**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

 

**FORM 20-F/A**

(AMENDMENT NO. 3)

 

**[  ]           REGISTRATION STATEMENT PURSUANT TOSECTION 12(B) OF THE SECURITIES EXCHANGE ACT OF 1934**

**OR**

** **

**[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the fiscal year endedDecember 31, 2002**

** **

**OR**

** **

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

** **

**Commission file number1-03006**

** **

**Philippine Long Distance Telephone Company**

(Exact name of Registrant as specified in its charter)

 

**Republic of the****Philippines**

(Jurisdiction of incorporation or organization)

 

**Ramon********Cojuangco********Building**

**Makati Avenue**

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

(Address of principal executive or organization)

 

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

 

| Title of each class                                                                                                                      | Name of each exchange

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

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

 

** Registered on the NewYork Stock Exchange not for trading but only in connection with theregistration of American Depositary Shares or Global Depositary Shares, as thecase may be, pursuant to the requirements of such stock exchanges*.

* *

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

 

None

 

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

 

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

 

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

 

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

 

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

 

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

 

 

| **TABLE OF CONTENTS**                             |
|---------------------------------------------------|
|                                              |
| CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT |
|                                              |
| FORWARD-LOOKING STATEMENTS                        |
|                                              |
| PART I                                            |
|                                              |
|                                              |           Item 1.            Identity of Directors, Senior Management and Advisors |
|                                              |           Item 2.            Offer Statistics and Expected Timetable |
|                                              |           Item 3.            Key Information |
|                                              | Selected Financial Data |
|                                              | Capital Stock |
|                                              | Dividends Declared |
|                                              | Dividends Paid |
|                                              | Exchange Rates |
|                                              | Risk Factors |
|                                              |           Item 4.            Information on the Company |
|                                              | Overview |
|                                              | Historical Background and Development |
|                                              | Organization |
|                                              | Strengths |
|                                              | Strategy |
|                                              | Fixed Line |
|                                              | Wireless |
|                                              | Information and Communications Technology |
|                                              | Fixed Line Network Infrastructure |
|                                              | Wireless Network Infrastructure |
|                                              | Interconnection Agreements |
|                                              | Licenses and Regulations |
|                                              | Competition |
|                                              | Environmental Matters |
|                                              | Intellectual Property Rights |
|                                              | Properties |
|                                              |           Item 5.            Operating and Financial Reviews and Prospects |
|                                              | Overview |
|                                              | Critical Accounting Policies |
|                                              | Results of Operations |
|                                              | Liquidity and Capital Resources |
|                                              | Effect of Peso Depreciation |
|                                              | Impact of Inflation and Changing Prices |
|                                              | Other Information |
|                                              | Certain Indebtedness |
|                                              |           Item 6.            Directors, Senior Management and Employees |
|                                              | Directors, Key Officers and Advisors |
|                                              | Term of Office |
|                                              | Family Relationships |
|                                              | Compensation |
|                                              | Executive Stock Option Plan |
|                                              | Share Ownership |
|                                              | Audit, Nomination, Executive Compensation and Finance Committees |
|                                              | Employees and Labor Relations |
|                                              | Pension and Retirement Benefits |
|                                              | Employees’ Stock Plan |
|                                              | Legal Proceedings |
|                                              |           Item 7.            Major Shareholders and Related Party Transactions |
|                                              | Major Shareholders |
|                                              | Related Party Transactions |
|                                              |           Item 8.            Financial Information |
|                                              | Consolidated Statements and Other Financial Information |
|                                              | Legal Proceedings |
|                                              | Dividend Distribution Policy |
|                                              |           Item 9.            The Offer and Listing |
|                                              | Common Capital Stock and American Depositary Receipts (“ADRs”) |
|                                              | Series III Convertible Preferred Stock and Global Depositary Receipts (“GDRs”) |
|                                              |        Item 10.            Additional Information |
|                                              | Articles of Incorporation and By-Laws |
|                                              | Material Contracts |
|                                              | Exchange Controls and Other Limitations Affecting Securities Holders |
|                                              | Taxation |
|                                              | Equity Securities |
|                                              | Debt Securities |
|                                              | Documents on Display |
|                                              |        Item 11.            Quantitative and Qualitative Disclosures About Market Risks |
|                                              | Liquidity Risk Management |
|                                              | Foreign Exchange Risk Management |
|                                              | Interest Rate Risk Management |
|                                              |        Item 12.            Description of Securities Other than Equity Securities |
|                                              |
| PART II                                           |
|                                              |
|                                              |        Item 13.            Defaults, Dividend Arrearages and Delinquencies |
|                                              |        Item 14.            Material Modifications to the Rights of Security Holders and Use of Proceeds |
|                                              |        Item 15.            Controls and Procedures |
|                                              |        Item 16.            Audit Committee Financial Expert, Code of Ethics, and Principal Accountant Fees and Services |
|                                              |
| PART III                                          |
|                                              |
|                                              |        Item 17.            Financial Statements |
|                                              |        Item 18.            Financial Statements |
|                                              |        Item 19.            Exhibits |
|                                              |
| CERTIFICATIONS                                    |
|                                              |
|                                              | Exhibit Number |

CERTAIN CONVENTIONSAND TERMS USED IN THIS REPORT
** **

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

 

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

 

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

 

In this report, unless otherwisespecified or the context otherwise requires, all references to “pesos,”“Philippine pesos” or “Php” are to the lawful currency of the Philippines, allreferences to “dollars,” “U.S. dollars” or “US$” are to the lawful currency ofthe United States, all references to “Japanese yen,” “JP¥” or “¥” are to thelawful currency of Japan, and all references to “Euro” or “€” are to the lawfulcurrency of the European Union.  Unless otherwise indicated, translations ofpeso amounts into U.S. dollars in this report were made based on the volumeweighted average exchange rate quoted through the Philippine Dealing System,which was Php53.254 to US$1.00 on December 31, 2002.  On September 30, 2003, the volume weighted average exchange rate quoted was Php54.877 to US$1.00.

 

In this report, each reference to:

 

•        ACeS Philippines means ACeS Philippines Cellular SatelliteCorporation, an 88.5%-owned subsidiary of PLDT and 11.5%-owned by Piltel;

 

•        AMPS means advanced mobile phone system;

 

•        ARPU means average monthly revenue per user;

 

•        BSP means Bangko Sentral ng Pilipinas;

 

•        CDMA means code division multiple access;

 

•        Clark Telecom means PLDT Clark Telecom, Inc., our wholly-ownedsubsidiary;

 

•        ePLDT means ePLDT, Inc., our wholly-owned subsidiary;

 

•        ETACS means enhanced total access communications system;

 

•        First Pacific means First Pacific Company Limited;

 

•        GAAP means generally accepted accounting principles;

 

•        GSM means global system for mobile communications;

 

•        ISP means internet service provider;

 

•        Infocom means Infocom Technologies, Inc., a 99.6%-owned subsidiaryof ePLDT;

 

•        Mabuhay Satellite means Mabuhay Satellite Corporation, our67%-owned subsidiary;

 

•        MaraTel means Maranao Telephone Company, Inc., our 97.5%-ownedsubsidiary;

 

•        NTC means the National Telecommunications Commission of the Philippines;

 

•        NTT Communications means NTT Communications Corporation, awholly-owned subsidiary of Nippon Telegraph and Telephone Corporation of Japan;

 

•        PAPTELCO means Philippine Association of Private TelephoneCompanies;

 

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

 

•        Piltel means Pilipino Telephone Corporation, in which we have a45.3% ownership interest and which is treated as a consolidated subsidiaryunder U.S. GAAP; 

 

•        PLDT Beneficial Trust Fund means the beneficial trust fundcreated by PLDT to pay the benefits under the PLDT Employees’ Benefit Plan;

 

•        PLDT Global means PLDT Global Corporation, our wholly-ownedsubsidiary;

 

•        SMS means short message service;

 

•        Smart means Smart Communications, Inc., our wholly-ownedsubsidiary;

 

•        Subic Telecom means Subic Telecommunications Company, Inc., ourwholly-owned subsidiary;

 

•        Telesat means Telesat, Inc., our 94.4%-owned subsidiary;

 

•        Vocativ means Vocativ Systems, Inc., a wholly-owned subsidiary ofePLDT; and

 

•        VSAT means very small aperture terminal.

 

**FORWARD-LOOKINGSTATEMENTS**

 

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

 

A forward-looking statement mayinclude a statement of the assumptions or bases underlying the forward-lookingstatement.  We have chosen these assumptions or bases in good faith, and webelieve that they are reasonable in all material respects.  However, we cautionyou that assumed facts or bases almost always vary from actual results, and thedifferences between results implied by the forward-looking statements, assumedfacts or bases and actual results can be material, depending on thecircumstances.  When considering forward-looking statements, you should keep inmind the description of risks and other cautionary statements in this report.You should also keep in mind that any forward-looking statement made by us inthis report or elsewhere speaks only as of the date on which we made it.  Newrisks and uncertainties come up from time to time, and it is impossible for usto predict these events or how they may affect us.  We have no duty to, and donot intend to, update or revise the statements in this report after the datehereof.  In light of these risks and uncertainties, you should keep in mindthat any forward-looking statement made in this report or elsewhere might notoccur.

 

**PARTI**

 

**Item 1.       ****Identity of Directors, Senior Management and Advisors**

 

Not applicable.

 

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

 

Not applicable.

 

**Item 3.       ****Key Information**

 

**Selected Financial Data**

 

The selected consolidated financial information below should beread in conjunction with, and is qualified in its entirety by reference to, ouraudited consolidated financial statements, including the notes, includedelsewhere in this report.  The consolidated financial statements have beenprepared and presented in conformity with U.S. GAAP.  Due to our decision tocommence this year using U.S. GAAP for our Annual Report on Form 20-F, we areunable to provide without unreasonable effort and expense U.S. GAAPconsolidated financial information with respect to the fiscal years endedDecember 31, 1998 and 1999.  As a result, we have omitted such information inthe table below.  In our previous Annual Reports on Form 20-F, we disclosedconsolidated financial statements, including the financial information withrespect to the years ended December 31, 1998 and 1999, prepared in accordancewith Philippine GAAP, along with a reconciliation to U.S. GAAP.

 

Prior to 2002, our consolidatedfinancial statements included in our Annual Report on Form 20-F filed with theU.S. Securities and Exchange Commission, or U.S. SEC, were prepared inconformity with Philippine GAAP. Philippine GAAP varies in certain significantrespects from U.S. GAAP.  A description of the significant differences betweenU.S. GAAP and Philippine GAAP and a quantitative reconciliation of suchdifferences in the net loss and stockholders’ equity to U.S. GAAP was disclosedin a note to our previously filed financial statements.  In connection with thepreparation of our consolidated balance sheets as of December 31, 2002 and2001, and the related consolidated statements of operations, changes instockholders’ equity and cash flows for the years ended December 31, 2002,2001, and 2000 in conformity with U.S. GAAP, we identified differences in theU.S. GAAP amounts previously disclosed for 2001 and 2000.  Please see Note 4 toour consolidated financial statements in Item 18 herein for a discussion ofsuch differences.  In addition, subsequent to the disclosure of ourconsolidated financial statements in the Annual Report on Form 20-F for the fiscalyear ended December 31, 2002 and the amendments thereto that were filed withthe U.S. SEC on July 15 and 16, 2003, we made additional adjustments to certainitems, which we believe are required to be made pursuant to U.S. GAAP.  Theseadditional adjustments made in this amended Annual Report on Form 20-F impactedour net loss, earnings per share, and stockholders’ equity as discussed infootnote 2 to the table below.  See also “Item 5. Operating and FinancialReview and Prospects ––Restatement of Information Previously Reported” and Note4 to our consolidated financial statements in Item 18 for a further discussionof these subsequent adjustments.

 

 

** **

**Consolidated Financial Data**

** **

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

**2002(1)**

 

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

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

 

 

 

 

**Statements of Operating Data:**

 

 

 

 

Operating revenues

Php60,348

Php80,294

Php92,743

US$1,742

Operating expenses

49,824

86,236

80,714

1,516

Net operating income (loss)

10,524

(5,942)

12,029

226

Net operating income (loss) per share

 

 

 

 

Basic

58.82

(47.36)

55.47

1.04

Diluted

58.82

(47.36)

52.23

0.98

Net loss(2)

(29,258)

(27,782)

(6,158)

(116)

Earnings per common share(2) and (3)

(193.48)

(176.85)

(52.08)

(0.98)

**Balance Sheets Data:**

 

 

 

 

Cash and cash equivalents

 

4,276

10,974

206

Total assets

 

284,877

269,651

5,063

Total long-term debt - net of current portion

 

169,870

171,323

3,217

Long-term debt

 

190,099

190,950

3,586

Total debt(4)

 

196,561

191,710

3,600

Total liabilities(5)

 

249,563

240,876

4,523

Total stockholders’ equity

 

24,472

16,413

308

**Other Data:**

 

 

 

 

EBITDA(6)

(5,902)

5,457

26,587

499

Depreciation 

12,756

16,218

17,481

328

Ratio of earnings to fixed charges(7)

–

–

–

–

Net cash provided by operating activities

20,727

20,168

39,692

745

Net cash used in investing activities

25,183

29,376

17,082

321

Net cash provided by (used in) financing activities

5,511

3,786

(16,009)

(301)

Dividends declared to common shareholders

752

202

–

–

Dividends declared per common share(8)

4.80

1.20

–

–

_____________

 

*(1)    **We maintain our accounts inPhilippine pesos. For convenience, the peso financial information as of and forthe year ended December 31, 2002, has been translated into U.S. dollars at theexchange rate of Php53.254 to US$1.00, the rate quoted through the PhilippineDealing System as of December 31, 2002.  This translation should not beconstrued as a representation that the Philippine peso amounts represent, orhave been or could be converted into, U.S. dollars at that rate or any otherrate.*

* *

*(2)   Subsequent to the issuance of our consolidatedfinancial statements as of December 31, 2002 and 2001 and for the years endedDecember 31, 2002, 2001 and 2000, we made additional adjustments to certainitems, which we believe are required to be made pursuant to U.S. GAAP.  Theseadditional adjustments made in this amended Annual Report on Form 20-F impactedour net loss, earnings per common share, and stockholders’ equity summarized asfollows:*

* *

 

2000

2001

2002

** **

(in millions, except per share amounts)

 

 

 

 

Net loss, as previously reported 

(Php23,087)

(Php27,484)

(Php4,559)

Depreciation:

 

 

 

Smart analog assets

–

–

(1,557)

Mabuhay

(136)

236

(273)

Impairment of Piltel E.O. No. 109 assets

–

–

(1,150)

Goodwill amortization

(863)

(1,151)

402

Customer lists amortization

–

(225)

(225)

Unrealized foreign exchange loss – net

(1,053)

(742)

(55)

Revenue recognition adjustments

(29)

(141)

112

Debt restructuring

–

(718)

–

Consolidation:

 

 

 

Piltel

(1,823)

567

(377)

Minority interest in net losses (income) of consolidated subsidiaries

416

–

(100)

Others

(56)

(58)

(63)

Deferred income tax benefit (expense)

(2,627)

1,934

1,687

Net loss, as restated

(Php29,258)

(Php27,782)

(Php6,158)

 

 

 

 

Earnings per common share as previously reported

(Php154.34)

(Php175.08)

(Php42.60)

Earnings per common share as restated(1)

(193.48)

(176.85)

(52.08)

(1)  Earnings per common share includes the effect of dividends and accretion of preferred stock

 

 

 

 

 

 

 

 

Stockholders’ equity, as previously reported

Php50,558

Php21,573

Php15,122

Adjustments to current year’s net loss

(6,171)

(298)

(1,599)

Adjustments affecting prior years’ net loss

–

(6,171)

(6,469)

Adjustments relating to Smart acquisition and other adjustments

7,195

7,190

7,181

Adjustments related to stockholders’ equity as at January 1, 2000

2,178

2,178

2,178

Stockholders’ equity, as restated 

Php53,760

Php24,472

Php16,413

 

(3)   *Our convertible preferred shares were deemedanti-dilutive based on a calculation of the required dividends on preferredshares for each series of convertible preferred shares divided by the number ofequivalent common shares assuming such preferred shares were converted intocommon shares and compared against the basic earnings per share.  Since theamount of dividends on preferred shares over the equivalent number of commonshares were greater than the basic earnings per share, the amounts for basicand diluted earnings per share are the same.*

 

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

* *

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

* *

*(6)    **On a consolidated basis,EBITDA is defined as income (loss) before minority interest in net income(loss) of consolidated subsidiaries and adding back interest expense andrelated items, taxes, and depreciation and amortization and deducting interestincome and is presented because it is generally accepted as providing usefulinformation regarding a company’s ability to service and/or incur debt. EBITDAshould not be considered in isolation or as a substitute for operating income,net income, cash flows from operating activities and other income or cash flowstatement data prepared in accordance with applicable generally acceptedaccounting principles, or as a measure of PLDT’s profitability or liquidity.  Aquantitative reconciliation of EBITDA from loss before minority interest in netincome of consolidated subsidiaries is provided in the following table:*

 

** **

**Consolidated Financial Data**

** **

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

**2002(1)**

 

**(in millions)**

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

 

 

 

 

Loss before minority interest in net income of consolidated subsidiaries 

(Php29,117)

(Php27,674)

(Php6,037)

(US$113)

Add/(deduct):

 

 

 

 

Interest expenses and related

items, net of capitalized interest

13,541

14,697

14,002

263

Interest income

(1,946)

(1,391)

(1,063)

(20)

Provision for (benefit from) income tax

(5,613)

(2,570)

1,438

27

Depreciation

12,756

16,218

17,481

328

Amortization of goodwill and other 

intangible assets

4,477

6,177

766

14

EBITDA

(Php5,902)

Php5,457

Php26,587

US$499

* *

 

 

 

 

 

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

* *

*Dueto PLDT’s losses in 2000, 2001 and 2002, the coverage ratio on a consolidatedbasis was less than 1.0x in all of these three years.  In order to achieve acoverage ratio of 1.0x, we would have had to generate additional consolidatedearnings of Php35,509 million, Php30,126 million and Php2,469 million for eachof the three years ended December 31, 2000, 2001 and 2002, respectively, toachieve a coverage ratio of 1.0x.*

* *

*(8)  **The most recent cashdividend declaration made by PLDT on its common stock was in March 2001, whichwas paid in April 2001.*

 

**Capital Stock**

 

The following table summarizes PLDT’s capital stock outstandingas of December 31, 2000, 2001 and 2002.

 

 

**December 31,**

 

**2000**

** **

**2001**

** **

**2002**

 

**(in millions)**

Serial Preferred Stock

 

 

 

 

 

Cumulative Convertible

 

 

 

 

 

10% Convertible

 

 

 

 

 

A to CC

Php3,515

 

Php3,723

 

Php4,068

Series III

46

 

46

 

46

Series V(1)

—

 

26

 

25

Series VI(1)

—

 

49

 

49

Series VII(1)

—

 

38

 

36

Cumulative Nonconvertible

 

 

 

 

 

Series IV

360

 

360

 

360

 

Php3,921

 

Php4,242

 

Php4,584

Common Stock

Php843

 

Php845

 

Php847

 

**Dividends Declared**

 

 

**Years Ended December 31,**

 

**2000**

** **

**2001**

** **

**2002**

Cash dividends declared per share of PLDT’s common stock, in pesos (2)

Php4.80

 

Php1.20

 

Php—

_____________

 

*(1)   Preferred stock subject to mandatory redemption(see Note 17 of our consolidated financial statements in Item 18 for a furtherdiscussion).*

* *

*(2)   The most recent cash dividend declaration made byPLDT on its common stock was in March 2001, which was paid in April 2001.  PLDTdoes not expect to declare cash dividends on these shares in 2003.*

 

**DividendsPaid**

 

A summary of dividends paid per share of PLDT's common stockstated in both Philippine pesos and U.S. dollars follows:

 

**In Philippine Pesos**

** **

**In U.S. Dollars**

1998

 

 

 

January 15

1.20

 

0.029

April 15

1.20

 

0.031

July 15

1.20

 

0.029

October 15

1.20

 

0.028

1999

 

 

 

January 15

1.20

 

0.031

April 15

1.20

 

0.031

July 15

1.20

 

0.031

October 15

1.20

 

0.030

2000

 

 

 

January 14

1.20

 

0.030

April 14

1.20

 

0.029

July 15

1.20

 

0.027

October 15

1.20

 

0.025

2001

 

 

 

January 15

1.20

 

0.023

April 16

1.20

 

0.024

 

(*Note*:      *Dividends on PLDT's common stockare declared and paid in Philippine pesos. For the convenience of the reader, thepeso dividends are translated into U.S. dollars based on exchange rates on therespective dates of dividend payments.  Dividends paid in January of each ofthe calendar years 1998-2001 were declared in the preceding December.Accordingly, total amounts shown for cash dividends declared under “DividendsDeclared” above may differ from the amounts shown for cash dividends paid under“Dividends Paid.”)*

 

**Exchange Rates**

** **

The Philippine government does notadministratively fix the exchange rate between the Philippine peso and the U.S.dollar.  Since August 1, 1992, a market average rate has been determined dailyin inter-bank trading using the Philippine Dealing System, known as the“Philippine Dealing System Reference Rate.”  The Philippine Dealing System is aspecialized off-floor direct dealing service for the trading of Philippinepesos-U.S. dollars by member banks of the Bankers Association of the Philippinesand *Bangko Sentral ng Pilipinas*, or BSP, the central bank of the Philippines.All members of the Bankers Association of the Philippines are required to maketheir Philippine peso-U.S. dollar trades through this system, which wasestablished by Telerate Financial Information Network of Hong Kong.

 

The following shows theexchange rates between the Philippine peso and the U.S. dollar, expressed inpesos per U.S. dollar, for the periods indicated, based on the volume-weightedaverage exchange rate for each business day in each of the periods presented:

 

 

**Year Ended December 31,**

** **

**Period End**

** **

**Average(1)**

** **

**Low(2)**

** **

**High(3)**

 

 

 

 

 

 

 

 

1998

Php39.145

 

Php40.942

 

Php36.989

 

Php45.420

1999

40.298

 

39.090

 

37.566

 

41.112

2000

49.986

 

44.179

 

39.830

 

51.680

2001

51.690

 

51.009

 

47.550

 

55.013

2002

53.254

 

51.583

 

49.336

 

53.841

2003 (through September 30, 2003)

54.877

 

53.877

 

52.021

 

55.532

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

 

**Month**

 

**Period End**

** **

**Average(1)**

** **

**Low(2)**

** **

**High(3)**

2003

 

 

 

 

 

 

 

April

Php52.612

 

Php52.755

 

Php52.272

 

Php53.337

May

53.230

 

52.538

 

52.021

 

53.282

June

53.522

 

53.414

 

53.176

 

53.706

July

54.734

 

53.767

 

53.369

 

54.734

August

54.947

 

55.002

 

54.638

 

55.532

September

54.877

 

55.020

 

54.764

 

55.253

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

This report contains conversions ofpeso amounts into U.S. dollars for your convenience.  Unless otherwisespecified, these conversions were made at the exchange rate as of December 31, 2002 of Php53.254 to US$1.00.  You should not assume that such peso amountsrepresent such U.S. dollar amounts or could have been or could be convertedinto U.S. dollars at the rate indicated, or at any particular rate.  As of September 30, 2003, the exchange rate quoted through the Philippine Dealing System wasPhp54.877 to US$1.00.

 

**Risk Factors**

 

***Risks Relating to Us***

 

Our substantial indebtedness could impair our ability tofulfill our financial obligations, service our other debt and carry out newfinancings

 

We have substantial indebtedness.  As of December 31, 2002, we had consolidated total indebtedness of approximately Php191,710 million(US$3,600 million), including short-term debt of approximately Php760 million(US$14 million) and a consolidated ratio of debt to equity (total debt on aconsolidated basis divided by stockholders' equity) of 11.68x.  Ourconsolidated ratio of earnings to fixed charges was less than the minimumrequired ratio of 1.0x for the year ended December 31, 2002.  For an explanation of how we calculate our consolidated ratio of earnings to fixedcharges, see footnote 7 to our consolidated financial data table under“Selected Financial Data” and Exhibit 7 in “Item 19.”  Our existing debtcontains covenants, which, among other things, require PLDT to maintain certainfinancial ratios calculated in accordance with Philippine GAAP on aconsolidated and non-consolidated basis, limit our ability to incurindebtedness, make investments, incur expenditures and pay dividends.Financial statements prepared in conformity with Philippine GAAP differ in somematerial respects from financial statements prepared in conformity with U.S.GAAP.  For a description of some of these covenants, see “Item 5. Operating andFinancial Review and Prospects — Liquidity and Capital Resources — FinancingActivities — Debt Financing — Covenants.”

 

Our substantial indebtedness andthe requirements and limitations imposed by our debt covenants could haveimportant consequences.  For example, they could:

 

•        make it more difficult for us to satisfy our debt obligations;

 

•        require us to dedicate a substantial portion of our cash flow topayments on our indebtedness, thereby reducing the availability of our cashflow to fund working capital, capital expenditures and other general corporaterequirements;

 

•        limit our ability to refinance our debt obligations or incur newdebt needed to finance our working capital, capital expenditure or otherrequirements;

 

•        limit our flexibility in planning for, or reacting to, changes inour business and the industry in which we operate; and

 

•        place us at a competitive disadvantage compared to ourcompetitors.

 

If we are unable to meet our debt service obligations or complywith our debt covenants, we could be forced to restructure or refinance ourindebtedness, seek additional equity capital or sell assets.  An inability toeffect these measures successfully could result in a declaration of default andan acceleration of some or all of our indebtedness.

 

Under the indenture for our 10.625% Notes due 2007 and 11.375%Notes due 2012, we may only incur additional debt, subject to certain exceptions,if, after incurrence of such debt, our consolidated leverage ratio underPhilippine GAAP, (the ratio of debt to EBITDA calculated on a non-consolidatedbasis based on definitions provided in the same indenture and except undercertain circumstances) would be less than 5.5 to 1 on or prior to December 31,2003, 5.0 to 1 after December 31, 2003, and on or prior to December 31, 2004and 4.5 to 1 thereafter.  Because our consolidated leverage ratio presently isin excess of 5.5 to 1, we are currently restricted from incurring anyadditional debt, subject to certain exceptions, including exceptions forrefinancing transactions.  In addition, we expect that we will have difficultymeeting our debt payment obligations if we do not continue to receive cash dividendsfrom Smart.

 

We may not be able tomaintain compliance with restrictive covenants and ratios imposed by ourindebtedness

 

Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests calculated in accordance with Philippine GAAP atrelevant measurement dates, principally at the end of quarterly periods.Financial statements prepared in conformity with Philippine GAAP differ in somematerial respects from financial statements prepared in conformity with U.S.GAAP.

 

The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the peso relative to the U.S. dollar, pooroperating performance of PLDT and its consolidated subsidiaries, impairment orsimilar charges in respect of investments or other assets that may berecognized by PLDT and its consolidated subsidiaries, and increases in ourinterest expenses.  As of December 31, 2002, approximately 94% of PLDT’sconsolidated indebtedness was denominated in foreign currencies, principally inU.S. dollars, and many of these financial ratios and other tests are negativelyaffected by any weakening of the peso.  The peso declined by approximately 1%against the U.S. dollar to an average of Php51.583 to US$1.00 in 2002 froman average of Php51.009 to US$1.00 for the year 2001.  At December 31, 2002, the exchange rate was Php53.254 to US$1.00, equivalent to approximately 3%depreciation of the peso relative to the rate at the end of 2001.  At September 30, 2003, the exchange rate was Php54.877 to US$1.00, equivalent toapproximately 3% depreciation of the peso relative to the rate at the end of2002.  Certain of our financial ratios would be adversely affected byimpairment or similar charges.  In addition, certain of our financial ratioswould be adversely affected by increases in interest expense, which may resultfrom factors including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the peso, thelowering of PLDT’s credit ratings or the credit ratings of the Philippines, anincrease in reference interest rates and general market conditions.

 

PLDT’s ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of our fixed line business,which is predominantly conducted by PLDT.  PLDT cannot be assured of thebenefit of results generated by Smart and PLDT’s other subsidiaries andinvestees in assisting in complying with non-consolidated covenants orcovenants that are calculated without giving effect to the results of PLDT’ssubsidiaries and investees.

 

To date, we have maintainedcompliance with all of our restrictive financial ratios and covenants asmeasured under Philippine GAAP under our loan agreements and other debtinstruments.  However, if negative factors adversely affect our financialratios, we may be unable to maintain compliance with these restrictive ratiosand covenants or be unable to incur new debt.  During 2001, our performanceunder certain of these ratios, including our total debt to EBITDA and interestcoverage ratios, was close to the permitted thresholds.  Under some of our loanagreements, the requirements with respect to our debt to EBITDA ratio on anon-consolidated basis has become more restrictive at the end of the secondquarter of 2003 and will continue to become more restrictive in incrementsthereafter, which will make it more difficult for PLDT to maintain compliancewith this ratio in the future.  In the future, our performance under certain ofour ratios may again fall close to the permitted thresholds.  Inability tocomply with our restrictive financial ratios and covenants or raise newfinancing could result in a declaration of default and acceleration of some orall of our indebtedness unless we are able to obtain waivers or amendments fromthe relevant lenders.  The terms of some of our debt instruments have nominimum amount for cross-default.

 

For more information on therequirements of our loan agreements and other debt instruments and ourcompliance with them, see “Item 5. Operating and Financial Review and Prospects— Liquidity and Capital Resources — Financing Activities — Debt Financing —Covenants.”

 

*Creditors of our subsidiaries will have superior claimsto our subsidiaries’ cash flow and assets*

 

A growing portion of our consolidated revenues and cash flowfrom operations is derived from our subsidiaries, particularly Smart.  Smartand some of our other subsidiaries have significant internal cash requirementsfor debt service, capital expenditures and operating expenses and so may befinancially unable to pay any dividends to PLDT.  In addition, some of oursubsidiaries are subject to covenants that restrict them from distributing cashto PLDT except under certain circumstances.  In particular, Smart is subject toloan covenants that restrict its ability to distribute cash to PLDT.  AlthoughSmart received consents under its relevant loans that permitted it to makedividend payments to PLDT in December 2002 and June 2003, we cannot assure youthat PLDT will continue to receive dividends or other distributions, orotherwise be able to derive liquidity from Smart or any other subsidiary orassociate in the future.

 

Creditors of our subsidiaries willhave prior claims to our subsidiaries’ assets and cash flows.  We and ourcreditors will effectively be subordinated to the existing and futureindebtedness and other liabilities, including trade payables, of oursubsidiaries, except that we may be recognized as a creditor on loans we havemade to subsidiaries.  If we are recognized as a creditor of a subsidiary, ourclaim will still be subordinated to any indebtedness secured by assets of thesubsidiary and any indebtedness of the subsidiary otherwise deemed senior toindebtedness we hold.

* *

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

 

Our projects under development andthe continued maintenance and improvement of our networks and services,including Smart’s projects, networks and services, require substantial ongoingcapital investment.  Our consolidated capital expenditures in 2001 and 2002totaled Php28,201 million and Php17,154 million, respectively.  Our 2003 budgetfor consolidated capital expenditures is Php15,000 million, of whichapproximately Php6,000 million is budgeted to be spent by PLDT andapproximately Php9,000 million is budgeted to be spent by Smart.  PLDT’scapital spending is intended principally to finance the continued build-out ofits data and Internet protocol infrastructures and for its data services andthe maintenance of its network.  Smart’s capital spending is focused onexpanding and upgrading its GSM network to meet increased demand for cellularservices.

