**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

 

FORM 20-F

 

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

**OR**

** **

**[X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the fiscal year endedDecember 31, 2006**

** **

**OR**

** **

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

** **

**OR**

** **

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

** **

**Commission file number1-03006**

** **

**Philippine Long Distance Telephone Company**

(Exact name of Registrant as specified in its charter)

 

**Republic of the Philippines**

(Jurisdiction of incorporation or organization)

 

**Ramon****Cojuangco Building**

**Makati Avenue**

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

(Address of principal executive offices)

 

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

 

| Title of each class                                                                                                        | Name of each exchange

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

 

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

* *

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

 

None

 

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

 

| 10.500% Notes due 2009 |
|------------------------|
| 11.375% Notes due 2012 |
| 8.350% Notes due 2017  |

 

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

 

| As at December 31, 2006:                                                               |
|----------------------------------------------------------------------------------------|
| 188,434,695 shares of Common Capital Stock, Par Value Five Philippine Pesos Per Share  |
| 442,375,057 shares of Serial Preferred Stock, Par Value Ten Philippine Pesos Per Share |

 

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

 

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

 

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

 

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

 

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

 

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

 

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

**TABLE OF CONTENTS**

 

 

|                                              |      |
|---------------------------------------------------|-----------|
| CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT |      |   |   |
|                                              |      |   |   |
| FORWARD-LOOKING STATEMENTS                        |      |   |   |
|                                              |      |   |   |
| PART I                                            |      |   |   |
|                                              | Item 1.   | Identity of Directors, Senior Management and Advisors |   |
|                                              | Item 2.   | Offer Statistics and Expected Timetable |   |
|                                              | Item 3.   | Key Information |   |
|                                              |      | Selected Financial Data |   |
|                                              |      | Capital Stock |   |
|                                              |      | Dividends Declared |   |
|                                              |      | Dividends Paid |   |
|                                              |      | Exchange Rates |   |
|                                              |      | Risk Factors |   |
|                                              | Item 4.   | Information on the Company |   |
|                                              |      | Overview |   |
|                                              |      | Historical Background and Development |   |
|                                              |      | Organization |   |
|                                              |      | Strengths |   |
|                                              |      | Strategy |   |
|                                              |      | Business |   |
|                                              |      | Infrastructure |   |
|                                              |      | Interconnection Agreements |   |
|                                              |      | Licenses and Regulation |   |
|                                              |      | Competition |   |
|                                              |      | Environmental Matters |   |
|                                              |      | Intellectual Property Rights |   |
|                                              |      | Properties |   |
|                                              | Item 4A.  | Unresolved Staff Comments |   |
|                                              | Item 5.   | Operating and Financial Review and Prospects |   |
|                                              |      | Overview |   |
|                                              |      | Critical Accounting Policies |   |
|                                              |      | Results of Operations |   |
|                                              |      | Liquidity and Capital Resources |   |
|                                              |      | Impact of Inflation and Changing Prices |   |
|                                              | Item 6.   | Directors, Senior Management and Employees |   |
|                                              |      | Directors, Key Officers and Advisors |   |
|                                              |      | Terms of Office |   |
|                                              |      | Family Relationships |   |
|                                              |      | Compensation of Key Management Personnel of the PLDT Group |   |
|                                              |      | Long-Term Incentive Plan |   |
|                                              |      | Executive Stock Option Plan |   |
|                                              |      | Share Ownership |   |
|                                              |      | Board of Directors |   |
|                                              |      | Audit, Nomination, Executive Compensation and Technology Strategy Committees |   |
|                                              |      | Directors’ and Officers’ Involvement in Certain Legal Proceedings |   |
|                                              |      | Employees and Labor Relations |   |
|                                              |      | Pension and Retirement Benefits |   |
|                                              | Item 7.   | Major Shareholders and Related Party Transactions |   |
|                                              |      | Related Party Transactions |   |
|                                              | Item 8.   | Financial Information |   |
|                                              |      | Consolidated Statements and Other Financial Information |   |
|                                              |      | Legal Proceedings |   |
|                                              |      | Dividend Distribution Policy |   |
|                                              | Item 9.   | The Offer and Listing |   |
|                                              |      | Common Capital Stock and Amercian Depositary Shares (“ADSs”) |   |
|                                              | Item 10.  | Additional Information |   |
|                                              |      | Articles of Incorporation and By-Laws |   |
|                                              |      | Material Contracts |   |
|                                              |      | Exchange Controls and Other Limitations Affecting Securities Holders |   |
|                                              |      | Taxation |   |
|                                              |      | Documents on Display |   |
|                                              | Item 11.  | Quantitative and Qualitative Disclosures About Market Risks |   |
|                                              |      | Liquidity Risk Management |   |
|                                              |      | Foreign Exchange Risk Management |   |
|                                              |      | Interest Rate Risk Management |   |
|                                              | Item 12.  | Description of Securities Other than Equity Securities |   |
|                                              |      |   |   |
| PART II                                           |      |   |   |
|                                              | Item 13.  | Defaults, Dividend Arrearages and Delinquencies |   |
|                                              | Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds |   |
|                                              | Item 15.  | Controls and Procedures |   |
|                                              | Item 16A. | Audit Committee Financial Expert |   |
|                                              | Item 16B. | Code of Business Conduct and Ethics |   |
|                                              | Item 16C. | Principal Accountant Fees and Services |   |
|                                              | Item 16D. | Exemption from the listing Standards for Audit Committees |   |
|                                              | Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchaser |   |
|                                              |      |   |   |
| PART III                                          |      |   |   |
|                                              | Item 17.  | Financial Statements |   |
|                                              | Item 18.  | Financial Statements |   |
|                                              | Item 19.  | Exhibits |   |
|                                              |      |   |   |
| EXHIBIT INDEX                                     |      |   |   |
|                                              |      |   |   |
| CERTIFICATION                                     |      |   |   |
|                                                   |           |  |  |  |  |  |  |  |

 

 

 

**CERTAINCONVENTIONS AND TERMS USED IN THIS REPORT**

 

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

 

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

 

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

 

Inthis report, unless otherwise specified or the context otherwise requires, allreferences to “pesos,” “Philippine pesos” or “Php” are to the lawful currencyof the Philippines, all references to “dollars,” “U.S. dollars” or “US$” are tothe lawful currency of the United States, all references to “Japanese yen,”“JP¥” or “¥” are to the lawful currency of Japan, and all references to “Euro”or “€” are to the lawful currency of the European Union.  Unless otherwiseindicated, translations of peso amounts into U.S. dollars in this report weremade based on the volume weighted average exchange rate quoted through thePhilippine Dealing System, which was Php49.045 to US$1.00 on December 31, 2006.On June 26, 2007, the volume weighted average exchange rate quoted was Php46.222to US$1.00.

 

Inthis report, each reference to:

 

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

 

•        AIL means ACeS InternationalLimited, a 36.99%-owned associate of ACeS Philippines;

 

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

 

•        ARPU means average monthly revenueper user;

 

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

 

•        BSP means Bangko Sentral ngPilipinas;

 

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

 

•        CyMed means CyMed, Inc., awholly-owned subsidiary of SPi;

 

•        Digital Paradise means DigitalParadise, Inc., a 75%-owned subsidiary of ePLDT;

 

•        DoCoMo means NTTDoCoMo, Inc.;

 

•        DSL means digital subscriber line;

 

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

 

•        ePLDT Ventus means the umbrellabrand name for ePLDT’s call center business, including Ventus, Vocativ andParlance;

 

•        First Pacific means First PacificCompany Limited;

 

•        First Pacific Group means FirstPacific and its Philippine and other affiliates;

 

•        GAAP means generally acceptedaccounting principles;

 

•        GSM means global system for mobilecommunications;

 

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

 

•        Level Up! means Level Up!, Inc., a60%-owned subsidiary of ePLDT;

 

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

 

•        Maratel means PLDT-Maratel, Inc.,our 97.5%-owned subsidiary;

 

•        netGames means netGames, Inc., an 80%-ownedsubsidiary of ePLDT;

 

•        NTC means the NationalTelecommunications Commission of the Philippines;

 

•        NTT means Nippon Telegraph andTelephone Corporation;

 

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

 

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

 

•        PAPTELCO means PhilippineAssociation of Private Telephone Companies, Inc.;

 

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

 

•        PFRS means Philippine FinancialReporting Standards;

 

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

 

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

 

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

 

•        SEC means theSecurities and Exchange Commission;

 

•        SIM meanssubscriber identification module;

 

•        SMS means shortmessaging service;

 

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

 

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

 

•        SPi means SPi Technologies, Inc.,a wholly-owned subsidiary of ePLDT;

 

•        SubicTel means Subic TelecommunicationsCompany, Inc., our wholly-owned subsidiary;

 

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

 

•        VAS means value-added service;

 

•        VAT means value-added tax;

 

•        Ventus means ePLDT Ventus, Inc., awholly-owned subsidiary of ePLDT;

 

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

 

•        VSAT means very small apertureterminal; 

 

•        WAP means wireless applicationprotocol;

 

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

 

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

Someinformation in this report may contain forward-looking statements within themeaning of Section 27A of the U.S. Securities Act of 1933, as amended, andSection 21E of the U.S. Securities Exchange Act of 1934, as amended.  We havebased these forward-looking statements on our current beliefs, expectations andintentions as to facts, actions and events that will or may occur in thefuture.  Such statements generally are identified by forward-looking words suchas “believe,” “plan,” “anticipate,” “continue,” “estimate,” “expect,” “may,”“will” or other similar words.

 

A forward-looking statement may include a statement ofthe assumptions or bases underlying the forward-looking statement.  We havechosen these assumptions or bases in good faith.  These forward-looking statements are subject to risks, uncertaintiesand assumptions, some of which are beyond our control.  In addition, theseforward-looking statements reflect our current views with respect to futureevents and are not a guarantee of future performance.  Actual results maydiffer materially from information contained in the forward-looking statementsas a result of a number of factors, including, without limitation, the riskfactors set forth in Item 3. “Key Information –– Risk Factors.”  When considering forward-looking statements, you should keepin mind the description of risks and other cautionary statements in thisreport.  

 

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

 

PART I

 

**Item 1.       Identity of Directors, Senior Managementand Advisors**

 

Not applicable.

 

**Item 2.       Offer Statistics and Expected Timetable**

 

Notapplicable.

 

**Item 3.       Key Information**

 

**Selected Financial Data**

 

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

 

Priorto the filing of our Annual Report on Form 20-F in respect of the year endedDecember 31, 2002, the consolidated financial statements included in our AnnualReports on Form 20-F filed with the U.S. Securities and Exchange Commission, orU.S. SEC, were prepared in conformity with PFRS.  PFRS varies in certainsignificant respects from U.S. GAAP.  A description of the significantdifferences between U.S. GAAP and PFRS and a quantitative reconciliation ofsuch differences in the net loss and stockholders’ equity to U.S. GAAP wasdisclosed in a note to our previously filed consolidated financial statements.

 

|                                          | **Consolidated Financial Data**                                                                                                                         |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          | **Years Ended December 31,**                                                                                                                            |
|                                          | **2006**                                                                                                                                                | **2006**(1) | **2005** | **2004** | **2003** | **2002** |
|                                          | (in millions, except operating income per share, earnings per common share, ratio of earnings to fixed charges and dividends declared per common share) |
| *Amounts in conformity with U.S. GAAP:*       |                                                                                                                                                    |   |   |   |   |   |
| **Statements of Operating Data:**             |                                                                                                                                                    |   |   |   |   |   |
| Operating Revenues                            | Php127,536                                                                                                                                              | US$2,600 | Php123,335 | Php121,173 | Php111,200 | Php93,831 |
| Service                                       | 125,004                                                                                                                                                 | 2,549 | 120,348 | 114,904 | 100,486 | 81,686 |
| Non-service                                   | 2,532                                                                                                                                                   | 52 | 2,987 | 6,269 | 10,714 | 12,145 |
| Operating Expenses                            | 79,357                                                                                                                                                  | 1,618 | 74,821 | 72,634 | 77,821 | 81,802 |
| Operating Income                              | 48,179                                                                                                                                                  | 982 | 48,514 | 48,539 | 33,379 | 12,029 |
| Operating income per share                    |                                                                                                                                                    |   |   |   |   |   |
| Basic                                         | 253.95                                                                                                                                                  | 5.18 | 263.81 | 266.73 | 179.04 | 55.47 |
| Diluted                                       | 253.95                                                                                                                                                  | 5.18 | 255.15 | 252.20 | 165.37 | 52.23 |
| Net income (loss)                             | 33,598                                                                                                                                                  | 685 | 40,603 | 28,101 | 11,045 | (6,158) |
| Earnings per common share(2)                  |                                                                                                                                                    |   |   |   |   |   |
| Basic                                         | 174.90                                                                                                                                                  | 3.57 | 217.84 | 146.32 | 47.20 | (52.08) |
| Diluted                                       | 174.90                                                                                                                                                  | 3.57 | 211.93 | 145.30 | 45.72 | (52.08) |
| **Balance Sheets Data:**                      |                                                                                                                                                    |   |   |   |   |   |
| Cash and cash equivalents                     | 16,870                                                                                                                                                  | 344 | 30,059 | 27,321 | 19,372 | 10,974 |
| Total assets                                  | 264,195                                                                                                                                                 | 5,387 | 269,709 | 279,041 | 276,362 | 269,387 |
| Total long-term debt - net of current portion | 69,542                                                                                                                                                  | 1,418 | 93,516 | 131,377 | 160,464 | 171,283 |
| Total debt(3)                                 | 86,059                                                                                                                                                  | 1,755 | 112,313 | 159,455 | 186,407 | 191,668 |
| Total liabilities(4)                          | 154,607                                                                                                                                                 | 3,152 | 176,980 | 215,145 | 236,630 | 240,622 |
| Total stockholders’ equity               | 106,173                                                                                                                                                 | 2,165 | 79,595 | 48,079 | 24,746 | 16,413 |
| **Other Data:**                               |                                                                                                                                                    |   |   |   |   |   |
| Depreciation and amortization                 | 28,130                                                                                                                                                  | 574 | 27,855 | 20,098 | 21,812 | 17,566 |
| Ratio of earnings to fixed charges(5)         | 8.1x                                                                                                                                                    | 8.1x | 5.9x | 4.1x | 2.0x | – |
| Net cash provided by operating activities     | 61,201                                                                                                                                                  | 1,248 | 66,280 | 63,107 | 42,582 | 39,722 |
| Net cash used in investing activities         | 36,764                                                                                                                                                  | 750 | 13,080 | 24,764 | 20,021 | 17,167 |
| Net cash used in financing activities         | 36,916                                                                                                                                                  | 753 | 49,470 | 30,325 | 14,135 | 15,954 |
| Dividends declared to common shareholders     | 14,459                                                                                                                                                  | 295 | 9,624 | – | – | – |
| Dividends declared per common share           | 78.00                                                                                                                                                   | 1.59 | 56.00 | – | – | – |
|                                               |                                                                                                                                                         |  |  |  |  |  |  |  |  |  |

_____________

 

*(1)    **We maintain our accounts inPhilippine peso.  For convenience, the peso financial information as at and forthe year ended December 31, 2006, has been translated into U.S. dollars at theexchange rate of Php49.045 to US$1.00, the rate quoted through the PhilippineDealing System as at December 31, 2006.  This translation should not beconstrued as a representation that the Philippine peso amounts represent, orhave been or could be converted into, U.S. dollars at that rate or any otherrate.*

* *

*(2)    **In 2006 and 2002, ourconvertible preferred shares were deemed anti-dilutive based on a calculationof the required dividends on preferred shares for each series of convertiblepreferred shares divided by the number of equivalent common shares assumingsuch preferred shares were converted into common shares and compared againstthe basic earnings per share.  Since the amount of dividends on preferredshares over the equivalent number of common shares were greater than the basicearnings per share, the amounts for basic and diluted earnings per share arethe same.*

* *

*(3)    **Total debt representscurrent portion of long-term debt, long-term debt — net of current portion andnotes payable.*

* *

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

* *

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

* *

*Dueto PLDT’s net losses in 2002, the coverage ratio on a consolidated basis wasless than 1.0x in that year.  In order to achieve a coverage ratio of 1.0x, wewould have had to generate additional consolidated earnings of Php2,463 millionfor  the year ended December 31, 2002.*

 

**Capital Stock**

 

Thefollowing table summarizes PLDT’s capital stock outstanding as at December 31,2006, 2005 and 2004.

 

|                                                         | **December 31,** |
|--------------------------------------------------------------|------------------|
|                                                         | 2006             | ** ** | **2005** | ** ** | **2004** |
|                                                         | (in millions)    |
| Serial Preferred Stock                                       |             |   |   |   |   |
| 10% Cumulative Convertible Preferred Stocks                  |             |   |   |   |   |
| A to EE                                                      | Php4,064         |   | Php4,073 |   | Php4,091 |
| Series III                                                   | –           |   | – |   | 46 |
| Convertible Preferred Stocks Subject to Mandatory Redemption |             |   |   |   |   |
| Series V(1)                                                  | –           |   | 2 |   | 22 |
| Series VI(1)                                                 | 9                |   | 44 |   | 47 |
| Series VII(2)                                                | –           |   | 38 |   | 38 |
| Cumulative Non-convertible Redeemable Preferred Stock        |             |   |   |   |   |
| Series IV                                                    | 360              |   | 360 |   | 360 |
|                                                         | Php4,433         |   | Php4,517 |   | Php4,604 |
| Common Stock                                                 | Php942           |   | Php904 |   | Php851 |

___________

*(1)   Preferred stock subject to mandatory redemptionin 2008 (see Note 14 – Preferred Stock Subject to Mandatory Redemption to theaccompanying consolidated financial statements in Item 18 for furtherdiscussion).*

 

*(2)   All shares of the Series VII ConvertiblesPreferred Stock were converted in 2006 (see Note 14 – Preferred Stock Subjectto Mandatory Redemption to the accompanying consolidated financial statementsin Item 18 for further discussion).*

 

**Dividends Declared**

 

The table sets forth dividend declarations on sharesof PLDT’s common stock in 2006:

 

| ** **       | **Date**          | **Amount**      |
|------------------|-------------------|-----------------|
| **Class**        | **Declaration**   | **Record**      | **Payable** | **Per Share** | **Total** |
|             |              |            |   |   | (in million pesos) |
|             |              |            |   |   |   |
| **Common Stock** | February 27, 2006 | March 20, 2006  | April 20, 2006 | Php28.00 | Php5,080 |
| ** **       | August 8, 2006    | August 21, 2006 | September 21, 2006 | 50.00 | 9,379 |

** **

Inaddition, on March 6, 2007, PLDT declared cash dividend of Php50 per share tocommon shareholders of record as at March 20, 2007 which was paid on April 20,2007.

** **

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

 

**Dividends Paid**

 

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

 

|                          | **In Philippine Peso** | ** ** | **In U.S. Dollars** |
|-------------------------------|------------------------|------------|---------------------|
|                          |                   |       |                |
| 2002                          | –                 |       | –              |
| 2003                          | –                 |       | –              |
| 2004                          | –                 |       | –              |
| 2005                          | 56.00                  |       | 1.142               |
| 2006                          | 78.00                  |       | 1.590               |
| April 20                      | 28.00                  |       | 0.545               |
| September 21                  | 50.00                  |       | 0.998               |
| 2007 (through April 20, 2007) | 50.00                  |       | 1.051               |

 

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

 

**Exchange Rates**

** **

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

 

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

 

|                         | **Year Ended December 31,** |
|------------------------------|-----------------------------|
| ** **                   | **Period End**              | ** ** | **Average****(1)** | ** ** | **High****(2)** | ** ** | **Low****(3)** |
|                         |                        |   |   |   |   |   |   |
| 2002                         | Php53.254                   |   | Php51.583 |   | Php49.336 |   | Php53.841 |
| 2003                         | 55.586                      |   | 54.215 |   | 52.021 |   | 55.767 |
| 2004                         | 56.341                      |   | 56.044 |   | 55.142 |   | 56.443 |
| 2005                         | 53.062                      |   | 55.085 |   | 53.062 |   | 56.321 |
| 2006                         | 49.045                      |   | 51.832 |   | 50.106 |   | 53.587 |
| 2007 (through June 26, 2007) | 46.222                      |   | 47.803 |   | 45.718 |   | 49.156 |

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

|                         | **Month**      |
|------------------------------|----------------|
|                         | **Period End** | ** ** | **Average****(1)** | ** ** | **High****(2)** | ** ** | **Low****(3)** |
| 2006                         |           |   |   |   |   |   |   |
| December                     | 49.045         |   | 49.431 |   | 49.045 |   | 49.659 |
| 2007                         |           |   |   |   |   |   |   |
| January                      | 48.902         |   | 48.908 |   | 48.706 |   | 49.156 |
| February                     | 48.583         |   | 48.365 |   | 48.054 |   | 48.781 |
| March                        | 48.217         |   | 48.501 |   | 48.077 |   | 48.864 |
| April                        | 47.536         |   | 47.785 |   | 47.449 |   | 48.294 |
| May                          | 46.178         |   | 46.749 |   | 45.922 |   | 47.673 |
| June (through June 26, 2007) | 46.222         |   | 46.130 |   | 45.718 |   | 46.594 |

_________________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

This report contains conversionsof Philippine peso amounts into U.S. dollars for your convenience.  Unlessotherwise specified, these conversions were made at the exchange rate as atDecember 31, 2006 of Php49.045 to US$1.00.  You should not assume that suchpeso amounts represent such U.S. dollar amounts or could have been or could beconverted into U.S. dollars at the rate indicated, or at any particular rate.As at June 26, 2007, the exchange rate quoted through the Philippine DealingSystem was Php46.222 to US$1.00.

 

**Risk Factors******

 

***Risks Relating to Us***

* *

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

 

The Philippine government has liberalized the Philippinetelecommunications industry and opened up the Philippine telecommunicationsmarket to new entrants.  Including the PLDT Group, there are nine major localexchange carriers, seven international gateway facility providers and fivecellular service providers in the country.  Many new entrants into thePhilippine telecommunications market have entered into strategic alliances withforeign telecommunications companies, which provide them access totechnological and funding support as well as service innovations and marketingstrategies.  Consequently, we are facing increasing competition in majorsegments of the telecommunications industry, particularly data and othernetwork services segments.  We cannot assure you that thenumber of providers of telecommunication services will not further increase orthat competition for telecommunications customers will not lead our cellular andfixed line subscribers to switch to other operators or lead us to increase our marketingexpenditures or reduce our rates, resulting in a reduction in ourprofitability.

 

Competition in the cellular telecommunications industry in the Philippines is based primarily on factors such as network coverage, quality of service andprice.  Recently, competition has increased as operators sought to develop andmaintain market share and to attract new subscribers.  Our principal cellularcompetitors, Globe Telecom, Inc., or Globe, and Digital TelecommunicationsPhilippines, Inc., or Digitel, have introduced aggressive marketing campaignsand promotions.  In addition, the government may allocate additionalfrequencies and award additional cellular telecommunications licenses in thefuture which could lead to increased competition.

 

As a result of thecompetitive environment, Smart has not increased its cellular rates sinceNovember 1998.  Moreover, the level of competition requires Smart tocontinuously innovate its products and to conduct promotions, which may affectits cellular revenues and revenue growth.  For example, in order to test themarket demand for fixed rate or “bucket” plans for voice and text services andin response to similar types of promotions launched by its competitors, Smartlaunched, in March 2005, the *Smart258**UnlimitedCall*and*Text promotions*pursuant to which Smart and *Talk ‘N Tex*t prepaidsubscribers had the option to avail themselves of unlimited on-network(Smart-to-Smart) voice calls or unlimited on-network (Smart-to-Smart) textmessages at a fixed rate. 

 

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

 

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

Thetelecommunications sector has been characterized recently by rapidtechnological changes.  We cannot assure you that these developments will notresult in competition from providers of new services or the need to makesubstantial capital expenditures to upgrade our facilities.  Furthermore, theNTC has issued to Smart and our competitors the license covering 3G cellularservices, and we have incurred significant expenses in the roll out of theseservices.  We are also continuing to upgrade to a next generation, all-IPnetwork and rolling out a wireless broadband network in order to expand our capabilityto provide broadband services.  These projects will require significant capitalexpenditures over the next few years.

 

Our future success will depend, in part, on our abilityto anticipate or adapt to such changes and to offer services that meet customerdemands on a competitive and timely basis.  We may be unable to obtain newtechnologies on a timely basis or on satisfactory terms or implement them in anappropriate or effective manner.  Future development of new technologies,services or standards could require significant changes to our business modelwhich could necessitate new investments.  In addition, new products andservices may be expensive to develop and may result in increased competition.Such strategic initiatives and technological developments could require us toincur significant additional capital expenditures.  There can be no assurancethat we would be able to adopt and successfully implement new technologies.  Inaddition, there can be no assurance on how emerging and future technologicalchanges will affect our operations or the competitiveness of our services.

* *

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

 

Theinternational long distance business has historically been one of our majorsources of revenue.  However, due to competition and the steep decline ininternational settlement rates that are paid to us by foreigntelecommunications carriers for termination of international calls on ournetwork, revenues generated from our international long distance business haveoverall declined in recent years.  

 

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

 

•        increasedcompetition from other domestic and international telecommunications providers;

 

•        advances intechnology;

 

•        alternativeproviders offering Internet telephony, also known as Voice over Internet Protocol,or VoIP, and broadband capacity; and 

 

•        unauthorizedtraffic termination and bypass routings by international simple resaleoperators.

 

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

 

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

* *

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

 

As at December 31, 2006, we hadconsolidated total indebtedness of approximately Php86,059 million (US$1,755million), and a consolidated ratio of debt to equity (total debt on aconsolidated basis divided by total equity) of 0.79x.  Our existing debt instrumentscontain covenants which, among other things, require PLDT to maintain certainfinancial ratios calculated on the basis of PFRS on a consolidated andnon-consolidated basis, limit our ability to incur indebtedness, makeinvestments and pay dividends.  Financial statements prepared in conformitywith PFRS differ in some material respects from financial statements preparedin conformity with U.S. GAAP.  For a description of some of these covenants,see Item 5. “Operating and Financial Review and Prospects — Liquidity andCapital Resources — Financing Activities — Debt Financing — Debt Covenants.”

 

Our substantial indebtedness and the requirements andlimitations imposed by our debt covenants could have important consequences.For example, they could:

 

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

 

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

 

Theprincipal factors that can negatively affect our ability to comply with thefinancial ratios and other financial tests under our debt instruments aredepreciation of the Philippine peso relative to the U.S. dollar, poor operatingperformance of PLDT and our consolidated subsidiaries, impairment or similarcharges in respect of investments or other long-lived assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expenses.  Since approximately 96% of our total consolidated debtswere denominated in foreign currencies, principally in U.S. dollars, many ofthese financial ratios and other tests are negatively affected by any weakeningof the peso.  

 

Thepeso has been subject to significant fluctuations in recent years.  From 2002to 2004, the peso has generally been depreciating from a high of Php49.336 onMay 20, 2002 to a low of Php56.443 on October 14, 2004.  In 2005, the pesofluctuated significantly from a low of Php56.321 on July 8, 2005 to a high ofPhp53.062 on December 29, 2005.  While the peso continued to appreciate in2006, there can be no assurance that the peso will not depreciate and besubject to significant fluctuations going forward.

 

Wehave maintained compliance with all of our financial ratios and covenants, asmeasured under PFRS, under our loan agreements and other debt instruments.However, if negative factors adversely affect our financial ratios, we may beunable to maintain compliance with these ratios and covenants or be unable toincur new debt.  Inability to comply with the financial ratios and covenants orraise new financing could result in a declaration of default and accelerationof some or all of our indebtedness.  The terms of some of our debt instrumentshave no minimum amount for cross-default.

 

Ifwe are unable to meet our debt service obligations or comply with our debtcovenants, we could be forced to restructure or refinance our indebtedness,seek additional equity capital or sell assets.  An inability to effect thesemeasures successfully could result in a declaration of default and anacceleration of some or all of our indebtedness.

 

Inaddition, we may have difficulty meeting debt payment obligations if we do not continueto receive cash dividends from Smart.

 

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

 

A growing portion of ourconsolidated operating revenues and cash flow from operations is derived fromour subsidiaries, particularly Smart.  Smart and some of our other subsidiarieshave significant internal cash requirements for debt service, capitalexpenditures and operating expenses and so may be financially unable to pay anydividends to PLDT.  Although Smart made dividend payments to PLDT sinceDecember 2002, we cannot assure you that PLDT will continue to receivedividends or other distributions, or otherwise be able to derive liquidity fromSmart or any other subsidiary or investee in the future.

 

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

 

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

* *

Our projects under development and the continuedmaintenance and improvement of our networks and services, including Smart’sprojects, networks and services, require substantial ongoing capitalinvestment.  Our consolidated capital expenditures in 2006 and 2005 totaled Php20,348million and Php15,864 million, respectively.  Our 2007 budget for consolidatedcapital expenditures is approximately Php21,400 million, of which approximatelyPhp11,100 million is budgeted to be spent by PLDT and approximately Php8,800million is budgeted to be spent by Smart; the balance represents the budgeted capitalspending of our other subsidiaries.  PLDT’s capital spending is intendedprincipally to finance the continued build-out and upgrade of its data and Internetprotocol infrastructures and for its fixed line data services and themaintenance of its network. ****Smart’s capital spending is focused onexpanding and upgrading its transmission network facilities to meet increaseddemand for cellular services.  

 

Futurestrategic initiatives could require us to incur significant additional capitalexpenditures.  We may be required to finance a portion of our future capitalexpenditures from external financing sources, which have not yet been fullyarranged.  We cannot assure you that financing for new projects will beavailable on terms acceptable to us or at all.  If we cannot complete ourdevelopment programs and other capital projects, our growth, results ofoperations and financial condition could be materially and adversely affected. ****

 

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

 

Substantiallyall of our indebtedness and related interest expense, a substantial portion ofour capital expenditures and a portion of our expenses are denominated in U.S.dollars and other foreign currencies, but a significant portion of our revenuesis denominated in pesos.  As at December 31, 2006, 96% of our totalconsolidated indebtedness was denominated in U.S. dollars.  As at December 31,2006, approximately 43% of our consolidated foreign currency-denominated debtswere unhedged.  A depreciation of the peso against the U.S. dollar increasesthe amount of our debt obligations and operating and interest expenses in pesoterms.  In the event that the peso depreciates against the U.S. dollar, we maybe unable to generate enough funds through operations (such as by raising ourservice rates, including through adjustments to rates for local exchangeservice based on movements in the peso-to-dollar exchange rate) and other meansto offset the resulting increase in our obligations in peso terms.  Further,these changes could cause us not to be in compliance with the financialcovenants imposed by our lenders under certain loan agreements and otherindebtedness.

 

On the other hand,approximately 33% of PLDT Group’s consolidated service revenues are eitherdenominated in U.S. dollars or is linked to the U.S. dollar.  In this respect,an appreciation of the peso against the U.S. dollar reduces our revenues inpeso terms and reduces our cash flow from operations.  

 

During the last decade, thepeso has generally depreciated against most foreign currencies. In addition,during this period, the Philippine economy has also, from time to time,experienced periods of concentrated peso devaluation and limited availabilityof foreign currency.  Since June 30, 1997, when the Bangko Sentral ngPilipinas, or BSP, announced that it would let market forces determine thevalue of the peso, the peso has experienced a significant decline against theU.S. dollar.  It depreciated from Php26.376 to US$1.00 on June 30, 1997, toPhp56.341 to US$1.00 as at December 31, 2004.  

 

The peso has been subject tosignificant fluctuations in recent years.  From 2002 to 2004, the peso hasgenerally been depreciating from a high of Php49.336 on May 20, 2002 to a lowof Php56.443 on October 14, 2004.  In 2005, the peso fluctuated significantlyfrom a low of Php56.321 on July 8 to a high of Php53.062 on December 29, 2005.While the peso continued to appreciate in 2006, there can be no assurance thatthe peso will not depreciate and be subject to significant fluctuations goingforward. 

 

Thepeso may again be subject to significant fluctuations and may depreciate due toa range of factors, including:

•        political andeconomic developments affecting the Philippines;

•        the volatility ofregional currencies, particularly the Japanese yen;

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

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

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

 

*The cellular telecommunications industry may not continue to grow*

 

The majority of our consolidated revenues is currently derived fromcellular services.  As a result, we depend on the continued development andgrowth of the cellular telecommunications industry.  The cellular penetrationrate in the Philippines is estimated to have reached approximately 48%.  Assuch, our cellular business is expected to grow at a slower rate as penetrationrate increases and Smart moves further into the lower-income segments of themarket.  The growth of the cellular communications market depends on manyfactors beyond our control, including the continued introduction of new andenhanced cellular devices, the price levels of cellular handsets, consumerpreferences and amount of disposable income of existing and potentialsubscribers.  Any economic, technological or other developments resulting in areduction in demand for cellular services may harm our business.

* *

Our businesses depend on the reliability of ournetwork infrastructure, which is subject to physical, technological and otherrisks
 

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

 

•        physicaldamage;

 

•        power loss;

 

•        capacitylimitation;

 

•        cable theft;

 

•        softwaredefects; and

 

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

 

The occurrence of any of theserisks could have a material and adverse effect on our ability to provideservices to customers.  While we are undertaking initiatives to prevent and/ormitigate the occurrence of said risks, including the preparation of a disasterrecovery plan that aims to allow restoration of service at the soonest possibletime from occurrence of an incident.  We cannot assure you that these riskswill not occur or that our initiatives will be effective should such risksoccur.

 

*A significant number of PLDT’s shares are held by three separateshareholders, which may not act in the interests of other shareholders orstakeholders in PLDT*

* *

The First Pacific Group has beneficialownership of approximately 28% in PLDT’s outstanding common stock as at May 31,2007.  This is the largest block of PLDT’s common stock that is directly orindirectly under common ownership.  

 

NTT Communications, which owned14% of PLDT’s common stock as at December 31, 2005, transferred on March 14,2006 approximately 12.6 million shares of PLDT’s common stock, representing approximately7% of the outstanding shares of PLDT’s common stock, to DoCoMo pursuant to astock sale and purchase agreement dated January 31, 2006.  NTT Communicationsis a wholly-owned subsidiary, and DoCoMo a majority-owned subsidiary of NTT.In connection with this transaction, First Pacific and certain of itsaffiliates, or the FP Parties, NTT Communications, DoCoMo and PLDT entered intoa Cooperation Agreement, dated January 31, 2006, or the Cooperation Agreement,pursuant to which, among other things, certain rights of NTT Communicationsunder the Stock Purchase and Strategic Investment Agreement dated September 28,1999 and the Shareholders Agreement dated March 24, 2000 were extended to DoCoMo.As a result, NTT Communications and DoCoMo, in coordination with each other,have contractual veto rights over a number of major decisions and transactionsthat PLDT could make or enter into, including:  

* *

•        capital expenditures in excess ofUS$50 million;

* *

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

 

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

 

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

 

•        new business activities other thanthose we currently engage in;

 

•        merger or consolidation; and

 

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

 

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

* *

•        elections of PLDT’s directors; and

 

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

 

The FP Parties and/or NTTCommunications and/or DoCoMo may exercise their respective influence over thesedecisions and transactions in a manner that could be contrary to yourinterests.

 

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

* *

If First Pacific Group or NTTCommunications sell all or a portion of their equity interest in PLDT, incertain circumstances, such sale may give rise to an obligation for PLDT tomake an offer to purchase its outstanding debt under its US$250 million 11.375%notes due 2012, and may result in a default under certain of Smart’s loanagreements.  As at December 31, 2006, Php13,208 million in principal amount ofPLDT’s indebtedness is directly subject to a change in major shareholding oroffer to purchase requirement and Php1,273 million in principal amount ofSmart’s indebtedness is subject to an event of default in the event of a changein major shareholding of PLDT.  In such event, if PLDT fails to complete anoffer to purchase the affected debts, all of its debt could become immediatelydue and payable as a result of various cross-default provisions.  

 

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

 

Smart has publicly stated that itbelieves that it had ten years from the commencement of its operations, oruntil August 2004, to conducta public offering of its shares required under the Public TelecommunicationsPolicy Act, or R.A. 7925.  As Smart has not conducted a public offering of itsshares, the Philippine Congress may revoke the franchise of Smart for itsfailure to comply with the requirement under R.A. 7925 on the public offeringof its shares.  A quo warranto case may also be filed against Smart by theOffice of the Solicitor General of the Philippines for the revocation of thefranchise of Smart on the ground of violation of R.A. 7925.  In September 2004,Senate Bill No. 1675 was filed seeking to amend Section 21 of R.A. 7925.  Thebill seeks to declare that a telecommunications entity shall be deemed to havecomplied with the requirement of making a public offering of its shares iftwo-third of its outstanding voting stock are owned and controlled directly orindirectly, by a listed company.  The bill is currently pending in thePhilippine Senate.  However, we cannot assure you that such bill will beenacted and that the franchise of Smart will not be revoked due to Smart’sfailure to timely conduct a public offering of its shares.

 

*Our business is significantly affected by governmentallaws and regulations, including regulations in respect of our franchises, ratesand taxes*

 

We operate our business underfranchises, each of which is subject to amendment, termination or repeal by thePhilippine Congress.  Additionally, PLDT operates pursuant to variousprovisional authorities and certificates of public convenience and necessity,or CPCNs, which are granted by the NTC and expire between now and 2028.  Someof PLDT’s CPCNs and provisional authorities have already expired.  However,PLDT filed applications for extension of these CPCNs and provisional authoritiesprior to their respective expiration dates and is therefore entitled tocontinue to conduct its business under its existing CPCNs and provisionalauthorities pending the NTC’s decisions on these extensions.  Smart alsooperates its cellular, international long distance, national long distance andglobal mobile personal communications via satellite services pursuant to CPCNs,which will expire upon the expiration of its franchise.  Smart’s franchise isdue to expire on March 27, 2017, 25 years after the date on which its currentfranchise was granted.  Smart operates international private leased circuitsunder a provisional authority, which expired on November 6, 2006.  Smartapplied for an extension of this provisional authority or for the issuance of aCPCN prior to its expiration.  The NTC has not yet acted on the motion.  BecausePLDT and Smart filed the applications for extension on a timely basis, weexpect that these extensions will be granted.  However, we cannot assure youthat the NTC will grant these extensions.  If a CPCN has not been issued, theNTC may permit an operator to provide services pursuant to a provisionalauthority.  Provisional authorities are typically granted for a period of 18months.  The Philippine Revised Administrative Code of 1987 provides that ifthe grantee of a license or permit, such as a CPCN or provisional authority,has made timely and sufficient application for the extension thereof, theexisting CPCN or provisional authority will not expire until the application isfinally decided upon by the administrative agency concerned.  However, wecannot assure you that our franchises, CPCNs and provisional authorities willbe renewed.  For a description of our licenses, see Item 4. “Information on theCompany –– Licenses and Regulation.”

 

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

 

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

 

ThePLDT Group is also subject to a number of national and local taxes.  OnMay 24, 2005, the president of the Philippines signed into law Republic Act No.9337, or R.A. 9337, amending certain sections of the National Internal RevenueCode, which took effect on November 1, 2005.  R.A. 9337, among others,introduced the following changes:

 

a.          The regular corporate income taxrate for domestic corporations and resident/non-resident foreign corporationsincreased from 32% to 35% effective November 1, 2005 and will be reduced to 30%effective January 1, 2009.

 

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

 

c.          The input VAT on capital goodsshould be spread evenly over the estimated useful life or sixty months,whichever is shorter, if the acquisition cost, excluding the VAT componentthereof, exceeds one million pesos.

 

There can be no assurancethat the increase in taxes will not have a material adverse effect on PLDTGroup’s revenues, profitability and cash flows.  In addition, there can beno assurance that PLDT Group will not be subject to new and/or additional taxesand that PLDT Group will be able to impose additional charges or fees tocompensate for the imposition of such taxes. 

* *

Thereare also various bills pending in the Philippine Congress which propose to imposea franchise tax on telecommunication companies and to tax telecommunicationsservices, among them, the imposition of a tax on mobile phone companies on alltext entries to text games; the imposition of a Php0.50 specific tax on eachSMS to be borne by the cellular phone companies; and the imposition of a 10% advalorem tax on all cellular phone calls using 3G.  We cannot assure you that we would be able to impose additionalcharges or fees to compensate for the imposition of such taxes.

* *

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

 

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

 

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

 

•        not to billcalls directed to recorded voice messages; and 

 

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

 

Alongwith the other Philippine cellular operators, Smart filed a complaint for thenullification of this memorandum circular before the regional trial court ofQuezon City and sought for the issuance of a preliminary injunction whileproceedings are ongoing.  The regional trial court issued the preliminaryinjunction, which restrained the implementation of the memorandum circular.  Thecomplaint of the Philippine cellular operators is being heard by the regionaltrial court of Quezon City.

 

InDecember 2005, the NTC issued a consultative document on the development ofcompetition policy framework for the information communications sector.  Theconsultative paper contains eleven questions which cover the following keyareas:

 

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

 

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

 

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

 

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

 

The NTC invitedpublic comment from industry stakeholders and other interested parties inrelation to the issues raised in the paper.  On January 31, 2006, we submitteda comprehensive response to the consultative paper.   On August 24, 2006,the NTC issued another consultative document specifically focusing on itsproposal to impose asymmetric regulations on carriers with significant marketpower, or SMP, including a discussion on its proposed roadmap for implementingsuch SMP obligations.  On October 23, 2006, we submitted our response to thesecond consultative paper to the NTC.   

 

In formulatingboth our responses, we took into account both industry interests and thebroader context of our nation’s economic development, drawing on the experiencein other countries.  We believe that the basis for the need for regulatoryreform is unclear and the envisioned SMP regime is inappropriate for the Philippines, as the market is highly competitive and well-functioning.  In addition, theimposition of SMP and its attendant obligations would discourage capitalinvestments in a sector on which the Philippine economy is highly dependent.  Wehave therefore proposed that the NTC explore its full range of optionsavailable on a cost-benefit basis, taking into consideration the specific localcontext of the Philippine marketplace.

 

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

 

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

 

Ourbusiness requires the regular installation of new, and the maintenance ofexisting, telecommunications transmission and other facilities and equipment,which are being undertaken.  The installation and maintenance of thesefacilities and equipment are subject to risks and uncertainties relating to:

 

•        shortages ofequipment, materials and labor;

 

•        work stoppagesand labor disputes;

 

•        interruptionsresulting from inclement weather and other natural disasters;

 

•        unforeseenengineering, environmental and geological problems; and

 

•        unanticipatedcost increases.

 

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

* *

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

 

Aspart of our growth strategy, we may, from time to time, make acquisitions andinvestments in companies or businesses, which may or may not be significant.The success of our acquisitions and investments depends on a number of factors,including:

•        our abilityto identify suitable opportunities for investment or acquisition; 

•        our abilityto reach an acquisition or investment agreement on terms that are satisfactoryto us or at all; 

•        theextent to which we are able to exercise control over the acquired company; 

•        theeconomic, business or other strategic objectives and goals of the acquiredcompany compared to those of the PLDT Group; and 

•        our abilityto successfully integrate the acquired company or business with our existingbusinesses. 

 

Anyof our contemplated acquisitions and investments may not be consummated due toreasons or factors beyond its control.  Even if any contemplated acquisitionsand investments are consummated, we may not be able to realize any or all ofthe anticipated benefits of such acquisitions and investments.  Moreover, if weare unsuccessful in our contemplated acquisitions and investments, we may notbe able to implement fully our business strategy to maintain or grow certain ofour businesses.

* *

*Failure to achieve and maintain effective internal control overfinancial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of2002 could adversely impact investor confidence and the market price of ourcommon shares and ADSs*

 

Effectiveinternal controls over financial reporting are necessary for us to providereasonable assurance with respect to our financial reports and to effectivelyprevent fraud.  If we are unable to provide reasonable assurance with respectto our financial reports and effectively prevent fraud, our reputation andresults of operations could be harmed.  

 

Weare required to comply with various Philippine and U.S. laws and regulations oninternal controls.  For example, pursuant to Section 404 of the Sarbanes-OxleyAct of 2002, beginning with this Annual Report on Form 20-F for the fiscal year ending December 31, 2006, we are required toinclude a report by our management on our internal control over financialreporting in our Annual Reports on Form 20-F that contains an assessment by ourmanagement of the effectiveness of our internal control over financialreporting.  In addition, our independent registered public accounting firm mustattest to and report on our management’s assessment of the effectiveness of ourinternal control over financial reporting.

 

Internalcontrol over financial reporting may not prevent or detect misstatementsbecause of its inherent limitations, including the possibility of human error,the circumvention or overriding of controls, or fraud.  Therefore, eveneffective internal control over financial reporting can provide reasonableassurance with respect to the preparation and fair presentation of financialstatements.  If we fail to maintain the adequacy of our internal control overfinancial reporting, including through a failure to implement required new orimproved controls, or if we experience difficulties in their implementation,our business and operating results could be harmed, we could fail to meet ourreporting obligations and there could be a material adverse effect on themarket prices of our common shares and ADSs.

 

***Risks Relating to the Philippines***

 

*PLDT’s business may be affected by political or social or economicinstability in the Philippines*

* *

On May 10, 2004, the Philippines held a presidential election which resulted in a victory by the incumbentPresident Arroyo who successfully retained her post.  Shortly after theelections, allegations of irregularities in the presidential elections, such asstolen ballots and vote buying intensified.  The Philippine Congress commencedan inquiry into a wire tapped audio tape which contains a conversationallegedly between President Gloria Macapagal-Arroyo and a commissioner of theCommission on Elections discussing the vote count on the presidential election.On June 27, 2005, President Gloria Macapagal-Arroyo publicly stated that shedid speak to a commissioner of the Commission on Elections in order to protecther votes, but not to influence the outcome of the election.  Impeachmentcomplaints based on allegations of culpable violation of the Constitution,graft and corruption and betrayal of public trust were filed against PresidentArroyo with the Philippine Congress.  On September 6, 2005, the PhilippineCongress voted to reject the impeachment complaints against President Arroyo.  

 

Other recent developmentsinclude coup d’etat attempts against the administration of President Arroyo.On February 24, 2006, President Arroyo declared a state of emergency allowingfor warrantless arrests and a temporary take-over of privately-owned utilitycompanies.  On March 3, 2006, President Arroyo lifted the state of emergency.

 

In June 2006,President Arroyo proposed to amend the Constitution of the Philippines to implement a unicameral federal, parliamentary system patterned after the Germanconstitution. Under said system, the country would be split into “states” witheach “state” granted a local legislature.  There were also plans to remove orease the current ban on foreign ownership of property, land and commercialorganizations in the Philippines.  A group of local leaders have joined togetherin what was known as the “People’s Initiative” which caused to further theamendment of the Constitution.  In addition to nationwide campaigns andrallies, a petition was filed with the Supreme Court, or SC, to reform theConstitution.  This petition was rejected by the SC on October 25, 2006.Nevertheless, the People’s Initiative continues to advocate amendments to the Constitution.

 

Furthermore, the Philippineeconomy has experienced periods of slow growth, high inflation and significantdevaluation of the peso.  The Philippine government is also facing a fiscaldeficit that the government is aiming to eliminate by 2008 by implementing anumber of economic reforms.

 

Thefiscal deficit position of the Philippine government and the ongoing politicaluncertainty have resulted in increased concerns about the political andeconomic stability of the country.  This, in turn, has resulted in thevolatility of the peso against the dollar.  There can be no assurance that thepolitical environment in the Philippines will be stable or that the current orany future government will adopt economic policies conducive to sustainedeconomic growth or which do not impact adversely on the current regulatoryenvironment for telecommunications or other companies.  

 

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

 

Approvalfrom or registration with the BSP for the issuance and guarantee of foreign currency-denominatedborrowings is not required in order to make our foreign currency paymentobligations legally valid and binding.  However, receiving this approval andregistration will enable a borrower to access the banking system to obtainforeign currency to service its debt obligations rather than using othersources of foreign currency, for example, foreign currency revenue streams.

 

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

 

•        suspend temporarily or restrictsales of foreign exchange;

 

•        require licensing of foreignexchange transactions; or

 

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

 

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

 

*The occurrence of natural catastrophes may materially disrupt ouroperations*

* *

The Philippines has experienced a number of majornatural catastrophes over the years including typhoons, volcanic eruptions andearthquakes that may materially disrupt and adversely affect our businessoperations.  The recent earthquake that hit Taiwan in December 26, 2006 severedcable systems linking the Philippines to other Asian and American countries,causing major slowdown of voice and non-voice data traffic exchange.  There canbe no assurance that the insurance coverage PLDT maintains for these risks willadequately compensate it for all damages and economic losses resulting fromnatural catastrophes.

 

Item 4.       Information on the Company
 

**Overview**

 

Weare the leading national telecommunications service provider in the Philippines.  Through our three principal business groups — wireless, fixed line, andinformation and communications technology — we offer a wide range oftelecommunications services to approximately 26 million subscribers in thePhilippines across the nation's most extensive fiber optic backbone and fixedline, cellular and satellite networks.

 

Weare the leading fixed line provider in the Philippines with approximately 63%of the total reported fixed line subscribers nationwide as at December 31,2006.  Smart, our wholly-owned subsidiary, is the leading cellular serviceprovider in the country, with approximately 41% of total reported cellularsubscribers as at December 31, 2006.  Piltel, Smart’s 92.1%-owned subsidiary,had approximately 17% of total reported cellular subscribers as at December 31,2006.  We have interests in the information and communications technologysectors, including the operation of our *Vitro*TM data center,call center and business process outsourcing, or BPO, businesses.

 

Our common shares are listed andtraded on the Philippine Stock Exchange, or PSE, and our American DepositaryShares, or ADSs, evidenced by American Depositary Receipts, or ADRs, are listedand traded on the New York Stock Exchange in the United States.  

 

Wehad a market capitalization of approximately Php481,948 million (US$10,437million) as at May 31, 2007, representing one of the largest marketcapitalizations among Philippine-listed companies.  For the year ended December31, 2006, we had consolidated operating revenues of Php127,536 million (US$2,600million). 

 

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

 

**Historical Background and Development**

 

PLDT was incorporated under the old Corporation Law ofthe Philippines (Act 1459, as amended) on November 28, 1928,following the merger of four telephone companies under common U.S. ownership.  In 1967, effective control of PLDT was sold by General Telephone and ElectronicsCorporation (a major shareholder since PLDT's incorporation) to a group ofFilipino businessmen.  In 1981, in furtherance of the then existing policy ofthe Philippine government to integrate the Philippine telecommunicationsindustry, PLDT purchased substantially all of the assets and liabilities of theRepublic Telephone Company, which at that time was the second largest telephonecompany in the Philippines.  In 1998, the First Pacific Group acquired asignificant interest in PLDT.  On March 24, 2000, NTT Communications, throughits wholly-owned subsidiary NTT Communications Capital (U.K.) Limited, orNTTC-UK, became PLDT’s strategic partner with approximately 15% economic andvoting interest in the issued and outstanding common stock of PLDT.  Simultaneouswith NTT Communications’ investment in PLDT, we acquired 100% of Smart.  On March14, 2006, NTT DoCoMo acquired from NTT Communications approximately 7% ofPLDT’s outstanding common shares held by NTT Communications with NTTCommunications retaining ownership of approximately 7% of PLDT’s commonshares.  On February 28, 2007, Metro Pacific Asset Holdings, Inc., a Philippineaffiliate of First Pacific, completed the acquisition of an additional interestof approximately 46% in PTIC.  This additional investment in PTIC, ashareholder of PLDT, represents an attributable interest of approximately 6.4% ofthe issued common shares of PLDT and thereby raised the First Pacific Group’s beneficialownership to approximately 28% of PLDT’s shares of common stock as at that date.See Item 7. “Major Shareholders and Related Party Transactions” for furtherdiscussion.

 

PLDT's originalfranchise was granted in 1928 and was last amended in 1991, extending itseffectiveness until 2028 and broadening PLDT’s franchise to permit PLDT toprovide virtually every type of telecommunications service.  PLDT’s franchisecovers the business of providing basic and enhanced telecommunications servicesin and between the provinces, cities and municipalities in the Philippines andbetween the Philippines and other countries and territories including mobile,cellular, wired or wireless telecommunications system, fiber optics,multi-channel transmission distribution systems and their value-added servicessuch as but not limited to transmission of voice, data, facsimile, controlsignals, audio and video, information services bureau and all other telecommunicationssystems technologies, as are at present available or can be made availablethrough technical advances or innovations in the future.  See Item 8. “FinancialInformation –– Legal Proceedings — Quo Warranto Action” for informationregarding legal proceedings initiated by the Solicitor General with respect toPLDT's franchise.

 

Since the implementation of itsSubscriber Investment Plan, or SIP, in 1973 pursuant to Presidential Decree No.217, which in the past required telephone subscribers to purchase shares ofPLDT's preferred stock, PLDT has developed a broad base of public ownershipwith 2,189,374 common and preferred stockholders of record as at December 31,2006.  As approved by the NTC, the SIP was made optional beginning in April 2003,from being compulsory in earlier years.  Of these stockholders, 2,172,964 arePhilippine persons representing approximately 86% of PLDT's outstanding commonand preferred shares.  For purposes of this paragraph, all the ADSs, eachrepresenting one PLDT common share and evidenced by American DepositaryReceipts, or ADRs, are considered to be held of record in the United States.  

 

Our consolidated capitalexpenditures amounted to Php20,348 million, Php15,864 million and Php19,268million in 2006, 2005 and 2004, respectively.  Of these amounts, Php8,573million, Php6,389 million and Php3,917 million were attributable to PLDT for2006, 2005 and 2004, respectively, while Php10,506 million, Php8,785 millionand Php14,735 million were spent by Smart for 2006, 2005 and 2004,respectively.  The remaining balances were spent by our other subsidiaries,principally ePLDT and its subsidiaries.

 

**Organization**

 

PLDT Group includes the following significantsubsidiaries:

 

**Name of Subsidiary**

**Place of Incorporation**

**Principal Activity**

**Percentage of Ownership**

**Direct**

**Indirect**

** **

 

 

** **

**Wireless**

Smart

Philippines

Cellular mobile services

100.0

–

Smart Broadband 

Philippines

Internet broadband and distributor

–

100.0

Wolfpac 

Philippines

Mobile applications developer and  service provider

–

100.0

Piltel

Philippines

Providing cellular and fixed line services

–

92.1

Telesat

Philippines

Satellite communications services

94.4

–

ACeS Philippines

Philippines

Satellite phone services

88.5

11.5

Mabuhay Satellite

Philippines

Satellite communications services

67.0

–

** **

 

 

 

 

**Fixed Line**

ClarkTel

Philippines

Telecommunications services

100.0

–

SubicTel

Philippines

Telecommunications services

100.0

–

PLDT Global

British Virgin Islands

Telecommunications services

100.0

–

SNMI

Philippines

Data and network services

100.0

–

Maratel

Philippines

Telecommunications services

97.5

–

BCC

Philippines

Telecommunications, infrastructure  and related value-added services

75.0

–

** **

 

 

 

 

**Information and Communications Technology**

ePLDT

Philippines

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

100.0

–

Vocativ

Philippines

Call center services

–

100.0

Parlance

Philippines

Call center services

–

100.0

Ventus

Philippines

Call center services

–

100.0

SPi and Subsidiaries (including CyMed)

Philippines

Business process outsourcing, or  BPO, services

–

100.0

Infocom

Philippines

Internet services

–

99.6

netGames

Philippines

Publisher of online games

–

80.0

 

 

 

 

 

Digital Paradise (formerly Netopia Computer Technologies, Inc.)

Philippines

Internet access services

–

75.0

Level Up!

Philippines

Publisher of online games

–

60.0

Digital Paradise Thailand

Thailand

Internet access services

–

51.0

Airborne Access

Philippines

Wireless internet services

–

51.0

* *

As describedbelow, SPi, CyMed and Level Up! were all acquired in 2006 and included in our2006 consolidated financial statements.  See *Note 9 – Goodwill and OtherIntangible Assets*to the accompanying consolidated financial statements inItem 18 for further discussion.

* *

OnSeptember 2, 2004, Smart entered into a sale and purchase agreement to acquire100% of Smart Broadband, a company primarily engaged in providing wirelessbroadband and data services to small and medium-scale enterprises in thePhilippines, for a total consideration of US$45 million, of which payments ofUS$11 million and US$7 million for an equity interest of 40% in Smart Broadbandwere made in 2004 and payment of US$4 million for an additional equity interestof 9% was made in January 2005.  The balance of US$23 million in respect of theremaining 51% equity interest in Smart Broadband was paid on March 7, 2006.The acquisition aims to strengthen Smart’s position in the wireless datasegment and is in line with Smart’s overall strategy of providing the widestrange of innovative wireless services.

 

WithSmart and PLDT owning 85.6% and 6.5% as at the year ended December 31, 2004,respectively, of Piltel's common equity, Piltel was reconsolidated into thePLDT group's wireless financial position and results of operations starting theyear ended December 31, 2004.  On April 25, 2005, PLDT and Smart enteredinto a subscription and assignment agreement under which PLDT assigned andtransferred to Smart its 767 million Piltel common shares in exchange for 11million of Smart's preferred shares.  As a result, Smart's shareholdings inPiltel now represents 92.1% of Piltel's outstanding common shares and PLDT nolonger owns any shares of Piltel's common stock.  

 

Followingits acquisition in October 2003 of an 80% equity interest in Wolfpac, a companyengaged in the business of consumer mobile applications software developmentand content development, Smart acquired in July 2006 the remaining 20% equityinterest in Wolfpac.

 

On February 16, 2006, ePLDTacquired a 60% equity interest in Level Up!, a leading publisher of onlinegames in the Philippines.  The acquisition of Level Up!, together withnetGames, ePLDT’s online gaming subsidiary, is expected to strengthen ePLDT’sonline gaming business in the Philippines.

 

On July 11, 2006, ePLDT acquired 100% of SPi Technologies, Inc., or SPi,and its direct and indirect Philippine and offshore subsidiaries for a cashconsideration of US$135 million.  SPi is the second largest pure-play BPO andthe ninth largest independent BPO service provider worldwide.  It hasoperations in 19 locations in North America, Europe and Asia.  On August 11,2006, SPi acquired 100% of CyMed, a leading medical transcription company basedin Richmond, Virginia and on April 16, 2007, SPi acquired 100% of SpringfieldService Corporation, one of the ten largest U.S. medical billing and revenuecycle management companies.

 

***Wireless***

 

Weprovide cellular, and wireless broadband, satellite, VSAT and other servicesunder our wireless business, contributing about 96% and 4% of our wirelessservice revenues, respectively, in 2006.  The rapid growth in the cellularmarket has resulted in a change in our revenue composition and sources of ourrevenue growth.  Starting with 2003, cellular service was our major revenuesource surpassing fixed line revenues.  Cellular data services, which includeall text messaging and text-related services ranging from ordinary text tovalue-added services, contributed significantly to our revenue increase.  Ourwireless operating revenues accounted for 63%, 62% and 61% of our consolidatedoperating revenues for the years ended December 31, 2006, 2005 and 2004,respectively.  For the years ended December 31, 2006, 2005 and 2004, cellularservice revenues accounted for 96%, 96% and 97%, respectively, of our wirelessbusiness operating revenues.

 

Weprovide cellular services (including handset sales), through Smart and itssubsidiary, Piltel.  Smart is the leading cellular services provider in the Philippines, with 17,201,005 subscribers as at December 31, 2006, representing an estimatedmarket share of approximately 41%.  Piltel, a reseller of Smart's GSM networkwith its own branding, had 6,974,379 subscribers as at December 31, 2006,representing an estimated market share of approximately 17%.  In 2006, thecombined number of Smart's and Piltel's subscribers increased by 3,766,763, or 18%,to 24,175,384.  As at December 31, 2006, cellular penetration in the Philippines reached approximately 48%, which was nearly 14 times the country's fixed linepenetration, although the existence of subscribers owning multiple SIMs haslikely overstated this penetration rate to a certain extent.

 

Smart'sand Piltel's cellular subscriber gains were predominantly attributable to theirrespective prepaid services.  Approximately 99% of Smart’s and all of Piltel’s cellularsubscribers were prepaid as at December 31, 2006.  The predominance of prepaidservice reflects one of the distinguishing characteristics of the Philippine cellularmarket.  The growth in our prepaid service has enabled us to increase andbroaden our subscriber base rapidly while controlling credit risk and reducingbilling and administrative costs on a per-subscriber basis.  

 

Ourcellular subscriber growth has also been driven by text messaging.  Textmessaging is extremely popular in the Philippines, particularly on the prepaidplatform, as it provides a convenient and inexpensive alternative to voice ande-mail based communications.  Text messaging contributed significantly toSmart's cellular data service revenue growth in 2006, generating revenues ofPhp34,403 million, an increase of Php3,594 million, or 12%, over 2005.

 

Smart'sNokia-provided cellular network is the most extensive in the Philippines, covering substantially all of Metro Manila and most of the other major populationcenters in the Philippines.  Its dual-band GSM network allows it to efficientlydeploy high capacity 1800 MHz base transceiver stations, or BTS, in dense urbanareas while its 900 MHz BTS can be much more economically deployed inpotentially high growth, but less densely populated provincial areas.  With6,099 GSM base stations as of the end of December 2006, Smart’s cellularnetwork covers approximately 99% of all towns and municipalities in the Philippines, accounting for approximately 99% of the population.

 

***Fixed Line***

 

We are the leading fixed line operator in the Philippines and the largest company providing fixed line telecommunications servicesthroughout the country.  Our fixed line business group offers local exchange,international long distance, national long distance, data and other network andmiscellaneous services.  We had 1,776,647 fixed line subscribers as at December31, 2006.  Operating revenues from our fixed line services accounted for 32%,36% and 37% of our consolidated operating revenues for the years ended December31, 2006, 2005 and 2004, respectively.

 

Our6,400-kilometer long domestic fiber optic network, or DFON, is supported by anextensive digital microwave backbone.  Our fixed line network reaches all ofthe major cities and municipalities in the Philippines, with a concentration inthe Metropolitan Manila area.  Our network offers the country's most extensiveconnections to international networks through three international gatewayswitching exchanges, satellite systems and various regional submarine cablesystems in which we have interests.

 

***Information andCommunications Technology***

 

Throughour wholly-owned subsidiary, ePLDT, we provide broad-based integratedinformation and communications technology, or ICT, services focusing oninfrastructure and solutions for Internet applications, Internet protocol-basedsolutions and multimedia content delivery.  ePLDT's principal activities arethe operation of an Internet data center under the brand name *VitroTM*,call center business, BPO, and Internet and online gaming business.  Operatingrevenues from our ICT services accounted for 5% of our consolidated operating revenuesfor the year ended December 31, 2006 and 2% for each of the years ended December 31,2005 and 2004.

 

**Strengths**

 

We believe our business ischaracterized by the following competitive strengths:

 

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

 

•        *Leading Market Shares*.  With approximately 26 million fixed line andcellular subscribers as at December 31, 2006, we have the leading marketposition in both the fixed line and cellular markets in the Philippines.  

 

•        *Diversified Revenue Sources*.  As a result of the continued growth of cellularservice in the country, approximately 63% of our consolidated operating revenuesin 2006 were derived from our wireless business segment.  Fixed line revenues,which represented 32% and 36% of our consolidated operating revenues in 2006and 2005, respectively, have remained stable over the past three years despitepressures on traditional fixed line voice revenues, resulting from increases inour fixed line data and other network services.  We continue to identify anddevelop new revenue sources from our cellular, fixed line and ICT businesses.

 

•        *Advanced Integrated Network*.  With one of the most advanced and extensivetelecommunications networks in the Philippines, we are able to offer a widearray of communications services.  We are enhancing the capabilities of ourfixed line and wireless networks to allow us to better exploit this competitivestrength and achieve higher levels of network efficiency in providing voice anddata services.  In addition, we have commenced the upgrade to Next GenerationNetwork, or NGN, and the roll out of 3G and wireless broadband in order toincrease broadband subscribers, and expand our data/broadband capabilities.

 

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

 

•        *Strong Strategic Relationship*.  We have important strategic relationships with NTTCommunications, DoCoMo and First Pacific.  The technological support,international experience and management expertise made available to us throughthese strategic relationships enhance our market leadership and ability toprovide and cross-sell a more complete range of products and services.

 

**Strategy**

 

Thekey elements of our business strategy are:

 

•        *Build on our leading positionsin the fixed line and wireless businesses*.  We plan to build on our position as the leading provider of fixedline service in the Philippines by continuing to launch new products andservices to increase subscriber value and utilization of our existingfacilities and equipment at reduced cost.  We plan to build on our position asthe leading wireless service provider in the Philippines by continuing tointroduce new products and services to increase our subscribers' use of ournetwork for both voice and data, as well as their reliance on our services.  Weare currently upgrading our fixed line facilities to NGN, and have rolled out a3G network based on a W-CDMA technology as well as expanding our DSL andwireless broadband facilities.  Our operating target is to continue growth inprofitability by increasing our revenues while controlling our costs.

 

•        *Capitalize on our strength asan integrated provider of telecommunications services*.  We offer the broadest range of telecommunicationsservices among all operators in the Philippines.  We plan to capitalize on thisposition to maximize revenue opportunities by bundling and cross-selling ourproducts and services between, and by developing convergent products thatfeature the combined benefits of voice and data, fixed line, wireless and ICTservices utilizing our network and business platforms.  We are also loweringour costs by integrating the operations of our different businesses.

 

•        *Strengthen our leading positionin the data market*.  Leveraging onthe inherent strength of our fixed line business, we are committed to furtherdevelop, enhance and lead our fastest growing business segment – data and othernetwork services.  Consistent with our strategy of introducing innovativeproducts and services using advanced technology, we have launched variousproducts and services that address different market needs.  

 

•        *Maintain a strong financialposition and improve shareholder returns.  *Since 2002, we have significantly improved ourfinancial position by utilizing our cash flows principally for debt reduction. As the cash flows generated by our businesses have increased and ourleverage ratios have improved, we were able to restore the payment of commondividends to our shareholders beginning 2005.  Since then, we haveincreased our dividend payout to common shareholders from 10% of 2004 earningsto 40% of 2005 earnings and to 60% of 2006 earnings.  We expect thata greater proportion of our free cash flows in succeeding years will beutilized for the payment of common dividends and investments in new growthareas while continuing to maintain a healthy balance sheet position.

** **

**Business**

** **

***Wireless***

 

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

 

*Cellular Service*

** **

*Overview*

** **

Ourcellular business, which we provide through Smart and Piltel to over 24 millionsubscribers, approximately 99% of whom are prepaid subscribers, is focused onproviding wireless voice communications, wireless data communications(primarily through text messaging) and a variety of other value-added services,which includes (a) *Mobile Banking* (banking services delivered over the cellularnetwork); (b) specialized content such as ringtones, logos, caller ringbacktunes; (c) *Smart Money*; (d) international roaming; and (e) games andother VAS developed on Smart’s platform.  Smart services approximately sevenmillion subscribers of Piltel on its GSM network through a facilities serviceagreement with Piltel, under the brand name *Talk ‘N Text*.

 

Thefollowing table summarizes key measures of Smart’s and Piltel’s cellularbusiness as at and for the years ended December 31, 2006, 2005 and 2004:

 

 

**Years Ended December 31,**

 

**2006**

**2005**

**2004**

Systemwide cellular subscriber base

24,175,384

20,408,621

19,208,232

Smart

17,201,005

15,424,196

14,595,782

Prepaid

16,882,442

15,144,118

14,321,288

Postpaid

318,563

280,078

274,494

Piltel(1)

6,974,379

4,984,425

4,612,450

Growth rate of cellular subscribers

18%

6%

48%

Smart

12%

6%

45%

Piltel(1)

40%

8%

61%

Cellular revenues (in millions)

Php77,627

Php74,229

Php72,532

Service

75,605

71,518

66,421

Non-service

 

 

 

Cellular handset sales 

2,022

2,711

6,111

Percentage of cellular revenues to total service revenues 

58%

59%

61%

_____________

 

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

* *

*ServicePlans*.  Smart and its service brands are strong and widely recognized brandnames in the Philippines.  Smart’s approach has been to methodically segmentthe market and tailor services and content appropriate to each particularniche.  One of the best examples of Smart’s successful market segmentationstrategy is *Talk ‘N Text*, the brand carried by Smart’s subsidiary,Piltel.  *Talk ‘N Text* is aimed at the lower-income markets with theobjective of serving as a flanker brand against our competition.  Capitalizingon the Filipino’s love for pop culture, *Talk ‘N Text* extensively useslocal celebrities as its endorsers and the vernacular in its advertising andpromotional campaigns.  With approximately seven million subscribers, *Talk ‘NText* has the third-largest GSM subscriber base in the Philippines.

 

Onthe postpaid side, we have *Smart Gold,* which serves the broad postpaidmarket, and*Smart Infinity,*a premium postpaid plan targeting affluent individuals 35 years and above whoare highly mobile locally and internationally.  *Smart Infinity* offersaround-the-clock dedicated personal concierge service, international assistanceservices, premium handset packages and exclusive lifestyle content.  

 

*VoiceServices.*Cellular voice servicescomprise local (including Smart-and Piltel-to-fixed lines calls and Smart-andPiltel-to-other mobile operators calls), national long distance andinternational long distance calls.  Voice services remains a major contributorto revenues, generating a total of Php35,221million, or 45%, and Php35,444 million, or 48%, of cellular service revenues in2006 and 2005, respectively.  Local calls continue to dominate outbound trafficwith 67% of all outbound minutes originating from our cellular service.  In2006, traffic volumes from local calls totaled 3,362 million minutes comparedto 3,658 million minutes in 2005.  National long distance traffic volumes for2006 stood at 73 million minutes compared to 80 million minutes in 2005.Outbound international long distance decreased to 2% from 4% in 2005 of totaloutbound traffic with 165 million minutes and 169 million minutes generated in2006 and 2005, respectively.  The ratio of inbound-to-outbound internationallong distance minutes was 12.5:1 for 2006, compared to 9.2:1 in 2005.

 

*TextMessaging Service and Other Value-added Services*.  The Philippines cellular market is one of the most text messaging-intensive markets in theworld, totaling approximately a billion text messages per day.  Text messagingis extremely popular in the Philippines, particularly on the prepaid platform,as it provides a convenient and inexpensive alternative to voice and e-mailbased communications.  Text messaging also utilizes less network capacity thanvoice, thereby increasing network efficiency.

 

Textmessaging has been one of the key drivers for our cellular subscriber growth.  Strong volume growth in text messaging contributedsignificantly to Smart's cellular revenue growth in 2006, generating revenuesof Php34,403 million, an increase of Php3,594 million, or 12%, over 2005.During 2006, Smart and Piltel's text messaging systems handled over 32,052million outbound messages on standard SMS services and another 203,669million messages generated through bucket-priced text services.  Thiscompares to 40,781 million outbound messages on standard SMS services in 2005and 52,373 million outbound messages generated through bucket-priced textservices.  Unlimited and bucket-priced SMS services were only made available inMarch 2005.

 

In 2005, Smart launched a series of promotions to testthe market demand for fixed rate or “bucket” plans for voice and text.  Bucketpricing promotions have now become a key driver for subscriber activations andusage stimulation.  

 

In addition, in 2006, Smart focused on segmenting itsmarket by offering sector-specific, value-driven packages providing a fixednumber of messages with prescribed validity periods.  

 

Thesuccess of text messaging is a strong indicator of future data usage potentialin this market.  In 2006, approximately 51% of Smart’s cellular revenues werederived from data usage, compared to 48% in 2005.  

 

Smarthas recognized early the importance of diversified and innovative products andservices as a competitive advantage in gaining and retaining market share aswell as improving profitability.  Smart has diversified its wireless datarevenues beyond text messaging and leads the market in terms of enhanced dataservices.  Its catalog of innovations include the award-winning *Smart Money*(a mobile cash card) and *Smart Load* (an over-the-air electronic loadingfacility), both of which were honored by the World GSM Congress in 2001 and2004, respectively, as “Most Innovative Service for Consumers.”  *Smart Load*has revolutionized the mobile industry with its adaptation of the “sachet”concept in consumer goods to air time reloads.  The concept has since beenemulated by other Asian operators and is regionally referred to as “microprepaid reloads”.  Smart subsequently introduced *Pasa Load*, a derivativeservice of *Smart Load*, which allows for air time load transfers betweensubscribers.  Smart also offers the following value-added cellular services:

 

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

 

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

 

•     *Smart Padala*, one of the many innovative initiatives from our *SmartMoney* platform, is the first cash remittance service through text and isfaster and cheaper than traditional remittance arrangements.  It was launchedinitially as an international remittance service for overseas Filipino workersbut is now available for domestic remittances as well.

 

Wealso offer value-added services such as voice mail, information-on-demand,which is a service that allows subscribers to order information from ourcontent providers whenever desired, *TextMail*, which is a service thatallows subscribers to send and receive text messages through their personalcomputers and location-based services, and *Voice Text*, which allows subscribersto record a voice message of up to 30 seconds and send it as a text message.In addition, Smart has a number of interactive activities, such as text gamesand chat services, developed on its own platforms.

 

Consistentwith Smart’s objective to develop new businesses, Smart introduced in 2006 a“fixed wireless” broadband service under the brand *SmartBro* tocomplement PLDT’s DSL in areas that are currently not covered by the fixed linenetwork.  *SmartBro*is rapidly increasing network coverage in order toretain “first mover” advantage in areas with limited or no fixed line orbroadband coverage.  *SmartBro* is also pioneering a shared access modelin order to propagate broadband and address affordability barriers.

 

Also, Smart rolled out *Smart Click*, a chain ofmobile Internet cafés.  *Smart Click* Internet cafés are housed inair-conditioned 40-foot container vans designed to provide remote communitieswith high-speed, wireless Internet access nationwide.  *Smart Click* hasestablished 19 mobile Internet cafés as at December 31, 2006.

 

Dueto the high level of text messaging service usage, we believe that thePhilippine market is well suited for text-based informational and e-commerceservices.  Our current approach is to continue maximizing our GSM, or 2G,services while upgrading our network to Enhanced Data for GSM Evolution, orEDGE.  EDGE is a technology that would further increase the speed and data capabilityof our GSM network.  In addition, on December 29, 2005, Smart was awarded a 3Glicense by the NTC after being ranked highest by the NTC in garnering a perfectscore on a 30-point grading system designed to gauge the capability oftelecommunication operators to effectively provide extensive 3G services.  As aresult of the perfect ranking, Smart received the largest radio frequencyallocation of 15 MHz as well as first choice of frequency spectrum.  Smartchose the 1920-1935 MHz and 2110-2125 MHz spectrum, the range that would bestenable it to rapidly deploy its 3G network nationwide and at the same timeoffer the highest quality of 3G service.

 

Smart further expanded its rosterof services with the commercial launch of its 3G services in May 2006.  Theseservices include video calling, video streaming, high speed Internet browsingand special 3G content downloads, each offered at rates similar to those of 2Gservices, and make Smart the first mobile operator in the Philippines to offer 3G services to the public.

 

*Ratesand Discounts*

 

Our current policy is torecognize a prepaid subscriber as “active” only when the subscriber activatesand uses the SIM card and reloads it at least once during the month of initialactivation or in the immediately succeeding month.  A prepaid cellularsubscriber is disconnected if the subscriber does not reload within four monthsafter the full usage or expiry of the last reload.

 

Ourprepaid cards are sold in denominations of Php300, Php500 and Php1,000,respectively.  The stored value of a prepaid card generally remains valid for aperiod of two months from the time a subscriber activates the card.  In 2003,we introduced *Smart Load*, an “over-the-air” electronic loading facility,which allows consumers to reload prepaid cards with denominations ranging fromPhp10 to Php 300 and with different expiration periods depending on thedenomination of the reload. Moreover, *Pasa Load*, a derivative service,allows prepaid subscribers to transfer even smaller denominations to other prepaidsubscribers.  Our prepaid subscribers are charged between Php5.50 per minute andPhp6.50 per minute for calls within our wireless network and between Php5.50 perminute and Php6.50 per minute for calls terminating to other cellular or fixedline networks.  Voice tariffs on our various prepaid voice packages range froma low of Php5.50 for four 15-second on-net calls to Php20 for three 3-minuteon-net calls, valid for one day.

 

Weoffer both flat rate, or regular, and consumable postpaid plans with monthlyservice fees ranging from Php500 to Php8,000.  These plans are available with varying amounts of free airtime and text messages and different rates beyond the free minutes and textmessages, depending on the monthly service fee.  Monthly service fees for flatrate, or regular, plans are applicable only to local calls and text messagesand for consumable plans to all voice calls, text messages (both local andinternational) and value-added services.

 

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

 

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

 

Wealso launch from time to time various promotions to stimulate usage and subscribergrowth.

* *

Wesell our cellular services primarily through a network of independent dealersand distributors that generally have their own retail networks, direct salesforces and sub-dealers.  We currently have nine major dealers, two of which areexclusive.  These dealers include major distributors of cellular handsets whosemain focus are telecommunications outlets.  Account managers from our salesforce manage the distribution network and regularly update these businesspartners on upcoming marketing strategies, promotional campaigns and newproducts introductions.  With the introduction of *Smart Load* in May2003, Smart moved into a new realm of distribution.  These over-the-airreloads, which were based on the “sachet” marketing concept of consumer goodssuch as shampoo and ketchup, required a distribution network that approximatesthose of fast-moving consumer goods companies.  Starting with just 50,000outlets when it was launched, *Smart Load*’s distribution network nowencompasses over 800,000 retail agents, 80% of which are micro businesses(e.g., neighborhood stores, individual entrepreneurs, individual rovingagents).  These micro-retailers must be affiliated with any of Smart’sauthorized dealers, distributors, sub-dealers or agents.  With the prepaidreloading distribution network now extended to corner store and individualretailer levels and minimum reloading denominations as low as Php10, Smart’sprepaid service becomes even more affordable and accessible to subscribers.

