**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

 

**FORM 20-F**

 

**[  ]           REGISTRATION STATEMENT PURSUANT TOSECTION 12(B) OF THE SECURITIES 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, 2002**

** **

**OR**

** **

**[  ]           TRANSITION REPORT PURSUANT TO SECTION 13OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the transition periodfrom _________ to _________**

** **

**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 or organization)

 

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

Pacific Exchange  |
| Series III Convertible Preferred Stock, Par Value Ten Philippine Pesos Per Share                                                         | New York Stock Exchange*                   |
| Global Depositary Shares, evidenced by Global Depositary Receipts, each representing one share of Series III Convertible Preferred Stock | New York Stock Exchange                    |

 

*   Registered on the New York Stock Exchange not fortrading but only in connection with the registration of American DepositaryShares or Global Depositary Shares, as the case may be, pursuant to therequirements of such stock exchanges.

* *

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.

 

| 8.500% Notes due 2003  |   | 10.625% Notes due 2007 |
|------------------------|--------|------------------------|
| 10.625% Notes due 2004 |   | 10.500% Notes due 2009 |
| 9.875% Notes due 2005  |   | 11.375% Notes due 2012 |
| 9.250% Notes due 2006  |   | 8.350% Notes due 2017  |
| 7.850% Notes due 2007  |   |                   |

 

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

 

| As of December 31, 2002:                                                               |
|----------------------------------------------------------------------------------------|
| 169,360,901 shares of Common Capital Stock, Par Value Five Philippine Pesos Per Share  |
| 458,434,729 shares of Serial Preferred Stock, Par Value Ten Philippine Pesos Per Share |

 

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 [X]   No

 

Indicateby check mark which financial statement item the registrant has elected tofollow:  Item 17    Item 18 [X]

 

 
TABLE OF CONTENTS
 

CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT

 

FORWARD-LOOKING STATEMENTS

 

PART I

 

 

     Item 1.            Identity of Directors, Senior Management and Advisors

 

     Item 2.            Offer Statistics and Expected Timetable

 

     Item 3.            Key Information

 

Selected Financial Data

 

Capital Stock

 

Dividends Declared

 

Dividends Paid

 

Exchange Rates

 

Risk Factors

 

     Item 4.            Information on the Company

 

Overview

 

Historical Background and Development

 

Organization

 

Strengths

 

Strategy

 

Fixed Line

 

Wireless

 

Information and Communications Technology

 

Fixed Line Network Infrastructure

 

Wireless Network Infrastructure

 

Interconnection Agreements

 

Licenses and Regulations

 

Competition

 

Environmental Matters

 

Intellectual Property Rights

 

Properties

 

     Item 5.            Operating and Financial Reviews and Prospects

 

Overview

 

Critical Accounting Policies

 

Results of Operations

 

Liquidity and Capital Resources

 

Effect of Peso Depreciation

 

Impact of Inflation and Changing Prices

 

Other Information

 

Certain Indebtedness

 

     Item 6.            Directors, Senior Management and Employees

 

Directors, Key Officers and Advisors

 

Term of Office

 

Family Relationships

 

Compensation

 

Executive Stock Option Plan

 

Share Ownership

 

Audit, Nomination, Executive Compensation and Finance Committees

 

Employees and Labor Relations

 

Pension and Retirement Benefits

 

Employees’ Stock Plan

 

Legal Proceedings

 

     Item 7.            Major Shareholders and Related Party Transactions

 

Major Shareholders

 

Related Party Transactions

 

     Item 8.            Financial Information

 

Consolidated Statements and Other Financial Information

 

Legal Proceedings

 

Dividend Distribution Policy

 

     Item 9.            The Offer and Listing

 

Common Capital Stock and American Depositary Receipts (“ADRs”)

 

Series III Convertible Preferred Stock and Global Depositary Receipts (“GDRs”)

 

 Item 10.            Additional Information

 

Articles of Incorporation and By-Laws

 

Material Contracts

 

Exchange Controls and Other Limitations Affecting Securities Holders

 

Taxation

 

Equity Securities

 

Debt Securities

 

Documents on Display

 

 Item 11.            Quantitative and Qualitative Disclosures about Market Risks

 

Liquidity Risk Management

 

Foreign Exchange Risk Management

 

Interest Rate Risk Management

 

 Item 12.            Description of Securities other than Equity Securities

 

PART II

 

 

 Item 13.            Defaults, Dividend Arrearages and Delinquencies

 

 Item 14.            Material Modifications to the Rights of Security Holders and Use of Proceeds

 

 Item 15.            Controls and Procedures

 

 Item 16.            Audit Committee Financial Expert, Code of Ethics, and Principal Accountant Fees and Services

 

PART III

 

 

 Item 17.            Financial Statements

 

 Item 18.            Financial Statements

 

 Item 19.            Exhibits

 

CERTIFICATIONS

 

 

Exhibit Number
****
CERTAIN CONVENTIONSAND TERMS USED IN THIS REPORT
 

Unless the context indicates orotherwise requires, references to “we,” “us,” “our” or “PLDT Group” meanPhilippine Long Distance Telephone Company and its consolidated subsidiaries,and references to “PLDT” mean Philippine Long Distance Telephone Company, notincluding its consolidated subsidiaries (see Note 2 to our financial statementsin Item 18 for a list of these subsidiaries, including a description of theirrespective principal business activities).

 

Any discrepancies in any tablebetween totals and the sums of the amounts listed are due to rounding.

 

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

 

In this report, unless otherwisespecified or the context otherwise requires, all references to “pesos,”“Philippine pesos” or “Php” are to the lawful currency of the Philippines, allreferences to “dollars,” “U.S. dollars” or “US$” are to the lawful currency ofthe United States, all references to “Japanese yen,” “JP¥” or “¥” are to thelawful currency of Japan, and all references to “Euro” or “€” are to the lawfulcurrency of the European Union.  Unless otherwise indicated, translations ofpeso amounts into U.S. dollars in this report were made based on the volumeweighted average exchange rate quoted through the Philippine Dealing System,which was Php53.254 = US$1.00 on December 31, 2002.  On June 30, 2003, the volume weighted average exchange rate quoted was Php53.522 = US$1.00.

 

In this report, each reference to:

 
- ACeS Philippines means ACeS Philippines Cellular SatelliteCorporation, an 88.5%-owned subsidiary of PLDT and 11.5% owned subsidiary ofPiltel;       - AMPS means advanced mobile phone system;         - ARPU means average monthly revenue per user;           - BSP means Bangko Sentral ng Pilipinas;             - CDMA means code division multiple access;               - Clark Telecom means PLDT Clark Telecom, Inc., our wholly-ownedsubsidiary;                 - ePLDT means ePLDT, Inc., our wholly-owned subsidiary;                   - ETACS means enhanced total access communications system;                     - First Pacific means First Pacific Company Limited;                       - GAAP means generally accepted accounting principles;                         - GSM means global system for mobile communications;                           - ISP means internet service provider;                             - Infocom means Infocom Technologies, Inc., a 99.6%-ownedsubsidiary of ePLDT;                               - Mabuhay Satellite means Mabuhay Philippines SatelliteCorporation, our 67%-owned subsidiary;                                 - MaraTel means Maranao Telephone Company, Inc., our 97.5%-ownedsubsidiary;                                   - NTC means the National Telecommunications Commission of the Philippines;                                     - NTT Communications means NTT Communications Corporation, awholly-owned subsidiary of Nippon Telegraph and Telephone Corporation of Japan;                                       - PAPTELCO means Philippine Association of Private TelephoneCompanies;                                         - Parlance means Parlance Systems, Inc., a wholly-owned subsidiaryof ePLDT;                                           - Piltel means Pilipino Telephone Corporation, in which we have a45.3% ownership interest and which is treated as a consolidated subsidiaryunder U.S. GAAP;                                              - PLDT Beneficial Trust Fund means the beneficial trust fundcreated by PLDT to provide benefit and retirement plans for PLDT’s employees;                                               - PLDT Global means PLDT Global Corporation, our wholly-ownedsubsidiary;                                                 - SMS means short message service;                                                   - Smart means Smart Communications, Inc., our wholly-ownedsubsidiary;                                                     - Subic Telecom means Subic Telecommunications Company, Inc., ourwholly-owned subsidiary;                                                       - Telesat means Telesat, Inc., our 94.4%-owned subsidiary;                                                         - Vocativ means Vocativ Systems, Inc., a wholly-owned subsidiary ofePLDT; and                                                           - VSAT means very small aperture terminal.     **FORWARD-LOOKINGSTATEMENTS**     Someinformation in this report may contain forward-looking statements within themeaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E ofthe U.S. Securities Exchange Act of 1934.  We have based these forward-lookingstatements on our current beliefs, expectations and intentions as to facts,actions and events that will or may occur in the future.  Such statementsgenerally are identified by forward-looking words such as “believe,” “plan,”“anticipate,” “continue,” “estimate,” “expect,” “may,” “will” or other similarwords.     Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement.  We have chosen these assumptions orbases in good faith, and we believe that they are reasonable in all materialrespects.  However, we caution you that assumed facts or bases almost alwaysvary from actual results, and the differences between results implied by theforward-looking statements, assumed facts or bases and actual results can bematerial, depending on the circumstances.  When considering forward-lookingstatements, you should keep in mind the description of risks and othercautionary statements in this report.  You should also keep in mind that anyforward-looking statement made by us in this report or elsewhere speaks only asof the date on which we made it.  New risks and uncertainties come up from timeto time, and it is impossible for us to predict these events or how they mayaffect us.  We have no duty to, and do not intend to, update or revise thestatements in this report after the date hereof.  In light of these risks anduncertainties, you should keep in mind that any forward-looking statement madein this report or elsewhere might not occur.     **PARTI**     **Item 1.       ****Identity of Directors, Senior Management and Advisors**     Not applicable.     **Item 2.       ****Offer Statistics and Expected Timetable**     Not applicable.     **Item 3.       ****Key Information**     **Selected Financial Data**     The selected consolidated financialinformation below should be read in conjunction with, and is qualified in itsentirety by reference to, our audited consolidated financial statements,including the notes, included elsewhere in this report.  The financialstatements have been prepared and presented in conformity with U.S. GAAP.  Dueto our decision to commence this year using U.S. GAAP for our Annual Report onForm 20-F, we are unable to provide without unreasonable effort and expenseU.S. GAAP consolidated financial information with respect to the fiscal yearsended December 31, 1998 and 1999. As a result, we have omitted such informationin the table below. In our previous Annual Reports on Form 20-F we disclosedfinancial statements, including the financial information with respect to theyears ended December 31, 1998 and 1999, prepared in accordance with PhilippineGAAP, along with a reconciliation to U.S. GAAP.     Prior to 2002, our financial statements included in our AnnualReport on Form 20-F filed with the U.S. Securities and Exchange Commission wereprepared in accordance with Philippine GAAP. Philippine GAAP varies in certainsignificant respects from U.S. GAAP.  A description of the significantdifferences between U.S. GAAP and Philippine GAAP and a quantitativereconciliation of such differences in the net income and shareholders’ equityto U.S. GAAP was disclosed in a note to our previously filed financialstatements. In connection with the preparation of our consolidated balancesheets as of December 31, 2002 and 2001, and the related statements of income,changes in stockholders’ equity and cash flows for the years ended December 31, 2002, 2001, and 2000 in accordance with U.S. GAAP, we identified differencesin the U.S. GAAP amounts previously disclosed for 2001 and 2000.  Please seeNote 4 to our consolidated financial statements included herein for adiscussion of such differences.          
** **

**Consolidated Financial Data**

** **

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

**2002(1)**

 

**(in millions, except net operating income (loss) per share, earnings (loss) per common share, ratio of earnings to fixed charges and dividends declared per common share)**

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

 

 

 

 

**Statement of Operating Data:**

 

 

 

 

Operating revenues

Php61,949

Php79,128

Php95,540

US$1,794

Operating expenses

50,503

88,701

80,565

1,513

Net operating income (loss)

11,446

(9,573)

14,975

281

Net operating income (loss) per share

 

 

 

 

Basic

64.67

(35.50)

79.92

1.50

Diluted

64.67

(35.50)

79.92

1.50

Net income (loss)

(23,086)

(27,779)

(4,477)

(84)

Earnings (loss) per common share(2)

(164.65)

(177.80)

(42.12)

(0.79)

**Balance Sheet Data:**

 

 

 

 

Cash and cash equivalents

 

4,276

10,974

206

Total assets

 

283,301

266,876

5,011

Total long-term debt-net of current portion

 

170,813

171,774

3,226

Long-term debt

 

190,099

190,950

3,586

Total debt(3)

 

196,561

191,710

3,600

Total liabilities(4)

 

250,307

239,531

4,498

Total stockholders’ equity

 

21,123

14,755

277

**Other Data:**

 

 

 

 

EBITDA(5)

(7,641)

1,947

29,555

555

Depreciation and amortization

13,049

16,454

17,663

332

Ratio of earnings to fixed charges(6)

—

—

—

—

Net cash provided by operating activities

24,034

21,641

36,689

692

Net cash used in investing activities

(29,014)

(32,777)

(15,140)

(284)

Net cash provided by (used in) financing activities

6,035

5,714

(14,975)

(281)

Dividends declared to common shareholders

752

202

—

—

Dividends declared per common share(7)

4.80

1.20

—

—
  _____________     *(1)    **We maintain our accounts inPhilippine pesos. For convenience, the peso financial information as of and forthe year ended December 31, 2002, has been translated into U.S. dollars at theexchange rate of Php53.254 = US$1.00, the rate quoted through the PhilippineDealing System as of December 31, 2002. This translation should not beconstrued as a representation that the Philippine peso amounts represent, orhave been or could be converted into, U.S. dollars at that rate or any otherrate.*  * *  *(2)    **Our convertible preferredshares were deemed anti-dilutive based on a calculation of the requireddividends on preferred shares for each series of convertible preferred sharesdivided by the number of equivalent common shares assuming such preferredshares were converted into common shares and compared against the basicearnings per share.  Since the amount of dividends on preferred shares over theequivalent number of common shares were greater than the basic earnings pershare, the amounts for basic and diluted earnings (loss) per share are thesame.*  * *  *(3)    **Total debt representscurrent portion of long-term debt, long-term debt—net of current portion andnotes payable.*  * *  *(4)    **Total liabilities on a consolidatedbasis represent the difference between total assets and minority interest innet losses of consolidated subsidiaries, preferred stock subject to mandatoryredemption and stockholders’ equity.*  * *  *(5)    **On a consolidated basis,EBITDA is defined as income (loss) before minority interest in net income(loss) of consolidated subsidiaries and adding back interest expense andrelated items, taxes, and depreciation and amortization and deducting interestincome and is presented because it is generally accepted as providing usefulinformation regarding a company's ability to service and/or incur debt. EBITDAshould not be considered in isolation or as a substitute for operating income,net income, cash flows from operating activities and other income or cash flowstatement data prepared in accordance with applicable generally acceptedaccounting principles, or as a measure of PLDT's profitability or liquidity.  Aquantitative reconciliation of EBITDA from income (loss) before minorityinterest in net income (loss) of consolidated subsidiaries is provided in thefollowing table:*     
** **

**Consolidated Financial Data**

** **

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

**2002(3)**

 

**(in millions)**

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

 

 

 

 

Income (loss) before minority interest in net income (losses) of consolidated subsidiaries 

Php(24,713)

Php(27,119)

Php(4,832)

US$(91)

Add/(deduct):

 

 

 

 

Interest expenses and related items, net of capitalized interest

14,209

14,639

14,662

275

Interest income

(1,946)

(1,391)

(1,063)

(20)

Provision for income tax

(8,240)

(636)

3,125

59

Depreciation and amortization

13,049

16,454

17,633

332

EBITDA

Php(7,641)

Php1,947

Php29,555

US$555

* *

 

 

 

 
     *(6)    **Forpurposes of this ratio, “Earnings” consist of income before provision forincome tax (excluding PLDT's share in undistributed income of less than 50%owned affiliates) and fixed charges (excluding capitalized interest).  “Fixedcharges” consist of interest (including capitalized interest, discounts andother financing costs) on all indebtedness, amortization of deferred financingcosts and the estimated financing component of rent expense (i.e., one-third ofrent expense).*  * *  *Due to PLDT's losses in2000, 2001 and 2002, the coverage ratio on a consolidated basis was less than1.0x in each of these three years.  In order to achieve a coverage ratio of1.0x, we would have had to generate additional consolidated earnings ofPhp37,925 million, Php26,700 million and Php7,063 million for the years endedDecember 31, 2000, 2001 and 2002, respectively, to achieve a coverage ratio of1.0x.*  * *  *(7)    **Themost recent cash dividend declaration made by PLDT on its common stock was inMarch 2001, which was paid in April 2001.*     **Capital Stock**     The following table summarizesPLDT's capital stock outstanding as of December 31, 2000, 2001 and 2002.     
 

**December 31,**

 

**2000**

** **

**2001**

** **

**2002**

 

(in millions)

Serial Preferred Stock

 

 

 

 

 

Cumulative Convertible

 

 

 

 

 

10% Convertible

 

 

 

 

 

A to CC

Php3,515

 

Php3,724

 

Php4,068

Series III

46

 

46

 

46

Series V

—

 

26

 

26

Series VI

—

 

48

 

46

Series VII

—

 

38

 

38

Cumulative Nonconvertible

 

 

 

 

 

Series IV

360

 

360

 

360

 

Php3,921

 

Php4,242

 

Php4,584

Common Stock

Php843

 

Php845

 

Php847
     **Dividends Declared**     
 

**Years Ended December 31,**

 

**2000**

** **

**2001**

** **

**2002**

Cash dividends declared per share of PLDT’s common stock (in pesos)(1)

Php4.80

 

Php1.20

 

Php—
  _____________     *(1)   The most recent cash dividend declaration made byPLDT on its common stock was in March 2001, which was paid in April 2001.  PLDTdoes not expect to declare cash dividends on these shares in 2003.*     **Dividends Paid**     A summary of dividends paid pershare of PLDT's common stock stated in both Philippine pesos and U.S. dollarsfollows:     
**In Philippine Pesos**

** **

**In U.S. Dollars**

1998

 

 

 

January 15

1.20

 

0.029

April 15

1.20

 

0.031

July 15

1.20

 

0.029

October 15

1.20

 

0.028

1999

 

 

 

January 15

1.20

 

0.031

April 15

1.20

 

0.031

July 15

1.20

 

0.031

October 15

1.20

 

0.030

2000

 

 

 

January 14

1.20

 

0.030

April 14

1.20

 

0.029

July 15

1.20

 

0.027

October 15

1.20

 

0.025

2001

 

 

 

January 15

1.20

 

0.023

April 16

1.20

 

0.024
     (*Note*:     *Dividends on PLDT's common stockare declared and paid in Philippine pesos. For the convenience of the reader,the peso dividends are translated into U.S. dollars based on exchange rates onthe respective dates of dividend payments.  Dividends paid in January of eachof the calendar years 1998-2001 were declared in the preceding December.Accordingly, total amounts shown for cash dividends declared under “DividendsDeclared” above may differ from the amounts shown for cash dividends paid under“Dividends Paid.”)*     **Exchange Rates**  ** **  The Philippine government does notadministratively fix the exchange rate between the Philippine peso and the U.S.dollar.  Since August 1, 1992, a market average rate has been determined dailyin inter-bank trading using the Philippine Dealing System, known as the“Philippine Dealing System Reference Rate.”  The Philippine Dealing System is aspecialized off-floor direct dealing service for the trading of Philippinepesos-U.S. dollars by member banks of the Bankers Association of the Philippinesand *Bangko Sentral ng Pilipinas*, or BSP, the central bank of the Philippines.All members of the Bankers Association of the Philippines are required to maketheir 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)**

** **

**Low(2)**

** **

**High(3)**

 

 

 

 

 

 

 

 

1998

Php39.145

 

Php40.942

 

Php36.989

 

Php45.420

1999

40.298

 

39.096

 

37.566

 

41.112

2000

49.986

 

44.179

 

39.830

 

51.680

2001

51.690

 

51.009

 

47.550

 

55.013

2002

53.254

 

51.583

 

49.336

 

53.841

2003 (through June 30, 2003)

53.522

 

53.504

 

52.021

 

55.075
  _____________     *Source:  Philippine DealingSystem Reference Rate*  *(1)   Simple average of exchange rates for the period.*  *(2)   Lowest exchange rate for the period.*  *(3)   Highest exchange rate for the period.*     
 

**Month**

 

**Period End**

** **

**Average(1)**

** **

**Low(2)**

** **

**High(3)**

2003

 

 

 

 

 

 

 

January

53.837

 

53.590

 

53.402

 

53.837

February

54.492

 

54.109

 

53.899

 

54.492

March

53.604

 

54.549

 

53.373

 

55.075

April

52.612

 

52.755

 

52.272

 

53.337

May

53.230

 

52.538

 

52.021

 

53.282

June

53.522

 

53.414

 

53.176

 

53.706
  _____________     *Source:  Philippine DealingSystem Reference Rate*  *(1)   Simple average of exchange rates for the month.*  *(2)   Lowest exchange rate for the month.*  *(3)   Highest exchange rate for the month.*     This report contains conversions ofpeso amounts into U.S. dollars for your convenience.  Unless otherwisespecified, these conversions were made at the exchange rate as of December 31, 2002 of Php53.254 = US$1.00.  You should not assume that such peso amountsrepresent such U.S. dollar amounts or could have been or could be convertedinto U.S. dollars at the rate indicated, or at any particular rate.  As of June 30, 2003, the exchange rate quoted through the Philippine Dealing System wasPhp53.522 = US$1.00.     **RiskFactors**     ***Risks Relating to Us***     Our substantial indebtedness could impair our ability tofulfill our financial obligations, service our other debt and carry out newfinancings     We havesubstantial indebtedness.  As of December 31, 2002, we had consolidated totalindebtedness of approximately Php191,710 million (US$3,600 million), includingshort-term debt of approximately Php760 million (US$14 million) and a consolidatedratio of debt to equity (total debt on a consolidated basis divided bystockholders' equity) of 12.99x.  Our consolidated ratio of earnings to fixedcharges was less than the minimum required ratio of 1.0x for the year ended December 31, 2002.  For an explanation of how we calculate our consolidated ratio ofearnings to fixed charges, see footnote 6 to our consolidated financial datatable under “Selected Financial Data” and Exhibit 7 in “Item 19.”  Our existingdebt contains covenants, which, among other things, require PLDT to maintaincertain financial ratios calculated in accordance with Philippine GAAP on aconsolidated and non-consolidated basis, limit our ability to incurindebtedness, make investments, incur expenditures and pay dividends.Financial statements prepared in conformity with Philippine GAAP differ in somematerial respects from financial statements prepared in conformity with U.S.GAAP.  For a description of some of these covenants, see “Item 5. Operating andFinancial Review and Prospects — Liquidity and Capital Resources — FinancingActivities — Debt Financing — Covenants.”     Our substantialindebtedness and the requirements and limitations imposed by our debt covenantscould have important consequences.  For example, they could:                                                             - make it more difficult for us to satisfy our debt obligations;                                                               - require us to dedicate a substantial portion of our cash flow topayments on our indebtedness, thereby reducing the availability of our cashflow to fund working capital, capital expenditures and other general corporaterequirements;                                                                 - limit our ability to refinance our debt obligations or incur newdebt needed to finance our working capital, capital expenditure or otherrequirements;                                                                   - limit our flexibility in planning for, or reacting to, changes inour business and the industry in which we operate; and                                                                     - place us at a competitive disadvantage compared to ourcompetitors.     If we are unable to meet our debt service obligationsor comply with our debt covenants, we could be forced to restructure orrefinance our indebtedness, seek additional equity capital or sell assets.  Aninability to effect these measures successfully could result in a declarationof default and an acceleration of some or all of our indebtedness.     Under the indenture for our 10.625%Notes due 2007 and 11.375% Notes due 2012, we may only incur additional debt,subject to certain exceptions, if, after incurrence of such debt, ourconsolidated leverage ratio (the ratio of debt to EBITDA calculated on a non-consolidatedbasis based on definitions provided in the same indenture and except undercertain circumstances) would be less than 5.5 to 1 prior to December 31, 2003,5.0 to 1 after December 31, 2003, and prior to December 31, 2004 and 4.5 to 1thereafter.  Because our consolidated leverage ratio presently is in excess of5.5 to 1, we are currently restricted from incurring any additional debt,subject to certain exceptions, including exceptions for refinancingtransactions.  In addition, we expect that we will have difficulty meeting ourdebt payment obligations if we do not continue to receive cash dividends fromSmart.     We may not be able to maintain compliance withrestrictive covenants and ratios imposed by our indebtedness     Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests calculated in accordance with Philippine GAAP atrelevant measurement dates, principally at the end of quarterly periods.Financial statements prepared in conformity with Philippine GAAP differ in somematerial respects from financial statements prepared in conformity with U.S.GAAP.     The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the peso relative to the U.S. dollar, pooroperating performance of PLDT and its consolidated subsidiaries, impairment orsimilar charges in respect of investments or other assets that may berecognized by PLDT and its consolidated subsidiaries, and increases in ourinterest expenses.  As of December 31, 2002, approximately 95% of PLDT's totalconsolidated long-term debt was denominated in foreign currencies, principallyin U.S. dollars, and many of these financial ratios and other tests arenegatively affected by any weakening of the peso.  The peso declined byapproximately 1% against the U.S. dollar to an average of Php51.583 =US$1.00 in 2002 from an average of Php51.009 = US$1.00 for the year 2001.At December 31, 2002, the exchange rate was Php53.254 = US$1.00, equivalent toapproximately 3% depreciation of the peso relative to the rate at the end of2001.  Certain of our financial ratios would be adversely affected byimpairment or similar charges.  In addition, certain of our financial ratios wouldbe adversely affected by increases in interest expense, which may result fromfactors including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the peso, thelowering of PLDT's credit ratings or the credit ratings of the Philippines, anincrease in reference interest rates and general market conditions.     PLDT's ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of our fixed line business,which is predominantly conducted by PLDT.  PLDT cannot be assured of thebenefit of results generated by Smart and PLDT's other subsidiaries andinvestees in assisting in complying with non-consolidated covenants orcovenants that are calculated without giving effect to the results of PLDT'ssubsidiaries and investees.     To date, we have maintainedcompliance with all of our restrictive financial ratios and covenants asmeasured under Philippine GAAP under our loan agreements and other debtinstruments.  However, if negative factors adversely affect our financialratios, we may be unable to maintain compliance with these restrictive ratiosand covenants or be unable to incur new debt.  During 2001, our performance undercertain of these ratios, including our total debt to EBITDA and interestcoverage ratios, was close to the permitted thresholds.  Under some of our loanagreements, the requirements with respect to our debt to EBITDA ratio on anon-consolidated basis has become more restrictive at the end of the secondquarter of 2003 and will continue to become more restrictive in incrementsthereafter, which will make it more difficult for PLDT to maintain compliancewith this ratio in the future.  In the future, our performance under certain ofour ratios may again fall close to the permitted thresholds.  Inability tocomply with our restrictive financial ratios and covenants or raise newfinancing could result in a declaration of default and acceleration of some orall of our indebtedness unless we are able to obtain waivers or amendments fromthe relevant lenders.  The terms of some of our debt instruments have nominimum amount for cross-default.     For more information on therequirements of our loan agreements and other debt instruments and ourcompliance with them, see “Item 5. Operating and Financial Review and Prospects— Liquidity and Capital Resources — Financing Activities — Debt Financing —Covenants.”     *Creditors of oursubsidiaries will have superior claims to our subsidiaries' cash flow andassets*     A growing portion of our consolidated revenues and cash flowfrom operations is derived from our subsidiaries, particularly Smart.  Smartand some of our other subsidiaries have significant internal cash requirementsfor debt service, capital expenditures and operating expenses and so may befinancially unable to pay any dividends to PLDT.  In addition, some of oursubsidiaries are subject to covenants that restrict them from distributing cashto PLDT except under certain circumstances.  In particular, Smart is subject toloan covenants that restrict its ability to distribute cash to PLDT.  AlthoughSmart received consents under its relevant loans that permitted it to makedividend payments to PLDT in December 2002 and June 2003, we cannot assure youthat PLDT will continue to receive dividends or other distributions, orotherwise be able to derive liquidity from Smart or any other subsidiary orassociate in the future.       Creditors of our subsidiaries willhave prior claims to our subsidiaries' assets and cash flows.  We and ourcreditors will effectively be subordinated to the existing and futureindebtedness 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 toindebtedness we hold.  * *  *Our businesses require substantial capital investment,which we may not be able to finance*     Our projects under development andthe continued maintenance and improvement of our networks and services,including Smart's projects, networks and services, require substantial ongoingcapital investment.  Our consolidated capital expenditures in 2001 and 2002totaled Php30,554 million and Php14,699 million, respectively.  Our 2003 budgetfor consolidated capital expenditures is Php16,000 million, of whichapproximately Php7,000 million is budgeted to be spent by PLDT andapproximately Php9,000 million is budgeted to be spent by Smart.  PLDT'scapital spending is intended principally to finance the continued build-out ofits data and Internet protocol infrastructures and for its data services andthe maintenance of its network.  Smart's capital spending is focused onexpanding and upgrading its GSM network to meet increased demand for cellularservices.     Future strategic initiatives couldrequire us to incur significant additional capital expenditures.  We plan tofinance a portion of our future capital expenditures from external financingsources, which have not yet been fully arranged.  We cannot assure you thatfinancing for new projects will be available on terms acceptable to us or atall.  If we cannot complete our development programs and other capitalprojects, our growth, results of operations and financial condition could bematerially and adversely affected.     Our ability to refinance our debt and raise new financingto fund our working capital, capital expenditures and other needs depends onmany factors beyond our control     In addition to our existingavailable credit facilities, we may require significant new external financingin order to fund all of our operating, investment, capital expenditures anddebt service requirements and to refinance and extend the maturities of ourshort and medium-term indebtedness.  Our ability to arrange for this and otherfinancing and the cost of such financing will be dependent on numerous factorsoutside of our control, including:                                                                       - general economic and capital market conditions, including thepeso-to-U.S. dollar exchange rate;                                                                         - the availability of credit from banks or other lenders;                                                                           - investor confidence in us;                                                                             - investor views about the Philippines;                                                                               - the continued success of our business;                                                                                 - our credit ratings and the sovereign credit ratings of the Philippines;and                                                                                   - provisions of tax and securities laws that may be applicable toour efforts to raise capital.     Any credit rating downgrades maysignificantly affect the availability and the terms of our prospectivefinancing, including financing costs.  In addition, restrictions under ourcurrent indebtedness subject us to various financial tests, which could preventus from incurring additional debt.  Inability to arrange such debt couldmaterially and adversely affect our ability to fund our anticipated operating,investment and capital expenditures as well as our anticipated debt servicerequirements, and could result in defaults and cross defaults under ourexisting debt, thereby adversely affecting our results of operations andfinancial condition.       *If the peso depreciatesagainst the U.S. dollar, our financial position could be materially and adverselyaffected*     Substantially all of ourindebtedness and associated interest expense, a substantial portion of ourcapital expenditures and a portion of our operating expenses are denominated inU.S. dollars and other foreign currencies, but a significant portion of ourrevenues is denominated in pesos.  As of December 31, 2002, 95% of our total consolidated long-term debt was denominated in U.S. dollars and otherforeign currencies.  A depreciation of the peso against the U.S. dollarincreases the amount of our debt obligations and operating and interestexpenses in peso terms.  In the event that the peso depreciates against theU.S. dollar, we may be unable to generate enough funds through operations (suchas by raising our service rates, including through adjustments to rates forlocal exchange service based on movements in the peso-to-dollar exchange rate)and other means to offset the resulting increase in our obligations in pesoterms.  Further, these changes could cause us not to be in compliance with thefinancial covenants imposed by our lenders under certain loan agreements andother indebtedness.     During the last decade, the pesohas generally depreciated against foreign currencies.  In addition, during thisperiod, the Philippine economy has also, from time to time, experienced periodsof concentrated peso devaluation and limited availability of foreign currency.Since June 30, 1997, when the**BSP, announced that it would let marketforces determine the value of the peso, the peso has experienced a significantdecline against the U.S. dollar.  It depreciated from Php26.376 = US$1.00 on June 30, 1997, to Php53.254 = US$1.00 as of December 31, 2002.  The peso declined byapproximately 3% against the U.S. dollar to Php53.254 = US$1.00 as of December 31, 2002 from Php51.69 = US$1.00 as of December 31, 2001.  The peso has also beensubject to significant fluctuations.  For example, during the first half of2003, the peso depreciated to a high of Php55.075 on March 12, 2003 and recovered to a low of Php52.021 on May 8, 2003.  The peso may again be subject tosignificant fluctuations and may depreciate due to a range of factors,including:                                                                                     - political and economic developments affecting the Philippines;                                                                                       - the volatility of regional currencies, particularly the Japaneseyen;                                                                                         - any interest rate increases by Federal Reserve Bank of the United States;                                                                                           - higher demand for U.S. dollars by both banks and domesticbusinesses to service their maturing U.S. dollar obligations; and                                                                                             - some banks covering their short U.S. dollar positions.     *Our results of operationshave been, and may continue to be, adversely affected by lower U.S. dollarrevenues caused by declining international termination rates and competition ininternational long distance service*     The international long distancebusiness was historically our major source of revenue.  However, due tocompetition and the steep decline in international termination rates that arepaid to us by foreign telecommunications carriers for termination ofinternational calls on our network, revenues generated from our internationallong distance business had declined significantly in recent years.  Thesedecreases in prices for international long distance services were not fullyoffset by increases in call traffic volume. For example, on January 1, 2000, we adopted the U.S. FCC benchmark accounting rate of US$0.38 per minutefor inbound international calls, which represented a settlement rate of US$0.19per minute for international long distance traffic between the Philippines andthe United States.  Since then, our termination rates for inbound calls fromthe United States have continued to decline to levels well below the U.S. FCCbenchmark accounting rate.  PLDT increased its termination rates with carriersaccounting for a substantial portion of its inbound international trafficterminating on its fixed line network to US$0.12 per minute effective February 1, 2003 and the international inbound traffic volume has decreased by 12%compared to the international inbound traffic volume before the rate increase.Prior to the increase in termination rates, a substantial portion of PLDT’sinternational inbound traffic terminating on its fixed line network was chargedan average termination rate of approximately US$0.08 per minute.  Smart likewiseimplemented an increase in its international termination rates to US$0.16 perminute effective February 1, 2003 for calls terminating on its cellularnetwork.  Moreover, our increased termination rates are the subject of anongoing proceeding before the United States Federal Communication Commission,or U.S. FCC, brought by WorldCom, Inc., or MCI, and AT&T Corp., orAT&T.  See “Item 5. Operating and Financial Review and Prospects — OtherInformation — U.S. FCC Proceeding on Termination Rates” and “Item 8. FinancialInformation — Legal Proceedings — U.S. FCC Proceeding on Termination Rates” forfurther discussion.     We anticipate that revenues frominternational communications and information services, including our services,will continue to decline in the future, due primarily to:                                                                                               - installed and expanding fiber networks and satellite capacitiesthat provide substantially more transmission capacity than may be needed in theshort or medium term;                                                                                                 - substantial increases in the transmission capacity of new andexisting networks, including those operated by our competitors, due to recenttechnological advances;                                                                                                   - increased competition from other domestic and internationaltelecommunications providers;                                                                                                     - alternative providers offering Internet telephony and broadbandcapacity;                                                                                                       - advances in technology; and                                                                                                         - continued uncertainty over the acceptance by certain U.S.carriers of our new termination rates.     We cannot assure you that thesedeclines will not materially and adversely affect our financial performance.     Net settlement payments betweenPLDT and other foreign telecommunications carriers for origination andtermination of international call traffic between the Philippines and othercountries have been our predominant source of foreign currency revenues.However, in U.S. dollar terms, these payments have been declining.  Continueddecline in our foreign currency revenues could increase our exposure to risksfrom declines in the value of the Philippine peso against the U.S. dollar.  Wecannot assure you that we will be able to achieve adequate increases in ourother revenues to make up for any adverse impact of a further decline in ournet settlement payments.  * *  *We face strong competition and may need to increase ourmarketing expenditures or reduce our rates in order to compete effectively*     We cannot assure you that thenumber of providers of cellular telecommunication services will not increase orthat competition for telecommunication customers will not lead our cellular andfixed line subscribers to switch to other operators or lead us to increase ourmarketing expenditures or reduce our rates, resulting in a reduction in ourprofitability.     The Philippine government hasliberalized the Philippine telecommunications industry and opened up thePhilippine telecommunications market to new entrants.  Including us, there areten major local exchange carriers, 11 international gateway facility providersand seven cellular mobile telephone system providers in the Philippines,including one, which has not yet commenced operations.  Many new entrants intothe Philippine telecommunications market have entered into strategic allianceswith foreign 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 in the cellularsegment and data and other network services segment.     The cellular telecommunicationsindustry in the Philippines has been particularly competitive, as operatorshave sought to develop and maintain market shares and to attract newsubscribers.  Our principal cellular competitor, Globe Telecom, Inc., or Globe,acquired another telecommunications provider, Isla Communications Company,Inc., or Islacom, on June 27, 2001, thereby strengthening Globe as acompetitor.  Further consolidation in the industry could result in morevigorous competition.  Digital Telecommunications Philippines, Inc., orDigitel, which was awarded a license to operate cellular telecommunicationsservices in 2000, launched its cellular service, *Sun Cellular*, on March 29, 2003.  In addition, the NTC has awarded a license to Bayan TelecommunicationsPhilippines, Inc., or BayanTel, to operate cellular telecommunicationsservices, but BayanTel has not yet commenced operations.  The recent entry ofDigitel is expected to create additional competition in the industry.  In thefuture, the government may allocate further frequencies and award additionalcellular telecommunications licenses, which would further increase competition.     Competitive pressures on cellularrates may affect our cellular revenues and revenue growth.  For example, wehave not increased our cellular rates to reflect fluctuations in thepeso-to-U.S. dollar exchange rate since November 1998 as a result of suchcompetitive pressures.  In addition, our prepaid GSM subscribers can, usingtheir existing handsets, switch to one of our competitors by having theirhandsets “unlocked” from our service for a fee and purchasing a new SIM cardfrom the desired operator.  We cannot assure you that these rate pressures andloss of customers will not have a material adverse effect on our financialperformance.  * *  If we are unable to install and maintaintelecommunications facilities and equipment in a timely manner, we may not beable to keep up with our principal competitors, which may have negativeimplications for our revenue and profitability     Our business requires the regularinstallation of new, and the maintenance of existing, telecommunicationstransmission and other facilities and equipment.  The installation andmaintenance of these facilities and equipment is subject to risks anduncertainties relating to:                                                                                                           - shortages of equipment, materials and labor;                                                                                                             - work stoppages and labor disputes;                                                                                                               - interruptions resulting from inclement weather and other naturaldisasters;                                                                                                                 - unforeseen engineering, environmental and geological problems;and                                                                                                                   - unanticipated cost increases.     Any of these factors could giverise to delays or cost overruns in the installation of new facilities orequipment or could prevent us from properly maintaining the equipment used inour networks, and could have a material adverse effect on our results ofoperations and financial condition.     *Rapid changes intelecommunications technology may adversely affect the economics of ourexisting businesses and the value of our assets, increase our required capitalexpenditures and create new competition*     The telecommunications sector hasbeen characterized recently by rapid technological changes.  We cannot assureyou that these developments will not result in competition from providers ofnew services or the need to make substantial capital expenditures to upgradeour facilities.  For example, if third-generation, or 3G, cellularservices were introduced in the Philippines, we would likely incur significantexpenses if we were to roll out those services.     Our future success will depend, inpart, on our ability to anticipate or adapt to such changes and to offerservices that meet customer demands on a competitive and timely basis.  Wecannot assure you that we will be able to obtain new technologies on a timelybasis or on satisfactory terms or implement them in an appropriate or effectivemanner.  The development and introduction of new technologies by us or ourcompetitors may cause significant portions of our existing assets to becomeobsolete and suffer an impairment in value earlier than their anticipateduseful lives and require us to accelerate their depreciation.  In 2001, werecognized impairment charges in respect of Smart's analog assets and Smart'sunamortized intangible asset relating to analog subscriber lists.  Piltelrecognized impairment losses in respect of its AMPS/CDMA and Executive Order,or E.O. No. 109 assets in 2001 and 2002.  * *  *The cellulartelecommunications industry may not continue to grow or may grow at a slowerrate*  * *  A significant portion of ourconsolidated revenues is currently derived from the cellular telecommunicationsindustry.  As a result, we depend on the continued development and growth ofthe cellular telecommunications industry.  Growth of the cellularcommunications market depends on many factors beyond our control, including thecontinued introduction of new and enhanced cellular devices and consumerpreferences.  Any economic, technological or other developments resulting in areduction in demand for cellular services may harm our business.     *Our businesses depend onthe reliability of our network infrastructure, which is subject to physical,technological and other risks*     The development and operation oftelecommunications networks are subject to physical, technological and otherrisks, which may cause interruptions in service or reduced capacity for customers.These risks include:                                                                                                                     - physical damage;                                                                                                                       - power loss;                                                                                                                         - capacity limitation;                                                                                                                           - software defects; and                                                                                                                             - breaches of security by computer viruses, break-ins or otherwise.     The occurrence of any of theserisks could have a material adverse effect on our ability to provide servicesto customers, and could have a material adverse effect on our business.     Piltel has experiencedfinancial difficulties and we cannot assure you that it will be able todischarge any of its debts or other obligations, including its debts or otherobligations owed to us and our affiliates     Piltel has experiencedsignificant financial difficulties in recent years.  It has restructuredsubstantially all of its debts in accordance with its debt restructuring plan,which was signed on June 4, 2001.  Under the terms of such debt restructuringplan, PLDT issued a Letter of Support for the benefit of Piltel and itscreditors under which PLDT has agreed to cover any funding shortfalls of Piltelup to a maximum amount of US$150 million, of which approximately US$50 millionremained undrawn as of December 31, 2002.  In June and October 2002, morecreditors of Piltel agreed to participate in its restructuring plan on the sameterms. As of December 31, 2002, total restructured long-term debt of Piltelamounted to Php21,630 million, with maturities of up to June 14, 2016.  Piltel is currently in the process of restructuring certain other debts.  However, wecannot assure you that Piltel will be able to restructure or otherwise pay theclaims relating to its unrestructured debt or that Piltel will have sufficientcash flow to meet its debt service and other payment obligations, including itspayment obligations to us.  As of December 31, 2002, Piltel owed PLDT and SmartPhp258 million and Php1,027 million, respectively, in respect of theirrespective facilities sharing and other agreements with Piltel.  Until allamounts owed to creditors participating in the debt restructuring plan havebeen paid or discharged, PLDT will not be permitted to demand or receive anypayment, redemption, or distribution in respect of any present and futureliability owed by Piltel to PLDT or any affiliate of PLDT, subject to specifiedexceptions.  These liabilities include amounts owed on Piltel preferred sharesowned by PLDT and other financial indebtedness owed by Piltel to PLDT or anyaffiliate of PLDT, but exclude payments due in respect of transactions havingarm’s-length terms or in which the pricing is based on market terms.  Thesesevere long-term restrictions significantly impair Piltel’s ability to transferfunds to PLDT.     Moreover, Piltel may not be able torestructure or otherwise pay the claims relating to its unrestructured debt.As of December 31, 2002, Piltel had an aggregate principal amount of Php451million of unrestructured debt.  Piltel does not intend to make any payments inrespect of this debt unless and until it reaches a restructuring agreement withthe creditors holding the obligations.  If Piltel’s non-participating creditorstake forceful measures to enforce their claims, it is possible that Piltelwould be required to submit itself to a court-supervised rehabilitationproceeding or an involuntary insolvency proceeding seeking liquidation.  All ofPiltel’s creditors that participated in the debt restructuring agreed inconnection with the debt restructuring that they would submit Piltel to arehabilitation proceeding in those circumstances and petition for the adoptionof a plan of rehabilitation that includes the financial terms of the debtrestructuring plan.  However, the laws and procedures governing arehabilitation proceeding in the Philippine courts remain untested insignificant respects.  We cannot assure you that a rehabilitation plan, whichincorporates the financial terms of the debt restructuring, would be adoptedpromptly or at all.  Even if such a rehabilitation plan were adopted, we cannotassure you that Piltel will prove to be viable thereafter and that it will beable to meet its obligations, including its obligations owed to us or ouraffiliates.  * *  A significant number of PLDT's shares are held by twoseparate shareholders, which may not act in the interests of other shareholdersor stakeholders in PLDT     Affiliates of First Pacificdirectly or indirectly own approximately 31.4% of PLDT's common stock as of March 31, 2003.  This is the largest block of PLDT's common stock that is directly orindirectly under common ownership.  NTT Communications owns 14.9% of PLDT'scommon stock as of March 31, 2003 and has contractual veto rights over a numberof major decisions and transactions that PLDT could make or enter into,including:                                                                                                                               - capital expenditures in excess of US$50 million;                                                                                                                                 - any investments, if the aggregate amount of new investments forthe previous 12 months is greater than US$100 million, determined on a rollingmonthly basis;                                                                                                                                   - any investments in a specific investee, if the cumulative valueof all investments made by PLDT in that investee is greater than US$10 millionin the case of an existing investee and US$50 million in the case of a newinvestee;                                                                                                                                     - issuance of common stock or stock that is convertible into commonstock;                                                                                                                                       - new business activities other than those we currently engage in;                                                                                                                                         - merger or consolidation; and                                                                                                                                           - the provision of financial support to Piltel in excess of thatremaining available under the PLDT Letter of Support.     First Pacific and NTTCommunications have also entered into a shareholders' agreement relating toPLDT.  As a result of this agreement and their respective stockholdings, FirstPacific and its affiliates and/or NTT Communications are able to influence ouractions and corporate governance, including:                                                                                                                                             - elections of PLDT's directors; and                                                                                                                                               - approval of major corporate actions, which require the vote ofcommon stockholders.     First Pacific and its affiliates and/or NTT Communications mayexercise control over these decisions and transactions in a manner that couldbe contrary to your interests.  * *  If First Pacific sells its interest in PLDT, thetransaction may result in an event of default      On June 5, 2002, First Pacific announced that on June 4, 2002, it had entered into aMemorandum of Agreement, or MOA, with the Gokongwei Group and JG SummitHoldings, Inc. (the “Gokongwei Group”) in relation to First Pacific’s existinginterests in PLDT and Bonifacio Land Corporation.  The MOA contemplated thatupon satisfaction of certain conditions precedent, First Pacific would injectits existing 24.4% economic interest in PLDT into an entity in which theGokongwei Group would purchase a two-thirds controlling interest.  On October 2, 2002, First Pacific announced that the Gokongwei Group had terminated the MOA.     First Pacific has accepted thetermination of the MOA by the Gokongwei Group.  Accordingly, First Pacific hasindicated that the transaction contemplated by the MOA will no longer proceed.First Pacific also stated in its announcement that it continues to review itsstrategic options in relation to its Philippine investments.  On April 2, 2003, First Pacific announced that it is finalizing a business plan that willbuild on Indofood and PLDT as its core assets.  Indofood, the food arm of FirstPacific, is the leading processed-foods group in Indonesia.     If First Pacific or NTTCommunications sells all or a portion of its equity interest in PLDT, incertain circumstances, such sale may give rise to an obligation for us to makean offer to purchase or prepay our outstanding debt under our 10.625% Notes due2007 and our 11.375% Notes due 2012, our US$145 million multicurrency term loanfacility, our JP¥9,760 million loan agreement with Japan Bank for InternationalCooperation, or JBIC and our JP¥5,615 million term loan, and may result in adefault under all of Smart’s loan agreements.  As of June 30, 2003, Php28,382million (excluding the second tranche of the US$145 million multicurrency termloan facility to be drawn in December 2003 and the JP¥5,615 million term loansigned on June 11, 2003) in principal amount of PLDT’s indebtedness is directlysubject to a change in control offer to purchase or prepay requirement and Php22,891million in principal amount of Smart’s indebtedness is subject to an event ofdefault in the event of a change in control of PLDT.  If we fail to complete arequired change in control offer to purchase or prepay the affected debts, allof our debt could become immediately due and payable as a result of variouscross-default provisions.  See “Item 5. Operating and Financial Review andProspects — Liquidity and Capital Resources — Financing Activities — DebtFinancing — Covenants.”  * *  The outcome of the proceeding at the U.S. FCC isuncertain and could materially affect our ability to engage in business in the United States and our results of operations     After lengthy negotiations commencing in May 2002 with carriers aroundthe world, PLDT increased its termination rates with carriers accounting for asubstantial portion of its international traffic terminating on its fixed linenetwork to US$0.12 per minute effective February 1, 2003 for international long distance calls terminating onits fixed line network.  Prior to the increase in termination rates, asubstantial portion of PLDT’s international inbound traffic terminating on itsfixed line network was charged an average termination rate of approximatelyUS$0.08 per minute.  Despite numerous extensions by PLDT of PLDT’s agreementson termination charges with AT&T and MCI to facilitate continuednegotiation over termination rates, AT&T and MCI failed to reach anagreement with PLDT on a termination rate and thus, effective February 1, 2003, PLDT ceased terminating traffic from MCI andAT&T.  Smart likewise implemented an increase in its termination rates toUS$0.16 per minute effective February 1, 2003 for calls terminatingon Smart’s cellular network.  On February 7, 2003, AT&T and MCIfiled separate petitions with the U.S. FCC requesting the U.S. FCC to takeaction to protect U.S. international carriers and U.S. consumers from alleged “whipsawing” behaviouroccurring on the U.S.-Philippine route.  In response to the petitions andnotwithstanding significant objection from PLDT and other Philippineinternational carriers, on March 10, 2003 the International Bureau of the U.S.FCC issued an Order directing all facilities-based carriers subject to U.S. FCCjurisdiction to suspend payments for termination services to PLDT, Smart andother Philippine carriers until such time as the U.S. FCC issues a publicnotice that AT&T’s circuits on the U.S.-Philippine route are fullyrestored.  The Order also removed the Philippines from thelist of U.S. – international routes approved for theprovision of International Simple Resale.  In response to the Order of theInternational Bureau of the U.S. FCC, on March 12, 2003 the NTCissued a Memorandum Order directing all affected Philippine carriers, includingus, not to accept terminating traffic via direct circuits from certain U.S.facilities-based carriers, including AT&T and MCI, if we are not being paidfor it.  On April 9, 2003, we filed with the U.S. FCC an application for reviewof the International Bureau’s March 10, 2003 Order.  See “Item 5. Operating andFinancial Review and Prospects — Other Information — U.S.FCC Proceeding on Termination Rates” and “Item 8. Financial Information — Legal Proceedings— U.S. FCC Proceeding on Termination Rates” for a detailed discussion of thehistory and procedural process of the U.S. FCC proceeding.     Although we believe that, based upon the applicable legal principlesand facts, the March 10, 2003 Order was incorrect and should beoverturned upon appeal, we cannot assure you that the March 10, 2003Order will not remain in effect.  It is also possible that the U.S. FCC couldtake further actions in light of allegations or complaints that have been madeor may in the future be made by AT&T, MCI, or other US facilities-based carriers.  The U.S. FCC may have theauthority in this regard to prohibit the transmission of all telecommunicationtraffic originating in the United States and destined for the Philippines, although we believe it unlikely that the U.S. FCCwould take such action.  To date, subsequent to the March 10, 2003 Order, ourrevenues derived from international long distance calls have not beenmaterially adversely affected by the actions taken by the International Bureauof the U.S. FCC and the NTC because most of the traffic originating in theUnited States are being re-routed through circuits of third parties in othercountries or otherwise not subject to this order.  We can provide no assurancethat over a longer period of time our international long distance revenues willnot be materially adversely affected by the March 10, 2003 Order.  In addition,we can provide no assurances that the U.S. FCC will not take other actions thatmay materially adversely affect our business in the United States or our revenues derived from our international longdistance service.     *PLDT's franchise may berevoked if we are unsuccessful in legal proceedings, which are pending*     The Constitution of the Philippinesrequires that at least 60% of the capital of a corporation operating a publicutility in the Philippines be owned by Philippine citizens.  In 1990, thethen-Solicitor General of the Philippines instituted legal proceedings seekingto revoke PLDT's franchise on various grounds, including violation of thisrequirement.  We believe that these proceedings are without merit.  In 1991,the Philippine Congress extended the term of PLDT's franchise until 2028 andbroadened PLDT's franchise authority.  The Congress granted this amendedfranchise to PLDT despite these pending legal proceedings and despite theopposition of the Solicitor General.  The Solicitor General has not taken anyfurther action to pursue or continue the proceedings on this case.  The partiesfiled their last pleadings in 1992 and since then the case has remainedinactive.  Consequently, under a court order dated January 20, 1999, the case has been archived, though the case can potentially be revived by action ofeither PLDT or the Solicitor General's office.  It is normal practice forPhilippine courts to archive cases that remain inactive for a long period oftime.  We are not aware of any court notice for the resumption of theproceedings in this case.  * *  Our business is significantly affected by governmentallaws and regulations, including regulations in respect of our franchises andrates     We operate our business under franchises, each of which issubject to amendment, termination or repeal by the Philippine Congress.Additionally, PLDT operates pursuant to various provisional authorities andcertificates of public convenience and necessity, or CPCNs, which are grantedby the NTC and expire between now and 2028.  Some of PLDT's CPCNs andprovisional authorities have already expired.  However, PLDT filed 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 decisions on these extensions.  Smart also operates its cellular,international long distance, national long distance and global mobile personalcommunications via satellite services pursuant to CPCNs, which will expire uponthe expiration of its franchise.  Smart’s franchise is due to expire on March 27, 2017, 25 years after the date on which its current franchise wasgranted.  Smart operates international private leased circuits under aprovisional authority, which expired on May 6, 2003.  Smart applied for anextension of this provisional authority prior to its expiration.  Because PLDT andSmart filed the applications for extension on a timely basis, we expect thatthese extensions will be granted.  However, we cannot assure you that the NTCwill grant these extensions.  If a CPCN has not been issued, the NTC may permitan operator to provide services pursuant to a provisional authority.Provisional authorities are typically granted for a period of 18 months.  ThePhilippine Revised Administrative Code of 1987 provides that if the grantee ofa license or permit, such as a CPCN or provisional authority, has made timelyand sufficient application for the extension thereof, the existing CPCN orprovisional authority will not expire until the application is finally decidedupon by the administrative agency concerned.  However, we cannot assure youthat our franchises, CPCNs and provisional authorities will be renewed.  For adescription of our licenses, see “Item 4. Information on the Company — Licensesand Regulation.”     The NTC also regulates the rates weare permitted to charge for services that have not yet been deregulated, suchas local exchange services.  We cannot assure you that the NTC will not imposeadditional obligations on us that could lead to the revocation of our licensesif not adhered to and/or reduction in our operating revenues or profitability.In addition, the NTC could adopt changes to the regulations governing ourinterconnection with other telecommunications companies or the rates and termsupon which we provide services to our customers that could have a material andadverse effect on our results of operations.  * *  *The NTC may implement proposed changes in billingrequirements for cellular operators, which may have negative implications forour revenues and profitability*     On June 16, 2000, the NTC issued Memorandum Circular No. 13-6-2000 proposing that cellular operators, includingSmart and Piltel, be required, among other things:                                                                                                                                                 - to bill their subscribers for cellular calls on a six-secondpulse basis instead of the current per minute basis;                                                                                                                                                    - not to bill calls directed to recorded voice messages; and                                                                                                                                                     - to extend the expiration date of prepaid cards from the currenttwo months to two years.     Although Philippine cellularoperators obtained a preliminary injunction restraining the implementation ofthe Memorandum Circular, on October 9, 2001, the Court of Appeals annulled thepreliminary injunction and dismissed the cellular operators' complaint againstthe NTC.  On January 10, 2002, the Court of Appeals denied the cellularoperators' motion to reconsider its earlier ruling.  On February 22, 2002, Smart and Piltel filed a Petition for Review by Certiorari with the Supreme Courtto annul and reverse the decision of the Court of Appeals.  Pending thedecision of the Supreme Court on the matter, the NTC cannot implement the billingand other requirements proposed in the Memorandum Circular.  We cannot assureyou that the NTC will not seek to implement the billing and other requirementsproposed in the Memorandum Circular if the case is eventually decided againstthe cellular operators.  If the measures proposed are implemented, Smart andPiltel's operating revenues could be materially and adversely affected.  * *  Wemay be subject to significant local business and franchise taxes if we areunsuccessful in legal proceedings, which are pending     We are currently facing variouslawsuits for local business and franchise taxes assessed by different localgovernment units, as described under “Item 8. Financial Information — LegalProceedings — Taxation — Local Business and Franchise Taxes."  Generally,each province may impose local franchise tax at a rate of up to 0.5% of thegross annual receipts received or realized within that province.  Cities withineach province may also impose annual franchise taxes on gross annual receiptsreceived or realized in those cities, at a rate that may not exceed theprovincial franchise tax rate by more than 50%.  In one case, involving theCity of Davao, the Supreme Court has ruled that we are not exempt from paymentof local business and franchise taxes.  On March 25, 2003, the Supreme Court denied our motion for reconsideration and affirmed the local franchise taxassessment of Davao City in the amount of approximately Php3.7 million.Although such a decision would constitute a precedent, this will not automaticallyresult in the termination of the other pending local franchise tax cases, withthe courts rendering decisions adverse to us.  While the courts in these casesare expected to adhere to this Supreme Court decision, each court would have tomake its own determination based on the evidence introduced by the parties andthe factual circumstances of each case.  We cannot assure you that other localgovernment units will not file lawsuits against us or otherwise claim amountsowed in respect of business and franchise taxes.  If the courts rule againstus, we would be liable for these taxes, including interest and penalties, forpast periods to the extent these taxes are assessed within five years from thedate they were due and for future periods.     As of December 31, 2002, the aggregate amount claimed by the plaintiffs in these lawsuits was Php4,524 million withrespect to PLDT, Php313 million with respect to Smart, and Php4.5 million withrespect to Piltel.  In addition, we have received assessments for localbusiness and franchise taxes in the aggregate amount of Php24 million, all ofwhich are under administrative protest.  We believe that in the event theselawsuits and protests were decided against us, in many cases, we would not beliable for the full amounts claimed by the local governments because theseamounts (1) were computed based on the gross annual receipts received orrealized not only from within the related province or city for the relatedperiod but also from gross annual receipts received or realized from otherprovinces or cities and (2) include assessments for periods occurring more thanfive years before the respective lawsuits were filed.  Accordingly, in theevent these lawsuits are decided against us, we believe that our potential liabilityis likely to be significantly lower than the amounts claimed by the plaintiffs.     If we continue to implement our manpower reductionprogram, PLDT’s labor relationship with its rank-and-file employees’ union maydeteriorate and result in labor unrest, which could materially adversely affectour operations and financial condition     Over the past several years, we have been implementing a manpowerreduction program to reduce the cost base of PLDT’s fixed line business, whichhas faced significant changes in technology, increasing competition, andshifting market preferences to cellular use.  We have been implementing themanpower reduction program under the New Labor Code and in compliance with allother relevant labor laws and regulations.  We currently expect that by the endof 2003 PLDT’s headcount will be reduced to approximately 10,500 employees,from 11,777 employees as of March 31, 2003.     As part of our manpower reduction program, 322 employees that wereproviding our regional operator services, where call volumes have significantlydeclined, were terminated effective December 31, 2002.  After a series of failed reconciliation meetingsbetween representatives of PLDT and our rank-and-file employees’ union, theunion staged a 14-day strike beginning on December 23, 2002. The strike ended on January 6, 2003 by virtue of a return-to-work order issued by theSecretary of Department of Labor and Employment, or DOLE. Moreover, the DOLESecretary, in the same order, certified the labor dispute to the National LaborRelations Commission, or NLRC, for compulsory arbitration.  The NLRC has yet toschedule arbitration proceedings on the union’s complaint against PLDT.     If we continue implementing ourmanpower reduction program, which calls for more reductions in the number ofrank-and file employees of our fixed line business, our relationship with ourrank-and-file employees’ union may deteriorate. The union may decide to stagestrikes, work stoppages, lockouts or other labor unrest against PLDT, which maydisrupt our business operations.  In addition, the Collective BargainingAgreement with our rank-and-file employees’ union will expire on November 8, 2003.  If our relationship with the rank-and-file employees’ uniondeteriorates as a result of the continued implementation of our manpowerreduction program, we may not be able to enter into a new Collective BargainingAgreement on the same or similar terms as before.  As a result, our businessoperations and financial condition may be adversely affected.       Alleged health risks ofwireless communications devices could lead to decreased wireless communicationsuse, increased difficulty in obtaining sites for base stations or potentiallitigation     We are aware of allegations thatthere may be health risks associated with the effects of radio waves emittedfrom transmitter masts and wireless handsets.  While there is currently nosubstantiated link between radio waves and health issues, the actual orperceived health risks of wireless communications devices could adverselyaffect our wireless activities through a reduction in customers, reduced usageper customer, or increased difficulty in obtaining sites for transmitters andexposure to potential litigation or other liabilities.  * *  ***Risks Relating to the******Philippines***     *Our business may beaffected by political or social instability in the**Philippines*     Our results of operations andfinancial performance and condition may be influenced by the general politicalsituation in, and the state of the economy of, the Philippines.  In February1986, a peaceful military and civilian uprising ended the 21-year rule ofPresident Ferdinand Marcos and installed Corazon Aquino as President of the Philippines.Between 1986 and 1989, there were several *coup d'état* attempts againstthe Aquino administration, none of which was successful.  Political andeconomic conditions in the Philippines were generally stable during the 1990'sfollowing the election of Fidel V. Ramos as President in 1992.  However, during2000, his successor President Joseph Estrada was subject to allegations ofcorruption, culminating in impeachment proceedings, mass public protests in theMetropolitan Manila area, withdrawal of the support of the military, and hisstepping down from office.  Then Vice President, Gloria Macapagal-Arroyo, wassworn in as President on January 20, 2001.  On April 25, 2001, Estrada was arrested on a non-bailable charge of plunder that resulted in public protestsby his supporters on May 1, 2001.  In response, President Macapagal-Arroyodeclared a week-long "state of rebellion."  On May 14, 2001, the Philippines held legislative elections, following which President Macapagal-Arroyo'scoalition won a majority of the seats in the Senate.  On May 10, 2004, the Philippines will hold presidential elections as well as elections for members of theSenate and Congress.     In the past three years, anincreasing number of kidnapping, criminal and terrorist activities haveoccurred in Mindanao principally led by the extremist "Abu Sayyaf"group, which reportedly has ties to the Al-Qaeda terrorist network.  In recentmonths, there have been a series of bombing incidents in key cities in Mindanao,including Davao City.  The armed conflict between the Philippine military andthe communist Moro Islamic Liberation Front also continues in Mindanao.  As aresult of these terrorist activities, the Armed Forces of the Philippines andthe United States military are engaged in joint military activities in Mindanao.     In November 2001, members of rebel groups damaged three ofSmart’s cell sites located in Central Luzon and one of our relay stations,including some radio facilities, in southern Mindanao in response to ourfailure to pay “revolutionary taxes” demanded by these groups.  In October2002, a group of unidentified armed men inflicted minor damage on Smart’s cellsite in Bicol.     We cannot assure you that politicalevents or terrorist activities will not again result in major public protest orthe involvement of the military in politics.  Any political instability in thefuture may have a negative effect on our results of operations and financialcondition.  We cannot assure you that the political environment in thePhilippines will be stable or that the current or any future government willadopt economic policies conducive to sustained economic growth or which do notimpact adversely on the current regulatory environment for telecommunicationsor other companies.     Our results of operations may be negatively affected byslow or negative growth rates and economic instability in the Philippines andin Asia     In the past, the Philippines hasexperienced periods of slow or negative growth, high inflation, significantdevaluation of the peso, imposition of exchange controls, debt restructuringand electricity shortages and blackouts.     From mid-1997 to 1999, theeconomies of a number of Asian countries experienced significant downturns.The regional economic turbulence affected the Philippine economy in a number ofways, including the depreciation of the peso, increases in interest rates,increases in unemployment and inflation, increased volatility and a decline inprices in the domestic stock market, the downgrading of the Philippines' localcurrency rating and the ratings outlook for the Philippine banking sector andthe reduction of foreign currency reserves.       In 2002, the Philippine governmentincurred a fiscal deficit of Php212,000 million, which representedapproximately 5.3% of the 2002 nominal gross domestic product, or GDP, largelydue to weak tax collection.  The fiscal deficit for 2003 is expected to reachPhp202,000 million.  As of April 2003, the fiscal deficit wasapproximately Php65,500 million.  On April 24, 2003, Standard & Poor’sannounced a lowering of the credit rating of the Philippines to “BBB” from“BBB+” mainly as a result of long-term fiscal deficit concerns.  This, in turn,has resulted in the depreciation of the peso against the U.S. dollar and thevolatility of the prices of shares traded on the domestic stock market as wellas prices of Philippine sovereign and corporate bonds.     In the second half of 2000 and thefirst half of 2001, the political developments relating to the allegations ofcorruption in the Estrada administration as well as economic events, forexample, the growing government fiscal deficit and a global increase in oilprices, have resulted in increased concerns about the political and economicstability in the Philippines.  This, in turn, has resulted in the depreciationof the peso against the U.S. dollar and the volatility of the prices of sharestraded on the domestic stock market.       We cannot assure you that thesefactors will not affect our results of operations in a materially adversemanner.  * *  *If foreign exchangecontrols were to be imposed, our ability to meet our foreign currency paymentobligations could be adversely affected*     Approvalfrom or registration with the BSP for the issuance and guarantee of foreigncurrency denominated borrowings is not required in order to make our foreigncurrency payment obligations legally valid and binding.  However, receivingthis approval and registration will enable a borrower to access the bankingsystem to obtain foreign currency to service its debt obligations rather thanusing other sources of foreign currency, for example, foreign currency revenuestreams.     The Philippine government has, inthe past, instituted restrictions on the conversion of pesos into foreigncurrency and the use of foreign exchange received by Philippine companies topay foreign currency-denominated obligations.  The Monetary Board of the BSP hasstatutory authority, with the approval of the President of the Philippines,during a foreign exchange crisis or in times of national emergency, to:                                                                                                                                                       - suspend temporarily or restrict sales of foreign exchange;                                                                                                                                                         - require licensing of foreign exchange transactions; or                                                                                                                                                           - require the delivery of foreign exchange to the BSP or itsdesignee banks.     We cannot assure you that foreignexchange controls will not be imposed in the future.  If imposed, theserestrictions could materially adversely affect our ability to obtain foreigncurrency to service our foreign currency obligations.     *The occurrence of natural catastrophes may materiallydisrupt our operations*  * *  The Philippines has experienced anumber of major natural catastrophes over the years including typhoons,volcanic eruptions and earthquakes that may materially disrupt and adverselyaffect our business operations.  We cannot assure you that the insurancecoverage we maintain for these risks will adequately compensate us for all damageand economic losses resulting from natural catastrophes.     Item 7.       Information on the Company     **Overview**     We are theleading national telecommunications service provider in the Philippines.Through our three principal business groups — fixed line, wireless, and informationand communications technology — we offer a wide range of telecommunicationsservices to over 11 million subscribers in the Philippines,  on the nation'smost extensive fiber optic backbone and fixed line, cellular and satellitenetworks.     We are the leading fixed lineprovider in the Philippines with approximately 66% of the total reported fixedlines in service nationwide as of March 31, 2003.  Smart is the leadingcellular service provider in the country, with approximately 45% of total reportedcellular subscribers as of March 31, 2003.  Piltel had approximately 12% oftotal reported cellular subscribers as of March 31, 2003.  We have interests inthe information and communications technology sectors, including *Vitro*TM, an Internet data center, two callcenters, namely Parlance and Vocativ, and Infocom, one of the leading ISPs inthe Philippines.     Our common shares are listed on thePhilippine Stock Exchange and our American Depositary Shares are listed on theNew York Stock Exchange and the Pacific Exchange.  We had a marketcapitalization of approximately Php95,647 million (US$1,787 million) as of June30, 2003, representing one of the largest market capitalizations amongPhilippine-listed companies.  For the year ended December 31, 2002, we hadconsolidated revenues, net loss and EBITDA of Php95,540 million (US$1,794million), Php4,477 million (US$84 million) and Php29,555 million (US$555million), respectively. See footnote 5 to the selected financial data table in“Item 3. Key Information — Selected Financial Data” for a quantitativereconciliation of EBITDA on a consolidated basis to income (loss) beforeminority interest in net income (losses) of consolidated subsidiaries.     Our principal executive offices are located at the RamonCojuangco Building, Makati Avenue, Makati City, Philippines and our telephonenumber is (632) 816-8024.  Our website address is *www.pldt.com.ph*.  Thecontents of our website are not a part of this annual report.     **Historical Background andDevelopment**  *** ***  PLDT was incorporated under the old Corporation Law of thePhilippines (Act 1459, as amended) on November 28, 1928, following the mergerof four telephone companies under common U.S. ownership.  Under the amendedArticles of Incorporation, the term of PLDT is limited to 2028.  In 1967,General Telephone and Electronics Corporation (a major stockholder since PLDT’sincorporation) sold its effective control of PLDT to a consortium of Filipinobusinessmen.  In 1981, in furtherance of the then-existing policy of the PhilippineGovernment to integrate the Philippine telecommunications industry, PLDTpurchased substantially all of the assets and liabilities of Republic TelephoneCompany, which at that time was the second largest telephone company in thePhilippines.  During 1998, First Pacific, through its Philippine and otheraffiliates, acquired a significant interest in PLDT.  On March 24, 2000, NTTCommunications became PLDT’s strategic partner with a 15% economic and votinginterest in the issued common capital stock of PLDT.  Simultaneous with NTTCommunications’ investment in PLDT, we acquired 100% of Smart.     PLDT’s original franchise, which was granted in 1928, was lastamended in 1991 to extend PLDT’s franchise until 2028.  The amended franchise(Republic Act No. 7082), which became effective on August 24, 1991, alsobroadened PLDT’s franchise to permit PLDT to provide virtually every type oftelecommunications service.  PLDT’s franchise covers the business of providingbasic and enhanced telecommunications services in and between the provinces,cities and municipalities in the Philippines and between the Philippines andother countries and territories including mobile, cellular, wired or wirelesstelecommunications system, fiber optics, multi-channel transmission distributionsystems and their value-added services such as but not limited to transmissionof voice, data, facsimile, control signals, audio and video, informationservices bureau and all other telecommunications systems technologies, as areat present available or can be made available through technical advances orinnovations in the future.  See “Item 8. Financial Information — LegalProceedings — Quo Warranto Action” for information regarding legal proceedingsinitiated by the Solicitor General with respect to PLDT’s franchise.     PLDT has made significant investments for the upgrade andexpansion of its fixed line business in the mid- to late-90’s when thePhilippine government liberalized the telecommunications industry.   Presently,PLDT has the most extensive fixed line access network in the country supportedby a 5,400-kilometer domestic fiber optic backbone and digital microwavebackbone.   Since 2000, PLDT’s capital expenditures have been focused on theexpansion of its transmission and data network capacities as well as themaintenance of its network and other computerization and support projects.  Inaddition, Smart has implemented an extensive deployment program for its GSMnetwork since the launch of its GSM service in 1999 to meet the growing demandfor GSM cellular service.  As of the first quarter of 2003, Smart’s digitalnetwork consists of 29 switching centers and 2,953 base stations covering 829cities and municipalities.     On a consolidated basis, capital expenditures amounted toPhp27,109 million, Php30,554 million and Php14,699 million in 2000, 2001 and2002, respectively.  Of these amounts, Php11,520 million, Php9,685 million andPhp6,932 million were attributable to PLDT, while Php14,672 million, Php18,990million and Php6,319 million were spent by Smart for 2000, 2001 and 2002,respectively.  The remaining balance of Php917 million, Php1,879 million, andPhp1,448 million were spent by our other subsidiaries, principally ePLDT, in2000, 2001, 2002, respectively.     **Organization**     Our two largeststockholders are First Pacific, a Hong Kong-based investment and managementcompany engaged in consumer, telecommunications and property businesses, which,through its Philippine and other affiliates, beneficially owns 31.4% of ourcommon stock, and NTT Communications, a wholly-owned subsidiary of NipponTelegraph and Telephone Corporation of Japan, which beneficially owns 14.9% ofour common stock.     PLDT and the following subsidiaries were all incorporated in thePhilippines, except for PLDT Global, which was incorporated in the BritishVirgin Islands:     
**Name of Investee**

Principal Activity
Percentage of Ownership
**2000**

**2001**

2002

 

 

 

 

 

**Fixed Line**

 

 

 

 

Clark Telecom

Telecommunications services

100.0

100.0

100.0

Subic Telecom

Telecommunications services

60.0

100.0

100.0

Smart-NTT Multimedia, Inc.

Data and network services

100.0

100.0

100.0

PLDT Global and subsidiaries

Telecommunications services

—

100.0

100.0

MaraTel

Telecommunications services

—

92.3

97.5

 

 

 

 

 

**Wireless**

 

 

 

 

Smart and subsidiaries

Cellular mobile services

100.0

100.0

100.0

Telesat

Satellite communications services

94.4

94.4

94.4

ACeS Philippines 

Satellite phone services

88.5

88.5

88.5

Mabuhay Satellite

Satellite communications services

67.0

67.0

67.0

Piltel and subsidiaries

Cellular mobile and telecommunications services

57.6

45.3

45.3

 

 

 

 

 

**Information and Communications Technology**

 

 

 

 

ePLDT and subsidiaries

Information and communications infrastructure for internet-based services, e-commerce, call centers and IT-related services

100.0

100.0

100.0

* *

*** ***

***Fixed Line***

 

We are the leading fixed lineoperator in the Philippines and the only company providing fixed linetelecommunications service throughout the country.  Our fixed line businessgroup offers local exchange, international long distance, national longdistance, data and other network, and miscellaneous services. As of March 31,2003, we had fixed lines in service of approximately 2.1 million, whichremained relatively unchanged as compared to December 31, 2002.  Revenues fromour fixed line services accounted for 51% of our consolidated operatingrevenues for the year ended December 31, 2002.

 

We have a 5,400-kilometer longdigital fiber optic backbone, which is supported by an extensive digitalmicrowave backbone.  Our fixed line network reaches all of the major cities andmunicipalities in the Philippines, with a concentration in the MetropolitanManila area.  Our network offers the country's most extensive connections tointernational networks through three international gateway switching exchanges,satellite systems and various regional submarine cable systems in which we haveinterests.

 

With a view to increasing fixedline revenues, we have recently introduced several new fixed line services,including *Telesulit*, a prepaid fixed line service, as well as new dataand other network services, such as *Shops.work*, a network solution thatallows electronic linking of retail stores; *Brains*, an integrated datanetwork solutions package; and *Hype*, a two-way fixed line textingservice.

 

***Wireless***

 

We provide cellular, satellite,VSAT and other services through our wireless business segment.  Revenues fromour wireless services accounted for 48% of our consolidated operating revenuesfor the year ended December 31, 2002.

 

We provide our cellular servicesthrough Smart and Piltel.  Piltel offers cellular services using Smart’s GSMnetwork under a revenue sharing agreement, acting principally as a reseller ofSmart’s digital GSM capacity under its own branding and pricing strategy forvoice and text messaging services.  Our cellular services accounted for about99% of our wireless business revenues in the year ended December 31, 2002.Smart is the leading cellular service provider in the Philippines, withapproximately 7.4 million subscribers as of March 31, 2003, an increase of 8%from 6.8 million subscribers as of December 31, 2002, representing a marketshare of 45%.  Piltel had approximately 2 million subscribers as of March 31,2003, an increase of 12% from 1.8 million as of December 31, 2002, representinga market share of 12%.  In the year ended December 31, 2002, the combinednumber of Smart’s and Piltel’s subscriber increased by 2.2 million,representing 58% of all cellular subscribers added by Philippines cellularoperators in that period.  In the three months ended March 31, 2003, Smartadded 564,000 subscribers and Piltel added 205,000 subscribers.  Since 2000,the aggregate number of Smart’s and Piltel’s cellular subscribers hasoutnumbered our fixed line subscribers.  As of March 31, 2003, the combinedsubscribers of Smart and Piltel outnumbered our fixed line subscribers by morethan 4 to 1.  As of March 31, 2003, Smart and Piltel had the largest and thirdlargest cellular subscriber bases, respectively, in the Philippines.  

 

Smart's and Piltel's cellularsubscriber gains were predominantly attributable to their prepaid GSM services,which Smart introduced in September 1999 and Piltel introduced in April 2000.Approximately 98% of Smart's and Piltel’s combined subscribers were prepaid asof March 31, 2003.  The predominance of prepaid service reflects one of thedistinguishing characteristics of the Philippine cellular market.  The growthin our prepaid service has enabled us to increase and broaden our subscriberbase rapidly while controlling credit risk and reducing billing andadministrative costs on a per-subscriber basis.  

 

Cellular revenues are derived mainly from various voice and dataservices and sales of handsets and phone kits.  Usage revenues, which compriseall voice and SMS and text-related services, contributed 67% of total cellularrevenues in 2002 while the balance of 33% is generated from handset and phonekit sales associated with new subscriber activations.

 

Our cellular subscriber growth hasalso been driven by SMS, a text messaging service on GSM networks, which wasintroduced in 1999.  SMS is extremely popular in the Philippines, particularlyon the prepaid platform, as it provides a convenient and inexpensivealternative to voice and e-mail based communications.  SMS has contributedsignificantly to the continued growth of our cellular data service revenues.During 2002, our SMS system handled 19,558 million outbound messages, anincrease of 39% compared to 14,055 million outbound messages handled during2001.  During the first quarter of 2003, the volume of outbound messageshandled by our SMS system was 6,069 million, a 35% increase over the 4,481million outbound messages handled during the same period in 2002.

 

As of March 31, 2003, Smart'sdigital GSM network had 29 switching centers and 2,953 base stations covering829 cities and municipalities, up from 2,777 base stations as of December 31,2002, which covered 807 cities and municipalities.  Piltel’s prepaid GSMservice, *Talk 'N Text*, is also supported on this network.

 

***Information andCommunications Technology***

 

We conductour information and communications technology businesses through our whollyowned subsidiary ePLDT, which was incorporated in August 2000 and commencedcommercial operations in February 2001.  ePLDT is a broad based integratedinformation and communications technology company, focusing on infrastructureand solutions for Internet applications, Internet protocol based solutions andmultimedia content delivery.  ePLDT’s principal activities are:

 
- the operation of an Internet data center under the brand name  Vitro TM;       - two wholly owned call centers, Vocativ and Parlance; and          - Infocom, an ISP.       ePLDT has also invested in a number of other e-commerce andInternet-related businesses, as described in “— Business — Information andCommunications Technology — Infrastructure and Services — Other Investments”below.     As a new business, revenues fromour information and communications technology services accounted for less than1% of our consolidated operating revenues in 2002.     **Strengths**     We believeour business is characterized by the following competitive strengths:           -  Recognized Brands .  PLDT and Smart are strong and widelyrecognized brand names in the Philippines.  We have built the PLDT brand namefor over 70 years as the leading telecommunications provider in thePhilippines.  Smart is recognized in the Philippines as an innovative providerof high-quality cellular services.  Piltel's  Talk 'N Text  brand, whichis provided using Smart’s GSM network, has also gained significant recognition.             -  Leading Market Shares .  With over 11 million subscribersas of March 31, 2003, we have the leading market position in both the fixedline and cellular markets in the Philippines.  ePLDT's subsidiary, Infocom, isone of the leading ISPs in the Philippines.               -  Diversified Product Mix .  We have reduced our dependenceon our long distance business, which accounted for approximately 20% of ourconsolidated operating revenues in 2002, compared to 25% in 2001 and 38% in2000.  Our wireless business has become a significant revenue contributor,accounting for 48%, 41% and 26% of our total operating revenues in 2002, 2001and 2000, respectively.  We currently generate the balance of our operatingrevenues from a range of products, including local exchange services, and dataand other network-based services.                   -  Advanced Integrated Network .  With one of the mostadvanced and extensive telecommunications networks in the Philippines, we areable to offer a wide array of communications services.  We are enhancing thecapabilities of our fixed line and wireless networks to allow us to betterexploit this competitive strength and achieve higher levels of networkefficiency in providing voice and data services.                   -  Innovative Products and Services .  We have successfullyintroduced a number of innovative and award-winning cellular products andservices, including  Smart zed ä,  SmartMoney,  PureTxt 100 ,  addict mobile  and  SmartLoad .  Wehave likewise launched new fixed line services, including  Telesulit,  aprepaid fixed line service;  Hype,  a two-way fixed line texting service;and data and other network services such as  Brains , a data networksolutions package, and  Shops.work , a network solution that allowselectronic linking of retail stores.  * *                  -  Strong Strategic Relationship .  We have an importantstrategic relationship with NTT Communications.  The technological support,international experience and management expertise made available to us throughthis strategic relationship enhance our market leadership and ability toprovide and cross-sell a more complete range of products and services.     **Strategy**  ** **  The keyelements of our business strategy are:                       -  Build on our leading positions in the fixed line and cellularbusinesses .  We plan to build on our position as the leading provider offixed line 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.  Wealso plan to further increase the capacity and expand the geographic reach ofour cellular network as well as to improve our service quality and indoorcoverage.                         -  Capitalize on our strength as an integrated provider oftelecommunications 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 between voice and data and fixed line and cellular.  We arealso lowering our costs by integrating the operations of our differentbusinesses.                           -  Strengthen our leading position in the data transmissionmarket .  Recognizing the significant growth potential of data and othernetwork services, including Internet-based services, and their increasingimportance to PLDT's overall business strategy, we are emphasizing thedevelopment of our data and network business segment to address the needs oflarge corporations, small and medium-sized enterprises and retail customers.We have launched a variety of products and services, including digital leasedlines, frame relay and other packet-based data services.  We are progressivelyintroducing asymmetric digital subscriber line, or ADSL, technology to ournetwork.                             -  Strengthen our financial position .  We are engaged in anumber of initiatives to strengthen our financial position.  We are working toincrease our cash flow available for debt reduction by containing our operatingcosts, reducing capital expenditures and capping investments in subsidiaries.In December 2002 and June 2003, Smart paid cash dividends to PLDT.  We willcontinue to seek dividend payments from Smart to supplement PLDT’s cash flowsavailable for debt reduction.     **Business**  ** **  **Fixed Line**     We providelocal exchange, international long distance, national long distance, data andother network and miscellaneous services under our fixed line business segment.     *Local Exchange Service*     *Overview*     Our local exchange service, whichconsists of our basic voice telephony business, is provided primarily throughPLDT.  On August 31, 2000, Smart transferred its fixed line business to PLDT.     Thefollowing table summarizes key measures of PLDT's local exchange servicesegment as of and for the years ended December 31, 2000, 2001 and 2002:     
 

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

 

 

 

 

Number of PLDT local exchange lines in service

1,915,985

2,075,109

2,092,539

Growth rate 

9%

8%

1%

Number of PLDT employees

13,285

12,915

12,131

Number of local exchange lines in service per employee

144

161

172

Consolidated local exchange revenues (in millions)

Php18,739

Php21,470

Php23,390

Growth rate

19%

15%

9%

Local exchange revenues as a percentage of total  operating revenues

30%

27%

24%
     We also provide local exchangeservices through Clark Telecom, Subic Telecom, MaraTel and Piltel.  Together,these subsidiaries account for approximately 1% of our total fixed lines inservice.     We regularly introduce new productsand services in an effort to increase our number of subscribers, improve ourchurn management efforts and minimize our credit risk exposure.  Since 1999,PLDT has launched prepaid fixed line services under the brand names *Teletipid*and*Telesulit*, introduced additional value-added services, such as *CallerID* and *conference calling*, and implemented initiatives aimed atincreasing subscription in areas where we have excess capacity and reduced ourinstallation fees, as described below under “— Rates.”     Launched in August 2000, *Teletipid*is the Philippines' first prepaid fixed line service.  Initially intended as anaffordable alternative telephone service for consumers under difficult economicconditions, *Teletipid* now forms an important part of PLDT’s overallchurn and credit risk exposure management and subscriber retention strategy.In February 2002, PLDT launched a premium variant to *Teletipid* under thebrand name *Telesulit*.  As of December 31, 2002, we had 121,054 active *Teletipid*subscribers and 121,973 active *Telesulit* subscribers, which togetherrepresented 12% of our total fixed lines in service.  For more information on *Teletipid*and*Telesulit*, see “Item 5. Operating and Financial Review andProspects –– Results of Operations — 2002 Compared to 2001 — ConsolidatedOperating Revenues — Fixed Line — Local Exchange Service” and “— Results ofOperations— 2001 Compared to 2000 — Consolidated Operating Revenues — FixedLine — Local Exchange Service.”     As of March 31, 2003, PLDT had2,087,237 fixed lines in service, of which 116,874 were active *Teletipid*subscribers and 134,411 were active *Telesulit* subscribers.  The combined*Teletipid* and *Telesulit* subscribers represented 12% of our totalfixed lines in service.     To attract new fixed linesubscribers and retain existing ones, PLDT has introduced various value-addedservices such as *Caller ID.  Caller ID* allows subscribers to identifycallers by telephone number, and is now bundled at special rates with othervalue-added phone services, such as c*all waiting*, c*all forwarding*,*3-party conference calling* and s*peed calling*.     *Rates*     *General*.As of December 31, 2002, basic monthly charges for PLDT’s local exchangeservice in the Metropolitan Manila area were Php634 for a single-partyresidential line and Php1,321 for a single business line.  Monthly charges varyaccording to the type of customer (business or residential) and location, withcharges for urban customers generally being higher than those forrural/provincial customers.  Service connection charges are currently Php895for residential customers and Php1,330 for business customers.  These one-timecharges are uniform throughout the country.  Other than basic monthly charges,we do not charge our postpaid subscribers for local calls.     PLDT adjusts its monthly localexchange service rates according to changes in the peso-to-U.S. dollar exchangerate.  Under the authorization granted to us by the NTC, PLDT is permitted toincrease and are required to decrease these rates by 1% for every Php0.10change in the exchange rate relative to a base exchange rate of Php11 to US$1.During 2002, PLDT implemented 13 upward and six downward adjustments in ourmonthly local exchange service rates.     PLDT’s *Teletipid* and *Telesulit*customers do not pay a basic monthly charge but are charged on usage.Initially, the rate for local calls charged to our *Teletipid* customerswas Php0.50 per minute but was increased to Php1.00 per minute, effective May1, 2002.  The rate for local calls charged to our *Telesulit*customerswas also increased from an initial rate of Php0.75 per minute to Php1.00 perminute, effective February 1, 2003.  The international and national longdistance rates PLDT charges to its *Teletipid* and *Telesulit*customers are similar to the rates it charges its postpaid customers.  For adescription of these rates, see "— International Long Distance Service —Rates" and "— National Long Distance Service — Rates."  *Teletipid*phone kits are sold for Php1,700 per unit, inclusive of Php300 worth ofpre-stored call credits, while *Telesulit* phone kits are sold forPhp1,900 per unit, inclusive of Php500 worth of pre-stored call credits.     EffectiveJanuary 1, 2003, calls originating from cellular subscribers are charged atermination rate of Php2.50 per minute, an increase from the previous rate ofPhp2.00 per minute, which will further increase to Php3.00per minute effective January 1, 2004.      *International LongDistance Service*     *Overview*     Our international long distanceservice consists of voice and packet-based voice services that go through ourinternational gateway facilities.  We also generate international long distancerevenues through access charges paid to us by other Philippinetelecommunications carriers for incoming international voice calls thatterminate to our local exchange network.  Our subsidiary, Subic Telecom, alsoprovides international long distance services through its own internationalgateway facility.  Our packet-based voice services are transmitted over ourexisting traditional circuits, the voice over Internet protocol, or VOIP, thenetwork of a consortium of dominant carriers in Asia, and the asynchronoustransfer mode, or ATM, Internet protocol global backbone of our wholly-ownedsubsidiary, PLDT Global.     Thefollowing table shows certain information about our international long distancebusiness as of and for the years ended December 31, 2000, 2001 and 2002:     
 

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

 

 

 

 

Total PLDT call volumes (million minutes)(1)

2,378

2,814

2,576

Growth rate

103%

18%

(8%)

Inbound call volumes (million minutes)

2,237

2,648

2,409

Growth rate

115%

18%

(9%)

Outbound call volumes (million minutes)

141

165

167

Growth rate

5%

17%

1%

Inbound-outbound call ratio

15.8:1

16.0:1

14.4:1

Consolidated international long distance revenues (in millions)

Php13,226

Php11,544

Php10,957

Growth rate

(11%)

(13%)

(5%)

International long distance revenues as a percentage of total operating revenues

21%

15%

11%
  _____________     *(1)   **Call volumes for the yearsended December 31, 2000 and 2001 have been restated to conform with our 2002financial statement presentation which includes interconnection traffic.*     International long distance servicehistorically was our major source of revenue.  However, due to the steepdecline in inbound termination rates and collection rates and intensecompetition, revenues derived from our international long distance service havebeen declining through the end of 2002.  We adopted a two-pronged initiative inearly 2000 with respect to inbound international service to try to address thisissue.  First, we lowered our termination rates at that time to market level torecapture market share from our competitors.  Second, we intensified ourefforts to identify and contain operators that use illegal bypass route callsto the Philippines through more effective monitoring of our internationaltrunks and leased lines.  International simple resale operation occurs when acompany rents an international leased line from a Philippine internationalgateway operator, aggregates traffic outside the Philippines and carries andterminates this traffic at the public switch telephone network in thePhilippines.  International simple resale can be used to bypass the localaccess charge system and is illegal in the Philippines.     Since 2001, we have become moreselective in accepting incoming traffic from some carriers, particularly secondand third tier international carriers.  In addition, we adopted a policy in2001 requiring prepayment from certain second and third tier internationalcarriers as a prerequisite for accepting their incoming traffic.  For adescription of this policy, see “Item 5. Operating and Financial Review andProspects — Results of Operations — 2002 Compared to 2001 — ConsolidatedOperating Revenues — Fixed Line — International Long Distance Service."     We are also pursuing a number ofother initiatives to further strengthen our inbound business.  We earnincremental revenues from foreign carriers by using our fiber optic submarinecable capacity to offer least cost call routing and regional hubbing.  We alsoprovide "carrier's carrier service" to new and emerging domestic andforeign service providers, including transit service that enables carriers tocomplete calls to countries to which they do not have a direct connection, andInternet telephony.  We have formed PLDT Global to establish our presence inseveral countries in North America, Europe and Asia.  Through arrangements withlocal carriers in these countries, we aggregate inbound call traffic to thePhilippines at our points of presence and, using our capacity in submarinecable systems connected to each point of presence, transmit calls to ournetwork.  We believe this strategy will help us mitigate the effect of rapidlydeclining accounting and settlement rates for inbound traffic, maximize the useof our existing international facilities, collect inbound international trafficat their sources and develop alternative sources of revenues such as carryingtraffic without routing through the Philippines.     To stimulate call volume growth andprevent further erosion in our share of outbound international call traffic, wehave introduced a number of marketing initiatives, including substantial cutsin international direct dialing rates, innovative pricing packages for largeaccounts and loyalty programs for some customers.     The tablebelow sets forth the net settlement amounts for international calls handled byPLDT, by country, for the years ended December 31, 2000, 2001 and 2002:     
 

**Net Settlement**

 

**Years Ended December 31,**

** **

**2000**

**2001**

**2002**

 

**(in millions)**

 

 

 

 

United States

US$107

US$82

US$68

Japan

22

23

16

Australia

9

18

5

Saudi Arabia

12

7

5

Canada

15

10

7

Hong Kong

5

7

3

Taiwan

1

3

6

Singapore

1

1

1

Others

30

49

75

 
Total

US$202

US$200

US$186

 
 

 

 

*Rates*

* *

We adopted the U.S. FCC benchmarkaccounting rate of US$0.38 per minute for inbound international calls onJanuary 1, 2000, which represented a settlement rate of US$0.19 per minute forinternational long distance traffic between the Philippines and the UnitedStates.  Adopting the U.S. FCC benchmark accounting rate one year ahead of thetarget date of January 1, 2001 allowed us pricing flexibility for inbound calltraffic.  This pricing flexibility enabled us to compete more effectively inthe U.S.-Philippine telecommunications market.  Our termination rates forinbound calls from the United States have continued to decline through the endof 2002 to levels below the U.S. FCC benchmark accounting rate. Terminationrates for inbound calls from other countries have also been declininggenerally.  As of December 31, 2002, a substantial portion of PLDT’sinternational inbound traffic terminating on its fixed line network was chargedan average termination rate of approximately US$0.08 per minute.  PLDTincreased termination rates with carriers accounting for a substantial portionof its international inbound traffic terminating on its fixed line network toUS$0.12 per minute effective February 1, 2003.  

