** **

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington****, D.C.****20549**

** **

**FORM 6 -K**

** **

**Report of Foreign Private Issuer**

** **

**Pursuant to Rule 13a-16 or 15d-16**

**of the Securities Exchange Act of 1934**

** **

**For the month of May 2008**

** **

**Commission File Number 1-03006**

** **

**Philippine Long Distance Telephone Company**

(Exact Name of Registrant as specified in its Charter)

 

**Ramon****Cojuangco Building**

**Makati Avenue**

**Makati****City**

**Philippines**

(Address of principal executive offices)

 

(Indicate by check mark whetherthe registrant files or will file annual reports under cover of Form 20-F orForm 40-F.)

 

| Form 20-F:  √ | Form 40-F: |
|---------------------|------------|

 

(Indicate by check mark whetherby furnishing the information contained in this form, the registrant is alsothereby furnishing the information to the commission pursuant to Rule 12g3-2(b)under the Securities Exchange Act 1934.)

 

| Yes: | No:  √ |
|------|--------------|

 

(If “Yes” is marked, indicatebelow the file number assigned to the registrant in connection with Rule12g3-2(b):  82-_____)

 

| SEC Number  | **PW-55** |
|-------------|-----------|
| File Number |      |

 

 

 

________________________________________________

 

 

**PHILIPPINE LONG DISTANCE**

**TELEPHONE COMPANY**

________________________________________________

(Company’s Full Name)

 

 

**Ramon****Cojuangco Building**

**Makati Avenue****, Makati****City**

_________________________________________________

(Company’s Address)

 

 

**(632) 816-8556**

______________________________________

(Telephone Number)

 

 

**Not Applicable**

______________________________________

(Fiscal Year Ending)

(month & day)

 

 

**SEC Form 17-Q**

______________________________________

Form Type

 

 

**Not Applicable**

______________________________________

Amendment Designation(if applicable)

 

 

**March 31, 2008**

______________________________________

Period Ended Date

 

 

**Not Applicable**

__________________________________________________

(Secondary LicenseType and File Number)

EXHIBITS

 

| Exhibit Number |                                                                                                                                                                   |   | Page   |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|           |                                                                                                                                                                   |   |   |
| 1.1            | Announcement date May 6, 2008                                                                                                                                          |   |   |
|           |                                                                                                                                                                   |   |   |
|           | Management’s Discussion and Analysis of Financial Condition and Results of Operations                                                                             |   | 32     |
|           |                                                                                                                                                                   |   |   |
|           | Consolidated Financial Statements as at March 31, 2008 (unaudited) and December 31, 2007 (audited) and for the three months ended  March 31, 2008 and 2007 (unaudited) |   | 93     |

 

 

SIGNATURES

 

 

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

 

 

 

 

| By:      /s/Ma. Lourdes C. Rausa-Chan                                                    |
|------------------------------------------------------------------------------------------|
| Ma. Lourdes C. Rausa-chan                                                                |
| Senior Vice President, Corporate Affairs and Legal Services Head and Corporate Secretary |
|                                                                                     |

 
May 6, 2008
 

 

Securities & Exchange Commission

Money Market Operations Department

SEC Building, EDSA

Mandaluyong City

 

Attention:  Director Justina Callangan
Corporations Finance Department

 

Gentlemen:

 

       In accordance withSection 17.1(b) of the Securities Regulation Code and SRC Rule 17.1, we submitherewith five (5) copies of SEC Form 17-Q with Management’s Discussion andAnalysis and accompanying audited financial statements of the Company as at andfor the period ended March 31, 2008.

 

 

 

Very truly yours,

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY
 
 
 
/s/Ma. Lourdes C. Rausa-Chan
MA. LOURDES C. RAUSA-CHAN
Corporate Secretary

 

 

 

COVER SHEET

 

 
P

W

-

5

5

 
 

S.E.C. Registration No.

 

P

H

I

L

I

P

P

I

N

E 

L

O

N

G

 

D

I

S

T

A

N

C

E

 

T

E

L

E

P

H

O

N

E

 

C

O

M

P

A

N

Y

 

 

 

 

 

 

(Company’s Full Name)

 

R

A

M

O

N

 

 C

O

J

U

A

N

G

C

O

 

B

L

D

G

.

 

 

 

 

M

A

K

A

T

I

 

A

V

E

.

 

M

A

K

A

T

I

 

C

I

T

Y

(Business Address: No. Street City/Town/Province)

 

JUNE CHERYL A. CABAL-FURIGAY

 

816-8534

**Contact Person**

** **

**Company Telephone Number**

** **

 
 

1

 

2

 

 

3

 

1

 

 

SEC FORM 17-Q

 

 

0

 

6

Every 2nd

Tuesday

 

 

 
Month

Day

FORM TYPE

Month

Day

Fiscal Year

 

Annual Meeting

 
 

 
C

F

D

 

N/A

Dept. Requiring this Doc.

 

Amended Articles

Number/Section

 

 

Total Amount of Borrowings

 
2,184,839

As of March 31, 2008

 

N/A

 

 

N/A

 
 
    Total No. of Stockholders

 

Domestic

 

Foreign

 

----------------------------------------------------------------------------------------------------------------------------------

To be accomplished by SEC Personnel concerned
 

 

 

 

 

 

 

 

 

 

 

 

______________________________

 
 
File Number

 

LCU

 

 

 

 

 

 

 

 

 

 

 

 

______________________________

 
 
Document I.D.

 

Cashier

 

 

*STAMPS*
 

Remarks:Please use black ink for scanning purposes.
****
SECURITIES AND EXCHANGECOMMISSION

** **

**SEC FORM 17-Q**

** **

**QUARTERLY REPORT PURSUANT TO SECTION17 OF THE SECURITIES REGULATION CODE (“SRC”) AND**

**SRC 17 (2) (b) THEREUNDER**

 

 

 

1.     For the quarterly period ended  ****March31, 2008

 

2.     SEC Identification Number  PW-55                             3.     BIR TaxIdentification No.  000-488-793

 

4.     Philippine LongDistance Telephone Company

        Exact name of registrant as specified in its charter 

 

5.     Republic of the Philippines                                                                            

        Province, country or other jurisdiction ofincorporation or organization

 

6.     Industry Classification Code:                                  (SECUse Only)

 

7.     Ramon Cojuangco Building, Makati Avenue, Makati City    0721****

        Address of registrant’s principal office                                                                                   PostalCode

 

8.     (632) 816-8556                                                              

        Registrant’s telephone number, including area code

 

9.     Not Applicable                                                                                                                   

        Former name, former address, and former fiscal year,if changed since last report

 

10.   Securities registered pursuant to Sections 8 of theSRC

 

 Title of Each Class       Number of Shares of Common Stock Outstanding 
 

       CommonCapital Stock, Php5 par value 188,895,600 shares as of March 31, 2008

 

11.   Are any or all of these securities listed on thePhilippine Stock Exchange?

 

                Yes [ X ]                      No[    ]

 

12.   Check whether the registrant

(a)   has filed all reports required to befiled by Section 17 of the SRC during the preceding ten months (or for suchshorter period that the registrant was required to file such reports):

                Yes [ X ]                      No[    ]

 

        (b)      has been subject to such filingrequirements for the past 90 days.

                Yes [ X ]                      No[    ]
****
TABLEOF CONTENTS
** **

PART I – FINANCIAL INFORMATION

 

 

1

Item 1.   Financial Statements

 

 

1

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

1

Financial Highlights and Key Performance Indicators

 

 

2

Overview

 

 

3

Results of Operations

 

 

4

Wireless

 

 

5

Total Revenues and Other Income

 

 

5

Expenses

 

 

12

Provision for Income Tax

 

 

14

Net Income

 

 

14

Fixed Line

 

 

15

Total Revenues and Other Income

 

 

15

Expenses

 

 

20

Provision for Income Tax

 

 

22

Net Income

 

 

22

Information and Communications Technology

 

 

22

Total Revenues and Other Income

 

 

22

Expenses

 

 

25

Provision for Income Tax

 

 

27

Net Income

 

 

27

Liquidity and Capital Resources

 

 

27

Operating Activities

 

 

28

Investing Activities

 

 

28

Financing Activities

 

 

29

Contractual Obligations and Commercial Commitments

 

 

31

Quantitative and Qualitative Disclosures About Market Risks

 

 

32

Impact of Inflation and Changing Prices

 

 

32

PART II – OTHER INFORMATION

 

 

32

Related Party Transactions

 

 

32

Annex – Aging of Accounts Receivable

 

 

A-1

Signatures

 

 

S-1

 
****
Exhibit 1.1
PART I –– FINANCIAL INFORMATION
 

Item 1. Financial Statements
 

*Ourconsolidated financial statements as at March 31, 2008 (unaudited) and December31, 2007 (audited) and for the three months ended March 31, 2008 and 2007(unaudited) and related notes (pages F-1 to F-93) are filed as part of thisreport on Form 17-Q.*

* *

Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations
* *

*Inthe following discussion and analysis of our financial condition and results ofoperations, unless the context indicates or otherwise requires, references to“we,” “us,” “our” or “PLDT Group” mean the Philippine Long Distance TelephoneCompany and its consolidated subsidiaries, and references to “PLDT” mean thePhilippine Long Distance Telephone Company, not including its consolidatedsubsidiaries (please see Note 2 – Summary of Significant Accounting Policiesand Practices to the accompanying unaudited consolidated financial statementsfor a list of these subsidiaries, including a description of their respectiveprincipal business activities).*

* *

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the accompanying unauditedconsolidated financial statements and the related notes.  Our unauditedconsolidated financial statements, and the financial information discussedbelow, have been prepared in accordance with Philippine Financial ReportingStandards, which differ in certain significant respects from International FinancialReporting Standards and generally accepted accounting principles in the United States.*

* *

*Thefinancial information appearing in this report and in the accompanying unauditedconsolidated financial statements is stated in Philippine pesos.  All referencesto “pesos,” “Philippine pesos” or “Php” are to the lawful currency of the Philippines; all references to “U.S. dollars,” “US$” or “dollars” are to the lawful currency of the United States; all references to “Japanese yen,” “JP¥” or “¥” are to the lawful currency ofJapan**and all references to “Euro”or “€” are to the lawful currency of the European Union**.  Translationsof Philippine peso amounts into U.S. dollars in this report and in theaccompanying unaudited consolidated financial statements were made based on theexchange rate of Php41.756 to US$1.00, the volume weighted average exchangerate at March 31, 2008 quoted through the Philippine Dealing System.*

* *

*Someinformation in this report may contain forward-looking statements within themeaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E ofthe U.S. Securities Exchange Act of 1934.  We have based these forward-lookingstatements on our current beliefs, expectations and intentions as to facts,actions and events that will or may occur in the future.  Such statementsgenerally are identified by forward-looking words such as “believe,” “plan,”“anticipate,” “continue,” “estimate,” “expect,” “may,” “will” or other similarwords.*

* *

*Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement.  We have chosen these assumptions orbases in good faith, and we believe that they are reasonable in all materialrespects.  However, we caution you that forward-looking statements and assumedfacts or bases almost always vary from actual results, and the differencesbetween the results implied by the forward-looking statements and assumed factsor bases and actual results can be material, depending on the circumstances.When considering forward-looking statements, you should keep in mind thedescription of risks and cautionary statements in this report.  You should alsokeep in mind that any forward-looking statement made by us in this report orelsewhere speaks only as at the date on which we made it.  New risks anduncertainties come up from time to time, and it is impossible for us to predictthese events or how they may affect us.  We have no duty to, and do not intendto, update or revise the forward-looking statements in this report after thedate hereof.  In light of these risks and uncertainties, any forward-lookingstatement made in this report or elsewhere might not occur.*
****
**Financial Highlights and Key Performance Indicators**

* *

** **

**March 31,**

** **

**December 31,**

** **

**Increase (Decrease)**

 

**2008**

 

**2007**

** **

**Amount**

** **

**%**

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

(Unaudited)

 

(Audited)

 

 

 

 

** **

 

 

 

 

 

 

 

**Consolidated Balance Sheets**

 

 

 

 

 

 

 

Total assets

Php253,496

 

Php240,158

 

Php13,338

 

6

Property, plant and equipment – net

156,112

 

159,414

 

(3,302)

 

(2)

Cash and cash equivalents and short-term investments

50,891

 

30,862

 

20,029

 

65

Total equity

99,339

 

112,511

 

(13,172)

 

(12)

Notes payable and long-term debt

63,499

 

60,640

 

2,859

 

5

Net debt(1) to equity ratio

0.13x

 

0.26x

 

–

 

–

** **

** **

** **

**Three Months Ended March 31,**

** **

**Increase (Decrease)**

 

**2008**

 

**2007**(2)

** **

**Amount**

** **

**%**

 

(Unaudited)

**Consolidated Statements of Income**

** **

** **

** **

** **

** **

** **

** **

Revenues and other income

Php37,899

 

Php34,816

 

Php3,083

 

9

Expenses

21,732

 

21,446

 

286

 

1

Income before income tax

16,167

 

13,370

 

2,797

 

21

Net income attributable to equity holders of PLDT

10,446

 

8,614

 

1,832

 

21

Pre-tax income margin

43%

 

38%

 

–

 

–

Net income margin

28%

 

25%

 

–

 

–

Earnings per common share 

 

 

 

 

 

 

 

Basic

54.71

 

45.08

 

9.63

 

21

Diluted

54.71

 

44.99

 

9.72

 

22

**Consolidated Statements of Cash Flows**

 

 

 

 

 

 

 

Net cash provided by operating activities

Php22,169

 

Php25,189

 

(Php3,020)

 

(12)

Net cash used in investing activities

12,919

 

13,667

 

(748)

 

(5)

*Capital expenditures*

*3,051*

* *

*5,937*

* *

*(2,886)*

* *

*(49)*

Net cash used in financing activities

159

 

6,122

 

(5,963)

 

(97)

**Operational Data**

** **

** **

** **

** **

** **

** **

** **

Number of cellular subscribers

31,575,959

 

25,483,459

 

6,092,500

 

24

Number of fixed line subscribers

1,763,602

 

1,847,084

 

(83,482)

 

(5)

Number of broadband subscribers

661,053

 

327,703

 

333,350

 

102

*Fixed Line*

*299,554*

* *

*152,645*

* *

*146,909*

* *

*96*

*Wireless*

*361,499*

* *

*175,058*

* *

*186,441*

* *

*107*

Number of employees

29,432

 

28,166

 

1,266

 

4

*Fixed Line*

*8,088*

* *

*8,702*

* *

*(614)*

* *

*(7)*

*Wireless*

*5,395*

* *

*5,295*

* *

*100*

* *

*2*

*Information and Communications Technology*

*15,949*

* *

*14,169*

* *

*1,780*

* *

*13*

 

**Exchange Rates**

**Php per US$**

 

** **

 

 

 

 

March 31, 2008

Php41.756

 

 

December 31, 2007

41.411

 

 

March 31, 2007

48.217

 

 

December 31, 2006

49.045

 

 

______________

 

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

*(2)    **2007 has been restated toreflect the change in revenue recognition policy for installation fees where weelected to defer and amortize our installation fees and corresponding costsover the expected average period of the customer relationship of our fixed linesubscribers.*

 

**Overview**

 

We are thelargest and most diversified telecommunications company in the Philippines.  We have organized our business into three main segments:

 

•           *Wireless**—***wirelesstelecommunications services provided by Smart Communications, Inc., or Smart,and Pilipino Telephone Corporation, or Piltel, our cellular service providers;Smart Broadband, Inc., or SBI, our wireless broadband provider; Wolfpac Mobile,Inc., or Wolfpac, our wireless content operator; Mabuhay Satellite Corporation,or Mabuhay Satellite and ACeS Philippines Cellular Satellite Corporation, orACeS Philippines, our satellite operator;**

 

•           *Fixed Line**—***fixed linetelecommunications services primarily provided through PLDT.  We also providefixed line services through PLDT’s subsidiaries, PLDT Clark Telecom, Inc., PLDTSubic Telecom, Inc., PLDT-Maratel, Inc., Piltel, PLDT Global Corporation, orPLDT Global, Smart-NTT Multimedia, Inc., and Bonifacio CommunicationsCorporation, which together account for approximately 4% of our consolidatedfixed line subscribers; and

 

•           *Information and CommunicationsTechnology, or ICT**—***information and communications infrastructure andservices for internet applications, internet protocol, or IP-based solutionsand multimedia content delivery provided by ePLDT, Inc., or ePLDT; knowledgeprocessing solutions provided by SPi Technologies, Inc. and its subsidiaries,or SPi Group; customer interaction services provided under the umbrella brandname *ePLDT Ventus*, through ePLDT Ventus, Inc., or Ventus, ParlanceSystems, Inc., or Parlance, and Vocativ Systems, Inc., or Vocativ; internetaccess and online gaming services provided by Infocom Technologies, Inc., orInfocom, Digital Paradise, Inc., or Digital Paradise, Digital ParadiseThailand, Ltd., or Digital Paradise Thailand, netGames, Inc., or netGames,Airborne Access Corporation, or Airborne Access, and Level Up!, Inc., or LevelUp!; and e-commerce, and IT-related services provided by other investees ofePLDT, as discussed in *Note 9 – Investments in Associates and Joint Ventures*to the accompanying unaudited consolidated financial statements. 

** **

Weregistered revenues and other income of Php37,899million in the first quarter of 2008, an increase of Php3,083 million, or 9%, as compared with Php34,816 million in the same period in 2007 primarilydue to a gain on derivative transactions of Php1,777 million and an increase inour service revenues by Php1,862 million largely from our wireless business.  

 

Expenses increasedby Php286 million, or 1%, to Php21,732 million in the first quarter of 2008 from Php21,446 million in the same period in 2007, largelyresulting from increases in depreciation and amortization, selling andpromotions expenses and foreign exchange losses, partly offset by loss onderivative transactions, lower financing costs and cost of sales.

 

Net incomeattributable to equity holders of PLDT increased by Php1,832 million, or 21%, toPhp10,446 million in the first quarter of 2008from Php8,614 million in the same periodin 2007.  Consequently, our basic and diluted earnings per common share increasedto Php54.71 in the first quarter of 2008 fromPhp45.08 and Php44.99 in the same period in 2007, respectively,despite the increase in the weighted average number of common sharesoutstanding from 188.6 million in thefirst quarter of 2007 to 188.9 million inthe same period in 2008.

 

**Resultsof Operations**

** **

The table below shows the contribution by each of ourbusiness segments to our unaudited revenues and other income, expenses and netincome for the three months ended March 31, 2008 and 2007.  Most of ourrevenues and other income are derived from our operations within the Philippines.

** **

 

**Wireless**

** **

** **

** **

**Fixed Line**

** **

** **

** **

**ICT**

** **

 

** **

**Inter-segment Transactions**

** **

**Total**

** **

** **

** **

**(in millions)**

**For the three months ended  March 31, 2008**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

Php23,095

 

 

 

Php14,733

 

 

 

Php2,607

 

 

 

(Php2,536)

 

Php37,899

 

 

Service

22,465

 

 

 

12,367

 

 

 

2,575

 

 

 

(2,474)

 

34,933

 

 

Non-service

344

 

 

 

99

 

 

 

40

 

 

 

(1)

 

482

 

 

Gain (loss) on derivative transactions – net

(124)

 

 

 

1,951

 

 

 

(31)

 

 

 

(19)

 

1,777

 

 

Interest income

310

 

 

 

135

 

 

 

5

 

 

 

–

 

450

 

 

Others 

100

 

 

 

181

 

 

 

18

 

 

 

(42)

 

257

 

 

Expenses

12,047

 

 

 

9,614

 

 

 

2,589

 

 

 

(2,518)

 

21,732

 

 

Income before income tax

11,048

 

 

 

5,119

 

 

 

18

 

 

 

(18)

 

16,167

 

 

Net income for the period

7,072

 

 

 

3,521

 

 

 

32

 

 

 

(18)

 

10,607

 

 

Net income attributable to  equity holders of PLDT

6,906

 

 

 

3,520

 

 

 

38

 

 

 

(18)

 

10,446

 

 

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the three months ended  March 31, 2007**(1) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

22,090

 

 

 

12,372

 

 

 

2,441

 

 

 

(2,087)

 

34,816

 

 

Service

20,811

 

 

 

11,887

 

 

 

2,425

 

 

 

(2,052)

 

33,071

 

 

Non-service

576

 

 

 

15

 

 

 

33

 

 

 

(11)

 

613

 

 

Gain on derivative transactions – net

–

 

 

 

–

 

 

 

–

 

 

 

–

 

–

 

 

Interest income

275

 

 

 

55

 

 

 

3

 

 

 

–

 

333

 

 

Foreign exchange gains (losses) – net

365

 

 

 

251

 

 

 

(28)

 

 

 

–

 

588

 

 

Others

63

 

 

 

164

 

 

 

8

 

 

 

(24)

 

211

 

 

Expenses

11,506

 

 

 

9,736

 

 

 

2,291

 

 

 

(2,087)

 

21,446

 

 

Income before income tax

10,584

 

 

 

2,636

 

 

 

150

 

 

 

–

 

13,370

 

 

Net income for the period

6,894

 

 

 

1,717

 

 

 

159

 

 

 

–

 

8,770

 

 

Net income attributable to  equity holders of PLDT

6,729

 

 

 

1,717

 

 

 

168

 

 

 

–

 

8,614

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Increase (Decrease)**

**Amount**

** **

**%**

** **

**Amount**

** **

**%**

** **

**Amount**

** **

**%**

** **

**Amount**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

Php1,005

 

5

 

Php2,361

 

19

 

Php166

 

7

 

(Php449)

 

Php3,083

 

9

Service

1,654

 

8

 

480

 

4

 

150

 

6

 

(422)

 

1,862

 

6

Non-service

(232)

 

(40)

 

84

 

560

 

7

 

21

 

10

 

(131)

 

(21)

Gain (loss) on derivative transactions – net

(124)

 

(100)

 

1,951

 

100

 

(31)

 

(100)

 

(19)

 

1,777

 

100

Interest income

35

 

13

 

80

 

145

 

2

 

67

 

–

 

117

 

35

Foreign exchange gains (losses) – net

(365)

 

(100)

 

(251)

 

(100)

 

28

 

100

 

–

 

(588)

 

(100)

Others

37

 

59

 

17

 

10

 

10

 

125

 

(18)

 

46

 

22

Expenses

541

 

5

 

(122)

 

(1)

 

298

 

13

 

(431)

 

286

 

1

Income before income tax

464

 

4

 

2,483

 

94

 

(132)

 

(88)

 

(18)

 

2,797

 

21

Net income for the period

178

 

3

 

1,804

 

105

 

(127)

 

(80)

 

(18)

 

1,837

 

21

Net income attributable to equity holders of PLDT

177

 

3

 

1,803

 

105

 

(130)

 

(77)

 

(18)

 

1,832

 

21

**____________**

*(1)**2007 has been restated to reflect the change in revenuerecognition policy for installation fees where we elected to defer and amortizeour installation fees and corresponding costs over the expected average periodof the customer relationship of our fixed line subscribers.*
****
** **

*Wireless*
 

***Total Revenues and Other Income***

 

Ourwireless business segment offers cellular services as well as wirelessbroadband, satellite and other services.

 

Thefollowing table summarizes our unaudited total revenues and other income fromour wireless business for the three months ended March 31, 2008 and 2007 byservice segment:

 

** **

**Three Months Ended March 31,**

 
** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 
** **

**2008**

** **

**%**

** **

**2007**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 
 

 

 

 

 

 

 

 

 

 

 

 

Wireless Services:

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php21,147

 

91

 

Php19,923

 

90

 

Php1,224

 

6

Wireless broadband, satellite and others

1,318

 

6

 

888

 

4

 

430

 

48

 

22,465

 

97

 

20,811

 

94

 

1,654

 

8

Non-Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

344

 

2

 

576

 

3

 

(232)

 

(40)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

310

 

1

 

275

 

1

 

35

 

13

Foreign exchange gains – net

–

 

–

 

365

 

2

 

(365)

 

(100)

Loss on derivative transactions – net

(124)

 

(1)

 

–

 

–

 

(124)

 

(100)

Others 

100

 

1

 

63

 

–

 

37

 

59

 

 

 

 

 

 

 

 

 

 

 

 

Total Wireless Revenues and Other Income

Php23,095

 

100

 

Php22,090

 

100

 

Php1,005

 

5

 

***Service Revenues***

 

Ourwireless service revenues increased by Php1,654 million, or 8%, to Php22,465million in the first quarter of 2008 as compared with Php20,811 million in thesame period in 2007, mainly as a result of the growth in the cellular andwireless broadband subscriber base.  Short messaging service, or SMS, and datarevenues benefited from the larger subscriber base; voice revenues remainedflat, however, as the unfavorable effect of a lower average Philippine peso tothe U.S. dollar exchange rata on our dollar-linked revenues offset the increasein call volumes.  As a percentage of our total wireless revenues and otherincome, service revenues contributed 97% in the first quarter of 2008 ascompared with 94% in the same period in 2007. 

 

*Cellular Service*

 

Ourcellular service revenues consist of: (i) revenues derived from actual usage ofthe network by prepaid subscribers and any unused peso value of expired prepaidcards or electronic air time loads, net of content costs and discounts given todealers and retailers; (ii) monthly service fees from postpaid subscribers,including (a) toll charges for national and international long distance calls;(b) charges for calls and text messages in excess of allocated free local callsand text messages, respectively; and (c) charges for value-added services, netof related content provider costs; (iii) revenues generated from incoming callsand messages to our subscribers, net of interconnection expenses, fees fromreciprocal traffic from international correspondents, and revenues from inboundinternational roaming services; and (iv) other charges, including those forreconnection and migration. 

 

Ourcellular service revenues in the first quarter of 2008 amounted to Php21,147million, an increase of Php1,224 million, or 6%, from Php19,923 million in thesame period in 2007.  Cellular service revenues accounted for 94% of ourwireless service revenues in the first quarter of 2008 as compared with 96% in thesame period in 2007.  

 

Smart markets cellular communications servicesnationwide under the brand names *Smart Buddy, Smart Gold* and *SmartInfinity.  Smart Buddy*is a prepaid service while *Smart Gold*and*Smart Infinity* are postpaid services, which are all provided throughSmart's digital network.  Piltel markets its cellular prepaid service under thebrand name *Talk ‘N Text* which is also provided through Smart’s network.

 

Smartand Piltel have focused on segmenting the market by offering sector-specific,value-driven packages for its prepaid subscribers.  These include new varietiesof our top-up service which provide a fixed number of messages with prescribedvalidity periods and call packages which allow a fixed number of calls ofpreset duration.  Starting out as purely on-network (Smart-to-Smart) packages,Smart’s top-up services now offer text message bundles available to allnetworks.  Smart also continues to offer *Smart 258*, aregistration-based service which offers unlimited on-network (Smart-to-Smart)text messaging in various load denominations with designated expirationperiods.  

 

Smartalso has a roster of 3G services which include video calling, video streaming,high-speed internet browsing and downloading of special 3G content, offered atrates similar to those of 2G services.

 

Thefollowing table summarizes the unaudited key measures of our cellular businessas at and for the three months ended March 31, 2008 and 2007:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

** **

**(in millions)**

 

 

 

 

 

 

 

 

Cellular service revenues 

Php21,147

 

Php19,923

 

Php1,224

 

6

 

 

 

 

 

 

 

 

*By service type*

*20,611*

* *

*19,391*

* *

*1,220*

* *

*6*

Prepaid

19,096

 

17,962

 

1,134

 

6

Postpaid

1,515

 

1,429

 

86

 

6

* *

* *

* *

* *

* *

* *

* *

* *

*By component*

*20,611*

* *

*19,391*

* *

*1,220*

* *

*6*

Voice 

8,889

 

8,874

 

15

 

–

Data

11,722

 

10,517

 

1,205

 

11

* *

* *

* *

* *

* *

* *

* *

* *

*Others*(1)

*536*

* *

*532*

* *

*4*

* *

*1*

____________

 

 

 

 

 

 

 

* *

*(1)     **Refers to othernon-subscriber-related revenues consisting primarily of inbound internationalroaming fees, revenues from Smart’s public calling offices and a small numberof leased line contracts, revenues from Wolfpac and other Smart subsidiariesand revenue share in PLDT’s WeRoam and PLDT Landline Plus services.*

 

 

**As at March 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

 

 

 

 

 

Cellular subscriber base 

31,575,959

 

25,483,459

 

6,092,500

 

24

Prepaid 

31,232,962

 

25,157,975

 

6,074,987

 

24

*Smart*

*20,279,368*

* *

*17,762,723*

* *

*2,516,645*

* *

*14*

*Piltel*

*10,953,594*

* *

*7,395,252*

* *

*3,558,342*

* *

*48*

Postpaid

342,997

 

325,484

 

17,513

 

5

 

** **

 

**Three Months Ended March 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

 

 

 

 

 

Systemwide traffic volumes (in millions)

 

 

 

 

 

 

 

Calls (in minutes) 

1,612

 

1,470

 

142

 

10

Domestic – outbound

949

 

872

 

77

 

9

International

663

 

598

 

65

 

11

*Inbound*

*609*

* *

*551*

* *

*58*

* *

*11*

*Outbound*

*54*

* *

*47*

* *

*7*

* *

*15*

 

 

 

 

 

 

 

 

SMS count

55,908

 

56,357

 

(449)

 

(1)

Text messages

55,493

 

55,783

 

(290)

 

(1)

*Standard*

*5,884*

* *

*6,911*

* *

*(1,027)*

* *

*(15)*

*Bucket-Priced*

*49,539*

* *

*48,810*

* *

*729*

* *

*1*

*International*

*70*

* *

*62*

* *

*8*

* *

*13*

Value-Added Services

407

 

563

 

(156)

 

(28)

Financial Services

8

 

11

 

(3)

 

(27)

 

Revenuesattributable to our cellular prepaid service amounted to Php19,096 million in thefirst quarter of 2008, a 6% increase over the Php17,962 million earned in thesame period in 2007.  Prepaid service revenues in the first quarter of 2008 and2007 accounted for 93% of voice and data revenues.  Revenues attributable toSmart’s postpaid service amounted to Php1,515 million in the first quarter of2008, a 6% increase over the Php1,429 million earned in the same period in 2007,and accounted for 7% of voice and data revenues in the first quarter of 2008and 2007.

* *

*VoiceServices*

* *

Cellularrevenues from voice services, which include all voice traffic and voicevalue-added services such as voice mail and international roaming, increased byPhp15 million to Php8,889 million in the first quarter of 2008 from Php8,874million in the same period in 2007 primarily due to an increase in outbounddomestic call traffic as well as in outbound and inbound international traffic,partly offset by the unfavorable effect on international revenues of a lowerPhilippine peso to the U.S. dollar exchange rate.  Cellular voice servicesaccounted for 42% of cellular service revenues in the first quarter of 2008 ascompared with 45% in the same period in 2007.

 

Air time rates for postpaidsubscribers vary depending on the type of postpaid plan selected bysubscribers.  

 

*DataServices*

 

Cellularrevenues from data services, whichinclude all text messaging-related services as well as value-added services,increased by Php1,205 million, or 11%, to Php11,722 million in the firstquarter of 2008 from Php10,517 million in the same period in 2007.  Cellulardata services accounted for 55% of cellular service revenues in the firstquarter of 2008 as compared with 53% in the same period in 2007.  

 

Thefollowing table shows the breakdown of our unaudited cellular data revenues forthe three months ended March 31, 2008 and 2007:

* *

** **

**Three Months Ended March 31,**

** **

** **

** **

**Increase (Decrease)**

** **

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

** **

**(in millions)**

Text messaging

 

 

 

 

 

 

 

Domestic 

Php10,659

 

Php9,270

 

Php1,389

 

15

*Standard*

*4,313*

* *

*5,536*

* *

*(1,223)*

* *

*(22)*

*Bucket-Priced*

*6,346*

* *

*3,734*

* *

*2,612*

* *

*70*

International

465

 

425

 

40

 

9

 

11,124

 

9,695

 

1,429

 

15

Value-added services

 

 

 

 

 

 

 

Standard(1)

360

 

552

 

(192)

 

(35)

Rich Media(2)

103

 

67

 

36

 

54

*Pasa Load*

120

 

182

 

(62)

 

(34)

 

583

 

801

 

(218)

 

(27)

Financial services

 

 

 

 

 

 

 

*Smart Money*

14

 

20

 

(6)

 

(30)

Mobile Banking

1

 

1

 

–

 

–

 

15

 

21

 

(6)

 

(29)

 

 

 

 

 

 

 

 

Total 

Php11,722

 

Php10,517

 

Php1,205

 

11

__________

*(1)  **Includes standard servicessuch as info-on-demand, ringtone and logo download, etc.*

*(2)  **Includes MultimediaMessaging System, Wireless Application Protocol, General Packet Radio Service,or GPRS, etc.*

 

Textmessaging-related services contributed revenues of Php11,124 million in thefirst quarter of 2008, an increase of Php1,429 million, or 15%, compared withPhp9,695 million in the same period in 2007, and accounted for 95% and 92% ofthe total cellular data revenues in the first quarter of 2008 and 2007,respectively.  The increase in revenues from text messaging-related services resulted mainly from Smart’s variousbucket-priced text promotional offerings which more than offset the decline inour standard texting services.  Text messaging revenues from the various bucketplans totaled Php6,346 million in the first quarter of 2008, an increase of Php2,612million, or 70%, compared with Php3,734 million in the same period in 2007.  Onthe other hand, standard text messaging revenues declined by Php1,223 million,or 22%, to Php4,313 million in the first quarter of 2008 compared with Php5,536million in the same period in 2007.

 

Standardtext messages totaled 5,884 million in the first quarter of 2008, a decrease of1,027 million, or 15%, from 6,911 million in the same period in 2007 mainly dueto a shift to bucket-priced text services.  Bucket-pricedtext**messages in the first quarterof 2008 totaled 49,539 million, an increase of 729 million, or 1%, as compared with48,810 million in the same period in 2007.  The minimal growth in bucket-pricedtext traffic is reflective of a shift from unlimited text packages to low-denominationtext packages with a fixed number of SMS, resulting in improved yield per SMS andincreased text revenues.

 

Value-addedservices, which contributed revenues ofPhp583 million in the first quarter of 2008, decreased by Php218 million, or 27%,from Php801 million in the same period in 2007 primarily due to lower usage ofstandard services and *Pasa Load*owing to the introduction oflow-denomination top-ups, partially offset by higher usage of rich media servicesin the first quarter of 2008 as compared with the same period in 2007.

 

*Subscriber Base, ARPU and Churn Rates*

 

In thefirst quarter of 2008, Smart and Piltel cellular subscribers totaled 31,575,959,an increase of 6,092,500, or 24%, over their combined cellular subscriber baseof 25,483,459 in the same period in 2007.  Prepaid subscribers accounted for99% of our total subscriber base in the first quarter of 2008 and 2007.  Ourcellular prepaid subscriber base grew by 24% to 31,232,962 in the first quarterof 2008 from 25,157,975 in the same period in 2007, while our postpaidsubscriber base increased by 5% to 342,997 in the first quarter of 2008 from 325,484in the same period in 2007.  Prepaid and postpaid subscribers reflected netsubscriber activations of 1,533,812 and 1,117, respectively, in the firstquarter of 2008.  

 

Our netsubscriber activations for the three months ended March 31, 2008 and 2007 wereas follows:

** **

 

**Three Months Ended March 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

 

(Unaudited)

Prepaid

 

 

 

 

 

 

 

Smart

282,044

 

880,281

 

(598,237)

 

(68)

Piltel

1,251,768

 

420,873

 

830,895

 

197

** **

 

 

 

 

 

 

 

Postpaid

1,117

 

6,921

 

(5,804)

 

(84)

 

 

 

 

 

 

 

 

Total

1,534,929

 

1,308,075

 

226,854

 

17

 

The following table summarizes our cellular ARPUs forthe three months ended March 31, 2008 and 2007:

 

 

**Three Months Ended March 31,**

 

**Gross**

** **

**Decrease**

** **

**Net**

 

**Decrease**

 

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

** **

**2008**

** **

**2007**

 

**Amount**

 

**%**

 

 

Prepaid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Smart

Php292

Php323

 

(Php31)

 

(10)

 

Php230

 

Php267

 

(Php37)

 

(14)

Piltel

207

228

 

(21)

 

(9)

 

163

 

187

 

(24)

 

(13)

Prepaid – Blended

263

295

 

(32)

 

(11)

 

207

 

244

 

(37)

 

(15)

Postpaid – Smart

2,013

2,045

 

(32)

 

(2)

 

1,472

 

1,483

 

(11)

 

(1)

Prepaid and Postpaid Blended

283

318

 

(35)

 

(11)

 

221

 

260

 

(39)

 

(15)

 

ARPU iscomputed for each month by dividing the revenues for the relevant services forthe month by the average of the number of subscribers at the beginning and atthe end of the month.  Gross monthly ARPU is computed by dividing the revenuesfor the relevant services, gross of discounts and allocated content-providercosts, including interconnection income but excluding inbound roaming revenues,by the average number of subscribers.  Net monthly ARPU, on the other hand, iscalculated based on revenues net of discounts and allocated content-providercosts and interconnection income net of interconnection expense.  ARPU for anyperiod of more than one month is calculated as the simple average of themonthly ARPUs in that period.

 

Prepaid service revenues consist mainly of charges forsubscribers’ actual usage of their loads.  Prepaid blended ARPU in the firstquarter of 2008 was Php263, a decrease of 11%, compared with Php295 in the sameperiod in 2007.  The average outbound domestic and international voice as wellas the average value-added services and inbound revenue per subscriber declinedin the first quarter of 2008 compared with the same period in 2007.  On a netbasis, prepaid blended ARPU in the first quarter of 2008 was Php207, a decreaseof 15%, compared with Php244 in the same period in 2007.  

 

MonthlyARPU for Smart’s postpaid services is calculated in a manner similar to that ofprepaid service, except that the revenues consist mainly of monthly servicefees and charges on usage in excess of the monthly service fees.  

 

Grossmonthly ARPU for postpaid subscribers decreased by 2% to Php2,013 while netmonthly ARPU decreased by 1% to Php1,472 in the first quarter of 2008 ascompared with Php2,045 and Php1,483 in the same period in 2007, respectively.Prepaid and postpaid monthly gross blended ARPU was Php283 in the first quarterof 2008, a decrease of 11%, compared with Php318 in the same period in 2007.Monthly net blended ARPU decreased by 15% to Php221 in the first quarter of2008 as compared with Php260 in the same period in 2007.

 

Our quarterly prepaid and postpaid ARPUs for the three months ended March31, 2008 and 2007 were as follows:

*** ***

 

**Prepaid**

** **

**Postpaid**

 

**Smart**

** **

**Piltel**

** **

**Smart**

 

**Gross**

** **

**Net**

** **

**Gross**

** **

**Net**

** **

**Gross**

** **

**Net**

** **

 

**2008**

 

 

 

 

 

 

 

 

 

 

 

First Quarter

Php292

 

Php230

 

Php207

 

Php163

 

Php2,013

 

Php1,472

** **

 

 

 

 

 

 

 

 

 

 

 

**2007**

 

 

 

 

 

 

 

 

 

 

 

First Quarter

Php323

 

Php267

 

Php228

 

Php187

 

Php2,045

 

Php1,483

Second Quarter

324

 

265

 

233

 

198

 

2,141

 

1,526

Third Quarter

293

 

239

 

206

 

173

 

2,073

 

1,464

Fourth Quarter 

307

 

244

 

216

 

177

 

2,105

 

1,467

 

Churn, or the rate at which existing subscribers havetheir service cancelled in a given period, is computed based on totaldisconnections in the period, net of reconnections in the case of postpaidsubscribers, divided by the average of the number of subscribers at thebeginning and at the end of a month, all divided by the number of months in thesame period.

 

Werecognize a prepaid cellular subscriber as an active subscriber when thatsubscriber activates and uses the SIM card in the subscriber’s handset, whichcontains pre-stored air time.  The pre-stored air time, which is equivalent toPhp1 plus 50 free SMS for *Smart Buddy* and 25 free SMS for *Talk ‘NText*, can only be used upon purchase or reload of air time of any value.Subscribers can reload their air time by purchasing prepaid “call and text”cards; by purchasing additional air time “over the air” via *Smart**Load,**All Text* or *Smart Connect*; and by receiving loads of Php2, Php5,Php10 and Php15 via *Pasa**Load*, or through their handsets using *SmartMoney*.  Reloads have validity periods ranging from one day to two months,depending on the amount reloaded.  A prepaid cellular subscriber isdisconnected if the subscriber does not reload within four months after thefull usage or expiry of the last reload.  Our current policy is to recognize aprepaid subscriber as “active” only when the subscriber activates and uses theSIM card and reloads at least once during the month of initial activation or inthe immediate succeeding month.    

 

For Smartprepaid, the average monthly churn rate for the first quarter of 2008 and 2007were 4.7% and 2.7%, respectively, while the average monthly churn rate for *Talk‘N Text* subscribers in the first quarter of 2008 and 2007 were 4.1% and 3.4%,respectively.  

 

The averagemonthly churn rate for Smart's postpaid subscribers for the first quarter of2008 was 1.5% compared with 1.1% in the same period in 2007.  Smart's policy isto redirect outgoing calls to an interactive voice response system if thepostpaid subscriber's account is either 45 days overdue or the subscriber hasexceeded the prescribed credit limit.  If the subscriber does not make apayment within 44 days of redirection, the account is disconnected.  Withinthis 44-day period, a series of collection activities are implemented,involving the sending of a collection letter, call-out reminders and collectionmessages via text messaging.

 

*Wireless Broadband, Satellite and Other Services*

 

Ourrevenues from wireless broadband, satellite and other services consist mainly ofrentals received for the lease of Mabuhay Satellite’s transponders, wirelessbroadband service revenues from SBI, charges for ACeS Philippines’ satelliteinformation and messaging services and service revenues generated from PLDTGlobal’s subsidiaries.  Gross revenues from these services for the firstquarter of 2008 amounted to Php1,318 million, an increase of Php430 million, or48%, from Php888 million in the same period in 2007 principally due to the growthin our wireless broadband business partially offset by lower satellitetransponder rental revenues owing to lower rental charges and number oftransponders being leased out, and higher level of the peso appreciation in2007.

 

SBI offersa number of wireless broadband services and had 347,958 subscribers in thefirst quarter of 2008 as compared with 163,799 in the same period in 2007.  *SmartBro*,SBI’s fixed wireless broadband service linked to Smart’s wirelessbroadband-enabled base stations, allows people to connect to the internet usingan outdoor aerial antenna installed in a subscriber’s home.  Wireless broadbandrevenues contributed Php919 million in the first quarter of 2008, increasing byPhp505 million, or 122%, from Php414 million in the same period in 2007.

 

OnNovember 22, 2007, we introduced *SmartBro Plug-It*which offers instantinternet access, through the use of a wireless modem, in places where there isSmart network coverage.  Subscribers to this plan simply have to plug the datamodem in order to access the internet with speeds ranging from 384 to 512kbps.  The monthly service fee of Php799 includes 40 hours per month of freeinternet usage.  A one-time charge for the modem costs Php1,200.  On April 13,2008, we launched the *SmartBro Plug-It Prepaid* which offers 30-minuteinternet access for every Php10 worth of load.  

 

Wealso offer *PLDT WeRoam*, a wireless broadband service, running on thePLDT Group’s nationwide wireless network (using GPRS, EDGE and WiFitechnologies).  Principally targeted at the corporate market, this service had13,541 subscribers in the first quarter of 2008 compared with 11,259subscribers in the same period in 2007 and contributed Php38 million to ourdata revenues, increasing by Php9 million, or 31%, from Php29 million.****

 

***Non-service Revenues***

 

Ourwireless non-service revenues consist of proceeds from sales of cellularhandsets and cellular SIM-packs.

 

Ourwireless non-service revenues decreased by Php232 million, or 40%, to Php344million in the first quarter of 2008 as compared with Php576 million in thesame period in 2007 primarily due to lower average revenue per cellular phonekitand SIM-pack, and a lower quantity of phonekits sold, partly offset by a highervolume of SIM-packs sold in the first quarter of 2008.  

 

***Interest Income***

 

Our wireless interest income increased by Php35million, or 13%, to Php310 million in the first quarter of 2008 as compared withPhp275 million in the same period in 2007 primarily due to a higher average interestrate and higher level of investments in the first quarter of 2008.

 

***Foreign Exchange Gains – net***

 

Foreignexchange gains – net amounted to Php365 million in the first quarter of 2007primarily due to a gain on revaluation of foreign currency-denominated assetsand liabilities mainly as a result of the peso appreciation in the firstquarter of 2007.

 

***Loss on Derivative Transactions – net***

 

Losson derivative transactions – net of Php124 million in the first quarter of 2008relates to the loss in the mark-to-market valuation of forward contracts andembedded derivatives on service and purchase contracts.

 

***Others***

 

Allother income/gains such as rental income, gain on disposal of property areincluded under this classification.  Our wireless business segment generatedother income of Php100 million in the first quarter of 2008, an increase ofPhp37 million, or 59%, as compared with Php63 million in the same period in2007 primarily due to recovery of inventory losses and increase in rentalincome, partly offset by lower gain on disposal of fixed assets. 

 

***Expenses***

 

Expensesassociated with our wireless business in the first quarter of 2008 amounted toPhp12,047 million, an increase of Php541 million, or 5%, from Php11,506 millionin the same period in 2007.  A significant portion of this increase wasattributable to higher rent, selling and promotions expenses, and depreciationand amortization, partially offset by lower cost of sales and financing costs.As a percentage of our total wireless revenues, expenses associated with ourwireless business accounted for 52% in the first quarter of 2008 and 2007.

 

Cellularbusiness expenses accounted for 91% of our wireless business expenses, whilewireless broadband, satellite and other business expenses accounted for theremaining 9% of our wireless business expenses in the first quarter of 2008compared with 94% and 6%, respectively, in the same period in 2007.

 

The following table summarizes the breakdown of our unaudited totalwireless-related expenses for the three months ended March 31, 2008 and 2007and the percentage of each expense item to the total:

 

 

**Three Months Ended March 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2008**

 

**%**

 

**2007**

 

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

** **

 

Wireless Services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php3,154

 

26

 

Php2,925

 

25

 

Php229

 

8

Rent

2,295

 

19

 

1,989

 

17

 

306

 

15

Compensation and employee benefits(1)

1,242

 

10

 

1,216

 

11

 

26

 

2

Selling and promotions

1,108

 

9

 

873

 

8

 

235

 

27

Repairs and maintenance

1,056

 

9

 

897

 

8

 

159

 

18

Cost of sales

779

 

7

 

1,149

 

10

 

(370)

 

(32)

Professional and other contracted services

594

 

5

 

565

 

5

 

29

 

5

Taxes and licenses

502

 

4

 

354

 

3

 

148

 

42

Financing costs – net

497

 

4

 

621

 

5

 

(124)

 

(20)

Communication, training and travel

239

 

2

 

239

 

2

 

–

 

–

Insurance and security services

172

 

1

 

198

 

2

 

(26)

 

(13)

Asset impairment

61

 

1

 

109

 

1

 

(48)

 

(44)

Amortization of intangible assets

33

 

–

 

42

 

–

 

(9)

 

(21)

Foreign exchanges losses – net

19

 

–

 

–

 

–

 

19

 

100

Gain on derivative transactions – net

–

 

–

 

(13)

 

–

 

13

 

100

Other expenses

296

 

3

 

342

 

3

 

(46)

 

(13)

Total 

Php12,047

 

100

 

Php11,506

 

100

 

Php541

 

5

__________

*(1)    **Includes salaries andemployee benefits, long-term incentive plan, or LTIP, pension and manpowerrightsizing program, or MRP, costs.*

 

Depreciation and amortization charges increased by Php229million, or 8%, to Php3,154 million in the first quarter of 2008 principallydue to an increase in our depreciable asset base mainly transmissionfacilities, 2G, 3G and broadband networks, and broadband customer-deployedequipment.

 

Rentexpenses increased by Php306 million, or 15%, to Php2,295 million on account ofan increase in DFON facilities and transmission circuits leased by Smart fromPLDT, as well as higher site rental expenses.  In the first quarter of 2008, wehad 5,116 GSM cell sites and 7,893 base stations, compared with 4,390 GSM cellsites and 7,194 base stations in the same period in 2007.

 

Compensationand employee benefits expenses increased by Php26 million, or 2%, to Php1,242million primarily due to higher accrued bonuses and employees’ basic payincrease of Smart partly offset by lower LTIP costs as a result of a pricedecrease in PLDT shares.  Smart and subsidiaries’ employee headcount increasedby 100 to 5,395 in the first quarter of 2008 as compared with 5,295 in the sameperiod in 2007.  For further discussion on our LTIP, please see *Note 23 –****Share-based Payments and**Employee Benefits* to theaccompanying unaudited consolidated financial statements.

 

Selling andpromotion expenses increased by Php235 million, or 27%, to Php1,108 million dueto higher advertising, promotion and commission expenses, partly offset bydecreases in public relations expense and printing cost of prepaid cards withthe prevalence of e-loading.

 

Repairs and maintenance expenses increasedby Php159 million, or 18%, to Php1,056 million mainly due to an increase insoftware and network repairs and maintenance costs, partly offset by a decreasein fuel costs for power generation.

