailed itself of the IVAP for the taxable years 2003, 2004, 2005 for incomeand withholding taxes except for income taxes for 2003 and 2004 where an EVAPCQ covering these taxable periods was already issued.  The total collectiveIVAP payments for Maratel, SubicTel and ClarkTel amounted to Php12 million.

 

*Air Time Purchase Agreement with AIL*

 

Asdiscussed in *Note 22 – Contractual Obligations and Commercial Commitments,*PLDTis a party to a Founder NSP Air Time Purchase Agreement entered into with AILin March 1997, which was amended in December 1998, under which PLDT was grantedthe exclusive right to sell AIL services as NSP in the Philippines.  Inexchange, the Air Time Purchase Agreement required PLDT to purchase from AIL aminimum of US$5 million worth of air time annually over ten years commencing onJanuary 1, 2002, the purported date of commercial operations of the Garuda ISatellite.

 

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.

 

In March 2003, PLDT, together with the other founderNSPs, entered into a Standstill Agreement with AIL.  Under the StandstillAgreement, payments made to AIL under the Air Time Purchase Agreement werebased on billings of actual usage pending final agreement on the terms of theproposed amendment to the Air Time Purchase Agreement.

 

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.

 

On June 21, 2004, AIL also sent PLDT a letter citingPLDT in default under the Air Time Purchase Agreement for non-payment ofoutstanding amounts and for repudiation of its obligations thereunder.  PLDT maintains,however, that the termination of the Standstill Agreement and reinstatement ofthe terms under the original Air Time Purchase Agreement are premature,considering that the discussions or negotiations on the terms of the proposedrevised Air Time Purchase Agreement were still pending between the parties,such that it is highly inequitable for AIL to have unilaterally decided toinvoke the provisions of the Standstill Agreement and declared PLDT in default.

 

The Air Time Purchase Agreement provides that the NSPsobligations to make minimum orsupplemental air time purchase paymentsremain in effect until all indebtedness incurred by AIL to finance the AILSystem has been repaid.  AIL indebtedness consists of (1) loans with severalfinancial institutions (the “Banks”) under the Credit Agreement dated March 12,1997, as amended from time to time, the latest of which was on December 30,1998 under the Amended and Restated Credit Agreement signed with the Banks; and(2) amounts owing to MMOC under the Spacecraft Contract dated August 28, 1995,as amended on December 30, 1998.

 

In2003, the Accounting Standards Council, or ASC, approved the adoption ofStatement Financial Accounting Standards, or SFAS, *37/IAS 37*, “*Provisions,Contingent Liabilities and Contingent Assets”,* which became effective inthe Philippines for financial statements covering periods beginning on or afterJanuary 1, 2003. 

 

PLDT’scost of air time usage per year is significantly less than the US$20 millionper year minimum and supplemental payments required under the Air Time PurchaseAgreement.

 

UnderSFAS/IAS 37, the Air Time Purchase Agreement was classified as “onerouscontract”.  As required by SFAS/IAS 37 “if an entity has a contract that isonerous, the present obligation under the contract shall be recognized andmeasured as a provision”.  SFAS/IAS 37 “defines an onerous contract as acontract in which the unavoidable costs of meeting the obligations under thecontract exceed the economic benefits expected to be received under it.  Theunavoidable costs under a contract reflect the least net cost of exiting fromthe contract, which is lower of the cost of fulfilling it and any compensationor penalties arising from failure to fulfill it.”

 

PLDT’sestimated share on AIL discounted cash shortfall to meet its obligations to theBanks and MMOC is determined to be the least net cost of exiting from the AirTime Purchase Agreement, which is lower than the total obligations under the AirTime Purchase Agreement.

 

Theadoption of SFAS/IAS 37 in 2003 prescribes the retroactive adjustment to theopening balance of retained earnings for the period in which the standard isfirst adopted. As allowed under the transitory provisions, we elected not toadjust the opening balance of retained earnings for the earliest periodpresented and not to restate comparative numbers.

