Management's Discussion and Analysis Overview As at the end of year 2005, the Company and its subsidiaries ("The Group") had the total of 16,408,900 mobile phone subscribers, comprising of 1,999,700 GSM advance and GSM 1800 subscribers and 14,409,200 One-2-Call! subscribers. This represented an increase of 1,224,900 subscribers or 8.07% from the total of 15,184,000 subscribers as at year-end 2004. During this year, the Group expanded to new businesses as follow: - Buddy Broadband: a home entertainment services using ADSL technology to deliver simultaneously broadband TV and high-speed internet through telephone landlines. The services include free TV, movie on demand, music video, news, documentary, and entertainment from various content partners. - MPay: a mobile electronic payment system that enables customers to conveniently make secured payment through mobile devices for their daily-life transactions such as good and services, utilities bill payment, online shopping, and etc. In 2005, the Group recorded total revenues of Baht 92,517 million, a decline of 4.1% y-o-y, caused by price competitions during 2Q05 and pressured consumer spending following to the rapid surge in oil price. Net profit was Baht 18,909 million, decreased by 6.7% y-o-y due to lower service revenue, higher amortization cost, and cost of new service "Buddy Broadband". Moreover, concession fee of postpaid service (GSM Advance) increased from a total of 25% of revenues to 30% since October, according to AIS concession contract. On the other hand, the Group had a better control of SG&A expenses, of which reduced by 8.7% y-o-y, attributable to stringent cost control measures, decrease allowance for doubtful account, and lower marketing expenses. The Group recorded a lower corporate income tax due to tax reclaim after it changed the timing of revenue recognition of cash card sales from previously the point of sales to when customers activate the cards. Total Revenue Service revenues and equipment sales have been our primary source of revenues, which include revenues from mobile telecommunication business, data network communication services (Datakit Virtual Circuit Switch), and the provision of call centre services. Revenues classified by nature of activities 2005 2004 Million Baht % Million Baht % Revenues from services and equipment rentals Mobile phone 79,976 86.4 83,912 87.0 Data Communications 553 0.6 477 0.5 Call Centre 5 0.0 6 0.0 Total 80,534 87.0 84,395 87.5 Sale revenues Handsets 11,979 12.9 12,032 12.5 Data Communications 4 0.1 10 0.0 Total 11,983 13.0 15,742 12.5 Grand Total 92,517 100.0 96,437 100.0 - Revenue from services and equipment rentals Revenues from mobile phone services decreased by 4.6% y-o-y from Baht 84,395 million in 2004 to Baht 80,534 million in 2005. As a result of intense competition in the telecommunication market, tariffs of mobile phone service fell considerably. This had pushed down average revenue per user (ARPU) of GSM advance, One-2-Call! and GSM 1800 in 2005 to Baht 1,127, Baht 315 and Baht 973, respectively. Breakdown of subscribers and Average Revenue Per User (ARPU) New subscriber additions Consolidated Subscribers ARPU ( Baht/month ) GSM One-2-Call! GSM GSM One-2-Call! GSM GSM One-2-Call! GSM Advance 1800 Advance 1800 Advance 1800 2004 32,100 1,939,900 (27,200)1,947,900 13,063,700 172,400 1,233 359 1,104 2005(84,600)1,345,500 (36,000)1,863,300 14,409,200 136,400 1,127 315 973 Subscriber growth had been slow due to pressures from the sharp increase in fuel prices since beginning of the year. The subscriber base growth of 1.2 million subscribers was not enough to compensate for the fall in service tariffs. - Revenue from sales In 2005, handset sales were Baht 11,979 million, a slight decline of 0.4% from Baht 12,032 million in 2004. The decrease in handset revenues was driven by higher sales volumes but at lower selling price per unit, affected by competitions in handset market. Total Cost Total cost includes cost of services and equipment rentals, concession fee and excise tax, and cost of sales. In 2005 The Group incurred Baht 54,198 million of total cost, rising by 2.3% from Baht 52,995 million in 2004. - Cost of services and equipment rentals Cost of services and equipment rentals was Baht 24,205 million in 2005 which rose by 8.0% from Baht 22,415 million in 2004. The increment was due to higher network amortization resulting from continued expansion of mobile service network. Moreover, a new business "Buddy Broadband" incurred related service costs. - Concession fee and excise tax The concession fee and excise tax declined from Baht 19,970 million in 2004 or down 3.8% to Baht 19,215 million in 2005 due to lower revenues from mobile services. However, the concession fee for postpaid revenue increased from 25% to 30% started since October 2005. Gross profit margin calculated from service and equipment rental revenues stood at 46.1% in 2005 and 49.8% in 2004. - Cost of Sales In 2005, cost of sales accounted for Baht 10,778 million, an increase of Baht 167 million, from Baht 10,611 million in 2004. Gross profit margin calculated from sales revenues was 10.1% in 2005, a decrease from 11.9% in 2004. The lower margin was due to continued strong competition in the handset distribution market. Selling and Administrative expenses The Group showed a lower selling and administrative expenses from Baht 11,027 million in 2004 down to Baht 10,067 million in 2005 or decreased by 8.7% y-o-y. The decline in SG&A of year 2005 was principally resulted from: 1. In 2005, marketing expense decreased by Baht 824 million or 23.5% as a part of our cost control measures. This represented 2.9% of total revenue. 