 

Cost of sales decreased by Php370 million, or 32%, toPhp779 million due to a lower average cost of cellular phonekits and SIM-packs,as well as a lower quantity of phonekits sold.  

 

Professionaland other contracted services increased by Php29 million, or 5%, to Php594million primarily due to higher expenses for outsourced and technical services,partially offset by lower consultancy fees.  Please see *Note 22 – RelatedParty Transactions* to the accompanying unaudited consolidated financialstatements for further discussion.

 

Taxesand licenses increased by Php148 million, or 42%, to Php502 million primarilydue to the imposition of new licenses and fees on telecommunications entities,partly offset by lower non-creditable input tax.

 

Ourfinancing costs – net decreased by Php124 million, or 20%, to Php497 million inthe first quarter of 2008 from Php621 million in the same period in 2007 onaccount of lower interest on loans and related items, lower financing chargesand higher capitalized interest.  

 

Insuranceand security services decreased by Php26 million, or 13%, to Php172 million primarilydue to a decrease in site security expenses and lower charges on insurancecontracts.

 

Assetimpairment decreased by Php48 million, or 44%, to Php61 million mainly due to lowerprovisions for inventory obsolescence in the first quarter of 2008.

 

Amortizationof intangible assets decreased by Php9 million, or 21%, to Php33 million mainlydue to intangible assets relating to customer list arising from the acquisitionof SBI which was fully amortized by August 2007. 

 

Foreignexchange losses – net amounted to Php19 million primarily due to loss onrevaluation of net foreign currency-denominated assets and liabilities due tothe depreciation of the Philippine peso in the first quarter of 2008.

 

Gainon derivative transactions – net of Php13 million in the first quarter of 2007relates to the gain in the mark-to-market valuation of forward contracts andembedded derivatives on service and purchase contracts.

 

Otherexpenses decreased by Php46 million, or 13%,to Php296 million primarily due to lower various business andoperational-related expenses. 

 

***Provision for Income Tax***

 

Provisionfor income tax increased by Php286 million, or 8%, to Php3,976 million in thefirst quarter of 2008 from Php3,690 million in the same period in 2007.  In thefirst quarter of 2008, the effective tax rate for our wireless business was 36%as compared with 35% in the same period in 2007 mainly due to higher non-deductibleexpenses and derecognition of deferred income tax assets by ACeS Philippines inthe first quarter of 2008.

 

***Net Income***

 

Ourwireless business segment recorded a net income of Php7,072 million in thefirst quarter of 2008, an increase of Php178 million, or 3%, over Php6,894million registered in the same period in 2007 on account of an 8% increase inwireless service revenues, partially offset by a 5% increase inwireless-related expenses and higher provision for income tax. 

 

*Fixed Line*
 

***Total Revenues and Other Income***

*** ***

Revenues andother income generated from our fixed line business in the first quarter of2008 totaled Php14,733 million, an increase of Php2,361 million, or 19%, fromPhp12,372 million in the same period in 2007.  

 

Thefollowing table summarizes the unaudited revenues and other income of our fixedline business for the three months ended March 31, 2008 and 2007 by servicesegment:

 

 

**Three Months Ended March 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2008**

** **

**%**

** **

**2007**

** **

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

** **

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php4,085

 

28

 

Php3,964

 

32

 

Php121

 

3

International long distance

1,835

 

12

 

2,400

 

19

 

(565)

 

(24)

National long distance

1,695

 

12

 

1,593

 

13

 

102

 

6

Data and other network

4,392

 

30

 

3,563

 

29

 

829

 

23

Miscellaneous

360

 

2

 

367

 

3

 

(7)

 

(2)

 

12,367

 

84

 

11,887

 

96

 

480

 

4

Non-service revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of computers

99

 

1

 

15

 

–

 

84

 

560

Gain on derivative transactions –net

1,951

 

13

 

–

 

–

 

1,951

 

100

Interest income

135

 

1

 

55

 

1

 

80

 

145

Foreign exchange gains –net

–

 

–

 

251

 

2

 

(251)

 

(100)

Others 

181

 

1

 

164

 

1

 

17

 

10

 

 

 

 

 

 

 

 

 

 

 

 

Total Fixed Line Revenues and Other Income

Php14,733

 

100

 

Php12,372

 

100

 

Php2,361

 

19

 

***Service Revenues***

*** ***

Our fixed line business provides local exchangeservice, international and national long distance services, data and othernetwork services, and miscellaneous services.  Our fixed line service revenues increased by Php480 million, or 4%, toPhp12,367 million in the first quarter of 2008 from Php11,887 million in thesame period in 2007 primarily due to an increase in our data and other networkservice as a result of higher revenues contributed by our DSL and Diginetservices, as well as increases in our local exchange and national long distanceservices, partially offset by a decrease in our international long distance andmiscellaneous services.

*** ***

*Local Exchange Service*

 

Ourlocal exchange service revenues consist of: (i) flat monthly fees for ourpostpaid and fixed charges for our bundled voice and data services; (ii) amortizationof installation charges and other one-time fees associated with theestablishment of customer service; (iii) revenues from usage of prepaid cardsfor calls within the local area and any unused peso value of expired prepaidcards; and (iv) charges for special features, including bundled value-addedservices such as call waiting, call forwarding, multi-party conference calling,speed calling and caller ID. 

 

Thefollowing table summarizes the unaudited key measures of our local exchangeservice business as at and for the three months ended March 31, 2008 and 2007:

 

 

**Three Months Ended March 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

 

 

Total local exchange service revenues (in millions)

Php4,085

 

Php3,964

 

Php121

 

3

Number of fixed line subscribers

1,763,602

 

1,847,084

 

(83,482)

 

(5)

Postpaid

1,521,159

 

1,476,621

 

44,538

 

3

Prepaid

242,443

 

370,463

 

(128,020)

 

(35)

Number of fixed line employees

8,088

 

8,702

 

(614)

 

(7)

Number of fixed line subscribers per employee

218

 

212

 

6

 

3

 

Revenuesfrom our local exchange service increased by Php121 million, or 3%, to Php4,085million in the first quarter of 2008 from Php3,964 million in the same periodin 2007 primarily due to an increase in the average number of postpaid billedlines as a result of the launching of PLDT Landline Plus and higher bundledvoice and data services, interconnection and service connection charges,partially offset by a decrease in average revenue per minute on account oflower fixed charges.  The percentage contribution of local exchange revenues toour total fixed line service revenues remained at 33% in the first quarter of2008 and 2007.

 

Initiallyintended as an affordable alternative telephone service for consumers underdifficult economic conditions, our prepaid fixed line services**now forman important part of our overall churn and credit risk exposure managementstrategy.  PLDT has consolidated its prepaid fixed line service into *Telepwede*which is funded by e-Loads (available at Smart or PLDT e-Load retailers).  *Telepwede*subscribers are charged Php115 to receive incoming calls and can reload foras low as Php30 to make outgoing calls.  Local call rates are made moreaffordable at Php2 per call, unlimited.  

 

InMarch 2007, PLDT launched the PLDT Landline Plus, a postpaid fixed wirelessservice where subscribers to the service benefit from a text-capable homephone.  The monthly service fee is at Php600 with 600 local minutes free andPhp1,000 with 1,000 local minutes free for residential and businesssubscribers, respectively.  In March 2008, we introduced the prepaidcounterpart of the PLDT Landline Plus.  As at March 31, 2008, there were atotal of 74,896 PLDT Landline Plus subscribers, of which 59,877 and 15,019 werepostpaid and prepaid subscribers, respectively.

 

*InternationalLong Distance Service*

 

Ourinternational long distance service revenues, which we generate through ourinternational gateway facilities, consist of (i) inbound call revenuesrepresenting settlements from foreign telecommunications carriers for inbound internationalcalls, virtual transit and hubbing service and reverse charged calls such asreceived collect and home country direct service; (ii) access charges paid tous by other Philippine telecommunications carriers for terminating inboundinternational calls to our local exchange network; and (iii) outbound callrevenues representing amounts billed to our customers (other than our cellularcustomers) for outbound international calls, net of amounts payable to foreigntelecommunications carriers for terminating calls in their territories.

 

The following table shows our unaudited fixed line international longdistance revenues and call volumes for the three months ended March 31, 2008and 2007:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

 

 

Total international long distance service revenues (in millions)

Php1,835

 

Php2,400

 

(Php565)

 

(24)

Inbound

1,475

 

2,032

 

(557)

 

(27)

Outbound

360

 

368

 

(8)

 

(2)

 

 

 

 

 

 

 

 

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

506

 

577

 

(71)

 

(12)

Inbound

443

 

513

 

(70)

 

(14)

Outbound

63

 

64

 

(1)

 

(2)

Inbound-outbound call ratio

7.0:1

 

8.0:1

 

–

 

–

 

Our totalinternational long distance service revenues decreased by Php565 million, or 24%,to Php1,835 million in the first quarter of 2008 from Php2,400 million in thesame period in 2007 primarily due to the appreciation of the Philippine peso, adecrease in average termination rates for inbound calls and a decrease ininbound and outbound call volumes.  The percentage contribution ofinternational long distance service revenues to our total fixed line servicerevenues decreased to 15% in the first quarter of 2008 from 20% in the sameperiod in 2007.

 

Ourrevenues from inbound international long distance service decreased by Php557million, or 27%, to Php1,475 million owing to the appreciation of thePhilippine peso to the U.S. dollar coupled with a decrease in averagetermination rate per minute due to the change in call mix with more trafficterminating to cellular operators where the net revenue retained by us is lower,as well as a decrease in inbound traffic volume by 70 million minutes to 443million minutes in the first quarter of 2008.  The appreciation of the Philippine peso to the U.S. dollar withaverage exchange rates of Php41.12 in the first quarter of 2008 and Php48.92 inthe same period in 2007 contributed to the decrease in our inboundinternational long distance revenues in peso terms, since settlement chargesfor inbound calls are billed in U.S. dollars or in special drawing rights, anestablished method of settlement among international telecommunicationscarriers using values based on a basket of foreign currencies that aretranslated into pesos at the time of billing. 

 

Ourrevenues from outbound international long distance service decreased by Php8million, or 2%, to Php360 million in the first quarter of 2008 primarily due toa decline in average revenue per minute as a result of a lower averagecollection rate with the introduction of low-rate services such as *PLDTID-DSL* and *Budget Card*, and the appreciation of Philippine peso in2007, which more than offset the increase in outbound international callvolumes in the first quarter of 2008.

 

*NationalLong Distance Service*

 

Ournational long distance service revenues consist of: (i) per minute charges forcalls made by our fixed line customers outside of the local service areas butwithin the Philippines, net of interconnection charges payable for callscarried through the backbone network of, and/or terminating to the customer of,another telecommunications carrier; (ii) access charges received from othertelecommunications carriers for calls carried through our backbone networkand/or terminating to our customers; and (iii) fixed charges paid by othertelephone companies, charges retained by PLDT for calls terminating to cellularsubscribers within the local area, and local access charges paid by cellularoperators for calls by cellular subscribers that terminate to our localexchange network. 

 

The following table shows our unaudited national longdistance service revenues and call volumes for the three months ended March 31,2008 and 2007:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

 

 

Total national long distance service revenues (in millions)

Php1,695

 

Php1,593

 

Php102

 

6

National long distance call volumes (in million minutes)

520

 

540

 

(20)

 

(4)

 

Ournational long distance service revenues increased by Php102 million, or 6%, toPhp1,695 million in the first quarter of 2008 from Php1,593 million in the sameperiod in 2007 primarily due to an increase in average revenue per minute in thefirst quarter of 2008.  The percentage contribution of national long distancerevenues to our fixed line service revenues accounted for 14% in the firstquarter of 2008 and 2007.

 

*Dataand Other Network Services*

 

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

 

The following table shows information about our unauditeddata and other network service revenues for the three months ended March 31,2008 and 2007:

 

** **

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

** **

**2008**

** **

**2007**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

 

 

 

 

Data and other network service revenues (in millions)

 

Php4,392

 

Php3,563

 

Php829

 

23

Number of *DSL* broadband subscribers

 

299,554

 

152,645

 

146,909

 

96

Number of *PLDT Vibe* narrowband subscribers

 

200,862

 

299,832

 

(98,970)

 

(33)

 

Inthe first quarter of 2008, our data and other network services posted revenuesof Php4,392 million, an increase of Php829 million, or 23%, from Php3,563million in the same period in 2007 primarily due to increases in leased lines,IP-based and packet-based data services, particularly Diginet and DFON rental,and PLDT DSL mitigated by lower PLDT Vibe services.  The percentagecontribution of this service segment to our fixed line service revenuesincreased to 35% in the first quarter of 2008 from 30% in the same period in2007.

 

IP-basedproducts include *PLDT**DSL* (*myDSL*and*BizDSL*), *PLDT Vibe* and I-Gate.  *PLDT**DSL*broadband internet service is targeted for heavy individual internetusers as well as for small and medium enterprises, while*PLDT Vibe,*PLDT’s dial-up/narrowband internet service, is targeted for light to mediumresidential or individual internet users.  I-Gate, our dedicated leased lineinternet access service, on the other hand, is targeted at enterprises andvalue-added service providers.  

 

DSLcontributed revenues of Php1,227 million in the first quarter of 2008, anincrease of Php351 million, or 40%, from Php876 million in the same period in2007 primarily due to an increase in the number of subscribers, which waspartially offset by lower ARPU as a result of launching of lower plans as partof promotions.  DSL reached 299,554 subscribers in the first quarter of 2008compared with 152,645 subscribers in the same period in 2007.  

 

*PLDTVibe* revenues decreased by Php35million, or 44%, to Php45 million in the first quarter of 2008 from Php80million in the same period in 2007 primarily due to lower number of plansubscribers as well as the declining usage of *Vibe* prepaid.  *PLDTVibe* subscribers decreased to 200,862 in the first quarter of 2008 from 299,382in the same period in 2007.  The declining number of *Vibe* plans andregular monthly users for *Vibe* prepaid may be attributed to themigration from *Vibe* dial-up to DSL which is now priced morecompetitively.  

 

Thecontinued growth in data services revenues can be attributed to several productofferings.  The steady demand for dedicated connectivity or private networkingfrom the corporate market using PLDT’s traditional international and domesticdata offerings – Fibernet, Arcstar, other Global Service Providers such asBT-infonet, Orange Business and Verizon; ISDN has also taken up muchsubscription from corporate customers, especially the Primary Rate Interfacetype, I-Gate, Diginet, BRAINS, IP-VPN and *Shops.work*, among others –continue to provide us with a stable revenue source.  

 

Diginet,our domestic private leased line service, has been providing Smart’s increasingfiber optic and leased line data requirements.  Diginet revenues increased byPhp306 million, or 19%, to Php1,925 million in the first quarter of 2008 ascompared with Php1,619 million in the same period in 2007 mainly due to Smart’sDFON rental of Php1,458 million and Php1,210 million in the first quarter of 2008and 2007, respectively.

* *

*Miscellaneous*

 

Miscellaneousservice revenues are derived mostly from directory advertising and facilitiesmanagement and rental fees.  In the first quarter of 2008, these revenues decreasedby Php7 million, or 2%, to Php360 million from Php367 million in the sameperiod in 2007 mainly due to a decline in facilities management fees and rentalincome owing to lower co-location charges.  The percentage contribution ofmiscellaneous service revenues to our total fixed line service revenues was 3%in the first quarter of 2008 and 2007.

 

***Non-******serviceRevenues***

 

Non-service revenues increased by Php84 million, or 560%,to Php99 million in the first quarter of 2008 from Php15 million in the sameperiod in 2007 primarily due to an increase in subscriptions for our DSLservice that is bundled with computers and thus resulted in higher computersales.

 

***Gain on Derivative Transactions– net***

 

Werecognized a gain on derivative transactions – net of Php1,951 million in thefirst quarter of 2008, of which Php1,255 million pertain to the gain onmark-to-market valuation of various financial instruments, and Php696 millionpertain to the impact of the de-designation of foreign currency swaps andoption contracts beginning January 1, 2008.  This change in accountingtreatment exposes our profit and loss accounts to the volatility of thefinancial instruments’ fair valuation at certain periods.  Please see *Note 26– Financial Assets and Liabilities* to the accompanying unauditedconsolidated financial statements for further discussion.

*** ***

***Interest Income***

 

Interestincome of our fixed line business segment increased by Php80 million, or 145%,to Php135 million in the first quarter of 2008 from Php55 million in the sameperiod in 2007 primarily due to a higher level of cash balances.

 

***Foreign Exchange Gains – net***

 

Our fixed line foreign exchange gains – net amountedto Php251 million in the first quarter of 2007 primarily due to revaluation ofnet foreign currency-denominated liabilities as a result of the appreciation ofthe Philippine peso to the U.S. dollar in the first quarter of 2007.

 

***Others***

 

All otherincome/gains such as rental income and gain on disposal of property, which donot fall under service and non-service revenues, are included under thisclassification.  In the first quarter of 2008, our fixed line business segmentregistered an increase in other income of Php17 million, or 10%, to Php181million from Php164 million in the same period in 2007 largely due to gain ondisposal of fixed assets.

 

***Expenses***

 

Expensesrelated to our fixed line business totaled Php9,614 million in the firstquarter of 2008, a decrease of Php122 million, or 1%, as compared with Php9,736million in the same period in 2007.  The decrease was primarily due to loss onderivative transactions in 2007, lower financing costs and compensation andemployee benefits, partially offset by higher depreciation and amortization,foreign exchange losses, asset impairment and rent.  

 

The followingtable shows the breakdown of our unaudited fixed line-related expenses for the threemonths ended March 31, 2008 and 2007 and the percentage of each expense item tothe total:

 

** **

**Three Months Ended March 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2008**

 

**%**

 

**2007**

 

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php2,993

 

31

 

Php2,289

 

24

 

Php704

 

31

Compensation and employee benefits(1)

1,916

 

20

 

2,382

 

25

 

(466)

 

(20)

Repairs and maintenance

997

 

10

 

928

 

10

 

69

 

7

Financing costs – net

842

 

9

 

1,424

 

15

 

(582)

 

(41)

Rent

546

 

6

 

423

 

4

 

123

 

29

Professional and other contracted services

444

 

5

 

430

 

4

 

14

 

3

Selling and promotions

409

 

4

 

362

 

4

 

47

 

13

Taxes and licenses

306

 

3

 

235

 

2

 

71

 

30

Foreign exchange losses – net

258

 

3

 

–

 

–

 

258

 

100

Asset impairment

244

 

2

 

114

 

1

 

130

 

114

Communication, training and travel

175

 

2

 

130

 

1

 

45

 

35

Insurance and security services

172

 

2

 

139

 

1

 

33

 

24

Cost of sales

74

 

1

 

47

 

1

 

27

 

57

Loss on derivative transactions – net

–

 

–

 

720

 

7

 

(720)

 

(100)

Provisions

–

 

–

 

9

 

–

 

(9)

 

(100)

Other expenses

238

 

2

 

104

 

1

 

134

 

129

Total 

Php9,614

 

100

 

Php9,736

 

100

 

(Php122)

 

(1)

__________

* *

*(1)****Includes salaries and employee benefits, LTIP, pensionand MRP costs.*

 

Depreciationand amortization charges increased by Php704 million, or 31%, to Php2,993million in the first quarter of 2008 due to higher depreciable asset base fromadditional completed projects.  

 

Compensationand employee benefits expenses decreased by Php466 million, or 20%, to Php1,916million primarily due to a decrease in pension benefits and lower LTIP costs asa result of a decrease in PLDT’s share price.  For further discussion on ourLTIP, please see *Note 23 – Share-based Payments and****EmployeeBenefits* to the accompanying unaudited consolidated financial statements.

 

Repairs andmaintenance expenses increased by Php69 million, or 7%, to Php997 millionprimarily due to higher maintenance costs of IT software and hardware and foreigncable and wire facilities as more operating and maintenance-relatedrestorations were incurred in the first quarter of 2008 as compared with thesame period in 2007.  

 

Financingcosts – net decreased by Php582 million, or 41%, to Php842 million largely dueto lower interest on loans and related items resulting from lower debt levels partiallyoffset by higher financing charges. 

 

Rentexpenses increased by Php123 million, or 29%, to Php546 million due to theincrease in pole rental charges and international leased circuit charges,partially offset by a decrease in transponder lease.

 

Professionaland other contracted services increased by Php14 million, or 3%, to Php444million primarily due to higher contracted fees for technical and advisoryservices, partially offset by lower consultancy service fees.

 

Selling andpromotion expenses increased by Php47 million, or 13%, to Php409 millionprimarily due to higher marketing expenses as a result of the launch of majoradvertising campaigns in the first quarter of 2008, partially offset by acollective effort in efficient media spending in relation to various productsand services.

 

Taxesand licenses increased by Php71 million, or 30%, to Php306 million mainly dueto higher payment of NTC supervision and license fees.

 

Foreignexchange losses – net amounted to Php258 million in the first quarter of 2008primarily due to loss on revaluation of net foreign currency-denominatedliabilities as a result of the depreciation of the Philippine peso in the firstquarter of 2008.

 

Assetimpairment increased by Php130 million, or 114%, to Php244 million mainly dueto higher impairment charge on uncollectible receivables.

 

Communication,training and travel expenses increased by Php45 million, or 35%, to Php175million due to the increase in mailing, courier and delivery charges, partiallyoffset by a net decrease in foreign and local travel, and training expenses.

 

Insuranceand security services increased by Php33 million, or 24%, to Php172 millionprimarily due to higher premiums on property all-risk, industrial all-risk andindustrial fire insurance. 

 

Costof sales increased by Php27 million, or 57%, to Php74 million due to highercomputer-bundled sales in relation to our DSL promotion and *WeRoam*subscriptions.

 

Losson derivative transactions – net amounted to Php720 million in the firstquarter of 2007 primarily due to higher hedging costs and the effect of theappreciation of the Philippine peso against the U.S. dollar.

 

Provisionsamounted to Php9 million in the first quarter of 2007 primarily due toprovision for assessments in 2007.  Please see *Note 25 – Provisions andContingencies* to the accompanying unaudited consolidated financialstatements for further details.

 

Otherexpenses increased by Php134 million, or 129%, to Php238 million due to highervarious business and operational-related expenses.

 

***Provision for Income Tax***

 

Provisionfor income tax amounted to Php1,598 million in the first quarter of 2008 as comparedwith Php919 million in the same period in 2007 primarily due to higher taxableincome.  Effective tax rate is lower at 31% in the first quarter of 2008compared with 35% in the same period in 2007 due to a higher non-taxable incomein the first quarter of 2008.

 

***Net Income***

 

In thefirst quarter of 2008, our fixed line business segment contributed a net incomeof Php3,521 million, an increase of Php1,804 million, or 105%, as compared withPhp1,717 million in the same period in 2007 mainly as a result of a gain onderivative transactions of Php1,951 million.

 

*Information and Communications Technology*
 

***Total Revenues andOther Income***

 

Our ICTbusiness provides knowledge processing solutions, customer interactionservices, internet and online gaming, and data center services.  

 

In thefirst quarter of 2008, our ICT business generated revenues and other income ofPhp2,607 million, an increase of Php166 million, or 7%, from Php2,441 millionin the same period in 2007.  This increase was due to the continued growth ofour customer interaction services.  

 

The following table summarizes the unaudited total revenues and otherincome from our ICT business for the three months ended March 31, 2008 and 2007by service segment:

 

** **

**Three Months Ended March 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2008**

 

**%**

 

**2007**

 

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

** **

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Knowledge processing solutions

Php1,323

 

51

 

Php1,269

 

52

 

Php54

 

4

Customer interaction services

867

 

33

 

782

 

32

 

85

 

11

Internet and online gaming 

242

 

9

 

237

 

10

 

5

 

2

*Vitro*ä data center

143

 

5

 

137

 

6

 

6

 

4

 

2,575

 

98

 

2,425

 

100

 

150

 

6

Non-service revenues

 

 

 

 

 

 

 

 

 

 

 

Point-Product-Sales

40

 

2

 

33

 

1

 

7

 

21

Interest income

5

 

–

 

3

 

–

 

2

 

67

Foreign exchange losses – net

–

 

–

 

(28)

 

(1)

 

28

 

100

Loss on derivative transactions – net

(31)

 

(1)

 

–

 

–

 

(31)

 

(100)

Others 

18

 

1

 

8

 

–

 

10

 

125

 

 

 

 

 

 

 

 

 

 

 

 

Total ICT Revenues and Other Income

Php2,607

 

100

 

Php2,441

 

100

 

Php166

 

7

 

***Service Revenues***

 

Service revenues generated by our ICT business segmentamounted to Php2,575 million in the first quarter of 2008, an increase of Php150million, or 6%, as compared with Php2,425 million in the same period in 2007primarily as a result of the consolidation of financial results of SpringfieldService Corporation, or Springfield, in April 2007 and the continued growth ofour customer interaction services business. 

* *

*Knowledge Processing Solutions*

*** ***

Knowledge processing solution revenues consist of: (i)editorial and content production services to the scholarly scientific,technical and medical (SSTM) journal publishing industry; (ii) digital contentconversion services to information organizations; (iii) pre-press projectmanagement services to book publishers; (iv) litigation support services whichinvolve conventional coding and electronic discovery support services forcorporations, international law firms, corporate counsels and governmentagencies; (v) conversion services of medical record/data from handwritten orspeech format to electronic format and patientscheduling, coding and compliance assistance, consulting and specializedreporting services; and (vi) revenuecycle management services for U.S. medical facilities.

 

Weprovide our knowledge processing solutions primarily through the SPi Group.Knowledge processing solutions contributed revenues of Php1,323 million in thefirst quarter of 2008, an increase of Php54 million, or 4%, from Php1,269million in the same period in 2007 primarily as a result of the effects of theconsolidation of the financial results of Springfield in April 2007.  Knowledgeprocessing solutions accounted for 51% and 52% of total service revenues of ourICT business in the first quarter of 2008 and 2007, respectively.

 

*Customer Interaction Services*

 

Customerinteraction service revenues consist of: (i) handling of inbound calls for customercare, product inquiries, sales and technical support based on active minutes,billable hours and full-time equivalents; (ii) outbound calls for sales andcollections based on active minutes, billable hours and full-time equivalents;and (iii) service income for e-mail handling, web chat, web co-browsing, dataentry and knowledge processing solutions based on transaction volume.

 

We provideour customer interaction services primarily through *ePLDT Ventus*.Revenues relating to our customer interaction services business increased byPhp85 million, or 11%, to Php867 million in the first quarter of 2008 from Php782million in the same period in 2007 primarily due to the expansion of ourfacilities.  In total, we own and operate approximately 6,490 seats with 5,050customer service representatives, or CSRs, in the first quarter of 2008compared with approximately 5,720 seats with 4,620 CSRs in the same period in2007.  In the first quarter of 2008, we have nine customer interaction servicesites.

 

Customerinteraction service revenues accounted for 34% and 32% of total servicerevenues of our ICT business in the first quarter of 2008 and 2007,respectively.

* *

*Internet and Online Gaming*

 

Internet andonline gaming service revenues consist of: (i) revenues derived from actualusage of the internet access network by prepaid subscribers; (ii) monthlyservice fees from postpaid corporate and consumer subscribers; (iii) one-timefees generated from the reselling of internet-related solutions such assecurity solutions and domain registration; (iv) franchise and royalty fees for*Netopia* internet cafés; (v) online gaming revenues from uniquesubscribers, including one-time sale of gaming cards and electronic pins, andtop-up fees upon actual consumption of gaming credits or after expiration ofany unused peso value thereof. 

 

Revenues from our internet and online gamingbusinesses increased by Php5 million, or 2%, to Php242 million in the firstquarter of 2008 from Php237 million in the same period in 2007 primarily due tothe increase in Infocom’s revenues from customer service outsourcing.  Ourinternet and online gaming business revenues accounted for 9% and 10% of totalservice revenues of our ICT business in the first quarter of 2008 and 2007,respectively.

 

*Vitro*ä *Data**Center*

 

ePLDToperates an internet data center under the brand name *Vitro*ä which provides co-location services, server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting andwebhosting, shared applications, data disaster recovery and business continuityservices, intrusion detection, and security services such as firewalls andmanaged firewalls.  

 

*Vitro*ä revenues consist of:(i) monthly service fees derived from co-location services, server hosting,hardware and software maintenance services, website development and maintenanceservices, web hosting, data recovery security services and other value-addedservices; (ii) installation charges or one-time fees associated with the set-upof services and professional services of *Vitro*ä’s certified professionals; and (iii) fees generated from theissuance of digital certificates and revenues derived from IT helpdesk/contactcenter solutions and terminals for credit, debit and credit card transactions.

 

In thefirst quarter of 2008, *Vitro*ä contributedrevenues of Php143 million, an increase of Php6 million, or 4%, from Php137million in the same period in 2007 primarily due to an increase in co-locationrevenues and server hosting.  *Vitro*ä revenues accountedfor 6% of service revenues of our ICT business in the first quarter of 2008 and2007.

 

Pleaserefer to *Note 9 – Investments**in Associates**and Joint Ventures*to the accompanying unaudited consolidated financial statements for furtherdiscussion on ePLDT’s investments.

 

***Non-service Revenues***

 

Non-servicerevenues consist of sales generated from reselling certain software licenses,server solutions, networking products, storage products and data securityproducts.  In the first quarter of 2008, non-service revenues generated by ourICT business increased by Php7 million, or 21%, to Php40 million as comparedwith Php33 million in the same period in 2007 primarily due to higher revenuesfrom sales of software and hardware licenses.

 

***Interest Income***

 

Interestincome for our ICT business segment increased by Php2 million, or 67%, to Php5million in the first quarter of 2008 from Php3 million in the same period in2007 primarily due to a higher level of interest rates.

 

***Loss on DerivativeTransactions – net***

 

Losson derivative transactions – net of Php31 million in the first quarter of 2008was primarily due to loss in the mark-to-market valuation recognized by ourcustomer interaction service and knowledge processing solutions businesses onforward exchange contracts.

 

***Others***

 

Otherincome generated from our ICT business increased by Php10 million, or 125%, toPhp18 million in the first quarter of 2008 as compared with Php8 million in thesame period in 2007 primarily due to the recognition of interest income onePLDT’s investment in convertible securities of Stradcom InternationalHoldings, Inc., or SIHI and gain on disposal of fixed assets.  Please see *Note13 – Investment in Debt Securities* to the accompanying unauditedconsolidated financial statements for further discussion of our investment inStradcom.  

* *

***Expenses***

 

Expenses associated with our ICT businesstotaled Php2,589 million in the first quarter of 2008, an increase of Php298million, or 13%, from Php2,291 million in the same period in 2007 primarily dueto the effects of the consolidation of the financial results of Springfield inApril 2007 resulting in an increase in compensation and employee benefits,financing costs, gain on derivative transactions, amortization of intangibles,and communication, training and travel, partially offset by lower professionaland other contracted services, depreciation and amortization, and assetimpairment.  As a percentage of our ICT total revenues, expenses related to ourICT business were 99% and 94% for in the first quarter of 2008 and 2007,respectively.  

 

The following tableshows the breakdown of our unaudited ICT-related expenses for the three monthsended March 31, 2008 and 2007 and the percentage of each expense item to thetotal:

 

 

**Three Months Ended March 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2008**

 

**%**

 

**2007**

 

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

 

 

ICT services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits(1)

Php1,383

 

53

 

Php1,184

 

52

 

Php199

 

17

Professional and other contracted services

217

 

8

 

320

 

14

 

(103)

 

(32)

Depreciation and amortization

216

 

8

 

234

 

10

 

(18)

 

(8)

Rent

162

 

6

 

152

 

7

 

10

 

7

Repairs and maintenance

133

 

5

 

127

 

6

 

6

 

5

Communication, training and travel

128

 

5

 

102

 

4

 

26

 

25

Selling and promotions

89

 

4

 

65

 

3

 

24

 

37

Amortization of intangible assets

61

 

2

 

34

 

1

 

27

 

79

Financing costs – net

50

 

2

 

8

 

–

 

42

 

525

Taxes and licenses

33

 

1

 

19

 

1

 

14

 

74

Cost of sales

29

 

1

 

24

 

1

 

5

 

21

Insurance and security services

14

 

1

 

11

 

–

 

3

 

27

Foreign exchange losses – net

11

 

1

 

–

 

–

 

11

 

100

Asset impairment

(3)

 

–

 

3

 

–

 

(6)

 

(200)

Gain on derivative transactions – net

–

 

–

 

(42)

 

(1)

 

42

 

100

Other expenses

66

 

3

 

50

 

2

 

16

 

32

Total 

Php2,589

 

100

 

Php2,291

 

100

 

298

 

13

 

__________

*(1)****Includes salaries and employee benefits, incentiveplan, pension and MRP costs.*

 

Compensationand employee benefits increased by Php199 million, or 17%, to Php1,383 millionlargely due to the consolidation of Springfield in April 2007 and the expansionof our customer interaction services business.  

 

Professionaland other contracted services decreased by Php103 million, or 32%, to Php217million primarily due to lower consultancy fees and subcontracted servicesincurred by the SPi Group related to its knowledge processing solutions.

 

Depreciationand amortization charges decreased by Php18 million, or 8%, to Php216 millionprimarily due to a decrease in the depreciable asset base of our customerinteraction services business offset by an increase in asset base brought aboutby the consolidation of Springfield in April 2007.  

 

Rentexpenses increased by Php10 million, or 7%, to Php162 million primarily due tohigher office space rentals and leased circuits from other carriers incurred byour customer interaction services business.

 

Repairsand maintenance expenses increased by Php6 million, or 5%, to Php133 millionprimarily due to higher maintenance costs for new customer interaction servicefacilities and the consolidation of Springfield.

 

Communication,training and travel expenses increased by Php26 million, or 25%, to Php128million primarily due to the increased cost of phone lines, bandwidth andinformation system charges, coupled with the increase in local and foreigntravel costs, and mailing and courier charges incurred by our customer interactionservice and knowledge processing solution businesses. 

 

Selling andpromotion expenses increased by Php24 million, or 37%, to Php89 million mainlydue to the SPi Group’s higher advertising and marketing spending.

 

Amortizationof intangible assets increased by Php27 million, or 79%, to Php61 million inrelation to the acquisition of the SPi Group and Level Up!, as well as theacquisition of Springfield by SPi in April 2007.  Please see *Note 11 –Goodwill and Intangible Assets* to theaccompanying unaudited consolidated financial statements for further discussion.  

 

Financingcosts – net increased by Php42 million, or 525%, to Php50 million in the firstquarter of 2008 primarily due to a higher accretion on financial liabilitiesparticularly the contingent consideration in relation to the Springfieldacquisition in 2007 and a higher interest on loans and related items.

 

Taxesand licenses increased by Php14 million, or 74%, to Php33 million primarily dueto the consolidation of Springfield in April 2007 and higher business-relatedtaxes.

 

Costof sales increased by Php5 million, or 21%, to Php29 million primarily due to highersales of software licenses and hardware products.

 

Insuranceand security services increased by Php3 million, or 27%, to Php14 millionprimarily due to higher premium costs and an increase in the value of assetsinsured.

 

Foreignexchange losses – net of Php11 million was primarily due to the loss onrevaluation of net foreign currency-denominated liabilities due to the depreciationof the Philippine peso in the first quarter of 2008.

 

Other expenses increased by Php16 million,or 32%, to Php66 million mainly due to higher business-related costs, such asoffice supplies.

 

***Benefit from Income Tax***

 

Benefit from income tax increasedby Php5 million, or 56%, to Php14 million in the first quarter of 2008primarily due to the corresponding deferred tax effect of the amortization ofintangible assets.  

 

***Net Income***

 

In thefirst quarter of 2008, our ICT business segment registered a net income of Php32million, a decrease of Php127 million, or 80%, from Php159 million in the sameperiod in 2007 mainly as a result of the 13% increase in ICT-related expenses,partly offset by the 9% increase in ICT-related revenues and other income andhigher benefit from income tax in the first quarter of 2008. 

 

**Liquidity and CapitalResources**

 

The following table shows our consolidated cash flowsfor the three months ended March 31, 2008 and 2007 as well as our consolidatedcapitalization and other selected financial data as at March 31, 2008 andDecember 31, 2007:

 

 

**Three Months Ended March 31,**

 

**2008**

 

**2007**

** **

**(in millions)**

**Cash Flows**

 

 

 

Net cash provided by operating activities

Php22,169

 

Php25,189

Net cash used in investing activities

12,919

 

13,667

*Capital expenditures*

*3,051*

* *

*5,937*

Net cash used in financing activities

159

 

6,122

Net increase in cash and cash equivalents

9,062

 

5,439

 

** **

 

** **

 

**March 31,**

** **

**December 31,**

 

**2008**

 

**2007**

 

**(in millions)**

**Capitalization**

 

 

 

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

 

 

 

Long-term debt

Php55,471

 

Php53,372

Obligations under capital lease

12

 

15

 

55,483

 

53,387

 

 

 

 

Current portion of interest-bearing financial liabilities: 

 

 

 

Notes payable

569

 

493

Long-term debt maturing within one year

7,459

 

6,775

Obligations under capital lease maturing within one year

192

 

481

Preferred stock subject to mandatory redemption 

652

 

1,015

 

8,872

 

8,764

Total interest-bearing financial liabilities

64,355

 

62,151

Total equity

99,339

 

112,511

 

Php163,694

 

Php174,662

** **

 

 

 

**Other Financial Data**

 

 

 

Total assets

Php253,496

 

Php240,158

Property, plant and equipment - net

156,112

 

159,414

Cash and cash equivalents

26,509

 

17,447

Short-term investments

24,382

 

13,415

 

As at March31, 2008, our consolidated cash and cash equivalents and short-term investmentstotaled Php50,891 million.  Principal sources of consolidated cash and cashequivalents in the first quarter of 2008 were cash flows from operatingactivities amounting to Php22,169 million and drawings from PLDT’s, Smart’s andePLDT’s debt facilities aggregating Php4,248 million.  These funds were usedprincipally for capital outlays of Php3,051 million, total debt principalpayments of Php1,999 million, share buyback of Php331 million, interestpayments of Php930 million and dividend payments of Php50 million.

 

***Operating Activities***

 

Ourconsolidated net cash flows from operating activities decreased by Php3,020million, or 12%, to Php22,169 million in the first quarter of 2008 from Php25,189million in the same period in 2007.  A growing portion of our consolidated cashflow is generated by our wireless service business, which accounted for 60% and59% of our total service revenues in the first quarter of 2008 and 2007.  Servicerevenues from our fixed line and information and communications technologyaccounted for 33% and 7%, respectively, of our total service revenues in thefirst quarter of 2008, and 34% and 7%, respectively, in the same period in 2007.

 

Cash flowsfrom operating activities of our wireless business amounted to Php15,253million in the first quarter of 2008, a decrease of Php1,882 million, or 11%,compared with Php17,135 million in the same period in 2007.  The decrease inour wireless business segment’s cash flows from operating activities was aresult of settlement of various payables in the first quarter of 2008.  Likewise,cash flows from operating activities of our fixed line business decreased byPhp942 million, or 12%, to Php6,610 million in the first quarter of 2008compared with Php7,552 million in the same period in 2007.  This decrease wasprimarily due to higher working capital requirements in our fixed line businessin the first quarter of 2008.  The overall decrease in our cash flows from operatingactivities was primarily due to a higher level of settlements of variouscurrent liabilities, partially offset by higher billings of accountsreceivable.  We believe that our continuing strong cash flows from operatingactivities on a consolidated basis will allow us to satisfy our currentliabilities as our current ratio is more than 1:1 as at March 31, 2008. 

 

Priorto April 2006, under restrictive covenants in certain of its loan facilities,Smart was required to obtain, and since 2002 had obtained, waivers fromFinnvera and certain of its lenders for all dividend payments made by Smart toPLDT.  Due to the repayment of all loan facilities by April 2006 that containedcovenants restricting Smart’s ability to pay dividends, redeem preferred shares,make distributions to PLDT or otherwise provide funds to PLDT or any associatewithout the consent of its lenders, Smart is no longer subject to suchrestrictions.  In March 2007, dividend payments received by PLDT from Smartamounted to Php8,000 million.

 

*Investing Activities*
 

Net cashused in investing activities amounted to Php12,919 million in the first quarterof 2008, a decrease of Php748 million, or 5%, from Php13,667 million in thesame period in 2007 primarily due to a decrease in capital expenditures of Php2,886million and redemption of SIHI’s preferred shares of Php1,187 million in thefirst quarter of 2008, partially offset by an increase in short-terminvestments and investment in debt securities of Php3,305 million mainly due toSmart’s increased investment in money market placements with over 90 daysmaturity.  

 

Ourconsolidated capital expenditures in the first quarter of 2008 totaled Php3,051million, a decrease of Php2,886 million, or 49%, from Php5,937 million in thesame period in 2007 primarily due to PLDT’s lower capital spending.  Smart'scapital spending of Php2,149 million in the first quarter of 2008 was usedprimarily to further upgrade its core, access and transmission networkfacilities, expand its wireless broadband facilities and acquire Cruztelco’sCluster 3 fixed line assets.  PLDT's capital spending of Php754 million wasprincipally used to finance the expansion and upgrade of its submarine cablefacilities, fixed line data and IP-based network services.  ePLDT and its subsidiaries’capital spending of Php139 million was primarily used to fund its continuedcustomer interaction services expansion.  The balance represented othersubsidiaries’ capital spending.  

 

As part of our growth strategy, we may from time totime, continue to make acquisitions and investments in companies or businesses.

 

***Financing Activities***

 

On aconsolidated basis, we used net cash of Php159 million in the first quarter of2008 for financing activities, net of loan drawings by Smart and PLDT, a decreaseof Php5,963 million compared with Php6,122 million in the same period in 2007.The net cash used in financing activities was mainly utilized for debtrepayments, interest payments, and dividend payments distributed to PLDT commonand preferred stockholders and buyback of PLDT’s common stock.  

 

*Debt Financing*
 

Additionsto our consolidated long-term debt in the first quarter of 2008 totaled Php4,248million mainly from Smart's and PLDT’s drawings related to the financing of ournetwork expansion projects and capital expenditure requirements, respectively.Payments in respect of principal and interest of our total debt amounted to Php1,999million and Php930 million, respectively, in the first quarter of 2008.

 

Our long-term debt increased byPhp2,783 million, or 5%, to Php62,930 million in the first quarter of 2008,largely due to drawings from our term loan facilities and the depreciation ofthe Philippine peso in the first quarter of 2008 as compared with the pesoappreciation in the same period in 2007 resulting to a higher peso equivalentsof our foreign currency-denominated debts, partially offset by debtamortizations and prepayments.  The debt levels of PLDT, Smart and Mabuhay increasedby 5%, 5% and 1% to Php35,548 million, Php26,197 million and Php1,154 million,respectively, in the first quarter of 2008 as compared with the levels as atDecember 31, 2007.  

 

In2007, we conducted a consent solicitation of holders of our 11.375% Notes due2012, 10.5% Notes due 2009 and 8.35% Notes due 2017, or the Notes, in respectof amendments to the terms of the Notes that allow PLDT greater flexibility tomake certain restricted payments, pay dividends or make distributions, whilereducing PLDT’s permitted leverage ratios pursuant to the terms of the Notes.These amendments to the terms of the Notes became effective on December 3,2007, the date on which PLDT made the applicable consent payments, afterholders of more than 51% of the aggregate principal amount of the Notes gavetheir consents for these amendments to the terms of the Notes prior to theexpiration of the consent solicitation period and after the execution ofrelevant amendments to the indentures governing the Notes on November 21, 2007.

 

OnJanuary 15, 2008, PLDT signed a US$100 million term loan facility agreementwith Norddeutsche Landesbank Girozentrale Singapore Branch to be used for thecapital expenditure requirements of PLDT.  The facility was drawn on March 27and April 10, 2008 for US$50 million each, respectively.  The loan is payable overfive years in 10 equal semi-annual installments starting September 29, 2008with final repayment due on March 27, 2013.

 

ApproximatelyPhp25,943 million principal amount of our consolidated outstanding long-termdebt as at March 31, 2008 is scheduled to mature over the period from 2008 to2011.  Of this amount, Php12,331 million is attributable to PLDT, Php12,428million to Smart and the remainder to Mabuhay Satellite and ePLDT.

 

Fora complete discussion of our long-term debt, see *Note 18 – Interest-bearingFinancial Liabilities – Long-term Debt*to the accompanying unauditedconsolidated financial statements.

 

*Debt Covenants*

 

Our debt instruments contain restrictive covenants thatrequire us to comply with specified financial ratios and other financial tests,calculated in conformity with PFRS, at relevant measurement dates, principallyat the end of each quarterly period.  Wehave complied with all of our maintenance financial ratios as required underour loan covenants and other debt instruments.  Furthermore, certain of PLDT’sdebt instruments contain provisions pursuant to which PLDT may be required torepurchase or prepay certain indebtedness in case of a change in control ofPLDT.

 

Please see *Note 18 – Interest-bearing FinancialLiabilities – Debt Covenants*to the accompanying unaudited consolidatedfinancial statements for a detailed discussion of our debt covenants.

 

*Financing Requirements*
 

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

 

As aresult of our strong cash flows and lower debt levels, we have increased ourdividend payout ratio to 70% of 2007 earnings per share from 60% of 2006earnings per share.

 

Withrespect to our 2007 earnings, in addition to the Php60 per share dividenddeclared on August 7, 2007, we declared on March 4, 2008 a regular cashdividend of Php68 per share and a special cash dividend of Php56 per share, inthe aggregate representing close to a 100% payout of our 2007 earnings pershare.  The total dividends declared last March4, 2008 and paid on April 21, 2008 amounted to Php23,438 million.

 

***Credit Ratings***

 

Noneof our existing indebtedness contains provisions under which credit ratingdowngrades would trigger a default, changes in applicable interest rates orother similar terms and conditions.  

 

PLDT’s current credit ratings are as follows:

 

**Rating Agency**

**Credit Rating**

** **

**Outlook**

 

 

 

 

Standard & Poor’s Ratings Services, or Standard & Poor’s

Foreign Currency Rating

BB+

Stable

 

 

 

 

Moody’s Investor Service, or Moody’s

Foreign Currency Senior Unsecured Debt Rating

Ba2

Positive

 

Local Currency Corporate Family Rating

Baa2

Positive

 

 

 

 

Fitch Ratings, or Fitch

Long-term Foreign Currency Rating

BB+

Stable

 

Long-term Local Currency Rating

BB+

Stable

 

Long-term Foreign Currency Issuer Default Rating

BB+

Stable

 

Long-term Local Currency Issuer Default Rating

BBB

Stable

 

National Long-term Rating 

AAA(ph1)

Stable

 

OnMarch 19, 2008, Moody’s affirmed our local currency rating and changed itsoutlook from stable to positive at the same time affirming our foreign currencybond Ba2 rating with a positive outlook.  The rating action reflects ourability to achieve ongoing revenue growth and fund high levels of capitalexpenditures internally, as well as the ability to increase dividend paymentsto our shareholders.  On January 28, 2008, Moody’s affirmed our foreigncurrency senior unsecured debt rating from stable to positive following thechange in the outlook of the Philippines Ba3 country ceiling for foreigncurrency bonds to positive from stable. 

 

On November 6, 2007, Standard and Poor’s, Moody’s andFitch affirmed some of our local and foreign currency ratings following theconsent solicitation announcement relating to the Notes to effect certainproposed amendments that would give us more flexibility to make investments anddividend payments.  The affirmation also reflects our healthy financial and dominantmarket positions though counterbalanced by the uncertainty of the Philippines’ political and economic environment.  However, any future upward ratings wouldbe more reflective of a stabilizing economic, political and social environmentreducing such uncertainties.

 

***Off-Balance SheetArrangement***

 

Thereare no off-balance sheet arrangements that have or are reasonably likely tohave any current or future effect on our financial position, results ofoperations, cash flows, changes in stockholders’ equity, liquidity, capitalexpenditures or capital resources that are material to investors.

 

***Equity Financing***

 

PLDT raisedPhp3 million and Php36 million from the exercise by certain officers andexecutives of stock options in the first quarter of 2008 and 2007, respectively.In addition, through our subscriber investment plan which provides postpaidfixed line subscribers the opportunity to buy shares of our 10% cumulativeconvertible preferred stock as part of the upfront payments collected fromsubscribers, PLDT was able to raise Php2 million in the first quarter of 2008. 

 

Aspart of our goal to maximize returns to our shareholders, we obtained onJanuary 29, 2008 an approval from our board of directors to conduct a sharebuyback program for up to two million PLDT common shares.  As at May 5, 2008, we acquired a total of 346,260shares of common stock at a weighted average price of Php2,720 for a totalamount of Php942 million.  Please refer to *Note 17 – Equity* to theaccompanying unaudited consolidated financial statements for further details.

 

Cashdividend payments in the first quarter of 2008 amounted to Php50 millioncompared with Php62 million paid to preferred shareholders in the same periodin 2007.  In the first quarter of 2008, there were 188.9 million PLDT commonshares outstanding compared with 188.7 million in the same period in 2007.

 

*Contractual Obligations and CommercialCommitments***
 

*Contractual Obligations*

 

For a discussion of our contractual obligations, see *Note 24 – Contractual Obligations and CommercialCommitments*to the accompanying unauditedconsolidated financial statements.

 

*Commercial Commitments*

 

As at March 31, 2008, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php1,132 million.These commitments will expire within one year.

