Bayan Telecommunications Holdings Corporation Fs 2006

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INDEPENDENT AUDITORS’ REPORT

The Stockholders and the Board of DirectorsBayan Telecommunications Holdings Corporation5th Floor, Benpres BuildingMeralco Avenue, Pasig City

We have audited the financial statements of Bayan Telecommunications Holdings Corporation and Subsidiaries for the year ended December 31, 2006, on which we have rendered the attached report dated April 4, 2007.

In compliance with SRC Rule 68, we are stating that the above Company has a total number of thirty nine (39) stockholders owning one hundred (100) or more shares.

SYCIP GORRES VELAYO & CO.

Emmanuel V. ClarinoPartnerCPA Certificate No. 27455SEC Accreditation No. 0071-AR-1Tax Identification No. 102-084-004PTR No. 0266537, January 2, 2007, Makati City

April 4, 2007

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The Stockholders and the Board of DirectorsBayan Telecommunications Holdings Corporation5th Floor, Benpres BuildingMeralco Avenue, Pasig City

We have audited the accompanying financial statements of Bayan Telecommunications Holdings Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2006 and 2005, and the consolidated statements of income, consolidated statements of changes in capital deficiency and consolidated statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility on the Financial Statements

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

Auditors’ Responsibility

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the financial statements.

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

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bayan Telecommunications Holdings Corporation and Subsidiaries as of December 31, 2006 and 2005, and their financial performance and their cash flows for the years then ended in compliance with Philippine Financial Reporting Standards.

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As discussed in Note 1 to the consolidated financial statements, the ability of the Company to continue as a going concern depends largely on the successful implementation of the Rehabilitation Plan of Bayan Telecommunications, Inc. (Bayantel), its ability to sustain revenue growth and successful debt restructuring of Radio Communications of the Philippines, Inc. (RCPI). Bayantel and RCPI are the Company’s major operating subsidiaries.



April 4, 2007

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The Stockholders and the Board of DirectorsBayan Telecommunications Holdings Corporation

We have audited the accompanying financial statements of Bayan Telecommunications Holdings Corporation and Subsidiaries, which comprise the consolidated balance sheets as at December 31, 2006 and 2005, and the consolidated statements of income, consolidated statements of changes in capital deficiency and consolidated statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility on the Financial Statements

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

Auditors’ Responsibility

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the management, as well as evaluating the overall presentation of the financial statements.

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

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bayan Telecommunications Holdings Corporation and Subsidiaries as of December 31, 2006 and 2005, and their financial performance and their cash flows for the years then ended in compliance with Philippine Financial Reporting Standards.

As discussed in Note 1 to the consolidated financial statements, the ability of the Company to continue as a going concern depends largely on the successful implementation of the Rehabilitation Plan of Bayan Telecommunications, Inc. (Bayantel), its ability to sustain revenue growth and successful debt restructuring of Radio Communications of the Philippines, Inc. (RCPI). Bayantel and RCPI are the Company’s major operating subsidiaries.



April 4, 2007

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BAYAN TELECOMMUNICATIONS HOLDINGS CORPORATIONAND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Amounts in Thousands)

December 31 2006 2005ASSETSCurrent AssetsCash and cash equivalents (Note 3) P865,519 P442,103Receivables - net (Notes 4, 6, 9, 14, and 20) 1,931,012 1,674,821Materials and supplies - at net realizable value 124,363 152,520Prepaid expenses and other current assets 94,775 206,333 Total Current Assets 3,015,669 2,475,777Noncurrent AssetsInvestments in shares of stock- net (Note 5) 146,260 146,257Property and equipment - net (Notes 1, 4, 6, 9,10, 11, 19, 23 and 25) 14,442,012 15,055,888Investment properties - net (Notes 1, 7, 10, and 11) 136,947 149,870Other noncurrent assets - net (Notes 8, 18, 19 and 20) 273,675 432,284 Total Noncurrent Assets 14,998,894 15,784,299 P18,014,563 P18,260,076 LIABILITIES AND CAPITAL DEFICIENCYCurrent LiabilitiesAccounts payable and other current liabilities (Notes 1, 4, 6, 9, 10, 11, and 14) P7,450,466 P7,326,612Preferred shares subject to mandatory redemption (Notes 12 and 14) 8,177,645 8,854,807Debt subject to restructuring (Notes 1, 6, 7, 10 and 14) 2,291,967 2,588,268Current portion of restructured debt (Notes 1, 6, 7, 10, 11 and 14) 213,517 227,931Income tax payable 20,629 5,254 Total Current Liabilities 18,154,224 19,002,872Noncurrent LiabilitiesRestructured debt - net of current portion (Notes 1, 6, 7, 10, 11 and 14) 12,921,159 12,759,773Deferred tax liability (Note 21) 3,246,210 3,778,191Other noncurrent liabilities (Note 25) 53,362 53,859 Total Noncurrent Liabilities 16,220,731 16,591,823Capital DeficiencyEquity attributable to equity holders of the parent: Capital stock (Note 13) 11,540,800 11,540,800 Additional paid-in capital 585,551 585,551 Deficit (28,486,743) (29,460,970) Net Capital Deficiency (16,360,392) (17,334,619)Minority Interest – – P18,014,563 P18,260,076 See accompanying Notes to Consolidated Financial Statements.

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BAYAN TELECOMMUNICATIONS HOLDINGS CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Amounts in Thousands)

Years ended in December 31 2006 2005

CONTINUING OPERATIONS

REVENUESNet operating revenue (Notes 15 and 20) P4,782,192 P4,721,620Gains from: Foreign exchange - net 1,190,219 2,147,765 Reversal of accrued liabilities (Notes 9 and 10) 767,419 – Sale of indefeasible right of use (IRU) (Note 6) 638,688 – Extinguishment of debt (Note 10) 140,453 – Disposal of property and equipment 2,937 148Interest income 34,071 19,893Rent income 18,560 3,085

7,574,539 6,892,511General and administrative (Notes 14, 16, 17, 18 and 23) (2,769,122) (2,637,075)Depreciation and amortization (Notes 6, 7, 8 and 19) (1,907,177) (2,173,058)Interest expense and other financing charges (Notes 10, 11, 12 and 14) (1,549,781) (1,790,190)Discount amortization (Note 10) (582,824) (572,247)Provision for doubtful accounts (237,404) (290,753)Others (Note 25) (35,800) 65,558

INCOME (LOSS) BEFORE INCOME TAX 492,431 (505,254)

PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 21)Current 50,185 27,720Deferred (531,981) 140,726 (481,796) 168,446

INCOME (LOSS) FROM CONTINUING OPERATIONS 974,227 (673,700)INCOME FROM DISCONTINUED OPERATIONS (Note 20) – 133,065

NET INCOME (LOSS) P974,227 (P540,635)

NET INCOME (LOSS) ATTRIBUTABLE TO:Equity holders of the parent P974,227 (P448,472)Minority interests – 92,163

P974,227 (P540,635) See accompanying Notes to Consolidated Financial Statements.

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BAYAN TELECOMMUNICATIONS HOLDINGS CORPORATION ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGESIN CAPITAL DEFICIENCY(Amounts in Thousands)

Years ended in December 31 2006 2005

ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT

Capital Stock (Note 13) P11,540,800 P11,540,800

Additional Paid-in Capital 585,551 585,551

DeficitBalance at beginning of the year (29,460,970) (29,012,498)Net income (loss) 974,227 (448,472)Balance at end of year (28,486,743) (29,460,970) (16,360,392) (17,334,619)

MINORITY INTERESTBalance at beginning of the year – 92,163Net loss – (92,163)Balance at end of year – –

(P16,360,392) (P17,334,619) See accompanying Notes to Consolidated Financial Statements

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BAYAN TELECOMMUNICATIONS HOLDINGS CORPORATIONAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in Thousands)

Years ended in December 31 2006 2005 CASH FLOWS FROM OPERATING ACTIVITIESIncome (loss) before income tax and minority interest P492,431 (P366,755)Adjustments for: Depreciation and amortization (Note 19) 1,907,177 2,201,285 Interest expense and other financing charges (Notes 10, 11, 12 and 14) 1,549,781 1,791,219 Discount amortization (Note 10) 582,824 572,247 Gains on: Foreign exchange gain - net (1,274,958) (2,191,504) Reversal of liabilities (Note 9) (767,419) Sale of IRU (Note 6) (638,688) – Extinguishment of debt (Note 10) (140,453) – Disposal of storefront business and property and equipment (2,937) (90,076)Interest income (Note 20) (34,071) (19,893)Other income (28,908) –Operating income before working capital changes 1,644,777 1,896,523Provision for doubtful accounts 237,404 290,753Decrease (increase) in: Receivables (153,240) (513,899) Prepaid expenses and other current assets 116,926 (113,790) Materials and supplies 28,157 (71,262)Increase in accounts payable and other current liabilities 1,307,893 193,981Cash generated from operations 3,181,917 1,682,306Interest received 55,698 24,226Income taxes paid (34,735) (77,239)Net cash provided by operating activities 3,202,880 1,629,293

CASH FLOWS FROM INVESTING ACTIVITIESReductions in (additions to): Property and equipment (1,638,075) (1,156,258) Investments (3) – Other noncurrent assets 158,609 (2,968)Proceeds from:Sale of IRU (Note 6) 365,867 –Disposal of storefront business and property and equipment 8,236 44,594 Net cash used in investing activities (1,105,366) (1,114,632)

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CASH FLOWS FROM FINANCING ACTIVITIESPayments of:Interest (1,587,510) (590,299)Restructured debt (86,091) (42,187)Other noncurrent liabilities (497) (13,523)Obligation under capital lease – (18,937)Short-term loans – (40,846)Net cash used in financing activities (1,674,098) (705,792)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 423,416 (191,131)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 442,103 633,234

CASH AND CASH EQUIVALENTS AT END OF YEAR P865,519 P442,103 See accompanying Notes to Consolidated Financial Statements.

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BAYAN TELECOMMUNICATIONS HOLDINGS CORPORATIONAND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Corporate Information

GeneralBayan Telecommunications Holdings Corporation, singly and collectively with subsidiaries, is referred herein as “the Company”.

The Company, a Philippine company with limited liability, is 85.4% owned by Benpres Holdings Corporation (Benpres) and Lopez, Inc. It was incorporated in October 1993 and holds investments in shares of stock of the following subsidiaries:

Percentage of Ownership

Direct IndirectBayan Telecommunications, Inc. (Bayantel) 98.63 0.55Radio Communications of the Philippines, Inc. (RCPI) 4.19 86.38Sky Internet, Incorporated (Sky Internet) - 98.63BTI Global Communications Japan, Inc. (BTI - Japan)* - 98.63BTI Global Communications Ltd. (BTI - UK)* - 98.63BTI America, LLC (BTI - America)** - 98.63Alarmnet, Inc. (Alarmnet) - 86.38NDTN Land, Inc. (NLI) - 64.31Telecoms Infrastructure Corp. of the Philippines (Telicphil) - 57.23

** Started operations in June 2004.*** Started operations in November 2006.

The Company also has the following subsidiaries which remain dormant: Telecommunications Service Corporation and Bayan Net, Inc. which are wholly owned, Marifil Holdings Corporation (Marifil), which is 60% owned, and Naga Telephone Company, Inc. (Nagatel), which is 87% owned.

All the subsidiaries were incorporated in the Philippines and registered with the Philippine Securities and Exchange Commission (SEC), except BTI - UK which was incorporated in the United Kingdom, BTI - Japan which was incorporated in Japan and BTI - America which was incorporated in the United States of America.

The registered office address of the Company is 5th Floor, Benpres Building, Meralco Avenue, Pasig City.

The accompanying consolidated financial statements were authorized for issuance by the Audit Committee, upon authorization of the Board of Directors (BOD) on April 4, 2007.