 

Forprepaid services, we grant discounts to dealers for prepaid phone kits, airtime cards and over-the-air reloads sold.  Smart and Piltel compensate dealers withPhp800 in cash per prepaid phone kit sold.  An additional 1% discount based onthe suggested retail price is given on cash purchases.  Air time cards andover-the-air reloads are sold to distributors at volume discounts determined bythe value of the cards purchased by the distributors.  Discounts given for airtime cards sold range from 8% to 8.4% while discounts on over-the-air reloadsrange from 2.5% to 5%.  Air time cards cannot be returned or refunded andnormally expire within six to 12 months after release from the Smart warehouse.

* *

*Wireless Broadband, Satellite, VSAT and Other Services*

* *

*Overview*

 

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

 

*MabuhaySatellite*

 

MabuhaySatellite is engaged in the control and operation of the Agila II satellite.Commencing commercial operations in January 1998, Agila II is the Philippines' first communication satellite.  Mabuhay Satellite leases satellite space segmentsin both the C and Ku bands on Agila II.  Through Agila II, Mabuhay Satellitealso offers Internet backbone access, video and data broadcasting, andbandwidth-on-demand, facilitating communication links betweentelecommunications, broadcast and other public utility companies operating inthe Asia-Pacific region.  In 2006, Mabuhay Satellite generated revenues ofPhp1,157 million and posted a net loss of Php1,499 million.

 

*Telesat*

 

Telesat operates a nationwide communications satellitenetwork using VSAT technology.  Telesat offers voice, facsimile and datatransmission services throughout the Philippines, including areas that areunderserved or unserved by local fixed line operators.  In 2006, Telesatgenerated revenues of Php9 million and posted a net loss of Php51 million.

 

Using VSAT technology, we also provide the followingservices:

 

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

 

•     private point-to-point services;and

 

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

 

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

 

*ACeS Philippines*

 

ACeS Philippines currently owns approximately 36.99% of AIL.  In 2006, ACeSPhilippines generated revenues of Php430 million and posted a net income ofPhp159 million.  AIL aims to develop and implement a satellite-basedcommunications system to provide services to users in the Asia-Pacific regionthrough the Garuda I satellite, or ACeS System and ACeS Service.  AIL hasentered into interconnection agreements and roaming service agreements withPLDT and other major telecommunications operators that will allow ACeS servicesubscribers to access GSM terrestrial cellular systems in addition to the ACeS system.Further, AIL has an Air Time Purchase Agreement, or ATPA, with National ServiceProviders in Asia, including PLDT.  For further discussion regarding the ATPA,please see Item 5. “Operating and Financial Review and Prospects — Liquidityand Capital Resources — Contractual Obligations and Commercial Commitments —Contractual Obligations — Unconditional Purchase Obligations — Air TimePurchase Agreement with AIL” below and*Note 16 – Related Party Transactions*to the accompanying consolidated financial statements in Item 18.

 

As part of the consolidation process of the PLDTGroup’s wireless business, ACeS Philippines’ operations has been integratedinto Smart.  This operational integration effectively gives Smart the widestservice coverage in the Philippines through the combination of ACeS Philippinessatellite phone service and Smart’s cellular service.

 

*Smart Broadband*

* *

SmartBroadband is engaged in providing wireless broadband and data services toresidential consumers as well as small and medium-scale enterprises in the Philippines.  As of December 31, 2006, Smart Broadband had 121,867 wireless broadbandsubscribers, of which 120,659 residential subscribers are under the brand name *SmartBro (*formerly *Smart WiFi)*.  *Smart Bro* aims to strengthenSmart’s position in the wireless data segment and complements PLDT’s *myDSL*service in areas where the latter is not available.   

 

*SmartBro* offers two packages for its wireless broadband service:

 

•     *Smart Bro* Plan 999, which is geared towards consumers andprovides Internet speeds of up to 384 kbps; and

 

•     *Smart Bro* Computer Station Plan 2600, which is gearedtowards entrepreneurs and includes a monthly subscription, hardware, software andmerchandising materials.

 

*Wolfpac*

* *

Wolfpac is primarily engaged in thebusiness of consumer mobile applications software development and consumermobile content development and other allied services.  Wolfpac is one of theleading content providers and the only Philippine content provider to have beennominated twice at the annual GSM Congress for successes in applicationdevelopments.  Wolfpac generated revenues of Php7 million and posted a net lossof Php119 million in 2006.  It aims to provide Smart to have a direct link tothe content development community, a key differentiator in wirelesscommunication service.  The company has various agreements with third partiesfor musical compositions, original sound recordings, original movies, callerringtune and other services.

 

*PLDTWeRoam*

 

Wealso offer *PLDT WeRoam,*or*WeRoam*, a wireless broadband serviceoffering running on Smart's nationwide wireless network (using GPRS, EDGE and WiFitechnologies) and PLDT's extensive IP infrastructure.  *WeRoam* providesworkers and remote offices, of large, medium and small businesses, withcontinuous wireless data connectivity from wherever the users may be to theircorporate headquarters’ Intranet and/or the global Internet.  Inaddition, we expanded the *PLDT Innovation Laboratory*, or *PLDTInnolab*, in Manila in partnership with the leading technology companies inthe country.  With the expanded *PLDT Innolab*, more clients as wellas people from the academe and government can now be accommodated and canexperience more on-line industry solutions.

 

InFebruary 2006, *WeRoam* introduced a prepaid option with bundled laptops featuringeasy payment plans in alliances with PC vendors across the country.  In July2006, *WeRoam* also made higher speed wireless broadband available to themarket with the launch of the *WeRoam 3G/HSDPA* service.

 

*Revenues*

 

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

 

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

 

•        revenues generated from Telesat'snationwide satellite network; 

 

•        revenues generated from ACeS Philippines’satellite phone service;

 

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

 

•        revenues generated from Wolfpacfor wireless data content.

 

*Rates*

 

MabuhaySatellite leases its transponders to third parties at average annual rates ofapproximately US$0.9 million and approximately US$0.7 million for its C-bandand Ku-band transponders, respectively.  Telesat provides its VSAT services ona cost plus mark-up basis.  ACeS service mobile subscribers are chargedPhp13.84 per minute for local and cell-to-cell calls and for national directdial services, while residential subscribers are charged peak-hour rates ofPhp13.00 per minute and off-peak hour rates of Php8.00 per minute for domesticcalls regardless of destination.  For ACeS system public calling offices,callers are charged Php4.50 and Php7.00 per minute for calls terminating tofixed line and cellular networks, respectively.  Rates for international longdistance calls depend on the country of termination and range from US$0.35 perminute for frequently called countries to US$0.85 per minute for lessfrequently called countries.

** **
SmartBroadband offers its wireless broadband and data services for residentialconsumers as well as small and medium-scale enterprises.  The wirelessbroadband service for residential consumers is branded as *Smart Bro* andoffers a maximum speed of 384 kbps for Php999 per month.  Monthly service feesfor corporate data services range from Php2,200 to Php48,000 depending on theconnection speed requirements.  

 

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

** **

*WeRoam*postpaid offers several packages for its wireless broadband service thatinclude unlimited Internet access with speeds ranging from 40 kbps to 1.8 Mbpswith monthly recurring fees of Php1,000 to Php1,700 depending on the type ofplan selected.

** **

*WeRoam*prepaid offers several packages that include the GPRS/EDGE card and an airtime value for three, six and 12 months with monthly subscription fees based onan initial air time value ranging from Php10,860 to Php20,940.  Once theinitial air time value expires, continued use of the service requires *WeLoad*or reloading of additional air time value with different denominations andexpiration periods.

 

***FixedLine***

 

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

 

*Local Exchange Service*

 

*Overview*

 

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

 

The following table summarizes key measures of ourlocal exchange service segment as at and for the years ended December 31, 2006,2005 and 2004:

 

 

**Years Ended December 31,**

 

**2006**

**2005**

**2004**

 

 

 

 

Number of fixed  line subscribers (at year-end)(1)

1,776,647

1,842,507

1,834,306

Number of fixed line employees (at year-end)

8,711

9,197

9,692

Number of fixed line subscribers per employee

204

200

189

Total local exchange revenues (in millions)

Php16,993

Php20,229

Php20,606

Local exchange revenues as a percentage of total service revenues 

13%

16%

17%

Local exchange revenues as a percentage of total fixed line service revenues

35%

41%

42%

____________

*(1) Previously set forth asnumber of fixed lines in service, this was restated in 2006 to reflect the effectof the change in parameters used to align with the PLDT Group’s policy onsubscriber count with the planned use of an integrated billing system for oursubscribers.*

 

We also provide local exchange services through oursubsidiaries ClarkTel, SubicTel, Maratel and Piltel.  Together, thesesubsidiaries account for approximately 4% of our consolidated fixed linesubscribers.

 

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

 

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

 

*Rates*

 

Asat December 31, 2006, basic monthly charges for our local exchange service inthe Metropolitan Manila area were Php594.17 for a single-party residential lineand Php1,237.27 for a single business line.  Monthly charges vary according tothe type of customer (business or residential) and location, with charges forurban customers generally being higher than those for rural/provincial customers.Regular installation charges amount to Php1,999 for residential customers andPhp3,500 for business customers.  New products launched on promotion orproducts bundled on existing services usually waive the installation fee orallow for a minimal installation fee of Php500.  Other than basic monthlycharges, we do not charge our postpaid subscribers for local calls.  

 

Pursuantto a currency exchange rate mechanism authorized by the NTC, we adjust ourmonthly local exchange service rates according to changes in the peso-to-U.S.dollar exchange rate.  Under the authorization granted to us by the NTC, we arepermitted to increase and are required to decrease these rates by 1% for everyPhp0.10 change in the exchange rate relative to a base exchange rate of Php11to US$1.00.  In 2006, we implemented eight downward adjustments and threeupward adjustments in our monthly local service rates.  During 2005, weimplemented three upward and six downward adjustments in our monthly localexchange service rates.  

 

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

 

Ourprepaid fixed line customers generally do not pay a basic monthly charge andare charged based on usage.  Prepaid fixed line customers are generally chargedbased on usage at a rate of Php1.00 per minute for local calls.  Subscribers of*TelePwede*, our upgraded prepaid fixed line service, are charged amonthly fee of Php115 per month to receive incoming calls and are charged perusage for outgoing calls with varying charges depending on the destination andnetwork of termination.  The international and national long distance rates wecharge to our prepaid fixed line customers are similar to the rates we charge toour postpaid customers.  (For a detailed description of these rates, see “—International Long Distance Service — Rates” and “— National Long DistanceService — Rates.”)  Prepaid phone kits, each containing Php500 worth ofpre-stored call credits, are sold for Php1,900 per unit.

* *

*International Long Distance Service*

 

*Overview*

 

Our international long distanceservice consists of voice and packet-based voice and data services that gothrough our international gateway facilities.  We also generate internationallong distance revenues through access charges paid to us by other Philippinetelecommunications carriers for incoming international voice calls thatterminate to our local exchange network.  Our packet-based voice and dataservices are transmitted over our existing traditional circuits, VoIP systemsand the network of a consortium of dominant Asian carriers in which PLDT is amember.

 

Thefollowing table shows certain information about our international long distancebusiness as at and for the years ended December 31, 2006, 2005 and 2004:

 

 

**Years Ended December 31,**

 

**2006**

**2005**

**2004**

 

 

 

 

Total call volumes (million minutes)

2,177

2,266

2,373

Inbound call volumes (million minutes)

1,984

2,117

2,216

Outbound call volumes (million minutes)

193

149

157

Inbound-outbound call ratio

10.3:1

14.2:1

14.1:1

Total international long distance service revenues (in millions)

Php9,933

Php12,245

Php12,804

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

7%

10%

11%

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

20%

25%

26%

 

Internationallong distance service historically has been a major source of our revenue.However, due to the steep decline in inbound termination and collection ratesand intense competition, revenues derived from our international long distanceservice have been declining.  We adopted a two-pronged initiative in early 2000with respect to inbound international service to try to address this issue.First, we lowered our inbound termination rates at that time; by reducing ourrates, we reduced the incentive for unauthorized traffic termination and bypassroutings by toll bypass operators, and therefore were able to recover some losttraffic; and secondly, we intensified our efforts to identify and containunauthorized traffic termination and bypass through more effective monitoringof our international trunks, leased lines and local network.  Internationalsimple resale operation occurs when a company rents an international leasedline from a Philippine international gateway operator, aggregates trafficoutside the Philippines and carries and terminates this traffic at the local publicswitch telephone network in the Philippines.  This termination of otherunauthorized and international simple resale can be used to bypass the localaccess charge system and is illegal in the Philippines.

 

Weare more selective in accepting incoming traffic from new and startup carriers,particularly second and third tier international carriers.  In addition, weadopted a policy requiring prepayment from certain second and third tierinternational carriers as a prerequisite for accepting their incoming traffic.

 

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

 

To stimulate call volume growth and prevent furthererosion in our share of outbound international call traffic, we have introduceda number of marketing initiatives, including substantial cuts in internationaldirect dialing rates, innovative pricing packages for large accounts andloyalty programs for some customers.

 

The table below sets forth the net settlement amountsfor international calls handled by PLDT, by country, for the years endedDecember 31, 2006, 2005 and 2004:

 

 

**Net Settlement**

 

**Years Ended December 31,**

 

**2006**

**2005**

**2004**

 

 

**(in millions)**

 

 

 

 

 

United States

US$54

USS$75

US$75

Saudi Arabia

27

21

18

Canada

18

11

10

United Arab Emirates

15

17

13

Japan

12

25

17

Italy 

11

16

16

Hong Kong

8

10

7

Kuwait

5

4

4

Taiwan

4

5

6

Others

31

31

64

Total

US$185

US$215

US$230

 

*Rates*
 

SinceFebruary 1, 2003, a substantial portion of PLDT’s international inbound trafficterminating on its fixed line network is charged US$0.12 per minute.  

 

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

 

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

 

Toaddress the market’s demand for low-priced international calls, PLDT enhanced the*Budget Card*, a prepaid call card, offering a reduced IDD rate of Php5per minute as a promotional offer starting September 24, 2005 for calls to 89overseas destinations including the United States, Canada, Japan and China*.*  Beginning March 4, 2006, the *Budget Card* IDD rates have been furtheradjusted to Php3, Php5 and Php8 per minute, depending on the destination, andnow permits calls to 100 overseas destinations.  *Budget Cards* are soldin denominations of Php200 and Php100 and must be consumed within 30 days fromfirst use.

* *

*National Long DistanceService*

 

*Overview*

 

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

 

The following table shows our national long distancecall volumes and revenues as at and for the years ended December 31, 2006, 2005and 2004:

 

 

**Years Ended December 31,**

 

**2006**

**2005**

**2004**

 

 

 

 

Total call volumes (million minutes)

2,251

2,348

1,930

Total national long distance service revenues (in millions)

Php6,920

Php5,254

Php6,736

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

5%

4%

6%

National long distance service revenue as a percentage of fixed line service revenues

14%

11%

14%

 

A substantial portion of our national long distancecalls were direct-dialed calls.  Operator-assisted calls are charged based on aminimum of three minutes plus operator charges, while direct-dialed calls arecharged on a less costly per minute basis. Cellular substitution and thewidespread availability and growing popularity of alternative, more economicalnon-voice means of communications, particularly e-mailing and cellular textmessaging, have negatively affected our national long distance call volumes.The integration of some of our local exchanges into a single local callingarea, as approved by the NTC, has also negatively affected our national longdistance call volumes and, consequently, our revenues.  Because of thisintegration, calls between two exchanges located within the same province areno longer considered national long distance calls but are treated as localcalls.

 

*Rates*

 

Rates for national long distance calls are based ontype of service, such as whether the call is operator-assisted ordirect-dialed.  In line with its move towards rate simplification, PLDTsimplified these rates to a flat rate of Php4.50 per minute effective November2, 2001.  At the same time, PLDT simplified its rates for calls terminating tocellular subscribers from a range of Php10.00 per minute to Php16.00 per minuteto a uniform rate of Php13.75 per minute.  EffectiveMarch 1, 2003, PLDT increased the rate for calls terminating to other localexchange carriers from a flat rate of Php4.50per minute to Php5.00 per minute.  Inaddition, NDD calls originating from and terminatingto PLDT was also adjusted to Php5.00 perminute from a flat rate of Php4.50 per minuteeffective June 8, 2003.  

 

Inaddition, PLDT launches from time to time promotions, such as flat ratepromotions for unlimited calls from PLDT subscribers terminating to PLDT andSmart and *Talk ‘N Text* subscribers, to stimulate fixed line usage.

 

OnJanuary 7, 2006, the Php10 per call to PLDT, Smart and *Talk ‘N Text*subscriberspromotion was made permanent with an optional Php50 monthly service fee forthose who may want to avail themselves of the service.  The offer introduced a permanentshift from “per minute” charging and allows PLDT fixed line subscribers accessto approximately 26 million PLDT, Smart and *Talk ‘N Text* subscribers ata lower rate.  The Php10 per call offer for calls to Smart and *Talk ‘N Text*subscribers was capped, limiting enrollees to those who registered on or beforeFebruary 24, 2006.  PLDT fixed line subscribers, however, can still registerand avail themselves of the unlimited Php10 per call service for national longdistance calls within the PLDT network.

 

Wecontinue to evaluate the present rate structure of fixed line from per minutetoll charges to single rate for unlimited calls.  This is envisioned to make fixedline rates competitive with VoIP rates and to revitalize interest in fixed lineusage.  We continue studying various pricing models in respect of the above newrate plan.

 

PLDTcurrently has interconnection arrangement with the majority of other localexchange carriers, pursuant to which the originating carrier pays: (1) ahauling charge of Php0.50 per minute for short-haul traffic or Php1.25 perminute for long-haul traffic to the carrier owning the backbone network; and(2) an access charge of Php1.00 per minute to the terminating carrier.  PLDTstill maintains revenue-sharing arrangements with a few other local exchangecarriers, whereby charges are generally apportioned 30% for the originatingentity, 40% for the backbone owner and the remaining 30% for the terminatingentity.  For more information on these interconnection arrangements, see “––Interconnection Agreements.”

 

*Data and Other Network Services*

 

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

 

Thefollowing table shows our data and other network service revenues for the yearsended December 31, 2006, 2005 and 2004:

 

 

**Years Ended December 31,**

 

**2006**

**2005**

**2004**

 

 

 

 

Consolidated data and other network service revenues (in millions)

Php13,725

Php10,394

Php7,114

Number of DSL broadband subscribers

133,159

88,811

48,289

Number of PLDT Vibe narrowband subscribers

297,250

266,703

257,325

 

Recognizing the growth potential of data and othernetworking services, including IP-based services, and in light of theirimportance to our business strategy, we have been putting considerable emphasison this service segment.  In 2005, this segment registered the highestpercentage growth in revenues among our fixed line services and continued togrow in 2006.

 

Thecontinuous upgrading of our network using next-generation facilities and thecompletion of our domestic fiber optic backbone has enabled us to offer agrowing range of value-added and broadband services.  With this and othertechnological upgrades, our infrastructure has developed from a traditionalvoice facility to a new packet-switched and IP-based network allowing fastertransmission of voice, video and data.  

 

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

 

In2006, we continued to broaden our service offerings with the launch of newservices and with the expansion or enhancement of some of our existing services.

 

InJune 2006, we introduced *Shops.work Unplugged*, or SWUP, to address theneed of retailers and banks for real-time wireless data communication usingSmart’s GPRS/EDGE network and PLDT’s private VPN network.  SWUP is a bundledsolution that offers wireless VPN connections in response to retailers’cashiering point-of-sale networking requirements, the need for back-up remoteconnections to bank automated teller machines, or ATMs, and merchants’ swipecard terminal access needs.  Retailers will now be able to reach out to abigger market in areas where physical connections are unavailable, expand thebanking system with wireless ATMs and release swipe card terminals to moremerchants.

 

Insupport of the growing data requirements of the small and medium enterprisemarket, the network footprints of BRAINS, IP-VPN, *Shops.work*and *Shops.workUnplugged*, or *SWUP.* PLDT’s private local networking services, havebeen expanded with the roll-out of NGN facilities in key business areas acrossthe country.

 

Thecontinued growth in data services revenues can be attributed to several productofferings.  The steady demand for dedicated connectivity or private networkingfrom the corporate market using PLDT’s traditional international and domesticdata offerings, including, among others, Fibernet, Arcstar, Acacia, I-Gate,Diginet, BRAINS, IP-VPN and *Shops.work*, continues to provide us with astable revenue source.  

 

Meanwhile,Digital Network, or Diginet, our domestic private leased line service, has beenproviding Smart’s increasing fiber optic and leased line data requirements.

*** ***

***Information andCommunications Technology***

*** ***

Weconduct our information and communications technology, or ICT, businessesthrough our wholly-owned subsidiary ePLDT.  ePLDT is a broad-based integratedinformation and communications technology company, focusing on infrastructureand solutions for Internet applications, Internet protocol-, or IP-, basedsolutions and multimedia content delivery.  ePLDT's principal businesses arethe operation of (a) call centers through Vocativ, Parlance and *Ventus*,(b) BPO, through SPi, (c) an Internet data center under the brand name *Vitro*TM,and (d) Internet and online gaming through Infocom, netGames, Digital Paradise,Digital Paradise Thailand, Level Up! and Airborne Access.  Our ICT segmentregistered revenues of Php6,890 million, Php3,305 million and Php2,401 million,accounting for 5%, 3% and 2% of our consolidated operating revenues for thethree years ended December 31, 2006, 2005 and 2004, respectively.  The increasein the revenue contribution from our information and communication technologysegment was primarily due to the consolidation of SPi, CyMed and Level Up!since their acquisition by ePLDT on July 11, 2006, August 11, 2006 and April30, 2006, respectively, and is expected to increase going forward with thefull-year consolidation of SPi.

 
*Call Centers*
 

We are focused on developing our callcenter business which capitalizes on the availability of English-speakingcollege graduates in the Philippines with a strong customer serviceorientation.  ePLDT has established one umbrella brand name, *ePLDT Ventus*,for all of its call center businesses, including Vocativ and Parlance.  *Ventus*provides offshore, cost-effective contact center outsourcing solutionsspecializing in inbound customer care.  Vocativ provides customer and technicalsupport to its clients in the Philippines, U.S. and U.K., while Parlanceprovides the exclusive customer support and billing requirements to one of thelargest direct-to-home satellite television providers in the U.S.  In aggregate, we own and operate approximately 5,600 seats with 5,130 customer servicerepresentatives, or CSRs, as at December 31, 2006 compared to approximately3,350 seats with 3,625 CSRs as at December 31, 2005.  In 2006, *ePLDT Ventus*launched two new sites bringing our total call center site count to seven as atDecember 31, 2006.  

 

*Business process outsourcing*
 

ePLDTacquired a 100% equity interest in SPi and its direct and indirect Philippineand offshore subsidiaries for a total cash consideration of US$135 million onJuly 11, 2006.  SPi is one of the leading pure-play BPO company and the ninthlargest independent BPO service provider worldwide.  It has operations in 19locations in North America, Europe and Asia.  On August 11, 2006, SPi acquired100% of CyMed, a leading medical transcription company based in Richmond, Virginia, and on April 16, 2007, SPi acquired 100% of Springfield ServiceCorporation, one of the ten largest players in the medical billing and revenuecycle management market.  

 

*Data**Center*

 

ePLDToperates *Vitro*TM, one of the Philippines' first Internet data centers.The Philippine Board of Investments granted *Vitro*TM pioneer status, whichentitles it to tax and other governmental incentives.  *Vitro*TM is aCISCO-certified co-location service provider.  *Vitro*TM providesco-location, web and server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting andwebhosting, shared applications, data disaster recovery and business continuityservices, intrusion detection and Internet protocol security services, as wellas firewall and managed firewall services.

 

*Internet and Online Gaming*
 

ePLDT’sInternet and online gaming business is conducted through several subsidiaries.  ePLDTowns a 99.6% interest in Infocom, one of the country's leading Internet serviceproviders, or ISPs.  Infocom offers consumer prepaid Internet access under thename *WarpSpeed* and *Speed Tipid* and postpaid Internet access;dedicated dial-up and multi-user dial-up corporate leased lines; broadbandInternet access through DSL and cable; and website consulting, development andhosting.  ePLDT also owns a 75% interest in Digital Paradise, an Internet cafébusiness with over 182 branches which assumed the assets of Netopia ComputerTechnologies, Inc. and the brand *Netopia.*ePLDT further holds an80%-interest in netGames, a publisher of Massively Multi-player Online Games inthe Philippines, and is the Philippine licensee of *Khan Online*, thecountry’s first full 3D online game; a 51% interest in Airborne Access, thecountry’s leading operator of WiFi hotspots, which provides wireless Internetaccess in hotspots equipped with Airborne Access WiFi access points and a 60%equity interest in Level Up!, a leading publisher of online games in thePhilippines with about an 80% share of the online gaming market.

 

**Infrastructure**

** **

***Wireless Network Infrastructure*********

 

*Cellular*

 

ThroughSmart, we operate a digital GSM network.  To meet the growing demand forcellular services, Smart has implemented an extensive deployment program forits GSM network covering substantially all of Metro Manila and most of theother population centers in the Philippines.  In 2006, Smart has 42 mobileswitching centers, 61 text messaging service centers and 6,099 base stations inoperation after having added 117 base stations to its nationwide cellularnetwork in 2006.  As at December 31, 2006, Piltel has six active cell sites.

 

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

 

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

 

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

 

Smart was awarded a 3G license by the NTC on December29, 2005.  Smart received the largest radio frequency allocation of 15 MHz aswell as first choice of frequency spectrum.  Smart chose the 1920-1935 MHz and2110-2125 MHz spectrum, the range that would best enable it to rapidly deployits 3G network nationwide and at the same time offer the highest quality of 3Gservice.  Smart has commenced its 3G network roll-out and continues to extendthe reach of its 3G network in various cities and municipalities nationwide,further improving coverage in major urban centers and selected provincialareas. 

 

Smartand Piltel have been co-locating their cell sites where their base stations areinstalled.  As at December 31, 2006, 36 of Smart's mobile switching centers and 193 of Smart'scell sites were housed in PLDT’s fixed line complexes while 242 of Smart’s cellsites were co-located with Piltel.  These operational synergies have allowedSmart to reduce switch installation time from three months to five weeks.

 

*Wireless Broadband, Satellite, VSAT and Other Services*

 

SmartBroadband operates a nationwide broadband wireless Internet data services.  Itis operating in the 2.4, 3.5 and 5.7 Ghz spectrum, supporting its WiFi, Canopyand eventually WiMax services, respectively.  It offers fixed wirelessbroadband Internet connectivity to both residential and corporate clients. Italso maintains and operates WiFi hotspots installations that serve mobile Internetusers.  Almost 2,500 of Smart’s base stations are now wirelessbroadband-capable, covering most of the key cities and the other populatedcenters in the country.  These are strategically co-located in the Smart’scellular base stations that allow it to reach as many subscribers as possible,in the fastest possible way.  For its backbone, it uses the nationwide PLDT andSmart fiber optic and IP backbone that provide substantial bandwidth capacityto utilize and to grow on demand. 

 

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

 

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

 

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

 

***FixedLine Network Infrastructure***

 

*Domestic*

 

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

 

The following table gives some basic measures of thedevelopment of our domestic telephone network as at December 31, 2006, 2005 and2004:

 

 

December 31,

 

**2006**

**2005**

**2004**

 

 

 

 

Number of central office exchanges

184

183

183

Number of fixed line subscribers(1)

1,776,647

1,842,507

1,834,306

Employees per 10,000 local exchange subscribers

49

50

53

_____________

*(1) Previously set forth as number of fixed lines inservice, this was restated in 2006 to reflect the effect of the change inparameters used to align with the PLDT Group’s policy on subscriber count withthe planned use of an integrated billing system for our subscribers.*

 

Wehave our own 6,400-kilometer domestic fiber optic network, or DFON, thecountry's first telecommunications network using fiber optics in deliveringvoice, video, data, and other broadband and multimedia services nationwide.Our fiber optic network employs synchronous digital hierarchy technology toimprove network performance and reduce operating costs.  Our network iscomposed of in-land and submarine cable installations and is configured inseven self-healing rings allowing route delivery even in the event of singlelink failure per ring.  To date, the PLDT DFON is equipped with N x 10 gigabitsper second capacity and is connected directly to four existing internationalsubmarine cable systems.  We use the *CS VEGA*(formerly*CS PLDT)*,a cable ship that we lease from NTT World Engineering Marine Corporationpursuant to a two-year renewal, entered into in January 2006, to a five-yearChartered Arrangement Maintenance Contract that expired in August 2005 tomaintain the 2,400 kilometers of submarine cable comprising the submergedportion of our DFON.  

*** ***

Weare currently upgrading our fixed line facilities to NGN, a broad term forcertain emerging computer network technologies that can encompass voice, dataand video where all information is efficiently transmitted via digital packetsof data.  It is a platform that will allow for more services to be madeavailable to our fixed line subscribers.

 

*International*

 

We provide international network services using ourthree international gateway switching exchanges.  As of December 31, 2006, ourinternational long distance facilities allow direct correspondence with 49countries/territories (representing 89 correspondents) and can reach 420foreign destinations (via direct and transited routes including breakouts)worldwide.  We also own interests in submarine and satellite systems, throughwhich we route most of our international traffic.

 

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

 

**Cable System**

**Countries Being Linked**

 

 

G-P

Guam and the Philippines

Asia-Pacific Cable Network

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

Asia-Pacific Cable Network 2

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

Transpacific Cable No. 5

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

SEA-ME-WE-3

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

PacRim East

Hawaii and New Zealand

Americas Cable 1

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

China-U.S. Cable

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

Columbus II Cable

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

FLAG Cable

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

RJK Cable

Russia, Japan and Korea

Southern Cross Cable

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

TAT 12/13 Cable

U.S. Mainland, UK and France

TVH Cable

Thailand, Vietnam and Hong Kong

EAC Cable

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

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

Japan and the U.S.

 

Additionally, on May 2, 2007, a consortium of seventeenmajor international telecommunication operators, including PLDT, signed anagreement to build the first high-bandwidth optical fiber submarine cable systemlinking Southeast Asia and the U.S.  The cable project, known as the *Asia-AmericaGateway,* will span 20,000 kilometers and will use the latest Dense WavelengthDivision Multiplexing technology to provide upgradeable, future prooftransmission facilities that will support bandwidth requirements for new andrevolutionary broadband applications.  It is expected that the *Asia-AmericaGateway* will cost approximately US$500 million (of which US$50 million representsPLDT’s investment) and will be ready for service by the end of 2008.

 

**Interconnection Agreements**

 

Since the issuance of Executive Order No. 59 in 1993,which requires non-discriminatory interconnection of Philippine carriers'networks, we have entered into bilateral interconnection arrangements withother Philippine fixed line and cellular carriers.  

 

Forlocal calls originating from PLDT and terminating to the cellular networks ofSmart and Globe, Smart and Globe charged PLDT a rate of Php4.50 per minuteeffective January 1, 2002.  Effective January 1, 2004, calls terminating tocellular subscribers originating from fixed line subscribers are charged atermination rate of Php4.00 per minute, a decrease from the previous Php4.50per minute.  

 

Effective January 1, 2003, local access for cellularoperators, including Smart, that terminate calls to PLDT’s fixed line networkincreased from Php2.00 per minute to Php2.50 per minute, which furtherincreased to Php3.00 per minute effective January 1, 2004.

 

Undera separate agreement between PLDT and PAPTELCO, PLDT is the transit facilityprovider between Smart, Globe, other local exchange carriers, or LEC, operatorsand PAPTELCO.  PAPTELCO is comprised of 48 LEC and operating in 144 majortelephone exchanges nationwide.  Transit traffic is a service by PLDT to Smart,Globe, other LEC operators and PAPTELCO members where PAPTELCO members have nodirect interconnection with either Smart, Globe and other LEC operators.

 

EffectiveFebruary 1, 2003, international calls terminating to PLDT’s fixed line networkwere charged a termination rate of US$0.12 per minute, an increase from theprevious rate of US$0.08 per minute.  Also, international calls terminating toSmart’s cellular network were charged a termination rate of US$0.16 per minute,an increase from the previous termination rate of US$0.12 per minute.

 

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

 

**Licenses and Regulation**

 

PLDT,Smart and Piltel provide telecommunications services pursuant to legislativefranchises that currently expire, in the case of PLDT, on November 28, 2028, inthe case of Smart, on March 27, 2017 and, in the case of Piltel, on May 14,2019.  A franchise holder is required to obtain operating authority from theNTC to provide specific telecommunications services.  These approvals may takethe form of a Certificate of Public Convenience and Necessity, or CPCN, or,while an application for a CPCN is pending, a provisional authority to operate.Provisional authorities are typically granted for a period of 18 months.  ThePhilippine Revised Administrative Code of 1987 provides that if the grantee ofa license or permit, such as a CPCN or provisional authority, has made timelyand sufficient application for the extension thereof, the existing CPCN orprovisional authority will not expire until the application is finally decidedupon by the administrative agency concerned.

 

PLDToperates its business pursuant to a number of provisional authorities and CPCNs,the terms of which will expire at various times between now and 2028.  PLDT'sCPCNs to provide services to most of the Metropolitan Manila area, Davao and other Philippine cities expired in 2003.  Although some of PLDT's CPCNs andprovisional authorities have already expired, PLDT filed timely applicationsfor extension of these CPCNs and provisional authorities prior to theirrespective expiration dates and is therefore entitled to continue to conductits business under its existing CPCNs and provisional authorities pending theNTC’s decision on these extensions.  PLDT expects that the NTC will grant theseextensions; however, there can be no assurance that this will occur.  Theperiod of validity of some of PLDT’s CPCNs which expired on November 28, 2003,coterminous with the term of its previous franchise under Republic Act No.6146, has been extended further by the NTC to November 28, 2028, coterminouswith PLDT’s current franchise under Republic Act No. 7082. Motions to extendthe period of validity of the other CPCNs to November 28, 2028 are now pending with the NTC.  See Item 3. “Key Information –– Risks Factors — RisksRelating to Us — Our business is significantly affected by governmental lawsand regulations, including regulations in respect of our franchises, rates andtaxes.”  

 

Smartoperates its cellular, international long distance and national long distanceservices pursuant to CPCNs, the terms of which will expire upon the expirationof its franchise.  On August 26, 2002, Smart was granted a CPCN to install,operate and maintain nationwide global mobile personal communications viasatellite which shall also expire upon expiration of its franchise.  Smart’sprovisional authority to establish, install, maintain, lease and operate aninternational private leased circuit was effective until November 6, 2006.Prior to its expiration, Smart filed for an extension of this provisionalauthority on the issuance of the CPCN, which remains pending.  On July 22, 2002, Smart was granted separate CPCNs to operate a cellular mobile telephonesystem and an international gateway facility.  

 

OnDecember 29, 2005, Smart was awarded a 3G license by the NTC after being rankedhighest in garnering a perfect score on a 30-point grading system designed togauge the capability of telecommunication operators to effectively provideextensive 3G services.  As a result, Smart received the largest radio frequencyallocation of 15 MHz as well as first choice of frequency spectrum.  Smartchose the 1920-1935 MHz and 2110-2125 MHz spectrum. 

 

Under the terms of the 3G license, Smart is requiredto:

 

•        begin installation and rollout of its3G network no later than 18 months from the date of the award;

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

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

 

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

 

Piltelis authorized to provide virtually every type of telecommunications service,including the transmission of voice, data facsimile, audio and video andinformation services, in and between provinces, cities and municipalitiesthroughout the Philippines.  The franchise, which was last amended on May 14,1992, will expire on May 14, 2019 and may be extended by a legislative act ofthe Philippine Congress.

 

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

 

**Carrier**

**Spectrum System**

**Frequency Assignment**

**Bandwidth**

 

 

 

 

Smart

ETACS/GSM 900

897.5-905/942.5-950 MHz

7.5 MHz

 

GSM 1800

1725-1730/1820-1825 MHz

5.0 MHz

 

 

1730-1732.5/1825-1827.5 MHz

2.5 MHz

 

 

1735-1740/1830-1835 MHz

5.0 MHz

 

 

1745-1750/1840-1845 MHz

5.0 MHz

 

 

1780-1782.5/1875-1877.5 MHz

2.5 MHz

 

3G (W-CDMA)

1920-1935/2110-2125 MHz

15.0 MHz

Piltel

AMPS/CDMA

824-835/869-880 MHz

11.0 MHz

 

 

845-846.5/890-891.5 MHz

1.5 MHz

 

 

 

 

Smart Broadband

Wireless broadband

2400-2483.5 MHz *

73 MHz

 

 

3400-3590 MHz *

94 MHz

 

 

5470-5850 MHz *

123 MHz

__________

**    Smart Broadband frequency assignments on thesebands are non-contiguous and on a per station and location basis.*

 

Operatorsof international gateway facilities and cellular telephone operators, pursuantto Executive Order No. 109, are required to install a minimum number of localexchange lines.  Of these new lines, operators are required to install onerural exchange line for every ten urban exchange lines installed.  Smart andPiltel were required to install 700,000 and 400,000 lines, respectively, andeach has received a certificate of compliance from the NTC.

 

PLDT,Smart and Piltel are required to pay various permit, regulation and supervisionfees to the NTC.  PLDT is currently engaged in disputes with the NTC over someof the assessed fees.  For more information on the disputes involving PLDT, seeItem 8. “Financial Information –– Legal Proceedings –– NTC supervision andregulatory fees, or SRF.”

 

OnMay 27, 1998, Smart filed an Urgent Ex Parte Motion and Manifestation regardingthe permit fee in the amount of approximately Php113 million assessed by theNTC for the CPCN pertaining to Smart’s Integrated Local Exchange TelephoneService, Domestic Toll Service and Private Line Service (NTC Case No. 93-482).Smart contended that the fee should have been calculated on the basis of theactual local exchange carrier project cost, and that therefore the fee shouldbe Php70 million.  Although the NTC has not yet resolved this issue, Smart hasalready paid Php50 million in respect of this assessment as of the date offiling this annual report.

 

In a letter dated April 12, 2005, the NTC requestedthat Smart pay the following permit fees in respect of its CPCNs andprovisional authorities:

 

**Case No.**

**Fee**

 

 

93-482

Php62,510,950

94-220

878,830

96-248

6,815,500

Total

Php70,205,280

 

Inits letter dated May 13, 2005, Smart reiterated its petition that the basis forcomputation of the permit fees should be amended and cited the pendency of itsUrgent Ex Parte Motion and Manifestation in NTC Case No. 93-482.

 

In order to diversify the ownership base of publicutilities, the Public Telecommunications Policy Act (R.A. 7925) requires a telecommunications entity with regulated types ofservices to make a public offering through the stock exchanges representing atleast 30% of its aggregate common shares by the later of the following:

 

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

 

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

 

PLDTand Piltel have complied with this requirement.  As Smart has not conducted apublic offering of its shares by August 2004, the Philippine Congress mayrevoke the franchise of Smart for failure to comply with the requirement underR.A. 7925 to conduct a public offering of its shares by August 2004.  A *quowarranto* case may also be filed against Smart by the Office of theSolicitor General of the Philippines on the ground of violation of R.A. 7925for the failure of Smart to conduct a public offering of its shares by August2004.  However, Smart believes that it did not violate the terms of itsfranchise by not conducting an initial public offering by August 2004.  Smartbelieves that the period stated in R.A. 7925 and in the other legislativefranchises within which to conduct a public offering and listing of shares ofstock of telecommunications companies should be deemed as merely directory andnot mandatory.  The DOJ has rendered an opinion that the three-year periodfixed under the Downstream Oil Industry Deregulation Act of 1998 (R.A. 8479)for the conduct of the initial public offering of shares in entities engaged inthe oil refinery business should be regarded as merely directory.  Smartbelieves that this DOJ opinion should also apply to the period for the conductof initial public offering of telecommunications companies.  Moreover, Smartbelieves that it should be deemed to have complied with the requirement ofmaking a public offering of its shares since PLDT owns 100% of the outstandingshares of Smart.  The purpose of R.A. 7925 in requiring telecommunicationscompanies to make a public offering of their shares, which is to broaden publicownership in telecommunications entities, is already realized as PLDT, apublicly listed company, owns 100% of Smart.  In September 2004, Senate Bill No. 1675 was filedseeking to amend Section 21 of R.A. 7925.  The bill seeks to declare that atelecommunications entity shall be deemed to have complied with the requirementof making a public offering of its shares if two-third of its outstandingvoting stock are owned and controlled directly or indirectly, by a listedcompany.  The bill is currently pending in the Philippine Senate.  PLDT regularly evaluates various strategic optionswith respect to its capital structure.

 

ThePhilippine Congress is considering two bills that relate to the imposition offranchise tax on telecoms companies.  HB No. 1469 proposes to re-impose a5% franchise tax on gross receipts on telephone and telegraph services in lieuof the VAT.  HB No. 1560 proposes a franchise tax at the rate of 3.5% onthe first year and 7% thereafter on the gross receipts of telecoms andbroadcast companies, in lieu of the VAT.  There are also various bills inCongress which propose to tax telecommunications services, among them, theimposition of a tax on mobile phone companies on all text entries to textgames; the imposition of a Php0.50 specific tax on each SMS to be borne by thecellular phone companies; and the imposition of a 10% ad valorem tax on allcellular phone calls using 3G.

 

**Competition**

** **

Theenactment of the Public Telecommunications Policy Act of the Philippines in March 1995 consolidated the government's various policy issuances governing thetelecommunications industry and reaffirmed, among other things, the policy ofliberalizing the industry and opening up the telecommunications market to newentrants.  Including us, there are nine major local exchange carriers, seveninternational gateway facility providers and five cellular service providers inthe country.  Many new entrants into the Philippine telecommunications markethave entered into strategic alliances with foreign telecommunicationscompanies, which provide them access to technological and funding support aswell as service innovations and marketing strategies.  Consequently, we arefacing increasing competition in major segments of the telecommunicationsindustry, particularly data and other network services segments.

 

*Cellular Service*

 

Thereare presently six operating service providers, namely Smart, Piltel, Globe,Islacom, Digitel and Express Telecom.  Globe acquired Islacom (now known as *Innove*)to form into one operating group, while Smart and Piltel, both being part ofthe PLDT Group, formed another operating group.  These two operating groupshave approximately 95% of the Philippine cellular market.  The third activeoperator, Digitel, commenced its cellular service, *SunCellular*, on March 29, 2003 and is estimated to have approximately 5% ofthe cellular market as at December 31, 2006.  In December 2005, the NTC awarded 3G licenses toexisting cellular operators Smart, Globe, Digitel and to a new entrant,Connectivity Unlimited Resources Enterprises, or CURE.  The NTC has yet toaward a fifth license to another operator.

 

Competitionin the cellular industry has intensified with the availability of affordablypriced handsets offering a range of new functions and the introduction bycompetitors of new and improved plans for postpaid subscribers, reduced ratesper minute and aggressive marketing and promotional strategies.  The principalbases of competition are price, including handset cost, quality of service,geographic coverage and attractiveness of packaged services.  Smart's networkleads the industry in terms of coverage with 6,099 base stations as at December31, 2006. 

 

As aresult of competitive pressures, several service providers, including Smart andPiltel, have recently introduced “bucket” plans providing unlimited voice andtext services, and other promotions.  While most of the “bucket” priced planscurrently available in the market are being offered on promotional bases,Smart, Globe and Sun Cellular continue to launch other services that aredesigned to encourage incremental usage from existing subscribers and also toattract new subscribers.  

 

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

 

On February 14, 2006, Smart opened its 3G network in selected keycities nationwide, making video calling, video streaming, high speed Internetbrowsing and special 3G content downloads on its 3G network available tosubscribers with 3G handsets.  Likewise, Globe is currently rolling out its 3Gnetwork.

 

Consistent with industry practice and Smart’s churn management efforts,Smart "locks" the handsets it sells to its subscribers, renderingthem incompatible with SIM cards issued by competitors and thereby hinderingthem from swapping the existing SIM for a SIM of a competing operator.However, subscribers can have their handsets “unlocked” by unauthorized partiesfor a nominal fee and purchase new SIM cards from competing operators.“Unlocking” does not involve significant cost.  Switching to another cellularoperator would, however, result in a change of the subscriber’s cellulartelephone number.

 

FromOctober 2003 to May 2005, “SIM-swapping” became a prevalent promotionalactivity in the cellular industry.  In “SIM-swapping” promotions, prepaidcellular subscribers had the ability to switch from one cellular operator toanother by simply exchanging their current prepaid SIM card for anotheroperator’s SIM card with a certain amount of preloaded air time credits at nocost.  These “SIM-swapping” activities gave rise to a situation where certainsubscribers regularly swapped their SIM card between cellular operators uponfull use of the pre-stored air time. As a result, our cellular subscriber basecontained a certain number of transient subscribers at any one point in time.In May 2005, we terminated our “SIM-swapping” promotions; as a result, ourchurn rates increased in the third and fourth quarters of 2005, but leveled offbeginning in the first quarter of 2006.   

 

*Local Exchange Service*

 

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

 

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

 

*International LongDistance Service*

 

Includingus, there are 11 licensed international gateway facility operators in thecountry.  While we have so far been able to maintain a leadership position inthis highly competitive segment of the industry, in recent years, our marketshare has reduced largely as a result of (1) competition from otherinternational gateway facility operators and illegal international simpleresale operators; (2) an increase in inbound and outbound international longdistance calls terminating to and originating from the growing number ofcellular subscribers; and (3) the popularity of alternative and cheaper modesof communication such as text messaging, e-mail, Internet telephony and theestablishment of virtual private networks for several corporate entities,further heightening the competition.

 

Withrespect to inbound calls into the Philippines, we adopted the U.S. FCCbenchmark accounting rate of US$0.38 per minute for inbound international callswhich represented a settlement rate of US$0.19 per minute, one year ahead ofthe target date of January 1, 2001.  This provided us with increasedflexibility to terminate more U.S. traffic into the Philippines, minimizeunauthorized traffic termination through international simple resale operationsand recover traffic lost due to bypass routings.  We have also established,through our wholly-owned subsidiary PLDT Global, presence in key citiesoverseas to identify and capture Philippine terminating traffic at its source,maximize the use of our international facilities and develop alternativesources of revenue.  Effective February 1, 2003, after lengthy negotiationswith approximately 100 telecommunications operators around the world, we increasedthe termination rate with carriers accounting for a substantial portion of ourinternational inbound traffic terminating on its fixed line network to US$0.12per minute.  Prior to the increase in termination rates, a substantial portionof PLDT’s international inbound traffic terminating on its fixed line networkwas charged an average termination rate of approximately US$0.08 per minute.See Item 5. “Operating and Financial Review and Prospects ––Results ofOperations –– 2006 Compared to 2005 –– On Business Segment Basis –– Fixed Line–– Operating Revenues –– Service Revenues –– International Long DistanceService” and Item 3. “Key Information –– Risks Factors –– Risks Relating to Us–– Our results of operations have been, and may continue to be, adverselyaffected by competition in international long distance service” for furtherdiscussion.  

 

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

 

*National Long Distance Service*

 

Our national long distance service business has been negativelyaffected by the growing number of cellular subscribers in the Philippines and the widespread availability and growing popularity of alternative economicalnon-voice methods of communication, particularly text messaging and e-mail.  Inaddition, various ISPs have launched voice services via the net to theirsubscribers nationwide.

 

While national longdistance call volumes have been declining, we have remained a leading providerof national long distance service in the Philippines due to our significantsubscriber base and ownership of the Philippines’ most extensive transmissionnetwork.  

 

Data and Other Network Services

 

Another rapidly growing segmentof the industry is the market for data and other network services.  The growthis spurred by the significant growth in consumer/retail narrowband andbroadband Internet access, enterprise resource planning applications, callcenters, BPO, on-line gaming and other e-services that drive the need forbroadband and Internet-protocol based solutions both here and abroad.  Ourmajor competitors in this area are Globe/Innove, Bayan Telecommunications, EasternTelecoms and Digitel.  The principal bases of competition in data servicesmarket are coverage, price, customer service and quality of service.

 

**EnvironmentalMatters**

 

Wehave not been subject to any material fines or legal or regulatory action involvingnon-compliance with environmental regulations of the Philippines.  We are notaware that we are not in compliance in any material respect with relevantenvironmental protection regulations.

 

**Intellectual Property Rights**

 

Wedo not own any material intellectual property rights apart from our brand namesand logos.  We are not dependent on patents, licenses or other intellectualproperty which are material to our business or results of operations, otherthan licenses to use the software that accompany most of our equipmentpurchases.

 

**Properties**

 

Weown four office buildings located in Makati City and own and operate 184exchanges nationwide, of which 61 are located in the Metropolitan Manila area.The remaining 123 exchanges are located in cities and small municipalitiesoutside the Metropolitan Manila area.  We also own radio transmitting andreceiving equipment used for international and domestic communications.  As at December31, 2006, we had 4,377 cellular cell sites and 6,099 base stations.

 

Asat December 31, 2006, our principal properties, excluding property underconstruction, consisted of the following, based on book values:

 

•        67% consisted of cable, wire andcellular facilities, including our domestic fiber optic network, subscribercable facilities, inter-office trunking and toll cable facilities and cellularfacilities;

 

•        18% consisted of central officeequipment, including three international gateway facilities, six pure nationaltoll exchanges and 15 combined local and toll exchanges, and our communicationssatellite;

 

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

 

•        1% consisted of informationorigination and termination equipment, including pay telephones and radioequipment installed for customers use, and cables and wires installed withincustomers' premises; and

 

•        3% consisted of other workequipment.

 

Formore information on these properties, see *Note 7 – Property, Plant andEquipment* to the accompanying consolidated financial statements in Item 18.

 

Theseproperties are located in areas where our subscribers are being served.  In ouropinion, these properties are in good condition, except for ordinary wear andtear, and are adequately insured.

 

Themajority of our connecting lines are above or under public streets andproperties owned by others.

 

PLDT's and Smart’s properties are free from anymortgage, charge, pledge, lien or encumbrance; however, substantial propertiesof Mabuhay Satellite and Piltel are subject to liens while a portion of ePLDT’sproperty is subject to liens.

 

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

 

For more information on the obligations relating tothese properties and long-term obligations, see *Note 21 – ContracualObligations and Commercial Commitments*to the accompanying consolidatedfinancial statements in Item 18.

 

Item 4A.    Unresolved Staff Comments
 

None.

 

**Item 5.       Operatingand Financial Review and Prospects**

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our audited consolidatedfinancial statements (and the related notes) as at December 31, 2006 and 2005and for the years ended December 31, 2006, 2005 and 2004 included elsewhere inthis report.  This discussion contains forward-looking statements that reflectour current views with respect to future events and our future financialperformance.  These statements involve risks and uncertainties, and our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of particular factors such as those set forth under"Forward-Looking Statements" and Item 3. "Key Information — RiskFactors" and elsewhere in this report.  Our audited consolidated financialstatements, and the financial information discussed below, have been preparedin accordance with U.S. GAAP.  For convenience, certain peso financialinformation in the following discussions has been translated to U.S. dollars atthe exchange rate at December 31, 2006 of Php49.045 to US$1.00, as quotedthrough the Philippine Dealing System.*

 

**Overview**

 

Weare the largest and most diversified telecommunications company in the Philippines.  We have organized our business into three main segments which serve as thebasis for management’s decision to allocate resources and evaluate operatingperformance:

 

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

 

•        *Fixed Line* — fixed linetelecommunications services are primarily provided through PLDT.  We alsoprovide fixed line services through PLDT’s subsidiaries ClarkTel, SubicTel,Maratel, Piltel and BCC, which together account for approximately 4% of ourconsolidated fixed line subscribers, and PLDT Global; and

 

 

•        *Information and CommunicationsTechnology* — information and communications infrastructure andservices for Internet applications, Internet protocol-based solutions andmultimedia content delivery provided by PLDT’s subsidiary ePLDT; call centerservices provided under *ePLDT Ventus*, including Ventus, Parlance andVocativ; BPO services provided by SPi (consolidated since July 11, 2006);Internet access and gaming services provided by ePLDT’s subsidiaries, Infocom,Digital Paradise, Digital Paradise Thailand, netGames, Airborne Access andLevel Up!; and e-commerce, and IT-related services provided by other investeesof ePLDT, as discussed in *Note 8 – Investments*to the accompanyingconsolidated financial statements in Item 18.

 

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

 

***Wireless***

 

We provide cellular and wirelessbroadband, satellite, VSAT and other services under our wireless business, withcellular contributing about 96% and the remaining wireless servicescontributing approximately 4% of our wireless service revenues, respectively,in 2006.  Rapid growth in the cellular market has resulted in a change in ourrevenue composition and sources of our revenue growth.  Starting in 2003,cellular service has been our major revenue source surpassing fixed linerevenues.  As of December 31, 2006, Smart and Piltel, which offer servicesusing Smart’s network, had the largest and third largest cellular subscriberbases, respectively, in the Philippines.  In addition, Smart’s and Piltel’ssubscribers increased by 18% in 2006, resulting in our aggregate system-widecellular subscribers outnumbering our fixed line in service by more than 14 to1 at the end of 2006, which was higher than the increases of Smart’s andPiltel’s subscriber base of 6% in 2005 but lower than the increase of Smart’sand Piltel’s subscriber base of 48% in 2004.  Cellular data services, whichinclude all text messaging and text-related services ranging from ordinary textto value-added services, contributed significantly to our cellular revenueincrease.  Our wireless operating revenues remained stable and accounted for 63%,62% and 61% of our consolidated operating revenues for each of the years endedDecember 31, 2006, 2005 and 2004, respectively.

 

***Fixed Line***

 

Ourfixed line business provides local exchange service, international and nationallong distance services, data and other network services and miscellaneousservices.  Our fixed line operating revenues accounted for 32%, 36% and 37% of ourconsolidated operating revenues for the years ended December 31, 2006, 2005 and2004, respectively.  Local exchange revenues have declined owing to shift insubscriber preference from postpaid to prepaid service with lower averagerevenue per user, or ARPUs.  National and international long distance revenueshave also been declining largely due to a drop in call volumes as a result ofalternative means of communications such as texting, e-mailing and Internettelephony.  Mitigating these declines was the steady growth of our data andother network services over the recent years.  Recognizing the growth potentialof the data and other network services segment, we have put considerableemphasis on the development of new packet-switched, data-capable and IP-basednetworks.

 

***Information andCommunications Technology***

* *

Weconduct our ICT businesses through ePLDT.  ePLDT’s principal businesses are theoperation of an Internet data center under the brand name *Vitro*TM;one umbrella brand name, *ePLDT Ventus*, for all of its call centerbusinesses, including Ventus, Vocativ and Parlance; BPO provided by SPiTechnologies, Inc., or SPi; Internet and online gaming through Infocom, DigitalParadise and Digital Paradise Thailand, netGames, Level Up! and AirborneAccess.  The revenue contribution of our information and communicationstechnology segment accounted for 5% of our consolidated operating revenues forthe year ended December 31, 2006, and 2% of our consolidated operating revenuesfor each of the years ended December 31, 2005 and 2004.  The increase in therevenue contribution from our information and communication technology segmentwas primarily due to the consolidation of SPi since its acquisition by ePLDT onJuly 11, 2006, and is expected to increase going forward with the full-yearconsolidation of SPi.****

 

**Critical AccountingPolicies**

 

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

 

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

* *

*Revenue Recognition*

 

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

 

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

 

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

 

*Estimating Useful Lives ofProperty, Plant and Equipment*

 

Weestimate the useful lives of our property, plant and equipment based on theperiods 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 and commercial obsolescence and legal and other limitations on theuse of our assets.  It is possible, however, that future results of operationscould be materially affected by changes in our estimates brought about bychanges in factors mentioned above.  The amounts and timing of recordedexpenses for any period would be affected by changes in these factors andcircumstances.  A reduction in theestimated useful lives of our property, plant and equipment would increase ourrecorded operating expenses and decrease our noncurrent assets.  Total carryingvalues of property, plant and equipment amounted to Php164,081 million and Php173,007million as at December 31, 2006 and 2005, respectively.

 

Asset Impairment 

 

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

 

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

 

The preparation of estimatedfuture cash flows involves significant judgments and estimations. While webelieve that our assumptions are appropriate and reasonable, significantchanges in our assumptions may materially affect our assessment of recoverablevalues and may lead to future additional impairment charges under U.S. GAAP.

* *

Totalcarrying values of goodwill and other intangible assets as at December 31, 2006and 2005 amounted to Php27,241 million and Php16,875 million, respectively.

* *

Financial Assets and Liabilities

 

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

 

Total fair value of financial assets andliabilities as at December 31, 2006 amounted to Php35,952 million and Php104,862million, respectively, while the total fair value of financial assets andliabilities as at December 31, 2005 amounted to Php43,459 million and Php150,077million, respectively.

* *

*Estimating Allowance forDoubtful Accounts*

 

We estimate the allowance fordoubtful accounts related to our trade receivables based on two methods.  Theamounts calculated using each of these methods are combined to determine thetotal amount we reserve.  First, we evaluate specific accounts where we haveinformation that certain customers are unable to meet their financialobligations.  In these cases, we use judgment, based on the best availablefacts and circumstances, including but not limited to, the length of ourrelationship with the customer and the customer’s current credit status basedon third party credit reports and known market factors, to record specificreserves for customers against amounts due to reduce our receivables to amountsthat we expect to collect.  These specific reserves are re-evaluated andadjusted as additional information received affects the amounts estimated.  Second,a provision is established as a certain percentage of operating revenues basedon the aging profile of receivables.  This percentage is based on a collectiveassessment of historical collection, write-off experience, current economictrends, changes in our customer payment terms and other factors that may affectour ability to collect payments.  Full allowance is provided for receivablesfrom permanently disconnected subscribers and carriers.  Such permanentdisconnections generally occur within 105 days from the date payment was due.Partial allowance is provided for active subscribers and carriers based on theage status of receivables.

 

Theamounts and timing of recorded expenses for any period would differ if we madedifferent judgments or utilized different estimates.  An increase in ourallowance for doubtful accounts would increase our recorded expenses anddecrease our current assets.  Provisionfor doubtful accounts amounted to 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 Php10,158 million and Php7,856 million as at December 31, 2006 and 2005,respectively.

 

*Investments*

* *

Thevarious interests that we hold in companies are accounted for under three methods: consolidation, equity method and cost method.  The method of accountingapplied to investments involves an evaluation of the significant terms of theinvestments that explicitly grant or suggest evidence of control or significantinfluence over the operations of the investees.  Consolidated investmentsinclude our controlled subsidiaries.  Investments in businesses which we do notcontrol but have the ability to exercise significant influence over their operatingand financial policies are accounted for using the equity method.  Investmentsin businesses which we do not have the ability to exercise significantinfluence over operating and financial policies are accounted for using thecost method.

 

*Pension Cost and Other Retirement Benefits*

 

Thedetermination of our obligation and cost for pension and other retirementbenefits is dependent on our selection of certain assumptions used by actuariesin calculating such amounts.  Those assumptions are described in *Note 17 –Employee Benefits*to the accompanying consolidated financial statements inItem 18, and include, among other things, discount rates, expected returns onplan assets and rates of compensation increases.  In accordance with U.S. GAAP,actual results that differ from our assumptions are recognized as income or expensewhen the net cumulative unrecognized actuarial gains and losses at the end ofthe previous reporting period exceeded 10% of the higher of the defined benefitobligation and the fair value of plan assets at that date.  While we believethat our assumptions are reasonable and appropriate, significant differences inour actual experience or significant changes in our assumptions may materiallyaffect our pension and other retirement obligations.  The accrued benefit cost as at December 31, 2006 and2005 amounted to Php7,627 million and Php2,421 million, respectively.  SFAS No.158 “Employees’ Accounting for Defined Benefit Pension and Other Post retirementPlans” which was adopted in 2006 requires the recognition of the unfunded statusof a benefit plan, and therefore no unrecognized net actuarial loss wasrecognized as at December 31, 2006.  Unrecognized net actuarial gain as atDecember 31, 2005 amounted to Php116 million.  

 

Deferred Tax Assets

 

We review the carrying amounts of our deferred taxassets at each balance sheet date and reduce these to the extent that it is nolonger probable that sufficient taxable income will be available to allow allor part of the deferred tax assets to be utilized.  Our assessment on the recognition of deferred taxassets on deductible temporary differences is based on the forecasted taxableincome of the subsequent reporting periods.  This forecast is based on our pastresults and future expectations on revenues and expenses.  Management believesthat we will not have sufficient future taxable income to utilize the benefitsof deductible temporary differences and there is no assurance that we willgenerate sufficient taxable income to allow all or part of our deferred taxassets to be utilized.

 

Asat December 31, 2006 and 2005, our net deferred tax assets amounted to Php25,366million and Php23,406 million, respectively, net of valuation allowanceamounting to Php299 million and Php5,732 million, respectively.

 

*Legal Contingencies*

* *

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

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

 

***Recently AdoptedAccounting Pronouncements***

 

EffectiveJanuary 1, 2006, we adopted SFAS No. 123 (R), “Share-Based Payment”, whichrevises SFAS No. 123. This statement requires an entity to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award and to recognize that cost over theperiod that an employee is required to provide service in exchange for theaward.  Any awards of liability instruments to employees would be measured atfair value at each reporting date through settlement. We adopted SFAS No. 123 (R)using the modified prospective transition method, and accordingly, the resultsof prior periods have not been restated. This method requires that theprovisions of SFAS No. 123 (R) are applied only to unvested share-based awards asof January 1, 2006. The cumulative effect of adoption of SFAS No. 123 (R) onprior years resulted in a change in our reported net income of Php189 million(net of income taxes of Php93 million and Php1.02 per share) in 2006, whichrepresents the difference between the intrinsic value and the fair value of theliability award on January 1, 2006.

 

In September2006, the Financial Accounting Standards Board, or FASB, issued SFAS 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans – An amendment of FASB Statements Nos. 87, 88, 106 and 132(R).”  Weadopted SFAS 158 as effective on December 31, 2006.  See *Note 17 –– EmployeeBenefits*.  Additionally, in  September 2006, the U.S. Securities andExchange Commission issued Staff Accounting Bulletin, or SAB, No. 108,” Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.” SAB 108 was effective for us upon adoptionon December 31, 2006. SAB 108 did not have a material effect on our financialposition or results of operations.  Effective January 1, 2006, we adopted FASBInterpretation, or FIN, No. 47, “Accounting for Conditional Asset RetirementObligations, an interpretation of SFAS 143.”  The adoption of SFAS 143 did nothad material effect on our financial position or results of operations in 2006.

 

InMay 2005, the FASB, as part of an effort to conform to international accountingstandards, issued SFAS 154, “Accounting Changes and Error Corrections”, whichwas effective for us beginning on January 1, 2006. SFAS 154 requires that allvoluntary changes in accounting principles be retrospectively applied to priorfinancial statements as if that principle had always been used, unless it isimpracticable to do so. When it is impracticable to calculate the effects onall prior periods, SFAS 154 requires that the new principle be applied to theearliest period practicable. The adoption of SFAS 154 did not have a materialeffect on our consolidated financial statements in 2006.

 

***New AccountingPronouncements Effective Subsequent to 2006***

 

In February 2006, FASB issued SFAS 155, “Accountingfor Certain Hybrid Financial Instruments,” an amendment to SFAS 133 and FAS140.  SFAS 155 permits an entity to elect fair value remeasurement for anyhybrid financial instrument (with changes in fair value recognized in earnings)if the hybrid instrument contains an embedded derivative that would otherwisebe required to be bifurcated and accounted for separately under SFAS 133.  Theelection to measure the hybrid instrument at fair value is made on aninstrument-by-instrument basis and is irreversible.  The statement will beeffective for all financial instruments acquired, issued, or subject to aremeasurement event occurring after the beginning of an entity’s fiscal yearsbeginning after September 15, 2006, with earlier adoption permitted as of thebeginning of fiscal year, provided that financial statements for any interimperiod of that fiscal year have not been issued.  We are currently in the process ofevaluating any effect of the adoption of FAS 155 will have on our consolidatedfinancial statements.

 

In June 2006, the EITF reached a consensus on IssueNo. 06-3, “How Taxes Collected from Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross VersusNet Presentation)”.  EITF Issue No. 06-3 requires that companies disclose theiraccounting policy regarding the gross or net presentation of certain taxes.Taxes within the scope of EITF Issue No. 06-3 are any tax assessed by agovernmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer and may include, but is not limitedto, sales, use, value added and some excise taxes.  EITF Issue No. 06-3 iseffective for our reporting period beginning January 1, 2007.  We are currentlyin the process of determining the impact of this issue on our consolidatedfinancial statements.

 

In June 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes”, or FIN 48, an interpretation of SFAS No. 109,“Accounting for Income Taxes”.  FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with SFAS No. 109, and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  FIN 48 is effectivefor our reporting period beginning January 1, 2007.  We are currently in theprocess of determining the impact of the adoption of this Interpretation on ourconsolidated financial statements. 

 

In September 2006, FASB issued SFAS 157, “Fair ValueMeasurements”.  This statement applies whenever other standards require (orpermit) assets or liabilities to be measured at fair value.  Under thisstatement, fair value refers to the price that would be received to sell an assetor paid to transfer a liability in an orderly transaction between marketparticipants in the market in which the reporting entity transacts.  Thisstatement clarifies the principle that fair value should be based on theassumptions market participants would use when pricing the asset or liability.In support of this principle, the standard establishes a fair value hierarchythat prioritizes the information used to develop those assumptions.  The fairvalue hierarchy gives the highest priority to quoted prices in active marketsand the lowest priority to unobservable data, for example, the reportingentity’s own data.  Under this statement, fair value measurements would beseparately disclosed by level within the fair value hierarchy.  This statementwill become effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and with interim periods within those fiscalyears.  Early adoption is permitted.  We are currently in the process ofevaluating the impact of this statement on our consolidated financialstatements. 

 

In September 2006, the Emerging Issues Task Force, orEITF, reached a consensus on Issue No. 06-1, “Accounting for ConsiderationGiven by a Service Provider to Manufacturers or Resellers of Equipment Necessaryfor an End-Customer to Receive Service from the Service Provider”.  EITF IssueNo. 06-1 provides guidance regarding whether the consideration given by aservice provider to a manufacturer or reseller of specialized equipment shouldbe characterized as a reduction of revenue or an expense.  This issue iseffective for our reporting period beginning January 1, 2008.  Entities arerequired to recognize the effects of applying this issue as a change inaccounting principle through retrospective application to all prior periodsunless it is impracticable to do so.  We are currently in the process ofevaluating the impact of this issue on our consolidated financial statements.

 

**Results of Operations**

 

We have reclassified certain accounts in 2005 and 2004to conform with our 2006 financial statement presentation.

 

The following table shows thecontribution by each of our business segments to our consolidated operatingrevenues, expenses and net income for each of the years ended December 31, 2006,2005 and 2004.  Most of our revenues are derived from our operations within the Philippines.  Our revenues derived from outside the Philippines consist primarily of revenues from incoming international calls to the Philippines.

 

 

Wireless

 

Fixed Line

 

ICT

 

Inter-segment  Transactions

 

Total

 

(in millions)

For the year ended December 31, 2006

** **

** **

** **

** **

** **

** **

** **

** **

** **

Operating Revenues 

Php80,405

 

Php49,282

 

Php6,890

 

(Php9,041)

 

Php127,536

Service

78,383

 

49,203

 

6,337

 

(8,919)

 

125,004

Non-service

2,022

 

79

 

553

 

(122)

 

2,532

Operating Expenses

42,271

 

39,086

 

7,142

 

(9,142)

 

79,357

Net Income (Loss)

32,918

 

923

 

(243)

 

–

 

33,598

For the year ended December 31, 2005

** **

** **

** **

** **

** **

** **

** **

** **

** **

Operating Revenues 

76,906

 

49,472

 

3,305

 

(6,348)

 

123,335

Service

74,195

 

49,431

 

2,953

 

(6,231)

 

120,348

Non-service

2,711

 

41

 

352

 

(117)

 

2,987

Operating Expenses

39,436

 

38,989

 

3,253

 

(6,857)

 

74,821

Net Income 

35,830

 

4,660

 

113

 

–

 

40,603

For the year ended December 31, 2004

 

 

 

 

 

 

 

 

 

Operating Revenues 

74,764

 

48,546

 

2,401

 

(4,538)

 

121,173

Service

68,653

 

48,546

 

2,080

 

(4,375)

 

114,904

Non-service

6,111

 

–

 

321

 

(163)

 

6,269

Operating Expenses

41,598

 

32,027

 

3,035

 

(4,026)

 

72,634

Net Income (Loss) 

27,559

 

1,241

 

(699)

 

–

 

28,101

 

**2006 Compared to 2005**

 

**On a Consolidated Basis**

 

***Consolidated OperatingRevenues***

** **

Ourconsolidated operating revenues for 2006 increased by Php4,201 million, or 3%,to Php127,536 million in 2006 from Php123,335 million in 2005.  This increase was higher than the increase in ourconsolidated operating revenues in 2005, primarily due to an increase in ourICT revenues largely due to the consolidation of SPi, CyMed and Level Up!,continued increase in our call center revenues and the continued growth of ourwireless business.  The revenuecontribution of our wireless business accounted for 63% and 62% of ourconsolidated operating revenues for 2006 and 2005, respectively.

** **

The following table shows the breakdown of ourconsolidated operating revenues for the years ended December 31, 2006 and 2005by business segment:

** **

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php80,405

 

63

 

Php76,906

 

62

 

Php3,499

 

5

Fixed line

49,282

 

39

 

49,472

 

40

 

(190)

 

–

Information and communications technology 

6,890

 

5

 

3,305

 

3

 

3,585

 

108

Inter-segment transactions

(9,041)

 

(7)

 

(6,348)

 

(5)

 

(2,693)

 

42

Total

Php127,536

 

100

 

Php123,335

 

100

 

Php4,201

 

3

 

***Consolidated Operating Expenses***

 

Our consolidated operating expenses in 2006 increasedby Php4,536 million, or 6%, to Php79,357 million from Php74,821 million in 2005.The increase was primarly due to higher operating expenses associated with our threebusiness segments primarily due to an increase in compensation and employeebenefits, primarily resulting from the effect of collective bargainingagreement-related increases in salaries and benefits, an increase in incentiveplan-related accruals, the consolidation of SPi, CyMed and Level Up!, andhigher accrued bonuses, pension benefits, long-term incentive plan costs and otheremployee benefits.  We currently expect these expenses to be significantlyhigher going forward as a result of the full year consolidation of SPi, CyMedand Level Up!.  As a percentage of our consolidated operating revenues,consolidated operating expenses increased to 62% in 2006 from 61% in 2005.

 

The following table shows the breakdown of ourconsolidated operating expenses for the years ended December 31, 2006 and 2005by business segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php42,271

 

53

 

Php39,436

 

53

 

Php2,835

 

7

Fixed line

39,086

 

49

 

38,989

 

52

 

97

 

–

Information and communications technology 

7,142

 

9

 

3,253

 

4

 

3,889

 

120

Inter-segment transactions

(9,142)

 

(11)

 

(6,857)

 

(9)

 

(2,285)

 

33

Total

Php79,357

 

100

 

Php74,821

 

100

 

Php4,536

 

6

 

***Consolidated Operating Income***

 

Our consolidated operating income in 2006 was Php48,179million, a decrease of Php335 million, or 1%, compared to Php48,514 million in2005 as a result of a 6% increase in our consolidated operating expenses whichmore than offset the 3% increase in our consolidated operating revenues.

 

***Consolidated Financing Costs***

 

Financingcosts on a consolidated basis decreased by Php964 million, or 28%, to Php2,459million primarily due to lower interest expense and related items owing tolower debt balances in 2006 compared with 2005 and lower accretion on financialliabilities due to lower levels of debt issuance costs, partially offset by lowerforeign exchange gains as a result of lower foreign currency debt levels.

 

***Consolidated InterestIncome***

 

Interestincome on a consolidated basis decreased by Php35 million, or 2%, to Php1,422million in 2006 from Php1,457 million in 2005 mainly attributable to higher levelsof short-term investments which resulted in lower interest income.

 

***Consolidated Loss (Gain)on Derivative Transactions***

 

Losson derivative transactions on a consolidated basis amounted to Php6,857 millionin 2006, an increase of Php5,056 million, or 281%, compared to Php1,801 millionin 2005 primarily due to mark-to-market loss from principal only swaps as aresult of the peso appreciation in 2006 and lower interest differential betweenpeso and U.S. dollar interest rates. 

 

***Consolidated OtherIncome - Net***

 

Otherincome on a consolidated basis totaled Php3,595 million in 2006, an increase ofPhp2,579 million, or 254%, compared to Php1,016 million in 2005.  The increasewas primarily due to the recognition of a gain of Php1,698 million on earlysettlement by Piltel of its restructured debt, a gain on disposal of propertyand equipment of Php355 million, a gain relating to a refund from ManilaElectric Company, or Meralco, of Php194 million recorded at fair value in 2006(payable by Meralco over four years) and a gain on disposal of materials.  

 

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

 

Our income before income tax, cumulativeeffect of change in accounting policy and minority interest in net loss(income) of consolidated subsidiaries in 2006 was Php43,828 million, a decreaseof Php1,942 million, or 4%, from Php45,770 million in 2005, primarily due tothe increase of Php5,056 million in loss on derivative transactions in 2006 anda slightly lower operating income, partially offset by an increase in our otherincome due to the recognition of a gainof Php1,698 million on early settlement by Piltel of its restructured debtand a significant decline in our financing costsowing to lower interest expense and related items in 2006.

 

***Provision for Income Tax***

 

Provisionfor income tax increased by Php4,197 million, or 87%, to Php9,046 million in2006 compared to Php4,849 million in 2005 mainly due to lower non-taxdeductible charges, partially offset bythe reversal of a valuation allowance of deferred tax assets in relation withthe likelihood that Piltel would be able to realize the future tax benefits onthese assets.  We currently expect that our effective corporate tax rate willbe higher going forward than in previous years due to the expiration of Smart’sincome tax holiday.

 

***Consolidated Net Income***

 

As aresult, our consolidated net income in 2006 was Php33,598 million, a decreaseof Php7,005 million, or 17%, compared to Php40,603 million in 2005.  Thefollowing table shows the breakdown of our consolidated net income for theyears ended December 31, 2006 and 2005 by business segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php32,918

 

98

 

Php35,830

 

88

 

(Php2,912)

 

(8)

Fixed line

923

 

3

 

4,660

 

12

 

(3,737)

 

(80)

Information and communications technology 

(243)

 

(1)

 

113

 

–

 

(356)

 

(315)

Total

Php33,598

 

100

 

Php40,603

 

100

 

(Php7,005)

 

(17)

 

**On Business Segment Basis**

 

**Wireless**

* *

***Operating Revenues***

 

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

 

Thefollowing table summarizes our total operating service and non-service revenuesfrom our wireless business for the years ended December 31, 2006 and 2005 byservice segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php75,605

 

94

 

Php71,518

 

93

 

Php4,087

 

6

Wireless broadband, satellite, VSAT and others

2,778

 

3

 

2,677

 

3

 

101

 

4

 

78,383

 

97

 

74,195

 

96

 

4,188

 

6

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

2,022

 

3

 

2,711

 

4

 

(689)

 

(25)

Total Wireless Operating Revenues 

Php80,405

 

100

 

Php76,906

 

100

 

Php3,499

 

5

 

ServiceRevenues

 

Our wireless service revenues increasedby Php4,188 million, or 6%, to Php78,383 million in 2006 compared to Php74,195million in 2005 mainly as a result of the continued growth of Smart’s andPiltel’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 operating revenues, wireless service revenuesincreased to 97% in 2006 from 96% in 2005. 

 

*Cellular Service*

 

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

 

Our cellular service revenues consist of:

 

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

 

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

 

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

 

•        other charges, including those forreconnection and migration. 

 

Our cellular service revenues in 2006 amounted to Php75,605million, an increase of Php4,087 million, or 6%, from Php71,518 million in 2005.Cellular service revenues accounted for 94% and 93% of our total wirelessoperating revenues in 2006 and 2005, respectively.  The increase in cellularservice revenues was primarily due to the continued growth of Smart’s andPiltel’s subscriber base.  As at December31, 2006, Smart and Piltel cellular subscribers totaled 24,175,384, an increaseof 3,766,763, or 18%, over their combined cellular subscriber base of20,408,621 as at December 31, 2005.  

 

The table below shows our cellular subscribers base asat December 31, 2006 and 2005:

 

 

**As at 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

 

Of our 24,175,384 subscribers as at December 31, 2006,prepaid subscribers accounted for approximately 99% while postpaid subscribersaccounted for the remaining 1%.  Our cellular prepaid subscriber base grew by19% to 23,856,821 as at December 31, 2006 from 20,128,543 as at December 31,2005, whereas our postpaid subscriber base increased by 14% to 318,563 as atDecember 31, 2006 from 280,078 as at December 31, 2005.  Smart’s prepaid andpostpaid net subscriber activations totaled 1,738,324 and 38,485, respectively,in 2006, or a quarterly average addition of 434,581 prepaid and 9,621 postpaidsubscribers.  On the other hand, Piltel’s prepaid subscribers increased by 40%to 6,974,379 as at December 31, 2006 from 4,984,425 as at December 31, 2005, ora quarterly average addition of 497,489 subscribers.  Postpaid subscribers asat December 31, 2006 were higher than as at December 31, 2005 primarily due toincreased net activations in the last two quarters of 2006.