 

On March 10, 2003, theInternational Bureau of the U.S. FCC issued an Order on petitions filed separatelyby AT&T and MCI requiring all U.S. carriers providing directfacilities-based service on the U.S.-Philippines route to suspend payments fortermination services to Philippine carriers, including PLDT, Smart and SubicTelecom, until such time as the U.S. FCC issues a public notice that AT&T’scircuits on the U.S.-Philippine route are fully restored.  The Order alsoremoved the Philippines from the list of U.S.- international routes approvedfor the provision of International Simple Resale.  In response to the Order ofthe International Bureau of the U.S. FCC, the NTC issued a Memorandum Orderdated March 12, 2003, directing all affected Philippine carriers “(1) not toaccept terminating traffic via direct circuits from U.S. facilities-basedcarriers who do not pay Philippine carriers for services rendered; and (2) totake all measures necessary to collect payments for services rendered in orderto preserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”  OnApril 9, 2003, we filed with the U.S. FCC an application for review of theInternational Bureau’s March 10, 2003 Order.  Our revenues derived frominternational long distance calls have not been materially adversely affectedby the Order of the International Bureau of the U.S. FCC because most of thefacilities-based traffic originating in the United States is being re-routedthrough circuits of third parties not subject to the Order.  See “Item 3. KeyInformation — Risk Factors — Risks Relating to Us — Our results of operationshave been, and may continue to be, adversely affected by lower U.S. dollarrevenues caused by declining international termination rates and competition ininternational long distance service”, “Item 5. Operating and Financial Reviewand Prospects — Other Information — U.S. FCC Proceeding on Termination Rates”,“Item 8. Financial Information — Legal Proceedings — U.S. FCC Proceeding onTermination Rates” and Note 28 to our financial statements in Item 18 forfurther discussion.

 

Effective February 2001, PLDTreduced its IDD rates for retail customers from US$0.49 per minute for off-peakhours and US$0.69 per minute for peak hours to a flat rate for retail customersof US$0.40 per minute applicable to all call destinations at any time and anyday of the week. Additionally, in November 2001, PLDT introduced Budget Card, aprepaid call card offering a reduced IDD rate of US$0.24 per minute for callsto the United States, Canada and Hawaii. Budget Cards are sold in adenomination of Php200, which must be used within 24 hours of activation.  

 

*National Long DistanceService*

* *

*Overview*

 

Our national long distance servicesare provided primarily through PLDT.  This service consists of voice servicesfor calls made by our fixed line customers outside of their local service areaswithin the Philippines and access charges paid to us by othertelecommunications carriers for calls carried through our backbone networkand/or terminating to our fixed line customers.

 

Thefollowing table shows our national long distance call volumes and revenues asof and for the years ended December 31, 2000, 2001 and 2002:

 

 

Years Ended December 31,

 

**2000**

**2001**

**2002**

 

 

 

 

Total PLDT call volumes (million minutes)

3,255

2,756

2,145

Growth rate

15%

(15%)

(22%)

Consolidated national long distance revenues (in millions)

Php10,453

Php8,367

Php8,191

Growth rate

5%

(20%)

(2%)

National long distance revenue as a percentage of total operating revenues

17%

10%

9%

 

Cellular substitution and thewidespread availability and growing popularity of alternative, more economical,non-voice means of communications, particularly e-mail and cellular textmessaging, have negatively affected our national long distance call volumes.The integration of some of our local exchanges into a single local calling areaeffective August 2000, as mandated by the NTC, has also negatively affected ournational long distance call volumes, and consequently, our revenues.  Becauseof this integration, calls between two exchanges located within the sameprovince are no longer considered national long distance calls but are treatedas local calls.

 

The technological changes we madefrom analog to digital switches has enabled us to increase data speed over ourtelephone lines and to shift customers from operator-assisted long distanceservice to lower-cost direct dialing service.  As a result, a substantialnumber of our national long distance calls have been direct-dialed calls.Operator-assisted calls are charged based on a minimum of three minutes plusoperator charges, while direct-dialed calls are charged on a less costly perminute basis.

 

In 2001, we launched *PLDTPremium Phone Services*, which allow customers to choose from a range ofservice applications, such as appointment-booking services for select embassies(including, among others, the U.S. and Australian embassies in thePhilippines), spiritual and love counseling, joining television-based gameshows, celebrity chatting, downloading and sending of ringtones and logos,televoting, job postings, and myMusic, a music entertainment line to variouspopular artists.  PLDT charges a minimum of Php10 per minute for these premiumphone services.

 

*Rates*

 

Rates for national long distancecalls are based on time, distance and type of service, such as whether the callis operator-assisted or direct-dialed.  In the latter part of 2001, PLDTsimplified its rates for calls to fixed line subscribers and for thoseterminating to cellular subscribers resulting in an overall rate increase.  Forcalls terminating to fixed line subscribers, the applicable rates from Januaryto November 1, 2001 ranged from Php3.00 to Php5.00 per minute, depending ondistance and time of call.  In line with its move towards rate simplification,PLDT simplified these rates to a flat rate of Php4.50 per minute effectiveNovember 2, 2001.  At the same time, PLDT simplified its rates for callsterminating to cellular subscribers from a range of Php10.00 to Php16.00 perminute to a uniform rate of Php13.75 per minute.  Effective March 1, 2003, PLDTincreased the rate for calls terminating to other local exchange carriers froma flat rate of Php4.50 per minute to Php5.00 per minute.  Through ratesimplification, we aim to simplify our tariff structure in order to enhance thecompetitiveness of our products and services and increase our operatingefficiencies.  

 

In 2001, PLDT entered into newinterconnection agreements with local exchange carriers and cellularoperators.  In May 2001, PLDT entered into a new interconnection arrangementwith the majority of other local exchange carriers, pursuant to which theoriginating carrier pays (1) a hauling charge of Php0.50 per minute forshort-haul traffic or Php1.25 per minute for long-haul traffic to the carrier owningthe backbone network and (2) an access charge of Php1.00 per minute to theterminating carrier.  In addition, effective January 2002, access charges beingpaid by PLDT to cellular operators were reduced to Php4.50 per minute fromPhp6.50 per minute it paid for the period from July to December 2001.  Prior toJuly 2001, PLDT was paying access charges ranging from a low of Php7.69 perminute to a high of Php10.94 per minute for calls terminating to cellularsubscribers, depending on whether the calls were local or long distance.  Weadopted simplified pricing plans and amended our interconnection agreementswith cellular operators with a view to maximizing revenues of our national longdistance service.  PLDT still maintains revenue-sharing arrangements with a fewother local exchange carriers, whereby charges are generally apportioned 30%for the originating entity, 40% for the backbone owner and the remaining 30%for the terminating entity.  For more information on these interconnectionarrangements, see “Item 5. Operating and Financial Review and Prospects —Results of Operations — 2002 Compared to 2001 — Consolidated Operating Revenues— Fixed Line — National Long Distance Service."

 

*Data and Other NetworkServices*

 

Recognizing the growth potential ofdata and other network services, including Internet-based services, and inlight of their importance to our business strategy, we have been puttingconsiderable emphasis on this service segment.  In 2002 and 2001, this segmentregistered the highest percentage growth in revenues among our fixed lineservices.

 

The upgrading of our network inrecent years through the completion of our domestic fiber optic backbone hasenabled us to offer a growing range of value-added and broadband services.With this and other technological upgrades, our infrastructure is beingdeveloped from a traditional voice facility to a new packet-switched andInternet-based network that allows faster transmission of voice, video anddata.  Data services we currently provide include:

 
- traditional bandwidth service — high-speed point-to-pointdomestic and international digital leased line services;       - broadband/packet-based/Internet protocol-based services — framerelay, ATM, Internet protocol virtual private network, or IP-VPN, digital subscriberline, or DSL, Internet gateway and wholesale digital signal level 3, or DS3;and         - other packet-based switching services — Datapac and integratedservices digital network, or ISDN.     Theforegoing services are used for the following:           - domestic and international communication;             - broadband data transmission services that transmit data over arange of frequencies and/or bandwidth into several narrower bands;               - Internet exchange services that provide ISPs with a primaryconnection to the global Internet to exchange local traffic generated withinthe Philippines;                 - private networking services that use the public Internet as abackbone for private interconnection between different locations;                   - switch-based services, provided through a fixed bandwidthtransmission facility, that allow establishment of a dedicated connection forthe duration of the call; and                     - international packet-based services, provided through bilateralarrangements and global alliances that integrate voice, video and data.     We continue to broaden our serviceofferings with the launch of new services and expansion or enhancement of someof the existing ones.     In March 2001, PLDT launched RemoteAccess Service, offering customers in the Philippines outsourced dial-up accessto their local area networks and head offices from remote locations using ourservers.  PLDT has installed remote access servers at our local central officeslocated in 17 key cities throughout the Philippines.     In April 2001, PLDT launchedIP-VPN, a networking service incorporating multi-protocol label switching.This switching technology assigns a label to each packet of data before it issent through the public Internet.  The label contains information such asdestination, precedence and VPN membership designed to prevent access toinformation by persons outside their virtual private network.  In June 2001, weexpanded the coverage of our IP-VPN service by making it available throughoutSoutheast Asia through ACASIA, a joint venture telecommunications company ownedby PLDT, Singapore Telecom, Telekom Malaysia, Jabatan Telecom Brunei, CAT ofThailand and PT Indosat.     In 2001, PLDT substantiallyincreased the capacity of our *I-Gate* network by 110 megabits per secondto 155 megabits per second to meet increased demand for broadband Internetaccess.  *I-Gate* is our Internet gateway service that provides high-speedaccess to the global Internet.  With the activation in December 2001 of theAsia Pacific Cable Network 2, of which PLDT is a part owner, we have furtherincreased *I-Gate's* capacity to 290 megabits per second as of October 31,2002.  By the end of 2002, we increased *I-Gate’s* capacity by 155megabits per second, making it the biggest terrestrial Internet connection inthe Philippines.     In the second half of 2001, PLDTaccelerated the deployment of our DSL infrastructure to meet the growing demandfor high-speed and dedicated Internet access.  DSL is a broadband service thatallows high-speed data transmission over ordinary (copper) telephone lines.PLDT’s DSL service is now available in Metro Manila and other key cities in thePhilippines under the brand names *PLDT DSL* for corporate customers and *myDSL*for retail customers.     In May 2002, PLDT launched apay-per-use dial-up Internet service under the brand name *PLDT Vibe*,which is available on a postpaid or prepaid basis to PLDT’s fixed linesubscribers. Charges for this service are Php0.25 per minute for off-peakhours, which are from 10:01 p.m.to 6:00 a.m., and Php0.50 perminute for peak hours, which are from 6:01 a.m.to 10:00 p.m.  With the launch of*PLDT Vibe*, PLDT now offers two residential Internet service packagestargeting separate markets — *PLDT Vibe* for light to medium Internetusers and *myDSL* broadband for heavy Internet users. As of December 31,2002, the number of PLDT’s postpaid fixed line subscribers that signed up for *PLDTVibe*was**60,878, while the number of subscribers to *PLDT DSL*and *myDSL* broadband service reached 10,896.  As of March 31, 2003, thenumber of PLDT’s postpaid fixed line subscribers that signed up for *PLDTVibe* was 72,263 while the number of subscribers to *PLDT DSL* and *myDSL*broadband service rose to 12,869 as of March 31, 2003.     In August 2002, PLDT launched *Shops.work*,a network solution that allows the electronic linking of retail stores providing,among others, sales and inventory reports, up-to-date and real-time monitoringof sales and inventory, and on-line access to head offices.      In March 2003, PLDT launched anumber of data services, namely: *Continuum, iView*and *Encompass*,all under the *Brains* umbrella. *Brains Continuum* providescustomers the ability to recover from service interruptions and offers networkdiversity, facility and hosting services in partnership with ePLDT.  *BrainsiView* enables customers to monitor the performance of their network, trackbandwidth utilization patterns and identify the source of network problems.  *BrainsEncompass* provides a broad range of services for the customers’ managednetworking needs, be it a wide area network or local area network.     In April 2003, PLDT introduced afull two-way fixed line text messaging service under the brand name *Hype,*which allows subscribers to send and receive text messages to and from landlineand mobile phones, and is capable of international text messaging. *Hype*also**allows subscribers to join TV network-based and new PLDT-initiated textingservices.     **Wireless**     We provide cellular andsatellite, VSAT and other services through our wireless business segment.      *Cellular Service*     *Overview*     Our cellular business, which weprovide through Smart and Piltel, is focused on providing products and servicesusing our digital GSM network, including products and services based on SMStechnology, such as *Smart zed*TM and *Smart Money*.  Piltel’s GSMprepaid service, *Talk 'N Text*, is also supported on Smart’s GSM network.     Thefollowing table summarizes key measures of our cellular business as of and forthe years ended December 31, 2000, 2001 and 2002:     
 

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

Cellular subscriber base

3,515,293

6,368,850

8,599,306

Smart

2,858,479

4,893,844

6,825,686

GSM

2,331,005

4,641,666

6,825,686

Prepaid

2,263,322

4,569,616

6,649,038

Postpaid

67,683

72,050

176,648

Analog/ETACS (1)

527,474

252,178

—

Prepaid(2)

282,529

87,429

—

Postpaid

244,945

164,749

—

Piltel

656,814

1,475,006

1,773,620

GSM—Prepaid(3)

368,578

1,329,326

1,773,620

Analog/CDMA(1)

288,236

145,680

—

Prepaid

200,042

76,473

—

Postpaid

88,194

69,207

—

Growth rate of cellular subscribers

137%

77%

38%

Smart

179%

71%

39%

GSM

1,119%

99%

47%

Analog/ETACS

(37%)

(52%)

(100%)

Piltel

44%

225%

20%

GSM—Prepaid(3)

100%

361%

33%

Analog/CDMA

(37%)

51%

(100%)

Cellular revenues (in millions)

Php15,576

Php31,627

Php45,375

Usage(4)

11,840

20,157

30,483

Others(5)

3,736

11,470

14,892

Percentage of cellular revenues to total operating revenues

25%

40%

47%
  _____________     *(1)      **In December 2002, Smartclosed down its analog/ETACS network.  In 2001 and 2002, Piltel recognizedimpairment losses in respect of its AMPS/CDMA network.*  * *  *(2)      **Priorto October 2000, Smart's prepaid analog subscribers were classified as inactiveif they had not reloaded for at least three months.  In October 2000, Smartchanged its disconnection policy with respect to prepaid analog subscribers,eliminating the "inactive" classification and adopting the samedisconnection periods applicable to its prepaid GSM subscribers.*  * *  *(3)      **RepresentsTalk ‘N Text, a prepaid GSM service provided by Piltel using Smart’s GSMnetwork. Piltel's GSM revenue is net of service fees payable to Smart for usingSmart's GSM network.  Piltel does not offer postpaid GSM service.*  * *  *(4)      **Refers to GSM and analogvoice and data revenues.*  * *  *(5)      **Includes handset, phone kitand other non-usage revenues.*     *ServicePlans*.  We market nationwide cellular communications services under thebrand names *Smart Buddy, Smart Gold*, *addict mobile* and *Talk 'NText*.     *Smart Buddy* is a prepaidservice while *Smart Gold* and *addict mobile* are postpaid services.These three services are provided through Smart’s digital GSM network.  OfSmart's total cellular subscribers as of December 31, 2002, 97% were *SmartBuddy* prepaid subscribers and 3% were *Smart Gold* postpaidsubscribers.  *addict mobile* was introduced in April 2003.  *Talk 'NText* is a prepaid service provided using Smart’s GSM network marketed byPiltel pursuant to a facilities service agreement between Smart and Piltel.Before Smart decommissioned its analog enhanced total access communicationssystem, or ETACS, network in December 2002, it had also offered analog prepaidand postpaid services under the brand names*BillCrusher*and*PriceBuster,*respectively.  Prior to 2002, Piltel had also offered analogprepaid and postpaid services under the brand names *Phone Pal* and *Mobiline*,respectively.      As ofDecember 31, 2002 and March 31, 2003, Smart’s and Piltel’s combined cellularsubscribers reached 8,599,306 and 9,368,513, respectively. As a result, theaggregate of Smart’s and Piltel’s cellular subscribers has outnumbered ourfixed line subscribers since 2000. As of December 31, 2002, the combinedsubscribers of Smart and Piltel outnumbered our fixed line subscribers by morethan 4 to 1.  As of December 31, 2002, Smart had 6,825,686 subscribers, ofwhich 6,649,038 were *Smart**Buddy* prepaid subscribers and 176,648were *Smart Gold* postpaid subscribers.  Smart’s prepaid and postpaidsubscribers increased to 7,176,196 and 213,611, respectively, for a total of7,389,807 subscribers, as of March 31, 2003.  As of December 31, 2002 and March31, 2003, Piltel’s *Talk 'N Text* subscribers reached 1,773,620 and1,978,706, respectively.  Piltel does not offer postpaid GSM service.     *SMS and Other Value-addedServices*.  Our cellular subscriber growth has been driven by SMS, a textmessaging service on GSM networks, which was introduced in 1999.  SMS isextremely popular in the Philippines, particularly on the prepaid platform, asit provides a convenient and cost-efficient alternative to voice and e-mailbased communications.  Strong volume growth in SMS contributed significantly toour cellular revenue growth in 2002.  The total volume of outbound messageshandled by our SMS system during 2002 increased by 39% to 19,558 million from14,055 million outbound messages handled during 2001.  During the first quarterof 2003, our SMS system handled 6,070 million outbound messages, a 35% increaseover the 4,481 million outbound messages handled during the same period in2002.       Our value-added services areprimarily based on SMS technology.  We offer value-added services such as voicemail, information-on-demand, which is a service that allows subscribers toorder information from our content providers whenever desired, mobile bankingand *TextMail*, which is a service that allows subscribers to send andreceive text messages through their personal computers, and location-basedservices.  Since 2000, we have launched the following major value-addedcellular services:                       -  Smart zedTM , a partnership with international cellularoperator Sonera zed Ltd. of Finland, enables subscribers to personalize theirinformation requirements not only as to the types of information required butalso when the information is required.  Sonera zed Ltd. has introduced a singleplatform that provides access to local and global information through SMS orwireless application protocol;                         -  Mobile Banking , launched in collaboration with variousbanks, allows subscribers to execute banking transactions, such as balanceinquiries and transfers, over their mobile telephones; and                           -  Smart Money , launched in conjunction with MasterCard,enables subscribers to pay for their purchases by transferring money from theirbank accounts to their  Smart Money  cards as well as reload their prepaidcards electronically.     Value addedservices offered through *Talk 'N Text* include group text messaging, or *TeamTEXT*, balance inquiry via text, cell-to-cell instant reload that enablessubscribers to reload their accounts through their handsets, andinformation-on-demand through the *zedTM* service.     Smart and Piltel have a number ofinteractive activities, such as text games and chat services, developed ontheir own platforms.     *Smart Money* was cited as the"Best Product Innovation" by MasterCard International and the"Most Innovative GSM Wireless Service for Customers" at the 3rd GSMWorld Congress held in Cannes, France, in March 2001.        Due to the high level of SMS usage,we believe that the Philippine market is well-suited for text-basedinformational and e-commerce services.  Our current approach is to continuemaximizing our GSM, or 2G, services.  We also offer General Packet RadioService, or GPRS or 2.5G, to service increased demand for bandwidth-intensiveapplications.  GPRS allows data transfer at an average speed of up to 115 kilobitsper second.  In addition, we are in the process of upgrading our network toEnhanced Data rates for GSM Evolution, or EDGE.  EDGE is a technology thatwould further increase the speed and data capability of our GSM network.     *Rates*  * *  *Smart Buddy* and Piltel’s *Talk‘N Text*prepaid cards are sold in denominations of Php300, Php500 andPhp1,000, which include 33, 83 and 250 free SMS text messages, respectively.The stored value of a prepaid card remains valid for a period of two monthsfrom the time a subscriber activates the card.  On May 11, 2003, *Smart Buddy*and*Talk 'N Text*launched  *SmartLoad,* an “over-the-air”electronic loading facility designed to make reloading of air time credits moreconvenient for, and accessible to *Smart Buddy* and *Talk ‘N Text*subscribers.  These “over-the-air” reloads, which have both voice and textfunctions, are packaged in smaller denominations of Php30, Php60 and Php115,but have shorter validity periods of 3 days, 6 days and 12 days, respectively.We had also previously offered *PureTxt 100*, a Php100-denominated prepaid card offering a text-onlyservice designed as an alternative for *Smart Buddy*and *Talk 'N Text*subscribers who may have temporarily been unable to afford thePhp300-denominated card.  *PureTxt 100* cards came with a free allocationof ten text messages and were valid for one month. Like *PureTxt 100*, webelieve that *SmartLoad* will encourage subscribers to stay within ournetwork, instead of churning and re-subscribing at a later time.  We haveceased the production and sale of *PureTxt 100* cards in anticipation thatour *PureTxt* subscribers will eventually avail of *SmartLoad*.     The peak hour air time rate for *SmartBuddy* subscribers is Php8.00 per minute, while the off-peak hour air timerate is Php4.00 per minute.  Charges for national direct dial services for *SmartBuddy* subscribers are as follows: for calls within the same island Php11.00per minute for peak hours and Php7.00 per minute for off-peak hours, for callsbetween Luzon and Visayas and between Visayas and Mindanao Php12.00 per minutefor peak hours and Php8.00 per minute for off-peak hours, and for calls betweenLuzon and Mindanao Php13.00 per minute for peak hours and Php9.00 per minutefor off-peak hours.  As described under “Item 5. Operating and Financial Reviewand Prospects — Results of Operations — 2001 Compared to 2000 — ConsolidatedOperating Revenues — Wireless — Cellular Service” on September 15, 2001 andJanuary 1, 2002, Smart reduced its free text message allocations to subscribersby a total two-thirds of the previous free text message allocations.     *Talk 'N Text* subscribersare charged Php6.50 per minute for local and cell-to-cell calls and fornational direct dial services, a peak-hour rate of Php12.00 per minute and anoff-peak hour rate of Php8.00 per minute, regardless of destination.        Prior to January 1, 2002, *SmartGold* offered the following monthly air time plans: Php600, Php1,200,Php1,800, Php3,000 and Php4,000.  Subscribers who enrolled in these plans priorto January 1, 2002 remained on these plans following introduction of the plansdescribed below.     *SmartGold* subscribers may choose from any of the subscription plans set forth inthe table below:     
**Plan**

**Free SMS Text Messages(1)**

**Free  Air time (in minutes)**

**Monthly  Service Fee (in pesos)(2)**

**Rate for SMS  Text Messages (pesos per  message)**

**Smart to Smart  Call Rate  (Peak/Off Peak)  (pesos per  minute)(3)**

**Smart to Fixed  Line/Other Cellular  Local Call Rate  (Peak/Off Peak)  (pesos per  minute(4)**

**NDD Rate  (Peak/Off Peak)  (pesos per  minute)(5)**

**NDD Rate  (Peak/Off Peak)  (pesos per  minute)(6)**

 

 

 

 

 

 

 

 

 

Gold Rave

500

20

500

1.00

7.50/3.00

8.00/4.00

11.00/7.00

9.50/5.00

Gold Standard

225

85

600

1.00

7.00/3.00

7.50/4.00

10.50/7.00

9.00/5.00

Gold Pick

350

100

800

1.00

7.00/3.00

7.50/4.00

10.50/7.00

9.00/5.00

Gold Choice

390

235

1,335

0.50

6.50/2.00

7.00/4.00

10.00/6.00

8.50/4.00

Gold Select

500

390

1,995

0.50

5.00/2.00

6.50/4.00

9.50/6.00

7.00/4.00

Gold Premium

800

600

2,665

0.50

4.00/2.00

5.00/4.00

8.00/6.00

6.00/4.00

Gold Elite

650

750

3,500

0.50

4.00/2.00

5.00/4.00

8.00/7.00

6.00/4.00
  _____________     *(1)    **Applies only topoint-to-point text messages sent within Smart's network and does not apply toSMS-based value-added services.*  * *  *(2)    **The monthly service fees maybe applied to any local, international long distance or national long distancecall, or any text, Smart zed**ä**, voice mailor international roaming service.*  * *  *(3)    **Air time rates for localcalls made to other Smart GSM subscribers.*  * *  *(4)    **Airtime rates for local calls made to fixed lines and cellular subscribers ofother carriers.*  * *  *(5)    **ForVisayas, Mindanao and Luzon, excluding radius covering Bulacan, Cavite,Laguna-San Pedro and Rizal.*  * *  (6)     *Forradius covering Bulacan, Cavite, Laguna-San Pedro and Rizal.*     On April 17,2003, Smart began offering the following postpaid plans under the *addict**mobile* brand.     
**Plan**

**Addict  Credits  (in pesos)**

**Free  Air time (in minutes)**

**Monthly  Service Fee (in pesos)**

**Rate for SMS  Text Messages (pesos per  message)**

**Smart to Smart Call Rate  (Peak/Off Peak)  (pesos per  minute)**

**Smart to Fixed Line/Other Cellular  Local Call Rate  (Peak/Off Peak)  (pesos per minute)**

**NDD Rate  (Peak/Off Peak)  (pesos per minute)**

**NDD Rate  (Peak/Off Peak)  (pesos per  minute)**

 

 

 

 

 

 

 

 

 

addict 500

500

20

500

1.00

7.50/3.00

8.00/4.00

11.00/7.00

9.50/5.00

addict 600

300

85

600

1.00

7.00/3.00

7.50/4.00

10.50/7.00

9.00/5.00

addict 800

450

100

800

1.00

7.00/3.00

7.50/4.00

10.50/7.00

9.00/5.00

addict 1335

550

235

1,335

0.50

6.50/2.00

7.00/4.00

10.00/6.00

8.50/4.00

addict 1995

700

390

1,995

0.50

5.00/2.00

6.50/4.00

9.50/6.00

7.00/4.00

addict 2665

850

600

2,665

0.50

4.00/2.00

5.00/4.00

8.00/6.00

6.00/4.00

addict 3500

950

750

3,500

0.50

4.00/2.00

5.00/4.00

8.00/7.00

6.00/4.00
     Smart is permitted to adjust its cellular air time andnational direct dial rates according to changes in the peso-to-U.S. dollarexchange rate.  Under the authorization granted to Smart by the NTC, Smart ispermitted to increase and is required to decrease its air time and nationaldirect dial rates by 1% for every Php0.25change in the exchange rate relative to a base rate of Php24.726 = US$1.00.  However, Smart has not implementedany foreign currency adjustments to its rates since November 4, 1998 because ofthe concern that increased rates may result in decreased usage by itssubscribers.     *Smart Buddy,**Smart Gold*and*addict mobile***subscribers pay an international direct dialing rateof US$0.40 per minute.  This rate applies to 200 destinations, including theUnited States, Hong Kong, Japan, Singapore, the United Kingdom and the UnitedArab Emirates.  Smart charges US$0.98 for 27 other destinations such asAfghanistan and Cuba and US$2.18 for another ten destinations such as EastTimor and the Falkland Islands. Talk ‘N Text subscribers pay an internationaldirect dialing rate of US$0.40 per minute to all 237 destinations.     Charges forpoint-to-point text messages beyond the allotted free text messages are asfollows:                             - for  Smart Buddy  and  Talk 'N Text  subscribers,Php1.00 per message; and                               - for  Smart Gold  and  addict mobile  subscribers,Php0.50 or Php1.00 per message, depending on air time plan, as listed in thetable above.     Smart and Talk ‘N Text subscriberspay for SMS-based value-added services, as follows:                                 - Php15.00 per message for international text for  Smart Buddy  and Talk ‘N Text  subscribers and Php10.00 per message for international textfor  Smart Gold  and  addict mobile  subscribers;                                   - Php2.50 per message for e-text and information-on-demandservices, such as news, stock and entertainment updates;                                     - Php15.00 for downloading ringtones and logos; and                                       - Php2.50 per  Mobile Banking  and  Smart Money  transaction,such as balance inquiry and fund transfer.     For multimedia messaging service,or MMS, and wireless application protocol, or WAP, services, the charges are asfollows:                                         - Php5.00 per person-to-person MMS still and animated images;                                           - Php15.00 per download of pictures, greeting cards, polyphonicring tones and traffic shots;                                             - Php2.50 per transaction when surfing on the Smart WAP portal; and     Except for *Mobile Banking*and*Smart Money*, which it does not offer, *Talk 'N Text* charges thesame rates for value- added services as those charged by Smart.  For voice mailretrieval, *Smart Buddy*, *Smart Gold* and *addict mobile*subscribers are charged Php8.00 per minute during peak hours and Php4.00 perminute during off-peak hours.  For voice mail retrieval, *Talk 'N Text*subscribers are charged a flat rate of Php4.00 per minute.     In addition to enjoying the sametariffs as *Smart Gold* subscribers, *addict mobile* subscribers areallowed to apply their allocated free credits on their choice of data andvalue-added services.     We sell our cellular servicesprimarily through a network of independent dealers that generally have theirown retail networks, direct sales forces and sub-dealers.  These dealersinclude major distributors of cellular handsets.  We currently have six dealersthat carry out distribution throughout the Philippines.  On December 1, 2002,Smart purchased the assets of Telecommunications Specialists, Inc., or TSI, amajor dealer that used to account for more than half of our sales of prepaidair time cards, and integrated TSI’s employees following the acquisition.Account managers from our dealer sales force manage our dealer network andregularly update these dealers on our upcoming marketing strategies,promotional campaigns and product development.  In addition, subscribers mayreload their prepaid cards electronically using their handsets through *SmartMoney* or “over-the-air” through *SmartLoad*.      For prepaid services, Smart andPiltel pay commissions to dealers for both prepaid phone kits and air timecards sold.  Beginning August 1, 2002, Smart and Piltel reduced the maximumcommission to dealers for prepaid phone kit sales from a range of Php1,000 toPhp1,300 per unit sold paid in the form of prepaid “call and text” cards(depending on the volume purchased) to Php800 in cash per prepaid phone kitsold.  An additional 1% rebate is given on cash purchases.  Air time cards aresold to dealers at volume discounts determined by the value of the cardspurchased by the dealers.  Air time cards cannot be returned or refunded andnormally expire within 6 to 12 months after release from the Smart and Piltelwarehouse.  For postpaid services, Smart pays dealer commissions based on theair time plan sold.     *Satellite and VSAT*  * *  *Overview*     We currently provide satellite andVSAT services through Mabuhay Satellite and Telesat.  ACeS Philippines, oursatellite phone service provider, started to roll out fixed satellite terminalsin the last quarter of 2001 and started commercial operations on January 1,2002.     *Mabuhay Satellite*     We currently own 67% of MabuhaySatellite, which is engaged in the control and operation of the Agila IIsatellite. Agila II, which is the Philippines' first communications satellite,commenced commercial operations in January 1998.  Mabuhay Satellite leasessatellite space segments in both the C and Ku bands on the Agila II.  Throughthe Agila II, Mabuhay Satellite also offers Internet backbone access, video anddata broadcasting, and bandwidth-on-demand, facilitating communication linksbetween telecommunications, broadcast and other public utility companiesoperating in the Asia-Pacific region.     See  “Item 5. Operating andFinancial Review and Prospects — Critical Accounting Policies — Investments”and Note 9 to our financial statements in Item 18 for a discussion of there-measurement of our investment account in Mabuhay Satellite.     *Telesat*     We currently own 94.4% of Telesat,which operates a nationwide communications satellite network using VSATtechnology.  Telesat offers voice, facsimile and data transmission servicesthroughout the Philippines, including areas that are underserved or unserved bylocal fixed line operators.      Using VSAT technology, we alsoprovide the following services:                                               - point-to-multipoint data transmission services, usually forintercompany communication for corporate customers;                                                 - private point-to-point service; and                                                   - connectivity for the cell sites of our wireless network inoutlying locations.     We lease transponder capacity onthe Agila II to provide VSAT services.     *ACeSPhilippines*     PLDT and Piltel currently own 88.5%and 11.5% , respectively, of ACeS Philippines, which commenced commercialoperation on January 1, 2002 and operates telecommunications gateway equipmentfor fixed satellite phone services.  ACeS Philippines owns approximately 20.23%of ACeS International Limited, or AIL, which aims to develop and implement asatellite-based communications system to provide services to users in theAsia-Pacific region through the Garuda I satellite.  ACeS International Limitedhas entered into interconnection agreements and roaming service agreements withPLDT and other major telecommunications operators that will allow ACeSPhilippines’ subscribers to access GSM terrestrial cellular systems in additionto the ACeS Philippines’ system.       In 2001, we made impairmentprovisions in respect of our investment in AIL and ground station equipment ofACeS Philippines in relation to the business of AIL, as described in  “Item 5.Operating and Financial Review and Prospects — Critical Accounting Policies —Impairment of Long-Lived Assets” and Note 9 to our financial statements in Item18 for a further discussion.     *Revenue*     Our satellite and VSAT servicerevenues consist of:                                                     - lease payments from the rental of Mabuhay Satellite's C-band andKu-band transponders;                                                        - revenues generated from Telesat's nationwide satellite network;and                                                         - revenues generated from ACeS Philippines’ satellite phoneservice.     *Rates*     Mabuhay Satellite leases itstransponders to third parties at annual rates of US$1.4 million and US$0.8million for its C-band and Ku-band transponders, respectively.  Telesatprovides its VSAT services on a cost plus mark-up basis. ACeS Philippines’mobile subscribers are charged Php13.84 per minute for local and cell-to-cellcalls and for national direct dial services while residential subscribers arecharged a peak-hour rate of Php13.00 per minute and off-peak hour rate ofPhp8.00 per minute for domestic calls regardless of destination.  For ACeSPhilippines’ public calling offices, callers are charged Php4.50 and Php7.00per minute for calls terminating on fixed line and cellular networks,respectively.  Rates for international long distance calls depend on thecountry of termination, ranging from US$0.35 per minute for frequently calledcountries to US$0.85 per minute for less frequently called countries.     **Information and CommunicationsTechnology**     We conduct our information andcommunication technology businesses through our wholly-owned subsidiary, ePLDT,which was incorporated in August 2000 and commenced commercial operations inFebruary 2001.  ePLDT is a broad based integrated information andcommunications technology company, focusing on infrastructure and solutions forInternet applications, Internet protocol based solutions and multimedia contentdelivery.  ePLDT’s principal business activities are:                                                           - the operation of an Internet data center under the brand name  Vitro TM;                                                             - two wholly-owned call centers, namely Vocativ and Parlance; and                                                                - Infocom, an ISP.       ePLDT has also invested in a number of other e-commerce andInternet-related businesses, as described in “–– Infrastructures and Services —Other Investments” below.     As a new business, revenues from our information andcommunications technology services accounted for less than 1% of ourconsolidated operating revenues in 2002.     *Infrastructures andServices*     *DataCenter*     ePLDT's *Vitro*TM is one of thePhilippines' first Internet data centers.  The Philippine Board of Investmentsgranted *Vitro*TM pioneer status, which entitles us to tax and othergovernmental incentives.  *Vitro*TM is a CISCO-certified co-locationservice provider.  *Vitro*TM provides co-location, web and 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 Internetprotocol security services, as well as firewall and managed firewall services.     *InternetService*     In December 2001, we transferred toePLDT our 99.6% interest in Infocom, one of the country's leading ISPs.Infocom offers consumer prepaid Internet access under the name *WarpSpeed*and postpaid Internet access; dedicated dial-up and multi-user dial-upcorporate leased lines; broadband Internet access through DSL and cable; andwebsite consulting, development and hosting.     *CallCenters*     ePLDT is focused on developing itscall center services business, which capitalizes on our network resources andthe availability of English-speaking labor in the Philippines.  The call centerservice business is being undertaken through the following subsidiaries ofePLDT:                                                                 - Parlance, a wholly-owned subsidiary of ePLDT, which operates adedicated call center facility capable of accommodating 520 seats.  Pursuant toa guaranteed three-year contract with one of the largest direct-to-homesatellite service providers in the United States, Parlance operates and managesthe facility exclusively for its client to provide customer support and billingservices.  Parlance commenced commercial operations in June 2002;                                                                     - Vocativ, a wholly-owned subsidiary of ePLDT, which operates acall center facility capable of accommodating 500 seats, which can be expandedto 750 seats.  Pursuant to a ten-year supplier-purchaser agreement with aglobal provider of customer relationship management services, Vocativ operatesand manages the call center facility exclusively for this provider’s clients.Vocativ commenced commercial operations in April 2002; and     ePLDT sold its entire interest inContact World on June 30, 2003.  Contact World, a joint venture with Salmat PtyLimited of Australia, was 51%-owned by ePLDT.  .     *Other Investments*     ePLDT also has investments inseveral other Internet-related businesses, including:                                                                     - 100% interest in mySecureSign, Inc., which issues VeriSigndigital certificates in the Philippines for e-commerce transactions;                                                                       - 100%-owned subsidiary, iPlus Intelligent Network, Inc., whichprovides IT helpdesk/contact center solutions;                                                                         - 20.5% interest in BayanTrade Dotcom, Inc., a business-to-businessexchange established together with six of the Philippines' leadingconglomerates;                                                                           - debt securities convertible into a 40% interest in Netopia, aleading branded chain of Internet cafes in the Philippines; and                                                                             - 22.5% interest in convertible securities of StradcomInternational Holdings, the parent company of Stradcom Corporation, which hasan existing 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.     In addition, we hold convertible notesissued by Unilink Communications Corporation, or Unilink, which owns 100% ofthe shares of The Philippine Home Cable Holdings, Inc. or Home Cable, thePhilippines' second largest cable television operator by subscriber number.The notes are convertible into shares of Unilink and/or exchangeable for sharesof Home Cable.  However, because Philippine law currently prohibits direct orindirect foreign ownership of equity in broadcast companies, we cannot convertor exchange our convertible notes into Unilink or Home Cable equity.  We havecontributed our convertible notes of Unilink to PLDT’s Beneficial Trust Fund in2003.  Mediaquest Holdings, Inc., a company wholly-owned by the beneficialtrust fund of PLDT's employees, owns all of the shares of Unilink.  Unilink haspledged all of its shares in Home Cable to a group of lenders as security for aloan of Home Cable.  Home Cable defaulted on the payment of principal andinterest due on December 6, 2001 under this loan and is currently engaged inefforts to restructure its debt.  On April 10, 2002, the loan agent, at therequest of a majority of the lenders, delivered a notice to Home Cabledeclaring an event of default and accelerating the loan.  Consequently, thelenders are entitled to foreclose on or sell the collateral granted as securityfor the loan, including Unilink's shares in Home Cable.  In the event that HomeCable's lenders were to foreclose on Unilink's Home Cable shares, the lenderswould be entitled to the proceeds from the sale thereof, or, if such shareswere not sold, to the shares, and Unilink would be subrogated to the lenders'claims against Home Cable.  As of the filing of this annual report, Home Cableis still in negotiations with its lenders to restructure its debt.  As ofDecember 31, 2001, we provided for an impairment charge against our investmentin the Unilink convertible notes amounting to Php2,052 million due to an otherthan temporary decline in value.       On July 18, 2001, we entered into a master consolidationagreement pursuant to which a newly incorporated company, Beyond Cable, Inc.,would hold all interests in Sky Cable and Home Cable.  Completion of thetransaction is subject to certain conditions, including obtaining consents oflenders of Sky Cable and Home Cable.  Upon completion of the transaction, theBenpres Group, which currently holds the interests in Sky Cable, would hold a66.5% interest in Beyond Cable and Mediaquest would hold the remainder.  Inconnection with this transaction, PLDT’s Beneficial Trust Fund is expected toassign the convertible notes in Unilink and our interests in convertible loansto Mediaquest.       **Fixed Line Network Infrastructure**     *Domestic*     Our domestic telephone networkincludes installed telephones and other equipment on customers' premises, localaccess lines connecting customers to exchanges, referred to as "outsideplant," inter-office lines connecting exchanges, and long distancetransmission equipment.     Thefollowing table gives some basic measures of the development of our domestic telephonenetwork as of December 31, 2000, 2001 and 2002:     
 

**As of December 31,**

 

**2000**

**2001**

**2002**

 

 

 

 

Number of central office exchanges

186

187

183

PLDT fixed lines in service

1,915,985

2,075,109

2,092,539

PLDT employees per 10,000 local exchanges in service

69

62

58
     Since the end of 1999,substantially all of our nationwide network has been upgraded from analog todigital exchanges.  This shift to digital technology has enabled us to realizesavings in network costs, upgrade our network to handle non-voicecommunications, and offer value-added and enhanced services such as fixed linetext messaging.     In November 1998, we completed ourdomestic fiber optic backbone, the country's first telecommunications networkusing fiber optics in delivering voice, video, data, and other broadband andmultimedia services nationwide.  Constructed at a total cost of US$188 million,our fiber optic network employs synchronous digital hierarchy technology toimprove network performance and reduce operating costs.  Our network iscomposed of in-land and submarine cable installations and is configured in sixself-healing rings and an extension link, allowing route delivery even in theevent of link failures.  It has an initial transmission speed of 2.5 gigabitsper second and is connected directly to five existing international submarinecable systems.     In July 2000, we inaugurated our domestic fiber optic networkfacilities in Cebu City, the second largest city in the Philippines.  The newfacilities enable us to offer a broader range of products and services to meetthe growing telecommunications needs of Cebu-based businesses.     On August 7, 2000, we inaugurated *CSPLDT*, a cable ship which we lease from NTT World Engineering MarineCorporation pursuant to a five year Chartered Arrangement MaintenanceContract.  Under the contract, NTT World Engineering Marine Corporation uses *CSPLDT* primarily to maintain the 2,400 kilometers of submarine cablecomprising the submerged portion of our domestic fiber optic network.       In 2001, we activated a secondfiber pair on our existing fiber cable and installed dense wavelength divisionmultiplexing technology in certain portions of the network.  The new systemserves the areas of Luzon, Visayas and Mindanao and also serves the internationalnode connecting the Philippines to the Asia-Pacific Cable Network 2.  Thesecond pair provides an extra 10 gigabits per second of capacity, or theequivalent of 120,000 voice circuits.  Nortel Networks supplied us with a suiteof optical Internet solutions, including a 10-gigabit per second densewavelength division multiplexing solution based on Nortel Networks OPTeraTM LongHaul 1600 Optical Line System.     In 2002, we increased ourtransmission and data network capacities and sold to Smart certain assets comprisinga portion of our digital fiber optic cable loops from Luzon to Mindanao andcertain related equipment.       *International*     We provide international networkservices using our three international gateway switching exchanges and ourextensive international network passing mainly through submarine fiber opticcable systems.  As of December 31, 2002, our international long distancefacilities allow our subscribers to reach 229 countries/territories worldwide,of which 50 countries/territories have direct circuits with PLDT.     The table below shows the submarinecable systems in which we have interests and the countries or territories theylink:     
**Cable System**

**Countries Being Linked**

 

 

G-P-T

Guam, the Philippines and Taiwan

B-M-P

Brunei, Malaysia and the Philippines

G-P

Guam and the Philippines

B-S

Brunei and Singapore

Hawaii-4/Transpacific-3

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

Asia-Pacific Cable Network 2

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

Asia-Pacific Cable Network

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

Transpacific Cable No. 5

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

Transpacific Cable No. 4

Japan, Canada, and the U.S. Mainland

KN-KK 

Kuantan and Kota Kinabalu in Malaysia

Southeast Asia-Middle East Western Europe No. 3

34 other countries in Europe, Africa, the Middle East, the Indian subcontinent, Southeast Asia and North Asia

HONTAI-2

Hong Kong and Taiwan

Asia Pacific

Hong Kong, Japan, Singapore, Malaysia and Taiwan

PacRim West

Guam and Australia

M-T

Malaysia and Thailand

Hawaii-5

Hawaii and the U.S. Mainland

C-J

China and Japan

North Pacific     

Japan, Alaska and the U.S. Mainland

H-J-K

Hong Kong, Japan and Korea

SEA-ME-WE-2 

13 countries in South East Asia, the Middle East and Western Europe including Singapore, Indonesia, India, Saudi Arabia, Egypt, Italy, Turkey and France
     In April 2000, we and 24 othertelecommunications administrations signed a construction and maintenanceagreement for Asia-Pacific Cable Network 2, a 19,000-kilometer long submarinecable that commenced commercial operations in late 2001 and links thePhilippines to China, Hong Kong, Japan, Korea, Malaysia, Singapore and Taiwan.Under the agreement, Asia-Pacific Cable Network 2 is required to deploy densewavelength division multiplexing technology that will initially allowtransmission of 40 gigabits per second of protected traffic.  This initialcapacity is expected to be upgraded in the future to reach a maximum of 2.56terabits per second.     **Wireless Network Infrastructure**     *Cellular*     Through Smart, we operate a digitalGSM network, which consists of 29 mobile switching centers with a capacity for10.7 million subscribers and 12 messaging centers capable of processing 239million messages per day.  To meet the growing demand for cellular services,Smart has implemented an extensive deployment program for its GSM network.  Inthe first quarter of 2003, Smart added 176 base stations to its nationwidecellular network, bringing Smart's total GSM base stations in operation to2,953.  Smart previously operated an analog/ETACS network, which it closed downin December 2002.  Piltel’s cell sites decreased to six as of March 31, 2003from 36 as of December 31, 2002 as it ceased to offer its analog/CDMA serviceat the end of 2002.     Smart and Piltel have beenco-locating their cell sites where their base stations are installed.  As ofMarch 31, 2003, 19 of Smart's mobile switching centers and 59 of Smart's cellsites are housed in our complexes while 150 cell sites are co-located on Piltelproperties.  These operational synergies have allowed Smart to reduce switchinstallation time from three months to five weeks.     In December 2002, Smart acquiredcertain assets comprising a portion of PLDT’s digital fiber optic cable loopsfrom Luzon to Mindanao and certain related equipment.     We are in the process of upgradingour network to EDGE technology to further increase the speed and datacapability of our GSM network.     *Satellite and VSAT*     Mabuhay Satellite controls andoperates the Agila II satellite, which has 30 C-band transponders and 24Ku-band transponders covering the Asia-Pacific region, the Indian subcontinentand Hawaii.  Of the 54 transponders, four C-band transponders are owned by LoralCyberstar, Inc. of the United States and PSN of Indonesia while six haverestricted usage.  Through Agila II, Mabuhay Satellite offers Internet service,video and data broadcasting, and bandwidth-on-demand, facilitatingcommunication links between telecommunications, broadcast and other publicutility companies operating in the Asia-Pacific region.  In December 2000,Agila II joined the U.S.  FCC's "Permitted Space Station" list, whichpermits U.S. owned and operated earth stations in Hawaii to access Agila II fortranspacific telecommunications, data, video and Internet-over-satellitetraffic and vice versa.     Telesat operates a nationalcommunications satellite network using VSAT technology to provide voice,facsimile, video and data transmission services to areas in the country thatare still underserved or unserved by local telephone operators.  Telesat leasestransponder capacity from Agila II to provide VSAT services such asmultipoint-to-multipoint and point-to-multipoint data transmission services,private point-to-point service, and connectivity for the cell sites of ourcellular network in outlying locations.     ACeS Philippines manages, controlsand operates its own satellite gateway and other ground infrastructure,including a 13-meter feeder-link C-band earth station, beam congruency antennaand equipment that serves as the primary interface between the ACeSPhilippines’ system and other telecommunications networks.  It uses the GarudaI satellite to provide digital voice services to ACeS Philippines’ mobile andfixed terminal users within the Asian service area.     InterconnectionAgreements
 

Since the issuance of E.O. No. 59in 1993, which requires non-discriminatory interconnection of Philippinecarriers' networks, we have entered into bilateral interconnection arrangementswith other Philippine fixed line and cellular carriers.  On April 6, 2001, July2, 2001 and July 10, 2001, PLDT signed separate amended interconnectionagreements with PAPTELCO, Smart and Globe, respectively.

 

Prior to July 2001, Smart and Globereceived and paid interconnection fees of Php1.00 per minute for callsoriginating from and terminating to each other’s cellular network.  EffectiveJuly 1, 2001, these fees were increased to Php3.00 per minute and furtherincreased to Php4.50 per minute, effective January 1, 2002.

 

On July 10, 2001, March 10, 2003,and April 4, 2003, Smart signed interconnection agreements with Digitelcovering fixed line, cellular and SMS, respectively.  Effective June 1, 2003,calls originating from Smart and terminating to Digitel’s fixed line networkare charged Php2.50 per minute, an increase from the previous charge of Php2.00per minute. For calls originating from Smart and terminating on Digitel’scellular network and for calls originating from Digitel and terminating onSmart’s cellular network, the charge is Php4.50 per minute.  For SMSoriginating from Smart and terminating on Digitel’s cellular network and forSMS originating from Digitel and terminating on Smart’s cellular network, thecharge is Php0.35 per message.

 

For local calls originating fromPLDT and terminating on the cellular networks of Smart and Globe, Smart andGlobe charge PLDT a rate of Php4.50 per minute effective January 1, 2002.Effective January 1, 2004, calls terminating to cellular subscribersoriginating from fixed line subscribers will be charged a termination rate ofPhp4.00 per minute, a decrease from the previous rate of Php4.50 per minute.From July 1, 2001 to December 31, 2001, Smart and Globe charged PLDT Php6.50per minute.  Prior to July 1, 2001, PLDT retained an origination charge ofPhp2.00 on every call terminating to the network of Smart or Globe.  The newarrangement also applies to national long distance calls originating from PLDTand terminating to the cellular network of either Smart or Globe.  Under thenew agreement, there will be no distinction between access charges for localcalls and national long distance calls.

 

Effective January 1, 2003, localaccess for cellular operators which terminate calls to PLDT’s fixed linenetwork increased from Php2.00 per minute to Php2.50 per minute which willfurther increase to Php3.00 per minute effective January 1, 2004.

 

Under a separate agreement betweenPLDT and PAPTELCO, PLDT is the transit facility provider between Smart andGlobe and PAPTELCO.  Transit traffic is an accommodation by PLDT to Smart,Globe and PAPTELCO members where PAPTELCO members have no directinterconnection with either Smart or Globe.

 

**Licenses and Regulation**

 

Telecommunications services in the Philippines are provided as a publicservice and are governed by specific regulations and laws.  The principal lawsgoverning the telecommunications industry are the 1936 Commonwealth Act No.146, as amended, referred to as the Public Service Act, and the PublicTelecommunications Policy Act.  The Public Service Act seeks to protect thepublic against unreasonable charges and poor, inefficient service by publicutilities and seeks to prevent ruinous competition.  The PublicTelecommunications Policy Act sets forth the current telecommunications policyobjectives of the Philippine government.  It also seeks to develop and maintaina viable, efficient, reliable and universal telecommunications infrastructure,which ensures that telecommunications services are available in unserved orunder-served areas, and sets out the functions, powers and responsibilities ofthe NTC.

 

The government agency charged with the administration of lawsgoverning the telecommunications industry is the NTC.  The NTC is a collegialbody composed of a commissioner and two deputy commissioners who are appointedby the Philippine President.  It is an agency attached to the Department ofTransportation and Communications and as such is subject to its supervision.In the exercise of its quasi-judicial function, however, the decisions of theNTC cannot be reviewed by the Department of Transportation and Communicationsand may only be appealed to the Court of Appeals or, ultimately, the SupremeCourt.

 

PLDT, Smart and Piltel provide telecommunicationsservices pursuant to legislative franchises, which expire, in the case of PLDT,25 years from November 28, 2003, in the case of Smart, 25 years from March 27,1992 or the date its current franchise was granted, and, in the case of Piltel,25 years from May 14, 1994.  A franchise holder is required to obtain operatingauthority from the NTC to provide specific telecommunications services.  Theseapprovals may take the form of a CPCN or, while an application for a CPCN ispending, a provisional authority to operate.

 

PLDT operates its business pursuantto a number of provisional authorities and CPCNs, the terms of which expire atvarious times between now and 2028.  PLDT's CPCNs to provide services to mostof the Metropolitan Manila area, Davao and other Philippine cities expire in2003.  Although some of PLDT's CPCNs and provisional authorities have alreadyexpired, PLDT filed timely applications for extension of these CPCNs andprovisional authorities prior to their respective expiration dates and istherefore entitled to continue to conduct its business under its existing CPCNsand provisional authorities pending the NTC’s decision on these extensions.The Philippine Revised Administrative Code of 1987 provides that if the granteeof a license or permit, such as a CPCN or provisional authority, has madetimely and sufficient application for the extension thereof, the existing CPCNor provisional authority will not expire until the application is finallydecided upon by the administrative agency concerned.  PLDT expects that the NTCwill grant these extensions; however, we cannot assure you that this willoccur.  The period of validity of some of PLDT’s CPCNs that will expire onNovember 28, 2003, co-terminus with the term of its previous franchise underRepublic Act No. 6146, has been extended further by the NTC to November 28,2028, co-terminus with PLDT’s current franchise under Republic Act No. 7082.Motions to extend the period of validity of the other CPCNs to November 28,2028 are now pending with the NTC.  See “Item 3. Key Information — Risk Factors— Risks Relating to Us — Our business is significantly affected by governmentallaws and regulations, including regulations in respect of our franchises andrates.”

 

Smart operates its cellular,international long distance and national long distance services pursuant toCPCNs, the terms of which will expire upon the expiration of its franchise.  OnAugust 26, 2002, Smart was granted a CPCN to install, operate and maintainnationwide global mobile personal communications via satellite which shall alsoexpire upon the expiration of its franchise.  Smart’s provisional authority toestablish, install, maintain, lease and operate an international private leasedcircuit expired on May 6, 2003.  Smart filed for an extension of thisprovisional authority prior to its expiration.  On July 22, 2002, Smart wasgranted a CPCN to operate cellular mobile telephone system and internationalgateway facility.  Piltel holds a CPCN to provide a nationwide cellular telephoneservice, which expires in August 2012.

 

The following table sets forth thespectrum system, licensed frequency and bandwidth of Smart and Piltel:

 

**Carrier**

**Spectrum System**

**Frequency Assignment**

**Bandwidth**

 

 

 

 

Smart

ETACS/GSM 900

897.5905/942.6-950 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

Piltel

AMPS/CDMA

825-835/845-846.5 Mhz

11.5 Mhz

 

Operators of international gatewayfacilities and cellular telephone operators, pursuant to E.O. No. 109, arerequired to install a minimum number of local exchange lines.  Of these newlines, operators are required to install one rural exchange line for every 10urban exchange lines installed.  Smart and Piltel were required to install700,000 and 400,000 lines, respectively, and each has received a certificate ofcompliance from the NTC.

 

PLDT, Smart and Piltel are requiredto pay various permit, regulation and supervision fees to the NTC.  PLDT, Smartand Piltel are currently engaged in disputes with the NTC over some of theassessed fees.  For more information on the disputes involving PLDT, see “Item8. Financial Information — Legal Proceedings — NTC Fees."

 

In a letterdated January 17, 2002, the NTC requested that Smart pay the following fees inrespect of its CPCNs and provisional authorities:

 

Case No.

**Fee**

 

 

92-303

Php3,750,000

93-482

62,510,950

94-220

878,830

96-248

6,815,500

Total     

Php73,955,280

 

On May 27, 1998, Smart filed anUrgent Ex Parte Motion and Manifestation regarding the permit fee assessed bythe NTC for CPCN 93-482.  Smart contended that the fee should have beencalculated on the basis of the actual local exchange carrier project cost, andthat therefore the fee should be Php70 million.  Although the NTC has not yetresolved this issue, Smart has already paid Php50 million in respect of thisassessment as of the date of filing this annual report.

 

Piltel has also been assessed bythe NTC for deficiency supervision and regulation fees.  Based on the latestcomputation of deficiency supervision and regulation fees received from theNTC, which is dated as of September 30, 2002, the total amount assessed onPiltel stands at Php639.7 million, including penalty fees amounting to Php274.9million.  Piltel has protested the assessments in good faith.  Piltel continuesto make payments for amounts, which it believes is properly due to the NTC.  OnSeptember 30, 2002, Piltel made a payment to the NTC under protest in theamount of Php9.1 million.

 

In order to diversify the ownershipbase of public utilities, the Public Telecommunications Policy Act requires atelecommunications entity with regulated types of services to make a publicoffering through the stock exchanges of at least 30% of its aggregate commonstock by the later of the following:

 
- the fifth anniversary of the date the law became effective; and       - the fifth anniversary of the date of the entity’s commencement ofcommercial operations.     PLDT and Piltel have complied withthis requirement.  Smart believes that it has ten years from the commencementof its operations, or until August 2004, to conduct a public offering becausethe Philippine government has granted franchises to other telecommunicationscompanies requiring a public offering within ten years from the later of theircommencement of operations or the date on which the franchise was granted.Because the Public Telecommunications Policy Act (Republic Act No. 7925)provides that any advantage granted under existing franchises automaticallybecomes part of previously granted telecommunications franchises, Smartbelieves that it is also entitled to this ten year period.  PLDT currentlycontemplates to cause Smart to conduct a public offering based on marketconditions and in accordance with applicable rules and regulations of thePhilippine Stock Exchange.     The Philippine Congress iscurrently considering five bills, each of which, if passed by Congress andenacted into law, would impose a 7% or 10% tax on the gross receipts ofcellular operators.  The proposed taxes would apply to both cellular call anddata revenues and prohibit cellular operators from imposing additional chargesor fees to compensate for the imposition of the proposed taxes.      **Competition**     The enactment of the PublicTelecommunications Policy Act (Republic Act No. 7925) of the Philippines inMarch 1995 consolidated the government's various policy issuances governing thetelecommunications industry and reaffirmed, among other things, the policy ofliberalizing the industry and opening up the telecommunications market to newentrants.  Including us, there are 10 major local exchange carriers, 11international gateway facility providers, and seven cellular service providersin the country, including one, which has not yet commenced operations.  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 in thecellular segment and data and other network services segment.     *Local Exchange Service*     The concerted nationwide localexchange line build-out by new entrants in recent years, as mandated by thePhilippine government, significantly increased the number of fixed lines inservice in the country and resulted in wider access to basic telephoneservice.  The growth of the fixed line market has considerably weakened due tothe surge in demand for cellular services and the general sluggishness of thenational economy.  Nevertheless, we have sustained our leading position in the fixedline market on account of PLDT's extensive network in key cities nationwide.In most areas, we face one or two competitors.  Our principal competitors inthe local exchange market are Digitel, BayanTel and Globe.       Over the past couple of years, however,competition among local exchange operators has reduced as certain operatorshave faced financial difficulties or have shifted strategic focus away from thefixed line business to cellular services.  On the other hand, we are facingincreasing competition from cellular operators mainly due to substitution ofcellular services for fixed line services.       *International LongDistance Service*     Including us, there are 11international gateway facility operators in the country.  While we have so farbeen able to maintain a leadership position in this highly competitive segmentof the industry, in recent years, our market share has reduced largely as aresult of (1) competition from other international gateway facility operatorsand international simple resale operators, (2) anincrease in inbound and outbound international long distance calls terminatingto and originating from a growing number of cellular subscribers, and (3) thepopularity of alternative and cheaper means of long distance communications,such as SMS, e-mail and Internet telephony, further heightening thecompetition.     With respect to inbound calls intothe Philippines, we compete with other service providers primarily throughpricing.  For example, we adopted the U.S. FCC benchmark accounting rate ofUS$0.38 per minute for inbound international calls, which represented asettlement rate of US$0.19 per minute, one year ahead of the target date ofJanuary 1, 2001, and reduced our average termination rates progressivelythrough 2002.  This provided us with increased flexibility to terminate moreU.S. traffic into the Philippines, minimize unauthorized traffic terminationthrough international simple resale operations and recover traffic lost due tobypass routings.  We have also established points of presence in key citiesoverseas to capture traffic at its source, maximize the use of ourinternational facilities and develop alternative sources of revenue.  EffectiveFebruary 1, 2003, after lengthy negotiations with approximately 100telecommunications operators around the world, we increased the terminationrate with carriers accounting for a substantial portion of our internationalinbound traffic terminating on its fixed line network to US$0.12 per minute.Prior to the increase in termination rates, a substantial portion of PLDT’sinternational inbound traffic terminating on its fixed line network was chargedan average termination rate of approximately US$0.08 per minute.  In addition,Smart implemented an increase in its international termination rates to US$0.16per minute effective February 1, 2003 for calls terminating on its cellularnetwork.  As of May 31, 2003, most of the other major international gatewayoperators in the Philippines have also independently negotiated increases intheir average termination rates.  It is still too early to determine, whetherwe will subsequently experience significant price competition at terminationrates substantially below US$0.12 per minute.     With respect to outbound calls fromthe Philippines, we compete for market share through our local exchange andcellular businesses, which are the origination points of outbound internationalcalls.  We have also introduced a number of marketing initiatives to stimulategrowth of outbound call volumes, including tariff reductions and volumediscounts for large corporate subscribers.     *National Long DistanceService*     Since 2000, our national long distance service business has beennegatively impacted by the growing number of cellular subscribers in thePhilippines and the widespread availability and growing popularity ofalternative economical non-voice methods of communication, particularly SMS ande-mail.     While national long distance callvolumes have been declining, we have remained a leading provider of nationallong distance service in the Philippines due to our significant subscriber baseand ownership of the Philippines’ most extensive domestic fiber optic network.In order to mitigate the decline of our national long distance revenues, wehave amended the interconnection agreements between ourselves and othercellular operators to provide the fixed line business more equitable accesscharge arrangements for calls between fixed line and cellular subscribers.     *Data and Other Network Services*     Another rapidly growing segment ofthe industry is the market for data and other network services, includingInternet-based services, spurred by the significant growth of the Internet and e-commerce.  Our principal competitors in this area are BayanTel, Globe andEastern Telecommunications.  The principal bases of competition in the dataservices market are price, customer service and quality of service and networkredundancy.     *Cellular Service*     Competition in the cellularbusiness has intensified with the introduction by competitors of affordablypriced handsets offering a range of new functions and features, new andimproved plans for postpaid subscribers, reduced rates per minute andaggressive marketing and promotional strategies.  Our principal competitor inthis area is Globe, which acquired Islacom in June 2001.  The principal basesof competition are price, including handset cost, quality of service, networkreliability, geographic coverage and attractiveness of packaged services.     Cellular operators are alsocompeting actively against each other in launching innovative products andvalue-added services.  The growing range of cellular products and services nowinclude text messaging, multi-media messaging, voice mail, text mail,international roaming, information-on-demand, mobile banking, e-commerce,mobile data and cellular Internet access.     Consistent with industry practiceand our churn management efforts, we "lock" the handsets we sell toour subscribers, rendering them incompatible with SIM cards issued by ourcompetitors.  However, our subscribers may have their handsets"unlocked" by unauthorized parties, for a nominal fee, and purchasenew SIM cards from competing operators.  "Unlocking" does not involvesignificant cost.  In addition, switching to another cellular operator wouldresult in a change of the subscriber's cellular telephone number.     We expect competition to increasein the future as new competitors enter the cellular telecommunications market.On March 29, 2003, Digitel launched its cellular service under the brand name *SunCellular*.  Moreover, in January 2002, the Supreme Court reinstatedBayanTel's license to provide cellular telecommunications service.     **Environmental Matters**     We have not been subject to anymaterial fines or legal or regulatory action involving non-compliance withenvironmental regulations of the Philippines.  We are not aware that we are notin compliance in any material respect with relevant environmental protectionregulations.     **Intellectual Property Rights**     We do not own any materialintellectual property rights apart from our brand names and logos.  We are notdependent on patents, licenses or other intellectual property, which arematerial to our business or results of operations, other than licenses to usethe software that accompanies most of our equipment purchases.     **Properties**     PLDT owns four office buildingslocated in Makati City and owns and operates 183 exchanges nationwide, of which61 are located in the Metropolitan Manila area.  The remaining 122 exchangesare located in small cities and municipalities outside Metropolitan Manilaarea.  We also own radio transmitting and receiving equipment used forinternational and domestic communications.     As ofDecember 31, 2002, our principal properties, excluding property under construction,consisted of the following, based on book value:         - 55% consisted of cable and wire facilities, including ourdomestic fiber optic network, subscriber cable facilities, inter-officetrunking and toll cable facilities and cellular facilities;           - 29% consisted of central office equipment, including threeinternational gateway facilities, seven pure national toll exchanges and 16combined local and toll exchanges;             - 7% consisted of land and improvements and buildings, which weacquired to house our telecommunications equipment;               - 2% consisted of information origination and terminationequipment, including, pay telephones and radio equipment installed forcustomers use, as well as cables and wires installed within customers'premises; and                 - 7% consisted of other work equipment.     For more information on theseproperties, see Note 8 to our financial statements in Item 18.  Theseproperties are located in areas being served by our exchanges.  In our opinion,these properties are in good condition, except for ordinary wear and tear, andare adequately insured.     The majority of our connectinglines are above or under public streets and properties owned by others.     PLDT's properties are free from anymortgage, charge, pledge, lien or encumbrance.  Except for the propertiescovered by chattel mortgages in favor of Nordbanken AB and ABN Amro Bank AB tosecure an outstanding loan of US$2,517 million, which was fully paid in January2003, all properties of Smart are also free from any mortgage, pledge, lien orencumbrance.  Substantial properties of Piltel and Mabuhay Satellite aresubject to liens.     PLDT has various long-term leasecontracts for periods ranging from two to ten years covering certain offices,warehouses, telecommunications equipment locations and various officeequipment.  For more information on these lease arrangements, see Note 23 toour financial statements in Item 18.     For 2003, on a non-consolidated basis, PLDT’s budgeted capitalexpenditures of Php7,000 million will be partially financed by committedlong-term debt facilities supported by various export credit agencies.  As ofDecember 31, 2002, PLDT had a total of approximately Php1,531 million undrawnbalances available under committed long-term debt facilities. In addition, wehave put in place long-term debt facilities during the first half of 2003,which will also finance in part PLDT’s budgeted capital expenditures for 2003.      Item 8.       Operating and 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 of December 31, 2001 and 2002and for the years ended December 31, 2000, 2001 and 2002 included elsewhere inthis report.  This discussion contains forward-looking statements that reflectour current views with respect to future events and our future financialperformance.  These statements involve risks and uncertainties, and our actualresults may differ materially from those anticipated in these forward-lookingstatements as a result of particular factors such as those set forth under“Risk Factors” and "Forward-Looking Statements" and “Item 3. KeyInformation — Risk Factors" and elsewhere in this report.  Our auditedconsolidated financial statements, and the financial information discussedbelow, have been prepared in accordance with U.S. GAAP.  For convenience,certain peso financial information in the following discussions has beentranslated to U.S. dollars at the exchange rate at December 31, 2002 ofPhp53.254 = US$1.00, as quoted through the Philippine Dealing System.*     *Prior to 2002, our financialstatements included in our Annual Report on Form 20-F filed with the U.S.Securities and Exchange Commission were prepared in accordance with PhilippineGAAP.  Philippine GAAP varies in certain significant respects from U.S. GAAP.A description of the significant differences between U.S. GAAP and PhilippineGAAP and a quantitative reconciliation of such differences in the net income andshareholders’ equity to U.S. GAAP was disclosed in a note to our previouslyfiled financial statements. In connection with the preparation of ourconsolidated balance sheets as of December 31, 2002 and 2001, and the relatedstatements of income, changes in stockholders’ equity and cash flows for theyears ended December 31, 2002, 2001, and 2000 in accordance with U.S. GAAP, weidentified differences in the U.S. GAAP amounts previously disclosed for 2001and 2000.  Please see Note 4 to our consolidated financial statements includedherein for a discussion of such differences.*     **Overview**     We are thelargest and most diversified telecommunications company in the Philippines.  Wehave organized our business into three main segments:                   -  Fixed Line  — fixed line telecommunications servicesprimarily provided through PLDT.  We also provide fixed line services throughPLDT's subsidiaries Clark Telecom, Subic Telecom and MaraTel, which togetheraccount for approximately 1% of our total fixed lines in service, and PLDTGlobal;                     -  Wireless  — wireless telecommunications services providedthrough our cellular service providers, namely Smart and Piltel, and satelliteoperators, namely Mabuhay Satellite, ACeS Philippines and Telesat; and                       -  Information and Communications Technology  — informationand communications infrastructure and services for Internet applications,Internet protocol-based solutions and multimedia content delivery provided byPLDT's subsidiary ePLDT, Internet access services provided by ePLDT'ssubsidiary Infocom, and e-commerce, call centers and IT-related servicesprovided by other subsidiaries and associates of ePLDT, as described in “Item4. Information on the Company — Business — Information and CommunicationsTechnology — Infrastructure and Services — Other Investments”.     **Fixed Line**
 

Our fixed line business provides local exchange service,international and national long distance services and data and other networkservices, and miscellaneous services.  Historically, our fixed line businesswas the primary source of our consolidated operating revenues.  In 2002, ourfixed line business accounted for 51% of our consolidated operating revenues,compared to 58% in 2001 and 73% in 2000.  

 

*Local Exchange Service*.Local exchange service remains one of our major revenue drivers.  In 2002,local exchange service contributed 24% of our consolidated operating revenuescompared to 27% in 2001 and 30% in 2000.  Local exchange revenues have remainedrelatively stable largely as a result of service rate increases implementedpursuant to the currency adjustment mechanism allowed by the NTC.  Under thismechanism, we are authorized to increase and, if we have increased servicerates, required to decrease, our monthly recurring local exchange service ratesby 1% for every Php0.10 change in the peso-to-dollar exchange rate relative toa base rate of Php11.00 = US$1.00.  Increased local exchange revenues alsoreflect a higher average number of fixed lines in service. Since 2000, however,there has been a shift in subscriber preference from postpaid to prepaid fixedline service.  As of December 31, 2002, prepaid subscribers accounted for 12%of PLDT’s fixed lines in service.

 

*International Long DistanceService*.  Historically, international long distance service was our primaryrevenue source.  However, international long distance revenues have beendeclining in both absolute terms and as a percentage of gross revenues due tothe reduction of international termination rates reduced calling rates andincreased competition.  We have initiated a number of marketing and otherinitiatives in an effort to prevent further erosion of our market share andrevenue base.  In 2002, international long distance services accounted for 11%of our consolidated operating revenues, compared to 15% in 2001 and 21% in2000.  Effective February 1, 2003, PLDT increased its average termination rateswith carriers accounting for a substantial portion of its international trafficterminating on its fixed line network to US$0.12 per minute.  Prior to the increase,a substantial portion of PLDT’s international inbound traffic terminating onits fixed line network was charged an average termination rate of approximatelyUS$0.08 per minute.  See “ — Other Information — U.S. FCC Proceeding onTermination Rates” and “Item 8. Financial Information –– Legal Proceedings —U.S. FCC Proceeding on Termination Rates.”

 

*National Long Distance Service*.National long distance service revenues have been declining since 2000 in bothabsolute terms and as a percentage of our consolidated operating revenues dueto a drop in call volumes and an increase in the proportion of calls subject torevenue sharing with other carriers.  Our national long distance business hasbeen negatively impacted by the increasing number of cellular subscribers, aswell as the widespread availability and popularity of alternative economicalnon-voice methods of communication, particularly SMS and e-mail.  In 2002,national long distance services accounted for 9% of our consolidated operatingrevenues, compared to 10% in 2001 and 17% in 2000.  Beginning 2001, we adoptedsimplified pricing plans and amended our interconnection agreements betweenourselves and cellular operators with a view to maximizing revenues of ournational long distance service.

 

*Data and Other Network Services*.  Data and other network services is the only majorsegment of our fixed line business that registered revenue growth in 2002.Recognizing the growth potential of this service segment and considering itsimportance to our business strategy, we have put considerable emphasis on thedevelopment of new packet-switched, data-capable and Internet-based networks.In 2002 and 2001, data and other network services remained unchanged atapproximately 6% of our consolidated operating revenues.  In 2000, data andother network services accounted for 5% of our consolidated operating revenues.

** **

**Wireless**
 

Our wireless business segmentoffers cellular service as well as satellite, VSAT and other services.  Ourwireless service revenues have increased considerably since 2000 mainly as aresult of the continued strong growth in revenues generated from Smart’scellular service.  In 2002, revenues from our wireless business represented 48%of our consolidated operating revenues, compared to 41% in 2001 and 26% in2000.

 

Cellular Service
 

Since 2000, our cellular service,which we provide through Smart and Piltel, has been the principal revenuesource of our wireless service segment and has increased its contribution toour consolidated revenues from 40% in 2001 to 47% in 2002.  Cellular revenueshave increased, from Php31,627 million in 2001 to Php45,375 million in 2002. 

 

Smart launched its GSM in September1999 after having offered analog services since 1994.  Since the launch of itsGSM service, Smart’s GSM subscriber base has grown to approximately 6.8 millionas of December 31, 2002.  Smart also supports Piltel’s prepaid GSM service, *Talk‘N Text,* on its GSM network.  Since the launch of *Talk ‘N Text* inApril 2000, Piltel has seen its GSM subscriber base grow to approximately 1.8million as of December 31, 2002.  As a result, the aggregate of Smart’s andPiltel’s cellular subscribers has outnumbered our fixed line subscribers since2000.  As of December 31, 2002, the combined subscribers of Smart and Pilteloutnumbered our fixed line subscribers by more than 4 to 1.  As of December 31,2002, Smart and Piltel had the largest and third largest cellular subscriberbases in the Philippines, respectively, with prepaid subscribers accounting for98% of Smart’s and Piltel’s combined subscriber base.  The number of Smart’sand Piltel’s analog subscribers had declined significantly, reflecting thePhilippine cellular users’ preference for digital networks, which are capableof providing a broader range of value-added services, such as SMS. 

 

Cellular revenues are derivedmainly from various voice and data services and sales of handsets and phonekits.  Usage revenues, which comprise all voice and SMS and text-relatedservices, contributed 67% of total cellular revenues in 2002 while the balanceof 33% is generated from handset and phone kit sales associated with newsubscriber activations.

 

In 2002, monthly churn rates for Smart’s prepaidservices averaged approximately 3.2% while monthly churn rates for Smart’spostpaid services averaged approximately 1.8%.  In 2002, monthly churn ratesfor Piltel’s *Talk ‘N Text* averaged at 5.7%.  We believe that theprincipal factors affecting subscriber churn are economic conditions in thePhilippines, network quality and technological advances that necessitated theupgrading of SIM cards.

 

For an explanation of how we calculate churn and thefactors affecting our churn rates in the years ended December 31, 2002 and2001, see “— Results of Operations — 2002 Compared to 2001 — ConsolidatedOperating Revenues — Wireless — Cellular Service" and "— 2001Compared to 2000 — Consolidated Operating Revenues — Wireless — CellularService," respectively.

 

Satellite, VSAT and Other Services
 

Our revenues from satellite andVSAT services consist mainly of rentals received for the lease of MabuhaySatellite's transponders and Telesat's VSAT facilities to other companies.ACeS Philippines, our satellite phone service provider, started to roll outfixed satellite terminals in the last quarter of 2001 and commenced commercialoperations on January 1, 2002.

 

**Information andCommunications Technology**
* *

We conduct our information and communications technology businessesthrough our wholly owned subsidiary ePLDT, which was incorporated in August 2000and started commercial operations in February 2001.  ePLDT’s principal businessactivities are:

 
- the operation of anInternet data center under the brand name  Vitro TM;       -  two wholly-owned callcenters, Vocativ and Parlance; and          - Infocom, an ISP.       PLDT transferred Infocom to ePLDT on December 1, 2001.  Through *Vitro*TM, weprovide co-location services, server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting and webhosting.  *Vitro*TM began commercial operations in the firsthalf of 2001.  ePLDT has also focused on developing its call center servicesbusiness, which we expect will account for a significant portion of ePLDT’soperating revenues and capital expenditures in the near future.  Both Vocativand Parlance commenced their operations in 2002.     In addition, ePLDT has interests inthe Philippines’ only digital certificate issuer, a business-to-businessexchange established together with five Philippine conglomerates, Internetcafes and a company with an existing build-own-and-operate agreement with thePhilippine government for the computerization of the nationwide operations ofthe Philippine Land Transportation Office.       **Critical Accounting Policies**     Our consolidated financialstatements are prepared in accordance with U.S. GAAP, which requires managementto make estimates and assumptions that affect amounts reported in our financialstatements and related notes.  In preparing these financial statements, we havemade our best estimates and judgments of certain amounts, giving dueconsideration to materiality.       We believe the following representour critical accounting policies under U.S. GAAP.  The impact and anyassociated risks relating to these policies in our business operations are discussedelsewhere in this section where such policies affect our reported and expectedfinancial results.    * *  *Revenue Recognition*     Revenue for services is stated atamounts invoiced to customers and excludes value-added tax.  We providefixed-line communication services, mobile communication services, andinformation and communications technology services.  We provide such servicesto business, residential, payphone and mobile customers.  Revenue, whichexcludes value-added tax, represents the value of fixed consideration that hasbeen received or is receivable.  Revenue is recognized when there is evidenceof an arrangement, collectibility is reasonably assured, and the delivery ofthe product or service has occurred. In certain circumstances, revenue is splitinto separately identifiable components and recognized when the relatedcomponents are delivered in order to reflect the substance of the transaction.The value of components is determined using verifiable objective evidence.  Wedo not provide our customers with the right to a refund.     *Products and services*     *Subscriptions*  * *  We provide telephone and datacommunication services under postpaid and prepaid payment arrangements. Revenueincludes fees for installation and activation. Installation and activation-relatedfees and the corresponding costs are deferred and recognized over the expectedperiod of the customer relationship period of 7 years and 3 years for fixedline and cellular service, respectively.  Costs incurred on first timeinstallations that form an integral part of the network are capitalized anddepreciated over the life of the network. All installation and activation costsare expensed as incurred.  Postpaid service arrangements include subscriptionfees, typically fixed monthly fees, which are recognized over the subscriptionperiod on a pro rata basis.      *Airtime, traffic and value-addedservices*  * *  Prepaid service revenue collectedin advance is deferred and recognized based on the earlier of actual usage orupon expiration of the usage period.  Payphone service revenue is recognizedwhen the service is provided. Interconnection revenue for call termination,call transit, and network usage are recognized in the period the trafficoccurs.  Revenue related to local, long distance, network-to-network, roamingand international call connection services are recognized when the call isplaced or the connection provided, net of amounts payable to othertelecommunication carriers for terminating calls in their territories. Revenuerelated to products and value-added services is recognized upon delivery of theproduct or service.     *Equipment sales*  * *  Sales of communication equipmentare recognized upon delivery to the customer.     *Directory services*  * *  Revenue related to publisheddirectory services is recognized on a pro rata basis over the period in whichthe publication expires, which is generally 12 months. Telephone-baseddirectory service revenue is recognized when the service is provided.     *Others*  * *  Interest is recognized on a timeproportion basis taking into account the principal amount outstanding and theeffective interest rate.     *Incentives*  * *  We record an insignificant amountof commission expense based on the number of new subscriber connectionsinitiated by certain dealers.  All other cash incentives provided to dealersand customers are recorded as a reduction to revenue.  Product based incentivesprovided to dealers and customers as part of a transaction are accounted for asmultiple element arrangements and recognized when earned.       *Impairment of Long-Lived Assets*     U.S. GAAP requires that animpairment review be performed when certain impairment indicators are present.The impairment review first compares the future undiscounted cash flowsexpected to be generated from the continued use and ultimate disposition of theassets with the book value of the assets.  If these cash flows are notsufficient to recover the book value of the assets, an impairment charge isrecognized based on the comparison between the discounted value of these cashflows and the book value of the assets.  In addition, our projections forfuture cash flows are generally less during periods of reduced cash flow.  As aresult, an impairment charge is more likely to occur during a period when ouroperating results are already otherwise depressed.     Purchase accounting requiresextensive use of accounting estimates and judgments to allocate the purchaseprice to the fair market values of the assets and liabilities purchased.  Ourbusiness acquisitions typically result in goodwill, which affected our resultsof operations for the amount of future period amortization expense.  However,we no longer amortize goodwill under U.S. GAAP effective January 1, 2002.Instead, goodwill is subject to a periodic impairment test.  Determining the valueof goodwill and future undiscounted cash flows expected to be generated fromthe continued use and ultimate disposition of such assets requires us to makeestimates and assumptions that can materially affect our consolidated financialstatements.  Future events could cause us to conclude that goodwill associatedwith an acquired business is impaired.  Any resulting impairment loss couldhave a material adverse impact on our financial condition and results ofoperations.     Piltel recognized an asset impairmentcharge of Php12,938 million in 2001 and Php11,596 million in 2002 relating toits AMPS/CDMA and E.O. 109 assets. The revenues generated from these servicescould no longer support the cost of operating the network.       Also, Smart carried out an impairmentreview of its analog assets in June and December 2001 as a result of decliningsubscriber numbers, decreasing average revenue per user and the generalmigration of analog subscribers to Smart’s GSM services.  This resulted to anasset impairment charge of Php3,783 million in 2001 based on the estimateddiscounted cash flows from continued use and eventual disposition of theseassets.       In 2001, Smart wrote-off theunamortized intangible assets (customer list) amounting to Php2,077 millionrelating to analog customers.       AIL incurred recurring significant losses, has a working capitaldeficiency and only began providing services to customers in 2001 and thereforehas a limited operating history.  In addition, the National Service Providers,including ACeS Philippines had not been able to generate the amount of revenuesoriginally expected as the growth in subscriber numbers had been significantlylower than budgeted.  These factors raised substantial doubt about AIL’sability to continue as a going-concern.  On this basis, we made impairmentprovisions in respect of our investment in AIL and ground station equipment ofACeS Philippines in relation to the business of AIL in 2001.     Total impairment charges amounted to Php3,579 million consisting offull write-down of the following:  (1) carrying value of our investment in AILof Php1,614 million; (2) net book value of ground station equipment of Php1,614million; (3) aggregate capitalized interest, net of depreciation, of Php73million recorded during the periods that construction of the Asia CellularSatellite System was in process, under the equity basis of accounting; and (4)shares of our losses in AIL amounting to Php921 million.  Related othercomprehensive income of Php1,801 million, will be credited to retainedearnings, upon disposal of investment.  ** **  PLDT’s total investments inconvertible notes of Unilink amounted to Php2,052 million as of December 31,2000.  These notes are convertible into shares of common stock of Unilink orHome Cable at the option of the holder, when the law limiting the ownership ofcable television systems to Philippine citizens or corporations, which arecurrently 100% owned by Philippine citizens, is eventually changed.  Unilink isa Philippine corporation owning all the outstanding common shares of HomeCable, which is also a Philippine corporation licensed to own, maintain andoperate a cable television system in the Philippines.     All of Unilink’s shares in HomeCable have been pledged to a group of lenders as security for a loan of HomeCable.  On December 6, 2001, Home Cable defaulted on the principal and interestpayments in respect of certain of its obligations.  On April 10, 2002, the loanagent, at the request of the lenders, delivered a notice to Home Cable declaringan event of default and accelerating the loan.  Consequently, the lenders areentitled to foreclose on or sell the collateral granted as security for theloan, including Unilink’s share in Home Cable.  In the event that Home Cable’slenders were to foreclose on Unilink’s Home Cable shares, the lenders would beentitled to the proceeds from the sale thereof or, if such shares were notsold, to the shares, and Unilink would be subrogated to the lenders’ claimsagainst Home Cable.  Home Cable is currently engaged in negotiations with thelenders to restructure its debt.       On the basis of Home Cable’s default on certain of its obligations, theuncertainty surrounding the negotiations with its creditors and equity holders,and its financial condition, we provided for a full permanent decline in valueof our investment totaling Php2,052 million in 2001.  Accordingly, we made thenecessary adjustment in respect to our pension cost of Php170 million to coverfor the consequent decline in value of our beneficial trust fund’s investmentin Home Cable.  ** **  Our investment in Mabuhay Satellite reflects the designation of itsfunctional currency to be U.S. dollar as provided under FAS 52.  MabuhaySatellite’s revenues are all in U.S. dollars and the cost of Mabuhay satellitesystem, which accounts for around 90% of its assets, was paid for in U.S.dollars and was funded by U.S. dollar-denominated debt to the extent of 70% ofthe original cost.  A re-measurement of our investment account in MabuhaySatellite’s functional currency had to be made since in the previous years, weaccounted for our investment on the basis of Mabuhay Satellite using thePhilippine peso as its functional currency.  The cumulative translationadjustment related to this amounted to Php1,031 million, Php946 million andPhp870 million in 2002, 2001 and 2000.  ** **  The preparation of these estimatedfuture cash flows involves significant judgment and estimations. While webelieve that our assumptions are appropriate and reasonable, significantchanges in our assumptions may materially affect our assessment of recoverablevalues and may lead to future additional impairment changes under U.S. GAAP.       *Estimating Allowances for Doubtful Accounts*     We estimate the allowance fordoubtful accounts related to our trade receivables based on two methods.  Theamounts calculated using each of these methods are combined to determine thetotal amount we reserve.  First, we evaluate specific accounts, mostly offoreign administrators and fixed line subscribers, or, where we haveinformation that certain customers may be unable to meet their financialobligations.  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 current credit status basedon third party credit reports and known market factors, to record specificreserves for customers against amounts due to reduce our receivables to amountsthat we expect to collect.  These specific reserves are re-evaluated andadjusted as additional information is received that impacts the amountsestimated.  Second, a general provision is established as a certain percentageof operating revenues.  This percentage is based on historical collection,write-off experience, current economic trends and changes in our customerpayment terms.  The amount and timing of recorded expenses for any period woulddiffer if we made different judgments or utilized different estimates.     An increase in our allowance fordoubtful accounts would increase our recorded operating expenses and decreaseour current assets.  Provision for doubtful accounts amounted to Php2,904million in 2000, Php3,168 million in 2001 and Php4,209 million in 2002 . Theprovision for doubtful accounts represented 5% of our consolidated operatingrevenues for the years ended December 31, 2000 and 4% for the years ended 2001and 2002.  The allowance for doubtful accounts as of December 31, 2001 and 2002amounted to Php6,888 million and, Php9,942 million, respectively.  We have notset aside any allowances for the receivables owed by U.S. carriers inconnection with the termination payments due for international long distance,which was US$19 million as of March 31, 2003, of whichUS$8 million was owed to PLDT, US$8 million to Smart andUS$3 million to Subic Telecom.  See” — Other Information — U.S. FCCProceeding on Termination Rates” and “Item 8. Financial Information — LegalProceedings — U.S. FCC Proceeding on Termination Rates.”  While we believe thatthese amounts can be recovered from these U.S. carriers, the ongoing disputeswith these U.S. carriers may increase the risk that the amounts may not berecoverable and may require an increase in the level of provision.      *Acquisitions andIntangible Assets*     Acquisitions have generally beenaccounted for as purchases.  Accordingly, the acquisition of Smart wasaccounted for using the purchase method of accounting.  The excess of the totalacquisition cost over the fair value of the net assets acquired was Php28,192million.  Based on management's review and estimate, Php5,900 million wasallocated to the value of customers acquired.  This excess, net of Php2,077million pertaining to the value of customers under the analog servicewritten-off, was initially amortized on a straight-line basis over itsestimated useful life of five years.  Effective January 1, 2002, amortizationof goodwill was no longer allowed under U.S. GAAP, which instead requires thetest of goodwill impairment at least annually.  Purchase accounting requiresextensive use of accounting estimates and judgments to allocate the purchaseprice to the fair market values of the assets and liabilities purchased.  See “— Impairment of Long-Lived Assets” above.     *Foreign ExchangeRevaluation Losses*     When we incur unhedged foreigncurrency-denominated liabilities arising directly from the acquisition ofproperty, plant and equipment invoiced in a foreign currency, such as U.S.dollar-denominated loans to finance equipment purchases, foreign exchange losseson those liabilities are charged or credited to operations in the currentperiod.  In recent years, the Philippine peso has depreciated significantlyagainst the U.S. dollar, resulting in substantial foreign exchange losses, andhas resulted in our incurring a net loss for certain periods.     *Investments*     The various interests that we holdin companies are accounted for under three methods:  consolidation, the equitymethod and the cost method.  The applicable accounting method is generallydetermined based on our voting interest in a company.  Majority-owned companiesare consolidated, 20% to 50% owned companies are accounted for using the equitymethod and our investments in companies over which no significant influence isexercised or in cases where our investments are temporary, the investments arestated at cost.     *Pension Cost*     The determination of our obligationand cost for pension and other retirement benefits is dependent on ourselection of certain assumptions used by actuaries in calculating such amounts.Those assumptions are described in Note 19 to our financial statements in Item18, and include among others, discount rates, expected returns on plan assetsand rates of compensation increase.  In accordance with U.S. GAAP, actualresults that differ from our assumptions are accumulated and amortized overfuture periods and therefore, generally affect our recognized expense andrecorded obligation in such future periods.  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.       *Legal Contingencies*     We are currently involved invarious legal proceedings.  Our estimate of the probable costs for theresolution of these claims has been developed in consultation with outsidecounsel handling our defense in these matters and is based upon an analysis ofpotential results.  We do not believe these proceedings will have a materialadverse effect on our consolidated financial position.  It is possible,however, that future results of operations could be materially affected bychanges in our estimates or in the effectiveness of our strategies relating tothese proceedings.  See “Item 8. Financial Information — Legal Proceedings.”     **Results of Operations**     Thefollowing table shows the contribution by each of our business segments to ourconsolidated operating revenues, operating expenses and net operating income(loss) for each of the years ended December 31, 2000, 2001 and 2002.  Most ofour revenues are derived from our operations within the Philippines.  Ourrevenues derived from outside the Philippines consist primarily of revenuesfrom incoming international calls to the Philippines.     
 

