Professional Documents
Culture Documents
01 Financial Highlights
04 Message to Stockholders OUR MISSION
We transform and enrich people’s lives through communications.
07 Message of the President
12 2005 Operational Achievements
16 Management’s Discussion & Analysis OUR VALUES
20 Wireless Products & Services Commitment to the Customer
22 GlobeSolutions Our customers are our greatest passion, and our business reason
25 Innove for being.
30 Board of Directors
Accountability
34 Senior Executive Group Thus, we do whatever it takes and hold ourselves personally
37 Report of Independent Auditors responsible and accountable to satisfy, and even exceed their
110 Business Centers expectations.
116 Corporate Social Responsibility
Innovation
We are relentless in the pursuit of innovation, willing to take risks to
Teamwork
As importantly, we value each other’s unique contributions and
Integrity
In everything we do, we are ethical, just and honorable. Because
“Your Company will also ultimately, these are what count to our Nation and our God.
sustain its initiatives
for achieving better
cost structures and for
enhancing execution
effectiveness.”
- Gerry Ablaza
GLOBE TELECOM, INC.
07 28
FINANCIAL HIGHLIGHTS
Wireless Subscribers (in 000s) Net Service Revenues (in Pm)
01 4,588 01 28,235
02 6,572 02 39,761
03 8,860 03 47,535
04 12,514 04 52,741
05 12,404 05 54,897
01 15,811 01 4,379
02 26,704 02 6,918
03 27,772** 03 9,953 **
04 32,895** 04 11,396**
05 31,972 05 10,315
Property & Equipment, Intangible Assets and Market Capitalization (in Pm)
Investment Property (in Pm)
01 89,101 01 80,620
02 96,270 02 67,978
03 95,946** 03 120,317
04 102,849** 04 133,608
05 99,915 05 96,947***
1
1. Jaime Augusto Zobel de Ayala II 2. Lim Chuan Poh 3. Delfin L. Lazaro
GLOBE TELECOM, INC.
2
In all that we do,
Globe has always
been about giving
Filipinos what they
want, and providing
what they need.
The changing dynamics in the domestic telecommunications industry has We continued to lay the
posed increased challenges and intensified competition in the market which put
pressure on your Company’s profitability in 2005. This prompted Globe to focus groundwork for the next wave of
heavily on refining its business model to better adapt and respond to these
growth in the sector.
challenging market conditions.
Globe has also continued to tap the vast potentials of the mobile phone beyond
Our efforts this year centered on strengthening Globe’s competitiveness to its traditional use in communication to allow services that include microfinance
achieve better topline performance while enhancing value and returns for transactions through G-Cash. We have expanded our G-Cash partnerships with
our customers and stakeholders. More importantly, we continued to lay the more merchants, retailers and banks as it continues to build momentum for this
groundwork for the next wave of growth in the sector. The new trends toward service. All these initiatives proved to be effective in increasing patronage which
greater convergence of fixed and mobile services, the advent of new generation reflected positively in the growth of Globe’s wireless revenues during the year.
technologies and regulatory-driven changes with the licensing of new services
such as Voice over Internet Protocol and broadband wireless services are Investments in the past years to develop the wireline segment of our business
certain to usher in a new dimension in Philippine telecommunications services. have also yielded positive results as indicated by the strong growth in wireline
subscribers and revenues this year. Various initiatives were introduced to expand
IMPROVING PRICE AND MARKET COMPETITIVENESS and increase market presence for all types of wireline voice and data services.
In line with moves to reinforce competitiveness, Globe directed its marketing
efforts towards price-based promotions and more innovative value added INSTITUTING BETTER COST MANAGEMENT
services. Given an increasingly price-sensitive market and less robust prospects Equally important are the cost-management initiatives that are an integral part
for subscriber growth in the wireless segment, it was important to shape of our efforts to enhance our competitiveness. Cost-cutting measures across
services that yielded the optimum price and value equation for our customers all areas of operations have been implemented. Apart from more cost-effective
to encourage greater usage and sustain subscriber loyalty. Underlying this is an marketing programs, we continued with semi-turnkey arrangements in the build
emphasis on customer satisfaction which has always been central to Globe and up of our network coverage providing us greater control over our expansion
key to its success over the past decade. initiatives.
GLOBE TELECOM, INC.
4
and exacerbated by the expiration of our income tax holiday in March 2005.
Despite the decline in earnings this year, your Company maintains solid
profitability and is in a very strong financial position with EBITDA margin at a high
58% and return on equity at 19%. Free cash flow remains robust and was up
60% versus last year to P19.4 billion.
EXPANDING NETWORK COVERAGE AND REGIONAL REACH
We continued to invest in expanding our network which we believe is essential This healthy financial position has enabled us to enhance value for our
not only in delivering the desired quality of services we have today, but in shareholders. This year, Globe successfully concluded a P7.7 billion share
establishing the delivery platform for new services. We have further widened buyback in March, a move that brought the Company’s net debt to equity ratio
our nationwide reach in 2005, bringing our total number of cell sites to 5,159 closer to target levels of 1:1 while keeping total debt to EBITDA within a 2 to 1
by year end. This network infrastructure is capable of serving up to 97% of the ratio. Furthermore, consistent with our cash dividend policy of distributing 50%
country’s entire population. of the prior year’s net income, your Board of Directors declared the first semi-
annual cash dividend of P20 per common share outstanding as of February 21,
Globe has also extended its reach regionally via its membership with the Bridge 2006. Total dividends amounting to P2.6 billion will be paid out on
Mobile Alliance which opened its membership this year to two new members, March 15, 2006.
CSL Hong Kong and Air Tel India. We believe the expansion of the Alliance will
not only enhance the synergistic benefits for the member companies but more
importantly render more seamless service for its combined subscriber base.
2005 2004 % var
We believe these initial strategic efforts are beginning to bear fruit given the Basic Earnings per Share 76.74 80.92 * -5%
positive momentum we have built during the year. This was further affirmed as Fully Diluted Earnings per Share 76.60 80.78 * -5%
we ended the last quarter of 2005 with historic high quarterly earnings. Given
Dividend per share 40.00 36.00 11%
the fundamental changes we have instituted with the clean-up of non-revenue
Share Price** 735.00 955.00 -23%
generating SIMs, we believe we will increasingly realize the benefits of these
initiatives moving forward. Ratios
Delfin L. Lazaro
Co-Vice Chairman
GLOBE TELECOM, INC.
6
MESSAGE OF THE PRESIDENT
2005 was a year of transformation for Globe Telecom. It will be remembered as WIRELESS BUSINESS
the year that challenged the entire telecommunications industry to deliver value Improved Pricing Competitiveness and Enhanced Customer Value
to a new breed of subscribers who want more for far less, in an environment
where the customer’s telecommunications spend had to take a back seat to Innovation and pinpoint marketing efforts were the broad themes behind all our
rapidly rising fuel prices. Intense price competition and changing consumer efforts in the wireless business in 2005. Throughout the year, Globe sought
profiles tested your company’s ability to stay relevant and responsive, but also new and highly focused ways to address the market first by repositioning Touch
provided your Company with an opportunity to step back and sharpen the entire Mobile (TM) to appeal to the mass market, and second by recasting price
organization’s focus towards improving its competitive position by enhancing promotions across all of the Company’s brands to lead the market away from
customer value propositions, attacking its cost structures, and building the value-destroying unlimited offers and onto price initiatives targeting key segments
foundations for long-term success. and specific consumer needs.
We are pleased to report that many of these efforts have begun to bear Relaunched as “TM, ang Bagong Touch Mobile” with the rallying cry “Power
fruit as we ended the year with a robust performance that will provide us to the Piso”, the new TM targeted the Filipino worker through the Power Piso
positive momentum as we move forward to what will certainly be an equally service, which charges a friendly rate of P1 for TM-to-TM calls starting on the
challenging 2006. third minute. TM made significant inroads into the mass market and surged
ahead in 2005, growing its subscriber base from 1.7 million in 2004 to
A NEW MISSION AND VISION FOR THE COMPANY 3.1 million in 2005.
In 2000, Globe wrote its first Vision, Mission and Values statement anchored on
the proposition that we provide more than just lines, but solutions to customers’ Globe also led the market with improved price propositions for its three brands:
communications-based needs. Since that time, Globe has come into its own as a Globe Handyphone, Globe Prepaid, and TM. Your Company not only responded to
force that not only provides communications solutions but breakthrough services unlimited price offers in the market but went well beyond traditional discounting
that change the way people do things. In 2005, Globe defined for itself a new and unlimited price plans by offering price packages tailored for specific needs
VMV statement that reflects this mission to transform and enrich people’s lives under the Globe CelebRATE! and TM Todo Tawag / Todo Text offerings.
through communication and its vision to make great things possible for every
Filipino. This new VMV statement, cascaded throughout the organization in In the fourth quarter of 2005, Globe again led the market by launching per
2005, has reinvigorated the company’s competitive spirit, serving as our battle second charging for mobile calls, enabling subscribers to be charged only 10
cry as we venture into exciting new territories while continuing to build on past centavos for actual usage measured to the second rather than rounded up to
successes. Sa Globe, Posible. the minute, for all Globe-to-Globe and TM-to-TM calls.
Our persistent efforts in reinventing our price proposition and honing our
communication with the market to target specific segments and needs have
yielded positive results through increased usage as well as healthy additions
01 1,782 01 29.8
02 2,190 02 20.5
03 2,580 03 15.8
04 3,736 04 21.2
05 5,159 05 14.8
0 1,000 2,000 3,000 4,000 5,000 6,000 0 5.0 10.0 15.0 20.0 25.0 30.0
to our subscriber base. A number of these promotions eventually became via the ATM, internet banking or mobile banking. The tie-up with Bancnet also
permanent offers, a testament to the market’s understanding and enthusiastic enables funds transfer from a subscriber’s ATM account in a Bancnet member-
response to Globe’s clear value propositions. bank to another person’s G-Cash wallet via the Bancnet Interbank Fund Transfer
facility. We also continue to work with the Rural Banks Association of the
Superior Network Coverage Philippines to enable microfinance payments in the countryside via G-Cash.
The company mandate to pursue closer alignment with segment-specific needs
permeated even the network roll-out as we calibrated our 2005 network build to We are delighted that the market has caught on to the benefits of G-Cash.
increase penetration in new areas and increase capacity and coverage in By the end of 2005, G-Cash had more than 1.2 million registered users and
areas where demand was largest. Your Company added 1,423 cell sites to formed alliances with over 500 local and international partners to provide our
its network in 2005, augmenting coverage strength to total 5,159 cell sites. subscribers access to 4,500 merchant partners. We are also elated at the
This represents a far-reaching 93% geographic coverage and 97% population local and international recognition that it has received.
coverage of the Philippines.
Moving forward, we will continue to build an increasingly robust ecosystem to
Breakthrough Services support G-Cash and make even greater things possible with this life-changing
G-Cash technology.
In 2004, Globe introduced G-Cash, our mobile micropayments system, to the
world. In 2005, we worked to explore new horizons with G-Cash by partnering Bridge Services
with various establishments who have not only agreed to accept payment via G- In 2005, Globe leveraged on its membership in Bridge Mobile Alliance,
Cash but have even helped Globe create new applications for this breakthrough Asia Pacific’s largest mobile consortium, to enhance its menu of services
product. – specifically for roaming clients. This strong alliance continues to represent
unique opportunities to redefine mobile experience in Asia Pacific, offering a
Our collaboration with BancNet connected G-Cash to the banking system, suite of exclusive benefits and privileges to 70 million subscribers in the region.
enabling subscribers to top-up their G-Cash wallets from their bank accounts New services came in the form of Bridge Roaming, Bridge Prepaid and Bridge
Concierge.
GLOBE TELECOM, INC.
8
Bridge Roaming enables our subscribers to benefit from a more seamless Emerging Technologies
roaming coverage and wider range of communication options. Bridge Prepaid Globe is at the forefront of the Philippines’ adoption of 3G, the third generation
provides convenience for our customers and Bridge member country customers mobile service that offers high-speed video and data service capabilities. Globe
as they are able to top up credits at any Bridge counter in member countries. was the first to be granted a 3G trial license by the NTC in July 2005. It was
Lastly, Bridge Concierge offers personalized services to roamers of any Bridge also the first to conduct a video call over mobile using our 3G test network. As
member country traveling to Bridge member destinations such as technical early as July, we launched 3G roaming services for our subscribers with 3G
assistance, queries on roaming, and lost phones. Special assistance services capable handsets roaming over SingTel, Maxis and KDDI networks in Singapore,
include SIM replacement, as well as free IDD calls to the home customer service Malaysia and Japan, respectively.
facility.
Globe showcased its 3G capability at the 23rd Southeast Asian Games held
Globe Kababayan in Manila, of which Globe was a proud sponsor. In the spirit of competition
In 2005 Globe went on a concerted effort to connect to the growing number of and bringing people closer together, your Company stood as the Games’ sole
Overseas Filipino Workers through Globe Kababayan, our program for various wireless provider, reaching out to inspire the country and its athletes as the
cross border remittance and reload services offered in top OFW destinations Philippines, for the first time, topped the regional athletic event.
such as Hong Kong, Singapore,Taiwan, Japan, UK and the US. Services like
G-Cash International Remittance via Text and Quick Remit and Load offered In December, Globe was granted a license to offer the service. Work on a
the OFW new ways to send money home, while International Share-A-Load and commercial launch of the 3G service is at its peak.
International Autoload Max allowed overseas Filipinos to send load to relatives
in the Philippines. We also partnered with telecom operators such as Singtel
and Maxis of Malaysia to launch co-branded Prepaid SIMs for the OFWs that
offered special rates and promos such as IDD calls at local call rates and lower
international text messaging rates to subscribers who are on Globe or TM in
the Philippines.
Among these is Globelines Broadband which offers value-priced, high-speed OUR 2005 PERFORMANCE
data services over a nationwide broadband network. We are excited about 2005 was a time of stepping back and understanding where our efforts in
the potential of this service which offers our customers, through the Internet, the past several years have brought us in the light of the new challenges that
better communication, knowledge, and entertainment services through richer now shape a dynamic and highly competitive industry. 2005 called upon the
and faster connectivity. company to change the way it did things so that it could, in turn, become
more competitive. The recalibration of our marketing efforts to respond to the
Another is GlobeQuest’s Wireless Internet Zone (WiZ) which utilizes WiFi changing market realities and sharpen our focus on key consumer segments,
technology that allows wireless broadband surfing at popular consumer our conscious choice to offer the market a different value proposition, and our
hangouts. As of year end, we had the largest WiFi hotspot footprint covering embrace of new – and potentially disruptive – technologies was not without cost.
236 outlets nationwide. That notwithstanding, we committed ourselves to pursue a sound, long-term
strategy that will build the underpinnings of sustainable growth: customer-centric
...we committed ourselves to propositions, greater usage habits, superior network coverage, and the ability to
enrich the Filipino’s life wherever he may be.
pursue a sound, long-term strategy
that will build the underpinnings of On the wireless front, we retained leadership in the postpaid segment of the
wireless market, while making inroads into the prepaid segment with TM. The
sustainable growth... positive response of subscribers to our value offers and more competitive
pricing, as well as wider network coverage, contributed to the 3% growth in our
GLOBE TELECOM, INC.
10
2005 REVENUE BREAKDOWN
Wireline Data
4%
Wireline Voice
8% Your Company’s balance sheet continues to be solid, with a healthy leverage
Wireless
profile well within covenants and debt service capabilities. Our free cash flows
88%
have grown by P7.3 billion, registering a year-on-year growth of 60% from
Data
40%
2004.
While reduction in interest expense and foreign exchange gains accruing from
an appreciation of the peso cushioned the impact of margin reductions, net
income decreased to P10.3 billion, 9% lower than the previous year.
11
2005 OPERATIONAL ACHIEVEMENTS
How does an enterprise thrive in a multi-player industry that is highly competitive?
What will set it apart from its rivals?
These are basic questions that drove and shaped Focused strategies allowed for more cost- allowed subscribers to make 15 minute TM-to-TM
your Company’s strategy in 2005. To go about effective management that helped us maximize calls for only P15, TM Todo Text which allowed
facing the challenges at hand, Globe Telecom went our resources, as well as enabled your Company unlimited texting for only P10 for one day for its
back to the foundation of its operations – its passion to provide value offerings and loyalty programs to subscribers, and the 75 centavos/text promo for all
for customer satisfaction. Indeed, its consumer- subscribers through a more efficient cost structure. TM-to-TM text.
centered approach enabled the continuous creation
and evolution of unique and innovative services that CONSUMER-CENTERED RESTRUCTURING By the end of 2005, these promotions not only
have responded to the needs of a discriminating To stay on top of the competition, your Company strengthened consumer offer, but also proved to
market. More than ever, Globe has become an launched a series of price-based promotions aimed be revenue accretive for your Company. With the
indispensable part of daily life for an increasing at improving its competitveness in an increasingly success of these offerings, our CelebRATE! and
number of people. As it pushes the envelope of price-sensitive market. Indeed, the intense tariff various TM promos were extended due to increased
telecommunications and forges new paths from new plays in the market have made promotions a demand. Our promo Globe Text Nonstop, now
technologies, it keeps a close watch on the needs requisite for acquisition and retention and are branded as “UnlimiTXT”, has also been made a
of a diverse consumer base with various needs. The expected to be staple items on the Globe menu in permanent offer to subscribers.
year 2005 was about this and more – yet invariably the near future.
staying connected to the consumers who are our Year 2005 also saw the launching of the 10
passion and reason for being. Through our series of Globe CelebRATE! and TM centavos-per-second promotion which enabled
Todo Tawag, Todo Text offerings, your Company per-second charging for all intra-network Globe and
STRENGTHENED COMPETITIVENESS was able to provide subscribers with price-value TM calls. With no required nor upfront payment to
Nimbleness can spell the difference between packages designed to increase usage, while avail of this service, subscribers could easily use
stagnation and success. In 2005, Globe rose to ensuring sustainable network quality at all levels. this service by dialing the 232 and 803 prefixes for
the challenges of a restless, changing industry by Globe-to-Globe and TM-to-TM calls, respectively.
initiating moves to realize its goals. For one, focus Our CelebRATE! promos introduced the following
was placed on strengthening competitiveness to offers: Globe also evolved its marketing strategy and
improve market and financial performance . Globe • P10-per-3-minute call for all Globe-to-Globe calls organization into product and segment business
continued to further develop markets where we are • Budget IDD calls at a low rate of US$ 0.20 per management to heighten insight and response to
strong, simultaneously taking bold steps to venture minute starting on the first minute for IDD calls to different markets. This affords us the chance to
into new areas. Our aggressive market expansion selected countries make our relentless innovations relevant to our
over the last two years has solidified our presence • Globe Text Nonstop promo afforded unlimited targeted specific client segments, and useful in the
in different segments, punctuated by the successful texting for only P50 for 5 days, P25 for 2 days, improvement of our consumers’ quality of life.
relaunch of TM in establishing greater presence in or P15 for 1 day
the mass market. Take, for instance, your Company’s highly successful
In addition, TM provided its subscribers with value Globe Kababayan service specifically designed to
offerings such as TM Todo Tawag 15/15 which cater the needs of the OFW and his family.
GLOBE TELECOM, INC.
12
The service has penetrated major OFW destinations Innovative breakthroughs such as the partnership
around the world with its array of various cross- between G-Cash and BancNet headlined the
border remittances and reload services. A package celebration which enables connectivity of G-Cash to
of new offerings for OFWs, aspiring OFWs, and their banking systems. Through G-Cash, our subscribers
families expanded your Company’s value proposition can also pay for utility bills such as Manila Water
with offerings such as special IDD rates and IDD and Meralco bills, insurance premiums, fast food
usage-based rewards, exclusive perks and privileges purchases and school tuition fees.
with partner merchants, and a mobile menu that
provides relevant information to OFW dependents G-Cash reaped recognition both in the Philippines
and aspirants. The Globe Kababayan service was and abroad, winning various prestigious awards:
also spiced up with the special IDD and ISMS “Most Innovative Mobile Operator Service” at the
promotion specifically for our subs who call and text Asian MobileNews Awards in Singapore (June
between the Philippines and destinations including 2005); “Best M-Commerce Application or Service”
Singapore and Malaysia. at the Global Messaging Awards in London (June
2005); Philippines’ Mobile Communications
G-Cash Celebrates Its 1st Year Effectiveness Award (August 2005); and Agora
Year 2005 also marked the first year of G-Cash Awards for World Class Excellence in Philippine
with over 1.2 million registered users generating Marketing (November 2005). These have helped
an average of almost P3 million in total daily G-Cash become more accepted across 14 countries
transactions. Your Company has achieved this with in Asia, Middle East, Europe and North America.
the support of over 500 partner establishments
with over 4,500 outlets nationwide.
14
calls using our 3G network, as well as offering 3G Improved Credit Rating We at Globe strongly believe that we are well poised
roaming services to subscribers with 3G-capable Taking into account Globe’s strong balance sheet to capitalize on opportunities and face challenges
handsets roaming over selected countries. and financial position, and after a new rating ahead. Our stronger network presence will enhance
methodology was introduced, Moody’s rating of subscriber additions from the broader market
GAINING POSITIVE MOMENTUM Globe debt was raised to Ba2. This underscores expansion. We will continue to develop winning
TM Relaunch: Banner Year Globe’s position as a leading telecommunications formulas to give our customers good value and
2005 was a banner year for our revitalized TM operator in a strong two-player market. stimulate revenue-generating usage.
brand. The exceptional performance by TM since
its relaunch has resulted in significant growth in its In addition, your Company’s healthy profitability and Your Company will continue to keep its eyes
subscriber base, reaching an impressive 3.1 million cash flow generation, along with sound debt maturity on the horizon and work on strengthening its
at year end. Various promotions and initiatives and liquidity profile, resulted in Standard & Poor’s competitiveness through innovations and other
such as TM’s Todo-Text /Todo-Tawag have been rating upgrade to BB+ after reviewing our reduced value propositions. As we navigate Globe through
equally successful with our subscribers yielding a risk of foreign exchange controls. short-term challenges, we are ever committed to
total of P2.7 billion in incremental revenues. The pursuing a sound, long-term growth strategy for
continued growth in this segment is testament to A BRAVE NEW WORLD the promotion of the greater usage and utility of the
our success in providing our Filipino workers with the We expect that potentially game-changing new mobile phone, enabling us to make more and more
power to use mobile phone services through better technology and intense price competition will great things possible.
affordability. continue to challenge us. In response, we will
continue to focus on our key business strengths
Subscribers’ Strong Uptake for Services and values that will enable us to sustain and
The robust performance of our wireless business is improve our competitiveness. We intend to
greatly attributable to the strong uptake of value- further improve our customer value propositions
based promotions which led to increased usage and price-competitiveness. Globe will continue
by subscribers, and driving a 4% year-on-year to enhance cost management effectiveness,
increase in total net service revenues. Our SIM base while continuing to take the lead on emerging
was steady at 12.4 million, but is of better quality technologies.
following the clean-up of non-revenue-generating
subscribers. With our customer-focused strategies, together
with our recently acquired 3G and nationwide LEC
Our wireline service, which continues to register licenses, we will be able to extend our market
double digit growth rates, generated 362,143 reach and offer various products and services
subscribers by the end of the year, a solid increase with a view to continuously address the needs of
of 12% from last year. Total net service revenues target market segments.
also grew by 13%, reaching P6.4 billion. This
contributed 12% to Globe’s total revenue, broadly in
line with last year’s revenue contribution.
Globe Group
Our company is a leading telecommunications company in the Philippines. We For the full year ended 31 Dec 31 Dec YoY
continue to grow and engage our customers through our clear commitment of (in millions of pesos) 2005 2004 Change
(%)
“Making Great Things Possible”.