 

Total cumulative provision for onerous contractamounted to US$79,209,746 as at December 31, 2006.

 

On September 1, 2006, AIL, PT Asia Cellular Satelliteand Inmarsat reached an agreement to pool their resources to develop productand service offerings in the Asian region, founded on their respective mobilesatellite communications networks, with (a) Inmarsat performing the role ofsatellite and network operator and wholesale product and services developer and(b) AIL performing the role of wholesale and retail distributor of products andservices.

 

Inmarsatoperates a constellation of geostationary satellites that extend mobile phone,fax and data communications to nearly every part of the world through theservices it offers to end users through its established chain of distributionpartners and satellite communications service providers.

 

Toformalize the terms of this agreement, Inmarsat signed various agreements withAIL,  including a Master Agreement, ServiceContinuity and Spectrum Access Agreements, User Terminal and IPR Agreements, aBGAN Services Distribution Agreement, a Trade Mark License Agreement, anExisting ACeS Services Distribution Agreement, a Voice Services DistributionAgreement, a Terminal Supply Agreement and a Commercial Framework Agreement.In addition, PT Asia Cellular Satellitealso entered into certain business collaboration arrangement with Inmarsat.  

 

The collaboration agreement with Inmarsat provided businessopportunities for new services and continuity.  In addition, Inmarsat committedto pay US$15 million over 5 years for the use of AIL spectrum.

 

PLDT likewise signed a Gateway Services Agreement withInmarsat, whereby PLDT committed to provide gateway infrastructure in Subic Bay up to a maximum amount of US$5 million.  In exchange, PLDT will earn US$0.015 perminute for interconnection services to be provided to Inmarsat distributionpartners for traffic going through the gateway facility in Subic Bay.

 

On September 1, 2006, AIL and PT Asia Cellular Satellitesigned a Term Sheet, or Banks Term Sheet, with a majority of the banks that willbe used as the basis for further good faith negotiations between the partiesthereto with a view to entering into an agreementfurther amending the Amended and Restated Credit Agreement with AIL’s bankcreditors.

 

Under the Banks Term Sheet, a majority of the banksagreed, subject to satisfaction of certain conditions, among other things, toamend the Founder NSP Air Time PurchaseAgreement and to re-denominate AIL debtinto non-interest bearing subordinated convertible bonds maturing in 2015; to amortizea senior term loan with a final maturity on August 1, 2013 and a junior term loanwith bullet payments on August 1, 2014 and 2015.

 

Pursuantto the business collaboration arrangements between AIL and Inmarsat, on September 1, 2006, Inmarsat made the firstpayment of US$4 million to AIL which was used to pay principal and interestpayable to the banks in accordance with the Banks Term Sheet.

 

OnFebruary 1, 2007, PLDT (through ACeS Philippines) signed an agreement topurchase LMGT and MMOC’s 50% equity and debt interest in AIL, respectively forUS$750,000 in accordance with a notice of proposed transfer issued by LMGTdated December 22, 2006 pursuant to a right of first refusal under the AIL Shareholders’Agreement.

 

The Air Time Purchase Agreement, as amended, will nolonger qualify as an onerous contract under the provision of PAS 37 since thecost of meeting the obligations under the amended Air Time Purchase Agreementis below or within the estimated benefits that PLDT is expected to receiveunder it.  Net provision for onerous contract amounting to US$72 million(Php3,529 million) was reversed on December 31, 2006, excluding the amount paidor to be paid in relation to the amendment of the Air Time Purchase Agreement.

 

 

 

**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 December 31, 2006 and 2005.There are no material unrecognized financial assets and liabilities as at December31, 2006 and 2005.