Status of OperationsThe Company has been incurring operating losses resulting to a deficit of P28.5 billion in 2006 and P29.5 billion in 2005 and a capital deficiency of P16.4 billion in 2006 and P17.3 billion in 2005 arising mainly from losses incurred by its major operating subsidiaries, Bayantel and RCPI. These affected Bayantel and RCPI’s ability to service their maturing obligations on a timely basis.

To address the debt problem, Bayantel and RCPI requested their creditors for the restructuring of its bank loans (short-term and long-term) and bonds payable. Instead of a consensual restructuring, creditors of Bayantel opted for a court-assisted rehabilitation. The Rehabilitation Plan (Plan) which were presented to the creditors and reviewed and evaluated by a court appointed receiver (Receiver) was approved by the Pasig Regional Trial Court (Court) in a decision dated June 28, 2004 (Decision). Consequently, the Company implemented or will implement the following provisions of the Plan, among others:

a. All creditors were treated equally and that this equal treatment was extended to all payment terms and treatment of past due interest;

b. Secured creditors continue to hold on to their security or collateral, which can be foreclosed if the rehabilitation fails and creditors resort to liquidation;

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c. The level of sustainable debt was reduced to the amount of US$325 million for a period of 19 years;

d. The unsustainable debt will be converted into an appropriate instrument that shall not be a financial burden for Bayantel;

e. All provisions relating to equity in the Plan must strictly conform to the requirements of the Constitution limiting foreign ownership to 40%; and

f. A Monitoring Committee was formed composing of representatives from all classes of the restructured debt. The Receiver’s role shall be limited to monitoring and overseeing the implementation of the Plan.

The Court approval, however, covered only claims against Bayantel.

Notwithstanding, the Court enjoined Bayantel to procure the restructuring of RCPI’s loans under the same terms and conditions because RCPI is operationally and financially integrated with Bayantel. Both Companies’ networks are linked together to form a seamless and redundant system and Bayantel provides substantial revenue to RCPI through its revenue sharing agreement. Without the revenue generated under this agreement, there is considerable doubt that RCPI would be able to meet its maturing liabilities. Negotiations are ongoing with the creditors of RCPI to agree to a debt restructuring pursuant to the Decision. As of December 31, 2006, one of the five creditors agreed to the debt restructuring. Pursuant to the Interim Rules of Procedure for Corporate Rehabilitation, the decision of the Court approving the Plan is immediately executory. Thus, on September 30, 2004, Bayantel commenced implementation and paid interest based on the decision of the Court. On January 13, 2005, the Receiver filed his implementing term sheet which the Court approved on March 15, 2005.

Within the period to appeal, certain creditors, including the Bank of New York and majority of the secured creditors, filed the required petitions for the review of the Decision approving the Plan. The unsecured creditors are seeking for the increase in the level of sustainable debt from $325 million to $471 million to be repaid in 12 years. The secured creditors, on the other hand, are appealing the pari-passu decision of the Court. The creditors, however, did not seek an order restraining the implementation of the Decision. Consequently, Bayantel continues to implement the Plan as approved by the Court.

In a Court of Appeals (CA) decision dated September 4, 2006, all the appeals filed by the creditors were consolidated, except for the appeal on pari-passu filed by the secured creditor. The consolidated appeals were dismissed by the CA for lack of merit in a decision dated November 9, 2006. Subsequently, the secured creditors filed a Petition for Partial Review on the consolidated appeals with the Supreme Court (SC) while the unsecured creditors filed a Motion for Reconsideration with the CA. Both are still pending for consideration by the SC and the CA.

Bayantel has been able to maintain its revenue level despite the increasing competition. The launching of the wireless loop service in 2006 is projected to grow the Company’s Local Exchange Carrier (LEC) subscriber base. Moreover, data service continue to be a major source of revenue stream because of the Company’s increasing capability to provide broadband and seamless service to customers with its upgraded internet backbone network and core data service network, Bayantel is gearing to compete in emerging markets and is developing strategic project based on internet protocol and projects that will leverage not only its voice and internet but also in its video capacity.

Consistent with the Company’s direction towards concentrating on its telecommunication business, RCPI, in 2005, sold its storefront business, including its subdivision Agency Expansion to a company owned by certain former officers of RCPI (Buyer), pursuant to a purchase agreement dated August 2, 2005 (see Note 20). The storefront business consists of the public calling office, money transfer, transport ticketing, retail portion of the telegraph business, merchant payments collection, international cargo business and other related storefront activities.

The ability of the Company to continue as a going concern depends largely on the successful implementation of Bayantel’s Plan, Bayantel’s ability to sustain its revenue growth and successful debt restructuring of RCPI. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

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Description of BusinessBayantel and RCPI, are duly enfranchised to provide telecommunications services of all types under Republic Act No. 7925, “An act to promote and govern the development of Philippine Telecommunications and the delivery of public telecommunications services” (RA 7925). The National Telecommunications Commission (NTC) has authorized Bayantel and RCPI to provide and operate the following major services:

Bayantela. LEC service covering the following areas in the Philippines:

i Quezon City, Valenzuela and Malabon, all in Metro Manila, and the provinces of Albay, Catanduanes, Camarines Norte, Camarines Sur, Sorsogon and Masbate under a Certificate of Public Convenience and Necessity (CPCN) issued on July 19, 1999 and valid for a period of 25 years from date of issuance;

ii Manila, Navotas and Caloocan, all in Metro Manila under a Provisional Authority (PA) issued on November 10, 1997;

iii Las Pinas, Paranaque, Mandaluyong, San Juan, Makati, Marikina, Muntinlupa, Taguig, Pasig, Pasay and Pateros, all in Metro Manila under a PA issued on December 3, 2003 and valid until June 3, 2005. The motion for extension of PA filed on May 25, 2005 is still pending resolution by NTC;

iv The provinces of Antique, Iloilo, Bohol (except Tagbilaran City), Bukidnon, Misamis Occidental, Misamis Oriental (except Cagayan de Oro City), Zamboanga del Sur, Davao del Norte (except Tagum), Davao Oriental, Saranggani including General Santos City, South Cotabato and Surigao del Sur under a PA issued on March 9, 1998;

v The provinces of Aklan, Capiz including Roxas City, Guimaras, Negros Occidental, including the cities of Bacolod and Bago), Negros Oriental including Dumaguete City, Cebu including the cities of Cebu, Lapu-Lapu and Mandaue, Zamboanga del Norte, Surigao del Norte including Surigao City, Tagbilaran City, Cagayan de Oro City and Tagum City under a PA issued on November 18, 2004;

vi Tacloban City and the towns of Tanauan and Palo, both in Leyte and Sogod, Southern Leyte under a CPCN for 25 years from March 16, 1994;

vii The towns of Abuyog, Baybay, Barauen, Carigara, Dulag, Hilongos, Isabel, Palompon and Hilaga, all in Leyte; Guiuan and Borongan, both in Eastern Samar; Catbalogan and Basey, both in Western Samar; Maasin in Southern Leyte under a PA issued on April 30, 1996 and valid until April 30, 2004. The motion for extension of PA filed on March 24, 2004 is still pending resolution by NTC; and

viii The provinces of Agusan del Norte and Agusan del Sur; and Butuan City under a PA issued on December 14, 1998 and valid until June 14, 2005. The motion for extension of PA filed on May 26, 2005 is still pending resolution by NTC.

A certain telecommunications carrier questioned before the CA the PA granted by the NTC to Bayantel to operate in Manila and Navotas. On April 30, 1998, the CA dismissed the case for lack of merit. The opposing telecommunications carrier elevated the case to the SC. On July 23, 2004, the SC upheld the grant of the PA to Bayantel. However, the SC required Bayantel to:

- Deposit in escrow in a reputable bank 20% of the investment required for the first two years of the implementation of the project; and

- Post a performance bond equivalent to 10% of the investment required for the first two years of the approved project but not to exceed P500 million.

On August 31, 2004, Bayantel filed a Motion for Partial Reconsideration against the foregoing requirements arguing that the same are not applicable because Bayantel has already completed its rollout commitments prescribed by the NTC. The motion for reconsideration is still pending consideration by the SC.

The PA granted to Bayantel covering item (ii) was similarly challenged in two separate petitions brought by two other telecommunications carriers before the CA. The petitions were both dismissed on April 15, 1999. One of the two telecommunications carriers elevated the case to the SC. The case is still pending resolution.

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b. International Gateway Facility (IGF) service

Bayantel has been granted a CPCN to provide IGF services for 25 years from April 19, 1996.

c. Leased Line service

Bayantel has been granted a CPCN to provide leased line services for 25 years from January 11, 2001.

d. Cellular Mobile Telephone Systems

The PA issued on May 3, 2000 was initially valid up to November 3, 2002 and was extended for three years up to November 3, 2005. On October 18, 2005, Bayantel filed a request to NTC to further extend the PA for another three years until November 2, 2008. To date, the request has not yet been granted by NTC.

e. Domestic Data and Voice Communications

Bayantel has been granted a PA to provide domestic data and voice communications service effective June 10, 2002 and valid until January 30, 2005. However, the motion for extension of PA filed on January 21, 2005 is still pending resolution by NTC.

f. Television Video Uplink

The PA issued on June 9, 2003 was initially valid up to April 23, 2005. However, the motion for extension of PA filed on April 4, 2005 is still pending resolution by NTC.

RCPI

a. Inter-exchange Carrier service

b. Public Trunk Radio service

RCPI has been granted a CPCN for its Public Trunk Radio service valid for 25 years from April 1998.

Bayantel’s existing nationwide network is composed of satellite, terrestrial and land/submarinebased cable facilities. The network includes capacities in the National Digital Transmission Network (NDTN), a joint project of six Philippine telecommunications carriers. Bayantel reports its share in the cost of the NDTN project, which amounts to P1.4 billion (net of accumulated depreciation of P920.4 million) and P1.6 billion (net of accumulated depreciation of P768.5 million) as of December 31, 2006 and 2005, respectively, as part of its property and equipment. The NDTN is the only major alternative telecommunications backbone in the country, the other being operated by Philippine Long Distance Telephone Company (PLDT), the dominant telecommunications carrier. The facility extends to as far as Santiago City in Cagayan Valley and San Fernando City in La Union in the north and to Davao City in the south through Cebu City and Cagayan de Oro City. The submarine cable portion of the NDTN runs from Lucena City to Cagayan de Oro City. Bayantel’s network also includes RCPI’s existing Synchronized Digital Hierarchy (SDH) microwave network with spur links which also extends from Luzon to Mindanao. Both Bayantel’s and RCPI’s networks are linked together to form a seamless and redundant system.

Bayantel’s network is interconnected with all the major telecommunications carriers in the country including PLDT. Various member-carriers belonging to the Philippine Association of Private Telephone Companies also have interconnection agreements with Bayantel. Through its various foreign correspondents, Bayantel can initiate and terminate international calls to and from 235 countries.

The main activity of Nagatel and Marifil is the holding of investments in shares of stock of Bayantel and Extelcom, respectively.

Alarmnet is engaged in the sale, maintenance and installation of intruder and other alarm equipment.

NLI’s primary business is to acquire and lease land required or necessary relative to the construction and installation of the telecommunications backbone (NDTN) for the use and benefit of NLI’s shareholders.

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Telicphil, in accordance with existing agreements, provides services such as administration and maintenance to the NDTN consortium under a reimbursement-of-cost basis, except depreciation and amortization, for a reasonable contractor’s fee.

Sky Internet is involved in providing communication and information networking services.

BTI - Japan, BTI - UK, and BTI - America provide prepaid international phone services.

2. Summary of Significant Accounting Policies

Statement of ComplianceThe accompanying consolidated financial statements of the Company have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). PFRS includes Philippine Accounting Standards (PAS) and interpretations issued by the Financial Reporting Standards Council.