 

Future strategic initiatives couldrequire us to incur significant additional capital expenditures.  We plan tofinance a portion of our future capital expenditures from external financingsources, which have not yet been fully arranged.  We cannot assure you thatfinancing for new projects will be available on terms acceptable to us or atall.  If we cannot complete our development programs and other capitalprojects, our growth, results of operations and financial condition could bematerially and adversely affected.

 

Our ability to refinanceour debt and raise new financing to fund our working capital, capitalexpenditures and other needs depends on many factors beyond our control

* *

In addition to our existing availablecredit facilities, we may require significant new external financing in orderto fund all of our operating, investment, capital expenditures and debt servicerequirements and to refinance and extend the maturities of our short andmedium-term indebtedness.  Our ability to arrange for this and other financingand the cost of such financing will be dependent on numerous factors outside ofour control, including:

 

•        general economic and capital market conditions, including thepeso-to-U.S. dollar exchange rate;

 

•        the availability of credit from banks or other lenders;

 

•        investor confidence in us;

 

•        investor views about the Philippines;

 

•        the continued success of our business;

 

•        our credit ratings and the sovereign credit ratings of the Philippines;and

 

•        provisions of tax and securities laws that may be applicable toour efforts to raise capital.

 

Any credit rating downgrades maysignificantly affect the availability and the terms of our prospectivefinancing, including financing costs.  In addition, restrictions under ourcurrent indebtedness subject us to various financial tests, which could preventus from incurring additional debt.  Inability to arrange such debt couldmaterially and adversely affect our ability to fund our anticipated operating,investment and capital expenditures as well as our anticipated debt servicerequirements, and could result in defaults and cross defaults under ourexisting debt, thereby adversely affecting our results of operations andfinancial condition.

 

*If the peso depreciates against the U.S. dollar, ourfinancial position could be materially and adversely affected*

 

Substantially all of ourindebtedness and related interest expense, a substantial portion of our capitalexpenditures and a portion of our operating expenses are denominated in U.S.dollars and other foreign currencies, but a significant portion of our revenuesis denominated in pesos.  As of December 31, 2002, approximately 94% of ourconsolidated indebtedness was denominated in U.S. dollars and other foreigncurrencies.  A depreciation of the peso against the U.S. dollar increases theamount of our debt obligations and operating and interest expenses in pesoterms.  In the event that the peso depreciates against the U.S. dollar, we maybe unable to generate enough funds through operations (such as by raising ourservice rates, including through adjustments to rates for local exchangeservice based on movements in the peso-to-dollar exchange rate) and other meansto offset the resulting increase in our obligations in peso terms.  Further,these changes could cause us not to be in compliance with the financialcovenants imposed by our lenders under certain loan agreements and otherindebtedness.

 

During the last decade, the pesohas generally depreciated against foreign currencies.  In addition, during thisperiod, the Philippine economy has also, from time to time, experienced periodsof concentrated peso devaluation and limited availability of foreign currency.Since June 30, 1997, when the**BSP, announced that it would let marketforces determine the value of the peso, the peso has experienced a significantdecline against the U.S. dollar.  It depreciated from Php26.376 to US$1.00 on June 30, 1997, to Php53.254 to US$1.00 as of December 31, 2002 and further to Php54.877 toUS$1.00 as of September 30, 2003.  The peso declined by approximately 3%against the U.S. dollar to Php53.254 to US$1.00 as of December 31, 2002 fromPhp51.69 to US$1.00 as of December 31, 2001 and by approximately 3% against theU.S. dollar to Php54.877 to US$1.00 as of September 30, 2003 from Php53.254 toUS$1.00 as of December 31, 2002.  The peso has also been subject to significantfluctuations.  For example, during the first nine months of 2003, the pesodepreciated to a low of Php55.075 to US$1.00 on March 12, 2003, recovered to a high of Php52.021 to US$1.00 on May 8, 2003 and again depreciated to a low ofPhp55.532 to US$1.00 on August 26, 2003.  The peso may again be subject tosignificant fluctuations and may depreciate due to a range of factors,including:

 

•        political and economic developments affecting the Philippines;

 

•        the volatility of regional currencies, particularly the Japaneseyen;

 

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

 

•        higher demand for U.S. dollars by both banks and domesticbusinesses to service their maturing U.S. dollar obligations; and

 

•        some banks covering their short U.S. dollar positions.

 

Our results of operationshave been, and may continue to be, adversely affected by lower U.S. dollarrevenues caused by declining international termination rates and competition ininternational long distance service

 

The international long distancebusiness was historically our major source of revenue.  However, due tocompetition and the steep decline in international termination rates that arepaid to us by foreign telecommunications carriers for termination ofinternational calls on our network, revenues generated from our internationallong distance business had declined significantly in recent years.  Thesedecreases in prices for international long distance services were not fullyoffset by increases in call traffic volume.  For example, on January 1, 2000, we adopted the United States Federal Communications Commission, or U.S. FCCbenchmark accounting rate of US$0.38 per minute for inbound internationalcalls, which represented a settlement rate of US$0.19 per minute forinternational long distance traffic between the Philippines and the United States.  Since then, our termination rates for inbound calls from the United States have continued to decline to levels well below the U.S. FCC benchmarkaccounting rate.  PLDT increased its termination rates with carriers accountingfor a substantial portion of its inbound international traffic terminating onits fixed line network to US$0.12 per minute effective February 1, 2003 and the international inbound traffic volume has decreased by 12% compared to theinternational inbound traffic volume before the rate increase.  Prior to theincrease in termination rates, a substantial portion of PLDT’s internationalinbound traffic terminating on its fixed line network was charged an averagetermination rate of approximately US$0.08 per minute.  Smart likewiseimplemented an increase in its international termination rates to US$0.16 perminute effective February 1, 2003 for calls terminating on its cellularnetwork.  Moreover, our increased termination rates are the subject of anongoing proceeding before the U.S. FCC, brought by WorldCom, Inc., or MCI, andAT&T Corp., or AT&T.  See “Item 5. Operating and Financial Review andProspects — Other Information — U.S. FCC Proceeding on Termination Rates” and“Item 8. Financial Information — Legal Proceedings — U.S. FCC Proceeding onTermination Rates” for further discussion.

 

We anticipate that revenues frominternational communications and information services, including our services,will continue to decline in the future, due primarily to:

 

•        installed and expanding fiber networks and satellite capacitiesthat provide substantially more transmission capacity than may be needed in theshort or medium term;

 

•        substantial increases in the transmission capacity of new andexisting networks, including those operated by our competitors, due to recenttechnological advances;

 

•        increased competition from other domestic and internationaltelecommunications providers;

 

•        alternative providers offering Internet telephony and broadbandcapacity;

 

•        advances in technology; and

 

•        continued uncertainty over the acceptance by certain U.S.carriers of our new termination rates.

 

We cannot assure you that thesedeclines will not materially and adversely affect our financial performance.

 

Net settlement payments betweenPLDT and other foreign telecommunications carriers for origination andtermination of international call traffic between the Philippines and othercountries have been our predominant source of foreign currency revenues.However, in U.S. dollar terms, these payments have been declining.  Continueddecline in our foreign currency revenues could increase our exposure to risksfrom declines in the value of the Philippine peso against the U.S. dollar.  Wecannot assure you that we will be able to achieve adequate increases in ourother revenues to make up for any adverse impact of a further decline in ournet settlement payments.

* *

We face strong competitionand may need to increase our marketing expenditures or reduce our rates inorder to compete effectively

 

We cannot assure you that thenumber of providers of cellular telecommunication services will not increase orthat competition for telecommunication customers will not lead our cellular andfixed line subscribers to switch to other operators or lead us to increase ourmarketing expenditures or reduce our rates, resulting in a reduction in our profitability.

 

The Philippine government hasliberalized the Philippine telecommunications industry and opened up thePhilippine telecommunications market to new entrants.  Including us, there areten major local exchange carriers, 11 international gateway facility providersand seven cellular mobile telephone system providers in the Philippines,including one, which has not yet commenced operations.  Many new entrants intothe Philippine telecommunications market have entered into strategic allianceswith foreign telecommunications companies, which provide them access totechnological and funding support as well as service innovations and marketingstrategies.  Consequently, we are facing increasing competition in majorsegments of the telecommunications industry, particularly in the cellularsegment and data and other network services segment.

 

The cellular telecommunicationsindustry in the Philippines has been particularly competitive, as operatorshave sought to develop and maintain market shares and to attract newsubscribers.  Our principal cellular competitor, Globe Telecom, Inc., or Globe,acquired another telecommunications provider, Isla Communications Company,Inc., or Islacom, on June 27, 2001, thereby strengthening Globe as acompetitor.  Further consolidation in the industry could result in morevigorous competition.  Digital Telecommunications Philippines, Inc., orDigitel, which was awarded a license to operate cellular telecommunicationsservices in 2000, launched its cellular service, *Sun Cellular*, on March 29, 2003.  In addition, the NTC has awarded a license to Bayan TelecommunicationsPhilippines, Inc., or BayanTel, to operate cellular telecommunicationsservices, but BayanTel has not yet commenced operations.  The recent entry ofDigitel is expected to create additional competition in the industry.  In thefuture, the government may allocate further frequencies and award additionalcellular telecommunications licenses, which would further increase competition.

 

Competitive pressures on cellularrates may affect our cellular revenues and revenue growth.  For example, wehave not increased our cellular rates to reflect fluctuations in thepeso-to-U.S. dollar exchange rate since November 1998 as a result of suchcompetitive pressures.  In addition, our prepaid GSM subscribers can, usingtheir existing handsets, switch to one of our competitors by having theirhandsets “unlocked” from our service for a fee and purchasing a new SIM cardfrom the desired operator.  We cannot assure you that these rate pressures andloss of customers will not have a material adverse effect on our financialperformance.

 

If we are unable to installand maintain telecommunications facilities and equipment in a timely manner, wemay not be able to keep up with our principal competitors, which may havenegative implications for our revenue and profitability

 

Our business requires the regular installation of new, and themaintenance of existing, telecommunications transmission and other facilitiesand equipment.  The installation and maintenance of these facilities andequipment is subject to risks and uncertainties relating to:

 

•        shortages of equipment, materials and labor;

 

•        work stoppages and labor disputes;

 

•        interruptions resulting from inclement weather and other naturaldisasters;

 

•        unforeseen engineering, environmental and geological problems;and

 

•        unanticipated cost increases.

 

Any of these factors could giverise to delays or cost overruns in the installation of new facilities orequipment or could prevent us from properly maintaining the equipment used inour networks, and could have a material adverse effect on our results ofoperations and financial condition.

 

Rapid changes intelecommunications technology may adversely affect the economics of ourexisting businesses and the value of our assets, increase our required capitalexpenditures and create new competition

* *

The telecommunications sector has been characterized recently byrapid technological changes.  We cannot assure you that these developments willnot result in competition from providers of new services or the need to makesubstantial capital expenditures to upgrade our facilities.  For example, ifthird-generation, or 3G, cellular services were introduced in the Philippines,we would likely incur significant expenses if we were to roll out thoseservices.

 

Our future success will depend, inpart, on our ability to anticipate or adapt to such changes and to offerservices that meet customer demands on a competitive and timely basis.  Wecannot assure you that we will be able to obtain new technologies on a timelybasis or on satisfactory terms or implement them in an appropriate or effectivemanner.  The development and introduction of new technologies by us or ourcompetitors may cause significant portions of our existing assets to becomeobsolete and suffer an impairment in value earlier than their anticipateduseful lives and require us to accelerate their depreciation.  In 2001, werecognized impairment charges in respect of Smart’s analog assets and Smart’s unamortizedintangible asset relating to analog customer lists.  Piltel recognizedimpairment losses in respect of its AMPS/CDMA and Executive Order No. 109, orE.O. No. 109 assets in 2001 and 2002, respectively.

* *

*The cellular telecommunications industry may not continueto grow or may grow at a slower rate*

* *

A significant portion of ourconsolidated revenues is currently derived from the cellular telecommunicationsindustry.  As a result, we depend on the continued development and growth ofthe cellular telecommunications industry.  Growth of the cellularcommunications market depends on many factors beyond our control, including thecontinued introduction of new and enhanced cellular devices and consumerpreferences.  Any economic, technological or other developments resulting in areduction in demand for cellular services may harm our business.

 

Our businesses depend onthe reliability of our network infrastructure, which is subject to physical,technological and other risks

 

The development and operation oftelecommunications networks are subject to physical, technological and otherrisks, which may cause interruptions in service or reduced capacity forcustomers.  These risks include:

 

•        physical damage;

 

•        power loss;

 

•        capacity limitation;

 

•        software defects; and

 

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

 

The occurrence of any of theserisks could have a material adverse effect on our ability to provide servicesto customers, and could have a material adverse effect on our business.

 

Piltel has experiencedfinancial difficulties and we cannot assure you that it will be able todischarge any of its debts or other obligations, including its debts or otherobligations owed to us and our affiliates

 

Piltel hasexperienced significant financial difficulties in recent years.  It hasrestructured substantially all of its debts in accordance with its debtrestructuring plan, which was signed on June 4, 2001.  Under the terms of suchdebt restructuring plan, PLDT issued a Letter of Support for the benefit ofPiltel and its creditors under which PLDT has agreed to cover any fundingshortfalls of Piltel up to a maximum amount of US$150 million, of whichapproximately US$50 million remained undrawn as of December 31, 2002 andSeptember 30, 2003.  In June and October 2002, more creditors of Piltel agreedto participate in its restructuring plan on the same terms.  As of December 31,2002, total restructured long-term debt of Piltel amounted to Php21,630million, with maturities of up to June 14, 2016.  Piltel is currently in theprocess of restructuring certain other debts.  However, we cannot assure youthat Piltel will be able to restructure or otherwise pay the claims relating toits unrestructured debt or that Piltel will have sufficient cash flow to meetits debt service and other payment obligations, including its paymentobligations to us.  As of December 31, 2002, Piltel owed PLDT and Smart Php797million and Php935 million, respectively, in respect of their respectivefacilities sharing and other agreements with Piltel.  Until all amounts owed tocreditors participating in the debt restructuring plan have been paid ordischarged, PLDT will not be permitted to demand or receive any payment,redemption, or distribution in respect of any present and future liability owedby Piltel to PLDT or any affiliate of PLDT, subject to specified exceptions.These liabilities include amounts owed on Piltel preferred shares owned by PLDTand other financial indebtedness owed by Piltel to PLDT or any affiliate of PLDT,but exclude payments due in respect of transactions having arm’s-length termsor in which the pricing is based on market terms.  These severe long-termrestrictions significantly impair Piltel’s ability to transfer funds to PLDT.

 

Moreover, Piltel may not be able torestructure or otherwise pay the claims relating to its unrestructured debt.As of December 31, 2002, Piltel had an aggregate principal amount of Php451million of unrestructured debt.  Piltel does not intend to make any payments inrespect of this debt unless and until it reaches a restructuring agreement withthe creditors holding the obligations.  If Piltel’s non-participating creditorstake forceful measures to enforce their claims, it is possible that Piltelwould be required to submit itself to a court-supervised rehabilitationproceeding or an involuntary insolvency proceeding seeking liquidation.  All ofPiltel’s creditors that participated in the debt restructuring agreed inconnection with the debt restructuring that they would submit Piltel to arehabilitation proceeding in those circumstances and petition for the adoptionof a plan of rehabilitation that includes the financial terms of the debtrestructuring plan.  However, the laws and procedures governing arehabilitation proceeding in the Philippine courts remain untested insignificant respects.  We cannot assure you that a rehabilitation plan, whichincorporates the financial terms of the debt restructuring, would be adoptedpromptly or at all.  Even if such a rehabilitation plan was adopted, we cannotassure you that Piltel will prove to be viable thereafter and that it will beable to meet its obligations, including its obligations owed to us or ouraffiliates.

* *

A significant number ofPLDT’s shares are held by two separate shareholders, which may not act in theinterests of other shareholders or stakeholders in PLDT

 

Affiliates of First Pacificdirectly or indirectly own approximately 31.4% of PLDT’s common stock as ofJune 30, 2003.  This is the largest block of PLDT’s common stock that isdirectly or indirectly under common ownership.  NTT Communications owns 14.9%of PLDT’s common stock as of June 30, 2003 and has contractual veto rights overa number of major decisions and transactions that PLDT could make or enter into,including:

 

•        capital expenditures in excess of US$50 million;

 

•        any investments, if the aggregate amount of new investments forthe previous 12 months is greater than US$100 million, determined on a rollingmonthly basis;

 

•        any investments in a specific investee, if the cumulative valueof all investments made by PLDT in that investee is greater than US$10 millionin the case of an existing investee and US$50 million in the case of a newinvestee;

 

•        issuance of common stock or stock that is convertible into commonstock;

 

•        new business activities other than those we currently engage in;

 

•        merger or consolidation; and

 

•        the provision of financial support to Piltel in excess of thatremaining available under the PLDT Letter of Support.

 

First Pacific and NTT Communicationshave also entered into a shareholders’ agreement relating to PLDT.  As a resultof this agreement and their respective stockholdings, First Pacific and itsaffiliates and/or NTT Communications are able to influence our actions andcorporate governance, including:

 

•        elections of PLDT’s directors; and

 

•        approval of major corporate actions, which require the vote ofcommon stockholders.

 

First Pacific and its affiliates and/or NTT Communications mayexercise control over these decisions and transactions in a manner that couldbe contrary to your interests.

* *

*If First Pacific sells its interest in PLDT, thetransaction may result in an event of default*

 

On June 5, 2002, First Pacific announced that on June 4, 2002,it had entered into a Memorandum of Agreement, or MOA, with the Gokongwei Groupand JG Summit Holdings, Inc. (the “Gokongwei Group”) in relation to FirstPacific’s existing interests in PLDT and Bonifacio Land Corporation.  The MOAcontemplated that upon satisfaction of certain conditions precedent, FirstPacific would inject its existing 24.4% economic interest in PLDT into anentity in which the Gokongwei Group would purchase a two-thirds controllinginterest.  On October 2, 2002, First Pacific announced that the Gokongwei Grouphad terminated the MOA.

 

First Pacific has accepted thetermination of the MOA by the Gokongwei Group.  Accordingly, First Pacific hasindicated that the transaction contemplated by the MOA will no longer proceed.First Pacific also stated in its announcement that it continues to review itsstrategic options in relation to its Philippine investments.  On April 2, 2003,First Pacific announced that it is finalizing a business plan that will buildon Indofood and PLDT as its core assets.  Indofood, the food arm of First Pacific,is the leading processed-foods group in Indonesia.

 

If First Pacific or NTTCommunications sells all or a portion of its equity interest in PLDT, incertain circumstances, such sale may give rise to an obligation for us to makean offer to purchase or prepay our outstanding debt under our 10.625% Notes due2007 and our 11.375% Notes due 2012, our US$145 million multicurrency term loanfacility agreement, our JP¥9,760 million loan agreement with Japan Bank forInternational Cooperation, or JBIC, and our JP¥5,615 million term loan, and mayresult in a default under all of Smart’s loan agreements.  As of June 30, 2003,Php28,382 million (excluding the second tranche of the US$145 millionmulticurrency term loan facility to be drawn in December 2003 and the JP¥5,615million term loan signed on June 11, 2003) in principal amount of PLDT’sindebtedness is directly subject to a change in control offer to purchase orprepay requirement and Php22,891 million in principal amount of Smart’sindebtedness is subject to an event of default in the event of a change incontrol of PLDT.  If we fail to complete a required change in control offer topurchase or prepay the affected debts, all of our debt could become immediatelydue and payable as a result of various cross-default provisions.  See “Item 5.Operating and Financial Review and Prospects — Liquidity and Capital Resources— Financing Activities — Debt Financing — Covenants.”

* *

The outcome of theproceeding at the U.S. FCC is uncertain and could materially affect our abilityto engage in business in the United States and our results of operations

 

After lengthy negotiationscommencing in May 2002 with carriers around the world, PLDT increased itstermination rates with carriers accounting for a substantial portion of itsinternational traffic terminating on its fixed line network to US$0.12 perminute effective February 1, 2003 for international long distance callsterminating on its fixed line network.  Prior to the increase in terminationrates, a substantial portion of PLDT’s international inbound trafficterminating on its fixed line network was charged an average termination rateof approximately US$0.08 per minute.  Despite numerous extensions by PLDT ofPLDT’s agreements on termination charges with AT&T and MCI to facilitatecontinued negotiation over termination rates, AT&T and MCI failed to reachan agreement with PLDT on a termination rate and thus, effective February 1,2003, PLDT ceased terminating traffic from MCI and AT&T.  Smart likewiseimplemented an increase in its termination rates to US$0.16 per minuteeffective February 1, 2003 for calls terminating on Smart’s cellular network.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. internationalcarriers and U.S. consumers from alleged “whipsawing” behaviour occurring onthe U.S.-Philippine route.  In response to the petitions and notwithstandingsignificant objection from PLDT and other Philippine international carriers, onMarch 10, 2003, the International Bureau of the U.S. FCC issued an Orderdirecting all facilities-based carriers subject to U.S. FCC jurisdiction tosuspend payments for termination services to PLDT, Smart and other Philippinecarriers until such time as the U.S. FCC issues a public notice that AT&T’scircuits on the U.S.-Philippine route are fully restored.  The Order alsoremoved the Philippines from the list of U.S. – international routes approvedfor the provision of International Simple Resale.  In response to the Order ofthe International Bureau of the U.S. FCC, on March 12, 2003, the NTCissued a Memorandum Order directing all affected Philippine carriers, includingus, not to accept terminating traffic via direct circuits from certain U.S.facilities-based carriers, including AT&T and MCI, if we are not being paidfor it.  On April 9, 2003, we filed with the U.S. FCC an application for reviewof the International Bureau’s March 10, 2003 Order.  OnApril 24, 2003, AT&T and MCI filed Oppositions to our application forreview of the International Bureau’s March 10, 2003 Order and on May 5, 2003,we filed our reply to these Oppositions.  See “Item 5. Operating andFinancial Review and Prospects — Other Information — U.S. FCC Proceeding onTermination Rates” and “Item 8. Financial Information — Legal Proceedings —U.S. FCC Proceeding on Termination Rates” for a detailed discussion of thehistory and procedural process of the U.S. FCC proceeding.

 

Although we believe that, based upon the applicable legal principlesand facts, the March 10, 2003 Order was incorrect and should beoverturned upon appeal, we cannot assure you that the March 10, 2003Order will not remain in effect.  It is also possible that the U.S. FCC couldtake further actions in light of allegations or complaints that have been madeor may in the future be made by AT&T, MCI, or other US facilities-basedcarriers.  The U.S. FCC may have the authority in this regard to prohibit thetransmission of all telecommunication traffic originating in the United Statesand destined for the Philippines, although we believe it unlikely that the U.S.FCC would take such action.  To date, subsequent to the March 10, 2003 Order,our revenues derived from international long distance calls have not beenmaterially adversely affected by the actions taken by the International Bureauof the U.S. FCC and the NTC because most of the traffic originating in theUnited States are being re-routed through circuits of third parties in othercountries or otherwise not subject to this order.  We can provide no assurancethat over a longer period of time our international long distance revenues willnot be materially adversely affected by the March 10, 2003 Order.  In addition,we can provide no assurances that the U.S. FCC will not take other actions thatmay materially adversely affect our business in the United States or ourrevenues derived from our international long distance service.

 

*PLDT’s franchise may be revoked if we are unsuccessful inlegal proceedings, which are pending*

 

The Constitution of the Philippinesrequires that at least 60% of the capital of a corporation operating a publicutility in the Philippines be owned by Philippine citizens.  In 1990, thethen-Solicitor General of the Philippines instituted legal proceedings seekingto revoke PLDT’s franchise on various grounds, including violation of thisrequirement.  We believe that these proceedings are without merit.  In 1991,the Philippine Congress extended the term of PLDT’s franchise until 2028 andbroadened PLDT’s franchise authority.  The Congress granted this amendedfranchise to PLDT despite these pending legal proceedings and despite theopposition of the Solicitor General.  The Solicitor General has not taken anyfurther action to pursue or continue the proceedings on this case.  The partiesfiled their last pleadings in 1992 and since then the case has remainedinactive.  Consequently, under a court order dated January 20, 1999, the casehas been archived, though the case can potentially be revived by action ofeither PLDT or the Solicitor General’s office.  It is a normal practice forPhilippine courts to archive cases that remain inactive for a long period oftime.  We are not aware of any court notice for the resumption of theproceedings in this case.

* *

Our business issignificantly affected by governmental laws and regulations, includingregulations in respect of our franchises and rates

 

We operate our business under franchises, each of which issubject to amendment, termination or repeal by the Philippine Congress.Additionally, PLDT operates pursuant to various provisional authorities andcertificates of public convenience and necessity, or CPCNs, which are grantedby the NTC and expire between now and 2028.  Some of PLDT’s CPCNs andprovisional authorities have already expired.  However, PLDT filed applicationsfor extension of these CPCNs and provisional authorities prior to theirrespective expiration dates and is therefore entitled to continue to conductits business under its existing CPCNs and provisional authorities pending theNTC’s decisions on these extensions.  Smart also operates its cellular,international long distance, national long distance and global mobile personalcommunications via satellite services pursuant to CPCNs, which will expire uponthe expiration of its franchise.  Smart’s franchise is due to expire on March27, 2017, 25 years after the date on which its current franchise was granted.Smart operates international private leased circuits under a provisionalauthority, which expired on May 6, 2003.  Smart applied for an extension ofthis provisional authority prior to its expiration.  Because PLDT and Smartfiled the applications for extension on a timely basis, we expect that theseextensions will be granted.  However, we cannot assure you that the NTC willgrant these extensions.  If a CPCN has not been issued, the NTC may permit anoperator to provide services pursuant to a provisional authority.  Provisionalauthorities are typically granted for a period of 18 months.  The PhilippineRevised Administrative Code of 1987 provides that if the grantee of a licenseor permit, such as a CPCN or provisional authority, has made timely andsufficient application for the extension thereof, the existing CPCN orprovisional authority will not expire until the application is finally decidedupon by the administrative agency concerned.  However, we cannot assure youthat our franchises, CPCNs and provisional authorities will be renewed.  For adescription of our licenses, see “Item 4. Information on the Company — Licensesand Regulation.”

 

The NTC also regulates the rates weare permitted to charge for services that have not yet been deregulated, suchas local exchange services.  We cannot assure you that the NTC will not imposeadditional obligations on us that could lead to the revocation of our licensesif not adhered to and/or reduction in our operating revenues or profitability.In addition, the NTC could adopt changes to the regulations governing ourinterconnection with other telecommunications companies or the rates and termsupon which we provide services to our customers that could have a material andadverse effect on our results of operations.

* *

The NTC may implementproposed changes in billing requirements for cellular operators, which may havenegative implications for our revenues and profitability

 

On June 16, 2000, the NTC issuedMemorandum Circular No. 13-6-2000 proposing that Philippine cellular operators,including Smart and Piltel, be required, among other things:

 

•        to bill their subscribers for cellular calls on a six-secondpulse basis instead of the current per minute basis;

 

•        not to bill calls directed to recorded voice messages; and

 

•        to extend the expiration date of prepaid cards from the currenttwo months to two years.

 

Although Philippine cellularoperators obtained from a Quezon City trial court a preliminary injunctionrestraining the implementation of the Memorandum Circular, on October 9, 2001,the Court of Appeals annulled the preliminary injunction and dismissed thecellular operators’ complaint against the NTC, ruling that the NTC hadjurisdiction over the matter.  On January 10, 2002, the Court of Appeals deniedthe cellular operators’ motion to reconsider its earlier ruling.  On February11, 2002, Smart and Piltel filed a Petition for Review by Certiorari with theSupreme Court to annul and reverse the decision of the Court of Appeals.  OnAugust 12, 2003, the Supreme Court reversed and set aside the decision of theCourt of Appeals and ruled that the Quezon City trial court had jurisdiction tohear and decide the case.  The Supreme Court remanded the case to the QuezonCity trial court for continuation of the proceedings.  The NTC has filed amotion for reconsideration on September 29, 2003.  In the event that theSupreme Court reconsiders its decision and the Memorandum Circular isimplemented in its current form, Smart’s and Piltel's operating revenues couldbe materially and adversely affected.

* *

We may be subject tosignificant local business and franchise taxes if we are unsuccessful in legalproceedings, which are pending

 

We are currently facing variouslawsuits for local business and franchise taxes assessed by different localgovernment units, as described under “Item 8. Financial Information — Legal Proceedings— Taxation — Local Business and Franchise Taxes.”  Generally, each province mayimpose local franchise tax at a rate of up to 0.5% of the gross annual receiptsreceived or realized within that province.  Cities within each province mayalso impose annual franchise taxes on gross annual receipts received orrealized in those cities, at a rate that may not exceed the provincialfranchise tax rate by more than 50%.  In one case, involving the City of Davao,the Supreme Court has ruled that we are not exempt from payment of localbusiness and franchise taxes.  On March 25, 2003, the Supreme Court denied ourmotion for reconsideration and affirmed the local franchise tax assessment ofDavao City in the amount of approximately Php4 million.  Subsequently, PLDTpaid the Davao City government franchise taxes covering the period 1999 to2003, including the Php4 million, but we are seeking reconsideration of thesurcharges and interests of about Php10 million imposed by the Davao Citygovernment.  Although the Supreme Court decision would constitute a precedent,this will not automatically result in the termination of the other pendinglocal franchise tax cases, with the courts rendering decisions adverse to us.While the courts in these cases are expected to adhere to this Supreme Courtdecision, each court would have to make its own determination based on theevidence introduced by the parties and the factual circumstances of each case.We cannot assure you that other local government units will not file lawsuitsagainst us or otherwise claim amounts owed in respect of business and franchisetaxes.  If the courts rule against us, we would be liable for these taxes,including interest and penalties, for past periods to the extent these taxesare assessed within five years from the date they were due and for futureperiods.

 

As of June 30, 2003, the aggregateamount claimed by the plaintiffs in these lawsuits was Php4,834 million withrespect to PLDT, Php313 million with respect to Smart, and Php5 million with respectto Piltel.  In addition, we have received assessments for local business andfranchise taxes in the aggregate amount of Php24.4 million, all of which areunder administrative protest.  We believe that in the event these lawsuits andprotests were decided against us, in many cases, we would not be liable for thefull amounts claimed by the local governments because these amounts (1) werecomputed based on the gross annual receipts received or realized not only fromwithin the related province or city for the related period but also from grossannual receipts received or realized from other provinces or cities and (2)include assessments for periods occurring more than five years before therespective lawsuits were filed.  Accordingly, in the event these lawsuits aredecided against us, we believe that our potential liability is likely to besignificantly lower than the amounts claimed by the plaintiffs.

 

If we continue to implementour manpower reduction program, PLDT’s labor relationship with its rank-and-fileemployees’ union may deteriorate and result in labor unrest, which couldmaterially adversely affect our operations and financial condition

 

Over the past several years, we have been implementing amanpower reduction program to reduce the cost base of PLDT’s fixed linebusiness, which has faced significant changes in technology, increasingcompetition, and shifting market preferences to cellular use.  We have beenimplementing the manpower reduction program under the New Labor Code and incompliance with all other relevant labor laws and regulations.  We currentlyexpect that by the end of 2003 PLDT’s headcount will be reduced toapproximately 10,400 employees, from 11,237 employees as of June 30, 2003.

