**MANAGEMENT’S DISCUSSION AND ANALYSISOFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**For the Three Months Ended****March 31, 2003**

 

 

*Inthe following discussion and analysis of our financial condition and results ofoperations, unless the context indicates or otherwise requires, references to“we,” “us,” “our” or “PLDT Group” mean the Philippine Long Distance TelephoneCompany and its consolidated subsidiaries, and references to “PLDT” mean thePhilippine Long Distance Telephone Company, not including its consolidatedsubsidiaries (see Note 2 to the accompanying financial statements for a list ofthese subsidiaries, including a description of their respective principalbusiness activities).*

* *

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the accompanying financialstatements and the related notes.  Our financial statements, and the financialinformation discussed below, have been prepared in accordance with Philippinegenerally accepted accounting principles, or Philippine GAAP, which differs incertain significant respects from generally accepted accounting principles inthe United States.*

* *

*Thefinancial information appearing in this report and in the accompanyingfinancial statements is stated in Philippine pesos.  All references to “pesos,”“Philippine pesos” or “Php” are to the lawful currency of the**Philippines**; all references to “U.S. dollars,” “US$” or “dollars” are to thelawful currency of the**United States**; and all references to“Japanese yen,” “JP¥” or “¥” are to the lawful currency of**Japan**.Translations of Philippine peso amounts into U.S. dollars in this report and inthe accompanying financial statements were made based on the exchange rate ofPhp53.604  = US$1.00, the volume weighted average exchange rate at March 31,2003 quoted through the Philippine Dealing System.*

* *

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

* *

*Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement.  We have chosen these assumptions orbases in good faith, and we believe that they are reasonable in all materialrespects.  However, we caution you that forward-looking statements and assumedfacts or bases almost always vary from actual results, and the differencesbetween the results implied by the forward-looking statements and assumed factsor bases and actual results can be material, depending on the circumstances.When considering forward-looking statements, you should keep in mind the descriptionof risks and cautionary statements in this report and in our Annual Report onForm 20-F, dated June 25, 2002.  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 theforward-looking statements in this report after the date hereof.  In light ofthese risks and uncertainties, any forward-looking statement made in thisreport or elsewhere might not occur.*

** **

**Financial Highlights**

** **

|                                                     | **March 31,**                    |   | **December 31,** |
|----------------------------------------------------------|----------------------------------|--------|------------------|
| **(in million pesos, except where otherwise indicated)** | **2003**                         |   | **2002**(1)      |
| ** **                                               | **(Unaudited)**                  |   | **(Audited)**    |
| **Consolidated Balance Sheets**                          |                             |   |             |
| Total assets                                             | 302,536                          |   | 303,330          |
| Property, plant and equipment - net                      | 248,909                          |   | 252,025          |
| Total debt                                               | 164,824                          |   | 168,523          |
| Total stockholders’ equity                          | 90,272                           |   | 88,088           |
| Debt to equity ratio                                     | 1.83x                            |   | 1.91x            |
| ** **                                               | ** **                       |
| ** **                                               | **Three Months Ended March 31,** |
|                                                     | **2003**                         |   | **2002**(2)      |
| **Consolidated Statements of Income**                    | **(Unaudited)**                  |
| Operating revenues                                       | 22,736                           |   | 18,674           |
| Operating expenses                                       | 15,666                           |   | 13,382           |
| Net operating income                                     | 7,070                            |   | 5,292            |
| EBIT(3)                                                  | 6,691                            |   | 5,442            |
| EBITDA(4)                                                | 12,504                           |   | 11,048           |
| Net income                                               | 2,479                            |   | 1,571            |
| Operating margin                                         | 31%                              |   | 28%              |
| EBITDA margin                                            | 55%                              |   | 59%              |
| **Consolidated Statements of Cash Flows**                |                             |   |             |
| Net cash provided by operating activities                | 11,686                           |   | 8,790            |
| Net cash used in investing activities                    | 1,533                            |   | 4,387            |
| Capital expenditures                                     | 1,807                            |   | 4,159            |
| Net cash used in financing activities                    | 8,491                            |   | 4,910            |

_____________

 

(1)    As restated to reflect the changein accounting policy on preoperating expenses, as described in Note 3 to theaccompanying financial statements. 

 

(2)    As restated to reflect the changein revenue recognition for prepaid cards from sales to usage and the change inaccounting policy on preoperating expenses, as described in Note 3 to theaccompanying financial statements. 

 

(3)   EBIT is defined as earnings before minorityinterest in net income (losses) of consolidated subsidiaries, adding backinterest expense and related items and taxes. EBIT should not be considered inisolation or as a substitute for operating income, net income, cash flows fromoperating activities and other income or cash flow statement data prepared inconformity with generally accepted accounting principles, or as a measure ofprofitability or liquidity.

 

(4)   EBITDA is defined as earnings before minorityinterest in net income (losses) of consolidated subsidiaries, adding backinterest expense and related items, taxes, depreciation and amortization and ispresented because it is generally accepted as providing useful informationregarding a company's ability to service and/or incur debt.  EBITDA should notbe considered in isolation or as a substitute for operating income, net income,cash flows from operating activities and other income or cash flow statementdata prepared in conformity with generally accepted accounting principles, oras a measure of profitability or liquidity.

 

EBIT and EBITDA, on a consolidated basis for the threemonths ended March 31, 2003 and 2002, are derived as follows:

 

| ** **                                                                               | **Three Months Ended March 31,** |
|------------------------------------------------------------------------------------------|----------------------------------|
| ** **                                                                               | **2003**                         | ** ** | **2002**(a) |
| **(in million pesos)**                                                                   | **(Unaudited)**                  |
| Earnings before minority interest in net income (losses) of consolidated subsidiaries(b) | 2,483                            |   | 1,569 |
| Add:  Interest expenses and related items, net of capitalized interest(c)                | 3,229                            |   | 3,381 |
| Provision for income tax(b)                                                              | 979                              |   | 492 |
| EBIT                                                                                     | 6,691                            |   | 5,442 |
| Add:  Depreciation and amortization(b)                                                   | 5,813                            |   | 5,606 |
| EBITDA                                                                                   | 12,504                           |   | 11,048 |

_________________

 

(a)    As restated to reflectthe change in revenue recognition for prepaid cards from sales to usage.

(b)   See statements of incomein the accompanying financial statements.

(c)     See Note 17 to the accompanyingfinancial statements.

 

**Overview**

 

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

 
    -  Fixed Line  — fixed line telecommunicationsservices primarily provided through PLDT.  We also provide fixed line servicesthrough PLDT’s subsidiaries PLDT Clark Telecom, Inc., Subic TelecommunicationsCompany, Inc., Maranao Telephone Company, Inc. and Bonifacio Communications Corporation,which together account for approximately 1% of our consolidated fixed lines inservice, and PLDT Global Corporation;           -  Wireless  — wireless telecommunicationsservices provided through our cellular service provider, Smart Communications,Inc., PLDT’s subsidiary and satellite operators, Mabuhay Philippines SatelliteCorporation, ACeS Philippines Cellular Satellite Corporation, and Telesat,Inc.; and              -  Information and CommunicationsTechnology  — information and communications infrastructure and services forInternet applications, Internet protocol-based solutions and multimedia contentdelivery provided by PLDT’s subsidiary ePLDT, Inc.; Internet access servicesprovided by ePLDT’s subsidiary Infocom Technologies, Inc.; and e-commerce, callcenters and IT-related services provided by ePLDT’s other subsidiaries andaffiliates, as described in Note 9 to the accompanying  financialstatements.   ** **  **Results of Operations**  ** **  Thetable below shows the contribution by each of our business segments to ourconsolidated operating revenues, operating expenses and net operating income(loss) for the three months ended March 31, 2003and 2002.  Most of our revenues are derived from our operations within the Philippines.Our revenues derived from outside the Philippines consist primarily of revenues from incominginternational calls to the Philippines.     
 

**Three Months Ended March 31,**

 

**2003**

** **

**%**(1)

** **

**2002**(2)

** **

**%(**1)

** **

**(Unaudited)**

**(in million pesos)**

 

 

 

 

 

 

 

**Operating Revenues**

 

 

 

 

 

 

 

Fixed line

11,439

 

50

 

11,232

 

60

Wireless

10,940

 

48

 

7,324

 

39

Information and communications technology

357

 

2

 

118

 

1

 

22,736

 

100

 

18,674

 

100

**Operating Expenses**

 

 

 

 

 

 

 

Fixed line

8,104

 

36

 

7,804

 

42

Wireless

7,130

 

31

 

5,366

 

29

Information and communications technology

432

 

2

 

212

 

1

 

15,666

 

69

 

13,382

 

72

**Net Operating Income (Loss)******

 

 

 

 

 

 

 

Fixed line

3,335

 

14

 

3,428

 

18

Wireless

3,810

 

17

 

1,958

 

10

Information and communications technology

(75)

 

–

 

(94)

 

–

 

7,070

 

31

 

5,292

 

28
  ________________     (1)   Operating expenses andnet operating income (loss) are computed as a percentage of operating revenues.  (2)   As restated to reflectthe change in revenue recognition for prepaid cards from sales to usage.     **Consolidated Operating Revenues**     Largely driven by the continued stronggrowth of our wireless business, particularly Smart’s cellular business, ourconsolidated operating revenues for the first quarter of 2003 increased by Php4,062 million, or 22%,to Php22,736 million from Php18,674 million for the first quarter of 2002.  Smart contributedPhp10,744 million in revenues for the firstquarter of 2003, an increase of 51% over its revenue contribution of Php7,132 million for the same period in 2002.  Smart’s revenuecontribution accounted for 47% of our consolidated operating revenues for thefirst quarter of 2003, compared to 38% for the same period in 2002.     ***Fixed Line***     Ourfixed line business provides local exchange service, international and nationallong distance services, data and other network services, and miscellaneousservices.  Revenues generated from this business in the first quarter of 2003totaled Php11,439 million, an increase of Php207 million, or 2%, from Php11,232million in the first quarter of 2002.  This increase was due to higher revenuesgenerated from international long distance service and data and other networkservices, partially offset by decreased revenues from local exchange service,national long distance service and miscellaneous services.  As a percentage ofour consolidated operating revenues, however, fixed line revenues decreased inthe first quarter of 2003 to 50% from 60% inthe same period in 2002 due principally to the continued strong growth of ourwireless business.     The following table summarizes our consolidatedoperating revenues from our fixed line business for the three months ended March 31, 2003 and 2002by service segment:     
 

**Three Months Ended March 31,**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

 

**(Unaudited)**

**(pesos in millions)**

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

Local exchange(1)

5,248

 

46

 

5,504

 

49

International long distance

3,053

 

27

 

2,509

 

22

National long distance

1,638

 

14

 

1,838

 

16

Data and other network

1,422

 

12

 

1,298

 

12

Miscellaneous 

78

 

1

 

83

 

1

Total

11,439

 

100

 

11,232

 

100
  ________________     (1) 2002 has been restated toreflect the change in revenue recognition for prepaid cards from sales tousage.     *LocalExchange Service*     Ourlocal exchange service revenues consist of:                - flat monthly fees for our postpaidservice;                  - installation charges and otherone-time fees associated with the establishment of customer service;                   - fixed charges paid by othertelephone companies, charges retained by PLDT for calls terminating to cellularsubscribers within the local area, and local access charges paid by cellularoperators for calls by cellular subscribers that terminate to our localexchange network;                     - revenues from usage of prepaidcards for calls within the local area and any unused peso value of expiredprepaid cards;                       - call revenues generated frompayphones and coin-operated phones; and                         - charges for special features,including bundled value-added services such as  call waiting ,  callforwarding ,  3-party conference calling, speed calling  and  CallerID .      Thefollowing table summarizes key measures of our local exchange service businesssegment as of and for the three months ended March 31, 2003 and 2002:     
 

**Three Months Ended March 31,**

 

**2003**

** **

**2002**

 

**(Unaudited)**

 

 

 

 

Consolidated local exchange revenues (in million pesos) (1)

5,248

 

5,504

Number of fixed lines in service

 

 

 

PLDT Group

2,111,721

 

2,126,073

PLDT(2)

2,087,237

 

2,103,510

Number of PLDT employees

11,777

 

12,869

Number of PLDT fixed lines in service per PLDT employee

177

 

163
  ________________     (1)   2002 has been restatedto reflect the change in revenue recognition for prepaid cards from sales tousage.  (2)   Approximately 88% werepostpaid fixed line subscribers as of March 31, 2003and 2002.     Revenuesfrom our local exchange service for the first quarter of 2003 decreased byPhp256 million, or 5%, to Php5,248 million from Php5,504 million for the sameperiod in 2002. The decrease was due to a continuing shift in subscriberpreference from postpaid to prepaid services, which generate lower averagerevenue per subscriber, partially offset by the combined effects of (1)adjustments in our monthly local service rates pursuant to the currencyexchange rate adjustment mechanism, and (2) increased local charges paid bycellular operators for calls terminating to our local exchange network.  Thepercentage contribution of local exchange revenues to our total fixed linerevenues also decreased in the first quarter of 2003 to 46% from 49% in thesame period in 2002.     Grossadditions to PLDT's fixed lines in service in the first quarter of 2003 totaled92,629, an increase of 17% from the gross additions of 78,992 in the firstquarter of 2002.  On a net basis, however, PLDT’s fixed lines decreased by5,302 in the first quarter of 2003, as against an increase of 28,401 in thesame period in 2002. While fixed line additions totaled 8,258 for PLDT’s prepaidfixed line services, particularly *Teletipid* and *Telesulit*, PLDT’spostpaid fixed lines in service declined by 13,560 in the first quarter of2003.     Initially intended as an affordable alternativetelephone service for consumers under difficult economic conditions, *Teletipid*now forms an important part of PLDT's overall churn and credit risk exposuremanagement and subscriber retention strategy.  *Teletipid* phone kits,each containing Php300 worth of pre-stored call credits, are sold for Php1,700per unit. 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 increased to Php1.00 perminute, but the rates for national and international long distance callsremained unchanged.     Launchedin February 2002, *Telesulit* is a premiumvariant to *Teletipid.**Telesulit* phone kits, each containingPhp500 worth of pre-stored call credits, are sold for Php1,900 per unit.Effective February 1, 2003, the local call rate for *Telesulit* wasincreased to Php1.00 per minute from Php0.75 per minute, while the national andinternational long distance rates are the same as those applicable to *Teletipid*and postpaid fixed line subscribers.  *Teletipid* subscribers migrating to*Telesulit* are able to retain their telephone numbers.      Asof March 31, 2003, PLDT’s active prepaid fixed line subscribers totaled251,285, of which 116,874 were *Teletipid* subscribers and 134,411 were *Telesulit*subscribers.  These subscribers accounted for approximately 12% of PLDT’s totalfixed lines in service as of March 31, 2003.     Aprepaid fixed line subscriber is recognized as an active subscriber when thatsubscriber activates and uses a prepaid call card. Prepaid fixed linesubscribers can reload their accounts by purchasing call cards that are sold indenominations of Php300 in the case of *Teletipid* and Php500 in the caseof *Telesulit*. Reloads are valid for two months.  A prepaid fixed linesubscriber is disconnected if that subscriber does not reload within fourmonths for *Teletipid* and within one month for *Telesulit* after theexpiry of the last reload.  All sales of prepaid *Teletipid* and *Telesulit*cards, whether through dealers or through PLDT's business offices, arenon-refundable.     Pursuantto a currency exchange rate adjustment mechanism authorized by the PhilippineNational Telecommunications Commission, or 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.During the first quarter of 2003, we implemented three upward adjustments inour monthly local service rates, as against two downward adjustments during thesame period in 2002.  The average peso-to-dollar rate in the first quarter of2003 was Php54.074 = US$1.00, compared to the average of Php51.250 = US$1.00 inthe first quarter of 2002.  This change in the average peso-to-dollar ratetranslated to a peso depreciation of 5%, which also resulted in an average netincrease of 5% in our monthly local service rates in the first quarter of 2003.     EffectiveJanuary 1, 2003, local access charges for cellular subscribers’ callsthat terminate to our fixed line subscribers increased from Php2.00 per minuteto Php2.50 per minute, which will further increase to Php3.00 per minuteeffective January 1, 2004.     Toattract new fixed line subscribers and retain existing ones, PLDT hasintroduced various value-added services such as *Caller ID.  Caller ID*allows subscribers to identify callers by telephone number, and it is nowbundled at special rates with other value-added phone services, such as *callwaiting*, *call forwarding*, *3-party conference calling* and *speedcalling*.       Theratio of PLDT fixed lines in service per PLDT employee improved from 163 at March 31, 2002 to 177at March 31, 2003. This improvement resulted from the net decrease inPLDT’s headcount.  During the twelve months ended March 31, 2003, PLDT’s workforcewas reduced by 1,092 employees, or 8%, mainly on account of PLDT’s ongoingmanpower reduction program.  See Note 17 to the accompanying financialstatements for further discussion.     *International Long Distance Service*     Our international long distance revenues, which wegenerate through our international gateway facilities, consist of:                           - inbound call revenues representingsettlements from foreign telecommunications carriers for inbound internationalcalls;                             - access charges paid to us by otherPhilippine telecommunications carriers for terminating inbound internationalcalls to our local exchange network; and                               - outbound call revenuesrepresenting amounts billed to our customers (other than our cellularcustomers) for outbound international calls, net of amounts payable to foreigntelecommunications carriers for terminating calls in their territories.     The following table shows information about ourinternational long distance business for the three months ended March 31, 2003 and2002:     
** **

**Three Months Ended March 31,**

** **

**2003**

** **

**2002**

 

**(Unaudited)**

 

 

 

 

Consolidated international long distance revenues (in million pesos)

3,053

 

2,509

Inbound

2,481

 

1,958

Outbound

572

 

551

 

 

 

 

International call volumes (in million minutes)

 

 

 

PLDT Group (1)

640

 

707

Inbound

595

 

660

Outbound

45

 

47

Inbound-outbound call ratio

13:1

 

14:1

 

 

 

 

PLDT

576

 

661

Inbound

532

 

616

Outbound

44

 

45

Inbound-outbound call ratio

12:1

 

14:1
  ________________     (1)   Excludes cellular callvolumes.     Ourconsolidated international long distance revenues increased by Php544 million,or 22%, to Php3,053 million in the first quarter of 2003 from Php2,509 millionin the same period in 2002, primarily as a result of an increase in averagetermination rates.  Likewise, the percentage contribution of international longdistance revenues to our total fixed line revenues improved in the firstquarter of 2003 to 27% from 22% in the same period in 2002.     Ourrevenues from inbound international long distance calls for the first quarterof 2003 increased by Php523 million, or 27%, to Php2,481 million from Php1,958million for the same period in 2002 due to an increase in PLDT’s averagetermination rates and the positive impact of the depreciation of the averagevalue of the peso relative to the U.S. dollar, partially offset by the effectof lower inbound call volumes.     Ourinbound international long distance call volumes for the first quarter of 2003decreased by 10% to 595 million minutes from 660 million minutes for the firstquarter of 2002 due to the following factors:                                 - increased competition fromalternative means of long distance communications, particularly e-mail,international text messaging and Internet telephony;                                    - more inbound calls terminatingdirectly to cellular subscribers;                                      - our policy requiring certainsecond and third tier international carriers to prepay in order for us toaccept their incoming traffic. Although this policy had a negative impact onour inbound international long distance revenues in the first quarter of 2003,we expect that this will help us achieve a more stable revenue base and controluncollectible accounts over the longer term;                                        - bankruptcy of certain foreignoperators; and                                         - the increase in our averagetermination rates.     For international long distance calls terminating toits fixed line network, PLDT increased its termination rates from an average ofUS$0.08 per minute to US$0.12 per minute effective February 1, 2003.  On March 10,2003, the International Bureau of the U.S. Federal Communications Commission,or U.S. FCC, issued an Order on petitions filed separately by AT&T and MCIrequiring all U.S. carriers providing direct facilities-based service on theU.S.-Philippines route to suspend payments for termination services toPhilippine carriers, including PLDT, Smart and Subic Telecom, until such timeas the U.S. FCC issues a public notice that the affected circuits of U.S.carriers on the U.S.-Philippine route are fully restored.  In response to theOrder of the International Bureau of the U.S. FCC, the NTC issued a MemorandumOrder dated March 12, 2003, directing all affected Philippine carriers “(1) notto accept 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.  See Note 25 to the accompanyingfinancial statements for further discussion.  Our revenues derived from internationallong distance calls have not been materially adversely affected by the Order ofthe International Bureau of the U.S. FCC because most of the facilities-basedtraffic originating in the United States is being re-routed through circuits of third parties.     Thedepreciation of the peso increased our inbound international long distancerevenues in peso terms because settlement charges for inbound calls are billedin U.S. dollars or in special drawing rights, an established method ofsettlement among international telecommunications carriers using values basedon a basket of foreign currencies, that are translated into pesos at theprevailing exchange rates at the time of billing.     Ourrevenues from outbound international long distance calls for the first quarterof 2003 increased by Php21 million, or 4%, to Php572 million from Php551million for the same period in 2002. The increase was due to the positiveeffect of the depreciation of the average value of the peso against the U.S.dollar, partially offset by lower outbound call volumes and reduced averageinternational direct dialing, or IDD, rates brought about by discounts grantedto our corporate customers and other large accounts, and lower levels ofoperator-assisted traffic, which are charged higher rates per minute than IDDcalls.     Thedepreciation of the peso increased our outbound international long distancerevenues in peso terms because outbound calls are charged at U.S. dollar ratesand billed to our subscribers in pesos at the prevailing exchange rates at thetime of billing.     Ouroutbound international long distance call volumes declined by 4% to 45 millionminutes in the first quarter of 2003 from 47 million minutes in the same periodin 2002. While our IDD call volumes remained flat, our operator-assisted calltraffic declined during the first quarter of 2003, compared to the same periodin 2002, as operator-assisted calls have declined due to the popularity ofdirect dialing and other alternative means of communications such as e-mailingand text messaging.     *National Long Distance Service*     Our national long distance revenues consist of:                                            - per minute charges for calls madeby our fixed line customers outside of the local service areas but within thePhilippines, net of interconnection charges payable for calls carried throughthe backbone network of, and/or terminating to the customer of, anothertelecommunications carrier; and                                             - access charges received from othertelecommunications carriers for calls carried through our backbone networkand/or terminating to our customers.     The following table shows our national long distancerevenues and call volumes for the three months ended March 31, 2003 and 2002:     
** **

**Three Months Ended March 31,**

** **

**2003**

** **

**2002**

** **

**(Unaudited)**

** **

 

 

 

Consolidated national long distance revenues (in million pesos)

1,638

 

1,838

National long distance call volumes (in million minutes)

 

 

 

PLDT Group

500

 

565

PLDT

492

 

556
     Ournational long distance revenues decreased by Php200 million, or 11%, toPhp1,638 million in the first quarter of 2003 from Php1,838 million in the sameperiod in 2002 due to lower call volumes.  Accordingly, the percentagecontribution of national long distance revenues to our total fixed linerevenues was down to 14% for the first quarter of 2003 from 16% for the sameperiod in 2002.     Ournational long distance call volumes decreased by approximately 12% to 500million minutes in the first quarter of 2003 from 565 million minutes in thesame period in 2002.  Cellular substitution and the widespread availability andgrowing popularity of alternative non-voice means of communications,particularly cellular text messaging and e-mail, have negatively affected callvolumes.     The decrease in our national long distance revenues inthe first quarter of 2003 compared to the same period in 2002 was, however,mitigated by the impact of the following:                                               - launch of  PLDT Premium PhoneServices;  and                                                 - rate simplification.      *PLDT Premium Phone Services* allow customers to choose from a range of service applications,such as appointment-booking services for select embassies (including, amongothers, the U.S. and Australian embassies in the Philippines), spiritual and love counseling, joiningtelevision-based game shows, celebrity chatting, downloading and sending ofring tones and logos, televoting, and job postings. PLDT charges an average ofPhp10 per minute for these premium phone services.      Effective March 1, 2003, the rate for callsterminating to other local exchange carriers increased from a flat rate ofPhp4.50 per minute to Php5.00 per minute. Previously, this rate ranged from Php3.00 to Php5.00 per minute,depending on distance and time of call, but was later simplified to a flat rateof Php4.50 per minute. Through rate simplification, we aim to simplify ourtariff structure in order to enhance the competitiveness of our products andservices and increase our operating efficiencies. We adopted these simplifiedpricing plans with a view to stabilizing our national long distance revenuesgoing forward.     *Data and Other Network Services*     Inthe first quarter of 2003, our data and other network services continued toregister increasing revenues.  This growth segment of our fixed line businessgenerated revenues of Php1,422 million, an increase of Php124 million, or 10%,from the Php1,298 million in the first quarter of 2002. The percentage revenuecontribution of this business segment to our total fixed line revenues in thefirst quarter of 2003, compared to the same period in 2002, remained unchangedat 12%.  We expect that demand for, and therefore revenues generated from,these services will continue to grow in the foreseeable future.     Data and other network services we currently provideinclude:                                                    - traditional bandwidth services — high-speed point-to-point domestic and international digital leasedline services;                                                      - broadband/packet-based/Internet-basedservices — frame relay, asynchronous transfer mode or ATM,Internet protocol-virtual private network or IP-VPN, digital subscriber line orDSL, Internet gateway, and wholesale digital signal level 3 or DS3; and                                                        - other packet-based switchingservices — Datapac and integrated services digital network, orISDN.     Theforegoing services are used for the following:                                                          - domestic and internationalcommunication;                                                            - broadband data transmission servicesthat transmit data over a range of frequencies and/or bandwidth into severalnarrower bands;                                                             - Internet exchange services thatprovide Internet service providers with a primary connection to the globalInternet to exchange local traffic generated within the Philippines;                                                               - private networking services thatuse the public Internet as a backbone for private interconnection betweendifferent locations;                                                                 - switched-based services, providedthrough a fixed bandwidth transmission facility, that allow establishment of adedicated connection for the duration of a call; and                                                                   - international packet-basedservices, provided through bilateral arrangements and global alliances, thatintegrate voice, video and data.     Traditionalbandwidth services accounted for 55% of the total revenues from PLDT’s data andother network services for the first quarter of 2003, broadband/IP-basedservices accounted for 39%, and other services accounted for the remaining 6%,compared to 62%, 35% and 3%, respectively, for the same period in 2002. Thesepercentage changes indicate a continuing shift in data and other networkrevenues from traditional bandwidth services to broadband/IP-based services.We expect this trend to continue given the growing demand for broadbandtransmission of voice, data and video due to the continued growth of theInternet, e-commerce and other online services.     InMay 2002, PLDT launched a pay-per-use dial-up Internet service under the brandname *PLDT Vibe*, which is available on a postpaid or prepaid basis toPLDT’s fixed line subscribers. Charges for this service are Php0.25 per minutefor off-peak hours, 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.  Withthe launch of *PLDT Vibe*, PLDT now offers two residential Internetservice packages targeting separate markets:  *PLDT Vibe*for light tomedium Internet users and *myDSL*broadband for heavy Internet users. Asof March 31, 2003, the number of PLDT’s postpaid fixed line subscribersthat signed up for *PLDT Vibe*was**72,263 while the number ofsubscribers to PLDT’s *myDSL* broadband service reached 11,139.     InAugust 2002, PLDT launched *Shops.work*, a network solution that allowsthe electronic linking of retail stores providing, among other features, salesand inventory reports, up-to-date and real-time monitoring of sales andinventory, and on-line access to head offices.      InMarch 2003, PLDT launched a number of data services, namely: *Continuum,iView*and *Encompass*, all under the *Brains* umbrella. *BrainsContinuum* provides customers the ability to recover from serviceinterruptions and offers network diversity, facility and hosting services inpartnership with ePLDT.  *Brains iView* enables customers to monitor theperformance of their network, track bandwidth utilization patterns and identifythe source of network problems.  *Brains**Encompass* provides aone-stop-shop solution for the customers’ managed networking needs, be it awide area network or local area network.     InApril 2003, PLDT introduced a full two-way fixed line text messaging serviceunder the brand name *Hype,* which allows subscribers to send and receivetext messages to and from landline and mobile phones, and is capable ofinternational text messaging. *Hype*also**allows subscribers tojoin TV network-based and new PLDT-initiated texting services.     *Miscellaneous*     Miscellaneousrevenues are derived mostly from directory advertising and facilities rental.For the first quarter of 2003, these revenues decreased by Php5 million, or 6%,to Php78 million from Php83 million for the same period in 2002, and accountedfor approximately 1% of our total fixed line revenues in each of thesecomparable periods.     ***Wireless***     Our wireless business segment offers cellular servicesas well as satellite, very small aperture terminal, or VSAT, and otherservices.      The following table summarizes our consolidatedoperating revenues from our wireless business for the three months ended March 31, 2003 and2002 by service segment:     
** **

**Three Months Ended March 31,**

** **

**2003**

** **

**%**

** **

**2002**(1)

** **

**%**

 

**(Unaudited)**

**(pesos in millions)**

 

 

 

 

 

 

 

Wireless services:

 

 

 

 

 

 

 

Cellular

10,744

 

98

 

7,132

 

97

Satellite, VSAT and others

196

 

2

 

192

 

3

Total

10,940

 

100

 

7,324

 

100
  ________________     (1)   As restated to reflectthe change in revenue recognition for prepaid cards from sales to usage.     Ourwireless service revenues increased significantly by Php3,616 million, or 49%,to Php10,940 million in the first quarter of 2003 from Php7,324 million in thesame period in 2002 mainly as a result of the continued strong growth inrevenues generated from Smart’s cellular service. Accordingly, as a percentageof our consolidated operating revenues, wireless service revenues increased to48% for the first quarter of 2003 from 39% for the same period in 2002.     *Cellular Service*     Our cellular service revenues consist of:                                                                      - revenues derived from actual usageof the network by prepaid subscribers and any unused peso value of expiredprepaid cards;                                                                        - monthly service fees from postpaidsubscribers, including (1) charges for calls in excess of allocated free localcalls, (2) toll charges for national and international long distance calls, (3)charges for text messages of our GSM service customers in excess of allottedfree text messages and (4) charges for value-added services, net of relatedcontent provider costs;                                                                         - revenues generated from incomingcalls and messages to our subscribers, net of interconnection expenses; feesfrom reciprocal traffic from international correspondents; and revenues frominbound international roaming calls for the GSM service;                                                                           - service fees charged to Piltel forusing Smart's GSM network for Piltel's  Talk 'N Text  prepaid cellularservice; and                                                                             - other charges, including those forreconnection and migration.      Proceeds from the sale of handsets and SIM cards andone-time registration fees are not recorded as part of cellular servicerevenues. Gains on the sale of handsets and one-time registration fees areoffset against selling and promotion expenses, while losses on the sale ofhandsets and SIM cards are included as part of selling and promotion expenses.     Ourcellular service revenues for the first quarter of 2003 amounted to Php10,744million, an increase of Php3,612 million, or 51%, from Php7,132 million for thesame period in 2002. Cellular service revenues accounted for 47% of ourconsolidated operating revenues for the first quarter of 2003, compared to 38%for the first quarter of 2002.  The significant increase in our cellularservice revenues was primarily a result of respective 44% and 179% increases inprepaid and postpaid subscribers, partially offset by a 4% drop in blendedmonthly average revenue per user, or ARPU.  Smart’s GSM subscriber baseincreased by 2,332,023, or 46%, from 5,057,784 at the end of the first quarterof 2002 to 7,389,807 at the end of the first quarter of 2003.     Smartmarkets nationwide cellular communications services under the brand names *SmartBuddy*and *Smart Gold.  Smart Buddy* is a prepaid service while *SmartGold* is a postpaid service, both provided through Smart's digital GSMnetwork.       The following table summarizes key measures of Smart'scellular business as of and for the three months ended March 31, 2003 and2002:     
** **

**Three Months Ended March 31,**

** **

**2003**

** **

**2002**

 

**(Unaudited)**

 

 

 

 

Cellular revenues (in million pesos)(1)

10,744

 

7,132

GSM

10,662

 

7,051

Voice

5,657

 

3,739

Data

3,992

 

2,757

Others(2)

1,013

 

555

Analog

—

 

33

Others(3)

82

 

48

Cellular subscriber base

7,389,807

 

5,274,250

GSM

7,389,807

 

5,057,784

Prepaid

7,176,196

 

4,981,156

Postpaid

213,611

 

76,628

Analog (4)

—

 

216,466

Prepaid

—

 

55,725

Postpaid

—

 

160,741

Systemwide subscriber base(5)

9,368,513

 

6,976,909

Traffic volumes (in millions)

 

 

 

Calls (in minutes)

831

 

657

Domestic

573

 

430

International

258

 

227

Inbound

224

 

203

Outbound

34

 

24

Messages - SMS(6)

5,142

 

3,814
  ________________     (1)    2002 has been restated to reflectthe change in revenue recognition for prepaid cards from sales to usage.      (2)    Refers to othernon-subscriber-related revenues, such as facility service fees from Smart’srevenue-sharing agreement with Piltel and inbound international roaming fees.      (3)    Refers to all other servicesconsisting primarily of revenues from Smart Money Holdings Corporation, PublicCalling Offices and *SMARTalk* payphones, and a small number of leasedline contracts.     (4)    Smart closed down its analog/ETACSnetwork in December 2002.     (5)    Includes Piltel’s *Talk’N Text*subscribers of 1,978,706 and 1,702,659 as of March 31, 2003 and 2002,respectively.  *Talk’N**Text* is a prepaid GSM service provided byPiltel using Smart’s GSM network.     (6)    Refers to short messaging serviceor text messaging.     *VoiceServices*     Smart’srevenues from voice services, which include all voice traffic and value-added servicessuch as voice mail and international roaming, increased by Php1,918 million, or51%, to Php5,657 million in the first quarter of 2003 from Php3,739 million inthe same period in 2002 mainly due to the increase in subscriber base.     EffectiveJanuary 1, 2003, the rate for calls terminating to fixed line subscribersincreased from Php2.00 per minute to Php2.50 per minute, which will furtherincrease to Php3.00 per minute effective January 1, 2004.  Effective February1, 2003, international long distance calls passing through Smart’s cellularnetwork facility terminating to cellular subscribers were charged at atermination rate of US$0.16 per minute, an increase from the previous rate ofUS$0.12 per minute.  See Note 25 to the accompanying financial statements forfurther discussion.  Effective January 1, 2004, calls terminating to cellularsubscribers originating from fixed line subscribers will be charged atermination rate of Php4.00 per minute, a decrease from the current rate ofPhp4.50 per minute.       *DataServices*     Smart’s**revenuesfrom cellular data services, which include all text messaging-related servicesas well as value-added services, increased by Php1,235 million, or 45%, toPhp3,992 million in the first quarter of 2003 from Php2,757 million in thefirst quarter of 2002.  Cellular data services accounted for 37% of Smart'scellular revenues in the first quarter of 2003, compared to 39% in the sameperiod in 2002.  In the first quarter of 2003, text messaging-related servicescontributed revenues of Php3,582 million, compared to Php2,482 million in thesame period in 2002, and accounted for 90% of the total wireless data revenuesfor each of these periods.  Revenues from domestic text-related servicesamounted to Php3,195 million in the first quarter of 2003, compared to Php2,255million in the first quarter of 2002, representing 80% and 82% of wireless datarevenues for these comparable periods, respectively. International textcontributed revenues of Php388 million in the first quarter of 2003, up by 71%from Php227 million in the first quarter of 2002. The increase in revenues fromtext messaging-related services resulted mainly from a 35% increase in volumeof text messages to 5,142 million outbound messagesduring the first quarter in 2003 from the 3,814 million outbound messageshandled during the same period in 2002.     *Smartzed*ä**contributedrevenues of Php187 million in the first quarter of 2003, compared to Php124million in the same period in 2002. Other value-added services developed bySmart on its own platform contributed total revenues of Php211 million in thefirst quarter of 2003 and Php147 million in the first quarter of 2002.  In thefirst quarter of 2003 and 2002, Smart also recognized revenues of Php11 millionand Php4 million, respectively, from mobile banking, roaming short messagingservice, wireless application protocol, and *Smart Money.*  * *  *Facility Services*     Smart’s revenues from GSM service for thefirst quarter of 2003 included facility service fees totaling Php841 million, representing Smart’s 50% share from *Talk‘N Text* revenues, net of interconnection fees.*Talk ‘N Text*is aprepaid service using Smart’s GSM network that is marketed by Piltel pursuantto a facilities service agreement between Smart and Piltel (see Note 15 to theaccompanying**financial statements for a description of this agreement).     *Subscriber Base, ARPU and Churn Rates*  * *  OfSmart’s 7,389,807 GSM subscribers as of March 31, 2003,prepaid subscribers accounted for 97% while postpaid subscribers accounted forthe remaining 3%.  Smart's prepaid GSM subscriber base grew by 44% to 7,176,196at March 31, 2003 from 4,981,156 at March 31, 2002, whereas Smart's postpaidGSM subscriber base increased by 179% to 213,611 at March 31, 2003 from 76,628at March 31, 2002. The significant increase in the postpaid subscriber base wasa result of Smart’s renewed marketing efforts to attract postpaid subscribers,primarily by offering handsets at subsidized prices.     The following table summarizes Smart's usage-basedmonthly ARPUs for the three months ended March 31, 2003and 2002:     
 