 

** **

**Carrying Value**

**Fair Value**

** **

**2006**

2005

**2006**

2005

 

(in million pesos)

**Noncurrent Financial Assets**

** **

 

 

 

Investments-available-for-sale

**116**

109

**116**

109

Derivative assets

**434**

2,648

**434**

2,648

Notes receivable

**–**

346

**–**

346

Total noncurrent financial assets

**550**

3,103

**550**

3,103

** **

** **

** **

**Current Financial Assets**

** **

 

** **

 

Cash and cash equivalents

**17,753**

30,059

**17,753**

30,059

Short-term investments

**8,327**

2,750

**8,327**

2,750

Trade and other receivables

**9,938**

7,856

**9,938**

7,856

Derivative assets

**47**

37

**47**

37

Total current financial assets

**36,065**

40,702

**36,065**

40,702

**Total Financial Assets**

**36,615**

43,805

**36,615**

43,805

** **

** **

 

** **

 

**Noncurrent Financial Liabilities**

** **

 

** **

 

Long-term debt - net of current portion*

**63,771**

84,860

**70,416**

92,811

Obligations under capital lease*

**106**

344

**106**

344

Preferred stock subject to mandatory redemption*

**1,369**

11,974

**1,528**

14,053

Derivative liabilities

**6,872**

5,777

**6,872**

5,777

Total noncurrent financial liabilities

**72,118**

102,955

**78,922**

112,985

**Current Financial Liabilities**

** **

 

** **

 

Accounts payable

**11,684**

15,966

**11,684**

15,966

Notes payable

**205**

–

**205**

–

Derivative liabilities

**108**

192

**108**

192

Current portion of long-term debt*

**16,183**

18,684

**17,512**

19,435

Obligations under capital lease*

**924**

754

**924**

754

Total current financial liabilities

**29,104**

35,596

**30,433**

36,347

**Total Financial Liabilities**

**101,222**

138,551

**109,355**

149,332

 

*    *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.

 

*Preferred stock subject to mandatory redemption:* The fair values were determined using a discountedcash flow model.

 

Derivative instruments:

 

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

 

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

 

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

 

*Bifurcatedequity call options:*The fair values were computed using an option pricingmodel.

 

Due to theshort-term nature of the transactions, the fair value of cash and cashequivalents, short-term investments, trade and other receivables, notes payableand accounts payable approximate the carrying amounts as of the balance sheetdate.

 

*Financialassets and liabilities carried at amortized cost*

 

Unamortizeddebt discount, representing debt issuance cost and any difference between thefair value of consideration given or received on initial recognition, includedin following financial liabilities amounted to Php6,755 million and Php13,347million as at December 31, 2006 and 2005, respectively, see *Note 17 –Interest-bearing Financial Liabilities*.

* *

*Financialassets and liabilities carried at fair value*

 

The following financial assets and liabilities werecarried at fair value as at December 31, 2006 and 2005.

 

 

**2006**

 

2005

 

(in million pesos)

Investments-available-for-sale

**116**

 

109

Derivative instruments

**(6,499)**

 

(3,284)

 

**(6,383)**

 

(3,175)

 

*Derivative Financial Instruments*

 

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

 

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

 

** **

**2006**

2005

 

** **

 

**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**

**(Php2,716)**

US$300

Php417

 

2012

**250**

**(2,475)**

250

(428)

 

** **

** **

 

 

Long-term foreign currency options

2009

**167**

**(747)**

175

301

 

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Long-term foreign currency options

2009

**167**(1)

**138**

175(1)

(270)

 

** **

** **

 

 

Short-term currency options

2007

**7**

**(6)**

JPY151

(2)

 

** **

** **

 

 

Interest rate swap

2012

**63**

**(423)**

US$125

(1,569)

 

** **

** **

 

 

Forward foreign exchange contracts

2007

**202**

**(90)**

220

(169)

 

**–**

** **

JPY1,282

7

 

** **

** **

 

 

Bifurcated equity call options

2008

**1 share**

**(224)**

8 shares

(1,597)

 

** **

**(Php6,543)**

 

(Php3,310)

***Smart***

 

** **

 

* *

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Bifurcated embedded derivatives

2007

**US$15**

**44**

US$9

26

Net liabilities

** **

**(Php6,499****)**

 