Basis of PreparationThe consolidated financial statements of the Company have been prepared on a historical cost basis, except for financial derivatives which have been presented at fair value.

The consolidated financial statements are presented in Philippine peso (PHP), which is the Company’s functional and presentation currency under PFRS. All values are rounded off to the nearest thousand (P000) except when otherwise indicated.

Basis of ConsolidationThe consolidated financial statements comprise the financial statements of Bayan Telecommunications Holding Corporation and its subsidiaries as of December 31 of each year. The financial statements of subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognized in assets and liabilities, are eliminated in full. Unrealized losses are eliminated unless costs cannot be recovered.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting year during which the Company has control.

The losses applicable to the minority in a subsidiary may exceed the minority’s investment in the subsidiary. The excess, and further losses applicable to the minority, are charged against the Company except to the extent that the minority has existing receivables or claims against the subsidiary or has a binding obligation to, and is able to, make good the losses. If the subsidiary subsequently reports profits, the Company is allocated all such profits until the minority’s share of losses previously absorbed by the Company has been recovered.

Changes in Accounting PoliciesThe accounting policies adopted are consistent with those of the previous financial year except that the Company has adopted the revised standard and interpretation mandatory for financial years beginning on or after January 1, 2006:

• Amendments to PAS 19, “Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures.” The amendments did not result to any significant impact on the consolidated financial statements as the Company chose not to adopt the option to allow the recognition of actuarial gain/loss outside the consolidated statements of income.

• IFRIC Interpretation 4, “Determining Whether an Arrangement contains a Lease.” The Company adopted this interpretation beginning January 1, 2006, which provides guidance in determining whether an arrangement contains a lease to which lease accounting must be applied. This change in accounting policy does not have a significant impact on the consolidated financial statements.

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Standards Not Yet EffectiveThe Company did not early adopt the following standards and amendments which have been approved but are not yet effective:

• The Amendment to PAS 1, “Presentation of Financial Statements.” This will be effective for financial years beginning on or after January 1, 2007. This introduces disclosures about the level of an entity’s capital and how it manages capital. The Company will apply the amendment to PAS 1 in 2007.

• PFRS 7, “Financial Instruments - Disclosures.” This will be effective for financial years beginning on or after January 1, 2007. This introduces new disclosures to improve information about financial instruments. The revised disclosures on financial instruments provided by this standard will be included in the Company’s consolidated financial statements when the amendment to the standard is adopted in 2007.

• PFRS 8, “Operating Segments.” This will be effective January 1, 2009 and will replace PAS 14, “Segment Reporting”, and adopts a management approach to reporting segment information. PFRS 8 is required for adoption only by entities whose debt or equity instruments are publicly traded, or are in the process of filing with the Philippines Securities and Exchange Commission for purposes of issuing any class of instruments in a public market. The Company is not required and will not adopt PFRS 8.

• International Financial Reporting Interpretations Committee (IFRIC) Interpretation 8, “Scope of IFRS 2.” This Interpretation becomes effective for financial years beginning on or after May 1, 2006. This requires IFRS 2 to be applied to any arrangements where equity instruments are issued for consideration which appears to be less than fair value. The interpretation will have no impact on the financial position of the Company.

• IFRIC Interpretation 9, “Reassessment of Embedded Derivatives.” This becomes effective for financial years beginning on or after June 1, 2006. This interpretation establishes that the date to assess the existence of an embedded derivative is the date an entity first becomes a party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. The Company assessed that the adoption of this interpretation will have no significant impact on the consolidated financial statements.

• IFRIC Interpretation 10, “Interim Financial Reporting and Impairment.” This becomes effective on or after November 1, 2006. This standard provides that the frequency of financial reporting does affect the amount of impairment charge to be recognized in the annual financial reporting with respect to goodwill and available-for-sale (AFS) investments. This interpretation has no significant impact to the consolidated financial statements of the Company.

• IFRIC Interpretation 11, “IFRS 2 - Group and Treasury Share Transactions.” This interpretation will be effective beginning March 1, 2007. This requires arrangements whereby an employee is granted rights to an entity’s equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or (b) the shareholder(s) of the entity provide the equity instruments needed. It also provides guidance on how subsidiaries, in their separate financial statements, account for such schemes when their employees receive rights to the equity instruments of the parent. The Company currently does not have any stock option plan and therefore, does not expect this interpretation to have significant impact on its consolidated financial statements.

• IFRIC 12, “Service Concession Arrangements.” This will become effective January 1, 2008. This interpretation which covers contractual arrangements arising from entities providing public services, is not relevant to the Company’s current operations.

Use of Judgments and Estimates

JudgmentsIn the process of applying the Company’s accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements:

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Operating Leases. The Company has entered into commercial property leases on its investment properties. The Company has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Finance Leases. The Company enters into finance leases of its network capacity through the grant of Indefeasible Rights of Use (IRU) to other telecommunications company. The Company has determined that it transferred all the significant risks and rewards of ownership of these properties to the lessee.

Legal Contingencies. The Company is currently involved in various legal and administrative proceedings. The Company’s estimate of the probable costs for the resolution of these claims has been developed in consultation with its counsel handling the defense in these matters and is based upon an analysis of potential results. The Company currently does not believe these proceedings will have a material adverse effect on the consolidated financial statements. It is possible, however, that future results of operations could be materially affected by changes in estimates or in the effectiveness of strategies relating to these proceedings.

Estimates and AssumptionsThe key assumptions concerning the future and other key sources of estimation uncertainty at balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Estimated Useful Lives. The useful life of each of the Company’s property and equipment and investment properties is estimated based on the period over which the asset is expected to be available for use. Such estimation is based on a collective assessment of industry practice, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible, however, that future results of operations could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. A reduction in the estimated useful life of any property and equipment and investment properties would increase the recorded operating expenses and decrease noncurrent assets.

As of December 31, 2006 and 2005, the carrying value of property and equipment amounted to P14.4 billion and P15.1 billion, respectively, and the carrying value of investment properties amounted to P136.9 million and P149.9 million, respectively.

Asset Impairment. An impairment review is performed when certain impairment indicators are present.

Determining the value of property and equipment and investment properties, which require the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires the Company to make estimates and assumptions that can materially affect its consolidated financial statements. Future events could cause the Company to conclude that property and equipment and investment properties are impaired. Any resulting additional impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.

The preparation of the estimated future cash flows involves significant judgment and estimations. While the Company believes that its assumptions are appropriate and reasonable, significant changes in these assumptions may materially affect the Company’s assessment of recoverable values and may lead to future additional impairment charges.

As of December 31, 2006 and 2005, the carrying value of property and equipment amounted to P14.4 billion and P15.1 billion, respectively, and the carrying value of investment properties amounted to P136.9 million and P149.9 million, respectively.

The accumulated impairment loss amounted to P1.5 billion as of December 31, 2006 and December 31, 2005.

Impairment of Investment in Shares of Stock. The Company follows the guidance of PAS 39 in determining when an investment is impaired. This determination requires significant judgment. In making this judgment, the Company evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow.

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If the assumption made regarding the duration that, and extent to which the fair value is less than cost, the Company would suffer an additional loss in its consolidated financial statements, representing the write down of cost at its fair value.

The carrying amount of available-for-sale investments is disclosed in Note 5.

Deferred Tax Assets. The Company reviews the carrying amount at each balance sheet date and reduces deferred tax assets to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Unrecognized deferred tax assets amounted to P2.8 billion and P4.4 billion as of December 31, 2006 and 2005, respectively (see Note 21).

Impairment of Goodwill. The Company determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Company to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows.

The carrying amount of goodwill as of December 31, 2006 and 2005 was P62.2 million. More details are given in Note 8.

Allowance for Doubtful Accounts. The Company assesses whether objective evidence of impairment exists for receivables that are individually significant, and collectively for receivables that are not individually significant. Allowance for doubtful accounts is maintained at a level considered adequate to provide for potentially uncollectible receivables.

Provision for doubtful accounts amounted to P237.4 million in 2006 and P290.8 million in 2005. The carrying amounts of receivables are disclosed in Note 4.

Allowance for Inventory Obsolescence. The Company provides allowance for materials and supplies whenever materials and supplies becomes lower than cost due to damage, physical deterioration, obsolescence, changes in price levels or other causes. The allowance account is reviewed on a monthly basis to reflect the accurate valuation in the financial records.

Materials and supplies identified to be obsolete and unusable are written off and charged as expense for the period.

As of December 31, 2006 and 2005, materials and supplies are carried at net realizable value of P124.4 million and P152.5 million, respectively. The related cost of materials and supplies amounted to P139.9 million and P187.8 million, respectively.

Pension Benefits. The Company determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash flows expected to be required to settle the pension obligations. In determining the appropriate discount rate, the Company considers the interest rate on government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.

The expected return on plan assets assumption is determined on a uniform basis, taking into consideration future estimates of long-term investment returns.

Other key assumptions for pension obligations are based in part on current market conditions. Additional information and carrying amounts of the benefit assets are disclosed in Note 18 to the consolidated financial statements.

Financial Assets and Liabilities. The Company carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and judgment. In addition, certain liabilities acquired through debt restructuring are required to be carried at fair value at the time of the restructuring. While significant components of fair value measurement were determined using verifiable objective evidence (i.e. foreign exchange rates, interest rates, volatility rates), the amount of changes in fair value would differ if the

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Company utilized different valuation methodology. Any changes in fair value of these financial assets and liabilities would affect directly the Company’s profit and loss and equity.

The carrying value and fair value of the financial assets and liabilities as of December 31, 2006 and 2005 are disclosed in Note 27.

Revenue Recognition. The Company’s revenue recognition policies require it to make use of estimates and assumptions that may affect the reported amounts of its revenues and receivables.

The Company’s agreements with domestic and foreign carriers for inbound and outbound traffic subject to settlements require traffic reconciliations before actual settlement is done, which may not be actual volume of traffic as measured by the Company. Initial recognition of revenues is based on the Company’s observed traffic adjusted by its normal experience adjustments, which historically are not material in the Company’s consolidated financial statements. Differences between the amounts initially recognized and actual settlements are taken up in the accounts upon reconciliation. However, there is no assurance that such use of estimates may not result to material adjustments in future periods.

Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and are subject to an insignificant risk of change in value.

Materials and SuppliesMaterials and supplies consist mainly of telephone sets and small spare parts like outside plant bolts, cables, wires and the like. These are valued at the lower of cost and net realizable value. Net realizable value is the current replacement cost. Cost is determined using the moving average method.

Financial Assets and Financial LiabilitiesFinancial assets and financial liabilities are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial assets and liabilities, except for financial instruments measured at fair value through profit or loss. The Company determines the classification of its financial assets after initial recognition and, where allowed and appropriate, reevaluates this designation at each financial year-end.

All regular way purchases and sales of financial assets are recognized on the trade date, i.e., the date that the Company commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability, are reported as expense or income. Financial instruments are offset when there is a legally enforceable right to offset and intention to settle either on a net basis or to realize the asset and settle the liability simultaneously.

Financial assets are classified as either financial asset at fair value through profit or loss, loans and receivables, investments held-to-maturity (HTM), or investments available-for-sale. The Company determines the classification at initial recognition and where allowed and appropriate, re-evaluates this designation at every reporting date. For the years ended December 31, 2006 and2005, the Company does not have financial instrument classified as HTM.

Financial Assets at Fair Value through Profit or Loss. Financial assets classified as held for trading are included in the category “financial assets at fair value through profit or loss”. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated and effective hedging instruments. Gains or losses on investments held for trading are recognized in income. This category includes derivative asset under “Other current assets” account.

Loans and Receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortized cost using the effective interest method. Gains and losses are recognized in income when the loans and receivables are derecognized or impaired, as well as through the amortization process. This category includes receivables and refundable deposits.