**Three Months Ended March 31,**

 

**2003**

** **

**2002**(1)

 

**(in pesos)**

GSM

 

 

 

Prepaid

533

 

575

Postpaid

2,067

 

2,033

Blended

575

 

598

Analog(2)

 

 

 

Prepaid

–

 

124

Postpaid

–

 

61

Blended

–

 

80
  ________________     (1)    As restated to reflect the changein revenue recognition for prepaid cards from sales to usage.   (2)    Smart closed down its analognetwork operation in December 2002.     ARPUis computed for each month by dividing the revenues for the relevant servicesfor the month by the average of the number of subscribers at the beginning andthe end of the month.  ARPU for any period of more than one month is calculatedas the simple average of the monthly ARPUs in that period.     Smart’sprepaid service revenues consist mainly of charges for subscribers' actualusage of their prepaid cards. Monthly ARPU for Smart’s prepaid GSM service forthe first quarter of 2003 was Php533, compared to Php575 for the same period in2002.  The decline was attributable mainly to the decrease of 11% and 24% inoutbound and inbound local traffic per subscriber (covering mobile-to-fixed andmobile-to-mobile traffic), respectively, for the first quarter of 2003.  Weexpect Smart’s prepaid ARPUs to continue to decline over time as Smart expandsfurther into the lower end of the market.     MonthlyARPU for Smart's postpaid GSM service is calculated in a manner similar to thatof prepaid service, except that the revenues consist mainly of monthly servicefees and charges on usage in excess of the monthly service fees. Monthly ARPUfor postpaid GSM subscribers for the first quarter of 2003 was Php2,067,compared to Php2,033 for the first quarter of 2002. Smart's monthly blendedARPU including GSM services, both prepaid and postpaid, for the first quarterof 2003 was Php575, compared to Php598 for the same period in 2002.     Smart's 50% share of Piltel's revenues from *Talk ‘N Text*under a revenue-sharing agreement between Smart and Piltel are notincluded in the computations of Smart's ARPUs.     Churn,or the rate at which existing subscribers have their service canceled in agiven period, is computed based on total disconnections in the period, net ofreconnections in the case of postpaid subscribers, divided by the average ofthe number of subscribers at the beginning and the end of a month, all dividedby the number of months in the same period.     Aprepaid cellular subscriber is recognized as an active subscriber when thatsubscriber activates and uses the SIM card in the handset, which alreadycontains Php100 worth of pre-stored air time. Subscribers can then reload bypurchasing prepaid call-and-text cards that are sold in denominations ofPhp300, Php500 and Php1,000 or by purchasing additional air time through theirhandsets using *Smart Money*. Reloads are valid for two months.  A prepaidGSM account is disconnected if the subscriber does not reload within fourmonths after the full usage or expiry of the last reload.  As a result, asubscriber would not be included in our churn rate calculation for up to fourto six months after the subscriber may have stopped using the service to makecalls or send messages (although the subscriber may continue to receive callsand messages).  These effects may cause ourcalculated churn rate for a period to be lower than the actual rate at whichsubscribers are ceasing to use Smart's services, and may contribute to morerapid growth in calculated churn following periods of rapid subscriber growth.      ForSmart's prepaid GSM subscribers, the average monthly churn rate for the firstquarter of 2003 was 3%, remaining the same as the first quarter of 2002.Smart's churn has been influenced by several factors, particularly thesluggishness of the Philippine economy, which negatively affected the abilityof some subscribers to afford the service.  As part of its initiatives toaddress churn, Smart introduced *PureTxt 100* in August 2002.  *PureTxt100*is a text-only card with a denomination of Php100 intended for *SmartBuddy* subscribers.  The card is designed as an alternative for prepaidsubscribers who may temporarily be unable to afford cards of higherdenominations.  Once a *PureTxt 100* card is loaded, the incoming andoutgoing voice-call capabilities of the subscriber are temporarilydeactivated.  To reactivate the voice-call capabilities, the subscriber simplyneeds to reload with a “call-and-text card” in a denomination of at leastPhp300.  *PureTxt 100* cards come with a free allocation of 10 textmessages and are valid for one month.      Theaverage monthly churn rate for Smart's postpaid GSM subscribers for the firstquarter of 2003 was 4%, compared to 3% for the same period in 2002.  Smart'spolicy is to redirect outgoing calls to an interactive voice response system ifthe postpaid subscriber's account is either 45 days overdue or the subscriberhas exceeded the prescribed credit limit. If the subscriber does not make apayment within 44 days of redirection, the account is disconnected.  Withinthis 44-day period, a series of collection activities are implemented,involving the sending of a collection letter, call-out reminders and collectionmessages via text messaging.     *Satellite, VSAT and Other Services*     Our revenues from satellite, VSAT and other servicesconsist mainly of rentals received for the lease of Mabuhay Satellite'stransponders and Telesat's VSAT facilities to other companies and charges forACeS Philippines’ satellite phone service.  Total revenues from these servicesfor the first quarter of 2003 amounted to Php196 million, an increase of Php4million, or 2%, from Php192 million for the first quarter of 2002.       ***Information andCommunications Technology***     Our information and communications technology businessis conducted by ePLDT, a wholly-owned subsidiary of PLDT.  ePLDT's principalbusiness is its operation of an Internet data center under the brand name *Vitro*ä.  Granted pioneer status as an Internet data center by the PhilippineBoard of Investments, *Vitro*ä providesco-location services, server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting andwebhosting, shared applications, data disaster recovery and business continuityservices, intrusion detection, and security services such as firewall andmanaged firewall. ePLDT also operates Infocom, our Internet service provider.      ePLDT is also engaged in the call center businessthrough the following subsidiaries:                                                                               - Parlance Systems, Inc., a100%-owned call center facility capable of accommodating 520 seats exclusivelyfor one of the largest direct-to-home satellite service providers in the United Statesfor customer support and billing requirements.  Parlance Systems commencedcommercial operations in June 2002.                                                                                 - Vocativ Systems, Inc., a100%-owned call center facility capable of accommodating 500 seats exclusivelyfor clients of a global provider of customer relationship management services.Vocativ Systems commenced commercial operations in April 2002; and                                                                                   - Contact World, Inc., a 51%-ownedcall center facility capable of accommodating 200 seats and providing servicesthat include customer acquisition, retention and growth, customer care andsupport, receivables management, help desk and technical support to variouscompanies.  Contact World commenced commercial operations in June 2001.     ePLDThas also invested in a number of other e-commerce and Internet-relatedbusinesses, as described in Note 9 to the accompanying**financialstatements.     Inthe first quarter of 2003, our information and communications technologybusiness generated total revenues of Php357 million, an increase of Php239million, or 203%, from the Php118 million in the same period in 2002. Theserevenues accounted for 2% of our consolidated operating revenues for the firstquarter of 2003, compared to 1% for the same period in 2002.  Each of ePLDT’scall center businesses, Infocom, and *Vitro*ä contributedrevenues of Php187 million, Php95 million and Php75 million, representing 52%,27% and 21%, respectively, of the total revenues from our information andcommunications technology business for the first quarter of 2003.  Infocom’srevenue contribution for the first quarter of 2003 represented an increase ofPhp10 million, or 12%, over its revenue contribution of Php85 million for thefirst quarter of 2002. Going forward, we expect revenues from our call centerbusiness to continue to contribute significantly to our information andcommunications technology revenues with the full commercial operations ofParlance Systems and Vocativ Systems and the growing demand for call centerservices.      **Consolidated OperatingExpenses**     Ourconsolidated operating expenses for the first quarter of 2003, which includeSmart's operating expenses of Php6,906 million, increased by Php2,284 million,or 17%, to Php15,666 million from Php13,382 million for the same period in2002.  The increase was due primarily to higher selling and promotion expensesand provision for doubtful accounts associated with our wireless business.  Asa percentage of our consolidated operating revenues, however, consolidatedoperating expenses decreased to 69% for the first quarter of 2003 from 72% forthe comparable period in 2002.     ***Fixed Line***     Consolidatedoperating expenses related to our fixed line business for the first quarter of2003 totaled Php8,104 million, an increase of Php300 million, or 4%, comparedto Php7,804 million for the first quarter of 2002.  The increase was due mainlyto higher cash expenses, particularly rent and compensation and benefits.  As apercentage of our total fixed line operating revenues, fixed line-related operatingexpenses increased to 71% in the first quarter of 2003 from 69% in the sameperiod in 2002.     The following table shows the breakdown of our totalconsolidated fixed line-related operating expenses for the three months ended March 31, 2003 and2002 and the percentage of each expense item to the total:     
 

**Three Months Ended March 31,**

 

**2003**

 

**%**

 

**2002**

 

**%**

 

**(Unaudited)**

**(pesos in millions)**

 

Fixed line services:

 

 

 

 

 

 

 

Depreciation and amortization(1)

3,293

 

40

 

3,253

 

42

Compensation and benefits

1,901

 

23

 

1,792

 

23

Maintenance

787

 

10

 

795

 

10

Provision for doubtful accounts

776

 

10

 

705

 

9

Selling and promotions

294

 

4

 

331

 

4

Rent

265

 

4

 

197

 

2

Professional and other service fees

236

 

3

 

232

 

3

Taxes and licenses

123

 

1

 

133

 

2

Other operating costs

429

 

5

 

366

 

5

Total

8,104

 

100

 

7,804

 

100
  ____________     (1)   Includes depreciation of capitalized foreignexchange losses from the revaluation of net dollar liabilities of Php1,055 millionin the first quarter of 2003 and Php1,042 million in the same period in 2002.     Depreciationand amortization charges increased by Php40 million, or 1%, to Php3,293 millionmainly due to (1) an increase of Php27 million in depreciation of our regularasset base primarily resulting from additional completed projects and (2) anincrease by Php13 million in depreciation of capitalized foreign exchangelosses from the revaluation of our net dollar liabilities, which were incurredin acquiring various telecommunications equipment.       Compensationand benefits increased by Php109 million, or 6%, to Php1,901 million mainly dueto collective bargaining agreement-related increases in salaries and benefitsof PLDT employees, partially offset by an 8% decrease in headcount due toPLDT’s ongoing manpower reduction program.  See Note 17 tothe accompanying financial statements for further discussion on PLDT’s manpowerreduction program.     Maintenanceexpenses decreased by Php8 million, or 1%, to Php787 million due primarily tolower maintenance costs for PLDT’s outside and inside plant facilities,partially offset by higher electricity expense that resulted from increasedpower consumption coupled with increased power rates.     Provisionfor doubtful accounts increased by Php71 million, or 10%, to Php776 million onaccount of PLDT Global’s and SubicTel’s higher provisions for anticipateduncollectible accounts from various specifically identified second-tierinternational telecommunications carriers.  PLDT’s provision for doubtfulaccounts remained flat, representing 6% of its operating revenues in the firstquarter of 2003 and 2002.     Sellingand promotion expenses decreased by Php37 million, or 11%, to Php294 millionmainly as a result of reduced public relations expenses due to lower costs ofcorporate-themed advertisements and sponsorships of special events and goodwillplacements partially offset by PLDT’s promotional activities in relation to thelaunch of *Hype* and other *Premium Phone Services*.     Rentexpenses increased by Php68 million, or 35%, to Php265 million mainly due torental charges for international leased lines, office spaces and equipmentincurred by PLDT Global relating to the operation of its points of presence inkey cities abroad and higher rentals paid by PLDT to suppliers of customerpremises equipment as part of its bundled services to corporate customers.     Professionaland other service fees increased by Php4 million, or 2%, to Php236 millionbecause of consultancy fees incurred by PLDT Global relating to theestablishment and operation of global points of presence, partially offset bylower advisory, consultancy and payment facility expenses incurred by PLDT as aresult of streamlining outsourced services.     Taxesand licenses decreased by Php10 million, or 8%, to Php123 million mainly onaccount of lower radio licenses and permit fees paid in the first quarter of2003 than in the first quarter of 2002 and lower real property taxes resultingfrom the disposal of certain PLDT properties.     Otheroperating costs increased by Php63 million, or 17%, to Php429 million dueprimarily to strike-related expenses incurred by PLDT during a 14-day strike bythe rank-and-file employees’ union that began on December 23, 2002 and ended onJanuary 6, 2003.  The strike was in relation to PLDT’s rationalization of itsoperator-assisted call-handling units, which operations have dramaticallydeclined over the past years.  Other operating costs have remained flat in linewith PLDT’s cost-control efforts.     ***Wireless***     Consolidatedoperating expenses associated with our wireless business for the first quarterof 2003 amounted to Php7,130 million, an increase of Php1,764 million, or 33%,from Php5,366 million for the first quarter of 2002.  A significant portion ofthis increase was attributable to Smart’s increased provision for doubtfulaccounts, taxes and licenses and selling and promotion expenses . As apercentage of our wireless operating revenues, operating expenses associatedwith our wireless business decreased to 65% for the first quarter of 2003 from73% for the same period in 2002.      The following table summarizes our consolidatedwireless-related operating expenses for the three months ended March 31, 2003 and2002 and the percentage of each expense item to the total:     
** **

**Three Months Ended March 31,**

** **

**2003**

** **

**%**

** **

**2002**

** **

**%**

 

**(Unaudited)**

**(pesos in millions)**

 

 

 

 

 

 

 

Wireless services

 

 

 

 

 

 

 

Depreciation and amortization(1)

2,417

 

34

 

2,296

 

43

Selling and promotions

1,959

 

27

 

1,183

 

22

Compensation and benefits

723

 

10

 

672

 

13

Rent

532

 

7

 

477

 

9

Maintenance

469

 

7

 

296

 

5

Provision for doubtful accounts

348

 

5

 

92

 

2

Taxes and licenses

145

 

2

 

80

 

1

Professional and other service fees

134

 

2

 

114

 

2

Other operating costs

403

 

6

 

156

 

3

Total

7,130

 

100

 

5,366

 

100
  _____________     (1)   Includes depreciation of capitalized foreignexchange losses from the revaluation of net dollar liabilities of Php252million in the first quarter of 2003 and in 2002.     Depreciationand amortization charges increased by Php121 million, or 5%, to Php2,417million mainly due to an increase of Php481 million in depreciation chargesresulting from an increase in Smart’s depreciable asset base owing tocontinuing network expansion and upgrade.  The increase in these charges waspartially reduced by the absence of any depreciation for Smart’s analog networkassets in the first quarter of 2003, compared to Php360 million of depreciationfor these assets in the first quarter of 2002.  Smart’s analog network assetswere fully depreciated as of December 31, 2002.     Sellingand promotion expenses increased by Php776 million, or 66%, to Php1,959 millionmainly due to Smart’s substantial increase in prepaid phone kit/SIM pack salesin the first quarter of 2003.  Smart’s average subscriber acquisition cost, orSAC, for prepaid subscribers in the first quarter of 2003 was Php703, adecrease of 49% from Php1,374 in the first quarter of 2002.  Commissions todealers accounted for the highest percentage of prepaid SAC at 63% and 79% inthe first quarter of 2003 and 2002, respectively.  On the other hand, postpaidSAC in the first quarter of 2003 was Php9,443, an increase of 76% from Php5,354in the first quarter of 2002 reflecting Smart’s renewed marketing efforts toattract postpaid subscribers.  Handset subsidies accounted for 87% and 75% ofpostpaid SAC in the first quarter of 2003 and 2002, respectively.  EffectiveAugust 1, 2002, Smart changed its mode of payment for dealer commissions fromprepaid air time cards to cash and reduced the maximum commission paid from arange of Php1,000-Php1,300 (depending on the volume purchased) to Php800 perprepaid phone kit sold.  An additional 1% rebate is given on cash purchases.      Compensationand benefits increased by Php51 million, or 8%, to Php723 million primarily dueto increased headcount and increased salaries and benefits of Smart’semployees.  Smart's employee headcount increased from 4,856 as of March 31, 2002 to5,252 as of March 31, 2003 mainly due to the integration of TelecommunicationsSpecialists, Inc., or TSI, personnel into Smart, following Smart’s purchase ofTSI’s assets on December 1, 2002. TSI was previously Smart’s largest dealer.     Rentalexpenses increased by Php55 million, or 12%, to Php532 million on account ofhigher site rental cost incurred by Smart for its growing number of cell sitesand base stations in line with its network expansion and increased operationalrequirements for satellite, microwave link and circuit facilities.  As of March 31, 2003, Smarthad 2,236 GSM cell sites and 2,953 base stations, compared with 1,791 GSM cellsites and 2,405 base stations as of March 31, 2002.     Maintenanceexpenses increased by Php173 million, or 58%, to Php469 million due to highersite utility, security, repairs and other maintenance-related expensesassociated with the expansion and upgrade of Smart’s cellular networkequipment.      Provisionfor doubtful accounts increased by Php256 million, or 278%, to Php348 millionmainly due to accounts of Smart.  In respect of carriers, Smart’s provisionincreased by Php87 million to Php147 million for the first quarter of 2003 fromPhp60 million for the same period in 2002.  In respect of subscriber accounts,Smart’s provision increased by Php162 million to Php191 million for the firstquarter of 2003 from Php29 million for the first quarter in 2002 mainly onaccount of an increase in Smart’s postpaid subscriber base and Smart’s adoptionof a more stringent provisioning policy.      Taxes and licenses increased by Php65 million, or 81%, to Php145 million mainly due to an increase in Smart’s municipallicenses and taxes, input taxes and NTC supervision and regulation fees.  SeeNote 21 to the accompanying**financialstatements for a discussion relating to NTC supervision and regulation fees.      Professionaland other service fees increased by Php20 million, or 18%, to Php134 millionmainly as a result of increased legal and technical service fees incurred bySmart.      Otheroperating costs increased by Php247 million, or 158%, to Php403 millionprimarily due to increases in Smart’s various other operating expenses, such asinsurance, facility usage fees, travel and transportation, and communicationsexpenses.     ***Information and Communications Technology***     Consolidated operating expenses associated with ourinformation and communications technology business for the first quarter of2003 totaled Php432 million, an increase of Php220 million, or 104%, fromPhp212 million for the same period in 2002.  The increase was due principallyto the full commercial operations of ePLDT and its newly formed subsidiaries.As a percentage of our information and communications technology operatingrevenues, operating expenses related to our information and communicationstechnology business decreased to 121% in the first quarter of 2003 from 180% inthe same period in 2002.  The three largest expense items related to ourinformation and communications technology business in the first quarter of 2003were compensation and benefits, depreciation and amortization, and maintenance,representing 27%, 24% and 19%, respectively, of our total operating expensesrelated to this business.  In comparison, the three largest expense itemsrelated to our information and communications technology business in the firstquarter of 2002 were depreciation and amortization, compensation and benefits,and rent, representing 27%, 23% and 13%, respectively, of related totaloperating expenses.     **Net Operating Income**     Our consolidated net operating income for the firstquarter of 2003 was Php7,070 million, an increase of Php1,778 million, or 34%,from Php5,292 million for the first quarter of 2002. Accordingly, ourconsolidated operating margin (net operating income as a percentage ofoperating revenues) improved by three percentage points to 31% in the firstquarter of 2003 from 28% in the same period in 2002.     ***Fixed Line***     For the first quarter of 2003, our fixed line businesssegment contributed an operating income of Php3,335 million, lower by Php93million, or 3%, than the Php3,428 million for the same period in 2002 as the 2%growth of our fixed line operating revenues was insufficient to cover the 4%increase in our fixed line-related expenses.  On a non-consolidated basis, thenet operating income contribution of this business segment for the firstquarter of 2003 decreased by Php34 million, or 1%, to Php3,260 million fromPhp3,294 million for the same quarter in 2002 as the 1% growth of our fixedline revenues was likewise inadequate to offset the 2% increase in our fixedline-related expenses.      ***Wireless***     Ourwireless business segment recorded an operating income of Php3,810 million inthe first quarter of 2003, an increase of Php1,852 million, or 95%, overPhp1,958 million registered in the first quarter of 2002. This significantimprovement was due to a substantial increase of Php1,885 million in Smart'soperating income contribution for the first quarter of 2003 which reachedPhp3,838 million from Php1,953 million for the same period in 2002.     ***Information and Communications Technology***     In the first quarter of 2003, our information andcommunications technology business segment incurred an operating loss of Php75million, down by Php19 million, or 20%, from the Php94 million operating lossposted for the same period in 2002.  These operating losses reflect thestart-up nature of ePLDT’s businesses and those of ePLDT’s subsidiaries.     **Other Expenses – Net**     The following table shows our consolidated otherexpenses – net for the three months ended March 31, 2003and 2002:     
 

**Three Months Ended March 31,**

 

**2003**

** **

**2002**

 

**(Unaudited)**

 

 

 

 

**(in million pesos)**

 

 

 

Interest expense and related items

3,499

 

3,767

Capitalized interest

(270)

 

(386)

Subtotal

3,229

 

3,381

Interest and other income – net

(111)

 

(623)

Other expenses

490

 

473

Total

3,608

 

3,231
     On a consolidated basis, our other expenses, net ofother income, increased by Php377 million, or 12%, to Php3,608 million for thefirst quarter of 2003 from Php3,231 million for the same period in 2002 due tothe combined effects of:                                                                                     - a decrease in interest expense andrelated items, net of capitalized interest, of Php152 million mainlyattributable to (1) the decrease in Smart and Mabuhay Satellite’s interestexpenses by Php147 million and Php34 million, respectively, due to lower debtbalances, (2) lower interest rates mainly on foreign currency-denominated loansbearing fluctuating interest rates.  These decreases were partially offset by anet increase of Php22 million in PLDT’s interest expense and related itemsresulting from the revaluation of dollar-denominated liabilities using anaverage exchange rate of Php54.074 = US$1 in the first quarter of 2003 comparedto an average of Php51.250 = US$1 in the first quarter of 2002, which increasewas partially offset by the combined effects of lower interest rates,particularly LIBOR, and PLDT’s repayments of various loans.                                                                                       - a decrease in interest and otherincome of Php512 million mainly due to a net gain in 2002 from PLDT’stermination of an interest rate swap agreement (there was no corresponding gainin 2003); and                                                                                          - an increase of Php17 million inother expenses due to increases in (1) manpower reduction cost by Php212million (see Note 17 to the accompanying financial statements for furtherdiscussion on PLDT’s manpower reduction program) and (2) hedging cost by Php171million as PLDT increased the hedged portion of its debt to 39% in the firstquarter of 2003 from 18% in the first quarter of 2002.  These increases werepartially offset by a decrease in equity in net losses of investees (includinggoodwill amortization and provision for permanent decline in value ofinvestment) of Php377 million resulting from provision for permanent decline invalue of PLDT’s investments in Piltel totaling Php350 million in the firstquarter of 2002, while no such provision was recognized in 2003 due to the fullwrite-down of PLDT’s investment in Piltel in December 2002.      **Income Before Income Taxand Minority Interest**     Ourincome before income tax and minority interest in net income (losses) ofconsolidated subsidiaries in the first quarter of 2003 was Php3,462 million,representing an increase of Php1,401 million, or 68%, from Php2,061 million inthe first quarter of 2002. On a non-consolidated basis, however, income beforeincome tax and equity share in net income of our subsidiaries decreased byPhp607 million, or 71%, to Php252 million in the first quarter of 2003 fromPhp859 million in the same period in 2002.     Ourconsolidated provision for income tax in the first quarter of 2003 increased by99%, to Php979 million from Php492 million in the first quarter of 2002.However, on a non-consolidated basis, our provision for income tax decreased byPhp183 million, or 74%, to Php64 million in the first quarter of 2003 fromPhp247 million in the same quarter in 2002.     Inthe first quarter of 2003, our effective corporate tax rates on a consolidatedand non-consolidated basis were 17% and 3%, respectively.  Our effectivecorporate tax rates were lower than the 32% statutory corporate tax rate due todifferences between our consolidated and non-consolidated income as shown inour financial statements and our taxable income.  These differences arose fromthe following:                                                                                           - the effect of a three-year incometax holiday granted to Smart by the Philippine Board of Investments inconnection with the pioneer status it awarded to Smart's GSM network expansionproject;                                                                                             - income already subjected to finaltax; and                                                                                               - equity in net income of oursubsidiaries, which has already been subjected to tax and therefore, as incometo PLDT, is no longer subject to income tax.      Smart'sthree-year income tax holiday, which will expire in May 2004, applies to theincremental income generated from its GSM network expansion.  We expect ourconsolidated effective tax rate to increase following the expiration of Smart’stax holiday.     **Net Income**     As a result of the factors discussed above and aftertaking into account our equity in net income of investees amounting to Php2,291million, our consolidated net income for the first quarter of 2003 was atPhp2,479 million, representing an increase of Php908 million, or 58%, over ourrestated consolidated net income of Php1,571 million for the same period in 2002.This substantial increase was largely due to Smart’s net income contribution ofPhp2,769 million for the first quarter of 2003, a significant improvement of96% from Smart’s net income contribution of Php1,410 million for the samequarter in 2002.      PLDT'snet income for the first quarter of 2003, before taking into account its equityshare in net income of investees, was Php188 million, representing a decreaseof Php424 million, or 69%, compared to the Php612 million for the same periodin 2002. The decrease was attributable to PLDT’s (1) manpower reduction cost ofPhp227 million for the three months ended March 31, 2003 (see Note 17 to theaccompanying financial statements for further discussion on PLDT’s manpowerreduction program) and (2) hedge cost of Php224 million as PLDT increased thehedged portion of its debts from 18% in the first quarter of 2002 to 39% in thefirst quarter of 2003.     Basicand diluted earnings per share of common stock increased to Php12.12 andPhp11.21, respectively, in the first quarter of 2003 from basic and dilutedearnings per share of Php6.91 and Php6.77, respectively, in the first quarterof 2002, after giving retroactive effect to stock dividend declarations.     **Liquidity and Capital Resources**     The following table shows our consolidated andnon-consolidated cash flows for the three months ended March 31, 2003 and2002 (unaudited) as well as consolidated and non-consolidated capitalizationand other selected financial data as of March 31, 2003(unaudited) and December 31, 2002 (audited):     
 

**Consolidated**

 

**Non-Consolidated**

 

**Three Months Ended March 31,**

 

**Three Months Ended March 31,**

 

**2003**

 

**2002**

 

**2003**

 

**2002**

 

(Unaudited)

**(in million pesos)**

 

 

 

 

 

 

 

Cash Flows 

 

 

 

 

 

 

 

Net cash provided by operating activities

11,686

 

8,790

 

5,237

 

4,982

Net cash used in investing activities

1,533

 

4,387

 

765

 

1,059

Capital expenditures

1,807

 

4,159

 

648

 

769

Net cash used in financing activities

8,491

 

4,910

 

5,751

 

4,387

 

** **

 

** **

 

** **

 

** **

 

**Consolidated**

 

**Non-Consolidated**

 

**March 31,**

 

**December 31,**

 

**March 31,**

 

**December 31,**

 

**2003**

 

**2002**

 

**2003**

 

**2002**

 

(**Unaudited**)

 

**(Audited)**

 

**(Unaudited)**

 

**(Audited)**

**(in million pesos)**

 

 

 

 

 

 

 

Capitalization 

 

 

 

 

 

 

 

Notes payable

882

 

760

 

722

 

719

Current portion of long-term debt

19,087

 

19,176

 

11,857

 

11,962

Long-term debt - net of current portion

144,855

 

148,587

 

125,543

 

127,362

Total debt

164,824

 

168,523

 

138,122

 

140,043

Stockholders’ equity

90,272

 

88,088

 

90,272

 

88,088

 

255,096

 

256,611

 

228,394

 

228,131

Other Financial Data 

 

 

 

 

 

 

 

Cash and cash equivalents

12,571

 

10,876

 

2,899

 

4,165

Property, plant and equipment - net

248,909

 

252,025

 

189,059

 

190,722

Total assets

302,536

 

303,330

 

261,515

 

262,415

Net debt

152,253

 

157,647

 

135,223

 

135,878
     Since2002, PLDT has pursued a number of liability management initiatives with theobjectives of further improving the balance between its cash flows and debtservice requirements and reducing its overall indebtedness.      Throughthese initiatives, PLDT was able to successfully raise the necessary externalfinancing to fund its operating, investing and debt service requirements for2002.  On January 25, 2002, PLDT signed two loan agreements with *Kreditanstaltfur Wiederaufbau*, or KfW, which provided PLDT with a refinancing facilityof US$149 million.  On May 2, 2002, PLDT completed a global offering of notesin the aggregate amount of US$350 million with a simultaneous tender offer forits 8.5% Notes due 2003 and 10.625% Notes due 2004, which closed on May 15,2002.  On July 26, 2002, PLDT signed a loan agreement with Japan Bank forInternational Cooperation, or JBIC, for a JP¥9,760 million credit facilityunder JBIC’s overseas investment loan program. On September 4, 2002, PLDTsigned a US$145 million syndicated multicurrency term loan facility, which isintended to refinance part of the principal amounts outstanding under twoexisting term loans falling due in 2003.      As of March 31, 2003, non-consolidated cash and cashequivalents amounted to Php2,899 million, while our consolidated cash and cashequivalents totaled Php12,571 million.  Principal sources of consolidated cashand cash equivalents in the first quarter of 2003 were cash flows fromoperations amounting to Php11,686 million, drawings from existing long-termcredit facilities aggregating Php1,245 million, and net equity funds raisedthrough PLDT's subscriber investment plan totaling Php40 million.  These fundswere used principally for capital outlays of Php1,807 million, includingcapitalized interest of Php270 million; debt principal payments of Php6,091million; and interest payments of Php2,838 million charged to operations.     ***Operating Activities***     On aconsolidated basis, net cash flows from operating activities in the firstquarter of 2003 increased by Php2,896 million, or 33%, to Php11,686 millionfrom Php8,790 million in the first quarter of 2002.      Agrowing portion of our consolidated cash flow is generated by our wireless anddata businesses, which accounted for 48% and 6%, respectively, of ourconsolidated operating revenues for the first quarter of 2003, compared to 39%and 7%, respectively, for the first quarter of 2002. Revenues from our localexchange service accounted for 23% of our consolidated operating revenues forthe first quarter of 2003, down from 29% for the same period in 2002.     Ourdependence on national long distance service for revenues has decreased overthe past several years owing mainly to cellular substitution.  In the firstquarter of 2003, this service accounted for 7% of our consolidated operatingrevenues, down from 10% in the first quarter of 2002.      PLDT'scontribution to our consolidated cash flows from operations in the firstquarter of 2003 was Php5,237 million, representing an increase of Php255million, or 5%, from Php4,982 million in the first quarter of 2002.  Theincrease was due to a reduction in PLDT’s working capital requirements as aresult of improved efficiency in receivable collection, partially offset by an increasein level of settlements of certain outstanding liabilities during the firstquarter of 2003, compared to the same period in 2002.     Our subsidiaries, particularly Smart, made significantcontributions to our cash from operations.  In the first quarter of 2003, Smartgenerated cash from operations of Php5,733 million, or 49% of our consolidatedcash flows from operations. Smart’s strong cash flows reflect the continuingstrong performance of its cellular business. However, Smart is subject to loancovenants that restrict its ability to pay dividends, redeem preferred shares,make distributions to PLDT or otherwise provide funds to PLDT or any associatewithout the consent of certain of its lenders. Smart obtained waivers fromFinnvera, the export credit agent for Smart’s GSM Phase 1, 2 and 3 loanfacilities, and other lenders to permit it to pay dividends to PLDT on December 16, 2002 of Php1,540 million.  On April 24, 2003 and May 7, 2003,Smart received the approvals from Finnvera and its other relevant lenders foradditional dividend payments to PLDT for an amount not to exceed 70% of Smart’snet income for 2002, subject to the receipt by Finnvera of an endorsement byits re-insurer and Smart’s compliance with all of the financial covenants underthese agreements.  We cannot assure you that Smart will be able to obtain thesewaivers or other waivers in the future, or what amounts, if any, Smart would bepermitted or financially able to distribute.      Asof March 31, 2003, related party liabilities included (1) PLDT’s payables toSmart amounting to Php1,995 million, representing interconnection fees; (2)Piltel’s liabilities to Smart totaling Php1,134 million, representing variousfees under the facilities, customer services and administrative support and managementservices agreements as well as a revenue-sharing agreement between Smart andPiltel; and (3) Piltel’s liabilities to PLDT amounting to Php775 million,representing interconnection charges. For a detailed discussion of theserelated party transactions, see “Related Party Transactions” in this report andNote 15 to the accompanying financial statements.     ***Investing Activities***     On a consolidated basis, net cash used in investingactivities in the first quarter of 2003 of Php1,533 million was lower by Php2,854million, or 65%, compared to Php4,387 million in the first quarter of 2002.This decline was primarily the result of Smart's significantly lower capitalspending.  Similarly, net cash used in investing activities on anon-consolidated basis decreased by Php294, or 28%, to Php765 million in thefirst quarter of 2003 from Php1,059 million in the same period in 2002 onaccount of PLDT’s lower capital outlays.     Ourconsolidated capital expenditures in the first quarter of 2003 totaled Php1,807million, representing a significant reduction of Php2,352 million, or 57%, fromPhp4,159 million in the first quarter of 2002 primarily due to Smart’s andPLDT’s reduced capital spending. Smart's capital spending of Php1,094 millionin the first quarter of 2003 was used to further expand and upgrade its GSM andtransmission network facilities to increase capacity and coverage in respect ofbasic and advanced cellular services. PLDT's capital spending of Php648 millionwas principally used to finance the expansion of its fixed line data andnetwork services.  ePLDT and its subsidiaries’ capital spending of Php10million was used to fund its Internet data center, other Internet-relatedbusiness initiatives, and call center business investments.  Othersubsidiaries’ capital spending totaled Php55 million.     Underthe Letter of Support, PLDT provided to Piltel Php2,317 million (US$48 million)in 2000, Php2,039 million (US$41 million) in 2001, and Php571 million (US$11million) in 2002. Drawings under the PLDT Letter of Support are converted intoU.S. dollars at the prevailing exchange rates at the time of the investment.There were no drawdowns in the first quarter of 2003 and 2002. As of March 31, 2003, theremaining undrawn balance under the Letter of Support was US$50 million.  If,among other things, Piltel's financial and operating performance were todeteriorate or any amounts were required to be paid to Piltel's unrestructuredcreditors in cash to settle their claims (aggregate principal of US$8 millionas of March 31, 2003), additional drawings under the Letter of Support wouldlikely be required to provide all or a portion of the funds needed by Piltel.We cannot assure that additional amounts will not have to be drawn under theLetter of Support nor can we predict when the remaining undrawn balance underthe Letter of Support will be exhausted. Piltel is currently in discussion withcertain holders of its convertible bonds and is seeking to restructure suchdebt on the terms and conditions of Piltel’s debt restructuring plan. However,there is no assurance that Piltel and the bondholders who have not participatedin the debt restructuring plan will be able to reach an agreement to resolvethe default and address the notice of acceleration.      For 2003, we anticipate lower capital expenditures andreduced equity investments.  Our 2003 budget for consolidated capitalexpenditures is Php16,000 million, of which Php7,000 million is budgeted to bespent by PLDT for its fixed line data and network services and Php9,000 millionis budgeted to be spent by Smart for further expansion and upgrading of its GSMnetwork.  As of March 31, 2003, we spent approximately Php1,807 million for capitalexpenditures in 2003.     ***Financing Activities***     On a consolidated basis, we used net cash of Php8,491million for financing activities in the first quarter of 2003, compared toPhp4,910 million in the first quarter of 2002.  On a non-consolidated basis,net cash used in financing activities in the first quarter of 2003 was Php5,751million, compared to Php4,387 million in the same period in 2002. The highernet cash used in financing activities in the first quarter of 2003 was mainlyattributable to debt repayments by PLDT in line with its ongoing debt reductionprogram.  On a stand-alone basis, Smart’s financing activities in the firstquarter of 2003 used net cash of Php2,266 million for debt amortization,compared to Php254 million in 2002.     *Debt Financing*     Additions to our consolidated long-term debt duringthe first quarter of 2003 totaled Php1,245 million, consisting of PLDT'sdrawings totaling Php1,158 million, primarily from loan facilities extendedand/or guaranteed by various export credit agencies, and Smart's drawings ofPhp87 million, under its loan facilities with HypoVereinsbank and CreditLyonnais.     Our consolidatedindebtedness as of March 31, 2003 was Php164,824 million, representing adecrease of Php3,697 million, or 2%, compared to Php168,523 million as of December 31, 2002.  This decrease was mainly due to the reductions of Php1,921 million andPhp1,498 million in PLDT’s and Smart’s indebtedness, respectively.  PLDT’snon-consolidated indebtedness decreased by 1% to Php138,122 million as of March 31, 2003 from Php140,043 million as of December 31, 2002, due to PLDT’s debt paymentsin line with the thrust to reduce PLDT’s overall indebtedness.  Smart'sindebtedness as of March 31, 2003 was Php21,393 million, a decrease of 7% fromPhp22,891 million as of December 31, 2002.     Asof March 31, 2003, PLDT had undrawn committed dollar-denominated long-termcredit facilities in the aggregate amount of US$253 million, inclusive of theUS$80 million undrawn portion of the US$149 million KfW refinancing facilityand the undrawn US$145 million multicurrency refinancing facility.  Smart also hadundrawn committed dollar-denominated long-term credit facilities in theaggregate amount of US$106 million, which includes a US$100 million five-yearterm loan facility supported by Nippon Export and Investment Insurance obtainedby Smart in November 2002.  In addition, Smart still has available facilitiesunder its US$50 million Framework Agreement with HypoVereinsbank up to amaximum aggregate amount of US$43 million.     After giving effect to the anticipated application ofexisting refinancing facilities, the scheduled maturities of our outstandinglong-term debt as of March 31, 2003 are as follows:     
 