(Php3,284)

 

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

 

 

**2006**

 

2005

 

(in million pesos)

Presented as:

** **

 

 

Noncurrent assets

**434**

 

2,648

Current assets

**47**

 

37

Noncurrent liabilities

**(6,872)**

 

(5,777)

Current liabilities

**(108)**

 

(192)

Net liabilities

**(6,499)**

 

(3,284)

 

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

 

 

**2006**

 

2005

 

(in million pesos)

Cumulative translation adjustments at beginning of year

**1,253**

 

362

Movements of cumulative translation adjustments:

** **

 

 

Deferred income tax effects on cash flow hedges

**1,088**

 

(427)

Currency translation differences

**(768)**

 

(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

**2,856**

 

2,390

Net loss on cash flow hedges

**(6,452)**

 

(1,014)

 

**(3,271)**

 

 891

Cumulative translation adjustments at end of year

**(2,018)**

 

1,253

 

Analysis of loss on derivative transactions for theyears ended December 31, 2006 and 2005 are as follows:

 

 

**2006**

2005

2004

 

(in million pesos)

Net mark-to-market loss at end of year

**(6,499)**

(3,284)

(2,953)

Net mark-to-market loss at beginning of year

**(3,284)**

(2,953)

(2,205)

Net change

**(3,215)**

(331)

(748)

Net loss charged to cumulative translation adjustments

**6,452**

1,014

159

Settlements, accretion and conversion

**(3,642)**

(1,311)

(275)

Net loss on derivative transactions (Note 5)

**(405)**

(628)

(864)

 

***PLDT***

*** ***

***CashFlow Hedges***

 

*Long-termCurrency Swaps*

*** ***

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

 

In orderto manage hedge costs, these swaps included a credit-linkage feature with PLDTas the reference entity.  The specified credit events include bankruptcy,failure to pay, obligation acceleration, moratorium/repudiation, andrestructuring of PLDT bonds or all or substantially all of PLDT’s obligations.Upon the occurrence of any of these credit events, subject to agreed thresholdamounts where applicable, the obligations to both PLDT and its counterpartyunder the swap contracts terminate without further settlements to either party,including any mark-to-market value of the swaps.  As at December 31, 2006 and2005, US$717 million and PhpUS$725 million, respectively, of PLDT’s long-termcurrency swaps/options have been structured to include credit-linkage with PLDTas the reference entity.  The semi-annual fixed or floating swap cost paymentsthat PLDT is required to make to its counterparties averaged about 5.18% and4.50% per annum as at December 31, 2006 and 2005, respectively.  As cash flowhedges, any movements in the fair value of these instruments will be taken as acumulative translation adjustment under equity in our consolidated balancesheets.

 

*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 6.17% and 5.68% perannum as at December 31, 2006 and 2005, respectively.

 

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

 

InDecember 2006, the currency swap agreements were partially terminated, whicheffectively lowered the outstanding currency options notional amount to US$167million.  Total amounts settled for the unwinding is Php40 million.

 

***Transactions Not Designated as Hedges***

 

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

 

*Long-termForeign Currency Options*

 

With reference to the above-mentioned hedge on PLDT’s2009 fixed rate notes, PLDT simultaneously sold a currency option contract withthe same notional amount of US$175 million with the same maturity that givesthe counterparty 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.  In December 2006, the currency swap agreements were partiallyterminated, which lowered the notional amount to $167 million.  Since chargesin fair value have already been recognized as profit and loss in prior periods,the corresponding proceeds from the partial termination of the currency optioncontract amounted to Php7 million.