 

As part of our manpower reduction program, 322 employees thatwere providing our regional operator services, where call volumes havesignificantly declined, were terminated effective December 31, 2002.  After aseries of failed reconciliation meetings between representatives of PLDT andour rank-and-file employees’ union, the union staged a 14-day strike beginningon December 23, 2002.  The strike ended on January 6, 2003 by virtue of areturn-to-work order issued by the Secretary of Department of Labor andEmployment, or DOLE. Moreover, the DOLE Secretary, in the same order, certifiedthe labor dispute to the National Labor Relations Commission, or NLRC, forcompulsory arbitration.  The NLRC has yet to schedule arbitration proceedingson the union’s complaint against PLDT.

 

If we continue implementing ourmanpower reduction program, which calls for more reductions in the number ofrank-and-file employees of our fixed line business, our relationship with ourrank-and-file employees’ union may deteriorate.  The union may decide to stagestrikes, work stoppages, lockouts or other labor unrest against PLDT, which maydisrupt our business operations.  In addition, the Collective BargainingAgreement with our rank-and-file employees’ union will expire on November 8,2003.  If our relationship with the rank-and-file employees’ union deterioratesas a result of the continued implementation of our manpower reduction program,we may not be able to enter into a new Collective Bargaining Agreement on thesame or similar terms as before.  As a result, our business operations andfinancial condition may be adversely affected.

 

Alleged health risks ofwireless communications devices could lead to decreased wireless communicationsuse, increased difficulty in obtaining sites for base stations or potentiallitigation

 

We are aware of allegations thatthere may be health risks associated with the effects of radio waves emittedfrom transmitter masts and wireless handsets.  While there is currently nosubstantiated link between radio waves and health issues, the actual or perceivedhealth risks of wireless communications devices could adversely affect ourwireless activities through a reduction in customers, reduced usage percustomer, or increased difficulty in obtaining sites for transmitters andexposure to potential litigation or other liabilities.

* *

***Risks Relating to the Philippines***

 

*Our business may be affected by political or socialinstability in the Philippines*

 

Our results of operations andfinancial performance and condition may be influenced by the general politicalsituation in, and the state of the economy of, the Philippines.  In February1986, a peaceful military and civilian uprising ended the 21-year rule ofPresident Ferdinand Marcos and installed Corazon Aquino as President of thePhilippines.  Between 1986 and 1989, there were several *coup d’état*attempts against the Aquino administration, none of which was successful.Political and economic conditions in the Philippines were generally stableduring the 1990’s following the election of Fidel V. Ramos as President in1992.  However, during 2000, his successor President Joseph Estrada was subjectto allegations of corruption, culminating in impeachment proceedings, masspublic protests in the Metropolitan Manila area, withdrawal of the support ofthe military, and his stepping down from office.  Then Vice President, GloriaMacapagal-Arroyo, was sworn in as President on January 20, 2001.  On April 25,2001, Estrada was arrested on a non-bailable charge of plunder that resulted inpublic protests by his supporters on May 1, 2001.  In response, PresidentMacapagal-Arroyo declared a week-long “state of rebellion.”  On May 14, 2001,the Philippines held legislative elections, following which PresidentMacapagal-Arroyo’s coalition won a majority of the seats in the Senate.  OnJuly 27, 2003, approximately 300 Philippine soldiers took control of a shoppingcenter and apartment complex in Makati City in an effort to express theirdissatisfaction with the Philippine government.  The mutineers surrenderedwithin 20 hours.  The Philippine government has reported that the actions takenby approximately 300 Philippine soldiers were part of a coup attempt.  On May10, 2004, the Philippines will hold presidential elections as well as electionsfor members of the Senate and Congress.

 

In the past three years, anincreasing number of kidnapping, criminal and terrorist activities haveoccurred in Mindanao principally led by the extremist “Abu Sayyaf” group, whichreportedly has ties to the Al-Qaeda terrorist network.  In recent months, therehave been a series of bombing incidents in key cities in Mindanao, includingDavao City.  The armed conflict between the Philippine military and thecommunist Moro Islamic Liberation Front also continues in Mindanao.  As aresult of these terrorist activities, the Armed Forces of the Philippines andthe United States military are engaged in joint military activities inMindanao.

 

In November 2001, members of rebel groups damaged three ofSmart’s cell sites located in Central Luzon and one of our relay stations,including some radio facilities, in southern Mindanao in response to ourfailure to pay “revolutionary taxes” demanded by these groups.  In October2002, a group of unidentified armed men inflicted minor damage on Smart’s cellsite in Bicol.

 

We cannot assure you that politicalevents or terrorist activities will not again result in major public protest orthe involvement of the military in politics.  Any political instability in thefuture may have a negative effect on our results of operations and financialcondition.  We cannot assure you that the political environment in thePhilippines will be stable or that the current or any future government willadopt economic policies conducive to sustained economic growth or which do notimpact adversely on the current regulatory environment for telecommunicationsor other companies.

 

Our results of operationsmay be negatively affected by slow growth rates and economic instability in thePhilippines and in Asia

 

In the past, the Philippines has experienced periods of slowgrowth, high inflation, significant devaluation of the peso, imposition ofexchange controls, debt restructuring and electricity shortages and blackouts.

 

From mid-1997 to 1999, the economies of a number of Asiancountries experienced significant downturns.  The regional economic turbulenceaffected the Philippine economy in a number of ways, including the depreciationof the peso, increases in interest rates, increases in unemployment andinflation, increased volatility and a decline in prices in the domestic stockmarket, the downgrading of the Philippines' local currency rating and theratings outlook for the Philippine banking sector and the reduction of foreigncurrency reserves.

 

In 2002, the Philippine governmentincurred a fiscal deficit of Php212,000 million, which representedapproximately 5.3% of the 2002 nominal gross domestic product, or GDP, largelydue to weak tax collection.  The fiscal deficit for 2003 is expected to reachPhp202,000 million.  As of April 2003, the fiscal deficit wasapproximately Php65,500 million.  On April 24, 2003, Standard & Poor’sannounced a lowering of the credit rating of the Philippines to “BBB” from“BBB+” mainly as a result of long-term fiscal deficit concerns.  This, in turn,has resulted in the depreciation of the peso against the U.S. dollar and thevolatility of the prices of shares traded on the domestic stock market as wellas prices of Philippine sovereign and corporate bonds.

 

In the second half of 2000 and the first half of 2001, thepolitical developments relating to the allegations of corruption in the Estradaadministration as well as economic events, for example, the growing governmentfiscal deficit and a global increase in oil prices, have resulted in increasedconcerns about the political and economic stability in the Philippines.  This,in turn, has resulted in the depreciation of the peso against the U.S. dollarand the volatility of the prices of shares traded on the domestic stock market.

 

We cannot assure you that these factorswill not affect our results of operations in a materially adverse manner.

* *

*If foreign exchange controls were to be imposed, ourability to meet our foreign currency payment obligations could be adverselyaffected*

 

Approval from or registration withthe BSP for the issuance and guarantee of foreign currency denominatedborrowings is not required in order to make our foreign currency paymentobligations legally valid and binding.  However, receiving this approval andregistration will enable a borrower to access the banking system to obtainforeign currency to service its debt obligations rather than using othersources of foreign currency, for example, foreign currency revenue streams.

 

The Philippine government has, inthe past, instituted restrictions on the conversion of pesos into foreigncurrency and the use of foreign exchange received by Philippine companies topay foreign currency-denominated obligations.  The Monetary Board of the BSP hasstatutory authority, with the approval of the President of the Philippines,during a foreign exchange crisis or in times of national emergency, to:

 

•        suspend temporarily or restrict sales of foreign exchange;

 

•        require licensing of foreign exchange transactions; or

 

•        require the delivery of foreign exchange to the BSP or itsdesignee banks.

 

We cannot assure you that foreignexchange controls will not be imposed in the future.  If imposed, theserestrictions could materially adversely affect our ability to obtain foreigncurrency to service our foreign currency obligations.

 

*The occurrence of natural catastrophes may materiallydisrupt our operations*

* *

The Philippines has experienced anumber of major natural catastrophes over the years including typhoons,volcanic eruptions and earthquakes that may materially disrupt and adverselyaffect our business operations.  We cannot assure you that the insurancecoverage we maintain for these risks will adequately compensate us for alldamage and economic losses resulting from natural catastrophes.

 

Item 4.       Information on the Company

 

**Overview**

 

We are the leading nationaltelecommunications service provider in the Philippines.  Through our threeprincipal business groups — fixed line, wireless, and information andcommunications technology — we offer a wide range of telecommunications servicesto over 12 million subscribers as of June 30, 2003 in the Philippines, on thenation's most extensive fiber optic backbone and fixed line, cellular andsatellite networks.

 

We are the leading fixed lineprovider in the Philippines with approximately 66% of the total reported fixedlines in service nationwide as of June 30, 2003.  Smart is the leading cellularservice provider in the country, with approximately 46% of total reportedcellular subscribers as of June 30, 2003.  Piltel had approximately 13% oftotal reported cellular subscribers as of June 30, 2003.  We have interests inthe information and communications technology sectors, including *Vitro*TM, an Internet data center, two callcenters, namely Parlance and Vocativ, and Infocom, one of the leading ISPs inthe Philippines.

 

Our common shares are listed on the Philippine Stock Exchangeand our American Depositary Shares are listed on the New York Stock Exchangeand the Pacific Exchange.  We had a market capitalization of approximatelyPhp108,345 million (US$1,974 million) as of September 30, 2003, representingone of the largest market capitalizations among Philippine-listed companies.For the year ended December 31, 2002, we had consolidated revenues, net lossand EBITDA of Php92,743 million (US$1,742 million), Php6,158 million (US$116million) and Php26,587 million (US$499 million), respectively. See footnote 6to the selected financial data table in “Item 3. Key Information — SelectedFinancial Data” for a quantitative reconciliation of EBITDA on a consolidatedbasis to income (loss) before minority interest in net income (losses) ofconsolidated subsidiaries.

 

Our principal executive offices arelocated at the Ramon Cojuangco Building, Makati Avenue, Makati City,Philippines and our telephone number is (632) 816-8024.  Our website address is*www.pldt.com.ph*.  The contents of our website are not a part of thisannual report.

 

**Historical Background andDevelopment**

*** ***

PLDT was incorporated under the old Corporation Law of thePhilippines (Act 1459, as amended) on November 28, 1928, following the mergerof four telephone companies under common U.S. ownership.  Under the amendedArticles of Incorporation, the term of PLDT is limited to 2028.  In 1967,General Telephone and Electronics Corporation (a major stockholder since PLDT’sincorporation) sold its effective control of PLDT to a consortium of Filipinobusinessmen.  In 1981, in furtherance of the then-existing policy of thePhilippine Government to integrate the Philippine telecommunications industry,PLDT purchased substantially all of the assets and liabilities of RepublicTelephone Company, which at that time was the second largest telephone companyin the Philippines.  During 1998, First Pacific, through its Philippine andother affiliates, acquired a significant interest in PLDT.  On March 24, 2000,NTT Communications became PLDT’s strategic partner with a 15% economic andvoting interest in the issued common capital stock of PLDT.  Simultaneous withNTT Communications’ investment in PLDT, we acquired 100% of Smart.

 

PLDT’s original franchise, which was granted in 1928, was lastamended in 1991 to extend PLDT’s franchise until 2028.  The amended franchise(Republic Act No. 7082), which became effective on August 24, 1991, alsobroadened PLDT’s franchise to permit PLDT to provide virtually every type oftelecommunications service.  PLDT’s franchise covers the business of providingbasic and enhanced telecommunications services in and between the provinces,cities and municipalities in the Philippines and between the Philippines andother countries and territories including mobile, cellular, wired or wirelesstelecommunications system, fiber optics, multi-channel transmissiondistribution systems and their value-added services such as but not limited totransmission of voice, data, facsimile, control signals, audio and video,information services bureau and all other telecommunications systemstechnologies, as are at present available or can be made available throughtechnical advances or innovations in the future.  See “Item 8. FinancialInformation — Legal Proceedings — Quo Warranto Action” for informationregarding legal proceedings initiated by the Solicitor General with respect toPLDT’s franchise.

 

PLDT has made significant investments for the upgrade andexpansion of its fixed line business in the mid- to late-90’s when thePhilippine government liberalized the telecommunications industry. Presently,PLDT has the most extensive fixed line access network in the country supportedby a 5,400-kilometer domestic fiber optic backbone and digital microwavebackbone.   Since 2000, PLDT’s capital expenditures have been focused on theexpansion of its transmission and data network capacities as well as themaintenance of its network and other computerization and support projects.  Inaddition, Smart has implemented an extensive deployment program for its GSMnetwork since the launch of its GSM service in 1999 to meet the growing demandfor GSM cellular service.

 

On a consolidated basis, capital expenditures amounted toPhp26,567 million, Php28,201 million and Php17,154 million in 2000, 2001 and2002, respectively.  Of these amounts, Php11,467 million, Php9,252 million andPhp8,194 million were attributable to PLDT for 2000, 2001 and 2002,respectively, while Php14,573 million, Php17,961 million and Php7,564 millionwere spent by Smart for 2000, 2001 and 2002, respectively.  The remainingbalances were spent by our other subsidiaries, principally ePLDT and itssubsidiaries.

 

**Organization**

 

Our two largest stockholders are First Pacific,a Hong Kong-based investment and management company engaged in consumer,telecommunications and property businesses, which, through its Philippine andother affiliates, beneficially owns 31.4% of our common stock, and NTT Communications,a wholly-owned subsidiary of Nippon Telegraph and Telephone Corporation ofJapan, which beneficially owns 14.9% of our common stock.

 

PLDT and the following subsidiaries were allincorporated in the Philippines, except for PLDT Global, which was incorporatedin the British Virgin Islands:

 

**Name of Subsidiary/Investee**

**Principal Activity**

**Percentage of Ownership**

**2000**

**2001**

2002

 

 

 

 

 

**Fixed Line**

 

 

 

 

Clark Telecom

Telecommunications services

100.0

100.0

100.0

Subic Telecom

Telecommunications services

60.0

100.0

100.0

Smart-NTT Multimedia, Inc.

Data and network services

100.0

100.0

100.0

PLDT Global and subsidiaries

Telecommunications services

—

100.0

100.0

MaraTel

Telecommunications services

—

92.3

97.5

 

 

 

 

 

**Wireless**

 

 

 

 

Smart and subsidiaries

Cellular mobile services

100.0

100.0

100.0

Telesat

Satellite communications services

94.4

94.4

94.4

ACeS Philippines 

Satellite phone services

95.1

93.7

93.7

Mabuhay Satellite

Satellite communications services

67.0

67.0

67.0

Piltel and subsidiaries

Cellular mobile and telecommunications services

57.6

45.3

45.3

 

 

 

 

 

**Information and Communications Technology**

 

 

 

 

ePLDT and subsidiaries

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

100.0

100.0

100.0

* *

*** ***

***Fixed Line***

 

We are the leading fixed line operator in the Philippines andthe only company providing fixed line telecommunications service throughout thecountry.  Our fixed line business group offers local exchange, internationallong distance, national long distance, data and other network and miscellaneousservices.  As of June 30, 2003 and December 31, 2002, we had approximately 2.1million fixed lines in service for both periods.  Revenues from our fixed lineservices accounted for 49% of our consolidated operating revenues for the yearended December 31, 2002.

 

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

 

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

 

***Wireless***

 

We provide cellular, satellite,VSAT and other services through our wireless business segment.  Revenues fromour wireless services accounted for 50% of our consolidated operating revenuesfor the year ended December 31, 2002.

 

We provide our cellular servicesthrough Smart and Piltel.  Piltel offers cellular services using Smart’s GSMnetwork under a revenue sharing agreement, acting principally as a reseller ofSmart’s digital GSM capacity under its own branding and pricing strategy forvoice and text messaging services.  Our cellular revenues, including cellularhandset sales, accounted for about 99% of our wireless business revenues in theyear ended December 31, 2002.  Smart is the leading cellular service providerin the Philippines, with approximately 8.1 million subscribers as of June 30,2003, an increase of 19% from 6.8 million subscribers as of December 31, 2002,representing a market share of 46%.  Piltel had approximately 2.2 millionsubscribers as of June 30, 2003, an increase of 22% from 1.8 million as ofDecember 31, 2002, representing a market share of 13%.  In the year endedDecember 31, 2002, the combined number of Smart’s and Piltel’s subscriberincreased by 2.2 million, representing 58% of all cellular subscribers added byPhilippines cellular operators in that period.  In the six months period endedJune 30, 2003, Smart added 1,317,703 subscribers and Piltel added 446,716subscribers.  Since 2000, the aggregate number of Smart’s and Piltel’s cellularsubscribers has outnumbered our fixed line subscribers.  As of June 30, 2003,the combined subscribers of Smart and Piltel outnumbered our fixed linesubscribers by more than 5 to 1.  As of June 30, 2003, Smart and Piltel had thelargest and third largest cellular subscriber bases, respectively, in thePhilippines.

 

Smart's and Piltel's cellularsubscriber gains were predominantly attributable to their prepaid GSM services,which Smart introduced in September 1999 and Piltel introduced in April 2000.Approximately 98% of Smart's and Piltel’s combined subscribers were prepaid asof June 30, 2003.  The predominance of prepaid service reflects one of thedistinguishing characteristics of the Philippine cellular market.  The growthin our prepaid service has enabled us to increase and broaden our subscriberbase rapidly while controlling credit risk and reducing billing andadministrative costs on a per-subscriber basis.

 

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

 

Our cellular subscriber growth hasalso been driven by SMS, a text messaging service on GSM networks, which wasintroduced in 1999.  SMS is extremely popular in the Philippines, particularlyon the prepaid platform, as it provides a convenient and inexpensivealternative to voice and e-mail based communications.  SMS has contributedsignificantly to the continued growth of our cellular data service revenues.During 2002, our SMS system handled 19,558 million outbound messages, anincrease of 39% compared to 14,055 million outbound messages handled during2001.  During the first half of 2003, the volume of outbound messages handledby our SMS system was 10,768 million, a 40% increase over the 7,670 millionoutbound messages handled during the same period in 2002.

 

As of June 30, 2003, Smart'sdigital GSM network had 29 switching centers with a capacity of 11.7 millionsubscribers and 3,285 base stations covering 880 cities and municipalities, upfrom 2,777 base stations as of December 31, 2002, which covered 807 cities andmunicipalities.  Piltel’s prepaid GSM service, *Talk 'N Text*, is alsosupported on this network.

 

***Information andCommunications Technology***

 

We conduct our information and communications technologybusinesses through our wholly owned subsidiary ePLDT, which was incorporated inAugust 2000 and commenced commercial operations in February 2001.  ePLDT is abroad based integrated information and communications technology company,focusing on infrastructure and solutions for Internet applications, Internetprotocol based solutions and multimedia content delivery.  ePLDT’s principalactivities are:

 

•        the operation of an Internet data center under the brand name *Vitro*TM;

 

•        two wholly-owned call centers, Vocativ and Parlance; and 

 

•        Infocom, an ISP.  

 

ePLDT has also invested in a number of other e-commerce andInternet-related businesses, as described in “— Business — Information andCommunications Technology — Infrastructure and Services — Other Investments”below.

 

As a new business, revenues fromour information and communications technology services accounted for 1% of ourconsolidated operating revenues in 2002.

 

**Strengths**

 

We believe our business is characterized by the followingcompetitive strengths:

 

•        *Recognized Brands*.  PLDT and Smart are strong and widelyrecognized brand names in the Philippines.  We have built the PLDT brand namefor over 70 years as the leading telecommunications provider in thePhilippines.  Smart is recognized in the Philippines as an innovative providerof high-quality cellular services.  Piltel’s *Talk 'N Text* brand, whichis provided using Smart’s GSM network, has also gained significant recognition.

 

•        *Leading Market Shares*.  With over 12 million subscribersas of June 30, 2003, we have the leading market position in both the fixed lineand cellular markets in the Philippines.  ePLDT’s subsidiary, Infocom, is oneof the leading ISPs in the Philippines.

 

•        *Diversified Product Mix*.  We have reduced our dependenceon our long distance business, which accounted for approximately 20% of ourconsolidated operating revenues in 2002, compared to 25% in 2001 and 39% in2000.  Our wireless business has become a significant revenue contributor,accounting for 50%, 42% and 25% of our total operating revenues in 2002, 2001and 2000, respectively.  We currently generate the balance of our operatingrevenues from a range of products, including local exchange services, and dataand other network-based services.

 

•        *Advanced Integrated Network*.  With one of the mostadvanced and extensive telecommunications networks in the Philippines, we areable to offer a wide array of communications services.  We are enhancing thecapabilities of our fixed line and wireless networks to allow us to betterexploit this competitive strength and achieve higher levels of networkefficiency in providing voice and data services.

 

•        *Innovative Products and Services*.  We have successfullyintroduced a number of innovative and award-winning cellular products andservices, including *Smart zed*ä, *Smart Money,**addictmobile*and *SmartLoad*.  We have likewise launched new fixed lineservices, including *Telesulit,*a prepaid fixed line service; *Hype,*atwo-way fixed line texting service; and data and other network services such as*Brains*, a data network solutions package, and *Shops.work*, anetwork solution that allows electronic linking of retail stores.

* *

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

 

**Strategy**

** **

The key elements of our business strategy are:

 

•        *Build on our leading positions in the fixed line and cellularbusinesses*.  We plan to build on our position as the leading provider offixed line service in the Philippines by continuing to launch new products andservices to increase subscriber value and utilization of our existingfacilities and equipment at reduced cost.  We plan to build on our position asthe leading wireless service provider in the Philippines by continuing tointroduce new products and services to increase our subscribers’ use of ournetwork for both voice and data, as well as their reliance on our services.  Wealso plan to further increase the capacity and expand the geographic reach ofour cellular network as well as to improve our service quality and indoorcoverage.

 

•        *Capitalize on our strength as an integrated provider oftelecommunications services*.  We offer the broadest range oftelecommunications services among all operators in the Philippines.  We plan tocapitalize on this position to maximize revenue opportunities by bundling andcross-selling our products and services between voice and data and fixed lineand cellular.  We are also lowering our costs by integrating the operations ofour different businesses.

 

•        *Strengthen our leading position in the data transmissionmarket*.  Recognizing the significant growth potential of data and othernetwork services, including Internet-based services, and their increasingimportance to PLDT’s overall business strategy, we are emphasizing thedevelopment of our data and network business segment to address the needs oflarge corporations, small and medium-sized enterprises and retail customers.We have launched a variety of products and services, including digital leasedlines, frame relay and other packet-based data services.  We are progressivelyintroducing asymmetric digital subscriber line, or ADSL, technology to ournetwork.

 

•        *Strengthen our financial position*.  We are engaged in anumber of initiatives to strengthen our financial position.  We are working toincrease our cash flow available for debt reduction by containing our operatingcosts, reducing capital expenditures and capping investments in subsidiaries.In December 2002 and June 2003, Smart paid cash dividends to PLDT.  We willcontinue to seek dividend payments from Smart to supplement PLDT’s cash flowsavailable for debt reduction.

 

**Business**

** **

**Fixed Line**

 

We provide local exchange,international long distance, national long distance, data and other network andmiscellaneous services under our fixed line business segment.

 

*Local Exchange Service*

 

*Overview*

 

Our local exchange service, whichconsists of our basic voice telephony business, is provided primarily throughPLDT.  On August 31, 2000, Smart transferred its fixed line business to PLDT.

 

The following table summarizes keymeasures of our local exchange service segment as of and for the years endedDecember 31, 2000, 2001 and 2002:

 

 

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

 

 

 

 

Number of PLDT local exchange lines in service

1,915,985

2,075,109

2,092,539

Growth rate 

9%

8%

1%

Number of PLDT employees

13,285

12,915

12,131

Number of local exchange lines in service per employee

144

161

172

Consolidated local exchange revenues (in millions)

Php18,671

Php21,356

Php21,345

Growth rate

18%

14%

––

Local exchange revenues as a percentage of total

operating revenues

31%

27%

23%

 

We also provide local exchangeservices through Clark Telecom, Subic Telecom, MaraTel and Piltel.  Together,these subsidiaries account for approximately 1% of our total fixed lines inservice.

 

We regularly introduce new productsand services in an effort to increase our number of subscribers, improve ourchurn management efforts and minimize our credit risk exposure.  Since 1999,PLDT has launched prepaid fixed line services under the brand names *Teletipid*and*Telesulit*, introduced additional value-added services, such as *CallerID* and *conference calling*, and implemented initiatives aimed atincreasing subscription in areas where we have excess capacity and reduced ourinstallation fees, as described below under “— Rates.”

 

Launched in August 2000, *Teletipid*is the Philippines’ first prepaid fixed line service.  Initially intended as anaffordable alternative telephone service for consumers under difficult economicconditions, *Teletipid* now forms an important part of PLDT’s overallchurn and credit risk exposure management and subscriber retention strategy.In February 2002, PLDT launched a premium variant to *Teletipid* under thebrand name *Telesulit*.  As of December 31, 2002, we had 121,054 active *Teletipid*subscribers and 121,973 active *Telesulit* subscribers, which togetherrepresented 12% of our total fixed lines in service.  For more information on *Teletipid*and*Telesulit*, see “Item 5. Operating and Financial Review andProspects –– Results of Operations — 2002 Compared to 2001 — ConsolidatedOperating Revenues — Fixed Line — Local Exchange Service” and “— Results ofOperations— 2001 Compared to 2000 — Consolidated Operating Revenues — FixedLine — Local Exchange Service.”

 

As of June 30, 2003, PLDT had2,060,437 fixed lines in service, of which 111,513 were active *Teletipid*subscribers and 149,991 were active *Telesulit* subscribers.  The combined*Teletipid* and *Telesulit* subscribers represented 13% of our totalfixed lines in service.

 

To attract new fixed linesubscribers and retain existing ones, PLDT has introduced various value-addedservices such as *Caller ID.  Caller ID* allows subscribers to identifycallers by telephone number, and is now bundled at special rates with othervalue-added phone services, such as c*all waiting*, c*all forwarding*,*3-party conference calling* and s*peed calling*.

 

*Rates*

 

*General*.  As of December 31,2002, basic monthly charges for PLDT’s local exchange service in the MetropolitanManila area were Php634 for a single-party residential line and Php1,321 for asingle business line.  Monthly charges vary according to the type of customer(business or residential) and location, with charges for urban customersgenerally being higher than those for rural/provincial customers.  Serviceconnection charges are currently Php895 for residential customers and Php1,330for business customers.  These one-time charges are uniform throughout thecountry.  Other than basic monthly charges, we do not charge our postpaidsubscribers for local calls.

 

PLDT adjusts its monthly localexchange service rates according to changes in the peso-to-U.S. dollar exchangerate.  Under the authorization granted to us by the NTC, PLDT is permitted toincrease and are required to decrease these rates by 1% for every Php0.10change in the exchange rate relative to a base exchange rate of Php11 toUS$1.00.  During 2002, PLDT implemented 13 upward and six downward adjustmentsin our monthly local exchange service rates.

 

PLDT’s *Teletipid* and *Telesulit*customers do not pay a basic monthly charge but are charged on usage.Initially, the rate for local calls charged to our *Teletipid* customerswas Php0.50 per minute but was increased to Php1.00 per minute, effective May1, 2002.  The rate for local calls charged to our *Telesulit*customerswas also increased from an initial rate of Php0.75 per minute to Php1.00 perminute, effective February 1, 2003.  The international and national longdistance rates PLDT charges to its *Teletipid* and *Telesulit*customers are similar to the rates it charges its postpaid customers.  For adescription of these rates, see "— International Long Distance Service —Rates" and "— National Long Distance Service — Rates."  *Teletipid*phone kits are sold for Php1,700 per unit, inclusive of Php300 worth ofpre-stored call credits, while *Telesulit* phone kits are sold forPhp1,900 per unit, inclusive of Php500 worth of pre-stored call credits.

 

EffectiveJanuary 1, 2003, calls originating from cellular subscribers are charged atermination rate of Php2.50 per minute, an increase from the previous rate ofPhp2.00 per minute, which will further increase to Php3.00per minute effective January 1, 2004.

 

*International Long Distance Service*

 

*Overview*

 

Our international long distanceservice consists of voice and packet-based voice services that go through ourinternational gateway facilities.  We also generate international long distancerevenues through access charges paid to us by other Philippine telecommunicationscarriers for incoming international voice calls that terminate to our localexchange network.  Our subsidiary, Subic Telecom, also provides internationallong distance services through its own international gateway facility.  Ourpacket-based voice services are transmitted over our existing traditionalcircuits, the voice over Internet protocol, or VOIP, the network of aconsortium of dominant carriers in Asia, and the asynchronous transfer mode, orATM, Internet protocol global backbone of our wholly-owned subsidiary, PLDTGlobal.

 

The following table showscertain information about our international long distance business as of andfor the years ended December 31, 2000, 2001 and 2002:

 

 

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

 

 

 

 

Total PLDT call volumes (million minutes)(1)

2,378

2,814

2,576

Growth rate

102%

18%

(8%)

Inbound call volumes (million minutes)

2,237

2,648

2,409

Growth rate

115%

18%

(9%)

Outbound call volumes (million minutes)

141

166

167

Growth rate

5%

18%

1%

Inbound-outbound call ratio

15.9:1

16.0:1

14.4:1

Consolidated international long distance revenues (in millions)

Php13,223

Php11,701

Php10,636

Growth rate

(11%)

(12%)

(9%)

International long distance revenues as a percentage of total

operating revenues

22%

15%

11%

_____________

 

*(1)   **Call volumes for the yearsended December 31, 2000 and 2001 have been restated to conform with our 2002financial statement presentation, which includes interconnection traffic.*

 

International long distance servicehistorically was our major source of revenue.  However, due to the steepdecline in inbound termination rates and collection rates and intensecompetition, revenues derived from our international long distance service havebeen declining through the end of 2002.  We adopted a two-pronged initiative inearly 2000 with respect to inbound international service to try to address thisissue.  First, we lowered our termination rates at that time to market level torecapture market share from our competitors.  Second, we intensified our effortsto identify and contain operators that use illegal bypass route calls to thePhilippines through more effective monitoring of our international trunks andleased lines.  International simple resale operation occurs when a companyrents an international leased line from a Philippine international gatewayoperator, aggregates traffic outside the Philippines and carries and terminatesthis traffic at the public switch telephone network in the Philippines.International simple resale can be used to bypass the local access chargesystem and is illegal in the Philippines.

 

Since 2001, we have become moreselective in accepting incoming traffic from some carriers, particularly secondand third tier international carriers.  In addition, we adopted a policy in2001 requiring prepayment from certain second and third tier internationalcarriers as a prerequisite for accepting their incoming traffic.  For adescription of this policy, see “Item 5. Operating and Financial Review andProspects — Results of Operations — 2002 Compared to 2001 — ConsolidatedOperating Revenues — Fixed Line — International Long Distance Service.”