**Years Ended December 31,**

 

**2000**

**%(1)**

**2001**

**%(1)**

**2002**

**%(1)**

** **

**(in millions)**

**Operating Revenues**

 

 

 

 

 

 

Fixed line

Php45,352

73

Php46,270

58

Php48,541

51

Wireless

16,358

27

32,389

41

46,058

48

Information and communications technology

239

—

469

1

941

1

 

61,949

100

79,128

100

95,540

100

**Operating Expenses**

 

 

 

 

 

 

Fixed line

27,336

43

29,281

33

42,089

40

Wireless

24,673

39

62,563

71

46,625

45

Information and communications technology

336

—

1,206

1

1,549

1

 

50,503

82

88,701

112

80,565

84

**Net Operating Income (Loss)**

 

 

 

 

 

 

Fixed line

18,482

29

17,625

20

3,932

4

Wireless

(7,064)

(11)

(22,268)

(25)

11,046

11

Information and communications technology

(97)

—

(737)

—

(608)

(1)

 

Php11,446

18

Php(9,573)

(12)

Php14,975

16
  _____________     *(1)    **Operatingexpenses and net operating income (loss) are computed as a percentage ofoperating revenues.*  * *  **2002 Compared to 2001**     ***Consolidated OperatingRevenues***     Ourconsolidated operating revenues grew by Php16,412 million, or 21%, to Php95,540million in 2002 from Php79,128 million in 2001 largely as a result of thecontinued strong performance of our wireless segment, particularly our cellularbusiness.  Our cellular revenues contributed Php45,375 million in revenues for2002, an increase of 43% over its revenue contribution of Php31,627 million for2001.  Our cellular revenues accounted for 47% of our consolidated operatingrevenues in 2002, compared to 40% in 2001.     The following table shows thebreak-down of our total consolidated operating revenues for the years endedDecember 31, 2001 and 2002 by business segment:     
** **

**Years Ended December 31,**

 

**2001**

** **

**%**

** **

**2002**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line services

Php46,270

 

58

 

Php48,541

 

51

Wireless services

32,389

 

41

 

46,058

 

48

Information and communications technology services 

469

 

1

 

941

 

1

Total

Php79,128

 

100

 

Php95,540

 

100
        ***Fixed Line***     Our fixedline business provides local exchange service, international and national longdistance services, data and other network services, and miscellaneousservices.  In 2002, this business segment generated total revenues of Php48,541million, increasing by Php2,271 million, or 5%, from Php46,270 million in2001.  The increase was due to higher local exchange and data and other networkservice revenues which more than offset declines in our long distance servicerevenues.  As a percentage of our consolidated operating revenues, fixed linerevenues, however decreased in 2002 to 51% from 58% in 2001 due principally tothe continued strong growth of our wireless business.     Thefollowing table summarizes our consolidated operating revenues from our fixedline business for the years ended December 31, 2001 and 2002 by servicesegment:     
 

**Years Ended December 31,**

 

**2001**

** **

**%**

** **

**2002**

** **

**%**

 

**(in millions)**

Fixed line services:

 

 

 

 

 

 

 

Local exchange

Php21,470

 

46

 

Php23,390

 

48

International long distance

11,544

 

24

 

10,957

 

23

National long distance

8,367

 

18

 

8,191

 

17

Data and other network

4,776

 

10

 

5,480

 

11

Miscellaneous 

113

 

2

 

523

 

1

Total

Php46,270

 

100

 

Php48,541

 

100
        *LocalExchange Service*     Our local exchange service revenuesconsist of:            - flat monthly fees for our postpaid service;              - amortizatin of installation charges and other one-time feesassociated with the establishment of customer service;               - fixed charges paid by other telephone companies, charges retainedby PLDT for calls terminating to cellular subscribers within the local area,and local access charges paid by cellular operators for calls by cellularsubscribers that terminate to our local exchange network;                 - revenues from usage of prepaid cards for calls within the localarea and any unused peso value of expired prepaid cards;                   - call revenues generated from payphones and coin-operated phones;and                     - charges for special features, including bundled value-addedservices such as  call waiting ,  call  forwarding ,  3-partyconference calling  and  Caller ID .      The following tablesummarizes key measures of our local exchange service business segment as ofand for the years ended December 31, 2001 and 2002:     
 

**Years Ended December 31,**

 

**2001**

** **

**2002**

 

 

 

 

Consolidated local exchange revenues (in millions)

Php21,470

 

Php23,390

Number of fixed lines in service

 

 

 

PLDT Group

2,174,082

 

2,188,612

PLDT(1)

2,075,109

 

2,092,539

Number of PLDT employees

12,915

 

12,131

Number of PLDT fixed lines in service per PLDT employee

161

 

172
  _____________     *(1)Approximately 93% and 88% were postpaid fixed line subscribers as of December31, 2001 and 2002, respectively.*  * *  Revenues from our localexchange service increased by Php1,920 million, or 9%, to Php23,390 million in2002 from Php21,470 million in 2001. The increase was primarily due to thecombined effects of (1) currency-related adjustments in our monthly localservice rates and (2) increased subscription to our bundled value-addedservices. Partially offseting the impact of these factors was the shift insubscriber preference from postpaid to prepaid services, which generate loweraverage revenue per subscriber.  The percentage contribution of local exchangerevenues to our total fixed line revenues increased to 48% in 2002 from 46% in2001.     Gross additions to PLDT's fixedlines in service in 2002 totaled 523,014, a 22% increase from the grossadditions of 427,349 in 2001.  On a net basis, however, PLDT’s fixed lineadditions decreased by 89% to 17,430 in 2002 from 159,124 in 2001. While fixedline additions totaled 98,525 for PLDT’s prepaid fixed line services, particularly*Teletipid* and *Telesulit*, PLDT’s postpaid fixed lines in servicedeclined by 81,095 in 2002.     As of December 31, 2002, PLDT’s postpaid fixed line subscriberstotaled 1,849,512.  These subscribers accounted for approximately 88% of PLDT’stotal fixed lines in service as of December 31, 2002.     Launched in 2000, *Teletipid*was initially intended as an affordable alternative telephone service forconsumers under difficult economic conditions.  In 2001, *Teletipid*eventually became part of PLDT's overall churn and credit risk exposuremanagement and subscriber retention efforts.  *Teletipid* phone kits, eachcontaining Php300 worth of pre-stored call credits, are sold for Php1,700 perunit. Prior to May 1, 2002, *Teletipid* subscribers were charged based onusage at a rate of Php0.50 per minute for local calls and at the same ratesapplicable to postpaid fixed line subscribers for national and internationallong distance calls. Effective May 1, 2002, the local call rate was increasedto Php1.00 per minute, but the rates for national and international longdistance calls remained unchanged.     In February 2002, PLDT launched apremium variant to *Teletipid* under the brand name *Telesulit*.  *Telesulit*phone kits, each containing Php500 worth of pre-stored call credits, are soldfor Php1,900 per unit.  Effective February 1, 2003, the local call rate for *Telesulit*was increased to Php1.00 per minute from Php0.75 per minute, while the nationaland international long distance rates are the same as those applicable to *Teletipid*and postpaid fixed line subscribers.  A *Teletipid* subscriber migratingto *Telesulit* will be able to retain the same telephone number.      As of December 31, 2002, PLDT’sactive prepaid fixed line subscribers totaled 243,027, of which 121,054 were *Teletipid*subscribers and 121,973 were *Telesulit* subscribers.  These subscribersaccounted for approximately 12% of PLDT’s total fixed lines in service.     A prepaid fixed line subscriber isrecognized as an active subscriber when that subscriber activates and uses aprepaid call card. Prepaid fixed line subscribers can reload their accounts bypurchasing call cards that are sold in denominations of Php300 in the case of *Teletipid*and Php500 in the case of *Telesulit*. Reloads are valid for two months.A prepaid fixed line subscriber is disconnected if that subscriber does notreload within four months for *Teletipid* and within one month for *Telesulit*after the expiry of the last reload.  All sales of prepaid *Teletipid* and*Telesulit* cards, whether through dealers or through PLDT's businessoffices, are non-refundable.     Pursuant to a currency exchangerate adjustment mechanism authorized by the NTC, we adjust our monthly localservice rates upward or downward by 1% for every Php0.10 change in thepeso-to-dollar exchange rate relative to a base rate of Php11.00 = US$1.00.  In2002, we implemented 13 upward adjustments and six downward adjustments in ourmonthly local service rates, compared to four upward adjustments and tendownward adjustments in 2001.  The average peso-to-dollar rate in 2002 wasPhp51.583 = US$1.00, compared to the average of Php51.009 = US$1.00 in 2001.This change in the average peso-to-dollar rate translated to a pesodepreciation of 1.2%, which resulted in a 1.1% average net increase in ourmonthly local service rates in 2002.      To attract new fixed linesubscribers and retain existing ones, PLDT has introduced additionalvalue-added products and services such as *Caller ID*and *txt135*.  *Caller ID* allows subscribers to identify callers bytelephone number, and it is now bundled at special rates with other value-addedphone services, such as *call waiting*, *call forwarding*, *3-partyconference calling* and *speed calling*.  *txt 135*allows one-way text messaging from PLDT fixed lines to Smart and Piltel GSM handsetsand is capable of international text messaging.       The ratio of PLDT fixed lines inservice per PLDT employee improved from 161 at December 31, 2001 to 172 atDecember 31, 2002. This improvement is a result of the net increase in PLDT'sfixed lines in service coupled with a reduction of PLDT’s workforce.  In 2002,employee headcount was reduced by 6% mainly as a result of PLDT’s ongoingmanpower reduction program, bringing its workforce down to 12,131 at year-end.     *InternationalLong Distance Service*     Our international long distancerevenues, which we generate through our international gateway facilities,consist of:                       - inbound call revenues representing settlements from foreigntelecommunications carriers for inbound international calls;                         - access charges paid to us by other Philippine telecommunicationscarriers for terminating inbound international calls to our local exchangenetwork; and                           - outbound call revenues representing amounts billed to ourcustomers (other than our cellular customers) for outbound international calls,net of amounts payable to foreign telecommunications carriers for terminatingcalls in their territories.     Thefollowing table shows information about our international long distancebusiness for the years ended December 31, 2001 and 2002:     
 

**Years Ended December 31,**

 

**2001**

** **

**2002**

 

 

 

 

Consolidated international long distance revenues (in millions)

Php11,544

 

Php10,957

Inbound 

9,075

 

8,778

Outbound 

2,469

 

2,179

 

 

 

 

International call volumes (in million minutes, except call ratio)(1)

 

 

 

PLDT Group(2)

3,276

 

2,815

Inbound 

3,108

 

2,644

Outbound

168

 

171

Inbound-outbound call ratio

18.5:1

 

15.5:1

 

 

 

 

PLDT

2,814

 

2,576

Inbound

2,648

 

2,409

Outbound 

166

 

167

Inbound-outbound call ratio

16.0:1

 

14.4:1
  _____________     *(1) Call volumes for the year ended December 31, 2001have been restated to conform with our 2002 financial statement presentation,which includes interconnection traffic.*  * *  *(2) Excludes cellular call volumes.*     Our consolidated international longdistance revenues declined by Php587 million, or 5%, to Php10,957 million in2002 from Php11,544 million in 2001, primarily as a result of lower inboundcall volumes.  The percentage contribution of international long distancerevenues to our total fixed line revenues also declined in 2002 to 23% from 24%in 2001.     Our revenues from inboundinternational long distance calls decreased by Php297 million, or 3%, toPhp8,778 million in 2002 from Php9,075 million in 2001. The decrease was duemainly to the combined effects of lower call volumes and continued declines inthe average international termination rates, partially offset by the positiveimpact of the depreciation of the average value of the peso relative to theU.S. dollar.      Our inbound international longdistance call volumes decreased by 15% to 2,644 million minutes in 2002 from3,108 million minutes in 2001 due to the following factors:                             - increased competition from alternative means of long distancecommunications, particularly  e-mail, international text messaging and Internettelephony;                                - more inbound calls terminating directly to cellular subscribers;and                                 - our policy requiring certain second and third tier internationalcarriers to prepay in order for us to accept their incoming traffic.  Althoughthis policy had a negative impact on our inbound international long distancerevenues in 2002, we expect that this will help us achieve a more stablerevenue base and control uncollectible accounts over the longer term.     The depreciation of the pesoincreased our inbound international long distance revenues in peso termsbecause settlement charges for inbound calls are billed in U.S. dollars or inspecial drawing rights, an established method of settlement among internationaltelecommunications carriers using values based on a basket of foreigncurrencies and translated into pesos at the prevailing exchange rates at thetime of billing.     Our revenues from outboundinternational long distance calls declined by Php290 million, or 12%, toPhp2,179 million in 2002 from Php2,469 million in 2001. The decline was dueprimarily to reductions in our average international direct dialing, or IDD,rates brought about by discounts granted to corporate customers and other largeaccounts and operator-assisted call charges, partially offset by higheroutbound call volumes and the positive effect of the depreciation of theaverage value of the peso against the U.S. dollar.      Effective February 2001, PLDTreduced its IDD rates for retail customers from US$0.49 per minute for off-peakhours and US$0.69 per minute for peak hours to a flat rate for retail customersof US$0.40 per minute applicable to all call destinations at any time and anyday of the week. Additionally, in November 2001, PLDT introduced *BudgetCard,*a prepaid call card offering a reduced IDD rate of US$0.24 per minutefor calls to the United States, Canada and Hawaii. *Budget Cards* are soldin a denomination of Php200, which must be used within 24 hours of activation.     Our outboundinternational long distance call volumes grew by 2% to 171 million minutes in2002 from 168 million minutes in 2001 on account of:                                   - reduced average IDD rates; and                                     - various marketing initiatives, including automatic activation ofthe IDD service for qualified subscribers, innovative pricing packages for corporateaccounts and loyalty programs for high-valued customers.     The depreciation of the pesoincreased our outbound international long distance revenues in peso termsbecause outbound calls are charged at U.S. dollar rates that are billed to oursubscribers in pesos at the prevailing exchange rates at the time of billing.     *NationalLong Distance Service*     Our national longdistance revenues consist of:                                        - per minute charges for calls made by our fixed line customersoutside of the local service areas but within the Philippines, net ofinterconnection charges payable for calls carried through the backbone networkof, and/or terminating to the customer of, another telecommunications carrier;and                                         - access charges received from other telecommunications carriers forcalls carried through our backbone network and/or terminating to our customers.     The following table shows ournational long distance revenues and call volumes for the years ended December31, 2001 and 2002:     
** **

**Years Ended December 31,**

** **

**2001**

** **

**2002**

 

 

 

 

Consolidated national long distance revenues (in millions)

Php8,367

 

Php8,191

National long distance call volumes (in million minutes)

 

 

 

PLDT Group

2,780

 

2,181

PLDT

2,756

 

2,145
     Our national long distance revenuesdecreased by Php176 million, or 2%, to Php8,191 million in 2002 from Php8,367million in 2001 due to the combined effects of the (1) decrease in call volumesresulting mainly from cellular substitution and (2) changes in PLDT’sinterconnection arrangements with the majority of other local exchangecarriers. Accordingly, the percentage contribution of national long distancerevenues to our fixed line revenues was down to 17% in 2002 from 18% in 2001.     Our national long distance callvolumes decreased by 22% to 2,181 million minutes in 2002 from 2,780 millionminutes in 2001. Cellular substitution and the widespread availability andgrowing popularity of alternative non-voice means of communications,particularly cellular text messaging and     e-mail, have negatively affectedcall volumes.     In the latter part of 2001, PLDTsimplified its rates for calls to fixed line subscribers and for thoseterminating to cellular subscribers resulting in an overall rate increase. Forcalls terminating to fixed line subscribers, the applicable rates from Januaryto November 1, 2001 ranged from Php3.00 to Php5.00 per minute, depending ondistance and time of call.  In line with its move towards rate simplification,PLDT simplified these rates to a flat rate of Php4.50 per minute effectiveNovember 2, 2001.  At the same time, PLDT also simplified its rates for callsterminating to cellular subscribers from a range of Php10.00 to Php16.00 perminute to a uniform rate of Php13.75 per minute.  Effective March 1, 2003, therate for calls terminating to other local exchange carriers increased from aflat rate of Php4.50 per minute to Php5.00 per minute.  Through ratesimplification, we aim to simplify our tariff structure in order to enhance thecompetitiveness of our products and services and increase our operating efficiencies.We adopted these simplified pricing plans with a view to maximizing ournational long distance revenues.     On May 1, 2001, PLDT entered into anew interconnection arrangement with the majority of other local exchangecarriers. Under this arrangement, the originating carrier pays (1) a haulingcharge of Php0.50 per minute for short-haul traffic or Php1.25 per minute forlong-haul traffic to the carrier owning the backbone network and (2) an accesscharge of Php1.00 per minute to the terminating carrier. PLDT maintainsrevenue-sharing arrangements with a few other local exchange carriers, wherebycharges are generally apportioned 30% for the originating entity, 40% for thebackbone owner and the remaining 30% for the terminating entity.     The decrease in our national longdistance revenues in 2002 compared to 2001 was, however, mitigated by theimpact of the following:                                           - changes in interconnection arrangements with cellular operators;                                              - increase in national direct dialing rates; and                                               - launch of  PLDT Premium Phone Services .     PLDT has reached an agreement withcellular operators to reduce the access charges it pays for calls terminatingto cellular subscribers.  Effective January 2002, PLDT pays access charges ofPhp4.50 per minute, down from the Php6.50 per minute it paid for the periodfrom July to December 2001.  Prior to July 2001, PLDT was paying access chargesranging from a low of Php7.69 per minute to a high of Php10.94 per minute forcalls terminating to cellular subscribers, depending on whether the calls werelocal or long distance.      Launched in 2001, *PLDT PremiumPhone Services* allow customers to choose from a range of serviceapplications, such as appointment-booking services for selected embassies(including, among others, the U.S. and Australian embassies in thePhilippines), spiritual and love counseling, joining television-based gameshows, celebrity chatting, downloading and sending of ring tones and logos,televoting, and job postings. PLDT charges an average of Php10.00 per minutefor these premium phone services.      *Data and Other Network Services*     While the other major segments ofour fixed line business posted lower revenues in 2002 compared to 2001, ourdata and other network services consistently registered increasing revenuegrowth. Revenues from these services grew by Php704 million, or 15%, toPhp5,480 million in 2002 from Php4,776 million in 2001.  The percentage revenuecontribution of these services to our fixed line revenues increased to 11% in2002 from 10% in 2001.  We expect that demand for, and therefore revenuesgenerated from, these services will continue to grow in the foreseeable future.     Data andother network services we currently provide include:                                                  - traditional bandwidth services —high-speed point-to-point domestic and international digital leased lineservices;                                                    - broadband/packet-based/Internet-based services — frame relay, ATM, IP-VPN, DSL, Internetgateway, and wholesale DS3; and                                                      - other packet-based switching services — Datapac and integrated services digital network, or ISDN.     The foregoing services are used forthe following:                                                        - domestic and international communication;                                                          - broadband data transmission services that transmit data over arange of frequencies and/or bandwidth into several narrower bands;                                                           - Internet exchange services that provide ISPs with a primaryconnection to the global Internet to exchange local traffic generated withinthe Philippines;                                                             - private networking services that use the public Internet as abackbone for private interconnection between different locations;                                                               - switch-based services, provided through a fixed bandwidthtransmission facility, that allow establishment of a dedicated connection forthe duration of the call; and                                                                 - international packet-based services, provided through bilateralarrangements and global alliances that integrate voice, video and data.     Traditional bandwidth servicesaccounted for 57% of the total revenues from PLDT’s data and other networkservices for 2002, broadband/IP-based services accounted for 38%, and otherservices accounted for the remaining 5%, compared to 67%, 29% and 4%,respectively, for 2001. These percentage changes indicate a shift in data andother network revenues from traditional bandwidth services tobroadband/IP-based services.  We expect this trend to continue given thegrowing demand for broadband transmission of voice, data and video due to thecontinued growth of the Internet, e-commerce and other online services.     In May 2002, PLDT launched apay-per-use dial-up Internet service under the brand name *PLDT Vibe*,which is available on a postpaid or prepaid basis to PLDT’s fixed linesubscribers. Charges for this service are Php0.25 per minute for off-peakhours, which are from 10:01 p.m.to 6:00 a.m., and Php0.50 perminute for peak hours, which are from 6:01 a.m.to 10:00 p.m.  With the launch of*PLDT Vibe*, PLDT now offers two residential Internet service packagestargeting separate markets:  *PLDT Vibe*for light to medium Internetusers and *myDSL*broadband for heavy Internet users.  As of December 31,2002, the number of PLDT’s postpaid fixed line subscribers that signed up for *PLDTVibe*was 60,878, while the number of subscribers to *PLDT DSL* and *myDSL*broadband services rose to 10,896 and 4,203 at the end of 2002 and 2001,respectively.     In August 2002, PLDT launched *Shops**.**work*,a network solution that allows the electronic linking of retail storesproviding, among others, sales and inventory reports, up-to-date and real-timemonitoring of sales and inventory, and on-line access to head offices.      *Miscellaneous*     Miscellaneous revenues are derivedmostly from directory advertising and facilities rental. In 2002, theserevenues increased by Php410 million, or 363%, to Php523 million from Php113million in 2001, and accounted for approximately 1% of our fixed line revenuesin 2002.     ***Wireless***     Our wirelessbusiness segment offers cellular services as well as satellite, VSAT, and otherservices.      The following table summarizesour consolidated operating revenues from our wireless business for the yearsended December 31, 2001 and 2002 by service segment:     
** **

**Years Ended December 31,**

 

**2001**

** **

**%**

** **

**2002**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Wireless services:

 

 

 

 

 

 

 

Cellular 

Php31,627

 

98

 

Php45,375

 

99

Satellite, VSAT and others

762

 

2

 

683

 

1

Total

Php32,389

 

100

 

Php46,058

 

100
     Our wireless service revenuesincreased considerably by Php13,669 million, or 42%, to Php46,058 million in2002 from Php32,389 million in 2001 mainly as a result of the continued stronggrowth in revenues generated from Smart’s cellular service. Accordingly, as apercentage of our consolidated operating revenues, wireless service revenuesrose to 48% in 2002 from 41% in 2001.     *CellularService*     Our cellular service revenuesconsist of:                                                                    - revenues derived from actual usage of the network by prepaidsubscribers and any unused peso value of expired prepaid cards;                                                                      - monthly service fees from postpaid subscribers, including (1)charges for calls in excess of allocated free local calls, (2) toll charges fornational and international long distance calls,  (3) charges for text messagesof our GSM service customers in excess of allotted free text messages and (4)charges for value-added services, net of related content provider costs;                                                                       - revenues generated from incoming calls and messages to oursubscribers, net of interconnection expenses; fees from reciprocal traffic frominternational correspondents; and revenues from inbound international roamingcalls for the GSM service;                                                                         - revenues associated with the sale of handsets and phone kits; and                                                                           - other charges, including those for reconnection and migration.     Our cellular service revenues in 2002, increased by Php13,748million, or 43%, to Php45,375 million from Php31,627 in 2001 as a result of thesignificant increase in our GSM subscriber base, partially offset by decliningusage per subscriber.  Cellular service revenues accounted for 47% of ourconsolidated operating revenues in 2002, compared to 40% in 2001.       We market nationwide cellularcommunications services through Smart and Piltel under the brand names *SmartBuddy, Smart Gold*, *addict mobile*, and *Talk 'N Text.  Smart Buddy*is a prepaid service while *Smart Gold* and *addict mobile* arepostpaid services, all provided through Smart's digital GSM network.  *addictmobile* was introduced in April 2003.  *Talk 'N Text* is a prepaidservice provided using Smart’s GSM network marketed by Piltel pursuant to afacilities service agreement between Smart and Piltel.    Before Smartdecommissioned its analog enhanced total access communications system, orETACS, network in December 2002, it had also offered analog prepaid andpostpaid services under the brand names*BillCrusher*and*PriceBuster,*respectively.Prior to 2002, Piltel had also offered analog prepaid and postpaid servicesunder the brand names *Phone Pal* and *Mobiline*, respectively.      The significant increase in ourcellular service revenues in 2002 was largely driven by our large GSMsubscriber base coupled with sustained subscriber growth.  The table belowshows our cellular subscriber base as of December 31, 2001 and 2002:     
** **

**Years Ended December 31,**

** **

**2001**

** **

**2002**

 

 

 

 

Cellular subscribers

6,368,850

 

8,599,306

Smart

4,893,844

 

6,825,686

GSM

4,641,666

 

6,825,686

Prepaid

4,569,616

 

6,649,038

Postpaid

72,050

 

176,648

Analog(1)

252,178

 

—

Prepaid

87,429

 

—

Postpaid

164,749

 

—

Piltel(2)

1,475,006

 

1,773,620

GSM Prepaid

1,329,326

 

1,773,620

Analog(1)

145,680

 

—

Prepaid

76,473

 

—

Postpaid

69,207

 

—
  _____________  * *  *(1)    **Smart closed down itsanalog/ETACS network in December 2002. Piltel ceased to offer its analog/CDMAprepaid and postpaid services at the end of 2002.*  * *  *(2)  **Piltel does not offer postpaid GSM services.*     As of December 31, 2002, Smart'sprepaid GSM subscriber base grew by 46% to 6,649,038 from 4,569,616 at December31, 2001, whereas Smart's postpaid GSM subscriber base increased by 145% to176,648 at December 31, 2002 from 72,050 at December 31, 2001. Of Smart's6,825,686 GSM subscribers at December 31, 2002, prepaid subscribers accountedfor 97%, while postpaid subscribers accounted for the remaining 3%. Piltel’s prepaid**GSM subscribers reached 1,773,620 as at December 31, 2002, representing a20% increase from its 1,475,006 subscribers at December 31, 2001.     The following table provides abreakdown of our cellular revenues as of and for the years ended December 31,2001 and 2002:     
**Years Ended December 31,**

** **

 

**2001**

** **

**2002**

** **

 

 

 

 

 

Cellular revenues (in millions)

Php31,627

 

Php45,375

 

Usage (1)

20,157

 

30,483

 

Others (2)

11,470

 

14,892

 
  _____________  * *  *(1)    **Refers to GSM and analogvoice and data revenues*  * *  *(2)    **Includes handset, phone kitand other non-usage revenues*     Usage revenues from voice and data services, which include allvoice traffic and value-added services such as voice mail and internationalroaming as well as text messaging-related services, increased by Php10,326million, or 51%, to Php30,483 million in 2002 from Php20,157 million in 2001due mainly to an increase of our cellular subscriber base, partially offset bya decrease in our revenue per user.     As a result of our increasing GSM subscriber base, volumes forboth domestic and international calls increased by 52% in 2002 to 3,252 millionminutes from 2,142 million minutes in 2001.  Domestic call volumes, whichinclude voice traffic originating from our cellular subscribers and terminatingwithin our cellular network and to other cellular and fixed line networks,increased by 54% to 2,288 million minutes in 2002 from 1,487 million minutes in2001.  In addition, international call volumes, both inbound and outbound, grewsignificantly to 964 million minutes in 2002 from 655 million minutes in 2001,representing an increase of 47%.       During 2002, our SMS system handled 19,558 million outboundmessages, an increase of 39% from the 14,055 million outbound messages handledduring 2001.  We implemented a two-phase reduction of our free text messageallocation to subscribers.  The first phase, effective September 15, 2001,reduced the allocation by one-third, while the second phase, effective January1, 2002, reduced the allocation by another one-third of the originalallocation, resulting in a total reduction of two-thirds.     Revenuesfrom our analog services have been declining as analog subscribers have beenmigrating to GSM service.  Smart decommissioned its analog enhanced totalaccess communications system, or ETACS, network in December 2002 while Piltelceased to offer its analog/CDMA service at the end of 2002.     Prior to July 2001, Smart and Piltel receivedinterconnection fees at an average of Php8.50 per minute for calls originatingfrom fixed line subscribers. Effective July 1, 2001, these fees were reduced toPhp6.50 per minute and then further reduced to Php4.50 per minute effectiveJanuary 1, 2002. Also, prior to July 2001, Smart and Piltel received and paidinterconnection fees of Php1.00 per minute for calls originatingfrom/terminating to another cellular operator's network. Effective July 1,2001, these fees were increased to Php3.00 per minute and then furtherincreased to Php4.50 per minute effective January 1, 2002.     Effective January 1, 2003, the termination rate for callsterminating to fixed line subscribers increased from Php2.00 per minute toPhp2.50 per minute, which will further increase to Php3.00 per minute effectiveJanuary 1, 2004.  Effective February 1, 2003, international long distance callspassing through our cellular network facility terminating to cellularsubscribers are charged a termination rate of US$0.16 per minute, an increasefrom the previous rate of US$0.12 per minute.  Effective January 1, 2004, callsterminating to cellular subscribers originating from fixed line subscriberswill be charged a termination rate of Php4.00 per minute, a decrease from theprevious rate of Php4.50 per minute.     *Handsetand Other Non-Usage Revenues*     Our cellular revenues includerevenues from the sale of handsets, phone kits and other non-usage revenuesamounting to Php14,892 million, an increase of 30% over the Php11,470 millionrecorded in 2001.  The increase was attributable to higher gross activations inour GSM subscribers.       *GSM ChurnRates*     Churn, or the rate at whichexisting subscribers have their service canceled in a given period, is computedbased on total disconnections in the period, net of reconnections in the case ofpostpaid subscribers, divided by the simple average of the numbers ofsubscribers at the beginning and at the end of a month, all divided by thenumber of months in the same period.     A prepaid cellular subscriber isrecognized as an active subscriber when that subscriber activates and uses theSIM card in the handset, which already contains Php100 worth of pre-stored airtime. Subscribers can then reload by purchasing prepaid call-and-text cardsthat are sold in denominations of Php300, Php500 and Php1,000 or, in the caseof Smart’s prepaid subscribers, by purchasing additional air time through theirhandsets using *Smart Money*.  Reloads are valid for two months.  Aprepaid GSM account is disconnected if the subscriber does not reload withinfour months after the full usage or expiry of the last reload.  As a result, asubscriber would not be recognized in churn for up to four to six months afterthe subscriber may have stopped using the service to make calls or sendmessages (although the subscriber may continue to receive calls and messages).These effects may cause our calculated churn rate for a period to be lower thanthe actual rate at which subscribers are ceasing to use Smart's and Piltel’sservices, and may contribute to more rapid growth in calculated churn followingperiods of rapid subscriber growth.      For Smart's prepaid GSMsubscribers, the average monthly churn rate for 2002 was 3.2%, compared to 1.8%for 2001.  Smart's churn has been influenced by several factors, particularlythe slowdown of the Philippine economy, which negatively affected the abilityof some subscribers to afford the service.  Piltel’s *Talk 'N Text*experienced churn for 2002 at an average rate of 5.7%, an increase from 2.7% in2001.     As part of our initiatives toaddress the increase in churn rate, we introduced *PureTxt 100* on August18, 2002.  The card was designed as an alternative for *Smart Buddy* and *Talk'N Text* subscribers who may temporarily be unable to afford the “call andtext” cards with higher denominations.  Once a *PureTxt 100* card wasloaded, the incoming and outgoing voice-call capabilities of the subscriberwere temporarily deactivated until such time that the subscriber reloaded witha “call and text” card” in a denomination of at least Php300.  *PureTxt 100*cards came with a free allocation of 10 text messages and were valid for onemonth.      In May 2003, we introduced *SmartLoad*,an “over-the-air” electronic loading facility designed to make reloading of airtime credits more convenient for and accessible to *Smart Buddy*and *Talk'N Text*subscribers.  These “over-the-air” reloads, which have both voiceand text functions, are packaged in smaller denominations of Php30, Php60 andPhp115, but have shorter validity periods of 3 days, 6 days and 12 days,respectively.  Like *PureTxt 100*, we believe that *SmartLoad* willencourage subscribers to stay within our cellular network instead of churningand re-subscribing at a later time.  We have ceased production of *PureTxt100* cards in anticipation that our *PureTxt* subscribers willeventually avail of *SmartLoad*.     The average monthly churn rate forSmart's postpaid GSM subscribers in 2002 was 2.3%, compared to 3.3% in 2001.Smart's policy is to redirect outgoing calls to an interactive voice responsesystem if the postpaid subscriber's account is either 45 days overdue or thesubscriber has exceeded the prescribed credit limit. If the subscriber does notmake a payment within 44 days of redirection, the account is disconnected.Within this 44-day period, a series of collection activities are implemented,involving the sending of a collection letter, call-out reminders and collectionmessages via text messaging.     *Satellite,VSAT and Other Services*     Our revenuesfrom satellite, VSAT and other services consist mainly of rentals received forthe lease of Mabuhay Satellite's transponders and Telesat's VSAT facilities toother companies and charges for ACeS Philippines’ satellite phone service.Total revenues from these services in 2002 amounted to Php683 million, adecrease of Php79 million, or 10%, from Php762 million in 2001.     ***Information and Communications Technology***     Our informationand communications technology business is conducted by ePLDT, a wholly-ownedsubsidiary of PLDT.  ePLDT was formed in August 2000 and started commercialoperations in February 2001.  ePLDT's principal business activities are theoperation of an Internet data center under the brand name *Vitro*ä; two wholly-owned call centers, namelyVocativ and Parlance; and Infocom, an ISP.  Granted pioneer status as anInternet data center by the Philippine Board of Investments, *Vitro*ä provides co-location services, serverhosting, hardware and software maintenance services, website development andmaintenance services, webcasting and webhosting, shared applications, datadisaster recovery and business continuity services, intrusion detection, andsecurity services such as firewall and managed firewall. ePLDT also operatesInfocom, our ISP, which was transferred from PLDT to ePLDT in December 2001 inline with the reorganization of our businesses into three major businesssegments.     ePLDT is engaged in the call centerbusiness through the following subsidiaries:                                                                             - Parlance, a 100%-owned call center facility capable ofaccommodating 520 seats exclusively for one of the largest direct-to-homeservice providers in the United States for customer support and billingrequirements.  Parlance commenced commercial operations in June 2002;                                                                               - Vocativ, a 100%-owned call center facility capable ofaccommodating 500 seats exclusively for clients of a global provider ofcustomer relationship management services.  Vocativ commenced commercialoperations in April 2002; and     ePLDT sold its entire 51% interestin Contact World on June 30, 2003.  Contact World, a call center facilitycapable of accommodating 200 seats, provides services that include customeracquisition, retention and growth, customer care and support, receivablesmanagement, help desk and technical support to various companies.  ContactWorld commenced commercial operations in June 2001.       ePLDT has also invested in a numberof other e-commerce and Internet-related businesses, as described in “Item 4.Information on the Company — Business — Information and CommunicationsTechnology — Infrastructure and Services — Other Investments.”     In 2002, our information andcommunications technology business generated total revenues of Php941 million,an increase of Php472 million, or 101%, over the Php469 million in 2001. Theserevenues accounted for less than 1% of our consolidated operating revenues ineach of the years 2002 and 2001.  *Vitro*äcontributed revenues of Php296 million, ePLDT’s call center business Php299million and Infocom Php346 million, representing 31%, 32% and 37%,respectively, of the total revenues from our information and communicationstechnology business in 2002.  Infocom’s revenue contribution in 2002represented an increase of Php12 million, or 4%, over its revenue contributionof Php334 million in 2001. Going forward, we expect revenues from our callcenter business to contribute significantly to our information andcommunications technology revenues with the full commercial operations ofParlance and Vocativ and the growing demand for call center services.      ***Consolidated OperatingExpenses***     Ourconsolidated operating expenses in 2002 decreased by Php8,136 million, or 9%,to Php80,565 million from Php88,701 million in 2001.  The decrease was dueprimarily to lower amortization expenses of goodwill and a lower amount ofimpairment charges recognized in 2002.  As a percentage of our consolidatedoperating revenues, consolidated operating expenses decreased to 84% in 2002from 112% in 2001 as a result of an increase in wireless revenues.     The following table shows thebreak-down of our total consolidated operating expenses for the years endedDecember 31, 2001 and 2002 by business segment:     
** **

**Years Ended December 31,**

 

**2001**

** **

** **

** **

**2002**

** **

** **

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line services

**Php**31,965

 

 

 

**Php**35,831

 

 

Wireless services

49,987

 

 

 

43,283

 

 

Information and communications technology services 

1,117

 

 

 

1,451

 

 

Total

Php83,070

 

 

 

Php80,565

 

 
  * *  *Fixed Line*     Consolidated operating expensesrelated to our fixed line business in 2002 totaled Php35,831 million, anincrease of Php3,866 million, or 12%, compared to Php31,965 million in 2001.     Thefollowing table shows the break-down of our total consolidated fixedline-related operating expenses for the years ended December 31, 2001 and 2002and the percentage of each expense item to the total:     
 

**Years Ended December 31,**

 

2001

** **

**%**

 

**2002**

 

**%**

 

**(in millions)**

Fixed line services:

 

 

 

 

 

 

 

Depreciation and amortization

Php8,820

 

 

 

Php13,902

 

 

Compensation and benefits

7,444

 

 

 

7,723

 

 

Provision for doubtful accounts

2,827

 

 

 

3,629

 

 

Maintenance

3,252

 

 

 

3,243

 

 

Selling and promotions

1,050

 

 

 

2,700

 

 

Professional and other service fees

1,008

 

 

 

1,018

 

 

Rent

832

 

 

 

868

 

 

Taxes and licenses

408

 

 

 

507

 

 

Other operating costs

1,676

 

 

 

1,699

 

 

Total

Php31,965

 

 

 

Php35,831

 

 
    Depreciation and amortizationcharges increased by Php5,081 million, or 58%, to Php13,902 million in 2002mainly due to higher depreciation of our asset base primarily resulting fromadditional completed projects.     Compensation and benefits increasedby Php279 million, or 4%, to Php7,723 million in 2002 mainly due to CollectiveBargaining Agreement related salary increases and partly offset by the impactof PLDT’s ongoing manpower reduction program and lower overtime costs.      Provision for doubtful accountsincreased by Php802 million, or 28%, to Php3,629 million in 2002 on account ofhigher provision for anticipated uncollectible accounts from variousspecifically identified second-tier international telecommunications carriers.To address the receivable issue, PLDT has adopted a prepayment policy as a prerequisitefor its acceptance of incoming international traffic from these carriers.Provision for doubtful accounts in 2002 was equivalent to 7% of its operatingrevenues, compared to 6% in 2001.     Maintenance expenses decreased byPhp9 million to Php3,243 million primarily due to lower maintenance costs forPLDT’s outside and inside plant facilities.  The reduction in maintenance costsfor these facilities was partially offset by higher electricity expense thatresulted from increased power consumption coupled with increased power rates.     Selling and promotion expensesincreased by Php1,650 million, or 157%, to Php2,700 million mainly due tohigher commissions paid to dealers for the sale of prepaid cards.     Professional and other service feesincreased by Php10 million, or 1%, to Php1,018 million because of consultancyfees incurred by PLDT Global relating to the establishment and operation ofglobal points of presence, partially offset by lower advisory, consultancy andpayment facility expenses incurred by PLDT as a result of streamlining itsoutsourced services.     Rental expense increased by Php37million, or 4%, to Php868 million mainly due to higher rental charges incurredby PLDT for its international leased circuit requirements.     Taxes and licenses increased byPhp99 million, or 24%, to Php507 million mainly on account of higher provisionfor NTC supervision and regulation fees (see Note 24 to our financialstatements in Item 18 for a discussion relating to NTC supervision andregulation fees).     Other operating costs increased by Php24 million, or 1%, toPhp1,699 million primarily due to higher travel, training and related expenses,partly offset by lower number of contractual employees and the overallreduction in other costs as a result of our cost-cutting efforts.     *Wireless*     Consolidated operating expenses associated with our wirelessbusiness in 2002 totaled Php43,283 million, a decrease of Php6,705 million, or13%, from Php49,987 million in 2001.     The following table summarizesour consolidated wireless-related operating expenses for the years endedDecember 31, 2001 and 2002 and the percentage of each expense item to thetotal:     
 

Years Ended December 31,

 

**2001**

 

 

 

**2002**

 

 

 

(in millions)

Wireless services

 

 

 

 

 

 

 

Cost of cellular handsets sold

Php13,232

 

 

 

Php15,981

 

 

Depreciation and amortization

7,516

 

 

 

3,493

 

 

Selling and promotions

2,416

 

 

 

2,906

 

 

Compensation and benefits

1,744

 

 

 

2,710

 

 

Rent

1,570

 

 

 

1,972

 

 

Maintenance

1,369

 

 

 

1,436

 

 

Professional and other service fees

1,242

 

 

 

1,299

 

 

Provision for doubtful accounts

310

 

 

 

535

 

 

Taxes and licenses

511

 

 

 

588

 

 

Asset impairment charge

19,470

 

 

 

10,865

 

 

Other operating costs

608

 

 

 

1,498

 

 

Total

Php49,987

 

 

 

Php43,283

 

 
     Cost of cellular handsets soldincreased by Php2,749 million, or 21%, to Php15,981 million mainly due to anincrease in GSM cellular subscribers both for Smart and Piltel.     Depreciation and amortizationcharges decreased by Php4,023 million, or 54%, to Php3,493 million mainly dueto an asset impairment charge in 2001 for Smart’s analog/ETACS and Piltel’sanalog/CDMA assets which reduced the depreciable value of Smart’s and Piltel’sassets.  Having complied with the requirements set out by the NTC, Smart closeddown the operation of its analog/ETACS network in December 2002.      Selling and promotion expensesincreased by Php490 million, or 20%, to Php2,906 million, mainly due toincreased gross activations of our cellular subscribers in 2002.  EffectiveAugust 1, 2002, we reduced maximum commission paid to dealers for prepaid phonekit sales from a range of Php1,000 to Php1,300 per unit sold (depending on thevolume purchased) in the form of prepaid “call and text” cards to Php800 incash per prepaid phone kit.  An additional 1% rebate is given on cashpurchases.      Compensation and benefits increasedby Php966 million, or 55%, to Php2,710 million primarily due to increasedsalaries and benefits of Smart’s employees coupled with accrued long-termincentive plan benefits for managers and executives of Smart.  Smart's employeeheadcount increased from 5,035 as of December 31, 2001 to 5,330 as of December31, 2002 mainly due to the integration of TSI into Smart on December 1, 2002.TSI was the largest dealer of Smart.     Rental expense increased by Php402million, or 26%, to Php1,972 million on account of higher site rentals incurredby Smart for its growing number of cell sites and base stations in line withits network expansion; increased operational requirements for satellite,microwave link and circuit facilities; and higher office space rentals due toincreased wireless business centers.  As of December 31, 2002, Smart had 2,110GSM cell sites and 2,777 base stations, compared with 1,570 GSM cell sites and2,091 base stations as of December 31, 2001.      Maintenance expense increased byPhp67 million, or 5%, to Php1,436 million due to higher maintenance costsincurred by Smart relating to additional network equipment for its growingnumber of cell sites.      Professional and other service feesincreased by Php57 million, or 5%, to Php1,299 million mainly as a result ofincreased technical service fees incurred by Smart.      Provision for doubtful accountsincreased by Php225 million, or 73%, to Php535 million due to an increase inSmart’s provision for doubtful carrier accounts mainly on account of anincrease in Smart’s postpaid subscriber base and Smart’s adoption of a morestringent provisioning policy.      Taxes and licenses increased byPhp77 million, or 15%, to Php588 million due mainly to the increase in Smart’sand Piltel’s real property tax, municipal licenses and taxes, and NTCsupervision and license fees.  See Note 24 to our financial statements in Item18 for a discussion relating to NTC supervision and regulation fees.      Asset impairment charges decreasedby Php8,604 million, or 34%, to Php10,865 million in 2002 on account ofimpairment charges relating to Piltel’s E.O. 109 limited mobility wirelesslocal loop assets.  Impairements relating to Smart’s analog/ETACS and Piltel’sanalog/CDMA assets were fully recognized in 2001. Smart’s customer list on itsanalog/ETACS service had been fully written off as at December 31, 2001 and assuch, no similar write off was taken in 2002.       Other operating costs increased byPhp890 million, or 146%, to Php1,498 million primarily due to increases inSmart’s various other operating expenses, such as insurance, facility usagefees, travel and transportation, and communications expenses.     *Information andCommunications Technology*     Consolidatedoperating expenses associated with our information and communicationstechnology business in 2002 totaled Php1,549 million, an increase of Php343million, or 28%, from Php1,206 million in 2001.  The increase was dueprincipally to the full commercial operations of ePLDT and its newly formedsubsidiaries.  As a percentage of our information and communications technologyoperating revenues, operating expenses related to our information andcommunications technology business decreased to 164% in 2002 from 257% in2001.  The three largest expense items related to our information andcommunications technology business in 2002 were maintenance, compensation andbenefits, and depreciation and amortization, representing [25%], [23%] and[22%], respectively, of our total operating expenses related to this business.In comparison, the three largest expense items related to our information andcommunications technology business in 2001 were rent, professional and otherservice fees, and depreciation and amortization, representing [30%], [17%] and[16%], respectively, of our total operating expenses related to the samebusiness.     ***Net Operating Income***     Our consolidated net operatingincome in 2002 was Php14,971 million, compared to a net operating loss ofPhp9,576 million in 2001. Accordingly, our consolidated operating margin (netoperating income as a percentage of operating revenues) improved to positive15% in 2002 from negative 12% in 2001.     The following table shows thebreak-down of our consolidated net operating income for the years endedDecember 31, 2001 and 2002 by business segment:  [update table]     
** **

**Years Ended December 31,**

 

**2001**

** **

**%**

** **

**2002**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line services

Php17,625

 

 

 

Php3,932

 

 

Wireless services

(22,268)

 

 

 

11,046

 

 

Information and communications technology services 

(737)

 

 

 

(608)

 

 

Total

Php(9,573)

 

100

 

Php14,975

 

100
     *Fixed Line*     In 2002, ourfixed line business segment contributed an operating income of Php3,827million, which was lower by Php13,797 million, or 78%, than Php17,624 millionin 2001. This lower operating income contribution was due largely to an assetimpairment charge of Php11,596 million in respect of Piltel’s E.O. 109 assets.      *Wireless*     Our wireless business segmentregistered an operating income of Php11,149 million in 2002, compared to anoperating loss of Php22,269 million in 2001.  This marked improvement was dueto a substantial increase of Php5,784 million in Smart's operating incomecontribution in 2002 to reach Php11,911 million from Php6,127 million in 2001.     *Information andCommunications Technology*     In 2002, ourinformation and communications technology business segment posted an operatingloss of Php608 million, a decrease of Php129 million, or 18%, compared to anoperating loss of Php737 million incurred in 2001.  These operating lossesreflect the start-up nature of ePLDT’s businesses and those of ePLDT’ssubsidiaries.     *Other Expenses – Net*     Thefollowing table shows our consolidated other expenses – net for the years endedDecember 31, 2001 and 2002:[table updated per note 19 but does not match f/s in2001]     
 

**Years Ended December 31,**

 

**2001**

** **

**2002**

 

**(in millions)**

 

 

 

 

Interest expenses and related items

Php17,043

 

Php16,006

Capitalized interest

(2,404)

 

(1,344)

Subtotal

Php14,639

 

Php14,662

Interest and other income

(1,458)

 

(2,567)

Other expenses – net

10,654

 

4,587

Total

Php23,835

 

Php16,682
     On a consolidated basis, our otherexpenses, net of other income, decreased by Php1,500 million, or 8%, toPhp16,682 million in 2002 from Php18,182 million in 2001 due to the combinedeffects of:                                                                                 - an increase in interest expense and related items, net ofcapitalized interest, of Php23 million attributable mainly to (1) a decrease ininterest expense of Php858 million due to the debt restructuring of Piltel and(2) a decrease of Php171 million in Mabuhay Satellite’s interest expense due todebt payments and lower interest rates mainly on Mabuhay Satellite’s foreigncurrency-denominated loans bearing fluctuating interest rates.  The abovedecreases were partially offset by (1) a net increase of Php12 million inPLDT’s interest expense and related items mainly due to the inclusion of thetender premium of Php518 million related to our tender offer for notes due 2003and 2004 completed in May 2002, which was substantially offset by the combinedeffects of lower interest rates, particularly LIBOR, and amortizations andprepayments of various loans in 2002; (2) an increase of Php302 million inSmart’s interest expense due to a higher level of indebtedness in 2002; (3) anet increase of Php7 million in other subsidiaries’ interest expenses, and (4)decrease in capitalized interest.;                                                                                   - an increase in interest and other income of Php1,109 millionmainly due to a net gain of Php633 million resulting from PLDT’s termination ofan interest rate swap agreement;                                                                                      - a decrease of Php6,067 million in other expenses–net due mainlyto decrease in impairment losses of Php5,653 million, a decrease in Php826million in equity partially offset by an increase in foreign currency  swap costsby Php207 million; and                                                                                       - equity in net losses of investees.        ***Loss Before Income Taxand Minority Interest***     Our lossbefore income tax and minority interest in net losses of consolidatedsubsidiaries in 2002 was Php1,707 million, a decrease of Php26,048 million, or94%, from a loss of Php27,755 million in 2001.      Our consolidated provision forincome tax in 2002 increased by Php3,761 million, or 590%, to Php3,125 millionfrom a carry forward benefit Php636 million in 2001.       In 2002, our effective corporate tax rate on a consolidatedbasis was 16%.  Our effective corporate tax rate was lower than the 32%statutory corporate tax rate due to the following:                                                                                         - the effect of a three-year income tax holiday granted to Smart bythe Philippine Board of Investments in connection with the pioneer status itawarded to Smart's GSM network expansion project;                                                                                           - income already subjected to a final tax; and                                                                                             - equity in net income of our subsidiaries, which has already beensubject to tax and therefore, as income to PLDT, is no longer subject to incometax.      Smart's three-year income taxholiday, which will expire in May 2004, applies to the incremental incomegenerated from its GSM network expansion.  We expect our effective tax rate toincrease following the expiration of the tax holiday granted to Smart.     ***Net Loss***     As a resultof the foregoing factors our consolidated net loss in 2002 stood at Php4,477million, an improvement of Php23,302 million, or 84%, over our consolidated netloss of Php27,779 million in 2001.  This improvement was largely due to thePhp[7,777] million net income contribution of our cellular business for 2002, a[171]% increase over its net income contribution of Php[2,874] million for2001.      Basic and diluted loss per share ofcommon stock amounted to Php[73.94] in 2002, compared to basic and diluted lossper share of Php[135.75] in 2001, after giving retroactive effect to stockdividend declarations.     **2001 Compared to 2000**  *** ***  *Consolidated OperatingRevenues*
 

Our consolidated operating revenuesgrew by Php17,179 million, or 28%, to Php79,128 million in 2001 compared withPhp61,949 million in 2000 largely as a result of the continuing strong growthof our wireless business.  Our cellular business contributed Php31,627 millionin revenues for 2001, an increase of 103% from Php15,576 million in 2000.  Ourcellular revenues, which was derived mostly from its cellular operations,accounted for 40% of our consolidated operating revenues in 2001, compared with25% in 2000.

 

Thefollowing table shows the break-down of our total consolidated operatingrevenues for the years ended December 31, 2000 and 2001 by business segment:

 

** **

**Years Ended December 31,**

 

**2000**

** **

**%**

** **

**2001**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line services

Php45,352

 

73

 

Php46,270

 

58

Wireless services

16,358

 

26

 

32,389

 

41

Information and communications technology services 

239

 

1

 

469

 

1

Total

Php61,949

 

100

 

Php79,128

 

100

 

***Fixed Line***

 

In 2001, our fixed line business generated revenues of Php46,270million, an increase of Php918 million, or 2%, from Php 45,352 million in2000.  The increase was mainly due to increases in revenues from our localexchange service and data and other network services, partially offset bydecreases in our national and international long distance revenues.  However,our fixed line revenues dropped to 58% of consolidated operating revenues in2001 from 73% in 2000 due to the significant growth in our wireless business.

 

The following table summarizesour consolidated operating revenues from our fixed line business for the yearsended December 31, 2000 and 2001 by service segment:

 

** **

**Years Ended December 31,**

** **

**2000**

**%**

**2001**

**%**

 

**(in millions)**

Fixed line services:

 

 

 

 

Local exchange

Php18,739

41

Php21,470

47

International long distance

13,226

29

11,544

25

National long distance

10,453

23

8,367

18

Data and other network

2,925

7

4,776

10

Miscellaneous

9

0

113

––

Total

Php45,352

100

Php46,270

100

 

Our consolidated operating revenuesfrom our fixed line business of Php46,270 million for the year ended December31, 2001 are presented net of inter-segment revenues of Php[159] million. Therewere no inter-segment revenues for the year ended December 31, 2000 from ourfixed lines business.

 

 

*LocalExchange Service*

 

The components of our localexchange revenues are described under "— 2002 Compared to 2001 —Consolidated Operating Revenues — Fixed Line — Local Exchange Service."

 

The following table summarizes keymeasures of our local exchange service business segment as of and for the yearsended December 31, 2000 and 2001:

 

 

**Years Ended December 31,**

 

**2000**

**2001**

 

 

 

Consolidated local exchange revenues (in millions)

Php18,739

Php21,470

Number of fixed lines in service

 

 

PLDT Group

1,999,922

2,174,082

PLDT(1)

1,915,985

2,075,109

Number of PLDT employees

13,285

12,915

Number of PLDT fixed lines in service per PLDT employee

144

161

________________

 

*(1) Approximately 99% and 93% were postpaid fixed linesubscribers as of December 31, 2000 and 2001, respectively.*

* *

Revenues from our local exchangeservice increased by Php2,731 million, or 15%, to Php21,470 million in 2001compared with Php18,739 million in 2000 principally due to:

 
- currency-related adjustments in our monthly local service rates;and       - higher average number of billed fixed lines in service.     As a percentage of total fixed linerevenues our local exchange service revenues increased to 47% in 2001 from 41%in 2000.     During 2001, we implemented tenupward and four downward adjustments in our monthly local service rates toreflect the movements of the peso-to-dollar exchange rate pursuant to acurrency adjustment mechanism allowed by the NTC.  During 2000, we implemented12 upward adjustments and one downward adjustment.  Under this mechanism, weincrease or decrease our monthly local service rates by 1% for every Php0.10change in the peso-to-dollar exchange rate relative to a base rate of Php11.00= US$1.00.  Following a depreciation of the peso, we increase our localexchange service rates after giving 15 days' prior notice to the NTC;conversely, we decrease our local exchange service rates immediately followingan appreciation of the peso.  The average peso-to-dollar exchange rate in 2001was Php51.009 = US$1.00, compared to the average of Php44.179 = US$1.00 in2000.  Rate adjustments under this mechanism relating to this 15% depreciationof the peso resulted in a 16% net increase in our average monthly local servicerates, thus increasing our local exchange revenues.     Despite lower gross fixed line additionsin 2001, PLDT achieved a higher number of net additional fixed lines in servicebecause of a lower number of disconnections during the year than in 2000.Gross additions to PLDT's fixed lines in service in 2001 totaled 427,349, lowerby 11% than last year's gross additions of 477,515.  On a net basis, PLDT added159,124 fixed lines in 2001, higher by 4% than the net additions of 153,516 in2000.     The increase in PLDT's net fixedline additions was mainly attributable to *Teletipid*, PLDT's prepaid fixedline service.  Launched in August 2000, *Teletipid* was initially intendedby PLDT as an alternative affordable telephone service for consumers underdifficult economic conditions.  At the end of 2000, PLDT had 13,905 *Teletipid*subscribers, all of which were new subscribers.  However, in 2001, *Teletipid*was incorporated into PLDT's overall churn and credit risk exposure managementand subscriber retention efforts.  In 2001, the number of additional *Teletipid*subscribers was 130,597, of which 82,002, or 63%, were new subscribers and48,595, or 37%, were migrated from PLDT's postpaid fixed line service, insteadof being disconnected from the service for non-payment of bills.  As ofDecember 31, 2001, active *Teletipid* subscribers reached 144,502,representing 7% of PLDT's total fixed lines in service.     *Teletipid* phone kits, eachcontaining Php300 of pre-paid air time, are sold for Php1,700 per unit.  *Teletipid*prepaid subscribers are charged based on usage at a rate of Php0.50 per minutefor local calls and at the same rates applicable to postpaid fixed linesubscribers for national and international long distance calls.     To stimulate fixed line subscribertake-up, effective November 13, 2000, PLDT reduced installation fees byapproximately 41%, from Php3,376.59 to Php1,999, for postpaid residentialsubscribers and by approximately 35%, from Php5,396.31 to Php3,500, forbusiness subscribers.  PLDT also introduced additional value-added products andservices, such as Caller ID and *TxT**135*, in order to attract newsubscribers and retain existing ones.  Caller ID allows subscribers to identifycallers by telephone number, while *TxT**135* allows one-way textmessaging from PLDT fixed lines to Smart and Piltel GSM handsets. *TxT**135*is also capable of international text messaging.      The ratio of PLDT fixed lines inservice per PLDT employee improved from 144 in 2000 to 161 in 2001 due to theincrease in PLDT's fixed lines in service and the impact of PLDT's manpowerreduction program.  PLDT's workforce was reduced by 370 employees, or 3%, in2001 primarily as a result of the manpower reduction program.     *International Long DistanceService*     The components of our internationallong distance revenues are described under “— 2002 Compared to 2001 —Consolidated Operating Revenues — Fixed Line — International Long DistanceService.     The following table showsinformation about our international long distance business for the years endedDecember 31, 2000 and 2001:     
 

**Years Ended December 31,**

 

**2000**

**2001**

 

 

 

Consolidated international long distance revenues (in millions)

Php13,226

Php11,544

Inbound

9,930

9,075

Outbound

3,296

2,469

International call volumes (in million minutes, except call ratio)(1)

 

 

PLDT Group(2)

2,457

3,276

Inbound

2,313

3,108

Outbound

144

168

Inbound-outbound call ratio

16.1:1

18.5:1

PLDT

2,378

2,814

Inbound

2,237

2,648

Outbound

141

166

Inbound-outbound call ratio

15.9:1

16.0:1
  ________________     *(1)    **Call volumes for the yearended December 31, 2001 have been restated to conform with our 2002 financialstatement presentation, which includes interconnection traffic.*  * *  *(2)    **Excludes cellular callvolumes.*        Our consolidated international longdistance revenues decreased by Php1,682 million, or 13%, to Php11,544 millionin 2001 from Php13,226 million in 2000 as a result of declines in revenues fromboth inbound and outbound international calls.  Our international long distancerevenues as a percentage of our total fixed line revenues also decreased to 25%in 2001 from 29% in 2000.     Our revenues from inbound internationallong distance calls for 2001 decreased by Php855 million, or 9%, to Php9,075million principally due to continued declines in international terminationrates.  This decrease was partially offset by the effects of the pesodepreciation against the U.S. dollar and higher call volumes.     On January 1, 2000, we adopted theU.S. FCC benchmark accounting rate of US$0.38 per minute for inboundinternational calls, which represented a settlement rate of US$0.19 per minutefor international long distance traffic between the Philippines and the UnitedStates.  Since then, our termination rates for inbound calls from the UnitedStates have continued to decline to levels below the U.S. FCC benchmarkaccounting rate.  Termination rates for inbound calls from other countries havedeclined as well.       The depreciation of the pesoincreased our inbound international long distance revenues in peso termsbecause settlement charges for inbound calls are billed in U.S. dollars or inspecial drawing rights, an established method of settlement among internationaltelecommunications carriers using values based on a basket of foreigncurrencies, that are translated into pesos at the prevailing exchange rates atthe time of billing.     Our inbound international longdistance call volumes increased by 34% to 3,108 million minutes in 2001 largelydue to:         - our enhanced competitiveness from flexible pricing that was madepossible by our adoption of the U.S. FCC benchmark accounting rate of US$0.38per minute for inbound international calls one year earlier than the targetdate set by the U.S. FCC; and           - our recovery of traffic previously lost to unauthorized traffictermination and bypass routings by international simple resale operators.     Beginning September 2001, PLDTadopted a policy requiring prepayment from certain second and third tierinternational carriers as a prerequisite for accepting their incoming traffic.This prepayment policy also contributed to the decline in revenues from inboundtraffic.  Although this prepayment policy has negatively impacted our inboundinternational long distance revenues in the near term, we expect that over thelonger term this policy will help us achieve a more stable revenue base andcontrol uncollectible accounts.     Our revenues from outbound internationallong distance calls for 2001 declined by Php827 million, or 25%, to Php2,469million primarily due to substantial reductions in our international directdialing or IDD rates, partially offset by the effects of the peso depreciationagainst the U.S. dollar and higher call volumes.  PLDT reduced its IDD ratesfor outbound calls an average of US$1.507 per minute to as low as US$0.49 perminute for off-peak hours and US$0.69 per minute for peak hours effective June15, 2000.  Effective February 1, 2001, PLDT further reduced these rates to aflat rate of US$0.40 per minute applicable to all call destinations at any timeand any day of the week.     The depreciation of the pesoincreased our outbound international long distance revenues in peso termsbecause outbound calls are charged at U.S. dollar rates that are billed to oursubscribers in pesos at the prevailing exchange rates at the time of billing.     Our outbound international longdistance call volumes grew by 17%, from 144 million minutes in 2000 to 168million minutes in 2001, as a result of:             - substantial reductions of our IDD rates; and               - implementation of our various marketing initiatives, includinginnovative pricing packages for large accounts and loyalty programs forhigh-value customers.     *National Long Distance Service*     The components of our national longdistance revenues are described under "— 2002 Compared to 2001 —Consolidated Operating Revenues — Fixed Line — National Long DistanceService."     The following table shows ournational long distance revenues and call volumes for the years ended December31, 2000 and 2001:     
** **

**Years Ended December 31,**

** **

**2000**

**2001**

 

 

 

Consolidated national long distance revenues (in millions)

Php10,453

Php8,367

National long distance call volumes (in million minutes)

 

 

PLDT Group

3,274

2,780

PLDT

3,255

2,756
     Our national long distance revenuesdeclined by Php2,086 million, or 20%, to Php8,367 million in 2001 fromPhp10,453 million in 2000 due to the combined effects of the following:                 - lower call volumes;                   - reduced national direct dialing, or NDD, rates; and                     - changes in interconnection arrangements and the percentage ofcalls subject to revenue sharing with other carriers.     Likewise, national long distancerevenues decreased to 18% of our total fixed line revenues in 2001 from 23% in2000.     Our national long distance callvolumes decreased by 15% to 2,780 million minutes in 2001 compared with 3,274million minutes in 2000.  Cellular substitution and the widespread availabilityand growing popularity of alternative, more economical non-voice means ofcommunications, particularly e-mail and cellular text messaging, havenegatively affected call volumes.  The integration of some of our localexchanges into single local calling areas effective August 2000, as mandated bythe NTC, has also negatively affected our national long distance call volumes.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.     In 2001, PLDT implemented changesin its NDD rates for calls to fixed line subscribers and for those terminatingto cellular subscribers.  For calls to fixed line subscribers, PLDT reduced itsNDD rates from a range of Php3.25 to Php6.60 per minute to a range of Php3.00to Php5.00 per minute effective May 1, 2001.  On November 2, 2001, PLDTrebalanced these rates to a flat rate of Php4.50 per minute.  For callsterminating to cellular subscribers, PLDT reduced its NDD rates from a range ofPhp12.69 to Php14.69 per minute to a uniform rate of Php12.50 per minuteeffective November 2, 2001.  Rate rebalancing aims to simplify our tariffstructure in order to enhance the competitiveness of our products and services,increase our operating efficiencies, and provide cost savings to ourcustomers.  We adopted these simplified pricing plans with a view tostabilizing our national long distance revenues going forward.     In 2001, 72% of PLDT's nationallong distance call volumes were subject to revenue sharing with other carriers,compared to 70% in 2000.     On May 1, 2001, PLDT entered intoan agreement with the majority of other local exchange carriers.  Under the newarrangement, the originating carrier pays access charges of (1) Php0.50 perminute for short haul or Php1.25 per minute for long haul traffic to thecarrier owning the backbone network and (2) Php1.00 per minute to theterminating carrier.  PLDT maintains revenue sharing arrangements with a fewother local exchange carriers whereby charges are generally apportioned 30% forthe originating entity, 40% for the backbone owner and another 30% for theterminating entity.     PLDT has also reached a favorablesettlement in its negotiations with different cellular operators on accesscharges for calls terminating to cellular subscribers.  Effective July 2001,access charges paid by PLDT to cellular operators were reduced to Php6.50 perminute for local and long distance calls, and, effective January 2002, accesscharges paid by PLDT were further reduced to Php4.50 per minute.  Prior to July2001, PLDT paid interconnection charges ranging from a low of Php7.69 to a highof Php10.94 per minute for calls terminating to cellular subscribers, dependingon whether the calls were local or long distance.     *Data and Other Network Services*     In 2001, data and other networkservices registered the highest percentage growth in revenues among our fixedline services, continuing the trend in the last two years.     The components of our data andother network revenues are described under "— 2002 Compared to 2001 —Consolidated Operating Revenues — Fixed Line — Data and Other NetworkServices."     Of our total revenues from data andother network services in 2001, traditional bandwidth services accounted for67%, broadband/IP-based services accounted for 29%, and other servicesaccounted for the remaining 4%, compared with 71%, 25% and 4%, respectively, in2000.     Revenues from our data and othernetwork services grew by Php1,851 million, or 63%, to Php4,776 million in 2001compared with Php2,925 million in 2000.  Revenues from our data and othernetwork services also increased to 10% of our total fixed line revenues in 2001from 7% in 2000.     In 2001, we continued to broadenour service offerings with the launch of new services, such as outsourcedremote dial-up access services and an Internet protocol-based networkingservice, and expansion or enhancement of some of the existing ones, includingincreasing the capacity of our Internet gateway service and accelerating thedeployment of our DSL infrastructure.     *Miscellaneous*     Miscellaneous revenues are derivedmostly from directory advertising and facilities rental.  For 2001, theserevenues increased by Php104 million to Php113 million from Php9 million in2000, and accounted for 0.2% of our 2001 total fixed line revenues.     ***Wireless***     The following table summarizesour consolidated operating revenues from our wireless business for the yearsended December 31, 2000 and 2001 by service segment:     
 

**Years Ended December 31,**

 

**2000**

**%**

**2001**

**%**

 

**(in millions)**

Wireless services:

 

 

 

 

Cellular

Php15,576

95

Php31,627

98

Satellite, VSAT and others

782

5

762

2

Total

Php16,358

100

Php32,389

100
     Wireless service revenues increasedby Php16,031 million, or 98%, to Php32,389 million in 2001 from Php16,358million in 2000 mainly as a result of the continuing strong growth in ourcellular service revenues.  As a percentage of consolidated operating revenues,our wireless service revenues rose to 41% in 2001 from 26% in 2000.     *Cellular Service*     The components of our cellularservice revenues are described above under “— 2002 Compared to 2001 —Consolidated Operating Revenues — Wireless — Cellular Service.”     Our cellular service revenues in2001 increased by Php16,051 million, or 103%, to Php31,627 million fromPhp15,576 in 2000. Cellular service revenues accounted for approximately 40% ofour consolidated operating revenues in 2001, compared to 25% in 2000.       We market our cellular servicesunder the brand names *Smart Buddy, Smart Gold, BillCrusher, PriceBuster,**Talk'N Text*, *Phone Pal* and *Mobiline*.  *Smart Buddy*and *SmartGold* are services provided using Smart’s digital GSM network, while *BillCrusher*and *PriceBuster*are offered through Smart’s analog/ETACS network.  *SmartBuddy*and *BillCrusher*are prepaid services, while *Smart Gold*and*PriceBuster*are postpaid services.  *Talk 'N Text* is provided byPiltel using Smart's GSM network, while *Phone Pal* and *Mobiline*are offered through Piltel's analog/CDMA network.  *Talk 'N Text* and *PhonePal* are prepaid services, while *Mobiline* is a postpaid service.     The substantial increase in ourcellular service revenues was driven by the strong growth in our cellularsubscriber base.  The table below shows our cellular subscriber base as ofDecember 31, 2000 and 2001:        
** **

**Years Ended December 31,**

** **

**2000**

** **

**2001**

 

 

 

 

Cellular subscribers

3,515,293

 

6,368,850

Smart

2,858,479

 

4,893,844

GSM

2,331,005

 

4,641,666

Prepaid

2,263,322

 

4,569,616

Postpaid

67,683

 

72,050

Analog

527,474

 

252,178

Prepaid

282,529

 

87,429

Postpaid

244,945

 

164,749

Piltel

656,814

 

1,475,006

GSM Prepaid

368,578

 

1,329,326

Analog

288,236

 

145,680

Prepaid

200,042

 

76,473

Postpaid

88,194

 

69,207
     Smart's prepaid GSM subscriber baseincreased by 2,306,294, or 102%, to 4,569,616, whereas Smart's postpaid GSMsubscriber base grew by 4,367, or 6%, to 72,050.  Prepaid subscribers accountedfor 98% of Smart's 4,641,666 GSM subscribers at December 31, 2001, whilepostpaid subscribers accounted for the remaining 2%.  In contrast, Smart'sprepaid analog subscriber base declined by 69% to 87,429 at December 31, 2001from 282,529 at December 31, 2000, while Smart's postpaid analog subscriberbase decreased by 33% to 164,749 at December 31, 2001 from 244,945 at December31, 2000.  Overall, Smart's analog subscriber base decreased during the year by52% to 252,178 at the end of 2001.     At December 31, 2001, Piltel's GSMsubscriber base increased by 960,748, or 261%, to 1,329,326 from 368,578 at theend of 2000.  In contrast, Piltel's prepaid analog subscriber base declined by62% to 76,473 at December 31, 2001 from 200,042 at December 31, 2000, whilePiltel's postpaid analog subscriber base decreased by 22% to 69,207 at December31, 2001 from 88,194 at December 31, 2000.  Overall, Piltel's analog subscriberbase decreased during the year by 49% to 145,680 at the end of 2001.     Thefollowing table provides a breakdown of our cellular revenues as of and for theyears ended December 31, 2000 and 2001:     
 

**Years Ended December 31,**

** **

 

**2000**

** **

**2001**

** **

 

 

 

 

 

Cellular revenues (in millions)

Php15,576

 

Php31,627

 

Usage (1)

11,840

 

20,157

 

Others (2)

3,736

 

      11,470

 
  _____________  * *  *(1)      **Refers to GSM and analogvoice and data revenues*  * *  *(2)    **Includes handset, phone kit and other non-usagerevenues*     Our cellular service revenues arepredominantly generated by our GSM service as revenues from our analog servicehave been decreasing due to the declining analog subscriber base coupled withdecreasing usage.     Usage revenues from voice and data services, which include allvoice traffic and value-added services such as voice mail and internationalroaming as well as text messaging-related services, increased by Php8,317million, or 70%, to Php20,157 million in 2001 from Php11,840 million in 2000due mainly to the 81% increase of our cellular subscriber base.     As a result of the substantial increase in our GSM subscriberbase, volumes for both domestic and international calls grew by 75% in 2001 to2,142 million minutes from 1,226 million minutes in 2000.  Domestic callvolumes, which include voice traffic originating from our cellular subscribersand terminating within our cellular network and to other cellular and fixedline networks, increased by 65% to 1,487 million minutes in 2001 from 901million minutes in 2001.  In addition, international call volumes, both inboundand outbound, increased to 655 million minutes in 2001 from 325 million minutesin 2000, representing an increase of 102%.       Prior to July 2001, Smart andPiltel received interconnection fees at an average of Php8.50 per minute forcalls originating from fixed line subscribers.  Effective July 2001, these feeswere reduced to Php6.50 per minute and were further reduced to Php4.50 perminute effective January 2002.  Also prior to July 2001, Smart and Piltelreceived and paid interconnection income and charges, respectively, of Php1.00per minute for calls originating/terminating in another cellular operator'snetwork.  Effective July 2001, these charges were increased to Php3.00 perminute and further increased to Php4.50 per minute effective January 2002.     During 2001, our SMS system handled 14,055 million outboundmessages, an increase of 232% from the 4,235 million messages handled during2000.  We implemented a two-phase reduction of its free text message allocationto subscribers.  The first phase, effective September 15, 2001, reduced theallocation by one-third, while the second phase, effective January 1, 2002,reduced the allocation by a further one-third of the original allocationresulting in a total reduction of two-thirds.       *Handsetand Other Non-Usage Revenues*     Our cellular revenues includerevenues from the sale of handsets, phone kits and other non-usage revenuesamounting to Php11,470 million in 2001, an increase of 30% over the Php3,736million recorded in 2000.  The increase was attributable to higher grossactivations in our GSM subscribers.       *GSM Churn Rates*     For Smart's prepaid GSMsubscribers, the average monthly churn rate for 2001 was 1.8%, compared to 0.4%in 2000.  Smart's churn rate in 2001 was influenced by several factors, including:                       - The general economic slowdown in the Philippines, whichnegatively impacted some subscribers' abilities to afford the service;                         - Technological advances, which necessitated the upgrading of SIMcards.  The introduction of  Smart zed Ôand  Smart Money  in late 2000 required our customers to upgrade earlierissued SIM cards to new, more advanced ones capable of supporting theseservices.  This cancellation and replacement of existing SIM cards contributedto increased churn.  This phenomenon may recur as Smart continues to introduceenhanced SIM cards as they become available and encourages its subscribers toupgrade to make use of Smart's various value-added services; and                           - Network quality in the first half of 2001, which may havecontributed to the increased churn rate during the second half of 2001.  AsSmart went through rapid subscriber growth in the first half of 2001, itsnetwork at times struggled to cope with the increased traffic.  Since then,however, Smart has invested heavily in increasing its network capacity.     The average monthly churn rate for Smart's postpaidGSM subscribers for each of the years 2000 and 2001 was 3.4% and 3.3%,respectively.  Smart's policy is to redirect outgoing calls to an interactivevoice response system if the postpaid subscriber's account is either 45 daysoverdue or the subscriber has exceeded the prescribed credit limit.  If thesubscriber does not make a payment within 30 days of redirection, the accountis disconnected.  Within this 30-day period, a series of collection activitiesare implemented, involving the sending of a collection letter, call-outreminders and collection messages via SMS.     *Talk 'N Text*'s averagemonthly churn rate for 2001 was 2.7%, increasing from 1.0% in January 2001 to4.6% in December 2001.  We believe Piltel's GSM service churn rate in 2001 wasinfluenced by the general economic slowdown in the Philippines, which may havenegatively impacted some subscribers' abilities to afford the service.  Inaddition, because churn for *Talk 'N Text* is computed in an identicalmanner to that of Smart's prepaid GSM service, a subscriber would not berecognized in churn for up to four to six months after the subscriber may havestopped using the service.       *Analog Churn Rates*     The churn rate for Smart’s prepaidand postpaid analog subscribers is computed in the same way as that for itsprepaid and postpaid GSM subscribers.  The average monthly churn rate forSmart’s prepaid analog subscribers in 2001 increased to 8.8% from 3.0% in 2000while the average monthly churn rate for Smart’s postpaid analog subscriberswas 3.3%, a decrease from 4.9% for 2000.     The average monthly churn rate for2001 for Piltel’s prepaid analog/CDMA service was 10.67%.     Satellite, VSAT and Other Services
 

Our revenues from satellite andVSAT services consist mainly of rentals received for the lease of MabuhaySatellite's transponders and Telesat's VSAT facilities to other companies.  In2001, revenues derived from these services amounted to Php762 million, adecrease of Php20 million, or 3%, from the Php782 million in 2000.  ACeSPhilippines, our satellite phone service provider, started to roll out fixedsatellite terminals in the last quarter of 2001.

 

***Information andCommunications Technology***

 

Revenues generated from ourinformation and communications technology business in 2001 amounted to Php469million, increasing by Php230 million, or 96%, from Php239 million in 2000, andaccounting for less than 1% of our consolidated revenues in each of these twoyears.  Infocom contributed revenues of Php334 million, an increase of Php95million, or 40%, over its revenue contribution of Php239 million in 2000.ePLDT, which started commercial operations only on February 5, 2001,contributed revenues of Php97 million from *Vitro*TM operations.  Our call center businesscontributed revenues of Php36 million to our information and communicationstechnology business.  

 

***Consolidated Operating Expenses***

 

Our consolidated operating expensesin 2001, increased by Php32,567 million, or 64%, to Php83,070 million fromPhp50,503 million in 2000.

 

The following table shows thebreak-down of our total consolidated operating expenses for the years endedDecember 31, 2000 and 2001 by business segment:

 

** **

**Years Ended December 31,**

 

**2000**

** **

** **

** **

**2001**

** **

** **

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line services

**Php**30,273

 

 

 

**Php**31,965

 

 

Wireless services

19,919

 

 

 

49,987

 

 

Information and communications technology services 

310

 

 

 

1,117

 

 

Total

**Php**50,503

 

100

 

Php83,070

 

100

 

 

*Fixed Line*

 

Consolidated operating expensesrelated to our fixed line business totaled Php31,965 million in 2001, anincrease of Php1,692 million, or 6%, from Php30,273 million in 2000 largely asa result of higher depreciation and amortization charges.  

Thefollowing table shows the break-down of the total consolidated fixedline-related operating expenses for the years ended December 31, 2000 and 2001and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

**2000**

** **

**2001**

** **

 

**(in millions)**

Fixed line services:

 

 

 

 

Depreciation and amortization (1)

Php7,508

 

Php8,820

 

Compensation and benefits

7,316

 

7,725

 

Maintenance

3,142

 

3,307

 

Provision for doubtful accounts

2,361

 

2,880

 

Selling and promotions

1,990

 

1,366

 

Professional and other service fees

1,112

 

1,008

 

Rent

840

 

954

 

Taxes and licenses

540

 

408

 

Other operating costs

2,259

 

2,416

 

Total

Php27,336

 

Php29,281

 

_____________

 

*(1)**Includes depreciation of capitalizedforeign exchange losses from revaluation of net dollar liabilities of Php4,590million in 2001 and Php3,283 million in 2000.*

 

Our consolidated operating expensesrelated to our fixed line business of Php29,281 million for the year endedDecember 31, 2001 are presented net of inter-segment expenses of Php927million. There were no inter-segment expenses for the year ended December 31,2000 related to our fixed line business.

 

 

Depreciation and amortizationcharges increased by Php1,441 million, or 19%, to Php9,217 million due to anexpanding depreciable asset base mainly as a result of completed projects. 

 

Compensation and benefits slightlyincreased by Php409 million, or 6%, to Php7,725 million.  This increasereflects the salary increases granted to PLDT's non-supervisory employeespursuant to a new three-year collective bargaining agreement signed in March2001.

 

Maintenance expenses increased byPhp165 million, or 5%, to Php3,307 million primarily due to the effect of thepeso depreciation on dollar-denominated maintenance costs, relating principallyto the maintenance of our domestic fiber optic network.

 

Provision for doubtful accountsincreased by Php519 million, or 22%, to Php2,880 million on account of higherprovision for anticipated uncollectible accounts from various second-tierinternational telecommunications carriers.  To address the receivable problemwith these second-tier carriers, PLDT adopted a prepayment policy as aprerequisite for PLDT's acceptance of their incoming international traffic.[Our provision for doubtful accounts in 2001 is equivalent to approximately 3%of our operating revenues, compared to approximately 4% in 2000.]

 

Selling and promotion expensesdecreased by Php624 million, or 31%, to Php1,366 million mainly due to asignificant drop in PLDT's advertising and public relations expenses during thesecond half of 2001.

 

Professional and other service feesdeclined by Php104 million, or 9%, to Php1,008 million as a result of thereduction of PLDT's consultancy and payment facility expenses.  The decrease inPLDT's consultancy and payment facility expenses was a result of thestreamlining of our outsourced services in line with our cost reductioninitiatives.

 

Rental expense increasedby Php114 million, or 14%, to Php954 million due mainly to the effect of thepeso depreciation on dollar-denominated rental of international satellitecircuits.

 

Taxes and licenses decreased byPhp132 million, or 24%, to Php408 million mainly on account of lower radiolicenses and permit fees paid in 2001 than in 2000 and lower property taxesresulting from disposal of some of PLDT's idle real properties.

 

Other operating costs increased byPhp157 million, or 7%, to Php2,416 million primarily due to Piltel-relatedexpenses.

 

*Wireless*

 

Consolidated operating expensesassociated with our wireless business in 2001 totaled Php62,563 million, anincrease of Php37,890 million, or 154%, from Php24,673 million in 2000.  Asignificant portion of this increase was due to higher cost of cellularhandsets sold, selling and promotion expenses, depreciation and amortizationcharges and the asset impairment charge for Smart’s analog/ETACS and Piltel’sanalog/CDMA assets in 2001 and the write-off of the customer list relating toSmart’s analog/ETACS service in 2001.  As a percentage of our wirelessoperating revenues, operating expenses associated with our wireless businesswas 155% in 2001 from 140% in 2000.

 

The following table summarizes ourconsolidated wireless-related operating expenses for the years ended December31, 2000 and 2001 and the percentage of each expense item to the total:

 

** **

**Years Ended December 31,**

** **

**2000**

**%**

**2001**

**%**

 

**(in millions)**

Wireless services:

 

 

 

 

Cost of cellular handsets sold

Php8,145

33

Php15,866

25

Depreciation and amortization

4,464

18

6,949

11

Selling and promotions

2,446

10

7,427

12

Compensation and benefits

1,506

6

1,775

3

Maintenance

830

3

1,357

2

Rent

699

3

1,435

2

Professional and other service fees

384

2

870

1

Taxes and licenses

204

1

322

1

Provision for doubtful accounts

556

2

310

1

Amortization of goodwill

4,359

18

5,781

9

Asset impairment charge

––

––

16,720

27

Write-off of customer list

––

––

2,077

3

Other operating costs

1,080

4

1,674

3

Total

Php24,673

100

Php62,563

100

 

Our consolidated operating expensesrelated to our wireless business of Php24,673 and Php62,563 million for theyears ended December 31, 2000 and 2001 are presented net of inter-segmentexpenses of Php991 million and Php699 million, respectively.

 

 

Cost of cellular handsets soldincreased by Php7,721 million, or 95%, to Php15,866 million resulting fromchanges in the prices and production life of popular handset models coupled bythe increase in Smart’s and Piltel’s subscriber base.