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Available-for-Sale Financial Assets. Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale. After initial recognition, available-for-sale financial assets are measured at fair value with gains or losses being recognized as a separate component of equity until the investment is derecognized or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the consolidated statement of income.

Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost. This category includes investments in shares of stock.

Day 1 profit. Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Company recognizes the difference between the transaction price and fair value (a Day 1 profit) in the statement of income, unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Company determines the appropriate method of recognizing the Day 1 profit amount.

Impairment of Financial AssetsThe Company assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.

Assets Carried at Amortized Cost. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e., the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through the use of an allowance account. The amount of loss shall be recognized in profit or loss.

The Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

Available-for-Sale Financial Assets. If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss previously recognized in profit or loss, is transferred from equity to the consolidated statement of income. Reversals in respect of equity instruments classified as available-for-sale are not recognized in profit. Reversals of impairment losses on debt instruments are reversed through profit or loss; if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognized in the consolidated statement of income.

Assets Carried at Cost. If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

Derecognition of Financial Assets and LiabilitiesFinancial Assets. A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where:

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• the rights to receive cash flows from the asset have expired;

• the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass-through” arrangement; or

• the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Company has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.

Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss.

Investments in Shares of StockThe Company’s investment in an associate is accounted for under the equity method in the consolidated financial statements. An associate is an entity in which the Company has significant influence and which is neither a subsidiary nor a joint venture of the Company. The investment in an associate is carried in the consolidated balance sheets at cost plus post-acquisition changes in the Company’s share in net assets of the associate, less impairment in value. The consolidated statements of income reflect the Company’s share in the results of operations of the associate. The Company discontinues the recognition of its share in net losses of the associate when the cumulative losses exceeds the investment and advances to the associate, except where the Company has provided guarantees or committed support to the associate. When the accumulated net losses exceed the cost of investment, the excess is offset against the related advances to the associate. Unrealized gains arising from the transactions with its associate are eliminated to the extent of the Company’s interest against the investment account. Unrealized losses are eliminated similarly but only to the extent that there is no evidence of impairment of the asset transferred.

The reporting date of the associate of the Company is identical and the associate’s accounting policies conform to those used by the Company for like transactions and events in similar circumstances.

Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that is linked to and must be settled by delivery of such unquoted equity instruments are measured at cost.

Interests in Joint VenturesThe Company recognized in the accompanying consolidated financial statements its share of the jointly controlled assets, classified as property and equipment, which are stated at cost less accumulated depreciation and amortization and any impairment in value (see Note 25a).

Property and EquipmentProperty and equipment are stated at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and amortization and accumulated impairment in value. Such cost includes asset retirement obligation and the cost of replacing the part of such property and equipment if such cost incurred has met the recognition criteria.

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the consolidated statement of income in the year the item is derecognized.

Depreciation and amortization are computed using the straight-line method.

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The assets’ residual values, useful lives, and method of depreciation and amortization are reviewed, and adjusted if appropriate, at each financial year-end.

When each major inspection is performed, its cost is recognized in the carrying amount of the property and equipment as a replacement if the recognition criteria are satisfied.

Construction in-progress represents properties under construction and is stated at cost. This includes cost of construction and equipment and other direct costs. Construction in-progress is not depreciated until such time the relevant assets are completed and are available for use.

Investment PropertiesInvestment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an investment property.

Investment properties are derecognized when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the consolidated statement of income in the year of retirement or disposal.

Transfers are made to investment properties when, and only when, there is a change in use, evidenced by ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment properties when and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sell.

If the property occupied by the Company as an owner-occupied property becomes an investment property, the Company accounts for such property in accordance with the policy stated under property and equipment up to the date of change in use.

GoodwillGoodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.

At the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. Where goodwill forms part of a cash-generating unit and part of the operation within that unit are disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.

Impairment of Non-financial AssetsThe carrying values of property and equipment and other long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying value exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of the asset is the greater of net selling price or value in use. The net selling price is the amount obtainable from the sale of the asset in an arm’s-length transaction.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Any impairment loss is charged to income.

Reversal of impairment losses recognized in the prior year, if any, is recorded when there is an indication that the impairment losses recognized for the asset no longer exist or have decreased. The reversal is recorded as income. However, the increase in carrying amount of an asset due to a reversal of an

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impairment loss is recognized to the extent that it does not exceed the carrying amount (net of accumulated depreciation and amortization) that would have been determined had no impairment loss been recognized for that asset in prior years.

Software CostsSoftware costs are stated at cost less accumulated amortization and any impairment in values.

Income TaxesCurrent Tax. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the balance sheet date.

Deferred Tax. Deferred tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except:

• where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable income or loss; and

• in respect of taxable temporary differences associated with investments in associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carry forward benefits of minimum corporate income tax (MCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable income will be available against which the deductible temporary differences, and the carry-forward of unused MCIT and NOLCO can be utilized except:

• where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable income or loss; and

• in respect of deductible temporary differences associated with investments in associates and interests in joint ventures, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable income will be available against which the temporary differences can be utilized.

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

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Income tax relating to items recognized directly in equity is recognized in equity and not in the consolidated statements of income.

Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

ProvisionsProvisions, if any, are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense.

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RevenueRevenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the amount of revenue can be measured reliably. The following specific recognition criteria must also be met before revenue is recognized:

Local and Long-distance Services. Revenue from local and long-distance services comprises the value of telecommunications services provided and are recognized when earned. Revenues from long-distance services are stated net of the share of the other telecommunications carriers, if any, under existing correspondence and interconnection agreements. Interconnection fees and charges are based on agreed rates with the other telecommunications carriers. Interconnection fees and charges are initially based on monitored traffic in call data records and are subsequently adjusted to amounts agreed upon with the other telecommunications carriers.

Data and Other Services. Revenue from business and data communications, including internet services and payphone services, and storefront business in 2005, are recognized as the services are provided.

Subscription fees are recognized based on a fixed monthly fee plus additional charges for the excess usage incurred by subscribers.

Installation fees are amortized on a straight line basis over the estimated life of customer relationship.

Revenue from sale of prepaid cards is recognized upon actual usage of the airtime value of the card or expiration of the unused value of the card, whichever comes earlier.

Rent Income. Rent income is recognized on a straight-line basis over the lease term.

Interest Income. Interest income is recognized as the interest accrues, taking into account the effective yield on the asset.

Borrowing CostsInterest is accrued based on the effective interest rate of the restructured debt and on the interest rates provided in the agreements for debt subject to restructuring.

Borrowing costs are capitalized if they are directly attributable to the acquisition or construction of a qualifying asset. Capitalization of borrowing costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the assets are substantially ready for their intended use. If the carrying amount of the asset exceeds its recoverable amount, an impairment loss is recorded.

Pension CostsThe Company has a funded, noncontributory defined benefit retirement plan, covering its permanent employees. Pension costs are actuarially determined using the projected unit credit method. This method reflects service rendered by employees to the date of valuation and incorporates assumptions concerning employees’ projected salaries. The portion of the actuarial gains and losses is recognized when it exceeds the corridor (10% of the greater of the present value of obligation or market related value of the plan assets) at the previous reporting date, divided by the expected average remaining working lives of active plan members.

The past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested. If the benefits are already vested immediately following the introduction of, or changes to, a pension plan, past service cost is recognized immediately.

The defined benefit liability is the aggregate of the present value of the defined benefit obligation and actuarial gains and losses not recognized reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligations are to be settled directly. If such aggregate is negative, the asset is measured at the lower of such aggregate or the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

If the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan, net actuarial losses of the current period and past service cost of the current period are recognized immediately to the extent that they exceed any reduction in the present value of those economic benefits. If there is no change or an increase in the present value of the

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economic benefits, the entire net actuarial losses of the current period and past service cost of the current period are recognized immediately. Similarly, net actuarial gains of the current period after the deduction of past service cost of the current period exceeding any increase in the present value of the economic benefits stated above are recognized immediately if the asset is measured at the aggregate of cumulative unrecognized net actuarial losses and past service cost and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. If there is no change or a decrease in the present value of the economic benefits, the entire net actuarial gains of the current period after the deduction of past service cost of the current period are recognized immediately.

LeasesThe determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Company as a Lessee. Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term.

Operating lease payments are recognized as expense in the consolidated statements of income on a straight-line basis over the lease term. For income tax reporting purposes, expenses under operating lease arrangements are treated as deductible expense in accordance with the terms of the lease arrangements.

Company as a Lessor. Leases where the Company retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same bases as rental income.

Leases where the Company transfers substantially all the risks and rewards incidental to legal ownership are classified as finance leases.

Foreign Currency TranslationThe consolidated financial statements are presented in Philippine peso, which is the Company’s functional and presentation currency. The parent company and each of its subsidiaries determine its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to profit or loss. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.

For income tax reporting purposes, foreign exchange gains or losses are treated as taxable income or deductible expenses, in the period such are realized.

ContingenciesContingent liabilities are not recognized in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable.

Subsequent EventsPost year-end events that provide additional information about the Company’s financial position at the balance sheet date (adjusting events) are reflected in the consolidated financial statements. Post year-end events that are not adjusting events are disclosed in the notes to consolidated financial statements when material.

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3. Cash and Cash Equivalents

Cash and cash equivalents consist of:

2006 2005 (In Thousands)

Cash on hand and in banks P282,208 P257,103Short-term placements 583,311 185,000 P865,519 P442,103

Cash in banks earns interest at the respective bank deposit rates. Short-term placements are made for varying periods not exceeding three months depending on the immediate cash requirements of the Company, and earn interest at the respective short-term placement rates.

4. Receivables

Receivables are summarized below:

2006 2005(In Thousands)

Receivables from: Customers P1,185,698 P1,378,302 Traffic settlements - net (see Notes 9) 1,005,451 1,150,644 Sale of IRU (see Note 6) 418,133 - Related parties (see Note 14) 23,564 15,674Deposits to suppliers and others 93,211 81,869Current portion of long-term receivable (see Note 20) 36,944 8,443Others 97,813 108,223

2,860,814 2,743,155Less allowance for doubtful accounts 929,802 1,068,334 P1,931,012 P1,674,821

Receivables from customers are non-interest bearing and are generally on 30-day terms.

Traffic settlements represent receivables arising from interconnection agreements with other telecommunications carriers. The aforementioned receivable balances are shown net of related payables to the same telecommunications carriers (see Note 9).

Receivable from sale of IRU is for a period of one year until July 2007.

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5. Investments in Shares of Stock

Breakdown of investments are as follows:

2006 2005 (In Thousands)

Investment in an associate - at equity:Acquisition cost P6,547,044 P6,547,044Less accumulated equity in net losses (2,278,665) (2,278,665) 4,268,379 4,268,379Less allowance for impairment loss 4,268,379 4,268,379 – –Other investments - at cost: Acquisition cost 155,328 154,271 Less allowance for impairment loss -9,068 -8,014 146,260 146,257 P146,260 P146,257

The investment in an associate represents a 47% indirect ownership (owned through Marifil) in Express Telecommunications Inc. (Extelcom).

Extelcom has been continually incurring significant net losses that raise substantial doubt as to the ability of Extelcom to continue in business. Correspondingly, in 1999, the Company set up a 100% provision for impairment loss on its investment in Extelcom, amounting to P4.3 billion.

Other investments include investments in shares of stock of ABS-CBN International, Bayanmap Corporation (Bayan Map) and Naga Telephone Company, Inc. (Nagatel) which represent investments in unquoted shares of stock that are designated as available-for-sale financial assets.

Impairment loss of P8.0 million to write down the carrying value of the Company’s investments in Bayanmap and Nagatel to zero was recognized due to the continuing net losses incurred by the investee companies which raise substantial doubt as to the future benefits expected to be recovered from the investments.