**Consolidated**

** **

**Non-consolidated**

**Maturity**

**(in million pesos)**

 

 

 

 

2003(1)

14,625

 

9,486

2004

22,304

 

15,034

2005

28,533

 

21,198

2006

26,025

 

20,372

2007 and onwards

72,455

 

71,310
  ________________     (1)  April 1, 2003 through December 31, 2003.     Approximately Php91,487 million principal amount ofour consolidated outstanding long-term debt as of March 31, 2003 is scheduled tomature over the period 2003 to 2006. Of this amount, approximately Php66,090million is attributable to PLDT, Php21,042 million to Smart, and the remainderto Mabuhay Satellite, MaraTel and ePLDT.     OnJanuary 25, 2002, PLDT signed two loan agreements with KfW that provide PLDTwith a new US$149 million facility to refinance in part the repaymentinstallments due under its existing loans from KfW due from January 2002 toDecember 2004.  The facility consists of two nine-year loans, inclusive of athree-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 March 31, 2003, drawings under this facility totaled US$69 million(Php3,720 million).     OnMay 2, 2002, PLDT issued 10.625% Notes due 2007 in the aggregate principalamount of US$100 million and 11.375% Notes due 2012 in the aggregate principalamount of US$250 million.  The net proceeds from this debt issue were usedmainly (1) to repurchase US$63 million principal amount of 8.5% Notes due 2003and US$117 million principal amount of 10.625% Notes due 2004 through ourtender offer, and US$10 million principal amount of 10.625% Notes due 2004 andUS$6 million principal amount of 9.875% Notes due 2005 from the open market and(2) to prepay or repay various loans in the aggregate amount of US$125 million,of which US$53 million (JP¥6,260 million) pertained to the Japanese yen termloan maturing in June 2003 and US$52 million pertained to the US$150 millionterm loan maturing in December 2003.  The remaining proceeds were used toprepay or repay PLDT’s short-term and other medium-term debts.      On July 26, 2002, PLDTsigned a loan agreement with JBIC for a JP¥9,760 million credit facility underJBIC’s Overseas Investment Loan program.  This fully drawn facility willamortize beginning March 21, 2005 and will mature on March 21, 2008.     On September 4, 2002,PLDT signed an agreement with a syndicate of banks for a US$145 millionmulticurrency term loan facility consisting of Japanese yen and U.S. dollarcommitments of JP¥10,914 million and US$53 million, respectively. Thisfacility, which has been split into two tranches to be drawn in June andDecember 2003, is intended to refinance a portion of the JP¥12,359 million andUS$52 million principal amounts outstanding as of March 31, 2003 under a Japaneseyen syndicated term loan and a U.S. dollar term loan, respectively, bothfalling due in 2003.  This new syndicated facility will amortize semi-annuallybeginning June 2004 and will mature in December 2006.     *Covenants*     Our debt instruments contain restrictive covenants andrequire us to comply with specified financial ratios and other financial testsat relevant measurement dates, principally at the end of quarterly periods.     The financial tests under our debt instruments, asamended, include maintaining a positive tangible net worth and compliance withthe following ratios:                                                                                                 - interest coverage ratio,calculated on a non-consolidated basis, excluding PLDT’s equity share in netincome of investees, of not less than 150%, 180% or 200%;                                                                                                   - total debt to EBITDA on anon-consolidated basis of not more than 6.0:1 through 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 and notmore than 4.0:1 from March 2005 and thereafter;                                                                                                     - long-term indebtedness toappraised value of equity/tangible net worth on a non-consolidated basis,ranging 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 of atleast 1.1:1; and                                                                                                           - debt to free cash flow ratio ofnot more than 6.0:1 from March 31, 2003 to June 30, 2003, not more than 5.5:1from September 30, 2003 to June 30, 2004, not more than 5.0:1 from September30, 2004 to June 30, 2005, not more than 4.5:1 from September 30, 2005 to June30, 2006, and not more than 4.0:1 from September 30, 2006 onwards.     Inaddition, some of PLDT's debt instruments contain covenants requiring PLDT tocomply with specified financial tests on a consolidated basis.  These include:                                                                                                             - long-term debt to appraised valueof equity/tangible net worth of not more than 2.33:1;                                                                                                               - total debt to EBITDA of not morethan 4.5:1 in 2003 and 2004, and not more than 4.0:1 in 2005 and thereafter;and                                                                                                                  - current ratio of not less than0.75:1 to 0.9:1.     Forpurposes of deriving appraised value of equity/tangible net worth, wedetermined the revaluation surplus in respect of PLDT’s properties.  PLDT’sproperties in service as of December 31, 1997 were reappraised by an independentfirm of appraisers to reflect their sound value based on the December 29, 1997exchange rate of Php40.116 to US$1.00.  As of December 31, 1997, the soundvalue was Php225,966 million and the revaluation surplus was Php82,723million.  This reappraisal was approved by the NTC on January 28, 2000under NTC Case No. 98-183.  As of March 31, 2003and December 31, 2002, the revaluation surplus on PLDT’s 1997 appraisedproperties still in service, net of a 5% disallowance factor, amounted toPhp43,347 million and Php44,984 million, respectively.       Theprincipal factors that can negatively affect our ability to comply with thesefinancial ratios and other financial tests are depreciation of the pesorelative to the U.S. dollar, poor operating performance of PLDT and itsconsolidated subsidiaries, impairment or similar charges in respect ofinvestments or other assets that may be recognized by PLDT and its consolidatedsubsidiaries, and increases in our interest expense.  Interest expense mayincrease as a result of various factors, including issuance of new debt, therefinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the peso, the lowering of PLDT's credit ratings or the creditratings of the Philippines, increases in reference interest rates, and generalmarket conditions.  Since approximately 97% of PLDT's long-term debt isdenominated in foreign currencies, principally in U.S. dollars, many of thesefinancial ratios and other tests are negatively affected by any weakening ofthe peso. The peso declined by approximately 5% against the U.S. dollar to anaverage of Php54.074 = US$1.00 in the first quarter of 2003 from an average ofPhp51.583 = US$1.00 for the year 2002.  In the first quarter of 2002, the pesodepreciated by 0.5% to an average of Php51.250 = US$1.00 from Php51.009 =US$1.00 for the year 2001.  At March 31, 2003, the exchange rate was Php53.604 =US$1.00, equivalent to a 0.7% depreciation of the peso relative to the rate atthe end of 2002.      PLDT'sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of ourfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other subsidiaries and associates in assisting in complying withnon-consolidated covenants.     Wehave maintained compliance with all of our financial ratios and covenants asmeasured under our loan agreements. However, if negative factors adverselyaffect our financial ratios, we may be unable to maintain compliance with theseratios and covenants or be unable to incur new debt.  Under some of our loanagreements, this ratio requirement will become more restrictive at the end ofthe second quarter of 2003 and will continue to become more restrictive inincrements thereafter, which will make it more difficult for PLDT to maintaincompliance with this ratio in the future.  Inability to comply with ourfinancial ratios and covenants or raise new financing could result in adeclaration of default and acceleration of some or all of our indebtedness.The terms of some of our debt instruments have no minimum amount forcross-default.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 150%, interest coverage ratio is the ratio of (x) PLDT'snon-consolidated after-tax net income, excluding equity share in net income orlosses of investees, 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.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 180%, interest coverage ratio is the ratio of (x) our after-tax netincome for the 12 months immediately preceding the calculation date after (1)adding back interest charges, depreciation, amortization and other non-cashcharges (including equity in the net income or losses of investees butexcluding provision for doubtful accounts) and provision for income tax, and(2) deducting capitalized subscriber acquisition costs, to (y) the estimatedaggregate interest charges payable during the 365-day period following thecalculation date on all of PLDT's indebtedness outstanding on such calculationdate.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 200%, interest coverage ratio is the ratio of (x) our after-tax netincome after adding back reserves for higher plant replacement costs, incometaxes, interest charges, depreciation and non-cash charges (including equity inthe net income or losses of investees and provision for doubtful accounts)during 12 consecutive months within the 15 calendar months immediatelypreceding the calculation date, to (y) the sum of (1) the estimated aggregateinterest charges on all indebtedness, net of interest capitalized toconstruction, plus (2) dividends on mandatorily redeemable preferred stock, ineach case scheduled to be paid during the 12 months following the calculationdate.     Non-consolidatedtotal debt to EBITDA is the ratio of (x) PLDT's total indebtedness (notincluding amounts payable by PLDT to Piltel under the Letter of Support) to (y)net income for the preceding 12 months, after adding back interest accrued onall indebtedness, depreciation, amortization and other non-cash charges(including equity in net income or losses of investees, but excluding provisionfor doubtful accounts) and provision for income taxes and deducting any capitalizedsubscriber acquisition costs.     Debtservice coverage ratio is the ratio of (x) PLDT’s cash flow from operationsafter adding back interest charges (to the extent previously deducted) plus (1)dividends received from subsidiaries 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.     Debtto free cash flow ratio is the ratio of (x) PLDT’s debt less PLDT’s closingcash balance of the last day of the calculation period to (y) PLDT’s cash flowfrom operations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from subsidiaries and interest incomereceived less (2) capital expenditures (excluding capitalized interest) andinvestments in subsidiaries for the 12 months immediately preceding thecalculation date.       Non-consolidatedlong-term indebtedness to appraised value of equity (or under some covenants,to tangible net worth) is the ratio of (x) PLDT's aggregate indebtedness (orportion of such indebtedness) due more than one year following the calculationdate and par value of all mandatorily redeemable preferred stock to (y) the sumof the aggregate par value of all of PLDT's outstanding common and convertiblepreferred stock (other than preferred stock subject to mandatory redemption),paid-in capital in excess of the par value of such stock, PLDT's retainedearnings, reserve for higher plant replacement costs and revaluation incrementarising from independent certified appraisals of PLDT's telephone plantapproved by the NTC.     Non-consolidatedcurrent ratio is the ratio of (x) non-consolidated current assets to (y)non-consolidated current liabilities, excluding from current liabilities 50% ofthe portion of long-term indebtedness due within one year of the calculationdate.     PLDT'sdebt instruments 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 assumingthe obligations of other persons;                                                                                                                             - paying dividends or otherdistributions, or redeeming, repurchasing or otherwise acquiring shares ofPLDT’s capital stock;                                                                                                                                - disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth;                                                                                                                                 - entering into management contractsproviding for the management of its business or operations by a third party;                                                                                                                                   - creating any lien or securityinterest;                                                                                                                                      - permitting set-off against amountsowed to PLDT;                                                                                                                                        - merging or consolidating with anyother company;                                                                                                                                         - entering into transactions withshareholders and associates; and                                                                                                                                           - entering into sale and leasebacktransactions.     Underthe terms of PLDT's 10.625% Notes due 2007 and 11.375% Notes due 2012, PLDT isrequired to comply with a number of additional covenants, including covenantsthat, subject to certain exceptions, restrict PLDT's ability to (1) incur debtin the event its ratio of debt to EBITDA (calculated on a non-consolidatedbasis, except under certain circumstances), after giving effect to theincurrence of such debt, would be less than 5.5 to 1 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.      Incase of a change in control of PLDT, PLDT may be required to repurchase orprepay certain indebtedness. Under the terms of the 10.625% Notes due 2007 and11.375% Notes due 2012, we are required to offer to purchase all outstandingnotes due 2007 and notes due 2012 for cash at a price of 101% of theirprincipal amounts plus accrued interest in the event that (1) the aggregate ofNTT Communications' and First Pacific's direct and indirect voting interest inPLDT's outstanding capital stock having voting rights falls below 35% of suchcapital stock, (2) any person or, in certain instances, group of persons, whichis not controlled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT's outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stockand (3) if a rating agency then maintains a rating on either series of notes,the rating agency downgrades its credit rating on the series within 90 days (ormore, in certain circumstances) following notice of the occurrence of theevents specified in (1) and (2) above.     Underthe terms of PLDT’s JPY9,760 million loan from JBIC, in the event of anyproposed sale or transfer of PLDT's stock that would result in NTTCommunications holding less than 14.95% of PLDT's voting stock, we will berequired to prepay, immediately upon effectiveness of such sale or transfer,all principal outstanding under the loan, together with accrued interest.However, prepayment will not be required if, following such sale or transfer,(1) NTT Communications continues to have prior approval rights with respect toall matters as to which NTT Communications has approval rights under the stockpurchase agreement pursuant to which it acquired its shares in PLDT or (2)JBIC, in its sole discretion, determines that NTT Communications’ participationin the expansion of Smart's GSM network capacity to extend PLDT’s cellularbusiness in Smart would not be reduced below its level of participation as ofthe date of the loan agreement.     Underthe terms of PLDT’s US$145 million multicurrency term loan facility agreement,if any lender so requests in writing, PLDT shall prepay in full such lender’sparticipation in the loan within 45 days from notification of the change ofcontrol and no later than the date on which PLDT is required to repurchase its10.625% Notes due 2007 and 11.375% Notes due 2012 (“Bonds”) from bondholdersaccepting the change of control offer in the event that (1) the aggregate ofNTT Communications’ and First Pacific’s direct and indirect voting interest inPLDT’s outstanding capital stock having voting rights falls below 35% of suchcapital stock, (2) any person or, in certain instances, group of persons, whichis not controlled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT’s outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stockand (3) if a rating agency then maintains a rating on the Bonds, the ratingagency downgrades its credit rating on the Bonds within 90 days (or more, incertain circumstances) following notice of the occurrence of the eventsspecified in (1) and (2) above.     PLDT’sdebt instruments contain customary and other defaults that permit the lender toaccelerate amounts due or terminate their commitments to extend additional fundsunder the debt 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 meet certainfinancial ratio covenants referred to above;                                                                                                                                                 - the occurrence of any materialadverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender;                                                                                                                                                    - the revocation, termination oramendment of any of the permits or franchises of PLDT in any mannerunacceptable to the lender;                                                                                                                                                     - the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender;                                                                                                                                                       - the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and                                                                                                                                                         - other typical events of default,including the commencement of bankruptcy, insolvency, liquidation or winding upproceedings by PLDT.     *FinancingRequirements*     Webelieve that our available cash, including cash flow from operations anddrawings from existing and anticipated credit facilities, will providesufficient liquidity to fund our projected operating, investment, capitalexpenditures and debt service requirements for the next 12 months.  Further, asdescribed above, we completed a number of initiatives under our liabilitymanagement program in 2002 to meet our debt service requirements in the shortand medium term.      Wecontinue to pursue various initiatives and financing transactions with theobjective of further improving the balance between our cash flows and debtservice requirements and reducing our overall indebtedness.  In addition, PLDThas reduced its capital expenditures and investments, suspended dividendpayments to common shareholders and increased its application of available cashto reduce its indebtedness.  Further, we currently expect to benefit fromincreasing revenue and cash flow contributions from our subsidiaries,particularly Smart. Smart obtained the necessary waivers of loan covenantrestrictions that permitted it to distribute dividends to PLDT of Php1,540million on December 16, 2002.  On April 24, 2003 and on May 7, 2003, Smartreceived the approvals from Finnvera and from its other relevant lenders foradditional dividend payments to PLDT in an amount not to exceed 70% of Smart’snet income for 2002, subject to the receipt by Finnvera of an endorsement byits re-insurer and Smart’s compliance with all of the financial covenants underthese agreements.  Further waivers would be required for payment of additional dividendsin future periods. On October 10, 2002, PLDT signed a receivables purchase facility underwhich PLDT received an advance payment of US$50 million.  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.     *Credit Ratings*     Ourcredit ratings may significantly affect the terms of our prospectivefinancings, particularly financing costs.  On April 30, 2003, Moody’s InvestorsService changed 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's Ratings Group affirmed its “BB” rating and stable outlookon PLDT.  On October 21, 2002, Moody’s Investors Service and Fitch Ratings alsoaffirmed PLDT’s corporate credit rating at “Ba3”. Earlier, PLDT's corporatecredit ratings had been downgraded by Standard & Poor's Ratings Group to"BB-" in November 2001, by Moody's Investors Service to "Ba3"in January 2002, and by Fitch Ratings and Duff & Phelps to "BB-"in February 2002.  However, none of our existing indebtedness containsprovisions under which credit rating downgrades would trigger a default,changes in applicable interest rates or other similar terms and conditions.      On October 29, 2002, Philippine Rating ServicesCorporation, or PhilRatings, a credit rating agency in the Philippines,announced its “PRS 1” rating for PLDT’s Php2 billion short-term commercialpaper issue for which the registration was approved by the PhilippineSecurities and Exchange Commission on February 6, 2003.PRS 1 is the highest rating possible on PhilRatings’ scale for short-termsecurities and is based on the issuer’s “strongest capability for timely paymentof debt on both principal and interest.”  See “Other Information — Issuance ofPLDT’s Php2 Billion One-Year Peso Notes” in this report for a relateddiscussion.     *Off-Balance Sheet Arrangement*     On October 10, 2002,PLDT entered into a Receivables Purchase Deed with a foreign institution, orthe Purchaser, under which PLDT agreed (1) to sell its receivables from certaineligible foreign carriers for an advance payment of US$50 million and (2) toservice, 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.  For the three months ended March 31, 2003,receivables sold under the Receivables Purchase Deed amounted to US$3 million(Php165 million).     *Equity Financing*     Throughour subscriber investment plan, which provides postpaid fixed line subscribersthe opportunity to buy shares of our 10% Cumulative Convertible Preferred Stockas part of the service connection charges collected from subscribers, PLDT wasable to raise Php40 million in the first quarter of 2003 and Php289 million inthe same period in 2002.      Cashdividend payments in the first quarter of 2003 amounted to Php368 million,compared to Php447 million in the first quarter of 2002, all of which were paidsolely to preferred shareholders of PLDT.  Since June 2001, PLDT has not paidany cash dividends to its common shareholders.     ***Contractual Obligations and Commercial Commitments***     *Contractual Obligations*     The following table discloses our contractualobligations outstanding as of March 31, 2003:      
 

**Payments Due by Period**

 

**Total**

** **

**Within 1 year**

** **

**2****-****3 years**

** **

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

** **

**After 5 years**

 

 

 

**(in million pesos)**

 

 

Long-term lease obligations

7,801

 

1,612

 

4,295

 

1,340

 

554

Unconditional purchase obligations(1)

10,161

 

715

 

2,194

 

2,160

 

5,092

Other long-term obligations

20,531

 

—

 

—

 

—

 

20,531

Total

38,493

 

2,327

 

6,489

 

3,500

 

26,177
  _____________     (1)  Under the Air Time Purchase Agreement with ACeSInternational Limited, 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.     *Long-term Lease Obligations*     ***TransponderLease Agreement***.   On December 28, 1995,PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, whichwas amended on May 10, 2000.  This agreement has a term of ten years commencingon December 18, 1997, unless terminated earlier in accordance with theterms thereof.  For 2002, the annual basic rent for the transponders was US$18million. As of March 31, 2003, PLDT’s aggregate remaining obligation under thisagreement was approximately Php4,060 million.     ***MunicipalTelephone Projects***.   In 1993,PLDT entered into two lease agreements with the Philippine Department ofTransportation 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 March 31, 2003, PLDT’s aggregate remaining obligation under theseagreements amounted to approximately Php978 million. In case of cancellation,PLDT is liable to pay Php100 million under each of the two contracts as liquidateddamages.      ***Domestic Fiber Optic Network Submerged Plant Agreement***.   On July 4, 2000, PLDT entered into an agreementwith NTT World Engineering Marine Corporation for submarine cable repair andrelated services for the maintenance of PLDT's domestic fiber optic networksubmerged plant for a period of five years up to July 4, 2005.  Under thisagreement, PLDT is required to pay NTT World Engineering Marine Corporation afixed annual 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.  As of March 31, 2003,PLDT’s aggregate remaining obligation under this agreement was approximatelyPhp310 million.     ***Digital Passage Service Contracts***.****PLDThas existing Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for 10to 25 years expiring at various dates.  As of March 31, 2003, PLDT’s aggregateremaining obligation under these contracts amounted to approximately Php146million.     ***License Agreement with Mobius Management Systems (******Australia******) Pty Ltd., or Mobius****.*PLDTentered into a license agreement with Mobius pursuant to which Mobius hasgranted PLDT a non-exclusive, non-assignable and non-transferable license forthe use of computer software components.  Under this agreement, Mobius is alsorequired to provide maintenance services for a period of one year at noadditional maintenance charge.  PLDT may purchase maintenance services uponexpiration of the first year for a fee of 15% of the current published licensefee.  As of March 31, 2003, PLDT’s aggregate obligation under this agreement wasapproximately Php81 million.     ***OtherLong-term Lease Obligations***.  Wehave various long-term lease contracts for periods ranging from two to tenyears covering certain offices, warehouses, cell sites, telecommunicationequipment locations and various office equipment.     *Unconditional Purchase Obligations*     ***Air Time Purchase Agreement with ACeS InternationalLimited***.  PLDT is a party to aFounder NSP Air Time Purchase Agreement, or ATPA, with ACeS InternationalLimited, or AIL, which was amended in December 1998, under which PLDT isgranted the exclusive right to sell AIL services in the Philippines.In exchange, PLDT is required to purchase from AIL a minimum of US$5 millionworth of air time annually over ten years commencing on the date of commercialoperations of the satellite.  In the event AIL’s aggregate billing revenues isless than US$45 million in any given year, PLDT is required to makesupplemental air time purchase payments not to exceed US$15 million per yearduring the ten-year term.      In March 2003, PLDT, together with thefounder shareholders, entered into a Standstill Agreement with AIL suspendingthe application and enforcement of the minimum and supplemental air timepayments under the original ATPA.  In lieu of these payments, the partiesagreed to fix the amount of air time usage fees for 2003 for unlimited use ofair time.  PLDT’s obligation under the Standstill Agreement amounts to US$3.8million for 2003.  The parties to the Standstill Agreement also agreed tonegotiate in good faith and use their best efforts to reach an agreement on arevised ATPA before November 15, 2003 that will cover, among other matters, theamended minimum and supplemental air time payment provisions subject to theapproval of AIL’s creditors.      Asof March 31, 2003, PLDT’s aggregate remaining minimum obligation underthis agreement was approximately Php9,852 million.     ***InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign.***   On September 15, 2000, ePLDT entered into anagreement with VeriSign for the non-exclusive, non-transferable right and licenseto use the VeriSign software, brand and Certification Practice Statement forthe purpose of approving, issuing, suspending or revoking digital certificatesfor users of the Internet or similar open systems in the Philippinesfor a period of seven years. Under this agreement, ePLDT is required to payVeriSign a certain percentage of the revenue derived from the services subjectto minimum annual royalty payments aggregating to US$1.2 million, which wassubsequently reduced to US$0.9 million, for the seven-year contract period.  Inaddition, ePLDT was required to pay an annual support fee totaling US$0.5million during the first year and US$0.3 million in each year thereafter. As ofMarch 31, 2003, ePLDT’s aggregate remaining minimum obligation underthis agreement was approximately Php70 million.     ***OtherUnconditional Purchase Obligations.***PLDT has various purchase contracts for periods ranging from two tothree years covering the use of fraud management system and satellite hub andremote VSAT network systems.     *Other Long-term Obligations*     ***MandatoryConversion and Purchase of Shares***.As of March 31, 2003, PLDT had issued a total of 3 million shares of Series VConvertible Preferred Stock, 5 million shares of Series VI ConvertiblePreferred Stock and 4 million shares of Series VII Convertible Preferred Stockin exchange for a total of 58 million shares of Piltel’s Series K, Class IConvertible Preferred Stock pursuant to the debt restructuring of Piltel.  Ofthese PLDT issued preferred shares, 99% of Series V, close to 100% of Series VIand 100% of Series VII Convertible Preferred Stock were issued on June 4, 2001.  In2002, PLDT issued additional 30,100 shares of Series V Convertible PreferredStock and 14,087 shares of Series VI Convertible Preferred Stock in exchangefor a total of 220,935 shares of Series K, Class I Convertible Preferred Stockof Piltel.  Upon receipt of tax clearance from the Bureau of Internal Revenueon March 3, 2003, PLDT issued 92,413 more shares of its ConvertiblePreferred Stock in exchange for 462,065 shares of Piltel’s Series K, Class IConvertible Preferred Stock. Each share of Series V, VI and VII ConvertiblePreferred Stock is convertible at any time at the option of the holder into onePLDT common share. 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.  Under a put option exercisablefor 30 days, holders of common shares received on mandatory conversion will beable to require PLDT to purchase such PLDT common shares for Php1,700 or US$36.132 or JP¥4,071.89 per share,depending on the series.     Asof March 31, 2003, 145,320 shares of Series V Convertible PreferredStock and 523,843 shares of Series VI Convertible Preferred Stock had beenconverted to PLDT common shares.  The aggregate value of the put option basedon outstanding shares as of March 31, 2003 was Php20,531million, of which Php13,418 million is payableon June 4, 2008 and Php7,113 million on June4, 2009 if all of the outstanding shares of Series V, VI and VII ConvertiblePreferred Stock were mandatorily converted and all the underlying common shareswere put to PLDT.  The market value of the underlying common shares was Php3,492 million, based on the market price ofPLDT’s common stock of Php315 per share as of March 31, 2003.     *Commercial Commitments*     As of March 31, 2003, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php3,515 million.These commitments will expire within a year.     InOctober 1998, Smart entered into a Frame Supply Contract with NokiaTelecommunications OY for the supply of hardware, software and documentationfor its GSM phone network.  In the same month, Smart and Nokia (Philippines),Inc. signed a Frame Services Contract that covers the design, planning,installation, commissioning, integration, acceptance testing, training, andhanding over of the GSM network.  In 2001, Smart issued a Master PurchaseOrder, or MPO, in the amount of US$200 million in favor of Nokia Networks OYfor the purchase of additional equipment to expand its GSM phone network.  Asof March 31, 2003, unavailed portion under this MPO amounted to US$65million.     **Quantitative andQualitative Disclosures about Market Risks**     Ouroperations are exposed to various risks, including liquidity risk, foreignexchange risk and interest rate risk.  The importance of managing these riskshas significantly 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***     Weseek to manage our liquidity profile to be able to finance our capitalexpenditures and service our maturing debts.  To cover our financingrequirements, we intend to use internally generated funds and proceeds fromdebt and equity issues and sales of certain assets.      Aspart of our liquidity risk management program, we regularly evaluate ourprojected and actual cash flow information and continuously assess conditionsin the financial markets for opportunities to pursue fund-raising initiatives.These initiatives may include bank loans, export credit agency-guaranteedfacilities, and debt capital and equity market issues.     ***Foreign Exchange Risk Management***     At March 31, 2003, thePhilippine peso depreciated against the U.S. dollar to Php53.604 = US$1.00 fromPhp53.254 = US$1 at December 31, 2002. In contrast, at March 31, 2002,the Philippine peso appreciated against the U.S. dollar to Php51.096 = US$1.00from Php51.690 = US$1.00 at December 31, 2001.  In the first quarter of 2003,PLDT capitalized net foreign exchange losses of Php910 million, as compared tothe capitalization of net foreign exchange gains of Php1,135 million in thefirst quarter of 2002.  Of these losses and gains, losses of Php819 million inthe first quarter of 2003 and gains of Php1,568 million in the same period in2002 were attributable to foreign currency-denominated liabilities used tofinance our capital investments and were therefore recorded as additions to thecarrying value of the related property accounts.      The following table shows our consolidated andnon-consolidated foreign currency-denominated monetary assets and liabilitiesand their peso equivalents as of March 31, 2003 and December 31, 2002:     
 

**March 31, 2003**(1)

 

**December 31, 2002**(2)

** **

**U.S. dollars**

** **

**Pesos**

** **

**U.S. dollars**

** **

**Pesos**

** **

**(Unaudited)**

 

**(Audited)**

** **

 

 

**(in millions)**

 

 

**Consolidated**

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

US$80

 

Php4,304

 

US$76

 

Php4,033

Accounts receivable

160

 

8,599

 

148

 

7,910

 

240

 

12,903

 

224

 

11,943

Liabilities

 

 

 

 

 

 

 

Accounts payable

37

 

1,986

 

56

 

2,969

Accrued expenses and other current liabilities

170

 

9,122

 

165

 

8,782

Notes payable

6

 

322

 

6

 

320

Long-term debt

2,875

 

152,854

 

2,957

 

156,398

Deferred credits and other noncurrent liabilities

50

 

2,693

 

50

 

2,676

 

3,138

 

166,977

 

3,234

 

171,145

Net foreign currency-denominated liabilities

US$2,898

 

Php154,074

 

US$3,010

 

Php159,202

**Non-Consolidated**

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

US$46

 

Php2,454

 

US$49

 

Php2,602

Accounts receivable

118

 

6,313

 

116

 

6,158

 

164

 

8,767

 

165

 

8,760

Liabilities

 

 

 

 

 

 

 

Accounts payable

6

 

342

 

23

 

1,220

Accrued expenses and other current liabilities

46

 

2,476

 

47

 

2,476

Notes payable

6

 

322

 

6

 

320

Long-term debt

2,510

 

133,314

 

2,558

 

135,158

Deferred credits and other noncurrent liabilities

50

 

2,693

 

50

 

2,676

 

2,618

 

139,147

 

2,684

 

141,850

Net foreign currency-denominated liabilities

US$2,454

 

Php130,380

 

US$2,519

 

Php133,090
  ________________     (1)    The exchange rate used wasPhp53.604 = US$1.00.  (2)    The exchange rate used wasPhp53.254 = US$1.00.     Whilea certain percentage of our revenues is either linked to or denominated in U.S.dollars, substantially all of our indebtedness, a substantial portion of ourcapital expenditures and a portion of our operating expenses are denominated inforeign currencies, mostly in U.S. dollars.  * *  Asof March 31, 2003, approximately 97% of our long-term consolidated andnon-consolidated debts were denominated in foreign currencies.  Of our foreigncurrency-denominated debts, 7% and 8% are in Japanese yen, on a consolidatedand non-consolidated basis, respectively, and the balance in U.S. dollars.Thus, a weakening of the peso against the U.S. dollar or Japanese yen willincrease both the principal amount of our unhedged foreign currency-denominateddebts (representing 60% and 61% of our consolidated and non-consolidated debts,respectively), and interest expense on our debt in peso terms.  In addition,many of our financial ratios and other financial tests will be negativelyaffected.  If, among other things, the value of the peso against the U.S.dollar drops from its current level, we may be unable to maintain compliancewith these ratios, which could result in acceleration of some or all of ourindebtedness.  For further information on our loan covenants, see “Liquidityand Capital Resources — Financing Activities — Covenants” above and Note 12 tothe accompanying financial statements.     Tomanage foreign exchange risks, stabilize cash flows, and improve investment andcash flow planning, 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 forward foreign exchange contracts and foreign currency swap contractsto manage the foreign exchange risk associated with our foreigncurrency-denominated loans.  As of March 31, 2003,outstanding forward foreign exchange contracts of PLDT amounted to US$170million and JP¥3,072 million and Smart amounted to US$124 million.  Also as of March 31, 2003, PLDThad outstanding principal-only long-term cross-currency swap contracts totalingUS$725 million, while Smart had a cross-currency swap contract amounting toUS$88 million.       InMarch 2003, PLDT utilized structures incorporating currency options to hedgethe maturing principal on its 2003 and 2004 fixed rate notes.  As of March 31, 2003, PLDThad outstanding currency option contracts amounting to US$125 million.      Forfurther discussions of these contracts, see Note 23 to the accompanyingfinancial statements.     ***Interest Rate Risk Management***     From time to time and on a limited basis, we enter intointerest rate swap agreements in order to manage our exposure to interest ratefluctuations. As of March 31, 2003, however, PLDT had no outstanding interest rate swapagreement.     We make use of hedging instruments and structuressolely for reducing or eliminating financial risks associated with ourliabilities and not for trading or speculative purposes.     **Effect of Peso Depreciation**  ** **  In the first three months of 2003 and 2002, ouroperating revenues which 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.  PLDThas capitalized its foreign exchange losses in respect of its U.S.dollar-denominated indebtedness, and net income in future periods is expectedto be negatively affected as a result of higher depreciation expense resultingfrom such capitalization.  Our cash flows are negatively affected by the higherpeso cost of repaying U.S. dollar-denominated debts, and our ability to complywith financial covenants and ratios is negatively affected by the increase inthe amount of our debts and our interest expenses in peso terms.  ** **  **Impact of Inflation and Changing Prices**     Inflation can be a significant factor in thePhilippine economy, and we are continually seeking ways to minimize itsimpact.  In recent periods, while decreases in the relative value of the pesohave had a significant effect on us, we do not believe inflation has had amaterial impact on our operations.  The average inflation rate in the Philippines inthe first quarter of 2003 was 3.1%, compared to 3.6%, in the same quarter of2002.         **OTHER INFORMATION**  ** **  **Issuance of PLDT’s Php2 Billion One-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 Php2.0 billion Peso Notes program registered with thePhilippine Securities and Exchange Commission, or SEC.  Net proceeds of theissue totaled Php1,836 million.  PLDT targeted retail investors for this issuein order to further diversify its funding sources.     The Peso Notes program, which was approved by thePhilippine SEC in February 2003, has been given a "PRS 1" rating byPhilRatings, an affiliate of Standard & Poor’s.  PRS1 is the highest ratingpossible on PhilRatings' scale for short-term securities and is assigned to issueswith "the strongest capability for timely payment of debt on bothprincipal and interest".      **Launch of Smart’s Productsand Services**     On April 17, 2003, Smartintroduced a new postpaid brand, *addict mobile*.  This service offersexclusive multimedia content to subscribers and features personalized menus forInternet surfing as well allowing subscribers to apply their allocated freecredits towards their choice of data and value-added services.     On May 11, 2003, Smartintroduced *SmartLoad*, an over-the-air electronic loading facilitydesigned to make reloading of air time credits more convenient for andaccessible to consumers.  These over-the-air loads are packaged in smallerdenominations, with correspondingly shorter validity periods.     **Related Party Transactions**     In the ordinary course of business, companiesbelonging to the PLDT Group are engaged in arm’s-length intercompanytransactions.  We believe that the terms of these transactions are comparablewith those available from unrelated parties.                                                                                                                                                            -  Telecommunications servicesprovided within the PLDT Group  —interconnection agreements among/between PLDT, Smart, Piltel, Clark Telecom,Subic Telecom, MaraTel and PLDT Global under terms similar with those of othertelecommunications providers outside the PLDT Group.                                                                                                                                                             -  Transponder Lease Agreementbetween PLDT and Mabuhay Satellite  —an agreement pursuant to which Mabuhay Satellite leases to PLDT C-bandtransponders on board the Agila II satellite, in consideration of a basicrent.  Rentals under this agreement totaled Php194 million and Php230 millionfor the three months ended March 31, 2003 and 2002, respectively. PLDT’s outstandingobligations under this agreement amounted to Php30 million as of March 31, 2003 andPhp269 million as of December 31, 2002.                                                                                                                                                               -  Facilities Management Agreementbetween PLDT and Piltel  — anagreement under which PLDT undertakes the management, operation and maintenanceof Piltel’s regional telecommunications facilities as well as Executive OrderNo. 109 network operations and services, including fixed line build-outinstallations, public calling offices, payphone facilities, and the systemsrequired to support these services.  Management fees under this agreementtotaled Php21 million and Php24 million for the three months ended March 31, 2003 and 2002,respectively.  PLDT’s outstanding receivables under this agreement amounted toPhp279 million as of March 31, 2003 and Php258 million as of December 31, 2002.                                                                                                                                                                 -  Facilities Management Agreementbetween Subic Telecom and Piltel  — anagreement under which Subic Telecom manages the regional telephone network,customer operations, network operations and payphones of Piltel in Subic and Olongapo City.Management fees under this agreement totaled Php5 million and Php6 million forthe three months ended March 31, 2003 and 2002, respectively.  Subic Telecom’s outstandingreceivables under this agreement amounted to Php4 million as of March 31, 2003 andPhp2 million as of December 31, 2002.                                                                                                                                                                   -  Agreements between Smart andPiltel  — agreements relating to theintegration of Smart’s and Piltel’s operations under which Smart undertakes tomanage Piltel’s facilities, customer services and administrative support andmanagement services.  Fees under these management agreements totaled Php168million and Php160 million for the three months ended March 31, 2003 and2002, respectively.  Under these agreements, Smart had outstanding receivablesof Php715 million as of March 31, 2003 and Php569 million as of December 31, 2002.  In addition,Smart also entered into a facilities service agreement with Piltel under whichPiltel accesses Smart's existing GSM network and facilities to enable Piltel tooffer prepaid cellular service using GSM technology in exchange forapproximately 50% of Piltel's revenues, net of interconnection expenses.Facility fees under this service agreement totaled Php841 million and Php784million for the three months ended March 31, 2003and 2002, respectively.  Smart’s outstanding receivables under this agreement amounted to Php302million as of March 31, 2003 and Php458 millionas of December 2002.                                                                                                                                                                     -  Air Time Purchase Agreementbetween PLDT and PT Asia Cellular Satellite and Related Agreements  — an agreement under which PLDT has been granted theexclusive right to sell ACeS services in the Philippines.  In March 2003,PLDT, together with the founder shareholders, entered into a StandstillAgreement in respect of the Air Time Purchase Agreement.  See Notes 15 and 20to the accompanying financial statements for further discussion.                                                                                                                                                                       -  Agreements between Smart and ACeSPhilippines  — agreements under whichSmart (1) provides ACeS Global Mobile Personal Communications by Satellite, orGMPCS, services, in the Philippines, (2) undertakes the management, maintenanceand operations of GMPCS, and (3) provides certain administrative support andservices in certain aspects of ACeS Philippines’ business operations.  Feesunder these agreements, net of Smart’s share, totaled Php16 million and Php7million for the three months ended March 31, 2003and 2002, respectively.  Under these agreements, Smart had outstanding payablesof Php50 million as of March 31, 2003, and no outstanding obligation as of December 31, 2002.     In addition, transactions to which PLDT or itssubsidiary was a party, in which a director or key officer or owner of morethan 5% of the common shares of PLDT, or any member of the immediate family ofa director or key officer or owner of more than 5% of the common shares of PLDThad a direct or indirect material interest as of March 31, 2003 and December31, 2002 and for the three months ended March 31, 2003 and 2002 are as follows:                                                                                                                                                                         -  Agreements with NTTCommunications and/or its Affiliates  —agreements under which (1) NTT Communications provides advisory services forvarious business areas of PLDT; (2) NTT World Engineering Marine Corporationprovides maintenance services to PLDT’s domestic fiber optic network; (3) PLDTis licensed to market managed data and other services using NTT Communications’Arcstar brand; and (4) PLDT and NTT Communications agree to cooperativearrangements for international telecommunication services.  Fees under theseagreements totaled Php85 million and Php74 million for the three months ended March 31, 2003 and2002, respectively.  PLDT’s outstanding obligations under these agreements amountedto Php38 million and Php36 million as of March 31, 2003and December 31, 2002, respectively.                                                                                                                                                                           -  Agreements between Smart and  Asia Link B.V . — agreements under whichAsia Link undertakes to provide technical support services for the operationsand maintenance of Smart’s CMTS.  Fees under these agreements totaled Php67million and Php73 million for the three months ended March 31, 2003 and2002, respectively.  Under these agreements, Smart had outstanding payables ofPhp67 million as of March 31, 2003 and Php31 million as of December 31, 2002.  Asia Link isa subsidiary of First Pacific.                                                                                                                                                                             -  Agreement with Foote, Cone& Belding Worldwide, or FCB Worldwide  — an agreement under which FCB Worldwide provides consultancy andadvisory services to PLDT.  The chairman of PLDT’s board of directors is thenon-executive chairman of FCB Worldwide’s representative office in the Philippines.                                                                                                                                                                               -  Agreements relating toinsurance companies  — Gotuaco delRosario and Associates, or Gotuaco, acts as the broker for certain insurance companiesto cover certain insurable properties of the PLDT Group.  Insurance premiumsare remitted to Gotuaco and the broker’s fees are settled between Gotuaco andthe insurance companies.  In addition, PLDT has signed an insurance policy withMalayan Insurance Co. Inc., or Malayan; wherein premiums are paid directly toMalayan.  Premium payments to Gotuaco and Malayan covering the twelve-monthperiod ending July 31, 2003 including payments subsequent to 2002 totaledPhp566 million.  Two directors of PLDT have a direct/indirect interest in orserve as director/officer of Gotuaco and Malayan.     Fora more detailed discussion of the related party transactions enumerated above,see Note 15 to the accompanying**financial statements.      pldt_1Q2003FS  
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**FINANCIAL STATEMENTS**