 

Quantitative and Qualitative Disclosures aboutMarket Risks
 

Ouroperations are exposed to various risks, including liquidity risk, foreignexchange risk, interest rate risk, credit risk and capital management risk.  Theimportance of managing these risks has significantly increased in light ofconsiderable change and continuing volatility in both the Philippine andinternational financial markets.  With a view to managing these risks, we haveincorporated financial risk management functions in our organization,particularly in our treasury operations, equity issues and sales of certainassets.

 

For further discussions of these risks, see *Note 24– Contractual Obligations and Commercial Commitments*and *Note 26 –Financial Assets and Liabilities*to the accompanying unaudited consolidatedfinancial statements.

 

Impact of Inflation and Changing Prices
** **

Inflationcan be a significant factor in the Philippine economy, and we are continuallyseeking ways to minimize its impact.  In recent periods, we do not believeinflation has had a material impact on our operations.  The average inflationrate in the Philippines in the first quarter of 2008 was 5.6% compared with 2.9%in the same period in 2007.

 

PART II – OTHER INFORMATION
 

***Acquisition of Connectivity Unlimited Resource Enterprise, or CURE***

 

On April 28, 2008, Smart acquired the entire issuedand outstanding capital stock of PH Communications Holdings Corporation, or PHCommunications, and Francom Holdings, Inc., or FHI, which collectively own 100%of CURE for the total amount of Php420 million.  PH Communications and FrancomHoldings own 96.57% and 3.43%, respectively, of CURE.  Smart also intends todirectly invest up to Php210 million in CURE, in the form of subscriptions fornew shares of CURE.  The fresh funds will be used by CURE for working capitalpurposes.  

 

The acquisition dovetails with Smart’s previouslyannounced plan to provide expanded

andenhanced 3G services nationwide, including higher speed wireless broadband services.CURE is envisioned to provide Smart with a platform to offer and provide differentiated3G services for niche markets.

 

Related Party Transactions
 

Fora detailed discussion of the related party transactions, see *Note 22–Related Party Transactions* to the accompanying**unaudited**consolidatedfinancial statements.

 

 

ANNEX – AGING OF ACCOUNTSRECEIVABLE

* *

Thefollowing table shows the aging of unaudited consolidated receivables as at March 31, 2008:

* *

Type of Accounts Receivable
** **

Total
 
Current
 
31-60 Days
 
61-90 Days
 
Over 91 Days
 

 

 

 

 

 

 

**(In Millions)**

 

 

 

 

 

 

 

 

 

 

 

Corporate subscribers 

 

Php9,094

 

Php1,650

 

Php1,360

 

Php858

 

Php5,226

Retails subscribers 

 

7,821

 

2,065

 

1,146

 

339

 

4,271

Foreign administrations 

 

4,096

 

1,423

 

1,127

 

532

 

1,014

Domestic carriers

 

1,024

 

233

 

85

 

108

 

598

Dealers, agents and others 

 

2,265

 

1,995

 

75

 

14

 

181

Total 

 

Php24,300

 

Php7,366

 

Php3,793

 

Php1,851

 

Php11,290

 

 

 

 

 

 

 

 

 

 

 

Less: Allowance for doubtful accounts 

 

12,397

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Total Receivables - net**

** **

**Php11,903**

** **

** **

** **

** **

** **

** **

** **

** **

* *

 

 

SIGNATURES

** **

** **

Pursuant tothe requirements of the Securities Regulation Code, the registrant has dulycaused this report for the first quarter of 2008 to be signed on its behalf bythe undersigned thereunto duly authorized.

 

 

Registrant:  **PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

** **

 

 

 

 

 

Signature and Title:   ____________/s/ Napoleon L. Nazareno_____________

Napoleon L. Nazareno
President and Chief Executive Officer

 

 

 

 

Signature and Title:   _____________/s/ Anabelle Lim-Chua______________

Anabelle Lim-Chua
Senior Vice President and Treasurer

(Principal Financial Officer)

 

 

 

 

Signature and Title:   __________/s/ June Cheryl A. Cabal-Furigay_________

June Cheryl A. Cabal-Furigay
Vice President and Controller

(Principal Accounting Officer)

 
 

 

 

 

 

Date: May 6, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCETELEPHONE COMPANY AND SUBSIDIARIES**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

AS AT MARCH 31, 2008(UNAUDITED) AND DECEMBER 31, 2007 (AUDITED)

AND FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007(UNAUDITED)

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

** **

CONSOLIDATEDBALANCE SHEETS

**(in million pesos, except par value, per share amountsand number of shares)**

** **

** **

**March 31,  2008**

 

December 31, 2007

** **

**(Unaudited)**

 

(Audited)

**ASSETS**

**Noncurrent Assets**

** **

** **

** **

Property, plant and equipment - net (Notes 2, 3, 5, 8, 18 and 26)

**156,112**

 

159,414

Investments in associates and joint ventures (Notes 2, 9, 18 and 26)

**1,328**

 

1,351

Investments-available-for-sale (Notes 2 and 26)

**142**

 

143

Investment in debt securities (Notes 2 and 26)

**632**

 

273

Investment properties (Notes 2, 3, 10 and 26)

**577**

 

577

Goodwill and intangible assets - net (Notes 2, 3, 5, 11 and 26)

**11,730**

 

11,721

Deferred income tax assets (Notes 2, 3, 4, 6 and 26)

**11,483**

 

13,757

Derivative financial assets (Notes 2 and 26)

**60**

 

59

Prepayments - net of current portion (Notes 16 and 26)

**2,294**

 

2,281

Advances and refundable deposits - net of current portion (Notes 2 and 26)

**1,023**

 

1,030

Total Noncurrent Assets 

**185,381**

 

190,606

**Current Assets**

** **

 

 

Cash and cash equivalents (Notes 2, 12 and 26)

**26,509**

 

17,447

Short-term investments (Notes 2 and 26)

**24,382**

 

13,415

Investment in debt securities (Notes 2, 13 and 26)

**–**

 

1,115

Trade and other receivables - net (Notes 2, 3, 14, 22 and 26)

**11,903**

 

12,645

Inventories and supplies (Notes 2, 15 and 26)

**1,755**

 

1,167

Derivative financial assets (Notes 2 and 26)

**169**

 

897

Current portion of prepayments (Notes 16 and 26)

**3,090**

 

2,368

Current portion of advances and refundable deposits (Notes 2 and 26)

**307**

 

498

Total Current Assets

**68,115**

 

49,552

**TOTAL ASSETS**

**253,496**

 

240,158

 

** **

 

 

**EQUITY AND LIABILITIES**

**Equity****Attributable to Equity Holders of PLDT**

** **

 

 

Preferred stock, Php10 par value, authorized - 822,500,000 shares;  issued and outstanding - 441,666,057 shares as at March 31, 2008 and  441,650,297 shares as at December 31, 2007****(Notes 2, 7 and 17)

**4,417**

 

4,417

Common stock, Php5 par value, authorized - 234,000,000 shares;  issued - 189,019,600 shares and outstanding - 188,895,600 shares as at  March 31, 2008 and issued and outstanding - 188,740,519 shares as at  December 31, 2007 (Notes 2, 7 and 17)

**945**

 

943

Treasury stock****- 124,000 shares as at March 31, 2008****(Note 17)

**(331)**

 

–

Stock options issued (Note 23)

**6**

 

9

Equity portion of convertible preferred stock (Note 18)

**5**

 

6

Capital in excess of par value

**67,534**

 

67,057

Retained earnings (Note 7)

**26,552**

 

39,576

Cumulative translation adjustments (Note 26)

**(1,352)**

 

(895)

      Total Equity Attributable to Equity Holders of PLDT

**97,776**

 

111,113

**Minority interest**

**1,563**

 

1,398

Total Equity

**99,339**

 

112,511

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

CONSOLIDATEDBALANCE SHEETS (*continued*)

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

 

** **

**March 31, 2008**

 

December 31, 2007

** **

**(Unaudited)**

 

(Audited)

**Noncurrent Liabilities**

** **

 

 

Interest-bearing financial liabilities - net of current portion (Notes 2, 8, 18, 24 and 26)

**55,483**

 

53,387

Deferred income tax liabilities (Notes 2, 3, 4, 6 and 26)

**2,086**

 

2,155

Derivative financial liabilities (Notes 2, 24 and 26)

**5,550**

 

7,741

Pension and other employee benefits (Notes 2, 3, 23 and 26)

**4,503**

 

4,540

Customers’ deposits (Notes 24 and 26)

**2,222**

 

2,201

Deferred credits and other noncurrent liabilities (Notes 2, 3, 8, 11, 14, 19 and 26)

**9,064**

 

9,632

Total Noncurrent Liabilities

**78,908**

 

79,656

**Current Liabilities**

** **

 

 

Accounts payable (Notes 2, 20, 22, 25 and 26)

**12,346**

 

12,253

Accrued expenses and other current liabilities (Notes 2, 3, 11, 18, 21, 22, 23, 24, 25 and 26)

**23,001**

 

21,674

Derivative financial liabilities (Notes 2, 24 and 26)

**230**

 

242

Provisions for assessments (Notes 2, 22, 24, 25 and 26)

**657**

 

1,112

Current portion of interest-bearing financial liabilities (Notes 2, 8, 18, 24 and 26)

**8,872**

 

8,764

Dividends payable (Notes 2, 7, 18, 24 and 26)

**24,491**

 

1,071

Income tax payable (Notes 2, 6 and 26)

**5,652**

 

2,875

Total Current Liabilities

**75,249**

 

47,991

**TOTAL EQUITY AND LIABILITIES**

**253,496**

 

240,158

* *

*See accompanying Notes to UnauditedConsolidated Financial Statements.*

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

 

**CONSOLIDATED STATEMENTS OF INCOME**

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

** **

** **

**Three Months Ended March 31,**

** **

**2008**

2007

** **

(Unaudited)

**REVENUES AND OTHER INCOME**

** **

 

Service revenues (Notes 2, 3 and 4)

**34,933**

33,071

Gains on derivative transactions – net (Notes 2, 4 and 26)

**1,777**

–

Non-service revenues (Notes 2, 3, 4 and 5)

**482**

613

Interest income (Notes 2 and 4)

**450**

333

Foreign exchange gains – net (Notes 2 and 4)

**–**

588

Others (Notes 2, 3 and 4)

**257**

211

 

**37,899**

34,816

**EXPENSES**

** **

 

Depreciation and amortization (Notes 3, 4 and 8)

**6,363**

5,448

Compensation and employee benefits (Notes 3, 5 and 23)

**4,539**

4,781

Repairs and maintenance (Note 22)

**2,049**

1,846

Selling and promotions

**1,605**

1,296

Financing costs – net (Notes 2, 5, 8, 18 and 26)

**1,389**

2,053

Professional and other contracted services (Notes 5 and 22)

**1,088**

1,279

Cost of sales (Notes 5, 22 and 24)

**882**

1,220

Rent (Note 24)

**879**

690

Taxes and licenses (Note 25)

**840**

608

Communication, training and travel

**484**

425

Insurance and security services (Note 22)

**341**

328

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

**302**

226

Foreign exchange losses – net

**288**

–

Amortization of intangible assets (Notes 3 and 11)

**94**

76

Equity share in net losses of associates

**23**

6

Loss on derivative transactions – net

**–**

665

Provisions (Notes 3, 4, 14, 15, 22, 24 and 25)

**–**

9

Other expenses (Note 22)

**566**

490

 

**21,732**

21,446

**INCOME BEFORE INCOME TAX**

**16,167**

13,370

**PROVISION FOR INCOME TAX** (Notes 2, 3, 4 and 6)

**5,560**

4,600

**NET INCOME FOR THE PERIOD**

**10,607**

8,770

**ATTRIBUTABLE TO:**

** **

 

Equity holders of PLDT (Note 7)

**10,446**

8,614

Minority interest

**161**

156

** **

**10,607**

8,770

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

** **

 

Basic

**54.71**

45.08

Diluted

**54.71**

44.99

* *

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

* *

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

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN EQUITY**

**(in million pesos)**

** **

 

**Preferred Stock**

**Common Stock**

**Treasury Stock**

**Stock Options Issued**

**Equity Portion of Convertible Preferred Stock**

**Capital in Excess of  Par Value**

**Retained Earnings (Deficit)**

**Cumulative Translation Adjustments**

**Equity Attributable to Equity Holders of PLDT**

**Minority Interest**

**Total  Equity**

**Balances at January 1, 2007**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

As previously reported

4,424

942

–

40

9

66,574

32,784

(1,796)

102,977

1,546

104,523

Effect of change in revenue recognition policy for installation fees (Note 2)

–

–

–

–

–

–

(456)

–

(456)

–

(456)

As restated – Note 2

4,424

942

–

40

9

66,574

32,328

(1,796)

102,521

1,546

104,067

Changes in equity:

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

 

 

 

 

 

 

 

 

 

As previously reported

–

–

–

–

–

–

8,575

–

8,575

156

8,731

Effect of change in revenue recognition policy for installation fees (Note 2)

–

–

–

–

–

–

39

–

39

–

39

As restated – Note 2

–

–

–

–

–

–

8,614

–

8,614

156

8,770

Deferred income tax effects on cash  flow hedges

–

–

–

–

–

–

–

(190)

(190)

–

(190)

Foreign currency translation differences

–

–

–

–

–

–

–

(179)

(179)

(9)

(188)

Net gains on available-for-sale financial investments

–

–

–

–

–

–

–

8

8

–

8

Net losses on cash flow hedges removed from cumulative translation adjustments taken to income

–

–

–

–

–

–

–

346

346

–

346

Net gains on cash flow hedges

–

–

–

–

–

–

–

286

286

–

286

Total income and expense for the period recognized directly in equity

–

–

–

–

–

–

–

271

271

(9)

262

**Total income and expense for the period**

**–**

**–**

**–**

**–**

**–**

**–**

**8,614**

**271**

**8,885**

**147**

**9,032**

**Cash dividends (Note 7)**

**–**

**–**

**–**

**–**

**–**

**–**

**(9,460)**

**–**

**(9,460)**

**–**

**(9,460)**

**Issuance of capital stock -  net of conversion (Note 17)**

**(3)**

**1**

**–**

**–**

**–**

**169**

**–**

**–**

**167**

**–**

**167**

**Exercised option shares**

**–**

**–**

**–**

**(15)**

**–**

**51**

**–**

**–**

**36**

**–**

**36**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**(14)**

**(14)**

**Balances at March 31, 2007 (Unaudited)**

**4,421**

**943**

**–**

**25**

**9**

**66,794**

**31,482**

**(1,525)**

**102,149**

**1,679**

**103,828**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Balances at January 1, 2008**

**4,417**

**943**

**–**

**9**

**6**

**67,057**

**39,576**

**(895)**

**111,113**

**1,398**

**112,511**

Changes in equity:

 

 

 

 

 

 

 

 

 

 

 

Net income for the period

**–**

**–**

**–**

**–**

**–**

–

10,446

–

10,446

161

10,607

Deferred income tax effects on cash  flow hedges

–

–

–

–

–

–

–

301

301

–

301

Foreign currency translation differences

–

–

–

–

–

–

–

132

132

4

136

Net losses on available-for-sale financial investments

–

–

–

–

–

–

–

(1)

(1)

–

(1)

Net gains on cash flow hedges removed from cumulative translation adjustments taken to income

–

–

–

–

–

–

–

(697)

(697)

–

(697)

Net losses on cash flow hedges

–

–

–

–

–

–

–

(192)

(192)

–

(192)

Total income and expense for the period recognized directly in equity

–

–

–

–

–

–

–

(457)

(457)

4

(453)

**Total income and expense for the period**

**–**

**–**

**–**

**–**

**–**

**–**

**10,446**

**(457)**

**9,989**

**165**

**10,154**

**Cash dividends (Note 7)**

**–**

**–**

**–**

**–**

**–**

**–**

**(23,470)**

**–**

**(23,470)**

**–**

**(23,470)**

**Issuance of capital stock -  net of conversion (Note 17)**

**–**

**2**

**–**

**–**

**(1)**

**477**

**–**

**–**

**478**

**–**

**478**

**Exercised option shares**

**–**

**–**

**–**

**(3)**

**–**

**–**

**–**

**–**

**(3)**

**–**

**(3)**

**Treasury stock**

**–**

**–**

**(331)**

**–**

**–**

**–**

**–**

**–**

**(331)**

**–**

**(331)**

**Balances at March 31, 2008 (Unaudited)**

**4,417**

**945**

**(331)**

**6**

**5**

**67,534**

**26,552**

**(1,352)**

**97,776**

**1,563**

**99,339**

* *

*See accompanying Notes to UnauditedConsolidated Financial Statements.*
**
**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in million pesos)**

 

** **

**Three Months Ended March 31,**

** **

**2008**

2007

** **

(Unaudited)

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

Income before income tax

**16,167**

13,370

Adjustments for:

** **

 

Depreciation and amortization (Notes 3, 4 and 8)

**6,363**

5,448

Interest on loans and related items – net (Note 5)

**1,095**

1,744

Asset impairment (Notes 3, 5, 14, 15 and 26)

**302**

226

Foreign exchange losses (gains) – net (Notes 5, 18 and 26)

**288**

(588)

Accretion on financial liabilities – net (Notes 5 and 26)

**265**

269

Pension (Notes 3, 5 and 23)

**175**

398

Amortization of intangible assets (Note 11)

**94**

76

Loss on disposal of fixed assets (Note 8)

**91**

10

Equity share in net losses of associates (Note 4)

**23**

6

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

**2**

5

Incentive plans (Notes 3, 5 and 23)

**(77)**

260

Interest income (Note 4)

**(450)**

(333)

Losses (gains) on derivative transactions – net (Notes 4 and 26)

**(1,777)**

665

Others

**(349)**

16

Operating income before changes in assets and liabilities

**22,212**

21,572

Decrease (increase) in:

** **

 

Trade and other receivables

**937**

(73)

Inventories and supplies

**(501)**

(84)

Prepayments

**(585)**

805

Advances and refundable deposits

**168**

3

Increase (decrease) in:

** **

 

Accounts payable

**(74)**

3,114

Accrued expenses and other current liabilities

**823**

594

Unearned revenues

**(209)**

3

Pension and other employee benefits

**(134)**

(363)

Customers’ deposits

**20**

(10)

Other noncurrent liabilities

**2**

(98)

Net cash generated from operations

**22,659**

25,463

Income taxes paid

**(490)**

(274)

Net cash provided by operating activities

**22,169**

25,189

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

Proceeds from redemption of investment in debt securities

**1,187**

–

Interest received

**219**

231

Proceeds from disposal of property, plant and equipment (Note 8)

**36**

40

Decrease (increase) in advances and refundable deposits

**3**

(20)

Payments for acquisition of intangibles

**(27)**

–

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

**(184)**

(114)

Payments for purchase of investment in debt securities

**(355)**

–

Additions to property, plant and equipment (Note 8)

**(2,867)**

(5,823)

Additions to short-term investments

**(10,931)**

(7,981)

Net cash used in investing activities

**(12,919)**

(13,667)

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

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

**(in million pesos)**

 

** **

**Three Months Ended March 31,**

** **

**2008**

2007

** **

(Unaudited)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

Proceeds from issuance of long-term debt (Note 18)

**4,121**

5,009

Additional capital expenditures under long-term financing

**544**

3,502

Proceeds from notes payable

**127**

–

Proceeds from issuance of capital stock

**5**

36

Payments of debt issuance costs

**(2)**

(13)

Cash dividends paid

**(50)**

(62)

Payments of notes payable

**(56)**

(2)

Settlements of derivative financial instruments

**(203)**

(622)

Payments of obligations under finance lease

**(295)**

(55)

Payments for redemption of shares

**(331)**

(14)

Interest paid - net of capitalized portion

**(930)**

(1,445)

Reduction in capital expenditures under long-term financing

**(1,146)**

(3,216)

Payments of long-term debt (Note 18)

**(1,943)**

(9,240)

Net cash used in financing activities

**(159)**

(6,122)

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

**(29)**

39

**NET INCREASE IN CASH AND CASH EQUIVALENTS**

**9,062**

5,439

**CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**

**17,447**

16,870

**CASH AND CASH EQUIVALENTS AT END OF PERIOD**

**26,509**

22,309

* *

*See accompanying Notes to Unaudited ConsolidatedFinancial Statements.*

* *

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

 

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

 

 

**1.        ****Corporate Information**

 

The Philippine Long DistanceTelephone Company, or PLDT, or Parent Company, was incorporated under the oldCorporation Law of the Philippines (Act 1459, as amended) on November 28, 1928,following the merger of four telephone companies under common U.S. ownership.  Under its amended Articles of Incorporation, PLDT’s corporate term is currentlylimited through 2028.  In 1967, effective control of PLDT was sold by the GeneralTelephone and Electronics Corporation, then a major shareholder since PLDT’sincorporation, to a group of Filipino businessmen.  In 1981, in furtherance ofthe then existing policy of the Philippine government to integrate thePhilippine telecommunications industry, PLDT purchased substantially all of theassets and liabilities of the Republic Telephone Company, which at that timewas the second largest telephone company in the Philippines.  In 1998, FirstPacific Company Limited, or First Pacific, through its Philippine and otheraffiliates, collectively the First Pacific Group, acquired a significantinterest in PLDT.  On March 24, 2000, NTT Communications Corporation, or NTTCommunications, through its wholly-owned subsidiary NTT Communications Capital(UK) Ltd., or NTTC-UK, became PLDT’s strategic partner with approximately 14%economic and voting interest in the issued and outstanding common stock ofPLDT.  Simultaneous with NTT Communications’ investment in PLDT, the latter acquired100% of Smart Communications, Inc., or Smart.  On March 14, 2006, NTT DoCoMo,Inc., or NTT DoCoMo, acquired from NTT Communications approximately 7% ofPLDT’s then outstanding common shares held by NTT Communications with NTTCommunications retaining ownership of approximately 7% of PLDT’s commonshares.  Since March 14, 2006, NTT DoCoMo has made additional purchases ofshares of PLDT and together with NTT Communications beneficially owned 20.86%of the outstanding shares of PLDT’s common stock as at March 31, 2008.  OnFebruary 28, 2007, Metro Pacific Asset Holdings, Inc., a Philippine affiliateof First Pacific, completed the acquisition of an additional interest ofapproximately 46% in Philippine Telecommunications Investment Corporation, orPTIC, a shareholder of PLDT.  This additional investment in PTIC represents anattributable interest of approximately 6.4% of the then issued common shares ofPLDT and thereby raised First Pacific Group’s beneficial ownership toapproximately 28% of PLDT’s shares of common stock as at that date.  FirstPacific Group had beneficial ownership of approximately 26.17% in PLDT’soutstanding common stock as at March 31, 2008.

 

The common shares ofPLDT are listed and traded on the Philippine Stock Exchange, or PSE.  OnOctober 19, 1994, an American Depositary Receipt, or ADR, facility wasestablished, pursuant to which Citibank N.A., as the depositary, issued ADRsevidencing American Depositary Shares, or ADSs, with each ADS representing onePLDT common share with a par value of Php5 per share.  Effective February 10,2003, PLDT appointed JP Morgan Chase Bank as successor depositary for PLDT’sADR facility.  The ADSs are listed on the New York Stock Exchange, or NYSE, inthe United States and are traded on the NYSE under the symbol “PHI”.  As at March31, 2008, there were a total of over 43 million ADSs outstanding.

 

Until early 2007, theADSs were also listed on the NYSE Arca.  However, PLDT voluntarily delisted itsADSs from the NYSE Arca, effective February 12, 2007, after determining thatdoing so is in the best interest of PLDT and its stockholders.

 

PLDToperates under the jurisdiction of the Philippine National TelecommunicationsCommission, or NTC, which jurisdiction extends, among other things, toapproving major services offered by PLDT and certain rates charged by PLDT.

 

Our registered office address is Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

 

 

 

 

 

**2.        ****Summary of Significant Accounting Policies andPractices**

 

**Basis ofPreparation**

 

Our unaudited consolidated financialstatements have been prepared under the historical cost basis except for therevaluation of derivative financial instruments, available-for-sale financial investmentsand investment properties that have been measured at fair values.

 

Our unaudited consolidatedfinancial statements include, in our opinion, adjustments consisting only ofnormal recurring adjustments, necessary to present fairly the results ofoperations for the interim periods.  The results of operations for the threemonths ended March 31, 2008 are not necessarily indicative of the results ofoperations that may be expected for the full year.

 

Our unaudited consolidatedfinancial statements are presented in Philippine peso, PLDT’s functional andpresentation currency and all values are rounded to the nearest million exceptwhen otherwise indicated.

 

**Basis of Unaudited ConsolidatedFinancial Statements Preparation**

 

Our unaudited consolidatedfinancial statements include the financial statements of PLDT (the “ParentCompany”) and those of the following subsidiaries (collectively, the “PLDTGroup”).

 

** **

**Place of Incorporation**

** **

**Percentage of Ownership**

**Name of Subsidiary**

**Principal Activity**

**Direct**

**Indirect**

** **

 

 

** **

** **

**Wireless**

** **

** **

Smart

Philippines

Cellular mobile services

100.0

–

Smart Broadband, Inc., or SBI

Philippines

Internet broadband distribution

–

100.0

SmartConnect Holdings Pte. Ltd., or SCH

Singapore

Investment company

–

100.0

I-Contacts Corporation, or  I-Contacts

Philippines

Customer interaction services

–

100.0

Wolfpac Mobile, Inc., or Wolfpac 

Philippines

Mobile applications development and services

–

100.0

SmartConnect Global Pte. Ltd., or SGP

Singapore

International trade of satellites and GSM enabled global telecommunications

–

100.0

Wireless Card, Inc., or WCI

Philippines

Promotion of the sale and/or patronage of debit and/or charge cards

–

100.0

Smarthub, Incorporated, or SHI

Philippines

Development and sale of software, maintenance and support services

–

100.0

Pilipino Telephone Corporation, or Piltel

Philippines

Cellular and fixed line services

–

92.1

3rd Brand Pte. Ltd., or  3rd Brand

Singapore

Solutions and systems integration services

–

85.0

Telesat, Inc., or Telesat

Philippines

Satellite communications services

100.0

–

ACeS Philippines Cellular Satellite  Corporation, or ACeS Philippines

Philippines

Satellite information and messaging services

88.5

11.5

Mabuhay Satellite Corporation,  or Mabuhay Satellite

Philippines

Satellite communications services

67.0

–

**Fixed Line**

 

 

PLDT Clark Telecom, Inc.,  or ClarkTel

Philippines

Telecommunications services

100.0

–

PLDT Subic Telecom, Inc.,  or SubicTel

Philippines

Telecommunications services

100.0

–

PLDT Global Corporation,  or PLDT Global

British Virgin Islands

Telecommunications services

100.0

–

Smart-NTT Multimedia, Inc.,  or SNMI

Philippines

Data and network services

100.0

–

PLDT-Maratel, Inc., or Maratel

Philippines

Telecommunications services

97.5

–

Bonifacio Communications Corporation, or BCC

Philippines

Telecommunications, infrastructure and related value-added services

75.0

–

** **

** **

** **

** **

**Information and Communications Technology, or ICT**

** **

** **

ePLDT, Inc., or ePLDT

Philippines

Information and communications infrastructure for Internet-based services, e-commerce, customer interaction services and IT-related services

100.0

–

SPi Technologies, Inc.,  or SPi, and subsidiaries,  or SPi Group

Philippines

Knowledge processing solutions

–

100.0

ePLDT Ventus, Inc., or Ventus

Philippines

Customer interaction services

–

100.0

Vocativ Systems, Inc.,  or Vocativ

Philippines

Customer interaction services

–

100.0

Parlance Systems, Inc.,  or Parlance

Philippines

Customer interaction services

–

100.0

Infocom Technologies, Inc.,  or Infocom

Philippines

Internet access services

–

99.6

Digital Paradise Thailand

Thailand

Internet access services

–

87.5

netGames, Inc., or netGames

Philippines

Publisher of online games

–

80.0

Digital Paradise, Inc., or  Digital Paradise

Philippines

Internet access services

–

75.0

Level Up! (Philippines), Inc.,  or Level Up!

Philippines

Publisher of online games

–

60.0

Airborne Access Corporation, or Airborne Access

Philippines

Wireless Internet services

–

51.0

 

Subsidiaries are fullyconsolidated from the date when control is transferred to the PLDT Group andcease to be consolidated from the date when control is transferred out of thePLDT Group.

 

The financial statements of oursubsidiaries are prepared for the same reporting period as PLDT.  We prepareour unaudited consolidated financial statements using uniform accountingpolicies for like transactions and other events with similar circumstances.All intra-group balances, income and expenses and unrealized gains and lossesresulting from intra-group transactions are eliminated in full.

 

Minorityinterest represents the portion of profit or loss and net assets not held by usand are presented separately in the unaudited consolidated statements of incomeand within equity in the unaudited consolidated balance sheets, separately fromequity attributable to equity holders of PLDT.  Acquisition of minorityinterests is accounted for using the parent entity extension method, whereby,the difference between the consideration and the net book value of the share ofthe net assets acquired is recognized in goodwill.

 

Minorityinterests represent the equity interests in Piltel, Level Up!, MabuhaySatellite, 3rd Brand, Maratel, BCC, Digital Paradise, Digital ParadiseThailand, netGames, Infocom and Airborne Access not held by the PLDT Group.

 

When subsidiaries are sold, thedifference between the selling price and the net assets plus cumulativetranslation differences and unamortized goodwill is recognized in the unauditedconsolidated statement of income.

 

***Acquisitionof Connectivity Unlimited Resource Enterprise, or CURE***

 

On April 28, 2008, Smart acquiredthe entire issued and outstanding capital stock of PH Communications HoldingsCorporation, or PH Communications, and Francom Holdings, Inc., or FHI, whichcollectively own 100% of CURE for the total amount of Php420 million.  PHCommunications and Francom Holdings own 96.57% and 3.43%, respectively, ofCURE.  Smart also intends to directly invest up to Php210 million in CURE, inthe form of subscriptions for new shares of CURE.  The fresh funds will beused by CURE for working capital purposes.

 

The acquisition dovetails withSmart’s previously announced plan to provide expanded and enhanced 3G servicesnationwide, including higher speed wireless broadband services. CURE isenvisioned to provide Smart with a platform to offer and provide differentiated3G services for niche markets.

 

**Statement of Compliance**

 

Our unaudited consolidatedfinancial statements have been prepared in conformity with Philippine FinancialReporting Standards, or PFRS.

 

**Changes in Accounting Policies**

 

Our accounting policies adoptedare consistent with those of the previous financial period except for policy onrevenue recognition on installation fees as discussed below and the adoption ofthe new and amended Philippine Accounting Standards, or PAS, PFRS andPhilippine Interpretations that became effective in 2008.

 

**Voluntary Change in RevenueRecognition Policy for Installation Fees**

 

In 2007, we changed our revenuerecognition policy for installation fees and have elected to defer and amortizeour installation fees and its corresponding costs over the expected averageperiods of the customer relationship of our subscribers.  Prior to 2007, werecognized installation fees and its corresponding cost outright.  Our changein revenue recognition policy was made to better reflect the expected utilityof installation fees over the terms of customer relationship.

 

Weaccounted for the change in accounting policy retroactively and accordinglyrestated our comparative unaudited consolidated financial statements to conformto the said change.  The after tax effect of the change was an increase in our unauditedconsolidated net income of Php39 million for the three months ended March 31, 2007,and decrease in the retained earnings beginning of Php456 million as at March 31,2007.  Basic earnings per common share increased by Php0.21 for the three monthsended March 31, 2007.

 

Ourconsolidated unearned revenues related to the unamortized installation feesamounted to Php438 million and Php479 million as at March 31, 2008 and December31, 2007, respectively, and are included in our “Accrued expenses and othercurrent liabilities” and “Deferred credits and other noncurrent liabilities” inthe unaudited consolidated balance sheets.

 

**Adoption of New Standards andInterpretations**

 

Our adoption of the following newand amended standards and interpretations did not have any effect on our unauditedconsolidated financial statements.  Our adoption, however, gave rise toadditional disclosures on the following:

 

•        ***Philippine Interpretation IFRIC 11, “PFRS 2, Group andTreasury Share Transactions”.***This standard is effective for annualperiods beginning on or after March 31, 2007.  This******interpretationaddresses issues relating to whether transactions should be accounted for asequity-settled or as cash-settled under PFRS 2 and issues concerningshare-based payment arrangement involving entities within the same group.  The interpretationhad no impact in our unaudited consolidated financial statements.

 

•        ***Philippine Interpretation IFRIC 12, “Service ConcessionArrangements”.*** This interpretation has become effective for financialyears beginning on or after January 1, 2008.  This interpretation applies tocontractual arrangements whereby a private sector party participates in thedevelopment, financing, operation and maintenance of infrastructure for publicsector services.  This interpretation is not relevant to our currentoperations.

 

•        ***Philippine Interpretation IFRIC 14, “PAS 19 – The Limit ona Defined Benefit Asset, Minimum Funding Requirements and their Interaction”.***This interpretation has become effective for financial years beginning on orafter January 1, 2008.  Philippine Interpretation IFRIC 14 addresses how toassess the limit under *PAS 19, “Employee Benefits”*, on the amount of thepension scheme surplus that can be recognized as an asset in our unaudited consolidatedbalance sheet, in particular, when a minimum funding requirement exists.  Thespecific issues addressed by the interpretation are: (1) a refund is availableto the entity only if there is an unconditional right to the refund and suchrefund is measured as the amount of the surplus at the balance sheet date lessany associated costs; (2) when there is an unconditional right to a refund andthere is no minimum funding requirement, an entity determines the benefitavailable as the lower of the surplus in the plan and the present value of thefuture service cost to the entity; (3) when a minimum funding requirementexists, the benefit available is the present value of the estimated futureservice cost less the estimated minimum funding contribution required inrespect of the future accrual of benefits in that year; and (4) if an entityhas a minimum funding requirement to pay additional contributions, the entitymust determine whether the contributions will be available as a refund orreduction in future contributions after they are paid into the plan.  If not, aliability is recognized when the obligation arises.  The interpretation had noimpact in our unaudited consolidated financial statements.

 

**Significant Accounting Policiesand Practices**

*** ***

***Investments in Associates***

 

Investments in associates are accountedfor using the equity method of accounting and are initially recognized at cost.An associate is an entity in which we have significant influence and which isneither a subsidiary nor a joint venture.

 

Under theequity method, the investment in associate is carried in the unaudited consolidatedbalance sheet at cost plus post acquisition changes in our share of net assetsof the associate.  Goodwill relating to an associate is included in thecarrying amount of the investment and is not amortized.  Our unaudited consolidatedstatement of income reflects the share of the results of operations of theassociates.  Where there has been a change recognized directly in the equity ofthe associate, we recognize our share in such change and disclose this, whenapplicable, in our consolidated statement of changes in equity.  Profits or lossesresulting from our transactions with and among our associates are eliminated tothe extent of our interest in those associates.

 

Our reportingdates and that of our associates are identical and our associate’s accountingpolicies conform to those used by us for like transactions and events insimilar circumstances.

 

***Investments in Joint Ventures***

 

Investments in a joint venturethat is a jointly controlled entity is accounted for using the equity method ofaccounting.  The financial statements of the joint venture are prepared for thesame reporting period as the unaudited consolidated financial statements ofPLDT.  Adjustments are made where necessary to bring the accounting policies inline with those of PLDT Group.

 

Adjustments are made in our unauditedconsolidated financial statements to eliminate our share of unrealized gainsand losses on transactions between PLDT and our jointly controlled entity.Losses on transactions are recognized immediately if the loss provides evidenceof a reduction in the net realizable value of current assets or an impairmentloss.  The joint venture is carried at equity method until the date on which wecease to have joint control over the joint venture.

 

***Foreign Currency Transactionsand Translations***

 

The functional and presentationcurrency of the entities under PLDT Group (except for SCH, SGP, 3rd Brand, MabuhaySatellite, PLDT Global, Digital Paradise Thailand and SPi and certain of itssubsidiaries) is the Philippine peso.  Transactions in foreign currencies areinitially recorded in the functional currency rate prevailing at the date ofthe transaction.  Monetary assets and liabilities denominated in foreigncurrencies are retranslated at the functional closing rate of exchangeprevailing at the balance sheet date.  All differences are recognized in the unauditedconsolidated statement of income except for foreign exchange losses that qualifyas capitalizable borrowing costs during the construction period for exchangegains or losses are treated as taxable income or deductible expenses in the periodsuch exchange gains or losses are realized.  Non–monetary items that aremeasured in terms of historical cost in a foreign currency are translated usingthe exchange rates as at the dates of the initial transactions.  Non–monetaryitems measured at fair value in a foreign currency are translated using theexchange rates at the date when the fair value is determined.  Any goodwillarising on the acquisition of a foreign operation and any fair valueadjustments to the carrying amounts of assets and liabilities arising on theacquisition are treated as assets and liabilities of the foreign operation andtranslated at the closing rate.

 

The functional and presentationcurrency of Mabuhay Satellite, PLDT Global, SPi and certain of its subsidiariesis the U.S. dollar; Thai baht for Digital Paradise Thailand and Singaporedollar for SCH, SGP and 3rd Brand.  As at the reporting date, the assets andliabilities of these subsidiaries are translated into the presentation currencyof the PLDT Group at the rate of exchange prevailing at the balance sheet date,and income and expenses of these subsidiaries are translated at the weightedaverage exchange rate for the period.  The exchange differences arising ontranslation were recognized as a separate component of equity as cumulativetranslation adjustments.  On disposal of these subsidiaries, the amount ofdeferred cumulative translation adjustments recognized in equity relating tosubsidiaries are recognized in the unaudited consolidated statement of income.

 

***Property, Plant andEquipment***

 

Property, plant and equipment,except for land, is stated at cost less accumulated depreciation andamortization and any accumulated impairment losses.  Land is stated at costless any impairment in value.  Cost includes the cost of replacing part of theproperty, plant and equipment when that cost is incurred, if the recognitioncriteria are met.  Likewise, when a major inspection is performed, its cost isrecognized in the carrying amount of the property, plant and equipment as areplacement if the recognition criteria are satisfied.  All other repair andmaintenance costs are recognized in profit or loss as incurred.

 

An item ofproperty, plant and equipment is derecognized upon disposal or when no futureeconomic benefits are expected from its use or disposal.  Any gain or lossarising on derecognition of the asset (calculated as the difference between thenet disposal proceeds and the carrying amount of the asset) is included inprofit or loss in the period the asset is derecognized.

 

Depreciation andamortization are calculated on a straight-line basis over the estimated usefullives of the assets.  

 

The residual values, estimated useful lives anddepreciation and amortization method are reviewed at least at each financialyear-end to ensure that the periods and method of depreciation and amortizationare consistent with the expected pattern of economic benefits from items ofproperty, plant and equipment.

 

Propertyunder construction is stated at cost.  This includes cost of construction,plant and equipment and other direct costs.  Property under construction is notdepreciated until such time that the relevant assets are completed and substantiallyavailable for their intended use.

 

***BorrowingCosts***

 

Borrowing costs are capitalized ifthey are directly attributable to the acquisition, construction or productionof a qualifying asset.  Capitalization of borrowing costs commences when theactivities necessary to prepare the asset for intended use are in progress andexpenditures and borrowing costs are being incurred.  Borrowing costs arecapitalized until the asset is ready for their intended use.  If the resultingcarrying amount of the asset exceeds its recoverable amount, an impairment lossis recognized.  Borrowing costs include interest charges and other costsincurred in connection with the borrowing of funds, as well as exchangedifferences arising from foreign currency borrowings used to finance theseprojects to the extent that they are regarded as an adjustment to interest costs.

 

All other borrowing costs areexpensed as incurred.

 

***Asset Retirement Obligations***

 

We are legallyrequired under various lease agreements to dismantle the installation in leasedsites and restore such sites to their original condition at the end of thelease contract term.  We recognize the liability measured at the present valueof the estimated costs of these obligations and capitalize such costs as partof the balance of the related item of property, plant and equipment.

 

The amountof asset retirement obligations are accreted and such accretion is recognizedas interest expense.

 

***InvestmentProperties***

 

Investment propertiesare initially measured at cost including transaction costs.  The carryingamount includes the cost of replacing part of an existing investment propertyat the time that cost is incurred if the recognition criteria are met; andexcludes the costs of day-to-day servicing of an investment property.  Subsequentto initial recognition, investment properties are stated at fair value, which havebeen determined based on the latest valuations performed by an independent firmof appraisers.  Gains or losses arising from changes in the fair values ofinvestment properties are included in the unauditedconsolidated statement of income in the period in which they arise.  

 

Investment propertiesare derecognized when they have been disposed of or when the investmentproperty is permanently withdrawn from use and no future benefit is expectedfrom its disposal.  Any gain or loss on the retirement or disposal of aninvestment property is recognized in the unauditedconsolidated statement of income in the period of retirement or disposal.

 

Transfersare made to or from investment property only when there is a change in use.For a transfer from investment property to owner occupied property, the deemedcost for subsequent accounting is the fair value at the date of change in use.If owner occupied property becomes an investment property, we account for suchproperty in accordance with the policy stated under property, plant andequipment up to the date of change in use.

 

No assets held under operatinglease have been classified as investment properties.

 

***Business Combinations and Goodwill***

 

Business combinations areaccounted for using the purchase method of accounting.  This involvesrecognizing identifiable assets (including previously unrecognized intangibleassets) and liabilities (including contingent liabilities and excluding futurerestructuring) of any acquired business at fair value.

 

Goodwillacquired in a business combination is initially measured at cost, such costbeing the excess of the cost of the business combination over our interest inthe net fair value of the acquiree’s identifiable assets, liabilities andcontingent liabilities.  Following initial recognition, goodwill is measured atcost less any accumulated impairment loss.  For the purpose of impairmenttesting, goodwill acquired in a business combination is, from the acquisitiondate, allocated to each of our cash-generating units, or groups of our cash-generatingunits, that are expected to benefit from the synergies of the combination,irrespective of whether our other assets or liabilities are assigned to thoseunits or groups of units.  Each unit or group of units to which the goodwill isallocated:  (1) represents our lowest level at which the goodwill is monitoredfor internal management purposes; and (2) is not larger than a segment based oneither our primary or secondary reporting format determined in accordance with *PAS14, “Segment Reporting”*.

 

Where a business combinationagreement provides for an adjustment to the consideration of the combinationcontingent on future events or achieving specified earnings level in futureperiods, we recognize the estimated amount of that adjustment as part of costof the combination and a liability at the acquisition date if the adjustment isprobable and can be measured reliably.  Otherwise, such adjustment is notrecognized until it becomes probable and can be measured reliably in thesubsequent period.  Where future events do not occur or the estimate needs tobe revised, the cost of the business combination initially recognized shall beadjusted accordingly.  Future changes in estimates are treated as an adjustmentto the cost of the combination with an adjustment to the recorded liability andgoodwill.

 

Wheregoodwill forms part of a cash-generating unit, or group of cash-generatingunits, and part of the operation within that unit is disposed of, the goodwillassociated with the operation disposed of is included in the carrying amount ofthe operation when determining the gain or loss on disposal of the operation.Goodwill disposed of in this circumstance is measured based on the relativevalues of the operation disposed of and the portion of the cash-generating unitretained.

 

***IntangibleAssets***

 

Intangible assets acquired separately are measured oninitial recognition at cost.  The cost of intangible assets acquired frombusiness combinations is initially recognized at fair value as at the date ofacquisition.  Following initial recognition, intangible assets are carried at costless any accumulated amortization and any accumulated impairment loss.  Theuseful lives of intangible assets are assessed at the individual asset level ashaving either a finite or indefinite useful life.

 

Intangible assetswith finite lives are amortized over the useful economic life using the straight-linemethod of accounting and assessed for impairment whenever there is anindication that the intangible assets may be impaired.  At a minimum, theamortization period and the amortization method for an intangible asset with afinite useful life are reviewed at each financial year-end.  Changes in theexpected useful life or the expected pattern of consumption of future economicbenefits embodied in the asset are accounted for by changing the amortizationperiod or method, as appropriate, and treated as changes in accountingestimates.  The amortization expense on intangible assets with finite lives isrecognized in the unaudited consolidated statement of income.

 

Intangibleassets with indefinite useful lives are tested for impairment annually eitherindividually or at the cash-generating unit level.  Such intangible assets arenot amortized.  The useful life of an intangible asset with an indefinite lifeis reviewed annually to determine whether indefinite life assessment continuesto be supportable.  If not, the change in the useful life assessment fromindefinite to finite is made on a prospective basis.

 

Gains or losses arising fromderecognition of an intangible asset are measured as the difference between thenet disposal proceeds and the carrying amount of the asset and are recognizedin the unaudited consolidated statement of income when the asset isderecognized.

 

Intangible assets created withinthe business are not capitalized and expenditures are charged against operationsin the period in which the expenditures are incurred.

 

Research and development costs areexpensed as incurred.

 

***Impairmentof Non-Financial Assets***

 

We assessat each reporting period whether there is an indication that our property,plant and equipment, and intangible assets with finite lives may be impaired.If any such indication exists, or when the annual impairment testing for anasset is required, we make an estimate of the asset’s recoverable amount.  Anasset’s recoverable amount is the higher of an asset’s or cash-generatingunit’s fair value less costs to sell or its value in use and is determined foran individual asset, unless the asset does not generate cash inflows that arelargely independent from those of other assets or groups of assets.  Where thecarrying amount of an asset exceeds its recoverable amount, the asset isconsidered impaired and is written down to its recoverable amount.  Inassessing the value in use, the estimated future cash flows are discounted totheir present value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset.  Indetermining the fair value less costs to sell, an appropriate valuation modelis used.

 

Impairment losses of continuingoperations are recognized in the unaudited consolidated statement of income.

 

For assets, excluding goodwill, anassessment is made at each reporting date as to whether there is any indicationthat previously recognized impairment losses may no longer exist or may havedecreased.  If such indication exists, we make an estimate of recoverableamount.  A previously recognized impairment loss is reversed only if there hasbeen a change in the estimates used to determine the asset’s recoverable amountsince the last impairment loss was recognized.  If this is the case, thecarrying amount of the asset is increased to its recoverable amount.  Theincrease cannot exceed the carrying amount that would have been determined, netof depreciation and amortization, had no impairment loss been recognized forthe asset in prior periods.  Such reversal is recognized in the unaudited consolidatedstatement of income.  After such reversal, the depreciation and amortization chargesare adjusted in future periods to allocate the asset’s revised carrying amount,less any residual value, on a systematic basis over its remaining economic usefullife.

 

The following criteria are alsoapplied in assessing impairment of specific assets:

 

*Goodwill*

 

Goodwill is reviewed forimpairment annually or more frequently if events or changes in circumstancesindicate that the carrying value may be impaired.  Impairment is determined forgoodwill by assessing the recoverable amount of the cash-generating unit, orgroup of cash-generating units, to which the goodwill relates.  Where therecoverable amount of the cash-generating unit, or group of cash-generatingunits, is less than the carrying amount of the cash-generating unit, or groupof cash-generating units, to which goodwill has been allocated to, animpairment loss is recognized.  Impairment losses relating to goodwill cannotbe reversed in future periods.  

 

*Intangibleassets*

 

Intangibleassets with indefinite useful lives are tested for impairment annually either individuallyor at the cash-generating unit level, as appropriate.  We calculate the amountof impairment as being the difference between the recoverable amount of theintangible asset and its carrying amount and recognize the amount of impairmentin the unaudited consolidated statement of income.

 

*Investments in associates*

 

After application of the equitymethod, we determine whether it is necessary to recognize an additionalimpairment loss on our investment in associates.  We determine at each balancesheet date whether there is any objective evidence that our investment in an associateis impaired.  If this is the case, we calculate the amount of impairment asbeing the difference between the recoverableamount of the investments in associates and its carrying amount andrecognize the amount of impairment in the unaudited consolidated statement ofincome.

 

***Cash and Cash Equivalents***

 

Cash includes cash onhand and in banks.  Cash equivalents are short-term, highly liquid investmentsthat are readily convertible to known amounts of cash with original maturitiesof three months or less from the date of acquisition and that are subject to aninsignificant risk of change in value.

 

***Short-termInvestments***

 

Short-terminvestments are money market placements, which are highly liquid withmaturities of more than three months but less than one year from date ofacquisition.

 

***Trade and Other Receivables***

 

Trade and other receivables,categorized as loans and receivables, are recognized initially at fair valueand subsequently measured at amortized cost using the effective interest rate method,less provision for impairment.  A provision for impairment of trade and otherreceivables is established when there is objective evidence that we will not beable to collect all amounts due according to the original terms of thereceivables.  Significant financial difficulties of the debtor, probabilitythat the debtor will enter bankruptcy or financial reorganization, and defaultor delinquency in payments are considered indicators that the trade receivableis impaired.  The amount of the provision is the difference between the asset’scarrying amount and the present value of estimated future cash flows,discounted at the original effective interest rate.  Cash flows relating to short-termreceivables are not discounted if the effect of discounting is immaterial.  Thecarrying amount of the asset is reduced through the use of an allowance accountand the amount of the loss is recognized in the unaudited consolidatedstatement of income.  When a trade receivable is uncollectible, it is written-offagainst the allowance account for trade and other receivables.  Subsequentrecoveries of amounts previously written-off are recognized as income in the unauditedconsolidated statement of income.

 

***Inventoriesand Supplies***

 

Inventoriesand supplies, which include cellular phone units, materials, spare parts,terminal units and accessories, are valued at the lower of cost and netrealizable value.