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6. Property and Equipment

Movements in the property and equipment account are presented below:

2006

Reclassifications/

Adjustments

2005 Additions Disposals (see note 9) 2006

(In Thousands)

Cost:

Land P617,231 P- P- (P60) P617,171

Telecommunications equipment 26,327,984 1,637,075 (79,995) (445,837) 27,439,227

Buildings and improvements 1,333,952 6,629 - (235) 1,340,346

Furniture, fixtures and office

equipment 1,540,897 112,960 (11,292) (27,062) 1,615,503

Transportation equipment 207,501 17,928 (9,417) (57) 215,955

Equipment under capital lease 612,543 - - - 612,543

Total (Carried Forward) 30,640,108 1,774,592 (100,704) (473,251) 31,840,745

Accumulated depreciation

and amortization:

Telecommunications equipment (12,132,994) (1,755,734) 13,765 177,314 (13,697,649)

Buildings and improvements (446,994) (59,421) - 2,662 (503,753)


equipment (1,382,895) (33,371) 10,911 (9,255) (1,414,610)

Transportation equipment (161,589) (11,736) 9,417 - (163,908)

Equipment under capital lease (352,009 (22,547) - - (374,556)

(14,476,481) (1,882,809) 34,093 170,721 (16,154,476)

Impairment loss (1,504,210) - - - (1,504,210)

14,659,417 (108,217) (66,611) (302,530) 14,182,059

Construction in progress 396,471 - - (136,517) 259,954

P15,055,888 P14,442,012

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2005

Reclassifications/Transfer to Investment

2004 Additions Disposals Properties 2005

(In Thousands)

Cost:

Land P617,021 P210 P- P- P617,231

Telecommunications equipment 25,945,484 237,953 (527,626) 672,173 26,327,984

Buildings and improvements 1,580,629 12,774 (181,018) (78,433) 1,333,952


equipment 1,635,150 13,150 (132,098) 24,695 1,540,897

Transportation equipment 242,858 12,052 (47,409) - 207,501

Equipment under capital lease 612,543 - - - 612,543

30,633,685 276,139 (888,151) 618,435 30,640,108

Accumulated depreciation

and amortization:

Telecommunications equipment (P10,597,736) (P1,994,203) P58,591 P354 (P12,132,994)

Buildings and improvements (572,258) (88,327) 159,478 54,113 (446,994)


equipment (1,418,402) (60,108) 96,061 (446) (1,382,895)

Transportation equipment (188,530) (8,911) (35,852) - (161,589)

Equipment under capital lease (329,462) (22,547) - - (352,009)

(13,106,388) (2,174,096) 749,982 54,021 (14,476,481)

Impairment loss (1,519,250) - 15,040 - (1,504,210)

16,008,047 (1,897,957) (123,129) 672,456 14,659,417

Construction in progress 229,427 880,253 (2,651) (710,558) 396,471

P16,237,474 P15,055,888

Depreciation and amortization are computed using the straight-line method over the following estimated useful lives, or in the case of leasehold improvements (included under Buildings and improvements) over the term of the lease, whichever is shorter:

Telecommunications equipment 3-20 yearsBuildings and improvements 5-25 yearsFurniture, fixtures and office equipment 2-5 yearsTransportation equipment 3-12 years

Depreciation and amortization charged to operations amounted to P1.9 billion in 2006 and P2.2 billion in 2005.

Impairment loss of P1.5 billion in 2003 was recognized representing the write-down of telecommunications equipment to recoverable amount. The recoverable amount was based on the value in use and was determined at the cash-generating unit level. In determining value in use for the cash-generating unit, the cash flows were discounted at a nominal rate of 12% on a pretax basis.

Telecommunications equipment includes the cost of the Company’s ownership share through Bayantel in the NDTN capacity (see Note 1) and Indefeasible Right of Use (IRUs) of circuits in various other cable systems. As discussed in Note 23, Bayantel and PLDT entered into IRU agreements involving the lease of specified capacities which were considered as finance leases.

In 2006, the Company entered into an agreement with another telecommunications company for the sale of IRU on its network capacity in NDTN for a consideration of P639.0 million. The arrangement which involves the use by the buyer of specified capacities over the economic life or termination of the network was considered as a finance lease as the significant risks and rewards of ownership are transferred to the buyer. Receivable arising from the transaction amounted to P418.1 million as of December 31, 2006 (see Note 4).

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In March 2005, the Company entered into an agreement with Japan Telecom Co. Ltd. to purchase rights with respect to capacity on an IRU in certain international cable systems for a period of 15 years. Related payable amounted to P14.4 million as of December 31, 2006 and P88.7 million as of December 31, 2005 (see Note 9).

Property and equipment with a carrying value of P1.4 billion in 2006 and P1.7 billion in 2005 are mortgaged to secure RCPI’s loans (see Notes 10 and 11). The entire property and equipment of Bayantel with a carrying value of P12.9 billion in 2006 and P13.5 billion in 2005 are mortgaged to secure its loans that were restructured pursuant to a Court decision on June 28, 2004 (see Notes 1 and 10).

7. Investment Properties

The movements in the investment properties account are as follows:


CostBalance at beginning of year P252,064 P159,944Reclassifications/transfers from property and equipment – 92,120Balance at end of the year 252,064 252,064Accumulated DepreciationBalance at beginning of year 102,194 38,468Depreciation 12,923 9,573Reclassifications/transfers from property and equipment – 54,153Balance at end of the year 115,117 102,194Net Book Value P136,947 P149,870

This account pertains to certain building and related improvements that are being leased out to third parties.

The fair value of the investment properties amounted to P181.7 million based on valuations performed by an independent appraiser as of December 31, 2005.

Management believes the fair value of the investment properties did not significantly change as of December 31, 2006. The fair value represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s-length transaction at the date of valuation.

Investment properties of Bayantel and RCPI with an aggregate carrying value of P136.9 million and P149.9 million as of December 31, 2006 and 2005, respectively, are mortgaged to secure Bayantel’s loans that were restructured pursuant to a Court decision on June 28, 2004 and RCPI’s debt subject to restructuring (see Notes 1, 10 and 11).

8. Other Noncurrent Assets

This account consists of:


Net retirement plan asset (see Note 18) 85,053 63,055Goodwill 62,156 62,156Software costs - net (see Note 19) 31,786 40,482Long-term receivable - net of current portion (see Note 20) – 169,551Miscellaneous deposits and others - net 94,680 97,040 273,675 432,284

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GoodwillGoodwill of P62.2 million was recognized by Bayantel when it increased its interest in Sky Internet to 100% in 2004.

For impairment testing, the goodwill acquired through 100% acquisition of Sky Internet’s interest in 2004 of P62.2 million has been allocated to the cash-generating unit level of Bayantel as Sky Internet is operationally and financially integrated with Bayantel and both companies’ networks are linked together to form a seamless and redundant system together with RCPI, the major operating subsidiary of Bayantel. Moreover, Sky Internet and RCPI generate substantial revenue from Bayantel through their revenue sharing agreement and they do not generate independent cash flows. The recoverable amount of the internet and data operation was based on the value use in use determined at the cash- generating unit. The cash flows were discounted using a discount rate of 12% on a pretax basis.

Software CostsThe movements of software costs account are as follows:

2006 2005 Additions 2006

(In Thousands)

Cost: Financial Management System P44,227 P- P44,227 Carrier Management System 51,662 2,749 54,411Microsoft License 6,214 - 6,214

102,103 2,748 104,852Accumulated amortization 61,621 11,445 73,066 P40,482 P31,786

2005 2005 Additions 2006

(In Thousands)Cost: Financial Management System P44,227 P– P44,227 Carrier Management System 51,662 – 51,662 Microsoft license – 6,214 6,214

95,889 6,214 102,103 42,110 19,511 61,621 P53,779 P40,482

Software costs are amortized on a straight-line basis over the estimated useful lives of 5 to 8 years.

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9. Accounts Payable and Other Current Liabilities

A summary of accounts payable and other current liabilities is presented below:


Trade (see Note 6) P750,375 P1,091,420Traffic settlements - net (see Notes 4 and 12) 426,852 344,001Advances from related parties (see Note 14) 3,131,216 2,846,801Accruals: Interest and penalties (see Note 11) 1,784,544 1,434,467 Leased lines 316,403 148,651 Taxes and licenses 174,273 477,688 Repairs and maintenance 136,533 69,672 Occupancy and utilities 62,511 41,888 Compensated absences 52,605 52,531 Professional fees 39,086 79,895 Deferred output value-added tax 32,880 319,908 Telephone sets (see Note 14) 23,293 25,854 Advertising 17,800 62,160 Pole rental (see Note 14) 8,565 13,376 Others 93,893 95,756Deferred revenue on installation fee and prepaid card sales 146,146 37,252Retention payable 88,522 91,008Deposits from customers 31,619 26,106Others (see Note 6) 133,350 68,178 P7,450,466 P7,326,612

Trade payables are non-interest bearing and are generally settled on 30-day terms.

Traffic settlements represent payables to other telecommunications carriers arising from interconnecting tolls and local services. The aforementioned payable balances are shown net of related receivables with the same telecommunications carrier (see Note 4).

In 2006, the Company reversed liabilities aggregating P1.1 billion of which P767.4 million was recognized as income in the consolidated statements of income. These are summarized as follows:

• Accrued real property tax of P310.2 million previously classified as "Taxes and licenses" above based on a SC decision upholding the real property tax exemption of the Company. The SC decision agreed with the Company that its telecommunication franchise is exempted from any real property taxes. The SC decision became final and executory on July 21, 2006. The amount was reversed to income.

• Liability to a supplier of P361.0 million in 2006, previously classified as trade payable. Management and its legal counsel believe it is no longer probable that an outflow of resources will be required to settle the obligation. The liability was reversed against the carrying value of the related equipment acquired and the remaining balance of P135.7 million was recognized as income.

• Accrued interest and penalties of P180.3 million as a result of RCPI’s debt restructuring as disclosed in Note 10.

• Various accruals on professional fees, advertising, commission, telephone and others aggregating P141.2 million was reversed to income. Other payables of P107.3 million as reversed against the carrying value of the related equipment.

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10. Restructured Debt

Outstanding Balance at Discounted ValueThe outstanding balance of the restructured debt as of December 31, 2006 and 2005 is presented below:

2006 2005 Bayantel RCPI Total Bayantel

(In Thousands)

Tranche AOriginal amount P16,714,659 P139,573 P16,854,232 P16,714,659Less: Payments to date (263,508) (2,373) (265,881) (42,187)Effect of restatement (2,012,869) - (2,012,869) (885,080)

14,438,282 137,200 14,575,482 15,787,392Less: Current portion (211,507) (2,010) (213,517) (227,931) 14,226,775 135,190 14,361,965 15,559,461Tranche BOriginal amount 8,872,676 73,743 8,946,419 8,872,676Effect of restatement (1,112,339) - (1,112,339) (509,723)

7,760,337 73,743 7,834,080 8,362,953Total 21,987,112 208,933 22,196,045 23,922,414Less unamortized discount (9,177,085) (97,801) (9,274,886) (11,162,641)Restructured debt P12,810,027 P111,132 P12,921,159 P12,759,773

The original amount of the restructured debt of Bayantel at effectivity date was discounted in accordance with PAS 39 and the resulting discount of P11.6 billion was recognized as income in 2004. The effective interest rate on the restructured debt is US bond yield + 2.8% for US dollar-denominated debt and Peso bond yield + 3% for peso-denominated debt.

As a result of Bayantel’s debt restructuring approved by the Court on June 28, 2004 (Effective Date), accrued interest and penalties of P5.7 billion was reversed and recognized as income in 2004. The income is neither subject to income tax nor gift tax pursuant to a ruling obtained by Bayantel on January 24, 2005 because the Plan was approved through a court action and not as a result of the mutual agreement of the debtors and creditors. Moreover, there is no donative intent on the part of the creditors and the condonation was made solely for business consideration.

