**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

 

FORM 20-F

 

**[  ]****REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THESECURITIES EXCHANGE ACT OF 1934**

**OR**

** **

**[X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the fiscal year endedDecember 31, 2007**

** **

**OR**

** **

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

** **

**OR**

** **

**[  ]           SHELL COMPANY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 – Date of eventrequiring this shell company report __________**

** **

**Commission file number1-03006**

** **

**Philippine Long Distance Telephone Company**

(Exact name of Registrant as specified in its charter)

 

**Republic of the Philippines**

(Jurisdiction of incorporation or organization)

 

**Ramon****Cojuangco Building**

**Makati Avenue**

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

(Address of principal executive offices)

 

**Atty. Ma. Lourdes C. Rausa-Chan, telephone: +(632)816-8556; lrchan@pldt.com.ph; Ramon Cojuangco Bldg., Makati Avenue, Makati City, Philippines**

(Name, telephone, e-mail and/or facsimile number andaddress of Company contact person)

 

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

 

| Title of each class                                                                                                        | Name of each exchange

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

 

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

* *

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

 

None

 

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

 

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

 

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

 

| As at December 31, 2007:                                                               |
|----------------------------------------------------------------------------------------|
| 188,740,519 shares of Common Capital Stock, Par Value Five Philippine Pesos Per Share  |
| 441,650,297 shares of Serial Preferred Stock, Par Value Ten Philippine Pesos Per Share |

 

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

 

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

 

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

 

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

 

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

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing. 

 

U.S. GAAP [  ]   

 

InternationalFinancial Reporting Standards as issued by the International AccountingStandards Board [√]

 

Other[  ]

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

 

Item17 [  ]    Item 18 [  ]

 

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

**TABLE OF CONTENTS**

 

 

|                                              |      |
|---------------------------------------------------|-----------|
| CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT |      |   | 3 |
|                                              |      |   |   |
| FORWARD-LOOKING STATEMENTS                        |      |   | 5 |
|                                              |      |   |   |
| PRESENTATION OF FINANCIAL INFORMATION             |      |   | 5 |
|                                              |      |   |   |
| PART I                                            |      |   | 5 |
|                                              | Item 1.   | Identity of Directors, Senior Management and Advisors | 5 |
|                                              | Item 2.   | Offer Statistics and Expected Timetable | 5 |
|                                              | Item 3.   | Key Information | 6 |
|                                              |      | Selected Financial Data | 6 |
|                                              |      | Capital Stock | 8 |
|                                              |      | Dividends Declared | 8 |
|                                              |      | Dividends Paid | 9 |
|                                              |      | Exchange Rates | 9 |
|                                              |      | Risk Factors | 10 |
|                                              | Item 4.   | Information on the Company | 20 |
|                                              |      | Overview | 20 |
|                                              |      | Historical Background and Development | 20 |
|                                              |      | Organization | 21 |
|                                              |      | Strengths | 23 |
|                                              |      | Strategy | 24 |
|                                              |      | Business | 24 |
|                                              |      | Infrastructure | 34 |
|                                              |      | Interconnection Agreements | 37 |
|                                              |      | Licenses and Regulation | 37 |
|                                              |      | Competition | 39 |
|                                              |      | Environmental Matters | 42 |
|                                              |      | Intellectual Property Rights | 42 |
|                                              |      | Properties | 42 |
|                                              | Item 4A.  | Unresolved Staff Comments | 43 |
|                                              | Item 5.   | Operating and Financial Review and Prospects | 43 |
|                                              |      | Overview | 43 |
|                                              |      | Critical Accounting Policies | 44 |
|                                              |      | New Accounting Pronouncements Effective Subsequent to 2007 | 48 |
|                                              |      | Results of Operations | 48 |
|                                              |      | Plans and Prospects | 65 |
|                                              |      | Liquidity and Capital Resources | 66 |
|                                              |      | Impact of Inflation and Changing Prices | 71 |
|                                              | Item 6.   | Directors, Senior Management and Employees | 72 |
|                                              |      | Directors, Key Officers and Advisors | 72 |
|                                              |      | Terms of Office | 78 |
|                                              |      | Family Relationships | 78 |
|                                              |      | Compensation of Key Management Personnel of the PLDT Group | 78 |
|                                              |      | Long-Term Incentive Plan | 78 |
|                                              |      | Executive Stock Option Plan | 79 |
|                                              |      | Share Ownership | 80 |
|                                              |      | Board of Directors – Independent Directors | 80 |
|                                              |      | Audit, Governance and Nomination, Executive Compensation and Technology Strategy Committees | 81 |
|                                              |      | Directors’ and Officers’ Involvement in Certain Legal Proceedings | 83 |
|                                              |      | Employees and Labor Relations | 85 |
|                                              |      | Pension and Retirement Benefits | 85 |
|                                              | Item 7.   | Major Shareholders and Related Party Transactions | 87 |
|                                              |      | Related Party Transactions | 89 |
|                                              | Item 8.   | Financial Information | 89 |
|                                              |      | Consolidated Statements and Other Financial Information | 89 |
|                                              |      | Legal Proceedings | 89 |
|                                              |      | Dividend Distribution Policy | 91 |
|                                              | Item 9.   | The Offer and Listing | 91 |
|                                              |      | Common Capital Stock and Amercian Depositary Shares (“ADSs”) | 91 |
|                                              | Item 10.  | Additional Information | 92 |
|                                              |      | Articles of Incorporation and By-Laws | 92 |
|                                              |      | Material Contracts | 97 |
|                                              |      | Exchange Controls and Other Limitations Affecting Securities Holders | 97 |
|                                              |      | Taxation | 98 |
|                                              |      | Documents on Display | 102 |
|                                              | Item 11.  | Quantitative and Qualitative Disclosures About Market Risks | 102 |
|                                              |      | Liquidity Risk | 102 |
|                                              |      | Foreign Currency Exchange Risk | 102 |
|                                              |      | Interest Rate Risk | 104 |
|                                              |      | Credit Risk | 105 |
|                                              |      | Capital Management | 109 |
|                                              | Item 12.  | Description of Securities Other than Equity Securities | 110 |
|                                              |      |   |   |
| PART II                                           |      |   |   |
|                                              | Item 13.  | Defaults, Dividend Arrearages and Delinquencies | 110 |
|                                              | Item 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 110 |
|                                              | Item 15.  | Controls and Procedures | 110 |
|                                              | Item 16A. | Audit Committee Financial Expert | 110 |
|                                              | Item 16B. | Code of Business Conduct and Ethics | 111 |
|                                              | Item 16C. | Principal Accountant Fees and Services | 115 |
|                                              | Item 16D. | Exemption from the Listing Standards for Audit Committees | 115 |
|                                              | Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchaser | 115 |
|                                              |      |   |   |
| PART III                                          |      |   | 116 |
|                                              | Item 17.  | Consolidated Financial Statements | 116 |
|                                              | Item 18.  | Consolidated Financial Statements | 116 |
|                                              | Item 19.  | Exhibits | 116 |
|                                              |      |   |   |
| EXHIBIT INDEX                                     |      |   | 118 |
|                                              |      |   |   |
| CERTIFICATION                                     |      |   | 123 |
|                                                   |           |  |  |  |  |  |  |

 

 

 

**CERTAINCONVENTIONS AND TERMS USED IN THIS REPORT**

 

Unlessthe context indicates or otherwise requires, references to “we,” “us,” “our” or“PLDT Group” mean Philippine Long Distance Telephone Company and itsconsolidated subsidiaries, and references to “PLDT” mean Philippine LongDistance Telephone Company, not including its consolidated subsidiaries (see *Note2 –Summary of Significant Accounting Policies and Practices*to theaccompanying audited consolidated financial statements in Item 18 for a list ofthese subsidiaries, including a description of their respective principalbusiness activities).

 

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

 

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

 

Inthis report, unless otherwise specified or the context otherwise requires, allreferences to “pesos,” “Philippine pesos” or “Php” are to the lawful currencyof the Philippines, all references to “dollars,” “U.S. dollars” or “US$” are tothe lawful currency of the United States, all references to “Japanese yen,”“JP¥” or “¥” are to the lawful currency of Japan, and all references to “Euro”or “€” are to the lawful currency of the European Union.  Unless otherwiseindicated, translations of peso amounts into U.S. dollars in this report weremade based on the volume weighted average exchange rate quoted through thePhilippine Dealing System, which was Php41.411 to US$1.00 on December 31, 2007.On April 3, 2007, the volume weighted average exchange rate quoted was Php41.552to US$1.00.

 

Inthis report, each reference to:

 

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

 

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

 

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

 

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

 

•        BSP means Bangko Sentral ngPilipinas;

 

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

 

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

 

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

 

•        DSL means digital subscriber line;

 

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

 

•        ePLDT Ventus means the umbrellabrand name for ePLDT’s customer interaction services, including Ventus, Vocativand Parlance;

 

•        First Pacific means First PacificCompany Limited;

 

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

 

•        GAAP means generally acceptedaccounting principles;

 

•        GSM means global system for mobilecommunications;

 

•        I-Contacts means I-ContactsCorporation, a wholly-owned subsidiary of Smart;

 

•        IFRS means International FinancialReporting Standards as issued by the International Accounting Standards Board;

 

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

 

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

 

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

 

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

 

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

 

•        NTC means the NationalTelecommunications Commission of the Philippines;

 

•        NTT means Nippon Telegraph andTelephone Corporation;

 

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

 

•        NTT DoCoMo means NTTDoCoMo, Inc., a majority-owned and publicly traded subsidiary of NipponTelegraph and Telephone Corporation;

 

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

 

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

 

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

 

•        PFRS means Philippine FinancialReporting Standards;

 

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

 

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

 

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

 

•        SEC means theSecurities and Exchange Commission;

 

•        SIM meanssubscriber identification module;

 

•        SMS means shortmessaging service;

 

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

 

•        SBI means Smart Broadband, Inc.,our wireless broadband provider and a wholly-owned subsidiary of Smart; 

 

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

 

•        SPi Group means SPi and itssubsidiaries;

 

•        SubicTel means PLDT SubicTelecommunications Company, Inc., our wholly-owned subsidiary;

 

•        VAS means value-added service;

 

•        VAT means value-added tax;

 

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

 

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

 

•        WAP means wireless applicationprotocol;

 

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

 

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

Some information in this report may containforward-looking statements within the meaning of Section 27A of the U.S.Securities Act of 1933, as amended, and Section 21E of the U.S. SecuritiesExchange Act of 1934, as amended.  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.

 

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

 

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

 

**PRESENTATION OF FINANCIAL INFORMATION**

 

Ourconsolidated financial statements as of and for the years ended December 31,2007 and 2006 included in this Annual Report on Form 20-F have been prepared inconformity with International Financial Reporting Standards as issued by theInternational Accounting Standards Board (“IFRS”).   We adopted IFRS effectiveas of and for the fiscal year ended December 31, 2007 by applying IFRS 1:First-Time Adoption of International Reporting Standards. Our consolidatedfinancial statements as at and for the year ended December 31, 2006 wereoriginally prepared in accordance with generally accepted accounting principlesin the United States, or U.S. GAAP, and were restated in accordance with IFRSfor comparative purposes only.  Anexplanation of how the transition to IFRS from U.S. GAAP has affected ourreported financial position, financial performance and cash flows is providedin *Note 2 – Summary of Significant Accounting Policies and Practices –First-time Adoption and Transition to IFRS* in the accompanying auditedconsolidated financial statements in Item 18.

 

Inaccordance with rule amendments adopted by the U.S. Securities ExchangeCommission, or U.S. SEC, which became effective on March 4, 2008, we do notprovide a reconciliation to U.S. GAAP.  Furthermore, pursuant to thetransitional relief granted by the U.S. SEC in respect of the first-time adoptionof IFRS, we have omitted in this Annual Report on Form 20-F financialstatements and financial information for the year ended December 31, 2005. 

 

Theconsolidated financial statements included in our Annual Reports on Form 20-Ffiled with the U.S. SEC in respect of the years ended December 31, 2006, 2005,2004, 2003 and 2002 were prepared in conformity with U.S. GAAP and, prior tothat, in conformity with PFRS.  

 

IFRSdiffers in certain significant aspects from U.S. GAAP and PFRS.  As a result,our financial information presented under IFRS is not directly comparable toour financial information presented in our previous Annual Reports on Form 20-Ffiled with the U.S. SEC.  

 

PART I

 

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

 

Not applicable.

 

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

 

Not applicable.

 

**Item 3.       KeyInformation**

 

**SelectedFinancial Data**

 

Theselected consolidated financial information below as of and for the years endedDecember 31, 2007 and 2006  should be read in conjunction with, and is qualifiedin its entirety by reference to, our consolidated financial statements,including the notes, included elsewhere in this Annual Report.  As disclosedabove under “Presentation of Financial Information”, our consolidated financialstatements as at, and for the years ended, December 31, 2007 and 2006 have beenprepared and presented in conformity with IFRS. 

 

Theselected consolidated financial information below as at and for the years endedDecember 31, 2005, 2004, and 2003 is based on financial statements prepared andpresented in conformity with U.S. GAAP and  should be read in conjunction with,and is qualified in its entirety by reference to, such consolidated financialstatements, including the notes, included in our previous Annual Report for thefiscal year ended December 31, 2006 filed with the U.S. SEC on June 27, 2007.

 

Therefore,data for 2005, 2004 and 2003 are not comparable with data for 2007 and 2006 andare presented separately.

*** ***

***Amounts in conformitywith IFRS:***

 

|                                          | **Consolidated Financial Data**                                                                                             |
|-----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                                          | **Years Ended December 31,**                                                                                                |
|                                          | **2007**(1)                                                                                                                 | **2007** | **2006** |
|                                          | (in millions, except earnings per common share, ratio of earnings to fixed charges and dividends declared per common share) |
| **Statements of Operating Data:**             |                                                                                                                        |   |   |
| Total Revenues                                | US$3,667                                                                                                                    | Php151,862 | Php139,724 |
| Service revenues                              | 3,271                                                                                                                       | 135,476 | 124,987 |
| Non-service revenues                          | 78                                                                                                                          | 3,226 | 2,520 |
| Foreign exchange gains – net             | 193                                                                                                                         | 7,990 | 4,823 |
| Interest Income                               | 36                                                                                                                          | 1,503 | 1,654 |
| Other Income                                  | 89                                                                                                                          | 3,667 | 5,740 |
| Expenses                                      | 2,265                                                                                                                       | 93,781 | 101,475 |
| Net income                                    | 948                                                                                                                         | 39,274 | 32,581 |
| Earnings per common share                     |                                                                                                                        |   |   |
| Basic                                         | 4.97                                                                                                                        | 205.84 | 173.10 |
| Diluted                                       | 4.95                                                                                                                        | 204.88 | 173.01 |
| **Balance Sheets Data:**                      |                                                                                                                        |   |   |
| Cash and cash equivalents                     | 421                                                                                                                         | 17,447 | 16,870 |
| Total assets                                  | 5,799                                                                                                                       | 240,158 | 241,904 |
| Total long-term debt - net of current portion | 1,289                                                                                                                       | 53,372 | 63,769 |
| Total debt(2)                                 | 1,464                                                                                                                       | 60,640 | 80,154 |
| Total liabilities(3)                          | 3,086                                                                                                                       | 127,813 | 139,051 |
| Total stockholders’ equity               | 2,713                                                                                                                       | 112,345 | 102,853 |
| **Other Data:**                               |                                                                                                                        |   |   |
| Depreciation and amortization                 | 691                                                                                                                         | 28,613 | 31,869 |
| Ratio of earnings to fixed charges(4)         | 8.4x                                                                                                                        | 8.4x | 5.1x |
| Net cash provided by operating activities     | 1,869                                                                                                                       | 77,418 | 69,211 |
| Net cash used in investing activities         | 756                                                                                                                         | 31,319 | 35,790 |
| Net cash used in financing activities         | 1,082                                                                                                                       | 44,819 | 45,900 |
| Dividends declared to common shareholders     | 683                                                                                                                         | 28,299 | 14,459 |
| Dividends declared per common share           | 3.62                                                                                                                        | 150.00 | 78.00 |

* *

***Amounts in conformity with U.S. GAAP:***

* *

| ** **                                    | **Consolidated Financial Data**                                                                                                                         |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                    | **Years Ended December 31,**                                                                                                                            |
| ** **                                    | **2005**                                                                                                                                                | **2004** | **2003** |
|                                          | (in millions, except operating income per share, earnings per common share, ratio of earnings to fixed charges and dividends declared per common share) |
|                                          |                                                                                                                                                    |   |   |
| **Statements of Operating Data:**             |                                                                                                                                                    |   |   |
| Revenues and Other Income                     | Php123,335                                                                                                                                              | Php121,173 | Php111,200 |
| Service revenues                              | 120,348                                                                                                                                                 | 114,904 | 100,486 |
| Non-service revenues                          | 2,987                                                                                                                                                   | 6,269 | 10,714 |
| Expenses                                      | 74,821                                                                                                                                                  | 72,634 | 77,821 |
| Operating income per share                    |                                                                                                                                                    |   |   |
| Basic                                         | 263.81                                                                                                                                                  | 266.73 | 179.04 |
| Diluted                                       | 255.15                                                                                                                                                  | 252.20 | 165.37 |
| Net income                                    | 40,603                                                                                                                                                  | 28,101 | 11,045 |
| Earnings per common share                     |                                                                                                                                                    |   |   |
| Basic                                         | 217.84                                                                                                                                                  | 146.32 | 47.20 |
| Diluted                                       | 211.93                                                                                                                                                  | 145.30 | 45.72 |
| **Balance Sheets Data:**                      |                                                                                                                                                    |   |   |
| Cash and cash equivalents                     | 30,059                                                                                                                                                  | 27,321 | 19,372 |
| Total assets                                  | 269,709                                                                                                                                                 | 279,041 | 276,362 |
| Total long-term debt - net of current portion | 93,516                                                                                                                                                  | 131,377 | 160,464 |
| Total debt(2)                                 | 112,313                                                                                                                                                 | 159,455 | 186,407 |
| Total liabilities(3)                          | 176,980                                                                                                                                                 | 215,145 | 236,630 |
| Total stockholders’ equity               | 79,595                                                                                                                                                  | 48,079 | 24,746 |
| **Other Data:**                               |                                                                                                                                                    |   |   |
| Depreciation and amortization                 | 27,855                                                                                                                                                  | 20,098 | 21,812 |
| Ratio of earnings to fixed charges(4)         | 5.9x                                                                                                                                                    | 4.1x | 2.0x |
| Net cash provided by operating activities     | 66,280                                                                                                                                                  | 63,107 | 42,582 |
| Net cash used in investing activities         | 13,080                                                                                                                                                  | 24,764 | 20,021 |
| Net cash used in financing activities         | 49,470                                                                                                                                                  | 30,325 | 14,135 |
| Dividends declared to common shareholders     | 9,624                                                                                                                                                   | – | – |
| Dividends declared per common share           | 56.00                                                                                                                                                   | – | – |

*_____________*

* *

*(1)    **We maintain our accounts inPhilippine peso.  For convenience, the peso financial information as at and forthe year ended December 31, 2007, has been translated into U.S. dollars at theexchange rate of Php41.411 to US$1.00, the rate quoted through the PhilippineDealing System as at December 31, 2007.  This translation should not be construedas a representation that the Philippine peso amounts represent, or have been orcould be converted into, U.S. dollars at that rate or any other rate.*

* *

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

* *

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

* *

*(4)    **For purposes of this ratio,“Earnings” consist of: (a) pre-tax income from continuing operations beforeadjustment for minority interest in consolidated subsidiaries or income or lossfrom equity investees, (b) fixed charges, (c) amortization of capitalizedinterest, (d) distributed income of equity investees, and (e) share of pre-taxlosses of equity investees for which charges arising from guarantees areincluded in fixed charges; less the sum of the following: (1) capitalizedinterest, (2) preference security dividend requirements of consolidatedsubsidiaries, and (3) the minority interest in pre-tax income of subsidiariesthat have not incurred fixed charges*

* *

*“Fixed charges” consist of interest expensed andcapitalized interest, amortized premiums, discounts and capitalized expensesrelated to indebtedness, an estimate of interest within rental expense, andpreference security dividend requirements of consolidated subsidiaries.*

* *

* *

**Capital Stock**

 

Thefollowing table summarizes PLDT’s capital stock outstanding as at December 31,2007 and 2006:

 

|                                                         | **December 31,** |
|--------------------------------------------------------------|------------------|
|                                                         | 2007             | ** ** | **2006** |
|                                                         | (in millions)    |
| Serial Preferred Stock                                       |             |   |   |
| 10% Cumulative Convertible Preferred Stocks                  |             |   |   |
| A to EE                                                      | Php4,056.5       |   | Php4,063.8 |
| Convertible Preferred Stocks Subject to Mandatory Redemption |             |   |   |
| Series V(1)                                                  | 0.3              |   | 0.5 |
| Series VI(1)                                                 | 6.8              |   | 8.8 |
| Cumulative Non-convertible Redeemable Preferred Stock        |             |   |   |
| Series IV                                                    | 360.0            |   | 360.0 |
|                                                         | Php4,423.6       |   | Php4,433.1 |
| Common Stock                                                 | Php943.7         |   | Php942.2 |

___________

*(1)   Preferred stock subject to mandatory redemptionin 2008 (see Note 18 – Interest-bearing Financial Liabilities – Preferred StockSubject to Mandatory Redemption to the accompanying audited consolidatedfinancial statements in Item 18 for further discussion).*

 

**Dividends Declared**

 

The table sets forth dividend declarations on shares ofPLDT’s common stock in 2007 and 2006:

 

| ** **   | ** ** | **Date**       | **Amount** |
|--------------|------------|----------------|------------|
| **Earnings** | ** ** | **Approved**   | ** ** | **Record** | ** ** | **Payable** | ** ** | **Per share** | ** ** | **Total Declared** |
|         |       |           |       |   |   |   |   |   |   | (in millions) |
|         |       |           |       |   |   |   |   |   |   |   |
| 2006         |       | August 8, 2006 |       | August 21, 2006 |   | September 21, 2006 |   | Php50 |   | Php9,379 |
| 2006         |       | March 6, 2007  |       | March 20, 2007 |   | April 20, 2007 |   | Php50 |   | 9,429 |
| 2006         |       | August 7, 2007 |       | August 24, 2007 |   | September 24, 2007 |   | Php40 |   | 7,548 |
|         |       |           |       |   |   |   |   | Php140 |   | Php26,356 |
|         |       |           |       |   |   |   |   |   |   |   |
| 2007         |       | August 7, 2007 |       | August 24, 2007 |   | September 24, 2007 |   | Php60 |   | Php11,322 |
| 2007         |       | March 4, 2008  |       | March 19, 2008 |   | April 21, 2008 |   | Php68 |   | Php12,834 |
| 2007         |       | March 4, 2008  |       | March 19, 2008 |   | April 21, 2008 |   | Php56 |   | Php10,570 |
|         |       |           |       |   |   |   |   | Php184 |   | Php34,726 |

** **

Ourcurrent policy is to declare and pay dividends taking into consideration theinterests of our shareholders as well as our working capital, capitalexpenditures and debt servicing requirements.  Also taken into considerationare our ability to meet loan covenant requirements in the declaration andpayment of dividends as discussed in *Note**17 – Equity* and *Note18 – Interest-bearing Financial Liabilities*to the accompanying audited consolidatedfinancial statements in Item 18.  The retention of earnings is necessary tomeet the funding requirements of our business expansion and developmentprograms.  Unappropriated retained earnings of PLDT include undistributedearnings representing accumulated equity in the net earnings of oursubsidiaries, which are not available for distribution as dividends untilreceived in the form of dividends from such subsidiaries (see *Note 17 – Equity*to the accompanying audited consolidated financial statements in Item 18).Dividends are generally paid in Philippine pesos.  In the case of shareholdersresiding outside the Philippines, PLDT's transfer agent in Manila, which actsas the dividend-disbursing agent, converts the peso dividends into U.S. dollarsat the prevailing exchange rates, and remits the dollar proceeds abroad, net ofapplicable withholding tax.

 

**Dividends Paid**

 

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

 

|                         | **In Philippine Peso** | ** ** | **In U.S. Dollars** |
|------------------------------|------------------------|------------|---------------------|
|                         |                   |       |                |
| 2005                         | 56.00                  |       | 1.142               |
| 2006                         | 70.00                  |       | 1.590               |
| 2007                         | 140.00                 |       | 3.381               |
| April 20                     | 50.00                  |       | 1.051               |
| September 24 (Regular)       | 60.00                  |       | 1.328               |
| September 24 (Special)       | 40.00                  |       | 0.885               |
| 2008 (through April 3, 2008) | –                 |       | –              |

 

*Note*:    *Dividendson PLDT's common stock were declared and paid in Philippine peso.  For theconvenience of the reader, the peso dividends are translated into U.S. dollarsbased on exchange rates on the respective dates of dividend payments.*

 

**Exchange Rates**

** **

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

 

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

 

|                         | **Year Ended December 31,** |
|------------------------------|-----------------------------|
| ** **                   | **Period End**              | ** ** | **Average****(1)** | ** ** | **High****(2)** | ** ** | **Low****(3)** |
|                         |                        |   |   |   |   |   |   |
| 2003                         | Php55.586                   |   | Php54.215 |   | Php52.021 |   | Php55.767 |
| 2004                         | 56.341                      |   | 56.044 |   | 55.142 |   | 56.443 |
| 2005                         | 53.062                      |   | 55.085 |   | 53.062 |   | 56.321 |
| 2006                         | 49.045                      |   | 51.332 |   | 49.045 |   | 53.587 |
| 2007                         | 41.411                      |   | 46.184 |   | 41.142 |   | 49.156 |
| 2008 (through April 3, 2008) | 41.552                      |   | 40.984 |   | 40.360 |   | 41.868 |

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

|                          | **Month**      |
|-------------------------------|----------------|
|                          | **Period End** | ** ** | **Average****(1)** | ** ** | **High****(2)** | ** ** | **Low****(3)** |
| 2007                          |           |   |   |   |   |   |   |
| September                     | 44.974         |   | 46.047 |   | 44.974 |   | 46.940 |
| October                       | 43.730         |   | 44.321 |   | 43.730 |   | 45.041 |
| November                      | 42.759         |   | 43.167 |   | 42.759 |   | 43.761 |
| December                      | 41.411         |   | 41.668 |   | 41.142 |   | 42.362 |
| 2008                          |           |   |   |   |   |   |   |
| January                       | 40.626         |   | 40.902 |   | 40.524 |   | 41.514 |
| February                      | 40.457         |   | 40.663 |   | 40.360 |   | 40.954 |
| March (through April 3, 2008) | 41.552         |   | 41.587 |   | 41.528 |   | 41.681 |

_________________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

This report contains conversionsof Philippine peso amounts into U.S. dollars for your convenience.  Unlessotherwise specified, these conversions were made at the exchange rate as atDecember 31, 2007 of Php41.411 to US$1.00.  You should not assume that suchpeso amounts represent such U.S. dollar amounts or could have been or could beconverted into U.S. dollars at the rate indicated, or at any particular rate.As at April 3, 2008, the exchange rate quoted through the Philippine DealingSystem was Php41.552 to US$1.00.

 

**Risk Factors******

 

***Risks Relating to Us***

* *

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

 

The Philippine government has liberalized the Philippinetelecommunications industry and opened up the Philippine telecommunicationsmarket to new entrants.  Including the PLDT Group, there are nine major localexchange carriers, seven international gateway facility providers and fivecellular service providers in the country.  Many new entrants into thePhilippine telecommunications market have entered into strategic alliances withforeign telecommunications companies, which provide them access totechnological and funding support as well as service innovations and marketingstrategies.  Consequently, we are facing increasing competition in majorsegments of the telecommunications industry, particularly data and othernetwork services segments.  There can be no assurance that thenumber of providers of telecommunication services will not further increase orthat competition for telecommunications customers will not lead our cellular andfixed line subscribers to switch to other operators or lead us to increase our marketingexpenditures or reduce our rates, resulting in a reduction in ourprofitability.

 

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

 

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

 

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

 

*The cellular telecommunications industry may not continue to grow*

 

The majority of our total revenues are currently derived fromcellular services.  As a result, we depend on the continued development andgrowth of the cellular telecommunications industry.  The cellular penetrationrate in the Philippines is estimated to have reached over 60%.  As such, ourcellular business is expected to grow at a slower rate as the penetration rateincreases, an increasing number of subscribers own multiple SIM cards and Smart moves further into the lower-income segments of themarket.  The growth of the cellular communications market depends on manyfactors beyond our control, including the continued introduction of new andenhanced cellular devices, the price levels of cellular handsets, consumerpreferences and amount of disposable income of existing and potentialsubscribers.  Any economic, technological or other developments resulting in a reductionin demand for cellular services may harm our business.

 

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

Thetelecommunications sector has been characterized recently by rapidtechnological changes.  There can be no assurance that these developments willnot result in competition from providers of new services or the need to makesubstantial capital expenditures to upgrade our facilities.  Furthermore, theNTC has issued to Smart and our competitors licenses covering 3G cellularservices, and we have incurred significant expenses in the rollout of theseservices.  We are also rolling out a wireless broadband network and continuingto upgrade to a next generation, all-IP network in order to expand our capabilityto provide broadband services.  These projects require and will continue torequire significant capital expenditures over the next few years.

 

Ourfuture success will depend, in part, on our ability to anticipate or adapt tosuch changes and to offer services that meet customer demands on a competitiveand timely basis.  We may be unable to obtain new technologies on a timelybasis or on satisfactory terms or implement them in an appropriate or effectivemanner.  Future development of new technologies, services or standards couldrequire significant changes to our business model, which could negativelyimpact our existing businesses and could necessitate new investments.  Inaddition, new products and services may be expensive to develop and may resultin increased competition.  Such strategic initiatives and technologicaldevelopments could require us to incur significant additional capitalexpenditures.  There can be no assurance that we would be able to adopt andsuccessfully implement new technologies.  In addition, there can be noassurance on how emerging and future technological changes will affect ouroperations or the competitiveness of our services.

 

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

 

Substantiallyall of our indebtedness and related interest expense, a substantial portion ofour capital expenditures and a portion of our expenses are denominated in U.S.dollars and other foreign currencies, but a significant portion of our revenuesis denominated in Philippine pesos.  As at December 31, 2007, 88% of our totalconsolidated indebtedness was foreign currency-denominated, of which approximately45% was unhedged.

 

Adepreciation of the Philippine peso against the U.S. dollar increases theamount of our debt obligations and operating and interest expenses in pesoterms.  In the event that the Philippine peso depreciates against the U.S.dollar, we may be unable to generate enough funds through operations and othermeans to offset the resulting increase in our obligations in peso terms.  Thesechanges could cause us not to be in compliance with the financial covenantsimposed by our lenders under certain loan agreements and other indebtedness.  Further,fluctuations in the Philippine peso value and of interest rates impact themark-to-market gains/losses of certain of our financial debt instruments whichwere designated as non-hedged items.

 

On the other hand,approximately 38% of PLDT Group’s consolidated service revenues are eitherdenominated in U.S. dollars or is linked to the U.S. dollar.  In this respect,an appreciation of the Philippine peso against the U.S. dollar reduces ourrevenues in peso terms and reduces our cash flow from operations.  

 

The Philippine peso has been subject tosignificant fluctuations in recent years.  From 2003 to 2005, the Philippine pesogenerally depreciated from a high of Php52.021 on May 8, 2003 to a low ofPhp56.443 on October 14, 2004.  In 2005, the peso fluctuated significantly froma low of Php56.321 on July 8 to a high of Php53.062 on December 29, 2005.  Whilethe peso appreciated in 2006 and continued to appreciate in 2007, there can beno assurance that the peso will not depreciate and be subject to significantfluctuations going forward due to a range of factors, including:

•        political andeconomic developments affecting the Philippines;

•        global economictrends;

•        the volatility ofregional currencies, particularly the Japanese yen;

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

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

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

* *

*Our results of operations have been, and may continue to be, adverselyaffected by competition in, and the emergence of new services which may put additionalpressure on, our traditional international and national long distance services*

 

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

 

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

 

•        increasedcompetition from other domestic and international telecommunications providers;

 

•        advances intechnology;

 

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

 

•        unauthorizedtraffic termination and bypass routings by international simple resaleoperators.

 

Thecontinued increase in cellular penetration in the Philippines and theprevalence of SMS has negatively impacted our national long distance businessin recent years.  There can be no assurance that we will be able to generatenew revenue streams that may fully offset the declines in our traditional fixedline long distance businesses or that these declines will not materially andadversely affect our financial performance.

* *

Net settlement payments between PLDT and other foreigntelecommunications carriers for origination and termination of internationalcall traffic between the Philippines and other countries have been ourpredominant source of foreign currency revenues.  However, in U.S. dollarterms, these payments have been declining in recent years.  A continued declinein our foreign currency revenues could increase our exposure to risks frompossible future declines in the value of the Philippine peso against the U.S.dollar.  We cannot assure you that we will be able to achieve adequateincreases in our other revenues to make up for any adverse impact of a furtherdecline in our net settlement payments.

* *

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

 

Aspart of our growth strategy, we may, from time to time, make acquisitions andinvestments in companies or businesses. The success of our acquisitions andinvestments depends on a number of factors, including:

•        our abilityto identify suitable opportunities for investment or acquisition; 

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

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

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

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

 

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

* *

*Our debt instruments contain restrictive covenants which require us tomaintain certain financial tests and our indebtedness could impair our abilityto fulfill our financial obligations, service our other debt and carry out newfinancings or pay dividends*

 

As at December 31, 2007, we hadconsolidated total indebtedness of approximately Php60,640 million (US$1,464million), and a consolidated ratio of debt to equity (total debt on aconsolidated basis divided by total equity) of 0.54x.  Our existing debt instrumentscontain covenants which, among other things, require PLDT to maintain certainfinancial ratios calculated on the basis of PFRS on a consolidated andnon-consolidated basis, limit our ability to incur indebtedness, makeinvestments and pay dividends.  For a description of some of these covenants,see Item 5. “Operating and Financial Review and Prospects — Liquidity andCapital Resources — Financing Activities — Debt Covenants.”

 

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

 

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

 

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

 

Theprincipal factors that can negatively affect our ability to comply with thefinancial ratios and other financial tests under our debt instruments aredepreciation of the Philippine peso relative to the U.S. dollar, poor operatingperformance of PLDT and our consolidated subsidiaries, impairment or similarcharges in respect of investments or other long-lived assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expenses.  Since approximately 88% of our total consolidated debtswere denominated in foreign currencies, principally in U.S. dollars, many ofthese financial ratios and other tests are negatively affected by any weakeningof the peso.  

 

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

 

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

 

Inaddition, we may have difficulty meeting debt payment obligations if we do notcontinue to receive cash dividends from Smart.

 

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

 

A growing portion of our total revenuesand cash flow from operations is derived from our subsidiaries, particularlySmart.  Smart and some of our other subsidiaries have significant internal cashrequirements for debt service, capital expenditures and expenses and so may befinancially unable to pay any dividends to PLDT.  Although Smart has beenmaking dividend payments to PLDT since December 2002, we cannot assure you thatPLDT will continue to receive dividends or other distributions, or otherwise beable to derive liquidity from Smart or any other subsidiary or investee in thefuture.

 

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

 

*Our businesses requiresubstantial capital investment, which we may not be able to finance*

* *

Ourprojects under development and the continued maintenance and improvement of ournetworks and services, including Smart’s projects, networks and services,require substantial ongoing capital investment.  Our consolidated capitalexpenditures in 2007 and 2006 totaled Php24,824 million and Php20,674 million,respectively.  Our 2008 budget for consolidated capital expenditures isapproximately Php25 billion, of which approximately Php9 billion is budgeted tobe spent by PLDT and approximately Php15 billion is budgeted to be spent bySmart; the balance represents the budgeted capital spending of our othersubsidiaries.  PLDT’s capital spending is intended principally to finance thecontinued build-out and upgrade of its data and internet protocolinfrastructures and for its fixed line data services and the maintenance of itsnetwork. ****Smart’s capital spending is focused on expanding and upgradingits transmission network facilities to meet increased demand for cellular andbroadband services.  

 

Futurestrategic initiatives could require us to incur significant additional capitalexpenditures.  We may be required to finance a portion of our future capitalexpenditures from external financing sources, which have not yet been fullyarranged.  There can be no assurance that financing for new projects will beavailable on terms acceptable to us or at all.  If we cannot complete ourdevelopment programs and other capital projects, our growth, results ofoperations and financial condition could be materially and adversely affected. ****

* *

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

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

 

•        physicaldamage;

 

•        power loss;

 

•        capacitylimitation;

 

•        cable theft;

 

•        softwaredefects; and

 

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

 

The occurrence of any of theserisks could have a material and adverse effect on our ability to provideservices to customers.  While we are undertaking initiatives to prevent and/ormitigate the occurrence of said risks, including the preparation of a disasterrecovery plan that aims to allow restoration of service at the soonest possibletime from occurrence of an incident.  There can be no assurance that theserisks will not occur or that our initiatives will be effective should suchrisks occur.

 

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

* *

The First Pacific Group has beneficialownership of approximately 26.17% in PLDT’s outstanding common stock as at February29, 2008.  This is the largest block of PLDT’s common stock that is directly orindirectly under common ownership.  

 

NTTCommunications, which owned 14% of PLDT’s common stock as at December 31, 2005,transferred on March 14, 2006, approximately 12.6 million shares of PLDT’scommon stock, representing approximately 7% of the then outstanding shares of PLDT’scommon stock, to NTT DoCoMo pursuant to a stock sale and purchase agreementdated January 31, 2006.  Since March 14, 2006, NTT DoCoMo has made additionalpurchases of shares of PLDT common stock and, together with NTT Communications,beneficially owns 20.86% of PLDT’s common stock as at February 29, 2008.  NTTCommunications is a wholly-owned subsidiary, and NTT DoCoMo a majority-ownedsubsidiary of NTT.  In connection with the above acquisition by NTT DoCoMo ofshares of PLDT from NTT Communications, First Pacific and certain of itsaffiliates, or the FP Parties, NTT Communications, NTT DoCoMo and PLDT enteredinto a Cooperation Agreement, dated January 31, 2006, or the CooperationAgreement, pursuant to which, among other things, certain rights of NTTCommunications under the Stock Purchase and Strategic Investment Agreement datedSeptember 28, 1999 and the Shareholders Agreement dated March 24, 2000 wereextended to NTT DoCoMo.  See Item 7. “Major Shareholders and Related PartyTransactions” for further details regarding the shareholdings of NTTCommunications and NTT DoCoMo in PLDT.  As a result of the CooperationAgreement, NTT Communications and NTT DoCoMo, in coordination with each other,have contractual veto rights over a number of major decisions and transactionsthat PLDT could make or enter into, including:  

* *

•        capital expenditures in excess ofUS$50 million;

* *

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

 

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

 

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

 

•        new business activities other thanthose we currently engage in; and

 

•        merger or consolidation. 

 

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

* *

•        elections of PLDT’s directors; and

 

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

 

Additionally, pursuant toamendments effected by the Cooperation Agreement to the Strategic Agreement andthe Shareholders Agreement, upon NTT Communcations 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:

 

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

 

•        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;

 

•        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 

 

•        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.  

 

Pursuant to public filings madewith the U.S. SEC by NTT Communications and NTT DoCoMo, as at February 29,2008, NTT Communications and NTT DoCoMo together beneficially owned 20.86% ofthe outstanding shares of PLDT’s common stock.

 

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

 

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

* *

If First Pacific Group or NTTCommunications sell all or a portion of their equity interest in PLDT, incertain circumstances, such sale may give rise to an obligation for PLDT tomake an offer to purchase its outstanding debt under its US$250 million 11.375%notes due 2012.  As at December 31, 2007, Php10,353 million in principal amountof PLDT’s indebtedness is directly subject to a change in major shareholding oroffer to purchase requirement.  In such event, if PLDT fails to complete anoffer to purchase the affected debts, all of its debt could become immediatelydue and payable as a result of various cross-default provisions.  

 

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

 

In order to diversify theownership base of public utilities, the Philippine Public TelecommunicationsPolicy Act, or R.A. 7925, requires a telecommunications entity with regulatedtypes of services to make a public offering through the stock exchangesrepresenting at least 30% of its aggregate common shares by the later of (i) thefifth anniversary of the date the law became effective; and (ii) the fifthanniversary of the date of the entity’s commencement of commercialoperations.   As Smart has notconducted a public offering of its shares, the Philippine Congress may revokethe franchise of Smart for its failure to comply with the requirement underR.A. 7925 on the public offering of its shares.  A *quo warranto*case mayalso be filed against Smart by the Office of the Solicitor General of the Philippines for the revocation of the franchise of Smart on the ground of violation of R.A.7925.  

 

Smart maintains the position thatit has not violated the provision in its franchise to make a public offering ofits shares within a certain period, since it believes such provision is merelydirectory.  Further, the policy underlying the requirement fortelecommunications entities to conduct a public offering should be deemed ofhaving been achieved when PLDT acquired a 100% equity interest in Smart in2000, given the fact that PLDT was then and continues to be a publicly listedcompany.  In September 2004, Senate Bill No. 1675 was filed seeking to declarethat a telecommunication entity shall be deemed to have complied with the requirementof making a public offering of its shares if two-thirds of its outstandingvoting stock are owned and controlled directly or indirectly, by a listedcompany.  This bill is currently pending in Congress.  However, there can be noassurance that such bill will be enacted or that Philippine Congress will notrevoke the franchise of Smart or the Office of Solicitor General of thePhilippines will not initiate a quo warranto proceeding against Smart for therevocation of its franchise for failure to comply with the provision under R.A.7925 on the public offering of shares.

 

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

 

We operate our business underfranchises, each of which is subject to amendment, termination or repeal by thePhilippine Congress.  Additionally, PLDT operates pursuant to various provisionalauthorities and certificates of public convenience and necessity, or CPCNs,which are granted by the NTC and expire between now and 2028.  Some of PLDT’sCPCNs and provisional authorities have already expired.  However, PLDT filedapplications for extension of these CPCNs and provisional authorities prior totheir respective expiration dates and is therefore entitled to continue toconduct its business under its existing CPCNs and provisional authoritiespending the NTC’s decisions on these extensions.  Smart also operates itscellular, international long distance, national long distance and global mobilepersonal communications via satellite services pursuant to CPCNs, which willexpire upon the expiration of its franchise.  Smart’s franchise is due toexpire on March 27, 2017, 25 years after the date on which its currentfranchise was granted.  Smart operates international private leased circuitsunder a provisional authority, which expired on November 6, 2006.  Smartapplied for an extension of this provisional authority or for the issuance of aCPCN prior to its expiration.  The NTC has not yet acted on the motion.  BecausePLDT and Smart filed the applications for extension on a timely basis, weexpect that these extensions will be granted.  However, there can be noassurance that the NTC will grant these extensions.  If a CPCN has not beenissued, the NTC may permit an operator to provide services pursuant to aprovisional authority.  Provisional authorities are typically granted for aperiod of 18 months.  The Philippine Revised Administrative Code of 1987provides that if the grantee of a license or permit, such as a CPCN orprovisional authority, has made timely and sufficient application for theextension thereof, the existing CPCN or provisional authority will not expireuntil the application is finally decided upon by the administrative agencyconcerned.  However, there can be no assurance that our franchises, CPCNs andprovisional authorities will be renewed.  For a description of our licenses,see Item 4. “Information on the Company –– Licenses and Regulation.”

 

The NTC also regulates the rateswe are permitted to charge for services that have not yet been deregulated,such as local exchange services.  There can be no assurance that the NTC willnot impose additional obligations on us that could lead to the revocation ofour licenses if not adhered to and/or reduction in our total revenues orprofitability.  In addition, the NTC could adopt changes to the regulationsgoverning our interconnection with other telecommunications companies or therates and terms upon which we provide services to our customers that could havea material and adverse effect on our results of operations.

 

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

 

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

 

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

 

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

 

There can be no assurancethat PLDT Group will not be subject to new and/or additional taxes and thatPLDT Group will be able to impose additional charges or fees to compensate forthe imposition of such taxes.  Furthermore, while the National Internal RevenueCode provides that our regular income tax rate will be reduced to 30% effectiveJanuary 1, 2009, there can be no assurance whether or when such reduction inthe regular corporate income tax rate will be implemented.  

* *

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

* *

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

 

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

 

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

 

•        not to billcalls directed to recorded voice messages; and 

 

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

 

Alongwith the other Philippine cellular operators, Smart filed a complaint for the nullificationof this memorandum circular before the regional trial court of Quezon City and soughtfor the issuance of a preliminary injunction while proceedings are ongoing.The regional trial court issued the preliminary injunction, which restrained theimplementation of the memorandum circular.  The complaint of the Philippinecellular operators is being heard by the regional trial court of Quezon City.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

•        shortages ofequipment, materials and labor;

 

•        work stoppagesand labor disputes;

 

•        interruptionsresulting from inclement weather and other natural disasters;

 

•        unforeseenengineering, environmental and geological problems; and

 

•        unanticipatedcost increases.

 

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

* *

*Failure to maintain effective internal control over financial reportingin accordance with Section 404 of the Sarbanes-Oxley Act of 2002 couldadversely impact investor confidence and the market price of our common sharesand ADSs*

 

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

 

Weare required to comply with various Philippine and U.S. laws and regulations oninternal controls.  For example, pursuant to Section 404 of the Sarbanes-OxleyAct of 2002, beginning with the Annual Report on Form 20-F for the fiscal year ended December 31, 2006, we have been required toinclude a report by our management on our internal control over financialreporting in our Annual Reports on Form 20-F that contains an assessment by ourmanagement of the effectiveness of our internal control over financialreporting.   In addition, our independent registered public accounting firmmust express an opinion on our internal control over financial reporting basedon their audit.

 

Internalcontrol over financial reporting may not prevent or detect misstatements becauseof its inherent limitations, including the possibility of human error, thecircumvention or overriding of controls, or fraud.  Therefore, even effectiveinternal control over financial reporting can provide only reasonable assurancewith respect to the preparation and fair presentation of financial statements.If we fail to maintain the adequacy of our internal control over financialreporting, including through a failure to implement required new or improvedcontrols, or if we experience difficulties in their implementation, ourbusiness and operating results could be harmed, we could fail to meet ourreporting obligations and there could be a material adverse effect on themarket prices of our common shares and ADSs.

 

***Risks Relating to the Philippines***

 

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

 

The Philippines is subject to political, social and economic volatility that, directly orindirectly, may have a material adverse impact on our ability to sustain ourbusiness and growth.  

 

Forexample, on May 10, 2004, the Philippines held a presidential election whichresulted in a victory by the incumbent President Gloria Macapagal-Arroyo whosuccessfully retained her post.  Shortly after the elections, allegations ofirregularities in the presidential elections, such as stolen ballots, votebuying and attempts to improperly influence the vote count, intensified and ledto impeachment complaints against President Arroyo, which were subsequentlydismissed.

 

Additionally,the Philippines have experienced various street protests and violent civilunrest, including coup d’etat attempts against the administration of PresidentArroyo.  For example, recent such events include the storming by armed rebelsoldiers on November 29, 2007 of a luxury hotel in Makati City, Philippines, occupying part of the hotel and demanding that President Arroyo step down, and thedeclaration by President Arroyo of a state of emergency from February 24, 2006to March 3, 2006.  

 

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

 

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

 

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

 

Approval from or registration with the BSP for theissuance and guarantee of foreign currency-denominated borrowings is notrequired in order to make our foreign currency payment obligations legallyvalid and binding.  However, receiving this approval and registration willenable a borrower to access the banking system to obtain foreign currency toservice its debt obligations rather than using other sources of foreigncurrency, for example, foreign currency revenue streams.

 

ThePhilippine government has, in the past, instituted restrictions on theconversion of the peso into foreign currency and the use of foreign exchangereceived by Philippine companies to pay foreign currency-denominatedobligations.  The Monetary Board of the BSP has statutory authority, with theapproval of the President of the Philippines, during a foreign exchange crisisor in times of national emergency, to:

 

•        suspend temporarily or restrictsales of foreign exchange;

 

•        require licensing of foreignexchange transactions; or

 

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

 

Therecan be no assurance that foreign exchange controls will not be imposed in thefuture.  If imposed, these restrictions could materially and adversely affectour ability to obtain foreign currency to service our foreign currencyobligations.

 

*The occurrence of naturalcatastrophes may materially disrupt our operations*

* *

The Philippines has experienced a number of major natural catastrophes over the years includingtyphoons, volcanic eruptions and earthquakes that may materially disrupt andadversely affect our business operations.  The earthquake that hit Taiwan in December 26, 2006 severed cable systems linking the Philippines to other Asian andAmerican countries, causing major slowdown of voice and non-voice data trafficexchange.  There can be no assurance that the insurance coverage PLDT maintainsfor these risks will adequately compensate it for all damages and economiclosses resulting from natural catastrophes.

 

Item 4.       Information on the Company
 

**Overview**

 

Weare the leading national telecommunications service provider in the Philippines.  Through our three principal business groups — wireless, fixed line, andinformation and communications technology — we offer a wide range oftelecommunications services to approximately 32 million subscribers in thePhilippines across the nation's most extensive fiber optic backbone and fixedline, cellular and satellite networks.

 

Weare the leading fixed line service provider in the Philippines withapproximately 59% of the total reported fixed line subscribers nationwide as atDecember 31, 2007.  Smart, our wholly-owned subsidiary, is the leading cellularservice provider in the country, with approximately 37% of total reportedcellular subscribers as at December 31, 2007.  Piltel, Smart’s 92.1%-ownedsubsidiary, had approximately 18% of total reported cellular subscribers as at December31, 2007.  We have interests in the information and communications technologysectors, including the operation of our *Vitro*TM data center, customerinteraction services, formerly referred to as call center business, and knowledgeprocessing solutions business, formerly referred to as business processoutsourcing.

 

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

 

We had a market capitalization ofapproximately Php547,841 million (US$13,541 million) as at February 29, 2008,representing one of the largest market capitalizations among Philippine-listedcompanies.  For the year ended December 31, 2007, we had total revenues of Php151,862million (US$3,667 million). 

 

Ourprincipal executive offices are located at the Ramon Cojuangco Building, MakatiAvenue, Makati City, Philippines and our telephone number is +(632) 816-8534.Our website address is *www.pldt.com.ph*.  The contents of our website arenot a part of this annual report.

 

**Historical Background and Development**

 

PLDT was incorporated under the old Corporation Law ofthe Philippines (Act 1459, as amended) on November 28, 1928,following the merger of four telephone companies under common U.S. ownership.  In 1967, effective control of PLDT was sold by the General Telephone andElectronics Corporation, then a major shareholder since PLDT's incorporation,to a group of Filipino businessmen.  In 1981, in furtherance of the thenexisting policy of the Philippine government to integrate the Philippinetelecommunications industry, PLDT purchased substantially all of the assets andliabilities of the Republic Telephone Company, which at that time was thesecond largest telephone company in the Philippines.  In 1998, the FirstPacific Group acquired a significant interest in PLDT.  On March 24, 2000, NTTCommunications, through its wholly-owned subsidiary NTT Communications Capital(U.K.) Limited, or NTTC-UK, became PLDT’s strategic partner with approximately14% economic and voting interest in the issued and outstanding common stock ofPLDT.  Simultaneous with NTT Communications’ investment in PLDT, we acquired100% of Smart.  On March 14, 2006, NTT DoCoMo acquired from NTT Communications approximately7% of PLDT’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’s common stock and together with NTT Communications beneficiallyowned 20.86% of the outstanding shares of PLDT’s common stock as at February 29,2008.  On February 28, 2007, Metro Pacific Asset Holdings, Inc., a Philippineaffiliate of First Pacific, completed the acquisition of an additional interestof approximately 46% in PTIC.  This additional investment in PTIC, a shareholderof PLDT, represents an attributable interest of approximately 6.4% of the then issuedcommon shares of PLDT and thereby raised the First Pacific Group’s beneficialownership to approximately 28% of PLDT’s shares of common stock as at that date.First Pacific Group had beneficial ownership of approximately 26.17% in PLDT’soutstanding common stock as at February 29, 2008.  See Item 7. “MajorShareholders and Related Party Transactions” for further discussion.

 

PLDT's originalfranchise was granted in 1928 and was last amended in 1991, extending itseffectiveness until 2028 and broadening PLDT’s franchise to permit PLDT toprovide virtually every type of telecommunications service.  PLDT’s franchisecovers the business of providing basic and enhanced telecommunications servicesin and between the provinces, cities and municipalities in the Philippines andbetween the Philippines and other countries and territories including mobile,cellular, wired or wireless telecommunications system, fiber optics, multi-channeltransmission distribution systems and their value-added services such as butnot limited to transmission of voice, data, facsimile, control signals, audioand video, information services bureau and all other telecommunications systemstechnologies, as are at present available or can be made available throughtechnical advances or innovations in the future.  See Item 8. “FinancialInformation –– Legal Proceedings — Quo Warranto Action” for informationregarding legal proceedings initiated by the Solicitor General with respect toPLDT's franchise.

 

Our consolidated capitalexpenditures amounted to Php24,824 million and Php20,674 million in 2007 and 2006,respectively.  Of these amounts, Php9,912 million and Php8,902 million wereattributable to PLDT in 2007 and 2006, respectively, while Php14,179 millionand Php10,506 million were spent by Smart in 2007 and 2006, respectively.  Theremaining balances were spent by our other subsidiaries, principally ePLDT andits subsidiaries.

 

**Organization**

 

PLDT Group includes the following significantsubsidiaries as at February 29, 2008:

 

** **

**Place of Incorporation**

** **

**Percentage of Ownership**

**Name of Subsidiary**

**Principal Activity**

**Direct**

**Indirect**

** **

 

 

** **

**Wireless**

Smart

Philippines

Cellular mobile services

100.0

–

Smart Braodband Inc., or SBI

Philippines

Internet broadband distribution

–

100.0

Smartconnect Holdings Pte. Ltd., or SCH

Singapore

International trade of satellites and global system mobile, or GSM, telecommunications

–

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 telecommunications

–

100.0

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

Singapore

Solutions and systems integration services

–

85.0

Wireless Card, Inc., or WCI

Philippines

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

–

100.0

Smart Hub, 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

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, cusomter interaction service 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

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

* *

Level Up!, SPi and CyMed were all acquired in 2006 and their financialresults have been included in our consolidated financial statements since February,July and August 2006, respectively.  On April 12, 2007, SPi acquired a 100%equity interest in Springfield Service Corporation, or Springfield, a companyengaged in the medical billing and revenue cycle management market in the United States.  The financial results of Springfield have been included in our 2007consolidated financial statements since April 2007.  See *Note 11 – Goodwilland Intangible Assets*to the accompanying audited consolidated financialstatements in Item 18 for further discussion regarding these and otheracquisitions.

* *

***Wireless***

 

Weprovide cellular and wireless broadband, satellite and other services through ourwireless business, which contributed about 95% and 5% of our wireless servicerevenues, respectively, in 2007.  The rapid growth in the cellular market hasresulted in a change in our revenue composition and sources of our revenuegrowth.  Starting with 2003, cellular service has become our major revenuesource surpassing fixed line revenues.  Cellular data services, which includeall text messaging and text-related services ranging from ordinary text tovalue-added services, contributed significantly to our revenue increase.  Our totalwireless revenues accounted for 62% and 60% of our total consolidated revenuesfor the years ended December 31, 2007 and 2006, respectively.  For the yearsended December 31, 2007 and 2006, cellular service revenues accounted for 88%and 90%, respectively, of our total wireless revenues 

 

Weprovide cellular services (including handset sales), through Smart and Piltel.Smart is the leading cellular service provider in the Philippines, with 20,339,204 subscribers as at December 31, 2007, representing a market share ofapproximately 37%.  Piltel, a reseller of Smart's GSM service with its ownbranding, had 9,701,826 subscribers as at December 31, 2007, representing anestimated market share of 18%.  In 2007, the combined number of Smart's andPiltel's subscribers increased by 5,865,646, or 24%, to 30,041,030 primarilydue to “multiple SIM card ownership”, in whichsubscribers avail of our services in addition to having subscriber arrangementswith other wireless operators, and our continued expansion in the lower incomesegment of the Philippine wireless market, which overallresulted in a decrease in our average revenue per user, or ARPU.  As atDecember 31, 2007, cellular penetration in the Philippines reached over 60%, orover 18 times the country's fixed line penetration, although the existence ofsubscribers owning multiple SIM cards has likely overstated this penetrationrate to a certain extent.

 

Smart'sand Piltel's cellular subscriber gains were predominantly attributable to theirrespective prepaid services.  Approximately 99% of Smart’s and all of Piltel’s cellularsubscribers as at December 31, 2007 were prepaid service subscribers.  Thepredominance of prepaid service reflects one of the distinguishingcharacteristics of the Philippine cellular market.  The growth in our prepaidservice has enabled us to increase and broaden our subscriber base rapidlywhile controlling credit risk and reducing billing and administrative costs ona per-subscriber basis.  

 

Ourcellular subscriber growth has also been driven by text messaging.  Textmessaging is extremely popular in the Philippines, particularly on the prepaidplatform, as it provides a convenient and inexpensive alternative to voice ande-mail based communications.  Text messaging contributed significantly toSmart's cellular data service revenue growth in 2007, generating revenues ofPhp41,265 million, an increase of Php6,616 million, or 19%, over 2006.

 

Smart'sNokia-provided cellular network is the most extensive in the Philippines, covering substantially all of Metro Manila and most of the other major populationcenters in the Philippines.  Its dual-band GSM network allows it to efficientlydeploy high capacity 1800 MHz base transceiver stations, or BTS, in dense urbanareas while its 900 MHz BTS can be much more economically deployed inpotentially high growth, but less densely populated provincial areas.  We haverolled out a 3G network based on a W-CDMA technology and currently upgradingour wireless broadband facilities.  With 7,825 GSM base stations as at the endof December 2007, Smart’s cellular network covers approximately 99% of alltowns and municipalities in the Philippines, accounting for approximately 99%of the population.

 

***Fixed Line***

 

Weare the leading provider in the Philippines of fixed line telecommunicationsservices throughout the country.  Our fixed line business group offers localexchange, international long distance, national long distance, data and othernetwork and miscellaneous services.  We had 1,724,702 fixed line subscribers asat December 31, 2007.  Total revenues from our fixed line services accountedfor 37% and 41% of our total revenues for the years ended December 31, 2007 and2006, respectively.

 

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

 

***Information and Communications Technology***

 

Throughour wholly-owned subsidiary, ePLDT, we provide broad-based integratedinformation and communications technology, or ICT, services focusing oninfrastructure and solutions for internet applications, internet protocol-basedsolutions and multimedia content delivery.  ePLDT's principal activities arethe operation of an internet data center under the brand name *VitroTM*, customerinteraction services, knowledge processing solutions, and internet and online gamingbusiness.  Total revenues from our ICT services accounted for 7% and 5% of our totalrevenues for the years ended December 31, 2007 and 2006, respectively.

 

**Strengths**

 

We believe our business ischaracterized by the following competitive strengths:

 

•        *Recognized Brands*.  PLDT and Smart are strong and widely recognized brandnames in the Philippines.  We have built the PLDT brand name for 80 years asthe leading telecommunications provider in the Philippines.  Smart isrecognized in the Philippines as an innovative provider of high-qualitycellular services.  Piltel's *Talk ‘N Text* brand, which is provided usingSmart’s network, has also gained significant recognition.

 

•        *Leading Market Shares*.  With approximately 32 million fixed line andcellular subscribers as at December 31, 2007, we have the leading marketpositions in both the fixed line and cellular markets in the Philippines.  

 

•        *Diversified Revenue Sources*.  As a result of the continued growth of cellularservice in the country, approximately 62% of our total consolidated revenues in2007 were derived from our wireless business segment.  Fixed line revenues,which represented 37% and 41% of our total revenues in 2007 and 2006,respectively, have declined over the past years as pressures on traditionalfixed line voice revenues, resulting from decreases in our local exchange,international long distance and national long distance services.  We continueto identify and develop new revenue sources from our cellular, fixed line andICT businesses.

 

•        *Advanced Integrated Network*.  With one of the most advanced and extensive telecommunicationsnetworks in the Philippines, we are able to offer a wide array ofcommunications services.  We are enhancing the capabilities of our fixed lineand wireless networks to allow us to better exploit this competitive strengthand achieve higher levels of network efficiency in providing voice and dataservices.  In addition, we continue our roll out of 3G and wireless broadband andour upgrade to NGN in order to increase broadband subscribers, and expand ourdata/broadband capabilities.

 

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

 

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

 

**Strategy**

 

Thekey elements of our business strategy are:

 

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

 

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

 

•        *Strengthen our leading positionin the data and broadband market*.  Leveragingon the inherent strength of our fixed line and wireless businesses, we arecommitted to further develop, enhance and lead our fastest growing businesssegment – broadband, data and other network services.  Consistent with ourstrategy of introducing innovative products and services using advanced technology,we have launched various products and services that address different marketneeds.  

 

•        *Maintain a strong financialposition and improve shareholder returns.*In recent years,**we have significantly improvedour financial position by utilizing our cash flows principally for debtreduction.  As the cash flows generated by our businesses have increased andour leverage ratios have improved, we were able to restore the payment of cash dividendsto our common shareholders beginning 2005.  Our debt decreased to US$1.6billion as at December 31, 2007 and we paid dividends on common shares aggregatingPhp28,167 million in 2007.  As a result of our strong cash flows and reduced debtlevels, we have increased our regular cash dividend payout ratio to 70% of our 2007earnings per share from 60% in 2006 and 40% in 2005.  Further to our regular cashdividend payments and after having determined that we have capacity to payadditional returns to shareholders, we paid special cash dividends whicheffectively increased our dividend pay-out ratio to close to 100% of our 2007earnings per share and 85% of our 2006 earnings per share.   We expectthat a greater proportion of our free cash flows in succeeding years will beutilized for the payment of cash dividends to common shareholders andinvestments in new growth areas while continuing to maintain a healthy balancesheet position.  As part of our growth strategy, we made and may continue tomake acquisitions and investments in companies or businesses.  We will continueto consider value-accretive investments in related businesses such as those inthe global outsourcing and off-shoring industry.

** **

**Business**

** **

***Wireless***

 

We provide cellular, wirelessbroadband, satellite and other services through our wireless business segment.

 

*Cellular Service*

** **

*Overview*

** **

Ourcellular business, which we provide through Smart and Piltel to over 30 millionsubscribers, approximately 99% of whom are prepaid subscribers, is focused onproviding wireless voice communications, wireless data communications(primarily through text messaging) and a variety of other value-added services,which includes (a) *Mobile Banking* (banking services delivered over the cellularnetwork); (b) specialized content such as ringtones, logos, caller ringbacktunes; (c) *Smart Money*; (d) international roaming; and (e) games andother VAS developed on Smart’s platform.  Smart services approximately ten millionsubscribers of Piltel on its GSM network through a facilities service agreementwith Piltel, under the brand name *Talk ‘N Text*.

 

Thefollowing table summarizes key measures of Smart’s and Piltel’s cellularbusiness as at and for the years ended December 31, 2007, 2006 and 2005:

 

 

**Years Ended December 31,**

 

**2007**

**2006**

**2005**(2)

Systemwide cellular subscriber base

30,041,030

24,175,384

20,408,621

Smart

20,339,204

17,201,005

15,424,196

Prepaid

19,997,324

16,882,442

15,144,118

Postpaid

341,880

318,563

280,078

Piltel(1)

9,701,826

6,974,379

4,984,425

Growth rate of cellular subscribers

24%

18%

6%

Smart

18%

12%

6%

Piltel(1)

39%

40%

8%

Cellular revenues (in millions)

Php85,134

Php77,627

 

Service

 

 

 

Cellular services

82,334

75,617

 

Non-service

 

 

 

Cellular handset sales 

2,800

2,010

 

Percentage of cellular revenues to total service revenues 

59%

58%

 

Percentage of cellular revenues to total wireless service revenues

98%

99%

 

_____________

 

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

* *

*(2)      **Pursuant to the transitionalrelief granted by the U.S. SEC in respect of the first-time adoption of IFRS,we have omitted revenue data for 2005.  Please see “Presentation of FinancialInformation” above for further details.*

* *

*ServicePlans*.  Smart markets nationwide cellular communications services under thebrand names *Smart Buddy, Smart Gold*and *Smart Infinity.  Smart Buddy*isa prepaid service while*Smart Gold*and *Smart Infinity* arepostpaid services, which are all provided through Smart’s digital network.  Piltelmarkets its cellular prepaid service under the brand name *Talk ‘N Text,*whichis also provided through Smart’s network.

 

Since2006, Smart and Piltel have focused on segmenting the market by offeringsector-specific, value-driven packages for its prepaid subscribers.  Theseinclude new varieties of our top-up service which provide a fixed number ofmessages with prescribed validity periods and call packages which allow a fixednumber of calls of preset duration.  Starting out as purely on-networkpackages, Smart’s and Piltel’s top-up services now offer text message bundlesavailable to all networks.  Smart also continues to offer *Smart 258*,a registration-based service which offers unlimited on-network text messagingin various load denominations with designated expiration periods.  

 

Smartalso has a roster of 3G services which it commercially launched in May 2006.These services include video calling, video streaming, high-speed internetbrowsing and downloading of special 3G content, offered at rates similar tothose of 2G services.

 

*VoiceServices.*Cellular voice servicescomprise all voice traffic as well as voice value-added services such as voicemail and international roaming.  Voiceservices remains a significant contributor to wireless revenues, generating atotal of Php36,105 million, or 44%, and Php35,221million, or 47%, of cellular service revenues in 2007 and 2006, respectively.Local calls continue to dominate outbound traffic with 67% of all outbound minutesoriginating from our cellular service.  In 2007, traffic volumes from localcalls totaled 3,728 million minutes compared to 3,362 million minutes in 2006.National long distance traffic volumes for 2007 totaled 70 million minutescompared to 73 million minutes in 2006.  Outbound international long distanceremained at 2% of total outbound traffic with 201 million minutes and 165million minutes generated in 2007 and 2006, respectively.  The ratio ofinbound-to-outbound international long distance minutes was 11.7:1 for 2007,compared to 12.5:1 in 2006.

 

*DataServices*.  Cellular revenues from data services include all textmessaging-related services and other data value-added services.  The Philippines cellular market is one of the most text messaging-intensive markets in theworld, totaling more than a billion text messages per day.  Text messaging isextremely popular in the Philippines, particularly on the prepaid platform, asit provides a convenient and inexpensive alternative to voice and e-mail basedcommunications.  Text messaging also utilizes less network capacity than voice,thereby increasing network efficiency.

 

Textmessaging has been one of the key drivers for our cellular subscriber growth.  Strong volume growth in text messaging contributedsignificantly to Smart's cellular revenue growth in 2007, generating revenuesof Php41,265 million, an increase of Php6,616 million, or 19%, over 2006.  In 2007,Smart and Piltel's text messaging systems handled over 25,289 million outboundmessages on standard SMS services with another 187,420 million messages generatedby the bucket-priced text services.  This compares to 32,065 million outboundmessages on standard SMS services in 2006 and 203,669 million outbound messagesgenerated through bucket-priced text service.  Unlimited SMS services were onlymade available in March 2005.

 

Welaunch from time to time various promotions to stimulate usage and subscribergrowth.  For example, in 2005, Smart launched a series of promotions to testthe market demand for fixed rate or “bucket” plans for voice and text.  In2006, Smart introduced low-denomination text packages which were furtherrefined in 2007 as Smart focused on further segmenting its market by offeringsector-specific, value-driven packages.  As a result, Smart continued tosuccessfully defend its market leadership through innovative voice and textpackages that drive activations, boost usage and strengthen brand equity.

 

Thesuccess of text messaging is a strong indicator of future data usage potentialin this market.  In 2007, approximately 54% of Smart’s cellular revenues werederived from data usage, compared to 51% in 2006.  

 

Smartalso offers the following value-added cellular services:

 

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

 

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

 

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

 

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

 

Dueto the high level of text messaging service usage, we believe that thePhilippine market is well suited for text-based informational and e-commerceservices.  Our current approach is to continue maximizing our GSM, or 2G,services while upgrading our network to 3G evolution technology.  On December29, 2005, Smart was awarded a 3G license by the NTC after being ranked highestby the NTC in garnering a perfect score on a 30-point grading system designedto gauge the capability of telecommunication operators to effectively provideextensive 3G services.  As a result of the perfect ranking, Smart received thelargest radio frequency allocation of 15 MHz as well as first choice offrequency spectrum.  Smart chose the 1920-1935 MHz and 2110-2125 MHz spectrum,the range that would best enable it to rapidly deploy its 3G network nationwideand at the same time offer the highest quality of 3G service.

 

*Ratesand Discounts*

 

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

 

*SmartBuddy* and *Talk ‘N Text* Call and Text prepaid cards are sold indenominations of Php300, Php500 and Php1,000, which include 33, 83 and 250 freetext messages, respectively.  We also recently introduced a Php100 denominationthat contains Php100 worth of air time with a validity period of 10 days.  Whilethe stored value of a prepaid card remains valid for a period from the time asubscriber activates the card, as we launch from time to time promotions withshorter validity periods.  The introduction of our “over-the-air” electronicloading facility *Smart Load* in 2003 made reloading of air time creditsmore convenient and accessible for consumers.  *Smart Load’s* over-the-airreloads have evolved to respond to market needs and now come in denominationsof Php15, Php30, Php50, Php60, Php115, Php200, Php300 and Php500 withcorresponding expiration periods.  

 

*SmartLoad* was followed by *Pasa Load*, a derivative service, allowingprepaid subscribers to transfer even smaller denominations to other prepaidsubscribers.  Our prepaid subscribers are charged between Php5.50 per minute andPhp6.50 per minute for calls within our wireless network and calls terminatingto other cellular or fixed line networks.  Voice tariffs on our various prepaidvoice packages range from a low of Php5.50 for four 15-second on-network callsto Php20 for three 3-minute on-network calls, valid for one day.

 

Weoffer both flat rate, or regular, and consumable postpaid plans with monthlyservice fees ranging from Php500 to Php3,500.  These plans are available with varying amounts of free airtime and text messages and different rates beyond the free minutes and textmessages, depending on the monthly service fee.  Monthly service fees for flatrate, or regular, plans are applicable only to local calls and text messagesand for consumable plans to all voice calls, text messages (both local andinternational) and value-added services.

 

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

 

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

 

Smartalso has in place various promotions to stimulate international usage.  In June2006, *Smart IDD Libre Text Abroad* was launched wherein subscribersearned one free international text message for every minute of IDD calling.  InOctober 2006, this was replaced by *International Budget Text* packages.  Thesepackages, which have limited duration and varying number of included messages,enable subscribers to send international text to pre-registered recipients ofthe subscriber’s choice on supported overseas carriers.

* *

Wesell our cellular services primarily through a network of independent dealersand distributors that generally have their own retail networks, direct salesforces and sub-dealers.  We currently have nine major dealers, two of which areexclusive.  These dealers include major distributors of cellular handsets whosemain focus are telecommunications outlets.  Account managers from our sales forcemanage the distribution network and regularly update these business partners onupcoming marketing strategies, promotional campaigns and new products introductions.With the introduction of *Smart Load* in May 2003, Smart moved into a newrealm of distribution.  These over-the-air reloads, which were based on the“sachet” marketing concept of consumer goods such as shampoo and ketchup,required a distribution network that approximates those of fast-moving consumergoods companies.  Starting with just 50,000 outlets when it was launched, *SmartLoad*’s distribution network now encompasses approximately one millionretail agents, 80% of which are micro businesses (e.g., neighborhood stores, individualentrepreneurs, individual roving agents).  These micro-retailers must beaffiliated with any of Smart’s authorized dealers, distributors, sub-dealers oragents.  With the prepaid reloading distribution network now extended to cornerstore and individual retailer levels and minimum reloading denominations as lowas Php10, Smart’s prepaid service becomes even more affordable and accessibleto subscribers.

 

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

* *

*Wireless Broadband, Satellite and Other Services*

* *

*Overview*

 

We currently provide wirelessbroadband, satellite and other services through SBI, our wireless broadbandprovider, Wolfpac, our wireless content operator, Mabuhay Satellite and ACeSPhilippines.

 

*SBI*

* *

ThroughSBI, we are engaged in providing wireless broadband and data services toresidential consumers as well as small and medium-scale enterprises in the Philippines.  As at December 31, 2007, SBI had 301,738 wireless broadband subscribers underthe brand name *Smart Bro*.  *Smart Bro* aims to strengthen Smart’sposition in the wireless data segment and complements PLDT’s *myDSL*service in areas where the latter is not available.   

 

*Wolfpac*

* *

Through Wolfpac, we are engaged in thebusiness of consumer mobile applications software development and consumermobile content development and other allied services.  

 

*PLDTWeRoam*

 

Wealso offer *PLDT WeRoam*, or *WeRoam*, a wireless prepaid or postpaidbroadband service, running on the PLDT Group’s nationwide wireless network(using GPRS, EDGE, WiFi and 3G/HSDPA technologies). 

 

*Mabuhay Satellite*

 

Mabuhay Satellite is engaged in the control andoperation of the Agila II satellite.  Commencing commercial operations inJanuary 1998, Agila II is the Philippines' first communication satellite.Mabuhay Satellite leases satellite space segments in both the C and Ku bands onAgila II.  Through Agila II, Mabuhay Satellite also offers internet backboneaccess, video and data broadcasting, and bandwidth-on-demand, facilitatingcommunication links between telecommunications, broadcast and other publicutility companies operating in the Asia-Pacific region.  In 2007, MabuhaySatellite generated revenues of Php976 million and posted a net income of Php121million.

 

*ACeS Philippines*

 

ACeS Philippines currently owns approximately 36.99% of AIL.  In 2007, ACeSPhilippines generated revenues of Php453 million and posted a net income of Php358million.  AIL aims to develop and implement a satellite-based communicationssystem to provide services to users in the Asia-Pacific region through theGaruda I satellite, or ACeS System and ACeS Service.  AIL has entered intointerconnection agreements and roaming service agreements with PLDT and othermajor telecommunications operators that will allow ACeS service subscribers toaccess GSM terrestrial cellular systems in addition to the ACeS system.Further, AIL has an amended Air Time Purchase Agreement, or ATPA, with NationalService Providers in Asia, including PLDT.  For further discussion regardingthe ATPA, please see *Note 22 – Related Party Transactions* to theaccompanying audited consolidated financial statements in Item 18.

 

Aspart of the consolidation process of the PLDT Group’s wireless business, ACeSPhilippines’ operations is being managed by Smart.  This operational arrangementeffectively gives Smart the widest service coverage in the Philippines through the combination of the coverage of ACeS Philippines with Smart’scellular service.

* *

*Revenues*

 

Ourrevenues from wireless broadband, satellite and other services consist ofwireless broadband service revenues for SBI, rental payments received for thelease of Mabuhay Satellite’s transponders’ charges for ACeS Philippines’satellite information and messaging services, service revenues generated fromPLDT Global’s subsidiaries, and revenues generated from Wolfpac for wirelessdata content.  

 

*Rates*

*** ***

SBIoffers its wireless broadband and data services for residential consumers aswell as small and medium-scale enterprises.  The wireless broadband service forresidential consumers is branded as *Smart Bro* and offers a maximum speedof 384 kbps for Php999 per month.  Monthly service fees for corporate dataservices range from Php999 to Php180,000 depending on the connection speedrequirements.  The monthly service fee for users of the *Smart Bro Plug-It*,a new service introduced in November 2007, is Php799 and includes 40 hours permonth of free internet usage.  Users also incur a one-time charge for the *SmartBro Plug-It*modem of Php1,200.

 

Wolfpac generates revenues fromSMS subscriptions, institutional services and downloadable contents.  Thesubscription price for the SMS subscription and institutional services ispegged at Php2.50 per SMS, while downloadable contents range from Php10.00 toPhp30.00.

** **

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

** **

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

 

MabuhaySatellite leases its transponders to third parties at average annual rates ofapproximately US$0.9 million and approximately US$0.7 million for its C-bandand Ku-band transponders, respectively.  ACeS service mobile subscribers arecharged Php13.84 per minute for local and cell-to-cell calls and for nationaldirect dial services, while residential subscribers are charged peak-hour ratesof Php13.00 per minute and off-peak hour rates of Php8.00 per minute fordomestic calls regardless of destination.  For ACeS system public callingoffices, callers are charged Php4.50 and Php7.00 per minute for callsterminating to fixed line and cellular networks, respectively.  Rates forinternational long distance calls depend on the country of termination andrange from US$0.35 per minute for frequently called countries to US$0.85 perminute for less frequently called countries.

 

***FixedLine***

 

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

 

Weoffer postpaid and prepaid fixed line services.  Initially intended as anaffordable alternative telephone service for consumers under difficult economicconditions, our prepaid fixed line services**now form an important partof our overall churn and credit risk exposure management strategy.  PLDT hasconsolidated its prepaid fixed line service into *TelePwede*,**whichis funded by e-loads (available at Smart or PLDT e-load retailers).  In March2007, PLDT launched PLDT Landline Plus, a postpaid and prepaid fixed wirelessservice where subscribers to the service benefit from a text-capable homephone.  This service is primarily intended for subscribers in areas where PLDThas no facilities and is expected to increase our fixed line subscriber base.  

 

*Local Exchange Service*

 

Our local exchange service, whichconsists of our basic voice telephony business, is provided primarily throughPLDT.  We also provide local exchangeservices through our subsidiaries ClarkTel, SubicTel, Maratel and Piltel.Together, these subsidiaries account for approximately 3% of our consolidatedfixed line subscribers.