 

Cost is determined using the weightedaverage method.  Net realizable value is either the estimated selling price inthe ordinary course of the business less the estimated cost to sell or assetreplacement costs.

 

***Convertible Preferred Stock***

 

*Philippine peso-denominated*

 

The component of our convertiblepreferred stock that exhibits characteristics of a liability is recognized as aliability in the unaudited consolidated balance sheet, net of transactioncosts.  The corresponding dividends on those shares are charged as interestexpense in the unaudited consolidated statement of income.  On issuance of our convertiblepreferred stock, the fair value of the liability component is determined usinga market rate for an equivalent non-convertible bond and this amount is carriedas a long-term liability on the amortized cost basis until extinguished throughconversion or redemption.

 

Theremainder of the proceeds is allocated to the conversion option that isrecognized and included in the equity section of the unaudited consolidatedbalance sheet, net of transaction costs.  The carrying amount of the conversionoption is not re-measured in subsequent periods.

 

Transaction costs are apportionedbetween the liability and equity components of the convertible preferred stockbased on the allocation of proceeds to the liability and equity components whenthe instruments are first recognized.

 

*Foreigncurrency-denominated*

 

We treatthe Series VI Convertible Preferred Stock as debt instruments with foreigncurrency-denominated embedded call options.  The fair value of embedded calloptions as of issuance date was bifurcated and thereafter accounted forseparately at fair value through profit or loss.  The residual amount wasassigned as a liability component and accreted to the redemption amount up tothe call option date using the effective interest rate method.

 

***Provisions***

 

We recognize provisions when we have present obligations,legal or constructive, as a result of past events, and when it is probable thatan outflow of resources embodying economic benefits will be required to settlethe obligation and a reliable estimate can be made of the amount of theobligation.  Where we expect some or all of a provision to be reimbursed, thereimbursement is recognized as a separate asset but only when the reimbursementis virtually certain.  The expense relating to any provision is presented inthe unaudited consolidated statement of income, net of any reimbursements.  Ifthe effect of the time value of money is material, provisions are discountedusing a current pre-tax rate that reflects, where appropriate, the risksspecific to the liability.  Where discounting is used, the increase in theprovision due to the passage of time is recognized as interest expense.

 

***Retirement Benefits***

 

*Defined benefit pension plans*

 

We have fundedretirement plans, administered by our respective Fund’s Trustees, coveringpermanent employees.  Retirement costs are actuarially determined using theprojected unit credit of accrued benefit valuation method.  This methodreflects services rendered by employees to the date of valuation andincorporates assumptions concerning employees’ projected salaries.  Retirementcosts include current service cost plus amortization of past service cost,experience adjustments and changes in actuarial assumptions.  Past service costis recognized as an expense on a straight-line basis over the average perioduntil the benefits become vested.  If the benefits vest immediately followingthe introduction of, or changes to, a pension plan, past service cost isrecognized immediately.  Actuarial gains and losses are recognized as income orexpense when the net cumulative unrecognized actuarial gains and losses foreach individual plan at the end of the previous reporting period exceeded 10%of the higher of the defined benefit obligation and the fair value of planassets at that date.  These gains and losses are recognized over the expectedaverage remaining working lives of the employees participating in the plan.

 

The defined benefit asset orliability comprises the present value of the defined benefit obligation lesspast service cost not yet recognized and less the fair value of plan assets outof which the obligations are to be settled directly.  The value of any asset isrestricted to the sum of any past service cost not yet recognized and thepresent value of any economic benefits available in the form of refunds fromthe plan or reductions in the future contributions to the plan.

 

*Defined contribution plans*

 

Smart and I-Contacts recordexpenses for defined contribution plans for their contribution when theemployee renders service to Smart and I-Contacts, respectively, essentiallycoinciding with their cash contributions to the plans.

 

***Share-Based Payment Transactions***

 

Certain of our employees(including advisors) receive remuneration in the form of share-based paymenttransactions, whereby employees render services in exchange for shares orrights over shares (“equity-settled transactions”).

 

*Equity-settledtransactions*

 

The cost ofequity-settled transactions with employees is measured by reference to the fairvalue of the stock options at the date at which they are granted.  Fair valueis determined using an option-pricing model, further details of which are setforth in *Note 23 – Share-based Payments and Employee Benefits*.  Invaluing equity-settled transactions, no account is taken of any performanceconditions, other than conditions linked to the price of the shares of PLDT(“market conditions”).

 

The cost ofequity-settled transactions is recognized, together with a correspondingincrease in equity, over the period in which the performance and/or service conditionsare fulfilled, ending on the date on which the relevant employees become fullyentitled to the award (“vesting date”).  The cumulative expense recognized forequity-settled transactions at each reporting date until the vesting datereflects the extent to which the vesting period has expired and the number ofawards that will ultimately vest, in our opinion, at that date, based on thebest available estimate.

 

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

 

Where the terms of an equity-settled awards aremodified and the modification increases the fair value of the equityinstruments granted, as measured immediately before and after the modification,the entity shall include the incremental fair value granted in the measurementof the amount recognized for services received as consideration for the equityinstruments granted. The incremental fair value granted is the differencebetween the fair value of the modified equity instrument and that of theoriginal equity instrument, both estimated as at the date of the modification.If the modification occurs during the vesting period, the incremental fairvalue granted is included in the measurement of the amount recognized forservices received over the period from the modification date until the datewhen the modified equity instruments vest, in addition to the amount based onthe grant date fair value of the original equity instruments, which is recognizedover the remainder of the original vesting period. If the modification occursafter vesting date, the incremental fair value granted is recognizedimmediately, or over the vesting period if the employee is required to completean additional period of service before becoming unconditionally entitled tothose modified equity instruments.

 

Where an equity-settled award is cancelled withpayment, it is treated as if it had vested on the date of cancellation, and anyexpense not yet recognized for the award is recognized immediately.  However,if a new award is substituted for the cancelled award, and designated as areplacement award on the date that it is granted, the cancelled and new awardsare treated as if they were modifications of the original award, as describedin the previous paragraph.

 

Thedilutive effect of outstanding options is reflected as additional sharedilution in the computation of earnings per share.  See *Note 7 – EarningsPer Common Share*.

 

*Cash-settled transactions*

 

Our Long-TermIncentive Plan, or LTIP, grants share appreciation rights, or SARs, to oureligible key executives and advisors.  Under the LTIP, we recognize theservices we receive from our eligible key executives and advisors, and ourliability to pay for those services, as the eligible key executives andadvisors render services during the vesting period.  We measure our liability,initially and at each reporting date until settled, at the fair value of theSARs, by applying an option valuation model, taking into account the terms andconditions on which the SARs were granted, and the extent to which the eligiblekey executives and advisors have rendered service to date.  We recognize anychanges in fair value at each reporting date until settled, in the unaudited consolidatedstatement of income for the period.

 

***Leases***

 

The determination of whether anarrangement contains a lease is based on the substance of the arrangement at theinception date of whether the fulfillment of the arrangement is dependent onthe use of a specific asset or assets or the arrangement conveys a right to usethe asset.

 

A lease is classified as a financelease if it transfers substantially all the risks and rewards incidental toownership.  All other leases are classified as operating leases.

 

A finance lease givesrise to a depreciation expense for the asset, as well as an interest expense foreach period.  Finance charges are charged directly to current operations.  Thedepreciation policy for leased assets is consistent with that for depreciableassets that are owned.

 

Capitalized leased assets aredepreciated over the shorter of the estimated useful life of the asset or thelease term, if there is no reasonable certainty that we will obtain ownershipof the leased asset at the end of the lease term.

 

***Revenue Recognition***

 

Revenues for servicesare stated at amounts invoiced to customers, net of value-added tax, or VAT, oroverseas communication tax, or OCT, where applicable.  We provide wirelesscommunication, fixed line communication, and ICT services.  We provide suchservices to mobile, business, residential and payphone customers.  Revenues representthe value of fixed consideration that have been received or are receivable.Revenues are recognized when there is evidence of an arrangement, collectibilityis reasonably assured, and the delivery of the product or rendering of servicehas occurred.  In certain circumstances, revenue is split into separatelyidentifiable components and recognized when the related components aredelivered in order to reflect the substance of the transactions.  The value ofcomponents is determined using verifiable objective evidence.  Under certainarrangements where the above criteria are met, but there is uncertaintyregarding the outcome of the transaction for which service was rendered,revenue is recognized only to the extent of expenses incurred for rendering theservice, and such amount is determined to be recoverable.  We do not provideour customers with the right to a refund.

 

*Service Revenues*

 

*Subscriptions*

 

We provide telephone and datacommunication services under prepaid and postpaid payment arrangements.  Installationand activation-related fees and the corresponding costs, not exceeding theactivation revenue, are deferred and recognized over the expected averageperiods of customer relationship for fixed line and cellular services.Postpaid service arrangements include subscription fees, typically fixedmonthly fees, which are recognized over the subscription period on a pro-ratabasis.

 

*Airtime, traffic and value-added services*

 

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

 

*Knowledge processing solutions*

 

Revenue isrecognized when it is probable that the economic benefits associated with thetransactions will flow to us and the amount of revenue can be measuredreliably.  Advance customer receipts that have not been recognized as revenue arerecorded as advances from customers and presented as a liability in the unauditedconsolidated balance sheet.  If the fee is not fixed or determinable, revenueis not recognized on those arrangements until the customer payment isreceived.  For arrangements requiring specific customer acceptance, revenue recognitionis deferred until the earlier of the end of the deemed acceptance period oruntil a written notice of acceptance is received from the customer.  Revenue onservices rendered to customers whose ability to pay is in doubt at the time ofperformance of services is also not recorded.  Rather, revenue is recognizedfrom these customers as payment is received.

 

*Incentives*

 

We recordinsignificant commission expenses based on the number of new subscriberconnections initiated by certain dealers.  All other cash incentives providedto dealers and customers are recorded as a reduction of revenue.  Product-basedincentives provided to dealers and customers as part of a transaction areaccounted for as multiple element arrangements and recognized when earned.

* *

*Non-serviceRevenues*

* *

*Handsetand equipment sales*

 

Sales ofcellular handsets and communication equipment are recognized upon delivery tothe customer.

 

*Interestincome*

 

Interestincome is recognized as it accrues on a time proportion basis taking into accountthe principal amount outstanding and the effective interest rate.  The majorityof interest income represents interest earned from cash and cash equivalents,short-term investments and investments in debt securities.

 

***Income Taxes***

 

*Current income tax*

 

Current incometax assets and liabilities for the current and prior periods are measured atthe amount expected to be recovered from or paid to the taxation authorities.The tax rates and tax laws used to compute the amount are those that areenacted or substantively enacted as at the balance sheet date.

 

*Deferred income tax*

 

Deferred income tax is providedusing the balance sheet liability method on all temporary differences at thebalance sheet date between the tax bases of assets and liabilities and theircarrying amounts for financial reporting purposes.

 

Deferred income taxliabilities are recognized for all taxable temporary differences except: (1)when the deferred income tax liability arises from the initial recognition ofgoodwill or of an asset or liability in a transaction that is not a businesscombination and, at the time of the transaction, affects neither the accountingprofit nor taxable profit or loss and (2) with respect to taxable temporarydifferences associated with investments in subsidiaries, associates andinterests in joint ventures, where the timing of the reversal of the temporarydifferences can be controlled and it is possible that the temporary differenceswill not reverse in the foreseeable future.  Deferred income tax assets arerecognized for all deductible temporary differences, carryforward benefit ofunused tax credits from excess minimum corporate income tax, or MCIT, andunused tax losses, to the extent that it is probable that taxable profit willbe available against which the deductible temporary differences andcarryforward benefit of unused tax credits and unused tax losses can beutilized except: (1) when the deferred tax asset relating to the deductibletemporary difference arises from the initial recognition of an asset orliability in a transaction that is not a business combination and, at the timeof the transaction, affects neither the accounting profit nor taxable profit orloss and (2) with respect to deductible temporary differences associated with investmentsin subsidiaries, associates and interests in joint ventures, deferred taxassets are recognized only to the extent that it is probable that the temporarydifferences will reverse in the foreseeable future and taxable profit will beavailable against which the temporary differences can be utilized.

 

Deferred income taxliabilities are not provided on non-taxable temporary differences associatedwith investments in domestic subsidiaries and associates.  With respect toinvestments in other subsidiaries and associates, deferred income taxliabilities are recognized except when the timing of the reversal of thetemporary difference can be controlled and it is probable that the temporarydifference will not reverse in the foreseeable future.

 

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

 

Deferred income tax assets and liabilitiesare measured at the tax rates that are expected to apply in the period when theasset is realized or the liability is settled, based on tax rates (and taxlaws) that have been enacted or substantively enacted as at the balance sheetdate.

 

Deferred income taxrelating to items recognized directly in equity is included in the related equityaccount and not in the unaudited consolidated statement of income.

 

Deferred incometax assets and liabilities are offset, if a legally enforceable right exists tooffset deferred income tax assets against deferred income tax liabilities andthe deferred income taxes relate to the same taxable entity and the sametaxation authority.

 

***Investments and OtherFinancial Assets and Liabilities***

 

Financial assets are categorizedas financial assets at fair value through profit or loss, loans andreceivables, held-to-maturity investments, or available-for-sale financial investments,as appropriate.  When financial assets are recognized initially, they aremeasured at fair value, plus, in the case of investments not at fair valuethrough profit or loss, directly attributable transaction costs.  We determinethe category of its financial assets on initial recognition and, where allowedand appropriate, re-evaluate this designation at each financial year-end.

 

All regular waypurchases and sales of financial assets are recognized on the trade date, whichis the date that we commit to purchase the asset. Regular way purchases orsales are purchases or sales of financial assets that require delivery ofassets within the period generally established by regulation or convention inthe marketplace.

 

*Day 1 profit*

 

Where the transactionprice in a non-active market is different to the fair value from otherobservable current market transactions in the same instrument or based on avaluation technique whose variables include only data from observable market, werecognize the difference between the transaction price and fair value (a Day 1 profit)in the unaudited consolidated statement of income unless it qualifies for recognitionas some other type of asset.  In cases where use is made of data which are notobservable, the difference between the transaction price and model value isonly recognized in the unaudited consolidated statement of income when theinputs become observable or when the instrument is derecognized.  For eachtransaction, we determine the appropriate method of recognizing the “Day 1”profit amount.

 

*Fair value*

 

The fair value ofinvestments that are actively traded in organized financial markets isdetermined by reference to quoted market bid prices at the close of business onthe balance sheet date.  For investments where there is no active market, fairvalue is determined using valuation techniques.  Such techniques include usingrecent arm’s-length market transactions; reference to the current market valueof another instrument which is substantially the same; discounted cash flowanalysis or other valuation models.

 

*Financial assets at fair value through profit or loss*

 

Financial assets at fair value through profit or lossinclude financial assets held-for-trading and financial assets designated uponinitial recognition as at fair value through profit or loss.  Financial assetsare classified as held-for-trading if they are acquired for the purpose ofselling in the near term.  Derivatives, including separated embeddedderivatives, are also classified as held-for-trading unless they are designatedas effective hedging instruments.  Gains or losses on investments held-for-tradingare recognized in profit or loss.

 

Financial assets maybe designated at initial recognition as at fair value through profit or loss ifany of the following criteria are met: (i) the designation eliminates orsignificantly reduces the inconsistent treatment that would otherwise arisefrom measuring the assets and liabilities or recognizing gains or losses onthem on a different basis; or (ii) the assets and liabilities are part of agroup of financial assets which are managed and their performance evaluated ona fair value basis, in accordance with a documented risk management strategy;or (iii) the financial assets and liabilities contain an embedded derivativethat would need to be separately recorded.  An embedded derivative is separatedfrom the hybrid or combined contract if all the following conditions are met: (a)the economic characteristics and risks of the embedded derivative are notclosely related to the economic characteristics and risks of the host contract;(b) a separate instrument with the same terms as the embedded derivative wouldmeet the definition of a derivative and (c) the hybrid instrument is notrecognized at fair value through profit or loss.

 

Subsequentreassessment is prohibited unless there is a change in the terms of thecontract that significantly modifies the cash flows that otherwise would berequired under the contract, in which case reassessment is required.  Wedetermine whether a modification to cash flows is significant by consideringthe extent to which the expected future cash flows associated with the embeddedderivative, the host contract or both have changed and whether the change issignificant relative to the previously expected cash flow on the contract.

 

*Loans and receivables*

 

Loans and receivables are non-derivative financialassets with fixed or determinable payments that are not quoted in an activemarket.  After initial measurement, loans and receivables are carried at amortizedcost using the effective interest method less any allowance for impairment.  Gainsand losses are recognized in profit or loss when the loans and receivables arederecognized or impaired, as well as through the amortization process.  Assetsin this category are included in current assets, except for maturities greaterthan 12 months after the balance sheet date, which are classified asnon-current assets.

 

*Held-to-maturityinvestments*

 

Non-derivative financial assets with fixed ordeterminable payments and fixed maturities are classified as held-to-maturitywhen we have the positive intention and ability to hold to maturity.  Afterinitial measurement, held-to-maturity investments are measured at amortizedcost using the effective interest rate method.  Gains and losses are recognizedin profit or loss when the investments are derecognized or impaired, as well asthrough the amortization process.  Assets in this category are included undercurrent assets, except for maturities greater than 12 months after the balancesheet date, which are classified as non-current assets.

 

*Available-for-salefinancial investments*

 

Available-for-salefinancial investments are those non-derivative financial assets that aredesignated as available-for-sale or are not classified in any of the threepreceding categories.  They are purchased and held indefinitely, and may besold in response to liquidity requirements or changes in market conditions.  Afterinitial measurement, available-for-sale financial investments are measured atfair value with unrealized gains or losses recognized directly in equity untilthe investment is derecognized or determined to be impaired at which time thecumulative gain or loss previously recorded in equity is recognized in profitor loss.  They are included under non-current assets unless we intend todispose of the investment within 12 months of the balance sheet date.

 

***Impairmentof Financial Assets***

 

We assess at each balance sheet date whether afinancial asset or group of financial assets is impaired.

 

*Financialassets carried at amortized cost*

 

For loans andreceivables carried at amortized cost, we assess whether objective evidence ofimpairment exists individually for financial assets that are individuallysignificant, or collectively for financial assets that are not individuallysignificant.  If we determine that no objective evidence of impairment existsfor individually assessed financial asset, whether significant or not, weinclude the asset in a group of financial assets with similar credit riskcharacteristics and collectively assesses for impairment.  Those characteristicsare relevant to the estimation of future cash flows for groups of such assetsby being indicative of the debtors’ ability to pay all amounts due according tothe contractual terms of the assets being evaluated.  Assets that areindividually assessed for impairment and for which an impairment loss is, orcontinues to be recognized, are not included in a collective assessment forimpairment.

 

If there isobjective evidence that an impairment loss has been incurred, the amount of theloss is measured as the difference between the asset’s carrying amount and thepresent value of the estimated future cash flows (excluding future creditlosses that have not been incurred).  The present value of the estimated futurecash flows is discounted at the financial asset’s original effective interestrate.  If a loan receivable has a variable interest rate, the discount rate formeasuring any impairment loss is the current effective interest rate, adjustedfor the original credit risk premium. The calculation of the present value ofthe estimated future cash flows of a collateralized financial asset reflectsthe cash flows that may result from foreclosure less costs for obtaining andselling the collateral, whether or not foreclosure is probable.

 

The carrying amountof the asset is reduced through the use of an allowance account and the amountof loss is charged to the unaudited consolidated statement of income.  Interestincome continues to be recognized based on the original effective interest rateof the asset.  Loans and receivables, together with the associated allowanceaccounts, are written-off when there is no realistic prospect of futurerecovery and all collateral has been realized.  If, in a subsequent period, theamount of the estimated impairment loss decreases because of an event occurringafter the impairment was recognized, the previously recognized impairment lossis reduced by adjusting the allowance account.  If a future write-off is laterrecovered, any amount formerly charged is credited to the income account.

 

For thepurpose of a collective evaluation of impairment, financial assets are groupedon the basis of such credit risk characteristics as industry, past-due or collectibilitystatus and term.  

 

Future cashflows in a group of financial assets that are collectively evaluated forimpairment are estimated on the basis of historical loss experience for assetswith similar credit risk characteristics.  Historical loss****experience isadjusted on the basis of current observable data to reflect the effects ofcurrent conditions that did not affect the period at which the historical lossexperience is based and to remove the effects of conditions in the historicalperiod that do not currently exist.  Estimates of changes in future cash flowsreflect, and are directionally consistent with changes in related observabledata from period to period (such changes in unemployment rates, propertyprices, commodity prices, payment status, or other factors that are indicativeof incurred losses and their magnitude).  The methodology and assumptions usedfor estimating future cash flows are reviewed regularly by management to reduceany differences between loss estimates and actual loss experience.

* *

*Available-**for-sale financial investments*

 

In case of equity investments classified as available-for-sale financialinvesments, an objective evidence of impairment would include a significant orprolonged decline in the fair value of the investments below its cost. 

 

Where there isevidence of impairment, the cumulative loss, measured as the difference betweenthe acquisition cost and the current fair value, less any impairment loss onthat financial asset previously recognized in the unaudited consolidated statementof income, is removed from equity and recognized in the unaudited consolidated statementof income.  Impairment losses on equity investments are not reversed throughthe unaudited consolidated statement of income.  Increases in fair value afterimpairment are recognized directly in equity.

 

In the case of debt instruments classified as available-for-sale,impairment is assessed based on the same criteria as financial assets carriedat amortized cost.  Interest continues to be accrued at the original effectiveinterest rate on the reduced carrying amount of the asset and is recorded aspart of “Interest income” account in the unaudited consolidated statement ofincome.  If, in subsequent period, the fair value of a debt instrumentincreased and the increase can be objectively related to an event occurring afterthe impairment loss was recognized in the unaudited consolidated statement ofincome, the impairment loss is reversed through the unaudited consolidated statementof income.

 

***Financial liabilities***

 

*Interest**-bearing loans and borrowings*

 

All loans and borrowings are initially recognized at fair value lessdirectly attributable transaction costs.  After initial recognition, interest-bearingloans and borrowings are subsequently measured at amortized cost using theeffective interest rate method.

 

Gains andlosses are recognized in profit or loss when the liabilities are derecognizedas well as through the amortization process.

 

*Financialliabilities at fair value through profit or loss*

 

Financialliabilities at fair value through profit or loss include financial liabilitiesheld-for-trading and financial liabilities designated upon initial recognitionas at fair value through profit or loss.

 

Financialliabilities are classified as held-for-trading if they are acquired for thepurpose of selling in the near term. Derivatives, including separated embeddedderivatives are also classified as held-for-trading unless they are designatedas effective hedging instruments.

 

Gains orlosses on liabilities held-for-trading and those designated at fair valuethrough profit or loss are recognized in profit or loss.

 

***Derecognitionof Financial Assets and Liabilities***

 

*Financialassets*

 

A financialasset (or, where applicable, a part of a financial asset or part of a group ofsimilar financial assets) is derecognized when:  (1) the rights to receive cashflows from the asset have expired; (2) we retain the right to receive cashflows from the asset, but have assumed an obligation to pay them in fullwithout material delay to a third party under a “pass through” arrangement; or(3) we have transferred our right to receive cash flows from the asset andeither (a) have transferred substantially all the risks and rewards of theasset, or (b) have neither transferred nor retained substantially all the risksand rewards of the asset, but have transferred control of the asset.

 

Where we have transferred our rightto receive cash flows from an asset and have neither transferred nor retainedsubstantially all the risks and rewards of the asset nor transferred control ofthe asset, the asset is recognized to the extent of our continuing involvementin the asset.  Continuing involvement that takes the form of a guarantee overthe transferred asset is measured at the lower of the original carrying amountof the asset and the maximum amount of consideration that we could be requiredto repay.

 

Wherecontinuing involvement takes the form of a written and/or purchased option(including a cash-settled option or similar provision) on the transferredasset, the extent of our continuing involvement is the amount of thetransferred asset that we may repurchase, except that in the case of a writtenput option (including a cash-settled option or similar provision) on an assetmeasured at fair value, the extent of our continuing involvement is limited tothe lower of the fair value of the transferred asset and the option exerciseprice.

 

*Financialliabilities*

 

A financialliability is derecognized when the obligation under the liability is dischargedor cancelled or has expired.

 

Where an existing financialliability is replaced by another from the same lender on substantiallydifferent terms, or the terms of an existing liability are substantiallymodified, such an exchange or modification is treated as a derecognition of theoriginal liability and the recognition of a new liability, and the differencein the respective carrying amounts is recognized in the unaudited consolidated statementof income.

 

*Offsettingfinancial instruments*

 

Financialassets and financial liabilities are offset and the net amount reported in the unauditedconsolidated balance sheet if, and only if, there is a currently enforceablelegal right to offset the recognized amounts and there is an intention tosettle on a net basis, or to realize the asset and settle the liability simultaneously.This is not generally the case with master netting agreements, and the relatedassets and liabilities are presented gross in the unaudited consolidatedbalance sheet.

 

***Derivative FinancialInstruments and Hedging***

 

We use derivative financial instruments,such as long-term currency swaps, foreign currency options, forward currencycontracts and interest rate swaps, to hedge our risks associated with interestrate and foreign currency fluctuations.  Such derivative financial instrumentsare initially recognized at fair value on the date on which a derivativecontract is entered into and are subsequently re-measured at fair value.Derivatives are carried as assets when the fair value is positive and asliabilities when the fair value is negative.

 

Any gainsor losses arising from changes in fair value on derivatives during the period thatdo not qualify for hedge accounting are taken directly to the losses or gainson derivative financial instruments account in the unaudited consolidated statementof income.

 

The fairvalue of forward currency contracts is calculated by reference to currentforward exchange rates for contracts with similar maturity profiles.  The fairvalue of long-term currency swaps, foreign currency options and interest rateswap contracts is determined using applicable valuation techniques.  See *Note26 – Financial Assets and Liabilities*.

 

For thepurpose of hedge accounting, hedges are classified as: (1) fair value hedgeswhen hedging the exposure to changes in the fair value of a recognized financialasset or liability or an unrecognized firm commitment (except for foreign-currencyrisk); (2) cash flow hedges when hedging exposure to variability in cash flowsthat is either attributable to a particular risk associated with a recognized financialasset or liability or a highly probable forecast transaction or the foreign-currencyrisk in an unrecognized firm commitment; or (3) hedges of a net investment in aforeign operation.

 

At the inception of a hedgerelationship, we formally designate and document the hedge relationship towhich we wish to apply hedge accounting and the risk management objective andstrategy for undertaking the hedge.  The documentation includes identificationof the hedging instrument, the hedged item or transaction, the nature of therisk being hedged and how we will assess the hedging instrument’s effectivenessin offsetting the exposure to changes in the hedged item’s fair value or cashflows attributable to the hedged risk.  Such hedges are expected to be highlyeffective in achieving offsetting changes in fair value or cash flows and areassessed on an on-going basis to determine that they actually have been highlyeffective throughout the financial reporting periods for which they aredesignated.  For situation when that hedged item is a forecast transaction, weassess whether transaction is highly probable and prevent an exposure tovariations in cash flows that could ultimately affect the unaudited consolidatedstatement of income.

 

Hedges which meet the strictcriteria for hedge accounting are accounted for as follows:

 

*Fair value hedges*

 

The change in the fair value of ahedging derivative is recognized in the unaudited consolidated statement ofincome.  The change in the fair value of the hedged item attributable to therisk being hedged is recorded as part of the carrying value of the hedged itemand is also recognized in the unaudited consolidated statement of income.

 

The fair value for financialinstruments traded in active markets at the balance sheet date is based ontheir quoted market price or dealer price quotations (bid price for longpositions and ask price for short positions), without any deduction fortransaction costs.  When current bid and asking prices are not available, the priceof the most recent transaction provides evidence of the current fair value aslong as there has not been a significant change in economic circumstances sincethe time of the transaction.  For all other financial instruments not listed inan active market, the fair value is determined by using an appropriatevaluation techniques.  Valuation techniques include net present value techniques,comparison to similar instruments for which market observable prices exist,options pricing models, and other relevant valuation models.

 

When an unrecognized firmcommitment is designated as a hedged item, the subsequent cumulative change inthe fair value of the firm commitment attributable to the hedged risk isrecognized as financial asset or liability with a corresponding gain or lossrecognized in the unaudited consolidated statement of income.  The changes inthe fair value of the hedging instrument are also recognized in the unaudited consolidatedstatement of income.

 

*Cash flowhedges*

 

Theeffective portion of the gain or loss on the hedging instrument is recognizeddirectly in equity, while any ineffective portion is recognized immediately inthe unaudited consolidated statement of income.

 

Amounts taken to equity aretransferred to the unaudited consolidated statement of income when the hedgedtransaction affects the unaudited consolidated statement of income, such aswhen the hedged financial income or financial expense is recognized or when aforecast sale occurs.  Where the hedged item is the cost of a non-financial assetor non-financial liability, the amounts taken to equity are transferred to theinitial carrying amount of the non-financial asset or liability.

 

If theforecast transaction or firm commitment is no longer expected to occur, amountspreviously recognized in equity are transferred to the unaudited consolidated statementof income.  If the hedging instrument expires or is sold, terminated orexercised without replacement or rollover, or if its designation as a hedge isrevoked, amounts previously recognized in equity remain in equity until theforecast transaction or firm commitment occurs.

 

*Hedges ofa net investment*

 

Hedges of anet investment in a foreign operation, including a hedge of a monetary itemthat is accounted for as part of the net investment, are accounted for in a waysimilar to cash flow hedges.  Gains or losses on the hedging instrumentrelating to the effective portion of the hedge are recognized directly inequity while any gains or losses relating to the ineffective portion arerecognized in the unaudited consolidated statement of income.  On disposal ofthe foreign operation, the cumulative value of any such gains or lossesrecognized directly in equity is transferred to the unaudited consolidated statementof income.

 

**NewAccounting Standards Subsequent to March 31, 2008**

 

Set forthbelow are the new PFRS accounting standards and Philippine Interpretations thatwill become effective subsequent to March 31, 2008:

 

•        ***PFRS 8, “Operating Segments”.***This standard willbecome effective for financial years beginning on or after January 1, 2009 andwill replace PAS 14.  This standard requires an entity to report financial anddescriptive information about our reportable segments.  The requirements ofthis standard will be included in our unaudited consolidated financialstatements for the fiscal year ending December 31, 2009.

 

•        ***PAS 23, “Borrowing Costs” – Revised.***This standardwill become effective for financial years beginning on or after January 1,2009.  The revised standard eliminates the option of expensing all borrowingcosts and requires borrowing costs to be capitalized if they are directlyattributable to the acquisition, construction or production of a qualifyingasset as part of the cost of those assets.

 

•        ***PAS 1 (Revised), “Presentation of Financial Statements”.***Thisstandard will become effective for financial years beginning on or afterJanuary 1, 2009.  PAS 1 has been revised to enhance the usefulness ofinformation presented in the unaudited consolidated financial statements.  Thekey changes are: (1) the statement of changes in equity includes onlytransactions with owners and all non-owner changes are presented in equity as asingle line with details included in a separate statement.  Owners are definedas “holders of instruments classified as equity”; (2) the introduction of a newstatement of comprehensive income that combines all items of income and expenserecognized in profit or loss together with “other comprehensive income”.  Therevisions specify what is included in other comprehensive income, such as gainsand losses on available-for-sale financial investments, actuarial gains andlosses on defined benefit pension plans and changes in the asset revaluationreserve.  Entities can choose to present all items in one statement, or topresent two linked statements, a separate unaudited consolidated statement ofincome and a statement of comprehensive income; (3) amounts reclassified toprofit or loss that were previously recognized in other comprehensive income(for example, previously unrealized gains on available-for-sale financial investmentsthat are sold) must be separately disclosed, either in the statement ofcomprehensive income itself or in the notes; (4) entities must disclose theincome tax relating to each component of other comprehensive income.  This canbe presented in the statement of comprehensive income itself or in the notes;(5) when an entity restates its financial statements or retrospectively appliesa new accounting policy, a statement of financial position must be presented asat the beginning of the earliest comparative period; (6) dividends to equityholders can now be shown only in the statement of changes in equity or in thenotes; and (7) the introduction of new terminology, replacing “balance sheet”with “statement of financial position” and “cash flow statement” with“statement of cash flows”, although the titles are not obligatory.  Therequirements of this standard will be included in our unaudited consolidatedfinancial statements for the fiscal year ending December 31, 2009.

 

•        ***Philippine Interpretation IFRIC 13, “Customer LoyaltyProgrammes”.***This interpretation will become effective for financialyears beginning on or after July 1, 2008.  This Interpretation requires thatloyalty award credits granted to customers as part of a sales transaction areaccounted for as a separate component of the sales transactions.  Theconsideration received in the sales transactions is allocated between theloyalty award credits and the other components of the sale.  The amountallocated to the loyalty award credits is determined by reference to their fairvalue and is deferred until the awards are redeemed or the liability isotherwise extinguished.  If the cost of fulfilling the awards is expected toexceed the consideration received, the entity will have an onerous contract anda liability for the excess must be recognized.

 

We expect that the adoption of thepronouncements listed above will have no significant impact on our unaudited consolidatedfinancial statements in the period of our initial application, except that managementis still evaluating the impact of Philippine Interpretations IFRIC 13 and PFRS8.

 

 

 

**3.     Management’s Use of Judgments, Estimatesand Assumptions**

 

The preparation of ourunaudited consolidated financial statements in conformity with PFRS requires usto make judgments, estimates and assumptions that affect the reported amountsof our revenues, expenses, assets and liabilities and disclosure of contingent liabilitiesat the reporting date.  The uncertainties inherent in these assumptions andestimates could result in outcomes that could require a material adjustment tothe carrying amount of the assets or liabilities affected in the future.

 

***Judgments***

 

In theprocess of applying the PLDT Group’s accounting policies, management has madethe following judgments, apart from those including estimations and assumptions,which have the most significant effect on the amount recognized in the unauditedconsolidated financial statements.

 

*Determinationof functional currency*

 

The functionalcurrencies of the entities under PLDT Group are the currency of the primaryeconomic environment in which each entity operates.  It is the currency thatmainly influences the revenue and cost of rendering services.

 

Based on the economicsubstance of the underlying circumstances relevant to the PLDT Group, thefunctional and presentation currency of the PLDT Group (except for SCH, SGP,3rd Brand, Mabuhay Satellite, PLDT Global, Digital Paradise Thailand and SPi and certain of its subsidiaries) is the Philippine peso.  The functional andpresentation currency of Mabuhay Satellite, PLDT Global, SPi and certain of itssubsidiaries is the U.S. dollar; Thai baht for Digital Paradise Thailand and Singaporedollar for SCH, SGP and 3rd Brand.

 

*Leases*

 

We have various lease agreements as a lessee inrespect of our certain equipment and properties.  We evaluate whethersignificant risks and rewards of ownership of the leased properties aretransferred to us or retained at the lessor based on *PAS 17*,*“Leases”*,which requires us to make judgments and estimates of transfer of risk andrewards of ownership of the leased properties.  Total lease expense arisingfrom operating leases amounted to Php879 million and Php690 million for the threemonths ended March 31, 2008 and 2007, respectively.  Total finance leaseobligations as at March 31, 2008 and December 31, 2007 amounted to Php204million and Php496 million, respectively.  See *Note 18 – Interest-bearingFinancial Liabilities, Note 24 – Contractual Obligations and CommercialCommitments*and*Note 26 – Financial Assets and Liabilities*.

*** ***

*Determinationof fair values of financial assets and liabilities*

 

We carry certain of our financial assets andliabilities at fair value, which requires extensive use of accounting estimatesand judgments for the fair values of financial assets and liabilities.  Inaddition, certain liabilities acquired through debt exchange and restructuringare required to be carried at fair value at the time of the debt exchange andrestructuring.  See *Note**26 – Financial Assets and Liabilities*.While significant components of fair value measurement were determined usingverifiable objective evidence (i.e., foreign exchange rates, interest rates andvolatility rates), the amount of changes in fair value would differ if weutilized a different valuation methodology.  Any change in fair value of thesefinancial assets and liabilities would directly affect our unaudited consolidatedstatement of income and consolidated statement of changes in equity.

 

Total fairvalues of financial assets and liabilities as at March 31, 2008 amounted to Php64,426million and Php132,302 million, respectively, while the total fair values offinancial assets and liabilities as at December 31, 2007 amounted to Php46,661million and Php111,086 million, respectively.  See *Note 26 – FinancialAssets and Liabilities*.

 

*Legalcontingencies*

 

We are currently involved invarious legal proceedings.  Our estimate of the probable costs for theresolution of these claims has been developed in consultation with outsidecounsel handling our defense in these matters and is based upon an analysis ofpotential results.  We currently do not believe these proceedings will have amaterial adverse effect on our unaudited consolidated financial statements.  Itis possible, however, that future results of operations could be materiallyaffected by changes in our estimates or in the effectiveness of our strategiesrelating to these proceedings.  See *Note 25 – Provisions and Contingencies.*

 

***Estimatesand Assumptions***

 

The key estimatesand assumptions concerning the future and other key sources of estimationuncertainty at the balance sheet date that have a significant risk of causing amaterial adjustment to the carrying amounts of assets and liabilities withinthe next financial period are discussed below:

 

*Estimating useful lives ofproperty, plant and equipment*

 

We estimate theuseful lives of our property, plant and equipment based on the periods overwhich our assets are expected to be available for use.  Our estimation of theuseful lives of our property, plant and equipment is based on our collectiveassessment of industry practice, internal technical evaluation and experiencewith similar assets.  The estimated useful lives of our property, plant andequipment are reviewed at least at each financial year-end and are updated ifexpectations differ from previous estimates due to physical wear and tear,technical or commercial obsolescence and legal or other limitations on the useof our assets.  It is possible, however, that future results of operationscould be materially affected by changes in our estimates brought about bychanges in the factors mentioned above.  The amounts and timing of recordedexpenses for any period would be affected by changes in these factors andcircumstances.  A reduction in the estimated useful lives of our property,plant and equipment would increase our recorded operating expenses and decreaseour noncurrent assets.

 

Total carrying valuesof property, plant and equipment, net of accumulated depreciation andamortization amounted to Php156,112 million and Php159,414 million as at March31, 2008 and December 31, 2007, respectively.  See *Note 8 – Property, Plantand Equipment*and *Note 26 – Financial Assets and Liabilities*.

 

*Investmentproperties*

 

We have adopted the fair value approach in determiningthe carrying value of our investment properties.  We opted to rely onindependent appraisers in determining the fair values of our investmentproperties, and such fair values were determined based on recent prices ofsimilar properties, with adjustments to reflectany changes in economic conditions since the date of those transactions.  Theamounts and timing of recorded changes in fair value for any period woulddiffer if we made different judgments and estimates or utilized a differentbasis for determining fair value.

 

Total carrying valuesof our investment properties as at March 31, 2008 and December 31, 2007amounted to Php577 million.  See *Note 10 – Investment Properties*and *Note26 – Financial Assets and Liabilities*.

 

*Goodwilland intangible assets*

 

Our unaudited consolidated financial statements and results ofoperations reflect acquired businesses after the completion of the respectiveacquisition.  We account for the acquired businesses using the purchase method of accounting which requiresextensive use of accounting estimates and judgments to allocate the purchaseprice to the fair market values of the acquiree’s identifiable assets and liabilitiesat the acquisition date.  Any excess inthe purchase price over the estimated fair market values of the net assetsacquired is recorded as goodwill in the unaudited consolidated balance sheet.  Our business acquisitions have resulted in goodwilland intangible assets, which are subject to annual impairment test andamortization, respectively.  See *Note 11 – Goodwill and Intangible Assets*.Thus, the numerous judgments made inestimating the fair market value to be assigned to the acquiree’s assets and liabilitiescan materially affect our results of operations.

 

Total carrying values of goodwill and intangibleassets as at March 31, 2008 and December 31, 2007 amounted to Php11,730 millionand Php11,721 million, respectively.  See *Note 11 – Goodwill and IntangibleAssets* and *Note 26 – Financial Assets and Liabilities*.

 

*Realizabilityof deferred income tax assets*

 

We review the carrying amounts of deferred income taxassets at each balance sheet date and reduce these to the extent that it is nolonger probable that sufficient taxable income will be available to allow allor part of the deferred income tax assets to be utilized.  Our assessment onthe recognition of deferred income tax assets on deductible temporarydifferences is based on the level and timing of forecasted taxable income ofthe subsequent reporting periods.  This forecast is based on our past resultsand future expectations on revenues and expenses as well as future tax planningstrategies.  However, there is no assurance that we will generate sufficienttaxable income to allow all or part of our deferred income tax assets to beutilized.

 

Based on the aboveassessment, we have not recognized certain of our deferred income tax assets asat March 31, 2008 and December 31, 2007 amounting to Php1,309 million and Php1,122million, respectively.  Total net deferred income tax assets as at March 31,2008 and December 31, 2007 amounted to Php11,483 million and Php13,757 million,respectively, while total net deferred income tax liabilities as at March 31,2008 and December 31, 2007 amounted to Php2,086 million and Php2,155 million,respectively.  See *Note 6 – Income Tax*.

 

*Estimatingallowance for doubtful accounts*

 

We estimate the allowance for doubtful accountsrelated to our trade receivables that are specifically identified as doubtfulof collection.  The level of allowance is evaluated by management on the basisof factors that affect the collectibility of the accounts.  In these cases, weuse judgment based on the best available facts and circumstances, including butnot limited to, the length of our relationship with the customer and thecustomer’s credit status based on third party credit reports and known marketfactors, to record specific reserves for customers against amounts due in orderto reduce our receivables to amounts that we expect to collect.  These specificreserves are re-evaluated and adjusted as additional information receivedaffect the amounts estimated.

 

In addition to specific allowance against individuallysignificant receivables, we also assess a collective impairment allowanceagainst credit exposures of our customer which were grouped based on common creditcharacteristic, which, although not specifically identified as requiring aspecific allowance, have a greater risk of default than when the receivableswere originally granted to customers.  This collective allowance is based on historicalloss experience using various factors such as historical performance of thecustomers within the collective group, deterioration in the markets in whichthe customers operate, and identified structural weaknesses or deterioration inthe cash flows of customers.

 

Impairment provisionfor receivable recognized in our unaudited consolidated statements of income amountedto Php291 million and Php163 million for the three months ended March 31, 2008and 2007, respectively.  Trade and other receivables, net of impairment,amounted to Php11,903 million and Php12,645 million as at March 31, 2008 and December31, 2007, respectively.  See *Note 5 – Income and Expenses, Note 14 – Tradeand Other Receivables* and *Note 26 – Financial Assets and Liabilities*.

 

*Estimationof pension cost and other retirement benefits*

 

The determination ofour obligation and cost for pension and other retirement benefits is dependenton our selection of certain assumptions used by actuaries in calculating suchamounts.  Those assumptions are described in *Note 23 – Share-based Payments andEmployee Benefits* and include, among other things, discount rates, expectedreturns on plan assets and rates of compensation increases.  Actual resultsthat differ from our assumptions are recognized as income or expense when thenet cumulative unrecognized actuarial gains and losses at the end of theprevious reporting period exceed 10% of the higher of the defined benefitobligation and the fair value of plan assets at that date.  While we believethat our assumptions are reasonable and appropriate, significant differences inour actual experience or significant changes in our assumptions may materiallyaffect our pension and other retirement obligations.

 

Total pension benefitcosts amounted to Php175 million and Php398 million for the three months ended March31, 2008 and 2007, respectively.  Unrecognized net actuarial gain as at March31, 2008 and December 31, 2007 amounted to Php1,339 million and Php1,344million, respectively.  The accrued benefit costs as at March 31, 2008 andDecember 31, 2007 amounted to Php3,021 million and Php2,985 million,respectively.  See *Note 23 – Share-based Payments and Employee Benefits*.

 

*Share-based payment transactions*

 

Our LTIP grants SARsto our eligible key executives and advisors.  Under the LTIP, we recognize theservices we receive from the eligible key executives and advisors, and ourliability to pay for those services, as the eligible key executives andadvisors render services during the vesting period.  We measure our liability,initially and at each reporting date until settled, at the fair value of theSARs, by applying an option valuation model, taking into account the terms andconditions on which the SARs were granted, and the extent to which the eligiblekey executives and advisors have rendered service to date.  We recognize anychanges in fair value at each reporting date until settled, in the results ofoperations for the period. The estimates and assumptions are described in *Note23 – Share-based Payments and Employee Benefits* and include, among otherthings, annual stock volatility, risk-free interest rate, dividends yield, the remaininglife of options, and the fair value of common stock.  While management believesthat the estimates and assumptions used are reasonable and appropriate,significant differences in our actual experience or significant changes in the estimatesand assumptions may materially affect the stock compensation costs charged tooperations.  The fair value of the LTIP recognized as an income for the threemonths ended March 31, 2008 amounted to Php77 million and the fair value of theLTIP recognized as an expense for the three months ended March 31, 2007 amountedto Php260 million.  As at March 31, 2008 and December 31, 2007, outstanding LTIPliability amounted to Php1,417 million and Php1,494 million,respectively.  See *Note 5 – Income and Expenses* and *Note 23 – Share-basedPayments and Employee Benefits*.

 

*Asset retirement obligations*

 

Asset retirement obligations arerecognized in the period in which they are incurred if a reasonable estimate offair value can be made. This requires an estimation of the cost to restore/dismantleon a per square meter basis, depending on the location, and is based on thebest estimate of the expenditure required to settle the obligation at the futurerestoration/dismantlement date, discounted at the balance sheet date using apre-tax rate that reflects the current market assessment of the time value ofmoney and, where appropriate, the risk specific to the liability.  Totalprovision for asset retirement obligations amounted to Php990 million and Php952million as at March 31, 2008 and December 31, 2007, respectively.  See *Note8 – Property, Plant and Equipment* and *Note 19 – Deferred Credits and OtherNoncurrent Liablities*.

 

*Assetimpairment*

 

PFRS requires that an impairment review be performedwhen certain impairment indicators are present.  In the case of goodwill, at a minimum,such asset is subject to an annual impairment test and more frequently wheneverthere is an indication that such asset may be impaired.  This requires anestimation of the value in use of the cash-generating units to which thegoodwill is allocated.  Estimating the value in use requires us to make anestimate of the expected future cash flows from the cash-generating unit and tochoose a suitable discount rate in order to calculate the present value ofthose cash flows.

 

Determining the fair values of property, plant andequipment, investments and intangible assets, which requires the determinationof future cash flows expected to be generated from the continued use andultimate disposition of such assets, requires us to make estimates andassumptions that can materially affect our unaudited consolidated financialstatements.  Future events could cause us to conclude that property, plant andequipment, investments and intangible assets associated with an acquired businessare impaired.  Any resulting impairment loss could have a material adverseimpact on our financial condition and results of operations.

 

The preparation ofestimated future cash flows involves significant estimations and assumptions.While we believe that our assumptions are appropriate and reasonable,significant changes in our assumptions may materially affect our assessment ofrecoverable values and may lead to future additional impairment charges under PFRS. Total impairment charges for the three months ended March 31, 2008 and 2007 amountedto Php302 million and Php226 million, respectively.  See *Note 4 – SegmentInformation*and *Note* 5 – *Income and Expenses*.

 

The carrying values of our property, plant andequipment, investments in associates, goodwill and intangible assets, trade andother receivables and inventories and supplies are separately disclosed in *Notes8, 9, 11, 14*and*15*, respectively.

 

*Revenuerecognition*

 

Our revenue recognition policies require us to makeuse of estimates and assumptions that may affect the reported amounts of ourrevenues and receivables.  

 

Our agreements withdomestic and foreign carriers for inbound and outbound traffic subject tosettlements require traffic reconciliations before actual settlement is done,which may not be the actual volume of traffic as measured by us.  Initialrecognition of revenues is based on our observed traffic adjusted by our normalexperience adjustments, which historically are not material to our unaudited consolidatedfinancial statements.  Differences between the amounts initially recognized andthe actual settlements are taken up in the accounts upon reconciliation.However, there is no assurance that such use of estimates will not result in materialadjustments in future periods.

 

Revenues under amultiple element arrangement specifically applicable to our wireless business aresplit into separately identifiable components and recognized when the relatedcomponents are delivered in order to reflect the substance of the transaction.The fair value of components is determined using verifiable objective evidence.

 

Under certain arrangements with ourknowledge processing solutions services, if there is uncertainty regarding theoutcome of the transaction for which service was rendered, revenue isrecognized only to the extent of expenses incurred for rendering the serviceand such amount is determined to be recoverable.

 

We recognize our revenues frominstallation and activation related fees and the corresponding costs over theexpected average periods of customer relationship for fixed line and cellularservices.  We estimate the expected average period of customer relationshipbased on our most recent churn-rate analysis.

 

 

 

 

 

**4.     Segment Information**

 

Operating segments are components of the PLDT Group thatengage in business activities from which they may earn revenues and incurexpenses (including revenues and expenses relating to transactions with othercomponents of PLDT), whose operating results are regularly reviewed by theenterprise’s chief operating decision-maker to make decisions about how resourcesare to be allocated to the segment and assess their performances, and for whichdiscrete financial information are available.  The accounting policies of thereportable segments are the same as those described in *Note 2 – Summary ofSignificant Accounting Policies and Practices*.