 

Depreciation and amortizationcharges increased by Php2,485 million, or 56%, to Php6,949 million due to anexpanding depreciable asset base mainly as a result of continued significantexpansion and upgrading of Smart's GSM network.  

 

Selling and promotion expensesincreased by Php4,981 million, to Php7,427 million, on account of higher dealerdiscounts and value-added services-related expenses reclassified to wirelessoperating revenues.  

 

Compensation and benefits rose byPhp269 million, or 18%, to Php1,775 million primarily due to an increase inSmart's employee headcount from 3,453 as of December 31, 2000 to 5,035 as ofDecember 31, 2001 to meet the staffing requirements of a rapidly expandingcellular network and subscriber base.

 

Maintenance expense increased byPhp527 million, or 63%, to Php1,357 million as a result of increasedmaintenance costs for Smart's additional cellular network equipment.

 

Rental expense increased by Php736million, or 105%, to Php1,435 million on account of higher site rentalsincurred by Smart for its increasing number of base stations and mobileswitching centers.

 

Professional and other service feesincreased by Php486 million, or 127%, to Php870 million due to higherprofessional fees paid to technical consultants for the operation andmaintenance of Smart's GSM network.

 

Taxes and licenses increased byPhp118 million, or 58%, to Php322 million as a result of increased NTCsupervision fees and radio permit fees.

 

Provision for doubtful accountsdecreased by Php246 million, or 44%, to Php310 million reflecting lowerprovisioning for anticipated uncollectible accounts due to the decliningpostpaid analog subscriber base.

 

Amortization of goodwill increasedby Php1,422 million, or 33% to Php5,781 million mainly due to a full-yeargoodwill amortization in 2001 in relation to Smart’s acquisition, as comparedto the recognition of goodwill amortization subsequent to the purchase of Smartin March 2000.

 

Asset impairment charge increasedby Php16,720, or 100%, in 2001 on account of charges amounting to Php3,782million and Php12,938 million recognized by Smart and Piltel for their analog/ETACSand analog/CDMA assets, respectively.  The following impairment indicators ledto the recognition of impairments charges by Smart and Piltel for their analogassets:  decline in subscriber numbers for analog cellular services, migrationof customers from analog services to GSM services and generally decliningARPUs.

Write-off of customer listpertaining to Smart’s analog/ETACS service increased by Php2,077 million, or100% in 2001 in line with the recognition of an asset impairment charge in respectof Smart’s analog/ETACS assets.

 

Other operating costs increased byPhp594 million, or 55%, to Php1,674 million attributable to Smart’sprovisioning for handset inventory obsolescence and increases in variousoperating expenses, such as printing and office supplies.

 

*Information andCommunications Technology*

 

Consolidated operating expensesassociated with our information and communications technology business amountedto Php1,206 million in 2001, an increase of Php870 million, or 259%, fromPhp336 million in 2000.  As a percentage of our information and communicationstechnology operating revenues, operating expenses related to our informationand communications technology business rose to 257% in 2001 from 141% in 2000,reflecting increased costs brought about by ePLDT's commercial operations thatstarted on February 5, 2001 and the start-up nature of ePLDT's businesses andsubsidiaries.  Rent, professional and other service fees, and depreciation andamortization comprised the top three highest expenses, contributing 30%, 17%and 16%, respectively, to total operating expenses related to our informationand communications technology business.

 

***Net Operating Income***

 

Our consolidated net operating lossin 2001 amounted to Php5,380 million, compared to an operating income ofPhp11,321 million in 2000.  Accordingly, our consolidated operating margin (netoperating income as a percentage of operating revenues) was negative 6% in 2001compared to positive 18% in 2000.

 

The following table shows thebreak-down of our consolidated net operating income for the years endedDecember 31, 2000 and 2001 by business segment:

 

** **

**Years Ended December 31,**

 

**2000**

** **

**%**

** **

**2001**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line services

Php18,482

 

 

 

Php17,624

 

 

Wireless services

(3,656)

 

 

 

(22,809)

 

 

Information and communications technology services 

(72)

 

 

 

(735)

 

 

Total

Php11,446

 

100

 

Php(9,573)

 

100

 

*Fixed Line*

 

In 2001, our fixed line businesssegment contributed an operating income of Php17,625 million, a decrease ofPhp857 million, or 5%, from Php18,482 million in 2000.  Although the declinesin our national and international long distance revenues were more than offsetby the increases in revenues from our local exchange service and data and othernetwork services, the overall increase in our consolidated fixed line operatingrevenues was insufficient to cover the increase in consolidated fixedline-related operating expenses, particularly depreciation and amortizationcharges.

 

*Wireless*

 

Our wireless business segmentregistered an operating loss of Php22,268 million in 2001, as against anoperating loss of Php7,064 million in 2000.  The increase in net operating losswas attributable to asset impairment charges recognized both by Smart and Piltelin 2001.

 

*Information and Communications Technology*

 

In 2001, our information andcommunications technology business segment posted an operating loss of Php737million, an increase of 660% from an operating loss of Php97 million incurredin 2000.  This significant increase in operating losses was attributable toePLDT, which started commercial operations only on February 5, 2001, asmentioned earlier.

 

***Other Expenses — Net***

 

The following table shows ourconsolidated other expenses – net for the years ended December 31, 2000 and2001:

 

 

**Years Ended  December 31,**

 

**2000**

**2001**

 

**(in millions)**

 

 

 

Interest expense and related items

Php16,812

Php17,043

Capitalized interest

(2,603)

(2,404)

Subtotal

Php14,209

Php14,639

Interest and other income

(2,885)

(1,458)

Other expenses (income)

33,075

5,001

Total

Php44,399

Php18,182

 

On aconsolidated basis, our other expenses, net of other income, decreased byPhp26,217 million, or 59%, to Php18,182 million in 2001 from Php44,399 millionin 2000 due to the combined effects of:

 
- an increase in interest expense and related items, net of capitalized interest, of Php775 million mainly due to an increase in PLDT’s interest expenses of Php1,084 million in respect of its foreign-currency denominated liabilities as a result of the peso depreciation, partially offset by the decreases in interest expenses of Smart and Mabuhay Satellite amounting to Php370 million and Php63 million, respectively;

 
- a decrease in interest and other income of Php1,446 million due a one-time gain of Php924 million realized by PLDT from the termination of a foreign currency swap agreement in 2000; and

 
- a decrease in other expense-net largely due to foreign exchange losses in 2000 attributable to our dollar-denominated liabilities.  At December 31, 2000, the exchange rate was Php49.986 = US$1.00, equivalent to a 24% depreciation of the peso relative to the rate at the end of 1999.

 

***Loss Before Income Tax and Minority Interest***

 

In 2001, our effective corporatetax rate was 26% on a consolidated basis.  Our effective corporate tax rate waslower than the 32% statutory corporate tax rate due to differences between ourconsolidated income as shown on our financial statements and our taxableincome, as well as the effect of a three year income tax holiday granted toSmart by the Philippine Board of Investments in connection with the pioneerstatus awarded to Smart's GSM network expansion project.  Our taxable income isdifferent from income as shown on our financial statements because a portion ofour financial income consists of interest income already subject to 20% finaltax and equity in net income of our subsidiaries, which has also been subjectto tax and therefore, as income to PLDT, is not subject to income tax.  Smart'sthree year income tax holiday will expire in May 2004 and applies to theincremental income generated from its GSM network expansion.  We expect oureffective tax rate to increase following the expiration of Smart's tax holiday.

 

In 2001, our loss before income taxand minority interest in net losses of consolidated subsidiaries was Php27,755million, from a net loss of Php32,953 million in 2000.  

 

Consolidated provision for incometax in 2001 decreased by Php4,811 million, or 76%, to Php1,545 million fromPhp6,356 million in 2000.  

 

***Net Loss***

 

As a result of the foregoing ourconsolidated net loss in 2001 stood at Php27,779 million, as against a net lossof Php23,086 million in 2000.  The substantial net loss posted in 2001 waslargely due to impairment charge aggregating Php[16,720] million in respect ofSmart’s analog/ETACS assets and Piltel’s analog/CDMA assets.  In 2000, thesubstantial net loss was attributable to foreign exchange losses of Php32,173million due to a 24% peso depreciation during 2000.

 

Accordingly, loss per common share,both basic and diluted, increased to Php191.74 in 2002 from Php135.75 in 2001.Since the amount of dividends on preferred shares over the equivalent number ofcommon shares were greater than the basic loss per share, the amounts for basicand diluted lossess per share are the same.

 

**Liquidity and Capital Resources**

 

Thefollowing table shows our consolidated cash flows, capitalization and otherselected financial data as of and for the years ended December 31, 2000, 2001and 2002:****

** **

 

Years Ended December 31,

 

**2000**

**2001**

**2002**

 

**(in million pesos)**

Cash Flows

 

 

 

Net cash provided by operating activities

24,034

21,641

36,869

Net cash used in investing activities

(29,014)

(32,777)

(15,140)

Capital expenditures

27,109

30,554

14,699

Net cash provided by (used in) financing activities

6,035

5,714

(14,975)

 

 

 

 

 

December 31,

 

** **

**2001**

**2002**

 

**(in million pesos )**

Capitalization

 

 

 

Cash and cash equivalents

 

4,276

10,974

Short-term debt

 

 

 

Current portion of long-term debt

 

19,286

19,176

Notes payable

 

6,462

760

Long-term debt – net of current portion

 

170,813

171,774

Total debt

 

196,561

191,710

Stockholders' equity

 

21,123

14,755

Total capitalization

 

217,684

206,465

 

In 2002, PLDT pursued a number ofliability management initiatives with the objectives of further improving thebalance between its cash flows and debt service requirements and reducing itsoverall indebtedness. 

 

Through these initiatives, PLDT wasable to successfully raise the necessary external financing to fund itsoperating, investing and debt service requirements.  On January 25, 2002, PLDTsigned two loan agreements with *Kreditanstalt fur Wiederaufbau*, or KfW,which provided PLDT with a refinancing facility of US$149 million.  On May 2,2002, PLDT completed a global offering of notes in the aggregate amount ofUS$350 million with a simultaneous tender offer for its 8.5% Notes due 2003 and10.625% Notes due 2004, which closed on May 15, 2002.  On July 26, 2002, PLDTsigned a loan agreement with JBIC for a JP¥9,760 million credit facility underJBIC’s Overseas Investment Loan Program. On September 4, 2002, PLDT signed aUS$145 million syndicated multicurrency term loan facility, which is intendedto refinance part of the principal amounts outstanding under two existing termloans falling due in 2003. 

 

As of December 31, 2002,consolidated cash and cash equivalents amounted to Php10,974 million.Principal sources of consolidated cash in 2002 were cash flows from operationsamounting to Php36,869 million, drawings from existing long-term creditfacilities totaling Php32,586 million, and net equity funds raised throughPLDT's subscriber investment plan amounting to Php464 million.  These fundswere used principally for capital outlays of Php14,699 million, includingcapitalized interest of Php1,344 million and debt payments of Php47,762million.

 

Principal sources of consolidatedcash in 2001 and 2000 were cash flows from operations amounting to Php21,641million and Php24,034 million, respectively; drawings from long-term andshort-term credit facilities totaling Php17,045 million and Php1,581 million,respectively, in 2001, and Php22,025 million from long-term facilities in 2000;and equity funds raised through the issuance of capital stock amounting to Php232million in 2001 and Php14,194 million in 2000.  These funds were usedprincipally for capital outlays of Php30,554 million (including capitalizedinterest of Php2,404 million) and payments of long-term debt amounting toPhp15,829 million in 2001; and capital outlays of Php27,109 million, (includingcapitalized interest of Php2,603 million) and payments of long-term debt andshort-term amounting to Php30,136 million in 2000.

 

***Operating Activities***

 

On a consolidated basis, net cashflows from operating activities in 2002 amounted to Php36,869 million, anincrease of Php15,228 million, or 70%, from Php21,641 million in 2001, mainlyreflecting strong earnings growth.  In 2001, consolidated operating cash flowsdecreased by Php2,393 million, or 10% from Php24,034 million in 2000, onaccount of outstanding liabilities in 2000 settled in 2001.

 

A growing portion of ourconsolidated cash flow is generated by our wireless and data businesses.  Therevenue contribution of these businesses has grown over the last three yearswith wireless business contributing 48%, 41% and 26% and data businesscontributing an average of 6% in 2002, 2001 and 2000, respectively.  Revenuesfrom our local exchange service accounted for approximately 24% of ourconsolidated operating revenues in 2002, down from 27% in 2001 and from 30% in2000.

 

Our dependence on international andnational long distance services has decreased over the past several years.  In2002, 2001 and 2000, these services together accounted for 20%, 25% and 38%,respectively, of our consolidated operating revenues.  Revenues from our longdistance businesses declined by 4% in 2002 compared to 2001 and by 16% in 2001compared to 2000 due to cellular substitution and declining prices. 

 

PLDT's contribution to ourconsolidated cash flows from operations in 2002 was Php17,053 million, anincrease of Php4,503 million, or 36%, from Php12,550 million in 2001, which inturn represents a decrease of Php8,512, or 40%, from Php21,062 in 2000. Theincrease in 2002 was due to a decrease in PLDT’s working capital management,including the decline in level of settlements of certain liabilitiesoutstanding during 2002, compared to 2001. The decrease in 2001, on the otherhand, was attributable to settlements in 2001 of certain payables outstandingat the end of 2000.

 

Our subsidiaries, particularly Smart, contributedsignificant cash from operations.  In 2002, Smart generated cash fromoperations of Php19,725 million, or approximately 48% of consolidated cash flowfrom operations.  In 2001, Smart generated cash from operations of Php9,923million, or 43%, of our consolidated cash flow from operations.  Smart’s strongcash flows reflect the continuing strong performance of its cellular business.However, Smart is subject to loan covenants that restrict its ability to paydividends, redeem preferred shares, make distributions to PLDT or otherwiseprovide funds to PLDT or any associate without the consent of certain of itslenders.  After receiving approvals from Finnvera and certain lenders for thepayment of dividends to PLDT in an amount not to exceed 40% of Smart’s netincome in 2001, Smart made its first dividend payment of Php1,540 million toPLDT in December 2002.  In addition, Smart paid dividends in the amount ofPhp4,300 million to PLDT in June 2003, representing 70% of Smart’s 2002 netincome, after receiving similar approvals from Finnvera and certain lenders.Smart will be required to obtain further waivers to pay additional dividends infuture periods.  We cannot assure you that Smart will be able to obtain suchwaivers in the future, or what amount, if any, Smart would be permitted orfinancially able to distribute.  We expect that we will have difficulty meetingour debt payment obligations if we do not continue to receive cash dividendsfrom Smart.]

 

***Investing Activities***

 

On a consolidated basis, net cashused in investing activities in 2002 was Php15,140 million, a decrease ofPhp17,637 million, or 52%, from Php32,777 million in 2001 mainly as a result ofSmart's lower capital spending. 

 

Our consolidated capitalexpenditures in 2002 totaled Php14,699 million, a significant reduction ofPhp15,855 million, or 52%, from Php30,554 million in 2001 due primarily toSmart’s and PLDT’s lower capital spending. Smart's capital spending of Php6,319million in 2002 was used to further expand and upgrade its GSM network to meetthe increasing demand for cellular services. PLDT's capital outlay of Php6,932million was principally used to finance the continued build-out of its data andbroadband/IP infrastructure and investment in Asia Pacific Cable Network 2.ePLDT and its subsidiaries’ capital spending of Php607 million was used to fundits Internet data center, other Internet-related business initiatives and callcenter business investments.  Other subsidiaries’ capital expenditures totalingPhp840 million were attributable mainly to PLDT Global, Mabuhay Satellite andSubic Telecom.  In December 2002, Smart acquired certain PLDT assets,consisting of a portion of PLDT’s digital fiber optic cable from Luzon toMindanao and certain related equipment, valued at Php4,138 million.

 

Under the terms of Piltel’s debtrestructuring plan, PLDT issued a Letter of Support for the benefit of Pilteland its creditors under which PLDT has agreed to cover any funding shortfallsof Piltel up to a maximum amount of US$150 million.  Under the Letter ofSupport, PLDT provided to Piltel Php2,317 million (US$48 million) in 2000,Php2,039 million (US$41 million) in 2001, and Php571 million (US$11 million) in2002. Drawings under the PLDT Letter of Support are converted into U.S. dollarsat the prevailing exchange rates at the time of the investment.  As of December31, 2002, the remaining undrawn balance under the PLDT Letter of Support wasUS$50 million.  If, among other things, Piltel's financial and operatingperformance were to deteriorate or any amounts were required to be paid toPiltel's unrestructured creditors in cash to settle their claims (aggregateprincipal of US$8 million as of March 31, 2003), additional drawings under theLetter of Support would likely be required to provide all or a portion of thefunds needed by Piltel.  We cannot assure you that additional amounts will nothave to be drawn under the Letter of Support nor can we predict when the remainingundrawn balance under the Letter of Support will be exhausted.  Piltel iscurrently in discussion with its unrestructured creditors and is seeking torestructure such debt on the terms and conditions of Piltel’s debtrestructuring.  However, Piltel may not be able to restructure or otherwise pay the claims relating to itsunrestructured debt.  See “Item 3. Key Information — Risk Factors — RisksRelating to Us — Piltel has experienced financial difficulties and we cannotassure you that it will be able to discharge any of its debt or otherobligations, including its debts or other obligations owed to us and ouraffiliates.”

 

For 2003, we anticipate lowercapital expenditures and reduced equity investments.  Our 2003 budget forconsolidated capital expenditures is Php16,000 million, of which Php7,000million is budgeted to be spent by PLDT for its fixed line data and networkservices and Php9,000 million is budgeted to be spent by Smart for furtherexpansion and upgrading of its GSM network.  

 

On a consolidated basis, net cashused in investing activities increased in 2001 and 2000 due to Smart’s highercapital spending.  On a consolidated basis, net cash used in investingactivities increased by Php3,763million, or 20%, to Php32,777 million in 2001from Php29,014 million in 2000.  

 

Our consolidated capitalexpenditures increased in 2001 and 2000, primarily due to higher capitalspending by Smart in order to expand and upgrade its GSM network to meet theincreasing demand for cellular services.  During these two years, PLDT'scapital outlay was principally used to finance the continued build-out of itsdata and broadband/IP infrastructure and investment in Asia Pacific CableNetwork 2. Our consolidated capital expenditures in 2001 totaled Php30,554million mainly from Smart's, PLDT's, and ePLDT's and its subsidiaries' capitalspending of Php18,191 million, Php8,179 million and Php1,580 million,respectively.  Our consolidated capital expenditures of Php27,109 million(including capitalized interest of Php2,603 million) in 2000 was largelyattributable to PLDT and Smart.  

 

***Financing Activities***

 

On a consolidated basis, weused net cash of Php14,975 million for financing activities in 2002, comparedto net cash provided from financing activities of Php5,714 million in 2001 andPhp6,035 million in 2000.  The net cash used in financing activities in 2002was higher than in 2001 mainly because of PLDT’s debt payments in line with itsongoing liability management program.  The net cash provided by financingactivities was likewise higher in 2000 than in 2001 primarily due to proceedsfrom the issuance of PLDT's common shares to NTT Communications Capital (UK)Limited, or NTTC-UK, a wholly-owned subsidiary of our strategic partner NTTCommunications, amounting to Php13,878 million in 2000.  On a stand-alonebasis, Smart’s financing activities in 2002 used net cash of Php14,209 million,specifically for debt payments in excess of loan drawdowns.  Conversely,Smart’s financing activities in 2001 and 2000 provided net cash of Php10,225million and Php7,618 million, respectively, representing drawings from variouscredit facilities. 

* *

*DebtFinancing*

 

Additions to our consolidatedlong-term debt in 2002 totaled Php32,586 million, consisting of (1) proceedsfrom PLDT's issuance of notes amounting to an aggregate of Php17,625 million(US$350 million) and drawings totaling Php8,746 million, primarily from PLDT’sloan facilities extended and/or guaranteed by various export credit agencies;(2) Smart's drawings of Php6,074 million, principally from its Phase 5 GSM loanfacilities; and (3) ePLDT’s drawing of Php141 million from a three-year termloan facility. 

 

Our consolidated indebtedness as ofDecember 31, 2002 was Php191,710 million, lower by Php4,851 million, or 2%,compared to Php196,561 million as of December 31, 2001 due mainly to thereductions of Php3,434 million and Php3,311 million in PLDT’s and Smart’sindebtedness, respectively.  PLDT’s non-consolidated indebtedness decreased by2%, from Php143,477 million as of December 31, 2001 to Php140,044 million as ofDecember 31, 2002, due to debt payments in line with our thrust to reducePLDT’s overall indebtedness.  Smart's indebtedness as of December 31, 2002stood at Php22,891 million, a decrease of 13% from Php26,202 million as ofDecember 31, 2001.  

 

As of December 31, 2002, PLDT hadundrawn committed dollar-denominated long-term credit facilities of US$273million, inclusive of the US$99 million undrawn portion of the US$149 millionKfW refinancing facility and the undrawn US$145 million multicurrencyrefinancing facility.  Smart also had undrawn committed dollar-denominatedlong-term credit facilities of US$108 million, as of December 31, 2002.  Inaddition, Smart still has available facilities under its €50 million Framework Agreement withHypoVereinsbank up to a maximum aggregate amount of €43 million.

 

After giving effect to theanticipated application of existing refinancing facilities, the scheduledmaturities of our outstanding long-term debt as of December 31, 2002 are asfollows:

 

 

**Consolidated**

** **

**Non-consolidated**

**Maturity**

(in millions)

 

 

 

 

2003

Php19,627

 

Php11,962

2004

22,415

 

15,109

2005

28,310

 

21,029

2006

25,717

 

20,200

2007 and onwards

94,881

 

72,087

 

Approximately Php71,112 million principal amount of ourconsolidated outstanding long-term debt as of December 31, 2002 is scheduled tomature over the period 2003 to 2005. Of this amount, approximately Php48,100million is attributable to PLDT, Php18,349 million to Smart, and the remainderto Mabuhay Satellite, MaraTel, ePLDT and Piltel.

 

On January 25, 2002, PLDT signed two loan agreementswith KfW that provide PLDT with a new US$149 million facility to refinance inpart the repayment installments due under its existing loans from KfW due fromJanuary 2002 to December 2004.  The facility is a nine-year loan, inclusive ofa three-year disbursement period and a two-year grace period during which noprincipal is payable.  It partly enjoys the guarantee of HERMES, the exportcredit agency of the Federal Republic of Germany.  Disbursements under thisfacility, which are made as the KfW loans to be repaid fall due, are currentlyavailable. As of December 31, 2002, drawings under this facility totaled US$50million (Php2,644 million).

 

On May 2, 2002, PLDT issued 10.625% Notes due 2007 inthe aggregate principal amount of US$100 million and 11.375% Notes due 2012 inthe aggregate principal amount of US$250 million.  The net proceeds from thisdebt issue were used mainly (1) to repurchase US$63 million principal amount of8.5% Notes due 2003 and US$117 million principal amount of 10.625% Notes due2004 through our tender offer, and US$6 million principal amount of 10.625%Notes due 2004 and US$6 million principal amount of 9.875% Notes due 2005 fromthe open market and (2) to prepay or repay various loans in the aggregateamount of US$121 million, of which US$53 million (JP¥6,260 million) pertainedto the Japanese yen term loan which matured on June 18, 2003 and US$52 millionpertained to the US$150 million term loan maturing in December 2003.  We willcontinue to prepay or repay short-term and medium-term debts of PLDT using theremaining proceeds of the bond issue. 

 

On July 26, 2002, PLDT signed aloan agreement with JBIC for a JP¥9,760 million credit facility under JBIC’sOverseas Investment Loan program.  This fully drawn facility will amortizebeginning March 21, 2005 and will mature on March 21, 2008.

 

On September 4, 2002, PLDT signedan agreement with a syndicate of banks for a US$145 million multicurrency termloan facility consisting of Japanese yen and U.S. dollar commitments ofJP¥10,914 million and US$53 million, respectively.  This facility, which hasbeen split into two tranches, the first of which was drawn in June 2003 and thesecond of which to be drawn in December 2003, is intended to refinance aportion of the JP¥12,359 million and US$52 million principal amountsoutstanding as of December 31, 2002 under a Japanese yen syndicated term loanand a U.S. dollar term loan, respectively, both falling due in 2003.  This newsyndicated facility will amortize semi-annually beginning June 2004 and willmature in December 2006.

 

On November 28, 2002, Smart signeda US$100 million five-year term loan facility supported by Nippon Export andInvestment Insurance of Japan.  This facility will be used to finance equipmentand services related to the Phase 6 of Smart’s GSM network expansion.  

 

On May 29, 2003 PLDT obtained aUS$12 million term loan facility from DEG-Deutsche Investitions-undEntwicklungsgesellschaft mbH.  On June 11, 2003, PLDT also signed a JPY5,615million syndicated term loan facility supported by Nippon Export and InvestmentInsurance of Japan.  As of June 30, 2003, we have not made any any drawdownsunder these two facilities.

 

*Covenants*

 

Our debt instrumentscontain restrictive covenants and require us to comply with specified financialratios and other financial tests.  The basis is Philippine GAAP financialposition and results of operations under Philippine GAAP at relevantmeasurement dates, principally at the end of quarterly periods.

 

Thefinancial tests under our debt instruments include maintaining a positivetangible net worth and compliance with the following ratios:

 
- interest coverage ratio, calculated on a non-consolidated basis,excluding PLDT’s equity share in net earnings of subsidiaries and associates,of not less than 150%, 180% or 200%;       - total debt to EBITDA on a non-consolidated basis of not more than6.0:1 until March 2003, not more than 5.5:1 from June 2003 to December 2003,not more than 5.0:1 from March 2004 to June 2004, not more than 4.5:1 fromSeptember 2004 to December 2004 and not more than 4.0:1 from March 2005 andthereafter;         - long-term indebtedness to appraised value of equity/tangible networth on a non-consolidated basis, ranging from not more than 1.1:1 to not morethan 3.0:1;           - current ratio on a non-consolidated basis, ranging from not lessthan 0.9:1 to not less than 1.2:1;             - debt service coverage ratio on a non-consolidated basis of atleast 1.1:1; and               - debt to free cash flow ratio on a non-consolidated basis of notmore than 6.0:1 from March 31, 2003 to June 30, 2003, not more than 5.5:1 fromSeptember 30, 2003 to June 30, 2004, not more than 5.0:1 from September 30,2004 to June 30, 2005, not more than 4.5:1 from September 30, 2005 to June 30,2006, and not more than 4.0:1 from September 30, 2006 and thereafter.     In addition, some of PLDT's debtinstruments contain covenants requiring PLDT to comply with specified financialtests on a consolidated basis as adjusted to exclude Piltel’s debts.  Theseinclude:                 - long-term debt to appraised value of equity/tangible net worth ofnot more than 2.33:1;                    - total debt to EBITDA of not more than 4.5:1 in 2003 and 2004, andnot more than 4.0:1 in 2005 and thereafter; and                     - current ratio ranging from not less than 0.75 to not less than0.9:1.     For purposes of deriving appraisedvalue of equity/tangible net worth, we determined the revaluation surplus inrespect of PLDT’s properties.  PLDT’s properties in service as of December 31,1997 were reappraised by an independent firm of appraisers to reflect theirsound value based on the December 29, 1997 exchange rate of Php40.116 =US$1.00.  As of December 31, 1997, the sound value was Php225,966 million andthe revaluation surplus was Php82,723 million.  This reappraisal was approvedby the NTC on January 28, 2000 under NTC Case No. 98-183.  As of December 31,2002, the revaluation surplus on PLDT’s 1997 appraised properties still inservice, net of a 5% disallowance factor, amounted to Php44,984 million.     The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the peso relative to the U.S. dollar, pooroperating performance of PLDT and its consolidated subsidiaries, impairment orsimilar charges in respect of investments or other assets that may berecognized by PLDT and its consolidated subsidiaries, and increases in ourinterest expenses.  Interest expense may increase as a result of variousfactors, including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the peso, thelowering of PLDT's credit ratings or the credit ratings of the Philippines,increases in reference interest rates, and general market conditions.  Sinceapproximately 95% of PLDT's total consolidated long-term debt is denominated inforeign currencies, principally in U.S. dollars, many of these financial ratiosand other tests are negatively affected by any weakening of the peso.  The pesodeclined by approximately 1% against the U.S. dollar to an average of Php51.583= US$1.00 in 2002 from an average of Php51.009 = US$1.00 for the year 2001.  AtJune 30, 2003, the exchange rate was Php53.522 = US$1.00, equivalent to a 0.5%depreciation of the peso relative to the rate at the end of 2002.      PLDT's ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of its fixed line business,which is predominantly conducted by PLDT.  PLDT cannot be assured of thebenefit of net revenues and cash flows generated by Smart and PLDT’s othersubsidiaries and associates in assisting in complying with non-consolidatedcovenants.     We have maintained compliance withall of our financial ratios and restrictive covenants as measured under ourloan agreements and other debt instruments.  However, if negative factorsadversely affect our financial ratios, we may be unable to maintain compliancewith these ratios and covenants or be unable to incur new debt.  During 2001,our performance under certain of these ratios, including our 150% interestcoverage and total debt to EBITDA ratios under Philippine GAAP, was close tothe permitted thresholds.  In August and September 2001, we obtained amendmentsto relax certain of PLDT's covenants setting a maximum ratio of total debt toEBITDA on a non-consolidated basis.  Under some of our loan agreements, thisratio requirement has become more restrictive at the end of the second quarterof 2003 and will continue to become more restrictive in increments thereafter,which will make it more difficult for PLDT to maintain compliance with thisratio in the future.  Inability to comply with our financial ratios andcovenants or raise new financing could result in a declaration of default andacceleration of some or all of our indebtedness.  The terms of some of our debtinstruments have no minimum amount for cross-default.     Under PLDT's loan agreement thatrequire maintenance of an interest coverage ratio of at least 150%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)PLDT's non-consolidated after-tax net income, excluding equity share in netincome or losses of investees, after adding back interest charges, net ofinterest capitalized to construction, on all indebtedness for the 12 monthsimmediately preceding the calculation date to (y) the estimated aggregateinterest charges payable, net of interest to be capitalized to construction,during the 365-day period following the calculation date on all of PLDT'sindebtedness outstanding on such calculation date.  Our interest coverage ratiocalculated on the basis of Philippine GAAP under this agreement for the12-month period ending December 31, 2002 was 172% as against the requiredthreshold of not less than 150%.     Under PLDT's loan agreements thatrequire maintenance of an interest coverage ratio of at least 180%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)our after-tax net income for the 12 months immediately preceding thecalculation date after (1) adding back interest charges, depreciation,amortization and other non-cash charges (including equity in the net income orloss of investees but excluding provision for doubtful accounts) and provisionfor income taxes, and (2) deducting capitalized subscriber acquisition costs,to (y) the estimated aggregate interest charges payable during the 365-dayperiod following the calculation date on all of PLDT's indebtedness outstandingon such calculation date.  Our interest coverage ratio calculated on the basisof Philippine GAAP under these agreements for the 12-month period endingDecember 31, 2002 was 290% as against the required threshold of not less than180%.     Under PLDT's loan agreements thatrequire maintenance of an interest coverage ratio of at least 200%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)our after-tax net income after adding back reserves for higher plantreplacement costs, income taxes, interest charges, depreciation and non-cashcharges (including equity in the net income or loss of investees and provisionfor doubtful accounts) during 12 consecutive months within the 15 calendarmonths immediately preceding the calculation date, to (y) the sum of (1) theestimated aggregate interest charges on all indebtedness, net of interestcapitalized to construction, plus (2) dividends on mandatorily redeemablepreferred stock, in each case scheduled to be paid during the 12 monthsfollowing the calculation date.  Our interest coverage ratio calculated on thebasis of Philippine GAAP under these agreements for the 12-month period endingDecember 31, 2002 was 393% as against the required threshold of not less than 200%.     Non-consolidated total debt toEBITDA is the ratio calculated on the basis of Philippine GAAP of (x) PLDT'stotal indebtedness (not including amounts payable by PLDT to Piltel under theLetter of Support) to (y) net income for the preceding 12 months, after addingback interest accrued on all indebtedness; depreciation, amortization and othernon-cash charges (including equity in net income or loss of investees, butexcluding provision for doubtful accounts) and provision for income taxes anddeducting any capitalized subscriber acquisition costs.  As of December 31,2002, our non-consolidated total debt to EBITDA calculated on the basis ofPhilippine GAAP was 4.93:1 as against the required threshold of not more than6.0:1.     Non-consolidated long-termindebtedness to appraised value of equity (or under some covenants, to tangiblenet worth) is the ratio calculated on the basis of Philippine GAAP of (x)PLDT's aggregate indebtedness (or portion of such indebtedness) due more thanone year following the calculation date and par value of all mandatorilyredeemable preferred stock to (y) the sum of the aggregate par value of all ofPLDT's outstanding common and convertible preferred stock (other than preferredstock subject to mandatory redemption), paid-in capital in excess of the parvalue of such stock, PLDT's retained earnings, reserve for higher plantreplacement costs and revaluation increment arising from independent certifiedappraisals of PLDT's telephone plant approved by the NTC.  As of December 31,2002, our non-consolidated long-term indebtedness to appraised value ofequity/tangible net worth calculated on the basis of Philippine GAAP was 0.95:1as against the most restrictive threshold of not more than 1.10:1.     Non-consolidated current ratio isthe ratio calculated on the basis of Philippine GAAP of (x) non-consolidatedcurrent assets to (y) non-consolidated current liabilities, excluding fromcurrent liabilities 50% of the portion of long-term indebtedness due within oneyear of the calculation date.  As of December 31, 2002, our non-consolidatedcurrent ratio was 1.49:1 as against the most restrictive threshold of not lessthan 1.20:1.     Debt service coverage ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s cash flow fromoperations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from subsidiaries, cash received upon anyredemption of redeemable preferred shares issued by Smart, any cash receivedunder PLDT’s subscriber investment plan, and interest income received less (2)capital expenditures (excluding capitalized interest) and investments insubsidiaries for the 12 months immediately preceding the calculation periodplus (3) PLDT’s closing cash balance of the last day of the calculation date to(y) the sum of the projected interest charges and principal debt repayments(excluding debt to be repaid with a refinancing facility) during the 12 monthsfollowing the calculation date.  The first calculation date was on March 31,2003, where our debt service coverage ratio for the 12-month period endingMarch 31, 2003 calculated on the basis of Philippine GAAP was 1.36:1 as againstthe required threshold of not less than 1.10:1.     Debt to free cash flow ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s debt less PLDT’sclosing cash balance of the last day of the calculation period to (y) PLDT’scash flow from operations after adding back interest charges (to the extentpreviously deducted) plus (1) dividends received from subsidiaries, cashreceived upon any redemption of redeemable preferred shares issued by Smart,any cash received under PLDT’s subscriber investment plan, and interest incomereceived less (2) capital expenditures (excluding capitalized interest) andinvestments in subsidiaries for the 12 months immediately preceding thecalculation date.  The first calculation date was on March 31, 2003, where ourdebt to free cash flow ratio for the 12-month period ending March 31, 2003calculated on the basis of Philippine GAAP was 5.1:1 as against the requiredthreshold of not more than 6.0:1.     Our consolidated long-term debt toappraised value of equity/tangible net worth, consolidated total debt to EBITDAand consolidated current ratios during the year 2002, each to be calculated onthe basis of Philippine GAAP, remained within the limits stipulated in thevarious loan agreements, including the most restrictive current ratio thresholdof not less 0.9:1.     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:                       - incurring additional indebtedness;                          - prepaying other debt;                            - making investments;                              - extending loans;                                - extending guarantees or assuming the obligations of otherpersons;                                 - paying dividends or other distributions, or redeeming,repurchasing or otherwise acquiring shares of PLDT’s capital stock;                                    - disposing of all or substantially all of its assets or of assetsin excess of specified thresholds of its tangible net worth;                                     - entering into management contracts providing for the managementof its business or operations by a third party;                                       - creating any lien or security interest;                                          - permitting set-off against amounts owed to PLDT;                                            - merging or consolidating with any other company;                                             - entering into transactions with shareholders and associates; and                                               - entering into sale and leaseback transactions.     Under the indenture of PLDT's10.625% Notes due 2007 and 11.375% Notes due 2012, PLDT is required to complywith a number of additional covenants, including covenants that, subject tocertain exceptions, restrict PLDT's ability to (1) incur debt in the event itsratio of debt to EBITDA calculated on the basis of Philippine GAAP (calculatedon a non-consolidated basis based on definitions provided in the sameindenture, except under certain circumstances), after giving effect to theincurrence of such debt, would be less than 5.5 to 1.0 on or prior to December31, 2003, 5.0 to 1 from January 1, 2004 to December 31, 2004 and 4.5 to 1thereafter and (2) pay dividends, repurchase or redeem its capital stock, makeinvestments and prepay subordinated debt, among other things.  Subject tocertain restrictions, these covenants also restrict our ability to sell assetsand to use the proceeds of these asset sales.       Under the terms of the US$149million facility with KfW, PLDT is prohibited from paying any dividends oncommon stock until after December 31, 2004.  In addition, under the terms ofPLDT's US$145 million multicurrency term facility agreement and JPY5,615million term loan facility agreement, PLDT is restricted from distributingdividends to common stockholders unless (i) no default has occurred which iscontinuing, and (ii) its debt to free cash flow ratio, after giving effect tothe distribution of such dividends and, under certain circumstances, otheradjustments to PLDT’s closing cash balance, would be less than 4.0 to 1.0.Under other loan agreements, PLDT may not declare or pay dividends on any ofits capital stock without the prior written consent of the lenders (i) if PLDTis in default in the payment of any amounts due and payable under such loanagreement or after the occurrence and during the continuance of any other eventof default or potential event of default under such agreements, (ii) if aftergiving effect to such action the current ratio would be less than 1.2 to 1 or(iii) in an amount greater than PLDT’s net income after taxes during the fiscalyear to which such payment or distribution relates.     In case of a change in control ofPLDT, PLDT may be required to repurchase or prepay certain indebtedness.  Underthe terms of the 10.625% Notes due 2007 and 11.375% Notes due 2012, we arerequired to offer to purchase all outstanding notes due 2007 and notes due 2012for cash at a price of 101% of their principal amounts plus accrued interest inthe event that (1) the aggregate of NTT Communications' and First Pacific'sdirect and indirect voting interest in PLDT's outstanding capital stock havingvoting rights falls below 35% of such capital stock, (2) any person or, incertain instances, group of persons, which is not controlled directly orindirectly by First Pacific or NTT Communications acquires a direct or indirectvoting interest in PLDT's outstanding capital stock having voting rights whichequals or exceeds 35% of such capital stock and (3) if a rating agency at suchtime maintains a rating on either series of notes, the rating agency downgradesits credit rating on the series within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(1) and (2) above.     Under the terms of our JP¥9,760million loan from JBIC, in the event of any proposed sale or transfer of PLDT'sstock that would result in NTT Communications holding less than 14.95% ofPLDT's voting stock, we will be required to prepay, immediately uponeffectiveness of such sale or transfer, all principal outstanding under theloan, together with accrued interest.  However, prepayment will not be requiredif, following such sale or transfer, (1) NTT Communications continues to haveprior approval rights with respect to all matters as to which NTTCommunications has approval rights under the stock purchase agreement pursuantto which it acquired its shares in PLDT or (2) JBIC, in its sole discretion,determines that NTT Communications’ participation in the expansion of Smart'sGSM network capacity to extend PLDT’s cellular business in Smart would not be reducedbelow its level of participation as of the date of the loan agreement.     Under both the terms of the US$145million multicurrency term facility agreement and the terms of our JP¥5,615million term loan, if any lender so requests in writing, PLDT shall prepay infull such lender’s participation in the loan within 45 days from notificationof the change in control and no later than the date on which PLDT is requiredto repurchase its 10.625% Notes due 2007 and 11.375% Notes due 2012 (“Bonds”)from bondholders accepting the change in control offer.  A change in control isdeemed to occur when (1) the aggregate of NTT Communications’ and FirstPacific’s direct and indirect voting interest in PLDT’s outstanding capitalstock having voting rights falls below 35% of such capital stock, (2) anyperson or, in certain instances, group of persons, which is not controlleddirectly or indirectly by First Pacific or NTT Communications acquires a director indirect voting interest in PLDT’s outstanding capital stock having votingrights which equals or exceeds 35% of such capital stock and (3) if a ratingagency at such time maintains a rating on the Bonds, the rating agencydowngrades its credit rating on the Bonds within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(1) and (2) above.     PLDT’s debt instruments containcustomary and other defaults that permit the lender to accelerate amounts dueor terminate their commitments to extend additional funds under the debtinstruments. These defaults include:                                                 - cross-defaults and cross-accelerations that permit a lender todeclare a default if PLDT is in default under another debt instrument.  In somecases, the cross-default provision is triggered upon a payment or other defaultpermitting the acceleration of PLDT’s debt, whether or not the defaulted debtis accelerated.  In other cases, the cross-default provision requires thedefaulted loan to be accelerated.  In some debt instruments, the cross-defaultprovision will be triggered only if the principal amount of the defaultedindebtedness exceeds a threshold amount specified in these debt instruments;                                                   - failure by PLDT to meet certain financial ratio covenantsreferred to above;                                                     - the occurrence of any material adverse change in circumstancesthat a lender reasonably believes materially impairs PLDT’s ability to performits obligations under its debt instrument with the lender;                                                        - the revocation, termination or amendment of any of the permits orfranchises of PLDT in any manner unacceptable to the lender;                                                         - the abandonment, termination or amendment of the project financedby a loan in a manner unacceptable to the lender;                                                           - the nationalization or sustained discontinuance of all or asubstantial portion of PLDT’s business; and                                                             - other typical events of default, including the commencement ofbankruptcy, insolvency, liquidation or winding up proceedings by PLDT.     *FinancingRequirements*     We believe that our available cash,including cash flow from operations and drawings from existing and anticipatedcredit facilities, will provide sufficient liquidity to fund our projectedoperating, investment, capital expenditures and debt service requirements [forthe next 12 months].  Further, as described above, we have completed a numberof initiatives under our liability management program to meet our debt servicerequirements in the short and medium term.      We continue to pursue variousinitiatives and financing transactions with the objective of further improvingthe balance between our cash flows and debt service requirements and reducingour overall indebtedness.  In addition, PLDT has reduced its capitalexpenditures and investments, suspended dividend payments to commonshareholders and increased its application of available cash to reduce itsindebtedness.  Further, we expect to benefit from increasing revenue and cashflow contributions from our subsidiaries, particularly Smart.  After receivingapprovals from Finnvera and certain lenders for the payment of dividends toPLDT in an amount not to exceed 40% of Smart’s net income in 2001, Smart madeits first dividend payment of Php1,540 million to PLDT in December 2002.  Inaddition, Smart paid dividends in the amount of Php4,300 million to PLDT inJune 2003, representing 70% of Smart’s 2002 net income, after receiving similarapprovals from Finnvera and certain lenders.  Smart will be required to obtainfurther waivers to pay additional dividends in future periods.  We cannotassure that Smart will be able to obtain such waivers in the future or whatamount, if any, Smart would be permitted or financially able to distribute.  Weexpect that we will have difficulty meeting our debt payment obligations if wedo not continue to receive cash dividends from Smart.  We intend to secureadditional financings from banks and other institutional lenders.  Our abilityto continue to refinance our debts and the terms on which such refinancing canbe obtained will depend on our successful financial and operating performance,conditions affecting the Philippine and international financial markets, thePhilippine peso-to-U.S. dollar exchange rate, our credit ratings and otherfactors, many of which are beyond our control.  An inability to repay orrefinance our debts could materially and adversely affect our results ofoperations and financial condition and could result in default on such debtsand cross-default and acceleration of substantially all of our other debts.     *CreditRatings*     Our credit ratings maysignificantly affect the terms of our prospective financings, particularlyfinancing costs.  On May 30, 2003, Fitch Ratings changed its outlook on PLDT tostable and affirmed its credit rating of “BB-”.  On April 30, 2003, Moody’schanged its outlook on PLDT to stable and affirmed its credit rating of “Ba3”and preferred stock rating of “B2”.  On April 22, 2003, Standard & Poor’sRatings Group, or S&P, affirmed its “BB” rating and stable outlook onPLDT.  On October 21, 2002, Moody’s and Fitch Ratings also affirmed PLDT’scorporate credit rating at “Ba3”.  Earlier, PLDT's corporate credit ratings hadbeen downgraded by S&P to “BB-” in November 2001, by Moody's InvestorsService to "Ba3" in January 2002, and by Fitch Ratings and Duff &Phelps to “BB-” in February 2002.  However, none of our existing indebtednesscontains provisions under which credit rating downgrades would trigger adefault, changes in applicable interest rates or other similar terms andconditions.      On October 29, 2002, PhilippineRatings Services Corporation, or PhilRatings, a credit rating agency in thePhilippines, announced its “PRS 1” rating for PLDT’s Php2,000 million One-YearPeso Notes for which the registration was rendered effective by the PhilippineSEC on April 9, 2003.  PRS 1 is the highest rating possible on PhilRatings’scale for short-term securities and is based on the issuer’s “strongestcapability for timely payment of debt on both principal and interest.”     A credit rating is not arecommendation to purchase, hold or sell securities as much as such rating doesnot comment as to market price or suitability for a particular investor.  Inaddition, a credit rating is subject to revision or withdrawal at any time bythe credit rating assigning organization.  We cannot assure you that the creditratings will remain in effect for any given period or that the ratings will notbe revised, downwards or upwards, by the rating agency in the future.     *Off-BalanceSheet Arrangements*     On October 10, 2002, PLDT enteredinto a Receivables Purchase Deed with a foreign institution, or the Purchaser,under which PLDT agreed (1) to sell its receivables from certain eligibleforeign carriers for an advance payment of US$50 million and (2) to service,administer and collect the receivables on behalf of the Purchaser. ThePurchaser will have no recourse to PLDT should the eligible carrier fail orrefuse to settle the assigned/purchased receivables, except if PLDT commits abreach on its representations and warranties under the Receivables PurchaseDeed.       Pursuant to separate MasterReceivables Purchase and Sale Agreements with Citibank, N.A., Hong Kong andCharta Corporation of New York, PLDT made sales of eligible receivables fromcertain foreign carriers totaling US$59 million (Php3,029 million) in 2001 thatresulted in losses of US$2 million (Php103 million).  In 2002, no receivableswere sold under these two agreements.  The agreement with Charta Corporationwas terminated on June 27, 2002, while the agreement with Citibank N.A., HongKong, was terminated on September 18, 2002.     Losses from sales of receivablesare included in the “Other Expenses – net” account in our consolidatedstatements of income, while receivables sold are excluded from our consolidatedbalance sheets.      *EquityFinancing*  * *  Through oursubscriber investment plan, which requires postpaid fixed line subscribers tobuy shares of our 10% Cumulative Convertible Preferred Stock as part of theupfront payments collected from subscribers, PLDT was able to raise Php464million in 2002 and Php232 million in 2001.      Cash dividend payments in 2002amounted to Php1,581 million, all of which were paid solely to preferredshareholders of PLDT. In 2001, cash dividend payments totaled Php1,820 million,of which Php402 million was paid to common shareholders of PLDT and theremainder to its preferred shareholders.  The most recent cash dividends paidby PLDT to its common shareholders was in April 2001, and it does not expect topay its common shareholders any dividends in 2003.     ***Contractual Obligationsand Commercial Commitments***     *ContractualObligations*     Thefollowing table discloses our contractual obligations outstanding as ofDecember 31, 2002:      
 

**Payments Due by Period**

 

**Total**

** **

**Less than 1 year**

** **

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

** **

**4****-****5 years**

** **

**More than 5 years**

 

 

 

**(in million pesos)**

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations

190,949

 

19,627

 

50,725

 

50,783

 

69,814

Long-term lease obligations

3,876

 

850

 

1,530

 

917

 

579

Unconditional purchase obligations(1)

9,930

 

219

 

2,241

 

2,145

 

5,325

Other long-term obligations

20,201

 

–

 

–

 

–

 

20,201

Total contractual cash obligations

224,956

 

20,696

 

54,496

 

53,845

 

95,919
  ______________     *(1)    **Underthe Air Time Purchase Agreement with ACeS International Limited, the amountdisclosed in the table above for payments due within 1 year reflects areduction in PLDT’s required payments agreed under a Standstill Agreement,while the amounts disclosed for payments due from 2 years onwards are based onthe original Air Time Purchase Agreement.  The parties to the StandstillAgreement have also agreed to negotiate in good faith and use their bestefforts to reach an agreement on a revised agreement before November 15, 2003that will cover, among other matters, the amended minimum and supplemental airtime payment provisions subject to the approval of ACeS International Limited’screditors.*  * *  *Long-termDebt Obligations*     For discussion of our long-termdebt obligations, see “— Liquidity and Capital Resources — Financing Activities— Debt Financing.”     *Long-termLease Obligations*     ***Municipal Telephone Projects***.In 1993, PLDT entered into two lease agreements with the Philippine Departmentof Transportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under theseagreements, PLDT was granted the exclusive right to perform telecommunicationsmanagement services, to expand services, and to promote the use of theDOTC-contracted facilities in certain covered areas for a period of fifteenyears.  Title to the properties shall be transferred to PLDT upon expiration ofthe lease term.  As of December 31, 2002, PLDT’s aggregate remaining obligationunder these agreements was approximately Php1,013 million.  In case ofcancellation, PLDT is liable to pay Php100 million under each of the twocontracts as liquidated damages.      ***Domestic Fiber Optic NetworkSubmerged Plant Agreement***.   On July 4, 2000, PLDT entered into anagreement with NTT World Engineering Marine Corporation for the submarine cablerepair and related services for the maintenance of PLDT's domestic fiber opticnetwork submerged plant for a period of five years up to July 4, 2005.  Underthis agreement, PLDT is required to pay NTT World Engineering MarineCorporation a fixed annual standing charge of US$2 million, excluding cost forthe use of a remotely operated submersible vehicle at US$5,000 for every day ofuse and repair cost computed at US$19,000 per day of actual repair.  As ofDecember 31, 2002, PLDT’s aggregate remaining obligation under this agreementwas approximately Php336 million.     ***Digital PassageService Contracts***.****PLDT hasexisting Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento 25 years expiring at various dates.  As of December 31, 2002, PLDT’saggregate remaining obligation under these contracts was approximately Php149million.     ***LicenseAgreement with Mobius Management Systems (Australia) Pty Ltd., or Mobius****.*PLDT has entered into a license agreement with Mobius pursuant to whichMobius has granted PLDT a non-exclusive, non-assignable and non-transferablelicense for the use of computer software components.  Under this agreement,Mobius is also required to provide maintenance services for a period of oneyear at no additional maintenance charge.  PLDT may purchase maintenanceservices upon expiration of the first year for a fee of 15% of the currentpublished license fee.  As of December 31, 2002, PLDT’s aggregate obligationunder this agreement was approximately Php86 million.     ***Other Long-term LeaseObligations***.   We have various long-term lease contracts for periodsranging from two to ten years covering certain offices, warehouses, cell sites,telecommunication equipment locations and various office equipment.     *Unconditional PurchaseObligations*     ***Air time Purchase Agreementwith ACeS International Limited***.  PLDT is a party to a Founder NSP Airtime Purchase Agreement, or ATPA, with AIL which was amended in December 1998,under which PLDT is granted the exclusive right to sell AIL services in thePhilippines.  In exchange, PLDT is required to purchase from ACeS a minimum ofUS$5 million worth of air time annually over ten years commencing on the dateof commercial operations of the satellite.  In the event AIL's aggregatebilling revenues is less than US$45 million in any given year, PLDT is requiredto make supplemental air time purchase payments not to exceed US$15 million peryear during the ten-year term.      In March 2003, PLDT, together withthe founder shareholders, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original ATPA. In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of US$3.8 million.  Moreover, PLDT is obliged to purchase from AIL13,750 satellite fixed phone units for the year 2003 at US$395 F.O.B. per unit,subject to quarterly price adjustment. The parties to the Standstill Agreementalso agreed to negotiate in good faith and to use their best efforts to reachagreement on a revised ATPA before November 15, 2003 that will cover, amongother matters, the amended minimum and supplemental air time payment provisionssubject to the approval of AIL’s creditors.     As of December 31, 2002, PLDT’saggregate remaining minimum obligation under this agreement was approximatelyPhp10,077 million.     ***International AffiliateAgreement with VeriSign, Inc., or VeriSign.***   On September 15, 2000,ePLDT entered into an agreement with VeriSign for the non-exclusive,non-transferable right and license to use the VeriSign software, brand andCertification Practice Statement for the purpose of approving, issuing,suspending or revoking digital certificates for users of the Internet orsimilar open systems in the Philippines for a period of seven years. Under thisagreement, ePLDT is required to pay VeriSign a certain percentage of therevenue derived from the services subject to minimum annual royalty paymentsaggregating to US$1.18 million, which was subsequently reduced to US$0.9million, for the seven-year contract period.  In addition, ePLDT was requiredto pay an annual support fee totaling US$0.5 million during the first year andUS$0.3 million in each year thereafter. As of December 31, 2002, ePLDT’saggregate remaining minimum obligation under this agreement was approximatelyPhp79 million.     ***Other Unconditional PurchaseObligations.***PLDT has various purchase contracts for periods rangingfrom two to three years covering the use of fraud management system andsatellite hub and remote VSAT network systems.     *OtherLong-term Obligations*     ***Mandatory Conversion andPurchase of Shares***.   On June 4, 2001, PLDT issued a total of 2.7million shares of Series V Convertible Preferred Stock, 5.1 million shares ofSeries VI Convertible Preferred Stock and 3.8 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58.1 million shares ofPiltel’s Series K, Class I Convertible Preferred Stock pursuant to the debtrestructuring of Piltel.  In 2002, PLDT issued additional 30,100 shares ofSeries V Convertible Preferred Stock and 14,087 shares of Series VI ConvertiblePreferred Stock in exchange for a total of 220,935 shares of Series K, Class IConvertible Preferred Stock of Piltel.  In March 2003, PLDT issued 92,413 moreshares of its Series VI Convertible Preferred Stock in exchange for 462,065shares of Piltel’s Series K, Class I Convertible Preferred Stock. Each share ofSeries V, VI and VII Convertible Preferred Stock is convertible at any time atthe option of the holder into one PLDT common share. On the date immediatelyfollowing the seventh anniversary of the issue date of the Series V and SeriesVI Convertible Preferred Stock and on the eighth anniversary of the issue dateof the Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted to PLDT common shares.  Undera put option exercisable for 30 days, holders of common shares received onmandatory conversion will be able to require PLDT to purchase such PLDT commonshares for Php1,700 or US$36.132 or JP¥4,071.89 per share, depending on theseries.     As of December 31, 2002, 145,320shares of Series V Convertible Preferred Stock and 523,843 shares of Series VIConvertible Preferred Stock had been converted to PLDT common shares.  As ofDecember 31, 2002, PLDT had 2.6 million Series V Convertible Preferred Stock,4.6 million Series VI Convertible Preferred Stock and 3.8 million Series VIIConvertible Preferred Stock issued and outstanding.  The aggregate value of theput option based on outstanding shares as of December 31, 2002 is Php20,201million, of which Php13,181 million is payable on June 4, 2008 and Php7,020million on June 4, 2009 if all of the outstanding shares of Series V, VI andVII Convertible Preferred Stock were mandatorily converted and all theunderlying common shares were put to PLDT.  The market value of the underlyingcommon shares is Php2,968 million, based on the market price of PLDT’s commonstock of Php270 per share as of December 31, 2002.     *CommercialCommitments*     As ofDecember 31, 2002, our outstanding commercial commitments, in the form ofletters of credit, amounted to Php3,610 million. These commitments will expirewithin one year.     In October 1998, Smart entered intoa Frame Supply Contract with Nokia Telecommunications OY for the supply ofhardware, software and documentation for its GSM cellular network.  In the samemonth, Smart and Nokia (Philippines), Inc. signed a Frame Services Contractthat covers the design, planning, installation, commissioning, integration,acceptance testing, training, and handling of the GSM network.  In 2001, Smartissued a Master Purchase Order, or MPO, in the amount of US$200 million infavor of Nokia Networks OY for the purchase of additional equipment to expandits GSM cellular network.  As of December 31, 2002, unavailed portion underthis MPO amounted to US$107 million.  In addition, on May 30, 2003, Smartentered into a Technical Support Services Order with Nokia (Philippines), Inc.in the amount of US$8.3 million.    ** **  **Effect of Peso Depreciation**     In 2000, 2001 and 2002, ouroperating revenues that have been received in U.S. dollars or in respect ofwhich we have been able to adjust our service fees to reflect changes in thepeso-to-dollar exchange rate, exceeded our U.S. dollar-linked operatingexpenses.  As a result, the depreciation of the peso against the dollar overthis period had a positive net impact on our operating profit.  However, sincesubstantially all of our indebtedness is denominated in U.S. dollars, suchdepreciation has also increased our interest expense in peso terms andincreased the peso amounts of our U.S. dollar-denominated indebtedness.    Ourcash flows are negatively affected by the higher peso cost of repaying U.S.dollar-denominated debts, and our ability to comply with financial covenantsand ratios is negatively affected by the increase in the amount of our debtsand our interest expenses in peso terms.     To manage foreign exchange risks,stabilize cash flows, and improve investment and cash flow planning, we enterinto forward foreign exchange contracts, foreign currency swap contracts,currency options and other hedging products aimed at reducing and/or managingthe adverse impact of changes in foreign exchange rates on our operatingresults and cash flows.  However, these hedges do not cover all of our exposureto foreign exchange risks, and hedges to cover all of our exposure are notcurrently nor readily available.  On a limited basis, we enter into interestrate swap agreements in order to manage our exposure to interest rate fluctuations.See “Item 11. Quantitative and Qualitative Disclosures about Market Risks —Foreign Exchange Risk Management” and “Item 11. Quantitative and QualitativeDisclosures about Market Risks — Interest Rate RiskManagement.”      **Impact of Inflation and ChangingPrices**     Inflation can be a significant factor in the Philippine economy,and we are continually seeking ways to minimize its impact.  In recent periods,while decreases in the relative value of the peso have had a significant effecton us, we do not believe inflation has had a material impact on ouroperations.  The average inflation rate in the Philippines in 2002 was 3%,compared to 6%, in 2001.     **Other Information**     ***Strike of PLDTEmployees***     In 2002, PLDT decided torationalize the operations of its operator-assisted call-handling units locatedprincipally in certain of its provincial exchanges.  In recent years,operator-assisted calls have dramatically declined due to the popularity ofdirect dialing and other alternative means of communications, such as e-mailand text messaging.  Consequently, 322 employees of PLDT manning its regionaloperator services, where call volumes have significantly declined, wereseparated from service with enhanced retirement/redundancy pay package,effective December 31, 2002.  In relation to this, the *Manggagawa ngKomunikasyon sa Pilipinas*, or MKP, our rank-and-file employees’ union,filed a Notice of Strike with the Department of Labor and Employment, or DOLE,on November 8, 2002, and filed a complaint against PLDT for alleged unfairlabor practices.     After a series of failedconciliation meetings between representatives of PLDT and MKP before a DOLEconciliator, MKP staged a 14-day strike beginning on December 23, 2002. Thestrike ended on January 6, 2003 by virtue of a return-to-work order issued bythe DOLE Secretary to striking employees, except those employees whoseemployment were already terminated by PLDT. Moreover, the DOLE Secretary, inthe same order, certified the labor dispute to the National Labor RelationsCommission, or NLRC, for compulsory arbitration. The NLRC has yet to schedulearbitration proceedings on MKP’s complaint against PLDT.     ***U.S. FCC Proceeding on Termination Rates***     In May 2002, PLDT advised AT&T,MCI and other carriers of PLDT’s need to increase its termination rates byAugust 2002. Despite numerous negotiation sessions in 2002 and 2003, AT&Tand MCI refused to accept any rate increases. PLDT unilaterally extended itsprior termination charges to AT&T and MCI while continuing offers to negotiate,first from August 1, 2002 to October 1, 2002, then until December 31, 2002, andthen, finally, despite the lack of a written agreement from AT&T and MCI,through January 31, 2003. While nearly 100 carriers worldwide, including morethan 20 U.S. carriers, have to date agreed to the new termination rates andentered into new termination rate agreements with PLDT, the written terminationrate agreements with AT&T and MCI lapsed in December 2002, without eitheragreeing with PLDT on any provisional arrangement or final agreement on the newtermination rates. Faced with the continuing stonewalling by AT&T and MCI,PLDT, in December 2002, was forced to notify each company that PLDT’stermination rates would finally be increased as of February 1, 2003.  Becauseno agreement was reached with either AT&T or MCI, effective as of February1, 2003, PLDT stopped terminating traffic sent directly by each of AT&T andMCI.     On February 7, 2003, AT&T andMCI filed separate petitions with the U.S. FCC requesting the U.S. FCC to takeaction to protect U.S. international carriers and U.S. consumers from alleged“whipsawing” behavior occurring on the U.S.-Philippine route.  “Whipsawing” isa form of anti-competitive behavior that involves the ability of foreigncarriers to obtain unduly favorable terms and conditions from U.S.international service providers by setting competing U.S. carriers against oneanother.     On February 7, 2003, the NTCdirected Philippine carriers to take one of two different courses of action,depending on whether such carriers had effective termination rates with theircounterparties.  If PLDT had “existing and effective agreements with foreigntelecommunication carriers relative to termination rates”, it should “complywith the terms thereof, specifically in maintaining the flow of traffic in andbetween circuits and facilities covered by such agreements.” If, however, thecounterparty and PLDT were “without existing and effective agreements relativeto termination rates,” then PLDT is “encouraged ... to negotiate and concludeagreements” with the counterparty, and “the parties may agree onprovisional/interim arrangements for continuity of service.” Each of AT&Tand MCI immediately rejected PLDT’s offer for an interim termination rateagreement.     On February 26, 2003, the NTCissued an Order confirming that, pursuant to its February 7 Order,“ it isunderstood that absent any provisional or interim arrangement or agreement”with U.S. carriers, there would be no provision of termination services betweenthe parties, “who are thereby encouraged to seek other routes or options toterminate traffic to the Philippines.”     On February 28, 2003, PLDT and MCIreached an “interim agreement” effective through March 31, 2003, whereby PLDTagreed to provide direct service under a revised termination rate structurewhile the parties negotiated a final termination rate agreement.  This interimagreement expired on April 15, 2003.     On March 10, 2003, theInternational Bureau of the U.S. FCC granted the request of AT&T and MCIand issued an Order, directing all facilities-based carriers subject to U.S.FCC jurisdiction to suspend payments for termination services to PLDT, GlobeTelecom, BayanTel, Digitel, Smart and Subic Telecom until such time as the U.S.FCC issues a Public Notice that all affected circuits of U.S. carriers on theU.S.-Philippine route are fully restored.  The Order also removed thePhilippines from the list of U.S.-international routes approved for theprovision of International Simple Resale. As of March 31, 2003, receivablesfrom U.S. carriers amounted to approximately US$19 million, of which US$8million was attributable to PLDT, US$8 million to Smart, and US$3 million toSubic Telecom.     In response to the ruling of theInternational Bureau of the U.S. FCC, the NTC issued a Memorandum Order datedMarch 12, 2003 directing all affected Philippine carriers “(1) not to acceptterminating traffic via direct circuits from U.S. facilities-based carriers whodo not pay Philippine carriers for services rendered; and (2) to take allmeasures necessary to collect payments for services rendered in order topreserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”     The NTC also stated in its March 12Order that the termination rates offered by PLDT are “fair and reasonable.”These rates, US$0.12 per minute for calls terminating on the fixed-line networkand US$0.16 per minute for calls terminating on mobile networks, are well belowthe U.S. FCC benchmark settlement rate of US$0.19 per minute for lower middleincome countries such as the Philippines and also substantially below thesettlement rate of US$0.238 per minute suggested by the InternationalTelecommunication Union for countries with teledensity between 1 to 5telephones per 100 population.       On April 9, 2003, PLDT filed withthe U.S. FCC an application for review of the International Bureau’s March 10,2003 Order.  See “Item 3. Key Information — Risk Factors — Risks Relating to Us— Our results of operations have been, and may continue to be, adverselyaffected by lower U.S. dollar revenues caused by declining internationaltermination rates and competition in international long distance service” and“Item 8. Financial Information –– Legal Proceedings –– U.S. FCC Proceeding onTermination Rates.”     Certain Indebtedness     ***Overview of PLDT's Indebtedness***     PLDT obtains credit from a varietyof sources, including bank loans and capital markets issuances.  As of December31, 2002, PLDT on a non-consolidated basis had US$2,650 million aggregateprincipal amount of outstanding indebtedness (including short-term debt).Approximately 97% of PLDT's non-consolidated outstanding indebtedness isdenominated in currencies other than Philippine pesos, predominately U.S.dollars, and 28% accrues interest at a floating rate.  US$1,296 million of thisdebt is scheduled to mature through 2006.     PLDT's aggregate outstandingindebtedness (including short-term debt) on a non-consolidated basis as of December31, 2002 and their respective maturities are shown below:     
Maturity

**Aggregate Outstanding Indebtedness**

** **

**(in millions)**

2003 (January 1 through December 31, 2003)

US$238

Php12,682

2004

284

15,109

2005

395

21,029

2006

379

20,200

2007 and onwards

1,354

72,087
     In 2002, PLDT pursued a number ofliability management initiatives with the objectives of further improving thebalance between its cash flows and debt service requirements and reducing itsoverall indebtedness.      As part of these initiatives, PLDTwas successful in raising external financing to fund a significant portion ofits projected operating, investing and debt service requirements.  On January25, 2002, PLDT signed two loan agreements with KfW that provided PLDT with arefinancing facility of US$149 million.  On May 2, 2002, PLDT completed aglobal offering of notes in the aggregate amount of US$350 million with asimultaneous tender offer for PLDT’s 8.5% Notes due 2003 and 10.625% Notes due2004, which closed on May 15, 2002.  On July 26, 2002, PLDT signed a loanagreement with JBIC in the total amount of JP¥9,760 million under JBIC’soverseas investment loan program.  On September 4, 2002, PLDT signed asyndicated multicurrency term loan facility amounting to US$145 million, intendedto refinance part of the principal amounts outstanding under two existing termloans falling due in 2003.       For a discussion of some of thecovenants, including financial ratios, negative pledges and defaults under ourdebt instruments, see “— Liquidity and Capital Resources — Financing Activities— Debt Financing — Covenants.”     ***Loans Supported byExport Credit Agencies***     In order to obtain importedcomponents for our network infrastructure in connection with our expansion andservice improvement programs, PLDT obtained loans extended and/or guaranteed byvarious export credit agencies.  These financings account for a significantportion of PLDT's indebtedness.     KfW, a German state-owneddevelopment bank, is our largest creditor.  On January 25, 2002, PLDT signedtwo loan agreements with KfW that provided PLDT with a US$149 million facilityto refinance in part the repayment installments under our existing loans fromKfW becoming due from January 2002 until December 2004.  The facility iscomposed of two nine-year loans, inclusive of a three-year disbursement periodand a two-year grace period during which no principal is payable.  It partlyenjoys the guarantee of HERMES, the export credit agency of the FederalRepublic of Germany.  Disbursements under this facility, which are made as theKfW loans to be repaid fall due, are currently available.  We have drawn US$50million (Php2,644 million) under this facility as of December 31, 2002.       As ofDecember 31, 2002, PLDT owed to KfW an aggregate principal amount of US$437million, as follows:                                                               - US$329 million provided under various export credit agency-backedfacilities, of which US$290 million was provided in connection with ourexpansion and service improvement programs and US$39 million in connection withthe US$149 million refinancing facility; and                                                                 - US$108 million provided for the 15% down payment portion andcredit facilities without guarantee/insurance cover from the export creditagencies, of which US$11 million is in connection with the US$149 million refinancingfacility.     After giving effect to theanticipated application of the existing refinancing facility, US$39 million ofour KfW loans matures in 2003, US$39 million matures in 2004, US$82 millionmatures in 2005, US$57 million matures in 2006, and US$220 million matures in2007 and onwards.  Principal of and interest on these loans are generallypayable in equal semi-annual installments.     PLDT has also obtained loansextended and/or guaranteed by other export credit agencies, including JapanBank for International Cooperation, formerly known as the Export-Import Bank ofJapan, the Export-Import Bank of the United States, and respective exportcredit agencies from France, Italy, Israel, Sweden, Denmark, Canada, Australia,Singapore and the United Kingdom, in the aggregate outstanding principal amountof US$248 million as of December 31, 2002.  Of the amounts outstanding underthese loans, US$62 million matures in 2003, US$60 million matures in 2004,US$49 million matures in 2005, US$39 million matures in 2006 and US$38 millionmatures in 2007 or later.     ***Fixed Rate Notes***     PLDT has nine series ofnon-amortizing fixed rate notes outstanding as of December 31, 2002, asfollows:     
Principal Amount

**Issue Date**

**Interest Rate**

**Maturity**

 

 

 

 

US$62,030,000

June 28, 1996

8.500%

June 30, 2003

US$81,822,000

June 2, 1994

10.625%

June 2, 2004

US$144,385,000

July 31, 1995

9.875%

August 1, 2005

US$175,000,000

June 28, 1996

9.250%

June 30, 2006

US$200,000,000

March 6, 1997

7.850%

March 6, 2007

US$100,000,000

May 2, 2002

10.625%

May 15, 2007

US$175,000,000

April 13, 1999

10.500%

April 15, 2009

US$250,000,000

May 2, 2002

11.375%

May 15, 2012

US$300,000,000

March 6, 1997

8.350%

March 6, 2017
     On May 2, 2002, PLDT issued US$100million aggregate principal amount of 10.625% Notes due 2007 and US$250 millionaggregate principal amount of 11.375% Notes due 2012.  The net proceeds fromthe issuance of the notes were used mainly to (1) repurchase US$63 million inprincipal amount of our 8.5% Notes due 2003 and US$117 million in principalamount of our 10.625% Notes due 2004, through our tender offer, and US$6million in principal amount of 10.625% Notes due 2004 and US$6 million inprincipal amount of 9.875% Notes due 2005 from the open market; and (2) prepayor repay various loans in the aggregate amount of US$121 million, of whichUS$53 million (JP¥6,260 million) pertained to the Japanese yen term loan whichmatured in June 2003 and US$52 million pertained to the US$150 million termloan maturing in December 2003.  We will continue to prepay or repay short-termand medium-term debts of PLDT using the remaining proceeds of the bond issue.     **Term Loans**     ***Local Exchange Transfer Loans***     In connection with the transfer ofSmart's local exchange business to PLDT, PLDT entered into loan agreements withNederlandse Financierings-Maatschappij Voor Ontwikkelings-landen N.V., or FMO,of the Netherlands, Exportkreditnamden, or EKN, of Sweden and Export CreditGuarantee Department, or ECGD, of the United Kingdom for loans in the principalamounts of US$135 million, US$36 million and US$27 million, respectively,approximately US$140 million in aggregate amount was outstanding as of December31, 2002.  These loans were amended in August and September 2001 to increasethe maximum total debt to earnings before interest, income tax and depreciationand amortization or EBITDA ratio that PLDT on a non-consolidated basis andcalculated on the basis of Philippine GAAP is permitted to maintain during theterms of the respective loans.  The FMO loan has a final maturity on September1, 2007 while the EKN and ECGD loans will mature on December 31, 2007.     ***US$150 Million TermLoan***  * *  In connection with PLDT's fixedline expansion projects, PLDT obtained a US$150 million term loan, which wassubsequently assigned to Norddeutsche Landesbank Girozentrale, SingaporeBranch, US$52 million of which was outstanding as of December 31, 2002.  Theoutstanding principal amount of this loan is payable at maturity on December22, 2003 and will be partly refinanced by a multicurrency facility describedbelow.     ***JP¥ 19,807 Million TermLoan***  *** ***  In December 1997, in connection with a refinancing of itsmaturing debt, PLDT obtained a Japanese yen term loan from a syndicate offoreign banks, JP¥12,359 million of which was outstanding as of December 31,2002.  This loan matured on June 18, 2003 and was partly refinanced by amulticurrency facility described below.     ***JBIC JP¥ 9,760 Million Overseas Investment Term Loan***     On July 26, 2002, PLDT signed aloan agreement with JBIC in the total amount of JP¥ 9,760 million under theOverseas Investment Loan program of JBIC.  The loan was drawn on July 31, 2002and will be amortized on a semi-annual basis beginning March 21, 2005, withfinal maturity on March 21, 2008.     ***MulticurrencyRefinancing Facility***  * *  On September 4, 2002, PLDT signed a loan agreementwith a syndicate of banks for a US$145 million multicurrency term loan facilityconsisting of Japanese yen and U.S. dollar commitments of JP¥10,914 million andUS$53 million, respectively.  This facility, which has been split into twotranches with the first tranche already drawn in June 2003 and the secondtranche to be drawn in December 2003, is intended to refinance a portion of theJP¥12,359 million and US$52 million principal amounts outstanding as ofDecember 31, 2002 under the JP¥19.807 billion syndicated term loan and a U.S.dollar term loan, respectively, both falling due in 2003.  The new syndicatedfacility will be amortized semi-annually beginning June 2004 and will mature inDecember 2006.  ** **  ***US$12 Million Term Loan***     On May 29, 2003, PLDT signed a US$12 million term loan facilitywith Deutsche Investitions-und Entwicklungsgesellschaft mbH to finance aportion of PLDT’s data services projects.  This loan will mature in December2009 and is payable in semi-annual installments starting from June 15, 2004.     ***JP¥5,615 Million TermLoan***     On June 11, 2003, PLDT signed aJP¥5,615 million syndicated term loan facility supported by Nippon Export andInvestment Insurance to finance the acquisition and construction oftelecommunications equipment and transmission systems including, but notlimited to (1) data network expansion and development projects, and (2) thepublic switch network optimization projects.  *** ***  ***JBIC 4 Program of theDevelopment Bank of the Philippines***  *** ***  In connection with the Asia PacificCable Network 2 project, PLDT entered into a loan agreement with Citibank,N.A., as facility agent, and a syndicate of banks in the aggregate principalamount of Php1,700 million, Php1,500 million of which was outstanding as ofDecember 31, 2002.  The loan is funded under the Japan Bank for InternationalCooperation Facility for Private Sector Development of the Development Bank ofthe Philippines.  This loan will mature on October 26, 2005 and is payable in quarterlyinstallments as set forth below:      
Quarterly Payment Number

**Percentage of Principal Payable on Each Quarterly Payment Date**

 

 

Payments 1-7

3.500%

Payments 8-11

8.875%

Payments 12-15

10.000%
     ***Php2,770 Million Peso Fixed Rate Corporate Notes***     In connection with PLDT's service improvements andexpansion programs, PLDT entered into two loan agreements, pursuant to each ofwhich PLDT issued fixed rate corporate notes in three tranches.  Interest oneach of the notes is payable semi-annually.     Under the first loan agreement,PLDT borrowed an aggregate of Php1,500 million, of which Php230 million maturedon November 11, 2002, Php500 million will mature on November 9, 2004 and Php770million on November 9, 2006.     Under the second loan agreement, PLDT borrowed anaggregate of Php1,270 million, of which Php360 million matured on June 9, 2003,Php100 million matures on June 9, 2005 and Php810 million matures on June 9,2010.  *** ***  ***Php2,000 MillionOne-Year Peso Notes***     On April 28, 2003 and May 14, 2003, PLDT issued, at adiscount, Php1,600 million and Php400 million One-Year Peso Notes,respectively, under its Php2 billion Peso Notes program registered with thePhilippine SEC.  Net proceeds of the issue totaled Php1,803 million.  PLDTtargeted retail investors primarily for this issue in order to furtherdiversify its funding sources.     The Peso Notes program, which was approved by the Philippine SECin February 2003, has been given “PRS 1” rating by PhilRatings, an affiliate ofStandard & Poor’s.  PRS1 is the highest rating possible on PhilRatings’scale for short-term securities and is assigned to issues with “the strongestcapability for timely payment of debt on both principal and interest.”  *** ***  ***Overview of Smart’sIndebtedness***     As of December 31, 2002,Smart had US$430 million of aggregate indebtedness outstanding which arescheduled to mature as follows:     
** **

**Aggregate Outstanding**

Maturity

**Indebtedness**

** **

**(in millions)**

 

 

 

2003 (January 1 through December 31, 2003)

US$116

Php6,173

2004

116

6,146

2005

113

6,031

2006

79

4,210

2007 and onwards

6

331
     As of December 31, 2002, Smart had no outstandingshort-term borrowings.     In connection with the build-outexpansion of its GSM network, Smart has entered into a number of loanagreements to finance the various phases of this expansion.     The loan facilities for Phases 1 to4 of the GSM network expansion, under which US$151 million was outstanding asof December 31, 2002, are repayable in ten equal semi-annual installments withfinal repayments due in October 2005 and April 2006.       On June 8 and June 14, 2001, Smartsigned its GSM Phase 5A financing comprised of US$195 million and Php1,000million loans, respectively. The US$195 million loans, US$159 million of whichwas outstanding as of December 31, 2002, are payable over five to six years,with final repayments due in September 2006 and March 2007. The Php1,000million facility, of which Php867 million was outstanding as of December 31,2002, is payable quarterly with final repayment in December 2005.       On December 13, 2001, Smart signedits GSM Phase 5B financing of US$100 million, of which US$81 million wasoutstanding as of December 31, 2002, and has the same terms as the Phase 5AUS$195 million loans described above.       Facilities under GSM Phases 1 to 4,the Finnish Export Credit plc tranche of GSM Phase 5A facility and GSM Phase 5Bfacility are covered by guarantees from Finnvera, the Finnish export creditagency.     On September 25,2001, Smart obtained a US$5.9 million term loan facility from Electro BanqueS.A., of which US$4 million was outstanding as of December 31, 2002.  On October 26,2001, Smart obtained a US$10.6 million term loan facility from Credit LyonnaisS.A., of which US$4 million was outstanding as of December 31, 2002.  On April 14, 2002, for the purpose of financing thepurchase of certain equipment, Smart obtained a US$7.2 million term loanfacility from Bayerische Hypo- und Vereinsbank Aktiengesellschaft, of whichUS$5 million was outstanding as of December 31, 2002, pursuant to the standardloan agreement No. 1 dated August 14, 2002 under the €50 millionFramework Agreement for the financing of individual export contracts datedNovember 8 and 13, 2001.     In addition, on January 9, 2002, Smart signed a loanfacility in the amount of Php300 million. This loan has been fully drawn and ispayable quarterly with final repayment in February 2007.     On November 28, 2002, Smart signed a US$100 millionterm loan facility supported by Nippon Export and Investment Insurance. Thisfacility remains undrawn as of the date of the filing of this annual report.     Smart's loan agreements contain restrictions thatlimit its ability to pay dividends, redeem preferred shares, make distributionsto its stockholders or otherwise provide funds to its stockholders oraffiliates without the consent of the lenders.  After receiving approvals fromFinnvera and certain lenders for the payment of dividends to PLDT in an amountnot to exceed 40% of Smart’s net income in 2001, Smart made its first dividendpayment of Php1,540 million to PLDT in December 2002.  In addition, Smart paiddividends in the amount of Php4,300 million to PLDT in June 2003, representing70% of Smart’s 2002 net income, after receiving similar approvals from Finnveraand certain lenders.  Further waivers would be required for payment ofadditional dividends in future periods.  We cannot assure you that Smart willbe able to obtain such waivers in the future, or what amounts, if any, Smartwould be permitted or financially able to distribute.  We expect that we willhave difficulty meeting our debt payment obligations if we do not continue toreceive cash dividends from Smart.     Smart’s loan agreements contain certain covenantsrequiring Smart to comply with specified financial ratios and other financialtests calculated on the basis of Philippine GAAP at semi-annual measurementdates.  The financial tests under Smart’s loan agreements include maintenanceof a debt-to-equity ratio of not more than 1.50:1 and a debt service coverageratio of not less than 1.50:1.  Smart has maintained compliance with all of itsfinancial covenants.  Smart’s loan agreements also contain customary defaultprovisions that permit the lender to accelerate amounts due under the loans orterminate their commitments to extend additional funds under the loans.  Thesedefaults include:                                                                   - cross defaults and cross accelerations that permit a lender todeclare a default if Smart is in default under another loan agreement.  Thesecross default provisions are triggered upon a payment or other default permittingthe acceleration of Smart debt, whether or not the defaulted debt isaccelerated;                                                                     - failure by Smart to comply with certain financial ratiocovenants;                                                                       - any reduction in PLDT's ownership of Smart stock below 51% of thetotal of each class of Smart stock outstanding;                                                                         - any reduction in First Pacific's and its affiliates' collectiveownership of PLDT’s common stock below 18% of the total common stockoutstanding or 18% of the voting power of the total common stock outstanding;and                                                                           - the occurrence of any material adverse change in circumstancesthat the lender reasonably believes materially impairs Smart's ability toperform its obligations under its loan agreement with the lender or that thelender believes materially impairs an applicable guarantor's ability to performits obligations under an applicable guaranty.     In addition, some of these loan agreements restrictSmart's ability to enter into transactions with affiliates except on armslength terms and for valuable consideration.     ***Overview of Piltel’s Indebtedness***     On June 4, 2001, Piltel completedthe restructuring of approximately Php41.1 billion of indebtedness and otherclaims owed to banks, trade creditors, bondholders and preferred shareholders,or the aggregate financial debt of Piltel, representing approximately 98% ofits total liabilities as of that date.     As of December 31, 2002, Piltel’s aggregate indebtednessoutstanding consists of:     
 

**Aggregate Outstanding**

**Indebtedness**

 

**(in millions)**

Restructured debt

 

 

10 year Tranche B

US$140

Php7,444

15 year Tranche C

140

7,444

15 year Conversion Notes

121

6,449

15 year Term Notes Facility

5

293

Unrestructured debt

8

451

Liabilities under capital lease

1

42

Total

US$415

Php22,124
     Piltel’s restructured debt as of December 31, 2002 are scheduledto mature as follows:     
Maturity

**Aggregate Outstanding Indebtedness**

** **

**(in millions)**

2003 (January 1 through December 31, 2003)

US$––

Php––

2004

1

22

2005

1

22

2006

4

224

2007 and onwards

400

21,362
     Under the terms of the debtrestructuring, 50% of the financial debt of each participating creditor wasreleased in consideration for the allotment of Piltel convertible preferredshares.  One (1) Piltel convertible preferred share was exchanged for everyPhp340 worth of debt for which it was being exchanged (converted into Pesos atan exchange rate of Php47.05 = US$1.00 for dollar denominated debt and Php1.00= JP¥2.39522 for yen denominated debt), which shares were immediately andmandatorily converted into PLDT convertible preferred shares.  One PLDT convertiblepreferred share was issued for every five (5) Piltel convertible preferredshares.       Approximately half of the remaining 50 percent of allparticipating creditors’ (except for bondholders and preferred shareholders)financial debt was restructured in a participation in a Tranche B Loan in thesame currency as their previous financial debt and the other half was exchangedfor participation in a Tranche C Loan, also in the same currency as theirprevious financial debt.  In the case of bondholders and preferredshareholders, the remaining 50 percent of their financial debt was exchangedfor participation in the Conversion Notes and in a single Tranche Peso loan(the “Term Notes Facility”), respectively.     In addition, under the terms of the restructuring, PLDTissued a Letter of Support for the benefit of Piltel and its creditors underwhich PLDT agreed to cover any funding shortfalls of Piltel up to a maximumamount of US$150 million less all amounts paid or committed to be paid to or onbehalf of Piltel by PLDT on or after March 23, 2000.  Under the Letter ofSupport, PLDT will provide funding to Piltel in the event that the cash flowfrom Piltel’s operations falls short of amounts required by it to discharge infull its obligations to any creditor of Piltel or any of its operating andfinancing subsidiaries and affiliates.  As of December 31, 2002, the undrawnbalance available under the Letter of Support was US$50 million.       ***Tranche B Loans***     Piltel’s Tranche B Loans consist of peso, U.S. dollar and Japaneseyen participations of Php2,166 million, US$33 million and JPY7,822 million,respectively.  These Tranche B loans have nominal principal amortizationsrepresenting 0.10% of the original Tranche B loan amount payable each yearbeginning 2004 to 2010 while the remaining balance of 99.3% will fall due inJune 4, 2011.     ***TrancheC Loans***     Piltel’s Tranche C Loans consist of peso, U.S. dollar andJapanese yen participations of Php2,166 million, US$33 million and JPY7,822million, respectively.  These Tranche C loans have principal amortizations of0.10% of the original Tranche C loan amount payable each year in 2004 and 2005,2% in 2006, 10% payable each year from 2007 to 2015, while the remainingbalance of 7.8% will fall due in June 4, 2016.     ***Term Notes Facility***     The Php293 million Term Notes Facility has nominal principalamortizations representing 0.10% of the original loan amount payable each yearbeginning 2004 to 2015 while the remaining balance of 98.8% will fall due onJune 14, 2016.     ***ConversionNotes***     As of December 31, 2002, approximately US$121 million ofPiltel Conversion Notes were outstanding.  These Conversion Notes haveprincipal amortizations of 0.10% of the amount outstanding payable each year in2004 and 2005, 1.05% in 2006, 5.05% payable each year from 2007 to 2010, 54.65%in 2011, 5% payable each year from 2012 to 2015, while the remaining balance of3.9% will fall due in June 4, 2016.     Piltel’srestructured obligations are secured by substantially all present and futureassets of Piltel under the Mortgage Trust Indenture, or MTI, dated June 4, 2001between the Piltel and Chase Manhattan Bank as security agent for thecreditors, which established the security arrangements relating to therestructured debts.  The participating creditors (other than the preferredshareholders) share equally in first ranking security and non-participatingcreditors and the preferred shareholders share equally in second rankingsecurity created under the MTI.  Such a mortgage was approved by at leasttwo-thirds of Piltel’s stockholders at its annual stockholders’ meeting onApril 18, 2001 and the NTC on May 18, 2001.     Piltellikewise agreed to pay into a dedicated account (a “Sinking Fund Account”) theamount by which (a) earnings before interest, tax, depreciation andamortization for a financial year is greater than (b) 200 percent of theprojected debt service costs and permitted capital expenditure for thefollowing financial year (the “Excess Cashflow”).  The moneys in that SinkingFund Account will be used (before drawings are made under the Letter ofSupport) to fund cash flow deficiencies of Piltel.  Also, if actual capitalexpenditure for a financial year differs from the projected capitalexpenditure, Piltel will either pay into the Sinking Fund established at theend of that year an amount equal to any over-projection of capital expenditureor will be entitled to withdraw funds, if any, equal to any under-projection.Any credit balance in a Sinking Fund after two financial years will be used toprepay all participating creditors ratably.     Underthe debt restructuring agreements, Piltel undertook, with respect to eachfinancial year (other than the financial year in which the final repaymentinstallment for Tranche B falls due), that the aggregate of earnings beforeinterest, tax, depreciation and amortization plus the available amount underthe Letter of Support shall be greater than 1.05 times debt service and 1.5times interest cost.       Piltel is currently not in compliance with the terms ofconvertible bonds with principal amount of US$1.7 million (approximately US$2.2million redemption price at the option of the holders), and US$6.2 million bankdebt.  Piltel is currently in the process of finalizing the terms under whichthe holder of the US$6.2 million debt would participate in the debtrestructuring.     Piltel may not be able to restructure or otherwise paythe claims of its unrestructured debt. However, default on and acceleration ofPiltel’s unrestructured indebtedness does not create a cross-default underPiltel’s restructured indebtedness or any indebtedness of PLDT.     *Liability under Capital Lease*
Piltel has an existing FinancialLease Agreement with the DOTC covering telecommunications facilitiesestablished under the Municipal Telephone Act.  Under the Financial LeaseAgreement, Piltel was granted the exclusive right to perform telecommunicationsmanagement services, to expand services, and to promote the use of theDOTC-contracted facilities in certain covered areas for a total lease obligationof PhP482.6 million over 30 years.  The last payment made by Piltel to the DOTCfor the lease was in July 2000, in the amount of PhP1.5 million.  No paymentswere made in 2001 and 2002.  In its letter to the DOTC dated January 14, 2003,Piltel has requested for a re-negotiation of said lease agreement; as of March24, 2003, DOTC has yet to reply to such request.