 

Our quarterly net subscriber activations (reductions)over the eight quarters in 2006 and 2005 are as follows:

 

 

**2006**

** **

**2005**

 

**1Q**

 

**2Q**

** **

**3Q**

** **

**4Q**

** **

**1Q**

** **

**2Q**

** **

**3Q**

 

**4Q**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid

486,009

 

1,553,570

 

450,553

 

1,238,146

 

1,050,638

 

536,840

 

(11,230)

 

(381,443)

Smart

111,987

 

851,326

 

131,486

 

643,525

 

920,885

 

314,607

 

(53,953)

 

(358,709)

Piltel

374,022

 

702,244

 

319,067

 

594,621

 

129,753

 

222,233

 

42,723

 

(22,734)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid 

5,001

 

11,955

 

13,722

 

7,807

 

(6,357)

 

116

 

10,506

 

1,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

491,010

 

1,565,525

 

464,275

 

1,245,953

 

1,044,281

 

536,956

 

(724)

 

(380,124)

 

*Wireless Broadband,Satellite, VSAT and Other Services*

 

Our revenues from wireless broadband, satellite, VSATand other services consist mainly of rentals received for the lease of MabuhaySatellite’s transponders and Telesat’s VSAT facilities to other companies andwireless broadband service revenues from Smart Broadband, charges for ACeSPhilippines’ satellite phone service and service revenues from PLDT Globalsubsidiary’s mobile virtual network operations.  Smart Broadband offers a number of wireless broadband services and had121,867 subscribers as at December 31, 2006.    

 

Gross service revenues from these services for 2006amounted to Php2,778 million, an increase of Php101 million, or 4%, from Php2,677million in 2005.  The increase was primarily due to the growth in our wirelessbroadband business.

 

*Non-service Revenues*

 

Ourwireless non-service revenues consist of:

 

•        proceeds from sale of cellularhandsets; and

 

•        proceeds from sale of cellularSIM-packs.

 

Our wireless non-service revenues decreased by Php689 million,or 25%, to Php2,022 million in 2006 as compared to Php2,711 millionin 2005 mainly attributable to lower handset sales due to the fact thatactivations in 2006 were primarily driven by more SIM-pack sales.  

 

*Operating Expenses*
 

Operating expenses associated with ourwireless business in 2006 amounted to Php42,271 million, an increase of Php2,835million, or 7%, from Php39,436 million in 2005.  This increase was mainly dueto increases in rent, compensation and benefits, and the recognition of anasset impairment charge, partially offset by decreases in costs of cellularhandsets and SIM-packs sold, cost of satellite air time, taxes and licenses,and selling and promotion.  As a percentage of our total wireless operatingrevenues, operating expenses associated with our wireless business decreased to53% in 2006 from 51% in 2005.   

 

Cellular business expenses accounted for 96% whilewireless broadband, satellite, VSAT and other business expenses accounted for 4%of our wireless business expenses in 2006, compared to 94% and 6%,respectively, in 2005.

*** ***

The following table summarizes our wireless-relatedexpenses for the years ended December 31, 2006 and 2005 and the percentage ofeach expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

9,743

 

23

 

Php9,200

 

23

 

Php543

 

6

Rent

7,887

 

19

 

5,577

 

14

 

2,310

 

41

Compensation and benefits(1)

5,040

 

12

 

4,245

 

11

 

795

 

19

Costs of cellular handsets and SIM-packs sold

4,688

 

11

 

5,827

 

15

 

(1,139)

 

(20)

Repairs and maintenance

3,646

 

9

 

3,667

 

9

 

(21)

 

(1)

Selling and promotions

3,012

 

7

 

3,124

 

8

 

(112)

 

(4)

Professional and other contracted services

1,780

 

4

 

1,608

 

4

 

172

 

11

Asset impairment 

1,391

 

3

 

–

 

–

 

1,391

 

100

Taxes and licenses

1,018

 

2

 

1,538

 

4

 

(520)

 

(34)

Communication, training and travel

891

 

2

 

960

 

2

 

(69)

 

(7)

Insurance and security services

798

 

2

 

947

 

2

 

(149)

 

(16)

Cost of satellite air time

698

 

2

 

1,008

 

3

 

(310)

 

(31)

Provision for doubtful accounts

627

 

1

 

253

 

1

 

374

 

148

Amortization of intangible assets

272

 

1

 

189

 

1

 

83

 

44

Provision for inventory obsolescence

202

 

1

 

322

 

1

 

(120)

 

(37)

Other operating expenses

578

 

1

 

971

 

2

 

(393)

 

(40)

Total 

Php42,271

 

100

 

Php39,436

 

100

 

Php2,835

 

7

__________

* *

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

*** ***

Depreciationand amortization charges increased by Php543 million, or 6%, to Php9,743 millionin 2006, principally due to an increase in our depreciable asset base mainly inour broadband and 3G network, and customer-deployed equipment.  For furtherdetails, see *Note 7 – Property, Plant and Equipment* to the accompanyingconsolidated financial statements in Item 18.

 

Rent expenses increased by Php2,310 million, or 41%,to Php7,887 million on account of an increase in domestic fiber optic network,or DFON, facilities leased by Smart from PLDT, as well as higher satellitetransmission and site rental expenses.  As at December 31, 2006, we had 4,377GSM cell sites and 6,099 base stations, compared with 4,305 GSM cell sites and5,982 base stations as at December 31, 2005.

 

Compensation and benefits expenses increased by Php795million, or 19%, to Php5,040 million, primarily due to higher accrued bonuses,pension benefits, long-term incentive plan costs and other employee benefits ofSmart.  Smart’s employee headcount increased by 219, or 4%, to 5,306 in 2006as compared to 5,087 in 2005.  For further discussion on our long-termincentive plan, please see Item 6. “Directos, Senior Management and Employees–– Long-Term Incentive Plan” and *Note 21 –Employee Benefits* to theaccompanying consolidated financial statements in Item 18.

 

Costof cellular, handsets, and SIM-packs sold decreased by Php1,139 million, or 20%,to Php4,688 million primarily due to a decrease in the volume of phone kitssold and the termination of SIM-swapping activities in May 2005.  

 

Repairs and maintenance expenses decreased by Php21million, or 1%, to Php3,646 million mainly on account of lower repairs andmaintenance costs for network facilities and motor vehicles which more than offsethigher expenses for electricity and power generation as well as highermaintenance expense for IT hardware and software.

 

Selling and promotions expenses decreased by Php112million, or 4%, to Php3,012 million due to lower commission, and advertisingand promotions expenses as well as a decrease in printing costs of prepaidcards.

 

Professionaland other contracted services increased by Php172 million, or 11%, to Php1,780million, primarily due to increased call center, contracted service, marketresearch, consultancy and technical service fees.

 

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 Php520 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.

 

Insurance and security services decreased by Php149million, or 16%, to Php798 million, primarilydue to the decrease in site security expenses and lower amortization charges onprepaid insurance contracts.

 

Costof satellite air time decreased by Php310 million, or 31%, to Php698 milliondue to a reduction of satellite air time cost as a result of the appreciationof the peso in 2006.  See “— Liquidity and Capital Resources — ContractualObligations and Commercial Commitments — Contractual Obligations —Unconditional Purchase Obligations — Air Time Purchase Agreement with AIL” and *Note16 – Related Party Transactions* to the accompanying consolidated financialstatements in Item 18.   

 

Provisionfor doubtful accounts increased by Php374 million, or 148%, to Php627 millionprimarily due to an increase in the provision for subscriber and carrierreceivables coupled with the reversal of the provision for non-tradereceivables booked in 2005.

 

Amortizationof intangible assets increased by Php83 million, or 44%, to Php272 millionmainly due to an increase in the amount of intangible assets recognizedfollowing the purchase of an additional 20% investment in Wolfpac. 

 

Provision for inventory obsolescence decreased by Php120million, or 37%, to Php202 million primarily due to a lower level of obsolete inventoryin 2006.  

 

Otheroperating expenses decreased by Php393 million, or 40%, to Php578 millionprimarily due to various lower business and operational-related expenses suchas bank charges, representation expenses and a loss on share swap in 2005.

 

***Operating Income***

 

Operating income from our wireless business amounted to Php38,134million in 2006, an increase of Php664 million, or 2%, from Php37,470 millionin 2005, which was primarily due to increased revenues, mainly from ourcellular services, partially offset  by higher operating expenses.  

 

***Financing Costs***

*** ***

Financing gain amounted to Php1,359 million in 2006,an increase of Php552 million, or 68%, from Php807 million in 2005 due to thecombined results of lower interest expense owing to lower debt balances andaccretion on financial liabilities as well as higher capitalized interest.  Thebreakdown of our financing costs for our wireless business for the years endedDecember 31, 2006 and 2005 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

 

 

 

 

 

 

Interest on loans and related items

Php716

 

Php1,037

 

(Php321)

 

(31)

Accretion on financial liabilities – net

129

 

248

 

(119)

 

(48)

Financing charges

37

 

52

 

(15)

 

(29)

Capitalized interest 

(248)

 

(85)

 

(163)

 

192

Foreign exchange gains – net

(1,993)

 

(2,059)

 

66

 

(3)

 

(Php1,359)

 

(Php807)

 

(Php552)

 

68

 

***Interest Income***

 

Interest income generated by our wireless businessamounted to Php965 million in 2006, a decrease of Php92 million, or 9%,compared to Php1,057 million in 2005 mainly attributable to Smart’s loweraverage cash balances.

* *
*Loss (Gain) on Derivative Transactions*
 

Gain on derivative transactions increased by Php157million, or 133%, to Php39 million in 2006 as compared to a loss on derivativetransactions of Php118 million in 2005 primarily due to mark-to-market gain fromSmart’s forward foreign exchange contracts as a result of the peso appreciation.

 

*Other Income – Net*
 

Our wireless business segment generated other income -net of Php2,285 million in 2006, an increase of Php993 million, or 77%, fromPhp1,292 million in 2005.  The increasewas primarily due to the recognition of a gain of Php1,698 million on earlysettlement by Piltel of its restructured debt and a reversal of prior years’provision for NTC fees to align with the assessments received in 2005.  

*** ***

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

*** ***

Incomebefore income tax, cumulative effect of change in accounting policy andminority interest in net income (loss) of consolidated subsidiaries increasedby Php2,274 million, or 6%, to Php42,782 million in 2006 compared to Php40,508million in 2005, mainly due to a 5% increase in wireless operating revenues,principally from our cellular business resulting from the continued cellularsubscriber growth in 2006, and an increase in other income.

 

***Provision for Income Tax***

 

Provision for income tax increased by Php4,444million, or 104%, to Php8,729 million in 2006 from Php4,285 million in 2005,primarily due to higher non-tax deductible charges and the net movement indeferred tax assets.  For 2006, the net movement in deferred tax assetsprimarily pertains to deferred tax assets recognized in relation to the benefitto be derived from the disposal of certain of Piltel’s assets with the liftingof certain mortgage trust indenture restrictions resulting from the fullprepayment of Piltel’s restructured debt on December 4, 2006.  We currentlyexpect that our effective corporate tax rate will be higher going forward thanin previous years due to the expiration of Smart’s income tax holiday.

 

***Net Income***

 

Ourwireless business segment recorded a net income of Php32,918 million in 2006, adecrease of Php2,912 million, or 8%, over Php35,830 million registered in 2005 asthe increase in our cellular revenues and our other income was more than offsetby an increase in operating expenses and higher provision for income tax.

 

Fixed Line
 

***Operating Revenues***

*** ***

Our fixed line business provides localexchange service, international and national long distance services, data andother network services, and miscellaneous services.  Total fixed line revenuesgenerated from our fixed line business in 2006 totaled Php49,282 million, a decreaseof Php190 million from Php49,472 million in 2005.  As a percentage of our totaloperating revenues, fixed line revenues decreased to 36% in 2006 from 38% in2005, principally due to the continued growth of our wireless business.  

 

The following table summarizes total operatingrevenues from our fixed line business for the years ended December 31, 2006 and2005, respectively, by service segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**%**

** **

**2005**

** **

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php16,993

 

35

 

Php20,229

 

41

 

(Php3,236)

 

(16)

International long distance

9,933

 

20

 

12,245

 

25

 

(2,312)

 

(19)

National long distance

6,920

 

14

 

5,254

 

11

 

1,666

 

32

Data and other network

13,725

 

28

 

10,394

 

21

 

3,331

 

32

Miscellaneous

1,632

 

3

 

1,309

 

2

 

323

 

25

 

49,203

 

100

 

49,431

 

100

 

(228)

 

–

Non-Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets

79

 

–

 

41

 

–

 

38

 

93

Total Fixed Line Operating Revenues 

Php49,282

 

100

 

Php49,472

 

100

 

(Php190)

 

–

 

*Service Revenues*

 

*Local Exchange Service*

 

Our local exchange service revenues consist of: 

 

•        flat monthly fees for our postpaidservice; 

 

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

 

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

 

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

 

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

 

The following table summarizes key measures of ourlocal exchange service business segment as at and for the years ended December31, 2006 and 2005, respectively:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated local exchange service revenues (in millions)

Php16,993

 

Php20,229

 

(Php3,236)

 

(16)

Number of fixed line subscribers(1)

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

204

 

200

 

4

 

2

_____________

*(1) Previously set forth as number of fixed lines inservice.  2006 was restated to reflect the effect of the change in parametersused to align with the PLDT Group’s policy on subscriber count with the planneduse of an integrated billing system for our subscribers.*

 

Revenues from our local exchange service decreased byPhp3,236 million, or 16%, to Php16,993 million in 2006 from Php20,229 millionin 2005.  The decrease was primarily due to a 4% decline in the number of fixedline subscribers and the appreciation of the peso which required us to makedownward adjustments in our monthly local service rates.  The percentagecontribution of local exchange revenues to our total fixed line service revenuesdecreased to 35% in 2006 as compared to 41% in 2005.

 

Asat December 31, 2006, postpaid and prepaid fixed line subscribers totaled 1,450,331and 326,316, respectively, which accounted for approximately 82 % and 18 %,respectively, of our total fixed line subscribers.

 

Pursuant to a currency exchange rate adjustmentmechanism authorized by the Philippine National Telecommunications Commission,or the NTC, we adjust our postpaid monthly local service rates upward ordownward by 1% for every Php0.10 change in the peso-to-dollar exchange raterelative to a base rate of Php11.00 to US$1.00.  In 2006, we implemented eightdownward adjustments and three upward adjustments in our monthly local servicerates, while there were six downward adjustments and three upward adjustmentsin 2005.  The average Philippine peso to U.S. dollar rate factored in ourmonthly local service rates in 2006 was Php51.53 to US$1.00, compared to anaverage of Php55.21 to US$1.00 in 2005.  This change in the averagepeso-to-dollar rate translated to a peso appreciation of 7%, which resulted ina net decrease of approximately 6% in our average monthly local service ratesin 2006.

 

*InternationalLong Distance Service*

 

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

 

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

 

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

 

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

 

The following table shows information about ourinternational fixed line long distance business for the years ended December31, 2006 and 2005, respectively:

 

** **

**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 total international long distance service revenuesdecreased by Php2,312 million, or 19%, to Php9,933 million in 2006 fromPhp12,245 million in 2005, primarily due to the peso appreciation, a decreasein average termination rates for inbound calls and a decline in inbound callvolumes largely as a result of alternative means of communications such ase-mailing, texting and Internet telephony.  The percentage contribution ofinternational long distance service revenues to our total fixed line servicerevenues 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 thePhilippine peso to the U.S. dollar with average rates of Php51.165 in 2006 andPhp55.006 in 2005 contributed to the decrease in our inbound international longdistance revenues in peso terms, since settlement charges for inbound calls arebilled in U.S. dollars or in special drawing rights, an established method ofsettlement among international telecommunications carriers using values basedon a basket of foreign currencies that are translated into pesos at the time ofbilling.

 

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 the significantincrease in outbound international call volumes in 2006.

 

*NationalLong Distance Service*

*** ***

Ournational long distance service revenues consist of:

*** ***

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

 

•        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 nationallong distance service revenues and call volumes for the years ended December31, 2006 and 2005, respectively:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2006**

** **

**2005**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php6,920

 

Php5,254

 

Php1,666

 

32

National long distance call volumes (in million minutes)

2,251

 

2,348

 

(97)

 

(4)

 

Our national long distance service revenues increasedby Php1,666 million, or 32%, to Php6,920 million in 2006 from Php5,254 millionin 2005, primarily due to higher average revenue per minute in 2006 due to thechange in mechanics in our Php10 per call promotion which more than offset thedecrease in call volumes.  In 2005, the Php10 per call promotion was open toall PLDT Group fixed line subscribers nationwide while in 2006, the Php10 percall service was made available only to registered PLDT subscribers for amonthly service fee.  Accordingly, the percentage contribution of national longdistance revenues to our fixed line service revenues accounted for 14% and 11%in 2006 and 2005, respectively.

 

*Dataand Other Network Services*

 

Ourdata and other network service revenues include charges for leased lines,IP-based, packet-based and switched-based services.  These services are usedfor domestic and international communications such as private networking,broadband and narrowband Internet-based data communications, and packet-basedcommunication.  

 

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**

** **

**%**

 

 

 

Data and other network service revenues (in millions)

 

Php13,725

 

Php10,394

 

Php3,331

 

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 Php3,331 million, or 32%, from Php10,394 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.

 

*PLDTDSL* contributed revenues of Php3,132million in 2006, an increase of Php754 million, or 32%, from Php2,378 millionin 2005, primarily due to an increase in the number of subscribers.  *PLDT**DSL* reached 133,159 subscribers as at December 31, 2006 compared with88,811 subscribers in the same period in 2005.  *PLDT**DSL*offers anumber of packages with maximum speeds ranging from 88 kbps to 5 Mbps dependingon the plan. 

 

*PLDT Vibe*revenues increased by Php106 million, or 38%, to Php387 million in 2006 fromPhp281 million in 2005, primarily due to an increase in subscribers.  As at December 31, 2006, *PLDT Vibe*registeredusers totaled 297,250, of which 100,362 were exclusive postpaid users, 182,968were exclusive prepaid users, and 13,920 were both postpaid and prepaid users.As at December 31, 2005, *PLDT Vibe* registered users totaled 266,703, ofwhich 97,016 were exclusive postpaid users, 149,973 were exclusive prepaidusers, and 19,714 were both postpaid and prepaid users.  

 

In support of the growing data requirements of thesmall and medium enterprise market, the network footprints of BRAINS, IP-VPNand *Shops.work,* PLDT’s private local networking services, have beenexpanded with the roll-out of NGN facilities in key business areas across thecountry.

 

Thecontinued growth in data services revenues can be attributed to several productofferings.  The steady demand for dedicated connectivity or private networkingfrom the corporate market using PLDT’s traditional international and domesticdata offerings – Fibernet, Arcstar, Acacia, I-Gate, Diginet, BRAINS, IP-VPN and*Shops.work*, among others – continues to provide us with a stable revenuesource.  

 

Diginet, our domesticprivate leased line service, has been providing Smart’s increasing fiber opticand leased line data requirements.  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.

 

*Miscellaneous*

 

Miscellaneous service revenues are derived mostly fromdirectory advertising and facilities rental.  In 2006, these revenues increasedby Php323 million, or 25%, to Php1,632 million from Php1,309 million in 2005.The improvement was mainly due to an increase in rental income, primarily fromco-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% and 2% in 2006 and 2005, respectively.

 

***Operating Expenses***

 

Expensesrelated to our fixed line business totaled Php39,086 million in 2006, an increaseof Php97 million as compared to Php38,989 million in 2005.  The increase wasprimarily due to an increase in compensation and benefits, repairs and maintenance,selling and promotions and asset impairment expenses, partially offset by lowerprovision for doubtful accounts, depreciation and amortization and taxes andlicenses.

 

The following table sets forth the breakdown of ourtotal fixed line-related expenses for the years ended December 31, 2006 and 2005,respectively, 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

Php17,676

 

45

 

Php18,240

 

47

 

(Php564)

 

(3)

Compensation and benefits(1)

10,207

 

26

 

8,261

 

21

 

1,946

 

24

Repairs and maintenance

4,232

 

11

 

3,297

 

9

 

935

 

28

Selling and promotions

1,736

 

5

 

1,535

 

4

 

201

 

13

Rent

1,579

 

4

 

1,727

 

4

 

(148)

 

(9)

Professional and other contracted services

1,128

 

3

 

1,039

 

3

 

89

 

9

Taxes and licenses

730

 

2

 

942

 

2

 

(212)

 

(23)

Communication, training and travel

506

 

1

 

447

 

1

 

59

 

13

Insurance and security services

499

 

1

 

628

 

2

 

(129)

 

(21)

Cost of computers 

159

 

–

 

53

 

–

 

106

 

200

Provision for doubtful accounts

45

 

–

 

1,944

 

5

 

(1,899)

 

(98)

Provision for inventory obsolescence

9

 

–

 

157

 

–

 

(148)

 

(94)

Other operating expenses

580

 

2

 

719

 

2

 

(139)

 

(19)

Total 

Php39,086

 

100

 

Php38,989

 

100

 

Php97

 

–

____________

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

 

Depreciationand amortization charges decreased by Php564 million, or 3%, to Php17,676million due to the lower depreciation of our regular asset base.  

 

Compensation and benefits expenses increased by Php1,946million, or 24%, to Php10,207 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 Item6. “Directors, Senior Management and Employees –– Long-Term Incentive Plan” and*Note 17 – Employee Benefits* to the accompanying consolidated financialstatements in Item 18.

 

Repairs and maintenanceexpenses increased by Php935 million, or 28%, to Php4,232 million, primarilydue to higher maintenance costs for foreign cable and wire facilities as moreoperating and maintenance-related restorations were incurred in 2006 ascompared to 2005.  

 

Selling and promotions expenses increased by Php201million, or 13%, to Php1,736 million, primarily as a result of an increase inPLDT’s promotional activities in relation to various products and services,coupled with higher public relations expense in 2006.

 

Rentexpenses decreased by Php148 million, or 9%, 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 other contracted services increasedby Php89 million, or 9%, to Php1,128 million primarily due to higher contractedservices and bill printing fees in 2006.

 

Taxesand licenses decreased by Php212 million, or 23%, to Php730 million, mainly onaccount of lower business-related taxes incurred in 2006 as compared to 2005.

 

Communication,training and travel expenses increased by Php59 million, or 13%, to Php506million due to an increase in local and foreign travel and training in 2006 ascompared to 2005.

 

Insuranceand security services decreased by Php129 million, or 21%, to Php499 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 computers increased by Php106 million, or 200%, to Php159 million in 2006due to the computer-bundled sales in relation to our DSL promotion and *WeRoam*subscriptions.

 

Provisionfor doubtful accounts decreased by Php1,899 million, or 98%, to Php45 millionprimarily on account of improvement in collection rates in 2006 as compared to2005. 

 

Provision for inventory obsolescence decreased by Php148million, or 94%, to Php9 million primarily due to the consequent reversal ofprovisions with the change in realizability of certain receivable accountsspecifically identified and previously provided for.  

 

Otheroperating expenses decreased by Php139 million, or 19%, to Php580 million dueto lower office supplies consumption and printing costs.

 

***Operating Income***

 

Operating income from our fixedline service amounted to Php10,196 million in 2006, a decrease of Php287million, or 3%, from Php10,483 million in 2005, which was primarily due to anincrease in fixed line-related expenses particularly increased compensation andbenefits, coupled with the decrease in fixed line-related revenues.

 

***Financing Costs***

 

Financing costs decreased byPhp491 million, or 12%, to Php3,685 million in 2006 largely due to lowerinterest on loans and related items owing to lower debt balances in 2006 ascompared to 2005 partially offset by lower foreign exchange gains recorded in2006 as a result of lower foreign currency debt levels and higher hedge costs.The breakdown of financing costs for our fixed line business for the yearsended 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)

Financing charges

1,460

 

1,384

 

76

 

5

Accretion on financial liabilities – net

206

 

320

 

(114)

 

(36)

Capitalized interest

(301)

 

(419)

 

118

 

(28)

Foreign exchange gains – net

(3,934)

 

(6,167)

 

2,233

 

(36)

 

Php3,685

 

Php4,176

 

(Php491)

 

(12)

 

***Interest Income***

*** ***

Interestincome generated by our fixed line business amounted to Php441 million in 2006,an increase of Php56 million, or 15%, compared to Php385 million in 2005 mainlyattributable to PLDT’s higher average cash balances in 2005.

*** ***

***Loss (Gain) onDerivative Transaction***

*** ***

Losson derivative transactions amounted to Php6,900 million in 2006, an increase ofPhp5,217 million, or 310%, from Php1,683 million in 2005 primarily due to PLDT’s mark-to-market loss from principal only swaps asa result of the peso appreciation in 2006 and lower interest differentialbetween peso and U.S. dollar interest rates.

*** ***

***Other Income - Net***

 

All other income/gains such asrental income, gain on disposal of property, which do not fall under servicerevenues are included under this classification.  In 2006, our fixed linebusiness segment registered an increase in other income of Php1,118 million toPhp1,314 million from Php196 million in 2005 mainly due to a gain on sale offixed assets, other property and materials in the aggregate amount of Php658million and a gain relating to a refund from Manila Electric Company, orMeralco, of Php194 million recorded at fair value in 2006 (payable by Meralcoover four years.)

 

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

*** ***

Ourfixed line business segment registered an income before income tax, cumulativeeffect of change in accounting policy and minority interest in net income ofconsolidated subsidiaries of Php1,366 million in 2006, a decrease of Php3,839million, or 74%, compared to Php5,205 million in 2005 mainly due to higher losson derivative transactions partially offset by higher other income. 

 

***Provision for IncomeTax***

 

Provisionfor income tax amounted to Php351 million in 2006, a decrease of Php193million, or 35%, as compared to Php544 million in 2005 primarily due to netmovement in deferred tax assets owing to higher foreign exchange differentialsrealized in 2005.

 

***Net Income***

 

In 2006, our fixed line businesssegment contributed a net income of Php923 million, a decrease of Php3,737million, or 80%, as compared to Php4,660 million in 2005 mainly due to higherloss on derivative transactions. 

 

**Information andCommunications Technology**

 

***OperatingRevenues***

 

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

 

OnJuly 11, 2006, ePLDT acquired a 100%equity interest in SPi and its direct and indirect Philippine and offshoresubsidiaries for a cash consideration of US$135 million.  SPi is the secondlargest pure-play BPO service provider and the ninth largest independent BPOservice provider worldwide.  It has operations in 19 locations in NorthAmerica, Europe and Asia.  On August 11, 2006, SPi acquired 100% of CyMed, Inc.,a leading medical transcription company based in Richmond, Virginia.  

 

OnFebruary 16, 2006, ePLDT acquired a 60% equity interest in Level Up!, a leadingpublisher of online games in the Philippines.  The acquisition of Level Up!,together with netGames, ePLDT’s online gaming subsidiary, is expected to strengthenePLDT’s online gaming business in the Philippines.

 

Forfurther discussion, see Item 4. “Information on the Company –– Organization”,Item 4. “Information on the Company –– Business –– Information andCommunications Technology” and *Note 9 – Goodwill and Other Intangible Assets*to the accompanying consolidated financial statements in Item 18.

 

In2006, our information and communications technology business generated revenuesof Php6,890 million, an increase of Php3,585 million, or 108%, from Php3,305million in 2005.  This increase was largely due to the consolidation of SPi,CyMed and Level Up! since July 11, 2006, August 11, 2006 and February 16, 2006,respectively, and the continued increase of our call center revenues.  Goingforward, we expect revenues from our call center and BPO businesses to continueto contribute significantly to our information and communications technologyrevenues in light of the growing demand for our call center and BPO servicesand as a result of the full-year consolidation of SPi, CyMed and Level Up!.

 

The following table summarizes our total operatingrevenues from our information and communications technology business for theyears ended December 31, 2006 and 2005 by service segment:

 

** **

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

** **

 

**(in millions)**

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php2,624

 

38

 

Php1,944

 

59

 

Php680

 

35

BPO

2,374

 

34

 

–

 

–

 

2,374

 

100

Internet and online gaming 

796

 

12

 

556

 

17

 

240

 

43

*Vitro*TM data center

428

 

6

 

376

 

11

 

52

 

14

Others

115

 

2

 

77

 

2

 

38

 

49

 

6,337

 

92

 

2,953

 

89

 

3,384

 

115

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point-Product Sales

553

 

8

 

352

 

11

 

201

 

57

 

 

 

 

 

 

 

 

 

 

 

 

Total Operating ICT Revenues 

Php6,890

 

100

 

Php3,305

 

100

 

Php3,585

 

108

 

*Service Revenues*

 

Servicerevenues generated by our information and communications technology segmentamounted to Php6,337 million in 2006, an increase of Php3,384 million, or 115%,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*

 

Call center revenues consist of:

 

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

 

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

 

•        service income for e-mailhandling, web chat, web co-browsing, data entry and 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’sexisting Taguig 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/overflow Makati facility by 220 seats from approximately 80 seats in2005 to approximately 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.

 

Callcenter revenues accounted for 41% and 66% of total information andcommunications technology service 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 which involve conventional codingand electronic discovery support services for international law firms,corporate counsels and government agencies; and

 

•        conversion services of medical record/data from handwritten orspeech 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 Php2,374million, primarily from services of SPi and its subsidiaries, and accounted for37% of total service revenues of our information and communications technologybusiness in 2006.

* *

*Internet and online gaming*

 

Internet and online gaming servicerevenues consist of: 

 

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

 

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

 

•        one-time fees generated fromreselling 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 our Internet and online gaming businessesincreased by Php240 million, or 43%, to Php796 million in 2006 from Php556million in 2005 primarily due to the full year consolidation of Airborne Accessand the consolidation of Level Up! in May 2006, which resulted in additionalrevenues of Php11 million and Php138 million, respectively.  Our Internet and onlinegaming business revenues accounted for 13% and 19% of service revenues of ourinformation and communications technology business in 2006 and 2005,respectively.

 

*VitroTM*datacenter

 

ePLDT operates an Internet data center under the brandname *Vitro*ä which provides co-location services, server hosting,hardware and software maintenance services, website development and maintenanceservices, webcasting and webhosting, shared applications, data disasterrecovery and business continuity services, intrusion detection, and securityservices such as firewalls and managed firewalls.  

 

*VitroTM*revenues consist of:

 

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

 

•        installation charges and otherone-time fees associated with the set-up and professional services of Vitro’scertified professionals.

 

In2006, *Vitro**TM* contributed revenues of Php428 million, an increaseof Php52 million, or 14%, from Php376 million in 2005, primarily due to anincrease in co-location revenues and server hosting.  *Vitro*ä revenues accounted for 7% and 13% of service revenues of our informationand communications technology business in 2006 and 2005, respectively.

 

*Others*

 

Other revenues consist of:

 

•        fees generated for issuance ofdigital certificates and licenses; and 

 

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

 

Revenuesfrom other businesses related to our information and communications technologysegment increased by Php38 million, or 49%, to Php115 million in 2006 fromPhp77 million in 2005, largely due to IT helpdesk/contact center servicesrendered coupled with an increase in the number of digital certificates sold.

 

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

 

*Non-service Revenues*

 

Non-servicerevenues consist of sales generated from reselling certain software licenses,server solutions, networking products, storage products and data securityproducts.  In 2006, non-service revenues generated by our information andcommunications technology business increased by Php201 million, or 57%, toPhp553 million as compared to Php352 million in 2005, primarily due to higherrevenues from sales of networking equipment and software licenses.

 

***Operating Expenses***

 

Expenses associated with our information andcommunications technology business totaled Php7,142 million in 2006, anincrease of Php3,889 million, or 120%, from Php3,253 million in 2005 primarilydue to the consolidation of SPi, CyMed and Level Up! resulting primarily in anincrease in compensation and benefits, and professional and other contractedservices.  We currently expect these expenses to be significantly higher goingforward as a result of the full year consolidation of SPi, CyMed and LevelUp!.  As a percentage of our information and communications technologyrevenues, expenses related to our information and communications technologybusiness were 104% and 98% for 2006 and 2005, respectively.  

 

The following table shows the breakdown of our totalinformation and communications technology-related expenses for the years endedDecember 31, 2006 and 2005, respectively, and the percentage of each expenseitem to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase**

 

**2006**

 

**%**

 

**2005**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php3,021

 

42

 

Php1,352

 

42

 

Php1,669

 

123

Professional and other contracted services

739

 

10

 

82

 

3

 

657

 

801

Depreciation and amortization

711

 

10

 

415

 

13

 

296

 

71

Cost of sales – point-product

476

 

7

 

300

 

9

 

176

 

59

Rent

444

 

6

 

362

 

11

 

82

 

23

Asset impairment 

408

 

6

 

11

 

–

 

397

 

3609

Repairs and maintenance

368

 

5

 

283

 

9

 

85

 

30

Selling and promotions

294

 

4

 

121

 

4

 

173

 

143

Communication, training and travel

276

 

4

 

98

 

3

 

178

 

182

Amortization of intangible assets

130

 

2

 

15

 

–

 

115

 

767

Taxes and licenses

67

 

1

 

36

 

1

 

31

 

86

Provision for doubtful accounts

64

 

1

 

54

 

2

 

10

 

19

Insurance and security services

33

 

–

 

14

 

–

 

19

 

136

Other operating expenses

111

 

2

 

110

 

3

 

1

 

1

Total 

Php7,142

 

100

 

Php3,253

 

100

 

Php3,889

 

120

____________

 

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

 

Compensationand benefits increased by Php1,669 million, or 123%, to Php3,021 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.  Theincrease in the number of employees as at December 31, 2006 was primarily dueto ePLDT’s acquisition of SPi, CyMed and Level Up!.

 

Professionaland other contracted services increased by Php657 million, or 801%, to Php739million primarily due to services sub-contracted by SPi from third partiesrelated to its BPO services.

 

Depreciation and amortization charges increased by Php296million, or 71%, to Php711 million primarily due to an increase in thedepreciable asset base in relation to the expansion of our call centerbusinesses and the consolidation of SPi in July 2006.  

 

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 Php82 million, or 23%, to Php444 million primarily due tothe opening of two additional call center sites in 2006 which led to increasedrental of leased circuits.

 

Assetimpairment increased by Php397 million to Php408 million primarily due to theimpairment of ePLDT’s notes receivable from Technology Support Services, Inc.Please see *Note 8 – Investments – Investment of ePLDT in Debt Securities ofTechnology Support Services, Inc., or TSSI (formerly First Advance Multi-MediaEntertainment Corp., or FAME)*to the accompanying consolidated financialstatements in Item 18 for further discussion.

 

Repairs and maintenance expenses increased by Php85million, or 30%, to Php368 million primarily due to higher hosting-relatedcosts incurred in 2006 as compared to 2005 partially offset by Vitro’s lowerhardware and server maintenance costs.

 

Sellingand promotions expenses increased by Php173 million, or 143%, to Php294 millionmainly due to higher advertising and marketing spending of netGames and LevelUp!.

 

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 Php130 million and Php15 millionwere recognized in 2006 and 2005, respectively.  Amortization of intangibles in2006 resulted primarily from the acquisition of SPi and Level Up!, whileamortization of intangibles in 2005 resulted from the impairment of goodwill ofePLDT’s investment in Netopia.  See *Note 9 – Goodwill and Other IntangibleAssets* to the accompanying consolidated financial statements in Item 18 forfurther discussion.  

 

Taxesand licenses increased by Php31 million, or 86%, to Php67 million due to higherbusiness-related taxes accrued and paid in 2006 as compared to 2005.

 

Provisionfor doubtful accounts increased by Php10 million, or 19%, to Php64 millionmainly due to anticipated uncollectible accounts specifically identified in2006.

 

Insurance and security services increased by Php19million, or 136%, to Php33 million primarily due to higher premium costs and anincrease in the value of assets insured in 2006 as compared to 2005.

 

Other operating expenses increased by Php1 million, or1%, to Php111 million mainly due to higher business-related costs.

 

***Financing Costs***

 

Financing costs increased by Php79 million, or 146%,to Php133 million, primarily due to the consolidation of SPi in July 2006.

 

*Provision for Income Tax*
 

Benefit from income tax amounted to Php34 million in2006 primarily due to the recognition of deferred tax assets pertaining toaccrued pension cost, net operating loss carry-over and allowance for doubtfulaccounts, as compared to a provision for income tax of Php20 million in 2005.

 

*Net Income (Loss**)*
In2006, our information and communications technology business segment registereda net loss of Php243 million as against a net income of Php113 million in 2005mainly as a result of a 120% increase in ICT-related expenses and the recentopening of two call centers, partly offset by the increase in ICT revenuesmainly from our call center business and the consolidation of SPi.

 

**2005 Compared to 2004**

 

**On a Consolidated Basis**

 

***Consolidated Operating Revenues***

** **

Largelydriven by the growth of our wireless business, our consolidated operatingrevenues for 2005 increased by Php2,162 million, or 2%, to Php123,335 millionin 2005 from Php121,173 million in 2004.  Thisincrease was lower than the increase in our consolidated operating revenues in2004, primarily due to the reduced growth of our cellular subscriber base in2005 compared to 2004.  The revenuecontribution of our wireless business accounted for 62% of our consolidatedoperating revenues for 2005 and 2004.

** **

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

** **

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php76,906

 

62

 

Php74,764

 

62

 

Php2,142

 

3

Fixed line

49,472

 

40

 

48,546

 

40

 

926

 

2

Information and communications technology 

3,305

 

3

 

2,401

 

2

 

904

 

38

Inter-segment revenues

(6,348)

 

(5)

 

(4,538)

 

(4)

 

(1,810)

 

40

Total

Php123,335

 

100

 

Php121,173

 

100

 

Php2,162

 

2

 

***Consolidated Operating Expenses***

 

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

 

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

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php39,436

 

53

 

Php41,598

 

57

 

(Php2,162)

 

(5)

Fixed line

38,989

 

52

 

32,027

 

44

 

6,962

 

22

Information and communications technology 

3,253

 

4

 

3,035

 

4

 

218

 

7

Inter-segment revenues

(6,857)

 

(9)

 

(4,026)

 

(5)

 

(2,831)

 

70

Total

Php74,821

 

100

 

Php72,634

 

100

 

Php2,187

 

3

 

***Consolidated Operating Income***

 

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

 

***Consolidated Financing Costs***

 

Financingcosts on a consolidated basis decreased by Php12,810 million, or 79%, to Php3,423million primarily due to foreign exchange gains pertaining to the foreignexchange revaluation of the carrying values of financial liabilities as againsta losss on foreign exchange revaluation in 2004 owing to the peso appreciation in2005. This decrease was complemented by lower interest expense and relateditems owing to lower debt balances in 2005 compared with 2004.

 

***Consolidated InterestIncome***

 

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

 

***Consolidated Loss (Gain)on Derivative Transactions***

 

Losson derivative transactions on a consolidated basis amounted to Php1,801 millionin 2005, an increase of Php937 million, or 108%, compared to Php864 million in2004 primarily due to mark-to-market loss from interest rate swap andbifurcated equity call options partially offset by gains from long-termcurrency swaps and long-term foreign currency options. 

 

***Consolidated Other Income- Net***

 

Otherincome on a consolidated basis totaled Php1,016 million in 2005, a decrease ofPhp1,514 million, or 60%, compared to Php2,530 million in 2004.  The decreasewas mainly due to the recognition of a gain on debt restructuring transactionconducted by Smart in 2004 pertaining to a wireless business with no similargain in 2005.  

 

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

 

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

 

***Provision for Income Tax***

 

Provisionfor income tax decreased by Php1,977 million, or 29%, to Php4,849 million in2005 compared to Php6,826 million in 2004 mainly due to lower non-tax deductible charges and the net movement in deferred tax assets as previously unrecognized deferred tax assets weretaken-up in 2005 with the increased likelihood that Smart and Piltel would beable to realize the future tax benefits on these assets.  

 

***Consolidated Net Income***

 

As a result, our consolidated net income in 2005 wasPhp40,603 million, an increase of Php12,502 million, or 44%, compared to Php28,101million in 2004.  The following table shows the breakdown of our consolidatednet income (loss) for the years ended December 31, 2005 and 2004 by business segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php35,830

 

88

 

Php27,559

 

98

 

Php8,271

 

30

Fixed line

4,660

 

12

 

1,241

 

4

 

3,419

 

276

Information and communications technology 

113

 

–

 

(699)

 

(2)

 

812

 

116

Total

Php40,603

 

100

 

Php28,101

 

100

 

Php12,502

 

44

 

**On Business Segment Basis**

 

**Wireless**

* *

***OperatingRevenues***

 

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

 

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

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php71,518

 

93

 

Php66,421

 

89

 

Php5,097

 

8

Wireless broadband, satellite, VSAT and others

2,677

 

3

 

2,232

 

3

 

445

 

20

 

74,195

 

96

 

68,653

 

92

 

5,542

 

8

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

2,711

 

4

 

6,111

 

8

 

(3,400)

 

(56)

Total Wireless Operating Revenues 

Php76,906

 

100

 

Php74,764

 

100

 

Php2,142

 

3

 

Service Revenues

 

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

 

*CellularService*

 

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

 

Ourcellular service revenues in 2005 amounted to Php71,518 million, an increase ofPhp5,097 million, or 8%, from Php66,421 million in 2004.  Cellular servicerevenues accounted for 93% and 89% of our total wireless operating revenues in2005 and 2004, respectively.  The increase in cellular service revenues wasprimarily due to the continued growth of Smart’s and Piltel’s subscriber base.As at December 31, 2005, the combined cellular subscribers of Smart and Piltelreached 20,408,621, an increase of 1,200,389, or 6%, over their combinedcellular subscriber base of 19,208,232 as at December 31, 2004.  Prepaid and postpaid net subscriber activations totaled 1,194,805 and 5,584, respectively,in 2005.  However, the growth in Smart’sand Piltel’s subscriber base in 2005 waslower than the increases in Smart’s and Piltel’s subscriber base of 48% and 51%in 2004 and 2003, respectively.

 

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

 

 

**As at December 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Cellular subscriber base 

20,408,621

 

19,208,232

 

1,200,389

 

6

Prepaid 

20,128,543

 

18,933,738

 

1,194,805

 

6

Smart 

15,144,118

 

14,321,288

 

822,830

 

6

Piltel

4,984,425

 

4,612,450

 

371,975

 

8

Postpaid

280,078

 

274,494

 

5,584

 

2

 

Of our 20,408,621 subscribers as at December 31, 2005, prepaid subscribers accounted for approximately 99% while postpaidsubscribers accounted for the remaining 1%.  Our cellular prepaid subscriberbase grew by 6% to 20,128,543 as at December 31, 2005 from 18,933,738 as atDecember 31, 2004, whereas our postpaid subscriber base increased by 2% to280,078 as at December 31, 2005 from 274,494 as at December 31, 2004.  Smart’sprepaid and postpaid net subscriber activations totaled 822,830 and 5,584,respectively, in 2005, or a quarterly average addition of 205,707 prepaid and1,396 postpaid subscribers.  On the other hand, Piltel’s prepaid subscribersincreased by 8% to 4,984,425 as at December 31, 2005 from 4,612,450 as atDecember 31, 2004, or a quarterly average addition of 92,994 subscribers.Postpaid subscribers as at December 31, 2005 were higher than as at December 31, 2004 primarily due to increased net activations in the last two quarters of2005.

 

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

 

 

**Prepaid**

** **

**Postpaid**

** **

**Total**

 

**Smart**

** **

**Piltel**

** **

**Smart**

** **

** **

 

** **

** **

** **

** **

** **

** **

** **

**2005**

 

 

 

 

 

 

 

First Quarter

920,885

 

129,753

 

(6,357)

 

1,044,281

Second Quarter

314,607

 

222,233

 

116

 

536,956

Third Quarter

(53,953)

 

42,723

 

10,506

 

(724)

Fourth Quarter

(358,709)

 

(22,734)

 

1,319

 

(380,124)

**2004**

 

 

 

 

 

 

 

First Quarter

1,162,301

 

218,038

 

16,866

 

1,397,205

Second Quarter

1,207,542

 

468,772

 

7,691

 

1,684,005

Third Quarter

797,686

 

635,978

 

10,445

 

1,444,109

Fourth Quarter

1,322,624

 

422,577

 

(9,485)

 

1,735,716

 

Wireless Broadband, Satellite, VSATand Other Services

 

Our revenues from wireless broadband, satellite, VSATand other services consist mainly of rentals received for the lease of MabuhaySatellite’s transponders and Telesat’s VSAT facilities to other companies andwireless broadband service revenues from Smart Broadband, charges for ACeSPhilippines’ satellite phone service and service revenues from PLDT Globalsubsidiary’s mobile virtual network operations.  Smart Broadband offers anumber of wireless broadband services with 25,428 subscribers as of December 31, 2005, including 21,759 *Smart WiFi* subscribers.  

 

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

* *

*Non-service Revenues*

 

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

 

*OperatingExpenses*
 

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

 

Cellular business expenses accounted for 94% while wirelessbroadband, satellite, VSAT and other business expenses accounted for 6% of ourwireless business expenses in 2005, compared to 93% and 7%, respectively, in2004.

*** ***

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

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**

 

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php9,200

 

23

 

Php10,082

 

24

 

(Php882)

 

(9)

Costs of cellular handsets and SIM-packs sold

5,827

 

15

 

10,599

 

25

 

(4,772)

 

(45)

Rent

5,577

 

14

 

4,156

 

10

 

1,421

 

34

Compensation and benefits(1)

4,245

 

11

 

3,195

 

8

 

1,050

 

33

Repairs and maintenance

3,667

 

9

 

2,597

 

6

 

1,070

 

41

Selling and promotions

3,124

 

8

 

4,261

 

10

 

(1,137)

 

(27)

Professional and other contracted services

1,608

 

4

 

472

 

1

 

1,136

 

241

Taxes and licenses

1,538

 

4

 

1,214

 

3

 

324

 

27

Cost of satellite air time

1,008

 

3

 

1,299

 

3

 

(291)

 

(22)

Communication, training and travel

960

 

2

 

791

 

2

 

169

 

21

Insurance and security services

947

 

2

 

937

 

2

 

10

 

1

Provision for inventory obsolescence

322

 

1

 

213

 

1

 

109

 

51

Provision for doubtful accounts

253

 

1

 

204

 

1

 

49

 

24

Amortization of intangible assets

189

 

1

 

93

 

–

 

96

 

103

Asset impairment 

–

 

–

 

430

 

1

 

(430)

 

(100)

Other operating expenses

971

 

2

 

1,055

 

3

 

(84)

 

(8)

Total 

Php39,436

 

100

 

Php41,598

 

100

 

(Php2,162)

 

(5)

__________

* *

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

*** ***

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

 

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

 

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

 

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

 

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

 

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

 

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

*** ***

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

***Operating Income***

 

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

 

***Financing Costs***

*** ***

Financinggains associated with our wireless business amounted to Php807 million in 2005compared to financing costs of Php2,292 million in 2004 primarily due toforeign exchange gains as a result of the 6% and 18% level of appreciation ofthe Philippine peso to the U.S. dollar and Japanese yen, respectively, fromDecember 31, 2004 to December 31, 2005 compared to foreign exchange losses in2004.  Foreign exchange losses recorded in 2004 with the peso depreciation of1% against the U.S. dollar, aggravated by the peso depreciation withapproximately 6% against the Japanese yen from December 31, 2004, amounted toPhp423 million.  In addition, lower debt balances in 2005 also contributed todecreased interest expense on loans.  The breakdown of our financing costs forour wireless business for the years ended December 31, 2005 and 2004 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php1,037

 

Php1,082

 

(Php45)

 

(4)

Accretion on financial liabilities

248

 

884

 

(636)

 

(72)

Financing charges

52

 

1

 

51

 

5,100

Capitalized interest

(85)

 

(98)

 

13

 

(13)

Foreign exchange (gains) losses – net

(2,059)

 

423

 

(2,482)

 

(587)

 

(Php807)

 

Php2,292

 

(Php3,099)

 

(135)

 

***Interest Income***

 

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

 

*Loss (Gain) on Derivative Transactions*
 

Loss on derivative transactions amounted to Php118million in 2005, an increase of Php125 million, from a gain on derivativetransactions of Php7 million in 2004 primarily due to mark-to-market loss from Smart’sforward foreign exchange contracts as a result of the peso appreciation.

 

*Other Income - Net*
 

Our wireless business segment generated other income -net of Php1,292 million in 2005, a decrease of Php638 million, or 33%, from Php1,930million in 2004.  This decrease was primarily a result of a Php2,820 milliongain on a debt restructuring transaction conducted by Smart in 2004 pertainingto our wireless business.  See *Note 12 – Interest-bearing FinancialLiabilities – Term Loans – US$283 Million Term Loan Facility, or Debt ExchangeFacility*to the accompanying consolidated financial statement in Item 18.

*** ***

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

*** ***

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

 

***Provision for IncomeTax***

 

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

 

***Net Income***

 

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

 

Fixed Line
 

***Operating Revenues***

*** ***

Operating revenues generated from our fixed linebusiness for 2005 totaled Php49,472 million, an increase of Php926 million, or 2%,from Php48,546 million in 2004.  Thisincrease was primarily due to higher revenues generated from data and othernetwork services, and miscellaneous revenues, which was partially offset bydecreased revenues from national long distance services, international longdistance services and local exchange service.  As a percentage of our totaloperating revenues, fixed line revenues decreased to 38% in 2005 from 39% in 2004,principally due to the continued growth of our wireless business.  

 

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

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php20,229

 

41

 

Php20,606

 

42

 

(Php377)

 

(2)

International long distance

12,245

 

25

 

12,804

 

26

 

(559)

 

(4)

National long distance

5,254

 

11

 

6,736

 

14

 

(1,482)

 

(22)

Data and other network

10,394

 

21

 

7,114

 

15

 

3,280

 

46

Miscellaneous

1,309

 

2

 

1,286

 

3

 

23

 

2

 

49,431

 

100

 

48,546

 

100

 

885

 

2

Non-Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets

41

 

–

 

–

 

–

 

41

 

100

Total Fixed Line Operating Revenues 

Php49,472

 

100

 

Php48,546

 

100

 

Php926

 

2

 

*Service Revenues*

 

*LocalExchange Service*

 

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

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated local exchange service revenues (in millions)

Php20,229

 

Php20,606

 

(Php377)

 

(2)

Number of fixed line subscribers

1,842,507

 

1,834,306

 

8,201

 

–

Number of fixed line employees

9,197

 

9,692

 

(495)

 

(5)

Number of fixed line subscribers per employee

200

 

189

 

11

 

6

 

Revenues from our local exchange service in 2005decreased by Php377 million, or 2%, to Php20,229 million from Php20,606 millionin 2004.  The decrease was primarily due to a decline in the number of fixedline subscribers and the appreciation of the peso against U.S. dollars whichrequired us to make downward adjustments in our monthly local service rates, whichwas partially offset by adjustments in our monthly local service rates.  Thepercentage contribution of local exchange revenues to our total fixed lineservice revenues decreased to 41% in 2005 from 42% in 2004.

 

As at December 31,2005, postpaid and prepaid fixed line subscribers totaled 1,453,297 and 389,210,respectively, which accounted for approximately 79% and 21%, respectively, of ourtotal fixed line subscribers.

 

Pursuant to a currency exchange rate adjustmentmechanism authorized by the NTC, we adjust our monthly local service ratesupward or downward by 1% for every Php0.10 change in the peso-to-U.S. dollarexchange rate relative to a base rate of Php11.00 to US$1.00.  During 2005, weimplemented six downward and three upward adjustments in our monthly localservice rates compared to six upward and one downward adjustments in 2004.  Theaverage peso-to-U.S. dollar rate factored in our monthly local service rates in2005 was Php55.21 to US$1.00, compared to the average of Php55.89 to US$1.00 in2004.  This change in the average peso-to-U.S. dollar rate translated to a pesoappreciation of 2%, which resulted in an average net decrease of 1% in ourmonthly local service rates in 2005. 

 

*International Long Distance Service*

 

The following table shows information about ourinternational fixed line long distance business for the years ended December31, 2005 and 2004, respectively:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total international long distance service revenues (in millions)

Php12,245

 

Php12,804

 

(Php559)

 

(4)

Inbound

10,203

 

10,686

 

(483)

 

(5)

Outbound

2,042

 

2,118

 

(76)

 

(4)

 

 

 

 

 

 

 

 

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

2,266

 

2,373

 

(107)

 

(5)

Inbound

2,117

 

2,216

 

(99)

 

(4)

Outbound

149

 

157

 

(8)

 

(5)

Inbound-outbound call ratio

14.2:1

 

14.1:1

 

–

 

–

 

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

 

Ourrevenues from inbound international long distance service decreased by Php483million due to a decrease in inbound traffic volume by 99 million minutes to 2,117million minutes in 2005.  In addition, the 2% appreciation in the average valueof peso to U.S. dollar to Php55.006 during 2005 from Php56.149 during 2004contributed to the decrease in our inbound international long distance revenuesin peso terms since settlement charges for inbound calls are billed in U.S.dollars or in special drawing rights, an established method of settlement amonginternational telecommunications carriers using values based on a basket offoreign currencies that are translated into pesos at the time of billing.

 

Ourrevenues from outbound international long distance calls in 2005 decreased byPhp76 million, or 4%, to Php2,042 million from Php2,118 million in 2004.  The decreaseresulted from lower conversion rates used as average billing rates were Php55.30and Php55.98 in 2005 and 2004, respectively.

 

Ouroutbound international long distance call volumes declined by 5% to 149 millionminutes in 2005 from 157 million minutes in 2004, primarily due to cellularsubstitution (subscribers opting to use cellular for international outboundcalls) and the popularity of alternative means of communications such ase-mailing, international text messaging and Internet telephony.

 

*NationalLong Distance Service*

*** ***

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

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php5,254

 

Php6,736

 

(Php1,482)

 

(22)

National long distance call volumes (in million minutes)

2,348

 

1,930

 

418

 

22

 

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

 

Ournational long distance call volumes increased by approximately 22% to 2,348million minutes in 2005 from 1,930 million minutes in 2004.  This was mainlydue to the Php10 per call promotion offered to PLDT fixed line subscribersnationwide.  

 

Theintegration of some of our local exchanges into a single local calling area, asapproved by the NTC, also negatively affected our national long distance callvolumes, and consequently, our revenues.  Because of this integration, callsbetween two exchanges located within the same province are no longer considerednational long distance calls but are treated as local calls.

 

*Dataand Other Network Services*

 

Ourdata and other network services in 2005 generated revenues of Php10,394million, an increase of Php3,280 million, or 46%, from Php7,114 million in2004, which was primarily due to increases in revenues generated in leasedlines and IP-based data services, particularly Diginet and DSL.  The revenuecontribution of this service segment to our fixed line service revenuesincreased to 21% in 2005 from 15% in 2004.

 

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

 

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

 

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

 

*Miscellaneous*

 

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

 

***Operating Expenses***

 

Operatingexpenses related to our fixed line business in 2005 totaled Php38,989 million,an increase of Php6,962 million, or 22%, compared to Php32,027 million in2004.  The increase was primarily due to higher depreciation and amortizationand higher selling and promotions expenses which were partially offset by lowerprovision for doubtful accounts expense.

 

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

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php18,240

 

47

 

Php9,677

 

30

 

Php8,563

 

88

Compensation and benefits(1)

8,261

 

21

 

7,921

 

25

 

340

 

4

Repairs and maintenance

3,297

 

9

 

3,211

 

10

 

86

 

3

Provision for doubtful accounts

1,944

 

5

 

3,751

 

12

 

(1,807)

 

(48)

Rent

1,727

 

4

 

1,746

 

5

 

(19)

 

(1)

Selling and promotions

1,535

 

4

 

1,159

 

4

 

376

 

32

Professional and other contracted services

1,039

 

3

 

1,060

 

3

 

(21)

 

(2)

Taxes and licenses

942

 

2

 

820

 

3

 

122

 

15

Insurance and security services

628

 

2

 

700

 

2

 

(72)

 

(10)

Communication, training and travel

447

 

1

 

449

 

1

 

(2)

 

–

Provision for inventory obsolescence

157

 

–

 

361

 

1

 

(204)

 

(57)

Cost of computers sold

53

 

–

 

–

 

–

 

53

 

100

Asset impairment 

–

 

–

 

365

 

1

 

(365)

 

(100)

Other operating expenses

719

 

2

 

807

 

3

 

(88)

 

(11)

Total 

Php38,989

 

100

 

Php32,027

 

100

 

Php6,962

 

22

____________

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Costof computers sold amounting to Php53 million were recognized in 2005 inrelation to our DSL promotion.  No similar charges were incurred in 2004.

 

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

 

Otheroperating expenses decreased by Php88 million, or 11%, to Php719 million due tolower office supplies consumption and printing costs resulting from PLDT’scontinuing cost-containing activities.

 

***Operating Income***

 

Operating income from our fixedline service amounted to Php10,483 million in 2005, a decrease of Php6,036million, or 37%, from Php16,519 million in 2004, which was primarily due to an increasein fixed line-related expenses particularly increased depreciation, which morethan offset the 2% increase in fixed line-related revenues.

 

***Financing Costs***

 

Financingcosts decreased by Php9,774 million, or 70%, to Php4,176 million due to thestrengthening of the peso relative to the U.S. dollar and Japanese yenresulting in foreign exchange gains in 2005 as compared to foreign exchangelosses recorded during 2004, and lower interest payments on loans and relateditems owing to lower debt balances in 2005 as compared to 2004.  

 

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

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php9,058

 

Php10,634

 

(Php1,576)

 

(15)

Financing charges

1,384

 

1,156

 

228

 

20

Accretion on financial liabilities – net

320

 

301

 

19

 

6

Capitalized interest

(419)

 

(497)

 

78

 

(16)

Foreign exchange (gains) losses –  net

(6,167)

 

2,356

 

(8,523)

 

(362)

 

Php4,176

 

Php13,950

 

(Php9,774)

 

(70)

 

***Interest Income***

*** ***

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

*** ***

*Loss (Gain) on Derivative Transactions*
 

Loss on derivative transactions amounted to Php1,683million in 2005, an increase of Php812 million, or 93%, from Php871 million in2004 primarily due to PLDT’s mark-to-marketloss from interest rate swap and bifurcated equity call options partiallyoffset by gain from long-term currency swaps and long-term foreign currencyoptions.

*** ***

***Other Income - Net***

 

All other income/gains such asrental income, gain on disposal of property, which do not fall under servicerevenues are included under this classification.  In 2005, our fixed linebusiness segment registered an increase in other income of Php122 million, or 165%,to Php196 million from Php74 million in 2004.

 

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

*** ***

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

 

***Provision for IncomeTax***

 

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

 

***Net Income***

 

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

 

**Information andCommunications Technology**

 

***Operating Revenues***

 

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

 

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

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**%**

** **

**2004**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php1,944

 

59

 

Php1,283

 

54

 

Php661

 

52

Internet and online gaming business

556

 

17

 

569

 

24

 

(13)

 

(2)

*VitroTM* data center

376

 

11

 

173

 

7

 

203

 

117

Others

77

 

2

 

55

 

2

 

22

 

40

 

2,953

 

89

 

2,080

 

87

 

873

 

42

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point-of-product sales

352

 

11

 

321

 

13

 

31

 

10

Total ICT Operating Revenues

Php3,305

 

100

 

Php2,401

 

100

 

Php904

 

38

 

*Service Revenues*

 

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

 

*Call**Center*

 

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

 

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

* *

*Internet and online gaming*

 

Revenues from our Internet and online gaming businessin 2005 decreased by Php13 million, or 2%, to Php556 million from Php569million in 2004, primarily due to a decrease in Infocom’s revenues in 2005,which was partially offset by the consolidation of Digital Paradise in June2004.  Our Internet and online gaming business revenues accounted for 19% and27% of service revenues from information and communications technology businessin 2005 and 2004, respectively.

 

*VitroTM*datacenter

 

ePLDToperates an Internet data center under the brand name *Vitro**TM*.  Grantedpioneer status as an Internet data center by the BOI, *Vitro**TM* providesco-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 firewall andmanaged firewall.

 

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

 

*Others*

 

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

 

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

 

*Non-service Revenues*

 

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

 

***Operating Expenses***

 

Expenses associated with our informationand communications technology business totaled Php3,253 million in 2005, anincrease of Php218 million, or 7%, from Php3,035 million in 2004, primarily dueto an increase in cash expenses, particularly compensation and benefits, anddepreciation and amortization, partly offset by an impairment provisionrecognized in 2004.  As a percentage of our information and communicationstechnology revenues, expenses related to our information and communicationstechnology business were at 98% and 126% for 2005 and 2004, respectively.  

 

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

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php1,352

 

42

 

Php900

 

30

 

Php452

 

50

Depreciation and amortization

415

 

13

 

339

 

11

 

76

 

22

Rent

362

 

11

 

366

 

12

 

(4)

 

(1)

Cost of sales – point products

300

 

9

 

230

 

8

 

70

 

30

Repairs and maintenance

283

 

9

 

316

 

11

 

(33)

 

(10)

Selling and promotions

121

 

4

 

61

 

2

 

60

 

98

Communication, training and travel

98

 

3

 

70

 

2

 

28

 

40

Professional and other contracted services

82

 

3

 

67

 

2

 

15

 

22

Provision for doubtful accounts

54

 

2

 

–

 

–

 

54

 

100

Taxes and licenses

36

 

1

 

21

 

1

 

15

 

71

Amortization of intangible assets

15

 

–

 

–

 

–

 

15

 

100

Insurance and security services

14

 

–

 

7

 

–

 

7

 

100

Asset impairment 

11

 

–

 

617

 

20

 

(606)

 

(98)

Provision for inventory obslescence

–

 

–

 

3

 

–

 

(3)

 

(100)

Other operating expenses

110

 

3

 

38

 

1

 

72

 

189

Total 

Php3,253

 

100

 

Php3,035

 

100

 

Php218

 

7

____________

 

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

 

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

 

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

 

Rent expenses decreased by Php4 million, or 1%, toPhp362 million primarily due to a decline in Vitro’s lease of hosting equipmentfor use in its Bureau of Internal Revenue project and the expansion of our callcenter and Internet and online gaming businesses.   

 

Costof sales increased by Php70 million, or 30%, to Php300 million primarily due toan increase in the cost of point products sold.

 

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

 

Sellingand promotions expenses increased by Php60 million, or 98%, to Php121 millionmainly as a result of the commercial release of *Khan Online* in February2005 following the commencement of netGames’ commercial operations.Furthermore, Vitro’s increase in sales of software products in 2005 as comparedto 2004 resulted in higher selling and marketing expenses.  

 

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

 

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

 

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

 

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

 

Amortization of intangible assets amounted to Php15million in 2005 due to impairment of goodwill of ePLDT’s investment in *Netopia*.

 

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

 

Asset impairment amounted to Php11 million in 2005, adecrease of Php606 million, or 98%, primarily due to the recognition of animpairment provision in relation to an investee company in 2004. 

 

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

 

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

 

***Financing Costs***

 

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

 

*Provision for Income Tax*
 

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

 

*Net Income (Loss**)*
 

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

 

**Liquidity and CapitalResources**

 

The following table shows our consolidated cash flows,capitalization and other selected financial data as at and for the years endedDecember 31, 2006, 2005 and 2004:

** **

 

Years Ended December 31,

 

**2006**

**2005**

**2004**

 

(in millions)

Cash Flows

 

 

 

Net cash provided by operating activities

Php61,201

Php66,280

Php63,107

Net cash used in investing activities

36,764

13,080

24,764

Capital expenditures

20,348

15,864

19,268

Net cash used in financing activities

36,916

49,470

30,325

Effect of foreign exchange rate changes on cash and cash equivalents

(710)

(987)

(69)

Net increase (decrease) in cash and cash equivalents

(13,189)

2,743

7,949

 

 

 

December 31,

 

**2006**

** **

**2005**

 

(in millions)

Capitalization

 

 

 

Cash and cash equivalents

Php16,870

 

Php30,059

Short-term debt

 

 

 

Notes payable

201

 

–

Current portion of long-term debt

16,316

 

18,797

Long-term debt – net of current portion

69,542

 

93,516

Total debt

86,059

 

112,313

Stockholders’ equity

106,173

 

79,595

Total capitalization

Php192,232

 

Php191,908

 

As at December 31, 2006, consolidated cash and cashequivalents amounted to Php16,870 million.  Our principal sources ofconsolidated cash in 2006 were cash flows from operating activities amountingto Php61,201 million, drawings from existing long-term credit facilitiestotaling Php18,883 million, and net equity funds raised through the issuance ofcapital stock amounting to Php66 million.  These funds were used principallyfor capital expenditures of Php20,348 million (including capitalized interestof Php549 million) and total debt principal repayments of Php38,520 million.

 

Principal sources of consolidatedcash in 2005 and 2004 were cash flows from operating activities amounting toPhp66,280 million and Php63,107 million, respectively; drawings from long-termand short-term credit facilities amounting to Php10,797 million and Php329million, respectively in 2005, and to Php15,187 million and Php457 million,respectively, in 2004; and equity funds raised through the issuance of capitalstock amounting to Php334 million in 2005 and Php281 million in 2004.  Thesefunds were used principally for capital expenditures of Php15,864 million(including capitalized interest of Php504 million) and payments of long-termand short-term debt totaling to Php48,236 million in 2005; and capitalexpenditures of Php19,268 million (including capitalized interest of Php595million) and payments of long-term and short-term debt totaling to Php44,109million in 2004.

 

***Operating Activities***

 

Ona consolidated basis, net cash flows from operating activities in 2006 amountedto Php61,201 million, a decrease of Php5,079 million, or 8%, from Php66,280million in 2005 and an increase of Php3,173 million, or 5% from Php63,107million in 2004.

 

Agrowing portion of our consolidated cash flow is generated by our wireless anddata businesses.  The revenue contribution of these businesses has grown significantlyover the last three years with wireless business contributing 63%, in 2006, 62%in 2005 and 61% in 2004, and data business contributing an average of 11% in2006, 8% in 2005 and 6% in 2004 of our total service revenues.  Revenues fromour local exchange service accounted for approximately 13% of our total servicerevenues in 2006, down from 16% in 2005 and from 17% in 2004.

 

Cash flows from operating activities of our wirelessbusiness in 2006 accounted for 60% of our consolidated cash flows from operatingactivities owing to the growth of our cellular subscriber base and serviceusage.  Our fixed line business contributed 38% to our consolidated cash flowsfrom operating activities in 2006 with improved collection efficiency and lowercash expenses in line with our cost-containment efforts.  

 

Until April 2006, Smart was subject toloan covenants that restricted its ability to pay dividends, redeem preferredshares, make distributions to PLDT or otherwise provide funds to PLDT or anyassociate without the consent of its lenders.  Smart was able to obtain waiversfrom Finnvera and certain of its lenders for each of the dividend payments madeby Smart to PLDT in March 2006, 2005, 2004, 2003 and 2002 aggregating Php7,000million, Php19,717 million, Php16,100 million, Php6,166 million and Php1,540million, respectively.  In 2005, Smart redeemed 380.8 million preferred sharespreviously issued to PLDT at a redemption price of Php13.875 per share, or atotal redemption price aggregating to Php5,283 million. 

 

Payments made by Smart to PLDT afterApril 2006 did not require prior creditor consent as all loan facilities thatcontained such restrictions had already been repaid.  In June 2006, September2006 and March 2007, dividend payments received from Smart amounted to Php7,000million, Php6,600 million and Php8,000 million, respectively.  In addition,Smart redeemed 392 million preferred shares at a total redemption price ofPhp5,441 million in June 2006.

 

***Investing Activities***

 

Ournet cash used in investing activities in 2006 amounted to Php36,764 million, anincrease of Php23,684 million, or 181%, compared to Php13,080 million in 2005and a decrease of Php11,684 million, or 47%, from Php24,764 million in 2004.The increase in 2006 primarily resulted from higher business acquisitionexpenditures by Php10,770 million, higher capital expenditures by Php4,484million and an increase in short-term investments of Php6,714 million.  Thedecrease in 2005 resulted from a decline in capital expenditures by Php3,404million, lower business acquisition expenditures by Php1,028 million, highercash receipts for leased deposits and a decrease in short-term investments ofPhp3,418 million largely due to the maturity of Smart’s investments in 2004.  

 

Ourconsolidated capital expenditures in 2006 totaled Php20,348 million, an increaseof Php4,484 million, or 28%, from Php15,864 million in 2005 primarily due toSmart’s and PLDT’s higher capital spending.  Smart's capital spending of Php10,506million in 2006 was used to roll-out its 3G network and further expand andupgrade its transmission network facilities to increase capacity and coveragein respect of basic and advanced cellular services.  PLDT's capital spending ofPhp8,573 million in 2006 was principally used to finance the expansion of itsfixed line data and IP-based network services.  ePLDT and its subsidiaries’capital spending of Php1,134 million in 2006 was used to primarily fund its *Vitro*TM, DigitalParadise and call center business operations.  The balances were spent by othersubsidiaries mainly PLDT Global, Mabuhay Satellite and Maratel.  In addition,in 2006, we made certain strategic investments, including the acquisition of SPiand a 60% equity interest in Level Up! for Php8,847 million and Php347 million,respectively.  Our consolidated capital expenditures in 2005 totaled Php15,864million, a decrease of Php3,404 million, or 18%, from Php19,268 million in 2004primarily due to Smart’s and PLDT’s lower capital spending.  Smart's capitalspending of Php8,785 million in 2005 was used to roll-out its 3G network andfurther expand and upgrade its transmission network facilities to increasecapacity and coverage in respect of basic and advanced cellular services.PLDT's capital spending of Php6,389 million in 2005 was principally used tofinance the expansion of its fixed line data and IP-based network services.ePLDT and its subsidiaries’ capital spending of Php605 million in 2005 was usedto primarily fund its *Vitro*TM, Digital Paradise and call center businessoperations.  The balances were spent by other subsidiaries mainly PLDT Global,Mabuhay Satellite and Maratel.  In addition, in 2005, we made certain strategicinvestments aggregating Php248 million to strengthen our position in thewireless and information and communications technology segments.  Of thePhp248 million investment, Php238 million represented Smart's partial paymentof its investment in a wireless broadband and data service company, and Php10million pertained to ePLDT's investment in convertible debt securities of acompany engaged in a systems integration of Internet and mobile telephonegaming project.

 

As part of our growth strategy, we may from time totime,continue to make acquisitions andinvestments in companies or businesses, which may or may not be significant.  

 

For 2007, we anticipate increasingthe level of our capital expenditures and equity investments.  Our 2007 budgetfor consolidated capital expenditures is approximately Php21,400 million, ofwhich approximately Php11,100 million is budgeted to be spent by PLDT,approximately Php8,800 million is budgeted to be spent by Smart and the balancerepresents the budgeted capital spending of our other subsidiaries.

 

***Financing Activities***

 

On aconsolidated basis, we used net cash of Php36,916 million for financing activitiesin 2006, compared to Php49,470 million in 2005 and Php30,325 million in 2004.The net cash used in financing activities in 2006, 2005 and 2004 was mainlyattributable to debt repayments and interest payments by PLDT in line with itsongoing debt reduction program and, in 2006 and 2005, dividend paymentsdistributed to common and preferred stockholders.  

 

*DebtFinancing*

 

Additionsto our consolidated long-term debt in 2006 totaled Php18,883 million mainlyfrom Smart's drawings related to the financing of its Phases 8 and 9 GSMfacilities.  Payments in respect of principal of our total debt amounted to Php38,391million in 2006, of which Php25,875 million were attributable to PLDT.

 

Ourconsolidated indebtedness as at December 31, 2006 was Php86,059 million, lowerby Php26,254 million, or 23%, compared to Php112,313 million as at December 31,2005 mainly due to the reductions of Php25,875 million and Php11,544 million inPLDT’s and Smart’s indebtedness, respectively.  PLDT’s non-consolidatedindebtedness decreased by 28%, from Php74,028 million as at December 31, 2005to Php52,936 million as at December 31, 2006, due to debt payments in line withour thrust to reduce PLDT’s overall indebtedness.  Smart’s indebtedness as atDecember 31, 2006 stood at Php30,783 million, a decrease of 12% from Php35,079million as at December 31, 2005.  On July 2, 2004, Smart acquired from Piltel’screditors US$289 million, or 69.4%, in the aggregate of Piltel’s totaloutstanding restructured debt at that time, in exchange for US$283.2 million,or Php13,892 million in July 2, 2004, in new debt of Smart and US$1.5 million,or Php84 million, in cash.  On June 5, 2006 and December 4, 2006, Piltelprepaid its entire restructured debt to Smart and Piltel’s other creditors.  Pleasesee *Note 12 – Interest-bearing Financial Liabilities*to the accompanyingconsolidated financial statements in Item 18 for further details.

 

Asat December 31, 2006, Smart had several committed dollar-denominated andpeso-denominated long-term credit facilities.  On July 31, 2006, Smart signed aU.S. Dollar Term Loan Facility for US$44.2 million with Finnish Export CreditPlc to partly finance the related Phase 9 GSM equipment and servicescontracts.  The facility was drawn on November 10, 2006 for the full amount ofUS$44.2 million.  On August 14, 2006, Smart signed a Peso Term Loan Facilitywith Metropolitan Bank and Trust Company to finance the related Phase 9 GSMfacility for an amount of Php2,500 million.  The facility was drawn on December10, 2006 for the full amount of Php2,500 million.  On October 16, 2006, Smartsigned a U.S. Dollar Term Loan Facility with Metropolitan Bank and TrustCompany to finance the related Phase 9 GSM Facility for an amount of US$50million.  On February 15, 2007, Smart issued Php5,000 million unsecured fixedrate corporate notes, comprised of Series A notes amounting to Php3,800 millionand Series B notes amounting to Php1,700 million with five- and ten-year terms,respectively.

 

Thescheduled maturities of our outstanding consolidated long-term debt as atDecember 31, 2006 are as follows:

 

**Year**

** **

**US$ Loans**

** **

**Peso Loans**

** **

**Total**

 

 

(in millions)

** **

 

 

 

 

 

 

 

 

2007

 

US$327

 

Php16,027

 

Php289

 

Php16,316

2008

 

147

 

7,203

 

556

 

7,759

2009

 

294

 

14,423

 

555

 

14,978

2010

 

71

 

3,468

 

1,366

 

4,834

2011 

 

15

 

724

 

555

 

1,279

2012 and onwards

 

829

 

40,692

 

–

 

40,692

 

 

US$1,681

 

Php82,537

 

Php3,321

 

Php85,858

 

Approximately Php45,166 million principal amount ofour consolidated outstanding long-term debt as at December 31, 2006 is scheduledto mature over the period from 2007 to 2011.  Of this amount, Php25,175 millionwas attributable to PLDT, Php14,543 million to Smart, and the remainder toMabuhay Satellite, Maratel, ePLDT and Piltel.

 

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

 

*Debt Covenants*

 

Our debt instruments containrestrictive covenants, including covenants that could prohibit us from payingdividends on common stock under certain circumstances, and require us to complywith specified financial ratios and other financial tests, calculated inconformity with PFRS, at relevant measurement dates, principally at the end ofeach quarterly period.  We have maintained compliance with all of ourmaintenance financial ratios as required under our loan covenants and otherdebt instruments.  However, if negative factors adversely affect our financialratios, we may be unable to maintain compliance with these ratios and covenantsor be unable to incur new debt.  The terms of some of our debt instruments haveno minimum amount for cross-default.

 

The principal factors that cannegatively affect our ability to comply with the financial ratios and otherfinancial tests under our debt instruments are depreciation of the Philippinepeso relative to the U.S. dollar, poor operating performance of PLDT and ourconsolidated subsidiaries, impairment or similar charges in respect ofinvestments or other long-lived assets that may be recognized by PLDT and itsconsolidated subsidiaries and increases in our interest expenses.  Interestexpenses may increase as a result of various factors including issuance of newdebt, the refinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the Philippine peso, the lowering of PLDT’s credit ratings orthe credit ratings of the Philippines, increase in reference interestrates, and general market conditions.  Since approximately 96% of our totalconsolidated debts were denominated in foreign currencies, principally in U.S.dollars, many of these financial ratios and other tests are negatively affectedby any weakening of the peso.  The peso has been subject to significantfluctuations in recent years.  From 2002 to 2004, the peso has generally beendepreciating from a high of Php49.336 on May 20, 2002 to a low of Php56.443 onOctober 14, 2004.  In 2005, the peso fluctuated significantly from a low ofPhp56.321 on July 8 to a high of Php53.062 on December 29.  As at December 31,2006, the peso had appreciated by 8% to Php49.045 to US$1.00, from Php53.062 toUS$1.00 as at December 31, 2005.

 

PLDT’sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of itsfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other investees in assisting PLDT in complying with non-consolidatedcovenants or covenants that are calculated without giving effect to the resultsof PLDT’s investees.

 

PLDT’s debt instruments contain a number of othernegative covenants that, subject to certain exceptions and qualifications,restrict PLDT’s ability to take certain actions without lenders’ approval,including: (a) incurring additional indebtedness; (b) prepaying other debt; (c)making investments; (d) extending loans; (e) extending guarantees or assumingthe obligations of other persons; (f) paying dividends or other distributionsor redeeming, repurchasing or otherwise acquiring shares of PLDT’s capitalstock; (g) disposing of all or substantially all of its assets or of assets inexcess of specified thresholds of its tangible net worth; (h) creating any lienor security 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. 