 

The following table summarizes key measures of ourlocal exchange service segment as at and for the years ended December 31, 2007,2006 and 2005:

 

 

**Years Ended December 31,**

 

**2007**

**2006**

**2005**(2)

 

 

 

 

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

1,724,702

1,776,647

1,842,507

Number of fixed line employees (at year-end)

8,080

8,711

9,197

Number of fixed line subscribers per employee

213

204

200

Total local exchange revenues (in millions)

Php16,205

Php16,963

 

Local exchange revenues as a percentage of total service revenues 

11%

13%

 

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

33%

35%

 

____________

*(1)    **Previously set forth asnumber of fixed lines in service, this was restated in 2006 to reflect theeffect of the change in parameters used to align with the PLDT Group’s policyon subscriber count with the planned use of an integrated billing system forour subscribers.*

* *

*(2)   Pursuant to thetransitional relief granted by the U.S. SEC in respect of the first-time adoptionof IFRS, we have omitted revenue data for 2005.  Please see “Presentation ofFinancial Information” above for further details.*

 

*Rates*

 

Asat December 31, 2007, basic monthly charges for our local exchange service inthe Metropolitan Manila area were Php592.63 for a single-party residential lineand Php1,234.02 for a single business line.  Monthly charges vary according tothe type of customer (business or residential) and location, with charges forurban customers generally being higher than those for rural/provincialcustomers.  Regular installation charges amount to Php1,200 for residentialcustomers and Php1,500 for business customers.  New products launched onpromotion or products bundled on existing services usually waive theinstallation fee or allow for a minimal installation fee of Php500.  Aside fromthe basic monthly charges, we charge our postpaid subscribers separately forNDD, IDD and calls to mobile phones.  Calls to PLDT and other landlines withina local area code are free.

 

Our prepaid fixed line customers generally do not pay abasic monthly charge and are charged based on usage.  Subscribers of *TelePwede*,our upgraded prepaid fixed line service, are charged a monthly fee of Php115per month to receive incoming calls and are charged per usage for outgoingcalls.  The *TelePwede*installation fee is Php1,500, including Php127 ofpreloaded value.  The international and national long distance rates we chargeto our prepaid fixed line customers are similar to the rates we charge to ourpostpaid customers.  (For a detailed description of these rates, see “—International Long Distance Service — Rates” and “— National Long DistanceService — Rates.”)  

 

The monthly service fee for our PLDT Landline Plusservice is available in load denominations of Php300, Php600 and Php1,000 forresidential and business subscribers and includes 150, 600 and 1,000 free localminutes, respectively.

 

Pursuantto a currency exchange rate adjustment, or CERA, mechanism authorized by theNTC, we are required to adjust our postpaid monthly local service rates upwardor downward by 1% for every Php0.10 change in the peso-to-dollar exchange raterelative to a base rate of Php11.00 to US$1.00.  In 2007, we implemented five downwardadjustments and one upward adjustment in our monthly local service rates, whilethere were eight downward adjustments and three upward adjustments in 2006.The average Philippine peso to U.S. dollar rate factored in our monthly localservice rates in 2007 was Php48.67 to US$1.00, compared to an average of Php51.53to US$1.00 in 2006.  This change in the average peso-to-dollar rate translatedto a peso appreciation of 6%, which resulted in a net decrease of approximately5% in our average monthly local service rates in 2007.  In its letter datedJuly 16, 2007, the NTC has approved our request to use annual average exchangerates as our basis in CERA computation instead of the currently used monthlyaverages.

 

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

* *

*International Long Distance Service*

 

Our international long distanceservice consists of switched voice and packet-based voice and data servicesthat go through our international gateway facilities.  We also generateinternational long distance revenues through access charges paid to us by otherPhilippine telecommunications carriers for incoming international voice callsthat terminate to our local exchange network.  Our packet-based voice and dataservices are transmitted over our existing traditional circuits, VoIP systemsand the network of a consortium of dominant carriers in Asia in which PLDT is amember.

 

Thefollowing table shows certain information about our international long distancebusiness as at and for the years ended December 31, 2007, 2006 and 2005:

 

 

**Years Ended December 31,**

 

**2007**

**2006**

**2005**(1)

 

 

 

 

Total call volumes (million minutes)

2,280

2,177

2,266

Inbound call volumes (million minutes)

2,007

1,984

2,117

Outbound call volumes (million minutes)

273

193

149

Inbound-outbound call ratio

7.4:1

10.3:1

14.2:1

Total international long distance service revenues (in millions)

Php8,674

Php9,933

 

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

6%

7%

 

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

18%

20%

 

__________

*(1)      **Pursuant to the transitionalrelief granted by the U.S. SEC in respect of the first-time adoption of IFRS,we have omitted revenue data for 2005.  Please see “Presentation of FinancialInformation” above for further details.*

 

Internationallong distance service historically has been a major source of our revenue.However, primarily due to the steep decline in inbound termination andcollection rates and intense competition, revenues derived from ourinternational long distance service have been declining.  

 

Wehave been pursuing a number of initiatives to strengthen our international longdistance service business, including by: (i) lowering our inbound terminationrates, (ii) identifying and containing unauthorized traffic termination onour network, (iii) being more selective in accepting incoming traffic fromsecond- and third-tier international carriers, and (iv) introducing a number ofmarketing initiatives, including substantial cuts in international directdialing rates, innovative pricing packages for large accounts and loyaltyprograms for some customers.  In addition, through PLDT Global, we aggregateinbound call traffic to the Philippines at our points of presence and, usingour capacity in submarine cable systems connected to each point of presence,transmit calls to our network.  PLDT Global is also enhancing the presence ofPLDT in other international markets by offering new products and services suchas international prepaid cards, mobile services, SMS transit and other globalbandwidth services.  We believe these strategies will help us maximize the useof our existing international facilities, and develop alternative sources ofrevenue.

 

The table below sets forth the net settlement amountsfor international calls handled by PLDT, by country, for the years endedDecember 31, 2007 and 2006(1):

 

 

**Net Settlement**

 

**Years Ended December 31,**

 

**2007**

**2006**

 

(in millions)

 

 

 

United States

US$55

US$54

Saudi Arabia

28

27

United Arab Emirates

18

15

Canada

17

18

Japan

12

12

Italy

10

11

Hong Kong

7

8

Malaysia

7

3

Taiwan

6

4

Others

36

33

Total

US$196

US$185

___________

*(1) Pursuant to thetransitional relief granted by the U.S. SEC in respect of the first-timeadoption of IFRS, we have omitted net settlement amounts for 2005.  Please see“Presentation of Financial Information” above for further details.*

 

*Rates*
 

Since February 1, 2003, a substantial portion of PLDT’sinternational inbound traffic terminating on its fixed line network is charged approximatelyUS$0.12 per minute.  

 

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

 

Wealso offer international long distance service through PLDT *Budget Card*,a prepaid call card, which offers low-priced international calling services at IDDcall rates ranging from Php3.00 per minute to Php8.00 per minute depending on thedestination to more than 90 destinations (excluding the Middle East).  In April 2007, we introduced the *Budget Card Middle East Edition*which offers reduced IDD call rates of Php10 per minute and Php15 per minute todifferent destinations in the Middle East.  *Budget Card* and *BudgetCard Middle East Edition* are sold in denominations of Php200, Php100 andPhp30 and must be consumed within 30 days from first use.

* *

*National Long DistanceService*

 

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

 

The following table shows our national long distanceservice revenues for the years ended December 31, 2007 and 2006 and ournational long distance call volumes for the years ended December 31, 2007, 2006and 2005:

 

 

**Years Ended December 31,**

 

**2007**

**2006**

**2005**(1)

 

 

 

 

Total call volumes (million minutes)

2,183

2,251

2,348

Total national long distance service revenues (in millions)

Php6,338

Php6,921

 

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

4%

5%

 

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

13%

14%

 

__________

*(1)    **Pursuant to the transitionalrelief granted by the U.S. SEC in respect of the first-time adoption of IFRS,we have omitted revenue data for 2005.  Please see “Presentation of FinancialInformation” above for further details.*

 

Cellularsubstitution and the widespread availability and growing popularity ofalternative, more economical non-voice means of communications, particularlye-mailing and cellular text messaging, have negatively affected our national longdistance call volumes.  The integration of some of our local exchanges into asingle local calling area, as approved by the NTC, has also negatively affectedour national long distance call volumes, and consequently, our revenues.Because of this integration, calls between two exchanges located within thesame province are no longer considered national long distance calls but aretreated as local calls.

 

*Rates*

 

Ratesfor national long distance calls traditionally were based on type of service,such as whether the call is operator-assisted or direct-dialed.  However, inline with its move towards rate simplification, PLDT simplified these rates inrecent years to a flat rate of Php5.09 per minute for calls originating andterminating to PLDT fixed line network, and for calls terminating to fixed linenetworks of other local exchange carriers.  Additionally, in recent years, PLDTsimplified its rates for calls terminating to cellular subscribers to a uniformrate of Php14.00 per minute.    

 

Inaddition, PLDT launches from time to time promotions to stimulate fixed lineusage.

 

OnJanuary 7, 2006, we implemented a monthly flat service rate of Php50 which permitssubscribers to make national long distance calls of unlimited duration forPhp10 per call to subscribers of PLDT and, which permits subscribers whoregistered for this flat rate service on or before February 24, 2006, to alsomake such calls to subscribers of Smart and Piltel.

 

Wecontinue to evaluate the present rate structure of our national long distanceservices from per minute toll charges to flat rates per call for calls ofunlimited duration.  This is envisioned to make fixed line rates morecompetitive with VoIP rates and to revitalize interest in fixed line usage.  Wecontinue studying various pricing models in respect of the above new rate plan.

 

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

 

*Data and Other Network Services*

 

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

 

The following table shows our data and other networkservice revenues for the years ended December 31, 2007 and 2006 and our numbersof broadband and narrowband subscribers as at December 31, 2007, 2006 and 2005:

 

 

**Years Ended December 31,**

 

**2007**

**2006**

**2005**(1)

 

 

 

 

Consolidated data and other network service revenues (in millions)

Php15,921

Php13,725

 

Number of DSL broadband subscribers

264,291

133,159

88,811

Number of PLDT Vibe narrowband subscribers

230,995

297,250

266,703

__________

*(1)    **Pursuant to the transitionalrelief granted by the U.S. SEC in respect of the first-time adoption of IFRS,we have omitted revenue data for 2005.  Please see “Presentation of FinancialInformation” above for further details.*

 

Recognizing the growth potential of data and othernetworking services, including IP-based services, and in light of theirimportance to our business strategy, we have been putting considerable emphasison these service segments.  These segments registered the highest percentagegrowth in revenues among our fixed line services in 2007 and continued to growin the first quarter of 2008. 

 

The continuous upgrading of ournetwork using next-generation facilities and the completion of our domesticfiber optic backbone has enabled us to offer a growing range of value-added andbroadband services.  With this and other technological upgrades, ourinfrastructure has developed from a traditional voice facility to a newpacket-switched and IP-based network allowing faster transmission of voice,video and data.  

 

Our IP-based services include *PLDTDSL* (*myDSL* and *BizDSL*), a broadband internet service targetedfor heavy individual internet users as well as for small and mediumenterprises, *PLDT Vibe*,  a dial-up/narrowband internet service targetedfor light to medium residential individual internet users, and I-Gate, ourdedicated leased line internet access service targeted for enterprises andvalue-added service providers.

 

In addition, in 2006, we introduced *Shops.work Unplugged*,or SWUP, a bundled service using Smart’s GPRS/EDGE network and PLDT’s virtualprivate network, or VPN, for retailers and banks  that offers real-timewireless data communication for retailers’ cashiering point-of sale networks,bank automated teller machines, or ATMs, and merchants’ swipe card terminals.

 

In2007, we continued to broaden our service offerings with the launch of newservices and expansion or enhancement of some of the existing offerings.  

*** ***

***Information andCommunications Technology***

*** ***

Weconduct our information and communications technology, or ICT, businessesthrough our wholly-owned subsidiary ePLDT.  ePLDT is a broad-based integratedinformation and communications technology company, focusing on infrastructureand solutions for internet applications, internet protocol-, or IP-, basedsolutions and multimedia content delivery.  ePLDT's principal businesses arethe operation of (1) knowledge processing solutions, through the SPi Group, (2)customer interaction services through Vocativ, Parlance and *Ventus*, (3)an internet data center under the brand name *Vitro*TM, and (4) internetand online gaming through Infocom, netGames, Digital Paradise, Digital ParadiseThailand, Level Up! and Airborne Access.  Our ICT business segment registeredrevenues of Php10,799 million and Php6,925 million, accounting for 7% and 5% ofour total revenues for 2007 and 2006, respectively.  The increase in therevenue contribution from our information and communication technology segmentwas primarily due to the consolidation of SPi, CyMed and Level Up! since their acquisitionby ePLDT on July 11, 2006, August 11, 2006 and April 30, 2006, respectively,and has increased with the full-year consolidation of the SPi Group in 2007.

 

*Knowledge Processing Solutions*
 

ePLDTprovides knowledge processing solutions through SPi Group, the second largestpure-play knowledge processing solutions company and the ninth largestindependent knowledge processing solutions service provider worldwide acquiredby ePLDT in July 2006.  SPi has operations in 19 locations in North America,Europe and Asia.  On August 11, 2006, SPi acquired 100% of CyMed, a leadingmedical transcription company based in Richmond, Virginia, and on April 12,2007, SPi acquired 100% of Springfield, one of the ten largest players in themedical billing and revenue cycle management market.  

 
*Customer Interaction Services*
 

ePLDT has established one umbrella brandname, *ePLDT Ventus*, for all of its customer interaction servicebusinesses, including Vocativ and Parlance.  *Ventus*provides offshore,cost-effective contact center outsourcing solutions specializing in inboundcustomer care.  Vocativ provides customer and technical support to its clientsin the Philippines, U.S. and U.K., while Parlance provides the exclusivecustomer support and billing requirements to one of the largest direct-to-homesatellite television providers in the U.S.  In total, we owned and operatedapproximately 6,400 seats with 5,930 customer service representatives, or CSRs,in 2007 compared to approximately 5,600 seats with 5,130 CSRs in 2006.  In2006, *ePLDT Ventus* launched two new sites bringing our total customerinteraction services site count to nine in 2007.

 

*Internet and Online Gaming*
 

ePLDT’sinternet and online gaming business is conducted through several subsidiaries.  ePLDTowns a 99.6% interest in Infocom, one of the country's leading internet serviceproviders, or ISPs.  Infocom offers consumer prepaid internet access under thename *WarpSpeed* and *Speed Tipid* and postpaid internet access;dedicated dial-up and multi-user dial-up corporate leased lines; broadband internetaccess through DSL and cable; and website consulting, development and hosting.ePLDT also owns a 75% interest in Digital Paradise, an internet café businesswith over 174 branches which assumed the assets of Netopia ComputerTechnologies, Inc. and the brand *Netopia.*ePLDT further holds an 80%-interestin netGames, a publisher of Massively Multi-player Online Games in thePhilippines, and is the Philippine licensee of *Khan Online*, thecountry’s first full 3D online game; a 51% interest in Airborne Access, thecountry’s leading operator of WiFi hotspots, which provides wireless internetaccess in hotspots equipped with Airborne Access WiFi access points and a 60%equity interest in Level Up!, a leading publisher of online games in thePhilippines with about an 80% share of the online gaming market.

 

*Data**Center*

 

ePLDToperates *Vitro*TM, one of the Philippines' first internet data centers.  *Vitro*TMis a CISCO-certified co-location service provider.  *Vitro*TM providesco-location, web and server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting and webhosting,shared applications, data disaster recovery and business continuity services,intrusion detection and internet protocol security services, as well asfirewall and managed firewall services.

 

**Infrastructure**

** **

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

 

*Cellular*

 

Through Smart, we operate a digital GSM network.  Tomeet the growing demand for cellular services, Smart has implemented anextensive deployment program for its GSM network covering substantially all ofMetro Manila and most of the other population centers in the Philippines.  As at December 31, 2007, Smart had 43 mobile switching centers and 77 text messagingservice centers and 7,825 base stations in operation after having added 1,726base stations to its nationwide cellular network in 2007, Piltel had six activecell sites.

 

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

 

Due to its access to PLDT’s network assets, Smart has beenable to achieve significant capital expenditure savings, which capitalexpenditures are understood to be significantly less, on a per net additionbasis, than its current competitors.  This translates into an improved abilityto price competitively and target the mass market subscriber base in the Philippines, while retaining profitability.  Based on existing equipment purchasecontracts, Smart expects incremental capital expenditure per net additionalsubscriber to amount to less than US$50. 

 

Weexpect continued increases in coverage (particularly indoor) in the comingyears, as well as the introduction of new types of BTS for indoor andcommercial offices.  Smart has introduced the *NanoBTS,*a compact andeasy-to-deploy**solution for indoor coverage and increased efficienciesin underserved offices and buildings.  The new base station equipment uses IPfor transport and Smart is one of the very first operators to deploy thisaccess solution.

 

Smartwas awarded a 3G license by the NTC in 2005 and received the largest radiofrequency allocation of 15 MHz.  Smart chose the 1920-1935 MHz and 2110-2125MHz spectrum, the range that would best enable it to rapidly deploy its 3Gnetwork nationwide and at the same time offer the highest quality of 3Gservice.  Smart has commenced its 3G network roll-out and continues to extendthe reach of its 3G network in various cities and municipalities nationwide,further improving coverage in major urban centers and selected provincialareas. 

 

Smartand Piltel have been co-locating their cell sites where their base stations areinstalled.  As at December 31, 2007, 26 of Smart's mobile switching centers and214 of Smart's cell sites were housed in PLDT’s fixed line complexes while 249of Smart’s cell sites were co-located with Piltel.  These operational synergieshave allowed Smart to reduce switch installation time from three months to fiveweeks.

 

*Wireless Broadband, Satellite and Other Services*

 

SBIoperates a nationwide broadband wireless internet data services.  It is operatingin the 2.4, 3.5 and 5.7 GHz spectrum, supporting its WiFi, Canopy and eventuallyWiMax services, respectively.  It offers fixed wireless broadband internetconnectivity to both residential and corporate clients. It also maintains andoperates WiFi hotspots installations that serve mobile internet users.  Almost 1,798of Smart’s base stations are now wireless broadband-capable, covering most ofthe key cities and the other populated centers in the country.  These arestrategically co-located in the Smart’s cellular base stations that allow it toreach as many subscribers as possible, in the fastest possible way.  For itsbackbone, it uses the nationwide PLDT and Smart fiber optic and IP backbonethat provide substantial bandwidth capacity to utilize and to grow on demand. 

 

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

 

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

 

***Fixed Line Network Infrastructure***

 

*Domestic*

 

Our domestic telephone network includes installedtelephones and other equipment on customers’ premises, local access linesconnecting customers to exchanges, referred to as “outside plant,” inter-officelines connecting exchanges, and long distance transmission equipment.  As atDecember 31, 2007, we had 228 central office exchanges compared to 184 in 2006.

 

Wehave our own 6,400-kilometer DFON, the country's first telecommunicationsnetwork using fiber optics in delivering voice, video, data, and otherbroadband and multimedia services nationwide.  Our fiber optic network employssynchronous digital hierarchy technology to improve network performance andreduce operating costs.  Our network is composed of in-land and submarine cableinstallations and is configured in seven self-healing rings allowing routedelivery even in the event of single link failure per ring.  To date, the PLDTDFON is equipped with N x 10 gigabits per second capacity and is connecteddirectly to four existing international submarine cable systems.  We use *CS VEGA*,a cable ship which we lease from NTT World Engineering Marine Corporation, orNTT-WEM, pursuant to a chartered arrangement maintenance contract to maintainthe 2,400 kilometers of submarine cable comprising the submerged portion of ourDFON.  This seven-year maintenance contract, as extended, expired last December31, 2007.  We are currently renewing the contract with NTT-WEM on a monthlybasis until such time that a new long-term maintenance contract is in place.

*** ***

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

 

*International*

 

We provide international network services using ourthree international gateway switching exchanges.  As at December 31, 2007, ourinternational long distance facilities allow direct correspondence with 47countries/territories (representing 87 correspondents) and can reach 460foreign destinations (via direct and transited routes including breakouts)worldwide.  We also own interests in submarine and satellite systems, throughwhich we route most of our international traffic.

 

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

 

**Cable System**

**Countries Being Linked**

 

 

G-P

Guam and the Philippines

Asia-Pacific Cable Network

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

Asia-Pacific Cable Network 2

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

Transpacific Cable No. 5

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

SEA-ME-WE-3

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

Americas Cable 1

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

China-U.S. Cable

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

Columbus II Cable

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

FLAG Cable

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

RJK Cable

Russia, Japan and Korea

Southern Cross Cable

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

TAT 12/13 Cable

U.S. Mainland, UK and France

TVH Cable

Thailand, Vietnam and Hong Kong

EAC Cable

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

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

Japan and the U.S.

 

Additionally, on May 2, 2007, a consortium of seventeenmajor international telecommunication operators, including PLDT, signed anagreement to build the first high-bandwidth optical fiber submarine cable systemlinking Southeast Asia and the U.S.  The cable project, known as the *Asia-AmericaGateway,* will span 20,000 kilometers and will use the latest Dense WavelengthDivision Multiplexing technology to provide upgradeable, future prooftransmission facilities that will support bandwidth requirements for new andrevolutionary broadband applications.  It is expected that the *Asia-AmericaGateway* will cost approximately US$500 million (of which US$50 million representsPLDT’s investment) and will be ready for service by the first quarter of 2009.

 

**Interconnection Agreements******

 

Sincethe issuance of Executive Order No. 59 in 1993, which requiresnon-discriminatory interconnection of Philippine carriers' networks, we haveentered into bilateral interconnection arrangements with other Philippine fixedline and cellular carriers.  

 

SinceJanuary 1, 2004, calls terminating to cellular subscribers originating fromfixed line subscribers are charged a termination rate of Php4.00 per minute.  

 

Since January 1, 2004, local access for cellularoperators, including Smart, that terminate calls to PLDT’s fixed line network werecharged at Php3.00 per minute.

 

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

 

SinceFebruary 1, 2003, international calls terminating to PLDT’s fixed line networkwere charged a termination rate of approximately US$0.12 per minute.  Also,international calls terminating to Smart’s cellular network were charged atermination rate of US$0.16 per minute.

 

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

 

**Licenses and Regulation******

 

PLDT,Smart and Piltel provide telecommunications services pursuant to legislativefranchises that expire, in the case of PLDT, on November 28, 2028, in the caseof Smart, on March 27, 2017 and, in the case of Piltel, on May 14, 2019.  Afranchise holder is required to obtain operating authority from the NTC toprovide specific telecommunications services.  These approvals may take theform of a Certificate of Public Convenience and Necessity, or CPCN, or, whilean application for a CPCN is pending, a provisional authority to operate.  Provisionalauthorities are typically granted for a period of 18 months.  The PhilippineRevised Administrative Code of 1987 provides that if the grantee of a licenseor permit, such as a CPCN or provisional authority, has made timely andsufficient application for the extension thereof, the existing CPCN orprovisional authority will not expire until the application is finally decidedupon by the administrative agency concerned.

 

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

 

Smartoperates its cellular, international long distance and national long distanceservices pursuant to CPCNs, the terms of which will expire upon the expirationof its franchise.  On July 22, 2002, Smart was granted separate CPCNs tooperate a cellular mobile telephone system, or CMTS, and an internationalgateway facility.  On August 26, 2002, Smart was granted a CPCN to install,operate and maintain nationwide global mobile personal communications viasatellite which will also expire upon expiration of its franchise.  On February19, 2008, Smart was granted a CPCN to establish, install, maintain, lease andoperate an international private leased circuit for a term that is co-terminuswith the expiration of its franchise. Prior to that, Smart was permitted toengage in these activities pursuant to a provisional authority and a timelyfiled application for the grant of such CPCN.  On the same date, uponapplication of Smart, the NTC extended Smart’s provisional authority toconstruct, install, operate and maintain a nationwide public calling office andpublic payphone service from January 4, 2007 to January 4, 2010.  

 

OnDecember 29, 2005, Smart was awarded a 3G license by the NTC after being rankedhighest in garnering a perfect score on a 30-point grading system designed togauge the capability of telecommunication operators to effectively provideextensive 3G services.  As a result, Smart received the largest radio frequencyallocation of 15 MHz as well as first choice of frequency spectrum.  Smartchose the 1920-1935 MHz and 2110-2125 MHz spectrum.  Smart is required to payannual license fees of Php115 million based on the 15 MHz awarded to Smart.

 

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

 

•        begin installation and rollout ofits 3G network no later than 18 months from the date of the award;

 

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

 

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

 

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

 

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

 

**Carrier**

**Spectrum System**

**Frequency Assignment**

**Bandwidth**

 

 

 

 

Smart

ETACS/GSM 900

897.5-905/942.5-950 MHz

7.5 MHz

 

GSM 1800

1725-1730/1820-1825 MHz

5.0 MHz

 

 

1730-1732.5/1825-1827.5 MHz

2.5 MHz

 

 

1735-1740/1830-1835 MHz

5.0 MHz

 

 

1745-1750/1840-1845 MHz

5.0 MHz

 

 

1780-1782.5/1875-1877.5 MHz

2.5 MHz

 

3G (W-CDMA)

1920-1935/2110-2125 MHz

15.0 MHz

Piltel

AMPS/CDMA

845-846.5/890-891.5 MHz

1.5 MHz

 

 

 

 

SBI

Wireless broadband

2400-2483.5 MHz *

73 MHz

 

 

3400-3590 MHz *

94 MHz

 

 

5470-5850 MHz *

123 MHz

__________

**    SBI frequency assignments on these bands arenon-contiguous and on a per station and location basis.*

 

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

 

PLDT,Smart and Piltel are required to pay various permit, regulation and supervisionfees to the NTC.  PLDT was previously engaged in disputes with the NTC oversome of the assessed fees.  For more information on the disputes involvingPLDT, see Item 8. “Financial Information –– Legal Proceedings –– NTC supervisionand regulatory fees, or SRF.”

 

Piltel is engaged in discussions with the NTC relatingto the allocation and use of certain 3G radio frequency bands.  On August 23,2005, the NTC issued Memorandum Circular No. 07-08-2005 or the Rules and Regulationson the Allocation and Assignment of 3G Radio Frequency Bands, allocating the825-845MHz/870-890MHz frequency band for 3G. In a letter dated December 8,2005, Piltel informed the NTC of its intent to upgrade its existing CDMA CMTSnetwork to 3G.

 

In a letter dated June 18, 2007, Piltel requested theNTC to affirm its right to use the said frequency band by allowing the jointuse thereof by Smart and Piltel which was granted previously by NTC (throughthen Commissioner Rio) in a letter dated May 6, 2002, arguing that there-allocation of the frequency band was done without due process; that Piltelhad been complying with the mandates of the NTC and had been persistentlyapplying for, and renewing, the Radio Station Licenses (RSLs); that it had beenpaying the spectrum users fees (SUF); and that the re-allocation of thefrequency band for 3G renders inutile the RSLs with effectivity dates of up toJune 30, 2008.

 

In a letter dated November 27, 2007, Piltel requestedto use the 824-835MHz/869-880MHz frequency band for 3G services, with acommitment to submit pertinent documents, referring to its letter of December8, 2005 on its intent to upgrade its existing CDMA CMTS network to 3G.

 

However, in its letter dated December 12, 2007, theNTC denied Piltel’s letter of November 27, 2007 citing that records showed thatthe radio frequencies 824-835MHz/869-880MHz had been re-allocated for InternationalMobile Telecommunications 2000 (IMT2000) or Third Generation (3G) Mobile TelecommunicationsServices under Memorandum Circular 07-08-2005 and that Piltel had not appliedfor the assignment and use of radio frequencies re-allocated for 3G MobileTelecommunications Service nor was qualified for the assignment of the same.

 

In a letter dated December 19, 2007, Piltel requestedreconsideration of the December 12, 2007 letter of the NTC, reiterating itscommitment to submit necessary documents that may be required by the NTC.  Piltel’srequest for reconsideration remains pending with the NTC.

 

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

 

Inorder to diversify the ownership base of public utilities, the PublicTelecommunications Policy Act (R.A. 7925) requires a telecommunications entitywith regulated types of services to make a public offering through the stockexchanges representing at least 30% of its aggregate common shares by the laterof the fifth anniversary of the date (a) the law became effective or (b) theentity’s commencement of commercial operations.  

 

PLDTand Piltel have complied with this requirement.  However, Smart has notconducted a public offering of its shares.  If Smart is found to be in violation of R.A. 7925, this could result in a revocation of thefranchise of Smart and in the filing of a *quo warranto* case againstSmart by the Office of the Solicitor General of the Philippines.  See Item 3.“Key Information – Risk Factors – The franchise of Smart may be revoked due toits failure to conduct a public offering of its shares” for further discussion.

 

**Competition**

 

Includingus, there are nine major local exchange carriers, seven international gatewayfacility providers and five cellular service providers in the country.  Manynew entrants into the Philippine telecommunications market have entered intostrategic alliances with foreign telecommunications companies, which providethem access to technological and funding support as well as service innovationsand marketing strategies.  Consequently, we are facing increasing competitionin major segments of the telecommunications industry, particularly data andother network services segments.

 

*Cellular Service*

 

There are presently six operating service providers,namely Smart, Piltel, Globe, Innove, Digitel and Express Telecom, or Extelcom.Globe acquired Innove to form into one operating group while Smart and Piltel,both being part of the PLDT Group, formed another operating group.  These twooperating groups have approximately 92% of the Philippine cellular market.There are therefore effectively two large competitors in the Philippinecellular market.  The third active operator, Digitel commenced itscellular service, *Sun Cellular*, on March 29, 2003 and is estimated tohave approximately 8% of the cellular market as at December 31, 2007.  Extelcomoperates on an analog platform and is estimated to have minimal subscribers.  In December 2005, the NTC awarded four outof five 3G licenses to existing cellular operators Smart, Globe, Digitel and toa new entrant, Connectivity Unlimited Resources Enterprises, or CURE.  The NTChas yet to award a fifth license to another operator.

 

Competitionin the cellular industry has intensified with the increased availability ofaffordably priced handsets offering a range of new functions and theintroduction by competitors of new and improved plans for postpaid subscribers,reduced rates per minute and aggressive marketing and promotional strategies.The principal bases of competition are price, including handset cost, qualityof service, network reliability, geographic coverage and attractiveness ofpackaged services.  Smart's network leads the industry in terms of coveragewith 7,825 base stations as at December 31, 2007.

 

As aresult of competitive pressures, several service providers, including Smart andPiltel, have, in the last two years, introduced “bucket” plans providingunlimited voice and text services, and other promotions.  The launch of *SunCellular’s “24/7”* promotion stimulated a market segment that is attractedto “bucket” plans for voice and text services.  Smart launched “*Smart 258*”,a registration-based service which offers unlimited on-networks text messagingin various load denominations with designated expiration periods.  While mostof the “bucket” priced plans currently available in the market are beingoffered on promotional bases, Smart, Globe and Sun Cellular continue to launchother services that are designed to encourage incremental usage from existingsubscribers and also to attract new subscribers.  

 

Cellular operators also compete actively in launching innovativeproducts and value-added services.  The growing range of cellular products andservices include not only text messaging but also multi-media messaging, voicemail, text mail, international roaming, information-on-demand, mobile banking,e-commerce, mobile data, cellular internet access and internet messaging.

 

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

 

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

 

Inorder to avail themselves of promotions and cost efficient network-to-networkcalling rates, cellular subscribers in the Philippines have increasingly beensubscribing to the services of multiple wireless operators.  As a result, theincreases in 2007 in our cellular subscriber base and the penetration rate ofthe wireless market in the Philippines partly was impacted by such “multiple SIMcard ownership”.   

 

*Local Exchange Service*

 

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

 

There are currently four major fixed wireless landlineservices in the market that adopt the look and feel of a cellular phone servicebut provide the same tariff structure of a fixed line service such as the chargingof monthly service fees.  The earliest such service was provided by Digitel inthe fourth quarter of 2005 at a fixed monthly rate of Php672.  This service is providedmostly in selected areas of Southern and Northern Luzon where Digitel waslacking fixed cable facilities.  Globe quickly followed suite with a similarservice at a monthly rate of Php995 which service bundled a wireless landlineand broadband internet connection of 384kbps.  This service is offered inlimited areas of Metro Manila like Makati, Las Piñas, the Visayas region andselected areas of Southern Luzon like Cavite and Batangas. 

 

Themost aggressive service of this type was launched by BayanTel in the secondhalf of 2006, which service maintains two major price points open to both residentialand business subscribers.  This service is available under two plans, a plan ata monthly rate of Php699 for customers in Metro Manila and a plan at a monthlyrate of Php599 for customers in selected regional areas of the Philippines.

 

In March 2007, we launched the *PLDTLandline Plus,*a postpaid and prepaid fixed wireless service which wasinitially available only in regional areas where there were no available PLDTfixed cable facilities, at a flat monthly rate of Php499, and which wassubsequently extended to other areas, including Metro Manila, and increased toa monthly rate of Php600 for residential and Php1,000 for business subscribers.

 

*International Long Distance Service*

 

Including us, there are 11 licensed internationalgateway facility operators in the country.  While we have so far been able tomaintain a leadership position in this highly competitive segment of theindustry, in recent years, our market share has reduced largely as a result of(1) competition from other international gateway facility operators and illegalinternational simple resale operators; (2) an increase in inbound and outboundinternational long distance calls terminating to and originating from thegrowing number of cellular subscribers; and (3) the popularity of alternativeand cheaper modes of communication such as text messaging, e-mail, internettelephony and the establishment of VPNs for several corporate entities, furtherheightening the competition.

 

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

 

Withrespect to inbound calls into the Philippines, we have been pursuing a numberof initiatives to strengthen our inbound telecommunications traffic, includinglowering our termination rates and identifying and limiting unauthorizedtraffic termination.   In addition, we have also established, through ourwholly-owned subsidiary PLDT Global, presence in key cities overseas toidentify and capture Philippine terminating traffic at its source, maximize theuse of our international facilities and develop alternative sources of revenue.

* *

*National Long DistanceService*

 

Our national longdistance service business has been negatively affected by the growing number ofcellular subscribers in the Philippines and the widespread availability andgrowing popularity of alternative economical non-voice methods ofcommunication, particularly text messaging and e-mail.  In addition, various ISPshave launched voice services via the net to their subscribers nationwide.

 

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

 

PLDTlaunches from time to time promotions bundled with our other products toattract new subscribers, including free PLDT-to-PLDT NDD service.

 

Dataand Other Network Services 

 

Anotherrapidly growing segment of the industry is the market for data and othernetwork services.  The growth is spurred by the significant growth inconsumer/retail narrowband and broadband internet access, enterprise resourceplanning applications, customer interaction services, knowledge processingsolutions, on-line gaming and other e-services that drive the need forbroadband and internet-protocol based solutions both here and abroad.  Ourmajor competitors in this area are Globe/Innove, Bayan Telecommunications,Eastern Telecoms and Digitel.  The principal bases of competition in dataservices market are coverage, price/value for money, bundles or free gifts,customer service and quality of service.  

 

**Environmental Matters**

 

Wehave not been subject to any material fines or legal or regulatory actioninvolving non-compliance with environmental regulations of the Philippines.  We are not aware that we are not in compliance in any material respect withrelevant environmental protection regulations.

 

**Intellectual Property Rights**

 

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

 

**Properties**

 

Weown four office buildings located in Makati City and own and operate 228exchanges nationwide, of which 48 are located in the Metropolitan Manila area.The remaining 180 exchanges are located in cities and small municipalitiesoutside Metropolitan Manila area.  We also own radio transmitting and receivingequipment used for international and domestic communications.  As at December31, 2007, we had 5,001 cellular cell sites and 7,825 base stations.

 

Asat December 31, 2007, our principal properties, excluding property underconstruction, consisted of the following, based on net book values:

 

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

 

•        17% consisted of central officeequipment, including three international gateway facilities, six pure nationaltoll exchanges and 15 combined local and toll exchanges, and our communicationssatellite;

 

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

 

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

 

•        4% consisted of other workequipment.

 

Formore information on these properties, see *Note 8 – Property, Plant andEquipment* to the accompanying audited consolidated financial statements inItem 18.  

 

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

 

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

 

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

 

OnFebruary 1, 2008, SBI completed the acquisition of certain assets from CruzTelephone Company, Inc., or Cruztelco, a local exchange operator offering fixedline services in North Eastern Mindanao.  Please see *Note 8 – Property,Plant and Equipment – SBI’s Acquisition of Cluster 3 Assets from Cruz TelephoneCompany, Inc., or Cruztelco*in the accompanying audited consolidatedfinancial statements in Item 18 for further discussion.

 

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

 

For more information on the obligations relating tothese properties and long-term obligations, see *Note 24 – ContractualObligations and Commercial Commitments*to the accompanying audited consolidatedfinancial statements in Item 18.

 

Item 4A.    Unresolved Staff Comments
 

None.

 

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

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our audited consolidatedfinancial statements (and the related notes) as at and for the years ended December31, 2007 and 2006 included elsewhere in this report.  This discussion containsforward-looking statements that reflect our current views with respect tofuture events and our future financial performance.  These statements involverisks and uncertainties, and our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of particularfactors such as those set forth under "Forward-Looking Statements"and Item 3. "Key Information — Risk Factors" and elsewhere in thisreport.  Our audited consolidated financial statements, and the financialinformation discussed below, have been prepared in accordance with IFRS**.  Since these are our first consolidated financialstatements prepared in accordance with IFRS, pursuant to the transitionalrelief granted by the SEC in respect of the first-time adoption of IFRS, thefollowing is limited to a discussion of our financial condition and results ofoperations for the years ended December 31, 2007 and 2006, and no comparativedata for the year ended December 31, 2005 have been included.  For furtherdetails, please see “Presentation of Financial Information” above.**For convenience, certain peso financial informationin the following discussions has been translated to U.S. dollars at theexchange rate at December 31, 2007 of Php41.411 to US$1.00, as quoted throughthe Philippine Dealing System.*

 

**Overview**

 

We are the largest and most diversifiedtelecommunications company in the Philippines.  We have organized our businessinto three main segments which serve as the basis for management’s decision toallocate resources and evaluate operating performance:

 

•        *Wireless* — wirelesstelecommunications services provided through our cellular service providersnamely, Smart and Piltel, SBI, our wireless broadband provider, and Wolfpac,our wireless content operator, and Mabuhay Satellite and ACeS Philippines, ourwireless broadband satellite and other service operators;

 

•        *Fixed Line* — fixed linetelecommunications services primarily provided through PLDT.  We also providefixed line services through PLDT’s subsidiaries ClarkTel, SubicTel, Maratel, Pilteland BCC, PLDT Global and SNMI, which together account for approximately 3% ofour consolidated fixed line subscribers; and

 

•        *Information and CommunicationsTechnology* — information and communications infrastructure andservices for internet applications, internet protocol-based solutions andmultimedia content delivery provided by ePLDT; customer interaction servicesprovided under the umbrella brand name *ePLDT Ventus*, including Ventus,Parlance and Vocativ; knowledge processing solutions services 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!, asdiscussed in *Note 9 – Investments in Associates and Joint Ventures*tothe accompanying audited consolidated financial statements in Item 18.

 

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

 

***Wireless***

 

We provide cellular and wirelessbroadband, satellite and other services under our wireless business, withcellular services contributing about 95% and the remaining wireless servicescontributing approximately 5% of our wireless service revenues, respectively,in 2007.  Rapid growth in the cellular market has resulted in a change in ourrevenue composition and sources of our revenue growth.  Starting in 2003,cellular service has been our major revenue source surpassing fixed linerevenues.  As at December 31, 2007, Smart and Piltel, which offers servicesusing Smart’s network, had the largest and third largest cellular subscriber bases,respectively, in the Philippines.  In 2007, Smart’s and Piltel’s subscribersincreased by 24%, resulting in our aggregate system-wide cellular subscribersoutnumbering our fixed line in service by more than 17 to 1 at the end of 2007.However, while our cellular subscriber base continued to increase in 2007, thisincrease was partly impacted by “multiple-SIM card ownership”, in whichsubscribers subscribe to our services in addition to having subscriberarrangements with other wireless operators, and our continued expansion in thelower income segment of the Philippine wireless market, which overall resultedin a decrease in our average revenue per user, or ARPU.  Cellular dataservices, which include all text messaging and text-related services rangingfrom ordinary text to value-added services, contributed significantly to our cellularrevenue increase.  Our total wireless revenues in 2007 increased by 12% from2006 and accounted for 58% and 56%, respectively, of our total revenues for eachof the years ended December 31, 2007 and 2006.

 

***Fixed Line***

 

Ourfixed line business provides local exchange service, international and nationallong distance services, data and other network services and miscellaneousservices.  Our total fixed line revenues accounted for 35% and 39% of our totalrevenues for the years ended December 31, 2007 and 2006, respectively.  Localexchange and international long distance revenues have declined primarily dueto the appreciation of the Philippine peso to the U.S. dollar.  National longdistance revenues have also been declining largely due to a drop in callvolumes as a result of alternative means of communications such as texting,e-mailing and internet telephony.  Mitigating these declines was the steadygrowth of our data and other network services over the recent years.Recognizing the growth potential of the data and other network servicessegment, we have put considerable emphasis on the development of newpacket-switched, data-capable and IP-based networks.

 

***Information andCommunications Technology***

* *

Weconduct our ICT businesses through ePLDT.  ePLDT’s principal businesses are theoperation of an internet data center under the brand name *Vitro*TM;customer interaction service businesses, including Ventus, Vocativ and Parlance,under the brand name *ePLDT Ventus*; knowledge processing solutions providedby SPi; internet and online gaming through Infocom, Digital Paradise andDigital Paradise Thailand, netGames, Level Up! and Airborne Access.  Therevenue contribution of our information and communications technology segmentaccounted for 7% and 5% of our total revenues for the years ended December 31,2007 and 2006, respectively.  The increase in the revenue contribution from ourinformation and communication technology segment was primarily due to the resultsof the full-year consolidation of the financial results of the SPi Group in2007.****

 

**Critical Accounting Policies**

 

The preparation of our consolidated financialstatements in conformity with IFRS requires us to make judgments, estimates andassumptions that affect the reported amounts of our revenues, expenses, assetsand liabilities and disclosure of contingent liabilities at the reportingdate.  Due to uncertainties inherent in these assumptions and estimates, actualresults and outcomes could differ from our assumptions and estimates.  Webelieve the following represent our critical accounting policies under IFRS.The impact and any associated risks relating to these policies in our businessoperations are discussed elsewhere in this section.

* *

*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 *IAS 17*,*“Leases”*,which requires us to make judgments and estimates of transfer of risks andrewards of ownership.  Total lease expense arising from operating leasesamounted to Php2,762 million and Php2,257 million for the years ended December31, 2007 and 2006, respectively.  Total finance lease obligations as atDecember 31, 2007 and 2006 amounted to Php496 million and Php1,030,respectively.  See *Note 18 – Interest-bearing Financial Liabilities, Note 24– Contractual Obligations and Commercial Commitments*and*Note 26 –Financial Assets and Liabilities*to the accompanying audited consolidatedfinancial statements in Item 18.

*** ***

*Determinationof fair values of financial assets and liabilities*

 

We carry certain of our financial assets and liabilitiesat fair value, which requires extensive use of accounting estimates andjudgments 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* tothe accompanying audited consolidated financial statements in Item 18.  While significant components of fair valuemeasurement were determined using verifiable objective evidence (i.e., foreignexchange rates, interest rates and volatility rates), the amount of changes infair value would differ if we utilized a different valuation methodology.  Anychange in fair value of these financial assets and liabilities would directlyaffect our consolidated statement of income and consolidated statement ofchanges in equity.

 

Total fair value of financial assets and liabilitiesas at December 31, 2007 amounted to Php46,661 million and Php111,086 million,respectively, while the total fair value of financial assets and liabilities asat December 31, 2006 amounted to Php36,517 million and Php124,801 million,respectively.  See *Note 26 – Financial Assets and Liabilities* to theaccompanying audited consolidated financial statements in Item 18.

 

*Legalcontingencies*

 

Weare currently involved in various legal proceedings.  Our estimate of theprobable costs for the resolution of these claims has been developed inconsultation with outside counsel handling our defense in these matters and isbased upon an analysis of potential results.  We currently do not believe theseproceedings will have a material adverse effect on our consolidated financialstatements.  It is possible, however, that future results of operations couldbe materially affected by changes in our estimates or in the effectiveness ofour strategies relating to these proceedings.  See *Note 25 – Provisions and Contingencies*to the accompanying audited consolidated financial statements in Item 18.  

 

*Estimatinguseful lives of property, plant and equipment*

 

We estimate the useful lives of our property, plantand equipment based on the periods over which our assets are expected to beavailable for use.  Our estimation of the useful lives of our property, plantand equipment is based on our collective assessment of industry practice,internal technical evaluation and experience with similar assets.  Theestimated useful lives of our property, plant and equipment are reviewed atleast at each financial year-end and are updated if expectations differ fromprevious estimates due to physical wear and tear, technical or commercialobsolescence and legal or other limitations on the use of our assets.  It ispossible, however, that future results of operations could be materiallyaffected by changes in our estimates brought about by changes in the factorsmentioned above.  The amounts and timing of recorded expenses for any periodwould be affected by changes in these factors and circumstances.  A reduction inthe estimated useful lives of our property, plant and equipment would increaseour recorded operating expenses and decrease our noncurrent assets.

 

We recognized additional depreciationcharges of Php796 million and Php8,624 million in 2007 and 2006, respectively,due to a change in the estimated useful lives of certain of our network assetsowing to continuing network upgrade and expansion.  The acceleration ofdepreciation is expected to result in reduction of future monthly depreciationamounting to Php10 million going forward.

 

Total carrying values of property, plantand equipment, net of accumulated depreciation and amortization amounted toPhp159,414 million and Php164,190 million as at December 31, 2007 and 2006,respectively.  See *Note 8 – Property, Plant and Equipment*and *Note 26– Financial Assets and Liabilities* to the accompanying audited consolidatedfinancial statements in Item 18.

 

*Goodwill and intangible assets*

 

Our consolidated financial statements and results of operations reflectacquired businesses after the completion of the respective acquisition.  Weaccount for the acquired businesses using the purchasemethod of accounting which requires extensive use of accounting estimates andjudgments to allocate the purchase price to the fair market values of theacquiree’s identifiable assets and liabilities at the acquisition date.  Anyexcess in the purchase price over the estimated fair market values of the netassets/liabilities acquired is recorded as goodwill in the balance sheet.  Our business acquisitions have resulted in goodwilland intangible assets, which are subject to periodic impairment test andamortization, respectively.  See *Note 11 – Goodwill and Intangible Assets*to the accompanying audited consolidated financial statements in Item 18.  Thus, the numerous judgments made in estimating thefair market value to be assigned to the acquiree’s assets and liabilities canmaterially affect our results of operations.

 

Total carrying values of goodwill andintangible assets as at December 31, 2007 and 2006 amounted to Php11,721million and Php12,214 million, respectively.

 

*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 above assessment, we have not recognizedcertain of our deferred income tax assets as at December 31, 2007 and 2006 amountingto Php1,122 million and Php299 million, respectively.  Total deferred taxassets as at December 31, 2007 and 2006 amounted to Php13,757 million andPhp20,538 million, respectively, while total deferred tax liabilities as atDecember 31, 2007 and 2006 amounted to Php2,066 million and Php402 million,respectively.  See *Note 6 – Income Tax* to the accompanying auditedconsolidated financial statements in Item 18.

 

*Estimating allowance for doubtful accounts*

 

We estimate the allowance for doubtfulaccounts related to our trade receivables that are specifically identified asdoubtful of collection.  The level of allowance is evaluated by management onthe basis of factors that affect the collectibility of the accounts.  In thesecases, we use judgment based on the best available facts and circumstances,including but not limited to, the length of our relationship with the customerand the customer’s credit status based on third party credit reports and knownmarket factors, to record specific reserves for customers against amounts duein order to reduce our receivables to amounts that we expect to collect.  Thesespecific reserves are re-evaluated and adjusted as additional informationreceived affect 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 commoncredit characteristic, which, although not specifically identified as requiringa specific allowance, have a greater risk of default than when the receivableswere originally granted to customers.  This collective allowance is based onhistorical loss experience using various factors such as historical performanceof the customers within the collective group, deterioration in the markets inwhich the customers operate, and identified structural weaknesses ordeterioration in the cash flows of customers.

 

Impairment provision for receivable recognized inconsolidated statements of income amounted to Php417 million and Php736 millionfor the years ended December 31, 2007 and 2006, respectively.  Trade and otherreceivables, net of impairment, amounted to Php12,645 million and Php10,158million as at December 31, 2007 and 2006, respectively.  See *Note 5 – Incomeand Expenses, Note 14 – Trade and Other Receivables* and *Note 26 –Financial Assets and Liabilities* to the accompanying audited consolidatedfinancial statements in Item 18.

 

*Estimation of pension cost and other retirementbenefits*

 

The determination of our obligation andcost for pension and other retirement benefits is dependent on our selection ofcertain assumptions used by actuaries in calculating such amounts.  Thoseassumptions are described in *Note 23 – Share-based Payments and EmployeeBenefits* to the accompanying audited consolidated financial statements inItem 18 and include, among other things, discount rates, expected returns onplan assets and rates of compensation increases.  Actual results that differfrom our assumptions are recognized as income or expense when the netcumulative unrecognized actuarial gains and losses at the end of the previousreporting period exceed 10% of the higher of the defined benefit obligation andthe fair value of plan assets at that date.  While we believe that ourassumptions are reasonable and appropriate, significant differences in ouractual experience or significant changes in our assumptions may materiallyaffect our pension and other retirement obligations.  Total pension benefitcosts amounted to Php1,773 million and Php1,003 million for the years endedDecember 31, 2007 and 2006, respectively.

 

Unrecognized net actuarial gain as at December 31,2007 amounted to Php1,344 million and unrecognized net actuarial loss as atDecember 31, 2006 amounted to Php4,657 million.  The accrued benefit costs asat December 31, 2007 and 2006 amounted to Php2,985 million and Php2,888million, respectively.  See *Note 23 – Share-based Payments and EmployeeBenefits* to the accompanying audited consolidated financial statements inItem 18.

 

*Share-basedpayment transactions*

 

Our long-term incentive plan, or LTIP, grants shareappreciation rights, or SARs, to our eligible key executives and advisors.Under the LTIP, we recognize the services we receive from the eligible keyexecutives and advisors, and our liability to pay for those services, as theeligible key executives and advisors render services during the vestingperiod.  We measure our liability, initially and at each reporting date untilsettled, at the fair value of the SARs, by applying an option valuation model,taking into account the terms and conditions on which the SARs were granted,and the extent to which the eligible key executives and advisors have renderedservice to date.  We recognize any changes in fair value at each reporting dateuntil settled, in the results of operations for the year. The assumptions andestimates are described in *Note 23 – Share-based Payments and EmployeeBenefits* to the accompanying audited consolidated financial statements inItem 18 and include, among other things, annual stock volatility, risk freeinterest rate, remaining life, and the fair value of common stock.  Whilemanagement believes that the assumptions and estimates used are reasonable andappropriate, significant differences in our actual experience or significantchanges in the assumptions may materially affect the stock compensation costscharged to operations.  The fair value of the LTIP recognized as an expense forthe years ended December 31, 2007 and 2006 amounted to Php1,448 million andPhp3,150 million, respectively.  As at December 31, 2007 and 2006, outstandingLTIP liability amounted to Php1,494 million and Php5,030 million,respectively.  See *Note 5 – Income and Expenses* and *Note 23 –Share-based Payments and Employee Benefits* to the accompanying auditedconsolidated financial statements in Item 18.

 

*Asset impairment*

 

IFRS requires that an impairment reviewbe performed when certain impairment indicators are present.  In the case ofgoodwill, at a minimum, such asset is subject to an annual impairment test andmore frequently whenever there is an indication that such asset may beimpaired.  This requires an estimation of the value in use of thecash-generating units to which the goodwill is allocated.  Estimating the valuein use requires us to make an estimate of the expected future cash flows fromthe cash-generating unit and to choose a suitable discount rate in order tocalculate the present value of those 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 and assumptionsthat can materially affect our consolidated financial statements.  Futureevents could cause us to conclude that property, plant and equipment,investments and intangible assets associated with an acquired business areimpaired.  Any resulting impairment loss could have a material adverse impacton our financial condition and results of operations.

 

The preparation of estimated future cash flowsinvolves significant judgments and estimations.  While we believe that ourassumptions are appropriate and reasonable, significant changes in ourassumptions may materially affect our assessment of recoverable values and maylead to future additional impairment charges under IFRS.  Total impairmentcharges for the years ended December 31, 2007 and 2006 amounted to Php1,317million and Php2,766 million, respectively.  See *Note 4 – SegmentInformation* and *Note* 5 – *Income and Expenses* to theaccompanying audited consolidated financial statements in Item 18.

 

The carrying value 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* to the accompanying audited consolidatedfinancial statements in Item 18, respectively.

 

*Revenue recognition*

 

Our revenue recognition policies requireus to make use of estimates and assumptions that may affect the reportedamounts of our revenues and receivables.  

 

Our agreements with domestic and foreigncarriers for inbound and outbound traffic subject to settlements requiretraffic reconciliations before actual settlement is done, which may not be theactual volume of traffic as measured by us.  Initial recognition of revenues isbased on our observed traffic adjusted by our normal experience adjustments,which historically are not material to our consolidated financial statements.Differences between the amounts initially recognized and the actual settlementsare taken up in the accounts upon reconciliation.  However, there is no assurancethat such use of estimates will not result in material adjustments in futureperiods.

 

Revenues under a multiple element arrangementspecifically applicable to our wireless business are split into separatelyidentifiable components and recognized when the related components aredelivered in order to reflect the substance of the transaction.  The fair valueof components is determined using verifiable objective evidence.

 

Undercertain arrangements with our knowledge processing solutions services, if thereis uncertainty regarding the outcome of the transaction for which service wasrendered, revenue is recognized only to the extent of expenses incurred forrendering the service and such amount is determined to be recoverable.

*** ***

**New AccountingPronouncements Effective Subsequent to 2007**

 

Please see *Note 2 – Summary of Significant Accounting Policies andPractices* to the accompanying audited consolidated financial statements inItem 18 for a discussion of new accounting standards that will become effectivesubsequent to December 31, 2007 and their anticipated impact on ourconsolidated financial statements.

 

**Resultsof Operations**

 

The following table shows thecontribution by each of our business segments to our total revenues, expensesand net income (loss) for each of the years ended December 31, 2007 and 2006.Most of our revenues are derived from our operations within the Philippines.  Our revenues derived from outside the Philippines consist primarily ofrevenues from incoming international calls to the Philippines.

 

 

Wireless

 

Fixed Line

 

ICT

 

Inter-segment  Transactions

 

Total

 

**(in millions)**

For the year ended December 31, 2007

** **

** **

** **

** **

** **

** **

** **

** **

** **

Total Revenues

Php94,105

 

Php56,797

 

Php10,799

 

(Php9,839)

 

Php151,862

Service

86,497

 

48,551

 

10,055

 

(9,627)

 

135,476

Non-service

2,800

 

281

 

267

 

(122)

 

3,226

Foreign exchange gains (losses) –net

2,649

 

5,479

 

(138)

 

–

 

7,990

Interest Income

1,186

 

296

 

21

 

–

 

1,503

Other Income

973

 

2,190

 

594

 

(90)

 

3,667

Expenses

46,759

 

45,920

 

11,010

 

(9,908)

 

93,781

Net Income (Loss)

31,780

 

7,519

 

(94)

 

69

 

39,274

For the year ended December 31, 2006

** **

** **

** **

** **

** **

** **

** **

** **

** **

Total Revenues 

84,030

 

57,910

 

6,925

 

(9,141)

 

139,724

Service

78,395

 

49,174

 

6,337

 

(8,919)

 

124,987

Non-service

2,010

 

79

 

553

 

(122)

 

2,520

Foreign exchange gains (losses) **–**net

1,722

 

3,210

 

(109)

 

–

 

4,823

Interest Income

1,197

 

441

 

16

 

–

 

1,654

Other Income

706

 

5,006

 

128

 

(100)

 

5,740

Expenses

47,559

 

55,783

 

7,274

 

(9,141)

 

101,475

Net Income (Loss)

30,127

 

2,766

 

(312)

 

–

 

32,581

 

**2007 Compared to 2006**

** **

**On a Consolidated Basis**

 

***Total Revenues***

** **

Our totalrevenues for 2007 increased by Php12,138 million, or 9%, to Php151,862 millionfrom Php139,724 million in 2006.  Thisincrease was primarily due to (i) an increase in our service revenues primarilyresulting from the continued growth of our wireless business and an increase inour ICT revenues largely due to the effects of the full-year consolidation of thefinancial results of SPi, CyMed and Level Up! and the continued increase in ourcustomer interaction service revenues, which was partially offset by acontinued decrease in our fixed line revenues; and (ii) an increase in foreignexchange gains, primarily due to the effect of foreign exchange revaluation asa result of the higher level of appreciation of the Philippine peso in 2007,which was partially offset by a decrease in our other income primarilyresulting from a recognition in 2006 in our fixed line business of a netreversal of provision for onerous contract related to the ATPA with AIL.  The revenue contribution of our wireless businessaccounted for 62% and 60% of our total revenues for 2007 and 2006, respectively.

** **

The following table shows the breakdown of our total revenuesfor the years ended December 31, 2007 and 2006 by business segment:

** **

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2007**

** **

**%**

** **

**2006**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

Wireless 

Php94,105

 

62

 

Php84,030

 

60

 

Php10,075

 

12

Fixed line

56,797

 

37

 

57,910

 

41

 

(1,113)

 

(2)

Information and communications technology 

10,799

 

7

 

6,925

 

5

 

3,874

 

56

Inter-segment transactions

(9,839)

 

(6)

 

(9,141)

 

(6)

 

(698)

 

8

Total

Php151,862

 

100

 

Php139,724

 

100

 

Php12,138

 

9

 

***Total Expenses***

 

Our totalexpenses in 2007 decreased by Php7,694 million, or 8%, to Php93,781 millionfrom Php101,475 million in 2006.  This decrease was primarly due to lowerfinancing costs on account of lower accretion of financial liabilitiescomplemented by lower loss on derivative transactions and loans and relateditems and lower depreciation and amortization, which was partially offset by anincrease in professional and other contracted services and compensation andemployee benefits.  As a percentage of our total revenues, total expenses decreasedto 62% in 2007 from 73% in 2006.

 

The following table shows the breakdown of our total expensesfor the years ended December 31, 2007 and 2006 by business segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2007**

** **

**%**

** **

**2006**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

Wireless 

Php46,759

 

50

 

Php47,559

 

47

 

(Php800)

 

(2)

Fixed line

45,920

 

49

 

55,783

 

55

 

(9,863)

 

(18)

Information and communications technology 

11,010

 

12

 

7,274

 

7

 

3,736

 

51

Inter-segment transactions

(9,908)

 

(11)

 

(9,141)

 

(9)

 

(767)

 

8

Total

Php93,781

 

100

 

Php101,475

 

100

 

(Php7,694)

 

(8)

 

***Provision for Income Tax***

 

Provision for income taxincreased by Php13,139 million, or 232%, to Php18,807 million in 2007 comparedto Php5,668 million in 2006 mainly due to the reversal in 2006 of a valuationallowance of deferred tax assets in relation to the likelihood that Piltelwould be able to realize the future benefits on these assets in 2006 and loweraccelerated depreciation recognized in 2007.

 

***Consolidated Net Income***

 

As aresult, our consolidated net income in 2007 was Php39,274 million, an increaseof Php6,693 million, or 21%, compared to Php32,581 million in 2006.  Thefollowing table shows the breakdown of our consolidated net income for theyears ended December 31, 2007 and 2006 by business segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2007**

** **

**%**

** **

**2006**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

Wireless 

Php31,780

 

81

 

Php30,127

 

92

 

Php1,653

 

5

Fixed line

7,519

 

19

 

2,766

 

9

 

4,753

 

172

Information and communications technology 

(94)

 

–

 

(312)

 

(1)

 

218

 

(70)

Inter-segment transactions

69

 

–

 

–

 

–

 

69

 

100

Total

Php39,274

 

100

 

Php32,581

 

100

 

Php6,693

 

21

 

**On Business Segment Basis**

 

**Wireless**

* *

***Total Revenues***

 

Our wireless business segment offerscellular services as well as wireless broadband, satellite and other services.

 

Thefollowing table summarizes our total revenues from our wireless business forthe years ended December 31, 2007 and 2006 by service segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2007**

** **

**%**

** **

**2006**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php82,334

 

88

 

Php75,617

 

90

 

Php6,717

 

9

Wireless broadband, satellite and others

4,163

 

4

 

2,778

 

3

 

1,385

 

50

 

86,497

 

92

 

78,395

 

93

 

8,102

 

10

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of cellular handsets and SIM-packs

2,800

 

3

 

2,010

 

2

 

790

 

39

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange gains – net

2,649

 

3

 

1,722

 

2

 

927

 

54

Interest Income

1,186

 

1

 

1,197

 

2

 

(11)

 

(1)

Other Income

973

 

1

 

706

 

1

 

267

 

38

Total Wireless Revenues 

Php94,105

 

100

 

Php84,030

 

100

 

Php10,075

 

12

 

ServiceRevenues

 

Our wireless service revenues increasedby Php8,102 million, or 10%, to Php86,497 million in 2007 compared to Php78,395million in 2006, mainly as a result of the continued growth in the cellular andwireless broadband subscriber base, an increase in inbound internationaltraffic and inbound roaming revenues, partially offset by an increase ininterconnection costs and the unfavorable effect of the appreciation of thePhilippine peso on our dollar-linked revenues.  As a percentage of our total wirelessrevenues, service revenues contributed 92% in 2007 as compared to 93% in 2006.

 

*Cellular Service*

 

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

 

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.

 

Our cellular service revenues in 2007 amounted toPhp82,334 million, an increase of Php6,717 million, or 9%, from Php75,617million in 2006.  Cellular service revenues accounted for 95% of our wirelessservice revenues in 2007 as compared to 96% in 2006.  The increase in cellularservice revenues was primarily due to the continued growth of Smart’s andPiltel’s subscriber base.  As at December 31, 2007, Smart and Piltel cellularsubscribers totaled 30,041,030, an increase of 5,865,646, or 24%, over theircombined cellular subscriber base of 24,175,384 as at December 31, 2006.  However,while our cellular subscriber base continued to increase in 2007, this increasewas partly impacted by “multiple-SIM card ownership”, in which subscriberssubscribe to our services in addition to having subscriber arrangements withother wireless operators, and our continued expansion in the lower incomesegment of the Philippine wireless market, which overall resulted in a decreasein our average revenue per user, or ARPU.  While our combined cellularsubscriber base continued to increase in the first two months of 2008 andreached 31,130,236 as at February 29, 2008, we expect that our combinedcellular subscriber base in 2008 will increase at a lower pace than in previousyears and that such increase will continue to be partly impacted by “multiple-SIMcard ownership” and our continued expansion in the lower income segment of thePhilippine wireless market.

 

The table below shows our cellular subscribers base asat December 31, 2007 and 2006:

 

 

**As at December 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2007**

** **

**2006**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Cellular subscriber base 

30,041,030

 

24,175,384

 

5,865,646

 

24

Prepaid 

29,699,150

 

23,856,821

 

5,842,329

 

24

Smart 

19,997,324

 

16,882,442

 

3,114,882

 

18

Piltel

9,701,826

 

6,974,379

 

2,727,447

 

39

Postpaid

341,880

 

318,563

 

23,317

 

7

 

Of our 30,041,030 subscribers as at December 31, 2007,prepaid subscribers accounted for approximately 99% while postpaid subscribersaccounted for the remaining 1%.  Our cellular prepaid subscriber base grew by 24%to 29,699,150 as at December 31, 2007 from 23,856,821 as at December 31, 2006,whereas our postpaid subscriber base increased by 7% to 341,880 as at December31, 2007 from 318,563 as at December 31, 2006.  Smart’s prepaid and postpaidnet subscriber activations totaled 3,114,882 and 23,317, respectively, in 2007,or a quarterly average addition of 778,721 prepaid and 5,829 postpaidsubscribers.  On the other hand, Piltel’s prepaid subscribers increased by 39%to 9,701,826 as at December 31, 2007 from 6,974,379 as at December 31, 2006, ora quarterly average addition of 681,862 subscribers.  Postpaid subscribers asat December 31, 2007 were higher than as at December 31, 2006 primarily due toincreased net activations in the last two quarters of 2007.

 

Our quarterly net subscriber activations over theeight quarters in 2007 and 2006 are as follows:

 

 

**2007**

** **

**2006**

 

**1Q**

 

**2Q**

** **

**3Q**

** **

**4Q**

** **

**1Q**

** **

**2Q**

** **

**3Q**

 

**4Q**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid

1,301,154

 

1,615,246

 

1,148,283

 

1,777,646

 

486,009

 

1,553,570

 

450,553

 

1,238,146

Smart

880,281

 

1,050,678

 

763,257

 

420,666

 

111,987

 

851,326

 

131,486

 

643,525

Piltel

420,873

 

564,568

 

385,026

 

1,356,980

 

374,022

 

702,244

 

319,067

 

594,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Postpaid 

6,921

 

7,403

 

5,704

 

3,289

 

5,001

 

11,955

 

13,722

 

7,807

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

1,308,075

 

1,622,649

 

1,153,987

 

1,780,935

 

491,010

 

1,565,525

 

464,275

 

1,245,953

 

*Wireless Broadband, Satellite and Other Services*

 

Our revenues from wireless broadband,satellite and other services consist mainly of rentals received for the leaseof Mabuhay Satellite’s transponders, wireless broadband service revenues fromSBI, charges for ACeS Philippines’ services and service revenues from PLDTGlobal subsidiary’s mobile virtual network operations.  SBI offers a number of wireless broadband services andhad 301,738 subscribers as at December 31, 2007.    

 

Gross service revenues from these services for 2007amounted to Php4,163 million, an increase of Php1,385 million, or 50%, fromPhp2,778 million in 2006.  This increase was primarily due to the growth in ourwireless broadband business resulting primarily from a continued growth in ourwireless broadband subscriber base.

 

*Non-service Revenues*

 

Our wireless non-service revenues consist of proceedsfrom sales of cellular handsets and cellular SIM-packs.

 

Our wireless non-service revenues increased by Php790 million, or 39%,to Php2,800 million in 2007 as compared to Php2,010 million in 2006 primarilydue to higher volume of cellular SIM-packs sold in 2007 partly offset by a lowervolumes of postpaid and prepaid handsets sold and lower average revenues percellular handset and cellular SIM-pack.    

 

*Foreign Exchange Gains – Net*

 

Our netwireless foreign exchange gains increased by Php927 million, or 54%, toPhp2,649 million in 2007 as compared to Php1,722 million in 2006 primarily dueto the effect of foreign exchange revaluation as a result of the higher levelof peso appreciation to the U.S. dollar in 2007 as compared to 2006.

* *

*Interest Income*

 

Our wireless interest income decreased by Php11million, or 1%, to Php1,186 million in 2007 as compared to Php1,197 million in2006 primarily due to lower interest rates.

 

*Other Income*

 

Allother income/gains such as rental income, gain on disposal of property which donot fall under service and non-service revenues, are included under thisclassification.  Our wireless business segment generated other income of Php973million in 2007, an increase of Php267 million, or 38%, as compared to Php706million in 2006.  

 

*Expenses*
 

Expenses associated with our wirelessbusiness in 2007 amounted to Php46,759 million, a decrease of Php800 million,or 2%, from Php47,559 million in 2006.  A significant portion of this decreasewas attributable to lower financing costs and a decrease in asset impairment,compensation and benefits expense and cost of sales, partially offset by anincrease in depreciation and amortization, professional and other contractedservices, rent expense and selling and promotion expenses.  As a percentage ofour total wireless revenues, expenses associated with our wireless businessdecreased to 50% in 2007 from 57% in 2006.   

 

Cellular business expenses accounted for 93% whilewireless broadband, satellite and other business expenses accounted for 7% ofour wireless business expenses in 2007, compared to 89% and 11%, respectively,in 2006.

*** ***

The following table summarizes our wireless-relatedexpenses for the years ended December 31, 2007 and 2006 and the percentage ofeach expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2007**

 

**%**

 

**2006**

 

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php12,202

 

26

 

Php10,752

 

23

 

Php1,450

 

13

Rent

8,751

 

19

 

7,887

 

16

 

864

 

11

Compensation and benefits(1)

4,608

 

10

 

5,041

 

10

 

(433)

 

(9)

Costs of cellular handsets and SIM-packs sold

4,285

 

9

 

4,688

 

10

 

(403)

 

(9)

Selling and promotions

3,804

 

8

 

3,013

 

6

 

791

 

26

Repairs and maintenance

3,634

 

8

 

3,646

 

8

 

(12)

 

–

Professional and other contracted services

2,369

 

5

 

1,779

 

4

 

590

 

33

Financing costs 

2,299

 

5

 

4,658

 

10

 

(2,359)

 

(51)

Taxes and licenses

1,348

 

3

 

1,018

 

2

 

330

 

32

Communication, training and travel

1,083

 

2

 

891

 

2

 

192

 

22

Insurance and security services

783

 

2

 

797

 

2

 

(14)

 

(2)

Asset impairment 

563

 

1

 

2,220

 

5

 

(1,657)

 

(75)

Cost of satellite air time

160

 

–

 

199

 

–

 

(39)

 

(20)

Amortization of intangible assets

158

 

–

 

312

 

1

 

(154)

 

(49)

Gain on derivative transactions

(278)

 

–

 

(39)

 

–

 

(239)

 

613

Other expenses

990

 

2

 

697

 

1

 

293

 

42

Total 

Php46,759

 

100

 

Php47,559

 

100

 

(Php800)

 

(2)

__________

* *

*(1)  Includes salaries andemployee benefits, incentive plan, pension and manpower rightsizing program, orMRP, costs.*

*** ***

Depreciationand amortization charges increased by Php1,450 million, or 13%, to Php12,202million in 2007 principally due to an increase in our depreciable asset basecomprised mainly of transmission facilities, 2G, 3G and broadband networks, andbroadband customer-deployed equipment.  Weexpect our depreciation and amortization expenses to futher increase in linewith our expected increase in capital expenditures in 2008.  For further details, see *Note 8 – Property, Plantand Equipment* to the accompanying audited consolidated financial statementsin Item 18.

 

Rent expenses increased by Php864 million, or 11%, toPhp8,751 million on account of an increase in domestic fiber optic network, orDFON, facilities and transmission circuits leased by Smart from PLDT, as wellas higher site rental expenses.  In 2007, we had 5,001 GSM cell sites and 7,825base stations, compared with 4,377 GSM cell sites and 6,099 base stations in2006.

 

Compensation and employee benefits expenses decreasedby Php433 million, or 9%, to Php4,608 million primarily due to higher accruedLTIP costs in 2006 as a result of the early vesting of the LTIP in 2006, partlyoffset by higher accrued bonuses and employees’ basic pay increase of Smart.Smart and subsidiaries’ employee headcount increased by 57 to 5,363 in 2007 ascompared to 5,306 in 2006.  For furtherdiscussion on our long-term incentive plan, please see Item 6. “Directors,Senior Management and Employees –– Long-Term Incentive Plan” and *Note 23 –Share-based Payments and Employee Benefits* to the accompanying audited consolidatedfinancial statements in Item 18.

 

Costof cellular handsets and SIM-packs sold decreased by Php403 million, or 9%, toPhp4,285 million primarily due to a decrease in the volume of phone kits sold.

 

Selling and promotion expenses increased by Php791million, or 26%, to Php3,804 million due to higher advertising, merchandisingand commission expenses, partly offset by a decrease in printing costs ofprepaid cards with the prevalence of e-loading.

 

Repairs and maintenance expenses decreased by Php12million to Php3,634 million mainly due to lower repairs and maintenance costsfor network facilities and a decrease in fuel costs for power generation,partly offset by an increase in IT software and hardware repairs andmaintenance costs, as well as higher electricity cost for cell sites.

 

Professional and other contracted services increasedby Php590 million, or 33%, to Php2,369 million primarily due to higher expensesfor consultancy, contracted and technical services, market research andadvisory fees in respect of investment evaluations in our cellular business.  

 

We recognized financing costs of Php2,299million in 2007, a decrease of Php2,359 million, or 51%, as compared to Php4,658million in 2006 on account of lower accretion on financial liabilities due tothe settlement of Piltel’s debt in 2006 and lower dividend on convertible preferredstock that is subject to mandatory redemption due to lower level of outstandingconvertible preferred stock as compared to 2006, partly offset by lowercapitalized interest.  The breakdown of our financing costs for our wirelessbusiness for the years ended December 31, 2007 and 2006 is as follows:

 

** **

** **

** **

** **

** **

**Change**

** **

**2007**

** **

**2006**

** **

**Amount**

** **

**%**

** **

**(in millions)**

** **

 

 

 

 

 

 

 

Interest on loans and related items

Php1,581

 

Php1,634

 

(Php53)

 

(3)

Accretion on financial liabilities – net

877

 

3,105

 

(2,228)

 

(72)

Financing charges

12

 

37

 

(25)

 

(68)

Dividends on preferred stock subject to mandatory redemption

17

 

130

 

(113)

 

(87)

Capitalized interest

(188)

 

(248)

 

60

 

(24)

 

Php2,299

 

Php4,658

 

(Php2,359)

 

(51)

 

Taxesand licenses increased by Php330 million, or 32%, to Php1,348 million primarilydue to higher non-creditable input tax and the payment of previously disputed NTClicenses and fees, partly offset by lower business-related taxes and licenses.

 

Communication,training and travel expenses increased by Php192 million, or 22%, to Php1,083million mainly due to higher mailing and courier charges, and increased traveland training activities.

 

Insurance and security services decreased by Php14million, or 2%, to Php783 million primarilydue to the decrease in site security expenses and lower charges on insurancecontracts.

 

Assetimpairment decreased by Php1,657 million, or 75%, to Php563 million due to therecognition by Mabuhay Satellite in 2006 of an asset impairment charge as aresult of the reduction in value of the Agila II satellite given the difficultyin generating cash flows with the satellite nearing its end-of-life and otherevents affecting its business and lower levels of impairment charge in 2007 forsubscriber accounts receivables.

 

Costof satellite air time decreased by Php39 million, or 20%, to Php160 million dueto a reduction of satellite air time cost as a result of the continued appreciationof the Philippine peso in 2007.  See *Note 22 – Related Party Transactions*to the accompanying audited consolidated financial statements in Item 18.   

 

Amortizationof intangible assets decreased by Php154 million, or 49%, to Php158 millionmainly due to the full amortization of intangible assets relating to technologyapplication and customer lists, which were recognized following the acquisitionof Wolfpac and SBI in November 2006 and August 2007, respectively. 

 

Gainon derivative transactions increased by Php239 million, or 613%, to Php278million primarily due to a Php270 million gain on US$ forward exchange contractsentered into by Smart in 2007 to hedge U.S. dollar-linked revenues and loanproceeds from an undrawn loan facility and an Php8 million gain on embeddedderivatives.  Gain of Php39 million in 2006 was on embedded derivativesrelating to service and purchase contracts.

 

Other expenses increased by Php293 million, or 42%, toPhp990 million primarily due to higher various business and operational-relatedexpenses.

 

***Provision for IncomeTax***

 

Provision for income tax increased by Php9,222million, or 145%, to Php15,566 million in 2007 from Php6,344 million in 2006.In 2007, the effective tax rate for our wireless business was 33% as comparedto 17% in 2006 mainly due to the recognition of deferred tax assets of Piltelin 2006 complemented by higher taxable income in 2007.  We currently expectthat our effective corporate tax rate  will be at a similar level in 2008.Furthermore, while the National Internal Revenue Code provides that our regularincome tax rate will be reduced to 30% effective January 1, 2009, there can beno assurance whether and when such reduction in the regular corporate incometax rate will be implemented.  

 

***Net Income***

 

Ourwireless business segment recorded a net income of Php31,780 million in 2007,an increase of Php1,653 million, or 5%, over Php30,127 million registered in2006 on account of higher cellular revenues complemented by slightly lowerexpenses, partially offset by a higher provision for income tax.

 

Fixed Line
 

***Total Revenues***

*** ***

Our fixed line business provides localexchange service, international and national long distance services, data andother network services, and miscellaneous services.  Total fixed line revenuesgenerated from our fixed line business in 2007 totaled Php56,797 million, adecrease of Php1,113 million, or 2%, from Php57,910 million in 2006.  As apercentage of our total revenues, fixed line revenue decreased to 35% in 2007from 39% in 2006.

 

The following table summarizes total revenues from ourfixed line business for the years ended December 31, 2007 and 2006,respectively, by service segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2007**

** **

**%**

** **

**2006**

** **

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

** **

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php16,205

 

29

 

Php16,963

 

29

 

(Php758)

 

(4)

International long distance

8,674

 

15

 

9,933

 

17

 

(1,259)

 

(13)

National long distance

6,338

 

11

 

6,921

 

12

 

(583)

 

(8)

Data and other network

15,921

 

28

 

13,725

 

24

 

2,196

 

16

Miscellaneous

1,413

 

2

 

1,632

 

3

 

(219)

 

(13)

 

48,551

 

85

 

49,174

 

85

 

(623)

 

(1)

Non-Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of computers

281

 

–

 

79

 

–

 

202

 

256

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Exchange Gains – Net

5,479

 

10

 

3,210

 

5

 

2,269

 

71

Interest Income

296

 

1

 

441

 

1

 

(145)

 

(33)

Other Income

2,190

 

4

 

5,006

 

9

 

(2,816)

 

(56)

Total Fixed Line Revenues 

Php56,797

 

100

 

Php57,910

 

100

 

(Php1,113)

 

(2)

 

*Service Revenues*

 

*LocalExchange 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.  