 

**Item 6.    Directors, SeniorManagement and Employees**

** **

**Directors, Key Officers andAdvisors**

 

The names, ages, positions and dateof appointment of our directors (including independent directors), key officersand advisors as of the date of this report are as follows:

 

**Name**

**Age**

**Position(s)**

**Date of Appointment**

 

 

 

 

Antonio O. Cojuangco

51

Director

April 21, 1982

 

 

Chairman of the Board

November 24, 1998

Manuel V. Pangilinan

56

Director

November 24, 1998

 

 

President

 

 

 

Chief Executive Officer

 

Helen Y. Dee

58

Director

June 18, 1986

Corazon S. de la Paz

62

Director

September 25, 2001

Albert F. del Rosario

63

Director

November 24, 1998

Ray C. Espinosa

46

Director

November 24, 1998

Napoleon L. Nazareno

53

Director

November 24, 1998

 

 

President and Chief Executive Officer

 

 

 

of Smart

 

Rev. Fr. Bienvenido F. Nebres, S.J.(1).. 

63

Director

November 24, 1998

Juan B. Santos(1)

64

Director

December 3, 2002

Pedro E. Roxas(1)

47

Director

March 1, 2001

Taketo Suzuki

58

Director

March 24, 2000

 

 

Chief Operating Advisor

 

Mitsuhiro Takase

55

Director

March 24, 2000

Ricardo R. Zarate(2)

61

Director

March 1, 2001

 

 

Executive Vice President

June 1, 1987

Antonio R. Samson(3)

57

Executive Vice President

April 27, 1999

Ma. Lourdes C. Rausa-Chan

49

Senior Vice President,

January 5, 1999

 

 

General Counsel and Corporate Secretary

November 24, 1998

Anabelle L. Chua

42

Senior Vice President 

February 26, 2002

 

 

Treasurer

February 1, 1999

George N. Lim

51

Senior Vice President

February 26, 1999

Claro Carmelo P. Ramirez

43

Senior Vice President

July 5, 1999

Victorico P. Vargas

51

Senior Vice President

March 28, 2000

Rosalie R. Montenegro

54

Senior Vice President

July 10, 2000

Ariel A. Roda

40

Senior Vice President

August 10, 2000

Alfredo S. Panlilio

40

Senior Vice President

May 8, 2001

Ernesto R. Alberto

42

Senior Vice President

May 15, 2003

Jun R. Florencio

47

First Vice President

March 28, 2000

 

 

Auditor General

September 1, 2000

Celso T. Dimarucut

42

First Vice President 

January 31, 2003

 

 

Controller

August 16, 2000

Christopher H. Young

45

Chief Financial Advisor

November 24, 1998

Anastacio R. Martirez

50

Head, Personal Communications and

September 1, 1993

 

 

Mobile Services Division of Smart

 

Peter J. Lawrence

44

Chief Financial Advisor to Smart

November 9, 1998

Donald J. Rae

42

Chief Operations Advisor to Smart

January 1, 1999

——————————

 

*(1)      **Independent directors.*

 

*(2)      **Retired as Executive VicePresident effective July 16, 2003 but remains as Director of PLDT.*

 

*(3)      **Retired effective July 16,2003.*

 

The business address of NapoleonL. Nazareno, Anastacio R. Martirez, Peter J. Lawrence and Donald J. Rae isSmart Tower II, Ayala Avenue, Makati City, Philippines.  The business addressof each of the other directors, key officers and advisors identified above isthe Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

 

The following is a briefdescription of the business experience during the past five years of each ofour directors, key officers and advisors.

** **

**Mr. Antonio O. Cojuangco**,the chairman of our board, served as president and chief executive officer ofPLDT for over 12 years until November 1998, when he assumed the chairmanship ofthe board.  He also holds the chairmanship of the Bank of Commerce, FCB Manilaand CAP Life Insurance Corporation, and sits on the boards of C&OInvestment Realty Corporation, Kuok Phil. Properties, Inc. and PhilippineTelecommunications Investment Corporation.

 

**Mr. Manuel V. Pangilinan** isPLDT's president and chief executive officer and chairman of the board of Smartand ePLDT.  He has been re-appointed as managing director and chief executiveofficer of First Pacific effective June 2, 2003.  He founded and was themanaging director of First Pacific from 1981 and served as its executivechairman from February 1999 to May 2003.  He is also the chairman of MetroPacific Corporation and president commissioner of P.T. Indofood Sukses Makmurtbk.  He also holds directorships in Philippine Telecommunications InvestmentCorporation, Negros Navigation Co., Inc., Metro Asia Link Holdings, Inc.,Enterprise Investments Holdings, Inc. and several property development andmanagement companies.  Mr. Pangilinan is also the chairman of the board ofMabuhay Satellite and of Infocom.

 

**Ms. Helen Y. Dee** is thechairperson and president and/or chief executive officer of Hydee Management& Resources, Inc., Promotions Personalized, Inc., Tameena Resources, Inc.,International Holding Management, Inc. and House of Investments, Inc. andchairperson of Landev Corporation, Manila Memorial Park, Inc, Mapua InformationTechnology Center, Inc., Pacific Plans, Inc., Silver Falcon Insurance Agency,Inc. and Hi-Eisai Pharmaceuticals, Inc.  She is the president of MoiraManagement, Inc., Equitas Insurance Brokers, Inc. and YGC Corporate Services,Inc.  She is the vice chairperson of Zurich Insurance (Taipei) Ltd. and alsosits on the boards of Chailease Finance Corporation, KK Converter, Inc., EEI Corporation,Petro Energy Resources Corp., Nippon Life Insurance Co., South Western CementCorp., Seafront Resources Corp., Manila Peninsula Hotel, Inc., MalayanInsurance Co. Inc., MICO Equities, Inc., YGC Corporate Services, Inc. and LaFuneraria Paz, Inc.

 

**Ms. Corazon S. de la Paz** isthe president and chief executive officer of the Social Security System.  UntilJune 30, 2001, she was the senior partner and the chairperson of JoaquinCunanan & Co., a member firm of PricewaterhouseCoopers Worldwide.  She isthe vice chairperson of Equitable PCI Bank and a director and the chairpersonof the audit committees of San Miguel Corporation, Philex Mining Corporation,and Philhealth Insurance Corporation.  She is also a director of IonicsCircuits, Inc., Republic Glass Holding Corp., PCI Leasing and Finance, PCICapital Corporation and Equitable Cardnetwork, Inc.  She is also a trustee ofseveral educational and non-profit organizations.

 

**Mr. Albert F. del Rosario** iscurrently the Philippine Ambassador Plenipotentiary and Extraordinary to theUnited States of America.  He is the chairman of the board of Gotuaco delRosario and Associates, Inc., Philippine Indocoil Corporation and SalimPhilippines, Inc., the vice chairman of the board of Asia Traders Insurance Corporation,and the president of ADR Holdings, Inc.  Mr. del Rosario also sits on theboards of Infrontier (Philippines) Inc., Metro Pacific Holdings, Inc.,Philippine Telecommunications Investment Corporation, Metro StrategicInfrastructure Holdings, Inc., Pacific Plaza Condominium Corporation, PacificPlaza Towers Condominium Corporation and Vision Insurance Consultants, Inc.  Hehas been appointed as independent non-executive director of First Pacificeffective on June 2, 2003.

 

**Atty. Ray C. Espinosa** is themanaging director of ePLDT, the chairman and chief executive officer ofParlance and Vocativ, and the chairman of mySecureSign, Inc.  He is a member ofthe boards of BayanTrade Dotcom, Inc., Contact World, Inc., Cyber BayCorporation, Digital Paradise, Inc., Filcredit Finance and Capital DevelopmentCorporation, Intelligent Network Plus, Inc., Mind Stream, Inc., NationBroadcasting Corporation, Netopia Computer Technologies, Inc., SideraTechnologies, Inc., Stradcom International Holdings, Inc. and PLDT Global.  Heis a trustee of PLDT Beneficial Trust Fund and PLDT Foundation, Inc. andcorporate secretary of Unilink Communications Corporation, Philippine HomeCable Holdings, Inc. and its subsidiaries, and Mediaquest Holdings, Inc. UntilJune 30, 2000, he was a partner and member of the executive committee of thelaw firm SyCip Salazar Hernandez & Gatmaitan.

 

**Mr. Napoleon L. Nazareno** isthe president and chief executive officer of Smart and president of ACeSPhilippines.  He was the president and chief executive officer of Metro PacificCorporation from August 1995 until December 1999 and of Piltel from November1998 to January 2003.  He is the chairman of the board of Piltel and I-ContactsCorporation and also holds directorships in Metro Pacific Management Services,Inc., Metro Pacific Holdings, Inc., Negros Navigation Company, Inc., PhilippineTelecommunications Investment Corporation and some subsidiaries of PLDT,namely, ACeS Philippines, Mabuhay Satellite and PLDT Global. 

** **

**Rev. Fr. Bienvenido F. Nebres, S.J.**is the president of the Ateneo de Manila University and a member of the boardsof trustees of several other private educational institutions.  He is chairmanof the board of the Center for Leadership and Change, Inc., a leadershiptraining institution, and LEAD, Inc., which work with farmers.

 

**Mr. Juan B. Santos** is thechairman of Nestlé Philippines, Inc. and was its president until March 31,2003.  Prior to his appointment as president of Nestlé Philippines in 1987, heserved as chief executive officer of the Nestlé Group of Companies inThailand.  From 1989 to 1995, he acted on concurrent capacity as chiefexecutive officer of Nestlé Singapore Pte. Ltd. and Nestlé Philippines.  He isa director of San Miguel Corporation, and the chairman of the advisory board ofEquitable-PCI Bank. He is also the chairman of the Philippine Business for theEnvironment and the Foundation for Rural Electrification for EconomicDevelopment and an active member of the boards of trustees of the PhilippineBusiness for Social Progress, the Development Board of Dualtech Canlubang, andthe International Chamber of Commerce of the Philippines. 

 

**Mr. Pedro E. Roxas** is thechairman and chief executive officer of Roxas Holdings, Inc., CentralAzucarera, Don Pedro, Inc. and CADP Group Corp.  He is the president ofRoxaco Land Corporation and the executive vice president and treasurer of Roxas& Company, Inc.  He is also the chairman of Batangas Assets Corporation andJade Orient Sugar Corp.  He holds directorships in Banco Santander Philippines,Inc. and Fuego Development Corporation.  Mr. Roxas is a director or trusteeand/or officer of the following non-profit organizations:  Fundacion Santiago,Club Punta Fuego, Roxas Gargollo Foundation, Philippine Business for theEnvironment and Habitat for Humanity.

 

**Mr. Taketo Suzuki** is thechief operating advisor of PLDT.  He was the vice chairman of the board ofdirectors and a senior technical advisor of Smart from 1995 to March 2000.  

 

**Mr. Mitsuhiro Takase** is thesenior vice president-Corporate Planning Department of NTT Communications.  Mr.Takase has also been a member of the board of directors of NTT Communicationssince June 26, 2001.  From 1996 to 1998, he was the vice president forstrategic planning and international cooperation department of the globalbusiness headquarters of NTT Corporation, in charge of strategic planning andgeneral personnel matters for NTT's international/overseas business.  Prior tothat, he was in charge of the marketing and management of consulting/engineeringprojects mainly in Asian countries, as vice president and general manager ofthe Telecommunications Consulting Department of NTT International Corporation.

 

**Mr. Ricardo R. Zarate** is anexecutive vice president of PLDT and the head of PLDT's fixed line business.From 1996 to 2000, he was the executive vice president for the network servicesgroup, in charge of operations and maintenance, regional business and technicaland operations support.  He also sits on the boards of Smart, Clark Telecom,PLDT Global, Unilink Communications Corporation, Mediaquest Holdings, Inc. andTahanan Mutual Building and Loan Association, Inc. and is a member of the boardof trustees of the PLDT Beneficial Trust Fund.

 

**Mr. Antonio R. Samson** is anexecutive vice president of PLDT.  He is concurrently president and chiefexecutive officer of Mediaquest Holdings, Inc.  Since joining PLDT in 1982, hehas been a senior officer in various capacities.  His business experienceincludes strategic planning, human resources and administration, informationsystems, investor relations, public relations and advertising, media relationsand property management.  Mr. Samson is a director of Radio Veritas, presidentof MCO Foundation and Metropolitan Museum Foundation, chairman of Ad Foundationand a trustee and the auditor of PLDT Foundation, Inc.

 

**Ms. Ma. Lourdes C. Rausa-Chan**issenior vice president for corporate and legal affairs and the general counseland corporate secretary of PLDT. She was the group vice president for legalaffairs, and the corporate secretary of some subsidiaries, of Metro PacificCorporation prior to joining PLDT in November 1998.  She served as a directorof PLDT from March 2000 to February 2001 and from June to December 2002.  Ms.Rausa-Chan is also a member of the boards of ACeS Philippines, FilcreditFinance and Capital Development Corporation, Tahanan Mutual Building and LoanAssociation, First Pacific Realty Partners Corporation and Metro Pacific LandHoldings, Inc.  She serves as corporate secretary of Piltel, ACeS Philippines,Filcredit Finance and Capital Development Corporation, Tahanan Mutual Buildingand Loan Association, ePLDT, Clark Telecom, Mabuhay Satellite, Subic Telecom,Telesat, Infocom and PLDT Foundation, Inc.

 

**Ms. Anabelle L. Chua** is thetreasurer of PLDT and senior vice president for PLDT’s corporate finance andtreasury sector.  She was a vice president at Citibank, N.A. where she workedfor ten years prior to her appointment as first vice president in March 1998,as treasurer in February 1999 and as a senior vice president on February 26,2002.  She has over 15 years of experience in the areas of corporate finance,treasury, financial control and credit risk management.  Ms. Chua is also adirector of Smart, ePLDT, Infocom, Vocativ, Parlance, iPlus IntelligentNetwork, Inc., mySecureSign, Inc., Sidera Technologies, Inc., Mind Stream, Inc.and Filcredit Finance and Capital Development Corporation and is a member ofthe board of trustees of the PLDT Beneficial Trust Fund.  

 

**Mr. George N. Lim** is seniorvice president for the network services group of PLDT.  He is also a directorof Philippine Bright Moon Cable Networks, Inc., Tarlac Cable, Satellite CableTV (Pangasinan), Cavite Cable (Imus), Isla Cable (Tanauan, Batangas), HotelInteractive Systems, FilCredit Finance and Capital Development Corporation andseveral PLDT subsidiaries, namely, Smart, ACeS Philippines, Telesat, ClarkTelecom, Mabuhay Satellite, Subic Telecom, MaraTel, Contact World, Inc. andSidera Technologies, Inc.

 

**Mr. Claro Carmelo P. Ramirez**is senior vice president for the retail business group of PLDT.  He has over 20years of work experience in the field of marketing.  He worked as associatedirector for Colgate Palmolive Company, Global Business Development in NewYork, and as marketing director for Colgate Palmolive Argentina, S.A.I.C.Prior to his appointment as senior vice president in July 1999, he was themarketing director of Colgate Palmolive Philippines, Inc.  He is also adirector of Smart, Subic Telecom, Clark Telecom, MaraTel, Contact World, Inc.and Sidera Technologies, Inc.

 

**Mr. Victorico P. Vargas** issenior vice president for human resources of PLDT. He has over 20 years of workexperience in various industries (insurance, consumer goods, real estate,banking and finance, and telecommunications/IT) in the area of human resourcemanagement.  Prior to joining PLDT in February 2000, he was vice president,country human resources director of Citibank N.A., Manila, and spent two yearsoutside the Philippines as country human resources director of Citibank, N.A.,Bangkok.

 

**Ms. Rosalie R. Montenegro** issenior vice president for the call center business group of PLDT.  Prior tothat, she served as consumer banking head of ABN-AMRO Savings Bank and vicepresident for remote banking of ABN-AMRO Consumer Bank, Singapore RegionalOffice from 1997 to 1999.  She was vice president for global consumer banking,CitiPhone banking and service quality director of Citibank N.A. from 1985 to1996 servicing both banking and the credit cards businesses.  Ms. Montenegro isalso the president of Vocativ and Parlance and a director of ePLDT and PLDTGlobal.

 

**Mr. Ariel A. Roda** is seniorvice president for business development group of PLDT. Prior to that, he was amanaging director of ePLDT. He has over 15 years of work experience in thefield of information technology.  He held various positions in Manila ElectricCompany and was its information technology head prior to his appointment as afirst vice president for information systems of PLDT in April 1999.  He is adirector of Clark Telecom and Subic Telecom.

 

**Mr. Alfredo S. Panlilio** issenior vice president for the international and carrier business group andpreviously head of the corporate business group of PLDT.  He has over 15 yearsof experience in the field of business development and information technology.He held management positions at IBM Philippines, Inc. and was the vicepresident for business development of the Lopez Communications Group (ABS-CBNBroadcasting, BayanTel and SKYCable) prior to joining PLDT in July 1999.  Mr.Panlilio is also a director of Acasia Communications, Sdn. Bhd, Clark Telecom,Subic Telecom, Telesat, Smart-NTT Multimedia, Inc., and Mindstream, Inc. 

 

**Mr. Ernesto R. Alberto** issenior vice president for the corporate business group of PLDT.  He has over 20years of experience in the area of corporate banking, relationship managementand business development.  Prior to joining PLDT in May 2003, he was a vicepresident and the group head of the national corporate group of Citibank N.A.,Manila from 1996 to 2003, and previously served as vice president and grouphead of the relationship management group of Citytrust Banking Corporation.

 

**Mr. Jun R. Florencio** is thefirst vice president for PLDT’s audit and assurance group.  He has over 20years of experience in the areas of external and internal audit, creditmanagement, information technology, financial management and controllership. Heheld various positions in the finance organization of EasternTelecommunications and was the financial controller of Smart for four yearsprior to his appointment as vice president and head of the financial reportingand control sector of PLDT in April 1999.

 

**Mr. Celso T. Dimarucut** isthe controller of PLDT and first vice president for PLDT’s financial reportingand control sector. Prior to joining PLDT, he was the controller and treasurerof Piltel and had previously served as the group financial controller fordomestic subsidiaries of Metropolitan Bank and Trust Company.  He specialized inaudit, tax and business advisory services for ten years having worked with anIndonesian firm Prasetio, Utomo & Co. for three years and with SGV &Co. for seven years.  He is currently a director and the treasurer of SubicTelecom and Clark Telecom and a director of Piltel (Cayman) Ltd.

 

**Mr. Christopher H. Young**,our chief financial advisor, served with PricewaterhouseCoopers in London andHong Kong from 1979 until 1987, at which time he joined First Pacific in HongKong as group financial controller.  He joined Metro Pacific Corporation in1995 as finance director, a position he held until he joined us in November1998.

 

**Mr. Anastacio R. Martirez** isa director and the head of personal communications and mobile services ofSmart.  He is the president of I-Contacts Corporation, a subsidiary of Smart,and a director of ACeS Philippines.  He has been involved in general andmarketing management for over 25 years with experience in consumer packagedgoods, consumer and industrial lighting, telecommunications and banking.  Heheld senior marketing positions in SKYCable, Philips Electronics and Lightingand Citytrust Banking Corporation.

 

**Mr. Peter J. Lawrence**, chieffinancial advisor to Smart, is a chartered accountant and spent a number ofyears as a senior tax consultant with Arthur Andersen & Co. (Australia).He joined First Pacific in 1991 as vice-president for group taxation and, inJanuary 1996, was promoted to the position of finance director — Asia LinkHoldings Limited (the telecommunications arm of First Pacific).

 

**Mr. Donald J. Rae**, the chiefoperations advisor to Smart, served as the chief operating officer for TimeTelecommunications Sdn. Bhd. in Malaysia prior to joining Smart in January1999.  He also spent over ten years with Deloitte & Touche Consultingspecializing in the Asian telecommunications sector.

 

Terms of Office

 

The directors of PLDT are electedeach year to serve until the next annual meeting of stockholders and untiltheir successors are elected and qualified.  The term of office of all officersis coterminous with that of the board of directors that elected or appointedthem.

 

Family Relationships

 

None of the directors or key officers of PLDT are related toeach other.

 

Compensation

 

The aggregate compensation paid tothe directors, the chief executive officer and other key officers named above,as a group, for 2002 amounted to Php187 million.

 

Each of the directors, includingthe members of the advisory board of PLDT, is entitled to a director's fee inthe amount of Php125,000 for each meeting of the board attended, except ManuelV. Pangilinan, who has waived his right to receive a director's fee.  Each ofthe members or advisors of the audit, executive compensation, nomination andfinance committees is entitled to a fee in the amount of Php50,000 for eachcommittee meeting attended.

 

There are no agreements between PLDT and any of itsdirectors and key officers providing for benefits upon termination ofemployment, except for such benefits to which they may be entitled under PLDT'sretirement plan.

 

ExecutiveStock Option Plan

 

On April 27, 1999 and December 10,1999, the board of directors and stockholders, respectively, of PLDT approvedthe executive stock option plan covering a total of 1,289,745 shares of commonstock and the amendment of the seventh article of the Articles of Incorporationof PLDT denying the pre-emptive right of holders of common stock to subscribefor any issue of the 1,289,745 shares of common stock pursuant to the executivestock option plan.

 

Stock options may be grantedpursuant to the executive stock option plan to management executives andadvisors/consultants of PLDT.  The executive compensation committee of ourboard determines the eligibility of a management executive oradvisor/consultant to receive a stock option, as well as the number of sharesof common stock to be covered by each stock option.

 

Stock options granted under the executive stock option planbecome fully vested after the completion of five years from the relevant optiongrant date.  An option holder may exercise his option to purchase that numberof vested shares of common stock underlying his option, in whole or in part, atthe price at Php814 per share, subject to adjustment upon the occurrence ofspecific events described in the executive stock option plan.  The optionholder is required to give written notice of exercise to the executivecompensation committee, indicating the number of vested shares to be purchased,accompanied by payment in cash of the full amount of the purchase price forthose shares.

 

**Share Ownership**

 

Thefollowing table sets forth information regarding ownership of our common stock,preferred stock and executive stock options as of May 31, 2003 by ourcontinuing directors, key officers and advisors.  Each individual below ownsless than 1% of our outstanding common stock and less than 1% of our preferredshares.

 

**Name of Owner**

**Shares of**

**Common Stock**

**Shares of**

**Preferred Stock**

**Shares of Common  Stock Underlying  Executive Stock Options(1)**

 

 

 

 

Antonio O. Cojuangco

4

4,060

—

Manuel V. Pangilinan

54,419

360

97,571

Helen Y. Dee

22,725(2)

180

—

Corazon S. de la Paz

12,553,130(3)

—

—

Albert F. del Rosario

38,425

1,560

—

Ray C. Espinosa

301

—

38,342

Napoleon L. Nazareno

6,429

495

—

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

2,467(4)

—

—

Juan B. Santos

1

—

—

Pedro E. Roxas

1

540

—

Taketo Suzuki

1,501

—

—

Mitsuhiro Takase

1

—

—

Ricardo R. Zarate

3,415

—

39,464

Antonio R. Samson

4,050

—

28,644

Ma. Lourdes C. Rausa-Chan

257

350

22,302

Anabelle L. Chua

1,540

—

13,738

George N. Lim

1,700

360

13,256

Claro Carmelo P. Ramirez

1,500

—

14,496

Victorico P. Vargas

—

180

23,835

Rosalie R. Montenegro

—

—

16,006

Ariel A. Roda

1,500

—

13,938

Alfredo S. Panlilio

—

—

11,151

Ernesto R. Alberto

—

—

—

Jun R. Florencio

15

530

10,593

Celso T. Dimarucut

—

460

14,218

Christopher H. Young

104,312

––

––

Anastacio R. Martirez

30,577

––

––

Peter J. Lawrence

––

––

––

Donald J. Rae

––

––

––

_____________

 

*(1)    **As of May 31, 2003, under PLDT's executive stock option plan,options to purchase 357,554 common shares have been granted to the key officerslisted in the table above.  No options have been granted to non-executivedirectors.  All outstanding options are exercisable at an exercise price ofPhp814 per share and have an expiration date of December 10, 2009.  Nooutstanding options were exercisable until December 10, 2001, at which time 25%became exercisable.  An additional 25% vested on December 10, 2002, and willvest annually on December 10, 2003 and 2004.*

* *

*(2)    **As chairperson and presidentof Hydee Management & Resources, Inc., Ms. Dee may exercise voting rightsin respect and may be considered to have beneficial ownership of 22,627 sharesof common stock owned by Hydee Management Resources, Inc.*

* *

*(3)    **As president and chiefexecutive officer of the Social Security System, Ms. de la Paz may exercisevoting rights in respect and may be considered to have beneficial ownership of12,553,129 shares of common stock owned by the Social Security System.*

* *

*(4)    **As president of the Ateneode Manila University, Rev. Fr. Nebres may exercise the voting rights of 2,465shares of common stock owned by the Ateneo de Manila University.*

* *

The aggregate number of common andpreferred shares directly owned by all key officers, directors and advisors asat May 31, 2003 were 250,049 and 9,075 respectively, or 0.148% and 0.001% ofPLDT’s outstanding common and preferred shares, respectively.

 

Audit, Nomination,Executive Compensation and Finance Committees

 

Our board of directors isauthorized under the by-laws to create committees as it may deem necessary.Some of the committees formed were the audit, nomination committee, executivecompensation and finance committees, the purpose of which is to assist ourboard of directors.

 

*Audit Committee*

 

Our audit committee is composed ofthree members who are independent directors, namely,       Fr. Bienvenido F.Nebres, S.J., who chairs the committee, Pedro E. Roxas and Juan B. Santos.Taketo Suzuki, who is a member of our board of directors, and Roberto R. Romuloand Amado Bagatsing are advisors to the audit committee.

 

As provided for in the auditcommittee charter, the purposes of the audit committee are to assist our boardof directors:

 
- in its oversight of PLDT’s accounting and financial reportingprinciples and policies and internal audit controls and procedures;       - in its oversight of the integrity of PLDT’s financial statementsand the independent audit thereof;         - in its oversight of PLDT’s compliance with legal and regulatoryrequirements;            - in selecting and recommending the external auditors to beappointed by our board of directors, evaluating such external auditors’qualifications and independence and, where deemed appropriate, replacing theexternal auditors; and             - in its oversight of the performance of the internal auditing organizationand the external auditors.     With respect to the externalauditors, the audit committee has the following duties and powers:               - to review and evaluate the qualifications, performance andindependence of the lead partner of the external auditors;                 - to select and recommend the external auditors to be appointed bythe board of directors and to recommend the removal or replacement of theexternal auditors;                   - to review in consultation with the head of the internal auditingorganization and the Chief Financial Adviser the fees charged by the externalauditors for audit and non-audit services;                     - to approve all audit engagement fees and terms, as well as allsignificant non-audit engagements with the external auditors;                       - to ensure that the external auditors prepare and deliver annuallythe Statement as to Independence and Auditor’s Statement, to discuss with theexternal auditors any relationships or services disclosed in such statementsthat may impact the objectivity, independence or quality of services of our externalauditors and to take appropriate action in response to such statements tosatisfy itself of the external auditor’s independence;                         - to ensure that the lead partner of the external auditors isrotated at least once every five (5) years; and                           - to instruct the external auditors that the external auditors areultimately accountable to the board of directors through the audit committee.     *Nomination Committee*     Our nomination committee iscomposed of four members, three of whom are independent directors namely, Fr.Bienvenido F. Nebres, S.J., who chairs the committee, Pedro E. Roxas and JuanB. Santos, and Victorico P. Vargas, who is a non-voting member.     *Executive CompensationCommittee*     Our executive compensationcommittee is composed of four members, three of whom are regular members of ourboard of directors.  Albert F. del Rosario, who chairs the committee, Ray C.Espinosa and Pedro E. Roxas are regular members of our board of directors.  Thefourth member of the committee is Oscar S. Reyes.  Taketo Suzuki, who is amember of our board of directors, is an advisor to the committee.     *Finance Committee*     Our finance committee is composedof four members, three of whom are regular members of our board of directors.Corazon S. de la Paz, who chairs the committee, Antonio O. Cojuangco andNapoleon L. Nazareno are regular members of our board of directors.Christopher H. Young is the fourth member.  Mitsuhiro Takase, who is a memberof our board of directors, is an advisor to the committee.     **Employees and Labor Relations**     As ofDecember 31, 2002, PLDT's total number of employees was 12,131, of which 52%were rank and file, 44% were management/supervisory staff and 4% wereexecutives.  This number represents a decrease of 784 employees, orapproximately 6%, from the personnel level as of the end of 2001, mainly as aresult of the ongoing manpower reduction program that we initiated in 1995.From a peak of 20,312 at the end of 1994, the number of our employees declinedby 8,181, or 40%, by the end of 2002.     In 2002, PLDTdecided to rationalize the operations of its operator-assisted call-handlingunits located principally in certain of its provincial exchanges.  In recentyears, operator-assisted calls have dramatically declined due to the popularityof direct dialing and other alternative means of communications, such as e-mailand text messaging.  Consequently, 322 employees of PLDT manning its regionaloperator services, where call volumes have significantly declined, wereseparated from service with enhanced retirement/redundancy pay package,effective December 31, 2002.  In relation to this, the *Manggagawa ngKomunikasyon sa Pilipinas*, or MKP, our rank-and-file employees’ union,filed a Notice of Strike with the Department of Labor and Employment, or DOLE,on November 8, 2002, and filed a complaint against PLDT for alleged unfairlabor practices.     After a series of failedconciliation meetings between representatives of PLDT and MKP before a DOLEconciliator, MKP staged a 14-day strike beginning on December 23, 2002. Thestrike ended on January 6, 2003 by virtue of a return-to-work order issued bythe DOLE Secretary to striking employees, except those employees whoseemployment were already terminated by PLDT. Moreover, the DOLE Secretary, inthe same order, certified the labor dispute to the National Labor RelationsCommission, or NLRC, for compulsory arbitration. The NLRC has yet to schedulearbitration proceedings on MKP’s complaint against PLDT.     Over the past several years, PLDThas been implementing a manpower reduction program, or MRP, in line with itscontinuing effort to reduce the cost base of the fixed line business.  In 2002and in the first quarter of 2003, 845 and 299 employees have availed of theprogram, respectively.  The MRP cost charged to operations amounted to Php324million for the year ended December 31, 2002 and Php227 million for the threemonths ended March 31, 2003.  We currently anticipate incurring approximatelyPhp1,000 million in additional costs in 2003 relating to the implementation of thisprogram.     The decision to implement the MRPwas anchored on the challenges being faced by the fixed line business assignificant changes in technology, increasing competition and shifting marketpreferences to cellular use have reshaped the future of the fixed linebusiness.  The MRP is being implemented under the New Labor Code and is incompliance with all other relevant labor laws and regulations.  By the end of2003, PLDT expects to reduce its headcount to approximately 10,500 employees.     We consider our relationship withour rank and file employees union, our supervisors' union and our salessupervisors' union to be generally good.  See also “Item 5. Operating andFinancial Review and Prospects — Other Information —Strike of PLDT Employees.”     **Pension and Retirement Benefits**     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 separation beginning at age 40 orcompletion of at least 15 years of credited service, total and physicaldisability, death and involuntary separation.  Benefits are based on theemployee's final monthly basic salary and length of service.     The normal retirement benefit isequal to a percentage of the final monthly basic salary per year of creditedservice.  The percentage is 100% for those with less than 15 years of serviceat retirement and 125% for those with 15 years of service at retirement.Thereafter, the percentage increases by 5% for every additional year ofcredited service up to a maximum of 200%.  The early retirement benefit isequal to the accrued normal retirement benefit with salary and service at thedate of early retirement.     The benefit plan's assets includeindirect ownership of 100% of the shares of Home Cable.  All of the shares ofHome Cable are pledged to a group of lenders as security for a loan of HomeCable, in respect of which Home Cable has defaulted on payment.  On April 10,2002, the loan agent, at the request of a majority of the lenders, delivered anotice to Home Cable declaring an event of default and accelerating this loan.Consequently, the lenders are entitled to foreclose on or sell the collateralgranted as security for the loan, including Unilink's shares in Home Cable.  Asa result, the benefit plan could lose its indirect ownership in these shares orthe pledged assets of Home Cable.     In the event the benefit plan'sassets were insufficient to pay the required retirement benefits, PLDT would beobligated to fund the amount of the shortfall.  In addition, claims of PLDT'semployees for retirement benefits that have accrued would rank above the claimsof all other creditors of PLDT, in the event of PLDT's bankruptcy orliquidation.     We spent Php890 million forpension, retirement and similar benefits for our employees for the year 2002.     For more information about the benefit plan, see Note 19 to ourfinancial statements in Item 18.     **Employees' Stock Plan**     Since 1966, PLDT has had anemployees' stock plan under which shares of common capital stock may be offeredand sold to our regular employees, other than directors, at a discount frommarket value.  On September 27, 1999, our board of directors approved theamendments to the employees' stock plan changing the plan name to “PLDT StockPurchase Plan” and limiting the coverage of the plan to rank-and-file andsupervisory employees.  These amendments were approved by our stockholders at aspecial meeting held on December 10, 1999.     Beginning January 3, 2000 to March31, 2000, we made our ninth offering under the PLDT Stock Purchase Plan, underwhich we made available up to 991,200 shares of common stock to all eligibleemployees as of January 3, 2000.  The shares were offered at a discounted priceof Php877.63 per share, which was 85% of the average market price of our commonstock on the Philippine Stock Exchange on January 3, 2000.  The 36-monthinstallment payment period began on April 30, 2000 and will end on April 15,2003.  As of December 31, 2002, the maximum number of shares remaining to beoffered under the plan was 1,173,513 shares.  We believe that the PLDT StockPurchase Plan gives our employees the opportunity to invest in our company onbeneficial terms and broadens our shareholder base.     **Legal Proceedings**     On April 10, 2001, a group ofprivate individuals filed a complaint with the Office of the Ombudsman againstformer President Joseph Estrada and other individuals, including Mr. Manuel V.Pangilinan, who is our president, chief executive officer and one of ourdirectors.  The complaint alleged that the defendants were involved in actsinvolving direct and indirect bribery, corruption of public officials, illegalgiving or offering of gifts to public officials and/or “economic plunder.”  Inthe case of Mr. Pangilinan, the complaint alleged that a Php20 million checkissued by Mr. Pangilinan was deposited in a bank account owned by formerPresident Estrada.  The Office of the Ombudsman reviewed the charges againstMr. Pangilinan to determine whether there is probable cause to warrantprosecution of the charges before the Sandiganbayan, a special court that hearsanti-graft cases.  Mr. Pangilinan has filed a counter-affidavit with the Officeof the Ombudsman to refute the allegations against him and believes, based onthe advice of his counsel that the complaint against him was without merit.The investigation by the Office of the Ombudsman into the matters raised by thecomplainant and its prosecution of Mr. Estrada continues.     Item 9.       Major Shareholders and Related Party Transactions     Major Shareholders     Thefollowing table sets forth information regarding ownership of PLDT common stockas of May 31, 2003 for all shareholders known to us to beneficially own 5% ormore of PLDT's common stock.  All shares of PLDT's common stock have one voteper share.     
** **

**Name of Beneficial Owner**

**Number of Shares**

**Beneficially Held****(1)**

**Percentage**

**of Class**

 

 

 

First Pacific(2)

53,238,376

31.43

PCD Nominee Corporation(3)

50,506,850

29.81

Chase Manhattan (Hong Kong) Nominees Limited(4)

27,038,020

15.96

NTT Communications(5)

25,266,971

14.92

Social Security System(6)

12,553,129

7.41
  ———————     *(1)**Underthe rules of the Commission, and as used in this table, “beneficial ownership”means the sole or shared power to vote or direct the voting or to dispose ordirect the disposition of any security.  In addition, a person is deemed to bethe beneficial owner of securities that can be acquired within 60 days, throughthe exercise of any option or warrant.  Common stock subject to options orwarrants that are currently exercisable or exercisable within 60 days aredeemed outstanding for computing the ownership percentage of the person holdingsuch options or warrants, but are not deemed outstanding for computing theownership percentage of any other person.  The amounts and percentages arebased upon 169,403,990 shares of common stock outstanding as of May 31, 2003.*     *(2)   Consists of shares held by affiliates of FirstPacific, including 26,034,263 shares held of record by PhilippineTelecommunications Investment Corporation, or PTIC, 6,717,319 shares held ofrecord and 455,000 shares held in street name by and for Larouge B.V.;2,919,260 shares held of record by Asia Link, B.V.; and 17,112,534 shares heldof record by Metro Pacific Resources, Inc., or MPRI. Pursuant to resolutionadopted by the board of directors of PTIC, a copy of which had been furnishedto PLDT, the President of PTIC, Mr. Manuel V. Pangilinan, has the continuingauthority to represent PTIC at any and all meetings of the stockholders of acorporation in which PTIC owns of record or beneficially any shares of stock orother voting security, and to sign and deliver, in favor of any person he maydeem fit, a proxy or other power of attorney, with full power of delegation andsubstitution, authorizing his designated proxy or attorney-in-fact to vote anyand all shares of stock and other voting securities owned of record orbeneficially by PTIC at any and all meetings of the stockholders of thecorporation issuing such shares of stock or voting securities.  Based on aSecretary’s Certificate, a copy of which had been furnished to PLDT, MPRI’sboard of directors designated MPRI’s President, Mr. Manuel V. Pangilinan or, inhis absence, any one of the other directors of MPRI, as authorizedrepresentative and proxy to represent MPRI in the Annual Meeting ofStockholders of PLDT for the year 2003 and to vote the shares registered in thename of MPRI in the books of PLDT on any and all matters which may properlycome before the stockholders during the aforementioned meeting.*  * *  *(3)   Registered owner of shares beneficially owned byparticipants in the Philippine Central Depository or PCD, a private companyorganized to implement an automated book entry system of handling securitiestransactions in the Philippines.*  * *  *(4)   Holds shares as nominee of JPMorgan Chase Bank,successor depositary of the shares of common stock underlying the AmericanDepositary Shares (ADSs) each representing one share of common stock of PLDTand evidenced by American Depositary Receipts (ADRs).  Pursuant to the CommonStock Deposit Agreement, dated October 14, 1994, as amended on February 10,2003, if the depositary does not receive voting instructions from a holder ofADRs, such holder will be deemed to have instructed the depositary to provide adiscretionary proxy to a person designated by PLDT for the purpose ofexercising the voting rights pertaining to the shares of common stockrepresented by such holder of ADRs, except that no discretionary proxy will begiven with respect to any matter as to which substantial opposition exists orwhich materially and adversely affects the rights of the holders of such ADRs.*  * *  *(5)   On December 11, 2002, NTT Communications Capital(UK) Limited, or NTTC-UK, and NTT Communications signed an agreement totransfer NTTC-UK’s ownership of shares in PLDT to NTT Communications to enablethe latter to consolidate its ownership by becoming the direct beneficial ownerthereof. Prior to this transfer, NTT Communications and NTT were already theindirect beneficial owners of the PLDT shares held by NTTC-UK, a wholly-ownedsubsidiary of NTT Communications. Inasmuch as NTT Communications is NTT’swholly-owned subsidiary, NTT remains to be the indirect beneficial owner of theshares in PLDT. In connection with the Annual Meeting of the Stockholders ofPLDT for the year 2003, Mr. Kiyoshi Maeda, an authorized representative of NTTCommunications, executed a proxy in favor of Mr. Manuel V. Pangilinan with fullpower of substitution and delegation to vote the PLDT common shares of NTTCommunications at the aforementioned meeting.*  * *  *(6)   Includes 7,518,340 shares held of record by PCDNominee Corporation.*  * *  As of May 31, 2003, approximately 87.9% of the outstandingcapital stock of PLDT was registered in the names of Philippine persons.     Related PartyTransactions     Companies within the PLDT Group areengaged in arm's-length transactions in the ordinary course of business.  Webelieve that the terms of these transactions are comparable with thoseavailable from unrelated parties.  The following is a discussion of the majoragreements with or between members of the PLDT Group and related parties.     *Agreementswith NTT Communications*     PLDT is a party to the followingagreements with NTT Communications and/or its affiliates:                             - On September 28, 1999, PLDT entered into a Stock Purchase andStrategic Investment Agreement with First Pacific and its affiliates and NTTCommunications whereby, pursuant to amendments on March 8, 2000 and March 24,2000, PLDT acquired all of the outstanding stock of Smart from First Pacificand its affiliates and NTTC-UK, in exchange for newly issued and fully paidcommon stock of PLDT.  As part of the strategic alliance formed between PLDTand NTT Communications, NTT Communications made a further strategic investmentin PLDT by subscribing for an additional 12 million newly issued shares ofcommon stock of PLDT for a price of approximately Php14,700 million effectivelymaking NTT Communications the beneficial owner of 15% of PLDT's common stock.In addition, PLDT and NTT Communications agreed to establish a joint committeeto explore the development and marketing of products and services between theparties, and PLDT granted to NTT Communications contractual veto rights overcertain decisions and transactions.  For more information, see “Item 3. KeyInformation — Risk Factors — Risks Relating to Us — A significant number ofPLDT's shares are held by two separate shareholders, which may not act in theinterests of other shareholders or stakeholders in PLDT”; and                               - Simultaneously with the closing of the Stock Purchase andStrategic Investment Agreement, First Pacific, NTT Communications and NTTC-UKentered into a Shareholders Agreement.  Under the Shareholders Agreement, NTTCommunications is entitled to nominate two directors to the PLDT board ofdirectors and First Pacific and its affiliates are entitled to nominate sixdirectors.  The Shareholders Agreement also entitles NTT Communications tonominate two directors to Smart's board of directors and, subject to specifiedconditions, one member to the board of directors of all other PLDTsubsidiaries.  NTT Communications is also entitled to appoint members or advisorsof certain PLDT management and board committees, including the audit, executivecompensation and finance committees described above under “— Audit, Nomination,Executive Compensation and Finance Committees.”  Under the ShareholdersAgreement, each party has agreed, under certain circumstances, to vote itsshares of common stock in favor of the nominees designated by the otherparties.        We are also a party to thefollowing agreements with NTT Communications and/or its affiliates, in respectof which Php32 million and Php39 million were payable as of December 31, 2002and 2001, respectively:                                 - Arcstar Licensing Agreement and Arcstar Service ProviderAgreement with NTT Worldwide Telecommunications Corporation under which PLDTmarkets managed data and other services under NTT Communications' “Arcstar”brand to its corporate customers in the Philippines;                                   - Conventional International Telecommunications Services Agreementwith NTT Communications under which PLDT and NTT Communications have agreed tocooperative arrangements for conventional international telecommunicationsservices to enhance their respective international businesses;                                     - Internet Services Agreement with NTT Communications under whichPLDT and NTT Communications have agreed on arrangements to coordinate theirplans for the deployment and utilization of Internet protocol transportcapacity and the development and promotion of Internet-related and othervalue-added services;                                       - Advisory Services Agreement with NTT Communications under whichNTT Communications provides PLDT with technical, marketing and otherconsultants for various business areas of PLDT;                                         - Smart-NTT Multimedia Agency Agreement with NTT Communicationsunder which Smart-NTT Multimedia, then a 60% owned subsidiary of Smart,provides a full range of PLDT's telecommunications services, including leasedlines, domestic frame relay, cellular service, and multimedia services;                                           - Domestic Fiber Optic Network Submerged Plant MaintenanceAgreement with NTT World Engineering Marine Corporation under which NTT WorldEngineering Marine Corporation provides maintenance services to PLDT’s domesticfiber optic network;                                             - Chartered Arrangement Maintenance Contract with NTT WorldEngineering Marine Corporation under which, for a period of five years, NTTWorld Engineering Marine Corporation uses CS PLDT primarily to maintain thesubmarine cable comprising the submerged portion of our fiber optic network;and                                               - Tradename and Trademark Agreement with NTT Communications underwhich PLDT has been given the right to use the trade name “Arcstar” and itsrelated trademark, logo and symbols, solely for the purpose of PLDT'smarketing, promotional and sales activities for the Arcstar services within thePhilippines.     *PLDT Letter of Support inFavor of Piltel*     In connection with Piltel's debtrestructuring, on June 4, 2001, PLDT issued a letter of support for the benefitof Piltel and its creditors, under which PLDT is obligated to provide up to amaximum of US$150 million to make up shortfalls in Piltel's operating cashflows.  As of December 31, 2002, US$50 million remained available under theletter of support.     *Agreements between Smartand Piltel*     Smart andPiltel have entered into the following agreements in connection with theintegration of their operations:                                                 - An agreement in 2002 for the co-location, or sharing, of cellularsites selected by agreement of the parties, whereby Piltel is paid a usage feeof Php45,000 per shared site per month, subject to a 10% annual increase;                                                   - An agreement whereby Smart manages the operation of Piltel'scellular and paging systems, which are divided into the following threesub-agreements:                                         (i)          A facilities management agreement in November 2000 under which Smartoperates, maintains and manages the physical facilities and technical servicesof Piltel's existing cellular and paging systems.  Piltel compensates Smartunder the arrangement through a monthly fixed fee of Php4 million and avariable monthly fee of Php13,735 per site covered by the agreement.  Anadditional fee of Php186,878 per month and Php624 per site are payable at theend of each calendar year upon rendition of the services in accordance with theagreement.  This agreement was amended in May 2001 to include the management,operation and maintenance of Piltel's cellular telecommunications network inthe E.O. No. 109 areas in Mindanao, including Piltel's business and centraloffices, base stations and public calling offices in South Cotabato, Sarangganiand General Santos, Davao City, Davao del Sur, Zamboanga del Norte, Zamboangadel Sur and Misamis Occidental;                                       (ii)          A customer service management agreement on September 15, 2000 underwhich Piltel outsourced the operation of its customer service and billingfunctions for its cellular and paging systems to Smart for a monthly fee ofPhp9 million and a variable cost of Php57.00, Php17.00 and Php25.00 perpostpaid and prepaid cellular and paging subscriber, respectively.  Anadditional fee of Php399,926 per month and Php1.00 per postpaid cellularsubscriber per month is payable at the end of each calendar year upon renditionof the services in accordance with the agreement; and                                      (iii)          An administrative support and management services agreement in September2000 under which Piltel pays a monthly fixed fee of Php8 million.  Anadditional fee of     Php 353,764 per month is payable at the end of eachcalendar year upon rendition of the services in accordance with the agreement;                                                      - A facilities service agreement in March 2000 under which Piltelaccesses Smart's existing GSM network and facilities to enable Piltel to offerprepaid cellular service using GSM technology in exchange for approximately 50%of Piltel's revenues, net of interconnection expenses.     *Facilities ManagementAgreement between Piltel and PLDT*     On July 19, 2001, PLDT entered intoa facilities management agreement with Piltel under which PLDT undertook themanagement, operation and maintenance of Piltel's regional telecommunicationand E.O. No. 109 network operations and services, including E.O. No. 109 fixedline build out installations, public calling offices and payphone facilitiesand the systems required to support these services.     The agreement covers Piltel'sregional telecommunication service in Baguio, Puerto Princesa, Masbate and Boacand E.O. No. 109 service in Alabel, Banga, Dapitan, Davao, Digos, Dipolog,General Santos, Kiamba, Koronadal, Pagadian, Polomolok and Surallah.     Under the agreement, PLDT alsoundertook the management of the computer system, billing, revenue assurance andinter-carrier settlements reporting of Piltel's regional telecommunicationservice in Olongapo and Subic.     The monthly management fee payableby Piltel is based on cost, and for cost components where margin is allowed,15% will be applied.  In addition, Piltel will pay a monthly variable cost peraccount in the amount of Php30.00 for bill generation and Php6.00 for billdelivery from an exchange to a subscriber.  All third party invoices will becharged to Piltel at cost, including value added tax.       The agreement is effective for thethree years from July 2001 to July 2004 and supersedes the facilitiesmanagement agreement between PLDT and Piltel, dated May 12, 2000, under whichPLDT undertook the management, maintenance and operation of the regionaltelecommunication services of Piltel, including public calling offices andpayphone operations located in Baguio City, Puerto Princesa, Boac and Masbate.     *Facilities Management Agreement between Piltel and SubicTelecom*  * *  On September 5, 2001, Piltel andSubic Telecom entered into a facilities management agreement under which SubicTelecom undertook the management, operation and maintenance of the regionaltelephone network, customer operations, network operations and pay phones ofPiltel in Subic and Olongapo City.  The monthly management fee payable byPiltel is based on cost, and for cost components where margin is allowed, 15%will be applied.  In addition, Piltel is required to pay a monthly variablecost per account in the amount of Php44.00 for repairs and maintenance andPhp6.00 for bill delivery from an exchange to a subscriber.  All third partyinvoices are required to be charged on to Piltel at cost, including value-addedtax.  This agreement supersedes the facilities management agreement enteredinto by Piltel and Subic Telecom on May 29, 2000.       *Air Time PurchaseAgreement between PLDT and PT Asia Cellular Satellite and Related Agreements*     In March 1997, PLDT entered into aFounder NSP Air Time Purchase Agreement with PT Asia Cellular Satellite, asamended in December 1998, under which PLDT was granted the exclusive right tosell ACeS services in the Philippines.  In exchange, PLDT is required topurchase from PT Asia Cellular Satellite at least US$5 million worth of airtime annually over ten years, commencing on the commercial operations date,which has been set as January 1, 2002.  In the event PT Asia CellularSatellite's billing revenues are less than US$45 million in any given year,PLDT is required to make supplemental air time purchase payments not to exceedUS$15 million per year during the ten year term of the agreement.     PLDT also entered into a FounderNSP Operating Agreement with PT Asia Cellular Satellite, dated as of March 12,1997, under which PLDT may:                                                       - authorize distributors to resell ACeS service in the Philippinesupon prior approval from PT Asia Cellular Satellite; and                                                         - appoint agents to solicit and bill PLDT's or its authorizeddistributors' subscribers for ACeS services and to sell terminals on behalf ofPLDT.     Under an Assignment and AssumptionAgreement dated December 29, 1998, PT Asia Cellular Satellite agreed to assignand transfer to ACeS International Limited all of PT Asia Cellular Satellite'srights under the Founder NSP Air Time Purchase Agreement and Founder NSPOperating Agreement.     Under an Acknowledgment ofAssignment of Air Time Purchase Agreement entered into on December 29, 1998, byand among PLDT, P.T. Bank Internasional Indonesia and ACeS InternationalLimited, PLDT consented to the assignment by ACeS International Limited of theFounder NSP Air Time Purchase Agreement to P.T. Bank Internasional Indonesia assecurity agent for the benefit of the secured parties under the SecurityAgreement dated as of December 29, 1998 which was executed in connection withthe Amended and Restated Credit Agreement dated December 29, 1998 among PT AsiaCellular Satellite, ACeS International Limited, P.T. Bank InternasionalIndonesia and various banks.     In March 2003, PLDT, together withthe founder shareholders, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original ATPA.  In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of approximately US$4 million.  PLDT is also obliged to purchase fromAIL 13,750 satellite fixed phone units for the year 2003 at US$395 F.O.B perunit, subject to quarterly price adjustment. The parties to the Standstill Agreementalso agreed to negotiate in good faith and use their best efforts to reach anagreement on a revised ATPA before November 15, 2003 that will cover, amongother matters, the amended minimum and supplemental air time payment provisionssubject to the approval of AIL’s creditors.  * *  *Transponder Lease fromMabuhay Satellite to PLDT*     On December28, 1995, PLDT and Mabuhay Satellite entered into a Transponder LeaseAgreement, as amended on May 10, 2000, pursuant to which Mabuhay Satelliteleases to PLDT C-band transponders on board the Agila II satellite, inconsideration of a basic rent.  This agreement has a term of ten yearscommencing on December 18, 1997, unless earlier terminated in accordance withthe terms thereof.  Originally, the lease covered 14 C-band transponders;however, on December 18, 2000, PLDT terminated the Transponder Lease Agreementwith respect to four transponders which service was interrupted and notrestored resulting in PLDT's inability to access and use the transponders.This was further reduced to 8 C-band transponders on December 18, 2002.  Theannual basic rent for the transponders is approximately US$14 million withUS$1.8 million annual lease per transponder.     Under an Acknowledgment and ConsentAgreement dated January 4, 1996, PLDT acknowledged and consented to MabuhaySatellite's:                                                           - transfer and assignment of all amounts payable by PLDT under theTransponder Lease Agreement; and                                                             - grant of a continuing security interest of first priority in allof Mabuhay Satellite's rights, title and interest in, to and under theTransponder Lease Agreement, in favor of the collateral agent for the benefitof the lenders who are parties to the Omnibus Credit and Security Agreementdated December 14, 1995.  * *  *Facilities ManagementAgreement and Service Agreement between Smart and ACeS Philippines*     Smart and ACeS Philippines areparties to a facilities management agreement and an administrative support andmanagement services agreement, both dated February 16, 2001.      Under the facilities managementagreement, Smart manages, maintains and operates the ACeS Global MobilePersonal Communications by Satellite (GMPCS).  Under the administrative supportand management services agreement, Smart provides administrative support andservices in certain aspects of ACeS Philippines’s business operations such aspayroll administration and training, finance, legal, audit, purchasing andmaterials management, public affairs, information technology, and sales andmarketing. In exchange for the foregoing services, Smart is compensated withfixed and variable monthly fees by ACeS Philippines.     Smart and ACeS Philippines are alsoparties to a service distribution agreement, dated July 18, 2000 and amended onFebruary 16, 2001, whereby Smart has been designated to be the authorizedservice provider of ACeS Philippines GMPCS. Under the amended agreement, Smartis required to remit to ACeS Philippines a facility usage fee based on arevenue-sharing formula while ACeS Philippines is required to pay Smart’scharges for the payphone-related services.     *Agreements between Smart and Asia Link B.V*. *, or ALBV*  Smart and ALBV are parties to agreements under whichAsia Link undertakes to provide technical support services for the operationsand maintenance of Smart’s CMTS for a period of five years, subject to renewalupon mutual agreement between the parties. Asia Link is a subsidiary of FirstPacific.  *Agreement with Foote, Cone & Belding Worldwide, orFCB Worldwide*  Under this agreement FCB Worldwide providesconsultancy and advisory services to PLDT.  The chairman of PLDT’s board ofdirectors is the non-executive chairman of FCB Worldwide’s representativeoffice in the Philippines.  *Agreements relating to insurance companies*  Gotuaco del Rosario and Associates, or Gotuaco, actsas the broker for certain insurance companies to cover certain insurableproperties of the PLDT Group.  Insurance premiums are remitted to Gotuaco andthe broker’s fees are settled between Gotuaco and the insurance companies.  Inaddition, PLDT has signed an insurance policy with Malayan Insurance Co. Inc.,or Malayan; wherein premiums are paid directly to Malayan.  Total payments toGotuaco and Malayan covering the twelve-month period ending July 31, 2003amounted Php307 million.  Two directors of PLDT have a direct/indirect interestin or serve as directors/officers of Gotuaco and Malayan.     *Other Transactions*     PLDT, Smart, Piltel, Clark Telecom,Subic Telecom and MaraTel are parties to various interconnection agreementswith each other.  The terms of these agreements are similar to the terms ofother interconnection agreements with telecommunications providers that are notaffiliated with PLDT.       On May 11, 2000, PLDT acquired fromPiltel 600,000 shares of common stock of Mabuhay Satellite for Php60 million.On the same date, Piltel assigned to PLDT Piltel's right to subscribe for617,028 shares of common stock of Mabuhay Satellite for which Piltel had paidPhp54 million.  In exchange, PLDT paid Php54 million to Piltel and assumed theobligation to pay Mabuhay Satellite the unpaid balance of the subscriptionprice amounting to Php8 million.     On August 14, 2000, PLDT acquiredfrom Smart 632,076 shares of common stock of Smart-NTT Multimedia for a totalconsideration of Php63 million.     On December 9, 2002, PLDT transferred and conveyed to Smartcertain inland and submarine domestic fiber optic cable loops, digitaltransmission equipment and corresponding network management systems with anaggregate net book value of Php4,138 million, as consideration and in exchangefor 298 million preferred shares of Smart subscribed by PLDT at Php13.875 pershare, or a total subscription price of Php4,138 million.     The above related partytransactions are discussed further in Note 18 to our financial statements inItem 18.     Item 10.   Financial Information  ** **  Consolidated Statementsand Other Financial Information     Consolidated financial statementsare set forth under “Item 18. Financial Statements.”     Legal Proceedings     Except as disclosed in thefollowing paragraphs, PLDT is not a party to, and none of its property issubject to, any pending legal proceedings which PLDT considers to bepotentially material to its business.     *Quo Warranto Action*  * *  On June 4, 1990, the SolicitorGeneral of the Philippines instituted legal proceedings in the Regional TrialCourt of Makati City seeking to “oust Philippine Long Distance TelephoneCompany (PLDT) from exercising its franchise and/or to revoke, cancel and/orpre-terminate its franchise (Act No. 3436, as amended) and/or to break up anunlawful monopoly and give equal and fair opportunity to other servicecorporations.” The Solicitor General cited constitutional and statutory groundsfor his action.  These include alleged foreign investors' participation in thecontrol and management of PLDT on a basis disproportionate to their holdings ofPLDT's capital stock, violation of the requirement that 60% of the capital of apublic utility be owned by Philippine citizens, inadequate and costly equipmentand service, and blocking of the right of other parties to provide telephoneservice in the Philippines.     We believe that these allegationsare without merit.  The Philippine Congress granted PLDT's amended franchiseunder Republic Act No. 7082 notwithstanding the existence of these proceedingsand the opposition of the Solicitor General.  The case has been archived byvirtue of a court order dated January 20, 1999.  No further action has beentaken and the case remains inactive.  For additional information regarding thiscase, see “Item 3. Key Information — Risk Factors — Risks Relating to Us —PLDT's franchise may be revoked if we are unsuccessful in legal proceedings,which are pending."     *NTC Fees*  * *  Since 1994, following the NTC'srejection of PLDT's formal protest against the assessments by the NTC ofpermit, supervision and regulation fees, PLDT and the NTC have been involved inlegal proceedings before the Court of Appeals and the Supreme Court.  The basisof these legal proceedings is the NTC's inclusion of stock dividends andcapital in excess of the par value of stock in computing these fees, and theNTC's assessment of administrative fees for the increase in PLDT's authorizedcapital stock even in the absence of NTC's performance of regulatory services.As of December 31, 2002, PLDT has paid under protest Php1,094 million insupervision and regulation fees and Php103 million in permit fees.     The Court of Appeals held that theannual supervision and regulation fees should be assessed and collected only onthe basis of the par value of PLDT's outstanding capital stock exclusive ofcapital in excess of par.  On appeal filed by the NTC, the Supreme Court, inits decision dated July 28, 1999, ordered the NTC to recompute the fees to beimposed on PLDT on the basis of PLDT's capital stock subscribed or paid, whichwas defined as the “total amount of the capital that persons have agreed totake and pay for.”  However, the subsequent assessment issued by the NTC foroutstanding supervision and regulation fees also included the amount of stockdividends in the basis of calculation, which PLDT believes is contrary to thedispositive portion of the Supreme Court decision.  In view of this, and NTC'sfailure to resolve PLDT's protest, PLDT filed with the Court of Appeals aPetition for Certiorari and Prohibition with an Application for a TemporaryRestraining Order/Writ of Preliminary Injunction to invalidate and permanentlyenjoin the enforcement of the NTC assessment.  Initially, the Court of Appealsissued a temporary restraining order.  Thereafter, on December 4, 2000, the Courtof Appeals issued a writ of preliminary injunction enjoining the implementationof the NTC's assessment.  On February 12, 2001, the Court of Appeals dismissedPLDT's petition.  PLDT filed a Motion for Reconsideration of this dismissal.Because the statutory deadline for the payment of the supervision andregulation fees is September 30 of each year, PLDT filed with the Court ofAppeals an Urgent Motion for Re-Issuance of Restraining/Injunctive Writ, whichwas granted on September 26, 2001, to be effective until the Motion forReconsideration is resolved.  On March 21, 2002, the Court of Appeals deniedPLDT's Motion for Reconsideration and dissolved the restraining/injunctivewrit.  On May 17, 2002, PLDT filed with the Supreme Court a Petition for Reviewon Certiorari of the decision of the Court of Appeals dated February 12, 2001.On September 5, 2002, PLDT filed an Urgent Motion for the issuance of atemporary restraining order to enjoin the NTC from enforcing any assessment forsupervision and regulation fees on PLDT until the Supreme Court has resolvedPLDT’s petition on its full merit.  Considering that the Supreme Court had notdecided on PLDT’s aforementioned Motion as of September 30, 2002, PLDT paid tothe NTC on said date supervision and regulation fees for the years 2000 and2002 calculated on the basis of paid-up capital including premium but excludingdividends.   * *  *Victor C. Fernandez*  * *  On December 9, 1999, a holder ofpreferred shares of stock of PLDT, Victor C. Fernandez, filed a petition againstthe incumbent directors of PLDT questioning the validity of the resolutions ofthe board of directors of PLDT then authorizing the acquisition of Smart.Fernandez claimed that he would suffer injury from dilution of his shares andthe possible revocation of PLDT's franchise in view of the violation of thePhilippine Constitution's foreign equity restrictions if these resolutions wereimplemented.  Fernandez also claimed that the approval rights to be granted toNTT Communications in connection with the Smart acquisition would constituteforeign intervention in the management and operation of public utility and thatthe Smart shares being acquired by PLDT were overvalued.  The respondentdirectors denied all these claims and have articulated their legal arguments intheir answer to the complaint.     Fernandez's application for arestraining order to enjoin the holding of the PLDT stockholders' meeting onDecember 10, 1999 was denied by the Philippine SEC.  At this meeting, thestockholders approved the resolutions passed by the board of directorsauthorizing the acquisition of Smart.  On June 20, 2000, Fernandez'sapplication for a writ of preliminary injunction was denied.     In view of the provisions of Republic Act No. 8799enacted in July 2000, referred to as the Securities Regulations Code,transferring the jurisdiction of intra-corporate controversies to the RegionalTrial Court, the Philippine SEC transferred the case to the Regional TrialCourt of Manila.  By a motion filed by the parties, the case was later orderedtransferred to the proper venue, the Regional Trial Court of Makati City andwas raffled to Branch 142 of the Regional Trial Court of Makati City (the“Makati Court”).     During the pre-trial hearing, the parties agreed tolimit the resolution of the case to merely issues of law except for the issueon respondent directors’ counterclaims.      The transactions subject of the suit (“QuestionedTransactions”) were limited to PLDT’s acquisition of Smart and NTT’s entry intoPLDT and the issues to be resolved were limited to whether   (a) the remainingQuestioned Transactions violate the constitutional limitations on foreignequity in public utilities, The Foreign Investments Act and the Anti-Dummy Law;(b) the Questioned Transactions result in a monopoly; and (c) Fernandez isentitled to annul the Questioned Transactions.      The Makati Courtin its decision dated February 21, 2002 (the “Decision”) held that theQuestioned Transactions “resulting from resolutions which have been approved byPLDT’s stockholders and government regulatory agencies, such as the NTC and thePhilippine SEC, are valid and legal” and thus dismissed the petition ofFernandez. On April 14, 2003, Fernandez filed with the Supreme Court a Petitionfor Review on Certiorari seeking a review of the Decision (the “Petition”).  OnMay 22, 2003, Fernandez filed a Motion to refer the Petition to the SupremeCourt en banc.  On the other hand, the hearing on the counterclaims of therespondent directors was reset to May 9, 2003.  However, On       April 29,2003, Fernandez filed a Motion for the Suspension of the Proceedings pendingresolution by the Supreme Court of the Petition.  On May 26, 2003, therespondent directors filed their Comment praying for the denial of the saidMotion.     *Taxation*     *National Internal Revenue Taxes*     PLDT has filedvarious cases against the Commissioner of the Bureau of Internal Revenue forrefunds and/or tax credit of:                                                               - erroneously paid value added taxes, compensating taxes, advancesales taxes and other internal revenue taxes on PLDT's importation of variousequipment, machinery, and spare parts;                                                                 - erroneously paid withholding tax on separation pay of employeeswho availed of the benefits under the Manpower Reduction Program; and                                                                   - overpaid value added taxes, which were paid based on grossbillings, not on gross receipts.     The first two cases are pendingwith the Supreme Court and the Court of Appeals, respectively.  With respect tothe third case, the Court of Tax Appeals issued a decision on July 18, 2002partially granting the claim for refund.  The Commissioner of Internal Revenuefiled a Motion for Partial Reconsideration, which was denied by the Court ofTax Appeals in its Resolution dated September 20, 2002.  On October 8, 2002,the Commissioner of Internal Revenue filed for a Motion for Extension of timeto file Petition for Review with the Court of Appeals.  However, despite thelapse of the extended period, the Commissioner of Internal Revenue failed tofile the Petition for Review.  Hence, the Court of Appeals issued a Resolutionon March 27, 2003 dismissing the petition.  On March 28, 2003, the Court ofAppeals issued a Resolution ordering the issuance of the Entry of Judgment andWrit of Execution.     *Local Business and FranchiseTaxes*  * *  PLDT currently faces various suits for local businessand franchise taxes assessed by different local government units.  PLDTbelieves that under prevailing Philippine laws, it is exempt from the paymentof local business and franchise taxes to local government units and it is contestingthe assessment of these taxes in all these cases.       In a case entitled PLDT vs. the City of Davao, onAugust 22, 2001, the Supreme Court denied PLDT’s Petition for Review onCertiorari and affirmed the decision of the Davao City Regional Trial Court upholdingthe assessment of local franchise tax in the amount of Php3.7 million for theyear 1999 and denying PLDT’s claim for a refund of erroneously paid franchisetax for the year 1997 and the first to the third quarters of 1998.  The SupremeCourt held that although the withdrawal of tax exemptions under the LocalGovernment Code does not preclude Congress from granting subsequent exemptions,the issue is whether, after the withdrawal of PLDT’s exemption under the LocalGovernment Code, PLDT again became entitled to the exemption by virtue ofSection 23 of Republic Act No. 7925.  The Supreme Court ruled that PLDT is notentitled to this exemption, and cited rules in statutory construction holdingthat tax exemptions are highly disfavored, and that legislative intent must beascertained from a consideration of the statute as a whole and not merely of aparticular provision.  The decision stated that the term “exemption” in Section23 is too general and it does not appear that, in approving Section 23 of RepublicAct No. 7925, Congress intended it to operate as a blanket tax exemption to alltelecommunication entities.  As such, the Supreme Court held that Section 23 ofthe Republic Act No. 7925 cannot be considered as having amended PLDT’sfranchise so as to entitle it to exemption from local franchise tax.  OnOctober 1, 2001, PLDT filed a Motion for Reconsideration of the Supreme Courtdecision and a Motion to Refer the case to the Court En Banc and for OralArguments.  The Supreme Court’s Second Division granted the Motion to Refer theCase to the Court En Banc, which referral was thereafter accepted by theSupreme Court En Banc.  The Oral Arguments were held on January 21, 2003 andboth parties submitted their Memorandum whereupon the Motion for Reconsiderationwas deemed submitted for resolution.  On March 25, 2003, the Supreme Courtdecided by a 9-to-5 vote to deny PLDT’s Motion for Reconsideration and affirmedthe franchise tax assessment of Davao City in the amount of Php3.7 million.PLDT believes that although such a decision would constitute a precedent, thiswill not automatically result in the termination of the other pending localfranchise tax cases with the courts rendering a decision adverse to us and PLDTwill pursue all legal remedies with regard to all pending cases.     On August 8, 2001, PLDT received a decision, datedJuly 16, 2001, on its petition filed with a Regional Trial Court of the City ofMakati appealing the denial of PLDT’s protest of the assessments for localfranchise taxes in the aggregate amount of Php594.7 million for the years 1992to 1994 and Php1,100 million for the last three quarters of 1995 up to 1998.This decision ordered PLDT to:                                                                     - submit its audited financialstatements showing its gross receipts for the period from October to December31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998, so that the City of Makati canmake the proper assessment of the tax due;                                                                       - pay the City of Makati the sumequivalent to 0.5% of the total gross receipts realized during the periodOctober 1 to December 31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998 afterdetermination of PLDT’s annual gross receipts for the subject years; and                                                                         - henceforth pay its franchise andbusiness taxes pursuant to Section 137 of Republic Act 7160.     PLDT filed an appeal with the Supreme Court onSeptember 20, 2001.  In its appeal, PLDT  argued, among other things,that:                                                                           - The right of the City of Makati toassess PLDT for any alleged deficiency in franchise tax for the years 1992 to1994 in the approximate amount of Php594.7 million has lapsed because the LocalGovernment Code provides for a period of five years within which an assessmentcan be made by the local government unit and the City of Makati assessed thesealleged taxes against PLDT only on May 24, 1999;                                                                             - PLDT is exempt from localfranchise and business taxes by virtue of the equality of treatment clauseunder the Public Telecommunications Policy Act as confirmed by the Departmentof Finance through the Bureau of Local Government Finance and is not thereforeliable to pay the City of Makati deficiency tax for the years 1995 to 1998 inthe amount approximately Php1,100 million; and                                                                               - Assuming (without admitting) thatPLDT is liable to pay the franchise tax, the approximate Php1,684 million totalassessment is erroneous as it was based on PLDT’s total annual gross receiptsderived from its overall business operations, while the Local Government Codeprovides that the franchise tax which can be imposed by the local governmentunit shall be based on the annual gross receipts derived from within the taxinglocal government unit territory or, in this case, from the operations of PLDTwithin the City of Makati only.     In a resolution datedOctober 22, 2001, the Supreme Court remanded the case to the Court of Appeals.As required by the Court of Appeals, the City of Makati has filed its Commentand PLDT has filed its Reply to the Comment.  On August 21, 2002, the Court ofAppeals suspended further proceedings in the case until the Supreme Courtresolved the similar issues raised in the City of Davao case discussed above.     PLDT is also protestingthe assessment by the City of Makati of a franchise tax deficiency for 1999 inthe amount of Php298 million.  On February 26, 2001, PLDT filed a petition inthe Regional Trial Court of Makati City to compel the Office of the Makati CityTreasurer and the Makati City Law Department to act on PLDT’s protest of theassessed franchise tax deficiency for 1999.  This case has been suspendedpending review by the Court of Appeals of the decision of the Makati CityRegional Trial Court in the action in respect of the 1992 to 1998 assessmentsdescribed above or until further notice.     On December 7, 2001,another case was filed by PLDT against the City of Makati protesting theassessment of local franchise and business taxes for the year 2000 in theamount of Php307 million. The pre-trial, originally scheduled on May 19, 2003,was postponed until August 18, 2003.     On April 16, 2002,another case was filed by PLDT against the City of Manila protesting theassessment of local franchise and business taxes in the amount of Php2,228.4million for the period covering 1997, 1998, 1999, 2000 and 2001, inclusive ofpenalties and interests.  PLDT filed a motion to suspend proceedings on March10, 2003 pending the resolution by the Supreme Court of the City of Davao casediscussed below.  The City of Manila submitted its comments and oppositions onPLDT’s motion to suspend the proceedings on March 21, 2003 and the motion isnow deemed submitted for resolution.     PLDT has filed othercases pertaining to the assessments made by other local government units,however, these cases involve amounts significantly lower than the assessmentsin the cases against the City of Makati and the City of Manila.  Some of thesecases are pending decision by the respective regional trial courts.  In each ofthe other cases in which an unfavorable decision has been rendered by the lowercourts against PLDT, PLDT has filed a Petition for Review with the SupremeCourt.     PLDT is also a respondentin a case filed by the Province of Pangasinan with the Court of Appeals.  OnSeptember 12, 2001, the Court of Appeals reversed the decision of the RegionalTrial Court of Lingayen, Pangasinan and held that PLDT is exempt from thepayment of the local franchise and business taxes.  The Court of Appeals deniedthe Motion for Extension of Time to file a Motion for Reconsideration of thedecision of the Regional Trial Court filed by the Province of Pangasinan andalso denied the Motion for Reconsideration of the Court of Appeals’ denial ofthe Motion for Extension of Time.  On April 26, 2002, the Province ofPangasinan filed a Petition for Certiorari seeking to, among other things, setaside the decision of the Court of Appeals in respect of the Motion forExtension of Time to file a Motion for Reconsideration and affirm the decisionof the Regional Trial Court of Lingayen.  On May 29, 2002, the Supreme Courtdenied this petition on the ground that “the petition is evidently used as asubstitute for the lost remedy of appeal” and the Province of Pangasinan fileda Motion for Reconsideration.  The Motion for Reconsideration of the SupremeCourt resolution filed by the Province of Pangasinan was denied with finalityon June 26, 2002.     Similarly, in a case filedby PLDT against the City of Cebu, the Regional Trial Court declared PLDT exemptfrom payment of local franchise tax and granted PLDT’s claim for refund.  Thisdecision became final on July 6, 2001; however, the City of Cebu filed aPetition for Relief of Judgment with a prayer for preliminary injunction,citing the Supreme Court’s decision in the Davao case.     In addition, we havereceived assessments for local business and franchise taxes in the aggregateamount of Php24.4 million, all of which are under administrative protest.      As of March 31, 2003,the aggregate amount claimed by the plaintiffs in these lawsuits was Php4,524million with respect to PLDT and Php313 million with respect to Smart.  Webelieve that in the event these lawsuits are decided against us, our potentialliability is likely to be significantly lower than the amounts claimed by theplaintiffs.     *Mabuhay Satellite Arbitration*  * *  Mabuhay Satellite was engaged in anarbitration commenced by Space Systems Loral, Inc., or SS/L, as a result of adispute between the parties concerning a joint venture between them.  On June5, 2002, Mabuhay Satellite received an arbitration decision requiring MabuhaySatellite to pay SS/L approximately US$10 million, plus accrued interestrepresenting Mabuhay Satellite’s unpaid balance for the 65% equity share in thejoint venture.  As of December 31, 2002, this amount totaled approximatelyUS$15 million (including accrued interest) and had been substantially accruedand recorded in the books of Mabuhay Satellite.  Mabuhay Satellite and SS/L arecurrently negotiating to settle the obligation through an asset-debt swap.     *Piltel*     In 1999 and 2001, the PhilippineSEC investigated Piltel for alleged failure to fully and fairly disclosePiltel's financial condition and the status of its debt obligations.  To theknowledge of PLDT, these investigations did not result in an adverse findingagainst Piltel or PLDT.  However, the Philippine SEC imposed a fine on Piltelfor late filing of the disclosure to the Philippine SEC of the default on thepayment of Piltel's debts.     On March 7, 2002, a Piltelshareholder notified Piltel that it has reasonable grounds to believe thatPiltel misrepresented or failed to disclose various liabilities in variousaudited financial statements.  Although no claim has been filed against Piltel,we cannot assure you that a claim on this or other bases will not be filed inthe future.     U.S. FCC Proceeding onTermination Rates  In May 2002, PLDT advised AT&T, MCI andother carriers of PLDT’s desire to increase its termination rates by August2002. Despite numerous negotiation sessions in 2002 and 2003, AT&T and MCIrefused to accept any rate increases.  PLDT unilaterally extended its priortermination charges to AT&T and MCI while continuing to seek to negotiate,first from August 1, 2002 to October 1, 2002, then until December 31, 2002, andthen, finally, despite the lack of a written agreement from AT&T and MCI,through January 31, 2003.  While nearly 100 carriers worldwide, including more than 20 U.S.carriers, have to date****agreedto the new termination rates and entered into new termination rate agreementswith PLDT, the written****termination rate agreements withAT&T and MCI lapsed in December 2002, without either agreeing with PLDT onany provisional arrangement or final agreement on the new termination rates**.**Faced with continuingstonewalling by AT&T and MCI, PLDT, in December 2002, was forced to notifyeach company that PLDT’s termination rates would finally be increased as ofFebruary 1, 2003.  Because no agreement was reached with either AT&T orMCI, effective as of February 1, 2003, PLDT stopped terminating traffic sentdirectly by each of AT&T and MCI.  On February 7, 2003, AT&Tand MCI filed separate petitions with the U.S. FCC requesting the U.S. FCC totake action to protect U.S. international carriers and U.S. consumers fromalleged “whipsawing” behavior occurring on the U.S.-Philippine Route.“Whipsawing” is a form of anti-competitive behavior that involves the abilityof foreign carriers to obtain unduly favorable terms and conditions from U.S.international service providers by setting competing U.S. carriers against oneanother.  On February 7, 2003, the NTCdirected Philippine carriers to take one of two different courses of action,depending on whether such carriers had effective termination rates with theircounterparties.  If PLDT had “existing and effective agreements with foreigntelecommunication carriers relative to termination rates”, it should “complywith the terms thereof, specifically in maintaining the flow of traffic in andbetween circuits and facilities covered by such agreements.”  If, however, thecounterparty and PLDT were “without existing and effective agreements relativeto termination rates,” then PLDT is “encouraged to negotiate and concludeagreements” with the counterparty, and “the parties may agree onprovisional/interim arrangements for continuity of service.”  Each of AT&Tand MCI immediately rejected PLDT’s offer for an interim termination rateagreement.  On February 26, 2003, the NTC issued an Order confirmingthat, pursuant to its February 7 Order, “it is understood that absent anyprovisional or interim arrangement or agreement” with U.S. carriers, therewould be no provision of termination services between the parties “who arethereby encouraged to seek other routes or options to terminate traffic to thePhilippines.”     On February 28, 2003, PLDT and MCI reached an “interimagreement” effective through March 31, 2003, whereby PLDT agreed to providedirect service under a revised termination rate structure while the partiesnegotiated a final termination rate agreement.  This interim agreement expiredon April 15, 2003.     On March 10, 2003, theInternational Bureau of the U.S. FCC granted the request of AT&T and MCIand issued an Order directing all facilities-based carriers subject to U.S. FCCjurisdiction to suspend payments for termination services to PLDT, GlobeTelecom, Inc., Bayan Telecommunications Philippines, Inc., DigitalTelecommunications Philippines, Inc., Smart and Subic Telecom until such timeas the U.S. FCC issues a Public Notice that AT&T’s circuits on theU.S.-Philippine route are fully restored.  The Order also removed thePhilippines from the list of U.S.-international routes approved for theprovision of International Simple Resale.  As of March 31, 2003, receivablesfrom U.S. carriers amounted to approximately US$19 million, of which US$8million was attributable to PLDT, US$8 million to Smart and US$3 million toSubic Telecom.  In response to the ruling ofthe International Bureau of the U.S. FCC, the NTC issued a Memorandum Orderdated March 12, 2003 directing all affected Philippine carriers “(1) not toaccept terminating traffic via direct circuits from U.S. facilities-basedcarriers who do not pay Philippine carriers for services rendered; and (2) totake all measures necessary to collect payments for services rendered in orderto preserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”  The NTC also stated in itsMarch 12, 2003 Order that the termination rates offered by PLDT are “fair andreasonable.”  These rates, US$0.12 per minute for calls terminating on thefixed-line network and US$0.16 per minute for calls terminating on mobilenetworks, are well below the U.S. FCC benchmark settlement rate of US$0.19 perminute for lower middle incomecountries such as the Philippines and also substantially below the settlementrate of US$0.238 per minute suggested by the International TelecommunicationUnion for countries with teledensity between 1 to 5 telephones per 100population.    On April 9, 2003, we filed withthe U.S. FCC an application for review of the International Bureau’s March 10,2003 Order.  Please see “Item 3. Key Information — Risk Factors — RisksRelating to Us— Theoutcome of the proceeding at the U.S. FCC is uncertain and could materiallyaffect our ability to engage in business in the United States and our resultsof operations.     Dividend DistributionPolicy     The mostrecent dividend declaration made by PLDT in respect of its common shares was inMarch 2001.  It continues to pay dividends in respect of its preferred shares.The current policy of PLDT is to well determine its ability to declare and paydividends, regularly taking into consideration the interests of itsshareholders as well as PLDT’s working capital, capital expenditure and debtservice requirements.  Also taken into account are the prohibitions andrestrictions under certain of our debt instruments with respect to thedeclaration and payment of dividends as discussed in “Item 5. Operating andFinancial Review and Prospects — Liquidity and Capital Resources — FinancingActivities — Debt Financing — Covenants”, “Item 10. Additional Information —Articles of Incorporation and By-Laws — Dividends” and in Notes 14 and 17 toour financial statements in Item 18.  The retention of earnings is necessary tomeet the funding requirements of our business expansion, service improvement anddevelopment programs.  The balance of PLDT’s unappropriated retained earningsincludes accumulated equity in the net earnings of investees, which are notavailable for distribution as dividends until declared by the investees (seeNote 17 to our financial statements in Item 18).  Except for dividends onPLDT's Series III and Series VI Convertible Preferred Stock, which are payablein U.S. dollars and PLDT's Series VII Convertible Preferred Stock, which arepayable in Japanese yen, dividends are generally paid in Philippine pesos.  Inthe case of shareholders residing outside the Philippines, PLDT's transferagent in Manila, which acts as the dividend disbursing agent, converts the pesodividends into U.S. dollars at the prevailing exchange rates, and remits thedollar proceeds abroad, net of withholding tax.     Item 11.   The Offer and Listing  ** **  Common Capital Stock andAmerican Depositary Receipts (“ADRs”)     The common shares of PLDT arelisted and traded on the Philippine Stock Exchange, and, prior to October 19,1994, were listed and traded on the American Stock Exchange and PacificExchange in the United States.  On October 19, 1994, an ADR facility wasestablished, pursuant to which Citibank, N.A., as the Depositary, issued ADRsevidencing ADSs, with each ADS representing one common share each with a parvalue of Php5.  Effective February 10, 2003, PLDT appointed JPMorgan Chase Bankas successor depositary of PLDT’s ADRs. The facility was established inaccordance with a Common Stock Deposit Agreement dated October 19, 1994, asamended on February 10, 2003, between the Depositary and the holders of ADRs.The ADSs have been listed and are traded on the New York Stock Exchange and thePacific Exchange in the United States under the symbol “PHI”.     In 2002, a total of 35.4 millionshares of PLDT's common capital stock were traded on the Philippine StockExchange.  During the same year, the volume of trading was 30.4 million ADSs onthe New York Stock Exchange but none on the Pacific Exchange.     As of December 31, 2002, approximately99% of PLDT’s Common Capital Stock was held of record in the Philippines by14,561 holders and approximately 1% was held of record in the United States,Canada and other countries by 1,391 holders.  In addition, as of December 31,2002, there was a total of 30.4 million ADSs outstanding, substantially all ofwhich PLDT believes were held in the United States by 481 holders.     High and lowsales prices for PLDT's common shares on the Philippine Stock Exchange, or PSE,and ADSs on the New York Stock Exchange, or NYSE, for each of the five mostrecent fiscal years, each full quarterly period during the two most recentyears, and each month in the most recent six months were as follows:     
 

**PSE**

**NYSE(1)**

 

**High**

**Low**

**High**

**Low**

1998

Php1,130.00

Php690.00

US$28

7/8

US$15

5/16

1999

1,290.00

770.00

33

1/2

18

9/16

2000

1,100.00

660.00

28

1/4

14

7/8

2001

1,060.00

332.50

20.75

 

6.55

 

First Quarter

1,060.00

695.00

20.75

 

14.19

 

Second Quarter

745.00

610.00

14.60

 

12.07

 

Third Quarter

735.00

475.00

14.15

 

9.30

 

Fourth Quarter

475.00

332.50

9.40

 

6.55

 

2002

565.00

209.00

11.30

 

3.85

 

First Quarter

550.00

407.50

10.72

 

7.91

 

Second Quarter

565.00

367.50

11.30

 

7.32

 

Third Quarter

380.00

277.50

7.55

 

5.16

 

Fourth Quarter

292.50

209.00

5.53

 

3.85

 

2003

565.00

265.00

10.77

 

4.85

 

First Quarter

337.50

265.00

6.18

 

4.85

 

January

337.50

265.00

6.18

 

4.85

 

February

312.50

277.50

5.60

 

5.12

 

March

315.00

285.00

5.81

 

5.11

 

Second Quarter

565.00

312.50

10.77

 

5.80

 

April

400.00

312.50

7.62

 

5.80

 

May

432.50

385.00

8.28

 

7.10

 

June

565.00

437.50

10.77

 

8.43

 
  _____________     *(1)**Effective January 29, 2001, PLDTconverted from fractional to the decimal system of pricing in compliance withthe new trading standard required by the U.S. SEC.*     Series III ConvertiblePreferred Stock and Global Depositary Receipts (“GDRs”)     On November 29, 1994 and onDecember 12, 1994, PLDT issued an aggregate of approximately 5 million sharesof Series III Convertible Preferred Stock, each with a par value of Php10.  Inconnection therewith, a Global Depositary Receipt facility was established,pursuant to which Citibank N.A., as Depositary, issued GDRs evidencing GlobalDepositary Shares, or GDS, with each GDS representing one share of Series IIIConvertible Preferred Stock.  The stock is convertible into common stock at theoption of the holder at any time, at the conversion price of US$29.19 a shareof Common Capital Stock (equivalent to a conversion ratio of 1.7129 of a shareof Common Capital Stock for each share of Series III Convertible PreferredStock, each share of convertible preferred stock being valued for this purposeat its reference amount of US$50 a share), subject to adjustment in certainevents.  Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank assuccessor Depositary of PLDT’s GDRs. The facility was established in accordancewith a Preferred Stock Deposit Agreement dated November 29, 1994, as amended onSeptember 6, 1999 and on February 10, 2003, between the Depositary and theholders of GDRs.  The GDSs have been listed and are traded on the New YorkStock Exchange under the symbol “PHI Pra.”     High and lowsales prices for the Series III Convertible Preferred Stock and the GDSs foreach of the five most recent fiscal years, each full quarterly period during thetwo most recent years, and each month in the most recent six months were asfollows:     
 

**NYSE(1)**

 

**High**

 

**Low**

 

 

 

 

 

 

1998 

52

1/2

 

35

1/4

1999 

57

1/2

 

38

7/16

2000 

50

1/2

 

31

1/4

2001(1)

39.875

 

 

16.00

 

First Quarter 

39.875

 

 

32.25

 

Second Quarter 

32.500

 

 

29.20

 

Third Quarter 

31.200

 

 

24.00

 

Fourth Quarter 

24.400

 

 

16.00

 

2002 

26.000

 

 

13.00

 

First Quarter 

26.000

 

 

18.00

 

Second Quarter 

25.900

 

 

20.10

 

Third Quarter 

20.200

 

 

15.93

 

Fourth Quarter 

22.750

 

 

13.00

 

2003 

32.900

 

 

20.50

 

First Quarter 

25.750

 

 

20.50

 

January

23.100

 

 

20.50

 

February

24.200

 

 

21.50

 

March

25.750

 

 

23.00

 

Second Quarter

37.750

 

 

25.75

 

April

29.150

 

 

25.75

 

May

32.630

 

 

28.30

 

June

37.750

 

 