 

Moreover,certain of PLDT’s debt instruments restrict PLDT from declaring or distributingdividends to common stockholders.  In particular, under certain loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, or (ii) in an amount greaterthan PLDT’s net income after taxes during the fiscal year to which such paymentor distribution relates.

 

In case of a change in control of PLDT, under the termsof the 11.375% Notes due 2012, we are required to offer to purchase outstandingnotes due 2012 for cash at a price of 101% of their principal amounts plusaccrued interest in the event that (1) the aggregate of NTT Communications’ andFirst Pacific’s direct and indirect voting interest in PLDT's outstandingcapital stock having voting rights falls below 35% of such capital stock, (2)any person or, in certain instances, group of persons, which is not controlleddirectly or indirectly by First Pacific or NTT Communications acquires a director indirect voting interest in PLDT’s outstanding capital stock having votingrights which equals or exceeds 35% of such capital stock and (3) if a ratingagency at such time maintains a rating on such notes, the rating agencydowngrades its credit rating on the notes within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(1) and (2) above.

 

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 or amendment of the project financed by aloan in a manner unacceptable to the lender; (f) the nationalization orsustained discontinuance of all or a substantial portion of PLDT’s business;and (g) other typical events of default, including the commencement of bankruptcy,insolvency, liquidation or winding up proceedings by PLDT.

 

Smart’s debt instruments contain certain restrictivecovenants that require Smart to comply with specified financial ratios andother financial tests at semi-annual measurement dates.  The financial testsunder Smart’s loan agreements include compliance with a debt to equity ratio ofnot more than 1.50:1 and a debt service coverage ratio of not less than1.50:1.  Smart has maintained compliance with all of its financial covenants.The agreements also contain customary and other default provisions that permitthe lender to accelerate amounts due under the loans or terminate theircommitments 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 loan agreement. These cross-default provisions are triggered upon a payment or other defaultpermitting the acceleration of Smart debt, whether or not the defaulted debt isaccelerated; (b) failure by Smart to comply with certain financial ratiocovenants; (c) any reduction in PLDT’s ownership of Smart’s shares below 51%;(d) any reduction in First Pacific’s and Metro Pacific Corporation’s collectivedirect and/or indirect ownership of PLDT’s common stock below 17.5% of thetotal common stock outstanding; and (e) the occurrence of any material adversechange in circumstances that the lender reasonably believes materially impairsSmart’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 sole unrestructured borrowings of Piltel.  Piltel’s failure to redeemthe convertible bonds when they fell due does not cause a default under thedebt arrangements of any other member of the PLDT group.  Piltel is working toidentify the holders of convertible bonds so that it can finalize redemptionarrangements.

 

The Credit and Omnibus Agreements of Mabuhay Satelliteimposes several negative covenants.  In particular, these covenants, amongother things, restrict material changes in Mabuhay Satellite’s nature ofbusiness and ownership structure, any lien upon or with respect to any of itsassets or to any right to receive income, acquisition of capital stock,declaration and payment of dividends, merger, consolidation and sale withanother entity and incurring or guaranteeing additional long-term debt beyondprescribed amounts.

 

ePLDT’sloan agreement imposes negative covenants which, among other things, restrictePLDT in regard to payment of cash dividends or any other income or any capitaldistribution to PLDT, voluntary suspension of its entire business operationsfor a period of 60 consecutive days, dissolution of its legal existence, andcreation of any encumbrances on the shares pledged.  One of ePLDT’s 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.

 

*Financing Requirements*

 

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

 

Since2002, we have been utilizing internally generated cash, particularly from our wirelessbusiness, to reduce our overall level of indebtedness.  In line with thisobjective, we have managed our capital expenditures, reduced our investmentsand suspended dividend payments to common shareholders from April 2001 to2004.  As a result of our improving cash flows and reduced debt levels, we haverestored the payment of common dividends in May 2005 and currently intend togradually increase our dividend payout ratio in succeeding years as we expectto improve our leverage ratios.

 

*Credit Ratings*

 

None of our existingindebtedness contains provisions under which credit rating downgrades wouldtrigger a default, changes in applicable interest rates or other similar termsand conditions.  

 

**Rating Agency**

**Credit Rating**

** **

**Outlook**

 

 

 

 

Standard and Poor’s

Foreign Currency Senior Unsecured Debt Rating

BB+

Stable

 

 

 

 

Moody’s Investors 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

** **

OnMay 31, 2007, Moody’s Investor Service, or Moody’s, upgraded PLDT’s localcurrency corporate family rating to Baa2 from Baa3.  This concludes thepossible upgrade that commenced on April 11, 2007.  At the same time, Moody’saffirmed PLDT’s Ba2 foreign currency bond rating.  The outlook on the ratingsis stable.  The ratings reflect PLDT’s continued improvements in its financialprofile, a strong operating performance and a dominant market position.

 

OnNovember 3, 2006, Moody’s affirmed PLDT’s Ba2 senior unsecured foreign currencyrating and changed its outlook to stable from negative.  The rating action wasprompted by the change in outlook on the Philippines Ba3 country ceiling forforeign currency bonds to stable from negative.  On July 18, 2006, Moody’supgraded PLDT’s local currency corporate family rating from Ba1 to Baa3 with apositive outlook.  The upgrade has been prompted by the following features: (1)continued improvements in PLDT’s credit profile; (2) PLDT enjoys a lowly gearedbalance sheet; (3) PLDT has a 65% share in revenue terms of the market whereonly one major competitor is present; and (4) PLDT has sufficient flexibilityto be able to invest its free cash flows into upgrading its technology base.

 

OnAugust 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 bondsand senior notes to “BB+” from “BB” and affirmed PLDT’s long-term localcurrency IDR of “BBB-” with a positive outlook.  Following the licensing ofFitch to provide National ratings in the Philippines, Fitch assigned PLDT aNational long-term rating of “AAA(ph1)” with a stable outlook.  The ratingsaction follows Fitch’s announcement that it has upgraded the Country Ceiling onthe Republic of the Philippines to “BB+” from “BB.”

 

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

 

*Off-balance Sheet Arrangements*

* *

There are nooff-balance sheet arrangements that have or are reasonably likely to have any current orfuture effect on our financial position, resultsof operations, cash flows, changes in stockholders’equity, liquidity, capitalexpenditures or capital resources that are material to investors.

 

*Equity Financing*

* *

PLDT raised Php63 million and Php275 million from theexercise by certain officers and executives of stock options in 2006 and 2005,respectively.  In addition, through our subscriber investment plan, or SIP,which provides postpaid fixed line subscribers the opportunity to buy shares ofour 10% cumulative convertible preferred stock as part of the upfront paymentscollected from subscribers, PLDT was able to raise Php4 million, Php10 million,Php7 million in 2006, 2005 and 2004, respectively.  

* *

Cash dividend payments in 2006 amountedto Php14,999 million, of which Php14,447 million and Php552 million were paidto common and preferred shareholders, respectively, compared to Php11,173million, of which Php9,587 million and Php1,586 million were paid to common andpreferred 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

 

Php2,373

 

 

May 5, 2005

 

June 3, 2005

 

July 14, 2005

 

21.00

 

3,589

 

 

November 8, 2005

 

November 28, 2005

 

December 28, 2005

 

21.00

 

3,625

 

 

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

 

9,388

 

Asat December 31, 2006, there were 188.4 million PLDT common shares outstandingcompared to 180.8 million common shares outstanding as at December 31, 2005.  See*Note 15 – Stockholders’ Equity* to the accompanying consolidatedfinancial statements in Item 18 for further discussion.  

 

***Contractual Obligations and Commercial Commitments***

 

***Contractual Obligations***

** **

The following table discloses the PLDT Group’scontractual obligations outstanding as at December 31, 2006: 

** **

 

** **

**Long-term lease obligations**

**Unconditional purchase**

**Other long-term**

** **

**Year**

**Long-term debt**

**Operating**

**Capital**

**obligations****(1)**

**obligations**

**Total**

 

(in million pesos)

2007

16,316

572

1,521

4,972

–

23,381

2008

7,759

593

38

981

1,629

11,000

2009

14,978

564

10

981

–

16,533

2010

4,834

465

1

981

–

6,281

2011

1,279

358

–

981

–

2,618

2012 and onwards

40,692

868

–

1,962

–

43,522

Total 

85,858

3,420

1,570

10,858

1,629

103,335

 

*(1)**Based on the Original Air Time Purchase Agreementwith AIL.*

 

*Long-termDebt Obligations*

 

For a discussion of our long-term debt obligations*,*see*Note 12 – Interest-bearing Financial Liabilities*to the consolidatedfinancial statements in Item 18*.*

 

*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 approximatelyPhp6 million.

 

*LicenseAgreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius.*PLDT entered into a license agreement with Mobiuspursuant to which Mobius has granted PLDT a non-exclusive, non-assignable andnon-transferable license for the use of computer software components.  Underthis agreement, Mobius is also required to provide maintenance services for aperiod of one year at no additional maintenance charge.  PLDT may purchasemaintenance services upon expiration of the first year for a fee of 15% of thecurrent published license fee.  As at December 31, 2006, PLDT’s aggregateremaining obligation under this agreement was approximately Php10 million.

 

*OtherLong-term Operating Lease Obligations*.The PLDT Group has various long-term lease contracts for periods ranging fromtwo to ten years covering certain offices, warehouses, cell sitestelecommunication equipment locations and various office equipment.  Inparticular, Smart has lease obligations 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 atDecember 31, 2006 in respect of office and lot rentals with over 185 lessorsnationwide, ePLDT has lease obligations amounting to Php238 million as atDecember 31, 2006 in respect of certain office space rentals and PLDT Globalhas lease obligations amounting to Php13 million as at December 31, 2006 inrespect of certain office space rentals.

 

*Long-termCapital Lease Obligations*

 

For adiscussion of our long-term capital lease obligations, see *Note 12 –Interest-bearing Financial Liabilities*to the consolidated financialstatements in Item 18.

 

*UnconditionalPurchase Obligations*

 

*AirTime Purchase Agreement with AIL.*Asalso discussed in*Note 16 – Related Party Transactions*to theconsolidated financial statements in Item 18, PLDT is a party to a Founder NSPAir Time Purchase Agreement entered into with AIL in March 1997, which wasamended in December 1998 (as amended, the “Original ATPA”), under which PLDTwas granted the exclusive right to sell AIL services as national serviceprovider, or NSP, in the Philippines.  In exchange, the Original ATPA requiredPLDT to purchase from AIL a minimum of US$5 million worth of air time (the“Minimum Air Time Purchase Obligation”) annually over ten years commencing onJanuary 1, 2002 (the “Minimum Purchase Period”), the purported date ofcommercial operations of the Garuda I Satellite. In the event that AIL’saggregate billed revenue was less than US$45 million in any given year, theOriginal ATPA also required PLDT to make supplemental air time purchasepayments not to exceed US$15 million per year during the Minimum PurchasePeriod (the “Supplemental Air Time Purchase Obligation”). 

 

Underthe Original ATPA, the Minimum Air Time Purchase Obligation and theSupplemental Air Time Purchase Obligation terminated upon the earlier of (i)the expiration of the Minimum Purchase Period and (ii) the date on which 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 timeto time, including the amendment through the rescheduling agreement, datedSeptember 30, 2002, which extended the principal repayment dates to agreedperiods with the final maturity date on January 31, 2012 (collectively, the“Amended Credit Agreement”); and (2) amounts owing to MMOC under the SpacecraftContract dated August 28, 1995, as amended on December 30, 1998.

 

As atDecember 31, 2006 and 2005, PLDT’s outstanding accrued obligations under the OriginalATPA was Php3,991 million and Php3,493 million, respectively.  Total air timepurchases made under this agreement amounted to Php698 million, Php1,008 millionand Php1,299 million for the years ended December 31, 2006, 2005 and 2004,respectively. 

 

AILhas incurred recurring significant operating losses, negative operating cashflows, and significant levels of debt.  The financial condition of AIL waspartly due to the NSPs, inability to generate the amount of revenues originallyexpected as the growth in subscriber numbers has been significantly lower thanbudgeted.  

 

OnSeptember 1, 2006, AIL, PT Asia Cellular Satellite, a 95% owned subsidiary ofAIL, and Inmarsat Global Limited, or Inmarsat, reached an agreement to pooltheir resources to develop powerful and novel product and service offerings inthe Asian region, founded on their respective mobile satellite communicationsnetworks, with (a) Inmarsat performing the role of satellite and network operator andwholesale product and services developer and (b) AIL performing the role ofwholesale and retail distributor of products and services.  

 

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.

 

OnSeptember 1, 2006, PLDT entered into a gateway services agreement withInmarsat, under which 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.

 

OnSeptember 1, 2006, AIL and PT Asia Cellular Satellite entered into a termsheet, as amended on October 20, 2006 and further amended on November 20, 2006(the “Bank Term Sheet”), with a majority of the banks to be used as the basisfor further good faith negotiations between the parties thereto with a view toentering into an agreement further amending the Amended Credit Agreement withAIL’s bank creditors.  Under the Banks Term Sheet, a majority of the banksagreed, subject to satisfaction of certain conditions, among other things, toamend the Original ATPA as set forth in an attachment to the Banks Terms Sheetand to restructure AIL’s indebtedness.   Pursuant to the business collaborationarrangements between AIL and Inmarsat, on September 1, 2006, Inmarsat made thefirst payment of US$4 million to AIL which was used to pay principal andinterest payable to the banks in accordance with the Banks Term Sheet.

 

OnFebruary 1, 2007, the parties to the Original ATPA entered into an amendment tothe Original ATPA on substantially the terms attached to the Bank Terms Sheet(the “Amended ATPA”).  Under the Amended ATPA, the Minimum Air Time PurchaseObligation was amended and replaced in its entirety with an obligation of PLDT(the “Amended Minimum Air Time Purchase Obligation”) to purchase from AIL aminimum of US$500,000 worth of air time annually over a period ending upon theearlier of (i) the expiration of the Minimum Purchase Period and (ii) the dateon which all indebtedness incurred by AIL to finance the AIL System is repaid.Furthermore, the Amended ATPA unconditionally released PLDT from anyobligations arising out of or in connection with the Original ATPA prior to thedate of the Amended ATPA, except for obligations to pay for billable units usedprior to such date.  Moreover, pursuant to a letter of confirmation, dated February1, 2007, the banks released and discharged PLDT and ACeS Philippines and theirrespective subsidiaries from any and all obligations and liabilities under theOriginal ATPA and related agreements. 

 

Moreover,in accordance with the above contractual arrangements, ACeS Philippinesacquired (i) from LMGT Holdings (ACeS), Inc., or LMGT, 50% of its equityinterest in AIL for a consideration of US$0.75 million pursuant to a sale andpurchase agreement entered into on February 1, 2007 and (ii) from Tera GlobalInvestment Ltd., or TGIL, for a nominal consideration 50% of TGIL’s interest ina promissory note issued by AIL, which 50% interest represents an aggregateamount of US$44,743,752, or the Transferred AIL Note, together with relatedsecurity interests pursuant to sale agreement entered into on February 1,2007.  Immediately thereafter, a portion of the Transferred AIL Note wasconverted into shares of AIL and the balance was converted into non-interestbearing convertible bonds of AIL.  As a result of these transactions, ACeSPhilippines owned 36.99% of AIL as at the date of this report.

 

*OtherLong-term Obligations*

 

*MandatoryConversion and Purchase of Shares*.As discussed in *Note 14 – Preferred Stock Subject to Manadatory Redemption*to the consolidated financial statements in Item 18, PLDT had issued a total of3 million shares of Series V Convertible Preferred Stock, 5 million shares ofSeries VI Convertible Preferred Stock and 4 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58 million shares ofSeries K Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel adopted in June 2001.  As at December 31, 2006,all Series VII Convertible Preferred Stock had been converted.

 

Eachshare of Series V and VI Convertible Preferred Stock is convertible at any timeat 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, the remaining outstanding sharesunder these series will be mandatorily converted to PLDT common shares.  Undera put option exercisable for 30 days, holders of common shares received onmandatory conversion of the Series V and VI Convertible Preferred Stocks willbe able to require PLDT to purchase such PLDT common shares for Php1,700 pershare and US$36.132 per share, respectively.  

 

As at December 31, 2006, 2,675,393 shares of Series VConvertible Preferred Stock, 4,419,916 shares of Series VI ConvertiblePreferred Stock and all of the 3,842,000 shares of Series VII ConvertiblePreferred Stock had been voluntarily converted to PLDT common shares.  As atDecember 31, 2006, 46,047 shares of Series V and 875,188 shares of Series VIConvertible Preferred Stocks remained outstanding.  The aggregate value of theput option based on outstanding shares as at December 31, 2006 was Php1,629million which is puttable on June 4, 2008, if all of the outstanding shares ofSeries V and VI Convertible Preferred Stocks were mandatorily converted and allthe common shares were put to PLDT at that time.  The market value of theunderlying shares of common stock was Php2,349 million, based on the marketprice of PLDT common shares of Php2,550.00 per share as at December 31, 2006.

 

***Commercial Commitments***

 

As at December 31, 2006, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php1,546 million.These commitments will expire within one year.

 

**Impact of Inflation and Changing Prices**

 

Inflation can be a significantfactor in the Philippine economy, and we are continually seeking ways tominimize its impact.  In recent periods, however, we do not believe inflationhas had a material impact on our operations.  The average inflation rate in the Philippines in 2006 was 6.2%, compared to 7.6% in 2005.

 

**Item 6.       Directors,Senior Management and Employees******

** **

**Directors, Key Officersand Advisors**

 

The following are the names, ages and periods ofservice, of the directors/independent directors of PLDT, all of whom had beennominated for re-election and were re-elected at the annual meeting of shareholdersthat was held on June 12, 2007: 

 

** **

**Name**

** **

** **

**Age**

** **

**Period during whichindividual has served as such**

 

 

 

 

 

Manuel V. Pangilinan

 

60

 

November 24, 1998 to present 

Napoleon L. Nazareno

 

57

 

November 24, 1998 to present

Helen Y. Dee

 

62

 

June 18, 1986 to present

Ray C. Espinosa 

 

51

 

November 24, 1998 to present

Tsuyoshi Kawashima(1)

 

48

 

July 11, 2006 to present

Tatsu Kono

 

54

 

March 28, 2006 to present

Rev. Fr. Bienvenido F. Nebres, S.J.*

 

67

 

November 24, 1998 to present

Corazon S. de la Paz 

 

66

 

September 25, 2001 to present

Ma. Lourdes C. Rausa-Chan(2)

 

53

 

March 6, 2007 to present

Oscar S. Reyes*

 

61

 

April 5, 2005 to present

Albert F. del Rosario

 

67

 

November 24, 1998 to present

Pedro E. Roxas*

 

51

 

March 1, 2001 to present

Alfred V. Ty*

 

39

 

June 13, 2006 to present

___________

**    Independent Director*

*(1) Mr. Tsuyoshi Kawashima was elected to fill thevacancy resulting from Mr. Shigeru Yoshida’s resignation on July 11, 2006.*

*(2) Atty. Ma. Lourdes C. Rausa-Chan replaced Mr.Antonio O. Cojuangco who resigned effective January 7, 2007.*

 

The names, ages, positions and periods of service ofthe key officers and advisors of PLDT as at June 12, 2007 are as follows: 

 

** **

**Name**

** **

** **

**Age**

** **

** **

**Position(s)**

** **

**Period during which**

**individual has served as such**

 

 

 

 

 

 

 

Manuel V. Pangilinan

 

60

 

Chairman of the Board

 

February 19, 2004 to present

Napoleon L. Nazareno

 

57

 

President and Chief Executive Officer

 

February 19, 2004 to present 

Ernesto R. Alberto

 

45

 

Senior Vice President Corporate Business Head

 

May 15, 2003 to present

Rene G. Bañez

 

51

 

Senior Vice President 

 

January 25, 2005 to present 

 

 

 

 

Chief Governance Officer 

 

October 5, 2004 to present 

Anabelle L. Chua 

 

46

 

Treasurer 

 

February 1, 1999 to present

 

 

 

 

Senior Vice President

 

February 26, 2002 to present

 

 

 

 

Corporate Finance and  Treasury Head

 

March 1, 1998 to present

 

 

 

 

Smart Chief Financial Officer 

 

December 1, 2005 to present 

Jun R. Florencio

 

52

 

Senior Vice President

 

June 14, 2005 to present

 

 

 

 

Audit and Assurance Head 

 

September 1, 2000 to February 15, 2006

 

 

 

 

Internal Audit and Fraud Risk Management Head

 

February 16, 2006 to present

Menardo G. Jimenez, Jr..

 

44

 

Senior Vice President 

 

December 9, 2004 to present 

 

 

 

 

Corporate Communications and Public Affairs Head

 

December 1, 2001 to June 15, 2004

 

 

 

 

Retail Business Head

 

June 16, 2004 to present 

George N. Lim

 

55

 

Senior Vice President 

 

February 26, 1999 to present 

 

 

 

 

Network Services Head 

 

February 1, 2003 to present 

Rosalie R. Montenegro

 

58

 

Senior Vice President 

 

July 10, 2000 to present 

 

 

 

 

Call Center Business Head 

 

February 1, 2003 to present 

Alfredo S. Panlilio

 

44

 

Senior Vice President 

 

May 8, 2001 to present 

 

 

 

 

PLDT Global Corp. President 

 

June 16, 2004 to present 

Claro Carmelo P. Ramirez

 

47

 

Senior Vice President 

 

July 1, 1999 to present 

 

 

 

 

International and Carrier  Business Head

 

June 16, 2004 to December 4, 2005

 

 

 

 

Consumer Affairs Head 

 

December 5, 2005 to present 

Ma. Lourdes C. Rausa-Chan

 

53

 

Corporate Secretary 

 

November 24, 1998 to present 

 

 

 

 

Senior Vice President, 

 

January 5, 1999 to present 

 

 

 

 

Corporate Affairs and Legal

 

 

 

 

 

 

Services Head

 

 

Victorico P. Vargas

 

56

 

Senior Vice President Human Resources Head

 

February 15, 2000 to present

 

 

 

 

International and Carrier  Business Head

 

March 1, 2007 to present

June Cheryl C. Furigay

 

33

 

Vice President

 

June 14, 2005 to present

 

 

 

 

Financial Reporting and Controllership Head

 

November 16, 2006 to present

Christopher H. Young

 

49

 

Chief Financial Advisor

 

November 24, 1998 to present

Donald J. Rae

 

46

 

Chief Operations Advisor of Smart

 

January 1, 1999 to present

Rolando G. Peña

 

44

 

Network Services Head of Smart

 

September 1, 1994 to present

Ramoncito S. Fernandez

 

50

 

Administration and Materials Management Head of Smart

 

June 6, 2000 to present

Danilo J. Mojica

 

46

 

Wireless Consumer Head of Smart

 

June 1, 2006 to present

* *

Under the Shareholders Agreemententered into among First Pacific, NTT Communications and NTTC-UK on September 28, 1999, as amended by the Cooperation Agreement dated January 31, 2006, NTT Communications is entitled to nominate two directors to the PLDT board of directorsand First Pacific and its affiliates are entitled to nominate six directors.The Shareholders Agreement also entitles NTT Communications to nominate twodirectors to the board of directors of Smart and, subject to specifiedconditions, one member to the board of directors of all other PLDTsubsidiaries.  As a result of the Cooperation Agreement, in respect of NTTCommunications’ right to nominate two directors to each of the board ofdirectors of PLDT and Smart, respectively, NTT Communications and the FPParties agreed to vote as a PLDT shareholder, lobby the directors of PLDT andotherwise use reasonable efforts to procure a shareholders’ vote in favor ofreplacing on each of the board of directors of PLDT and Smart, respectively,one NTT Communications nominee with one DoCoMo nominee.  Under the ShareholdersAgreement, NTT Communications is also entitled to appoint members or advisorsof certain PLDT management and board committees, including the audit,governance and nomination, executive compensation and technology strategy committeesdescribed below under “— Audit, Governance and Nomination, ExecutiveCompensation and Technology Strategy Committees,” and as a result of theCooperation Agreement, the FP Parties and NTT Communications agreed to usereasonable efforts to procure that DoCoMo be entitled to appoint oneindividual, who may be replaced at any time, to attend any board committee ofPLDT as a member, advisor or observer.  Upon NTT Communications, DoCoMo andtheir subsidiaries owning in the aggregate 20% or more of the shares of PLDT’scommon stock and for as long as NTT Communications, DoCoMo and theirsubsidiaries continue to own in the aggregate 17.5% of the shares of PLDT’scommon stock then outstanding, DoCoMo will be entitled to nominate oneadditional DoCoMo nominee to the board of directors of each of PLDT andSmart.   Under the Shareholders Agreement and the Cooperation Agreement, eachparty has agreed, under certain circumstances, to vote its shares of commonstock in favor of the nominees designated by the other parties. For moreinformation about the Cooperation Agreement, see Item 7. “Major Shareholdersand Related Party Transactions –– Related Party Transactions –– CooperationAgreement with First Pacific and certain affiliates, or the FP Parties, NTTCommunications and DoCoMo.”

 

Thebusiness address of Donald J. Rae, RamoncitoS. Fernandez and Rolando G. Peña andDanilo J. Mojica is Smart Tower II, Ayala Avenue, Makati City, Philippines.  The business address of each of the other directors, key officers and advisorsidentified above is the Ramon Cojuangco Building, Makati Avenue, Makati City , Philippines.

 

Thefollowing is a brief description of the business experience during the pastfive years of each of our directors, key officers and advisors.

** **

**Mr.Manuel V. Pangilinan** is the chairmanof our board and the managing director of First Pacific.  He assumed thechairmanship of our board in February 2004 after serving as president and chiefexecutive officer for over five years since November 1998.  During hispresidency, he led the successful transformation of PLDT from a traditionalplain old telephony service (voice) into a convergent voice, data, video(multi-media) service.  He is the chairman of the Governance and Nomination andTechnology Strategy Committees of PLDT.  He is also the chairman of the boardsof Smart, Piltel, ePLDT and Metro Pacific Investments Corporation.  He alsoholds directorships in Metro Pacific Corporation and Landco PacificCorporation.  In 2005, he was named “Management Man of the Year,” a prestigiousaward that the Management Association of the Philippines bestows on individualsin the business community or government for attaining unquestioned distinctionin the practice of management and for contributing to the country’s progress.He was chosen for, among his other achievements, engineering the turnaround ofPLDT and Piltel through a disciplined convergence strategy consisting ofconsolidation, diversification and expansion, spearheading PLDT’s emergence asone of Asia’s most recognized, admired, innovative and best performingtelecommunication companies, spurring investor interest in the Philippines bybringing First Pacific and other foreign investors into the Philippines, beingan exemplary Filipino capable of effective and ethical leadership and ofcompeting with the best in the international business community, and for anoutstanding career that spans business, academe, charitable, non-government,arts and culture, sports and health organizations.  In May 20006, the Office ofthe President of the Philippines awarded Mr. Pangilinan the Order of Lakandularank of Komandante in recognition of his contributions to the country.

 

**Mr.Napoleon L. Nazareno** is the presidentand chief executive officer of PLDT effective February 19, 2004 andconcurrently the president and chief executive officer of Smart and Piltel,positions he has held since January 2000 and November 2004, respectively.  Healso serves as a member of the Technology Strategy Committee. He is thechairman of the boards of I-Contacts Corporation, Wolfpac, Smart Broadband andMabuhay Satellite and the president of ACeS Philippines.  He also holdsdirectorships in Rufino Pacific Tower Condominium Corporation and somesubsidiaries of PLDT, namely, ePLDT and PLDT Global.  His business experiencespans over 30 years and cuts across a broad range of industries, namely,packaging, bottling, petrochemicals, real estate and, in the last decade,telecommunications and information technologies.  In August 1995, he served aspresident and chief executive officer of Metro Pacific Corporation untilDecember 1999.  In November 2004, Mr. Nazareno was appointed by PresidentGloria Macapagal-Arroyo as Private Sector Representative of the Public-PrivateSector Task Force for the Development of Globally Competitive PhilippineService Industries.  He was voted Best Chief Executive Officer of the Year inthe Philippines at the 2004, 2005 and 2006 Best-Managed Companies and CorporateGovernance Polls conducted by *Asiamoney,*one of Asia’s most influentialmagazines.  

 

**Ms.Helen Y. Dee** is the chairman andpresident and/or chief executive officer of Hydee Management & Resources,Inc., House of Investments, Inc., Tameena Resources, Inc., Grepalife AssetManagement Corporation and Grepalife Fixed Income Fund Corporation.  She isalso chairman of Rizal Commercial Banking Corporation, Landev Corporation,Manila Memorial Park, Inc., Mapua Information Technology Center, Inc. andHi-Eisai Pharmaceuticals, Inc. and the vice-chairman of Pan Malayan Managementand Investment Corporation.  She is the president of Moira Management, Inc. andYGC Corporate Services, Inc.  She sits on the boards of EEI Corporation, PetroEnergy Resources Corp., Nippon Life Insurance Co., South Western Cement Corp.,Seafront Resources Corp., Malayan Insurance Co. Inc., MICO Equities, Inc.,Hermoza Ecozone Development Corporation, La Funeraria Paz, Inc., Honda CarsPhilippines, Inc. and Isuzu Philippines, Inc.

 

**Atty.Ray C. Espinosa** is the president ofePLDT and the chairman of certain subsidiaries of ePLDT, namely Parlance,Vocativ, ePLDT Ventus, SPi, Infocom, Digital Paradise, Airborne Access andLevel Up!.  He also serves as a member of the Technology Strategy Committee.  Heis a member of the boards of Cyber Bay Corporation, Nation BroadcastingCorporation, Lepanto Consolidated Mining Co., Mediaquest Holdings, Inc., MetroPacific Resources, Inc., Philippine Telecommunications Investment Corporationand several other companies.  He is vice-chairman of the PLDT Beneficial TrustFund.  Until June 30, 2000, he was a partner and member of the ExecutiveCommittee of the law firm SyCip Salazar Hernandez & Gatmaitan.

 

**Mr.Tsuyoshi Kawashima**has been thegeneral manager of the Philippine branch of NTT Communications since April2005.  He joined NTT Communications inOctober 1999 as senior manager of Global Business Development in the GlobalBusiness Division.  Prior to that, he occupied various positions in TheLong-Term Credit Bank of Japan, Ltd. from 1982 to 1998.  Since August 2000, hehas been an Executive Advisor of PLDT.  He serves as a member of the ExecutiveCompensation Committee and as an advisor to the Audit Committee of the Board ofDirectors of PLDT.  

 

**Mr.Tatsu Kono**is the managing directorof the Corporate Sales Department, Corporate Division of DoCoMo.  He joinedDoCoMo in 2000 and served as executive director of the Global Investment Group,Global Business Department.  Prior to that, he occupied various positions inKokusai Denshin Denwa Co., Ltd., or KDD, and became the general manager of theSales Promotion Department in 1989, the managing director of the Kyoto SalesOffice in 1990 and the managing director of the Tokyo Sales Office in 1998.  Heserves as a member of the Governance and Nomination and Technology Strategy Committeesand as an advisor to the Audit Committee of the Board of Directors of PLDT.   

 

**Rev.Fr. Bienvenido F. Nebres, S.J.** is thepresident of the Ateneo de Manila University and the vice chairman of the Boardof Trustees of Asian Institute of Management.  He is also a member of theboards of trustees of several other private educational institutions.  He isthe chairman of the Audit Committee and a member of the Governance andNomination Committee of the board of directors of PLDT.  

 

**Ms.Corazon S. de la Paz** is the vicechairman of the Social Security Commission, the president and chief executiveofficer of the Social Security System and the chairman of Equitable-PCI Bank.She is an advisor to the Audit Committee of PLDT.  She has been electedpresident of the International Social Security Association, an associationbased in Geneva, Switzerland, to serve as such for a three-year term commencingin September 2004.  Until June 30, 2001, she was the chairman and seniorpartner of Joaquin Cunanan & Co., a member firm of PricewaterhouseCoopersWorldwide.  She is a director of San Miguel Corporation, Ayala Land, Inc.,Philippine Health Insurance Corporation, Philex Mining Corporation, PhilexGold, Inc., Republic Glass Holding Corp., PCI Leasing and Finance, Inc., PCICapital Corporation, EBC Investment, Inc. and Ionics Circuits, Inc.  She isalso a trustee of several educational and non-profit organizations.

** **

**Atty.Ma. Lourdes C. Rausa-Chan** is seniorvice president for corporate affairs and legal services and the general counseland corporate secretary of PLDT.  She also serves as corporate secretary ofseveral subsidiaries of PLDT.  Prior to joining PLDT in November 1998, she wasthe group vice president for legal affairs of Metro Pacific Corporation for 11years.  She has previously served as a director of PLDT from December 1999 toFebruary 2001 and from June to December 2002 and was elected again on March 6,2007.   

 

**Mr.Oscar S. Reyes**is the Chairman****ofUnicapital Securities, Inc. and Link Edge, Inc.  He serves as a member of theAudit, Governance and Nomination, Executive Compensation and TechnologyStrategy Committees of the Board of Directors of PLDT and also holdsdirectorships in Bank of the Philippine Islands, CEOs, Inc., DMCI Holdings,Inc., Level Up!, Inc., Manila Water Corporation, Universal Robina Corporation,Sunlife of Canada (Philippines) and other private corporations.  He was amember of the Advisory Board of PLDT for four years until April 2005.  Mr.Reyes was the Country Chairman of the Shell Companies in the Philippines from 1997 to 2001 and concurrently the Managing Director of Shell PhilippinesExploration B.V. until 2002.  From 2002 to 2004, he served as the ManagementAdviser of Shell Philippines Exploration B.V. and as CEO Adviser of PilipinasShell Petroleum Corporation.  

 

**Mr.Albert F. del Rosario** is the chairmanof the board of Gotuaco del Rosario and Associates, Inc., Philippine IndocoilCorporation and Business World Publishing Corporation, the vice chairman of theboard of Asia Traders Insurance Corporation and the president of ADR Holdings,Inc., ARS Reinsurance Brokers, Inc., Management Association of the Philippines and Philippine Telecommunications Investment Corporation.  From 2001 to 2006,he served as the Ambassador Plenipotentiary and Extraordinary of the Republicof the Philippines to the United States of America.  He is also the chairman ofthe Board of Trustees of the PLDT Beneficial Trust Fund and the ExecutiveCompensation Committee of the Board of Directors of PLDT.  Mr. del Rosario alsosits on the boards of Infrontier (Philippines) Inc., Smart CommunicationsPhilippine Holdings, Inc., LMG Chemicals Corporation, Pacific Plaza CondominiumCorporation, Pacific Plaza Towers Condominium Corporation, Six HarmoniesHoldings, Inc., Landco Pacific Corporation and Metro Pacific InvestmentsCorporation.  

** **

**Mr.Pedro E. Roxas** is the chairman and/orchief executive officer of various business organizations in the fields ofagri-business, sugar manufacturing and real estate development including RoxasHoldings, Inc., CADP Group Corp., Roxaco Land Corporation and Roxas &Company, Inc., and is a director of BDO Private Bank.  He serves as a member ofthe Audit Committee and Executive Compensation Committee of the Board ofDirectors of PLDT.

** **

**Mr.Alfred V. Ty**is the chairman of AsiaPacific Top Management International Resources Corporation, vice chairman ofToyota Motor Philippines Corporation, the president of Federalland, Inc. andthe corporate secretary of Metropolitan Bank and Trust Corporation.  He servesas a member of the Governance and Nomination and Executive CompensationCommittees of PLDT.

 

**Mr.Ernesto R. Alberto** is senior vicepresident for the corporate business group of PLDT.  He has over 20 years ofwork experience in the areas of corporate banking, relationship management andbusiness development.  Prior to joining PLDT in May 2003, he was a vicepresident and the group head of the national corporate group of Citibank N.A., Manila from 1996 to 2003, and previously served as vice president and group head of therelationship management group of Citytrust Banking Corporation.  Mr. Alberto isa director of several subsidiaries of PLDT.

 

**Mr.Rene G. Bañez**is our chief governanceofficer and is a non-voting member of the Governance and Nomination Committeeof PLDT.  He****served asCommissioner of the Philippine Bureau of Internal Revenue from February 2001 toAugust 2002.  Prior to that, he was the head of support services and tax managementgroup of PLDT from January 1999 to January 2001.  He served as group vicepresident for Tax Affairs of Metro Pacific Corporation for three years untilDecember 1998.  He is a non-voting member of the Governance and NominationCommittee of the Board of Directors of PLDT.

 

**Ms.Anabelle L. Chua** is the treasurer ofPLDT and senior vice president for PLDT’s corporate finance and treasurysector.  She concurrently serves as the Chief Financial Officer of Smart.  Shewas a vice president at Citibank, N.A. where she worked for ten years prior tojoining PLDT in March 1998.  She has over 15 years of work experience in theareas of corporate finance, treasury, financial control and credit riskmanagement.  Ms. Chua is currently a director of the Philippine Stock Exchange,Inc. and several subsidiaries and affiliates of PLDT.  She is also a member ofthe board of trustees of the PLDT Beneficial Trust Fund.  

 

**Mr.Jun R. Florencio** is the senior vicepresident for PLDT’s internal audit and fraud risk management group.  He hasover 20 years of work experience in the areas of external and internal audit,credit management, information technology, financial management andcontrollership.  He joined PLDT in April 1999 and served as the financial reportingand control sector head until March 2000.  He then served as audit and assurancehead until he assumed his present position in February 2006.  He held variouspositions in the finance organization of Eastern Telecommunications and was thefinancial controller of Smart for four years until March 1999.

 

**Mr.Menardo G. Jimenez, Jr.** is seniorvice president for the retail business group of PLDT and has previously servedas the Officer-in-Charge of the Mobile Consumer Division of Smart.  He managedvarious broadcasting and production companies in radio, television andstage-theater prior to his appointment as corporate communications and public affairshead of PLDT in December 2001.  His business experience spans more than 20years in film and cinema, theater, television advertising, publishing,broadcasting, education and, recently, in the telecommunications sector.  As afilm producer, he came up with internationally recognized and top-grossingmovies and, under Trumpets Theater Company, a company he founded, he producedtop musical plays.  He had a stint at GMA Network, Inc., where he served ashead of creative services and network promotions, during which he produced anumber of international award-winning campaigns for its radio and televisionprograms.  In 1998, Mr. Jimenez was given the Ten Outstanding Young Men (TOYM)Award in Manila for Multi-Media Achievement.  In 1999, he received his TenOutstanding Young Persons (TOYP) of the World Award for Cultural Achievement in Cannes, France.  He won the first CEO (Communications Excellence inOrganizations) Awards given by the International Association of BusinessCommunicators.  In 2006, his further achievements in handling the retailbusiness of PLDT and his stint in Smart as Officer-in-Charge for marketing wererecognized by the Agora Awards, which chose him as its Marketing Man of theYear.  Mr. Jimenez is the President of the TOYM Foundation, a regular speakerfor the Business Matters Foundation and a contributing writer at two major dailynewspapers.  He is a founder of the Philippine Forum, which convenes the youngmovers of the Philippine business, government, media, art and other sectors ina yearly major forum.

 

**Mr.George N. Lim** is senior vicepresident for the network services group of PLDT.  He has over 25 years of workexperience in telecommunications management.  Prior to his appointment as headof network services in February 2003, he served as head of network developmentand provisioning from February 1999 and as head of marketing from December1993.  He is a director of some subsidiaries of PLDT and Philippine Home CableHoldings, Inc.

 

**Ms.Rosalie R. Montenegro** concurrentlyserves as president of Vocativ, Parlance and Ventus, all of which arewholly-owned subsidiaries of ePLDT engaged in the call center business.  Priorto her appointment as a senior vice president in July 2000, she served asconsumer banking head of ABN-AMRO Savings Bank and as vice president for remotebanking of ABN-AMRO Consumer Bank, Singapore Regional Office from 1997 to1999.  She was vice president for global consumer banking (CitiPhone banking)and service quality director of Citibank N.A. from 1985 to 1996, servicing bothbanking and the credit cards businesses.  Ms. Montenegro holds directorships inseveral subsidiaries of PLDT and ePLDT.

 

**Mr.Alfredo S. Panlilio** is a senior vicepresident of PLDT and currently serves as the president of PLDT Global Corp.  Hejoined PLDT in July 1999 and served as corporate business head until February2003 and as international carrier business until May 2004.  He has over 15years of work experience in the field of business development and informationtechnology.  He held management positions at IBM Philippines, Inc. and was thevice president for business development of the Lopez Communications Group(ABS-CBN Broadcasting, Bayan Telecommunications and SKYCable) prior to joiningPLDT in July 1999.  Mr. Panlilio is also a director of several subsidiaries ofPLDT and PLDT Global. 

 

**Mr.Claro Carmelo P. Ramirez** is seniorvice president for the consumer affairs group.  He was the retail business headfrom February 2003 to June 2004 and then served as the international andcarrier business head until December 2005.  He is also a director of severalsubsidiaries of PLDT.  He has over 20 years of work experience in the field ofmarketing.  He has worked as associate director for Colgate Palmolive Company,Global Business Development in New York, and as marketing director for ColgatePalmolive Argentina, S.A.I.C.  Prior to his appointment as senior vicepresident in July 1999, he was the marketing director of Colgate PalmolivePhilippines, Inc.  

 

**Mr.Victorico P. Vargas** is senior vicepresident for human resources management and effective March 1, 2007,concurrently heads the international and carrier business group of PLDT.  Hehas over 20 years of work experience in the area of human resource management withrespect to various industries including insurance, consumer goods, real estate,banking and finance, and telecommunications/IT.  Prior to joining PLDT inFebruary 2000, he was the country human resources director of Citibank N.A., Manila, and spent two years outside the Philippines as country human resources director ofCitibank, N.A., Bangkok.  He is also a director of several subsidiaries of PLDTand is a non-voting member of the Governance and Nomination and ExecutiveCompensation Committees of the Board of Directors of PLDT.  

 

**Ms.June Cheryl C. Furigay**joinedPLDT in June 2000 as an executive trainee in the finance group and then servedas an executive assistant to the corporate finance and treasury sector headfrom December 2000 to April 2002.  Prior to being appointed to her present position as vice president and financial reporting and controllershiphead in June 2005 and November 2006, respectively,she was the Head of Financial Reporting and Planning Center.  From 1993 to1997, she was a Senior Associate in the business audit and advisory groupof SGV & Co.  She also serves as director and is the treasurer of severalsubsidiaries of PLDT.

** **

**Mr.Christopher H. Young** is our chieffinancial advisor.  He worked in PricewaterhouseCoopers in London and Hong Kongfrom 1979 until 1987, at which time he joined First Pacific in Hong Kong as group financial controller.  He joined Metro Pacific Corporation in 1995 asfinance director, a position he held until he joined us in November 1998.

 

**Mr.Donald J. Rae** is the chief operationsadvisor to Smart.  He served as the chief operating officer for TimeTelecommunications Sdn. Bhd. in Malaysia prior to joining Smart in January1999.  He also spent over ten years with Deloitte & Touche Consultingspecializing in the Asian telecommunications sector.

 

**Mr.Rolando G. Peña**is head of the NetworkServices Division of Smart.  He was firstvice president for technical operations group at Digitel, where he worked forfive years prior to his appointment as a director for Smart’s local exchangecarrier services in September 1994.  He held various positions in EasternTelecommunications Philippines, Inc. from 1982 until 1989.  He has over 22years of experience in telecommunications operations, regional business andtechnical and operations support.  He sits in the boards of Smart, Piltel,Wolfpac, Netopia, Smart Broadband and Mabuhay Satellite.  

** **

**Mr.Ramoncito S. Fernandez**is head of theAdministration and Materials Management Division of Smart.  He is also a member of the board of directors ofSmart, Piltel, I-Contact and Wolfpac.  Until June 2000, he was the executivevice president in charge of marketing, sales and logistics of StarpackPhilippines Corporation.  He has over 15 years of experience in materialsmanagement, industrial marketing and sales. 

** **

**Mr.Danilo J. Mojica**is head of the WirelessConsumer Division of****Smart.  Prior to joining Smart in June 2006, he wasthe general manager and chief operating officer of Cebu Pacific Air, awholly-owned subsidiary of JG Summit Group, from 2003 to 2006 and was presidentof Rickett Benckiser Indonesia from 1997 to 2003.

** **

**Terms of Office**

** **

The directors of PLDT are elected each year to serveuntil the next annual meeting of stockholders and until their successors areelected and qualified.  The term of office of all officers is coterminous withthat of the board of directors that elected or appointed them.

** **

**Family Relationships**

** **

None of the directors, key officersand advisors of PLDT has any family relationships up to the fourth civil degreeeither by consanguinity or affinity.

** **

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

** **

Theaggregate compensation paid to our key officers and directors named above, as agroup, for 2006 amounted to approximately Php368 million.  

** **

Each of the directors, including the members of the advisory board ofPLDT, is entitled to a director’s fee in the amount of Php125,000 for eachmeeting of the board attended.  Each of the members or advisors of the audit,executive compensation, governance and nomination and technology strategy committeesis entitled to a fee in the amount of Php50,000 for each committee meetingattended.

 

There are no agreements between PLDT Group and any of its keymanagement personnel providing for benefits upon termination of employment,except for such benefits to which they may be entitled under PLDT Group’sretirement and incentive plans.

 

**Long-TermIncentive Plan******

 

OnAugust 3, 2004, PLDT’s Board of Directors approved the establishment of a LongTerm Incentive Plan, or Original LTIP, for eligible key executive officers andadvisors of PLDT and its subsidiaries, which is administered by the ExecutiveCompensation Committee.  The Original LTIP is a four-year cash-settled sharebased plan covering the period from January 1, 2004 to December 31, 2007, orthe Performance Cycle.  The payment of awards was intended to be made at theend of the Performance Cycle (without interim payments) and contingent upon theachievement of an approved target increase in PLDT’s common share price by theend of the performance cycle and a cumulative consolidated net income target forthe Performance Cycle.  

 

OnAugust 28, 2006, PLDT’s Board of Directors approved, in principle, the broadoutline of the PLDT Group’s strategic plans for 2007 to 2009 focusing on thedevelopment of new revenue streams to drive future growth while protecting theexisting core communications business.  To ensure the proper execution of thethree-year plan, particularly with respect to the manpower resources beingcommitted to such plans, a new LTIP, or New LTIP, upon endorsement of theExecutive Compensation Committee, was approved by the Board of Directors tocover the period from January 1, 2007 to December 31, 2009, or New PerformanceCycle.     

 

As aresult of the establishment of the New LTIP, the Board also approved the earlyvesting of the Original LTIP by the end of 2006 for those of its participantswho were invited to join the New LTIP and chose to join.  Participants in theOriginal LTIP who were not invited to join the New LTIP, or who were invitedbut chose not to join, remained subject to the Original LTIP and its originalvesting schedule. 

 

TheOriginal LTIP cost, including cost for advisors (presented under professionaland other service fees in the statements of income), and cumulative effect of theadoption of SFAS 123 (R), recognized as an expense as at December 31, 2006 and2005 amounted to Php3,432 million and Php1,224 million, respectively.  As atDecember 31, 2006 and 2005, total Original LTIP liability amounted to Php5,030million and Php1,880 million, respectively.  

 

TheNew LTIP, like the Original LTIP, is a cash plan that is intended to providemeaningful, contingent, financial incentive compensation for eligibleexecutives, officers and advisors of the PLDT Group, who are consistentperformers and contributors to the achievement of the long-term strategic plansand objectives, as well as the functional strategy and goals of the PLDTGroup.  

 

The New LTIP, like the Original LTIP, is administered by the ExecutiveCompensation Committee which has the authority to determine (a) eligibility andidentity of participants; (b) the award attributable to each participant basedon the participant’s annual base compensation and taking into account suchparticipant’s seniority, responsibility level, performance potential, tenurewith the PLDT Group, job difficulty and such other measures as the Committeedeems appropriate; (c) the level of achievement of the performance objectives;and (d) the actual award payable to each participant based on the level ofachievement of the performance objectives.

 

**Executive Stock OptionPlan**

** **

On April 27, 1999 and December 10, 1999, the board ofdirectors and stockholders, respectively, of PLDT approved the executive stockoption plan covering a total of 1,289,745 shares of common stock and theamendment of the seventh article of the Articles of Incorporation of PLDTdenying the pre-emptive right of holders of shares of common stock to subscribefor any issue of the 1,289,745 shares of common stock pursuant to the executivestock option plan.

 

Stock options thatwere granted pursuant to the executive stock option plan to managementexecutives and advisors/consultants of PLDT became fully vested in December2004.  An option holder may exercise his option to purchase that number ofvested shares of common stock underlying his option, in whole or in part, atthe price at Php814 per share, subject to adjustment upon the occurrence ofspecific events described in the executive stock option plan.  The optionexercise period is until December 9, 2009.  The option holder is required togive written notice of exercise to the executive compensation committee,indicating the number of vested shares to be purchased, accompanied by paymentin cash of the full amount of the purchase price for those shares.

 

As at May 31, 2007, the total number of shares ofcommon stock allocated for options granted to the chief executive officer,directors and key officers of PLDT named below, as a group, under the executivestock option plan was 261,290.

 

**Share Ownership******

** **

Thefollowing table sets forth information regarding ownership of our common stock,preferred stock and executive stock options, as at May 31, 2007, by ourcontinuing directors, key officers and advisors.  Each individual below ownsless than 1% of our outstanding common and preferred shares. 

** **

**Name of Owner**

**Shares of**

**Common Stock**

**Shares of**

**Preferred Stock**

**Shares of Common Stock Underlying Executive**

**Stock Options**(1)

 

 

 

 

Manuel V. Pangilinan

217,350

360

–

Napoleon L. Nazareno

6,427

495

–

Helen Y. Dee

22,055(2)

180

–

Ray C. Espinosa

3,201(3)

–

13,042

Tsuyoshi Kawashima

10

–

–

Tatsu Kono

100

–

–

Rev. Fr. Bienvenido F. Nebres, S.J 

3,078(4)

–

–

Corazon S. de la Paz

11,146,310(5)

–

–

Ma. Lourdes C. Rausa-Chan

699(3)

350

–

Oscar S. Reyes

1

360

–

Albert F. del Rosario

119,995(3)

1,560

–

Pedro E. Roxas

1

540

–

Alfred V. Ty

1

–

–

Ernesto R. Alberto

–

–

–

Rene G. Bañez

1

540

–

Anabelle L. Chua

12,778(3)

–

–

Jun R. Florencio

15

530

–

Menardo G. Jimenez, Jr.

22

–

–

George N. Lim

5,756(3)

360

–

Rosalie R. Montenegro 

–

–

–

Alfredo S. Panlilio 

1

–

–

Claro Carmelo P. Ramirez

11,500

–

–

Victorico P. Vargas 

–

180

2,878

June Cheryl C. Furigay

–

–

–

Christopher H. Young

47,813(3)

–

–

Donald J. Rae

–

–

–

Rolando G. Peña

–

–

–

Ramoncito S. Fernandez

156

–

–

Danilo J. Mojica

–

–

–

_____________

 

*(1)    **As at May 31, 2007, underPLDT’s ESOP, options to purchase 19,938**shares of common stock for the keyofficers listed in the table above remain unexercised.  No options have beengranted to non-executive directors.  All outstanding options are exercisable atan exercise price of Php814 per share and have an expiration date of December10, 2009.  All outstanding options were fully vested as at December 10, 2004.*

*(2)    **Includes 21,957 PLDT commonshares registered in the name of Hydee Management and Resources, Inc.  Aschairperson and president of Hydee Management & Resources, Inc., Ms. Deemay exercise voting rights in respect and may be considered to have beneficialownership of these shares.*

*(3)    **Includes PLDT common sharesthat have been lodged with the Philippine Central Depository, Inc.*

*(4)    **Includes 386 shares of PLDT’scommon stock registered in the name of Ateneo de Manila University and 2,690 sharesof PLDT’s common stock held of record by PCD Nominee Corporation.  As Presidentof the Ateneo de Manila University, Rev. Fr. Nebres may exercise voting rightsin respect of these shares and may be considered to have beneficial ownershipof these shares*.

*(5)    **Includes 5,024,789 PLDTcommon shares registered in the name of Social Security System and****6,121,520****PLDT common shares held of record by PCD Nominee Corporation.  Ms. De laPaz, as president and chief executive officer of the Social Security System,may exercise voting rights in respect of these shares and may be considered tohave beneficial ownership of these shares.*

 

Theaggregate number of common and preferred shares directly and indirectly ownedby directors, key officers and advisors listed above, as at May 31, 2007, was 11,597,270and 5,455 respectively, or 6.148182% and 0.000772% of PLDT’s outstanding commonand preferred shares, respectively. 

 

**Boardof Directors –– Independent Directors**

* *

At least four of our directors,namely, Rev. Fr. Bienvenido F. Nebres, S.J., Oscar S. Reyes, Pedro E. Roxas andAlfred V. Ty, are independent directors who are not officers or employees ofPLDT or any of its subsidiaries, and who are free from any business or otherrelationship with PLDT or any of its subsidiaries which could, or couldreasonably be perceived to, materially interfere with the exercise ofindependent judgment in carrying out their responsibilities as directors.  The independence standards/criteria are provided in ourBy-Laws and Manual on Corporate Governance pursuant to which, in general, adirector may not be deemed independent if such director is, or in the past fiveyears had been, employed in an executive capacity by us or any company controlling,controlled by or under common control with us or he is, or within the past fiveyears had been, retained as a professional adviser by us or any of our relatedcompanies, or he is not free from any business or other relationships with uswhich could, or could reasonably be perceived, to materially interfere with hisexercise of independent judgment in carrying out his responsibilities as adirector.

 

**Audit, Governance andNomination, Executive Compensation and Technology Strategy Committees**

 

Ourboard of directors is authorized under the by-laws to create committees, as itmay deem necessary.  We currently have four board committees, namely, theaudit, governance and nomination, executive compensation and technologystrategy committees, the purpose of which is to assist our board of directors.Each of these committees has a board-approved written charter that provides forsuch committee’s composition, membership qualifications, functions andresponsibilities, conduct of meetings, and reporting procedure to the board ofdirectors.

 

*AuditCommittee*

 

Our audit committee is composedof three members, all of whom are independent directors, namely, Fr. BienvenidoF. Nebres, S.J., who chairs the committee, Mr. Pedro E. Roxas and Mr. Oscar S.Reyes.  Mr. Tatsu Kono and Mr. Tsuyoshi Kawashima, who are non-independentmembers of our board of directors, Ms. Corazon S. de la Paz and Mr. Roberto R.Romulo serve as advisors to the audit committee.  All of the members of ouraudit committee are financially literate and Ms. Corazon S. de la Paz, anadvisor to the audit committee, is an accounting and financial managementexpert.

 

Asprovided for in the audit committee charter, the purposes of the auditcommittee are to assist our board of directors:

 

•        in its oversight of PLDT’saccounting and financial reporting principles and policies and internal auditcontrols and procedures;

 

•        in its oversight of the integrityof PLDT’s financial statements and the independent audit thereof;

 

•        in its oversight of PLDT’scompliance with legal and regulatory requirements; 

 

•        in its oversight of the externalauditor’s qualifications and independence; and

 

•        in its oversight of theperformance of the internal auditing organization and the external auditors.

 

Tocarry its direct responsibility for the appointment, setting of compensation,retention and removal of the external auditors, the audit committee has thefollowing duties and powers:

 

•        to review and evaluate thequalifications, performance and independence of the external auditors and the leadpartner of the external auditors;

 

•        to select and appoint the externalauditors and to remove or replace the external auditors;

 

•        to review and approve inconsultation with the head of the internal auditing organization and the chieffinancial advisor the fees charged by the external auditors for audit andnon-audit services;

 

•        to pre-approve all audit andnon-audit services to be provided by and all fees to be paid to the externalauditors;

 

•        to ensure that the externalauditors prepare and deliver annually the statement as to independence andauditors’ statement, to discuss with the external auditors any relationships orservices disclosed in such statements that may impact the objectivity,independence or quality of services of our external auditors and to takeappropriate action in response to such statements to satisfy itself of theexternal auditor’s independence;

 

•        to ensure that the externalauditors or the lead partner of the external auditors is rotated at least onceevery five (5) years; 

 

•        to have separate sessionsperiodically, with management, with the internal audit organization and withthe external auditors, where deemed appropriate, to surface issues warrantingthe attention of the audit committee; and

 

•        to resolve disagreements betweenmanagement and the external auditors regarding financial reporting. 

 

Theaudit committee also has the authority to retain or obtain advice from specialcounsel or other experts or consultants in the discharge of theirresponsibilities without the need for board approval.

 

*Governance and NominationCommittee*

 

Ourgovernance and nomination committee is composed of five voting and twonon-voting members.  Three of the voting members are independent directorsnamely, Fr. Bienvenido F. Nebres, S.J., Mr. Alfred V. Ty and Mr. Oscar S. Reyes.  Mr. Manuel V. Pangilinan, who serves as chairman, and Mr.Tatsu Kono are the other voting members, and Mr. Victorico P. Vargas and Mr.Rene G. Bañez are the non-voting members. 

 

The principal functions andresponsibilities of our governance and nomination committee are:

 

1.       To develop and recommend to the boardfor approval and oversee the implementation of corporate governance principlesand policies;

 

2.       To review and evaluate thequalifications of the persons nominated for election as directors (includingindependent directors) or other positions requiring board appointment;

 

3.       To identify the qualified nomineesand recommend that the board select and recommend such qualified nominees forelection as directors/independent directors at the annual meeting ofshareholders; and

 

4.       To provide an assessment on our board’seffectiveness in the process of replacing or appointing new directors ormembers of the board committees.

 

*Executive Compensation Committee*

 

Ourexecutive compensation committee is composed of six members: five votingmembers and one non-voting member.  Three of these voting members areindependent directors, namely Mr. Pedro E. Roxas, Mr. Oscar S. Reyes and Mr.Alfred V. Ty, two are non-independent directors, namely Mr. Tsuyoshi Kawashimaand Mr. Albert F. del Rosario, who serves as chairman, and one is a non-votingmember, namely Mr. Victorico P. Vargas.

 

The principal functions and responsibilities of our executivecompensation committee are:

 

1.       To provide guidance to and assistour board of directors in developing a compensation philosophy or policyconsistent with our culture, strategy and control environment;

 

2.      To oversee the development andadministration of our compensation programs; and

 

3.       To review and approve corporategoals and objectives relevant to the compensation of our chief executive officer,evaluate the performance of our chief executive officer in light of those goalsand objectives, and set the compensationlevel of our chief executive officer based on such evaluation.

 

*Technology Strategy Committee*

 

EffectiveJune 12, 2007, our board of directors created a new committee, the technologystrategy committee.  Our technology strategy committee is composed of fivemembers, all of whom are voting members.  One of the members is an independentdirector, namely Mr. Oscar S. Reyes, and four are non-independent directors,namely Mr. Manuel V. Pangilinan, who serves as chairman, Mr. Napoleon L. Nazareno, Mr.Ray C. Espinosa and Mr. Tatsu Kono.

 

Theprincipal functions and responsibilities of our technology strategy committeeare:

 

1.       To review and approve ourtechnology strategy and roadmap, and to review and advise our board on majortechnology trends and strategies;

 

2.       To evaluate and advise our boardon actual and proposed technology investments and transactions;

 

3.       To review and submit to the boardrecommendations regarding management’s formulation and execution, and tooversee the execution of, our technology strategy; and 

 

4.       To recommend to the boardapproaches to acquiring and maintaining technology positions and maximizing ouraccess to relevant technologies, and to ensure optimized contribution oftechnology to our business strategy and growth targets.

 

*Finance CommitteeDissolved*

 

EffectiveJune 12, 2007, our board of directors dissolved our finance committee as itsfunctions had regularly been carried out by the full board of directors for aprolonged period of time, supplanting the need to continue to maintain afinance committee.

 

**Directors’and Officers’ Involvement in Certain Legal Proceedings**

 

The following is a description of the cases in whichour Chairman, Manuel V. Pangilinan, our President and Chief Executive Officer,Mr. Napoleon L. Nazareno and our directors, Mr. Albert F. del Rosario and Ms. Ma. Lourdes C. Rausa-Chan are respondents:

 

1.      Mr. Manuel V. Pangilinan, in his capacity asChairman of the Board of Metro Pacific Corporation, a stockholder of MetroTagaytay Land Company, Inc. (“MTLCI”), and four other individuals arerespondents in I.S. 04-A-1057 for alleged violation of Article 315 (1)(b)(“estafa”) of the Revised Penal Code filed by Mr. Vicente A. Tuason in behalfof Universal Leisure Club, Inc. (“ULCI”) and Mr. Jose L. Merin in behalf ofUniversal Rightfield Property Holdings, Inc. (“URPHI”).  In the complaint-affidavit,Messrs. Tuason and Merin alleged that, in violation of the trust reposed byULCI and certain contractual commitments and representations, MTLCI, with theparticipation and/or conformity of the respondents, misappropriated andconverted P139 million that ULCI entrusted for the purpose of incorporatingGolf Land Co., Inc. (“GLCI”), a corporation to be wholly owned by MTLCI and towhich a property of MTLCI was to be transferred in exchange for shares inGLCI.  The said shares were then supposed to be transferred to ULCI.  Based onhis counsel’s advice, Mr. Pangilinan cannot be held liable for violatingArticle 315 (1)(b) of the Revised Penal Code because no document or otherevidence has been presented to prove that Mr. Pangilinan actually participatedin the negotiation, preparation, approval, execution and/or implementation ofthe agreement/contract upon which the claims of the complainants arepurportedly based, much less that Mr. Pangilinan, with abuse of trust andconfidence, misappropriated any amounts paid by ULCI to MTLCI.  On March 25,2004, Mr. Pangilinan submitted his counter-affidavit in I.S. No. 04-A-1057.  Ina Joint Resolution dated June 7, 2004, the City Prosecution Office of Makatidismissed all charges in the estafa case against Mr. Pangilinan.  On November16, 2004, ULCI, through Messrs. Tuason and Merin, filed with the PhilippineDepartment of Justice, or DOJ, a Petition for Review assailing the Resolutionof the City Prosecution Office of Makati.  Subsequently, the complainants andrespondents, including Mr. Pangilinan, filed a Joint Motion to Dismiss (withprejudice) the charges and counter-charges subject of the investigation, whichmotion is pending resolution by the DOJ.

 

2.      Mr. Napoleon L. Nazareno is a respondent inCriminal Case No. 133235-R pending before the 6th Municipal TrialCourt in Cities, Branch 6 of Cebu City, and I. S. No. 2005-57-B pending beforethe Municipal Trial Court of Borongan, Samar, all for alleged violation ofSection 301 in relation to Section 213 of Presidential Decree 1096 (otherwiseknow as the National Building Code of the Philippines).  The complaints allegedthat Smart built its cellsites without securing building permits and Smart’sofficers are criminally liable therefor.  The proceedings in Criminal Case No.133235-R and I. S. No. 2005-57-B have been suspended pending the submission bySmart of a building permit.  To date, the building permits for the sites havebeen secured and Smart is set to file the appropriate pleadings for thedismissal of the cases.

 

3.      Messrs. Nazareno and Albert F. del Rosarioand other directors and officers of the former PDCP Bank, are respondents in acomplaint docketed as I.S. No. 2004-631, which was filed by Chung HingWong/Unisteel/Unisco Metals, Inc. with the DOJ, for alleged syndicated estafa,estafa through falsification of documents, other deceits, misconduct androbbery.  As stated in their respective counter affidavits, the charges againstthe PDCP directors are entirely without merit.  The case is currently pendingwith the Philippine DOJ.     

 

4.      Mr. del Rosario and other formerdirectors/officers and corporate secretaries/assistant corporate secretaries,including Ma. Lourdes C. Rausa-Chan, of Steniel Cavite Packaging Corporation,Metro Paper and Packaging Products, Inc., AR Packaging Corporation and StarpackPhilippines Corporation, are respondents in a case docketed as OMBC-C-04-0363-H (CPL No. C-04-1248), in the Office of the Ombudsman.  Thecomplaint is for alleged:  (a) violation of Republic Act No. 3019 (otherwiseknown as the Anti-Graft and Corrupt Practices Act); (b) estafa through falsification of public documents; (c) falsification ofpublic documents under Article 171, in relation to Article 172, of the RevisedPenal Code, or RPC; (d) infidelity in the custody of public documents underArticle 226 of the RPC; and (e) grave misconduct.  The complaint related tovarious tax credit certificates (allegedly fraudulent, with spurious and fakesupporting documents) issued to Victory Textile Mills, Inc. (allegedly anon-existent corporation with fictitious incorporators and directors) andtransferred to several companies including the aforesaid companies.  Thecomplaint against Mr. del Rosario and Ms. Rausa-Chan involves the first twooffenses only and in their capacity as director and corporate secretary,respectively, of Metro Paper and Packaging Products, Inc.  In the opinion ofthe legal counsels for Mr. del Rosario and Ms. Rausa-Chan, there are no legaland factual bases for their inclusion as respondents in this complaint.  Mr.del Rosario and Ms. Rausa-Chan had no participation or involvement in thealleged anomalous acquisition and transfer of the subject tax creditcertificates.  The case is currently pending with the Office of the Ombudsman.

 

**Employees and LaborRelations**

 

Asat December 31, 2006, we had 28,219 employees within the PLDT Group.  PLDT had8,526 employees at the end of 2006, of which 44% were rank-and-file employees,51% were management/supervisory staff and 5% were executives.  This numberrepresents a decrease of 493 employees, or approximately 6%, from the stafflevel as of the end of 2005, mainly as a result of the ongoing manpowerrightsizing program.  From a peak of 20,312 at the end of 1994, PLDT’s numberof employees has declined by 11,786, or 58%, by the end of 2006.  As at December31, 2005, we had 18,926 and 9,013 employees under the PLDT Group and PLDT,respectively.  The increase in the number of employees as at December 31, 2006was primarily due to the acquisition of SPi, CyMed and Level Up!.

 

PLDThas three employee unions, the members of which in the aggregate represent 23%of the employees of the PLDT Group.  We consider our relationship with ourrank-and-file employees’ union, our supervisors’ union and our sales supervisors’union to be good.

 

On November 16, 2006, PLDT and the *Manggagawa ng Komunikasyon saPilipinas*, or MKP, our rank-and-file employees’ union, concluded and signeda new three-year Collective Bargaining Agreement, or CBA, covering the periodfrom November 9, 2006 to November 8, 2008.  This CBA provides each member asigning bonus equivalent to one month’s salary (computed at the salary rateprevailing prior to November 9, 2007) plus Php15,000; monthly salary increasesof Php2,150, Php2,200 and Php2,550 for the first, second and third year,respectively; an increase in the yearly Christmas gift certificate fromPhp7,000 to Php8,000; an increase in the amount of coverage under the grouplife insurance plan from Php500,000 to Php650,000; an additional contributionof Php1 million to the Educational Loan Fund; and Php35,000 funeral assistancefor death the of a dependent.  Other highlights of this CBA include increasesin the rice subsidy and professional fee for dependent’s hospitalization.

 

On March 8, 2005, PLDT and PLDTSales Supervisors’ Union, or PSSU, concluded and signed a new three-year CBAcovering the period from January 1, 2005 to December 31, 2007.  This CBAprovides each member monthly salary increases of 8% of basic pay or Php2,000,whichever is higher, for the first year; 10% of basic pay or Php2,700,whichever is higher, for the second year; and another 10% of basic pay orPhp2,400, whichever is higher, for the third year.  Other highlights of thisCBA are improvements of existing benefits and a one-time signing bonus ofPhp33,000, including a Php3,000 goodwill bonus, for each member of PSSU.Furthermore, a Php4,000 one-time clothing accessory allowance was alsoprovided.

 

On January 20, 2005, PLDT and *Gabay ng Unyon sa Telekomunikasyon ngmga Superbisor*, or GUTS, our supervisors’ union, concluded and signed a newthree-year CBA covering the period from January 1, 2005 to December 31, 2007.This CBA provides each member monthly salary increases of 8% of basic pay orPhp2,000, whichever is higher, for 2005; 10% of basic pay or Php2,700,whichever is higher, for 2006; and another 10% of basic pay or Php2,400,whichever is higher, for 2007.  Other highlights of this CBA are improvementsof existing benefits and a one-time signing bonus of Php33,000, including aPhp3,000 goodwill bonus, for each member of GUTS.

 

**Pension and RetirementBenefits**

 

*Defined Benefit Plans*

* *

We have definedbenefit pension plans, covering substantially all of our employees, except theemployees of Smart.  The plans require contributions to be made to a separateadministrative fund.

 

PLDT has a trusteed,non-contributory defined benefit plan covering all permanent and regularemployees.  The benefit plan provides benefits upon normal retirement beginningat age 65, early retirement beginning at age 50 or completion of at least 30years of credited service, voluntary resignation with completion of at least 15years of credited service, total and physical disability, death and involuntaryseparation.  Benefits are based on the employee's final monthly basic salaryand length of service.

 

The normalretirement benefit is equal to a percentage of the final monthly basic salaryper year of credited service.  The percentage is 100% for those with less than15 years of service at retirement and 125% for those with 15 years of serviceat retirement.  Thereafter, the percentage increases by 5% for every additionalyear of credited service up to a maximum of 200%.  Early retirement benefit isequal to the accrued normal retirement benefit based on salary and service atthe date of early retirement.

 

Inthe event the benefit plan's assets were insufficient to pay the requiredretirement benefits, PLDT would be obligated to fund the amount of theshortfall.  In addition, claims of PLDT's employees for retirement benefitsthat have accrued would rank above the claims of all other creditors of PLDT,in the event of PLDT's bankruptcy or liquidation.

 

Formore information about the benefit plan, see *Note 17 – Employee Benefits*tothe accompanying consolidated financial statements in Item 18.

 

**Item 7.       Major Shareholders and Related PartyTransactions******

** **

The following table sets forth information regardingownership of shares of PLDT’s common stock as at May 31, 2007 of allshareholders known to us to beneficially own 5% or more of PLDT shares ofcommon stock.  All shares of PLDT's common stock have one vote per share.  

 

Title of Class

Name and Address of Record Owner and Relationship with Issuer

Place of Incorporation

Name of Beneficial Owner and Relationship with Record Owner

Number of Shares Held

Percentage of Class

 Common

 Philippine Telecommunications Investment Corporation(1)  12th Floor Ramon Cojuangco Bldg.,  Makati Avenue, Makati City

 Philippine Corporation

 Metro Pacific Assets Holdings, Inc. c/o Corporate Secretary

18th Floor Liberty Center, 

104 H.V. Dela Costa St., 

Salcedo Village, Makati City (See Footnote 1 below)

 13,338,415

 7.07

Common

Metro Pacific Resources, Inc. (2) c/o Corporate Secretary 18th Floor Liberty Center,  104 H.V. dela Costa St.  Salcedo Village, Makati City

Philippine Corporation

Metro Pacific Holdings, Inc. c/o Corporate Secretary

18th Floor Liberty Center, 

104 H.V. Dela Costa St., 

Salcedo Village, Makati City (See Footnotes 1 and 2 below)

17,112,534

9.07

Common

NTT Communications Corporation(3) 1-1-6 Uchisaiwai-cho 1-Chome, Chiyoda-ku Tokyo 100-8019, Japan

Japanese Corporation

Nippon Telegraph and Telephone Corporation 2-3-1 Otemachi Chiyoda-ku, TKY 100-8116

12,633,487

6.70

Common

NTT DoCoMo, Inc.(4) 41st flr Sanno Park Tower 2-11-1 Nagata-cho, Chiyoda-ku Tokyo 100-6150, Japan

Japanese Corporation

Nippon Telegraph and Telephone Corporation 2-3-1 Otemachi Chiyoda-ku, TKY 100-8116

15,987,736

8.48

Common

Social Security System(5) SSS Building East Avenue, Quezon City

Philippine Corporation

Same as Record Owner

11,146,309

5.91

Common

PCD Nominee Corporation(6) 37/F Enterprise Building, Tower 1 Paseo de Roxas cor. Ayala Avenue, Makati City

Philippine Corporation

See Footnote 6 below

87,123,483

46.19

Common

J.P. Morgan Asset Holdings (HK) Limited(7) (various accounts) 20/F Chater House, 8 Connaught Road  Central, Hongkong

Hongkong Corporation

See Footnote 7 below

34,902,407

18.50

Common

Capital Research and Management Company(8)

U.S. Company

See Footnote 8 below

14,575,690

7.73

 

*(1) **Pursuant to a resolution adopted by the Board ofDirectors of Philippine Telecommunications Investment Corporation, or PTIC, acopy of which had been furnished to PLDT, the President of PTIC, Mr. Manuel V.Pangilinan, has the continuing authority to represent PTIC at any and allmeetings of the stockholders of a corporation in which PTIC owns of record orbeneficially any shares of stock or other voting security, and to sign anddeliver, in favor of any person he may deem fit, a proxy or other power ofattorney, with full power of delegation and substitution, authorizing hisdesignated proxy or attorney-in-fact to vote any and all shares of stock andother voting securities owned of record or beneficially by PTIC at any and allmeetings of the stockholders of the corporation issuing such shares of stock orvoting securities.*

* *

*First Pacific Group beneficially owned 28% of ourcommon shares as at May 31, 2007 by virtue of the PLDT common shareholdings byintermediate holding companies, including PTIC, MPRI, Metro Pacific AssetsHoldings, Inc., and Metro Pacific Holdings, Inc.*

* *

*PTIC’s shareholding of 13,338,415 shares excludes the12,695,848 PLDT shares that have been delivered and lodged with PhilippineDepositary and Trust Co.  The actual percentage of PLDT’s shares held by PTIC,if the shares delivered and lodged with PCD are included, is 13.8%.*

* *

*(2) **Based on the resolution of the Board of Directors ofMetro Pacific Resources, Inc., or MPRI, a copy of which had been furnished toPLDT, Mr. Manuel V. Pangilinan has been appointed as proxy or duly authorizedrepresentative of MPRI to represent and vote the PLDT shares of common stock ofMPRI in the annual meeting of stockholders of PLDT.*

* *

*(3) **Based on publicly available information, NTTCommunications is a wholly-owned subsidiary of Nippon Telegraph and TelephoneCorporation.  Pursuant to the amendment No. 4 to Schedule 13D filed with theSecurities and Exchange Commission on April 18, 2007 by NTT and NTTCommunications, NTT, NTT Communications and DoCoMo as a group beneficiallyowned 28,621,223 shares of PLDT common stock.  As certified by our stocktransfer agent, NTT Communications was the record owner of 12,633,487 shares ofPLDT common stock as at May 31, 2007.  Based on a certification signed by a dulyauthorized officer of NTT Communications, a copy of which had been furnished toPLDT, Mr. Jun Sawada  is authorized to execute for and on behalf of NTTCommunications, endorsements, transfers and other matters relating to the PLDTshares of common stock held by NTT Communications.*

* *

*(4) **DoCoMo completed the acquisition of 12,633,486 sharesof PLDT common stock from NTT Communications on March 14, 2006.  Moreover, asdisclosed in its amendment No. 1 to Schedule 13D filed with the Securities andExchange Commission on April 18, 2007 (the “DoCoMo Schedule 13D”), from March20, 2007 through April 16, 2007, DoCoMo acquired through open market purchases anadditional 1,966,062 shares of PLDT common stock.  DoCoMo informed PLDT thatDoCoMo made further open market purchases of shares of PLDT common stockthereby increasing the number of shares of PLDT common stock held by DoCoMo to15,987,736 as at May 31, 2007.  Based on publicly available information, DoCoMois a majority-owned and publicly traded subsidiary of NTT.  Based on acertification signed by a duly authorized officer of DoCoMo, a copy of whichhad been furnished to PLDT, Mr. Toshinari Kunieda or Mr. Matsuo Yamamoto, isauthorized to execute for and on behalf of NTT DoCoMo, endorsements, transfersand other matters relating to the PLDT shares of common stock held by DoCoMo.*

* *

*(5) **Social Security System, or SSS, is the record owner of5,024,789 shares and is the beneficial owner of 6,121,520 shares held of recordby PCD Nominee Corporation as at May 31, 2007.  Please refer to footnote 6.Pursuant to a resolution of the Board of Directors of the SSS, a copy of whichhad been furnished to PLDT, Ms. Corazon S. de la Paz, as President and ChiefExecutive Officer of the SSS, has been authorized to represent and vote thePLDT shares of common stock of SSS in the Annual Meeting.*

* *

*(6) **Registered owner of shares held by participants in thePhilippine Depository and Trust Co., or PDTC, a private company organized toimplement an automated book entry system of handling securities transactions inthe Philippines.  Under the PDTC procedures, when an issuer of a PDTC-eligibleissue will hold a stockholders’ meeting, the PDTC will execute a pro-formaproxy in favor of its participants for the total number of shares in theirrespective principal securities account as well as for the total number ofshares in their client securities account.  For the shares held in theprincipal securities account, the participant concerned is appointed as proxywith full voting rights and powers as registered owner of such shares.  For theshares held in the client securities account, the participant concerned isappointed as proxy, with the obligation to constitute a sub-proxy in favor ofits clients with full voting and other rights for the number of sharesbeneficially owned by such clients.  Based on available information, none ofthe owners of the PLDT common shares registered under the name of PCD NomineeCorporation, or PCD, owned more than 5% of PLDT’s outstanding common stock asat May 31, 2007, except The Hongkong and Shanghai Banking Corp.Ltd.–Clients, Capital Research and Management Company, Standard Chartered Bank andCitibank N.A., which own approximately 21.47%, 7.73%, 5.77% and 5.55%,respectively, of PLDT’s outstanding common stock as at such date.  The Companyhas no knowledge if any beneficial owner of the shares under The Hongkong andShanghai Banking Corp. Ltd.–Clients and Standard Chartered Bank accounts ownmore than 5% of PLDT’s outstanding common stock as at such date.*

* *

*The PCD account also includes 6,121,520 sharesbeneficially owned by the Social Security System and 11,938,750 sharesbeneficially owned by Capital Research and Management Company.  Please refer tofootnotes 5 and 8.*

* *

*(7) **Holds shares as nominee of JPMorgan Chase Bank, successordepositary under the Common Stock Deposit Agreement, dated October 14, 1994, asamended on February 10, 2003, between JPMorgan Chase Bank and the holders ofAmerican Depositary Receipts, or ADRs, evidencing American Depositary Shares,or ADSs, representing shares of common stock of the Company (the “DepositAgreement”).  Under the Deposit Agreement, if  the depositary does not receivevoting instructions from a holder of ADRs, such holder will be deemed to haveinstructed the depositary to provide a discretionary proxy to a persondesignated by PLDT for the purpose of exercising the voting rights pertainingto the shares of common stock represented by such holder of ADRs, except thatno discretionary proxy will be given with respect to any matter as to whichsubstantial opposition exists or which materially and adversely affects therights of the holders of such ADRs.*

* *

*This account also includes 2,636,940 shares of commonstock underlying ADSs owned by Capital Research and Management Company.  Pleaserefer to footnote 8.*

* *

*(8) **According to the Schedule 13G of Capital Research andManagement Company, filed with the Securities and Exchange Commission onFebruary 6, 2007, Capital Research and Management Company, as an investmentadviser, beneficially owned 14,575,690 shares of PLDT common stock, including2,636,940 shares of PLDT common stock represented by ADSs as at December 29,2006.  Please refer to footnotes 6 and 7 for further discussion.*

 

As at May 31, 2007, approximately86.03% of the outstanding capital stock of PLDT was registered in the names ofPhilippine persons.