Net Operating Revenues from:
Service Revenues
Wireless 48,481 47,054 3%
The Globe Group is comprised of the following three focused companies: Voice ¹ ….……………………………………… 28,945 27,630 5%
Data 2 .…………………………………….… 19,536 19,424 1%
• Globe provides our wireless telecommunications services; Wireline 6,416 5,687 13%
Voice 3
……………………………………….. 4,396 3,945 11%
Data 4
.…………………………………....... 2,020 1,742 16%
• Innove, a wholly-owned subsidiary, provides our fixed Net Service Revenues .…………...………….. 54,897 52,741 4%
line telecommunications services and information and communications Non-Service Revenues 5 ..…………….…....... 3,851 2,868 34%
Net Operating Revenues .…………….......... 58,748 55,609 6%
infrastructure and services for internal applications, internet protocol
¹ Wireless voice net service revenues include the following: (a) Monthly service
based solutions and multimedia content delivery. Innove currently offers fees on postpaid plans & subscription fees on prepaid services; (b) Charges for
cellular services under the TM prepaid brand.The TM brand is supported in intra-network and outbound calls in excess of the free minutes for various Globe
Handyphone postpaid plans, including currency exchange rate adjustments, or
the integrated cellular networks of Globe and Innove; and
CERA net of marketing promotions credited to subscriber billings; (c) Airtime
fees from prepaid reload denominations (for Globe Handyphone Prepaid and
TM) for intra network and outbound calls recognized upon the earlier of actual
• As part of its wireless business, Globe also provides mobile commerce
usage of the airtime value or expiration of the unused value of the prepaid
services through its wholly-owned subsidiary, G-Xchange, Inc. (GXI) which reload denomination which occurs between 1 and 60 days after activation
was incorporated in 2004. depending on the prepaid value reloaded by the subscriber net of (i) bonus
credits* ii) prepaid reload discounts; and (d) Revenues generated from inbound
international and national long distance calls and international roaming calls;
GROUP OPERATING REVENUES and Revenues from (a) to (d) are net of any interconnection or settlement
payouts to international and local carriers.
Service Revenues (*Included airtime on SIM cards provided under Globe’s SIM swap program
which was concluded last May 2005.)
For the full year 2005, the Globe Group’s total net operating revenues improved
by 6% to P58,748 million from P55,609 million in 2004 while total net service 2
Wireless data net service revenues consist of revenues from value-added
services such as inbound and outbound SMS and MMS, content downloading
revenues increased by 4% to P54,897 million in 2005 from P52,741 million in and infotext net of any interconnection or settlement payouts to international
2004. and local carriers and content providers.
3
Wireline voice net service revenues consist of the following: (a) Monthly service
Wireless service revenues, which accounted for 88% of net service revenues in fees including CERA; (b) Revenues from local, international and national long
distance calls made by postpaid, prepaid wireline subscribers and payphone
2005, grew by 3% year-on-year to P48,481 million. Meanwhile, wireline service
customers, net of (i) prepaid and payphone call card discounts (ii) bonus credits
revenues, which accounted for the remaining 12% of net service revenues in and (iii) marketing promotions credited to subscriber billings; (c) Revenues from
2005, grew by 13% year-on-year to P6,416 million. inbound local, international and national long distance calls from other carriers
terminating on our network; and (d) Installation charges and other one-time
fees associated with the establishment of the service. Revenues from (a) and
Non-Service Revenues (b) are net of any interconnection or settlement payments to domestic and
international carriers.
We also registered non-service revenues of P3,851 million for the full year
2005, a 34% increase from last year’s P2,868 million due mostly to higher
4
Wireline data net service revenues consist of revenues from: (a) International
and domestic leased lines; (b) Internet services (c) Other wholesale transport
year-on-year handset sales contributed by subscriber acquisitions. services and (d) Revenues from value-added services.
GLOBE TELECOM, INC.
5
Non-service revenues consist principally of sales of handsets, accessories and
SIM packs and phonekits.
16
Wireless Business net operating revenues to reach P52,229 million for the full year ended
Our Company offers its wireless services including local, national long distance, 31 December 2005. This is mainly attributable to growth experienced in both
international long distance, international roaming and other value-added services our voice and data sectors as well as in our non-service revenues.
through three brands: Globe Handyphone, Globe Handyphone Prepaid and TM.
Wireless net service revenues registered a 3% year-on-year growth from
Globe Handyphone is the postpaid brand of Globe. This includes all postpaid P47,054 million to P48,481 million for the full year 2004 and 2005,
plans such as G-Plans and consumable G-Flex Plans, Platinum (for the high-end respectively. This 3% growth was driven by a 5% increase in voice service
market), and GlobeSolutions (for corporate and business needs). revenues, particularly in international voice and roaming services, despite a 1%
drop in wireless subscribers. Wireless data net service revenues increased by
Globe Handyphone Prepaid and TM are the prepaid brands of the Globe Group. 1% to P19,536 million in 2005 from P19,424 million in 2004.
Each brand is positioned at different market segments to better address various
subscribers’ needs. Total gross subscriber additions for the full year 2005 decreased by 2% year-
on-year to 11.6 million compared to 11.9 million in 2004. On the other hand,
To cater to a wide variety of our prepaid subscribers, we provide various top net additions contracted by 103% to a net reduction of 110,000 subscribers
up facilities at each subscriber’s convenience. Our Globe Handyphone Prepaid for the full year 2005 against 3.7 million net additions in 2004, hence, a higher
and TM subscribers can reload airtime value or credits using various reloading churn rate of 7.9% at the consolidated level from 6.4% in 2004. The higher
channels. year-on-year consolidated churn was driven by higher terminations of non-revenue
generating subscribers in the Globe Handyphone Prepaid segment.
Overall, the wireless business recorded a 5% year-on-year increase on its
For the full year ended 2005, our postpaid sector comprised approximately 5%
of our total subscriber base. The postpaid subscriber base reached 594,142
KEY INDICATORS 31 Dec 31 Dec YoY in 2005 which is 6% lower than the previous year. This is mainly due to the
2005 2004 Change
(%) increased incidence of Globe-initiated credit-related terminations resulting in a
Cumulative Subscribers (or SIMs*) –
Net Subscribers* (End of period) 12,403,575 12,513,973 -1% slight increase in average monthly churn of 3.1% in 2005 from 2.6% in 2004.
Postpaid . ………………………………… 594,142 630,495 -6%
Prepaid .…………………………………… 11,809,433 11,883,478 -1%
Globe Handyphone Prepaid ……………… 8,699,687 10,185,154 -15% Overall, our consolidated prepaid subscribers decreased by 1% to 11.8 million
TM ………………………………………… 3,109,746 1,698,324 83%
in 2005 from 11.9 million in 2004, as Globe culled out the non-revenue
Net ARPU
Postpaid . ………………………………… 1,635 1,605 2% generating subscribers related to its SIM swap program starting May 2005. Net
Prepaid
Globe Handyphone Prepaid ……………. 268 305 -12%
incremental prepaid subscriber base fell by 74,075 in 2005 compared to the
TM ………………………………………… 214 183 17% 3,708,621 incremental prepaid subscribers generated in 2004. However, gross
Subscriber Acquisition Cost (SAC) prepaid additions remained strong driven mostly by 57% year-on-year growth
Postpaid . ………………………………… 7,026 9,886 -29%
Prepaid in gross additions from the TM brand from 2.6 million in 2004 to 4.1 million
Globe Handyphone Prepaid ……………. 248 267 -7%
TM ………………………………………… 90 151 -40%
in 2005. Globe Handyphone Prepaid likewise had gross adds of 7.3 million
subscribers in 2005 but this is a 19% decrease compared to the 9.1 million
Average Monthly Churn Rate (%)
Postpaid . ………………………………… 3.1% 2.6% new subscribers in 2004.
Prepaid
Globe Handyphone Prepaid ……………. 7.8% 5.5%
TM ……………………………………….... 9.5% 12.7%
*The word “subscriber” may be used interchangeably with the term “SIM.”
For the full year ended (in millions of pesos) 31 Dec 31 Dec YoY
2005 2004 Change
Wireline Voice (%)
Our voice segment grew by 11% year-on-year to register P4.4 billion in net Data
International …..………………………………...... 679 670 1%
service revenues in 2005. The year-on-year growth in our wireline voice
Domestic ……. …………………………………….. 770 644 20%
revenues is mainly driven by the increase in net subscribers of voice and Others 1 ……………………………………………. 571 428 33%
Net Non Service Revenues………………………. 92 0 100%
broadband subscribers. Total Data Operating Revenues…………………. 2,112 1,742 21%
1
Includes revenues from value-added services and corporate internet services.
KEY INDICATORS 31 Dec 31 Dec YoY
2005 2004 Change
(%)
18
International Long Distance (ILD) Services LIQUIDITY AND CAPITAL RESOURCES
On a consolidated basis, ILD revenues from the Wireless and Wireline services Globe Group’s consolidated assets as of 31 December 2005 amounted to
increased by 7% to P13,526 million in 2005 compared to P12,622 million P125,102 million compared to P129,704 million as of 31 December 2004.
in 2004. The increase was mostly driven by higher traffic during the second
half of 2005 due to the strong holiday demand and encouraged by various IDD As of 31 December 2005 and 2004, current ratio on a consolidated basis
promotions from the wireless (Globe Budget IDD) and wireline (Globelines Lowest was 0.90:1 and 0.87:1, repectively. Consolidated cash, cash equivalents and
IDD Rates) groups. short term investments was at P12,165 million at the end of 2005, 15% lower
than the P14,303 million in 2004 due to dividend payments and the buyback
Globe Group YoY
For the full year ended 31 Dec 31 Dec Change of shares in March 2005. Gross debt to equity ratio as of 31 December 2005
2005 2004 (%)
was 0.96:1 on a consolidated basis and remains well within the 2:1 debt to
Total ILD Minutes (in million minutes) ¹……………………. 1,469 1,271 16% equity limit dictated by certain debt covenants. Net debt to equity ratio was at
Inbound…………………………………………………… 1,251 1,082 16%
Outbound.………………………………………………… 218 189 15% 0.73:1 as of 31 December 2005.
ILD Inbound / Outbound Ratio (x) ……………………… 5.7 5.7
1
ILD minutes originating from and terminating to Globe and Innove networks.
Consolidated net cash flow from operations (excluding capex) amounted to
P28,841 million for the period ended 31 December 2005, a 7% increase from
P26,927 million in 2004.
GROUP OPERATING EXPENSES
For the full year 2005, the Globe Group’s operating expenses increased by Consolidated net cash used in investing activities amounted to P15,832 million
29% to P20,751 million from P16,039 million in 2004 as Globe continued its for the full year 2005, a 10% decrease from the P17,679 million in 2004.
aggressive marketing promotions and shouldered increased network operating Consolidated capital expenditures amounted to P14,786 million in 2005, a
costs related to its expansion in the past year. Of the total operating expenses decrease of 30% from the previous year. For 2006, Globe has earmarked
of P20,751 million in 2005, network support or network-related expenses approximately P13 billion (US$250 million) for capital expenditures to expand
accounted for 43%, marketing contributed 23%, business support added 29% its wireless network, and upgrade the necessary facilities for 3G, and increase
and corporate-related expenses made up the remaining balance of 5%. capacity for areas where traffic is expected to surge. The 2006 capital
expenditure program will be funded through internally-generated cash and debt
Globe Group
31 Dec 31 Dec YoY financing.
For the full year ended (in millions of pesos) 2005 2004 Change
(as restated)1 (%)
Consolidated net cash used in financing activities for the full year 2005
Cost of sales…………………………………………….. 6,025 6,675 -10% amounted to P15,680 million, an 80% increase compared to P8,707 million in
Selling, Advertising and Promotions ……………….. 4,697 3,753 25% 2004 due to Globe’s reacquisition of its common shares via a tender offer and
Staff Costs ………………………………………………… 3,519 2,874 22%
Utilities, Supplies & Other Administrative Expenses 1,982 1,715 16% higher dividend payments in 2005. Consolidated total debt as of 31 December
Rent………………………………………………………… 1,840 1,420 30%
Repairs and Maintenance……………………………… 1,877 1,325 42%
2005 amounted to P49,693 million, a 5% decrease from the P52,218 million
Provisions (Reversal of Allowance) for: in 2004 as Globe prepaid US$41 million of its long term loans in addition to
Doubtful Accounts ………………………………… 616 1,052 -41%
Inventory Losses, Obsolescence and Market Decline 80 72 11% US$161 million of maturing loans in 2005. Loan repayments of Globe for the
Losses on Property and Equipment and
Other Probable losses.................................. 179 (489) -137% full year 2005 amounted to P12,527 million (US$236 million) compared to the
Losses on retirement of property and equipment…. 734 - 100%
Services and Others……………………………………..
P18,874 million (US$335 million) paid in 2004.
Professional Fees & Other Contracted Services 1,496 1,295 16%
Insurance and Security Services………………… 1,478 1,035 43%
Taxes and Licenses………………………………… 832 616 35%
Others ……………………………………………….. 1,421 1,371 4%
Operating Expenses………………………………...... 20,751 16,039 29%
Depreciation and Amortization ……………………. 15,734 14,706 7%
Financing…………………………………………………. 3,141 6,327 -50%
19
WIRELESS PRODUCTS & SERVICES
Globe Handyphone, together with a rejuvenated
TM, captured the hearts and minds of its 12.4M
subscribers with the introduction of a series of
groundbreaking services and offers - fulfilling its
mission to transform lives and make even greater,
more enriching human connections possible. Globe Kababayan also launched the first and only Kababayan cellphone menu,
which lets subscribers browse important information about Globe Kababayan
GLOBE CelebRATE! services and offers straight from their cellphones. These are but a few of the
Tariff offers were the big headline for 2005, and Globe aggressively launched services lined up for Globe Kababayan, all geared towards ensuring deeper
its very own program, Globe CelebRATE!. Globe subscribers were treated to connections between OFWs and their families, building lasting relationships no
substantial text, call and IDD rate value offers in the second half of the year, matter how many miles separate them.
giving them, as the campaign proclaimed, “even more reasons to celebrate”.
G-CASH
In June 2005, Globe Prepaid offered its subscribers the most economical Globe- G-Cash, Globe’s flagship mobile commerce service, was born from a simple goal
to-Globe call & text rates to date, with Globe CelebRATE! pricing schemes of of transforming a mobile phone into a wallet enabling Globe and TM subscribers
P0.50 per text sent and an affordable call rate of P5.00 for the first call minute access to a cashless and cardless method of making money-transfers from
and P2.50 per succeeding minute. This was soon followed by the Prepaid Text person to person (or from mobile phone to mobile phone) by simply sending a
Nonstop offer of 24-hour unlimited texting for P15, with a range of choices all text message.
the way up to 10-day unlimited texting for P100. On the heels of this innovative
offer was Globe’s bulk-purchase promo of P10-for-3-minute budget Globe-to- From G-Cash’s initial thrust towards money-transfers, purchase of goods
Globe calls. Later in the year, the Globe CelebRATE! offers were opened to Globe and services from retail outlets, and sending and receiving domestic and
postpaid subscribers as well, while Globe’s International Services weighed in with international remittances, the service, over a span of one year, created a whole
the Budget IDD rate of US $0.20 per minute. new series of creative possibilities in the field of mobile commerce. Today,
G-Cash allows Globe and TM subscribers to pay for the following using their
Globe then heralded the coming of the New Year with the introduction of its mobile phone’s text messaging service:
revolutionary 10 centavos per second call rate. This new way of charging calls • utility bills
answered the market’s demand for value, allowing them to budget their calls • interest and amortization of loans
down to the last second. The 10 centavos-per-second call rate was the pinnacle • insurance premiums
of an exciting year of relevant tariff plays focusing on affordability and value for • donations to various institutions and organizations
money. Truly, 2005 was the year that Globe made great rates possible. • sales commissions
• school tuition fees
In the end, Globe CelebRATE!’s ever-growing menu of value offers exemplifies • micro tax payments (for annual business registration)
Globe’s commitment to giving its subscribers the best deals, thus enriching the
relationships that mean most to them, keeping them constantly connected to In addition, G-Cash also tallied impressive statistics in 2005, its first full-year of
friends, family and business partners. being in service. Registered subscribers have exceeded 1.2 million with over
500 partners both nationwide and abroad providing Globe and TM subscribers
GLOBE KABABAYAN access to 4,500 outlets offering the G-cash service. Locally, its merchant
Globe continues to dominate the burgeoning OFW market in 2005 with the partners include shopping mall chains, bookstores, drug stores, convenience
introduction of even more key services and offers for OFWs and their families stores, universities, rural banks, cooperatives, restaurants, insurance
GLOBE TELECOM, INC.
back home. These include the Special IDD Rates & Rewards program, which companies, remittance companies, pawnshops, and utility companies. G-Cash
gives OFW family members an inexpensive and beneficial way to call their loved is also already accepted across 14 countries in Asia, Middle East, Europe and
ones abroad, and Exclusive Benefits & Discounts, which include substantial North America.
markdowns at major retail outlets and institutions.
20
G-Cash has also won four prestigious awards to date. Aside from the GSM TM: ANG PINALAKAS NA TOUCH MOBILE
Association Awards in France (February 2005), G-Cash also received the Asian
Mobile News Awards in Singapore (June 2005), the Global Messaging Award
in London (June 2005), the Philippines’ very own Mobile Communications
Effectiveness Award (August 2005), and the Agora Awards for World Class
Excellence in Philippine Marketing (November 2005).
3G 2005 also saw the rebirth of the Touch Mobile brand as TM, the mobile phone
A decade ago, Globe became the first mobile service provider to introduce GSM service provider for the male blue-collar worker. Standing firmly on a Value For
technology, a move that cemented its claim as the industry’s “technology leader”. Money proposition, it captured its chosen market with a powerful promise: TM
Today, that coveted title is again being fought over. The race for 3G technology empowers the working man and enables him to be resourceful, maximizing every
will reach fever pitch in 2006, with competitors attempting to co-opt the title of hard-earned peso.
3G Pioneer.
TM was the first brand to own the Power Piso proposition, launching a series of
But Globe aggressively took the lead in value-driven Power Piso offers throughout the year: a P1 per minute call rate
2005, recording the very first public and after the first 2 minutes, P1 per text sent and P1 downloads.
live 3G demonstrations in the Philippines,
showcasing Globe’s 3G capabilities at high- This value message was further strengthened by TM’s strong lineup of tariff
profile events attended by top executives offers: Todo Text (Unlimited texting for TM-to-TM texts), Todo Tawag 15/15
from the country’s major corporations as (P15 for up to 15 minutes of TM-to-TM calls), Budget IDD (US $0.20 per
well as distinguished media and advertising minute for IDD calls to selected countries), 10 centavos-per-second TM-to-TM
practitioners. In addition, Globe sponsored calls and 75 centavos per TM-to-TM text.
the first international 3G video call to
Singapore, reuniting OFW Delia Bautista The relaunch of TM has given the brand a distinct and focused market to which
with members of the Manila-based family it can establish stronger, more meaningful connections. The revitalized TM has
that she had not seen in eight years. given Globe Telecom a strong foothold in the mass market - a segment that has
These displays proved that Globe remains historically been underserved, but which now exhibits massive growth potential
one of the pioneers in leading-edge and will be a key frontier in Globe’s drive for market dominance.
21
GlobeSolutions Corporate Wireless
Solutions and Services
The communication requirements for top corporations are slowly growing more
complex over time. In order to compete and succeed in their chosen arenas,
corporations must be able to communicate effectively and instantly with their
partners, their clients and within their own organizations.
As the corporate arm of Globe Telecom, GlobeSolutions provides not just voice,
text and data for its subscribers, but more importantly, solutions to help them
grow their companies and compete in today’s world. Complete with its own
dedicated technical and customer relationship teams, GlobeSolutions provides
the unique mix of products and solutions tailored for each corporation’s needs:
MOBILEMAIL
MobileMail keeps employees securely connected to the corporate email server.
With MobileMail, employees can access email anywhere, view attachments,
contact lists and corporate calendars even on the go.
BLACKBERRY®
BlackBerry® Enterprise Solution is the leading wireless solution for keeping
mobile professionals connected on the go. Its award-winning platform provides
integrated, secure, and wireless connectivity to a range of business applications
- corporate data, e-mail, phone, web, SMS and organizer applications - all from a
single wireless handheld.
MOBILEOFFICE
MobileOffice enables corporate clients to connect and collaborate even outside
of the office. It allows them to get mail, browse and download files, share notes,
presentations, databases, schedules and documents within a group of users
GLOBE TELECOM, INC.
– making sure that the job gets done, even on the go.
22
SMS Messaging Solutions
TXTCONNECT
TxtConnect enables clients to reach their customers and employees wherever they
may be, by allowing them to send high-volume text broadcasts to pre-registered
groups. Instant, targeted, two-way communication in just one click – without the
expense of printing and delivery.
TXTHOTLINE
TxtHotline - the virtual customer service line by text. With TxtHotline,
customers can send queries or feedback via SMS and customer relations
representatives receive and respond to these concerns via email.
INFOTEXT
Customers can get up-to-date information via SMS through InfoText by simply
using keywords to trigger the appropriate response. Clients can streamline
customer service with automated responses to frequently asked queries.
BILLANALYZER
BillAnalyzer - a web-based service that analyzes monthly billing data to reveal
information inside. This allows the clients to identify trends, patterns, and
changes in consumption to unlock greater efficiencies and more savings.
CORPORATE RINGBACK
The Corporate Ringback is a cellular technology that allows companies to
have their own customized audio clip played back on their employees’ mobile
phones. It is an innovative solution that will have the corporate or product-
related jingles ringing in the ears of callers - may they be colleagues, partners,
or most importantly, customers.
The Blackberry® and RIM families of related marks, images and symbols are the exclusive properties of
and trademarks of Research In Motion Limited – Used by permission
23
Visibility
In today’s busy world, don’t you wish you could do two things at the same time?
Like swapping files with your co-workers while swapping stories in a café?
Your files need not to be too far from you when you are away from your
office desk.
You can opt to bundle your plans with a wide range of devices like PDA’s and
laptops, as well as relevant applications such as Mobile Office and Remote
Office.
All of these give you the power to make your business visible to you despite
the distance!
GLOBE TELECOM, INC.
24
We are the leader
in this broadband
revolution, a revolution
that will have three
winners: the Filipino
consumer, the
business community
and our nation.
Before the Broadband Revolution, Filipinos found it a chore GlobeQUEST, our corporate voice and data arm, has
to study, to work and to live. partnered with Ayala Center to unwire Glorietta, Greenbelt,
Ayala Center Cebu and Alabang Town Center and make them
Now, Information and Communications Technology gives WiFi hotspots. Most major hotels and airports also went
Filipinos the gift of choice. Being disabled, too poor, too far wireless: Waterfront Hotels and Casinos in Lahug, Cebu City,
from school, or saddled with family obligations or full-time Holiday Inn Mimosa in Clark, Pampanga, Waterfront Hotel
jobs are no longer reasons for people not to be in school. in Davao, Legend Hotel in Mandaluyong, Microtel Suites in
Cavite; Lipa and Sto.Tomas, Batangas, as well as the Mactan
Without leaving his room, through the power of the Internet, International Airport and Davao International Airport.
anyone can register for classes, attend, retrieve lessons,
review, take exams, chat, shop, buy books and supplies We also provide broadband-to-the-room and WiFi service to
online, publish diaries and blogs to reach out to people most of the major hotels: Mandarin Oriental Hotel, Oakwood
regardless of age, social class or race. With a personal Premiere Ayala Center, Intercontinental Hotel Manila, Dusit
computer (PC) before him and a Globelines Broadband Hotel Nikko, The Linden Suites, Somerset Olympia, Marriot
subscription, everything is at his fingertips. Cebu City, and Marco Polo Hotel in Davao.