32.80

 
  _____________     *(1)   Effective January 29, 2001, PLDT convertedfrom fractional to the decimal system of pricing in compliance with the newtrading standard required by the U.S. SEC.*     As of December 31, 2002, there wereapproximately 4.6 million GDSs outstanding, which PLDT believes weresubstantially held in the United States.     Item 12.   Additional Information  ** **  Articles ofIncorporation and By-Laws     The following summarizes certainprovisions of PLDT's Articles of Incorporation and By-Laws and applicablePhilippine law.  This summary is qualified in its entirety by reference to theCorporation Code of the Philippines (the “Corporation Code”) and PLDT'sArticles of Incorporation and By-Laws.  Information on where investors canobtain copies of the Articles of Association and By-Laws is described under theheading “Documents Available.”     *Purpose of PLDT*     PLDT's Articles of Incorporationhave been filed with the Philippine SEC and PLDT has been issued SEC Reg. No.55.  The Second Article of PLDT's Articles of Incorporation provides that thepurposes for which PLDT was formed are to install, maintain, and operate anyand all kinds of equipment for communications; to install, maintain, operate orlease telephone lines and systems, and to purchase, sell and deal in all kindsof products which may be combined with the building, installing and operationof those systems and lines and in general, to engage in any and all acts andbusiness which may be necessary or convenient, in the furtherance of such linesof communication and business.     *Directors*     PLDT's Amended By-Laws provide thatthe Board of Directors shall consist of thirteen members, each of whom musthold at least one share of stock of PLDT in his own name and possess theminimum qualifications and have none of the qualifications provided in theBy-Laws.  There are no provisions in PLDT's Amended Articles of Incorporationor Amended By-laws with respect to (a) a director's power to vote on aproposal, arrangement or contract in which the director is materiallyinterested; (b) the directors' power, in the absence of an independent quorum,to vote compensation to themselves or any members of their body; (c) borrowingpowers exercisable by the directors and how such borrowing powers can bevaried; or (d) retirement or non-retirement of directors under an age limitrequirement.     *Description of PLDTCapital Stock*  * *  *Authorized Capital Stock*     Theauthorized capital stock of PLDT is Php9,395 million divided into two classesconsisting of 234 million shares of Common Capital Stock with a par value ofPhp5 per share (the “Common Stock”) and 822.5 million shares of serialPreferred Stock with a par value of Php10 per share (the “PLDT PreferredStock”).     *PLDT Common Stock*     Set out below is a statement of thedividend, voting, pre-emption and other rights of the holders of Common Stock asset out in the Articles of Incorporation and/or By-Laws of PLDT:     (a)    After therequirements with respect to preferential dividends on the serial PreferredStock shall have been met and after PLDT shall have complied with all therequirements, if any, with respect to the setting aside of sums as purchase,retirement or sinking funds, the holders of the Common Stock shall be entitledto receive such dividends as may be declared from time to time by the Board ofDirectors out of funds legally available therefor.     (b)    Afterdistribution in full of the preferential amounts to be distributed to theholders of serial Preferred Stock in the event of the voluntary or involuntaryliquidation, dissolution, distribution of assets or winding up of PLDT, theholders of Common Stock shall be entitled to receive all the remaining assetsof PLDT of whatever kind available for distribution to stockholders ratably inproportion to the number of Common Stock held by them, respectively.     (c)    Except as may beotherwise required by law, or by the Articles of Incorporation of PLDT, eachholder of Common Stock shall have one vote in respect of each share of suchstock held by him on all matters to be voted upon by the stockholders, and theholders of Common Stock shall have the exclusive right to vote for the electionof directors and for all other purposes.  At every election of directors, aholder of Common Stock is entitled to vote such shares of Common Stock held byhim for as many persons as there are directors to be elected, or to cumulatesaid shares and give one candidate as many votes as the number of directors tobe elected 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 additionto the foregoing rights, the Corporation Code provides for other stockholders'rights generally.  These include:     (a)    Appraisal rightor the right of a dissenting stockholder to demand payment of the fair value ofhis shares of stock in the following instances:  (a) in case any amendment tothe articles of incorporation has the effect of changing or restricting therights of any stockholders or class of shares, or of authorizing preferences inany respect superior to those of outstanding shares of any class, or ofextending or shortening 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; and(c) in case of merger or consolidation.     (b)    The right toapprove certain corporate acts, such as:  (a) election of directors; (b)removal of directors; (c) extension or shortening of corporate term; (d)increase or decrease of capital stock, and incurring, creating or increasing bondedindebtedness; (e) sale or other disposition of all or substantially all of thecorporate assets; (f) investment of corporate funds in any other corporation orbusiness or for any purpose other than the primary purpose for which it wasorganized; (g) declaration of stock dividend; (h) entering into a managementcontract with another corporation; (i) plan of merger or consolidation; and (j)voluntary dissolution of the corporation by shortening corporate term.     (c)    The right toinspect at reasonable hours on business days the records of all businesstransactions of the corporation and the minutes of any meeting; however, thestockholders' right to inspect corporate records and books is not an absoluteright so that the corporation may deny said right on the basis of improprietyof the purpose or motive of the stockholder.     (d)    The right to befurnished the most recent financial statements of the corporation, within tendays from receipt by the corporation of a written request from a stockholder.The same right exists at the annual meeting of stockholders at which the Boardof Directors must present to the stockholders a financial report of theoperations of the corporation for the preceding year which shall includefinancial statements duly signed and certified by an independent certifiedpublic accountant.     *Restrictions on ForeignOwnership*     The Constitution of the Republic ofthe Philippines (Section 11, Article XII) states that no franchise,certificate, or any other form of authorization for the operation of a publicutility shall be granted except to citizens of the Philippines or tocorporations or associations organized under the laws of the Philippines atleast 60% of whose capital is owned by such citizens.     While the Articles of Incorporationand By-Laws of PLDT do not contain any specific restriction on the sale,assignment or transfer of shares that would violate the aforecited ownershiprequirement, the Articles of Incorporation of PLDT provide that the Board ofDirectors shall have full power and authority to authorize (whether by adoptionof amendments to the By-Laws of PLDT or of resolutions, the promulgation ofrules or regulations or otherwise) the taking by said corporation of all suchactions as the Board of Directors may deem necessary or appropriate to ensurecompliance by said corporation with any applicable provision of theConstitution of the Republic of the Philippines or any other applicable law,treaty, rule or regulation relating to the ownership of securities of saidcorporation by citizens of the Philippines, aliens or other persons or group ofpersons.     *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 stockholdersmay be called at any time by the President or three (3) of the Directors or bya number of stockholders representing two-thirds (2/3) of the subscribedcapital stock.  Notice in writing of such meeting stating the date, time orplace thereof, 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.     The By-Laws of PLDT provide thateach stock which has voting rights on any matter under consideration may berepresented at any meeting of stockholders by the holder thereof or by hisattorney duly authorized by proxy in writing on forms prescribed by the Boardof Directors which shall be furnished to a stockholder upon his request.Unless otherwise provided in the proxy, it shall be valid only for the meetingin respect of which such proxy was issued.  Proxies must be filed with theSecretary, Assistant Secretary or transfer agent of PLDT at least two (2) daysbefore the day of the meeting.  Any proxy filed with the Secretary, AssistantSecretary or transfer agent of the corporation may be revoked by thestockholder concerned either in an instrument in writing duly presented to theSecretary, Assistant Secretary or transfer agent of the corporation at leasttwo (2) days before the day of the meeting or by his personal presence at themeeting.  The decision of the Secretary on the validity of proxies shall befinal and binding until and unless set aside by a court of competentjurisdiction.  As provided in the Corporation Code, unless otherwise providedin the proxy, it shall be valid only for the meeting for which it is intendedand no proxy shall be valid and effective for a period longer than five (5)years at any one time.     The By-Laws of PLDT also providethat at any meeting of the stockholders, persons representing, in person or byproxy, a majority of the shares issued and outstanding and entitled to vote atsaid meeting shall constitute a quorum for the transaction of any business,except as otherwise provided by law, and except that a lesser number mayadjourn the meeting.     *Issues of Shares*  * *  The Board of Directors of PLDT hasthe power to authorize the issue and sale of authorized but unissued shares ofCommon Stock of said corporation for such consideration as it shall determine,provided that such consideration shall not be less than the par value of suchshares and, provided further, that such issue and sale is not otherwiseprohibited under applicable laws.     Under the Securities RegulationCode (Republic Act 8799) (the “SRC”), no securities except of a class exemptunder the provisions thereof or unless sold in any transaction exempt under anyof the provisions thereof, shall be sold or offered for sale or distribution tothe public unless such securities shall have been registered and permitted tobe sold pursuant to the SRC.     *Transferof Shares*  * *  The sharesof Common Stock may be transferred by delivery of certificate(s) endorsed bythe shareholder named in the certificate or his duly authorized attorney orrepresentative.  No transfer, however, shall be valid, except as between theparties, until the transfer is recorded in the stock and transfer books of PLDTmaintained by Hongkong and Shanghai Banking Corporation, the stock transferagent of PLDT for the Common Stock.     Philippine law does not requiretransfers of Common Stock to be effected on PSE, but any off-exchange transferswill subject the transferor to a capital gains tax that may be significantlygreater than the stock transfer tax applicable to transfers effected on thePSE.  All transfers of shares of Common Stock on the PSE must be effectedthrough a licensed broker in the Philippines.     *Share Certificates*  * *  Certificates representing fullypaid shares of Common Stock are issued in such denominations as stockholdersmay request, except that certificates will not be issued for any fractionalpart of a share or any undivided interest in any share.     *Dividends*  * *  UnderPhilippine law, the board of directors may declare dividends on the CommonStock out of the unrestricted retained earnings which may be payable in cash,in property or in stock to all stockholders on the basis of outstanding sharesheld by them.  Declaration of stock dividends require approval of thestockholders of PLDT representing not less than two-thirds of the outstandingcapital stock of PLDT.  If a stock dividend would require an increase in sharecapital, Philippine SEC approval would be required.  Common Stock issued asstock dividends should be registered with and licensed by the Philippine SECand 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.Notwithstanding this general requirement, a Philippine corporation may retainall or any portion of such surplus in the following cases:  (i) when justifiedby definite corporate expansion projects or programs approved by the board ofdirectors; or (ii) when the corporation is prohibited under any loan agreementwith any financial institution or creditor, whether local or foreign, fromdeclaring dividends without its/his consent, and such consent has not yet beensecured; or (iii) when it can be clearly shown that such retention is necessaryunder special circumstances relevant to the corporation, such as when there isa need for special reserve for probable contingencies.     PLDT has entered into certain loanand credit agreements, which restrict the declaration and payment of dividendsby PLDT.  Under the loan agreement with KfW entered into in January 2002, PLDTis prohibited from paying any dividends on Common Stock until December 31,2004.  Under the terms of the US$149 million facility with KfW, PLDT isprohibited from paying any dividends on Common Stock until December 31, 2004.In addition, under the terms of PLDT's US$145 million multicurrency termfacility agreement and JPY5,615 million term loan facility agreement,PLDT is restricted from distributing dividends to common stockholders unless(i) no default has occurred which is continuing, and (ii) its debt to free cashflow ratio, after giving effect to the distribution of such dividends and,under certain circumstances, other adjustments to PLDT’s closing cash balance,would be less than 4.0 to 1.0.  Under other loan agreements, PLDT may notdeclare or pay dividends on any of its capital stock without the prior writtenconsent of the lenders (i) if PLDT is in default in the payment of any amountsdue and payable under such loan agreement or after the occurrence and duringthe continuance of any other event of default or potential event of defaultunder such agreements, (ii) if after giving effect to such action the currentratio would be less than 1.2 to 1 or (iii) in an amount greater than PLDT netincome after taxes during the fiscal year to which such payment or distributionrelates.  For the year 2001, PLDT declared cash dividends on outstanding sharesof Common Stock in the amount of approximately Php202 million.  PLDT has notdeclared dividends on the Common Stock since March 2001.     *PLDT Preferred Stock*     PLDT 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 unpaiddividends.  Except as otherwise provided by law, the holders of PLDT PreferredStock are not entitled to vote for the election of directors or for any otherpurpose; provided, however, that PLDT may not change the rights of the holdersof any series in any manner prejudicial to the holders thereof without theaffirmative vote of the holders of a majority of the shares of such series.  Nosuch approval is needed to increase the number of shares of PLDT PreferredStock (up to the number from time to time authorized by the Articles) or toauthorize classes of shares ranking on a parity with the PLDT Preferred Stock.     *Issued and Outstanding PLDTPreferred Stock*     The series of PLDT Preferred Stockand the number of shares subscribed and outstanding under each series as ofDecember 31, 2002 are as follows:     
**Series**

**No. of Shares**

Series A to CC 10% Cumulative Convertible

406,826,136

Series III Convertible

4,616,200

Series IV Cumulative Non-Convertible Redeemable

36,000,000

Series V Cumulative Convertible Redeemable

2,576,120

Series VI Cumulative Convertible Redeemable

4,574,273

Series VII Cumulative Convertible Redeemable

3,842,000
     The 10% Cumulative ConvertiblePreferred Stock are entitled to receive cumulative cash dividend at the rate of10% per share per annum; redeemable at the option of PLDT, at par value plusaccrued dividends, five years after the year of issuance; convertible to commonshares at any time after 1 year from issuance at a price equivalent to 10%below the average market price of the Common Stock at the PSE over a period of30 consecutive trading days before conversion date; and entitled to be paid anamount equal to the par value of the shares plus accrued and unpaid dividends thereonto the date fixed for such payment in the event of a voluntary or involuntaryliquidation, dissolution, distribution of assets or winding up of the affairsof the corporation.     The Series III ConvertiblePreferred Stock are entitled to receive annual fixed cumulative cash dividendsof US$3.50 per share; in the event of any voluntary or involuntary liquidation,dissolution or winding up of PLDT, are entitled to receive out of the assets ofPLDT available for distribution to the stockholders of PLDT, before anydistribution of assets is made to holders of shares of Common Stock or anyother shares of stock of PLDT ranking as to such a distribution junior to theSeries III Convertible Preferred Stock, liquidating distributions in the amountof Php11 per share plus accrued and unpaid dividends; are convertible intoshares of Common Stock at the holder's option at any time, at the conversionprice of US$29.19 per share of Common Stock (equivalent to a conversion ratioof 1.7129 of a share of Common Stock for each share of Series III ConvertiblePreferred Stock, each share being valued for this purpose at its referenceamount of US$50 per share), subject to adjustment in certain events; and arenot redeemable.     Series IV CumulativeNon-Convertible Redeemable Preferred Stock are entitled to receive cumulativecash dividends at the rate of 13.5% per annum calculated on the par value ofsuch shares or if such shares are not yet fully paid, the actual amount paid;are not convertible into shares of Common Stock; are redeemable at the optionof PLDT one year after subscription at an amount equal to the par value of suchshares so redeemed or if such shares are not yet fully paid, the actual amountpaid, plus accrued and unpaid dividends thereon; and in the event of avoluntary or involuntary liquidation, dissolution or winding up of affairs ofPLDT, shall be entitled to be paid an amount equal to the par value of suchshares or if such shares are not yet fully paid, the actual amount paid, plusan amount equal to the dividends accrued thereon to the date fixed forpayment.  The outstanding shares of Series IV Cumulative Non-ConvertibleRedeemable Preferred Stock have not been fully paid.     Series V, VI and VII ConvertiblePreferred Stock are entitled to receive annual dividends of Php18.70 per share,US$0.397 per share and JPY40.7189 per share, respectively.  Each share ofSeries V, VI and VII Convertible Preferred Stock is convertible at any time atthe option of the holder into one PLDT common share.  In the event of anyvoluntary or involuntary liquidation, dissolution or winding up of PLDT, theholders of the Series V, VI and VII 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, VI and VII Convertible Preferred Stock,liquidating distributions in the amount of Php11 per share plus accrued andunpaid dividends.  On the date immediately following the seventh anniversary ofthe issue date of the Series V and Series VI Convertible Preferred Stock and onthe eighth anniversary of the issue date of the Series VII ConvertiblePreferred Stock, the remaining outstanding shares under these series will bemandatorily converted to PLDT common shares at a conversion rate of one PLDTcommon share for each preferred share subject to adjustments in certainevents.  Under a put option exercisable for 30 days, holders of common sharesreceived on mandatory conversion will be able to require PLDT to purchase suchPLDT common shares for Php1,700 or US$36.132 or JP¥4,071.89 per share,depending on the series.     As of December 31, 2002, 145,320shares of Series V Convertible Preferred Stock and 523,843 shares of Series VIConvertible Preferred Stock had been converted to PLDT common shares.  As ofDecember 31, 2002, PLDT had 2.6 million Series V Convertible Preferred Stock,4.6 million Series VI Convertible Preferred Stock and 3.8 million Series VIIConvertible Preferred Stock issued and outstanding.  The aggregate value of theput option based on outstanding shares as of December 31, 2002 is Php20,201million, of which Php13,181 million is payable on June 4, 2008 and Php7,020million on June 4, 2009 if all of the outstanding shares of Series V, VI andVII Convertible Preferred Stock were mandatorily converted and all theunderlying common shares were put to PLDT.  The market value of the underlyingcommon shares is Php2,968 million, based on the market price of PLDT’s commonstock of Php270 per share as of December 31, 2002.     *Change in Control*     Article V,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 ofDirectors.       Material Contracts     For a description of the Stock Purchase and Strategic InvestmentAgreement relating to the acquisition of Smart and the investment by NTT, see“Item 7. Major Shareholders and Related Party Transactions — Related PartyTransactions.”      Exchange Controls andOther Limitations Affecting Securities Holders     In Circular No. 1389 dated November10, 1993 of the Central Bank of the Philippines (now *Bangko Sentral ngPilipinas*, or BSP, foreign investments in equity which are made in thePhilippines and are duly registered with the BSP or with a custodian bank dulydesignated by the foreign investor are entitled to full and immediate capitalrepatriation and dividend and interest remittance privileges.  Without the needto obtain prior BSP approval, commercial banks are authorized to sell and toremit the equivalent foreign exchange (at the exchange rate prevailing at thetime of actual remittance) representing sales and divestment proceeds ordividends of a duly registered foreign equity investment upon presentation of aBSP Registration Document (“BSRD”) together with other supporting documents.The BSRD serves as the authority to repatriate such divestment and salesproceeds or remittance of cash dividends.  Cash dividends accruing to foreigninvestments in securities listed on the PSE and registered under theregistration system existing prior to BSP Circular 1389 may be remitted throughany commercial bank without the need of a BSP Confirmation Document, subject,however, to the submission to the remitting bank of a cash dividend schedule,the company's audited financial statements covering the dividend declarationperiod, and a copy of the pertinent Board Resolution authorizing thedeclaration of the cash dividends to be remitted.  The remitting commercialbank must submit to the BSP a statement of remittance together with thesupporting documents within two banking days from date of actual remittance.Foreign investments not duly registered with the BSP or with the investor'sdesignated custodian bank are not entitled to repatriation and remittanceprivileges through the banking system except capital repatriation or dividendremittance of direct foreign equity investments made prior to March 15, 1973when BSP registration was not yet required.  The BSP should be notified of thetransfer of sale of foreign investments in equity or securities alreadyregistered with the BSP, in order that the registration of the foreigninvestment may be transferred in the name of the transferee or purchaser.     Cash dividends on PLDT's stock arepaid in Philippine pesos, except dividends on the Series III and Series VIIConvertible Preferred Stock, which are paid in U.S. dollars and on the SeriesVII Convertible Preferred Stock, which are paid in Japanese yen.  PLDT’sCustodian for its Series III Convertible Preferred Stock, Citibank, N.A. –Manila and PLDT’s Transfer Agent and Dividend Paying Agent for its Series VIand VII Convertible Preferred Stock, Hongkong and Shanghai Banking Corporation,converts and remits in the particular foreign currency, at the prevailingexchange rate, cash dividends due to holders of the Series III, Series VI andVII Convertible Preferred Shares.  PLDT's Transfer Agent for its common stock,The Hongkong and Shanghai Banking Corporation, (which also acts as dividend payingagent) converts and remits in U.S. dollars, at the prevailing exchange rate,cash dividends due all common stockholders residing outside the Philippines.Under the above-mentioned regulations, PLDT has been able to remit the cashdividends due stockholders residing outside the Philippines.  As of December31, 2002, approximately 88% of PLDT's outstanding capital stock was owned bycitizens of the Philippines.  For certain restrictions on the declaration andpayment of dividends by PLDT, see Note 14 to our financial statements in Item18.     For certain constitutionallimitations on the capital ownership of public utilities, see “Item 8.Financial Information — Legal Proceedings — Quo Warranto Action.”     Principal of and interest on PLDT's10.625% Notes due 2004, 9.875% Notes due 2005, 8.5% Notes due 2003, 9.25% Notesdue 2006, 7.85% Notes due 2007, 8.35% Notes due 2017, 10.5% Notes due 2009,10.625% Notes due 2007 and 11.375% Notes due 2012 are payable in U.S. dollarswhich may be purchased from the local banking system either pursuant to theregistration of such Notes with the BSP or otherwise pursuant to specific BSPapproval of such payment.  Such principal and interest may also be paidutilizing PLDT's own dollar resources without necessity of BSP approval.  TheBSP, with the approval of the President of the Philippines, may, however,restrict the availability of foreign exchange during an exchange crisis, whenan exchange crisis is imminent, or in times of national emergency.     Taxation     The following is a summary ofmaterial Philippine, Hong Kong and United States federal tax consequences toUnited States Holders (as defined below) of ownership of shares of CommonStock, ADSs and GDSs (collectively, the “Equity Securities”) and of PLDT's10.625% Notes due 2004, 9.875% Notes due 2005, 8.5% Notes due 2003, 9.25% Notesdue 2006, 7.85% Notes due 2007, 8.35% Notes due 2017, 10.5% Notes due 2009,10.625% Notes due 2007 and 11.375% Notes due 2012 (the “Debt Securities” and,collectively with the Equity Securities, the “Securities”).  This summary isbased upon laws, regulations, rulings, income tax treaties, administrativepractice and judicial decisions in effect at the date of this Annual Report(including the Philippine National Internal Revenue Code of 1997 (the“Philippine Tax Code”), the income tax treaty between the Philippines and theUnited States (the “Philippines-United States Tax Treaty”), and the UnitedStates Internal Revenue Code of 1986, as amended (the “United States Tax Code”)and the Treasury Regulations promulgated thereunder (the “Regulations”)).Legislative, judicial or administrative changes or interpretations may alter ormodify the statements and conclusions set forth herein.  Any such changes orinterpretations may be retroactive and could affect the tax consequences toholders of Securities.     This summary does not address alltax aspects that may be important to a holder of Securities.  The tax treatmentof a holder of Securities may vary depending on such holder's particularsituation, and certain holders (including holders such as dealers, insurancecompanies, tax-exempt organizations, financial institutions and persons whoown, constructively or actually, 10% or more of the total voting power or totalvalue of PLDT's stock) may be subject to special rules not discussed.Moreover, except as expressly noted, the state, local and foreign taxconsequences are not discussed below.  The summary of United States federaltaxation deals only with Securities held as capital assets by United States Holderswhose functional currency is the United States dollar.  For purposes of thissummary, the term "United States Holder" means a beneficial owner,for United States federal income tax purposes, of a security that is (i) acitizen or resident of the United States, (ii) a corporation or partnershipcreated or organized under the laws of the United States or any state of theUnited States, (iii) an estate whose income is includable in gross income forUnited States federal income tax purposes regardless of its source, (iv) atrust if (a) a court within the United States is able to exercise primarysupervision over the administration of the trust and (b) at least one UnitedStates person has authority to control all substantial decisions of the trust,or  (v) a person or entity otherwise subject to United States federal incometaxation on a net income basis in respect of the Securities.  The summary ofPhilippine taxation deals only with United States Holders that hold securitiesas capital assets.     **HOLDERS AREURGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCESOF THE OWNERSHIP AND DISPOSITION OF SECURITIES, INCLUDING THE APPLICABILITY ANDEFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.**  ** **  Equity Securities     *Philippine Taxation*     *Taxes onExchange of ADRs for Common Stock and GDRs for Series III Convertible PreferredStock*     Philippine capital gains or stocktransaction taxes and documentary stamp taxes may be payable upon the transferof shares of Common Stock to a holder of ADRs or shares of Series IIIConvertible Preferred Stock to a holder of GDRs.  See “Capital Gains Tax andStock Transaction Tax” and “Documentary Stamp Taxes.”     *Taxation of Dividends*     Under the Philippine Tax Code,dividends paid by a Philippine corporation to citizens of the Philippines andresident aliens in the Philippines are subject to a final withholding tax of10% while those paid to non-resident aliens engaged in trade and businesswithin the Philippines are subject to a final withholding tax of 20%.  Dividendspaid to non-resident aliens not engaged in trade and business within thePhilippines are subject to a final withholding tax of 25%. Dividends paid by aPhilippine corporation to other Philippine corporations or to residentnon-Philippine corporations are not subject to tax.  Dividends paid tonon-resident non-Philippine corporations not engaged in a trade or business inthe Philippines by Philippine corporations shall be subject to a finalwithholding tax of 15%, subject to the condition that the country in which thenon-resident non-Philippine corporation is domiciled either (i) allows a creditagainst the tax due from the non-resident non-Philippine corporation taxesdeemed to have been paid in the Philippines equivalent to 17% (which representsthe difference between the regular income tax on non-resident non-Philippinecorporations of 32% and the 15% tax on dividends) (this condition is notsatisfied in the case of such 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 such corporations domiciled in the United States).  Ifneither of the foregoing conditions are met, the dividends paid to thenon-resident non-Philippine corporation shall be subject to the regular incometax rate of 32%.  Under rulings issued by Philippine tax authorities, Hong Kongis viewed as falling within clause (ii) and, thus, companies that are organizedin Hong Kong that are not engaged in trade or business in the Philippines maybe entitled to the benefit of the 15% rate.  Such rulings, however, were basedupon the laws of Hong Kong as in effect at the time such rulings were issued,and any subsequent changes in the relevant laws of Hong Kong may affect thevalidity of such rulings.     As further discussed below, inrespect of regular quarterly cash dividends payable on shares of the underlyingSeries III Convertible Preferred Stock while such shares are on deposit withthe Depositary, PLDT intends to make payments of withholding tax pursuant tothe terms of such Series III Convertible Preferred Stock, at the rate of 15%,which is the rate applicable to dividends payable to residents of the domicileof the registered shareholder, which is a company organized in Hong Kong notengaged in trade or business in the Philippines.  PLDT reserves the right tochange the rate at which it makes payments of withholding tax whenever it deemsit appropriate under applicable law.     Holders will receive regularquarterly cash dividends paid in respect of the Series III ConvertiblePreferred Stock, but not on the Common Stock issuable on conversion of suchSeries III Convertible Preferred Stock, free and clear of withholding tax, suchwithholding tax being an obligation of PLDT pursuant to the terms of the SeriesIII Convertible Preferred Stock.  Any other dividends will be subject towithholding tax at the relevant applicable rate.     If the holder of Common Stock is anon-resident foreign partnership, which is treated as a corporation forPhilippine tax purposes, dividends on the Common Stock should be subject to afinal withholding tax of 32%.  Cede & Co., the partnership nominee ofDepository Trust Company (“DTC”), should qualify as a non-resident foreignpartnership that would be treated as a corporation for Philippine taxpurposes.       In certain circumstances where theholder holds Common Stock, a tax treaty rate may be applicable with respect tothe Philippine withholding tax.  For instance, holders under such circumstancesand as to which the Philippines-United States Tax Treaty would be applicablewould be eligible for a treaty rate of 25% (or 20% in certain instances).  The20% treaty rate is generally not applicable in the case of non-residentnon-Philippine corporations domiciled in the United States which own less than10% of the voting stock of PLDT.  Holders are required, however, to establishto the Philippine 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 theUnited States for purposes of the Philippines-United States Tax Treaty. PLDTreserves the right to change the rate at which it makes payments of withholdingtax whenever it deems it appropriate under applicable law.     *Capital Gains Tax and StockTransaction Tax*     The Philippine Tax Code providesthat gain from the sale of shares of stock in a Philippine corporation shall betreated as derived entirely from sources within the Philippines, regardless ofwhere the shares are sold.  Subject to applicable tax treaty rates, the rate oftax on such gain, where the stock is not disposed of through the PhilippineStock Exchange, is a final tax of 5% for gains not exceeding 100,000 pesos anda final tax of 10% for gains in excess of that amount.  The rate is the samefor both non-resident individuals and non-resident non-Philippinecorporations.  While this tax is not collected through withholding, the PhilippineTax Code prohibits a transfer from being recorded on the books of thecorporation unless the Philippine Commissioner of Internal Revenue certifiesthat the tax has been paid or certain other conditions are met.  Under thePhilippine Tax Code, non-resident individuals and non-resident non-Philippinecorporations may net capital gains and losses from the sale of shares of stocknot sold or disposed of through the Philippine Stock Exchange during a taxableyear in determining their total capital gains tax.     The sale of shares which are listedin and sold through the PSE are subject to the stock transaction tax imposed atthe rate of 1/2 of 1% of the gross selling price.  This tax is required to becollected and paid to the Government by the selling stockbroker on behalf ofhis client.  Sales of shares other than through a Philippine stock exchangewill be subject to Philippine capital gains tax in the manner described above.     Under the Philippines-United StatesTax Treaty, gains derived by a United States resident from the sale of sharesof stock of a Philippine corporation will not be subject to Philippine tax,either capital gains tax or stock transaction tax, unless the shares are thoseof a corporation over 50% of the assets of which consist of real propertyinterests located in the Philippines.  PLDT does not believe that itcurrently is such a corporation.      *ConversionFeature*     PLDT believes that there would beno Philippine capital gains taxes upon the conversion of shares of Series IIIConvertible Preferred Stock into shares of Common Stock.     *DocumentaryStamp Taxes*     The Philippines imposes adocumentary stamp tax upon transfers of shares of stock issued by a Philippinecorporation at a rate of Php1.50 on each Php200, or fractional part thereof, ofthe par value of the shares.  The documentary stamp tax is collectible whereverthe document is made, signed, issued, accepted or transferred, when theobligation or right arises from Philippine sources or the property is situatedin the Philippines.       *Estate and Donor's Taxes*     Shares of stock issued by acorporation organized or constituted in accordance with Philippine law aredeemed to have a Philippine situs and their transfer by way of succession ordonation is subject to Philippine estate and gift taxes. The transfer of sharesof stock by a deceased individual to his heirs by way of succession, whethersuch an individual was a citizen of the Philippines or an alien, regardless ofresidence, will be subject to Philippine estate tax at progressive rates rangingfrom 5% to 20% if the net estate is over Php200,000. Individual and corporatestockholders, whether or not citizens or residents of the Philippines, whotransfer the Equity Securities by way of gift or donation will be liable forPhilippine donor’s tax on such transfers at progressive rates ranging from 2%to 15%, if the net gifts made during the calendar year exceed Php100,000. Therate of tax with respect to net gifts made to a stranger, who is not a brother,sister, spouse, ancestor, lineal descendant or relative by consanguinity in thecollateral line within the fourth degree of relationship of the donor, is aflat rate of 30%. Estate and gift taxes will not be collected in respect ofintangible personal property such as the Equity Securities:                                                                                 - if the deceased at the time of death, or the donor at the time ofdonation, was a citizen and resident of a foreign country which at the time ofhis death or donation did not impose a transfer tax of any character in respectof intangible personal property of citizens of the Philippines not residing inthat foreign country, or                                                                                   - if the laws of the foreign country of which the deceased or thedonor was a citizen and resident at the time of his death or donation allow asimilar exemption from transfer or death taxes of every character ordescription in respect of intangible personal property owned by citizens of thePhilippines not residing in that foreign country.     Shares of stock of a deceasedstockholder or shares that have been donated may not be transferred on thebooks of the corporation without a certificate from the Philippine Commissionerof Internal Revenue that the applicable estate or donor's taxes have beenpaid.  In the case of ADRs and GDRs, however, there is no correspondingrequirement, unless a transfer of the ADRs and GDRs would also entail a changein the registration of the underlying shares.     *Hong Kong Taxation*     No tax will be payable in Hong Kongin respect of any income from, or gains arising on the disposal of ADRs, GDRsor shares of Common Stock, nor will any tax, duties or other levies ofwhatsoever nature be payable in Hong Kong on the transfer of any suchsecurities except that gains from the sale of property by persons carrying on atrade, profession or business in Hong Kong where such gains are derived from orarise in Hong Kong from such trade, profession or business will be chargeableto Hong Kong profits tax.  A holder or an owner of such securities may thus beassessable to profit tax in Hong Kong on gains arising on the disposal of ADRs,GDRs or shares of Common Stock if such gains are derived in Hong Kong from aHong Kong business of dealing or trading in securities carried on by suchholder or owner.     *United States Federal Taxation*     For the United States federalincome tax purposes discussed herein, United States Holders of GDRs or ADRswill be treated as the owners of the underlying shares of Convertible PreferredStock or Common Stock.  Deposits and withdrawals by United States Holders ofshares of Convertible Preferred Stock or Common Stock in exchange for GDRs orADRs will not be subject to United States federal income tax.     *Taxationof Dividends*     Distributions made by PLDT withrespect to Convertible Preferred Stock or Common Stock, to the extent made outof current or accumulated earnings and profits of PLDT, as determined forUnited States federal income tax purposes, will be subject to United Statesfederal income taxation on the date actually or constructively received by theDepositary or, in the case of shares held directly by the United States Holder,the United States Holder. If you are a non-corporate U.S. holder, dividendspaid to you in taxable years beginning after December 31, 2002 and beforeJanuary 1, 2009 that constitute qualified dividend income will be taxable toyou at a maximum tax rate of 15% provided that you hold the shares or ADSs formore than 60 days during the 120-day period beginning 60 days before theex-dividend date and meet other holding period requirements.  Dividends we paywith respect to the shares or ADSs generally will be qualified dividendincome.  Such dividends will not be eligible for the dividends-receiveddeduction generally allowed to corporations.  The amount of the dividend willequal the amount, determined on the date of distribution, of United Statesdollars received by the Depositary or, in the case of shares held directly bythe United States Holder, the United States Holder, plus the United Statesdollar value of any Philippine taxes withheld from such dividend.  To theextent that a distribution exceeds the Holder's allocable share of PLDT'scurrent or accumulated earnings and profits, such distribution will first betreated as a nontaxable return of capital, applied against and in reduction ofthe Holder's tax basis in the shares.  Amounts received in excess of theHolder's basis will be treated as received in exchange for the shares and taxedas capital gain, which will be long-term capital gain if the Holder's holdingperiod for the shares is more than one year.      Philippine taxes withheld from adividend should, subject to the limitations and tax return disclosurerequirements in the United States Tax Code and the Regulations, and toapplicable provisions of the Philippines-United States Tax Treaty, be eligiblefor credit against a United States Holder's U.S. federal income tax liabilityor deductible for purposes of computing such liability. Special rules apply indetermining the foreign tax credit limitation with respect to dividends thatare subject to the maximum 15% tax rate.  For foreign tax credit purposes,dividend income generally will constitute “passive income” or, in the case ofcertain United States Holders, “financial services income.” The availability ofa foreign tax credit or a deduction for Philippine withholding taxes remittedby PLDT on behalf of a United States Holder is discussed below.     *CertainWithholding Tax Payments*     Holders will receive regularquarterly cash dividends paid in respect of the Series III ConvertiblePreferred Stock, but not on the Common Stock issuable on conversion of suchSeries III Convertible Preferred Stock, free and clear of withholding tax, suchwithholding tax being an obligation of PLDT pursuant to the terms of the SeriesIII Convertible Preferred Stock.  PLDT intends to make such payments ofwithholding tax based on an applicable withholding tax rate of 15%.  A UnitedStates Holder that receives dividends free and clear of withholding tax will betreated for United States federal income tax purposes as having received anadditional distribution with respect to the Series III Convertible PreferredStock in the amount of the withholding tax which is paid to the PhilippineBureau of Internal Revenue on behalf of such United States Holder.  Such adeemed additional distribution will generally be subject to the rules describedabove under “Taxation of Dividends.” The amount of the Philippine withholdingtax, and thus the amount of additional income deemed to have been received bythe United States Holder, will be equal to the initial amount of tax paid byPLDT (based on the applicable withholding tax rate) divided by the differencebetween one and the applicable withholding tax rate.  For example, assuming a$100 dividend received free and clear of a withholding tax of 15% (the ratebelieved by PLDT to be the applicable withholding tax rate; see “PhilippineTaxation — Taxation of Dividends”), the United States Holder will be treated ashaving paid Philippine withholding tax of, and as having received additionalincome in the amount of, $15/(1-.15), or $17.65.  Although, as indicated, suchadditional income will generally be taxable to such United States Holder,except to the extent described below, the additional tax should be creditableagainst such United States Holder's United States federal income tax to theextent such United States Holder is able to utilize foreign tax credits.  Inthe case of United States Holders who are unable to utilize fully foreign taxcredits, the increased taxable income arising from such payment could result ina net after-tax yield that is less than that available to a holder who is ableto use the foreign tax credit.     *Sale orOther Disposition of GDRs, ADRs or Shares*     A United States Holder willrecognize capital gain or loss upon the sale of GDRs, ADRs or shares of CommonStock in an amount equal to the difference between such United States Holder'sbasis in the ADRs, GDRs or shares of Common Stock and the amount realized uponthe sale.  Such gain or loss generally will be long-term capital gain or lossif, at the time of sale, exchange or retirement, the ADR, GDR or Common Stockhas been held for more than one year.  Capital gain of a non-corporate U.S.holder that is recognized on or after May 6, 2003 and before January 1, 2009 isgenerally taxed at a maximum rate of 15% where the property is held for morethan one year.  Generally, any such gain or loss realized will be treated asUnited States source income or loss.  United States Holders may not be eligibleto credit against their United States federal income tax liability amounts paidin respect of the Philippine stock transaction tax.  See “— Philippine Taxation— Capital Gains Tax and Stock Transaction Tax.”     *Conversion Feature*     In general, no gain or loss will berecognized for United States federal income tax purposes on a conversion ofConvertible Preferred Stock into Common Stock except with respect to cashreceived in lieu of fractional shares of stock.  The tax basis for Common Stockreceived upon conversion will be equal to the basis of the ConvertiblePreferred Stock converted and the holding period of the Common Stock receivedupon conversion will include the holding period of the Convertible PreferredStock.     *TaxInformation Reporting and Backup Withholding*  * *  Dividends on, and proceeds from thesale or other disposition of, GDRs, ADRs or shares of Common Stock received anddistributed by the Depositary are subject to United States informationreporting.  Under current Regulations, backup withholding is not required to becollected by the Depositary in respect of dividends and sales proceeds if theholder of shares of Convertible Preferred Stock, Common Stock, ADRs or GDRs (i)provides the Depositary with such holder's correct taxpayer identificationnumber in the manner required by law, certifies that such holder is not subjectto backup withholding rules and otherwise complies with the backup withholdingrules or (ii) otherwise establishes an exemption.  The amount of any backupwithholding taxes from a payment to a United States Holder would be allowed asa credit against the United States federal income tax liability of such holderand may entitle such holder to a refund, provided that the required informationis furnished to the Internal Revenue Service (“IRS”).     *FederalEstate Tax*  * *  Subject tocertain statutory limitations and exceptions, United States estate tax appliesto the entire estate, wherever situated, of a decedent who was a United Statescitizen or resident.  A credit is generally available for any estate,inheritance, legacy or succession taxes paid to a foreign country with respectto property situated in that country and included in the decedent's grossestate, subject to the limitations established by United States Tax Code andthe Regulations.  Convertible Preferred Stock and Common Stock would beproperly deemed situated in the Philippines for this purpose and ADRs, and GDRsshould also be deemed situated in the Philippines for this purpose.  The creditis limited to the amount of United States federal estate tax attributable understatutory rules to such property.     The United States Tax Code does notauthorize a comparable credit for foreign gift or donor's tax such as thoseimposed by the Philippines.  See “— Philippine Taxation — Estate and Donor'sTaxes.”     Debt Securities  ** **  *Philippine Taxation*  * *  *Taxation of Interest*  * *  The Debt Securities are representedby Global Securities deposited with a custodian for, and registered in the nameof, Cede & Co., a partnership nominee of DTC.       Under the Philippine Tax Code,interest on the Debt Securities received by citizens of the Philippines,resident aliens in the Philippines, non-resident alien individuals engaged intrade and business within the Philippines, domestic corporations and residentforeign corporations is subject to 20% final withholding tax.  Interestreceived by non-resident alien individuals not engaged in trade or businesswithin the Philippines is subject to final withholding tax at the rate of 25%.Interest income received by non-resident foreign corporations not engaged in tradeor business within the Philippines on foreign loans is subject to a 20% finalwithholding tax.  “Foreign loans” include any loan contract payable in foreigncurrency which is entered into by a Philippine resident individual orcorporation with a non-resident.  Therefore, if the registered holder of a DebtSecurity is a non-resident corporation or a foreign partnership, which istreated as a corporation for Philippine tax purposes, the Debt Securities willbe considered “foreign loans” and interest thereon should be subject to the 20%final withholding tax rate.  The tax withheld constitutes a final settlement ofPhilippine income tax liability with respect to such interest.     Any tax treaty in force between thePhilippines and the country of domicile of a non-resident holder may providefor reduced withholding tax on interest.  Cede & Co. should qualify as anon-resident foreign partnership that is treated as a corporation forPhilippine tax purposes.     In the case of Debt Securitiesissued with original issue discount (“OID”), withholding tax on OID should bepaid at issuance if the Debt Securities have maturities of less than one year,and at redemption in all other cases.  The Debt Securities consisting of10.625% Notes due 2004, 9.875% Notes due 2005, 8.5% Notes due 2003, 9.25% Notesdue 2006, 7.85% Notes due 2007, 8.35% Notes due 2017, 10.5% Notes due 2009,10.625% Notes due 2007 and 11.375% Notes due 2012 were originally issued to thepublic at prices of 99.485%, 99.987%, 99.687%, 99.677%, 99.924%, 99.624%,99.651%, 99.990% and 99.988%, respectively, of their principal amounts.Accordingly, Philippine withholding tax on such original issue discount will bepayable at maturity.     The withholding tax rates specifiedabove may be reduced in accordance with any applicable tax treaty in forcebetween the Philippines and the country of residence of the non-resident ownerof the interest.  Most tax treaties to which the Philippines is a party providefor reduced withholding tax rate of 15% in cases where the interest arising inthe Philippines is paid to a resident of the other contracting state.  Underthe Philippines-United States Tax Treaty, the final withholding tax is reducedto 15% where the interest arises in the Philippines and is paid to a residentof the United States.  However, most tax treaties also provide that the reducedwithholding tax rate will not apply if the recipient of the interest, who is aresident of the other contracting state, carries on business in the Philippinesthrough a permanent establishment and the holding of the Debt Securities, towhich the receipt of the interest relates, is effectively connected with suchpermanent establishment.  In general, as long as a United States Holder of theDebt Security which is a resident of the United States under thePhilippines-United States Tax Treaty does not carry on business in thePhilippines through a permanent establishment, interest paid on the DebtSecurities will be subject to withholding tax at the 15% rate.  PLDT intends topay withholding tax at the reduced treaty rate on the basis that the registeredholder of the Debt Security, Cede & Co., is a resident of the United Statesfor purposes of the treaty.  PLDT reserves the right to change the rate atwhich it makes payments of withholding tax whenever it deems it appropriateunder applicable law.     Although interest paid on the DebtSecurities is generally subject to Philippine withholding taxes as describedabove, the payment of such taxes with respect to the interest on the DebtSecurities will be made by PLDT without deduction of any amounts therefore fromthe interest to be remitted to the beneficial owners of the Debt Securities.Such beneficial owners will generally receive the same amounts they would havereceived had no such withholding taxes been imposed.  The effect of suchcontract or provision is to make the Debt Securities “tax-free covenantbonds.”  With respect to interest on tax-free covenant bonds, PLDT is requiredto withhold a tax equal to 30% of the interest thereon if the interest ispayable to a nonresident alien or to a citizen or resident of the Philippines.     However, where applicable, thePhilippines-United States Tax Treaty would reduce the withholding rate on“tax-free covenant bonds” to 15%.  PLDT intends to pay withholding tax at thereduced treaty rate on the basis that the registered holder of the DebtSecurity, Cede & Co., is a resident of the United States under thePhilippines-United States Tax Treaty.  PLDT reserves the right to change therate at which it makes payments of withholding tax whenever it deems itappropriate under applicable law.     *Taxationof Capital Gains*     Upon a sale or other disposition ofthe Debt Securities, the holder will recognize a gain or loss equal to thedifference between the amount realized upon the sale or disposition of the DebtSecurities and the basis of the Debt Securities.  The basis for determininggain or loss from the sale or disposition of Debt Securities is generally thecost of acquiring such Debt Securities.  Under the Philippine Tax Code, gainsrealized from the sale or exchange or retirement of bonds, debentures or othercertificates of indebtedness with a maturity of more than five years is exemptfrom Philippine income tax.  Since the Debt Securities have maturities of morethan five years from the date of issuance, any gains realized by any holderfrom the sale, exchange or retirement of such Debt Securities will not besubject to Philippine income tax.  * *  *Value Added Tax*  ** **  The sale or exchange of DebtSecurities in the Philippines by dealers in securities is subject tovalue-added tax (“VAT”) at the rate of 10% of the gross income they derive fromsuch sale or exchange.     Following the implementation ofRevenue Regulation No. 12-2003 (the “VAT Regulations”) by the Bureau ofInternal Revenue which came into force on 1 January 2003, a 10% VAT is imposedon services rendered by financial institutions, which include banks, non-bankfinancial intermediaries, quasi-banks and finance companies (excludinginsurance companies). Under the VAT Regulations, VAT is imposed on the grossreceipts derived by such financial institutions for all financial andnon-financial services, or a combination thereof, performed within thePhilippines, including the net trading gains derived from the trading ofsecurities, commercial papers and other financial instruments.  ** **  *Tax Treaties*     The following table lists some ofthe countries with which the Philippines has tax treaties and the tax ratescurrently applicable to non-resident holders of Debt Securities, who areresidents of those countries:  ** **  
** **

Capital GainsTax on Sale or Disposition of Notes

Tax Rate on Interest
** **

** **

** **

Canada

exempt

15%

France

exempt

15%

Germany

exempt

15%

Japan

exempt

15%

Singapore

exempt

15%

United Kingdom

exempt

15%

United States

exempt

15%

** **

*DocumentaryStamp Taxes*

* *

A documentary stamp tax is imposedon the issuance of the Debt Securities at the rate of Php0.30 on each Php200,or fractional part thereof, of the face value of the Debt Securities. Under thePhilippine Tax Code, an instrument which is subject to documentary stamp taxand which has been signed, issued, accepted or transferred without thedocumentary stamp tax being paid is not permitted to be admitted or used inevidence in any court in the Philippines until the requisite documentary stamptax is paid. PLDT is exempt from payment of documentary stamp tax.  However,under the Philippine Tax Code, whenever one party to a taxable document enjoysexemption from documentary stamp tax, the other party thereto who is not exemptshall be the party directly liable for the tax. Pursuant to the indenturesunder which the Debt Securities were issued, PLDT has agreed to pay anydocumentary stamp tax that may be legally due on the Debt Securities.

 

*Estateand Donor's Taxes*

 

Obligations or bonds (such as theDebt Securities) issued by a corporation organized or constituted in accordancewith Philippine law are deemed to have a Philippine situs and their transfer byway of succession or donation is subject to Philippine estate and gift taxes.The transfer of Debt Securities 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 holders, whether or not citizens or residents of thePhilippines, who transfer the Debt Securities by way of gift or donation willbe liable for Philippine donor’s tax on such transfers at progressive ratesranging from 2% to 15%, if the net gifts made during the calendar year exceedPhp100,000. The rate of tax with respect to net gifts made to a stranger, whois not a brother, sister, spouse, ancestor, lineal descendant or relative byconsanguinity in the collateral line within the fourth degree of relationshipof the donor, is a flat rate of 30%. Estate and gift taxes will not becollected in respect of intangible personal property such as the DebtSecurities:

 

•     if thedeceased at the time of death, or the donor at the time of donation, was acitizen and resident of a foreign country which at the time of his death ordonation did not impose a transfer tax of any character in respect ofintangible personal property of citizens of the Philippines not residing inthat foreign country, or

 

•     if thelaws of the foreign country of which the deceased or the donor was a citizenand resident at the time of his death or donation allow a similar exemptionfrom transfer or death taxes of every character or description in respect ofintangible personal property owned by citizens of the Philippines not residingin that foreign country.

 

No donative transfer of DebtSecurities by a registered holder of such Debt Securities and no transfer ofDebt Securities to the heirs of a deceased registered holder of such DebtSecurities by way of succession may be recorded on PLDT's books without acertificate from the Commissioner of Internal Revenue of the Philippinesstating that the corresponding estate or donor's tax, as the case may be, hasbeen paid.

 

*United States FederalTaxation*

 

*Payments of Interest*

* *

A United States Holder of DebtSecurities is required to report, as ordinary income, stated interest on theDebt Securities in accordance with such holder's method of accounting forUnited States federal income tax purposes.  Thus, accrual method United StatesHolders must report stated interest on the Debt Securities as it accrues, andcash method United States Holders must report stated interest when it isreceived or unconditionally made available for receipt.  Interest paid by PLDTon the Debt Securities will constitute income from sources outside the UnitedStates for United States federal income tax purposes.

 

*Effect ofPhilippine Withholding Taxes*

 

As discussed under “— DebtSecurities — Philippine Taxation — Taxation of Interest” above, interest paidto investors that are not Philippine residents or citizens is subject toPhilippine withholding taxes.  PLDT is obligated to pay additional amounts,subject to certain customary exceptions, so that U.S. holders will receive thesame amounts that they would have received had no such withholding taxes beenimposed.  Any such additional amounts paid to United States holders by PLDTwill be taxable to United States holders as interest income.  For federalincome tax purposes, United States holders will be treated as having actuallyreceived the amount of Philippine taxes withheld by PLDT with respect to a noteand as having paid over such withheld taxes to the Philippine taxingauthorities.  As a result, the amount of interest income included in grossincome for federal income tax purposes by a United States holder with respectto a payment of interest may be greater than the amount of cash actuallyreceived by the United States holder.

 

A United States Holder may beeligible to claim a deduction or, subject to a number of complex limitations, aforeign tax credit in respect of any Philippine withholding taxes imposed uponsuch interest payments.  If a United States Holder elects to claim a foreigntax credit, rather than a deduction, for a particular taxable year, suchelection will apply to all foreign taxes paid by the holder in the particularyear.

 

In the event that Philippines taxis withheld at a rate in excess of the reduced rate that a United States Holderwould be eligible for under the Philippines-United States income tax treaty, aUnited States Holder may not be entitled to claim a foreign tax credit for theexcess of the amount actually withheld over the amount that would have beenwithheld under the reduced treaty rate even though the procedure for claimingthe reduced treaty rate or the practical likelihood of receiving a refund ofsuch excess tax paid from the Philippine tax authorities is uncertain.

 

*Market Discount*

 

If a United States Holder purchasesa Debt Security after its original issue for an amount that is less than itsstated redemption price at maturity, the difference between the Debt Security'stax basis and its stated redemption price at maturity will be treated as“market discount” for United States federal income tax purposes, unless suchdifference is less than a specified de minimis amount.  Any market discountwill be considered to accrue ratably during the period from the date ofacquisition to the maturity date of the Debt Security, unless the United StatesHolder elects to accrue market discount on a constant yield method.  Gain onthe disposition or maturity of a Debt Security purchased with market discount isordinary income to the extent of accrued market discount on the Debt Security.

 

In addition, the United StatesHolder may be required to defer, until the maturity of the Debt Security or itsearlier disposition in a taxable transaction, the deduction of all or a portionof the interest expense on any indebtedness incurred to purchase or carry amarket discount Debt Security.  A United States Holder of a Debt Security mayelect to include market discount in income currently as it accrues, in whichcase the rule described above regarding deferral of interest deductions willnot apply.  This election to include market discount in income currently, oncemade, applies to all market discount obligations acquired on or after the firsttaxable year to which the election applies, and may not be revoked without theconsent of the IRS.

 

*Amortizable Premium*

* *

A United States Holder whopurchases a Debt Security for an amount in excess of its stated redemptionprice at maturity will be considered to have purchased the Debt Security at apremium.  A United States Holder generally may elect to amortize the premium onthe constant yield method.  The amount amortized in any year will be treated asa reduction of the United States Holder's interest income from the Debt Security.The premium on a Debt Security held by a United States Holder that does notmake such an election will decrease the gain or increase the loss otherwiserecognized on disposition or retirement of the Debt Security.  The election toamortize the premium on a constant yield method once made applies to all debtobligations held or subsequently acquired by the electing holder on or afterthe first day of the first taxable year to which the election applies and maynot be revoked without the consent of the IRS.

 

*Sale, Exchange and Retirement ofDebt Securities*

 

A United States Holder's initialtax basis in a Debt Security will, in general, be the United States Holder'spurchase price.  The United States Holder's initial tax basis will be increasedby market discount previously included in income by the United States Holderand reduced by any amortized premium.  Upon the sale, exchange or retirement ofa Debt Security, a United States Holder will recognize gain or loss equal tothe difference between the amount realized upon the sale, exchange orretirement and the adjusted tax basis of the Debt Security.  Amounts receivedupon sale that are attributable to accrued interest will not be treated as partof the amount realized but rather as a payment of interest.  Except asdescribed above with respect to market discount, such gain or loss will becapital gain or loss and will be long-term capital gain or loss if at the timeof sale, exchange or retirement the Debt Security has been held for more thanone year.  Capital gain of a non-corporate U.S. holder that is recognized on orafter May 6, 2003 and before January 1, 2009 is generally taxed at a maximumrate of 15% where the property is held for more than one year.  Generally, anysuch gain or loss realized will be treated as United States source income orloss.  The claim of a deduction in respect of capital losses for United Statesfederal income tax purposes is subject to limitations.

 

*Philippine Documentary Stamp Taxes*

 

United States Holders willgenerally have income equal to the amount of any Philippine documentary stamptaxes, described under “— Philippine Taxation — Documentary Stamp Taxes” above,deemed to be paid on their behalf by PLDT.  Any such taxes deemed paid onbehalf of a United States Holder in connection with the acquisition ordisposition of Debt Securities will generally be treated as part of the cost ofthe Debt Securities acquired, or in the case of a disposition of DebtSecurities, as a reduction in the amount realized on such disposition.

 

*Federal Estate Taxes*

 

Subject to certain statutorylimitations and exceptions, United States federal estate tax applies to theentire estate, wherever situated, of a decedent who was a United States citizenor resident.  The Philippines imposes an estate tax on decedents who own DebtSecurities, even if the decedent was not a citizen or resident of thePhilippines.  See “— Philippine Taxation — Estate and Donor's Taxes.”  Theamount of any estate tax, inheritance, legacy or succession taxes paid to thePhilippines with respect to property situated or deemed situated in thePhilippines generally can be applied as a credit against the United Statesestate tax, subject to the limitations established by the United States TaxCode and Regulations.  However, under the analysis applied by the United StatesTax Court in Estate of *Henry K. Schwartz*, 83 T.C. 943 (1984), the creditmay not be available for Philippine estate taxes on Debt Securities orbeneficial interests therein.  The credit is limited to the amount of the UnitedStates federal estate tax attributable under statutory rules to the DebtSecurities.

 

*Backup Withholding andInformation Reporting*

 

Information reporting requirementsmay apply to certain payments of principal and interest on the Debt Securitiesand to the proceeds of a sale of a Debt Security made to United States Holdersof Debt Securities other than certain exempt recipients.  A backup withholdingtax will not apply to such payments if the United States Holder (i) provides acorrect taxpayer identification number in the manner required by law, certifiesthat such holder is not subject to backup withholding and otherwise complieswith the backup withholding rules or (ii) otherwise establishes an exemption.Any amounts withheld under the backup withholding rules will be allowed as arefund or a credit against such United States Holder's United States federalincome tax liability provided the required information is furnished to the IRS.

 

Documents On Display

 

We are subject to the informationalrequirements of the Exchange Act, and files reports and other information withthe Commission, as required by this act.  Reports and other information filedby us with the Commission may be inspected and copied at the public referencefacilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,Washington, D.C. 20549, and at the Commission's regional offices at Suite 1400,Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois60661-2511.  Copies of this material may be obtained by mail from the publicreference section of the Commission, 450 Fifth Street, N.W., Washington, D.C.20549, at prescribed rates.  These reports and other information may also beinspected at the offices of the New York Stock Exchange, 20 Broad Street, NewYork, New York 10005 and the Pacific Exchange, 301 Pine Street, San Francisco,California 94104, on which the American Depositary Shares representing ourCommon Capital Stock are listed.

 

Item 13.   Quantitative and Qualitative Disclosures about Market Risks

** **

Our operationsare exposed to various risks, including liquidity risk, foreign exchange riskand interest rate risk.  The importance of managing these risks hassignificantly increased in light of considerable change and continuingvolatility in the Philippine and international financial markets.  With a viewto managing these risks, we have incorporated financial risk managementfunctions in our organization, particularly in our treasury operations.

 

Liquidity RiskManagement

 

We seek to manage our liquidity profileto be able to finance our capital expenditures and service our maturing debts.To cover our financing requirements, we intend to 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 flowinformation and continuously assess conditions in the financial markets foropportunities to pursue fund-raising initiatives.  These initiatives mayinclude bank loans, export credit agency-guaranteed facilities, and debtcapital and equity market issues.

 

Foreign Exchange RiskManagement

 

At December 31, 2002, the Philippine peso depreciatedagainst the U.S. dollar to Php53.254 = US$1 from Php51.690 = US$1 at December 31, 2001,which in turn depreciated from Php49.986 = US$1 at December 31, 2000.  

 

The following tableshows our consolidated foreign currency-denominated monetary assets andliabilities and their peso equivalents as of December 31, 2000, 2001 and 2002:

 

** **

Years Ended December 31,

** **

**2000(1)**

**2001(2)**

**2002(3)**

** **

**US$**

Php

**US$**

Php

**US$**

**Php**

** **

** **

**(in millions)**

** **

Assets

 

 

 

 

 

 

Cash and cash equivalents

142

7,098

40

2,083

76

4,033

Accounts receivable

131

6,563

146

7,536

148

7,910

 

273

13,661

186

9,619

224

11,943

Liabilities

 

 

 

 

 

 

Accounts payable

39

1,940

27

1,411

56

2,969

Accrued and other current liabilities

125

6,253

165

8,529

165

8,782

Notes payable

10

520

23

1,189

6

320

Long-term debt

3,600

179,930

3,156

163,144

2,937

156,398

Deferred credits and other noncurrent liabilities

—

—

—

—

50

2,676

 

3,774

188,643

3,371

174,273

3,214

171,145

Net foreign currency-denominated liabilities

3,501

174,982 

3,185

164,654

2,990

159,202

______________

 

*(1)   The exchange rate used was Php49.986 = US$1.00*

* *

*(2)   The exchange rate used was Php51.690 = US$1.00*

* *

*(3)   The exchange rate used was Php53.254 = US$1.00*

* *

While a certain percentage of ourrevenues is either linked to or denominated in U.S. dollars, substantially allof our indebtedness, a substantial portion of our capital expenditures and aportion of our operating expenses are denominated in foreign currencies, mostlyin U.S. dollars.

* *

As of December 31, 2002,approximately 95% of our long-term debts, on a consolidated andnon-consolidated basis, were denominated in foreign currencies, principally inU.S. dollars.  Of our foreign currency denominated debts, 10% and 8% are inJapanese yen, on a consolidated and non-consolidated basis, respectively, andthe balance in U.S. dollars.  Thus, a weakening of the peso against the U.S.dollar will increase both the principal amount of and interest expense on ourdebt in peso terms.  In addition, many of our financial ratios and otherfinancial tests would be negatively affected.  If, among other things, thevalue of the peso against the U.S. dollar drops from its current level, we maybe unable to maintain compliance with these ratios, which could result inacceleration of some or all of our indebtedness.  For further information onour loan covenants, see “Item 5. Operating and Financial Review and Prospects —Liquidity and Capital Resources — Financing Activities — Debt Financing —Covenants” above and Note 14 to our financial statements in Item 18.

 

To manage foreign exchange risks,stabilize cash flows, we enter into forward foreign exchange contracts, foreigncurrency swap contracts, currency options and other hedging products aimed atreducing and/or managing the adverse impact of changes in foreign exchangerates on our operating results and cash flows.  However, these hedges do notcover all of our exposure to foreign exchange risks, and hedges to cover all ofour exposure are not currently nor readily available.

 

Specifically, we use forwardforeign exchange contracts and foreign currency swap contracts to manage theforeign exchange risk associated with our foreign currency-denominated loans.As of December 31, 2002, PLDT and Smart had outstanding forward foreignexchange contracts of US$211 million (Php11,258 million) and US$5 million(Php241 million), respectively.  Also at the end of 2002, PLDT had outstandingprincipal-only long-term cross-currency swap contracts totaling US$550 million(Php28,196 million), while Smart had a cross-currency swap contract amountingto US$88 million (Php4,673 million). For further discussions of thesecontracts, see Note 26 to our financial statements in Item 18.

 

Interest Rate RiskManagement

 

On a limited basis, we enter intointerest rate swap agreements in order to manage our exposure to interest ratefluctuations.  In September 2002, PLDT terminated its outstanding interest rateswap agreement amounting to US$175 million (Php9,172 million) for which itreceived payment amounting to US$12 million (Php633 million), net ofoutstanding receivables at the termination date. This amount was recorded asother income in our Statements of Income. As of December 31, 2002, PLDT had nooutstanding interest rate swap agreement.

 

We make use of hedging instrumentsand structures solely for reducing or eliminating financial risks associatedwith our liabilities and not for trading or speculative purposes.

 

The table below sets out theinformation about PLDT's derivative financial instruments and othertransactions as of December 31, 2002 that are sensitive to foreign exchangerates and to changes in interest rates:

 

** **

 

 

 

**Total**

**Fair Value**

 

**Below 5 years**

**5 to 8.5 years**

**Over 8.5 years**

**In Dollars**

**In Pesos**

**In Dollars**

**In Pesos**

** **

 

 

 

**(in millions)**

**Liabilities**

 

 

 

 

 

 

 

Long-term Debt

 

 

 

 

 

 

 

Fixed Rate

 

 

 

 

 

 

 

US$ Notes (in millions)

763

175

550

1,488

78,161

1,312

69,077

Average interest rate

7.85% to 10.625%

10.50%

8.35% to 11.375%

—

—

—

—

US$ Fixed Loans (in millions)

154

95

—

249

13,251

271

14,419

Average interest rate

5.83% to 8.03%

5.65% to 7.58%

—

—

—

—

—

Japanese Yen (in millions)

—

82

—

82

4,379

83

4,431

Average interest rate

—

2.125%

—

—

—

—

—

Philippine Peso (in millions)

63

15

—

78

4,166

86

4,573

Average interest rate

11.18% to 17.50%

15.0%

—

—

—

—

—

Variable Rate

 

 

 

 

 

 

 

US Dollar (in millions)

445

164

—

609

32,412

609

32,412

Average interest rate

0.15% to 2.75%  over London Interbank Offered Rate, or LIBOR

0.55% to 2.5%  over LIBOR

—

—

—

—

—

Japanese Yen (in millions)

104

28

—

132

7,049

132

7,049

Average interest rate

0.90% over  Japanese Yen  LIBOR

0.40% over Japanese Yen LIBOR

—

—

—

—

—

**Forward Foreign Exchange Agreement**

 

 

 

 

 

 

 

(Receive US$/Pay Philippine Peso) Contract Amount (in millions)

211

—

—

211

11,402

211

11,258

Average Contractual Exchange Rate

Php53.9361

—

—

—

—

—

—

**Resettable Cross Currency  Swap Agreement**

 

 

 

 

 

 

 

(Receive US$/Pay Philippine Peso) Contract Amount (in millions)

—

—

550

550

28,196

550

29,290

Average Contractual Exchange  Rate

—

—

Php51.266

—

—

—

—

 

Item 14.   Description of Securities Other than Equity Securities

 

Not Applicable.

 

PART II

 

Item 15.   Defaults, Dividend Arrearages and Delinquencies

 

Piltel has experienced significantfinancial difficulties in recent years.  It has restructured substantially allof its debts in accordance with its debt restructuring plan, which was signedon June 4, 2001.  In June and October 2002, more creditors of Piltel agreed toparticipate in its restructuring plan on the same terms. As of December 31,2002, total restructured long-term debt of Piltel amounted to Php21,630million, with maturities of up to June 14, 2016.  Piltel is currently in theprocess of restructuring certain other debts.  As of December 31, 2002, Piltelhad an aggregate principal amount of Php451 million of unrestructured debt. 

 

Piltel iscurrently not in compliance with the terms of convertible bonds with principalamount of US$1.7 million (approximately US$2.2 million redemption price at theoption of the holders), and US$6.2 million bank debt. Piltel is currently inthe process of finalizing the terms under which the holder of the US$6.2million debt would participate in the debt restructuring.  See “Item 5.Operating and Financial Review and Prospects — Certain Indebtedness — Overviewof Piltel’s Indebtedness”.

 

The Series C, Class I PreferredStock of Piltel, is entitled to annual cumulative cash dividends of Php0.20 pershare (10% on the par value per share).  Piltel is in arrears with payments ofdividends with respect to the Series C, Class I Preferred Stock in the amountof Php1 million for each of the fiscal years ended December 31, 2000, 2001 and2002.  As of the date of this annual report on Form 20-F, the total arrearagewith respect to the Series C, Class I Preferred Stock of Piltel amounted toPhp3.5 million.

 

See “Item 3. Key Information — RiskFactors — Risks Relating to Us — Piltel hasexperienced financial difficulties and we cannot assure you that it will beable to discharge any of its debt or other obligations owed to us and ouraffiliates” and Notes 10 and 14 to our financial statements in Item 18.

 

Item 16.   Material Modifications to the Rights of Security Holders and Use ofProceeds

 

None.

 

Item 17.   Controls and Procedures

** **

Our Chief Executive Officer andTreasurer, after evaluating the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-14(c) of the Securities Exchange Act of1934, as amended) within 90 days prior to the date of this Form 20-F, haveconcluded that, as of such date, our disclosure controls and procedures wereeffective to ensure that material information relating to us was made known tothem by others within the PLDT Group, particularly during the period in whichthe Form 20-F was being prepared.

 

There were no significant changesin our internal controls or in other factors that could significantly affectthese controls subsequent to the date our Chief Executive Officer and Treasurercompleted their evaluation, nor were there any significant deficiencies ormaterial weaknesses in our internal controls requiring corrective actions.

** **

Item 18.   Audit Committee Financial Expert, Code of Ethics, and PrincipalAccountant Fees and Services

 

Not applicable.

 

PART III

 

Item 19.   Financial Statements

** **

Not applicable.

 

Item 20.   Financial Statements

** **

Index to Consolidated andNon-Consolidated Financial Statements

 

 

**Page**

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AUDITED ANNUAL FINANCIAL STATEMENTS

 

Report of Independent Auditors

F-1

Balance Sheets as of December 31, 2001 and 2002

F-3

Statements of Income for the Years Ended December 31, 2000, 2001 and 2002

F-4

Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2001 and 2002

F-5

Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002

F-6

Notes to Financial Statements

F-8

 

Item 21.   Exhibits

** **

See Item 18 above for detailsof the financial statements filed as part of this annual report.

 

Exhibits to this report:

 

1.

Articles of Incorporation and By-laws

 

 

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

 

**SIGNATURE**

 

The registrant hereby certifies that it meets all of the requirementsfor filing on Form 20-F and that it has duly caused and authorized theundersigned 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 Secretary

 

 

General Counsel

 

 

 

Date:  July 15, 2003

 

CERTIFICATIONS

 

I, Manuel V. Pangilinan, certifythat:

 

1.   I havereviewed this annual report on Form 20-F of Philippine Long Distance TelephoneCompany (the “Registrant”); 

 

2.   Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report; 

 

3.   Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the Registrant asof, and for, the periods presented in this annual report; 

 

4.   TheRegistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Registrant and have: 

 

a.      designed such disclosure controlsand procedures to ensure that material information relating to the Registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b.      evaluated the effectiveness of theRegistrant's disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c.      presented in this annual reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date. 

 

5.   TheRegistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the Registrant’s auditors and the audit committee ofRegistrant’s board of directors (or persons performing the equivalentfunction): 

 

a.   allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Registrant's ability to record, process, summarizeand report financial data and have identified for the Registrant’s auditors anymaterial weaknesses in internal controls; and

 

b.   any fraud,whether or not material, that involves management or other employees who have asignificant role in the Registrant’s internal controls.

 

5.   The Registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses. 

 

 
 

By:

/s/

Manuel V. Pangilinan

 
 

 

Manuel V. Pangilinan

 
 

 

President and Chief Executive Officer

 
 

 

(Principal Executive Officer)

 
 
 

 

July 15, 2003  

 

I, Anabelle L. Chua,certify that:

 

1.   I have reviewed this annualreport on Form 20-F of Philippine Long Distance Telephone Company (the“Registrant”); 

 

2.   Based on my knowledge, thisannual report does not contain any untrue statement of a material fact or omitto state a material 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 annual report; 

 

3.   Based on my knowledge, the financial statements, and otherfinancial information included in this annual report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the Registrant as of, and for, the periods presented in this annual report; 

 

4.   The Registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and have: 

 

a.       designed such disclosure controls and procedures toensure that material information relating to the Registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b.       evaluated the effectiveness of the Registrant'sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c.       presented in this annual report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date.

 

5.   The Registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the Registrant’s auditors and the audit committee of Registrant's board ofdirectors (or persons performing the equivalent function):

 

a.       all significant deficiencies in the design oroperation of internal controls which could adversely affect the Registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internal controls; and

 

b.       any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the Registrant’sinternal controls.

 

6.   The Registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

By:

/s/

Anabelle L. Chua

 
 

 

Anabelle L. Chua

 
 

 

Senior Vice President and Treasurer

 
 

 

(Principal Finance Officer)

 
 
 

 

July 15, 2003  

 

EXHIBIT INDEX
 

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 (incorporated by reference to PLDT's Form 6-K for the month of April 2001[1])

 

 

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 [2])

 

 

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)

 

 

6

Computation of Earnings per Share

 

 

7

Calculation of Ratio of Earnings to Fixed Charges 

 

 

8

Subsidiaries 

 

**EXHIBIT 6**

 

**PHILIPPINE LONG DISTANCETELEPHONE COMPANY**

**Computation of EarningsPer Share**

**For the years 1998 through2002**

 

** **

**1998**

**1999**

**2000**

**2001**

**2002**

**2002**(1)

 

**(in millions, except earnings (loss) per common share)**

**1. Net operating income per share**

** **

** **

** **

** **

** **

** **

Basic

 

 

 

 

 

 

Net operating income (loss) 

10,904

12,813

11,321

(5,380)

14,370

270

Deduct: Dividends on preferred stock

1,092

1,099

1,249

1,503

1,644

31

Amortization of difference between fair market value and put option price of Preferred Stock subject to mandatory conversion

–

–

–

653

1,254

24

Net operating income (loss) applicable to common stock

9,812

11,714

10,072

(7,536)

11,472

215

Diluted

 

 

 

 

 

 

Net operating income (loss) 

10,904

12,813

11,321

(5,380)

14,370

270

Deduct: Dividends on preferred stock

808

37

1,249

1,503

1,036

19

Amortization of difference between fair market value and put option price of Preferred Stock subject to mandatory conversion

–

–

–

653

1,254

24

Net operating income (loss) applicable to common stock

10,096

12,776

10,072

(7,536)

12,080

227

Basic

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

121,090

121,133

121,173

168,498

168,895

 

Effect of common shares issuance during the year

29

20

36,504

162

200

 

 

121,119

121,153

157,677

168,660

169,095

 

Diluted

 

 

 

 

 

 

Weighted average number of common shares (in thousands

 

 

 

 

 

 

Outstanding common shares, beginning

121,090

121,133

121,173

168,498

168,895

 

Effect of common shares issuance during the year

3,643

11,319

36,504

162

22,360

 

 

124,733

132,452

157,677

168,660

191,255

 

 

 

 

 

 

 

 

Net operating income (loss) per share 

 

 

 

 

 

 

Basic

Php81.01

Php96.69

Php63.88

Php(44.68)

Php67.84

US$1.27

Diluted

80.94

96.46

63.88

–

63.16

1.19

 

**EXHIBIT 6—continued**

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

**Computation of Earnings Per Share**

**For the years 1998 through 2002**

 

** **

**1998**

**1999**

**2000**

**2001**

**2002**

**2002**(1)

 

**(in millions, except earnings (loss) per common share)**

**2. Earnings (loss) per share**

** **

** **

** **

** **

** **

** **

Basic

 

 

 

 

 

 

Net income (loss) 

2,265

933

(28,984)

(20,739)

(9,604)

(180)

Deduct: Dividends on preferred stock

1,092

1,099

1,249

1,503

1,644

31

Amortization of difference between fair market value and option price of Preferred Stock Subject to Mandatory Conversion

–

–

–

653

1,254

24

Net income (loss) applicable to common stock

1,173

(166)

(30,233)

(22,895)

(12,502)

(235)

 

**EXHIBIT 6—continued**

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

**Computation of Earnings Per Share**

**For the years 1998 through 2002**

 

** **

**1998**

**1999**

**2000**

**2001**

**2002**

**2002**(1)

 

**(in millions, except earnings (loss) per common share)**

Diluted

 

 

 

 

 

 

Net income (loss) 

Php2,265

Php933

Php(28,984)

Php(20,739)

Php(9,604)

US$(180)

Deduct: Dividends on preferred stock

1,092

1,099

1,249

1,503

1,644

31

Amortization of difference between fair market value and option price of Preferred Stock Subject to Mandatory Conversion

–

–

–

653

1,254

24

Net income (loss) applicable to common stock

1,173

(166)

(30,233)

(22,895)

(12,502)

(235)

Weighted average number of common  shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

121,090

121,133

121,173

168,498

168,895

 

Effect of common shares issuance during the year

29

20

36,504

162

200

 

 

121,119

121,153

157,677

168,660

169,095

 

Earnings (loss) per share 

 

 

 

 

 

 

Basic

Php9.68

Php(1.37)

Php(191.74)

Php(135.75)

Php(73.93)

US$(1.39)

Diluted

9.68

–

–

–

–

–

_____________

 

*(1)    **The PLDT Group maintains itsaccounts in Philippine pesos.  For convenience, the peso financial informationas of and for the year ended December 31, 2002 has been translated into U.S.dollars at the exchange rate of Php53.254 = US$1.00, the peso-dollar rate asquoted through the Philippine Dealing System as of December 31, 2002.*

* *

*(2)    **Our convertible preferredshares were deemed anti-dilutive based on the calculation above.  Since theamount of preferred dividends over the equivalent number of common shares weregreater than the basic earnings per share, the amounts reported for basic anddiluted earnings (loss) per common share were the same.*

* *
**
**EXHIBIT 7**

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

**Calculation of Ratio of Earnings to Fixed Charges**

For the years 1998 through 2002

 

 

Consolidated

 

**1998**

**1999**

**2000**

**2001**

**2002**

**2002(1)**

 

**(in millions, except ratio of earnings (loss) to fixed charges)**

Earnings (a)

Php13,652

Php11,290

Php(21,580)

Php(8,081)

Php10,559

US$198

Fixed charges – (b)

 

 

 

 

 

 

Fixed charges without capitalized interest

Php8,628

Php10,032

Php14,467

Php16,214

Php16,278

US$306

Capitalized interest, net of amortization

4,542

2,699

1,879

2,404

1,344

25

 

Php13,170

Php12,731

Php16,346

Php18,618

Php17,622

Php331

Ratio (a/b) (2)

1.0

–

–

–

–

–

_____________

 

*(1)    **PLDT maintains its accountsin Philippine pesos.  For convenience, the peso financial information as of andfor the year ended December 31, 2002 has been translated into U.S. dollars atthe exchange rate of Php53.254 = US$1, the peso-dollar rate as quoted throughthe Philippine Dealing System as of December 31, 2002.*

* *

*(2)    **For purposes of this ratio,“Earnings” consist of income before provision for income tax (excluding PLDT’sshare in undistributed income of less than 50%-owned affiliates) and fixed ofcharges (excluding capitalized interest).  “Fixed charges” consist of interest(including capitalized interest, discounts and other financing costs) on allindebtedness, amortization of deferred financing costs and the estimatedfinancing component of rent expense (i.e., one-third of rent expense).*

* *
******
** **

**EXHIBIT 8**

 

 

SUBSIDIARIES
 

**Name of Subsidiary**

** **

Jurisdiction

** **

**Principal Activity**

** **

**Percentage of Ownership (As of****December 31, 2002****)**

 

 

 

 

 

 

 

Smart Communications, Inc.

 

Philippines

 

Cellular mobile services

 

100.0

 

 

 

 

 

 

 

PLDT Clark Telecom, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Subic Telecommunications Company, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

ePLDT, Inc.

 

Philippines

 

Information and communications infrastructure for Internet-based  services, e-commerce, call centers and IT-related services

 

100.0

 

 

 

 

 

 

 

PLDT Global Corporation

 

British Virgin Islands

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Smart-NTT Multimedia, Inc.

 

Philippines

 

Data and network services

 

100.0

 

 

 

 

 

 

 

Telesat, Inc.

 

Philippines

 

Satellite communications services

 

94.4

 

 

 

 

 

 

 

Maranao Telephone Company, Inc.

 

Philippines

 

Télécommunications services

 

97.5

 

 

 

 

 

 

 

ACeS Philippines Cellular Satellite Corporation

 

Philippines

 

Satellite phone services 

 

88.5

 

 

 

 

 

 

 

Mabuhay Philippines Satellite Corporation

 

Philippines

 

Satellite communications services

 

67.0

 

 

 

 

 

 

 

Pilipino Telephone Corporation

 

Philippines

 

Cellular mobile services

 

45.3

 

 

 

 

To the Board of Directors and Shareholders

Philippine Long Distance Telephone Company

 

 

We have audited the accompanying consolidated balance sheetsof Philippine Long Distance Telephone Company and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, cashflows and changes in stockholders’ equity for each of the three years in theperiod ended December 31, 2002.  These financial statements are theresponsibility of the Company’s management.  Our responsibility is to expressan opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  We believe that our audits provide areasonable basis for our opinion. 

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Philippine Long Distance Telephone Company andsubsidiaries as of December 31, 2002 and 2001, and the consolidated results oftheir operations and their consolidated cash flows for each of the three yearsin the period ended December 31, 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

 

 

 

 

 

SyCip Gorres Velayo & Co

A member practice of Ernst & Young Global

 

Makati City, Philippines

 

July 14, 2003

 

 

 

** **

** **

** **

**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY**

** **

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2002****AND 2001**

**(inmillion pesos)**

 

 

 

**2002**

2001

**ASSETS**

**Current Assets**

 

 

Cash and cash equivalents (Notes 5 and 25)

**10,974**

4,276

Accounts receivable – net (Notes 6, 18 and 25) 

**17,312**

26,119

Inventories and supplies – net (Note 7)

**4,501**

5,331

Deferred income tax (Note 21)

**4,297**

2,025

Other current assets – net 

**2,358**

2,469

Total Current Assets

**39,442**

40,220

**Noncurrent Assets**

** **

** **

Property, plant and equipment – net (Notes 7, 8, 14 and 23)

**199,367**

210,916

Investments – net (Notes 4, 9, 10, 17 and 20)

**2,142**

2,218

Goodwill and other intangible assets – net (Notes 11, 19 and 26)

**12,490**

13,031

Deferred income tax (Note 21)

**9,771**

13,508

Other noncurrent assets – net (Notes 12 and 22)

**3,664**

3,408

Total Noncurrent Assets

**227,434**

243,081

 

**266,876**

283,301

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

 

 

Accounts payable (Notes 18 and 25)

**9,866**

13,979

Current portion of long-term debt (Notes 8, 14, 18, 23 and 25) 

**19,176**

19,286

Accrued and other current liabilities (Notes 3, 12, 13, 19 and 25)

**15,102**

13,113

Notes payable (Note 23)

**760**

6,462

Income tax payable (Note 21)

**982**

355

Dividends payable (Note 17)

**429**

328

Total Current Liabilities

**46,315**

53,523

**Noncurrent Liabilities**

 

 

Long-term debt – net of current portion (Notes 8, 14, 18, 23 and 25) 

**171,774**

170,813

Deferred credits and other noncurrent liabilities (Notes 14, 15, 17 and 25)

**21,037**

25,520

Total Noncurrent Liabilities

**192,811**

196,333

**Minority Interest in Consolidated Subsidiaries**

**2,454**

2,472

**Preferred Stock Subject to Mandatory Redemption** (Note 16) 

**10,174**

9,399

**Stockholders’ Equity** (Notes 2 and 17)

 

 

Preferred stock

**4,468**

4,126

Common stock

**847**

845

Capital in excess of par value

**65,872**

65,510

Retained earnings

**(58,897)**

(51,654)

Accumulated other comprehensive income - cumulative translation adjustments (Note 4)

**2,832**

2,747

Total Stockholders’ Equity

**15,122**

21,574

 

**266,876**

283,301

*See accompanying Notes to Consolidated FinancialStatements.*

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

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FORTHE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**(inmillion pesos, except per share amounts)**

** **

** **

 
** **

**2002**

2001

2000

 
** **

** **

** **

** **

 
**OPERATING REVENUES**(Notes 16)

** **

** **

** **

 
Fixed line

 

 

 

 
Local exchange 

**23,390**

21,470

18,739

 
International long distance

**10,957**

11,544

13,226

 
National long distance

**8,191**

8,367

10,453

 
Data and other network

**5,480**

4,776

2,925

 
Miscellaneous

**523**

113

9

 
 

**48,541**

46,270

45,352

 
Wireless

 

 

 

 
Services

**31,282**

21,025

12,637

 
Handset sales

**14,776**

11,364

3,721

 
Information and communications technology services

**941**

469

239

 
 

**95,540**

79,128

61,949

 
**OPERATING EXPENSES**

** **

 

 

 
Depreciation (Note 7)

**17,663**

16,454

13,049

 
Compensation and benefits (Note 17)

**10,768**

9,353

9,097

 
Cost of cellular handsets sold 

**15,981**

13,232

7,042

 
Selling and promotions 

**5,640**

3,504

3,438

 
Maintenance (Note 16)

**5,043**

4,632

4,035

 
Amortization of intangibles

**541**

4,649

3,486

 
Provision for doubtful accounts (Note 5)

**4,209**

3,168

2,904

 
Rent (Note 16)

**3,108**

2,586

1,612

 
Professional and other service fees (Note 16)

**2,311**

2,381

1,478

 
Taxes and licenses (Note 22)

**1,101**

940

744

 
Asset impairment charges (Note 7)

**10,865**

19,483

–

 
Other operating costs (Note 16) 

**3,335**

2,701

3,618

 
 

**80,565**

83,070

50,503

 
**NET OPERATING INCOME (LOSS)**

**14,975**

(3,942)

11,446

 
**OTHER EXPENSES – Net**(Notes 5, 7, 8, 13, 15, 16, 20 and 23)

**16,315**

23,385

44,399

 
**LOSS BEFORE INCOME TAX, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE AND MINORITY INTEREST IN NET LOSSES OF CONSOLIDATED SUBSIDIARIES**

**(1,340)**

(27,327)

(32,953)

 
**PROVISION FOR INCOME TAX**(Note 21)

**3,125**

(636)

(8,240)

 
**LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE MINORITY INTEREST IN NET INCOME (LOSSES) OF CONSOLIDATED SUBSIDIARIES**

**(4,465)**

(26,691)

(24,713)

 
**CUMULATIVE EFFECT ON PRIOR YEARS (UP TO DECEMBER 31, 2000 OF ADOPTING SFAS 133 – NET OF TAX EFFECT (NOTE 21)**

–

54

–

 
**LOSS BEFORE MINORITY INTEREST IN NET INCOME (LOSSES) MINORITY INTEREST IN NET INCOME (LOSS) OF CONSOLIDATED SUBSIDIARIES**

**(355)**

739 

(1,627)

 
**NET LOSS**

**(4,110)**

(27,329) 

(23,086)

**Earnings Per Common Share**(Note 22)

** **

 

 

Basic earnings per share before cumulative effect of change in accounting principle and minority interest in net income (loss) of consolidated subsidiaries (Note 21)

**(43.55)**

(171.04)

(164.65)

Cumulative effect of change in accounting principle

–

(0.32)

–

Minority interest in net income (loss) of consolidated subsidiaries

**(2.10)**

4.38

(10.32)

Basic earnings per common share

**(45.65)**

(166.97)

(174.97)

*See accompanying Notes to Consolidated FinancialStatements.*
****
** **

** **

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FORTHE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**(inmillion pesos)**

** **

** **

 

**Preferred Stock**

**Common Stock**

**Capital in  Excess of  Par Value**

**Retained Earnings (Deficit)**

**Other Comprehensive Income – Cumulative Translation Adjustments**

**Total**

Balance as of January 1, 2000

3,625

606

21,456

3,112

2,566

31,365

Net loss for the year

–

–

–

(23,086)

–

(23,086)

Cash dividends

–

–

–

(1,988)

–

(1,988)

Issuance of capital stock

296

237

43,735

–

–

44,268

Balance as of December 31, 2000

3,921

843

65,191

(21,963)

2,566

50,558

Balance as of January 1, 2001

3,921

843

65,191

(21,963)

2,566

50,558

Net loss for the year

–

–

–

(27,779)

–

(27,934)

Adjustments

–

–

–

–

181

181

Accretion of difference between fair market value and redemption value of Preferred Stock Subject to Mandatory Redemption

–

–

–

(541)

–

(541)

Cash dividends

–

–

–

(1,666)

–

(1,666)

Issuance of capital stock

205

2

319

–

–

526

Balance as of December 31, 2001

4,126

845

65,510

(52,104)

1,126

21,124

Balance as of January 1, 2002

4,126

845

65,510

(52,104)

1,126

21,124

Net loss for the year

–

–

–

(4,477)

–

(4,477)

Adjustments

–

–

–

–

85

85

Accretion of difference between fair market value and redemption value of Preferred Stock Subject to Mandatory Redemption

–

–

–

(1,000)

–

(1,000)

Cash dividends

–

–

–

(1,683)

–

(1,683)

Partial redemption of Series IV Preferred Stock (Note 15)

(60)

–

–

(12)

–

(72)

Issuance of capital stock

414

2

362

–

–

778

**Balance as of December 31, 2002**

**4,456**

**847**

**65,872**

**(59,277)**

**1,801**

**1****4,755**

*See accompanying Notes to Consolidated FinancialStatements.*

** **
****
** **

** **

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FORTHE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**(inmillion pesos)**

** **

** **

 

**2002**

2001

2000

** **

** **

 

 

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

Net loss

**(4,110)**

(27,329)

(23,086)

Adjustments to reconcile net loss to net cash provided by operating activities:

** **

 

 

Depreciation and amortization

**18,204**

21,103

16,5359

Asset impairment charges

**10,865**

19,470

–

Foreign exchange revaluation losses

**3,820**

3,660

32,173

Provision for doubtful accounts

**4,209**

3,168

2,904

Provision for decline in value of investments

**–**

5,181

**–**

Write-off of customer list

**–**

2,077

–

Provision for income tax – deferred

**530**

(1,826)

(10,148)

Minority interest in income (losses) of consolidated subsidiaries

**(355)**

739

(1,627)

Equity in net losses of investees

**128**

954

902

Others

**1,392**

(F388)

1,455

Operating income before working capital

**34,684**

24,732 

19,108

Decrease (increase) in:

** **

 

 

Accounts receivable

**1,233**

643

(3,615)

Inventories and supplies

**386**

(1,079)

(938)

Other current assets

**811**

(101)

(175)

Increase (decrease) in:

 

 

 

Accounts payable

**(3,628)**

(2,027)

7,050

Accrued and other current liabilities

**1,139**

181

2,477

Income tax payable

**2,244**

(708)

127

Net cash provided by operating activities

**36,869**

21,641

24,034

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

Net additions to property, plant and equipment

**(14,699)**

(30,554)

(27,109)

Net (reductions in) additions to investments

**1,430**

460

(826)

Increase in other noncurrent assets

**(1,871)**

(2,683)

(2,507)

Cash acquired from acquisition of Smart

–

–

1,428

Cash used in investing activities

**(15,140)**

(32,777)

(29,014)

*(Forward)*

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS *(Continued)***

**FORTHE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2001**

**(inmillion pesos)**

** **

 

**2002**

2001

2000

** **

** **

 

 

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

 

Additions to long-term debt

**32,586**

17,045

22,025

Reduction of long-term debt

**(42,019)**

(15,829)

(19,241)

Additions to (reduction of) notes payable 

**(5,743)**

1,581

(10,895)

Cash dividends paid

**(1,582)**

(1,821)

(1,876)

Proceeds from issuance of capital stock

**464**

232

14,194

Increase in deferred credits and other noncurrent liabilities

**1,391**

4,506

1,828

Redemption of preferred stock

**(72)**

–

–

Net cash provided by (used in) financing activities

**(14,975)**

5,714

6,035

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

**(56)**

24

757

**NET INCREASE (DECREASE) IN CASH AND  CASH EQUIVALENTS**

**6,698**

(5,398)

1,812

**CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR**

**4,276**

9,675

7,862

**CASH AND CASH EQUIVALENTS AT END OF YEAR**

**10,974**

4,276

9,674

 
 

 

 

SUPPLEMENTAL CASH FLOW DISCLOSURES
 

 

 

Income tax paid

**351**

1,009

1,781

Interest paid  Capitalized to property, plant and equipment

**1,344**

2,404

2,603

Charged to operations

**13,956**

16,071

14,640

Interest received

**732**

1,031

1,844

*See accompanying Notes to Consolidated FinancialStatements.*

** **
**
* *

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE YEARSENDED DECEMBER 31, 2002, 2001 AND 2000**

** **

 

 

**1.  ****CorporateInformation**

 

The Philippine Long DistanceTelephone Company, or PLDT, was incorporated under the old Corporation Law ofthe Philippines (Act 1459, as amended) on November 28, 1928, following themerger of four telephone companies under common U.S. ownership.  In 1967,effective control of PLDT was sold by General Telephone and ElectronicsCorporation (a major stockholder since PLDT’s incorporation) to a group ofFilipino businessmen.  In 1981, in furtherance of the then existing policy ofthe Philippine government to integrate the Philippine telecommunicationsindustry, PLDT purchased substantially all of the assets and liabilities of RepublicTelephone Company. 