 

The following table summarizes key measures of our localexchange service business segment as at and for the years ended December 31,2007 and 2006, respectively:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2007**

** **

**2006**

** **

**Amount**

** **

**%**

 

 

Total local exchange service revenues (in millions)

Php16,205

 

Php16,963

 

(Php758)

 

(4)

Number of fixed line subscribers

1,724,702

 

1,776,647

 

(51,945)

 

(3)

Postpaid

1,479,647

 

1,450,331

 

29,316

 

2

Prepaid

245,055

 

326,316

 

(81,261)

 

(25)

Number of fixed line employees

8,080

 

8,711

 

(631)

 

(7)

Number of fixed line subscribers per employee

213

 

204

 

9

 

4

 

Revenues from our local exchange service decreased byPhp758 million, or 4%, to Php16,205 million in 2007 from Php16,963 million in2006.  The decrease was primarily due to the appreciation of the Philippine pesowhich required us to make further downward adjustments in our monthly localservice rates pursuant to the currency exchange rate adjustment mechanismauthorized by the NTC as described in Item 4. “Information on the Company –Business – Fixed Line – Local Exchange Service – Rates” and the decrease in prepaid subscribers, partiallyoffset by an increase in postpaid subscribers.  The percentage contribution oflocal exchange revenues to our total fixed line service revenues decreased to33% in 2007 as compared to 35% in 2006.

 

Asat December 31, 2007, postpaid and prepaid fixed line subscribers totaled 1,479,647and 245,055, respectively, which accounted for approximately 86 % and 14 %,respectively, of our total fixed line subscribers.

 

*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 inboundinternational calls, virtual transit and hubbing service and reverse chargedcalls such as received collect and home country direct service; (ii) accesscharges paid to us by other Philippine telecommunications carriers forterminating inbound international calls to our local exchange network; and (iii)outbound call revenues representing amounts billed to our customers (other thanour cellular customers) for outbound international calls, net of amountspayable to foreign telecommunications carriers for terminating calls in theirterritories.

 

The following table shows information about ourinternational fixed line long distance business for the years ended December31, 2007 and 2006, respectively:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2007**

** **

**2006**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total international long distance service revenues (in millions)

Php8,674

 

Php9,933

 

(Php1,259)

 

(13)

Inbound

7,127

 

8,378

 

(1,251)

 

(15)

Outbound

1,547

 

1,555

 

(8)

 

(1)

 

 

 

 

 

 

 

 

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

2,280

 

2,177

 

103

 

5

Inbound

2,007

 

1,984

 

23

 

1

Outbound

273

 

193

 

80

 

41

Inbound-outbound call ratio

7.4:1

 

10.3:1

 

–

 

–

 

Our total international long distance service revenuesdecreased by Php1,259 million, or 13%, to Php8,674 million in 2007 fromPhp9,933 million in 2006 primarily due to the appreciation of the Philippinepeso and a decrease in average termination rates for inbound calls partiallymitigated by an increase in inbound and outbound call volumes.  The percentagecontribution of international long distance service revenues to our total fixedline service revenues decreased to 18% in 2007 from 20% in 2006.

 

Ourrevenues from inbound international long distance service decreased by Php1,251million, or 15%, to Php7,127 million primarily due to the appreciation of thePhilippine peso to the U.S. dollar and a decrease in the average termination rateper minute due to the change in call mix with more traffic terminating tocellular operators where the net revenue retained by us is lower.  Thesedecreasing effects were partially offset by a slight increase in inboundtraffic volume by 23 million minutes to 2,007 million minutes in 2007.  Theappreciation of the Philippine peso to the U.S. dollar with average exchangerates of Php45.900 in 2007 and Php51.165 in 2006 contributed to the decrease inour inbound international long distance revenues in peso terms, sincesettlement charges for inbound calls are billed in U.S. dollars or in specialdrawing rights, an established method of settlement among internationaltelecommunications carriers using values based on a basket of foreigncurrencies that are translated into pesos at the time of billing. 

 

Ourrevenues from outbound international long distance service decreased by Php8million, or 1%, to Php1,547 million in 2007 primarily due to a decline inaverage revenue per minute as a result of a lower average collection rate withthe introduction of low-rate services such as *PLDT ID-DSL* and *BudgetCard*, and the higher level of the appreciation of the Philippine peso in2007, which more than offset the increase in outbound international callvolumes in 2007.

 

*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 nationallong distance service revenues and call volumes for the years ended December31, 2007 and 2006, respectively:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2007**

** **

**2006**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php6,338

 

Php6,921

 

(Php583)

 

(8)

National long distance call volumes (in million minutes)

2,183

 

2,251

 

(68)

 

(3)

 

Our national long distance service revenues decreasedby Php583 million, or 8%, to Php6,338 million in 2007 from Php6,921 million in2006 primarily due to a decrease in call volumes coupled with lower averagerevenue per minute in 2007 as a result of our various bundled promotions.  Thepercentage contribution of national long distance revenues to our fixed lineservice revenues accounted for 13% in 2007 and 14% in 2006.

 

*Dataand Other Network Services*

 

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

 

Thefollowing table shows information about our data and other network servicerevenues for the years ended December 31, 2007 and 2006:

 

** **

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

** **

**2007**

** **

**2006**

** **

**Amount**

** **

**%**

 

 

 

Data and other network service revenues (in millions)

 

Php15,921

 

Php13,725

 

Php2,196

 

16

Number of DSL broadband subscribers

 

264,291

 

133,159

 

131,132

 

98

Number of PLDT Vibe narrowband subscribers

 

230,995

 

297,250

 

(66,255)

 

(22)

 

In2007, our data and other network services recognized revenues of Php15,921million, an increase of Php2,196 million, or 16%, from Php13,725 million in2006.  This increase was primarily due to increases in leased lines, IP-basedand packet-based data services, particularly Diginet and DFON rental, asignificant increase in the number of DSL broadband subscribers, which waspartially offset by a decrease in the number of PLDT Vibe narrowbandsubscribers.  IP-based products include *PLDT**DSL* (*myDSL*and*BizDSL*),*PLDT Vibe* and I-Gate.  The percentage contribution of thisservice segment to our fixed line service revenues increased to 33% in 2007from 28% in 2006.

 

*DSL* contributed revenues of Php3,880 million in 2007, anincrease of Php748 million, or 24%, from Php3,132 million in 2006 primarily dueto a significant increase in the number of subscribers, which was partiallyoffset by lower average revenue per user as a result of launching lower plansas part of promotions.  *DSL* reached 264,291 subscribers in 2007 comparedwith 133,159 subscribers in 2006.  

 

*PLDTVibe* revenues decreased by Php128million, or 33%, to Php259 million in 2007 from Php387 million in 2006primarily due to lower number of plan subscribers as well as the decliningusage of our Vibe prepaid service.  *PLDT Vibe* subscribers decreased to230,995 in 2007 from 297,250 in 2006.  The declining number of Vibe plans andregular monthly users for our Vibe prepaid service may be partially attributableto the migration from Vibe dial-up to *DSL* which is now priced morecompetitively.  

 

Thecontinued growth in data services revenues steady demand for dedicatedconnectivity or private networking from the corporate market using PLDT’straditional international and domestic data services offerings.

 

Diginet, our domesticprivate leased line service, has been providing Smart’s increasing fiber opticand leased line data requirements.  Diginet revenues increased by Php478million, or 7%, to Php7,291 million in 2007 as compared to Php6,813 million in2006 mainly due to an increase in Smart’s DFON rental to Php5,565 million in2007 from Php4,940 million in 2006.

 

*Miscellaneous*

 

Miscellaneous service revenues arederived mostly from directory advertising and facilities management and rentalfees.  In 2007, these revenues decreased by Php219 million, or 13%, to Php1,413million from Php1,632 million in 2006 mainly due to a decline in facilitiesmanagement fees and rental income owing to lower co-location charges.  Thepercentage contribution of miscellaneous service revenues to our total fixedline service revenues was 3% in 2007 and 2006.

 

*Non-service Revenues*

 

Non-servicerevenues increased by Php202 million, or 256%, to Php281 million in 2007 fromPhp79 million in 2006 primarily due to an increase in subscriptions for DSLservice that is bundled with computers and thus resulted in higher computersales.

 

*Foreign Exchange Gains –Net*

 

Our netfixed line foreign exchange gains increased by Php2,269 million, or 71%, to Php5,479million in 2007 from Php3,210 million in 2006 primarily due to higher level ofthe appreciation of the Philippine peso to the U.S. dollar in 2007 as comparedto 2006.

 

*Interest Income*

 

Interestincome of our fixed line business segment decreased by Php145 million, or 33%,to Php296 million in 2007 from Php441 million in 2006 primarily due to lower interestrates.

 

 

*Other Income*

 

All other income/gains such as rental income and gain on disposal ofproperty, which do not fall under service and non-service revenues, are includedunder this classification.  In 2007, our fixed line business segment registereda decrease in other income of Php2,816 million, or 56%, to Php2,190 millionfrom Php5,006 million in 2006 largely due to the recognition in 2006 of the netreversal of a provision for onerous contract amounting to Php3,529 millionrelated to the change in the Air Time Purchase Agreement with AIL (please see *Note2 – Summary of Significant Accounting Policies and Practices*and *Note 22– Related Party Transactions*to the accompanying audited consolidatedfinancial statements in Item 18 for further discussion).

 

***Expenses***

 

Expensesrelated to our fixed line business totaled Php45,920 million in 2007, adecrease of Php9,863 million, or 18%, as compared to Php55,783 million in 2006.This decrease was primarily due to lower loss on derivative transactions, depreciationand amortization, and financing costs, partially offset by higher professionaland other contracted services, provisions, rent, repairs and maintenance andtaxes and licenses.

 

The following table sets forth the breakdown of ourtotal fixed line-related expenses for the years ended December 31, 2007 and 2006,respectively, and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2007**

 

**%**

 

**2006**

 

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php15,477

 

34

 

Php20,406

 

37

 

(Php4,929)

 

(24)

Compensation and employee benefits(1)

10,411

 

23

 

10,298

 

19

 

113

 

1

Financing costs

4,657

 

10

 

6,173

 

11

 

(1,516)

 

(25)

Repairs and maintenance

3,772

 

8

 

3,553

 

6

 

219

 

6

Loss on derivative transactions

3,335

 

7

 

8,346

 

15

 

(5,011)

 

(60)

Rent

1,799

 

4

 

1,579

 

3

 

220

 

14

Professional and other contracted services

1,727

 

4

 

1,082

 

2

 

645

 

60

Selling and promotions

1,707

 

4

 

1,736

 

3

 

(29)

 

(2)

Taxes and licenses

877

 

2

 

659

 

1

 

218

 

33

Provisions

666

 

1

 

38

 

–

 

628

 

1,653

Communication, training and travel

466

 

1

 

507

 

1

 

(41)

 

(8)

Insurance and security services

439

 

1

 

498

 

1

 

(59)

 

(12)

Cost of sales

145

 

–

 

159

 

–

 

(14)

 

(9)

Asset impairment

43

 

–

 

54

 

–

 

(11)

 

(20)

Other expenses

399

 

1

 

695

 

1

 

(296)

 

(43)

Total 

Php45,920

 

100

 

Php55,783

 

100

 

(Php9,863)

 

(18)

____________

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

 

Depreciationand amortization charges decreased by Php4,929 million, or 24%, to Php15,477million due to the recognition in 2006 of additional depreciation charges oncertain properties and equipment resulting from the accelerated pace of our NGNroll-out in 2006.  In contrast, our NGN roll-out progressed at a significantly slowerpace in 2007 and thereby resulted in a lower level of our depreciation andamortization charges in 2007.  In 2007, as a result of such continued NGNroll-out, we recognized additional depreciation charges of Php734 millionrelating to Piltel’s fixed line equipment that were also affected by ourcontinuing network upgrade and expansion. ****We currently expect that thelevel of our amortization and depreciation charges in 2008 will continue to beimpacted by, among other things, the pace of our NGN roll-out, which pace isinfluenced by, among other things, the condition of our property and equipmentand general economic conditions.  

 

Compensation and employee benefitsexpenses increased by Php113 million, or 1%, to Php10,411 million primarily dueto an increase in pension benefits and costs associated with our MRP, and theeffect of collective bargaining agreement-related increases in salaries andemployee benefits, partially offset by lower LTIP costs.  In 2006, we accruedhigher LTIP costs as a result of the early vesting of the LTIP in 2006.  Overthe past years, PLDT has been implementing its MRP in line with the challengesbeing faced by the fixed line business as significant changes in technology,increasing competition and shifting market preferences to cellular use havereshaped the future of our fixed line business.  Total MRP costs in 2007 and2006 amounted to Php564 million and Php414 million, respectively.  For furtherdiscussion on our LTIP, please see Item 6. “Directors, Senior Management and Employees– Long-Term Incentive Plan” and *Note 23 – Share-based Payments and EmployeeBenefits* to the accompanying audited consolidated financial statements inItem 18.

 

Financing costs decreased by Php1,516million, or 25%, to Php4,657 million largely due to lower interest on loans andrelated items and accretion of financial liabilities.  This was partiallyoffset by higher financing charges in relation to costs incurred in the consentsolicitation of holders of our 11.375% Notes due 2012, 10.5% Notes due 2009 and8.35% Notes due 2017, or the Notes, and the amendments of the covenants of our Notes,as discussed in *Note 18 – Interest-bearing Financial Liabilities*to theaccompanying audited consolidated financial statements in Item 18.  The breakdown of financing costs for our fixed linebusiness for the years ended December 31, 2007 and 2006 is as follows: 

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2007**

** **

**2006**

** **

**Amount**

** **

**%**

** **

**(in millions)**

** **

 

 

 

 

 

 

 

Interest on loans and related items

Php4,642

 

Php6,254

 

(Php1,612)

 

(26)

Accretion on financial liabilities – net

185

 

206

 

(21)

 

(10)

Financing charges

184

 

14

 

170

 

1,214

Capitalized interest

(354)

 

(301)

 

(53)

 

18

 

Php4,657

 

Php6,173

 

(Php1,516)

 

(25)

 

Repairs and maintenance expenses increased by Php219million, or 6%, to Php3,772 million primarily due to higher maintenance costsof central office and telecoms equipment and domestic cable and wire facilitiesas more operating and maintenance-related restorations were incurred in 2007 ascompared to 2006.  

 

Losson derivative transactions decreased by Php5,011 million, or 60%, to Php3,335million primarily due to lower hedging costs and the effect of the appreciationof the peso against the U.S. dollar.

 

Rentexpenses increased by Php220 million, or 14%, to Php1,799 million due to thesettlement of pole rental charges and an increase in international leasedcircuit charges, partially offset by a decrease in transponder leases.

 

Professional and other contracted services increasedby Php645 million, or 60%, to Php1,727 million primarily due to an increase inconsultancy services coupled with higher contracted fees for technical andadvisory services.

 

Selling and promotion expenses decreased by Php29million, or 2%, to Php1,707 million primarily as a result of a collectiveeffort in efficient media spending in relation to various products andservices, partially offset by higher public relations expenses.

 

Taxesand licenses increased by Php218 million, or 33%, to Php877 million mainly onaccount of higher business-related taxes.  Please see *Note 25 — Provisionsand Contingencies* to the accompanying audited consolidated financialstatements in Item 18 for a further discussion.

 

Provisionsincreased by Php628 million to Php666 million primarily due to higher provisionfor assessments in 2007.  Please see *Note 25 – Provisions and Contingencies*to the accompanying audited consolidated financial statements in Item 18 forfurther details. 

 

Communication,training and travel expenses decreased by Php41 million, or 8%, to Php466million due to the decrease in mailing, courier and delivery charges, and a netdecrease in foreign and local travel, and training expenses.

 

Insuranceand security services decreased by Php59 million, or 12%, to Php439 millionprimarily due to lower premiums on property all-risk, industrial all-risk andindustrial fire insurance. 

 

Costof sales decreased by Php14 million, or 9%, to Php145 million due to lowercomputer-bundled sales in relation to our DSL promotions and *WeRoam*subscriptions.

 

Assetimpairment decreased by Php11 million, or 20%, to Php43 million mainly due tolower uncollectible receivables.

 

Otherexpenses decreased by Php296 million, or 43%, to Php399 million due to lowervarious business and operational-related expenses.

 

***Provision for (Benefitfrom) Income Tax***

 

Provision for income tax amounted to Php3,358 millionin 2007 as compared to a benefit from income tax of Php639 million in 2006primarily due to higher taxable income as a result of lower expenses primarilydue to lower loss on derivative transactions, depreciation and amortization andfinancing costs recognized in 2007.

 

***Net Income***

 

In 2007, our fixed line businesssegment contributed a net income of Php7,519 million, an increase of Php4,753million, or 172%, as compared to Php2,766 million in 2006 mainly as a result ofan 18% decline in fixed line-related expenses, particularly lower loss onderivative transactions, depreciation and amortization and financing costs,partially offset by a 2% decrease in the revenues from our fixed line service anda higher provision for income tax. 

 

**Information and Communications Technology**

 

**Total Revenues**
 

Our ICT business provides knowledge processingsolutions, customer interaction services, internet and online gaming and datacenter services.  

 

In2007, our ICT business generated revenues of Php10,799 million, an increase ofPhp3,874 million, or 56%, from Php6,925 million in 2006.  This increase waslargely due to the effects of the full-year consolidation of the financialresults of the SPi Group in 2007 and the continued increase of our customerinteraction service revenues.

 

The following table summarizes our total revenues fromour information and communications technology business for the years endedDecember 31, 2007 and 2006 by service segment:

 

** **

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2007**

 

**%**

 

**2006**

 

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

** **

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Knowledge processing solutions

Php5,261

 

49

 

Php2,374

 

34

 

Php2,887

 

122

Customer interaction services

3,262

 

30

 

2,624

 

38

 

638

 

24

Internet and online gaming 

937

 

9

 

796

 

12

 

141

 

18

*Vitro*ä data center

595

 

5

 

543

 

8

 

52

 

10

 

10,055

 

93

 

6,337

 

92

 

3,718

 

59

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point product sales

267

 

2

 

553

 

8

 

(286)

 

(52)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange loss – net

(138)

 

(1)

 

(109)

 

(2)

 

(29)

 

27

Interest income

21

 

–

 

16

 

–

 

5

 

31

Other Income

594

 

6

 

128

 

2

 

466

 

364

 

 

 

 

 

 

 

 

 

 

 

 

Total ICT Revenues 

Php10,799

 

100

 

Php6,925

 

100

 

Php3,874

 

56

 

*Service Revenues*

 

Servicerevenues generated by our ICT business segment amounted to Php10,055 million in2007, an increase of Php3,718 million, or 59%, as compared to Php6,337 millionin 2006 primarily as a result of the consolidation of the SPi Group and LevelUp! and the continued growth of our customer interaction services business.

 

*KnowledgeProcessing Solutions (formerly referred to as Business Process Outsourcing)*

*** ***

Knowledgeprocessing solution revenues consist of: (i) editorial and content productionservices to the scholarly scientific, technical and medical (SSTM) journalpublishing industry; (ii) digital content conversion services to informationorganizations; (iii) pre-press project management services to book publishers; (iv)litigation support services which involve conventional coding and electronicdiscovery support services for corporations, international law firms, corporatecounsels and government agencies; (v) conversion services of medicalrecord/data from handwritten or speech format to electronic format and patientscheduling, coding and compliance assistance, consulting and specializedreporting services; and (vi) revenue cycle management services for U.S. medicalfacilities.

 

Weprovide our knowledge processing solutions primarily through the SPi Group,which ePLDT acquired on July 11, 2006.  Knowledge processing solutionscontributed revenues of Php5,261 million in 2007, an increase of Php2,887 million,or 122%, from Php2,374 million in 2006 primarily as a result of the effects ofthe full-year consolidation of the financial results of the SPi Group, andaccounted for 52% and 37% of total service revenues of our ICT business in 2007and 2006, respectively.

 

*CustomerInteraction Services (formerly described as Call Center business)*

 

Customerinteraction service revenues consist of: (i) inbound calls for customer care,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 provide our customer interaction services primarilythrough *ePLDT Ventus*.  Revenues relating to our customer interactionservices business increased by Php638 million, or 24%, to Php3,262 million in2007 from Php2,624 million in 2006 primarily due to the expansion of ourfacilities.  In total, we own and operate approximately 6,400 seats with 5,930customer service representatives, or CSRs, in 2007 compared to approximately5,600 seats with 5,130 CSRs in 2006.  In 2006, *ePLDT Ventus* launched twonew sites bringing our total customer interaction services site count to ninein 2007.

 

Customer interaction service revenues accounted for 33%and 41% of total service revenues of our ICT business in 2007 and 2006,respectively.

* *

*Internet and Online Gaming*

 

Internet and online gaming servicerevenues consist of: (i) revenues derived from actual usage of the internetaccess network by prepaid subscribers; (ii) monthly service fees from postpaidcorporate and consumer subscribers; (iii) one-time fees generated from thereselling of internet-related solutions such as security solutions and domainregistration; (iv) franchise and royalty fees for *Netopia* internetcafés; and (v) online gaming revenues from subscribers, including one-time saleof gaming cards and electronic pins, and top-up fees upon actual consumption ofgaming credits or after expiration of any unused peso value thereof. 

 

Revenues from our internet and online gamingbusinesses increased by Php141 million, or 18%, to Php937 million in 2007 fromPhp796 million in 2006 primarily due to the effects of the full-year consolidationof the financial results of Level Up! which resulted in an increase in revenuesby Php49 million, and an increase in Infocom’s revenues by Php63 million due toadditional revenues from our customer service outsourcing.  Our internet andonline gaming business revenues accounted for 9% and 13% of total servicerevenues of our ICT business in 2007 and 2006, respectively.

 

*Vitro*ä *Data**Center*

 

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

 

*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’s certified professionals; and (iii)fees generated from the issuance of digital certificates and revenues derivedfrom IT helpdesk/contact center solutions and terminals for credit, debit andcredit card transactions.

 

In2007, *Vitro*ä contributed revenues of Php595 million, an increaseof Php52 million, or 10%, from Php543 million in 2006.  This increase wasprimarily due to an increase in co-location revenues and server hosting.  *Vitro*ä revenues accounted for 6% and 9% of service revenues of our ICTbusiness in 2007 and 2006, respectively.

 

Pleaserefer to *Note 9 – Investments**in Associates**and Joint Ventures*to the accompanying audited consolidated financial statements in Item 18 forfurther discussion 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 2007, non-service revenues generated by our ICT businessdecreased by Php286 million, or 52%, to Php267 million as compared to Php553million in 2006 primarily due to lower revenues from sales of software andhardware licenses.

 

*Foreign Exchange Loss –Net*

 

Our netICT foreign exchange loss increased by Php29 million, or 27%, to Php138 millionin 2007 from Php109 million in 2006 primarily due to the loss on revaluation ofour net foreign currency-denominated assets.

 

*Interest Income*

 

Interestincome for our ICT business segment increased by Php5 million, or 31%, to Php21million in 2007 from Php16 million in 2006 primarily due to a higher level ofcash balances in 2007.

 

*Other Income*

 

Allother income/gains which do not fall under service and non-service revenues areincluded under this classification.  Other income generated from our ICTbusiness increased by Php466 million, or 364%, to Php594 million in 2007 ascompared to Php128 million in 2006 primarily due to the recognition ofcumulative dividends and interest on ePLDT’s investment in convertiblesecurities of Stradcom International Holdings, Inc., or SIHI.  On February 28,2008, SIHI redeemed all of the convertible securities of SIHI held by ePLDT.Please see *Note 13 – Investment in Debt Securities* to the accompanyingaudited consolidated financial statements in Item 18 for further discussion ofour investment in Stradcom.  

 

***Expenses***

 

Expenses associated with our ICT business totaledPhp11,010 million in 2007, an increase of Php3,736 million, or 51%, fromPhp7,274 million in 2006 primarily due to the effects of the full-year consolidationof the financial results of the SPi Group and Level Up! in 2007 resulting in anincrease in compensation and employee benefits, professional and othercontracted services, communication, training and travel, depreciation andamortization and asset impairment, partially offset by lower cost of sales andhigher gain on derivative transactions.  As a percentage of our total ICTrevenues, expenses related to our ICT business were 102% and 105% for 2007 and2006, respectively.   

 

The following table shows the breakdown of our totalinformation and communications technology-related expenses for the years endedDecember 31, 2007 and 2006, respectively, and the percentage of each expenseitem to the total:

 

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2007**

 

**%**

 

**2006**

 

**%**

** **

**Amount**

** **

**%**

** **

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

ICT services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and employee benefits(1)

Php5,455

 

50

 

Php3,021

 

41

 

Php2,434

 

81

Professional and other contracted services

1,129

 

10

 

739

 

10

 

390

 

53

Depreciation and amortization

934

 

8

 

711

 

10

 

223

 

31

Asset impairment

711

 

6

 

492

 

7

 

219

 

45

Rent

620

 

6

 

444

 

6

 

176

 

40

Communication, training and travel

523

 

5

 

276

 

4

 

247

 

89

Repairs and maintenance

504

 

5

 

368

 

5

 

136

 

37

Selling and promotions

321

 

3

 

293

 

4

 

28

 

10

Cost of sales

254

 

2

 

476

 

7

 

(222)

 

(47)

Amortization of intangible assets

232

 

2

 

138

 

2

 

94

 

68

Financing costs 

132

 

1

 

23

 

–

 

109

 

474

Taxes and licenses

94

 

1

 

70

 

1

 

24

 

34

Insurance and security services

49

 

–

 

35

 

–

 

14

 

40

Equity share in net losses of associates

11

 

–

 

52

 

1

 

(41)

 

(79)

Gain on derivative transactions

(138)

 

(1)

 

(3)

 

–

 

(135)

 

4,500

Other expenses

179

 

2

 

139

 

2

 

40

 

29

Total 

Php11,010

 

100

 

Php7,274

 

100

 

Php3,736

 

51

____________

 

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

 

Compensationand employee benefits increased by Php2,434 million, or 81%, to Php5,455million largely due to the full-year consolidation of the SPi Group in 2007 andthe expansion of our customer interaction services business.  

 

Professionaland other contracted services increased by Php390 million, or 53%, to Php1,129million primarily due to the full-year consolidation of the SPi Group and higherconsultancy fees and subcontracted services incurred by the SPi Group relatedto its knowledge processing solutions.

 

Depreciation and amortization charges increased byPhp223 million, or 31%, to Php934 million primarily due to an increase in thedepreciable asset base in relation to the expansion of our customer interactionservices business and the full-year consolidation of the SPi Group in 2007.  

 

Asset impairment increased by Php219 million, or 45%,to Php711 million mainly due to ePLDT’s provision for impairment of goodwillmainly from an investment by SPi and Level Up! amounting to Php1,162 million,partially offset by a provision for impairment on notes receivable amounting toPhp346 million in 2006 and the reversal in 2007 of an impairment loss of Php616million related to our investment in SIHI.  Please see *Note 13 – Investmentin Debt Securities* to the accompanying audited consolidated financialstatements in Item 18 for further discussion of our investment in SIHI.

 

Rentexpenses increased by Php176 million, or 40%, to Php620 million primarily dueto higher office space rentals and leased circuits from other carriers incurredby our customer interaction services business, the SPi Group and Level Up!.

 

Communication,training and travel expenses increased by Php247 million, or 89%, to Php523million primarily due to the increased cost of phone lines, bandwidth andinformation system charges, coupled with the increase in local and foreigntravel costs, mailing and courier charges, and freight and hauling chargesincurred by our customer interaction service and knowledge processing solutionbusinesses due to the full-year consolidation of the SPi Group in 2007.  

 

Repairs and maintenance expenses increased by Php136million, or 37%, to Php504 million primarily due to higher maintenance costsfor new customer interaction service facilities plus higher electricity chargesfor *Vitro*TM and the full-year consolidation of the SPi Groupand Level Up!.

 

Selling and promotion expenses increased by Php28million, or 10%, to Php321 million mainly due to the SPi Group’s higheradvertising and marketing spending.

 

Costof sales decreased by Php222 million, or 47%, to Php254 million primarily dueto lower sales of software licenses and hardware products.

 

Amortizationof intangible assets increased by Php94 million, or 68%, to Php232 million inrelation to the acquisition of the SPi Group and Level Up!, as well as theacquisition of Springfield Service Corporation, or Springfield, by SPi in April2007.  Please see *Note 11 – Goodwill and Intangible Assets* to theaccompanying audited consolidated financial statements in Item 18 for a furtherdiscussion.  

 

Financingcosts increased by Php109 million, or 474%, to Php132 million in 2007 primarilydue to a higher accretion on financial liabilities particularly in relation to thecontingent consideration for the Springfield acquisition in 2007.

 

Taxesand licenses increased by Php24 million, or 34%, to Php94 million primarily dueto the full-year consolidation of the SPi Group in 2007 and the payment of previouslydisputed business-related taxes.  Please see *Note 25 — Provisions andContingencies* to the accompanying audited consolidated financial statementsin Item 18 for a further discussion.

 

Insurance and security services increased by Php14million, or 40%, to Php49 million primarily due to higher premium costs and anincrease in the value of assets insured.

 

Equityshare in net losses of associates amounted to Php11 million in 2007 compared toPhp52 million in 2006 primarily due to a decrease in ePLDT’s share in netlosses of unconsolidated investee companies.

 

Gainon derivative transactions increased by Php135 million to Php138 million in2007 primarily due to higher derivative gains recognized by our customerinteraction service and knowledge processing solutions businesses as a resultof the peso appreciation.

 

Other expenses increased by Php40 million, or 29%, toPhp179 million mainly due to higher business-related costs, such as officesupplies.

 

***Benefit from Income Tax***

 

Benefit from income tax increased by Php80 million, or216%, to Php117 million in 2007 primarily due to the corresponding deferred taxeffect of the amortization of intangible assets in relation to the acquisitionof the SPi Group and Level Up!.  

* *
*Net Loss*
 

In2007, our ICT business segment registered a net loss of Php94 million, animprovement of 70% from a net loss of Php312 million in 2006.  This decrease innet loss was mainly a result of the 56% increase in ICT-related revenues mainlyfrom the full-year consolidation of the SPi Group and Level Up! and higherbenefit from income tax in 2007, partially offset by the 51% increase inICT-related expenses mainly from the full-year consolidation of the SPi Group.

 

**Plans and Prospects**

 

We are the largest and most diversified telecommunicationscompany in the Philippines.  We offer the broadest range of telecommunicationsservices among all operators in the Philippines.  We plan to capitalize on thisposition to further expand our subscriber base and fortify our industryposition.  We also plan to maximize revenue opportunities by offering morevalue-driven products and services, while bundling and cross-selling voice anddata offerings across our various platforms of our wireless, fixed line and ICTbusiness segments.  We intend to align as well the deployment of our fixed lineand wireless platforms and technologies such that these initiatives dovetailwith our delivery of services.  We will continue to consider value-accretiveinvestments in related businesses such as those in the global outsourcing andoff-shoring industry.

 

For2008, cash from operations will allow us to increase the level of our capitalexpenditures for the expansion and upgrading of our network infrastructure.  Weexpect to make additional investments in our core facilities to maximizeexisting technologies and increase capacity.  Our 2008 budget for consolidatedcapital expenditures is approximately Php25,000 million, of which approximatelyPhp15,000 million is budgeted to be spent by Smart, approximately Php9,000 millionis budgeted to be spent by PLDT and the balance represents the budgeted capitalspending of our other subsidiaries.

 

**Liquidityand Capital Resources**

 

The following table shows our consolidated cash flows,capitalization and other selected financial data as at and for the years endedDecember 31, 2007 and 2006:

** **

 

**Years Ended December 31,**

 

**2007**

 

**2006**

** **

**(in millions)**

 

 

 

 

**Cash Flows**

 

 

 

Net cash provided by operating activities

Php77,418

 

Php69,211

Net cash used in investing activities

31,319

 

35,790

*Capital expenditures*

*24,824*

* *

*20,674*

Net cash used in financing activities

44,819

 

45,900

Net increase (decrease) in cash and cash equivalents

577

 

(13,189)

 

** **

 

** **

 

**December 31,**

 

**2007**

 

**2006**

 

**(in millions)**

**Capitalization**

 

 

 

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

 

 

 

Long-term debt

Php53,372

 

Php63,769

Obligations under capital lease

15

 

106

Preferred stock subject to mandatory redemption

–

 

1,369

 

53,387

 

65,244

 

 

 

 

Current portion of interest-bearing financial liabilities: 

 

 

 

Notes payable

493

 

201

Long-term debt maturing within one year

6,775

 

16,184

Obligations under finance lease maturing within one year

481

 

924

Preferred stock subject to mandatory redemption 

1,015

 

–

 

8,764

 

17,309

Total interest-bearing financial liabilities

62,151

 

82,553

Total equity

112,345

 

102,853

 

Php174,496

 

Php185,406

** **

 

 

 

**Other Financial Data**

 

 

 

Total assets

Php240,158

 

Php241,904

Property, plant and equipment - net

159,414

 

164,190

Cash and cash equivalents

17,447

 

16,870

Short-term investments

13,415

 

8,327

 

As at December 31, 2007, our consolidated cash andcash equivalents and short-term investments totaled Php30,862 million.  Our principalsources of consolidated cash and cash equivalents in 2007 were cash flows fromoperating activities amounting to Php77,418 million, drawings from Smart’s,PLDT’s and ePLDT’s debt facilities aggregating Php7,647 million and short-termcredit facilities totaling Php502 million.  These funds were used principallyfor dividend payments of Php28,470 million, capital outlays of Php24,824million, total debt principal payments of Php18,258 million and interestpayments of Php5,891 million.  

 

Principal sources of consolidatedcash and cash equivalents in 2006 were cash flows from operations amounting toPhp69,211 million, drawings from long-term and short-term credit facilitiestotaling Php9,724 million and Php211 million, respectively, and equity fundsraised through the issuance of capital stock amounting to Php66 million in2006.  These funds were used principally for capital outlays of Php20,674million (including capitalized interest of Php549 million), payments oflong-term and short-term debt totaling Php29,366 million and interest paymentsof Php7,528 million. 

 

***Operating Activities***

 

Our consolidated net cash flows fromoperating activities in 2007 increased by Php8,207 million, or 12%, to Php77,418million from Php69,211 million in 2006.

 

A growing portion of our consolidated cash flow continuesto be generated by our wireless business, which accounted for 58% and 56% ofour total revenues in 2007 and 2006, respectively.  Revenues from our fixedline and information and communications technology services accounted for 35%and 7%, respectively, of our total revenues in 2007 and 39% and 5% in 2006,respectively.   

 

Cash flows from operating activities ofour wireless business amounted to Php49,616 million in 2007, an increase ofPhp12,331 million, or 33%, compared to Php37,285 million in 2006.  The increasein our wireless business segment’s cash flows from operating activities wasprimarily due to the decrease in our working capital requirements in 2007 owingto the higher level of settlement of various payables in 2006.  However, cashflows from operating activities of our fixed line business decreased by Php5,151million, or 17%, to Php25,274 million in 2007 compared to Php30,425 million in2006.  This decrease was primarily due to higher working capital requirementsin our fixed line business in 2007 due to PLDT’s contribution to its pensionplan and the settlement of our LTIP in 2006 and lower collection of receivables. The overall increase in our cash flows fromoperating activities was primarily due to a decrease in working capitalrequirements with lower level of settlements of various current liabilities,partially offset by higher billings of accounts receivable.  We believe thatour continuing strong cash flows from operating activities on a consolidatedbasis will allow us to satisfy our current liabilities as our current ratio ismore than 1:1 as at December 31, 2007.

 

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 preferredshares, make distributions to PLDT or otherwise provide funds to PLDT or anyassociate without the consent of its lenders, Smart is no longer subject tosuch restrictions.  Cash dividends paid by Smart to PLDT for the years endedDecember 31, 2007 and 2006 amounted to Php26,927 million and Php20,600 million,respectively.

 

In 2007, Piltel paid cash dividends tovarious preferred shareholders in the aggregate amount of Php2,943 million, ofwhich Php2,930 million was paid to PLDT.

 

***Investing Activities***

 

Net cash used in investingactivities amounted to Php31,319 million in 2007, a decrease of Php4,471million, or 12%, from Php35,790 million in 2006.  This decrease was primarily anet result of a decrease in investments by Php8,602 million in 2007 due to theacquisitions of 100% equity interests in SPi and CyMed in 2006, partiallyoffset by an increase in capital expenditures of Php4,150 million in 2007.Payments for purchase of investments in 2007 amounted to Php2,288 million, ofwhich Php1,687 million and Php601 million were paid for the acquisitions of a100% equity interest in Springfield and a 30% equity interest in Blue Ocean Wireless,respectively.  Net cash used in investing activities amounted to Php35,790million in 2006 primarily comprised of capital expenditures in the amount ofPhp20,674 million, and payments for purchase of investments in the amount of Php10,890million in relation to the purchase of the following in 2006: (a) a 100% equityinterest in SPi and CyMed aggregating Php8,847 million; (b) the finalsettlement of the acquisition of Smart Broadband of Php1,201 million; (c) thepurchase of a 60% equity interest in Level Up! of Php383 million; (d) and theacquisition of the remaining 20% equity in Wolfpac for Php30 million.  

 

Ourconsolidated capital expenditures in 2007 totaled Php24,824 million, an increaseby Php4,150 million, or 20%, from Php20,674 million in 2006 primarily due toSmart’s and PLDT’s higher capital spending.  Smart's capital spending ofPhp14,179 million in 2007 was used primarily to further upgrade its core,access and transmission network facilities, expand its wireless broadbandfacilities and develop IT platforms for new businesses.  PLDT's capitalspending of Php9,912 million was principally used to finance the expansion andupgrade of its submarine cable facilities, fixed line data and IP-based networkservices.  ePLDT and its subsidiaries’ capital spending of Php678 million wasprimarily used to fund its continued customer interaction services expansion.The balance represented other subsidiaries’ capital spending.  Our consolidatedcapital expenditures in 2006 totaled Php20,674 million.  Smart's capitalspending of Php10,506 million in 2006 was used primarily to rollout its 3Gnetwork, further upgrade its core and transmission network facilities andexpand its wireless broadband facilities, to increase capacity and coverage inrespect of basic and advanced wireless services.  PLDT's capital spending ofPhp8,902 million was principally used to finance the expansion of its fixedline data and IP-based network services.  ePLDT and its subsidiaries’ capitalspending of Php1,132 million was primarily used to fund its continued customerinteraction service expansion.  The balance represented other subsidiaries’capital spending.  

 

Aspart of our growth strategy, we may from time to time, continue to makeacquisitions and investments in companies or businesses.  

 

***Financing Activities***

 

On aconsolidated basis, we used net cash of Php44,819 million for financingactivities in 2007, compared to Php45,900 million in 2006.  The net cash used infinancing activities in 2007 was mainly utilized for dividend paymentsdistributed to PLDT common and preferred stockholders, debt repayments andinterest payments.  The net cash used in financing activities in 2006 wasmainly utilized for debt repayments, dividend payments distributed by PLDT toits common and preferred stockholders and interest payments by PLDT and Piltelin line with their debt reduction programs.  

 

*DebtFinancing*

 

Additions to our consolidated long-term debt in 2007totaled Php7,647 million mainly from Smart's drawings related to the financingof its network expansion projects.  Payments in respect of principal andinterest of our total debt amounted to Php18,258 million and Php5,891 million,respectively, in 2007, of which Php12,505 million in principal and Php4,451million in interest were attributable to PLDT.

 

Our long-term debt decreased by Php19,806 million, or25%, to Php60,147 million in 2007, largely due to debt amortizations andprepayments in line with our efforts to reduce our overall debt level, and alsodue to the appreciation of the Philippine peso resulting to the lower pesorevaluation of our foreign currency-denominated debts.  The debt levels ofPLDT, Smart and Mabuhay decreased by 35%, 1% and 45% to Php33,975 million,Php24,995 million and Php1,145 million, respectively, in 2007 compared to thelevels in 2006.  

 

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 distributions, whilereducing PLDT’s permitted leverage ratios pursuant to the terms of the Notes.  Theseamendments to the terms of the Notes became effective on December 3, 2007, thedate on which PLDT made the applicable consent payments, after holders of morethan 51% of the aggregate principal amount of the Notes gave their consents forthese amendments to the terms of the Notes prior to the expiration of theconsent solicitation period and after the execution of relevant amendments tothe indentures governing the Notes on November 21, 2007.  

 

OnMay 22, 2007, PLDT entered into loan agreements with The Philippine American Lifeand General Insurance Company for Php400 million and The Philam Bond Fund, Inc.for Php20 million to refinance their respective participations in respect of aloan agreement relating to PLDT’s borrowing of Php1,270 million in the form ofpeso fixed rate corporate bonds, which were repaid on June 12, 2007.  Bothrefinancing loans will mature on June 12, 2014.

 

OnFebruary 15, 2007, Smart issued Php5 billion unsecured fixed rate corporatenotes, made up of Series A notes amounting to Php3.8 billion and Series B notesamounting to Php1.2 billion with five and ten year terms, respectively.  SeriesA notes were priced at 5.625%, while Series B notes were priced at 6.500%.Funds raised from the issuance of these notes have primarily been for Smart’scapital expenditures for network improvement and expansion. 

 

Approximately Php24,398 million principal amount ofour consolidated outstanding long-term debt in 2007 is scheduled to mature overthe period from 2008 to 2011.  Of this amount, Php11,165 million is attributableto PLDT, Php12,056 million to Smart and the remainder to Mabuhay Satellite andePLDT.

 

For a more detailed discussion ofour long-term debt including the scheduled maturities of our outstandingconsolidated long-term debt as at December 31, 2007, see *Note 18 –Interest-bearing Financial Liabilities – Long-term Debt*to the accompanyingaudited consolidated financial statements in Item 18.

* *

*Debt Covenants*

 

Ourdebt instruments contain restrictive covenants, including covenants that couldprohibit us from paying dividends on common stock under certain circumstances,and require us to comply with specified financial ratios and other financialtests, calculated in conformity with PFRS, at relevant measurement dates,principally at the end of each quarterly period.  We have complied with all ofour maintenance financial ratios as required under our loan covenants and otherdebt instruments.  Furthermore, certain of PLDT’s debt instruments containprovisions pursuant to which PLDT may be required to repurchase or prepaycertain indebtedness in case of a change in control of PLDT.

 

Please see *Note 18 – Interest-bearingFinancial Liabilities – Debt Covenants*to the accompanying auditedconsolidated financial statements in Item 18 for a detailed discussion of our debtcovenants.

 

*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.

 

OnAugust 7, 2007, we declared a special cash dividend of Php40 per shareattributable to our 2006 earnings.  This special cash dividend was anincremental dividend payout representing approximately 25% of our 2006 earningsper share.  As a result of such special dividend declaration, our totaldividend payments attributable to our 2006 earnings increased to Php140 pershare, inclusive of the regular dividends paid out of our 2006 earningsaggregating Php100 per share.  With respect to our 2007 earnings, in additionto the Php60 per share dividend declared on August 7, 2007, we declared onMarch 4, 2008 a regular cash dividend of Php68 per share and a special cashdividend of Php56 per share, in the aggregate representing close to a 100% ofour 2007 earnings per share.

* *

Cash dividend payments in 2007 amounted to Php28,470million, of which Php28,167 million and Php303 million were paid to common andpreferred shareholders, respectively.  Cash dividend payments in 2006 amountedto Php14,913 million, of which Php14,447 million and Php466 million were paidto common and preferred shareholders, respectively.

 

Forfurther details in respect of our dividend declarations and payments, pleaserefer to Item 3. “Key Information – Dividends Declared” and Item 3. “KeyInformation – Dividends Paid”.

 

PLDTraised Php73 million and Php62 million from the exercise by certain officersand executives of stock options in 2007 and 2006, respectively.  In addition,through our subscriber investment plan which provides postpaid fixed linesubscribers the opportunity to buy shares of our 10% cumulative convertiblepreferred stock as part of the upfront payments collected from subscribers,PLDT was able to raise Php3 million and Php4 million in 2007 and 2006,respectively.

 

Asat December 31, 2007, there were 188.7 million PLDT common shares outstandingcompared to 188.4 million common shares outstanding as at December 31, 2006.  See*Note 17 – Equity* to the accompanying audited consolidated financialstatements in Item 18 for further discussion.

 

*CreditRatings*

 

None of our existing indebtedness containsprovisions under which credit rating downgrades would trigger a default,changes in applicable interest rates or other 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, or IDR

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 capital expendituresinternally, as well as the ability to increase dividend payments to ourshareholders.  On January 28, 2008, Moody’s affirmed our foreign currencysenior unsecured debt rating from stable to positive following the change inthe outlook of the Philippines Ba3 country ceiling for foreign currency bondsto positive from stable. 

 

OnNovember 6, 2007, Standard and Poor’s, Moody’s and Fitch affirmed some of ourlocal and foreign currency ratings following the consent solicitationannouncement relating to the Notes to effect certain proposed amendments thatwould give us more flexibility to make investments and dividend payments.  Theaffirmation also reflects our healthy financial and dominant market positionsthough counterbalanced by the uncertainty of the Philippines’ political andeconomic environment.  However, any future upward ratings would be morereflective of a stabilizing economic, political and social environment reducingsuch uncertainties.

* *

*Off-balance Sheet Arrangements*

* *

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.

 

***Contractual Obligations and Commercial Commitments***

 

***Contractual Obligations***

 

The following table shows our contractual obligationsas at December 31, 2007:

 

 

**Payments Due by Period**

 

**Total**

**Less than  1 year**

**1****-****3 years**

**3****-****5  Years**

**More than  5 years**

 

**(in millions)**

**December 31, 2007**

 

 

 

 

 

*Long-term debt(1):*

*Php**86,334*

*Php**11,441*

*Php**22,662*

*Php**21,218*

*Php**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)*

*77**6*

*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’ deposits 

2,201

–

267

50

1,884

Carriers 

2,187

2,187

–

–

–

Dividends

1,071

1,071

–

–

–

Others

1,640

1,640

–

–

–

**Total contractual obligations**

**Php****143,15****2**

**Php****42,569**

**Php****35,053**

**Php****26,800**

**Php****38,729**

____________

*(1)**Before deductingunamortized debt discount and debt issuance costs.*

*(2)**Based on the AmendedATPA with AIL.*

*(3)**Grossliabilities before any offsetting application.*

 

Fora detailed discussion of our contractual obligations, please see *Note 24 –Contractual Obligations and Commercial Commitments*to the accompanyingaudited consolidated financial statements in Item 18.

 

***Commercial Commitments***

 

As at December 31, 2007, our outstandingcommercial commitments, in the form of letters of credit, amounted to Php3,782million.  These commitments will expire within one year.

 

**Impact of Inflation and Changing Prices**

 

Inflation can be a significantfactor in the Philippine economy, and we are continually seeking ways tominimize its impact.  In recent periods, we do not believe inflation has had amaterial impact on our operations.  The average inflation rate in the Philippines in 2007 was 2.8% compared to 6.2% in 2006.

 

**Item6.       Directors, Senior Management and Employees******

** **

**Directors,Key Officers and Advisors**

 

The following are the names, ages and periods ofservice, of the current directors/independent directors of PLDT, all of whom,except for Mr. Takashi Ooi, had been nominated for re-election and werere-elected at the annual meeting of shareholders that was held on June 12, 2007:

 

** **

**Name**

** **

** **

**Age**

** **

**Period during whichindividual has served as such**

 

 

 

 

 

Manuel V. Pangilinan

 

61

 

November 24, 1998 to present 

Napoleon L. Nazareno

 

58

 

November 24, 1998 to present

Helen Y. Dee

 

63

 

June 18, 1986 to present

Ray C. Espinosa 

 

51

 

November 24, 1998 to present

Tatsu Kono

 

54

 

March 28, 2006 to present

Rev. Fr. Bienvenido F. Nebres, S.J.*

 

67

 

November 24, 1998 to present

Takashi Ooi(1)

 

46

 

November 6, 2007 to present

Corazon S. de la Paz-Bernardo 

 

66

 

September 25, 2001 to present

Oscar S. Reyes*

 

61

 

April 5, 2005 to present

Albert F. del Rosario

 

68

 

November 24, 1998 to present

Pedro E. Roxas*

 

51

 

March 1, 2001 to present

Alfred V. Ty*

 

40

 

June 13, 2006 to present

Ma. Lourdes C. Rausa-Chan

 

54

 

March 6, 2007 to present

___________

**    Independent Director*

*(1) Mr. Takashi Ooi replaced Mr.Tsuyoshi Kawashima (who served as director from July 11, 2006 until hisresignation effective November 5, 2007), as director effective November 6, 2007and will serve as such for the unexpired term of Mr. Kawashima.*

 

The names, ages, positions and periods of service ofthe key officers and advisors of PLDT as at February 29, 2008 are as follows: 

 

** **

**Name**

** **

** **

**Age**

** **

** **

**Position(s)**

** **

**Period during which**

**individual has served as such**

 

 

 

 

 

 

 

Manuel V. Pangilinan

 

61

 

Chairman of the Board

 

February 19, 2004 to present

Napoleon L. Nazareno

 

58

 

President and Chief Executive Officer

 

February 19, 2004 to present 

 

 

 

 

President and Chief Executive Officer of Smart

 

January 2006 to present

Ernesto R. Alberto

 

46

 

Senior Vice President

 

May 15, 2003 to present

 

 

 

 

Corporate Business Head

 

May 15, 2003 to January 31, 2008

 

 

 

 

Customer Sales and Marketing Group Head

 

February 1, 2008 to present

Rene G. Bañez

 

52

 

Senior Vice President 

 

January 25, 2005 to present 

 

 

 

 

Chief Governance Officer 

 

October 5, 2004 to March 3, 2008 

 

 

 

 

Administration and Materials Management Group Head

 

January 1, 2008 to present

Anabelle L. Chua 

 

47

 

Senior Vice President

 

February 26, 2002 to present

 

 

 

 

Treasurer 

 

February 1, 1999 to present

 

 

 

 

Corporate Finance and Treasury Head

 

March 1, 1998 to present

 

 

 

 

Smart Chief Financial Officer 

 

December 1, 2005 to present 

Jun R. Florencio

 

52

 

Senior Vice President

 

June 14, 2005 to present

 

 

 

 

Audit and Assurance Head 

 

September 1, 2000 to February 15, 2006

 

 

 

 

Internal Audit and Fraud Risk Management Head

 

February 16, 2006 to present

Menardo G. Jimenez, Jr.

 

44

 

Senior Vice President 

 

December 9, 2004 to present 

 

 

 

 

Corporate Communications and Public Affairs Head

 

December 1, 2001 to June 15, 2004

 

 

 

 

Retail Business Head

 

June 16, 2004 to December 31, 2007 

 

 

 

 

Business Transformation Office

 

January 1, 2008 to present

George N. Lim

 

55

 

Senior Vice President 

 

February 26, 1999 to present 

 

 

 

 

Network Services Group Head 

 

February 1, 2003 to December 31, 2007 

 

 

 

 

Business Transformation Office

 

January 1, 2008 to present

Alfredo S. Panlilio

 

44

 

Senior Vice President 

 

May 8, 2001 to present 

 

 

 

 

International and Carrier Business Group Head

 

February 1, 2003 to June 15, 2004

 

 

 

 

PLDT Global Corp. President 

 

June 16, 2004 to present 

Claro Carmelo P. Ramirez

 

47

 

Senior Vice President 

 

July 1, 1999 to present 

 

 

 

 

Retail Business Group Head

 

February 1, 2003 to June 15, 2004

 

 

 

 

International and Carrier Business Group Head

 

June 16, 2004 to December 4, 2005

 

 

 

 

Consumer Affairs Group Head 

 

December 5, 2005 to December 31, 2007 

 

 

 

 

Office of the President

 

January 1, 2008 to present

Ma. Lourdes C. Rausa-Chan

 

54

 

Senior Vice President 

 

January 5, 1999 to present 

 

 

 

 

Corporate Secretary 

 

November 24, 1998 to present 

 

 

 

 

Corporate Affairs and Legal Services Head

 

July 5, 1999 to present

 

 

 

 

Chief Governance Officer

 

March 4, 2008 to present

Victorico P. Vargas

 

56

 

Senior Vice President

 

February 15, 2000 to present

 

 

 

 

Human Resources Group Head

 

February 15, 2000 to present

 

 

 

 

International and Carrier Business Head

 

March 1, 2007 to December 31, 2007

 

 

 

 

Business Transformation Office Head

 

January 1, 2008 to present

June Cheryl A. Cabal-Furigay

 

34

 

Vice President

 

June 14, 2005 to present

 

 

 

 

Financial Reporting and Planning Head

 

May 1, 2002 to November 15, 2006

 

 

 

 

Financial Reporting and Controllership Head

 

November 16, 2006 to present

Christopher H. Young

 

50

 

Chief Financial Advisor

 

November 24, 1998 to present

Rolando G. Peña

 

45

 

Network Services Head of Smart

 

September 1, 1994 to present

 

 

 

 

Customer Service Assurance Group Head

 

January 1, 2008 to present

Ramoncito S. Fernandez

 

55

 

Administration and Materials Management Head of Smart

 

June 6, 2000 to present

 

 

 

 

International and Carrier Business and Global Access Head

 

January 1, 2008 to present

Danilo J. Mojica

 

47

 

Wireless Consumer Head of Smart

 

June 1, 2006 to present

* *

Under the Shareholders Agreemententered into among First Pacific and certain of its affiliates, or the FPParties, NTT Communications and NTTC-UK on September 28, 1999, as amended bythe Cooperation Agreement dated January 31, 2006, NTT Communications isentitled to nominate two directors to the PLDT board of directors and the FPParties are entitled to nominate six directors.  The Shareholders Agreementalso entitles NTT Communications to nominate two directors to the board ofdirectors of Smart and, subject to specified conditions, one member to theboard of directors of all other PLDT subsidiaries.  However, as a result of theCooperation Agreement, in respect of NTT Communications’ right to nominate twodirectors to each of the board of directors of PLDT and Smart, respectively,NTT Communications and the FP Parties agreed to vote as a PLDT shareholder,lobby the directors of PLDT and otherwise use reasonable efforts to procure ashareholders’ vote in favor of replacing on each of the board of directors ofPLDT and Smart, respectively, one NTT Communications nominee with one NTT DoCoMonominee.  Under the Shareholders Agreement, NTT Communications is also entitledto appoint members or advisors of certain PLDT management and board committees,including the audit, governance and nomination, executive compensation and technologystrategy committees described below under “— Audit, Governance and Nomination,Executive Compensation and Technology Strategy Committees,” and as a result ofthe Cooperation Agreement, the FP Parties and NTT Communications agreed to usereasonable efforts to procure that NTT DoCoMo be entitled to appoint oneindividual, who may be replaced at any time, to attend any board committee ofPLDT as a member, advisor or observer.  Moreover, the Cooperation Agreementprovides that upon NTT Communications, NTT DoCoMo and their subsidiaries owningin the aggregate 20% or more of the shares of PLDT’s common stock and for aslong as NTT Communications, NTT DoCoMo and their subsidiaries continue to ownin the aggregate 17.5% of the shares of PLDT’s common stock then outstanding, NTTDoCoMo will be entitled to additional rights under the Strategic Agreement andthe Shareholders Agreement, including the right to nominate one additional NTTDoCoMo nominee to the board of directors of each of PLDT and Smart.  Pursuantto public filings made with the U.S. SEC by NTT Communications and NTT DoCoMo,as at January 30, 2008, NTT Communications and NTT DoCoMo together beneficiallyowned 20.70% of the outstanding shares of PLDT’s common stock.  As a result,NTT DoCoMo is currently entitled to nominate one additional NTT DoCoMO nomineeto the board of directors of each of PLDT and Smart. ****Under the ShareholdersAgreement and the Cooperation Agreement, each party has agreed, under certaincircumstances, to vote its shares of common stock in favor of the nomineesdesignated by the other parties. For more information about the CooperationAgreement, see Item 7. “Major Shareholders and Related Party Transactions ––Related Party Transactions.”

 

Thebusiness address of Rolando G. Peña, Ramoncito S. Fernandez and DaniloJ. Mojica is Smart Tower II, Ayala Avenue, Makati City, Philippines.  The business address of each of the other directors, key officers and advisorsidentified above is the Ramon Cojuangco Building, Makati Avenue, Makati City , Philippines.

 

Thefollowing is a brief description of the business experience during the pastfive years of each of our directors, key officers and advisors.

 

**Mr.Manuel V. Pangilinan** assumed thechairmanship of the board of directors of PLDT in February 2004 after servingas its president and chief executive officer for over five years from November1998 to February 2004.  He also serves as chairman of Smart, Piltel, ePLDT,Metro Pacific Investment Corporation and Landco Pacific Corporation, as well aschairman of the governance and nomination and technology strategy committees ofPLDT.  Mr. Pangilinan founded First Pacific in 1981 and was appointed asexecutive chairman until June 2003, when he was named chief executive officerand managing director of First Pacific.  He also holds the position ofpresident commissioner of P. T. Indofood Sukses Makmur Tbk, the largest food companyin Indonesia.  Mr. Pangilinan is also a member of the board of overseers of the Wharton School of Finance & Commerce, University of Pennsylvania and is chairmanof the board of trustees of Ateneo de Manila University.  He was recentlyappointed by the Office of the President of the Philippines to the Board of theRegents of the University of the Philippines.  He also serves as chairman ofMedical Doctors Inc. (which operates the Makati Medical Center), the Hong KongBayanihan Trust and the Philippine Business for Social Progress.  Mr.Pangilinan has received numerous prestigious awards including the TenOutstanding Young Men of the Philippines (TOYM) Award for International Finance(1983), the Presidential Pamana ng Pilipino Award by the Office of the Presidentof the Philippines (1996), an Honorary Doctorate in Humanities by the San BedaCollege (2002), Best CEO in the Philippines by Institutional Investor (2004),CEO of the Year (Philippines) by Biz News Asia (2004), People of the Year byPeople Asia Magazine (2004), Distinguished World Class Businessman Award by theAssociation of Makati Industries, Inc. (2005), Order of Lakandula (Rank of aKomandante) by the Office of the President of the Philippines (2006), and an HonoraryDoctorate in Humanities by the Xavier University (2007).  Recently, he wasvoted as Corporate Executive Officer of the Year (Philippines) at the 2007Best-Managed Companies and Corporate Governance Polls conducted by Asia Money.Mr. Pangilinan graduated cum laude from the Ateneo de Manila University, with aBachelor of Arts degree in Economics.  He received his Master’s degree inBusiness Administration from the Wharton School of Finance and Commerce, University of Pennsylvania.

 

**Mr.Napoleon L. Nazareno** was appointed aspresident and chief executive officer of PLDT on February 19, 2004 and isconcurrently the president and chief executive officer of Smart and Piltel,positions he has held since January 2000 and November 2004, respectively.  Healso serves as president of ACeS Philippines and chairman of Wolfpac, SBI, I-Contactsand Mabuhay Satellite.  He also serves as a member of the technology strategycommittee of PLDT.

 

Mr.Nazareno’s business experience spans over 30 years and cuts across a broadrange of industries, namely, packaging, bottling, petrochemicals, real estateand, in the last decade, telecommunications and information technologies.  In1981, he started a successful career in the international firm Akerlund &Rausing, occupying senior management to top level positions and, in 1989,became the president and chief executive officer of Akerlund & Rausing (Philippines), Inc.  In August 1995, he moved to Metro Pacific Corporation where he servedas president and chief executive officer until December 1999.  

 

InNovember 2004, Mr. Nazareno was appointed by President Gloria Macapagal-Arroyoas Private Sector Representative of the Public-Private Sector Task Force forthe Development of Globally Competitive Philippine Service Industries.  He wasvoted Corporate Executive Officer of the Year in the Philippines for threeconsecutive years in the 2004, 2005 and 2006 Best-Managed Companies andCorporate Governance Polls conducted by *AsiaMoney*.

 

Mr.Nazareno received his Master’s degree in Business Management from the AsianInstitute of Management and completed the INSEAD Executive Program of theEuropean Institute of Business Administration in Fountainbleu, France.

 

**Ms.Helen Y. Dee** is the chairman andpresident and/or chief executive officer of Hydee Management & Resources,Inc., House of Investments, Inc., Tameena Resources, Inc., Grepalife AssetManagement Corporation and Grepalife Fixed Income Fund Corporation.  She isalso chairman of Malayan Insurance Company, Rizal Commercial BankingCorporation, Landev Corporation, Manila Memorial Park, Inc., Mapua InformationTechnology Center, Inc. and Hi-Eisai Pharmaceuticals, Inc. and thevice-chairman of Pan Malayan Management and Investment Corporation.  She is thepresident of Moira Management, Inc. and YGC Corporate Services, Inc.  She sitson the boards of EEI Corporation, Petro Energy Resources Corp., Nippon LifeInsurance Co., South Western Cement Corp., Seafront Resources Corp., MalayanInsurance Co. Inc., MICO Equities, Inc., Hermoza Ecozone DevelopmentCorporation, La Funeraria Paz, Inc., Honda Cars Philippines, Inc. and IsuzuPhilippines, Inc.  Ms. Dee received her Master’s degree in BusinessAdministration from De La Salle University.

 

**Atty.Ray C. Espinosa** is the president ofePLDT and the chairman of ePLDT subsidiaries Parlance, Vocativ, ePLDT Ventus,SPi, Infocom, Digital Paradise, Airborne Access and Level Up!.  He also servesas a member of the technology strategy committee.  He is a member of the boardsof Cyber Bay Corporation, Nation Broadcasting Corporation, Lepanto ConsolidatedMining Co., Mediaquest Holdings, Inc., Metro Pacific Resources, Inc., PTIC and severalother companies.  He is vice-chairman of the PLDT Beneficial Trust Fund.  UntilJune 30, 2000, he was a partner and member of the Executive Committee of the lawfirm SyCip Salazar Hernandez & Gatmaitan.  Mr. Espinosa received his Master’sof Laws degree from the University of Michigan Law School.

 

**Mr.Tatsu Kono**is the managing directorof the corporate sales department, corporate marketing division of NTT DoCoMo.He joined NTT DoCoMo in 2000 and served as executive director of the global investmentgroup, global business department.  Prior to that, he occupied variouspositions in Kokusai Denshin Denwa Co., Ltd., or KDD, and became the generalmanager of the Sales Promotion Department in 1989, the managing director of theKyoto Sales Office in 1990 and the managing director of the Tokyo Sales Officein 1998.  He serves as an advisor to the audit committee and a member of eachof the governance and nomination, executive compensation and technologystrategy committees of PLDT.  Mr. Konoreceived his Bachelor of Law degree from Waseda University.   

 

**Rev.Fr. Bienvenido F. Nebres, S.J.** hasbeen a director of PLDT since November 24, 1998.  He is the chairman of the auditcommittee and a member of the governance and nomination committee of PLDT.  Heis the president and a member of the board of trustees of the Ateneo de ManilaUniversity and the vice chairman of the board of trustees of the AsianInstitute of Management.  He is also a member of the board of trustees of theManila Observatory, Philippine Institute of Pure and Applied Chemistry andseveral private educational institutions including Georgetown University, Regis University, Assumption College, Stonyhurst School and Sacred Heart School – Jesuit Cebu City.  Rev. Fr. Nebres received his Ph.D in Mathematics from Stanford University.

 

**Mr.Takashi Ooi** has been a director ofPLDT since November 6, 2007.  He built his career in NTT and its subsidiariesNTT Communications and NTT America.  He is presently the vice president fornetwork integration and solutions, global business division of NTT Com, and isresponsible for product/service development and proposal/installation/deliveryof global network for global multi-national companies.  From March 2001 to June2006, he was vice president for product management, global business division ofNTT Com.  He served as director of NTT America and technical advisor toTeligent, Inc. from November 1997 to February 2001.  Prior to that, he heldmanagerial positions in various departments of NTT Com.  Mr. Ooi obtained hisMaster’s of Science degree in Physics from the University of Tokyo and his Master’s of Business Administration degree from Boston University.

 

**Ms.Corazon S. de la Paz-Bernardo** hasbeen a director of PLDT since September 25, 2001.  She is the vice chairman of the Social SecurityCommission, the president and chief executive officer of the Social SecuritySystem and the vice chairman of Banco de Oro Unibank, Inc.  She is an advisorto the audit committee of PLDT.  She has been re-elected president of theInternational Social Security Association, an association based in Geneva, Switzerland, to serve as such for a second consecutive three-year term commencingin September 2007.  Until June 2001, she was the chairman and senior partner ofJoaquin Cunanan & Co., a member firm of PricewaterhouseCoopers Worldwide.She is a director of San Miguel Corporation, Ayala Land, Inc., PhilippineHealth Insurance Corporation, Philex Mining Corporation, Philex Gold, Inc.,Republic Glass Holding Corp., Equitable Card Network, Inc., and IonicsCircuits, Inc.  Ms. De la Paz-Bernardo is a certified public accountant andreceived her Master’s degree in Business Administration from Cornell University.

** **

**Mr.Oscar S. Reyes**has been a director ofPLDT since April 5, 2005 and an independent director of Smart.  He serves as a memberof each of the audit, governance and nomination, executive compensation andtechnology strategy committees of PLDT.  He is the chairman of Link Edge, Inc.and MRL Gold Phils. Inc.  He is also director in various public companies andprivate firms engaged in banking, insurance, financial and business advisoryservices, beverages, electrical products manufacturing, mining and a waterdistribution utility.  These include the Bank of the Philippine Island, MutualFund Co. of the Philippines, Sun Life of Canada (Phils.) Inc., Sun LifeProsperity Dollar Advantage and Dollar Abundance Fund, Inc., Sun Life FinancialPlans, Inc., Pepsi Cola Products Phils. Inc., First Philippine Electric Co.,Basic Energy Corp., Mindoro Resources Ltd., in one archipelago mineral, Inc.,and Manila Water Corporation.  He was the country chairman of the ShellCompanies in the Philippines from 1997 to 2001 and concurrently the ManagingDirector of Shell Philippines Exploration B.V. until 2002.  From 2002 to 2004,he was the senior management adviser of Shell Philippines Exploration B.V. andthe CEO adviser of Pilipinas Shell Petroleum Corporation.  Mr. Reyes completedthe Master’s in Business Administration program of the Ateneo Graduate Schoolof Business and the Program in Management Development of the Harvard Business School, and holds a degree in International Business from Waterloos University.  

 

**Mr.Albert F. del Rosario** has been adirector of PLDT since November 24, 1998.  He is also the chairman of the boardof trustees of the PLDT Beneficial Trust Fund and the executive compensationcommittee of the board of directors of PLDT.  He is the chairman of the board of Gotuaco del Rosario and Associates,Inc., Philippine Indocoil Corporation, Business World Publishing Corporation, andStratbase, Inc., the vice chairman of the board of Asia Insurance (Philippines) Corporation and the president of ADR Holdings, Inc., ARS Reinsurance Brokers,Inc., and Philippine Telecommunications Investment Corporation.  From 2001 to2006, he served as the Ambassador Plenipotentiary and Extraordinary of theRepublic of the Philippines to the United States of America.  Mr. del Rosarioalso sits on the boards of Infrontier (Philippines) Inc., LMG ChemicalsCorporation, Six Harmonies Holdings, Inc., Landco Pacific Corporation and MetroPacific Investments Corporation.  Mr. del Rosario received his Bachelor ofScience degree in Economics from New York University.

** **

**Mr.Pedro E. Roxas** has been a director ofPLDT since March 1, 2001.  He serves as a member of the audit and executive compensationcommittee of the board of directors of PLDT.  He is the chairman and/or presidentand chief executive officer of various business organizations in the fields ofagri-business, sugar manufacturing and real estate development, including RoxasHoldings Inc., CADP Group Corp., Roxaco Land Corporation, Roxas and Company,Inc. and Fuego Land Corporation.  He is also a director of Banco de Oro PrivateBank.  Mr. Roxas received his Bachelor of Science degree in BusinessAdministration from the University of Notre Dame.

** **

**Mr.Alfred V. Ty**has been a director ofPLDT since June 13, 2006.  He is a member of the governance and nomination andexecutive compensation committees of the board of directors of PLDT.  He is thechairman of Asia Pacific Top Management International Resources Corporation,vice chairman of Toyota Motor Philippines Corporation, the president ofFederalland, Inc. and the corporate secretary of Metropolitan Bank and TrustCorporation.  

 

**Atty.Ma. Lourdes C. Rausa-Chan** has been a director of PLDT since March 6, 2007.  Sheis senior vice president for corporate affairsand legal services and the general counsel and corporate secretary of PLDT.She also serves as corporate secretary of several subsidiaries of PLDT.  InMarch 2008, she was appointed as chief governance officer of PLDT and anon-voting member of the governance and nomination committee of the board ofdirectors of PLDT.  Prior to joining PLDT in November 1998, she was the groupvice president for legal affairs of Metro Pacific Corporation for 11 years.  Sheobtained her Bachelor of Arts and Bachelor of Laws degrees from the Universityof the Philippines.   

 

**Mr.Ernesto R. Alberto** is a senior vicepresident of PLDT.  He was appointed in February 2008 as head of our customer salesand marketing group which was created to consolidate and synchronize allrevenue generation relationship initiatives of PLDT, including product/marketdevelopment, product management, marketing, sales and distribution, andcustomer relationship management.  He was the corporate business head of PLDTfrom May 2003 until January 31, 2008.  He has over 20 years of work experiencein the areas of corporate banking, relationship management and businessdevelopment.  Prior to joining PLDT in 2003, he was a vice president and headof the national corporate group of Citibank N.A., Manila from 1996 to May 2003.He previously served as vice president and head of the relationship management groupof Citytrust Banking Corporation.  Mr. Alberto holds directorships in certain subsidiariesof PLDT.

 

**Mr.Rene G. Bañez**is a senior vicepresident of PLDT.  He****was appointedas administration and materials management group head in January 2008.  He wasthe chief governance officer of PLDT from October 5, 2004 to March 3, 2008, anon-voting member of the governance and nomination committee until March 28,2008 and was the head of the support services and tax management group of PLDTfrom January 1999 to January 2001.  He served as Commissioner of the PhilippineBureau of Internal Revenue from February 2001 to August 2002.  Prior to joiningPLDT, he was the group vice president for tax affairs of Metro PacificCorporation for 3 years until December 1998.

 

**Ms.Anabelle L. Chua** is the treasurer ofPLDT and a senior vice president.  She concurrently holds the position of chieffinancial officer of Smart.  She holds directorships in several subsidiariesand affiliates of PLDT, is a member of the board of trustees of the PLDTBeneficial Trust Fund, and a director of Philippine TelecommunicationsInvestment Corporation and the PSE.  She was a vice president at Citibank, N.A.where she worked for 10 years prior to joining PLDT in 1998.  She has over 15years of work experience in the areas of corporate finance, treasury, financialcontrol and credit risk management.

 

**Mr.Jun R. Florencio** is a senior vicepresident for PLDT’s internal audit and fraud risk management group.  He hasover 20 years of work experience in the areas of external and internal audit,credit management, information technology, financial management, andcontrollership.  He joined the Company in April 1999 and, prior to his presentposition, served as the financial reporting and control head up to March 2000.He previously held various positions in the finance organization of EasternTelecommunications and was the financial controller of Smart for 4 years untilMarch 1999.

 

**Mr.Menardo G. Jimenez, Jr.** is a seniorvice president.  He was appointed as business transformation office lead for revenuecomposition workstream in January 2008.  He was the retail business head fromJune 2004 to December 31, 2007.  He previously worked at GMA Network, Inc.,where he served as head of a creative services and network promotions, duringwhich he produced a number of international award-winning campaigns for saidcompany and its radio and television programs.  In 2005, he won the first CEOExcel Award (Communications Excellence in Organizations) given by theInternational Association of Business Communicators mainly for effectivelyusing communication strategies in managing the PLDT retail business team tomeet its targets and achieve new heights in the fixed line business.  In 2006,his further achievements in handling the retail business of PLDT and his workat Smart as officer-in-charge for marketing were recognized by the Agora Awardswhich chose him as its Marketing Man of the Year.  

 

**Mr.George N. Lim** is a senior vicepresident.  He was appointed as business transformation office lead for networkworkstream in January 2008.  He was the network services head from February2003 to December 2007.  He served as head of network development and provisioningfrom February 1999 to January 2003 and as head of marketing from December 1993to February 1999.  Mr. Lim holds directorships in certain subsidiaries of PLDT.

 

**Mr.Alfredo S. Panlilio** is a senior vicepresident.  He has over 15 years of work experience in the fields of businessdevelopment and information technology.  He was the corporate business headfrom August 2000 to May 2003 and international carrier business head from May2003 to June 2004.  Prior to joining PLDT in July 1999, he held managementpositions at IBM Philippines, Inc. and was the vice president for business developmentof the Lopez Communications Group (ABS-CBN Broadcasting, BayanTel and SkyCable) until June 1999.   Mr. Panlilio holds directorships in certain subsidiariesof PLDT and PLDT Global Corporation.

 

**Mr.Claro Carmelo P. Ramirez** is a seniorvice president.  He has over 20 years of work experience in the field ofmarketing.  He worked as associate director for Colgate Palmolive Company, GlobalBusiness development in New York, and as marketing director for ColgatePalmolive Argentina, S.A.I.C.  Prior to joining PLDT in July 1999, he was the marketingdirector of Colgate Palmolive Philippines, Inc.  Mr. Ramirez also holdsdirectorships in certain subsidiaries of PLDT.

 

**Mr.Victorico P. Vargas** is a senior vicepresident.  He was appointed as business transformation office head in January2008 in addition to his functions as human resources group head, to lead thebusiness transformation initiatives of PLDT.  He has over 20 years of workexperience in various industries including insurance, consumer goods, realestate, banking and finance, telecommunications/information technology.  Priorto joining PLDT in February 2000, he served as the country human resources directorof Citibank N.A., Manila and spent two years outside the Philippines as country human resources director of Citibank, N.A., Bangkok.  He also serves as anon-voting member of the governance and nomination and executive compensationcommittees of PLDT.  Mr. Vargas is a director of certain subsidiaries of PLDT. 

 

**Ms.June Cheryl A. Cabal-Furigay**is avice president.  She****joined PLDT in June 2000as an executive trainee in the finance group, then served as an executive assistant tothe corporate finance and treasury sector head from December 2000 to April2002.  Prior to her present position, she was the head of financial reportingand planning center.  From 1993 to 1997, she was a senior associatein the business audit and advisory group of Sycip Gorres Velayo & Co. She is a director and the treasurer of certain subsidiaries of PLDT and thePLDT-Smart Foundation, Inc.

** **

**Mr.Christopher H. Young** is our chieffinancial advisor.  He worked in PricewaterhouseCoopers in London and Hong Kongfrom 1979 until 1987, at which time he joined First Pacific in Hong Kong as group financial controller.  He joined Metro Pacific Corporation in 1995 asfinance director, a position he held until he joined us in November 1998.

 

**Mr.Rolando G. Peña**was appointed inJanuary 2008 as head of customer service assurance group.  He is responsiblefor managing the overall development and implementation of strategies andprograms covering network engineering and operations, facility provisioning andmaintenance, and customer servicing and fulfillment.  Mr. Peña has over 20years of experience in telecommunication operations and was chosen asElectronics and Communications Engineer for the year 2000 by the Institute of Electronics and Communications Engineers of the Philippines.  From 1999 to 2007,he was the head of network services division of Smart and prior to joiningSmart in 1994, he was the first vice president in charge of technical operationsof Digital Telecommunications Philippines, Inc.  Mr. Peña holds directorshipsin certain subsidiaries of PLDT and Smart. 

** **

**Mr.Ramoncito S. Fernandez**was appointedin January 2008, as the head of international and carrier business of PLDT andSmart in a concurrent capacity.  He is responsible for directing overallinitiatives to optimize business potentials and grow revenues for bothinternational and domestic carrier markets.  Mr. Fernandez has over 15 years ofexperience in materials management, industrial marketing and sales.  He was theadministration and materials management head of Smart from 2000, and of PLDTfrom 2004, until December 31, 2007.  He was the executive vice president incharge of marketing, sales and logistics of Starpack Philippines, Inc. untilJune 2000.  He also worked for Union Carbide Philippines in manufacturing andindustrial engineering.  Mr. Fernandez holds directorships in certain subsidiariesof PLDT and Smart.

** **

**Mr.Danilo J. Mojica**is head of the wirelessconsumer division of****Smart.  Prior to joining Smart in June 2006, he wasthe general manager and chief operating officer of Cebu Pacific Air, awholly-owned subsidiary of JG Summit Group, from 2003 to 2006 and was presidentof Rickett Benckiser Indonesia from 1997 to 2003.

** **

**Termsof Office**

** **

The directors of PLDT are elected each year to serveuntil the next annual meeting of stockholders and until their successors areelected and qualified.  The term of office of all officers is coterminous withthat of the board of directors that elected or appointed them.

** **

**Family Relationships**

** **

None of the directors, key officersand advisors of PLDT has any family relationships up to the fourth civil degreeeither by consanguinity or affinity.

** **

**Compensation****of Key Management Personnel of the PLDT Group******

** **

Theaggregate compensation paid to our key officers and directors named above, as agroup, for 2007 amounted to approximately Php1,092 million.  

** **

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

 

There are no agreements between PLDT Group and any of its keymanagement personnel providing for benefits upon termination of employment,except for such benefits to which they may be entitled under PLDT Group’sretirement and incentive plans.

 

**Long-TermIncentive Plan******

 

OnAugust 3, 2004, PLDT’s board of directors approved the establishment of theoriginal LTIP, or Original LTIP, for eligible key executive officers andadvisors of PLDT and its subsidiaries, which is administered by the ExecutiveCompensation Committee.  The Original LTIP is a four-year cash-settled sharebased plan that covered the period from January 1, 2004 to December 31, 2007,or the Performance Cycle.  The payment of awards was intended to be made at theend of the Performance Cycle (without interim payments) and contingent upon theachievement of an approved target increase in PLDT’s common share price by theend of the performance cycle and a cumulative consolidated net income target forthe Performance Cycle.  