Whether a student or a mobile professional, a Globelines At home, at school, or on the move, Innove offers Filipinos
or GlobeQUEST broadband customer does not need to not just a knowledge tool or a bridge over the digital divide,
lug around a PC with him wherever he goes. He can take but a vital link to people they love. That’s why your company
his Internet account with him anywhere and anytime, via was the first to offer toll-free NDD (National Direct Distance)
Globelines’ all-in-one Worldpass. for the whole archipelago and the cheapest (International
Direct Dial) IDD service.
As a second option, he can use his mobile phone, laptop
or personal digital assistant (PDA) to log in at GlobeQUEST Globelines, our residential and Small and Medium Enterprise
Wireless Internet Zone (WiZ) hotspots in shopping malls, (SME) arm, charges only US$0.20 per minute for postpaid
residential buildings, hotels, airports, food courts, cafes, subscribers making IDD calls to 51 countries.
schools, lounges and restaurants.
GLOBE TELECOM, INC.
26
Globe1 card IDD rates are lower still, at P4.50 per minute from Globelines
postpaid and prepaid lines, including payphones, to selected countries.
In Globe1, we put all the connectivity needs of an individual into a single pre-paid
PIN-based card that gives him the flexibility to choose what device to call local
or overseas, through any Globelines landline or payphone, Globe Handyphone or
Touch Mobile cellphone.
In addition, VoIP has value-added services not available on traditional telephony. With our core business and our core competency, we help develop our service
Callers can bring their phone number anywhere as long as they are connected areas, where we empower not just the individual, but the family and the whole
to the internet. They just log in to make and receive calls wherever they are. community as well.
By the end of 2005, Globelines, our consumer broadband group, had a Being in a public school in a remote area, for instance, no longer places a
total wireline voice subscriber base exceeding 362 thousand and more than student at a disadvantage. Innove sees to it that he can access the worldwide
22 thousand broadband customers. These numbers are expected to grow web from wherever he is.
substantially as broadband services and speed improve and prices come down.
We want to serve as many customers as possible in this area of highest growth. By end 2005, we connected 402 public high schools under our Innove Internet
in Schools Program (ISP), in support of the Gearing up Internet Literacy
Access for Students (GILAS), which is a consortium of private companies and
OUR SERVICE TO THE COMMUNITY government agencies that aims to connect the more than 5,000 public high
schools in the country within 5 years.
We believe that corporate governance and social responsibility go together. We
are not just a provider of telecommunications services but a good corporate Volunteerism is also high in your company. Some 10% of our over 1,000
citizen and a true partner in progress. workforce have signed up for our iTeach, iCare Program.
Contributions we make at enriching initiative which provides an outlet for an employee’s desire to give back
to society, even as it creates goodwill, endearing Innove to the communities
each level affect all, growing it serves. Our high school student beneficiaries gain both professional and
personal knowledge, while our Innove employee volunteers practice the company
and start his own business, procure and inventory his goods, outsource his
requirements, take care of his sales, marketing and back-office needs.
Through the ILAW awards, we aspire to create a culture of excellence in our In just a few years, we can provide universal access in unserved and
internal community and nurture more leaders from within our ranks. underserved areas and ensure efficient competition in local access services.
28
It was the first to successfully integrate connectivity options such as General entire Asian region, creating connected digital villages, municipalities and nations
Packet Radio Service (GPRS), Enhanced Data for Global Evolution (EDGE), that enjoy the full capabilities of technology.
Wireless Fidelity (WiFi), and dial-up using a single log on, under one account and
presented in an integrated bill. In 2006 onwards, your company expects to accomplish more, especially after
the NTC has issued our nationwide license to install landlines outside of our
The Enterprise Business Group also delivers its promise to make lives easier for service areas.
those in the hotel and in the retail industries, call centers and Business Process
Outsourcing (BPO) companies. We are witnessing the early years of our broadband revolution, with great
expectations of our future. We are happy to have achieved this year’s targets
We continue to develop network services, Internet solutions and value-added and to have become the fastest growing broadband service provider in the
services, such as: managed router services, data center services and disaster country today.
recovery systems for enterprises, wireless intranet communication, hosted
emails and applications shared infrastructure to improve the operations of We believe that three transport revolutions transformed the world. Although as
various industries in the enterprise market. a company we are too young to be part of the first two, we take immense pride
in bringing about the last.
As the Philippines becomes an Information and Communications Technology
(ICT) hub, your company maintains its lead in innovation, building on its strong The first revolution was the transport of goods; the second, the transport of
network as well as its strong customer relations. people. Today, we are in the third: the transport of information.
Our work creates an impact in the lives of our employees, in our communities,
OUR SERVICE TO THE NATION in the way our individual or institutional customers managed their lives or
operations, and ultimately create a positive impact to society and our country.
In the end, your company connects not just people and companies. We link the We are the leader in this broadband revolution, a revolution that will have three
Philippines to Asia and to the rest of the world. winners: the Filipino consumer, the business community and our nation.
That’s why Innove was an early mover in WiMAX (Wireless Inter-operability for
Microwave Access) in the ASEAN region. In fact, GlobeQUEST and Globelines
launched the country’s first WiMAX service through a commercial trial with Intel
in Cavite in 2005.
Jaime Augusto
Zobel de Ayala II
Chairman of the Board
since 1997; Director
since 1989
Director of Ayala Corporation (since 1987). Co-Vice Chairman, President and CEO
of Ayala Corporation; Bank of the Philippine Islands, Ayala International Pte., Ltd.,
and Integrated Microelectronics Inc.; Vice Chairman of Ayala Land, Inc. and Co-Vice
Chairman of Ayala Foundation, Inc.; Member of the Board of Trustees of the JP Morgan
International Council, Mitsubishi Corporation International Advisory Committee, Toshiba
International Advisory Group, Harvard University Asia Center Advisory Committee, Board
of Trustees of the Asian Institute of Management and a national council member of the
World Wildlife Fund (US) and Chairman of World Wildlife Fund (Philippines).
Delfin L. Lazaro
Co-Vice Chairman
Director since January 1997; Chairman of the Executive Committee Director since 2001; Executive Vice President (Strategic
and former President of Globe; Chief Finance Officer and a member Investments) of Singapore Telecom; Chairman of Bridge
of the Management Committee of the Ayala Corporation; President of Mobile Alliance, which is Asia Pacific’s largest mobile
Azalea Technology Investments; Member of the Board of Directors of alliance group; Former Deputy Secretary of the Ministry
Ayala Land, Inc. (ALI), Manila Water Co., Inc. (MWC) and Integrated of Communications; Also served in different senior
Micro-electronics, Inc. (IMI); Former President and CEO of Benguet appointments in the Singapore Civil Services.
Corporation and Secretary of the Department of Energy of the Philippine
government; Named Management Man of the Year 1999 by the
GLOBE TELECOM, INC.
30
Senior Managing Director of Ayala Corporation;
Former Vice President and Country Business Manager for
the Philippines and Guam of Citibank, N.A; Former Vice
President of Citibank, N.A. Singapore for
Consumer Banking.
Fernando Zobel
de Ayala
Director since 1995
Romeo L. Bernardo
Director since 2001
Director of Ayala Corporation (since 1994). Co-Vice Chairman and President of Lazaro Bernardo Tiu and Associates;
Executive Managing Director of Ayala Corporation; Chairman of Ayala Chairman and/or member of the Board of several private
Land, Inc., Manila Water Company, Inc., AC International Finance Ltd., companies including the Bank of the Philippine Islands,
Ayala Automotive Holdings, Inc., Alabang Commercial Corporation, Roxas RFM Corporation, Phinma, PSI Technologies (a Nasdaq-
Land Corporation; Vice Chairman of Ayala International Pte. Ltd.; Co-Vice listed company), and ALFM Peso, Dollar and Euro Bond
Chairman Ayala Foundation, Inc.; and Director of Bank of the Philippine Funds; Former Undersecretary of Finance of the Philippine
Islands, Integrated Micro-electronics, Inc.; Member of the Board of Government and Alternate Executive Director of the Asian
Directors of Habitat for Humanity International, Member of the East Asia Development Bank.
31
Xavier P. Loinaz
Director since 2001
Guillermo D.
Luchangco
Director since 2001
Chairman and Chief Executive Officer of Investment & Capital Corporation Former President of the Bank of the Philippine Islands (BPI); Director
of the Philippines, ICCP Venture Partners, Inc., Pueblo de Oro Development of BPI, BPI Capital Corporation, BPI Direct Savings Bank, Inc., BPI/MS
Corp., Manila Exposition Complex, Inc. and RFM-Science Park of the Insurance Corporation and BPI Family Savings Bank, Inc.; Chairman of the
Philippines, Inc. Also a Director of Bacnotan Consolidated Industries, Inc., Board of Directors of Ayala Life Assurance, Inc.; Member of the Board of
Planters Development Bank, Ionics EMS, Inc., and Ionics Circuits, Inc. Trustees of BPI Foundation, Inc.
32
Jesus P. Tambunting
Director since 2003
Renato O. Marzan
Corporate Secretary
since 1993
Chairman and CEO of Planters Development Bank (Plantersbank). Former Director of Globe; Managing Director of Ayala Corporation; Director
Chairman of SME Solutions, Inc., the PDB-FMO Development Center and Corporate Secretary of Honda Cars Makati, Inc., Isuzu Automotive
and the Micro Enterprise Bank of the Philippines; Current Chairman Dealership, Inc. and Michigan Holdings, Inc.; Corporate Secretary of Avida
of the Association of Development Financing Institutions in Asia Land, Corp. (formerly Laguna Properties Holdings, Inc.), Ayala Systems
and the Pacific (ADFIAP); Served as Ambassador Extraordinary and Technology, Inc., Azalea Technology Investment, Inc., Ayala Hotels, Inc.,
Plenipotentiary to the United Kingdom of Great Britain and Northern Laguna Technopark, Inc., Integrated Micro-electronics, Inc., Community
Ireland from 1993 to 1998. Conferred “Management Man of the Innovations, Inc., and Roxas Land Corporation; Assistant Corporate
Year 2003” by the Management Association of the Philippines, Secretary of Ayala Corporation, Ayala Land, Inc. and Ayala Foundation, Inc.
“Knight of the Equestrian Order of the Holy Sepulchre of Jerusalem” by
the Vatican in 2004 and Lifetime Achievement Award in 2005 by the
Asian Bankers Association
Jeann Low*
Director since 2005
33
‘05 SENIOR
EXECUTIVE
GROUP
34
Ferdinand M. de la Cruz Rodolfo A. Salalima
Consumer Business Head Corporate & Regulatory Affairs Head
CONSULTANTS
The management of GLOBE TELECOM, Inc. is responsible for all information and representations contained in the consolidated
financial statements for the years ended December 31, 2005, and 2004. The consolidated financial statements have been pre-
pared in conformity with accounting principles generally accepted in the Philippines and reflect amounts that are based on the best
estimates and judgment of management with an appropriate consideration to materiality.
In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to
ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition
and liabilities are recognized. The management likewise discloses to the Company’s Audit Committee and to its external auditors:
(i) all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to record, process,
and report financial data; (ii) material weaknesses in the internal controls; and (iii) any fraud that involves management or other
employees who exercise significant roles in internal controls.
The Board of Directors reviews the financial statements before such statements are approved and submitted to the stockholders
of the Company.
SyCip Gorres Velayo & Co, the independent auditors appointed by the stockholders, have audited the consolidated financial state-
ments of the Company in accordance with auditing standards generally accepted in the Philippines and have expressed their opinion
on the fairness of presentation upon completion of such audit, in its report to the Stockholders and the Board of Directors.
36
Report Of Independent Auditors
We have audited the accompanying consolidated balance sheets of Globe Telecom, Inc. and Subsidiaries as of
December 31, 2005, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity
and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Philippines. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Globe Telecom, Inc. and Subsidiaries as of December 31, 2005, 2004 and 2003, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles generally accepted in the Philippines.
Luis Y. Benitez
Partner
CPA Certificate No. 19698
SEC Accreditation No. 0067-A
Tax Identification No. 105-339-766
PTR No. 4180813, January 2, 2006, Makati City
February 7, 2006
December 31
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
ASSETS
Current Assets
Cash and cash equivalents (Notes 25 and 27) P
= 10,910,961 P
= 13,581,842 P
= 13,041,048
Short-term investments (Note 25) 1,253,759 720,831 1,962,889
Receivables - net (Notes 3, 5, 16 and 25) 6,764,130 5,457,913 7,760,694
Inventories and supplies (Note 6) 1,372,459 1,136,885 616,741
Prepayments and other current assets (Notes 3, 7, 16, 22 and 25) 1,232,525 1,083,408 1,602,192
Total Current Assets 21,533,834 21,980,879 24,983,564
Noncurrent Assets
Property and equipment - net (Notes 3, 8, 15, 16 and 22) 98,554,670 101,643,592 95,069,687
Investment property - net (Notes 3 and 9) 259,538 261,516 270,988
Intangible assets - net (Notes 3 and 10) 1,100,727 944,265 604,951
Deferred income tax - net (Notes 3 and 21) 1,163,943 2,413,253 1,759,412
Investments in associates, joint venture and others - net (Notes 3, 11 and 25) 76,897 91,925 727,726
Other noncurrent assets (Notes 3, 12, 18, 22 and 25) 2,412,781 2,368,498 3,008,349
Total Noncurrent Assets 103,568,556 107,723,049 101,441,113
P
= 125,102,390 P
= 129,703,928 P
= 126,424,677
See accompanying Notes to Consolidated Financial Statements.
38
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
NET INCOME P
= 10,314,508 P
= 11,396,242 P
= 9,952,636
39
GLOBE TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
Additional
Paid-in Cost of Treasury Cumulative
Capital Capital Share-Based Stock - Translation Retained
Stock* Common Payment Common Adjustment Earnings Total
For The Year Ended December 31, 2005 (In Thousand Pesos)
As of January 1, 2005,
as previously reported P
= 8,323,023 P
= 31,111,790 P
=– (P
= 8,192,770) P
=– P
= 25,774,446 P
= 57,016,489
Effect of changes in accounting
policies (Note 2) – 764 193,096 – – (2,703,447) (2,509,587)
Cumulative effect of change in
accounting policy for financial
instruments as of January 1, 2005
(Notes 2 and 25) – – – – (151,008) 31,290 (119,718)
As of January 1, 2005, as restated 8,323,023 31,112,554 193,096 (8,192,770) (151,008) 23,102,289 54,387,184
Changes in fair value of cash
flow hedges (429,336) – (429,336)
Transferred to income and expense for
the year for cash flow hedges 237,619 – 237,619
Tax effect of items taken directly to or
transferred from equity 114,167 – 114,167
Changes in fair value of
available- for-sale equity
investments (7,334) – (7,334)
Net income recognized
directly in equity (84,884) – (84,884)
Net income for the year – 10,314,508 10,314,508
Total recognized income
for the year (84,884) 10,314,508 10,229,624
Acquisition of treasury shares
for the year (Note 17) – – – (7,675,658) – – (7,675,658)
Retirement of treasury
shares (Note 17) (1,003,283) (5,179,349) – 15,868,428 – (9,685,796) –
Dividends on (Note 17):
Common stock – – – – – (5,436,017) (5,436,017)
Preferred stock – – – – – (68,334) (68,334)
Cost of share-based – – –
payment (Note 18) – – 161,731 161,731
Collections of subscriptions
receivable - net of refunds 10,968 – – – – – 10,968
Exercise of stock options 3,033 48,462 (42,183) – – – 9,312
As of December 31, 2005 P
= 7,333,741 P
= 25,981,667 P
= 312,644 P
=– (P
= 235,892) P
= 18,226,650 P
= 51,618,810
(Forward)
GLOBE TELECOM, INC.
40
Additional
Paid-in Cost of Treasury Cumulative
Capital Capital - Share-Based Stock - Translation Retained
Stock* Common Payment Common Adjustment Earnings Total
For the Year Ended December 31, 2004 (In Thousand Pesos)
As of January 1, 2004,
as previously reported P
= 8,307,828 P
= 31,110,194 P
=– (P
= 8,192,770) P
=– P
= 19,628,747 P
= 50,853,999
Effect of changes in accounting
policies (Note 2) – – 59,091 – – (2,842,323) (2,783,232)
As of January 1, 2004, as restated 8,307,828 31,110,194 59,091 (8,192,770) – 16,786,424 48,070,767
Net income for the year, as restated – – – – – 11,396,242 11,396,242
Dividends on (Note 17):
Common stock – – – – – (5,036,539) (5,036,539)
Preferred stock – – – – – (75,128) (75,128)
Cost of share-based
payment (Note 18) – – 134,769 – – – 134,769
Exercise of stock options – 2,147 (764) – – – 1,383
Stock option purchase price – 213 – – – – 213
Collections of subscription
receivable - net of refunds 15,195 – – – – – 15,195
As of December 31, 2004, as restated P
= 8,323,023 P
= 31,112,554 P
= 193,096 (P
= 8,192,770) P
=– P
= 23,070,999 P
= 54,506,902
For The Year Ended December 31, 2003 (In Thousand Pesos)
As of January 1, 2003,
as previously reported P
= 8,267,828 P
= 31,109,975 P
=– P
=– P
=– P
= 11,478,127 P
= 50,855,930
Effect of changes in accounting policies
(Note 2) – – – – – (2,449,706) (2,449,706)
As of January 1, 2003, as restated 8,267,828 31,109,975 – – – 9,028,421 48,406,224
Net income for the year, as restated – – – – – 9,952,636 9,952,636
Acquisition of treasury shares – – – (8,192,770) – – (8,192,770)
Dividends on (Note 17):
Common stock (2,126,676) (2,126,676)
Preferred stock – – – – – (67,957) (67,957)
Cost of share-based
payment (Note 18) – – 59,091 – – – 59,091
Stock option purchase price – 219 – – – – 219
Collections of subscription
receivable - net of refunds 40,000 – – – – – 40,000
As of December 31, 2003, as restated P
= 8,307,828 P
= 31,110,194 P
= 59,091 (P
= 8,192,770) P
=– P
= 16,786,424 P
= 48,070,767
*Net of subscriptions receivable of P
= 53.86 million, P
= 64.82 million and P
= 80.02 million as of December 31, 2005, 2004 and 2003, respectively.
See accompanying Notes to Consolidated Financial Statements.
(Forward)
42
Years Ended December 31
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
See accompanying Notes to Consolidated Financial Statements.
1. Corporate Information
Globe Telecom, Inc. (hereafter referred to as “Globe Telecom” or the “Parent Company”) is a stock corporation organized under the
laws of the Philippines, and enfranchised under Republic Act (RA) No. 7229 and its related laws to render any and all types of
domestic and international telecommunications services. Globe Telecom is one of the leading providers of digital wireless
communications services in the Philippines using a full digital network based on the Global System for Mobile Communication (GSM)
technology. It also offers domestic and international long distance communication services or carrier services. Globe Telecom’s
principal executive offices are located at 5th Floor, Globe Telecom Plaza, Pioneer Highlands, Pioneer corner Madison Streets,
Mandaluyong City, Metropolitan Manila, Philippines. Globe Telecom is listed in the Philippine Stock Exchange (PSE) and has been
included in the PSE composite index since September 17, 2001.
Globe Telecom owns 100% of Innove Communications, Inc. (“Innove”). Innove is a stock corporation organized under the laws of the
Philippines and enfranchised under RA No. 7372 and its related laws to render any and all types of domestic and international
telecommunications services. Innove is one of the providers of digital wireless communication services in the Philippines. Innove
currently offers cellular service under the Touch Mobile (TM) prepaid cellular brand. The TM brand is supported in the integrated
cellular networks of Globe Telecom and Innove. Innove also offers a broad range of wireline voice communication services, as well
as domestic and international long distance communication services or carrier services. Innove’s principal executive office is located
at 18th Floor, Innove IT Plaza corner Samar and Panay Roads, Cebu Business Park, Cebu City, Philippines.
Globe Telecom is a grantee of various authorizations and licenses from the National Telecommunications Commission (NTC) as
follows: (1) license to offer and operate telex, facsimile, other traditional voice and data services and domestic line service using
Very Small Aperture Terminal (VSAT) technology; (2) license for inter-exchange services; and (3) Certificate of Public Convenience
and Necessity (CPCN) for: (a) international digital gateway facility (IGF) in Metro Manila, (b) nationwide digital cellular mobile
telephone system under the GSM standard (CMTS-GSM), and (c) local exchange carrier (LEC) services in Makati and surrounding
areas in Metro Manila, Batangas, Cavite, Mindoro, Palawan and certain areas in Mindanao.
On August 7, 2003, the NTC granted Globe Telecom’s application to transfer its wireline business, assets, obligations and subscribers
to Innove. With the transfer of Globe Telecom’s wireline voice and data services to Innove on September 30, 2003, Innove now holds
the following: (a) the authorizations and licenses from the NTC issued to Globe Telecom to offer and operate telex, facsimile, and
other traditional voice and data services and domestic leased line service using VSAT technology; and (b) the CPCN previously
issued to Globe Telecom on July 23, 2002 to offer LEC services in Makati and surrounding areas in Metro Manila, Batangas, Cavite,
Mindoro, Palawan and certain areas in Mindanao.
On July 23, 2002, the NTC also issued the CPCN for Innove’s IGF, CMTS and LEC services which is valid and renewable after
25 years.
On June 17, 2005, NTC issued a provisional authority to Innove to establish, install telephone, operate and maintain LEC service,
particularly integrated local telephone service with public payphone facilities and public calling stations in all regions, provinces, cities
and municipalities across the nation that are not yet covered by its existing CPCN and to charge therefore monthly rates at par with
the approved rates of the LEC operators in the area, subject to certain conditions.
GLOBE TELECOM, INC.
44
On December 28, 2005, NTC approved Globe Telecom’s application for third generation (3G) radio frequency spectra to support the
upgrade of its CMTS network to be able to provide 3G services. Globe Telecom has been assigned the 10-Megahertz (MHz) of
3G radio frequency spectrum.
On August 23, 2004, Globe Telecom invested in G-Xchange, Inc. (GXI), a wholly-owned subsidiary, with the primary purpose of
developing, designing, administering, managing and operating software applications and systems, including systems designed for the
operations of bills, payment and money remittance, payment and delivery facilities through various telecommunications systems
operated by telecommunications carriers in the Philippines and throughout the world and to supply software and hardware facilities
for such purposes. GXI handles the mobile payment and remittance service using Globe Telecom’s network as transport channel
under the G-Cash brand. The service, which is integrated into the cellular services of Globe Telecom and Innove, enables easy and
convenient person-to-person fund transfers via short messaging services (SMS) and allows Globe Telecom and Innove subscribers
to easily and conveniently put cash into and get cash out of the G-Cash system. GXI started commercial operations on
October 16, 2004. GXI is a stock corporation organized under the laws of the Philippines. GXI is registered with the Bangko Sentral
ng Pilipinas as a remittance agent. GXI’s principal executive office is located at 6th Floor, Globe Telecom Plaza, Pioneer Highlands,
Pioneer corner Madison Streets, Mandaluyong City, Metropolitan Manila, Philippines.
The Globe Group applied PFRS 1, First-time Adoption of PFRS, in preparing the consolidated financial statements, with
January 1, 2003 as the date of transition. The Globe Group applied the accounting policies set forth below to all the years presented,
except those relating to the classification and measurement of financial instruments.