 

The common shares of PLDT arelisted and traded on the Philippine Stock Exchange, or PSE, and prior toOctober 19, 1994, were listed and traded on the American Stock Exchange andPacific Exchange in the United States.  On October 19, 1994, an AmericanDepositary Receipts, or ADRs, facility was established pursuant to whichCitibank N.A., as depositary, issued ADRs evidencing American DepositaryShares, or ADSs, with each ADS representing one PLDT common share.  JP MorganChase Bank has been appointed as successor depositary for PLDT’s ADRs effectiveFebruary 10, 2003.  The ADSs are listed and traded on the New York StockExchange and the Pacific Exchange in the United States.

 

PLDT’s charter, like those of allother Philippine corporations, was initially limited to a period of 50 yearsbut has since been extended twice for 25 years each, the last extension beingfor an additional 25-year period to 2028.  Under its amended charter (RepublicAct No. 7082), which became effective on August 24, 1991, PLDT is authorized toprovide virtually every type of telecommunications service, both within thePhilippines and between the Philippines and other countries.

 

PLDT operates under thejurisdiction of the Philippine National Telecommunications Commission, or NTC,which jurisdiction extends, among other things, to approving major servicesoffered by PLDT and certain rates charged by PLDT. 

 

We had 19,139 and 18,531 employeesas of December 31, 2002 and 2001, respectively.

 

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

 

 

**2.       ****Basis of Consolidated Financial Statement Preparation**

 

Our consolidated financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the United States of America, or US GAAP.

 

Our consolidated financialstatements include the financial statements of PLDT and those of the followingsubsidiaries (collectively, the PLDT Group), which were all incorporated in thePhilippines except for PLDT Global Corporation, or PLDT Global, which wasincorporated in the British Virgin Islands.

 

** **

** **

**Percentage of Ownership**

**Name of Subsidiary/Investee**

**Principal Activity**

**2002**

2001

2000

**Fixed Line**

 

** **

** **

** **

PLDT Clark Telecom, Inc., or  Clark Telecom

Telecommunications services

**100.0**

100.0

100.0

Subic Telecommunications Company, Inc.,  or Subic Telecom

Telecommunications services

**100.0**

100.0

60.0

Smart–NTT Multimedia, Inc., or SNMI

Data and network services

**100.0**

100.0

100.0

PLDT Global and subsidiaries

Telecommunications services

**100.0**

100.0

–

Maranao Telephone Company, Inc.,  or MaraTel

Telecommunications services

**97.5**

92.3

–

**Wireless**

 

** **

** **

** **

Smart Communications, Inc., or Smart,  and subsidiaries

Cellular mobile services

**100.0**

100.0

100.0

Telesat, Inc., or Telesat

Satellite communications services

**94.4**

94.4

94.4

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services

**88.5**

88.5

88.5

Mabuhay Philippines Satellite  Corporation, or Mabuhay Satellite

Satellite communications services

**67.0**

67.0

67.0

Pilipino Telephone Corporation, or  Piltel, and subsidiaries

Cellular mobile and  telecommunications services

**45.3**

45.3

57.6

**Information and Communications  Technology**

 

 

 

 

ePLDT, Inc., or ePLDT, and  subsidiaries

Information and communications  infrastructure for internet-based  services, e-commerce, call centers  and IT-related services

**100.0**

100.0

100.0

* *

* *

Themethod of accounting applied to investments, whether consolidated, equity orcost, involves an evaluation of all significant terms of the investments thatexplicitly grant or suggest evidence of control or influence over theoperations of the investee. The consolidated financial statements include ourcontrolled subsidiaries. Investments in businesses which we do not control, butwe have the ability to exercise significant influence over operating andfinancial policies, are accounted for using the equity method. Investments inwhich we do not have the ability to exercise significant influence overoperating and financial policies are accounted for using the cost method.Equity and cost method investments are included in “Investments” in ourconsolidated balance sheets.  Certain of our cost method investments areclassified as available for sale securities and adjusted to fair value at eachreport date pursuant to Statement of Financial Accounting Standards (SFAS) No.115, “Accounting for Certain Investments in Debt and Equity Securities.”  Otherthan temporary declines in the value are recorded in operations in the periodincurred.

 

Consolidated financial statementsare prepared using uniform accounting policies for like transactions and eventswith similar circumstances.  Intercompany balances and transactions, includingintercompany profits and unrealized profits and losses, are eliminated.

 

Minority interests represent theequity interests in MaraTel, Telesat, Mabuhay Satellite and Piltel and theirrespective subsidiaries not held by the PLDT Group.

 

 

**3.        ****Summary of Significant Accounting Policies**

 

Our significant accounting policiesand practices are discussed below to facilitate the understanding of ourfinancial statements:

 

***RevenueRecognition***

 

Revenue for services is stated atamounts invoiced to customers and excludes value-added tax.  We providefixed-line communication services, mobile communication services, andinformation and communications technology services.  We provide such servicesto business, residential, payphone and mobile customers.  Revenue, whichexcludes value-added tax, represents the value of fixed consideration that hasbeen received or is receivable.  Revenue is recognized when there is evidenceof an arrangement, collectibility is reasonably assured, and the delivery ofthe product or service has occurred. In certain circumstances, revenue is splitinto separately identifiable components and recognized when the relatedcomponents are delivered in order to reflect the substance of the transaction.The value of components is determined using verifiable objective evidence.  Wedo not provide our customers with the right to a refund.

 

*Products and services*

 

*Subscriptions*

* *

We provide telephone and datacommunication services under postpaid and prepaid payment arrangements. Revenueincludes fees for installation and activation. Installation and activation-relatedfees and the corresponding costs are deferred and recognized over the expectedperiod of the customer relationship period of 7 years and 3 years for fixedline and cellular service, respectively.  All installation and activation costsare expensed as incurred.  Postpaid service arrangements include subscriptionfees, typically fixed monthly fees, which are recognized over the subscriptionperiod on a pro rata basis. 

 

*Airtime, traffic and value-addedservices*

* *

Prepaid service revenue collectedin advance is deferred and recognized based on actual usage or upon expirationof the usage period, whichever comes first.  Payphone service revenue isrecognized when the service is provided. Interconnection revenue for calltermination, call transit, and network usage are recognized in the period thetraffic occurs.  Revenue related to local, long distance, network-to-network,roaming and international call connection services is recognized when the callis placed or the connection provided, net of amounts payable to othertelecommunication carriers for terminating calls in their territories. Revenuerelated to products and value-added services is recognized upon delivery of theproduct or service.

 

*Equipment sales*

* *

Sales of communication equipmentare recognized upon delivery to the customer.

 

*Directory services*

* *

Revenue related to publisheddirectory services is recognized on a pro rata basis over the period in whichthe publication expires, which is generally 12 months.  Telephone-baseddirectory service revenue is recognized when the service is provided.

 

*Others*

* *

Interest is recognized on a timeproportion basis taking into account the principal amount outstanding and theeffective interest rate.

 

*Incentives*

* *

We record an insignificant amountof commission expense based on the number of new subscriber connectionsinitiated by certain dealers.  All other cash incentives provided to dealersand customers are recorded as a reduction to revenue.  Product based incentivesprovided to dealers and customers as part of a transaction are accounted for asmultiple element arrangements and recognized when earned.  

* *

***Cash andCash Equivalents***

* *

Cash includes cash on hand and inbanks.  Cash equivalents are short-term, highly liquid investments that arereadily convertible to known amounts of cash with original maturities of threemonths or less and that are subject to an insignificant risk of change invalue.

* *

***AccountsReceivable***

* *

Accounts receivable are stated atface value, net of allowance for doubtful accounts.

* *

***Allowancefor Doubtful Accounts***

* *

Allowance for doubtful accounts ismaintained at a level considered adequate to provide for potentiallyuncollectible receivables.  The level of allowance is based on historicalcollections, write-off experience, current economic trends, changes in ourcustomer payment terms and other factors that may affect collectibility.  Anevaluation of the receivables, designed to identify potential charges to theallowance, is performed on a continuous basis during the year.

* *

The allowance is established bycharges to income in the form of provisions for doubtful accounts.  Suchprovisions are computed as a certain percentage of operating revenues.  Thelevel of this allowance is also evaluated by management on the basis of factorsthat affect the collectibility of the accounts, e.g., age status ofreceivables.  In addition, a provision is made for accounts specificallyidentified to be potentially uncollectible based on Management’s estimate ofcollectibility.

* *

***Inventoriesand Supplies***

* *

Inventories and supplies are valuedat the lower of cost or net realizable value.  These are items of cellularphone units, materials, spare parts, terminal units and accessories.

 

Net realizable value is thereplacement cost.  Cost is determined using the moving average method.

 

***Property,Plant and Equipment***

 

Property, plant and equipment arestated at cost less accumulated depreciation, amortization and any impairmentin value.

 

The initial cost of property, plantand equipment comprises its purchase price and any costs directly attributableto bringing the asset to its working condition and location for its intendeduse.  Expenditures incurred after the assets have been put into operation, suchas repairs and maintenance and overhaul costs, are normally charged to incomein the period the costs are incurred.  In situations where it can be clearlydemonstrated that the expenditures have resulted in an increase in the futureeconomic benefits expected to be obtained from the use of an item of property,plant and equipment beyond its originally assessed standard of performance, theexpenditures are capitalized as an additional cost of property, plant andequipment.  Cost also includes interest on borrowed funds used during theconstruction period.  When assets are sold or retired, their costs andaccumulated depreciation and amortization are eliminated from the accounts andany gain or loss resulting from their disposal is included in the statement ofoperation of such period.

* *

Depreciation and amortization are calculatedon a straight-line basis over the following estimated useful lives of theassets:

* *

**Property, Plant and Equipment**

**Estimated Useful Lives**

 

 

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Cellular facilities

10 years

Buildings

25 – 40 years

Vehicles and other work equipment

5 – 10 years

Furniture

3 – 10 years

Communications satellites

15 years

Information origination/termination equipment

5 – 15 years

Land improvements

10 years

 

The useful lives and depreciationand amortization method are reviewed periodically to ensure that the period andmethod of depreciation and amortization are consistent with the expectedpattern of economic benefits from items of property, plant and equipment.

 

Property under construction isstated at cost.  This includes cost of construction, plant and equipment andother direct costs.  Property under construction is not depreciated until suchtime that the relevant assets are completed and put into operational use.

 

Borrowing costs that are directlyattributable to the construction of plant and equipment are capitalized duringthe construction period, See*Note 8 – Property, Plant and Equipment.*

 

***Impairmentof Assets***

* *

Long-lived assets and identifiableintangible assets are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Assets, which are held and used in operations, would be impairedif the book value of the asset exceeded the undiscounted future net cash flowswithout interest charges expected to result from the use of the asset.  If animpairment exists, the amount of the impairment recorded is based on the fairvalue of the assets.  Assets, which are to be disposed of, would be impaired tothe extent the book value of the asset exceeded fair value less disposalcosts.  PLDT Group considers relevant cash flows, estimated future operatingresults, trends and other available information in assessing whether thecarrying values of assets are recoverable.

 

***Goodwilland Other Intangible Assets***

 

Goodwill is the excess of theacquisition cost of a business, including associates over the fair value of theidentifiable net assets acquired. Effective January 1, 2002, we adopted SFASNo. 142, “Goodwill and Other Intangible Assets” and, as required, we no longeramortize goodwill (including goodwill recorded on our equity methodinvestments), or intangible assets which we have determined has an indefinitelife. Goodwill is reviewed annually (or more frequently under variousconditions) for impairment using a fair value approach. Intangible assets thatdo not have indefinite lives are amortized over their useful lives and reviewedfor impairment in accordance with SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  We have no indefinite-lived intangibles.

 

Priorto January 1, 2002, we generally amortized goodwill and other identifiableintangibles on a straight-line basis over their estimated useful life, notexceeding 5 years. We assessed the impairment of other identifiable intangiblesand goodwill related to our consolidated subsidiaries under SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of,” whenever events or changes in circumstances indicated thatthe carrying value may not be recoverable. A determination of impairment (ifany) was made based on estimates of future cash flows. In instances wheregoodwill was recorded for assets that were subject to an impairment loss, thecarrying amount of the goodwill was eliminated before any reduction was made tothe carrying amounts of impaired long-lived assets and identifiableintangibles.  On a quarterly basis, we assessed the impairment of enterpriselevel goodwill under Accounting Principles Board (APB) Opinion No. 17,“Intangible Assets.” A determination of impairment (if any) was made basedprimarily on estimates of market value.

 

***Cost ofDebt Issuance***

* *

Issuance costs, underwriting feesand related expenses incurred in connection with the issuance of debtinstruments are deferred and amortized over the terms of the instruments.Deferred costs related to the extinguishment of debt are charged to operationswhen the related debt is extinguished.

* *

***BorrowingCosts***

* *

Borrowing costs are generallyexpensed as incurred.  Borrowing costs are capitalized if they are incurredduring the acquisition, construction or production of a qualifying asset andsuch costs could have been avoided if expenditures for the assets have not beenmade.  Capitalization of borrowing costs commences when the activities toprepare the asset are in progress and expenditures and borrowing costs arebeing incurred.  Borrowing costs are capitalized until the assets are ready fortheir intended use.  If the resulting carrying amount of the asset exceeds itsrecoverable amount, an impairment loss is recorded.  Borrowing costs includeinterest charges and other costs incurred in connection with the borrowing offunds, excluding exchange differences arising from foreign currency borrowingsused to finance these projects.

* *

***RetirementCosts***

* *

PLDT and Smart have fundednoncontributory retirement plans, administered by the respective companies’Trustee, covering employees.  Retirement costs are actuarially determined usingthe projected unit credit of accrued benefit valuation method.  This methodreflects services rendered by employees to the date of valuation andincorporates assumptions concerning employees’ projected salaries.  Retirementcosts include current service cost plus amortization of past service cost,experience adjustments and changes in actuarial assumptions over the expectedaverage remaining working lives of the covered employees.

* *

***Stock-BasedCompensation***

 

We have historically accounted forstock-based employee compensation plans under APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations, and followed thedisclosure-only provisions of SFAS No. 123, “Accounting for Stock-BasedCompensation.”  See Note 16 for additional information.

 

Stock-based compensationarrangements are accounted for in accordance with the provisions of AccountingPrinciples Board, or APB, Opinion No. 25, “Accounting for Stock Issued toEmployees,” or SFAS No. 123, “Accounting for Stock-Based Compensation.”  UnderAPB Opinion No. 25, compensation cost is measured at the intrinsic value, whichis the difference between market price and exercise price, if any, on themeasurement date.  Under SFAS No. 123, compensation cost is calculated based onthe fair value of the options granted.  Fair value is determined using anacceptable option-pricing model based on certain management assumptions.Compensation expense is recognized over the performance period. Additionally,for its stock-based compensation, U.S. GAAP requires certain disclosures asprescribed under SFAS No. 123.

 

PLDT accounts for its stock-basedcompensation under the Executive Stock Option Plan and Employee Stock PurchasePlan in accordance with APB Opinion No. 25, and has adopted the disclosureprovisions of SFAS No. 123.  PLDT has recognized an insignificant amount ofcompensation expense for its stock-based compensation for the years endedDecember 31, 2002, 2001 and 2000.

 

*Executive Stock Option Plan*

 

Stock options granted under thePlan vest over five years and have a maximum contractual life of ten years fromthe date of grant.  The exercise price of the options granted under the Planshall not be lower than the average of the closing price of the common stock onthe Philippine Stock Exchange for thirty calendar days immediately precedingthe date of grant.

 

The number of shares reserved underthis Plan should not exceed 1.2% of the total issued common shares of PLDT, andthe number of shares reserved for issuance under this Plan is increased toinclude any shares of PLDT’s common stock issuable upon exercise of optionsgranted under the Plan that expire or lapse for any reason without having beenexercised in full. 

 

The Executive Stock Option Planwill terminate on December 10, 2009, unless PLDT’s board of directorsterminates it earlier. 

 

On December 10, 1999, PLDT grantedapproximately 1.4 million options to purchase PLDT’s common stock under theExecutive Stock Option Plan. Stock option activity under the Plan for the yearended December 31, 2002, 2001 and 2000 are summarized below:

 

 

**Options Outstanding**

 

Number of  Options

Weighted  Average  Exercise Price  Per Share

 

(in millions, except number of options)

Balances, December 31, 2000

1,322

814

Options granted (cancelled):

 

 

2001

(165)

814

2002

69

814

Balances, December 31, 2002

1,226

814

 

All the above grants made under theExecutive Stock Option Plan were made to executives of PLDT.

 

In accordance with the provisionsof SFAS No. 123, the fair value of each option is estimated using theBlack-Scholes model with the following assumptions for grants under theExecutive Stock Option Plan during the year ended December 31, 1999: dividendyield of 0.8%, volatility of 47%, risk-free interest rate of 14% at the date ofgrant and an expected term of five years.

 

The weighted average per share fairvalue of common stock options granted in 2000 was Php1,335.  The remainingweighted average contractual life was eight years as of December 31, 2002.

 

At December 31, 2002, there were noshares issued under the Executive Stock Option Plan which were unvested andsubject to repurchase.

 

*Employee Stock Purchase Plan*

 

On March 3, 2000 a total of 991,200shares of common stock were made available under the plan to all eligibleemployees as of January 3, 2000.  The purchase price was fixed at the lower of85% of the average market price of PLDT stock on the Philippine Stock Exchangeon January 3, 2000 or 85% of the average market price on April 15, 2003.  In noevent will the price per share be less than the par value of each share.

 

The maximum number of shares thatmay be issued and sold under the plan is 5.6 million.  Sales under the EmployeeStock Purchase Plan for the year December 31, 2000 amounted to Php827,000 at2002 average price of Php878.  There were no sales under the Plan for the yearended December 31, 2001.

 

The weighted average estimatedgrant date fair value, as defined by SFAS No. 123, of rights to purchase stockunder the Employee Stock Purchase Plan granted in 2002, 2001 and 2000 was zero,at Php1,472 per share.  The estimated grant date fair value was calculatedusing the Black-Scholes model.  The following weighted average assumptions wereincluded in the estimated grant date fair value calculations for rights topurchase stock under PLDT's Employee Stock Purchase Plan: dividend yield of0.5%, volatility of 59%, risk-free interest rate of 13% at the date of grantand an expected term of three years.

 

Pro forma information regarding netincome (loss) and earnings per share is required by SFAS No. 123.  Thisinformation is required to be determined as if PLDT had accounted for itsemployee stock options (including shares issued under the Employee StockPurchase Plan) using the fair value method.  Under SFAS No. 123, employee stockoptions are valued at the grant date using the Black-Scholes valuation model,and this compensation cost is recognized ratably over the vesting period.  Hadcompensation expense for PLDT’s stock option plan and stock purchase plan beendetermined based on the fair value at the grant date for awards for years 2002,2001 and 2000, consistent with the provision of SFAS No. 123, PLDT’s net losswould have increased in 2002, 2001 and 2000 to the pro-forma amounts indicatedbelow:

 

 

**Years Ended December 31,**

 

**2002**

2001

2000

 

(in million pesos, except per share amounts)

 

** **

 

 

Net loss, as reported

**(4,110)**

(27,329)

(23,086)

Net loss, pro forma 

**(9,763)**

(20,793)

(29,235)

Net loss per common share – basic and diluted, as reported

**(45.65)**

(166.97)

(174.97)

Net loss per common share – basic and diluted, pro forma

**(74.88)**

(136.07)

(193.33)

* *

***ForeignCurrency Transactions and Translations***

 

For each entity in the group,transactions in foreign currencies are recorded in functional currency of theentity by applying to the foreign currency amount the spot exchange rateprevailing at the time of the transaction date.  Foreign exchange gains orlosses arising on the spot settlements or restatement of monetary items atrates different from those at which they were initially recorded during theperiod or presented in the previous financial statements are recorded in thestatements of income in the period in which they arise

 

Certain entities and associates ofour consolidated group have functional currencies different than out reportingcurrency.  The assets and liabilities of such entities are translated to ourreporting currency using exchange rates at the balance sheet date, and thestatement of operations are translated using the weighted average rate for theperiod.  The resulting translation adjustments are recorded as a component ofcomprehensive income.. 

 

***Derivativesand Hedging Instruments***

 

In June 1998, the FinancialAccounting Standards Board issued Statement No. 133, *Accounting forDerivative Instruments and Hedging Activities*.  The Statement requires theCompany to recognize all derivatives on the balance sheet at fair value.Derivatives that are not hedges must be adjusted to fair value through income.If the derivative is a hedge, depending on the nature of the hedge, and to theextent of the hedge’s effectiveness changes in the fair value of derivativesare either offset against the change in fair value of hedged assets,liabilities, or firm commitments through earnings or recognized in othercomprehensive income until the hedged item is recognized in earnings.  Theineffective portion of a derivative’s change in fair value will be immediatelyrecognized in earnings.  The adoption of Statement No. 133 on January 1, 2001resulted in the cumulative effect of an accounting change of Php54 million, netof tax effect, being recognized as a loss in the statement of net income.

 

Prior to January 1, 2001,derivative transactions entered into as hedges were accounted for as follows:

 

*Forward Exchange Contracts*.Translation gains or losses on forward exchange contracts were computed bymultiplying the forward notional amounts by the difference between the spotexchange rates prevailing on balance sheet dates and the spot exchange rates onthe contract inception dates (or the last reporting dates).  The resultinggains or losses were offset against the translation losses or gains on theunderlying hedged transactions.  Any premium or discount was amortized over theperiod of the contract and charged or credited to current operations.  

 

*Interest Rate Swaps.*Interest due to and from the swaps was accrued as of balance sheet date.

*** ***

***IncomeTaxes***

 

Deferred income tax is providedusing the liability method.  Deferred tax assets and liabilities are recognizedfor the future tax consequences attributable to: (a) temporary differencesbetween the financial reporting bases of assets and liabilities and theirrelated tax bases; and (b) net operating loss carryover, or NOLCO.  Deferredtax assets and liabilities are measured using the tax rates applicable totaxable income in the years in which those temporary differences are expectedto be recovered or settled and NOLCO are expected to be applied.  A valuationallowance is provided for deferred tax assets when it is more likely than notthat some or all of the deferred tax assets will not be realized in the future.

 

***EarningsPer Common Share***

 

Basic earnings per share, or EPS,is calculated by dividing the net income (loss) for the year attributable tocommon shareholders by the weighted average number of common shares outstandingduring the year, after giving retroactive effect to any stock dividenddeclarations.

 

Diluted EPS is calculated in thesame manner assuming that, at the beginning of the year or at the time ofissuance during the year, all outstanding options are exercised and convertiblepreferred shares are converted to common shares.  Outstanding stock optionswill have a dilutive effect under the treasury stock method only when theaverage market price of the underlying common share during the period exceedsthe exercise price of the option.  

 

Where the effects of the assumedconversion of the preferred shares and the exercise of all outstanding optionshave anti-dilutive effect, basic and diluted EPS are stated the same.

 

***Segment Reporting***

 

Segment assets include operatingassets used by a segment and consist principally of operating cash,receivables, inventories and property, plant and equipment, net of allowancesand provisions.  Segment liabilities include all operating liabilities andconsist principally of accounts payable, accrued expenses and long-term debt.  

 

Segment revenues, segment expensesand segment performance include transfers between business segments.  Thetransfers are accounted for at competitive market prices charged tounaffiliated customers for similar products.  Such transfers are eliminated inour consolidation.

 

***Use ofEstimates***

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States, requires us to make estimates and assumptions that affect thereported amounts of our assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the period reported.  Actual resultscould differ from those our estimates.

 

Examples of significant estimatesinclude the allowance for doubtful accounts, the recoverability of intangiblesand other long-lived assets and valuation allowances on tax assets.

 

***Impact of Recently Issued Accounting Pronouncements***

 

In April 2002, the FASB issued SFASNo. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment ofFASB Statement No. 13, and Technical Corrections." Among other provisions,SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses fromExtinguishment of Debt." Accordingly, gains or losses from extinguishmentof debt shall not be reported as extraordinary items unless the extinguishmentqualifies as an extraordinary item under the criteria of Accounting PrinciplesBoard ("APB") Opinion No. 30, "Reporting the Results ofOperations--Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events andTransactions."

 

Gains or losses from extinguishmentof debt that do not meet the criteria of APB No. 30 should be reclassified toincome from continuing operations in all prior periods presented. Theapplication of SFAS No. 145 is not expected to have a material impact on ourconsolidated financial position and results of operations.

 

In June 2002, the FASB issued SFASNo. 146, "Accounting for Costs Associated with Exit or DisposalActivities." SFAS No. 146 provides guidance related to accounting forcosts associated with disposal activities covered by SFAS No. 144 or with exitor restructuring activities previously covered by Emerging Issues Task Force("EITF") Issue No. 94-3, "Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity (includingCertain Costs Incurred in a Restructuring)." SFAS No. 146 supersedes EITFIssue No. 94-3 in its entirety. SFAS No. 146 requires that costs related toexiting an activity or to a restructuring not be recognized until the liabilityis incurred. SFAS No. 146 will be applied prospectively to exit or disposalactivities that are initiated after December 31, 2002. The application of SFASNo. 146 is not expected to have a material impact on our consolidated financialposition and results of operations.

 

In November 2002, the FASB issuedFASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others." FIN 45 requires that a liability be recorded inthe guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45requires disclosures about the guarantees that an entity has issued, includinga rollforward of the entity's product warranty liabilities. We will apply therecognition provisions of FIN 45 prospectively to guarantees issued afterDecember 31, 2002. The disclosure provisions of FIN 45 are effective forfinancial statements for the year ended December 31, 2002. We are currently inthe process of evaluating the potential impact that the adoption of FIN 45 willhave on our consolidated financial position and results of operations. Theapplication of FIN 45 is not expected to have a material impact on our reportedconsolidated financial position and results of operations.

 

In November 2002, the EITF reacheda consensus on Issue No. 00-21, "Revenue Arrangements with MultipleDeliverables." EITF Issue No. 00-21 provides guidance on how to accountfor arrangements that involve the delivery or performance of multiple products,services and/or rights to use assets. The provisions of EITF Issue No. 00-21will apply to revenue arrangements entered into in fiscal periods beginningafter December 15, 2002. We are currently evaluating the effect that theadoption of EITF Issue No. 00-21 will have on our consolidated financialcondition and results of operations.  The application of EITF Issue No. 00-21is not expected to have a material impact on our reported financial positionand results of operations.

 

In January 2003, the FASB issuedFIN No. 46, “Consolidation of Variable Interest Entities.”  The primaryobjective of FIN No. 46 is to provide guidance on the identification of, andfinancial reporting for, entities over which control is achieved through meansother than voting right; such entities are known as variable interestentities.  FIN No. 46 requires variable interest entities to be consolidated bythe primary beneficiary of the variable interest entities and expandsdisclosure requirements for variable interest entities that are consolidated aswell as those within which an enterprise holds a significant variableinterest.  FIN No. 46 is effective immediately for all variable interestentities created after January 31, 2003, and is effective no later than thebeginning of the first interim or annual reporting period beginning after June15, 2003 for all variable interest entities created prior to February 1, 2003.We are currently in the process of evaluating any effect the adoption of FINNo. 46 will have on our consolidated results of operations, financial positionand cash flows.

 

In April 2002, the FASB issued SFASNo. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities.  This Statement is intended to result in more consistent reportingof contracts as either freestanding derivative instruments subject to Statement133 in its entirely, or as hybrid instruments with debt host contracts andembedded derivative features.  Statement 149 amends Statement 133 as a resultof decisions previously made as part of the Derivatives Implementation Groupprocess, changes made in connection with other Board projects dealing withfinancial instruments, and deliberations in connection with issues raised inrelation to application of the definition of a derivative.  Statement 149 iseffective for contracts entered into or modified after June 30, 2003, andhedging relationships designated after June 30, 2003.  However, the provisionsof Statement 149 that merely represent the codification of previous DerivativesImplementation Group decisions, are already effective and should continue to beapplied in accordance with their prior respective effective dates.  Adoption ofSFAS No. 149 is expected not to have a material impact on the Company.

 

In May 2003, the FASB issued SFASNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity.”  This Statement establishes standards for how anissuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  This Statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003, except for mandatorily redeemable financial instruments of nonpublicentities.  Adoption of SFAS No. 150 is expected not to have a material impacton the company. 

 

 

**4.        ****Changes in U.S. GAAP Information Previously Disclosed**

 

Prior to 2002, our consolidatedfinancial statements included in annual reports on Form 20-F filed with theU.S. Securities and Exchange Commission were prepared in accordance withaccounting principles generally accepted in the Philippines (Philippine GAAP).Philippine GAAP vary in certain significant respects from U.S. GAAP.  Adescription of the significant differences between U.S. GAAP and PhilippineGAAP and a reconciliation of such differences in the net income and shareholders’equity to U.S. GAAP was disclosed in a note to our previously filed financialstatements.  In connection with the preparation of the consolidated balancesheets as of December 31, 2002 and 2001, and the related statements of income,changes in stockholders’ equity and cash flows for the years ended December 31,2002, 2001, and 2000 in accordance with U.S. GAAP, we identified differences inthe U.S. GAAP amounts previously disclosed for 2001 and prior periods.  The netincome (loss), shareholders’ equity and earnings per share amounts inaccordance with U.S. GAAP as previously disclosed for 2001 and prior periodsand the amounts included in our consolidated financial statements prepared inaccordance with U.S. GAAP are summarized as follows: 

 

 

2001

2000

 

(in million pesos)

**Net loss**

** **

** **

As previously disclosed

(20,739)

(28,984)

Per consolidated financial statements prepared in accordance with U.S. GAAP

(27,309)

(23,086)

**Stockholders’ equity at December 31**

** **

** **

As previously disclosed

29,050

51,577

Per consolidated financial statements prepared in accordance with U.S. GAAP

21,574

50,559

**Loss per common share, basic and diluted**

** **

** **

As previously disclosed

(135.75)

(191.74)

Per consolidated financial statements prepared in accordance with U.S. GAAP

(166.97)

(174.97)

 

 

** **

 

An explanation for the significantdifferences between the U.S. GAAP information previously disclosed for 2001 andprior periods and the amounts included in the consolidated financial statementsprepared in accordance with U.S. GAAP is provided below:

 

***ACeS International Limited***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods accounted for our investment in ACeSInternational Limited, or AIL, on the cost basis. The consolidated financialstatements prepared in accordance with U.S. GAAP account for our investment inAIL on the equity basis. As an equity basis investment, we recorded our shareof losses in AIL in each period. In addition, we record capitalized interestduring the periods that construction was in process and adjusted depreciationaccordingly. For 2001, we concluded that our investment in AIL was impaired andwrote off the carrying amount of our investment. We based our decision torecognize an impairment charge for AIL on (1) significant negative operatingcash flows for both AIL and ACeS Philippines, (2) significant levels of debtheld by AIL, (3) concerns about the ability of AIL to continue to operate as agoing concern and (4) projected cash flows that indicate our investment wouldnot be recovered.  See *Note 9 - Investments*.

 

***ACeS Philippines***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods did not account for capitalized intereston the construction of the Asia Cellular Satellite System during theconstruction period. The consolidated financial statements prepared inaccordance with U.S. GAAP recognize capitalized interest on Asia CellularSatellite System during the construction period and adjust depreciationaccordingly.  In 2001, in connection with our impairment analysis of ourinvestment in AIL, we concluded that our investment in the Asia CellularSatellite System was also impaired and expensed the carrying amount of ourinvestment. See *Note 9 - Investments*.

 

***Mabuhay Satellite***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods did not account for capitalized intereston the construction of the Mabuhay Satellite system during the constructionperiod. Also, the financial statements of Mabuhay Satellite and its jointventure investment were prepared using Philippine peso functional currency.The consolidated financial statements prepared in accordance with U.S. GAAPrecognize capitalized interest for the construction of the Mabuhay Satellitesystem during the construction period and adjusted depreciation accordingly. Inaddition, we concluded that the functional currency of Mabuhay Satellite andits joint venture investment is the U.S. dollar and adjusted the financialstatements accordingly.  See *Note 9 - Investments*.

 

***Smart Acquisition***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods did not account for certain elements ofour acquisition of Smart. The consolidated financial statements prepared inaccordance with U.S. GAAP recognize unearned revenue and deferred taxliabilities at the acquisition date. In addition, we revised the purchase priceof Smart to reflect the market price of the shares given up at the date theterms of the acquisition were agreed to and announced.  In addition, in 2001 werevised our estimated useful life of the acquired customer list based on ouranalysis of customer churn rates. 

 

***Smart Derivatives***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods did not account for embedded derivativesrelated to services contracts denominated in foreign currencies.  The financialstatements prepared in accordance with U.S. GAAP bifurcate such derivatives andrecognize the bifurcated derivatives at fair value at each balance sheet datewith changes in fair value recognized in the statements of operations.

 

***Unilink Communications Corporation***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods accounted for our investment in theconvertible notes of Unilink Communications Corporation, or Unilink, at cost.The financial statements prepared in accordance with U.S. GAAP recognize another than temporary decline in the value of such investment in 2001.Unilink’s principal investment is the ownership of 100% of the shares inPhilippine Home Cable Holdings Inc., or Home Cable, the Philippines’ secondlargest cable television operator. The other than temporary decline resultedfrom the default by Home Cable on certain obligations that were collateralizedwith Unilink assets, uncertainty surrounding the negotiations with Home Cablecreditors and the financial condition of Home Cable.  See *Note 9 -Investments*. 

 

***Piltel Restructuring***

*** ***

U.S. GAAP information previouslydisclosed for 2001 and prior periods did not account for the fair value ofembedded derivatives that are not clearly and closely related to host financialinstruments issued in connection with the restructuring. The financialstatements prepared in accordance with U.S. GAAP, bifurcate such derivativesand recognize the bifurcated derivatives at fair value at each balance sheetdate with changes in fair value recognized in the statements of operations.  Inaddition the bifurcation of embedded derivatives resulted in changes in theaccounting for the host instruments subsequent to the restructuring.  See *Note16 - Preferred Stock Subject to MandatoryRedemption.*

 

***Philcom***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods accounted for receivables from Philcombased on the assumption that Philcom would successfully restructure liabilitieswith creditors and equity holders in a manner that would eventually result inthe accounts receivable being recovered.  The financial statements prepared inaccordance with U.S. GAAP record a provision against the accounts receivablefrom Philcom based on the uncertainty surrounding the negotiations withPhilcom’s creditors and equity holders and the financial condition of Philcom.

 

***Revenue recognition***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods accounted for certain incentives providedto dealers and customers as marketing expenses based on the retail value of theincentives.  Additionally, certain activation-related revenues were recordedover the initial usage period, instead of the customer relationship period.The consolidated financial statements prepared in accordance with U.S. GAAPaccount for incentives provided to dealers as adjustments to the price ofrelated products and services, which are recorded based on the cashconsideration received.  In addition, multiple element arrangements wereconsidered and accounted for using the various components.  Activation-relatedrevenues are recorded over the estimated customer relationship period.

 

 

**5.        ****Cash and CashEquivalents**

** **

This account consists of:

** **

 

**2002**

2001

 

(in million pesos)

Cash on hand and in banks

**3,151**

2,001

Temporary investments

**7,823**

2,275

 

**10,974**

4,276

** **

Cash in banks earns interest at theprevailing bank deposit rates.  Temporary investments are made for varyingperiods of up to one month depending on our immediate cash requirements, andearn interest at the prevailing short-term deposit rates.

 

 

**6.        ****Accounts Receivable**

** **

This account consists ofreceivables from:

 

 

**2002**

2001

 

(in million pesos)

Customers and carriers

**25,304**

28,845 

Others

**1,950**

4,162 

 

**27,254**

33,007 

Less allowance for doubtful accounts

**9,942**

6,888 

 

**17,312**

26,119 

 

Receivables from carriers representreceivables arising from interconnection agreements with othertelecommunications carriers.  The aforementioned receivable balances are shownnet of related payables to the same telecommunications carriers.

 

On June 30, 1999, PLDT entered intoa Master Receivables Purchase and Sale Agreement, or MRPSA, with a foreignfinancial institution, or the Purchaser, under which PLDT sold to the Purchasereligible receivables from certain foreign carriers in several discrete sales.Under this agreement, PLDT services, administers and collects the receivableson behalf of the Purchaser, and transfers all its rights of ownership to thePurchaser upon sale.  This facility was terminated on June 27, 2002.

 

On September 21, 2000, PLDT enteredinto a similar MRPSA with another foreign financial institution coveringforeign carriers that were not included in the June 30, 1999 agreement.  Thissecond facility was terminated on September 18, 2002.

 

On October 10, 2002, PLDT enteredinto a Receivables Purchase Deed, or RPD, with a foreign financial institution,or the Purchaser, under which PLDT agreed (1) to sell its receivables fromcertain eligible foreign carriers for an advance payment of US$50 million and(2) to service, administer and collect the receivables on behalf of thePurchaser.  The Purchaser shall have no recourse to PLDT should the eligiblecarrier fail or refuse to settle the assigned/purchased receivables, exceptwhen PLDT commits a breach on its representations and warranties under the RPD.

 

In 2002, sale of receivables underthe RPD amounted to US$3 million (Php165 million), with resulting losses ofUS$0.5 million (Php25 million).  There was no sale of receivables under theMRPSA in 2002.  In 2001 and in 2000, sales of receivables under these MRPSAagreements amounted to US$59 million (Php3,029 million) and US$78 million(Php3,914 million), respectively, with resulting losses of US$2 million (Php103million) in 2001 and US$4 million (Php205 million) in 2000.  

 

 

**7.        ****Inventories andSupplies**

 

This account consists of:

 

 

**2002**

2001

 

(in million pesos)

Terminal and cellular phone units – net of allowance for inventory  obsolescence of Php520 million in 2002 and Php286 million in 2001 

**1,768**

2,141

Spare parts and supplies

**2,281**

2,342

Others

**452**

848

 

**4,501**

5,331

 

Spare parts and supplies issued tovarious projects are included as part of property under construction shownunder “Property, Plant and Equipment”.  

 

 

**8.        ****Property, Plant andEquipment**

** **

This account consists of:

 

 

**2002**

2001

 

(in million pesos)

Cable and wire facilities

**95,516**

74,016

Central office equipment

**65,517**

70,654

Cellular facilities

**48,163**

40,711

Buildings

**17,528**

16,714

Vehicle, furniture, and other work equipment

**19,926**

18,236

Communications satellite

**30,585**

30,256

Information origination/termination equipment

**5,654**

5,254

Land and land improvements

**2,984**

2,891

 

**287,873**

258,732

Less accumulated depreciation and amortization

**(105,510)**

(78,583)

 

**182,363**

180,149

Property under construction

**17,004**

30,767

 

**199,367**

210,916

 

Capitalized interest for the yearsended December 31, 2002, 2001 and 2000 amounted to Php1,344 million, Php2,404million and Php2,603 million, respectively.

 

In 2001, Piltel wrote down assetsvalued at Php12,938 million, which was a result of Piltel’s decision to scaledown its Advanced Mobile Phone System, or AMPS, and Code Division MultipleAccess System, or CDMA networks, beginning the second half of 2001 due toPiltel’s success in marketing its GSM prepaid service using the GSM network ofSmart and the difficulty experienced in sourcing analog/CDMA handsets.

 

Smart carried out an impairmentreview on its analog assets in June and December 2001 as a result of decliningsubscriber numbers, decreasing average revenue per user and the generalmigration of analog subscribers to Smart’s GSM service.  This resulted in anasset impairment charge of Php2,281 million in June 2001 and Php1,502 millionin December 2001 based on the estimated discounted cash flows from continueduse and eventual disposition of these assets.  

 

In December 2002, Piltel recognizedimpairment losses in respect of its Executive Order, or EO 109 limited mobilitywireless local loop prepaid assets valued at Php11,596 million.  The impairmentof EO 109 assets brought down the net book value of these assets to theirrecoverable value, which was estimated using the undiscounted future cash flowsfrom the EO 109 postpaid service.  Cash flows from the EO 109 prepaid orlimited mobility service were no longer considered in computing the recoverablevalue of the EO 109 assets as Piltel terminated this service in February 2003.Revenues from the EO 109 prepaid or limited mobility service, which uses N-AMPScellular technology, were unfavorably affected by the success of Piltel’s andother cellular operators’ prepaid GSM cellular service.

 

Under the terms of certain loanagreements, PLDT may not create, incur, assume or permit or suffer to exist anymortgage, pledge, lien or other encumbrance or security interest over the wholeor any part of its assets or revenues or suffer to exist any obligation aslessee for the rental or hire of real or personal property in connection withany sale and leaseback transaction.

 

 

**9.        ****Investments**

 

This account consists of:

** **

 

**2002**

2001

 

(in million pesos)

Investments in shares of stock:

** **

 

Acquisition cost:

** **

 

Common

**1,643**

1,935

Preferred

**1,815**

1,691

 

**3,458**

3,626

Net accumulated equity in net losses of investees 

**(1,414)**

(1,496)

Total cost and accumulated equity in net losses of investees

**2,044**

2,130

Investment in debt securities

**98**

88

Total

**2,142**

2,218

Investments in shares of stock:

** **

 

At equity:

** **

 

ACeS International Limited 

–

–

Mabuhay Space Holdings Limited

**1,193**

1,243

Others

**31**

104

 

**1,224**

1,347

At cost:

** **

 

Stradcom International Holdings, Inc.

**616**

616

Others

**204**

167

 

**820**

783

Total

**2,044**

2,130

 

***Investmentof ACeS Philippines in AIL***

 

As of December 31, 2002, ACeSPhilippines has a 20% investment in ACeS International Limited, or AIL, acompany incorporated under the laws of the island of Bermuda.  AIL owns theGaruda I satellite and the related system control equipment in Batam,Indonesia.

 

In December 1998, AIL and its 95%owned subsidiary, PT Asia Cellular Satellite, entered into an Amended andRestated Credit Agreement, or Amended Agreement, to amend the original CreditAgreement entered into by PT Asia Cellular Satellite and its bank creditors in1997.  Under the Amended Agreement, AIL has, among others, assigned to thebanks as collateral all of its tangible properties, including the GarudaSatellite, the system control facilities and system control equipment.  OnSeptember 30, 2002, PT Asia Cellular Satellite, AIL, as guarantor, P.T. BankInternational Indonesia, as security agent, and various banks signed aRescheduling Agreement, which amended the terms of the Amended and RestatedCredit Agreement dated December 29, 1998 moving the principal repayment datesto agreed periods with the final maturity date on January 31, 2012.  

 

AIL incurred recurring significantlosses, has a working capital deficiency and only began providing services tocustomers in 2001 and therefore has a limited operating history.  In addition,the National Service Providers, including AceS Philippines, had not been ableto generate the amount of revenues originally expected as the growth insubscriber numbers had been significantly lower than budgeted.  These factorsraised substantial doubt about AIL’s ability to continue as a going-concern.On this basis, we made impairment provisions in respect of our investment inAIL and ground station equipment of ACeS Philippines in relation to thebusiness of AIL in 2001.

 

Total impairment charges amountedto Php3,579 million consisting of full write-down of the following:  (1)carrying value of our investment in AIL of Php1,614 million; (2) net book valueof ground station equipment of Php265 million; (3) aggregate capitalizedinterest, net of depreciation, of Php73 million recorded during the periodsthat construction of the Asia Cellular Satellite System was in process, underthe equity basis of accounting; and (4) shares of our losses in AIL amountingto Php921 million.  Related other comprehensive income of Php1,801 million,will be credited to retained earnings, upon disposal of investment.

 

***Investmentof Mabuhay Satellite in Mabuhay Space Holdings Limited***

 

On July 18, 1996, Mabuhay Satelliteentered into a Joint Venture Agreement with Space Systems/Loral Inc. or SS/L,to form Mabuhay Space Holdings Limited for the purpose of providing high-powerKu-Band satellite transmission services using the payload which was added bySS/L aboard Agila II.  

 

Our investment in Mabuhay Satellitereflects the designation of its functional currency to be U.S. dollar asprovided under FAS 52.  Mabuhay Satellite’s revenues are all in U.S. dollarsand the cost of Mabuhay satellite system, which accounts for around 90% of itsassets, was paid for in U.S. dollars and was funded by U.S. dollar-denominateddebt to the extent of 70% of the original cost.  A re-measurement of ourinvestment account in Mabuhay Satellite’s functional currency had to be madesince in the previous years, we accounted for our investment on the basis ofMabuhay Satellite using the Philippine peso as its functional currency.  Thecumulative translation adjustment related to this amounted to Php1,031 million,Php946 million and Php870 million in 2002, 2001 and 2000.

 

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

*** ***

On May 8, 2001, ePLDT subscribedfor 172.8 million shares of convertible preferred stock through subscriptionagreement entered into with Stradcom International Holdings, Inc., orStradcom.  Stradcom is a holding company, which owns 100% of StradcomCorporation.

 

Stradcom has a 10-year Build, Ownand Operate, or BOO, project with the Land Transportation Office forcomputerized issuance of drivers’ licenses and motor vehicle registration.  Ithas an option to buy into two other companies that won the computerized projectswith the Land Registration Authority for the land titling and with theDepartment of Foreign Affairs for passport issuances.

 
******
***Investmentsin Debt Securities***

 

***Unilink CommunicationsCorporation***

* *

PLDT’s total investments inconvertible notes of Unilink amounted to Php2,052 million as of December 31,2000.  These notes are convertible into shares of common stock of Unilink orHome Cable at the option of the holder, when the law limiting the ownership ofcable television systems to Philippine citizens or corporations, which arecurrently 100% owned by Philippine citizens, is eventually changed.  Unilink isa Philippine corporation owning all the outstanding common shares of HomeCable, which is also a Philippine corporation licensed to own, maintain and operatea cable television system in the Philippines.

 

All of Unilink’s shares in HomeCable have been pledged to a group of lenders as security for a loan of HomeCable.  On December 6, 2001, Home Cable defaulted on the principal and interestpayments in respect of certain of its obligations.  On April 10, 2002, the loanagent, at the request of the lenders, delivered a notice to Home Cabledeclaring an event of default and accelerating the loan.  Consequently, thelenders are entitled to foreclose on or sell the collateral granted as securityfor the loan, including Unilink’s shares in Home Cable.  In the event that HomeCable’s lenders were to foreclose on Unilink’s Home Cable shares, the lenderswould be entitled to the proceeds from the sale thereof or, if such shares werenot sold, to the shares, and Unilink would be subrogated to the lenders’ claimsagainst Home Cable.  Home Cable is currently engaged in negotiations with thelenders to restructure its debt.  

 

On the basis of Home Cable’sdefault on certain of its obligations, the uncertainty surrounding thenegotiations with its creditors and equity holders, and its financialcondition, we provided for a full permanent decline in value of our investmenttotaling Php2,052 million in 2001.  Accordingly, we made the necessaryadjustment in respect to our pension cost of Php170 million to cover for theconsequent decline in value of our beneficial trust fund’s investment in HomeCable.

 

 

**10.    ****Information with Respect to Piltel**

** **

Piltel has experienced significantdifficulties in recent years.  On June 4, 2001, Piltel completed therestructuring of approximately Php41.1 billion of indebtedness and otherclaims, representing approximately 98% of its total liabilities as of thatdate.  On June 27, 2001, PLDT transferred 208 million common shares of Piltel,representing approximately 12.3% of Piltel’s outstanding common shares, tofinancial advisors of Piltel to settle part of their fees in connection withthe debt structuring.  As a result, our ownership of Piltel’s outstandingcommon stock decreased from 57.6% to approximately 45.3%. 

 

Piltel continues to be treated as aconsolidated subsidiary because PLDT has the ability to control Piltel byacquiring a majority membership interest in excess of 90% of Piltel’s common stockthrough the conversion of preferred shares into Piltel’s common shares.  Inaddition, pursuant to Piltel debt restructuring agreements, PLDT issued aLetter of Support for the benefit of Piltel and its creditors under which PLDThas agreed to cover any funding shortfalls of Piltel up to a maximum amount ofUS$150 million less all amounts paid or committed to be paid to or on behalf ofPiltel by PLDT on or after March 23, 2000.  Under the Letter of Support, PLDTwill provide funding to Piltel in the event that the cash flow from Piltel’soperations falls short of amounts required by it to discharge in full itsobligations to any creditor of Piltel or any of its operating and financingsubsidiaries and affiliates.  PLDT is subject to contractual restrictionslimiting the amount of financial support it can provide to Piltel up to US$150million.  The undrawn balance under the Letter of Support was US$50 million(approximately Php2,676 million) as of December 31, 2002, US$61 million(approximately Php3,162 million) as of December 31, 2001 and US$102 million(approximately Php5,099 million) as of December 31, 2000 after taking intoaccount PLDT’s investments in Piltel as of and subsequent to March 23, 2000.  

 

The continued operation of Piltelas a going-concern is dependent upon amounts available to it under the Letterof Support and its ability to generate sufficient cash flows to meet itsobligations on a timely basis, to comply with the provision of therestructuring agreements.  As presented in *Note 10 - Information withRespect to Piltel*, as of December 31, 2002, Piltel had total assets ofPhp5,966 million and a capital deficiency of Php28,787 million.

 

Until all amounts owed toparticipating creditors have been paid or discharged, PLDT will not be permittedto demand or receive any payment, redeem, or distribute in respect of anypresent and future liability owed by Piltel to PLDT or any affiliate of PLDT,subject to specified exceptions.  These liabilities include amounts owed onPiltel preferred shares owned by PLDT and other financial indebtedness owed byPiltel to PLDT or any affiliate of PLDT, but exclude payments due in respect oftransactions having arm’s-length terms and/or in which the pricing is based onmarket terms.  These restrictions significantly impair Piltel’s ability totransfer funds to PLDT.  

 

In the accompanying U.S. GAAPfinancial statements, PLDT’s deficit of Php59,265 million includes Piltel’scapital deficiency of Php28,787 million as of December 31, 2002 notwithstandingthat under Piltel debt restructuring agreements, the amount of financialsupport that PLDT can still provide to Piltel was limited to US$50 million asof December 31, 2002. 

 

Condensed balance sheets as ofDecember 31, 2002 and 2001 statements of operations and cash flows as of andfor the years ended December 31, 2002, 2001 and 2000 of Piltel included in theconsolidated financial statements are as follows:

 

 

**December 31,**

 

**2002**

 

2001

 

(in million pesos)

**Balance Sheets**

** **

** **

** **

Current assets

**1,017**

 

974

Non-current assets

**4,949**

 

19,306

 

**5,966**

 

20,280

 

** **

 

 

Current liabilities

**4,920**

 

4,817

Long-term debt 

**21,673**

 

20,250

Deferred credits and other liabilities

**8,160**

 

8,922

Stockholders’ equity

**(28,787)**

 

(13,709)

 

**5,966**

* *

20,280

 

** **

 

 

 

**Years Ended December 31,**

 

**2002**

 

2001

 

2000

**Statements of Operations**

(in million pesos)

Operating revenues

**3,544**

 

4,414

 

3,074

Operating expenses

**(16,936)**

 

(21,987)

 

(5,779)

Other expenses

**(1,972)**

 

(1,485)

 

(4,461)

Net loss

**(15,364)**

 

(19,058)

 

(7,166)

 

** **

 

 

 

 

 

 

 

 

 

 

**Statements of Cash Flows**

** **

** **

 

 

 

Net cash provided by (used in) operations

**79**

 

(2,106)

 

(1,974)

Cash provided by (used in) investing activities

**53**

 

88

 

(275)

Cash provided by (used in) financing activities

**(194)**

* *

2,039

 

2,317

** **
****
** **

 

**11.    ****Goodwill and OtherIntangible Assets**

** **

 

**2002**

2001

 

(in million pesos)

Goodwill

**17,344**

17,344

Intangible assets

**5,900**

5,900

 

**23,244**

23,244

Less accumulated amortization

**10,304**

10,213

 

**12,490**

13,031

** **
****
** **

 

**12.    ****Other NoncurrentAssets**

** **

This account consists of:

 

 

**2002**

2001

 

(in million pesos)

Debt issuance expenses – net 

**2,494**

1,785

Refundable deposits

**475**

364

Others – net

**695**

1,259

 

**3,664**

3,408

 

 

**13.    ****Accrued and Other Current Liabilities**

 

This account consists of:

 

 

**2002**

2001

 

(in million pesos)

Accrued interest on various loans (Note 14)

**2,790**

3,124

Accrued taxes and other expenses

**2,617**

1,439

Unearned revenue on sale of prepaid cards 

**2,911**

3,166

Accrual for payment for unused sick leave and other employee benefits

**1,452**

780

Accrued utilities and general expenses

**2,888**

1,520

Others

**2,444**

3,084

 

**15,102**

13,113

 

 

**14.    ****Long-term Debt**

** **

This account consists ofoutstanding indebtedness to the following:

 

 

**2002**

2001

 

(in million pesos)

PLDT

**140,387**

141,524

Smart

**22,891**

21,702

Piltel 

**22,124**

21,193

Mabuhay Satellite

**5,356**

5,623

ePLDT

**150**

–

MaraTel

**42**

57

 

**190,950**

190,099

Less current portion

**19,176**

19,286

 

**171,774**

170,813

 

The scheduled maturities ofoutstanding long-term debt as of December 31, 2002 are as follows:

 

Year

(in million pesos)

 

 

2003

19,627

2004

22,415

2005

28,310

2006

25,717

2007 and onwards

94,881

*** ***

***PLDT***

 

PLDT's aggregate outstandingindebtedness is broken down as follows:

 

**Description**

**2002**

2001

 

(in millions)

**U.S. Dollars**

 

 

 

 

Export Credit Agencies-Supported Loans

 

 

 

 

Kreditanstalt für Wiederaufbau

**US$437**

**Php23,265**

US$475

Php24,549

JBIC/Co-financing Banks

**87**

**4,657**

109

5,653

Others 

**161**

**8,575**

183

9,441

 

**685**

**36,497**

767

39,643

Fixed Rate Notes

**1,487**

**79,160**

1,427

73,762

Term Loans

**172**

**9,166**

290

14,976

 

**US$2,344**

**124,823**

US$2,484

128,381

**Japanese Yen**

 

 

 

 

Term Loans 

**JP¥15,641**

**7,019**

JP¥23,029

9,048

JBIC OIL

**9,760**

**4,379**

–

–

** **

**JP¥25,401**

**11,398**

JP¥23,029

9,048

**Philippine Pesos**

 

 

 

 

Peso Fixed Rate Corporate Notes

 

**2,540**

 

2,770

Term Loans

 

**1,626**

 

1,325

 

 

**4,166**

 

4,095

 

 

**140,387**

 

141,524

Less current portion

 

**11,962**

 

14,274

 

** **

**Php128,425**

 

Php127,241

 

The effective average interestrates applicable to the above indebtedness are as follows:

 

 

**2002**

2001

 

** **

** **

Dollar-denominated loans

**8.3%**

8.7%

Yen-denominated loans

**1.2%**

1.3%

Peso-denominated loans

**13.8%**

14.5%

 

*ExportCredit Agencies-Supported Loans*

 

In order to obtain importedcomponents for our network infrastructure in connection with our expansion andservice improvement programs, we have obtained loans extended and/or guaranteedby various export credit agencies.  These financings account for a significantportion of PLDT's indebtedness.

 

Kreditanstalt für Wiederaufbau, orKfW, a German state-owned development bank, is our largest single creditor.  

 

On January 25, 2002, PLDT signedtwo loan agreements with KfW that provide PLDT with a new US$149 millionfacility to refinance in part the repayment installments under its existingloans from KfW due from January 2002 to December 2004.  The facility is anine-year loan, inclusive of a three-year disbursement period and a two-yeargrace period during which no principal is payable.  It partly enjoys theguarantee of HERMES, the export credit agency of the Federal Republic ofGermany.  Disbursements under this facility, which are made as the KfW loans tobe repaid fall due, are currently available.  We have drawn US$50 million(Php2,644 million) under this facility as of December 31, 2002.  

 

As of December 31, 2002, we owedUS$437 million aggregate principal amount of debt to KfW, as follows:

 
- US$329 million provided undervarious export credit agency-backed facilities, of which US$290 million was inconnection with our expansion and service improvement programs and US$39million in connection with a refinancing facility; and       - US$108 million provided forthe 15% downpayment portion and credit facilities without guarantee/insurancecover from the export credit agencies, of which US$11 million was provided inconnection with a refinancing facility.        After giving effect to theanticipated application of the existing refinancing facility, US$39 million ofour KfW loans will mature in 2003, US$39 million in 2004, US$82 million in2005, US$57 million in 2006 and US$220 million in 2007 and onwards.  Principaland interest on these loans are generally payable in equal semi-annualinstallments.     PLDT has also obtained loansextended and/or guaranteed by other export credit agencies, including JapanBank for International Cooperation, or JBIC, (formerly the Export-Import Bankof Japan), the Export-Import Bank of the United States, and the respectiveexport credit agencies of France, Italy, Israel, Sweden, Denmark, Canada,Australia, the United Kingdom and Singapore, in the aggregate outstandingprincipal amount of US$248 million, US$292 million and US$320 million as ofDecember 31, 2002, 2001 and 2000, respectively.  Of the amounts outstanding asof December 31, 2002 under these loans, US$62 million will mature in 2003, US$60million in 2004, US$49 million in 2005, US$39 million in 2006 and US$38 millionin 2007 or later.       *Fixed Rate Notes*     PLDT has nine series ofnon-amortizing fixed rate notes outstanding as of December 31, 2002, asfollows:     
**Principal Amount**

 

**Issue Date**

**Interest Rate**

** **

**Maturity**

 

 

 

 

 

 

US$62,030,000

 

June 28, 1996

8.500%

 

June 30, 2003

US$81,822,000

 

June 2, 1994

10.625%

 

June 2, 2004

US$144,385,000

 

July 31, 1995

9.875%

 

August 1, 2005

US$175,000,000

 

June 28, 1996

9.250%

 

June 30, 2006

US$200,000,000

 

March 6, 1997

7.850%

 

March 6, 2007

US$100,000,000

 

May 2, 2002

10.625%

 

May 15, 2007

US$175,000,000

 

April 13, 1999

10.500%

 

April 15, 2009

US$250,000,000

 

May 2, 2002

11.375%

 

May 15, 2012

US$300,000,000

 

March 6, 1997

8.350%

 

March 6, 2017
     On May 2, 2002, PLDT issued US$100million aggregate principal amount of 10.625% Notes due 2007 and US$250 millionaggregate principal amount of 11.375% Notes due 2012.  The net proceeds fromthe issuance of the notes were used mainly to (1) repurchase US$63 million inprincipal amount of our 8.5% Notes due 2003 and US$117 million in principalamount of our 10.625% Notes due 2004 validly tendered by holders in our tenderoffer, and US$6 million in principal amount of our 10.625% Notes due 2004, andUS$6 million in principal amount of our 9.875% Notes due 2005 from the openmarket, and (2) prepay or repay various loans in the aggregate amount of US$121million, of which US$53 million (JP¥6,260) pertained to the Japanese yen termloan which matured in June 2003 and US$52 million pertained to the US$150million term loan maturing in December 2003.  We will continue to prepay orrepay short-term and medium-term debts of PLDT using the remaining proceedsfrom the bond issueThe remaining proceeds were used to prepay or repay PLDT’sshort-term and other medium term debts..     *Term Loans*     *Local Exchange Transfer Loans*     In connection with the transfer ofSmart's local exchange business to PLDT, PLDT entered into loan agreements withNederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V., or FMO,of the Netherlands, Exportkreditnamden, or EKN, of Sweden and Export CreditGuarantee Department, or ECGD, of the United Kingdom for loans in the principalamounts of US$135 million, US$36 million and US$27 million, respectively,approximately US$140 million in aggregate amount was outstanding as of December31, 2002.  These loans were amended in August and September 2001 to increasethe maximum total debt to earnings before interest, income tax and depreciationand amortization or EBITDA ratio that PLDT on a non-consolidated basis andcalculated on the basis of Philippine GAAP is permitted to maintain during theterms of the respective loans.  The FMO loan has a final maturity on September1, 2007, while the EKN and ECGD loans will mature on December 31, 2007.      *US$150 Million Term Loan*     In connection with PLDT's fixedline expansion projects, PLDT obtained a US$150 million term loan, which wassubsequently assigned to Norddeutsche Landesbank Girozentrale, Singapore Branch,US$52 million of which was outstanding as of December 31, 2002.  Theoutstanding principal amount of this loan is payable at maturity on December22, 2003 and will be partly refinanced by a multicurrency refinancing facilitydescribed below.     *JP¥ 19,807 Million Term Loan*     In December 1997, in connectionwith a refinancing of its maturing debt, PLDT obtained a Japanese yen term loanfrom a syndicate of foreign banks, JP¥12,359 million of which was outstandingas of December 31, 2002.  This loan has a final maturity on June 18, 2003 andhas been partly refinanced by a multicurrency refinancing facility describedbelow.     *JBIC JP¥ 9,760 Million OverseasInvestment Term Loan*     On July 26, 2002, PLDT signed aloan agreement with JBIC in the total amount of JP¥ 9,760 million under theOverseas Investment Loan program of JBIC.  The loan was drawn on July 31, 2002and will be amortized on a semi-annual basis beginning March 2005 with finalmaturity on March 21, 2008.     *Multicurrency RefinancingFacility*     On September 4, 2002, PLDT signed aloan agreement with a syndicate of banks for a US$145 million multicurrencyterm loan facility consisting of Japanese yen and U.S. dollar commitments ofJP¥10,914 million and US$53 million, respectively.  This facility, which has beensplit into two tranches with the first tranche already drawn in June 2003 andthe second tranche to be drawn in December 2003, is intended to refinance aportion of the JP¥12,359 million outstanding as of December 31, 2002 under theJPY19,807 million term loan and a portion of the US$52 million principalamount outstanding as of December 31, 2002 under the US$150 million term loan,both falling due in 2003.  The new syndicated facility will be amortizedsemi-annually beginning June 2004 and will mature in December 2006.     *JBIC 4 Program of theDevelopment Bank of the Philippines*     In connection with the Asia PacificCable Network 2 project, PLDT entered into a loan agreement with Citibank,N.A., as facility agent, and a syndicate of banks in the aggregate principalamount of Php1,700 million, of which about Php1,500 million was outstanding asof December 31, 2002.  The loan is funded under the Japan Bank forInternational Cooperation Facility for Private Sector Development of theDevelopment Bank of the Philippines.  This loan will mature on October 26, 2005and is payable in quarterly installments starting April 2002 as set forthbelow:      
**Quarterly Payment Number**

**Percentage of Principal  Payable on Each Quarterly Payment Date**

 

 

Payments 1–7 

3.500%

Payments 8–11

8.875%

Payments 12–15

10.000%
     *Php2,770 Million Peso Fixed Rate Corporate Notes*     In connection with PLDT's serviceimprovement and expansion programs, PLDT has entered into two loan agreements,pursuant to each of which PLDT issued fixed rate corporate notes in threetranches.  Interest on each of the notes is payable semi-annually.     Under the first loan agreement,PLDT borrowed an aggregate amount of Php1,500 million, of which Php230 millionmatured on November 11, 2002, Php500 million will mature on November 9, 2004and Php770 million on November 9, 2006.     Under the second loan agreement,PLDT borrowed an aggregate amount of Php1,270 million, of which Php360 millionmatured on June 9, 2003, Php100 million will mature on June 9, 2005 and Php810million on June 9, 2010.     *Covenants*     Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests on the basis of Philippine GAAP financial positionand results of operations at relevant measurement dates, principally at the endof quarterly periods.     The financial tests under our debtinstruments, as amended, include maintaining a positive tangible net worth andcompliance with the following ratios:         - interest coverage ratio,calculated on a non-consolidated basis and excluding PLDT’s equity share in netincome of subsidiaries and associates, of not less than 150%, 180% or 200%;           - total debt to EBITDA on anon-consolidated basis of not more than 6.0:1 until March 2003, not more than5.5:1 from June 2003 to December 2003, not more than 5.0:1 from March 2004 toJune 2004, not more than 4.5:1 from September 2004 to December 2004 andnot more than 4.0:1 from March 2005 and thereafter;             - long-term indebtedness toappraised value of equity/tangible net worth on a non-consolidated basisranging from not more than 1.1:1 to not more than 3.0:1;                - current ratio on anon-consolidated basis, ranging from not less than 0.9:1 to not less than1.2:1.                 - debt service coverage ratio on a non-consolidated basis of atleast 1.1:1; and                   - debt to free cash flow ratio on a non-consolidated basis of notmore than 6.0:1 from March 31, 2003 to June 30, 2003, not more than 5.5:1 fromSeptember 30, 2003 to June 30, 2004, not more than 5.0:1 from September 30,2004 to June 30, 2005, not more than 4.5:1 from September 30, 2005 to June 30,2006, and not more than 4.0:1 from September 30, 2006 and thereafter.     In addition, some of PLDT's debtinstruments contain covenants requiring PLDT to comply with specified financialtests on a consolidated basis adjusted to exclude Piltel’s debts.  Theseinclude:                     - long-term debt to appraisedvalue of equity/tangible net worth of not more than 2.33:1;                       - total debt to EBITDA of notmore than 4.5:1 in 2003 and 2004, and not more than 4.0:1 in 2005 andthereafter; and                         - current ratio ranging fromnot less than 0.75:1 to not less than 0.9:1.     For purposes of deriving appraisedvalue of equity/tangible net worth, we determined the revaluation surplus inrespect of PLDT’s properties.  PLDT’s properties in service as of December 31,1997 were reappraised by an independent firm of appraisers to reflect theirsound value, based on the December 29, 1997 exchange rate of Php40.116 toUS$1.00.  As of December 31, 1997, the sound value was Php225,966 million andthe revaluation surplus was Php82,723 million.  This reappraisal was approvedby the NTC on January 28, 2000 under NTC Case No. 98-183.  As of December 31,2002, the revaluation surplus on PLDT’s 1997 appraised properties still inservice, net of a 5% disallowance factor, amounted to Php44,984 million.     The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the peso relative to the U.S. dollar, pooroperating performance of PLDT and its consolidated subsidiaries, impairment orsimilar charges in respect of investments or other assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expenses.  Interest expense may increase as a result of variousfactors, including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the peso, thelowering of PLDT's credit ratings or the credit ratings of the Philippines,increases in reference interest rates, and general market conditions.  Sinceapproximately 97% of PLDT's long-term debt is 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 ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of its fixed line business,which is predominantly conducted by PLDT.  PLDT cannot be assured of thebenefit of net revenues and cash flows generated by Smart and PLDT’s othersubsidiaries and associates in assisting in complying with non-consolidatedcovenants.     We have maintained compliance withall of our financial ratios and covenants as measured under our loan agreementsand other debt instruments.  However, if negative factors adversely affect ourfinancial ratios, we may be unable to maintain compliance with these ratios andcovenants or be unable to incur new debt.  During 2001, our performance undercertain of these ratios, including our 150% interest coverage and total debt toEBITDA ratios under Philippine GAAP, was close to the permitted thresholds.  InAugust and September 2001, we obtained amendments to relax certain of PLDT'scovenants setting a maximum ratio of total debt to EBITDA on a non-consolidatedbasis.  Under some of our loan agreements, this ratio requirement has becomemore restrictive at the end of the second quarter of 2003 and will continue tobecome more restrictive in increments thereafter, which will make it moredifficult for PLDT to maintain compliance with this ratio in the future.Inability to comply with our financial ratios and covenants or raise newfinancing could result in a declaration of default and acceleration of some orall of our indebtedness.  The terms of some of our debt instruments have nominimum amount for cross-default.     Under PLDT's loan agreements thatrequire maintenance of an interest coverage ratio of at least 150%, interest coverageratio is the ratio calculated on the basis of Philippine GAAP of (x) PLDT'snon-consolidated after-tax net income, excluding equity share in net income orlosses of subsidiaries after adding back interest charges, net of interestcapitalized to construction, on all indebtedness for the 12 months immediatelypreceding the calculation date to (y) the estimated aggregate interest chargespayable, net of interest to be capitalized to construction, during the 365-dayperiod following the calculation date on all of PLDT's indebtedness outstandingon such calculation date.  Our interest coverage ratio calculated on the basisof Philippine GAAP under this agreement for the 12-month period ending December31, 2002 was 172% as against the required threshold of not less than 150%.     Under PLDT's loan agreements thatrequire maintenance of an interest coverage ratio of at least 180%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)our after-tax net income for the 12 months immediately preceding thecalculation date after (1) adding back interest charges, depreciation,amortization and other non-cash charges (including equity in the net income orloss of subsidiaries but excluding provision for doubtful accounts) andprovision for income taxes, and (2) deducting capitalized subscriberacquisition costs, to (y) the estimated aggregate interest charges payableduring the 365-day period following the calculation date on all of PLDT'sindebtedness outstanding on such calculation date.  Our interest coverage ratiocalculated on the basis of Philippine GAAP under these agreements for the12-month period ending December 31, 2002 was 290% as against the requiredthreshold of not less than 180%.     Under PLDT's loan agreements thatrequire maintenance of an interest coverage ratio of at least 200%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of  (x)our after-tax net income after adding back reserves for higher plantreplacement costs, income taxes, interest charges, depreciation and non-cashcharges (including equity in the net income or losses of subsidiaries andprovision for doubtful accounts) during 12 consecutive months within the 15calendar months immediately preceding the calculation date, to (y) the sum of(1) the estimated aggregate interest charges on all indebtedness, net ofinterest capitalized to construction, plus (2) dividends on mandatorilyredeemable preferred stock, in each case scheduled to be paid during the 12months following the calculation date.  Our interest coverage ratio calculatedon the basis of Philippine GAAP under these agreements for the 12-month periodending December 31, 2002 was 393% as against the required threshold of not lessthan 200%.     Non-consolidated total debt to EBITDAis the ratio calculated on the basis of Philippine GAAP of (x) PLDT's totalindebtedness (not including amounts payable by PLDT under the Letter ofSupport) to (y) net income for the preceding 12 months, after adding backinterest accrued on all indebtedness; depreciation, amortization and othernon-cash charges (including equity in net income or loss of subsidiaries, butexcluding provision for doubtful accounts) and provision for income taxes anddeducting any capitalized subscriber acquisition costs.  As of December 31,2002, our non-consolidated total debt to EBITDA calculated on the basis ofPhilippine GAAP was 4.93:1 as against the required threshold of not more than6.0:1.     Non-consolidated long-termindebtedness to appraised value of equity (or under some covenants, to tangiblenet worth) is the ratio calculated on the basis of Philippine GAAP of (x)PLDT's aggregate indebtedness (or portion of such indebtedness) due more thanone year following the calculation date and par value of all mandatorilyredeemable preferred stock to (y) the sum of the aggregate par value of all ofPLDT's outstanding common and convertible preferred stock (other than preferredstock subject to mandatory redemption), paid-in capital in excess of the parvalue of such stock, PLDT's retained earnings, reserve for higher plantreplacement costs and revaluation increment arising from independent certifiedappraisals of PLDT's telephone plant approved by the NTC.  As of December 31,2002, our non-consolidated long-term indebtedness to appraised value ofequity/tangible net worth calculated on the basis of Philippine GAAP was 0.95:1as against the most restrictive threshold of not more than 1.10:1.     Non-consolidated current ratio isthe ratio calculated on the basis of Philippine GAAP of (x) non-consolidatedcurrent assets to (y) non-consolidated current liabilities, excluding fromcurrent liabilities 50% of the portion of long-term indebtedness due within oneyear of the calculation date.  As of December 31, 2002, our non-consolidatedcurrent ratio calculated on the basis of Philippine GAAP was 1.49:1 as againstthe most restrictive threshold of not less than 1.20:1.     Debt service coverage ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s cash flow fromoperations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from subsidiaries, cash received upon anyredemption of redeemable preferred shares issued by Smart, any cash receivedunder PLDT’s subscriber investment plan, and interest income received less (2)capital expenditures (excluding capitalized interest) and investments insubsidiaries for the 12 months immediately preceding the calculation periodplus (3) PLDT’s closing cash balance of the last day of the calculation date to(y) the sum of the projected interest charges and principal debt repayments(excluding debt to be repaid with a refinancing facility) during the 12 monthsfollowing the calculation date.  The first calculation date was on March 31,2003, where our debt service coverage ratio for the 12-month period endingMarch 31, 2003 calculated on the basis of Philippine GAAP was 1.36:1 as againstthe required threshold of not less than 1.10:1.     Debt to free cash flow ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s debt less PLDT’sclosing cash balance of the last day of the calculation period to (y) PLDT’scash flow from operations after adding back interest charges (to the extentpreviously deducted) plus (1) dividends received from subsidiaries, cashreceived upon any redemption of redeemable preferred shares issued by Smart,any cash received under PLDT’s subscriber investment plan, and interest incomereceived less (2) capital expenditures (excluding capitalized interest) andinvestments in subsidiaries for the 12 months immediately preceding thecalculation date.  The first calculation date was on March 31, 2003, where ourdebt to free cash flow ratio for the 12-month period ending March 31, 2003calculated on the basis of Philippine GAAP was 5.1:1 as against the requiredthreshold of not more than 6.0:1.     Our consolidated long-term debt toappraised value of equity/tangible net worth, consolidated total debt to EBITDAand consolidated current ratios during the year 2002, each to be calculated onthe basis of Philippine GAAP, remained within the limits stipulated in thevarious loan agreements, including the most restrictive current ratio thresholdof not less 0.9:1.     PLDT's debt instruments contain anumber of other negative covenants that, subject to certain exceptions andqualifications, restrict PLDT's ability to take certain actions withoutlenders' approval, including:                           - incurring additionalindebtedness;                              - prepaying other debt;                                - making investments;                                  - extending loans;                                    - extending guarantees orassuming the obligations of other persons;                                     - paying dividends or otherdistributions or redeeming, repurchasing or otherwise acquiring shares ofPLDT’s capital stock;                                        - disposing of all orsubstantially all of its assets or of assets in excess of specified thresholdsof its tangible net worth;                                         - entering into managementcontracts providing for the management of its business or operations by a thirdparty;                                           - creating any lien or securityinterest;                                              - permitting set off against amountsowed to PLDT;                                               - merging or consolidating withany other company;                                                 - entering into transactionswith shareholders and affiliates; and                                                   - entering into sale andleaseback transactions.      Under the indenture of PLDT's10.625% Notes due 2007 and 11.375% Notes due 2012, we are required to complywith a number of additional covenants, including covenants that, subject tocertain exceptions, restrict PLDT's ability to: (1) incur debt in the event itsratio of debt to EBITDA calculated on the basis of Philippine GAAP (calculatedon a non-consolidated basis based on definitions provided in the sameindenture, except in certain circumstances), after giving effect to theincurrence of such debt, would be less than 5.5 to 1.0 on or prior to December31, 2003, 5.0 to 1 from January 1, 2004 to December 31, 2004 and 4.5 to 1.0thereafter and (2) pay dividends on, repurchase or redeem its capital stock,make investments and prepay subordinated debt, among other things.  Subject tocertain exceptions, these covenants also restrict our ability to sell assetsand use the proceeds of these asset sales.       Under the terms of the US$149million facility with KfW, PLDT is prohibited from paying any dividends oncommon stock until December 31, 2004.  In addition, under the terms of PLDT'sUS$145 million multicurrency term facility agreement and JPY5,615 million termloan facility agreement, PLDT is restricted from distributing dividends tocommon stockholders unless (1) no default has occurred which is continuing, and(2) its debt to free cash flow ratio, after giving effect to the distributionof such dividends and, under certain circumstances, other adjustments to PLDT’sclosing cash balance, would be less than 4.0 to 1.0.  Under other loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (1) PLDT is in default in thepayment of any amounts due and payable under such loan agreement or after theoccurrence and during the continuance of any other event of default orpotential event of default under such agreements, (2) if after giving effect tosuch action the current ratio would be less than 1.2 to 1 or (3) in an amountgreater than PLDT net income after taxes during the fiscal year to which suchpayment or distribution relates.     In case of a change in control ofPLDT, PLDT may be required to repurchase or prepay certain indebtedness.  Underthe terms of the 10.625% Notes due 2007 and 11.375% Notes due 2012, we arerequired to offer to purchase all outstanding Notes due 2007 and Notes due 2012for cash at a price of 101% of their principal amounts plus accrued interest inthe event that (1) the aggregate of NTT Communications' and First Pacific'sdirect and indirect voting interest in PLDT's outstanding capital stock havingvoting rights falls below 35% of such capital stock, (2) any person or, incertain instances, group of persons, which is not controlled directly orindirectly by First Pacific or NTT Communications acquires a direct or indirectvoting interest in PLDT's outstanding capital stock having voting rights whichequals or exceeds 35% of such capital stock and (3) if a rating agency at suchtime maintains a rating on either series of notes, the rating agency downgradesits credit rating on the series within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(1) and (2) above.     Under the terms of our JP¥9,760million loan from JBIC, in the event of any proposed sale or transfer of PLDT'sstock that would result in NTT Communications holding less than 14.95% ofPLDT's voting stock, we will be required to prepay, immediately uponeffectiveness of such sale or transfer, all principal outstanding under theloan, together with accrued interest.  However, prepayment will not be requiredif, following such sale or transfer, (1) NTT Communications continues to haveprior approval rights with respect to all matters as to which NTTCommunications has approval rights under the stock purchase agreement pursuantto which it acquired its shares in PLDT or (2) JBIC, in its sole discretion,determines that NTT Communications’ participation in the expansion of Smart'sGSM network capacity to extend PLDT’s cellular business in Smart would not bereduced below its level of participation as of the date of the loan agreement.     Under both the terms of the US$145million multicurrency term facility agreement and the terms of our JPY5,615million term loan, if any lender so requests in writing, PLDT shall prepay infull such lender’s participation in the loan within 45 days from notificationof the change in control and no later than the date on which PLDT is requiredto repurchase its 10.625% Notes due 2007 and 11.375% Notes due 2012 (“Bonds”)from bondholders accepting the change in control offer.  A change in control isdeemed to occur when (1) the aggregate of NTT Communications’ and FirstPacific’s direct and indirect voting interest in PLDT’s outstanding capitalstock having voting rights fall below 35% of such capital stock, (2) any personor, in certain instances, group of persons, which is not controlled directly orindirectly by First Pacific or NTT Communications acquires a direct or indirectvoting interest in PLDT’s outstanding capital stock having voting rights whichequals or exceeds 35% of such capital stock and (3) if a rating agency at suchtime maintains a rating on the Bonds, the rating agency downgrades its creditrating on the Bonds within 90 days (or more, in certain circumstances)following notice of the occurrence of the events specified in (1) and (2)above.     PLDT’s debt instruments containcustomary and other default provisions that permit the lender to accelerateamounts due or terminate their commitments to extend additional funds under thedebt instruments. These defaults include:                                                     - cross-defaults andcross-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;                                                       - failure by PLDT to meetcertain financial ratio covenants referred to above;                                                         - the occurrence of anymaterial adverse change in circumstances that a lender reasonably believesmaterially impairs PLDT’s ability to perform its obligations under its debtinstrument with the lender;                                                            - the revocation, terminationor amendment of any of the permits or franchises of PLDT in any manner unacceptableto the lender;                                                             - the abandonment, terminationor amendment of the project financed by a loan in a manner unacceptable to thelender;                                                               - the nationalization orsustained discontinuance of all or a substantial portion of PLDT’s business;and                                                                 - other typical events ofdefault, including the commencement of bankruptcy, insolvency, liquidation orwinding up proceedings by PLDT.  *** ***  ***Smart***     Smart’s long-term debt consists of:     
 

**2002**

2001

 

(in millions)

 
U.S. Dollars

**US$408**

**Php21,724**

US$401

Php20,702

Philippine Pesos

 

**1,167**

 

1,000

 

 

**22,891**

 

21,702

Less current portion

 

**6,173**

 

4,577

 

 

**Php16,718**

 

Php17,125

 

Smart’s bank loan facilities, whichare being used to finance its purchases of telecommunications equipment, areavailed of through one or more drawdowns. 

 

In connection with the build-outexpansion of its GSM network, Smart has entered into a number of loanagreements to finance the various phases of this expansion.

 

The loan facilities for Phases 1 to4 of the GSM network expansion, under which US$151 million was outstanding asof December 31, 2002, are repayable in ten equal semi-annual installments withfinal repayments due in October 2005 and April 2006.  

 

On June 8 and June 14, 2001, Smartsigned its GSM Phase 5A financing comprised of US$195 million and Php1,000million loans, respectively. The US$195 million loans, US$159 million of whichwas outstanding as of December 31, 2002, are payable over five to six years,with final repayments due in September 2006 and March 2007. The Php1,000million facility, of which Php867 million was outstanding as of December 31,2002, is payable quarterly with final repayment in December 2005.  

 

On December 13, 2001, Smart signedits GSM Phase 5B financing of US$100 million, of which US$81 million wasoutstanding as of December 31, 2002, and has the same terms as the Phase 5AUS$195 million loans described above.  

 

Facilities under GSM Phases 1 to 4,the Finnish Export Credit plc tranche of GSM Phase 5A facility and GSM Phase 5Bfacility are covered by guarantees from Finnvera, the Finnish export creditagency.

 

On September 25,2001, Smart obtained a US$5.9 million term loan facility from Electro BanqueS.A., of which US$4 million was outstanding as of December 31, 2002.

On October 26,2001, Smart obtained a US$10.6 million term loan facility from Credit LyonnaisS.A., of which US$4 million was outstanding as of December 31, 2002.

On April 14, 2002, for the purpose of financing thepurchase of certain equipment, Smart obtained a US$7.2 million term loanfacility from Bayerische Hypo- und Vereinsbank Aktiengesellschaft, of whichUS$5 million was outstanding as of December 31, 2002, pursuant to the standardloan agreement No. 1 dated August 14, 2002 under the €50million Framework Agreement for the financing of individual export contractsdated November 8 and 13, 2001.

 

In addition, on January 9, 2002, Smart signed a loanfacility in the amount of Php300 million. This loan has been fully drawn and ispayable quarterly with final repayment in February 2007.

 

On November 28, 2002, Smart signed a US$100 millionterm loan facility supported by Nippon Export and Investment Insurance. Thisfacility remains undrawn as of the date of the filing of this annual report.

Interest on Smart’s dollardenominated loans is either fixed or based on LIBOR plus premium.  These loansare payable in semi-annual installments and have maturities of up to 2007.  Thepeso loans are payable quarterly and accrue interest based on the weightedaverage interest rate, or WAIR, plus Participating Financial Institution, orPFI, premium and will mature in December 2005 and February 2007 for thePhp1,000 million and Php300 million facilities, respectively.

 

Smart is subject to loan covenants that limit itsability to pay dividends, redeem preferred shares, make distributions to itsstockholders or otherwise provide funds to its stockholders or any affiliatewithout the consent of its lenders.  After receiving approvals from Finnveraand certain lenders for the payment of dividends to PLDT in an amount not toexceed 40% of Smart’s net income in 2001, Smart made its first dividend paymentof Php1,540 million to PLDT in December 2002.  In addition, Smart paiddividends in the amount of Php4,300 million to PLDT in June 2003, representing 70%of Smart’s 2002 net income, after receiving similar approvals from Finnvera andcertain lenders.  Further waivers would be required for payment of additionaldividends in future periods.  We cannot assure you that Smart will be able toobtain such waivers in the future, or what amounts, if any, Smart would bepermitted or financially able to distribute.  

 

Smart’s loan agreements containcertain restrictive covenants requiring Smart to comply with specifiedfinancial ratios and other financial tests calculated on the basis ofPhilippine GAAP at semi-annual measurement dates.  The financial tests underSmart’s loan agreements include compliance with a debt to equity ratio of notmore than 1.50:1 and a debt service coverage ratio of not less than 1.50:1.  Smarthas maintained compliance with all of its financial covenants.  The agreementsalso contain customary default provisions that permit the lender to accelerateamounts due under the loans or terminate their commitments to extend additionalfunds under the loans.  These defaults under Smart’s loan agreements include:

 
- Cross-defaults andcross-accelerations that permit a lender to declare a default if Smart is indefault under another loan agreement.  These cross default provisions aretriggered upon a payment or other default permitting the acceleration of Smartdebt, whether or not the defaulted debt is accelerated;       - Failure by Smart to complywith certain financial ratio covenants;         - Any reduction in PLDT’sownership of Smart’s stock below 51% of the total of each class of Smart’sstock outstanding;           - Any reduction in FirstPacific’s and its affiliates’ collective ownership of PLDT’s common stock below18% of the total common stock outstanding or 18% of the voting power of thetotal common stock outstanding; and             - The occurrence of anymaterial adverse change in circumstances that the lender reasonably believesmaterially impairs Smart’s ability to perform its obligations under its loanagreements with the lender or that the lender believes materially impairs anapplicable guarantors’ ability to perform its obligations under an applicableguaranty.     In addition, some of these loanagreements restrict Smart’s ability to enter into transactions with affiliatesexcept on arms length terms and for valuable consideration.     **  ***Piltel***  Piltel’s long-term debt consistsof:     
** **

**2002**

2001

** **

(in millions)

**Restructured debt**

** **

** **

** **

 

Philippine Pesos

** **

** **

** **

 

10 year Tranche B

 

**Php2,166**

 

Php2,166

15 year Tranche C

 

**2,166**

 

2,166

15 year Term Notes Facility

 

**293**

 

241

 

 

**4,625**

 

4,573

U.S. Dollars

 

 

 

 

10 year Tranche B

**US$33**

**1,768**

US$33

1,717

15 year Tranche C

**33**

**1,768**

33

1,717

15 year Conversion Notes Facility

**121**

**6,448**

117

6,060

 

**US$****187**

**9,984**

US$183

9,494

 

 

 

 

 

Japanese Yen

 

 

 

 

10 year Tranche B

**JPY 7,822**

**3,510**

JPY 7,822

3,070

15 year Tranche C

**7,822**

**3,510**

7,822

3,070

 

**JPY****15,644**

**7,020**

JPY 15,644

6,140

Total

 

**21,629**

 

20,207

**Unrestructured debt**

** **

** **

** **

 

Philippine Pesos

** **

** **

** **

 

Banks

 

–

 

–

Preferred shareholders

 

–

 

107

 

 

–

 

107

U.S. Dollars

 

 

 

 

Banks

**US$6**

**331**

US$6

322

Convertible bonds

**2**

**120**

10

514

Trade creditors

–

–

–

–

 

**US$****8**

**451**

US$16

836

Total

 

**451**

 

943

**Liabilities under capital lease**

 

**43**

 

43

 

 

**22,123**

 

Php21,193

Less current portion

 

**451**

 

943

 

 

**Php17,125**

 

Php16,718
     On June 4, 2001, Piltel completedthe restructuring of approximately Php41.1 billion of indebtedness and otherclaims, representing approximately 98% of its total liabilities as of thatdate.  Under the terms of the debt restructuring, 50% of Piltel’s debt wascancelled in exchange for Piltel convertible preferred shares which were mandatorilyexchanged for PLDT convertible preferred shares, and the balance wasrestructured into 10-year and 15-year loans secured by substantially all of thepresent and future assets of Piltel.  See *Note 16 – Preferred Stcok Subjectto Mandatory Redemption*for the terms of the PLDT convertible preferredshares.       Summarized below are the principalterms of the restructured debt of Piltel:   ** **  
 

**10-Year Tranche B Loans**

**15-Year Tranche C Loans**

**Term Notes Facility**

**Conversion Notes**

Final maturity

10 years from Effective Date

15 years from Effective Date

15 years plus 10 days from Effective Date

15 years from Effective Date

Amortization

per annum

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 3 to 9  –  0.10%

Years 3 and 4  –  0.10%

Years 3 to 14  –  0.10%

Years 3 and 4  –  0.10%

 

Year 10  –  99.30%

Year 5  –  2.00%

Year 15  –  98.80%

Year 5  –  1.05%

 

 

Years 6 to 14  –  10.00%

 

Years 6 to 9  –  5.05%

 

 

Year 15  –  7.80%

 

Year 10  –  54.65%

 

 

 

 

Years 11 to 14  –  5.00%

 

 

 

 

Year 15  –  3.90%

Interest rate

 

**Peso facility** – Philippine 91-day treasury bill rate (T-Bill Rate) or the average of the 91-day T-Bill Rate and the 90-day Philippine inter-bank offered rate (PHIBOR), if 90-day PHIBOR is different from the T-Bill Rate by more than 2.50%, plus 1.00% p.a.