 

OnAugust 28, 2006, PLDT’s board of directors approved, in principle, the broadoutline of the PLDT Group’s strategic plans for 2007 to 2009 focusing on thedevelopment of new revenue streams to drive future growth while protecting theexisting core communications business.  To ensure the proper execution of thethree-year plan, particularly with respect to the manpower resources beingcommitted to such plans, a new LTIP, or New LTIP, upon endorsement of the executivecompensation committee, was approved by the board of directors to cover theperiod from January 1, 2007 to December 31, 2009, or New Performance Cycle.

 

As a result of the establishment of the New LTIP, the boardof directors also approved the early vesting of the Original LTIP by the end of2006 for those of its participants who were invited to join the New LTIP andchose to join.  Participants in the Original LTIP who were not invited to jointhe New LTIP, or who were invited but chose not to join, remained subject tothe Original LTIP and its original vesting schedule. 

 

The New LTIP, like the Original LTIP, is a cash planthat is intended to provide meaningful, contingent, financial incentivecompensation for eligible executives, officers and advisors of the PLDT Group,who are consistent performers and contributors to the achievement of the long-termstrategic plans and objectives, as well as the functional strategy and goals ofthe PLDT Group.  

 

The New LTIP, like the Original LTIP, is administered by the executive compensationcommittee which has the authority to determine (a) eligibility and identity ofparticipants; (b) the award attributable to each participant based on theparticipant’s annual base compensation and taking into account suchparticipant’s seniority, responsibility level, performance potential, tenurewith the PLDT Group, job difficulty and such other measures as the Committeedeems appropriate; (c) the level of achievement of the performance objectives;and (d) the actual award payable to each participant based on the level ofachievement of the performance objectives.

 

LTIP cost for the year ended December 31, 2007 pertaining to the NewLTIP, and for the year ended December 31, 2006 pertaining to the Original LTIP,amounted to Php1,448 million and Php3,150 million, respectively.  As atDecember 31, 2007 and 2006, outstanding LTIP liability amounted to Php1,494million and Php5,030 million, respectively, see *Note 23 – Share-basedPayments and Employee Benefits* to the accompanying audited consolidatedfinancial statements in Item 18.

 

**Executive Stock OptionPlan**

** **

On April 27, 1999 and December 10, 1999, the board ofdirectors and stockholders, respectively, of PLDT approved the executive stockoption plan covering a total of 1,289,745 shares of common stock and theamendment of the seventh article of the Articles of Incorporation of PLDTdenying the pre-emptive right of holders of shares of common stock to subscribefor any issue of the 1,289,745 shares of common stock pursuant to the executivestock option plan.

 

Stock options thatwere granted pursuant to the executive stock option plan to managementexecutives and advisors/consultants of PLDT became fully vested in December2004.  An option holder may exercise his option to purchase that number ofvested shares of common stock underlying his option, in whole or in part, atthe price of Php814 per share, subject to adjustment upon the occurrence ofspecific events described in the executive stock option plan.  The optionexercise period is until December 9, 2009.  The option holder is required togive written notice of exercise to the executive compensation committee,indicating the number of vested shares to be purchased, accompanied by paymentin cash of the full amount of the purchase price for those shares.

 

As at February 29, 2008, the total number of shares ofcommon stock allocated for options granted to the chief executive officer,directors and key officers of PLDT named below, as a group, under the executivestock option plan was 206,942.

 

**ShareOwnership******

** **

Thefollowing table sets forth information regarding ownership of our common stockand preferred stock, as at February 29, 2008, by our continuing directors, keyofficers and advisors.  Each individual below owns less than 1% of ouroutstanding common and preferred shares. 

** **

**Name of Owner**

**Shares of**

**Common Stock****(1)**

**Shares of**

**Preferred Stock**

 

 

 

Manuel V. Pangilinan

219,350

360

Napoleon L. Nazareno

9,487(2)

495

Helen Y. Dee

22,055(3)

180

Ray C. Espinosa

15,243(2)

–

Takashi Ooi

1

–

Tatsu Kono

100

–

Rev. Fr. Bienvenido F. Nebres, S.J 

3,078(4)

–

Corazon S. de la Paz-Bernardo

11,146,310(5)

–

Ma. Lourdes C. Rausa-Chan

699(2)

350

Oscar S. Reyes

1

360

Albert F. del Rosario

130,005

1,560

Pedro E. Roxas

1

540

Alfred V. Ty

1

–

Ernesto R. Alberto

–

–

Rene G. Bañez

1

540

Anabelle L. Chua

13,078(2)

–

Jun R. Florencio

15

530

Menardo G. Jimenez, Jr.

22

–

George N. Lim

5,356(2)

360

Alfredo S. Panlilio 

280

–

Claro Carmelo P. Ramirez

11,500

–

Victorico P. Vargas 

2,878

180

June Cheryl A. Cabal-Furigay

–

–

Christopher H. Young

51,813(2)

–

Rolando G. Peña

–

–

Ramoncito S. Fernandez

156

–

Danilo J. Mojica

–

–

_____________

 

*(1)    **As at February 29, 2008,under PLDT’s ESOP, all of the options to purchase**shares of common stock of key officers and directors listedin the table above had been exercised.  No options have been granted tonon-executive directors.  All outstanding options were exercisable at anexercise price of Php814 per share and had an expiration date of December 10,2009.  All outstanding options were fully vested as at December 10, 2004.*

*(2)    **Includes PLDT common sharesthat have been lodged with the Philippine Central Depository, Inc.*

*(3)    **Includes 21,957 PLDT commonshares registered in the name of Hydee Management and Resources, Inc.  Aschairperson and president of Hydee Management & Resources, Inc., Ms. Deemay exercise voting rights in respect and may be considered to have beneficialownership of these shares.*

*(4)    **Includes 386 shares of PLDT’scommon stock registered in the name of Ateneo de Manila University and 2,690 sharesof PLDT’s common stock held of record by PCD Nominee Corporation.  As presidentof the Ateneo de Manila University, Rev. Fr. Nebres may exercise voting rightsin respect of these shares and may be considered to have beneficial ownershipof these shares*.

*(5)    **Includes 5,024,789 PLDTcommon shares registered in the name of Social Security System and****6,121,520****PLDT common shares held of record by PCD Nominee Corporation.  Ms. De laPaz, as president and chief executive officer of the Social Security System,may exercise voting rights in respect of these shares and may be considered tohave beneficial ownership of these shares.*

 

Theaggregate number of common and preferred shares directly and indirectly ownedby directors, key officers and advisors listed above, as at February 29, 2008,was 11,631,430 and 5,455 respectively, or 6.157103% and 0.002888% of PLDT’soutstanding common and preferred shares, respectively. 

 

**Boardof Directors –– Independent Directors**

* *

At least four of our directors,namely, Rev. Fr. Bienvenido F. Nebres, S.J., Oscar S. Reyes, Pedro E. Roxas andAlfred V. Ty, are independent directors who are not officers or employees ofPLDT or any of its subsidiaries, and who are free from any business or otherrelationship with PLDT or any of its subsidiaries which could, or couldreasonably be perceived to, materially interfere with the exercise ofindependent judgment in carrying out their responsibilities as directors.  The independence standards/criteria are provided in ourBy-Laws and Manual on Corporate Governance pursuant to which, in general, a directormay not be deemed independent if such director is, or in the past five yearshad been, employed in an executive capacity by us or any company controlling,controlled by or under common control with us or he is, or within the past fiveyears had been, retained as a professional adviser by us or any of our relatedcompanies, or he is not free from any business or other relationships with uswhich could, or could reasonably be perceived, to materially interfere with hisexercise of independent judgment in carrying out his responsibilities as adirector.

 

**Audit,Governance and Nomination, Executive Compensation and Technology Strategy Committees**

 

Our board of directors isauthorized under the by-laws to create committees, as it may deem necessary.We currently have four board committees, namely, the audit, governance andnomination, executive compensation and technology strategy committees, thepurpose of which is to assist our board of directors.  Each of these committeeshas a board-approved written charter that provides for such committee’scomposition, membership qualifications, functions and responsibilities, conductof meetings, and reporting procedure to the board of directors.

 

*Audit Committee*

 

Ouraudit committee is composed of three members, all of whom are independentdirectors, namely, Rev. Fr. Bienvenido F. Nebres, S.J., who chairs thecommittee, Mr. Pedro E. Roxas and Mr. Oscar S. Reyes.  Mr. Tatsu Kono and Ms.Corazon S. de la Paz-Bernardo, who are non-independent members of our board ofdirectors, and Mr. Roberto R. Romulo, an independent member of our board of directors,serve as advisors to the audit committee.  All of the members of our auditcommittee are financially literate and Ms. Corazon S. de la Paz-Bernardo, anadvisor to the audit committee, is an accounting and financial managementexpert.

 

Asprovided for in the audit committee charter, the purposes of the auditcommittee are to assist our board of directors in fulfilling its oversight responsibilitiesfor (i) PLDT’s accounting and financial reporting principles and policies andinternal audit controls and procedures; (ii) the integrity of PLDT’s financialstatements and the independent audit thereof; (iii) PLDT’s compliance withlegal and regulatory requirements; and (iv) the performance of the internalaudit organization and the external auditors.

 

Tocarry its direct responsibility for the appointment, setting of compensation,retention and removal of the external auditors, the audit committee has thefollowing duties and powers:

 

•        to review and evaluate thequalifications, performance and independence of the external auditors and the leadpartner of the external auditors;

 

•        to select and appoint the externalauditors and to remove or replace the external auditors;

 

•        to review and approve inconsultation with the head of the internal audit organization and the chieffinancial advisor the fees charged by the external auditors for audit andnon-audit services;

 

•        to pre-approve all audit andnon-audit services to be provided by and all fees to be paid to the externalauditors;

 

•        to ensure that the externalauditors prepare and deliver annually the statement as to independence, todiscuss with the external auditors any relationships or services disclosed insuch statements that may impact the objectivity, independence or quality ofservices of said external auditors and to take appropriate action in responseto such statement to satisfy itself of the external auditor’s independence;

 

•        to ensure that the externalauditors or the lead partner of the external auditors having the primaryresponsibility for the audit of PLDT’s accounts is rotated at least once everyfive (5) years; 

 

•        to advise the external auditorsthat they are expected to provide the committee a timely analysis ofsignificant/critical financial reporting issues and practices; 

 

•        to obtain assurance from theexternal auditors that the audit was conducted in a manner consistent with therequirement under applicable rules; and

 

•        to resolve disagreements betweenmanagement and the external auditors regarding financial reporting. 

 

Theaudit committee also has the authority to retain or obtain advice from specialcounsel or other experts or consultants in the discharge of theirresponsibilities without the need for board approval.

 

*Governance and NominationCommittee*

 

Ourgovernance and nomination committee is composed of five voting and twonon-voting members.  Three of the voting members are independent directors,namely, Rev. Fr. Bienvenido F. Nebres, S.J., Mr. Alfred V. Ty and Mr. Oscar S.Reyes.  Mr. Manuel V. Pangilinan, who serves as chairman, and Mr. Tatsu Konoare the other voting members, and Mr. Victorico P. Vargas and Atty. Ma. LourdesC. Rausa-Chan are the non-voting members. 

 

The principal functions andresponsibilities of our governance and nomination committee are:

 

1.       To develop and recommend to the boardfor approval and oversee the implementation of corporate governance principlesand policies;

 

2.       To review and evaluate thequalifications of the persons nominated for election as directors (includingindependent directors) or other positions requiring board appointment;

 

3.       To identify the qualified nomineesand recommend that the board select and recommend such qualified nominees forelection as directors/independent directors at the annual meeting ofshareholders; and

 

4.       To assist our board in developingand implementing the board’s performance evaluation process.

 

*Executive Compensation Committee*

 

Ourexecutive compensation committee is composed of six members: five voting membersand one non-voting member.  Three of these voting members are independentdirectors, namely, Mr. Pedro E. Roxas, Mr. Oscar S. Reyes and Mr. Alfred V. Ty,two are non-independent directors, namely, Mr. Tatsu Kono and Mr. Albert F. delRosario, who serves as chairman, and one is a non-voting member, namely Mr.Victorico P. Vargas.

 

The principal functions and responsibilities of our executivecompensation committee are:

 

1.       To provide guidance to and assistour board of directors in developing a compensation philosophy or policyconsistent with our culture, strategy and control environment;

 

2.      To oversee the development andadministration of our compensation programs; and

 

3.       To review and approve corporategoals and objectives relevant to the compensation of our chief executive officer,evaluate the performance of our chief executive officer in light of those goalsand objectives, and set the compensation level of our chief executive officer based on suchevaluation.

 

*Technology Strategy Committee*

 

Our technology strategy committee is composed of fivemembers, all of whom are voting members.  One of the members is an independentdirector, namely, Mr. Oscar S. Reyes, and four are non-independent directors,namely Mr. Manuel V. Pangilinan, who serves as chairman, Mr. Napoleon L.Nazareno, Mr. Ray C. Espinosa and Mr. Tatsu Kono.

 

Theprincipal functions and responsibilities of our technology strategy committeeare:

 

1.       To review and approve ourtechnology strategy and roadmap, and to review and advise our board on major technologytrends and strategies;

 

2.       To evaluate and advise our boardon actual and proposed technology investments and transactions;

 

3.       To review and submit to the boardrecommendations regarding management’s formulation and execution and overallperformance in achieving technology-related strategic goals and objectives; and

 

4.       To recommend to the boardapproaches to acquiring and maintaining technology positions and maximizing ouraccess to relevant technologies, and to ensure optimized contribution oftechnology to our business strategy and growth targets.

 

EffectiveJune 12, 2007, our board of directors dissolved the finance committee, since,for several years thereto, all financial transactions which were within theauthority of the finance committee to review and/or approve were elevateddirectly to our board.

 

**Directors’and Officers’ Involvement in Certain Legal Proceedings**

 

Thefollowing is a description of the cases in which our chairman, Manuel V.Pangilinan, our president and chief executive officer, Mr. Napoleon L. Nazarenoand our directors, Mr. Albert F. del Rosario, Ms. Ma. Lourdes C. Rausa-Chan andMs. Corazon S. de la Paz-Bernardo are respondents:

 

1.     Mr. Manuel V.Pangilinan, in his capacity as chairman of the board of Metro PacificCorporation, a stockholder of Metro Tagaytay Land Company, Inc., or MTLCI, andfour other individuals were respondents in I.S. 04-A-1057 for alleged violationof Article 315 (1)(b) (Estafa) of the Revised Penal Code filed by Mr. VicenteA. Tuason in behalf of Universal Leisure Club, Inc., or ULCI, and Mr. Jose L.Merin in behalf of Universal Rightfield Property Holdings, Inc., or URPHI. 

 

In the complaint-affidavit, Messrs. Tuason and Merinalleged that, in violation of the trust reposed by ULCI and certain contractualcommitments and representations, MTLCI, with the participation and/orconformity of the respondents, misappropriated and converted Php139 millionthat ULCI entrusted for the purpose of incorporating Golf Land Co., Inc.(GLCI), a corporation to be wholly owned by MTLCI and to which a property ofMTLCI was to be transferred in exchange for shares in GLCI.  The said shareswere then supposed to be transferred to ULCI. 

 

Based on his counsel’s advice, Mr. Pangilinan cannotbe held liable for violating Article 315 (1)(b) of the Revised Penal Codebecause no document or other evidence has been presented to prove that Mr.Pangilinan actually participated in the negotiation, preparation, approval,execution and/or implementation of the agreement/contract upon which the claimsof the complainants are purportedly based, much less that Mr. Pangilinan, withabuse of trust and confidence, misappropriated any amounts paid by ULCI toMTLCI. 

 

On March 25, 2004, Mr. Pangilinan submitted hiscounter-affidavit in I.S. No. 04-A-1057, including therein counter-chargesagainst Messrs Tuason and Merin for Perjury and Unjust Vexation. Thesecounter-charges were docketed as I.S. No. 04-C-5493-94. 

 

In a Joint Resolution dated June 7, 2004, the CityProsecution Office of Makati dismissed all charges in the Estafa case againstMr. Pangilinan as well as the counter-charges for Perjury and Unjust Vexationagainst Messrs. Tuason and Merin. 

 

On November 16, 2004, ULCI, through Messrs. Tuasonand Merin, filed with the Philippine Department of Justice, or DOJ, theirrespective Petitions for Review assailing the Resolution of the CityProsecution Office of Makati.  Thereafter, the complainants and respondentsincluding Mr. Pangilinan filed, with the assistance of their respectivecounsels, a Joint Motion to Dismiss (with prejudice) the charges andcounter-charges subject of the investigation before the DOJ. 

 

On March 20, 2006, Mr. Pangilinan, through counsel,filed a Manifestation and Motion reiterating the parties’ prayer in their JointMotion to Dismiss that the cases be dismissed with prejudice. The DOJ still hasto resolve this Joint Motion to Dismiss. 

 

2.     Mr. Napoleon L.Nazareno, in his capacity as president and chief executive officer of Smart,is a respondent in the following cases: 

 

(a)   Criminal Case No.133235-R submitted to the Municipal Trial Court in Cities Branch 6 Cebu Cityand complaint docketed as I. S. No. 2005-57-B and filed with the Prosecutor’sOffice of  Borongan, Eastern Samar, all for alleged violation of Section 301 inrelation to Section 213 of Presidential Decree 1096 (otherwise know as theNational Building Code of the Philippines).  The complaints alleged that Smartbuilt its cellsites without securing building permits and Smart’s officers arecriminally liable therefor. 

 

In Criminal Case No. 133235-R, the Municipal TrialCourt in Cities Branch 6 Cebu City granted Mr. Nazareno’s Motion to Dismiss andordered the dismissal of the case in an order dated July 13, 2007. 

 

The Prosecutor’s Office of Borongan, Eastern Sama r, finding no probable cause to indict respondent Mr. Nazareno, dismissed thecomplaint docketed as I.S. No. 2005-57-B in a Resolution dated July 4, 2007.

 

(b)   Complaint docketedas I.S. 07-3216-F and filed with the Cebu City Prosecutor’s Office by IntegratedDistribution Network, Inc., or IDNI, for alleged Estafa and violation ofRepublic Act No. 8484, or the “Access Devices Regulation Act of 1988”. IDNIalleged that Smart, through its directors and officers, including Mr. Nazareno,who are respondents in this complaint, perpetrated fraud by blocking the SIMsof its sub-dealers. The dispute arose from contracts executed between Smart andIDNI on roving billboards. The parties entered into a settlement agreementallowing IDNI to purchase electronic load from Smart within a specific  periodand for a specified amount. It is Smart’s position that IDNI’s cause of action,if any, is purely civil in nature.  

 

The Cebu City Prosecutor’s Office issued a resolutiondated November 12, 2007, finding probable cause to indict the respondents for Estafaand violation of the Access Devices Regulation Act of 1988.  On January 10,2008, Mr. Nazareno filed a petition for review before the DOJ seeking thereversal of that Resolution.  On January 16, 2008, the other respondents filedtheir petition for review before the DOJ.  Both petitions are still pendingbefore the DOJ.

 

3.     Messrs. Napoleon L.Nazareno and Albert F. del Rosario and other directors and officers of theformer PDCP Bank and some officers of the Bangko Sentral ng Pilipinas andDevelopment Bank of the Philippines, are respondents in a complaint docketed asI.S. No. 2004-631 and filed by Chung Hing Wong/Unisteel/Unisco Metals, Inc.with the DOJ, for alleged syndicated Estafa, Estafa through falsification ofdocuments, other deceits, malversation and robbery.  In thecomplaint-affidavit, the complainant alleged that the officers and directors ofPDCP Bank deceived the complainant to secure a loan from PDCP Bank throughmisrepresentation and with the sinister purpose of taking over thecomplainant’s corporation.  As stated in their respective counter-affidavits,the charges against the PDCP directors including Messrs. Nazareno and delRosario are entirely without merit.  The complaint was referred to the Officeof the Ombudsman by the DOJ on October 30, 2007 on the ground that some of therespondents are public officers and the alleged offenses were committed in theperformance of their official functions.  The complaint is still pending withthe Office of the Ombudsman.      

 

4.     Mr. Albert F. delRosario and other former directors/officers, and Ms. Ma. Lourdes C. Rausa-Chanand other former corporate secretaries/assistant corporate secretaries ofSteniel Cavite Packaging Corporation, Metro Paper and Packaging Products, Inc.,AR Packaging Corporation and Starpack Philippines Corporation, are respondentsin a case docketed as OMB C-C-04-0363-H (CPL No. C-04-1248) in the Office ofthe Ombudsman.  The complaint is for alleged:  (a) violation of Republic ActNo. 3019 (otherwise known as the Anti-Graft and Corrupt Practices Act); (b)estafa thru falsification of public documents; (c) falsification of publicdocuments under Article 171, in relation to Article 172, of the Revised PenalCode (RPC); (d) infidelity in the custody of public documents under Article 226of the RPC; and (e) grave misconduct.  The complaint related to various taxcredit certificates (allegedly fraudulent, with spurious and fake supportingdocuments) issued to Victory Textile Mills, Inc. (allegedly, a non-existentcorporation with fictitious incorporators and directors) and transferred toseveral companies including the aforesaid companies.  The complaints againstMr. del Rosario and Ms. Rausa-Chan involve the first two offenses only and intheir capacity as director and corporate secretary, respectively, of MetroPaper and Packaging Products, Inc.  In the opinion of the legal counsels of Mr.del Rosario and Ms. Rausa-Chan, there are no legal and factual bases for theirinclusion as respondents in this complaint.  Mr. del Rosario and Ms. Rausa-Chanhad no participation or involvement in the alleged anomalous acquisition andtransfer of the subject tax credit certificates.  The case is still pendingwith the Office of the Ombudsman.

 

5.     Ms. Corazon S. dela Paz-Bernardo, in her capacity as president and chief executive officer of SocialSecurity System, or SSS, is a respondent in the following cases: 

 

a.       Complaints docketed asOMB-C-C-04-281F, OMB-C-A-04-0276F and CPC No-C-04-850 and filed with the Officeof the Ombudsman for alleged inaction of SSS officials on the request for thepayment of liquidated damages relating to the SSS Baguio building. On September22, 2006, the Office of the Ombudsman dismissed the case.  The complainantappealed the administrative case to the Court of Appeals but the same wasdismissed.  The criminal aspect of the case is pending appeal with the SupremeCourt.

 

b.     Complaint docketed asOMB-C-C-06-0166C and filed with the Office of the Ombudsman for allegedviolation of Section 3 (h) of Republic Act 3019 and Section 7 (a) of RepublicAct 6713. The case is still pending with the Office of the Ombudsman.

** **

**Employees and LaborRelations******

 

As at December 31, 2007, we had30,255 employees within the PLDT Group, with 5,415, 8,080 and 16,760 employees inour wireless, fixed line and ICT groups, respectively.  PLDT had 7,909employees at the end of 2007, of which 40% were rank-and-file employees, 55%were management/supervisory staff and 5% were executives.  This numberrepresents a decrease of 617, or approximately 7%, from the staff level as atthe end of 2006, mainly as a result of the ongoing manpower rightsizingprogram.  From a peak of 20,312 at the end of 1994, PLDT’s number of employeeshas declined by 12,403, or 61%, by the end of 2007.  As at December 31, 2006,we had 28,225 and 8,526 employees within the PLDT Group and PLDT, respectively.The increase in the number of employees within the PLDT Group from 2006 to2007 primarily resulted from the acquisition of Springfield by SPi in April2007. 

 

PLDThas three employee unions, the members of which in the aggregate represent 20%of the employees of the PLDT Group.  We consider our relationship with ourrank-and-file employees’ union, our supervisors’ union and our salessupervisors’ union to be good.

 

On November 16, 2006, PLDT and the *Manggagawa ng Komunikasyon saPilipinas*, or MKP, our rank-and-file employees’ union, concluded and signeda new three-year Collective Bargaining Agreement, or CBA, covering the periodfrom November 9, 2006 to November 8, 2009.  This CBA provides each member asigning bonus equivalent to one month’s salary (computed at the salary rateprevailing prior to November 9, 2006) plus Php15,000; monthly salary increasesof Php2,150, Php2,200 and Php2,550 for the first, second and third year,respectively; an increase in the yearly Christmas gift certificate fromPhp7,000 to Php8,000; an increase in the amount of coverage under the grouplife insurance plan from Php500,000 to Php650,000; an additional contributionof Php1 million to the Educational Loan Fund; and Php35,000 funeral assistancefor the death of a dependent.  Other provisions of this CBA include increasesin the rice subsidy and professional fee for dependent’s hospitalization.

 

On March 8, 2005, PLDT and PLDTSales Supervisors’ Union, or PSSU, concluded and signed a three-year CBAcovering the period from January 1, 2005 to December 31, 2007.  As at the dateof the filing of this Annual Report on Form 20-F, negotiations are stillon-going for the signing of a new CBA covering the period January 1, 2008 toDecember 31, 2010.

 

On January 20, 2005, PLDT and *Gabay ng Unyon sa Telekomunikasyon ngmga Superbisor*, or GUTS, our supervisors’ union, concluded and signed athree-year CBA covering the period from January 1, 2005 to December 31, 2007.  Asat the date of the filing of this Annual Report on Form 20-F, negotiations are stillon-going for the signing of a new CBA covering the period from January 1, 2008to December 31, 2010.

 

**Pensionand Retirement Benefits**

 

*Defined Benefit Plans*

* *

We have defined benefit pension plans, coveringsubstantially all of our employees, except the employees of Smart.  The plans requirecontributions to be made to a separate administrative fund.

 

PLDT has a trusteed,non-contributory defined benefit plan covering all permanent and regularemployees.  The benefit plan provides benefits upon normal retirement beginningat age 65, early retirement beginning at age 50 or completion of at least 30years of credited service, voluntary resignation with completion of at least 15years of credited service, total and physical disability, death and involuntaryseparation.  Benefits are based on the employee's final monthly basic salaryand length of service.

 

The normalretirement benefit is equal to a percentage of the final monthly basic salaryper year of credited service.  The percentage is 100% for those with less than15 years of service at retirement and 125% for those with 15 years of serviceat retirement.  Thereafter, the percentage increases by 5% for every additionalyear of credited service up to a maximum of 200%.  Early retirement benefit isequal to the accrued normal retirement benefit based on salary and service atthe date of early retirement.

 

Inthe event the benefit plan's assets were insufficient to pay the requiredretirement benefits, PLDT would be obligated to fund the amount of theshortfall.  In addition, claims of PLDT's employees for retirement benefitsthat have accrued would rank above the claims of all other creditors of PLDT,in the event of PLDT's bankruptcy or liquidation.

 

*DefinedContribution Plan*

 

Smartmaintains a trustee-managed, tax-qualified, multi-employer plan coveringsubstantially all permanent and regular employees.  The plan has a definedcontribution format limiting Smart’s obligation to specified contribution tothe plan.  It is being financed by the participating companies (Smart and itssubsidiary, I-Contacts) and contribution by employees is optional.

 

Wespent Php1,773 million for pension, retirement and similar benefits for ouremployees for the year ended December 31, 2007.  In addition, Php603 millionwas recognized in respect of 616 employees who availed of the enhancedseparation package under our MRP.  For more information about the benefit planincluding the total amount set aside to provide pension retirement or similarbenefits, see *Note 5 – Income and Expenses* and *Note 23 – Share-basedPayments and Employee Benefits* to the accompanying audited consolidatedfinancial statements in Item 18.

 

**Item 7.       Major Shareholders and Related PartyTransactions******

** **

The following table sets forth information regardingownership of shares of PLDT’s common stock as at February 29, 2008, of allshareholders known to us to beneficially own 5% or more of PLDT shares ofcommon stock.  All shares of PLDT's common stock have one vote per share.  

 

** **

**Title  of Class**

** **

**Name and Address of Record Owner and Relationship With Issuer**

** **

**Place of Incorporation**

** **

**Name of Beneficial  Owner and Relationship with Record Owner**

** **

**Number of**

**Shares Held of Record**

** **

**Percentage  of Class**

 

Common

 

Metro Pacific Resources, Inc.(1)

c/o Corporate Secretary

18th Floor, Liberty Center,

104 H. V. dela Costa St.

Salcedo Village, Makati City

 

Philippine

Corporation

 

Same as Record Owner

 

17,112,534

 

9.06

 

Common

 

 

Philippine Telecommunications

Investment Corporation(2)

12th Floor Ramon Cojuangco Bldg.

Makati Avenue, Makati City

 

Philippine

Corporation

 

Same as Record Owner

 

13,338,415(3)

 

7.06

 

Common

 

NTT Communications Corporation(4)

1-1-6 Uchisaiwai-cho

1-Chome, Chiyoda-ku

Tokyo 100-8019, Japan

 

Japanese

Corporation

 

See Footnote 6 below

 

12,633,487

 

6.69

 

Common

 

NTT DoCoMo, Inc.(5)

41st Floor, Sanno Park Tower

2-11-1 Nagata-cho, Chiyoda-ku  Tokyo 100-6150, Japan

 

Japanese

Corporation

 

See Footnote 6 below

 

12,633,486(6)

 

6.69

 

Common

 

Social Security System(7)

SSS Building

East Avenue, Quezon City

 

 

Philippine

Corporation

 

Same as Record Owner

 

5,024,789(8)

 

2.66

 

Common

 

PCD Nominee Corporation(9)

37/F Enterprise Building, Tower I

Paseo De Roxas cor. Ayala Avenue,

Makati City

 

 

Philippine Corporation

 

See Footnote 9 below

 

84,247,398

 

44.60

 

Common

 

J. P. Morgan Asset Holdings

(HK) Limited(10)

(various accounts)

20F Chater House, 8 Connaught Road

Central, Hongkong 

 

 

HongKong

Corporation

 

See Footnote 10 below

 

38,906,071

 

20.59

 

Common

 

Capital Research Global Investors(11)

 

Delaware Corporation

 

See Footnote 11 below

 

15,098,070

 

7.99

__________

*(1)   **Based on a resolution of theboard of directors of Metro Pacific Resources, Inc., or MPRI, Mr. Manuel V.Pangilinan has been appointed as proxy or duly authorized representative ofMPRI to represent and vote the PLDT shares of common stock of MPRI at the annualmeeting of stockholders of PLDT.*

* *

*(2)   **Pursuant to a resolutionadopted by the board of directors of Philippine Telecommunications InvestmentCorporation, or PTIC, the president of PTIC, Mr. Manuel V. Pangilinan, has thecontinuing authority to represent PTIC at any and all meetings of thestockholders of a corporation in which PTIC owns of record or beneficially anyshares of stock or other voting security, and to sign and deliver, in favor ofany person he may deem fit, a proxy or other power of attorney, with full powerof delegation and substitution, authorizing his designated proxy or attorney-in-factto vote any and all shares of stock and other voting securities owned of recordor beneficially by PTIC at any and all meetings of the stockholders of thecorporation issuing such shares of stock or voting securities.*

* *

*(3)   **In addition to the13,338,415 shares owned on record by PTIC, PTIC beneficially owns 12,695,848 sharesof PLDT’s common stock held of record by PCD Nominee Corporation, or PCD.  Thetotal shareholdings of PTIC is 26,034,263 shares of PLDT common stock representing13.78% of the outstanding common stock of PLDT as at February 29, 2008.*

* *

*First Pacific Group beneficially owned 26.17% of ourcommon shares as at February 29, 2008 by virtue of PLDT common shareholdings byintermediate holding companies, including PTIC and MPRI.*

* *

*(4)   **Based on publicly availableinformation, NTT Communications is a wholly-owned subsidiary of NipponTelegraph and Telephone Corporation, or NTT.  Based on a certification signedby a duly authorized officer of NTT Communication, Mr. Jun Sawada is authorizedto execute for and on behalf of NTT Communications, endorsements, transfers,and other matters relating to the shares of PLDT common stock held by NTTCommunications.*

* *

*(5)   **Based on publicly availableinformation, NTT DoCoMo is a majority-owned and publicly traded subsidiary ofNTT.  Based on a certification signed by a duly authorized officer of NTTDoCoMo, Mr. Toshinari Kunieda or Mr. Matsuo Yamamoto, is authorized to executefor and on behalf of NTT DoCoMo, endorsements, transfers and other mattersrelating to the PLDT shares of common stock held by NTT DoCoMo.*

* *

*(6)   **NTT DoCoMo completed anacquisition of 12,633,486 shares of PLDT common stock from NTT Communicationson March 14, 2006.  From March 23, 2007 to February 11, 2008, NTT DoCoMoacquired through open market purchases a total of 14,134,588 additional sharesof PLDT common stock.  The total shareholdings of NTT DoCoMo is 26,768,074shares of PLDT common stock (of which 12,633,486 are owned on record by NTTDoCoMo, 8,533,253 are ADS and 5,601,335 are held of record by PCD) representing14.17% of the outstanding common stock of PLDT as of February 29, 2008.*

* *

*In reports filed by NTT Communications and NTT DoCoMo,it is stated that because of NTT’s ownership of all the outstanding capitalstock of NTT Communications and a majority of the common stock of NTT DoCoMo,together with certain contractual arrangements including the CooperationAgreement dated January 31, 2006, NTT, NTT Communications and NTT DoCoMo may beconsidered to constitute a “group” within the meaning of Section 13(d)(3) ofthe U.S. Securities Exchange Act of 1934, as amended.  Therefore, each of themmay be deemed to have beneficial ownership of the 39,401,561 shares inaggregate held by NTT Communications and NTT DoCoMo, representing 20.86% of theoutstanding common stock of PLDT as at February 29, 2008.*

* *

*(7)   **Pursuant to a resolution ofthe Board of Directors of the Social Security System, or SSS, Ms. Corazon S. dela Paz-Bernardo, as president and chief executive officer of the SSS, has beenauthorized to represent and vote the PLDT shares of common stock of SSS in theannual meeting of stockholders of PLDT.*

* *

*(8)   **In addition to the 5,024,789shares owned on record by the SSS, SSS also beneficially owned 5,750,492 sharesof PLDT common stock held of record by PCD.  The total beneficial shareholdingsof SSS is 10,775,281 shares of PLDT common stock representing 5.70% of theoutstanding common stock of PLDT as at February 29, 2008.*

* *

*(9)   **Registered owner of shares held by participants in thePhilippine Depository and Trust Co., or PDTC, a private company organized toimplement an automated book entry system of handling securities transactions inthe Philippines.  Under the PDTC procedures, when an issuer of a PDTC-eligibleissue will hold a stockholders’ meeting, the PDTC will execute a pro-formaproxy in favor of its participants for the total number of shares in theirrespective principal securities account as well as for the total number ofshares in their client securities account.  For the shares held in theprincipal securities account, the participant concerned is appointed as proxywith full voting rights and powers as registered owner of such shares.  For theshares held in the client securities account, the participant concerned isappointed as proxy, with the obligation to constitute a sub-proxy in favor ofits clients with full voting and other rights for the number of sharesbeneficially owned by such clients.  Based on available information, none ofthe owners of the shares of PLDT common stock registered under the name of PCDNominee Corporation, or PCD, owned more than 5% of PLDT’s outstanding commonstock as at February 29, 2008, except The Hongkong and Shanghai Banking Corp.Ltd.–Clients, Capital Research Global Investors, and Citibank N.A., which ownapproximately 19.37%, 7.99%, and 7.51%, respectively, of PLDT’s outstandingcommon stock as at such date.  The Company has no knowledge if any beneficialowner of the shares under The Hongkong and Shanghai Banking Corp. Ltd.–Clients,Capital Research Global Investors, and Citibank accounts owned more than 5% ofPLDT’s outstanding common stock as at such date.*

* *

*The PCD account also includes 12,695,848 sharesbeneficially owned by the PTIC, 5,601,335 shares beneficially owned by NTTDoCoMo, 5,750,492 shares beneficially owned by SSS and 12,461,130 sharesbeneficially owned by Capital Research Global Investors.*

* *

*(10)**Holds shares as nominee of JPMorgan Chase Bank,successor depositary under the Common Stock Deposit Agreement, dated October 14, 1994, as amended on February 10, 2003, between JPMorgan Chase Bankand the holders of American Depositary Receipts, or ADRs, evidencing AmericanDepositary Shares, or ADSs, representing shares of common stock of the Company(the “Deposit Agreement”).  Under the Deposit Agreement, if  the depositarydoes not receive voting instructions from a holder of ADRs, such holder will bedeemed to have instructed the depositary to provide a discretionary proxy to aperson designated by PLDT for the purpose of exercising the voting rights pertainingto the shares of common stock represented by such holder of ADRs, except thatno discretionary proxy will be given with respect to any matter as to whichsubstantial opposition exists or which materially and adversely affects therights of the holders of such ADRs.*

* *

*This account also includes 2,636,940 shares of PLDTcommon stock underlying ADSs owned by Capital Research Global Investors,8,533,253 shares of PLDT common stock underlying ADS owned by NTT DoCoMo.*

* *

*(11)**According to the Schedule 13G of Capital ResearchGlobal Investors filed with the U.S. SEC on February 11, 2008, Capital ResearchGlobal Investors, as an investment adviser, beneficially owned 15,098,070shares of PLDT common stock, which includes 2,636,940 shares of PLDT commonstock underlying ADSs and 12,461,130 shares of PLDT common stock held of recordby PCD as at February 29, 2008.*

 

As at February 29, 2008,approximately 85.95% of the outstanding capital stock of PLDT was registered inthe names of Philippine persons.

 

**RelatedParty Transactions**

 

For a discussion of our material related partytransactions, please see *Note 22 – Related Party Transactions* to theaccompanying audited consolidated financial statements in Item 18.

 

Except for the transactions described above, therewere no other material related party transactions during the last two years.

 

Nodirector or officer of PLDT or associate of any such director or officer wasindebted to PLDT at any time during the period from January 1, 2007 through thedate of filing of this annual report.

 

**Item 8.       FinancialInformation**

** **

**Consolidated Statementsand Other Financial Information**

 

Consolidatedfinancial statements are set forth under Item 18. “Financial Statements.”

 

**LegalProceedings**

 

Exceptas disclosed in the following paragraphs, neither PLDT nor any of itssubsidiaries is a party to, and none of their respective properties is subjectto, any pending legal proceedings that PLDT considers to be potentiallymaterial to its and its subsidiaries’ business.

 

*QuoWarranto Action*

 

OnJune 4, 1990, the Solicitor General of the Philippines instituted legalproceedings in the Regional Trial Court of Makati City seeking to “oustPhilippine Long Distance Telephone Company (PLDT) from exercising its franchiseand/or to revoke, cancel and/or pre-terminate its franchise (Act No. 3436, asamended) and/or to break up an alleged unlawful monopoly and give equal andfair opportunity to other service corporations.”  The Solicitor General citedconstitutional and statutory grounds for his action, including alleged foreigninvestors’ participation in the control and management of PLDT on a basisdisproportionate to their holdings of PLDT’s capital stock, violation of therequirement that 60% of the capital of a public utility be owned by Philippinecitizens, inadequate and costly equipment and service, and blocking of theright of other parties to provide telephone service in the Philippines.

 

Webelieve that these allegations are without merit and plan to defend ourselvesvigorously.  The Philippine Congress granted PLDT’s amended franchise underRepublic Act No. 7082 notwithstanding the existence of these proceedings andthe opposition of the Solicitor General.  The case has been archived by virtueof a court order dated January 20, 1999.  No further action has been taken andthe case continues to remain inactive.  

 

Taxation

* *

*National Internal Revenue Taxes*

* *

PLDT has filed various cases against the Commissionerof the Bureau of Internal Revenue, or BIR, for refunds and/or tax credit of:

 

•        erroneously paid VAT, compensating taxes, advance sales taxes andother internal revenue taxes on PLDT's importation of various equipment,machinery and spare parts; and

 

•        erroneously paid withholding tax on separation pay of employeeswho availed of the benefits under the Manpower Reduction Program. 

 

Inthe case of the claim for refund of erroneously paid value-added taxes,compensating taxes, advance sales taxes and other internal revenue taxes onPLDT’s importation of various equipment, machinery and spare parts, the SupremeCourt, on December 15, 2005, rendered a decision partially granting the claimfor refund or tax credit certificates and ordering the Commissioner of InternalRevenue, or CIR, to issue a Tax Credit Certificate or to refund to PLDT Php95million representing erroneously collected advance sales tax and compensatingtax.  PLDT filed a Motion for Execution with the Second Division of the Courtof Tax Appeals which was opposed by the CIR.  The Second Division of Court ofTax Appeals granted the Motion for Execution but the CIR appealed the saiddecision to the Court of Tax Appeals *En Banc* where the case is currentlypending.

 

Thecase of the claim for refund of erroneously paid withholding tax on separationpay continues to be pending with the Supreme Court.

* *

*NTC supervision and regulation fees, or SRF*

* *

Since1994, following the rejection of PLDT's formal protest against the assessmentsby the NTC of SRF, PLDT and the NTC had been involved in legal proceedingsbefore the Court of Appeals and the Supreme Court.  The principal issue inthese proceedings was the basis for the computation of the SRF.  PLDT’sposition, which was upheld by the Court of Appeals, but, as set forth below,rejected by the Supreme Court, was that the SRF should be computed based onlyon the par value of the subscribed or paid up capital of PLDT, excluding stockdividends, premium or capital in excess of par.  

 

Asat December 31, 2007, PLDT has paid, since 1994, a total amount of Php2,541million in SRF of which Php2,251 million were paid under protest.  TheSupreme Court, 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 Resolutionin paying the outstanding principal balance relating to stock dividends in theamount of Php455 million to the NTC.

 

*Localbusiness and franchise tax assessments*

* *

As discussed below, we currently expect that goingforward, we will pay local franchise taxes on an annual basis based on the gross receipts received or collected forservices rendered within the jurisdiction of the respective taxing authority.For this reason, we have made the appropriate provisions in our consolidated financial statements as at December31, 2007.

 

The Local Government Code of 1991, or Republic Act(R.A.) 7160, which took effect on January 1, 1992, extended to local governmentunits, or LGUs, the power to tax businesses within their territorialjurisdiction granted under Batas Pambansa 337, and withdrew tax exemptionspreviously granted to franchise grantees under Section 12 of R.A. 7082.

 

PLDT believes, based on the opinion of its legalcounsel, that the Public Telecommunications Policy Act, or R.A. 7925, whichtook effect on March 16, 1995, and the grant of local franchise and businesstaxes exemption privileges to other franchise holders subsequent to theeffectivity of R.A. 7160, implicitly restored its local franchise and businesstaxes exemption privilege under Section 12 of R.A. 7082, or the PLDT Franchisepursuant to Section 23 thereof or the equality of treatment clause.  To confirmthis position, PLDT sought and obtained on June 2, 1998 a ruling from theBureau of Local Government Finance, or BLGF, of the Philippine Department ofFinance, which ruled that PLDT is exempt from the payment of local franchiseand business taxes imposable by LGUs under R.A. 7160.  However, on March 25,2003, in a ruling relating to a tax assessment by the City of Davao, theSupreme Court decided that PLDT was not exempt from the local franchise tax.

 

Although PLDT believes that it is notliable to pay local franchise and business taxes, PLDT has entered intocompromise settlements with several LGUs, including the City of Makati, in order to maintain and preserve its good standing and relationship with theseLGUs.  Under these compromise settlements, which have mostly been approved bythe relevant courts, as at December 31, 2007, PLDT has paid a total amount ofPhp694 million for local franchise tax covering prior periods up to the end of2006.

 

PLDT had no longer contested assessments of LGUs forfranchise taxes based on gross receipts received or collected for serviceswithin their respective territorial jurisdiction as at December 31, 2007.

 

However, PLDT continues to contest the imposition oflocal business taxes in addition to local franchise tax by the Cities ofTuguegarao, Balanga and Caloocan in the amounts of Php1.9 million, Php0.2million and Php6.2 million, respectively, for the years 1998 to 2003 for theCity of Tuguegarao, and for the years 2005 to 2007 for the Cities of Balangaand Caloocan.  PLDT is likewise contesting the imposition of a business tax onthe transmission of messages by the Municipality of San Pedro in the amount ofPhp0.3 million for the years 2005 to 2007.  In addition, PLDT is contesting theimposition of franchise tax by the Province of Cagayan based on gross receiptsderived from outside its territorial jurisdiction in the amount of Php3 millionfor the years 1999 to 2006.

 

While Smart had received and paid underprotest the local franchise tax assessment issued by the City of Makatitotaling approximately Php312 million, the Regional Trial Court, or RTC, ofMakati declared Smart exempt from payment of local franchise tax to the City ofMakati and on June 9, 2005, the Court of Appeals dismissed the appeal filed bythe City of Makati.

 

Also,Smart had received LFT 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.

 

**DividendDistribution Policy**

 

Pleasesee Item 3. “Key Information – Dividends Declared” for a description of ourdividend distribution policy, and please see Item 3. “Key Information –Dividends Declared” and *Note 7 – Earnings Per Common Share* to theaccompanying audited consolidated financial statements in Item 18 for tablesthat show dividends declared in 2007.

 

**Item 9.       The Offerand Listing**

** **

**Common Capital Stock and American Depositary Shares (“ADSs”)**

** **

Thecommon shares of PLDT are listed and traded on the PSE.  On October 19, 1994, an ADR facility was established, pursuant to which Citibank, N.A., as thedepositary, issued ADRs evidencing ADSs, with each ADS representing one PLDTcommon share with a par value of Php5 per share.  Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary of PLDT’s ADRfacility.  The facility was established in accordance with a Common StockDeposit Agreement dated October 19, 1994, as amended on February 10, 2003 between the Depositary and the holders of the ADRs.  The ADSs have been listed andare traded on the New York Stock Exchange, or NYSE, in the United States under the symbol “PHI”.  

 

Untilearly 2007, the ADSs were also listed on the NYSE Arca.  However, PLDTvoluntarily delisted its ADSs from the NYSE Arca, effective February 12, 2007,after determining that doing so is in the best interest of PLDT and itsstockholders.

 

As at February 29, 2008, a total of 7.0 million shares of PLDT's commoncapital stock were traded on the PSE.  During the same year, the volume oftrading was 7.7 million ADSs on the NYSE.

 

As at February 29, 2008, 10,807 stockholders were Philippine personsand held approximately 35% of PLDT’s common capital stock.  In addition, as at February29, 2008, there was a total of approximately 43 million ADSs outstanding,substantially all of which PLDT believes were held in the United States by 374 holders.

 

High and low sales prices for PLDT’s common shares onthe PSE and ADSs on the NYSE for each of the five most recent fiscal years,each full quarterly period during the two most recent fiscal years, and eachmonth in the most recent six months were as follows: 

 

 

**Philippine Stock Exchange**

 

**New York****Stock  Exchange**

 

**High**

 

**Low**

 

**High**

 

**Low**

2008

 

 

 

 

 

 

 

First Quarter

Php3,175.00

 

Php2,520.00

 

US$76.72

 

US$61.49

January

3,175.00

 

2,520.00

 

76.72

 

62.20

February

3,050.00

 

2,830.00

 

75.67

 

70.13

March 

2,905.00

 

2,600.00

 

71.65

 

61.49

2007

3,285.00

 

2,250.00

 

76.30

 

45.25

First Quarter

2,820.00

 

2,250.00

 

56.62

 

45.25

Second Quarter

2,730.00

 

2,390.00

 

58.88

 

50.05

Third Quarter

2,950.00

 

2,270.00

 

65.16

 

48.00

Fourth Quarter

3,285.00

 

2,900.00

 

76.30

 

64.90

October 

3,285.00

 

2,900.00

 

72.50

 

64.90

November

3,105.00

 

2,925.00

 

73.39

 

67.21

December

3,205.00

 

2,970.00

 

76.30

 

69.62

2006

2,610.00

 

1,675.00

 

51.90

 

32.15

First Quarter

1,930.00

 

1,675.00

 

38.09

 

32.20

Second Quarter

2,295.00

 

1,700.00

 

43.99

 

32.15

Third Quarter

2,300.00

 

1,790.00

 

45.00

 

34.57

Fourth Quarter

2,610.00

 

2,150.00

 

51.90

 

42.56

2005

1,860.00

 

1,310.00

 

34.35

 

23.50

2004

1,505.00

 

810.00

 

27.03

 

14.38

2003

990.00

 

265.00

 

17.79

 

4.85

 

**Item 10.    AdditionalInformation**

** **

**Articles of Incorporationand By-Laws**

 

Thefollowing summarizes certain provisions of PLDT's Articles of Incorporation andBy-Laws and applicable Philippine law.  This summary is qualified in itsentirety by reference to the Corporation Code of the Philippines (the“Corporation Code”) and PLDT’s Articles of Incorporation and By-Laws.Information on where investors can obtain copies of the Articles of Associationand By-Laws is described under the heading “Documents Available.”

 

*Purpose of PLDT*

 

PLDT'sArticles of Incorporation have been filed with the Philippine SEC and PLDT hasbeen issued Philippine SEC Reg. No. 55.  The Second Article of PLDT's Articlesof Incorporation provides that the purposes for which PLDT was formed are toinstall, maintain, and operate any and all kinds of equipment forcommunications; to install, maintain, operate or lease telephone lines andsystems, and to purchase, sell and deal in all kinds of products which may becombined with the building, installing and operation of those systems and linesand in general, to engage in any and all acts and business which may benecessary or convenient, in the furtherance of such lines of communication andbusiness.

 

*Directors*

 

PLDT'sAmended By-Laws provide that the board of directors shall consist of thirteenmembers, each of whom must hold at least one share of stock of PLDT in his ownname and possess the minimum qualifications and have none of thedisqualifications provided in the By-Laws.  There are no provisions in PLDT’sAmended Articles of Incorporation or Amended By-Laws with respect to (a) adirector’s power to vote on a proposal, arrangement or contract in which thedirector is materially interested, (b) the directors’ power, in the absence ofan independent quorum, to vote compensation to themselves or any members oftheir body, (c) borrowing powers exercisable by the directors and how suchborrowing powers can be varied, or (d) retirement or non-retirement ofdirectors under an age limit requirement.

 

Description of PLDT Capital Stock

* *

*Authorized Capital Stock*

 

The authorized capital stock ofPLDT is Php9,395 million divided into two classes consisting of 234 millionshares of Common Capital Stock with a par value of Php5 per share (the “CommonStock”) and 822.5 million shares of serial Preferred Stock with a par value ofPhp10 per share (the “Preferred Stock”).

 

*Common Stock*

 

Setout below is a statement of the dividend, voting, pre-emption and other rightsof the holders of Common Stock as set out in the Articles of Incorporationand/or By-Laws of PLDT:

 

(a)    After the requirements withrespect to preferential dividends on the serial Preferred Stock shall have beenmet and after PLDT shall have complied with all the requirements, if any, withrespect to the setting aside of sums as purchase, retirement or sinking funds,the holders of the Common Stock shall be entitled to receive such dividends asmay be declared from time to time by the board of directors out of fundslegally available therefor.

 

(b)    After distribution in full of thepreferential amounts to be distributed to the holders of serial Preferred Stockin the event of the voluntary or involuntary liquidation, dissolution, distributionof assets or winding up of PLDT, the holders of Common Stock shall be entitledto receive all the remaining assets of PLDT of whatever kind available fordistribution to stockholders ratably in proportion to the number of CommonStock held by them, respectively.

 

(c)    Except as may be otherwiserequired by law, or by the Articles of Incorporation of PLDT, each holder ofCommon Stock shall have one vote in respect of each share of such stock held byhim on all matters to be voted upon by the stockholders, and the holders ofCommon Stock shall have the exclusive right to vote for the election ofdirectors and for all other purposes.  At every election of directors, a holderof Common Stock is entitled to vote such shares of Common Stock held by him foras many persons as there are directors to be elected, or to cumulate saidshares and give one candidate as many votes as the number of directors to beelected multiplied by the number of his shares shall equal, or to distributesuch votes on the same principle among as many candidates as he shall thinkfit.

 

In addition to the foregoingrights, the Corporation Code provides for other stockholders’ rights generally,which include:

 

(a)    Appraisal right or the right of adissenting stockholder to demand payment of the fair value of his shares ofstock in the following instances:  (a) in case any amendment to the articles ofincorporation has the effect of changing or restricting the rights of anystockholders or class of shares, or of authorizing preferences in any respectsuperior to those of outstanding shares of any class, or of extending orshortening the term of corporate existence; (b) in case of sale, lease,exchange, transfer, mortgage, pledge or other disposition of all orsubstantially all of the corporate property and assets of the corporation; (c)in case of merger or consolidation; and (d) in case of investment of funds ofthe corporation in any other corporation or business or for any purpose otherthan the primary purpose for which it was organized, except where theinvestment by the corporation is reasonably necessary to accomplish its primarypurpose as stated in its articles of incorporation.

 

(b)    The right to approve certaincorporate acts, such as (a) election of directors; (b) removal of directors; (c) extension or shortening of the corporate term; (d) increase or decrease ofcapital stock, and incurring, creating or increasing bonded indebtedness; (e)sale or other disposition of all or substantially all of the corporate assets;(f) investment of corporate funds in any other corporation or business or forany purpose other than the primary purpose for which it was organized exceptwhere the investment is reasonably necessary to accomplish its primary purposeas stated in the corporation’s articles of incorporation; (g) declaration ofstock dividend; (h) entering into a management contract with anothercorporation; (i) plan of merger or consolidation; and (j) voluntary dissolutionof the corporation by shortening the corporate term.

 

(c)    The right to inspect at reasonablehours on business days the records of all business transactions of thecorporation and the minutes of any meeting; however, the stockholders’ right toinspect corporate records and books is not an absolute right so that thecorporation may deny said right on the basis of impropriety of the purpose ormotive of the stockholder.

 

(d)    The right to be furnished the mostrecent financial statements of the corporation, within ten (10) days fromreceipt by the corporation of a written request from a stockholder.  The sameright exists at the annual meeting of stockholders at which the board of directorsmust present to the stockholders a financial report of the operations of thecorporation for the preceding year which shall include financial statementsduly signed and certified by an independent certified public accountant.

 

*Restrictionson Foreign Ownership*

 

TheConstitution of the Republic of the Philippines (Section 11, Article XII)states that no franchise, certificate, or any other form of authorization forthe operation of a public utility shall be granted except to citizens of thePhilippines or to corporations or associations organized under the laws of thePhilippines at least 60% of whose capital is owned by such citizens.

 

Whilethe Articles of Incorporation and By-Laws of PLDT do not contain any specificrestriction on the sale, assignment or transfer of shares that would violatethe aforecited ownership requirement, the Articles of Incorporation of PLDTprovide that the board of directors shall have full power and authority toauthorize (whether by adoption of amendments to the By-Laws of PLDT or ofresolutions, the promulgation of rules or regulations or otherwise) the takingby said corporation of all such actions as the board of directors may deemnecessary or appropriate to ensure compliance by said corporation with anyapplicable provision of the Constitution of the Republic of the Philippines orany other applicable law, treaty, rule or regulation relating to the ownershipof securities of said corporation by citizens of the Philippines, aliens orother persons or group of persons.

 

*Meetings*

* *

TheCorporation Code requires corporations to hold an annual meeting ofstockholders and to send notice thereof to stockholders.  Under PLDT’s By-Laws,the annual meeting of stockholders shall be held at the principal office of thecorporation, or at such other place designated by the board of directors in thecity or municipality where the principal office of the corporation is located,on the second Tuesday in June of each year.  In the annual meeting, the boardof directors shall be elected and such other business may be transacted asshall come before the meeting.  At least fifteen (15) business days written orprinted notice of the date, time and place of holding every annualstockholders' meeting shall be given by the Secretary or by an AssistantSecretary by personal delivery or by mail to each stockholder at his or herlast known place of residence or business.  Special meetings of stockholders maybe called at any time by the President or three (3) of the Directors or by anumber of stockholders representing two-thirds (2/3) of the subscribed capitalstock.  Notice in writing of such meeting stating the date, time or placethereof, shall be given to each stockholder by the Secretary or AssistantSecretary or, in case of his absence, inability, refusal or neglect to act,then by the President, Directors or stockholders calling said meeting, bypersonal delivery or by mail to each stockholder at his or her last known placeof residence, at least fifteen (15) business days before the date fixed for themeeting.

 

TheBy-Laws of PLDT provide that each share of common stock which has voting rightson any matter under consideration may be represented at any meeting ofstockholders by the holder thereof or by his attorney duly authorized by proxyin writing on forms prescribed by the board of directors which shall befurnished to a stockholder upon his request.  Unless otherwise provided in theproxy, it shall be valid only for the meeting in respect of which such proxywas issued.  Proxies must be filed with the Secretary, Assistant Secretary ortransfer agent of PLDT at least two (2) days before the day of the meeting.Any proxy filed with the Secretary, Assistant Secretary or transfer agent ofthe corporation may be revoked by the stockholder concerned either in aninstrument in writing duly presented to the Secretary, Assistant Secretary ortransfer agent of the corporation at least two (2) days before the day of themeeting or by his personal presence at the meeting.  The decision of theSecretary on the validity of proxies shall be final and binding until andunless set aside by a court of competent jurisdiction.  As provided in theCorporation Code, unless otherwise provided in the proxy, it shall be validonly for the meeting for which it is intended and no proxy shall be valid andeffective for a period longer than five (5) years at any one time.

 

TheBy-Laws of PLDT also provide that at any meeting of the stockholders, personsrepresenting, in person or by proxy, a majority of the shares issued andoutstanding and entitled to vote at said meeting shall constitute a quorum forthe transaction of any business, except as otherwise provided by law, and exceptthat a lesser number may adjourn the meeting.

 

*Issuesof Shares*

* *

The boardof directors of PLDT has the power to authorize the issue and sale ofauthorized but unissued shares of Common Stock of said corporation for suchconsideration as it shall determine, provided that such consideration shall notbe less than the par value of such shares and, provided further, that suchissue and sale is not otherwise prohibited under applicable laws.

 

Underthe Securities Regulation Code of the Philippines (R.A. No. 8799), or SRC, nosecurities except of a class exempt under the provisions thereof or unless soldin any transaction exempt under any of the provisions thereof, shall be sold oroffered for sale or distribution to the public unless such securities shallhave been registered and permitted to be sold pursuant to the SRC.

 

*Transfer of Shares*

* *

The shares of Common Stock may be transferred bydelivery of certificate(s) endorsed by the shareholder named in the certificateor his duly authorized attorney or representative.  No transfer, however, shallbe valid, except as between the parties, until the transfer is recorded in thestock and transfer books of PLDT maintained by  Hong Kong and Shanghai Banking Corporation, the stock transfer agent of PLDTfor its Common Stock.

 

Philippinelaw does not require transfers of Common Stock to be effected on the PSE, butany off-exchange transfers will subject the transferor to a capital gains taxthat may be significantly greater than the stock transfer tax applicable to transferseffected on the PSE.  All transfers of shares of Common Stock on the PSE mustbe effected through a licensed broker in the Philippines.

 

*ShareCertificates*

* *

Certificatesrepresenting fully paid shares of Common Stock are issued in such denominationsas stockholders may request, except that certificates will not be issued forany fractional part of a share or any undivided interest in any share.

 

*Dividends*

* *

Underthe Corporation Code, the board of directors may declare dividends on theCommon Stock out of the unrestricted retained earnings which may be payable incash, in property or in stock to all stockholders on the basis of outstandingshares held by them.  The declaration of stock dividends requires the approvalof the stockholders of PLDT representing not less than two-thirds of theoutstanding capital stock of PLDT.  If a stock dividend would require anincrease in the authorized capital stock, Philippine SEC approval would berequired.  Common Stock issued as stock dividends should be registered with andlicensed by the Philippine SEC and listed on the PSE.

 

The Corporation Code requires aPhilippine corporation with retained earnings in excess of 100% of its paid-incapital to declare and distribute as dividends the amount of such surplus.  Notwithstandingthis general requirement, a Philippine corporation may retain all or anyportion of such surplus in the following cases:  (i) when justified by definitecorporate expansion projects or programs approved by the board of directors;(ii) when the corporation is prohibited under any loan agreement with anyfinancial institution or creditor, whether local or foreign, from declaringdividends without its/his consent, and such consent has not yet been secured;or (iii) when it can be clearly shown that such retention is necessary underspecial circumstances relevant to the corporation, such as when there is a needfor special reserve for probable contingencies.

 

PLDThas entered into certain loan and credit agreements, which restrict thedeclaration and payment of dividends by PLDT.  In particular, under certain loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, (ii) if after giving effectto such action the current ratio would be less than 0.90:1 or (iii) in anamount greater than PLDT’s net income after taxes during the fiscal year towhich such payment or distribution relates.  On March 1, 2005, PLDT declared a cash dividend at Php14 per commonshare to holders of record as at March 31, 2005, which was paid on May 12, 2005, constituting the first cash dividend declaration to common shareholderssince March 2001.  This was followed by cash dividend declarations made by PLDTon its common stock on May 5, 2005, at Php21 per common share to holders ofrecord as at June 3, 2005, which was paid on July 14, 2005; on November 8,2005, at Php21 per common share to holders of record as at November 28, 2005,which was paid on December 28, 2005; on February 27, 2006, at Php28 per commonshare to holders of record as at March 20, 2006, which was paid on April 20,2006; and on August 8, 2006, at Php50 percommon share to holders of record as at August 21, 2006, which was paid onSeptember 21, 2006.

 

*Preferred Stock*

 

Preferred Stock may be issuedfrom time to time in one or more series as the board of directors maydetermine.  The board of directors is authorized to establish and designate thetitle and number of shares of each series and to fix the terms thereof,including dividend rate, redemption and sinking fund provisions, conversionrights and the amount to be received upon liquidation, provided that theamounts payable upon redemption or liquidation may not be more than 110%, norless than 100%, of par value, plus in each such case accrued and unpaid dividends.Except as otherwise provided by law, the holders of Preferred Stock are notentitled to vote for the election of directors or for any other purpose;provided, however, that PLDT may not change the rights of the holders of anyseries of Preferred Stock in any manner prejudicial to the holders thereofwithout the affirmative vote of the holders of a majority of the shares of suchseries.  No such approval is needed to increase the number of shares ofPreferred Stock (up to the number from time to time authorized by the Articles)or to authorize classes of shares ranking on a parity with the Preferred Stock.

 

*Issued and Outstanding Preferred Stock*

 

The series of Preferred Stock and the number of sharesissued and outstanding under each series as at February 29, 2008 are as follows:****

 

**Series**

**No. of Shares**

Series A to EE 10% Cumulative Convertible

405,661,417

Series IV Cumulative Non-Convertible Redeemable

36,000,000

Series V Cumulative Convertible Redeemable

27,303

Series VI Cumulative Convertible Redeemable

513,957

 

TheSeries A to EE 10% Cumulative Convertible Preferred Stock are entitled toreceive cumulative dividends at the rate of 10% per annum; redeemable at theoption of PLDT, at par value plus accrued dividends, five years after the yearof issuance; convertible to shares of Common Stock a year after the year ofshare issuance, at a price equivalent to 10% below the average market price ofthe Common Stock at the PSE over a period of 30 consecutive trading days beforethe conversion date; and entitled to be paid an amount equal to the par valueof the shares plus accrued and unpaid dividends thereon to the date fixed forsuch payment in the event of a voluntary or involuntary liquidation,dissolution, distribution of assets or winding up of the affairs of thecorporation.

 

TheSeries IV Cumulative Non-Convertible Redeemable Preferred Stock are entitled toreceive cumulative dividends at the rate of 13.5% per annum based on thepaid-up subscription price.  It is redeemable at the option of PLDT one year atany time after subscription at an amount equal to the par value of such sharesso redeemed or if such shares are not yet fully paid, the actual amount paid,plus accrued and unpaid dividends thereon; and in the event of a voluntary orinvoluntary liquidation, dissolution or winding up of affairs of PLDT, shall beentitled to be paid an amount equal to the par value of such shares or if suchshares are not yet fully paid, the actual amount paid, plus an amount equal tothe dividends accrued thereon to the date fixed for payment.  The outstandingshares of Series IV Cumulative Non-Convertible Redeemable Preferred Stock havenot been fully paid.

 

Sharesof Series V and VI Convertible Preferred Stock are entitled to receive annualdividends of Php18.70 per share and US$0.397 per share, respectively.  Eachshare of Series V and VI Convertible Preferred Stock is convertible at any timeat the option of the holder into one share of PLDT Common Stock.  In the eventof any voluntary or involuntary liquidation, dissolution or winding up of PLDT,the holders of the Series V and VI Convertible Preferred Stock are entitled toreceive out of the assets of PLDT available for distribution to theshareholders of PLDT, before any distribution of assets is made to holders ofshares of Common Stock or any other shares of stock of PLDT ranking as to suchdistribution junior to the Series V and VI Convertible Preferred Stock,liquidating distributions in the amount of Php11 per share plus accrued andunpaid dividends.  Shares of Series V and VI Convertible Preferred Stock which are outstanding on June 4, 2008, the seventhanniversary of the issue date thereof,will be mandatorily converted into shares of PLDT Common Stock on the dateimmediately following such anniversary date at a conversion rate of one shareof Common Stock for each share of Series V or VI Convertible Preferred Stocksubject to adjustments in certain events.  Under a put option exercisable for30 days following the mandatory conversion, holders of shares of PLDT CommonStock received on mandatory conversion will be able to require PLDT to purchasesuch shares of PLDT Common Stock for Php1,700 per share and US$36.132 pershare, for Series V and VI Convertible Preferred Stock, respectively.

 

Asat December 31, 2007, 2,690,650 shares of Series V Convertible Preferred Stock,4,614,801 shares of Series VI Convertible Preferred Stock and 3,842,000 sharesof Series VII Convertible Preferred Stock had been voluntarily converted toPLDT common shares and 30,790 shares of Series V and 680,303 shares of SeriesVI Convertible Preferred Stocks remained outstanding.  As at December 31, 2007, the aggregate value of the put options based onoutstanding shares as at such date was Php1,070 million assuming all of theoutstanding shares of Series V and VI Convertible Preferred Stocks weremandatorily converted on June 5, 2008 and all the common shares issued uponconversion were put to PLDT at that time in accordance with the terms of theput options.  The market value of the underlying common shares was Php2,256million, based on the market price of PLDT common shares of Php3,175 per shareas at December 31, 2007.  On March 4,2008, PLDT issued a notice to the effect that all of the shares of Series V andSeries VI Convertible Preferred Stock originally issued on June 4, 2001, andoutstanding as at June 4, 2008, will be mandatorily converted on June 5, 2008,to PLDT common shares. As a result of such mandatory conversion, holders ofcommon shares received on mandatory conversion of the Series V and Series VIConvertible Preferred Shares will be able to exercise the above described putoptions in accordance with their terms.

 

*Change in Control*

 

ArticleV, Section 1 of PLDT's Amended By-Laws may have the effect of preventing a changein control of PLDT.  This section provides that any person who is engaged inany business that competes with or is antagonistic to that of PLDT or itssubsidiaries is ineligible for nomination or election to the board of directors.

 

Under the Cooperation Agreement, each of NTTCommunications, NTT DoCoMo and the FP Parties agreed that to the extentpermissible under applicable laws and regulations of the Philippines and otherjurisdictions, subject to certain conditions, it shall cast its vote as a PLDTshareholder in support of any resolution proposed by the PLDT board ofdirectors for the purpose of safeguarding PLDT from any Hostile Transferee. SeeItem 7. “Major Shareholders and Related Party Transactions — Related PartyTransactions.

 

**Material Contracts**

 

We have entered into the following contract within thetwo years preceding the date of this annual report which is or may be material:

 

The Cooperation Agreement, dated January 31, 2006, entered into by and among PLDT, First Pacific, Metro Pacific Corporation,Metro Asia Link Holdings, Inc., Metro Pacific Resources, Inc., Larouge B.V.,Metro Pacific Assets Holdings, Inc., NTT Communications and NTT DoCoMo. 

 

**Exchange Controls andOther Limitations Affecting Securities Holders**

 

InCircular No. 1389 dated November 10, 1993, as amended by Circular No. 224 dated January 26, 2000, of the BSP, foreign investments in the shares of stock ofPhilippine companies listed in the PSE may be registered either with the BSP orwith an investor’s designated custodian bank.  The foreign investments inlisted shares of stock, which are duly registered with the BSP or with acustodian bank duly designated by the foreign investor, are entitled to fulland immediate capital repatriation and dividend and interest remittance privileges.Without the need to obtain prior BSP approval, commercial banks are authorizedto sell and to remit the equivalent foreign exchange (at the exchange rateprevailing at the time of actual remittance) representing sales and divestmentproceeds or dividends of a duly registered foreign equity investment uponpresentation of a BSP Registration Document (“BSRD”) together with othersupporting documents.  The BSRD is issued by the BSP or the custodian bank uponregistration of the foreign investment and serves as the authority torepatriate such divestment and sales proceeds or remittance of cash dividends.Effective April 3, 2000, only pre-numbered BSRD forms, printed on BSP securitypaper may be used and issued as proof of registration of foreign investments inaccordance with existing BSP rules.  The remitting commercial bank must submitto the BSP a statement of remittance together with the supporting documentswithin two banking days from date of actual remittance.  Foreign investmentsnot duly registered with the BSP or with the investor's designated custodianbank are not entitled to repatriation and remittance privileges through thebanking system except capital repatriation or dividend remittance of directforeign equity investments made prior to March 15, 1973 when BSP registration was not yet required.  The BSP should be notified of the transfer ofsale of foreign investments in equity or securities already registered with theBSP, in order that the registration of the foreign investment may be transferredin the name of the transferee or purchaser.

 

Cashdividends on PLDT’s stock are paid in Philippine peso, except dividends on theSeries VI Convertible Preferred Stock, which are paid in U.S. dollars.  PLDT’sTransfer Agent and Dividend Paying Agent for its Series VI ConvertiblePreferred Stock, Hong Kong and Shanghai Banking Corporation, converts andremits in U.S. dollars, at the prevailing exchange rate, cash dividends due toholders of the Series VI Convertible Preferred Stock.  PLDT’s Transfer Agentfor its common stock, The Hong Kong and Shanghai Banking Corporation, whichalso acts as dividend paying agent, converts and remits in U.S. dollars, at theprevailing exchange rate, cash dividends due all common shareholders residingoutside the Philippines.  Under the above-mentioned regulations, PLDT has beenable to remit the cash dividends due to shareholders residing outside the Philippines.  As at December 31, 2007, approximately 86% of PLDT’s outstanding shares ofcommon and preferred stock were held by Philippine persons.  For certainrestrictions on the declaration and payment of dividends by PLDT, see *Note 17–Equity* and *Note 18 – Interest-bearing Financial Liabilities* to theaccompanying audited consolidated financial statements in Item 18.

 

Principalof and interest on PLDT’s 10.5% Notes due 2009, 11.375% Notes due 2012 and8.35% Notes due 2017 are payable in U.S. dollars which may be purchased fromthe local banking system either pursuant to the registration of such Notes withthe BSP or otherwise pursuant to specific BSP approval of such payment.  Suchprincipal and interest may also be paid utilizing PLDT's own dollar resourceswithout necessity of BSP approval.  The BSP, with the approval of the Presidentof the Philippines, may, however, restrict the availability of foreign exchangeduring an exchange crisis, when an exchange crisis is imminent, or in times ofnational emergency.

 

**Taxation**

 

Thefollowing is a description of the material Philippine and United States federalincome tax consequences to United States Holders (as defined below) of owningshares of Common Stock and ADSs.  It applies to you only if you hold your CommonStock or ADSs as capital assets for tax purposes.  This section does not applyto you if you are a member of a special class of holders subject to specialrules, including a dealer in securities, a trader in securities that elects touse a mark-to-market method of accounting for securities holdings, a tax-exemptorganization, a life insurance company, a person liable for alternative minimumtax, a person that actually or constructively owns 10% or more of PLDT’s votingstock, a person that holds Common Stock or ADSs as part of a straddle or ahedging or conversion transaction, or a United States Holder (as defined below)whose functional currency is not the U.S. dollar.

 

Thissection is based on the United States Internal Revenue Code of 1986, as amended(the “U.S. Tax Code”), its legislative history, existing and proposedregulations, published rulings and court decisions, and the laws of thePhilippines including the Philippine National Internal Revenue Code of 1997(the “Philippine Tax Code”) all as currently in effect, as well as on theConvention Between the Philippines and the United States (the “Philippines-UnitedStates Tax Treaty”).  These laws are subject to change, possibly on aretroactive basis.  In addition, this section is based in part on therepresentations of the Depositary and the assumption that each obligation inthe Deposit Agreement and any related agreement will be performed according toits terms.

 

You are aUnited States Holder if you are a beneficial owner of Common Stock or ADSs andyou are a citizen or resident of the United States, a domestic corporation, anestate whose income is subject to United States federal income tax regardlessof its source, or a trust if a United States court can exercise primarysupervision over the trust’s administration and one or more United Statespersons are authorized to control all substantial decisions of the trust.

** **

This discussion addresses only United States federal income taxation and Philippine income taxation, estate and donor’staxation, stock transaction taxation and documentary stamp taxes.

** **

*Philippine Taxation*

 

*Taxes on Exchange of ADSs for Common Stock*

 

Philippine capital gains or stock transaction taxesand documentary stamp taxes may be payable upon the transfer of shares ofCommon Stock to a holder of ADRs to a holder of GDRs.  See “–– Capital GainsTax and Stock Transaction Tax” and “–– Documentary Stamp Taxes.”

 

*Taxation of Dividends*

 

Under the Philippine Tax Code, dividends paid by aPhilippine corporation to citizens of the Philippines and resident aliens inthe Philippines are subject to a final withholding tax of 10% while those paidto non-resident aliens engaged in trade or business within the Philippines aresubject to a final withholding tax of 20%.  Dividends paid to non-residentaliens not engaged in trade or business within the Philippines are subject to afinal withholding tax of 25%.  Dividends paid by a Philippine corporation toother Philippine corporations or to resident non-Philippine corporations arenot subject to tax.  Dividends paid to non-resident non-Philippine corporationsnot engaged in a trade or business in the Philippines by Philippinecorporations shall be subject to a final withholding tax of 15%, subject to thecondition that the country in which the non-resident non-Philippine corporationis domiciled either (i) allows a credit against the tax due from the non-residentnon-Philippine corporation taxes deemed to have been paid in the Philippinesequivalent to 20% effective November 1, 2005 (which represents the differencebetween the regular income tax on non-resident non-Philippine corporations of35% effective November 1, 2005 and the 15% tax on dividends) (this condition isnot satisfied in the case of corporations domiciled in the United States ifsuch corporations own less than 10% of the voting stock of PLDT) or (ii)imposes no income taxes on dividends received by such non-residentnon-Philippine corporations from Philippine corporations (this condition is notsatisfied in the case of corporations domiciled in the United States).  Ifneither of the foregoing conditions are met, the dividends paid to the non-residentnon-Philippine corporation shall be subject to the regular income tax rate of35% effective November 1, 2005.  Under rulings issued by Philippine taxauthorities, Hong Kong is viewed as falling within clause (ii) and, thus,companies that are organized in Hong Kong that are not engaged in trade orbusiness in the Philippines may be entitled to the benefit of the 15% rate.Such rulings, however, were based upon the laws of Hong Kong as in effect atthe time such rulings were issued, and any subsequent changes in the relevantlaws of Hong Kong may affect the validity of such rulings.  PLDT reserves theright to change the rate at which it makes payments of withholding tax wheneverit deems it appropriate under applicable law.

 

Ifthe holder of Common Stock is a non-resident foreign partnership, which istreated as a corporation for Philippine tax purposes, dividends on the CommonStock should be subject to a final withholding tax of 35% effective November 1,2005.  Cede & Co., the partnership nominee of Depository Trust Company(“DTC”), should qualify as a non-resident foreign partnership that would betreated as a corporation for Philippine tax purposes.

 

Incertain circumstances where the holder holds Common Stock, a tax treaty ratemay be applicable with respect to the Philippine withholding tax.  Forinstance, holders under such circumstances and as to which thePhilippines-United States Tax Treaty would be applicable would be eligible fora treaty rate of 25% (or 20% in certain instances).  The 20% treaty rate isgenerally not applicable in the case of non-resident non-Philippinecorporations domiciled in the United States which own less than 10% of thevoting stock of PLDT.  Holders are required, however, to establish to thePhilippine taxing authorities their eligibility for such treaty rate.Philippine tax authorities have prescribed, through an administrative issuance,procedures for availment of tax treaty relief.  PLDT intends to pay withholdingtax at the reduced treaty rate in respect of shares the registered holder ofwhich is Cede & Co., on the basis that Cede & Co. is a resident of the United States for purposes of the Philippines-United States Tax Treaty.  PLDT reserves theright to change the rate at which it makes payments of withholding tax wheneverit deems it appropriate under applicable law.

 

*CapitalGains Tax and Stock Transaction Tax*

 

ThePhilippine Tax Code provides that gain from the sale of shares of stock in aPhilippine corporation shall be treated as derived entirely from sources withinthe Philippines, regardless of where the shares are sold.  Subject toapplicable tax treaty rates, the rate of tax on such gain, where the share isnot disposed of through the Philippine Stock Exchange, is a final tax of 5% forgains not exceeding Php100,000 and a final tax of 10% for gains in excess ofthat amount.  The rate is the same for both non-resident individuals andnon-resident non-Philippine corporations.  While this tax is not collectedthrough withholding, the Philippine Tax Code prohibits a transfer from beingrecorded on the books of the corporation unless the Philippine Commissioner ofInternal Revenue certifies that the tax has been paid or certain otherconditions are met.  

 

The sale of shares which arelisted in and sold through the PSE are subject to the stock transaction taximposed at the rate of 1/2 of 1% of the gross selling price.  This tax isrequired to be collected and paid to the government by the selling stockbrokeron behalf of his client.  Sales of shares other than through a Philippine stockexchange will be subject to Philippine capital gains tax in the mannerdescribed above.

 

Underthe Philippines-United States Tax Treaty, gains derived by a United Statesresident from the sale of shares of stock of a Philippine corporation will notbe subject to capital gains tax where the share is not disposed of through thePhilippine Stock Exchange, unless the shares are those of a corporation over50% of the assets of which consist of real property interests located in thePhilippines.  PLDT does not believe that it currently is such acorporation.