 

**Related PartyTransactions**

 

*Cooperation Agreement withFirst Pacific and certain affiliates, or the FP Parties, NTT Communications andDoCoMo*

 

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, as set forth above under Item3. “Key Information –– Risk Factors –– Risks Relating to Us –– A significantnumber of PLDT’s shares are held by three separate shareholders, which may notact in the interests of other shareholders or stakeholders in PLDT”; and

 

•        rights relating to therepresentation on the board of directors of PLDT and Smart, respectively, andany committees thereof, as described above under Item 6. “Directors, SeniorManagement and Employees –– Directors, Key Officers and Advisors”.

 

Moreover, key provisions of theCooperation Agreement pertain to, among other things:

 

•        *Restriction on Ownership ofShares of PLDT by NTT Communications and DoCoMo.* Each of NTT Communications and DoCoMo 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 to acquire,seeking to acquire or acquires a further 2% of such PLDT common shares (a) at aprice per share which is less than the fair market value as determined by theboard of directors of PLDT as advised by a professional financial advisor, (b)which is subject to conditions which are subjective or which could notreasonably be satisfied, (c) without making an offer for all PLDT common sharesnot 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.  For information as to certain provisions of PLDT’sAmended By-Laws that may have the effectof preventing a change in control of PLDT, see Item 10. “Additional Information–– Articles of Incorporations and By-Laws–– Change in Control”.

 

•        *Termination.*  If NTT Communications, DoCoMo or their respectivesubsidiaries cease to own, in the aggregate, full legal and beneficial title toat least 10% of the shares of PLDT’s common stock then issued and outstanding,their respective rights and obligations under the Cooperation Agreement and theShareholders Agreement will terminate and the Strategic Arrangements (asdefined in the Stock Purchase and Strategic Investment Agreement) willterminate.  If the FP Parties and their respective subsidiaries cease to have,directly or indirectly, effective voting power in respect of shares of PLDT’scommon stock representing at least 18.5% of the shares of PLDT’s common stockthen issued and outstanding, their respective rights and obligations under theCooperation Agreement, the Stock Purchase and Strategic Investment Agreement,and the Shareholders Agreement will terminate.

 

*Integrated i-mode ServicesPackage Agreement between DoCoMo and Smart*

 

AnIntegrated i-mode Services Package Agreement was entered into by Smart andDoCoMo on February 15, 2006, under which DoCoMo agreed to grant Smart, on anexclusive basis within the territory of the Philippines for a period of fiveyears, an integrated i-mode services package including a non-transferablelicense to use the licensed materials and the i-mode brand, as well asimplementation support and assistance and post-commercial launch support fromDoCoMo.  Pursuant to this agreement, Smart is required to pay an initiallicense fee and running royalty fees based on the revenue arising from i-modesubscription fees and data traffic.  The initial license fee paid as atDecember 31, 2006 amounted to Php53 million.

 

*Advisory Services Agreement between DoCoMo and PLDT*

 

An Advisory Services Agreement was entered into byDoCoMo and PLDT on June 5, 2006, in accordance with the Cooperation Agreement.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*

 

PLDTis a party to the following agreements with NTT Communications and/or itsaffiliates:

 

•        *AdvisoryServices Agreement.*On March 24,2000, PLDT entered into an agreement with NTT Communications, as amended onMarch 31, 2003, March 31, 2005 and June 16, 2006, under which NTTCommunications provides PLDT with technical, marketing and other consultingservices for various business areas of PLDT starting April 1, 2000;

 

•        *ArcstarLicensing Agreement and Arcstar Service Provider Agreement.*On March 24, 2000, PLDT entered into an agreement withNTT Worldwide Telecommunications Corporation under which PLDT markets manageddata and other services under NTT Communications’ “Arcstar” brand to itscorporate customers in the Philippines.  PLDT also entered into a Trade Nameand Trademark Agreement with NTT Communications under which PLDT has been giventhe right to use the tradename “Arcstar” and its related trademark, logo andsymbols, solely for the purpose of PLDT’s marketing, promotional and salesactivities for the Arcstar services within the Philippines; and

 

•        *ConventionalInternational Telecommunications Services Agreement.*  On March 24, 2000, PLDT entered into an agreement with NTTCommunications under which PLDT and NTT Communications agreed to cooperativearrangements for conventional international telecommunications services toenhance their respective international businesses.  

 

Total fees under these agreementsamounted to Php184 million, Php256 million and Php336 million for the yearsended December 31, 2006, 2005 and 2004, respectively.  As at December 31, 2006and 2005, outstanding obligations of PLDT amounted to Php18 million and Php23million, respectively.

* *

*Air Time Purchase Agreement between PLDT and AIL and Related Agreements*

 

See Item 5. “Operating and Financial Review and Prospects— Liquidity and Capital Resources — Contractual Obligations and CommercialCommitments — Contractual Obligations — Unconditional Purchase Obligations —Air Time Purchase Agreement with AIL” above and *Note 16 – Related PartyTransactions*to the consolidated financial statements in Item 18 for adiscussion of the ATPA and PLDT’s obligations thereunder.

* *

*Agreementbetween Smart and Asia Link B.V*.*,or ALBV*

Smarthas an existing Technical Assistance Agreement with ALBV, a subsidiary of theFirst Pacific Group, for ALBV to provide technical support services andassistance in the operations and maintenance of cellular business for a periodof five years, subject to renewal upon mutual agreement between the parties.The agreement provides for quarterly payments of technical service feesequivalent to 2% of the net revenues of Smart.  In January 2004, the agreementwas amended, reducing the technical service fees to be paid by Smart to ALBV to1% of net revenues effective January 1, 2004.  On February 18, 2004, Smart andALBV entered into a renewal of the Technical Assistance Agreement extending theeffectivity of the terms thereof to February 23, 2008.  Furthermore, in view ofthe acquisition by Smart of Piltel Series K Class I Convertible Preferred Stockheld by PLDT, the parties agreed to make the consolidated net revenues of Smartthe basis for the computation of the 1% technical service fees payable by Smartto ALBV, effective January 1, 2005.

 

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

 

Total fees under these agreements amountedto Php591 million, Php567 and Php507 million for the years ended December 31,2006, 2005 and 2004, respectively.  Outstanding obligations of Smart underthese agreements amounted to Php128 million and Php194 million as at December31, 2006 and 2005, respectively.  Outstanding prepaid management fees as atDecember 31, 2006 and 2005 amounted to Php869 million and Php920 million,respectively.

 

*Agreements relating to insurance companies*

Gotuaco del Rosario and Associates, orGotuaco, acts as the broker for certain insurance companies to cover certaininsurable properties of the PLDT Group.  Insurance premiums are remitted toGotuaco and the broker’s fees are settled between Gotuaco and the insurance companies.In addition, PLDT has an insurance policy with Malayan Insurance Co., Inc., orMalayan, wherein premiums are paid directly to Malayan.  Total insuranceexpenses paid under these agreements amounted to Php360 million, Php468 millionand Php534 million for the years ended December 31, 2006, 2005 and 2004,respectively.  Two directors of PLDT have a direct/indirect interest in orserve as a director/officer of Gotuaco and Malayan.

 

There have been no loans between PLDT and any related party during theperiod beginning January 1, 2004 through the date of filing of this annualreport.

 

Except for the transactions described above, there were no othermaterial transactions during the last two years, nor are there any materialtransactions currently proposed, to which PLDT was or is to be a party, inwhich a director or key officer or owner of more than 10% of the common sharesof PLDT, or any member of the immediate family of a director or key officer orowner of more than 10% of the common shares of PLDT had or is to have a director indirect material interest.  In the ordinary course of business, PLDT hastransactions with other companies in which some of such persons may have aninterest.

 

Nodirector or officer of PLDT or associate of any such director or officer wasindebted to PLDT at any time during the period from January 1, 2004 through the date of filing of this annual report.

 

**Item 8.       FinancialInformation**

** **

**Consolidated Statementsand Other Financial Information**

 

Consolidatedfinancial statements are set forth under Item 18. “Financial Statements.”

 

**Legal Proceedings**

 

Exceptas disclosed in the following paragraphs, neither PLDT nor any of itssubsidiaries is a party to, and none of their respective properties is subjectto, any pending legal proceedings that PLDT considers to be potentiallymaterial to its and its subsidiaries’ business.

 

*QuoWarranto Action*

 

OnJune 4, 1990, the Solicitor General of the Philippines instituted legalproceedings in the Regional Trial Court of Makati City seeking to “oustPhilippine Long Distance Telephone Company (PLDT) from exercising its franchiseand/or to revoke, cancel and/or pre-terminate its franchise (Act No. 3436, asamended) and/or to break up an alleged unlawful monopoly and give equal andfair opportunity to other service corporations.”  The Solicitor General citedconstitutional and statutory grounds for his action, including alleged foreigninvestors’ participation in the control and management of PLDT on a basisdisproportionate to their holdings of PLDT’s capital stock, violation of therequirement that 60% of the capital of a public utility be owned by Philippinecitizens, inadequate and costly equipment and service, and blocking of theright of other parties to provide telephone service in the Philippines.

 

Webelieve that these allegations are without merit and plan to defend ourselvesvigorously.  The Philippine Congress granted PLDT’s amended franchise underRepublic Act No. 7082 notwithstanding the existence of these proceedings andthe opposition of the Solicitor General.  The case has been archived by virtueof a court order dated January 20, 1999.  No further action has been taken andthe case remains inactive.  

 

Taxation

* *

*National Internal Revenue Taxes*

* *

PLDT has filed various cases against the Commissionerof the Bureau of Internal Revenue, or BIR, for refunds and/or tax credit of:

 

•        erroneously paid VAT, compensating taxes, advance sales taxes andother internal revenue taxes on PLDT's importation of various equipment,machinery and spare parts; and

 

•        erroneously paid withholding tax on separation pay of employeeswho availed of the benefits under the Manpower Reduction Program. 

 

Inthe case of the claim for refund of erroneously paid VAT, compensating taxes,advance sales taxes and other internal revenue taxes on PLDT’s importation ofvarious equipment, machinery and spare parts, the Supreme Court, on December15, 2005, rendered a decision partially granting the claim for refund or taxcredit certificates and ordering the Commissioner of the BIR to issue a TaxCredit Certificate or to refund to PLDT approximately Php95 millionrepresenting erroneously collected advance sales tax and compensating tax.PLDT filed a motion for execution that was opposed by the BIR and is currentlystill pending with the Court of Tax Appeals.  The Court of Tax Appeals hasissued a Resolution on May 18, 2007, ordering the issuance of the correspondingWrit of Execution.

 

Thecase of the claim for refund of erroneously paid withholding tax on separationpay is still pending with the Supreme Court.

* *

*NTC supervision and regulation fees, or SRF*

* *

Since 1994, following the NTC's rejection of PLDT'sformal protest against the assessments by the NTC of permit, supervision andregulation fees, PLDT and the NTC have been involved in legal proceedingsbefore the Court of Appeals and the Supreme Court.  The basis of these legalproceedings is the NTC's inclusion of stock dividends and capital in excess ofthe par value of stock in computing these fees, and the NTC's assessment ofadministrative fees for the increase in PLDT's authorized capital stock even inthe absence of NTC's performance of regulatory services.  As at December 31,2006, since 1994, PLDT has paid a total amount of Php2,219 million insupervision and regulation fees, of which Php1,956 million were paid underprotest.  

 

*Localbusiness and franchise tax assesments*

* *

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

 

The Local Government Code of 1991, orRepublic Act (R.A.) 7160, which took effect on January 1, 1992, extended tolocal government units, or LGUs, the power to tax businesses within theirterritorial jurisdiction granted under Batas Pambansa 337, and withdrew taxexemptions previously granted to franchise grantees under Section 12 of R.A.7082. 

 

PLDT believes, based on the opinion of its legalcounsel, that R.A. 7925, which took effect on March 16, 1995, and the grant oflocal franchise and business taxes exemption privileges to other franchiseholders subsequent to the effectivity of R.A. 7160, implicitly restored itslocal franchise and business taxes exemption privilege under Section 12 of R.A.7082, or the PLDT Franchise pursuant to Section 23 thereof or the equality oftreatment clause. 

 

Toconfirm this position, PLDT sought and obtained on June 2, 1998 a ruling fromthe Bureau of Local Government Finance, or BLGF, of the Philippine Departmentof Finance, which ruled that PLDT is exempt from the payment of local franchiseand business taxes imposable by LGUs under R.A. 7160.

 

By virtue of the BLGFRuling, PLDT stopped paying local franchise and business taxes starting withthe fourth quarter of 1998 and has filed with certain LGUs claims for taxrefund covering the period from the second quarter of 1995 to the third quarterof 1998.  PLDT has received assessments for local franchise and business taxes fromseveral cities and provinces following PLDT’s decision to stop payment of localfranchise and business taxes.  

 

Following a decision of the Supreme Court on March 25,2003, a judgment in the amount of Php4 million against PLDT involving the Cityof Davao became final and executory on April 9, 2003, pursuant to which PLDTwas declared not exempt from the local franchise tax.  Pursuant to saiddecision, PLDT has voluntarily paid the total amount of Php15 million for theperiod from the fourth quarter of 1998 until December 31, 2003, which includesthe Php4 million subject of the case.  

 

PLDThad no longer contested assessments of LGUs for franchise taxes as at December31, 2006.  However, PLDT continues to contest the validity of the assessment ofpenalties and surcharges of Php1.3 million and Php2.3 million, by the City ofOzamiz and the Province of Bulacan, respectively, for the years 1998 to 2002when PLDT refrained from payment of local franchise taxes upon its reliance ingood faith on the BLGF Ruling that it is exempt from local franchise tax.  PLDTis also contesting the validity of the assessment of local franchise tax ofPhp2.8 million by the Province of Cagayan on the gross receipts received orcollected by PLDT in Tuguegarao City wherein franchise tax was already paid tothe latter.

 

PLDTlikewise continues to contest the imposition of local business taxes inaddition to local franchise tax by the Cities of Tuguegarao, Balanga andCaloocan in the amounts of Php1.9 million, Php0.2 million and Php6.3 million,respectively, for the years 1998 to 2003 for the City of Tuguegarao, and forthe years 2005 to 2007 for the Cities of Balanga and Caloocan.  PLDT islikewise contesting the imposition of a business tax on the transmission ofmessages by the Municipality of San Pedro in the amount of Php0.3 million forthe years 2005 to 2007.

 

PLDTcurrently expects that going forward it will pay local franchise and business taxeson an annual basis and based on the gross receipts received or collected forservices rendered within the jurisdiction of the respective taxing authority.  

 

Smart has paid local business and franchise taxes tocertain cities and provinces in the aggregate amount of Php313 million underprotest.  Smart’s legal position is that it is not liable to pay the localfranchise tax by virtue of its Smart’s exemption under legislative franchiseunder R.A. 7294, which took effect after the effective date of the LocalGovernment Code of 1991, or R.A. 7160.

 

The Regional Trial Court, or RTC, of Makati has declared Smart exempt from payment of local franchise tax to the City of Makati in a decision rendered in the case entitled *Smart Communications, Inc. vs. Cityof Makati*(Civil Cases No. 02-249 & 02-725, August 3, 2004).  The Cityof Makati has filed a Motion for Extension to file a Petition for Review withthe Court of Appeals.  However, on June 9, 2005, the Court of Appeals dismissedthe appeal filed by the City of Makati.

 

The RTC of Iloilo has likewise ruled in a decisiondated January 19, 2005 that Smart is exempt from payment of local franchise taxto the City of Iloilo.  The City of Iloilo has filed an appeal directly withthe Supreme Court, which remains pending.

 

*Piltel’s Bureau of Internal Revenue Assessment*

 

Piltel has received the followingassessment notices from the BIR:

 

**Year**

**Tax Assessment Type**

**Basic**

**Interest**

**Total**

 

 

(in million pesos)

1998

VAT

85.8

68.7

 154.5

 

Overseas Communications Tax, or OCT

31.8

25.5

  57.3

 

Income Tax

12.4

9.4

  21.8

 

Administrative Penalties

0.1

–

   0.1

 

 

 

 

 

1999

VAT

94.5

67.8

 162.3

 

Income Tax

22.7

13.8

  36.5

 

 

 

 

 

2001

VAT

56.2

35.1

  91.3

 

Income Tax

13.4

8.9

  22.3

 

On December 12, 2005, Piltel filed acollective application for a compromise settlement with the BIR for thedeficiency tax assessments arising from taxable years 1998, 1999 and 2001,citing “reasonable doubt as to the validity of the tax assessments” as abasis.  The prescribed minimum percentage of the compromise settlement for suchbasis is 40% of the basic assessed tax.

 

On January 27, 2006, Piltel received thefavorable recommendation and approval from the BIR on the said application fora compromise settlement.  On January 31, 2006, Piltel settled the total amountof Php114 million, which is equivalent to 40% of the basic taxes per finalassessment notices received, to effect the immediate cancellation of the taxassessments.  On February 24, 2006, the BIR accepted Piltel’s application for acompromise settlement of income taxes and VAT for the years 1998, 1999 and2001, and issued the Certificate of Availment on the said date.

 

**Dividend Distribution Policy**

 

In2006 and 2005, PLDT declared cash dividends of Php588 million and Php1,627million, respectively, solely for its preferred shareholders.  In addition, onMarch 1, 2005, PLDT declared a cash dividend at Php14 per common share toholders of record as at March 31, 2005, which was paid on May 12, 2005,constituting the first cash dividend declaration to common shareholders sinceMarch 2001.  This was followed by cash dividend declarations made by PLDT onits common stock on May 5, 2005, at Php21 per common share to holders of recordas at June 3, 2005, which was paid on July 14, 2005; on November 8, 2005, atPhp21 per common share to holders of record as at November 28, 2005, which waspaid on December 28, 2005; on February 27, 2006, at Php28 per common share toholders of record as at March 20, 2006, which was paid on April 20, 2006; andon August 8, 2006, at Php50 per common share to holders of record as at August21, 2006, which was paid on September 21, 2006. .

 

Ourcurrent policy is to declare and pay dividends taking into consideration theinterests of our shareholders as well as our working capital, capitalexpenditures and debt servicing requirements.  Also taken into considerationare our ability to meet loan covenant requirements and the required priorwritten consents of certain creditors and preferred stockholders (for stockdividends), under certain conditions, in the declaration and payment ofdividends as discussed in *Note 12 – Interest-bearing Financial Liabilities*and*Note**15 – Stockholders’ Equity* to the accompanying consolidatedfinancial statements in Item 18.  The retention of earnings is necessary tomeet the funding requirements of our business expansion and developmentprograms.  Unappropriated retained earnings of PLDT include undistributedearnings representing accumulated equity in the net earnings of oursubsidiaries, which are not available for distribution as dividends untilreceived in the form of dividends from such subsidiaries (see *Note 15 – Stockholders’Equity* to the accompanying consolidated financial statements in Item 18).Dividends are generally paid in Philippine pesos.  In the case of shareholdersresiding outside the Philippines, PLDT's transfer agent in Manila, which actsas the dividend-disbursing agent, converts the peso dividends into U.S. dollarsat the prevailing exchange rates and remits the dollar proceeds abroad, net ofwithholding tax.

 

**Item 9.       The Offerand Listing**

** **

**Common Capital Stock and American Depositary Shares (“ADSs”)**

** **

Thecommon shares of PLDT are listed and traded on the PSE.  On October 19, 1994, an ADR facility was established, pursuant to which Citibank, N.A., asthe depositary, issued ADRs evidencing ADSs, with each ADS representing onePLDT common share with a par value of Php5 per share.  Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary of PLDT’sADR facility.  The facility was established in accordance with a Common StockDeposit Agreement dated October 19, 1994, as amended on February 10, 2003 between the Depositary and the holders of the ADRs.  The ADSs have been listed andare traded on the New York Stock Exchange, or NYSE, in the United States under the symbol “PHI”.  

 

Until recently, the ADSs werealso listed on the NYSE Arca.  However, on December 18, 2006, PLDT issued anotice of its intent to voluntarily delist its ADSs from NYSE Arca, after determiningthat doing so is in the best interest of PLDT and its stockholders as it wouldeliminate the duplicative administrative burdens and costs inherent in duallisting on both the NYSE and NYSE Arca.  The actual delisting from the NYSEArca became effective on February 12, 2007.

 

In 2006, a total of 39.6 million shares of PLDT's common capital stockwere traded on the PSE.  During the same year, the volume of trading was 69.7million ADSs on the NYSE.

 

As at May 31, 2007, approximately 11,105 stockholders were Philippinepersons and held approximately 35% of the shares of PLDT’s common stock andapproximately 86.03% of the outstanding capital stock of PLDT.  In addition, asat May 31, 2007, there was a total of over 40 million ADSs outstanding,substantially all of which PLDT believes were held in the United States by 379 holders.

 

High and low sales prices for PLDT’s common shares onthe PSE and ADSs on the NYSE for each of the five most recent fiscal years,each full quarterly period during the two most recent fiscal years, and eachmonth in the most recent six months were as follows: 

 

 

**PSE**

 

**NYSE**

 

**High**

 

**Low**

 

**High**

 

**Low**

2007

 

 

 

 

 

 

 

Second Quarter (through June 26, 2007)

Php2,730.00

 

Php2,390.00

 

US$58.88

 

US$50.05

April 

2,585.00

 

2,390.00

 

54.89

 

50.05

May

2,585.00

 

2,470.00

 

56.66

 

53.00

June (through June 26, 2007)

2,730.00

 

2,525.00

 

58.88

 

54.88

First Quarter

2,820.00

 

2,250.00

 

56.62

 

45.25

January 

2,820.00

 

2,385.00

 

56.62

 

48.20

February

2,675.00

 

2,285.00

 

54.10

 

45.25

March

2,555.00

 

2,250.00

 

53.40

 

46.30

2006

2,610.00

 

1,675.00

 

51.90

 

32.15

First Quarter

1,930.00

 

1,675.00

 

38.09

 

32.20

Second Quarter 

2,295.00

 

1,700.00

 

43.99

 

32.15

Third Quarter

2,300.00

 

1,790.00

 

45.00

 

34.57

Fourth Quarter

2,610.00

 

2,150.00

 

51.90

 

42.56

December

2,570.00

 

2,325.00

 

51.50

 

47.08

2005

1,860.00

 

1,310.00

 

34.35

 

23.50

First Quarter

1,495.00

 

1,310.00

 

27.75

 

23.50

Second Quarter

1,645.00

 

1,330.00

 

30.07

 

24.10

Third Quarter

1,715.00

 

1,520.00

 

30.59

 

27.28

Fourth Quarter

1,860.00

 

1,630.00

 

34.35

 

28.88

2004

1,505.00

 

810.00

 

27.03

 

14.38

2003

990.00

 

265.00

 

17.79

 

4.85

2002

565.00

 

209.00

 

11.30

 

3.85

 

**Item 10.    AdditionalInformation**

** **

**Articles of Incorporationand By-Laws**

 

Thefollowing summarizes certain provisions of PLDT's Articles of Incorporation andBy-Laws and applicable Philippine law.  This summary is qualified in itsentirety by reference to the Corporation Code of the Philippines (the“Corporation Code”) and PLDT’s Articles of Incorporation and By-Laws.Information on where investors can obtain copies of the Articles of Associationand By-Laws is described under the heading “Documents Available.”

 

*Purpose of PLDT*

 

PLDT'sArticles of Incorporation have been filed with the Philippine SEC and PLDT hasbeen issued Philippine SEC Reg. No. 55.  The Second Article of PLDT's Articlesof Incorporation provides that the purposes for which PLDT was formed are toinstall, maintain, and operate any and all kinds of equipment forcommunications; to install, maintain, operate or lease telephone lines andsystems, and to purchase, sell and deal in all kinds of products which may becombined with the building, installing and operation of those systems and linesand in general, to engage in any and all acts and business which may be necessaryor convenient, in the furtherance of such lines of communication and business.

 

*Directors*

 

PLDT'sAmended By-Laws provide that the Board of Directors shall consist of thirteenmembers, each of whom must hold at least one share of stock of PLDT in his ownname and possess the minimum qualifications and have none of thedisqualifications provided in the By-Laws.  There are no provisions in PLDT’sAmended Articles of Incorporation or Amended By-Laws with respect to (a) adirector’s power to vote on a proposal, arrangement or contract in which thedirector is materially interested, (b) the directors’ power, in the absence ofan independent quorum, to vote compensation to themselves or any members oftheir body, (c) borrowing powers exercisable by the directors and how suchborrowing powers can be varied, or (d) retirement or non-retirement ofdirectors under an age limit requirement.

 

Descriptionof PLDT Capital Stock

* *

*Authorized Capital Stock*

 

Theauthorized capital stock of PLDT is Php9,395 million divided into two classesconsisting of 234 million shares of Common Capital Stock with a par value ofPhp5 per share (the “Common Stock”) and 822.5 million shares of serialPreferred Stock with a par value of Php10 per share (the “Preferred Stock”).

 

*Common Stock*

 

Setout below is a statement of the dividend, voting, pre-emption and other rightsof the holders of Common Stock as set out in the Articles of Incorporationand/or By-Laws of PLDT:

 

(a)    After the requirements withrespect to preferential dividends on the serial Preferred Stock shall have beenmet and after PLDT shall have complied with all the requirements, if any, withrespect to the setting aside of sums as purchase, retirement or sinking funds,the holders of the Common Stock shall be entitled to receive such dividends asmay be declared from time to time by the Board of Directors out of fundslegally available therefor.

 

(b)    After distribution in full of thepreferential amounts to be distributed to the holders of serial Preferred Stockin the event of the voluntary or involuntary liquidation, dissolution,distribution of assets or winding up of PLDT, the holders of Common Stock shallbe entitled to receive all the remaining assets of PLDT of whatever kindavailable for distribution to stockholders ratably in proportion to the numberof Common Stock held by them, respectively.

 

(c)    Except as may be otherwiserequired by law, or by the Articles of Incorporation of PLDT, each holder ofCommon Stock shall have one vote in respect of each share of such stock held byhim on all matters to be voted upon by the stockholders, and the holders ofCommon Stock shall have the exclusive right to vote for the election ofdirectors and for all other purposes.  At every election of directors, a holderof Common Stock is entitled to vote such shares of Common Stock held by him foras many persons as there are directors to be elected, or to cumulate saidshares and give one candidate as many votes as the number of directors to beelected multiplied by the number of his shares shall equal, or to distributesuch votes on the same principle among as many candidates as he shall thinkfit.

 

In addition to the foregoingrights, the Corporation Code provides for other stockholders’ rights generally,which include:

 

(a)    Appraisal right or the right of adissenting stockholder to demand payment of the fair value of his shares ofstock in the following instances:  (a) in case any amendment to the articles ofincorporation has the effect of changing or restricting the rights of anystockholders or class of shares, or of authorizing preferences in any respectsuperior to those of outstanding shares of any class, or of extending orshortening the term of corporate existence; (b) in case of sale, lease,exchange, transfer, mortgage, pledge or other disposition of all orsubstantially all of the corporate property and assets of the corporation; (c)in case of merger or consolidation; and (d) in case of investment of funds ofthe corporation in any other corporation or business or for any purpose otherthan the primary purpose for which it was organized, except where theinvestment by the corporation is reasonably necessary to accomplish its primarypurpose as stated in its articles of incorporation.

 

(b)    The right to approve certaincorporate acts, such as (a) election of directors; (b) removal of directors; (c) extension or shortening of the corporate term; (d) increase or decrease ofcapital stock, and incurring, creating or increasing bonded indebtedness; (e)sale or other disposition of all or substantially all of the corporate assets;(f) investment of corporate funds in any other corporation or business or forany purpose other than the primary purpose for which it was organized exceptwhere the investment is reasonably necessary to accomplish its primary purposeas stated in the corporation’s articles of incorporation; (g) declaration ofstock dividend; (h) entering into a management contract with anothercorporation; (i) plan of merger or consolidation; and (j) voluntary dissolutionof the corporation by shortening the corporate term.

 

(c)    The right to inspect at reasonablehours on business days the records of all business transactions of thecorporation and the minutes of any meeting; however, the stockholders’ right toinspect corporate records and books is not an absolute right so that thecorporation may deny said right on the basis of impropriety of the purpose ormotive of the stockholder.

 

(d)    The right to be furnished the mostrecent financial statements of the corporation, within ten (10) days fromreceipt by the corporation of a written request from a stockholder.  The sameright exists at the annual meeting of stockholders at which the Board ofDirectors must present to the stockholders a financial report of the operationsof the corporation for the preceding year which shall include financialstatements duly signed and certified by an independent certified publicaccountant.

 

*Restrictionson Foreign Ownership*

 

TheConstitution of the Republic of the Philippines (Section 11, Article XII)states that no franchise, certificate, or any other form of authorization forthe operation of a public utility shall be granted except to citizens of thePhilippines or to corporations or associations organized under the laws of thePhilippines at least 60% of whose capital is owned by such citizens.

 

Whilethe Articles of Incorporation and By-Laws of PLDT do not contain any specificrestriction on the sale, assignment or transfer of shares that would violatethe aforecited ownership requirement, the Articles of Incorporation of PLDTprovide that the Board of Directors shall have full power and authority toauthorize (whether by adoption of amendments to the By-Laws of PLDT or ofresolutions, the promulgation of rules or regulations or otherwise) the takingby said corporation of all such actions as the Board of Directors may deemnecessary or appropriate to ensure compliance by said corporation with anyapplicable provision of the Constitution of the Republic of the Philippines orany other applicable law, treaty, rule or regulation relating to the ownershipof securities of said corporation by citizens of the Philippines, aliens orother persons or group of persons.

 

*Meetings*

* *

TheCorporation Code requires corporations to hold an annual meeting ofstockholders and to send notice thereof to stockholders.  Under PLDT’s By-Laws,the annual meeting of stockholders shall be held at the principal office of thecorporation, or at such other place designated by the Board of Directors in thecity or municipality where the principal office of the corporation is located,on the second Tuesday in June of each year.  In the annual meeting, the Boardof Directors shall be elected and such other business may be transacted asshall come before the meeting.  At least fifteen (15) business days written orprinted notice of the date, time and place of holding every annualstockholders' meeting shall be given by the Secretary or by an AssistantSecretary by personal delivery or by mail to each stockholder at his or herlast known place of residence or business.  Special meetings of stockholdersmay be called at any time by the President or three (3) of the Directors or bya number of stockholders representing two-thirds (2/3) of the subscribedcapital stock.  Notice in writing of such meeting stating the date, time orplace thereof, shall be given to each stockholder by the Secretary or AssistantSecretary or, in case of his absence, inability, refusal or neglect to act,then by the President, Directors or stockholders calling said meeting, bypersonal delivery or by mail to each stockholder at his or her last known placeof residence, at least fifteen (15) business days before the date fixed for themeeting.

 

TheBy-Laws of PLDT provide that each share of common stock which has voting rightson any matter under consideration may be represented at any meeting ofstockholders by the holder thereof or by his attorney duly authorized by proxyin writing on forms prescribed by the Board of Directors which shall befurnished to a stockholder upon his request.  Unless otherwise provided in theproxy, it shall be valid only for the meeting in respect of which such proxywas issued.  Proxies must be filed with the Secretary, Assistant Secretary ortransfer agent of PLDT at least two (2) days before the day of the meeting.Any proxy filed with the Secretary, Assistant Secretary or transfer agent ofthe corporation may be revoked by the stockholder concerned either in aninstrument in writing duly presented to the Secretary, Assistant Secretary ortransfer agent of the corporation at least two (2) days before the day of themeeting or by his personal presence at the meeting.  The decision of theSecretary on the validity of proxies shall be final and binding until andunless set aside by a court of competent jurisdiction.  As provided in theCorporation Code, unless otherwise provided in the proxy, it shall be validonly for the meeting for which it is intended and no proxy shall be valid andeffective for a period longer than five (5) years at any one time.

 

TheBy-Laws of PLDT also provide that at any meeting of the stockholders, personsrepresenting, in person or by proxy, a majority of the shares issued andoutstanding and entitled to vote at said meeting shall constitute a quorum forthe transaction of any business, except as otherwise provided by law, andexcept that a lesser number may adjourn the meeting.

 

*Issuesof Shares*

* *

TheBoard of Directors of PLDT has the power to authorize the issue and sale ofauthorized but unissued shares of Common Stock of said corporation for suchconsideration as it shall determine, provided that such consideration shall notbe less than the par value of such shares and, provided further, that suchissue and sale is not otherwise prohibited under applicable laws.

 

Underthe Securities Regulation Code of the Philippines (R.A. No. 8799), or SRC, nosecurities except of a class exempt under the provisions thereof or unless soldin any transaction exempt under any of the provisions thereof, shall be sold oroffered for sale or distribution to the public unless such securities shallhave been registered and permitted to be sold pursuant to the SRC.

 

*Transfer of Shares*

* *

The shares of Common Stock may be transferred bydelivery of certificate(s) endorsed by the shareholder named in the certificateor his duly authorized attorney or representative.  No transfer, however, shallbe valid, except as between the parties, until the transfer is recorded in thestock and transfer books of PLDT maintained by Hongkong and Shanghai BankingCorporation, the stock transfer agent of PLDT for its Common Stock.

 

Philippinelaw does not require transfers of Common Stock to be effected on the PSE, butany off-exchange transfers will subject the transferor to a capital gains taxthat may be significantly greater than the stock transfer tax applicable totransfers effected on the PSE.  All transfers of shares of Common Stock on thePSE must be effected through a licensed broker in the Philippines.

 

*ShareCertificates*

* *

Certificatesrepresenting fully paid shares of Common Stock are issued in such denominationsas stockholders may request, except that certificates will not be issued forany fractional part of a share or any undivided interest in any share.

 

*Dividends*

* *

Under the Corporation Code, the Board of Directors maydeclare dividends on the Common Stock out of the unrestricted retained earningswhich may be payable in cash, in property or in stock to all stockholders onthe basis of outstanding shares held by them.  The declaration of stockdividends requires the approval of the stockholders of PLDT representing notless than two-thirds of the outstanding capital stock of PLDT.  If a stockdividend would require an increase in the authorized capital stock, PhilippineSEC approval would be required.  Common Stock issued as stock dividends shouldbe registered with and licensed by the Philippine SEC and listed on the PSE.

 

The Corporation Code requires aPhilippine corporation with retained earnings in excess of 100% of its paid-incapital to declare and distribute as dividends the amount of such surplus.Notwithstanding this general requirement, a Philippine corporation may retainall or any portion of such surplus in the following cases:  (i) when justifiedby definite corporate expansion projects or programs approved by the board ofdirectors; (ii) when the corporation is prohibited under any loan agreementwith any financial institution or creditor, whether local or foreign, fromdeclaring dividends without its/his consent, and such consent has not yet beensecured; or (iii) when it can be clearly shown that such retention is necessaryunder special circumstances relevant to the corporation, such as when there isa need for special reserve for probable contingencies.

 

PLDThas entered into certain loan and credit agreements, which restrict thedeclaration and payment of dividends by PLDT.  In particular, under certain loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, (ii) if after giving effectto such action the current ratio would be less than 0.90:1 or (iii) in anamount greater than PLDT’s net income after taxes during the fiscal year towhich such payment or distribution relates.  On March 1, 2005, PLDT declared a cash dividend at Php14 per commonshare to holders of record as at March 31, 2005, which was paid on May 12, 2005, constituting the first cash dividend declaration to common shareholderssince March 2001.  This was followed by cash dividend declarations made by PLDTon its common stock on May 5, 2005, at Php21 per common share to holders ofrecord as at June 3, 2005, which was paid on July 14, 2005; on November 8,2005, at Php21 per common share to holders of record as at November 28, 2005,which was paid on December 28, 2005; on February 27, 2006, at Php28 per commonshare to holders of record as at March 20, 2006, which was paid on April 20,2006; and on August 8, 2006, at Php50 percommon share to holders of record as at August 21, 2006, which was paid onSeptember 21, 2006.

 

*Preferred Stock*

 

Preferred Stock may be issuedfrom time to time in one or more series as the Board of Directors maydetermine.  The Board of Directors is authorized to establish and designate thetitle and number of shares of each series and to fix the terms thereof, includingdividend rate, redemption and sinking fund provisions, conversion rights andthe amount to be received upon liquidation, provided that the amounts payableupon redemption or liquidation may not be more than 110%, nor less than 100%,of par value, plus in each such case accrued and unpaid dividends.  Except asotherwise provided by law, the holders of Preferred Stock are not entitled tovote for the election of directors or for any other purpose; provided, however,that PLDT may not change the rights of the holders of any series of PreferredStock in any manner prejudicial to the holders thereof without the affirmativevote of the holders of a majority of the shares of such series.  No suchapproval is needed to increase the number of shares of Preferred Stock (up tothe number from time to time authorized by the Articles) or to authorizeclasses of shares ranking on a parity with the Preferred Stock.

 

*Issued and Outstanding Preferred Stock*

 

The series of Preferred Stock and the number of sharesissued and outstanding under each series as at May 31, 2007 are as follows:****

 

**Series**

**No. of Shares**

Series A to EE 10% Cumulative Convertible

406,100,137

Series IV Cumulative Non-Convertible Redeemable

36,000,000

Series V Cumulative Convertible Redeemable

43,675

Series VI Cumulative Convertible Redeemable

743,218

 

TheSeries A to EE 10% Cumulative Convertible Preferred Stock are entitled toreceive cumulative dividends at the rate of 10% per annum; redeemable at theoption of PLDT, at par value plus accrued dividends, five years after the yearof issuance; convertible to shares of Common Stock a year after the year ofshare issuance, at a price equivalent to 10% below the average market price ofthe Common Stock at the PSE over a period of 30 consecutive trading days beforethe conversion date; and entitled to be paid an amount equal to the par valueof the shares plus accrued and unpaid dividends thereon to the date fixed forsuch payment in the event of a voluntary or involuntary liquidation,dissolution, distribution of assets or winding up of the affairs of thecorporation.

 

TheSeries IV Cumulative Non-Convertible Redeemable Preferred Stock are entitled toreceive cumulative dividends at the rate of 13.5% per annum based on thepaid-up subscription price.  It is redeemable at the option of PLDT one year atany time after subscription at an amount equal to the par value of such sharesso redeemed or if such shares are not yet fully paid, the actual amount paid,plus accrued and unpaid dividends thereon; and in the event of a voluntary orinvoluntary liquidation, dissolution or winding up of affairs of PLDT, shall beentitled to be paid an amount equal to the par value of such shares or if suchshares are not yet fully paid, the actual amount paid, plus an amount equal tothe dividends accrued thereon to the date fixed for payment.  The outstandingshares of Series IV Cumulative Non-Convertible Redeemable Preferred Stock havenot been fully paid.

 

Sharesof Series V and VI Convertible Preferred Stock are entitled to receive annualdividends of Php18.70 per share and US$0.397 per share, respectively.  Eachshare of Series V and VI PLDT Convertible Preferred Stock is convertible at anytime at the option of the holder into one share of PLDT Common Stock.  In theevent of any voluntary or involuntary liquidation, dissolution or winding up ofPLDT, the holders of the Series V and VI Convertible Preferred Stock areentitled to receive out of the assets of PLDT available for distribution to theshareholders of PLDT, before any distribution of assets is made to holders ofshares of Common Stock or any other shares of stock of PLDT ranking as to suchdistribution junior to the Series V and VI Convertible Preferred Stock,liquidating distributions in the amount of Php11 per share plus accrued andunpaid dividends.  On the date immediately following the seventh anniversary ofthe issue date of the Series V and VI Convertible Preferred Stock, theremaining outstanding shares under these series will be mandatorily convertedinto shares of PLDT Common Stock at a conversion rate of one share of CommonStock for each share of Series V or VI Convertible Preferred Stock subject toadjustments in certain events.  Under a put option exercisable for 30 days,holders of shares of Common Stock received on mandatory conversion will be ableto require PLDT to purchase such shares of Common Stock for Php1,700 per shareand US$36.132 per share, for Series V and VI Convertible Preferred Stock,respectively.

 

Asat December 31, 2006, 2,675,393 shares of Series V Convertible Preferred Stock,4,419,916 shares of Series VI Convertible Preferred Stock and all 3,842,000shares of the then outstanding Series VII Convertible Preferred Stock had beenvoluntarily converted to PLDT common shares.  As at December 31, 2006, 46,047shares of Series V and 875,188 shares of Series VI Convertible Preferred Stocksremained outstanding.  The aggregate value of the put option based onoutstanding shares as at December 31, 2006 was Php1,629 million which isputtable on June 4, 2008, if all of the outstanding shares of Series V and VIConvertible Preferred Stocks were mandatorily converted and all the commonshares were put to PLDT at that time.  The market value of the underlyingshares of common stock was Php2,349 million, based on the market price of PLDTcommon shares of Php2,550 per share as at December 31, 2006.

 

*Change in Control*

 

ArticleV, Section 1 of PLDT's Amended By-Laws may have the effect of preventing achange in control of PLDT.  This section provides that any person who isengaged in any business that competes with or is antagonistic to that of PLDTor its subsidiaries is ineligible for nomination or election to the Board ofDirectors.

 

Under the Cooperation Agreement, each of NTTCommunications, DoCoMo and the FP Parties agreed that to the extent permissibleunder applicable laws and regulations of the Philippines and otherjurisdictions, subject to certain conditions, it shall cast its vote as a PLDTshareholder in support of any resolution proposed by the PLDT board ofdirectors for the purpose of safeguarding PLDT from any Hostile Transferee. SeeItem 7. “Major Shareholders and Related Party Transactions — Related PartyTransactions — Cooperation Agreement with the FirstPacific and certain affiliates, or the FP Parties, NTT Communications andDoCoMo”.

 

**MaterialContracts**

 

Wehave entered into the following contract within the two years preceding thedate of this annual report which is or may be material:

 

The Cooperation Agreement, dated January 31, 2006, entered into by and among PLDT, First Pacific, Metro PacificCorporation, Metro Asia Link Holdings, Inc., Metro Pacific Resources, Inc.,Larouge B.V., Metro Pacific Assets Holdings, Inc., NTT Communications andDoCoMo. 

 

**Exchange Controls andOther Limitations Affecting Securities Holders**

 

InCircular No. 1389 dated November 10, 1993, as amended by Circular No. 224 dated January 26, 2000, of the BSP, foreign investments in the shares of stock ofPhilippine companies listed in the PSE may be registered either with the BSP orwith an investor’s designated custodian bank.  The foreign investments inlisted shares of stock, which are duly registered with the BSP or with acustodian bank duly designated by the foreign investor, are entitled to fulland immediate capital repatriation and dividend and interest remittanceprivileges.  Without the need to obtain prior BSP approval, commercial banksare authorized to sell and to remit the equivalent foreign exchange (at theexchange rate prevailing at the time of actual remittance) representing salesand divestment proceeds or dividends of a duly registered foreign equityinvestment upon presentation of a BSP Registration Document (“BSRD”) togetherwith other supporting documents.  The BSRD is issued by the BSP or thecustodian bank upon registration of the foreign investment and serves as theauthority to repatriate such divestment and sales proceeds or remittance ofcash dividends.  Effective April 3, 2000, only pre-numbered BSRD forms, printedon BSP security paper may be used and issued as proof of registration offoreign investments in accordance with existing BSP rules.  The remittingcommercial bank must submit to the BSP a statement of remittance together withthe supporting documents within two banking days from date of actualremittance.  Foreign investments not duly registered with the BSP or with theinvestor's designated custodian bank are not entitled to repatriation andremittance privileges through the banking system except capital repatriation ordividend remittance of direct foreign equity investments made prior to March 15, 1973 when BSP registration was not yet required.  The BSP should be notified ofthe transfer of sale of foreign investments in equity or securities alreadyregistered with the BSP, in order that the registration of the foreigninvestment may be transferred in the name of the transferee or purchaser.

 

Cashdividends on PLDT’s stock are paid in Philippine peso, except dividends on theSeries VI Convertible Preferred Stock, which are paid in U.S. dollars.  PLDT’sTransfer Agent and Dividend Paying Agent for its Series VI ConvertiblePreferred Stock, Hongkong and Shanghai Banking Corporation, converts and remitsin U.S. dollars, at the prevailing exchange rate, cash dividends due to holdersof the Series VI Convertible Preferred Stock.  PLDT’s Transfer Agent for itscommon stock, The Hongkong and Shanghai Banking Corporation, which also acts asdividend paying agent, converts and remits in U.S. dollars, at the prevailingexchange rate, cash dividends due all common shareholders residing outside the Philippines.  Under the above-mentioned regulations, PLDT has been able to remit the cashdividends due to shareholders residing outside the Philippines.  As at December31, 2006, approximately 86% of PLDT’s outstanding shares of common andpreferred stock were held by Philippine persons.  For certain restrictions onthe declaration and payment of dividends by PLDT, see *Note 14 – PreferredStock Subject to Mandatory Redemption* and *Note 15 – Stockholders’ Equity*to the accompanying consolidated financial statements in Item 18.

 

Principalof and interest on PLDT’s 10.5% Notes due 2009, 11.375% Notes due 2012 and8.35% Notes due 2017 are payable in U.S. dollars which may be purchased fromthe local banking system either pursuant to the registration of such Notes withthe BSP or otherwise pursuant to specific BSP approval of such payment.  Suchprincipal and interest may also be paid utilizing PLDT's own dollar resourceswithout necessity of BSP approval.  The BSP, with the approval of the Presidentof the Philippines, may, however, restrict the availability of foreign exchangeduring an exchange crisis, when an exchange crisis is imminent, or in times ofnational emergency.

 

**Taxation**

 

Thefollowing is a description of the material Philippine and United States federalincome tax consequences to United States Holders (as defined below) of owningshares of Common Stock and ADSs.  It applies to you only if you hold your CommonStock or ADSs as capital assets for tax purposes.  This section does not applyto you if you are a member of a special class of holders subject to specialrules, including a dealer in securities, a trader in securities that elects touse a mark-to-market method of accounting for securities holdings, a tax-exemptorganization, a life insurance company, a person liable for alternative minimumtax, a person that actually or constructively owns 10% or more of PLDT’s votingstock, a person that holds Common Stock or ADSs as part of a straddle or ahedging or conversion transaction, or a United States Holder (as defined below)whose functional currency is not the U.S. dollar.

 

Thissection is based on the United States Internal Revenue Code of 1986, as amended(the “U.S. Tax Code”), its legislative history, existing and proposedregulations, published rulings and court decisions, and the laws of thePhilippines including the Philippine National Internal Revenue Code of 1997(the “Philippine Tax Code”) all as currently in effect, as well as on theConvention Between the Philippines and the United States (the“Philippines-United States Tax Treaty”).  These laws are subject to change,possibly on a retroactive basis.  In addition, this section is based in part onthe representations of the Depositary and the assumption that each obligationin the Deposit Agreement and any related agreement will be performed accordingto its terms.

 

You are aUnited States Holder if you are a beneficial owner of Common Stock or ADSs andyou are a citizen or resident of the United States, a domestic corporation, anestate whose income is subject to United States federal income tax regardlessof its source, or a trust if a United States court can exercise primarysupervision over the trust’s administration and one or more United Statespersons are authorized to control all substantial decisions of the trust.

** **

Ingeneral, taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated asthe owner of the shares represented by those ADRs.  Exchanges of shares forADRs, and ADRs for shares, generally will not be subject to United States federal income tax.

** **

This discussion addresses only United States federal income taxation and Philippine income taxation, estate and donor’staxation, stock transaction taxation and documentary stamp taxes.

** **

*Philippine Taxation*

 

*Taxes on Exchange of ADSs for Common Stock*

 

Philippine capital gains or stock transaction taxesand documentary stamp taxes may be payable upon the transfer of shares ofCommon Stock to a holder of ADRs to a holder of GDRs.  See “–– Capital GainsTax and Stock Transaction Tax” and “–– Documentary Stamp Taxes.”

 

*Taxationof Dividends*

 

Underthe Philippine Tax Code, dividends paid by a Philippine corporation to citizensof the Philippines and resident aliens in the Philippines are subject to afinal withholding tax of 10% while those paid to non-resident aliens engaged intrade or business within the Philippines are subject to a final withholding taxof 20%.  Dividends paid to non-resident aliens not engaged in trade or businesswithin the Philippines are subject to a final withholding tax of 25%.  Dividendspaid by a Philippine corporation to other Philippine corporations or toresident non-Philippine corporations are not subject to tax.  Dividends paid tonon-resident non-Philippine corporations not engaged in a trade or business inthe Philippines by Philippine corporations shall be subject to a finalwithholding tax of 15%, subject to the condition that the country in which thenon-resident non-Philippine corporation is domiciled either (i) allows a creditagainst the tax due from the non-resident non-Philippine corporation taxesdeemed to have been paid in the Philippines equivalent to 20% effective November1, 2005 (which represents the difference between the regular income tax onnon-resident non-Philippine corporations of 35% effective November 1, 2005 andthe 15% tax on dividends) (this condition is not satisfied in the case ofcorporations domiciled in the United States if such corporations own less than10% of the voting stock of PLDT) or (ii) imposes no income taxes on dividendsreceived by such non-resident non-Philippine corporations from Philippinecorporations (this condition is not satisfied in the case of corporationsdomiciled in the United States).  If neither of the foregoing conditions aremet, the dividends paid to the non-resident non-Philippine corporation shall besubject to the regular income tax rate of 35% effective November 1, 2005.Under rulings issued by Philippine tax authorities, Hong Kong is viewed asfalling within clause (ii) and, thus, companies that are organized in Hong Kongthat are not engaged in trade or business in the Philippines may be entitled tothe benefit of the 15% rate.  Such rulings, however, were based upon the lawsof Hong Kong as in effect at the time such rulings were issued, and anysubsequent changes in the relevant laws of Hong Kong may affect the validity ofsuch rulings.  PLDT reserves the right to change the rate at which it makespayments of withholding tax whenever it deems it appropriate under applicablelaw.

 

Ifthe holder of Common Stock is a non-resident foreign partnership, which istreated as a corporation for Philippine tax purposes, dividends on the CommonStock should be subject to a final withholding tax of 35% effective November 1,2005.  Cede & Co., the partnership nominee of Depository Trust Company(“DTC”), should qualify as a non-resident foreign partnership that would betreated as a corporation for Philippine tax purposes.

 

Incertain circumstances where the holder holds Common Stock, a tax treaty ratemay be applicable with respect to the Philippine withholding tax.  Forinstance, holders under such circumstances and as to which thePhilippines-United States Tax Treaty would be applicable would be eligible fora treaty rate of 25% (or 20% in certain instances).  The 20% treaty rate isgenerally not applicable in the case of non-resident non-Philippinecorporations domiciled in the United States which own less than 10% of thevoting stock of PLDT.  Holders are required, however, to establish to thePhilippine taxing authorities their eligibility for such treaty rate.Philippine tax authorities have prescribed, through an administrative issuance,procedures for availment of tax treaty relief.  PLDT intends to pay withholdingtax at the reduced treaty rate in respect of shares the registered holder ofwhich is Cede & Co., on the basis that Cede & Co. is a resident of the United States for purposes of the Philippines-United States Tax Treaty.  PLDT reserves theright to change the rate at which it makes payments of withholding tax wheneverit deems it appropriate under applicable law.

 

*CapitalGains Tax and Stock Transaction Tax*

 

ThePhilippine Tax Code provides that gain from the sale of shares of stock in aPhilippine corporation shall be treated as derived entirely from sources withinthe Philippines, regardless of where the shares are sold.  Subject toapplicable tax treaty rates, the rate of tax on such gain, where the share isnot disposed of through the Philippine Stock Exchange, is a final tax of 5% forgains not exceeding Php100,000 and a final tax of 10% for gains in excess ofthat amount.  The rate is the same for both non-resident individuals andnon-resident non-Philippine corporations.  While this tax is not collectedthrough withholding, the Philippine Tax Code prohibits a transfer from beingrecorded on the books of the corporation unless the Philippine Commissioner ofInternal Revenue certifies that the tax has been paid or certain otherconditions are met.  

 

The sale of shares which arelisted in and sold through the PSE are subject to the stock transaction taximposed at the rate of 1/2 of 1% of the gross selling price.  This tax isrequired to be collected and paid to the government by the selling stockbrokeron behalf of his client.  Sales of shares other than through a Philippine stockexchange will be subject to Philippine capital gains tax in the manner describedabove.

 

Underthe Philippines-United States Tax Treaty, gains derived by a United Statesresident from the sale of shares of stock of a Philippine corporation will notbe subject to capital gains tax where the share is not disposed of through thePhilippine Stock Exchange, unless the shares are those of a corporation over50% of the assets of which consist of real property interests located in thePhilippines.  PLDT does not believe that it currently is such acorporation.

 

*Documentary Stamp Taxes*

 

The Philippines imposes a documentary stamp tax upon transfers of shares of stockissued by a Philippine corporation at a rate of Php0.75 on each Php200, orfractional part thereof, of the par value of the shares.  The documentary stamptax is collectible wherever the document is made, signed, issued, accepted ortransferred, when the obligation or right arises from Philippine sources or theproperty is situated in the Philippines.  Effective March 20, 2004, thedocumentary stamp tax rate upon transfer of shares of stock issued by aPhilippine corporation was decreased from Php1.50 to Php0.75 on each Php200, orfractional part thereof, of the par value of the shares.  However, theimposition of documentary stamp tax on secondary transfer of shares of stock ofa Philippine Corporation which is listed and traded through the facilities ofthe Philippine Stock Exchange is suspended for a period of five years countedfrom the same effective date.   

 

*Estateand Donor’s Taxes*

 

Sharesof stock issued by a corporation organized or constituted in accordance withPhilippine law are deemed to have a Philippine situs and their transfer by wayof succession or donation is subject to Philippine estate and gift taxes.  Thetransfer of shares of stock by a deceased individual to his heirs by way ofsuccession, whether such an individual was a citizen of the Philippines or analien, regardless of residence, will be subject to Philippine estate tax atprogressive rates ranging from 5% to 20% if the net estate is over Php200,000.  Individualand corporate shareholders, whether or not citizens or residents of thePhilippines, who transfer the Equity Securities by way of gift or donation willbe liable for Philippine donor’s tax on such transfers at progressive ratesranging from 2% to 15%, if the net gifts made during the calendar year exceedPhp100,000.  The rate of tax with respect to net gifts made to a stranger, whois not a brother, sister, spouse, ancestor, lineal descendant or relative byconsanguinity in the collateral line within the fourth degree of relationshipof the donor, is a flat rate of 30%.  Estate and gift taxes will not becollected in respect of intangible personal property such as the EquitySecurities:

 

•        if the deceased at the time ofdeath, or the donor at the time of donation, was a citizen and resident of aforeign country which at the time of his death or donation did not impose atransfer tax of any character in respect of intangible personal property ofcitizens of the Philippines not residing in that foreign country, or

 

•        if the laws of the foreign countryof which the deceased or the donor was a citizen and resident at the time ofhis death or donation allow a similar exemption from transfer or death taxes ofevery character or description in respect of intangible personal property ownedby citizens of the Philippines not residing in that foreign country.

 

Sharesof stock of a deceased shareholder or shares that have been donated may not betransferred on the books of the corporation without a certificate from thePhilippine Commissioner of Internal Revenue that the applicable estate ordonor's taxes have been paid.  In the case of ADRs, however, there is nocorresponding requirement, unless a transfer of the ADRs would also entail achange in the registration of the underlying shares.

 

*United States**Federal Taxation*

 

For United States federal income tax purposes, United States Holders of ADRs will be treated asthe owners of the underlying shares of Common Stock.  Deposits and withdrawalsby United States Holders of shares of Common Stock in exchange for ADRs willnot be subject to United States federal income tax.

 

*Taxation of Dividends*

 

Underthe United States federal income tax laws, and subject to the passive foreigninvestment company, or PFIC, rules discussed below, if you are a United StatesHolder, the gross amount of any dividend we pay out of our current oraccumulated earnings and profits (as determined for United States federalincome tax purposes) is subject to United States federal income taxation.  Ifyou are a non-corporate United States Holder, dividends paid to you in taxableyears beginning before January 1, 2011 that constitute qualified dividendincome will be taxable to you at a maximum tax rate of 15% provided that, inthe case of Common Stock or ADSs, you hold the Common Stock or ADSs for morethan 60 days during the 121-day period beginning 60 days before the ex-dividenddate.  Dividends we pay with respect to the Common Stock or ADSs generally willbe qualified dividend income.

 

Youmust include any Philippine tax withheld from the dividend payment in thisgross amount even though you do not in fact receive it.  The dividend istaxable to you when you, in the case of Common Stock, or the Depositary, in thecase of ADSs, receive the dividend, actually or constructively.  The dividendwill not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations.The amount of the dividend distribution that you must include in your income asa United States Holder will be the U.S. dollar value of the Philippine pesopayments made, determined at the spot Philippine peso/U.S. dollar rate on thedate the dividend distribution is includible in your income, regardless ofwhether the payment is in fact converted into U.S. dollars.  Generally, anygain or loss resulting from currency exchange fluctuations during the periodfrom the date you include the dividend payment in income to the date you convertthe payment into U.S. dollars will be treated as ordinary income or loss andwill not be eligible for the special tax rate applicable to qualified dividendincome.  The gain or loss generally will be income or loss from sources withinthe United States for foreign tax credit limitation purposes.  Distributions inexcess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return ofcapital to the extent of your basis in the Common Stock or ADSs and thereafteras capital gain. 

 

Subjectto certain limitations, the Philippine tax withheld in accordance with the Philippines-United States Tax Treaty and paid over to the Philippines will be creditable ordeductible against your United States federal income tax liability.  Specialrules apply in determining the foreign tax credit limitation with respect todividends that are subject to the maximum 15% tax rate.

 

Dividendswill be income from sources outside the United States.  Dividends paid in taxable years beginning beforeJanuary 1, 2007 generally will be “passive” or “financial services” income, anddividends paid in taxable years beginning after December 31, 2006 will,depending on your circumstances, be “passive” or “general” income which, ineither case, is treated separately from other types of income for purposes ofcomputing the foreign tax credit allowable to you.

* *

*Sale**or Other Disposition of Equity Securities*

 

Subject to the PFIC rulesdiscussed below, a United States Holder will recognize capital gain or lossupon the sale of Common Stock orADSs in an amount equal to the difference between such United StatesHolder's basis in the Common Stock or ADSs and the amount realized upon thesale.  Such gain or loss generally will be long-term capital gain or loss if,at the time of sale, exchange or retirement, the Common Stock or ADSs have beenheld for more than one year.  Capital gain of a non-corporate U.S. holder that is recognized in taxable years beginning January 1, 2011 is generally taxed at amaximum rate of 15% where the property is held for more than one year.Generally, any such gain or loss will be treated as realized income or lossfrom sources within the United States for foreign tax credit limitation purposes.United States Holders may not be eligible to credit against their United States federal income tax liability amounts paid in respect of the Philippine stocktransaction tax.  See “— Philippine Taxation — Capital Gains Tax and StockTransaction Tax.”

 

TheU.S. Tax Code does not authorize a comparable credit for foreign gift ordonor's taxes such as those imposed by the Philippines.  See “— PhilippineTaxation — Estate and Donor’s Taxes.”

 

*PassiveForeign Investment Company Rules*

 

Webelieve that the Common Stock or ADSs should not be treated as stock of a PFICfor United States federal income tax purposes, but this conclusion is a factualdetermination that is made annually and thus may be subject to change.  If wewere to be treated as a PFIC, unless the Common Stock or ADSs are “marketablestock” and a United States Holder elects to be taxed annually on amark-to-market basis with respect to the Common Stock or ADSs, gain realized onthe sale or other disposition of your Common Stock or ADSs would in general notbe treated as capital gain.  Instead, if you are a United States Holder, youwould be treated as if you had realized such gain and certain "excessdistributions" ratably over your holding period for the Common Stock orADSs and would be taxed at the highest tax rate in effect for each such year towhich the gain was allocated, together with an interest charge in respect ofthe tax attributable to each such year.  In addition, dividends that youreceive from us will not be eligible for the special tax rates applicable toqualified dividend income if we are a PFIC either in the taxable year of thedistribution or the preceding taxable year, but instead will be taxable atrates applicable to ordinary income.

 

**Documents on Display**

 

Weare subject to the informational requirements of the Exchange Act, and filereports and other information with the Commission, as required by this Act.Reports and other information filed by us with the Commission may be inspectedand copied at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  The public may obtain information on the operation of theCommission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330.  The Commission also maintains a website that containsreports, proxy statements and other information regarding registrants that fileelectronically with the Commission.  Copies of these materials may be obtainedby mail from the public reference section of the Commission, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.  These reports and otherinformation may also be inspected at the offices of the New York StockExchange, 20 Broad Street, New York, New York 10005, on which the AmericanDepositary Shares representing our Common Stock are listed.

 

**Item 11.    Quantitativeand Qualitative Disclosures about Market Risks**

** **

Our operations are exposed to various risks, includingliquidity risk, foreign exchange risk and interest rate risk.  The importanceof managing these risks has significantly increased in light of considerablechange and continuing volatility in both the Philippine and internationalfinancial markets.  With a view to managing these risks, we have incorporatedfinancial risk management functions in our organization, particularly in ourtreasury operations and equity issues and sales of certain assets.

 

**Liquidity Risk Management**

 

We seek to manage our liquidity profile to be able tofinance our capital expenditures and service our maturing debts.  To cover ourfinancing requirements, we currently intend to use internally generated fundsand proceeds from debt and equity issues and sales of certain assets. 

 

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

 

**Foreign Exchange RiskManagement**

 

Asat December 31, 2006, the Philippine peso had appreciated by 8% against theU.S. dollar to Php49.045 to US$1.00 from Php53.062 to US$1.00 as at December31, 2005.  As at December 31, 2005, likewise, the peso appreciated by 6% toPhp53.062 to US$1.00 from Php56.341 to US$1.00 as at December 31, 2004.  Therevaluation of our foreign currency-denominated assets and liabilities isrecognized as foreign exchange gains or losses as at the balance sheet date.Since substantially 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 hedgeswe carry.  As at December 31, 2006, consolidated foreign currency-denominateddebt amounted to Php76,647 million, a reduction from Php101,423 million as atDecember 31, 2005.  As such, we recognized foreign exchange gains of Php2,008million and Php4,906 million in 2006 and 2005, respectively.  

 

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)

Current Financial Assets

 

 

 

 

Cash and cash equivalents

US$154

Php7,578

US$244

Php12,957

Short-term investments

92

4,521

55

2,934

Trade and other receivables

252

12,348

139

7,371

Derivative assets

1

47

1

37

Total current financial assets

 499

24,494

 439

23,299

Noncurrent Financial Assets

 

 

 

 

Derivative assets

9

434

50

2,648

Notes receivable

–

–

6

346

Total noncurrent financial assets

   9

 434

  56

2,994

Total Financial Assets

US$508

Php24,928

US$495

Php26,293

 

 

 

 

 

Current Financial Liabilities

 

 

 

 

Accounts payable

US$122

Php5,968

US$42

Php2,227

Accrued expenses and other current liabilities

208

10,194

68

3,587

Derivative liabilities

2

108

3

192

Current portion of interest-bearing financial liabilities

327

16,027

337

17,867

Total current financial liabilities

659

32,297

 450

23,873

Noncurrent Financial Liabilities

 

 

 

 

Interest-bearing financial liabilities - net of current portion

1,356

66,510

1,738

92,218

Derivative liabilities

140

6,872

109

5,777

Preferred stock subject to mandatory redemption

27

1,308

221

11,702

Total noncurrent financial liabilities

1,523

74,690

2,068

109,697

Total Financial Liabilities

US$2,182

Php106,987

US$2,518

Php133,570 

 

*(1)**The exchangerate used was Php**49.045 to US$1.00.*

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

 

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

* *

As at December 31, 2006,approximately 96% of our total consolidated debts were denominated in foreigncurrencies, principally in U.S. dollars.  Thus, a strengthening or weakening ofthe Philippine peso against the U.S. dollar will decrease or increase,respectively, 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 exchange rate.  For further information on our loan covenants, see Item 5. “Operatingand Financial Review and Prospects — Liquidity and Capital Resources —Financing Activities — Debt Financing — Debt Covenants” above and *Note 12 –Interest-bearing Financial Liabilities* to the accompanying consolidatedfinancial statements in Item 18.

* *

Tomanage our foreign exchange risks, stabilize cash flows, and improve investmentand cash flow planning, we enter into forward foreign exchange contracts,foreign currency swap contracts, currency option contracts and other hedgingproducts aimed at reducing and/or managing the adverse impact of changes inforeign exchange rates on our operating results and cash flows.  However, thesehedges do not cover all of our exposure to foreign exchange risks.

 

Specifically,we use forward foreign exchange contracts, foreign currency swap contracts andcurrency option contracts to manage the foreign 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 accumulated other comprehensive income (loss) cumulativetranslation adjustments in equity until the hedged item is recognized directlyas income or expense for the period.  

 

Asat December 31, 2006, PLDT’s outstanding forward foreign exchange contracts,principal-only long-term cross-currency swap contracts, and currency optioncontracts amounted to US$202 million, US$550 million, and US$174 million,respectively.  Smart had no outstanding forward foreign exchange contracts asat December 31, 2006.

 

**Interest Rate RiskManagement******

 

Ona limited basis, we enter into interest rate swap agreements in order to manageour exposure to interest rate fluctuations.  We make use of hedging instrumentsand structures solely for reducing or managing financial risks associated withour liabilities and not for trading or speculative purposes.

 

The tables below set out thecarrying amount, by maturity, of our financial instruments that are exposed tointerest rate risk for the years ended December 31, 2006 and 2005.  Financialinstruments that are not subject to interest rate risk were not included in thetable:

 

YearEnded December 31, 2006

 

** **

 

 

 

 

 

 

** **

 

** **

 
** **

 

 

 

 

 

 

** **

** **

** **

 

 

 

 

**Over 5**

**In U.S.**

**Carrying Value**

**Fair Value**

**In U.S.**

** **

** **

**Below 1 year**

**1-2 years**

**2 – 3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**Dollar**

**In Php**

** **

 

 

 

 

 

 

**(in millions)**

**Liabilities:**

 

 

 

 

 

 

** **

 

** **

Long-term Debt

 

 

 

 

 

 

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

129

–

167

–

550

845

41,463

965

47,349

Interest rate

7.85% to  10.625%

–

10.50%

–

8.35% to 11.375%

–

–

–

–

US$ Fixed Loans (in millions)

69

56

46

32

280

 483

23,682

361

17,712

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

21

1,035

Interest rate

–

–

–

15%

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

128

92

81

53

–

355

17,392

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

51

2,511

Interest rate

3% over 

90-day PHIBOR, MART1 + 0.75%

MART1 + 0.75%

MART1 + 0.75%

MART1 + 0.75%

–

–

–

–

–

 

 

 

 

 

 

**1,751**

**85,858**

**1,753**

**85,999**

 

 

 

 

 

 

 

 

 

 

*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

–

–

–

–

 

YearEnded December 31, 2005

 

** **

 

 

 

 

 

 

** **

 

** **

** **

 

 

 

 

 

 

** **

** **

** **

 

 

 

 

**Over 5**

**In U.S.**

**Carrying Value**

**Fair Value**

**In U.S.**

** **

** **

**Below 1 year**

**1-2 years**

**2 – 3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**Dollar**

**In Php**

** **

 

 

 

 

 

 

** **

**(in millions)**

** **

**Liabilities:**

 

 

 

 

 

 

** **

 

** **

Long-term Debt

 

 

 

 

 

 

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

115

159

–

175

549

998

52,980

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

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

59

3,158

Interest rate

2.125%

2.125%

2.125%

–

–

–

–

–

–

Philippine Peso (in millions)

15

1

–

15

–

30

1,580

37

1,795

Interest rate

15.816%  to 24%

–

–

15.0%

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

129

143

79

117

94

 562

29,806

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

13

709

Interest rate

1.70% over LIBOR

1.70% over LIBOR

1.70% over LIBOR

–

–

–

–

–

–

Philippine Peso (in millions)

3

–

–

2

7

12

648

9

648

Interest rate

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

–

–

1% over 91-day T-bill rate 

1% over 91-day T-bill rate

–

–

–

–

 

 

 

 

 

 

**2,116**

**112,313**

**2,115**

**112,246**

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$125 million)

–

–

–

–

–

30

–

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

–

–

–

–

 

**Item 12.    Descriptionof Securities Other than Equity Securities**

 

Not Applicable.

 

PARTII
 

**Item 13.    Defaults,Dividend Arrearages and Delinquencies**

 

As at December 31, 2006,Piltel had outstanding convertible bonds with a principal amount of US$0.7million.  These were redeemed and paid, including accrued interest, on March30, 2007.  See *Note 12 – Interest-bearing Financial Liabilities* to theaccompanying consolidated financial statements in Item 18.

 

TheSeries C, Class I Preferred Stock of Piltel is entitled to annual cumulativecash dividends of Php0.20 per share (10% on the par value per share).  As atthe date of this annual report on Form 20-F, the total arrearage with respectto the Series C, Class I Preferred Stock of Piltel amounted to approximately Php7million. 

 

**Item 14.    MaterialModifications to the Rights of Security Holders and Use of Proceeds**

 

None.

 

**Item15.    Controls and Procedures**

** **

**DisclosureControls and Procedures.**  Ourmanagement, with the participation of our principal executive officer and principalfinancial officer, carried out an evaluation on the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)of the Securities Exchange Act of 1934, as amended) as at December 31, 2006.Based on this evaluation, our chief executive officer and principal financialofficer concluded that our disclosure controls and procedures were effective asat December 31, 2006. 

 

**Management’sAnnual Report on Internal Control Over Financial Reporting.**  Management is responsible for establishing andmaintaining adequate internal control over financial reporting.  Our internalcontrol over financial reporting is a process designed under the supervision ofour principal executive and principal financial officers to provide reasonableassurance regarding the reliability of financial reporting and the preparationof our financial statements for external reporting purposes in accordance withPFRS and U.S. GAAP.  Our internal control over financial reporting includespolicies and procedures that pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect transactions and dispositionsof assets; provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with PFRSand U.S. GAAP, and that receipts and expenditures are being made only inaccordance with authorizations of our management and directors; and providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton our financial statements. 

 

Ourmanagement conducted an assessment of the effectiveness of our internal controlover financial reporting based on the framework established in Internal Control– Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). Based on this assessment, management hasdetermined that our internal control over financial reporting as at December31, 2006 is effective.  

 

Management’sassessment of the effectiveness of our internal control over financialreporting as at December 31, 2006 has been audited by Sycip Gorres Velayo &Co., an independent registered public accounting firm, as stated in theirreport appearing on the accompanying consolidated financial statements in Item18, which expresses  an unqualified opinion on management’s assessment and onthe effectiveness of our internal control over financial reporting as atDecember 31, 2006. 

 

**Changesin Internal Control Over Financial Reporting.**During 2006, no change to our internal control overfinancial reporting occurred that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**AttestationReport of the Registered Public Accounting Firm.**The attestation report of Sycip Gorres Velayo &Co., an independent registered public accounting firm, regarding its audit ofPLDT Group’s internal control over financial reporting is set forth in Item 18“Financial Statements”.

 

**Item 16A. Audit CommitteeFinancial Expert**

 

Ourboard of directors has determined that currently none of the members of theAudit Committee is an audit committee financial expert as defined under theapplicable rules of the U.S. SEC issued pursuant to Section 407 of theSarbanes-Oxley Act of 2002.  However, our board of directors believes that theaudit committee members along with its advisors, possess sufficient financialknowledge and experience.  Our board of directors has appointed one of ournon-independent directors, Ms. Corazon de la Paz, as Audit Committee advisor torender advice on complex financial reporting or accounting issues that may beraised in our Audit Committee’s evaluation of our financial statements andother related matters.  Formerly the Chairman and a Senior Partner of JoaquinCunanan & Company (a member firm of PricewaterhouseCoopers Worldwide), Ms. Corazonde la Paz is a certified public accountant and possesses in-depth knowledge ofaccounting principles (including U.S. GAAP), internal controls and proceduresfor financial reporting and audit committee functions, as well as extensiveexperience in overseeing or actively supervising the preparation, audit,analysis or evaluation of financial statements and in addressing complex andgeneral financial reporting, accounting and audit issues.

 

**Item16B. Code of Business Conduct and Ethics**

 

OnMarch 30, 2004, our board of directors approved and adopted our Code ofBusiness Conduct and Ethics, or Code of Ethics, that sets out our businessprinciples and standards of behavior and business relationships.

 

It is our declared objective thatall our actions and those of our directors, officers and employees must, at alltimes, be consistent with the principles of accountability, integrity, fairnessand transparency.

 

Our Code of Ethics providesstandards to foster honest and ethical behavior including the following:

 

1.       Compliance with applicable laws,rules and regulations;

 

2.       Ethical handling of conflicts ofinterest, corporate opportunities and confidential information;

 

3.       Protection and proper use of ourassets;

 

4.       Fair dealing with our employees,customers, service providers, suppliers and competitors;

 

5.       Compliance with our reporting anddisclosure obligations to the relevant regulators and the investors;

 

6.       Compliance with our disclosure andfinancial reporting controls and procedures;

 

7.       Assessment and management of risksinvolved in our business endeavours; and

 

8.       Adoption of international bestpractices of good corporate governance in the conduct of our business.

 

*CorporateGovernance*

* *

OurCode of Ethics was adopted to strengthen the implementation of our CorporateGovernance Manual, or Governance Manual, which was adopted and approved by ourboard of directors in September 2002.  Our Governance Manual seeks toinstitutionalize the principles of good governance that our board of directorsand management believe to be a necessary component of sound businessmanagement.

 

OurGovernance Manual conforms with the requirements of the Code of CorporateGovernance, or Philippine SEC Governance Code, that was promulgated by thePhilippine Securities and Exchange Commission, or Philippine SEC, under thePhilippine SEC Memorandum Circular No. 2, Series of 2002, on April 5, 2002, inline with the Philippine Government’s policy to promote corporate governancereform aimed to raise investor confidence, develop capital market and helpachieve sustained growth for the Philippine corporate sector and the economy.

 

In compliance with the Philippine SEC Governance Codeand consistent with the relevant provisions of the Securities Regulation Codeand Corporation Code of the Philippines, our Governance Manual covers thefollowing key areas:

 

1.       The qualifications and grounds fordisqualification for directorship;

 

2.       The requirement that at least twoor twenty percent of the members of our board of directors, whichever islesser, must be independent directors and the standards/criteria for thedetermination of independent directors;

 

3.       The duties and responsibilities ofour board of directors and the individual directors;

 

4.       Our board committees,specifically, the nomination committee, audit committee and executivecompensation committee, the composition and the principal duties andresponsibilities of such committees;

 

5.       The role of our chairman inensuring compliance with the corporate governance principles;

 

6.       The role of our president/chiefexecutive officer in ensuring that our organizational and procedural controlsare adequate and effective to ensure reliability and integrity of financial andoperational information, effectiveness and efficiency of operations,safeguarding of assets and compliance with laws, rules, regulations andcontracts;

 

7.       The duties and responsibilities ofour corporate secretary/assistant corporate secretary in terms of the supportservices that they need to provide our board in upholding sound corporategovernance;

 

8.       The duties and responsibilities ofthe head of our internal audit organization that would provide our board of directors,management and shareholders with reasonable assurance that our keyorganizational and procedural controls are appropriate, adequate, effective andreasonably complied with;

 

9.       The functions of our independentauditors that would reasonably ensure an environment of sound corporategovernance as reflected in our financial records and reports; the requirementthat non-audit work of the independent auditors should not conflict with theirfunction as independent auditors; the requirement to rotate, at least onceevery five years, the independent auditors or the lead partner assigned tohandle the independent audit of our financial statements;

 

10.    Our commitment to respect andpromote shareholders’ rights such as voting right, pre-emptive right,inspection right, dividend right, appraisal right, and right to receiveinformation about the background, business experience, compensation andshareholdings of our directors and officers and their transactions with us;

 

11.    The requirement to appoint acompliance officer and the duties and responsibilities of such complianceofficer including the establishment of an evaluation system to determine andmeasure compliance with the provisions of our Governance Manual; and

 

12.    The penalties for violations ofour Governance Manual.

 

Wehave also summarized in our website the differences between our corporategovernance practices and those required of U.S. listed companies under NYSESection 303A.11.  