The consolidated financial statements of the Globe Group have been prepared under the historical cost convention method, except
for derivative financial instruments and available-for-sale financial assets that are measured at fair value. The carrying values of
recognized assets and liabilities that are hedged are adjusted to record changes in the fair values attributable to the risks that are
being hedged.
The consolidated financial statements of the Globe Group are presented in Philippine peso and rounded to the nearest thousands
except when otherwise indicated.
PFRS 1, First Time Adoption of PFRS, requires an entity to comply with each PFRS effective at the reporting date for its first
PFRS financial statements. The Globe Group has adopted PFRS for these financial statements as of and for the year ended
December 31, 2005 and has also restated the comparative amounts for the years ended December 31, 2004 and 2003, except
for PAS 32 and PAS 39 based on the exemption provided by PFRS 1. In addition, the following courses of action have been
taken as allowed under PFRS 1:
PFRS 2, Share-based Payment, sets out the measurement principles and accounting requirements for share-based payment
transactions, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of
the entity. Under this standard, the Globe Group is required to recognize in the statements of income the cost of share options
granted after November 7, 2002 that had not vested on or before January 1, 2005. Prior to January 1, 2005, the Globe Group did
not recognize any expense for share options granted but disclosed required information for such options.
PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, specifies the accounting for assets held for sale and the
presentation and disclosure requirements for discontinued operations. Under this standard, qualifying noncurrent assets or
disposal groups held for sale shall be carried at fair value less cost to sell if this amount is lower than its carrying amount. The
company shall not depreciate (or amortize) noncurrent assets (or disposal groups) while classified as held for sale. Any gain or
loss on the remeasurement of a noncurrent asset (or disposal group) classified as held for sale shall be included in the profit or
loss from continuing operations.
As of December 31, 2005, 2004 and 2003, the Globe Group has no qualifying noncurrent assets that are held for sale.
PAS 19, Employee Benefits, prescribes the accounting and disclosures by employers for employee benefits (including short-term
employee benefits, post-employment benefits, other long-term employee benefits and termination benefits). For post-
employment benefits classified as defined benefit plans, the standard requires: (a) the use of the projected unit credit method to
measure an entity’s obligations and costs; (b) an entity to determine the present value of defined benefit obligations and the fair
value of any plan assets with sufficient regularity; and (c) the recognition of a specific portion of net cumulative actuarial gains
and losses when the net cumulative amount exceeds 10% of the greater of the present value of the defined benefit obligation or
10% of the fair value of the plan assets, but also permits the immediate recognition of these actuarial gains and losses.
GLOBE TELECOM, INC.
46
The adoption of PAS 19 has decreased net income by P = 21.78 million and P= 18.12 million in 2004 and 2003, respectively, and
increased retained earnings by P
= 92.89 million, P
= 114.67 million and P= 132.79 million as of January 1, 2005, 2004 and 2003,
respectively. Pension cost and accrual of short-term benefits amounted to P = 258.32 million in 2005.
PAS 21, The Effects of Changes in Foreign Exchange Rates, eliminates the capitalization of foreign exchange differentials
related to the acquisition of property and equipment.
PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure and presentation of all financial instruments.
The standard requires more comprehensive disclosures about a company’s financial instruments, whether recognized or
unrecognized in the financial statements. New disclosure requirements include terms and conditions of financial instruments used
by the entity, types of risks associated with both recognized and unrecognized financial instruments (market risk, foreign
exchange risk, price risk, credit risk, liquidity risk and cash flow risk), fair value information of both recognized and unrecognized
financial assets and financial liabilities, and the entity’s financial risk management policies and objectives. The standard also
requires financial instruments to be classified as debt or equity in accordance with their substance and not their legal form.
The standard also requires presentation of financial assets and financial liabilities on a net basis when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognized amounts; and (b) intends either to settle on a net basis, or to
realize the asset and settle the liability simultaneously (see Notes 5 and 13).
PAS 39, Financial Instruments: Recognition and Measurement, establishes the accounting and reporting standards for the
recognition and measurement of the entity’s financial assets and financial liabilities. When financial assets are recognized
initially, they are measured at fair value plus, in the case of investments not at fair value through profit or loss, directly
attributable transaction costs. Subsequent to initial recognition, an entity should measure financial assets at their fair values,
except for loans and receivables and held-to-maturity investments, which are measured at amortized cost using the effective
interest rate method. Financial liabilities are subsequently measured at amortized cost, except for liabilities classified under fair
value through profit and loss and derivatives, which are subsequently measured at fair value.
PAS 39 also establishes the accounting and reporting standards requiring that every derivative instrument (including certain
derivatives embedded in other contracts) be recorded in the balance sheets as either an asset or liability measured at its fair
value. PAS 39 requires that changes in the derivative’s fair value be recognized currently in the statements of income unless
specific hedges allow a derivative’s gains and losses to offset related results on the hedged item in the statements of income, or
deferred in the stockholders’ equity as “Cumulative translation adjustment”. PAS 39 requires that an entity must formally
document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.
Derivatives that are not designated and do not qualify as hedges are adjusted to fair value through income.
The Globe Group has adopted the hedge accounting treatment of PAS 39 for certain derivative instruments.
As allowed by the SEC and PFRS 1, the adoption of PAS 39 did not result in the restatement of prior year financial statements.
The cumulative effect of adopting this accounting standard was included in the January 1, 2005 retained earnings and cumulative
translation adjustment.
PAS 40, Investment Property, establishes the accounting and reporting standards for investment property. Investment property is
property (land or a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital
appreciation or both, rather than for: (a) use in the production or supply of goods or supply of goods or services or for
administrative purposes; or (b) sale in the ordinary course of business. Under this standard, an entity is permitted to choose either
the fair value model or cost model in the subsequent measurement of a qualifying investment property. Fair value model requires
an investment property to be measured at fair value with fair value changes recognized directly in the statements of income.
Cost model requires an investment property to be measured at cost less any accumulated depreciation and impairment losses.
The Globe Group adopted the cost model for investment property.
The adoption of PAS 40 resulted in reclassification of the carrying value of the portion of a building being leased to third parties
amounting to P
= 261.52 million, P
= 270.99 million and P
= 281.41 million as of January 1, 2005, 2004 and 2003, respectively, from
property and equipment to investment property (see Note 9).
PAS 16, Property, Plant and Equipment, (a) provides additional guidance and clarification on recognition and measurement of
items of property, plant and equipment; (b) requires the capitalization of the costs of asset dismantling, removal or restoration as
a result of either acquiring or having used the asset for purposes other than to produce inventories during the year; and
(c) requires measurement of an item of property, plant and equipment acquired in exchange for a nonmonetary asset or a
combination of monetary and nonmonetary assets at fair value, unless the exchange transaction lacks commercial substance.
Under the previous version of the standard, an entity measured such an acquired asset at fair value unless the exchanged assets
were similar.
The adoption of the following revised accounting standards did not have a material effect on the Globe Group’s financial statements.
Additional disclosures required by the revised accounting standards were included in the Globe Group’s financial statements, where
applicable:
PAS 1, Presentation of Financial Statements, (a) provides the framework within which an entity assesses how to present fairly the
effects of transactions and other events; (b) provides the base criteria for classifying liabilities as current or noncurrent;
(c) prohibits the presentation of income from operating activities and extraordinary items as separate line items in the statements
of income; and (d) specifies the disclosures about key sources of estimation, uncertainty and judgments management has made
in the process of applying a company’s accounting policies (see Note 3).
PAS 2, Inventories, reduces the alternatives for measurement of inventories by disallowing the use of the last in, first out formula.
Moreover, the revised accounting standard does not permit foreign exchange differences arising directly on the recent acquisition
of inventories invoiced in a foreign currency to be included in the cost of inventories.
PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, (a) removes the concept of fundamental errors and the
allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to
correct prior period errors; (b) updates the previous hierarchy of guidance to which management refers and whose applicability it
GLOBE TELECOM, INC.
48
considers when selecting accounting policies in the absence of standards and interpretations that specifically apply; (c) defines
material omissions or misstatements; and (d) describes how to apply the concept of materiality when applying accounting policies
and correcting errors.
PAS 10, Events after the Balance Sheet Date, provides a limited clarification of the accounting for dividends declared after the
balance sheet date.
PAS 17, Leases, provides a limited revision to clarify on the classification of a lease of land and buildings and prohibits
expensing of initial direct costs in the financial statements of lessors.
PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of the standard, the definitions and
disclosures for related parties. It also requires disclosure of the total compensation of key management personnel by benefit type
(see Note 16).
PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in accounting for investments in subsidiaries in
the separate financial statements of a parent, venturer or investor. Investments in subsidiaries will be accounted for either at cost
or in accordance with PAS 39 in the separate financial statements. Equity method of accounting will no longer be allowed in the
separate financial statements.
PAS 28, Investments in Associates, reduces alternatives in accounting for investments in associates in the separate financial
statements of an investor. Investments in associates will be accounted for either at cost or in accordance with PAS 39 in the
separate financial statements. Equity method of accounting will no longer be allowed in the separate financial statements.
PAS 27 and 28 require strict compliance with adoption of uniform accounting policies and require the parent company/investor to
make appropriate adjustments to the subsidiary’s/associate’s financial statements to conform them to the parent
company’s/investor’s accounting policies for reporting like transactions and other events in similar circumstances.
PAS 31, Interests in Joint Ventures, reduces the alternatives in accounting for interests in joint ventures in the separate financial
statements of a venturer. Interests in joint ventures are accounted for either at cost or in accordance with PAS 39 in the separate
financial statements. Equity method of accounting is no longer allowed in the separate financial statements.
PAS 33, Earnings per Share, prescribes principles for the determination and presentation of earnings per share for entities with
publicly traded shares, entities in the process of issuing ordinary shares to the public, and any entities that calculate and disclose
earnings per share. This standard also provides additional guidance in computing earnings per share, including the effects of
mandatorily convertible instruments and contingently issuable shares, among others.
PAS 36, Impairment of Assets, establishes frequency of impairment testing for certain intangibles and provides additional
guidance on the measurement of an asset’s value in use.
PAS 38, Intangible Assets, provides additional clarification on the definition and recognition of certain intangibles. Moreover, this
revised accounting standard requires that an intangible asset with an indefinite useful life should not be amortized but will be
tested for impairment by comparing its recoverable amount with its carrying amount annually and whenever there is an indication
that the intangible asset may be impaired.
January 1,
2004
Noncurrent Current Noncurrent Retained
Assets Liabilities Liabilities Equity* Earnings Net Income
(In Thousand Pesos)
PFRS 2 - Share-based Payment P
= 10,795 P
=– (P
= 88,760) P
= 193,860 (P
= 30,746) (P
= 63,559)
PAS 16 - Property, Plant and Equipment 418,057 – 676,556 – (187,048) (71,451)
PAS 19 - Employee Benefits 279,304 40,049 146,365 – 114,669 (21,779)
PAS 21 - The Effects of Changes in
Foreign Exchange Rates (3,674,015) – (1,230,482) – (2,739,198) 295,665
(P
= 2,965,859) P
= 40,049 (P
= 496,321) P
= 193,860 (P
= 2,842,323) P
= 138,876
January 1,
2003
Noncurrent Current Noncurrent Retained
Assets Liabilities Liabilities Equity* Earnings Net Income
(In Thousand Pesos)
PFRS 2 - Share-based Payment P
= 3,094 P
=– (P
= 25,251) P
= 59,091 P
=– (P
= 30,746)
PAS 16 - Property, Plant and Equipment 266,580 – 453,628 – (118,994) (68,054)
PAS 19 - Employee Benefits 239,213 (6,076) 130,620 – 132,793 (18,124)
PAS 21 - The Effects of Changes in Foreign
Exchange Rates (4,431,116) – (1,691,918) – (2,463,505) (275,693)
(P
= 3,922,229) = 6,076) (P
(P = 1,132,921) P
= 59,091 (P
= 2,449,706) (P
= 392,617)
*Represents effect on additional paid-in capital-common and cost of share-based payment.
The reconciliation of the increasing (decreasing) effects of transition to PFRS as they apply to stockholders’ equity as of
January 1, 2005, 2004 and 2003 and the net income and earnings per share in 2004 and 2003 follows:
Stockholders’ equity
50
Net income
2004 2003
(In Thousand Pesos)
As previously reported P
= 11,257,366 P
= 10,345,253
PFRS 2 - Share-based Payment (63,559) (30,746)
PAS 16 - Property, Plant and Equipment (71,451) (68,054)
PAS 19 - Employee Benefits (21,779) (18,124)
PAS 21 - The Effects of Changes in Foreign Exchange Rates 295,665 (275,693)
As restated P
= 11,396,242 P
= 9,952,636
2004 2003
As previously reported P
= 79.93 P
= 68.79
PFRS 2 - Share-based Payment (0.45) (0.21)
PAS 16 - Property, Plant and Equipment (0.51) (0.46)
PAS 19 - Employee Benefits (0.16) (0.12)
PAS 21 - The Effects of Changes in Foreign Exchange Rates 2.11 (1.84)
As restated P
= 80.92 P
= 66.16
The Globe Group did not early adopt the following Standards that have been approved but are not yet effective:
PFRS 6, Exploration for and Evaluation of Mineral Resources - This standard does not apply to the activities of the Globe Group.
PFRS 7, Financial Instruments: Disclosures - The revised disclosure on financial instruments provided by this standard will be
included in the Globe Group’s financial statements when the standard is adopted in 2007.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Globe Telecom, Innove and GXI. Innove’s and GXI’s
principal activities are wireless and wireline services, and software management for telecom applications, respectively.
Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar
circumstances. All significant intercompany balances and transactions, including intercompany profits and unrealized profits and
losses, were eliminated during consolidation in accordance with the accounting policy on consolidation.
Revenue Recognition
The Globe Group provides wireless services and wireline voice and data communication services. Wireless and wireline voice
services are provided under postpaid and prepaid arrangements while wireline data services are all under postpaid arrangement.
Revenue is recognized when the delivery of the products or services has occurred and the collectibility is reasonably assured.
Revenue is stated at amounts invoiced and accrued to customers, taking into consideration the bill cycle cut-off (for postpaid
subscribers), and charged against preloaded airtime value (for prepaid subscribers), and excludes value added tax (VAT) and
overseas communication tax.
Postpaid service arrangements include fixed monthly charges, which are recognized over the subscription period on a pro-rata basis.
Telecommunications services provided to postpaid subscribers are billed throughout the month according to the bill cycles of
subscribers. As a result of bill cycle cut-off, monthly service revenues earned but not yet billed at end of the month are estimated and
accrued. These estimates are based on actual usage less estimated free usage using historical ratio of free over billable usage.
Proceeds from the sale of prepaid cards and airtime value through over-the-air reloading services are deferred and shown as
“Unearned revenues” in the consolidated balance sheets. Revenue is recognized upon actual charging of subscription fees for
promotional discounted calls or SMS services and the actual usage of the airtime value for voice, SMS, MMS and content
downloading, and net of free service allocation and bonus reload, or upon expiration of the unused value, whichever comes earlier.
Inbound revenues and outbound charges are accrued based on actual volume of traffic monitored by the Group’s network and in the
traffic settlement system and the agreed termination rates and on revenue sharing agreement with other foreign and local carriers
and content providers. Prompt payment discounts on settlement of inbound revenues are recorded when incurred upon settlement of
accounts. Inbound revenues represent settlements recognized from telecommunications providers that sent traffic to the Globe
Group’s network, while outbound charges represent settlements to telecommunications providers for traffic originating from the Globe
Group’s network and settlements to service providers for value added contents downloaded by subscribers. Adjustments are made to
the accrued amount for discrepancies between the traffic volume per Globe Group’s records and per records of the other carriers and
content providers as these are determined and/or are mutually agreed by the parties. Uncollected inbound revenues are shown as
traffic settlements receivable under “Receivables”, while unpaid outbound charges are shown as traffic settlements payable under
“Accounts payable and accrued expenses” in the consolidated balance sheets, unless a right of offset exists.
Proceeds from sale of handsets, phonekits, SIM packs, and other phone accessories are recognized upon delivery of the item to
customers. The related costs of handsets, phonekits, SIM packs and accessories sold to customers are presented as “Cost of sales”
in the consolidated statements of income.
Lease income from operating lease is recognized on a straight-line basis over the lease term.
52
Bill credits are deducted from operating revenues upon application against qualifying subscriber bills.
Receivables
Receivables are recognized and carried at billable amounts less an allowance for doubtful accounts. Penalties, termination fees and
surcharges on past due accounts of postpaid subscribers are recognized as revenues upon collection. An allowance for doubtful
accounts is maintained at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is
evaluated by management on the basis of factors that affect the collectibility of the accounts. A review of the age and status of
receivables, designed to identify accounts to be provided with allowance, is performed regularly.
Customers
Full allowance is provided for receivables from permanently disconnected wireless and wireline subscribers. Permanent
disconnections are made after a series of collection steps following nonpayment by postpaid subscribers. Such permanent
disconnections generally occur within a predetermined period from statement date. Except for specific individual and corporate
wireless subscribers subjected to specific evaluation and special credit management handling, full allowance is generally
provided for active individual and corporate wireless subscribers with outstanding receivables that are past due by 90 and
120 days, respectively, and those with temporary disconnected status that are subject for termination within the succeeding
month. Full allowance is also provided for active residential and business wireline voice subscribers with outstanding receivables
that are past due by 90 and 150 days, respectively. Full allowance is likewise provided for receivables from wireline data
corporate accounts that are past due by 150 days.
Traffic Settlements
Full allowance is generally provided for the net receivable from international and national traffic carriers and roaming partners
which are not settled within 10 months and 6 months, respectively, from transaction date and after review of the status of
settlement with other carriers.
Additional provisions are made for accounts specifically identified to be doubtful of collection regardless of age of the account.
Supplies of SIM packs and telephone handsets are consumed upon activation of the wireless and wireline services.
Effective January 1, 2005, foreign exchange differentials arising from the acquisition of property and equipment are charged against
current operations and no longer capitalized. The comparative 2004 and 2003 financial statements were restated to reflect this
change in accounting policy.
Assets under construction are transferred to the related property and equipment account when the construction or installation and
related activities necessary to prepare the property and equipment for their intended use are completed, and the property and
equipment are ready for service.
Depreciation and amortization of property and equipment commences once the property and equipment are available for use and
computed using the straight-line method over the estimated useful lives (EUL) of the assets regardless of utilization.
Leasehold improvements are amortized over the shorter of their EUL or the corresponding lease terms.
The EUL of property and equipment are reviewed annually based on expected asset utilization as anchored on business plans and
strategies that also consider expected future technological developments and market behavior to ensure that the period of
depreciation and amortization is consistent with the expected pattern of economic benefits from items of property and equipment.
The EUL of property and equipment of the Globe Group are as follows:
Years
Telecommunications equipment:
Tower 15
Switch 10 and 15
Outside plant 10-20
Distribution dropwires 5
Cellular facilities and others 3-10
Buildings 20
Leasehold improvements 5 years or lease term, whichever is shorter
Investments in cable systems 15
Furniture, fixtures and equipment 3-5
Transportation and work equipment 2-5
When property and equipment is retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization
and accumulated provision for impairment losses, if any, are removed from the accounts and any resulting gain or loss is credited to
or charged against current operations.
54
Investment Property
Investment property is initially measured at cost including transaction costs. Investment property is derecognized when it has either
been disposed of or permanently withdrawn from use and no future benefit is expected from its disposal. Any gain or loss on the
derecognition of an investment property is recognized in the consolidated statement of income in the year of derecognition.
Transfers are made to investment property when, and only when, there is a change in use, evidenced by the end of
owner-occupation, commencement of an operating lease to another party or by the end of construction or development. Transfers are
made from investment property 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.
Depreciation of investment property is computed using the straight-line method over its useful life, regardless of utilization. The EUL
of the investment property is 15 years.
Intangible Assets
Intangible assets acquired separately are capitalized at cost. Subsequently, intangible assets are measured at cost less accumulated
amortization and provisions for impairment losses, if any. The useful lives of intangible assets with finite life are assessed at the
individual asset level. Intangible assets with finite life are amortized over their useful life. Periods and method of amortization for
intangible assets with finite useful lives are reviewed annually or earlier when an indicator of impairment exists.
Costs incurred to acquire computer software (not an integral part of its related hardware) and bring it to its intended use are
capitalized as intangible assets. These costs are amortized over the EUL of the related computer software ranging from 3 to 5 years.
Costs directly associated with the development of identifiable computer software that generate expected future benefits to the Globe
Group are recognized as intangible assets. All other costs of developing and maintaining computer software programs are recognized
as expense when incurred.
A gain or loss arising from derecognition of an intangible asset is measured as the difference between the net disposal proceeds and
the carrying amount of the asset and is recognized in the consolidated statements of income when the asset is derecognized.
Effective January 1, 2005, debt issuance costs were amortized using the effective interest method and unamortized debt issuance
costs are netted against the related carrying value of the debt instrument in the consolidated balance sheets.
When the related instrument is retired, the related unamortized debt issuance costs at the date of retirement are charged against
current operations.
Under the equity method, the investments in associates and JV are carried in the consolidated balance sheets at cost plus
post-acquisition changes in the Globe Group’s share of net assets of the associates and JV, less any accumulated impairment in
value. The consolidated statements of income reflect the share of the results of operations of the associates and JV. Where there has
Other investments include shares of stock where the Globe Group’s ownership interest is less than 20% or where control is likely to
be temporary. These are initially recognized at cost, being the fair value of the consideration given and including acquisition charges
associated with the investments. Gains or losses on these investments are recognized directly in equity, through the statement of
changes in stockholders’ equity. When the investment is derecognized, the cumulative gain or loss previously recognized in equity is
recognized in the consolidated statements of income.
Impairment of Assets
An assessment is made at the balance sheet date to determine whether there is any indication that the asset may be impaired, or
whether there is any indication that an impairment loss previously recognized for an asset in prior years may no longer exist or may
have decreased. If any such indication exists and when the carrying value of an assets exceeds its estimated recoverable amount,
the asset or cash generating unit to which the asset belongs is written down to its recoverable amount. The recoverable amount of an
asset is the greater of its net selling price and value in use. An impairment loss is recognized only if the carrying amount of an asset
exceeds its recoverable amount. An impairment loss is charged against operations in the year in which it arises. A previously
recognized impairment loss is reversed only if there has been a change in estimate used to determine the recoverable amount of an
asset, however, not to an amount higher than the carrying amount that would have been determined (net of any accumulated
depreciation and amortization for property and equipment) had no impairment loss been recognized for the asset in prior years. A
reversal of an impairment loss is credited to current operations.
For the Globe Group, the cash-generating unit for purposes of impairment assessment of property and equipment is the combined
wireless and wireline asset groups of Globe Telecom and Innove. This asset grouping is predicated upon the requirement contained
in Executive Order (EO) No. 109 and RA No. 7925 requiring licensees of CMTS and IGF services to provide 400,000 and
300,000 LEC lines, respectively, as a condition for the grant of such licenses.
Treasury Stock
Treasury stock is recorded at cost and is presented as a deduction from equity. When the shares are retired, the capital stock account
is reduced by its par value. The excess of cost over par value upon retirement is debited to the following accounts in the order given:
(a) additional paid-in capital to the extent of the specific or average additional paid-in capital when the shares were issued, and
(b) retained earnings.
Income Taxes
Deferred income tax is provided using the balance sheet liability method on all temporary differences, with certain exceptions, at
balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognized for all taxable temporary differences, with certain exceptions. Deferred income tax
assets are recognized for all deductible temporary differences and carryforward benefit of unused tax credits from excess minimum
corporate income tax (MCIT) over regular corporate income tax and 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 carryforward benefit of
unused MCIT and NOLCO can be used.