 

*Documentary Stamp Taxes*

 

The Philippines imposes a documentary stamp tax upon transfers of shares of stockissued by a Philippine corporation at a rate of Php0.75 on each Php200, orfractional part thereof, of the par value of the shares.  The documentary stamptax is collectible wherever the document is made, signed, issued, accepted ortransferred, when the obligation or right arises from Philippine sources or theproperty is situated in the Philippines.  Effective March 20, 2004, thedocumentary stamp tax rate upon transfer of shares of stock issued by aPhilippine corporation was decreased from Php1.50 to Php0.75 on each Php200, orfractional part thereof, of the par value of the shares.  However, theimposition of documentary stamp tax on secondary transfer of shares of stock ofa Philippine Corporation which is listed and traded through the facilities ofthe Philippine Stock Exchange is suspended for a period of five years countedfrom the same effective date.   

 

*Estateand Donor’s Taxes*

 

Sharesof stock issued by a corporation organized or constituted in accordance withPhilippine law are deemed to have a Philippine situs and their transfer by wayof succession or donation is subject to Philippine estate and gift taxes.  Thetransfer of shares of stock by a deceased individual to his heirs by way ofsuccession, whether such an individual was a citizen of the Philippines or analien, regardless of residence, will be subject to Philippine estate tax atprogressive rates ranging from 5% to 20% if the net estate is over Php200,000.Individual and corporate shareholders, whether or not citizens or residents ofthe Philippines, who transfer the Equity Securities by way of gift or donationwill be liable for Philippine donor’s tax on such transfers at progressiverates ranging from 2% to 15%, if the net gifts made during the calendar yearexceed Php100,000.  The rate of tax with respect to net gifts made to astranger, who is not a brother, sister, spouse, ancestor, lineal descendant orrelative by consanguinity in the collateral line within the fourth degree ofrelationship of the donor, is a flat rate of 30%.  Estate and gift taxes willnot be collected in respect of intangible personal property such as the EquitySecurities:

 

•        if the deceased at the time ofdeath, or the donor at the time of donation, was a citizen and resident of aforeign country which at the time of his death or donation did not impose atransfer tax of any character in respect of intangible personal property ofcitizens of the Philippines not residing in that foreign country, or

 

•        if the laws of the foreign countryof which the deceased or the donor was a citizen and resident at the time ofhis death or donation allow a similar exemption from transfer or death taxes ofevery character or description in respect of intangible personal property ownedby citizens of the Philippines not residing in that foreign country.

 

Sharesof stock of a deceased shareholder or shares that have been donated may not betransferred on the books of the corporation without a certificate from thePhilippine Commissioner of Internal Revenue that the applicable estate ordonor's taxes have been paid.  In the case of ADRs, however, there is no correspondingrequirement, unless a transfer of the ADRs would also entail a change in theregistration of the underlying shares.

 

*United States**Federal Taxation*

 

Ingeneral, taking into account the earlier assumptions that each obligation ofthe Deposit Agreement and any related agreement will be performed according toits terms, for United States federal income tax purposes, if you hold ADRsevidencing ADSs, you will be treated as the owner of the shares represented bythose ADRs.  Exchanges of shares of Common Stock for ADRs, and ADRs for sharesof Common Stock, generally will not be subject to United States federal incometax.

 

*Taxation of Dividends*

 

Underthe United States federal income tax laws, and subject to the passive foreigninvestment company, or PFIC, rules discussed below, if you are a United StatesHolder, the gross amount of any dividend we pay out of our current oraccumulated earnings and profits (as determined for United States federalincome tax purposes) is subject to United States federal income taxation.  Ifyou are a non-corporate United States Holder, dividends paid to you in taxableyears beginning before January 1, 2011 that constitute qualified dividendincome will be taxable to you at a maximum tax rate of 15% provided that, inthe case of Common Stock or ADSs, you hold the Common Stock or ADSs for morethan 60 days during the 121-day period beginning 60 days before the ex-dividenddate.  Dividends we pay with respect to the Common Stock or ADSs generally willbe qualified dividend income.

 

Youmust include any Philippine tax withheld from the dividend payment in thisgross amount even though you do not in fact receive it.  The dividend istaxable to you when you, in the case of Common Stock, or the Depositary, in thecase of ADSs, receive the dividend, actually or constructively.  The dividendwill not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations.The amount of the dividend distribution that you must include in your income asa United States Holder will be the U.S. dollar value of the Philippine pesopayments made, determined at the spot Philippine peso/U.S. dollar rate on thedate the dividend distribution is includible in your income, regardless ofwhether the payment is in fact converted into U.S. dollars.  Generally, anygain or loss resulting from currency exchange fluctuations during the periodfrom the date you include the dividend payment in income to the date youconvert the payment into U.S. dollars will be treated as ordinary income orloss and will not be eligible for the special tax rate applicable to qualifieddividend income.  The gain or loss generally will be income or loss fromsources within the United States for foreign tax credit limitation purposes.Distributions in excess of current and accumulated earnings and profits, asdetermined for United States federal income tax purposes, will be treated as anon-taxable return of capital to the extent of your basis in the Common Stockor ADSs and thereafter as capital gain. 

 

Subjectto certain limitations, the Philippine tax withheld in accordance with the Philippines-United States Tax Treaty and paid over to the Philippines will be creditable or deductibleagainst your United States federal income tax liability.  Special rules applyin determining the foreign tax credit limitation with respect to dividends thatare subject to the maximum 15% tax rate.

 

Dividendswill be income from sources outside the United States.  Dividends paid in taxable years beginning beforeJanuary 1, 2007 generally will be “passive” or “financial services” income, anddividends paid in taxable years beginning after December 31, 2006 will,depending on your circumstances, be “passive” or “general” income which, ineither case, is treated separately from other types of income for purposes ofcomputing the foreign tax credit allowable to you.

* *

*Sale**or Other Disposition of Equity Securities*

 

Subject to the PFIC rulesdiscussed below, a United States Holder will recognize capital gain or lossupon the sale of Common Stock orADSs in an amount equal to the difference between such United StatesHolder's basis in the Common Stock or ADSs and the amount realized upon thesale.  Such gain or loss generally will be long-term capital gain or loss if,at the time of sale, exchange or retirement, the Common Stock or ADSs have beenheld for more than one year.  Capital gain of a non-corporate U.S. holder that is recognized in taxable years beginning before January 1, 2011 is generally taxedat a maximum rate of 15% where the property is held for more than one year.Generally, any such gain or loss will be treated as realized income or lossfrom sources within the United States for foreign tax credit limitationpurposes.  United States Holders may not be eligible to credit against their United States federal income tax liability amounts paid in respect of the Philippine stocktransaction tax.  See “— Philippine Taxation — Capital Gains Tax and StockTransaction Tax.”

 

TheU.S. Tax Code does not authorize a comparable credit for foreign gift ordonor's taxes such as those imposed by the Philippines.  See “— PhilippineTaxation — Estate and Donor’s Taxes.”

 

*PassiveForeign Investment Company Rules*

 

Webelieve that the Common Stock or ADSs should not be treated as stock of a PFICfor United States federal income tax purposes, but this conclusion is a factualdetermination that is made annually and thus may be subject to change.  If wewere to be treated as a PFIC, unless the Common Stock or ADSs are “marketablestock” and a United States Holder elects to be taxed annually on amark-to-market basis with respect to the Common Stock or ADSs, gain realized onthe sale or other disposition of your Common Stock or ADSs would in general notbe treated as capital gain.  Instead, if you are a United States Holder, youwould be treated as if you had realized such gain and certain "excessdistributions" ratably over your holding period for the Common Stock orADSs and would be taxed at the highest tax rate in effect for each such year towhich the gain was allocated, together with an interest charge in respect ofthe tax attributable to each such year.  In addition, dividends that youreceive from us will not be eligible for the special tax rates applicable toqualified dividend income if we are a PFIC either in the taxable year of thedistribution or the preceding taxable year, but instead will be taxable atrates applicable to ordinary income.

 

**Documents on Display**

 

Weare subject to the informational requirements of the Exchange Act, and filereports and other information with the Commission, as required by this Act.Reports and other information filed by us with the Commission may be inspectedand copied at the Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  The public may obtain information on the operation of theCommission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330.  The Commission also maintains a website that containsreports, proxy statements and other information regarding registrants that fileelectronically with the Commission.  Copies of these materials may be obtainedby mail from the public reference section of the Commission, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.  These reports and otherinformation may also be inspected at the offices of the New York StockExchange, 20 Broad Street, New York, New York 10005, on which the AmericanDepositary Shares representing our Common Stock are listed.

 

**Item 11.    Quantitativeand Qualitative Disclosures about Market Risks**

** **

The main risks arising from our financial instrumentsare liquidity risk, foreign currency exchange risk, interest rate risk andcredit 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 need to manage our liquidity profile to be able tofinance our operations and capital expenditures, service our maturing debts andmeet our other financial obligations.  To cover our financing requirements, weuse internally generated funds and proceeds from debt and equity issues andsales of certain assets. 

 

Aspart of our liquidity risk management program, we regularly evaluate ourprojected 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-datedand principal-protected bank products that provide flexibility of withdrawingthe funds 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.  Our fundingarrangements are designed to keep an appropriate balance between equity anddebt and to provide financing flexibility while enhancing our businesses. 

 

A summary of the maturity profile of our financialliabilities as at December 31, 2007 and 2006 based on contractual undiscountedpayments is set out in *Note 24 – Contractual Obligations and CommercialCommitments*to the accompanying audited consolidated financial statementsin Item 18.

 

*ForeignCurrency Exchange Risk*

 

The revaluation of our foreign currency-denominatedfinancial assets and liabilities as a result of the appreciation ordepreciation of the Philippine peso is recognized as foreign exchange gains orlosses as at the balance sheet date.  The extent of foreign exchange gains orlosses is largely dependent on the amount of foreign currency debt and hedgeswe carry.  While a certain percentage ofour revenues are either linked to or denominated in U.S. dollars, most of ourindebtedness and related interest expense, a substantial portion of our capitalexpenditures and a portion of our operating expenses are denominated in foreigncurrencies, mostly in U.S. dollars.  As such, a strengthening or weakening ofthe Philippine peso against the U.S. dollar will decrease or increase inPhilippine peso terms both the principal amount of our unhedged foreigncurrency-denominated debts and the related interest expense of our foreigncurrency-denominated capital expenditures and operating expenses as well as ourU.S. dollar-linked and U.S. dollar-denominated revenues.  In addition, many ofour financial ratios and other financial tests are affected by the movements inthe Philippine peso to U.S. dollar exchange rate.

 

Tomanage our foreign exchange risks and to stabilize our cash flows to improveinvestment and cash flow planning, we enter into forward foreign exchangecontracts, currency swap contracts, currency option contracts and other hedgingproducts aimed at reducing and/or managing the adverse impact of changes inforeign exchange rates on our operating results and cash flows.  We use forwardforeign exchange purchase contracts, currency swap contracts and foreigncurrency option contracts to manage the foreign currency risks associated withour foreign currency-denominated loans.  We also enter into forward foreignexchange sale contracts to manage foreign currency risks associated with ourU.S. dollar-linked and U.S. dollar-denominated revenues.  In order to managehedge costs of these contracts, we utilize structures that includecredit-linkage with PLDT as the reference entity, a combination of foreigncurrency option contracts, and fixed to floating coupon only swap agreements.We accounted for these instruments as transactions not designated as hedges,wherein changes in the fair value are recognized directly as income or expensefor the year.

 

The following table shows our consolidated foreigncurrency-denominated monetary financial assets and liabilities and theirPhilippine peso equivalents as at December 31, 2007 and 2006:

 

** **

**2007**

** **

**2006**

** **

**U.S. Dollar**

** **

**Php**(1)

** **

**U.S. Dollar**

** **

**Php**(2)

 

**(in millions)**

**Noncurrent Financial Asset**

 

 

 

 

 

 

 

Derivative financial assets

US$1

 

Php59

 

US$9

 

Php434

** **

 

 

 

 

 

 

 

**Current Financial Assets**

 

 

 

 

 

 

 

Cash and cash equivalents

93

 

3,853

 

155

 

7,578

Short-term investments

56

 

2,324

 

92

 

4,521

Trade and other receivables

227

 

9,400

 

277

 

13,589

Derivative financial assets

23

 

967

 

1

 

47

Total current financial assets

 399

 

16,544

 

 525

 

25,735

**Total Financial Assets**

US$400

 

Php16,603

 

US$534

 

Php26,169

** **

 

 

 

 

 

 

 

**Noncurrent Financial Liabilities**

 

 

 

 

 

 

 

Interest-bearing financial liabilities - net of current portion

US$1,126

 

Php46,612

 

US$1,239

 

Php60,756

Derivative financial liabilities

187

 

7,741

 

140

 

6,872

Total noncurrent financial liabilities

1,313

 

54,353

 

1,379

 

67,628

** **

 

 

 

 

 

 

 

**Current Financial Liabilities**

 

 

 

 

 

 

 

Accounts payable

160

 

6,614

 

268

 

13,115

Accrued expenses and other current liabilities

95

 

3,958

 

74

 

3,605

Derivative financial liabilities

6

 

242

 

2

 

108

Current portion of interest-bearing financial liabilities

187

 

7,748

 

328

 

16,104

Total current financial liabilities

 448

 

18,562

 

 672

 

32,932

**Total Financial Liabilities**

US$1,761

 

Php72,915

 

US$2,051

 

Php100,560

__________

*(1)**Theexchange rate used to translate the U.S. dollar amounts into Philippine pesowas Php**41.411 to US$1.00, thepeso-dollar rate as quoted through the Philippine Dealing System as at December31, 2007.*

*(2)**The exchange rate used to translate the U.S. dollar amounts intoPhilippine peso was Php49.045 to US$1.00, the peso-dollar rate as quotedthrough Philippine Dealing System as at December 31, 2006.*

 

As at April 3, 2008, the peso-dollarexchange rate was Php41.552 to US$1.00.  Using this exchange rate, ourconsolidated net foreign currency-denominated financial liabilities as atDecember 31, 2007 would have increased by Php192 million.

 

As at December 31, 2007, approximately 88% of our total consolidated debts was denominated inU.S. dollars.  Consolidated foreign currency-denominated debt was reduced toPhp52,540 million as at December 31, 2007 from Php76,646 million as at December31, 2007.  PLDT’s outstanding long-term principal only currency swap contractsand foreign currency option contracts amounted to US$550 million and US$136million, respectively, as at December 31, 2007.  Consequently, the unhedgedportion of consolidated debts amounts was approximately 45% (or 36%, net of ourU.S. dollar cash balances) as at December 31, 2007. 

 

For the year ended December 31, 2007, approximately34% of our consolidated revenues were either denominated in U.S. dollars orwere linked to the U.S. dollars.  In this respect, the recent appreciation ofthe Philippine peso against the U.S. dollar reduced our revenues, andconsequently, our cash flow from operations in Philippine peso terms.

 

The Philippine peso had appreciated by 16% against theU.S. dollar to Php41.411 to US$1.00 as at December 31, 2007, from Php49.045 toUS$1.00 as at December 31, 2006.  Likewise, as at December 31, 2006, the pesohad appreciated by 8% to Php49.045 to US$1.00 from Php53.062 to US$1.00 as atDecember 31, 2005.  As a result of the foreign exchange movements as well asthe amount of our outstanding foreign currency debts and derivatives, werecognized foreign exchange gains of Php7,990 million and Php4,823 million in2007 and 2006, respectively.

 

Management conducted a survey among our banks todetermine the outlook of the peso-dollar exchange rate until our next reportingdate of March 31, 2008 and 2007.  Our outlook is that the peso-dollar exchangerate may weaken/strengthen by 2% as compared to the exchange rate of Php41.411to US$1.00 as of year-end 2007 and Php49.045 to US$1.00 as of year-end 2006.At December 31, 2007 and 2006, if the peso-dollar exchange rate hadweakened/strengthened by 2%, with all other variables held constant, profitafter tax would have been higher/lower by Php1,088 million and Php270 millionfor the year 2007 and 2006, respectively, and our stockholders’ equity as atDecember 31, 2007 and 2006 would have been higher/lower by Php1,194 million andPhp284 million, respectively, mainly as a result of foreign exchange gains,losses on translation of U.S. dollar-denominated net assets/liabilities andmarked-to-market valuation of derivative transactions.

 

*Interest Rate Risk*

 

Our exposure to the risk of changes inmarket interest rates relates primarily to our long-term debt obligations andshort-term borrowings with floating interest rates. 

 

Our policy is to manage interest costthrough a mix of fixed and variable rate debts. We evaluate the fixed tofloating ratio of our loans in line with movements of relevant interest ratesin the financial markets. Based on our assessment, new financing will be pricedeither on a fixed or floating rate basis. On a limited basis, we enter into interestrate swap agreements in order to manage our exposure to interest ratefluctuations.  We make use of hedging instruments and structures solely forreducing or managing financial risk associated with our liabilities and not fortrading purposes.

 

The following tables set out the carryingamount, by maturity, of our financial instruments that are exposed to interestrate risk for the years ended December 31, 2007 and 2006.  Financialinstruments that are not subject to interest rate risk were not included in thetable.

** **

**YearEnded December 31, 2007**

 

** **

 

 

 

 

 

 

 

**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

31,900

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

–

–

–

–

–

–

** **

**Year Ended December 31, 2006**

** **

** **

 

 

 

 

 

 

 

**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

130

–

167

–

550

 847

41,510

539

40,971

965

47,228

Interest rate

7.85% to  10.625%

–

10.50%

–

8.35% to 11.375%

–

–

–

–

–

–

US$ Fixed Loans

69

55

46

33

280

 483

23,683

5,326

18,357

376

18,438

Interest rate

1.75% to 10%

4.49% to 10%

4.49% to 10%

4.515% to 4.70%

2.25%

–

–

–

–

–

–

Philippine Peso

–

–

–

17

–

  17

810

2

 808

21

1,035

Interest rate

–

–

–

15%

–

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar

128

92

81

53

–

 354

17,392

74

17,318

355

17,392

Interest rate

GOVCO’s Cost + 0.20%; 0.05% to 2.75% over LIBOR

0.05% to 2.75% over LIBOR

0.05% to 2.75% over LIBOR

0.05% to 2.5% over LIBOR

–

–

–

–

–

–

–

Philippine Peso

6

11

11

23

–

  51

2,511

12

2,499

51

2,511

Interest rate

3% over 90-day PHIBOR, MART1 + 0.75%

MART1 + 0.75%

MART1 + 0.75%

MART1 + 0.75%

–

–

–

–

–

–

–

 

 

 

 

 

 

**1,752**

**85,906**

**5,953**

**79,953**

**1,768**

**86,604**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$63 million)

–

–

–

–

–

9

423

–

423

9

423

Japanese Yen (JPY7,519 million)

–

–

–

–

–

–

–

–

–

–

–

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

11.375%

–

–

–

–

–

–

Variable Rate on JPY notional

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

–

–

–

–

–

–

 

Fixed rate financial instruments are subject to fairvalue interest rate risk while floating rate financial instruments are subjectto 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 March 31, 2008 and 2007.  Our outlook is thatthe U.S. dollar and Philippine peso interest rates may move 190 basis pointsand 30 basis points higher/lower, respectively, as compared to levels atyear-end 2007 and 100 basis points and 5 basis points higher/lower,respectively, as compared to levels at year-end 2006.  At December 31, 2007, ifU.S. dollar interest rates had been 190 basis points higher/lower as comparedto market levels at year-end 2007 and 100 basis points higher/lower as comparedto market levels at year-end 2006, with all other variables held constant,profit after tax for the year 2007 and 2006 would have been lower/higher byPhp1,527 million and Php44 million, respectively, mainly as a result ofhigher/lower interest expense on floating rate borrowings and losses and gainson derivatives transactions.  Stockholders’ equity would have been lower/higherby Php1,459 million and Php44 million, as at December 31, 2007 and 2006,respectively, mainly as a result of a decrease/increase in the fair value ofcash flow hedges.  At December 31, 2007 and 2006, if Philippine peso interestrates had been higher/lower by 30 basis points and 5 basis points,respectively, as compared to market levels at year-end 2007 and 2006, with allother variables held constant, profit before tax would have been lower/higherby Php1,132 million and Php853 million for 2007 and 2006, respectively, mainlyas a result of higher/lower interest expense on floating rate borrowings andlosses and gains on derivatives transactions.

 

*Credit Risk*

 

Credit risk is the risk that we will incur a lossarising from our customers, clients or counterparties that fail to dischargetheir contractual obligations.  We manage and control credit risk by settinglimits on the amount of risk we are willing to accept for individualcounterparties and by monitoring exposures in relation to such limits.

 

We trade only withrecognized and creditworthy third parties.  It is our policy that all customerswho wish to trade on credit terms are subject to credit verificationprocedures.  In addition, receivable balances are monitored on an on-goingbasis to reduce our exposure to bad debts.

 

We established a credit quality review process toprovide regular identification of changes in the creditworthiness ofcounterparties.  Counterparty limits are established and periodically reviewedbased on latest available financial data on our counterparties’ credit ratings,capitalization, asset quality and liquidity.  Our credit quality review processallows us to assess the potential loss as a result of the risks to which we areexposed and take corrective actions.

 

The table below showsthe maximum exposure to credit risk for the components of the consolidatedbalance sheet, including derivative instruments.

 

** **

**Gross Maximum Exposure****(1)**

**Net Maximum Exposure****(2)**

** **

**2007**

**2006**

**2007**

**2006**

 

**(in millions)**

Loans and receivables:

** **

 

** **

 

Advances and refundable deposits

Php734

Php647

Php734

Php647

Cash and cash equivalents

17,447

16,870

17,406

16,833

Short-term investments

11,366

5,520

11,366

5,520

Investment in debt securities

1,115

–

1,115

–

Foreign administrations

4,324

3,836

4,324

3,836

Retail subscribers

3,861

2,027

3,861

2,027

Corporate subscribers

2,040

1,742

2,040

1,742

Domestic carriers

1,503

1,461

1,503

1,461

Dealers, agents and others

917

1,092

917

1,092

Held-to-maturity investments:

 

 

 

 

Investment in debt securities

273

–

273

–

Investments-available-for-sale

143

116

143

116

Held-for-trading:

 

 

 

 

Short-term investments

2,049

2,807

2,049

2,807

Forward foreign exchange contracts

193

3

193

3

Long-term foreign currency options

59

434

59

434

Bifurcated embedded derivatives

34

44

34

44

Derivatives used for hedging:

 

 

 

 

Forward foreign exchange contracts

670

–

670

–

**Total**

Php46,728

Php36,599

Php46,687

Php36,562

__________

*(1) Gross financial assets before taking into account any collateralheld or other credit enhancements or offsetting arrangements.*

*(2) Gross financial assets after taking into account any collateral heldor other credit enhancements 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**

** **

** **

**Total**

**Class A**(1)

**Class B**(2)

**Impaired**

 

(in million pesos)

**December 31, 2007**

 

 

 

 

 

Loans and receivables:

 

 

** **

 

 

Advances and refundable deposits 

Php734

Php734

Php–

Php–

Php–

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

Dealers, agents and others 

2,151

983

315

196

657

Domestic carriers 

1,884

119

11

1,373

381

Held-to-maturity investments:

 

 

 

 

 

Investment in debt securities

 273

273

–

–

–

Investments-available-for-sale

 143

113

30

–

–

Held-for-trading:

 

 

 

 

 

Short-term investments

2,049

2,049

–

–

–

Forward foreign exchange contracts 

 193

190

3

–

–

Long-term foreign currency options 

  59

59

–

–

–

Bifurcated embedded derivatives 

  34

34

–

–

–

Derivatives used for hedging(3): 

 

 

 

 

 

Forward foreign exchange contracts

 670

670

–

–

–

**Total**

**59,583**

**35,984**

**5,070**

**6,193**

**12,336**

 

 

 

 

 

 

**December 31, 2006**

 

 

 

 

 

Loans and receivables:

 

 

 

 

 

Advances and refundable deposits 

 647

647

–

–

–

Cash and cash equivalents 

16,870

15,756

1,114

–

–

Short-term investments 

5,520

5,218

302

–

–

Corporate subscribers 

8,160

1,267

206

211

6,476

Retail subscribers 

7,874

681

220

1,132

5,841

Foreign administrations 

6,342

1,609

816

1,411

2,506

Dealers, agents and others 

2,587

1,222

7

89

1,269

Domestic carriers 

1,965

372

30

1,060

503

Investments-available-for-sale

 116

90

26

–

–

Held-for-trading:

 

 

 

 

 

Short-term investments

2,807

2,807

–

–

–

Long-term foreign currency options

 434

434

–

–

–

Bifurcated embedded derivatives

  44

44

–

–

–

Forward foreign exchange contracts

   3

3

–

–

–

**Total**

**Php****53,369**

**Php****30,150**

**Php****2,721**

**Php****3,903**

**Php****16,595**

 

*(1)**This includes low risk and good paying customeraccounts with no history of account treatment for a defined period and nooverdue accounts as at report date; and deposits or placements tocounterparties with good credit rating or bank standing financial review;*

*(2)**This includes medium risk and average payingcustomer accounts with no overdue accounts as at report date, and new customeraccounts for which sufficient credit history has not been established; and depositsor placements to counterparties not classified as Class A; and*

*(3)**Grossreceivables from counterparties, before any offsetting arrangements.*

 

The aging analysis of past due but not impaired classof 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 millions)

**December 31, 2007**

** **

** **

 

 

 

 

Loans and receivables:

** **

** **

 

 

 

 

Advances and refundable deposits 

Php734

Php734

Php–

Php–

Php–

Php–

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

Dealers, agents and others 

2,151

1,298

30

4

162

657

Domestic carriers 

1,884

130

88

103

1,182

381

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

  59

59

–

–

–

–

Bifurcated embedded derivatives 

  34

34

–

–

–

–

Derivatives used for hedging:

 

 

 

 

 

 

Forward foreign exchange contracts

 670

670

–

–

–

–

** **

**59,583**

**41,054**

**3,248**

**787**

**2,158**

**12,336**

 

 

 

 

 

 

 

**December 31, 2006**

 

 

 

 

 

 

Loans and receivables:

 

 

 

 

 

 

Advances and refundable deposits 

647

647

–

–

–

–

Cash and cash equivalents 

16,870

16,870

–

–

–

–

Short-term investments 

5,520

5,520

–

–

–

–

Corporate subscribers 

8,160

1,473

139

38

34

6,476

Retail subscribers 

7,874

901

945

118

69

5,841

Foreign administrations 

6,342

2,425

694

267

450

2,506

Dealers, agents and others 

2,587

1,229

25

10

54

1,269

Domestic carriers 

1,965

402

96

77

887

503

Investments-available-for-sale

 116

116

–

–

–

–

Held-for-trading:

 

 

 

 

 

 

Short-term investments

2,807

2,807

–

–

–

–

Long-term foreign currency options 

 434

434

–

–

–

–

Bifurcated embedded derivatives

  44

44

–

–

–

–

Forward foreign exchange contracts

   3

3

–

–

–

–

** **

Php**53,369**

Php**32,871**

Php**1,899**

Php**510**

Php**1,494**

Php**16,595**

 

*Impairmentassessments*

 

Themain consideration for the impairment assessment include whether any paymentsof principal or interest are overdue by more than 90 days or there are anyknown difficulties in the cash flows of counterparties, credit ratingdowngrades, or infringement of the original terms of the contract.  Our impairmentassessments are classified into two areas: individually assessed allowance andcollectively assessed allowance.

 

*Individuallyassessed allowance*

 

Wedetermine the allowance appropriate for each individually significant loan oradvance on an individual basis. Items considered when determining allowanceamounts include the sustainability of the counterparty’s business plan, itsability to improve performance once a financial difficulty has arisen,projected receipts and the expected dividend payout should bankruptcy ensue,the availability of other financial support, the realizable value ofcollateral, if any, and the timing of the expected cash flows.  The impairmentlosses are evaluated at each reporting date, unless unforeseen circumstancesrequire more careful attention.

 

*Collectively assessed allowances*

* *

Allowances are assessed collectively for losses onloans and advances that are not individually significant and for individuallysignificant loans and advances where there is no objective evidence ofindividual impairment.  Allowances are evaluated on each reporting date witheach portfolio receiving a separate review. 

 

The collective assessment takes account ofimpairment that is likely to be present in the portfolio even though there isno objective evidence of the impairment in an individual assessment. Impairmentlosses are estimated by taking into consideration the following information;historical losses on the portfolio, current economic conditions, theapproximate delay between the time a loss is likely to have been incurred andthe time it will identified as requiring an individually assessed impairmentallowance, and expected receipts and recoveries once impaired.  The impairmentallowance is then reviewed by credit management to ensure alignment with ourpolicy.

 

*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 of commondividends to shareholders.  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 to our shareholders.Further, in the event no investment opportunities arise, we may consider theoption of returning additional cash to our shareholders in the form of specialdividends or share buybacks.  Philippine corporate regulations prescribe,however, that we can only pay out dividends or make capital distribution up tothe amount of our unrestricted retained earnings.

 

As part of our aim to maximize returns to ourshareholders, we obtained approval from our board of directors on January29, 2008 for a buyback program of up to two million PLDT common shares.  See *Note17 – Equity*.

 

Some of our debt instruments contain covenants thatimpose maximum leverage ratios.  In addition, our credit ratings from theinternational credit ratings agencies are based on our ability to remain withincertain leverage ratios.

 

We monitor capital using several financial leveragemeasurements calculated in conformity with Philippine Financial ReportingStandards, such as net debt to equity ratio.  Net debt is derived by deductingcash and cash equivalents and short-term investments from total debt (notespayable and long-term debt).  Our objective is to maintain our net debt toequity ratio below 100%.

 

 

**2007**

** **

**2006**

** **

(in millions)

 

 

 

 

Long-term debt, including current portion

Php60,147

 

Php79,953

Notes payable

493

 

201

Total debt

60,640

 

80,154

Cash and cash equivalents

(17,447)

 

(16,870)

Short-term investments

(13,415)

 

(8,327)

Net debt

29,778

 

54,957

 

 

 

 

Equity attributable to equity holders of PLDT

111,113

 

102,521

Net debt to equity ratio

27%

 

54%

 

Forfurther discussions of these risks, see *Note 24 – Contractual Obligationsand Commercial Commitments* to the accompanying audited consolidatedfinancial statements in Item 18.

 

**Item12.    Description of Securities Other than Equity Securities**

 

NotApplicable.

 

PARTII
 

**Item 13.    Defaults,Dividend Arrearages and Delinquencies**

 

None.

 

**Item 14.    MaterialModifications to the Rights of Security Holders and Use of Proceeds**

 

None.

 

**Item 15.    Controls and Procedures******

** **

**Disclosure Controls and Procedures.**  Our management, with the participation of ourprincipal executive officer and principal financial officer, carried out anevaluation on the effectiveness of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,as amended) as at December 31, 2007.  Based on this evaluation, our chiefexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures were effective as at December 31, 2007. 

 

**Management’sAnnual Report on Internal Control Over Financial Reporting.**  Management is responsible for establishing andmaintaining adequate internal control over financial reporting.  Our internalcontrol over financial reporting is a process designed under the supervision ofour principal executive and principal financial officers to provide reasonableassurance regarding the reliability of financial reporting and the preparationof our financial statements for external reporting purposes in accordance with IFRS.Our internal control over financial reporting includes policies and proceduresthat pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect transactions and dispositions of assets; providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with IFRS, and that receiptsand expenditures are being made only in accordance with authorizations of ourmanagement and directors; and provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of ourassets that could have a material effect on our financial statements. 

 

Ourmanagement conducted an assessment of the effectiveness of our internal controlover financial reporting based on the framework established in Internal Control– Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). Based on this assessment, management hasdetermined that our internal control over financial reporting as at December 31, 2007 is effective.  

 

SyCipGorres Velayo & Co. (a member firm of Ernst & Young Global), the independentregistered public accounting firm hasaudited our consolidated financial statements included in this Annual Reportand has issued an attestation report on ourinternal control over financial reporting as at December 31, 2007.  Thisattestation report is set forth in Item 18 “Financial Statements”.

 

**Changesin Internal Control Over Financial Reporting.**During 2007, no change to our internal control overfinancial reporting occurred that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting

 

**Item 16A. Audit CommitteeFinancial Expert**

 

Ourboard of directors has determined that currently none of the members of theAudit Committee is an audit committee financial expert as defined under theapplicable rules of the U.S. SEC issued pursuant to Section 407 of theSarbanes-Oxley Act of 2002.  However, our board of directors believes that theaudit committee members along with its advisors, possess sufficient financialknowledge and experience.  Our board of directors has appointed one of ournon-independent directors, Ms. Corazon de la Paz-Bernardo, as Audit Committeeadvisor to render advice on complex financial reporting or accounting issuesthat may be raised in our Audit Committee’s evaluation of our financialstatements and other related matters.  Formerly the Chairman and a SeniorPartner of Joaquin Cunanan & Company (a member firm ofPricewaterhouseCoopers Worldwide), Ms. Corazon de la Paz-Bernardo is acertified public accountant and possesses in-depth knowledge of accountingprinciples (including IFRS), internal controls and procedures for financialreporting and audit committee functions, as well as extensive experience inoverseeing or actively supervising the preparation, audit, analysis orevaluation of financial statements and in addressing complex and generalfinancial reporting, accounting and audit issues.

 

**Item16B. Code of Business Conduct and Ethics**

 

OnMarch 30, 2004, our board of directors approved and adopted our Code ofBusiness Conduct and Ethics, or Code of Ethics, which was revised and amendedin 2006, that sets out our business principles and standards of behavior andbusiness relationships.

 

It is our declared objective thatall our actions and those of our directors, officers and employees must, at alltimes, be consistent with the principles of accountability, integrity, fairnessand transparency.

 

OurCode of Ethics provides standards to foster honest and ethical behaviorincluding the following:

 

1.       Compliance with applicable laws,rules and regulations;

 

2.       Ethical handling of conflicts ofinterest, corporate opportunities and confidential information;

 

3.       Protection and proper use of ourassets;

 

4.       Fair dealing with our employees,customers, service providers, suppliers and competitors;

 

5.       Compliance with our reporting anddisclosure obligations to the relevant regulators and the investors;

 

6.       Compliance with our disclosure andfinancial reporting controls and procedures;

 

7.       Assessment and management of risksinvolved in our business endeavours; and

 

8.       Adoption of international bestpractices of good corporate governance in the conduct of our business.

 

*CorporateGovernance*

* *

OurCode of Ethics was adopted to strengthen the implementation of our CorporateGovernance Manual, or Governance Manual, subsequently reviewed and amended inJanuary 30, 2007, which was adopted and approved by our board of directors inSeptember 2002, and was revised and amended on January 30, 2007.  OurGovernance Manual seeks to institutionalize the principles of good governancethat our board of directors and management believe to be a necessary componentof sound business management.

 

Our Governance Manual conformswith the requirements of the Code of Corporate Governance, or Philippine SECGovernance Code, that was promulgated by the Philippine Securities and ExchangeCommission, or Philippine SEC, under the Philippine SEC Memorandum Circular No.2, Series of 2002, on April 5, 2002 to promote good corporate governance.

 

In compliance with the Philippine SEC Governance Codeand consistent with the relevant provisions of the Securities Regulation Codeand Corporation Code of the Philippines, our Governance Manual covers thefollowing key areas:

 

1.       The qualifications and grounds fordisqualification for directorship;

 

2.       The requirement that at least twoor twenty percent of the members of our board of directors, whichever islesser, must be independent directors and the standards/criteria for thedetermination of independent directors;

 

3.       The duties and responsibilities ofour board of directors and the individual directors;

 

4.       Our board committees,specifically, the nomination committee, audit committee and executivecompensation committee, the composition and the principal duties andresponsibilities of such committees;

 

5.       The role of our chairman inensuring compliance with the corporate governance principles;

 

6.       The role of our president/chief executiveofficer in ensuring that our organizational and procedural controls areadequate and effective to ensure reliability and integrity of financial andoperational information, effectiveness and efficiency of operations,safeguarding of assets and compliance with laws, rules, regulations andcontracts;

 

7.       The duties and responsibilities ofour corporate secretary/assistant corporate secretary in terms of the supportservices that they need to provide our board in upholding sound corporategovernance;

 

8.       The duties and responsibilities ofthe head of our internal audit organization that would provide our board ofdirectors, management and shareholders with reasonable assurance that our keyorganizational and procedural controls are appropriate, adequate, effective andreasonably complied with;

 

9.       The functions of our independentauditors that would reasonably ensure an environment of sound corporategovernance as reflected in our financial records and reports; the requirementthat non-audit work of the independent auditors should not conflict with theirfunction as independent auditors; the requirement to rotate, at least onceevery five years, the independent auditors or the lead partner assigned tohandle the independent audit of our financial statements;

 

10.    Our commitment to respect andpromote shareholders’ rights such as voting right, pre-emptive right,inspection right, dividend right, appraisal right, and right to receiveinformation about the background, business experience, compensation andshareholdings of our directors and officers and their transactions with us;

 

11.    The requirement to appoint acompliance officer and the duties and responsibilities of such complianceofficer including the establishment of an evaluation system to determine andmeasure compliance with the provisions of our Governance Manual; and

 

12.    The penalties for violations ofour Governance Manual.

 

Inaddition, we adopted a more extensive Conflict of Interest Policy (“COIPolicy”) in 2005.  On January 31, 2006, the Board approved a Policy on Gifts,Entertainment and Sponsored Travel and the Supplier/Contractor RelationsPolicy.  Finally, on May 9, 2006, the Board approved the ExpandedWhistleblowing Policy, or EWB, or the Administrative Order on the Handling ofEmployee Disclosures and Complaints regarding violations of the corporate governancerules, questionable accounting or auditing matters, and offenses covered by ourtable of penalties.  In addition, on the same date, the Board adopted anAdministrative Order creating the structures and rules on officer discipline.  Aspart of the embedding of corporate governance standards in the performanceevaluation of our personnel, the Policy on Employee Qualification forIncentives and Rewards was amended in 2007 to include corporate governance policyviolations as a disqualification factor.  All these policies and rules(collectively, the Corporate Governance Rules, or CG Rules) comply with therequirements of the Philippine and U.S. Securities and Exchange Commissions andNew York Stock Exchange rules, as may be applicable.  From 2005 to 2007, oursubsidiaries have also adopted corporate governance rules and policiessubstantially similar in substance and form to our CG Rules, as well asappointed their respective corporate governance officers.

 

Further,we have communicated to our business partners, including suppliers, ourcommitment to, as well as expectations on, good corporate governance.  Toensure that relations between our company and business partners are imbued withour standards on good corporate governance, we have held supplier/contractor’sbriefings and have developed written corporate governance guidelines forsuppliers and contractors, to which our suppliers and contractors are expectedto consent in writing, thereby including, their understanding and acceptance ofthese standards as indispensable in doing business with us.

 

Ourcorporate governance education and communication activities focused on resultsof a culture risk assessment done in the period from December 2006 to January 2007.In addressing identified risks, the two main objectives were strengtheningethical decision-making skills among our officers, executives and team leaders,as well as strengthening ethics and customer service orientation amongidentified key responsible business units in the PLDT Group.  Pursuant thereto,we have conducted various activities, such as:

 

•                    training sessions and workshopsbased on concepts and modules developed by the Corporate Governance Office andfacilitated by various professionals, both local and international, known inthe field of corporate governance and ethics;

 

•                    development and operation of an e-learningsession on Conflict of Interest, which involved the development and publicationof a 5-minute audio-video material discussing the Conflict of Interest Policyin simple terms and with examples.  All supervisors and rank and file employeesof PLDT are required to undergo the session, which was launched in September2007; and

 

•                    development and distribution ofthe Corporate Governance Handbook, and other literature, including monthly andweekly e-mail newsletters and summaries.

 

Our corporate governance framework involves threedevelopment phases: compliance, competency, and character/culture.  Following ourcorporate governance framework of engineering, education and enforcement, ourcorporate governance was elevated from the compliance level to the competencylevel.  In succeeding years, we aim to achieve strong ethical corporatecharacter or culture, thereby completing the three C’s of our corporategovernance.

 

Asidefrom the continuation and improvement of our various programs geared towardsethical culture-building and enabling ethical decision-making, our plans includecommissioned research to come up with an Ethical Compliance Framework forPhilippine Business to align local culture with a global compliance culture,and participation in a Companies Circle project to undertake an inventory ofPhilippine SEC and PSE corporate governance regulations for the guidance of allPhilippine corporations.

 

Wehave also summarized on our website the differences between our corporategovernance practices and those required of U.S. listed companies under NYSESection 303A.11.  

 

Toaccess our Code of Ethics, Governance Manual or the differences between ourcorporate governance practices and those required of U.S. listed companiesunder NYSE Section 303A.11, please refer to:

 

http://www.pldt.com.ph/download/pldt-corpgov_manual.pdfOR http://www.pldt.com.ph/cgov/downloads/pldt-corpgov_manual.pdf

http://www.pldt.com.ph/download/pldt-code_ethics.pdfOR http://www.pldt.com.ph/cgov/downloads/Code%20of%20Ethics(BD_APPRVD)-03.30.04.pdf

http://www.pldt.com.ph/download/pldt-disclosure.pdfOR http://www.pldt.com.ph/cgov/downloads/NYSE-PLDT_CG-DISC-07.01.pdf

* *

*Chief Governance Officer*

 

Ourchief governance officer is responsible for monitoring compliance with,interpreting and deciding any issues arising from, investigating anddetermining violations and recommending the disciplinary actions againstviolators of our Governance Manual and Code of Ethics.

 

*Board and Board Committees*

 

We have maintained our board’s independence frommanagement through the separation of the posts of the board chairman andpresident and chief executive officer.  Each position has distinct and separateduties and responsibilities as contained in our By-Laws and Governance Manual.In addition, we have four independent directors, namely, Rev. Fr. Bienvenido F.Nebres, S.J. and Messrs. Oscar S. Reyes, Pedro E. Roxas, and Alfred V. Ty.

 

To assistour board in fulfilling its duties and functions, we have four board committees,namely the governance and nomination, audit, executive compensation andtechnology strategy committees.  Each committee has a board-approved writtencharter that provides for such committee’s composition, membershipqualifications, functions and responsibilities, conduct of meetings, andreporting procedure to the board.  SeeItem 6. “Directors, Senior Management and Employees –– Audit, Governance andNomination, Executive Compensation and Technology Strategy Committees” forfurther details.

 

*Internal Audit Organization*

 

We have an internal audit organization that determineswhether our network or risk management, control and governance processes areadequate and functioning to ensure that:

 

1.       Risks are appropriately identifiedand managed;

 

2.       Significant financial, managerial,and operating information are accurate, reliable, and timely;

 

3.       Employees’ actions are incompliance with policies, standards, procedures, and applicable laws andregulations;

 

4.       Resources are acquiredeconomically, used efficiently, and adequately protected;

 

5.       Programs, plans and objectives areachieved;

 

6.       Quality and continuous improvementare fostered in our control process;

 

7.       Significant legislative or regulatoryissues impacting us are recognized and addressed appropriately; and

 

8.       Interaction with variousgovernance groups occurs as needed.

 

To ensure independence, the headof our internal audit organization reports functionally to our audit committeeand administratively to our president and chief executive officer.  He isaccountable to management and our audit committee in the discharge of hisduties and is required to:

 

1.       Provide annually an assessment onthe adequacy and effectiveness of our processes for controlling our activitiesand managing our risks;

 

2.       Report significant issues relatedto the processes of controlling our activities, including potentialimprovements to those processes, and provide information concerning suchissues;

 

3.       Periodically provide informationon the status and results of the annual audit plan and the sufficiency of ourinternal audit organization’s resources; and

 

4.       Coordinate with and provideoversight of other control and monitoring functions (risk management,compliance, security, legal, ethics, environmental, external audit).

 

Our internal audit organizationhas a charter that has been approved by our audit committee.  It seeks tocomply with the Standards for the Professional Practice of Internal Auditing ofThe Institute of Internal Auditors in the discharge of its scope of work andresponsibilities.

 

*Policy on EmployeeDisclosure on Violations of the Corporate Governance Rules, QuestionableAccounting or Auditing Matters, and Offenses Covered By the Company’s Table ofPenalties*

 

We have expanded our writtenpolicy on the handling of employees’ anonymous and non-anonymous complaints ordisclosures on violations or irregularities to cover accounting, internalcontrols and auditing matters, as well as corporate governance rules andoffenses covered by our table of penalties.  Said policy also providesprotection against retaliation for those employees who make such complaints ordisclosures.  We have likewise established dedicated structures and facilities(post office box, e-mail, hotline number, fax and website) for the submissionof such disclosures or complaints. 

 

Anyemployee may submit a complaint or disclosure of the above nature to theCorporate Governance Office (CGO) or the chief governance officer, verbally orin writing.  The CGO shall conduct a preliminary evaluation to determine theappropriate investigating unit to which the case shall be assigned for furtheraction.

 

The CGO monitors the casesreported and ensures the appropriate reporting to our audit committee, governanceand nomination committee, or any other relevant committee or body on theresults of the investigations and the prompt referrals of findings to theappropriate units concerned.  Our committees on officer or employee discipline,as the case may be, are responsible for evaluating and approving theappropriate disciplinary action against erring officers and employees.

 

Thepublic may obtain information on our Code of Ethics, Governance Manual andCharters of our Board Committees through our website.  We undertake to providea copy, without charge, to any person requesting for such copy from our chiefgovernance officer, Atty. Ma. Lourdes C. Rausa-Chan*,*who can be reachedat e-mail address*lrchan@pldt.com.ph*or telephone number +632-816-8556.We also maintain a website at *www.pldt.com.ph*on which reports filed byus and other information may be accessed.

 

**Item 16C. Principal AccountantFees and Services******

 

The following tablesummarizes the fees paid or accrued for services rendered by our independent auditorfor the fiscal years ended December 31, 2007 and 2006:

 

 

**2007**

** **

**2006**

 

(in millions)

 

 

 

 

Audit Fees

Php41

 

Php47

All Other Fees

25

 

29

**Total**

**Php66**

** **

**Php76**

 

*Audit Fees*.  This category includes the auditof our annual financial statements, review of interim financial statements andservices that are normally provided by the independent auditor in connectionwith statutory and regulatory filings or engagements for those fiscal years.  

 

*All Other Fees*.  This category consists primarily of fees with respect toour Sarbanes-Oxley Act 404 assessment, certain projects and out-of-pocket andincidental expenses.

 

The fees presented above includeout-of-pocket expenses incidental to our independent auditors’ work, whichamounts do not exceed 5% of the agreed-upon engagement fees.

 

Our audit committee pre-approves all audit and non-auditservices as these are proposed or endorsed before these services are performedby our independent auditors.  

 

**Item 16D. Exemption fromthe Listing Standards for Audit Committees**

 

Not applicable.

 

**Item 16E.  Purchases ofEquity Securities by the Issuer and Affiliated Purchaser**

 

There were no share purchases by or on behalf of PLDT or anyaffiliated purchaser of shares of PLDT during the fiscal year ended December31, 2007.  

 

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 total outstandingshares of common stock.  As at March 25, 2008, we acquired a total of 98,000shares of common stock based on the buyback program.  The subsequentacquisition of shares of PLDT’s common stock pursuant to the buyback program hasno effect on our basic and diluted earnings per share for the years endedDecember 31, 2007 and 2006.

 

PART III
 

**Item 17.    Consolidated Financial Statements******

 

TheCompany has elected to provide the financial statements and related informationspecified in Item 18 in lieu of Item 17.

 

**Item 18.    Consolidated FinancialStatements**

 

Indexto Financial Statements

 

 

**Page**

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AUDITED ANNUAL FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

127

Report of Independent Registered Public Accounting Firm

128

Consolidated Balance Sheets as at December 31, 2007 and 2006

130

Consolidated Statements of Income for the Years Ended December 31, 2007 and 2006 

132

Consolidated Statements of Changes in Equity for the Years Ended December 31, 2007 and 2006 

133

Consolidated Statements of Cash Flows for the Years Ended December 31, 2007 and 2006 

134

Notes to Consolidated Financial Statements

136

** **

**Item 19.    Exhibits**

** **

SeeItem 18 above for details of the financial statements filed as part of thisannual report.

** **

Exhibitsto this report:

** **

1(a).

Articles of Incorporation (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

1(b).

By-Laws (as amended on June 28, 2005) (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in June 2006)

 

 

2.

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4.

Material Contracts

 

 

6.

Computation of Earnings Per Share

 

 

7.

Calculation of Ratio of Earnings to Fixed Charges

 

 

8.

Subsidiaries

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

 

SIGNATURE

 

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf.

 

 

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

 

 

 

 

 

 

 

 

 

By:

 

                /s/ Ma. Lourdes C. Rausa-Chan

 

 

MA. LOURDES C. RAUSA-CHAN

 

 

Senior Vice President, Corporate Affairs and Legal

 

 

Services Head and Corporate Secretary

 

 

 

Date:  April 9, 2008
****
EXHIBITINDEX
** **

Exhibit Number

**Description of Exhibit**

 

 

1(a)

Articles of Incorporation (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

1(b)

By-Laws (as amended on June 28, 2005) (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in June 2006)

 

 

2

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4(a)

Stock Purchase and Strategic Investment Agreement, dated September 28, 1999, by and among PLDT, First Pacific Limited, Metro Pacific Corporation, Metro Pacific Asia Link Holdings, Inc., Metro Pacific Resources, Inc. and NTT Communications Corporation (incorporated by reference to PLDT’s Form 6-K for the month of September 1999)

 

 

4(b)

Executive Stock Option Plan (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

4(c)

Master Restructuring Agreement, dated June 21, 2000, as amended on December 12, 2000 and December 19, 2000, between Piltel, Piltel (Cayman) Limited, PLDT, The Chase Manhattan Bank, as escrow agent, Metropolitan Bank and Trust Company, as administrative agent and the creditors named therein (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

4(d)

The Cooperation Agreement, dated January 31, 2006, entered into by and among PLDT, First Pacific, Metro Pacific Corporation, Metro Asia Link Holdings, Inc., Metro Pacific Resources, Inc., Larouge B.V., Metro Pacific Assets Holdings, Inc., NTT Communications and NTT DoCoMo (incorporated by reference to Schedule 13D/A (Amendment No.2) as filed with the United States Securities and Exchange Commission by Nippon Telegraph and Telephone Corporation and NTT Communications Corporation on January 31, 2006) 

 

 

6

Computation of Earnings Per Share

 

 

7

Calculation of Ratio of Earnings to Fixed Charges 

 

 

8

Subsidiaries 

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

** **

** **

 

 

 

 

 

 

 

 

 

 

 

* *
******
** **

**EXHIBIT 6**

PHILIPPINE LONG DISTANCETELEPHONE COMPANY

Computationof Earnings Per Share

**For the years 2007 and 2006**

***Amounts in conformity with IFRS***

* *

 

**2007**(1)

**2007**

**2006**

 

**(in millions, except earnings per common share)**

**Earnings per share**

** **

** **

** **

Basic

 

 

 

Net income (loss) after cumulative effect of change in accounting policy

US$949

Php39,289

Php32,385

Deduct:  Dividends on preferred stock 

(11)

(457)

(455)

               Accretion to redemption value of preferred stock subject to mandatory conversion

–

–

–

Net income (loss) attributable  to common shareholders

US$938

Php38,832

Php31,930

Diluted

 

 

 

Net income (loss) after cumulative effect of change in accounting policy

US$949

Php39,289

Php32,385

Deduct:  Dividends on preferred stock 

(11)

(440)

(455)

               Accretion to redemption value of preferred stock subject to mandatory conversion

3

131

–

Foreign exchange gain on preferred stock subject to mandatory conversion

(4)

(182)

–

Net income (loss) applicable to common shareholders

US$937

Php38,798

Php31,930

Basic

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

Outstanding common shares, beginning

 

188,435

180,789

Effect of issuance of common shares during the year

 

221

3,667

 

 

188,656

184,456

Diluted

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

Outstanding common shares, beginning

 

188,435

180,789

Effect of issuance of common shares during the year

 

221

3,667

Weighted average number of shares under ESOP during the year(2)

 

38

98

Common share equivalent of preferred shares deemed dilutive:

 

680

–

 

 

189,374

184,554

Earnings per share 

 

 

 

Basic

4.97

205.84

173.10

Diluted

4.95

204.88

173.01

* *

____________

*(1)   **PLDT Group maintains itsaccounts in Philippine peso.  For convenience, the peso financial informationas at and for the year ended December 31, 2007 has been translated into U.S.dollars at the exchange rate of Php41.411 to US$1.00, the peso-dollar rate asquoted through the Philippine Dealing System as at December 31, 2007.*

* *

*(2)    The dilutive effect of the outstanding optionsis reflected as additional share dilution in the computation of earnings percommon share, see Note 7 – Earnings per Common Share**to the accompanying audited consolidated financialstatements in Item 18 for further discussion.*

 
****
PHILIPPINE LONG DISTANCETELEPHONE COMPANY

Computationof Operating Income and Earnings Per Share

**For the years 2003 through 2005**

***Amounts in conformity with U.S. GAAP***

** **

**2005**

**2004**

**2003**

** **

**(in millions, except net operating income (loss) per common share)**

**1. Operating income per share**

** **

** **

** **

Basic

 

 

 

Operating income 

Php48,514

Php48,539

Php33,379

Deduct:  Dividends on preferred stock

1,677

1,764

1,739

Accretion of redemption value of  preferred stock subject to mandatory conversion

1,443

1,503

1,309

Operating income applicable to common shareholders

Php45,394

Php45,272

Php30,331

Diluted

 

 

 

Operating income 

Php48,514

Php48,539

Php33,379

Deduct:  Dividends on preferred stock

70

49

49

Accretion of redemption value of preferred stock subject to mandatory conversion

1,746

–

1,309

Operating income applicable to common shareholders

Php46,698

Php48,490

Php32,021

Basic

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

Outstanding common shares, beginning

170,214

169,476

169,361

Effect of issuance of common shares during the year

1,855

252

52

 

172,069

169,728

169,413

Diluted

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

Outstanding common shares, beginning

170,214

169,476

169,361

Effect of issuance of common shares during the year

1,855

252

52

Weighted average number of shares under ESOP during the year(3)

94

155

–

Common share equivalent of preferred shares deemed dilutive

10,858

22,381

24,222

 

183,021

192,264

193,635

 

 

 

 

Operating income per share 

 

 

 

Basic

Php263.81

Php266.73

Php179.04

Diluted

255.15

252.20

165.37

 

** **

** **

** **

**2. Earnings per share****(1)**

** **

** **

** **

Basic

 

 

 

Net income (loss) after cumulative effect of change in accounting policy

Php40,603

Php28,101

Php11,045

Deduct:  Dividends on preferred stock 

1,677

1,764

1,739

               Accretion to redemption value of preferred stock subject to mandatory conversion

1,443

1,503

1,309

Net income (loss) attributable  to common shareholders

Php37,483

Php24,834

Php7,997

Diluted

 

 

 

Net income (loss) after cumulative effect of change in accounting policy

Php40,603

Php28,101

Php11,045

Deduct:  Dividends on preferred stock 

70

285

1,485

               Accretion to redemption value of preferred stock subject to mandatory conversion

1,746

1,503

1,309

Net income (loss) applicable to common shareholders

Php38,787

Php26,313

Php8,251

Basic

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

Outstanding common shares, beginning

170,214

169,476

169,361

Effect of issuance of common shares during the year

1,855

252

52

 

172,069

169,728

169,413

Diluted

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

Outstanding common shares, beginning

170,214

169,476

169,361

Effect of issuance of common shares during the year

1,855

252

52

Weighted average number of shares under ESOP during the year(2)

94

155

–

Common share equivalent of preferred shares deemed dilutive:

10,858

11,213

11,069

 

183,021

181,096

180,482

Earnings per share(1) 

 

 

 

Basic

Php217.84

Php146.32

Php47.20

Diluted

211.93

145.30

45.72

 

*(1)    Our convertible preferred stocks were deemedanti-dilutive for the year ended December 31, 2003.   Since the amount ofpreferred dividends over the equivalent number of common stocks was greaterthan the basic earnings per share, the amounts reported for the year endedDecember 31, 2002 basic and diluted earnings per common share were the same.*

 

*(2)    The dilutive effect of the outstanding optionsis reflected as additional share dilution in the computation of earnings percommon share, see Note 7 – Earnings per Common Share**to the accompanying audited consolidated financialstatements in Item 18 for further discussion.*

** **
****
**EXHIBIT 7**

* *

* *

* *

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

**Calculation of Ratio of Earnings to Fixed Charges**

For the years 2007 and2006

***Amountsin conformity with IFRS:***

 

 

**2007****(1)**

**2007**

**2006**

 

**(in millions, except ratio of earnings (loss) to fixed charges)**

 

 

 

 

Earnings:

US$1,403

Php58,081

Php38,249

Pre-tax income (loss) from continuing operations before adjustment for minority interest in consolidated subsidiaries or income or loss from equity investees subsidiaries

 

 

 

Add (Deduct):

 

 

 

Fixed Charges (see b below)

194

8,051

10,874

Amortization of capitalized interest

38

1,559

1,490

Capitalized interest

(13)

(542)

(549)

Total Earnings(a)

US$1,622

Php67,149

Php50,064

Fixed Charges(b)

 

 

 

Interest on loans and related items

US$138

Php5,714

Php7,359

Capitalized interest

13

542

549

Amortization of debt issuance costs

21

874

2,214

Estimated financing component of rent expense(3)

22

921

752

Total Fixed Charges

US$194

Php8,051

Php10,874

Ratio (a/b) (2)

8.3

8.3

4.6

 

For the years 2003 through2005

***Amounts in conformity with U.S. GAAP***

 

 

**2005**

**2004**

**2003**

 

**(in millions, except ratio of earnings (loss) to fixed charges)**

 

 

 

 

Earnings:

Php45,770

Php34,840

Php9,820

Pre-tax income (loss) from continuing operations before adjustment for minority interest in consolidated subsidiaries or income or loss from equity investees subsidiaries

 

 

 

Add (Deduct):

 

 

 

Fixed Charges (see b below)

11,273

13,479

13,644

Amortization of capitalized interest

1,443

1,510

1,601

Capitalized interest

(504)

(595)

(887)

Total Earnings(a)

Php57,982

Php49,234

Php24,178

Fixed Charges(b)

 

 

 

Interest on loans and related items

Php9,615

Php11,115

Php11,434

Capitalized interest

504

595

887

Amortization of debt issuance costs

459

1,049

601

Estimated financing component of rent expense(3)

695

720

722

Total Fixed Charges

Php11,273

Php13,479

Php13,644

Ratio (a/b) (2)

5.1

3.7

1.8

_____________

 

*(1)   **PLDT Group maintains itsaccounts in Philippine peso.  For convenience, the peso financial informationas at and for the year ended December 31, 2007 has been translated into U.S.dollars at the exchange rate of Php41.411 to US$1.00, the peso-dollar rate as quotedthrough the Philippine Dealing System as at December 31, 2007.*

* *

*(2)   **For purposes of this ratio,“Earnings” consist of: (a) pre-tax income from continuing operations beforeadjustment for minority interest in consolidated subsidiaries or income or lossfrom equity investees, (b) fixed charges, (c) amortization of capitalizedinterest, (d) distributed income of equity investees, and (e) share of pre-taxlosses of equity investees for which charges arising from guarantees areincluded in fixed charges; less the sum of the following: (1) capitalizedinterest, (2) preference security dividend requirements of consolidatedsubsidiaries, and (3) the minority interest in pre-tax income of subsidiariesthat have not incurred fixed charges*

* *

*“Fixed charges” consist of interest expensed andcapitalized interest, amortized premiums, discounts and capitalized expensesrelated to indebtedness, an estimate of interest within rental expense, andpreference security dividend requirements of consolidated subsidiaries.*

* *

*(3)   **Rent expense substantiallyrepresents payments for the satellite circuits leased by PLDT.  Historically,PLDT has been using one-third of rent expense as a reasonable estimate of thefinancing component of rent expense, since it is impracticable to determine theactual financing component of rent expense.*

**EXHIBIT 8**

 

**PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

Subsidiariesas at December 31, 2007

 

** **

**Place of Incorporation**

** **

**Percentage of Ownership**

**Name of Subsidiary**

**Principal Activity**

**Direct**

**Indirect**

** **

 

 

** **

**Wireless**

Smart

Philippines

Cellular mobile services

100.0

–

Smart Braodband Inc., or SBI

Philippines

Internet broadband distribution

–

100.0

Smartconnect Holdings Pte. Ltd., or SCH

Singapore

International trade of satellites and global system mobile, or GSM, telecommunications

–

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 telecommunications

–

100.0

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

Singapore

Solutions and systems integration services

–

85.0

Wireless Card, Inc., or WCI

Philippines

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

–

100.0

Smart Hub, 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

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, cusomter interaction service 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

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

 

**Exhibit 12.1**

** **

CERTIFICATION
** **

I, Napoleon L. Nazareno, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company (the “Company”);

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as of, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company andhave:

 

(a)    Designed such disclosure controlsand procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating tothe Company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisreport is being prepared;

(b)    Designed such internal controlover financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles;

(c)    Evaluated the effectiveness of theCompany’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures,as of the end of the period covered by this report based on such evaluation;and

(d)    Disclosed in this report anychange in the Company’s internal control over financial reporting that occurredduring the period covered by the annual report that has materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting; and

 

5.       The Company’s other certifying officer(s)and I have disclosed, based on our most recent evaluation of internal controlover financial reporting, to the Company’s auditors and the audit committee ofthe Company’s board of directors (or persons performing the equivalentfunctions):

 

(a)    All significant deficiencies andmaterial weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the Company’sability to record, process, summarize and report financial information; and

 

(b)    Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the Company’s internal control over financial reporting.

 

 

Date:  April 9, 2008

 

/s/  Napoleon L. Nazareno

Napoleon L. Nazareno

President and Chief Executive Officer

(Principal Executive Officer)

 
****
**Exhibit 12.2**

** **

**CERTIFICATION**

** **

I,Anabelle L. Chua, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company (the “Company”);

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as of, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) and internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

(a)   Designed such disclosure controls andprocedures, or caused such disclosure controls and procedures to be designedunder our supervision, to ensure that material information relating to theCompany, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report isbeing prepared;

(b)   Designed such internal control over financialreporting, or caused such internal control over financial reporting to bedesigned under our supervision, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples; 

(c)   Evaluated the effectiveness of the Company’sdisclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of theend of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in theCompany’s internal control over financial reporting that occurred during theperiod covered by the annual report that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting; and

 

5.       The Company’s other certifyingofficer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the Company’s auditors and theaudit committee of the Company’s board of directors (or persons performing theequivalent functions):

 

(a)   All significant deficiencies and materialweaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the Company’s abilityto record, process, summarize and report financial information; and

 

(b)   Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theCompany’s internal control over financial reporting.

 

 

Date:April 9, 2008

 

/s/  Anabelle L. Chua

Anabelle L. Chua

Senior Vice President and Treasurer

(Principal Financial Officer)

** **
****
**Exhibit13.1**

** **

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. §1350, I, Napoleon L. Nazareno, President and Chief Executive Officer ofPhilippine Long Distance Telephone Company, hereby certify, to my knowledge,that our annual report on Form 20-F for the year ended December 31, 2007 (the “Report”)fully complies with the requirements of Section 13(a) or 15(d), as applicable,of the Securities Exchange Act of 1934, and that the information contained inthe Report fairly presents, in all material respects, our financial conditionand results of operations.

 

 

Date:  April 9, 2008

 

 

 

 

 

/s/  Napoleon L. Nazareno

 

 

 

Napoleon L. Nazareno

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

The foregoingcertification is being furnished solely pursuant to 18 U.S.C. § 1350 and is notbeing filed as part of the Report or as a separate disclosure document.

 

**Exhibit 13.2**

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. §1350, I, Anabelle L. Chua, Senior Vice President and Treasurer of PhilippineLong Distance Telephone Company, hereby certify, to my knowledge, that ourannual report on Form 20-F for the year ended December 31, 2007 (the “Report”)fully complies with the requirements of Section 13(a) or 15(d), as applicable,of the Securities Exchange Act of 1934, and that the information contained inthe Report fairly presents, in all material respects, our financial conditionand results of operations.

 

 

Date:  April 9, 2008

 

 

 

 

 

/s/  Anabelle L. Chua

 

 

 

Anabelle L. Chua

Senior Vice President and Treasurer

 

 

 

(Principal Financial Officer)

The foregoingcertification is being furnished solely pursuant to 18 U.S.C. § 1350 and is notbeing filed as part of the Report or as a separate disclosure document.
****
Report of Independent Registered Public AccountingFirm

 

 

 

The Board of Directors and theStockholders

Philippine Long Distance TelephoneCompany

 

 

We have auditedPhilippine Long Distance Telephone Company and subsidiaries’ (the “PLDT Group”)internal control over financial reporting as of December 31, 2007, based on criteriaestablished in Internal Control - Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission (the COSO criteria).The PLDT Group’s management is responsible for maintaining effective internalcontrol over financial reporting, and for its assessment of the effectivenessof internal control over financial reporting included in the accompanyingManagement’s Annual Report on Internal Control over Financial Reporting.  Ourresponsibility is to express an opinion on the PLDT Group’s internal controlover financial reporting based on our audit. 

 

We conducted our auditin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether effective internal controlover financial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk, and performing such other procedures as we considerednecessary in the circumstances.  We believe that our audit provides a reasonablebasis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  A company’s internal control over financialreporting includes those policies and procedures that: (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In our opinion, the PLDTGroup maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2007, based on****the COSO criteria**.**

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofthe PLDT Group as of December 31, 2007 and 2006, and the related consolidatedstatements of income, changes in equity, and cash flows for the years thenended in accordance with International Financial Reporting Standards as issuedby the International Accounting Standards Board, and our report dated April 3,2008 expressed an unqualified opinion thereon.

 

 

 

 

/s/SyCip Gorres Velayo & Co.

Makati City, Philippines

April 3, 2008

**Report of Independent Registered Public Accounting Firm**

 

 

 

The Stockholders and the Board of Directors

Philippine Long Distance Telephone Company

 

 

We have audited the accompanying consolidated balance sheetsof Philippine Long Distance Telephone Company and subsidiaries (the “PLDTGroup”) as of December 31, 2007 and 2006, and the related consolidatedstatements of income, statements of equity, and cash flows for each of the twoyears in the period ended December 31, 2007.  These financial statements arethe responsibility of the PLDT Group’s management.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof the PLDT Group at December 31, 2007 and 2006, and the consolidated resultsof their operations and their cash flows for each of the two years in theperiod ended December 31, 2007, in conformity with International FinancialReporting Standards as issued by the International Accounting Standards Board.

 

We also have audited, in accordance with the standards ofthe Public Company Accounting Oversight Board (United States), the PLDT Group’sinternal control over financial reporting as of December 31, 2007, based oncriteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated April 3, 2008 expressed an unqualified opinion thereon.

 

** **

** **

** **

 

/s/SyCip Gorres Velayo & Co.

Makati City, Philippines

April 3,2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCETELEPHONE COMPANY AND SUBSIDIARIES**

 

**CONSOLIDATED FINANCIAL STATEMENTS**

 

AS AT AND FOR THEYEARS ENDED DECEMBER 31, 2007 AND 2006

 

AND

 

INDEPENDENTAUDITORS’ REPORT

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

** **

CONSOLIDATEDBALANCE SHEETS

**December 31, 2007and 2006**

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

** **

** **

**2007**

 

2006

**ASSETS**

**Noncurrent Assets**

** **

** **

** **

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

**159,414**

 

164,190

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

**1,351**

 

636

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

**143**

 

116

Investment in debt securities (Notes 2 and 26)

**273**

 

–

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

**577**

 

587

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

**11,721**

 

12,214

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

**13,757**

 

20,538

Derivative financial assets (Notes 2 and 26)

**59**

 

434

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

**2,281**

 

1,368

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

**1,030**

 

1,066

Total Noncurrent Assets 

**190,606**

 

201,149

**Current Assets**

** **

 

 

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

**17,447**

 

16,870

Short-term investments (Notes 2 and 26)

**13,415**

 

8,327

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

**1,115**

 

–

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

**12,645**

 

10,158

Inventories and supplies (Notes 2, 15 and 26)

**1,167**

 

1,230

Derivative financial assets (Notes 2 and 26)

**897**

 

47

Current portion of prepayments (Notes 16 and 26)

**2,368**

 

3,967

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

**498**

 

156

Total Current Assets

**49,552**

 

40,755

**TOTAL ASSETS**

**240,158**

 

241,904

 

** **

 

 

**EQUITY AND LIABILITIES**

**Equity****Attributable to Equity Holders of PLDT**(Notes 2, 7 and 17)

** **

 

 

Preferred stock, Php10 par value, authorized - 822,500,000 shares;  issued and outstanding - 441,650,297 shares as at December 31, 2007 and  442,375,057 shares as at December 31, 2006

**4,417**

 

4,424

Common stock, Php5 par value, authorized - 234,000,000 shares;  issued and outstanding - 188,740,519 shares as at December 31, 2007 and  188,434,695 shares as at December 31, 2006

**943**

 

942

Stock options issued (Note 23)

**9**

 

40

Equity portion of convertible preferred stock (Note 18)

**6**

 

9

Capital in excess of par value

**67,057**

 

66,574

Retained earnings (Note 7)

**39,894**

 

29,361

Cumulative translation adjustments

**(1,383)**

 

(37)

     Total Equity Attributable to Equity Holders of PLDT

**110,943**

 

101,313

**Minority interest**

**1,402**

 

1,540

Total Equity

**112,345**

 

102,853

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

CONSOLIDATEDBALANCE SHEETS (*continued*)

**December 31, 2007and 2006**

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

 

** **

**2007**

 

2006

**Noncurrent Liabilities**

** **

 

 

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

**53,387**

 

65,244

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

**2,066**

 

402

Derivative financial liabilities (Notes 2, 24 and 26)

**7,741**

 

6,872

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

**4,540**

 

2,982

Customers’ deposits (Notes 24 and 26)

**2,201**

 

2,204

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

**9,632**

 

8,503

Total Noncurrent Liabilities

**79,567**

 

86,207

**Current Liabilities**

** **

 

 

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

**12,253**

 

8,634

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

**21,929**

 

23,135

Derivative financial liabilities (Notes 2, 24 and 26)

**242**

 

108

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

**1,112**

 

446

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

**8,764**

 

17,309

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

**1,071**

 

774

Income tax payable (Notes 2, 6 and 26)

**2,875**

 

2,438

Total Current Liabilities

**48,246**

 

52,844

**TOTAL EQUITY AND LIABILITIES**

**240,158**

 

241,904

* *

*See accompanying Notes toConsolidated Financial Statements.*

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

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**Forthe Years Ended December 31, 2007 and 2006**

**(inmillion pesos, except earnings per common share amounts)**

** **

** **

**2007**

2006

**REVENUES**

** **

 

Service revenues (Notes 2, 3 and 4)

**135,476**

124,987

Foreign exchange gains – net

**7,990**

4,823

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

**3,226**

2,520

Interest income

**1,503**

1,654

Other income (Notes 2, 3 and 4)

**3,667**

5,740

 

**151,862**

139,724

**EXPENSES**

** **

 

Depreciation and amortization (Notes 3, 4 and 8)

**28,613**

31,869

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

**20,470**

18,359

Repairs and maintenance (Note 22)

**7,310**

6,886

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

**7,088**

10,854

Selling and promotions

**5,824**

5,010

Professional and other contracted services (Notes 5 and 22)

**4,719**

3,098

Cost of sales (Notes 5, 22 and 24)

**4,844**

5,522

Losses on derivative financial instruments – net

**2,849**

8,304

Rent (Note 24)

**2,762**

2,257

Taxes and licenses (Note 25)

**2,319**

1,747

Communication, training and travel

**1,850**

1,481

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

**1,317**

2,766

Insurance and security services (Note 22)

**1,197**

1,255

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

**666**

38

Amortization of intangible assets (Notes 3 and 11)

**390**

450

Equity share in net losses of associates

**11**

52

Other expenses (Note 22)

**1,552**

1,527

 

**93,781**

101,475

**INCOME BEFORE INCOME TAX**

**58,081**

38,249

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

**18,807**

5,668

**NET INCOME FOR THE YEAR**

**39,274**

32,581

**ATTRIBUTABLE TO:**

** **

 

Equity holders of PLDT (Note 7)

**39,289**

32,385

Minority interest

**(15)**

196

** **

**39,274**

32,581

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

** **

 

Basic

**205.84**

173.10

Diluted

**204.88**

173.01

* *

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

* *

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

** **

**CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY**

**For the Years Ended December 31, 2007 and 2006**

**(in million pesos)**

** **

 

**Preferred Stock**

**Common 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**

** **

(in million pesos)

Balances at January 1, 2006

 

 

 

 

 

 

 

 

 

 

Equity under U.S. GAAP

4,433

904

–

–

78,873

(5,288)

673

79,595

–

79,595

Reconciliation adjustments from U.S. GAAP to IFRS (Note 2)

–

–

67

49

(24,955)

17,179

(169)

(7,829)

1,162

(6,667)

Equity under IFRS (Note 2)

4,433

904

67

49

53,918

11,891

504

71,766

1,162

72,928

Changes in equity:

 

 

 

 

 

 

 

 

 

 

Net income under U.S. GAAP

–

–

–

–

–

33,597

–

33,597

–

33,597

Reconciliation adjustments from USGAAP to IFRS (Note 2)

–

–

–

–

–

(1,212**)**

–

(1,212)

196

(1,016)

Net income under IFRS (Note 2)

–

–

–

–

–

32,385

–

32,385

196

32,581

Currency translation differences

–

–

–

–

–

–

(546)

(546)

(45)

(591)

Net gains on available-for-sale financial investments

–

–

–

–

–

–

5

5

–

5

Total income and expense for the year recognized directly in equity

–

–

–

–

–

–

(541)

(541)

(45)

(586)

**Total income and expense for the year**

**–**

**–**

**–**

**–**

**–**

**32,385**

**(541)**

**31,844**

**151**

**31,995**

**Cash dividends (Note 7)**

**–**

**–**

**–**

**–**

**–**

**(14,915)**

**–**

**(14,915)**

**–**

**(14,915)**

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

**(9)**

**38**

**–**

**(40)**

**12,567**

**–**

**–**

**12,556**

**–**

**12,556**

**Exercised option shares**

**–**

**–**

**(****27)**

**–**

**89**

**–**

**–**

**62**

**–**

**62**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**227**

**227**

**Balances at December 31, 2006**

**4,424**

**942**

**40**

**9**

**66,574**

**29,361**

**(37)**

**101,313**

**1,540**

**102,853**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Balances at January 1, 2007

 

 

 

 

 

 

 

 

 

 

Equity under U.S. GAAP

4,424

942

–

–

91,479

12,498

(3,170)

106,173

–

106,173

Reconciliation adjustments from U.S. GAAP to IFRS (Note 2)

–

–

40

9

(24,905)

16,863

3,133

(4,860)

1,540

(3,320)

Equity under IFRS (Note 2)

4,424

942

40

9

66,574

29,361

(37)

101,313

1,540

102,853

Changes in equity:

 

 

 

 

 

 

 

 

 

 

Net income under IFRS

–

–

–

–

–

39,289

–

39,289

(15)

39,274

Deferred income tax effects on  cash flow hedges

–

–

–

–

–

–

(256)

(256)

**–**

(256)

Currency translation differences

–

–

–

–

–

–

(1,782)

(1,782)

(67)

(1,849)

Net gains on available-for-sale financial investments

–

–

–

–

–

–

30

30

–

30

Net gains on cash flow hedges

–

–

–

–

–

–

662

662

–

662

Total income and expense for the year recognized directly in equity

–

–

–

–

–

–

(1,346)

(1,346)

(67)

(1,413)

**Total income and expense for the year**

**–**

**–**

**–**

**–**

**–**

**39,289**

**(1,346)**

**37,943**

**(82)**

**37,861**

**Cash dividends (Note 7)**

**–**

**–**

**–**

**–**

**–**

**(28,756)**

**–**

**(28,756)**

**(12)**

**(28,768)**

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

**(7)**

**1**

**–**

**(3)**

**379**

**–**

**–**

**370**

**–**

**370**

**Exercised option shares**

**–**

**–**

**(31)**

**–**

**104**

**–**

**–**

**73**

** **

**73**

**Minority interest**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**–**

**(44)**

**(44)**

**Balances at December 31, 2007**

**4,417**

**943**

**9**

**6**

**67,057**

**39,894**

**(1,383)**

**110,943**

**1,402**

**112,345**

* *

*See accompanying Notes toConsolidated Financial Statements.*****PHILIPPINE LONG DISTANCE TELEPHONECOMPANY AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**For the YearsEnded December 31, 2007 and 2006**

**(in million pesos)**

 

** **

**2007**

2006

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

Income before income tax

**58,081**

38,249

Adjustments for:

** **

 

Depreciation and amortization (Notes 3, 4 and 8)

**28,613**

31,869

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

**5,714**

7,359

Losses on derivative transactions – net (Notes 5 and 26)

**2,849**

8,304

Pension (Notes 3, 5 and 23)

**1,773**

1,003

Incentive plans (Notes 3, 5 and 23)

**1,448**

3,150

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

**1,317**

2,766

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

**1,161**

3,314

Amortization of intangible assets (Note 11)

**390**

450

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

**17**

130

Equity share in net losses of associates (Note 4)

**11**

52

Loss (gain) on disposal of fixed assets (Note 8)

**(527)**

(158)

Interest income (Note 5)

**(1,503)**

(1,654)

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

**(7,990)**

(4,823)

Gain on reversal of provision for onerous contracts (Note 25)

**–**

(3,529)

Others

**(1,242)**

(895)

Operating income before changes in assets and liabilities

**90,112**

85,587

Decrease (increase) in:

** **

 

Trade and other receivables

**(3,266)**

(1,187)

Inventories and supplies

**(76)**

343

Prepayments

**1,862**

(1,513)

Advances and refundable deposits

**(307)**

1,329

Increase (decrease) in:

** **

 

Accounts payable

**4,763**

(9,254)

Accrued expenses and other current liabilities

**4,223**

1,590

Unearned revenues

**(665)**

969

Pension and other employee benefits

**(6,649)**

(435)

Customers’ deposits

**12**

6

Other noncurrent liabilities

**(1,167)**

43

Net cash generated from operations

**88,842**

77,478

Income taxes paid

**(11,424)**

(8,267)

Net cash provided by operating activities

**77,418**

69,211

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

Proceeds from maturity of short-term investments

**15,935**

658

Interest received

**1,218**

1,481

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

**953**

694

Proceeds from disposal of investment properties

**10**

72

Proceeds from disposal of investments-held-for-sale

**7**

–

Payments for acquisition of intangibles (Note 11)

**(213)**

–

Payments for purchase of investment in debt securities

**(264)**

–

Increase in advances and refundable deposits

**(424)**

(1,054)

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

**(542)**

(549)

Payments for purchase of investment in associates

**(601)**

(636)

Payments for purchase of investments – net of cash acquired (Note 11)

**(1,687)**

(10,254)

Additions to short-term investments

**(21,429)**

(6,166)

Additions to property, plant and equipment (Note 8)

**(24,282)**

(20,125)

Proceeds from collection of notes receivable

**–**

89

Net cash used in investing activities

**(31,319)**

(35,790)

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (*continued*)**

**For the YearsEnded December 31, 2007 and 2006**

**(in million pesos)**

 

** **

**2007**

2006

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

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

**7,647**

9,724

Payments of long-term debt (Note 18)

**(18,065)**

(29,238)

Payments of debt issuance costs

**(54)**

(34)

Proceeds from notes payable

**502**

211

Payments of notes payable

**(193)**

(128)

Payments of obligations under finance lease

**(199)**

(210)

Interest paid – net of capitalized portion

**(5,891)**

(7,528)

Settlements of derivative transactions

**(2,066)**

(3,727)

Cash dividends paid

**(28,470)**

(14,913)

Proceeds from issuance of capital stock

**76**

66

Redemption of shares of minority interest

**(15)**

–

Proceeds from capital expenditures under long-term financing

**8,746**

9,159

Payments of capital expenditures under long-term financing

**(6,837)**

(9,282)

Net cash used in financing activities

**(44,819)**

(45,900)

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

**(703)**

(710)

**NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**

**577**

(13,189)

**CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**

**16,870**

30,059

**CASH AND CASH EQUIVALENTS AT END OF YEAR**

**17,447**

16,870

* *

*Seeaccompanying Notes to Consolidated Financial Statements.*

* *

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

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

 

**1.     ****CorporateInformation**

 

ThePhilippine Long Distance Telephone Company, or PLDT, or Parent Company, wasincorporated under the old Corporation Law of the Philippines (Act 1459, asamended) on November 28, 1928, following the merger of four telephone companiesunder common U.S. ownership.  Under its amended Articles of Incorporation,PLDT’s corporate term is currently limited through 2028.  In 1967, effectivecontrol of PLDT was sold by the General Telephone and Electronics Corporation,then a major shareholder since PLDT’s incorporation, to a group of Filipinobusinessmen.  In 1981, in furtherance of the then existing policy of thePhilippine government to integrate the Philippine telecommunications industry,PLDT purchased substantially all of the assets and liabilities of the RepublicTelephone Company, which at that time was the second largest telephone companyin the Philippines.  In 1998, First Pacific Company Limited, or First Pacific,and its Philippine and other affiliates, collectively the First Pacific Group,acquired a significant interest in PLDT.  On March 24, 2000, NTT CommunicationsCorporation, or NTT Communications, through its wholly-owned subsidiary NTTCommunications Capital (UK) Ltd., or NTTC-UK, became PLDT’s strategic partnerwith approximately 14% economic and voting interest in the issued andoutstanding common stock of PLDT.  Simultaneous with NTT Communications’investment in PLDT, the latter acquired 100% of Smart Communications, Inc., orSmart.  On March 14, 2006, NTT DoCoMo, Inc., or NTT DoCoMo, acquired from NTTCommunications approximately 7% of PLDT’s then outstanding common shares heldby NTT Communications with NTT Communications retaining ownership ofapproximately 7% of PLDT’s common shares.  Since March 14, 2006, NTT DoCoMo hasmade additional purchases of shares of PLDT and together with NTTCommunications beneficially owned 20.86% of the outstanding shares of PLDT’scommon stock as at February 29, 2008.  On February 28, 2007, Metro PacificAsset Holdings, Inc., a Philippine affiliate of First Pacific, completed theacquisition of an additional interest of approximately 46% in PhilippineTelecommunications Investment Corporation, or PTIC, a shareholder of PLDT.This additional investment in PTIC represents an attributable interest ofapproximately 6.4% of the then issued common shares of PLDT and thereby raisedFirst Pacific Group’s beneficial ownership to approximately 28% of PLDT’sshares of common stock as at that date.  First Pacific Group had beneficialownership of approximately 26.17% in PLDT’s outstanding common stock as atFebruary 29, 2008.