 

*Short-termCurrency Options*

 

PLDT entered into short-term U.S. dollar subsidizedforward contracts to partially hedge PLDT’s fixed rate notes due June 2006.  Inorder to reduce overall net hedging cost for the transactions, these forwardcontracts have been structured to include the sale of currency call optioncontracts that give the counterparty the right to purchase foreign currency atan agreed exchange rate.  PLDT effectively has the obligation to buy U.S.dollars at a subsidized forward rate plus any excess above the agreed thresholdrate should the Philippine peso to U.S. dollars spot exchange rate on thematurity date settle beyond that agreed threshold.  PLDT’s subsidized forwardcontracts amounting to US$62 million matured on June 29, 2006.  As at December31, 2006, there were no outstanding 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 at December31, 2006, the outstanding U.S. dollar currency option contracts amounted to US$8million with an average exchange rate of US$50.40.  PLDT’s Japanese yencurrency option contracts amounting to JPY5,410 million matured onSeptember 21, 2006.  As at December 31, 2006, there were no outstandingJapanese yen currency option contracts.

 

*InterestRate Swap*

 

A portionof PLDT’s currency swap agreements to hedge its 2017 fixed rate notes carryfixed rate swap cost payments.  To effectively lower the running cost of suchswap agreements, PLDT, in April 2003, entered into an agreement to swap thecoupon on US$125 million of its 2012 fixed rate notes into a floating rateJapanese yen amount.  Under this agreement, PLDT is entitled to receive a fixedcoupon rate of 11.375%, provided the Japanese yen to U.S. dollar exchange ratestays above JP¥99.90/US$1.00.  Below this level, a reduced fixed coupon rate of3% will be due to PLDT.  In order to mitigate the risk of the Japanese yenstrengthening below the agreed threshold, PLDT, in December 2003, entered intoan overlay swap transaction to effectively lower the portion of the couponindexed to the U.S. dollar to Japanese yen rate to 3% such that the fixedcoupon rate due to PLDT when the JPY strengthens below the agreedthreshold will be 8.375%.  Both swap agreements include a credit-linkagefeature with PLDT as the reference entity.

 

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

 

*ForwardForeign Exchange Contracts*

 

PLDT enteredinto short-term U.S. dollar and Japanese yen forward foreign exchange contractsto hedge short-term foreign currency obligations.  As at December 31, 2006,outstanding forward foreign exchange contracts amounted to $202 million with anaverage exchange rate of Php49.50.  There were no outstanding JPYforward foreign exchange contracts as at December 31, 2006.

* *

*BifurcatedEquity Call Options*

 

Pursuantto Piltel’s debt restructuring plan, PLDT issued its Series VI and VIIConvertible Preferred Stock, see *Note 17 – Interest-bearing FinancialLiabilities*.  Each share of Series VI and VII Convertible Preferred Stockis convertible at any time at the option of the holder into one share of PLDT’scommon stock.  On the date immediately following the seventh anniversary of theissue date of the Series VI Convertible Preferred Stock and on the eighthanniversary of the issue date of the Series VII Convertible Preferred Stock,the remaining outstanding shares under these series will be mandatorilyconverted into shares of PLDT common stock.  For 30 days thereafter, theholders of these mandatorily converted shares of common stock have the optionto sell such shares of common stock back to PLDT for US$36.132 per share and JPY4,071.89per share for Series VI and VII, respectively.  On August 18, 2006, all3,842,000 shares of Series VII shares were converted to PLDT common stock.  Asat December 31, 2006 and 2005, the net negative mark-to-market value of theseembedded call options amounted to Php224 million and Php1,597 million,respectively.

* *

***Smart***

* *

Smart’sother embedded derivatives were bifurcated from service and purchasecontracts.  As at December 31, 2006 and 2005, outstanding contracts includedservice contract with foreign equipment suppliers and various supplierscovering handset importations denominated in U.S. dollars, which is not thefunctional currency of a substantial party to the contract or the routinecurrency of the transaction.