As discussed in Note 1, the Company has ongoing negotiations with creditors of RCPI for a debt restructuring pursuant to the Court Decision. As of December 31, 2006, one of the creditors have agreed. The restructuring of the debt with the creditor resulted to the reversal of accrued interest and penalties of P219.6 million, of the amount P180.3 million was recognized in the statement income in 2006 (see Note 9) while P39.3 million was previously included as part of the principal. The income is not subject to income tax or gift tax pursuant to a ruling similar to Bayantel, as previously discussed.

The previous balance of the debt was derecognized and the restructured balance of P213.3 million (shown as original amount under Tranche A and Tranche B in above presentation) was discounted in accordance with PAS 39. The resulting discount of P101.2 million and the portion of interests and penalties of the debt subject to restructuring waived of P39.3 million were recognized as income in 2006 aggregating P140.4 million. The effective interest rate on the restructured debt is peso bond yield + 3%.

Terms of PaymentThe restructured debt is divided into sustainable debt (Tranche A) and unsustainable debt (Tranche B) and is denominated in existing currencies with an option for any of the local creditors in Tranche B to convert their US dollar (USD) denominated restructured debt into PHP at the agreement exchange rate (P54.626 to US$1) on the date of implementation.

Tranche A is repayable semi-annually on a paripassu basis up to December 31, 2023 based on a table of debt reduction computed at certain percentages of the principal. Tranche A USD denominated debt repayment milestones (DRM) have been set with reference to the business plan exchange rate and a DRM exchange rate band. If the DRM becomes greater or lower than the exchange rate band, it is subject to adjustment based on a defined formula.

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Scheduled maturities of Tranche A are as follows:

USD Denominated Loans PHP Denominated in USD In Peso Loans Total

(In Thousands)

2007 $4,045 198,326 P15,191 P213,5172008 4,326 212,104 16,226 228,3302009 10,732 526,141 40,249 566,3902010 12,417 608,806 46,571 655,3772011 and onwards 244,633 11,994,356 917,512 12,911,868 $276,153 P13,539,733 P1,035,749 P14,575,482

The interest for Tranche A is payable quarterly starting July 1, 2004 based on the following interest rates:

Period USD PHPJuly 1, 2004 - December 31, 2007 3% 6%July 1, 2008 - December 31, 2012 4% 7%July 1, 2013 - December 31, 2018 5% 8%July 1, 2019 - December 31, 2023 6% 9%

Tranche B is noninterest-bearing convertible debt and, to be repaid only if there are sufficient future cash flows. At the conclusion of the rehabilitation period, other than as the result of an event of default, eachfinancial creditor’s participation in Tranche B to the extent not previously converted, is to be converted intoBayantel’s new shares. The conversion rights in relation to Tranche B are up to a maximum of 40% of theauthorized share capital as at the effective date.

In accordance with the Plan, Bayantel and RCPI have several undertakings which pertain to operatingbudgets, capital expenditure, change of business and capital reorganization, among others. Bayantel isalso required to comply with certain financial covenants.

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Detail and Description of the Restructured DebtA tabular presentation of the restructured debt is as follows:

2006 2005

Tranche A Tranche B Total Trahche A Tranche B Total

(In Thousands)

USD denominated:

Bayantel:

Omnibus Credit

Agreement (OCA) P4,010,690 P2,155,679 P6,166,369 P4,406,419 P2,334,183 P6,740,602

Bayerische Landesbank

Girozentrale (BLG) 1,232,940 662,685 1,895,625 1,354,593 717,560 2,072,153

Express Investments III

Private Ltd. (Express

Investments) 843,656 453,451 1,297,107 926,898 491,000 1,417,898

Export Development Corp. (EDC) 430,096 231,170 661,266 472,533 250,312 722,845

Consortium of creditors 107,147 57,590 164,737 117,719 62,359 180,078

Avenue Asia Capital (AAC) 32,338 17,381 49,719 35,529 18,820 54,349

Bonds Payable 6,882,894 3,699,441 10,582,335 7,562,018 4,005,779 11,567,797

Total 13,539,761 7,277,397 20,817,158 14,875,709 7,880,013 22,755,722

PHP denominated:

Bayantel:

Consortium of creditors 150,792 80,864 231,656 152,996 80,864 233,860

Philippine Opportunities

for Growth and Income

(SPV-AMC), Inc. (POGII)

Loan A 8,362 4,494 12,856 8,485 4,494 12,979

Loan B 23,010 12,552 35,562 23,352 12,552 35,904

Others 716,357 385,030 1,101,387 726,850 385,030 1,111,880

RCPI:

Cameron Granville 2 Asset

Management, Inc. (CGAMI) 137,200 73,743 210,943 0 0 0

Total 1,035,721 556,683 1,592,404 911,683 482,940 1,394,624

Less: Current portion (213,517) - (213,517) (227,931) - (227,931)

Unamortized discount (3,359,375) (5,915,511) (9,274,886) (4,328,589) (6,834,052) (11,162,641)

P11,002,590 P1,918,569 P12,921,159 P11,230,872 P1,528,901 P12,759,773

The USD denominated portion of the restructured debt aggregated $424.6 million in 2006 and $428.6 million in 2005.

a. The OCA loans represent availments under the Omnibus Credit Agreement with Northern Telecom International Finance B.V., Siemens Aktiengesellschaft, Chemical Bank of Tokyo, and several local banks to finance the Company’s LEC and IGF projects.

b. The loan from BLG (and participated in by De Nationale Investeringsbank Asia Ltd.) were used to finance the Company’s portion of NDTN project (see Note 1).

c. The Express Investments loan was used for the design, supply, construction, installation and commissioning of equipment. Express Investments is a party to the Inter-creditor Agreement and the OCA.

d. The EDC loan was used for the purchase and installation of switching and transmission equipment for the Company’s IGF. The loan is secured by mortgages over the equipment acquired from the proceeds of the loan from Northern Telecom Limited and its affiliates, and is subject to the security sharing and enforcement arrangements under the OCA.

e. The USD-denominated consortium loans represent loans obtained from Standard Chartered Bank (SCB) and Asset Pool A (SPV-AMC), Inc. (APAI) to partially finance the Company’s expansion project.

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f. The loan from AAC was obtained for the principal amount of Australian $2.1 million to finance equipment purchases.

g. The peso-denominated consortium loans represent the loans from SCB, APAI, POGII and AAC. The AAC loan was transferred from Asian Pacific Recoveries Corporation (APRC) 2006.

h. The POGII loan A was used to finance equipment purchases. The loan is secured by a chattel mortgage on the equipment purchased from the loan proceeds. The mortgage collateral under this loan is subject to the security sharing and enforcement arrangements under the Omnibus Credit Agreement.

i. The POGII loan B was a loan of Nagatel, a subsidiary, to fund its expansion programs and was assumed by the Company pursuant to a Deed of Conveyance. The loan is secured by land and improvements of Nagatel which were subsequently transferred to the Company under the Deed of Conveyance. The Company provided guarantee for the loan.

j. The bonds were issued mainly to partially pay existing loans. Bayantel, as issuer, and the Company, as guarantor of the bonds, were jointly and severally liable to pay additional interest and penalties on the bonds because Bayantel failed to file the exchange offer with the U.S. Securities and Exchange Commission for the registration of the bonds.

k. The CGAMI loan was used to finance the installation and upgrading of RCPI’s nationwide SDH telecommunications backbone from Luzon to Mindanao.

The Company provided guarantees on all of the above loans except item (h) on which Lopez, Inc. provided the guarantee.

The above loans except items (e), (f), (g), (j) and (k) are covered by mortgages over Bayantel’s existing and future real property and movable assets, pledge over some of its subsidiaries’ shares of stock and assignment of its contract rights. The chattel mortgage covers switching, transmission and ancillary equipment. Real estate mortgages have been executed covering certain parcels of land and improvements. The collateral pool has a total carrying value of P12.8 billion in 2006 and P13.2 billion in 2005.

Items (e) and (g) above are secured by real estate and chattel mortgages over properties and telecommunications equipment in Tacloban, Samar and Leyte with a total carrying value of P236.3 million in 2006 and P268.4 million in 2005.

Item (k) together with the Banco De Oro Universal (BDO) loan under debt subject to restructuring in Note 11 is covered by mortgage on SDH telecommunications backbone with a carrying value of P300.3 million in 2006 and P343.6 million in 2005.

11. Debt Subject to Restructuring

As discussed in Notes 1 and 10, the Court approved only the debt restructuring of Bayantel. RCPI’s debt subject to restructuring are as follows:


US Denominated: AAC P226,544 P245,303 Deutsche Bank (DB) 282,714 306,124PHP Denominated: DB and other creditors 957,120 957,120 Banco de Oro Universal (BDO) 300,000 300,000 POGII 180,000 180,000 CGAMI 0 200,000Principal amount of debt 1,946,378 2,188,547Accrued interest and penalties 345,589 399,721

P2,291,967 P2,588,268

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The USD Denominated portion of the debt subject to restructuring aggregated $10.4 million as of December 31, 2006 and 2005.

A description of the debt subject to restructuring is summarized below:

a. The AAC loan was obtained to finance the acquisition of supplies and microwave components for RCPI Synchronized Digital Hierarchy (SDH) telecommunications backbone upgrade project.

b. The DB USD-denominated loan was used to finance equipment purchases.

c. The DB and other creditors PHP-denominated loans were used for loan restructuring. These represent borrowings from DB, POGII and AAC. The AAC loan was transferred from APRC in 2006.

d. The BDO and CGAMI loans were used to finance the installation and upgrading of RCPI’s nationwide SDH telecommunications backbone from Luzon to Mindanao. CGAMI loan was restructured in 2006 and was reclassified under restructured debt (see Note 10).

e. The POGII loan represents unsecured short-term loan.

The loans in items (a) and (b) are covered by mortgages on equipment acquired from the proceeds of the loans with a carrying value of P0.7 billion in 2006 and P0.9 billion in 2005. The Company provided guarantees on all of the above loans except the 1995 credit availed in (a) above on which Lopez, Inc. provided the guarantee.

The loan in item (c) is secured by a real estate mortgage over certain parcels of land, as well as a chattel mortgage on certain properties with carrying value of P451.8 million in 2006 and P513.0 million in 2005.

The loan in item (d) is covered by mortgage on SDH telecommunications backbone as discussed in Note 10.

Based on the original loan agreements, RCPI loans earned interest at effective rates ranging from 6.16% to 15.45% for PHP denominated loans and 2.10% to 4.78% for USD denominated loans. Penalties imposed by creditors for default in payment range from 1% to 2% for USD denominated loans and 1% for PHP denominated.

The loan agreements contain certain provisions pertaining to the use of the proceeds of the loans, disposal of property and equipment, incurrence of additional debt, entering into mergers and consolidations, and disposal or mortgage of assets pledged as security for the loans. The loan agreements also require the maintenance of certain financial ratios. RCPI did not meet the required financial ratios as of December 31, 2006 and 2005.

Effective June 11, 2001, upon notification to creditors of RCPI, interest payments were based on LIBOR + 1.25 10 2% on all USD denominated loans and Philippine T-Bills + 1% on all PHP-denominated loans. Penalties imposed for default in payment range from 1% to 4% for USD denominated loans and 12% to 24% for PHP-denominated loans.

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12. Preferred Shares Subject to Mandatory Redemption

The Company has 2,604,580 authorized and issued convertible preferred shares at P100 par value.