 

We have organized our business into three mainsegments:

 

•        Wireless – wireless telecommunications services provided throughour cellular service providers namely, Smart and Piltel, SBI, our wirelessbroadband provider, Wolfpac, our wireless content operator, and MabuhaySatellite and ACeS Philippines, our wireless broadband satellite and otherservice operators;

 

•        Fixed Line – fixed line telecommunications services primarilyprovided through PLDT.  We also provide fixed line services through PLDT’ssubsidiaries ClarkTel, SubicTel, Maratel, Piltel, BCC, PLDT Global and SNMI,which together account for approximately 3% of our consolidated fixed linesubscribers; and

 

•        ICT – information and communications infrastructure and servicesfor internet applications, internet protocol-based solutions and multimediacontent delivery provided by ePLDT; customer interaction services (formerlyreferred to as call center business) provided under the umbrella brand name *ePLDTVentus*, including Ventus, Parlance and Vocativ; knowledge processing solutionsservices (formerly referred to as business process outsourcing) provided throughthe SPi Group (consolidated since July 11, 2006); and internet access andonline gaming services provided by ePLDT’s subsidiaries Infocom, DigitalParadise, Digital Paradise Thailand, netGames, Airborne Access and Level Up!.

 

Transfer prices between businesssegments are set on terms similar to transactions with third parties.  Segmentrevenue, segment expense and segment result include transfers between businesssegments.  These transfers are eliminated upon consolidation.

 

Most of our revenuesare derived from our operations within the Philippines.

 

The segment assets and liabilitiesas at March 31, 2008 and December 31, 2007 and results of operations and cashflows of our reportable business segments for the three months ended March 31,2008 and 2007 are as follows:

 

** **

**Wireless**

**Fixed Line**

**ICT**

**Inter-segment Transactions**

** **

**Total**

 

(in million pesos)

* *

* *

 

 

 

 

***As at and for the three months ended March 31, 2008 (Unaudited)***

**Revenues and Other Income**

 

 

 

 

 

Service revenues

22,465

12,367

2,575

(2,474)

34,933

External party

22,372

10,154

2,407

–

34,933

Inter-segment transactions

93

2,213

168

(2,474)

–

Gains on derivative transactions – net

(124)

1,951

(31)

(19)

1,777

Non-service revenues (Note 5)

 344

  99

  40

(1)

482

External party

344

99

39

–

 482

Inter-segment transactions

–

–

1

(1)

–

Interest income

310

135

5

–

 450

Others

 100

181

  18

(42)

257

External party

74

166

17

–

257

Inter-segment transactions

26

15

1

(42)

–

Segment income

23,095

14,733

2,607

(2,536)

37,899

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income before income tax

11,048

5,119

18

(18)

16,167

Provision for (benefit from) income tax (Notes 2 and 6)

3,976

1,598

(14)

–

5,560

Net income for the period

7,072

3,521

  32

(18)

10,607

** **

 

 

 

 

 

Assets and liabilities

 

 

 

 

 

Segment assets

103,530

189,435

17,754

(68,706)

242,013

Deferred income tax assets (Notes 2, 6 and 26)

447

10,948

88

–

11,483

Total assets

103,977

200,383

17,842

(68,706)

253,496

 

 

 

 

 

 

Segment liabilities

72,660

99,329

5,099

(25,017)

152,071

Deferred income tax liabilities (Notes 2, 6 and 26)

1,637

–

449

–

2,086

Total liabilities

74,297

99,329

5,548

(25,017)

154,157

 

 

** **

** **

** **

** **

Cash flows

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

15,253

6,610

306

–

22,169

Investing activities

(12,364)

(421)

(134)

–

(12,919)

Financing activities

936

(1,279)

184

–

(159)

 

 

** **

** **

** **

** **

Other segment information

 

** **

** **

** **

** **

Capital expenditures

1,762

1,150

139

–

3,051

Depreciation and amortization (Note 8)

3,154

2,993

216

–

6,363

Interest on loans and related items – net (Note 5)

284

802

9

–

1,095

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

61

244

(3)

–

302

* *

 

* *

* *

* *

* *

***As at December 31, 2007 (Audited) and for the three months ended March 31, 2007 (Unaudited)***

** **

**Revenues and Other Income**

 

 

 

 

 

Service revenues

20,811

11,887

2,425

(2,052)

33,071

External party

20,692

9,947

2,432

–

33,071

Inter-segment transactions

119

1,940

(7)

(2,052)

–

Foreign exchange gains – net

365

251

(28)

–

588

Non-service revenues (Note 5)

576

15

33

(11)

613

External party

576

15

22

–

613

Inter-segment transactions

–

–

11

(11)

–

Interest income

275

55

3

–

333

Others

63

164

8

(24)

211

External party

55

153

3

–

211

Inter-segment transactions

8

11

5

(24)

–

Segment income

22,090

12,372

2,441

(2,087)

34,816

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income before income tax

10,584

2,636

150

–

13,370

Provision for (benefit from) income tax (Notes 2 and 6)

3,690

919

(9)

–

4,600

Net income for the period

6,894

1,717

 159

–

8,770

** **

 

 

 

 

 

**Assets and liabilities**

 

 

 

 

 

Segment assets

90,708

180,529

18,290

(63,126) 

226,401

Deferred income tax assets (Notes 2, 6 and 26)

1,640

12,040

77

–

13,757

Total assets

92,348

192,569

18,367

(63,126)

240,158

 

 

 

 

 

 

Segment liabilities

50,573

78,323

5,697

(9,101)

125,492

Deferred income tax liabilities (Notes 2, 6 and 26)

1,660

–

495

–

2,155

Total liabilities

52,233

78,323

6,192

(9,101)

127,647

** **

 

** **

** **

** **

** **

**Cash flows**

** **

** **

** **

** **

** **

Net cash provided by (used in):

 

 

 

 

 

Operating activities

17,135

7,552

502

–

25,189

Investing activities

(9,751)

4,194

(110)

(8,000)

(13,667)

Financing activities

(4,982)

(9,129)

(11)

8,000

(6,122)

** **

 

** **

** **

** **

** **

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

1,981

3,846

110

–

5,937

Depreciation and amortization (Note 8)

2,925

2,289

234

–

5,448

Interest on loans and related items – net (Note 5)

359

1,378

7

–

1,744

Provisions

–

9

–

–

   9

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

109

114

3

–

 226

 

 

 

**5.     Income and Expenses**

 

*Non-service Revenues*

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Sale of computers, cellular handsets and cellular SIM-packs

**443**

 

591

Point-product sales

**39**

 

22

 

**482**

 

613

 

*Compensationand Employee Benefits*

 

** **

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Salaries and other employee benefits

**4,433**

 

4,111

Pension (Notes 3 and 23)

**175**

 

398

Manpower rightsizing program

**8**

 

12

Incentive plans (Notes 3 and 23)

**(77)**

 

260

 

**4,539**

 

4,781

 

*Financing Costs – net*

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Interest on loans and related items (Notes 18 and 26)

**1,279**

 

1,858

Accretion on financial liabilities – net (Notes 2, 18 and 26)

**265**

 

269

Financing charges (Note 26)

**27**

 

35

Dividends on preferred stock subject to mandatory redemption (Notes 7 and 18)

**2**

 

5

Capitalized interest (Notes 2 and 8)

**(184)**

 

(114)

 

**1,389**

 

2,053

 

Interest expense for short-termborrowings for the three months ended March 31, 2008 and 2007 amounted to Php10million and Php8 million, respectively.

 

*Professional and Other ContractedServices*

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Technical and consultancy fees (Note 22)

**654**

 

716

Contracted services

**325**

 

479

Legal and audit fees

**57**

 

45

Other services

**52**

 

39

 

**1,088**

 

1,279

 

*Cost of Sales*

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Cost of computers, cellular handsets and cellular SIM-packs sold

**817**

 

1,152

Cost of satellite air time and terminal units (Notes 22 and 24)

**36**

 

44

Cost of point-product sales

**29**

 

24

 

**882**

 

1,220

 

*Asset Impairment*

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Trade and other receivables (Notes 3 and 14)

**291**

 

163

Write-down of inventories to net realizable value

**17**

 

61

Goodwill and intangible assets (Note 11)

**(6)**

 

–

Property, plant and equipment (Note 8)

**–**

 

2

 

**302**

 

226

 

 

 

**6.     Income Tax**

 

The net components of deferred income tax assets(liabilities) recognized in the unaudited consolidated balance sheets are asfollows:

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Net assets

**11,483**

** **

13,757

Net liabilities

**(2,086)**

** **

(2,155)

 

The components of the consolidatednet deferred income tax assets and liabilities are as follows:

 

 

**March 31,  2008 (Unaudited)**

** **

December 31, 2007 (Audited)

 

(in million pesos)

Net assets:

 

** **

 

Net operating loss carryover, or NOLCO

**5,273**

** **

6,055

Accumulated allowance for doubtful accounts

**3,252**

** **

3,428

Derivative financial instruments

**1,677**

** **

2,308

Unearned revenues

**1,551**

** **

1,789

Pension and other employee benefits

**1,081**

** **

1,096

Unamortized past service pension costs

**946**

** **

985

MCIT

**903**

** **

645

Unrealized foreign exchange losses

**646**

** **

544

Provisions for impaired assets

**500**

** **

494

Accumulated write-down of inventories to net realizable values

**224**

** **

224

Leases

**65**

** **

160

Executive stock option plan

**19**

** **

32

Intangible assets and fair value adjustments on assets acquired

**2**

** **

2

Preferred stock subject to mandatory redemption

**(52)**

** **

(100)

Excess of fair value over cost of investment properties

**(80)**

** **

(80)

Capitalized taxes and duties – net of amortization

**(358)**

** **

(376)

Capitalized foreign exchange differential

**(743)**

** **

(783)

Undepreciated capitalized interest charges

**(3,490)**

** **

(3,572)

Asset impairment

**–**

** **

824

Others 

**67**

** **

82

 

**11,483**

** **

13,757

 

 

 

 

Net liabilities:

 

** **

 

Unearned revenues

**795**

** **

825

Asset retirement obligation – net of undepreciated capitalized asset

**344**

** **

332

Accumulated provision for doubtful accounts

**314**

** **

304

Asset impairment

**257**

** **

277

Pension and other employee benefits

**207**

** **

217

Provisions for impaired assets

**92**

** **

348

Leases

**38**

** **

42

Unamortized past service pension costs

**7**

** **

7

Derivative financial instruments

**3**

** **

(164)

Capitalized foreign exchange differential

**(****19)**

** **

–

Excess of fair value over cost of investment properties

**(55)**

** **

(60)

Interest charges capitalized

**(699)**

** **

(718)

Intangible assets and fair value adjustments on assets acquired

**(709)**

** **

(736)

Gain on debt exchange and debt restructuring transactions

**(1,191)**

** **

(1,228)

Unrealized foreign exchange gains

**(1,486)**

** **

(1,613)

Others

**16**

** **

12

 

**(2,086)**

** **

(2,155)

 

Provision for corporateincome tax consists of:

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Current

**3,060**

 

2,263

Deferred

**2,500**

 

2,337

 

**5,560**

 

4,600

 

The reconciliation between the provision for incometax at the applicable statutory tax rates and the actual provision for corporateincome tax is as follows:

 

 

**Three Months Ended March 31,**

 

**2008**

** **

2007

 

(Unaudited)

 

(in million pesos)

Provision for corporate income tax at the applicable statutory tax rates

**5,658**

 

4,680

Tax effects of:

** **

 

 

Non-deductible expenses

**245**

 

64

Net movement in unrecognized deferred income tax assets

**187**

 

–

Equity share in net loss of investees

**8**

 

2

Loss (income) subject to lower tax rate

**(101)**

 

70

Income subject to final tax

**(165)**

 

(118)

Income not subject to tax

**(272)******

 

(98)

Actual provision for corporate income tax (Note 4)

**5,560**

 

4,600

 

Mabuhay Satellite and SubicTel are registered as SubicBay Freeport Enterprises while ClarkTel is registered as a Clark SpecialEconomic Zone Enterprise under Republic Act No. 7227, or R.A. 7227, otherwiseknown as the Bases Conversion and Development Act of 1992.  As registrants,Mabuhay Satellite, SubicTel and ClarkTel are entitled to all the rights,privileges and benefits established thereunder including tax and duty-freeimportation of capital equipment and a special income tax rate of 5% of grossincome, as defined in R.A. 7227.

 

On January3, 2007, the BOI approved ePLDT’s application for pioneer status for its newdata center facility as a new IT service firm in the field of services relatedto Internet Data Center.  ePLDT was granted a six-year income tax holiday, or ITH,for its new data center facility from the earlier of January 2007 and the actualstart of commercial operations.  ePLDT started commercial operations of its newdata center facility in February 2007.

 

On August13, 2007, ePLDT received approval from the Philippine Economic Zone Authority,or PEZA, to declare the Vitro Data Center Building as a PEZA-registered ITBuilding EcoZone facility enabling prospective clients to apply for fiscalincentives should they qualify as a PEZA-registered entity.  However, ePLDT asa developer and operator of Vitro Data Center Building is not entitled to PEZAincentives under R.A. No. 7916, or R.A. 7916, otherwise known as “The Special EconomicZone Act of 1995”, as amended by Republic Act No. 8748, or R.A. 8748.

 

Parlance is registered with the BOI as a new IT exportservice firm in the field of customer interaction center on a pioneer status.Under this registration, Parlance is entitled to certain tax incentives, includingan ITH for six years starting in June 2002.  Parlance is required to complywith specific terms and conditions stated in its BOI registration.

 

Vocativ is registered with the PEZA as an EcozoneExport Enterprise to develop and operate a customer interaction services thatserves overseas clients by providing customer relationship managementservices.  As a registered enterprise, Vocativ is entitled to certain tax andnon-tax incentives which include, among other things, tax and duty-freeimportations, exemption from local tax and an ITH for four years from start ofcommercial operations.  After the ITH period, Vocativ is liable for a finaltax, in lieu of all taxes, of 5% gross income less allowable deductions asdefined under R.A. 7916.  The 5% final tax must be paid and remitted inaccordance with the amendments contained in R.A. 8748, as follows: (a) 3% tothe National Government; and (b) 2% which will be directly remitted by thebusiness establishments to the treasurer’s office of the municipality or citywhere the enterprise is located.

 

On December 5, 2005, Vocativ received approval fromPEZA for the adjustment of the start of its commercial operations, effectivelyextending the ITH to end of March 2006.  On June 30, 2006, PEZA approved Vocativ’sITH extension for another year until April 2007.  On September 3, 2007, PEZA againapproved Vocativ’s ITH extension for another year until March 2008.

 

Ventus and two of itscustomer interaction projects are registered with the BOI as a new IT exportservice firm in the field of customer interaction center on a pioneer status.Under their registrations, Ventus, Ventus Iloilo and Pasig customer interactionprojects are entitled to certain tax incentives such as an ITH for six yearsstarting March 2005 for Ventus and Ventus Iloilo customer interaction projectsand August 2006 for Ventus Pasig customer interaction project.  In relation tothis, they are required to comply with specific terms and conditions stated intheir BOI registration.

 

iPlus Intelligent Network, Inc.,or iPlus, is a wholly-owned subsidiary of ePLDT and is registered with the BOIas a new IT service firm in the field of application service provider on apioneer status.  Under such registration, iPlus is entitled to a six-year ITHincentive from the actual start of commercial operations until January 1, 2009.

 

Digital Paradise is registeredwith the BOI as a new IT service firm in the field of community access on anon-pioneer status.  Under the provisions of the registration, Digital Paradise’ssales generated from its own community access activity and franchise fees are entitledto an ITH for a period of four years beginning December 2002.  In December2006, the BOI approved Digital Paradise’s application for a status upgrade fromnon-pioneer to pioneer, accordingly extending the ITH period for another twoyears starting January 2007.

 

Level Up! wasoriginally registered with the BOI as a new IT service firm in the field ofapplication service provider on a non-pioneer status.  Under such registration,Level Up! is entitled to certain tax incentives, which includes a four-year ITHfrom January 2003 and a tax credit for taxes on duties on materials used inexport products for ten years starting January 2003.  In April 2004, the BOIapproved Level Up!’s request for upgrading its status from non-pioneer topioneer in connection with its IT service activity in the field of applicationservice provider for entertainment and educational project.  Accordingly, theITH period was extended from four years to six years to expire on January 2009.

 

In September 2006, PEZA approved SPi’s application forregistration as an ecozone information technology enterprise to provide ITenabled services with emphasis on the creation of electronic discovery,presentation of content in electronic information formats, data analysis,capture, abstracting and data processing, design, development andimplementation of healthcare documentation solutions.  As a registeredenterprise, SPi is entitled to certain tax and non-tax incentives whichinclude, among other things, tax and duty-free importations, exemption fromlocal tax and an ITH for four years starting from June 2002.  After the ITHperiod, SPi is liable for a final tax, in lieu of all taxes.  The final tax iscomputed at 5% of gross income, in lieu of all taxes, less allowable deductionsas defined under R.A. 7916 and will be paid and remitted in accordance with theamendments contained in R.A. 8748, as follows: (a) 3% to the National Government;and (b) 2% which will be directly remitted by the business establishments tothe treasurer’s office of the municipality or city where the enterprise islocated.

 

Wolfpac is registeredwith the BOI as a new operator of service provider applications.  Under theterms of its registration, it is entitled to certain tax and non-tax incentiveswhich include, among other things, an ITH for four years starting February2004.

 

On November 29, 2007,the BOI approved Wolfpac’s application for a one year extension of ITHincentive on the basis that the capital equipment to labor ratio did not exceedUS$10 million as provided under Article 39 of Executive Order, or E.O. 226.The approved bonus is for the period from February 13, 2008 to February 12,2009.

 

Smart Broadband,Inc., or SBI, has three registered activities with the BOI on a pioneer status,namely: (i) a new operator of telecommunications systems (inter-exchangecarrier for data services); (ii) new information technology service firm in thefield of providing internet services; and (iii) a new operator oftelecommunications facilities (nationwide broadband wireless access).  Underthe terms of these registrations, SBI is entitled to certain tax and non-taxincentives which include, among other things, an ITH for six years until February2007, August 2007 and July 2011, respectively.  As at December 31, 2007, theremaining registered activity of SBI in the nationwide broadband wirelessaccess, the first two registered activities have already expired after the ITHperiod, SBI is liable for a 30% regular corporate income tax or 2% MCIT,whichever is higher.

 

Income derived from non-registeredactivities with the BOI is subject to the regular corporate income tax rateenacted as at the balance sheet date.

 

Consolidated taxincentives that we availed for the three months ended March 31, 2008 and 2007 amountedto Php365 million and Php201 million, respectively.

 

On May 24, 2005, the President of the Philippines signed into law Republic Act No. 9337, or R.A. 9337, amending certain sectionsof the National Internal Revenue Code, which took effect on November 1, 2005.R.A. 9337, among others, introduced the following changes:

 

a.     The regular corporate income tax rate for domestic corporations andresident/non-resident foreign corporations increased from 32% to 35% effectiveNovember 1, 2005 and will be reduced to 30% effective January 1, 2009;

 

b.      The VAT rate increased from 10% to 12% effective February 1, 2006; and

 

c.     The input VAT on capital goods should be spread evenly over theestimated useful life or sixty months, whichever is shorter, if the acquisitioncost, excluding the VAT component thereof, exceeds Php1 million.

 

Our deferredincome tax assets have been recorded to the extent that such deferred income taxassets are expected to be utilized against sufficient future taxable profit.  Wehad unrecognized deferred income tax assets of Php1,309 million and Php1,122 millionlargely pertaining to MCIT and asset impairments as at March 31, 2008 and December31, 2007, respectively.

 

The breakdown of our consolidated unutilized NOLCO asat March 31, 2008 is as follows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2005

2008

10,049

2006

2009

5,424

2007

2010

191

 

 

15,664

 

 

 

Tax benefit from NOLCO

 

5,332

Unrecognized deferred income tax assets from NOLCO as at March 31, 2008

 

(59)

 

 

5,273

 

The breakdown of our consolidated excess MCIT as at March31, 2008 is as follows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2005

2008

484

2006

2009

499

2007

2010

642

2008

2011

261

 

 

1,886

 

 

 

Unrecognized deferred income tax assets from MCIT as at March 31, 2008

 

(983)

 

 

 903

 

 

 

**7.     Earnings PerCommon Share**

 

The following table presentsinformation necessary to calculate the earnings per common share:

 

** **

**Three Months Ended March 31,**

 

**2008**

2007

 

**Basic**

**Diluted**

Basic

Diluted

 

(Unaudited)

 

(in million pesos)

Consolidated net income attributable to equity holders of PLDT

**10,446**

**10,446**

8,614

8,614

Dividends on convertible preferred shares

**(114)**

**(114)**

(114)

(114)

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

**–**

**–**

**–**

5

Accretion of preferred stock subject to mandatory redemption

**–**

**–**

**–**

37

Foreign exchange gains on preferred stock subject to mandatory redemption

**–**

**–**

**–**

(20)

Consolidated net income applicable to common shares

**10,332**

**10,332**

8,500

8,522

 

 

 

(in thousands, except per share amounts)

 

** **

** **

** **

** **

Outstanding common shares at beginning of period

**188,741**

**188,741**

188,435

188,435

Effect of issuance of common shares during the period

**150**

**150**

127

127

Effect of purchase of treasury stock during the period

**(41)**

**(41)**

–

–

Average incremental number of shares under ESOP during the period

**–**

**16**

–

60

Common shares equivalent of convertible preferred shares deemed dilutive:

** **

** **

 

 

Preferred Stock Series VI (Note 18)

**–**

**–**

–

783

Weighted average number of common shares for the period

**188,850**

**188,866**

188,562

189,405

Earnings per common share

**Php****54.71**

**Php****54.71**

Php45.08

Php44.99

 

Basic EPS is calculated by dividing the consolidated netincome for the period attributable to common shareholders (consolidated netincome adjusted for dividends on all series of preferred shares except fordividends on preferred stock subject to mandatory redemption) by the weightedaverage number of common shares outstanding during the period, after givingretroactive effect to any stock dividend declarations.

 

Diluted EPS is calculated in the same manner assumingthat, at the beginning of the period or at the time of issuance during the period,all outstanding options are exercised and convertible preferred shares areconverted to common shares, and appropriate adjustments to consolidated netincome are effected for the related income and expenses on preferred shares.Outstanding stock options will have a dilutive effect only when the averagemarket price of the underlying common share during the period exceeds theexercise price of the option.

 

Where theeffect of the assumed conversion of the preferred shares and the exercise ofall outstanding options have an anti-dilutive effect, basic and diluted EPS arestated at the same amount.

 

When requireddividends declared on each series of convertible preferred shares divided bythe number of equivalent common shares, assuming such convertible preferredshares are converted to common shares, decreases the basic EPS, then suchconvertible preferred shares are deemed dilutive.  As such, the diluted EPS is calculatedby dividing the consolidated net income attributable to common shareholders(consolidated net income, adding back any dividends and/or other chargesrecognized for the period related to the dilutive convertible preferred sharesclassified as liability, less dividends on non-dilutive preferred shares exceptfor dividends on preferred stock subject to mandatory redemption) by theweighted average number of common shares including the weighted average numberof common shares held as treasury shares, the common share equivalent arisingfrom the conversion of the dilutive convertible preferred shares.

 

Series VIConvertible Preferred Stocks in 2007 were deemed dilutive based on a calculationof the required dividends on these preferred shares divided by the number ofequivalent common shares assuming such preferred shares are converted intocommon shares, including the effect of shares under ESOP and treasury shares,and compared against the basic EPS.  Since the amount of dividends on theSeries A to HH, Series V and VI Convertible Preferred Stocks in 2008 and SeriesA to HH and Series V Convertible Preferred Stock in 2007 over its equivalentnumber of common shares increased the basic EPS, these Convertible PreferredStocks were anti-dilutive.

 

On January 29, 2008, our board ofdirectors approved a share buyback program of up to two million shares ofPLDT’s common stock, representing approximately 1.1% of PLDT’s totaloutstanding shares of common stock.  As at March 31, 2008, we acquired and paida total of 124,000 shares of common stock at a weighted average price ofPhp2,667 for a total of Php331 million based on the share buyback program.  Theeffect of the acquisition of shares of PLDT’s common stock pursuant to theshare buyback program was considered in the computation of our basic anddiluted earnings per common share for the three months ended March 31, 2008.See *Note 17 – Equity* for further discussion.

 

**Dividends Declared For The ThreeMonths Ended March 31, 2008 (Unaudited)**

 

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**(in million pesos)

 

 

 

 

 

 

**Preferred Stock Subject to Mandatory Redemption**

 

 

 

 

 

Series V

March 4, 2008

March 20, 2008

April 15, 2008

Php4.675

–

Series VI

March 4, 2008

March 20, 2008

April 15, 2008

US$0.09925

2

Charged to income

 

 

 

 

   2

 

 

 

 

 

 

**10% Cumulative Convertible  Preferred Stock**

 

 

 

 

 

Series CC

January 29, 2008

February 28, 2008

March 31, 2008

Php1.00

17

Series DD

January 29, 2008

February 15, 2008

February 29, 2008

1.00

3

Series EE

March 25, 2008

April 24, 2008

May 30, 2008

1.00

–

 

 

 

 

 

  20

 

 

 

 

 

 

 

 

**Cumulative Non-Convertible Redeemable Preferred Stock**

 

 

 

 

 

Series IV*

January 29, 2008

February 22, 2008

March 15, 2008

Php–

12

 

 

 

 

 

 

**Common Stock**

 

 

 

 

 

Regular Dividend

March 4, 2008

March 19, 2008

April 21, 2008

Php68.00

12,853

Special Dividend

March 4, 2008

March 19, 2008

April 21, 2008

56.00

10,585

 

 

 

 

 

23,438

Charged to retained earnings

 

 

 

 

23,470

 

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

 

**DividendsDeclared After March 31, 2008**

 

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**(in million pesos)

 

 

 

 

 

 

**Cumulative Non-Convertible Redeemable Preferred Stock**

 

 

 

 

 

Series IV*

May 6, 2008

May 23, 2008

June 15, 2008

Php–

12

** **

 

 

 

 

 

**Convertible Preferred Stock**

 

 

 

 

 

Series V**

May 6, 2008

June 4, 2008

June 23, 2008

Php0.051944  per day

–

Series VI**

May 6, 2008

June 4, 2008

June 23, 2008

US$0.001103 per day

2

 

 

 

 

 

2

** **

 

 

 

 

14

 

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

*****Only theholders of Series V and VI Convertible Preferred Stock whose shares wereoriginally issued on June 4, 2001 and will be mandatorily converted on June 5,2008 shall be entitled to this final dividend.*

 

 

 

**8.     Property, Plant and Equipment**

 

This account consists of:

 

** **

**Cable and wire facilities**

**Central office equipment**

**Cellular facilities**

**Buildings**

**Vehicles, furniture and other network equipment**

**Communications satellite**

**Information origination and termination equipment**

**Land and**

**land improvements**

**Property under construction**

**Total**

** **

(in million pesos)

**At December 31, 2006 (Audited)**

Cost

112,621

84,604

64,423

20,376

31,039

9,834

9,140

2,684

12,686

347,407

Accumulated depreciation and amortization

(46,594)

(58,292)

(32,889)

(6,235)

(25,461)

(7,678)

(5,800)

(268)

–

(183,217)

Net book value

66,027

26,312

31,534

14,141

5,578

2,156

3,340

2,416

12,686

164,190

** **

**Period Ended December 31, 2007 (Audited)**

Net book value at beginning of period

66,027

26,312

31,534

14,141

5,578

2,156

3,340

2,416

12,686

164,190

Additions/Transfers – net

4,769

2,254

3,018

408

1,811

–

1,633

1

10,914

24,808

Disposals/Retirements

(183)

(55)

(75)

(11)

(45)

–

–

(41)

(31)

(441)

Translation differences charged directly to cumulative translation adjustments

–

5

–

(77)

(103)

(495)

–

(84)

–

(754)

Acquisition through business combination

–

99

–

18

146

–

(32)

–

(7)

 224

Reclassifications

894

3

4,923

31

888

–

(1,709)

–

(5,030)

–

Depreciation and amortization

(8,449)

(6,063)

(7,530)

(1,138)

(3,426)

(556)

(1,448)

(3)

–

(28,613)

Net book value at end of period (Note 3)

63,058

22,555

31,870

13,372

4,849

1,105

1,784

2,289

18,532

159,414

 

 

 

 

 

 

 

 

 

 

 

 

**At December 31, 2007 (Audited)**

 

 

 

 

 

 

 

 

 

Cost

117,081

86,841

70,045

20,695

32,572

8,454

8,191

2,561

18,532

364,972

Accumulated depreciation and amortization

(54,023)

(64,286)

(38,175)

(7,323)

(27,723)

(7,349)

(6,407)

(272)

–

(205,558)

 

63,058

22,555

31,870

13,372

4,849

1,105

1,784

2,289

18,532

159,414

 

 

 

 

 

 

 

 

 

 

 

**Period Ended March 31, 2008 (Unaudited)**

 

 

 

 

 

 

 

 

Net book value at beginning of period

63,058

22,555

31,870

13,372

4,849

1,105

1,784

2,289

18,532

159,414

Additions/Transfers – net

521

430

842

74

456

–

111

25

669

3,128

Disposals/Retirements

(2)

(31)

(14)

(77)

1

–

–

–

(4)

(127)

Translation differences charged directly to cumulative translation adjustments

–

(6)

–

(11)

59

18

–

–

–

  60

Reclassifications

241

–

418

10

585

–

–

–

(1,254)

–

Depreciation and amortization

      (Note 4)

(1,801)

(1,485)

(2,069)

(280)

(505)

(123)

(100)

–

–

(6,363)

Net book value at end of period (Note 3)

62,017

21,463

31,047

13,088

5,445

1,000

1,795

2,314

17,943

156,112

** **

**At March 31, 2008 (Unaudited)**

Cost

117,779

87,216

70,859

20,591

33,371

8,516

8,216

2,586

17,943

367,077

Accumulated depreciation and amortization

(55,762)

(65,753)

(39,812)

(7,503)

(27,926)

(7,516)

(6,421)

(272)

–

(210,965)

Net book value (Note 3)

62,017

21,463

31,047

13,088

5,445

1,000

1,795

2,314

17,943

156,112

 

Substantially, all ourtelecommunications equipment is purchased from outside the Philippines.  Our significant sources of financing for such purchases are foreign loans requiringrepayment in currencies other than Philippine pesos, principally in U.S.dollars.  See *Note 18 – Interest-bearing Financial Liabilities*.Interest, using an average capitalization rate of 10%, and net foreign exchangelosses capitalized to property, plant and equipment qualified as borrowingcosts for the three months ended March 31, 2008 and 2007 were as follows:

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Interest (Notes 2 and 5)

**184**

 

114

Foreign exchange losses (gains) – net

**55**

 

(78)

 

As at March 31, 2008and December 31, 2007, the undepreciated capitalized net foreign exchangelosses which qualified as borrowing costs amounted to Php2,476 million and Php2,533million, respectively.

 

The consolidated useful lives of theassets are estimated as follows:

 

Buildings

25 years

Cable and wire facilities 

10 – 25 years

Central office equipment

10 – 20 years

Communications satellite

15 years

Information origination and termination equipment

3 – 15 years

Land improvements

10 years

Vehicles, furniture and other network equipment

3 – 10 years

Cellular facilities

3 – 10 years

 

*SBI’s Acquisition of Cluster 3Assets from Cruz Telephone Company, Inc., or Cruztelco*

 

On February7, 2008, SBI completed the acquisition of the Cluster 3 assets from Cruztelcoat a price of Php371 million.  Cruztelco is a Local Exchange Carrier operatoroffering fixed line services in three geographical clusters, namely:  (i)Cluster 1 covering certain areas in Visayas and Luzon; (ii) Cluster 2 NorthWestern Mindanao, and (iii) Cluster 3 North Eastern Mindanao.

 

The fair value of the Cluster 3 assets, determinedprovisionally, was assessed to be equal to its book value allocated as follows:(a) equipment at Php318 million; (b) land at Php31 million; and (c) buildingsand improvements at Php22 million.

 

SBI intends to engage anindependent appraiser to establish the fair values of the acquired assets.

 

*AssetImpairment Review*

 

As atDecember 31, 2006, management determined that due to Mabuhay Satellite’sdifficulty in generating cash flows with the satellite nearing its end-of-lifeand other events affecting its business, Mabuhay Satellite’s Agila II transponderwas considered impaired.  This impairment review was based on the net presentvalue of future cash flows from the continued use of this asset group using thediscount factor of 10% as applied on cash flow projection from 2008 until 2010.An impairment loss of Php1,391 million was charged to the carrying value of thissatellite as at December 31, 2006 and included in the accumulated depreciationand amortization account in the audited consolidated balance sheet as at December31, 2006.  In 2007, we performed an impairment update review on MabuhaySatellite’s Agila II and no additional impairment was recognized.  Annualupdate in the impairment testing will be completed at year-end.

 

Property,plant and equipment include the following amounts for capitalized leases as at March31, 2008 and December 31, 2007:

 

** **

**March 31, 2008 (Unaudited)**

 

**Vehicles, furniture and other network equipment**

**Cable and wire facilities**

**Central office equipment**

**Total**

 

(in million pesos)

Cost

**1,171**

**46**

**308**

**1,525**

Less accumulated depreciation

**1,099**

**26**

**308**

**1,433**

 

**72**

**20**

**–**

**92**

 

** **

December 31, 2007 (Audited)

 

Vehicles, furniture and other network equipment

Cable and  wire facilities

Central office  equipment

Total

 

(in million pesos)

Cost

1,190

46

308

1,544

Less accumulated depreciation

1,109

25

308

1,442

 

  81

  21

–

 102

 

The following table summarizes all changes to the liabilitieson asset retirement obligations as at March 31, 2008 and December 31, 2007:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Asset retirement obligations at beginning of period

**952**

 

831

Additional liability recognized during the period

**21**

 

48

Accretion expenses

**20**

 

81

Settlement of obligations

**(3)**

 

(8)

Asset retirement obligations at end of period (Notes 3 and 19)

**990**

 

 952

 

 

 

**9.     Investments in Associates and Joint Ventures**

 

This account consists of:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

ACeS International Limited

**1,896**

 

1,896

Mabuhay Space Holdings Limited

**798**

 

791

Blue Ocean Wireless

**724**

 

724

Philweb Corporation

**712**

 

712

BayanTrade Dotcom, Inc.

**97**

 

97

ePDS, Inc.

**6**

 

6

 

**4,233**

 

4,226

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

**2,905**

 

2,875

 

**1,328**

 

1,351 

 

Movementsin the accumulated equity share in net losses of associates are as follows:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Balance at beginning of period

**93**

 

82

Equity share in net losses of associates for the period

**23**

 

11

Balance at end of period

**116**

 

  93

 

Movementsin the accumulated impairment losses are as follows:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Balance at beginning of period

**2,782**

 

2,930

Translation adjustments

**7**

 

(148)

Balance at end of period

**2,789**

 

2,782

 

***Investmentof ACeS Philippines in ACeS International Limited, or AIL***

 

As at March31, 2008, ACeS Philippines had a 36.99% investment in AIL, a companyincorporated under the laws of Bermuda.  AIL owns the Garuda I Satellite andthe related system control equipment in Batam, Indonesia.

 

AIL hasincurred recurring significant operating losses, negative operating cash flows,and significant levels of debt.  The financial condition of AIL was partly dueto the National Service Providers’, or NSPs, inability to generate the amountof revenues originally expected as the growth in subscriber numbers has beensignificantly lower than budgeted.  These factors raised substantial doubtabout AIL’s ability to continue as a going concern.  On this basis, werecognized a full impairment provision in respect of our investment in AIL.

 

See *Note 22 – Related Party Transactions*and *Note 24 – Contractual Obligations and Commercial Commitments* forfurther details as to the contractual relationships in respect of AIL.

 

***Investmentof Mabuhay Satellite in Mabuhay Space Holdings Limited, or MSHL***

 

In 1996, Mabuhay Satelliteentered into a Joint Venture Agreement, or JVA, with Space Systems/Loral Inc.,or SS/L, to form MSHL for the purpose of providing high-power Ku-Band satellitetransmission services using the payload which was added by SS/L to the Agila IISatellite.  Under the terms of the JVA, SS/L is required to convey title to theadditional payload service to MSHL in consideration for SS/L’s 35% equityinterest in MSHL, and Mabuhay Satellite is required to pay SS/L in the amountof US$19 million for a 65% equity interest in MSHL.

 

In 2000, SS/L filed aNotice of Default and Termination against Mabuhay Satellite arising from thelatter’s alleged failure to amicably resolve its unpaid obligation to SS/Lunder the JVA.  In 2002, the arbitration panel handed down its decision andprovided for payment by Mabuhay Satellite to SS/L of the principal amount ofUS$10 million plus accrued interest at 9% per annum.  On June 30, 2003, MabuhaySatellite and SS/L concluded a US$15 million settlement agreement under whichMabuhay Satellite leased two transponders under a transponder agreement on alife-term basis to SS/L and offset the lease charges due from SS/L and itsreceivables from Loral Skynet Network Services, Inc. (formerly known as theLoral Cyberstar, Inc.), among other things, for a full and final settlement ofthe arbitration decision.  The agreement was subsequently approved by MabuhaySatellite’s creditors in March 2004.

 

In accordance with thesettlement agreement, Mabuhay Satellite and SS/L are required to proceed todissolve the joint venture under a separate agreement, for which each of theparties will receive title over a number of transponders owned by the jointventure in proportion to their respective interests.  On the basis of the jointventure dissolution, we recognized full impairment provision in respect of ourinvestment in MSHL in 2004.

 

***Investment of Smart in Blue Ocean Wireless, or BOW***

 

On August 3, 2007, Smart (throughits subsidiary, SCH) acquired a 30% equity interest in BOW, a Dublin-basedcompany delivering GSM communication capability for the merchant maritimesector.  The total acquisition cost amounted to US$16 million, or Php724million, of which US$13 million, or Php601 million, was paid in cash and US$3million, or Php123 million, worth of equipment and services was delivered bySmart in accordance with the subscription agreement.  BOW provides GSM network atsea through Altobridge, a patented GSM technology that will complement Smart’sprepaid wireless satellite phone service, *SmartLink*.

 

***Investmentof ePLDT in Philweb Corporation, or Philweb***

 

In May2006, ePLDT subscribed to newly issued common shares of Philweb, aninternet-based online gaming company, equivalent to 20% of the totaloutstanding capital stock of Philweb at a price of Php0.020 per share or anaggregate amount of Php503 million.  Of the total subscription price, Php428million was paid by ePLDT on the closing date.  The portion of the unpaidsubscription price amounting to Php25 million will be paid by ePLDT at the sametime as the Philweb majority stockholders pay the remaining unpaid portion ofthe subscription pursuant to a general call on subscription to be made byPhilweb’s board of directors.  The unpaid balance of Php50 million will be paidupon the lapse of certain post-closing price adjustment periods.  The unpaidsubscription of Php75 million was recorded as part of accrued expenses andother current liabilities in the unaudited consolidated balance sheet.

 

In October2006, ePLDT acquired an additional 8,037,692,308 shares of Philweb at a priceof Php0.026 per share or an aggregate amount of Php209 million.  Thisrepresents an additional 6.2% of the outstanding shares of Philweb, raisingePLDT’s total equity stake to 26.87% as at March 31, 2008 and December 31, 2007.

 

Philweb isprimarily engaged in internet-based online gaming, through its appointment asPrincipal Technology Service Provider under the Marketing Consultancy Agreementfor Internet Sports Betting and Internet Casino with the Philippine Amusementand Gaming Corporation, or PAGCOR.  As at the end of December 2007, Philweboffers Internet Sports Betting in over 200 PAGCOR Internet Sports BettingStations and over 70 Internet Casino Stations nationwide.  As at March 31, 2008and December 31, 2007, the market value of ePLDT’s investments in Philwebamounted to Php1,227 million and Php1,492 million, respectively.

 

***Investmentof ePLDT in BayanTrade Dotcom, Inc., or BayanTrade***

 

BayanTradewas incorporated and registered with the Philippine SEC on August 8, 2000 toprovide:  (a) a business-to-business electronic purchasing market place to linkbuyers and suppliers of goods and services over the internet; (b) electroniccatalogue purchasing facilities over the internet to buyers and suppliers; (c)link-up with similar horizontal markets and vertical markets across theAsia-Pacific Region and the world; and (d) facilitating services incidental tothe business.  BayanTrade is an e-procurement joint venture establishedtogether with six of the Philippines’ leading conglomerates.  ePLDT’s initialshareholding in BayanTrade was 20.5%, which was subsequently diluted to 19.17%in August 2004 due to an equity call to which ePLDT did not subscribe.  Thedilution did not affect the degree of our representation on the board ofdirectors of BayanTrade and significant influence was therefore retained.

 

In September 2005, ePLDT received4,794,615 bonus warrants from BayanTrade which entitles ePLDT to purchase2,794,615 common shares at a price of Php0.50 per share at any time on orbefore August 31, 2010.

 

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

 

ePLDT entered into a joint ventureagreement with DataPost Pte Ltd., or DataPost, a subsidiary of Singapore Post,or Spring, and G3 Worldwide ASPAC pursuant to which the parties formed ePDS, abills printing company that performs laser printing and enveloping services forstatements, bills and invoices, and other value-added services for companies inthe Philippines.  ePLDT has a 50% equity interest in ePDS, while DataPost has a30% equity interest.  Spring, the largest international mail services provider,owns the remaining 20% equity interest.  ePDS has an initial paid-up capital ofPhp11 million.

 

***SummarizedFinancial Information of Equity Investees and Joint Ventures***

 

The followingtable presents the summarized financial information of our investments inassociates and joint ventures in conformity with PFRS for equity investees forwhich we have significant influence as at March 31, 2008 and December 31, 2007 andfor the three months ended March 31, 2008 and 2007.

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Noncurrent assets

**1,376**

 

1,383

Current assets

**965**

 

1,084

Capital deficiency

**(8,069)**

 

(8,340)

Noncurrent liabilities

**9,655**

 

10,162

Current liabilities

**755**

 

645

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Revenues

**458**

 

362

Revenues less cost of revenues

**116**

 

71

Expenses

**83**

 

124

Net loss

**(33)**

 

(53)

 

 

 

**10.  Investment Properties**

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Balance at beginning of period

**577**

 

587

Net gain from fair value adjustments

**–**

 

3

Disposals

**–**

 

(13)

Balance at end of period (Notes 3 and 26)

**577**

 

577

 

Investment propertiesare stated at fair values, which have been determined based on the latestvaluations performed by Asian Appraisal Company, Inc., an independent firm ofappraisers, which is an industry specialist in valuing these types of investmentproperties.  The valuation undertaken was based on an open market value,supported by a market evidence in which assets could be exchanged between aknowledgeable willing buyer and seller in an arm’s-length transaction at thedates of valuation.  None of our investment properties are being leased tothird parties that earn rental income.

 

 

 

**11.  Goodwill andIntangible Assets**

 

Movements in goodwill andintangible assets are as follows:

 

 

**March 31, 2008 (Unaudited)**

December 31, 2007 (Audited)

 

**Goodwill**

**Intangible assets**

**Total**

Goodwill

Intangible assets

Total

 

(in million pesos)

Cost:

 

 

 

 

 

 

Balance at beginning of period

**10,879**

**3,821**

**14,700**

10,137

3,456

13,593

Additions during the period

**–**

**27**

**27**

2,231

607

2,838

Translation adjustments

**69**

**12**

**81**

(1,489)

(242)

(1,731)

Balance at end of period

**10,948**

**3,860**

**14,808**

10,879

3,821

14,700

 

** **

** **

** **

 

 

 

Accumulated amortization and impairment:

** **

** **

** **

 

 

 

Balance at beginning of period

**1,629**

**1,350**

**2,979**

438

941

1,379

Amortization during the period

**–**

**94**

**94**

–

390

 390

Translation adjustments

**7**

**4**

**11**

–

(34)

(34)

Impairment (reversal) during the period (Note 5)

**–**

**(6)**

**(6)**

1,191

53

1,244

Balance at end of period

**1,636**

**1,442**

**3,078**

1,629

1,350

2,979

Net balance (Notes 3 and 26)

**9,312**

**2,418**

**11,730**

9,250

2,471

11,721

 

*SPi’s Acquisition of SpringfieldService Corporation, or Springfield*

 

On April 12, 2007, SPi acquired,through a wholly-owned U.S. subsidiary, a 100% equity interest in Springfieldfor an aggregate purchase price of US$35 million, or Php1,664 million, pluspossible future earn-out payments with an aggregate fair value at acquisitiondate of US$18 million, or Php855 million.  As at date of acquisition, the netcash outflow related to acquisition was US$35 million, or Php1,664 million,representing cash payments of US$34 million, or Php1,616 million,  net of cashacquired from Springfield of US$1 million, or Php48 million, and incidentalcost amounted to US$1.3 million, or Php63 million.  The total purchase priceconsideration including the fair value of possible future earn-out payments atacquisition date amounted to US$53 million, or Php2,520 million, inclusive ofother net debt adjustments totaling US$8 million, or Php380 million.  As at March31, 2008, the revised fair value of possible future earn-out payments, asrevised after effecting adjustments on forecasted earn-out and accretion, amountedto US$25 million, or Php1,091 million.  See *Note 19 – Deferred Credits andOther Noncurrent Liabilities*and *Note 21 – Accrued Expenses and OtherCurrent Liabilities*.

 

Thepurchase price consideration has been allocated to the assets and liabilitieson the basis of fair values at the date of acquisition.  The fair values of theidentifiable acquired assets and liabilities of Springfield as at the time ofthe acquisition and the corresponding carrying amounts immediately before theacquisition are as follows:

 

 

Previous Carrying Value

Fair Value Recognized on Acquisition

 

In U.S. Dollar

Php(1)

In U.S. Dollar

Php(1)

 

(in millions)

**Assets:**

 

 

 

 

Property, plant and equipment

3

143

3

143

Goodwill

–

–

45

2,139

Intangible assets

7

333

8

380

Cash and cash equivalents

1

48

1

48

Trade and other receivables

3

143

3

143

 

14

667

60

2,853

**Liabilities:**

 

 

 

 

Deferred income tax liabilities

1

48

4

190

Noncurrent liabilities

–

–

1

48

Accounts payable and other current liabilities

10

475

2

95

 

11

523

7

333

Net assets acquired

3

144

53

2,520

 

*(1)**Convertedto Philippine Peso using the exchange rate at the time of purchase of Php47.536to US$1.00.*

 

Springfield was accounted for in ourconsolidated financial statements using the purchase price method ofaccounting, which resulted in goodwill amounting to Php2,139 million on April12, 2007.  Goodwill pertains to the assembled workforce of Springfield andother unidentified intangible assets that did not qualify as intangible assetsunder PAS 38.

 

Intangibleassets pertaining to Springfield customer relationship was determined at Php380million with an estimated useful life of seven years.  Intangible assets wasvalued by American Appraisal China, Limited, an independent appraiser, based onmultiple excess earnings approach using a discount rate of 15%.

 

Our consolidatedrevenues would have been increased by Php333 million while our consolidated netincome would have been decreased by Php11 million for the year ended December31, 2007 if the acquisition of Springfield had actually taken place on January1, 2007.  Total net income of Springfield included in our 2007 audited consolidatedstatement of income from the time of acquisition until December 31, 2007amounted to Php164 million.

 

*Smart’sInvestment in 3rd Brand*

 

In 2007, Smartrecognized intangible assets for technology and license costs in 3rd Brand amountingto US$4 million, or Php179 million.  Said technology and license costs wereestimated to have an estimated useful life of 10 years.

 

*Smart’sSupply Agreement with THISS Technologies Pte. Ltd., or THISS*

 

In 2007, Smart also recognized an intangibleasset for technology and license costs incurred in connection with SCH’s GSMconnectivity service for the commercial shipping sector.  Smart (through SCH)engaged the services of THISS as developer and supplier for this service.  During2008, additional development costs of Php18 million was incurred.  Thedevelopment costs recognized as intangible asset for this project amounted to US$1.5million, or Php61 million, and US$1 million, or Php41 million, as at March 31,2008 and December 31, 2007, respectively.

 

***OtherIntangible Assets***

 

Otherintangible assets consist of:

 

 

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2008 (Audited)

 

 

** **

**Gross**

**Net**

 

Gross

Net

 

**Estimated  Useful Lives**

**Remaining  Useful Lives**

**Carrying  Amount**

**Accumulated Amortization**

** **

 

Carrying Amount

Accumulated Amortization

 

 

 

 

(in million pesos)

Customer list

**3 – 6 years**

**5 years**

**1,498**

**440**

**1,058**

 

1,486

384

1,102

Spectrum

**15 years**

**11 years**

**1,205**

**288**

**917**

 

1,205

268

 937

Technology application

**3 – 10 years**

**1 – 10 years**

**838**

**528**

**310**

 

812

516

 296

Licenses

**5 – 18 years**

**3 – 14 years**

**319**

**186**

**133**

 

318

182

 136

 

 

** **

**3,860**

**1,442**

**2,418**

 

3,821

1,350

2,471

 

The future amortization of otherintangible assets as at March 31, 2008 is as follows: 

 

** **

**(in million pesos)**

2008(1)

309

2009

385

2010

354

2011

320

2012 and onwards

1,050

Balance at end of period

2,418

 

*(1)**April 1, 2008through December 31, 2008.*

*** ***

***Impairment Testing ofGoodwill***

 

*Goodwill from Acquisition of SBI*

 

The test for recoverability of goodwillrecognized in connection with the acquisition of SBI was applied to ourwireless asset group, representing the lowest level for which identifiable cashflows are largely independent of the cash flows of other groups of assets andliabilities.