* *

**Financial Risk Management Objectives and Policies**

* *

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

* *

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

* *

***LiquidityRisk***

* *

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

* *

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

* *

***Foreign Exchange Risk***

* *

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

* *

** **

**2006**

2005

** **

**U.S. Dollar**

**Php Equivalent**(1)

U.S. Dollar

Php Equivalent(2)

 

(in millions)

**Noncurrent Financial Assets**

** **

 

** **

** **

Derivative assets

**US$9**

**Php434**

US$50

Php2,648

Notes receivable

**–**

**–**

6

346

Total noncurrent financial assets

**9**

**434**

  56

2,994

** **

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**155**

**7,578**

248

13,160

Short-term investments

**92**

**4,521**

51

2,731

Trade and other receivables

**277**

**13,589**

139

7,371

Derivative assets

**1**

**47**

1

37

Total current financial assets

**525**

**25,735**

 439

23,299

**Total Financial Assets**

**US$****534**

**Php26,169**

US$495

Php26,293

** **

** **

** **

 

 

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities – net of current portion

**US$1,239**

**Php60,756**

US$1,809

Php95,953

Derivative liabilities

**140**

**6,872**

109

5,777

Total noncurrent financial liabilities

**1,379**

**67,628**

1,918

101,730

** **

** **

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**268**

**13,115**

42

2,227

Accrued expenses and other current liabilities

**74**

**3,605**

68

3,587

Derivative liabilities

**2**

**108**

3

192

Current portion of interest-bearing financial liabilities

**328**

**16,104**

319

16,946

Total current financial liabilities

**672**

**32,932**

 432

22,952

**Total Financial Liabilities**

**US$****2,051**

**Php100,560**

US$2,350

Php124,682

 

*(1)**The exchangerate used was Php**49.045**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 Php49.045 to US$1.00 and Php53.062to US$1.00, the Philippine peso-U.S. dollar exchange rates as at December 31,2006 and 2005, respectively.

 

As at March 5, 2007, the peso-dollar exchange ratewas Php48.864 to US$1.00.  Using this exchange rate, our consolidated netforeign currency-denominated liabilities as at December 31, 2006 would have decreasedby Php275 million.

 

While a certain percentage of our revenues is eitherlinked to or denominated in U.S. dollars, substantially all of our indebtednessand related interest expense, a substantial portion of our capital expendituresand a portion of our operating expenses are denominated in foreign currencies,mostly in U.S. dollars.

 

As atDecember 31, 2006, approximately 96% 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 43% of our consolidated debts, or 31% net of our U.S.dollar cash balances as at December 31, 2006), and interest expense on our debtin Philippine peso terms.  In addition, many of our financial ratios and otherfinancial tests are affected by the movements in the Philippine peso to U.S.dollar exchange rate.

 

To manage our foreign exchange risks, stabilize cashflows, and improve investment and cash flow planning, we enter into forwardforeign exchange contracts, foreign currency swap contracts, currency optioncontracts and other hedging products aimed at reducing and/or managing theadverse impact of changes in foreign exchange rates on our operating resultsand cash flows.  However, these hedges do not cover all of our exposure toforeign 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 for as either cash flow hedgesor transactions 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 a limited basis, we enter into interest rate swapagreements in order to manage our exposure to interest rate fluctuations.  Wemake use of hedging instruments and structures solely for reducing or managingfinancial risks associated with our liabilities and not for trading orspeculative purposes.

 

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

 

**YearEnded December 31, 2006**

 

** **

 

 

 

 

 

 

 

**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)

130

–

167

–

550

 847

41,511

539

40,972

966

47,350

Interest rate

7.85% to  10.625%

–

10.50%

–

8.35% to 11.375%

–

–

–

–

–

–

US$ Fixed Loans (in millions)

69

55

46

33

280

 483

23,683

5,326

18,357

400

19,640

Interest rate

1.75% to 10%

4.49% to 10%

4.49% to 10%

4.515% to 4.70%

2.25%

–

–

–

–

–

–

Philippine Peso (in millions)

–

–

–

17

–

  17

810

2

 808

21

1,035

Interest rate

–

–

–

15%

–

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

128

92

81

53

–

 354

17,392

74

17,318

355

17,392

Interest rate

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

0.05% to 2.5% over LIBOR

–

–

–

–

–

–

–

Philippine Peso (in millions)