Deferred income tax is not recognized when it arises from the initial recognition of an asset or liability in a transaction that is not a
business combination and, at the time of transaction, affects neither the accounting profit nor taxable profit or loss. Deferred income
tax liabilities are not provided on nontaxable temporary differences associated with investment in a domestic associate. The carrying
amounts of deferred income tax assets are 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 income tax assets to be utilized.
GLOBE TELECOM, INC.
56
Deferred income tax assets and liabilities are measured at the tax rate that is expected to apply in the year when the asset is realized
or the liability is settled based on tax rates (and tax laws) that have been enacted or substantially enacted as of balance sheet date.
Provisions
A provision is recognized only when the Globe Group has: (a) a present obligation (legal or constructive) as a result of a past event;
(b) it is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the
obligation; and (c) a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet
date and adjusted to reflect the current best estimate. If the effect of the time value of money is material, provisions are determined
by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money
and, 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.
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are
granted. In valuing equity-settled transactions, vesting conditions, including performance conditions, other than market conditions
(conditions linked to share prices), shall not be taken into account when estimating the fair value of the shares or share options at the
measurement date. Instead, vesting conditions are taken into account in estimating the number of equity instruments that will vest.
The cost of equity-settled transactions is recognized in the consolidated statements of income, together with a corresponding
increase in equity, over the period in which the service conditions are fulfilled, ending on the date on which the relevant employees
become fully entitled to the award (‘vesting date’). The cumulative expense recognized for equity-settled transactions at each
reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of awards that, in the
opinion of the management of the Globe Group at that date, based on the best available estimate of the number of equity
instruments, will ultimately vest.
No expense is recognized for awards that do not ultimately vest, except for awards where vesting is conditional upon a market
condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other
performance conditions are satisfied.
Where the terms of an equity-settled award are modified, as a minimum, an expense is recognized as if the terms had not been
modified. In addition, an expense is recognized for any increase in the value of the transaction as a result of the modification,
measured at the date of modification.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet
recognized for the award is recognized immediately. However, if a new award is substituted for the cancelled award, and designated
as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the
original award, as described in the previous paragraph.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share
(see Note 24).
The Globe Group has taken the advantage of the transitional provision of PFRS 2 in respect of equity-settled awards and has applied
PFRS 2 only to equity-settled awards granted after November 7, 2002 that had not vested on January 1, 2005. For equity-settled
awards granted on or before November 7, 2002, the Globe Group did not recognize any expense but disclosed
information for such options.
The net pension asset recognized by the Globe Group in respect of the defined benefit pension plan is the lower of: (a) the fair value
of the plan assets less the present value of the defined benefit obligation at the balance sheet date, together with adjustments for
unrecognized actuarial gains or losses and past service costs that shall be recognized in later periods; or (b) the total of any
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 future contributions to the plan. The defined benefit obligation is calculated annually by
independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by
discounting the estimated future cash outflows using risk-free interest rates of government bonds that have terms to maturity
approximating the terms of the related pension liabilities.
In accordance with PFRS 1, the effect of change in accounting policy includes all cumulative actuarial gains and losses at the date of
transition to PFRS. In subsequent periods, a portion of actuarial gains and losses is recognized as income or expense if the
cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceeded the greater of 10% of the
present value of defined benefit obligation or 10% of the fair value of plan assets. These gains and losses are recognized over the
expected average remaining working lives of the employees participating in the plans.
Borrowing Costs
Interest and other related financing charges on borrowed funds used to finance the acquisition of property and equipment to the
extent incurred during the period of installation are capitalized as part of the cost of property and equipment. The capitalization of
borrowing costs as part of the cost of an item of property and equipment: (a) commences when the expenditures and borrowing costs
being incurred during the installation and related activities necessary to prepare the item of property and equipment for its intended
use are in progress; (b) is suspended during extended periods in which active development is interrupted; and (c) ceases when
substantially all the activities necessary to prepare the item of property and equipment for its intended use are completed. These
costs are amortized using the straight-line method over the EUL of the related property and equipment.
Other borrowing costs are recognized as expense in the period in which these are incurred.
Premiums on long-term debt are included in “Long-term debt” account in the consolidated balance sheets and are amortized using
the effective interest rate method.
Leases
Finance leases, which transfer to the Globe Group substantially all the risks and benefits incidental to ownership of the leased item,
are capitalized at the inception of the lease at the lower of the value of the leased property and the present value of the minimum
lease payments. Lease payments are apportioned between 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 current operations.
Capitalized leased assets are depreciated over the shorter of the EUL of the assets or the corresponding lease terms.
Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases.
Operating lease collection or payment is recognized in the consolidated statements of income on a straight-line basis over the lease
terms.
GLOBE TELECOM, INC.
58
Advertising Expenses
Advertising expenses are charged against current operations as incurred.
Financial Instruments
Financial instruments are recognized in the consolidated balance sheets when the Globe Group becomes a party to the contractual
provisions of the instrument. Financial assets are derecognized either when the Globe Group has transferred substantially all the
risks and rewards of ownership or when it has neither transferred nor retained substantially all the risks and rewards of ownership but
it no longer has control over the financial assets. Financial liabilities are derecognized when the obligation is extinguished.
The subsequent measurement bases for financial instruments depend on classification. Financial instruments that are classified as
held-to-maturity, loans and receivables, and financial liabilities other than liabilities measured at fair value through profit and loss are
measured at amortized cost using the effective interest rate method. Investments are classified as held-to-maturity when those are
nonderivatives with fixed or determinable payments and fixed maturity that the Globe Group has positive intention and ability to hold
to maturity. Investments to be held for an undefined period are not included in this classification. Amortized cost is calculated by
taking into account any discount, premium and transaction costs on acquisition, over the year to maturity. Amortizations of discounts,
premiums and transaction costs are taken directly to the consolidated statements of income. For investments carried at amortized
cost, gains and losses are recognized in income when the investments are derecognized or impaired, as well as through the
amortization process.
Changes in the fair value of financial assets and liabilities measured at fair value of: (a) all derivatives (except those eligible for
hedge accounting); (b) other items that are held for trading; and (c) any item designated as held “at fair value through profit and loss”
at origination, are taken directly to the consolidated statements of income. Changes in the fair value of investments classified as
available-for-sale securities are recognized in equity, except for the foreign exchange fluctuations on available-for-sale debt
securities and the related effective interest which are taken directly to the consolidated statements of income. These changes in fair
values are recognized in equity until the investment is sold, collected or otherwise disposed of, 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 statements of
income.
Financial assets and liabilities include financial instruments which may be a non-derivative instrument, such as receivables, payables
and equity securities, or a derivative instrument, such as financial options, forwards and swaps.
The Globe Group enters into deliverable prepaid forward contracts that entitle the Globe Group to a discount on the contracted
forward rate. Such contracts contain embedded currency derivatives that are bifurcated and marked-to-market through earnings, with
the host debt instrument being accreted to its face value.
The Globe Group enters into short-term interest rate swap contracts to manage its interest rate exposures on certain short-term
floating rate peso investments. The parent company also enters into long-term currency and interest rate swap contracts to manage
its foreign currency and interest rate exposures arising from its long-term loan. Such swap contracts are sometimes entered into in
combination with options. The Globe Group also sells currency options as cost subsidy for outstanding currency swap contracts.
Derivative financial instruments are recognized and measured in the consolidated balance sheets at fair values. The method of
recognizing the resulting gain or loss depends on whether the derivative is designated as a hedge of an identified risk and qualifies
for hedge accounting treatment. The objective of hedge accounting is to match the impact of the hedged item and the hedging
instrument in the consolidated statements of income. To qualify for hedge accounting, the hedging relationship must comply with
strict requirements such as the designation of the derivative of an identified risk exposure, hedge documentation, probability of
occurrence of the forecasted transaction in a cash flow hedge, assessment and measurement of hedge effectiveness, and reliability
of the measurement bases of the derivative instruments.
Upon inception of the hedge, the Globe Group documents the relationship between the hedging instrument and the hedged item, its
risk management objective and strategy for undertaking various hedge transactions, and the details of the hedging instrument and
the hedged item. The Globe Group also documents its hedge effectiveness assessment methodology, both at the hedge inception
and on an ongoing basis, as to whether the derivatives that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. Hedge effectiveness is likewise measured, with any ineffectiveness being reported
immediately in the consolidated statements of income.
The Globe Group designates derivatives which qualify as accounting hedges as either: (a) a hedge of the fair value of a recognized
fixed rate asset, liability or unrecognized firm commitment (fair value hedge); or (b) a hedge of the cash flow variability of recognized
floating rate asset and liability or forecasted transaction (cash flow hedge).
As of December 31, 2005, there were no derivatives designated and accounted for as fair value hedges.
60
A cash flow hedge is a hedge of the exposure to variability in future cash flows related to a recognized asset, liability or a forecasted
transaction. Changes in the fair value of a hedging instrument that qualifies as a highly effective cash flow hedge are recognized in
“Cumulative translation adjustment,” which is a component of stockholders’ equity. Any hedge ineffectiveness is immediately
recognized in the consolidated statements of income.
Where the forecasted transaction result in the recognition of an asset or liability, the gains and losses previously included in
“Cumulative translation adjustment” are included in the initial measurement of the asset or liability. Otherwise, amounts recorded in
equity are transferred to the consolidated statements of income in the same period in which the forecasted transaction affects the
consolidated statements of income.
Hedge accounting is discontinued prospectively when the hedge ceases to be highly effective. When hedge accounting is
discontinued, the cumulative gain or loss on the hedging instrument that has been reported in “Cumulative translation adjustment” is
retained in the stockholders’ equity until the hedged transaction impacts earnings. When the forecasted transaction is no longer
expected to occur, any net cumulative gain or loss previously reported in “Cumulative translation adjustment” is recognized
immediately in the consolidated statements of income.
For bifurcated embedded derivatives that are not designated or do not qualify as hedges, changes in the fair values of such
transactions are recognized in the consolidated statements of income.
The mark-to-market gains or losses on these contracts as well as the other types of derivative contracts are not considered in the
determination of consolidated net income but are disclosed in the related notes to the consolidated financial statements.
The Globe Group 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 exist for an individually assessed financial asset, whether significant or not, the asset is
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 statements of income, to the extent that the carrying value of the asset does not
exceed its amortized cost at the reversal date.
Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding during the year,
after giving retroactive effect for any stock dividends, stock splits or reverse stock splits during the year, and adjusted for the effect of
dilutive options and dilutive convertible preferred shares. Outstanding stock options will have a dilutive effect under the treasury
stock method only when the average market price of the underlying common share during the period exceeds the exercise price of
the option. If the required dividends to be declared on convertible preferred shares divided by the number of equivalent common
shares, assuming such shares are converted, would decrease the basic EPS, then such convertible preferred shares would be
deemed dilutive. Where the effect of the assumed conversion of the preferred shares and the exercise of all outstanding options
have anti-dilutive effect, basic and diluted EPS are stated at the same amount.
Segment Reporting
The Globe Group’s major operating business units are the basis upon which the Globe Group reports its primary segment
information. In 2005, the Globe Group started monitoring its wireline voice and data businesses as one major converged service with
similar risks and returns. The Globe Group’s business segments consist of: (1) wireless communication services and (2) wireline
communication services. The Globe Group generally accounts for inter-segment revenues and expenses at agreed transfer prices.
Contingencies
Contingent liabilities are not recognized in the consolidated financial statements. These are disclosed unless the possibility of an
outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the consolidated financial
statements but are disclosed when an inflow of economic benefits is probable.
GLOBE TELECOM, INC.
62
Subsequent Events
Any post year-end event up to the date of approval of the Board of Directors (BOD) of the consolidated financial statements that
provides additional information about the Globe Group’s position at balance sheet date (adjusting event) is reflected in the
consolidated financial statements. Any post year-end event that is not an adjusting event is disclosed in the notes to the consolidated
financial statements when material.
The preparation of the accompanying consolidated financial statements in conformity with Philippine GAAP requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.
The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s
evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from
such estimates.
PAS 1, Presentation of Financial Statements, which was adopted by the Globe Group effective January 1, 2005, requires disclosures
about key sources of estimation, uncertainty and judgments management has made in the process of applying accounting policies.
The following presents a summary of these significant estimates and judgments:
The amount and timing of recorded expenses for any period would differ if the Globe Group made different judgments or utilized
different estimates. An increase in allowance for doubtful accounts would increase the recorded operating expenses and decrease
current assets.
The amount and timing of recorded expenses for any period would differ if different judgments were made or different estimates were
utilized. An increase in ARO would increase recorded operating expenses and increase noncurrent liabilities.
Estimated useful lives of property and equipment, intangible assets and investment property
Globe Group reviews annually the estimated useful lives of property and equipment, intangible assets and investment property based
on expected asset utilization as anchored on business plans and strategies that also consider expected future technological
developments and market behavior. It is possible that future results of operations could be materially affected by changes in these
estimates brought about by changes in the factors mentioned. A reduction in the EUL of property and equipment, intangible assets
and investment property would increase the recorded depreciation and amortization expense and decrease noncurrent assets.
As of December 31, 2005, 2004 and 2003, property and equipment, intangible assets and investment property amounted to
P
= 99,914.94 million, P
= 102,849.37 million and P
= 95,945.63 million, respectively (see Notes 8, 9 and 10).
Asset impairment
Globe Group assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The factors that Globe Group considers important which could trigger an impairment review include
the following:
An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s net selling price and value in use. The net selling price is the amount obtainable from the sale of
an asset in an arm’s length transaction while value in use is the present value of estimated future cash flows expected to arise from
the continuing use of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual
assets or, if it is not possible, for the cash-generating unit to which the asset belongs. For impairment loss on specific assets, the
recoverable amount represents the net selling price.
In determining the present value of estimated future cash flows expected to be generated from the continued use of the assets,
Globe Group is required to make estimates and assumptions that can materially affect the consolidated financial statements.
The carrying value of property and equipment, investment property, intangible assets and investment in subsidiaries, associates, joint
ventures and others amounted to P= 99,991.83 million, P
= 102,941.30 million and P
= 96,673.35 million as of December 31, 2005, 2004
and 2003, respectively, (see Notes 8, 9, 10 and 11).
As of December 31, 2005, 2004 and 2003, Innove has net deferred income tax assets of P = 1,163.94 million, P
= 2,413.25 million and
P
= 1,759.41 million, respectively, while Globe Telecom has net deferred income tax liabilities of P
= 4,432.87 million, P
= 3,474.73 million
and P= 1,874.08 million, respectively. Globe Telecom and Innove has no unrecognized deferred income tax assets as of
December 31, 2005. GXI has not recognized deferred income tax assets on its net operating loss carry over.
GLOBE TELECOM, INC.
64
Financial assets and liabilities
Globe Group carries certain financial assets and liabilities at fair value, which requires extensive use of accounting estimates and
judgment. 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 Globe Group utilized different
valuation methodologies. Any changes in fair value of these financial assets and liabilities would affect profit and loss and equity.
Financial assets and liabilities carried at fair values as of December 31, 2005 amounted to P
= 1,548.89 million and P
= 731.75 million,
respectively (see Note 25).
While the Globe Group believes that the assumptions are reasonable and appropriate, significant differences between actual
experiences and assumptions may materially affect the cost of employee benefits and related obligations.
As of December 31, 2005 and 2004, Globe Telecom has unrecognized actuarial gains of P = 35.39 million and P
= 31.42 million,
respectively, while unrecognized actuarial losses for 2003 amounted to P = 75.33 million. Innove’s unrecognized actuarial gains
amounted to P = 118.20 million, P
= 74.04 million and P
= 17.17 million as of December 31, 2005, 2004 and 2003, respectively
(see Note 18).
The Globe Group also estimates other employee benefit obligations and expenses, including costs of paid leaves based on historical
leave availments of employees, subject to the Globe Group’s policy. These estimates may vary depending on the future changes in
salaries and actual experiences during the year.
The accrued balance of other employee benefits as of December 31, 2005 amounted to P
= 217.26 million.
Contingencies
Globe Telecom and Innove are currently involved in various legal proceedings. The estimate of the probable costs for the resolution
of these claims has been developed in consultation with outside counsel handling the companies’ defense in these matters and is
based upon an analysis of potential results. Globe Telecom and Innove currently do not believe that these proceedings will have a
material adverse effect on the consolidated financial position. It is possible, however, that future results of operations could be
materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings (see Note 23).
On August 7, 2003, the NTC approved the legal rights transfer of Globe Telecom’s wireline business authorizations, properties,
assets and obligations to Innove. In September 2003, pursuant to the approval granted by the NTC, Globe Telecom’s wireline voice
and data assets and liabilities were transferred to Innove and the wireline business of Globe Group was integrated into Innove. On
June 30, 2004 and November 30, 2005, Globe Telecom transferred additional wireline assets and certain investments in cable
systems to Innove. On a consolidated basis, the transfers had no impact on net revenues, EBITDA [earnings before interest, income
tax, depreciation and amortization and other income (expense)] and net income. Innove remains a wholly-owned subsidiary of Globe
Telecom.
5. Receivables
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Customers P
= 8,022,307 P
= 7,988,865 P
= 7,109,926
Traffic settlements receivables - net (Notes 16 and 25) 3,120,374 2,315,050 4,514,080
Others 305,076 242,789 197,687
11,447,757 10,546,704 11,821,693
Less allowance for doubtful accounts (Note 3):
Customers P
= 4,468,009 P
= 4,787,070 P
= 3,879,846
Traffic settlements and others 215,618 301,721 181,153
4,683,627 5,088,791 4,060,999
P
= 6,764,130 P
= 5,457,913 P
= 7,760,694
66
7. Prepayments and Other Current Assets
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Prepayments P
= 297,109 P
= 331,591 P
= 365,101
Input VAT - net 286,784 312,566 746,648
Derivative assets (Notes 2 and 25) 117,056 – –
Other current assets (Note 25) 531,576 439,251 490,443
P
= 1,232,525 P
= 1,083,408 P
= 1,602,192
As of December 31, 2005 and 2004, Globe Telecom reported a net output VAT amounting to P = 69.32 million and P
= 150.38 million,
net of input VAT of P
= 207.07 million and P
= 224.74 million, respectively, included in “Accounts payable and accrued expenses” account
in the consolidated balance sheets (see Note 13). Innove’s net input VAT as of December 31, 2005 and 2004 is presented
net of output VAT of P
= 102.65 million and P
= 172.98 million, respectively.
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Furniture, fixtures and equipment P
= 138,978 P
= 166,417 P
= 180,103
Transportation and work equipment 3,850 4,400 4,400
142,828 170,817 184,503
Less accumulated depreciation 136,481 147,902 148,028
Net book value P
= 6,347 P
= 22,915 P
= 36,475
Investments in cable systems include the cost of Globe Group’s ownership share in the capacity of certain cable systems under a
joint venture or a consortium or private cable set-up and indefeasible rights of use (IRUs) of circuits in various cable systems. It also
includes the cost of cable landing station and transmission facilities where Globe Group is the landing party (see Note 16).
In 2004, as a result of periodic review of the EUL and depreciation and amortization methods of items of property and equipment,
management came to the conclusion that there has been a significant change in the expected pattern of economic benefits from
certain telecommunications equipment and investments in cable systems. Globe Group revised the EUL of certain switch equipment
from 15 to 10 years and investments in cable systems from 20 to 15 years.
In addition, Globe Group revised the remaining EUL of certain telecommunications equipment, which are specifically identified to be
useful for specific periods shorter than the previous EUL. These changes have been accounted for as changes in accounting
estimates. The changes increased depreciation expense by about P = 1,618.27 million or P
= 11.26 reduction in basic earnings per share,
before related income taxes in 2004.
As discussed in Note 2, the Globe Group adopted PAS 16 beginning January 1, 2005. It requires the capitalization of the costs of
dismantling and restoration of the leased property at the end of the leased term. Additional capitalized ARO in 2005, 2004 and 2003
amounted to P= 44.43 million P
= 182.36 million and P
= 70.26 million, respectively (see Notes 15 and 27).
In 2005, 2004 and 2003, total capitalized borrowing costs amounted to P = 123.56 million, P
= 203.55 million and P
= 704.31 million
(including capitalized interest of P
= 111.34 million, P
= 77.67 million and P
= 557.40 million), respectively.
68
9. Investment Property
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Cost
Balance at beginning of year P
= 290,834 P
= 281,821 P
= 281,821
Additions 17,621 9,013 –
Balance at end of year 308,455 290,834 281,821
Accumulated depreciation
Balance at beginning of year 29,318 10,833 412
Depreciation for the year 19,599 18,485 10,421
Balance at end of year 48,917 29,318 10,833
Net Book Value P
= 259,538 P
= 261,516 P
= 270,988
Investment property represents the portion of a building that is currently being held for lease to third parties.
Additions to investment property during the year represent new leases of office spaces to third parties.
Total lease income from investment property included under “Others - net” in the consolidated statements of income amounted to
about P= 29.01 million, P
= 20.84 million and P
= 13.19 million in 2005, 2004 and 2003, respectively. Total direct operating expenses
related to investment property that generated rental income amounted to about P = 20.09 million, P
= 19.01 million and P
= 11.09 million in
2005, 2004 and 2003, respectively.
The fair value of the investment property computed using market data approach as of December 31, 2005 amounted to
P
= 204.85 million based on the report issued by an independent appraiser dated January 6, 2006.
Intangible assets pertain to software costs that are not integral to the computer hardware.
70
2005 2004 2003
(In Thousand Pesos)
Investments in shares of stock carried at cost:
C2C Holdings, Pte. Ltd. P
= 894,551 P
= 894,551 P
= 894,551
Others 45,766 47,460 47,345
940,317 942,011 941,896
Less allowance for impairment of investments:
C2C Holdings, Pte. Ltd. 894,551 894,551 894,551
Others 12,132 12,132 12,132
906,683 906,683 906,683
Carrying values at end of period:
C2C Holdings, Pte. Ltd. – – –
Others 33,634 35,328 35,213
33,634 35,328 35,213
Total investments in associates and joint venture 76,897 91,925 35,540
Investments in ROP Bonds and DLPN (Note 25) – – 692,186
P
= 76,897 P
= 91,925 P
= 727,726
Equity in net losses for the year is shown under “Equity in net losses of an associate and joint venture” account in the consolidated
statements of income.
Investment in GTHI
GTHI is a special purpose vehicle incorporated in the Philippines, owned 32.67% each by Globe Telecom and Ayala Corporation
(AC), 33% by Singapore Telecom International Pte. Ltd. (STI) [a wholly owned subsidiary of Singapore Telecom (ST)], and 1.66% by
its directors and officers. On December 26, 2002, GTHI, having completed and concluded its only business activity, related to
Philippine Deposit Receipts (PDR), filed with the Philippine SEC a request for the revocation of its permit to sell PDRs. On
December 8, 2003, the Philippine SEC approved the revocation of the Order of Registration and Certificate of Permit to Sell
Securities to the Public issued to GTHI. On December 15, 2004, the BOD of GTHI approved the dissolution of GTHI, which was
subsequently approved by the Philippine SEC on December 13, 2005.