 

We are also pursuing a number ofother initiatives to further strengthen our inbound business.  We earnincremental revenues from foreign carriers by using our fiber optic submarinecable capacity to offer least cost call routing and regional hubbing.  We alsoprovide “carrier’s carrier service” to new and emerging domestic and foreignservice providers, including transit service that enables carriers to completecalls to countries to which they do not have a direct connection, and Internettelephony.  We have formed PLDT Global to establish our presence in severalcountries in North America, Europe and Asia.  Through arrangements with localcarriers in these countries, we aggregate inbound call traffic to thePhilippines at our points of presence and, using our capacity in submarinecable systems connected to each point of presence, transmit calls to ournetwork.  We believe this strategy will help us mitigate the effect of rapidlydeclining accounting and settlement rates for inbound traffic, maximize the useof our existing international facilities, collect inbound international trafficat their sources and develop alternative sources of revenues such as carryingtraffic without routing through the Philippines.

 

To stimulate call volume growth andprevent further erosion in our share of outbound international call traffic, wehave introduced a number of marketing initiatives, including substantial cutsin international direct dialing rates, innovative pricing packages for largeaccounts and loyalty programs for some customers.

 

The table below sets forth the net settlement amounts forinternational calls handled by PLDT, by country, for the years ended December31, 2000, 2001 and 2002:

 

 

**Net Settlement**

 

**Years Ended December 31,**

** **

**2000**

**2001**

**2002**

 

**(in millions)**

 

 

 

 

United States

US$107

US$82

US$68

Japan

22

23

16

Australia

9

18

5

Saudi Arabia

12

7

5

Canada

15

10

7

Hong Kong

5

7

3

Taiwan

1

3

6

Singapore

1

1

1

Others

30

49

75

 
Total

US$202

US$200

US$186

 
 

 

 

*Rates*

* *

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

 

On March 10, 2003, theInternational Bureau of the U.S. FCC issued an Order on petitions filedseparately by AT&T and MCI requiring all U.S. carriers providing directfacilities-based service on the U.S.-Philippines route to suspend payments fortermination services to Philippine carriers, including PLDT, Smart and SubicTelecom, until such time as the U.S. FCC issues a public notice that AT&T’scircuits on the U.S.-Philippine route are fully restored.  The Order alsoremoved the Philippines from the list of U.S.- international routes approvedfor the provision of International Simple Resale.  In response to the Order ofthe International Bureau of the U.S. FCC, the NTC issued a Memorandum Order datedMarch 12, 2003, directing all affected Philippine carriers “(1) not to acceptterminating traffic via direct circuits from U.S. facilities-based carriers whodo not pay Philippine carriers for services rendered; and (2) to take allmeasures necessary to collect payments for services rendered in order topreserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”  OnApril 9, 2003, we filed with the U.S. FCC an application for review of theInternational Bureau’s March 10, 2003 Order.  OnApril 24, 2003, AT&T and MCI filed Oppositions to our application forreview of the International Bureau’s March 10, 2003 Order and on May 5, 2003,we filed our reply to these Oppositions.  Our revenues derived frominternational long distance calls have not been materially adversely affectedby the Order of the International Bureau of the U.S. FCC because most of thefacilities-based traffic originating in the United States is being re-routedthrough circuits of third parties not subject to the Order.  See “Item 3. KeyInformation — Risk Factors — Risks Relating to Us — Our results of operationshave been, and may continue to be, adversely affected by lower U.S. dollarrevenues caused by declining international termination rates and competition ininternational long distance service”, “Item 5. Operating and Financial Reviewand Prospects — Other Information — U.S. FCC Proceeding on Termination Rates”,“Item 8. Financial Information — Legal Proceedings — U.S. FCC Proceeding onTermination Rates” and Note 29 to our financial statements in Item 18 forfurther discussion.

 

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

 

*National Long Distance Service*

* *

*Overview*

 

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

 

The following table shows ournational long distance call volumes and revenues as of and for the years endedDecember 31, 2000, 2001 and 2002:

 

 

Years Ended December 31,

 

**2000**

**2001**

**2002**

 

 

 

 

Total PLDT call volumes (million minutes)

3,255

2,756

2,145

Growth rate

15%

(15%)

(22%)

Consolidated national long distance revenues (in millions)

Php10,436

Php8,500

Php7,818

Growth rate

3%

(19%)

(8%)

National long distance revenue as a percentage of total operating revenues

17%

11%

8%

 

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

 

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

 

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

 

*Rates*

 

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

 

In 2001, PLDT entered into newinterconnection agreements with local exchange carriers and cellularoperators.  In May 2001, PLDT entered into a new interconnection arrangementwith the majority of other local exchange carriers, pursuant to which theoriginating carrier pays (1) a hauling charge of Php0.50 per minute forshort-haul traffic or Php1.25 per minute for long-haul traffic to the carrierowning the backbone network and (2) an access charge of Php1.00 per minute tothe terminating carrier.  In addition, effective January 2002, access chargesbeing paid by PLDT to cellular operators were reduced to Php4.50 per minutefrom Php6.50 per minute it paid for the period from July to December 2001.Prior to July 2001, PLDT was paying access charges ranging from a low ofPhp7.69 per minute to a high of Php10.94 per minute for calls terminating tocellular subscribers, depending on whether the calls were local or longdistance.  We adopted simplified pricing plans and amended our interconnectionagreements with cellular operators with a view to maximizing revenues of ournational long distance service.  PLDT still maintains revenue-sharingarrangements with a few other local exchange carriers, whereby charges aregenerally apportioned 30% for the originating entity, 40% for the backboneowner and the remaining 30% for the terminating entity.  For more informationon these interconnection arrangements, see “Item 5. Operating and FinancialReview and Prospects — Results of Operations — 2002 Compared to 2001 —Consolidated Operating Revenues — Fixed Line — National Long Distance Service.”

 

*Data and Other Network Services*

 

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

 

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

 

•        traditional bandwidth service — high-speed point-to-pointdomestic and international digital leased line services;

 

•        broadband/packet-based/Internet protocol-based services — framerelay, ATM, Internet protocol virtual private network, or IP-VPN, digitalsubscriber line, or DSL, Internet gateway and wholesale digital signal level 3,or DS3; and

 

•        other packet-based switching services — Datapac and integratedservices digital network, or ISDN.

 

The foregoing services are used forthe following:

 

•        domestic and international communication;

 

•        broadband data transmission services that transmit data over arange of frequencies and/or bandwidth into several narrower bands;

 

•        Internet exchange services that provide ISPs with a primaryconnection to the global Internet to exchange local traffic generated withinthe Philippines;

 

•        private networking services that use the public Internet as abackbone for private interconnection between different locations;

 

•        switch-based services, provided through a fixed bandwidthtransmission facility, that allow establishment of a dedicated connection forthe duration of the call; and

 

•        international packet-based services, provided through bilateral arrangementsand global alliances that integrate voice, video and data.

 

We continue to broaden our serviceofferings with the launch of new services and expansion or enhancement of someof the existing ones.

 

In March 2001, PLDT launched RemoteAccess Service, offering customers in the Philippines outsourced dial-up accessto their local area networks and head offices from remote locations using ourservers.  PLDT has installed remote access servers at our local central officeslocated in 17 key cities throughout the Philippines.

 

In April 2001, PLDT launchedIP-VPN, a networking service incorporating multi-protocol label switching.This switching technology assigns a label to each packet of data before it issent through the public Internet.  The label contains information such asdestination, precedence and VPN membership designed to prevent access toinformation by persons outside their virtual private network.  In June 2001, weexpanded the coverage of our IP-VPN service by making it available throughoutSoutheast Asia through ACASIA, a joint venture telecommunications company ownedby PLDT, Singapore Telecom, Telekom Malaysia, Jabatan Telecom Brunei, CAT ofThailand and PT Indosat.

 

In 2001, PLDT substantiallyincreased the capacity of our *I-Gate* network by 110 megabits per secondto 155 megabits per second to meet increased demand for broadband Internetaccess.  *I-Gate* is our Internet gateway service that provides high-speedaccess to the global Internet.  With the activation in December 2001 of the AsiaPacific Cable Network 2, of which PLDT is a part owner, we have furtherincreased *I-Gate’s* capacity to 290 megabits per second as of October 31,2002.  By the end of 2002, we increased *I-Gate’s* capacity by 155megabits per second, making it the biggest terrestrial Internet connection inthe Philippines.

 

In the second half of 2001, PLDTaccelerated the deployment of our DSL infrastructure to meet the growing demandfor high-speed and dedicated Internet access.  DSL is a broadband service thatallows high-speed data transmission over ordinary (copper) telephone lines.PLDT’s DSL service is now available in Metro Manila and other key cities in thePhilippines under the brand names *PLDT DSL* for corporate customers and *myDSL*for retail customers.

 

In May 2002, PLDT launched apay-per-use dial-up Internet service under the brand name *PLDT Vibe*,which is available on a postpaid or prepaid basis to PLDT’s fixed linesubscribers. Charges for this service are Php0.25 per minute for off-peakhours, which are from 10:01 p.m. to 6:00 a.m., and Php0.50 per minute for peakhours, which are from 6:01 a.m. to 10:00 p.m.  With the launch of *PLDT Vibe*,PLDT now offers two residential Internet service packages targeting separatemarkets — *PLDT Vibe* for light to medium Internet users and *myDSL*broadband for heavy Internet users.  As of December 31, 2002, the number ofPLDT’s postpaid fixed line subscribers that signed up for *PLDT Vibe*was**60,878, while the number of subscribers to *PLDT DSL* and *myDSL*broadband service reached 10,896.  As of June 30, 2003, the number of PLDT’spostpaid fixed line subscribers that signed up for *PLDT Vibe* was 84,566while the number of subscribers to *PLDT DSL* and *myDSL* broadbandservice rose to 14,579 as of June 30, 2003.

 

In August 2002, PLDT launched *Shops.work*,a network solution that allows the electronic linking of retail storesproviding, among others, sales and inventory reports, up-to-date and real-timemonitoring of sales and inventory, and on-line access to head offices.

 

In March 2003, PLDT launched anumber of data services, namely: *Continuum, iView*and *Encompass*,all under the *Brains* umbrella.  *Brains Continuum* providescustomers the ability to recover from service interruptions and offers networkdiversity, facility and hosting services in partnership with ePLDT.  *BrainsiView* enables customers to monitor the performance of their network, trackbandwidth utilization patterns and identify the source of network problems.  *BrainsEncompass* provides a broad range of services for the customers’ managednetworking needs, be it a wide area network or local area network.

 

In April 2003, PLDT introduced afull two-way fixed line text messaging service under the brand name *Hype,*which allows subscribers to send and receive text messages to and from landlineand mobile phones, and is capable of international text messaging. *Hype*also**allows subscribers to join TV network-based and new PLDT-initiated textingservices.

 

**Wireless**

 

We provide cellular and satellite, VSAT and other servicesthrough our wireless business segment.

 

*Cellular Service*

 

*Overview*

 

Our cellular business, which weprovide through Smart and Piltel, is focused on providing products and servicesusing our digital GSM network, including products and services based on SMStechnology, such as *Smart zed*TM and *Smart Money*.  Piltel’s GSMprepaid service, *Talk 'N Text*, is also supported on Smart’s GSM network.

 

The following table summarizeskey measures of our cellular business as of and for the years ended December31, 2000, 2001 and 2002:

 

 

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

Cellular subscriber base

3,515,293

6,368,850

8,599,306

Smart

2,858,479

4,893,844

6,825,686

GSM

2,331,005

4,641,666

6,825,686

Prepaid

2,263,322

4,569,616

6,649,038

Postpaid

67,683

72,050

176,648

Analog/ETACS (1)

527,474

252,178

—

Prepaid(2)

282,529

87,429

—

Postpaid

244,945

164,749

—

Piltel

656,814

1,475,006

1,773,620

GSM—Prepaid(3)

368,578

1,329,326

1,773,620

Analog/CDMA(1)

288,236

145,680

—

Prepaid

200,042

76,473

—

Postpaid

88,194

69,207

—

Growth rate of cellular subscribers

137%

81%

35%

Smart

179%

71%

39%

GSM

1,119%

99%

47%

Analog/ETACS

(37%)

(52%)

(100%)

Piltel

44%

125%

20%

GSM—Prepaid(3)

100%

261%

33%

Analog/CDMA

(37%)

(49%)

(100%)

Cellular revenues (in millions)

Php14,017

Php32,835

Php45,565

Service (4)

9,255

19,820

30,583

Handset sales

4,762

13,015

14,982

Percentage of cellular revenues to total operating revenues

23%

41%

49%

_____________

 

*(1)      **In December 2002, Smartclosed down its analog/ETACS network.  In 2001, Piltel recognized impairmentlosses in respect of its AMPS/CDMA network.*

 

*(2)      **Priorto October 2000, Smart’s prepaid analog subscribers were classified as inactiveif they had not reloaded for at least three months.  In October 2000, Smartchanged its disconnection policy with respect to prepaid analog subscribers,eliminating the “inactive” classification and adopting the same disconnectionperiods applicable to its prepaid GSM subscribers.*

 

*(3)      **RepresentsTalk ‘N Text, a prepaid GSM service provided by Piltel using Smart’s GSMnetwork. Piltel’s GSM revenue is net of service fees payable to Smart for usingSmart’s GSM network.  Piltel does not offer postpaid GSM service.*

 

*(4)      **Refers to GSM and analogvoice and data revenues.*

 

* *

*Service Plans*.  We marketnationwide cellular communications services under the brand names *SmartBuddy, Smart Gold*, *addict mobile* and *Talk 'N Text*.

 

*Smart Buddy* is a prepaidservice while *Smart Gold* and *addict mobile* are postpaidservices.  These three services are provided through Smart’s digital GSMnetwork.  Of Smart’s total cellular subscribers as of  December 31, 2002, 97%were *Smart Buddy* prepaid subscribers and 3% were *Smart Gold*postpaid subscribers.  *addict mobile* was introduced in April 2003.  *Talk‘N Text* is a prepaid service provided using Smart’s GSM network marketed byPiltel pursuant to a facilities service agreement between Smart and Piltel.Before Smart decommissioned its analog enhanced total access communicationssystem, or ETACS, network in December 2002, it had also offered analog prepaidand postpaid services under the brand names*BillCrusher*and*PriceBuster,*respectively.  Prior to 2002, Piltel had also offered analogprepaid and postpaid services under the brand names *Phone Pal* and *Mobiline*,respectively.

 

As of December 31, 2002 and June30, 2003, Smart’s and Piltel’s combined cellular subscribers reached 8,599,306and 10,363,725, respectively.  Notably, the aggregate of Smart’s and Piltel’scellular subscribers has outnumbered our fixed line subscribers since 2000.  Asof December 31, 2002, the combined subscribers of Smart and Piltel outnumberedour fixed line subscribers by more than 4 to 1.  As of December 31, 2002, Smarthad 6,825,686 subscribers, of which 6,649,038 were *Smart**Buddy*prepaid subscribers and 176,648 were *Smart Gold* postpaid subscribers.Smart’s prepaid and postpaid subscribers increased to 7,920,447 and 222,942,respectively, for a total of 8,143,389 subscribers, as of June 30, 2003.  As ofDecember 31, 2002 and June 30, 2003, Piltel’s *Talk ‘N Text* subscribersreached 1,773,620 and 2,220,336, respectively.  Piltel does not offer postpaidGSM service.

 

*SMS and Other Value-addedServices*.  Our cellular subscriber growth has been driven by SMS, a textmessaging service on GSM networks, which was introduced in 1999.  SMS isextremely popular in the Philippines, particularly on the prepaid platform, asit provides a convenient and cost-efficient alternative to voice and e-mailbased communications.  Strong volume growth in SMS contributed significantly toour cellular revenue growth in 2002.  The total volume of outbound messageshandled by our SMS system during 2002 increased by 39% to 19,558 million from14,055 million outbound messages handled during 2001.  During the first half of2003, our SMS system handled 10,768 million outbound messages, a 40% increaseover the 7,670 million outbound messages handled during the same period in2002.

 

Our value-added services areprimarily based on SMS technology.  We offer value-added services such as voicemail, information-on-demand, which is a service that allows subscribers toorder information from our content providers whenever desired, mobile bankingand *TextMail*, which is a service that allows subscribers to send andreceive text messages through their personal computers, and location-basedservices.  Since 2000, we have launched the following major value-addedcellular services:

 

•        *Smart zedTM*, a partnership with international cellularoperator Sonera zed Ltd. of Finland, enables subscribers to personalize theirinformation requirements not only as to the types of information required butalso when the information is required.  Sonera zed Ltd. has introduced a singleplatform that provides access to local and global information through SMS orwireless application protocol;

 

•        *Mobile Banking*, launched in collaboration with variousbanks, allows subscribers to execute banking transactions, such as balanceinquiries and transfers, over their mobile telephones; and

 

•        *Smart Money*, launched in conjunction with MasterCard,enables subscribers to pay for their purchases by transferring money from theirbank accounts to their *Smart Money*cards as well as reload their prepaidcards electronically.

 

Value-added services offeredthrough *Talk 'N Text* include group text messaging, or *Team TEXT*,balance inquiry via text, cell-to-cell instant reload that enables subscribersto reload their accounts through their handsets, and information-on-demandthrough the *zedTM* service.

 

Smart and Piltel have a number ofinteractive activities, such as text games and chat services, developed ontheir own platforms.

 

*Smart Money* was cited as the“Best Product Innovation” by MasterCard International and the “Most InnovativeGSM Wireless Service for Customers” at the 3rd GSM World Congress held inCannes, France in March 2001.

 

Due to the high level of SMS usage,we believe that the Philippine market is well suited for text-basedinformational and e-commerce services.  Our current approach is to continuemaximizing our GSM, or 2G, services.  We also offer General Packet RadioService, or GPRS or 2.5G, to service increased demand for bandwidth-intensiveapplications.  GPRS allows data transfer at an average speed of up to 115 kilobitsper second.  In addition, we are in the process of upgrading our network toEnhanced Data rates for GSM Evolution, or EDGE.  EDGE is a technology thatwould further increase the speed and data capability of our GSM network.

 

*Rates*

* *

*Smart Buddy* and Piltel’s *Talk‘N Text*prepaid cards are sold in denominations of Php300, Php500 andPhp1,000, which include 33, 83 and 250 free SMS text messages, respectively.The stored value of a prepaid card remains valid for a period of two monthsfrom the time a subscriber activates the card.  On May 11, 2003, *Smart Buddy*and*Talk 'N Text*launched *SmartLoad,* an “over-the-air” electronicloading facility designed to make reloading of air time credits more convenientfor, and accessible to *Smart Buddy* and *Talk ‘N Text* subscribers.These “over-the-air” reloads, which have both voice and text functions, arepackaged in smaller denominations of Php30, Php60 and Php115, but have shortervalidity periods of 3 days, 6 days and 12 days, respectively.  A Php200denomination load with a one-month validity period was added on July 11, 2003.We had also previously offered *PureTxt 100*, a Php100-denominated prepaid cardoffering a text-only service designed as an alternative for *Smart Buddy*and*Talk ‘N Text* subscribers who may have temporarily been unable to affordthe Php300-denominated card.  *PureTxt 100* cards came with a freeallocation of ten text messages and were valid for one month.  Like *PureTxt100*, we believe that *SmartLoad* will encourage subscribers to staywithin our network, instead of churning and re-subscribing at a later time.  Wehave ceased the production and sale of *PureTxt 100* cards due to thelaunching of *SmartLoad**.*

 

The peak hour air time rate for *SmartBuddy* subscribers is Php8.00 per minute, while the off-peak hour air timerate is Php4.00 per minute.  Charges for national direct dial services for *SmartBuddy* subscribers are as follows: for calls within the same island Php11.00per minute for peak hours and Php7.00 per minute for off-peak hours, for callsbetween Luzon and Visayas and between Visayas and Mindanao Php12.00 per minutefor peak hours and Php8.00 per minute for off-peak hours, and for calls betweenLuzon and Mindanao Php13.00 per minute for peak hours and Php9.00 per minutefor off-peak hours.  As described under “Item 5. Operating and Financial Reviewand Prospects — Results of Operations — 2001 Compared to 2000 — ConsolidatedOperating Revenues — Wireless — Cellular Service” on September 15, 2001 andJanuary 1, 2002, Smart reduced its free text message allocations to subscribersby a total two-thirds of the previous free text message allocations.

 

*Talk 'N Text* subscribers arecharged Php6.50 per minute for local and cell-to-cell calls and for nationaldirect dial services, a peak-hour rate of Php12.00 per minute and an off-peakhour rate of Php8.00 per minute, regardless of destination.

 

Prior to January 1, 2002, *SmartGold* offered the following monthly air time plans: Php600, Php1,200,Php1,800, Php3,000 and Php4,000.  Subscribers who enrolled in these plans priorto January 1, 2002 remained on these plans following introduction of the plansdescribed below.

 

*Smart Gold* subscribers maychoose from any of the subscription plans set forth in the table below:

 

**Plan**

**Free SMS Text Messages(1)**

**Free  Air time (in minutes)**

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

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

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

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

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

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

 

 

 

 

 

 

 

 

 

Gold Rave

500

20

500

1.00

7.50/3.00

8.00/4.00

11.00/7.00

9.50/5.00

Gold Standard

225

85

600

1.00

7.00/3.00

7.50/4.00

10.50/7.00

9.00/5.00

Gold Pick

350

100

800

1.00

7.00/3.00

7.50/4.00

10.50/7.00

9.00/5.00

Gold Choice

390

235

1,335

0.50

6.50/2.00

7.00/4.00

10.00/6.00

8.50/4.00

Gold Select

500

390

1,995

0.50

5.00/2.00

6.50/4.00

9.50/6.00

7.00/4.00

Gold Premium

800

600

2,665

0.50

4.00/2.00

5.00/4.00

8.00/6.00

6.00/4.00

Gold Elite

650

750

3,500

0.50

4.00/2.00

5.00/4.00

8.00/7.00

6.00/4.00

_____________

 

*(1)    **Applies only topoint-to-point text messages sent within Smart’s network and does not apply toSMS-based value-added services.*

* *

*(2)    **The monthly service fees maybe applied to any local, international long distance or national long distancecall, or any text, Smart zed**ä**, voice mailor international roaming service.*

* *

*(3)    **Air time rates for localcalls made to other Smart GSM subscribers.*

* *

*(4)    **Airtime rates for local calls made to fixed lines and cellular subscribers ofother carriers.*

* *

*(5)    **ForVisayas, Mindanao and Luzon, excluding radius covering Bulacan, Cavite,Laguna-San Pedro and Rizal.*

* *

(6)     *Forradius covering Bulacan, Cavite, Laguna-San Pedro and Rizal.*

 

On April 17, 2003, Smart beganoffering the following postpaid plans under the *addict**mobile*brand.

 

**Plan**

**Addict  Credits  (in pesos)**

**Free  Air time (in minutes)**

**Monthly  Service Fee (in pesos)**

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

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

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

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

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

 

 

 

 

 

 

 

 

 

addict 500

500

20

500

1.00

7.50/3.00

8.00/4.00

11.00/7.00

9.50/5.00

addict 600

300

85

600

1.00

7.00/3.00

7.50/4.00

10.50/7.00

9.00/5.00

addict 800

450

100

800

1.00

7.00/3.00

7.50/4.00

10.50/7.00

9.00/5.00

addict 1335

550

235

1,335

0.50

6.50/2.00

7.00/4.00

10.00/6.00

8.50/4.00

addict 1995

700

390

1,995

0.50

5.00/2.00

6.50/4.00

9.50/6.00

7.00/4.00

addict 2665

850

600

2,665

0.50

4.00/2.00

5.00/4.00

8.00/6.00

6.00/4.00

addict 3500

950

750

3,500

0.50

4.00/2.00

5.00/4.00

8.00/7.00

6.00/4.00

 

Smart is permitted to adjust its cellular air time andnational direct dial rates according to changes in the peso-to-U.S. dollarexchange rate.  Under the authorization granted to Smart by the NTC, Smart ispermitted to increase and is required to decrease its air time and national directdial rates by 1% for every Php0.25 changein the exchange rate relative to a base rate of Php24.726 to US$1.00.  However, Smart has not implementedany foreign currency adjustments to its rates since November 4, 1998 because ofthe concern that increased rates may result in decreased usage by itssubscribers.

 

*Smart Buddy,**Smart Gold*and*addict mobile***subscribers pay an international direct dialing rateof US$0.40 per minute.  This rate applies to 200 destinations, including theUnited States, Hong Kong, Japan, Singapore, the United Kingdom and the UnitedArab Emirates.  Smart charges US$0.98 for 27 other destinations such asAfghanistan and Cuba and US$2.18 for another ten destinations such as EastTimor and the Falkland Islands. Talk ‘N Text subscribers pay an internationaldirect dialing rate of US$0.40 per minute to all 237 destinations.

 

Charges for point-to-point textmessages beyond the allotted free text messages are as follows:

 

•        for *Smart Buddy*and *Talk ‘N Text* subscribers,Php1.00 per message; and

 

•        for *Smart Gold*and*addict mobile*subscribers,Php0.50 or Php1.00 per message, depending on air time plan, as listed in thetable above.

 

Smart and *Talk ‘N Text*subscribers pay for SMS-based value-added services, as follows:

 

•        Php15.00 per message for international text for *Smart Buddy*and*Talk ‘N Text*subscribers and Php10.00 per message for international textfor *Smart Gold*and*addict mobile*subscribers;

 

•        Php2.50 per message for e-text and information-on-demandservices, such as news, stock and entertainment updates;

 

•        Php15.00 for downloading ringtones and logos; and

 

•        Php2.50 per *Mobile Banking*and *Smart Money*transaction,such as balance inquiry and fund transfer.

 

For multimedia messaging service, or MMS, and wirelessapplication protocol, or WAP, services, the charges are as follows:

 

•        Php5.00 per person-to-person MMS still and animated images;

 

•        Php15.00 per download of pictures, greeting cards, polyphonicring tones and traffic shots;

 

•        Php2.50 per transaction when surfing on the Smart WAP portal; and

 

Except for *Mobile Banking*and*Smart Money*, which it does not offer, *Talk ‘N Text* charges thesame rates for value- added services as those charged by Smart.  For voice mailretrieval, *Smart Buddy*, *Smart Gold* and *addict mobile*subscribers are charged Php8.00 per minute during peak hours and Php4.00 perminute during off-peak hours.  For voice mail retrieval, *Talk ‘N Text*subscribers are charged a flat rate of Php4.00 per minute.

 

In addition to enjoying the sametariffs as *Smart Gold* subscribers, *addict mobile* subscribers areallowed to apply their allocated free credits on their choice of data andvalue-added services.

 

We sell our cellular servicesprimarily through a network of independent dealers that generally have theirown retail networks, direct sales forces and sub-dealers.  These dealersinclude major distributors of cellular handsets.  We currently have six dealersthat carry out distribution throughout the Philippines.  On December 1, 2002,Smart purchased the assets of Telecommunications Specialists, Inc., or TSI, amajor dealer that used to account for more than half of our sales of prepaidair time cards, and integrated TSI’s employees following the acquisition.Account managers from our dealer sales force manage our dealer network andregularly update these dealers on our upcoming marketing strategies,promotional campaigns and product development.  In addition, subscribers mayreload their prepaid cards electronically using their handsets through *SmartMoney* or “over-the-air” through *SmartLoad*. 

 

For prepaid services, Smart andPiltel pay commissions to dealers for both prepaid phone kits and air timecards sold.  Beginning August 1, 2002, Smart and Piltel reduced the maximumcommission to dealers for prepaid phone kit sales from a range of Php1,000 toPhp1,300 per unit sold paid in the form of prepaid “call and text” cards(depending on the volume purchased) to Php800 in cash per prepaid phone kitsold.  An additional 1% rebate is given on cash purchases.  Air time cards aresold to dealers at volume discounts determined by the value of the cardspurchased by the dealers.  Air time cards cannot be returned or refunded andnormally expire within 6 to 12 months after release from the Smart and Piltelwarehouse.  For postpaid services, Smart pays dealer commissions based on theair time plan sold.

 

*Satellite and VSAT*

* *

*Overview*

 

We currently provide satellite andVSAT services through Mabuhay Satellite and Telesat.  ACeS Philippines, oursatellite phone service provider, started to roll out fixed satellite terminalsin the last quarter of 2001 and started commercial operations on January 1,2002.

 

*MabuhaySatellite*

 

We currently own 67% of MabuhaySatellite, which is engaged in the control and operation of the Agila IIsatellite.  Agila II, which is the Philippines’ first communications satellite,commenced commercial operations in January 1998.  Mabuhay Satellite leasessatellite space segments in both the C and Ku bands on the Agila II.  Throughthe Agila II, Mabuhay Satellite also offers Internet backbone access, video anddata broadcasting, and bandwidth-on-demand, facilitating communication linksbetween telecommunications, broadcast and other public utility companiesoperating in the Asia-Pacific region.

 

See  “Item 5. Operating andFinancial Review and Prospects — Critical Accounting Policies — Investments”and Note 9 to our consolidated financial statements in Item 18 for a discussionof the re-measurement of our investment account in Mabuhay Satellite.

 

*Telesat*

 

We currently own 94.4% of Telesat,which operates a nationwide communications satellite network using VSATtechnology.  Telesat offers voice, facsimile and data transmission servicesthroughout the Philippines, including areas that are underserved or unserved bylocal fixed line operators. 

 

Using VSAT technology, we alsoprovide the following services:

 

•        point-to-multipoint data transmission services, usually forintercompany communication for corporate customers;

 

•        private point-to-point service; and

 

•        connectivity for the cell sites of our wireless network inoutlying locations.

 

We lease transponder capacity onthe Agila II to provide VSAT services.

 

*ACeS Philippines*

 

PLDT and Piltel currently own 88.5%and 11.5% , respectively, of ACeS Philippines, which commenced commercialoperation on January 1, 2002 and operates telecommunications gateway equipmentfor fixed satellite phone services.  ACeS Philippines owns approximately 20.23%of ACeS International Limited, or AIL, which aims to develop and implement asatellite-based communications system to provide services to users in theAsia-Pacific region through the Garuda I satellite.  AIL has entered intointerconnection agreements and roaming service agreements with PLDT and othermajor telecommunications operators that will allow ACeS Philippines’subscribers to access GSM terrestrial cellular systems in addition to the ACeSPhilippines’ system.

 

In 2001, we made impairmentprovisions in respect of our investment in AIL and ground station equipment ofACeS Philippines in relation to the business of AIL, as described in  “Item 5.Operating and Financial Review and Prospects — Critical Accounting Policies —Impairment of Long-Lived Assets” and Notes 4, 8 and 9 to our consolidatedfinancial statements in Item 18 for a further discussion.

 

*Revenue*

 

Our satellite and VSAT servicerevenues consist of:

 

•        lease payments from the rental of Mabuhay Satellite’s C-band andKu-band transponders; 

 

•        revenues generated from Telesat’s nationwide satellite network;and

 

•        revenues generated from ACeS Philippines’ satellite phoneservice.

 

*Rates*

 

Mabuhay Satellite leases itstransponders to third parties at annual rates of US$1.4 million and US$0.8million for its C-band and Ku-band transponders, respectively.  Telesatprovides its VSAT services on a cost plus mark-up basis.  ACeS Philippines’mobile subscribers are charged Php13.84 per minute for local and cell-to-cellcalls and for national direct dial services while residential subscribers arecharged a peak-hour rate of Php13.00 per minute and off-peak hour rate of Php8.00per minute for domestic calls regardless of destination.  For ACeS Philippines’public calling offices, callers are charged Php4.50 and Php7.00 per minute forcalls terminating on fixed line and cellular networks, respectively.  Rates forinternational long distance calls depend on the country of termination, rangingfrom US$0.35 per minute for frequently called countries to US$0.85 per minutefor less frequently called countries.