 

Although revenue streams may besegregated between Smart and SBI through subscribers availing themselves oftheir respective cellular and wireless broadband services, the cost items andcash flows are difficult to carve out, largely due to the significant portionof shared and common-used networks/platforms.  In the case of SBI, it providesbroadband wireless access to its subscribers using Smart’s cellular basestations, fiber optic and IP backbone.  With the common use of wireless assets ofSmart in providing wireless services, the lowest asset group for SBI for whichcash flows could be clearly identified from other groups of assets is Smart’swireless business segment.

 

Our wireless business segment is ourlargest revenue and cash flow contributor.  As such, there is no impairment ofour wireless business segment.  As at December 31, 2007, the recoverable amountof this segment is determined on the basis of value in use calculations usingcash flow projections based on the financial budgets approved by the board ofdirectors, covering a 5-year period from 2008 to 2012.  The pre-tax discountrate applied to cash flow projections is 8.4% and cash flows beyond the 5-yearperiod are determined using a 2.5% growth rate that is the same as thelong-term average growth rate for the telecommunications industry.

 

Annual update in the impairmenttesting will be completed at year-end.

 

*Goodwillfrom Acquisition of SPi and its Subsidiary, CyMed*

* *

Thegoodwill acquired through the SPi and CyMed transactions was allocated forimpairment testing to each of the cash-generating units of those businesses,namely medical transcription, litigation and publishing.  The recoverableamount of goodwill was determined using the value in use approach.  Value inuse was based on the cash flow projections of the most recent financialbudgets/forecasts approved by the board of directors, which management believesare reasonable and are management’s best estimate of the ranges of economicconditions that will exist over the remaining useful life of the asset.  Thediscount rate applied was 15% which was based on the weighted cost of capitaladjusted for the difference in currency and specific risks associated with theassets or business of a cash-generating unit.

 

We recognized an impairment lossof Php908 million in 2007 pertaining to the medical transcription business ofSPi, since the carrying amount of the individual assets, pertaining to themedical transcription business, exceeded the recoverable amount in 2007.

 

Annualupdate in the impairment testing will be completed at year-end.

 

*Goodwillfrom Acquisition of Level Up!*

 

Goodwillacquired from our acquisition of a 60% equity interest in Level Up! was testedfor impairment where the recoverable amount was determined using the value inuse approach.  Value in use was based on the cash flow projections on the mostrecent financial budgets/forecasts approved by the board of directors.  Thediscount rate applied was 22% which was based on the weighted cost of capital.We recognized an impairment loss of Php254 million pertaining to the goodwillof ePLDT’s acquisition of Level Up! in 2007.

 

Annualupdate in the impairment testing will be completed at year-end.

 

*Goodwillfrom Acquisition of Digital Paradise*

 

Goodwill acquired from theacquisition of Digital Paradise was tested for impairment based on therecoverable amount of the long lived assets where recoverable amount wasdetermined based on the cash flow projections on the most recent financialbudgets/forecasts approved by the board of directors.  The discount rateapplied was 22% which was based on the weighted cost of capital.  We impairedgoodwill acquired from ePLDT’s acquisition of Digital Paradise amounting toPhp29 million in 2007.

 

Annualupdate in the impairment testing will be completed at year-end.

*** ***

*** ***

 

**12.  Cash and Cash Equivalents**

*** ***

This account consists of:

*** ***

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Cash on hand and in banks (Note 26)

**3,772**

 

3,944

Temporary cash investments (Note 26)

**22,737**

 

13,503

 

**26,509**

 

17,447

 

Cash in banks earns interest at prevailing bankdeposit rates.  Temporary cash investments are made for varying periods of upto three months depending on our immediate cash requirements, and earn interestat the prevailing short-term deposit rates.  Due to the short-term nature ofsuch transactions, the carrying value approximates the fair value of ourtemporary cash investments.

 

 

 

**13.  Investment in Debt Securities**

*** ***

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

 

ePLDT had a 22.5% equity interest in convertible securities of SIHI, theparent company of Stradcom Corporation, or Stradcom, which has an existingconcession agreement with the Philippine Government for the modernization ofthe Philippine Land Transportation Office, including the computerization ofdriver’s license issuance, vehicle registration and traffic adjudicationsystems.  SIHI has been incurring losses from the start of operations due toStradcom’s continuous losses and recurring excess of current liabilities overcurrent assets.  On this basis, we recognized an impairment provision inrespect of our total investment in SIHI of Php616 million in 2004.

 

In 2007,Stradcom entered into a Lenders’ Agreement for the issuance of Asset-BackedBonds amounting to Php1.6 billion.  The proceeds were used to payoff all ofStradcom’s debts, trade payables and capital expenditures for upgrade in itsnew inter-connectivity business, which is expected to contribute significantlyto Stradcom’s operating results in future years. 

 

On December 10, 2007, ePLDT and SIHI agreed to extend the redemptiondate of the convertible securities of SIHI owned by ePLDT to January 31, 2008and fixed the redemption price at Php1,171 million as at December 27, 2007(original maturity date) plus an additional amount of Php256,760 per day fromDecember 27, 2007 until the date ofactual redemption of such shares.  OnJanuary 29, 2008, the redemption date was further extended to February 29, 2008. 

 

The netrealizable value of our investment in convertible securities of SIHI amountedto Php1,115 million as at December 31, 2007.  On February 29, 2008, werecognized an interest income of Php16 million after SIHI redeemed theconvertible securities for Php1,187 million.

 

Movementsin the accumulated impairment losses are as follows:

 

 

December 31, 2007 (Audited)

 

(in million pesos)

Balance at beginning of period

616

Reversal of impairment provision for the period

(616)

Balance at end of period

–

 

 

 

**14.  Trade and Other Receivables**

 

Thisaccount consists of receivables from:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Corporate subscribers (Notes 22 and 26)

**9,094**

 

7,915

Retail subscribers (Note 26)

**7,821**

 

8,179

Foreign administrations (Note 26)

**4,096**

 

5,371

Domestic carriers (Note 26)

**1,024**

 

1,884

Dealers, agents and others (Notes 22 and 26)

**2,265**

 

2,151

 

**24,300**

 

25,500

Less allowance for doubtful accounts

**12,397**

 

12,855

 

**11,903**

 

12,645

 

Movementsin the allowance for doubtful accounts are as follows:

 

** **

**Total**

**Corporate Subscribers**

**Retail Subscribers**

**Foreign Administrations**

**Domestic Carriers**

**Dealers, Agents and Others**

 

(in million pesos)

**March 31, 2008 (Unaudited)**

** **

 

 

 

 

Balance at beginning of period

12,855

5,875

4,318

1,047

381

1,234

Provisions for the period (Notes 3 and 5)

291

18

192

78

–

3

Translation adjustments

  3

3

–

–

–

–

Reversals/reclassifications

(2)

555

184

(69)

(99)

(573)

Write-offs

(750)

(41)

(66)

(645)

–

2

Balance at end of period

12,397

6,410

4,628

411

282

666

 

 

 

 

 

 

 

Individual impairment

12,310

6,410

4,541

411

282

666

Collective impairment

 87

–

87

–

–

–

** **

12,397

6,410

4,628

411

282

666

** **

 

 

 

 

 

 

Gross amount of receivables, individually impaired, before deducting any individually assessed impairment allowance

12,416

6,413

4,644

411

282

666

 

 

 

 

 

 

 

**December 31, 2007 (Audited)**

 

 

 

 

 

Balance at beginning of period

16,770

6,418

5,847

2,506

504

1,495

Provisions for the period (Notes 3 and 5)

417

151

226

–

–

40

Translation adjustments

(91)

(91)

–

–

–

–

Reversals/reclassifications

(889)

(603)

213

(175)

(123)

(201)

Write-offs 

(3,352)

–

(1,968)

(1,284)

–

(100)

Balance at end of period

12,855

5,875

4,318

1,047

381

1,234

 

 

 

 

 

 

 

Individual impairment

12,115

5,509

3,944

1,047

381

1,234

Collective impairment

740

366

374

–

–

–

 

12,855

5,875

4,318

1,047

381

1,234

 

 

 

 

 

 

 

Gross amount of receivables, individually impaired, before deducting any individually assessed impairment allowance

12,168

5,555

3,951

1,047

381

1,234

 

Receivablesfrom carriers represent receivables arising from interconnection agreementswith other telecommunication carriers.  The aforementioned amount of receivableis shown net of related payable to the same telecommunications carriers becausea legal right of offset exists.

 

On October 10, 2002, PLDT entered into a ReceivablesPurchase Deed, or RPD, with a foreign financial institution, or the Purchaser,under which PLDT agreed (1) to sell its receivables from certain eligibleforeign carriers up to September 30, 2007 for an advance payment of US$50million and (2) to service, administer and collect the receivables on behalf ofthe Purchaser.  Under the RPD, the Purchaser has no recourse against PLDTshould an eligible carrier fail or refuse to settle the assigned/purchasedreceivables, except when PLDT commits a breach of its representations andwarranties under the RPD.  The RPD expired on December 4, 2007.

 

Sale of receivablesunder the RPD amounted to US$4 million, or Php167 million, and US$1 million, orPhp61 million, for the year ended December 31, 2007 and for the three monthsended March 31, 2007, respectively.  Loss on sale of receivables under the RPD includedin other expenses account amounted to US$0.1 million, or Php6 million, US$0.07 million,or Php3 million, for the year ended December 31, 2007 and for the three monthsended March 31, 2007, respectively.

 

 

 

**15.  Inventories and Supplies**

 

Thisaccount consists of:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Terminal and cellular phone units:

** **

 

 

At net realizable value

**819**

 

554

At cost

**1,028**

 

808

Spare parts and supplies:

** **

 

 

At net realizable value

**775**

 

502

At cost

**1,615**

 

1,385

Others:

** **

 

 

At net realizable value

**161**

 

111

At cost

**162**

 

112

At lower of cost or net realizable value (Note 26)

**1,755**

 

1,167

 

 

 

**16.  Prepayments**

 

This account consists of:

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Prepaid taxes (Notes 6 and 25)

**4,482**

 

3,995

Prepaid fees and licenses (Notes 5 and 25)

**474**

 

236

Prepaid insurance (Note 22)

**174**

 

184

Prepaid rent (Note 24)

**66**

 

61

Other prepayments

**188**

 

173

 

**5,384**

 

4,649

Less current portion of prepayments

**3,090**

 

2,368

Net of noncurrent portion of prepayments

**2,294**

 

2,281

 

Prepaid taxes include creditablewithholding taxes, input VAT and real property taxes.

 

 

 

**17.    Equity**

 

The movement of PLDT’s capitalaccounts as at December 31, 2007 and March 31, 2008 are as follows:

 

** **

**Preferred Stock** –  Php10 par value per share

** **

** **

**Series  A to HH**

**IV**

**Total Preferred Stock**

** **

** **

**Common Stock** –  Php5 par value per share

** **

**No. of Shares**

** **

**Amount**

** **

**No. of Shares**

**Amount**

** **

(in millions)

**Authorized**

 

** **

823

Php8,230

234

Php1,170

**Outstanding**

** **

** **

** **

** **

 

 

Balance at January 1, 2007

406

36

 442

Php4,424

188

Php942

Conversion

(1)

–

(1)

(8)

–

1

Issuance

–

–

–

1

–

–

Balance at December 31, 2007 (Audited)

 405

  36

 441

Php4,417

 188

Php943

 

 

 

 

 

 

 

Balance at January 1, 2008

 405

  36

 441

Php4,417

 188

Php943

Conversion

–

–

–

–

–

2

Balance at March 31, 2008 (Unaudited)

 405

  36

 441

Php4,417

 188

Php945

 

***Preferred Stock***

 

The preferred stock is non-voting,except as specifically provided by law, and is preferred as to liquidation.

 

The Series A to HH 10%Cumulative Convertible Preferred Stocks earn cumulative dividends at an annualrate of 10%.  After the lapse of one year from the last day of the year ofissuance of a particular series of 10% Cumulative Convertible Preferred Stock,any holder of such series may convert all or any of the shares of 10%Cumulative Convertible Preferred Stock held by him into fully paid andnon-assessable shares of Common Stock of PLDT, at a conversion price equivalentto 10% below the average of the high and low daily sales price of a share ofCommon Stock on the PSE, or if there have been no such sales on the PSE on anyday, the average of the bid and the asked prices of a share of Common Stock ofPLDT at the end of such day on such Exchange, in each such case averaged over aperiod of 30 consecutive trading days prior to the conversion date, but in nocase shall the conversion price be less than the price set by the board ofdirectors which, as at March 31, 2008, was Php5.00 per share.  The number ofshares of Common Stock issuable at any time upon conversion of one share of thesubscriber investment plan, or SIP, or the 10% Cumulative Convertible PreferredStock is determined by dividing Php10.00 by the then applicable conversionprice.

 

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

 

In case of any otherreclassification or change of outstanding shares of Common Stock, or in case ofany consolidation or merger of PLDT with or into another corporation, the boardof directors shall make such provisions, if any, for adjustment of the minimumconversion price and the sales price utilized in calculating the conversionprice as the board of directors, in its sole discretion, shall deem appropriate.

 

At PLDT’soption, the Series A to HH 10% Cumulative Convertible Preferred Stocks areredeemable at par value plus accrued dividends five years after the year ofissuance.

 

The SeriesIV Cumulative Non-Convertible Redeemable Preferred Stock earns cumulativedividends at an annual rate of 13.5% based on the paid-up subscription price.It is redeemable at the option of PLDT at any time one year after subscriptionand at the actual amount paid for such stock, plus accrued dividends.

 

Theprovisions of certain subscription agreements involving preferred stock have aneffect on the ability of PLDT to, without written consent, sell certain assetsand pay cash dividends unless all dividends for all past quarterly dividendperiods have been paid, and provision has been made for the currently payabledividends.

 

***CommonStock***

 

On January 29, 2008, our board ofdirectors approved a share buyback program of up to two million shares ofPLDT’s common stock, representing approximately 1.1% of PLDT’s totaloutstanding shares of common stock.  The share buyback program reflectsPLDT’s commitment to capital management as an important element in enhancingshareholder value.  This also reinforces initiatives that PLDT has alreadyundertaken such as the declaration of special dividends in addition to theregular dividend pay out of 70% on common shares, after having determined thatPLDT has the capacity to pay additional returns to shareholders.  The sharebuyback program contemplates that PLDT will reacquire shares on an opportunisticbasis, direct from the open market through the trading facilities of the PSEand NYSE.

 

As part of our goal to maximizereturns to our shareholders, we obtained on January 29, 2008 an approval fromour board of directors to conduct a share buyback program for up to two millionPLDT common shares.  As at March 31, 2008, we have acquired and paid 124,000shares of common stock at a weighted average price of Php2,667 for a total ofPhp331 million based on the share buyback program.  As at May 5, 2008, we haveacquired a total of 346,260 shares of common stock at a weighted average priceof Php2,720 for a total of Php942 million.  See also *Note 7 – Earnings PerCommon Share*.

 

 

 

**18.  Interest-bearingFinancial Liabilities**

 

This account consists of the following:

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

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

** **

 

 

Long-term debt (Note 26)

**55,471**

 

53,372

Obligations under finance lease (Notes 8 and 26)

**12**

 

15

 

**55,483**

 

53,387

 

** **

 

 

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

** **

** **

** **

Notes payable

**569**

** **

493

Long-term debt maturing within one year (Note 26)

**7,459**

 

6,775

Obligations under finance lease maturing within one year (Notes 8 and 26)

**192**

 

481

Preferred stock subject to mandatory redemption (Note 26)

**652**

 

1,015

 

**8,872**

 

8,764

 

Unamortized debtdiscount, representing debt issuance costs and any difference between the fairvalue of consideration given or received on initial recognition, included in thefinancial liabilities are as follows:

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2006 (Audited)

 

(in million pesos)

Long-term debt (Note 26)

**4,356**

 

4,472

Obligations under finance lease (Notes 8 and 26)

**442**

 

444

Preferred stock subject to mandatory redemption

**14**

 

56

Total unamortized debt discount at end of period

**4,812**

 

4,972

 

Thefollowing table describes all changes to unamortized debt discount as at March 31,2008 and 2007.

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2006 (Audited)

 

(in million pesos)

Unamortized debt discount at beginning of period

**4,972**

 

6,753

Revaluations during the period

**76**

 

(678)

Additions during the period

**3**

 

59

Settlements and conversions during the period

**(14)**

 

(96)

Accretion during the period charged to interest expense (Note 4)

**(225)**

 

(1,066)

Total unamortized debt discount at end of period

**4,812**

 

4,972

 

**Long-term Debt**

 

Long-termdebt consists of:

 

**Description**

**Interest Rates**

**March 31, 2008 (Unaudited)**

December 31, 2007 (Audited)

 

 

(in millions)

*U.S. Dollar Debt:*

** **

** **

** **

** **

** **

Export Credit Agencies-Supported Loans:

** **

** **

** **

** **

** **

Kreditanstalt für Wiederaufbau, or KfW

5.65% - 7.58% and US$ LIBOR  + 0.55% - 2.5% in 2008 and 2007

**US$124**

**Php5,157**

US$130

Php5,365

Finnvera, Plc, or Finnvera

US$ LIBOR + 0.05% in 2008 and 2007

**40**

**1,652**

49

2,048

Others

6.60% and US$ LIBOR + 0.15% - 0.65% in 2008 and 6.60% and  US$ LIBOR + 0.15% - 0.65% and GOVCO’s cost + 0.20% in 2007

**1**

**38**

1

47

 

 

**165**

**6,847**

 180

7,460

Fixed Rate Notes

8.35% - 11.375% in 2008 and 7.85% - 11.375% in 2007

**667**

**27,844**

676

28,016

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

2.25% and US$ LIBOR + 1%  in 2008 and 2007

**190**

**7,935**

187

7,742

GSM Network Expansion Facilities

4.49% - 4.70% and US$ LIBOR  + 0.42% - 0.815% in 2008 and 4.49% - 4.70% and US$ LIBOR  + 0.75% - 0.815% in 2007

**229**

**9,567**

194

8,024

Others

6% - 8.9% and US$ LIBOR + 0.40% - 0.42% in 2008 and 6% - 10% and US$ LIBOR + 0.40% in 2007

**50**

**2,113**

4

153

Satellite Acquisition Loans

US$ LIBOR + 1.75% - 2.75% in 2008 and 5.66% and US$ LIBOR  + 1.75% - 2.75% in 2007

**28**

**1,154**

28

1,145

 

 

**US$1,329**

**55,460**

US$1,269

52,540

 

 

** **

** **

 

 

*Philippine Peso Debt:*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

5.625% - 6.50% in 2008 and 5.625% - 15% in 2007

** **

**4,969**

 

4,967

 

 

** **

** **

 

 

Term Loans:

 

** **

** **

 

 

Secured Term Loans

7.09% and MART1 + 5.70% in 2008 and 7.09%, MART1 + 5.70% and 90-day PHILBOR + 3% in 2007

** **

**5**

 

6

Unsecured Term Loans

6.125% and MART1 + 0.75%  in 2008 and 2007

** **

**2,496**

 

2,634

 

 

** **

**7,470**

 

7,607

Total long-term debt

 

** **

**62,930**

 

60,147

Less portion maturing within one year (Note 26)

 

** **

**7,459**

 

6,775

Noncurrent portion of long-term debt (Note 26)

 

** **

**Php****55,471**

 

Php53,372

 

*Note:Amounts presented are net of unamortized debt discount and debt issuance costs.*

 

Thescheduled maturities of our outstanding consolidated long-term debt at nominalvalues as at March 31, 2008 are as follows:

 

*** ***

**U.S. Dollar Loans**

**Php Loans**

**Total**

**Year**

**In U.S. Dollar**

**In Php**

**In Php**

**In Php**

** **

(in millions)

2008(1)

129

5,362

419

5,781

2009

294

12,283

570

12,853

2010

102

4,255

568

4,823

2011

46

1,918

568

2,486

2012 and onwards

861

35,959

5,384

41,343

 

1,432

59,777

7,509

67,286

 

*(1)**April 1, 2008through December 31, 2008.*

*** ***

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

 

*ExportCredit Agencies-Supported Loans*

 

In order toobtain imported components for our network infrastructure in connection withour expansion and service improvement programs, we obtained loans extendedand/or guaranteed by various export credit agencies.  These financings accountfor a significant portion of our indebtedness.

 

*Kreditanstalt für Wiederaufbau, or KfW*

 

KfW, a German state-owneddevelopment bank, is PLDT’s largest single creditor.  As at March 31, 2008, weowed an aggregate principal amount of US$124 million, or Php5,157 million, to KfW,as follows:

 
- US$90 million provided under various export credit agency-backed facilities, of which US$9 million was in connection with our expansion and service improvement programs, and US$81 million in connection with the US$149 million refinancing facility discussed below; and

 
- US$34 million provided for the 15% downpayment portion and credit facilities without guarantee/insurance cover from the export credit agencies, of which US$22 million was in connection with the US$149 million refinancing facility discussed in the following paragraphs.

 

On January 25, 2002, PLDT signedtwo loan agreements with KfW, which provided PLDT with a US$149 millionfacility to refinance in part the repayment installments under its existingloans from KfW due from January 2002 to December 2004.  The facility iscomposed of a nine-year loan, inclusive of a three-year disbursement period anda two-year grace period during which no principal is payable.  It partly enjoysthe guarantee of HERMES, the export credit agency of the Federal Republic ofGermany.  We have drawn US$140 million, or Php5,844 million, under thisfacility as at March 31, 2008.  PLDT waived further disbursements under thisrefinancing facility effective September 1, 2004.  Thus, the undrawn portion ofUS$9 million was cancelled.

 

Of the amounts outstanding underthese KfW loans, US$49 million will mature in 2008, US$44 million will mature in2009 and US$31 million will mature in 2010.  Principal amortizations on theseloans are generally payable in equal semi-annual installments.

 

*Finnvera, Plc, or Finnvera*

 

As at March 31, 2008, a principalamount of US$40 million (US$39.6 million, net of unamortized debt discount ofUS$0.4 million), or Php1,670 million (Php1,652 million, net of unamortized debtdiscount of Php18 million) of Smart’s debt was provided by various banks underan export credit agency-backed facility in connection with Smart’s GSMexpansion program.  This facility is covered by a guarantee from Finnvera, theFinnish Export Credit Agency, for 100% of political and commercial risk for therefinancing facility of GSM Phases 5A and 5B.  

 

A US$100million refinancing facility was obtained on February 11, 2005 in relation toSmart’s GSM Phases 5A and 5B loans which were prepaid on March 1, 2005 with outstandingbalances of US$60 million and US$41 million, respectively, at the time ofprepayment.  This refinancing facility is payable semi-annually over five yearsstarting September 1, 2005 with final repayment due in March 2010.  Theprincipal benefit of refinancing the Phase 5 loan was the savings from a lowerinterest margin on the refinancing facility.

 

Of the amount outstanding underthe remaining Finnvera guaranteed loan, US$10 million will mature in 2008, US$20million will mature in 2009 and US$10 million will mature in 2010.  Principalamortization on this loan is payable in equal semi-annual installments.

 

*Nippon Export and InvestmentInsurance of Japan, or NEXI*

 

On November 28, 2002, Smart signeda US$100 million term loan facility supported by NEXI, of which US$60 millionwas drawn on November 28, 2003 and US$40 million on April 5, 2004.  This loanis payable semi-annually over four years in eight equal installments startingMay 28, 2004 with final repayment due in November 2007.  The outstandingbalance was fully paid in the amount of US$25 million on May 25, 2007.

 

*Other Export Credit AgencySupported Loans*

 

PLDT has also obtained loansextended and/or guaranteed by other export credit agencies, including theExport-Import Bank of the United States, and the respective export creditagencies of France and Italy, in the aggregate outstanding principal amount ofUS$1 million, or Php38 million, as at March 31, 2008.  The outstanding balanceunder these loans will mature on variousdates from April 1, 2008 to September 15, 2008.

 

*FixedRate Notes*

 

PLDT hasthe following non-amortizing fixed rate notes outstanding as at March 31, 2008and December 31, 2007:

 

**Principal Amount**

**Interest Rate**

**Maturity Date**

**March 31, 2008 (Unaudited)**

December 31, 2007 (Audited)

** **

** **

** **

(in millions)

US$300,000,000

8.350%

March 6, 2017

**US$297**

**Php12,378**

US$296

Php12,273

US$239,900,000

11.375%

May 15, 2012

**235**

**9,808**

245

10,136

US$135,886,000

10.500%

April 15, 2009

**135**

**5,658**

135

5,607

 

 

 

**US$****667**

**Php27,844**

US$676

Php28,016

 

*Consent Solicitation for theUS$175 Million 10.5% Notes due 2009, or 2009 Notes, US$250 Million 11.375%Notes due 2012, or 2012 Notes, and US$300 Million 8.35% Notes due 2017, or 2017Notes*

 

In 2007, we conducted a consentsolicitation of holders of our 11.375% Notes due 2012, 10.5% Notes due 2009 and8.35% Notes due 2017, or the Notes, in respect of amendments to the terms ofthe Notes that allow PLDT greater flexibility to make certain restrictedpayments, pay dividends or make distributions, while reducing PLDT’s permittedleverage ratios pursuant to the terms of the Notes.  These amendments to theterms of the Notes became effective on December 3, 2007, the date on which PLDTmade the applicable consent payments, after holders of more than 51% of theaggregate principal amount of the Notes gave their consents for theseamendments to the terms of the Notes prior to the expiration of the consentsolicitation period and after the execution of relevant amendments to theindentures governing the Notes on November 21, 2007.

 

*Term Loans*

 

*US$283 Million Term LoanFacility, or Debt Exchange Facility*

 

On July 2, 2004, Smart acquiredfrom Piltel’s creditors approximately US$289 million, or 69.4%, in theaggregate of Piltel’s outstanding restructured debt at that time, in exchangefor Smart debt and a cash payment by Smart.  In particular, Smart paid anamount in cash of US$1.5 million, or Php84 million and issued new debt ofUS$283.2 million, or Php15,854 million, at fair value of Php8,390 million, netof debt discount amounting to Php7,464 million.

 

The breakdown of the total outstanding amount of Smartdebt issued to participating Piltel creditors is as follows:

 

•        2007 Facility in the amount of US$0.2 million which was paid infull in December 2007;

•        2008 Facility in the amount of US$2.9 million will be payable infull in December 2008; and

•        2014 Facility in the amount of US$280.1 million will be payablein full in June 2014.

 

As at March 31, 2008, outstandingbalance of the 2008 Facility and the 2014 Facility amounted to US$283 million(US$190 million, net of unamortized debt discount of US$93 million), or Php11,818million (Php7,935 million, net of unamortized debt discount of Php3,883million).  The 2007 Facility was fully paid in the amount of US$0.2 million onDecember 28, 2007.

 

Interest for the 2008Facility and the 2014 Facility is payableevery quarter at a floating rate of three months US$ LIBOR plus 1.00% for the 2008Facility, and a fixed rate of 2.25% per annum for the 2014 Facility.Furthermore, a portion of the 2014 Facility amounting to US$144 million has avariable yield option whereby the creditors have an option to elect for anearly repayment at a discount in December 2008 at 57.5% of the relevant debtamount.

 

*GSM**NetworkExpansion Facilities*

 

On September 13, 2004, Smart signed a US$104 million5-year term loan facility to finance the related Phase 7 GSM equipment andservices.  The facility was awarded to ABN AMRO Bank, Banque National deParibas, Calyon, DBS Bank and Sumitomo Mitsui Banking Corporation as the LeadArrangers with Finnish Export Credit, Plc as the Lender.  The full amount ofthe facility was drawn on November 22, 2004 at a fixed rate of 4.49%, of whichUS$42 million, or Php1,737 million, remained outstanding as at March 31, 2008.The loan is payable over five years in ten equal semi-annual payments startingMay 2005 with final repayment in November 2009.

 

On August 8,2005, Smart signed a US$30 million commercial facility with NIB to partlyfinance the related Phase 8 GSM equipment and services contracts.  The facilityis a 5-year term loan payable semi-annually in ten equal installmentscommencing six months from the first drawdown date at a floating interest rateof US$ LIBOR plus 0.815% margin per annum.  The facility was drawn in full onJuly 11, 2006 for the full amount of US$30 million at a floating interest rate of6.21% (5.40% US$ LIBOR plus 0.815% per annum margin).  The first installmentpayment commenced on January 11, 2007 with final repayment on July 11, 2011.  Theamount of US$21 million, or Php877 million, remained outstanding as at March 31,2008.

 

On August10, 2005, Smart signed a loan facility for its GSM Phase 8 financing in theamount of US$70 million.  The facility was awarded to the Bank of TokyoMitsubishi Ltd., Mizuho Corporate Bank Ltd., Standard Chartered Bank andSumitomo Mitsui Banking Corporation as the Lead Arrangers, with FEC as theLender.  Smart opted to utilize only a total of US$67 million which was drawn onFebruary 15, 2006 and March 13, 2006 for US$10 million and US$57 million,respectively.  The undrawn balance of US$3 million was cancelled.  The facilityis a 5-year term loan payable in 10 equal semi-annual installments with finalrepayment on September 1, 2010.  Interest is payable semi-annually at a fixedrate of 4.515% per annum.  As at March 31, 2008, US$36 million, or Php1,526million, remained outstanding.

 

On July 31, 2006, Smart signed a U.S.Dollar term loan facility for US$44.2 million to partly finance the relatedPhase 9 GSM equipment and services contracts.  The Lender is FEC with ABN AMROBank N.V., Standard Chartered Bank, Sumitomo Mitsui Banking Corporation andMizuho Corporate Bank Ltd. as the Lead Arrangers.  The facility is a 5-yearterm loan payable in 10 equal semi-annual installments commencing six monthsfrom the drawdown date at a commercial interest reference rate, or CIRR, fixedrate of 4.05% per annum plus 0.65% margin.  The facility was drawn on November10, 2006 for the full amount of US$44.2 million.  The first installmentcommenced on January 16, 2007 with final repayment on July 15, 2011.  As at March31, 2008, US$31 million, or Php1,292 million, remained outstanding.

 

On October 16, 2006,Smart signed a U.S. Dollar term loan facility with Metropolitan Bank and TrustCompany to finance the related Phase 9 GSM facility for an amount of US$50million.  The facility is a 5-year loan payable in 18 equal and consecutivequarterly installments commencing on the third quarter from the date of thefirst drawdown.  Interest rate is floating at three-month US$ LIBOR plus 0.75% per annum margin.  The facility was drawn on October 10, 2007 for the fullamount of US$50 million.  The first installment will commence on July 10, 2008with final repayment on October 10, 2012. As at March 31, 2008, US$50 million,or Php2,088 million, remained outstanding.

 

As at March31, 2008, the aggregate outstanding balance of these loans amounted to US$230million (US$229 million, net of unamortized debt discount of US$1 million), orPhp9,608 million (Php9,567 million, net of unamortized debt discount of Php41 million).

 

*OtherTerm Loans*

 

On October 10, 2007, Smart signeda US$50 million 5-year term loan facility to finance the related Phase 10 GSMequipment and service contracts.  The facility was awarded to NorddeutscheLandesbank Girozentrale Singapore Branch (Nord/LB) as the original lender withStandard Chartered Bank (Hong Kong) Ltd. as the facility agent.  The fullamount of the facility was drawn on March 10, 2008.  The loan is payable overfive years in ten equal semi-annual payments.  The first installment willcommence on September 10, 2008 with final repayment on March 11, 2013.  As atMarch 31, 2008, US$50 million, or Php2,088 million, remained outstanding.

 

On July 1,2004, CyMed availed itself of a 5-year interest-bearing advance from an officerof CyMed to fund its operating expenses, including salaries and otherincidental expenses.  The outstanding balance of this loan as at March 31, 2008amounted to US$0.6 million, or Php25 million, which is payable quarterly untilJuly 31, 2009.

 

On January 15, 2008, PLDT signed aUS$100 million term loan facility agreement with Norddeutsche LandesbankGirozentrale Singapore Branch to be used for the capital expenditurerequirements of PLDT.  The facility was drawn on March 27 and April 10, 2008for US$50 million each. The loan is payable over five years in 10 equalsemi-annual installments starting September 29, 2008 with final repayment dueon March 27, 2013.

 

*Satellite**Acquisition Loans*

 

Mabuhay Satellite had a credit agreement with theExport-Import Bank of the United States, or Ex-Im Bank, to finance a portion ofthe cost of purchasing the Agila II Satellite.  In 2004, Ex-Im Bank approved,in principle, the re-profiling of Mabuhay Satellite’s US$42 million debt withthem by extending the maturity of the loan by 11⁄2 years to July 15, 2007 andreducing the interest rate by 1% to 5.6%.  The revised repayment terms havebeen approved by the majority of the local creditor banks.  On the extendedmaturity date, the outstanding balance was fully paid in the amount of US$5million, or Php236 million.

 

Mabuhay Satellite has an existingOmnibus Agreement with a syndicate of local banks, or the Banks, which includesissuance of irrevocable standby Letters of Credit in favor of Ex-Im Bank, assecurity under the above credit agreement and a term loan to Mabuhay Satellitewhich term loan will mature on various dates from 2007 to 2009.  Theirrevocable standby Letters of Credit have been cancelled after the abovedescribed full payment of the Ex-Im Bank loan.  As at March 31, 2008, the outstandingamount under the term loan was US$28 million, or Php1,154 million.

 

Mabuhay Satellite has constitutedin favor of the Banks: (a) a first mortgage on its leasehold rights under alease agreement entered into with the Subic Bay Metropolitan Authority and thecomponents of the satellite system; (b) an assignment of its rights under its purchase contract for the satellitesystem; (c) an assignment of its rights under the transponder lease contractsto be entered into with its shareholders and other parties and the revenuestherefrom; and (d) an assignment of the applicable proceeds of insurance to betaken on the satellite system.

 

In 2006, the Banks have approvedMabuhay’s request to extend the maturity of the loan under the OmnibusAgreement by two years to October 20, 2009, with a 1% increase in the margin onthe deferred amount.

 

***Philippine Peso Debt:***

 

*Peso Fixed Rate CorporateNotes*

 

*Php5 Billion Peso Fixed RateCorporate Notes*

 

On February 15, 2007, Smart issuedPhp5 billion unsecured fixed rate corporate notes, comprised of Series A notesamounting to Php3.8 billion and Series B notes amounting to Php1.2 billion withfive and ten year terms, respectively.  Series A notes were priced at 5.625%,while Series B notes were priced at 6.500%.  Funds raised from the issuance ofthese notes have been used primarily for Smart’s capital expenditures fornetwork improvement and expansion.  The amount of Php5 billion remainedoutstanding as at March 31, 2008.

 

*TermLoans*

 

*Unsecured**Term Loans*

 

*Php2,500 Million**TermLoan Facility*

 

On August 14, 2006, Smart signed aPhilippine Peso term loan facility with Metropolitan Bank and Trust Company tofinance the related Phase 9 GSM facility for an amount of Php2,500 million.The facility is a five-year loan payable in 18 equal consecutive quarterlyinstallments commencing on the third quarter from the date of the firstdrawdown.  Interest rate is floating at three-month MART plus 0.75% per annummargin.  The facility was drawn on December 11, 2006 for the full amount ofPhp2,500 million at a floating interest rate of 6.02% (5.27% three-month MART1 plus0.75% per annum margin).  The first installment commenced on September 11, 2007with final repayment on December 9, 2011.  The outstanding balance of this loanas at March 31, 2008 amounted to Php2,083 million (Php2,076 million, net ofunamortized debt discount of Php7 million).

 

*Php400Million and Php20 Million Refinancing Loans*

 

On May 22,2007, PLDT signed loan agreements with The Philippine American Life and GeneralInsurance Company for Php400 million and The Philam Bond Fund, Inc. for Php20million, respectively, to refinance their respective participations in theTen-Year Note under the Php1,270 million Peso Fixed Rate Corporate Notes whichwere repaid on June 12, 2007.  Interest is payable quarterly.  Both refinancingloans will mature on June 12, 2014.

 

*Debt Covenants*

 

Our debt instruments containrestrictive covenants, including covenants that require us to comply withspecified financial ratios and other financial tests, calculated in conformitywith PFRS, at relevant measurement dates, principally at the end of eachquarterly period.  We have complied with all of our maintenance financialratios as required under our loan covenants and other debt instruments.

 

The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the Philippine peso relative to the U.S.dollar, poor operating performance of PLDT and its consolidated subsidiaries,impairment or similar charges in respect of investments or other long-livedassets that may be recognized by PLDT and its consolidated subsidiaries andincreases in our interest expense.  Interest expense may increase as a resultof various factors including issuance of new debt, the refinancing of lowercost indebtedness by higher cost indebtedness, depreciation of the Philippinepeso, the lowering of PLDT’s credit ratings or the credit ratings of the Philippines, increase in reference interest rates, and general market conditions.  Sinceapproximately 88% of PLDT’s total consolidated debts are denominated in foreigncurrencies, principally in U.S. dollars, many of these financial ratios andother tests are negatively affected by any weakening of the peso.

 

PLDT’s debt instruments contain a number of othernegative covenants that, subject to certain exceptions and qualifications,restrict PLDT’s ability to take certain actions without lenders’ approval,including: (a) incurring additional indebtedness; (b) prepaying other debt; (c)extending guarantees or assuming the obligations of other persons; (d) disposingof all or substantially all of its assets or of assets in excess of specifiedthresholds of its tangible net worth; (e) creating any lien or securityinterest; (f) permitting set-off against amounts owed to PLDT; (g) merging orconsolidating with any other company; (h) entering into transactions withstockholders and affiliates; and (i) entering into sale and leasebacktransactions. 

 

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

 

PLDT’s debt instruments alsocontain customary and other default provisions that permit the lender toaccelerate amounts due or terminate their commitments to extend additionalfunds under the debt instruments. These default provisions include: (a)cross-defaults and cross-accelerations that permit a lender to declare adefault if PLDT is in default under another debt instrument; in some cases, thecross-default provision is triggered upon a payment or other default permittingthe acceleration of PLDT’s debt, whether or not the defaulted debt isaccelerated.  In other cases, the cross-default provision requires thedefaulted loan to be accelerated.  In some debt instruments, the cross-defaultprovision will be triggered only if the principal amount of the defaultedindebtedness exceeds a threshold amount specified in these debt instruments;(b) failure by PLDT to meet certain financial ratio covenants referred toabove; (c) the occurrence of any material adverse change in circumstances thata lender reasonably believes materially impairs PLDT’s ability to perform itsobligations under its debt instrument with the lender; (d) the revocation,termination or amendment of any of the permits or franchises of PLDT in any mannerunacceptable to the lender; (e) the abandonment, termination or amendment ofthe project financed by a loan in a manner unacceptable to the lender; (f) thenationalization or sustained discontinuance of all or a substantial portion ofPLDT’s business; and (g) other typical events of default, including thecommencement of bankruptcy, insolvency, liquidation or winding up proceedingsby PLDT.

 

Smart’s debt instruments contain certain restrictivecovenants that require Smart to comply with specified financial ratios andother financial tests at semi-annual measurement dates.  The financial testsunder Smart’s loan agreements include compliance with a consolidated debt to consolidatedequity ratio of not more than 1.5:1.0, a consolidated debt to consolidated EBITDAratio of not more than 3:1 and a debt service coverage ratio of not less than1.5:1.0.  As at March 31, 2008, Smart has maintained compliance with all of itsfinancial covenants.  The agreements also contain customary and other defaultprovisions that permit the lender to accelerate amounts due under the loans orterminate their commitments to extend additional funds under the loans.  Thesedefault provisions include: (a) cross-defaults and cross-accelerations thatpermit a lender to declare a default if Smart is in default under another loanagreement.  These cross-default provisions are triggered upon a payment orother default permitting the acceleration of Smart debt, whether or not thedefaulted debt is accelerated; (b) failure by Smart to comply with certainfinancial ratio covenants; and (c) the occurrence of any material adversechange in circumstances that the lender reasonably believes materially impairsSmart’s ability to perform its obligations or impair guarantors’ ability toperform their obligations under its loan agreements.

 

The Omnibus Agreementof Mabuhay Satellite imposes several negative covenants which, among otherthings, restrict material changes in Mabuhay Satellite’s nature of business andownership structure, any lien upon or with respect to any of its assets or toany right to receive income, acquisition of capital stock, declaration andpayment of dividends, merger, consolidation and sale with another entity andincurring or guaranteeing additional long-term debt beyond prescribed amounts.

 

As at March 31, 2008,we are in compliance with all of our debt covenants.

 

**ObligationsUnder Finance Lease**

 

The future minimum payments for finance leases as at March31, 2008 are as follows:

 

**Year**

**(in million pesos)**

2008

630

2009

16

Total minimum lease payments (Note 24)

 646

Less amount representing interest

442

Present value of net minimum lease payments (Note 3)

 204

Less obligations under finance lease maturing within one year (Notes 8 and 26)

12

Long-term portion of obligations under finance lease (Notes 8 and 26)

 192

 

*MunicipalTelephone Projects*

 

PLDT has an existinglease agreement (the “Financial Lease Agreement, or FLA”) with the PhilippineDepartment of Transportation and Communications, or DOTC, coveringtelecommunications facilities in the province of Batangas established under theMunicipal Telephone Act.  Under this FLA, PLDT was granted the exclusive rightto provide telecommunications management services, to expand telecommunicationsservices, and to promote the use of the DOTC-contracted facilities in certaincovered areas for a period of 15 years.  Title to the telecommunicationsfacilities/properties shall be transferred to PLDT upon expiration of the leaseterm.  As at March 31, 2008, PLDT’s aggregate remaining obligation under theBatangas lease agreement was approximately Php123 million.  In case ofcancellation, PLDT is liable to pay Php100 million under the FLA as liquidateddamages.

 

Piltel entered intoan agreement for the financial lease of the Palawan Telecommunications Systemof the Municipal Telephone PublicOffice with the DOTC on September 3, 1994.  The Municipal Telephone PublicOffice Contract is a 30-year contract for Piltel to lease facilities for publiccall office stations in the Palawan area, with revenues going to Piltel.  Inconsideration, Piltel pays the DOTC an escalating annual lease fee.  The totallease payment for 30 years is Php483 million.  As at March 31, 2008, Piltel’saggregate remaining obligation under this agreement was approximately Php43million.

 

*OtherLong-term Finance Lease Obligations*

 

The PLDT Group hasvarious long-term lease contracts for a period of three years covering variousoffice equipment.  In particular, PLDT, Smart and ePLDT have finance leaseobligations in the aggregate amount of Php480 million as at March 31, 2008 inrespect of office equipment.

 

Under the terms of certain loanagreements and other debt instruments, PLDT may not create, incur, assume orpermit or suffer to exist any mortgage, pledge, lien or other encumbrance orsecurity interest over the whole or any part of its assets or revenues orsuffer to exist any obligation as lessee for the rental or hire of real orpersonal property in connection with any sale and leaseback transaction.

 

**Preferred Stock Subject toMandatory Redemption**

 

The movements of PLDT’s preferredstock subject to mandatory redemption for March 31, 2008 and December 31, 2007 areas follows:

 

 

**March 31, 2008 (Unaudited)**

December 31, 2007 (Audited)

 

**Series V**

**Series VI**

**Total**

Series V

Series VI

Total

 

(in million pesos)

Balance at beginning of period

**49**

**966**

**1,015**

61

1,308

1,369

Accretion

**2**

**25**

**27**

10

131

141

Conversion

**(6)**

**(384)**

**(390)**

(22)

(291)

(313)

Revaluation

**–**

**–**

**–**

–

(182)

(182)

Balance at end of period (Notes 24 and 26)

**45**

**607**

**652**

 49

966

1,015

 

PLDT had issued 3 million shares of Series VConvertible Preferred Stock, 5 million shares of Series VI ConvertiblePreferred Stock and 4 million shares of Series VII Convertible Preferred Stockin exchange for a total of 58 million shares of Series K Class I ConvertiblePreferred Stock of Piltel, pursuant to the debt restructuring plan of Pilteladopted in June 2001.  As discussed below, as at December 31, 2006, all sharesof Series VII Convertible Preferred Stock had been converted.  Shares of SeriesV and VI Convertible Preferred Stock are entitled to receive annual dividendsof Php18.70 per share and US$0.397 per share, respectively.  Each share ofSeries V and VI Convertible Preferred Stock is convertible at any time at theoption of the holder into one share of PLDT’s common stock.  Shares of Series Vand Series VI Convertible Preferred Stock which are outstanding on the seventhanniversary of the issue date thereof, will be mandatorily converted into sharesof PLDT’s common stock on the date immediately following such anniversary date.Under a put option exercisable for 30 days following the mandatory conversion,holders of shares of PLDT’s common stock received on mandatory conversion ofthe shares of `Series V and VI Convertible Preferred Stock, will be able torequire PLDT to purchase such shares of PLDT’s common stock for Php1,700 pershare and US$36.132 per share, respectively.

 

TheSeries V Convertible Preferred Stock was designated as a compound instrumentconsisting of liability and equity components.  The fair value of the Series V ConvertiblePreferred Stock was determined on the issue date, of which the fair value ofthe liability component as at date of issuance is recorded as “Preferred StockSubject to Mandatory Redemption” and is included under the “Interest-bearingFinancial Liabilities” account in the unaudited consolidated balance sheets.The residual amount was assigned as the equity component.

 

The cost of each foreign currency component of the SeriesVI and VII Convertible Preferred Stock was designated as a debt instrument withembedded call options.  The fair value of the Series VI and VII ConvertiblePreferred Stock was determined on the issue date, of which the fair value of embeddedcall options was bifurcated and accounted for separately.  See *Note 2 –Summary of Significant Accounting Policies and Practices*and*Note 26 –Financial Assets and Liabilities*.  The residual amount was assigned as a liabilitycomponent and recorded as “Preferred Stock Subject to Mandatory Redemption” andis included under the “Interest-bearing Financial Liabilities” account in the unauditedconsolidated balance sheets.

 

The difference between the amount designated asliability components of the Series V, VI and VII Convertible Preferred Stock atissue date and the aggregate redemption value is accreted over the period up tothe put option date using the effective interest rate method.  Accretions addedto Preferred Stock Subject to Mandatory Redemption and charged to interest asat March 31, 2008 and 2007 amounted to Php27 million and Php141 million,respectively.

 

Preferred Stock Subject to Mandatory Redemptionamounted to Php652 million and Php1,015 million as at March 31, 2008 and December 31, 2007, respectively, after revaluation of SeriesVI and VII Convertible Preferred Stock to the exchange rates at balance sheetdates and after giving effect to the above accretions, conversions andadditional issuances.  As at March 31, 2008 and December 31, 2007, 11,420,326shares and 11,147,451 shares, respectively, of the Series V and VI ConvertiblePreferred Stock had been voluntarily converted into PLDT common shares.  On August 18, 2006, all of the 3,842,000 shares of the SeriesVII Convertible Preferred Stock had been voluntarily converted into shares of PLDT’scommon stock.  As at March 31, 2008, 27,303 shares of the Series V and 410,915shares of the Series VI Convertible Preferred Stock remained outstanding.  OnMarch 4, 2008, PLDT issued a notice to the effect that all of the Series V andVI Convertible Preferred Stock originally issued on June 4, 2001 andoutstanding as at June 4, 2008 will be mandatorily converted on June 5, 2008 toshares of PLDT’s common stock.  The aggregate redemption value of the outstandingshares of the Series V and VI Convertible Preferred Stock amounted to Php666million and Php1,070 million as at March 31, 2008 and December 31, 2007,respectively.  See *Note 24 – Contractual Obligations and CommercialCommitments*.

 

The correspondingdividends on these shares charged as interest expense amounted to Php2 millionand Php5 million for the three months ended March 31, 2008 and 2007,respectively.  See *Note 5 – Income and Expenses*.

 

**NotesPayable**

 

In 2006, SPi obtained unsecured dollar-denominatedshort-term notes payable from various local commercial banks amounting toUS$4.09 million.  In 2008 and 2007, additional short-term unsecureddollar-denominated notes payable were obtained from various banks totaling US$3.1million and US$4.8 million, respectively.  Interest on the notes range from 4.8%to 6.4% of the outstanding balance per annum and the notes are payable within90 to 360 days from the availment date.  The outstanding balance of US$12 million,or Php490 million, as at March 31, 2008 will mature on various dates from May26, 2008 to December 8, 2008.

 

In 2006, CyMedobtained two-year interest-bearing notes payable amounting to US$3.4 millionfrom its previous shareholders.  Interest on the notes payable is 6.2% perannum.  The outstanding balance of US$2 million, or Php68 million, as at March 31,2008 will mature in August 2008.

 

On June 1, 2007, SPi America LLC obtained short-terminterest-bearing notes payable amounting to US$0.5 million, or Php22 million,in payment for software license.  The loan is payable within one year in fourequal quarterly payments of principal and interest which commenced on September1, 2007.  Interest on the loan is 5% per annum.  The outstanding balance of US$0.01million, or Php5 million, as at March 31, 2008 will mature on June 1, 2008.