6

11

11

23

–

  51

2,511

12

2,499

51

2,511

Interest rate

3% over 

90-day PHIBOR, MART1 + 0.75%

MART1 + 0.75%

MART1 + 0.75%

MART1 + 0.75%

–

–

–

–

–

–

–

 

 

 

 

 

 

**1,752**

**85,907**

**5,953**

**79,954**

**1,793**

**87,928**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$63 million)

–

–

–

–

–

9

423

–

–

9

423

Japanese Yen (JPY7,519 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

–

–

–

–

–

–

** **

**Year Ended December 31, 2005**

** **

** **

 

 

 

 

 

 

 

**Discount/**

** **

 

** **

** **

 

 

 

 

 

 

 

**Debt**

** **

** **

** **

 

 

 

 

**Over 5**

**In U.S.**

 

**Issuance Cost**

**Carrying Value**

**Fair Value**

**In U.S.**

** **

** **

**Below 1 year**

**1-2 years**

**2 – 3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**In Php**

**In Php**

**Dollar**

**In Php**

** **

 

 

 

 

 

 

 

**(in millions)**

**Liabilities:**

 

 

 

 

 

 

 

** **

** **

 

** **

Long-term Debt

 

 

 

 

 

 

 

** **

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

115

160

–

175

550

1,000

53,040

686

52,354

1,108

58,780

Interest rate

9.25%

7.85% to 10.625%

–

10.50%

8.35% and 11.375%

–

–

–

–

–

–

US$ Fixed Loans (in millions)

64

45

31

22

280

 442

23,451

6,356

17,095

327

17,350

Interest rate

4.49% to 7.75%

4.49% to 7.58%

4. 49% to 7.58%

4.49% to 5.65%

2.25%

–

–

–

–

–

–

Japanese Yen (in millions)

23

24

12

–

–

  59

3,139

–

3,139

59

3,158

Interest rate

2.125%

2.125%

2.125%

–

–

–

–

–

–

–

–

Philippine Peso (in millions)

17

1

–

15

–

  33

1,746

4

1,742

37

1,961

Interest rate

11% to 24%

11% to 24%

–

15.0%

–

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

129

143

79

117

94

 562

29,806

1,679

28,127

562

29,806

Interest rate

GOVCO’s Cost + 0.20%; 0.05% to 3.625% over LIBOR

GOVCO’s Cost + 0.20%; 0.05% to 3.625% over LIBOR

0.05% to 3.625% over LIBOR

.05% to 2.5% over LIBOR

1% over LIBOR

–

–

–

–

–

–

Japanese Yen (in millions)

5

5

3

–

–

  13

709

1

 708

13

709

Interest rate

1.70% over LIBOR

1.70% over LIBOR

1.70% over LIBOR

–

–

–

–

–

–

–

–

Philippine Peso (in millions)

–

–

–

2

7

   9

482

103

 379

9

482

Interest rate

–

–

–

1% over 91-day T-bill rate 

1% over 91-day T-bill rate

–

–

–

–

–

–

 

 

 

 

 

 

**2,118**

**112,373**

**8,829**

**103,544**

**2,115**

**112,246**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$125 million)

–

–

–

–

–

30

1,569

–

–

30

1,569

Japanese Yen (JPY15,037 million)

–

–

–

–

–

–

–

–

–

–

–

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

11.375%

–

–

–

–

–

–

Variable Rate on JPY notional

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

–

–

–

–

–

–

 

Fixed ratefinancial instruments are subject to fair value interest rate risk whilefloating rate financial instruments are subject to cash flow interest raterisk.  

 
Repricingof floating rate financial instruments is mostly done on intervals of threemonths or six months.  Interest on fixed rate financial instruments is fixeduntil maturity of instrument.  Financial instruments that are not subject tointerest rate risk were not included in the above tables.

 
***Credit Risk***

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

 

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

 

Wehave no significant concentrations of credit risk.

 

**25. Reclassification of Accounts**

 

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

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