 

**Information and CommunicationsTechnology**

 

We conduct our information andcommunication technology businesses through our wholly-owned subsidiary, ePLDT,which was incorporated in August 2000 and commenced commercial operations inFebruary 2001.  ePLDT is a broad based integrated information andcommunications technology company, focusing on infrastructure and solutions forInternet applications, Internet protocol based solutions and multimedia contentdelivery.  ePLDT’s principal business activities are:

 

•        the operation of an Internet data center under the brand name *Vitro*TM;

 

•        two wholly-owned call centers, namely Vocativ and Parlance; and 

 

•        Infocom, an ISP.  

 

ePLDT has also invested in a number of other e-commerce andInternet-related businesses, as described in “–– Infrastructures and Services —Other Investments” below.

 

As a new business, revenues from our information andcommunications technology services accounted for approximately 1% of ourconsolidated operating revenues in 2002.

 

*Infrastructures and Services*

 

*Data Center*

 

ePLDT’s *Vitro*TM is one of thePhilippines’ first Internet data centers.  The Philippine Board of Investmentsgranted *Vitro*TM pioneer status, which entitles us to tax and othergovernmental incentives.  *Vitro*TM is a CISCO-certified co-locationservice provider.  *Vitro*TM provides co-location, web and server hosting,hardware and software maintenance services, website development and maintenanceservices, webcasting and webhosting, shared applications, data disasterrecovery and business continuity services, intrusion detection and Internetprotocol security services, as well as firewall and managed firewall services.

 

*Internet Service*

 

In December 2001, we transferred toePLDT our 99.6% interest in Infocom, one of the country’s leading ISPs.Infocom offers consumer prepaid Internet access under the name *WarpSpeed*and postpaid Internet access; dedicated dial-up and multi-user dial-upcorporate leased lines; broadband Internet access through DSL and cable; andwebsite consulting, development and hosting.

 

*Call Centers*

 

ePLDT is focused on developing itscall center services business, which capitalizes on our network resources andthe availability of English-speaking labor in the Philippines.  The call centerservice business is being undertaken through the following subsidiaries ofePLDT:

 

•        Parlance, a wholly-owned subsidiary of ePLDT, which operates adedicated call center facility capable of accommodating 520 seats.  Pursuant toa guaranteed three-year contract with one of the largest direct-to-homesatellite service providers in the United States, Parlance operates and managesthe facility exclusively for its client to provide customer support and billingservices.  Parlance commenced commercial operations in June 2002; and

 

•        Vocativ, a wholly-owned subsidiary of ePLDT, which operates acall center facility capable of accommodating 500 seats, which can be expandedto 750 seats.  Pursuant to a ten-year supplier-purchaser agreement with aglobal provider of customer relationship management services, Vocativ operatesand manages the call center facility exclusively for this provider’s clients.Vocativ commenced commercial operations in April 2002.

 

ePLDT sold its entire interest inContact World on June 30, 2003.  Contact World, a joint venture with Salmat PtyLimited of Australia, was 51%-owned by ePLDT.

 

*Other Investments*

 

ePLDT also has investments inseveral other Internet-related businesses, including:

 

•        100% interest in mySecureSign, Inc., which issues VeriSigndigital certificates in the Philippines for e-commerce transactions;

 

•        100%-owned subsidiary, iPlus Intelligent Network, Inc., whichprovides IT helpdesk/contact center solutions;

 

•        20.5% interest in BayanTrade Dotcom, Inc., a business-to-businessexchange established together with six of the Philippines’ leadingconglomerates;

 

•        debt securities convertible into a 40% interest in Netopia, aleading branded chain of Internet cafes in the Philippines; and

 

•        22.5% interest in convertible securities of StradcomInternational Holdings, the parent company of Stradcom Corporation, which hasan existing concession agreement with the Philippine government for themodernization of the Philippine Land Transportation Office, including thecomputerization of driver’s license issuance, vehicle registration and trafficadjudication systems.

 

In addition, we held convertible notesissued by Unilink Communications Corporation, or Unilink, which owns 100% ofthe shares of The Philippine Home Cable Holdings, Inc. or Home Cable, thePhilippines’ second largest cable television operator by subscriber number.The notes are convertible into shares of Unilink and/or exchangeable for sharesof Home Cable.  However, because Philippine law currently prohibits direct orindirect foreign ownership of equity in broadcast companies, we could notconvert or exchange our convertible notes into Unilink or Home Cable equity.Mediaquest Holdings, Inc., a company wholly-owned by PLDT’s Beneficial TrustFund, owns all of the shares of Unilink.  Unilink has pledged all of its sharesin Home Cable to a group of lenders as security for a loan of Home Cable.  Asof December 31, 2001, we provided for a full impairment charge against ourinvestment in the Unilink convertible notes amounting to Php2,052 million dueto an other than temporary decline in value of the investment.  In June 2003,PLDT assigned and ceded unto the PLDT Beneficial Trust Fund, or BTF, all of itsrights, interest and participation in respect of its investment in convertiblenotes of Unilink with a nil fair value of zero and effectively for zeroconsideration under U.S. GAAP.  In addition, PLDT also ceded its rights,interest and participation to certain other assets unrelated to Unilink for andin consideration of partial payment of the contributions which PLDT is requiredto make to the BTF under PLDT’s employee benefit plan.

 

Home Cable defaulted on the payment of principal and interestdue on December 6, 2001 under this loan and is currently engaged in efforts torestructure its debt.  On April 10, 2002, the loan agent, at the request of amajority of the lenders, delivered a notice to Home Cable declaring an event ofdefault and accelerating the loan.  Consequently, the lenders are entitled toforeclose on or sell the collateral granted as security for the loan, includingUnilink’s shares in Home Cable.  In the event that Home Cable’s lenders were toforeclose on Unilink’s Home Cable shares, the lenders would be entitled to theproceeds from the sale thereof, or, if such shares were not sold, to theshares, and Unilink would be subrogated to the lenders’ claims against HomeCable.  As of the filing of this annual report, Home Cable is still innegotiations with its lenders to restructure its debt.

 

On July 18, 2001, we entered into amaster consolidation agreement pursuant to which a newly incorporated company,Beyond Cable, Inc., would hold all interests in Sky Cable and Home Cable.Completion of the transaction is subject to certain conditions, includingobtaining consents of lenders of Sky Cable and Home Cable.  Upon completion ofthe transaction, the Benpres Group, which currently holds the interests in SkyCable, would hold a 66.5% interest in Beyond Cable and Mediaquest would holdthe remainder.  In connection with this transaction, PLDT’s Beneficial TrustFund is expected to assign the convertible notes in Unilink and our interestsin convertible loans to Mediaquest.

 

**Fixed Line Network Infrastructure**

 

*Domestic*

 

Our domestic telephone networkincludes installed telephones and other equipment on customers’ premises, localaccess lines connecting customers to exchanges, referred to as “outside plant,”inter-office lines connecting exchanges, and long distance transmissionequipment.

 

The following table gives somebasic measures of the development of our domestic telephone network as ofDecember 31, 2000, 2001 and 2002:

 

 

**As of December 31,**

 

**2000**

**2001**

**2002**

 

 

 

 

Number of central office exchanges

186

187

183

PLDT fixed lines in service

1,915,985

2,075,109

2,092,539

PLDT employees per 10,000 local exchanges in service

69

62

58

 

Since the end of 1999,substantially all of our nationwide network has been upgraded from analog todigital exchanges.  This shift to digital technology has enabled us to realizesavings in network costs, upgrade our network to handle non-voicecommunications, and offer value-added and enhanced services such as fixed linetext messaging.

 

In November 1998, we completed ourdomestic fiber optic backbone, the country’s first telecommunications networkusing fiber optics in delivering voice, video, data, and other broadband andmultimedia services nationwide.  Constructed at a total cost of US$188 million,our fiber optic network employs synchronous digital hierarchy technology toimprove network performance and reduce operating costs.  Our network iscomposed of in-land and submarine cable installations and is configured in sixself-healing rings and an extension link, allowing route delivery even in theevent of link failures.  It has an initial transmission speed of 2.5 gigabitsper second and is connected directly to five existing international submarinecable systems.

 

In July 2000, we inaugurated our domestic fiber optic networkfacilities in Cebu City, the second largest city in the Philippines.  The newfacilities enable us to offer a broader range of products and services to meetthe growing telecommunications needs of Cebu-based businesses.

 

On August 7, 2000, we inaugurated *CSPLDT*, a cable ship which we lease from NTT World Engineering MarineCorporation pursuant to a five year Chartered Arrangement MaintenanceContract.  Under the contract, NTT World Engineering Marine Corporation uses *CSPLDT* primarily to maintain the 2,400 kilometers of submarine cablecomprising the submerged portion of our domestic fiber optic network.

 

In 2001, we activated a secondfiber pair on our existing fiber cable and installed dense wavelength divisionmultiplexing technology in certain portions of the network.  The new systemserves the areas of Luzon, Visayas and Mindanao and also serves theinternational node connecting the Philippines to the Asia-Pacific Cable Network2.  The second pair provides an extra 10 gigabits per second of capacity, orthe equivalent of 120,000 voice circuits.  Nortel Networks supplied us with asuite of optical Internet solutions, including a 10-gigabit per second densewavelength division multiplexing solution based on Nortel Networks OPTeraTM LongHaul 1600 Optical Line System.

 

In 2002, we increased ourtransmission and data network capacities and sold to Smart certain assetscomprising a portion of our digital fiber optic cable loops from Luzon toMindanao and certain related equipment.

 

*International*

 

We provide international networkservices using our three international gateway switching exchanges and ourextensive international network passing mainly through submarine fiber opticcable systems.  As of December 31, 2002, our international long distancefacilities allow our subscribers to reach 229 countries/territories worldwide,of which 50 countries/territories have direct circuits with PLDT.

 

The table below shows the submarine cable systems in which wehave interests and the countries or territories they link:

 

**Cable System**

**Countries Being Linked**

 

 

G-P-T

Guam, the Philippines and Taiwan

B-M-P

Brunei, Malaysia and the Philippines

G-P

Guam and the Philippines

B-S

Brunei and Singapore

Hawaii-4/Transpacific-3

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

Asia-Pacific Cable Network 2

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

Asia-Pacific Cable Network

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

Indonesia and Thailand

Transpacific Cable No. 5

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

Transpacific Cable No. 4

Japan, Canada, and the U.S. Mainland

KN-KK

Kuantan and Kota Kinabalu in Malaysia

Southeast Asia-Middle East

Western Europe No. 3

34 other countries in Europe, Africa, the Middle East, the Indian

subcontinent, Southeast Asia and North Asia

HONTAI-2

Hong Kong and Taiwan

Asia Pacific

Hong Kong, Japan, Singapore, Malaysia and Taiwan

PacRim West

Guam and Australia

M-T

Malaysia and Thailand

Hawaii-5

Hawaii and the U.S. Mainland

C-J

China and Japan

North Pacific

Japan, Alaska and the U.S. Mainland

H-J-K

Hong Kong, Japan and Korea

SEA-ME-WE-2

13 countries in South East Asia, the Middle East and Western Europe

including Singapore, Indonesia, India, Saudi Arabia, Egypt, Italy, Turkey

and France

 

In April 2000, we and 24 othertelecommunications administrations signed a construction and maintenanceagreement for Asia-Pacific Cable Network 2, a 19,000-kilometer long submarinecable that commenced commercial operations in late 2001 and links thePhilippines to China, Hong Kong, Japan, Korea, Malaysia, Singapore and Taiwan.Under the agreement, Asia-Pacific Cable Network 2 is required to deploy densewavelength division multiplexing technology that will initially allowtransmission of 40 gigabits per second of protected traffic.  This initialcapacity is expected to be upgraded in the future to reach a maximum of 2.56terabits per second.

 

**Wireless Network Infrastructure**

 

*Cellular*

 

Through Smart, we operate a digitalGSM network, which as of June 30, 2003, consists of 29 mobile switching centerswith a capacity for approximately 11.7 million subscribers and 15 messagingcenters capable of processing 314 million messages per day.  To meet the growingdemand for cellular services, Smart has implemented an extensive deploymentprogram for its GSM network.  In the first half of 2003, Smart added 508 basestations to its nationwide cellular network, bringing Smart’s total GSM basestations in operation to 3,285.  Smart previously operated an analog/ETACSnetwork, which it closed down in December 2002.  Piltel’s cell sites decreasedto six as of June 30, 2003 from 36 as of December 31, 2002 as it ceased tooffer its analog/CDMA service at the end of 2002.

 

Smart and Piltel have beenco-locating their cell sites where their base stations are installed.  As ofJune 30, 2003, 19 of Smart’s mobile switching centers and 63 of Smart's cellsites are housed in our complexes while 224 cell sites are co-located on Piltelproperties.  These operational synergies have allowed Smart to reduce switchinstallation time from three months to five weeks.

 

In December 2002, Smart acquiredcertain assets comprising a portion of PLDT’s digital fiber optic cable loopsfrom Luzon to Mindanao and certain related equipment.

 

We are in the process of upgradingour network to EDGE technology to further increase the speed and datacapability of our GSM network.

 

*Satellite and VSAT*

 

Mabuhay Satellite controls andoperates the Agila II satellite, which has 30 C-band transponders and 24Ku-band transponders covering the Asia-Pacific region, the Indian subcontinentand Hawaii.  Of the 54 transponders, four C-band transponders are owned byLoral Cyberstar, Inc. of the United States and PSN of Indonesia while six haverestricted usage.  Through Agila II, Mabuhay Satellite offers Internet service,video and data broadcasting, and bandwidth-on-demand, facilitatingcommunication links between telecommunications, broadcast and other public utilitycompanies operating in the Asia-Pacific region.  In December 2000, Agila IIjoined the U.S.  FCC’s “Permitted Space Station” list, which permits U.S. ownedand operated earth stations in Hawaii to access Agila II for transpacifictelecommunications, data, video and Internet-over-satellite traffic and viceversa.

 

Telesat operates a nationalcommunications satellite network using VSAT technology to provide voice,facsimile, video and data transmission services to areas in the country thatare still underserved or unserved by local telephone operators.  Telesat leasestransponder capacity from Agila II to provide VSAT services such asmultipoint-to-multipoint and point-to-multipoint data transmission services,private point-to-point service, and connectivity for the cell sites of ourcellular network in outlying locations.

 

ACeS Philippines manages, controlsand operates its own satellite gateway and other ground infrastructure,including a 13-meter feeder-link C-band earth station, beam congruency antennaand equipment that serves as the primary interface between the ACeSPhilippines’ system and other telecommunications networks.  It uses the GarudaI satellite to provide digital voice services to ACeS Philippines’ mobile andfixed terminal users within the Asian service area.

 

Interconnection Agreements
 

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

 

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

 

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

 

For local calls originating fromPLDT and terminating on the cellular networks of Smart and Globe, Smart andGlobe charge PLDT a rate of Php4.50 per minute effective January 1, 2002.Effective January 1, 2004, calls terminating to cellular subscribersoriginating from fixed line subscribers will be charged a termination rate ofPhp4.00 per minute, a decrease from the previous rate of Php4.50 per minute.From July 1, 2001 to December 31, 2001, Smart and Globe charged PLDTPhp6.50 per minute.  Prior to July 1, 2001, PLDT retained an origination chargeof Php2.00 on every call terminating to the network of Smart or Globe.  The newarrangement also applies to national long distance calls originating from PLDTand terminating to the cellular network of either Smart or Globe.  Under thenew agreement, there will be no distinction between access charges for localcalls and national long distance calls.

 

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

 

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

 

**Licenses and Regulation**

 

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

 

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

 

PLDT, Smart and Piltel providetelecommunications services pursuant to legislative franchises, which expire,in the case of PLDT, 25 years from November 28, 2003, in the case of Smart, 25years from March 27, 1992 or the date its current franchise was granted, and,in the case of Piltel, 25 years from May 14, 1994.  A franchise holder isrequired to obtain operating authority from the NTC to provide specifictelecommunications services.  These approvals may take the form of a CPCN or,while an application for a CPCN is pending, a provisional authority to operate.

 

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

 

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

 

The following table sets forth the spectrum system, licensedfrequency and bandwidth of Smart and Piltel:

 

**Carrier**

**Spectrum System**

**Frequency Assignment**

**Bandwidth**

 

 

 

 

Smart

ETACS/GSM 900

897.5905/942.6-950 Mhz

7.5 Mhz

 

GSM 1800

1725-1730/1820-1825 Mhz

5.0 Mhz

 

 

1730-1732.5/1825-1827.5 Mhz

2.5 Mhz

 

 

1735-1740/1830-1835 Mhz

5.0 Mhz

 

 

1745-1750/1840-1845 Mhz

5.0 Mhz

Piltel

AMPS/CDMA

825-835/845-846.5 Mhz

11.5 Mhz

 

Operators of international gatewayfacilities and cellular telephone operators, pursuant to E.O. No. 109, arerequired to install a minimum number of local exchange lines.  Of these newlines, operators are required to install one rural exchange line for every tenurban exchange lines installed.  Smart and Piltel were required to install 700,000and 400,000 lines, respectively, and each has received a certificate ofcompliance from the NTC.

 

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

 

In a letter dated January 17, 2002,the NTC requested that Smart pay the following fees in respect of its CPCNs andprovisional authorities:

 

Case No.

**Fee**

 

 

92-303

Php3,750,000

93-482

62,510,950

94-220

878,830

96-248

6,815,500

Total 

Php73,955,280

 

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

 

Piltel has also been assessed bythe NTC for deficiency supervision and regulation fees.  Based on the latestcomputation of deficiency supervision and regulation fees received from theNTC, which is dated as of September 30, 2002, the total amount assessed onPiltel stands at Php640 million, including penalty fees amounting to Php275million.  Piltel has protested the assessments in good faith.  Piltel continuesto make payments for which it believes are properly due to the NTC.  OnSeptember 30, 2002, Piltel made a payment to the NTC under protest in theamount of Php9.1 million.

 

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

 

•        the fifth anniversary of the date the law became effective; and

 

•        the fifth anniversary of the date of the entity’s commencement ofcommercial operations.

 

PLDT and Piltel have complied withthis requirement.  Smart believes that it has ten years from the commencementof its operations, or until August 2004, to conduct a public offering becausethe Philippine government has granted franchises to other telecommunicationscompanies requiring a public offering within ten years from the later of theircommencement of operations or the date on which the franchise was granted.Because the Public Telecommunications Policy Act (Republic Act No. 7925)provides that any advantage granted under existing franchises automaticallybecomes part of previously granted telecommunications franchises, Smartbelieves that it is also entitled to this ten year period.  PLDT currentlycontemplates to cause Smart to conduct a public offering based on marketconditions and in accordance with applicable rules and regulations of thePhilippine Stock Exchange.

 

The Philippine Congress iscurrently considering five bills, each of which, if passed by Congress andenacted into law, would impose a 7% or 10% tax on the gross receipts ofcellular operators.  The proposed taxes would apply to both cellular call anddata revenues and prohibit cellular operators from imposing additional chargesor fees to compensate for the imposition of the proposed taxes.

 

**Competition**

 

The enactment of the PublicTelecommunications Policy Act (Republic Act No. 7925) of the Philippines inMarch 1995 consolidated the government's various policy issuances governing thetelecommunications industry and reaffirmed, among other things, the policy ofliberalizing the industry and opening up the telecommunications market to newentrants.  Including us, there are 10 major local exchange carriers, 11international gateway facility providers, and seven cellular service providersin the country, including one, which has not yet commenced operations.  Manynew entrants into the Philippine telecommunications market have entered intostrategic alliances with foreign telecommunications companies, which providethem access to technological and funding support as well as service innovationsand marketing strategies.  Consequently, we are facing increasing competitionin major segments of the telecommunications industry, particularly in thecellular segment and data and other network services segment.

 

*Local Exchange Service*

 

The concerted nationwide localexchange line build-out by new entrants in recent years, as mandated by thePhilippine government, significantly increased the number of fixed lines inservice in the country and resulted in wider access to basic telephoneservice.  The growth of the fixed line market has considerably weakened due tothe surge in demand for cellular services and the general sluggishness of thenational economy.  Nevertheless, we have sustained our leading position in thefixed line market on account of PLDT’s extensive network in key citiesnationwide.  In most areas, we face one or two competitors.  Our principalcompetitors in the local exchange market are Digitel, BayanTel and Globe.  

 

Over the past couple of years,however, competition among local exchange operators has reduced as certainoperators have faced financial difficulties or have shifted strategic focusaway from the fixed line business to cellular services.  On the other hand, weare facing increasing competition from cellular operators mainly due tosubstitution of cellular services for fixed line services.  

 

*International Long Distance Service*

 

Including us, there are 11international gateway facility operators in the country.  While we have so farbeen able to maintain a leadership position in this highly competitive segmentof the industry, in recent years, our market share has reduced largely as aresult of (1) competition from other international gateway facility operatorsand international simple resale operators, (2) anincrease in inbound and outbound international long distance calls terminatingto and originating from a growing number of cellular subscribers, and (3) thepopularity of alternative and cheaper means of long distance communications,such as SMS, e-mail and Internet telephony, further heightening thecompetition.

 

With respect to inbound calls intothe Philippines, we compete with other service providers primarily throughpricing.  For example, we adopted the U.S. FCC benchmark accounting rate ofUS$0.38 per minute for inbound international calls, which represented asettlement rate of US$0.19 per minute, one year ahead of the target date ofJanuary 1, 2001, and reduced our average termination rates progressivelythrough 2002.  This provided us with increased flexibility to terminate moreU.S. traffic into the Philippines, minimize unauthorized traffic terminationthrough international simple resale operations and recover traffic lost due tobypass routings.  We have also established points of presence in key citiesoverseas to capture traffic at its source, maximize the use of ourinternational facilities and develop alternative sources of revenue.  EffectiveFebruary 1, 2003, after lengthy negotiations with approximately 100telecommunications operators around the world, we increased the terminationrate with carriers accounting for a substantial portion of our internationalinbound traffic terminating on its fixed line network to US$0.12 per minute.Prior to the increase in termination rates, a substantial portion of PLDT’sinternational inbound traffic terminating on its fixed line network was chargedan average termination rate of approximately US$0.08 per minute.  In addition,Smart implemented an increase in its international termination rates to US$0.16per minute effective February 1, 2003 for calls terminating on its cellularnetwork.  See “Item 3. Key Information — Risk Factors — Risks Relating to Us —Our results of operations have been, and may continue to be, adversely affectedby lower U.S. dollar revenues caused by declining international terminationrates and competition in international long distance service” and “Item 8.Financial Information –– Legal Proceedings –– U.S. FCC Proceeding onTermination Rates.”  As of June 30, 2003, most of the other major internationalgateway operators in the Philippines have also independently negotiatedincreases in their average termination rates.  It is still too early todetermine, whether we will subsequently experience significant pricecompetition at termination rates substantially below US$0.12 per minute.

 

With respect to outbound calls fromthe Philippines, we compete for market share through our local exchange andcellular businesses, which are the origination points of outbound internationalcalls.  We have also introduced a number of marketing initiatives to stimulategrowth of outbound call volumes, including tariff reductions and volumediscounts for large corporate subscribers

 

*National Long Distance Service*

 

Since 2000, our national long distance service business has beennegatively impacted by the growing number of cellular subscribers in thePhilippines and the widespread availability and growing popularity ofalternative economical non-voice methods of communication, particularly SMS ande-mail.

 

While national long distance callvolumes have been declining, we have remained a leading provider of nationallong distance service in the Philippines due to our significant subscriber baseand ownership of the Philippines’ most extensive domestic fiber optic network.In order to mitigate the decline of our national long distance revenues, wehave amended the interconnection agreements between ourselves and othercellular operators to provide the fixed line business more equitable accesscharge arrangements for calls between fixed line and cellular subscribers.

 

*Data and Other Network Services*

 

Another rapidly growing segment ofthe industry is the market for data and other network services, includingInternet-based services, spurred by the significant growth of the Internet ande-commerce.  Our principal competitors in this area are BayanTel, Globe andEastern Telecommunications.  The principal bases of competition in the dataservices market are price, customer service and quality of service and networkredundancy.

 

*Cellular Service*

 

Competition in the cellularbusiness has intensified with the introduction by competitors of affordablypriced handsets offering a range of new functions and features, new andimproved plans for postpaid subscribers, reduced rates per minute andaggressive marketing and promotional strategies.  Our principal competitor inthis area is Globe, which acquired Islacom in June 2001.  The principal basesof competition are price, including handset cost, quality of service, networkreliability, geographic coverage and attractiveness of packaged services.

 

Cellular operators are alsocompeting actively against each other in launching innovative products andvalue-added services.  The growing range of cellular products and services nowinclude text messaging, multi-media messaging, voice mail, text mail,international roaming, information-on-demand, mobile banking, e-commerce,mobile data and cellular Internet access.

 

Consistent with industry practice and our churn managementefforts, we "lock" the handsets we sell to our subscribers, renderingthem incompatible with SIM cards issued by our competitors.  However, oursubscribers may have their handsets “unlocked” by unauthorized parties, for anominal fee, and purchase new SIM cards from competing operators.  “Unlocking”does not involve significant cost.  In addition, switching to another cellularoperator would result in a change of the subscriber’s cellular telephonenumber.

 

We expect competition to increasein the future as new competitors enter the cellular telecommunications market.On March 29, 2003, Digitel launched its cellular service under the brand name *SunCellular*.  Moreover, in January 2002, the Supreme Court reinstatedBayanTel’s license to provide cellular telecommunications service.

 

**Environmental Matters**

 

We have not been subject to anymaterial fines or legal or regulatory action involving non-compliance withenvironmental regulations of the Philippines.  We are not aware that we are notin compliance in any material respect with relevant environmental protectionregulations.

 

**Intellectual Property Rights**

 

We do not own any materialintellectual property rights apart from our brand names and logos.  We are notdependent on patents, licenses or other intellectual property, which arematerial to our business or results of operations, other than licenses to usethe software that accompanies most of our equipment purchases.

 

**Properties**

 

PLDT owns four office buildingslocated in Makati City and owns and operates 183 exchanges nationwide, of which61 are located in the Metropolitan Manila area.  The remaining 122 exchangesare located in small cities and municipalities outside Metropolitan Manilaarea.  We also own radio transmitting and receiving equipment used forinternational and domestic communications.

 

As of December 31, 2002, ourprincipal properties, excluding property under construction, consisted of thefollowing, based on book value:

 

•        46% consisted of cable and wire facilities, including ourdomestic fiber optic network, subscriber cable facilities, inter-officetrunking and toll cable facilities and cellular facilities;

 

•        36% consisted of central office equipment, including threeinternational gateway facilities, seven pure national toll exchanges and 16combined local and toll exchanges;

 

•        9% consisted of land and improvements and buildings, which weacquired to house our telecommunications equipment;

 

•        1% consisted of information origination and terminationequipment, including pay telephones and radio equipment installed for customersuse, as well as cables and wires installed within customers’ premises; and

 

•        8% consisted of other work equipment.

 

For more information on theseproperties, see Note 8 to our consolidated financial statements in Item 18.These properties are located in areas being served by our exchanges.  In ouropinion, these properties are in good condition, except for ordinary wear andtear, and are adequately insured.

 

The majority of our connectinglines are above or under public streets and properties owned by others.

 

PLDT’s and Smart’s properties arefree from any mortgage, charge, pledge, lien or encumbrance.  Substantialproperties of Piltel and Mabuhay Satellite are subject to liens.

 

PLDT has various long-term leasecontracts for periods ranging from two to ten years covering certain offices,warehouses, telecommunications equipment locations and various officeequipment.  For more information on these lease arrangements, see Note 24 toour consolidated financial statements in Item 18.

 

For 2003, on a non-consolidated basis, PLDT’s budgeted capitalexpenditures of Php6,000 million will be partially financed by committedlong-term debt facilities supported by various export credit agencies.  As ofDecember 31, 2002, PLDT had a total of approximately Php1,531 million undrawnbalances available under committed long-term debt facilities.  In addition, wehave put in place long-term debt facilities during the first half of 2003,which will also finance in part PLDT’s budgeted capital expenditures for 2003.

 

Item 5.       Operating and Financial Review and Prospects

** **

*The following discussion andanalysis of our financial condition and results of operations should be read inconjunction with our audited consolidated financial statements (and the relatednotes) as of    December 31, 2001 and 2002 and for the years ended December 31,2000, 2001 and 2002 included elsewhere in this report.  This discussioncontains forward-looking statements that reflect our current views with respectto future events and our future financial performance.  These statements involverisks and uncertainties, and our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of particularfactors such as those set forth under “Risk Factors” and "Forward-LookingStatements" and “Item 3. Key Information — Risk Factors" andelsewhere in this report.  Our audited consolidated financial statements, andthe financial information discussed below, have been prepared in accordancewith U.S. GAAP.  For convenience, certain peso financial information in thefollowing discussions has been translated to U.S. dollars at the exchange rateat December 31, 2002 of Php53.254 to US$1.00, as quoted through the PhilippineDealing System.*

 

*Prior to 2002, our consolidatedfinancial statements included in our Annual Report on Form 20-F filed with theU.S. SEC were prepared in accordance with Philippine GAAP.  Philippine GAAPvaries in certain significant respects from U.S. GAAP.  A description of thesignificant differences between U.S. GAAP and Philippine GAAP and aquantitative reconciliation of such differences in the net income andstockholders’ equity to U.S. GAAP was disclosed in a note to our previouslyfiled financial statements.  In connection with the preparation of ourconsolidated balance sheets as of December 31, 2002 and 2001, and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for the years ended December 31, 2002, 2001, and 2000 in accordance withU.S. GAAP, we identified differences in the U.S. GAAP amounts previouslydisclosed for 2001 and 2000.  Please see Note 4 to our consolidated financialstatements included herein for a discussion of such differences.*

 

*In addition, subsequent to thedisclosure of our consolidated financial statements in the Annual Report onForm 20-F for the fiscal year ended December 31, 2002 and the amendmentsthereto that were filed with the U.S. SEC on July 15 and 16, 2003, we madeadditional adjustments to certain items, which we believe are required to bemade pursuant to U.S. GAAP.  These additional adjustments made in this amendedAnnual Report on Form 20-F impacted our net loss, earnings per share, andstockholders’ equity as discussed in “–– Restatement of Information PreviouslyReported” below and Note 4 to our consolidated financial statements in Item 18.*

 

**Overview**

 

We are the largest and mostdiversified telecommunications company in the Philippines.  We have organizedour business into three main segments:

 

•        *Fixed Line* — fixed line telecommunications services primarilyprovided through PLDT.  We also provide fixed line services through PLDT'ssubsidiaries Clark Telecom, Subic Telecom, Piltel and MaraTel, which togetheraccount for approximately 1% of our total fixed lines in service, and PLDTGlobal;

 

•        *Wireless* — wireless telecommunications services providedthrough our cellular service providers, namely Smart and Piltel, and satelliteoperators, namely Mabuhay Satellite, ACeS Philippines and Telesat; and

 

•        *Information and Communications Technology* — informationand communications infrastructure and services for Internet applications,Internet protocol-based solutions and multimedia content delivery provided byPLDT's subsidiary ePLDT, Internet access services provided by ePLDT'ssubsidiary Infocom, and e-commerce, call centers and IT-related servicesprovided by other subsidiaries and associates of ePLDT, as described in “Item4. Information on the Company — Business — Information and CommunicationsTechnology — Infrastructure and Services — Other Investments”.