2006 2005 (In USD) (In PhP) (In USD) (In PhP)

(In Thousands)

Preferred shares - P100 par value: At par value $6,655 P260,458 $6,655 P260,458 Additional paid-in capital 123,574 4,836,266 123,574 4,836,266

130,299 5,096,724 130,229 5,096,724 Undeclared dividends and accreted yield 36,560 2,059,804 36,560 2,059,804Effect of restatement – 1,021,117 – 1,698,279 $166,789 P8,177,645 $166,789 P8,854,807

Under PAS 32, preferred shares that provide for mandatory redemption for a fixed or determinable amount at a fixed or determinable date are classified as financial liabilities. Thus, starting January 1, 2005, the total redemption price, including undeclared dividends and accreted yield up to redemption date of the convertible preferred shares were classified as financial liabilities.

The convertible preferred shares were issued in 1998 at the issue price of US$50 per share. The convertible preferred shares are entitled to cumulative dividends payable in US dollars, equal to 2% per year based on the issue price. The dividends are payable in three annual installments starting January 8, 2001, the end of the third year from the issue date. Unpaid dividends earn annual interest at LIBOR + 4%.

The convertible preferred shares are convertible to common shares at the option of the holder at the conversion ratio of 4.76 common shares for each share of convertible preferred share. The conversion ratio is subject to adjustment for, among other things, declaration of common stock dividends; combination, subdivision or reclassification of common shares; and issuance to any person other than the shareholders of the Company of any equity interest.

The convertible preferred shares rank senior to common shares with respect to dividend rights, rights on liquidation and distribution of assets upon winding-up and dissolution of the Company. Under the Guarantee issued by Benpres to the holders of convertible preferred shares dated January 16, 1998, in the event that the Company is required to declare and pay any dividends but is legally unable to make such payment out of unrestricted retained earnings of the Company, Benpres agreed to advance to each holder, on behalf of the Company, such amount that the holder is entitled to receive from the Company with respect to such dividend payments.

Advance payments of Benpres aggregated US$29.0 million (P1.4 billion, using the December 31, 2006 foreign exchange rate of P49.03 to US$1.00) and US$24.3 million (P1.3 billion, using the December 31, 2005 foreign exchange rate of P53.09 to US$1.00) as of December 31, 2006 and 2005, respectively.

Also, pursuant to the said Guarantee, the Company and Benpres entered into an Indemnity Agreement whereby the Company agreed to indemnify Benpres in the event that Benpres is required to pay the guaranteed obligations. Under the said Indemnity Agreement, the Company shall indemnify and keep Benpres indemnified by paying Benpres the guaranteed obligations actually paid by Benpres within 45 days from the date of such payment. The Company shall also indemnify Benpres for all costs, liabilities, losses and expenses that Benpres may incur by reason of, in connection with, or in relation to the Guarantee. Yearly payments made by Benpres were charged against interest expense in the consolidated statement of income starting January 1, 2005 in accordance with PAS 32, and against “Deficit” in the consolidated statement of changes in capital deficiency prior to 2005.

Advances made by Benpres effective November 2002 bear interest at LIBOR plus 1% on the value of the convertible preferred shares as of May 30, 2003.

The convertible preferred shares were subject to mandatory redemption on January 8, 2003 at US$50 per share plus accrued and unpaid dividends and a final dividend that will provide holders with an effective annual yield of 6.5% compounded annually from issue date to the date of redemption. Benpres, pursuant to the said guarantee, has likewise guaranteed payment in full of the convertible preferred shares at its accreted value at maturity date. On January 8, 2003, the Company and Benpres were unable to redeem the

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shares. Benpres is presently negotiating with the preferred shareholders on the settlement of the mandatory redemption price. As of December 31, 2006, no actual redemption has been made by the Company and Benpres.

As of December 31, 2006 and 2005, the undeclared dividends and the accreted yield to effectively give the preferred shareholders an annual yield of 6.5% from the date of issuance to the date of redemption amounted to US$36.6 million (equivalent to P1.8 billion as of December 31, 2006 and P1.9 billion as of December 31, 2005), excluding payments already made by Benpres for interest at LIBOR + 1%.

At a mandatory redemption price of US$50 a share, the total redemption price for the 2,604,580 outstanding convertible preferred shares, including accreted yield up to redemption date based on the original terms will be US$166.8 million (equivalent to P8.2 billion as of December 31, 2006 and P8.9 billion as of December 31, 2005).

All sums payable under the terms of the convertible preferred shares in respect of face value, dividends, and yield to final redemption shall be paid in USD.

13. Capital Stock

Classification and description of the Company’s capital stock are as follows:

Number of Shares Authorized Issued Amount

(In Thousands Except Earnings Per Share Data)

Common shares - P100 par value: Class A 95,546,565 87,421,970 P8,742,197 Class B 31,848,855 27,987,407 2,798,741 P11,540,938

Class A and Class B common shares are identical in all respects except that Class A shares are restricted in ownership to Philippine nationals as well as Philippine corporations. Philippine nationals should own at least 60% of the Company’s outstanding common shares.

14. Related Party Disclosures

Parties are considered to be related if one party has the ability, directly and indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence.

The Company, in the normal course of business, has transactions with related parties. These are summarized below:

Rent/Lease Guarantee

Expenses Internet Fee

Related Party Relationship Year (See Note 23) Expenses (See Note 12) Receivable Payable

Benpres Stockholder 2006 P- P395,981 P99,904 P- P3,086,799

2005 - 463,268 107,467 - 2,806,923

ABS-CBN, Affiliate 2006 - - - 307,442 -

International 2005 - - - 306,842 -

Manila Electric Affiliate 2006 - - - - 14,451

Company 2005 15,381 - - - 13,376

(Meralco)

Adtel, Inc. Affiliate 2006 - - - - P23,193

2005 - - - - 25,854

Others Affiliate 2006 - - - 23,564 44,417

2005 - - - 15,674 39,878

2006 P- P395,981 P99,904 P331,006 P3,168,860

2005 15,381 463,268 107,467 322,516 2,886,031

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Receivables from related parties consist of share in common expenses and non interest-bearing cash advances mainly for working capital requirements. Allowance for doubtful related party accounts amounted to P10.9 million and P11.8 million as of December 31, 2006 and December 31, 2005, respectively.

Payables to related parties consist of USD-denominated payments to preferred shareholders by Benpres on behalf of the Company (see Note 12), interest and non-interest bearing cash advances mainly for working capital requirements, purchase of telephone sets for sale to subscribers and telecommunications installations services provided by Adtel, Inc. under competitive bids totaling P14.5 million in 2006 and P25.9 million in 2005, and share in common expenses.

Bayantel has a joint pole agreement with Meralco under which Bayantel pays the former a monthly amount for the use of poles for telephone cabling. Lease payments for the use of poles amounted to P29.1 million in 2006 and P15.4 million in 2005. Accrued pole rental amounted to P8.6 million in 2006 and P13.4 million in 2005.

Guarantee fee and interest expense pertain to the corporate guarantees issued by Benpres on the convertible preferred shares (see Note 12). As provided in the covering Indemnity Agreement, the Company shall pay Benpres an annual guarantee fee of 1.5% of the total issue price of the convertible preferred shares. In addition, the Company shall pay Benpres any payments made under the Guarantee plus interest at its prevailing borrowing rate plus 1.5% per year for the outstanding guaranteed payments made by the latter.

The Company and Lopez, Inc. provided guarantee to various credit facilities obtained by Bayantel and RCPI (see Notes 10 and 11).

Compensation of key management personnel of the Company:


Short-term employee benefits P44,105 P70,872Post-employment benefits 2,892 4,647 P46,997 P75,519

15. Net Operating Revenues

Net operating revenues consist of:


Local services P1,903,551 P1,908,947Long-distance services 1,096,581 1,132,918Data 1,684,806 1,599,817Others 97,254 79,938

4,782,192 4,721,620Net operating revenues attributable to discontinued operations (see Note 20) – 376,802 P4,782,192 P5,098,422

Local and long-distance services are stated net of the share of the other telecommunications carriers.

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16. General and Administrative Expenses

A breakdown of general and administrative expenses is presented below:


Personnel costs (see Notes 17 and 18) P557,648 P686,493Repairs and maintenance 509,183 380,457Occupancy and utilities (see Note 14) 382,034 345,356Leased circuit expenses (see Note 23) 346,054 341,007Marketing expenses 248,331 242,929Professional and other service fees 185,470 206,100Telephone sets (see Note 14) 174,932 36,065Transportation and travel 103,958 96,425Insurance, taxes and licenses 115,761 135,157Entertainment, amusement and recreation 37,444 31,454Provision for loss 12,954 –Miscellaneous 95,353 135,632 P2,769,122 P2,637,075

17. Personnel Costs

Personnel costs consist of:


Salaries and wages P462,347 P490,124Employee benefits (see Note 18) 95,301 196,369 P557,648 P686,493

18. Pension Plan

Bayantel maintains a tax-qualified, noncontributory defined benefit retirement plan covering its permanent employees. The benefits are based on years of service and compensation during the latest year of employment.

The following tables summarize the components of net benefit expense (income) recognized in the consolidated statements of income and the funded status and amounts recognized in the consolidated balance sheets.

Net Benefit Expense (Income)


Current service cost P10,588 P10,303Interest cost 11,844 11,219Expected return on plan assets (20,889) (19,474)Curtailment loss – 1,753Change in asset limit (23,541) – (P21,998) P3,801

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Net Retirement Plan Asset


Present value of obligation P245,034 P87,479Fair value of plan assets (205,057) (174,075)

39,977 (86,596)Unrecognized actuarial losses (125,030) –Unrecognized asset – 23,541Net plan asset (P85,053) (P63,055)

Net plan asset represents the present value of the economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

Movements of net plan asset recognized in the consolidated balance sheets are as follows:


At January 1 (P63,055) (P90,397)Benefit expense (income) (21,998) 3,801At December 31 (85,053) (86,596)Unrecognized asset - 23,541Net plan asset (85,053) (63,055)

Change in asset limit charged (credited) to the consolidated statements of income (P23,541) P-

Changes in the present value of the defined benefit obligation are as follows:


Defined benefit obligation, January 1 P87,479 P94,526Actuarial loss 135,123 –Interest cost 11,844 11,219Current service cost 10,588 10,303Curtailment gain – (27,541)Benefits paid – (1,028)Defined benefit obligation, December 31 P245,034 P87,479

Changes in the fair value of plan assets are as follows:


Fair value of plan assets, January 1 P174,075 P184,923Expected return in plan assets 20,889 19,474Actuarial gains 10,093 -Benefits paid - (30,322)Fair value of plan assets, December 31 205,057 174,075

Actual return on plan assets P30,982 P19,474

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Actuarial gain on experience adjustments included in defined benefit obligation amounted to P11.8 million in 2006.

The principal actuarial assumptions used in determining retirement benefit obligations/assets were as follows:

2006 2005Discount rate 8% 13%Expected rate of return on plan assets 12 12Salary increase 8 8

The overall expected rate of return on assets is determined based on the market price prevailing on the balance sheet date, applicable to the period over which the obligation is to be settled.

As of December 31, 2006, the components of the Company’s plan assets are as follows:

AmountCash in bank P19,617Investments in: Government securities 77,583 Bonds 45,659 Available for Sale 30,690 Other securities 17,488Loans and discounts 10,482Receivables 3,538 P205,057

The Company does not expect to contribute to the fund in 2007.

19. Depreciation and Amortization

Depreciation and amortization consist of:


Depreciation of property and equipment and investment properties (see Notes 6 and 7) P1,895,732 P2,160,642Amortization of software costs and others (see Note 8) 11,445 12,416 P1,907,177 P2,173,058

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20. Discontinued Operations

Pursuant to a purchase agreement dated August 2, 2005, RCPI sold its storefront business (Storefront), including its subdivision Agency Expansion, to a company owned by certain former officers of the RCPI (Buyer) for P221.8 million at a gain of P89.9 million.