Investment in PTL
PTL is a limited partnership organized in the United States (US) which Globe Telecom has a 50% ownership. On October 19, 2000,
the BOD approved a resolution to seek the dissolution of PTL and the termination of Globe Telecom’s Limited Liability Agreement
with Pacific Gateway Exchange (PGE) and other agreements with PGE and/or PTL. On January 17, 2001, PGE gave its consent to
the dissolution of PTL. The dissolution has not been effected in order to enable PTL to file its Proof of Claim against PGE before the
US Bankruptcy Court, District Court of California (San Francisco Division) to recover US$5.39 million of receivables from PGE. The
Proof of Claim was filed on May 11, 2001. However, on December 27, 2002, the Official Committee of Unsecured Creditors of PGE
(Committee) filed a complaint for recovery of money/property against PTL and Globe Telecom alleging that PGE made preferred
transfers in favor of PTL and Globe Telecom prior to the filing of the bankruptcy proceedings. PTL and Globe Telecom filed their
respective answers alleging that the payments were part of a contemporaneous exchange of new value. Thereafter, PTL, Globe
Telecom and Committee agreed to settle the dispute with a mutual release of claims. On December 17, 2004, the US Bankruptcy
Court for the Northern District of California approved the settlement agreement among the parties. PTL has not been operating since
2000 and its status is deemed administratively cancelled as of December 31, 2005.
In 2003, Innove recognized a full provision for its equity investment in C2C Holdings amounting to P= 894.55 million (or P
= 6.39 on a
per share basis). The provision was made following the assessment by C2C Holdings of the estimated future cash flows expected
from the continuing use of the cable network assets of C2C until the end of its economic useful lives and after considering the
increased potential risk to the restructuring of C2C’s debt. This considered an independent market study commissioned to revalidate
the bandwidth market potential and its effect on C2C Holdings.
In October 2005, the creditors of C2C appointed receivers and in January 2006, manifested their intention to take over the
management of C2C. Innove is awaiting the resolution of the matter between C2C and STI.
Investment in BMPL
On November 3, 2004, Globe Telecom and six other leading Asia Pacific mobile operators (JV partners) signed an Agreement
(JV Agreement) to form a regional mobile alliance, which will operate through a Singapore-incorporated company, BMPL. In 2005,
the JV consisted of eight partners. The joint venture company will look at driving commercial and other benefits for the operators and
delivering regional mobile services to their subscribers.
BMPL will be a commercial vehicle in which the eight JV partners jointly invest to build and establish a regional mobile infrastructure
and common service platform. This will enable the creation and seamless delivery of regional mobile services across geographical
borders, and enhance the service experience of their mobile customers when they roam from one country to another. BMPL will also
develop new products and services on a regional basis and create competitive advantages and differentiation for the mobile
operators in their respective markets.
The other joint venture partners with equal stake in the alliance include Bharti Tele-Ventures Limited (India), Maxis Communications
Berhad (Malaysia), Optus Mobile Pty. Limited (Australia), Singapore Telecom Mobile Pte. Ltd. (Singapore),Taiwan Cellular
Corporation (Taiwan), PT Telekomunikasi Selular (Indonesia) and Hongkong CSL Ltd. (Hongkong).
Under the JV Agreement, each partner (shareholder) shall contribute US$4.00 million scheduled as follows:
72
12. Other Noncurrent Assets
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Derivative assets (Notes 2 and 25) P
= 1,431,835 P
=– P
=–
Miscellaneous deposits (Notes 22a and 25) 342,492 251,547 218,896
Advance payments to suppliers and contractors 279,206 418,677 535,058
Prepaid pension (Note 18) 253,718 300,701 354,438
Revaluation of foreign currency swaps and unamortized
premium (Notes 2 and 25) – 1,116,414 1,631,758
Others 105,530 281,159 268,199
P
= 2,412,781 P
= 2,368,498 P
= 3,008,349
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Accounts payable (Notes 7, 16 and 25) P
= 5,813,717 P
= 5,053,554 P
= 4,055,138
Accrued expenses (Notes 16d and 25) 4,101,400 4,084,200 4,811,964
Accrued project costs (Note 22) 2,444,114 3,454,285 3,003,053
Traffic settlements - net (Notes 3 and 25) 1,544,657 1,104,861 1,461,224
Provisions 231,455 282,309 793,066
Dividends payable (Note 17) 68,334 75,128 67,957
Derivative liabilities (Notes 2, 3 and 25) 32,656 – –
P
= 14,236,333 P
= 14,054,337 P
= 14,192,402
Traffic settlements payables are presented net of traffic settlements receivables amounting to P
= 7,478.60 million, P
= 3,761.56 million
and P
= 3,745.67 million as of December 31, 2005, 2004 and 2003, respectively.
Provisions relate to various pending regulatory claims and assessments. The information usually required by PAS 37, Provisions,
Contingent Liabilities and Contingent Assets, is not disclosed on the grounds that it can be expected to prejudice the outcome of
these claims and assessments. The provisions include those related to Globe Group’s wireless and wireline business amounting to
P
= 114.19 million, P
= 165.05 million and P
= 675.80 million as of December 31, 2005, 2004 and 2003, respectively. The Globe Group
recognized a net reversal of provision in 2005 amounting to P = 50.85 million. As of February 7, 2006, the remaining pending regulatory
claims and assessments are still being resolved.
The balance of the provisions also includes Innove’s provision relating to NTC permit fees amounting to P
= 117.26 million, which were
assessed by NTC on March 27, 1996 as required under Section 40 (g) of the Public Service Act. Innove, together with other
telecommunications companies, particularly the members of the Telecommunications Operators of the Philippines, had decided not
The maturities of long-term debt at nominal values as of December 31, 2005 follow (in thousand pesos):
Due in:
2006 P
= 7,806,535
2007 6,829,642
2008 4,982,030
2009 7,832,200
2010 and thereafter 21,791,258
P
= 49,241,665
GLOBE TELECOM, INC.
74
The interest rates and maturities of the above loans follow:
Unamortized debt premium and issuance costs included in the following long-term debt as of December 31, 2005 are as follows
(in thousand pesos) (see Note 25):
The loan agreements with suppliers, banks and other financial institutions provide for certain restrictions and requirements with
respect to, among others, maintenance of financial ratios and percentage of ownership of specific shareholders, incurrence of
additional long-term indebtedness or guarantees and creation of property encumbrances.
(a) On July 23, 2004, Globe Telecom issued US$100.00 million notes (the Notes) at 109% under an indenture with the Bank of New
York as Trustee. The Notes are consolidated and form a single series with the 2012 Senior Notes issued on April 4, 2002. On
October 29, 2004, the US$300.00 million Senior Notes have been listed and quoted on the Singapore Stock Exchange.
(b) On August 2, 2004, Globe Telecom exercised its call option on the 2009 Senior Notes and redeemed the balance of the 2009
Senior Notes amounting to US$142.72 million at 106.5%. Prior to the exercise of the call option, Globe Telecom has redeemed
US$77.28 million of the 2009 Senior Notes. US$88.00 million of swaps and forwards used to hedge the 2009 Senior Notes have
also matured. Bond redemption costs (included in “Financing costs” account) incurred in 2004 and 2003 amounted to
P
= 693.39 million and P
= 410.44 million, respectively.
Redemption Options
The 2012 Senior Notes are redeemable in whole or in part at the option of Globe Telecom at the redemption dates set forth below,
after giving the required notice under the indenture, and, if at the time of such notice the Notes are listed on the Luxembourg Stock
Exchange, by publishing a notice in the Luxembourg Wort. The 2012 Senior Notes may be redeemed at the following prices
(for Senior Notes redeemed during the 12-month period commencing on each of the years below, expressed as percentages of the
principal amount), plus accrued and unpaid interest and additional amounts thereon, if any, to the redemption date (subject to the
right of holders of record on the relevant record date to receive interest due on the relevant interest payment date):
Consent Solicitation
On July 6, 2004, Globe Telecom solicited consents from holders of its 2012 Senior Notes to amend the indenture under which the
2012 Senior Notes were issued in April 2002. On July 20, 2004, Globe Telecom obtained the required consents from the holders of
the 2012 Senior Notes. The amendments changed certain covenants and other terms in the indenture, including covenants related to
the provision of the consolidated financial statements and reports, limitations on restricted payments and designation of restricted
and unrestricted subsidiaries.
GLOBE TELECOM, INC.
76
Covenants
The 2012 Senior Notes are unsecured obligations, equal in ranking among themselves and with all of the existing and future
unsecured and unsubordinated debt, subject to Article 2244 (14) of the Civil Code of the Philippines, and senior in right of payment to
all future subordinated debt. Secured debt of Globe Telecom will be effectively senior to the Senior Notes to the extent of the value
of the assets securing such debt and also to the extent any such indebtedness is incurred by a restricted subsidiary. In addition, under
the laws of the Philippines, in the event a borrower submits to insolvency or liquidation proceedings in which the borrower’s assets
are liquidated, unsecured debt of the borrower that is evidenced by a public instrument as provided in Article 2244 (14) of the Civil
Code of the Philippines will rank ahead of unsecured debt of the borrower that is not evidenced by a public instrument.
The 2012 Senior Notes provide certain restrictions, which include among others, incurrence of additional debt, certain dividend
payments, and liens, repayments of certain debts, merger/consolidation and sale of assets in general.
Retail Bonds
In February 2004, Globe Telecom issued P = 3,000.00 million retail bonds locally with fixed and floating interest rates based on MART1
plus margins. The retail bonds have maturities ranging from 3 to 5 years. The retail bonds may be redeemed in whole, but not in part,
at any time, by giving not less than 30 nor more than 60 days prior notice, at a price equal to 100% of the principal amount of the
bonds, together with accrued and unpaid interest to the date fixed for redemption, if Globe Telecom will pay additional amounts due
to change in tax and/or other regulations. The agreements covering the retail bonds provide restrictions with respect to, among
others, maintenance of certain financial ratios, sale, transfer, assignment or disposal of assets and creation of property
encumbrances.
Suppliers’ Credits
Suppliers’ credits accrue interests that are either fixed or based on USD LIBOR plus margins.
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Non-interest bearing liabilities to an affiliate (Note 16c)* P
= 1,235,810 P
= 2,262,283 P
= 2,430,363
ARO (Notes 2, 8 and 27) 907,053 769,795 519,309
Derivative liabilities (Notes 2 and 25) 699,090 – –
Advance lease and service revenues (Note 16c) 137,925 164,209 221,453
Accrued lease obligations and others (Note 22c) 548,082 473,317 391,726
3,527,960 3,669,604 3,562,851
Less current portion 269,737 292,589 325,373
P
= 3,258,223 P
= 3,377,015 P
= 3,237,478
*2005 balance is net of PAS 39 adjustments with no restatement of prior years (see Note 2).
Due in:
2006 P
= 269,737
2007 100,342
2008 107,814
2009 116,237
2010 and thereafter 2,933,830
P
= 3,527,960
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Balance at beginning of year P
= 769,795 P
= 519,309 P
= 384,747
Capitalized to property and equipment during the year 44,433 182,363 70,256
Accretion expense during the year 92,825 68,123 64,306
Balance at end of year P
= 907,053 P
= 769,795 P
= 519,309
As discussed in Note 2, Globe Group adopted PAS 24, Related Party Disclosures, effective January 1, 2005. The information includes
the additional disclosures required by the revised accounting standard.
Globe Telecom and Innove, in their regular conduct of business, enters into transactions with its principal shareholders, AC and STI,
and certain related parties. These transactions, which are accounted for at market prices normally charged to unaffiliated customers
for similar goods and services, include the following:
Globe Telecom
(a) Globe Telecom has interconnection agreements with STI. The related net traffic settlements receivable (included in
“Receivables” in the consolidated balance sheets) and the interconnection toll income (included in “Service revenues” in the
consolidated statements of income) earned as of and for the years ended December 31 follow:
(b) Globe Telecom and STI have a technical assistance agreement whereby STI will provide consultancy and advisory services,
including those with respect to the construction and operation of Globe Telecom’s networks and communication services,
equipment procurement and personnel services. In addition, Globe Telecom has software development, supply, license and
support arrangements, lease of cable facilities, maintenance and restoration costs and other transactions with STI.
The details of fees (included in “Operating costs and expenses” account in the consolidated statements of income) incurred under
these agreements are as follows:
GLOBE TELECOM, INC.
78
2005 2004 2003
(In Thousand Pesos)
Lease of cable facilities, maintenance and restoration costs and other
transactions P
= 266,793 P
= 137,111 P
= 54,026
Technical assistance fee 143,450 44,360 78,095
Software development, supply, license and support 35,652 40,409 56,316
The net outstanding balances due to STI (included in “Accounts payable and accrued expenses” account in the consolidated balance
sheets) arising from these transactions are as follows:
(c) In 2001, Globe Telecom signed a cable equipment supply agreement with C2C, a related party of STI. In March 2002, Globe
Telecom entered into an equipment lease agreement for the same equipment obtained from C2C with GB21 Hong Kong Limited
(GB21). Subsequently, GB21, in consideration of C2C’s agreement to assume all payment obligations pursuant to the lease
agreement, assigned all its rights, obligations and interest in the equipment lease agreement to C2C. As a result of the said
assignment of receivables and payables by GB21 and C2C under the two agreements, Globe Telecom’s liability arising from the
cable equipment supply agreement with C2C was effectively converted into a noninterest bearing long-term obligation. Upon
adoption of PAS 39 in 2005, the noninterest bearing long-term obligation was restated to its fair value, representing the present
value of future cash flows. The difference between the principal amount and the present value of the obligation is reported as an
adjustment to the property and equipment account. As of December 31, 2005, the remaining liability of Globe Telecom to C2C
for the cable equipment supply agreement amounted to P = 1,235.81 million (inclusive of the accumulated accretion of
P
= 486.98 million) included under “Other long-term liabilities” account in the consolidated balance sheets. The fair value of the
equipment purchased amounted to P = 1,453.89 million included under “Property and equipment” account in the consolidated
balance sheets.
Globe Telecom entered into agreements with C2C for the purchase of IRUs in the C2C and Japan-US Cable Networks. The
aggregate cost of capacity purchased from C2C amounted to P
= 1,133.79 million. This was part of the property and equipment
transferred to Innove in June 2004.
In July 2002, Globe Telecom received advance service fees from C2C amounting to US$1.60 million, which will be offset against
its share in the operations and maintenance costs of the cable landing facilities of Globe Telecom. Also, in January 2003, Globe
Telecom received advance lease payments from C2C for its use of a portion of Globe Telecom’s cable landing station facilities
amounting to US$4.11 million.
The parties have agreed on a lease amortization schedule and application of a portion of the advance service fees for C2C’s
share in the 2002 operations and maintenance costs of the cable landing facilities. Accordingly, Globe Telecom recognized lease
income amounting to P= 15.06 million, P
= 16.32 million and 51.00 million in 2005, 2004 and 2003, respectively. Globe Telecom also
recognized service fees amounting to P = 2.33 million, P
= 43.76 million and P
= 42.33 million in 2005, 2004 and 2003, respectively.
(d) Globe Telecom reimburses AC for certain operating expenses. The net outstanding liabilities to AC related to these transactions
as of December 31, 2005 were not material.
(e) Globe Telecom has preferred roaming service contract with BMPL. Under this contract, Globe Telecom will pay BMPL for
services rendered by the latter which include, among others, coordination and facilitation of preferred roaming arrangement
among JV partners, and procurement and maintenance of telecommunications equipment necessary for delivery of seamless
roaming experience to customers. Globe Telecom also earns or incurs commission form BMPL for regional top-up service
provided by the JV partners. As of December 31, 2005, balances related to these transactions were not material.
The summary of consolidated outstanding balances resulting from transactions with related parties follows:
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Traffic settlements receivable - net
(included in Receivables) (Note 5) P
= 335,766 P
= 31,212 P
= 548,395
Other current assets (Note 7) 927 946 1,118
Accounts payable (included in Accounts payable and
accrued expenses) (Note 13) 129,420 122,959 45,962
Other long-term liabilities (Note 15) 1,373,735 2,426,492 2,651,816
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Short-term employee benefits P
= 296,191 P
= 261,174 P
= 186,727
Share-based payment (Note 18) 161,731 134,769 59,091
Post-employment benefits 32,938 35,667 33,945
P
= 490,860 P
= 431,610 P
= 279,763
There are no agreements between Globe Group and any of its directors and key officers providing for benefits upon termination of
employment, except for such benefits to which they may be entitled under Globe Group’s retirement plans.
GLOBE TELECOM, INC.
80
17. Stockholders’ Equity
Treasury Shares
On February 1, 2005, the BOD approved an offer to purchase one share for every fifteen shares (1:15) of the outstanding common
stock of Globe Telecom from all stockholders of record as of February 10, 2005 at P = 950.00 per share. The approval allowed Globe
Telecom to purchase up to 9,326,924 shares representing 6.67% of Globe Telecom’s outstanding common shares. Each shareholder
is entitled to tender a proportionate number of shares at the 1:15 ratio for purchase by Globe Telecom upon and subject to the terms
and conditions of the tender offer. Globe Telecom also filed with the SEC the tender offer report with a copy of the letter to the
shareholders, the terms and conditions of the tender offer and the tender form. Globe Telecom commenced the tender offer on
February 3, 2005 and ended on March 3, 2005.
On March 15, 2005, Globe Telecom acquired 8,064,094 shares at a total cost of P
= 7,675.66 million, including incidental costs.
On April 4, 2005, Globe Telecom’s stockholders approved the cancellation of the 20.06 million treasury shares consisting of the
12.00 million shares acquired from Deutsche Telekom (DT) in 2003 and the 8.06 million shares acquired during the share buyback,
and the amendments of the articles of incorporation of Globe Telecom to reduce accordingly the authorized capital stock of the
corporation from P= 11,250.00 million to P
= 10,246.72 million. On April 29, 2005, Globe Telecom applied for the retirement and
cancellation of the existing treasury shares with the SEC, which the latter approved on October 28, 2005. Accordingly, Globe
Telecom cancelled the existing treasury shares at cost. The difference between the par value and cost of treasury shares was
charged to “Additional paid in capital” and “Retained earnings” accounts amounting to P = 5,179.35 million and P
= 9,685.80 million,
respectively.
Preferred “A” shares were listed on July 29, 2001 with the PSE.
The dividends for preferred shares are declared upon the sole discretion of Globe Telecom’s BOD.
In 2003, the BOD approved the declaration of cash dividends to preferred shareholders “Series A” as of record date
December 31, 2003 amounting to P= 67.96 million, which were paid on September 28, 2004.
On December 15, 2004, the BOD approved the declaration of cash dividends to preferred shareholders “Series A” as of record date
December 31, 2004 amounting to P
= 75.13 million, which were paid on March 15, 2005.
On December 13, 2005, the BOD approved the declaration of cash dividends to preferred shareholders “Series A” as of record date
December 31, 2005 amounting to P
= 68.33 million.
Cash Dividends
On April 1, 2003, the BOD of Globe Telecom approved the declaration of cash dividends of P
= 2,126.68 million
(P
= 14.00 per common share) to common stockholders of record as of April 21, 2003. Payment was made on May 6, 2003.
On January 29, 2004, the BOD of Globe Telecom approved a new dividend policy to declare cash dividends to its common
stockholders on a regular basis as may be determined by the BOD from time to time. The BOD had set out a dividend payout rate of
approximately 50% of prior year’s net income payable semi-annually in March and September of each year. This will be reviewed
annually, taking into account Globe Group’s operating results, cash flows, debt covenants, capital expenditure levels and liquidity.
The BOD also declared the first semi-annual cash dividend in 2004 of P = 18 per share payable to common stockholders of record as of
February 18, 2004 and subsequently paid dividends amounting to P = 2,518.27 million on March 15, 2004. The second semi-annual
cash dividend of P= 18 per share payable to common stockholders of record as of August 20, 2004 was declared on August 2, 2004
and paid on September 15, 2004.
On February 1, 2005, the BOD declared the first semi-annual cash dividend in 2005 of P
= 20.00 per share payable to common
stockholders of record as of February 18, 2005 and subsequently paid dividends amounting to P= 2,798.10 million on March 15, 2005.
On August 2, 2005, the BOD declared the second semi-annual cash dividend for 2005 amounting to P
= 20.00 per common share
outstanding as of record date August 19, 2005, and was paid on September 14, 2005.
82
dividend declaration until received in the form of dividends from subsidiaries and associates. The Globe Group is also subject to loan
covenants that restrict its ability to pay dividends (see Note 14).
As discussed in Note 2, the Globe Group adopted PFRS 2, Share-based Payment and PAS 19, Employee Benefits on
January 1, 2005. The information below includes the disclosure requirements under these new standards.
The Employees Stock Ownership Plan (ESOWN) for all regular employees (granted in 1998 and 1999) and the Executive Stock
Option Plan 1 (ESOP1) for key senior executives (granted in 1998 and 2000) provide for an initial subscription price for shares
subject of each option granted equivalent to 85% of the initial offer price. Any subsequent subscription for the ESOP1 shall be for a
price equivalent to 85% of the average closing price for the month prior to the month of eligibility. These options are settled in equity
once exercised. The qualified officers and employees shall pay for the shares subscribed under the ESOWN and ESOP1 through
installments over a maximum period of 5 years and 10 years, respectively. The shares of stock have a holding period of five years
and the employees must remain with Globe Telecom or its affiliates over such period. The plans also provide restrictions on sale or
assignment of shares for five years from date of subscription. The number of exercised shares under ESOP1 totaled
1,712,133 shares with a weighted average exercise price of P = 196.75 per share. The remaining stock options under ESOWN and
ESOP1 expired in 2004.
On April 4, 2003, Globe Telecom granted additional stock options to key executives and senior management personnel of the Globe
Group under Executive Stock Option Plan 2 (ESOP2). It required the grantees to pay a nonrefundable option purchase price of
P
= 1,000.00. As of December 31, 2005, a total of 680,200 stock options were granted to key executives and senior management
personnel. ESOP2 provides for an exercise price of P = 547.00 a share, which is the average quoted market price of the last 20 trading
days preceding April 4, 2003. These options are settled in equity once exercised. Fifty percent of the options will be exercisable from
April 4, 2005 to April 4, 2013, while the remaining fifty percent will be exercisable from April 4, 2006 to April 4, 2013. In order to avail
of the privilege, the grantees must remain with Globe Telecom or its affiliates from grant date up to the beginning of the exercise
period of the corresponding shares.
On July 1, 2004, the Globe Group granted additional stock options to key executives and senior management personnel of the Globe
Group under ESOP2. It required the grantees to pay a nonrefundable option purchase price of P = 1,000.00. As of December 31, 2005,
a total of 803,800 stock options were granted to key executives and senior management personnel. The agreement provides for an
exercise price of P
= 840.75 per share. These options will be settled in equity once exercised. Fifty percent of the options become
exercisable from July 1, 2006 to June 30, 2014, while the remaining fifty percent become exercisable from July 1, 2007 to
June 30, 2014. In order to avail of the privilege, the grantees must remain with Globe Telecom or its affiliates from grant date up to
the beginning of the exercise period of the corresponding shares.
The average share price at the date of exercise for the options exercised in 2005 and 2004 amounted to P
= 807.08 and
P
= 909.17, respectively.
The options have a contractual term of 10 years. As of December 31, 2005, 2004 and 2003, the weighted average remaining
contractual life of options outstanding is 8.03 years, 8.94 years and 9.22 years, respectively.
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model. The fair values of stock
options granted under ESOP2 on April 4, 2003 and July 1, 2004 amounted to P = 283.11 and P
= 357.94, respectively. The following
assumptions were used to determine the fair value of the stock options at grant date:
The expected volatility measured at the standard deviation of expected share price returns was based on analysis of share prices for
the past 365 days.
84
Pension Plans
Globe Telecom
Globe Telecom has a funded, noncontributory, defined benefit pension plan covering substantially all of its regular employees.
The benefits are based on years of service and compensation on the last year of employment.