 

**Fixed Line**
 

Our fixed line business provides local exchange service,international and national long distance services and data and other networkservices, and miscellaneous services.  Historically, our fixed line businesswas the primary source of our consolidated operating revenues.  In 2002, ourfixed line business accounted for 49% of our consolidated operating revenues,compared to 58% in 2001 and 75% in 2000.

 

*Local Exchange Service*.Local exchange service remains one of our major revenue drivers.  In 2002,local exchange service contributed 23% of our consolidated operating revenuescompared to 27% in 2001 and 31% in 2000.  Local exchange revenues have remainedrelatively stable largely as a result of service rate increases implementedpursuant to the currency adjustment mechanism allowed by the NTC.  Under thismechanism, we are authorized to increase and, if we have increased servicerates, required to decrease, our monthly recurring local exchange service ratesby 1% for every Php0.10 change in the peso-to-dollar exchange rate relative toa base rate of Php11.00 to US$1.00.  Increased local exchange revenues alsoreflect a higher average number of fixed lines in service. Since 2000, however,there has been a shift in subscriber preference from postpaid to prepaid fixedline service.  As of December 31, 2002, prepaid subscribers accounted for 12%of PLDT’s fixed lines in service.

 

*International Long DistanceService*.  Historically, international long distance service was our primaryrevenue source.  However, international long distance revenues have beendeclining in both absolute terms and as a percentage of gross revenues due tothe reduction of international termination rates, reduced calling rates andincreased competition.  We have initiated a number of marketing and otherinitiatives in an effort to prevent further erosion of our market share andrevenue base.  In 2002, international long distance services accounted for 11%of our consolidated operating revenues, compared to 15% in 2001 and 22% in 2000.Effective February 1, 2003, PLDT increased its average termination rates withcarriers accounting for a substantial portion of its international trafficterminating on its fixed line network to US$0.12 per minute.  Prior to theincrease, a substantial portion of PLDT’s international inbound trafficterminating on its fixed line network was charged an average termination rateof approximately US$0.08 per minute.  See “ — Other Information — U.S. FCCProceeding on Termination Rates” and “Item 8. Financial Information –– LegalProceedings — U.S. FCC Proceeding on Termination Rates.”

 

*National Long Distance Service*.National long distance service revenues have been declining since 2000 in bothabsolute terms and as a percentage of our consolidated operating revenues dueto a drop in call volumes and an increase in the proportion of calls subject torevenue sharing with other carriers.  Our national long distance business hasbeen negatively impacted by the increasing number of cellular subscribers, aswell as the widespread availability and popularity of alternative economicalnon-voice methods of communication, particularly SMS and e-mail.  In 2002,national long distance services accounted for 8% of our consolidated operatingrevenues, compared to 11% in 2001 and 17% in 2000.  Beginning 2001, we adoptedsimplified pricing plans and amended our interconnection agreements betweenourselves and cellular operators with a view to maximizing revenues of ournational long distance service.

 

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

** **

**Wireless**
 

Our wireless business segmentoffers cellular services and sale of cellular handsets as well as satellite,VSAT and other services.  Our wireless service revenues have increasedconsiderably since 2000 mainly as a result of the continued strong growth inrevenues generated from Smart’s cellular service.  In 2002, revenues from ourwireless business represented 50% of our consolidated operating revenues,compared to 42% in 2001 and 25% in 2000.

 

Cellular Services and Cellular HandsetSales
 

Since 2000, our cellular services, which we provide throughSmart and Piltel, and our cellular handset sales have been the principalrevenue source of our wireless service segment and have increased theircontribution to our consolidated revenues from 42% in 2001 to 50% in 2002.Revenues from our cellular services have increased from Php19,820 million in2001 to Php30,583 million in 2002.  Revenues from our cellular handset saleshave increased from Php13,015 million in 2001 to Php14,982 million in 2002.Accordingly, cellular revenues, which consist of our cellular services andcellular handset sales, have increased from Php32,835 million in 2001 toPhp45,565 million in 2002.

 

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

 

Cellular revenues are derivedmainly from various voice and data services and sales of handsets.  Usagerevenues comprise all voice and SMS and text-related services, while revenuesfrom handset sales are associated with new subscriber activations.

 

In 2002, monthly churn rates for Smart’s prepaidservices averaged approximately 3.2% while monthly churn rates for Smart’spostpaid services averaged approximately 2.3%.  In 2002, monthly churn ratesfor Piltel’s *Talk ‘N Text* averaged at 5.7%.  We believe that theprincipal factors affecting subscriber churn are economic conditions in thePhilippines, network quality and technological advances that necessitated theupgrading of SIM cards.

 

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

 

Satellite, VSAT and Other Services
 

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

 

**Information and Communications Technology**
* *

We conduct our information and communications technology businessesthrough our wholly owned subsidiary ePLDT, which was incorporated in August2000 and started commercial operations in February 2001.  ePLDT’s principalbusiness activities are:

 

•        the operation of anInternet data center under the brand name *Vitro*TM;

 

•         two wholly-owned callcenters, Vocativ and Parlance; and 

 

•        Infocom, an ISP.

 

PLDT transferred Infocom to ePLDT on December 1, 2001.  Through *Vitro*TM, weprovide co-location services, server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting and webhosting.  *Vitro*TM began commercial operations in the firsthalf of 2001.  ePLDT has also focused on developing its call center servicesbusiness, which we expect will account for a significant portion of ePLDT’soperating revenues and capital expenditures in the near future.  Both Vocativand Parlance commenced their operations in 2002.

 

In addition, ePLDT has interests inthe Philippines’ only digital certificate issuer, a business-to-businessexchange established together with five Philippine conglomerates, Internetcafes and a company with an existing build-own-and-operate agreement with thePhilippine government for the computerization of the nationwide operations ofthe Philippine Land Transportation Office.

 

**Critical Accounting Policies**

 

Our consolidated financialstatements are prepared in accordance with U.S. GAAP, which requires managementto make estimates and assumptions that affect amounts reported in ourconsolidated financial statements and related notes.  In preparing theseconsolidated financial statements, we have made our best estimates andjudgments of certain amounts, giving due consideration to materiality.

 

We believe the following representour critical accounting policies under U.S. GAAP.  The impact and anyassociated risks relating to these policies in our business operations arediscussed elsewhere in this section where such policies affect our reported andexpected financial results.

* *

*Revenue Recognition*

 

Revenue for services is stated atamounts invoiced to customers and excludes value-added tax.  We provide fixedline communication services, wireless communication services, and informationand communications technology services.  We provide such services to business,residential, payphone and mobile customers.  Revenue represents the value offixed consideration that has been received or is receivable.  Revenue isrecognized when there is evidence of an arrangement, collectibility isreasonably assured, and the delivery of the product or service has occurred.In certain circumstances, revenue is split into separately identifiablecomponents and recognized when the related components are delivered in order toreflect the substance of the transaction.  The value of components isdetermined using verifiable objective evidence.  We do not provide ourcustomers with the right to a refund.

 

*Products and services*

 

*Subscriptions.*We providetelephone and data communication services under postpaid and prepaid paymentarrangements. Revenue includes fees for installation and activation.Installation and activation-related fees and the corresponding costs, notexceeding the activation revenue, are deferred and recognized over the expectedperiod of the customer relationship period of seven years and three years forfixed line and cellular service, respectively.  Postpaid service arrangementsinclude subscription fees, typically fixed monthly fees, which are recognizedover the subscription period on a pro rata basis.

 

*Air time, traffic andvalue-added services.*Prepaid service revenue collected in advance isdeferred and recognized based on the earlier of actual usage or upon expirationof the usage period.  Payphone service revenue is recognized when the serviceis provided.  Interconnection revenue for call termination, call transit, andnetwork usage are recognized in the period the traffic occurs.  Revenue relatedto local, long distance, network-to-network, roaming and international callconnection services are recognized when the call is placed or the connectionprovided, net of amounts payable to other telecommunication carriers forterminating calls in their territories. Revenue related to products andvalue-added services is recognized upon delivery of the product or service.

 

*Equipment sales.*Sales ofcommunication equipment are recognized upon delivery to the customer.

 

*Directory services.*Revenuerelated to published directory services is recognized on a pro rata basis overthe period in which the publication expires, which is generally 12 months.Telephone-based directory service revenue is recognized when the service isprovided.

 

*Incentives.*We record aninsignificant amount of commission expense based on the number of newsubscriber connections initiated by certain dealers.  All other cash incentivesprovided to dealers and customers are recorded as a reduction to revenue.Product-based incentives provided to dealers and customers as part of atransaction are accounted for as multiple element arrangements and recognizedwhen earned.

* *

*Others.*Interest income from cash deposits is recognizedon a time proportion basis taking into account the principal amount outstandingand the effective interest rate.

 

*Impairment of Long-Lived Assets*

 

U.S. GAAP requires that an impairment review be performed whencertain impairment indicators are present.  The impairment review firstcompares the future undiscounted cash flows expected to be generated from thecontinued use and ultimate disposition of the assets with the book value of theassets.  If these cash flows are not sufficient to recover the book value ofthe assets, an impairment charge is recognized based on the comparison betweenthe discounted value of these cash flows and the book value of the assets.  Inaddition, our projections for future cash flows are generally less duringperiods of reduced cash flow.  As a result, an impairment charge is more likelyto occur during a period when our operating results are already otherwisedepressed.

 

Purchase accounting requiresextensive use of accounting estimates and judgments to allocate the purchaseprice to the fair market values of the assets and liabilities purchased.  Ourbusiness acquisitions typically result in goodwill, which affected our resultsof operations for the amount of future period amortization expense.  However,we no longer amortize goodwill under U.S. GAAP effective January 1, 2002.Instead, goodwill is subject to a periodic impairment test.  Determining thevalue of goodwill and future undiscounted cash flows expected to be generatedfrom the continued use and ultimate disposition of such assets require us tomake estimates and assumptions that can materially affect our consolidatedfinancial statements.  Future events could cause us to conclude that goodwillassociated with an acquired business is impaired.  Any resulting impairment losscould have a material adverse impact on our financial condition and results ofoperations.

 

Piltel recognized an assetimpairment charge of Php12,938 million in 2001 and Php13,204 million in 2002relating to its AMPS/CDMA and E.O. No. 109 assets, respectively.  The revenuesgenerated from these services could no longer support the cost of operating thenetwork.

 

Also, Smart carried out animpairment review of its analog assets in June and December 2001 as a result ofdeclining subscriber numbers, decreasing average revenue per user and thegeneral migration of analog subscribers to Smart’s GSM services.  This resultedto an asset impairment charge of Php3,782 million in 2001 based on theestimated discounted cash flows from continued use and eventual disposition ofthese assets.

 

In 2001, Smart wrote-off theunamortized intangible assets (customer lists) amounting to Php2,077 millionrelating to analog customers.

 

As of December 31, 2002, ACeS Philippines had a 20% investment in AIL,a company incorporated under the laws of the island of Bermuda.  AIL owns theGaruda I satellite and related system control equipment.  In December 1998, AILand its 95% owned subsidiary, PT Asia Cellular Satellite, entered into anAmended and Restated Credit Agreement, or Amended Agreement, to amend theoriginal Credit Agreement entered into by PT Asia Cellular Satellite and itsbank creditors in 1997.  Under the Amended Agreement, AIL has, among others,assigned to the banks as collateral all of its tangible properties, includingthe Garuda Satellite, the system control facilities and system controlequipment.  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.  As of December 2001, AIL had incurred recurring significant operatinglosses, negative operating cash flows, and significant levels of debt.  Thefinancial condition of AIL was partly due to the National Service Provider’sinability to generate the amount of revenues originally expected as the growthin subscriber numbers have been significantly lower than budgeted.  Thesefactors raised substantial doubt about AIL’s ability to continue as a goingconcern.  On this basis, we recognized an impairment provision in respect ofour investment in AIL of Php3,314 million and ground station equipment of ACeSPhilippines in relation to the business of AIL in 2001 of Php673 million.

 

PLDT’s total investments inconvertible notes of Unilink amounted to Php2,052 million as of December 31,2001.

 

These notes are convertible into shares of common stock of Unilink orHome Cable at the option of the holder, when the law limiting the ownership ofcable television systems to Philippine citizens or corporations, which arecurrently 100% owned by Philippine citizens, is eventually changed.  Unilink isa Philippine corporation owning all the outstanding common shares of HomeCable, which is also a Philippine corporation licensed to own, maintain andoperate a cable television system in the Philippines.  All of Unilink’s shares inHome Cable have been pledged to a group of lenders as security for a loan ofHome Cable.  On December 6, 2001, Home Cable defaulted on the principal andinterest payments in respect of certain of its obligations.  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.  On the basis of Home Cable’s default oncertain of its obligations, the uncertainty surrounding the negotiations withits creditors and equity holders, and its financial condition, we provided fora full permanent decline in value of our investment totaling Php2,052 millionin 2001.  In June 2003, PLDT assigned and ceded unto the PLDT Beneficial TrustFund, or BTF, all of its rights, interest and participation in respect of itsinvestment in convertible notes of Unilink with a fair value of zero andeffectively for zero consideration under U.S. GAAP.  In addition, PLDT alsoceded its rights, interest and participation to certain other assets unrelatedto Unilink for and in consideration of partial payment of the contributionswhich PLDT is required to make to the BTF under PLDT’s employee benefit plan.

** **

The preparation of these estimated future cash flowsinvolves significant judgment and estimations. While we believe that ourassumptions are appropriate and reasonable, significant changes in ourassumptions may materially affect our assessment of recoverable values and maylead to future additional impairment changes under U.S. GAAP.

* *

*Estimating Allowances for Doubtful Accounts*

 

We estimate the allowance fordoubtful accounts related to our trade receivables based on two methods.  Theamounts calculated using each of these methods are combined to determine thetotal amount we reserve.  First, we evaluate specific accounts, mostly offoreign administrators and fixed line subscribers, or, where we haveinformation that certain customers may be unable to meet their financialobligations.  In these cases, we use judgment, based on the best availablefacts and circumstances, including but not limited to, the length of ourrelationship with the customer and the customer’s current credit status basedon third party credit reports and known market factors, to record specificreserves for customers against amounts due to reduce our receivables to amountsthat we expect to collect.  These specific reserves are re-evaluated andadjusted as additional information received impacts the amounts estimated.Second, a general provision is established as a certain percentage of operatingrevenues.  This percentage is based on historical collection, write-offexperience, current economic trends and changes in our customer payment terms.The amount and timing of recorded expenses for any period would differ if wemade different judgments or utilized different estimates.

 

An increase in our allowance fordoubtful accounts would increase our recorded operating expenses and decreaseour current assets.  Provision for doubtful accounts amounted to Php2,929 millionin 2000, Php3,221 million in 2001 and Php4,136 million in 2002.  The provisionfor doubtful accounts represented 5% of our consolidated operating revenues forthe years ended December 31, 2000 and 4% for the years ended 2001 and 2002.The allowance for doubtful accounts as of December 31, 2001 and 2002 amountedto Php9,024 million and Php12,189 million, respectively.  We have not set asideany allowances for the receivables owed by U.S. carriers in connection with thetermination payments due for international long distance amounting to US$13million as of June 30, 2003.  See “— Other Information — U.S. FCC Proceeding onTermination Rates” and “Item 8. Financial Information — Legal Proceedings —U.S. FCC Proceeding on Termination Rates.”  While we believe that these amountscan be recovered from these U.S. carriers, the ongoing disputes with these U.S.carriers may increase the risk that the amounts may not be recoverable and mayrequire an increase in the level of provision.

 

*Acquisitions and Intangible Assets*

 

Acquisitions have generally beenaccounted for as purchases.  Accordingly, the acquisition of Smart wasaccounted for using the purchase method of accounting.  The excess of the totalacquisition cost over the fair value of the net assets acquired was Php23,096million.  Based on management's review and estimate, Php5,900 million wasrecorded as the value of customers acquired.  Prior to 2002, the excess of thetotal acquisition cost over the fair value of the net assets acquired wasamortized on a straight-line basis over five years.  Starting 2002, theunamortized balance is reviewed annually for impairment using the fair valueapproach.  On the other hand, prior to 2001, customers list for both GSM andanalog subscribers were amortized over five years which at that time was theexpected term of the customer relationship.  Beginning 2001, we revised ourestimated useful life of the acquired GSM customer lists based on our analysisof customer churn rates over three years.  The unamortized balance of theanalog customer lists was fully impaired in 2001.  Purchase accounting requiresextensive use of accounting estimates and judgments to allocate the purchaseprice to the fair market values of the assets and liabilities purchased.

 

*Foreign Exchange RevaluationLosses*

 

When we incur unhedged foreigncurrency-denominated liabilities arising directly from the acquisition ofproperty, plant and equipment invoiced in a foreign currency, such as U.S.dollar-denominated loans to finance equipment purchases, foreign exchangelosses on those liabilities are charged or credited to operations in thecurrent period.  In recent years, the Philippine peso has depreciatedsignificantly against the U.S. dollar, resulting in substantial foreignexchange losses, and has resulted in our incurring a net loss for certainperiods.

 

*Investments*

 

The various interests that we holdin companies are accounted for under three methods:  consolidation, the equitymethod and the cost method.  The applicable accounting method is generallydetermined based on our voting interest in a company.  Majority-owned companiesare consolidated, 20% to 50% owned companies are accounted for using the equitymethod and our investments in companies over which no significant influence isexercised or in cases where our investments are temporary, the investments arestated at cost.

 

*Pension Cost*

 

The determination of our obligationand cost for pension and other retirement benefits is dependent on ourselection of certain assumptions used by actuaries in calculating suchamounts.  Those assumptions are described in Note 20 to our consolidatedfinancial statements in Item 18, and include among others, discount rates,expected returns on plan assets and rates of compensation increase.  Inaccordance with U.S. GAAP, actual results that differ from our assumptions areaccumulated and amortized over future periods and therefore, generally affectour recognized expense and recorded obligation in such future periods.  Whilewe believe that our assumptions are reasonable and appropriate, significantdifferences in our actual experience or significant changes in our assumptionsmay materially affect our pension and other retirement obligations.

 

*Legal Contingencies*

 

We are currently involved invarious legal proceedings.  Our estimate of the probable costs for theresolution of these claims has been developed in consultation with outsidecounsel handling our defense in these matters and is based upon an analysis ofpotential results.  We do not believe these proceedings will have a materialadverse effect on our consolidated financial position.  It is possible,however, that future results of operations could be materially affected bychanges in our estimates or in the effectiveness of our strategies relating tothese proceedings.  See “Item 8. Financial Information — Legal Proceedings.”

 

**Restatement of Information Previously Reported**

** **

Subsequent to the issuance of our consolidatedfinancial statements included in the annual report on Form 20-F for the fiscalyear ended December 31, 2002 and the amendments thereto that were filed withthe U.S. SEC on July 15, and 16, 2003, we made adjustments to certain items inthe previously issued financial statements.  These adjustments have beenreflected in the accompanying consolidated financial statements and aresummarized as follows:

 

***Depreciation***

 

In the financial information previously issued,depreciation expense of Smart was understated in 2002.  In addition,depreciation expense for Mabuhay was adjusted for all years presented due to achange in the U.S. GAAP cost basis of certain property, plant and equipment.

 

***Impairment***

 

In the financial informationpreviously issued for 2002, we concluded that certain assets of a subsidiary,Piltel, were impaired and we recorded an impairment charge.  The originalcalculation did not properly reduce the carrying value of the E.O. No. 109assets to fair value.

 

***Goodwill amortization***

*** ***

The goodwill amortizationadjustments for 2001 and 2000 represent the additional amortization for the understatementof goodwill related to the Smart acquisition.  The goodwill amortizationadjustments for 2002 relate to the reversal of amortization of goodwill relatedprimarily to Maratel.  This amortization expense was previously classified asother expense.

 

***Customer lists amortization***

*** ***

In the financial information previously issued, amortizationexpense related to customer lists intangibles was understated due to a changein the customer life that was not previously reflected in the amortization.  Werevised the estimated useful life of the acquired GSM customer lists based onour analysis of customer churn rates.

*** ***

*Foreignexchange loss*
In the financial informationpreviously issued, there were instances where foreign exchange gains/lossesreported by Piltel and Mabuhay Satellite in 2001 and 2000 were not properlyvalidated which resulted in incorrect amounts of foreign exchangedifferential.  Additionally, foreign exchange gains and losses on certainforeign currency denominated liabilities were not identified.

 

***Debt restructuring***

*** ***

In the financial informationpreviously issued, we incorrectly recorded certain items related to a troubleddebt restructuring.

*** ***

***Piltel consolidation***

*** ***

In the financial informationpreviously issued, the losses related to Piltel were understated due to theincorrect allocation of a portion of the losses to the minority interestaccount.

 

***Minority interest***

*** ***

In the financial informationpreviously issued, we recorded minority interest related to certain entitieswithout converting the financial statements to U.S. GAAP and a debit balance inminority interest of a subsidiary was incorrectly offset against the creditbalance of minority interest in other subsidiaries.

 

***Others***

 

Subsequent to the financialinformation previously issued, as indicated, we made adjustments to additionalitems primarily related to lease accounting.

 

***Income tax benefit (expense)***

*** ***

Subsequent to the financialinformation previously issued, we made adjustments to income taxes to conformwith the liability method and in relation to other restated amounts.

 

***Reclassifications***

*** ***

Certain accounts were reclassifiedto conform with U.S. GAAP presentation requirements.  These reclassificationsdid not affect net loss in the years presented.  The following items discuss thesignificant reclassifications that have been made.

 

a.       Discountsand phone kitting fees were recorded as operating expenses in the previouslyfiled financial information rather than as deductions against gross revenues.Revenues and costs related to the sale of handsets below acquisition cost toentice subscribers were previously recorded as marketing expenses rather thanas revenues and costs of items sold.

*** ***

b.       Impairmentcharge related to Piltel’s analog network assets were presented as depreciationexpense in the previously issued financial information.  Subsequently, theamount was reclassified under asset impairment charges account.

 

c.       Inthe previously filed financial information, amortization of intangibles waspresented as part of interest income and expense rather than as a separate lineitem as amortization of intangibles.

 

d.       Manpowerreduction cost was presented as part of other expenses in the previously filedfinancial information rather than as a separate item under operating expenses.

 

e.       Inthe previously filed financial information, certain foreign exchange losseswere inappropriately included under interest and other income.

 

***Adjustments related to stockholders’**equity***

*** ***

*a.    **Smartacquisition*

* *

In the financial informationpreviously issued, the measurement date used for the Smart acquisition, whichclosed in March 2000, was incorrect.  The adjustment reflects the use of ameasurement date for a reasonable period before and after the date the terms ofthe acquisition are agreed to and announced.

* *

*b.    **Openingretained earnings at January 1, 2000*

* *

With respect to opening retainedequity, we also made adjustments to record certain net foreign exchange loss inthe proper period, to adjust deferred income tax, to properly account forcertain leases and to reflect proper consolidation.

*** ***

The effects ofthese restatements on net loss, per share amounts and stockholders’ equity areprovided below.
 

 

**Years Ended December 31,**

 

**2000**

**2001**

**2002**

** **

(in millions, except per share amounts)

Net loss, as previously reported

(Php23,087)

(Php27,484)

(Php4,559)

Depreciation:

 

 

 

Smart analog assets

–

–

(1,557)

Mabuhay

(136)

236

(273)

Impairment of Piltel E.O. 109 assets

–

–

(1,150)

Goodwill amortization

(863)

(1,151)

402

Customer lists amortization

–

(225)

(225)

Unrealized foreign exchange loss – net

(1,053)

(742)

(55)

Revenue recognition adjustments

(29)

(141)

112

Debt Restructuring

–

(718)

–

Consolidation:

 

 

 

Piltel

(1,823)

567

(377)

Minority interest in net losses (income) of consolidated subsidiaries

416

–

(100)

Others

(Php56)

(Php58)

(Php63)

Deferred income tax benefit (expense)

(2,627)

1,934

1,687

Net loss, as restated

(Php29,258)

(Php27,782)

(Php6,158)

 

 

 

** **

 

**2000**

**2001**

**2002**

Earnings per common share, as previously reported

(Php154.34)

(Php175.08)

(Php42.60)

Earnings per  share impact of restated items:

 

 

 

Depreciation:

 

 

 

Smart analog assets

–

–

(9.21)

Mabuhay

(0.86)

1.40

(1.61)

Impairment of Piltel E.O. 109 assets

–

–

(6.80)

Goodwill amortization

(5.47)

(6.83)

2.37

Customer lists amortization

–

(1.33)

(1.33)

Unrealized foreign exchange loss – net

(6.68)

(4.40)

(0.33)

Revenue recognition adjustments

(0.18)

(0.84)

0.66

Debt restructuring

–

(4.26)

–

Consolidation:

 

 

 

Piltel

(11.56)

3.36

(2.23)

Minority interest in net losses (income ) of consolidated subsidiaries

2.63

–

(0.59)

Others

(0.36)

(0.34)

(0.38)

Deferred income tax benefit (expense)

(16.66)

11.47

9.97

Earnings per common share, as restated (1)

(Php193.48)

(Php176.85)

(Php52.08)

*(1) Earnings per common share includes the effect of dividends and accretion of preferred stock.*

 

 

 

 

Stockholders’ equity, as previously reported

Php50,558

Php21,573

Php15,122

Adjustments to current year’s net loss

(6,171)

(298)

(1,599)

Adjustments affecting prior years’ net loss

–

(6,171)

(6,469)

Adjustments relating to Smart acquisition and others

7,195

7,190

7,181

Adjustments related to stockholders’ equity as at January 1, 2000

2,178

2,178

2,178

Stockholders’ equity, as restated 

Php53,760

Php24,472

Php16,413

 

 

The effect of these restatements did nothave a significant effect on individual consolidated balance sheet line itemspreviously disclosed except as presented above. Additionally, certain itemshave been reclassified subsequent to the previous presentation.

 

The following tables summarize the effects of the restatement,after giving effect to the reclassifications discussed above, on ourconsolidated statements of operations for the years ended December 31, 2002, 2001 and 2000.

 

 

Previously Reported

2002

As Restated

2002

 

(in millions of pesos)

**Condensed Statements of Operations**

 

Service revenues

80,764

77,761

Cellular handset sales

14,776

14,982

** **

95,540

92,743

**Operating Expenses**

 

 

Cost of cellular handsets sold

15,981

16,203

Asset impairment charges

10,947

13,279

Selling and promotions

5,640

3,961

Other operating expenses

48,079

47,271

 

80,647

80,714

**Operating Income**

14,893

12,029

Other expenses, net

(16,682)

(16,628)

**Loss before income tax, cumulative effect of change in accounting principle and minority interest in net losses (income) of consolidated subsidiaries**

 

(1,789)

 

(4,599)

Provision for income tax

(3,125)

(1,438)

Minority interest in net losses (income ) of consolidated subsidiaries

355

(121)

**Net loss**

(4,559)

(6,158)

 

 

 

 

Previously Reported

2001

As Restated

 2001

**Condensed Statements of Operations**

(in millions of pesos)

Service revenues

67,658

67,279

Cellular handset sales

11,470

13,015

** **

79,128

80,294

**Operating Expenses**

 

 

Cost of cellular handsets sold

13,232

15,179

Asset impairment charges

19,735

19,735

Selling and promotions

3,504

2,887

Other operating expenses

46,599

48,435

 

83,070

86,236

**Operating Loss**

(3,942)

(5,942)

Other income and expenses

(23,385)

(24,248)

**Loss before income tax, cumulative effect of change in accounting principle and minority interest in net income of consolidated subsidiaries**

 

(27,327)

 

(30,190)

Benefit from income tax

636

2,570

Cumulative effect on prior years (up to December 31, 2000) of adopting SFAS No. 133 – net of tax effect

 

(54)

 

(54)

Minority interest in net income of consolidated subsidiaries

(739)

(108)

**Net loss**

(27,484)

(27,782)

 

 

Previously Reported

2000

Restated

2000

**Condensed Statements of Operations**

(in millions of pesos)

Service revenues

58,213

55,586

Cellular handset sales

3,736

4,762

** **

61,949

60,348

**Operating Expenses**

 

 

Cost of cellular handsets sold

7,042

6,774

Selling and promotions

3,438

3,078

Other operating expenses

40,024

39,972

 

50,504

49,824

**Operating Income**

11,445

10,524

Other income and expenses

(44,399)

(45,254)

**Loss before income tax, cumulative effect of change in accounting principle and minority interest in net losses (income)of consolidated subsidiaries**

 

(32,954)

 

(34,730)

Benefit from income tax

8,240

5,613

Minority interest in net losses (income ) of consolidated subsidiaries

1,627

(141)

**Net loss**

(23,087)

(29,258)

** **

The following table summarizesthe effects of the restatement on stockholders’ equity as of January 1, 2000.

 

 

(in millions of pesos)

**Effect of restated amounts on stockholders’ equity**

** **

Piltel consolidation

1,516

Deferred income tax

(539)

Foreign exchange loss – net

753

Minority interest

734

Capital lease

(321)

Others

35

** **

2,178

 

Changes in U.S. GAAP Information Previously Disclosed

* *

Prior to 2002, our consolidatedfinancial statements included in annual reports on Form 20-F filed with the USSEC were prepared in conformity with accounting principles generally acceptedin the Philippines (Philippine GAAP). Philippine GAAP vary in certainsignificant respects from U.S. GAAP.  A description of the significantdifferences between U.S. GAAP and Philippine GAAP and a reconciliation of suchdifferences in the net loss and stockholders’ equity to U.S. GAAP weredisclosed in a note to our previously filed consolidated financial statements.In connection with the preparation of the consolidated balance sheets as ofDecember 31, 2002 and 2001, and the related consolidated statements ofoperations, changes in stockholders’ equity and cash flows for the years endedDecember 31, 2002, 2001, and 2000 in conformity with U.S. GAAP, we identifieddifferences in the U.S. GAAP amounts previously disclosed in 2001 and priorperiods.  The net loss, stockholders’ equity and earnings per share amounts inconformity with U.S. GAAP as previously disclosed for 2001 and prior periodsand the amounts included in our consolidated financial statements prepared inconformity with U.S. GAAP are summarized as follows:

 

 

2001

2000

 

(in millions of pesos, except per share amounts)

**Net loss**

** **

** **

        As previously disclosed

(20,739)

(28,984)

        Per consolidated financial statements prepared in conformity

      with U.S. GAAP

(27,782)

(29,258)

**Stockholders’ equity at December 31**

** **

** **

        As previously disclosed

29,050

51,577

        Per consolidated financial statements prepared in conformity

      with U.S. GAAP

24,472

53,760

**Basic earnings per common share**

** **

****

        As previously disclosed

(135.75)

(191.74)

        Per consolidated financial statements prepared in conformity 

with U.S. GAAP

(176.85)

(193.48)

** **

An explanation of the significant differences between the U.S.GAAP information previously disclosed for 2001 and prior periods and theamounts included in the consolidated financial statements prepared inconformity with U.S. GAAP is provided below.