** **

AS OF MARCH 31, 2003 AND DECEMBER 31, 2002

AND FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND2002

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**BALANCE SHEETS**

**(in million pesos)**

 

** **

**Consolidated**

 

**Non-Consolidated**

** **

**March 31, 2003**

**(Unaudited)**

** **

December 31, 2002 (As restated -

Note 3)

 

**March 31, 2003**

**(Unaudited)**

 

December 31, 2002 (As restated -

Note 3)

**ASSETS**

**Current Assets**

** **

** **

 

 

 

Cash and cash equivalents (Notes 5 and 22)

**12,571**

10,876

 

**2,899**

4,165

Accounts receivable – net (Notes 6, 15 and 22)

**20,923**

20,124

 

**19,056**

19,376

Inventories and supplies – net (Note 7)

**4,636**

4,507

 

**2,741**

2,709

Deferred income tax – net (Notes 3 and 18)

**3,336**

3,772

 

**2,991**

3,002

Prepayments and other current assets

**1,845**

1,879

 

**1,261**

1,403

Total Current Assets

**43,311**

41,158

 

**28,948**

30,655

**Noncurrent Assets**

** **

 

 

** **

 

Property, plant and equipment –****net (Notes 7, 8, 12 and 20)

**248,909**

252,025

 

**189,059**

190,722

Investments****– net (Notes 2, 3, 9, 12, 14, 15, 17 and 20)

**5,377**

5,470

 

**41,763**

39,425

Other noncurrent assets – net (Notes 9, 10 and 15)

**4,939**

4,677

 

**1,745**

1,613

Total Noncurrent Assets

**259,225**

262,172

 

**232,567**

231,760

 

**302,536**

303,330

 

**261,515**

262,415

 

** **

** **

 

** **

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

** **

** **

 

** **

 

Notes payable (Note 22)

**882**

760

 

**722**

719

Accounts payable (Notes 15 and 22)

**8,256**

9,694

 

**6,068**

7,397

Accrued expenses and other current liabilities  (Notes 3, 11, 15 and 22)

**14,726**

12,531

 

**6,265**

5,537

Current portion of long-term debt (Notes 8, 12, 22 and 23)

**19,087**

19,176

 

**11,857**

11,962

Dividends payable (Note 14)

**413**

424

 

**391**

424

Income tax payable (Note 18)

**1,439**

982

 

**538**

538

Total Current Liabilities

**44,803**

43,567

 

**25,841**

26,577

**Noncurrent Liabilities**

** **

 

 

** **

 

Long-term debt – net of current portion (Notes 8, 12, 22 and 23)

**144,855**

148,587

 

**125,543**

127,362

Deferred income tax – net (Note 18)

**10,782**

10,699

 

**9,284**

9,231

Deferred credits and other noncurrent liabilities  (Notes 3, 13, 15 and 16)

**10,940**

11,540

 

**10,575**

11,157

Total Noncurrent Liabilities

**166,577**

170,826

 

**145,402**

147,750

Minority Interest in Consolidated Subsidiaries

**884**

849

 

–

–

**Stockholders’****Equity**(Notes 2 and 14)

**90,272**

88,088

 

**90,272**

88,088

 

**302,536**

303,330

 

**261,515**

262,415

* *

*See accompanying Notes to Financial Statements.*

** **

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF INCOME**

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

** **

** **

**Consolidated**

 

**Non-Consolidated**

** **

**Three Months Ended March 31**

** **

**2003**

** **

** **

2002

(As restated -

Note 3)

 

**2003**

** **

** **

2002

(As restated  Note 3)

** **

(Unaudited)

** **

** **

 

 

** **

 

**OPERATING REVENUES** (Notes 3 and 15)

** **

 

 

** **

 

Fixed line services:

** **

 

 

** **

 

Local exchange

**5,248**

5,504

 

**5,221**

5,474

International long distance

**3,053**

2,509

 

**2,870**

2,490

National long distance

**1,638**

1,838

 

**1,624**

1,817

Data and other network

**1,422**

1,298

 

**1,403**

1,292

Miscellaneous

**78**

83

 

**163**

121

 

**11,439**

11,232

 

**11,281**

11,194

Wireless services

**10,940**

7,324

 

–

–

Information and communications technology services

**357**

118

 

–

–

 

**22,736**

18,674

 

**11,281**

11,194

OPERATING EXPENSES

** **

 

 

** **

 

Depreciation and amortization (Note 8)

**5,813**

5,606

 

**3,221**

3,218

Compensation and benefits (Note 16)

**2,741**

2,512

 

**1,867**

1,778

Selling and promotions (Note 3)

**2,262**

1,523

 

**293**

331

Maintenance (Note 15)

**1,337**

1,102

 

**771**

785

Provision for doubtful accounts (Note 6)

**1,130**

803

 

**702**

702

Rent (Note 15)

**842**

701

 

**432**

424

Professional and other service fees (Note 15)

**388**

362

 

**221**

231

Taxes and licenses (Note 21)

**278**

216

 

**122**

132

Other operating costs (Note 15) 

**875**

557

 

**392**

299

 

**15,666**

13,382

 

**8,021**

7,900

NET OPERATING INCOME

**7,070**

5,292

 

**3,260**

3,294

**OTHER EXPENSES – Net**(Notes 3, 6, 8, 9, 10, 12, 15, 17 and 22)

**3,608**

3,231

 

**717**

1,476

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

**3,462**

2,061

 

**2,543**

1,818

**PROVISION FOR INCOME TAX** (Notes 3 and 18)

**979**

492

 

**64**

247

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

**2,483**

1,569

 

**2,479**

1,571

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

**4**

(2)

 

**–**

–

**NET INCOME**

**2,479**

1,571

 

**2,479**

1,571

**Earnings Per Common Share** (Note 19)

** **

 

 

** **

 

Basic

**12.12**

6.91

 

**12.12**

6.91

Diluted

**11.21**

6.77

 

**11.21**

6.77

* *

*Seeaccompanying Notes to**FinancialStatements.*

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(in million pesos)**

** **

 

**Preferred Stock**

** **

**Common Stock**

** **

**Capital in Excess of  Par Value**

** **

**Retained Earnings**

** **

**Total**

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2002:

 

 

 

 

 

 

 

 

 

As previously reported

4,242

 

844

 

48,905

 

34,635

 

88,626

Effect of change in revenue recognition for prepaid cards, net of income tax effect (Note 3)

–

 

–

 

–

 

(2,066)

 

(2,066)

Effect of change in accounting policy on preoperating expenses (Note 3)

–

 

–

 

–

 

(212)

 

(212)

As restated

4,242

 

844

 

48,905

 

32,357

 

86,348

Net income for the period:

**–**

 

–

 

–

 

**–**

 

**–**

As previously reported

 

 

 

 

 

 

1,302

 

1,302

Effect of change in revenue recognition for prepaid cards, net of income tax effect (Note 3)

–

 

–

 

–

 

277

 

277

Effect of change in accounting policy on preoperating expenses (Note 3)

–

 

–

 

–

 

(8)

 

(8)

As restated

 

 

 

 

 

 

1,571

 

1,571

Cash dividends

**–**

 

–

 

–

 

(495)

 

(495)

Partial redemption of Series IV Preferred Stock (Note 14)

(72)

 

**–**

 

**–**

 

**–**

 

(72)

Issuance of capital stock (Note 14)

281

 

–

 

7

 

–

 

288

Balances at March 31, 2002 

4,451

 

844

 

48,912

 

33,433

 

87,640

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2003:

 

 

 

 

 

 

 

 

 

As previously reported

4,585

 

847

 

48,953

 

34,004

 

88,389

Effect of change in accounting policy on preoperating expenses (Note 3)

–

** **

–

** **

–

** **

(301)

** **

(301)

As restated

4,585

** **

847

** **

48,953

** **

33,703

** **

88,088

Net income for the period

 

** **

 

** **

 

** **

2,479

** **

2,479

Cash dividends

** **

** **

 

** **

 

** **

(335)

 

(335)

Issuance of capital stock (Note 14)

35

** **

**–**

** **

5

** **

**–**

** **

40

**Balances at****March 31, 2003**

**4,620**

** **

**847**

** **

**48,958**

** **

**35,847**

** **

**90,272**

* *

*See accompanying Notes toFinancial Statements.*

* *

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF CASH FLOWS**

**(in million pesos)**

** **

** **

**Consolidated**

** **

**Non-Consolidated**

** **

**Three Months Ended March 31**

** **

**2003**

** **

** **

 

2002

(As restated -

Note 3)

** **

**2003**

** **

** **

** **

2002

(As restated -

Note 3)

** **

(Unaudited)

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

** **

** **

** **

** **

** **

 

** **

 

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

**3,462**

 

2,061

** **

**2,543**

 

1,818

Adjustments for:

** **

 

 

** **

** **

 

 

Depreciation and amortization

**5,813**

 

5,606

** **

**3,221**

 

3,218

Provision for doubtful accounts

**1,130**

 

803

** **

**702**

 

702

Equity in net losses (income) of investees, including goodwill amortization and provision for impairment in value of investment

**4**

 

381

** **

**(2,291)**

 

(959) 

Others

**618**

 

77

** **

**(1)**

 

–

Interest expense

**3,229**

 

3,381

** **

**2,554**

 

2,532

Interest income

**(276)**

 

(258)

** **

**(14)**

 

(8)

Operating income before working capital changes

**13,980**

 

12,051

** **

**6,714**

 

7,303

Decrease (increase) in:

** **

 

 

** **

** **

 

 

Accounts receivable

**(1,918)**

 

(260)

** **

**(440)**

 

(1,451)

Inventories and supplies

**(281)**

 

(1,573)

** **

**(33)**

 

154

Prepayments and other current assets

**(24)**

 

(505)

** **

**111**

 

(273)

Increase (decrease) in:

** **

 

 

** **

** **

 

 

Accounts payable

**(1,402)**

 

(670)

** **

**(1,369)**

 

(1,033)

Accrued expenses and other current liabilities

**1,346**

 

(243)

** **

**254**

 

282

Cash generated from operations

**11,701**

 

8,800

** **

**5,237**

 

4,982

Income taxes paid

**(15)**

 

(10)

** **

**–**

 

–

Net cash provided by operating activities

**11,686**

 

8,790

** **

**5,237**

 

4,982

**CASH FLOWS FROM INVESTINGACTIVITIES**

** **

 

 

** **

** **

 

 

Net additions to property, plant and equipment

**(1,537)**

 

(3,773)

** **

**(385)**

 

(444)

Interest paid – capitalized to property, plant and equipment

**(270)**

 

(386)

** **

**(263)**

 

(325)

Decrease in other noncurrent assets

**(87)**

 

(364)

** **

**(132)**

 

(297)

Interest received

**361**

 

136

** **

**15**

 

7

Net cash used in investing activities

**(1,533)**

 

(4,387)

** **

**(765)**

 

(1,059)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

 

** **

** **

 

 

Proceeds from long-term debt

**1,245**

 

4,577

** **

**1,158**

 

1,814

Payments of long-term debt

**(6,091)**

 

(4,583)

** **

**(3,901)**

 

(3,149)

Payments of notes payable 

**120**

 

(706)

** **

–****

 

(154)

Interest paid – net of capitalized portion

**(2,838)**

 

(3,306)

** **

**(2,098)**

 

(2,407)

Decrease in deferred credits and other noncurrent liabilities

(599)

 

(662)

 

(582)

 

(261)

Cash dividends paid

**(368)**

 

(447)

** **

**(368)**

 

(447) 

Proceeds from issuance of capital stock

**40**

 

289

** **

**40**

 

289

Redemption of preferred stock

**–**

 

(72)

** **

–****

 

(72)

Net cash used in financing activities

**(8,491)**

 

(4,910)

** **

**(5,751)**

 

(4,387)

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

**33**

 

(37)

** **

**13**

 

(25)

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

**1,695**

 

(544)

** **

**(1,266)**

 

(489)

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

**10,876**

 

4,123

** **

**4,165**

 

2,336

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

**12,571**

 

3,579

** **

**2,899**

 

1,847

* *

*See accompanying Notes toFinancial Statements.*

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**NOTES TO FINANCIAL STATEMENTS**

 

 

**1.     ****CorporateInformation**

** **

ThePhilippine Long Distance Telephone Company, or PLDT, was incorporated under theold Corporation Law of the 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 ofRepublic Telephone Company. 

 

Thecommon shares of PLDT are listed and traded on the Philippine Stock Exchange,or PSE, and prior to October 19, 1994, were listed and traded on the American StockExchange and Pacific 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 YorkStock Exchange and the Pacific Exchange in the United States.

 

PLDT’scharter, like those of all other Philippine corporations, was initially limitedto a period of 50 years but has since been extended twice for 25 years each,the last extension being for an additional 25-year period to 2028.  Under itsamended charter (Republic Act No. 7082), which became effective on August 24,1991, PLDT is authorized to provide virtually every type of telecommunicationsservice, both within the Philippines and between the Philippines and othercountries.

 

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

 

Asof March 31, 2003, the PLDT Group had 19,247 employees while PLDT on astand-alone basis had 11,777 employees, compared to 19,098 and 12,090employees, respectively, as of December 31, 2002.  

 

Theregistered office address of PLDT is Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

 

 

 

**2.     ****Basis ofFinancial Statement Preparation**

** **

Ourfinancial statements have been prepared in conformity with generally acceptedaccounting principles in the Philippines, or Philippine GAAP, based on the historical costconvention.

 

Ourunaudited financial statements include, in our opinion, all adjustmentsconsisting only of normal recurring adjustments, necessary to present fairlythe results of operations for the interim periods.  The results of operationsfor the three months ended March 31, 2003 are not necessarily indicative of the results ofoperations that may be expected for the full year.

 

Inpreparing the unaudited March 31, 2003 financial statements, we followed the same accountingpolicies, except as discussed in *Note 3 – Accounting Changes, Investment in ePLDT,*and methods of computation that we had applied in the preparation of theaudited December 31, 2002 financial statements.

 

Ourunaudited consolidated financial statements include the unaudited financialstatements of PLDT and those of the following subsidiaries (collectively, thePLDT Group), which were all incorporated in the Philippines except for PLDTGlobal Corporation, which was incorporated in the British Virgin Islands.

 

** **

** **

**Percentage of Ownership**

** **

** **

**As of March 31,**

**Name of Subsidiary**

**Principal Activity**

**2003**

2002

** **

 

** **

** **

**Fixed Line**

 

** **

** **

PLDT Clark Telecom, Inc., or Clark Telecom

Telecommunications services

**100.0**

100.0

Subic Telecommunications Company,  Inc., or Subic Telecom

Telecommunications services

**100.0**

100.0

Smart–NTT Multimedia, Inc., or SNMI

Data and network services

**100.0**

100.0

PLDT Global Corporation, or PLDT Global, and subsidiaries

Telecommunications services

**100.0**

100.0

Maranao Telephone Company, Inc., or MaraTel

Telecommunications services

**97.5**

92.3

Bonifacio Communications Corporation, or BCC

Telecommunications services

**75.0**

–

**Wireless**

 

** **

 

Smart Communications, Inc., or Smart,  and subsidiaries

Cellular mobile services

**100.0**

100.0

Telesat, Inc., or Telesat

Satellite communications services

**94.4**

94.4

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services

**88.5**

88.5

Mabuhay Philippines Satellite  Corporation, or Mabuhay Satellite

Satellite communications services

**67.0**

67.0

**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

 

Inthe non-consolidated financial statements, investments in subsidiaries, exceptfor the investment in Pilipino Telephone Corporation, or Piltel, (see *Note 3– Accounting Changes, Investment in Piltel*),**are accounted for underthe equity method.

* *

Subsidiariesare consolidated from the date when control is transferred to the PLDT Groupand cease to be consolidated from the date when control is transferred out ofthe PLDT Group.

 

Consolidatedfinancial statements are prepared using uniform accounting policies for liketransactions and other events in similar circumstances.  Intercompany balancesand transactions, including intercompany profits and unrealized profits andlosses, are eliminated.

 

Minorityinterests represent the equity interests in MaraTel, BCC, Telesat, ACeSPhilippines and Mabuhay Satellite not held by the PLDT Group.

* *

***Investmentsin Shares of Stock***

 

Investmentsin shares of stock of companies where PLDT’s ownership interest ranges from 20%to 50% (collectibly referred to as associates), except for the investments in Piltel(see *Note 3**– Accounting Changes, Investment in Piltel),*areaccounted for under the equity method of accounting.  These are entities inwhich the PLDT Group has significant control and influence and which is neithera subsidiary nor a joint venture of the PLDT Group.  Under the equity method,the investments in associates are carried in the balance sheets at cost pluspost-acquisition changes in the PLDT Group’s share in net assets of associates,less impairment in value, if any.  The statements of income reflect the PLDTGroup’s share in the results of operations of associates.  Unrealized gainsarising from transactions with our associates are eliminated to the extent ofthe PLDT Group’s interests in associates, against the investments inassociates.  The PLDT Group’s investments in its associates include goodwill(net of accumulated amortization) on acquisition, which are treated inaccordance with the accounting policy for goodwill, See *Note 4 – Summary ofSignificant Accounting Policies*.

 

Otherinvestments in companies over which no significant influence is exercised arestated at cost, less allowance for any significant and permanent decline inmarket value.

 

 

 

**3.     ****Accounting Changes**

** **

***RevenueRecognition for Prepaid Cards***

 

In2002, we changed our revenue recognition policy for prepaid cards and have nowelected to recognize the revenue based on actual subscribers’ usage of theprepaid cards for better matching of revenues and expenses.  Prior to 2002, werecognized revenues at the time of sale.

 

Wehave accounted for this change in accounting policy retroactively and haveaccordingly restated our comparative financial statements to conform to thechanged policy.  The after-tax effect of the change was an increase of Php277 million in consolidated net income for thethree months ended March 31, 2002 and a reduction of Php2,066million in beginning retained earnings in 2002.  Basic and diluted earnings percommon share increased by Php1.64 and Php1.54,respectively, for the three months ended March 31, 2002.

 

Consolidatedunearned revenues related to unused prepaid cards sold amounting to Php2,501 million and Php2,022million as of March 31, 2003 and December 31, 2002 and non-consolidatedunearned revenues amounting to Php433 millionand Php431 million as of March 31, 2003 andDecember 31, 2002, respectively, are included in “Accrued expenses and othercurrent liabilities” in the balance sheets.

 

***Investmentsin Piltel***

 

InJune 2001, Piltel completed the restructuring of substantially all of itsindebtedness and other claims.  PLDT’s ownership in Piltel’s outstanding commonstock decreased from 57.6% to 45.3% as a result of the transfer of 208 millioncommon shares of Piltel held by PLDT to financial advisors of Piltel to settlepart of the fees in connection with the debt restructuring.

 

EffectiveJune 27, 2001, Piltel ceased to be treated as a consolidatedsubsidiary as a result of the reduction in PLDT’s equity interest in commonshares of Piltel from 57.6% to 45.3%.

 

PLDTaccounted for its investments in Piltel using the equity method from June 27, 2001 to December 31, 2001.As of December 31, 2001, the balance of PLDT’s investments in Piltel amountedto Php948 million, representing the equity innet assets of Piltel as of that date.

 

Underthe terms of Piltel’s debt restructuring plan, Piltel is not permitted todeclare or pay any dividends, repay or pay interest on any financialindebtedness to PLDT Group and purchase, cancel, redeem or otherwise repay anyof its share capital until all amounts owed to Piltel creditors have been paidor discharged.  As of March 31, 2003 and December 31, 2002, Piltel reported a capitaldeficiency of Php19,460 million and Php19,100 million, respectively.

 

Inaddition, 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 US$50 million (approximatelyPhp2,693 million) remained undrawn as of March31, 2003.

 

ThePhilippine Accounting Standards Council, or ASC, approved the adoption ofStatement of Financial Accounting Standards, or SFAS, 28/ InternationalAccounting Standards, or IAS, 28, “Accounting for Investments in Associates,”which became effective in the Philippines for financial statements coveringperiods beginning on or after January 1, 2002.  Under SFAS 28/IAS 28, aninvestment in an associate should be accounted for in the consolidatedfinancial statements under the equity method, except when it operates undersevere long-term restrictions that significantly impair its ability to transferfunds to the parent company.  Such investments should be accounted for at costin accordance with the original SFAS 10, “Summary of Generally AcceptedAccounting Principles on Investments”.

 

Thechange in method of accounting for investments in Piltel from equity method tocost method does not have any effect on our financial statements.

 

***Investmentin ePLDT***

 

TheASC approved the adoption of SFAS 38/IAS 38 “Intangible Assets”, which becameeffective in the Philippines for financial statements covering periods beginningon or after January 1, 2003.  SFAS 38/IAS 38 requires that expenditures onresearch, start-up, training, advertising and relocation are to be expensed asincurred.  Further, SFAS 38/IAS 38 prescribes the retroactive adjustment ofunamortized intangible assets to beginning retained earnings of 2003 and therestatement of comparative prior period financial statements.

 

Asat January 1, 2003, ePLDT’s and certain of its subsidiaries’consolidated unamortized preoperating expenses amounted to Php311 million, of which Php301million, representing ePLDT’s equity interest, was retroactively adjusted tobeginning retained earnings.  Preoperating expenses incurred for the threemonths ended March 31, 2003 were charged to operations.  The effect of theapplication of SFAS 38/IAS 38 was a decrease of Php8million in the consolidated and non-consolidated net income for the threemonths ended March 31, 2002 and reductions in beginning retained earningsamounting to Php301 million in 2003 and Php186 million in 2002.  No tax effect adjustmentwas considered in the application of SFAS 38/IAS 28 due to income tax holidayenjoyed by ePLDT and its subsidiaries.

 

 

**4.     ****Summary of SignificantAccounting Policies**

 

Oursignificant accounting policies and practices are discussed below to facilitatethe understanding of our financial statements:

 

***RevenueRecognition***

 

*FixedLine Services*

 

*LocalExchange Service.*   Our localexchange revenues consist of (a) flat monthly fees for our postpaid service;(b) installation charges and other one-time fees associated with theestablishment of customer service; (c) fixed charges paid by other telephonecompanies, charges retained by PLDT for calls terminating to cellularsubscribers within the local area and local access charges paid by cellularoperators for calls by cellular subscribers that terminate to our localexchange network; (d) revenues from usage of prepaid cards for calls within thelocal area and any unused peso value of expired prepaid cards; (e) proceedsfrom calls from payphones; and (f) charges for special features, includingbundled value-added services.

 

Flatmonthly fees are recognized as revenue on an accrual basis, based on contractedrates, as the service is provided to our customers.  Installation charges andother one-time fees associated with the establishment of customer service arerecognized when the related installation of equipment is complete and thetelephone service is activated.  Fixed charges and local access charges arerecognized upon the completion of a call that terminated to our local exchangenetwork.  

 

*InternationalLong Distance Service*.   Ourinternational long distance revenues, which we generate through ourinternational gateway facilities, consist of (a) inbound call revenuesrepresenting settlements from foreign telecommunications carriers for inboundinternational calls; (b) access charges paid to us by other Philippine telecommunicationscarriers for terminating inbound international calls to our local exchangenetwork; and (c) outbound call revenues representing amounts earned fromoutbound international calls, net of amounts payable to foreigntelecommunications carriers for terminating calls in their territories.

 

Internationallong distance revenues are recognized based on minutes of traffic processed andcontracted rates as incurred.

 

*NationalLong Distance Service*.   Our nationallong distance revenues consist of (a) per-minute charges for calls made by ourfixed line customers outside of the local service areas but within thePhilippines, net of interconnection charges payable for calls carried throughthe backbone network of, and/or terminating to the customer of, another telecommunicationscarrier; and (b) access charges received from other telecommunications carriersfor calls carried through our backbone network and/or terminating to ourcustomers.

 

Nationallong distance revenues are recognized based on minutes of traffic processed andcontracted rates as incurred.

 

*Dataand Other Network Services*.   Ourdata and other network services revenues are those derived from (a) traditionalbandwidth services – high-speed point-to-point domestic and internationaldigital leased line services; (b) broadband/packet-based/Internet-basedservices – frame relay; asynchronous transfer mode, or ATM; Internetprotocol-virtual private network, or IP-VPN; digital subscriber line, or DSL;Internet gateway; and wholesale Digital Signal Level 3, or DS3; and (c) otherpacket-based switching services – Datapac and integrated services digitalnetwork, or ISDN.

 

Dataand other network services revenues are recognized based on contracted rates,as the service is provided to our customers.  Installation charges and otherone-time fees associated with the establishment of customer service arerecognized when the related installation of equipment is complete and the dataor other network service has been activated.

 

*WirelessServices*

 

*CellularService*.   Our cellular servicerevenues consist of (a) revenues derived from actual usage of the network byprepaid subscribers and any unused peso value of expired prepaid cards; (b)monthly service fees from postpaid subscribers, including charges for calls in excessof allocated free local calls, toll charges for national and international longdistance calls, charges for text messages of our Global System for MobileCommunications, or GSM, service customers in excess of allotted free textmessages and charges for value-added services; (c) revenues from incoming callsand messages to our customers, net of interconnection expenses; fees fromreciprocal traffic from international correspondents; and revenues from inboundinternational roaming calls for the GSM service; (d) facility service feescharged to Piltel for using Smart’s GSM network for Piltel’s *Talk ‘N Text*prepaid cellular service; and (e) other charges, including reconnection andmigration charges.

 

Postpaidservice revenues, including charges for text messages sent in excess ofallotted free messages provided, are recognized based upon minutes of trafficprocessed and contracted fees for services provided.  Charges for value-addedservices are recognized upon availment by subscribers.

 

Othercharges, including reconnection and migration charges, are recognized as therelated service is provided to customers.

 

*Satellite,VSAT and Other Services.*Ourrevenues from satellite, very small aperture terminal, or VSAT, and otherservices consist mainly of rentals received for the lease of MabuhaySatellite’s transponders and Telesat’s VSAT facilities to other companies andcharges for ACeS Philippines’ satellite phone service.

* *

***Cashand Cash Equivalents***

 

Cashconsists of cash on hand and in banks.  Cash equivalents are short-term, highlyliquid investments that are readily convertible to known amounts of cash withoriginal maturities of three months or less and that are subject to aninsignificant risk of change in value.

 

***AccountsReceivable***

*** ***

Accountsreceivable are stated at face value, net of allowance for doubtful accounts.

 

***Allowancefor Doubtful Accounts***

 

Allowancefor doubtful accounts is maintained at a level considered adequate to providefor potentially uncollectible receivables.  The level of allowance is based onpast collection experience and other factors that may affect collectibility.An evaluation of the receivables, designed to identify potential charges to theallowance, is performed on a continuous basis during the period.

 

Theallowance is established by charges to income in the form of provisions fordoubtful accounts.  Such provisions are computed as a certain percentage ofoperating revenues.  The level of this allowance is also evaluated bymanagement on the basis of factors that affect the collectibility of theaccounts, such as**age status of receivables.  In addition, accountsspecifically identified to be potentially uncollectible are provided withadequate allowance.

 

***Inventoriesand Supplies***

 

Inventoriesand supplies are valued at the lower of cost or net realizable value.  Theseare items of cellular phone units, materials, spare parts, terminal units andaccessories.

 

Netrealizable value is the replacement cost.  Cost is determined using the movingaverage method.

 

***Property,Plant and Equipment***

 

Property,plant and equipment are stated at cost less accumulated depreciation,amortization and any impairment in value.

 

Theinitial cost of property, plant and equipment comprises its purchase price andany costs directly attributable to bringing the asset to its working conditionand location for its intended use.  Expenditures incurred after the assets havebeen put into operation, such as repairs and maintenance and overhaul costs,are normally charged to income in the period the costs are incurred.  Insituations where it can be clearly demonstrated that the expenditures haveresulted in an increase in the future economic benefits expected to be obtainedfrom the use of an item of property, plant and equipment beyond its originallyassessed standard of performance, the expenditures are capitalized as anadditional cost of property, plant and equipment.  Cost also includes intereston borrowed funds used during the construction period and capitalized foreignexchange losses and gains related to foreign currency-denominated liabilitiesused to acquire such assets, net of foreign exchange gains on restatement ofmonetary assets.  When assets are sold or retired, their costs and accumulateddepreciation, amortization and impairment losses, if any, are eliminated fromthe accounts and any gain or loss resulting from their disposal is included inthe statements of income of such period.

 

Depreciationand amortization are calculated on a straight-line basis over the followingestimated useful lives of the assets:

 

**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

 

Theuseful lives and depreciation and amortization method are reviewed periodicallyto ensure that the period and method of depreciation and amortization areconsistent with the expected pattern of economic benefits from items ofproperty, plant and equipment.

 

In2001, Smart revised the estimated remaining useful lives of its certain analognetwork assets from 6.8 years to 2.25 years to reflect the effects ofobsolescence, continuing decline in analog subscribers, competition and othereconomic factors which are considered to have shortened the economic usefullives of these assets.  As a result, depreciation charges increased by Php360 million for the three months ended March 31, 2002.  In June 2002, theestimated useful lives of these assets were further revised to effectively endby December 2002.  Having complied with therequirements set out by the NTC, Smart closed down the operation of its analognetwork on December 31, 2002.

 

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

 

Borrowingcosts that are directly attributable to the construction of plant and equipmentare capitalized during the construction period, See*Note 8 – Property, Plantand Equipment.*

 

***Impairmentof Assets***

 

StartingJanuary 1, 2002, property, plant and equipment, investments, goodwilland other long-lived assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Whenever the carrying amount of an asset exceeds itsrecoverable amount, an impairment loss is recognized in the statements ofincome.  The recoverable amount is the higher of an asset’s net selling priceor value in use.  The net selling price is the amount obtainable from the saleof an asset in an arm’s – length transaction while value in use is the presentvalue of estimated future cash flows expected to arise from the continuing useof an asset and from its disposal at the end of its useful life.  Recoverableamounts are estimated for individual assets or, if it is not possible, for thecash-generating unit to which the asset belongs.  Reversal of impairment lossesrecognized in prior years is recorded when there is an indication that theimpairment losses recognized for the asset no longer exist or have decreased.The reversal is recorded as income.  However, the increased carrying amount ofan asset due to a reversal of an impairment loss is recognized to the extent itdoes not exceed the carrying amount that would have been determined had theimpairment loss not been recognized for that asset in prior years.

 

***Goodwill***

 

Goodwill,included under “Other noncurrent assets – net” in the consolidated balancesheets, represents the excess of acquisition cost over the fair value ofidentifiable net assets of a subsidiary at the date of acquisition.  Withrespect to investment in an associate, goodwill is included in the carryingamount of the investment.  Goodwill is amortized on a straight-line basis overthe estimated useful economic life up to a maximum of five years.  It is statedat cost less accumulated amortization and any impairment in value.

 

***DeferredCharges***

 

Issuancecosts, underwriting fees and related expenses incurred in connection with theissuance of debt instruments are deferred and amortized over the terms of theinstruments.

 

***BorrowingCosts***

 

Borrowingcosts are generally expensed as incurred.  Borrowing costs are capitalized ifthey are directly attributable to the acquisition, construction or productionof a qualifying asset.  Capitalization of borrowing costs commences when theactivities to prepare the asset are in progress and expenditures and borrowingcosts are being incurred.  Borrowing costs are capitalized until the assets areready for their intended use.  If the resulting carrying amount of the assetexceeds its recoverable amount, an impairment loss is recorded.  Borrowingcosts include interest charges and other costs incurred in connection with theborrowing of funds, including exchange differences arising from foreigncurrency borrowings used to finance these projects to the extent that they areregarded as an adjustment to interest cost.

 

Forincome tax purposes, interest and other financing charges are treated asdeductible expenses in the year they are incurred.

 

***RetirementCosts***

 

PLDTand Smart have funded noncontributory retirement plans, administered by therespective companies’ Trustee, covering permanent employees.  Retirement costsare actuarially determined using the projected unit credit of accrued benefitvaluation method.  This method reflects services rendered by employees to thedate of valuation and incorporates assumptions concerning employees’ projectedsalaries.  Retirement costs include current service cost plus amortization ofpast service cost, experience adjustments and changes in actuarial assumptionsover the expected average remaining working lives of the covered employees.

*** ***

***ForeignCurrency Transactions and Translations***

*** ***

Transactionsin foreign currencies are recorded in Philippine pesos by applying to theforeign currency amount the spot exchange rate prevailing at the time of thetransaction date.  Foreign exchange gains or losses arising on the spotsettlements or restatement of monetary items at rates different from those atwhich they were initially recorded during the period or presented in theprevious financial statements are recorded in the statements of income in theperiod in which they arise, except for exchange losses arising from borrowedfunds used and liabilities incurred to finance the acquisition of property,plant and equipment, net of foreign exchange gains from all foreign currencymonetary items, if any, which are capitalized to the appropriate property andequipment accounts, see – *New Accounting Standards Effective Subsequent to2002, SFAS 21/IAS 21, “The Effects of Changes in Foreign Exchange Rates”.*

 

Financialstatements of consolidated foreign subsidiaries that are integral to theoperations of the PLDT Group are translated as if the transactions of theforeign operation had been those of the PLDT Group.  At each balance sheetdate, foreign currency monetary items are translated using the closing rate, nonmonetaryitems which are carried at historical cost are translated using the historicalrate as of the date of acquisition and nonmonetary items which are carried atfair value are translated using the exchange rate that existed when the valueswere determined.  Income and expense items are translated at the exchange rateson the dates of the transactions.  Resulting exchange differences arerecognized in the statements of income during the period.