 

Thecommon shares of PLDT are listed and traded on the Philippine Stock Exchange,or PSE.  On October 19, 1994, an American Depositary Receipt, or ADR, facilitywas established, pursuant to which Citibank N.A., as the depositary, issuedADRs evidencing American Depositary Shares, or ADSs, with each ADS representingone PLDT common share with a par value of Php5 per share.  Effective February10, 2003, PLDT appointed JP Morgan Chase Bank as successor depositary forPLDT’s ADR facility.  The ADSs are listed on the New York Stock Exchange, orNYSE, in the United States and are traded on the NYSE under the symbol “PHI”.As at December 31, 2007, there were a total of over 42 million ADSsoutstanding.

 

Untilearly 2007, the ADSs were also listed on the NYSE Arca.  However, PLDTvoluntarily delisted its ADSs from the NYSE Arca, effective February 12, 2007, afterdetermining that doing 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.

 

Our consolidated financialstatements as at December 31, 2007 and 2006 and for the two years endedDecember 31, 2007 were approved and authorized by the board of directors onMarch 25, 2008, as reviewed and recommended for approval by the AuditCommittee.

 

 

 

**2.     ****Summaryof Significant Accounting Policies and Practices**

 

**Basis ofPreparation**

 

Ourconsolidated financial statements have been prepared under the historical costconvention except for the revaluation of derivative financial instruments,available-for-sale financial investments and investment properties that havebeen measured at fair values.

 

Our consolidated financialstatements are presented in Philippine peso, PLDT’s functional and presentationcurrency and all values are rounded to the nearest million except whenotherwise indicated.

 

**Basis ofConsolidated Financial Statements Preparation**

 

Ourconsolidated financial statements include the financial statements of PLDT (the“Parent Company”) and those of the following subsidiaries (collectively, the “PLDTGroup”).

 

** **

** **

** **

**2007**

** **

2006

** **

**Place of Incorporation**

** **

**Percentage of Ownership**

**Name of Subsidiary**

**Principal Activity**

**Direct**

**Indirect**

** **

Direct

Indirect

** **

 

 

** **

** **

** **

** **

** **

**Wireless**

** **

** **

** **

** **

** **

Smart

Philippines

Cellular mobile services

**100.0**

**–**

 

100.0

–

Smart Broadband, Inc., or SBI

Philippines

Internet broadband distribution

**–**

**100.0**

 

–

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**

 

–

100.0

Wolfpac Mobile, Inc., or Wolfpac 

Philippines

Mobile applications development and services

**–**

**100.0**

 

–

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**

 

–

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**

 

–

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**

**–**

 

94.4

–

AceS Philippines Cellular Satellite  Corporation, or AceS Philippines

Philippines

Satellite information and messaging services

**88.5**

**11.5**

 

88.5

11.5

Mabuhay Satellite Corporation,  or Mabuhay Satellite

Philippines

Satellite communications services

**67.0**

**–**

 

67.0

–

**Fixed Line**

 

 

 

 

 

PLDT Clark Telecom, Inc., or ClarkTel

Philippines

Telecommunications services

**100.0**

**–**

 

100.0

–

PLDT Subic Telecom, Inc., or SubicTel

Philippines

Telecommunications services

**100.0**

**–**

 

100.0

–

PLDT Global Corporation,  or PLDT Global

British Virgin Islands

Telecommunications services

**100.0**

**–**

 

100.0

–

Smart-NTT Multimedia, Inc., or SNMI

Philippines

Data and network services

**100.0**

**–**

 

100.0

–

PLDT-Maratel, Inc., or Maratel

Philippines

Telecommunications services

**97.5**

**–**

 

97.5

–

Bonifacio Communications Corporation, or BCC

Philippines

Telecommunications, infrastructure  and related value-added services

**75.0**

**–**

 

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**

**–**

 

100.0

–

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

Philippines

Knowledge processing solutions

**–**

**100.0**

 

–

100.0

ePLDT Ventus, Inc.,  or Ventus

Philippines

Customer interaction services

**–**

**100.0**

 

–

100.0

Vocativ Systems, Inc., or Vocativ

Philippines

Customer interaction services

**–**

**100.0**

 

–

100.0

Parlance Systems, Inc., or Parlance

Philippines

Customer interaction services

**–**

**100.0**

 

–

100.0

Infocom Technologies, Inc.,  or Infocom

Philippines

Internet access services

**–**

**99.6**

 

–

99.6

Digital Paradise Thailand

Thailand

Internet access services

**–**

**87.5**

 

–

87.5

netGames, Inc., or netGames

Philippines

Publisher of online games

**–**

**80.0**

 

–

80.0

Digital Paradise, Inc., or  Digital Paradise

Philippines

Internet access services

**–**

**75.0**

 

–

75.0

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

Philippines

Publisher of online games

**–**

**60.0**

 

–

60.0

Airborne Access Corporation,  or Airborne Access

Philippines

Wireless Internet services

**–**

**51.0**

 

–

51.0

 

Subsidiaries are fully consolidatedfrom the date when control is transferred to the PLDT Group and cease to beconsolidated from the date when control is transferred out of the PLDT Group.

 

The financial statements of oursubsidiaries are prepared for the same reporting period as PLDT.  We prepareour consolidated financial statements using uniform accounting policies forlike transactions and other events with similar circumstances.  All intra-groupbalances, income and expenses and unrealized gains and losses resulting fromintra-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 consolidated statements of income andwithin equity in the consolidated balance sheets, separately from equityattributable to equity holders of PLDT.  Acquisition of minority interests isaccounted for using the parent entity extension method, whereby, the differencebetween the consideration and the net book value of the share of the net assetsacquired is recognized in goodwill.

 

Minorityinterests represent the equity interests in Piltel, Level Up!, MabuhaySatellite, 3rd Brand, Maratel, BCC,Digital Paradise, Digital Paradise Thailand, netGames, Infocom and AirborneAccess 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 theconsolidated statement of income.

 

**Statementof Compliance**

 

Our consolidated financialstatements are prepared in compliance with International Financial ReportingStandards as issued by the International Accounting Standards Board (“IFRS”).

 

References to IFRS standardsinclude the application of International Accounting Standards, or IAS,interpretations of the International Financial Reporting InterpretationsCommittee, or IFRIC, and interpretations of the Standards InterpretationCommittee, or SIC.

 

**First-timeAdoption and Transition to IFRS**

 

These are our first consolidated financialstatements prepared in accordance with IFRS.

 

Prior to our adoption of IFRSuntil December 31, 2006, we prepared our consolidated financial statements inaccordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

 

On April 13, 2005, the U.S.Securities and Exchange Commission adopted amendments to Form 20-F for foreignprivate issuers related to the first-time adoption of IFRS.  Under theseamendments, PLDT is permitted to provide only one year of comparative IFRSbalances in the consolidated financial statements for the year ended December31, 2007.  We have applied *IFRS 1, “First-time Adoption of InternationalFinancial Reporting Standards”*, in preparing these consolidated financialstatements, with January 1, 2006 as our date of transition.  An explanation ofhow the adoption of IFRS has affected our reported financial position,financial performance and cash flows is set forth below.

 

Thefirst-time adoption and transition to IFRS resulted in certain changes to ourprevious accounting policies recorded under U.S. GAAP.  The comparative figuresfor the 2006 consolidated financial statements were restated to reflect thechanges in accounting policies. 

 

IFRS1 allows first-time adopters certain exemptions from the general requirementsto apply IFRS effective December 31, 2007 retrospectively.  In preparing ourfirst IFRS financial statements we applied the following exemptions: (a) *IFRS3, “Business Combinations”,* has not been applied to acquisitions ofsubsidiaries or of interests in associates and joint ventures that occurredbefore January 1, 2000; and (b) we have recognized all cumulative actuarialgains and losses on pensions and other post-retirement benefits as at January1, 2006, directly in equity.

 

The following tables(“Reconciliation Tables”) set forth a reconciliation of (i) consolidated equityas at January 1, and December 31, 2006, (ii) consolidated net income for theyear ended December 31, 2006 and (iii) consolidated statements of cash flowsfor the year ended December 31, 2006, in each case between IFRS and thepreviously reported U.S. GAAP financial statements.

** **

Reconciliation of consolidatedequity under U.S. GAAP and IFRS at January 1, 2006 and December 31, 2006:

** **

 

**Note**

**January 1, 2006**

**December 31, 2006**

 

 

(in million pesos)

Consolidated equity under U.S. GAAP

** **

**79,595**

106,173

Reconciling adjustments:

** **

** **

 

Troubled debt restructuring

**A**

**13,026**

7,969

Component depreciation

**B**

**(2,329)**

(4,799)

Qualified borrowing costs

**C**

**4,276**

3,118

Defined benefit pension

**D**

**(27)**

4,646

Investment properties

**E**

**300**

264

Smart acquisition

**F**

**(14,794)**

(14,794)

Provision for onerous contracts

**G**

**(473)**

3,636

Stock-based compensation – long-term  incentive plan, or LTIP

**H**

**(282)**

–

Deferred income tax and others

**I**

**(7,526)**

(4,900)

Equity attributable to equity holders of PLDT

** **

**71,766**

101,313

Minority interest

** **

**1,****162**

1,540

Consolidated equity under IFRS

** **

**72,928**

102,853

** **

Reconciliationbetween consolidated net income under U.S.GAAP and IFRS for the year ended December 31, 2006:

** **

 

**Note**

**(in million pesos)**

Consolidated net income under U.S. GAAP

 

33,597

Reconciling adjustments:

** **

 

Troubled debt restructuring

**A**

(5,938)

Component depreciation

**B**

(2,470)

Qualified borrowing costs

**C**

(1,158)

Defined benefit pension

**D**

(45)

Investment properties

**E**

(36)

Provision for onerous contracts

**G**

4,109

Stock-based compensation – LTIP

**H**

282

Deferred income tax and others

**I**

4,044

Consolidated net income attributable to the equity holders of PLDT for the year under IFRS

** **

32,385

Minority interest under IFRS

** **

196

Consolidated net income for the year under IFRS

** **

32,581

** **

Reconciliation between consolidated statements of cashflows under U.S. GAAP and IFRS for the yearended December 31, 2006:

** **

 

**Operating Activities**

**Investing Activities**

**Financing Activities**

 

(in million pesos)

Consolidated cash provided by (used in) under U.S. GAAP

61,201

(36,764)

(36,916)

Classification of interest paid

8,077

(549)

(7,528)

Classification of interest income received

(1,481)

1,481

–

Hedge cost settlement

1,423

–

(1,423)

Others

(9)

42

(33)

Consolidated cash provided by (used in) under IFRS

69,211

(35,790)

(45,900)

** **

***A. TroubledDebt Restructuring***

 

Pursuantto a debt restructuring plan of Piltel adopted in June 2001, PLDT issued 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 Series K Class I ConvertiblePreferred Stock of Piltel.  Each share of Series V, VI and VIIConvertible Preferred Stock is convertible at any time at the option of theholder into one share of PLDT common stock.  Shares of Series V and Series VIConvertible Preferred Stock which are outstanding on the seventh anniversary ofthe issue date thereof, and shares of Series VII Convertible Preferred Stockwhich are outstanding on the eighth anniversary of the issue date thereof, willbe mandatorily converted into shares of PLDT common stock on the dateimmediately following such anniversary date.  Under a put option exercisablefor 30 days following the mandatory conversion, holders of common shares receivedon mandatory conversion of the Series V, VI and VII Convertible PreferredStock, will be able to require PLDT to purchase such PLDT common shares forPhp1,700 per share, US$36.132 per shareand JPY4,071.89 per share, respectively. As at December 31, 2006,all Series VII Convertible Preferred Stock had been voluntarily converted.

 

OnJuly 2, 2004, Smart acquired from Piltel’s creditors approximately US$289million, or 69.4%, in the aggregate, of Piltel’s outstanding restructured debtat that time, in exchange for Smart debt and a cash payment by Smart. Inparticular, Smart paid an amount in cash of US$1.5 million, or Php84 million,and issued new debt of US$283.2 million, or Php13,892 million.

 

Under U.S. GAAP, Series V, VI andVII Convertible Preferred Stock were accounted for and recognized at fair valueat the date of issuances – net of bifurcated option values.  The debtinstruments were recorded as a “Preferred Stock Subject to MandatoryRedemption” account and presented as mezzanine equity in the consolidatedbalance sheets.  The foreign currency component and the call option embedded in the Series V, VI andVII Convertible Preferred Stock was bifurcated and accounted for separately inconformity with *FAS 133, “Accounting for Derivative Instruments and HedgingActivities”*.  Moreover, the difference between the aggregate fair value ofthe issued Series V, VI and VII Convertible Preferred Stock (inclusive of option values) and thePiltel Series K Class I Convertible Preferred Stock was deferred and presentedas part of “Remaining excess of debt forgiven over value of considerationgiven” account in the consolidated balance sheets in conformity with theaccounting for troubled debt restructuring, such that no gain was recorded onthe restructuring. Thereafter, interest incurred on the remaining restructureddebt was recorded as an offset against remaining excess of debt forgiven overthe value of consideration given.

 

Furthermore, under U.S. GAAP, thePiltel debt outstanding as at July 2, 2004 was reduced by the amount of debtcancelled in connection with the above transaction by Smart. The difference between the sum of futureundiscounted cash flows for the newly issued debt of Smart and cash settlementand the Piltel cancelled debt was recognized as gain on debt restructuring inthe 2004 consolidated statement of income. The difference between the futureundiscounted cash flows of the newly issued debt and the fair value of new debtwas deferred and presented as part of “Remaining excess of debt forgiven overvalue of consideration given” account in the consolidated balance sheets inconformity with the accounting for troubled debt restructuring. Thereafter,interest incurred on the new debt has been recorded as an offset against“Remaining excess of debt forgiven over value of consideration given”.

 

 

 

Under IFRS,we treated the Series V Convertible Preferred Stock as a compound instrumentconsisting of a liability and an equity component. The fair value of the SeriesV Convertible Preferred Stock was determined at issue date, of which  the fairvalue of the liability component as at date of issuance was recorded as“Preferred Stock Subject to Mandatory Redemption” and was included under the“Interest-bearing Financial Liabilities” account in the consolidated balancesheets. The residual amount was assigned as the equity component. Series VI andVII Convertible Preferred Stock, on the other hand, are not denominated in thefunctional currency of the PLDT Group and hence do not contain an equitycomponent. These instruments were designated as debt instruments with embeddedcall options. The fair value of embedded call options as of issuance date wasbifurcated and thereafter accounted for separately at fair value through profitor loss. The residual amount was assigned as a liability component and accretedto the redemption amount up to the call option date using the effectiveinterest rate method.  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 arerecognized as interest expense in the profit and loss and added to the“Preferred Stock Subject to Mandatory Redemption” account.

 

Furthermore,under IFRS, the Piltel debt outstanding as at July 2, 2004 and June 2001(outstanding restructured debt and Series K Class I Convertible Preferred Stockof Piltel) was reduced by the amount of debt cancelled.  The difference betweenthe net carrying value of the cancelled Piltel debt and the fair market valueof the consideration given to the existing debt holders, in the form of newlyissued Smart debt and PLDT Convertible Preferred Stock, was recorded as a gainat the date of restructuring. All interest payments related to the restructureddebt are charged interest expensed as incurred. 

 

These adjustments reduced our consolidated net income byPhp5,938 million for the year ended December 31, 2006, as well as our dividendand accretion of liability on Convertible Preferred Stock totaling Php881million, which is presented under equity section under U.S. GAAP, and increasedour consolidated equity by Php13,026 million and Php7,969 million as at January1, 2006 and December 31, 2006, respectively.  Also, as at December 31, 2006,this adjustment reduced our consolidated interest bearing financialliabilities, net of current portion, remaining excess of debt forgiven andpreferred stock subject to mandatory redemption by Php3,924 million, Php2,688million and Php1,374 million, respectively, and increased our consolidatedcurrent portion of interest bearing financial liabilities by Php17 million.

*** ***

***B. Component Depreciation***

*** ***

Under IFRS, component depreciationis required if components of an asset have different patterns of economic benefit. Each part of an item of property, plant and equipment with a cost that issignificant in relation to the total cost of the item should be depreciatedseparately, based on a systematic basis over the estimated useful life of eachidentified part.  There is no such equivalent accounting requirement under U.S.GAAP.  The reconciliation adjustment pertains to the effect of the applicationof component depreciation for property, plant and equipment under IFRS, wherebycomponents of an asset were identified and depreciated with their correspondingestimated useful lives.  

 

This adjustment reduced ourconsolidated net income by Php2,470 million for the year ended December 31, 2006and reduced our consolidated equity by Php2,329 million as at January 1, 2006and reduced our consolidated equity and consolidated property, plant andequipment by Php4,799 million as at December 31, 2006.

*** ***

***C. QualifiedBorrowing Costs***

 

Under IFRS,capitalized borrowing costs include exchange rate differences arising fromforeign currency borrowings whereas under U.S. GAAP, capitalized borrowingcosts exclude rate exchange differences arising from foreign currencyborrowings.  The reconciliation adjustments include a capitalization of exchangerate differences from foreign currency borrowings eligible for capitalizationto our property, plant and equipment and depreciation expense related tocapitalized exchange rate differences.

 

This adjustment reduced ourconsolidated net income by Php1,158 million for the year ended December 31,2006 and increased our equity by Php4,276 million as at January 1, 2006 and ourconsolidated equity and consolidated property, plant and equipment by Php3,118million as at December 31, 2006.

 

***D. DefinedBenefit Pension***

 

Under IFRS,the defined benefit pension obligation recognized in the consolidated balancesheet is equal to the present value of such obligation plus or minus anyactuarial gains and losses not yet recognized, minus unrecognized priorservices costs, and minus the fair value of any plan assets.  Under U.S. GAAP,following the adoption of *FAS 158, “Employers’ Accounting for DefinedBenefit Pension and Other Post-Retirement Plans”*, in 2006, we recognizedthe overfunded or underfunded status of a benefit plan, measured as thedifference between the fair value of the plan assets and the defined benefitpension obligation as an asset or liability in the consolidated balance sheet.FAS 158 also requires that the changes in the funded status be recorded throughcomprehensive income in the year in which those changes occur.  In 2006, werecognized an aggregate amount of Php4,718 million unfunded plans as othercomprehensive income in the equity section of our 2006 consolidated balancesheet.

 

In our transition to IFRS, weavailed of the exemption allowed under IFRS to recognize all cumulativeactuarial gains and losses in equity.  The reconciliation adjustments includethe reversal of other comprehensive income of Php4,718 million recognized in2006 and recognition of other differences between the accrued liability underIAS 19 and FAS 158.

 

This difference reduced ourconsolidated net income by Php45 million for the year ended December 31, 2006and our consolidated pension and other benefits and thereby our consolidatedequity by Php27 million as at January 1, 2006, and increased our consolidatedpension and other benefits and thereby our consolidated equity by Php4,646million as at December 31, 2006.

 

***E. InvestmentProperties***

 

Under U.S.GAAP, investment properties are accounted for at cost  similar to theaccounting policy adopted for property, plant and equipment.  Under IFRS,investment properties are presented separately in the consolidated balancesheet and accounted for at fair value with the changes in fair value recognizedin the consolidated statement of income.  The reconciliation adjustmentpertains to reclassification of certain property, plant and equipment toinvestment properties, fair market value adjustments and reversal of previouslyrecognized depreciation expenses.

 

This difference reduced ourconsolidated net income by Php36 million for the year ended December 31, 2006and increased our consolidated equity by Php300 million and Php264 million asat January 1, 2006 and December 31, 2006, respectively.  Also, as at December31, 2006, our consolidated property, plant and equipment was reduced by Php323million and our consolidated investment properties increased by Php587 million.

 

***F. Smart Acquisition***

 

Pursuant to the exemptionsavailable under IFRS 1, we applied IFRS 3 in respect of all our businesscombinations starting January 1, 2000. The application of IFRS 3 did not resultin any significant differences between U.S. GAAP and IFRS except for our acquisitionof Smart in 2000.**Under IFRS, the Smart acquisition is accounted for athistorical cost similar to a pooling of interest method while under U.S. GAAP, theSmart acquisition has been accounted for under the purchase method ofaccounting.  The reconciliation adjustment pertains to the carrying value ofgoodwill as at January 1 and December 31, 2006.  The fair value adjustments andrecognized intangible assets recognized under purchase accounting in U.S. GAAPhave been fully amortized as at January 1, 2006.

 

This difference reduced ourconsolidated equity by Php14,794 million as at January 1, 2006 and December 31,2006 and reduced our consolidated goodwill and other intangible assets by thesame amount as at December 31, 2006.

 

***G. Provisionfor Onerous Contracts***

 

Under U.S. GAAP, we accounted forthe minimum and supplemental portion of the Air Time Purchase Agreement, orATPA, with ACeS International Limited, or AIL, similar to a lease obligation.See *Note 22 – Related Party Transactions*and*Note 24 – ContractualObligations and Commercial Commitments*.  Accordingly, the minimum Air TimePurchase Obligation of US$5 million was recorded as a rent expense on astraight-line basis over the term of the ATPA.  The Supplemental Air TimePurchase Obligation of US$15 million, on the other hand, was accounted for as acontingent rent, where such rent is only accrued if certain conditions aremet.  As those conditions were met throughout the life of the ATPA, an annualcharge of US$15 million was accrued for U.S. GAAP purposes.

 

Under *IAS 37, “Provisions,Contingent Liabilities and Contingent Assets,”* we considered the ATPA as“onerous” and recorded a provision for future payments in the said contract inprior years and as of the date of transition to IFRS in January 1, 2006.

 

Under U.S. GAAP, a debtor of acontractual obligation is permitted to derecognize a liability if and only ifit has been contractually extinguished, which requires that either of thefollowing conditions be met: (a) the debtor pays the creditor and is relievedof its obligation for the liability; or (b) the debtor is legally released frombeing the primary obligor under the liability, either judicially or by thecreditor.  Following the formal entering into an amendment to the ATPA onFebruary 1, 2007, the Amended ATPA, as more fully described in *Note 22 –Related Party*Transactions, the second condition was met and we would haverecorded in 2007 an adjustment to reverse the ATPA liability in the amount ofPhp3,991 million.

 

In contrast, under IFRS, asat December 31, 2006, the ATPA no longer qualified as an onerous contract underthe provision of *IAS 10, “Events After the Balance Sheet Date”*, sincethe cost of meeting the obligations under the Amended ATPA is below or withinthe estimated benefits that PLDT is expected to receive under the agreement.  Accordingly, the net provision for onerous contactamounting to US$72 million, or Php3,529 million, was reversed on December 31,2006, excluding the amount paid or to be paid in relation to the Amended ATPA.

 

The reconciliation adjustments in2006 represent the derecognition of the onerous contract liability under IFRS,which under U.S. GAAP had been reversed in 2007.  This difference increased ourconsolidated net income by Php4,109 million and reduced our consolidated equityby Php473 million as at January 1, 2006 and increased our consolidated equityby Php3,636 million as at December 31, 2006.  Also, as at December 31, 2006,our consolidated accounts payable increased by Php287 million and our consolidatedaccrued and other current liabilities decreased by Php3,923 million.

 

***H. StockBased Compensation – LTIP***

*** ***

UnderU.S. GAAP, prior to January 1, 2006, we applied the intrinsic value methodunder *Accounting Principles Board 25, “Accounting for Stock Issued toEmployees”* and*FASB Interpretations No. (FIN) 28, “Accounting for StockAppreciation Rights and Other Variable Stock Option or Award Plans”* inaccounting for equity-settled and cash-settled share-based payments,respectively.  In 2006, following our adoption of *FAS 123 (R),**“Share-basedPayments”,* we accounted for share-based payments at fair value which isconsistent with *IFRS 2, “Share-based Payments.”*In our adoption of FAS123 (R), we availed ourselves of the provisions of the modified prospectivetransition, or MPT, method wherein we recognized the cumulative effect of thechange in accounting principle, net of any tax effects, to reflect thedifference between the intrinsic value and the fair value of the liabilityaward in 2006.  Prior year financial statements under U.S. GAAP were notrestated.  The cumulative effect of adoption of FAS 123 (R) prior to January 1,2006 resulted in a change in our reported net income under U.S. GAAP of Php189million (net of tax of Php93 million) in 2006, which represents the differencebetween the intrinsic value and the fair value of the liability award onJanuary 1, 2006.

 

UnderIFRS 2, similar to FAS 123 (R), both equity-settled and cash-settledshare-based payment awards are accounted at fair value similar to FAS 123 (R).The reconciliation adjustment derecognizes the cumulative effect of ouradoption of FAS 123 (R) of Php189 million (net of tax of Php93 million) as acharge to the opening retained earnings on January 1, 2006.

 

This difference increased our consolidatednet income by Php282 million for the year ended December 31, 2006 and reducedour consolidated equity by the same amount as at January 1, 2006.  The adoptionof IFRS had no impact on the consolidated stock-based compensation under ourconsolidated equity as at December 31, 2006.

 

***I.  Deferredincome tax and others***

 

Thereconciliation of deferred income tax pertains to the tax effects of the IFRSand U.S. GAAP reconciliation adjustments discussed in items A to H above.

 

Otherreconciliation adjustments refer to the adjustments made to account forbusiness combinations involving less than 100% of the equity interests in anacquiree.  Under IFRS, net identifiable assets of an acquiree are recognized attheir full fair value and minority interest is measured at its proportionateshare of the fair value of the acquiree’s net identifiable assets, exclusive ofgoodwill.  Under U.S. GAAP, net identifiable assets of an acquiree arerecognized partly at fair market value (to the extent of the acquirer’s ownershipinterest) and partly at historical book value (to the extent of the minority’sownership interest) and minority interest is measured at its proportionateshare of the historical book value of the acquiree’s net identifiable assets.

 

The effectof the above differences increased our consolidated net income by Php4,044million and decreased our cumulative translation adjustments by Php1,418million for the year ended December 31, 2006 and reduced our consolidatedequity by Php7,526 million and Php4,900 million as at January 1, 2006 andDecember 31, 2006, respectively.  Additionally, as at December 31, 2006, ourconsolidated goodwill and other intangible assets, other assets, minorityinterests, current deferred income tax assets and accrued and other currentliabilities were reduced by Php233 million, Php10 million,  Php503 million,Php10,042 million and Php71 million, respectively.  Our consolidated noncurrentdeferred income tax assets and noncurrent deferred income tax liabilitiesincreased by Php4,832 million and Php21 million, respectively, as at December31, 2006. 

 

***Reclassifications***

 

Certain accounts werereclassified to conform with IFRS presentation requirements. Thesereclassifications have no effect on our consolidated net income for the year endedDecember 31, 2006.  The following items discuss the significantreclassifications that have been made:

 

(a)    under U.S. GAAP,deferred taxes are presented as current or noncurrent assets/liabilitiesdepending on the timing of settlement or realization of the related balancesheet item; whereas, under IFRS, deferred taxes are presented as noncurrentassets/liabilities regardless of the timing of realization;

 

(b)    under U.S. GAAP,minority interests are presented in a specific, separate item on the liabilityside of the balance sheet, whereas, under IFRS, minority interests arepresented as part of equity;

 

(c)    under U.S. GAAP,debt issuance costs are presented as part of other noncurrent and currentassets in the balance sheet, whereas, under IFRS, debt issuance costs arenetted against long-term debt under interest bearing financial liabilities; and

 

(d)    a differentpresentation format was used for the consolidated balance sheet, consolidatedstatement of income and consolidated statement of cash flows.

 

**Accounting Standards Effectivein 2007**

 

Concurrent with our first timeadoption of IFRS, we have also adopted the following new and amended IAS and IFRSthat became effective in 2007.

 

Ouradoption of the following new and amended standards and interpretations did nothave any effect on our consolidated financial statements.  Our adoption,however, gave rise to additional disclosures on the following:

 

•        ***Amendments to IAS 1, “Presentation of Financial Statements– Capital Disclosures”.***  This amendment requires us to make newdisclosures to enable users of the consolidated financial statements toevaluate our objectives, policies and processes for capital management.  Thesenew disclosures are shown in *Note 26 – Financial Assets and Liabilities*.

 

•        ***IFRS 7, “Financial Instruments: Disclosures”.***  Thisstandard requires disclosures that enable users of the consolidated financialstatements to evaluate the significance of our financial instruments and thenature and extent of risks arising from those financial instruments.  The new disclosuresare included throughout the consolidated financial statements.  These newdisclosures are shown in *Note 14 – Trade and Other Receivables* and *Note26 – Financial Assets and Liabilities*.

 

•        ***International Financial Reporting Interpretations Committee(IFRIC) 8, “Scope of IFRS 2, Share-based Payment”.***  This interpretationrequires IFRS 2 to be applied to any arrangements in which the entity cannotidentify specifically some or all of the goods received, in particular whereequity instruments are issued for consideration which appears to be less thanfair value.  As equity instruments are only issued to employees in accordancewith the employee share scheme, the interpretation had no impact on ourconsolidated financial statements.

 

•        ***IFRIC 9, “Reassessment of Embedded Derivatives”.***This interpretation states that the date to assess the existence of an embeddedderivative is the date that an entity first becomes a party to the contract,with reassessment only if there is a change to the contract that significantlymodifies the cash flows.  The Interpretation had no impact on our consolidatedfinancial statements.

 

•        ***IFRIC 10, “Interim Financial Reporting and Impairment”.***We adopted this Interpretation of IFRIC 10 as at January 1, 2007, whichrequires that an entity must not reverse an impairment loss recognized in aprevious interim period in respect of goodwill or an investmentsavailable-for-sale.  As we had no impairment losses previously reversed, theinterpretation had no impact on our consolidated financial statements.

 

**Significant Accounting Policiesand Practices**

 

***Investmentsin Associates***

 

Investmentsin associates are accounted for using the equity method of accounting and areinitially recognized at cost.  An associate is an entity in which we have significantinfluence and which is neither a subsidiary nor a joint venture.

 

Under the equity method, theinvestment in associate is carried in the consolidated balance sheet at costplus post acquisition changes in our share of net assets of the associate.Goodwill relating to an associate is included in the carrying amount of theinvestment and is not amortized.  Our consolidated statement of income reflectsthe share of the results of operations of the associates.  Where there has beena change recognized directly in the equity of the associate, we recognize ourshare in such change and disclose this, when applicable, in our consolidatedstatement of changes in equity.  Profits or losses resulting from ourtransactions with and among our associates are eliminated to the extent of our interestin those associates.

 

Ourreporting dates and that of our associates are identical and our associates’accounting policies conform to those used by us for like transactions andevents in similar circumstances.

 

***Investments in JointVentures***

 

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 financial statements of PLDT.  Adjustments aremade where necessary to bring the accounting policies in line with those ofPLDT Group.

 

Adjustmentsare made in our consolidated financial statements to eliminate our share ofunrealized gains and losses on transactions between PLDT and our jointlycontrolled entity.  Losses on transactions are recognized immediately if theloss provides evidence of a reduction in the net realizable value of currentassets or an impairment loss.  The joint venture is carried at equity methoduntil the date on which we cease to have joint control over the joint venture.

 

***Foreign Currency Transactionsand Translations***

 

The functional and presentation currency ofthe entities under 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.  Transactions in foreign currencies are initiallyrecorded in the functional currency rate prevailing at the date of thetransaction.  Monetary assets and liabilities denominated in foreign currenciesare retranslated at the functional closing rate of exchange prevailing at thebalance sheet date.  All differences are recognized in the consolidatedstatement of income except for foreign exchange losses that qualify ascapitalizable borrowing costs during the construction period for exchange gainsor losses are treated as taxable income or deductible expenses in the year suchexchange gains or losses are realized.  Non–monetary items that are measured interms of historical cost in a foreign currency are translated using theexchange rates as at the dates of the initial transactions.  Non–monetary itemsmeasured at fair value in a foreign currency are translated using the exchangerates at the date when the fair value is determined.  Any goodwill arising onthe acquisition of a foreign operation and any fair value adjustments to thecarrying amounts of assets and liabilities arising on the acquisition aretreated as assets and liabilities of the foreign operation and translated atthe closing rate.

 

The functional currency andpresentation currency of Mabuhay Satellite, PLDT Global, SPi and certain of itssubsidiaries is the U.S. dollar; Thai baht for Digital Paradise Thailand andSingapore dollar for SCH, SGP and 3rd Brand.  As at the reporting date, theassets and liabilities of these subsidiaries are translated into thepresentation currency of the PLDT Group at the rate of exchange prevailing atthe balance sheet date, and income and expenses of these subsidiaries aretranslated at the weighted average exchange rate for the year.  The exchangedifferences arising on translation were recognized as a separate component ofequity as cumulative translation adjustments.  On disposal of thesesubsidiaries, the amount of deferred cumulative translation adjustmentsrecognized in equity relating to subsidiaries are recognized in theconsolidated statement of income.

 

***Property,Plant and Equipment***

 

Property,plant and equipment, except for land, is stated at cost less accumulateddepreciation and amortization and any accumulated impairment losses.  Land isstated at cost less any impairment in value.  Cost includes the cost ofreplacing part of the property, plant and equipment when that cost is incurred,if the recognition criteria are met.  Likewise, when a major inspection isperformed, its cost is recognized in the carrying amount of the property, plantand equipment as a replacement if the recognition criteria are satisfied.  Allother repair and maintenance costs are recognized in profit or loss asincurred.

 

An item of property, plant andequipment is derecognized upon disposal or when no future economic benefits areexpected from its use or disposal.  Any gain or loss arising on derecognitionof the asset (calculated as the difference between the net disposal proceedsand the carrying amount of the asset) is included in profit or loss in the yearthe 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.

 

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

 

***Borrowing Costs***

 

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.

 

***AssetRetirement Obligations***

 

We arelegally required under various lease agreements to dismantle the installation inleased sites and restore such sites to their original condition at the end ofthe lease contract term.  We recognize the liability measured at the presentvalue of the estimated costs of these obligations and capitalize such costs aspart of 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 properties are initially measured at costincluding transaction costs.  The carrying amount includes the cost ofreplacing part of an existing investment property at the time that cost isincurred if the recognition criteria are met; and excludes the costs of day today servicing of an investment property.  Subsequent to initial recognition,investment properties are stated at fair value, which have been determinedbased on latest valuations performed by an independent firm of appraisers.Gains or losses arising from changes in the fair values of investmentproperties are included in the consolidated statement of income in the year inwhich 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 consolidated statement of income inthe year 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 and equipmentup to the date of change in use.

 

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

 

***BusinessCombinations and Goodwill***

 

Businesscombinations are accounted for using the purchase method of accounting.  Thisinvolves recognizing identifiable assets (including previously unrecognizedintangible assets) and liabilities (including contingent liabilities andexcluding future restructuring) of any acquired business at fair value.

 

Goodwill acquired in a businesscombination is initially measured at cost, such cost being the excess of thecost of the business combination over our interest in the net fair value of theacquiree’s identifiable assets, liabilities and contingent liabilities.Following initial recognition, goodwill is measured at cost less anyaccumulated impairment loss.  For the purpose of impairment testing, goodwillacquired in a business combination is, from the acquisition date, allocated toeach of our cash-generating units, or groups of our cash-generating units, thatare expected to benefit from the synergies of the combination, irrespective ofwhether our other assets or liabilities are assigned to those units or groupsof units.  Each unit or group of units to which the goodwill is allocated:  (1)represents our lowest level at which the goodwill is monitored for internalmanagement purposes; and (2) is not larger than a segment based on either ourprimary or secondary reporting format determined in accordance with *IAS 14,“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 atcost less any accumulated amortization and any accumulated impairment loss.The useful lives of intangible assets are assessed at the individual assetlevel as having either a finite or indefinite useful life.

 

Intangible assetswith finite lives are amortized over the useful economic life using thestraight-line method 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 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 orlosses arising from derecognition of an intangible asset are measured as thedifference between the net disposal proceeds and the carrying amount of theasset and are recognized in the consolidated statement of income when the assetis derecognized.

 

Intangible assets created withinthe business are not capitalized and expenditures are charged againstoperations in the year in which the expenditures are incurred.

 

Research and development costs areexpensed as incurred.

 

***Impairment of Non-FinancialAssets***

 

We assess at each reporting periodwhether there is an indication that our property, plant and equipment, andintangible assets with finite lives may be impaired.  If any such indicationexists, or when the annual impairment testing for an asset is required, we makean estimate of the asset’s recoverable amount.  An asset’s recoverable amountis the higher of an asset’s or cash-generating unit’s fair value less costs tosell or its value in use and is determined for an individual asset, unless theasset does not generate cash inflows that are largely independent from those ofother assets or groups of assets.  Where the carrying amount of an assetexceeds its recoverable amount, the asset is considered impaired and is writtendown to its recoverable amount.  In assessing the value in use, the estimatedfuture cash flows are discounted to their present value using a pre-taxdiscount rate that reflects current market assessments of the time value ofmoney and the risks specific to the asset.  In determining the fair value lesscosts to sell, an appropriate valuation model is used.

 

Impairment losses of continuingoperations are recognized in the 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 years.  Such reversal is recognized in the consolidatedstatement of income.  After such reversal, the depreciation and amortization chargesare adjusted in future years to allocate the asset’s revised carrying amount,less any residual value, on a systematic basis over its remaining economic usefullife.

 

Thefollowing criteria are also applied in assessing impairment of specific assets:

 

*Goodwill*

 

Goodwill isreviewed for impairment annually or more frequently if events or changes incircumstances indicate that the carrying value may be impaired.  Impairment isdetermined for goodwill by assessing the recoverable amount of thecash-generating unit, or group of cash-generating units, to which the goodwillrelates.  Where the recoverable amount of the cash-generating unit, or group ofcash-generating units, is less than the carrying amount of the cash-generatingunit, or group of cash-generating units, to which goodwill has been allocatedto, an impairment loss is recognized.  Impairment losses relating to goodwillcannot be reversed in future periods.  

 

*Intangibleassets*

 

Intangibleassets with indefinite useful lives are tested for impairment annually eitherindividually or at the cash-generating unit level, as appropriate.  Wecalculate the amount of impairment as being the difference between the recoverableamount of the intangible asset and its carrying amount and recognize the amountof impairment in the 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 anassociate is impaired.  If this is the case, we calculate the amount ofimpairment as being the difference between the recoverable amount of theinvestments in associates and its carrying amount and recognize the amount ofimpairment in the consolidated statement of income.

 

***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-term Investments***

 

Short-term investments are moneymarket placements, which are highly liquid with maturities of more than threemonths but less than one year from date of acquisition.

 

***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 toshort-term receivables are not discounted if the effect of discounting isimmaterial.  The carrying amount of the asset is reduced through the use of anallowance account, and the amount of the loss is recognized in the consolidatedstatement of income.  When a trade receivable is uncollectible, it is writtenoff against the allowance account for trade and other receivables.  Subsequentrecoveries of amounts previously written off are recognized as income in the consolidatedstatement of income.

 

***Inventories and Supplies***

 

Inventories and supplies, whichinclude cellular phone units, materials, spare parts, terminal units andaccessories, are valued at the lower of cost and net realizable value.

 

Cost is determined using the weightedaverage method.  Net realizable value is the estimated selling price in theordinary course of the business less the estimated cost to sell.

 

***Convertible Preferred Stock***

 

*Philippine peso-denominated*

 

The component of our convertiblepreferred stock that exhibits characteristics of a liability is recognized as aliability in the consolidated balance sheet, net of transaction costs.  Thecorresponding dividends on those shares are charged as interest expense in theconsolidated statement of income.  On issuance of our convertible preferredstock, the fair value of the liability component is determined using a marketrate for an equivalent non-convertible bond and this amount is carried as along-term liability on the amortized cost basis until extinguished through conversionor redemption.

 

Theremainder of the proceeds is allocated to the conversion option that isrecognized and included in the equity section of the consolidated balancesheet, net of transaction costs.  The carrying amount of the conversion optionis not re-measured in subsequent years.

 

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 consolidated statement of income, net of any reimbursements.  If the effectof the time value of money is material, provisions are discounted using acurrent pre-tax rate that reflects, where appropriate, the risks specific tothe liability.  Where discounting is used, the increase in the provision due tothe 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.  Retirement costsinclude current service cost plus amortization of past service cost, experienceadjustments and changes in actuarial assumptions.  Past service cost isrecognized as an expense on a straight-line basis over the average period untilthe benefits become vested.  If the benefits vest immediately following theintroduction of, or changes to, a pension plan, past service cost is recognizedimmediately.  Actuarial gains and losses are recognized as income or expensewhen the net cumulative unrecognized actuarial gains and losses for eachindividual plan at the end of the previous reporting period exceeded 10% of thehigher of the defined benefit obligation and the fair value of plan assets atthat date.  These gains and losses are recognized over the expected averageremaining 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, essentially coincidingwith their cash contributions to the plans.

 

***Share-BasedPayment Transactions***

 

Certain of our employees(including directors) 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 of equity-settledtransactions with employees is measured by reference to the fair value of thestock options at the date at which they are granted.  Fair value is determinedusing an option-pricing model, further details of which are set forth in *Note23 – Share-based Payments and Employee Benefits*.  In valuing equity-settledtransactions, no account is taken of any performance conditions, other thanconditions 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 serviceconditions are fulfilled, ending on the date on which the relevant employeesbecome fully entitled to the award (“vesting date”).  The cumulative expenserecognized for equity-settled transactions at each reporting date until thevesting date reflects the extent to which the vesting period has expired andthe number of awards that will ultimately vest, in our opinion, at that date,based on the best 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 share dilutionin the computation of earnings per share.  See *Note 7 – Earnings Per CommonShare*.

 

*Cash-settled transactions*

 

Our LTIP grants shareappreciation rights, or SARs, to our eligible key executives and advisors.Under the LTIP, we recognize the services we receive from our eligible keyexecutives and advisors, and our liability to pay for those services, as theeligible key executives and advisors render services during the vestingperiod.  We measure our liability, initially and at each reporting date untilsettled, at the fair value of the SARs, by applying an option valuation model,taking into account the terms and conditions on which the SARs were granted,and the extent to which the eligible key executives and advisors have renderedservice to date.  We recognize any changes in fair value at each reporting dateuntil settled, in the consolidated statement of income for the year.

 

***Leases***

 

Thedetermination of whether an arrangement contains a lease is based on thesubstance of the arrangement at the inception date of whether the fulfillmentof the arrangement is dependent on the use of a specific asset or assets or thearrangement conveys a right to use the asset.

 

A lease isclassified as a finance lease if it transfers substantially all the risks and rewardsincidental to ownership.  All other leases are classified as operating leases.

 

A finance lease givesrise to a depreciation expense for the asset, as well as an interest expensefor each year.  Finance charges are charged directly to current operations.The depreciation policy for leased assets is consistent with that fordepreciable assets that are owned.

 

Capitalizedleased assets are depreciated over the shorter of the estimated useful life ofthe asset or the lease term, if there is no reasonable certainty that we willobtain ownership of 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.  Revenuesrepresent the value of fixed consideration that have been received or arereceivable.  Revenues are recognized when there is evidence of an arrangement,collectibility is reasonably assured, and the delivery of the product or renderingof service has occurred.  In certain circumstances, revenue is split intoseparately identifiable components and recognized when the related componentsare delivered in order to reflect the substance of the transactions.  The valueof components 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.Installation and activation-related fees and the corresponding costs, notexceeding the activation revenue, are deferred and recognized over the expectedaverage periods 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 year the traffic occurs.  Revenues related to local, longdistance, 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 is recognized when it isprobable that the economic benefits associated with the transactions will flowto us and the amount of revenue can be measured reliably.  Advance customerreceipts that have not been recognized as revenue are recorded as advances fromcustomers and presented as a liability in the consolidated balance sheet.  Ifthe fee is not fixed or determinable, revenue is not recognized on thosearrangements until the customer payment is received.  For arrangementsrequiring specific customer acceptance, revenue recognition is deferred untilthe earlier of the end of the deemed acceptance period or until a writtennotice of acceptance is received from the customer.  Revenue on servicesrendered 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 record insignificant commissionexpenses based on the number of new subscriber connections initiated by certaindealers.  All other cash incentives provided to dealers and customers arerecorded as a reduction of revenue.  Product-based incentives provided todealers and customers as part of a transaction are accounted for as multipleelement 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 intoaccount the principal amount outstanding and the effective interest rate.  Themajority of interest income represents interest earned from cash and cashequivalents, short-term investments and investments in debt securities.

 

***Income Taxes***

 

*Current income tax*

 

Currentincome tax assets and liabilities for the current and prior years are measuredat the amount expected to be recovered from or paid to the taxationauthorities.  The tax rates and tax laws used to compute the amount are thosethat are enacted 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 tax liabilities are recognized for alltaxable temporary differences except: (1) when the deferred income taxliability arises from the initial recognition of goodwill or 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 taxable temporary differences associated withinvestments in subsidiaries, associates and interests in joint ventures, wherethe timing of the reversal of the temporary differences can be controlled andit is possible that the temporary differences will not reverse in theforeseeable future.  Deferred income tax assets are recognized for alldeductible temporary differences, carryforward benefit of unused tax creditsfrom excess minimum corporate income tax, or MCIT, and unused tax losses, tothe extent that it is probable that taxable profit will be available againstwhich the deductible temporary differences and carryforward benefit of unusedtax credits and unused tax losses can be utilized except: (1) when the deferredtax asset relating to the deductible temporary difference arises from theinitial recognition of an asset or liability in a transaction that is not abusiness combination and, at the time of the transaction, affects neither theaccounting profit nor taxable profit or loss and (2) with respect to deductible temporary differences associated withinvestments in subsidiaries, associates and interests in joint ventures,deferred tax assets are recognized only to the extent that it is probable thatthe temporary differences will reverse in the foreseeable future and taxableprofit will be available against which the temporary differences can beutilized.

 

Deferred income tax liabilities are not provided onnon-taxable temporary differences associated with investments in domestic subsidiariesand associates.  With respect to investments in other subsidiaries andassociates, deferred income tax liabilities are recognized except when thetiming of the reversal of the temporary difference can be controlled and it isprobable that the temporary difference will not reverse in the foreseeablefuture.

 

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

 

Deferred income tax assets andliabilities are measured at the tax rates that are expected to apply in the yearwhen the asset is realized or the liability is settled, based on tax rates (andtax laws) that have been enacted or substantively enacted as at the balancesheet date.

 

Deferred income taxrelating to items recognized directly in equity is included in the relatedequity account and not in the consolidated statement of income.

 

Deferredincome tax assets and liabilities are offset, if a legally enforceable rightexists to offset deferred income tax assets against deferred income taxliabilities and the deferred income taxes relate to the same taxable entity andthe same taxation authority.

 

***Investmentsand Other Financial Assets and Liabilities***

 

Financial assets are categorized as financial assetsat fair value through profit or loss, loans and receivables, held-to-maturityinvestments, or available-for-sale financial investments, as appropriate.  Whenfinancial assets are recognized initially, they are measured at fair value,plus, in the case of investments not at fair value through profit or loss,directly attributable transaction costs.  We determine the category of itsfinancial assets on initial recognition and, where allowed and 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 1profit*

 

Where the transaction price in a non-active market isdifferent to the fair value from other observable current market transactionsin the same instrument or based on a valuation technique whose variables includeonly data from observable market, we recognize the difference between thetransaction price and fair value (a Day 1 profit) in the statement of incomeunless it qualifies for recognition as some other type of asset.  In caseswhere use is made of data which are not observable, the difference between the transactionprice and model value is only recognized in the consolidated statement ofincome when the inputs become observable or when the instrument is derecognized.For each transaction, we determine the appropriate method of recognizing the “Day1” profit amount.

 

*Fairvalue*

 

The fair value of investments that are actively tradedin organized financial markets is determined by reference to quoted market bidprices at the close of business on the balance sheet date.  For investmentswhere there is no active market, fair value is determined using valuationtechniques.  Such techniques include using recent arm’s–length markettransactions; reference to the current market value of another instrument whichis substantially the same; discounted cash flow analysis or other valuationmodels.

 

*Financialassets 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 or significantlyreduces the inconsistent treatment that would otherwise arise from measuringthe assets and liabilities or recognizing gains or losses on them on adifferent basis; or (ii) the assets and liabilities are part of a group offinancial assets which are managed and their performance evaluated on a fairvalue basis, in accordance with a documented risk management strategy; or (iii)the financial assets and liabilities contain an embedded derivative that wouldneed to be separately recorded.  An embedded derivative is separated from thehybrid or combined contract if all the following conditions are met: (a) theeconomic characteristics and risks of the embedded derivative are not closelyrelated to the economic characteristics and risks of the host contract; (b) aseparate instrument with the same terms as the embedded derivative would meetthe definition of a derivative and (c) the hybrid instrument is not recognizedat fair value through profit or loss.

 

Subsequent reassessment isprohibited unless there is a change in the terms of the contract thatsignificantly modifies the cash flows that otherwise would be required underthe contract, in which case reassessment is required.  We determine whether amodification to cash flows is significant by considering the extent to whichthe expected future cash flows associated with the embedded derivative, thehost contract or both have changed and whether the change is significantrelative to the previously expected cash flow on the contract.

 

*Loans andreceivables*

 

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 atamortized cost using the effective interest method less any allowance forimpairment.  Gains and losses are recognized in profit or loss when the loansand receivables are derecognized or impaired, as well as through theamortization process.  Assets in this category are included in current assets,except for maturities greater than 12 months after the balance sheet date,which are classified as non-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-sale financialinvestments*

 

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.After initial measurement, available-for-sale financial investments aremeasured at fair value with unrealized gains or losses recognized directly inequity until the investment is derecognized or determined to be impaired atwhich time the cumulative gain or loss previously recorded in equity isrecognized in profit or loss.  They are included under non-current assets unlesswe intend to dispose of the investment within 12 months of the balance sheetdate.

 

***Impairmentof Financial Assets***

 

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

 

*Financial assets carried at amortizedcost*

 

For loans and receivables carriedat amortized cost, we assess whether objective evidence of impairment existsindividually for financial assets that are individually significant, orcollectively for financial assets that are not individually significant.  If wedetermine that no objective evidence of impairment exists for individuallyassessed financial asset, whether significant or not, we include the asset in agroup of financial assets with similar credit risk characteristics andcollectively assesses for impairment.  Those characteristics are relevant tothe estimation of future cash flows for groups of such assets by beingindicative of the debtors’ ability to pay all amounts due according to thecontractual terms of the assets being evaluated.  Assets that are individuallyassessed for impairment and for which an impairment loss is, or continues to berecognized, are not included in a collective assessment for impairment.

 

If there is objective evidencethat an impairment loss has been incurred, the amount of the loss is measuredas the difference between the asset’s carrying amount and the present value ofthe estimated future cash flows (excluding future credit losses that have notbeen incurred).  The present value of the estimated future cash flows isdiscounted at the financial asset’s original effective interest rate.  If aloan receivable has a variable interest rate, the discount rate for measuringany impairment loss is the current effective interest rate, adjusted for theoriginal credit risk premium. The calculation of the present value of theestimated future cash flows of a collateralized financial asset reflects thecash flows that may result from foreclosure less costs for obtaining andselling the collateral, whether or not foreclosure is probable.

 

Thecarrying amount of the asset is reduced through the use of an allowance accountand the amount of loss is charged to the consolidated statement of income.Interest income continues to be recognized based on the original effectiveinterest rate of the asset.  Loans and receivables, together with theassociated allowance accounts, are written off when there is no realisticprospect of future recovery and all collateral has been realized.  If, in asubsequent year, the amount of the estimated impairment loss decreases becauseof an event occurring after the impairment was recognized, the previouslyrecognized impairment loss is reduced by adjusting the allowance account.  If afuture write-off is later recovered, any amount formerly charged is credited tothe income account.

 

For the purpose of a collectiveevaluation of impairment, financial assets are grouped on the basis of suchcredit risk characteristics as industry, past-due or collectibility status andterm.  

 

Future cashflows in a group of financial assets that are collectively evaluated forimpairment are estimated on the basis of historical loss experience for assetswith 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 exist currently.  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-salefinancial investments*

 

In case ofequity investments classified as available-for-sale financial investments, anobjective evidence of impairment would include a significant or prolongeddecline in the fair value of the investments below its cost. 

 

Where thereis evidence of impairment, the cumulative loss, measured as the differencebetween the acquisition cost and the current fair value, less any impairmentloss on that financial asset previously recognized in the consolidated statementof income, is removed from equity and recognized in the consolidated statementof income.  Impairment losses on equity investments are not reversed throughthe consolidated statement of income.  Increases in fair value after impairmentare recognized directly in equity.

 

In the case of debt instrumentsclassified as available-for-sale, impairment is assessed based on the samecriteria as financial assets carried at amortized cost.  Interest continues tobe accrued at the original effective interest rate on the reduced carryingamount of the asset and is recorded as part of “Interest income” account in theconsolidated statement of income.  If, in subsequent year, the fair value of adebt instrument increased and the increase can be objectively related to anevent occurring after the impairment loss was recognized in the consolidated statementof income, the impairment loss is reversed through the consolidated statementof income.

 

***Financialliabilities***

 

*Interest**-bearingloans and borrowings*

 

All loansand borrowings are initially recognized at fair value less directlyattributable transaction costs.  After initial recognition, interest bearingloans and borrowings are subsequently measured at amortized cost using theeffective interest rate method.

 

Gains and losses are recognized inprofit or loss when the liabilities are derecognized as well as through theamortization process.

 

*Financial liabilities at fairvalue through profit or loss*

 

Financial liabilities at fairvalue through profit or loss include financial liabilities held–for–trading andfinancial liabilities designated upon initial recognition as at fair valuethrough profit or loss.

 

Financial liabilities areclassified as held-for-trading if they are acquired for the purpose of sellingin the near term. Derivatives, including separated embedded derivatives arealso classified as held-for-trading unless they are designated as effectivehedging instruments.

 

Gains or losses on liabilitiesheld-for–trading and those designated at fair value through profit or loss arerecognized 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 ourright to receive cash flows from an asset and have neither transferred norretained substantially all the risks and rewards of the asset nor transferredcontrol of the asset, the asset is recognized to the extent of our continuinginvolvement in the asset.  Continuing involvement that takes the form of aguarantee over the transferred asset is measured at the lower of the originalcarrying amount of the asset and the maximum amount of consideration that wecould be required to repay.

 

Where continuing involvement takesthe form of a written and/or purchased option (including a cash-settled optionor similar provision) on the transferred asset, the extent of our continuinginvolvement is the amount of the transferred asset that we may repurchase,except that in the case of a written put option (including a cash-settledoption or similar provision) on an asset measured at fair value, the extent ofour continuing involvement is limited to the lower of the fair value of thetransferred asset and the option exercise price.

 

*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 consolidated statementof income.

 

*Offsetting financial instruments*

 

Financial assets and financialliabilities are offset and the net amount reported in the consolidated balancesheet if, and only if, there is a currently enforceable legal right to offsetthe recognized amounts and there is an intention to settle on a net basis, orto realize the asset and settle the liability simultaneously.  This is notgenerally the case with master netting agreements, and the related assets andliabilities are presented gross in the consolidated balance sheet.

 

***Derivative FinancialInstruments and Hedging***

 

We use derivative financialinstruments, such as long-term currency swaps, foreign-currency options, forwardcurrency contracts and interest rate swaps, to hedge our risks associated withinterest rate and foreign currency fluctuations.  Such derivative financialinstruments are initially recognized at fair value on the date on which aderivative contract is entered into and are subsequently re-measured at fairvalue.  Derivatives are carried as assets when the fair value is positive andas liabilities when the fair value is negative.

 

Any gainsor losses arising from changes in fair value on derivatives during the yearthat do not qualify for hedge accounting are taken directly to the losses orgains on derivative financial instruments account in the 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 recognizedfinancial asset or liability or an unrecognized firm commitment (except forforeign-currency risk); (2) cash flow hedges when hedging exposure tovariability in cash flows that is either attributable to a particular riskassociated with a recognized financial asset or liability or a highly probableforecast transaction or the foreign-currency risk in an unrecognized firmcommitment; or (3) hedges of a net investment in a foreign operation.

 

At theinception of a hedge relationship, we formally designate and document the hedgerelationship to which we wish to apply hedge accounting and the risk managementobjective and strategy for undertaking the hedge.  The documentation includesidentification of the hedging instrument, the hedged item or transaction, thenature of the risk being hedged and how we will assess the hedging instrument’seffectiveness in offsetting the exposure to changes in the hedged item’s fairvalue or cash flows attributable to the hedged risk.  Such hedges are expectedto be highly effective in achieving offsetting changes in fair value or cashflows and are assessed on an on-going basis to determine that they actuallyhave been highly effective throughout the financial reporting periods for whichthey are designated.  For situation when that hedged item is a forecasttransaction, we assess whether transaction is highly probable and prevent anexposure to variations in cash flows that could ultimately affect theconsolidated statement of income.

 

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

 

*Fairvalue hedges*

 

The changein the fair value of a hedging derivative is recognized in the consolidatedstatement of income.  The change in the fair value of the hedged itemattributable to the risk being hedged is recorded as part of the carrying valueof the hedged item and is also recognized in the consolidated statement ofincome.

 

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 appropriate valuation techniques.Valuation techniques include net present value techniques, comparison tosimilar instruments for which market observable prices exist, options pricingmodels, 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 consolidated statement of income.  The changes in the fairvalue of the hedging instrument are also recognized in the 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 consolidated statement of income.

 

Amountstaken to equity are transferred to the consolidated statement of income whenthe hedged transaction affects the 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-financialasset or non-financial liability, the amounts taken to equity are transferredto the initial 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 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 in equitywhile any gains or losses relating to the ineffective portion are recognized inthe consolidated statement of income.  On disposal of the foreign operation,the cumulative value of any such gains or losses recognized directly in equityis transferred to the consolidated statement of income.

 

**NewAccounting Standards Subsequent to 2007**

 

Set forthbelow are the new IFRS accounting statements that will become effectivesubsequent to December 31, 2007:

 

•        ***IFRS 2, “Share-based Payments – Vesting Conditions and Cancellations*”.**This amendment to IFRS 2 was published in January 2008 and will becomeeffective for financial years beginning on or after January 1, 2009.  Thisstandard restricts the definition of “vesting condition” to a condition thatincludes an explicit or implicit requirement to provide services.  Any otherconditions are non-vesting conditions, which have to be taken into account todetermine the fair value of the equity instruments granted.  In the case thatan award does not vest as the result of a failure to meet a non-vestingcondition that is within the control of either the entity or the counterparty,this must be accounted for as a cancellation.  We have not entered intoshare-based payment schemes with non-vesting conditions attached and, therefore,do not expect significant implications on our accounting for share-basedpayments.

** **

•        ***IFRS 3 (Revised), “Business Combinations”, and IAS 27(Revised), “Consolidated and Separate Financial Statements”.***  Therevised standards were issued in January 2008 and will become effective forfinancial years beginning on or after July 1, 2009.  IFRS 3 (Revised)introduces a number of changes in the accounting for business combinations thatwill impact the amount of goodwill recognized, the reported results in the periodin which an acquisition occurs, and future reported results.  IAS 27 (Revised)requires that a change in the ownership interest of a subsidiary is accountedfor as an equity transaction.  Therefore, such a change will have no impact ongoodwill, nor will it give raise to a gain or loss.  Furthermore, the amendedstandard changes the accounting for losses incurred by the subsidiary as wellas the loss of control of a subsidiary.  The changes introduced by IFRS 3(Revised) and IAS 27 (Revised) must be applied prospectively and will affectfuture acquisitions and transactions with minority interests.

** **

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

** **

•        ***IAS 1 (Revised), “Presentation of Financial Statements”.***Thisstandard will become effective for financial years beginning on or afterJanuary 1, 2009.  IAS 1 has been revised to enhance the usefulness ofinformation presented in the consolidated financial statements.  The keychanges are: (1) the statement of changes in equity includes only transactionswith owners and all non-owner changes are presented in equity as a single linewith details included in a separate statement.  Owners are defined as “holdersof instruments classified as equity”; (2) the introduction of a new statementof 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 consolidated statement of income anda statement of comprehensive income; (3) amounts reclassified to profit or lossthat were previously recognized in other comprehensive income (for example, previouslyunrealized gains on available-for-sale financial investments that are sold)must be separately disclosed, either in the statement of comprehensive incomeitself or in the notes; (4) entities must disclose the income tax relating toeach component of other comprehensive income.  This can be presented in thestatement of comprehensive income itself or in the notes; (5) when an entityrestates its financial statements or retrospectively applies a new accountingpolicy, a statement of financial position must be presented as at the beginningof the earliest comparative period; (6) dividends to equity holders can now beshown only in the statement of changes in equity or in the notes; and (7) theintroduction of new terminology, replacing “balance sheet” with “statement offinancial position” and “cash flow statement” with “statement of cash flows”,although the titles are not obligatory.  The requirements of this standard willbe included in our consolidated financial statements for the fiscal year endingDecember 31, 2009.

** **

•        ***Amendments to IAS 32 and IAS 1, “Puttable FinancialInstruments”.***Amendments to IAS 32 and IAS 1 were issued in February2008 and will become effective for financial years beginning on or afterJanuary 1, 2009.  The amendment to IAS 32 requires certain puttable financialinstruments and obligations arising on liquidation to be classified as equityif certain criteria are met.  It also requires disclosure of certaininformation relating to puttable instruments classified as equity.

** **

•        ***IAS 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.

** **

•        ***IFRIC 11, “IFRS 2, Group and Treasury Share Transactions”.***This interpretation is effective for financial years beginning on orafter March 31, 2007.  This******interpretation addresses issues relatingto whether transactions should be accounted for as equity-settled or ascash-settled under IFRS 2 and issues concerning share-based payment arrangementinvolving entities within the same group.  The requirements of this interpretationwill be included in our consolidated financial statements for our fiscal yearbeginning January 1, 2008.

 

•        ***IFRIC 12, “Service Concession Arrangements”.*** This interpretationhas become effective for financial years beginning on or after January 1,2008.  This interpretation applies to contractual arrangements whereby aprivate sector party participates in the development, financing, operation andmaintenance of infrastructure for public sector services.  This interpretationis not relevant to our current operations.

 

•        ***IFRIC 13, “Customer Loyalty Programmes”.***This interpretationwill become effective for financial years beginning on or after July 1, 2008.This interpretation requires that loyalty award credits granted to customers aspart of a sales transaction are accounted for as a separate component of thesales transactions.  The consideration received in the sales transactions isallocated between the loyalty award credits and the other components of thesale.  The amount allocated to the loyalty award credits is determined byreference to their fair value and is deferred until the awards are redeemed orthe liability is otherwise extinguished.  If the cost of fulfilling the awardsis expected to exceed the consideration received, the entity will have anonerous contract and a liability for the excess must be recognized.

 

•        ***IFRIC 14, “IAS 19 – The Limit on a Defined Benefit Asset,Minimum Funding Requirements and their Interaction”.***  This interpretationhas become effective for financial years beginning on or after January 1,2008.  IFRIC 14 addresses how to assess the limit under *IAS 19, “EmployeeBenefits”*, on the amount of the pension scheme surplus that can berecognized as an asset in our consolidated balance sheet, in particular, when aminimum funding requirement exists.  The specific issues addressed by theinterpretation are: (1) a refund is available to the entity only if there is anunconditional right to the refund and such refund is measured as the amount ofthe surplus at the balance sheet date less any associated costs; (2) when thereis an unconditional right to a refund and there is no minimum fundingrequirement, an entity determines the benefit available as the lower of thesurplus in the plan and the present value of the future service cost to theentity; (3) when a minimum funding requirement exists, the benefit available isthe present value of the estimated future service cost less the estimatedminimum funding contribution required in respect of the future accrual ofbenefits in that year; and (4) if an entity has a minimum funding requirementto pay additional contributions, the entity must determine whether thecontributions will be available as a refund or reduction in future contributionsafter they are paid into the plan.  If not, a liability is recognized when theobligation arises.  The requirements of this interpretation will be included inour consolidated financial statements for our financial year beginning January1, 2008.

 

We expectthat the adoption of the pronouncements listed above will have no significantimpact on our consolidated financial statements in the period of our initialapplication, except that management is still evaluating the impact of IFRIC 11and 13 and IFRS 8.

 

 

 

**3.     ****Management’s Use of Judgments, Estimates andAssumptions**

 

The preparation of our consolidated financialstatements in conformity with IFRS requires us to make judgments, estimates andassumptions that affect the reported amounts of our revenues, expenses, assetsand liabilities and disclosure of contingent liabilities at the reporting date.Due to uncertainties inherent in these assumptions and estimates could resultin outcomes that could require a material adjustment to the carrying amount ofthe asset 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, which have themost significant effect on the amount recognized in the consolidated financialstatements.

 

*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, 3rdBrand, Mabuhay Satellite, PLDT Global, Digital Paradise Thailand and SPi and certain of its subsidiaries) is the Philippine peso.  The functional currencyof Mabuhay Satellite, PLDT Global, SPi and certain of its subsidiaries is theU.S. dollar; Thai baht for Digital Paradise Thailand and Singapore dollar for SCH,SGP and 3rd Brand.

* *

*Leases*

 

We have various leaseagreements as a lessee in respect of our certain equipment and properties.  Weevaluate whether significant risks and rewards of ownership of the leasedproperties are transferred to us or retained at the lessor based on *IAS 17*,*“Leases”*, which requires us to make judgments and estimates of transfer ofrisk and rewards of ownership of the leased properties.  Total lease expensearising from operating leases amounted to Php2,762 million and Php2,257 millionfor the years ended December 31, 2007 and 2006, respectively.  Total financelease obligations as at December 31, 2007 and 2006 amounted to Php496 millionand Php1,030 million, respectively.  See *Note 18 – Interest-bearingFinancial Liabilities, Note 24 – Contractual Obligations and CommercialCommitments*and*Note 26 – Financial Assets and Liabilities*.

*** ***

*Determination of fair values offinancial assets and liabilities*

 

We carry certain ofour financial assets and liabilities at fair value, which requires extensiveuse of accounting estimates and judgments for the fair values of financialassets and liabilities.  In addition, certain liabilities acquired through debtexchange and restructuring are required to be carried at fair value at the timeof the debt exchange and restructuring.  See *Note**26 – FinancialAssets and Liabilities*.  While significant components of fair valuemeasurement were determined using verifiable objective evidence (i.e., foreignexchange rates, interest rates and volatility rates), the amount of changes infair value would differ if we utilized a different valuation methodology.  Anychange in fair value of these financial assets and liabilities would directlyaffect our consolidated statement of income and consolidated statement ofchanges in equity.

 

Total fairvalue of financial assets and liabilities as at December 31, 2007 amounted toPhp46,661 million and Php111,086 million, respectively, while the total fairvalue of financial assets and liabilities as at December 31, 2006 amounted toPhp36,517 million and Php124,801 million, respectively.  See *Note 26 –Financial Assets and Liabilities*.

 

*Legalcontingencies*

 

We arecurrently involved in various legal proceedings.  Our estimate of the probablecosts for the resolution of these claims has been developed in consultationwith outside counsel handling our defense in these matters and is based upon ananalysis of potential results.  We currently do not believe these proceedingswill have a material adverse effect on our consolidated financial statements.It is 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*.

*** ***

***Estimates and Assumptions***

 

The key assumptions concerning thefuture and other key sources of estimation uncertainty at the balance sheetdate that have a significant risk of causing a material adjustment to thecarrying amounts of assets and liabilities within the next financial year arediscussed below:

 

*Estimatinguseful lives of property, plant and equipment*

 

We estimate the useful lives of our property, plantand equipment based on the periods over which our assets are expected to beavailable for use.  Our estimation of the useful lives of our property, plantand equipment is based on our collective assessment of industry practice,internal technical evaluation and experience with similar assets.  Theestimated useful lives of our property, plant and equipment are reviewed atleast at each financial year-end and are updated if expectations differ fromprevious estimates due to physical wear and tear, technical or commercialobsolescence and legal or other limitations on the use of our assets.  It ispossible, however, that future results of operations could be materiallyaffected by changes in our estimates brought about by changes in the factorsmentioned above.  The amounts and timing of recorded expenses for any periodwould be affected by changes in these factors and circumstances.  A reductionin the estimated useful lives of our property, plant and equipment wouldincrease our recorded operating expenses and decrease our noncurrent assets.

 

We recognized an additional depreciation charge ofPhp796 million and Php8,624 million in 2007 and 2006, respectively, due to achange in the estimated useful lives of certain of our network assets owing tocontinuing network upgrade and expansion.  The acceleration of depreciation isexpected to result in a reduction of future monthly depreciation chargeamounting to Php10 million going forward.

 

Total carrying values of property, plant andequipment, net of accumulated depreciation and amortization amounted to Php159,414million and Php164,190 million as at December 31, 2007 and 2006, respectively.  See*Note 8 – Property, Plant and Equipment*and *Note 26 – Financial Assetsand 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 December 31, 2007 and 2006 amounted toPhp577 million and Php587 million, respectively.  See *Note 10 –Investment Properties*and *Note 26 – Financial Assets and Liabilities*.

 

*Goodwilland intangible assets*

 

Our 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 andliabilities at the acquisition date.  Anyexcess in the purchase price over the estimated fair market values of the netassets acquired is recorded as goodwill in the balance sheet.  Our business acquisitions have resulted in goodwilland intangible assets, which are subject to periodic 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 andliabilities can materially affect our results of operations.

 

Total carrying values of goodwill and intangibleassets as at December 31, 2007 and 2006 amounted to Php11,721 million andPhp12,214 million, respectively.

 

*Realizability of deferred incometax assets*

 

We review thecarrying amounts of deferred income tax assets at each balance sheet date andreduce these to the extent that it is no longer probable that sufficienttaxable income will be available to allow all or part of the deferred incometax assets to be utilized.  Our assessment on the recognition of deferredincome tax assets on deductible temporary differences is based on the level andtiming of forecasted taxable income of the subsequent reporting periods.  Thisforecast is based on our past results and future expectations on revenues andexpenses as well as future tax planning strategies.  However, there is noassurance that we will generate sufficient taxable income to allow all or partof our deferred income tax assets to be utilized.

 

Based on the above assessment, we have not recognized certainof our deferred income tax assets as at December 31, 2007 and 2006 amounting toPhp1,122 million and Php299 million, respectively.  Total deferred tax assetsas at December 31, 2007 and 2006 amounted to Php13,757 million and Php20,538million, respectively, while total deferred tax liabilities as at December 31,2007 and 2006 amounted to Php2,066 million and Php402 million, respectively.  See*Note 6 – Income Tax*.

 

*Estimatingallowance for doubtful accounts*

 

We estimate theallowance for doubtful accounts related to our trade receivables that arespecifically identified as doubtful of collection.  The level of allowance isevaluated by management on the basis of factors that affect the collectibilityof the accounts.  In these cases, we use judgment based on the best availablefacts and circumstances, including but not limited to, the length of ourrelationship with the customer and the customer’s credit status based on thirdparty credit reports and known market factors, to record specific reserves forcustomers against amounts due in order to reduce our receivables to amountsthat we expect to collect.  These specific reserves are re-evaluated andadjusted as additional information received affect the amounts estimated.

 

In addition tospecific allowance against individually significant receivables, we also assessa collective impairment allowance against credit exposures of our customerwhich were grouped based on common credit characteristic, which, although notspecifically identified as requiring a specific allowance, have a greater riskof default than when the receivables were originally granted to customers.This collective allowance is based on historical loss experience using variousfactors such as historical performance of the customers within the collectivegroup, deterioration in the markets in which the customers operate, andidentified structural weaknesses or deterioration in the cash flows ofcustomers.

 

Impairment provisionfor receivable recognized in consolidated statements of income amounted toPhp417 million and Php736 million for the years ended December 31, 2007 and2006, respectively.  Trade and other receivables, net of impairment, amountedto Php12,645 million and Php10,158 million as at December 31, 2007 and 2006,respectively.  See *Note 5 – Income and Expenses, Note 14 – Trade and OtherReceivables* and *Note 26 – Financial Assets and Liabilities*.

 

*Estimationof pension cost and other retirement benefits*

 

The determination of our obligation and cost forpension and other retirement benefits is dependent on our selection of certainassumptions used by actuaries in calculating such amounts.  Those assumptionsare described in *Note 23 – Share-based Payments and Employee Benefits*and include, among other things, discount rates, expected returns on planassets and rates of compensation increases.  Actual results that differ fromour assumptions are recognized as income or expense when the net cumulativeunrecognized actuarial gains and losses at the end of the previous reportingperiod exceed 10% of the higher of the defined benefit obligation and the fairvalue of plan assets at that date.  While we believe that our assumptions arereasonable and appropriate, significant differences in our actual experience orsignificant changes in our assumptions may materially affect our pension andother retirement obligations.  Total pension benefit costs amounted to Php1,773million and Php1,003 million for the years ended December 31, 2007 and 2006,respectively.