2. A decrease of Baht 252 million in bad debt and allowance for doubtful account due mainly to the Group's efforts in strengthening collection performance in the period before. 3. In 2004, we had donation Baht 120 million for helping Tsunami's victims. Interest expenses The Group showed interest expense of Baht 1,529 million, a decrease of Baht 600 million from Baht 2,129 million in 2004, resulting from debenture redemption of Baht 4,000 million. Income Tax In 2005 the income tax expense considerably decreased to Baht 8,435 million from Baht 10,601 million in 2004 as a result of tax reclaim from cash card business. The timing of its cash card revenue recognition was changed from the point of sales to when the customers activate the cards since the third quarter of 2005. Net Profit The Group's net profit was Baht 18,909 million in 2005, a fall from Baht 20,258 million in 2004 (6.7%) as the reasons mentioned above. Financial Position 1. Assets As of year-end 2005 our total assets amounted to Baht 119,014 million, a 1.8% lower from Baht 121,168 million as of year-end 2004. Current assets accounted for 17.1% of total asset while non-current assets stood at 82.9%. Details of major items therein are as follows: - Cash & cash equivalents Cash and cash equivalents outstanding as of year-end 2005 were Baht 11,456 million increased by Baht 2,007 million or 21.2% from Baht 9,449 million as of year-end 2004. The Company generates Baht 33,591 million net cash flow from operating activities compared to Baht 38,932 million in 2004 due to Baht 4,690 million restricted cash in bank deposit in compliance to the notification of Bank of Thailand which requires cash reserve for the Group's cash card business. Net cash outflow from investing activities was stepped up due to higher network investment. Net cash flow from financing activities was lower despite higher dividend payment. This was because of lower amount of debt repayment and having cash receipt from minority interest from additional shares in a subsidiary Baht 315 million. An ending balance of Cash and Cash equivalent as of year-end 2005 must be deducted by Baht 4,690 million of restricted bank deposit for comparison with cash flow statement. - Trade account receivables - net Net trade account receivables totalled Baht 4,526 million as of year-end 2005, declined by 21.4% from Baht 5,761 million as of year-end 2004. The improvement in trade account receivables turnover from 14.49 times in 2004 to 15.60 times in 2005 also implied an effective collection system. - Inventories - net As of year-end 2005, inventory level was Baht 1,156 million, increased from Baht 1,037 million in 2004. Inventory turnover was 10.28 times at year-end 2004 but fell to 9.83 times at year-end 2005. This was due to higher efficiency of inventory control policy for dynamic handset market. - Other current assets As of year-end 2005, other current assets stood at Baht 2,714 million, increased by Baht 333 million from year-end 2004's level of Baht 2,382 million. The main balance item came from account receivable-cash card and prepaid expense amounting Baht 1,266 million and Baht 887 million, respectively. - Property and equipment, net (incl. Computer software) Our property and equipment-net for year-end 2005 equalled to Baht 9,700 million decreased by Baht 1,918 million from year-end 2004's level of Baht 11,618 million as new investments were less than depreciation and amortisation. We undertake our asset assessments and review any possibility of asset value impairment every year in order to properly adjust the relevant book value. The effort is aimed to make our balance sheet reflect, as closely as possible, the true economic value of those assets. - Assets under concession agreements, net Investment costs of the cellular network are the main items under the concession agreements. As of year-end 2005, the net assets under the concession agreements totalled Baht 75,843 million, a slight increase from Baht 75,658 million recorded as of year-end 2004. 