The components of pension expense (included in staff costs under “Operating costs and expenses”) in the consolidated
statements of income are as follows:
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Current service cost P
= 73,591 P
= 75,843 P
= 67,552
Interest cost on benefit obligation 58,697 47,814 46,437
Expected return on plan assets (85,305) (70,053) (60,226)
Net actuarial loss – 133 939
Total pension expense P
= 46,983 P
= 53,737 P
= 54,702
Actual return on plan assets P
= 56,151 P
= 77,229 P
= 89,883
The funded status and amounts recognized under “Other noncurrent assets” in the consolidated balance sheets for the pension
plan of Globe Telecom are as follows:
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Benefit obligation P
= 481,754 P
= 434,771 P
= 433,106
Plan assets (770,860) (766,890) (712,219)
(289,106) (332,119) (279,113)
Unrecognized net actuarial gains (losses) (Note 3) 35,388 31,418 (75,325)*
Asset recognized in the consolidated balance sheets (P
= 253,718) (P
= 300,701) (P
= 354,438)
*Net of portion of actuarial losses recognized in 2003 amounting to P
= 72.04 million related to curtailment.
Changes in the present value of the defined benefit obligation are as follows:
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Balance at January 1 P
= 434,771 P
= 433,106 P
= 432,717
Interest cost 58,697 47,814 46,437
Current service cost 73,591 75,843 67,552
Curtailments/settlements – – (229,508)
Benefits paid (58,347) (25,889) (97,961)
Actuarial (gains)/losses (26,958) (96,103) 213,869
Balance at December 31 P
= 481,754 P
= 434,771 P
= 433,106
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Balance at January 1 P
= 766,890 P
= 712,219 P
= 708,062
Expected return 85,306 70,053 60,226
Contributions – – 199,557
Benefits paid (58,347) (25,889) (97,961)
Settlements – – (224,489)
Actuarial gains/(losses) (22,989) 10,507 66,824
Balance at December 31 P
= 770,860 P
= 766,890 P
= 712,219
Globe Telecom expects not to make contribution to its defined benefit pension plan in 2006.
The allocation of the fair value of plan assets of Globe Telecom as of December 31, 2005 follows:
Innove
Innove has a funded, noncontributory, defined benefit pension plan covering substantially all of its regular employees. The
benefits are based on years of service and compensation on the last year of employment.
The components of pension expense (included in staff costs under “Operating costs and expenses”) in the consolidated
statements of income are as follows:
2004 2003
2005 (As restated) (As restated)
(In Thousand Pesos)
Current service cost P
= 19,714 P
= 22,489 P
= 7,176
Interest cost on benefit obligation 22,510 20,938 4,814
Expected return on plan assets (27,528) (21,737) (6,085)
Net actuarial loss (2,454) – –
Total pension expense P
= 12,242 P
= 21,690 P
= 5,905
Actual return on plan assets P
= 24,305 P
= 20,711 P
= 1,251
GLOBE TELECOM, INC.
86
The funded status and amounts recognized in prepayments under “Prepayments and other current assets” in the consolidated
balance sheets for the pension plan of Innove are as follows:
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Benefit obligation P
= 167,071 P
= 168,851 P
= 189,402
Plan assets (295,581) (251,419) (208,770)
(128,510) (82,568) (19,368)
Unrecognized net actuarial gains (Note 3) 118,204 74,043 17,168
Asset recognized in the consolidated balance sheets (P
= 10,306) (P
= 8,525) (P
= 2,200)
Changes in the present value of the defined benefit obligation are as follows:
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Balance at January 1 P
= 168,851 P
= 189,402 P
= 206,933
Interest cost 22,510 20,938 4,813
Current service cost 19,714 22,489 7,176
Benefits paid (11,633) (10,832) (2,584)
Actuarial gains on obligation (32,371) (53,146) (26,936)
Balance at December 31 P
= 167,071 P
= 168,851 P
= 189,402
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Balance at January 1 P
= 251,419 P
= 208,770 P
= 200,161
Expected return 27,528 21,737 6,085
Contributions 14,023 28,015 15,405
Benefits paid (11,633) (10,832) (2,584)
Settlements – – (6,066)
Actuarial gains/(losses) on obligation 14,244 3,729 (4,231)
Balance at December 31 P
= 295,581 P
= 251,419 P
= 208,770
Innove expects to make contribution to its defined benefit pension plan in 2006.
As of December 31, 2005, the pension plan assets of Globe Telecom and Innove include shares of stock of Globe Telecom with
total fair value of P
= 32.44 million, and shares of stock of other related parties with total fair value of P
= 41.10 million.
The assumptions used to determine pension benefits of Globe Telecom and Innove in December 31 are as follows:
The overall expected rate of return on plan assets is determined based on the market prices prevailing on that date, applicable to
the period over which the obligation is to be settled.
2004 2003
2005 (As restated) (As restated)
(In Thousand Pesos)
Selling, advertising and promotions P
= 4,697,406 P
= 3,753,134 P
= 3,119,264
Staff costs (Note 18) 3,518,910 2,874,338 2,552,465
Utilities, supplies and other administrative expenses 1,982,396 1,714,677 1,545,426
Repairs and maintenance 1,877,425 1,325,098 1,779,154
Rent (Note 22) 1,839,999 1,420,069 1,604,418
Professional and other contracted services 1,495,634 1,295,369 793,067
Insurance and security services 1,477,739 1,034,835 702,516
Taxes and licenses 831,629 616,257 956,311
Others 1,421,124 1,370,186 945,947
P
= 19,142,262 P
= 15,403,963 P
= 13,998,568
Number of employees at end of year 4,987 4,956 4,186
Revenue Regulation No. 10-2002 defines expenses to be classified as entertainment, amusement and recreation (EAR) expenses
and sets a limit for the amount that is deductible for tax purposes.
EAR expenses are limited to 0.5% of net sales for sellers of goods or properties or 1% of net revenue for sellers of services. For
sellers of both goods or properties and services, an apportionment formula is used in determining the ceiling on such expenses.
In 2005, 2004 and 2003, Globe Group recognized EAR expenses (included in others under “Operating costs and expenses”)
amounting to P = 14.09 million, P
= 9.45 million and P
= 10.07 million, respectively.
GLOBE TELECOM, INC.
88
20. Financing Costs
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Interest expense - net of accretion of bond
premium (Note 14) P
= 4,657,748 P
= 4,368,716 P
= 4,088,209
Foreign exchange loss (gain) - net (Note 25) (2,303,327) 213,995 803,058
Loss on derivative instruments - net (Note 25) 104,301 – –
Swap and other financing costs ( Notes 14 and 25) 681,871 1,744,168 1,847,759
P
= 3,140,593 P
= 6,326,879 P
= 6,739,026
The significant components of the deferred income tax assets and liabilities of the Globe Group represent the deferred income tax
effects of the following:
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Deferred income tax assets on:
Allowances for:
Doubtful accounts P
= 1,664,166 P
= 1,646,573 P
= 571,435
Property and equipment and
other probable losses 266,546 210,735 281,629
Inventory losses, obsolescence and
market decline 91,620 63,661 35,568
Impairment in value of investments in
shares of stock 9,725 10,373 10,373
Unearned revenues and advances already subjected to
income tax 518,293 1,022,142 1,166,476
Net unrealized foreign exchange losses 400,440 1,329,102 2,287,531
Excess of depreciable cost of equipment for tax purposes 285,106 – –
ARO 154,956 121,647 88,023
Accrued rent expense 70,328 36,705 –
Deferred charges 51,868 96,010 73,520
Accrued vacation leave 47,583 9,182 7,653
Cost of share-based payments 31,370 99,554 28,345
MCIT – 255,215 42,592
NOLCO – 32 106,021
3,592,001 4,900,931 4,699,166
(Forward)
Net deferred tax assets and liabilities presented in the consolidated balance sheets on a net basis by entity are as follows:
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Net deferred tax assets (Innove and GXI) P
= 1,163,943 P
= 2,413,253 P
= 1,759,412
Net deferred tax liabilities (Globe Telecom) 4,432,867 3,474,732 1,874,082
As of December 31, 2005, deferred tax asset of GXI that has not been recognized and is available for offset against future taxable
income or tax payable amounted to P
= 6.37 million.
As of December 31, 2005, 2004 and 2003, deferred income tax liabilities have not been recognized on the undistributed earnings
(losses) of subsidiaries, associates and joint venture amounting to P
= 4,162.35 million, P
= 2,029.85 million and (P
= 198.04) million,
respectively, since such amounts are not taxable.
Following are the movements in Innove’s and GXI’s NOLCO and MCIT:
90
2005 2004 2003
(In Thousand Pesos)
MCIT:
At January 1 P
= 255,215 P
= 260,957 P
= 164,184
Additions – 36,850 96,773
Applications/expirations (255,215) (42,592) –
At December 31 P
=– P
= 255,215 P
= 260,957
The reconciliation of the provision for income tax at statutory tax rate and the provision for income tax follows:
2004 2003
2005 (As restated) (As restated)
(In Thousand Pesos)
Provision at statutory income tax rate P
= 4,609,234 P
= 4,071,339 P
= 3,256,524
Add (deduct) tax effects of:
Unearned revenues under income tax holiday (ITH) (365,344) (98,418) 463,762
Income under ITH (254,486) (1,074,326) (1,536,559)
Change in income tax rates (222,142) – –
Income subjected to lower tax rates (103,462) (124,864) (206,240)
Equity in net losses of an associate and joint venture 4,334 20 1,261
Provision for impairment of investment in shares of stock – – 286,256
Expired NOLCO – – 11,508
Changes in unrecognized deferred tax assets – (2,058,254) (2,076,376)
Additional deferred tax liability on wireline assets
transferred due to different tax rates – 167,373 –
Others 198,368 443,822 23,865
Provision for income tax P
= 3,866,502 P
= 1,326,692 P
= 224,001
As discussed in Note 1, Globe Telecom and Innove is enfranchised under RA No. 7229 and 7372, respectively, and its related laws to
render any and all types of domestic and international telecommunications services. Globe Group is entitled to certain tax and nontax
incentives under its franchise and has availed of incentives for tax and duty-free importation of capital equipment for its services
under its franchise.
On July 19, 2001, the Board of Investments (BOI) approved Globe Telecom’s application as an expanding operator of
telecommunications systems (Nationwide CMTS-GSM Network) and granted its Phase 8 Expansion Project a pioneer status. The
BOI issued the certificate of registration on March 5, 2002 which entitled Globe Telecom to ITH for 3 years. The ITH commenced on
April 1, 2002, the date when Phase 8 Expansion was placed in commercial operations. The availment of the ITH resulted in an
increase of P
= 1.90, P
= 8.38, and P
= 7.18 in the basic EPS in 2005, 2004 and 2003, respectively. The ITH expired on March 31, 2005.
On June 25, 2002, the BOI issued a Certificate of Registration to Globe Telecom and granted a pioneer status as a new operator of
Infrastructure and Telecommunications Facilities (Cable Landing Station Facilities). On June 30, 2004, Globe Telecom transferred
additional wireline assets and certain investments in cable systems to Innove. Included in the assets transferred are various
capacities in the C2C cable network forming part of the registered project. Ownership and operation of such capacities are now
transferred to Innove. In anticipation of such transfer, on June 23, 2004, Globe Telecom voluntarily surrendered its certificate of
registration on the Cable Landing Station Facilities to the BOI. Effective June 23, 2004, Globe Telecom will no longer be entitled to
the ITH on Cable Landing Station Facilities.
Increase in the corporate income tax rate from 32% to 35% with a reduction thereof to 30% beginning January 1, 2009;
Increase in VAT rate from 10% to 12% effective February 1, 2006 as authorized by the Philippine President pursuant to the
recommendation of the Secretary of Finance;
Revised invoicing and reporting requirements for VAT;
Expanded scope of transactions subject to VAT; and
Provide thresholds and limitations on the amounts of VAT credits that can be claimed.
Lease Commitments
(a) Operating lease commitments - Globe Group as lessee
Globe Telecom and Innove leases certain premises for some of telecommunications facilities and equipment and for most of its
business centers and cell sites. The operating lease agreements are for periods ranging from 1 to 10 years from the date of the
contracts and are renewable under certain terms and conditions. The agreements generally require certain amounts of deposit
and advance rentals, which are shown as part of “Other noncurrent assets” account in the consolidated balance sheets. The
Globe Group’s rentals incurred on these leases (included in “Operating costs and expenses’ account in the consolidated
statements of income) amounted to P = 1,840.00 million, P
= 1,420.07 million and P
= 1,604.42 million in 2005, 2004 and 2003,
respectively.
As of December 31, 2005, the future minimum lease payments under these operating leases are as follows (in thousand pesos):
Globe Telecom and Innove have certain lease agreements on equipment and office spaces. The operating lease agreements are
for periods ranging from 1 to 10 years from the date of contracts.
Globe Telecom has an equipment lease agreement with C2C for a period of 14 years. Lease income (included under
“Others - net” account in the consolidated statements of income) amounted to P
= 194.01 million, P
= 200.08 million and
P
= 196.33 million in 2005, 2004 and 2003, respectively.
GLOBE TELECOM, INC.
92
The future minimum lease payments receivable under this operating lease are as follows (in thousand pesos):
Innove entered into a lease agreement covering the lease of office space at the Innove IT Plaza to a third party. The lease has a
remaining lease term of less than a year renewable under certain terms and conditions. As of December 31, 2005, the future
minimum lease receivables under this operating lease amounted to P = 50.15 million which is due within two years.
Globe Telecom and Innove have entered into finance lease agreements for various items of property and equipment. The said
leased assets are capitalized and are depreciated over their estimated useful life of three years, which is also equivalent to the
lease term.
As of December 31, 2005, the consolidated future minimum lease payments under finance leases and the present value of the
net minimum lease payments are as follows (in thousand pesos):
The present value of the minimum lease payments under finance leases is included under “Other long-term liabilities” account in
the consolidated balance sheets.
Innove has existing finance lease arrangements with a lessee for Innove’s office equipment. As of December 31, 2005, the gross
investment and the present value of the net minimum lease payments receivable included under “Prepayments and other current
assets” account in the consolidated balance sheets are P
= 12.00 million and P
= 11.48 million, respectively. No collections were
received from the lessee as of December 31, 2005.
As of December 31, 2005, the Globe Group has available short-term credit facilities of US$43.00 million and P
= 5,050.00 million.
23. Contingencies
Globe Telecom and Innove are contingently liable for various claims arising in the ordinary conduct of business and certain tax
assessments which are either pending decision by the courts or are being contested, the outcome of which are not presently
determinable. In the opinion of management and legal counsel, the eventual liability under these claims, if any, will not have a
material or adverse effect on the Globe Group’s financial position and results of operations.
The SC, in its resolution dated September 9, 2002, denied the Petition for Review, a copy of which was received by Globe Telecom
and Innove on September 26, 2002. On October 10, 2002, Globe Telecom and Innove filed a motion for reconsideration (with motion
to consolidate) of the SC’s resolution. On February 17, 2003, the SC granted the motion for reconsideration and reinstated the
petition. On April 15, 2003, Globe Group received the order of the SC requiring the Group to file the memorandum in the case.
Subsequently, the SC reversed the decision of the CA and declared the RTC as having jurisdiction over the case. The SC remanded
the case to the RTC for further hearing. As of February 7, 2006, Globe Telecom is still awaiting the resumption of proceedings before
the RTC.
In the event, however, that Globe Telecom and Innove are not eventually sustained in their position and NTC Memorandum Circular
No. 13-6-2000 is implemented in its current form, the Globe Group would probably incur additional costs for carrying and maintaining
prepaid subscribers in their networks.
GLOBE TELECOM, INC.
94
NTC Administrative Case No. 2005-18
On February 11, 2005, Innove filed a case against Digitel Mobile Philippines, Inc. (Digitel) for predatory pricing and violation of NTC
Memorandum Circular No. 07-06-2002 on service performance standards. The case has been consolidated with NTC Administrative
Case No. 2005-18 entitled PILTEL vs. Digitel. A hearing was conducted on April 5, 2005 and NTC was requested to conduct a drive
test measurement on Digitel’s performance which will be witnessed by NTC and signed-off by representatives of the parties involved.
This is pending resolution by the NTC. During the April 26, 2005 hearing, Digitel manifested that it will no longer present evidence.
On August 3, 2005, the NTC issued an order that states that carriers are free to provide whatever service quality they wanted on
innovative price plans for so long as they advertised their service quality. Certain service quality improvements and minimum
standards should, however, be provided over time. The order is not yet final and Innove is still considering its options to deal with the
said order.
On January 26, 2004, the US FCC lifted its stop-payment order against Globe Telecom following confirmation by US carriers that
service with Globe Telecom had been normalized. US carriers were required to resume payments for termination services.
In June 2004, the US FCC issued an order denying the petitions for review filed by the different Philippine carriers and upholding the
finding of whipsawing. In the same order, the US FCC stated that the matter of lifting the International Settlement Policy (ISP) over
the Philippine route will be decided in FCC proceedings relative to its ISP reform order. Pursuant to the ISP Reform Order, countries
whose rates are at or below benchmark will be dropped from the coverage of the ISP unless serious concerns are raised on the route.
In August 2004, the US FCC, in the proceedings on the ISP Reform Order, required US Carriers to certify that the rates charged by
the Philippine Carriers are benchmark compliant. As of October 11, 2004, all three major US Carriers (AT&T, MCI and Sprint) have
certified to the benchmark compliance of the Philippine route.
On August 15, 2005, the US FCC released its order upholding the findings of whipsawing. Despite this, however, it ordered the lifting
of the ISP on the Philippine route on the ground that the rates on the route were still benchmark-compliant and there was no further
evidence of continuing anti-competitive conduct on the route.
On January 10 and 11, 2004, the United States Department of Justice (US DOJ) served subpoenas on several Philippine telecom
executives, including two Globe Telecom managers and the chief executive officer of Innove, requiring them to appear before a
grand jury investigation in Hawaii. The investigation is for the purpose of determining if the conduct of the Philippine carriers in
relation to the termination rate disputes with US carriers may have violated US laws. On March 24, 2005, the District Court of Hawaii
granted Globe Telecom’s motion to quash the subpoena duces tecum against it on the ground that US courts have no jurisdiction. On
April 28, 2005, the US DOJ filed a notice of appeal stating its intention to appeal the ruling of the district court of Hawaii.
On July 5, 2005, Globe Telecom received an advice from US DOJ that its investigation has been closed.
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos and Number of Shares, Except Per Share
Figures)
Net income attributable to common shareholders
for basic earnings per share P
= 10,246,174 P
= 11,321,114 P
= 9,884,679
Add dividends on preferred shares 68,334 75,128 67,957
Net income attributable to common shareholders
for diluted earnings per share 10,314,508 11,396,242 9,952,636
Weighted average number of shares for basic earnings per share 133,520 139,904 149,405
Dilutive shares arising from:
Convertible preferred shares 982 872 1,227
Stock options 146 297 74
Adjusted weighted average number of common stock for diluted
earnings per share 134,648 141,073 150,706
Basic earnings per share P
= 76.74 P
= 80.92 P
= 66.16
Diluted earnings per share P
= 76.60 P
= 80.78 P
= 66.04
The main purpose of the Globe Group’s financial instruments is to fund its operations and capital expenditures. The main risks arising
from the use of financial instruments are liquidity risk, foreign currency risk, interest rate risk, and credit risk. Globe Telecom also
enters into derivative transactions, the purpose of which is to manage the currency and interest rate risk arising from its financial
instruments.
The BOD reviews and approves the policies for managing each of these risks. The Globe Group monitors market price risk arising
from all financial instruments and regularly reports financial management activities and the results of these activities to the BOD.
Globe Telecom’s policy is to manage its interest cost using a mix of fixed and variable rate debt. The Globe Group’s policy is to keep
a maximum of 75% of its borrowings at fixed rates of interest. To manage this mix in a cost-efficient manner, the Globe Group enters
into interest rate swaps, in which the companies agree to exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated by reference to an agreed-upon notional principal amount.
GLOBE TELECOM, INC.
96
As of December 31, 2005, after taking into account the effect of interest rate swaps, 67% of the Globe Group’s borrowings are at a
fixed rate of interest.
It is Globe Telecom’s policy to hedge its foreign currency denominated debt such that the sum of PHP debt and USD debt that has
been swapped to PHP shall comprise at least 50% of total outstanding debt. Globe Telecom enters into short-term foreign currency
forwards and long-term foreign currency swap contracts in order to achieve this target. As of December 31, 2005, the amount of USD
debt that has been swapped to PHP and PHP-denominated loans amounted to approximately 53% of the total debt.
Credit Risk
All regular applicants for postpaid service are subject to standard credit verification procedures. The Credit Management unit of
Globe Group continuously provides credit notification and implements differentiated credit actions, depending on assessed risks, to
minimize credit exposure. Receivable balances of postpaid subscribers are being monitored on a regular basis and appropriate
actions are executed. Likewise, net receivable balances from carriers of traffic are also being monitored and subjected to appropriate
actions to manage credit risk.
With respect to credit risk arising from the other financial assets of the Globe Group, which comprise cash and cash equivalents,
available-for-sale financial assets and certain derivative instruments, the Globe Group’s exposure to credit risk arises from default of
the counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Globe Group has a counterparty
credit risk management policy which allocates investment limits based on counterparty credit ratings and credit risk profile.
Liquidity Risk
The Globe Group seeks to manage its liquidity profile to be able to finance capital expenditures and service maturing debts. To cover
its financing requirements, the Globe Group intends to use internally generated funds and available long-term and short-term credit
facilities. As of December 31, 2005, the Globe Group has available short-term credit facilities of US$43.00 million and
P
= 5,050.00 million.
As part of its liquidity risk management, Globe Telecom regularly evaluates its projected and actual cash flows. It also continuously
assesses conditions in the financial markets for opportunities to pursue fund raising activities, in case any requirements arise. Fund
raising activities may include bank loans, export credit agency facilities, and capital market issues.
It is the Globe Group’s policy to ensure that capabilities exist for active but conservative management of its foreign exchange and
interest rate risks. The Globe Group does not engage in any speculative derivative transactions. Authorized derivative instruments
include currency forward contracts (freestanding and embedded), currency swap contracts, interest rate swap contracts and currency
option contracts (freestanding and embedded). Certain currency swaps are entered into in combination with options or contain a
structured provision.
The table below presents a comparison by category of carrying amounts and estimated fair values of all the Globe Group’s financial
instruments as of December 31, 2005.
Traffic settlement receivable and payable accounts, included as part of the Receivables - net and Accounts payable and accrued
expenses accounts, respectively, in the above table, are presented net of any related payable or receivable balances with the same
telecommunications carriers only when there is a right of offset under the traffic settlement agreements and that the accounts are
settled on a net basis.
The fair value of Globe Telecom’s outstanding Senior Notes due 2012 is based on the quoted market price of the Notes. The price of
the Notes (after bifurcating the value of the embedded prepayment option) is 118.25%, with an effective interest rate of 6.20%. The
fair value of other fixed rate interest bearing loans is based on the discounted value of future cash flows using the applicable rates for
similar types of loans. The discount rates used range from 6.47% to 10.16% (for PHP loans) and 5.43% (for USD loans).
GLOBE TELECOM, INC.
98
For variable rate loans that reprice every three months, the carrying value approximates the fair value because of recent and regular
repricing based on current market rates. For variable rate loans that reprice every six months, the fair value is determined by
discounting the principal amount plus the next interest payment using the prevailing market rate for the period up to the next repricing
date. The discount rates used range from 4.65% to 7.81% (for USD loans). The variable rate PHP loans reprice every three months.
For noninterest bearing obligations, the fair value is estimated as the present value of all future cash flows discounted using the
prevailing market rate of interest for a similar instrument.
Derivative Instruments
The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with similar
maturity profiles.
The fair value of embedded foreign exchange derivatives in notes that have been purchased by Globe Telecom is calculated by
reference to the current price of the note and the change in the foreign exchange rate that is linked to the note.