 

Unrecognized netactuarial gain as at December 31, 2007 amounted to Php1,344 million and unrecognizednet actuarial loss as at December 31, 2006 amounted to Php4,657 million.  Theaccrued benefit costs as at December 31, 2007 and 2006 amounted to Php2,985million and Php2,888 million, respectively.  See *Note 23 – Share-basedPayments 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 of operationsfor the year. The assumptions and estimates are described in *Note 23 – Share-basedPayments and Employee Benefits* and include, among other things, annualstock volatility, risk free interest rate, remaining life, and the fair valueof common stock.  While management believes that the assumptions and estimatesused are reasonable and appropriate, significant differences in our actualexperience or significant changes in the assumptions may materially affect thestock compensation costs charged to operations.  The fair value of the LTIPrecognized as an expense for the years ended December 31, 2007 and 2006amounted to Php1,448 million and Php3,150 million, respectively.  As atDecember 31, 2007 and 2006, outstanding LTIP liability amounted to Php1,494million and Php5,030 million, respectively.  See *Note 5 – Income andExpenses* and *Note 23 – Share-based Payments and Employee Benefits*.

 

*Assetretirement obligations*

 

Assetretirement obligations are recognized in the period in which they are incurredif a reasonable estimate of fair value can be made. This requires an estimationof the cost to restore/dismantle on a per square meter basis, depending on thelocation, and is based on the best estimate of the expenditure required tosettle the obligation at the future restoration/dismantlement date, discounted atthe balance sheet date using a pre-tax rate that reflects the current marketassessment of the time value of money and, where appropriate, the risk specificto the liability.  Total provision for asset retirement obligations amounted toPhp952 million and Php831 million as at December 31, 2007 and 2006,respectively.  See *Note 8 – Property, Plant and Equipment* and *Note 19– Deferred Credits and Other Noncurrent Liablities*.

 

*Assetimpairment*

 

IFRS requires that an impairment review be performedwhen certain impairment indicators are present.  In the case of goodwill, at aminimum, such asset is subject to an annual impairment test and more frequentlywhenever there is an indication that such asset may be impaired.  This requiresan estimation 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 consolidated financial statements.Future events could cause us to conclude that property, plant and equipment,investments and intangible assets associated with an acquired business areimpaired.  Any resulting impairment loss could have a material adverse impacton our financial condition and results of operations.

 

The preparation ofestimated future cash flows involves significant judgments and estimations.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 IFRS. Total impairment charges for the years ended December 31, 2007 and 2006amounted to Php1,317 million and Php2,766 million, respectively.  See *Note 4– Segment Information*and *Note* 5 – *Income and Expenses*.

 

The carrying valuesof our property, plant and equipment, investments in associates, goodwill andintangible assets, trade and other receivables and inventories and supplies areseparately disclosed in *Notes 8, 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 with domestic and foreign carriers forinbound and outbound traffic subject to settlements require trafficreconciliations before actual settlement is done, which may not be the actualvolume of traffic as measured by us.  Initial recognition of revenues is basedon our observed traffic adjusted by our normal experience adjustments, whichhistorically are not material to our consolidated financial statements.Differences between the amounts initially recognized and the actual settlementsare taken up in the accounts upon reconciliation.  However, there is noassurance that such use of estimates will not result in material adjustments infuture periods.

 

Revenues under amultiple element arrangement specifically applicable to our wireless businessare split into separately identifiable components and recognized when therelated components are delivered in order to reflect the substance of thetransaction.  The fair value of components is determined using verifiableobjective evidence.

 

Under certain arrangements withour BPO services, if there is uncertainty regarding the outcome of the transactionfor which service was rendered, revenue is recognized only to the extent ofexpenses incurred for rendering the service and such amount is determined to berecoverable.

 

*CustomerRelationship*

 

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 howresources are to be allocated to the segment and assess their performances, andfor which discrete financial information are available.  The accountingpolicies of the reportable segments are the same as those described in *Note2 – Summary of Significant 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, and 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 andliabilities, results of operations and cash flows of our reportable segments asat and for the years ended December 31, 2007 and 2006 are as follows:

 

** **

**Wireless**

**Fixed Line**

**ICT**

**Inter-segment Transactions**

** **

**Total**

 

(in million pesos)

* *

* *

 

 

 

 

***As at and for the year ended December 31, 2007***

**Income**

 

 

 

 

 

Service revenues

86,497

48,551

10,055

(9,627)

135,476

External party

86,065

39,836

9,575

–

135,476

Inter-segment transactions

432

8,715

480

(9,627)

–

Foreign exchange gains – net 

2,649

5,479

(138)

–

7,990

Non-service revenues (Note 5)

2,800

 281

 267

(122)

3,226

External party

2,800

281

145

–

3,226

Inter-segment transactions

–

–

122

(122)

–

Interest income

1,186

296

21

–

1,503

Other income

 973

2,190

 594

(90)

3,667

External party

939                                       

2,140

588

–

3,667

Inter-segment transactions

34

50

6

(90)

–

Segment income

94,105

56,797

10,799

(9,839)

151,862

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income (loss) before income tax

47,346

10,877

(211)

69

58,081

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

15,566

3,358

(117)

–

18,807

Net income (loss) for the year

31,780

7,519

(94)

  69

39,274

** **

 

 

 

 

 

Assets and liabilities

 

 

 

 

 

Segment assets

90,708

180,360

18,290

(62,957) 

226,401

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

1,640

12,040

77

–

13,757

Total assets

92,348

192,400

18,367

(62,957)

240,158

 

 

 

 

 

 

Segment liabilities

50,828

78,323

5,697

(9,101)

125,747

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

1,571

–

495

–

2,066

Total liabilities

52,399

78,323

6,192

(9,101)

127,813

 

 

 

** **

** **

** **

** **

Cash flows

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

49,616

25,274

2,529

(1)

77,418

Investing activities

(19,915)

26,092

(2,687)

(34,809)

(31,319)

Financing activities

(34,635)

(45,385)

391

34,810

(44,819)

 

 

** **

** **

** **

** **

Other segment information

 

** **

** **

** **

** **

Capital expenditures

14,259

9,887

678

–

24,824

Depreciation and amortization (Note 8)

12,202

15,477

934

–

28,613

Interest on loans and related items - net 

1,393

4,288

33

–

5,714

Provisions

–

666

–

–

 666

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

563

43

711

–

1,317

* *

 

* *

* *

* *

* *

***As at and for the year ended December 31, 2006***

** **

**Income**

 

 

 

 

 

Service revenues

78,395

49,174

6,337

(8,919)

124,987

External party

77,832

41,299

5,856

–

124,987

Inter-segment transactions

563

7,875

481

(8,919)

–

Foreign exchange gains – net

1,722

3,210

(109)

–

4,823

Non-service revenues (Note 5)

2,010

  79

 553

(122)

2,520

External party

2,010

79

431

–

2,520

Inter-segment transactions

–

–

122

(122)

–

Interest income

1,197

441

16

–

1,654

Other income

 706

5,006

 128

(100)

5,740

External party

671

4,943

126

–

5,740

Inter-segment transactions

35

63

2

(100)

–

Segment income

84,030

57,910

6,925

(9,141)

139,724

 

 

 

 

 

 

**Result**

 

 

 

 

 

Income (loss) before income tax

36,471

2,127

(349)

–

38,249

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

6,344

(639)

(37)

–

5,668

Net income (loss) for the year

30,127

2,766

(312)

–

32,581

** **

 

 

 

 

 

**Assets and liabilities**

 

 

 

 

 

Segment assets

86,037

182,887

17,431

(64,989)

221,366

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

5,645

14,834

59

–

20,538

Total assets

91,682

197,721

17,490

(64,989)

241,904

 

 

 

 

 

 

Segment liabilities

49,751

91,874

3,396

(6,372)

138,649

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

6

–

396

–

 402

Total liabilities

49,757

91,874

3,792

(6,372)

139,051

** **

 

** **

** **

** **

** **

**Cash flows**

** **

** **

** **

** **

** **

Net cash provided by (used in):

 

 

 

 

 

Operating activities

37,285

30,425

1,501

–

69,211

Investing activities

(15,855)

7,051

(11,708)

(15,278)

(35,790)

Financing activities

(30,438)

(41,264)

10,524

15,278

(45,900)

** **

 

** **

** **

** **

** **

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

10,490

9,052

1,132

–

20,674

Depreciation and amortization (Note 8)

10,752

20,406

711

–

31,869

Interest on loans and related items - net 

1,386

5,953

20

–

7,359

Provisions

–

38

–

–

  38

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

2,220

54

492

–

2,766

 

 

 

**5.   Income and Expenses**

 

*Non-service Revenues*

 

 

**2007**

2006

 

(in million pesos)

Sale of computers, cellular handsets and cellular SIM-packs

**3,081**

2,089

Point-product sales

**145**

431

(Note 4)

**3,226**

2,520

 

*Compensation and EmployeeBenefits*

 

** **

**2007**

2006

 

(in million pesos)

Salaries and other employee benefits

**16,645**

13,761

Pension (Notes 3 and 23)

**1,773**

1,003

Incentive plans (Notes 3 and 23)

**1,448**

3,150

Manpower rightsizing program, or MRP

**604**

445

 

**20,470**

18,359

 

Over the past years, PLDT has beenimplementing its MRP in line with its continuing effort to reduce the cost baseof its fixed line business.  The total MRP cost charged to operations for theyears ended December 31, 2007 and 2006 amounted to Php604 million and Php445million, respectively.  The decision to implement the MRP was anchored on thechallenges being faced by the fixed line business as significant changes intechnology, increasing competition, and shifting market preferences to cellularuse have reshaped the future of the fixed line business.  The MRP is being implementedin compliance with the Labor Code of the Philippines and all other relevantlabor laws and regulations in the Philippines.

 

*Professional and Other Contracted Services*

* *

 

**2007**

2006

 

(in million pesos)

Technical and consultancy fees (Note 22)

**2,756**

1,858

Contracted services

**1,641**

948

Legal and audit fees

**203**

219

Other services

**119**

73

 

**4,719**

3,098

* *

*Cost of Sales*

* *

 

**2007**

2006

 

(in million pesos)

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

**4,430**

4,847

Cost of point-product sales

**254**

476

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

**160**

199

 

**4,844**

5,522

* *

*Financing Costs – net*

* *

 

**2007**

2006

 

(in million pesos)

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

**6,256**

7,908

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

**1,161**

3,314

Financing charges (Note 26)

**196**

51

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

**17**

130

Capitalized interest (Notes 2 and 8)

**(542)**

(549)

 

**7,088**

10,854

* *

Interest expense for short-termborrowings for the years ended December 31, 2007 and 2006 amounted to Php32million and Php10 million, respectively.

 

*AssetImpairment*

 

 

**2007**

2006

 

(in million pesos)

Goodwill and intangible assets (Note 11)

**1,244**

50

Trade and other receivables (Notes 3 and 14)

**417**

736

Inventories and supplies (Note 15)

**243**

211

Reversal of impairment in investment in debt securities (Notes 9 and 13)

**(****616)**

–

Property, plant and equipment (Note 8)

**–**

1,402

Notes receivable

**–**

346

Other assets

**29**

21

 

**1,317**

2,766

* *

 

 

**6.   Income Tax**

* *

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

* *

 

**2007**

2006

 

(in million pesos)

Net assets

**13,757**

20,538

Net liabilities

**(2,066)**

(402)

 

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

 

 

**2007**

2006

 

(in million pesos)

Net assets:

 

 

Net operating loss carryover, or NOLCO

**6,055**

4,983

Accumulated allowance for doubtful accounts

**3,428**

4,746

Derivative financial instruments

**2,308**

1,878

Unearned revenues

**1,789**

2,955

Pension and other employee benefits

**1,096**

2,568

Unamortized past service pension costs

**985**

871

Asset impairment

**824**

5,432

MCIT

**645**

982

Unrealized foreign exchange losses

**544**

2,632

Provisions for impaired assets

**494**

732

Accumulated write-down of inventories to net realizable values

**224**

321

Leases

**160**

304

Executive stock option plan

**32**

106

Intangible assets and fair value adjustments on assets acquired

**2**

(391)

Excess of fair value over cost of investment properties

**(80)**

(77)

Preferred stock subject to mandatory redemption

**(100)**

(109)

Capitalized taxes and duties – net of amortization

**(376)**

(446)

Capitalized foreign exchange differential

**(783)**

(988)

Undepreciated capitalized interest charges

**(3,572)**

(4,607)

Gain on debt exchange and debt restructuring transactions

**–**

(1,650)

Asset retirement obligation – net of undepreciated capitalized asset

**–**

191

Others 

**82**

105

 

**13,757**

20,538

 

 

 

Net liabilities:

 

 

Unearned revenues

**914**

(1)

Provisions for impaired assets

**348**

–

Asset retirement obligation – net of undepreciated capitalized asset

**332**

–

Accumulated provision for doubtful accounts

**304**

–

Asset impairment

**277**

–

Pension and other employee benefits

**217**

–

Leases

**42**

–

Unamortized past service pension costs

**7**

–

Excess of fair value over cost of investment properties

**(60)**

(38)

Derivative financial instruments

**(164)**

–

Interest charges capitalized

**(718)**

–

Intangible assets and fair value adjustments on assets acquired

**(736)**

(357)

Gain on debt exchange and debt restructuring transactions

**(1,228)**

–

Unrealized foreign exchange gains

**(1,****613)**

(6)

Others

**12**

–

 

**(2,066)**

(402)

 

Provision for corporate income tax consists of:

 

 

**2007**

2006

 

(in million pesos)

Current

**10,776**

10,035

Deferred

**8,031**

(4,367)

 

**18,807**

5,668

 

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

 

 

**2007**

2006

 

(in million pesos)

Provision for corporate income tax at the applicable statutory tax rates

**20,328**

13,387

Tax effects of:

** **

 

Non-deductible expenses

**333**

751

Equity share in net loss of investees

**4**

18

(Income) loss subject to lower tax rate

**(106)**

326

Income not subject to tax

**(420)**

(2,375)

Income subject to final tax

**(509)**

(550)

Net movement in unrecognized deferred income tax assets

**(823)**

(5,889)

Actual provision for corporate income tax (Note 4)

**18,807**

5,668

 

Mabuhay Satellite and SubicTel are registered as SubicBay Freeport Enterprises while ClarkTel is registered as a Clark Special EconomicZone Enterprise under Republic Act No. 7227, or R.A. 7227, otherwise known asthe Bases Conversion and Development Act of 1992.  As registrants, MabuhaySatellite, SubicTel and ClarkTel are entitled to all the rights, privileges andbenefits established thereunder including tax and duty-free importation ofcapital equipment and a special income tax rate of 5% of gross income, asdefined in R.A. 7227.

 

OnDecember 22, 2000, the Philippine Board of Investments, or BOI, approvedePLDT’s registration as a new information technology, or IT, service firm inthe field of services related to its internet data center on a pioneer status.As such, ePLDT enjoyed, among other incentives, a six-year income tax holiday,or ITH, starting January 2001 until January 2007.

 

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 ITH for its new datacenter facility from the earlier of January 2007 and the actual start ofoperations.  ePLDT started commercial operations of its new data centerfacility 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/operator of Vitro Data Center Building is not entitled to PEZAincentives under R.A. No. 7916, or R.A. 7916, otherwise known as “The SpecialEconomic Zone 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,including an ITH for six years starting in June 2002.  Parlance is required tocomply with specific terms and conditions stated in its BOI registration.

 

Vocativ is registered with the PEZA as an EcozoneExport Enterprise to develop and operate a call center business that servesoverseas clients by providing customer relationship management services.  As aregistered enterprise, Vocativ is entitled to certain tax and non-taxincentives which include, among other things, tax and duty-free importations,exemption from local tax and an ITH for four years from start of commercialoperations.  After the ITH period, Vocativ is liable for a final tax, in lieuof all taxes, of 5% gross income less allowable deductions as defined underR.A. 7916.  The 5% final tax must be paid and remitted in accordance with theamendments contained in R.A. 8748, as follows: (a) 3% to the NationalGovernment; and (b) 2% which will be directly remitted by the businessestablishments to the treasurer’s office of the municipality or city where theenterprise is located.

 

OnDecember 5, 2005, Vocativ received approval from PEZA for the adjustment of thestart of its commercial operations, effectively extending the ITH to end ofMarch 2006.  On June 30, 2006, PEZA approved Vocativ’s ITH extension foranother year until April 2007.  On September 3, 2007, PEZA again approvedVocativ’s ITH extension for another year until March 2008.

 

Ventusand two of its call center projects are registered with the BOI as a new ITexport service firm in the field of customer interaction center on a pioneerstatus.  Under their registrations, Ventus, Ventus Iloilo and Pasig call centerprojects are entitled to certain tax incentives such as an ITH for six yearsstarting March 2005 for Ventus and Ventus Iloilo call center and August 2006for Ventus Pasig call center.  In relation to this, they are required to complywith specific terms and conditions stated in their 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.

 

mySecureSign, Inc., or mSSI, is awholly-owned subsidiary of ePLDT and is registered with the BOI as a new ITservice firm in the field of services related to public key infrastructure on apioneer status. Under such registration, mSSI enjoyed, among other incentives,a six-year ITH from August 1, 2001.

 

Digital Paradise is registered with the BOI as a new IT service firm in the field of communityaccess on a non-pioneer status.  Under the provisions of the registration,Digital Paradise’s sales generated from its own community access activity andfranchise fees are entitled to an ITH for a period of four years beginningDecember 2002.  In December 2006, the BOI approved Digital Paradise’sapplication for a status upgrade from non-pioneer to pioneer, accordinglyextending the ITH period for another two years starting January 2007.

* *

Level Up! 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 ITH period, SPi is liable for a finaltax, in lieu of all taxes.  The final tax is computed at 5% of gross incomeless allowable deductions as defined under R.A. 7916 and will be paid andremitted in accordance with the amendments contained in R.A. 8748, as follows:(a) 3% to the National Government; and (b) 2% which will be directly remittedby the business establishments to the treasurer’s office of the municipality orcity where the enterprise is located.

* *

Wolfpacis registered with the BOI as a new operator of service provider applications.Under the terms of its registration, it is entitled to certain tax and non-taxincentives which include, among other things, an ITH for four years startingFebruary 2004.

* *

OnNovember 29, 2007, the BOI approved Wolfpac’s application for a one yearextension of ITH incentive on the basis that the capital equipment to laborratio did not exceed US$10 million as provided under Article 39 of ExecutiveOrder, or E.O. 226.  The approved bonus year is for the period from February13, 2008 to February 12, 2009.

* *

SmartBroadband, Inc., or SBI, has three registered activities with the BOI on apioneer status, namely: (i) a new operator of telecommunications systems(inter-exchange carrier for data services); (ii) new information technologyservice firm in the field of providing internet services; and (iii) a newoperator of telecommunications facilities (nationwide broadband wirelessaccess).  Under the terms of these registrations, SBI is entitled to certaintax and non-tax incentives which include, among other things, an ITH for sixyears until February 2007, August 2007 and July 2011, respectively.  After theITH period, SBI is liable for a 30% regular corporate income tax or 2% MCIT,whichever is higher.

* *

Incomederived from non-registered activities with the BOI is subject to the regular incometax rate enacted as at the balance sheet date.

* *

Consolidatedtax incentives that we availed for the years ended December 31, 2007 and 2006amounted to Php766 million and Php142 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.       Theregular 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.       TheVAT 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.

 

Ourdeferred income tax assets have been recorded to the extent that such deferredincome tax assets are expected to be utilized against sufficient future taxableprofit.  We had unrecognized deferred income tax assets of Php1,122 million and Php299 million largely pertaining to MCIT and assetimpairments as at December 31, 2007 and 2006, respectively.

 

The breakdown of our consolidated unutilized NOLCO asat December 31, 2007 is as follows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2005

2008

11,383

2006

2009

5,424

2007

2010

931

 

 

17,738

 

 

 

Tax benefit from NOLCO

 

6,060

Unrecognized deferred income tax assets from NOLCO as at December 31, 2007

 

(5)

 

 

6,055

 

The breakdown of our consolidated excess MCIT as atDecember 31, 2007 is as follows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2005

2008

484

2006

2009

499

2007

2010

645

 

 

1,628

Unrecognized deferred income tax assets from MCIT as at December 31, 2007

 

(983)

 

 

 645

 

 

 

**7.   Earnings PerCommon Share**

 

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

 

** **

**2007**

2006

 

**Basic**

**Diluted**

Basic

Diluted

 

(in million pesos)

Consolidated net income attributable to equity holders  of PLDT

**39,289**

**39,289**

32,385

32,385

Dividends on convertible preferred shares

**(457)**

**(457)**

(455)

(455)

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

**–**

**17**

–

–

Accretion of preferred stock subject to mandatory redemption

**–**

**131**

–

–

Foreign exchange gains on preferred stock subject to mandatory redemption

–

**(182)**

–

–

Consolidated net income applicable to common shares

**38,832**

**38,798**

**31,930**

**31,930**

 

(in thousands, except per share amounts)

 

** **

** **

** **

** **

Outstanding common shares at beginning of year

**188,435**

**188,435**

180,789

180,789

Effect of issuance of common shares during the year

**221**

**221**

3,667

3,667

Average incremental number of shares under ESOP  during the year

**–**

**38**

–

98

Common shares equivalent of convertible preferred shares deemed dilutive:

** **

** **

 

 

Preferred Stock Series VI (Note 18)

**–**

**680**

–

–

Weighted average number of common shares for the year

**188,656**

**189,374**

184,456

184,554

Earnings per common share

**Php****205.84**

**Php****204.88**

Php173.10

Php173.01

 

Basic EPS is calculated bydividing the consolidated net income for the year attributable to commonshareholders (consolidated net income adjusted for dividends on all series ofpreferred shares except for dividends on preferred stock subject to mandatoryredemption) by the weighted average number of common shares outstanding duringthe year, after giving retroactive effect to any stock dividend declarations.

 

Diluted EPS is calculated in the same manner assumingthat, at the beginning of the year or at the time of issuance during the year,all outstanding options are exercised and convertible preferred shares areconverted to common shares, and appropriate adjustments to consolidated netincome are effected for the related expenses and income on preferred shares.Outstanding stock options will have a dilutive effect only when the averagemarket price of the underlying common share during the year 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 consolidated net income attributable to common shareholders(consolidated net income, adding back any dividends and/or other chargesrecognized in the year 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 common share equivalentarising from the conversion of the dilutive convertible preferred shares.

 

Series VIConvertible Preferred Stocks in 2007 and Series A to EE, VI and VII ConvertiblePreferred Stocks in 2005 were deemed dilutive based on a calculation of therequired 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 compared againstthe basic EPS.  Since the amount of dividends on the Series A to EE and SeriesV Convertible Preferred Stocks in 2007 and Series A to EE, V and VI ConvertiblePreferred Stocks in 2006 over its equivalent number of common shares increasedthe basic EPS, these Convertible Preferred Stocks were anti-dilutive.

 

On January29, 2008, our board of directors approved a share buyback program of up to twomillion shares of PLDT’s common stock, representing approximately 1.1% of PLDT’stotal outstanding shares of common stock.  As at March 25, 2008, we acquired atotal of 98,000 shares of common stock based on the buyback program.  Thesubsequent acquisition of shares of PLDT’s common stock pursuant to the buybackprogram has no effect on our basic and diluted earnings per common share forthe years ended December 31, 2007 and 2006. See *Note 17 – Equity* forfurther discussion.

 

**Dividends Declared For The YearEnded December 31, 2007**

 

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**(in million pesos)

 

 

 

 

 

 

**Preferred Stock Subject to Mandatory Redemption**

 

 

 

 

 

Series V

March 6, 2007

March 20, 2007

April 15, 2007

Php4.675

–

 

June 12, 2007

June 28, 2007

July 15, 2007

4.675

–

 

September 14, 2007

September 28, 2007

October 15, 2007

4.675

–

 

December 1, 2007

December 21, 2007

January 15, 2008

4.675

–

Series VI

March 6, 2007

March 20, 2007

April 15, 2007

US$0.09925

4

 

June 12, 2007

June 28, 2007

July 15, 2007

0.09925

3

 

September 14, 2007

September 28, 2007

October 15, 2007

0.09925

3

 

December 1, 2007

December 21, 2007

January 15, 2008

0.09925

3

Charged to income

 

 

 

 

  13

 

 

 

 

 

 

 

 

 

**10% Cumulative Convertible  Preferred Stock**

 

 

 

 

 

Series CC

January 30, 2007

February 28, 2007

March 30, 2007

Php1.00

17

Series DD

January 31, 2007

February 15, 2007

February 28, 2007

1.00

2

Series EE

March 27, 2007

April 26, 2007

May 31, 2007

1.00

–

Series A, I, R, W, AA and BB

July 10, 2007

August 1, 2007

August 31, 2007

1.00

129

Series B, F, Q, V and Z

August 7, 2007

September 3, 2007

September 28, 2007

1.00

91

Series E, K, O and U

September 14, 2007

October 4, 2007

October 31, 2007

1.00

44

Series C, D, J, T and X

September 14, 2007

October 14, 2007

November 27, 2007

1.00

57

Series G, N, P and S

November 6, 2007

December 6, 2007

December 28, 2007

1.00

27

Series H, L, M and Y

December 1, 2007

December 28 2007

January 31, 2008

1.00

41

 

 

 

 

 

 408

 

 

 

 

 

 

**Cumulative Non-Convertible Redeemable Preferred Stock**

 

 

 

 

 

Series IV*

January 30, 2007

February 23, 2007

March 15, 2007

Php–

12

 

May 8, 2007

May 25, 2007

June 15, 2007

–

13

 

July 10, 2007

August 9, 2007

September 15, 2007

–

12

 

November 6, 2007

November 23, 2007

December 15, 2007

–

12

 

 

 

 

 

  49

 

 

 

 

 

 

**Common Stock**

 

 

 

 

 

Regular Dividend

March 6, 2007

March 20, 2007

April 20, 2007

Php50.00

9,429

** **

August 7, 2007

August 24, 2007

September 24, 2007

60.00

11,322

Special Dividend

August 7, 2007

August 24, 2007

September 24, 2007

40.00

7,548

 

 

 

 

 

28,299

Charged to retained earnings

 

 

 

 

28,756

 

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

* *

**DividendsDeclared After December 31, 2007**

* *

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**(in million pesos)

 

 

 

 

 

 

**Cumulative Non-convertible Redeemable Preferred Stock**

 

 

 

 

 

Series IV*

January 29, 2008

February 22, 2008

March 15, 2008

Php–

12

** **

 

 

 

 

 

**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

2

 

 

 

 

 

  19

**Convertible Preferred Stock**

 

 

 

 

 

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

3

 

 

 

 

 

3

 

 

 

 

 

 

**Common Stock**

 

 

 

 

 

Regular Dividend

March 4, 2008

March 19, 2008

April 21, 2008

Php68.00

12,834

Special Dividend

March 4, 2008

March 19, 2008

April 21, 2008

56.00

10,570

 

 

 

 

 

23,404

** **

 

 

 

 

23,438

 

****Dividendsare declared based on total amount paid up*

* *

* *

 

**8.   Property, Plant andEquipment**

* *

Thisaccount 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, 2005**

Cost

107,781

82,353

61,043

19,727

27,923

10,560

7,918

2,438

11,794

331,537

Accumulated depreciation and amortization

(41,262)

(46,259)

(29,410)

(5,196)

(21,056)

(6,083)

(5,048)

(249)

–

(154,563)

 

66,519

36,094

31,633

14,531

6,867

4,477

2,870

2,189

11,794

176,974

** **

**Year Ended December 31, 2006**

Net book value at beginning of year

66,519

36,094

31,633

14,531

6,867

4,477

2,870

2,189

11,794

176,974

Additions/Transfers – net

4,900

3,277

6,562

601

2,193

–

1,351

230

1,084

20,198

Disposals/Retirements

(38)

(158)

(103)

(71)

99

–

(2)

(4)

(223)

(500)

Translation differences charged directly to cumulative translation adjustments

–

(35)

–

(7)

(73)

(311)

–

–

–

(426)

Acquisition through business combination

–

(13)

–

273

903

–

1

20

31

1,215

Reclassifications

2

91

(99)

8

(2)

–

–

–

–

–

Impairment losses recognized during the year (Note 5)

–

(3)

–

(5)

(3)

(1,391)

–

–

–

(1,402)

Depreciation and amortization (Note 4)

(5,356)

(12,941)

(6,459)

(1,189)

(4,406)

(619)

(880)

(19)

–

 (31,869)

Net book value at end of year (Note 3)

66,027

26,312

31,534

14,141

5,578

2,156

3,340

2,416

12,686

164,190

**Year Ended December 31, 2007**

Net book value at beginning of year

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 (Note 4)

(8,449)

(6,063)

(7,530)

(1,138)

(3,426)

(556)

(1,448)

(3)

–

 (28,613)

Net book value at end of year (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**

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)

Net book value (Note 3)

63,058

22,555

31,870

13,372

4,849

1,105

1,784

2,289

18,532

159,414

 

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 years ended December 31, 2007 and 2006 were as follows:

 

 

**2007**

2006

 

(in million pesos)

Interest (Notes 2 and 5)

**542**

549

Foreign exchange gains – net

**63**

521

 

Asat December 31, 2007 and 2006, the undepreciated capitalized net foreignexchange losses which qualified as borrowing costs amounted to Php2,533 millionand Php3,117 million, 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

 

We recognized additional depreciation charge of Php796million and Php8,624 million in 2007 and 2006, respectively, due to a change inthe estimated useful lives of certain of our network assets owing to continuingnetwork upgrade and expansion.  The acceleration of depreciation is expected toresult in a reduction of future monthly depreciation charge amounting to Php10million moving forward.

 

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

 

On February1, 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.

 

Thefair value of the Cluster 3 assets, determined provisionally, was assessed tobe equal to its book value allocated as follows: (a) equipment Php318 million;(b) land Php31 million; and  (c) buildings and improvements Php22 million.

 

SBI intendsto engage an independent appraiser to establish the fair values of the acquiredassets.

 

*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 IItransponder was considered impaired.  This impairment review was based on the netpresent value of future cash flows from the continued use of this asset groupusing the discount factor of 10% as applied on cash flow projection from 2008until 2010.  An impairment loss of Php1,391 million was charged to the carryingvalue of this satellite as at December 31, 2006 and included in the accumulateddepreciation and amortization account in the consolidated balance sheets as at December31, 2006.  In 2007, we performed an impairment update review on MabuhaySatellite’s Agila II and no additional impairment was recognized.

 

Property,plant and equipment include the following amounts for capitalized leases as atDecember 31, 2007 and 2006:

 

** **

**2007**

2006

 

**Central office equipment**

**Vehicles, furniture and other network equipment**

**Total**

Central office equipment

Vehicles, furniture and other network equipment

Total

 

(in million pesos)

Cost

**354**

**1,190**

**1,544**

354

1,183

1,537

Less accumulated depreciation

**333**

**1,109**

**1,442**

310

950

1,260

 

**21**

**81**

**102**

  44

 233

 277

 

The following table summarizes all changes to theliabilities on asset retirement obligations as at December 31, 2007 and 2006:

 

 

**2007**

2006

 

(in million pesos)

Asset retirement obligations at beginning of year

**831**

752

Accretion expenses

**81**

87

Additional liability recognized during the year

**48**

45

Settlement of obligations

**(8)**

(53)

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

**952**

 831

 

 

 

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

 

This account consists of:

 

 

**2007**

2006

 

(in million pesos)

ACeS International Limited

**1,896**

1,896

Mabuhay Space Holdings Limited

**791**

937

Blue Ocean Wireless

**724**

–

Philweb Corporation

**712**

712

BayanTrade Dotcom, Inc.

**97**

97

ePDS, Inc.

**6**

6

 

**4,226**

3,648

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

**2,875**

3,012

 

**1,351**

 636 

 

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

 

 

**2007**

2006

 

(in million pesos)

Balance at beginning of year

**82**

134

Equity in net losses (gain) of associates for the year

**11**

(52)

Balance at end of year

**93**

  82

 

Movementsin the accumulated impairment losses are as follows:

 

 

**2007**

2006

 

(in million pesos)

Balance at beginning of year

**2,930**

2,725

Translation adjustments

**(****148)**

(77)

Impairment losses for the year

**–**

282

Balance at end of year

**2,782**

2,930

 

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

 

As atDecember 31, 2007, 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 has incurred recurringsignificant operating losses, negative operating cash flows, and significantlevels of debt.  The financial condition of AIL was partly due to the NationalService Providers’, or NSPs, inability to generate the amount of revenuesoriginally expected as the growth in subscriber numbers has been significantlylower than budgeted.  These factors raised substantial doubt about AIL’s abilityto continue as a going concern.  On this basis, we recognized a full impairmentprovision in respect of our investment in AIL in 2003.

 

For further details as to thecontractual relationships in respect of AIL.  See *Note 22 – Related PartyTransactions*and *Note 24 – Contractual Obligations and CommercialCommitments*.

 

***Investment of MabuhaySatellite in Mabuhay Space Holdings Limited, or MSHL***

 

In 1996, Mabuhay Satellite enteredinto 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 US$19 millionfor a 65% equity interest in MSHL.

 

In 2000,SS/L filed a Notice of Default and Termination against Mabuhay Satellite arisingfrom the latter’s alleged failure to amicably resolve its unpaid obligation toSS/L under the JVA.  In 2002, the arbitration panel handed down its decisionand provided for payment by Mabuhay Satellite to SS/L of the principal amountof US$10 million plus accrued interest at 9% per annum.  On June 30, 2003,Mabuhay Satellite and SS/L concluded a US$15 million settlement agreement underwhich Mabuhay Satellite leased two transponders under a transponder agreementon a life-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 withthe settlement 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.

 

***Investmentof Smart in Blue Ocean Wireless, or BOW***

 

On August3, 2007, Smart (through its subsidiary, SCH) acquired a 30% equity interest inBOW, a Dublin-based company delivering GSM communication capability for themerchant maritime sector.  Total acquisition cost amounted to US$16 million, orPhp724 million, of which US$13 million, or Php601 million, was paid in cash andUS$3 million, or Php123 million, worth of equipment and services was deliveredby Smart in accordance with the subscription agreement.  BOW provides GSM networkon the seas through Altobridge, a patented GSM technology that will complementSmart’s prepaid wireless satellite phone service, *SmartLink*.

 

***Investment of ePLDT inPhilweb Corporation, or Philweb***

 

In May 2006, ePLDT subscribed tonewly issued common shares of Philweb, an internet-based online gaming company,equivalent to 20% of the total outstanding capital stock of Philweb at a priceof Php0.020 per share or an aggregate amount of Php503 million.  Of the totalsubscription price, Php427 million was paid by ePLDT on the closing date.  Theportion of the unpaid subscription price amounting to Php25 million will bepaid by ePLDT at the same time as the Philweb majority stockholders pay theremaining unpaid portion of the subscription pursuant to a general call onsubscription to be made by Philweb’s board of directors.  The balance of Php50million will be paid upon the lapse of certain post-closing price adjustmentperiods.  The unpaid subscription of Php75 million was recorded as part of accruedexpenses and other current liabilities in the consolidated balance sheet.

 

In October 2006, ePLDT acquired anadditional 8,037,692,308 shares of Philweb at a price of Php0.026 per share oran aggregate amount of Php209 million.  This represents an additional 6.2% ofthe outstanding shares of Philweb, raising ePLDT’s total equity stake to 26.87%and 25.5% as at December 31, 2007 and 2006, respectively.

 

Philweb is primarily engaged ininternet-based online gaming, through its appointment as Principal Technology ServiceProvider under the Marketing Consultancy Agreement for Internet Sports Bettingand Internet Casino with the Philippine Amusement and Gaming Corporation, orPAGCOR.  As at the end of December 2007, Philweb offers Internet Sports Bettingin over 200 PAGCOR Internet Sports Betting Stations and over 70 Internet CasinoStations nationwide.  As at December 31, 2007 and 2006, the market value ofePLDT’s investments in Philweb amounted to Php1,492 million and Php1,028million, respectively.

 

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

 

BayanTrade was incorporated andregistered with the Philippine SEC on August 8, 2000 to provide:  (a) abusiness-to-business electronic purchasing market place to link buyers andsuppliers of goods and services over the internet; (b) electronic cataloguepurchasing facilities over the internet to buyers and suppliers; (c) link-upwith similar horizontal markets and vertical markets across the Asia-PacificRegion and the world; and (d) facilitating services incidental to thebusiness.  BayanTrade is an e-procurement joint venture established togetherwith 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.

 

InSeptember 2005, ePLDT received 4,794,615 bonus warrants from BayanTrade whichentitles ePLDT to purchase 2,794,615 common shares at a price of Php0.50 pershare at any time on or before August 31, 2010.

 

***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 does laser printing and enveloping services forstatements, bills and invoices, and other value-added services for companies inthe Philippines.  ePLDT has a 50% interest in ePDS, while DataPost has a 30%interest.  Spring, the largest international mail services provider, owns theremaining 20%.  ePDS has an initial paid-up capital of Php11 million.

 

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

 

The followingtable presents the summarized financial information of our investments inassociates in conformity with IFRS for equity investees for which we havesignificant influence as at and for the years ended December 31, 2007 and 2006.

 

 

**2007**

2006

 

(in million pesos)

**Consolidated Balance Sheets:**

** **

 

Noncurrent assets

**1,383**

1,333

Current assets

**1,084**

1,122

Capital deficiency

**(8,340)**

(9,618)

Noncurrent liabilities

**10,162**

10,029

Current liabilities

**645**

2,044

 

** **

 

**Consolidated Statements of Income**

** **

 

Revenues

**863**

1,194

Revenues less cost of revenues

**746**

654

Expenses

**578**

1,066

Net income (loss)

**168**

(412)

 

 

 

**10. InvestmentProperties**

 

 

**2007**

2006

 

(in million pesos)

Balance at beginning of year

**587**

701

Net gains (losses) from fair value adjustments

**3**

(2)

Disposals

**(13)**

(112)

Balance at end of year (Notes 3 and 26)

**577**

587

 

Investmentproperties are stated at fair values, which have been determined based on thelatest valuations performed by Asian Appraisal Company, Inc., an independentfirm of appraisers, which is an industry specialist in valuing these types ofinvestment properties.  The valuation undertaken was based on an open marketvalue, supported by a market evidence in which assets could be exchangedbetween a knowledgeable willing buyer and a knowledgeable willing seller in anarm’s-length transaction at the dates of valuation.  None of our investmentproperties are being leased to third parties that earn rental income.

 

 

 

**11. Goodwill andIntangible Assets**

 

Movements in goodwill andintangible assets are as follows:

 

 

**2007**

2006

 

**Goodwill**

**Intangible assets**

**Total**

Goodwill

Intangible assets

Total

 

(in million pesos)

Cost:

 

 

 

 

 

 

Balance at beginning of year

**10,137**

**3,456**

**13,593**

1,942

1,991

3,933

Additions during the year

**2,231**

**607**

**2,838**

8,498

1,540

10,038

Translation adjustments

**(1,489)**

**(242)**

**(1,731)**

(303)

(75)

(378)

Balance at end of year

**10,879**

**3,821**

**14,700**

10,137

3,456

13,593

 

** **

** **

** **

 

 

 

Accumulated amortization and impairment:

** **

** **

** **

 

 

 

Balance at beginning of year

**438**

**941**

**1,379**

438

446

 884

Amortization during the year

**–**

**390**

**390**

–

450

 450

Impairment during the year (Note 5)

**1,191**

**53**

**1,244**

–

50

  50

Translation adjustments 

**–**

**(34)**

**(34)**

–

(5)

(5)

Balance at end of year

**1,629**

**1,350**

**2,979**

 438

 941

1,379

Net balance (Notes 3 and 26)

**9,250**

**2,471**

**11,721**

9,699

2,515

12,214

* *

***2006Acquisitions***

*** ***

*ePLDT’sAcquisition of Level Up!*

 

On February16, 2006, ePLDT entered into a sale and purchase agreement to acquire a 60%equity interest of Level Up!, a leading publisher of online games in the Philippines, for a total consideration of US$7 million, or Php383 million.  The transactionwas completed on April 30, 2006.  In August 2006, the shareholders agreementand share purchase agreement between ePLDT and Level Up! were amended toreflect the removal of earn-out and price adjustment provisions thereby fixingthe acquisition for 60% equity interest of Level Up! at the aforementionedoriginal purchase price of US$7 million, or Php383 million.  As at April 30,2006, the net cash outflow related to the acquisition was Php350 million,representing cash payments of Php383 million, net of cash acquired from LevelUp! of Php35 million. Total cash payments include a purchase price considerationof Php381 million and incidental cost of Php2 million.

 

Thepurchase consideration has been allocated to the assets and liabilities on thebasis of fair values at the date of acquisition.  The fair values of theidentifiable acquired assets and liabilities of Level Up! as at April 30, 2006and the corresponding carrying amounts immediately before the acquisition areas follows:

 

 

Previous Carrying Value

Fair Value Recognized on Acquisition

** **

(in million pesos)

**Assets:**

 

 

Property, plant and equipment

129

129

Goodwill

–

597

Intangible assets

84

185

Prepayments and advances and refundable deposits –net of current portion

7

7

Cash and cash equivalents

35

35

Trade and other receivables

8

8

Inventories and supplies

1

1

Current portion of prepayments and advances and refundable deposits

20

20

 

 284

 982

**Liabilities:**

 

 

Deferred income tax liabilities

–

60

Finance lease

49

49

Accounts payable

21

21

Accrued expenses and other current liabilities

104

104

Due to related parties

110

110

 

 284

 344

Minority interest

–

255

Net assets acquired

–

383

 

Intangibleassets, as determined by American Appraisal China, Limited, an independentappraiser, pertaining to Level Up!’s game license agreements for certain of itsservices amounted to Php185 million with an estimated remaining useful life of5.67 years.  Level Up! was accounted for in our consolidated financialstatements using the purchase method of accounting, which resulted in goodwillamounting to Php597 million in 2006.  Goodwill pertains to the assembledworkforce and other unidentified intangible assets that did not qualify asintangible assets under*IAS 38, “Intangible Assets”*.  As at December 31,2006, ePLDT provided impairment in value of its intangible assets in Level Up!amounting to Php50 million, representing a write-down of such intangible assetsto recoverable amounts using the value in use approach.  The impairment was aresult of projected decline on revenues related to certain license agreements.Value in use was based on the discounted cash flow projections using the mostrecent financial forecast approved by our management.

 

Our consolidated revenues wouldhave been increased by Php140 million while our net income would have beendecreased by Php6 million for the year ended December 31, 2006 if the acquisitionof Level Up! had actually taken place on January 1, 2006.  Total net loss ofLevel Up! included in our 2006 consolidated statement of income from the timeof acquisition until December 31, 2006 amounted to Php34 million.

 

*ePLDT’sAcquisition of SPi*

 

On July 11, 2006, ePLDT acquired a100% equity interest in SPi and its direct and indirect Philippine and offshoresubsidiaries for a total cash consideration of US$136 million.  As part of thetransaction, ePLDT also assumed a US$7 million debt owed by SPi to the sellerat face value.  In addition, ePLDT advanced US$16 million to SPi in order forSPi to fully pay its debt owed to DBS Bank Singapore.  As at December 31, 2006,the net cash outflow related to the acquisition was Php7,028 million,representing cash payments of Php7,114 million, net of cash acquired from SPiof Php86 million.  Total cash payments include a purchase price considerationof Php7,024 million and incidental cost of Php90 million.

 

Thepurchase consideration has been allocated to the assets and liabilities on thebasis of fair values at the date of acquisition.  The fair values of theidentifiable acquired assets and liabilities of SPi as at the time of theacquisition and the corresponding carrying amounts immediately before theacquisition are as follows:

 

 

Previous Carrying Value

Fair Value Recognized on Acquisition

 

In U.S. Dollar

In Php(1)

In U.S. Dollar

In Php(1)

 

(in millions)

**Assets:**

 

 

 

 

Property, plant and equipment

16

862

19

1,019

Goodwill

72

3,830

130

6,906

Intangible assets

–

–

18

972

Prepayments and advances and  refundable deposits – net of current portion

1

51

1

51

Cash and cash equivalents

2

86

2

86

Trade and other receivables

36

1,915

36

1,915

Current portion of prepayments and advances and refundable deposits

2

96

2

96

 

129

6,840

208

11,045

**Liabilities:**

 

 

 

 

Deferred income tax liabilities

1

38

7

395

Deferred credits and other noncurrent liabilities

3

182

3

182

Accounts payable

54

2,942

54

2,942

Accrued expenses and other current liabilities

8

412

8

412

 

66

3,574

72

3,931

Net assets acquired

63

3,266

 136

7,114

 

*(1)**Converted toPhilippine Peso using the exchange rate at the time of purchase of Php**53.11**toUS$1.00**.*

 

Intangibleassets, as determined by an independent appraiser, amounted to Php972 millionrelating to SPi’s customer relationships and self-developed software with estimatedremaining useful lives of seven and four years, respectively.

 

SPi was accounted for in theconsolidated financial statements using the purchase method of accounting,which resulted in goodwill amounting to Php6,906 million.  Goodwill pertains tothe assembled workforce of SPi and other unidentified intangible assets thatdid not qualify as intangible assets under IAS 38.

 

Our consolidated revenues wouldhave been increased by Php1,724 million while our net income would have beendecreased by Php295 million for the year ended December 31, 2006 if the acquisitionof SPi and its direct and indirect Philippine offshore subsidiaries had actuallytaken place on January 1, 2006.  Total net income of SPi and its direct andindirect Philippine offshore subsidiaries included in our 2006 consolidatedstatement of income from the time of acquisition until December 31, 2006amounted to Php68 million.

* *

*ePLDT’sAcquisition of CyMed*

 

On August 11, 2006, ePLDT, throughits direct subsidiary SPi, acquired 100% equity interest of CyMed for anaggregate purchase price of US$37 million, inclusive of certain debtobligations.  As at August 15, 2006, the net cash outflow related for this acquisitionwas Php1,774 million, representing cash payments of Php1,831 million, net ofcash acquired from CyMed of Php57 million.  Total cash payments include a purchaseprice consideration of Php1,716 million, working capital amounts and other netdebt adjustments totaling Php102 million and incidental cost of Php13 million.

 

The purchaseconsideration has been allocated to the assets and liabilities on the basis offair values at the date of acquisition.  The fair values of the identifiableacquired assets and liabilities of CyMed as at the time of the acquisition andthe corresponding carrying amounts immediately before the acquisition are asfollows:

 

 

Previous Carrying Value

Fair Value Recognized on Acquisition

 

In U.S. Dollar

In Php(1)

In U.S. Dollar

In Php(1)

 

(in millions)

**Assets:**

 

 

 

 

Property, plant and equipment

1

39

1

39

Goodwill

2

108

25

1,223

Intangible assets

–

–

7

336

Deferred income tax assets

1

30

1

30

Cash and cash equivalents

1

57

1

57

Trade and other receivables

3

148

3

148

Notes receivable

2

108

2

108

Current portion of advances and  refundable deposits

1

20

1

20

 

11

510

41

1,961

**Liabilities:**

 

 

 

 

Interest-bearing financial liabilities –  net of current portion

2

72

2

72

Accounts payable and other current liabilities

2

58

2

58

 

4

130

4

130

Net assets acquired

7

380

37

1,831

 

*(1)**Convertedto Philippine Peso using the exchange rate at the time of purchase of Php49.03**to US$1.00**.*

 

CyMed was accounted for in theconsolidated financial statements using the purchase method of accounting,which resulted in goodwill amounting to Php1,223 million.  Goodwill pertains toassembled workforce of CyMed and other unidentified intangible assets that didnot qualify as intangible assets under IAS 38.

 

Intangible assets pertaining to CyMed’scustomer relationship was determined at Php336 million with an estimated usefullife of five years.  Intangible assets were valued by an independent appraiser.

 

Ourconsolidated revenues would have been increased by Php681 million while our netincome would have been decreased by Php40 million for the year ended December31, 2006 if the acquisition of CyMed had actually taken place on January 1, 2006.Total net loss of CyMed included in our 2006 consolidated statement of incomefrom the time of acquisition until December 31, 2006 amounted to Php40 million.

 

***2007Acquisitions***

 

*SPi’sAcquisition of Springfield Service Corporation, or Springfield*

 

On April 12,2007, SPi acquired, through a wholly-owned U.S. subsidiary, a 100% equityinterest in Springfield for an aggregate purchase price of US$35 million, orPhp1,664 million, plus possible future earn-out payments with an aggregate fairvalue at acquisition date of US$18 million, or Php855 million.  As at date ofacquisition, the net cash outflow related to acquisition was US$35 million, orPhp1,664 million, representing cash payments of US$34 million, or Php1,616million,  net of cash acquired from Springfield of US$1 million, or Php48million, and incidental cost amounted to US$1.3 million, or Php63 million.Total purchase price consideration including the fair value of possible futureearn-out payments at acquisition date amounted to US$53 million, or Php2,520million, inclusive of  other net debt adjustments totaling US$8 million, orPhp380 million.  As at December 31, 2007, the fair value of possible futureearn-out payments, as revised after effecting adjustments on forecastedearn-out and accretion, amounted to US$25 million, or Php1,048 million.  See *Note19 – Deferred Credits and Other Noncurrent Liabilities*and *Note 21 –Accrued Expenses and Other Current Liabilities*.

 

Thepurchase consideration has been allocated to the assets and liabilities on thebasis of fair values at the date of acquisition.  The fair values of theidentifiable acquired assets and liabilities of 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 inour consolidated financial statements using the purchase price method ofaccounting, which resulted in goodwill amounting to Php2,139 million.  Goodwillpertains to the assembled workforce of Springfield and other unidentifiedintangible assets that did not qualify as intangible assets under IAS 38.

 

Intangible assets pertaining to Springfield customer relationship was determined at Php380 million with an estimated usefullife of seven years.  Intangible assets was valued by an independent appraiserbased on multiple excess earnings approach using a discount rate of 15%.

 

Ourconsolidated revenues would have been increased by Php333 million while our 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 consolidatedstatement of income from the time of acquisition until December 31, 2007amounted to Php164 million.

 

*Smart’sInvestment in 3rd Brand*

 

In 2007, Smartalso recognized intangible assets for technology and license costs in 3rd Brandamounting to US$4 million, or Php172 million.  Said technology and licensecosts were estimated to have a useful life of 10 years.

* *

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

 

In 2007, Smart recognizedintangible assets for technology and license costs incurred in connection withSCH’s GSM connectivity service for the commercial shipping sector.  Smart(through SCH) engaged the services of THISS as developer and supplier for thisservice.  As at December 31, 2007, US$1 million, or Php41 million, has been recognizedas intangible assets for this project.

 

***OtherIntangible Assets***

 

Otherintangible assets consist of:

 

 

 

 

**2007**

 

2006

 

 

** **

**Gross**

**Net**

 

Gross

Net

 

**Estimated  Useful Lives**

**Remaining  Useful Lives**

**Carrying  Amount**

**Accumulated Amortization**

** **

 

Carrying Amount

Accumulated Amortization

 

 

 

 

(in million pesos)

Customer list

**1 – 10 years**

**4 – 6 years**

1,486

384

**1,102**

 

1,332

195

1,137

Spectrum

**15 years**

**12 years**

1,205

268

**937**

 

1,205

187

1,018

Technology application

**4 – 10 years**

**2 – 10 years**

812

516

**296**

 

601

471

 130

Licenses

**5 – 17 years**

**4 – 15 years**

318

182

**136**

 

318

88

 230

 

 

** **

**3,821**

**1,350**

**2,471**

 

3,456

 941

2,515

 

The future amortization of otherintangible assets as at December 31, 2007 is as follows: 

 

 

(in million pesos)

2008

382

2009

378

2010

347

2011

317

2012 and onwards

1,047

Balance at end of year

2,471

 

***ImpairmentTesting of Goodwill***

 

*Goodwillfrom Acquisition of SBI*

 

The testfor recoverability of goodwill recognized in connection with the acquisition ofSBI was applied to our wireless asset group, representing the lowest level forwhich identifiable cash flows are largely independent of the cash flows ofother groups of assets and liabilities.

 

Althoughrevenue streams may be segregated between Smart and SBI through subscribersavailing themselves of their respective cellular and wireless broadbandservices, the cost items and cash flows are difficult to carve out, largely dueto the significant portion of shared and common-used networks/platforms.  Inthe case of SBI, it provides broadband wireless access to its subscribers usingSmart’s cellular base stations, fiber optic and IP backbone.  With the commonuse of wireless assets of Smart in providing wireless services, the lowestasset group for SBI for which cash flows could be clearly identified from othergroups of assets is Smart’s wireless business segment.

 

Ourwireless business segment is our largest revenue and cash flow contributor.  Assuch, there is no impairment of our wireless business segment.  As at December31, 2007, the recoverable amount of this segment is determined on the basis ofvalue in use calculations using cash flow projections based on the financialbudgets approved by the board of directors, covering a 5-year period from 2008to 2012.  The pre-tax discount rate applied to cash flow projections is 8.4%and cash flows beyond the 5-year period are determined using a 2.5% growth ratethat is the same as the long-term average growth rate for thetelecommunications industry.

 

*Goodwill from Acquisition of SPiand its Subsidiary, CyMed*

 

The goodwill acquired through theSPi and CyMed transactions was allocated for impairment testing to each of thecash-generating units of those businesses, namely medical transcription,litigation and publishing.  The recoverable amount of goodwill was determinedusing the value in use approach.  Value in use was based on the cash flowprojections of the most recent financial budgets/forecasts approved by the boardof directors, which management believes are reasonable and are management’sbest estimate of the ranges of economic conditions that will exist over theremaining useful life of the asset.  The discount rate applied was 15% whichwas based on the weighted cost of capital adjusted for the difference incurrency and specific risks associated with the assets or business of a cash-generatingunit.

 

Werecognized an impairment loss of Php908 million in 2007 pertaining to the medicaltranscription business of SPi, since the carrying amount of the individualassets pertaining to the medical transcription business exceeded therecoverable amount in 2007.

 

*Goodwill from Acquisition ofLevel Up!*

 

Goodwill acquired from our acquisitionof a 60% equity interest in Level Up! was tested for impairment where therecoverable amount was determined using the value in use approach.  Value inuse was based on the cash flow projections on the most recent financial budgets/forecastsapproved by the board of directors.  The discount rate applied was 22% whichwas based on the weighted cost of capital.  We recognized an impairment loss ofPhp254 million pertaining to the goodwill of ePLDT’s acquisition of Level Up!in 2007.

 

*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/forecast approved by the board of directors.  The discount rate appliedwas 22%.  We impaired goodwill acquired from ePLDT’s acquisition of DigitalParadise amounting to Php29 million in 2007.

 

 

 

**12. Cash and Cash Equivalents**

*** ***

This account consists of:

*** ***

 

**2007**

2006

 

(in million pesos)

Cash on hand and in banks (Note 26)

**3,944**

3,416

Temporary cash investments (Note 26)

**13,503**

13,454

 

**17,447**

16,870

 

Cash in banks earnsinterest at prevailing bank deposit rates.  Temporary cash investments are madefor varying periods of up to three months depending on our immediate cashrequirements, and earn interest at the prevailing short-term deposit rates.Due to the short-term nature of such transactions, the carrying valueapproximates the fair value of our temporary cash investments.

 

 

 

**13. Investment in Debt Securities**

*** ***

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

 

ePLDT has a 22.5% interest in convertible securitiesof SIHI, the parent company of Stradcom Corporation, or Stradcom, which has anexisting concession agreement with the Philippine Government for themodernization of the Philippine Land Transportation Office, including thecomputerization of driver’s license issuance, vehicle registration and trafficadjudication systems.  SIHI has been incurring losses from the start ofoperations due to Stradcom’s continuous losses and recurring excess of currentliabilities over current assets.  On this basis, we recognized an impairmentprovision in respect of our total investment in SIHI of Php616 million in 2004.

 

In 2007, Stradcom entered into aLenders’ Agreement for the issuance of Asset-Backed Bonds amounting to Php1.6billion.  The proceeds were used to payoff all of Stradcom’s debts and tradepayables and capital expenditures for upgrade in its new inter-connectivitybusiness, which is expected to contribute significantly to Stradcom’s operatingresults 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 Php1,170 million as at December 31, 2007(original maturity date) plus an additional amount of Php256,760 per day fromDecember 31, 2007 until actual redemption of such shares.  The redemption datewas further extended to February 28, 2008, on which date SIHI paid Php1,187million in final redemption amount.

 

As at December 31, 2007, with theforegoing development with Stradcom, the provision for impairment frominvestment in SIHI amounting to Php616 million was reversed to profit or loss.See *Note 5 – Income and Expenses*.  Cumulative dividends and interestrecognized in the consolidated statement of income amounted to Php499 millionin 2007.  As at December 31, 2007, the balance of investment in SIHI amounted toPhp1,115 million.  Investment in SIHI as at December 31, 2006 was carried atnil value.

 

Movementsin the accumulated impairment losses are as follows:

 

 

**2007**

2006

 

(in million pesos)

Balance at beginning of year

**616**

616

Reversal of impairment provision for the year

**(****616)**

–

Balance at end of year

**–**

 616

 

 

 

**14. Trade and Other Receivables**

 

Thisaccount consists of receivables from:

 

 

**2007**

2006

 

(in million pesos)

Retail subscribers (Note 26)

**8,179**

7,874

Corporate subscribers (Notes 22 and 26)

**7,915**

8,160

Foreign administrations (Note 26)

**5,371**

6,342

Domestic carriers (Note 26)

**1,884**

1,965

Dealers, agents and others (Notes 22 and 26)

**2,151**

2,587

 

**25,500**

26,928

Less allowance for doubtful accounts

**12,855**

16,770

 

**12,645**

10,158

 

Movements in the allowance fordoubtful accounts are as follows:

 

** **

**Total**

**Retail Subscribers**

**Corporate Subscribers**

**Foreign Administrations**

**Domestic Carriers**

**Dealers, Agents and Others**

 

(in million pesos)

**December 31, 2007**

** **

 

 

 

 

Balance at beginning of year

16,770

5,847

6,418

2,506

504

1,495

Provisions for the year (Notes 3 and 5)

417

226

151

–

–

40

Translation adjustments

(91)

–

(91)

–

–

–

Reversals/reclassifications

(889)

213

(603)

(175)

(123)

(201)

Write-offs 

(3,352)

(1,968)

–

(1,284)

–

(100)

Balance at end of year

12,855

4,318

5,875

1,047

381

1,234

 

 

 

 

 

 

 

Individual impairment

12,115

3,944

5,509

1,047

381

1,234

Collective impairment

740

374

366

–

–

–

** **

12,855

4,318

5,875

1,047

381

1,234

** **

 

 

 

 

 

 

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

12,168

3,951

5,555

1,047

381

1,234

 

 

 

 

 

 

 

**December 31, 2006**

 

 

 

 

 

Balance at beginning of year

18,525

7,657

6,196

2,497

780

1,395

Provisions for the year (Notes 3 and 5)

736

273

324

25

–

114

Translation adjustments

(24)

–

(24)

–

–

–

Business combination 

 71

–

71

–

–

–

Reversals/reclassifications

(654)

(317)

(45)

(16)

(276)

–

Write-offs 

(1,884)

(1,766)

(104)

–

–

(14)

Balance at end of year

16,770

5,847

6,418

2,506

504

1,495

 

 

 

 

 

 

 

Individual impairment

15,828

5,180

6,143

2,506

504

1,495

Collective impairment

942

667

275

–

–

–

 

16,770

5,847

6,418

2,506

504

1,495

 

 

 

 

 

 

 

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

15,895

5,190

6,200

2,506

504

1,495

 

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 and warrantiesunder the RPD.  The RPD expired on December 4, 2007.

 

Sale of receivables under the RPD amounted to US$4million, or Php167 million, and US$6 million, or Php272 million, for the yearsended December 31, 2007 and 2006, respectively.  Loss on sale of receivablesunder the RPD included in other expenses account amounted to US$0.1 million, orPhp6 million and US$0.5 million, or Php27 million for the years ended December31, 2007 and 2006, respectively.

 

 

 

**15. Inventories andSupplies**

 

This account consists of:

 

 

**2007**

2006

 

(in million pesos)

Terminal and cellular phone units:

** **

 

At net realizable value

**554**

556

At cost

**808**

719

Spare parts and supplies:

** **

 

At net realizable value

**502**

513

At cost

**1,385**

1,397

Others:

** **

 

At net realizable value

**111**

161

At cost

**112**

161

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

**1,167**

1,230

 

 

 

**16. Prepayments**

 

Thisaccount consists of:

 

 

**2007**

2006

 

(in million pesos)

Prepaid taxes (Notes 6 and 25)

**3,995**

4,844

Prepaid fees and licenses (Notes 5 and 25)

**236**

24

Prepaid insurance (Note 22)

**184**

189

Prepaid rent (Note 24)

**61**

128

Other prepayments

**173**

150

 

**4,649**

5,335

Less – current portion of prepayments

**2,368**

3,967

Net of noncurrent portion of prepayments

**2,281**

1,368

 

Prepaidtaxes include creditable withholding taxes, input VAT and real property taxes.

 

 

 

**17.     Equity**

 

The movement of PLDT’s capitalaccounts for the years ended December 31, 2006 and 2007 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, 2006

407

36

 443

Php4,433

181

Php904

Conversion

(1)

–

(1)

(11)

7

38

Issuance

–

–

–

2

–

–

Balance at December 31, 2006

 406

  36

 442

Php4,424

 188

Php942

 

 

 

 

 

 

 

Balance at January 1, 2007

 406

  36

 442

Php4,424

 188

Php942

Conversion

(1)

–

(1)

(8)

–

1

Issuance

–

–

–

1

–

–

Balance at December 31, 2007

 405

  36

 441

Php4,417

 188

Php943

 

***PreferredStock***

 

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

 

The Series A to EE 10% Cumulative Convertible PreferredStocks earn cumulative dividends at an annual rate of 10%.  After the lapse ofone year from the last day of the year of issuance of a particular series of10% Cumulative Convertible Preferred Stock, any holder of such series mayconvert all or any of the shares of 10% Cumulative Convertible Preferred Stockheld by him into fully paid and non-assessable shares of Common Stock of PLDT,at a conversion price equivalent to 10% below the average of the high and lowdaily sales price of a share of Common Stock on the PSE, or if there have beenno such sales on the PSE on any day, the average of the bid and the askedprices of a share of Common Stock of PLDT at the end of such day on suchExchange, in each such case averaged over a period of 30 consecutive tradingdays prior to the conversion date, but in no case shall the conversion price beless than the price set by the board of directors which, as at December 31,2007, was Php5.00 per share.  The number of shares of Common Stock issuable atany time upon conversion of one share of the subscriber investment plan, orSIP, or the 10% Cumulative Convertible Preferred Stock is determined bydividing Php10.00 by the then applicable conversion price.

 

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 be proportionatelydecreased, provided, however, that in every case the minimum conversion priceshall not be less than the par value per share of Common Stock.  In the eventthe relevant effective date for any such subdivision or consolidation of sharesor stock dividend occurs during the period of 30 trading days preceding thepresentation of any shares of 10% Cumulative Convertible Preferred Stock forconversion, a similar adjustment will be made in the sales prices applicable tothe trading days prior to such effective date utilized in calculating theconversion price of the shares presented for conversion.

 

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 EE 10% Cumulative Convertible Preferred Stocks areredeemable at par value plus accrued dividends five years after the year ofissuance.

 

On January 30, 2007, the board ofdirectors designated 150,000 shares of serial preferred stock as Series HH 10%Cumulative Preferred Stock for issuance from January 1, 2007 up to December 31,2009.

 

The issuance of SIP Series FF, GGand HH is an exempt transaction under Section 10.2 of the Securities RegulationCode, as confirmed by the Philippine SEC on April 2, 2007.

 

The Series IV CumulativeNon-Convertible Redeemable Preferred Stock earns cumulative dividends at anannual rate of 13.5% based on the paid-up subscription price.  It is redeemableat the option of PLDT at any time one year after subscription and at the actualamount 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.

 

***Common Stock***

 

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 reflects PLDT’scommitment 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 anopportunistic basis, direct from the open market through the trading facilitiesof the PSE and NYSE.

 

As at March 25, 2008, we acquired atotal of 98,000 shares of common stock based on the buyback program.  See also *Note7 – Earnings Per Common Share*.

 

 

 

**18. Interest-bearing Financial Liabilities**

 

Thisaccount consists of the following:

 

 

**2007**

2006

 

(in million pesos)

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

** **

 

Long-term debt (Note 26)

**53,372**

63,769

Obligations under finance lease (Notes 8 and 26)

**15**

 

106

Preferred stock subject to mandatory redemption (Note 26)

**–**

 

1,369

 

**53,387**

 

65,244

 

** **

 

 

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

** **

** **

** **

Notes payable

**493**

** **

201

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

**6,775**

 

16,184

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

**481**

 

924

Preferred stock subject to mandatory redemption (Note 26)

**1,015**

 

–

 

**8,764**

 

17,309

 

Unamortized debt discount, representing debt issuancecosts and any difference between the fair value of consideration given orreceived on initial recognition, included in the financial liabilities are asfollows:

 

 

**2007**

 

2006

 

(in million pesos)

Long-term debt

**4,472**

 

5,953

Obligations under finance lease (Notes 8 and 26)

**444**

 

540

Preferred stock subject to mandatory redemption

**56**

 

260

Total unamortized debt discount at end of year

**4,972**

 

6,753

 

Thefollowing table describes all changes to unamortized debt discount as atDecember 31, 2007 and 2006.

 

 

**2007**

 

2006

 

(in million pesos)

Unamortized debt discount at beginning of year

**6,753**

 

13,347

Additions during the year

**59**

 

48

Settlements and conversions during the year

**(96)**

 

(2,733)

Revaluations during the year

**(678)**

 

(595)

Accretion during the year charged to interest expense

**(1,066)**

 

(3,314)

Total unamortized debt discount at end of year

**4,972**

 

6,753

 

**Long-termDebt**

 

Long-term debt consists of:

 

**Description**

**Interest Rates**

**2007**

2006

 

 

(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 2007 and 2006

**US$130**

**Php5,365**

US$201

Php9,877

Finnvera, Plc, or Finnvera

US$ LIBOR + 0.05% in 2007 and 7.53% - 7.75% and US$ LIBOR + 0.05% in 2006

**49**

**2,048**

69

3,381

Nippon Export and Investment  Insurance of Japan, or NEXI

US$ LIBOR + 1% in 2007  and in 2006

**–**

**–**

25

1,215

Others

6.60% and US$ LIBOR + 0.15% - 0.65% and GOVCO’s cost + 0.20% in 2007 and 5.83% - 6.6% and US$ LIBOR + 0.15% - 1.60% and GOVCO’s Cost + 0.20% in 2006

**1**

**47**

10

508

 

 

**180**

**7,460**

 305

14,981

Fixed Rate Notes

7.85% - 11.375% in 2007  and 2006

**676**

**28,016**

835

40,971

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

2.25% and US$ LIBOR + 1%  in 2007 and 2006

**187**

**7,742**

176

8,615

GSM Network Expansion Facilities

4.49% - 4.70% and US$ LIBOR  + 0.75% - 0.815% in 2007 and 4.49% - 4.70% and US$ LIBOR + 0.815% - 3.25% in 2006

**194**

**8,024**

194

9,509

Others

US$ LIBOR + 0.40% and 6% - 10% in 2007 and US$ LIBOR  + 0.40% - 3.625% and 1.75% - 10% in 2006

**4**

**153**

10

487

Satellite Acquisition Loans

5.66% and US$ LIBOR + 1.75% - 2.75% in 2007 and 2006

**28**

**1,145**

42

2,083

 

 

**US$1,269**

**52,540**

US$1,562

76,646

 

 

** **

** **

 

 

*Philippine Peso Debt:*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

5.625% - 15% in 2007 and 15% - 15.816% in 2006

** **

**4,967**

 

808

Term Loans:

 

** **

** **

 

 

Secured Term Loans

7.09%, MART1 + 5.70% and 90-day PHILBOR + 3% in 2007 and 7.09% – 15% and 90-day PHILBOR + 3% in 2006

** **

**6**

 

11

Unsecured Term Loans

6.125% and MART1 + 0.75%  in 2007 and MART1 + 0.75% in 2006

** **

**2,634**

 

2,488

 

 

** **

**7,607**

 

3,307

Total long-term debt

 

** **

**60,147**

 

79,953

Less portion maturing within one year (Note 26)

 

** **

**6,775**

 

16,184

Noncurrent portion of long-term debt (Note 26)

 

** **

**Php53,372**

 

Php63,769

 

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

 

Thescheduled maturities of our outstanding consolidated long-term debt at nominalvalues as at December 31, 2007 are as follows:

 

*** ***

**U.S. Dollar Loans**

**Php Loans**

**Total**

**Year**

**In U.S. Dollar**

**In Php**

**In Php**

**In Php**

** **

(in millions)

2008

152

6,315

558

6,873

2009

274

11,353

570

11,923

2010

82

3,391

568

3,959

2011

26

1,075

568

1,643

2012 and onwards

841

34,837

5,384

40,221

 

1,375

56,971

7,648

64,619

 

***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 December 31, 2007,we owed an aggregate principal amount of US$130 million, or Php5,365 million,to KfW, as follows:

 
- US$95 million provided under various export credit agency-backed facilities, of which US$14 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$35 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 Php5,796 million, under thisfacility as at December 31, 2007.  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$55 million will mature in 2008, US$44 million will maturein 2009 and US$31 million will mature in 2010.  Principal amortizations onthese loans are generally payable in equal semi-annual installments.

 

*Finnvera, Plc, or Finnvera*

 

As at December 31, 2007, aprincipal amount of US$50 million (US$49 million, net of unamortized debtdiscount of US$1 million), or Php2,070 million (Php2,048 million, net ofunamortized debt discount of Php22 million) of Smart’s debt was provided byvarious banks under an export credit agency-backed facility in connection withSmart’s GSM expansion program.  This facility is covered by a guarantee fromFinnvera, the Finnish Export Credit Agency, for 100% of political andcommercial risk for the refinancing 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 withoutstanding balances of US$60 million and US$41 million, respectively, at thetime of prepayment.  This refinancing facility is payable semi-annually overfive years starting September 1, 2005 with final repayment due in March 2010.The principal benefit of refinancing the Phase 5 loan was the savings from alower interest margin on the refinancing facility.

 

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

 

*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 outstanding balancewas 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 Php47 million, as at December 31, 2007.  The outstandingbalance under this loan will mature on various dates from April 1, 2008 toSeptember 15, 2008.  Smart, likewise, obtained loans guaranteed by the exportcredit agencies of Calyon (SACE) Hypo (GIEK).  The outstanding balance wasfully paid in the amounts of US$0.5 million and US$0.7 million on May 30, 2007and October 1, 2007, respectively.

 

*FixedRate Notes*

 

PLDT hasthe following non-amortizing fixed rate notes outstanding as at December 31,2007 and 2006:

 

**Principal Amount**

**Interest Rate**

**Maturity Date**

**2007**

2006

** **

** **

** **

(in millions)

US$300,000,000

8.350%

March 6, 2017

**US$296**

**Php12,273**

US$296

Php14,523

US$250,000,000

11.375%

May 15, 2012

**245**

**10,136**

244

11,963

US$135,886,000

10.500%

April 15, 2009

**135**

**5,607**

166

8,148

US$  19,310,000

10.625%

May 15, 2007

**–**

**–**

19

941

US$110,068,000

7.850%

March 6, 2007

**–**

**–**

110

5,396

 

 

 

**US$****676**

**Php28,016**

US$835

Php40,971

 

*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.

 

*TermLoans*

 

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

 

On July 2,2004, Smart acquired from Piltel’s creditors approximately US$289 million, or69.4%, in the aggregate of Piltel’s outstanding restructured debt at that time,in exchange for Smart debt and a cash payment by Smart.  In particular, Smartpaid an amount 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 payablein full 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 December 31, 2007,outstanding balance of the 2008 Facility and the 2014 Facility amounted toUS$283 million (US$187 million, net of unamortized debt discount of US$96million), or Php11,721 million (Php7,742 million, net of unamortized debt discountof Php3,979 million).  The 2007 Facility was fully paid in the amount of US$0.2million on December 28, 2007.

 

Interest for the 2008 Facility and the 2014 Facilityis payable every quarter at a floating rate ofthree months US$ LIBOR plus 1.00% for the 2008 Facility, and a fixed rate of2.25% per annum for the 2014 Facility.  Furthermore, a portion of the 2014Facility amounting to US$144 million has a variable yield option whereby thecreditors have an option to elect for an early repayment at a discount inDecember 2008 at 57.5% of the relevant debt amount.

 

*GSM**Network ExpansionFacilities*

 

On September 13,2004, Smart signed a US$104 million 5-year term loan facility to finance therelated Phase 7 GSM equipment and services.  The facility was awarded to ABNAMRO Bank, Banque National de Paribas, Calyon, DBS Bank and Sumitomo MitsuiBanking Corporation as the Lead Arrangers with Finnish Export Credit, Plc asthe Lender.  The full amount of the facility was drawn on November 22, 2004 ata fixed rate of 4.49%, of which US$42 million, or Php1,723 million, remainedoutstanding as at December 31, 2007.  The loan is payable over five years inten equal semi-annual payments starting May 2005 with final repayment inNovember 2009.

 

On August 8, 2005, Smart signed aUS$30 million commercial facility with NIB to partly finance the related Phase8 GSM equipment and services contracts.  The facility is a 5-year term loanpayable semi-annually in ten equal installments commencing six months from thefirst drawdown date at a floating interest rate of US$ LIBOR plus 0.815% marginper annum.  The facility was drawn in full on July 11, 2006 for the full amountof US$30 million at a floating interest rate of 6.21% (5.40% US$ LIBOR plus0.815% per annum margin).  The first installment payment commenced on January11, 2007 with final repayment on July 11, 2011.  The amount of US$24 million,or Php994 million, remained outstanding as at December 31, 2007.

 

On August 10, 2005, Smart signed aloan facility for its GSM Phase 8 financing in the amount of US$70 million.The facility was awarded to the Bank of Tokyo Mitsubishi Ltd., Mizuho CorporateBank Ltd., Standard Chartered Bank and Sumitomo Mitsui Banking Corporation asthe Lead Arrangers, with FEC as the Lender.  Smart opted to utilize only atotal of US$67 million which was drawn on February 15, 2006 and March 13, 2006for US$10 million and US$57 million, respectively.  The undrawn balance of US$3million was cancelled.  The facility is a 5-year term loan payable in 10 equalsemi-annual installments with final repayment on September 1, 2010.  Interestis payable semi-annually at a fixed rate of 4.515% per annum.  As at December31, 2007, US$44 million, or Php1,816 million, remained outstanding.

 

On July 31,2006, Smart signed a U.S. Dollar term loan facility for US$44.2 million topartly finance the related Phase 9 GSM equipment and services contracts.  TheLender is FEC with ABN AMRO Bank N.V., Standard Chartered Bank, Sumitomo MitsuiBanking Corporation and Mizuho Corporate Bank Ltd. as the Lead Arrangers.  Thefacility is a 5-year term loan payable in 10 equal semi-annual installmentscommencing six months from the drawdown date at a commercial interest referencerate, or CIRR, fixed rate of 4.05% per annum plus 0.65% margin.  The facilitywas drawn on November 10, 2006 for the full amount of US$44.2 million.  Thefirst installment commenced on January 16, 2007 with final repayment on July15, 2011.  As at December 31, 2007, US$35 million, or Php1,464 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 December 31, 2007, US$50million, or Php2,071 million, remained outstanding.

 

As atDecember 31, 2007, the aggregate outstanding balance of these loans amounted toUS$195 million (US$194 million, net of unamortized debt discount of US$1million), or Php8,068 million (Php8,024 million, net of unamortized debtdiscount of Php44 million).

 

*Other Term Loans*

 

On July 1, 2004, CyMed availed itselfof a 5-year interest-bearing advance from an officer of CyMed to fund itsoperating expenses, including salaries and other incidental expenses.  Theoutstanding balance of this loan as at December 31, 2007 amounted to US$1million, or Php26 million, which is payable quarterly until July 31, 2009.

 

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 Brance (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.

 

*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 loan.  As at December 31, 2007, the outstandingamount under the term loan was US$28 million, or Php1,145 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.

 

***PhilippinePeso Debt:***

 

*Php2,**770Million Peso Fixed Rate Corporate Notes*

 

In connectionwith PLDT’s service improvement and expansion programs, PLDT has entered intotwo loan agreements, pursuant to each of which PLDT issued fixed rate corporatenotes in three tranches.

 

Under the first loan agreement,PLDT borrowed an aggregate amount of Php1,500million, of which Php230 million was repaid onNovember 11, 2002, Php500 million was repaidon November 9, 2004 and Php770 million wasrepaid on November 9, 2006.

 

Under thesecond loan agreement, PLDT borrowed an aggregate amount of Php1,270 million,of which Php360 million was repaid on June 9,2003, Php100 million was repaid on June 9,2005 and Php810 million was repaid on June 12,2007.

 

*Php5Billion Peso Fixed Rate Corporate Notes*

 

On February15, 2007, Smart issued Php5 billion unsecured fixed rate corporate notes,comprised of Series A notes amounting to Php3.8 billion and Series B notesamounting to Php1.2 billion with five and ten year terms, respectively.  SeriesA notes were priced at 5.625%, while Series B notes were priced at 6.500%.Funds raised from the issuance of these notes have been used primarily forSmart’s capital expenditures for network improvement and expansion.  The amountof Php5 billion remained outstanding as at December 31, 2007.

 

*TermLoans*

 

*Secured**Term Loans*

 

*Php100Million Term Loan Facility*

 

On March15, 2004, ePLDT entered into a three-year term loan facility with Asia UnitedBank amounting to Php100 million for the payment of its outstanding short-termbank loan facility and for other working capital requirements.  This loan wasfully paid on March 31, 2007.

 

*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 MART1plus 0.75% per annum margin).  The first installment commenced on September 11,2007 with final repayment on December 9, 2011.  The outstanding balance of thisloan as at December 31, 2007 amounted to Php2,222 million (Php2,214 million,net of unamortized debt discount of Php8 million).