 

**U.S. dollar facilities** – London interbank offered rate (LIBOR) for three-month U.S. dollar deposits plus 1.00% p.a.

 

**Yen facility** – LIBOR for three-month Yen deposits plus 1.00% p.a.

181-day T-Bill Rate or the average of the 181-day T-Bill Rate and the 6-months PHIBOR, if 6-months PHIBOR is different from the T-Bill Rate by more than 2.50%, plus 1.00% p.a.

LIBOR for six-month U.S. dollar deposits plus 1.00% p.a.

 

Interest payment dates

Quarterly in arrears

Semi-annually
     Piltel did not comply with theterms of convertible bonds with principal amount of US$2 million (approximatelyUS$2 million redemption price at the option of the holders), and US$6 millionof other U.S. dollar denominated debt.     Piltel is currently in the processof finalizing the terms under which the holder of the US$6 million debt wouldparticipate in the debt restructuring.     Piltel may not be able torestructure or otherwise pay the claims relating to its unrestructured debt.However, default on and acceleration of Piltel's unrestructured indebtedness donot create a cross-default under Piltel's restructured indebtedness or anyindebtedness of PLDT.     If Piltel’s non-participatingcreditors take forceful measures to enforce their claims, it is possible thatPiltel would be required to submit itself to a court-supervised rehabilitationproceeding or an involuntary insolvency proceeding seeking liquidation.  All ofPiltel’s creditors that participated in the debt restructuring agreed in connectionwith the debt restructuring that they would submit Piltel to a rehabilitationproceeding in those circumstances and petition for the adoption of a plan ofrehabilitation that includes the financial terms of the debt restructuringplan.  However, the laws and procedures governing a rehabilitation proceedingin the Philippine courts remain untested in significant respects.  It cannot beassured that a rehabilitation plan which incorporates the financial terms ofthe debt restructuring would be adopted promptly or at all.  Even if such arehabilitation plan were adopted, it cannot be assured that Piltel would proveto be viable thereafter.        ***MabuhaySatellite***     Mabuhay Satellite’s long-term debtconsists of:     
 

**2002**

2001

 

(in millions)

U.S. Dollars

** **

** **

** **

 

Credit Agreement 

**US$55**

**Php2,925**

US$62

Php3,201

Omnibus Agreement

**46**

**2,431**

47

2,421

 

**101**

**5,356**

109

5,622

Less current portion

**18**

**980**

8

424

 

**US$83**

**Php4,376**

US$101

Php5,198
     *Credit Agreement*     Mabuhay Satellite has an existingCredit Agreement with the Export-Import Bank of the United States (Ex-Im Bank)to finance a portion of the cost of purchasing the Agila II Satellite.  On May8, 2000, Ex-Im Bank agreed to amend the repayment terms of the principal underthe Restructuring Agreement.  Under the Amendment, the outstanding balance asof the effective date of the Amendment shall be amortized in 13 successivesemi-annual installments due on January 15 and July 15 of each year, beginningJanuary 15, 2000.  Interest rate remains at 6.6% per annum.     *OmnibusAgreement*     Mabuhay Satellite also has anexisting Omnibus Agreement with a syndicate of local banks, or the Banks, whichincludes issuance of irrevocable standby Letters of Credit with an aggregatestated value not exceeding US$55 million (Php2,925 million) in favor of Ex-ImBank, as security under the Credit Agreement and a term loan to MabuhaySatellite in the aggregate amount of US$46 million.      As security, Mabuhay Satellite hasconstituted in favor of the Banks:               - A first mortgage on itsleasehold rights under a lease agreement entered into with the Subic BayMetropolitan Authority, or SBMA, and the components of the satellite system;                 - An assignment of its rightsunder the transponder lease contracts to be entered into with its stockholdersand other parties and the revenues therefrom; and                   - An assignment of theapplicable proceeds of insurance to be taken on the satellite system.     Restructuring of MabuhaySatellite’s debt under the Omnibus Agreement and the second restructuring ofits debt under the Credit Agreement, were approved by the Monetary Board of the*Bangko Sentral ng Pilipinas* on July 6, 2000 under the latter’sResolution No. 1107.     The Credit and Omnibus Agreementsimpose negative covenants which, among other things, restrict the materialchanges in Mabuhay Satellite’s nature of business and ownership structure, anylien upon or with respect to any of its assets or to any right to receiveincome, acquisition of capital stock, declaration and payment of dividends,merger, consolidation and sale with another entity and incurring orguaranteeing additional long-term debt beyond prescribed amounts.  *** ***  **  ***ePLDT***     On March 4, 2002, ePLDT enteredinto a three-year loan facility with Philippine Bank of Communicationsamounting to Php150 million with a grace period of one year.  The loan facilitywas fully drawn as of December 31, 2002.  The quarterly principal payments ofPhp15 million shall start in the second year with a balloon payment of Php45million at the end of the third year.  Interest on this loan is equivalent to91-day T-bill rate plus 4% per annum payable quarterly in arrears.  The loan issecured by ePLDT’s investment in an affiliate with a carrying value of Php616million as of December 31, 2002 and a deed of assignment of receivables of anassociate from a foreign customer.     The loan agreement imposes negativecovenants which, among other things, restrict ePLDT in regard to payment ofcash dividends or any other income of any capital distribution to PLDT,voluntary suspension of its entire business operations for a period of 60consecutive days of dissolution of its legal existence, and creation of anyencumbrances on the shares pledged.     ***MaraTel***     MaraTel’s long-term debt consistsof a Php60 million loan obtained on October 20, 1997 and a Php19 million loandrawn on July 19, 1999.  The Php60 million loan carries an interest rateranging from 12% to 15% per annum and matures on October 16, 2005, while thePhp19 million loan bears a fixed interest rate of 15% per annum and matures onJuly 30, 2004.  As of December 31, 2002, the outstanding balances of theseloans totaled Php42 million, of which Php16 million will mature in 2003.     
 
  **15.    ****Deferred Credits and Other Noncurrent Liabilities**     This account consists of:     
 

**2002**

2001

 

(in million pesos)

Remaining excess of debt forgiven over value of Piltel’s preferred shares

**8,706**

9,419

Accrued pension cost (Note 19)

**3,957**

3,537

Advance payment under a receivables purchase facility (Note 5)

**2,530**

–

Customers’ deposits

**2,162**

2,453

Accrual of capital expenditures under long-term financing (Note 21)

**1,625**

6,995

Others (including derivative instruments)

**2,057**

3,116

 

**21,037**

25,520
     
 
  **16.    ****Preferred StockSubject to Mandatory Redemption**     On June 4, 2001, PLDT issued 2.7million shares of Series V Convertible Preferred Stock, 5.1 million shares ofSeries VI Convertible Preferred Stock and 3.8 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58.1 million shares ofSeries K, Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel.  Shares of Series V, VI and VII ConvertiblePreferred Stock are entitled to receive annual dividends of Php18.70 per share,US$0.397 per share and JP¥40.7189 per share, respectively.  In addition, in2002, PLDT issued 30,100 shares of Series V Convertible Preferred Stock and14,087 shares of Series VI Convertible Preferred Stock in exchange for a totalof 220,935 shares of Series K, Class I Convertible Preferred Stock of Piltel.Upon receipt of tax clearance from the Bureau of Internal Revenue, PLDT willissue 106,500 more shares of its Convertible Preferred Shares in exchange for462,065 shares of Piltel Series K Class I Convertible Preferred Stock.  Eachshare of Series V, VI and VII PLDT Convertible Preferred Stock is convertibleat any time at the option of the holder into one PLDT common share.  On thedate immediately following the seventh anniversary of the issue date of theSeries V and Series VI Convertible Preferred Stock and on the eighthanniversary of the issue date of the Series VII Convertible Preferred Stock,the remaining outstanding shares under these series will be mandatorilyconverted to PLDT common shares.  For thirty days thereafter, the holders ofthe mandatorily converted common shares have the option to sell such commonshares back to PLDT for Php1,700 per share, US$36.132 per share and JPY4,071.89per share for Series V, VI and VII, respectively.  Due to the foreign currencycomponent of the call option embedded in the Series VI and VII ConvertiblePreferred Stock, such call options were bifurcated and accounted for separatelyin accordance with FASB Statement No. 133, as amended (see Note 25 – *DerivativeInstruments and Hedging Activities*).  The aggregate fair value of theissued Series V, VI and VII Convertible Preferred Stock – net of the bifurcatedoption values – is presented under the “Preferred Stock Subject to MandatoryRedemption” liability account.     As of June 4, 2001, the aggregate fair value of the issuedSeries V, VI and VII Convertible Preferred Stock (inclusive of the optionvalues) amounted to Php10,165 million, as determined using an independentparty’s valuation model.  The difference between this aggregate fair value amountand the P20,080 million Piltel debt restructured was deferred and included aspart of “Deferred Credits and Other Liabilities” in the consolidated balancesheets.  Thereafter, interest incurred on the remaining restructured debt isrecorded as an offset to the deferred credits.  Total interest incurred relatedto the restructured debt for the year ended December 31, 2002 and the periodfrom June 4, 2001 to December 31, 2001 amounted to Php758 million and Php497million, respectively.  As of December 31, 2002 and 2001, the deferred creditbalance amounted to Php8,706 million and Php9,419 million, respectively, aftergiving effect to the above interest expense and the additional issuance of44,187 convertible preferred shares to restructure another Php81.8 million ofPiltel’s debt.     The difference between the aggregate fair value of theSeries V, VI and VII Convertible Preferred Stock at issue date (net of thebifurcated option values for Series VI and VII) and the aggregate redemptionvalue is accreted over the period up to the call option date using theeffective interest rate method.  As of June 4, 2001, the aggregate fair valueof the convertible preferred shares – net of bifurcated option values –amounted to Php9,113 million, while the aggregate redemption value amounted toPhp19,750 million, resulting to a difference for accretion of Php10,637million.  Accretions added to “Preferred Stock Subject to Mandatory Redemption”and charged against retained earnings for the years ended December 31, 2002 and2001 amounted to Php1,004 million and Php542 million, respectively.  During2002 and 2001, 318,144 shares and 351,019 shares, respectively, of thepreferred stocks were converted into PLDT common shares.   “Preferred StockSubject to Mandatory Redemption” amounted to Php10,174 million and Php9,399million as of December 31, 2002 and 2001, respectively, after giving effect tothe above accretions, conversions and additional issuances.  The aggregateredemption value of the outstanding Series V, VI and VII Convertible PreferredStock amounted to Php20,201 million as of December 31, 2002.               
 
  **17.    ****Stockholders’ Equity**     The movement of PLDT’s capitalstock account including preferred stock subject to mandatory redemption (seeNote 16 – Preferred Stock Subject to Mandatory Redemption) follows:     
** **

** **

**Preferred Stock -**Php10 par value

** **

 
 

** **

** **

** **

** **

**Subject to Mandatory Redemption**(Note 16)

** **

** **

 

**Common Stock –**Php5 par value

**Series  A to CC**

**III**

**IV**

** **

** **

**V**

**VI**

**VII**
****
 

**No. of Shares**

**Amount**

**No. of Shares**

**Total Preferred Shares**

**Amount**

 
 

(in millions)

 
Authorized
234

Php1,170

** **

** **

** **

** **

** **

** **

822

Php822

 
**Outstanding**

** **

 

** **

** **

** **

** **

** **

** **

** **

 

 
Balance at January 1, 2000

156

Php782

322

4

36

–

–

–

362

Php3,625

 
Issuance

12

61

32

–

–

–

–

–

32

316

 
Conversion

–

–

(2)

–

–

–

–

–

(2)

(20)

 
Balance at December 31, 2000

168

Php843

352

4

36

–

–

–

392

Php3,921

 
 

 

 

 

 

 

 

 

 

 

 

 
Balance at January 1, 2001

168

Php843

352

4

36

–

–

–

392

Php3,921

 
Issuance

–

–

23

–

–

3

5

4

35

348

 
Conversion

–

2

(3)

–

–

–

–

–

(3)

(27)

 
Balance at December 31, 2001

168

Php845

372

4

36

3

5

4

424

Php4,242

 
 

 

 

 

 

 

 

 

 

 

 

 
Balance at January 1, 2002

168

Php845

372

4

36

3

5

4

424

Php4,242

 
Issuance

–

–

37

–

7

–

–

–

44

440

 
Conversion

1

2

(2)

 

 

–

–

–

(3)

(26)

 
Redemption

–

–

–

–

(7)

– 

–

–

(7)

(72)

 
Balance at December 31, 2002

169

Php847

407

4

36

3

5

4

458

Php4,584

 
 

On March 17, 2000, the PhilippineSEC approved the increase in authorized capital stock of PLDT from Php9,000million, divided into two classes consisting of 783 million shares of serialpreferred stock with a par value of Php10 each and 134 million shares of commonstock with a par value of Php5 each, to Php9,395 million divided into twoclasses consisting of 822 million shares of serial preferred stock with a parvalue of Php10 each and 234 million shares of common stock with a par value ofPhp5 each.  Out of said increase in capital stock, PLDT issued 35 millionshares as consideration and in exchange for the acquisition of the entireissued capital stock of Smart and 12 million shares of stock were subscribed byNTT Communication’s subsidiary for cash (see *Note 18 – Related Party Transactions*).

 

***PreferredStock***

 

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

 

The Series A to CC 10% CumulativeConvertible Preferred Stocks earn cumulative dividends at an annual rate of10%.  These series of preferred stock are convertible into common stock a yearafter the year of share issuance, at a price equivalent to 10% below theaverage market price of PLDT's common stock at the PSE over a period of 30consecutive trading days before the conversion date.  The conversion price,however, shall not be less than the conversion price set by the Board ofDirectors, which as of December 31, 2002, is Php5 per share.  At PLDT’s option,the Series A to CC 10% Cumulative Convertible Preferred Stock are redeemable atpar value plus accrued dividends five years after the year of issuance.

 

On September 25, 2001, the Board ofDirectors designated an additional 5 million shares of serial preferred stockas Series AA 10% Cumulative Convertible Preferred Stock.  On October 24, 2001,the Philippine SEC issued a resolution confirming that the issuance of 5million Series AA 10% Cumulative Convertible Preferred Stock is a transactionexempt from the registration requirements under the Securities Regulation Code,or SRC.  On December 12, 2001, the PSE approved the listing of the additional 5million preferred shares, bringing the total listed Series AA 10% CumulativeConvertible Preferred Stock to 35 million shares.

 

On January 22, 2002, the Board ofDirectors designated 10 million shares of serial preferred stock as Series CC10% Cumulative Convertible Preferred Stock for issuance throughout 2002.  Inaddition, on February 26, 2002, the Board of Directors designated an additional15 million shares of serial preferred stock as Series AA 10% CumulativeConvertible Preferred Stock.  The issuance of the 10 million shares of SeriesCC 10% Cumulative Convertible Preferred Stock and the additional 15 millionshares of Series AA 10% Cumulative Convertible Preferred Stock is an exempttransaction under Section 10.2 of the SRC, as confirmed by the Philippine SECon March 13, 2002 and July 31, 2002, respectively.  PSE approved the listing ofthe 10 million shares of Series CC 10% Cumulative Convertible Preferred Stockand the additional 15 million shares of Series AA 10% Cumulative ConvertiblePreferred Stock on August 14, 2002.

 

On December 2, 2002, the Board ofDirectors designated 10 million shares of serial preferred stock as Series DD10% Cumulative Convertible Preferred Stock for issuance throughout 2003 and anadditional 10 million shares of serial preferred stock as Series CC 10%Cumulative Convertible Preferred Stock.  The issuance of the 10 million sharesof Series DD 10% Cumulative Convertible Preferred Stock and the additional 10million shares of Series CC 10% Cumulative Convertible Preferred Stock is anexempt transaction under Section 10.2 of the SRC, as confirmed by the SEC onJanuary 30, 2003.  In an earlier letter dated October 24, 2002, PSE allowedPLDT to utilize 24,287,455 unissued preferred shares remaining listed with thePSE in order to cover the issuance requirement of the other series under PLDT’sSubscriber Investment Plan.  The issuance requirement for the 10 million sharesof Series DD 10% Cumulative Convertible Preferred Stock and the additional 10million shares of Series CC 10% Cumulative Convertible Preferred Stock will betaken from the said remaining listed and unissued preferred shares. 

 

The Series III ConvertiblePreferred Stock earns cumulative dividends at an annual rate of US$3.50 a sharepayable quarterly, free and clear of Philippine withholding taxes.  It isconvertible into common stock at the option of the holder at any time, at theconversion price of US$29.19 per share of common stock (equivalent to aconversion ratio of 1.7129 shares of common stock for each share of Series IIIConvertible Preferred Stock, each share of Series III Convertible PreferredStock being valued for this purpose at its reference amount of US$50 a share),subject to adjustment in certain events.  The Series III Convertible PreferredStock is not redeemable.  Upon liquidation of PLDT, holders of the Series IIIConvertible Preferred Stock will be entitled to receive liquidatingdistributions equivalent to Php11 a share, plus accrued and unpaid dividends tothe date of distribution, subject to the prior rights of creditors.

 

The Series IV CumulativeNon-Convertible Redeemable Preferred Stock earns cumulative dividends at anannual rate of 14% 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.  On February 26, 2002, theBoard of Directors called for the payment of a portion of the balance of thesubscription price of the Series IV Cumulative Non-Convertible RedeemablePreferred Stock amounting to Php72 million, which was paid on March 5, 2002.On March 22, 2002, PLDT redeemed 60 million shares out of the 360 millionsubscribed shares of its Series IV Cumulative Non-Convertible Preferred Stockand paid Php72 million, representing the redemption price plus unpaid dividendsup to the date of redemption.

 

The provisions of certainsubscription agreements involving preferred stock have an effect on the abilityof PLDT to, without written consent, sell certain assets and pay cash dividendsunless all dividends for all past quarterly dividend periods have been paid andprovision has been made for the currently payable dividends.

 

On December 2, 2002, the Board ofDirectors approved the dividend declaration of: (a) Php1 per share on 10%Cumulative Convertible Preferred Shares Series H, L, M and Y payable on January31, 2003 to the holders of record on December 26, 2002; and (b) US$1.029412,Php4.675, US$0.09925 and JP¥10.179725 per outstanding share of Series III, V,VI and VII Convertible Preferred Stock, respectively, payable on January 15,2003 to the holders of record on December 16, 2002.  As of December 31, 2002,undeclared cumulative dividends applicable to shares of preferred stockamounted to approximately Php159 million.  On January 31, 2003, the Board ofDirectors approved the dividend declaration of: (a) Php1 per share on 10%Cumulative Convertible Preferred Shares Series CC payable on March 31, 2003 tothe holders of record on February 7, 2003; and (b) Php12.15 per share on SeriesIV Cumulative Non-Convertible Redeemable Preferred Stock payable on March 15,2003 to the holders of record on February 17, 2003.  Also, on February 26,2003, the Board of Directors approved the dividend declaration of US$1.029412per share on Series III Cumulative Convertible Preferred Shares payable onApril 15, 2003 to the holders of record on March 17, 2003.

 

***RetainedEarnings***

 

The most recent dividenddeclaration made by PLDT in respect of its common shares was in March 2001.PLDT continues to pay dividends in respect of its preferred shares.  Thecurrent policy of PLDT is to determine its ability to declare and pay dividendstaking into consideration the interest of its shareholders as well as PLDT’sworking capital, capital expenditures and debt servicing requirements.  Alsotaken into account are the prohibitions and restrictions under certain ofPLDT’s debt instruments with respect to declaration and payment of dividends.The retention of earnings is necessary to meet the funding requirements of ourbusiness expansion, service improvement and development programs.  Thestatutory unappropriated retained earnings balance of PLDT determined under PhilippineGAAP as of December 31, 2002 which is available for distribution as dividendsamounted to Php ____ million.

 

 

**18.             ****Related Party Transactions**

** **

Companies within the PLDT Group areengaged in arm’s-length transactions with each other in the ordinary course ofbusiness.  We believe that the terms of these transactions are comparable withthose available to unrelated parties. 

 

***Transactionswith/between Related Parties***

 

*Airtime Purchase Agreementbetween PLDT and PT Asia Cellular Satellite and Related Agreements*

 

In March 1997, PLDT entered into aFounder NSP Air Time Purchase Agreement with PT Asia Cellular Satellite, asamended in December 1998, under which PLDT was granted the exclusive right tosell ACeS services in the Philippines.  In exchange, PLDT is required topurchase from PT Asia Cellular Satellite at least US$5 million worth of airtime annually over ten years, commencing on the commercial operations date,which has been set as January 1, 2002.  In the event PT Asia CellularSatellite's billing revenues are less than US$45 million in any given year,PLDT is required to make supplemental air time purchase payments not to exceedUS$15 million per year during the ten year term of the agreement.

 

PLDT also entered into a FounderNSP Operating Agreement with PT Asia Cellular Satellite on March 12, 1997,under which PLDT may:

 
- authorize distributors toresell ACeS services in the Philippines upon prior approval from PT AsiaCellular Satellite; and       - appoint agents to solicit andbill PLDT's or its authorized distributors' subscribers for ACeS services andto sell terminals on behalf of PLDT.     Under an Assignment and AssumptionAgreement dated December 29, 1998, PT Asia Cellular Satellite agreed to assignand transfer to ACeS International Limited, or AIL, all of PT Asia CellularSatellite's rights under the Founder NSP Airtime Purchase Agreement and FounderNSP Operating Agreement.     Under an Acknowledgment ofAssignment of Airtime Purchase Agreement entered into on December 29, 1998, byand among PLDT, P.T. Bank Internasional Indonesia and AIL, PLDT consented tothe assignment by AIL of the Founder NSP Airtime Purchase Agreement to P.T.Bank Internasional Indonesia, as security agent, for the benefit of the securedparties under the Security Agreement dated as of December 29, 1998, which wasexecuted in connection with the Amended and Restated Credit Agreement datedDecember 29, 1998 among PT Asia Cellular Satellite, AIL, P.T. BankInternasional Indonesia and various other banks.     In March 2003, PLDT, together withthe founder shareholders, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original ATPA.  In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of approximately US$4 million.  PLDT is also obliged to purchase fromAIL 13,750 satellite fixed phone units for the year 2003 at US$395 F.O.B perunit, subject to quarterly price adjustment. The parties to the StandstillAgreement also agreed to negotiate in good faith and use their best efforts toreach an agreement on a revised ATPA before November 15, 2003 that will cover,among other matters, the amended minimum and supplemental air time paymentprovisions subject to the approval of AIL’s creditors.     ***Transactionswith Major Stockholders, Directors and Officers***     Transactions between PLDT or itssubsidiary and a director or key officer or owner of more than 10% of thecommon shares of PLDT, or any member of the immediate family of a director orkey officer or owner of more than 10% of the common shares of PLDT, who has adirect or indirect material interest in PLDT or its subsidiary, as of and forthe years ended December 31, 2002, 2001 and 2000 are as follows:     *a.     **Agreementswith NTT Communications and/or its Affiliates*     PLDT is a party to the followingagreements with NTT Communications and/or its affiliates:         -  Advisory ServicesAgreement.    On March 24, 2000,PLDT entered into an agreement with NTT Communications under which NTTCommunications provides PLDT with technical, marketing and other consultantsfor various business areas of PLDT starting April 1, 2000.  Total fees underthis agreement amounted to Php207million, Php248 million and Php117 million for the years ended December 31,2002, 2001 and 2000, respectively.  As of December 31, 2002 and 2001outstanding obligations of PLDT amounted to Php32 million and Php39 million,respectively.           -  Domestic Fiber OpticNetwork Submerged Plant Maintenance Agreement.    On July 4, 2000, PLDT entered into anagreement with NTT World Engineering Marine Corporation, or NTT WEMC, for thesubmarine cable repair and other allied services for the maintenance of PLDT’sdomestic fiber-optic network, or DFON, submerged plant for a period of fiveyears up to July 4, 2005.  Under the agreement, PLDT shall pay NTT WEMC a fixedannual standing charge of US$2 million, excluding cost for the use of aremotely operated submersible vehicle at US$5,000 for every day of use andrepair cost computed at US$19,000 per day of actual repair. Total fees underthis agreement amounted to Php65million, Php107 million and Php35 million for the years ended December 31, 2002,2001 and 2000, respectively.             -  Arcstar LicensingAgreement and Arcstar Service Provider Agreement.    On March 24, 2000, PLDT entered into an agreementwith NTT Worldwide Telecommunications Corporation under which PLDT marketsmanaged data and other services under NTT Communications' "Arcstar"brand to its corporate customers in the Philippines.  PLDT also entered into aTrade Name and Trademark Agreement with NTT Communications under which PLDT hasbeen given the right to use the tradename "Arcstar" and its relatedtrademark, logo and symbols, solely for the purpose of PLDT's marketing,promotional and sales activities for the Arcstar services within thePhilippines.  Global coordination fees to NTT Communications based on certainpercentage of revenues derived from Arcstar products and services amounted to Php14 million, Php7 million and Php1 million forthe years ended December 31, 2002, 2001 and 2000, respectively.  As of December31, 2002 and 2001, outstanding obligation of PLDT amounted to Php3 million and Php1 million, respectively.               -  Conventional InternationalTelecommunications Services Agreement.    On March 24, 2000, PLDT entered into an agreement with NTTCommunications under which PLDT and NTT Communications agreed to cooperative arrangementsfor conventional international telecommunications services to enhance theirrespective international businesses.  Total fees under this agreement amountedto Php3 million and Php0.4 million for the years ended December 31, 2002and 2001, respectively.  As of December 31, 2002 and 2001, outstandingobligation of PLDT amounted to Php0.6million and Php0.3 million,respectively.     *b.     **Agreementbetween Smart and Asia Link B.V., or ALBV***     Smart has an existing TechnicalAssistance Agreement with ALBV for the latter to provide technical supportservices and assistance in the operations and maintenance of CMTS for a periodof five years, subject to renewal upon mutual agreement between the parties.The agreement provides for quarterly payments of technical service feesequivalent to 2% of the net revenues of Smart.     Smart also has an existing ServicesAgreement with ALBV for a period of 25 years starting January 1, 1999, whichshall automatically expire unless renewed by mutual agreement of both parties.Under the agreement, ALBV provides advice and assistance to Smart in sourcingcapital equipment and negotiating with international suppliers, arranginginternational financing and other services therein consistent with and for thefurtherance of the objectives of the services.     ALBV is a subsidiary of the FirstPacific Group.     Total fees under these agreementsamounted to Php429 million, Php249 million and Php195 million for the yearsended December 31, 2002, 2001 and 2000, respectively.  Smart has an outstandingobligation of Php31 million in 2002 and receivable of Php5 million in 2001under these agreements.  * *  *c.      **Agreementwith Foote, Cone & Belding Worldwide, or FCB Worldwide***     FCB Worldwide provides consultancyand advisory services to PLDT.  Total fees under this agreement amounted toPhp19 million and Php34 million for the years ended December 31, 2002 and 2001,respectively.  The chairman of PLDT’s Board is the non-executive chairman ofFCB Worldwide’s representative office in the Philippines.       *d.     **Agreementsrelating to insurance companies*  * *  Gotuaco del Rosario and Associates,or Gotuaco, acts as broker for certain insurance companies to cover certainproperties of the PLDT Group.  Insurance premiums are remitted to Gotuaco andthe broker’s fees are settled between Gotuaco and the insurance companies.  Inaddition, PLDT has signed an insurance policy with Malayan Insurance Co. Inc.,or Malayan, wherein premiums are directly paid to Malayan.  Total payments toGotuaco and Malayan in 2002 covering the twelve-month period ending July 31,2003 amounted to Php307 million.  Two directors of PLDT have a direct/indirectinterest in or serve as director/officer of Gotuaco and Malayan.     
 
  **19.    ****Employees’ BenefitPlan**     ***PLDT***     PLDT has a trustee-managed,noncontributory defined benefit plan, or the Benefit Plan, providing forretirement and death benefits and service terminal pay to substantially allpermanent and regular employees.  Benefits under the Benefit Plan are based onfinal salary and length of service.     In accordance with SFAS No.132,“Employers’ Disclosures about Pensions and Other Post-retirement Benefits,” thefollowing table sets forth the Plan’s funded status and pension amountsrecognized as of December 31, 2002, 2001 and 2000:     
 

**2002**

2001

2000

 

(in million pesos)

Change in benefit obligation:

 

** **

** **

Benefit obligation at beginning of year

**6,638**

9,264

9,862

Service cost

**452**

697

713

Interest cost

**794**

1,108

1,086

Benefits paid

**(496)**

(669)

(969)

Actuarial loss (gain)

**596**

(3,763)

(1,428)

Benefit obligation at end of year

**7,984**

6,637

9,264

Change in Plan assets:

** **

 

 

Fair value of Plan assets at beginning of year

**4,591**

5,007

5,450

Actual return on Plan assets

**(1,651)**

(1898)

(100)

Employer’s contribution

**470**

341

626

Benefits paid

**(495)**

(669)

(969)

Fair value of Plan assets at end of year

**2,914**

2,781

5,007

Funded status

**(5,070)**

(3,856)

(4,257)

Unrealized net transition obligation

**275**

289

302

Unrecognized net actuarial (gain) loss

**838**

(31)

1,245

Accrued benefit cost

**(3,957)**

(3,536)

(2,710)

Components of net periodic benefit cost:

** **

 

 

Service cost

**452**

697

713

Interest cost

**794**

1,108

1,086

Expected return on Plan assets

**(369)**

(665)

(595)

Amortization of:

** **

 

 

Unrecognized net transition obligation

**13**

14

13

Unrecognized net loss

**–**

14

48

Net periodic benefit cost

**890**

1,168

1,265
       The significant assumptions used indetermining the actuarial present value of the projected benefit obligations asof December 31, 2002, 2001 and 2000 are as follows:     
 

**2002**

2001

2000

Weighted average assumptions

 

 

 

Discount rate

**9%**

12%

12%

Expected return on Plan assets

**8%**

12%

12%

Rate of compensation increase

**9%**

10%

12%
     ***Smart***     Smart has a trustee-managedtax-qualified Provident Plan providing for retirement, death or serviceterminal pay to substantially all permanent and regular employees.  Under theProvident Plan, Smart contributes to the provident fund for the credit of eachmember's Personal Retirement Account, or PRA, a percentage of such member'smonthly salary.  The member has an option to contribute to the Provident Fundan amount not to exceed 25% of the member's monthly salary, which are creditedto each member's PRA; however, very few members contribute. Net earnings of theProvident Fund are credited every six months to the PRAs of the members basedon their proportionate share in the total value of the Provident Fund as of theend of the preceding period.  Smart, not the participating employees, bears allrisk of loss associated with the investment of the funds assets.       Any benefit payable under this Planshall be in lieu of or in compliance with, but not in addition to, the paymentof similar benefits Smart is required to pay its employees under existing orfuture laws, employment contracts or collective bargaining agreements, it beingunderstood that the employee shall be entitled only to the higher of thebenefits and not to both.     The following are the minimum additionaldisclosure required by law:     
 

**2002**

2001

2000*

 

(in million pesos)

Change in benefit obligation:

** **

 

 

Benefit obligation at beginning of the period

**125**

79

55

Service cost

**45**

32

14

Interest cost

**12**

8

4

Benefits paid

**(1)**

–

–

Actuarial loss (gain)

**(22)**

6

6

Benefit obligation at end of the period

**159**

125

79

Change in Plan assets:

** **

 

 

Fair value of Plan assets at beginning of the period

**119**

80

63

Actual return on Plan assets

**25**

11

(1)

Employer’s contribution

**54**

28

18

Benefits paid

**(1)**

–

–

Fair value of Plan assets at end of the period

**197**

119

80

 

** **

 

 

Funded status

**38**

(6)

1

Unrecognized net transition obligation

**(7)**

(7)

(8)

Unrecognized net actuarial (gain) loss 

**(23)**

10

3

Accrued benefit cost

**8**

(3)

(4)

Components of net periodic benefit cost:

** **

 

 

Service cost

**45**

32

14

Interest cost

**12**

8

4

Expected return on Plan assets

**(14)**

(10)

(5)

Net periodic benefit cost

**43**

30

13
  ** FromMarch 24, 2000, date of PLDT’s acquisition of Smart.*     The significant assumptions used indetermining the actuarial present value of the projected benefit obligations asof December 31, 2002, 2001 and 2000 are as follows:     
 

**2002**

2001

2000

Weighted average assumptions

 

 

 

Discount rate

**10%**

10%

10%

Expected return on Plan assets

**10%**

10%

10%

Rate of compensation increase

**9%**

10%

10%
  .  
 
  **20.    ****Other Expenses – Net**     This account consists of:     
 

**2002**

2001

2000

 

(in million pesos)

Interest expense and related items - net  of capitalized interest (Notes 7 and 13)

**14,662**

14,639

14,209

Interest and other income - net

**(2,567)**

(1,458)

(2,885)

Provision for decline in value of investment

**–**

5,631

–

Equity in net losses (income) of investees (Note 8)

**128**

954

902

Manpower reduction cost

**324**

279

–

Foreign currency swap costs (Note 25)

**315**

108

–

Foreign exchange losses 

**3,820**

3,682

32,173

 

**16,682**

23,835

44,399
     
 
  **21.    ****Income Taxes**     The net current and noncurrentcomponents of deferred income tax recognized in the consolidated balance sheetsfollow:     
 

**2002**

2001

 

(in million pesos)

 

 

 

Net current assets

**4,297**

2,025

Net noncurrent assets

9,771

**13,508**
  * *     Provision for income tax consistsof:     
 

**2002**

2001

2000

 

(in million pesos)

Current

**589**

876

1,736

Deferred

**2,536**

(1,512)

(9,976)

 

**3,125**

(636)

(8,240)
        On July 20, 1999, Mabuhay Satellitewas registered as a Subic Bay Freeport Enterprise and Clark Telecom was alsoregistered as a Clark Special Economic Zone Enterprise under Republic Act No.7227, otherwise known as the Bases Conversion and Development Act of 1992, orthe Act.  As registrants, Mabuhay Satellite and Clark Telecom are entitled toall the rights, privileges and benefits established thereunder including taxand duty-free importation of capital equipment and special income tax rate of5% of gross income, as defined in the Act.      Smart is registered with the Boardof Investments, or BOI, under the Omnibus Investments Code of 1987 as apreferred non-pioneer enterprise for the operation of the IGF and CMTS services.As such, Smart was entitled to certain tax and non-tax incentives, including anincome tax holiday for a period of three years up to August 2000.      The BOI Governing Board, in itsmeeting on August 10, 2000, granted the request of Smart for the transfer ofits LEC business to PLDT subject to certain conditions, which include thesurrender of Smart’s original certificate of registration to the BOI forannotation and safekeeping and the issuance of a certificate of registration toPLDT with respect to the transferred LEC business.     On May 3, 2001, the BOI awardedSmart pioneer status for its GSM expansion projects entitling it to enjoy athree-year tax holiday up to May 2004.  The tax incentive is availed on thebasis of incremental income generated from the said expansion project.  Inaddition, on July 12, 2001, the BOI awarded Smart pioneer status for itspayment infrastructure projects entitling it to enjoy a six-year tax holiday.In this case, the tax incentive is availed for the entire taxable income of theproject.      Smart’s deferred income tax assetsand liabilities as of December 31, 2002 have been restated at realizableamounts after provision of a valuation allowance for portions of income taxassets that will not have tax consequences.     On December 22, 2000, the BOIapproved ePLDT’s registration as a new IT service firm in the field of servicesrelated to Internet data center on a pioneer status.  As such, ePLDT enjoys,among other incentives, a six-year income tax holiday from January 2001 or actualstart of commercial operations, whichever comes first.     In 2002 and 2001 tax incentivesavailed amounted to Php2,699 million and Php776 million, respectively.     
 
  **22.    ****Earnings (Loss) PerCommon Share**     The following table presentsinformation necessary to calculate the loss per share:     
 

**2002**

2001

2000

 

(in million pesos)

Loss before cumulative effect of change in accounting principle and minority interest in net lossesg of consolidated subsidiaries 

**(4,465)**

(26,691)

(24,713)

Dividends on preferred stock

**(1,645)**

(1,503)

(1,249)

Amortization of difference between fair market value and put option price of Preferred Stock Subject to Mandatory Redemption 

**(1,254)**

(653)

–

Loss before cumulative effect of change in accounting principle and minority interest in net losses of consolidated subsidiaries applicable to common stock

**(7,731)**

(29,297)

(25,962)

Cumulative effect of change in accounting principle

–

**(54)**

–

Loss before minority interest in net loss of consolidated subsidiaries applicable to common stock

**(7,753)**

**(29,351)**

**(25,962)**

Minority interest in net income (loss) of consolidated subsidiaries

**(355)**

**739**

**(1,627)**

Net loss applicable to common stock

**(8,086)**

**(28,612)**

**(27,589)**

 

** **

 

 

 

(in thousand pesos, except per share amounts)

Outstanding common shares, beginning

**168,895**

168,498

121,174

Effect of issuance of common shares during the year

**200**

162

36,503

Weighted average number of common shares, end

**169,095**

168,660

157,677

Earnings per common share

 

 

 

Basic loss before cumulative effect of change in accounting principle and minority interest in net losses of consolidated subsidiaries applicable to common stock

**(47.75)**

**(160.92)**

**(148.47)**

Cumulative effect of change in accounting principle

–

**(.32)**

–

Minority interest in net income (loss) of consolidated subsidiaries

**2.10**

**(4.38)**

**9.77**

Basic earnings per common share

**(45.65)**

**(165.62)**

**(138.70)**
     The computations of diluted lossper share were anti-dilutive for the years ended December 2002, 2001 and 2000;therefore, the amounts reported for basic and diluted loss per share were thesame.       
 
  **23.    ****ContractualObligations and Commercial Commitments**  ** **  ***Contractual Obligations***     The following table discloses thePLDT Group’s contractual obligations outstanding as of December 31, 2002:      
 

**Payments Due by Period**

 

**Total**

**Less than 1 year**

**1****-3**

**years**

**4****-5**

**years**

**More than  5 years**

 

(in million pesos)

 

 

 

 

 

 

Long-term debt obligations

190,949

19,627

50,725

50,783

69,814

Long-term lease obligations 

3,876

850

1530

917

579

Unconditional purchase obligations 

9,930

219

2,241

2,145

5,325

Other long-term obligations 

20,201

–

–

–

20,201

Total contractual cash obligations 

224,956

20,696

54,496

53,845

95,919
  * *  (1)    *Under the Air Time PurchaseAgreement with AIL, the amount disclosed in the table above for payments duewithin 1 year reflects a reduction in PLDT’s required payments agreed under aStandstill Agreement, while the amounts disclosed for payments due from 2 yearsonwards are based on the original Air Time Purchase Agreement.  The parties ofthe standstill Agreement have also agreed to negotiate in good faith and usetheir best efforts to reach an agreement on revised ATPA before November 15,2003 that will cover, among other matters, the amended minimum and supplementalair time payment provisions subject to the approval of ACeS InternationalLimited’s creditors.*  * *  *Long-term Debt Obligations*  * *  For discussion of our long-termdebt obligations see *Note 14 – Long-term Debt*.     *Long-term Lease Obligations*     *Municipal Telephone Projects*.In 1993, PLDT entered into two lease agreements with the Philippine Departmentof Transportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under theseagreements, PLDT was granted the exclusive right to perform telecommunicationsmanagement services, to expand services, and to promote the use of theDOTC-contracted facilities in certain covered areas for a period of 15 years.Title to the properties shall be transferred to PLDT upon expiration of thelease term.  As of December 31, 2002, the aggregate remaining obligation wasapproximately Php1,013 million.  In case of cancellation, PLDT is liable to payPhp100 million under each of the two contracts as liquidated damages.     *Domestic Fiber Optic NetworkSubmerged Plant Agreement*.   As discussed in *Note 18 – Related PartyTransactions*, PLDT entered into an agreement with NTT World EngineeringMarine Corporation on July 4, 2000, for the submarine cable repair and relatedservices for the maintenance of PLDT’s DFON submerged plant for a period offive years up to July 4, 2005.  Under this agreement, PLDT is required to payNTT World Engineering Marine Corporation a fixed annual standing charge of US$2million, excluding cost for the use of a remotely-operated submersible vehicleat US$5,000 for every day of use and repair cost computed at US$19,000 per dayof actual repair.  As of December 31, 2002, the aggregate remaining obligationwas approximately Php336 million.     *Digital PassageService Contracts*.   PLDT has existing DigitalPassage Service Contracts with foreign telecommunication administrations forseveral dedicated circuits to various destinations for ten to 25 years expiringat various dates.  As of December 31, 2002, the aggregate remaining obligationwas approximately Php149 million.     *License Agreement with MobiusManagement Systems (Australia) Pty  Ltd., or Mobius.*   PLDT entered into alicense agreement with Mobius pursuant to which Mobius has granted PLDT anon-exclusive, non-assignable and non-transferable license for the use ofcomputer software components.  Under this agreement, Mobius is also required toprovide maintenance services for a period of one year at no additionalmaintenance charge.  PLDT may purchase maintenance services at the expirationof the first year for a fee of 15% of the current published license fee.  As ofDecember 31, 2002, the aggregate remaining obligation was approximately Php86million.     *Other Long-term LeaseObligations*.   The PLDT Group has various long-term lease contracts forperiods ranging from two to ten years covering certain offices, warehouses,cell sites, telecommunication equipment locations and various office equipment.     *Unconditional PurchaseObligations*     *Air Time Purchase Agreement withACeS International Limited.*  As discussed in *Note 18 – Related PartyTransactions*, PLDT entered into a Founder NSP Air Time Purchase Agreement,or ATPA, with ACeS International Limited, or AIL, in March 1997, which wasamended in December 1998, under which PLDT is granted the exclusive right tosell AIL services in the Philippines.  In exchange, PLDT is required topurchase from AIL a minimum of US$5 million worth of air time annually over tenyears commencing on the date of the satellite’s commercial operations.  In theevent AIL aggregate billing revenues is less than US$45 million in any givenyear, PLDT is required to make supplemental air time purchase payments not toexceed US$15 million per year during the ten-year term.       In March 2003, PLDT, together withthe founder shareholders, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original ATPA.  In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders, withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of US$3.8 million.  PLDT is also obliged to purchase from AIL 13,750satellite fixed phone units for the year 2003 at US$395 F.O.B. per unit,subject to quarterly price adjustment.  The parties to the Standstill Agreementalso agreed to negotiate in good faith and use their best efforts to reachagreement on a revised ATPA before November 15, 2003 that will cover, amongother matters, the amended minimum and supplemental air time payment provisionssubject to the approval of AIL’s creditors.       As of December 31, 2002, theaggregate remaining minimum obligation was approximately Php10,077 million.     *International AffiliateAgreement with VeriSign, Inc., or VeriSign.*   On September 15, 2000, ePLDTentered into an agreement with VeriSign for the non-exclusive, non-transferableright and license to use the VeriSign software, brand and CertificationPractice Statement for the purpose of approving, issuing, suspending orrevoking digital certificates for users of the Internet or similar open systemsin the Philippines for a period of seven years.  Under this agreement, ePLDT isrequired to pay VeriSign a certain percentage of the revenue derived from theservices subject to minimum annual royalty payments aggregating to US$1.18million, which was subsequently reduced to US$0.9 million, for the seven-yearcontract period.  In addition, ePLDT was required to pay an annual support feeof US$0.5 million for the first year and US$0.3 million in each yearthereafter.  As of December 31, 2002, ePLDT’s aggregate remaining minimumobligation under this agreement was approximately Php79 million.       *Other Unconditional PurchaseObligations*.   PLDT has various purchase contracts for periods ranging fromtwo to three years covering the use of fraud management system and satellite huband remote VSAT network systems.  * *  *Other Long-term Obligations*     *Mandatory Conversion andPurchase of Shares*.   As discussed in Note 16 – Preferred Stock Subject toMandatory Redemption, on June 4, 2001, PLDT issued a total of 2.7 millionshares of Series V Convertible Preferred Stock, 5.1 million shares of Series VIConvertible Preferred Stock and 3.8 million shares of Series VII ConvertiblePreferred Stock in exchange for a total of 58.1 million shares of Series KClass I Convertible Preferred Stock of Piltel pursuant to the debtrestructuring of Piltel.       As of December 31, 2002, 145,320shares of Series V Convertible Preferred Stock and 523,843 shares of Series VIConvertible Preferred Stock were converted to PLDT common shares.  As ofDecember 31, 2002, PLDT had 2.6 million Series V Convertible Preferred Stock,4.6 million Series VI Convertible Preferred Stock and 3.8 million Series VIIConvertible Preferred Stock issued and outstanding.  The aggregate redemptionvalue of the outstanding shares as of December 31, 2002 is Php20,201 million,of which Php13,181 million is payable on June 4, 2008 and Php7,020 million onJune 4, 2009 if all of the outstanding shares of Series V, VI and VIIConvertible Preferred Stock were mandatorily converted and all the underlyingcommon shares were put to PLDT.  The market value of the underlying commonshares is Php2,968 million, based on the market price of PLDT’s common stock ofPhp270 per share as of December 31, 2002.  *** ***  ***Commercial Commitments***  * *  As of December 31, 2002, ouroutstanding commercial commitments, in the form of letters of credit, amountedto Php3,610 million.  These commitments will expire within one year.     In October 1998, Smart entered intoa Frame Supply Contract with Nokia Telecommunications OY for the supply ofhardware, software and documentation for its GSM cellular network.  In the samemonth, Smart and Nokia (Philippines), Inc. signed a Frame Services Contractthat covers the design, planning, installation, commissioning, integration,acceptance testing, training and handling over of the GSM network.  In 2001,Smart issued a Master Purchase Order, or MPO, in the amount of US$200 millionin favor of Nokia Networks OY for the purchase of additional equipment toexpand its GSM cellular network.  Under this MPO, unavailed portion as ofDecember 31, 2002 amounted to US$107 million.  In addition, on May 30, 2003,Smart entered into a Technical Support Services Order with Nokia (Philippines),Inc. in the amount of US$8.3 million.  * *  
 
  **24.    ****Contingencies**  ** **  ***PLDT***     *NTC supervision and regulationfees, or SRF*.   On various dates in 1988, NTC served various assessmentnotices and demands for payment of SRF pursuant to Section 40 of CommonwealthAct 146, otherwise known as the Public Service Act (PSA).  PLDT protested saidassessments and demands for payment on the grounds that (a) all assessmentsunder Section 40 (e) of the PSA should legally be based on the par value of acorporate utility operator’s outstanding capital stock, exclusive of capital inexcess of par; (b) the assessment were being levied to raise revenues and notas mere reimbursements for actual regulatory expenses in violation of thedoctrine in PLDT vs. PSC, 66 SCRA 341 (1975); (c) NTC had no authority tocompel PLDT’s payment of the administrative fees under Section 40 (f) of thePSA for the increase of PLDT’s authorized capital stock, since NTC did notrender any supervisory or regulatory activity nor incur any expenses inrelation to such corporate act; and (d) NTC had no authority to increase therates of the administrative fees under Section 40 of the PSA from Php0.20 toPhp0.50 per Php100 of the capital stock pursuant to Batas Pambansa, or B.P.,325 since the latter legislation was of general application and thus, could nothave legally or validly amended a special law such as the PSA.     After exhausting all availableadministrative remedies with the NTC, PLDT filed an appeal via a Petition forCertiorari with Prayer for Temporary Restraining Order and/or PreliminaryInjunction with the Court of Appeals, or CA.  The CA promulgated its decisionwhich, in the main, held that (a) the annual SRF should be assessed on thebasis of the par value of the subscribed or paid-up capital stock of PLDT,exclusive of capital in excess of par; (b) the NTC is legally authorized tocollect the administrative fees under Section 40 (f) of the PSA even if itrenders or performs no regulatory service or incurs no expense whatsoever inapproving PLDT’s increase in authorized capital stock; and (c) the fees underSection 40 (e) and (f) of the PSA should be computed at the rate of Php0.50 perPhp100, or a fraction thereof pursuant to B.P. 325 instead of only Php0.20 perPhp100 or fraction thereof under the PSA.       In an appeal to the Supreme Court,or SC, PLDT questioned the CA decision (a) that the NTC can validly collectfees even in the absence of any regulatory services performed, and (b)upholding the validity of the increase in the rate of fee under Section 40 (e)of the PSA to Php0.50 from Php0.20 per Php100 or a fraction thereof of thecapital stock.  NTC, on the other hand, questioned the basis for the SRFassessment, which was determined by the CA to be the par value of thesubscribed capital stock exclusive of capital in excess of par.      In a decision dated July 28, 1999,the SC ordered the NTC to recompute the SRF due from PLDT on the basis ofPLDT’s “capital stock subscribed or paid”.      Pursuant to the SC decision, theNTC issued a re-assessment letter in February 2000 for the balance of the SRFfor previous years computed on the same basis stated in the SC decision butinclusive of stock dividends.  On the ground that the inclusion of stockdividends in the calculation of the SRF has no basis in law and jurisprudence,PLDT requested the NTC to cancel/withdraw the portions of the assessment basedon the stock dividends.     Without resolving or ruling onPLDT’s request, in September 2000, the NTC issued another assessment letter forthe balance of the SRF for previous years and the SRF for the year endedDecember 31, 2000.  Consequently, PLDT filed a Petition for Certiorari andProhibition with Urgent Prayer for the Immediate Issuance of a TemporaryRestraining Order with the CA.  The CA temporarily restrained the NTC fromenforcing/implementing its February and September 2000 assessments andsubsequently issued a Writ of Preliminary Injunction.   In February 2001, theCA dismissed the Petition for Certiorari and Prohibition filed by PLDT anddissolved the Writ of Preliminary Injunction earlier issued.     PLDT filed a Motion for Reconsiderationof the aforementioned CA decision on the ground that the same would vitiate andnot validate the decision rendered by the SC on July 28, 1999, ordering the NTCto recompute the SRF to be imposed on PLDT.  On April 6, 2001, the Office ofthe Solicitor General, or OSG, adopting its Comment dated October 11, 2000 asits comment on the Motion for Reconsideration filed by PLDT, stated that theNTC by insisting on its assessments is providing its own definition of “stockdividend” at variance with the SC decision dated July 28, 1999 and is in effectenlarging its meaning and scope and expanding the concept envisaged therein.Further, the OSG stated that the sole and only issue is whether or not the SCdecision directs the inclusion or exclusion of  “stock dividends” in thecomputation of the SRF.  The NTC also filed its comment on PLDT’s Motion forReconsideration and PLDT filed a Reply to the NTC’s Comment stressing that thefailure of NTC to deny the allegations in PLDT’s Motion for Reconsideration that(a) the SC decision dated July 28, 1999 annulled and set aside the NTC SRFassessment; (b) the SC directed the NTC to make a recomputation of the said SRFassessments but that NTC did not make any such recomputation; (c) the NTCserved anew on PLDT exactly the same SRF assessments that were ordered setaside by the SC; (d) the SC decision dated July 28, 1999 has become final andexecutory; (e) the fundamental issues raised by PLDT in its Motion forReconsideration is not at all whether the SC decision dated July 28, 1999 isright or wrong but rather whether it did or did not direct the exclusion ofstock dividends in the SRF assessment; and (f) the SC decision dated July 28,1999 held that the SRF should lawfully be based only on such capital stock subscribedor paid for which PLDT received actual payment; should all be taken to meanthat the NTC SRF assessments should exclude stock dividends.     Considering the September 30statutory deadline for the payment of the SRF, PLDT filed with the CA an UrgentMotion for Re-Issuance of Restraining/Injunctive Writ requesting the CA tore-issue and expand the Writ of Preliminary Injunction it had previouslyissued, to cover any and all SRF assessments, including the SRF assessments dueon September 30, 2001, pending final resolution of PLDT’s Motion forReconsideration.  The CA granted PLDT’s prayer for injunctive relief, andre-issued a Writ of Preliminary Injunction, the same to be effective until theresolution of PLDT’s Motion for Reconsideration.     In March 2002, the CA issued aresolution denying PLDT’s Motion for Reconsideration and dissolving the Writ ofPreliminary Injunction.  PLDT then filed with the SC a Petition for Review onCertiorari of the said CA decision.      In light of the impending September30 statutory deadline for the payment of the SRF, PLDT filed with the SC anUrgent Motion for the Issuance of a Temporary Restraining Order to enjoin theNTC from enforcing any SRF assessments against PLDT pending the resolution ofits Petition for Review on Certiorari.  Considering, however, that as ofSeptember 30, 2002, no decision has yet been promulgated by the SC on theaforementioned Motion, PLDT on the said date paid the SRF for the years 2000and 2002 based on the paid-up capital including premium but excluding stockdividends.     Since 1976, PLDT has receivedassessments from the NTC for permit, SRF and other charges.  As of December 31,2002, PLDT has paid a total amount of Php1,249 million in SRF, of whichPhp1,094 million were paid under protest.     *Local franchise tax assessments.*PLDT is presently a party to several cases pending before courts of originaland appellate jurisdictions in the Philippines involving the issue of exemptionof PLDT from local franchise and business taxes.      PLDT believes, based on the opinionof its legal counsel, that it is exempt from payment of local franchise andbusiness taxes to local government units and it is contesting the assessment ofthese taxes in all cases.       In a case entitled PLDT vs. the City of Davao, onAugust 22, 2001, the Supreme Court denied PLDT’s Petition for Review onCertiorari and affirmed the decision of the Davao City Regional Trial Courtupholding the assessment of local franchise tax in the amount of Php3.7 millionfor the year 1999 and denying PLDT’s claim for a refund of erroneously paidfranchise tax for the year 1997 and the first to the third quarters of 1998.The Supreme Court held that although the withdrawal of tax exemptions under theLocal Government Code does not preclude Congress from granting subsequentexemptions, the issue is whether, after the withdrawal of PLDT’s exemptionunder the Local Government Code, PLDT again became entitled to the exemption byvirtue of Section 23 of Republic Act No. 7925.  The Supreme Court ruled thatPLDT is not entitled to this exemption, and cited rules in statutoryconstruction holding that tax exemptions are highly disfavored, and thatlegislative intent must be ascertained from a consideration of the statute as awhole and not merely of a particular provision.  The decision stated that theterm “exemption” in Section 23 is too general and it does not appear that, inapproving Section 23 of Republic Act No. 7925, Congress intended it to operateas a blanket tax exemption to all telecommunication entities.  As such, theSupreme Court held that Section 23 of the Republic Act No. 7925 cannot beconsidered as having amended PLDT’s franchise so as to entitle it to exemptionfrom local franchise tax.  On October 1, 2001, PLDT filed a Motion forReconsideration of the Supreme Court decision and a Motion to Refer the case tothe Court En Banc and for Oral Arguments.  The Supreme Court’s Second Divisiongranted the Motion to Refer the Case to the Court En Banc, which referral wasthereafter accepted by the Supreme Court En Banc.  The Oral Arguments were heldon January 21, 2003 and both parties submitted their Memorandum whereupon theMotion for Reconsideration was deemed submitted for resolution.  On March 25,2003, the Supreme Court decided by a 9-to-5 vote to deny PLDT’s Motion forReconsideration and affirmed the franchise tax assessment of Davao City in theamount of Php3.7 million.  PLDT believes that although such a decision wouldconstitute a precedent, this will not automatically result in the termination ofthe other pending local franchise tax cases with the courts rendering adecision adverse to us and PLDT will pursue all legal remedies with regard toall pending cases.      On August 8, 2001, PLDT received a decision, datedJuly 16, 2001, on its petition filed with a Regional Trial Court of the City ofMakati appealing the denial of PLDT’s protest of the assessments for localfranchise taxes in the aggregate amount of Php594.7 million for the years 1992to 1994 and Php1,100 million for the last three quarters of 1995 up to 1998.This decision ordered PLDT to:                 - submit its audited financialstatements showing its gross receipts for the period from October to December31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998, so that the City of Makati canmake the proper assessment of the tax due;                   - pay the City of Makati thesum equivalent to 0.5% of the total gross receipts realized during the periodOctober 1 to December 31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998 afterdetermination of PLDT’s annual gross receipts for the subject years; and                     - henceforth pay its franchiseand business taxes pursuant to Section 137 of Republic Act 7160.     PLDT filed an appeal with the Supreme Court onSeptember 20, 2001.  In its appeal, PLDT argued, among other things, that:                       - The right of the City ofMakati to assess PLDT for any alleged deficiency in franchise tax for the years1992 to 1994 in the approximate amount of Php594.7 million has prescribedbecause the Local Government Code provides for a period of five years withinwhich an assessment can be made by the local government unit and the City ofMakati assessed these alleged taxes against PLDT only on May 24, 1999;                         - PLDT is exempt from localfranchise and business taxes by virtue of the equality of treatment clauseunder the Public Telecommunications Policy Act as confirmed by the Departmentof Finance through the Bureau of Local Government Finance and is not thereforeliable to pay the City of Makati deficiency tax for the years 1995 to 1998 inthe amount approximately Php1,100 million; and                           - Assuming (without admitting)that PLDT is liable to pay the franchise tax, the approximate Php1,684 milliontotal assessment is erroneous as it was based on PLDT’s total annual grossreceipts derived from its overall business operations, while the LocalGovernment Code provides that the franchise tax which can be imposed by thelocal government unit shall be based on the annual gross receipts derived fromwithin the taxing local government unit territory or, in this case, from theoperations of PLDT within the City of Makati only.     In a resolution dated October 22, 2001, the SupremeCourt remanded the case to the Court of Appeals.  As required by the Court ofAppeals, the City of Makati has filed its Comment and PLDT has filed its Replyto the Comment.  On August 21, 2002, the Court of Appeals suspended furtherproceedings in the case until the Supreme Court resolved the similar issuesraised in the City of Davao case discussed above.     PLDT is also protesting the assessment by the City ofMakati of a franchise tax deficiency for 1999 in the amount of Php298 million.On February 26, 2001, PLDT filed a petition in the Regional Trial Court ofMakati City to compel the Office of the Makati City Treasurer and the MakatiCity Law Department to act on PLDT’s protest of the assessed franchise taxdeficiency for 1999.  This case has been suspended pending review by the Courtof Appeals of the decision of the Makati City Regional Trial Court in theaction in respect of the 1992 to 1998 assessments described above or untilfurther notice.     On December 7, 2001, another case was filed by PLDTagainst the City of Makati protesting the assessment of local franchise andbusiness taxes for the year 2000 in the amount of Php307 million. Thepre-trial, originally scheduled on May 19, 2003, was postponed until August 18,2003.     On April 16, 2002, another case was filed by PLDTagainst the City of Manila protesting the assessment of local franchise andbusiness taxes in the amount of Php2,228.4 million for the period covering1997, 1998, 1999, 2000 and 2001, inclusive of penalties and interests.  PLDTfiled a motion to suspend proceedings on March 10, 2003 pending the resolutionby the Supreme Court of the City of Davao case discussed below.  The City ofManila submitted its comments and oppositions on PLDT’ motion to suspend theproceedings on March 21, 2003 and the motion is now deemed submitted forresolution.     PLDT has filed other cases pertaining to theassessments made by other local government units, however, these cases involveamounts significantly lower than the assessments in the cases against the Cityof Makati and the City of Manila.  Some of these cases are pending decision bythe respective regional trial courts.  In each of the other cases in which anunfavorable decision has been rendered by the lower courts against PLDT, PLDThas filed a Petition for Review with the Supreme Court.     PLDT is also a respondent in a case filed by theProvince of Pangasinan with the Court of Appeals.  On September 12, 2001, the Courtof Appeals reversed the decision of the Regional Trial Court of Lingayen,Pangasinan and held that PLDT is exempt from the payment of the local franchiseand business taxes.  The Court of Appeals denied the Motion for Extension ofTime to file a Motion for Reconsideration of the decision of the Regional TrialCourt filed by the Province of Pangasinan and also denied the Motion forReconsideration of the Court of Appeals’ denial of the Motion for Extension ofTime.  On April 26, 2002, the Province of Pangasinan filed a Petition forCertiorari seeking to, among other things, set aside the decision of the Courtof Appeals in respect of the Motion for Extension of Time to file a Motion forReconsideration and affirm the decision of the Regional Trial Court ofLingayen.  On May 29, 2002, the Supreme Court denied this petition on theground that “the petition is evidently used as a substitute for the lost remedyof appeal” and the Province of Pangasinan filed a Motion for Reconsideration.The Motion for Reconsideration of the Supreme Court resolution filed by theProvince of Pangasinan was denied with finality on June 26, 2002.     Similarly, in a case filed by PLDT against the City ofCebu, the Regional Trial Court declared PLDT exempt from payment of local franchisetax and granted PLDT’s claim for refund.  This decision became final on July 6,2001; however, the City of Cebu filed a Petition for Relief of Judgment with aprayer for preliminary injunction, citing the Supreme Court’s decision in theDavao case.     In addition, we have received assessments for localbusiness and franchise taxes in the aggregate amount of Php24.4 million, all ofwhich are under administrative protest.      As of March 31, 2003, the aggregateamount claimed by the plaintiffs in these lawsuits was Php4,524 million withrespect to PLDT and Php313 million with respect to Smart.  We believe that inthe event these lawsuits are decided against us, our potential liability islikely to be significantly lower than the amounts claimed by the plaintiffs.     ***Smart***     *NTC SRF*.   Smart has beenpaying under protest the SRF assessed by the NTC.  On September 27, 2001, Smartpaid the amount of Php86 million representing SRF for 2001.  On September 30,2002, Smart paid the amount of Php114 million representing SRF for 2002.     The above amounts and all otherassessments for SRF in the past were paid under protest as Smart believes thatthe same is exorbitant and unreasonable and contrary to Section 5(g) of R.A.7925.  R.A. 7925 states that the NTC should impose only reasonable fees andcharges as may be necessary to cover reasonable costs and expenses for theregulation and supervision of the operation of the telecommunications entities.     In its protest, Smart also citedthe decision of the Court of Appeals in the case of ICC Corporation vs. NTC(CA-GR SP No. 45-100, 30 September 1999) which held that:  “In the guise oftaxation, respondent NTC has in fact arrogated upon itself the power to tax anentity, which it is not authorized by law to do, thereby exceeding its lawfuljurisdiction and/or acting with grave abuse of discretion.  That respondent NTChas been generating income from the collection of fees from telecommunicationentities in the guise of regulation is evident and that the NTC is notclassified as tax generating agency of the government.”     *Local franchise tax assessments*.To date, Smart has received assessments for local franchise and business taxesfrom certain cities and municipalities in the aggregate amount of approximatelyPhp313 million.  Smart has formally protested these assessments based on thefollowing:                             - An opinion issued by theBureau of Local Government Finance, or BLGF, dated August 13, 1998 stating thatSmart should be considered exempt from the local franchise tax provided underSection 137 of the Local Government Code, which exemption shall be applicableonly to local franchise and business taxes.                               - R.A. 7925 was passed onFebruary 20, 1995 after the passage of the Local Government Code.  Under theipso facto provision of R.A. 7925, the holder of a franchise granted prior toor after the effective date of R.A. 7925 is entitled to the benefit or anyfavorable provisions contained in any other franchises, regardless of whethersuch franchises were granted prior to or after the passage of R.A. 7925.                                 - Because Smart’s legislativefranchise took effect after the effective date of the Local Government Code,the franchise tax prescribed under Section 137 thereof should be deemed to bepart of the said franchise.  Section 137 states that “cellular operators shallonly pay a franchise tax equivalent to 3% of all gross receipts of the businesstransacted under the franchise, and the said percentage shall be in lieu of alltaxes on this franchise or earnings thereof.”                                   - In the PLDT vs. City of Davaocase, the Supreme Court took cognizance of the BLGF opinion by stating thatSmart’s franchise granted after the effectivity of the Local Government Codeexempted it from the payment of local franchise and business taxes.     Smart’s administrative protest againstthe Makati and Iloilo assessments were denied, while those against the Digosand General Santos assessments in the aggregate amount of Php59,447 have notyet been decided.     Smart filed separate petitionsappealing the local franchise and business tax assessments of Makati City inthe amount of Php196 million for the calendar years 2000 and 2001, and in theamount of Php116 million for the calendar years 1995, 1998 and 1999.  Thesecases have been consolidated and are now pending before Regional Trial Court,Branch 61 of Makati City.  Smart’s earlier motion to suspend trial pendingresolution of the Smart franchise tax case in Davao was subsequently denied bysaid court.     Smart also filed a petitionappealing the local franchise and business tax assessment of Iloilo City in theamount of Php1 million.  This case is now pending before the Regional TrialCourt, Branch 28 of Iloilo City.     Smart also filed a Petition forDeclaratory Relief with the SC questioning an ordinance issued by the CityCouncil of Davao on the local franchise and business taxes.  The SC decided infavor of the City of Davao and Smart’s Motion for Reconsideration of saiddecision was denied.  Smart filed with the SC a Petition for Review under Rule45 of the 1997 Rules of Procedure to appeal the aforestated decision.     ***Piltel***  *** ***  *NTC SRF.*Based on thelatest computation of deficiency supervision and regulation fees received fromthe NTC, which is dated as of September 30, 2002, Piltel’s total assessmentamounted to Php639.7 million , including penalty fees of Php274.9 million.Piltel has protested the assessments in good faith.  Piltel continues to makepayments for amounts which believes is properly due to the NTC.  On September30, 2002, Piltel made a payment to the NTC under protest in the amount ofPhp9.1 million      ***Mabuhay Satellite***     Mabuhay Satellite was therespondent in an arbitration commenced by SS/L as a result of a dispute betweenthe two parties concerning their satellite joint venture.  On June 5, 2002,Mabuhay Satellite received an arbitration decision requiring Mabuhay Satelliteto pay SS/L an estimated amount of US$10 million representing MabuhaySatellite’s unpaid balance for the 65% equity share in the joint venture.  Asof December 31, 2002, this amount totaled approximately US$15 million(including accrued interest) and had been substantially accrued and recorded inthe books of Mabuhay Satellite.  Mabuhay Satellite and SS/L are currentlynegotiating to settle the obligation through an asset-debt swap.     PLDT and some of its subsidiariesare involved in certain other legal actions and claims arising in the ordinarycourse of business.  The respective managements of PLDT and said subsidiariesbelieve that any possible loss that they may incur as a result of such legalactions, claims and assessments not covered by an allowance for losses will nothave a material effect on their respective financial positions and results ofoperations.     
 
  **25.    ****Fair Value ofFinancial Instruments**     Financial Assets and Liabilities     The following methods andassumptions were used to estimate the fair value of each class of financialinstrument for which it is practicable to estimate such value:     Cash and cash equivalents:  Thecarrying amount reported in the audited balance sheets approximates fair value.     Accounts receivable:  The netcarrying value represents the fair value due to the short-term maturities ofthese receivables.     Accounts payable and accruedexpenses, and dividends payable:  The carrying value reported in the auditedbalance sheets approximates fair value due to the short-term maturities ofthese liabilities.     Long-term debt:  Fair value isbased on the following:     
**Debt Type**

**Fair Value Assumptions**

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 rates for similar types of loans.

Variable Rate Loans

The carrying value approximates fair value because of recent and frequent repricing based on market conditions.
     Forward exchange contracts, foreigncurrency swaps, and interest rate swaps:  The fair values were based oncounterparty quotes.     Bifurcated foreign currencyforwards:  The fair values were determined using forward exchange  market ratesat the balance sheet date.     Bifurcated foreign currencyoptions:  The fair values were computed using the option pricing model inBloomberg.     Bifurcated call options:  The fairvalues were based on the independent calculation of a third party investmentbanker.     The estimated fair values of thefinancial instruments included in the respective account captions as ofDecember 31, 2002 are as follows:     
** **

**Carrying Value**

**Fair Value**

 

(in million pesos)

**Financial assets**

** **

** **

Cash and cash equivalents

10,975

10,975

Accounts receivable - net

18,753

18,753

Bifurcated foreign currency options (Note 25)

37

37

**Financial liabilities:**

** **

** **

Accounts payable

9,865

9,865

Accrued and other current liabilities

15,148

15,148

Dividends payable

429

429

Notes payable

760

760

Long-term debt (including current portion)

190,949

161,271

Deferred credits and other noncurrent liabilities

461

461

Foreign exchange contracts (Note 25)

163

163

Foreign currency swaps (Note 25)

461

461

Bifurcated foreign currency forwards (Note 25)

13

13

Bifurcated call options (Note 25)

38

38
       
 
  **26.    ****Derivatives andHedging Instruments**  ** **  Effective January 1, 2001, PLDT andits subsidiaries adopted Statement of Financial Accounting Standards (“SFAS”)No. 133 – Accounting for Derivative Instruments and Hedging Activities, asamended.  SFAS No. 133 establishes accounting and reporting standards requiringthat all derivative instruments (including certain derivative instrumentsembedded in other contracts) be recognized in the balance sheet as either anasset or liability measured at fair value.  The statement requires that changesin the derivative’s fair value be recognized currently in earnings unless thereporting entity has elected to designate such derivative as a hedge instrumentunder the provisions of SFAS No. 133, and certain conditions are met.     PLDT and its subsidiaries usecurrency forwards, currency swaps, and interest rate swaps to manage theirmarket risks associated with their foreign currency denominated loans, andtheir exposures to interest rate fluctuations.  The PLDT Group has elected notto designate these derivatives, as well as the embedded derivatives bifurcatedfrom their various contracts, as hedge instruments under the provisions of SFASNo. 133.  In accordance with the provisions of SFAS No. 133, the fair values ofderivative instruments not designated as hedging instruments are recognizeddirectly through earnings.  As of January 1, 2001, the cumulative adjustment tonet income as a result of the initial adoption of SFAS No. 133 amounted to aloss of Php53.84 million, net of tax effect.  For the years ended December 31,2002 and 2001, gains (losses) recognized in earnings, arising from fair valuechanges of derivative transactions, amounted to Php603 million and (Php42million), respectively.     Following are the outstandingderivative transactions of the PLDT Group as of December 31, 2002 and 2001:     ***Freestanding Derivatives***     Item 2.            Forward Exchange Contracts
 

PLDT and Smart use forward exchangecontracts to hedge foreign currency-denominated assets, liabilities and firmcommitments.  Following are the outstanding forward exchange contracts as ofDecember 31, 2002 and 2001.

 

** **

Aggregate Notional Amount
**(in millions)**

**Aggregate Mark-to-market Loss (in millions)**

 

**2002**

2001

**2002**

2001

Forward buy US$ sell peso

**US$216**

US$297

**Php103**

Php164

Forward buy JPY sell US$

**JPY3,296**

JPY3,968

**Php60**

Php120

 

The above forward contracts havematurities ranging from 1 to 6 months.

 

Item 3.            Foreign Currency Swaps
 

In 2002 and 2001, PLDT entered intocurrency swap agreements with various foreign counterparties to hedge thecurrency risk on its fixed rate notes maturing in 2012 and 2017 (see *Note 14– Long-term Debt*).  As of December 31, 2002, and 2001 the swaps have anaggregate notional amount of US$550 million and US$100 million, respectively.Under the swaps, PLDT effectively exchanges the principal of its USdollar-denominated fixed rate notes into peso-denominated loan exposures at anagreed swap exchange rate.  The agreed swap exchange rate is reset to the lowestPeso/US$ spot exchange rate during the term of the swap, subject to a minimumexchange rate.  As of December 31, 2002 and 2001, the outstanding swapcontracts have been reset to an average exchange rate of Php51.27 and Php50.77,respectively.  In addition, PLDT is required to make semi-annual fixed orfloating swap cost payments to its counterparties, which amount to about 2.35%and 3.86% on December 31, 2002 and 2001, respectively.  Following are theoutstanding balances of the swaps as of December 31, 2002 and 2001.

 

 
Aggregate Notional Amount
**(in millions)**

** **

** **

**Maturity**

** **

**Aggregate Mark-to-market Loss (in millions)**

**2002**

2001

 

**2002**

2001

**US$300**

US$100

2017

**Php399**

Php312

**US$250**

–

2012

**Php62**

–

 

US$400 million of the swapsoutstanding as of December 31, 2002, have been structured to includecredit-linkage with PLDT as the reference entity.  The specified credit eventsinclude bankruptcy, failure to pay, obligation acceleration,moratorium/repudiation, and restructuring of PLDT bonds on all or substantiallyall of PLDT’s obligations.  Upon the occurrence of any of these credit events,subject to agreed threshold amount where applicable, the obligations to bothPLDT and its counterparty under the swap contracts terminate without furthersettlements to either party, including any mark-to-market value of the swaps.  

 

Item 4.            Interest Rate Swap
 

As of December 31, 2001, PLDT hadan outstanding US$/JPY interest rate swap agreement to swap the couponon US$175 million of Fixed Rate Notes for a floating rate JPY amount.The swap had a mark-to-market gain of Php80.4 million as of December 31, 2001.The swap was terminated in 2002 at a realized gain of Php633.2 million.

 

***Bifurcated Embedded Derivatives***

 

Following are the embeddedderivatives bifurcated from various purchase and service contracts of PLDT andits subsidiaries as of December 31, 2002 and 2001:

 

Item 5.            Bifurcated Foreign Currency Options
 

 
**Aggregate Notional Amount (in millions****)**

** **

** **

**Maturity**

**Aggregate Mark-to-market Gain (in millions)**

**2002**

2001

 

**2002**

2001

US$6

–

2003

Php37

–

 

Item 6.            Bifurcated Foreign Currency Forwards
 

 
**Aggregate Notional Amount (in millions)**

** **

** **

**Maturity**

**Aggregate Mark-to-market Loss (Gain) (in millions)**

**2002**

2001

 

**2002**

2001

**US$5**

US$3

Less than 1 year

**(Php5)**

Php18

**US$3**

US$6

Over 1 year (up to 2007) 

**Php18**

Php54

 

Item 7.            Bifurcated Put Options
* *

Pursuant to Piltel’s debtrestructuring plan, PLDT issued its Series V, VI and VII Convertible PreferredStock in 2001 (See *Notes 14 – Long Term Debt* and *Note 16 - Preferred Stock Subject to Mandatory Redemption*).Each share of Series V, VI and VII Convertible Preferred Stock is convertibleat any time at the option of the holder into one PLDT common share.  On thedate immediately following the seventh anniversary of the issue date of theSeries V and VI Convertible Preferred Stock and on the eighth anniversary ofthe issue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to PLDTcommon shares.  For thirty days thereafter, the holders of these mandatorilyconverted common shares have the option to sell such common shares back to PLDTfor US$36.132 per share and JPY4,071.89 per share for Series VI and VII,respectively.  As of December 31, 2002 and 2001, the net mark-to-market valueof these embedded call options amounted to about Php38 million and Php324million, respectively.  Such mark-to-market value is based on the independentcalculation of a third-party investment banker. 

 

 

**27.    ****Reportable Segmentsand Major Customer**

 

Operating segments are componentsof an enterprise about which separate financial information is available thatis evaluated regularly by management in deciding how to allocate resources andin assessing performance.  Generally, financial information is required to bereported on the basis that it is used internally for evaluating segmentperformance and deciding how to allocate resources to segments.

 

We have organized our business intothree main segments:

 
- Fixed Line — fixed line telecommunications services primarilyprovided through PLDT.  We also provide fixed line services through PLDT’ssubsidiaries Clark Telecom, Subic Telecom, MaraTel, which together account forapproximately 1% of our consolidated fixed lines in service, and PLDT Global;       - Wireless — wireless telecommunications services providedthrough our cellular service providers, namely PLDT’s subsidiaries Smart andPiltel, and satellite operators, namely PLDT’s subsidiaries Mabuhay Satellite,ACeS Philippines and Telesat; and          - Information andCommunications Technology — information andcommunications infrastructure and services for Internet applications, Internetprotocol-based solutions and multimedia content delivery provided by PLDT’ssubsidiary ePLDT, Internet access services provided by ePLDT’s subsidiaryInfocom, and e-commerce, call centers and IT-related services provided by othersubsidiaries and affiliates of ePLDT, as described in  Note 9 – Investments .     The segment assets as of December31, 2002, 2001 and 2000 and results of operations of our reportable segmentsfor the years ended December 31, 2002, 2001 and 2000 reported under PhilippineGAAP are as follows:     
 

**Fixed Line**

**Wireless**

**Information and  Communications Technology**

** **

** **

**Eliminations**

**Total**

* *

 

 

(in million pesos)

 

 

 

 

 

 

 

*As of and for the year ended December 31, 2002*

 

 

 

 

Operating revenues

48,287

58,595

970

(3,219)

104,633

External revenues

46,021

57,671

941

–

104,633

Inter-segment revenues

2,266

924

29

(3,219)

–

Operating expenses

44,975

46,959

1,549

(3,220)

90,263

External expenses

42,089

46,625

1,549

–

90,263

Inter-segment expenses

2,886

334

–

(3,220)

–

Operating income (loss)

3,827

11,149

(608)

2

14,370

Segment assets

189,144

72,982

3,651

(10,858)

254,919

Segment liabilities

172,608

74,647

3,060

(8,418)

241,897

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

18,291

20,201

1

2,228

40,721

Investing activities

(4,650)

(4,029)

(668)

(5,863)

(15,210)

Financing activities

(11,211)

(11,969)

629

3,625

(19,916)

Depreciation and amortization

10,712

5,981

269

–

16,962

Provision for doubtful accounts

3,565

526

45

–

4,136

Capital expenditures

(7,502)

(6,537)

(607)

–

(14,646)

 

 

 

 

 

 

*As of and for the year ended December 31, 2001*

 

 

 

 

Operating revenues

46,477

24,582

469

(991)

70,537

External revenues

46,906

40295

469

–

87,670

Inter-segment revenues

159

927

–

(1,086)

–

Operating expenses

32,628

21,145

780

659

53,894

External expenses

29,281

62,563

1,206

–

93,050

Inter-segment expenses

927

699

–

(1,626)

0

Operating income (loss)

17,624

(22,809)

(735)

540

(5,380)

Segment assets

200,420

83,758

2,887

(14,343)

272,722

Segment liabilities

172,119

80,691

2,242

(4,938)

250,114

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

16,201

7,250

1,245

–

24,747

Investing activities

(13,075)

(22,875)

(2,108)

6,221

(31,837)

Financing activities

(4,828)

13,379

928

(6,221)

3,258

Depreciation and amortization

9,217

6,949

119

–

16,285

Provision for doubtful accounts

2,880

310

31

–

3,221

Capital expenditures

(9,748)

(18,964)

(1,579)

–

(30,291)

* *

 

 

 

 

 

*As of and for the year ended December 31, 2000*

 

 

 

 

Operating revenues

45,818

18,734

239

(1,125)

63,666

External revenues

45,818

17,609

239

–

63,666

Inter-segment revenues

–

1,125

–

(1,125)

–

Operating expenses

27,336

25,664

336

(991)

52,345

External expenses

27,336

24,673

336

–

52,345

Inter-segment expenses

–

991

 

(991)

 

Operating income (loss)

14,661

(3,656)

(72)

(134)

10,799

Segment assets

246,694

109,751

1,435

(31,109)

326,771

Segment liabilities

179,453

53,712

359

1,686

235,210

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

[35,685]

[1,825]

[177]

[(895)]

23,634

Investing activities

[(30,255)]

[(6,983)]

[(497)]

[11,714]

(26,431)

Financing activities

[(5,316)]

[4,503]

[488]

[(10,819)]

3,852

Depreciation and amortization

7,776

4,464

35

–

12,275

Provision for doubtful accounts

2,361

556

12

–

2,929

Capital expenditures

(20,415)

(6,463)

(231)

–

(27,109)
     International long distance networkrevenues, which are recorded under fixed line service, include settlementsunder bilateral agreements between the PLDT Group and foreign carriers orprivate carriers.  The net consolidated receivables and consolidated revenuesfrom a major foreign carrier amounted to Php340 million and Php2,324 million,respectively, for the year ended December 31, 2002 and Php1,890 million andPhp2,493 million, respectively, for the year ended December 31, 2001.  Asdiscussed in *Note 6 - Accounts Receivable*, PLDT sells certainreceivables from foreign carriers to different foreign financial institutionsunder the Master Receivables Purchase and Sale Agreements.  Receivables fromthe same major foreign carrier mentioned above were sold on a quarterly basisin 2001 and 2000 and have been excluded from the balance sheets.  Theseamounted to US$22 million (Php1,127 million) and US$30 million (Php1,485million) for the years ended December 31, 2001 and 2000, respectively.     The sale of receivables fromforeign carrier during the years ended December 31, 2001 and 2000 wereaccounted for as an outright sale and as a result the related receivables havebeen excluded from the accompanying consolidated balance sheets.  PLDT transfersall of its rights of ownership and surrenders control over those financialassets to the foreign financial institutions.  The purchasers have the right topledge such receivables and are entitled to such receivables in liquidation orbankruptcy.      
 
  **28.    ****Other Matters**  ** **  a.         Interconnection Agreements     PLDT has existing interconnectionagreements with nine International Gate Facilities, or IGF operators, six InterExchange Carriers, or IXCs, six Cellular Mobile Telephone Systems, or CMTSoperators, 70 LECs (including members of the Philippine Association of PrivateTelephone Companies, Inc.), and 12 paging and trunk radio operators.  Theseinterconnection agreements include provisions for settlement and payment ofcharges.  Settlements with interconnecting IGF operators and CMTS operators forlocal calls are in the form of access charges.  Settlements withinterconnecting IXCs and LECs for toll calls are based on hauling and accesscharges, and to some extent, revenue sharing.  Settlement also involves paymentof access charges, but settlement for toll calls is on a revenue-sharingbasis.  LEC to LEC interconnection with hauling from one service area toanother service area is settled based on trunk charges, while overlay LEC toLEC interconnection in a given service area is without charges.  Paging andtrunk radio interconnection settlements are based on fixed charges.       b.         Proposed Metering of Local Exchange Service     The proposed metering of PLDT’slocal exchange service has been temporarily suspended for further review by theNTC.     c.         U.S. Federal Communications Commission, or FCC, Proceedings onTermination Rates     In May 2002, PLDT advised AT&TCorp., or AT&T, WorldCom, Inc., or MC1, and other carriers of PLDT’s needto increase its termination rates by August 2002. Despite numerous negotiationsessions in 2002 and 2003, AT&T and MCI refused to accept any rateincreases.  PLDT unilaterally extended its prior termination charges to eachcarrier while continuing offers to negotiate, first from August 1, 2002 to October1, 2002, then until December 31, 2002, and then, finally, despite the lack of awritten agreement from AT&T and MCI, through January 31, 2003.  Whilenearly 100 carriers worldwide, including more than 20 U.S. carriers, haveagreed to the new termination rates and entered into new termination rateagreements with PLDT, the termination rate agreements with AT&T and MCIlapsed in December 2002, without them agreeing with PLDT on any provisionalarrangement or final agreement on the new termination rates.  Faced with thecontinuing stonewalling by AT&T and MCI, PLDT, in December 2002, was forcedto notify each company that PLDT’s termination rates would finally be increasedas of February 1, 2003.  Because no agreement was reached with either AT&Tor MCI, effective as of February 1, 2003, PLDT stopped terminating traffic sentdirectly by each of AT&T and MCI.     On February 7, 2003, AT&T and MCI filed separate petitions with the U.S. FCC requesting the U.S. FCC to takeaction to protect U.S. international carriers and U.S. consumers from alleged“whipsawing” behavior occurring on the U.S.-Philippine Route.  “Whipsawing” isa form of anti-competitive behavior that involves the ability of foreigncarriers to obtain unduly favorable terms and conditions from U.S. internationalservice providers by setting competing U.S. carriers against one another.     On February 7, 2003, the NTC of the Republic of the Philippines directed Philippine carriers to take one of twodifferent courses of action, depending on whether such carriers had effectivetermination rates with their counterparties.  If PLDT had “existing andeffective agreements with foreign telecommunication carriers relative totermination rates”, it should “comply with the terms thereof, specifically inmaintaining the flow of traffic in and between circuits and facilities coveredby such agreements.”  If, however, the counterparty and PLDT were “withoutexisting and effective agreements relative to termination rates,” then PLDT is“encouraged ... to negotiate and conclude agreements” with the counterparty, and“the parties may agree on provisional/interim arrangements for continuity ofservice.”  Each of AT&T and MCI immediately rejected PLDT’s offer for aninterim termination rate agreement.     On February 26, 2003, the NTC issued an Order confirming that, pursuant to its February 7 Order,“ it is understoodthat absent any provisional or interim arrangement or agreement” with U.S.carriers, there would be no provision of termination services between theparties “who are thereby encouraged to seek other routes or options toterminate traffic to the Philippines.”     On February 28, 2003, PLDT and MCIreached an “interim agreement” effective through March 31, 2003, whereby PLDTagreed to provide direct service under a revised termination rate structurewhile the parties negotiated a final termination rate agreement.  This interimagreement expired on April 15, 2003.     On March 10, 2003, theInternational Bureau of the FCC granted the request of AT&T and MCI andissued an Order directing all facilities-based carriers subject to U.S. FCCjurisdiction to suspend payments for termination services to PLDT, GlobeTelecom, Inc., Bayan Telecommunications Philippines, Inc., DigitalTelecommunications Philippines, Inc., Smart and Subic Telecom until such timeas the U.S. FCC issues a Public Notice that AT&T’s circuits on theU.S.-Philippine route are fully restored.  The Order also removed the Philippinesfrom the list of U.S.-international routes approved for the provision ofInternational Simple Resale.  As of March 31, 2003, receivables from U.S.carriers amounted to approximately US$19 million, of which US$8 million wasattributable to PLDT, US$8 million to Smart and US$3 million to Subic Telecom.     In response to the ruling of theInternational Bureau of the FCC, the NTC issued in a Memorandum Order datedMarch 12, 2003 directing all affected Philippine carriers “(1) not to acceptterminating traffic via direct circuits from U.S. facilities-based carriers whodo not pay Philippine carriers for services rendered; and (2) to take allmeasures necessary to collect payments for services rendered in order topreserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”     The NTC also stated in its March 12, 2003 Order that the termination rates offered by PLDT are “fair andreasonable.”  These rates, US$0.12 per minute for calls terminating on thefixed-line network and US$0.16 per minute for calls terminating on mobilenetworks, are well below the FCC benchmark settlement rate of US$0.19 perminute for lower middle income countries such as the Philippines and alsosubstantially below the settlement rate of US$0.238 per minute suggested by theInternational Telecommunications Union for countries with teledensity between 1to 5 telephones per 100 population.       On April 9, 2003, we filed with theU.S. FCC an application for review of the International Bureau’s March 10, 2003Order.  ** **  
 
  **29.    ****Reclassification ofAccounts**  ** **  We have reclassified certainaccounts in 2001 and 2000 to conform with our 2002 financial statementspresentation.