 

***FinancialInstruments***

 

PLDTand Smart use forward exchange contracts to hedge foreign currency assets,liabilities and firm commitments.  Translation gains or losses on these forwardexchange contracts are computed by multiplying the forward notional amounts bythe difference between the spot exchange rates prevailing on balance sheetdates and the spot exchange rates on the contract inception dates (or the lastreporting dates).  The resulting gains or losses are offset against thetranslation losses or gains on the underlying hedged transactions.  Any premiumor discount is amortized over the period of the contract and charged orcredited to current operations.  For short-term forward transactions, thecontracted forward rates are used to record the underlying hedged transactions.

 

PLDTalso enters into currency swap contracts to hedge the currency risk on its fixedrate notes.  With these swaps, PLDT effectively converts its U.S. dollar notesto peso notes.  Thus, the underlying notes are no longer revalued to spotexchange rates on balance sheet date but are recorded at the hedged exchangerates.  Swap costs due on the contracts are accrued as of balance sheet date.

 

PLDTalso utilizes various structures incorporating currency option (both buy andsell) contracts to hedge the currency risk on its fixed rate notes.  Thesecontracts provide PLDT the right to purchase or the obligation to sell foreigncurrency at pre-determined prices.  Premium payments due on the contracts areamortized over the contract term and charged to current operations.  Changes inthe options’ intrinsic values are also charged or credited to currentoperations.

 

Interestrate swap agreements are entered into to manage exposure to interest ratefluctuations.  Net income/expense on the swaps is accrued as of balance sheetdate.

 

Unrealizedmark-to-market gains and losses on outstanding derivatives entered into ashedges are not included in the determination of net income but are disclosed inthe related notes to financial statements.

 

Otherderivative financial instruments entered into that are not designated as hedgesare marked to market, with the revaluation gains and losses credited or chargedto current operations.      

 

***IncomeTaxes***

 

Deferredincome tax is provided using the liability method.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable to: (a)temporary differences between the financial reporting bases of assets andliabilities and their related tax bases; and (b) net operating loss carryover,or NOLCO.  Deferred tax assets and liabilities are measured using the tax ratesapplicable to taxable income in the years in which those temporary differencesare expected to be recovered or settled and NOLCO are expected to be applied.A valuation allowance is provided for deferred tax assets when it is morelikely than not that some or all of the deferred tax assets will not berealized in the future.

 

***EarningsPer Common Share***

 

Basicearnings per share, or EPS, is calculated by dividing the net income for theyear attributable to common shareholders by the weighted average number ofcommon shares outstanding during the year, after giving retroactive effect toany stock dividend declarations.

 

DilutedEPS is calculated in the same manner assuming that, at the beginning of theyear or at the time of issuance during the year, all outstanding options areexercised and convertible preferred shares are converted to common shares.Outstanding stock options will have a dilutive effect under the treasury stockmethod only when the average market price of the underlying common share duringthe period exceeds the exercise price of the option.  

 

Wherethe effects of the assumed conversion of the preferred shares and the exerciseof all outstanding options have anti-dilutive effect, basic and diluted EPS arestated at the same amount.

*** ***

***SegmentReporting***

*** ***

Segmentassets include operating assets used by a segment and consist principally ofoperating cash, receivables, inventories and property, plant and equipment, netof allowances and provisions.  Segment liabilities include all operatingliabilities and consist principally of accounts payable, accrued expenses andlong-term debt.  Segment assets and liabilities do not include deferred incometaxes.

 

Segmentrevenues, segment expenses and segment performance include transfers betweenbusiness segments.  The transfers are accounted for at competitive marketprices charged to unaffiliated customers for similar products.  Such transfersare eliminated in our consolidation.

 

*Use of Estimates*
 

Thepreparation of financial statements in conformity with generally accepted accountingprinciples 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 financial statements, and revenue andexpenses during the period reported.  Actual results could differ from ourestimates.

 

***Adoptionof New Statements of Financial Accounting Standards, or SFAS/InternationalAccounting Standards, or IAS***

 

Weadopted the following SFAS/IAS, which became effective on January 1, 2003:

 
-  SFAS 10/IAS 10, “Events After the Balance Sheet Date”;    - SFAS 22/IAS 22, “BusinessCombinations”;      - SFAS 37/IAS 37, “Provisions,Contingent Liabilities and Contingent Assets”; and         - SFAS 38/IAS 38, “IntangibleAssets”.      The effects of adopting SFAS 38/IAS 38 are discussed in *Note**– 3, Accounting Changes, Investment in ePLDT*.  Additional disclosure requirements by the newstandards were included in the financial statements where applicable.     ***New Accounting Standards Effective Subsequent to******March 31, 2003***     The ASC has approved the following accounting standards,which will be effective subsequent to 2003:          - SFAS 17/IAS 17, “Leases”, whichprescribes the accounting policies and disclosures to be applied to finance andoperating leases.  Finance leases are those that transfer substantially allrisks and rewards of ownership to the lessee.  The standard provides certainguidelines on assessing whether leases or similar agreements would qualify asfinance leases.  We will adopt SFAS 17/IAS 17 when it becomes effective in 2004and based on current circumstances, we do not believe the effect of theadoption will be material; and            - SFAS 21/IAS 21, “The Effects ofChanges in Foreign Exchange Rates”, which provides restrictive conditions forthe capitalization of foreign exchange losses.  As of March 31, 2003, undepreciatedcapitalized foreign exchange losses on a consolidated and non-consolidatedbasis included in property, plant and equipment amounted to Php61,853 million and Php54,249million, respectively.  Upon adoption in 2005 of SFAS 21/IAS 21, the proposedtreatment is to adjust any undepreciated capitalized foreign exchange losses,net of exchange losses that qualify as borrowing cost and income tax effect,against beginning retained earnings, to the extent that amounts capitalized donot meet the conditions under the new standard, and to restate prior years’financial statements.  As of March 31, 2003, undepreciated capitalized foreignexchange losses that qualify as borrowing cost amount to approximately Php31,000 million on a consolidated basis and Php26,000 million on a non-consolidated basis.          
 
  **5.     ****Cashand Cash Equivalents**  ** **  This account consists of:  ** **  
 

**Consolidated**

 

**Non-Consolidated**

 

**March 31, 2003**

**(Unaudited)**

December 31,

2002 (Audited)

 

**March 31,**

**2003**

**(Unaudited)**

December 31,

2002 (Audited)

 

(in million pesos)

Cash on hand and in banks

**2,363**

3,053

 

**652**

856

Temporary investments

**10,208**

7,823

 

**2,247**

3,309

 

**12,571**

10,876

 

**2,899**

4,165
  ** **  Cashin banks earns interest at the prevailing bank deposit rates.  Temporaryinvestments are made for varying periods of up to three months depending on ourimmediate cash requirements, and earn interest at the prevailing short-termdeposit rates.        
 
  **6.     ****AccountsReceivable**  ** **  Thisaccount consists of receivables from:     
 

**Consolidated**

 

**Non-Consolidated**

 

**March 31,**

**2003**

**(Unaudited)**

December 31,

2002 (Audited)

 

**March 31,**

**2003**

**(Unaudited)**

December 31,

2002 (Audited)

 

(in million pesos)

Customers and carriers

**27,833**

26,675

 

**22,610**

22,601

Others

**2,261**

1,950

 

**2,821**

2,758

 

**30,094**

28,625

 

**25,431**

25,359

Less allowance for doubtful accounts

**9,171**

8,501

 

**6,375**

5,983

 

**20,923**

20,124

 
**19,056**

19,376

 

Receivables from carriers represent receivablesarising from interconnection agreements with other telecommunicationscarriers.  The aforementioned receivable balances are shown net of relatedpayables to the same telecommunications carriers.  

 

On June 30, 1999, PLDTentered into a Master Receivables Purchase and Sale Agreement, or MRPSA, with aforeign financial institution, or the Purchaser, under which PLDT sold to thePurchaser eligible receivables from certain foreign carriers in severaldiscrete sales.  Under this agreement, PLDT services, administers and collectsthe receivables on behalf of the Purchaser, and transfers all its rights ofownership to the Purchaser upon sale.  This facility was terminated on June 27, 2002.

 

On September 21, 2000,PLDT entered into a similar MRPSA with another foreign financial institutioncovering foreign carriers that were not included in the June 30, 1999agreement.  This second facility was terminated on September 18, 2002.

 

On October 10, 2002,PLDT entered into a Receivables Purchase Deed, or RPD, with a foreign financialinstitution, or the Purchaser, under which PLDT agreed (1) to sell itsreceivables from certain eligible foreign carriers for an advance payment ofUS$50 million and (2) to service, administer and collect the receivables onbehalf of the Purchaser.  The Purchaser shall have no recourse to PLDT shouldthe eligible carrier fail or refuse to settle the assigned/purchasedreceivables, except when PLDT commits a breach of its representations andwarranties under the RPD.

 

Sale of receivables under theRPD amounted to US$3 million (Php165 million)for the three months ended March 31, 2003.  No sale was made under the MRPSAagreements for the three months ended March 31, 2002.  

 

 

 

**7.     ****Inventoriesand Supplies**

 

This account consists of:

 

 

**Consolidated**

** **

**Non-Consolidated**

 

**March 31,**

**2003**

**(Unaudited)**

December 31,

2002 (Audited)

** **

**March 31,**

**2003**

**(Unaudited)**

December 31,

2002 (Audited)

 

** **

(in million pesos)

 

Spare parts and supplies

**2,234**

2,281

** **

**2,223**

2,272

Terminal and cellular phone units – net of allowance for inventory obsolescence of Php438 million in 2003 and Php434 million in 2002 in the consolidated financial statements

**1,946**

1,774

** **

**368**

369

Others

**456**

452

** **

**150**

68

 

**4,636**

4,507

** **

**2,741**

2,709

 

Spare parts and supplies issued to various projectsare included as part of property under construction shown under “Property,Plant and Equipment”. 

 

 

 

 

**8.     ****Property,Plant and Equipment**

** **

This account consists of:

** **

** **

**Cable and wire facilities**

**Central  office equipment**

**Cellular facilities**

**Buildings**

**Vehicles, furniture, and other work equipment**

**Commu- nications  satellites**

**Information origination/ termination equipment**

**Land  and land improvements**

**Property  under construction**

**Total**

*** ***

***(in million pesos)***

***Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

**At****December 31, 2002****(Audited)**

Cost

111,117

97,414

55,632

25,016

19,090

10,767

5,705

2,528

20,170

347,439

Accumulated depreciation, and amortization 

(23,671)

(31,717)

(18,587)

(4,467)

(11,536)

(3,088)

(2,108)

(240)

–

(95,414)

Net book value

87,446

65,697

37,045

20,549

7,554

7,679

3,597

2,288

20,170

252,025

**Three Months Ended****March 31, 2003****(Unaudited)**

Opening net book value

87,446

65,697

37,045

20,549

7,554

7,679

3,597

2,288

20,170

252,025

Additions/Transfers

1,470

1,175

1,516

554

376

33

71

(1)

(1,920)

3,274

Disposals/Retirement

(18)

–

(22)

(32)

(492)

–

(25)

(1)

–

(590)

Accumulated depreciation, and amortization

(1,265)

(1,650) 

(1,652)

(226)

(612)

(196)

(192)

(7)

–

(5,800)

Closing net book value

87,633

65,222

36,887

20,845

6,826

7,516

3,451

2,279

18,250

248,909

**At****March 31, 2003****(Unaudited)**

Cost

112,527

98,566

56,929

25,282

19,082

10,800

5,628

2,526

18,250

349,590

Accumulated depreciation, and amortization

(24,894)

(33,344)

(20,042)

(4,437)

(12,256)

(3,284)

(2,177)

(247)

–

(100,681)

Net book value

87,633

65,222

36,887

20,845

6,826

7,516

3,451

2,279

18,250

248,909

 

 

 

 

 

 

 

 

 

 

 

***Non-Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

 

**At****December 31, 2002****(Audited)**

Cost

101,912

96,245

–

23,143

11,358

–

5,441

2,116

18,652

258,867

Accumulated depreciation and amortization 

(22,685)

(31,377)

–

(3,544) 

(8,290) 

–

(2,013)

(236)

–

(68,145)

Net book value

79,227

64,868

–

19,599

3,068

–

3,428

1,880

18,652

190,722

**Three Months Ended****March 31, 2003****(Unaudited)**

Opening net book value

79,227

64,868

–

19,599

3,068

–

3,428

1,880

18,652

190,722

Additions/Transfers

1,187

1,135

–

252

241

–

66

(3)

(1,320)

1,558

Disposals/Retirement

 

 

 

 

 

 

 

 

 

 

Accumulated depreciation and amortization 

(1,046)

(1,606)

–

(160)

(231)

–

(172)

(6)

–

(3,221)

Closing net book value

79,368

64,397

–

19,691

3,078

–

3,322

1,871

17,332

189,059

**At****March 31, 2003****(Unaudited)**

Cost

103,039

97,374

–

23,395

11,576

–

5,383

2,114

17,332

260,213

Accumulated depreciation and amortization 

(23,671)

(32,977)

–

(3,704)

(8,498)

–

(2,061)

(243)

–

(71,154)

Net book value

79,368

64,397

–

19,691

3,078

–

3,322

1,871

17,332

189,059

 

Substantiallyall our telecommunications equipment is purchased outside the Philippines.A significant source of financing for such purchases is foreign loans thatrequire repayment in currencies other than Philippine pesos, principally inU.S. dollars (see *Note 12 – Long-term Debt*).  Interest and net foreignexchange losses (gains) capitalized to property, plant and equipment for thethree months ended 

March 31, 2003and 2002 were as follows:

 

**Consolidated**

** **

**Non-Consolidated**

** **

**Three Months Ended March 31**

 

**2003**

2002

 

**2003**

2002

 

(Unaudited)

 

(in million pesos)

Interest

**270**

386

 

**263**

325

Foreign exchange losses (gains) - net

**1,111**

(1,388)

 

**910**

(1,135)

 

Asof March 31, 2003 and December 31, 2002, the undepreciated capitalizednet foreign exchange losses amounted to Php61,853 million and Php62,049million, respectively, on a consolidated basis and amounted to Php54,249million and Php54,395 million, respectively, on a non-consolidated basis.  

 

In2001, Smart revised the estimated remaining useful lives of certain of itsanalog network assets from 6.8 years to 2.25 years to reflect the effects ofobsolescence, continuing decline in analog subscribers, competition and othereconomic factors which are considered to have shortened the economic usefullives of these assets.  As a result, depreciation charges increased by Php360million for the three months ended March 31, 2002.In June 2002, the estimated useful lives of these assets were further revisedto effectively end by December 2002.  Having complied with the requirements setout by the NTC, Smart closed down the operation of its analog network on December 31, 2002.

 

Underthe terms of certain loan agreements and other debt instruments, PLDT may notcreate, incur, assume or permit or suffer to exist any mortgage, pledge, lienor other encumbrance or security interest over the whole or any part of itsassets or revenues or suffer to exist any obligation as lessee for the rentalor hire of real or personal property in connection with any sale and leasebacktransaction.

 

 

 

**9.     ****Investments**

 

This account consists of:

** **

 

**Consolidated**

 

**Non-Consolidated**

 

**March 31,  2003****(Unaudited)**

** **

December 31, 2002 (Audited)

 

** **

**March 31,  2003****(Unaudited)**

** **

December 31, 2002 (As restated -

Note 3)

 

 

(in million pesos)

 

Investments in shares of stock:

 

** **

 

 

 

Cost:

 

** **

 

 

 

Common

**5,919**

5,920

 

**26,476**

26,425

Preferred

**9,223**

9,309

 

**18,291**

18,296

 

**15,142**

15,229

 

**44,767**

44,721

Less cost of investment in Piltel

**(11,801)**

(11,801)

 

**(11,801)**

(11,801)

 

**3,341**

3,428

 

**32,966**

32,920

Accumulated equity in net losses of investees

**(11,915)**

(11,909)

 

**(5,056)**

(7,348)

Less accumulated equity in net losses of Piltel 

**11,801**

11,801

 

**11,801**

11,801

Net accumulated equity in net income (losses) of investees (Note 14)

**(114)**

(108)

 

**6,745**

4,453

Total cost and accumulated equity in net income of investees

**3,227**

3,320

 

**39,711**

37,373

Investments in debt securities

**2,150**

2,150

 

**2,052**

2,052

Total

**5,377**

5,470

 

**41,763**

39,425

Investments in shares of stock:

** **

 

 

** **

 

At equity:

** **

 

 

** **

 

Smart 

**–**

–

 

**34,974**

32,205

ACeS Philippines

**–**

–

 

**1,768**

1,822

Mabuhay Satellite 

**–**

–

 

**1,320**

1,299

ePLDT 

**–**

–

 

**190**

632

Subic Telecom 

**–**

–

 

**708**

727

Clark Telecom 

**–**

–

 

**224**

221

Telesat 

**–**

–

 

**190**

179

SNMI

**–**

–

 

**115**

115

BCC

**–**

**–**

 

**93**

–

MaraTel

**–**

–

 

**77**

75

PLDT Global

**–**

–

 

**3**

3

Others

**25**

31

 

**–**

–

 

**25**

31

 

**39,662**

37,278

At cost:

** **

 

 

** **

 

ACeS International Limited 

**1,614**

1,614

 

**–**

–

Mabuhay Space Holdings Limited

**885**

885

 

**–**

–

Stradcom International Holdings, Inc.

**616**

616

 

**–**

–

Piltel (Note 3)

**–**

–

 

**–**

–

Others

**87**

174

 

**49**

95

 

**3,202**

3,289

 

**49**

95

Total

**3,227**

3,320

 

**39,711**

37,373

 

Themovements in our net accumulated equity in net income (losses) of investees canbe accounted for as follows:

 

** **

**Consolidated**

** **

**Non-Consolidated**

 

**March 31,  2003****(Unaudited)**

** **

December 31, 2002 (Audited)

 

** **

**March 31,  2003****(Unaudited)**

** **

December 31, 2002 (As restated -

Note 3)

 

 

(in million pesos)

 

Accumulated equity in net losses of investees at beginning of period

**(11,908)**

(7,739)

 

**(7,347)**

(6,352)

Equity in net (losses) income of investees, including goodwill amortization and provision for impairment in value of investment for the period

**(4)**

(4,163)

 

**2,291**

344

Dividends received and others

**(3)**

(7)

 

**–**

(1,340)

Accumulated equity in net losses of investees at end of period

** **

**(11,915)**

(11,909)

 

** **

**(5,056)**

(7,348)

Less accumulated equity in net losses of Piltel

**11,801**

11,801

 

**11,801**

11,801

Net accumulated equity in net income (losses) of investees

**(114)**

(108)

 

**6,745**

4,453

 

***Investmentin Piltel***

 

Piltelhas experienced significant financial difficulties arising from several factorsaffecting its business.  In 1999, it imposed a moratorium on payment of itsoutstanding indebtedness and began negotiations for the restructuring of itsindebtedness to financial creditors.  On June 4, 2001, Piltelcompleted the restructuring of approximately Php41billion of indebtedness and other claims, representing approximately 98% of itstotal liabilities as of that date, including its contingent liability toMarubeni Corporation, or Marubeni, arising out of a Build-Transfer Agreementbetween Piltel and Marubeni.

 

Underthe terms of the debt restructuring, 50% of Piltel’s debt was cancelled inexchange 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 14 – Stockholders’ Equity*for the terms of the PLDT convertible preferred shares.

 

InJune 2002, holders of Piltel’s Series B, Class II Non-Convertible PreferredStock, which had an aggregate redemption amount of Php102million (including accrued dividends of Php20million up to June 4, 2001), agreed to participate in the debt restructuringplan.  Consequently, 50% of the redemption amount was released in exchange for150,500 shares of Series K, Class I Convertible Preferred Stock of Piltel, orone share of Piltel’s Convertible Preferred Stock for every Php340 of the redemption amount, which were thenexchanged for 30,100 shares of PLDT’s Series V Convertible Preferred Stock.See *Note 14 – Stockholders’ Equity*for the terms of PLDT ConvertiblePreferred Stock.  The remaining 50% of the redemption amount was exchanged fora participation in the “Term Notes Facility” as described in the foregoing.

 

InOctober 2002, holders of Piltel’s convertible bonds, which had a redemptionamount of US$7.7 million (principal amount of US$5.8 million includingaccretion costs up to June 4, 2001), agreed to participate in the debtrestructuring plan.  Consequently, 50% of the redemption amount was released inexchange for 532,500 shares of Piltel’s Series K, Class I Convertible PreferredStock or one Piltel convertible preferred share for every Php340 of the redemption amount, which were thenexchanged for 106,500 shares of PLDT’s Convertible Preferred Shares.  In 2002,only 70,435 shares of Piltel’s Series K, Class I Convertible Preferred Stockwere exchanged for 14,087 shares of PLDT’s Series VI Convertible PreferredStock.  Upon receipt of tax clearance from the Bureau of Internal Revenue, orBIR, on March 31, 2003, the remaining 462,065 shares of Piltel’s Series K,Class I Convertible Preferred Stock were exchanged for 92,413 shares of PLDT’sConvertible Preferred Stock.  The remaining 50% of the redemption amount wasexchanged for a participation in the “Conversion Notes Facility”.  

 

Summarized below are the principal terms of therestructured debt of Piltel: 

** **

 

**10-Year Loans**

**15-Year Loans**

**Term Notes Facility**

**Convertible 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

 

As of March 31, 2003 and December 31, 2002, total long-term debt of Piltel amounted to Php22,287million and Php22,124million, respectively, with maturities of up to June 14, 2016, consists of the following: 

 

** **

**March 31, 2003****(Unaudited)**

December 31, 2002 (Audited)

** **

** **

(in millions)

** **

**Restructured debt**

** **

** **

 

 

Philippine Pesos

** **

** **

 

 

10 year Tranche B

 

**Php****2,166**

 

Php2,166

15 year Tranche C

 

**2,166**

 

2,166

15 year Term Notes Facility

 

**293**

 

293

 

 

**4,625**

 

4,625

U.S. Dollars

 

 

 

 

10 year Tranche B

**US$33**

**1,780**

US$33

1,768

15 year Tranche C

**33**

**1,780**

33

1,768

15 year Conversion Notes Facility

**122**

**6,491**

122

6,449

 

**US$****188**

**10,051**

US$188

9,985

Japanese Yen

** **

** **

 

 

10 year Tranche B

**JPY 7,822**

**3,557**

JPY 7,822

3,510

15 year Tranche C

**7,822**

**3,557**

7,822

3,510

 

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

**7,114**

JPY 15,644

7,020

Total

 

**21,790**

 

21,630

**Unrestructured debt**

** **

** **

 

 

U.S. Dollars

 

 

 

 

Banks

**US$6**

**333**

US$6

331

Convertible bonds

**2**

**121**

2

120

 

**US$****8**

**454**

US$8

451

**Liabilities under capital lease**

 

**43**

 

43

 

 

**Php22,287**

 

Php22,124

 

Pilteldid not comply with the terms of convertible bonds with principal amount ofUS$2 million and US$6 million of other U.S. dollar denominated debt.

 

Piltelis currently in the process of finalizing the terms under which the holder ofthe US$6 million debt would participate in the debt restructuring.

 

Piltelmay not be able to restructure or otherwise pay the claims relating to its unrestructureddebt.  However, default on and acceleration of Piltel's unrestructuredindebtedness do not create a cross-default under Piltel's restructuredindebtedness or any indebtedness of PLDT.

 

If Piltel’snon-participating creditors take forceful measures to enforce their claims, itis possible that Piltel would be required to submit itself to acourt-supervised rehabilitation proceeding or an involuntary insolvencyproceeding seeking liquidation.  All of Piltel’s creditors that participated inthe debt restructuring agreed in connection with the debt restructuring thatthey would submit Piltel to a rehabilitation proceeding in those circumstancesand petition for the adoption of a plan of rehabilitation that includes thefinancial terms of the debt restructuring plan.  However, the laws andprocedures governing a rehabilitation proceeding in the Philippine courtsremain untested in significant respects.  It cannot be assured that arehabilitation plan which incorporates the financial terms of the debtrestructuring 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. 

 

Untilall amounts owed to participating creditors have been paid or discharged, PLDTwill not be permitted to demand or receive any payment, redeem, or distributein respect of any present and future liability owed by Piltel to PLDT or anyaffiliate of PLDT, subject to specified exceptions.  These liabilities includeequity funding to Piltel and other financial indebtedness owed by Piltel toPLDT 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 severe long-term restrictions significantly impair Piltel’sability to transfer funds to PLDT.  In addition, PLDT is subject to contractualrestrictions in the amount of financial support it can provide to Piltel underthe Letter of Support.

 

PLDTissued a Letter of Support for the benefit of Piltel and its creditors underwhich PLDT has 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 of Support, PLDT will provide funding to Piltel in the eventthat the cash flow from Piltel’s operations falls short of amounts required byit to discharge in full its obligations to any creditor of Piltel or any of itsoperating and financing subsidiaries and affiliates.  PLDT is subject tocontractual restrictions limiting the amount of financial support it canprovide to Piltel up to US$150 million.  The undrawn balance under the Letterof Support was US$50 million, approximately Php2,693million as of March 31, 2003 and Php2,676 million as of December 31, 2002, after taking into account PLDT’s investments in Piltel as of andsubsequent to March 23, 2000.  

 

Thecontinued operation of Piltel as a going concern is dependent upon amountsavailable to it under the Letter of Support and its ability to generatesufficient cash flows to meet its obligations on a timely basis, to comply withthe provisions of the restructuring agreements it has entered into, and toobtain additional financing, as may be necessary.  

 

In2001, Piltel wrote down assets valued at Php13,984million, which was reflected in Piltel’s accounts as of December 31, 2001.The write-down, as approved by Piltel’s Board of Directors, was a result of Piltel’sdecision to scale down its Advanced Mobile Phone System, or AMPS, and CodeDivision 

MultipleAccess System, or CDMA networks, beginning the second half of 2001 due to Piltel’srecent success in marketing its GSM prepaid service using the GSM network ofSmart and the difficulty experienced in sourcing analog/CDMA handsets.

 

Piltel’snet worth amounted to Php1,900 million as of December 31, 2001 after taking into account the debt restructuring andassets write down.  The balance of PLDT’s investments as of December 31, 2001 in Piltel amounted to Php948 million, representing theequity in net assets as of that date.

 

InDecember 2002, Piltel recognized impairment losses in respect of its AMPS/CDMAand Executive Order, or EO 109 assets valued at Php4,737million and Php12,054 million, respectively.  For the AMPS/CDMA assets,the impairment resulted from Piltel’s decision to deactivate all its AMPS/CDMAcell sites as the revenues generated from its AMPS/CDMA postpaid and prepaidservices could no longer support the cost of operating the network.  Piltel’srevenues from its AMPS/CDMA postpaid and prepaid services declined considerablyin 2002 with the sustained success of Piltel’s and other cellular operators’prepaid GSM service.

 

Theimpairment of EO 109 assets brought down the net book value of these assets totheir recoverable value, which was estimated using the net present value offuture cash flows from the EO 109 postpaid service.  Cash flows from the EO 109prepaid or limited mobility service were no longer considered in computing therecoverable value of the EO 109 assets as Piltel had to terminate this servicein February 2003.  Revenues from the EO 109 prepaid or limited mobilityservice, which uses N-AMPS cellular technology, were likewise unfavorablyaffected by the success of Piltel’s and other cellular operators’ prepaid GSMservice.

 

Thecurrent level of operation of Piltel indicates that it is unlikely thatresidual amounts may be realized by PLDT from its investments in Piltel.  Piltelhad a total negative net worth of Php19,460million as of March 31, 2003 as a result of continuing losses of Piltel andimpairment losses amounting to Php16,790million in 2002 in respect of its AMPS/CDMA and EO 109 assets.  

 

Accordingly,in 2002, PLDT wrote down Php1,519 million,representing the balance of PLDT’s investments in Piltel amounting to Php948 million as of December 31, 2001 and Php571 million drawings under the Letter of Supportin 2002, and recorded liability on its balance sheet of approximately Php2,676 million in respect of the undrawn balanceof the Letter of Support amounting to US$50 million as of December 31, 2002.  

 

***Subscriptionfor Smart Preferred Shares***

 

Onvarious dates in 2001 and 2000, PLDT entered into Subscription Agreements withSmart under which PLDT subscribed for a total of 762 million preferred sharesof Smart at Php13.875 per share, or anaggregate subscription price of Php10,578million.  As of December 31, 2002, the subscription price of said preferred shares hadbeen fully paid. 

 

OnDecember 12, 2002, Smart redeemed 299 million out of 762 million preferredshares subscribed by PLDT in 2001 and 2000 at a redemption price of Php13.875 per share, or a total redemption price of Php4,150 million.

 

Thepreferred shares of Smart have the same dividend rights as its common sharesand are convertible at any time at the option of the shareholder, at aconversion ratio of one common share for each preferred share.  These preferredshares are redeemable at any time at the option of Smart, provided that theconversion right of the shareholder shall prevail over the redemption right ofSmart.

 

On December 9, 2002,PLDT transferred and conveyed to Smart certain inland and submarine domesticfiber optic cable loops, digital transmission equipment and correspondingnetwork management systems with an aggregate net book value of Php4,138 million, as consideration and in exchangefor 298 million preferred shares of Smart subscribed by PLDT at Php13.875 per share. 

 

***Investmentin ePLDT***

 

InAugust 2000, PLDT incorporated ePLDT to serve as the principal corporatevehicle for PLDT’s information and communications technology initiatives andventures.  As of March 31, 2003, ePLDT held interests in a number of businesses,which include: 

 

a.      Internet Data Center under the brand name VitroÔ; 

b.      100% investment in Vocativ SystemsInc., a 500-seat call center facility that commenced full commercial operationsin April 2002 exclusively for clients of a global provider of customerrelationship management services; 

 

c.      100% investment in ParlanceSystems, Inc., a 520-seat call center facility that commenced full commercialoperations in June 2002 exclusively for one of the largest direct-to-homesatellite service providers in the United States for customer support andbilling requirements;

 

d.      100% owned subsidiary, mySecureSign,Inc., a principal affiliate of VeriSign, Inc., which is the largestcertification authority and issuer of digital certificates worldwide thatcommenced full commercial operations in January 2002; 

 

e.      100% owned subsidiary, iPlusIntelligent Network, Inc., which provides IT helpdesk/contact center solutionsand terminals for credit, debit and cash card transaction;

 

f.       100% owned subsidiary, SideraTechnologies, Inc., which is engaged in the business of designing and managing reloadablechip-based cards;

 

g.      99.6% investment in InfocomTechnologies Inc., an Internet service provider;

 

h.      80% investment in DigitalParadise, Inc. incorporated on July 23, 2002, which is engaged in the retailingof computer products;

 

i.        51% equity interest in ContactWorld, Inc., a joint venture company with Salmat Pty Limited of Australiaengaged in the call center business;

 

j.        45% interest in Mind Stream, Inc.,an information technology or IT learning center under license with the NationalInstitute of Information Technology, or NIIT, of India for IT courseware;

 

k.      Investment in debt securitieswhich is convertible into 40% of the total capital stock of NetopiaTechnologies, Inc., the leading branded internet café chain in the Philippines; 

 

l.        22.5% interest in convertiblesecurities of Stradcom International Holdings, the parent company of StradcomCorporation which has an existing build-own-and-operate agreement with thePhilippine government for the computerization of the nationwide operations ofthe Land Transportation Office; and

 

m.    20.5% equity interest in thePhilippine e-procurement joint venture, BayanTrade Dotcom, Inc.

 

OnAugust 20, 2002, ePLDT sold to Directories Philippines Corporation its 51%interest in eYP.ph Corporation and assigned and transferred its deposit forfuture subscription of Php12 million to thecommon capital stock, in exchange for the latter’s receivables of Php30 million from PLDT.

 

ePLDThad an initial authorized capital stock of Php1billion, which was increased in May 2001 to Php4 billion.As of March 31, 2003, PLDT had subscribed for 1,672 million shares of ePLDT’scommon capital stock for which PLDT partially paid cash of Php550 million.  The balance was fully paid by: (a)offsetting against PLDT’s receivables from ePLDT amounting to Php450 million, (b) transferring to ePLDT 19 millionInfocom shares held by PLDT valued at Php135million, (c) transferring to ePLDT certain areas of PLDT’s Information SystemsData Center valued at Php270 million, and (d)transferring to ePLDT a portion of PLDT’s Jupiter property valued at Php267 million.

 

***Investmentin MaraTel***

 

InJune 2001, PLDT acquired 2,439,060 common shares of MaraTel for a totalconsideration of Php451 million.  The sharesrepresent 92.3% of the issued and outstanding common stock of MaraTel. 

 

MaraTelis a franchised operator of telecommunications services in the province of Lanao del Norteand the cities of Iligan and Marawi.  It has been in operation for fifty yearswith 16,990 subscribers and a switch capacity of 34,800 digital lines as of March 31, 2003.  

 

In2002, PLDT acquired an additional 134,237 common shares for a consideration of Php1 million.  Accordingly, PLDT’s interest in MaraTelincreased from 92.3% to 97.5%.

 

Theacquisition of a controlling stake in MaraTel is expected to improve PLDT’sexisting coverage in Mindanao.

 

***Investmentin PLDT Global***

 

PLDTGlobal is a wholly owned subsidiary incorporated with a view of positioningPLDT as a major full service global telecommunications player through a strategyof establishing points of presence in key cities worldwide.

 

Theauthorized capital stock of PLDT Global consists of 50,000 shares with a parvalue of US$1 per share.

 

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

 

Asof March 31, 2003, ACeS Philippines had a 20.2% investment in ACeSInternational Limited, or AIL, a company incorporated under the laws of the island of Bermuda.  AILowns the Garuda I satellite and the related system control equipment in Batam, Indonesia.

 

InDecember 1998, AIL and its 95% owned subsidiary, PT Asia Cellular Satellite,entered into an Amended and Restated Credit Agreement, or Amended Agreement, toamend the original Credit Agreement entered into by PT Asia Cellular Satelliteand its bank creditors in 1997.  Under the Amended Agreement, AIL has, amongothers, assigned to the banks as collateral all of its tangible properties,including the Garuda Satellite, the system control facilities and systemcontrol equipment.  On September 30, 2002, PT Asia Cellular Satellite, AIL, asguarantor, P.T. Bank International Indonesia, as security agent, and variousbanks signed a Rescheduling Agreement, which amended the terms of the Amendedand Restated Credit Agreement dated December 29, 1998 moving the principalrepayment dates to agreed periods with the final maturity date on January 31,2012.  

 

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

 

On July 18, 1996, MabuhaySatellite entered into a Joint Venture Agreement with Space Systems/Loral Inc.,or SS/L, to form Mabuhay Space Holdings Limited, or MSHL, for the purpose ofproviding high-power Ku-Band satellite transmission services using the payloadwhich was added by SS/L aboard Agila II.  

 

Underthe terms of the Agreement, SS/L is required to convey title to the AdditionalPayload to MSHL in consideration for SS/L’s 35% equity interest in MSHL andMSHL is required to pay SS/L US$19 million for a 65% equity interest in MSHL.

 

On February 24, 2000,SS/L filed a Notice of Default and Termination against MSHL arising from thelatter’s alleged failure to amicably resolve its alleged unpaid obligation toSS/L under the JVA.  In 2002, the Arbitration panel handed down its decisionand provided for payment by MSHL to SS/L of the principal amount of US$10million plus annual interest at the rate of 9%.  Management believes that theadverse opinion does not have an impact on the results of MSHL operation sincesubstantial portion of the liability to SS/L has been accrued in the books asof March 31, 2003.

 

Themanagement of Mabuhay Satellite expects that control over the joint venturewill be temporary.  Accordingly, Mabuhay Satellite accounts for its investmentin the joint venture under the cost method.

 

***Investmentin BCC***

 

InFebruary 2003, PLDT entered into a separate Deed of Assignment of Subscriptionwith Smart and Fort Bonifacio Development Corporation, or FBDC, where Smart andFBDC assigned, transferred and conveyed in favor of PLDT their totalsubscription of 750,000 common shares and 750,000 preferred shares of BCC andall their interest and rights therein for a total consideration of Php93 million.  The assignments include subscriptionpayable aggregating Php68 million. The sharesrepresent 75% of the subscribed capital stock of BCC.

 

BCCwas incorporated primarily to own, construct, establish, maintain, lease andotherwise operate, to the extent allowed by law, communication infrastructureand to provide related services, including but not limited to, value-addedservices, within the Fort Bonifacio Global City and Villamor Air Base.

 

***Investmentsin Debt Securities***

 

*UnilinkCommunications Corporation*

* *

PLDT’stotal investments in convertible notes of Unilink Communications Corporation,or Unilink, amounted to Php2,052 million as ofMarch 31, 2003 and December 31, 2002.