2. Liabilities As of year-end 2005, the total liabilities were Baht 47,933 million, decreased from Baht 53,080 million in 2004. Total liabilities comprised of 76.4% current liabilities and 23.6% non-current liabilities. The incremental proportion of current liabilities to total liability was due to a large amount of current portion of long term debenture on schedule. Details of major items therein are as follows: - Trade account payables As of year-end 2005, trade account payables were Baht 4,520 million, continuously declining compared to Baht 4,790 million in 2004. Turnover in trade account payables increased from 6.29 times in 2004 to 7.51 in 2005. - Accrued concession fees, concession rights payable and accrued excise taxes Concession rights are paid for operational rights granted to one of our subsidiaries under the digital GSM 1800 concession agreement. As of year-end 2005, concession rights payable and accrued interest payable to Total Access Communication (Public) Ltd (TAC) amounted to Baht 4,739 million, a certain part of which was accrued in 2002 and 2003. It should be noted that the matter remains inconclusive. We have negotiated for a payment reduction; however, in 2003, TAC took the matter to arbitration and our subsidiary filed for an appeal. Concession fees, concession rights payable and accrued excise taxes increased from Baht 7,017 million in 2004 to Baht 7,354 million in 2005 or up by Baht 337 million. From October 2005 onward, concession fee on post- paid revenue sharing to TOT changed from 25% to 30% and keep this rate for the next 5 year. - Debentures and Loans Debentures and loans are composed of long-term debentures, and financial leases. As of year-end 2005, these items were Baht 25,451 million, decreasing from Baht 29,521 million in 2004. During the year, we settled Baht 4,000 million of long-term debenture and Baht 103 million of financial lease obligations,and engaged in a new financial lease arrangement worth Baht 8 million. As of year-end 2005, we recorded the current portions of Baht 14,241 million and the long-term portion of Baht 11,210 million. - Other current liabilities Other current liabilities decreased from Baht 11,213 million in 2004 to Baht 10,415 million in 2005 which consisted of Baht 3,315 million advanced payments received from cash cards, Baht 2,992 million accrued tax liabilities, and Baht 2,198 million unearned income from scratch card. 3. Shareholders' equity On a consolidated basis, shareholder's equity improved to Baht 71,081 million in 2005 compared to Baht 68,087 million in 2004 from net operating results. The paid-up capital was Baht 2,951 million, and premiums on share capital were Baht 20,730 million. An increase in capital base was due to the issuance of new common stocks worth Baht 265 million to provide shares for exercise of outstanding warrants (under employee stock option program). Payments made in advance for another newly issued shares amounted to Baht 25 million. A Baht 18,909 million net profit for the year contributed largely to retained earnings of Baht 45,817 million (excluded legal reserve and capital reserve for treasury stock). During the year we made Baht 16,492 million in cash dividends for twice a year, at a dividend ratio of Baht 2.60 and Baht 3.00 per share. During the year, various credit rating agencies had conducted credit reviews of our entity and subsidiaries. They were: 1. Standard & Poor's Rating Services rated our local and foreign currency at A-, raised from BBB+ in 2004. 2. TRIS Rating Agency rated our company and our unsecured debentures at AA, the same level as in 2004 and 2003. 4. Capital Structure Analysis The debt to equity ratio improved from 0.78:1 in 2004 to 0.67:1 in 2005. This was a result of continual decline in total liabilities from debenture/loan repayments. It should be noted that it is our policy to maintain the debt to equity ratio of both our entity and our subsidiaries at a level not exceeding 2:1. 5. Liquidity Analysis At year-end 2005, consolidated net cash flow from operating activities was Baht 33,591 million decreased by Baht 5,341 million from the previous year. This was mainly due to Baht 4,690 million restricted cash in bank deposit in compliance to the notification of Bank of Thailand which requires cash reserve for the Group's cash card business. Consolidated cash outlays relating to investment activities rose from Baht 13,107 million in 2004 to Baht 16,263 million in 2005. Net cash flow from financing activities was negative at Baht 20,024 million compared to Baht 25,008 million in 2004, reflecting the use of funds for dividend payments, and debenture redemptions, the source of fund came from share capital increased and cash receipt from additional share in a subsidiary from minorities. Thus, as at year-end 2005, cash and cash equivalent showed net increase of Baht 2,007 million. Current ratio decreased from 0.69:1 in 2004 to 0.56:1 in 2005. Operating cash flow to current liability ratio reflected from 1.42:1 in 2004 to 0.92:1 in 2005. The collection period stood at from 25 days in 2004 to 23 days in 2005. The day sales period was expanded from 35 days in 2004 to 37 days in 2005. The payment period declined from 57 days in 2004 to 48 days in 2005. 6. Solvency Analysis In terms of the ability to meet our long-term debt obligations, our solvency depends on both its level of future cash flows and the level of debts. The interest coverage ratio grew up from to 25.75 in 2004 to 34.78 in 2005, as a result of sustaining net cash flow from operations at the high level as well as trimming down in interest payment owing to repayment in debentures.