The sale comprise of the net assets of Storefront and Agency Expansion as of May 31, 2005. However, the RCPI and the Buyer agreed to a transitory period from the affectivity of the sale up to October 31, 2005, for the Buyer to complete its registration and other administrative requirements with certain government agencies. As a result, revenue from Storefront during the transitory period of P128.4 million and related expenses of P128.0 million were recognized by RCPI and included under discontinued operations in the 2005 consolidated statement of income. The results of operation of the Storefront and Agency Expansion in 2005 were classified under the discontinued operations section of the 2005 consolidated statement of income. Results of operations for the five months ended May 31, 2005 follows:

Amount(In Thousands)

Net operating revenue P376,802Cost of sales and services 245,924Gross profit 130,878General and administrative (53,318)Gain on disposal of storefront business 89,870Selling expenses (17,749)Foreign exchange loss - net (7,700)Interest expense and other financing costs (1,029)Depreciation and amortization (649)Rental income 60Gain on disposal of property and equipment 58Others (1,922)Income before income tax 138,499Provisions for income tax 5,434Net income attributable to discontinuing operations P133,065

The net operating cash flows provided by Storefront and Agency Expansion are as follows:

2005 2004(In Millions)

Net cash inflow P23.4 P106.1

The purchase agreement also included, among others, the absorption of the Buyer of the Storefront employees, including assumption of related benefit liabilities, and assignment of contracts, including the Company’s lease contracts on PCO, contract with First VSAT and LAN Resources, Inc. and merchant contracts for money transfer, transport ticketing, payment collection, and other similar arrangements for allied services of Storefront.

Receivable arising from the purchase agreement amounted to P36.9 million as of December 31, 2006 and P178.0 million as of December 31, 2005. The receivable was fully collected in March 2007.

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21. Income Tax

Deferred tax assets not recognized relate to the following temporary differences NOLCO and carry forward benefits of MCIT:


Temporary differences on: Allowance for: Allowance for impairment losses P1,372,676 P1,504,210 Doubtful accounts 899,317 1,032,255 Inventory obsolescence 25,396 45,133 Unrealized foreign exchange loss (gain) - net (575,711) 1,874,885 Accrued commutation pay and others 150,746 64,498NOLCO 5,792,790 7,784,695Carry forward benefits of MCIT 107,850 107,926 P7,773,064 P12,413,602

Deferred tax assets were not recognized because the Company is not expecting that sufficient taxable profit will be available against which deferred tax assets can be applied.

The deferred tax liability of P3.2 billion as of December 31, 2006 and P3.8 billion as ofDecember 31, 2005 pertains to the tax effect of the unamortized discount on restructured debt (see Note 10).

NOLCO and MCIT as of December 31, 2006 can be carried forward and claimed as deduction against regular taxable income and as a deduction from regular income tax liability, respectively, as follows:

Year Incurred/Paid Carryforward Benefit Up To NOLCO MCIT(In Thousands)

2004 December 31, 2007 P4,738,959 P34,2682005 December 31, 2008 1,049,069 26,5162006 December 31, 2009 4,762 47,141

P5,792,790 P107,925

NOLCO of P2.0 billion and MCIT of P25.6 million expired in 2006.

The reconciliation between the statutory tax rates and the effective income tax rate follows:

2006 2005Applicable statutory tax rates (35.00%) (32.50%)Change in unrecognized deferred tax assets (230) 23.52Effect of change in tax rate – 3.22Interest income subjected to lower final tax rate and others (188.94) (106.65)Reversal of accrued interest and penalties (92.15) –Effective tax rates (98.21%) (47.41%)

In May 2005, Republic Act (R.A.) No. 9337 was signed into law, amending certain provisions of the Tax Reform Act of 1997 including the Expanded VAT Act. R.A. No. 9337 should have taken effect on July 1, 2005. However, on July 1, 2005, a temporary restraining order was issuedagainst R.A. No. 9337, which was subsequently lifted on October 18, 2005. Effective November 1, 2005, the new regular corporate income tax rate, which was previously 32%, is 35%.

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22. Registration with the Board of Investments (BOI)

Bayantel is registered with the BOI under the Omnibus Investments Code of 1987 (Executive Order No. 226) as a preferred non-pioneer expanding operator of telecommunications facilities (IGF, satellite stations and LEC services). Under the terms of its registration, Bayantel is entitled to certain tax (e.g., duty free importation) and nontax incentives subject to certain requirements, principally that of maintaining a specified debt-to-equity ratio and a separate accounting system for its registered activity. No incentives were availed in 2006 and 2005.

23. Leases

Finance LeasesBayantel and PLDT are lessee and lessors in several IRU agreements that are considered as finance leases. Obligation under finance lease was fully paid in 2005. Moreover, as discussed in Note 6, the Company entered in an IRU agreement with another telecommunications company in 2006 under the same finance lease arrangement, as lessor.

Operating LeasesOn December 22, 1998, Bayantel entered into a lease agreement with Mabuhay Philippines Satellite Corporation for the lease of a transponder on a full time basis. The lease is for a period of three years up to December 22, 2001 and may be extended by mutual agreement of both parties, adjusted to prevailing conditions. On January 1, 2002, Bayantel renewed the lease for four years up to December 31, 2005. On an amendment dated March 15, 2005, the lease was extended until December 31, 2007.

Total rent charged to operations amounted to P260.9 million and P157.2 million in 2006 and 2005, respectively.

Future minimum annual lease payments for satellite space (expressed in pesos using the December 31, 2006 foreign exchange rate of P49.03 to US$1.00) amounted to P58.8 million in 2007.

24. Contingencies

The Company is a party to various cases and assessments which are pending in courts or are under protest. Management and the Company’s legal counsels strongly believe that the liabilities, if any that may result from the final outcome of these cases and assessments will not materially affect the Company’s financial position and results of operations.

25. Contracts and Other Matters

A summary of contracts and other matters are discussed below:

a. Bayantel, together with the other members of a consortium of Philippine telecommunications carriers (Co-owners), have entered into management contracts for NDTN, a telecommunication backbone facility. Under these contracts, the Co-owners have designated Telicphil to oversee the maintenance of the NDTN project and appointed Telicphil to act on their behalf in the management and administration of NDTN. Accordingly, only the Coowners are liable for all monetary obligations that may arise from such contracts (see Note 1).

b. Pursuant to RA 7925, Bayantel among others, shall make a public offering through the stock exchange of at least 30% of its aggregate common stocks within a period of five years from the start of its commercial operations. The Company has not made the public offering as of December 31, 2006.

c. Others account in the consolidated statements of income are composed of immaterial individual balances.

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26. Financial Risk Management Objectives and Policies

The Company’s principal financial instruments, comprise of restructured debt, debt subject to restructuring, convertible preferred shares, advances to and from related parties, and cash and cash equivalents. The main purpose of these financial instruments is to finance the Company’s operations. The Company has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations.

The main risks arising from the Company’s financial instruments are interest rate risk, liquidity risk, foreign currency risk and credit risk. The BOD reviews and approves policies for managing each of these risks and they are summarized below:

Interest Rate RiskThe Company’s exposure to changes in interest rates relates primarily to the Company’s long-term debt obligations and convertible preferred shares subject to mandatory redemption.

The following table sets out the carrying amount, by maturity, of the Company’s financial instruments that are exposed to interest rate risk:

Fixed rate. The Company’s financial instruments that are exposed to fair value interest rate risk consist of the restructured debt, which is subject to fixed rates. The carrying value and schedule of maturities are presented in Note 10.

Floating rate. The Company’s financial instruments that are exposed to cash flow interest risk consist mainly of debt subject to restructuring amounting to P2.6 billion as of December 31, 2006 and as of December 31, 2005 and due to a related party amounting to P2.8 billion as of December 31, 2006 and as of December 31, 2005 which are subject to floating rates. The financial instruments subject to floating rates are due and demandable.

Interest on financial instruments classified as floating rate is repriced monthly. Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. The other financial instruments of the Company that are not included in the above tables are noninterest bearing and are therefore not subject to interest rate risk.

Foreign Currency RiskThe Company’s currency exposure relates to foreign currency in which traffic receivables, accounts payable, restructured debt, debt subject to restructuring, advances from a related party, and convertible preferred shares subject to mandatory redemption have to be collected and paid.

The Company’s USD monetary assets and liabilities and their PHP equivalents follow:

2006 2005 USD PHP USD PHP

(In Thousands)

Assets: Cash and cash equivalents $4,830 P236,813 $1,790 P95,038 Receivables 12,967 635,769 14,008 758,081 17,797 872,582 15,798 853,119Liabilities: Accounts payable and other current liabilities $1,483 P72,718 $12,374 P660,633 Preferred shares subject to mandatory redemption 166,789 8,177,645 166,789 8,854,807 Restructured debt 272,107 13,341,417 236,626 12,562,474 Debt subject to restructuring 10,387 509,258 10,387 551,427 450,766 22,101,038 426,176 22,629,341Net USD denominated monetary liabilities $432,969 P21,228,456 $410,378 P21,776,222

For purposes of translating the USD denominated monetary assets and liabilities, the foreign exchange rates used were P49.03 to US$1.00 and P53.09 to US$1.00 as of December 31, 2006 and 2005, respectively.

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Credit RiskConcentration of credit risk relating to customer receivables is limited due to the large number of customers. For traffic settlement receivables from other telecommunication companies, the concentration of the credit risk is also limited due to the netting agreements with accounts payable to these companies.

Credit risk arising from the inability of a counterparty to meet the terms of the Company’s financial instruments is generally limited to the amount, if any, by which the counterparty’s obligations exceed the obligation of the Company.

With respect to credit risk arising from the other financial assets of the Company, which comprise cash and cash equivalents, advances to related parties and derivative instruments, the Company’s exposure to credit risk arises from default of the counter party, with a maximum exposure equal to the carrying amount of these instruments.

Liquidity RiskThe Company’s objective is to maintain a balance between continuity of funding and flexibility through the availments of loans and advances to and from related parties.

27. Financial Instruments

Fair ValuesSet out below is a comparison by category of carrying amounts and fair values of all of the Company’s financial assets and liabilities that are carried in the consolidated financial statements as of December 31, 2006 and 2005:

Carrying Carrying Amount Amount Fair Value Fair Value

2006 2005 2006 2005(In Thousands)

Financial Assets: Cash and cash equivalents P865,519 P442,103 P865,519 P442,103 Receivables 1,978,524 1,674,821 1,978,524 1,674,821 Long-term receivable First tranche - 107,994 - 107,994 Second tranche - 70,000 - 84,222 Miscellaneous deposits 89,737 61,324 87,741 62,574Financial Liabilities: Accounts payable and other current liabilities 7,450,466 7,326,612 7,450,466 7,326,612 Preferred shares subject to mandatory redemption 8,177,645 8,854,807 8,177,645 8,854,807 Restructured debt 12,810,027 12,987,704 13,252,364 14,181,381 Debt subject to restructuring 2,291,967 2,588,268 2,291,967 2,588,268 Other noncurrent liabilities 53,362 53,859 53,362 53,859

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate on such date:

Cash and Cash Equivalents, Receivables, Advances to and from Related Parties, and Accounts Payable and Other Current Liabilities. Due to the short-term nature of transactions, the fair values approximate the amount of consideration at balance sheet date.

Long-term Receivable (First Tranche), Preferred Shares Subject to Mandatory Redemption and Debt Subject to Restructuring. Estimated fair value approximates the carrying amounts as of balance sheet date because of the monthly repricing of the floating rates based on the prevailing market interest rates.

Restructured Debt, Long-term Receivable (Second Tranche) and Miscellaneous Deposits. The fair value of the financial instruments was determined using risk free rates on similar Pesodenominated financial instruments and USD-denominated financial instruments, adjusted for credit risk.

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Bayan Telecommunications Holdings Corporation Fs 2006

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