 

Thesenotes are convertible into shares of common stock of Unilink or The PhilippineHome Cable Holdings, Inc., or Home Cable, at the option of the holder, when thelaw limiting the ownership of cable television systems to Philippine citizensor corporations, which are 100% owned by Philippine citizens is eventuallychanged.  Unilink is a Philippine corporation owning all the outstanding commonshares of Home Cable, which is also a Philippine corporation licensed to own,maintain and operate a cable television system in the Philippines.

 

Allof Unilink’s shares in Home Cable have been pledged to a group of lenders assecurity for a loan of Home Cable.  On April 10, 2002,the loan agent, 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 share 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.  

 

 

 

**10. ****OtherNoncurrent Assets**

** **

This account consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**March 31,  2003****(Unaudited)**

** **

December 31, 2002 (As restated - 

Note 3)

** **

**March 31,  2003****(Unaudited)**

** **

December 31, 2002 (As restated - 

Note 3)

 

** **

(in million pesos)

 

Debt issuance expenses – net 

**2,419**

2,494

 

**1,089**

1,122

Refundable deposits

**481**

475

 

**206**

213

Others – net

**2,039**

1,708

 

**450**

278

 

**4,939**

4,677

 

**1,745**

1,613

 

 

 

**11. ****Accrued Expenses and OtherCurrent Liabilities**

 

This account consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**March 31,  2003****(Unaudited)**

December 31, 2002 (Audited)

 

**March 31,  2003****(Unaudited)**

December 31, 2002 (Audited)

 

** **

(in million pesos)

 

Accrued utilities and general expenses

**3,311**

2,888

 

**1,060**

1,142

Accrued interest on various loans (Note 12)

**3,278**

2,717

 

**2,525**

2,069

Unearned revenues on sale of prepaid cards (Note 3)

**2,501**

2,022

 

**433**

431

Accrual for payment for unused sick leave  and other employee benefits

**1,839**

1,452

 

**735**

584

Accrued taxes and other expenses

**1,335**

1,461

 

**903**

752

Others

**2,462**

1,991

 

**609**

559

 

**14,726**

12,531

 

**6,265**

5,537

 

 

 

**12. ****Long-term Debt******

** **

Thisaccount consists of outstanding indebtedness of the following:

 

 

Consolidated
 

**March 31,  2003****(Unaudited)**

December 31, 2002 (Audited)

 

(in million pesos)

PLDT

**137,400**

139,324
Smart

**21,392**

22,891

Mabuhay Satellite

**4,962**

5,356

ePLDT

**150**

150

MaraTel

**38**

42

 

**163,942**

167,763

Less current portion

**19,087**

19,176

 

**144,855**

148,587

 

Aftergiving effect to the anticipated application of existing refinancingfacilities, the scheduled maturities of outstanding long-term debt as of March 31, 2003 are asfollows:

 

**Year**

**Consolidated**

**Non-Consolidated**

 

(in million pesos)

2003(1)

14,625

9,486

2004

22,304

15,034

2005

28,533

21,198

2006

26,025

20,372

2007 and onwards

72,455

71,310

 

(1)    April 1, 2003 through December 31, 2003

 

***PLDT***

 

PLDT'saggregate outstanding indebtedness is broken down as follows:

 

**Description**

**March 31, 2003****(Unaudited)**

December 31, 2002 (Audited)

 

(In Millions)

**U.S. Dollars**

** **

** **

 

 

Export Credit Agencies-Supported Loans

 
 

 

 

Kreditanstalt fur Wiederaufbau

**US$429**

**Php22,997**

US$437

Php23,265

JBIC/Co-financing Banks

**79**

**4,236**

87

4,657

Others 

**153**

**8,201**

161

8,575

 

**661**

**35,434**

685

36,497

Fixed Rate Notes

**1,482**

**78,206**

1,487

78,067

Term Loans

**154**

**8,239**

172

9,166

 

**US$2,297**

**121,879**

US$2,344

123,730

**Japanese Yen**

** **

** **

 

 

Term Loans 

**JP¥15,418**

**6,998**

JP¥15,641

7,049

JBIC OIL

**9,760**

**4,438**

9,760

4,379

** **

**JP¥****25,178**

**11,436**

JP¥25,401

11,428

**Philippine Pesos**

** **

** **

 

 

Peso Fixed Rate Corporate Notes

** **

**2,540**

 

2,540

Term Loans

** **

**1,545**

 

1,626

 

** **

**4,085**

 

4,166

 

** **

**137,400**

 

139,324

Less current portion

** **

**11,857**

 

11,962

 

** **

**Php125,543**

 

Php127,362

 

Theeffective average interest rates applicable to the above indebtedness are asfollows:

 

 

**March 31, 2003****(Unaudited)**

December 31, 2002 (Audited)

 

** **

 

Dollar-denominated loans

**8.1%**

8.3%

Yen-denominated loans

**1.4%**

1.2%

Peso-denominated loans

**13.7%**

13.8%

 

*ExportCredit Agencies-Supported Loans*

 

Inorder to obtain imported components for our network infrastructure inconnection with our expansion and service improvement programs, we haveobtained loans extended and/or guaranteed by various export credit agencies.These financings account for a significant portion of PLDT's indebtedness.

 

Kreditanstaltfur Wiederaufbau, or KfW, a German state-owned development bank, is our largestsingle creditor.  As of March 31, 2003, we owed US$429 million aggregate principal amount ofdebt to KfW, as follows:

 
- US$321 million provided undervarious export credit agency-backed facilities, of which US$265 million is inconnection with our expansion and service improvement programs and US$56million in connection with a refinancing facility; and       - US$108 million provided for the15% downpayment portion and credit facilities without guarantee/insurance coverfrom the export credit agencies, of which US$13 million is in connection with arefinancing facility.     OnJanuary 25, 2002, PLDT signed two loan agreements with KfW that provide PLDTwith a new US$149 million facility to refinance in part the repaymentinstallments under its existing loans from KfW due from January 2002 toDecember 2004.  The facility is a nine-year loan, inclusive of a three-yeardisbursement period and a two-year grace period during which no principal ispayable.  It partly enjoys the guarantee of HERMES, the export credit agency ofthe Federal Republic of Germany.  Disbursements under this facility, which aremade as the KfW loans to be repaid fall due, are currently available.  We havedrawn US$69 million (Php3,720 million) underthis facility as of March 31, 2003.       Aftergiving effect to the refinancing of facilities, US$31 million of our KfW loanswill mature in 2003, US$39 million in 2004, US$82 million in 2005, US$57million in 2006 and US$220 million in 2007 and onwards.  Principal and intereston these loans are generally payable in equal semi-annual installments.     PLDThas also obtained loans extended and/or guaranteed by other export creditagencies, including Japan Bank for International Cooperation, or JBIC,(formerly the Export-Import Bank of Japan), the Export-Import Bank of theUnited States, and the respective export credit agencies of France, Italy,Israel, Sweden, Denmark, Canada, Australia, the United Kingdom and Singapore,in the aggregate outstanding principal amount of US$232 million and US$248million as of March 31, 2003 and December 31, 2002, respectively.  Of theseloans, US$44 million will mature in 2003, US$60 million in 2004, US$49 millionin 2005, US$40 million in 2006 and US$39 million in 2007 or later.     *FixedRate Notes*     PLDThas nine series of non-amortizing fixed rate notes outstanding as of March 31, 2003, asfollows:     
**Principal Amount**

 

**Issue Date**

**Interest Rate**

** **

**Maturity**

 

 

 

 

 

 

US$62,030,000

 

June 28, 1996

8.500%

 

June 30, 2003

US$77,802,000

 

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
     OnMay 2, 2002, PLDT issued 10.625% Notes due 2007 in the aggregate principalamount of US$100 million and 11.375% Notes due 2012 in the aggregate principalamount of US$250 million.  The net proceeds from the issuance of the notes wereused to effect the repurchase of (1) US$63 million in principal amount of our8.5% Notes due 2003 and US$117 million in principal amount of our 10.625% Notesdue 2004 validly tendered by holders in our tender offer and (2) US$10 millionin principal amount of our 10.625% Notes due 2004 and US$6 million in principalamount of our 9.875% Notes due 2005 from the open market, and to prepay orrepay various loans in the aggregate amount of US$125 million, of which US$53million (JP¥6,260) pertains to the Japanese yen term loan maturing in June 2003and US$52 million in connection with the US$150 million term loan maturing inDecember 2003.  The remaining proceeds were used to prepay or repay PLDT’sshort-term and other medium-term debts.     *TermLoans*     *LocalExchange Transfer Loans*     Inconnection with the transfer to PLDT of Smart's local exchange business, PLDTentered into loan agreements with Nederlandse Financierings-Maatschappij Voor OntwikkelingslandenN.V., or FMO, of the Netherlands, Exportkreditnamden, or EKN, of Sweden andExport Credits Guarantee Department, or ECGD, of the United Kingdom for loansin the principal amounts of US$135 million, US$36 million and US$27 million,respectively.  These loans were amended in August and September 2001 toincrease the maximum total debt to earnings before interest, income tax,depreciation and amortization or EBITDA ratio that PLDT on a non-consolidatedbasis is permitted to maintain during the terms of the respective loans.Approximately US$128 million of these loans was outstanding as of March 31, 2003.  TheFMO loan matures on September 1, 2007, while the EKN and ECGD loans mature on December 31, 2007.      *US$150Million Term Loan*     Inconnection with PLDT's fixed line expansion projects, PLDT obtained a US$150million term loan, which was subsequently assigned to Norddeutsche Landesbank Girozentrale,Singapore Branch, US$52 million of which was outstanding as of March 31, 2003.  Theoutstanding principal amount of this loan is payable at maturity on December 22, 2003 andwill be partly refinanced by a multi-currency refinancing facility describedbelow.     *JapaneseYen Term Loan*  * *  InDecember 1997, in connection with a refinancing of its maturing debt, PLDTobtained a Japanese yen term loan from a syndicate of foreign banks, JP¥12,359million of which was outstanding as of March 31, 2003.This loan has a final maturity on June 18, 2003and will be partly refinanced by a multicurrency refinancing facility describedbelow.     *JBICJP¥ 9,760 Million Overseas Investment Term Loan*     On July 26, 2002, PLDTsigned a loan agreement with JBIC for a credit facility of JP¥ 9,760 millionunder the JBIC’s Overseas Investment Loan (OIL) Program.  The loan, which wasdrawn on July 31, 2002, will be amortized semi-annually beginning March 21, 2005 andwill mature on March 21, 2008.     *JBIC4 Program of the Development Bank of the**Philippines*     Inconnection with the Asia Pacific Cable Network 2 project, PLDT entered into aloan agreement with Citibank, N.A., as facility agent, and a syndicate of banksin the aggregate principal amount of Php1,700million, of which about Php1,462 million wasoutstanding as of March 31, 2003.  The loan, which is funded under the Japan Bank forInternational Cooperation Facility for Private Sector Development of theDevelopment Bank of the Philippines, matures 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%
     *PesoFixed Rate Corporate Notes*     Inconnection with PLDT's service improvement and expansion programs, PLDT hasentered into two loan agreements, pursuant to each of which PLDT issued fixedrate corporate notes in three tranches.  Interest on each tranche is payablesemi-annually.     Underthe first loan agreement, PLDT borrowed an aggregate amount of Php1,500 million, of which Php230million matured on November 11, 2002, Php500 millionmatures on November 9, 2004, and Php770 millionon November 9, 2006.     Underthe second loan agreement, PLDT borrowed an aggregate amount of Php1,270 million, of which Php360million matures on June 9, 2003, Php100 million on June 9, 2005, and Php810 million on June 9, 2010.     *MulticurrencyRefinancing Facility*  * *  On September 4, 2002,PLDT signed a loan agreement with a syndicate of banks for a US$145 millionmulticurrency term loan facility consisting of Japanese yen and U.S. dollarcommitments of JP¥10,914 million and US$53 million, respectively.  Thisfacility, which has been split into two tranches to be drawn in June andDecember 2003, is intended to refinance a portion of the JP¥12,359 million andUS$52 million principal amounts outstanding as of March 31, 2003 under theJapanese yen syndicated term loan and a U.S. dollar term loan, respectively,both falling due in 2003.  The new syndicated facility will be amortizedsemi-annually beginning June 2004 and will mature in December 2006.     *Covenants*     Ourdebt instruments contain restrictive covenants and require us to comply withspecified financial ratios and other financial tests at relevant measurementdates, principally at the end of each quarterly period.     Thefinancial tests under our debt instruments, as amended, include maintaining apositive tangible net worth and compliance with the following ratios:         - interest coverage ratio,calculated on a non-consolidated basis and excluding PLDT’s equity share in netincome of investees, of not less than 150%, 180% or 200%;           - total debt to EBITDA on a non-consolidatedbasis of not more than 6.0:1 through March 2003, not more than 5.5:1 from June2003 to December 2003, not more than 5.0:1 from March 2004 to June 2004, notmore than 4.5:1 from September 2004 to December 2004 and not more than 4.0:1from 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 of atleast 1.1:1; and                   - debt to free cash flow ratio ofnot more 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 onwards.     Inaddition, some of PLDT's debt instruments contain covenants requiring PLDT tocomply with specified financial tests on a consolidated basis.  These include:                     - long-term debt to appraised valueof equity/tangible net worth of not more than 2.33:1;                       - total debt to EBITDA of not morethan 4.5:1 in 2003 and 2004, and not more than 4.0:1 in 2005 and thereafter; and                         - current ratio of not less than0.75:1 to 0.9:1.     Forpurposes of deriving appraised value of equity/tangible net worth, wedetermined the revaluation surplus in respect of PLDT’s properties.  PLDT’sproperties in service as of December 31, 1997 were reappraised by anindependent firm of appraisers to reflect their sound value, as part of NTC’sfinancial reporting requirements, based on the December 29, 1997 exchange rateof Php40.116 to US$1.00.  As of December 31, 1997,the sound value was Php225,966 million and therevaluation surplus was Php82,723 million.This reappraisal was approved by the NTC on January 28, 2000under NTC Case No. 98-183.  As of March 31, 2003and December 31, 2002, the revaluation surplus on PLDT’s 1997 appraisedproperties still in service, net of a 5% disallowance factor, amounted to Php43,347 million and Php44,984million, respectively.     Theprincipal factors that can negatively affect our ability to comply with thesefinancial ratios and other financial tests are depreciation of the pesorelative to the U.S. dollar, poor operating performance of PLDT and itsconsolidated subsidiaries, impairment or similar charges in respect ofinvestments or other assets that may be recognized by PLDT and its consolidatedsubsidiaries and increases in our interest expenses.  Interest expense mayincrease as a result of various factors including issuance of new debt, therefinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the peso, the lowering of PLDT’s credit ratings or the creditratings of the Philippines, increase in reference interest rates, and generalmarket conditions.  Since approximately 97% of PLDT's long-term debt isdenominated in foreign currencies, principally in U.S. dollars, many of thesefinancial ratios and other tests are negatively affected by any weakening ofthe peso.  The peso declined by 5% against the U.S. dollar to an average of Php54.074 to US$1.00 in the first quarter of 2003 from an average of Php51.583 to US$1.00 for the year 2002.In the first quarter of 2002 the peso depreciated by 0.5% to an average ofPhp51.250 to US$1.00 from Php51.009 to US$1.00 for the year 2001.  As ofMarch 31, 2003, the exchange rate was Php53.604to US$1.00, equivalent to a 0.7% depreciation of the peso relative to the rateat the end of 2002.       PLDT'sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of ourfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart and PLDT’sother subsidiaries and associates in assisting in complying withnon-consolidated covenants.     Wehave maintained compliance with all of our financial ratios and covenants asmeasured under our loan agreements.  However, if negative factors adverselyaffect our financial ratios, we may be unable to maintain compliance with theseratios and covenants or be unable to incur new debt.  Under some of our loanagreements, this ratio requirement will become more restrictive at the end ofthe second quarter of 2003 and will continue to become more restrictive inincrements thereafter, which will make it more difficult for PLDT to maintaincompliance with this ratio in the future.  Inability to comply with ourfinancial ratios and covenants or raise new financing could result in adeclaration of default and acceleration of some or all of our indebtedness.The terms of some of our debt instruments have no minimum amount forcross-default.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 150%, interest coverage ratio is the ratio of (x) PLDT'snon-consolidated after-tax net income, excluding equity in net income or lossesof investees after adding back interest charges, net of interest capitalized toconstruction, on all indebtedness for the 12 months immediately preceding thecalculation date to (y) the estimated aggregate interest charges payable, netof interest to be capitalized to construction, during the 365-day periodfollowing the calculation date on all of PLDT's indebtedness outstanding onsuch calculation date.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 180%, interest coverage ratio is the ratio of (x) our after-tax netincome for the 12 months immediately preceding the calculation date after: (a)adding back interest charges, depreciation, amortization and other non-cashcharges (including equity in net income or losses of investees but excludingprovision for doubtful accounts) and provision for income taxes, and (b)deducting capitalized subscriber acquisition costs, to (y) the estimatedaggregate interest charges payable during the 365-day period following thecalculation date on all of PLDT's indebtedness outstanding on such calculationdate.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 200%, interest coverage ratio is the ratio of (x) our after-tax netincome after adding back reserves for higher plant replacement costs, incometaxes, interest charges, depreciation and non-cash charges (including equity inthe net income or losses of investees and provision for doubtful accounts)during 12 consecutive months within the 15 calendar months immediatelypreceding the calculation date, to (y) the sum of (a) the estimated aggregateinterest charges on all indebtedness, net of interest capitalized toconstruction, plus (b) dividends on mandatorily redeemable preferred stock, ineach case scheduled to be paid during the 12 months following the calculationdate.     Non-consolidatedtotal debt to EBITDA is the ratio of (a) PLDT's total indebtedness (notincluding amounts payable by PLDT under the Letter of Support) to (b) netincome for the preceding 12 months, after adding back interest accrued on allindebtedness; depreciation, amortization and other non-cash charges (includingequity in net income or losses of investees, but excluding provision fordoubtful accounts) and provision for income taxes and deducting any capitalizedsubscriber acquisition costs.      Debtservice coverage ratio is the ratio of (x) PLDT’s cash flow from operationsafter adding back interest charges (to the extent previously deducted) plus (1)dividends received from subsidiaries 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.     Debtto free cash flow ratio is the ratio of (x) PLDT’s debt less PLDT’s closingcash balance of the last day of the calculation period to (y) PLDT’s cash flowfrom operations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from subsidiaries and interest incomereceived less (2) capital expenditures (excluding capitalized interest) andinvestments in subsidiaries or affiliates for the 12 months immediatelypreceding the calculation date.       Non-consolidatedlong-term indebtedness to appraised value of equity (or under some covenants,to tangible net worth) is the ratio of (a) PLDT's aggregate indebtedness (orportion of such indebtedness) due more than one year following the calculationdate and par value of all mandatorily redeemable preferred stock to (b) the sumof the aggregate par value of all of PLDT's outstanding common and convertiblepreferred stock (other than preferred stock subject to mandatory redemption),paid-in capital in excess of the par value of such stock, PLDT's retainedearnings, reserve for higher plant replacement costs and revaluation incrementarising from independent certified appraisals of PLDT's telephone plantapproved by the NTC.       Non-consolidatedcurrent ratio is the ratio of (x) non-consolidated current assets to (y)non-consolidated current liabilities, excluding from current liabilities 50% ofthe portion of long-term indebtedness due within one year of the calculationdate.       PLDT'sdebt instruments 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 assumingthe obligations of other persons;                                     - paying dividends or otherdistributions or redeeming, repurchasing or otherwise acquiring shares of PLDT’scapital stock;                                        - disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth;                                         - entering into management contractsproviding for the management of its business or operations by a third party;                                           - creating any lien or securityinterest;                                              - permitting set off against amountsowed to PLDT;                                               - merging or consolidating with anyother company;                                                 - entering into transactions withshareholders and affiliates; and                                                   - entering into sale and leasebacktransactions.      Underthe terms of PLDT's 10.625% Notes due 2007 and 11.375% Notes due 2012, we are requiredto comply with a number of additional covenants, including covenants that,subject to certain exceptions, restrict PLDT's ability to: (a) incur debt inthe event its ratio of debt to EBITDA (calculated on a non-consolidated basis,except in certain circumstances), after giving effect to the incurrence of suchdebt, would be less than 5.5 to 1 on or prior to December 31, 2003, 5.0 to 1from January 1, 2004 to December 31, 2004 and 4.5 to 1 thereafter and (b) paydividends on, repurchase or redeem its capital stock, make investments andprepay subordinated debt, among other things.  Subject to certain restrictions,these covenants also restrict our ability to sell assets and use the proceedsof these asset sales.       Incase of a change in control of PLDT, PLDT may be required to repurchase orprepay certain indebtedness.  Under the terms of the 10.625% Notes due 2007 and11.375% Notes due 2012, we are required to offer to purchase all outstandingnotes due 2007 and notes due 2012 for cash at a price of 101% of theirprincipal amounts plus accrued interest in the event that (a) the aggregate ofNTT Communications' and First Pacific's direct and indirect voting interest in PLDT'soutstanding capital stock having voting rights falls below 35% of such capitalstock, (b) any person or, in certain instances, group of persons, which is notcontrolled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT's outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stockand (c) if a rating agency then maintains a rating on either series of notes,the rating agency downgrades its credit rating on the series within 90 days (ormore, in certain circumstances) following notice of the occurrence of theevents specified in (a) and (b) above.     Underthe terms of PLDT’s JPY9,760 million loan from JBIC, in the event of anyproposed sale or transfer of PLDT's stock that would result in NTTCommunications holding less than 14.95% of PLDT's voting stock, we will berequired to prepay, immediately upon effectiveness of such sale or transfer,all principal outstanding under the loan, together with accrued interest.However, prepayment will not be required if, following such sale or transfer,(a) NTT Communications continues to have prior approval rights with respect toall matters as to which NTT Communications has approval rights under the stockpurchase agreement pursuant to which it acquired its shares in PLDT or (b)JBIC, in its sole discretion, determines that NTT Communications’ participationin the expansion of Smart's GSM network capacity to extend PLDT’s cellularbusiness in Smart would not be reduced below its level of participation as ofthe date of the loan agreement.     Underthe terms of the PLDT’s US$145 million multicurrency term loan facilityagreement, if any lender so requests in writing, PLDT shall prepay in full suchlender’s participation in the loan within 45 days from notification of thechange of control and no later than the date on which PLDT is required torepurchase its 10.625% Notes due 2007 and 11.375% Notes due 2012 (“Bonds”) frombondholders accepting the change of control offer in the event that (a) theaggregate of NTT Communications’ and First Pacific’s direct and indirect votinginterest in PLDT’s outstanding capital stock having voting rights fall below35% of such capital stock, (b) any person or, in certain instances, group ofpersons, which is not controlled directly or indirectly by First Pacific or NTTCommunications acquires a direct or indirect voting interest in PLDT’soutstanding capital stock having voting rights which equals or exceeds 35% ofsuch capital stock and (c) if a rating agency then maintains a rating on theBonds, the rating agency downgrades its credit rating on the Bonds within 90days (or more, in certain circumstances) following notice of the occurrence ofthe events specified in (a) and (b) above.     PLDT’sdebt instruments contain customary and other default provisions that permit thelender to accelerate amounts due or terminate their commitments to extendadditional funds under the debt 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 meet certainfinancial ratio covenants referred to above;                                                         - the occurrence of any materialadverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender;                                                            - the revocation, termination oramendment of any of the permits or franchises of PLDT in any mannerunacceptable to the lender;                                                             - the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender;                                                               - the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and                                                                 - other typical events of default,including the commencement of bankruptcy, insolvency, liquidation or winding upproceedings by PLDT.     ***Smart***     Smart’slong-term debt consists of:     
 

**March 31, 2003****(Unaudited)**

December 31, 2002 (Audited)

 

** **

(in millions)

 

U.S. Dollars

**US$379**

**Php20,359**

US$408

Php21,724

Philippine Pesos

** **

**1,033**

 

1,167

 

** **

**21,392**

 

22,891

Less current portion

** **

**6,114**

 

6,173

 

** **

**Php15,278**

 

Php16,718
     Smart’sbank loan facilities, which are being used to finance its purchases oftelecommunications equipment, are availed of through one or more drawdowns.      Intereston Smart’s dollar denominated loans is either fixed or based on LIBOR pluspremium.  These loans are payable in semi-annual installments and havematurities of up to 2007.  The peso loans are payable quarterly and accrueinterest based on the weighted average interest rate, or WAIR, plusParticipating Financial Institution, or PFI, premium and will mature inDecember 2005 and February 2007 for the Php1,000 million and Php300 millionfacilities, respectively.     Smartis subject to loan covenants that restrict its ability to pay dividends, redeempreferred shares, make distributions to PLDT or otherwise provide funds to PLDTor any affiliate without the consent of its lenders.  Some of these covenantscontain an absolute prohibition on paying dividends before December 2002, whileothers require that a portion of the loan equal to the amount of the dividendbe prepaid.  On April 24, 2003 and May 7, 2003, Smart received the approvalsfrom Finnvera and from its other relevant lenders for additional dividendpayments to PLDT in an amount not to exceed 70% of Smart’s net income for 2002,subject to the receipt by Finnvera of an endorsement by its re-insurer and Smart’scompliance with all of the financial covenants under these agreements.      Smart’sdebt instruments also contain certain restrictive covenants that require Smartto comply with specified financial ratios and other financial tests atsemi-annual measurement dates.  Smart has maintained compliance with all of thefinancial covenants.  The financial tests under Smart’s loan agreements includecompliance with a debt to equity ratio of not more than 1.50:1 and a debtservice coverage ratio of not less than 1.50:1.  The agreements also containcustomary and other default provisions that permit the lender to accelerateamounts due under the loans or terminate their commitments to extend additionalfunds under the loans.  These default provisions 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 comply withcertain financial ratio covenants;                                                                    - Any reduction in PLDT’s ownershipof Smart’s stock below 51% of the total of each class of Smart’s issued shares;                                                                      - Any reduction in First Pacific’sand Metro Pacific Corporation’s collective direct and/or indirect ownership of PLDT’scommon stock below 17.5% of the total common stock outstanding or 17.5% of thevoting power of the total common stock outstanding; and                                                                        - The occurrence of any materialadverse change in circumstances that the lender reasonably believes materiallyimpairs Smart’s ability to perform its obligations under its loan agreementswith the lender or that the lender believes materially impairs an applicableguarantors’ ability to perform its obligations under an applicable guaranty.     ***MabuhaySatellite***     MabuhaySatellite’s long-term debt consists of:     
 

**March 31, 2003****(Unaudited)**

December 31, 2002 (Audited)

 

(in millions)

U.S. Dollars

** **

** **

** **

** **

Credit Agreement 

**US$47**

**Php2,516**

US$55

Php2,925

Omnibus Agreement

**46**

**2,446**

46

2,431

 

**93**

**4,962**

101

5,356

Less current portion

**19**

**1,040**

18

980

 

**US$74**

**Php3,922**

US$83

Php4,376
     *CreditAgreement*     OnJanuary 8, 1999, Mabuhay Satellite entered into a Restructuring Agreement withEx-Im Bank relating to the Credit Agreement to finance a portion of the costsof purchasing the Agila II Satellite, which included, among other majorprovisions, the principal repayments in 18 semi-annual installments of US$5million due and payable on January 15 and July 15 of each year starting 1999and interest at a rate of 6.6% per annum.      On May 8, 2000, Ex-Im Bankagreed to amend the repayment terms of the principal under the RestructuringAgreement.  The outstanding balance as of the effective date of the Amendmentshall be amortized in 13 successive semi-annual installments due on January 15and July 15 of each year, beginning January 15, 2000.Interest rate remains at 6.6% per annum.     *OmnibusAgreement*     MabuhaySatellite also has an existing Omnibus Agreement with a syndicate of localbanks, or the Banks, which includes issuance of irrevocable standby Letters ofCredit with an aggregate stated value not exceeding US$47 million (Php2,516 million) in favor of Ex-Im Bank, assecurity under the Credit Agreement and a term loan to Mabuhay Satellite in theaggregate amount of US$46 million (Php2,446 million).     Assecurity, Mabuhay Satellite has constituted in favor of the Banks:                                                                             - A first mortgage on its leaseholdrights under a lease agreement entered into with the Subic Bay MetropolitanAuthority, or SBMA, and the components of the satellite system;                                                                               - An assignment of its rights underits Purchase Contract for the Satellite System;                                                                                 - An assignment of its rights underthe transponder lease contracts to be entered into with its stockholders andother parties and the revenues therefrom; and                                                                                   - An assignment of the applicableproceeds of insurance to be taken on the satellite system.     Restructuringof Mabuhay Satellite’s debt under the Omnibus Agreement and the secondrestructuring of its debt under the Credit Agreement were approved by theMonetary Board of the Bangko Sentral ng Pilipinas on July 6, 2000 under the latter’sResolution No. 1107.     TheCredit and Omnibus Agreements impose negative covenants which, among otherthings, restrict the material changes in Mabuhay Satellite’s nature of businessand ownership structure, any lien upon or with respect to any of its assets orto any right to receive income, acquisition of capital stock, declaration andpayment of dividends, merger, consolidation and sale with another entity andincurring or guaranteeing additional long-term debt beyond prescribed amounts.  *** ***  ***ePLDT***     On March 4, 2002, ePLDTentered into a three-year loan facility with Philippine Bank of Communicationsamounting to Php150 million with a graceperiod of one year.  The loan facility was fully drawn as of December 31, 2002.  The quarterly principal payments of Php15 million shall start in the second year with aballoon payment of Php45 million at the end ofthe third year.  Interest on this loan is equivalent to 91-day T-bill rate plus4% per annum payable quarterly in arrears.  The loan is secured by ePLDT’sinvestment in an affiliate with a carrying value of Php616million as of March 31, 2003 and a deed of assignment of receivables of anassociate from a foreign customer.     Theloan agreement imposes negative covenants which, among other things, restrict ePLDTin regard to payment of cash dividends or any other income of any capitaldistribution to PLDT, voluntary suspension of its entire business operationsfor a period of 60 consecutive days of dissolution of its legal existence, andcreation of any encumbrances on the shares pledged.     ***MaraTel***     MaraTel’slong-term debt consists of a Php60 million loanobtained on October 20, 1997 and a Php19 millionloan drawn on July 19, 1999.  The Php60 million loancarries an interest rate ranging from 11.6% to 14.6% per annum and matures on October 16, 2005,while the Php19 million loan bears a fixedinterest rate of 14.7% per annum and matures on July 30, 2004.  As of March 31, 2003, theoutstanding balances of these loans totaled Php38million, of which Php12 million will mature in2003.        
 
  **13. ****Deferred Credits and Other NoncurrentLiabilities**     Thisaccount consists of:     
 

**Consolidated**

 

**Non-Consolidated**

 

**March 31,  2003****(Unaudited)**

December 31, 2002 (Audited)

 

**March 31,  2003****(Unaudited)**

December 31, 2002 (Audited)

 

** **

(in million pesos)

 

Liability under Letter of Support (Note 3)

**2,693**

2,676

 

**2,693**

2,676

Advance payment under a receivables purchase facility (Note 6)

**2,412**

2,530

 

**2,412**

2,530

Customers’ deposits

**2,110**

2,162

 

**2,017**

2,055

Accrual of capital expenditures under long-term financing (Note 20)

**1,474**

1,625

 

**1,367**

1,515

Accrued pension cost (Note 16)

**923**

1,175

 

**923**

1,175

Others 

**1,328**

1,372

 

**1,163**

1,206

 

**10,940**

11,540

 

**10,575**

11,157
        
 
  **14. ****Stockholders’ Equity**  ** **  Themovement of PLDT’s capital stock account follows:     
** **

** **

**Preferred Shares -**Php10 par value

** **

** **

**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

** **

** **

** **

** **

** **

** **

823

Php8,230

**Outstanding**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Balances at January 1, 2002

168

Php844

372

4

36

3

5

4

424

Php4,242

Issuance

–

–

37

–

7

–

–

–

44

441

Conversion

1

3

(3)

–

–

–

–

–

(3)

(26)

Redemption

–

–

–

–

(7)

–

–

–

(7)

(72)

Balances at December 31, 2002 (Audited)

169

Php847

406

4

36

3

5

4

458

Php4,585

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2003

169

Php847

406

4

36

3

5

4

458

Php4,585

Issuance

–

–

4

–

–

–

–

–

4

40

Conversion

–

–

–

–

–

–

–

–

–

(5)

Redemption

–

–

–

–

–

–

–

–

–

–

Balances at March 31, 2003 (Unaudited)

169

Php847

410

4

36

3

5

4

462

Php4,620
     ***PreferredStock***     Thepreferred stock is non-voting, except as specifically provided by law, and ispreferred as to liquidation.     TheSeries A to CC 10% Cumulative Convertible Preferred Stocks earn cumulativedividends at an annual rate of 10%.  These series of preferred stock areconvertible into common stock a year after the year of share issuance, at aprice equivalent to 10% below the average market price of PLDT's common stockat the PSE over a period of 30 consecutive trading days before the conversiondate.  The conversion price, however, shall not be less than the conversionprice set by the Board of Directors, which as of March 31, 2003, is Php5 per share.  At PLDT’s option, the Series A toCC 10% Cumulative Convertible Preferred Stock are redeemable at par value plusaccrued dividends five years after the year of issuance.     On January 22, 2002, theBoard of Directors designated 10 million shares of serial preferred stock asSeries CC 10% Cumulative Convertible Preferred Stock for issuance throughout2002.  In addition, on February 26, 2002, the Board of Directors designated an additional 15million 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 thelisting of the 10 million shares of Series CC 10% Cumulative ConvertiblePreferred Stock and the additional 15 million shares of Series AA 10%Cumulative Convertible Preferred Stock on August 14, 2002.     On December 2, 2002, theBoard of Directors designated 10 million shares of serial preferred stock asSeries DD 10% Cumulative Convertible Preferred Stock for issuance throughout2003 and an additional 10 million shares of serial preferred stock as Series CC10% Cumulative Convertible Preferred Stock.  The issuance of the 10 millionshares of Series DD 10% Cumulative Convertible Preferred Stock and theadditional 10 million shares of Series CC 10% Cumulative Convertible PreferredStock is an exempt transaction under Section 10.2 of the SRC, as confirmed bythe SEC on January 30, 2003.  In an earlier letter dated October 24, 2002, PSEallowed PLDT to utilize 24,287,455 unissued preferred shares remaining listedwith the PSE in order to cover the issuance requirement of the other seriesunder PLDT’s Subscriber Investment Plan.  The issuance requirement for the 10million shares of Series DD 10% Cumulative Convertible Preferred Stock and theadditional 10 million shares of Series CC 10% Cumulative Convertible PreferredStock will be taken from the said remaining listed and unissued preferredshares.      TheSeries III Convertible Preferred Stock earns cumulative dividends at an annualrate of US$3.50 a share payable quarterly, free and clear of Philippinewithholding taxes.  It is convertible into common stock at the option of theholder at any time, at the conversion price of US$29.19 per share of commonstock (equivalent to a conversion ratio of 1.7129 shares of common stock foreach share of Series III Convertible Preferred Stock, each share of Series IIIConvertible Preferred Stock being valued for this purpose at its referenceamount of US$50 a share), subject to adjustment in certain events.  The SeriesIII Convertible Preferred Stock is not redeemable.  Upon liquidation of PLDT,holders of the Series III Convertible Preferred Stock will be entitled toreceive liquidating distributions equivalent to Php11a share, plus accrued and unpaid dividends to the date of distribution, subjectto the prior rights of creditors.     TheSeries IV Cumulative Non-Convertible Redeemable Preferred Stock earnscumulative dividends at an annual rate of 13.5% based on the paid-upsubscription price.  It is redeemable at the option of PLDT at any time oneyear after subscription and at the actual amount paid for such stock, plusaccrued dividends.  On February 26, 2002, the Board of Directors called for the payment of aportion of the balance of the subscription price of the Series IV CumulativeNon-Convertible Redeemable Preferred 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 million subscribed sharesof its Series IV Cumulative Non-Convertible Preferred Stock and paid Php72 million, representing the redemption priceplus unpaid dividends up to the date of redemption.     OnJune 4, 2001, PLDT issued 2.7 million shares of Series V Convertible PreferredStock, 5.1 million shares of Series VI Convertible Preferred Stock and 3.8million shares of Series VII Convertible Preferred Stock in exchange for atotal of 58.1 million shares of Series K, Class I Convertible Preferred Stockof Piltel, pursuant to the debt restructuring plan of Piltel.  Shares of SeriesV, VI and VII Convertible Preferred Stock are entitled to receive annualdividends of Php18.70 per share, US$0.397 pershare and JP¥40.7189 per share, respectively.  In addition, in 2002, PLDTissued 30,100 shares of Series V Convertible Preferred Stock and 14,087 sharesof Series VI Convertible Preferred Stock in exchange for a total of 220,935shares of Series K, Class I Convertible Preferred Stock of Piltel.  Uponreceipt of tax clearance from the BIR on March 3, 2003,PLDT issued 92,413 more shares of Series VI Convertible Preferred Stock inexchange for 462,065 shares of Piltel Series K Class I Convertible PreferredStock.  Each share of Series V, VI and VII PLDT Convertible Preferred Stock isconvertible at any time at the option of the holder into one PLDT commonshare.  On the date immediately following the seventh anniversary of the issuedate of the Series V and Series VI Convertible Preferred Stock and on theeighth anniversary of the issue date of the Series VII Convertible PreferredStock, the remaining outstanding shares under these series will be mandatorilyconverted to PLDT common shares, which will benefit from a put optionexercisable for thirty days to sell such PLDT common shares to PLDT for Php1,700 or US$36.132 or JP¥4,071.89 per sharedepending on the series.  PLDT would be obligated to pay up to Php4,600 million, US$184 million and JP¥15,600million under the put option if all the convertible preferred shares will be mandatorilyconverted and all the underlying common shares will be put to PLDT.     Asof March 31, 2003 and December 31, 2002, a total of 669,163 shares ofSeries V and VI Convertible Preferred Stock have been converted to PLDT commonshares.     Theaggregate value of the put option as of March 31, 2003is Php20,531 million while the market value ofthe underlying common shares is Php3,492million based on the market price of PLDT’s common stock of Php315 per share as of March 31, 2003.     Theshares of preferred stock, except shares of Series V, VI and VII ConvertiblePreferred Stock, redeemed or converted into common stock shall revert to andform part of the unissued preferred stock, and may be reissued in any otherseries that the Board of Directors may, from time to time, establish anddesignate.     Theprovisions of certain subscription agreements involving preferred stock have aneffect on the ability of PLDT to, without written consent, sell certain assetsand pay cash dividends unless all dividends for all past quarterly dividendperiods have been paid and provision has been made for the currently payabledividends.     OnJanuary 31, 2003, the Board of Directors approved the dividend declaration of: (a)Php1.00 per outstanding share of 10% CumulativeConvertible Preferred Stock Series CC payable on March 31, 2003 to the holdersof record on February 7, 2003; and (b) Php12.15 million on the outstandingshares of Series IV Cumulative Non-Convertible Redeemable Preferred Stockpayable on March 15, 2003 to the holders of record on February 17, 2003.  Also,on February 26, 2003, the Board of Directors approved thedividend declaration of US$1.029412 per outstanding share of Series IIICumulative Convertible Preferred Stock payable on April 15, 2003 to the holders of record on March 17, 2003.As of March 31, 2003, undeclared cumulative dividends applicable to sharesof preferred stock amounted to approximately Php148million.****     ***Employees’Stock Purchase Plan***     TheEmployees’ Stock Purchase Plan, or ESPP, of PLDT provides an opportunity to itsregular rank-and-file and supervisory employees to purchase an ownershipinterest in PLDT’s common stock at a reduced price on a deferred payment basis.     On November 3, 1999, theBoard of Directors approved the Ninth Offering under the ESPP.  Up to 991,200shares of common stock have been made available for purchase under the NinthOffering.     Movementsin the number of stock purchase plan outstanding are as follows:     
 

**March 31, 2003****(Unaudited)**

December 31, 2002 (Audited)

Beginning balance

**55,124**

169,708

Exercised

**(9,990)**

(114,584)

Ending balance

**45,134**

55,124
     Thepurchase price is set at the prevailing market price which should not exceed Php877.63 per share.  This cap represented 85% ofthe market price at offer date on January 3, 2000.  The average market value ofthe shares exercised in 2002 was Php378 pershare (total Php43 million).     Asof March 31, 2003, about 1.2 million shares of common stock wasreserved for future offerings under the ESPP.      ***ExecutiveStock Option Plan***     OnApril 27, 1999 and December 10, 1999, the Board of Directors and stockholders,respectively, approved the establishment of an Executive Stock Option Plan, orESOP, and the amendment of the Seventh Article of the Articles of Incorporationof PLDT denying the pre-emptive right of holders of shares of common stock tosubscribe for any issue of up to 1,289,745 shares of common stock pursuant tothe ESOP.  The ESOP covers management executives, which include officers withrank of Vice President up to the President, executives with the rank of Managerup to Assistant Vice President, and advisors/consultants engaged by PLDT.  TheESOP seeks to motivate option holders to achieve PLDT’s goals, reward optionholders for the creation of stockholder value, align the option holders’interests with those of the stockholders of PLDT and retain the option holdersto serve the long-term interests of PLDT.  The ESOP is administered by theExecutive Compensation Committee of the Board of Directors.  About 1.3 millionshares of common stock of PLDT have been reserved as underlying shares ofoptions under the ESOP.      Movementsin the number of stock option plan outstanding are as follows:     
 

**March 31, 2003****(Unaudited)**

December 31, 2002 (Audited)

Beginning balance

**1,226,395**

1,157,258

Granted

–

144,428

Cancelled

**(53,302)**

(75,291)

Ending balance

**1,173,093**

1,226,395
     Sincethe date of the grant on December 10, 2001, there were no officers orexecutives that exercised their options.  Instead, there were cancellations ofoptions due to officer resignations and retirements of officers and executives.     ***RetainedEarnings***     Thisaccount consists of:     
** **

**Three Months Ended March 31**

 

**2003 (Unaudited)**

 

2002 (As restated -

Note 3)

 

(in million pesos)

Appropriated for plant expansion and higher replacement costs

**435**

435

Unappropriated

**35,410**

33,023

 

**35,845**

33,458
     PLDTregularly declares and pays dividends on its preferred shares.  However, thewritten consent of its creditors and certain preferred stockholders may berequired under certain conditions (as discussed in *Note 12 – Long-term Debt*).PLDT has not declared any dividends on its common shares since June 2001.  Theretention of earnings is necessary to meet the funding requirements of ourbusiness expansion, service improvement and development programs.  The unappropriatedretained earnings balance of PLDT as of March 31, 2003 and December 31, 2002includes accumulated equity in net income of investees of Php6,745 million and Php4,453 million, respectively, whichare not available for distribution as dividends until declared by the investees.        
 