 

 

 

**19.  Deferred Credits and Other Noncurrent Liabilities**

 

This account consists of:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Accrual of capital expenditures under long-term financing

**6,952**

 

7,554

Liabilities on asset retirement obligations (Notes 3 and 8)

**990**

 

952

Future earn-out payments – net (Notes 2 and 11)

**788**

 

782

Unearned revenues (Note 21)

**280**

 

290

Others

**54**

 

54

 

**9,064**

 

9,632

 

Accrual of capital expendituresunder long-term financing represent expenditures related to the expansion andupgrade of our network facilities which are not expected to be settled withinone year and shall be refinanced by long-term debt.

 

 

 

**20.  Accounts Payable**

 

This account consists of:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Suppliers and contractors (Notes 24 and 26)

**8,607**

 

8,672

Taxes (Note 25)

**1,879**

 

1,648

Carriers (Note 26)

**1,577**

 

1,843

Related parties (Note 22)

**43**

 

29

Others

**240**

 

61

 

**12,346**

 

12,253

 

 

 

**21.  Accrued Expenses and Other Current Liabilities**

 

This account consists of:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Accrued utilities and related expenses (Note 22)

**12,278**

 

10,823

Unearned revenues (Note 2)

**3,571**

 

3,769

Accrued employee benefits (Note 23)

**2,477**

 

2,837

Accrued interests and other related costs (Notes 18 and 22)

**1,403**

 

1,234

Accrued taxes and related expenses (Notes 24 and 25)

**1,257**

 

977

Current portion of future earn-out payments (Notes 2 and 11)

**303**

 

266

Payable in installment purchase of equity investment (Note 11)

**123**

 

123

Others

**1,589**

 

1,645

 

**23,001**

 

21,674

 

Unearned revenues representadvance payments for leased lines, installation fees, monthly service fees andunused and/or unexpired portion of prepaid loads.

 

 

 

**22.  Related Party Transactions**

 

*a.     Air Time Purchase Agreement between PLDT and AIL and RelatedAgreements*

 

Under the FounderNSP Air Time Purchase Agreement, or ATPA, entered into with AIL in March 1997,which was amended in December 1998 (as amended, the “Original ATPA”), PLDT wasgranted the exclusive right to sell AIL services as national service provider,or NSP, in the Philippines.  In exchange, the Original ATPA required PLDT topurchase from AIL a minimum of US$5 million worth of air time (the “Minimum AirTime Purchase Obligation”) annually over ten years commencing on January 1,2002 (the “Minimum Purchase Period”), the purported date of commercialoperations of the Garuda I Satellite. In the event that AIL’s aggregate billedrevenue was less than US$45 million in any given year, the Original ATPA alsorequired PLDT to make supplemental air time purchase payments not to exceedUS$15 million per year during the Minimum Purchase Period (the “SupplementalAir Time Purchase Obligation”).

 

On February1, 2007, the parties to the Original ATPA entered into an amendment to theOriginal ATPA on substantially the terms attached to the Banks Terms Sheet (the“Amended ATPA”).  Under the Amended ATPA, the Minimum Air Time PurchaseObligation was amended and replaced in its entirety with an obligation of PLDT(the “Amended Minimum Air Time Purchase Obligation”) to purchase from AIL aminimum of US$500,000 worth of air time annually over a period ending upon theearlier of (i) the expiration of the Minimum Purchase Period and (ii) the dateon which all indebtedness incurred by AIL to finance the AIL System is repaid.Furthermore, the Amended ATPA unconditionally released PLDT from anyobligations arising out of or in connection with the Original ATPA prior to thedate of the Amended ATPA, except for obligations to pay for billable units usedprior to such date.  Moreover, pursuant to a letter of confirmation, datedFebruary 1, 2007, the banks released and discharged PLDT and ACeS Philippinesand their respective subsidiaries from any and all obligations and liabilitiesunder the Original ATPA and related agreements. 

 

Moreover, in accordance with theabove contractual arrangements, ACeS Philippines acquired (i) from LMGTHoldings (ACeS), Inc., or LMGT, 50% of its equity interest in AIL for aconsideration of US$0.75 million pursuant to a sale and purchase agreemententered into on February 1, 2007 and (ii) from Tera Global Investment Ltd., orTGIL, for a nominal consideration, 50% of TGIL’s interest in a promissory noteissued by AIL, which 50% interest represents an aggregate amount of US$44million, or the Transferred AIL Note, together with related security interestspursuant to a sale agreement entered into on February 1, 2007.  Immediatelythereafter, a portion of the Transferred AIL Note was converted into shares ofAIL and the balance was converted into non-interest bearing convertible bondsof AIL.  As a result of these transactions, ACeS Philippines’ equity holdingsin AIL increased from 20% in 2006 to 36.99% as at the date of this report.

 

Total fees under the Amended ATPA amountedto Php36 million and Php44 million for the three months ended March 31, 2008and 2007, respectively.  The Amended ATPA no longer qualifies as an onerouscontract under the provision of *PAS 10, “Events After the Balance SheetDate”*, since the cost of meeting the obligations under the Amended ATPA isbelow or within the estimated benefits that PLDT is expected to receive by it.Net provisions for onerous contact amounting to US$72 million, or Php3,529million, were reversed on December 31, 2006, excluding the amount paid or to bepaid in relation to the Amended ATPA.  As a result, as at March 31, 2008 and December31, 2007, outstanding obligations of PLDT under the Amended ATPA amounted toPhp81 million and Php93 million, respectively.

 

*b.     Transactionswith Major Stockholders, Directors and Officers*

 

Material transactions to which PLDTor any of its subsidiaries is a party, in which a director, key officer orowner of more than 10% of the outstanding common stock of PLDT, or any memberof the immediate family of a director, key officer or owner of more than 10% ofthe outstanding common stock of PLDT had a direct or indirect materialinterest, as at March 31, 2008 (unaudited) and December 31, 2007 (audited) andfor the three months ended March 31, 2008 and 2007 (unaudited) are as follows:

 

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

 

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

 

•        certain contractual veto rights over a number of major decisionsor transactions; and

 

•        rights relating to the representation on the board of directors ofPLDT and Smart, respectively, and any committees thereof.

 

Moreover, key provisions of the Cooperation Agreementpertain to, among other things:

 

•        *Restriction on Ownership of Shares of PLDT by NTTCommunications and NTT DoCoMo.* Each of NTT Communications and NTT DoCoMohas agreed not to beneficially own, directly or indirectly, in the aggregatewith their respective subsidiaries and affiliates, more than 21% of the issuedand outstanding shares of PLDT’s common stock.  If such event does occur, theFP Parties, as long as they own in the aggregate not less than 21% of theissued and outstanding shares of PLDT’s common stock, have the right toterminate their respective rights and obligations under the CooperationAgreement, the Shareholders Agreement and the Stock Purchase and StrategicInvestment Agreement.

 

•        *Limitation on Competition.*  NTT Communications, NTT DoCoMoand their respective subsidiaries are prohibited from investing in excess ofcertain thresholds in businesses competing with PLDT in respect of customersprincipally located in the Philippines and from using their assets in the Philippines in such businesses. Moreover, if PLDT, Smart or any of Smart’s subsidiariesintends to enter into any contractual arrangement relating to certain competingbusinesses, PLDT is required to provide, or to use reasonable efforts toprocure that Smart or any of Smart’s subsidiaries provide, NTT Communicationsand NTT DoCoMo with the same opportunity to enter into such agreement with PLDTor Smart or Smart’s subsidiaries, as the case may be.

 

•        *Business Cooperation.*  PLDT and NTT DoCoMo agreed inprinciple to collaborate with each other on the business development, roll-outand use of a wireless-code division multiple access mobile communicationnetwork.  In addition, PLDT agreed, to the extent of the power conferred by itsdirect or indirect shareholding in Smart, to procure that Smart will (i) becomea member of a strategic alliance group for international roaming and corporatesales and services and (ii) enter into a business relationship concerningpreferred roaming and inter-operator tariff discounts with NTT DoCoMo.

 

•        *Additional Rights of NTT DoCoMo.*Pursuant to amendmentseffected by the Cooperation Agreement to the Strategic Agreement and theShareholders Agreement, upon NTT Communications and NTT DoCoMo and theirrespective subsidiaries owning in the aggregate 20% or more of PLDT’s shares ofcommon stock and for as long as they continue to own in the aggregate at least17.5% of PLDT’s shares of common stock then outstanding, NTT DoCoMo hasadditional rights under the Strategic Agreement and Shareholders Agreement,including that:

 

1.    NTT DoCoMo is entitled to nominateone additional NTT DoCoMo nominee to the board of directors of each PLDT andSmart;

 

2.    PLDT must consult NTT DoCoMo nolater than 30 days prior to the first submission to the board of PLDT orcertain of its committees of any proposal of investment in an entity that wouldprimarily engage in a business that would be in direct competition orsubstantially the same business opportunities, customer base, products orservices with business carried on by NTT DoCoMo, or which NTT DoCoMo hasannounced publicly an intention to carry on;

 

3.    PLDT must procure that Smart doesnot cease to carry on its business, dispose of all of its assets, issue commonshares, merge or consolidate, or effect winding up or liquidation without PLDTfirst consulting with NTT DoCoMo no later than 30 days prior to the firstsubmission to the board of PLDT or Smart, or certain of its committees; and 

 

4.    PLDT must first consult with NTTDoCoMo no later than 30 days prior to the first submission to the board of PLDTor certain of its committees for the approval of any transfer by any member ofthe PLDT Group of Smart common capital stock to any person who is not a memberof the PLDT Group.  

 

As at March 31, 2008, NTTCommunications and NTT DoCoMo together beneficially owned 20.86% of theoutstanding shares of PLDT’s common stock.

 

•        *Change in Control.*  Each of NTT Communications, NTT DoCoMoand the FP Parties agreed that to the extent permissible under applicable lawsand regulations of the Philippines and other jurisdictions, subject to certainconditions, to cast its vote as a shareholder in support of any resolutionproposed by the board of directors of PLDT for the purpose of safeguarding PLDTfrom any Hostile Transferee.  A *“Hostile Transferee”* is defined underthe Cooperation Agreement to mean any person (other than NTT Communications, NTTDoCoMo, First Pacific or any of their respective affiliates) determined to beso by the PLDT board of directors and includes, without limitation, a personwho announces an intention to acquire, seeking to acquire or acquires 30% ormore of PLDT common shares then issued and outstanding from time-to-time orhaving (by itself or together with itself) acquired 30% or more of the PLDTcommon shares announces an intention to acquire, seeking to acquire or acquiresa further 2% of such PLDT common shares: (a) at a price per share which is lessthan the fair market value as determined by the board of directors of PLDT asadvised by a professional financial advisor; (b) which is subject to conditionswhich are subjective or which could not reasonably be satisfied; (c) withoutmaking an offer for all PLDT common shares not held by it and/or its affiliatesand/or persons who, pursuant to an agreement or understanding (whether formalor informal), actively cooperate to obtain or consolidate control over PLDT; (d)whose offer for the PLDT common shares is unlikely to succeed or (e) whose intentionis otherwise not *bona fide*; provided that, no person will be deemed aHostile Transferee unless prior to making such determination, the board ofdirectors of PLDT has used reasonable efforts to discuss with NTTCommunications and NTT DoCoMo in good faith whether such person should beconsidered a Hostile Transferee.

 

•        *Termination.*  If NTT Communications, NTT DoCoMo or theirrespective subsidiaries cease to own, in the aggregate, full legal andbeneficial title to at least 10% of the shares of PLDT’s common stock thenissued and outstanding, their respective rights and obligations under theCooperation Agreement and the Shareholders Agreement will terminate and theStrategic Arrangements (as defined in the Stock Purchase and StrategicInvestment Agreement) will terminate.  If the FP Parties and their respectivesubsidiaries cease to have, directly or indirectly, effective voting power inrespect of shares of PLDT’s common stock representing at least 18.5% of theshares of PLDT’s common stock then issued and outstanding, their respectiverights and obligations under the Cooperation Agreement, the Stock Purchase andStrategic Investment Agreement, and the Shareholders Agreement will terminate.

 

*2.     Integrated i-mode Services Package Agreement between NTT DoCoMoand Smart*

 

An Integratedi-mode Services Package Agreement was entered into by Smart and NTT DoCoMo onFebruary 15, 2006, under which NTT DoCoMo agreed to grant Smart, on anexclusive basis within the territory of the Philippines for a period of five years,an integrated i-mode services package including a non-transferable license touse the licensed materials and the i-mode brand, as well as implementationsupport and assistance and post-commercial launch support from NTT DoCoMo.Pursuant to this agreement, Smart is required to pay an initial license fee andrunning royalty fees based on the revenue arising from i-mode subscription feesand data traffic.  Total royalty fees charged to operations under thisagreement amounted to Php41 million and Php88 million for the three months endedMarch 31, 2008, respectively.  Smart has no outstanding obligation under thisagreement as at March 31, 2008 and December 31, 2007.

 

*3.     Advisory Services Agreement between NTT DoCoMo andPLDT*

 

An Advisory Services Agreement wasentered into by NTT DoCoMo and PLDT on June 5, 2006, in accordance with theCooperation Agreement dated January 31, 2006.  Pursuant to the AdvisoryServices Agreement, NTT DoCoMo will provide the services of certain keypersonnel in connection with certain aspects of the business of PLDT andSmart.  Also, said agreement governs the terms and conditions of theappointments of such key personnel and the corresponding fees related thereto.Total fees under this agreement amounted to Php17 million and Php19 million forthe three months ended March 31, 2008 and 2007, respectively.  Outstandingliability under this agreement amounted to Php17 million and Php12 million asat March 31, 2008 and December 31, 2007, respectively.

 

*4.     Other Agreements withNTT Communications and/or its Affiliates*

 

PLDT is a party tothe following agreements with NTT Communications and/or its affiliates:

 

•        *Advisory Services Agreement*.   On March 24, 2000, PLDTentered into an agreement with NTT Communications, as amended on March 31, 2003,March 31, 2005 and June 16, 2006, under which NTT Communications provides PLDTwith technical, marketing and other consulting services for various businessareas of PLDT starting April 1, 2000;

 

•        *Arcstar Licensing Agreement and Arcstar Service ProviderAgreement.*On March 24, 2000, PLDT entered into an agreement with NTTWorldwide Telecommunications Corporation under which PLDT markets managed dataand other services under NTT Communications’ “Arcstar” brand to its corporatecustomers in the Philippines.  PLDT also entered into a Trade Name andTrademark Agreement with NTT Communications under which PLDT has been given theright to use the tradename “Arcstar” and its related trademark, logo andsymbols, solely for the purpose of PLDT’s marketing, promotional and salesactivities for the Arcstar services within the Philippines; and

 

•        *Conventional International Telecommunications ServicesAgreement*.   On March 24, 2000, PLDT entered into an agreement with NTTCommunications under which PLDT and NTT Communications agreed to cooperativearrangements for conventional international telecommunications services toenhance their respective international businesses.

 

Total feesunder these agreements amounted to Php25 million and Php37 million for the threemonths ended March 31, 2008 and 2007, respectively.  As at March 31, 2008 and December31, 2007, outstanding obligations of PLDT under these agreements amounted to Php20million and Php16 million, respectively.

 

*5.     Agreementsbetween Smart and Asia Link B.V., or ALBV.*Smart has an existing TechnicalAssistance Agreement with ALBV, a subsidiary of the First Pacific Group.  ALBVprovides technical support services and assistance in the operations andmaintenance of Smart’s cellular business.  The agreement, which is effective untilFebruary 23, 2012 and is subject to renewal upon mutual agreement of theparties, provides for payment of technical service fees equivalent to 1% of theconsolidated net revenues of Smart.  Total service fees charged to operationsunder this agreement amounted to Php160 million and Php165 million for the threemonths ended March 31, 2008 and 2007, respectively.  As at March 31, 2008 andDecember 31, 2007, Smart had advanced the payment of service fees to ALBVamounting to Php11 million and Php87 million, respectively.

 

*6.     Agreements Relating to Insurance Companies.*  Gotuaco delRosario and Associates, or Gotuaco, acts as the broker for certain insurancecompanies to cover certain insurable properties of the PLDT Group.  Insurancepremiums are remitted to Gotuaco and the broker’s fees are settled betweenGotuaco and the insurance companies.  In addition, PLDT has an insurance policywith Malayan Insurance Co., Inc., or Malayan, wherein premiums are directlypaid to Malayan.  Total insurance expenses under these agreements amounted to Php123million and Php119 million for the three months ended March 31, 2008 and 2007, respectively.Two directors of PLDT have direct/indirect interests in or serve as a director/officerof Gotuaco and Malayan, respectively.

*** ***

***Compensation of Key Officers of the PLDT Group***

*** ***

PLDT Group’s compensation of key officers by benefit type follows:

*** ***

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Short-term employee benefits

**353**

 

306

Post-employment benefits (Note 23)

**6**

 

19

Share-based payments (Note 23)

**(15)**

 

51

 

**344**

 

 376

*** ***

Each of the directors, including the members of the advisory board ofPLDT, is entitled to a director’s fee in the amount of Php125,000 for eachmeeting of the board attended.  Each of the members or advisors of the audit,executive compensation, governance and nomination and technology strategy committeesis entitled to a fee in the amount of Php50,000 for each committee meetingattended.

*** ***

There are no agreements between PLDT Group and any ofits key management personnel providing for benefits upon termination ofemployment, except for such benefits to which they may be entitled under PLDTGroup’s retirement and incentive plans.

*** ***

 

 

**23.  Share-basedPayments and Employee Benefits**

 

***ExecutiveStock Option Plan, or ESOP***

 

On April 27, 1999 andDecember 10, 1999, the board of directors and stockholders, respectively,approved the establishment of an ESOP and the amendment of the Seventh Articleof the Articles of Incorporation of PLDT denying the pre-emptive right ofholders of common stock to subscribe for any issue of up to 1,289,745 commonstock pursuant to the ESOP.  The ESOP covers management executives, whichinclude officers with rank of Vice President up to the President, executiveswith the rank of Manager up to Assistant Vice President, andadvisors/consultants engaged by PLDT.  The ESOP seeks to motivate optionholders to achieve PLDT’s goals, reward option holders for the creation ofshareholder value, align the option holders’ interests with those of thestockholders of PLDT, and retain the option holders to serve the long-terminterests of PLDT.  The ESOP is administered by the Executive CompensationCommittee of the board of directors.  About 1.3 million shares of common stockof PLDT were reserved as underlying option shares under the ESOP in 1999.

 

Movements in thenumber of stock options outstanding under the ESOP are as follows:

 

 

**March 31, 2008 (Unaudited)**

 

December 31, 2007 (Audited)

Balance at beginning of period

**26,758**

 

119,034

Exercised shares*

**(8,017)**

 

(92,276)

Balance at end of period

**18,741**

 

26,758

 

****Based on the dateof payment of exercised shares.*

*** ***

As at March 31, 2008, a total of 851,109 shares wereacquired by certain officers and executives who exercised their options, at anexercise price of Php814 per share.

*** ***

The fair value of the ESOP wasestimated at the date of grant using an option pricing model, which consideredannual stock volatility, risk-free interest rate, expected life of the option,exercise price of Php814 per share, and a weighted average price of Php870 andPhp315 per share for the 1999 and 2002 grants, respectively, as at valuationdate.  Total fair value of shares granted amounted to Php359 million as at March31, 2008 and December 31, 2007.  No fair value of share options were recognizedas an expense for the three months ended March 31, 2008 and 2007.

*** ***

***LTIP***

 

On August 3, 2004, PLDT’s board of directors approved the establishmentof a Long-term Incentive Plan, or Original LTIP, for eligible key executiveofficers and advisors of PLDT and its subsidiaries, which is administered bythe Executive Compensation Committee.  The Original LTIP was a four-yearcash-settled share-based plan covering the period from January 1, 2004 toDecember 31, 2007, or the Performance Cycle.  The payment was intended to bemade at the end of the Performance Cycle (without interim payments) andcontingent upon the achievement of an approved target increase in PLDT’s commonshare price by the end of the Performance Cycle and a cumulative consolidatednet income target for the Performance Cycle.

 

On August 28, 2006, PLDT’s board of directors approved, in principle,the broad outline of the PLDT Group’s strategic plans for 2007 to 2009 focusingon the development of new revenue streams to drive future growth whileprotecting the existing core communications business.  To ensure the properexecution of the three-year plan, particularly with respect to the manpowerresources being committed to such plans, a new LTIP, or New LTIP, uponendorsement of the Executive Compensation Committee, was approved by the boardof directors to cover the period from January 1, 2007 to December 31, 2009, orNew Performance Cycle.  As a result of the establishment of the New LTIP, theBoard also approved the early vesting of the Original LTIP by the end of 2006for those of its participants who were invited and chose to join the New LTIP.Participants in the Original LTIP who were not invited to join the New LTIP, orwho were invited but chose not to join, remained subject to the Original LTIPand its original vesting schedule.

 

The total number of SARs outstanding under the OriginalLTIP as at March 31, 2008 was 17,445 which is expected to be paid in May 2008.  Thetotal number of SARs awarded under the New LTIP as at March 31, 2008 was 4,316,260,which will be paid in 2010 subject to the achievement of the targets specifiedin the New LTIP.

 

The fair value of theNew LTIP was estimated using an option pricing model, which considered annualstock volatility, risk-free interest rates, dividends yield, the remaining lifeof options and the share price capped at Php2,300 and share price of Php2,815as at March 31, 2008.  Incentive cost per share as at March 31, 2008 and 2007 forthe New LTIP amounted to Php786.15 and Php785.95, respectively.  The fair valueof the LTIP recognized as an income for the three months ended March 31, 2008amounted to Php77 million and the fair value of the LTIP recognized as an expensefor the three months ended March 31, 2007 amounted to Php260 million.  As at March31, 2008 and December 31, 2007, outstanding LTIP liability amounted to Php1,417 million and Php1,494 million,respectively.  See *Note 3 – Management’s Use of Judgments, Estimates andAssumptions*and*Note 5 – Income and Expenses*.

 

***Pension***

 

*Defined Benefit Pension Plans*

 

We have defined benefit pensionplans, covering substantially our permanent and regular employees, excludingthose of Smart and its subsidiary, I-Contacts, which require contributions tobe made to separate administrative funds.

 

Our actuarial valuation is done on an annual basis.Based on the latest actuarial valuation, the actual present value of accruedliabilities, net pension cost and average assumptions used in developing thevaluation are as follows:

 

 

(in million pesos)

Benefit obligation as at December 31, 2007

10,160

Fair value of plan assets as at December 31, 2007

8,519

Funded status

1,641

Unrecognized net actuarial gain

1,344

Accrued benefit cost as at December 31, 2007 (Audited)

2,985

Accrual of pension cost during the period

137

Contributions

(101)

Accrued benefit cost as at March 31, 2008 (Unaudited)

3,021

 

Net pension cost was computed as follows:

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Components of net periodic benefit cost:

** **

 

 

Interest cost

**208**

 

267

Current service cost

**150**

 

215

Amortizations of unrecognized net actuarial loss

**(5)**

 

–

Expected return on plan assets

**(216)**

 

(151)

Amortizations of unrecognized net transition obligation

**–**

 

37

Net periodic benefit cost

**137**

 

 368

 

Theweighted average assumptions used to determine pension benefits as at March 31,2008 and December 31, 2007 are as follows:

 

Average remaining working years of covered employee

21

Expected rate of return on plan assets

10%

Discount rate

8%

Rate of increase in compensation

7%

 

We have adopted mortality rates in accordance with the 1983 GroupAnnuity Mortality Table developed by the U.S. Society of Actuaries, whichprovides separate rates for males and females.

 

As at March 31, 2008 and December31, 2007, the assets of the beneficial trust fund established for PLDT’spension plan include investments in shares of stocks of PLDT and Piltel with totalfair values aggregating Php2,404 million and Php2,651 million, respectively, whichrepresent about 29% and 31%, respectively, of such beneficial trust fund’s netassets available for plan benefits.

 

The Boardof Trustees of the beneficial trust fund uses an investment approach of mixedequity and fixed income investments to maximize the long-term expected returnof plan assets.  The investment portfolio has been structured to achieve theobjective of regular income with capital growth and out-performance ofbenchmarks.  A majority of the investment portfolio consists of fixed incomedebt securities and various equity securities, while the remaining portionconsists of multi-currency investments.

 

Theallocation of the fair value of the beneficial trust fund’s assets for the PLDTpension plan follows:

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2006 (Audited)

Investments in equity securities

**56%**

 

60%

Investments in debt and fixed income securities

**22%**

 

21%

Investments in real estate

**8%**

 

8%

Investments in temporary placements

**8%**

 

5%

Investments in mutual funds

**6%**

 

6%

 

**100%**

 

100%

 

Based onthe latest actuarial valuation report, the recommended cash contributions ofPLDT to its pension plan in 2008 amounts to approximately Php311 million.

 

*Defined Contribution Plan*

 

Smart andI-Contacts contributions to the plan are made based on the employee’s years oftenure and range from 5% to 10% of the employee’s monthly salary.Additionally, an employee has an option to make a personal contribution to thefund, at an amount not exceeding 10% of his monthly salary.  The employer thenprovides an additional contribution to the fund ranging from 10% to 50% of theemployee’s contribution based on the latter’s years of tenure.  Although the planhas a defined contribution format, Smart and I-Contacts regularly monitorcompliance with R.A. 7641, otherwise known as “The Retirement Pay Law”.  As at March31, 2008 and December 31, 2007, Smart and I-Contacts were in compliance withthe requirements of R.A. 7641.

 

The plan’s investment portfolioseeks to achieve regular income and long-term capital growth and consistentperformance over its own portfolio benchmark.  In order to attain thisobjective, the trustee’s mandate is to invest in a diversified portfolio ofbonds and equities, both domestic and international.  The portfolio mix is keptat 60% to 90% for debt and fixed income securities while 10% to 40% is allottedto equity securities.

 

The allocation of the fair valueof plan assets for Smart as at March 31, 2008 (unaudited) and as at December31, 2007 (audited) follows:

 

Investments in debt and fixed income securities

57%

Investments in equity securities

35%

Others

8%

 

100%

 

Total cashcontributions to the pension plan for the three months ended March 31, 2008 and2007 amounted to Php34 million and Php29 million, respectively, of which Php1 millionare contributions to the defined contribution plans for key managementpersonnel for both periods.

 

Smart and I-Contacts currently expectto make approximately Php143 million of cash contributions to their pensionplans in 2008.

 

*PensionBenefit Cost*

 

Total pension benefit cost follows:

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Expense recognized for defined benefit plans

**137**

 

368

Expense recognized for defined contribution plans

**38**

 

30

Total (Notes 3 and 5)

**175**

 

398

 

 

 

**24.  Contractual Obligations and Commercial Commitments**

 

***ContractualObligations***

 

Thefollowing table discloses our consolidated contractual undiscounted obligationsoutstanding as at March 31, 2008 and December 31, 2007:

 

 

**Payments Due by Period**

 

**Total**

**Less than  1 year**

**1****-****3 years**

**3****-****5 Years**

**More than 5 years**

 

(in million pesos)

**March 31, 2008 (Unaudited)**

 

 

 

 

 

*Long-term debt(1):*

*87,887*

*11,709*

*23,494*

*22,050*

*30,634*

Principal

67,286

7,428

16,873

17,189

25,796

Interest

20,601

4,281

6,621

4,861

4,838

*Lease obligations:*

*5,411*

*2,760*

*1,412*

*888*

*351*

Operating lease 

4,765

2,127

1,399

888

351

Finance lease 

 646

633

13

–

–

*Unconditional purchase obligations(2)*

*645*

*87*

*42*

*172*

*344*

*Other obligations:*

*72,025*

*53,052*

*9,214*

*3,686*

*6,073*

Mandatory conversion and purchase of shares

 666

666

–

–

–

Derivative financial liabilities(3):

10,567

1,019

1,799

3,599

4,150

Long-term currency swaps 

10,084

660

1,675

3,599

4,150

Long-term foreign currency options 

 373

249

124

–

–

Forward foreign exchange contracts

 110

110

–

–

–

Various trade and other obligations:

60,792

51,367

7,415

  87

1,923

Dividends

24,491

24,491

–

–

–

Suppliers and contractors 

15,662

8,640

7,022

–

–

Utilities and related expenses 

11,581

11,401

109

13

58

Employee benefits 

2,446

2,445

1

–

–

Customers’ deposits 

2,222

–

283

74

1,865

Carriers 

1,617

1,617

–

–

–

Others

2,773

2,773

–

–

–

**Total contractual obligations**

**165,968**

**67,608**

**34,162**

**26,796**

**37,402**

** **

** **

** **

** **

** **

** **

**December 31, 2007 (Audited)**

 

 

 

 

 

*Long-term debt(1):*

*86,334*

*11,441*

*22,662*

*21,218*

*31,013*

Principal

64,619

6,872

15,883

16,267

25,597

Interest

21,715

4,569

6,779

4,951

5,416

*Lease obligations:*

*6,554*

*2,992*

*1,515*

*1,040*

*1,007*

Operating lease

5,614

2,067

1,500

1,040

1,007

Finance lease 

 940

925

15

–

–

*Unconditional purchase obligations(2)*

*776*

*113*

*41*

*249*

*373*

*Other obligations:*

*49,488*

*28,023*

*10,835*

*4,294*

*6,336*

Mandatory conversion and purchase of shares

1,070

1,070

–

–

–

Derivative financial liabilities(3):

11,638

   8

2,938

4,240

4,452

Long-term currency swaps

11,170

–

2,527

4,191

4,452

Long-term foreign currency options

 318

–

318

–

–

Interest rate swap

 142

–

93

49

–

Forward foreign exchange contracts 

   8

8

–

–

–

Various trade and other obligations:

36,780

26,945

7,897

  54

1,884

Suppliers and contractors

16,371

8,816

7,555

–

–

Utilities and related expenses 

10,532

10,453

75

4

–

Employee benefits 

2,778

2,778

–

–

–

Customers’ deposit 

2,201

–

267

50

1,884

Carriers 

2,187

2,187

–

–

–

Dividends 

1,071

1,071

–

–

–

Others

1,640

1,640

–

–

–

**Total contractual obligations**

**143,152**

**42,569**

**35,053**

**26,801**

**38,729**

 

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

*(2)**Basedon the Amended ATPA with AIL.*

*(3)**Grossliabilities before any offsetting application.*

 

*Long-term Debt*

 

See *Note 18*– *Interest-bearingFinancial Liabilities* for a detailed discussion of our long-term debt.

 

*OperatingLease Obligations*

 

*DigitalPassage Service Contracts.*  PLDT has existing Digital Passage ServiceContracts with foreign telecommunication administrations for several dedicatedcircuits to various destinations for 10 to 25 years expiring at various dates.As at March 31, 2008 and December 31, 2007, PLDT’s aggregate remainingobligation under these contracts amounted to approximately Php3 million.

 

*LicenseAgreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius.*PLDTentered into a license agreement with Mobius pursuant to which Mobius hasgranted PLDT a non-exclusive, non-assignable and non-transferable license forthe use of computer software components.  Under this agreement, PLDT maypurchase maintenance services for a fee of 15% of the current published licensefee.  As at March 31, 2008 and December 31, 2007, PLDT’s aggregate remainingobligation under this agreement was approximately Php5 million and Php15million, respectively.

 

*OtherOperating Lease Obligations*.  The PLDT Group has various lease contractsfor periods ranging from one to ten years covering certain offices, warehouses,cell sites telecommunication equipment locations and various office equipmentamounting to Php4,757 million and Php5,596 as at March 31, 2008 and December31, 2007, respectively.

 

*Finance Lease Obligations*

 

See *Note 18 – Interest-bearingFinancial Liabilities* for the detailed discussion of our long-term finance leaseobligations.

 

*UnconditionalPurchase Obligations*

 

See *Note22 – Related Party Transactions* for a detailed discussion of PLDT’sobligation under the Original ATPA and the Amended ATPA.

 

As at March31, 2008 and December 31, 2007, PLDT’s aggregate remaining minimum obligationunder the Amended ATPA was approximately Php645 million and Php776 million,respectively.

 

*OtherObligations*

 

*MandatoryConversion and Purchase of Shares*.   As discussed in *Note 18 –Interest-bearing Financial Liabilities*, PLDT had issued a total of 3million shares of Series V Convertible Preferred Stock, 5 million shares ofSeries VI Convertible Preferred Stock and 4 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58 million shares ofSeries K Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel adopted in June 2001.  As at March 31, 2008, 2,694,137shares of the Series V Convertible Preferred Stock, 4,884,189 shares of the SeriesVI Convertible Preferred Stock and all of the 3,842,000 shares of the SeriesVII Convertible Preferred Stock had been voluntarily converted into shares of PLDT’scommon stock and 27,303 shares of the Series V Convertible Preferred Stock and 410,915shares of the Series VI Convertible Preferred Stock remained outstanding.

 

Each shareof Series V and VI Convertible Preferred Stock is convertible at any time atthe option of the holder into one share of PLDT’s common stock.  Shares ofSeries V and Series VI Convertible Preferred Stock which are outstanding on theseventh anniversary of the issue date thereof, will be mandatorily converted intoshares of PLDT’s common stock on the date immediately following suchanniversary date.  Under a put option exercisable for 30 days following themandatory conversion, holders of shares of PLDT’s common stock received onmandatory conversion of the Series V and VI Convertible Preferred Stock will beable to require PLDT to purchase such shares of PLDT’s common stock forPhp1,700 per share and US$36.132 per share, respectively.  

 

The aggregate value of the put options based onoutstanding shares as at March 31, 2008 was Php666 million assuming all of theoutstanding shares of the Series V and VI Convertible Preferred Stock weremandatorily converted on June 5, 2008 and all shares of PLDT’s common stock issuedupon such conversion were put to PLDT at that time in accordance with the termsof the put option.  The market value of the underlying shares of PLDT’s commonstock was Php1,234 million, based on the market price of PLDT common shares ofPhp2,815 per share as at March 31, 2008.  On March 4, 2008, PLDT issued a noticeto the effect that all of the shares of Series V and VI Convertible PreferredStock originally issued on June 4, 2001 and outstanding as at June 4, 2008 willbe mandatorily converted on June 5, 2008 to shares of PLDT’s common stock.  Asa result of such mandatory conversion, holders of shares of PLDT’s common stockreceived on mandatory conversion of the shares of Series V and VI ConvertiblePreferred Stock will be able to exercise the above described put option inaccordance with its terms.

 

*Derivative**Financial Liabilities.*  See *Note 26 – Financial Assets and Liabilities*for the detailed discussion of our derivative financial liabilities.

 

*Varioustrade and**other obligations.*PLDT Group has various obligations tosuppliers for the acquisition of phone and network equipment, contractors forservices rendered on various projects, foreign administrations and domesticcarriers for the access charges, shareholders for unpaid dividendsdistributions, employees for benefits related obligations, and various businessand operational related agreements.  As at March 31, 2008 and December 31,2007, total obligations under these various agreements amounted toapproximately Php60,792 million and Php36,780 million, respectively. 

 

***Commercial Commitments***

 

As at March31, 2008 and December 31, 2007, our outstanding commercial commitments, in theform of letters of credit, amounted to Php1,132 million and Php3,782 million,respectively.  These commitments expire within one year.

 

 

 

**25.  Provisions and Contingencies**

 

*NTC Supervision and Regulation Fees, or SRF*

 

Since 1994, following therejection of PLDT’s formal protest against the assessments by the NTC of SRF,PLDT and the NTC had been involved in legal proceedings before the Court of Appealsand the Supreme Court.  The principal issue in these proceedings was the basisfor the computation of the SRF.  PLDT’s position, which was upheld by the Courtof Appeals, but, as set forth below, rejected by the Supreme Court, was thatthe SRF should be computed based only on the par value of the subscribed orpaid up capital of PLDT, excluding stock dividends, premium or capital inexcess of par.  The Supreme Court, in its decision dated July 28, 1999, orderedthe NTC to make a recomputation of the SRF based on PLDT’s capital stock subscribedand paid.  Subsequently, in February 2000, the NTC issued an assessment letterfor the balance of the SRF, but in calculating said fees, the NTC used as abasis not only capital stock subscribed or paid but also the stock dividends.PLDT questioned the inclusion of the stock dividends in the calculation of theSRF and sought to restrain the NTC from enforcing/implementing its assessmentuntil the resolution of the said issue.  Prior to the resolution of the issuementioned above, PLDT paid the SRF due in 2000 together with the balance duefrom the recalculation of the SRF and had been paying the SRF due in Septemberof each year thereafter, excluding the portion that was based on stockdividends.

 

The SupremeCourt, in a resolution promulgated on December 4, 2007, upheld the NTCassessment of SRF based on outstanding capital stock of PLDT, including stockdividends.  On April 3, 2008, PLDT complied with the Supreme Court Resolution inpaying the outstanding principal amount relating to SRF on stock dividends inthe amount of Php455 million to the NTC.  PLDTprotested and disputed NTC’s assessments in the total amount of Php2,870million which included penalties and NTC’s computation thereof which PLDTbelieves is contrary to applicable laws and without any legal basis.  Ina letter dated April 14, 2008, the NTC demanded for payment of the balance oftheir assessment which PLDT intends to contest in appropriate proceedings.

 

*Local Business and Franchise Tax Assessments*

 

Asdiscussed below, PLDT currently expects that going forward, PLDT will pay localfranchise taxes on an annual basis based on the gross receipts received orcollected for services rendered within the jurisdiction of the respectivetaxing authority.  For this reason, we have made the appropriate provisions inour unaudited consolidated financial statements as at March 31, 2008.

 

The Local GovernmentCode of 1991, or Republic Act (R.A.) 7160, which took effect on January 1,1992, extended to local government units, or LGUs, the power to tax businesseswithin their territorial jurisdiction granted under Batas Pambansa 337, andwithdrew tax exemptions previously granted to franchise grantees under Section12 of R.A. 7082.

 

PLDT believes, basedon the opinion of its legal counsel, that the Public Telecommunications PolicyAct, or R.A. 7925, which took effect on March 16, 1995, and the grant of localfranchise and business taxes exemption privileges to other franchise holderssubsequent to the effectivity of R.A. 7160, implicitly restored its localfranchise and business taxes exemption privilege under Section 12 of R.A. 7082,or the PLDT Franchise pursuant to Section 23 thereof or the equality oftreatment clause.  To confirm this position, PLDT sought and obtained on June2, 1998 a ruling from the Bureau of Local Government Finance, or BLGF, of thePhilippine Department of Finance, which ruled that PLDT is exempt from thepayment of local franchise and business taxes imposable by LGUs under R.A.7160.  However, on March 25, 2003, in a ruling relating to a tax assessment bythe City of Davao, the Supreme Court decided that PLDT was not exempt from thelocal franchise tax.

 

Although PLDTbelieves that it is not liable to pay local franchise and business taxes, PLDThas entered into compromise settlements with several LGUs, including the Cityof Makati, in order to maintain and preserve its good standing and relationshipwith these LGUs.  Under these compromise settlements, which have mostly beenapproved by the relevant courts, as at March 31, 2008, PLDT has paid a totalamount of Php739 million for local franchise tax covering prior periods up tothe end of 2006.

 

PLDT no longer contested assessments of LGUs forfranchise taxes based on gross receipts received or collected for serviceswithin their respective territorial jurisdiction as at March 31, 2008.

 

However, PLDTcontinues to contest the imposition of local business taxes in addition tolocal franchise tax by the Cities of Tuguegarao, Balanga and Caloocan in theamounts of Php1.9 million, Php0.2 million and Php6.2 million, respectively, forthe years 1998 to 2003 for the City of Tuguegarao, and for the years 2005 to2007 for the Cities of Balanga and Caloocan.  PLDT is likewise contesting theimposition of a business tax on the transmission of messages by the Municipality of San Pedro in the amount of Php0.3 million for the years 2005 to 2007.  Inaddition, PLDT is contesting the imposition of franchise tax by the Province of Cagayan based on gross receipts derived from outside its territorial jurisdictionin the amount of Php3 million for the years 1999 to 2006.

 

While Smarthad received and paid under protest the local franchise tax assessment issuedby the City of Makati totaling approximately Php312 million, the Regional TrialCourt, or RTC, of Makati declared Smart exempt from payment of local franchisetax to the City of Makati and on June 9, 2005, the Court of Appeals dismissedthe appeal filed by the City of Makati.

 

Also, Smart had received localfranchise tax assessments issued by the City of Iloilo amounting toapproximately Php1 million.  The RTC of Iloilo has likewise ruled in a decisiondated January 19, 2005 that Smart is exempt from payment of local franchise taxto the City of Iloilo.  To date, Smart has not received any notice that thesaid decision had been appealed by the City of Iloilo.

 

 

 

**26.  Financial Assets and Liabilities**

 

Ourprincipal financial liabilities, other than derivatives, comprise of bank loansand overdrafts, convertible preferred stock, finance leases, trade andnon-trade payables. The main purpose of these financial liabilities is to financeour operations.  We have various financial assets such as trade and non-trade receivablesand cash and short-term deposits, which arise directly from our operations. Wealso enter into derivative transactions, primarily principal only currency swapagreements, currency options, interest rate swaps and forward foreign exchange contractsto manage the currency and interest rate risks arising from our operations andsources of financing. Our accounting policies in relation to derivatives areset out in *Note 2 – Summary of Significant Accounting Policies and Practices*.

 

The following table sets forth our financial assetsand financial liabilities as at March 31, 2008 and December 31, 2007.

 

** **

**Loans and receivables**

**Held-to-maturity investments**

**Held-for-trading**

**Derivatives used for hedging**

**Available-for-sale financial investments**

**Liabilities carried at amortized cost**

**Total financial assets and liabilities**

**Non-financial assets and liabilities**

**Total**

** **

(in million pesos) 

**Assets as at March 31, 2008 (Unaudited)*Noncurrent:***

 

 

 

 

 

 

 

 

 

Property, plant and equipment – net

–

–

–

–

–

–

–

156,112

156,112

Investments in associates

–

–

–

–

–

–

–

1,328

1,328

Investments-available-for-sale

–

–

–

–

142

–

 142

–

 142

Investment in debt securities

–

632

–

–

–

–

 632

–

 632

Investment properties

–

–

–

–

–

–

–

577

 577

Goodwill and intangible assets

–

–

–

–

–

–

–

11,730

11,730

Deferred income tax assets

–

–

–

–

–

–

–

11,483

11,483

Derivative financial assets

–

–

60

–

–

–

  60

–

  60

Prepayments – net of current portion

–

–

–

–

–

–

–

2,294

2,294

Advances and refundable deposits –  net of current portion

744

–

–

–

–

–

 744

279

1,023

***Current:*** Cash and cash equivalents

26,509

–

–

–

–

–

26,509

–

26,509

Short-term investments

22,303

–

2,079

–

–

–

24,382

–

24,382

Trade and other receivables 

11,903

–

–

–

–

–

11,903

–

11,903

Inventories and supplies

–

–

–

–

–

–

–

1,755

1,755

Derivative financial assets

–

–

12

157

–

–

 169

–

 169

Current portion of prepayments 

–

–

 

–

–

–

–

3,090

3,090

Current portion of advances and refundable deposits

–

–

–

–

–

–

–

307

 307

Total assets

61,459

 632

2,151

 157

 142

–

64,541

188,955

253,496

 

 

 

 

 

 

 

 

 

 

**Liabilities as at March 31, 2008 (Unaudited)*Noncurrent:***

 

 

 

 

 

 

 

 

 

Interest bearing financial liabilities –  net of current portion

–

–

–

–

–

55,483

55,483

–

55,483

Deferred income tax liabilities

–

–

–

–

–

–

–

2,086

2,086

Derivative financial liabilities

–

–

326

5,224

–

–

5,550

–

5,550

Pension and other employee benefits 

–

–

–

–

–

–

–

4,503

4,503

Customers’ deposits

–

–

–

–

–

2,222

2,222

–

2,222

Deferred credits and other noncurrent liabilities

–

–

–

–

–

7,006

7,006

2,058

9,064

***Current:***

Accounts payable

–

–

–

–

–

10,466

10,466

1,880

12,346

Accrued expenses and other current liabilities 

–

–

–

–

–

17,740

17,740

5,261

23,001

Derivative financial liabilities

–

–

230

–

–

–

 230

–

 230

Provisions for assessments

–

–

–

–

–

–

–

657

 657

Current portion of interest-bearing financial liabilities

–

–

–

–

–

8,872

8,872

–

8,872

Dividends payable

–

–

–

–

–

24,491

24,491

–

24,491

Income tax payable

–

–

–

–

–

–

–

5,652

5,652

Total liabilities

–

–

 556

5,224

–

126,280

132,060

22,097

154,157

**Net assets and liabilities**

**61,459**

**632**

**1,595**

**(5,067)**

**142**

**(126,280)**

**(67,519)**

**166,858**

**99,339**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Assets as at December 31, 2007 (Audited)*Noncurrent:***

 

 

 

 

 

 

 

 

 

Property, plant and equipment – net 

–

–

–

–

–

–

–

159,414

159,414

Investments in associates

–

–

–

–

–

–

–

1,351

1,351

Investments-available-for-sale 

–

–

–

–

143

–

 143

–

 143

Investment in debt securities

–

273

–

–

–

–

 273

–

 273

Investment properties 

–

–

–

–

–

–

–

577

 577

Goodwill and intangible assets

–

–

–

–

–

–

–

11,721

11,721

Deferred income tax assets

–

–

–

–

–

–

–

13,757

13,757

Derivative financial assets

–

–

58

1

–

–

  59

–

  59

Prepayments – net of current portion

–

–

–

–

–

–

–

2,281

2,281

Advances and refundable deposits –  net of current portion

734

–

–

–

–

–

 734

296

1,030

***Current:***

Cash and cash equivalents

17,447

–

–

–

–

–

17,447

–

17,447

Short-term investments

11,366

–

2,049

–

–

–

13,415

–

13,415

Investment in debt securities

1,115

–

–

–

–

–

1,115

–

1,115

Trade and other receivables

12,645

–

–

–

–

–

12,645

–

12,645

Inventories and supplies

–

–

–

–

–

–

–

1,167

1,167

Derivative financial assets

–

–

227

670

–

–

 897

–

 897

Current portion of prepayments 

–

–

 

–

–

–

–

2,368

2,368

Current portion of advances and refundable deposits 

–

–

–

–

–

–

–

498

 498

Total assets

43,307

 273

2,334

 671

 143

–

46,728

193,430

240,158

 

 

 

 

 

 

 

 

 

 

**Liabilities as at December 31, 2007 (Audited)*Noncurrent:***

 

 

 

 

 

 

 

 

 

Interest bearing financial liabilities –  net of current portion 

–

–

–

–

–

53,387

53,387

–

53,387

Deferred income tax liabilities

–

–

–

–

–

–

–

2,155

2,155

Derivative financial liabilities

–

–

530

7,211

–

–

7,741

–

7,741

Pension and other employee benefits

–

–

–

–

–

–

–

4,540

4,540

Customers’ deposits

–

–

–

–

–

2,201

2,201

–

2,201

Deferred credits and other noncurrent liabilities 

–

–

–

–

–

7,608

7,608

2,024

9,632

***Current:***

Accounts payable

–

–

–

–

–

10,605

10,605

1,648

12,253

Accrued expenses and other current liabilities 

–

–

–

–

–

16,570

16,570

5,104

21,674

Derivative financial liabilities

–

–

237

5

–

–

 242

–

 242

Provisions for assessments

–

–

–

–

–

–

–

1,112

1,112

Current portion of interest-bearing financial liabilities

–

–

–

–

–

8,764

8,764

–

8,764

Dividends payable

–

–

–

–

–

1,071

1,071

–

1,071

Income tax payable

–

–

–

–

–

–

–

2,875

2,875

Total liabilities

–

–

 767

7,216

–

100,206

108,189

19,458

127,647

**Net assets and liabilities**

**43,307**

**273**

**1,567**

**(6,545)**

**143**

**(100,206)**

**(61,461)**

**173,972**

**112,511**

 

The following tablesets forth the carrying values and estimated fair values of our financialassets and liabilities recognized as at March 31, 2008 and December 31, 2007.