 

*Php400 Million and Php20Million Refinancing Loans*

 

On May 22, 2007, PLDT signed loanagreements with The Philippine American Life and General Insurance Company forPhp400 million and The Philam Bond Fund, Inc. for Php20 million, respectively,to refinance their respective participations in the Ten-Year Note under thePhp1,270 million Peso Fixed Rate Corporate Notes which were repaid on June 12,2007.  Interest is payable quarterly.  Both refinancing loans will mature onJune 12, 2014.

 

*DebtCovenants*

 

Our debtinstruments contain restrictive covenants, including covenants that couldprohibit us from paying dividends on common stock under certain circumstancesand require us to comply with specified financial ratios and other financialtests, calculated in conformity with IFRS, at relevant measurement dates,principally at the end of each quarterly period.  We have complied with all ofour maintenance financial ratios as required under our loan covenants and otherdebt 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 debtinstruments contain a number of other negative covenants that, subject tocertain exceptions and qualifications, restrict PLDT’s ability to take certainactions without lenders’ approval, including: (a) incurring additionalindebtedness; (b) prepaying other debt; (c) making investments; (d) extendingloans; (e) extending guarantees or assuming the obligations of other persons; (f)paying dividends or other distributions or redeeming, repurchasing or otherwiseacquiring shares of PLDT’s capital stock, (g) disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth; (h) creating any lien or security interest; (i) permittingset-off against amounts owed to PLDT; (j) merging or consolidating with anyother company; (k) entering into transactions with stockholders and affiliates; and (l)entering into sale and leaseback transactions. 

 

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

 

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-defaultsand cross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument; in some cases, the cross-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated.  In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments; (b) failure by PLDT tomeet certain financial ratio covenants referred to above; (c) the occurrence ofany material adverse change in circumstances that a lender reasonably believesmaterially impairs PLDT’s ability to perform its obligations under its debtinstrument with the lender; (d) the revocation, termination or amendment of anyof the permits or franchises of PLDT in any manner unacceptable to the lender;(e) the abandonment, termination or amendment of the project financed by a loanin a manner unacceptable to the lender; (f) the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and (g)other typical events of default, including the commencement of bankruptcy,insolvency, liquidation or winding up proceedings by PLDT.

 

Smart’s debtinstruments contain certain restrictive covenants that require Smart to complywith specified financial ratios and other financial tests at semi-annualmeasurement dates.  The financial tests under Smart’s loan agreements includecompliance with a consolidated debt to consolidated equity ratio of not morethan 1.5:1.0, a consolidated debt to consolidated EBITDA ratio of not more than3:1 and a debt service coverage ratio of not less than 1.5:1.0.  As at December31, 2007, Smart has maintained compliance with all of its financial covenants.The agreements also contain customary and other default provisions that permitthe lender to accelerate amounts due under the loans or terminate theircommitments to extend additional funds under the loans.  These defaultprovisions include: (a) cross-defaults and cross-accelerations that permit alender to declare a default if Smart is in default under another 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 December 31,2007, we are in compliance with all of our debt covenants.

 

**Obligations Under Finance Lease**

 

The future minimum payments for financeleases as at December 31, 2007 are as follows:

 

**Year**

**(in million pesos)**

2008

925

2009

15

Total minimum lease payments (Note 24)

 940

Less amount representing interest

444

Present value of net minimum lease payments (Note 3)

 496

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

481

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

  15

 

*MunicipalTelephone Projects*

 

In 1993, PLDT entered into two (2) lease agreements(the “Financial Lease Agreements, or FLAs”) with the Philippine Department ofTransportation and Communications, or DOTC, covering telecommunicationsfacilities in the provinces of Bohol and Batangas established under theMunicipal Telephone Act.  Under these FLAs, PLDT was granted the exclusiveright to provide telecommunications management services, to expandtelecommunications services, and to promote the use of the DOTC-contractedfacilities in certain covered areas for a period of 15 years.  Title to thetelecommunications facilities/properties shall be transferred to PLDT uponexpiration of the lease term.  As at December 31, 2007, PLDT’s aggregateremaining obligation under this agreement was approximately Php393 million.  Incase of cancellation, PLDT is liable to pay Php100 million under each of thetwo contracts as liquidated damages.

 

OnJune 1, 2004, PLDT served the DOTC a notice of termination of the FLA inrespect of the telecommunications system in Bohol which state of deterioration,obsolescence and disrepair has made it impossible for PLDT to continuemanaging, operating, and maintaining the system.  Since 2002, PLDT has beenadvising the DOTC of the need to review the viability of the Boholtelecommunications system as PLDT had infused more than Php200 million forupgrades and maintenance to keep the system operable.  Further, the enactmentof Public Telecommunications Policy Act, or R.A. No. 7925, which negated theDOTC’s warranty to grant PLDT the exclusive right to provide telecommunicationservices in the areas stipulated, prevented PLDT from achieving its originallyprojected profitability, thereby rendering it impossible for PLDT to continuefulfilling its obligations under the FLA.

 

Although several discussionshave been held since 2002, no mutually acceptable agreement has been reachedbetween the parties.  On June 30, 2004, DOTC advised PLDT that the request fortermination of the FLA for Bohol telecommunications system has been referred tothe Department of Justice, or DOJ, as government agencies such as the DOTC arerequired to refer all interpretation of contracts and agreements to the DOJSecretary as attorney-general of the national government.  On May 5, 2005, PLDTreceived a letter from the DOTC stating that PLDT is in default for failure toremit to DOTC the quarterly installments under the FLA.

 

Due tothe failure of the parties to amicably settle their dispute, the dispute was referredto arbitration.  On October 11, 2007, the arbitral committee issued a final awardwhich held that the FLA relating to Bohol was validly terminated effective July1, 2004.  In spite of the valid pre-termination of the FLA, however, the arbitralcommittee decreed that there remained particular payments due from PLDT toDOTC, particularly on the lease rentals that have accrued as of the date of terminationof the FLA, and the net present value of the facilities.  Moreover, thearbitral committee decreed that payment by PLDT of the net present value of thefacilities and the transfer fee will result in the transfer of ownership of thefacilities to PLDT.  Hence, under the final award, the arbitral committee awardedin favor of DOTC a total amount of Php293 million, which amount PLDT has fullypaid on various dates between September 26, 2007 and January 8, 2008.  Thearbitral committee’s final award was confirmed by the Regional Trial Court(Branch 121) of Mandaluyong City in an Order dated November 20, 2007.

 

As at December 31, 2007, the telecommunications systemin Bohol, including PLDT’s additional capital expenditure relating to thetelecommunications system has been fully depreciated, while the net book valueof corresponding finance lease obligation amounted to Php277 million.

 

Piltelentered into an agreement for the financial lease of the PalawanTelecommunications System of the Municipal Telephone Public Office with theDOTC on September 3, 1994.  The Municipal Telephone Public Office Contract is a30-year contract for Piltel to lease facilities for public call office stationsin the Palawan area, with revenues going to Piltel.  In consideration, Piltelpays the DOTC an escalating annual lease fee.  The total lease payment forthirty years is Php483 million.  As at December 31, 2007, Piltel’s aggregateremaining obligation under this agreement was approximately Php43 million.

 

*OtherLong-term Finance Lease Obligations*

 

ThePLDT Group has various long-term lease contracts for a period of three yearscovering various office equipment.  In particular, PLDT, Smart and ePLDT have financelease obligations in the aggregate amount of Php504 million as at December 31,2007 in respect 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.

 

**PreferredStock Subject to Mandatory Redemption**

 

Themovements of PLDT’s preferred stock subject to mandatory redemption for 2007and 2006 are as follows:

 

 

**2007**

2006

 

**Series V**

**Series VI**

**Total**

Series V

Series VI

Series VII

Total

 

(in million pesos)

Balance at beginning of year

**61**

**1,308**

**1,369**

272

6,321

5,381

11,974

Accretion

**10**

**131**

**141**

13

481

282

776

Conversion 

**(22)**

**(291)**

**(313)**

(224)

(5,253)

(5,543)

(11,020)

Revaluation 

**–**

**(182)**

**(182)**

–

(241)

(120)

(361)

Balance at end of year (Notes 24 and 26)

**49**

**966**

**1,015**

 61

1,308

–

1,369

 

PLDT had issued 3 million sharesof Series V Convertible Preferred Stock, 5 million shares of Series VIConvertible Preferred Stock and 4 million shares of Series VII ConvertiblePreferred Stock in exchange for a total of 58 million shares of Series K ClassI Convertible Preferred Stock of Piltel, pursuant to the debt restructuringplan of Piltel adopted in June 2001.  As discussed below, as at December 31,2006, all Series VII Convertible Preferred Stock had been converted.  Shares ofSeries V and VI Convertible Preferred Stock are entitled to receive annualdividends of Php18.70 per share and US$0.397 per share, respectively.  Eachshare of Series V and VI Convertible Preferred Stock is convertible at any timeat the option of the holder into one share of PLDT’s common stock.  Shares of SeriesV and Series VI Convertible Preferred Stock which are outstanding on June 4,2008, the seventh anniversary of the issue date thereof, will be mandatorilyconverted into shares of PLDT’s common stock on the date immediately followingsuch anniversary date.  Under a put option exercisable for 30 days followingthe mandatory conversion, holders of shares of PLDT’s common stock received onmandatory conversion of the Series V and VI Convertible Preferred Stock, willbe able to require PLDT to purchase such shares of PLDT’s common stock for Php1,700per share and US$36.132 per share, respectively.

 

The Series V ConvertiblePreferred Stock was designated as a compound instrument consisting of liabilityand equity components.  The fair value of the Series V Convertible PreferredStock was determined on the issue date, of which the fair value of theliability 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 consolidated balance sheets.  Theresidual amount was assigned as the equity component.

 

The costof each foreign currency component of the Series VI and VII ConvertiblePreferred Stock Series VI and VII 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 theconsolidated 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 interestfor the years ended December 31, 2007 and 2006 amounted to Php141 million andPhp776 million, respectively.

 

“Preferred Stock Subject to Mandatory Redemption”amounted to Php1,015 million and Php1,369 million as at December 31, 2007 and2006, respectively, after revaluation of Series VI and VII ConvertiblePreferred Stock to the exchange rates at balance sheet dates and after givingeffect to the above accretions, conversions and additional issuances.  As atDecember 31, 2007 and 2006, 11,147,451 shares and 10,937,309 shares,respectively, of the Series V, VI and VII Convertible Preferred Stock had beenvoluntarily converted into PLDT common shares.  On August18, 2006, all of the remaining 3,842,000 shares of the Series VII ConvertiblePreferred Stock had been voluntarily converted into shares of PLDT’s common stock.As at December 31, 2007, 30,790 shares of the Series V and 680,303 shares ofthe Series VI Convertible Preferred Stock remained outstanding.  On March 4,2008, PLDT issued a notice to the effect that all of the Series V and VIConvertible Preferred Stock originally issued on June 4, 2001 and outstandingas at June 4, 2008 will be mandatorily converted on June 5, 2008 to shares of PLDT’scommon stock.  The aggregate redemption value of the outstanding shares of the SeriesV and VI Convertible Preferred Stock amounted to Php1,070 million and Php1,629million as at December 31, 2007 and 2006, respectively.  See *Note 24 –Contractual Obligations and Commercial Commitments*.

 

The corresponding dividends on these shares charged asinterest expense amounted to Php17 million and Php130 million for the years endedDecember 31, 2007 and 2006, 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 2007, additional short-term unsecured dollar-denominatednotes payable were obtained from various banks totaling US$4.8 million.Interest on the notes range from 6.9% to 7.5% of the outstanding balance perannum and the notes are payable within 90 to 360 days from the availment date.The outstanding balance of US$10 million, or Php416 million, as at December 31,2007 will mature on various dates from January 31, 2008 to December 8, 2008.

 

In 2006, CyMed obtained two-year interest bearingnotes payable amounting to US$3.4 million from its previous shareholders.Interest on the notes payable is 6.2% per annum.  The outstanding balance ofUS$2 million, or Php67 million, as at December 31, 2007 will mature in August2008.

 

On June 1, 2007, SPiAmerica LLC obtained short-term interest-bearing notes payable amounting toUS$0.5 million, or Php22 million, in payment for software license.  The loan ispayable within one year in four equal quarterly payments of principal andinterest commencing on September 1, 2007.  Interest on the loan is 5% perannum.  The outstanding balance of US$.02 million, or Php10 million, as atDecember 31, 2007 will mature on various dates from March 1, 2008 to June 1,2008.

 

 

 

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

 

Thisaccount consists of:

 

 

**2007**

 

2006

 

(in million pesos)

Accrual of capital expenditures under long-term financing

**7,554**

 

5,646

Liabilities on asset retirement obligations (Notes 3 and 8)

**952**

 

831

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

**782**

 

–

Unearned revenues (Note 21)

**290**

 

985

Prepayments received under a receivables purchase facility (Note 14)

**–**

 

205

Others

**54**

 

836

 

**9,632**

 

8,503

 

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 refinanced by long-term debt.

 

 

 

**20. Accounts Payable**

 

Thisaccount consists of:

 

 

**2007**

 

2006

 

(in million pesos)

Suppliers and contractors (Notes 24 and 26)

**8,672**

 

5,428

Carriers (Note 26)

**1,843**

 

1,593

Taxes (Note 25)

**1,648**

 

1,286

Related parties (Note 22)

**29**

 

133

Others

**61**

 

194

 

**12,253**

 

8,634

 

 

 

**21. Accrued Expensesand Other Current Liabilities**

 

This accountconsists of:

 

 

**2007**

 

2006

 

(in million pesos)

Accrued utilities and related expenses (Note 22)

**10,823**

 

8,078

Unearned revenues (Note 2)

**4,024**

 

4,033

Accrued employee benefits (Note 23)

**2,837**

 

7,474

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

**1,234**

 

1,768

Accrued taxes and related expenses (Notes 24 and 25)

**977**

 

756

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

**266**

 

–

Payable in installment purchase of equity investment (Note 11)

**123**

 

–

Others

**1,645**

 

1,026

 

**21,929**

 

23,135

 

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”).

 

Under theOriginal ATPA, the Minimum Air Time Purchase Obligation and the SupplementalAir Time Purchase Obligation terminated upon the earlier of (i) the expirationof the Minimum Purchase Period and (ii) the date on which all indebtedness incurred by AIL to finance the AILSystem has been repaid.  AIL indebtedness consists of: (1) loans with severalfinancial institutions (the “Banks”) under the Credit Agreement dated March 12,1997, as amended from time to time, including the amendment through therescheduling agreement, dated September 30, 2002, which extended the principalrepayment dates to agreed periods with final maturity date on January 31, 2012(collectively, the “Amended Credit Agreement”); and (2) amounts owing to MMOCunder the Spacecraft Contract dated August 28, 1995, as amended on December 30,1998.

 

AIL has incurred recurringsignificant operating losses, negative operating cash flows, and significantlevels of debt.  The financial condition of AIL was partly due to the NSPsinability to generate the amount of revenues originally expected as the growthin subscriber numbers has been significantly lower than budgeted.

 

On September 1, 2006, AIL, PT AsiaCellular Satellite, a 95%-owned subsidiary of AIL, and Inmarsat Global Limited,or Inmarsat, reached an agreement to pool their resources to develop powerfuland novel product and service offerings in the Asian region, founded on theirrespective mobile satellite communications networks, with (a) Inmarsatperforming the role of satellite and network operator and wholesale product andservices developer and (b) AIL performing the role of wholesale and retaildistributor of products and services.  

 

Inmarsatoperates a constellation of geostationary satellites that extend mobile phone,fax and data communications to nearly every part of the world through theservices it offers to end users through its established chain of distributionpartners and satellite communications service providers.

 

On September1, 2006, PLDT entered into a gateway services agreement with Inmarsat, underwhich PLDT committed to provide gateway infrastructure in Subic Bay up to amaximum amount of US$5 million.  In exchange, PLDT will earn US$0.015 perminute for interconnection services to be provided to Inmarsat distributionpartners for traffic going through the gateway facility in Subic Bay.

 

On September1, 2006, AIL and PT Asia Cellular Satellite entered into a term sheet, asamended on October 20, 2006 and further amended on November 20, 2006 (the “BanksTerms Sheet”), with a majority of the banks, as the basis for negotiationsbetween the parties thereto with a view to enter into an agreement to furtheramend the Amended Credit Agreement with AIL’s bank creditors.  Under the BanksTerms Sheet, a majority of the banks agreed, subject to satisfaction of certainconditions, among other things, to amend the Original ATPA as set forth in anattachment to the Banks Terms Sheet and to restructure AIL’s indebtedness.Pursuant to the business collaboration arrangements between AIL and Inmarsat,on September 1, 2006, Inmarsat made the first payment of US$4 million to AILwhich was used to pay principal and interest payable to the banks in accordancewith the Banks Terms Sheet.

 

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 holdings inAIL increased from 20% in 2006 to 36.99% as at the date of this report.

 

Total feesunder the Amended ATPA amounted to Php160 million and Php199 million for theyears ended December 31, 2007 and 2006, respectively.  The Amended ATPA did nolonger qualify as an onerous contract under the provision of *IAS 10, “EventsAfter the Balance Sheet Date”*, since the cost of meeting the obligationsunder the Amended ATPA is below or within the estimated benefits that PLDT isexpected to receive by it.  Net provisions for onerous contact amounting toUS$72 million, or Php3,529 million, were reversed on December 31, 2006,excluding the amount paid or to be paid in relation to the Amended ATPA.  As aresult, as at December 31, 2007 and 2006, outstanding obligations of PLDT underthe Amended ATPA amounted to Php93 million and Php24 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 and for the years ended December 31, 2007 and 2006 are asfollows:

 

*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 directorsof PLDT 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 then 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 thenissued 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 in principleto collaborate with each other on the business development, roll-out and use ofa wireless-code division multiple access mobile communication network.  Inaddition, PLDT agreed, to the extent of the power conferred by its direct orindirect shareholding in Smart, to procure that Smart will (i) become a memberof a strategic alliance group for international roaming and corporate sales andservices and (ii) enter into a business relationship concerning preferredroaming 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 February 29, 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 board of directors of PLDT 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) whoseintention is otherwise not *bona fide*; provided that, no person will bedeemed a Hostile Transferee unless prior to making such determination, the boardof directors 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 Integrated i-mode ServicesPackage Agreement was entered into by Smart and NTT DoCoMo on February 15,2006, under which NTT DoCoMo agreed to grant Smart, on an exclusive basiswithin the territory of the Philippines for a period of five years, anintegrated i-mode services package including a non-transferable license to usethe licensed materials and the i-mode brand, as well as implementation supportand assistance and post-commercial launch support from NTT DoCoMo. Pursuant tothis agreement, Smart is required to pay an initial license fee and runningroyalty fees based on the revenue arising from i-mode subscription fees anddata traffic.  Smart has no outstanding obligation under this agreement as atDecember 31, 2007.  Outstanding obligation under this agreement amounted toPhp53 million as at December 31, 2006.  Total royalty fees charged tooperations under this agreement amounted to Php88 million and Php53 million asat December 31, 2007 and 2006, respectively. 

 

*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 Php73 million and Php44 million forthe years ended December 31, 2007 and 2006, respectively.  Outstandingliability under this agreement amounted to Php12 million and Php32 million asat December 31, 2007 and 2006, respectively.

 

*4.   OtherAgreements with NTT Communications and/or its Affiliates*

 

PLDT is a party to the following agreements with NTTCommunications 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 providesPLDT with technical, marketing and other consulting services for variousbusiness areas of PLDT starting April 1, 2000;

 

•        *Arcstar Licensing Agreement and Arcstar Service Provider Agreement.*On March 24, 2000, PLDT entered into an agreement with NTT WorldwideTelecommunications Corporation under which PLDT markets managed data and otherservices under NTT Communications’ “Arcstar” brand to its corporate customersin the Philippines.  PLDT also entered into a Trade Name and TrademarkAgreement with NTT Communications under which PLDT has been given the right touse the tradename “Arcstar” and its related trademark, logo and symbols, solelyfor the purpose of PLDT’s marketing, promotional and sales activities for theArcstar services within the Philippines; and

 

•        *Conventional 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 Php177 million and Php184 million for theyears ended December 31, 2007 and 2006, respectively.  As at December 31, 2007and 2006, outstanding obligations of PLDT under these agreements amounted toPhp28 million and Php18 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, 2008 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 Php656 million and Php591 million for theyears ended December 31, 2007 and 2006, respectively.  As at December 31, 2007,Smart had advanced the payment of service fees to ALBV amounting to Php87million.  Smart’s outstanding liability to ALBV amounted to Php128 million asat December 31, 2006.

 

*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 toPhp339 million and Php360 million for the years ended December 31, 2007 and2006, respectively.  Two directors of PLDT have direct/indirect interests in orserve as a director/officer of Gotuaco and Malayan, respectively.

 

***Compensation of Key ManagementPersonnel of the PLDT Group***

 

PLDT Group’s compensation of key management personnelby benefit type follows:

 

 

**2007**

2006

 

(in million pesos)

Short-term employee benefits

**781**

698

Share-based payments (Note 23)

**299**

978

Post-employment benefits (Note 23)

**58**

30

 

**1,138**

1,706

 

Each of the directors, including the members of theadvisory board of PLDT, is entitled to a director’s fee in the amount ofPhp125,000 for each meeting of the board attended.  Each of the members oradvisors of the audit, executive compensation, governance and nomination andfinance committees is entitled to a fee in the amount of Php50,000 for each committeemeeting attended.

 

There are no agreements between PLDT Group and any of its keymanagement personnel providing for benefits upon termination of employment,except for such benefits to which they may be entitled under PLDT Group’sretirement and incentive plans.

 

 

 

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

 

***Executive Stock Option Plan,or ESOP***

 

On April 27, 1999 andDecember 10, 1999, the board of directors and stockholders, respectively, approved theestablishment of an ESOP and the amendment of the Seventh Article of theArticles of Incorporation of PLDT denying the pre-emptive right of holders ofcommon stock to subscribe for any issue of up to 1,289,745 common stockpursuant to the ESOP.  The ESOP covers management executives, which include officerswith rank of Vice President up to the President, executives with the rank ofManager up to Assistant Vice President, and advisors/consultants engaged byPLDT.  The ESOP seeks to motivate option holders to achieve PLDT’s goals,reward option holders for the creation of shareholder value, align the optionholders’ interests with those of the stockholders of PLDT, and retain theoption holders to serve the long-term interests of PLDT.  The ESOP isadministered by the Executive Compensation Committee of the board of directors.About 1.3 million shares of common stock of PLDT had been reserved asunderlying option shares under the ESOP in 1999.

*** ***

Movements in the number of stock options outstandingunder the ESOP are as follows:

*** ***

 

**2007**

 

2006

Balance at beginning of year

**119,034**

 

197,500

Exercised shares*

**(92,276)**

 

(78,466)

Balance at end of year

**26,758**

 

119,034

 

****Basedon the date of payment of exercised shares.*

*** ***

Under ESOP, option grants were made for a total of1,541,360 shares of PLDT’s common stock, all of which were made to executivesof PLDT and 206,942 of which were made to “key officers”.  All outstandingstock options became fully vested in December 2004.  As at December 31, 2007, atotal of 843,092 shares were acquired by certain officers and executives whoexercised their options, at an exercise price of Php814 per share and 671,510share option grants were cancelled due to resignation of PLDT executives.

*** ***

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 atDecember 31, 2007.  No fair value of share options were recognized as anexpense for the years ended December 31, 2007 and 2006.

*** ***

***LTIP***

*** ***

On August 3, 2004,PLDT’s board of directors approved the establishment of a Long-term IncentivePlan, or Original LTIP, for eligible key executive officers and advisors ofPLDT and its subsidiaries, which is administered by the Executive CompensationCommittee.  The Original LTIP was a four-year cash-settled share based plancovering the period from January 1, 2004 to December 31, 2007, or thePerformance Cycle.  The payment was intended to be made at the end of thePerformance Cycle (without interim payments) and contingent upon the achievementof an approved target increase in PLDT’s common share price by the end of thePerformance Cycle and a cumulative consolidated net income target for thePerformance Cycle.

 

On August 28, 2006, PLDT’sboard of directors approved, in principle, the broad outline of the PLDTGroup’s strategic plans for 2007 to 2009 focusing on the development of newrevenue streams to drive future growth while protecting the existing corecommunications business.  To ensure the proper execution of the three-yearplan, particularly with respect to the manpower resources being committed tosuch plans, a new LTIP, or New LTIP, upon endorsement of the ExecutiveCompensation Committee, was approved by the boardof directors to cover the period fromJanuary 1, 2007 to December 31, 2009, or New Performance Cycle.  As a result ofthe establishment of the New LTIP, the Board also approved the early vesting ofthe Original LTIP by the end of 2006 for those of its participants who wereinvited and chose to join the New LTIP.  The early vesting of the Original LTIPin 2006 resulted in additional LTIP costs of Php1,339 million in 2006.  Participantsin the Original LTIP who were not invited to join the New LTIP, or who wereinvited but chose not to join, remained subject to the Original LTIP and itsoriginal vesting schedule.

 

The total number of SARsoutstanding under the Original LTIP as at December 31, 2007 was 17,445 which isexpected to be paid in May 2008.  The total number of SARs awarded under the NewLTIP as at December 31, 2007 was 4,319,585, which will be paid in 2010.

 

Thefair value of the Original LTIP was estimated using an option pricing model,which considered annual stock volatility, risk-free interest rates, dividendsyield, the remaining life of options and the share price capped at Php2,300 asat December 31, 2006 for the Original LTIP and share price of Php3,175 as atDecember 31, 2007 for the New LTIP.  Incentive cost per share as at December31, 2007 for the existing Original LTIP and for the New LTIP amounted to Php1,500and Php1,039, respectively, while incentive cost per share as at December 31,2006 for the existing Original LTIP amounted to Php1,350.  The fair value ofthe LTIP recognized as an expense for the years ended December 31, 2007 and2006 amounted to Php1,448 million and Php3,150 million, respectively.  As atDecember 31, 2007 and 2006, outstanding LTIP liability amounted to Php1,494million and Php5,030 million, respectively.  See *Note 3 – Management’s Useof Judgments, Estimates and Assumptions,*and*Note 5 – Income andExpenses*.

 

***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 actuarialvaluation is done on an annual basis.  Based on the latest actuarial valuation,the actual present value of accrued liabilities, net pension cost and averageassumptions used in developing the valuation are as follows:

 

 

**2007**

2006

 

(in million pesos)

Change in benefit obligation:

** **

 

Benefit obligation at beginning of year

**13,314**

7,652

Current service cost

**777**

479

Interest cost

**996**

895

Curtailment

**427**

–

Benefits paid from assets

**(566)**

(594)

Actuarial losses (gains) on obligation

**(4,788)**

4,826

Liabilities of newly acquired subsidiaries

**–**

56

Benefit obligation at end of year

**10,160**

13,314

 

** **

 

Change in plan assets:

** **

 

Fair value of plan assets at beginning of year

**5,768**

5,154

Actuarial gain on plan assets

**1,157**

343

Actual contribution

**1,515**

320

Expected return on plan assets

**644**

541

Actual benefits paid

**(565)**

(590)

Fair value of plan assets at end of year

**8,519**

5,768

Unfunded status

**1,641**

7,546

Unrecognized net actuarial gain (loss) (Note 3)

**1,344**

(4,657)

Unrealized net transition obligation

**–**

(1)

Accrued benefit cost (Note 3)

**2,985**

2,888

 

** **

 

Components of net periodic benefit cost:

** **

 

Interest cost

**996**

895

Current service cost

**777**

479

Curtailment loss

**416**

–

Net actuarial loss recognized for the year

**89**

–

Expected return on plan assets

**(644)**

(541)

Amortizations of unrecognized net transition obligation

**1**

58

Net periodic benefit cost

**1,635**

 891

 

Actual return on plan assets amounted to Php1,801million and Php884 million for the years ended December 31, 2007 and 2006,respectively.

 

The weighted average assumptionsused to determine pension benefits as at December 31, 2007 and 2006 are asfollows:

 

 

**2007**

2006

Average remaining working years of covered employee

**21**

22

Expected rate of return on plan assets

**10%**

10%

Discount rate

**8%**

8%

Rate of increase in compensation

**7%**

9%

 

We have adopted mortality rates in accordance with the1983 Group Annuity Mortality Table developed by the U.S. Society of ActuariesCommittee, which provides separate rates for males and females.

 

As atDecember 31, 2007 and 2006, the assets of the beneficial trust fund establishedfor PLDT’s pension plan include investments in shares of stocks of PLDT andPiltel with total fair values aggregating Php2,651 million and Php2,185million, respectively, which represent about 31% and 35%, respectively, of suchbeneficial trust fund’s net assets 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 as at December 31, 2007 and 2006 follows:

 

 

**2007**

2006

Investments in equity securities

**60%**

52%

Investments in debt and fixed income securities

**21%**

23%

Investments in real estate

**8%**

10%

Investments in mutual funds

**6%**

8%

Investments in temporary placements

**5%**

7%

 

**100%**

100%

 

Based onthe latest actuarial valuation report, the recommended cash contributions ofPLDT to its pension plan in 2008 amounted 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 December31, 2007 and 2006, Smart and I-Contacts were in compliance with the 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 fixed income securities while 10% to 40% is allotted toequity securities.

 

The allocation of the fair valueof plan assets for Smart as at December 31, 2007 and 2006 follows:

 

 

**2007**

2006

Investments in debt and fixed income securities

**57%**

68%

Investments in equity securities

**35%**

29%

Others

**8%**

3%

 

**100%**

100%

 

Total cashcontribution to pension plan for the year ended December 31, 2007 and 2006amounted to Php143 million and Php114 million, respectively, of which Php5million and Php3 million, respectively, are contributions to definedcontribution plans for key management personnel.

 

Smart and I-Contacts currentlyexpects to make approximately Php143 million of cash contributions to itspension plan in 2008.

 

*PensionBenefit Cost*

 

Total pension benefit cost follows:

 

 

**2007**

2006

 

(in million pesos)

Expense recognized for defined benefit plans

**1,635**

891

Expense recognized for defined contribution plans

**138**

112

Total (Notes 3 and 5)

**1,773**

1,003

 

 

 

**24. ContractualObligations and Commercial Commitments**

 

***Contractual Obligations***

 

The following table discloses ourconsolidated contractual undiscounted obligations outstanding as at December31, 2007 and 2006:

 

 

**Payments Due by Period**

 

**Total**

**Less than  1 year**

**1****-****3 years**

**3****-****5 Years**

**More than 5 years**

 

(in million pesos)

**December 31, 2007**

 

 

 

 

 

*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’ deposits 

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**

** **

** **

** **

** **

** **

** **

**December 31, 2006**

 

 

 

 

 

*Long-term debt(1):*

*117,375*

*22,343*

*32,550*

*13,068*

*49,414*

Principal

85,906

16,323

22,749

6,120

40,714

Interest

31,469

6,020

9,801

6,948

8,700

*Lease obligations:*

*6,866*

*3,311*

*1,530*

*1,016*

*1,009*

Operating lease

5,296

1,837

1,435

1,015

1,009

Finance lease 

1,570

1,474

95

1

–

*Unconditional purchase obligations(2)*

*834*

*25*

*49*

*172*

*588*

*Other obligations:*

*42,564*

*22,166*

*12,222*

*2,362*

*5,814*

Mandatory conversion and purchase of shares (Notes 18 and 26)

1,629

–

1,629

–

–

Derivative financial liabilities(3):

10,718

–

4,381

2,284

4,053

Long-term currency swaps

9,296

–

3,134

2,144

4,018

Long-term foreign currency options

 943

–

943

–

–

Interest rate swaps 

 377

–

202

140

35

Forward foreign exchange contracts 

 102

–

102

–

–

Various trade and other obligations:

30,217

22,166

6,212

  78

1,761

Suppliers and contractors

11,455

5,809

5,646

–

–

Utilities and related expenses 

9,696

9,495

200

1

–

Employee benefits 

2,416

2,416

–

–

–

Customers’ deposit 

2,205

1

366

77

1,761

Carriers 

2,407

2,407

–

–

–

Dividends 

 774

774

–

–

–

Others

1,264

1,264

–

–

–

**Total contractual obligations**

**167,639**

**47,845**

**46,351**

**16,618**

**56,825**

 

*(1)**Before deductingunamortized debt discount and debt issuance costs.*

*(2)**Based on the AmendedATPA with AIL.*

*(3)**Grossliabilities before any offsetting application.*

 

*Long-term Debt*

 

For a detailed discussion of ourlong-term debt.  See *Note 18*– *Interest-bearing Financial Liabilities*.

 

*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 December 31, 2007 and 2006, PLDT’s aggregate remaining obligation underthese contracts amounted to approximately Php3 million and Php6 million, respectively.

 

*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 December 31, 2007 and 2006, PLDT’s aggregate remaining obligationunder this agreement was approximately Php15 million and Php10 million,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 Php5,596 million and Php5,280 million as at December 31, 2007 and2006, respectively.

 

*Finance Lease Obligations*

 

For the detailed discussion of ourlong-term finance lease obligations.  See *Note 18 – Interest-bearingFinancial Liabilities*.

 

*UnconditionalPurchase Obligations*

 

For adetailed discussion of PLDT’s obligation under the Original ATPA and the AmendedATPA.  See *Note 22 – Related Party Transactions*.

 

As atDecember 31, 2007 and 2006, PLDT’s aggregate remaining minimum obligation underthe Amended ATPA was approximately Php776 million and Php834 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 of SeriesK Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel adopted in June 2001.  As at December 31, 2007, 2,690,650shares of the Series V Convertible Preferred Stock, 4,614,801 shares of the SeriesVI Convertible Preferred Stock and all of the remaining 3,842,000 shares of theSeries VII Convertible Preferred Stock had been voluntarily converted into sharesof PLDT’s common stock and 30,790 shares of the Series V and 680,303 shares of theSeries 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 onJune 4, 2008, the seventh anniversary of the issue date thereof, will bemandatorily converted into shares of PLDT’s common stock on the dateimmediately following such anniversary date.  Under a put option exercisablefor 30 days following the mandatory conversion, holders of shares of PLDT’s commonstock received on mandatory conversion of the Series V and VI ConvertiblePreferred Stock will be able to require PLDT to purchase such shares of PLDT’s commonstock for Php1,700 per share and US$36.132 per share, respectively.  

 

The aggregate value of the put options based onoutstanding shares as at December 31, 2007 was Php1,070 million assuming all ofthe outstanding 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 Php2,256 million, based on the market price of PLDT common shares ofPhp3,175 per share as at December 31, 2007.  On March 4, 2008, PLDT issued anotice to the effect that all of the shares of the Series V and VI ConvertiblePreferred Stock originally issued on June 4, 2001 and outstanding as at June 4,2008 will be mandatorily converted on June 5, 2008 to shares of PLDT’s commonstock.  As a result of such mandatory conversion, holders of shares of PLDT’scommon stock received on mandatory conversion of the Series V and VIConvertible Preferred Stock will be able to exercise the above described putoption in accordance with its terms.

 

*Derivative**Financial Liabilities.*  For the detailed discussion of our derivativefinancial liabilities.  See *Note 26 – Financial Assets and 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 December 31, 2007 and 2006, totalobligations under these various agreements amounted to approximately Php36,780million and Php30,217 million, respectively. 

 

***CommercialCommitments***

 

As atDecember 31, 2007, our outstanding commercial commitments, in the form ofletters of credit, amounted to Php3,782 million.  These commitments will expirewithin one year.

 

 

 

**25. Provisions and Contingencies**

 

*NTC Supervision and RegulationFees, 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 ofAppeals and the Supreme Court.  The principal issue in these proceedings wasthe basis for the computation of the SRF.  PLDT’s position, which was upheld bythe Court of Appeals, but, as set forth below, rejected by the Supreme Court,was that the SRF should be computed based only on the par value of thesubscribed or paid up capital of PLDT, excluding stock dividends, premium orcapital in excess of par.  The Supreme Court, in its decision dated July 28,1999, ordered the NTC to make a recomputation of the SRF based on PLDT’scapital stock subscribed and paid.  Subsequently, in February 2000, the NTCissued an assessment letter for the balance of the SRF, but in calculating saidfees, the NTC used as a basis not only capital stock subscribed or paid butalso the stock dividends.  PLDT questioned the inclusion of the stock dividendsin the calculation of the SRF and sought to restrain the NTC fromenforcing/implementing its assessment until the resolution of the said issue.Prior to the resolution of the issue mentioned above, PLDT paid the SRF due in2000 together with the balance due from the recalculation of the SRF and hadbeen paying the SRF due in September of each year thereafter, excluding theportion that was based on stock dividends.

 

As atDecember 31, 2007, PLDT has paid, since 1994, a total amount of Php2,541million in SRF, of which Php2,251 million was paid under protest.

 

The Supreme Court, in a resolutionpromulgated on December 4, 2007, upheld the NTC assessment of SRF based onoutstanding capital stock of PLDT, including stock dividends.  On April 3,2008, PLDT complied with the Supreme Court Resolution in paying the outstandingprincipal balance relating to stock dividends in the amount of Php455 millionto the NTC.

*LocalBusiness 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 consolidated financial statements as at December 31, 2007.

 

TheLocal Government Code of 1991, or Republic Act (R.A.) 7160, which took effecton January 1, 1992, extended to local government units, or LGUs, the power totax businesses within their territorial jurisdiction granted under BatasPambansa 337, and withdrew tax exemptions previously granted to franchisegrantees under Section 12 of R.A. 7082.

 

PLDT believes, based on the opinion of its legalcounsel, that the Public Telecommunications Policy Act, or R.A. 7925, whichtook effect on March 16, 1995, and the grant of local franchise and businesstaxes exemption privileges to other franchise holders subsequent to theeffectivity of R.A. 7160, implicitly restored its local franchise and businesstaxes exemption privilege under Section 12 of R.A. 7082, or the PLDT Franchisepursuant to Section 23 thereof or the equality of treatment clause.  To confirmthis position, PLDT sought and obtained on June 2, 1998 a ruling from theBureau of Local Government Finance, or BLGF, of the Philippine Department ofFinance, which ruled that PLDT is exempt from the payment of local franchiseand business taxes imposable by LGUs under R.A. 7160.  However, on March 25,2003, in a ruling relating to a tax assessment by the City of Davao, theSupreme Court decided that PLDT was not exempt from the local franchise tax.

 

Although PLDT believes that itis not liable to pay local franchise and business taxes, PLDT has entered intocompromise settlements with several LGUs, including the City of Makati, in order tomaintain and preserve its good standing and relationship with these LGUs.Under these compromise settlements, which have mostly been approved by therelevant courts, as at December 31, 2007, PLDT has paid a total amount ofPhp694 million for local franchise tax covering prior periods up to the end of2006.

 

PLDT had no longercontested assessments of LGUs for franchise taxes based on gross receiptsreceived or collected for services within their respective territorialjurisdiction as at December 31, 2007.

 

However, PLDT continues to contestthe imposition of local business taxes in addition to local franchise tax bythe Cities of Tuguegarao, Balanga and Caloocan in the amounts of Php1.9million, Php0.2 million and Php6.2 million, respectively, for the years 1998 to2003 for the City of Tuguegarao, and for the years 2005 to 2007 for the Citiesof Balanga and Caloocan.  PLDT is likewise contesting the imposition of abusiness 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.  In addition, PLDT iscontesting the imposition of franchise tax by the Province of Cagayan based on gross receipts derived from outside its territorial jurisdiction in the amountof 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 LFTassessments issued by the City of Iloilo amounting to approximately Php1million.  The RTC of Iloilo has likewise ruled in a decision dated January 19,2005 that Smart is exempt from payment of local franchise tax to the City of Iloilo.  To date, Smart has not received any notice that the said decision had beenappealed 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 December 31, 2007 and 2006.

 

** **

**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 December 31, 2007*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

–

–

59

–

–

–

  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

2,335

 670

 143

–

46,728

193,430

240,158

 

 

 

 

 

 

 

 

 

 

**Liabilities as at December 31, 2007*Noncurrent:***

 

 

 

 

 

 

 

 

 

Interest bearing financial liabilities -  net of current portion

–

–

–

–

–

53,387

53,387

–

53,387

Deferred income tax liabilities

–

–

–

–

–

–

–

2,066

2,066

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

5,359

21,929

Current portion of 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

19,624

127,813

**Net assets and liabilities**

**43,307**

**273**

**1,568**

**(6,546)**

**143**

**(100,206)**

**(61,461)**

**173,806**

**112,345**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Assets as at December 31, 2006*Noncurrent:***

 

 

 

 

 

 

 

 

 

Property, plant and equipment – net 

–

–

–

–

–

–

–

164,190

164,190

Investments in associates

–

–

–

–

–

–

–

636

 636

Investments-available-for-sale 

–

–

–

–

116

–

 116

–

 116

Investment properties 

–

–

–

–

–

–

–

587

 587

Goodwill and intangible assets

–

–

–

–

–

–

–

12,214

12,214

Deferred income tax assets

–

–

–

–

–

–

–

20,538

20,538

Derivative financial assets

–

–

434

–

–

–

 434

–

 434

Prepayments - net of current portion

–

–

–

–

–

–

–

1,368

1,368

Advances and refundable deposits -  net of current portion

646

–

–

–

–

–

 646

420

1,066

***Current:***Cash and cash equivalents

16,870

–

–

–

–

–

16,870

–

16,870

Short-term investments

5,520

–

2,807

–

–

–

8,327

–

8,327

Trade and other receivables

10,158

–

–

–

–

–

10,158

–

10,158

Inventories and supplies

–

–

–

–

–

–

–

1,230

1,230

Derivative financial assets

–

–

47

–

–

–

  47

–

  47

Current portion of prepayments 

–

–

–

–

–

–

–

3,967

3,967

Current portion of advances and refundable deposits 

1

–

–

–

–

–

   1

155

 156

Total assets

33,195

–

3,288

–

 116

–

36,599

205,305

241,904

 

 

 

 

 

 

 

 

 

 

**Liabilities as at December 31, 2006*Noncurrent:***

 

 

 

 

 

 

 

 

 

Interest bearing financial liabilities -  net of current portion 

–

–

–

–

–

65,244

65,244

–

65,244

Deferred income tax liabilities

–

–

–

–

–

–

–

402

 402

Derivative financial liabilities

–

–

1,680

5,192

–

–

6,872

 

6,872

Pension and other employee benefits

–

–

–

–

–

–

–

2,982

2,982

Customers’ deposits

–

–

–

–

–

2,204

2,204

 

2,204

Deferred credits and other noncurrent liabilities 

–

–

–

–

–

6,483

6,483

2,020

8,503

***Current:***Accounts payable

–

–

–

–

–

7,348

7,348

1,286

8,634

Accrued expenses and other current liabilities 

–

–

–

–

–

13,288

13,288

9,847

23,135

Derivative financial liabilities

–

–

108

–

–

–

 108

–

 108

Provisions for assessments

–

–

–

–

–

–

–

446

 446

Current portion of interest-bearing financial liabilities

–

–

–

–

–

17,309

17,309

–

17,309

Dividends payable

–

–

–

–

–

774

 774

–

 774

Income tax payable

–

–

–

–

–

–

–

2,438

2,438

Total liabilities

–

–

1,788

5,192

–

112,650

119,630

19,421

139,051

**Net assets and liabilities**

**33,195**

**–**

**1,500**

**(5,192)**

**116**

**(112,650)**

**(83,031)**

**185,884**

**102,853**

 

The following table sets forth the carrying values andestimated fair values of our financial assets and liabilities recognized as atDecember 31, 2007 and 2006.

 

** **

**Carrying Value**

**Fair Value**

** **

**2007**

2006

**2007**

2006

 

(in million pesos)

**Noncurrent Financial Assets**

** **

 

 

 

Investments-available-for-sale:

** **

 

** **

 

Listed equity securities

**77**

55

**77**

55

Unlisted equity securities

**66**

61

**66**

61

Investment in debt securities

**273**

–

**283**

–

Derivative financial assets:

** **

 

** **

 

Long-term foreign currency options

**59**

434

**59**

434

Advances and refundable deposits – net of current portion 

**734**

646

**657**

564

Total noncurrent financial assets

**1,209**

1,196

**1,142**

1,114

**Current Financial Assets**

** **

 

** **

 

Cash and cash equivalents:

** **

 

** **

 

Cash on hand and in banks

**3,944**

3,416

**3,944**

3,416

Temporary cash investments

**13,503**

13,454

**13,503**

13,454

Short-term investments

**13,415**

8,327

**13,415**

8,327

Investment in debt securities

**1,115**

–

**1,115**

–

Trade and other receivables:

** **

 

** **

 

Foreign administrations

**4,324**

3,836

**4,324**

3,836

Retail subscribers

**3,861**

2,027

**3,861**

2,027

Corporate subscribers

**2,040**

1,742

**2,040**

1,742

Domestic carriers

**1,503**

1,461

**1,503**

1,461

Dealers, agents and others

**917**

1,092

**917**

1,092

 

 

 

Derivative financial assets:

** **

 

** **

 

Forward foreign exchange contracts

**863**

3

**863**

3

Bifurcated embedded derivatives

**34**

44

**34**

44

Current portion of advances and refundable deposits 

**–**

1

**–**

1

Total current financial assets

**45,519**

35,403

**45,519**

35,403

**Total Financial Assets**

**46,728**

36,599

**46,661**

36,517

** **

** **

 

** **

 

**Noncurrent Financial Liabilities**

** **

 

** **

 

Interest-bearing financial liabilities:

** **

 

** **

 

Long-term debt - net of current portion

**53,372**

63,769

**58,044**

70,420

Obligations under finance lease

**15**

106

**15**

106

Preferred stock subject to mandatory redemption

**–**

1,369

**–**

1,528

Derivative financial liabilities:

** **

 

** **

 

Long-term currency swap

**7,211**

5,192

**7,211**

5,192

Long-term foreign currency options

**390**

1,043

**390**

1,043

Interest rate swap

**140**

413

**140**

413

Bifurcated equity call options

**–**

224

**–**

224

Customers’ deposits

**2,201**

2,204

**1,481**

1,439

Deferred credits and other noncurrent liabilities 

**7,608**

6,483

**6,553**

5,609

Total noncurrent financial liabilities

**70,937**

80,803

**73,834**

85,974

**Current Financial Liabilities**

** **

 

** **

 

Accounts payable:

** **

 

** **

 

Suppliers and contractors

**8,493**

5,562

**8,493**

5,562

Carriers

**1,843**

1,593

**1,843**

1,593

Others

**269**

193

**269**

193

Accrued expenses and other current liabilities:

** **

 

** **

 

Utilities and related expenses

**10,780**

8,078

**10,780**

8,078

Employee benefits

**2,795**

2,416

**2,795**

2,416

Interest and other related costs

**1,234**

1,768

**1,234**

1,768

Others

**1,761**

1,026

**1,761**

1,026

Derivative financial liabilities:

** **

 

** **

 

Bifurcated equity call options

**231**

–

**231**

–

Forward foreign exchange contracts

**7**

92

**7**

92

Interest rate swap

**4**

10

**4**

10

Long-term currency options

**–**

6

**–**

6

Interest-bearing financial liabilities:

** **

 

** **

 

Notes payable

**493**

201

**493**

201

Current portion of long-term debt

**6,775**

16,184

**6,775**

16,184

Obligations under finance lease

**481**

924

**481**

924

Preferred stock subject to mandatory redemption

**1,015**

–

**1,015**

 

Dividends payable

**1,071**

774

**1,071**

774

Total current financial liabilities

**37,252**

38,827

**37,252**

38,827

**Total****Financial Liabilities**

**108,189**

119,630

**111,086**

124,801

 

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-termfinancial assets and liabilities:* 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, 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 pricing model usingmarket volatility rates of the PLDT share price as at valuation date.

 

*Investments-available-for sale:*Fair values were determined using quoted prices.

 

Dueto the short-term nature of the transactions, the fair value of cash and cashequivalents, short-term investments, investment in debt securities, trade andother receivables, current portion of advances and refundable deposits,accounts payable, accrued expenses and other current liabilities, currentportion of interest-bearing financial liabilities, and dividends payable approximatethe carrying values as at the balance sheet date.

 

*Derivative FinancialInstruments*

 

Ourderivative financial instruments are accounted for as either cash flow hedgesor transactions 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.

 

Thetable below sets out the information about our derivative financial instrumentsas at December 31, 2007 and 2006:

 

** **

**2007**

2006

 

** **

 

**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$****134**

**Php296**

US$–

Php–

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Long-term currency swaps

2017

**300**

**(****3,714)**

300

(2,716)

 

2012

**250**

**(3,496)**

250

(2,475) 

Long-term foreign currency bought  call options

2009

**136**

**(389)**

167

(747)

Long-term foreign currency sold  call options

2009

**136**(1)

**58**

136(1)

138

Forward foreign exchange contracts

2008

**16**

**20**

202

(90)

Interest rate swap

2012

**31**

**(144)**

63

(423)

Bifurcated equity call options

2008

**1 share**

**(231)**

1 share

(224)

Short-term currency options

2007

**–**

**–**

7

(6)

 

** **

**(7,600)**

 

(6,543)

***Smart***

 

** **

 

* *

Cash flow hedges:

** **

** **

 

 

Forward foreign exchange contracts

2008

**171**

**265**

–

–

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Forward foreign exchange contracts

 

** **

** **

 

 

On loan proceeds

2008

**50**

**100**

–

–

On gross U.S. dollar revenues

2008

**55**

**70**

–

–

Bifurcated embedded derivatives

2008

**5**

**34**

15

44

 

** **

**469**

 

44

***ePLDT***

** **

** **

 

 

Cash flow hedges:

 

** **

** **

 

 

Forward foreign exchange contracts

2008

**36**

**104**

–

–

Net liabilities

** **

**(Php****7,027)**

** **

(Php6,499)

 

*(1)**Soldcall options of 2009 long-term foreign currency options based on the samenotional amount as the long-term foreign currency bought call option.*

 

 

**2007**

 

2006

 

(in million pesos)

Presented as:

** **

 

 

Noncurrent assets

**59**

 

434

Current assets

**897**

 

47

Noncurrent liabilities

**(7,741)**

 

(6,872)

Current liabilities

**(242)**

 

(108)

Net liabilities

**(7,027)**

 

(6,499)

 

 

Analysis of losses (gains) on derivative financialinstruments for the years ended December 31, 2007 and 2006 are as follows:

 

 

**2007**

2006

 

(in million pesos)

Net mark-to-market losses at end of year

**(7,027)**

(6,499)

Net mark-to-market losses at beginning of year

**(6,499)**

(3,284)

Net change

**(528)**

(3,215)

Net losses charged to cumulative translation adjustments

**(570)**

–

Settlements, accretion and conversion

**(622)**

(3,643)

Ineffective portion recognized in the profit or loss for the cash flow hedge

**(4)**

–

Net losses on derivative financial instruments (Note 5)

**(1,724)**

(6,858)

 

**PLDT**

*** ***

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 swap agreements, currency optioncontracts, and fixed-to-floating coupon-only swaps that may not qualify forhedge accounting. 

 

*Long-term Foreign Currency Options*

 

To manage hedging costs, thecurrency swap agreement relating to the 2009 fixed rate notes with a notionalamount of US$175 million has been structured to include currency optioncontracts.  If the Philippine peso to U.S. dollar spot exchange rate onmaturity date settles beyond Php90.00 to US$1.00, 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.  On the other hand, if on maturity, thePhilippine peso to U.S. dollar spot exchange rate is lower than the exchangerate of Php52.50 to US$1.00, PLDT will have to purchase at the prevailingPhilippine peso to U.S. dollar spot exchange rate.  In July 2004, PLDT and itscounterparty, agreed to re-document and re-classify the transaction intolong-term currency option contracts.  The net semi-annual floating hedge costpayments that PLDT is required to pay under these transactions wasapproximately 4.34% and 6.17% per annum as at December 31, 2007 and 2006,respectively. 

 

In December 2006, the currency option agreement waspartially terminated, thereby reducing the outstanding currency optionsnotional amount to US$167 million.  The total amounts settled for the unwindingwas Php40 million.

 

In January2007, the currency option agreement was again partially terminated, therebyfurther reducing the outstanding currency options notional amount to US$136million.  The total amounts settled for the unwinding was Php177 million.

 

Concurrent with the above swapagreement relating to the 2009 fixed rate notes, PLDT sold a currency optioncontract with the same notional amount of US$175 million with the same maturitythat gives the counterparty a right to purchase foreign currency at Php90.00 toUS$1.00. Together with the above mentioned long-term currency option contract,PLDT has the obligation to purchase U.S. dollars at an exchange rate ofPhp52.50 to US$1.00 plus the excess above the agreed threshold rate.  Inexchange for this condition, the overall net hedging cost for the transaction isreduced.

 

In December 2006, the currencyoption agreement was partially terminated, thereby reducing the notional amountto US$167 million.  Since changes in fair value have already been recognized asprofit or loss in prior periods, the corresponding proceeds from the partialtermination of the currency option contract amounted to Php7 million.

 

In January2007, the currency option agreement was again partially terminated, therebyfurther reducing the outstanding notional amount to US$136 million.  The proceedsfrom this transaction amounted to Php33 million.

 

The option currency contract relating to PLDT’s optionto purchase U.S. dollar at Php52.50 to US$1.00 or prevailing spot exchange rateat maturity, whichever is lower, and the option currency contract relating tothe counterparty’s option to purchase foreign currency from PLDT at Php90.00 toUS$1.00 are not designated as a hedge.  Both option contracts have beenstructured to include credit-linkage with PLDT as the reference entity similarto the long-term currency swaps. 

 

*Long-term Currency Swaps*

*** ***

PLDTentered into long-term principal only currency swap agreements with variousforeign counterparties to hedge the currency risk on its fixed rate notesmaturing in 2012 and 2017.  As at December 31, 2007 and 2006, these long-termcurrency swaps have an aggregate notional amount of US$550 million.  Under theswaps, PLDT effectively exchanges the principal of its U.S. dollar-denominatedfixed rate notes into Philippine peso-denominated loan exposures at agreed swapexchange rates.  The agreed swap exchange rates are reset to the lowest U.S.dollar/Philippine peso spot exchange rate during the term of the swaps, subjectto a minimum exchange rate.  In March and April 2004, PLDT entered intoamendments to keep the lowest reset exchange rate and unwind the downwardresettable feature of US$550 million of its long-term principal only currencyswap agreements in order to lower the running hedging cost of the swaps.  As atDecember 31, 2007 and 2006, the outstanding swap contracts have an agreedaverage swap exchange rate of Php50.76.

 

In order to manage hedge costs,these swaps included a credit-linkage feature with PLDT as the referenceentity.  The specified credit events include bankruptcy, failure to pay, obligationacceleration, moratorium/repudiation, and restructuring of PLDT bonds or all orsubstantially all of PLDT’s obligations.  Upon the occurrence of any of thesecredit events, subject to agreed threshold amounts where applicable, theobligations 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 December 31, 2007 and 2006, US$686million and US$717 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 3.93% and 5.18%per annum as at December 31, 2007 and 2006, respectively.

 

*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 December31, 2007, outstanding forward foreign exchange contracts not accounted forunder hedge accounting amounted to US$16 million with an average exchange rateof Php43.19.

 

PLDT entered intoshort-term U.S. dollar forward foreign exchange purchase contracts to hedgeshort-term foreign currency obligations.  There were no outstanding forwardforeign exchange contracts as at December 31, 2007.  As at December 31, 2006,outstanding forward foreign exchange contracts amounted to US$202 million withan average exchange rate of Php49.50.

 

*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 March2006, the interest rate and overlay swap agreements were partially terminatedto effectively lower the outstanding interest rate swap notional amount to US$63million.  Since changes in fair values have already been recognized as profit orloss in prior periods, the corresponding liability settled by PLDT amounted toPhp804 million. 

 

In April2007, the interest and overlay swap agreements were again partially terminatedwhere outstanding notional amount was lowered to US$31 million.  Total amountssettled for the unwinding is Php276 million.  

 

*Bifurcated Equity Call Options*

 

Pursuant to Piltel’s debt restructuring plan, PLDTissued its Series VI and VII Convertible Preferred Stock.  See *Note 18 –Interest-bearing Financial Liabilities*.  Each share of Series VI and VIIConvertible Preferred Stock is convertible at any time at the option of theholder into one share of PLDT’s common stock.  On the date immediatelyfollowing the seventh anniversary of the issue date of the Series VIConvertible Preferred Stock and on the eighth anniversary of the issue date ofthe Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted into shares of PLDT commonstock.  For 30 days thereafter, the holders of these mandatorily convertedshares of PLDT’s common stock have the option to sell such shares of PLDT’s commonstock back to PLDT for US$36.132 per share and JPY4,071.89 per share forSeries VI and VII, respectively.  On August 18, 2006, all of the remaining 3,842,000shares of the Series VII shares were converted to PLDT common stock.  As atDecember 31, 2007 and 2006, the negative fair market value of these embeddedcall options amounted to Php231 million and Php224 million, respectively.

 

*Short-term Foreign Currency Options*

 

In 2006, PLDT entered intoshort-term U.S. dollar currency option contracts to hedge our other short-termforeign currency obligations.  There were no outstanding currency optioncontracts as at December 31, 2007.  As at December 31, 2006, outstanding U.S.dollar currency option contracts amounted to US$7 million with an averagerating of US$50.40.

* *

**Smart**

* *

Smart entered in U.S. dollarforward foreign exchange sale contracts to hedge a portion of monthly dollarrevenues maturing in 2008.  As at December 31, 2007, outstanding forwardforeign exchange sale contracts not accounted for under hedge accountingamounted to US$55 million with an average exchange rate of Php42.997.

* *

Smart also entered into short-term U.S. dollar forwardforeign exchange sale contracts for a total amount of US$50 million as atDecember 31, 2007 to hedge 100% of the total expected loan proceeds from theundrawn US$50 million Nord/LB Facility with average exchange rate of Php43.561.

 

Smart’sother embedded derivatives were bifurcated from service and purchasecontracts.  As at December 31, 2007 and 2006, outstanding contracts includedservice contracts with foreign equipment suppliers and various supplierscovering handset importations denominated in U.S. dollars, which is not thefunctional currency of a substantial party to the contract or the routinecurrency of the transaction.

 

**FinancialRisk Management Objectives and Policies**

 

The mainrisks arising from our financial instruments are liquidity risk, foreignexchange risk, interest rate risk and credit risk.  The importance of managingthose risks has significantly increased in light of the considerable change andvolatility in both the Philippine and international financial markets.  Our boardof directors reviews and approves policies for managing each of these risks.Our policies for managing these risks are summarized below.  We also monitorthe market price risk arising from all financial instruments.

 

*Liquidity Risk*

 

We need to manage ourliquidity profile to be able to finance our operations and capitalexpenditures, service our maturing debts and meet our other financialobligations.  To cover our financing requirements, we use internally generatedfunds and proceeds from debt and equity issues and sales of certain assets. 

 

As part of our liquidity riskmanagement program, we regularly evaluate our projected and actual cash flows,including our loan maturity profiles, and continuously assess conditions in thefinancial markets for opportunities to pursue fund-raising initiatives.  Theseactivities may include bank loans, export credit agency-guaranteed facilities,debt capital and equity market issues.

 

Any excessfunds are primarily invested in short-dated and principal-protected bankproducts that provide flexibility of withdrawing the funds anytime.  We alsoallocate a portion of our cash in longer tenor investments such as fixed incomesecurities issued or guaranteed by the Republic of the Philippines, or ROP, and Philippine banks and corporates, managed funds and other structuredproducts linked to the ROP.  We regularly evaluate available financial productsand monitor market conditions for opportunities to enhance yields at acceptablerisk levels.  Our investments are also subject to certain restrictionscontained in our debt covenants.  Our funding arrangements are designed to keepan appropriate balance between equity and debt and to provide financingflexibility while enhancing our businesses. 

 

A summaryof the maturity profile of our financial liabilities as at December 31, 2007and 2006 based on contractual undiscounted payments is set out in *Note 24 –Contractual Obligations and Commercial Commitments*.

 

***Foreign Currency ExchangeRisk***

 

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. dollarwill decrease or increase in Philippine peso terms both the principal amount ofour unhedged foreign currency-denominated debts and the related interestexpense of our foreign currency-denominated capital expenditures and operatingexpenses 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 astransactions not designated as hedges, wherein changes in the fair value arerecognized directly as income or expense for the year.

 

Thefollowing table shows our consolidated foreign currency-denominated monetary financialassets and liabilities and their Philippine peso equivalents as at December 31,2007 and 2006:

 

** **

**2007**

2006

** **

**U.S. Dollar**

**Php**(1)

U.S. Dollar

Php(2)

 

(in millions)

**Noncurrent Financial Asset**

** **

 

** **

** **

Derivative financial assets

**US$****1**

**Php****59**

US$9

Php434

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**93**

**3,853**

155

7,578

Short-term investments

**56**

**2,324**

92

4,521

Trade and other receivables

**227**

**9,400**

277

13,589

Derivative financial assets

**23**

**967**

1

47

Total current financial assets

**399**

**16,544**

 525

25,735

**Total Financial Assets**

**US$400**

**Php****16,603**

US$534

Php26,169

** **

** **

** **

 

 

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities - net of current portion

**US$****1,126**

**Php46,612**

US$1,239

Php60,756

Derivative financial liabilities

**187**

**7,741**

140

6,872

Total noncurrent financial liabilities

**1,313**

**54,353**

1,379

67,628

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**160**

**6,614**

268

13,115

Accrued expenses and other current liabilities

**95**

**3,958**

74

3,605

Derivative financial liabilities

**6**

**242**

2

108

Current portion of interest-bearing financial liabilities

**187**

**7,748**

328

16,104

Total current financial liabilities

**448**

**18,562**

 672

32,932

**Total Financial Liabilities**

**US$1,761**

**Php72,915**

US$2,051

Php100,560

 

*(1)**The exchange rate used to translate the U.S. dollaramounts into Philippine peso was Php**41.411to US$1.00, the peso-dollar rate as quoted through the Philippine DealingSystem as at December 31, 2007.*

*(2)**The exchange rate used to translate the U.S. dollaramounts into Philippine peso was Php49.045 to**US$1.00, the peso-dollar rate as quoted throughPhilippine Dealing System as at December 31, 2006.*

 

As at April 3, 2008, the peso-dollar exchange rate wasPhp41.552 to US$1.00.  Using this exchange rate, our consolidated net foreigncurrency-denominated financial liabilities as at December 31, 2007 would have increasedby Php192 million.

 

As at December 31, 2007, approximately 88% of our total consolidated debts was denominated inU.S. dollars.  Consolidated foreign currency-denominated debt was reduced toPhp52,540 million as at December 31, 2007 from Php76,646 million as at December31, 2006.  PLDT’s outstanding long-term principal only currency swap contractsand foreign currency option contracts amounted to US$550 million and US$136million, respectively, as at December 31, 2007.  Consequently, the unhedgedportion of consolidated debts amounts was approximately 45% (or 36%, net of ourU.S. dollar cash balances) as at December 31, 2007. 

 

For the year ended December 31, 2007, approximately 34%of our consolidated revenues were either denominated in U.S. dollars or werelinked to the U.S. dollars.  In this respect, the recent appreciation of the Philippinepeso against the U.S. dollar reduced our revenues, and consequently, our cashflow from operations in Philippine peso terms.

 

The Philippine pesohad appreciated by 16% against the U.S. dollar to Php41.411 to US$1.00 as atDecember 31, 2007, from Php49.045 to US$1.00 as at December 31, 2006.Likewise, as at December 31, 2006, the peso had appreciated by 8% to Php49.045to US$1.00 from Php53.062 to US$1.00 as at December 31, 2005.  As a result ofthe foreign exchange movements as well as the amount of our outstanding foreigncurrency debts and derivatives, we recognized foreign exchange gains of Php7,990million and Php4,823 million in 2007 and 2006, respectively.

 

Management conducteda survey among our banks to determine the outlook of the peso-dollar exchangerate until our next reporting date of March 31, 2008 and 2007.  Our outlook isthat the peso-dollar exchange rate may weaken/strengthen by 2% as compared to theexchange rate of Php41.411 to US$1.00 as of year-end 2007 and Php49.045 toUS$1.00 as of year-end 2006.  At December 31, 2007 and 2006, if the peso-dollarexchange rate had weakened/strengthened by 2%, with all other variables heldconstant, profit after tax would have been higher/lower by Php1,088 million andPhp270 million for the year 2007 and 2006, respectively, and our stockholders’ equityas at December 31, 2007 and 2006 would have been higher/lower by Php1,194million and Php284 million, respectively, mainly as a result of foreignexchange gains, losses on translation of U.S. dollar-denominated netassets/liabilities and marked-to-market valuation of derivative 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 riskfor the years ended December 31, 2007 and 2006.  Financial instruments that arenot subject to interest rate risk were not included in the table.

** **

**Year Ended December 31, 2007**

** **

** **

 

 

 

 

 

 

 

**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

31,900

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

2,228

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

–

–

–

–

–

–

** **
****
**YearEnded December 31, 2006**

** **

** **

 

 

 

 

 

 

 

**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

130

–

167

–

550

 847

41,510

539

40,971

965

47,228

Interest rate

7.85% to  10.625%

–

10.50%

–

8.35% to 11.375%

–

–

–

–

–

–

US$ Fixed Loans

69

55

46

33

280

 483

23,683

5,326

18,357

376

18,438

Interest rate

1.75% to 10%

4.49% to 10%

4.49% to 10%

4.515% to 4.70%

2.25%

–

–

–

–

–

–

Philippine Peso

–

–

–

17

–

  17

810

2

 808

21

1,035

Interest rate

–

–

–

15%

–

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar

128

92

81

53

–

 354

17,392

74

17,318

355

17,392

Interest rate

GOVCO’s Cost + 0.20%; 0.05% to 2.75% over LIBOR

0.05% to 2.75% over LIBOR

0.05% to 2.75% over LIBOR

0.05% to 2.5% over LIBOR

–

–

–

–

–

–

–

Philippine Peso

6

11

11

23

–

  51

2,511

12

2,499

51

2,511

Interest rate

3% over 90-day PHIBOR, MART1 + 0.75%

MART1 + 0.75%

MART1 + 0.75%

MART1 + 0.75%

–

–

–

–

–

–

–

 

 

 

 

 

 

**1,752**

**85,906**

**5,953**

**79,953**

**1,768**

**86,604**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$63 million)

–

–

–

–

–

9

423

–

423

9

423

Japanese Yen (JPY7,519 million)

–

–

–

–

–

–

–

–

–

–

–

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

11.375%

–

–

–

–

–

–

Variable Rate on JPY notional

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

–

–

–

–

–

–

 

Fixedrate financial instruments are subject to fair value interest rate risk whilefloating rate financial instruments are subject to cash flow interest raterisk.  

 
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 conducteda survey among our banks to determine the outlook of the U.S. dollar andPhilippine peso interest rates until our next reporting date of March 31, 2008and 2007.  Our outlook is that the U.S. dollar and Philippine peso interestrates may move 190 basis points and 30 basis points higher/lower, respectively,as compared to levels at year-end 2007 and 100 basis points and 5 basis pointshigher/lower, respectively, as compared to levels at year-end 2006.  AtDecember 31, 2007, if U.S. dollar interest rates had been 190 basis pointshigher/lower as compared to market levels at year-end 2007 and 100 basis pointshigher/lower as compared to market levels at year-end 2006, with all othervariables held constant, profit after tax for the year 2007 and 2006 would havebeen lower/higher by Php1,527 million and Php44 million, respectively, mainlyas a result of higher/lower interest expense on floating rate borrowings andlosses and gains on derivatives transactions.  Stockholders’ equity would havebeen lower/higher by Php1,459 million and Php44 million, as at December 31,2007 and 2006, respectively, mainly as a result of a decrease/increase in thefair value of cash flow hedges.  At December 31, 2007 and 2006, if Philippinepeso interest rates had been higher/lower by 30 basis points and 5 basispoints, respectively, as compared to market levels at year-end 2007 and 2006,with all other variables held constant, profit before tax would have beenlower/higher by Php1,132 million and Php853 million for 2007 and 2006,respectively, mainly as a result of higher/lower interest expense on floatingrate borrowings and losses and gains on derivatives transactions.

 

*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.

 

We trade only with recognizedand creditworthy third parties.  It is our policy that all customers who wishto trade on credit terms are subject to credit verification procedures.  Inaddition, receivable balances are monitored on an on-going basis to reduce ourexposure to bad debts.

 

We established a credit qualityreview process to provide regular identification of changes in thecreditworthiness of counterparties.  Counterparty limits are established andperiodically reviewed based on latest available financial data on our counterparties’credit ratings, capitalization, asset quality and liquidity.  Our creditquality review process allows us to assess the potential loss as a result ofthe risks to which we are exposed and take corrective actions.

 

The tablebelow shows the maximum exposure to credit risk for the components of the consolidatedbalance sheet, including derivative instruments.

 

** **

**Gross Maximum Exposure**(1)

**Net Maximum Exposure**(2)

** **

**2007**

2006

**2007**

2006

 

(in million pesos)

Loans and receivables:

** **

 

** **

 

Advances and refundable deposits

**734**

647

**734**

647

Cash and cash equivalents

**17,447**

16,870

**17,406**

16,833

Short-term investments

**11,366**

5,520

**11,366**

5,520

Investment in debt securities

**1,115**

–

**1,115**

–

Foreign administrations

**4,324**

3,836

**4,324**

3,836

Retail subscribers

**3,861**

2,027

**3,861**

2,027

Corporate subscribers

**2,040**

1,742

**2,040**

1,742

Domestic carriers

**1,503**

1,461

**1,503**

1,461

Dealers, agents and others

**917**

1,092

**917**

1,092

Held-to-maturity investments:

** **

 

** **

 

Investment in debt securities

**273**

–

**273**

–

Investments-available-for-sale

**143**

116

**143**

116

Held-for-trading:

** **

 

** **

 

Short-term investments

**2,049**

2,807

**2,049**

2,807

Forward foreign exchange contracts

**193**

3

**193**

3

Long-term foreign currency options

**59**

434

**59**

434

Bifurcated embedded derivatives

**34**

44

**34**

44

Derivatives used for hedging:

** **

 

** **

 

Forward foreign exchange contracts

**670**

–

**670**

–

**Total**

**46,728**

36,599

**46,687**

36,562

 

*(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.*

 

The tablebelow 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**

** **

** **

**Total**

**Class A**(1)

**Class B**(2)

**Impaired**

 

(in million pesos)

**December 31, 2007**

 

 

 

 

 

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

Dealers, agents and others 

2,151

983

315

196

657

Domestic carriers 

1,884

119

11

1,373

381

Held-to-maturity investments:

 

 

 

 

 

Investment in debt securities

 273

273

–

–

–

Investments-available-for-sale

 143

113

30

–

–

Held-for-trading:

 

 

 

 

 

Short-term investments

2,049

2,049

–

–

–

Forward foreign exchange contracts 

 193

190

3

–

–

Long-term foreign currency options 

  59

59

–

–

–

Bifurcated embedded derivatives 

  34

34

–

–

–

Derivatives used for hedging(3): 

 

 

 

 

 

Forward foreign exchange contracts

 670

670

–

–

–

**Total**

**59,583**

**35,984**

**5,070**

**6,193**

**12,336**

 

 

 

 

 

 

**December 31, 2006**

 

 

 

 

 

Loans and receivables:

 

 

 

 

 

Advances and refundable deposits 

 647

647

–

–

–

Cash and cash equivalents 

16,870

15,756

1,114

–

–

Short-term investments 

5,520

5,218

302

–

–

Corporate subscribers 

8,160

1,267

206

211

6,476

Retail subscribers 

7,874

681

220

1,132

5,841

Foreign administrations 

6,342

1,609

816

1,411

2,506

Dealers, agents and others 

2,587

1,222

7

89

1,269

Domestic carriers 

1,965

372

30

1,060

503

Investments-available-for-sale

 116

90

26

–

–

Held-for-trading:

 

 

 

 

 

Short-term investments

2,807

2,807

–

–

–

Long-term foreign currency options

 434

434

–

–

–

Bifurcated embedded derivatives

  44

44

–

–

–

Forward foreign exchange contracts

   3

3

–

–

–

**Total**

**53,369**

**30,150**

**2,721**

**3,903**

**16,595**

 

*(1)**This includes low risk and good paying customeraccounts with no history of account treatment for a defined period and nooverdue accounts as at report date; and deposits or placements tocounterparties with good credit rating or bank standing financial review;*

*(2)**This includes medium risk and average paying customeraccounts with no overdue accounts as at report date, and new customer accountsfor which sufficient credit history has not been established; and deposits orplacements to counterparties 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)

**December 31, 2007**

** **

** **

 

 

 

 

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

Dealers, agents and others 

2,151

1,298

30

4

162

657

Domestic carriers 

1,884

130

88

103

1,182

381

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

  59

59

–

–

–

–

Bifurcated embedded derivatives 

  34

34

–

–

–

–

Derivatives used for hedging:

 

 

 

 

 

 

Forward foreign exchange contracts

 670

670

–

–

–

–

** **

**59,583**

**41,054**

**3,248**

**787**

**2,158**

**12,336**

 

 

 

 

 

 

 

**December 31, 2006**

 

 

 

 

 

 

Loans and receivables:

 

 

 

 

 

 

Advances and refundable deposits 

 647

647

–

–

–

–

Cash and cash equivalents 

16,870

16,870

–

–

–

–

Short-term investments 

5,520

5,520

–

–

–

–

Corporate subscribers 

8,160

1,473

139

38

34

6,476

Retail subscribers 

7,874

901

945

118

69

5,841

Foreign administrations 

6,342

2,425

694

267

450

2,506

Dealers, agents and others 

2,587

1,229

25

10

54

1,269

Domestic carriers 

1,965

402

96

77

887

503

Investments-available-for-sale

 116

116

–

–

–

–

Held-for-trading:

 

 

 

 

 

 

Short-term investments

2,807

2,807

–

–

–

–

Long-term foreign currency options 

 434

434

–

–

–

–

Bifurcated embedded derivatives

  44

44

–

–

–

–

Forward foreign exchange contracts

   3

3

–

–

–

–

** **

**53,369**

**32,871**

**1,899**

**510**

**1,494**

**16,595**

 

*Impairment assessments*

 

The main consideration for theimpairment assessment include whether any payments of principal or interest areoverdue by more than 90 days or there are any known difficulties in the cashflows of counterparties, credit rating downgrades, or infringement of theoriginal terms of the contract.  Our impairment assessments are classified intotwo areas: individually assessed allowance and collectively assessed allowance.

 

*Individuallyassessed allowance*

 

Wedetermine the allowance appropriate for each individually significant loan oradvance on an individual basis. Items considered when determining allowanceamounts include the sustainability of the counterparty’s business plan, itsability to improve performance once a financial difficulty has arisen,projected receipts and the expected dividend payout should bankruptcy ensue,the availability of other financial support, the realizable value ofcollateral, if any, and the timing of the expected cash flows.  The impairmentlosses are evaluated at each reporting date, unless unforeseen circumstancesrequire more careful attention.

 

*Collectively assessed allowances*

* *

Allowances are assessedcollectively for losses on loans and advances that are not individuallysignificant and for individually significant loans and advances where there isno objective evidence of individual impairment.  Allowances are evaluated oneach reporting date with each portfolio receiving a separate review. 

 

The collective assessment takes account ofimpairment that is likely to be present in the portfolio even though there isno objective evidence of the impairment in an individual assessment. Impairmentlosses are estimated by taking into consideration the following information;historical losses on the portfolio, current economic conditions, theapproximate delay between the time a loss is likely to have been incurred andthe time it will identified as requiring an individually assessed impairmentallowance, and expected receipts and recoveries once impaired.  The impairmentallowance is then reviewed by credit management to ensure alignment with ourpolicy.

 

*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 of commondividends to shareholders.  Since then, our strong cashflows have enabled us tomake investments in new areas and pay higher dividends.

 

Our approach tocapital management focuses on balancing the allocation of cash and theincurrence of debt as we seek new investment opportunities for new businessesand growth areas.  Our current dividend policy is to pay out 70% of our coreearnings to our shareholders.  Further, in the event no investmentopportunities arise, we may consider the option of returning additional cash toour shareholders in the form of special dividends or share buybacks.Philippine corporate regulations prescribe, however, that we can only pay outdividends or make capital distribution up to the amount of our unrestrictedretained earnings.

 

As part of our aim to maximize returns to ourshareholders, we obtained approval from our board of directors on January29, 2008 for a buyback program of up to two million PLDT common shares.  See *Note17 – Equity*.

 

Some of our debt instruments contain covenants thatimpose maximum leverage ratios.  In addition, our credit ratings from theinternational credit ratings agencies are based on our ability to remain withincertain leverage ratios.

 

We monitor capital using several financial leveragemeasurements calculated in conformity with Philippine Financial ReportingStandards, such as net debt to equity ratio.  Net debt is derived by deductingcash and cash equivalents and short-term investments from total debt (notespayable and long-term debt).  Our objective is to maintain our net debt toequity ratio below 100%.

 

**2007**

2006

 

(in million pesos)

Long-term debt, including current portion

**60,147**

79,953

Notes payable

**493**

201

Total debt

**60,640**

80,154

Cash and cash equivalents

**(17,447)**

(16,870)

Short-term investments

**(13,415)**

(8,327)

Net debt

**29,778**

54,957

 

** **

 

Equity attributable to equity holders of PLDT

**111,113**

102,521

Net debt to equity ratio

**27%**

54%

 

 

 

**27. Supplemental CashFlow Information**

 

 

**2007**

2006

2005

 

(in million pesos)

Supplemental information for noncash investing activity:

** **

 

 

Fair value of future earn-out payments

**1,048**

–

–

 

** **

 

 

Supplemental information for noncash financing activities:

** **

 

 

Conversion of preferred stock subject to mandatory  redemption (Note 18)

**313**

11,020

2,591

Recognition of asset retirement obligations (Note 8)

**48**

45

63