  **15. ****Related Party Transactions**  ** **  Companieswithin the PLDT Group are engaged in arm’s-length transactions with each otherin the ordinary course of business.  We believe that the terms of thesetransactions are comparable with those available to unrelated parties.      ***Transactionswith/between Related Parties***     Adescription of major transactions with/between related parties is as follows:     *a.   Telecommunications Services Provided within PLDTGroup*     Telecommunicationscarriers within the PLDT Group (namely, PLDT, Smart, Piltel, Clark Telecom, SubicTelecom, MaraTel and PLDT Global) have existing intercompany agreements, suchas interconnection agreements with one another under terms similar with thoseagreed with other telecommunications providers outside the PLDT Group (see *Note25 - Other Matters*).  Each of these carriers recognizes revenues, net ofinterconnection charges, for calls terminating with the customer of the othercarriers.      *b.   Transponder Lease Agreement between PLDT and MabuhaySatellite*     On December 28, 1995,PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, asamended on May 10, 2000, pursuant to which Mabuhay Satellite leases to PLDT C-bandtransponders on board the Agila II satellite, in consideration of a basicrent.  This agreement has a term of ten years commencing on December 18, 1997,unless earlier terminated in accordance with the terms thereof.      Underan Acknowledgment and Consent Agreement dated January 4, 1996,PLDT acknowledged and consented to Mabuhay Satellite's:                                                                                     - transfer and assignment of allamounts payable by PLDT under the Transponder Lease Agreement; and                                                                                       - grant of a continuing securityinterest of first priority in all of Mabuhay Satellite's rights, title andinterest in, to and under the Transponder Lease Agreement, in favor of thecollateral agent for the benefit of the lenders who are parties to the OmnibusCredit and Security Agreement dated December 14, 1995.     Totalfees under these agreements amounted to Php194million and Php230 million for the threemonths ended March 31, 2003 and 2002, respectively.  Outstanding obligations ofPLDT under these agreements amounted to Php30 millionand Php269 million as of March 31, 2003and December 31, 2002, respectively.     *c.   Facilities Management Agreement between PLDT and Piltel*  * *  OnJuly 19, 2001, PLDT entered into a Facilities Management Agreement with Piltelunder which PLDT undertakes the management, operation and maintenance of Piltel'sregional telecommunication and EO 109, network operations and services,including EO 109 fixed line build-out installations, public calling offices andpayphone facilities and the systems required to support these services.     Theagreement covers Piltel's regional telecommunication services in Baguio, PuertoPrincesa, Masbate, and Boac and EO 109 services in Alabel, Banga, Dapitan, Davao,Digos, Dipolog, General Santos, Kiamba, Koronadal, Pagadian, Polomolok and Surallahin Mindanao.     Underthe agreement, PLDT also undertakes the management of the computer system,billing, revenue assurance and inter-carrier settlements reporting of Piltel'sregional telecommunication services in Olongapo and Subic.     Themonthly management fee payable by Piltel is based on cost, and for costcomponents where margin is allowed, 15% will be applied.  All third partyinvoices will be passed on to Piltel at cost, including value-added tax.     Theagreement supersedes the Facilities Management Agreement between PLDT and Piltel,dated May 12, 2000, under which PLDT undertook the management, maintenance andoperation of the regional telecommunication services of Piltel, includingpublic calling offices and payphone operations located in Baguio City, Puerto Princesa,Boac and Masbate.  The new agreement is effective for three years from July2001 to July 2004.     Totalmanagement fees under these agreements amounted to Php21million and Php24 million for the three monthsended March 31, 2003 and 2002, respectively.  Outstanding receivables ofPLDT under these agreements amounted to Php279million and Php258 million as of March 31, 2003 and December 31, 2002, respectively.     *d.   Facilities Management Agreement between**Subic**Telecom and Piltel*     On September 5, 2001, Pilteland Subic Telecom entered into a Facilities Management Agreement of theregional telephone network, customer operations, network operations andpayphones of Piltel in Subic and Olongapo City.  The monthly management fee payable by Piltel isbased on cost, and for cost components where margin is allowed, 15% will beapplied.  In addition, Piltel will pay a monthly variable cost per account inthe amount of Php44 for repairs andmaintenance and Php6 for bill delivery from anexchange to a subscriber.  All third party invoices will be passed on to Piltelat cost, including value-added tax.  This agreement supersedes the facilitiesmanagement agreement entered into by Piltel and Subic Telecom on May 29, 2000.     Totalmanagement fees under this agreement amounted to Php5million and Php6 million for the three monthsended March 31, 2003 and 2002, respectively.  The new agreement iseffective for three years until September 2004.  Outstanding receivables of SubicTelecom under this agreement amounted to Php4 millionand Php2 million as of March 31, 2003 and December 31, 2002, respectively.     *e.   Agreements between Smart and Piltel*     Inconnection with the integration of their operations, Smart and Piltel haveentered into the following agreements:                                                                                         - An agreement for the co-location,or sharing, of cellular sites selected at the option of Smart, whereby Piltelis paid a usage fee of Php45,000 per sharedsite per month, subject to a 10% annual increase;                                                                                           - An agreement whereby Smart managesthe operation of Piltel's cellular and paging systems.  This agreement isdivided into three sub-agreements as follows:     i.        A Facilities Management Agreementunder which Smart operates, maintains and manages the physical facilities andtechnical services of Piltel's existing cellular and paging systems. Piltelpays Smart a fixed monthly fee of Php4 millionand a variable monthly fee of Php13,735 persite covered by the agreement.  Additional fees of Php0.2million per month and Php624 per site permonth are payable at the end of each calendar year upon rendition of theservices in accordance with the agreement.  This agreement was amended in May2001 to include the management, operation and maintenance of Piltel's prepaidwireless telecommunications network in the EO 109 areas in Mindanao includingthe business and central offices, base stations, and public calling offices of Piltellocated in South Cotabato, Saranggani and General Santos, Davao City, Davao delSur, Zamboanga del Norte, Zamboanga del Sur and Misamis Occidental;     ii.      A Customer Service ManagementAgreement under which Piltel outsources the operation of its customer serviceand billing functions for its cellular and paging systems to Smart for a fixedmonthly fee of Php8.8 million and a variablecost of Php57, Php17and Php25 per postpaid, prepaid cellular andpaging subscriber, respectively.  An additional fee of Php399,926per month and Php1 per postpaid subscriber permonth is payable at the end of each calendar year upon rendition of theservices in accordance with the agreement; and     iii.     An Administrative Support andManagement Services Agreement under which Piltel pays a fixed monthly fee of Php7.8 million.  An additional fee of Php353,764 per month is payable at the end of eachcalendar year upon rendition of the services in accordance with the agreement.      Totalfees under these management agreements amounted to Php168million and Php160 million for the threemonths ended March 31, 2003 and 2002, respectively.  Under these agreements,outstanding receivables of Smart as of March 31, 2003and December 31, 2002 amounted to Php715 millionand Php569 million, respectively.     Inaddition, Smart also entered into a Facilities Service Agreement with Piltelunder which Piltel accesses Smart's existing GSM network and facilities toenable Piltel to offer prepaid cellular service using GSM technology inexchange for approximately 50% of Piltel's revenues, net of interconnectionexpenses.  Total facility fees under this agreement amounted to Php841 million and Php784million for the three months ended March 31, 2003and 2002, respectively.  Outstanding receivables of Smart under this agreement amounted to Php302million and Php458 million as of March 2003 and December 31, 2002, respectively.     *f.      Air Time Purchase Agreement between PLDT andPT Asia Cellular Satellite and Related Agreements*  * *  InMarch 1997, PLDT entered into a Founder NSP Air Time Purchase Agreement with PTAsia Cellular Satellite, as amended in December 1998, under which PLDT wasgranted the exclusive right to sell ACeS services in the Philippines.In exchange, PLDT is required to purchase from PT Asia Cellular Satellite atleast US$5 million worth of airtime annually over ten years commencing on thedate of the satellite’s commercial operations.  The commercial operations dateis defined as the earlier of:                                                                                             - the day on which PT Asia CellularSatellite places the Garuda I satellite in commercial operation; and                                                                                               - the date of final acceptance ofthe Garuda I satellite and associated equipment under the terms of theSpacecraft Contract, dated August 28, 1995, between PT Asia Cellular Satelliteand Martin Marietta Overseas Corporation.     However,the commercial operations date may not occur without the consent of PLDT ifthere is a constructive total loss or partial loss of the satellite under itslaunch insurance contract and the satellite cannot provide commercial servicein the Philippines.      Inthe event that PT Asia Cellular Satellite's aggregate billing revenues is lessthan US$45 million in any given year, PLDT is required to make supplemental airtimepurchase payments not to exceed US$15 million per year during the ten-yearterm.     InMarch 2003, PLDT, together with the founder shareholders, entered into aStandstill Agreement in respect of the Air Time Purchase Agreement.  See*Note 20 – Contractual Obligations and Commercial Commitments*for furtherdiscussion*.*     PLDTalso entered into a Founder NSP Operating Agreement with PT Asia CellularSatellite on March 12, 1997, under which PLDT may:                                                                                                 - authorize distributors to resell ACeSservices in the Philippines upon prior approval from PT Asia Cellular Satellite;and                                                                                                   - appoint agents to solicit and billPLDT's or its authorized distributors' subscribers for ACeS services and tosell terminals on behalf of PLDT.     Underan Assignment and Assumption Agreement dated December 29, 1998, PT AsiaCellular Satellite agreed to assign and transfer to AIL all of PT Asia CellularSatellite's rights under the Founder NSP Airtime Purchase Agreement and FounderNSP Operating Agreement.     Underan Acknowledgment of Assignment of Airtime Purchase Agreement entered into onDecember 29, 1998, by and among PLDT, P.T. Bank Internasional Indonesia andAIL, PLDT consented to the assignment by AIL of the Founder NSP AirtimePurchase Agreement to P.T. Bank Internasional Indonesia, as security agent, forthe benefit of the secured parties under the Security Agreement dated as ofDecember 29, 1998, which was executed in connection with the Amended andRestated Credit Agreement dated December 29, 1998 among PT Asia CellularSatellite, AIL, P.T. Bank Internasional Indonesia and various other banks.     OnSeptember 30, 2002, PT Asia Cellular Satellite, AIL, as guarantor, P.T. BankInternational Indonesia, as security agent, and various other 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.     *g.   Agreements between Smart and ACeS**Philippines*     OnJuly 18, 2000, Smart entered into a Service Distribution Agreement with ACeSPhilippines under which ACeS Philippines appointed Smart as an authorizedservice provider of ACeS Global Mobile Personal Communication by SatelliteServices, or GMPCS Services, in the Philippines having the task of exerting itsbest efforts to market and sell access to usage of the said services toprospective subscribers.       Anamendment to this Service Distribution Agreement was made on February 16, 2001,whereby Smart shall remit to ACeS Philippines a Facility Usage Fee based on arevenue sharing formula.  ACeS Philippines shall in turn pay Smart’s charges for thepayphone-related services.       Alsoon February 16, 2001, Smart entered into a Facilities ManagementAgreement, or FMA, and Administrative Support and Management ServicesAgreement, or the Service Agreement, with ACeS Philippines.  In exchange forits services, Smart shall receive fixed and variable monthly fees from ACeSPhilippines.  Under the FMA, Smart undertakes the management, maintenance andoperation of the ACeS GMPCS Services, which are currently ready and availablefor actual use or operation.  Under the Service Agreement, Smart shall providecertain administrative support and services in certain aspects of ACeSPhilippines’ business operations such as payroll administration and training,finance, audit, legal, purchasing and materials management, public affairs,information technology, sales and marketing, ACeS Philippines NSP relations, ACeSInternational relations and other support services.     Totalfees under these agreements, net of Smart’s share, amounted to Php16 millionand Php7 million for the three months ended March 31, 2003and 2002, respectively.  The outstanding payable of Smart amounted to Php50million as of March 31, 2003 and no outstanding obligations as of December 31, 2002.      *h.   Other Transactions*     Equityinvestments in subsidiaries and associates are discussed in *Note 9 –Investments.*     OnDecember 9, 2002, PLDT transferred and conveyed to Smart certain inland andsubmarine domestic fiber optic cable loops, digital transmission equipment andcorresponding network management systems with an aggregate net book value of Php4,138 million, as consideration and in exchangefor 298 million preferred shares of Smart subscribed by PLDT at Php13.875 per share, or a total subscription priceof Php4,138 million.       Thefollowing is a summary of related party accounts with subsidiaries eliminatedfrom the consolidated balance sheets as of March 31, 2003(unaudited) and December 31, 2002 (audited) and from the consolidated statements ofincome for the three months ended March 31, 2003and 2002 (unaudited):     
 

**2003**

2002

 

(in million pesos)

Balance Sheets

 

*** ***

Accounts receivable

**7,804**

6,601

Other noncurrent assets 

**86**

86

Accounts payable 

**3,505**

2,755

Accrued expenses and other current liabilities

**1,384**

1,095

Deferred credits and other noncurrent liabilities

**2,597**

2,434

Statements of Income

 

*** ***

Fixed line revenues

**755**

49

Wireless revenues

**191**

230

Information and communications technology revenues

**4**

–

Rent expense

**857**

230

Maintenance expense

**95**

–
     Thefollowing is a summary of related party accounts with Piltel as of March 31, 2003 (unaudited)and December 31, 2002 (audited) and for the three months ended March 31, 2003 and2002:      
 

**2003**

2002

 

(in million pesos)

Balance Sheets

 

*** ***

Accounts receivable

**1,909**

1,731

Statements of Income

 

*** ***

Fixed line revenues

**911**

100

Miscellaneous income

**189**

177
  *** ***  ***Transactionswith Major Stockholders, Directors and Officers***     Transactionsto which PLDT or its subsidiary was a party, in which a director or key officeror owner of more than 5% of the common shares of PLDT, or any member of theimmediate family of a director or key officer or owner of more than 5%of the common shares of PLDT had a direct or indirect material interest as ofMarch 31, 2003 and December 31, 2002 and for the three months ended March 31,2003 and 2002 are as follows:     *a.   Agreements with NTT Communications and/or itsAffiliates*     PLDTis a party to the following agreements with NTT Communications and/or itsaffiliates:                                                                                                     -  Advisory Services Agreement .   On March 24, 2000, PLDT entered into an agreementwith NTT Communications, as amended on March 31, 2003,under which NTT Communications provides PLDT with technical, marketing andother consultants for various business areas of PLDT starting April 1, 2000.  Totalfees under this agreement amounted to Php48million and Php56 million for the three monthsended March 31, 2003 and 2002, respectively.  Asof March 31, 2003 and December 31, 2002, outstandingobligations of PLDT amounted to Php32 million.                                                                                                       -  Domestic Fiber Optic NetworkSubmerged Plant Maintenance Agreement .On July 4, 2000, PLDT entered into an agreement with NTT WorldEngineering Marine Corporation, or NTT WEMC, for the submarine cable repair andother allied services for the maintenance of PLDT’s domestic fiber-opticnetwork, or DFON, submerged plant for a period of five years up to July 4, 2005.  Underthe agreement, PLDT shall pay NTT WEMC 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.  Total fees under this agreement amounted to Php28 million and Php16million for the three months ended March 31, 2003and 2002, respectively.                                                                                                         -  Arcstar Licensing Agreement 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 a Trade Name and TrademarkAgreement with NTT Communications under which PLDT has been given the right touse the tradename "Arcstar" and its related trademark, logo andsymbols, solely for the purpose of PLDT's marketing, promotional and salesactivities for the Arcstar services within the Philippines.  Globalcoordination fees to NTT Communications based on certain percentage of revenuesderived from Arcstar products and services amounted to Php7million and Php2 million for the three months ended March 31, 2003 and 2002,respectively.  As of March 31, 2003 and December 31, 2002, outstanding obligationof PLDT amounted to Php5 million and Php3 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 cooperativearrangements for conventional international telecommunications services toenhance their respective international businesses.  Total fees under thisagreement amounted to Php2 million and Php0.4 million for the three months ended March 31, 2003 and2002, respectively.  As of March 31, 2003 and December 31, 2002, outstandingobligation of PLDT amounted to Php1 million and Php0.6 million, respectively.     *b.   Agreement between Smart and**Asia**Link B.V., or ALBV.* Smart has anexisting Technical Assistance Agreement with ALBV for the latter to providetechnical support services and assistance in the operations and maintenance ofCMTS for a period of five years, subject to renewal upon mutual agreementbetween the parties.  The agreement provides for quarterly payments oftechnical service fees equivalent to 2% of the net revenues of Smart.     Smartalso has an existing Services Agreement with ALBV for a period of 25 yearsstarting January 1, 1999, which shall automatically expire unless renewed bymutual agreement of both parties.  Under the agreement, ALBV provides adviceand assistance to Smart in sourcing capital equipment and negotiating withinternational suppliers, arranging international financing and other servicestherein consistent with and for the furtherance of the objectives of theservices.     ALBVis a subsidiary of the First Pacific Group.     Totalfees under these agreements amounted to Php67million and Php73 million for the three monthsended March 31, 2003 and 2002, respectively.  Outstanding payables ofSmart under these agreements amounted to Php67million and receivables of Php31 million as of March 31, 2003 and December 31, 2002, respectively.  * *  *c.   Agreement with Foote, Cone & BeldingWorldwide, or FCB Worldwide.*  FCBWorldwide provides consultancy and advisory services to PLDT.    The chairmanof PLDT’s Board is the non-executive chairman of FCB Worldwide’s representativeoffice in the Philippines.     *d.   Agreements relating to insurance companies.*Gotuaco del Rosario and Associates, or Gotuaco*,* acts asbroker for certain insurance companies to cover certain properties of the PLDTGroup.  Insurance premiums are remitted to Gotuaco and the broker’s fees aresettled between Gotuaco and the insurance companies.  In addition, PLDT hassigned an insurance policy with Malayan Insurance Co. Inc., or Malayan, whereinpremiums are directly paid to Malayan.  Total payments to Gotuaco and Malayancovering the twelve-month period ending July 31, 2003 including paymentssubsequent to 2002 amounted to Php566 million.  Two directors of PLDT have adirect/indirect interest in or serve as director/officer of Gotuaco andMalayan.        
 
  **16. ****Employees’Benefit Plan**     ***PLDT***     PLDThas a trustee-managed, noncontributory defined benefit plan, or the BenefitPlan, providing for retirement and death benefits and service terminal pay tosubstantially all permanent and regular employees.  Benefits under the BenefitPlan are based on final salary and length of service.     PLDT’sactuarial valuation is done on an annual basis.  Based on the latest actuarialvaluation dated February 2003, the actuarial present value of accruedliability, net pension cost and average assumptions used in developing thevaluation at December 31, 2002 are as follows:     
** **

(in million pesos)

** **

 

Actuarial accrued liability

7,984

Assets at fair value

4,094

Unfunded actuarial accrued liability

(3,890)

Unrecognized:

 

Net transition liability

2,889

Net experience adjustment

(174)

Accrued pension cost as of December 31, 2002

(1,175)

Accrual of pension cost

(164)

Payments of pension liability

416

Accrued pension cost as of March 31, 2003

(923)
     Theweighted average assumptions used to determine pension benefits for 2003 are asfollows:     
Discount rate

9%

Rate of increase in compensation

8%

Rate of return on plan assets

9%
     Netpension cost was computed as follows:     
** **

**Three Months Ended March 31**

** **

**2003**

2002

** **

(Unaudited)

** **

(in million pesos)

Normal cost

**117**

101

Interest cost

**10**

12

Amortization of:

** **

** **

Unrecognized net transition obligation

**41**

41

Unrecognized net experience adjustments

**(4)**

(22)

** **

**164**

132
     ***Smart***     Smarthas a trustee-managed, tax-qualified Provident Plan providing for retirement,death or service terminal pay to substantially all permanent and regularemployees.  Under the Provident Plan, Smart contributes to the provident fundfor the credit of each member’s Personal Retirement Account, or PRA, apercentage of such member’s monthly salary.  The member has an option tocontribute to the Provident Fund an amount not to exceed 25% of the member’smonthly salary, which are credited to each member’s PRA; however, very fewmembers contribute.  Net earnings of the Provident Fund are credited every ninemonths to the PRAs of the members based on their proportionate share in thetotal value of the Provident Fund as of the end of the preceding period.     Anybenefit payable under this Plan shall be in lieu of or in compliance with, butnot in addition to, the payment of similar benefits Smart is required to payits employees under existing or future laws, employment contracts or collectivebargaining agreements, it being understood that the employee shall be entitledonly to the higher of the benefits and not to both.     Contributionsby Smart to the Provident Plan charged to operations amounted to Php16 millionand Php11 million for the three months ended March 31, 2003and 2002, respectively.        
 
  **17. ****OtherExpenses – Net**     This account consists of:     
 

**Consolidated**

 

**Non-Consolidated**

** **

**Three Months Ended March 31**

 
 

**2003**

2002

(As restated -

Note 3)

 

**2003**

2002

(As restated -

Note 3)

 
 

(Unaudited)

 

(in million pesos)

Interest expense and related items - net of capitalized interest  (Notes 8 and 12)

**3,229**

3,381

 

**2,554**

2,532

 
Manpower reduction cost

**227**

15

 

**227**

15

 
Hedge cost

**224**

53

 

**224**

53

 
Foreign exchange/swap losses (Notes 12 and 23)

**35**

24

 

**31**

3

 
Equity in net losses (income) of investees, including goodwill amortization and provision for impairment in value of investment (Note 9)

**4**

381

 

**(2,291)**

(959)

 
Interest and other income - net

**(111)**

(623)

 

**(28)**

(168)

 
 

**3,608**

3,231

 

**717**

1,476

 
 

Overthe past years, PLDT has been implementing a manpower reduction program, orMRP, in line with its continuing effort to reduce the cost base of the fixedline business.  In 2002 and in the first quarter of 2003, 886 and 299 employeesavailed of the program, respectively.  The MRP cost charged to operationsamounted to Php324 million for the year ended December 31, 2002 andPhp227 million for the three months ended March 31, 2003.  

 

Thedecision to implement the MRP was anchored on the challenges being faced by thefixed line business as significant changes in technology, increasingcompetition, and shifting market preferences to cellular use have reshaped thefuture of the fixed line business.  The MRP is being implemented under the NewLabor Code and is in compliance with all other relevant labor laws andregulations.  By the end of 2003, PLDT expects to reduce its headcount toapproximately 10,500 employees.

 

 

 

**18. ****Income Taxes**

 

Thenet current and noncurrent components of deferred income tax recognized in thebalance sheets follow:

 

** **

**Consolidated**

** **

**Non-Consolidated**

 

**March 31,  2003****(Unaudited)**

December 31,  2002 (Audited)

 

**March 31,  2003****(Unaudited)**

December 31,  2002 (Audited)

 

(in million pesos)

Net current assets

**3,336**

3,772

** **

**2,991**

3,002

Net noncurrent liabilities

**(10,782)**

(10,699)

** **

**(9,284)**

(9,231)

 

Thecomponents of net deferred tax assets and liabilities are as follows:

 

** **

**Consolidated**

** **

**Non-Consolidated**

** **

**March 31,  2003****(Unaudited)**

December 31, 2002 (Audited)

** **

**March 31,  2003****(Unaudited)**

December 31, 2002 (Audited)

 

(in million pesos)

Current assets:

** **

** **

** **

** **

 

Allowance for doubtful accounts

**3,007**

2,760

** **

**2,109**

1,983

Unearned revenues on sale of  prepaid cards

**818**

710

** **

**139**

138

NOLCO

**533**

618

** **

**534**

618

Accrued pension cost 

**516**

571

** **

**295**

376

Allowance for inventory losses

**234**

192

** **

–

–

Current portion of unamortized past service cost

**52**

54

** **

**52**

54

Others

**14**

18

** **

–

–

 

**5,174**

4,923

** **

**3,129**

3,169

Less valuation allowance and income tax holiday adjustment 

**1,765**

1,052

** **

**69**

69

 

**3,409**

3,871

** **

**3,060**

3,100

Current liabilities:

** **

** **

** **

** **

 

Lump-sum payment under the collective bargaining agreement

**(69)**

(98)

** **

**(69)**

(98)

Unrealized foreign exchange gains

**(4)**

(1)

** **

–

–

 

**(73)**

(99)

** **

**(69)**

(98)

Net current assets

**3,336**

3,772

** **

**2,991**

3,002

 

** **

** **

** **

** **

 

Noncurrent assets:

 

 

 

 

 

Additional depreciation for wireless analog assets

**879**

880

** **

**–**

–

Unamortized past service cost

**96**

108

** **

**96**

108

 

**975**

988

** **

**96**

108

Noncurrent liabilities:

** **

** **

** **

** **

 

Interest charges capitalized, net of amortization

**(5,558)**

(5,536)

** **

**(4,831)**

(4,830)

Foreign exchange differential capitalized, net of depreciation and unrealized foreign exchange losses

**(4,540)**

(4,536)

** **

**(3,854)**

(3,798)

Taxes and duties capitalized, net of amortization

**(695)**

(711)

** **

**(695)**

(711)

Undistributed income of foreign subsidiaries

**(360)**

(333)

** **

**–**

–

 

**(11,153)**

(11,116)

** **

**(9,380)**

(9,339)

 

**(10,178)**

(10,128)

** **

** **

 

Less valuation allowance and income tax holiday adjustment

**(604)**

(571)

** **

**–**

–

Net noncurrent liabilities

**(10,782)**

(10,699)

** **

**(9,284)**

(9,231)

 

Thecarryforward benefit of NOLCO amounting to Php1,668million as of March 31, 2003 can be claimed as deductions against taxable incomeuntil 2005.

 

Provisionfor income tax consists of:

 

 

**Consolidated**

** **

**Non-Consolidated**

** **

**Three Month Ended March 31**

 

**2003**

** **

 

2002

(As restated -

Note 3)

** **

**2003**

** **

 

2002

 

(Unaudited)

 

(in million pesos)

Current

**333**

245

** **

–

–

Deferred

**646**

247

** **

**64**

247

 

**979**

492

** **

**64**

247

 

Thecurrent provision for income tax in 2002, on a consolidated basis, mainlyrepresents the subsidiaries’ income tax under the regular corporate taxes.  PLDT’sminimum corporate income tax in 2002 amounting to Php638million was charged directly to “Prepayments and other current assets”.  The carryforwardbenefit of MCIT as of March 31, 2003, can be claimed as deductions against income taxpayable until 2005.

 

Thecurrent provision for income tax for the three months ended March 31, 2003 and2002 mainly represents the subsidiaries’ income tax under the regular corporateincome tax.

 

Thereconciliation between the provision for income tax at the applicable statutorytax rates and the actual provision for income tax follows:

 

** **

**Consolidated**

** **

**Non-Consolidated**

** **

**Three Month Ended March 31**

 

**2003**

** **

** **

2002

(As restated -

Note 3)

 

**2003**

** **

** **

2002

 

** **

 

(Unaudited)

 

(in million pesos)

Provision at statutory tax rate

**1,108**

660

 

**814**

582

Tax effect of:

** **

 

 

** **

** **

Tax loss position

**132**

2

 

–

–

Equity in net income (losses) of investees, including goodwill amortization, and provision for impairment in value of investment 

**1**

122

 

**(733)**

(307)

Income subjected to lower tax rates

**(63)**

(30)

 

**(18)**

(14)

Others – net

**(258)**

(262)

 

**1**

(14)

Change in valuation allowance

**59**

–

 

–

–

Actual provision for income tax

**979**

492

 

**64**

247

 

On July 20, 1999, MabuhaySatellite was registered as a Subic Bay Freeport Enterprise and Clark Telecomwas also registered as a Clark Special Economic Zone Enterprise under RepublicAct No. 7227, otherwise known as the Bases Conversion and Development Act of1992, or the Act.  As registrants, Mabuhay Satellite and Clark Telecom areentitled to all the rights, privileges and benefits established thereunderincluding tax and duty-free importation of capital equipment and special incometax rate of 5% of gross income, as defined in the Act. 

 

Smartis registered with the Board of Investments, or BOI, under the OmnibusInvestments Code of 1987 as a preferred non-pioneer enterprise for theoperation of the IGF and CMTS services.  As such, Smart was entitled to certaintax and non-tax incentives, including an income tax holiday for a period ofthree years up to August 2000. 

 

TheBOI Governing Board, in its meeting on August 10, 2000, granted the request ofSmart for the transfer of its LEC business to PLDT subject to certainconditions, which include the surrender of Smart’s original certificate ofregistration to the BOI for annotation and safekeeping and the issuance of acertificate of registration to PLDT with respect to the transferred LECbusiness.

 

On May 3, 2001, the BOIawarded Smart pioneer status for its GSM expansion projects entitling it toenjoy a three-year tax holiday up to May 2004.  The tax incentive is availed onthe basis of incremental income generated from the said expansion project.  Inaddition, on July 12, 2001, the BOI awarded Smart pioneer status for its paymentinfrastructure projects entitling it to enjoy a six-year tax holiday.  In thiscase, the tax incentive is availed for the entire taxable income of theproject. 

 

Smart’sdeferred income tax assets and liabilities as of March 31, 2003 and December31, 2002 have been restated at realizable amounts after provision of avaluation allowance for portions of income tax assets that will not have taxconsequences.

 

On December 22, 2000,the BOI approved ePLDT’s registration as a new IT service firm in the field ofservices related to Internet data center on a pioneer status.  As such, ePLDTenjoys, among other incentives, a six-year income tax holiday from January 2001or actual start of commercial operations, whichever comes first.

 

 

 

**19. ****EarningsPer Common Share**

 

The following table presents information necessary tocalculate the earnings per share:

 

** **

**Three Months Ended March 31**

 

**2003**

2002

** **

**Basic**

**Diluted**

Basic

Diluted

 

(Unaudited)

** **

(in million pesos)

Net income

**2,479**

**2,479**

1,571

1,571

Less dividends on preferred stock

**426**

**270**

404

352

Net income applicable to common stock

**2,053**

**2,209**

1,167

1,219

 

 

 

(in thousands, except per share amounts)

Outstanding common shares, beginning

**169,361**

**169,361**

168,895

168,895

Effect of issuance of common shares during the period

**14**

**27,711**

67

11,280

Weighted average number of common shares, end

**169,375**

**197,072**

168,962

180,175

Earnings per common share

**Php12.12**

**Php11.21**

Php6.91

Php6.77

 

 

 

**20. ****Contractual Obligations andCommercial Commitments**

** **

***ContractualObligations***

 

Thefollowing table discloses the PLDT Group’s contractual obligations outstandingas of March 31, 2003: 

 

 

**Payments Due by Period**

 

**Total**

**Within 1 year**

**2****-3**

**years**

**4****-5**

**years**

**After 5 years**

 

(in million pesos)

 

 

 

 

 

 

Long-term lease obligations 

7,801

1,612

4,295

1,340

554

Unconditional purchase obligations(1)

10,161

715

2,194

2,160

5,092

Other long-term obligations 

20,531

**-**

**-**

**-**

20,531

Total contractual cash obligations 

38,493

2,327

6,489

3,500

26,177

 

(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.

* *

*Long-termLease Obligations*

*** ***

*TransponderLease Agreement*.   As discussed in *Note 15 – Related Party Transactions*, PLDT and Mabuhay Satellite entered into aTransponder Lease Agreement on December 28, 1995, which was amended on May 10, 2000.  Thisagreement is for a period of ten years commencing on December 18, 1997, unlessearlier terminated in accordance with the terms thereof.  The annual basic rentfor the transponders for 2002 is US$18 million.  As of March 31, 2003, PLDT’saggregate remaining obligation under this agreement was approximately Php4,060million. 