 

Toaccess our Code of Ethics, Governance Manual or the differences between our corporategovernance practices and those required of U.S. listed companies under NYSESection 303A.11, please refer to:

 

http://www.pldt.com.ph/download/pldt-corpgov_manual.pdfOR http://www.pldt.com.ph/cgov/downloads/pldt-corpgov_manual.pdf

http://www.pldt.com.ph/download/pldt-code_ethics.pdfOR http://www.pldt.com.ph/cgov/downloads/Code%20of%20Ethics(BD_APPRVD)-03.30.04.pdf

http://www.pldt.com.ph/download/pldt-disclosure.pdfOR http://www.pldt.com.ph/cgov/downloads/NYSE-PLDT_CG-DISC-07.01.pdf

* *

*Chief Governance Officer*

 

Our chief governance officeris responsible for monitoring compliance with, interpreting and deciding anyissues arising from, investigating and determining violations and recommendingthe disciplinary actions against violators of our Governance Manual and Code ofEthics.

 

*Board Committees*

 

Wehave four board committees, namely the governance and nomination, audit,executive compensation and technology strategy committees.  Each committee hasa board-approved written charter that provides for such committee’scomposition, membership qualifications, functions and responsibilities, conductof meetings, and reporting procedure to the board.  See Item 6. “Directors,Senior Management and Employees –– Audit, Governance and Nomination, ExecutiveCompensation and Technology Strategy Committees” for further details.

 

*Internal AuditOrganization*

 

Wehave an internal audit organization that determines whether our network or riskmanagement, control and governance processes are adequate and functioning to ensurethat:

 

1.       Risks are appropriately identifiedand managed;

 

2.       Significant financial, managerial,and operating information are accurate, reliable, and timely;

 

3.       Employees’ actions are incompliance with policies, standards, procedures, and applicable laws andregulations;

 

4.       Resources are acquiredeconomically, used efficiently, and adequately protected;

 

5.       Programs, plans and objectives areachieved;

 

6.       Quality and continuous improvementare fostered in our control process;

 

7.       Significant legislative orregulatory issues impacting us are recognized and addressed appropriately; and

 

8.       Interaction with variousgovernance groups occurs as needed.

 

To ensure independence, the headof our internal audit organization reports functionally to our audit committeeand administratively to our president and chief executive officer.  He isaccountable to management and our audit committee in the discharge of hisduties and is required to:

 

1.       Provide annually an assessment onthe adequacy and effectiveness of our processes for controlling our activitiesand managing our risks;

 

2.       Report significant issues relatedto the processes of controlling our activities, including potentialimprovements to those processes, and provide information concerning suchissues;

 

3.       Periodically provide informationon the status and results of the annual audit plan and the sufficiency of ourinternal audit organization’s resources; and

 

4.       Coordinate with and provideoversight of other control and monitoring functions (risk management,compliance, security, legal, ethics, environmental, external audit).

 

Our internal audit organizationhas a charter that has been approved by our audit committee.  It seeks tocomply with the Standards for the Professional Practice of Internal Auditing ofThe Institute of Internal Auditors in the discharge of its scope of work andresponsibilities.

 

*Policy on Employee Disclosure on Violations of theCorporate Governance Rules, Questionable Accounting or Auditing Matters, andOffenses Covered By the Company’s Table of Penalties*

 

We have expanded our writtenpolicy on the handling of employees’ anonymous and non-anonymous complaints ordisclosures on violations or irregularities to cover accounting, internalcontrols and auditing matters, as well as corporate governance rules and offensescovered by our table of penalties.  Said policy also provides protectionagainst retaliation for those employees who make such complaints ordisclosures.  We have likewise established dedicated structures and facilities(post office box, e-mail, hotline number, fax and website) for the submissionof such disclosures or complaints. 

 

Anyemployee may submit a complaint or disclosure of the above nature to theCorporate Governance Office (CGO) or the chief governance officer, verbally orin writing.  The CGO shall conduct a preliminary evaluation to determine theappropriate investigating unit to which the case shall be assigned for furtheraction.

 

The CGO monitors the casesreported and ensures the appropriate reporting to our audit committee,governance and nomination committee, or any other relevant committee or body onthe results of the investigations and the prompt referrals of findings to theappropriate units concerned.  Our committees on officer or employee discipline,as the case may be, are responsible for evaluating and approving theappropriate disciplinary action against erring officers and employees.

 

Thepublic may obtain information on our Code of Ethics, Governance Manual andCharters of our Board Committees through our website.  We undertake to providea copy, without charge, to any person requesting for such copy from our chiefgovernance officer, Rene G. Bañez*,*who can be reached at e-mail address*rgbanez@pldt.com.ph*or telephone number +632-816-8917.  We also maintain awebsite at *www.pldt.com.ph*on which reports filed by us and otherinformation may be accessed.

 

**Item 16C. Principal Accountant Fees and Services**

 

The following tablesummarizes the fees paid for services billed by our external auditors for thefiscal years ended December 31, 2006 and 2005:

 

 

**2006**

** **

**2005**

 

(in millions)

 

 

 

 

Audit Fees

Php45.8

 

Php38.1

Tax Fees

–

 

1.0

All Other Fees

8.3

 

10.5

**Total**

**Php54.1**

** **

**Php49.6**

 

*Audit Fees*.  This category includes the auditof our annual financial statements, review of interim financial statements andservices that are normally provided by the independent auditors in connectionwith statutory and regulatory filings or engagements for those fiscal years.  

 

*Tax Services*.  This category includes tax compliance, tax advice andtax planning services performed by our independent auditors.

 

*All Other Fees*.  This category consists primarily of fees forconsultation with respect to our IAS adoption, Sarbanes-Oxley Act 404compliance initiatives due diligence review for certain projects and out-of-pocketand incidental expenses.

 

The fees presented above includeout-of-pocket expenses incidental to our independent auditors’ work, whichamounts do not exceed 5% of the agreed-upon engagement fees.

 

Our Audit Committee pre-approves all audit and non-auditservices as these are proposed or endorsed before these services are performedby our independent auditors.  

 

**Item 16D. Exemption from the listing Standards forAudit Committees**

 

Not applicable.

 

**Item 16E.  Purchases of Equity Securities by theIssuer and Affiliated Purchaser**

 

Not applicable.

PART III
 

**Item17.    Financial Statements******

 

The Company has elected toprovide the financial statements and related information specified in Item 18in lieu of Item 17.

 

**Item 18.    Financial Statements**

 

Indexto Financial Statements

 

 

**Page**

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AUDITED ANNUAL FINANCIAL STATEMENTS

 

Attestation Report of the Independent Registered Public Accounting Firm 

144

Report of Independent Registered Public Accounting Firm

146

Balance Sheets as at December 31, 2006 and 2005

148

Statements of Income for the Years Ended December 31, 2006, 2005 and 2004

149

Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2006, 2005 and 2004

150

Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004

151

Notes to Financial Statements

152

** **

**Item 19.    Exhibits**

** **

SeeItem 18 above for details of the financial statements filed as part of thisannual report.

** **

Exhibitsto this report:

** **

1(a).

Articles of Incorporation (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

1(b).

By-Laws (as amended on June 28, 2005) (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in June 2006)

 

 

2.

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4.

Material Contracts

 

 

6.

Computation of Earnings per Share

 

 

7.

Calculation of Ratio of Earnings to Fixed Charges

 

 

8.

Subsidiaries

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

 

SIGNATURE

 

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf.

 

 

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

 

 

 

 

 

 

 

 

 

By:

 

                /s/ Ma. Lourdes C. Rausa-Chan

 

 

MA. LOURDES C. RAUSA-CHAN

 

 

Senior Vice President, Corporate Affairs and Legal

 

 

Services Head and Corporate Secretary

 

 

 

Date:  June 27, 2007
****
EXHIBITINDEX
** **

Exhibit Number

**Description of Exhibit**

 

 

1(a)

Articles of Incorporation (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

1(b)

By-Laws (as amended on June 28, 2005) (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in June 2006)

 

 

2

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4(a)

Stock Purchase and Strategic Investment Agreement, dated September 28, 1999, by and among PLDT, First Pacific Limited, Metro Pacific Corporation, Metro Pacific Asia Link Holdings, Inc., Metro Pacific Resources, Inc. and NTT Communications Corporation (incorporated by reference to PLDT’s Form 6-K for the month of September 1999)

 

 

4(b)

Executive Stock Option Plan (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

4(c)

Master Restructuring Agreement, dated June 21, 2000, as amended on December 12, 2000 and December 19, 2000, between Piltel, Piltel (Cayman) Limited, PLDT, The Chase Manhattan Bank, as escrow agent, Metropolitan Bank and Trust Company, as administrative agent and the creditors named therein (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

4(d)

The Cooperation Agreement, dated January 31, 2006, entered into by and among PLDT, First Pacific, Metro Pacific Corporation, Metro Asia Link Holdings, Inc., Metro Pacific Resources, Inc., Larouge B.V., Metro Pacific Assets Holdings, Inc., NTT Communications and DoCoMo (incorporated by reference to Schedule 13D/A (Amendment No.2) as filed with the United States Securities and Exchange Commission by Nippon Telegraph and Telephone Corporation and NTT Communications Corporation on January 31, 2006) 

 

 

6

Computation of Earnings per Share

 

 

7

Calculation of Ratio of Earnings to Fixed Charges 

 

 

8

Subsidiaries 

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

** **

** **

 

 

 

 

 

 

 

 

 

 

 

**EXHIBIT 6**

 

PHILIPPINE LONG DISTANCETELEPHONE COMPANY

Computationof Operating Income and Earnings Per Share

For the years 2002through 2006

 

** **

**2006**

**2006****(1)**

**2005**

**2004**

**2003**

**2002**

** **

**(in millions, except net operating income (loss) per common share)**

**1. Operating income per share**

** **

** **

** **

** **

** **

** **

Basic

 

 

 

 

 

 

Operating income 

Php48,179

US$982

Php48,514

Php48,539

Php33,379

Php12,029

Deduct:  Dividends on preferred stock

572

12

1,677

1,764

1,739

1,645

Accretion of redemption value of preferred stock subject to mandatory conversion

765

16

1,443

1,503

1,309

1,004

Operating income applicable to common shareholders

Php46,842

US$955

Php45,394

Php45,272

Php30,331

Php9,380

Diluted

 

 

 

 

 

 

Operating income 

Php48,179

US$982

Php48,514

Php48,539

Php33,379

Php12,029

Deduct:  Dividends on preferred stock

572

12

70

49

49

1,036

Accretion of redemption value of preferred stock subject to mandatory conversion

765

16

1,746

–

1,309

1,004

Operating income applicable to common shareholders

Php46,842

US$955

Php46,698

Php48,490

Php32,021

Php9,989

Basic

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

180,789

 

170,214

169,476

169,361

168,895

Effect of issuance of common shares during the year

3,667

 

1,855

252

52

200

 

184,456

 

172,069

169,728

169,413

169,095

Diluted

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

180,789

 

170,214

169,476

169,361

168,895

Effect of issuance of common shares during the year

3,667

 

1,855

252

52

200

Weighted average number of shares under ESOP during the year(3)

 

 

94

155

–

–

Common share equivalent of preferred shares deemed dilutive

 

 

10,858

22,381

24,222

22,160

 

184,456

 

183,021

192,264

193,635

191,255

 

 

 

 

 

 

 

Operating income per share 

 

 

 

 

 

 

Basic

Php253.95

 

Php263.81

Php266.73

Php179.04

Php55.47

Diluted

253.95

 

255.15

252.20

165.37

52.23

 

** **

** **

** **

** **

** **

** **

 

**(in millions, except earnings per common share)**

**2. Earnings per share****(2)**

** **

** **

** **

** **

** **

** **

Basic

 

 

 

 

 

 

Net income (loss) after cumulative effect of change in accounting policy

Php33,598

US$685

Php40,603

Php28,101

Php11,045

(Php6,158)

Deduct:  Dividends on preferred stock 

572

11

1,677

1,764

1,739

1,645

               Accretion to redemption value of preferred stock subject to mandatory conversion

765

14

1,443

1,503

1,309

1,004

Net income (loss) attributable  to common shareholders

Php32,261

US$660

Php37,483

Php24,834

Php7,997

(Php8,807)

Diluted

 

 

 

 

 

 

Net income (loss) after cumulative effect of change in accounting policy

Php33,598

US$685

Php40,603

Php28,101

Php11,045

(Php6,158)

Deduct:  Dividends on preferred stock 

572

11

70

285

1,485

1,645

               Accretion to redemption value of preferred stock subject to mandatory conversion

765

14

1,746

1,503

1,309

1,004

Net income (loss) applicable to common shareholders

Php32,261

US$660

Php38,787

Php26,313

Php8,251

(Php8,807)

Basic

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

180,789

 

170,214

169,476

169,361

168,895

Effect of issuance of common shares during the year

3,667

 

1,855

252

52

200

 

184,456

 

172,069

169,728

169,413

169,095

Diluted

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

180,789

 

170,214

169,476

169,361

168,895

Effect of issuance of common shares during the year

3,667

 

1,855

252

52

200

Weighted average number of shares under ESOP during the year(3)

 

 

94

155

–

–

Common share equivalent of preferred shares deemed dilutive:

 

 

10,858

11,213

11,069

–

 

184,456

 

183,021

181,096

180,482

169,095

Earnings per share(2) 

 

 

 

 

 

 

Basic

Php174.90

 

Php217.84

Php146.32

Php47.20

(Php52.08)

Diluted

174.90

 

211.93

145.30

45.72

(52.08)

 

*(1)    PLDT Group maintains its accounts in Philippinepeso.  For convenience, the peso financial information as at and for the yearended December 31, 2006 has been translated into U.S. dollars at the exchangerate of Php49.045 to US$1.00, the peso-dollar rate as quoted through thePhilippine Dealing System as at December 31, 2006.*

 

*(2)    Our convertible preferred stocks were deemedanti-dilutive for the years ended December 31, 2002 and 2006.   Since theamount of preferred dividends over the equivalent number of common stocks weregreater than the basic earnings per share, the amounts reported for the yearsended December 31, 2002 and 2006  basic and diluted earnings per common sharewere the same.*

 

*(3)    The dilutive effect of the outstanding optionsis reflected as additional share dilution in the computation of earnings percommon share, see Note 20 – Earnings per Common Share**to the accompanying consolidated financial statementsin Item 18 for further discussion.*

**EXHIBIT 7**

* *

* *

* *

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

**Calculation of Ratio of Earnings to Fixed Charges**

For the years 2002 through2006

 

 

**2006**

**2006****(1)**

**2005**

**2004**

**2003**

**2002**

 

**(in millions, except ratio of earnings (loss) to fixed charges)**

 

 

 

 

 

 

 

Earnings (a)

Php52,763

US$1,076

Php57,972

Php49,155

Php24,168

Php11,320

Fixed charges – (b)

 

 

 

 

 

 

Fixed charges excluding amortization of capitalized interest

Php7,445

US$152

Php10,759

Php12,805

Php12,747

Php14,177

Capitalized interest, net of amortization

(941)

(19)

(939)

(915)

(714)

(394)

 

Php6,504

133

Php9,820

Php11,890

Php12,033

Php13,783

Ratio (a/b) (2)

8.1

8.1

5.9

4.1

2.0

–

_____________

 

*(1)      **PLDT Group maintains itsaccounts in Philippine peso.  For convenience, the peso financial informationas at and for the year ended December 31, 2006 has been translated into U.S.dollars at the exchange rate of Php49.045 to US$1.00, the peso-dollar rate asquoted through the Philippine Dealing System as at December 31, 2006.*

* *

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

* *

*Due to PLDT’s net loss in 2002, the coverage ratio on aconsolidated basis was less than 1.0x.  In order to achieve a coverage ratio of1.0x in that year, we would have had to generate additional consolidatedearnings of Php2,463 million for the year ended December 31, 2002.*

* *
******
** **

**EXHIBIT 8**

 

**PLDT SUBSIDIARIES**

**Name of Subsidiary**

**Place of Incorporation**

**Principal Activity**

**Percentage of Ownership**

**Direct**

**Indirect**

** **

 

 

** **

**Wireless**

Smart

Philippines

Cellular mobile services

100.0

–

Smart Broadband 

Philippines

Internet broadband and distributor

–

100.0

Wolfpac 

Philippines

Mobile applications developer and  service provider

–

100.0

Piltel

Philippines

Providing cellular and fixed line services

–

92.1

Telesat

Philippines

Satellite communications services

94.4

–

ACeS Philippines

Philippines

Satellite phone services

88.5

11.5

Mabuhay Satellite

Philippines

Satellite communications services

67.0

–

** **

 

 

 

 

**Fixed Line**

ClarkTel

Philippines

Telecommunications services

100.0

–

SubicTel

Philippines

Telecommunications services

100.0

–

PLDT Global

British Virgin Islands

Telecommunications services

100.0

–

SNMI

Philippines

Data and network services

100.0

–

Maratel

Philippines

Telecommunications services

97.5

–

BCC

Philippines

Telecommunications, infrastructure  and related value-added services

75.0

–

** **

 

 

 

 

**Information and Communications Technology**

ePLDT

Philippines

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

100.0

–

Vocativ

Philippines

Call center services

–

100.0

Parlance

Philippines

Call center services

–

100.0

Ventus

Philippines

Call center services

–

100.0

SPi and Subsidiaries (including CyMed)

Philippines

Business process outsourcing, or BPO, services

–

100.0

Infocom

Philippines

Internet services

–

99.6

netGames

Philippines

Publisher of online games

–

80.0

Digital Paradise (formerly Netopia Computer Technologies, Inc.)

Philippines

Internet access services

–

75.0

Level Up!

Philippines

Publisher of online games

–

60.0

Digital Paradise Thailand

Thailand

Internet access services

–

51.0

Airborne Access

Philippines

Wireless internet services

–

51.0

 

**Exhibit 12.1**

** **

CERTIFICATION
** **

I, Napoleon L. Nazareno, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company;

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as of, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) and internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) forthe Company and have:

 

(a)    Designed such disclosure controlsand procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating tothe Company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisreport is being prepared;

(b)    Designed such internal controlover financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles;

(c)    Evaluated the effectiveness of theCompany’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based on such evaluation; and

(d)    Disclosed in this report anychange in the Company’s internal control over financial reporting that occurredduring the period covered by the annual report that has materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting; and

 

5.       The Company’s other certifyingofficer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the Company’s auditors and theaudit committee of the Company’s board of directors (or persons performing theequivalent functions):

 

(a)    All significant deficiencies andmaterial weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the Company’sability to record, process, summarize and report financial information; and

 

(b)    Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the Company’s internal control over financial reporting.

 

 

Date:  June 27, 2007

 

/s/  Napoleon L. Nazareno

Napoleon L. Nazareno

President and Chief Executive Officer

(Principal Executive Officer)

 
****
**Exhibit 12.2**

** **

**CERTIFICATION**

** **

I,Anabelle L. Chua, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company;

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as of, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) and internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

(a)   Designed such disclosure controls andprocedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to theCompany, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report isbeing prepared;

(b)   Designed such internal control over financialreporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples; 

(c)   Evaluated the effectiveness of the Company’sdisclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of theend of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in theCompany’s internal control over financial reporting that occurred during theperiod covered by the annual report that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting; and

 

5.       The Company’s other certifyingofficer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the Company’s auditors and theaudit committee of the Company’s board of directors (or persons performing theequivalent functions):

 

(a)   All significant deficiencies and materialweaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the Company’s abilityto record, process, summarize and report financial information; and

 

(b)   Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theCompany’s internal control over financial reporting.

 

 

Date:June 27, 2007

 

/s/  Anabelle L. Chua

Anabelle L. Chua

Senior Vice President and Treasurer

(Principal Financial Officer)

** **
****
**Exhibit13.1**

** **

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. §1350, I, Napoleon L. Nazareno, President and Chief Executive Officer ofPhilippine Long Distance Telephone Company, hereby certify, to my knowledge,that our annual report on Form 20-F for the year ended December 31, 2006 (the“Report”) fully complies with the requirements of Section 13(a) or 15(d), asapplicable, of the Securities Exchange Act of 1934, and that the informationcontained in the Report fairly presents, in all material respects, ourfinancial condition and results of operations.

 

 

Date:  June 27, 2007

 

 

 

 

 

/s/  Napoleon L. Nazareno

 

 

 

Napoleon L. Nazareno

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

The foregoingcertification is being furnished solely pursuant to 18 U.S.C. § 1350 and is notbeing filed as part of the Report or as a separate disclosure document.

 

**Exhibit 13.2**

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. §1350, I, Anabelle L. Chua, Senior Vice President and Treasurer of PhilippineLong Distance Telephone Company, hereby certify, to my knowledge, that ourannual report on Form 20-F for the year ended December 31, 2006 (the “Report”)fully complies with the requirements of Section 13(a) or 15(d), as applicable,of the Securities Exchange Act of 1934, and that the information contained inthe Report fairly presents, in all material respects, our financial conditionand results of operations.

 

 

Date:  June 27, 2007

 

 

 

 

 

/s/  Anabelle L. Chua

 

 

 

Anabelle L. Chua

Senior Vice President and Treasurer

 

 

 

(Principal Financial Officer)

The foregoingcertification is being furnished solely pursuant to 18 U.S.C. § 1350 and is notbeing filed as part of the Report or as a separate disclosure document.

 
****
 

 

 

Report of Independent Registered Public AccountingFirm

 

 

 

The Board of Directors and theStockholders 

Philippine Long Distance TelephoneCompany

 

 

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that Philippine Long Distance Telephone Company and Subsidiaries(“the Company”) maintained effective internal control over financial reportingas of December 31, 2006, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (the COSO criteria).  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit. 

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects.  Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that the Companymaintained effective internal control over financial reporting as of December31, 2006, is fairly stated, in all material respects, based on the COSOcriteria.  Also, in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December31, 2006, based on****the COSO criteria**.**

** **

 

 

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of the Company as of December31, 2006 and 2005, and the related consolidated statements of income, changesin stockholders’ equity and cash flows for each of the three years in theperiod ended December 31, 2006, and our report dated June 25, 2007 expressed anunqualified opinion thereon.

 

 

 

 

/s/Sycip Gorres Velayo & Co.______

SYCIP, GORRES, VELAYO & CO.

Makati City, Philippines

June 25, 2007

** **

** **

**Report of Independent Registered PublicAccounting Firm**

 

 

 

The Board of Directors and Stockholders 

Philippine Long Distance Telephone Company

 

 

We have audited the accompanying consolidatedbalance sheets of Philippine Long Distance Telephone Company and subsidiariesas of December 31, 2006 and 2005, and the related consolidated statements ofincome, stockholders’ equity, and cash flows for each of the three years in theperiod ended December 31, 2006.  These financial statements are theresponsibility of the Company’s management.  Our responsibility is to expressan opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements.  An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe that our audits provide a reasonable basis forour opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Philippine Long Distance Telephone Company andsubsidiaries as of December 31, 2006 and 2005, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2006, in conformity with U.S. generally acceptedaccounting principles.

 

As discussed in Note 2 to the consolidatedfinancial statements, the Company changed its method of accounting forshare-based payments in accordance with the provisions of Statement ofFinancial Accounting Standards No. 123 (revised 2004) beginning January 1,2006.  Also, as discussed in Note 2 to theconsolidated financial statements, effective December 31, 2006, theCompany adopted the provisions of Statement of Financial Accounting StandardsNo. 158, *Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans — an amendment of FASB Statements No. 87, 88,106, and 132(R)*.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theeffectiveness of Philippine Long Distance Telephone Company’s internal controlover financial reporting as of December 31, 2006, based on criteria establishedin*Internal Control - Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated June25, 2007 expressed an unqualified opinion thereon. 

 

 

 

 

/s/Sycip Gorres Velayo & Co.______

SYCIP, GORRES, VELAYO & CO.

Makati City, Philippines

June 25, 2007 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

AS AT DECEMBER 31,2006 AND 2005

AND FOR THE THREEYEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

** **

AND

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCETELEPHONE COMPANY AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2006 AND 2005**

**(inmillion pesos, except par value and share amounts)**

 

 

 

**2006**

2005

**ASSETS**

**Current Assets**

** **

 

Cash and cash equivalents (Notes 4 and 23)

**16,870**

30,059

Short-term investments (Note 23)

**8,327**

2,750

Trade and other receivables - net (Notes 5 and 23) 

**10,158**

7,856

Inventories and supplies - net (Note 6)

**1,230**

1,548

Deferred income tax assets - net (Note 19)

**10,042**

9,866

Derivative assets (Note 23)

**47**

37

Prepaid expenses

**5,293**

5,001

Other current assets

**383**

1,539

Total Current Assets

**52,350**

58,656

**Noncurrent Assets**

** **

 

Property, plant and equipment - net (Note 7)

**164,081**

173,007

Investments - net (Note 8)

**637**

361

Investments-available-for-sale (Note 23)

**116**

109

Goodwill and other intangible assets - net (Note 9)

**27,241**

16,875

Deferred income tax assets - net (Note 19)

**15,706**

13,589

Derivative assets (Note 23)

**434**

2,648

Other noncurrent assets - net (Note 10)

**3,630**

4,464

Total Noncurrent Assets

**211,845**

211,053

Total Assets

**264,195**

269,709

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

** **

 

Accounts payable (Note 23)

**8,347**

15,966

Accrued expenses and other current liabilities (Notes 8, 11, 16, 17, 21, 22 and 23) (Due to related parties amounted to Php4,120 and Php3,711 in 2006 and 2005, respectively)

**23,524**

15,986

Unearned revenues

**4,019**

3,125

Derivative liabilities (Note 23)

**108**

192

Deferred income tax liabilities (Note 19)

**–**

5

Current portion of interest-bearing financial liabilities (Notes 7, 12, 21 and 23)

**17,441**

19,550

Dividends payable (Notes 20 and 23)

**777**

746

Income tax payable (Note 19)

**2,438**

2,080

Total Current Liabilities

**56,654**

57,650

**Noncurrent Liabilities**

** **

 

Interest-bearing financial liabilities - net of current portion (Notes 7, 12, 21 and 23)

**69,648**

93,860

Derivative liabilities (Note 23)

**6,872**

5,777

Deferred income tax liabilities (Note 19)

**382**

44

Pension and other employee benefits (Note 17)

**7,627**

3,943

Customers’ deposits

**2,204**

2,214

Remaining excess of debt forgiven over value of consideration given - net (Notes 12 and 14)

**2,688**

5,071

Deferred credits and other noncurrent liabilities (Notes 13 and 21)

**8,532**

8,421

Total Noncurrent Liabilities

**97,953**

119,330

**Minority Interest in Consolidated Subsidiaries**

**2,041**

1,130

**Preferred Stock Subject to Mandatory Redemption**(Notes 14 and 23)

**1,374**

12,004

**Stockholders’ Equity** (Notes 15 and 20)

** **

 

Preferred stock, Php10 par value, authorized - 822,500,000 shares: 

** **

 

Series A to GG (issued and outstanding - 406,375,057 shares as at December 31, 2006 and 407,343,035 shares as at December 31, 2005

**4,064**

4,073

Series IV (issued and outstanding - 36,000,000 shares)

**360**

360

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

Capital in excess of par value

**91,479**

78,873

Retained earnings (deficit) (Note 20)

**12,498**

(5,288)

Accumulated other comprehensive income (loss)

**(3,170)**

673

Total Stockholders’ Equity

**106,173**

79,595

Total Liabilities and Stockholders’ Equity

**264,195**

269,709

Seeaccompanying Notes to Consolidated Financial Statements.
****
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

 

CONSOLIDATEDSTATEMENTS OF INCOME
**FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

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

** **

** **

**2006**

2005

2004

**OPERATING REVENUES**(Notes 18 and 24)

** **

** **

** **

Service revenues

**125,004**

120,348

114,904

Non-service revenues

**2,532**

2,987

6,269

 

**127,536**

123,335

121,173

**OPERATING EXPENSES**(Note 18)

** **

 

 

Depreciation and amortization (Notes 7 and 24)

**28,130**

27,855

20,098

Compensation and employee benefits (Notes 17 and 18)

**18,267**

13,852

12,016

Repairs and maintenance (Note 16) (Total transactions with related parties amounted to Php18, Php640 and Php111 in 2006,  2005 and 2004, respectively)

**7,565**

6,705

5,671

Cost of computers, cellular handsets, SIM-packs sold and point-product sales

**5,323**

6,180

10,599

Selling and promotions (Note 16) (Total transactions with related parties amounted to Php23, Php29 and Php32 in 2006,  2005 and 2004, respectively)

**5,010**

4,768

5,708

Professional and other contracted services (Notes 16 and 18) (Total transactions with related parties amounted to Php725, Php147 and Php694 in 2006,  2005 and 2004, respectively)

**3,144**

2,432

2,187

Rent (Note 16) (Total transactions with related parties amounted to Php10, Php8 and Php6 in 2006 and 2005 and 2004, respectively)

**2,257**

2,086

2,160

Asset impairment (Notes 7, 8, 18 and 24)

**1,799**

11

1,412

Taxes and licenses (Notes 16 and 22)  (Total transactions with related parties amounted to Php53 in 2006)

**1,815**

2,516

2,055

Communication, training and travel

**1,480**

1,465

1,310

Insurance and security services (Note 16) (Total transactions with related parties amounted to Php360, Php467 and Php534 in 2006,  2005 and 2004, respectively)

**1,255**

1,523

1,644

Provision for doubtful accounts (Notes 5 and 24)

**736**

2,251

3,955

Cost of satellite air time (All are transactions with related parties) (Notes 16 and 21) 

**698**

1,008

1,299

Amortization of intangible assets (Note 9)

**402**

204

93

Provision for inventory obsolescence (Notes 6 and 24)

**211**

479

577

Other operating expenses 

**1,265**

1,486

1,850

 

**79,357**

74,821

72,634

OPERATING INCOME

**48,179**

48,514

48,539

**FINANCING COSTS** (Notes 18 and 24)

**(2,459)**

(3,423)

(16,233)

**INTEREST INCOME** (Note 24)

**1,422**

1,457

942

**EQUITY SHARE IN NET INCOME (LOSS) OF ASSOCIATES**

**(52)**

7

(74)

**LOSS****ON****DERIVATIVE TRANSACTIONS –**net (Note 23)

**(6,857)**

(1,801)

(864)

**OTHER INCOME**– net (Note 18)

**3,595**

1,016

2,530

INCOME BEFORE INCOME TAX, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY AND MINORITY INTEREST IN NET LOSS (INCOME)  OF CONSOLIDATED SUBSIDIARIES 

**43,828**

45,770

34,840

**PROVISION FOR INCOME TAX**(Notes 19 and 24)

**(9,046)**

(4,849)

(6,826)

**INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING  POLICY AND MINORITY INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES**

**34,782**

40,921

28,014

**CUMULATIVE EFFECT ON PRIOR YEARS (UP TO DECEMBER 31, 2005) OF  ADOPTING SFAS NO. 123 (R), “SHARE-BASED PAYMENT”**– net of tax effect (Note 3)

**(189)**

–

–

**INCOME BEFORE MINORITY INTEREST IN NET LOSS (INCOME) OF  CONSOLIDATED SUBSIDIARIES**

**34,593**

40,921

28,014

**MINORITY INTEREST IN NET LOSS (INCOME) OF CONSOLIDATED SUBSIDIARIES**

**(995)**

(318)

87

**NET INCOME**

**33,598**

40,603

28,101

**DIVIDENDS, ACCRETION AND FOREIGN EXCHANGE REVALUATION  OF PREFERRED STOCK**(Note 20)

**(1,337)**

(3,120)

(3,267)

**NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS**(Note 20)

**32,261**

37,483

24,834

**Earnings Per Common Share**(Note 20)

** **

 

 

Basic earnings per common share

**174.90**

217.84

146.32

Diluted earnings per common share

**174.90**

211.93

145.30

*Seeaccompanying Notes to Consolidated Financial Statements.*
**
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THE YEARSENDED DECEMBER 31, 2006, 2005 AND 2004**

**(in million pesos)**

** **

 

**Preferred Stock**

**Common Stock**

**Capital in  Excess of  Par Value**

**Retained Earnings (Deficit)**

**Accumulated Other Comprehensive Income (Loss)**

**Total Equity**

**Balances as at January 1, 2004**

**4,505**

**847**

**74,520**

**(58,031)**

**2,904**

**24,745**

Comprehensive income (loss):

 

 

 

 

 

 

Net income for the year

–

–

–

28,101

–

28,101

Translation losses

–

–

–

–

(2,168)

(2,168)

Net losses on available-for-sale financial assets (Note 23)

–

–

–

–

(5)

(5)

Others

–

–

–

–

(199)

(199)

Net comprehensive income (loss)

–

–

–

28,101

(2,372)

25,729

**Cash dividends (Note 20)**

**–**

**–**

**–**

**(1,764)**

**–**

**(1,764)**

**Accretion to redemption value of preferred stock subject to mandatory redemption (Note 20)**

**–**

**–**

**–**

**(1,503)**

**–**

**(1,503)**

**Issuance of capital stock - net (Note 15)**

**(8)**

**4**

**876**

**–**

**–**

**872**

**Balances as at December 31, 2004**

**4,497**

**851**

**75,396**

**(33,197)**

**532**

**48,079**

Comprehensive income (loss):

 

 

 

 

 

 

Net income for the year

–

–

–

40,603

–

40,603

Translation losses

–

–

–

–

(63)

(63)

Net gains on available-for-sale financial assets (Note 23)

–

–

–

–

5

   5

Others

–

–

–

–

199

 199

Net comprehensive income

–

–

–

40,603

 141

40,744

**Cash dividends****(Note 20)**

**–**

**–**

**–**

**(11,251)**

**–**

**(11,251)**

**Accretion to redemption value of preferred stock subject to mandatory redemption (****Note 20)**

**–**

**–**

**–**

**(1,443)**

**–**

**(1,443)**

**Issuance of capital stock - net****(Note 15)**

**(64)**

**53**

**3,477**

**–**

**–**

**3,466**

**Balances as at December 31, 2005**

**4,433**

**904**

**78,873**

**(5,288)**

**673**

**79,595**

Comprehensive income (loss):

 

 

 

 

 

 

Net income for the year

–

–

–

33,598

–

33,598

Translation losses

–

–

–

–

(535)

(535)

Net loss on available-for-sale financial assets (Note 23)

–

–

–

**–**

(5)

(5)

Net comprehensive income (loss)

–

–

–

33,598

(540)

33,058

**Cash dividends****(Note 20)**

**–**

**–**

**–**

**(15,047)**

**–**

**(15,047)**

**Unrecognized pension cost – net (Note 17)**

**–**

**–**

**–**

**–**

**(3,303)**

**(3,303)**

**Accretion to redemption value of preferred stock subject to mandatory redemption (****Note 20)**

**–**

**–**

**–**

**(765)**

**–**

**(765)**

**Issuance of capital stock - net****(Note 15)**

**(9)**

**38**

**12,606**

**–**

**–**

**12,635**

**Balances as at December 31, 2006**

**4,424**

**942**

**91,479**

**12,498**

**(3,170)**

**106,173**

*Seeaccompanying Notes to Consolidated Financial Statements.*

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

** **

CONSOLIDATED STATEMENTS OF CASH FLOWS
**FORTHE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004**

**(inmillion pesos)**

** **

** **

 

**2006**

2005

2004

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

Net income 

**33,598**

40,603

28,101

Adjustments to reconcile net income to net cash provided by operating activities:

** **

 

 

Depreciation and amortization (Notes 7 and 24)

**28,130**

27,855

20,098

Loss on derivative instruments (Note 23)

**6,857**

1,801

864

Asset impairment (Notes 7, 8, 18 and 24)

**1,799**

11

1,412

Minority interest in net income (loss) of consolidated subsidiaries

**995**

318

(87)

Provision for doubtful accounts (Notes 5 and 24)

**736**

2,251

3,955

Amortization of intangible assets (Note 9)

**402**

204

93

Accretion on financial liabilities (Note 18)

**338**

568

1,185

Provision for inventory obsolescence (Notes 6 and 24)

**211**

479

577

Equity share in net loss (income) of associates

**52**

(7)

74

(Gain) loss on disposal of property and equipment

**(195)**

160

155

Benefit from deferred income tax including tax on cumulative cumulative effect of change in accounting policy (Note 3)

**(1,082)**

(3,734)

(531)

Gain on early settlement of debt, debt exchange and debt restructuring transactions (Notes 12, 14 and 18)

**(1,698)**

–

(2,816)

Unrealized foreign exchange losses (gains)

**(5,818)**

(8,196)

2,882

Others

**(903)**

(360)

478

Operating cash flows before working capital changes 

**63,422**

61,953

56,440

Changes in assets and liabilities, net of effect from purchase of subsidiaries: 

** **

 

 

Decrease (increase) in:

** **

 

 

Trade and other receivables

**(1,119)**

(2,315)

2,305

Inventories and supplies

**343**

509

(9)

Prepaid expenses and other current assets

**1,228**

(1,867)

(1,279)

Increase (decrease) in:

** **

 

 

Accounts payable

**(9,268)**

6,756

1,848

Accrued expenses and other current liabilities

**1,928**

1,116

2,844

Unearned revenues

**983**

110

(343)

Income tax payable

**357**

103

2,367

Deferred credits and other noncurrent liabilities

**3,327**

(85)

(1,066)

Net cash provided by operating activities

**61,201**

66,280

63,107

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

Additions to property, plant and equipment

**(20,348)**

(15,864)

(19,268)

Proceeds from disposal of property and equipment

**766**

912

112

Payments for business acquired – net of cash acquired (Note 9)

**(11,018)**

(248)

(1,276)

(Disbursements) cash receipts for lease deposits and other noncurrent assets

**(745)**

974

(1,834)

(Increase) decrease in short-term investments

**(5,508)**

1,206

(2,212)

Decrease (increase) in investments in debt securities

**89**

(60)

(286)

Net cash used in investing activities

**(36,764)**

(13,080)

(24,764)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

 

Proceeds from long-term borrowings

**18,883**

10,797

15,187

Payments of long-term borrowings

**(38,391)**

(47,849)

(41,697)

Proceeds from notes payable

**210**

329

457

Repayments of notes payable

**(128)**

(387)

(2,412)

Dividends paid

**(14,999)**

(11,173)

(1,692)

Proceeds from issuance of capital stock

**66**

334

281

Payments of capital lease liabilities

**(211)**

(38)

(134)

Redemption of shares of minority

**(8)**

–

–

Settlements of derivatives

**(2,304)**

(1,311)

(247)

Payments of debt issuance costs

**(34)**

(172)

(68)

Net cash used in financing activities

**(36,916)**

(49,470)

(30,325)        

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

**(710)**

(987)

(69)

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

**(13,189)**

2,743

7,949

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

**30,059**

27,316

19,367

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

**16,870**

30,059

27,316

*See accompanying Notes to Consolidated FinancialStatements.*

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

 

**1.      ****CorporateInformation**

 

The Philippine Long Distance Telephone Company, orPLDT, or Parent Company, was incorporated under the old Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following the merger of four telephonecompanies under common U.S. ownership.  Under its amended Articles ofIncorporation, PLDT’s corporate term is currently limited through 2028.  In1967, effective control of PLDT was sold by General Telephone and ElectronicsCorporation (a major shareholder since PLDT’s incorporation) to a group ofFilipino businessmen.  In 1981, in furtherance of the then existing policy ofthe Philippine government to integrate the Philippine telecommunicationsindustry, PLDT purchased substantially all of the assets and liabilities of theRepublic Telephone Company, which at that time was the second largest telephonecompany in the Philippines.  In 1998, First Pacific Company Limited, or FirstPacific, and its Philippine and other affiliates, or collectively the FirstPacific Group, acquired a significant interest in PLDT.  On March 24, 2000, NTTCommunications Corporation, or NTT Communications, through its wholly-ownedsubsidiary NTT Communications Capital (UK) Ltd., or NTTC-UK, became PLDT’sstrategic partner with approximately 15% economic and voting interest in theissued and outstanding common stock of PLDT.  Simultaneous with NTTCommunications’ investment in PLDT, we acquired 100% of Smart Communications,Inc., or Smart.  On March 14, 2006, NTT DoCoMo, Inc., or DoCoMo, acquired fromNTT Communications approximately 7% of PLDT’s outstanding common shares held byNTT Communications with NTT Communications retaining ownership of approximately7% of PLDT’s common shares.  On February 28, 2007, Metro Pacific AssetHoldings, Inc., a Philippine affiliate of First Pacific completed theacquisition of an additional interest of approximately 46% in PhilippineTelecommunications Investment Corporation, or PTIC, a shareholder of PLDT.  Thisadditional investment in PTIC represents an attributable interest ofapproximately 6.4% of the issued common shares of PLDT and thereby raised FirstPacific Group’s beneficial ownership to approximately 28% of PLDT’s shares ofcommon stock as at that date.

 

Thecommon shares of PLDT are listed and traded on the Philippine Stock Exchange,or PSE.  On October 19, 1994, an American Depositary Receipt, or ADR, facilitywas established, pursuant to which Citibank N.A., as the depositary, issuedADRs evidencing American Depositary Shares, or ADSs, with each ADS representingone PLDT common share with a par value of Php5 per share.  Effective February10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary forPLDT’s ADR facility.  The ADSs are listed on the New York Stock Exchange, orNYSE, in the United States and are traded on the NYSE under the symbol “PHI”.As at December 31, 2006, there were a total of over 37 million ADSsoutstanding.

 

Until recently, the ADSs werealso listed on the NYSE Arca.  However, on December 18, 2006, PLDT issued anotice of its intent to voluntarily delist its ADSs from NYSE Arca, afterdetermining that doing so is in the best interest of PLDT and its stockholdersas it would eliminate the duplicative administrative burdens and costs inherentin dual listing on both the NYSE and NYSE Arca.  The actual delisting from theNYSE Arca became effective on February 12, 2007.

 

PLDToperates under the jurisdiction of the Philippine National TelecommunicationsCommission, or NTC, which jurisdiction extends, among other things, toapproving major services offered by PLDT and certain rates charged by PLDT.

 

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

 

 

 

**2.        ****Basis ofConsolidated Financial Statements Preparation**

 

Ourconsolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America, orU.S. GAAP.

 

Our consolidated financial statements include thefinancial statements of PLDT and those of the following subsidiaries(collectively, the PLDT Group).

 

**Name of Subsidiary**

**Place of Incorporation**

**Principal Activity**

**Percentage of Ownership**

**Direct**

**Indirect**

** **

 

 

** **

**Wireless**

Smart Communications, Inc., or 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., or ePLDT

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, Inc., or Ventus

Philippines

Call center services

–

100.0

SPi Technologies, Inc., or SPi, and Subsidiaries (including CyMed, Inc., or CyMed)

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

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

 

SPi, CyMed and Level Up! were all acquired in 2006 and includedin our 2006 consolidated financial statements, see *Note 9 – Goodwill andOther Intangible Assets*.

 

The method of accounting applied to investments, whetherconsolidated, equity or cost, involves an evaluation of all significant termsof the investments that explicitly grant or suggest evidence of control orsignificant influence over the operations of the investee.  The consolidatedfinancial statements include our controlled subsidiaries. Investments inbusinesses which we do not control, but have the ability to exercisesignificant influence over operating and financial policies, are accounted forusing the equity method.  Investments in which we do not have the ability toexercise significant influence over operating and financial policies areaccounted for using the cost method.  Equity and cost method investments areincluded in the “Investments” account in our consolidated balance sheets.  

 

Ourconsolidated financial statements are prepared using uniform accountingpolicies for like transactions and events with similar circumstances.Intercompany balances and transactions, including intercompany profits andunrealized profits and losses, are eliminated in consolidation.

 

Minorityinterests represent the equity interests in Piltel, Level Up!, Telesat, MabuhaySatellite, Maratel, BCC, Digital Paradise, Digital Paradise Thailand, netGames,Infocom, and Airborne Access, not held by the PLDT Group.

 

 

 

**3.         ****Summary of SignificantAccounting Policies and Practices**

 

Oursignificant accounting policies and practices are discussed below to facilitatethe understanding of our consolidated financial statements:

 

***Management’s Use ofEstimates***

 

Thepreparation of our consolidated financial statements in conformity with U.S.GAAP requires us to make estimates and assumptions that affect the reportedamounts of our assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements, and thereported amounts of revenues and expenses during the period reported.  Actualresults could differ from those estimates.

 

Examplesof significant estimates include the allowance for doubtful accounts, inventoryobsolescence, depreciation rate, impairment of intangibles, investments andother long-lived assets, valuation allowance on deferred tax assets, pensionbenefit assumptions, asset retirement obligation measurement, stock optionvaluation and purchase price allocation.

 

***Concentrations***

 

ThePLDT Group’s results of operations and financial performance and condition maybe influenced by the general political situation in the Philippines.  The Philippines experienced several *coup d’état* attempts against the governmentadministration between 1986 and 1989, and in July 2003.  Political conditionsin the Philippines were generally stable during the 1990’s.  In the past fouryears, an increasing number of kidnappings and criminal and terroristactivities have occurred in Mindanao, principally led by the extremist “AbuSayyaf” group, which reportedly has ties to the Al-Qaeda terrorist network.There were series of bombing incidents in key cities in Mindanao, including Davao City.  The armed conflict between the Philippine military and the communist MoroIslamic Liberation Front also continues in Mindanao.

 

ThePLDT Group’s results of operations may be negatively affected by slow or negativegrowth rates and economic instability in the Philippines and in Asia.  In the past, the Philippines has experienced periods of slow or negative growth,high inflation, significant devaluation of the peso, imposition of exchangecontrols, debt restructuring and electricity shortages and blackouts.  Frommid-1997 to 1999, the economies of a number of Asian countries experiencedsignificant downturns.  The regional economic turbulence affected thePhilippine economy in a number of ways, including the depreciation of the peso,increases in interest rates, increases in unemployment and inflation, increasedvolatility and a decline in prices in the domestic stock market, thedowngrading of the Philippines’ local currency rating and the ratings outlookfor the Philippine banking sector and the reduction of foreign currencyreserves.  

 

As at December 31, 2006, other than the concentrationof our wireless services on prepaid subscribers, we do not have any significantconcentration of business transacted with a particular supplier, lender orformer affiliate that could, if suddenly adversely impacted, severely impactour operations.  We also do not have a concentration of available sources orother rights that could, if suddenly eliminated, severely impact ouroperations.  We invest our cash and cash equivalents with various high-qualityfinancial institutions.

 

***Revenue Recognition***

 

Revenues for services are stated atamounts invoiced to customers, net of value-added tax, or VAT, or overseascommunications tax, or OCT, if applicable.  We provide wireless communication,fixed line communication, and information and communications technologyservices.  We provide such services to mobile, business, residential andpayphone customers.  Revenues represent the value of fixed consideration thathave been received or are receivable.  Revenues are recognized when there isevidence of an arrangement, collectibility is reasonably assured, and thedelivery of the product or service has occurred.  In certain circumstances, revenueis split into separately identifiable components and recognized when therelated components are delivered in order to reflect the substance of thetransactions.  The value of components is determined using verifiable objectiveevidence.  We do not provide our customers with the right to a refund.

 

*Servicerevenues*

 

*Subscriptions.*We provide telephone and datacommunication services under prepaid and postpaid payment arrangements.  Installation and activation-related fees and thecorresponding costs, not exceeding the activation revenue, are deferred andrecognized over the expected average periods of customer relationship for fixedline and cellular service.  Postpaid service arrangements include subscriptionfees, typically fixed monthly fees, which are recognized over the subscriptionperiod on a pro rata basis. 

 

*Airtime, traffic and value-added services.*Prepaid service revenues collected in advance are deferred andrecognized based on the earlier of actual usage or upon expiration of the usageperiod.  Interconnection revenues for call termination, call transit, andnetwork usage are recognized in the period the traffic occurs.  Revenuesrelated to local, long distance, network-to-network, roaming and internationalcall connection services are recognized when the call is placed or connectionis provided, net of amounts payable to other telecommunication carriers forterminating calls in their territories.  Revenues related to products andvalue-added services are recognized upon delivery of the product or service.

 

*BusinessProcess Outsourcing, or BPO.*Revenueis recognized when it is probable that the economic benefits associated withthe transactions will flow to us and the amount of revenue can be measuredreliably.  Advance customer receipts arerecorded as advances from customers and presented as a liability in theconsolidated balance sheet.  For arrangements requiring specific customeracceptance, revenue recognition is deferred until the earlier of the end of thedeemed acceptance period or until written notice of acceptance is received fromthe customer.  Revenue on services rendered to customers whose ability to payis in doubt at the time of performance of services is also not recorded.Rather, revenue is recognized from these customers as payment is received.

 

*Non-servicerevenues*

 

*Handsetand equipment sales.*Sales ofcellular handsets and communication equipment are recognized upon delivery tothe customer.

 

***Cash and Cash Equivalents***

 

Cash includes cash on hand and in banks.  Cash equivalentsare short-term, highly liquid investments that are readily convertible to knownamounts of cash with original maturities of three months or less from the dateof acquisition and that are subject to an insignificant risk of change invalue.

 

***Short-term Investments***

 

Short-terminvestments includes time deposits with original maturities of more than threemonths but not more than one year from the date of acquisition of Php5,519million and Php19 million as at December 31, 2006 and 2005, respectively.  Thisalso includes trading securities that are bought and held principally for thepurpose of selling them in the near term and reported at fair value, withunrealized gains and losses included in earnings of Php2,808 million and Php2,731million as at December 31, 2006 and 2005, respectively.

 

***Trade and Other Receivables***

 

Tradeand other receivables are stated at face value, net of an allowance for anydoubtful accounts.

 

***Allowance for Doubtful Accounts***

 

Allowancefor doubtful accounts is maintained at a level considered adequate to providefor uncollectible receivables.  The level of allowance is based on historicalcollections, write-off experience, current economic trends, changes in ourcustomer payment terms and other factors that may affect our ability to collectpayments.  An evaluation of the receivables, designed to identify potentialcharges to the allowance, is performed on a continuous basis during the 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 overdue andafter a review of the status of settlement with other carriers.

 

***Inventories and Supplies***

 

Inventories and supplies whichinclude, among other things, cellular phone units, materials, spare parts,terminal units and accessories, are valued at the lower of cost and marketvalue.  Cost is determined using the moving average method.  Allowance forinventory obsolescence is set for based on the lower of cost or market value ofinventories.

 

***Property, Plant and Equipment***

 

Property, plant and equipment, except for land, arestated at cost less accumulated depreciation and amortization.  Land is statedat cost.

 

The initial cost of property, plant and equipmentcomprises its purchase price and any costs directly attributable in bringingthe asset to its working condition and location for its intended use, plus thefair value of asset retirement obligations.  Expenditures incurred after theassets have been put into operation, such as repairs and maintenance andoverhaul costs, are normally charged to income in the year the costs areincurred.  In situations where it can be clearly demonstrated that theexpenditures have resulted in an increase in the future economic benefitsexpected to be obtained from the use of an item of property, plant andequipment beyond its originally assessed standard of performance, theexpenditures are capitalized as additional costs of property, plant andequipment.  Cost also includes interests on borrowed funds used during theconstruction period.  When assets are sold or retired, their costs andaccumulated depreciation and amortization, if any, are eliminated from theaccounts and any gain or loss resulting from their disposal is included in theconsolidated statement of income of such period.

 

Depreciation and amortization arecalculated on a straight-line basis over the estimated useful lives of theassets:

 

** **

**Estimated Useful Lives**

Buildings

25 – 40 years

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Communications satellite

15 years

Information origination and termination equipment

5 – 15 years

Cellular facilities

10 years

Land improvements

10 years

Vehicles, furniture and other work equipment

3 – 10 years

 

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

 

Property under construction isstated at cost.  This includes cost of construction, plant and equipment andother direct costs.  Property under construction is not depreciated until suchtime that the relevant assets are completed and substantially available fortheir intended use.

 

Interest and other costs incurred in connection withthe borrowing of funds are capitalized during the construction of plant andequipment as part of the cost of acquiring assets.

 

Interest capitalization ceases once a project issubstantially complete or no longer undergoing construction activities toprepare it to its intended use.

 

***Investments in Equity Interests***

 

Investments in entities in which we canexercise significant influence but in which we do not own a majority equityinterest or which we do not otherwise control, are accounted for using theequity method and included as investments in our consolidated balance sheets.We record our share of the results of these companies in the line item equityshare in net income (losses) of associates in our consolidated statements ofincome.  We monitor our investments for other-than-temporary impairment byconsidering factors including the stock price of public companies in which wehave an equity investment as well as current economic and market conditions andthe operating performance of the companies and record reductions in carryingvalues when necessary.  The fair value of privately held investments isestimated using the best available information as of the valuation date,including current earnings trends, discounted cash flows, quoted stock pricesof comparable public companies, and other company specific information,including recent financings.

 

The carrying amounts of our investments are greater than theunderlying equity in net assets of these companies in certain cases due in partto goodwill, which is not subject to amortization in accordance with SFAS No.142, “Goodwill and Other Intangible Assets”.  This goodwill is evaluated forimpairment in accordance with AccountingPrinciples Board, or APB,Opinion No. 18, “The Equity Method of Accounting for Investments in CommonStock”.

 

***Goodwill and Other Intangible Assets***

 

Goodwill is the excess of the acquisition cost of abusiness, including investments accounted for using the equity method, over thefair value of the identifiable net tangible and intangible assets acquired.  Goodwillis initially measured at cost which is defined as the excess of the acquisitioncost over the fair value of identifiable assets, liabilities and contingentliabilities. In accordance with the provisions of SFAS No. 142, goodwill is notamortized.

 

Goodwillis reviewed for impairment, annually or more frequently if events or changes in circumstancesindicate that the carrying value may be impaired.  The impairment of goodwillis determined through a two-step approach, which is performed at the reportingunit level.  Step one entails comparing the fair value of the reporting unit(calculated using a discounted cash flow method) to its carrying value.  If thecarrying value exceeds the fair value, there is a potential impairment and steptwo must be performed.  Step two entails comparing the carrying value of thereporting unit’s goodwill to its implied fair value (i.e. fair value ofreporting unit less the fair value of the unit’s assets and liabilities,including identifiable intangible assets).  If the carrying value of goodwillexceeds its implied fair value, the excess is required to be recorded as animpairment.

 

Intangibleassetsarising from business combinations are initially recognized at fair value at the date ofacquisition. Where an intangible assets has a finite life, it is amortized on astraight-line basis over its estimated useful life.  We reevaluate the usefullife determination for these intangible assets each reporting period todetermine whether events and circumstances warrant a revision in their remaininguseful life.  Intangible assets with finite useful lives are reviewed wheneverevents or circumstances arise indicating that an impairment loss may exist.  Ifany such indications are present, we test the intangible assets forrecoverability by comparing the carrying amount of the intangible asset to thenet undiscounted cash flows expected to be generated from the intangibleasset.  If those net undiscounted cash flows do not exceed the carrying amount(i.e. the intangible asset is not recoverable), we determine the fair value ofthe asset and record an impairment, if any.

 

Wherethere are no legal, regulatory, contractual or other factors that wouldreasonably limit the useful life of an intangible asset, we classify theintangible asset as indefinite lived and such intangible assets are notamortized but tested for impairment annually.

 

***Impairment of Long-Lived Assets***

*** ***

We review long-lived assets, other than goodwill and other intangibleassets with indefinite lives, for impairment whenever facts andcircumstances indicate that the carrying amounts of the assets may not berecoverable. For measurement purposes, long-lived assets are grouped with otherassets and liabilities at the lowest level for which identifiable cash flowsare largely independent of the cash f lows of other assets and liabilities. Animpairment loss is recognized only if the carrying amount of the asset group isnot recoverable and exceeds its fair value. Recoverability of the asset groupto be held and used is measured by comparing the carrying amount of the assetgroup to the estimated undiscounted future net cash flows expected to begenerated by the asset group. If the asset group’s carrying value is notrecoverable, an impairment charge is recognized for the amount by which thecarrying amount of the asset group exceeds its fair value. We determine fairvalues by using a combination of comparable market values and discounted cashflows, as appropriate.

 

***Asset Retirement Obligations***

 

UnderSFAS No. 143, “Accounting for Asset Retirement Obligations”, the fair value oflegal obligations associated with the retirement of a tangible long-lived assetthat resulted from the acquisition, construction or development and the normaloperation of a long-lived asset is required to be recognized in the period inwhich it is incurred.  Under SFAS No. 143, the PLDT Group recognizes assetretirement obligations in the period in which they are incurred if a reasonableestimate of a fair value can be made.  The related asset retirement costs arecapitalized as part of the carrying amount of the corresponding long-livedasset.

 

ThePLDT Group is legally required under various lease agreements to dismantle variousinstallations and restore its leased sites at the end of the lease contractterm.  The PLDT Group recognizes the fair value of the liability for theseobligations and capitalizes the present value of these costs as part of thebalance of the related property and equipment accounts, such costs are beingdepreciated on a straight-line basis over the useful lives of the relatedassets or the contract periods, whichever is shorter.

 

Thefollowing table summarizes the changes to the asset retirement obligations asat 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 13)

**831**

 752

 

Areliable estimate of a market risk premium is not obtainable and therefore isexcluded from estimating the fair value of the asset retirement obligation.

 

EffectiveJanuary 1, 2006, we adopted FASB Interpretation, or FIN, No. 47, “Accountingfor Conditional Asset Retirement Obligations –– An interpretation of FASBStatement No. 143”.  The adoption of SFAS No. 143 did not have a materialeffect on our consolidated financial statements in 2006.

 

***Investments available-for-sale***

 

Investments available-for-sale are measured at fairvalue with unrealized gains or losses being recognized directly in the equityaccount as accumulated other comprehensive income (loss) except when thefinancial asset is impaired.  When the investment is disposed of, thecumulative gain or loss previously recorded in equity is recognized in theconsolidated statement of income.

 

***Debt Issuance Costs***

 

Issuance costs, underwriting fees and related expensesincurred in connection with the issuance of debt instruments are deferred andamortized using the effective interest rate method over the terms of theinstruments.  Unamortized debt issuance costs are charged to operations whenthe related debt is significantly modified and extinguished.

 

***Retirement Costs***

 

InSeptember 2006, the FASB issued SFAS No. 158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans –– An amendment of FASBStatements No. 87, 88, 106 and SFAS No. 123 (R), “Share-Based Payment”.  SFAS No.158 requires the recognition of a defined benefit postretirement plan’s fundedstatus as either an asset or liability on the balance sheet.  SFAS No. 158 alsorequires the immediate recognition of the unrecognized actuarial gains andlosses and prior service costs and credits that arise during the period as acomponent of other accumulated comprehensive income, net of applicable incometaxes.  Additionally, the fair value of plan assets must be determined atyear-end.  We adopted SFAS No. 158 effective December 31, 2006, which resultedin a net decrease to stockholders’ equity of Php3,303 million (net of tax ofPhp1,415), see *Note 17 – Employee Benefits*.

 

*DefinedBenefit Pension*

*** ***

Theunfunded status of PLDT’s retirement-related benefit plans is recognized in ourconsolidated balance sheets.  The unfunded status is measured as the differencebetween the fair value of plan assets and the benefit obligation at December31, the measurement date.  For defined benefit pension plans, the benefitobligation is the projected benefit obligation, or PBO.  The PBO represents theactuarial present value of benefits expected to be paid upon retirement basedon estimated future compensation levels.  The fair value of plan assetsrepresents the current market value of our cumulative contributions made to theretirement irrevocable trust fund, held for the sole benefit of participants,which contributions are invested by the trust fund.  Overfunded plans, with thefair value of plan assets exceeding the benefit obligation, are aggregated andrecorded as a prepaid pension asset equal to this excess.  Underfunded plans,with the benefit obligation exceeding the fair value of plan assets, areaggregated and recorded as a retirement benefit obligation equal to thisexcess.  The current portion of the retirement benefit obligation representsthe actuarial present value of benefits payable in the next 12 months exceedingthe fair value of plan assets, measured on a plan-by-plan basis.  Thisliability is recorded in compensation and benefits in our consolidatedstatements of income.

 

(Gains) / losses andprior service cost / (credit) not recognized as a component of net periodicpension cost / (income) in our consolidated statements of income as they arise, arerecognized as a component of accumulated other comprehensive income (loss) in ourconsolidated statement of stockholders’ equity, net of tax.  Those (gains) / lossesand prior service cost / (credit) are subsequently recognized as a component ofnet periodic pension period cost / (income) pursuant to the recognition andamortization provisions of applicable accounting standards.  (Gains) / lossesarise as a result of differences between actual experience and assumptions oras a result of changes in actuarial assumptions.  Prior service cost / (credit)represents the cost of benefit improvements attributable to prior servicegranted in plan amendments.

 

Net periodic pensioncost / (income) is recorded in our consolidated statements of income andincludes service cost, interest cost, expected return on plan assets,amortization of prior service cost and (gains) / losses previously recognizedas a component of accumulated other comprehensive income (loss) andamortization of the net transition asset remaining in accumulated othercomprehensive income (loss).  Service cost represents the actuarial presentvalue of participant benefits earned in the current year. Interest costrepresents the time value of money cost associated with the passage of time.  Certainevents, such as changes in employee base, plan amendments and changes inactuarial assumptions, result in a change in the benefit obligation and thecorresponding change in accumulated other comprehensive income (loss).  Theresult of these events is amortized as a component of net periodic cost / (income)over the service lives of the participants, provided such amounts exceedthresholds which are based upon the benefit obligation or the value of planassets.

 

The measurement of thebenefit obligation and net periodic pension cost / (income) is based on PLDT’s estimatesand actuarial valuations provided by third-party actuaries which are approvedby PLDT’s management.  These valuations reflect the terms of the plans and useparticipant-specific information such as compensation, age and years of serviceas well as certain assumptions, including estimates of discount rates, expectedreturn on plan assets, rate of compensation increases, interest crediting ratesand mortality rates.

 

*DefinedContribution Plans*

 

Smart and I-Contacts,Inc. record expenses for defined contribution plans for their contribution whenthe employee renders service to Smart and I-Contacts, Inc., respectively,essentially coinciding with their cash contributions to the plans.

 

***Stock-Based Compensation***

 

We have historically accounted for stock-basedemployee compensation plans under APB Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations, and followed thedisclosure-only provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation”.

 

UnderAPB Opinion No. 25, compensation cost is measured at the intrinsic value, whichis the difference between market price and exercise price, if any, on themeasurement date.  Under SFAS No. 123, compensation cost is calculated based onthe fair value of the options granted.  Fair value is determined using anacceptable option-pricing model based on certain management assumptions andcompensation expense is recognized over the performance period.

 

EffectiveJanuary 1, 2006, we adopted SFAS No. 123 (R), “Share-Based Payment”, whichrevises SFAS No. 123. This statement requires an entity to measure the cost ofemployee services received in exchange for an award of equity instruments basedon the grant-date fair value of the award and to recognize that cost over theperiod that an employee is required to provide service in exchange for theaward.  Any awards of liability instruments to employees would be measured atfair value at each reporting date through settlement. 

 

Weadopted SFAS No. 123 (R) using the modified prospective transition method, andaccordingly, the results of prior periods have not been restated. This methodrequires that the provisions of SFAS No. 123 (R) are applied only to unvested share-basedawards as of January 1, 2006.

 

Thedilutive effect of outstanding options is reflected as additional sharedilution in the computation of earnings per common share, see *Note 20 –Earnings Per Common Share*.

 

Thecumulative effect of adoption of SFAS No. 123 (R) on prior years resulted in achange in our reported net income of Php189 million (net of income taxes of Php93million and Php1.02 per share) in 2006, which represents the difference betweenthe intrinsic value and the fair value of the liability award on January 1,2006.

 

Hadcompensation expense for PLDT’s stock option plan, stock purchase plan andoriginal Long-Term Incentive Plan been determined based on the fair value atthe grant date of awards for years 2005 and 2004 consistent with the provisionof SFAS No. 123 (R), PLDT’s net income in 2005 would have increased by Php1million whereas in 2004 would have decreased by Php92 million.  The pro formaamounts are indicated below:

 

** **

2005

2004

 

Basic

Diluted

Basic

Diluted

 

(in million pesos, except per share amounts) 

Consolidated net income attributable to common  shareholders (Note 20)

37,483

38,787

24,834

26,313

Add:  Total stock-based employee compensation expense included in net income

824

824

239

239

Deduct:  Total stock-based employee compensation expense determined under fair value based method

(823)

(823)

(331)

(331)

Pro forma consolidated net income attributable to common shareholders

37,484

38,788

24,742

26,221

Earnings per common share:

** **

As reported

217.84

211.93

146.32

145.30

Pro forma

217.84

211.93

145.77

144.79

 

The dilutive effect of outstanding options is reflectedas additional share dilution in the computation of earnings per common share,see *Note 20 – Earnings Per Common Share*.

 

***Leases***

 

Lease obligations having provisions for bargainpurchase options, ownership transfer at the end of the lease term, a lease term equal to 75% or more of the estimatedeconomic life of the leased property, or lease obligations where the presentvalue at the beginning of the lease term of the minimum lease payments(excluding executory costs and taxes to be paid or paid by the lessor andincluding any profit thereon) equals or exceeds 90% of the fair value of theleased property, are capitalized.  Therelated obligations are recognized as liabilities.  Minimum lease payments are allocated between the finance charges and reduction of thelease liability so as to achieve a constant periodic rate of interest on the remaining balance of theliability.

 

Acapital lease gives rise to a depreciation expense for the asset, as well as aninterest expense for each period.  Finance charges are charged directly tocurrent operations.  The depreciation policy for leased assets is consistentwith that for depreciable assets that are owned.  

 

Leaseswhere the lessor retains substantially all the risks and benefits of ownershipof the asset are classified as operating leases.  Initial direct costs incurredin negotiating an operating lease are deferred and amortized on a straight-linemethod over the lease term on the same bases as the lease income.  Operatinglease payments are recognized as an expense in the consolidated statements ofincome on a straight-line basis over the lease term.  For income tax reportingpurposes, expenses that should have been incurred under a lease agreement areconsidered deductible expenses.

 

Operatinglease expense amounted to Php2,257million, Php2,086 million and Php2,160million in 2006, 2005 and 2004, respectively.

 

***Advertising and Promotion Expenses***

 

Advertisingand promotions are expensed as incurred.  Advertising and promotion expensesamounted to Php4,142 million, Php4,160 million and Php5,002 million in 2006, 2005and 2004, respectively. 

 

***Repairs and Maintenance Expenses***

 

Repairsand maintenance are expensed as incurred.  Repairs and maintenance expensesamounted to Php7,565 million, Php6,705 million and Php5,671 million in 2006, 2005and 2004, respectively. 

 

***Foreign Currency Transactions and Translations***

 

The functional currency of the PLDT Group (except forMabuhay Satellite, PLDT Global, Digital Paradise Thailand and SPi and certainof its subsidiaries) is the Philippine peso.  Transactions in foreigncurrencies are initially recorded in the functional currency rate prevailing atthe date of the transaction.  Monetary assets and liabilities denominated inforeign currencies are translated at the functional currency rate of exchangeprevailing at the balance sheet date.  All differences are recognized in theconsolidated statement of income.  For income tax purposes, exchange gains orlosses are treated as taxable income or deductible expenses in the year suchexchange gains or losses are realized.

 

The functional currency of Mabuhay Satellite, PLDTGlobal, SPi and certain of its subsidiaries is the U.S. dollar and DigitalParadise Thailand is the Thai Baht.  As at the reporting date, the assets andliabilities of these subsidiaries are translated into the reporting currency ofthe 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 accumulatedother comprehensive income (loss).  On disposal of these subsidiaries, theamount of deferred accumulated other comprehensive income (loss) recognized inequity relating to subsidiaries is recognized in the consolidated statement ofincome.

 

***Derivatives and Hedging Instruments***

 

The Company recognizes all derivatives on theconsolidated balance sheet at fair value.  Derivatives that are not designatedas hedges are recognized at fair value through earnings.  If the derivative isa hedge, depending on the nature of the hedge, and to the extent of the hedge’seffectiveness, changes in the fair value of derivatives are either offsetagainst the change in fair value of hedged assets, liabilities, or firm commitmentsthrough earnings or recognized in other comprehensive income (loss) until thehedged item is recognized in earnings.  The ineffective portion of aderivative’s change in fair value will be immediately recognized in earnings.The PLDT Group enters into derivatives that are meant to be economic hedges ofidentified underlying instruments and are marked to market directly throughearnings.

 

***Income Taxes***

 

Deferred income tax is provided using the liabilitymethod.  Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to: (a) temporary differences between the financialreporting bases of assets and liabilities and their related tax bases and (b)carryforward benefits of net operating loss carryover, or NOLCO, and minimumcorporate income tax, or MCIT.  Deferred tax assets and liabilities aremeasured using the tax rates applicable to taxable income in the years in whichthose temporary differences are expected to be recovered or settled, and thecarryforward benefits of NOLCO and MCIT are expected to be applied.  Avaluation allowance is provided for deferred tax assets when it is more likelythan not that some or all of the deferred tax assets will not be realized inthe future.

 

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

 

BasicEPS is calculated by dividing the net income or loss for the year attributableto common shareholders by the weighted average number of common sharesoutstanding during the year, after giving retroactive effect to any stockdividend declarations.

 

DilutedEPS is calculated in the same manner assuming that, at the beginning of theyear or at the time of issuance during the year, all outstanding options areexercised and convertible preferred shares are converted to common shares.Outstanding stock options will have a dilutive effect under the treasury stockmethod only when the average market price of the underlying common share duringthe period exceeds the exercise price of the option.  

 

Wherethe effect of the assumed conversion of the preferred shares and the exerciseof all outstanding options is anti-dilutive, basic and diluted EPS are statedat the same amount.

 

***Other Recently Adopted Accounting Pronouncements***

 

InSeptember 2006, the U.S. Securities and Exchange Commission issued Staff AccountingBulletin, or SAB, No. 108, “Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements”.  SAB 108was effective for us upon adoption on December 31, 2006.  SAB 108 did not havea material effect on our consolidated financial statements in 2006.

 

InMay 2005, the FASB, as part of an effort to conform to international accountingstandards, issued SFAS No. 154, “Accounting Changes and Error Corrections”,which was effective for us beginning on January 1, 2006.  SFAS No. 154 requiresthat all voluntary changes in accounting principles be retrospectively appliedto prior financial statements as if that principle had always been used, unlessit is impracticable to do so.  When it is impracticable to calculate theeffects on all prior periods, SFAS No. 154 requires that the new principle beapplied to the earliest period practicable. The adoption of SFAS No. 154 did nothave a material effect on our consolidated financial statements in 2006.

 

***New Accounting Pronouncements Effective Subsequent to 2006***

 

In February 2006, FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments”, an amendment to SFAS No.133 and SFAS No. 140.  SFAS No. 155 permits an entity to elect fair value remeasurementfor any hybrid financial instrument (with changes in fair value recognized inearnings) if the hybrid instrument contains an embedded derivative that wouldotherwise be required to be bifurcated and accounted for separately under SFAS No.133.  The election to measure the hybrid instrument at fair value is made on aninstrument-by-instrument basis and is irreversible.  The statement will beeffective for all financial instruments acquired, issued, or subject to aremeasurement event occurring after the beginning of an entity’s fiscal yearsbeginning after September 15, 2006, with earlier adoption permitted as of thebeginning of fiscal year, provided that financial statements for any interimperiod of that fiscal year have not been issued.  We are currently in the process ofevaluating any effect of the adoption of FAS 155 will have on our consolidatedfinancial statements.

 

In June 2006, the EITF reached a consensus on IssueNo. 06-3, “How Taxes Collected from Customers and Remitted to Governmental AuthoritiesShould Be Presented in the Income Statement (That Is, Gross Versus NetPresentation)”.  EITF Issue No. 06-3 requires that companies disclose theiraccounting policy regarding the gross or net presentation of certain taxes.Taxes within the scope of EITF Issue No. 06-3 are any tax assessed by agovernmental authority that is directly imposed on a revenue-producingtransaction between a seller and a customer and may include, but is not limitedto, sales, use, value added and some excise taxes.  EITF Issue No. 06-3 iseffective for our reporting period beginning January 1, 2007.  We are currentlyin the process of determining the impact of this issue on our consolidatedfinancial statements.

 

In June 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes”, or FIN 48, an interpretation of SFAS No. 109,“Accounting for Income Taxes”.  FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in an enterprise’s financial statements inaccordance with SFAS No. 109, and prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return.  FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  FIN 48 is effectivefor our reporting period beginning January 1, 2007.  We are currently in theprocess of determining the impact of the adoption of this Interpretation on ourconsolidated financial statements.

 

In September 2006, FASB issued SFAS No. 157, “FairValue Measurements”.  This statement applies whenever other standards require(or permit) assets or liabilities to be measured at fair value. Under this statement,fair value refers to the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsin the market in which the reporting entity transacts.  This statementclarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing the asset or liability.  In supportof this principle, the standard establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions.  The fair valuehierarchy gives the highest priority to quoted prices in active markets and thelowest priority to unobservable data, for example, the reporting entity’s owndata.  Under this statement, fair value measurements would be separatelydisclosed by level within the fair value hierarchy.  This statement will becomeeffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and with interim periods within those fiscal years.  Earlyadoption is permitted.  We are currently in the process of evaluating theimpact of this statement on our consolidated financial statements. 

 

In September 2006, the Emerging Issues Task Force, orEITF, reached a consensus on Issue No. 06-1, “Accounting for Consideration Givenby a Service Provider to Manufacturers or Resellers of Equipment Necessary foran End-Customer to Receive Service from the Service Provider”.  EITF Issue No.06-1 provides guidance regarding whether the consideration given by a serviceprovider to a manufacturer or reseller of specialized equipment should becharacterized as a reduction of revenue or an expense.  This issue is effectivefor our reporting period beginning January 1, 2008.  Entities are required torecognize the effects of applying this issue as a change in accountingprinciple through retrospective application to all prior periods unless it isimpracticable to do so.  We are currently in the process of evaluating theimpact of this issue on our consolidated financial statements.

 

 

 

**4.         ****Cashand Cash Equivalents**

 

This account consists of:

 

 

**2006**

2005

 

(in million pesos)

Cash on hand and in banks

**3,416**

6,496

Temporary investments

**13,454**

23,563

 

**16,870**

30,059

 

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

 

 

 

**5.         ****Tradeand Other Receivables**

 

Thisaccount consists of receivables from:

 

 

**2006**

2005

 

(in million pesos)

Customers and carriers

**25,293**

25,222

Others

**1,578**

1,159

 

**26,871**

26,381

Less allowance for doubtful accounts

**16,713**

18,525

 

**10,158**

7,856

 

Movements in the allowance for doubtful accounts areas follows:

 

 

**2006**

2005

2004

 

(in million pesos)

Balance at beginning of year

**18,525**

18,070

14,307

Provision for the year (Note 24)

**736**

2,251

3,955

Translation adjustments

**(28)**

(16)

–

Reversals

**(654)**

(11)

–

Write-offs

**(1,866)**

(1,769)

(192)

Balance at end of year

**16,713**

18,525

18,070

 

Receivables from carriers represent receivablesarising from interconnection agreements with other telecommunicationscarriers.  The aforementioned amount of receivable is shown net of relatedpayable to the same telecommunications carriers because an established right ofoffset exists.

 

Unbilledreceivables from customers and carriers of Php604 million and Php631 million in2006 and 2005, respectively, represent recognized revenue for services renderedto fixed line and wireless subscribers that have not been billed at the balancesheet dates. The unbilled amounts are billed upon completion of thecorresponding subscribers’ billing cycles.

 

On October 10, 2002, PLDT entered into aReceivables Purchase Deed, or RPD, with a foreign financial institution, or thePurchaser, under which PLDT agreed (1) to sell its receivables from certaineligible foreign carriers for an advance payment of US$50 million, of whichUS$3 million, or Php147 million, and US$20 million, or Php1,061 million, remainedoutstanding as at December 31, 2006 and 2005, respectively, and (2) to service,administer and collect the receivables on behalf of the Purchaser.  Under theRPD, the Purchaser has no recourse against PLDT should an eligible carrier failor refuse to settle the assigned/purchased receivables, except when PLDTcommits a breach of its representations and warranties under the RPD.

 

Sale of receivablesunder the RPD amounted to US$6 million (Php272 million) and US$11 million(Php586 million) for the years ended December 31, 2006 and 2005, respectively.Loss on sale of receivables under the RPD amounted to US$0.5 million (Php27million) for the year ended December 31, 2006 and US$1 million (Php75 million)for the years ended December 31, 2005 and 2004.