 

** **

**Carrying Value**

**Fair Value**

** **

**March 31,  2008 (Unaudited)**

December 31, 2007 (Audited)

**March 31,  2008 (Unaudited)**

December 31, 2007 (Audited)

 

(in million pesos)

**Noncurrent Financial Assets**

** **

 

 

 

Investments-available-for-sale:

** **

 

** **

 

Listed equity securities

**73**

77

**73**

77

Unlisted equity securities

**69**

66

**69**

66

Investment in debt securities

**632**

273

**612**

283

Derivative financial assets:

** **

 

** **

 

Long-term foreign currency options

**60**

58

**60**

58

Long-term currency options

**–**

1

**–**

1

Advances and refundable deposits – net of current portion 

**744**

734

**649**

657

Total noncurrent financial assets

**1,578**

1,209

**1,463**

1,142

**Current Financial Assets**

** **

 

** **

 

Cash and cash equivalents:

** **

 

** **

 

Cash on hand and in banks

**3,772**

3,944

**3,772**

3,944

Temporary cash investments

**22,737**

13,503

**22,737**

13,503

Short-term investments

**24,382**

13,415

**24,382**

13,415

Investment in debt securities

**–**

1,115

**–**

1,115

Trade and other receivables:

** **

 

** **

 

Foreign administrations

**3,685**

4,324

**3,685**

4,324

Retail subscribers

**3,193**

3,861

**3,193**

3,861

Corporate subscribers

**2,683**

2,040

**2,683**

2,040

Domestic carriers

**743**

1,503

**743**

1,503

Dealers, agents and others

**1,599**

917

**1,599**

917

Derivative financial assets:

** **

 

** **

 

Forward foreign exchange contracts

**157**

863

**157**

863

Bifurcated embedded derivatives

**12**

34

**12**

34

Total current financial assets

**62,963**

45,519

**62,963**

45,519

**Total Financial Assets**

**64,541**

46,728

**64,426**

46,661

** **

** **

** **

** **

** **

 

** **

 

**Noncurrent Financial Liabilities**

** **

 

** **

 

Interest-bearing financial liabilities:

** **

 

** **

 

Long-term debt – net of current portion

**55,471**

53,372

**57,549**

58,044

Obligations under finance lease

**12**

15

**12**

15

Derivative financial liabilities:

** **

 

** **

 

Long-term currency swap

**5,224**

7,211

**5,224**

7,211

Long-term foreign currency options

**326**

390

**326**

390

Interest rate swap

**–**

140

**–**

140

Customers’ deposits

**2,222**

2,201

**820**

1,481

Deferred credits and other noncurrent liabilities 

**7,006**

7,608

**6,572**

6,553

Total noncurrent financial liabilities

**70,261**

70,937

**70,503**

73,834

**Current Financial Liabilities**

** **

 

** **

 

Accounts payable:

** **

 

** **

 

Suppliers and contractors

**8,456**

8,493

**8,456**

8,493

Carriers

**1,577**

1,843

**1,577**

1,843

Others

**433**

269

**433**

269

Accrued expenses and other current liabilities:

** **

 

** **

 

Utilities and related expenses

**12,195**

10,780

**12,195**

10,780

Employee benefits

**2,408**

2,795

**2,408**

2,795

Interest and other related costs

**1,403**

1,234

**1,403**

1,234

Others

**1,734**

1,761

**1,734**

1,761

Derivative financial liabilities:

** **

 

** **

 

Bifurcated equity call options

**120**

231

**120**

231

Forward foreign exchange contracts

**105**

7

**105**

7

Bifurcated embedded derivatives

**5**

–

**5**

–

Interest rate swap

**–**

4

**–**

4

Interest-bearing financial liabilities:

** **

 

** **

 

Notes payable

**569**

493

**569**

493

Current portion of long-term debt

**7,459**

6,775

**7,459**

6,775

Obligations under finance lease

**192**

481

**192**

481

Preferred stock subject to mandatory redemption

**652**

1,015

**652**

1,015

Dividends payable

**24,491**

1,071

**24,491**

1,071

Total current financial liabilities

**61,799**

37,252

**61,799**

37,252

**Total****Financial Liabilities**

**132,060**

108,189

**132,302**

111,086

 

The following methods and assumptions were used toestimate the fair value of each class of financial instrument for which it ispracticable to estimate such value:

 

*Long-term financial assets andliabilities:* Fair value is based on the following:

 

**Type**

**Fair Value Assumptions**

Noncurrent portion of advances and refundable deposits

Estimated fair value is based on the discounted values of future cash flows using the applicable zero coupon rates plus credit spread.

Fixed rate loans:

U.S. dollar notes/convertible debt

Other loans in all other currencies

 

Quoted market price.

Estimated fair value is based on the discounted value of future cash flows using the applicable CIRR and Philippine Dealing System Treasury Fixing rates for similar types of loans.

Variable rate loans

The carrying value approximates fair value because of recent and regular repricing based on market conditions.

Customers’ deposits and deferred credits and other noncurrent liabilities

Estimated fair value is based on the discounted values of future cash flows using the applicable zero coupon rates plus credit spread.

 

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

 

Derivative FinancialInstruments:

 

*Foreign currency options:*The fair values were computed using an option pricing model using marketvolatility rates of the U.S. dollar and Philippine peso exchange rate as atvaluation date.

 

*Forward foreign exchange contracts, bifurcated foreigncurrency forwards, foreign currency and interest rate swaps:*  The fair values were computed as the present valueof estimated future cash flows using market U.S. dollar and Philippine pesointerest rates as at valuation date.

 

*Bifurcated equity call options:*The fair values were computed using an option pricingmodel using market volatility rates of the PLDT share price as at valuationdate.

 

*Investments-available-forsale:*Fair values were determinedusing quoted prices.

 

Due to the short-termnature of the transactions, the fair value of cash and cash equivalents,short-term investments, investment in debt securities, trade and otherreceivables, current portion of advances and refundable deposits, accountspayable, accrued expenses and other current liabilities, current portion ofinterest-bearing financial liabilities, and dividends payable approximate thecarrying values as at the balance sheet date.

 

*Derivative FinancialInstruments*

 

Our derivativefinancial instruments are accounted for as either cash flow hedges ortransactions not designated as hedges.  Cash flow hedges refer to thosetransactions that hedge our exposure to variability in cash flows attributableto a particular risk associated with a recognized financial asset or liabilityand exposures arising from forecast transactions.  Changes in the fair value ofthese instruments representing effective hedges are recognized as cumulativetranslation adjustments in equity until the hedged item is recognized inearnings.  For transactions that are not designated as hedges, any gains orlosses arising from the changes in fair value are recognized directly to incomefor the period.

 

The table below setsout the information about our derivative financial instruments as at March 31,2008 and December 31, 2007:

 

** **

**March 31, 2008 (Unaudited)**

December 31, 2007 (Audited)

** **

 

**Maturity**

**Notional**

**Mark-to-market Gains (Losses)**

Notional

Mark-to-market Gains (Losses)

 

 

(in millions)

***PLDT***

** **

** **

 

 

Cash flow hedges:

** **

** **

 

 

Forward foreign exchange contracts

2008

**US$103**

**Php52**

US$134

Php296

Long-term currency swaps

2017

**–**

**–**

300

(3,715)

 

2012

**–**

**–**

250

(3,496)

Long-term foreign currency bought options

2009

**–**

**–**

136

(390)

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Long-term currency swaps

2017

**300**

**(2,850)**

–

–

 

2012

**210**

**(2,374)**

–

–

Long-term foreign currency bought call options

2009

**136**

**(326)**

–

–

Long-term foreign currency sold call options

2009

**136**(1)

**60**

136(1)

59

Bifurcated equity call options

2008

**0.4 share**

**(120)**

1 share

(231)

Forward foreign exchange contracts

2008

**–**

**–**

US$16

21

Interest rate swap

2012

**–**

**–**

31

(144)

 

** **

**(5,558)**

 

(7,600) 

*** ***

 

** **

 

* *

***Smart***

 

** **

 

* *

Cash flow hedges:

** **

** **

 

 

Forward foreign exchange contracts

2008

**223**

**(17)**

171

265

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Bifurcated embedded derivatives

2008

**8**

**7**

5

34

Forward foreign exchange contracts

 

** **

** **

 

 

On loan proceeds

2008

**–**

**–**

50

100

On gross U.S. dollar revenues

2008

**–**

**–**

55

70

*** ***

** **

**(****10)**

 

469

***ePLDT***

** **

** **

 

 

Cash flow hedges:

 

** **

** **

 

 

Forward foreign exchange contracts

2008

**37**

**17**

36

104

Net liabilities

** **

**(Php5,551****)**

** **

(Php7,027)

 

*(1)**Soldcall options of 2009 long-term foreign currency options based on the samenotional amount as the long-term foreign currency bought call option.*

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2007 (Audited)

 

(in million pesos)

Presented as:

** **

 

 

Noncurrent assets

**60**

 

59

Current assets

**169**

 

897

Noncurrent liabilities

**(5,550)**

 

(7,741)

Current liabilities

**(230)**

 

(242)

Net liabilities

**(5,551)**

 

(7,027)

 

Analysis of gains (losses) on derivative financialinstruments for the three months March 31, 2008 and 2007 are as follows:

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Net mark-to-market losses at end of period

**(5,551)**

 

(6,248)

Net mark-to-market losses at beginning of period

**(7,027)**

 

(6,499)

Net change

**1,****476**

 

 251

Net gains charged on cash flow hedges removed from cumulative  translation adjustments and taken to income

**697**

 

–

Net gains (losses) charged to cumulative translation adjustments

**192**

 

(286)

Ineffective portion recognized in the profit or loss for the cash flow hedge

**7**

 

–

Settlements, accretion and conversion

**(85)**

 

(276)

Hedge cost

**(199)**

 

(354)

Effective portion recognized in the profit or loss for the cash flow hedge

**(311)**

 

–

Net gains (losses) on derivative transactions

**1,777**

 

(665)

 

**PLDT**

 

***Transactions Designated as Hedges***

 

*Forward Foreign Exchange Contracts*

 

PLDT entered into short-term U.S.dollar forward foreign exchange sale contracts to hedge a portion of monthlydollar revenues maturing monthly in 2008.  As at March 31, 2008 and December31, 2007, outstanding forward foreign exchange contracts that are designated ashedges amounted to US$103 million with an average exchange rate of Php42.775,and US$134 million with an average exchange rate of Php43.96, respectively.The ineffective portion of the gain in the fair value of these instrumentsrecognized in the unaudited consolidated statement of income for the threemonths ended March 31, 2008 amounted to Php0.1 million.  There is noineffective portion in the fair value of these instruments recognized in theunaudited consolidated statement of income for the three months ended March 31,2007.

 

In March 2008, we entered intounwind transactions to terminate US$63 million of our forward foreign exchangecontracts.  The proceeds from the unwind transaction amounted to Php102million.  In addition, we entered into new forward foreign exchange salecontracts in March 2008 amounting to US$68 million.

 

***Transactions Not Designatedas Hedges***

 

Due to the amounts of PLDT’sforeign currency hedging requirements and the large interest differentialbetween the Philippine peso and the U.S. dollar, the costs to book long-termhedges can be significant.  In order to manage such hedging costs, PLDTutilizes structures that include currency option contracts, andfixed-to-floating coupon-only swaps that may not qualify for hedge accounting.

 

*Long-term Currency Swaps*

*** ***

PLDT entered into long-term principal only currencyswap agreements with various foreign counterparties to hedge the currency riskon its fixed rate notes maturing in 2012 and 2017.  As at March 31, 2008 and December31, 2007, these long-term currency swaps have an aggregate notional amount of US$510million and US$550 million, respectively.  Under the swaps, PLDT effectivelyexchanges the principal of its U.S. dollar-denominated fixed rate notes intoPhilippine peso-denominated loan exposures at agreed swap exchange rates.  Theagreed swap exchange rates are reset to the lowest U.S. dollar/Philippine pesospot exchange rate during the term of the swaps, subject to a minimum exchangerate.  As at March 31, 2008 and December 31, 2007, the outstanding swapcontracts have an agreed average swap exchange rate of Php50.668 and Php50.756,respectively.

 

In March 2008, the long-termprincipal only currency swap agreement maturing 2012 were partially terminatedthereby reducing the outstanding notional amount to US$210 million.  The totalamount settled for the unwind is Php511 million.

 

In order to managehedge costs, these swaps included a credit-linkage feature with PLDT as thereference entity.  The specified credit events include bankruptcy, failure topay, obligation acceleration, moratorium/repudiation, and restructuring of PLDTbonds or all or substantially all of PLDT’s obligations.  Upon the occurrenceof any of these credit events, subject to agreed threshold amounts whereapplicable, the obligations to both PLDT and its counterparty under the swap contractsterminate without further settlements to either party, including anymark-to-market value of the swaps.  As at March 31, 2008 and December 31, 2007,US$646 million and US$686 million, respectively, of PLDT’s long-term currencyswaps/options have been structured to include credit-linkage with PLDT as thereference entity.  The semi-annual fixed or floating swap cost payments thatPLDT is required to make to its counterparties averaged about 3.60% and 4.01%per annum as at March 31, 2008 and December 31, 2007, respectively.

 

Until December 31, 2007, changes in the fair value ofthe financial instruments were booked to equity.  Effective January 1, 2008,PLDT opted to discontinue the hedge accounting treatment for its long-termcurrency swaps.  Consequently, the loss deferred under equity amounting toPhp359 million was recognized in the profit or loss.  Any movements in the fairvalue of the instrument are now taken to profit or loss in the unaudited consolidatedstatement of income.

 

*Long-term Foreign Currency Options*

 

To manage hedgingcosts, the currency swap agreement relating to the 2009 fixed rate notes with anotional amount of US$175 million has been structured to include currencyoption contracts.  If the Philippine peso to U.S. dollar spot exchange rate onmaturity date settles beyond Php52.500 to US$1.00 up to Php90.00 to US$1.00,PLDT will have the option to purchase U.S. dollar at an exchange rate ofPhp52.500 to US$1.00.  On the other hand, if the Philippine peso to U.S. dollarspot exchange rate settles beyond Php90.00, PLDT will have the option topurchase U.S. dollar at an exchange rate of Php52.50 to US$1.00 plus the excessabove the agreed threshold rate.  If on maturity, the Philippine peso to U.S.dollar spot exchange rate is lower than the exchange rate of Php52.50 toUS$1.00, PLDT will have the option to purchase at the prevailing Philippinepeso to U.S. dollar spot exchange rate.  The option contracts have beenstructured to include credit-linkage with PLDT as the reference entity similarto the long-term currency swaps.  The net semi-annual floating hedge costpayments that PLDT is required to pay under these transactions wasapproximately 3.33% and 4.34% per annum as at March 31, 2008 and December 31,2007, respectively.

 

In December 2006, thecurrency option agreement was partially terminated, thereby reducing theoutstanding currency options notional amount to US$167 million.  The totalamounts settled for the unwinding was Php33 million.

 

In January 2007, thecurrency option agreement was again partially terminated, thereby furtherreducing the outstanding currency options notional amount to US$136 million.The total amounts settled for the unwinding was Php44 million.

 

Until December 31,2007, changes in the fair value of PLDT’s option to purchase U.S. dollar atPhp52.50 to US$1.00 or prevailing spot exchange rate at maturity, whichever islower, were booked to equity.  Effective January 1, 2008, PLDT opted todiscontinue the hedge accounting treatment for its long-term foreign currencyoptions.  Consequently, the gain deferred under equity amounting to Php1,055million was recognized in the profit or loss.  Any movements in the fair valueof the instrument are now taken to profit or loss in the unaudited consolidatedstatement of income.

 

*Forward Foreign Exchange Contracts*

 

In 2007, PLDT enteredinto short-term U.S. dollar forward foreign exchange sale contracts to hedge aportion of monthly dollar revenues maturing monthly in 2008.  As at March 31,2008, there were no outstanding forward foreign exchange contracts notdesignated as hedges while the outstanding forward foreign exchange contractsnot accounted for under hedge accounting as at December 31, 2007 amounted toUS$16 million with an average exchange rate of Php43.19.

 

In March 2008, PLDTentered into unwind transactions to terminate US$16 million of our forwardforeign exchange contracts.  The proceeds from the unwind transaction amountedto Php11 million.

 

*Interest Rate Swap*

 

A portion of PLDT’s currency swap agreements to hedgeits 2017 fixed rate notes carry fixed rate swap cost payments.  To effectivelylower the running cost of such swap agreements, in April 2003, PLDT enteredinto an agreement to swap the coupon on US$125 million of its 2012 fixed ratenotes into a floating rate Japanese yen amount.  Under this agreement, PLDT isentitled to receive a fixed coupon rate of 11.375%, provided the Japanese yento U.S. dollar exchange rate stays above JP¥99.90 to US$1.00.  Below thislevel, a reduced fixed coupon rate of 3% will be due to PLDT.  In order tomitigate the risk of the Japanese yen strengthening below the agreed threshold,in December 2003, PLDT entered into an overlay swap transaction to effectivelylower the portion of the coupon indexed to the U.S. dollar to Japanese yen rateto 3% such that the fixed coupon rate due to PLDT when the Japanese yenstrengthens below the agreed threshold will be 8.375%.  Both swap agreementsinclude a credit-linkage feature with PLDT as the reference entity.

 

In March 2006, the interest rate and overlay swap agreements werepartially terminated to effectively lower the outstanding interest rate swapnotional amount to US$63 million.  Since changes in fair values have alreadybeen recognized as profit or loss in prior periods, the corresponding liabilitysettled by PLDT amounted to Php804 million. 

 

In April 2007,the interest and overlay swap agreements were again partially terminated whereoutstanding notional amount was lowered to US$31 million.  The total amountssettled for the unwinding is Php276 million.

 

In March 2008,the outstanding interest rate and overlay swap agreements were fullyterminated.  The total settlement amount for this unwind is Php223 million.

 

*Bifurcated Equity Call Options*

 

Pursuant to Piltel’sdebt restructuring plan, PLDT issued its shares of Series VI and VIIConvertible Preferred Stock.  See *Note 18 – Interest-bearing FinancialLiabilities*.  Each share of Series VI and VII Convertible Preferred Stockis convertible at any time at the option of the holder into one share of PLDT’scommon stock.  On the date immediately following the seventh anniversary of theissue date of the Series VI Convertible Preferred Stock and on the eighthanniversary of the issue date of the Series VII Convertible Preferred Stock,the remaining outstanding shares under these series will be mandatorilyconverted into shares of PLDT’s common stock.  For 30 days thereafter, theholders of these mandatorily converted shares of PLDT’s common stock have theoption to sell such shares of PLDT’s common stock back to PLDT for US$36.132per share and JPY4,071.89 per share for Series VI and VII,respectively.  On August 18, 2006, all of the 3,842,000 shares of the SeriesVII were converted to PLDT’s common stock.  As at March 31, 2008 and December31, 2007, the negative fair market value of these embedded call optionsamounted to Php120 million and Php231 million, respectively.

 

**Smart**

 

***Cash Flow Hegdes***

 

Smart entered into short-term U.S. dollar forwardforeign exchange sale contracts to hedge a portion of monthly dollar revenuesmaturing monthly in 2008 and loan proceeds from the Nord/LB Facility.  

 

The outstandingforward foreign exchange contracts as at March 31, 2008 amounted to US$223million with an average exchange rate of Php42.172 which are all designated ashedges.  As at December 31, 2007, outstanding forward foreign exchangecontracts amounted to US$226 million, of which US$171 million with an averageexchange rate of Php43.293 were designated as hedges, while US$55 million withan average exchange rate of Php42.997 did not qualify under hedge accounting.  Theineffective portion of the gain in the fair value of these instrumentsrecognized in the unaudited consolidated statement of income for the threemonths ended March 31, 2008 amounted to Php8 million.  There is no ineffectiveportion in the fair value of these instruments recognized in the unauditedconsolidated statement of income for the three months ended March 31, 2007.

 

In January 2008,Smart entered into additional short term U.S. dollar forward foreign exchangesale contracts amounting to US$71.5 million with an average exchange rate ofPhp41.158 to hedge dollar revenues maturing monthly in 2008.

 

In March 2008, Smartentered into unwind transactions to terminate US$172 million of outstandingforward foreign exchange contracts.  The proceeds from the unwind transactionamounted to Php89 million.  Consequently, new forward foreign exchange salecontracts were entered into in March 2008 amounting to US$172 million with anaverage exchange rate of Php42.018.

 

***Transactions not Designatedas Hedges***

*** ***

Smart’s otherembedded derivatives were bifurcated from service and purchase contracts.  Asat March 31, 2008 and December 31, 2007, outstanding contracts included servicecontracts with foreign equipment suppliers and various suppliers coveringhandset importations denominated in U.S. dollars, which is not the functionalcurrency of a substantial party to the contract or the routine currency of thetransaction.

 

**ePLDT**

 

***CashFlow Hedges***

 

ePLDT subsidiaries,namely Vocativ Systems, Inc., Parlance Systems, Inc. and SPi Technologies, Inc.(hereafter collectively referred to in this section as “ePLDT”) entered intoshort-term U.S. dollar forward foreign exchange sale contracts to hedge a portionof monthly dollar revenues maturing monthly in 2008.  As at March 31, 2008 andDecember 31, 2007, outstanding forward foreign exchange contracts that aredesignated as hedges amounted to US$45 million with an average exchange rate ofPhp42.740, and US$36 million with an average exchange rate of Php44.700,respectively.  The ineffective portion of the loss in the fair value of theseinstruments recognized in the unaudited consolidated statement of income forthe three months ended March 31, 2008 amounted to Php0.12 million.  There is noineffective portion in the fair value of these instruments recognized in theunaudited consolidated statement of income for the three months ended March 31,2007.

 

In March 2008, weentered into unwind transactions to terminate US$18 million of our forwardforeign exchange contracts.  The proceeds from the unwind transaction amountedto Php45.84 million.  In addition, we entered into new forward foreign exchangesale contracts in March 2008 amounting to US$28 million.

 

**Financial Risk ManagementObjectives and Policies**

 

The main risks arising from ourfinancial instruments are liquidity risk, foreign exchange risk, interest raterisk and credit risk.  The importance of managing those risks has significantlyincreased in light of the considerable change and volatility in both thePhilippine and international financial markets.  Our board of directors reviewsand approves policies for managing each of these risks.  Our policies formanaging these risks are summarized below.  We also monitor the market pricerisk arising from all financial instruments.

 

***Liquidity Risk***

 

We manage our liquidity profile to be able to financeour operations and capital expenditures, service our maturing debts and meetour other financial obligations.  To cover our financing requirements, we useinternally generated funds and proceeds from debt and equity issues and salesof certain assets. 

 

As part of our liquidity risk management program, we regularly evaluateour projected and actual cash flows, including our loan maturity profiles, andcontinuously assess conditions in the financial markets for opportunities topursue fund-raising initiatives.  These activities may include bank loans,export credit agency-guaranteed facilities, debt capital and equity marketissues.

 

Any excess funds are primarily invested in short-dated andprincipal-protected bank products that provide flexibility of withdrawing thefunds anytime.  We also allocate a portion of our cash in longer tenorinvestments such as fixed income securities issued or guaranteed by theRepublic of the Philippines, or ROP, and Philippine banks and corporates,managed funds and other structured products linked to the ROP.  We regularlyevaluate available financial products and monitor market conditions foropportunities to enhance yields at acceptable risk levels.  Our investments arealso subject to certain restrictions contained in our debt covenants.  Ourfunding arrangements are designed to keep an appropriate balance between equityand debt and to provide financing flexibility while enhancing our businesses. 

 

A summary of the maturity profile of our financial liabilities as at March31, 2008 and December 31, 2007 based on contractual undiscounted payments is setout in *Note 24 – Contractual Obligations and Commercial Commitments*.

 

***ForeignCurrency Exchange Risk***

 

The revaluation ofour foreign currency-denominated financial assets and liabilities as a resultof the appreciation or depreciation of the Philippine peso is recognized asforeign exchange gains or losses as at the balance sheet date.  The extent offoreign exchange gains or losses is largely dependent on the amount of foreigncurrency debt and hedges we carry.  Whilea certain percentage of our revenues are either linked to or denominated inU.S. dollars, most of our indebtedness and related interest expense, asubstantial portion of our capital expenditures and a portion of our operatingexpenses are denominated in foreign currencies, mostly in U.S. dollars.  Assuch, a strengthening or weakening of the Philippine peso against the U.S.dollar will decrease or increase in Philippine peso terms both the principalamount of our unhedged foreign currency-denominated debts and the relatedinterest expense of our foreign currency-denominated capital expenditures andoperating expenses as well as our U.S. dollar-linked and U.S. dollar-denominatedrevenues.  In addition, many of our financial ratios and other financial testsare affected by the movements in the Philippine peso to U.S. dollar exchangerate.

 

To manage our foreign exchangerisks and to stabilize our cash flows to improve investment and cash flowplanning, we enter into forward foreign exchange contracts, currency swapcontracts, currency option contracts and other hedging products aimed atreducing and/or managing the adverse impact of changes in foreign exchangerates on our operating results and cash flows.  We use forward foreign exchangepurchase contracts, currency swap contracts and foreign currency optioncontracts to manage the foreign currency risks associated with our foreigncurrency-denominated loans.  We also enter into forward foreign exchange salecontracts to manage foreign currency risks associated with our U.S. dollar-linkedand U.S. dollar-denominated revenues.  In order to manage hedge costs of thesecontracts, we utilize structures that include credit-linkage with PLDT as thereference entity, a combination of foreign currency option contracts, and fixedto floating coupon only swap agreements.  We accounted for these instruments aseither cash flow hedges, wherein changes in the fair value are recognized ascumulative translation adjustments in equity until the hedged transactionaffects the unaudited consolidated statement of income or when the hedginginstrument expires, or transactions not designated as hedges, wherein changesin the fair value are recognized directly as income or expense for the period.

 

Thefollowing table shows our consolidated foreign currency-denominated monetary financialassets and liabilities and their Philippine peso equivalents as at March 31,2008 and December 31, 2007:

 

** **

**March 31, 2008 (Unaudited)**

December 31, 2007 (Audited)

** **

**U.S. Dollar**

**Php**(1)

U.S. Dollar

Php(2)

 

(in millions)

**Noncurrent Financial Asset**

** **

 

** **

** **

Derivative financial assets

**US$1**

**Php****60**

US$1

Php59

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**97**

**4,035**

93

3,853

Short-term investments

**56**

**2,351**

56

2,324

Trade and other receivables

**189**

**7,905**

227

9,400

Derivative financial assets

**4**

**169**

22

897

Total current financial assets

**346**

**14,460**

 398

16,474

**Total Financial Assets**

**347**

**14,520**

399

16,533

** **

** **

** **

 

 

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities - net of current portion

**1,182**

**49,352**

1,126

46,612

Derivative financial liabilities

**133**

**5,550**

187

7,741

Total noncurrent financial liabilities

**1,315**

**54,902**

1,313

54,353

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**171**

**7,116**

160

6,614

Accrued expenses and other current liabilities

**104**

**4,358**

95

3,958

Derivative financial liabilities

**5**

**230**

6

242

Current portion of interest-bearing financial liabilities

**196**

**8,184**

187

7,748

Total current financial liabilities

**476**

**19,888**

 448

18,562

**Total Financial Liabilities**

**US$1,791**

**Php74,790**

US$1,761

Php72,915

 

*(1)**The exchange rate used to translate the U.S.dollar amounts into Philippine peso was Php**41.756 to US$1.00, the peso-dollar rate as quoted through the Philippine Dealing System as at March 31, 2008.*

*(2)**The exchange rate used to translate the U.S. dollaramounts into Philippine peso was Php41.411 to US$1.00, the peso-dollar rate as quoted through the Philippine Dealing System as at December 31, 2007.*

 

As at May 5, 2008, the peso-dollar exchange rate was Php42.332to US$1.00.  Using this exchange rate, our consolidated net foreigncurrency-denominated financial liabilities as at March 31, 2008 would have increasedby Php832 million.

 

As at March 31, 2008, approximately 89% of our total consolidated debts was denominated inU.S. dollars.  Consolidated foreign currency-denominated debt was increased toPhp55,460 million as at March 31, 2008 from Php52,540 million as at December31, 2007.  PLDT’s outstanding long-term principal only currency swap contractsand foreign currency option contracts amounted to US$510 million and US$136million, respectively, as at March 31, 2008.  Consequently, the unhedgedportion of consolidated debt amounts was approximately 49% (or 40%, net of ourU.S. dollar cash balances) as at March 31, 2008. 

 

For the three months ended March 31, 2008,approximately 35% of our consolidated service revenues were denominated in U.S.dollars and/or were linked to the U.S. dollars.  In this respect, the recentappreciation of the Philippine peso against the U.S. dollar reduced ourrevenues, and consequently, our cash flow from operations in Philippine pesoterms.

 

The Philippine pesohad depreciated by 0.8% against the U.S. dollar to Php41.756 to US$1.00 as at March31, 2008 from Php41.411 to US$1.00 as at December 31, 2007.  As at December 31,2007, the peso had appreciated by 15.6% to Php41.411 to US$1.00 from Php49.045to US$1.00 as at December 31, 2006.  As a result of the foreign exchangemovements as well as the amount of our outstanding foreign currency debts andhedges, we recognized foreign exchange losses of Php288 million and gains of Php588million for the three months ended March 31, 2008 and 2007, respectively.

 

Management conducteda survey among our banks to determine the outlook of the peso-dollar exchangerate until our next reporting date of June 30, 2008.  Our outlook is that thepeso-dollar exchange rate may weaken/strengthen by 2% as compared to theexchange rate of Php41.756 to US$1.00 as at March 31, 2008.  If the peso-dollarexchange rate had weakened/strengthened by 2% at March 31, 2008, with all othervariables held constant, profit after tax for the period would have been Php470million higher/lower and our consolidated stockholders’ equity would have been Php658million higher/lower, mainly as a result of foreign exchange gains, losses ontranslation of U.S. dollar-denominated net assets/liabilities, marked-to-marketvaluation of financial assets/liabilities and foreign exchange gains/losses ontranslation of cash flow hedges transactions.

 

***Interest Rate Risk***

 

Our exposure to therisk of changes in market interest rates relates primarily to our long-termdebt obligations and short-term borrowings with floating interest rates. 

 

Our policy is to manage interest cost through a mix offixed and variable rate debts. We evaluate the fixed to floating ratio of ourloans in line with movements of relevant interest rates in the financialmarkets. Based on our assessment, new financing will be priced either on afixed or floating rate basis. On a limited basis, we enter into interest rateswap agreements in order to manage our exposure to interest rate fluctuations.We make use of hedging instruments and structures solely for reducing ormanaging financial risk associated with our liabilities and not for tradingpurposes.

 

The following tables set out the carrying amount, bymaturity, of our financial instruments that are exposed to interest rate risk asat March 31, 2008 and December 31, 2007.  Financial instruments that are notsubject to interest rate risk were not included in the table.

 

**Three Months EndedMarch 31, 2008 (Unaudited)**

 

** **

 

 

 

 

 

 

 

**Discount/**

** **

 

** **

** **

 

 

 

 

 

 

 

**Debt**

** **

** **

** **

 

 

 

 

**Over 5**

**In U.S.**

 

**Issuance Cost**

**Carrying Value**

**Fair Value**

**In U.S.**

** **

** **

**Below 1 year**

**1-2 years**

**2 – 3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**In Php**

**In Php**

**Dollar**

**In Php**

** **

 

 

 

 

 

 

 

**(in millions)**

**Liabilities:**

 

 

 

 

 

 

 

** **

** **

 

** **

Long-term Debt

 

 

 

 

 

 

 

** **

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

 

 

US$ Notes

–

136

–

240

300

 676

28,218

374

27,844

770

32,143

Interest rate

–

10.500%

–

11.375%

8.350%

–

–

–

–

–

–

US$ Fixed Loans

52

45

16

5

280

 398

16,620

3,903

12,717

253

10,572

Interest rate

4.49% to 6.66%

4.49% to 6.0%

4.515% to 4.7%

4.700%

2.250%

–

–

–

–

–

–

Philippine Peso

–

–

–

92

38

 130

5,420

32

5,388

127

5,290

Interest rate

–

6.500%

6.500%

5.625% to 6.50%

6.125% to 6.50%

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar

116

112

67

62

–

 357

14,939

40

14,899

357

14,919

Interest rate

0.05% to  2.75% over US$ LIBOR

0.05% to 2.75% over US$ LIBOR

0.42% to 2.5% over US$ LIBOR

0.42% to 0.815% over US$ LIBOR

–

–

–

–

–

–

–

Philippine Peso

13

13

14

10

–

  50

2,089

7

2,082

50

2,084

Interest rate

MART1 + 0.75% to 5.70%

MART1 + 0.75% to 5.70%

MART1 + 0.75%

MART1 + 0.75% 

–

–

–

–

–

–

–

 

 

 

 

 

 

**1,611**

**67,286**

**4,356**

**62,930**

**1,557**

**65,008**

 

**Year Ended December 31, 2007 (Audited)**

 

** **

 

 

 

 

 

 

 

**Discount/**

** **

 

** **

** **

 

 

 

 

 

 

 

**Debt**

** **

** **

** **

 

 

 

 

**Over 5**

**In U.S.**

 

**Issuance Cost**

**Carrying Value**

**Fair Value**

**In U.S.**

** **

** **

**Below 1 year**

**1-2 years**

**2 – 3 years**

**3-5 years**

**years**

**Dollar**

**In Php**

**In Php**

**In Php**

**Dollar**

**In Php**

** **

 

 

 

 

 

 

 

**(in millions)**

**Liabilities:**

 

 

 

 

 

 

 

** **

** **

 

** **

Long-term Debt

 

 

 

 

 

 

 

** **

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

 

 

US$ Notes

–

136

–

250

300

 686

28,403

387

28,016

770

31,901

Interest rate

–

10.500%

–

11.375%

8.350%

–

–

–

–

–

–

US$ Fixed Loans

55

46

23

9

280

 413

17,123

4,016

13,107

342

14,078

Interest rate

4.49% to 8.9%

4.49% to 6.0%

4.515% to 4.7%

4.700%

2.250%

–

–

–

–

–

–

Philippine Peso

–

–

–

93

38

 131

5,420

33

5,387

125

5,168

Interest rate

7.090%

6.500%

6.500%

5.625% to 6.50%

6.125% to 6.50%

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar

98

92

58

28

–

 276

11,445

28

11,417

276

11,445

Interest rate

0.05% to 2.75% over US$ LIBOR

0.05% to 2.75% over US$ LIBOR

0.05% to 2.5% over US$ LIBOR

0.75% to 0.815% over US$ LIBOR

–

–

–

–

–

–

–

Philippine Peso

14

14

13

13

–

  54

2,228

8

2,220

54

2,227

 

 

 

Interest rate

 

 

 

MART1 + 0.75% to 5.70%

 

 

 

MART1 + 0.75% to 5.70%

 

 

 

MART1 + 0.75% to 5.70%

 

 

 

MART1 + 0.75% 

 

 

 

–

 

 

 

–

 

 

 

–

 

 

 

–

 

 

 

–

 

 

 

–

 

 

 

–

 

 

 

 

 

 

**1,560**

**64,619**

**4,472**

**60,147**

**1,567**

**64,819**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$31 million)

–

–

–

–

–

3.5

144

–

144

3.5

144

Japanese Yen (JPY3,759 million)

–

–

–

–

–

–

–

–

–

–

–

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

11.375%

–

–

–

–

–

–

Variable Rate on JPY notional

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

–

–

–

–

–

–

 

Fixed rate financialinstruments are subject to fair value interest rate risk while floating ratefinancial instruments are subject to cash flow interest rate risk.  

 
Repricing of floating rate financial instruments ismostly done on intervals of three months or six months.  Interest on fixed ratefinancial instruments is fixed until maturity of the particular instrument.Financial instruments that are not subject to interest rate risk were notincluded in the above tables.

 

Management conducted a survey among our banks todetermine the outlook of the U.S. dollar and Philippine peso interest ratesuntil our next reporting date of June 30, 2008.  Our outlook is that the U.S.dollar and Philippine peso interest rates may move 40 basis points and 60 basispoints higher/lower, respectively, as compared to levels as at March 31, 2008.  IfU.S. dollar interest rates had been 40 basis points higher/lower as compared tomarket levels as at March 31, 2008, with all other variables held constant,profit after tax for the period would have been Php312 million lower/higher asat March 31, 2008, mainly as a result of higher/lower interest expense onfloating rate borrowings and loss/gain on derivatives transactions, exceptthose derivatives designated and considered as effective hedging instrumentsand our consolidated stockholders’ equity would have been Php299 millionlower/higher mainly as a result of a decrease/increase in the fair value ofcash flow hedges.  If Philippine peso interest rates had been 60 basis pointshigher/lower as compared to market levels as at March 31, 2008, with all othervariables held constant, profit before tax for the period would have been Php425million lower/higher as at March 31, 2008, mainly as a result of higher/lowerinterest expense on floating rate borrowings and loss/gain on derivativestransactions, except those derivatives designated and considered as effectivehedging instruments and our stockholders’ equity would have been Php406 millionlower/higher mainly as a result of a decrease/increase in the profit or lossand fair value of cash flow hedges.

 

***Credit Risk***

 

Creditrisk is the risk that we will incur a loss arising from our customers, clientsor counterparties that fail to discharge their contractual obligations.  Wemanage and control credit risk by setting limits on the amount of risk we are willingto accept for individual counterparties and by monitoring exposures in relationto such limits.

 

Wetrade only with recognized and creditworthy third parties.  It is our policythat all customers who wish to trade on credit terms are subject to creditverification procedures.  In addition, receivable balances are monitored on anon-going basis to reduce our exposure to bad debts.

 

Weestablished a credit quality review process to provide regular identificationof changes in the creditworthiness of counterparties.  Counterparty limits areestablished and periodically reviewed based on latest available financial dataon our counterparties’ credit ratings, capitalization, asset quality andliquidity.  Our credit quality review process allows us to assess the potentialloss as a result of the risks to which we are exposed and take correctiveactions.

 

The table below shows the maximum exposure to creditrisk for the components of the unaudited consolidated balance sheet, includingderivative financial instruments.

 

** **

**Gross Maximum Exposure**(1)

**Net Maximum Exposure**(2)

** **

**March 31, 2008 (Unaudited)**

December 31, 2007 (Auidted)

**March 31, 2008 (Unaudited)**

December 31, 2007 (Auidted)

 

(in million pesos)

Loans and receivables:

** **

 

** **

 

Advances and refundable deposits

**744**

734

**739**

734

Cash and cash equivalents

**26,509**

17,447

**26,446**

17,406

Short-term investments

**22,303**

11,366

**22,302**

11,366

Investment in debt securities

**–**

1,115

**–**

1,115

Foreign administrations

**3,685**

4,324

**3,685**

4,324

Retail subscribers

**3,193**

3,861

**3,158**

3,861

Corporate subscribers

**2,683**

2,040

**2,582**

2,040

Domestic carriers

**743**

1,503

**743**

1,503

Dealers, agents and others

**1,599**

917

**1,597**

917

Held-to-maturity investments:

** **

 

** **

 

Investment in debt securities

**632**

273

**632**

273

Investments-available-for-sale

**142**

143

**142**

143

Held-for-trading:

** **

 

** **

 

Short-term investments

**2,079**

2,049

**2,079**

2,049

Long-term foreign currency options

**60**

58

**60**

58

Forward foreign exchange contracts

**12**

193

**12**

193

Bifurcated embedded derivatives

**–**

34

**–**

34

Derivatives used for hedging:

** **

 

** **

 

Forward foreign exchange contracts

**157**

670

**157**

670

Long-term foreign currency options

**–**

1

**–**

1

**Total**

**64,541**

46,728

**64,334**

46,687

 

*(1)**Grossfinancial assets before taking into account any collateral held or other creditenhancements or offsetting arrangements.*

*(2)**Grossfinancial assets after taking into account any collateral held or other creditenhancements or offsetting arrangements.*

 

Thetable below provides information regarding the credit quality by class of ourfinancial assets according to our credit ratings of counterparties:

 

** **

** **

**Neither past due  nor impaired**

**Past due but not impaired**

**Impaired**

** **

**Total**

**Class A**(1)

**Class B**(2)

 

(in million pesos)

**March 31, 2008 (Unaudited)**

 

 

 

 

 

Loans and receivables:

 

 

** **

 

 

Advances and refundable deposits 

 744

744

–

–

–

Cash and cash equivalents 

26,509

25,975

534

–

–

Short-term investments 

22,303

21,576

727

–

–

Corporate subscribers 

9,094

1,070

271

1,300

6,453

Retail subscribers 

7,821

985

578

1,630

4,628

Foreign administrations 

4,096

1,137

1,315

1,233

411

Domestic carriers 

1,024

205

1

537

281

Dealers, agents and others 

2,265

1,137

291

172

665

Held-to-maturity investments:

 

 

 

 

 

Investment in debt securities

 632

632

–

–

–

Investments-available-for-sale

 142

110

32

–

–

Held-for-trading(3):

 

 

 

 

 

Short-term investments

2,079

2,079

–

–

–

Long-term foreign currency options 

  60

60

–

–

–

Forward foreign exchange contracts 

  12

12

–

–

–

Derivatives used for hedging(3): 

 

 

 

 

 

Forward foreign exchange contracts

 157

157

–

–

–

**Total**

**76,938**

**55,879**

**3,749**

**4,872**

**12,438**

 

 

 

 

 

 

**December 31, 2007 (Audited)**

 

 

 

 

 

Loans and receivables:

 

 

 

 

 

Advances and refundable deposits 

 734

734

–

–

–

Cash and cash equivalents 

17,447

15,150

2,297

–

–

Short-term investments 

11,366

10,637

729

–

–

Investment in debt securities

1,115

1,115

–

–

–

Retail subscribers

8,179

1,389

637

1,823

4,330

Corporate subscribers 

7,915

641

187

1,166

5,921

Foreign administrations 

5,371

1,828

861

1,635

1,047

Domestic carriers 

1,884

119

11

1,373

381

Dealers, agents and others 

2,151

983

315

196

657

Held-to-maturity investments:

 

 

 

 

 

Investment in debt securities

 273

273

 

 

 

Investments-available-for-sale

 143

113

30

–

–

 

Held-for-trading(3):

 

 

 

 

 

Short-term investments

2,049

2,049

–

–

–

Forward foreign exchange contracts

 193

190

3

–

–

Long-term foreign currency options 

  58

58

–

–

–

Bifurcated embedded derivatives

  34

34

–

–

–

Derivatives used-for-hedging(3):

 

 

 

 

 

Forward foreign exchange contracts

 670

670

–

–

–

Long-term foreign currency options 

   1

1

–

–

–

**Total**

**59,583**

**35,984**

**5,070**

**6,193**

**12,336**

 

*(1)**Thisincludes low risk and good paying customer accounts with no history of accounttreatment for a defined period and no overdue accounts as at report date; anddeposits or placements to counterparties with good credit rating or bankstanding financial review;*

*(2)**Thisincludes medium risk and average paying customer accounts with no overdueaccounts as at report date, and new customer accounts for which sufficientcredit history has not been established; and deposits or placements tocounterparties not classified as Class A; and*

*(3)**Grossreceivables from counterparties, before any offsetting arrangements.*

 

The aginganalysis of past due but not impaired class of financial assets is as follows:

 

** **

**Total**

**Neither past due nor impaired**

**Past due but not impaired**

** **

**1-60 days**

**61-90****days**

**Over 91 days**

**Impaired**

 

(in million pesos)

**March 31, 2008 (Unaudited)**

** **

** **

 

 

 

 

Loans and receivables:

** **

** **

 

 

 

 

Advances and refundable deposits 

 744

744

–

–

–

–

Cash and cash equivalents 

26,509

26,509

–

–

–

–

Short-term investments 

22,303

22,303

–

–

–

–

Corporate subscribers 

9,094

1,341

844

205

251

6,453

Retail subscribers 

7,821

1,563

1,185

308

137

4,628

Foreign administrations 

4,096

2,452

851

166

216

411

Domestic carriers 

1,024

206

89

103

345

281

Dealers, agents and others 

2,265

1,428

77

12

83

665

Held-to-maturity investments:

 

 

 

 

 

 

Investment in debt securities

 632

632

–

–

–

–

Investments-available-for-sale

 142

142

–

–

–

–

Held-for-trading:

 

 

 

 

 

 

Short-term investments

2,079

2,079

–

–

–

–

Long-term foreign currency options

  60

60

–

–

–

–

Forward foreign exchange contracts

  12

12

–

–

–

–

Derivatives used for hedging:

 

 

 

 

 

 

Forward foreign exchange contracts

 157

157

–

–

–

–

** **

**76,938**

**59,628**

**3,046**

**794**

**1,032**

**12,438**

 

 

 

 

 

 

 

**December 31, 2007 (Audited)**

 

 

 

 

 

 

Loans and receivables:

 

 

 

 

 

 

Advances and refundable deposits 

 734

734

–

–

–

–

Cash and cash equivalents 

17,447

17,447

–

–

–

–

Short-term investments 

11,366

11,366

–

–

–

–

Investment in debt securities 

1,115

1,115

–

–

–

–

Retail subscribers 

8,179

2,026

1,513

231

79

4,330

Corporate subscribers 

7,915

828

715

133

318

5,921

Foreign administrations 

5,371

2,689

902

316

417

1,047

Domestic carriers 

1,884

130

88

103

1,182

381

Dealers, agents and others 

2,151

1,298

30

4

162

657

Held-to-maturity investments:

 

 

 

 

 

 

Investment in debt securities

 273

273

–

–

–

–

Investments-available-for-sale

 143

143

–

–

–

–

Held-for-trading:

 

 

 

 

 

 

Short-term investments

2,049

2,049

–

–

–

–

Forward foreign exchange contracts 

 193

193

–

–

–

–

Long-term foreign currency options 

  58

58

–

–

–

–

Bifurcated embedded derivatives 

  34

34

–

–

–

–

Derivatives used for hedging:

 

 

 

 

 

 

Forward foreign exchange contracts

 670

670

–

–

–

–

Long-term foreign currency options 

   1

1

 

 

 

 

** **

**59,583**

**41,054**

**3,248**

**787**

**2,158**

**12,336**

 

*Impairmentassessments*

 

The mainconsideration for the impairment assessment include whether any payments ofprincipal or interest are overdue by more than 90 days or there are any knowndifficulties in the cash flows of counterparties, credit rating downgrades, orinfringement of the original terms of the contract.  Our impairment assessmentsare classified into two areas: individually assessed allowance and collectivelyassessed allowance.

 

*Individually assessed allowance*

 

We determine the allowanceappropriate for each individually significant loan or advance on an individualbasis. Items considered when determining allowance amounts include thesustainability of the counterparty’s business plan, its ability to improveperformance once a financial difficulty has arisen, projected receipts and theexpected dividend payout should bankruptcy ensue, the availability of otherfinancial support, the realizable value of collateral, if any, and the timingof the expected cash flows.  The impairment losses are evaluated at eachreporting date, unless unforeseen circumstances require more careful attention.

 

*Collectivelyassessed allowances*

* *

Allowancesare assessed collectively for losses on loans and advances that are notindividually significant and for individually significant loans and advanceswhere there is no objective evidence of individual impairment.  Allowances areevaluated on each reporting date with each portfolio receiving a separatereview. 

 

The collective assessment takes account of impairment thatis likely to be present in the portfolio even though there is no objectiveevidence of the impairment in an individual assessment. Impairment losses areestimated by taking into consideration the following information: historicallosses on the portfolio, current economic conditions, the approximate delaybetween the time a loss is likely to have been incurred and the time it is identifiedas requiring an individually assessed impairment allowance, and expectedreceipts and recoveries once impaired.  The impairment allowance is thenreviewed by credit management to ensure alignment with our policy.

 

***Capital Management***

 

We aim to achieve an optimal capital structure inpursuit of our business objectives which include maintaining healthy capitalratios and strong credit ratings, and maximizing shareholder value. 

 

In recent years, our cashflow from operations hasallowed us to substantially reduce debts and, in 2005, resume payment ofdividends on common shares.  Since then, our strong cashflows have enabled us tomake investments in new areas and pay higher dividends.

 

Our approach to capital management focuses onbalancing the allocation of cash and the incurrence of debt as we seek newinvestment opportunities for new businesses and growth areas.  Our currentdividend policy is to pay out 70% of our core earnings per common share.  Further,in the event no investment opportunities arise, we may consider the option ofreturning additional cash to our shareholders in the form of special dividendsor share buybacks.  Philippine corporate regulations prescribe, however, thatwe can only pay out dividends or make capital distribution up to the amount ofour unrestricted retained earnings.

 

Aspart of our goal to maximize returns to our shareholders, we obtained onJanuary 29, 2008 an approval from our board of directors to conduct a sharebuyback program for up to two million PLDT common shares.  As at May 5, 2008,we have acquired a total of 346,260 shares of common stock at a weightedaverage price of Php2,720 for a total of Php942 million.  See *Note 17 –Equity*.

 

Someof our debt instruments contain covenants that impose maximum leverage ratios.In addition, our credit ratings from the international credit ratings agenciesare based on our ability to remain within certain leverage ratios.

 

Wemonitor capital using several financial leverage measurements, such as net debtto equity ratio.  Net debt is derived by deducting cash and cash equivalentsand short-term investments from total debt (notes payable and long-term debt).  Ourobjective is to maintain our net debt to equity ratio below 100%.

 

 

**March 31,  2008 (Unaudited)**

 

December 31, 2006 (Audited)

 

(in million pesos)

Long-term debt, including current portion

**62,930**

 

60,147

Notes payable

**569**

 

493

Total debt

**63,499**

 

60,640

Cash and cash equivalents

**(26,509)**

 

(17,447)

Short-term investments

**(24,382)**

 

(13,415)

Net debt

**12,608**

 

29,778

 

** **

 

 

Equity attributable to equity holders of PLDT

**97,776**

 

111,113

Net debt to equity ratio

**13%**

 

27%

 

 

 

**27.  Supplemental Cash Flow Information**

 

 

**Three Months Ended March 31,**

 

**2008**

 

2007

 

(Unaudited)

 

(in million pesos)

Supplemental information for noncash financing activities:

** **

 

 

Recognition of asset retirement obligations (Note 8)

**990**

 

952

Conversion of preferred stock subject to mandatory redemption (Note 18)

**390**

 

142

 

 

 

**28.  Reclassificationof Accounts**

 

Certain accounts in December 31,2007 audited consolidated financial statements and March 31, 2007 unaudited consolidatedfinancial statements were reclassified to conform with the March 31, 2008 unauditedconsolidated financial statements presentation.