 

*MunicipalTelephone Projects*.   In 1993, PLDTentered into two lease agreements with the Philippine Department ofTransportation 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 March 31, 2003, the aggregate remaining obligation was approximatelyPhp978 million.  In case of cancellation, PLDTis liable to pay Php100 million under each ofthe two contracts as liquidated damages.

 

*DomesticFiber Optic Network Submerged Plant Agreement*.   As discussed in *Note 15 – Related Party Transactions*, PLDTentered into an agreement with NTT World Engineering Marine Corporation on July 4, 2000, for thesubmarine cable repair and other allied services in relation to the maintenanceof PLDT’s DFON submerged plant for a period of five years up to July 4, 2005.  Underthe agreement, PLDT shall pay NTT World Engineering Marine Corporation 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.  As of March 31, 2003, theaggregate remaining obligation was approximately Php310million.

 

*Digital Passage Service Contracts*.   PLDT hasexisting Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for 10to 25 years expiring at various dates.  As of March 31, 2003, the aggregateremaining obligation was approximately Php146million.

 

*LicenseAgreement with Mobius Management Systems (**Australia**) Pty Ltd., or Mobius.*PLDT entered into a license agreementwith Mobius pursuant to which Mobius has granted PLDT a non-exclusive, non-assignableand non-transferable license for the use of computer software components.Under the agreement, Mobius is also required to provide maintenance servicesfor a period of one year at no additional maintenance charge.  PLDT maypurchase maintenance services at the expiration of the first year for a fee of15% of the current published license fee.  As of March 31, 2003, the aggregateremaining obligation was approximately Php81million.

 

*OtherLong-term Lease Obligations*.   ThePLDT Group has various long-term lease contracts for periods ranging from twoto ten years covering certain offices, warehouses, cell sites,telecommunication equipment locations and various office equipment.

 

*UnconditionalPurchase Obligations*

 

*AirTime Purchase Agreement with AIL*.As discussed in *Note 15 – Related Party Transactions*, PLDT is a party toa Founder NSP Air Time Purchase Agreement, or ATPA, with AIL, which was amendedin December 1998, under which PLDT is granted the exclusive right to sell AILservices in the Philippines.  In exchange, PLDT is required to purchase fromAIL a minimum of US$5 million worth of air time annually over ten yearscommencing on the date of the commercial operations of the satellite.  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.

 

InMarch 2003, PLDT, together with the founder shareholders, entered into aStandstill Agreement with AIL suspending the application and enforcement of theminimum and supplemental air time payments under the original ATPA.  In lieu ofthese payments, the parties agreed to fix the amount of air time usage fees for2003 for unlimited use of air time.  PLDT’s obligation under the StandstillAgreement amounts to US$3.8 million for 2003.  The parties to the StandstillAgreement also agreed to negotiate in good faith and use their best efforts toreach 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.  

 

Asof March 31, 2003, PLDT’s aggregate remaining minimum obligation underthis agreement was approximately Php9,852million.

 

*InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign*.   On September 15, 2000, ePLDT entered into anagreement with VeriSign for the non-exclusive, non-transferable right andlicense to use the VeriSign software, brand and Certification PracticeStatement for the purpose of approving, issuing, suspending or revoking digitalcertificates for users of the Internet or similar open systems in the Philippinesfor a period of seven years.  Under this agreement, ePLDT is required to pay VeriSigna certain percentage of the revenue derived from the services subject tominimum annual royalty payments aggregating to US$1.2 million, which wassubsequently reduced to US$0.9 million, for the seven-year contract period.  Inaddition, ePLDT was required to pay an annual support fee of US$0.5 million forthe first year and US$0.3 million in each year thereafter.  As of March 31, 2003, ePLDT’saggregate remaining minimum obligation under this agreement was approximately Php70 million.

 

*OtherUnconditional Purchase Obligations.*PLDT has various purchase contracts for periods ranging from two to three yearscovering the use of fraud management system and satellite hub and remote VSATnetwork systems.

* *

*OtherLong-term Obligations*

 

*MandatoryConversion and Purchase of Shares*.As discussed in *Note 9 – Investments* and *Note 14 – Stockholders'Equity*, as of March 31, 2003, PLDT had issued a total of 3 million sharesof Series V Convertible Preferred Stock, 5 million shares of Series VIConvertible Preferred Stock and 4 million shares of Series VII ConvertiblePreferred Stock in exchange for a total of 58 million shares of Series K ClassI Convertible Preferred Stock of Piltel pursuant to the debt restructuring of Piltel.

 

Asof March 31, 2003, 145,320 shares of Series V Convertible PreferredStock and 523,843 shares of Series VI Convertible Preferred Stock wereconverted to PLDT common shares.  The aggregate value of the put option basedon outstanding shares as of March 31, 2003 was Php20,531million, of which Php13,418 million is payableon June 4, 2008 and Php7,113 million on June4, 2009 if all of the outstanding shares of Series V, VI and VII ConvertiblePreferred Stock were mandatorily converted and all the underlying common shareswere put to PLDT.  The market value of the underlying common shares was Php3,492 million, based on the market price of PLDT’scommon stock of Php315 per share as of March 31, 2003.

*** ***

***CommercialCommitments***

* *

Asof March 31, 2003, our outstanding commercial commitments, in the formof letters of credit, amounted to Php3,515 million.These commitments will expire within one year.

 

InOctober 1998, Smart entered into a Frame Supply Contract with NokiaTelecommunications OY for the supply of hardware, software and documentationfor its GSM phone network.  In the same month, Smart and Nokia (Philippines),Inc. signed a Frame Services Contract that covers the design, planning,installation, commissioning, integration, acceptance testing, training andhandling over of the GSM network.  In 2001, Smart issued a Master PurchaseOrder, or MPO, in the amount of US$200 million in favor of Nokia Networks OYfor the purchase of additional equipment to expand its GSM phone network.Under this MPO, unavailed portion as of March 31, 2003amounted to US$65 million.

 

* *

 

**21. ****Contingencies**

** **

***PLDT***

 

*NTCsupervision and regulation fees, or SRF.*On various dates in 1988, NTC served various assessment notices and demands forpayment of SRF pursuant to Section 40 of Commonwealth Act 146, otherwise knownas the Public Service Act (PSA).  PLDT protested said assessments and demandsfor payment on the grounds that (a) all assessments under Section 40 (e) of thePSA should legally be based on the par value of a corporate utility operator’soutstanding capital stock, exclusive of capital in excess of par; (b) theassessment were being levied to raise revenues and not as mere reimbursementsfor actual regulatory expenses in violation of the doctrine in PLDT vs. PSC, 66SCRA 341 (1975); (c) NTC had no authority to compel PLDT’s payment of theadministrative fees under Section 40 (f) of the PSA for the increase of PLDT’sauthorized capital stock, since NTC did not render any supervisory orregulatory activity nor incur any expenses in relation to such corporate act;and (d) NTC had no authority to increase the rates of the administrative feesunder Section 40 of the PSA from Php0.20 to Php0.50 per Php100.00of the capital stock pursuant to Batas Pambansa, or B.P. 325 since the latterlegislation was of general application and thus, could not have legally orvalidly amended a special law such as the PSA.

 

Afterexhausting all available administrative remedies with the NTC, PLDT filed anappeal via a Petition for Certiorari with Prayer for Temporary Restraining Orderand/or Preliminary Injunction with the Court of Appeals, or CA.  The CApromulgated its decision which, in the main, held that (a) the annual SRFshould be assessed on the basis of the par value of the subscribed or paid-upcapital stock of PLDT, exclusive of capital in excess of par; (b) the NTC islegally authorized to collect the administrative fees under Section 40 (f) ofthe PSA even if it renders or performs no regulatory service or incurs noexpense whatsoever in approving PLDT’s increase in authorized capital stock;and (c) the fees under Section 40 (e) and (f) of the PSA should be computed atthe rate of Php0.50 per Php100.00, or a fraction thereof pursuant to B.P.325 instead of only Php0.20 per Php100.00 or fraction thereof under the PSA.  

 

Inan appeal to the Supreme Court, or SC, PLDT questioned the CA decision (a) thatthe NTC can validly collect fees even in the absence of any regulatory servicesperformed, and (b) upholding the validity of the increase in the rate of feeunder Section 40 (e) of the PSA to Php0.50from Php0.20 per Php100.00or a fraction thereof of the capital stock.  NTC, on the other hand, questionedthe basis for the SRF assessment, which was determined by the CA to be the parvalue of the subscribed capital stock exclusive of capital in excess of par. 

 

Ina decision dated July 28, 1999, the SC ordered the NTC to recompute the SRF due fromPLDT on the basis of PLDT’s “capital stock subscribed or paid”. 

 

Pursuantto the SC decision, the NTC issued a re-assessment letter in February 2000 forthe balance of the SRF for previous years computed on the same basis stated inthe SC decision but inclusive of stock dividends.  On the ground that theinclusion of stock dividends in the calculation of the SRF has no basis in lawand jurisprudence, PLDT requested the NTC to cancel/withdraw the portions ofthe assessment based on the stock dividends.

 

Withoutresolving or ruling on PLDT’s request, in September 2000, the NTC issuedanother assessment letter for the balance of the SRF for previous years and theSRF for the year ended December 31, 2000.  Consequently, PLDT filed a Petition for Certiorariand Prohibition 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.

 

PLDTfiled a Motion for Reconsideration of the aforementioned CA decision on theground that the same would vitiate and not validate the decision rendered bythe SC on July 28, 1999, ordering the NTC to recompute the SRF to be imposedon PLDT.  On April 6, 2001, the Office of the Solicitor General, or OSG,adopting its Comment dated October 11, 2000 as its comment on the Motion forReconsideration filed by PLDT, stated that the NTC by insisting on itsassessments is providing its own definition of “stock dividend” at variancewith the SC decision dated July 28, 1999 and is in effect enlarging its meaningand scope and expanding the concept envisaged therein.  Further, the OSG statedthat the sole and only issue is whether or not the SC decision directs theinclusion or exclusion of  “stock dividends” in the computation of the SRF.The NTC also filed its comment on PLDT’s Motion for Reconsideration and PLDTfiled a Reply to the NTC’s Comment stressing that the failure of NTC to denythe allegations in PLDT’s Motion for Reconsideration that (a) the SC decisiondated July 28, 1999 annulled and set aside the NTC SRF assessment; (b) the SCdirected the NTC to make a recomputation of the said SRF assessments but thatNTC did not make any such recomputation; (c) the NTC served anew on PLDTexactly the same SRF assessments that were ordered set aside by the SC; (d) theSC decision dated July 28, 1999 has become final and executory; (e) thefundamental issues raised by PLDT in its Motion for Reconsideration is not atall whether the SC decision dated July 28, 1999 is right or wrong but ratherwhether it did or did not direct the exclusion of stock dividends in the SRFassessment; and (f) the SC decision dated July 28, 1999 held that the SRFshould lawfully be based only on such capital stock subscribed or paid forwhich PLDT received actual payment; should all be taken to mean that the NTCSRF assessments should exclude stock dividends.

 

Consideringthe September 30 statutory deadline for the payment of the SRF, PLDT filed withthe CA an Urgent Motion for Re-Issuance of Restraining/Injunctive Writrequesting the CA to re-issue and expand the Writ of Preliminary Injunction ithad previously issued, to cover any and all SRF assessments, including the SRFassessments due on September 30, 2001, pending final resolution of PLDT’sMotion for Reconsideration.  The CA granted PLDT’s prayer for injunctiverelief, and re-issued a Writ of Preliminary Injunction, the same to beeffective until the resolution of PLDT’s Motion for Reconsideration.

 

InMarch 2002, the CA issued a resolution denying PLDT’s Motion forReconsideration and dissolving the Writ of Preliminary Injunction.  PLDT thenfiled with the SC a Petition for Review on Certiorari of the said CA decision. 

 

Inlight of the impending September 30 statutory deadline for the payment of theSRF, PLDT filed with the SC an Urgent Motion for the Issuance of a TemporaryRestraining Order to enjoin the NTC from enforcing any SRF assessments againstPLDT pending the resolution of its Petition for Review on Certiorari.Considering, however, that as of September 30, 2002, no decision has yet beenpromulgated by the SC on the aforementioned Motion, PLDT on the said date paidthe SRF for the years 2000 and 2002 based on the paid-up capital includingpremium but excluding stock dividends.

 

Since1976, PLDT has received assessments from the NTC for permit, SRF and othercharges.  As of March 31, 2003, PLDT has paid a total amount of Php1,249 million in SRF, of which Php1,094 million were paid under protest.

 

*Localfranchise tax assessments*.   PLDT ispresently a party to several cases pending before courts of original andappellate jurisdictions in the Philippines involving the issue of exemption of PLDT from localfranchise and business taxes. 

 

PLDTbelieves, based on the opinion of its legal counsel, that it is exempt frompayment of local franchise and business taxes.  PLDT’s claim for exemption orexclusion from local franchise and business taxes is grounded on Section 12 ofR.A. 7082, or the PLDT Franchise, as implicitly amended and expanded by Section23 of Republic Act 7925, or R.A. 7925, also known as the PublicTelecommunications Policy Act.  Further, PLDT claims that assuming that it is liablefor local franchise tax, R.A. 7160, or the Local Government Code, provides thatlocal franchise tax shall be based on the gross receipts of the preceding yearreceived or collected for services rendered within the jurisdiction of thetaxing authority.  Therefore, the use by some local government units of grossrevenues as the basis for computation of franchise tax is in gross violation ofthe law because it pertains to all income earned regardless of whether it wasreceived or not, unlike gross receipts which are essentially the amount ofmoney or its equivalent actually or constructively received.  Moreover, grossrevenues refer to all income earned by PLDT within and outside the jurisdictionof the local taxing authority; thus, the use thereof as a basis of computationwill exceptionally overstate the franchise tax.

 

Asof March 31, 2003, PLDT has received from several local governmentunits’ assessments for local franchise and/or business taxes covering variousperiods, in the aggregate amount of Php4,524million.  PLDT has invariably protested these assessments, appealed to thelower courts denials of its protests by local government units, and elevated tothe CA or the SC adverse decisions of the lower courts.

 

Inone case involving the City of Davao, the SC rendered on August 22, 2001 a decisiondenying PLDT’s petition for review of the decision of a regional trial court ofDavao City affirming the assessment of local franchise tax of Php3.7 million on PLDT.  The SC held that althoughthe withdrawal of tax exemptions under the Local Government Code does notpreclude Congress from granting subsequent exemptions, Congress, in enactingR.A.7925 particularly Section 23 thereof, did not intend it to operate as ablanket tax exemption to all telecommunications entities and that Section 23 ofR.A. 7925 cannot be considered as having amended the PLDT Franchise so as toentitle PLDT to exemption from local franchise tax.  PLDT filed a Motion forReconsideration of the said decision and a Motion to Refer the Case to theCourt *En Banc* and for Oral Arguments.  The Court’s Second Divisiongranted the Motion to Refer the Case to the Court *En Banc*, whichreferral was thereafter accepted by the Court *En Banc*.  The OralArguments was held on January 21, 2003.  Both parties submitted their Memorandum and theMotion for Reconsideration was deemed submitted for resolution.  On April 3, 2003, PLDTreceived a copy of the SC decision dated March 25, 2003,denying the Motion for Reconsideration by a vote of 9-5 and stating that saiddenial is final.

 

Onthe other hand, in another case involving the Province of Pangasinan,the CA rendered a decision granting PLDT’s appeal of an earlier unfavorabledecision rendered by a regional trial court of Pangasinan.  The CA ruled thatR.A. 7925 impliedly withdrew from the Province of Pangasinan and all other provinces the power to impose andcollect local franchise and business taxes on all telecommunicationscompanies.  The Province of Pangasinan subsequently filed a Motion for Reconsideration ofthe CA decision which was denied.  Hence, the Province of Pangasinanfiled a Petition for Review on Certiorari under Rule 65 of the Rules of Courtwhich the SC dismissed on the ground that “the petition is evidently used as asubstitute for the lost remedy of appeal”.  The Province of Pangasinan’sMotion for Reconsideration of the SC resolution was likewise denied.

 

Theoutcome of these local franchise assessments may have an effect on other taxesto which PLDT could be subject to.

*** ***

***Smart***

 

*NTCSRF.*   Smart has been paying underprotest the SRF assessed by the NTC.  On September 27, 2001,Smart paid the amount of Php86 millionrepresenting SRF for 2001.  On September 30, 2002, Smart paid the amount of Php114 million representing SRF for 2002.

 

Theabove amounts and all other assessments for SRF in the past were paid underprotest as Smart believes that the same is exorbitant and unreasonable andcontrary to Section 5(g) of R.A. 7925.  R.A. 7925 states that the NTC shouldimpose only reasonable fees and charges as may be necessary to cover reasonablecosts and expenses for the regulation and supervision of the operation of thetelecommunications entities.

 

Inits protest, Smart also cited the decision of the Court of Appeals in the caseof ICC Corporation vs. NTC (CA-GR SP No. 45-100, 30 September 1999) which heldthat:  “In the guise of taxation, respondent NTC has in fact arrogated uponitself the power to tax an entity, which it is not authorized by law to do,thereby exceeding its lawful jurisdiction and/or acting with grave abuse ofdiscretion.  That respondent NTC has been generating income from the collectionof fees from telecommunication entities in the guise of regulation is evidentand that the NTC is not classified as tax generating agency of the government.”

 

*NTC Spectrum User’s Fee, or SUF.*Smart has been paying under protest the SUF, assessedby the NTC.  On January 31, 2002, Smart paid about Php40million representing SUF for 2002.  On January 31, 2003,Smart paid about Php48 million representingSUF for 2003.

 

Theabove amounts and other assessments for SUF were paid under protest as Smartbelieves that the same are exorbitant and not reasonable for the use of theradio frequency spectrum considering the present economic conditions and the expensesincurred in the operations and maintenance of Smart’s telecommunicationsfacilities.  Also, as provided in Memorandum Circular 10-10-97 of the NTC, “theSUF shall be based on the amount of spectrum used, the type of service beingoffered and the economical classification of the area covered by the radiostation” and Section 15 of RA 7925 is clear when it mandates that the use ofthe radio frequency spectrum “shall be subject to reasonable spectrum userfees”.

 

*NTCRadio Station License, or**RSL*.   Smartfiled a petition with the NTC last March 4, 2003 for the refund or credit ofoverpaid RSL fees in the amount of Php31 million for the years2000 to 2002. The overpayment was a result of the redundancy in the computationof the SUF and RSL fees.

 

*Localfranchise tax assessments.*   To date,Smart has received assessments for local franchise and business taxes fromcertain cities and municipalities in the aggregate amount of approximately Php313 million.  Smart has formally protested theseassessments based on the following:

 
- An opinion issued by the Bureau of Local Government Finance, or BLGF, dated August 13, 1998 stating that Smart should be considered exempt from the local franchise tax provided under Section 137 of the Local Government Code, which exemption shall be applicable only to local franchise and business taxes.

 
- R.A. 7925 was passed on February 20, 1995 after the passage of the Local Government Code.  Under the  ipso facto  provision of R.A. 7925, the holder of a franchise granted prior to or after the effective date of R.A. 7925 is entitled to the benefit or any favorable provisions contained in any other franchises, regardless of whether such franchises were granted prior to or after the passage of R.A. 7925.

 
- Because Smart’s legislative franchise took effect after the effective date of the Local Government Code, the franchise tax prescribed under Section 137 thereof should be deemed to be part of the said franchise.  Section 137 states that “cellular operators shall only pay a franchise tax equivalent to 3% of all gross receipts of the business transacted under the franchise, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof.”

 
- In the PLDT vs. City of Davao case, the Supreme Court took cognizance of the BLGF opinion by stating that Smart’s franchise granted after the effectivity of the Local Government Code exempted it from the payment of local franchise and business taxes.

 

Smart’sadministrative protest against the Makati and Iloilo assessments were denied,while those against the Digos and General Santos assessments in the aggregateamount of Php59,447 have not yet been decided.

 

Smartfiled separate petitions appealing the local franchise and business taxassessments of Makati City in the amount of Php196million for the calendar years 2000 and 2001, and in the amount of Php116 million for the calendar years 1995, 1998 and1999.  These cases have been consolidated and are now pending before RegionalTrial Court, Branch 61 of Makati City.  

 

Smartalso filed a petition appealing the local franchise and business tax assessmentof Iloilo City in the amount of Php0.8 million.  This case is nowpending before the Regional Trial Court, Branch 28 of Iloilo City.

 

Smartalso filed a Petition for Declaratory Relief with the SC questioning anordinance issued by the City Council of Davao on the local franchise andbusiness taxes.  The SC decided in favor of the City of Davao and Smart’sMotion for Reconsideration of said decision was denied.  Smart filed with theSC a Petition for Review under Rule 45 of the 1997 Rules of Procedure to appealthe aforestated decision.

 

***MabuhaySatellite***

 

MabuhaySatellite was the respondent in an arbitration commenced by SS/L as a result ofa dispute between the two parties concerning their satellite joint venture.  OnJune 5, 2002, Mabuhay Satellite received an arbitration decisionrequiring Mabuhay Satellite to pay SS/L principal amount of US$10 million plusinterest representing Mabuhay Satellite’s unpaid balance for the 65% equity sharein the joint venture.  The amount has been fully accrued and recorded in thebooks of Mabuhay Satellite as of March 31, 2003. 

 

PLDTand some of its subsidiaries are involved in certain other legal actions andclaims arising in the ordinary course of business.  The respective managementsof PLDT and said subsidiaries believe that any possible loss that they mayincur as a result of such legal actions, claims and assessments not covered byan allowance for losses will not have a material effect on their respectivefinancial positions and results of operations.

 

 

 

**22. ****ForeignCurrency-Denominated Monetary Assets and Liabilities**

 

PLDT’sand its subsidiaries’ foreign currency-denominated monetary assets andliabilities and their peso equivalents follow:

 

 

**March 31, 2003****(Unaudited)**

 

December 31, 2002 (Audited)

 

**U.S. Dollar**

**Peso Equivalent**

 

U.S. Dollar

Peso Equivalent

 

(in millions)

***Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

Assets

** **

** **

 

** **

** **

Cash and cash equivalents

**US$80**

**Php4,304**

 

US$76

Php4,033

Accounts receivable

**160**

**8,599**

 

148

7,910

 

**240**

**12,903**

 

224

11,943

Liabilities

** **

** **

 

 

 

Accounts payable

**37**

**1,986**

 

56

2,969

Accrued and other current liabilities

**170**

**9,122**

 

165

8,782

Notes payable

**6**

**322**

 

6

320

Long-term debt

**2,875**

**152,854**

 

2,957

156,398

Deferred credits and other noncurrent liabilities

**50**

**2,693**

** **

50

2,676

**3,138**

**166,977**

 

3,234

171,145

Net foreign currency-

** **

** **

 

 

 

denominated liabilities

**US$2,898**

**Php15****4,074**

 

US$3,010

Php159,202

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

***Non-Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

Assets

** **

** **

 

** **

** **

Cash and cash equivalents

**US$46**

**Php2,454**

 

US$49

Php2,602

Accounts receivable

**118**

**6,313**

 

116

6,158

 

**164**

**8,767**

 

165

8,760

Liabilities

** **

** **

 

 

 

Accounts payable

**6**

**342**

 

23

1,220

Accrued and other current liabilities

**46**

**2,476**

 

47

2,476

Notes payable

**6**

**322**

 

6

320

Long-term debt

**2,510**

**133,314**

 

2,558

135,158

Deferred credits and other noncurrent liabilities

**50**

**2,693**

** **

50

2,676

**2,618**

**139,147**

 

2,684

141,850

Net foreign currency-

** **

** **

 

 

 

denominated liabilities

**US$2,454**

**Php130,380**

 

US$2,519

Php133,090

 

Intranslating the foreign currency-denominated monetary assets and liabilitiesinto peso amounts, the exchange rates used were Php53.604to US$1.00 and Php53.254 to US$1.00, thepeso-dollar exchange rates as at March 31, 2003 and December 31, 2002, respectively.

 

 

**23. ****FinancialInstruments**

** **

***PLDT***

*** ***

*CurrencySwaps*

 

In2002 and 2001, PLDT entered into long-term principal-only currency swapagreements with various foreign counterparties to hedge the currency risk onits fixed rate notes maturing in 2012 and 2017.  In March 2003, PLDT enteredinto another long-term principal-only currency swap agreement to hedge its 2009fixed rate notes.  As of March 31, 2003 and December 31, 2002, the swaps have an aggregatenotional amount of US$725 million and US$550 million, respectively.  Under theswaps, PLDT effectively exchanges the principal of its US dollar-denominatedfixed rate notes into peso-denominated loan exposures at an agreed swapexchange rate.  The agreed swap exchange rate is reset to the lowest Peso/US$spot exchange rate during the term of the swap, subject to a minimum exchangerate.  As of March 31, 2003 and December 31, 2002, the outstanding swap contractshave been reset to average exchange rate of Php51.787and Php51.266, respectively.  Inaddition, PLDT is required to make semi-annual fixed or floating swap costpayments to its counterparties, which amount to about 2.08% and 2.35% on March 31, 2003 and December 31, 2002,respectively.  

 

Thecurrency swap agreement relating to the 2009 fixed rate notes had beenstructured to include currency option contracts as well.  If the Peso/US$ spotexchange rate on maturity date settles beyond an agreed threshold, PLDT willhave to purchase US$ at the minimum exchange rate plus the excess above theagreed threshold rate.  On the other hand, if on maturity, the Peso/US$ spotexchange rate is lower than the minimum exchange rate, PLDT will have theoption to purchase at the prevailing Peso/US$ spot exchange rate. 

 

US$575million of the long-term currency swaps outstanding as of March 31, 2003, havebeen structured to include credit-linkage with PLDT as the reference entity.The specified credit events include bankruptcy, failure to pay, obligationacceleration, moratorium/repudiation, and restructuring of PLDT bonds or all orsubstantially all of PLDT’s obligations.  Upon the occurrence of any of thesecredit events, subject to agreed threshold amounts where applicable, theobligations of both PLDT and its counterparty under the swap contractsterminate without further settlements to either party, including anymark-to-market value of the swaps.  

 

Asof March 31, 2003 and December 31, 2002, the aggregate mark-to-market value ofthe outstanding currency swaps, as confirmed by the counterparties, amounted toa net loss of Php693 million and Php461 million, respectively.  

 

*ForwardExchange Contracts*

 

PLDThad the following aggregate outstanding short-term forward exchange contractsto buy US$ and sell Pesos as of March 31, 2003 and December 31, 2002: 

 

 

**March 31,**

**2003**

**(Unaudited)**

 

December 31, 

2002

(Audited)

Aggregate notional amount (in millions)

**US$170**

 

US$211

Weighted average forward rate

**Php54.80 to US$1**

 

Php53.94 to US$1

 

PLDThad the following outstanding short-term forward exchange contracts to buy JP¥and sell US$ as of March 31, 2003 and December 31, 2002:

 

 

**March 31,**

**2003**

**(Unaudited)**

 

December 31, 

2002

(Audited)

Aggregate notional amount (in millions)

JP¥3,072

 

JP¥3,296

Contracted forward rate

JP¥118.22 to US$1

 

JP¥115.19 to US$1 

 

Thenet mark-to-market loss on all the outstanding forward exchange contractsamounted to about Php145 and Php162 million as of March 31, 2003 and December 312002, respectively, as confirmed by the counterparties.

 

*CurrencyOption Contracts*

 

InMarch 2003, PLDT utilized structures incorporating currency options to hedgethe maturing principal on its 2003 and 2004 fixed rate notes.  As of March 31, 2003, PLDThad outstanding currency option contracts amounting to US$125 million.  The netmark-to-market loss on these outstanding currency option contracts amounted toabout Php21 million as of March 31, 2003, asconfirmed by counterparties.

* *

*InterestRate Swap*

 

In2001, PLDT entered into a US$/Japanese yen (JP¥) swap agreement to swap the couponon US$175 million of its fixed rate notes for a floating rate JP¥ amount.  Theswap was terminated in 2002 at a realized gain of Php633million.

* *

***Smart***

 

*CurrencySwaps*

 

Smarthad existing currency swap agreements with a foreign financial institution,with aggregate notional amount of US$88 million as of March 31, 2003 and December 31, 2002 andaverage swap rate of Php37.90 to US$1.00.Under the swaps, Smart receives fixed US dollar interest payments and paysfixed peso interest payments in semi-annual intervals up to April 2003.  As ofMarch 31, 2003 and December 31, 2002, the net mark-to-market gains on theseswap agreements, as confirmed by the conterparty, amounted to about Php1,273 million and Php1,361million, respectively, and are recognized directly through earnings.  

 

Awholly owned subsidiary of Smart entered into complementary currency swapagreements with the same counterparty, whereby the mark-to-market value of suchcurrency swaps offset the mark-to-market value of the currency swaps enteredinto by the Smart.

 

*ForwardExchange Contracts*

 

Smarthas the following outstanding short-term forward exchange contracts to buy US$and sell Pesos as of March 31, 2003 and December 31, 2002:

 

 

**March 31,**

**2003**

**(Unaudited)**

 

December 31, 

2002

(Audited)

Aggregate notional amount (in millions)

**US$124**

 

US$5

Weighted average forward rate

**Php56.65 to US$1**

 

Php53.47 to US$1

 

Thenet mark-to-market loss on the outstanding forward contracts amounted to about Php139 million as of March 31, 2003, as confirmed bycounterparties.  The mark-to-market value as of December 31, 2002 is notmaterial.

 

 

 

**24. ****Reportable Segments**

 

Operatingsegments are components of an enterprise about which separate financialinformation is available that is evaluated regularly by management in decidinghow to allocate resources and in assessing performance.  Generally, financialinformation is required to be reported on the basis that it is used internallyfor evaluating segment performance and deciding how to allocate resources tosegments.

 

Wehave organized our business into three main segments:

 
- Fixed Line — fixed line telecommunications services primarily provided throughPLDT.  We also provide fixed line services through PLDT’s subsidiaries ClarkTelecom, Subic Telecom, MaraTel, BCC which together account for approximately1% of our consolidated fixed lines in service, and PLDT Global;        - Wireless — wireless telecommunications services provided through our cellularservice provider, Smart, and satellite operators, namely PLDT’s subsidiaries MabuhaySatellite, ACeS Philippines and Telesat; and          - Information and CommunicationsTechnology — information and communications infrastructure andservices for Internet applications, Internet protocol-based solutions andmultimedia content delivery provided by PLDT’s subsidiary ePLDT, Internetaccess services provided by ePLDT’s subsidiary Infocom, and e-commerce, callcenters and IT-related services provided by other subsidiaries and affiliatesof ePLDT, as described in  Note 9 – Investments.      Thesegment assets as of March 31, 2003 and December 31, 2002 and results of operations ofour reportable segments for the three months ended March 31, 2003 and 2002reported under Philippine GAAP are as follows:  ** **  
 

**Fixed Line**

**Wireless**

**Information and  Communications Technology**

** **

** **

**Eliminations**

**Total**

* *

(in million pesos)

*As of and for the three months ended**March 31, 2003**(Unaudited)*

Operating revenues

12,196

11,132

361

(953)

22,736

External revenues

11,439

10,940

357

–

22,736

Inter-segment revenues

757

192

4

(953)

–

Operating expenses

8,963

7,227

432

(956)

15,666

External expenses

8,104

7,130

432

–

15,666

Inter-segment expenses

859

97

–

(956)

–

Operating income (loss)

3,233

3,905

(71)

3

7,070

Segment assets

262,159

81,142

3,364

(47,466)

299,199

Segment liabilities

164,487

40,786

3,215

(7,890)

200,598

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

5,395

6,170

(89)

210

11,686

Investing activities

(785)

(706)

5

(47)

(1,533)

Financing activities

(5,786)

(2,719)

178

(164)

(8,491)

Depreciation and amortization

3,293

2,417

103

–

5,813

Provision for doubtful accounts

776

348

6

–

1,130

Capital expenditures

693

1,104

10

–

1,807

* *

*As of December 31, 2002 (As restated – Note 3) and  for the three months ended March 31, 2002 (Unaudited/As restated -Note 3)*

Operating revenues

11,281

7,554

118

(279)

18,674

External revenues

11,232

7,324

118

–

18,674

Inter-segment revenues

49

230

–

(279)

–

Operating expenses

8,034

5,415

212

(279)

13,382

External expenses

7,804

5,366

212

–

13,382

Inter-segment expenses

230

49

–

(279)

–

Operating income (loss)

3,247

2,139

(94)

–

5,292

Segment assets

263,043

77,035

3,651

(44,171)

299,558

Segment liabilities

167,427

39,894

3,060

(6,687)

203,694

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

5,078

3,384

(47)

375

8,790

Investing activities

(1,099)

(3,078)

(210)

–

(4,387)

Financing activities

(4,392)

(377)

234

(375)

(4,910)

Depreciation and amortization

3,253

2,296

57

–

5,606

Provision for doubtful accounts

705

92

6

–

803

Capital expenditures

806

3,170

183

–

4,159
        
 
  **25. ****Other Matters**  ** **  a.      Interconnection Agreements     PLDThas existing interconnection agreements with nine International GatewayFacilities, or IGF operators, six Inter Exchange Carriers, or IXCs, sixCellular Mobile Telephone Systems, or CMTS operators, 70 LECs (includingmembers of the Philippine Association of Private Telephone Companies, Inc.),and 12 paging and trunk radio operators.  These interconnection agreementsinclude provisions for settlement and payment of charges.  Settlements withinterconnecting IGF operators and CMTS operators for local calls are in theform of access charges.  Settlements with interconnecting IXCs and LECs fortoll calls are based on hauling and access charges, and to some extent, revenuesharing.  Settlement also involves payment of access charges, but settlementfor toll calls is on a revenue-sharing basis.  LEC to LEC interconnection withhauling from one service area to another service area is settled based on trunkcharges, while overlay LEC to LEC interconnection in a given service area iswithout charges.  Paging and trunk radio interconnection settlements are basedon fixed charges.       b.      Proposed Metering of LocalExchange Service     Theproposed metering of PLDT’s local exchange service has been temporarilysuspended for further review by the NTC.     c.      U.S. Federal Communications Commission, or FCC, Ruling versus PhilippineTelecommunications Companies     InMay 2002, PLDT advised AT&T Corp., or AT&T, MCI and other carriers of PLDT’sdesire to increase its termination rates by August 2002. Despite numerousnegotiation sessions in 2002 and 2003, AT&T and MCI refused to accept anyrate increases.  PLDT unilaterally extended its prior termination charges toeach carrier while continuing offers to negotiate, first from August 1, 2002 toOctober 1, 2002, then until December 31, 2002, and then, finally, despite thelack of a written agreement from AT&T and MCI, through January 31, 2003.While nearly 100 carriers worldwide, including 23 U.S. carriers,agreed 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 eitherAT&T or MCI, effective as of February 1, 2003, PLDT stopped terminatingtraffic sent directly 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 take action to protect U.S. international carriers and U.S. consumersfrom alleged “whipsawing” behavior occurring on the U.S.-Philippine Route.  “Whipsawing” is a form of anti-competitive behavior that involvesthe ability of foreign carriers to obtain unduly favorable terms and conditionsfrom U.S. international service providers by setting competing U.S. carriersagainst one another.     On February 7, 2003, theNational Telecommunications Commission, or NTC, of the Republic of the Philippinesdirected 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.     OnMarch 10, 2003, the International Bureau of the U.S. FCC issued an Order on thepetitions filed separately by AT&T and MCI requiring all U.S. carriersproviding direct all facilities-based service on the U.S.-Philippine route tosuspend payments for termination services to Philippine carriers, includingPLDT, Globe Telecom, Inc., Bayan Telecommunications Philippines, Inc., DigitalTelecommunications Philippines, Inc., Smart and Subic Telecom until such timeas the U.S. FCC issues a Public Notice that the affected circuits of U.S.carriers 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.  As of March 31, 2003,receivables from U.S. carriers amounted to approximately US$19 million, ofwhich US$8 million was attributable to PLDT, US$8 million to Smart and US$3million to Subic Telecom.     Inresponse to the ruling of the International Bureau of the FCC, the NTC issued aMemorandum Order dated March 12, 2003 directing all affected Philippinecarriers “(1) not to accept terminating traffic via direct circuits from U.S.facilities-based carriers who do not pay Philippine carriers for servicesrendered; and (2) to take all measures necessary to collect payments forservices rendered in order to preserve the viability, efficiency, sustainedgrowth and development and continued competitiveness of the Philippinetelecommunications industry.”     TheNTC also stated in its March 12 Order that the termination rates offered byPLDT are “fair and reasonable.”  These rates, US$0.12 per minute for callsterminating on the fixed-line network and US$0.16 per minute for callsterminating on mobile networks, are well below the FCC benchmark settlementrate of US$0.19 per minute for low middle income countries such as thePhilippines and also substantially below the settlement rate of US$0.238 perminute suggested by the International Telecommunication Union for countrieswith teledensity between 1 to 5 telephones per 100 population.       On April 9, 2003, wefiled with the FCC an application for review of the International Bureau’s March 10, 2003 Order.        
 
  **26. ****Reclassification of Accounts**  ** **  Wehave reclassified certain accounts in 2002 to conform with our 2003 financialstatements presentation.