** **

***AIL***

*** ***

U.S. GAAP information previouslydisclosed accounted for our investment in ACeS International Limited, or AIL,on the cost basis.  The consolidated financial statements prepared inconformity with U.S. GAAP account for our investment in AIL on the equitybasis.  As an equity basis investment, we recorded our share of losses in AILin each period.  In addition, we recorded capitalized interest during theperiods that construction was in progress and adjusted depreciationaccordingly. For 2001, we concluded that our investment in AIL was impaired andwrote off the carrying amount of our investment. We based our decision torecognize an impairment charge for AIL on (1) significant negative operatingcash flows by AIL, (2) significant levels of debt held by AIL, (3) concernsabout the ability of AIL to continue as a going concern and (4) projected cashflows that indicate our investment would not be recovered.  See *Note 9 -Investments*.

 

***ACeS******Philippines***

*** ***

U.S. GAAP information previouslydisclosed did not account for capitalized interest on the construction of theAsia Cellular Satellite System during the construction period.  Theconsolidated financial statements prepared in conformity with U.S. GAAPrecognize capitalized interest on the Asia Cellular Satellite System during theconstruction period and adjusted depreciation accordingly.  In 2001, inconnection with our impairment analysis of our investment in AIL, we concludedthat our investment in the Asia Cellular Satellite System was also impaired.See *Note 8 – Property, Plant and Equipment*

* *

***Mabuhay Satellite***

*** ***

U.S. GAAP information previouslydisclosed did not account for capitalized interest on the construction of theMabuhay Satellite system during the construction period. Also, the financialstatements of Mabuhay Satellite and its joint venture investment were preparedusing Philippine peso as functional currency.  The consolidated financialstatements prepared in conformity with U.S. GAAP recognized capitalizedinterest for the construction of the Mabuhay Satellite system during theconstruction period and adjusted depreciation accordingly.  In addition, weconcluded that the functional currency of Mabuhay Satellite and its jointventure investment is the U.S. dollar and adjusted the consolidated financialstatements accordingly.

 

***Smart Acquisition***

*** ***

U.S. GAAP information previouslydisclosed did not account for certain elements of our acquisition of Smart.The consolidated financial statements prepared in conformity with U.S. GAAPrecognized unearned revenue related to prepaid cards and different deferred taxamounts at the acquisition date.  In addition, in 2001, we revised ourestimated useful life of the acquired customer lists based on our analysis ofcustomer churn rates.

 

***Derivatives and Hedging Instruments***

*** ***

U.S. GAAP information previouslydisclosed for 2001 did not account for derivatives embedded in variouscontracts.  The consolidated financial statements prepared in conformity withU.S. GAAP bifurcated such derivatives and recognized the bifurcated derivativesat fair value at each balance sheet date with changes in fair value recognizedin the consolidated statements of operations.

 

***Unilink Communications Corporation, or Unilink***

*** ***

U.S. GAAP information previouslydisclosed for 2001 and prior periods accounted for our investment in theconvertible notes of Unilink, at cost.  The consolidated financial statementsprepared in conformity with U.S. GAAP recognized an other than temporarydecline in the value of such investment in 2001.  Unilink’s principalinvestment is the ownership of 100% of the shares in Philippine Home CableHoldings, Inc., or Home Cable, the Philippines’ second largest cable televisionoperator.  The other than temporary decline in value of investments resultedfrom the default by Home Cable on certain obligations that were collateralizedwith Unilink’s ownership interest in Home Cable, uncertainty surrounding thenegotiations with Home Cable creditors and the financial condition of HomeCable.  See *Note 9*— *Investments*.

 

***Piltel DebtRestructuring***

*** ***

U.S. GAAP information previouslydisclosed for 2001 and prior periods did not account for the fair value ofembedded derivatives that are not clearly and closely related to host financialinstruments issued in connection with the restructuring.  The consolidatedfinancial statements prepared in conformity with U.S. GAAP, bifurcated suchderivatives and recognized the bifurcated derivatives at fair value at eachbalance sheet date with changes in fair value recognized in the consolidatedstatements of operations.  In addition, the bifurcation of embedded derivativesresulted in changes in the accounting for the host instruments subsequent tothe restructuring.  See *Note 17*— *Preferred Stock Subject to Mandatory Redemption.*

* *

***Accounts Receivable from Philcom Corporation andPhilippine Global Communications, Inc., collectively referred to as Philcom***

*** ***

U.S. GAAP information previously disclosed for 2001 and priorperiods accounted for accounts receivable from Philcom based on the assumptionthat Philcom would successfully restructure its liabilities with creditors andequity holders in a manner that would eventually result in the accountsreceivable being recovered.  The consolidated financial statements prepared inconformity with U.S. GAAP recorded a provision against the accounts receivablefrom Philcom based on the uncertainty surrounding the negotiations withPhilcom’s creditors and equity holders and the financial condition of Philcom.

 

***Revenue Recognition***

*** ***

U.S.GAAP information previously disclosed for 2001 and prior periods accounted forcertain incentives provided to dealers and customers as marketing expensesbased on the retail value of the incentives.  Additionally, certainactivation-related revenues were recorded in the incorrect period, instead ofthe customer relationship period.   The consolidated financial statementsprepared in conformity with U.S. GAAP account for incentives provided todealers as adjustments to the price of related products and services, which arerecorded based on the cash consideration received and recognized in the periodin which services are provided.  Activation-related revenues are recognizedover the estimated customer relationship period.

 

***Foreign Exchange Gains and Losses***

*** ***

U.S. GAAP information previouslydisclosed accounted for foreign exchange gains and losses based on theestimated losses of certain subsidiaries.  The consolidated financialstatements prepared in conformity with U.S. GAAP recognized foreign exchangegains and losses based on actual amounts.

 

***Income Taxes***

*** ***

The consolidated financialstatements prepared in conformity with U.S. GAAP account for income taxes inconformity with the liability method and reflect adjustments for the changesreferred to above.

** **

**Resultsof Operations**

 

The following table shows the contribution by each of ourbusiness segments to our consolidated operating revenues, operating expensesand net operating income (loss) for each of the years ended     December 31, 2000, 2001 and 2002.  Most of our revenues are derived from our operationswithin the Philippines.  Our revenues derived from outside the Philippinesconsist primarily of revenues from incoming international calls to the Philippines.

 

 

**Years Ended December 31,**

 

**2000**

**%(1)**

**2001**

**%(1)**

**2002**

**%(1)**

** **

**(in millions)**

**Operating Revenues**

 

 

 

 

 

 

Fixed line

Php45,310

75

Php46,323

58

Php45,851

49

Wireless

14,799

25

33,597

42

46,248

50

Information and communications technology

239

––

374

––

644

1

 

60,348

100

80,294

100

92,743

100

**Operating Expenses**

 

 

 

 

 

 

Fixed line

26,322

44

27,495

34

42,031

45

Wireless

23,165

38

57,537

72

37,231

40

Information and communications technology

337

––

1,204

1

1,452

2

 

49,824

82

86,236

107

80,714

87

**Net Operating Income (Loss)**

 

 

 

 

 

 

Fixed line

18,988

31

18,828

24

3,820

4

Wireless

(8,366)

(13)

(23,940)

(30)

9,017

10

Information and communications technology

(98)

––

(830)

(1)

(808)

(1)

 

Php10,524

18

Php(5,942)

(7)

Php12,029

13

_____________

 

*(1)    **Operatingexpenses and net operating income (loss) are computed as a percentage ofoperating revenues.*

* *

**2002 Compared to 2001**

 

***Consolidated Operating Revenues***

 

Our consolidated operating revenuesgrew by Php12,449 million, or 16%, to Php92,743 million in 2002 from Php80,294million in 2001 largely as a result of the continued strong performance of ourwireless segment, particularly our cellular business.  Our cellular revenuescontributed Php45,565 million in revenues for 2002, an increase of 39% over itsrevenue contribution of Php32,835 million for 2001.  Our cellular revenuesaccounted for 49% of our consolidated operating revenues in 2002, compared to41% in 2001.

 

The following table shows the breakdown of our totalconsolidated operating revenues for the years ended December 31, 2001 and 2002by business segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

 

**2001**

** **

**%**

** **

**2002**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line

Php46,323

 

58

 

Php45,851

 

49

Wireless 

33,597

 

42

 

46,248

 

50

Information and communications technology 

374

 

––

 

644

 

1

Total

Php80,294

 

100

 

Php92,743

 

100

 

 

***Fixed Line***

 

Our fixed line business provideslocal exchange service, international and national long distance services, dataand other network services, and miscellaneous services.  In 2002, this businesssegment generated total revenues of Php45,851 million, decreasing by Php472million, or 1%, from Php46,323 million in 2001.  The decrease was due to lowerinternational and national long distance service revenues partially offset byincreases in data and other network and miscellaneous service revenues.  As apercentage of our consolidated operating revenues, fixed line revenuesdecreased in 2002 to 49% from 58% in 2001 due principally to the continuedstrong growth of our wireless business.

 

The following table summarizes our consolidated operatingrevenues from our fixed line business for the years ended December 31, 2001 and2002 by service segment:

 

 

**Years Ended December 31,**

 

**2001**

** **

**%**

** **

**2002**

** **

**%**

 

**(in millions)**

Fixed line:

 

 

 

 

 

 

 

Local exchange

Php21,356

 

46

 

Php21,345

 

47

International long distance

11,701

 

25

 

10,636

 

23

National long distance

8,500

 

19

 

7,818

 

17

Data and other network

4,653

 

10

 

5,561

 

12

Miscellaneous 

113

 

––

 

491

 

1

Total

Php46,323

 

100

 

Php45,851

 

100

 

*Local Exchange Service*

 

Our local exchange service revenuesconsist of:

 

•        flat monthly fees for our postpaid service;

 

•        amortization of installation charges and other one-time feesassociated with the establishment of customer service;

 

•        fixed charges paid by other telephone companies, charges retainedby PLDT for calls terminating to cellular subscribers within the local area,and local access charges paid by cellular operators for calls by cellularsubscribers that terminate to our local exchange network;

 

•        revenues from usage of prepaid cards for calls within the localarea and any unused peso value of expired prepaid cards;

 

•        call revenues generated from payphones and coin-operated phones;and

 

•        charges for special features, including bundled value-addedservices such as *call waiting*, *call**forwarding*, *3-partyconference calling* and *Caller ID*.

 

The following table summarizes key measures of ourlocal exchange service business segment as of and for the years ended December31, 2001 and 2002:

 

 

**Years Ended December 31,**

 

**2001**

** **

**2002**

 

 

 

 

Consolidated local exchange revenues (in millions)

Php21,356

 

Php21,345

Number of fixed lines in service

 

 

 

PLDT Group

2,174,082

 

2,188,612

PLDT(1)

2,075,109

 

2,092,539

Number of PLDT employees

12,915

 

12,131

Number of PLDT fixed lines in service per PLDT employee

161

 

172

_____________

 

*(1)Approximately 93% and 88% were postpaid fixed line subscribers as of December31, 2001 and 2002, respectively.*

* *

Revenues from our local exchange service decreased byPhp11 million to Php21,345 million in 2002 from Php21,356 million in 2001.  Thedecrease was primarily due to the shift in subscriber preference from postpaidto prepaid services, which generated lower average revenues per subscriberpartially offset by the combined effects of (1) currency-related adjustments inour monthly local service rates and (2) increased subscription to our bundledvalue-added services.  The percentage contribution of local exchange revenuesto our total fixed line revenues was 47% and 46% in 2002 and 2001,respectively.

 

Gross additions to PLDT's fixedlines in service in 2002 totaled 523,014, a 22% increase from the grossadditions of 427,349 in 2001.  On a net basis, however, PLDT’s fixed lineadditions decreased by 89% to 17,430 in 2002 from 159,124 in 2001. While fixedline additions totaled 98,525 for PLDT’s prepaid fixed line services,particularly *Teletipid* and *Telesulit*, PLDT’s postpaid fixed linesin service declined by 81,095 in 2002.

 

As of December 31, 2002, PLDT’s postpaid fixed line subscriberstotaled 1,849,512.  These subscribers accounted for approximately 88% of PLDT’stotal fixed lines in service as of December 31, 2002.

 

Launched in 2000, *Teletipid*was initially intended as an affordable alternative telephone service forconsumers under difficult economic conditions.  In 2001, *Teletipid*eventually became part of PLDT’s overall churn and credit risk exposuremanagement and subscriber retention efforts.  *Teletipid* phone kits, eachcontaining Php300 worth of pre-stored call credits, are sold for Php1,700 perunit.  Prior to May 1, 2002, *Teletipid* subscribers were charged based onusage at a rate of Php0.50 per minute for local calls and at the same ratesapplicable to postpaid fixed line subscribers for national and internationallong distance calls. Effective May 1, 2002, the local call rate was increasedto Php1.00 per minute, but the rates for national and international longdistance calls remained unchanged.

 

In February 2002, PLDT launched apremium variant to *Teletipid* under the brand name *Telesulit*.  *Telesulit*phone kits, each containing Php500 worth of pre-stored call credits, are soldfor Php1,900 per unit.  Effective February 1, 2003, the local call rate for *Telesulit*was increased to Php1.00 per minute from Php0.75 per minute, while the nationaland international long distance rates are the same as those applicable to *Teletipid*and postpaid fixed line subscribers.  A *Teletipid* subscriber migratingto *Telesulit* will be able to retain the same telephone number.

 

As of December 31, 2002, PLDT’sactive prepaid fixed line subscribers totaled 243,027, of which 121,054 were *Teletipid*subscribers and 121,973 were *Telesulit* subscribers.  These subscribersaccounted for approximately 12% of PLDT’s total fixed lines in service.

 

A prepaid fixed line subscriber isrecognized as an active subscriber when that subscriber activates and uses aprepaid call card.  Prepaid fixed line subscribers can reload their accounts bypurchasing call cards that are sold in denominations of Php300 in the case of *Teletipid*and Php500 in the case of *Telesulit*.  Reloads are valid for two months.A prepaid fixed line subscriber is disconnected if that subscriber does notreload within four months for *Teletipid* and within one month for *Telesulit*after the expiry of the last reload.  All sales of prepaid *Teletipid* and*Telesulit* cards, whether through dealers or through PLDT’s businessoffices, are non-refundable.

 

Pursuant to a currency exchangerate adjustment mechanism authorized by the NTC, we adjust our monthly localservice rates upward or downward by 1% for every Php0.10 change in thepeso-to-dollar exchange rate relative to a base rate of Php11.00 to US$1.00.In 2002, we implemented 13 upward adjustments and six downward adjustments inour monthly local service rates, compared to four upward adjustments and tendownward adjustments in 2001.  The average peso-to-dollar rate in 2002 wasPhp51.583 to US$1.00, compared to the average of Php51.009 to US$1.00 in 2001.This change in the average peso-to-dollar rate translated to a pesodepreciation of 1.2%, which resulted in a 1.1% average net increase in ourmonthly local service rates in 2002.

 

To attract new fixed linesubscribers and retain existing ones, PLDT has introduced additionalvalue-added products and services such as *Caller ID*and *tXt**135*.*Caller ID* allows subscribers to identify callers by telephone number,and it is now bundled at special rates with other value-added phone services,such as *call waiting*, *call forwarding*, *3-party conferencecalling* and *speed calling*.  *tXt**135* allows one-way textmessaging from PLDT fixed lines to Smart and Piltel GSM handsets and is capableof international text messaging.

 

The ratio of PLDT fixed lines inservice per PLDT employee improved from 161 at December 31, 2001 to 172 atDecember 31, 2002.  This improvement is a result of the net increase in PLDT'sfixed lines in service coupled with a reduction of PLDT’s workforce.  In 2002,employee headcount was reduced by 6% mainly as a result of PLDT’s ongoingmanpower reduction program, bringing its workforce down to 12,131 at year-end.

 

*International Long DistanceService*

 

Our international long distancerevenues, which we generate through our international gateway facilities,consist of:

 

•        inbound call revenues representing settlements from foreigntelecommunications carriers for inbound international calls;

 

•        access charges paid to us by other Philippine telecommunicationscarriers for terminating inbound international calls to our local exchangenetwork; and

 

•        outbound call revenues representing amounts billed to ourcustomers (other than our cellular customers) for outbound international calls,net of amounts payable to foreign telecommunications carriers for terminatingcalls in their territories.

 

The following table showsinformation about our international long distance business for the years endedDecember 31, 2001 and 2002:

 

 

**Years Ended December 31,**

 

**2001**

** **

**2002**

 

 

 

 

Consolidated international long distance revenues (in millions)

Php11,701

 

Php10,636

Inbound 

9,232

 

8,457

Outbound 

2,469

 

2,179

 

 

 

 

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

 

 

 

PLDT Group(2)

3,276

 

2,815

Inbound 

3,108

 

2,644

Outbound

168

 

171

Inbound-outbound call ratio

18.5:1

 

15.5:1

 

 

 

 

PLDT

2,814

 

2,576

Inbound

2,648

 

2,409

Outbound 

166

 

167

Inbound-outbound call ratio

16.0:1

 

14.4:1

_____________

 

*(1) Call volumes for the year ended December 31, 2001have been restated to conform with our 2002 financial statement presentation,which includes interconnection traffic.*

* *

*(2) Excludes cellular call volumes.*

 

Our consolidated international longdistance revenues declined by Php1,065 million, or 9%, to Php10,636 million in2002 from Php11,701 million in 2001, primarily as a result of lower inboundcall volumes.  The percentage contribution of international long distancerevenues to our total fixed line revenues also declined in 2002 to 23% from 25%in 2001.

 

Our revenues from inboundinternational long distance calls decreased by Php775 million, or 8%, toPhp8,457 million in 2002 from Php9,232 million in 2001.  The decrease was duemainly to the combined effects of lower call volumes and continued declines inthe average international termination rates, partially offset by the positiveimpact of the depreciation of the average value of the peso relative to theU.S. dollar.

 

Our inbound international longdistance call volumes decreased by 15% to 2,644 million minutes in 2002 from3,108 million minutes in 2001 due to the following factors:

 

•        increased competition from alternative means of long distancecommunications, particularly  e-mail, international text messaging and Internettelephony;

 

•        more inbound calls terminating directly to cellular subscribers;and

 

•        our policy requiring certain second and third tier internationalcarriers to prepay in order for us to accept their incoming traffic.  Althoughthis policy had a negative impact on our inbound international long distancerevenues in 2002, we expect that this will help us achieve a more stablerevenue base and control uncollectible accounts over the longer term.

 

The depreciation of the peso increased our inbound internationallong distance revenues in peso terms because settlement charges for inboundcalls are billed in U.S. dollars or in special drawing rights, an establishedmethod of settlement among international telecommunications carriers usingvalues based on a basket of foreign currencies and translated into pesos at theprevailing exchange rates at the time of billing.

 

Our revenues from outboundinternational long distance calls declined by Php290 million, or 12%, toPhp2,179 million in 2002 from Php2,469 million in 2001.  The decline was dueprimarily to reductions in our average international direct dialing, or IDD,rates brought about by discounts granted to corporate customers and other largeaccounts and operator-assisted call charges, partially offset by higheroutbound call volumes and the positive effect of the depreciation of theaverage value of the peso against the U.S. dollar.

 

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

 

Our outbound international longdistance call volumes grew by 2% to 171 million minutes in 2002 from 168million minutes in 2001 on account of:

 

•        reduced average IDD rates; and

 

•        various marketing initiatives, including automatic activation ofthe IDD service for qualified subscribers, innovative pricing packages forcorporate accounts and loyalty programs for high-valued customers.

 

The depreciation of the pesoincreased our outbound international long distance revenues in peso termsbecause outbound calls are charged at U.S. dollar rates that are billed to oursubscribers in pesos at the prevailing exchange rates at the time of billing.

 

*National Long Distance Service*

 

Our national long distance revenues consist of:

 

•        per minute charges for calls made by our fixed line customersoutside of the local service areas but within the Philippines, net ofinterconnection charges payable for calls carried through the backbone networkof, and/or terminating to the customer of, another telecommunications carrier;and

 

•        access charges received from other telecommunications carriersfor calls carried through our backbone network and/or terminating to ourcustomers.

 

The following table shows our national long distance revenuesand call volumes for the years ended December 31, 2001 and 2002:

 

** **

**Years Ended December 31,**

** **

**2001**

** **

**2002**

 

 

 

 

Consolidated national long distance revenues (in millions)

Php8,500

 

Php7,818

National long distance call volumes (in million minutes)

 

 

 

PLDT Group

2,780

 

2,181

PLDT

2,756

 

2,145

 

Our national long distance revenuesdecreased by Php682 million, or 8%, to Php7,818 million in 2002 from Php8,500million in 2001 due to the combined effects of the (1) decrease in call volumesresulting mainly from cellular substitution and (2) changes in PLDT’sinterconnection arrangements with the majority of other local exchangecarriers.  Accordingly, the percentage contribution of national long distancerevenues to our fixed line revenues was down to 17% in 2002 from 18% in 2001.

 

Our national long distance callvolumes decreased by 22% to 2,181 million minutes in 2002 from 2,780 millionminutes in 2001. Cellular substitution and the widespread availability andgrowing popularity of alternative non-voice means of communications,particularly cellular text messaging and e-mail, have negatively affected callvolumes.

 

In the latter part of 2001, PLDTsimplified its rates for calls to fixed line subscribers and for thoseterminating to cellular subscribers resulting in an overall rate increase. Forcalls terminating to fixed line subscribers, the applicable rates from Januaryto November 1, 2001 ranged from Php3.00 to Php5.00 per minute, depending ondistance and time of call.  In line with its move towards rate simplification,PLDT simplified these rates to a flat rate of Php4.50 per minute effectiveNovember 2, 2001.  At the same time, PLDT also simplified its rates for callsterminating to cellular subscribers from a range of Php10.00 to Php16.00 perminute to a uniform rate of Php13.75 per minute.  Effective March 1, 2003, therate for calls terminating to other local exchange carriers increased from aflat rate of Php4.50 per minute to Php5.00 per minute.  Through ratesimplification, we aim to simplify our tariff structure in order to enhance thecompetitiveness of our products and services and increase our operatingefficiencies. We adopted these simplified pricing plans with a view tomaximizing our national long distance revenues.

 

On May 1, 2001, PLDT entered into anew interconnection arrangement with the majority of other local exchangecarriers.  Under this arrangement, the originating carrier pays (1) a haulingcharge of Php0.50 per minute for short-haul traffic or Php1.25 per minute forlong-haul traffic to the carrier owning the backbone network and (2) an accesscharge of Php1.00 per minute to the terminating carrier.  PLDT maintainsrevenue-sharing arrangements with a few other local exchange carriers, wherebycharges are generally apportioned 30% for the originating entity, 40% for thebackbone owner and the remaining 30% for the terminating entity.

 

The decrease in our national longdistance revenues in 2002 compared to 2001 was, however, mitigated by theimpact of the following:

 

•        changes in interconnection arrangements with cellular operators;

 

•        increase in national direct dialing rates; and

 

•        launch of *PLDT Premium Phone Services*.

 

PLDT has reached an agreement withcellular operators to reduce the access charges it pays for calls terminatingto cellular subscribers.  Effective January 2002, PLDT pays access charges ofPhp4.50 per minute, down from the Php6.50 per minute it paid for the periodfrom July to December 2001.  Prior to July 2001, PLDT was paying access chargesranging from a low of Php7.69 per minute to a high of Php10.94 per minute for callsterminating to cellular subscribers, depending on whether the calls were localor long distance.

 

Launched in 2001, *PLDT PremiumPhone Services* allow customers to choose from a range of serviceapplications, such as appointment-booking services for selected embassies(including, among others, the U.S. and Australian embassies in thePhilippines), spiritual and love counseling, joining television-based gameshows, celebrity chatting, downloading and sending of ring tones and logos,televoting, and job postings.  PLDT charges an average of Php10.00 per minutefor these premium phone services.

 

*Data and Other Network Services*

 

While the other major segments ofour fixed line business posted lower revenues in 2002 compared to 2001, ourdata and other network services consistently registered increasing revenuegrowth. Revenues from these services grew by Php908 million, or 20%, toPhp5,561 million in 2002 from Php4,653 million in 2001.  The percentage revenuecontribution of these services to our fixed line revenues increased to 12% in2002 from 10% in 2001.  We expect that demand for, and therefore revenuesgenerated from, these services will continue to grow in the foreseeable future.

 

Data and other network services wecurrently provide include:

 

•        traditional bandwidth services —high-speed point-to-point domestic and international digital leased lineservices;

 

•        broadband/packet-based/Internet-based services — frame relay, ATM, IP-VPN, DSL, Internetgateway, and wholesale DS3; and

 

•        other packet-based switching services — Datapac and integrated services digital network, or ISDN.

 

The foregoing services are used forthe following:

 

•        domestic and international communication;

 

•        broadband data transmission services that transmit data over arange of frequencies and/or bandwidth into several narrower bands;

 

•        Internet exchange services that provide ISPs with a primaryconnection to the global Internet to exchange local traffic generated withinthe Philippines;

 

•        private networking services that use the public Internet as abackbone for private interconnection between different locations;

 

•        switch-based services, provided through a fixed bandwidthtransmission facility, that allow establishment of a dedicated connection forthe duration of the call; and

 

•        international packet-based services, provided through bilateralarrangements and global alliances that integrate voice, video and data.

 

Traditional bandwidth servicesaccounted for 57% of the total revenues from PLDT’s data and other networkservices for 2002, broadband/IP-based services accounted for 38%, and otherservices accounted for the remaining 5%, compared to 67%, 29% and 4%,respectively, for 2001.  These percentage changes indicate a shift in data andother network revenues from traditional bandwidth services to broadband/IP-basedservices.  We expect this trend to continue given the growing demand forbroadband transmission of voice, data and video due to the continued growth ofthe Internet, e-commerce and other online services.

 

In May 2002, PLDT launched a pay-per-usedial-up Internet service under the brand name *PLDT Vibe*, which isavailable on a postpaid or prepaid basis to PLDT’s fixed line subscribers.Charges for this service are Php0.25 per minute for off-peak hours, which arefrom 10:01 p.m.to 6:00 a.m.,and Php0.50 per minute 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 December 31, 2002, the number of PLDT’s postpaid fixed line subscribers thatsigned up for *PLDT Vibe*was 60,878, while the number of subscribers to *PLDTDSL* and *myDSL* broadband services rose to 10,896.

 

In August 2002, PLDT launched *Shops.work*,a network solution that allows the electronic linking of retail storesproviding, among others, sales and inventory reports, up-to-date and real-timemonitoring of sales and inventory, and on-line access to head offices.

 

*Miscellaneous*

 

Miscellaneous revenues are derived mostly from directoryadvertising and facilities rental.  In 2002, these revenues increased by Php378million, or 335%, to Php491 million from Php113 million in 2001, and accountedfor approximately 1% of our fixed line revenues in 2002.

 

***Wireless***

 

Our wireless business segmentoffers cellular services, cellular handset sales as well as satellite, VSAT,and other services.

 

The following table summarizes our consolidated operatingrevenues from our wireless business for the years ended December 31, 2001 and2002 by service segment:

 

** **

**Years Ended December 31,**

 

**2001**

** **

**%**

** **

**2002**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Wireless :

 

 

 

 

 

 

 

Cellular services(1)

Php19,820

 

59

 

Php30,583

 

66

Cellular handset sales

13,015

 

39

 

14,982

 

32

Satellite, VSAT and others

762

 

2

 

683

 

2

Total

Php33,597

 

100

 

Php46,248

 

100

_____________

* *

*(1)    **Refers to GSM and analogvoice and data revenues*

 

Our wireless revenues increasedconsiderably by Php12,651 million, or 38%, to Php46,248 million in 2002 fromPhp33,597 million in 2001 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 revenues rose to 50% in 2002from 42% in 2001.

 

*Cellular Service*

 

Our cellular service revenues consist of:

 

•        revenues derived from actual usage of the network by prepaidsubscribers and any unused peso value of expired prepaid cards;

 

•        monthly service fees from postpaid subscribers, including (1)charges for calls in excess of allocated free local calls, (2) toll charges fornational and international long distance calls,  (3) charges for text messagesof our GSM service customers in excess of allotted free text messages and (4)charges for value-added services, net of related content provider costs;

 

•        revenues generated from incoming calls and messages to oursubscribers, net of interconnection expenses; fees from reciprocal traffic frominternational correspondents; and revenues from inbound international roamingcalls for the GSM service; and

 

•        other charges, including those for reconnection and migration.

 

Our cellular service revenues in 2002, which include all voicetraffic and value-added services such as voice mail and international roamingas well as text messaging-related services, increased by Php10,763 million, or54%, to Php30,583 million from Php19,820 in 2001 as a result of the significantincrease in our GSM subscriber base, partially offset by declining usage persubscriber.  Cellular service revenues accounted for 33% of our consolidatedoperating revenues in 2002, compared to 25% in 2001.

 

We market nationwide cellularcommunications services through Smart and Piltel under the brand names *SmartBuddy, Smart Gold*, *addict mobile*, and *Talk ‘N Text.  Smart Buddy*is a prepaid service while *Smart Gold* and *addict mobile* arepostpaid services, all provided through Smart’s digital GSM network.  *addictmobile* was introduced in April 2003.  *Talk 'N Text* is a prepaidservice provided using Smart’s GSM network marketed by Piltel pursuant to afacilities service agreement between Smart and Piltel.  Before Smartdecommissioned its analog enhanced total access communications system, orETACS, network in December 2002, it had also offered analog prepaid andpostpaid services under the brand names*BillCrusher*and*PriceBuster,*respectively.Prior to 2002, Piltel had also offered analog prepaid and postpaid servicesunder the brand names *Phone Pal* and *Mobiline*, respectively.

 

The significant increase in ourcellular service revenues in 2002 was largely driven by our large GSMsubscriber base coupled with sustained subscriber growth.  The table belowshows our cellular subscriber base as of December 31, 2001 and 2002:

 

** **

**Years Ended December 31,**

** **

**2001**

** **

**2002**

 

 

 

 

Cellular subscribers

6,368,850

 

8,599,306

Smart

4,893,844

 

6,825,686

GSM

4,641,666

 

6,825,686

Prepaid

4,569,616

 

6,649,038

Postpaid

72,050

 

176,648

Analog(1)

252,178

 

—

Prepaid

87,429

 

—

Postpaid

164,749

 

—

Piltel

1,475,006

 

1,773,620

GSM Prepaid(2)

1,329,326

 

1,773,620

Analog(1)

145,680

 

—

Prepaid

76,473

 

—

Postpaid

69,207

 

—

_____________

* *

*(1)    **Smart closed down itsanalog/ETACS network in December 2002. Piltel ceased to offer its analog/CDMAprepaid and postpaid services at the end of 2002.*

* *

*(2)    **Represents Talk ‘N Text, aprepaid GSM service provided by Piltel using Smart’s GSM network. Piltel’s GSMrevenue is net of service fees payable to Smart for using Smart's GSM network.Piltel does not offer postpaid GSM service.*

 

As of December 31, 2002, Smart’sprepaid GSM subscriber base grew by 46% to 6,649,038 from 4,569,616 at December31, 2001, whereas Smart’s postpaid GSM subscriber base increased by 145% to176,648 at December 31, 2002 from 72,050 at December 31, 2001.  Of Smart's6,825,686 GSM subscribers at December 31, 2002, prepaid subscribers accountedfor 97%, while postpaid subscribers accounted for the remaining 3%.  Piltel’sprepaid GSM subscriber reached 1,773,620 as at December 31, 2002, representinga 20% increase from its 1,475,006 subscribers at December 31, 2001.