The fair values of interest rate swaps, currency and cross currency swap transactions are determined using valuation techniques with
assumptions that are based on market conditions existing at balance sheet date. The fair value of interest rate swap transactions is
the net present value of the estimated future cash flows. The fair values of currency and cross currency swap transactions are
determined based on changes in the term structure of interest rates of each currency and the spot rate. The fair values of structured
swaps transactions are determined based on quotes obtained from counterparty banks.
Embedded currency option and forward contracts are valued using the simple option pricing model of Bloomberg. The embedded call
option on the 2012 Senior Notes is also valued using Bloomberg models.
2004 2003
2005 (As Restated) (As Restated)
US Peso US Peso US Peso
Dollar Equivalent Dollar Equivalent Dollar Equivalent
(In Thousands)
Assets
Cash and cash equivalents $78,901 P
= 4,186,627 $173,563 P
= 9,778,713 $141,414 P
= 7,860,639
Short-term investments – – 9,574 539,409 33,416 1,857,462
Traffic settlements receivables 50,162 2,661,691 38,516 2,170,045 84,689 4,707,496
Other current assets 5,238 277,948 2,490 140,289 3,129 173,929
Other noncurrent assets – – – – 12,523 696,103
134,301 7,126,266 224,143 12,628,456 275,171 15,295,629
Liabilities
Accounts payable and accrued
expenses 42,240 2,241,384 52,626 2,965,001 66,315 3,686,186
Traffic settlements payable 11,294 599,306 18,338 1,033,196 12,274 682,236
Long-term debt 611,487 32,446,723 713,258 40,185,669 858,022 47,694,036
Other long-term liabilities 25,889 1,373,734 48,197 2,715,467 53,185 2,956,316
690,910 36,661,147 832,419 46,899,333 989,796 55,018,774
Net foreign currency-
denominated liabilities $556,609 P
= 29,534,881 $608,276 P
= 34,270,877 $714,625 P
= 39,723,145
GLOBE TELECOM, INC.
100
The following table shows information about the Globe Telecom’s financial instruments that are exposed to interest rate risk and
presented by maturity profile. The table also sets out information about the Globe Telecom’s derivative instruments as of
December 31, 2005 that were entered into to manage interest and foreign exchange risks (in thousands).
Premium
and Carrying
Total Total Issuance Value
<1 year >1-<2 years >2-<3 years >3-<4 years >4-<5 years >5 years (In USD) (in PHP) Costs (In PHP) Fair Value
Liabilities:
Long-term debt
Fixed rate
US$ notes $20,329 $18,383 $11,116 $6,140 $– $300,000 $355,968 P
= 18,888,369 = 467,979 P
P = 19,356,348 P
= 21,870,614
Interest rate 4.81% -6.55% 4.81% -6.55% 6.44% 6.44% 10.83%
Philippine
peso P
= 876,400 P
= 1,347,650 P
= 2,208,550 = 5,002,000
P P
= 1,607,000 11,041,600 (16,256) 11,025,344 12,201,003
Interest rate 10.37% - 10.37% - 10.37% - 10.47% - 13.49% -
10.72% 10.72% 10.72% 13.79% 16%
Floating rate
US$ notes $91,695 $69,902 $28,254 $23,822 $22,222 $11,111 $247,006 13,106,632 − 13,106,632 13,273,951
Interest rate Libor only; Libor Libor only; Libor Libor + .6755% - Libor +1.20% - Libor +1.63% Libor +1.63%
+ .45% - Libor + + .45% - Libor + Libor +1.63% Libor + 1.63%
3.20% 3.20%
Philippine
peso P
= 985,898 P
= 797,447 P
= 684,423 = 1,240,373
P P
= 2,496,923 P
=– P
=– 6,205,064 − 6,205,064 6,205,064
Interest rate Mart 1 + 1.3% Mart 1 + 1.3% Mart 1 + 1.3% Mart 1 + 1% 3 mo Mart1 +
margin; margin; margin; 3 mo Mart + 1.75%
Mart 1 + 1.5% Mart 1 + 1.5% Mart 1 + 1.5% 1.375% Mart 1 + 1%
margin; margin; margin; 3 mo Mart + 1% margin
Mart 1 + 1% Mart 1 + 1% Mart 1 + 1%
margin margin margin
3 mo Mart + 3 mo Mart +
1% margin 1% margin
3 mo Mart + 3 mo Mart +
1.38% margin 1.38% margin
P
= 49,241,665 = 451,723 P
P = 49,693,388 P
= 53,550,632
(Forward)
102
Derivative Instruments Accounted for as Hedges
The following sections discuss in detail the derivative instruments accounted for as cash flow hedges.
Globe Telecom also has outstanding foreign currency swap agreements with certain banks, under which it effectively swaps the
principal of US$71.68 million loans into PHP up to April 2012. Under these contracts, swap costs are payable in semi-annual
intervals in PHP or USD.
The unrealized fair value after tax included under “Cumulative translation adjustment” in the stockholders’ equity section of the
consolidated balance sheets amounted to P = 223.42 million as of December 31, 2005.
As of December 31, 2005, the fair value of the outstanding swap amounted to a P = 57.49 million gain, of which P= 5.14 million
(net of tax) is reported as “Cumulative translation adjustment” in the stockholders’ equity section of the consolidated balance
sheets.
Freestanding Derivatives
Freestanding derivatives that are not designated as hedges consist of currency forwards, options, swaps and interest rate swaps
entered into by Globe Telecom. Mark-to-market changes on these instruments are accounted for directly in the consolidated
statements of income.
Non-deliverable Forwards
Globe Telecom entered into short-term non-deliverable currency forward contracts to fix the peso cash flows from coupon and
redemption of certain DLPN issued by the ROP. These currency forward contracts with a notional amount of US$2.88 million,
matured in December 2005. The realized gain amounted to P = 23.44 million.
Globe Telecom also entered into cross-currency swap agreements with certain banks, under which it swaps the principal and
interest of certain USD-denominated loans into Philippine peso with quarterly or semi-annual payment intervals up to June 2008.
As of December 31, 2005, the total outstanding notional amounts of the cross-currency swaps amounted to US$14.31 million.
The mark-to-market values of the outstanding currency and cross-currency swaps as of December 31, 2005 amounted to a gain
of P
= 19.86 million and a loss of P
= 249.01 million, respectively on these instruments.
Globe Telecom also has an outstanding interest rate swap contract with a notional amount of P= 1,000.00 million, which effectively
swaps a fixed rate PHP-denominated bond into floating rate, with quarterly payment intervals up to February 2009.
The mark-to-market values on the interest rate swaps as of December 31, 2005 amounted to a net mark-to-market gain of
P
= 50.34 million.
104
Embedded Call Option
Globe Telecom’s 2012 Senior Notes contain embedded call options which give Globe Telecom the right to prepay the notes at a
certain call price per year. As of December 31, 2005, the embedded call options have a notional amount of US$300.00 million
and mark-to-market gain of P = 1,268.71 million.
The DLPN investments contain embedded currency forwards that were bifurcated and marked-to-market through profit and loss.
Globe Group realized a net loss of P
= 2.74 million.
The host peso debt instruments on the DLPN investments were accounted for at amortized cost.
The distinction of the results of hedge accounting into “Effective” or “Ineffective” represent designations based on PAS 39 and are not
necessarily reflective of the economic effectiveness of the instruments.
Wireless Communications Services - represents cellular telecommunications services that allow subscribers to make and receive
local, domestic long distance and international long distance calls to and from any place within the coverage area. Revenues
principally consist of one-time registration fees, fixed monthly service fees, revenues from value-added services such as text
messaging, proceeds from sale of handsets and other phone accessories, upfront fees from activation of simpacks/simcards and per
minute airtime and toll fees for basic services which vary based primarily on the monthly volume of calls and the network on which
the call terminates.
On September 30, 2003, Globe Telecom has discontinued its telex service due to declining revenues and for cost efficiency.
The segment assets and liabilities and results of operations in 2004 and 2003 have been restated to reflect the effects of the change
in accounting policies.
The segment’s performance is evaluated based on earnings before income taxes and depreciation and amortization (EBITDA).
2005
Wireless Wireline
Communications Communications
[1]
Services Services Corporate Total
Revenues P
= 52,229 P
= 6,519 P
=– P
= 58,748
Operating expenses (22,341)* (3,495) (940) (26,776)
[2]
EBITDA 29,888 3,024 (940) 31,972
Depreciation and amortization (12,062) (2,677) (995) (15,734)
EBIT 17,826 347 (1,935) 16,238
Other income (expenses) - net (2,262) 73 132 (2,057)
Income (loss) before income tax P
= 15,564 P
= 420 (P
= 1,803) P
= 14,181
*Includes provision for property and equipment amounting to P
= 191.95 million.
Wireless Wireline
Communications Communications
Services Services Corporate[1] Total
Revenues P= 49,903 P
= 5,706 P
=– P
= 55,609
Operating expenses (18,863) (2,885) (967) (22,715)
EBITDA[2] 31,040 2,821 (967) 32,894
Depreciation and amortization (11,470) (2,688) (548) (14,706)
EBIT 19,570 133 (1,515) 18,188
Other income (expenses) - net (5,876) 240 171 (5,465)
Income (loss) before income tax P= 13,694 P
= 373 (P
= 1,344) P
= 12,723
GLOBE TELECOM, INC.
106
2003 (As Restated)
Wireless Wireline
Communications Communications
Services Services Corporate[1] Total
Revenues P= 44,465 P
= 5,013 P
=– P
= 49,478
Operating expenses (18,846) (2,859) (1) (21,706)
[2]
EBITDA 25,619 2,154 (1) 27,772
Depreciation and amortization (8,505) (3,069) (15) (11,589)
EBIT 17,114 (915) (16) 16,183
Other income (expenses) - net (5,881) 799 (924) (6,006)
Income (loss) before income tax P= 11,233 (P
= 116) (P
= 940) P
= 10,177
The segment assets and liabilities as of December 31, 2005, 2004 and 2003 are as follows (in millions):
2005
Wireless Wireline
Communications Communications
[1]
Services Services Corporate Total
[3]
Segment assets P= 97,537 P= 20,110 P
= 6,291 P
= 123,938
Segment liabilities[3] 65,729 2,228 1,094 69,051
Wireless Wireline
Communications Communications
Services Services Corporate[1] Total
[3]
Segment assets P= 98,978 P= 23,579 P
= 4,734 P
= 127,291
Segment liabilities [3] 68,895 1,654 1,173 71,722
Wireless Wireline
Communications Communications
Services Services Corporate[1] Total
Segment assets [3] P
= 96,274 P= 22,917 P
= 5,474 P
= 124,665
Segment liabilities [3] 73,068 2,113 1,299 76,480
2004 2003
2005 (As Restated) (As Restated)
Wireless communications services P
= 12,907 P
= 19,158 P
= 15,829
Wireline communications services 1,267 3,235 1,210
Corporate 916 1,280 593
P
= 15,090 P
= 23,673 P
= 17,632
[1] Corporate represents support services that cannot be directly identified with any of the revenue generating services.
[2] The term EBITDA is presented because it is generally accepted as providing useful information regarding a company’s ability to service and incur debt. The Globe
Group’s presentation of EBITDA differs from the above definition by excluding other income (expenses). The Globe Group’s presentation of EBITDA may not be
comparable to similarly titled measures presented by other companies and could be misleading because not all companies and analysts calculate EBITDA in the same
manner.
[3] Segment assets and liabilities do not include deferred income taxes.
2004 2003
2005 (As Restated) (As Restated)
(In Thousand Pesos)
Increase (decrease) in liabilities related to the acquisition of
property and equipment (P
= 1,163,860) P
= 935,909 (P
= 1,637,835)
Dividends on preferred shares 68,334 75,128 67,957
Capitalized ARO 44,433 182,363 70,256
Cash in banks earns interest at respective bank deposit rates. Short-term placements are made for varying periods of up to three
months depending on the immediate cash requirements of Globe Group and earn interest at the respective short-term placement
rates.
Certain comparative figures have been reclassified to conform with the current year’s presentation (see Note 2).
GLOBE TELECOM, INC.
108
29. Event After the Balance Sheet Date
On February 7, 2006, the BOD approved the declaration of the first semi-annual cash dividends in 2006 of P
= 2,638.00 million
(P
= 20.00 per common share) to common stockholders of record as of February 21, 2006 payable on March 15, 2006.
On February 7, 2006, the BOD approved and authorized the release of consolidated financial statements of Globe Telecom, Inc. and
Subsidiaries as of and for the years ended December 31, 2005, 2004 and 2003.
110
SM MANILA SAN FERNANDO, LA UNION SM MARILAO
4/Flr Unit 430 SM City Manila, G/F Provincial Administrative Bldg., Unit 219 level 2, SM City Marilao,
Arroceros St. Cor. Marcelino Sts and Concepcion Quezon Ave., San Fernando, La Union Km. 21 Barangay Ibayo, McArthur Hway,
Avenue Manila (near Chowking) Bulacan
SM BAGUIO
SM SAN LAZARO Unit 349 & 350 - Level 3, SM PAMPANGA
Unit 354 3rd Floor, SM City San Lazaro, SM City Baguio, Luneta Hill, Ground Floor, SM City Pampanga,
Felix Huertas Cor. A.H. Lacson St., Upper Session Road, Baguio City Lagundi, Mexico, Pampanga
Sta. Cruz Manila (infront of Play & Display)
TARLAC
SM SOUTHMALL LINK G/F Metrotown Mall, SOLANO
2/F Cyberzone, SM Southmall , Juan Luna St. Cor. McArthur Highway, 225 J.P. Rizal Avenue, Maharlika Highway,
Zapote-Alabang Road, Las Piñas City Tarlac City Solano Nueva Vizcaya
112
INNOVE BUSINESS CENTERS
Luzon Office Site Management & Processes Globelines Payments & Services
Globelines Payments & Services, 17th Floor, Innove Plaza, Diversion Extension Rd, Brgy. Bolbok,
Upper Ground Floor, cor. Samar Loop & Panay Rd., Batangas City, Batangas
Globe Telecom Plaza Tower 1, Cebu Business Park, Cebu City Tel (043) 9807888
cor. Pioneer & Madison Sts., Mandaluyong City Tel (032) 415-8888 loc 829/ 415-8981
Tel (02) 730-2757; (02) 7975554 Fax (032) 415-8982 BACOOR
Fax (02) 739-8000; (02) 797-5550 General Tirona Highway,
Technical Support Barangay Dulong Bayan, Bacoor, Cavite
VisMin Office 12th Floor, Valero Telepark, Tel (046) 970-8888
17th Floor Innove Plaza, 111 Valero Street, Makati City Fax (046) 970-1555
cor. Samar Loop & Panay Rd., Tel (02) 797-5556
Cebu Business Park, Cebu City Fax (02) 739-8000; (02) 797-5560 SM MOLINO
Tel (032) 415-8831, 2nd Level, SM Supercenter Molino,
(032) 415-8888 loc 830 METRO MANILA Molino IV, Bacoor, Cavite
Fax (032) 415-8832 Tel (046) 517-2865
GT PLAZA Fax (046) 517-2862
OPERATIONS SUPPORT Upper Ground Floor,
Globe Telecom Plaza Tower 1, SM DASMARINAS
Centers Marketing, Training and Events cor. Pioneer & Madison Sts., 2nd Level , SM City Dasmarinas,
12th Floor, Valero Telepark, Mandaluyong City Governor’s Drive 1, Barangay Sampaloc,
111 Valero Street, Makati City Tel (02) 730-3988 Dasmarinas, Cavite
Tel (02) 730-3984; (02) 7975558 Fax (02) 739-8000 Tel (046) 9731888
Fax (02) 739-8000; (02) 797-5560 Fax (046) 9735555
MARIKINA
Internal Communication 2nd Level, Blue Wave Mall, GENERAL TRIAS
12th Floor, Valero Telepark, Sumulong Highway cor. G. Fernando Ave., 2nd Floor, Trinidad Ybay Building,
111 Valero Street, Makati City Brgy. Sto. Nino, Marikina City National Highway, Brgy. Tejero,
Tel (02) 730-3391; (02) 797-5559 Tel (02) 943-4167 Gen. Trias, Cavite
Fax (02) 739-8000; (02) 797-5560 Fax (02) 943-4169 Tel (046) 5091888
Fax (046) 5091555
OM Luzon PARK SQUARE 2
15th Floor, Valero Telepark, GF Park Square Bldg., BOLBOK
111 Valero St. Makati City Ayala Center, Makati City Diversion Extension Rd,
Tel (02) 7975551/7975552/7975553 Tel (02) 752-8658 Brgy. Bolbok, Batangas City, Batangas
Fax (02) 797-5560 Fax (02) 752-8582 Tel (043) 9807888
Fax (043) 9800123
OM Mindanao SM MEGAMALL
GT Iligan Business Center, 4th level, Bldg. B, Cyberzone Area, SM Megamall, SM BATANGAS
Kimberly Bldg. Iligan City Dona Julia Vargas Ave., Mandaluyong City 2nd Level, SM City Batangas,
Tel /Fax (063) 492-2097 Tel (02) 914-8855 Brgy. Pallocan Kanluran, Batangas City
Fax (02) 914-4602 Tel (043) 9841074
OM Visayas Fax (043) 9841067
17th Floor, Innove Plaza,
cor. Samar Loop & Panay Rd.,
Cebu Business Park, Cebu City
Tel (032) 415-8938/8940
Fax (032) 415-8982
114
SAGAY SM CITY ILOILO KALIBO
ATB Bldg., Maranon St., 2nd Level, SM City Iloilo, Diversion Road, Arch. Reyes St., Kalibo, Aklan
Poblacion II, Sagay City, Mandurriao, Iloilo City Tel (036) 5007606
Negros Occidental Tel (033) 5096880 Fax (036) 5007
Tel (034) 722-8012 Fax (033) 5096878
HOTLINE OPERATIONS (VERTEX)
DUMAGUETE POTOTAN 33th Floor Wynsum Tower,
GF Sol y Mar Bldg., Teresa Magbanua St., Pototan, Iloilo Emerald Avenue, Ortigas Center, Pasig City
Cor. Rizal Blvd.& San Juan Sts., Tel (033) 529-7701 Tel (02) 7976901
Dumaguete City Fax (033) 529-7703
Tel /Fax (035) 422-9284 GT TECHNICAL HELPDESK
ROXAS 5th Floor, Globe Telecom Plaza 2,
TANJAY P. Gomez cor. Legaspi Sts., Roxas City Pioneer Corner Madison Streets, Mandaluyong
Kyle’s foodshoppe, Magallanes St., Tel (036) 522-1033 City Tel (02) 7302015 or (02) 7303606
Tanjay City Fax (036) 522-1032
Tel (035) 415-9675 GT CS ISF - WIRELINE
Fax (035) 415-8098 SAN JOSE 5th Floor, Globe Telecom Plaza 2,
T. Fornier St., San Jose, Antique Pioneer Corner Madison Streets,
GAISANO ILOILO Tel (036) 540-7026 Mandaluyong City
2/F Gaisano Iloilo, La Paz, Iloilo City Fax (036) 540-7025 Tel (02) 7302068
Tel (033) 5087877 Fax (02) 7393002
Fax (033) 508-0003
Subsidiaries
Innove Communications, Inc. G-Xchange, Inc.
Innove Corporate Office (Luzon) Innove Corporate Office (Visayas) Globe Telecom Plaza 1,
GT Telepark Innove Plaza Pioneer corner Madison Sts.
111 Valero St., Salcedo Village, Samar Loop corner Panay Road Mandaluyong City
Makati City Cebu Business Park Tel (02) 7302000
Tel (02) 7302000 Tel (032) 4158888 Fax (02) 7392000
Fax (02) 7392000 Fax (032) 4158822
Shareholder Information
Upon the written request of the stockholders, the Corporation Or you may course your requests through:
undertakes to furnish said stockholder a copy of SEC Form 17-A Ms. Cherry Chan-Tan
free of charge except for the exhibit attached thereto which shall Investor Relations-Head
be charged at cost. Any written request for a copy of SEC Form Tel (02) 7302820, (02) 7303251
17-A shall be addressed to the following: Fax (02) 7390072
Email: globeinv@globetel.com.ph
GLOBE TELECOM, INC.
5th Floor Globe Telecom Plaza I, For inquiries regarding dividend payments, change of address and
Pioneer corner Madison Streets, account status, lost or damaged stock certificates, please write or
Mandaluyong City, Philippines call Bank of the Philippine Islands:
115
CORPORATE SOCIAL RESPONSIBILITY
EMPOWERING COMMUNITIES, BRIDGING COMMUNITIES to get actively involved in livelihood activities and promoted starting small
business for families and community welfare. Some 1,200 barangay leaders
Globe Telecom believes in making an impact on the communities in which we and 650 women entrepreneurs participated in this project. Globe provided
operate. Managed well, this impact can bring significant benefits to both the entrepreneurship opportunities through its Autoload Max retailership program
community and the business. while a number of communities started their own barangay-based businesses.
In 2005, Globe’s Bridging Communities Program Globe also addressed the need for rural IT development
(BridgeCom), your company’s flagship corporate Globe believes in through the BridgeCom PCs for Barangays. This
social responsibility program embarked on projects program brought 50 sets of personal computers to
benefiting over 400 communities nationwide that making an impact on barangays and local civic organizations nationwide and
enhanced and developed community the communities in developed computer literacy skills of barangay officials
leadership and entrepreneurship and advanced and their constituents and helped them semiautomate
education through information technology. which we operate. applicable barangay transactions.
BridgeCom Sa Bayan, a leadership and business In the field of education and information technology, Globe
development training program for barangay leaders and women micro- embarked on the third year of its involvement in Text2Teach and instituted the
entrepreneurs was implemented to develop leadership and entrepreneurial Globe Technical Advancement Program (GTAP), among others.
skills in over 350 barangays nationwide. Community leaders identified potential
businesses and Globe, in partnership with ABS-CBN Foundation, Inc., provided A collaboration of Globe, Nokia, International Youth Foundation (IYF), United
them with skills on strategic planning, financial management, marketing and Nations Development Program (UNDP), Ayala Foundation, and other local
credit discipline. This program encouraged communities through LGU leaders partners, Text2Teach provided teachers educational materials and information
GLOBE TELECOM, INC.
116
through the use of mobile telephones. Lectures in Science, English, and • Globe’s Bantay Baterya project (in partnership with ABS-CBN’s Bantay
Mathematics were requested through SMS and an instructional video was sent Kalikasan) disposed 100% of the company’s used lead-acid batteries to
via satellite to a digital recorder connected to a television in the classroom. fully comply with government and environmental standards.
Text2Teach was made available in more than 200 public elementary schools • BridgeCom Disaster Response provided relief operations for typhoon
nationwide. For the secondary level, Globe Kababayan, through a grant to the affected provinces of Quezon and Oriental Mindoro.
“Classroom Galing Sa Mamamayan Abroad” program donated two classrooms in
Alulod Elementary School in Indang, Cavite. We believe that the greatest contribution Globe can make to poverty alleviation
is through sustained corporate social responsibility programs. This is in line with
On the other hand, GTAP enriched the learning experience of Engineering and our effort to ensure that the economic, social and environmental impacts of
IT students through curriculum update and development, hands-on-training and these involvements are positive. And that one of the better ways to participate
internship. Its first beneficiary was the University of San Jose Recoletos Cebu. in national development would be the effective use of our core products and
services to uplift the lives of marginalized Filipinos.
• BridgeCom Medical Missions in Mandaluyong, Cebu, Nueva Ecija, Cavite
and Maripipi Island, Biliran province served more than 2,000 patients from
depressed communities.
117
GLOBE TELECOM, INC.
A member of the Ayala group of companies