 

 

 

**6.         ****Inventoriesand Supplies**

 

This account consists of:

 

 

**2006**

2005

 

(in million pesos)

Spare parts and supplies 

**1,397**

1,393

Terminal and cellular phone units 

**719**

1,002

Others

**161**

255

 

**2,277**

2,650

Less allowance for inventory obsolescence

**1,047**

1,102

 

**1,230**

1,548

 

Movementsin the allowance for inventory obsolescence are as follows:

 

 

**2006**

2005

2004

 

(in million pesos)

Balance at beginning of year

**1,102**

1,134

729

Provision for the year (Note 24)

**211**

479

577

Write-offs

**(266)**

(511)

(172)

Balance at end of year

**1,047**

1,102

1,134

 

Spare parts and supplies issued to various projects, includedas part of property under construction shown under *Note 7 – Property, Plantand Equipment*, amounted to Php2,928 million, Php1,970 million and Php2,277million in 2006, 2005 and 2004, respectively.  

 

 

 

**7.         ****Property,Plant and Equipment**

 

This account consists of:

 

 

**2006**

2005

 

(in million pesos)

Cable and wire facilities

**105,596**

100,756

Central office equipment

**77,575**

73,473

Cellular facilities

**59,680**

57,985

Vehicles, furniture and other work equipment

**29,477**

26,905

Buildings

**20,152**

19,627

Communications satellite

**6,511**

8,628

Information origination and termination equipment

**3,921**

2,890

Land and land improvements

**2,889**

2,730

 

**305,801**

292,994

Less accumulated depreciation and amortization

**155,078**

132,131

 

**150,723**

160,863

Property under construction

**13,358**

12,144

 

**164,081**

173,007

 

Interestcapitalized for the years ended December 31, 2006, 2005 and 2004 amounted toPhp549 million, Php504 million and Php595 million, respectively.

 

In2006 and 2005, assets impaired consist of assets of wireless and informationand communications technology segments.  Assets impaired in 2004 consist ofassets of the wireless and fixed line segments.

 

In2006, management believes that due to Mabuhay Satellite’s difficulty ingenerating cash flows with the satellite nearing its end-of-life and otherevents affecting its business, Mabuhay Satellite’s Agila II transponders isconsidered impaired.  This impairment review is based on the net present value offuture cash flows from the continued use of the asset group using the discountfactor of 11%.  An impairment loss of Php1,391 million was charged to thecarrying value of this satellite as at December 31, 2006.

 

In2004, certain assets with net book values aggregating Php365 million wereimpaired.  These assets relate primarily to certain international facilityequipment of PLDT Global and Subic Telecom in relation to our strategicdirection to functionally integrate our international fixed line business.

 

Whenimpairment charges are recognized, a new cost basis for the assets isestablished.

 

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

 

** **

**2006**

 

2005

 

**Central office equipment**

**Vehicles, furniture and other work equipment**

** **

** **

** **

**Total**

 

Central office equipment

Vehicles, furniture and other work 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

 

Depreciationexpense for assets reported under capitalized leases amounted to Php284 million,Php333 million and Php282 million in 2006, 2005 and 2004, respectively.

 

In 2006, 2005 and 2004, we changed the estimateduseful lives of certain network assets owing to continuing network expansionand upgrade.

 

Belowis the pro forma financial information assuming no changes in accountingestimates:

 

** **

**2006**

2005

2004

** **

(in million pesos, except per share amounts)

Consolidated net income

** **

** **

** **

As reported

**33,598**

40,603

28,101

Pro forma

**39,203**

45,872

30,319

Earnings per common share – basic

** **

 

 

As reported

**174.90**

217.84

146.32

Pro forma

**205.29**

248.46

159.38

Earnings per common share – diluted

** **

 

 

As reported

**174.90**

211.93

145.30

Pro forma

**205.29**

240.72

157.55

 

Under the terms of certain loan agreements, PLDT maynot create, incur, assume, permit or suffer to exist any mortgage, pledge, lienor other encumbrance or security interest over the whole or any part of itsassets or revenues or suffer to exist any obligation as lessee for the rentalor hire of real or personal property in connection with any sale and leasebacktransaction.

 

 

 

**8.         ****Investments**

 

Thisaccount consists of:

 

 

**2006**

2005

 

(in million pesos)

Investments in shares of stock:

** **

 

Acquisition cost

**3,908**

3,409

Less accumulated equity share in net losses

**3,271**

3,394

 

**637**

  15

At equity:

** **

 

Philweb Corporation

**613**

–

ePDS, Inc.

**24**

15

Mabuhay Space Holdings Limited

**–**

–

BayanTrade Dotcom, Inc.

**–**

–

ACeS International Limited

**–**

–

 

**637**

  15

At cost:

** **

 

Stradcom International Holdings, Inc.

**–**

–

 

**–**

–

 

**637**

  15

Investments in debt security

**–**

346

 

**637**

 361

 

***Investment of 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.  Total equityshare in net loss of Philweb recognized in the statements of income for theyear ended December 31, 2006 amounted to Php97 million.

 

Philweb is primarily engaged in internet-based gaming,through its appointment as Principal Technology Service Provider under theMarketing Consultancy Agreement for Internet Sports Betting and Internet Casinowith the Philippine Amusement and Gaming Corporation, or PAGCOR.  As of the endof December 2006, Philweb offers Internet Sports Betting in over 230 PAGCORInternet Sports Betting Stations and over 40 Internet Casino Stationsnationwide.  As at December 31, 2006, themarket value of ePLDT’s investments in Philweb amounted to Php1,028 million.

 

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

*** ***

OnJune 30, 2003, ePLDT signed a joint venture agreement with DataPost Pte Ltd.,or DataPost, a subsidiary of Singapore Post, and G3 Worldwide ASPAC, or Spring,pursuant to which the parties formed ePDS, a bills printing company which doeslaser printing and enveloping services for statements, bills and invoices, andother value-added services for companies in the Philippines.  ePLDT has a 50%interest in ePDS, while DataPost has a 30% interest.  Spring, the largestinternational mail services provider, owns the remaining 20%.  ePDS has aninitial 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 Philippine SEC in June 2006.

 

***Investment of Mabuhay Satellite in Mabuhay Space Holdings, Limited, orMSHL***

 

In 1996, Mabuhay Satellite entered into a JointVenture Agreement, or JVA, with Space Systems/Loral Inc., or SS/L, to form MSHLfor the purpose of providing high-power Ku-Band satellite transmission servicesusing the payload which was added by SS/L to the Agila II Satellite.  Under theterms of the JVA, SS/L is required to convey title to the additional payloadservice to MSHL in consideration for SS/L’s 35% equity interest in MSHL, andMabuhay Satellite is required to pay SS/L US$19 million for a 65% equityinterest in MSHL.

 

In2000, SS/L filed a Notice of Default and Termination against Mabuhay Satellitearising from the latter’s alleged failure to amicably resolve its unpaidobligation to SS/L under the JVA.  In 2002, the arbitration panel handed downits 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 the settlement agreement, MabuhaySatellite and SS/L shall proceed to dissolve the joint venture under a separateagreement, for which each of the parties will receive title over a number oftransponders owned by the joint venture in proportion to their respectiveinterests.  On the basis of the joint venture dissolution, we recognized animpairment provision in respect of our investment in MSHL of Php431 million in2004.

 

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

 

BayanTrade was incorporated and registered with theSEC on August 8, 2000 to provide:  (a) a business-to-business electronicpurchasing marketplace to link buyers and suppliers of goods services over theInternet; (b) electronic catalogue purchasing facilities over the Internet to buyers andsuppliers; (c) link-up with similar horizontal markets and vertical marketsacross the Asia-Pacific Region and the world; and (d) facilitating servicesincidental to the business.  BayanTrade is an e-procurement joint ventureestablished together with six of the Philippines’ leading conglomerates.ePLDT’s initial shareholding in BayanTrade was 20.5%, which was subsequentlydiluted to 19.17% in August 2004 due to an equity call to which ePLDT did notsubscribe.

 

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.  We did not account for thevalue of bonus warrants because the value is not material.

 

***Investment of ACeS Philippines in ACeS International Limited, or AIL***

 

Asat December 31, 2006 and as at the date of this report, ACeS Philippines had a20% and 36.99%, respectively, investment in AIL, a company incorporated underthe laws of Bermuda.  AIL owns the Garuda I Satellite and the related systemcontrol equipment in Batam, Indonesia.

 

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 has been significantly lower than budgeted.These factors raised 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.

 

Forfurther details as to the contractual relationships in respect of AIL, see *Note16 – Related Party Transactions*.

 

***Investm******ent inStradcom Int’l. Holdings, Inc., or SIHI***

 

ePLDT has a 22.5% interest in convertiblesecurities of SIHI, the parent company of Stradcom Corporation, which has anexisting concession agreement with the Philippine Government for themodernization of the Philippine Land Transportation Office, including thecomputerization of driver’s license issuance, vehicle registration and trafficadjudication systems.  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 total investment in SIHI of Php616million in 2004.

 

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

 

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

 

The following table presents summarized financialinformation in conformity with U.S. GAAP for equity investees for which we havesignificant influence as at December 31, 2006 and 2005 and for the years endedDecember 31, 2006, 2005 and 2004.

 

 

**2006**

2005

 

(in million pesos)

Current assets

**1,122**

652

Noncurrent assets

**1,333**

1,388

Current liabilities

**2,044**

1,585

Noncurrent liabilities

**10,029**

11,242

Capital deficiency

**9,618**

10,787

 

 

**2006**

2005

2004

 

 (in million pesos)

Revenues

**1,194**

774

1,299

Revenues less cost of revenues

**654**

615

1,013

Expenses

**1,066**

472

592

Net income (loss)

**(412)**

471

(19)

 

***Investment of ePLDT inDebt Securities of Technology Support Services, Inc., or TSSI (formerly FirstAdvance Multi-Media Entertainment Corp., or FAME)***

 

On June 1, 2004, ePLDT and FAME entered into anagreement whereby ePLDT granted a seven-year zero-coupon loan to FAME amountingto US$3.1 million.  Based on agreement, upon maturity of the loan, which is atthe end of seven years from issuance, ePLDT may require FAME to redeem or paythe loan at a redemption value amounting to US$6.1 million.  At any time duringthe life of the outstanding loan, ePLDT may convert the loan into 20% of thetotal outstanding capital stock of FAME.

*** ***

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

*** ***

On September 14, 2004, ePLDT entered into a secondagreement with TSSI whereby ePLDT granted another seven-year zero coupon loanto TSSI amounting to US$3.1 million with the same terms and features as thefirst loan.  As at December 31, 2006, the aggregate loans of ePLDT to TSSIamounted 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 in 2006.

 

 

** **

**9.         ****Goodwilland Other Intangible Assets**

 

This account consists of:

** **

 

**2006**

2005

 

(in million pesos)

Goodwill

**33,349**

24,419

Other intangible assets

**5,632**

3,779

 

**38,981**

28,198

Less accumulated amortization

**11,740**

11,323

 

**27,241**

16,875

 

Movementsin accumulated amortization of goodwill and other intangible assets are asfollows:

 

 

**2006**

2005

2004

 

                (in million pesos)

Balance at beginning of year

**11,323**

11,134

11,041

Amortization during the year

**402**

204

93

Translation adjustments (Note 18)

**15**

(15)

–

Balance at end of year

**11,740**

11,323

11,134

 

Movements of the net carrying value of goodwill perreportable segments are as follows:

 

 

**Wireless**

**Fixed Line**

Information and Communications Technology

**Total**

 

(in million pesos)

Balances as at December 31, 2003

14,941

426

97

15,464

Additions during the year

1,019

–

90

1,109

Reclassification during the year

(173)

–

–

(173)

Balances as at December 31, 2004

15,787

 426

 187

16,400

Additions during the year

133

–

12

 145

Reclassification during the year

(448)

–

–

(448)

Impairment during the year

–

–

(15)

(15)

Balances as at December 31, 2005

15,472

 426

 184

16,082

Additions during the year

974

–

8,260

9,234

Translation adjustments during the year

–

–

(303)

(303)

**Balances as at December 31, 2006**

**16,446**

**426**

**8,141**

**25,013**

 

A substantial portion of goodwill is related to thewireless business segment due to our acquisition of Smart and Smart Broadbandand to the information and communication technology business segment due to ouracquisition of SPi and its subsidiary, CyMed.  We have completed our annualevaluation of the goodwill value in conformity with SFAS No. 142 and consistentwith our increase in wireless and information and communications technology revenues,there is no impairment in the value of goodwill.

 

OnSeptember 2, 2004, Smart entered into a sale and purchase agreement to acquire100% of Smart Broadband, a company primarily engaged in providing wirelessbroadband and data services to small and medium-scale enterprises in thePhilippines, for a total consideration of US$45 million, of which payments ofUS$11 million and US$7 million for an equity interest of 40% in Smart Broadbandwere made in 2004 and payment of US$4 million for an additional equity interestof 9% was made in January 2005.  The balance of US$23 million, or Php1,201million, in respect of the remaining 51% equity interest in Smart Broadband waspaid on March 7, 2006.

 

Thepurchase consideration for the acquisition of the remaining 51% stake in SmartBroadband has been allocated to the assets and liabilities on the basis of fairvalues at the date of acquisition.  The fair values of the identifiableacquired assets and liabilities of Smart Broadband at the time of acquisitionof the remaining 51% stake in 2006 are as follows:

 

 

(in million pesos)

Cash and cash equivalents

124

Trade and other receivables

15

Inventories and supplies

2

Prepaid expenses and other current assets

75

Property, plant and equipment

601

Goodwill

974

Intangible assets

428

 

2,219

Accrued expenses and other current liabilities

881

Deferred income tax liabilities

137

 

1,018

Net assets acquired

1,201

 

*Smart’s 20% Acquisition of Wolfpac*

 

On May 8, 2006, Smart signed a share purchaseagreement to acquire the remaining 20% equity interest in Wolfpac, a companyengaged in the business of consumer mobile applications software developmentand content development.  Smart acquired an 80% equity interest in Wolfpac inOctober 2003.  The remaining 20% equity interest in Wolfpac was acquired inJuly 2006 for Php30 million.

 

*ePLDT’s Acquisition ofLevel Up!*

 

OnFebruary 16, 2006, ePLDT entered into a sale and purchase agreement to acquire60% equity interest of Level Up!, a leading publisher of online games in the Philippines, for a total consideration of Php383 million.  Post-closing conditions werecompleted on April 30, 2006.  In August 2006, the Shareholders Agreement andShare Purchase Agreement between ePLDT and Level Up! were amended to reflectthe removal of earn-out and price adjustment provisions thereby fixing theacquisition for 60% of Level Up! at the aforementioned original purchase priceof US$7 million.  As at purchase date, the net cash outflow related to theacquisition was Php348 million, representing cash payments of Php383 million,net of cash acquired from Level Up! of Php35 million.  Total cash paymentsinclude a purchase price consideration of Php381 million and incidental cost ofPhp2 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 LevelUp! as at April 30, 2006, are as follows:

 

 

(in million pesos)

Cash and cash equivalents

35

Trade and other receivables

9

Inventories and supplies

1

Prepaid expenses and other current assets

20

Property, plant and equipment

129

Goodwill

358

Intangible assets

111

Other noncurrent assets

41

 

704

Accounts payable

148

Accrued expenses and other current liabilities

49

Unearned revenues

40

Deferred income tax liabilities

36

Capital lease liabilities

48

 

321

Net assets acquired

383

 

Intangibleassets, as determined by an independent appraiser, pertains to Level Up!’s gamelicense agreements for Ragnarok, ROSE Online, RF Online and Freestyle amountedto Php111 million with an estimated remaining useful life of 5.67 years.  LevelUp! was accounted for in the consolidated financial statements using thepurchase method of accounting, which resulted in goodwill amounting to Php358million in 2006.  Goodwill pertains to the assembled workforce and otherunidentified intangible assets that did not qualify as intangible assets underSFAS No. 142.  As at December 2006, ePLDT has provided impairment in value ofits intangible assets in Level Up! amounting to Php30 million, representing awrite-down of such intangible assets to recoverable amounts using the marketvalue approach.  The impairment was a result of projected decline on revenuesrelated to certain license agreements.  Market value was based on thediscounted cash flow projections using the most recent financial forecastapproved by our management.

 

*ePLDT’s Acquisition of SPi*

 

On July 11, 2006, ePLDT entered into a sale andpurchase agreement to acquire 100% equity interest of 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.  As at December 31, 2006, the net cash outflow related to the acquisition wasPhp7,028 million, representing cash payments of Php7,114 million, net of cashacquired from SPi of Php86 million.  Total cash payments include a purchaseprice consideration of Php7,024 million and incidental cost of Php90 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 SPi atthe time of acquisition are as follows:

 

 

In U.S. Dollar

In Php Equivalent(1)

 

(in millions)

Cash and cash equivalents

2

86

Trade and other receivables

36

1,915

Prepaid expenses and other current assets

2

96

Property, plant and equipment

19

1,019

Goodwill

130

6,906

Intangible assets

18

972

Other noncurrent assets

1

51

 

208

11,045

Accounts payable

54

2,942

Accrued expenses and other current liabilities

8

412

Deferred income tax liabilities

7

395

Other noncurrent liabilities

3

182

 

72

3,931

Net assets acquired

136

7,114

 

*(1)**Converted to Philippine Peso using the exchangerate at the time of purchase of Php**53.11**to US$1.00**.*

 

Intangibleassets, as determined by an independent appraiser, amounted to Php972 millionrelating to SPi’s customer relationships and self-developed software withestimated remaining useful lives of seven and four years, respectively.

 

SPi was accounted for in the consolidated financialstatements using the purchase method of accounting, which resulted in goodwillamounting to Php6,906 million.  Goodwill pertains to the assembled workforce ofSPi and other unidentified intangible assets that did not qualify as intangibleassets under SFAS No. 142.

 

*ePLDT’s Acquisition of CyMed*

 

On August 11, 2006, ePLDT, through its directsubsidiary SPi, entered into a sale and purchase agreement to acquire 100%equity interest of CyMed for an aggregate purchase price of US$37 million,inclusive of certain debt obligations.  As at August 15, 2006, the net cashoutflow related on acquisition was Php1,774 million, representing cash paymentsof Php1,831 million, net of cash acquired from CyMed of Php57 million.  Totalcash payments include a purchase price consideration of Php1,716 million,working capital amounts and other net debt adjustments totaling Php102 millionand incidental cost of Php13 million.

 

Thepurchase consideration has been allocated to the assets and liabilities on thebasis of fair values at the date of acquisition.  The fair values of theidentifiable acquired assets and liabilities of CyMed at the time ofacquisition are as follows:

 

 

In U.S. Dollar

In Php Equivalent(1)

 

(in millions)

Cash and cash equivalents

1

57

Trade and other receivables

3

168

Notes receivable

2

87

Prepaid expenses and other current assets

1

20

Property, plant and equipment

1

39

Goodwill

27

1,334

Intangible assets

5

228

Deferred income tax assets

1

30

 

41

1,963

Accounts payable and other current liabilities

2

72

Interest-bearing financial liabilities – net of current portion

2

60

 

4

132

Net assets acquired

37

1,831

* *

*(1)**Converted to Philippine Peso using the exchangerate at the time of purchase of Php49.03**to US$1.00**.*

 

CyMedwas accounted for in the consolidated financial statements using the purchasemethod of accounting, which resulted in goodwill amounting to Php1,334million.  Goodwill pertains to assembled workforce of CyMed and otherunidentified intangible assets that did not qualify as intangible assets under SFASNo. 142.

 

Intangible assets pertaining to CyMed’s customerrelationship was determined at Php336 million with an estimated useful life offive years.  Intangible assets was valued by an independent appraiser.

 

The following unaudited pro forma consolidatedfinancial information reflects the results of our operations for the yearsended December 31, 2006, 2005 and 2004, as if the acquisition of Level Up!, SPiand CyMed had occurred on January 1, 2004.  These unaudited pro forma resultshave been prepared for comparative purposes only, do not purport to beindicative of what the operating results of Level Up!, SPi and CyMed would havebeen had the acquisition actually taken place on January 1, 2004 and may not beindicative of future operating results.

 

** **

**2006**

2005

2004

** **

(in million pesos, except per share amounts)

Operating revenues

 

** **

** **

As reported

**127,536**

123,335

121,173

Pro forma

**130,082**

128,174

124,451

Consolidated net income

** **

 

 

As reported

**33,598**

40,603

28,101

Pro forma

**33,170**

38,945

26,890

Earnings per common share – basic

** **

 

 

As reported

**174.90**

217.84

146.32

Pro forma

**172.58**

208.20

139.18

Earnings per common share – diluted

 

 

 

As reported

**174.90**

211.93

145.30

Pro forma

**172.58**

202.87

138.61

 

Other intangible assets consist of:

 

 

 

**2006**

 

2005

 

 

**Gross**

**Net**

 

Gross

Net

 

**Estimated  Useful Lives**

**Carrying Amount**

**Accumulated Amortization**

** **

 

Carrying Amount

Accumulated Amortization

 

 

 

(in million pesos)

Customer list

1 – 7 years

**3,931**

**2,819**

**1,112**

 

2,758

2,728

  30

Spectrum

15 years

**899**

**106**

**793**

 

591

50

 541

Technology application

4 years

**587**

**454**

**133**

 

365

204

 161

Licenses

5 – 17 years

**215**

**25**

**190**

 

66

5

  61

 

 

**5,632**

**3,404**

**2,228**

 

3,780

2,987

 793

 

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

 

 

(in million pesos)

2007

362

2008

337

2009

287

2010

280

2011

211

2012 and onwards

751

Balance at end of year

2,228

 

 

 

**10.    Other Noncurrent Assets**

 

This account consists of:

 

 

**2006**

2005

 

(in million pesos)

Telephone instruments – net

**2,114**

2,420

Refundable deposits

**512**

516

Debt issuance costs – net

**401**

750

Others

**603**

778

 

**3,630**

4,464

 

 

 

**11.    Accrued Expenses and Other CurrentLiabilities**

 

This account consists of:

 

 

**2006**

2005

 

(in million pesos)

Accrued utilities and related expenses (Note 16)

**8,009**

5,559

Accrued employee benefits (Note 17)

**7,474**

1,760

Accrued satellite air time cost and provisions (Notes 16, 21 and 22)

**4,437**

3,901

Accrued interests and other related costs (Note 12)

**1,764**

2,003

Accrued taxes and related expenses (Note 22)

**756**

760

Others

**1,084**

2,003

 

**23,524**

15,986

 

Overthe past years, PLDT has been implementing its manpower rightsizing program, orMRP, in line with its continuing effort to reduce the cost base of its fixedline business.  The MRP cost charged to operations for the years ended December31, 2006, 2005 and 2004 amounted to Php445million, Php458 million and Php566million, respectively, determined in accordance with SFAS No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities”.  The decision toimplement the MRP was anchored on the challenges being faced by the fixed linebusiness as significant changes in technology, increasing competition, andshifting market preferences to cellular use have reshaped the future of thefixed line business.  The MRP was implemented under the Labor Code of the Philippines, as amended, and is in compliance with all other relevant labor laws and regulations inthe Philippines.

 

Movementsin the accrued MRP cost accounts, included under accrual for payment for unusedsick leave and other employee benefits during the years, are as follows:

 

 

**2006**

2005

2004

 

                  (in million pesos)

Balance at beginning of year

**25**

48

16

Cost for the year (Notes 18 and 24)

**445**

458

566

Payments

**(279)**

(481)

(534)

Balance at end of year

**191**

  25

  48

 

 

 

12.    Interest-bearing Financial Liabilities

 

Thisaccount consists of the following:

 

 

**2006**

2005

 

(in million pesos)

 

** **

 

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

** **

 

Long-term debt maturing within one year (Note 23)

**16,316**

18,797

Obligations under capital lease maturing within one year (Notes 7 and 23)

**924**

753

Notes payable

**201**

–

 

**17,441**

19,550

 

** **

 

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

** **

 

Long-term debt (Note 23)

**69,542**

93,516

Obligations under capital lease (Notes 7 and 23)

**106**

344

 

**69,648**

93,860

 

***Long-term Debt***

 

Long-termdebt 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

**70**

**3,433**

107

5,651

Nippon Export and Investment Insurance  of Japan, or NEXI

US$ LIBOR + 1% in 2006 and  in 2005

**US$25**

**Php1,226**

US$50

Php2,653

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

**11**

**508**

28

1,478

 

 

**307**

**15,044**

 439

23,271

Fixed Rate Notes

7.85% - 11.375% in 2006 and 2005

**845**

**41,463**

998

52,980

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

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

**283**

**13,892**

283

15,030

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

**195**

**9,568**

87

4,632

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

**11**

**487**

19

978

Restructured Loans

US$ LIBOR + 1% in 2006  and 2005

**–**

**–**

119

6,305

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$****1,683**

**82,537**

US$2,002

106,236

 

 

** **

** **

 

 

*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

**–**

**–**

1,575

710

** **

 

**JP¥****–**

**–**

JP¥8,545

3,849

** **

 

** **

** **

 

 

*Philippine Peso Debt:*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

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

**–**

**810**

–

1,580

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

**–**

**2,500**

–

–

Restructured Loans

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

**–**

**–**

–

482

 

 

**–**

**3,321**

–

2,228

 

 

** **

**85,858**

 

112,313

Less current portion

 

** **

**16,316**

 

18,797

Long-term debt - net of current portion

 

** **

**Php69,542**

 

Php93,516

 

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

 

 

**U.S. Dollar Loans**

**Php Loans**

**Total**

**Year**

**In U.S. Dollar**

**In Php**

**In Php**

**In Php**

** **

(in millions)

2007

327

16,027

289

16,316

2008

147

7,203

556

7,759

2009

294

14,423

555

14,978

2010

71

3,468

1,366

4,834

2011

15

724

555

1,279

2012 and onwards

829

40,692

–

40,692

 

1,683

82,537

3,321

85,858

 

*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 improvementprograms, 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 million in aggregateprincipal amount to KfW, as follows:

 

•        US$153 million provided undervarious export credit agency-backed facilities, of which US$43 million was inconnection with our expansion and service improvement programs, and US$110million in connection with the US$149 million refinancing facility discussedbelow; and

 

•        US$48 million provided for the 15%downpayment portion and credit facilities without guarantee/insurance coverfrom the export credit agencies, of which US$30 million was in connection withthe US$149 million refinancing facility discussed in the following paragraphs.

 

On January 25, 2002, PLDT signed two loan agreementswith KfW, which provided PLDT with a US$149 million facility to refinance inpart the repayment installments under its existing loans from KfW due fromJanuary 2002 to December 2004.  The facility is composed of a nine-year loan,inclusive of a three-year disbursement period and a two-year grace periodduring which no principal is payable.  It partly enjoys the guarantee ofHERMES, the export credit agency of the Federal Republic of Germany.  We havedrawn US$140 million (Php6,864 million) under this facility as at December 31,2006.  PLDT waived further disbursements under this refinancing facilityeffective September 1, 2004.  Thus, the undrawn portion of US$9 million wascancelled.

 

Ofthe amounts outstanding under these KfW loans, US$37 million matured and waspaid on various dates between January 2, 2007 and June 4, 2007, US$35 millionwill mature on various dates between July 2, 2007 and December 4, 2007, US$55million will mature in 2008, US$43 million will mature in 2009 and US$31million will mature in 2010.  Principal amortizations on these loans aregenerally payable in equal semi-annual installments.

* *

*Finnvera,plc, or Finnvera*

 

Asat December 31, 2006, US$70 million, or Php3,433 million, principal amount ofSmart’s debt was provided by various banks under an export credit agency-backedfacility in connection with Smart’s GSM expansion program.  This facility iscovered by a guaranty from Finnvera, the Finnish Export Credit Agency, for 100%of political and commercial risk for the refinancing facility of GSM Phases 5Aand 5B.  This is the only remaining outstanding facility guaranteed byFinnvera.  Other Finnvera-guaranteed GSM loan facilities were already fully paidin the aggregate amount of US$16.5 million for GSM Phases 3 and 4 loanfacilities on April 28, 2006, and in the aggregate amount of US$5.8 million forGSM Phases 1 and 2 loan facilities on October 31, 2005.

 

A US$100million refinancing facility was obtained on February 11, 2005 in relation toSmart’s GSM Phases 5A and 5B loans which were prepaid on March 1, 2005 withoutstanding balances of US$60 million and US$41 million, respectively, at thetime of prepayment.  This refinancing facility is payable semi-annually overfive years starting September 1, 2005 with final repayment due in March 2010.The principal benefit of refinancing the Phase 5 loan was the savings from alower interest margin on the refinancing facility.

 

Of the amount outstanding under the remaining Finnveraguaranteed loan, US$10 million matured and was paid on March 1, 2007, US$10million will mature on September 1, 2007, US$20 million will mature in 2008,US$20 million will mature in 2009 and US$10 million will mature in 2010.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 or Php1,226 million.

 

*Other Export Credit Agency Supported Loans*

 

PLDT has also obtained loans extended and/orguaranteed by other export credit agencies, including the Export-Import Bank ofthe United States, and the respective export credit agencies of France and Italy, in the aggregate outstanding principal amount of US$8 million as at December 31,2006.  Smart, likewise, obtained loans guaranteed by the export credit agenciesof Norway and Italy amounting to US$3 million.  Of the amounts outstandingunder these loans, US$6 million matured and was paid on various dates betweenJanuary 2, 2007 and June 15, 2007, US$4 million will mature on various datesbetween September 15, 2007 and December 15, 2007 and US$1 million will maturein 2008.

 

*Fixed Rate Notes*

 

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

 

Principal

Interest

**Maturity**

**December 31,**

**Amount**

**Rate**

**Date**

  2006

   2005

** **

** **

** **

(in millions)

US$300,000,000

8.350%

March 6, 2017

**US$299**

**Php14,675**

US$299

Php15,874

US$250,000,000

11.375%

May 15, 2012

**250**

**12,261**

250

13,265

US$167,000,000

10.500%

April 15, 2009

**167**

**8,182**

175

9,272

US$110,068,000

7.850%

March 6, 2007

**110**

**5,398**

138

7,339

US$  19,310,000

10.625%

May 15, 2007

**19**

**947**

21

1,120

US$112,168,000

9.250%

June 30, 2006

**–**

**–**

115

6,110

 

 

 

**US$****845**

**Php41,463**

US$998

Php52,980

 

*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 Php13,892 million.

 

The breakdown of the total amount ofSmart debt issued 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 July 2, 2004, the estimatedfuture cash flows for the Smart newly issued debt amounted to Php19,507million, as determined using undiscounted cash flows.  The difference betweenthe sum of future cash flows for newly issued debt of Php19,507 million andcash settlement of Php84 million, and the Php22,211 million Piltel cancelleddebt was recognized as gain on debt restructuring in the 2004 consolidatedstatement of income.  The total gain from the debt restructuring amounted toPhp2,620 million (Php15.44 per share) including the gain of Php241 million fromthe cash settled debt of Piltel.  The difference between the future cash flowsof the newly issued debt of Php19,507 million and the value of new debt ofPhp15,854 million was deferred and presented as part of “Remaining excess ofdebt forgiven over value of consideration given” account in the consolidatedbalance sheets in conformity with the accounting for troubled debtrestructuring.  Thereafter, interest incurred on the new debt is recorded as anoffset against “Remaining excess of debt forgiven over value of considerationgiven”.  Total interest incurred related to the new debt for the years endedDecember 31, 2006, 2005 and 2004 amounted to Php368 million, Php398 million andPhp199 million, respectively.  As at December 31, 2006 and 2005, the balance of“Remaining excess of debt forgiven over value of consideration given” accountfor this restructuring amounted to Php2,688 million and Php3,056 million,respectively, after giving effect to the above interest expense.

* *

Interest for the above facilities ispayable every quarter at a floating rate of three months US$ LIBOR plus 1.00% for the 2007 and 2008 facilities, and a fixed rate of 2.25% per annum for the2014 facility.  Furthermore, a portion of the 2014 facility amounting to US$144million has a variable yield option whereby the creditors have an option toelect for an early repayment at a discount either in December 2007 at 52.5% ofthe relevant debt amount or in December 2008 at 57.5% of the relevant debtamount.

 

*GSM**NetworkExpansion Facilities*

 

On September 13, 2004, Smart signed aUS$104 million 5-year term loan facility to finance the related Phase 7 GSMEquipment and services.  The facility was awarded to ABN AMRO Bank, BanqueNational de Paribas, Calyon, DBS Bank and Sumitomo Mitsui Banking Corporation asthe Lead Arrangers with Finnish Export Credit, Plc as the Lender.  The fullamount of the facility was drawn on November 22, 2004, of which US$62 millionand US$83 million remained outstanding as at December 31, 2006 and 2005,respectively.  The loan is payable over five years in ten equal semi-annualpayments starting May 2005 with final repayment in November 2009.  

 

On June 8, 2001, Smart signed its GSMPhase 5A financing comprised of US$195 million loans, of which US$30 million isowed to Nordic Investment Bank, or NIB, US$15 million to NederlandseFinancierings-Maatschappij Voor Ontwikkelingslanden N.V., or FMO, of theNetherlands and US$150 million supported by Finnvera.  The NIB loan balance ofUS$12 million was prepaid in full on December 8, 2005, and the FMO loan balanceof US$4 million was prepaid in full on March 1, 2006.

 

OnAugust 8, 2005, Smart signed a US$30 million commercial facility with NIB topartly finance the related Phase 8 GSM equipment and services contracts.  Thefacility is a 5-year term loan payable semi-annually in ten equal installmentscommencing six months from the first drawdown date at a floating rate of US$LIBOR plus 0.815% margin per annum.  The facility was drawn on July 11, 2006for the full amount of US$30 million at a floating interest of 6.445% (5.63% US$ LIBOR plus 0.815% per annum margin).  The first installment payment will commence onJanuary 11, 2007.  The full US$30 million amount remained outstanding as atDecember 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.

 

On July 31, 2006, Smart signed a U.S. Dollar Term LoanFacility for US$44.2 million to partly finance the related Phase 9 GSMequipment and services contracts.  The Lender is FEC with ABN AMRO Bank N.V.,Standard Chartered Bank and Sumitomo Mitsui Banking Corporation and Mizuho CorporateBank Ltd. as the Lead Arrangers.  The facility is a 5-year term loan payable in10 equal semi-annual installments commencing six months from the drawdown dateat a CIRR Fixed rate of 4.05% per annum.  The facility was drawn on November10, 2006 for the full amount of US$44.2 million.  The first installmentcommences on January 16, 2007 with final repayment on July 15, 2011.  As atDecember 31, 2006, the US$44.2 million loan remained outstanding.

 

*Other Term Loan*

 

OnDecember 1, 2001, CyMed availed itself of a 6-year non-interest-bearingadvances from certain officers of the company to fund its operating expenses,including salaries and other incidental expenses.  The outstanding balance ofthis loan as at December 31, 2006 amounted to US$0.8 million, which is payablequarterly 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$50 million.  The facility is afive-year loan payable in 18 equal and consecutive quarterly installmentscommencing on the third quarter from the date of the first drawdown.  Interestrate is floating at three-month US$ LIBOR plus 0.75% per annum margin.

 

*Restructured Loans*

 

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

 

As aresult 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 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’sresidual long-term debt to third parties that was not exchanged in the debtexchange offer conducted by Smart in 2005 consisted of:

 

**Description**

**2006**

2005

 

(in millions)

**Restructured Debts**

** **

** **

** **

** **

Philippine Pesos

** **

** **

** **

 

10 year Tranche B

** **

**Php–**

 

Php241

15 year Tranche C

** **

**–**

 

241

 

** **

**–**

 

482

U.S. Dollars

** **

** **

 

 

10 year Tranche B

**US$–**

**–**

US$10

515

15 year Tranche C

**–**

**–**

10

515

15 year Conversion Notes Facility

**–**

**–**

99

5,275

 

**US$****–**

**–**

US$119

6,305

Total

** **

**–**

 

6,787

 

** **

** **

 

 

**Unrestructured Debt**

** **

** **

 

 

U.S. Dollars

** **

** **

 

 

Convertible Bonds

**US$1**

**45**

US$1

49

Total

** **

**45**

 

6,836

Less current portion

** **

**45**

 

120

 

** **

**Php–**

 

Php6,716

 

On June 5, 2006, Piltel made a partial voluntaryprepayment of principal under its Peso bank facility, U.S. dollar bankfacility, various Trade Creditor Facilities and Notes Indenture.  The voluntaryprepayment was made in lieu of depositing Excess Cash Flow from the operationsof Piltel’s business into a Sinking Fund Account.  The aggregate voluntaryprepayment amount was Php9,325 million (Php6,393 million to Smart and Php2,932million to third party creditors) or US$176 million (US$121 million to Smartand US$55 million to third party creditors), which was applied proportionallyto the various debt facilities as set out in the Intercreditor Agreement datedJune 4, 2001 or the Intercreditor Agreement.

 

On December 4, 2006, Piltel prepaid the outstandingbalance of its restructured principal debt under its Peso bank facility, U.S.Dollar bank facility, Peso Term Note facility, various Trade CreditorFacilities and Notes Indenture in the aggregate amount of Php11,631 million(Php8,061 million to Smart and Php3,570 million to third party creditors) orUS$233 million (US$161 million to Smart and US$72 million to third partycreditors).  Piltel obtained approval from the Bangko Sentral ng Pilipinas tosource dollar payment from authorized agent banks.

 

OnMarch 30, 2007, Piltel paid the outstanding convertible bonds with principalamount of US$0.7 million.

 

Piltel’s restructured obligations were secured bysubstantially all present and future assets of Piltel under the MTI dated June4, 2001 between Piltel and JPMorgan Chase Bank, N.A. (Manila Branch) asSecurity Agent for the creditors, which established the security arrangementsrelating to the restructured debts.  The participating creditors (other thanthe participating holders of the Peso Term Note facility) shared equally infirst ranking security, while non-participating creditors and the participatingholders of the Peso Term Note facility shared equally in second rankingsecurity created under the MTI.  Such mortgage was approved by at leasttwo-thirds of Piltel’s stockholders at its annual meeting on April 18, 2001 andby the NTC on May 18, 2001.

 

On July 7, 2006, Piltel, PLDT and JPMorgan Chase Bank,N.A. (Manila Branch), as Security Agent on behalf of the Finance Parties underthe Intercreditor Agreement, agreed to the amendment of Clause 25 thereof toallow the amendment of any term of the MTI and the release and sale of certainproperties or assets from the security interests created by the MTI upon theinstructions of the creditor representatives.  On the same date, and followingthe effectivity of the amendment of the Intercreditor Agreement, Piltel and theSecurity Agent, executed an Amendment to the MTI, pursuant to which Piltel isallowed to sell or dispose of certain categories of assets or properties withthe consent of the Majority Bank Creditors, the Majority Trade Creditors andthe Trustee, provided, however that for as long as Avenue Asia holds a majorityof Piltel’s Conversion Notes, the prior consent of Avenue Asia will be requiredfor (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.

 

On April 18, 2007, Piltel received a Notice ofTermination of the MTI from JP Morgan Chase Bank, N.A. (Manila Branch).

 

*Satellite Acquisition Loans*

 

Mabuhay Satellite has an existing CreditAgreement with the Export-Import Bank of the United States, or Ex-Im Bank, tofinance a portion of the cost of purchasing the Agila II Satellite.  In 2004,Ex-Im Bank approved, in principle, the re-profiling of Mabuhay Satellite’sUS$42 million debt with them by extending the maturity of the loan by 11⁄2 yearsto July 15, 2007 and reducing the interest rate by 1% to 5.6%.  The revisedrepayment terms have been approved by the majority of the local creditorbanks.  As at December 31, 2006, the remaining outstanding loan amounted toUS$10 million (Php511 million).

 

MabuhaySatellite also has an existing Omnibus Agreement with a syndicate of localbanks, or the Banks, which includes issuance of irrevocable standby Letters ofCredit which as at December 31, 2006 had an aggregate stated value notexceeding US$11 million (Php527 million) in favor of Ex-Im Bank, as securityunder the Credit Agreement and a term loan to Mabuhay Satellite in theaggregate amount of US$32 million (Php1,572 million), which will mature onvarious dates from 2006 to 2009. 

 

Mabuhay Satellite has constituted infavor of the Banks: (a) a first mortgage on its leasehold rights under a leaseagreement entered into with the Subic Bay Metropolitan Authority and thecomponents of the satellite system; (b) an assignment of its rights under itspurchase contract for the satellite system; (c) an assignment of its rightsunder the transponder lease contracts to be entered into with its shareholdersand other parties and the revenues therefrom; and (d) an assignment of theapplicable proceeds of insurance to be taken on the satellite system.

* *

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, PLDT signed a JP¥5,615 millionsyndicated term loan facility supported by NEXI, of which all outstandingamounts 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 was repaid on November 11, 2002, Php500million was repaid on November 9, 2004 and Php770million was repaid on November 9, 2006.

* *

Under the second loan agreement, PLDT borrowed anaggregate amount of Php1,270 million, of whichPhp360 million was repaid on June 9, 2003, Php100 million was repaid on June 9, 2005 and Php810 million was repaid on June 12, 2007.

 

*Php5,000 Million Peso Fixed Rate Corporate Notes*

 

On February 15, 2007, Smart issued Php5,000 millionunsecured fixed rate corporate notes, comprised of Series A notes amounting toPhp3,800 million and Series B notes amounting to Php1,200 million with five andten year terms, respectively.  Series A notes were priced at 5.625%, whileSeries B notes were priced at 6.500%.  Funds raised from the issuance of thesenotes will be used primarily for Smart’s capital expenditures for networkimprovement and expansion.

 

*Php400 Million and Php20 Million Refinancing Loans*

 

OnMay 22, 2007, PLDT entered into loan agreements with The Philippine AmericanLife and General Insurance Company for Php400 million and with The Philam BondFund, Inc. for Php20 million to refinance their respective participations inthe Ten-Year Note under the Php1,270 million Peso Fixed Rate Corporate Noteswhich were repaid on June12, 2007.

 

*Secured Term Loans*

 

*Php150 Million**Term Loan Facility*

 

On March 4, 2002, ePLDT entered into a three-year loanfacility with Philippine Bank of Communications amounting to Php150 million.The loan facility was fully drawn on December 31, 2002 and payable in sevenquarterly installments, with a grace period of one year, beginning in 2003.The quarterly principal payments of Php15 million started in June 2003 with aballoon payment of Php45 million in March 2005.  Interest on this loan wasequivalent to 91-day T-bill rate plus 4% per annum payable quarterly inarrears.  The loan was secured by ePLDT’s deed of assignment of receivables ofa subsidiary from a foreign customer and an investment in an associate with anoriginal cost of Php629 million.  This loan was fully paid as at March 31,2005.  The investment in this associate has been fully provided for asdisclosed in *Note 8 – Investments*.

 

*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 outstanding short-termbank loan facility and for other working capital requirements.  The loanfacility was fully drawn as at December 31, 2004.  The loan was to be repaid innine equal quarterly installments starting March 2005 with final repayment inMarch 2007.  Interest on the loan was equivalent to 90-day PHIBOR plus 3% perannum payable quarterly in arrears.  The loan was secured by a Mortgage TrustIndenture Agreement, or MTIA, dated March 15, 2004, with Asia United Bank –Trust and Investments Group, on a parcel of land with a carrying value ofPhp279 million as at December 31, 2004.  As at December 31, 2006, theoutstanding balance of this loan amounted to Php11 million, which was repaid infull at maturity in March 2007.

 

*Php149 Million Term Loan Facility*

 

In January 2006, Vocativ, a wholly-owned call centersubsidiary of ePLDT, partially prepaid Php89 million out of its outstandingfive-year term loan facility of Php109 million with Asia United Bank for thepayment of its additional capital expenditures and working capitalrequirements.  Under the terms of the loan, principal payment is to be paid in14 equal quarterly installments starting April 2006 with final repayment inJuly 2009.  Interest on the loan is equivalent to 90-day PHIBOR plus 3% perannum payable quarterly in arrears.  The loan is secured by a MortgageParticipation Certificate against the MTIA between ePLDT and Asia United BankCorporation – Trust and Investments Group dated March 15, 2004 on a parcel ofland, which excludes the buildings and improvements.  The remaining balance ofPhp20 million was pre-paid in April 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 five-yearloan payable in 18 equal consecutive quarterly installments commencing on thethird quarter from the date of the first drawdown.  Interest rate is floatingat three-month MART plus 0.75% per annum margin.  The facility was drawn onDecember 11, 2006 for the full amount of Php2,500 million at a floatinginterest of 6.0232% (5.2732% three-month MART1 plus 0.75% per annum margin).The first installment will commence on September 11, 2007 with final repaymenton December 9, 2011.  The full amount of Php2,500 million was outstanding as atDecember 31, 2006.

 

DebtCovenants

 

Our debt instruments containrestrictive covenants, including covenants that could prohibit us from payingdividends on common stock under certain circumstances, and require us to complywith specified financial ratios and other financial tests, calculated inconformity with Philippine Financial Reporting Standards, at relevantmeasurement dates, principally at the end of each quarterly period.  We havemaintained compliance with all of our maintenance financial ratios as requiredunder our loan covenants and other debt instruments.  However, if negativefactors adversely affect our financial ratios, we may be unable to maintaincompliance with these ratios and covenants or be unable to incur new debt.  Theterms of some of our debt instruments have no minimum amount for cross-default.

 

Theprincipal factors that can negatively affect our ability to comply with thefinancial ratios and other financial tests under our debt instruments aredepreciation of the Philippine peso relative to the U.S. dollar, poor operatingperformance of PLDT and our consolidated subsidiaries, impairment or similarcharges in respect of investments or other long-lived assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expenses.  Interest expenses may increase as a result of variousfactors including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the Philippine peso,the lowering of PLDT’s credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions.  Sinceapproximately 96% of our total consolidated debts were denominated in foreigncurrencies, principally in U.S. dollars, many of these financial ratios andother tests are negatively affected by any weakening of the peso.  The peso hasbeen subject to significant fluctuations in recent years.  From 2002 to 2004,the peso has generally been depreciating from a high of Php49.336 on May 20,2002 to a low of Php56.443 on October 14, 2004.  In 2005, the peso fluctuatedsignificantly from a low of Php56.321 on July 8 to a high of Php53.062 onDecember 29.  As at December 31, 2006, the peso had appreciated by 8% to Php49.045to US$1.00, from Php53.062 to US$1.00 as at December 31, 2005.

 

PLDT’s ability to maintain compliance with financialcovenant requirements measured on a non-consolidated basis is principallyaffected by the performance of its fixed line business, which is predominantlyconducted by PLDT.  PLDT cannot be assured of the benefit of net revenues andcash flows generated by Smart and PLDT’s other investees in assisting PLDT incomplying with non-consolidated covenants or covenants that are calculatedwithout giving effect to the results of PLDT’s investees.

 

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) extendingloans; (e) extending guarantees or assuming the obligations of other persons;(f) paying dividends or other distributions or redeeming, repurchasing orotherwise acquiring shares of PLDT’s capital stock; (g) disposing of all orsubstantially all of its assets or of assets in excess of specified thresholdsof its tangible net worth; (h) creating any lien or security interest; (i)permitting set-off against amounts owed to PLDT; (j) merging or consolidatingwith any other company; (k) entering into transactions with stockholders andaffiliates; and (l) entering into sale and leaseback transactions. 

 

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

 

Moreover,certain of PLDT’s debt instruments restrict PLDT from declaring or distributingdividends to common stockholders.  In particular, under certain loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, or (ii) in an amount greaterthan PLDT’s net income after taxes during the fiscal year to which such paymentor distribution relates.

 

In case of a change in control of PLDT, PLDT may berequired to repurchase or prepay certain indebtedness.  Under the terms of the11.375% Notes due 2012, we are required to offer to purchase all outstandingnotes due 2012 for cash at a price of 101% of their principal amounts plusaccrued interest in the event that (1) the aggregate of NTT Communications’ andFirst Pacific’s direct and indirect voting interest in PLDT's outstandingcapital stock having voting rights falls below 35% of such capital stock, (2)any person or, in certain instances, group of persons, which is not controlleddirectly or indirectly by First Pacific or NTT Communications acquires a director indirect voting interest in PLDT’s outstanding capital stock having votingrights which equals or exceeds 35% of such capital stock and (3) if a ratingagency at such time maintains a rating on such notes, the rating agency downgradesits credit rating on the Notes within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(1) and (2) above.

 

PLDT’sdebt instruments also contain customary and other default provisions that permitthe lender to accelerate amounts due or terminate their commitments to extendadditional funds under the debt instruments. These default provisions include:(a) cross-defaults and cross-accelerations that permit a lender to declare adefault if PLDT is in default under another debt instrument; in some cases, thecross-default provision is triggered upon a payment or other default permittingthe acceleration of PLDT’s debt, whether or not the defaulted debt isaccelerated.  In other cases, the cross-default provision requires thedefaulted loan to be accelerated.  In some debt instruments, the cross-defaultprovision will be triggered only if the principal amount of the defaultedindebtedness exceeds a threshold amount specified in these debt instruments; (b)failure by PLDT to meet certain financial ratio covenants referred to above;(c) the occurrence of any material adverse change in circumstances that alender reasonably believes materially impairs PLDT’s ability to perform itsobligations under its debt instrument with the lender; (d) the revocation,termination or amendment of any of the permits or franchises of PLDT in anymanner unacceptable to the lender; (e) the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender; (f) the nationalization or sustained discontinuance of all or asubstantial portion of PLDT’s business; and (g) other typical events ofdefault, including the commencement of bankruptcy, insolvency, liquidation orwinding up proceedings by PLDT.

 

Smart’s debt instruments contain certainrestrictive covenants that require Smart to comply with specified financialratios and other financial tests at semi-annual measurement dates.  Thefinancial tests under Smart’s loan agreements include compliance with a debt toequity ratio of not more than 1.5:1, a debt to EBITDA ratio of not more than3:1 and a debt service coverage ratio of not less than 1.50:1.  Smart hasmaintained compliance with all of its financial covenants.  The agreements alsocontain customary and other default provisions that permit the lender toaccelerate amounts due under the loans or terminate their commitments to extendadditional funds under the loans.  These default provisions include: (a)cross-defaults and cross-accelerations that permit a lender to declare adefault if Smart is in default under another loan agreement.  Thesecross-default provisions are triggered upon a payment or other defaultpermitting the acceleration of Smart debt, whether or not the defaulted debt isaccelerated; (b) failure by Smart to comply with certain financial ratiocovenants; (c) any reduction in PLDT’s ownership of Smart’s shares below 51%;(d) any reduction in First Pacific’s and Metro Pacific Corporation’s collectivedirect and/or indirect ownership of PLDT’s common stock below 17.5% of thetotal common stock outstanding; and (e) the occurrence of any material adversechange in circumstances that the lender reasonably believes materially impairsSmart’s ability to perform its obligations under its loan agreements.

 

As at December 31, 2006 convertiblebonds with a principal amount of US$0.7 million had fallen due for payment andhad not been paid.  These bonds represented the sole unrestructured borrowingsof Piltel as at December 31, 2006 and were redeemed and paid, including accruedinterest and penalties, on March 31, 2007.  Piltel’s failure to redeem theconvertible bonds when they fell due did not cause a default under the debtarrangements of any other member of the PLDT group.

 

The Credit and Omnibus Agreements ofMabuhay Satellite impose several negative covenants which, among other things,restrict material changes in Mabuhay Satellite’s nature of business andownership structure, any lien upon or with respect to any of its assets or toany right to receive income, acquisition of capital stock, declaration andpayment of dividends, merger, consolidation and sale with another entity andincurring or guaranteeing additional long-term debt beyond prescribed amounts.

 

ePLDT’s loan agreement imposes negativecovenants which, among other things, restrict ePLDT with regard to payment ofcash dividends or any other income or any capital distribution to PLDT,voluntary suspension of its entire business operations for a period of 60consecutive days, dissolution of its legal existence, and creation of anyencumbrances on the shares pledged.  One of ePLDT’s loan agreements alsorequires ePLDT to comply with specified financial ratios and other financialtests at quarterly measurement dates.  The agreement also contains customaryand other default provisions that permit the lender to accelerate amounts dueunder the loan or terminate their commitments to extend additional funds underthe loan.  As at December 31, 2006, ePLDT was in compliance with all of itsfinancial covenants.

 

**Obligations Under Capital Lease**

 

Thefuture minimum payments for capitalized leases are as follows as at December31, 2006:

 

Year

(in million pesos)

2007

1,521

2008

38

2009

10

2010 and onwards

1

Total minimum lease payments

1,570

Less amount representing interest

540

Present value of net minimum lease payments

1,030

Less obligations under capital lease maturing within one year (Notes 7 and 23)

924

Long-term portion of obligations under capital lease (Notes 7 and 23)

 106

 

*Municipal Telephone Projects*

 

In 1993, PLDT entered into two leaseagreements with the Philippine Department of Transportation and Communications,or DOTC, covering telecommunications facilities in the province of Bohol and Batangas established under the Municipal Telephone Act.  Under these agreements, PLDTwas granted the exclusive right to provide telecommunications managementservices, to expand services, and to promote the use of the DOTC-contractedfacilities in certain covered areas for a period of 15 years.  Title to theproperties shall be transferred to PLDT upon expiration of the lease term.  Asat December 31, 2006, PLDT’s aggregate remaining obligation under thisagreement was approximately Php858 million.  In case of cancellation, PLDT isliable to pay Php100 million under each of the two contracts as liquidateddamages.

 

On June 1, 2004, PLDT served the DOTC a notice oftermination of the lease agreement in respect of the telecommunications systemin Bohol which state of deterioration, obsolescence and disrepair has made itimpossible for PLDT to continue managing, operating, and maintaining thesystem.  Since 2002, PLDT has been advising the DOTC of the need to review theviability of the system as PLDT has infused more than Php200 million forupgrades and maintenance to keep the system operable.  Further, the enactmentof Public Telecommunications Policy Act, or R.A. No. 7925, which negated theDOTC’s warranty to grant PLDT the exclusive right to provide telecommunicationservices in the areas stipulated, prevented PLDT from achieving the originallyprojected profitability, thereby rendering it impossible for PLDT to continuefulfilling its obligation under the lease agreement.  Although severaldiscussions have been held since then, no mutually acceptable agreement hasbeen reached.  On June 30, 2004, the DOTC advised PLDT that the request fortermination of the lease agreement in Bohol has been referred to the Departmentof Justice, or DOJ, as government agencies are required to refer allinterpretation of contracts and agreements to the DOJ secretary asattorney-general of the national government.  On May 5, 2005, PLDT received aletter from the DOTC stating that PLDT is in default for failure to remit tothe DOTC the quarterly installments under the lease agreement.  Due to thefailure of the parties to amicably settle their dispute, on September 28, 2005,PLDT demanded that the dispute be referred to arbitration and that the partiesagree on the composition of the arbitration committee.  In response, the DOTC,in a letter dated October 17, 2005, informed PLDT that pursuant to ExecutiveOrder No. 269, Series of 2004, dated January 12, 2004, the existingcommunications programs and projects implemented by DOTC were transferred tothe Commission on Information and Communications Technology, or CICT, and thatthe DOTC had forwarded to CICT PLDT’s letter dated September 28, 2005.  In aletter dated March 24, 2006, the CICT informed PLDT that the CICT poses noobjection on PLDT’s stated intentions and preference to refer the unresolvedand outstanding issues to the Philippine Dispute Resolution Center, Inc., orPDRCI, per the arbitration clause of the lease agreement.  On June 27, 2006, aRequest for Arbitration dated June 1, 2006 was filed by PLDT with the PDRCI.On November 15, 2006, DOTC has filed its answer to the said Request forArbitration.  As at December 31, 2006, the net book value of thetelecommunications system in Bohol, including PLDT’s additional capitalexpenditure relating to the telecommunications system, and correspondingcapital lease obligation amounted to Php21 million and Php735 million,respectively.

 

Piltel also entered into an agreement forthe financial lease of the Palawan Telecommunications 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 CapitalLease 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 ofPhp237 million as at December 31, 2006 in respect of office equipment.

 

Underthe terms of certain loan agreements and other debt instruments, PLDT may notcreate, incur, assume or permit or suffer to exist any mortgage, pledge, lienor other encumbrance or security interest over the whole or any part of itsassets or revenues or suffer to exist any obligation as lessee for the rentalor hire of real or personal property in connection with any sale and leasebacktransaction.

 

**Notes Payable**

 

In 2006, SPi obtained unsecured dollar-denominatedshort-term notes payable from various local commercial banks amounting toUS$3.7 million.  Interest on the notes range from 7.4% to 9.2% of theoutstanding balance per annum and the notes are payable within an average of150 days from the availment date.  The outstanding balance of Php201 million asat December 31, 2006 will mature in various months in 2007.

 

 

 

**13.    Deferred Credits and Other NoncurrentLiabilities**

 

This account consists of:

 

 

**2006**

2005

 

(in million pesos)

Accrual of capital expenditures under long-term financing

**5,646**

5,769

Liabilities on asset retirement obligations (Note 3)

**831**

752

Advance payment under a receivables purchase facility (Note 5)

**205**

976

Others

**1,850**

924

 

**8,532**

8,421

 

 

 

**14.    Preferred Stock Subject to MandatoryRedemption**

 

As at December 31, 2006, PLDT had issued 3 millionshares of Series V Convertible Preferred Stock, 5 million shares of Series VI Convertible Preferred Stock and 4 million sharesof Series VII Convertible Preferred Stock in exchange for Series K Class IConvertible Preferred Stock of Piltel, pursuant to the debt restructuring planof Piltel adopted in June 2001.  As discussed below, as at December 31, 2006,all Series VII Convertible Preferred Stock had been converted.  Shares ofSeries V and VI Convertible Preferred Stock are entitled to receive annualdividends of Php18.70 per share and US$0.397 per share, respectively.  Eachshare of Series V and VI Convertible Preferred Stock is convertible at any timeat 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 Stock, the remaining outstanding sharesunder these series will be mandatorily converted into PLDT common shares.Under a put option exercisable for 30 days, holders of common shares receivedon mandatory conversion of the Series V and VI Convertible Preferred Stock willbe able to require PLDT to purchase such PLDT common shares for Php1,700 pershare and US$36.132 per share, respectively.  Due to the foreign currencycomponent of the call option embedded in the Series VI Convertible PreferredStock, such call options were bifurcated and accounted for separately inconformity with SFAS No. 133, as amended, see *Note 23* – *FinancialAssets and Liabilities*.  The aggregate fair value of the issued Series V,VI and VII Convertible Preferred Stock as at date of issuance – net of thebifurcated option values – is shown under the “Preferred Stock Subject toMandatory Redemption” account in the consolidated balance sheets.

 

As at June 4, 2001, the aggregatefair value of the issued Series V, VI and VII Convertible Preferred Stock(inclusive of the option values) amounted to Php10,165 million, as determinedusing an independent party’s valuation model.  The remaining difference betweenthis aggregate fair value amount and the Php20,080 million Piltel restructureddebt was deferred and presented as part of “Remaining excess of debt forgivenover value of consideration given” account in the consolidated balance sheetsin conformity with the accounting for troubled debt restructuring, such that nogain was recorded on the restructuring.  Thereafter, interest incurred on theremaining restructured debt is recorded as an offset against remaining excessof debt forgiven over the value of consideration given.  Total interestincurred related to the restructured debt for the years ended December 31,2006, 2005 and 2004 amounted to Php317 million, Php365 million and Php473million, respectively.  As at December 31, 2005, the remaining excess of debtforgiven over the value of consideration given balance amounted to Php2,015million and none as at December 31, 2006, after giving effect to the aboveinterest expense, cancellation of Piltel debt through Smart acquisition fromPiltel’s creditors of the 69.4% of outstanding restructured Piltel debt andvoluntary prepayment of Piltel’s debt, see *Note 12 – Interest-bearingFinancial Liabilities,* and the additional issuances in 2004 and 2003 ofconvertible preferred shares to restructure Piltel’s debt.  The remainingexcess of debt forgiven over the value of consideration given amounted toPhp1,698 million and was recognized as gain in the consolidated statement ofincome for the year ended December 31, 2006 due to prepayment of Piltel’s debt.

 

The difference between the aggregate fair value of theSeries V, VI and VII Convertible Preferred Stock at issue date (net of thebifurcated option values for Series VI and VII) and the aggregate redemptionvalue is accreted over the period up to the call option date using theeffective interest rate method.  Accretions added to “Preferred stock subjectto mandatory redemption” and charged against accumulated deficit as at December31, 2006, 2005 and 2004 amounted to Php765 million, Php1,443 million andPhp1,503 million, respectively.  Unaccreted balance as at December 31, 2006 and2005 amounted to Php256 million and Php3,886 million, respectively.

 

“PreferredStock Subject to Mandatory Redemption” amounted to Php1,374 million andPhp12,004 million as at December 31, 2006 and 2005, respectively, afterrevaluation of Series VI and VII Convertible Preferred Stock to the exchangerates at balance sheet dates and after giving effect to the above accretions,conversions and additional issuances.  As at December 31, 2006 and 2005, 10,937,309shares and 3,376,743 shares, respectively, of the Convertible Preferred Stockhave been converted into PLDT common shares.  On August 18, 2006, all 3,842,000shares of Series VII Convertible Preferred Stock were converted into PLDTcommon shares.  The outstanding shares of Series V and VI Convertible PreferredStock as at December 31, 2006 were 46,047 and 875,188, respectively.  Theaggregate redemption value of the outstanding Series V and VI ConvertiblePreferred Stock amounted to Php1,629 million and Php15,890 million as atDecember 31, 2006 and 2005, respectively.

 

 

 

**15.    Stockholders’ Equity**

 

The movement of PLDT’s capital accounts for the yearsended December 31, 2004, 2005 and 2006 are as follows:

 

** **

**Preferred Stock** –  Php10 par value per share

** **

 

**Series  A to GG**

**III**

**IV**

** **

** **

** **

**Common Stock** –Php5 par value  per share

 

**No. of Shares**

**Total Preferred Stock**

**Amount**

**No. of Shares**

**Amount**

** **

(in million shares and pesos)

**Authorized**

 

 

** **

823

Php8,230

234

Php1,170

**Outstanding**

** **

 

** **

** **

** **

 

 

Balance at January 1, 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)

7

38

**Balance at December 31, 2006**

**406**

**–**

**36**

**442**

**Php4,424**

**188**

**Php942**

 

***Preferred Stock***

 

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

 

The Series A to GG 10% CumulativeConvertible Preferred Stocks earn cumulative dividends at an annual rate of10%.  After the lapse of one year from the last day of the year of issuance ofa particular series of 10% Cumulative Convertible Preferred Stock, any holderof such series may convert all or any of the shares of 10% CumulativeConvertible Preferred Stock held by him into fully paid and non-assessableshares of Common Stock of PLDT, at a conversion price equivalent to 10% belowthe average of the high and low daily sales price of a share of Common Stock onthe PSE, or if there have been no such sales on the PSE on any day, the averageof the bid and the asked prices of a share of Common Stock of PLDT at the endof such day on such Exchange, in each such case averaged over a period of 30consecutive trading days prior to the conversion date, but in no case shall theconversion price be less than the price set by the Board of Directors which, asat December 31, 2006, was Php5.00 per share.  The number of shares of CommonStock issuable at any time upon conversion of one share of the subscriberinvestment plan, or SIP, or the 10% Cumulative Convertible Preferred Stock isdetermined by dividing Php10.00 by the then applicable conversion price.

 

In case the shares of Common Stock at anytimeoutstanding are subdivided into a greater or consolidated into a lesser numberof shares, then the minimum conversion price per share of Common Stock will beproportionately decreased or increased, as the case may be, and in the case ofa stock dividend, such price will be proportionately decreased, provided,however, that in every case the minimum conversion price shall not be less thanthe par value per share of Common Stock.  In the event the relevant effectivedate for any such subdivision or consolidation of shares or stock dividendoccurs during the period of 30 trading days preceding the presentation of anyshares of 10% Cumulative Convertible Preferred Stock for conversion, a similaradjustment will be made in the sales prices applicable to the trading daysprior to such effective date utilized in calculating the conversion price ofthe shares presented for conversion.

 

Incase of any other reclassification or change of outstanding shares of CommonStock, or in case of any consolidation or merger of PLDT with or into anothercorporation, the Board of Directors shall make such provisions, if any, foradjustment of the minimum conversion price and the sales price utilized incalculating the conversion price as the Board of Directors, in its solediscretion, shall deem appropriate.

 

AtPLDT’s option, the Series A to GG 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 issuance up toDecember 31, 2009.

 

Theissuance of SIP Series FF, GG and HH is an exempt transaction under Section10.2 of the Securities Regulation Code, as confirmed by the Philippine SEC onApril 2, 2007.

 

On October 24, 2005, PLDT issued to JPMorgan, asdepositary, and to the holders of the Series III Convertible Preferred Stock anotice of mandatory conversion of all of its outstanding 4,616,200 shares ofSeries III Convertible Preferred Stock into shares of PLDT Common Stock.

 

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

 

As at December 19,2005, as a result of PLDT’s issuance of a notice of mandatory conversion, allof the outstanding shares of Series III Convertible Preferred Stock werevoluntarily and mandatorily converted into shares of PLDT Common Stock.  Each shareof Series III Convertible Preferred Stock was converted into 1.7129 shares ofCommon Stock.  A total of 7,907,032 shares of PLDT’s Common Stock were issuedas a result of the voluntary and mandatory conversions of all of the Series IIIConvertible Preferred Stock.

 

The Series IV Cumulative Non-Convertible RedeemablePreferred Stock earns cumulative dividends at an annual rate of 13.5% based onthe paid-up subscription price.  It is redeemable at the option of PLDT at anytime one year after subscription and at the actual amount paid for such stock,plus accrued dividends.  On February 26, 2002, the Board of Directors calledfor the payment of a portion of the balance of the subscription price of theSeries IV Cumulative Non-Convertible Redeemable Preferred Stock amounting toPhp72 million, which was paid on March 5, 2002.  On March 22, 2002, PLDTredeemed 60 million shares out of the 360 million subscribed shares of its SeriesIV Cumulative Non-Convertible Preferred Stock and paid Php72 million,representing the redemption price plus unpaid dividends up to the date ofredemption.

 

Theprovisions of certain subscription agreements involving preferred stock have aneffect on the ability of PLDT to, without written consent, sell certain assetsand pay cash dividends unless all dividends for all past quarterly dividendperiods have been paid, and provision has been made for the currently payabledividends.

 

 

 

**16.    Related Party Transactions**

 

Thefollowing is a summary of related party accounts with affiliates presented aspart of our consolidated balance sheets as at December 31, 2006 and 2005 andconsolidated statements of income for the years ended December 31, 2006, 2005and 2004:

 

 

 

**2006**

2005

 

(in million pesos)

Consolidated Balance Sheets

 

*** ***

*** ***

Accrued expenses and other current liabilities

** **

**4,120**

3,711

 

 

**2006**

2005

2004

 

(in million pesos)

Consolidated Statements of Income

** **

 

 

Repairs and maintenance

**18**

640

111

Selling and promotions

**23**

29

32

Professional and other contracted services

**725**

147

694

Rent

**10**

8

6

Taxes and licenses

**53**

–

–

Insurance and security services

**360**

467

534

Cost of satellite air time

**698**

1,008

1,299

 

*a.   Air Time Purchase Agreementbetween PLDT and AIL and Related Agreements*

* *

PLDTis a party to a Founder NSP Air Time Purchase Agreement, or ATPA, entered intowith AIL in March 1997, which was amended in December 1998 (as amended, the“Original ATPA”), under which PLDT was granted the exclusive right to sell AILservices as national service provider, or NSP, in the Philippines.  Inexchange, the Original ATPA required PLDT to purchase from AIL a minimum ofUS$5 million worth of air time (the “Minimum Air Time Purchase Obligation”)annually over ten years commencing on January 1, 2002 (the “Minimum PurchasePeriod”), the purported date of commercial operations of the Garuda ISatellite. In the event that AIL’s aggregate billed revenue was less than US$45million in any given year, the Original ATPA also required PLDT to makesupplemental air time purchase payments not to exceed US$15 million per yearduring the Minimum Purchase Period (the “Supplemental Air Time PurchaseObligation”).

 

Underthe Original ATPA, the Minimum Air Time Purchase Obligation and the SupplementalAir Time Purchase Obligation terminated upon the earlier of (i) the expirationof the Minimum Purchase Period and (ii) the date on which all indebtednessincurred by AIL to finance the AIL System has been repaid.  AIL indebtednessconsists of: (1) loans with several financial institutions (the “Banks”) underthe Credit Agreement dated March 12, 1997, as amended from time to time,including the amendment through the rescheduling agreement, dated September 30,2002, which extended the principal repayment dates to agreed periods with thefinal maturity date on January 31, 2012 (collectively, the “Amended CreditAgreement”); and (2) amounts owing to MMOC under the Spacecraft Contract datedAugust 28, 1995, as amended on December 30, 1998.

 

Asat December 31, 2006 and 2005, PLDT’s outstanding accrued obligations under theOriginal ATPA was Php3,991 million and Php3,493 million, respectively.  Total airtimepurchases made under this agreement amounted to Php698 million, Php1,008million and Php1,299 million for the years ended December 31, 2006, 2005 and2004, respectively. 

 

AILhas incurred recurring significant operating losses, negative operating cashflows, and significant levels of debt.  The financial condition of AIL waspartly due to the NSPs, inability to generate the amount of revenues originallyexpected as the growth in subscriber numbers has been significantly lower thanbudgeted.

 

OnSeptember 1, 2006, AIL, PT Asia Cellular Satellite, a 95% owned subsidiary ofAIL, and Inmarsat Global Limited, or Inmarsat, reached an agreement to pooltheir resources to develop powerful and novel product and service offerings inthe Asian region, founded on their respective mobile satellite communicationsnetworks, with (a) Inmarsat performing the role of satellite and networkoperator and wholesale product and services developer and (b) AIL performingthe role of wholesale and retail distributor of products and services.  

 

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.

 

OnSeptember 1, 2006, PLDT entered into a gateway services agreement withInmarsat, under which 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.

 

OnSeptember 1, 2006, AIL and PT Asia Cellular Satellite entered into a termsheet, as amended on October 20, 2006 and further amended on November 20, 2006(the “Bank Term Sheet”), with a majority of the banks to be used as the basisfor further good faith negotiations between the parties thereto with a view toentering into an agreement further amending the Amended Credit Agreement withAIL’s bank creditors.  Under the Banks Term Sheet, a majority of the banksagreed, subject to satisfaction of certain conditions, among other things, toamend the Original ATPA as set forth in an attachment to the Banks Terms Sheetand to restructure AIL’s indebtedness.  Pursuant to the business collaborationarrangements between AIL and Inmarsat, on September 1, 2006, Inmarsat made thefirst payment of US$4 million to AIL which was used to pay principal andinterest payable to the banks in accordance with the Banks Term Sheet.

 

On February 1, 2007, the parties to the Original ATPAentered into an amendment to the Original ATPA on substantially the termsattached to the Bank Terms Sheet (the “Amended ATPA”).  Under the Amended ATPA,the Minimum Air Time Purchase Obligation was amended and replaced in itsentirety with an obligation of PLDT (the “Amended Minimum Air Time PurchaseObligation”) to purchase from AIL a minimum of US$500,000 worth of air timeannually over a period ending upon the earlier of (i) the expiration of theMinimum Purchase Period and (ii) the date on which all indebtedness incurred byAIL to finance the AIL System is repaid.  Furthermore, the Amended ATPAunconditionally released PLDT from any obligations arising out of or inconnection with the Original ATPA prior to the date of the Amended ATPA, exceptfor obligations to pay for billable units used prior to such date.  Moreover,pursuant to a letter of confirmation, dated February 1, 2007, the banksreleased and discharged PLDT and ACeS Philippines and their respectivesubsidiaries from any and all obligations and liabilities under the OriginalATPA and related agreements. 

 

Moreover,in accordance with the above contractual arrangements, ACeS Philippinesacquired (i) from LMGT Holdings (ACeS), Inc., or LMGT, 50% of its equityinterest in AIL for a consideration of US$0.75 million pursuant to a sale andpurchase agreement entered into on February 1, 2007 and (ii) from Tera GlobalInvestment Ltd., or TGIL, for a nominal consideration 50% of TGIL’s interest ina promissory note issued by AIL, which 50% interest represents an aggregateamount of US$44,743,752, or the Transferred AIL Note, together with relatedsecurity interests pursuant to sale agreement entered into on February 1,2007.  Immediately thereafter, a portion of the Transferred AIL Note wasconverted into shares of AIL and the balance was converted into non-interestbearing convertible bonds of AIL.  As a result of these transactions, ACeSPhilippines owned 36.99% of AIL as at the date of this report.

 

*b.   Transactions with**Major**Stockholders, Directors and Officers*

 

Materialtransactions to which PLDT or any of its subsidiaries is a party, in which adirector, key officer or owner of more than 10% of the outstanding common stockof PLDT, or any member of the immediate family of a director, key officer orowner of more than 10% of the outstanding common stock of PLDT had a direct orindirect material interest, as at December 31, 2006 and 2005 and for each of thethree years ended December 31, 2006, 2005 and 2004 are as follows:

 

*1.   Cooperation Agreement with First Pacific andcertain affiliates, or the FP Parties, NTT Communications and DoCoMo*

 

Inconnection with the transfer by NTT Communications Corporation, or NTTCommunications, of approximately 12.6 million shares of PLDT’s common stock to NTTDoCoMo, Inc., or DoCoMo, pursuant to a Stock Sale and Purchase Agreement datedJanuary 31, 2006 between NTT Communications and DoCoMo, the FP Parties, NTTCommunications and DoCoMo entered into a Cooperation Agreement, dated January31, 2006.  Under the Cooperation Agreement, the relevant parties extendedcertain rights of NTT Communications under the Stock Purchase and StrategicInvestment Agreement dated September 28, 1999, as amended, and the ShareholdersAgreement dated March 24, 2000, to DoCoMo, including:

 

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

 

•        rights relating to therepresentation on the board of directors of PLDT and Smart, respectively, andany committees thereof.

 

Moreover, key provisions of the Cooperation Agreementpertain to, among other things:

 

•        *Restriction on Ownership ofShares of PLDT by NTT Communications and DoCoMo.* Each of NTT Communications and DoCoMo has agreed notto beneficially own, directly or indirectly, in the aggregate with theirrespective subsidiaries and affiliates, more than 21% of then issued andoutstanding shares of PLDT’s common stock.  If such event does occur, the FPParties, as long as they own in the aggregate not less than 21% of then issuedand outstanding shares of PLDT’s common stock, have the right to terminatetheir respective rights and obligations under the Cooperation Agreement, theShareholders Agreement and the StockPurchase and Strategic Investment Agreement.

 

•        *Limitation on Competition.*  NTT Communications, DoCoMo and their respectivesubsidiaries are prohibited from investing in excess of certain thresholds inbusinesses competing with PLDT in respect of customers principally located inthe Philippines and from using their assets in the Philippines in suchbusinesses. Moreover, if PLDT, Smart or any of Smart’s subsidiariesintends to enter into any contractual arrangement relating to certain competingbusinesses, PLDT is required to provide, or to use reasonable efforts to procurethat Smart or any of Smart’s subsidiaries provide, NTT Communications andDoCoMo with the same opportunity to enter into such agreement with PLDT orSmart or Smart’s subsidiaries, as the case may be.

 

•        *Business Cooperation.*  PLDT and DoCoMo agreed in principle to collaboratewith each other on the business development, roll-out and use of awireless-code division multiple access mobile communication network.  Inaddition, PLDT agreed, to the extent of the power conferred by its direct orindirect 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’scommon stock and for as long as NTT Communications, DoCoMo and theirsubsidiaries continue to own in the aggregate 17.5% of the shares of PLDT’scommon stock then outstanding, DoCoMo will be entitled to certain additionalrights under the 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 unlessprior to 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 (as defined in theStock Purchase and Strategic Investment Agreement) will terminate.  If the FPParties and their respective subsidiaries cease to have, directly orindirectly, effective voting power in respect of shares of PLDT’s common stockrepresenting at least 18.5% of the shares of PLDT’s common stock then issuedand outstanding, their respective rights and obligations under the CooperationAgreement, the Stock Purchase and Strategic Investment Agreement, and theShareholders Agreement will terminate.

 

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

 

An Integrated i-mode Services 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 services 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.   AdvisoryServices Agreement between DoCoMo and PLDT*

 

AnAdvisory Services Agreement was entered into by DoCoMo and PLDT on June 5,2006, in accordance with the Cooperation Agreement.  Pursuant to the Agreement,DoCoMo will provide the services of certain key personnel in connection withcertain aspects of the business of PLDT and Smart.  Also, the agreement governsthe terms and conditions of the appointments and the corresponding fees relatedthereto.  The initial license fee paid as at December 31, 2006 amounted toPhp12 million.  Outstanding liability under this agreement amounted to Php32million as at December 31, 2006.

 

*4.**Other**Agreementswith NTT Communications and/or its Affiliates*

 

PLDT is a party to the followingagreements with NTT Communications and/or its affiliates:

 

•        *Advisory Services Agreement*.   On March 24, 2000, PLDT entered into an agreementwith NTT Communications, as amended on March 31, 2003, March 31, 2005 and June16, 2006, under which NTT Communications provides PLDT with technical,marketing and other consulting services for various business areas of PLDTstarting 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 Communicationsunder which 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., or ALBV*

 

Smarthas an existing Technical Assistance Agreement with ALBV, a subsidiary of theFirst Pacific Group, for ALBV to provide technical support services and assistancein the operations and maintenance of cellular business for a period of fiveyears, subject to renewal upon mutual agreement between the parties.  Theagreement provides for quarterly payments of technical service fees equivalentto 2% of the net revenues of Smart.  In January 2004, the agreement wasamended, reducing the technical service fees to be paid by Smart to ALBV to 1%of net revenues effective January 1, 2004.  On February 18, 2004, Smart andALBV entered into a renewal of the Technical Assistance Agreement extending theeffectivity of the terms thereof to February 23, 2008.  Furthermore, in view ofthe acquisition by Smart of Piltel Series K Class I Convertible Preferred Stockheld by PLDT, the parties agreed to make the consolidated net revenues of Smartthe basis for the computation of the 1% technical service fees payable by Smartto ALBV, effective January 1, 2005.

 

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

 

Total fees under these agreements amounted to Php591 million, Php567million and Php507 million for the years ended December 31, 2006, 2005 and2004, respectively.  Outstanding obligations of Smart under these agreementsamounted to Php128 million and Php194 million as at December 31, 2006 and 2005,respectively.  Outstanding prepaid management fees as at December 31, 2006 and2005 amounted to Php869 million and Php920 million, respectively.

 

*6.   Agreements relating to insurancecompanies*

 

Gotuaco del Rosario and Associates, or Gotuaco, actsas the broker for certain insurance companies to cover certain insurableproperties of the PLDT Group.  Insurance premiums are remitted to Gotuaco andthe broker’s fees are settled between Gotuaco and the insurance companies.  Inaddition, PLDT has an insurance policy with Malayan Insurance Co., Inc., orMalayan, wherein premiums are paid directly to Malayan.  Total insuranceexpenses paid under these agreements amounted to Php360 million, Php468 millionand Php534 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.

 

 

 

**17.    Employee Benefits**

 

***Share-Based Payment***

 

*Executive Stock Option Plan, or ESOP*

 

Stockoptions granted under the ESOP vest over five years and have a maximum contractuallife of ten years from the date of grant.  The exercise price of the optionsgranted under the ESOP shall not be lower than the average of the closing priceof our common stock on the PSE for 30 calendar days immediately preceding thedate of grant.

 

Thestock options granted under the ESOP shall vest, beginning two years from thegrant date at a per year rate of 25% of the options granted.

 

The number of shares reserved under the ESOP shouldnot exceed 1.2% of the total issued common shares of PLDT, and the number ofshares reserved for issuance under the ESOP is increased to include any sharesof PLDT’s common stock issuable upon exercise of options granted under the ESOPthat expire or lapse for any reason without having been exercised in full. 

 

TheESOP will terminate on December 10, 2009, unless PLDT’s Board of Directorsterminates it earlier. 

 

OnDecember 10, 1999, PLDT granted 1,289,745 options to purchase shares of PLDT’scommon stock under the ESOP.  Stock option activity under the ESOP for theyears ended December 31, 2006, 2005 and 2004 is summarized below:

 

 

**Weighted Average Exercise Price Per Share**

**2006**

2005

2004

Balance at beginning of year

Php814

**197,500**

536,589

900,118

Exercised shares

814

**(78,466)**

(335,605)

(336,745)

Cancellations/forfeitures

814

**–**

(3,484)

(26,784)

Balance at end of year

Php814

**119,034**

197,500

536,589

 

Allthe above grants under the ESOP were made to executives of PLDT and alloutstanding stock options became fully vested in December 2004.

 

Thenumber of options exercisable at December 31, 2006 and 2005 were 119,034 sharesand 197,500 shares, respectively.

 

In conformity with the provisionsof SFAS No. 123, the fair value of each option is estimated using theBlack-Scholes valuation model with the following assumptions for grants underthe ESOP during the year ended December 31, 1999: volatility of 71.3%,risk-free interest rate of 8.94% at the date of grant and an expected term offive years.

 

Theweighted average per share fair value of common stock options granted in 2002was Php582.59.  The remaining weighted average contractual life was three yearsas at December 31, 2006.

 

*Long-TermIncentive Plan, or LTIP*

 

On August 3, 2004, PLDT’s Board of Directors approved the establishmentof a Long-term Incentive Plan, or Original LTIP, for eligible key executiveofficers and advisors of PLDT and its subsidiaries, which is administered bythe Executive Compensation Committee.  The Original LTIP was a four-yearcash-settled share based plan covering the period from January 1, 2004 toDecember 31, 2007, or the Performance Cycle.  The payment was intended to bemade at the end of the Performance Cycle (without interim payments) andcontingent upon the achievement of an approved target increase in PLDT’s commonshare price by the end of the Performance Cycle and a cumulative consolidatednet income target for the Performance Cycle.

 

On August 28, 2006, PLDT’s Board of Directors approved, in principle,the broad outline of the PLDT Group’s strategic plans for 2007 to 2009 focusingon the development of new revenue streams to drive future growth whileprotecting the existing core communications business.  To ensure the properexecution of the three-year plan, particularly with respect to the manpowerresources being committed to such plans, a new LTIP, or New LTIP, uponendorsement of the Executive Compensation Committee, was approved by the Boardof Directors to cover the period from January 1, 2007 to December 31, 2009, orNew Performance Cycle.  As a result of the establishment of the New LTIP, theBoard also approved the early vesting of the Original LTIP by the end of 2006for those of its participants who were invited to join the New LTIP and choseto join.  Participants in the Original LTIP who were not invited to join theNew LTIP, or who were invited but chose not to join, remained subject to theOriginal LTIP and its original vesting schedule.

 

Prior to January 1, 2006, we accounted for the LTIP using the intrinsicvalue method supplemented by pro forma disclosures in accordance with APBOpinion No. 25 and SFAS No. 123.  Effective January 1, 2006, we adopted SFASNo. 123(R) using the modified prospective approach and accordingly priorperiods have not been restated to reflect the impact of SFAS No. 123(R).  Thecumulative effect of adoption of SFAS No. 123(R) was recognized separately in ourconsolidated statements of income.

 

Thefair value of the Original LTIP was estimated using an option pricing model,which considered annual stock volatility, risk-free interest rates, theremaining life of options and the share price capped at Php2,300.00 as atDecember 31, 2006.  Incentive cost per share as at December 31, 2006 amountedto Php1,350.00.  The Original LTIP cost, including the cost for advisors(presented under professional and other service fees in the statements ofincome) and the cumulative effect of the adoption of FAS 123 (R), recognized asan expense as at December 31, 2006 and 2005, amounted to Php3,432 million andPhp1,224 million, respectively.  As at December 31, 2006 and 2005, total OriginalLTIP liability amounted to Php5,030 million and Php1,880 million, respectively.

 

Movements in the number of share appreciation rightsoutstanding under the Original LTIP awards 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***

 

*PLDT*

 

PLDT has a trustee-managed, non-contributory definedbenefit plan, or Benefit Plan, providing for retirement and death benefits and service terminal pay tosubstantially all permanent and regular employees.  The Benefit Plan providesbenefits upon normal retirement beginning at age 65, early retirement beginningat age 50 or completion of at least 30 years of credited service, voluntaryseparation beginning at age 40 or completion of at least 15 years of creditedservice, total and physical disability, death and involuntary separation.Benefits under the Benefit Plan are based on the employee’s final monthly basicsalary and length of service.

 

In2006, PLDT adopted FAS 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans”.  SFAS No. 158 requires the recognition of theoverfunded or unfunded status of a benefit plan, measured as the differencebetween the fair value of the plan assets and the benefit obligations, as anasset or liability in the consolidated balance sheet; it also requires that thechanges in the funded status be recorded through comprehensive income in theyear in which those changes occur.  Accordingly, we have recognized theaggregate amount of Php4,718 million (Php3,303 million after tax effect)unfunded plans in our 2006 consolidated balance sheet.

 

Inconformity with SFAS No. 158, the following table sets forth the Plan’s fundedstatus and pension amounts recognized as at December 31, 2006, 2005 and 2004based on the latest actuarial valuation dated January 2007:

 

 

**2006**

2005

2004

 

(in million pesos)

Change in benefit obligation:

 

** **

** **

Benefit obligation at beginning of year

**7,601**

6,864

5,971

Current service cost

**461**

427

382

Interest cost

**889**

684

535

Benefits paid

**(590)**

(495)

(18)

Actuarial loss on obligation

**4,768**

121

679

Curtailment

**–**

–

116

Settlement

**–**

–

(801)

Benefit obligation at end of year

**13,129**

7,601

6,864

 

** **

 

 

Change in plan assets:

** **

 

 

Fair value of plan assets at beginning of year

**5,154**

4,448

3,927

Actual return on plan assets

**884**

568

457

Actual contribution

**320**

633

883

Settlement

**–**

–

(801)

Actual benefits paid

**(590)**

(495)

(18)

Fair value of plan assets at end of year

**5,768**

5,154

4,448

Funded status

**(7,361)**

(2,447)

(2,416)

Unrealized net transition obligation

**–**

189

199

Unrecognized net actuarial gain

**–**

116

89

Accrued benefit cost

**(7,361)**

(2,142)

(2,128)

 

** **

 

 

Components of net periodic benefit cost:

** **

 

 

Current service cost

**461**

427

382

Interest cost

**889**

684

535

Expected return on plan assets

**(540)**

(540)

(376)

Amortizations of unrecognized net transition obligation

**10**

10

10

Net periodic benefit cost

**820**

 581

 551

 

Theaccumulated benefit obligations amounted to Php3,379 million, Php1,946 millionand Php2,868 million as at December 31, 2006, 2005 and 2004, respectively.

 

The significant assumptions used in determining theactuarial present value of the projected benefit obligations as at December 31,2006, 2005 and 2004 are as follows:

 

 

**2006**

2005

2004

Weighted average assumptions:

 

 

 

Expected rate of return on plan assets

**10%**

10%

10%

Discount rate

**8%**

11%

10%

Rate of compensation increase

**8%**

8%

7%

 

Theallocation of the fair value of the beneficial trust fund’s assets for the PLDTpension plan as at December 31, 2006, 2005 and 2004 follows:

 

 

**2006**

2005

2004

Investments in equity securities

**52%**

37%

33%

Investments in debt and fixed income securities

**23%**

40%

41%

Investments in real estate

**10%**

13%

16%

Investments in mutual funds

**8%**

6%

2%

Investments in temporary placements

**7%**

4%

8%

 

**100%**

100%

100%

 

ThePLDT Group adopts an investment approach of mixed equity and fixed incomeinvestments to maximize the long-term return of plan assets.  The investmentportfolio has been structured to achieve the objective of regular income withcapital growth and out-performance of benchmarks.  A majority of the investmentportfolio consists of fixed income debt securities and various equitysecurities, while the remaining portion consists of multi-currency investments.

*** ***

SFASNo. 87 requires the use of an average rate of earnings expected on fundsinvested or to be invested, considering returns being earned by plan assets inthe fund and rates of return expected to be available for reinvestment.  Dueconsideration was given not only to historical performance of plan investments,but also to the current investment mix and anticipated rates of return.   Thus,the expected rate of return on assets was set at 10% per annum.

 

Asat December 31, 2006 and 2005, the assets of the beneficial trust fundestablished for PLDT’s pension plan include investments in shares of stocks ofPLDT and Piltel with total fair values aggregating Php2,185 million andPhp1,643 million, respectively, which represent about 35% and 29%,respectively, of such beneficial trust fund’s net assets available for planbenefits (31% in 2004).

*** ***

Movementsof shares of stock of PLDT and Piltel held by the plan during 2006 are asfollows:

*** ***

 

**PLDT**

Piltel

** **

**Common Shares**

Preferred Shares

**Common Shares**

Numbers of shares held by the plan as at January 1, 2006

661,643

36,000,000

19,958,760

Purchases during the year

–

–

–

Sales during the year

–

–

–

**Number of shares held by the plan as at December 31, 2006**

**661,643**

**36,000,000**

**19,958,760**

*** ***

Dividendsreceived by the plan from PLDT for the years ended December 31, 2006, 2005 and2004 amounted to Php103 million, Php86 million and Php47 million, respectively.

*** ***

PLDT expects to makeapproximately Php509 million of cash contributions to its pension plan in 2007.

*** ***

The table below presents the expected compulsoryretirement benefits of PLDT to be paid out of the fund for the next ten years:

*** ***

**Year**

(in million pesos)

2007

73

2008

100

2009

131

2010

180

2011

274

2012 and onwards

3,055

*** ***

*Smart*

*** ***

Smart has a trustee-managed, tax-qualified providentplan, or Provident Plan, providing for retirement, death or service terminalpay to substantially all permanent and regular employees.  Under the ProvidentPlan, Smart contributes to the provident fund for the credit of each member’sPersonal Retirement Account, or PRA, a percentage of such member’s monthlysalary.  Net earnings of the Provident Fund are credited every nine months tothe PRAs of the members based on their proportionate share in the total valueof the Provident Fund as at the end of the preceding period.

*** ***

InOctober 2003, Smart’s Board of Directors approved certain enhancements to theretirement plan.  The enhanced retirement plan gives a member the option tocontribute to the fund up to a maximum of 10% of his monthly salary.  On top ofits current contribution, Smart will provide an additional contribution of upto 50% of the member’s contribution, depending on his tenure in the company.

 

Smart’s total cash contributions to its plan for theyears ended December 31, 2006, 2005 and 2004 amounted to Php112, million, Php50million and Php94 million, respectively.

*** ***

*** ***

 

**18.    Operating Revenues andExpenses**

*** ***

*Service Revenues*

*** ***

 

**2006**

2005

2004

 

(in million pesos)

Wireless services

** **

 

 

Cellular

**75,747**

71,518

65,818

Very small aperture terminal, or VSAT

**2,073**

1,945

1,958

Fixed lines

** **

 

 

Local exchange

**16,860**

20,210

20,606

International long distance

**9,921**

12,240

12,804

National long distance

**6,874**

5,232

6,736

Data and other network

**7,199**

6,001

4,433

Miscellaneous

**474**

441

535

Information and communications technology

**5,856**

2,761

2,014

 

**125,004**

120,348

114,904

 

*Non-service Revenues*

 

 

**2006**

2005

2004

 

(in million pesos)

Sale of computers, cellular handsets and SIM-packs

**2,101**

2,752

6,111

Point-of-product sales

**431**

235

158

 

**2,532**

2,987

6,269

 

*Compensation and Employee Benefits*

 

 

**2006**

2005

2004

 

(in million pesos)

Salaries and benefits

**13,761**

11,465

10,307

Incentive plans (Note 17)

**3,104**

1,195

308

Pension and other benefits (Note 17)

**957**

734

835

MRP (Note 11)

**445**

458

566

 

**18,267**

13,852

12,016

 

*Professional**and Other Contracted Services*

 

 

**2006**

2005

2004

 

(in million pesos)

Technical and consultancy fees (Note 16)

**1,930**

1,387

1,608

Contracted services

**948**

470

403

Legal and audit fees

**219**

508

132

Others

**47**

67

44

 

**3,144**

2,432

2,187

 

*Asset Impairment*

 

 

**2006**

2005

2004

 

(in million pesos)

Property, plant and equipment (Note 7)

**1,402**

11

365

Notes receivables (Note 8)

**346**

–

–

Intangibles (Note 9)

**30**

–

–

Investments (Note 8)

**4**

–

1,047

Other assets

**17**

–

–

 

**1,799**

 11

1,412

 

*FinancingCosts*

 

 

**2006**

2005

2004

 

(in million pesos)

Interest on loans and related items (Note 24)

**6,991**

10,119

11,710

Financing charges (Note 23)

**1,497**

1,436

1,157

Accretion on financial liabilities – net (Notes 12 and 23)

**338**

568

1,185

Capitalized interest (Notes 7 and 24)

**(549)**

(504)

(595)

Foreign exchange losses (gains) – net (Notes 12 and 23)

**(5,818)**

(8,196)

2,776

 

**2,459**

3,423

16,233

 

*Other Income – Net*

 

 

**2006**

2005

2004

 

(in million pesos)

Gain on early settlement of debt, debt exchange and debt restructuring transactions (Php9.21 per share and Php16.59 per share in 2006 and 2004, respectively) (Notes 12 and 14)

**1,698**

–

2,816

Miscellaneous income (expense) – net

**1,897**

1,016

(286)

 

**3,595**

1,016

2,530

 

 

 

19.    Income Taxes

 

The net current and noncurrent components of deferred incometax assets (liabilities) recognized in the consolidated balance sheets follow:

 

**2006**

2005

 

(in million pesos)

Net current deferred income tax assets

**10,042**

9,866

Net noncurrent deferred income tax assets

**15,706**

13,589

Net current deferred income tax liabilities

**–**

(5)

Net noncurrent deferred income tax liabilities

**(382)**

(44)

 

The components of the consolidated net deferred income tax assets andliabilities are as follows:

 

 

**2006**

2005

 

(in million pesos)

Current assets:

** **

 

Accumulated provision for doubtful accounts

**4,813**

5,531

Unearned prepaid card revenues 

**1,325**

781

MCIT

**983**

526

Provision for unrealizable assets

**422**

423

Allowance for inventory obsolescence 

**323**

337

Capital lease

**261**

157

Unamortized past service pension cost

**154**

170

Executive stock option plan

**106**

104

Unearned revenues – others

**78**

798

Derivative financial instruments

**33**

67

NOLCO

**7**

9

Others

**1,622**

1,459

 

**10,127**

10,362

Current liabilities:

** **

 

Unrealized foreign exchange gains on financial instruments

**(1)**

(40)

 

**10,126**

10,322

Less valuation allowance

**84**

456

Net current assets

**10,042**

9,866

Noncurrent assets:

** **

 

Asset impairment

**5,631**

8,398

NOLCO

**4,987**

3,931

Unrealized foreign exchange losses

**2,989**

6,459

Derivative financial instruments

**2,331**

692

Accrued pension cost

**2,329**

788

LTIP

**1,595**

520

Unearned revenues – others

**1,262**

1,388

Unamortized past service pension cost

**717**

861

Remaining excess of debt forgiven over value of consideration given

**401**

1,636

Deferred charges

**266**

284

Asset retirement obligations

**191**

157

Capitalized taxes and duties – net of amortization

**(446)**

(516)

Intangible assets and fair value adjustments on assets acquired

**(328)**

(254)

Fixed assets componentization

**(1,679)**

(815)

Capitalized interest charges – net of amortization

**(4,607)**

(4,664)

Others

**282**

–

 

**15,921**

18,865

Less valuation allowance

**215**

5,276

Net noncurrent assets

**15,706**

13,589

Current liabilities:

** **

 

Accumulated provision for doubtful accounts

**–**

(5)

Current liabilities

**–**

(5)

Noncurrent liabilities:

** **

 

Unrealized foreign exchange losses

**(7)**

(44)

Unearned revenues

**(****39****)**

–

Intangible assets and fair value adjustments on assets acquired

**(336)**

–

Noncurrent liabilities

**(382)**

(44)

 

Provisionfor income tax consists of:

 

**2006**

2005

2004

 

(in million pesos)

Current

**10,035**

8,583

7,357

Deferred

**(989)**

(3,734)

(531)

 

**9,046**

4,849

6,826

 

Mabuhay Satellite and SubicTel areregistered as Subic Bay Freeport Enterprises while ClarkTel is registered as aClark Special Economic Zone Enterprise under Republic Act No. 9337, or R.A.7227, otherwise known as the Bases Conversion and Development Act of 1992.  Asregistrants, Mabuhay Satellite, SubicTel and ClarkTel are entitled to all therights, privileges and benefits established thereunder including tax andduty-free importation of capital equipment and a special income tax rate of 5%of gross income, as defined in the R.A. 7227.

 

On December 22, 2000, the Philippine Board ofInvestments, or BOI, approved ePLDT’s registration as a new informationtechnology, or IT, service firm in the field of services related to itsinternet data center on a pioneer status.  As such, ePLDT enjoys, among otherincentives, a six-year income tax holiday, or ITH, starting February 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 for this activity.  The coverage periodof the new ITH is yet to be disclosed by the BOI.

 

Parlance is registered with the BOI as a new IT exportservice firm in the field of customer interaction center on a pioneer status.Under this registration, Parlance is entitled to certain tax incentives,including an ITH for six years starting in June 2002.  Parlance is required tocomply with specific terms and conditions stated in its BOI registration.

 

iPlus Intelligent Network, Inc., oriPlus, is a wholly-owned subsidiary of ePLDT and is registered with the BOI asa new IT service firm in the field of application service provider on a pioneerstatus.  Under such registration, iPlus is entitled to a six-year ITH incentivefrom the actual start of commercial operations until January 1, 2009.

 

Vocativ is registered with the Philippine EconomicZone Authority, or PEZA, as an Ecozone Export Enterprise to develop and operatea call center business that serves overseas clients by providing customerrelationship management services.  As a registered enterprise, Vocativ isentitled to certain tax and non-tax incentives which include, among otherthings, tax and duty-free importations, exemption from local tax and an ITH forfour years from start of commercial operations.  After the ITH period, Vocativis liable for a final tax, in lieu of all taxes after the expiration of itsincentives.  The final tax is computed at 5% of gross income less allowabledeductions as defined under R.A. No. 7916, “The Special Economic Zone Act of1995”, and must be paid and remitted in accordance with the amendmentscontained 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 tothe treasurer’s office of the municipality or city where the enterprise islocated.

 

On December 5, 2005, Vocativ receivedapproval from PEZA for the adjustment of the start of commercial operations,effectively extending the ITH expiration to the end of March 2006.  On June 30,2006, PEZA approved an ITH extension for another year which effectively extendsthe ITH expiration to April 2007.

 

mySecureSign, Inc., or mSSI, is awholly-owned subsidiary of ePLDT and is registered with the BOI as a new ITservice firm in the field of services related to public key infrastructure on apioneer status. Under such registration, mSSI enjoys, among other incentives, asix-year ITH from August 1, 2001 or the actual start of commercial operations,whichever comes first.  mSSI started commercial operations on January 1, 2002.

 

Ventus is registered with the BOI as anew IT export service firm in the field of customer interaction center on apioneer status.  Under this registration, Ventus is entitled to certain taxincentives such as an ITH for six years starting March 2005.  In relation tothis, Ventus is required to comply with specific terms and conditions stated inthe BOI registration.

 

Two of Ventus’ call center projects are registeredwith the BOI as a new IT export service firm in the field of customerinteraction center on a pioneer status.  Under this registration, Ventus’ Iloilo and Pasig call center projects are entitled to certain tax incentives such as anITH for six years starting March 2005 and August 2006, respectively.  Inrelation to this, Ventus is required to comply with specific terms andconditions stated in the BOI registration.

 

Digital Paradise is registered with the BOI as a new IT service firm in the field ofcommunity access on a non-pioneer status.  Under the provisions of theregistration, Digital Paradise’s sales generated from its own community accessactivity and franchise fees are entitled to an ITH for a period of four yearsbeginning December 2002.  In December 2006, the BOI approved Digital Paradise’sapplication for a status upgrade from non-pioneer to pioneer, accordinglyextending the ITH period for another 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.  In April 2004, the BOI approved Level Up!’s request forupgrading its status from non-pioneer to pioneer in connection with its ITservice activity in the field of application service provider for entertainmentand educational project.  Accordingly, the ITH period was extended from four tosix years.

 

In September 2006, PEZA approved SPi’s application forregistration as an ecozone information technology enterprise to provide ITenabled services with emphasis on the creation of electronic discovery,presentation of content in electronic information formats, data analysis,capture, abstracting and data processing, design, development andimplementation of healthcare documentation solutions.  As a registeredenterprise, SPi is entitled to certain tax and non-tax incentives whichinclude, among other things, tax and duty-free importations, exemption fromlocal tax and an ITH for four years.  After the ITH period, SPi 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. 7916, “The Special Economic Zone Act of 1995”, and will bepaid and remitted in accordance with the amendments contained in R.A. 8748, asfollows: (a) 3% to the Philippine Government; and (b) 2% which will be directlyremitted by the business establishments to the treasurer’s office of themunicipality or city where the enterprise is located.

 

Wolfpac is registered with the BOI as a new operatorof service provider applications.  Under the terms of its registration, it isentitled to certain tax and non-tax incentives which include, among otherthings, an ITH for four years starting February 2004.

 

Smart Broadband has three registeredactivities with the BOI on a pioneer status, namely: (i) a new operator oftelecommunications systems (inter-exchange carrier for data services); (ii) newinformation technology service firm in the field of providing internetservices; and (iii) a new operator of telecommunications facilities (nationwidebroadband wireless access).  Under the terms of these registrations, SmartBroadband is entitled to certain tax and non-tax incentives which include,among other things, an ITH for six years from February 2001, August 2001 andJuly 2005, respectively.

 

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

 

Consolidated tax incentives availed for the years endedDecember 31, 2006, 2005 and 2004 amounted to Php142 million, Php235 million andPhp2,208 million, respectively.

 

On May 24, 2005, the president of the Philippines signed into law Republic Act No. 9337, or R.A. 9337, amending certain sections of theNational Internal Revenue Code, which took effect on November 1, 2005.  R.A.9337, among others, introduced the following changes:

 

d.       The regular corporate income taxrate for domestic corporations and resident/non-resident foreign corporationsincreased from 32% to 35% effective November 1, 2005 and will be reduced to 30%effective January 1, 2009.

 

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

 

f.        The input VAT on capital goodsshould be spread evenly over the estimated useful life or sixty months,whichever is shorter, if the acquisition cost, excluding the VAT componentthereof, exceeds one 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 *Note12 – Interest-bearing Financial Liabilities*.

 

Certainof our valuation allowance on deferred income tax assets have been reversed tothe extent that such related deferred tax assets are expected to be utilizedagainst sufficient future taxable profit.  We had valuation allowance on deferredtax assets of Php299 million and Php5,615 million largely pertaining to assetimpairment as at December 31, 2006 and 2005, respectively.

 

The balance of consolidated NOLCO as at December 31,2006 may be used by the particular entities that incurred the losses asdeductions against their future taxable income as follows:

 

**Year Incurred**

**Expiry Date**

(in million pesos)

2004

December 31, 2007

26

2005

December 31, 2008

11,222

2006

December 31, 2009

3,020

Total NOLCO

** **

14,268

 

** **

 

Tax benefit as at December 31, 2006

** **

4,994

 

Thebenefit of MCIT amounting to Php983 million as at December 31, 2006 can be claimed asdeductions against income tax payable until 2008.

 

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

 

 

**2006**

2005

2004

 

(in million pesos)

Provision for income tax at the applicable statutory tax rates

**15,340**

14,875

11,149

Tax effects of:

** **

 

 

Tax exempt income and non-deductible expenses

**1,410**

445

3,731

Differences between statutory tax rate and special tax rate  of certain subsidiaries

**1,043**

(1,507)

(835)

Equity share in net losses (income) of associates

**18**

(2)

24

Results of operations subject to income tax holiday and  other non-taxable income

**(1,674)**

(1,234)

(1,316)

Changes in valuation allowance

**(7,091)**

(7,728)

(5,927)

Actual provision for income tax

**9,046**

4,849

6,826

 

 

** **

**20.    Earnings Per Common Share**

 

Thefollowing table presents information necessary to calculate the earnings pershare:

 

** **

**2006**

2005

2004

 

**Basic**

**Diluted**

Basic

Diluted

Basic

Diluted

 

(in million pesos, except per share amounts)

Consolidated net income

**33,598**

**33,598**

40,603

40,603

28,101

28,101

Dividends on preferred stock

**(572)**

**(572)**

(1,677)

(70)

(1,764)

(285)

Accretion to redemption value of Preferred Stock Subject  to Mandatory Redemption and foreign exchange revaluation

**(765)**

**(765)**

(1,443)

(1,746)

(1,503)

(1,503)

Consolidated net income attributable to common shareholders

**32,261**

**32,261**

37,483

38,787

24,834

26,313

 

(in thousand shares)

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

**–**

**–**

–

94

–

155

Common shares equivalent of preferred shares deemed dilutive:

** **

** **

 

 

 

 

      10% Cumulative Convertible Preferred Stock (Note 14)

**–**

**–**

–

2,617

–

3,305

      Preferred Stock Series III (Note 14)

**–**

**–**

–

–

–

7,908

      Preferred Stock Series VI (Note 14)

**–**

**–**

–

4,399

–

–

      Preferred Stock Series VII (Note 14)

**–**

**–**

–

3,842

–

–

Weighted average number of common shares for the year

**184,456**

**184,456**

172,069

183,021

169,728

181,096

Earnings per common share

**Php174.90**

**Php174.90**

Php217.84

Php211.93

Php146.32

Php145.30

 

Series III, V, VI and VII Convertible Preferred Stockand 10% Cumulative Convertible Preferred Stock were deemed dilutive based on acalculation of the required dividends on eachrespective preferred shares divided by the number of equivalent commonshares, assuming such preferred shares are converted into common shares andcompared against the basic EPS.  Since the amount of dividends on Series VI andVII Convertible Preferred Stock in 2005 and Series III Convertible PreferredStock in 2004, including 10% Cumulative Convertible Preferred Stock in bothyears, over its equivalent number of common shares decreased the basic EPS,these convertible preferred stocks were deemed dilutive.

 

Thecomputation of diluted earnings per common share were anti-dilutive for theyear ended December 31, 2006, therefore, the amounts reported for basic anddiluted earnings per common share were the same.

 

**Dividends Declared For theYears Ended December 31, 2006, 2005 and 2004**

 

** **

**2006**

**2005**

**2004**

**Class**

**Per Share**

**Total**

**Per Share**

**Total**

**Per Share**

**Total**

 

** **

**(in million pesos)**

 

(in million pesos)

 

(in million pesos)

**Preferred Stock Subject to  Mandatory Redemption**

** **

** **

 

 

 

 

Series V

**Php4.675**

**2**

Php4.675

21

Php4.675

48

Series VI

**US$0.09925**

**71**

US$0.09925

102

US$0.09925

106

Series VII

**JPY10.179725**

**59**

JPY10.179725

78

JPY10.179725

82

 

** **

**132**

 

 201

 

 236

 

** **

** **

 

 

 

 

**10% Cumulative Convertible  Preferred Stock**

** **

** **

 

 

 

 

Series CC

**Php1.00**

**17**

Php1.00

17

Php1.00

17

Series DD

**1.00**

**3**

1.00

3

1.00

2

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

**1.00**

**128**

1.00

129

1.00

130

Series B, F, Q, V and Z

**1.00**

**90**

1.00

91

1.00

91

Series E, K, O and U

**1.00**

**45**

1.00

44

1.00

45

Series C, D, J, T and X

**1.00**

**58**

1.00

58

1.00

58

Series G, N, P and S

**1.00**

**26**

1.00

27

1.00

27

Series H, L, M and Y

**1.00**

**40**

1.00

40

1.00

40

 

** **

**407**

 

 409

 

 410

 

** **

** **

 

 

 

 

**Convertible Preferred Stock**

** **

** **

 

 

 

 

Series III

**–**

**–**

US$1.029412

968

US$1.029412

1,070

 

** **

** **

 

 

 

 

**Cumulative Non-Convertible Redeemable Preferred Stock**

** **

** **

 

 

 

 

Series IV*

** **

**49**

 

49

 

48

 

** **

** **

 

 

 

 

**Common Stock**

**Php50.00**

**9,379**

Php14.00

2,384

Php–

–

 

**28.00**

**5,080**

21.00

3,598

–

–

 

**–**

**–**

21.00

3,642

–

–

 

** **

**14,459**

 

9,624

 

–

Charged to retained earnings

** **

**15,047**

 

11,251

 

1,764

 

****Dividends are declared based on total amount paid up.*

** **

**Dividends Declared AfterDecember 31, 2006**

** **

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**

 

 

 

 

 

(in million pesos)

**Preferred Stock Subject to Mandatory Redemption**

 

 

 

 

 

Series V

March 6, 2007

March 20, 2007

April 15, 2007

Php4.675

–

 

June 12, 2007

June 28, 2007

July 15, 2007

Php4.675

–

Series VI

March 6, 2007

March 20, 2007

April 15, 2007

US$0.09925

4

** **

June 12, 2007

June 28, 2007

July 15, 2007

US$0.09925

3

** **

 

 

 

 

   7

** **

 

 

 

 

 

**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

Series EE

March 27, 2007

April 26, 2007

May 31, 2007

1.00

–

 

 

 

 

 

  19

**Cumulative Non-Convertible Redeemable Preferred Stock**

 

 

 

 

 

Series IV*

January 30, 2007

February 23, 2007

March 15, 2007

–

12

 

May 8, 2007

May 25, 2007

June 15, 2007

–

12

** **

 

 

 

 

  24

 

 

 

 

 

 

**Common Stock**

March 6, 2007

March 20, 2007

April 20, 2007

Php50.00

9,428

** **

** **

** **

** **

** **

**9,478**

 

****Dividends are declared based on total amount paid up.*

** **

** **

 

21.    Contractual Obligations and CommercialCommitments

** **

***Contractual Obligations***

** **

Thefollowing table discloses the PLDT Group’s contractual obligations outstandingas at December 31, 2006: 

** **

 

** **

**Long-term lease obligations**

**Unconditional purchase**

**Other long-term**

** **

**Year**

**Long-term debt**

**Operating**

**Capital**

**obligations****(1)**

**obligations**

**Total**

 

(in million pesos)

2007

16,316

572

1,521

4,972

–

23,381

2008

7,759

593

38

981

1,629

11,000

2009

14,978

564

10

981

–

16,533

2010

4,834

465

1

981

–

6,281

2011

1,279

358

–

981

–

2,618

2012 and onwards

40,692

868

–

1,962

–

43,522

**Total**

**85,858**

**3,420**

**1,570**

**10,858**

**1,629**

**103,335**

 

*(1)**Based on the Original Air Time Purchase Agreementwith AIL*

* *

 

*Long-term Debt Obligations*

 

For a discussion of our long-term debt obligations*,*see*Note 12 – Interest-bearing Financial Liabilities.*

 

*Long-term Operating Lease Obligations*

 

*Digital Passage Service Contracts.*   PLDT has existing Digital Passage Service Contractswith foreign telecommunication administrations for several dedicated circuitsto various destinations for ten to 25 years expiring at various dates.  As atDecember 31, 2006, PLDT’s aggregate remaining obligation under these contractsamounted to approximately Php6 million.

 

*LicenseAgreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius.*PLDT entered into a license agreement with Mobiuspursuant to which Mobius has granted PLDT a non-exclusive, non-assignable andnon-transferable license for the use of computer software components.  Underthis agreement, Mobius is also required to provide maintenance services for aperiod of one year at no additional maintenance charge.  PLDT may purchasemaintenance services upon expiration of the first year for a fee of 15% of thecurrent published license fee.  As at December 31, 2006, PLDT’s aggregateremaining obligation under this agreement was approximately Php10 million.

 

*Other Long-term Operating Lease Obligations*.   The PLDT Group has various long-term leasecontracts for periods ranging from two to ten years covering certain offices,warehouses, cell sites telecommunication equipment locations and various officeequipment.  In particular, Smart has lease obligations amounting to Php3,053million as at December 31, 2006 in respect of office and cell site rentals withover 3,000 lessors nationwide, PLDT has lease obligations amounting to Php100million as at December 31, 2006 in respect of office and lot rentals with over185 lessors nationwide, ePLDT has lease obligations amounting to Php238 millionas at December 31, 2006 in respect of certain office space rentals and PLDTGlobal has lease obligations amounting to Php13 million as at December 31, 2006in respect of certain office space rentals.

 

*Long-termCapital Lease Obligations*

 

For adiscussion of our long-term capital lease obligations, see *Note 12 –Interest-bearing Financial Liabilities*.

 

*Unconditional Purchase Obligations*

 

*Air Time Purchase Agreement with AIL.*See *Note 16 – Related Party Transactions*, for adiscussion of PLDT’s obligations under the Original ATPA and the Amended ATPA.

 

Asat December 31, 2006, PLDT’s aggregate remaining minimum obligation under the OriginalATPA was approximately Php10,858 million.

 

*Other Long-term Obligations*

 

*MandatoryConversion and Purchase of Shares*.As discussed in *Note 14 – Preferred Stock Subject to Mandatory Redemption*,PLDT had issued a total of 3 million shares of Series V Convertible PreferredStock, 5 million shares of Series VI Convertible Preferred Stock and 4 millionshares of Series VII Convertible Preferred Stock in exchange for a total of 58million shares of Series K Class I Convertible Preferred Stock of Piltel,pursuant to the debt restructuring plan of Piltel adopted in June 2001.  As atDecember 31, 2006, 2,675,393 shares of Series V Convertible Preferred Stock,4,419,916 shares of Series VI Convertible Preferred Stock and all of the3,842,000 shares of the then outstanding Series VII Convertible Preferred Stockhad been voluntarily converted to PLDT common shares.  As at December 31, 2006,46,047 shares of Series V and 875,188 shares of Series VI Convertible PreferredStocks remained outstanding.

 

Eachshare of Series V and VI Convertible Preferred Stock is convertible at any timeat 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, the remaining outstanding sharesunder these series will be mandatorily converted to PLDT common shares.  Undera put option exercisable for 30 days, holders of common shares received onmandatory conversion of the Series V and VI Convertible Preferred Stocks willbe able to require PLDT to purchase such PLDT common shares for Php1,700 pershare and US$36.132 per share, respectively.  

 

The aggregate value of the put option based onoutstanding shares as at December 31, 2006 was Php1,629 million which isputtable on June 4, 2008, if all of the outstanding shares of Series V and VIConvertible Preferred Stocks were mandatorily converted and all the commonshares were put to PLDT at that time.  The market value of the underlyingshares of common stock was Php2,349 million, based on the market price of PLDTcommon shares of Php2,550.00 per share as at December 31, 2006.

 

***Commercial Commitments***

 

As at December 31, 2006, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php1,546 million.These commitments will expire within one year.

 

 

 

**22.    Provisions andContingencies**

 

As discussed below, we currently expect that goingforward, we will pay local franchise taxes on an annual basis and based on thegross receipts received or collected for services rendered within thejurisdiction of the respective taxing authority.  For this reason, we have madethe appropriate provisions in our consolidated financial statements as atDecember 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, since 1994, PLDT has paid a total amountof Php2,219 million in SRF, of which Php1,956 million was paid under protest.

 

PLDT is contesting the manner by which theseassessments were calculated and the basis for such calculations.  The case isnow with the Supreme Court and, upon the rules and practice of court, standssubmitted 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 Local Government Code of 1991, orRepublic Act (R.A.) 7160, which took effect on January 1, 1992, extended tolocal government units, or LGUs, the power to tax businesses within theirterritorial jurisdiction granted under Batas Pambansa 337, and withdrew taxexemptions previously granted to franchise grantees under Section 12 of R.A.7082. 

 

PLDT believes, based on the opinion of its legalcounsel, that R.A. 7925, which took effect on March 16, 1995, and the grant oflocal franchise and business taxes exemption privileges to other franchiseholders subsequent to the effectivity of R.A. 7160, implicitly restored itslocal franchise and business taxes exemption privilege under Section 12 of R.A.7082, or the PLDT Franchise pursuant to Section 23 thereof or the equality oftreatment clause. 

 

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

 

By virtue of the BLGF Ruling, PLDT stopped payinglocal franchise and business taxes starting with the fourth quarter of 1998 andhas filed with certain LGUs claims for tax refund covering the period from thesecond quarter of 1995 to the third quarter of 1998.  PLDT has receivedassessments for local franchise and business taxes from several cities andprovinces following PLDT’s decision to stop payment of local franchise andbusiness taxes.  

 

Following a decision of the Supreme Court on March 25,2003, a judgment in the amount of Php4 million against PLDT involving the Cityof Davao became final and executory on April 9, 2003, pursuant to which PLDTwas declared not exempt from the local franchise tax.  Pursuant to saiddecision, PLDT has voluntarily paid the total amount of Php15 million for theperiod from the fourth quarter of 1998 until December 31, 2003, which includesthe Php4 million subject of the case.

 

PLDT had no longer contested assessments of LGUs forfranchise taxes as at December 31, 2006.  However, PLDT continues to contestthe validity of the assessment of penalties and surcharges of Php1.3 millionand Php2.3 million, by the City of Ozamiz and the Province of Bulacan,respectively, for the years 1998 to 2002 when PLDT refrained from payment of localfranchise taxes upon its reliance in good faith on the BLGF Ruling that it isexempt from local franchise tax.  PLDT is also contesting the validity of theassessment of local franchise tax of Php2.8 million by the Province of Cagayan on the gross receipts received or collected by PLDT in Tuguegarao City wherein franchise tax was already paid to the latter.

 

PLDT likewise continues to contest the imposition oflocal business taxes in addition to local franchise tax by the Cities ofTuguegarao, Balanga and Caloocan in the amounts of Php1.9 million, Php0.2million and Php6.2 million, respectively, for the years 1998 to 2003 for theCity of Tuguegarao, and for the years 2005 to 2007 for the Cities of Balangaand Caloocan.  PLDT is likewise contesting the imposition of a business tax onthe transmission of messages by the Municipality of San Pedro in the amount ofPhp0.3 million for the years 2005 to 2007.

 

PLDT currently expects that going forward it will paylocal franchise and business taxes on an annual basis and based on the grossreceipts received or collected for services rendered within the jurisdiction ofthe respective taxing authority.

 

Smart has paid local business andfranchise taxes to certain cities and provinces in the aggregate amount ofPhp313 million under protest.  Smart’s legal position is that it is not liableto pay the local franchise tax by virtue of Smart’s exemption under itslegislative franchise under R.A. 7294, which took effect after the effectivedate of the Local Government Code of 1991, or R.A. 7160.

 

The Regional Trial Court, or RTC, of Makati has declared Smart exempt from payment of local franchise tax to the City of Makati in a decision rendered in the case entitled *Smart Communications, Inc. vs. Cityof Makati*(Civil Cases No. 02-249 and 02-725, August 3, 2004).  The City of Makati has filed a Motion for Extension to file a Petition for Review withthe Court of Appeals.  However, on June 9, 2005, the Court of Appeals dismissedthe appeal filed by the City of Makati.

 

The RTC of Iloilo has likewise ruled in adecision dated January 19, 2005 that Smart is exempt from payment of localfranchise tax to the City of Iloilo.  The City of Iloilo has filed an appealdirectly with the Supreme Court, which remains pending.

 

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

 

Piltel has received the following assessment noticesfrom the BIR:

 

**Year**

**Tax Assessment Type**

**Basic**

**Interest**

**Total**

 

 

(in million pesos)

1998

Value Added Tax, or VAT

85.8

68.7

 154.5

 

Overseas Communications Tax, or OCT

31.8

25.5

  57.3

 

Income Tax

12.4

9.4

  21.8

 

Administrative Penalties

0.1

–

   0.1

 

 

 

 

 

1999

VAT

94.5

67.8

 162.3

 

Income Tax

22.7

13.8

  36.5

 

 

 

 

 

2001

VAT

56.2

35.1

  91.3

 

Income Tax

13.4

8.9

  22.3

 

On December 12, 2005, Piltel filed a collectiveapplication for a compromise settlement with the BIR for the deficiency taxassessments arising from taxable years 1998, 1999 and 2001, citing “reasonabledoubt as to the validity of the tax assessments” as a basis.  The prescribedminimum percentage of the compromise settlement for such basis is 40% of thebasic assessed tax.

 

On January 27, 2006, Piltel received the favorablerecommendation and approval from the BIR on the said application for acompromise settlement.  On January 31, 2006, Piltel settled the total amount ofPhp114 million, which is equivalent to 40% of the basic taxes per finalassessment notices received, to effect the immediate cancellation of the taxassessments.  On February 24, 2006, the BIR accepted Piltel’s application for acompromise settlement of income taxes and VAT for the years 1998, 1999 and2001, 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 themselvesof the program and are qualified the privilege of the last priority in BIRaudit and investigation.  The EVAP applies to all internal revenue taxes coveringthe taxable year ending December 31, 2004 and all prior years, includingone-time taxes 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 likewise applies to taxpayers enjoying preferentialtax treatment.  A taxpayer who has availed himself of the EVAP and is qualifiedto avail himself will not be audited except upon prior authorization andapproval of the Commissioner of Internal Revenue when there is strong evidenceor a finding of understatement in the payment of a taxpayer’s correct taxliability by more than 30%, as supported by a written report of the appropriateoffice stating in detail the facts and the law on which such finding is based.However, any EVAP payment should be allowed as tax credit against deficiencytax due, if any, in case the concerned taxpayer has been subjected to a taxaudit. 

 

PLDTavailed itself of the program and paid a total of Php6 million for VAT and incometax for taxable year 2004, and VAT and withholding tax for taxable year 2002.

 

Maratel availed itself of the EVAP for income tax forthe taxable year 2004, SubicTel availed itself the program for its income tax,withholding tax and percentage tax for taxable year 2002 and ClarkTel availed itselfof the program for its income tax for both taxable years 2003 and 2004.  Thetotal payment of Maratel, SubicTel and ClarkTel amounted to Php800,000.Smart’s EVAP availment, for which Php53 million was paid, covered the incometax for the taxable years 2003 and 2004, the VAT for the taxable year 2002, theOCT for the year 2002, and the withholding taxes for the taxable years 2002,2003 and 2004.  Meanwhile, Piltel’s EVAP availment, which involved payment ofPhp3 million, covered its income tax for the taxable year 2003 and its expandedwithholding tax for the taxable years 2003 and 2004.  On August 2, 2006, Smartreceived its Certificate of Qualification, or CQ, for the EVAP availment forincome tax, VAT, OCT and withholding 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 for their respective 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 availedthemselves of the program and are qualified the privilege of the last priorityin BIR audit 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-time taxessuch as estate tax, donor’s tax, capital gains tax, expanded withholding taxand documentary stamp tax on the transfer, sale, exchange, or disposition ofassets, and likewise applies to taxpayers enjoying preferential tax treatment.Unlike under the EVAP, however, under the IVAP, taxpayers who avail themselvesof the same will no longer be subject to tax audit except in the case of fraudmanifested through understatement of the correct tax liability by more than30%.

 

Smart availed itself of the IVAP for its income taxand VAT for the taxable year 2005 and paid a total amount of Php40 million tothe BIR.  Maratel availed itself of the IVAP for the taxable years 2004 and2005 for its income, VAT, percentage and withholding taxes, while SubicTelavailed itself of the program for the taxable year 2004 for its income andvalue added taxes only and for the taxable year 2005 for its income, VAT andwithholding taxes.  ClarkTel availed itself of the IVAP for the taxable years2003, 2004, 2005 for income and withholding taxes, except for income taxes for taxableyears 2003 and 2004, for which an EVAP CQ covering these taxable periods wasalready issued.  The total collective IVAP payments for Maratel, SubicTel andClarkTel amounted to Php12 million.

 

*Air Time Purchase Agreement with AIL*

 

See *Note 16 – Related PartyTransactions*and *Note 21 – Contractual Obligations and CommercialCommitments* for a discussion of PLDT’s obligations under the Original ATPAand the Amended ATPA.

 

 

 

**23.    Financial Assets andLiabilities**

 

Our financial assets and liabilities are recognizedinitially at fair value.  Transaction costs (debt issuance costs) are includedin the initial measurement of all financial assets and liabilities except thoseclassified as financial instruments measured at fair value through profit andloss.  Subsequent to initial recognition, assets and liabilities are eithervalued at amortized cost using the effective interest rate method or at fairvalue depending on classification.

 

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 atDecember 31, 2006 and 2005.

 

** **

**Carrying Value**

**Fair Value**

 

**2006**

2005

**2006**

2005

 

(in million pesos)

**Current Financial Assets**

** **

 

 

 

Cash and cash equivalents

**16,870**

30,059

**16,870**

30,059

Short-term investments

**8,327**

2,750

**8,327**

2,750

Trade and other receivables

**10,158**

7,856

**10,158**

7,856

Derivative assets

**47**

37

**47**

37

Total current financial assets

**35,402**

40,702

**35,402**

40,702

**Noncurrent Financial Assets**

** **

 

** **

 

Investments - available-for-sale(1)

**116**

109

**116**

109

Derivative assets

**434**

2,648

**434**

2,648

Total noncurrent financial assets

**550**

2,757

**550**

2,757

**Total Financial Assets**

**35,952**

43,459

**35,952**

43,459

** **

** **

 

** **

 

**Current Financial Liabilities**

** **

 

** **

 

Accounts payable

**8,347**

15,966

**8,347**

15,966

Current portion of long-term debt(2)

**16,316**

18,797

**16,971**

19,435

Obligations under capital lease(2)

**924**

753

**924**

753

Notes payable(2)

**201**

–

**201**

–

Derivative liabilities

**108**

192

**108**

192

Dividends payable

**777**

746

**777**

746

Total current financial liabilities

**26,673**

36,454

**27,328**

37,092

**Noncurrent Financial Liabilities**

** **

 

** **

 

Long-term debt – net of current portion(2)

**69,542**

93,516

**69,028**

92,811

Obligations under capital lease(2)

**106**

344

**106**

344

Derivative liabilities

**6,872**

5,777

**6,872**

5,777

Preferred stock subject to mandatory redemption

**1,374**

12,004

**1,528**

14,053

Total noncurrent financial liabilities

**77,894**

111,641

**77,534**

112,985

**Total Financial Liabilities**

**104,567**

148,095

**104,862**

150,077

 

*(1)**Pertains to investments in club shares.*

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

 

The following methods and assumptionswere used to estimate the fair value of each class of financial instrument forwhich it is practicable to estimate such value:

 

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.

 

Derivativeinstruments:

 

*Forwardforeign exchange contracts and bifurcated foreign currency forwards:* The fair values were determined using forward exchangemarket rates at the balance sheet date.

 

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

 

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

 

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

 

Due to the short-term nature of the transactions, thefair value of cash and cash equivalents, short-term investments, trade andother receivables, notes payable and accounts payable approximate the carryingamounts as of the balance sheet date.

* *

*Derivative Financial Instruments*

* *

Our derivative financialinstruments are accounted for under non-hedge accounting.  Changes in the fairvalue of these instruments are recognized directly to income for the period.

* *

The table below sets out theinformation about our derivative financial instruments as at December 31, 2006and 2005:

* *

** **

**2006**

2005

 

** **

 

**Maturity**

**Notional**

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

Notional

Mark-to-market Gain (Loss)

 

 

(in millions)

***PLDT***

** **

** **

 

 

 

** **

** **

 

 

Long-term currency swaps

** **

** **

 

 

 

2017

**US$300**

**(Php2,716)**

US$300

Php417

 

2012

**250**

**(2,475)**

250

(428)

 

** **

** **

 

 

Long-term foreign currency bought call options

2009

**167**

**(747)**

175

301

 

 

** **

** **

 

 

Long-term foreign currency sold call options

2009

**167**(1)

**138**

175(1)

(270)

 

** **

** **

 

 

Short-term currency sold call 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***

 

** **

 

* *

 

** **

** **

 

 

Bifurcated embedded derivatives

2007

**US$15**

**44**

US$9

26

Net liabilities

** **

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

 

(Php3,284)

 

*(1)**Soldcall options of 2009 long-term foreign currency options based on the samenotional amount as the long-term foreign currency bought call option.*

* *

 

**2006**

2005

 

(in million pesos)

Presented as:

** **

 

Current assets

**47**

37

Noncurrent assets

**434**

2,648

Current liabilities

**(108)**

(192)

Noncurrent liabilities

**(6,872)**

(5,777)

Net liabilities

**(6,499)**

(3,284)

 

Analysis of loss on derivativetransactions for the years ended December 31, 2006, 2005 and 2004 are asfollows:

* *

 

**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)

Settlements, accretion and conversion

**(3,642)**

(1,470)

(116)

Net loss on derivative transactions

**(6,857)**

(1,801)

(864)

* *

***PLDT***

* *

*Long-termCurrency Swaps*

* *

PLDT entered into long-term principal only currencyswap agreements with various foreign counterparties to hedge the currency riskon its fixed rate notes maturing in 2009, 2012 and 2017.  As at December 31,2006 and 2005, these long-term currency swaps have an aggregate notional amountof US$550 million.  Under the swaps, PLDT effectively exchanges the principalof its U.S. dollar-denominated fixed rate notes into Philippinepeso-denominated loan exposures at agreed swap exchange rates.  The agreed swapexchange rates are reset to the lowest U.S. dollar/Philippine peso spotexchange rate during the term of the swaps, subject to a minimum exchangerate.  In March and April 2004, PLDT entered into amendments to keep the lowestreset exchange rate and unwind the downward resettable feature of its long-termprincipal only currency swap agreements in order to lower the running hedgingcost of the swaps.  As at December 31, 2006 and 2005, the outstanding swapcontracts have an agreed average swap exchange rate of Php50.76.

 

Inorder to manage hedge costs, these swaps included a credit-linkage feature withPLDT as the reference entity.  The specified credit events include bankruptcy,failure to pay, obligation acceleration, moratorium/repudiation, andrestructuring of PLDT bonds or all or substantially all of PLDT’s obligations.Upon the occurrence of any of these credit events, subject to agreed thresholdamounts where applicable, the obligations to both PLDT and its counterpartyunder the swap contracts terminate without further settlements to either party,including any mark-to-market value of the swaps.  As at December 31, 2006 and2005, US$717 million and US$725 million, respectively, of PLDT’s long-term currencyswaps/options have been structured to include credit-linkage with PLDT as thereference entity.  The semi-annual fixed or floating swap cost payments thatPLDT is required to make to its counterparties averaged about 5.18% and 4.50%per annum as at December 31, 2006 and 2005, respectively.

 

*Long-termForeign Currency Bought Call Options*

 

Tomanage hedging costs, the currency swap agreement relating to the 2009 fixedrate notes has been structured to include currency option contracts.  If thePhilippine peso to U.S. dollar spot exchange rate on maturity date settlesbeyond Php90.00 to US$1.00, PLDT will have to purchase U.S. dollar at anexchange rate of Php52.50 to US$1.00 plus the excess of the spot exchange rateon maturity date against the agreed threshold rate.  On the other hand, if onmaturity, the Philippine peso to US$1.00 spot exchange rate is lower than theexchange rate of Php52.50 to US$1.00, PLDT will have the option to purchase atthe prevailing Philippine peso to U.S. dollar spot exchange rate.  In July2004, PLDT and its counterparty agreed to re-document and re-classify thetransaction into long-term currency option contracts.  The net semi-annualfloating hedge cost payments that PLDT is required to pay under thesetransactions was approximately 6.17% and 5.68% per annum as at December 31,2006 and 2005, respectively.

 

Theoption currency contract relating to PLDT’s option to purchase U.S. dollar atPhp52.50 to US$1.00 or the prevailing spot rate at maturity, whichever islower, is entered into in tandem with an option currency contract relating tothe counterparty’s option to purchase foreign currency from PLDT at Php90.00 toUS$1.00.  See discussion below under – *Long-term Foreign Currency Sold CallOptions*.

 

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.

 

*Long-termForeign Currency Sold Call Options*

 

With reference to theabove-mentioned hedge on the PLDT’s 2009 fixed rate notes, PLDT simultaneouslysold a currency option contract with the same notional amount of US$175 millionwith the same maturity that gives the counterparty a right to purchase foreigncurrency at Php90.00 to US$1.00.  Together with the bought call long-termcurrency option contract, PLDT has the obligation to purchase U.S. dollars atan exchange rate of Php52.50 to US$1.00 plus the excess of the spot exchangerate on maturity date against the agreed threshold rate.  In exchange for thiscondition, the overall net hedging cost for the transaction is reduced.  InDecember 2006, the currency swap agreements were partially terminated, whichlowered the notional amount to US$167 million.  Since charges in fair valuehave already been recognized as profit and loss in prior periods, thecorresponding proceeds from the partial termination of the currency optioncontract amounted to Php7 million.

 

*Short-termForeign Currency Sold Call Options*

 

PLDTentered into short-term U.S. dollar subsidized forward contracts to partiallyhedge PLDT’s fixed rate notes due June 2006.  In order to reduce overall nethedging cost for the transactions, these forward contracts have been structuredto include the sale of currency call option contracts that give thecounterparty the right to purchase foreign currency at an agreed exchangerate.  PLDT effectively has the obligation to buy U.S. dollars at a subsidizedforward rate plus any excess above the agreed threshold rate should thePhilippine peso to U.S. dollars spot exchange rate on the maturity date settlebeyond that agreed threshold.  PLDT’s subsidized forward contracts amounting toUS$62 million matured on June 29, 2006.  As at December 31, 2006, there were nooutstanding subsidized forward contracts.

* *

PLDT also entered into short-termU.S. dollar subsidized and accumulating forwards and Japanese yen currencyoption contracts to hedge other short-term foreign currency obligations.  As atDecember 31, 2006, the outstanding U.S. dollar currency option contractsamounted to US$8 million with an average exchange rate of US$50.40.  PLDT’s Japanese yen currency optioncontracts amounting to JPY5,410 million matured on September 21, 2006.  As atDecember 31, 2006, there are no outstanding Japanese yen currency optioncontracts.

* *

*InterestRate Swap*

 

A portion of PLDT’s currency swap agreements to hedgeits 2017 fixed rate notes carry fixed rate swap cost payments.  To effectivelylower the running cost of such swap agreements, PLDT, in April 2003, enteredinto an agreement to swap the coupon on US$125 million of its 2012 fixed ratenotes into a floating rate Japanese yen amount.  Under this agreement, PLDT isentitled to receive a fixed coupon rate of 11.375%, provided the Japanese yento U.S. dollar exchange rate stays above JP¥99.90 to US$1.00.  Below thislevel, a reduced fixed coupon rate of 3% will be due to PLDT.  In order tomitigate the risk of the Japanese yen strengthening below the agreed threshold,PLDT, in December 2003, entered into an overlay swap transaction to effectivelylower the portion of the coupon indexed to the U.S. dollar to Japanese yen rateto 3% such that the fixed coupon rate due to PLDT when the Japanese yenstrengthens below the agreed threshold will be 8.375%.  Both swap agreementsinclude a credit-linkage feature with PLDT as the reference entity.

 

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

 

*Forward Foreign Exchange Contracts*

 

PLDT entered into short-term U.S. dollar and Japaneseyen forward foreign exchange contracts to hedge short-term foreign currencyobligations.  As at December 31, 2006, outstanding forward foreign exchangecontracts amounted to US$202 million with an average exchange rate of Php49.50.There were no outstanding JPY forward foreign exchange contracts as atDecember 31, 2006.

 

*Bifurcated Embedded Derivatives*

 

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

 

*BifurcatedEquity Call Options*

 

Pursuantto Piltel’s debt restructuring plan, PLDT issued its Series VI and VIIConvertible Preferred Stock, see *Note 12 – 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 eighth anniversaryof the issue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted into sharesof PLDT common stock.  For 30 days thereafter, the holders of these mandatorilyconverted shares of common stock have the option to sell such shares of commonstock back to PLDT for US$36.132 per share and JPY4,071.89 per share forSeries VI and VII, respectively.  On August 18, 2006, all 3,842,000 shares ofSeries VII shares were converted to PLDT common stock.  As at December 31, 2006and 2005, the negative fair market value of these embedded call optionsamounted to Php224 million and Php1,597 million, respectively.

 

***Smart***

 

Smart’s other embedded derivatives were bifurcatedfrom service and purchase contracts.  As at December 31, 2006 and 2005,outstanding contracts included service contract with foreign equipmentsuppliers and various suppliers covering handset importations denominated inU.S. dollars, which is not the functional currency of a substantial party tothe contract or the routine currency of the transaction.

 

**Financial Risk ManagementObjectives and Policies**

 

The main purpose of our financialinstruments is to fund our operations.  We also enter into derivativetransactions, the purpose of which is to manage the currency risks and interestrate risks arising from our operations and our sources of financing.  It is,and has been throughout the year under review, our policy that no trading infinancial instruments shall be undertaken.

* *

The main risks arising from ourfinancial instruments are liquidity risk, foreign exchange risk, interest raterisk and credit risk.  Our board of directors reviews and approves policies formanaging each of these risks. Our policies for managing these risks aresummarized below.  We also monitor the market price risk arising from allfinancial instruments.  Our accounting policies in relation to derivatives areset out in *Note 3 – Summary of Significant Accounting Policies and Practices*.

 

***Liquidity Risk***

 

We seek to manage our liquidity profileto be able to finance our capital expenditures and service our maturing debts.To cover our financing requirements, we currently intend to use internallygenerated funds and proceeds from debt and equity issues and sales of certainassets. 

* *

As part of our liquidity risk managementprogram, we regularly evaluate our projected and actual cash flow informationand continuously assess conditions in the financial markets for opportunitiesto pursue fund-raising initiatives.  These initiatives may include bank loans,export credit agency-guaranteed facilities, and debt capital and equity marketissues.

 

***Foreign Exchange Risk***

 

Thefollowing table shows our consolidated foreign currency-denominated monetaryassets and liabilities and their peso equivalents as at December 31, 2006 and2005:

 

** **

2006

2005

** **

**U.S. Dollar**

**Php Equivalent****(1)**

U.S. Dollar

Php Equivalent(2)

 

(in millions)

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**US$154**

**Php7,577**

US$244

Php12,957

Short-term investments

**92**

**4,521**

55

2,934

Trade and other receivables

**252**

**12,348**

139

7,371

Derivative assets

**1**

**47**

1

37

Total current financial assets

**499**

**24,493**

 439

23,299

**Noncurrent Financial Assets**

** **

** **

 

 

Derivative assets

**9**

**434**

50

2,648

Notes receivable

**–**

**–**

6

346

Total noncurrent financial assets

**9**

**434**

  56

2,994

**Total Financial Assets**

**US$****508**

**Php24,927**

US$495

Php26,293

** **

** **

** **

** **

 

 

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**US$122**

**Php5,968**

US$42

Php2,227

Accrued expenses and other current liabilities

**208**

**10,194**

68

3,587

Derivative liabilities

**2**

**108**

3

192

Current portion of interest-bearing financial liabilities

**327**

**16,027**

337

17,867

Total current financial liabilities

**659**

**32,297**

 450

23,873

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities - net of current portion

**1,356**

**66,510**

1,738

92,218

Derivative liabilities

**140**

**6,872**

109

5,777

Preferred stock subject to mandatory redemption

**27**

**1,308**

221

11,702

Total noncurrent financial liabilities

**1,523**

**74,690**

2,068

109,697

**Total Financial Liabilities**

**US$****2,182**

**Php106,987**

US$2,518

Php133,570 

* *

*(1)**The exchange rate used was Php**49.045**toUS$1.00.*

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

 

In translating the foreign currency-denominatedmonetary assets and liabilities into peso amounts, the exchange rates used werePhp49.045 to US$1.00 and Php53.062 to US$1.00, the Philippine peso-U.S. dollarexchange rates as at December 31, 2006 and 2005, respectively.

 

As at June 26, 2007, the peso-dollarexchange rate was Php46.222 to US$1.00.  Using this exchange rate, ourconsolidated net foreign currency-denominated liabilities as at December 31,2006 would have decreased by Php4,726 million.

 

While a certain percentage of ourrevenues is either linked to or denominated in U.S. dollars, substantially allof our indebtedness and related interest expense, a substantial portion of ourcapital expenditures and a portion of our operating expenses are denominated inforeign 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, astrengthening or weakening of the Philippine peso against the U.S. dollar willdecrease or increase, respectively, both the principal amount of our unhedgedforeign currency-denominated debts (representing 43% of our consolidated debts,or 31% net of our U.S. dollar cash balances as at December 31, 2006), andinterest expense on our debt in Philippine peso terms.  In addition, many ofour financial ratios and other financial tests are affected by the movements inthe Philippine peso to U.S. dollar exchange rate.  For furtherinformation on our loan covenants, see *Note 12 – Interest-bearing FinancialLiabilities*.

 

To manage our foreign exchange risks,stabilize cash flows, and improve investment and cash flow planning, we enterinto forward foreign exchange contracts, foreign currency swap contracts,currency option contracts and other hedging products aimed at reducing and/ormanaging the adverse impact of changes in foreign exchange rates on ouroperating results and cash flows.  However, these hedges do not cover all of ourexposure 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 thesefinancial instruments are recognized as accumulated other comprehensive income(loss) in equity until the hedged item is recognized directly as income orexpense for the period.

 

Asat December 31, 2006, PLDT’s outstanding forward foreign exchange contracts,principal-only long-term cross-currency swap contracts, and currency optioncontracts amounted to US$202 million, US$550 million, and US$174 million,respectively.  Smart had no outstanding forward foreign exchange contracts asat December 31, 2006.

 

***Interest Rate Risk***

 

On a limited basis, we enter intointerest rate swap agreements in order to manage our exposure to interest ratefluctuations.  We make use of hedging instruments and structures solely forreducing or managing financial risks associated with our liabilities and notfor trading or speculative purposes.

 

Fixed rate financial instruments aresubject to fair value interest rate risk while floating rate financialinstruments are subject to cash flow interest rate risk.  

 

Repricing of floating rate financialinstruments is mostly done on intervals of three months or six months.Interest on fixed rate financial instruments is fixed until maturity of theparticular instrument.

 

***Credit Risk***

 

We trade only withrecognized and creditworthy third parties.  It is our policy that all customerswho wish to trade on credit terms are subject to credit verificationprocedures.  In addition, receivable balances are monitored on an ongoing basisto reduce our exposure to bad debts.

 

With respect to credit risk arising from ourfinancial assets, which comprise cash and cash equivalents, trade and otherreceivables, notes receivable and certain derivative financial instruments, ourexposure to credit risk arises from default of the counterparty, with a maximumexposure equal to the carrying amount of these financial instruments.

 

We have no significant concentrations of creditrisk.

 

 

 

24.    Reportable Segments 

 

Operating segments are components of PLDT that engagein business activities from which they may earn revenues and incur expenses(including revenues and expenses relating to transactions with other componentsof PLDT), whose operating results are regularly reviewed by the enterprise’schief operating decision-maker to make decisions about how resources are to beallocated to the segment and assess their performances, and for which discretefinancial information is available.  The accounting policies of the reportablesegments are the same as those described in *Note 3 – Summary of Significant Accounting Policies and Practices*.

 

We have organized our business into three mainsegments:

 

•        Wireless — wireless telecommunications services provided through (a) our cellularservice providers namely, Smart and Piltel, Smart Broadband, our wirelessbroadband provider, and Wolfpac, our wireless content operator and (b) our satelliteand VSAT operators, namely PLDT’s subsidiaries Mabuhay Satellite, ACeSPhilippines and Telesat;

 

•        Fixed Line — fixed line telecommunications services are primarily provided throughPLDT.  We also provide fixed line services through PLDT’s subsidiariesClarkTel, SubicTel, Maratel, Piltel, BCC and PLDT Global, which togetheraccount for approximately 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 since 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 8 – Investments*.

 

Transfer prices between business segments are set on anarm’s-length basis in a manner similar to transactions with third parties.Segment revenue, segment expense and segment result include transfers betweenbusiness segments.  These transfers are eliminated in consolidation.

 

Theresults of the reportable segments are derived directly from the PLDT Group’smanagement reportingsystem. The results are based on the PLDT Group’s method of internalreporting.  The segment assets andresults of operations of our reportable segments as at and for the years endedDecember 31, 2006, 2005 and 2004 reported under U.S. GAAP are as follows:

 

 

**Wireless**

**Fixed Line**

**Information and Communications Technology**

**Inter-segment Transactions**

**Total**

 

(in million pesos)

* *

* *

 

 

 

 

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

* *

 

 

 

**Revenues**

 

 

 

 

 

Service

78,383

49,203

6,337

(8,919)

125,004

Non-service

2,022

79

553

(122)

2,532

Segment revenues

80,405

49,282

6,890

(9,041)

127,536

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income (loss)

38,134

10,196

(252)

101

48,179

Income (loss) before income (loss) tax, cumulative effect of change in accounting policy and minority interest in net loss (income) of consolidated subsidiaries

42,782

1,366

 

 

(320)

–

43,828

Benefit from (provision for) income tax

(8,729)

(351)

34

–

(9,046)

Net income (loss) for the year before cumulative effect of changes in accounting policy and minority interest in net loss of consolidated subsidiaries

34,053

1,015

(286)

–

34,782

** **

 

 

 

 

 

Assets

 

 

 

 

 

Segment assets

87,873

193,012

17,148

(59,586)

238,447

Deferred income tax assets

7,349

18,340

59

–

25,748

Total assets

95,222

211,352

17,207

(59,586)

264,195

 

 

 

 

 

 

Investments – at equity

–

–

636

–

 636

Goodwill

16,446

426

8,141

–

25,013

** **

 

** **

** **

** **

** **

Other segment information 

 

** **

** **

** **

** **

Capital expenditures

10,491

8,723

1,134

–

20,348

Depreciation and amortization

9,743

17,676

711

–

28,130

Provision for doubtful accounts

627

45

64

–

 736

Provision for inventory obsolescence

202

9

–

–

 211

Asset impairment

1,391

–

408

–

1,799

MRP

29

413

3

–

 445

Interest on loans and related items – net of capitalized interest

468

5,953

21

–

6,442

Interest income

965

441

16

–

1,422

* *

 

* *

* *

* *

* *

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

* *

* *

**Revenues**

 

 

 

 

 

Service

74,195

49,431

2,953

(6,231)

120,348

Non-service

2,711

41

352

(117)

2,987

Segment revenues

76,906

49,472

3,305

(6,348)

123,335

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income

37,470

10,483

52

509

48,514

Income before income tax, cumulative effect of change in accounting policy and minority interest in net income of consolidated subsidiaries

40,508

5,205

57

–

45,770

Provision for income tax

(4,285)

(544)

(20)

–

(4,849)

Net income for the year before cumulative effect of changes in accounting policy and minority interest in net loss of consolidated subsidiaries 

36,223

4,661

37

–

40,921

** **

 

 

 

 

 

**Assets**

 

 

 

 

 

Segment assets

93,589

191,193

4,355

(42,883)

246,254

Deferred income tax assets

6,735

16,715

5

–

23,455

Total assets

100,324

207,908

4,360

(42,883)

269,709

 

 

 

 

 

 

Investments – at equity

–

–

15

–

  15

Goodwill

15,472

426

184

–

16,082

 

 

 

 

 

 

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

8,827

6,432

605

–

15,864

Depreciation and amortization

9,200

18,240

415

–

27,855

Provision for doubtful accounts

253

1,944

54

–

2,251

Provision for inventory obsolescence

322

157

–

–

 479

Asset impairment

–

–

11

–

  11

MRP

131

327

–

–

 458

Interest on loans and related items – net of capitalized interest

952

8,639

24

–

9,615

Interest income

1,057

385

15

–

1,457

 

 

 

 

 

 

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

* *

* *

* *

* *

**Revenues**

 

 

 

 

 

Service

68,653

48,546

2,080

(4,375)

114,904

Non-service

6,111

–

321

(163)

6,269

Segment revenues

74,764

48,546

2,401

(4,538)

121,173

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income (loss)

33,166

16,519

(634)

(512)

48,539

Income (loss) before income tax, cumulative effect of change in accounting policy and minority interest in net income of consolidated subsidiaries

33,463

2,020

(643)

–

34,840

Provision for income tax

(5,967)

(800)

(59)

–

(6,826)

Net income (loss) for the year before cumulative effect of changes in accounting policy and minority interest in net income of consolidated subsidiaries 

27,496

1,220

(702)

–

28,014

** **

 

 

 

 

 

**Assets**

 

 

 

 

 

Segment assets

89,869

196,300

3,716

(30,871)

259,014

Deferred income tax assets

3,164

16,846

17

–

20,027

Total assets

93,033

213,146

3,733

(30,871)

279,041

 

 

 

 

 

 

Investments – at equity

–

–

8

–

   8

Goodwill

15,787

426

187

–

16,400

 

 

 

 

 

 

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

14,742

4,026

500

–

19,268

Depreciation and amortization

10,082

9,677

339

–

20,098

Provision for doubtful accounts

204

3,751

–

–

3,955

Provision for inventory obsolescence

213

361

3

–

 577

Asset impairment

430

365

617

–

1,412

MRP

13

553

–

–

 566

Interest on loans and related items – net of capitalized interest

984

10,137

42

(48)

11,115

Interest income

724

248

18

(48)

 942

 

 

 

25.    Other Matters

 

a.     Supplemental Disclosures of Cash Flow Information

 

 

**2006**

2005

2004

 

 (in million pesos)

Cash paid during the year for:

 

 

 

Income tax 

**8,267**

9,722

5,478

Interest:  

** **

 

 

    Capitalized to property, plant and equipment

**549**

504

595

Charged to operations

**7,528**

10,545

12,310

Interest income received

**1,481**

1,408

954

 

** **

 

 

Supplemental schedule of noncash investing and financing activities:

** **

 

 

Preferred stock subject to mandatory redemption issued

**–**

–

125

Long-term debt restructured

**–**

–

170

 

b.   InterconnectionAgreements

 

PLDThas existing interconnection agreements with nine International GatewayFacilities, or IGF operators, six Inter Exchange Carriers, or IXCs, sixCellular Mobile Telephone Systems, or CMTS operators, 70 LECs (includingmembers of the Philippine Association of Private Telephone Companies, Inc.),and 12 paging and trunk radio operators.  These interconnection agreementsinclude provisions for settlement and payment of charges.  Settlements withinterconnecting IGF operators and CMTS operators for local calls are in theform of access charges.  Settlement with interconnecting IXCs and LECs for tollcalls are based on hauling and access charges, and to some extent, revenuesharing.  Settlement also involves payment of access charges, but settlementfor toll calls is on a revenue-sharing basis.  LEC to LEC interconnection withhauling from one service area to another service area is settled based on trunkcharges, while overlay LEC to LEC interconnection in a given service area iswithout charges.  Paging and trunk radio interconnection settlements are basedon fixed charges.  

 

c.   ProposedMetering of Local Exchange Service

 

The proposed metering of PLDT’s local exchange servicehas been temporarily suspended for further review by the NTC.

 

d.   Employees and Labor Relations

 

As at December 31, 2006, we had 28,219 employeeswithin the PLDT Group.  PLDT had 8,526 employees at the end of 2006, of which 44%were rank-and-file employees, 51% were management/supervisory staff and 5% wereexecutives.  This number represents a decrease of 493 employees, orapproximately 6%, from the staff level as at the end of 2005, mainly as aresult of the ongoing MRP.  From a peak of 20,312 at the end of 1994, PLDT’snumber of employees has declined by 11,786, or 58%, by the end of 2006.  As at December31, 2005, we had 18,926 and 9,013 employees under the PLDT Group and PLDT,respectively.  The increase in the number of employees as at December 31, 2006was primarily due to the acquisition of SPi, CyMed and Level Up!.

 

PLDThas three employee unions, the members of which in the aggregate represent 23%of the employees of the PLDT Group.  We consider our relationship with ourrank-and-file employees’ union, our supervisors’ union and our salessupervisors’ union to be good.

 

OnNovember 16, 2006, PLDT and the *Manggagawa ng Komunikasyon sa Pilipinas*,or MKP, our rank-and-file employees’ union, concluded and signed a newthree-year Collective Bargaining Agreement, or CBA, covering the period fromNovember 9, 2006 to November 8, 2008.  This CBA provides each member a signingbonus equivalent to one month’s salary (computed at the salary rate prevailingprior to November 9, 2007) plus Php15,000; monthly salary increases ofPhp2,150, Php2,200 and Php2,550 for the first, second and third year, respectively;an increase in the yearly Christmas gift certificate from Php7,000 to Php8,000;an increase in the amount of coverage under the group life insurance plan fromPhp500,000 to Php650,000; an additional contribution of Php1 million to theEducation Loan Fund; Php35,000 funeral assistance for the death of adependent.  Other highlights of this CBA include increases in the rice subsidyand professional fee for dependent’s hospitalization.

 

OnMarch 8, 2005, PLDT and PLDT Sales Supervisors’ Union, or PSSU, concluded andsigned a new three-year CBA covering the period from January 1, 2005 toDecember 31, 2007.  Effectivity date has been negotiated to be moved from Marchto January.  This CBA provided each member monthly salary increases of 8% ofbasic pay or Php2,000, whichever is higher, for the first year; 10% of basicpay or Php2,700, whichever is higher, for the second year; and another 10% ofbasic pay or Php2,400, whichever is higher, for the third year.  Otherhighlights of this CBA were improvements of existing benefits and a one-timesigning bonus of Php33,000, including a Php3,000 goodwill bonus, for eachmember of PSSU.  Furthermore, a Php4,000 one-time clothing accessory allowance wasalso provided.  

 

On January 20, 2005, PLDT and *Gabay ng Unyon sa Telekomunikasyonng mga Superbisor*, or GUTS, our supervisors’ union, concluded and signed anew three-year CBA covering the period from January 1, 2005 to December 31,2007.  This CBA provided each member monthly salary increases of 8% of basicpay or Php2,000, whichever is higher, for 2005; 10% of basic pay or Php2,700,whichever is higher, for 2006; and another 10% of basic pay or Php2,400,whichever is higher, for 2007.  Other highlights of this CBA are improvementsof existing benefits and a one-time signing bonus of Php33,000, including aPhp3,000 goodwill bonus, for each member of GUTS.

 

e.   SPi’s Acquisition of Springfield ServiceCorporation, or Springfield

 

OnApril 16, 2007, SPi acquired, through a wholly-owned US subsidiary, 100% of Springfield for an aggregate purchase price of US$44 million plus possible future earn outpayments.  Springfield offers practice management services including patientscheduling, coding and compliance assistance, consulting and specializedreporting services.

 

f.    Piltel’s Equity Restructuring

 

On April 20, 2007, the Philippine SEC approvedPiltel’s request to undergo equity restructuring to eliminate the deficit ofPiltel as at December 31, 2006 amounting to Php22,251 million against theadditional paid-in capital.  The equity restructuring was approved by Piltel’sBoard of Directors on March 5, 2007.

 

 

 

**26.    Changes in Presentation of ComparativeConsolidated Financial Statements**

 

Wehave reclassified certain accounts in 2005 consolidated financial statements toconform with our 2006 consolidated financial statements presentation.