 

As a result of our increasing GSM subscriber base, volumes forboth domestic and international calls increased by 52% in 2002 to 3,252 millionminutes from 2,142 million minutes in 2001.  Domestic call volumes, whichinclude voice traffic originating from our cellular subscribers and terminatingwithin our cellular network and to other cellular and fixed line networks,increased by 54% to 2,288 million minutes in 2002 from 1,487 million minutes in2001.  In addition, international call volumes, both inbound and outbound, grewsignificantly to 964 million minutes in 2002 from 655 million minutes in 2001,representing an increase of 47%.

 

During 2002, our SMS system handled 19,558 million outboundmessages, an increase of 39% from the 14,055 million outbound messages handledduring 2001.  We implemented a two-phase reduction of our free text messageallocation to subscribers.  The first phase, effective September 15, 2001,reduced the allocation by one-third, while the second phase, effective January1, 2002, reduced the allocation by another one-third of the originalallocation, resulting in a total reduction of two-thirds.

 

Revenuesfrom our analog services have been declining as analog subscribers have beenmigrating to GSM service.  Smart decommissioned its analog enhanced totalaccess communications system, or ETACS, network in December 2002 while Piltelceased to offer its analog/CDMA service at the end of 2002.

 

Prior to July 2001, Smart and Piltel receivedinterconnection fees at an average of Php8.50 per minute for calls originatingfrom fixed line subscribers.  Effective July 1, 2001, these fees were reducedto Php6.50 per minute and then further reduced to Php4.50 per minute effectiveJanuary 1, 2002.  Also, prior to July 2001, Smart and Piltel received and paidinterconnection fees of Php1.00 per minute for calls originatingfrom/terminating to another cellular operator’s network.  Effective July 1,2001, these fees were increased to Php3.00 per minute and then furtherincreased to Php4.50 per minute effective January 1, 2002.

 

Effective January 1, 2003, the termination rate for callsterminating to fixed line subscribers increased from Php2.00 per minute toPhp2.50 per minute, which will further increase to Php3.00 per minute effectiveJanuary 1, 2004.  Effective February 1, 2003, international long distance callspassing through our cellular network facility terminating to cellularsubscribers are charged a termination rate of US$0.16 per minute, an increasefrom the previous rate of US$0.12 per minute.  Effective January 1, 2004, callsterminating to cellular subscribers originating from fixed line subscriberswill be charged a termination rate of Php4.00 per minute, a decrease from theprevious rate of Php4.50 per minute.

 

*Cellular Handset Sales*

 

Our cellular revenues includerevenues from the sale of handsets amounting to Php14,982 million, an increaseof 15% over the Php13,015 million recorded in 2001.  The increase wasattributable to higher gross activations in our GSM subscribers.

 

*GSM Churn Rates*

 

Churn, or the rate at whichexisting subscribers have their service cancelled in a given period, iscomputed based on total disconnections in the period, net of reconnections inthe case of postpaid subscribers, divided by the simple average of the numbersof subscribers at the beginning and at the end of a month, all divided by thenumber of months in the same period.

 

A prepaid cellular subscriber isrecognized as an active subscriber when that subscriber activates and uses theSIM card in the handset, which already contains Php100 worth of pre-stored airtime.  Subscribers can then reload by purchasing prepaid call-and-text cardsthat are sold in denominations of Php300, Php500 and Php1,000 or, in the caseof Smart’s prepaid subscribers, by purchasing additional air time through theirhandsets using *Smart Money*.  Reloads are valid for two months.  Aprepaid GSM account is disconnected if the subscriber does not reload withinfour months after the full usage or expiry of the last reload.  As a result, asubscriber would not be recognized in churn for up to four months and threedays to six months after the subscriber may have stopped using the service tomake calls or send messages (although the subscriber may continue to receivecalls and messages).  These effects may cause our calculated churn rate for aperiod to be lower than the actual rate at which subscribers are ceasing to useSmart's and Piltel’s services, and may contribute to more rapid growth incalculated churn following periods of rapid subscriber growth.

 

For Smart’s prepaid GSMsubscribers, the average monthly churn rate for 2002 was 3.2%, compared to 1.8%for 2001.  Smart’s churn has been influenced by several factors, particularlythe slowdown of the Philippine economy, which negatively affected the abilityof some subscribers to afford the service.  Piltel’s *Talk ‘N Text*experienced churn for 2002 at an average rate of 5.7%, an increase from 2.7% in2001.

 

As part of our initiatives toaddress the increase in churn rate, we introduced *PureTxt 100* on August18, 2002.  The card was designed as an alternative for *Smart Buddy* and *Talk‘N Text* subscribers who may temporarily be unable to afford the “call andtext” cards with higher denominations.  Once a *PureTxt 100* card wasloaded, the incoming and outgoing voice-call capabilities of the subscriberwere temporarily deactivated until such time that the subscriber reloaded witha “call and text” card” in a denomination of at least Php300.  *PureTxt 100*cards came with a free allocation of 10 text messages and were valid for onemonth.

In May 2003, we introduced *SmartLoad*,an “over-the-air” electronic loading facility designed to make reloading of airtime credits more convenient for and accessible to *Smart Buddy*and *Talk‘N Text*subscribers.  These “over-the-air” reloads, which have both voiceand text functions, are packaged in smaller denominations of Php30, Php60,Php115 and Php200, but have shorter validity periods of 3 days, 6 days, 12 daysand 30 days, respectively.  Like *PureTxt 100*, we believe that *SmartLoad*will encourage subscribers to stay within our cellular network instead ofchurning and re-subscribing at a later time.  As a result of the launch of *SmartLoad*,we have ceased production of *PureTxt 100* cards.

 

The average monthly churn rate forSmart’s postpaid GSM subscribers in 2002 was 2.3%, compared to 3.3% in 2001.Smart’s policy is to redirect outgoing calls to an interactive voice responsesystem if the postpaid subscriber’s account is either 45 days overdue or thesubscriber has exceeded the prescribed credit limit.  If the subscriber doesnot make a payment within 44 days of redirection, the account is disconnected.Within this 44-day period, a series of collection activities are implemented,involving the sending of a collection letter, call-out reminders and collectionmessages via text messaging.

 

*Satellite, VSAT and OtherServices*

 

Our revenues from satellite, VSATand other services 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.  Total revenues fromthese services in 2002 amounted to Php683 million, a decrease of Php79 million,or 10%, from Php762 million in 2001.

 

***Information and Communications Technology***

 

Our information and communicationstechnology business is conducted by ePLDT, a wholly-owned subsidiary of PLDT.ePLDT was formed in August 2000 and started commercial operations in February2001.  ePLDT’s principal business activities are the operation of an Internetdata center under the brand name Vitroä;two wholly-owned call centers, namely Vocativ and Parlance; and Infocom, anISP.  Granted pioneer status as an Internet data center by the Philippine Boardof Investments, Vitroä providesco-location services, server hosting, hardware and software maintenanceservices, website development and maintenance services, webcasting and webhosting,shared applications, data disaster recovery and business continuity services,intrusion detection, and security services such as firewall and managedfirewall.  ePLDT also operates Infocom, our ISP, which was transferred fromPLDT to ePLDT in December 2001 in line with the reorganization of ourbusinesses into three major business segments.

 

ePLDT is engaged in the call centerbusiness through the following subsidiaries:

 

•        Parlance, a 100%-owned call center facility capable ofaccommodating 520 seats exclusively for one of the largest direct-to-homeservice providers in the United States for customer support and billingrequirements.  Parlance commenced commercial operations in June 2002; and

 

•        Vocativ, a 100%-owned call center facility capable of accommodating500 seats exclusively for clients of a global provider of customer relationshipmanagement services.  Vocativ commenced commercial operations in April 2002.

 

ePLDT sold its entire 51% interestin Contact World on June 30, 2003.  Contact World, a call center facilitycapable of accommodating 200 seats, provides services that include customeracquisition, retention and growth, customer care and support, receivablesmanagement, help desk and technical support to various companies.  ContactWorld commenced commercial operations in June 2001.

 

ePLDT has also invested in a numberof other e-commerce and Internet-related businesses, as described in “Item 4.Information on the Company — Business — Information and CommunicationsTechnology — Infrastructure and Services — Other Investments.”

 

In 2002, our information andcommunications technology business generated total revenues of Php644 million,an increase of Php270 million, or 72%, over the Php374 million in 2001.  Theserevenues accounted for 1% of our consolidated operating revenues in 2002 andless than 1% in 2001.  Infocom contributed revenues of Php318 million; ePLDT’scall center business contributed revenues of Php290 million and *Vitro*ä contributed revenues of Php36 million,representing 49%, 45% and 6%, respectively, of the total revenues from ourinformation and communications technology business in 2002.  Infocom’s revenuein 2002 remained unchanged over 2001. Going forward, we expect revenues fromour call center business to contribute significantly to our information andcommunications technology revenues with the full commercial operations ofParlance and Vocativ and the growing demand for call center services.

 

***Consolidated Operating Expenses***

 

Our consolidated operating expensesin 2002 decreased by Php5,522 million, or 6%, to Php80,714 million fromPhp86,236 million in 2001.  The decrease was due primarily to loweramortization expenses of goodwill and a lower amount of impairment chargesrecognized in 2002.  As a percentage of our consolidated operating revenues,consolidated operating expenses decreased to 87% in 2002 from 107% in 2001 as aresult of an increase in wireless revenues.

 

The following table shows thebreakdown of our total consolidated operating expenses for the years endedDecember 31, 2001 and 2002 by business segment:

 

** **

**Years Ended December 31,**

 

**2001**

** **

**%**

** **

**2002**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line 

Php27,495

 

32

 

Php42,031

 

52

Wireless 

57,537

 

67

 

37,231

 

46

Information and communications technology 

1,204

 

1

 

1,452

 

2

Total

Php86,236

 

100

 

Php80,714

 

100

* *

*Fixed Line*

 

Consolidated operating expensesrelated to our fixed line business in 2002 totaled Php42,031 million, anincrease of Php14,536 million, or 53%, compared to Php27,495 million in 2001.

 

The following table shows thebreak-down of our total consolidated fixed line-related operating expenses forthe years ended December 31, 2001 and 2002 and the percentage of each expenseitem to the total:

 

 

**Years Ended December 31,**

 

2001

** **

**%**

 

**2002**

 

**%**

 

**(in millions)**

Fixed line :

 

 

 

 

 

 

 

Asset impairment charges

Php265

 

1

 

Php13,204

 

31

Depreciation 

8,849

 

32

 

9,825

 

23

Compensation and benefits

7,717

 

28

 

7,836

 

19

Provision for doubtful accounts

2,880

 

10

 

3,659

 

9

Maintenance

3,200

 

12

 

2,544

 

6

Selling and promotions

1,050

 

4

 

1,083

 

3

Professional and other service fees

1,008

 

4

 

994

 

2

Rent

815

 

3

 

889

 

2

Taxes and licenses

420

 

2

 

547

 

1

Amortization of intangibles

69

 

–

 

–

 

–

Other operating costs

1,222

 

4

 

1,450

 

4

Total

Php27,495

 

100

 

Php42,031

 

100

 

Asset impairment charges increasedby Php12,939 million to Php13,204 million due to Piltel’s impairmentrecognition relating to its E.O. No. 109 assets as the revenues generated fromthese services could no longer support the cost of operating the network.

 

Depreciation charges increased byPhp976 million, or 11%, to Php9,825 million in 2002 mainly due to higherdepreciation of our asset primarily resulting from additional completedprojects.

 

Compensation and benefits increasedby Php119 million, or 2%, to Php7,836 million in 2002 mainly due to the impactof collective bargaining agreement-related increases in salaries and benefitsof PLDT employees partly offset by PLDT’s ongoing manpower reduction programand lower overtime costs. 

 

Provision for doubtful accountsincreased by Php779 million, or 27%, to Php3,659 million in 2002 on account ofhigher provision for anticipated uncollectible accounts from variousspecifically identified second-tier international telecommunications carriers.To address the receivable issue, we have adopted a prepayment policy as aprerequisite for its acceptance of incoming international traffic from thesecarriers.

 

Maintenance expenses decreased byPhp656 million, or 21%, to Php2,544 million primarily due to lower maintenance costsfor PLDT’s outside and inside plant facilities partially offset by higherelectricity expense that resulted from increased power consumption coupled withincreased power rates.

 

Selling and promotion expensesincreased by Php33 million, or 3%, to Php1,083 million mainly due to increasedadvertising costs attributable to subscriber acquisition campaigns.

 

Professional and other service feesdecreased by Php14 million, or 1%, to Php994 million mainly because of loweradvisory, consultancy and payment facility expenses incurred by PLDT as aresult of streamlining of its outsourced services.

 

Rental expense increased by Php74million, or 9%, to Php889 million mainly due to higher rental charges incurredby PLDT for its international leased circuit requirements.

 

Taxes and licenses increased byPhp127 million, or 30%, to Php547 million mainly on account of higher provisionfor NTC supervision and regulation fees.  See Note 25 to our consolidatedfinancial statements in Item 18 for a discussion relating to NTC supervisionand regulation fees.

 

Amortization of intangiblesdecreased by 100% in 2002 from Php69 million in 2001 as amortization ofgoodwill is no longer applicable under U.S. GAAP beginning January 1, 2002.Instead, a test of goodwill impairment should be done at least annually.

 

Other operating costs increased byPhp228 million, or 19%, to Php1,450 million primarily due to an increase ininsurance expense due to higher premiums paid partially offset by lesserconsumption of office supplies as part of PLDT’s cost-cutting efforts.

 

*Wireless*

 

Consolidated operating expenses associated with our wirelessbusiness in 2002 totaled Php37,231 million, a decrease of Php20,306 million, or35%, from Php57,537 million in 2001.

 

The following table summarizes our consolidated wireless-relatedoperating expenses for the years ended December 31, 2001 and 2002 and thepercentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

2001

** **

**%**

 

**2002**

 

**%**

 

**(in millions)**

Wireless 

 

 

 

 

 

 

 

Cost of cellular handsets sold

Php15,179

 

26

 

Php16,203

 

44

Depreciation 

7,251

 

13

 

7,387

 

20

Selling and promotions

1,799

 

3

 

2,845

 

8

Compensation and benefits

1,798

 

3

 

2,710

 

7

Rent

1,537

 

3

 

1,951

 

5

Maintenance

1,369

 

2

 

1,745

 

5

Professional and other service fees

1,242

 

2

 

1,221

 

3

Amortization of intangibles

6,021

 

10

 

766

 

2

Taxes and licenses

499

 

1

 

548

 

1

Provision for doubtful accounts

310

 

1

 

432

 

1

Asset impairment charge

19,470

 

34

 

75

 

–

Other operating costs

1,062

 

2

 

1,348

 

4

Total

Php57,537

 

100

 

Php37,231

 

100

 

Cost of cellular handsets soldincreased by Php1,024 million, or 7%, to Php16,203 million mainly due to anincrease in GSM cellular subscribers both for Smart and Piltel.

 

Depreciation charges increased byPhp136 million, or 2%, to Php7,387 million in 2002 mainly due to an increase inSmart’s depreciable asset base owing to the continuing GSM network expansionand upgrade, which was partially offset by a reduction in the depreciable valueof Smart’s and Piltel’s assets as a result of  asset impairment charges in 2001for Smart’s analog/ETACS and Piltel’s analog/CDMA assets.  Having complied withthe requirements set out by the NTC, Smart closed down the operation of itsanalog/ETACS network in December 2002.

 

Selling and promotion expenses increasedby Php1,046 million, or 58%, to Php2,845 million, mainly due to increased grossactivations of our cellular subscribers in 2002.  Effective August 1, 2002, wereduced maximum commission paid to dealers for prepaid phone kit sales from arange of Php1,000 to Php1,300 per unit sold (depending on the volume purchased)in the form of prepaid “call and text” cards to Php800 in cash per prepaidphone kit.  An additional 1% rebate is given on cash purchases.

 

Compensation and benefits increasedby Php912 million, or 51%, to Php2,710 million primarily due to increasedsalaries and benefits of Smart’s employees coupled with accrued long-termincentive plan benefits for managers and executives of Smart.  Smart’s employeeheadcount increased from 5,035 as of December 31, 2001 to 5,330 as of December31, 2002 mainly due to the integration of TSI into Smart on December 1, 2002.TSI was the largest dealer of Smart.

Rental expense increased by Php414million, or 27%, to Php1,951 million on account of higher site rentals incurredby Smart for its growing number of cell sites and base stations in line withits network expansion; increased operational requirements for satellite,microwave link and circuit facilities; and higher office space rentals due toincreased wireless business centers.  As of December 31, 2002, Smart had 2,110GSM cell sites and 2,777 base stations, compared with 1,570 GSM cell sites and2,091 base stations as of December 31, 2001.

 

Maintenance expense increased byPhp376 million, or 27%, to Php1,745 million due to higher maintenance costsincurred by Smart relating to additional network equipment for its growingnumber of cell sites.

 

Professional and other service feesdecreased by Php21 million, or 2%, to Php1,221 million mainly as a result of lowertechnical service fees incurred by Smart.

 

Amortization of intangiblesdecreased by Php5,255 million, or 87%, in 2002 from Php6,021 million in 2001 asamortization of goodwill is no longer applicable under U.S. GAAP beginningJanuary 1, 2002.  Instead, a test of goodwill impairment should be done atleast annually.

 

Taxes and licenses increased byPhp49 million, or 10%, to Php548 million due mainly to the increase in Smart’sand Piltel’s real property tax, municipal licenses and taxes, and NTC supervisionand license fees.  See Note 25 to our consolidated financial statements in Item18 for a discussion relating to NTC supervision and regulation fees.

 

Provision for doubtful accountsincreased by Php122 million, or 39%, to Php432 million due to an increase inSmart’s provision for doubtful carrier accounts, an increase in Smart’spostpaid subscriber base, and Smart’s adoption of a more stringent provisioningpolicy.

 

Asset impairment charges decreasedby Php19,395 million, or 100%, to Php75 million in 2002.  In 2001, Smart andPiltel recognized impairment charges of the values relating to their analogassets.

 

Other operating costs increased byPhp286 million, or 27%, to Php1,348 million primarily due to increases inSmart’s various other operating expenses, such as insurance, facility usagefees, travel and transportation, and communications expenses.

 

*Information and Communications Technology*

 

Consolidated operating expensesassociated with our information and communications technology business in 2002totaled Php1,452 million, an increase of Php248 million, or 21%, from Php1,204million in 2001.  The increase was due principally to the full commercialoperations of ePLDT and its newly formed subsidiaries.   The three largestexpense items related to our information and communications technology businessin 2002 were maintenance, compensation and benefits, and depreciation andamortization, representing 25%, 23% and 19%, respectively, of our totaloperating expenses related to this business.

 

***Net Operating Income***

 

Our consolidated net operatingincome in 2002 was Php12,029 million, compared to a net operating loss ofPhp5,942 million in 2001.  Accordingly, our consolidated operating margin (netoperating income as a percentage of operating revenues) improved to positive13% in 2002 from negative 7% in 2001.

 

The following table shows thebreakdown of our consolidated net operating income (loss) for the years endedDecember 31, 2001 and 2002 by business segment:

 

 

**Years Ended December 31,**

 

2001

** **

**%**

 

**2002**

 

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

Fixed line 

Php18,828

 

(317)

 

Php3,820

 

32

Wireless 

(23,940)

 

403

 

9,017

 

75

Information and communications technology 

(830)

 

14

 

(808)

 

(7)

Total

Php(5,942)

 

100

 

Php12,029

 

100

 

*Fixed Line*

 

In 2002, our fixed line business segmentcontributed an operating income of Php3,820 million, which was lower byPhp15,008 million, or 80%, than Php18,828 million in 2001.  This loweroperating income contribution was mainly due to the overall decline in ourfixed line operating revenues by 1% coupled with an increase in our fixedline-related operating expenses by 53% primarily owing to Piltel’s impairmentof its E.O. No. 109 assets in 2002 amounting to Php13,204 million.

 

*Wireless*

 

Our wireless business segmentregistered an operating income of Php9,017 million in 2002, compared to anoperating loss of Php23,940 million in 2001.  This improvement was due to asubstantial increase in our cellular operating income contribution and adecline in asset impairment provisions from 2001 to 2002.

 

*Information and Communications Technology*

 

In 2002, our information andcommunications technology business segment posted an operating loss of Php808million, a decrease of Php22 million, or 3%, compared to an operating loss ofPhp830 million incurred in 2001.  These operating losses reflect the start-upnature of ePLDT’s businesses and those of ePLDT’s subsidiaries.

 

*Other Expenses – Net*

 

The following table shows ourconsolidated other expenses – net for the years ended December 31, 2001 and2002:

 

 

**Years Ended December 31,**

 

**2001**

** **

**2002**

 

**(in millions)**

 

 

 

 

Interest expenses and related items

Php17,101

 

Php15,346

Capitalized interest

(2,404)

 

(1,344)

Subtotal

Php14,697

 

Php14,002

Interest and other income

(1,278)

 

(2,776)

Other expenses – net

10,829

 

5,402

Total

Php24,248

 

Php16,628

 

On a consolidated basis, ourother expenses, net of other income, decreased by Php7,620 million, or 31%, toPhp16,628 million in 2002 from Php24,248 million in 2001 due to the combinedeffects of:

 

•        a decrease in interest expense and related items, net ofcapitalized interest, of Php695 million attributable mainly to (1) a decreasein interest expense of Php858 million due to the debt restructuring of Pilteland (2) a decrease of Php171 million in Mabuhay Satellite’s interest expensedue to debt payments and lower interest rates mainly on Mabuhay Satellite’sforeign currency-denominated loans bearing fluctuating interest rates.  Theabove decreases were partially offset by (1) a net increase of Php25 million inPLDT’s interest expense and related items mainly due to the inclusion of thetender premium of Php518 million related to our tender offer for notes due 2003and 2004 completed in May 2002, which was substantially offset by the combinedeffects of lower interest rates, particularly LIBOR, and amortizations andprepayments of various loans in 2002; (2) an increase of Php302 million inSmart’s interest expense due to a higher level of indebtedness in 2002; and (3)a net increase of Php7 million in other subsidiaries’ interest expenses;

 

•        an increase in interest and other income of Php1,498 millionmainly due to a net gain of Php633 million resulting from PLDT’s termination ofa derivative instrument; and

 

•        a decrease of Php5,427 million in other expenses–net due mainlyto a decrease in equity in net losses of investees of Php4,141 million and anon-recurrence of a provision for permanent decline in value of investment ofPhp2,052 million recognized in 2001. 

 

***Loss Before Income Tax, Cumulative Effect of Change inAccounting Principle and Minority Interest in Net Income of ConsolidatedSubsidiaries***

 

Our loss before income tax,cumulative effect of change in accounting principle and minority interest innet losses of consolidated subsidiaries in 2002 was Php4,599 million, a decreaseof Php25,591 million, or 85%, from a loss of Php30,190 million in 2001.

 

In 2002, our effective corporate tax rate on a consolidatedbasis was 16%.  Our effective corporate tax rate was lower than the 32%statutory corporate tax rate due to the following:

 

•        the effect of a three-year income tax holiday granted to Smart bythe Philippine Board of Investments in connection with the pioneer status itawarded to Smart’s GSM network expansion project;

 

•        income already subjected to a final tax; and

 

•        equity in net income of our subsidiaries, which is not subject totax in PLDT as this has already been subject to tax in the subsidiaries.

 

Smart’s three-year income taxholiday, which will expire in May 2004, applies to the incremental incomegenerated from its GSM network expansion.  We expect our effective tax rate toincrease following the expiration of the tax holiday granted to Smart.

 

***Net Loss***

 

As a result of the foregoingfactors our consolidated net loss in 2002 stood at Php6,158 million, animprovement of Php21,624 million, or 78%, over our consolidated net loss ofPhp27,782 million in 2001.  This improvement was largely due to the decreasednet loss of our wireless business for 2002.

 

Basic and diluted loss per share ofcommon stock amounted to Php52.08 in 2002, compared to basic and diluted lossper share of Php176.85 in 2001, after giving retroactive effect to stockdividend declarations.

 

**2001 Compared to 2000**

*** ***

*Consolidated Operating Revenues*
 

Our consolidated operating revenuesgrew by Php19,946 million, or 33%, to Php80,294 million in 2001 compared withPhp60,348 million in 2000 largely as a result of the continuing strong growthof our wireless business.  Our cellular business contributed Php32,835 millionin revenues for 2001, an increase of 134% from Php14,017 million in 2000.  Ourcellular revenues, accounted for 41% of our consolidated operating revenues in2001, compared with 23% in 2000.

 

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

 

** **

**Years Ended December 31,**

 

**2000**

** **

**%**

** **

**2001**

** **

**%**

 

**(pesos in millions)**

 

 

 

 

 

 

 

 

Fixed line 

Php45,310

 

75

 

Php46,323

 

58

Wireless 

14,799

 

25

 

33,597

 

42

Information and communications technology 

239

 

–

 

374

 

–

Total

Php60,348

 

100

 

Php80,294

 

100

 

***Fixed Line***

 

In 2001, our fixed line business generated revenues of Php46,323million, an increase of Php1,013 million, or 2%, from Php 45,310 million in2000.  The increase was mainly due to increases in revenues from our localexchange service and data and other network services, partially offset bydecreases in our national and international long distance revenues.  However,our fixed line revenues dropped to 58% of consolidated operating revenues in2001 from 75% in 2000 due to the significant growth in our wireless business.

 

The following table summarizes our consolidated operatingrevenues from our fixed line business for the years ended December 31, 2000 and2001 by service segment:

 

 

**Years Ended December 31,**

** **

**2000**

**%**

**2001**

**%**

 

**(in millions)**

Fixed line:

 

 

 

 

Local exchange

Php18,671

41

Php21,356

46

International long distance

13,223

29

11,701

25

National long distance

10,436

23

8,500

19

Data and other network

2,971

7

4,653

10

Miscellaneous

9

–

113

–

Total

Php45,310

100

Php46,323

100

 

*Local Exchange Service*

 

The components of our localexchange revenues are described under “— 2002 Compared to 2001 — ConsolidatedOperating Revenues — Fixed Line — Local Exchange Service.”

 

The following table summarizeskey measures of our local exchange service business segment as of and for theyears ended December 31, 2000 and 2001:

 

 

**Years Ended December 31,**

 

**2000**

**2001**

 

 

 

Consolidated local exchange revenues (in millions)

Php18,671

Php21,356

Number of fixed lines in service

 

 

PLDT Group

1,999,922

2,174,082

PLDT(1)

1,915,985

2,075,109

Number of PLDT employees

13,285

12,915

Number of PLDT fixed lines in service per PLDT employee

144

161

________________

 

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

* *

Revenues from our local exchangeservice increased by Php2,685 million, or 14%, to Php21,356 million in 2001compared with Php18,671 million in 2000 principally due to:

 

•        currency-related adjustments in our monthly local service rates;and

 

•        higher average number of billed fixed lines in service.

 

As a percentage of total fixed linerevenues our local exchange service revenues increased to 46% in 2001 from 41%in 2000.

 

During 2001, we implemented tenupward and four downward adjustments in our monthly local service rates toreflect the movements of the peso-to-dollar exchange rate pursuant to acurrency adjustment mechanism allowed by the NTC.  During 2000, we implemented12 upward adjustments and one downward adjustment.  Under this mechanism, weincrease or decrease our monthly local service rates by 1% for every Php0.10change in the peso-to-dollar exchange rate relative to a base rate of Php11.00to US$1.00.  Following a depreciation of the peso, we increase our localexchange service rates after giving 15 days’ prior notice to the NTC;conversely, we decrease our local exchange service rates immediately followingan appreciation of the peso.  The average peso-to-dollar exchange rate in 2001was Php51.009 to US$1.00, compared to the average of Php44.179 to US$1.00 in2000.  Rate adjustments under this mechanism relating to this 15% depreciationof the peso resulted in a 16% net increase in our average monthly local servicerates, thus increasing our local exchange revenues.

 

Despite lower gross fixed lineadditions in 2001, PLDT achieved a higher number of net additional fixed linesin service because of a lower number of disconnections during the year than in2000.  Gross additions to PLDT’s fixed lines in service in 2001 totaled427,349, lower by 11% than last year’s gross additions of 477,515.  On a netbasis, PLDT added 159,124 fixed lines in 2001, higher by 4% than the netadditions of 153,516 in 2000.

 

The increase in PLDT's net fixedline additions was mainly attributable to *Teletipid*, PLDT’s prepaidfixed line service.  Launched in August 2000, *Teletipid* was initiallyintended by PLDT as an alternative affordable telephone service for consumersunder difficult economic conditions.  At the end of 2000, PLDT had 13,905 *Teletipid*subscribers, all of which were new subscribers.  However, in 2001, *Teletipid*was incorporated into PLDT’s overall churn and credit risk exposure managementand subscriber retention efforts.  In 2001, the number of additional *Teletipid*subscribers was 130,597, of which 82,002, or 63%, were new subscribers and48,595, or 37%, were migrated from PLDT’s postpaid fixed line service, insteadof being disconnected from the service for non-payment of bills.  As ofDecember 31, 2001, active *Teletipid* subscribers reached 144,502,representing 7% of PLDT’s total fixed lines in service.

 

*Teletipid* phone kits, eachcontaining Php300 of pre-paid air time, are sold for Php1,700 per unit.  *Teletipid*prepaid subscribers are charged based on usage at a rate of Php0.50 per minutefor local calls and at the same rates applicable to postpaid fixed linesubscribers for national and international long distance calls.

 

To stimulate fixed line subscribertake-up, effective November 13, 2000, PLDT reduced installation fees byapproximately 41%, from Php3,376.59 to Php1,999, for postpaid residentialsubscribers and by approximately 35%, from Php5,396.31 to Php3,500, forbusiness subscribers.  PLDT also introduced additional value-added products andservices, such as Caller ID and *tXt**135*, in order to attract newsubscribers and retain existing ones.  Caller ID allows subscribers to identifycallers by telephone number, while *tXt**135* allows one-way textmessaging from PLDT fixed lines to Smart and Piltel GSM handsets. *tXt**135*is also capable of international text messaging.

 

The ratio of PLDT fixed lines inservice per PLDT employee improved from 144 in 2000 to 161 in 2001 due to theincrease in PLDT’s fixed lines in service and the impact of PLDT's manpowerreduction program.  PLDT’s workforce was reduced by 370 employees, or 3%, in2001 primarily as a result of the manpower reduction program.

 

*International Long DistanceService*

 

The components of our internationallong distance revenues are described under “— 2002 Compared to 2001 —Consolidated Operating Revenues — Fixed Line — International Long DistanceService.”

 

The following table shows information about our internationallong distance business for the years ended December 31, 2000 and 2001:

 

 

**Years Ended December 31,**

 

**2000**

**2001**

 

 

 

Consolidated international long distance revenues (in millions)

Php13,223

Php11,701

Inbound

9,927

9,232

Outbound

3,296

2,469

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

 

 

PLDT Group(2)

2,457

3,276

Inbound

2,313

3,108

Outbound

144

168

Inbound-outbound call ratio

16.1:1

18.5:1

PLDT

2,378

2,814

Inbound

2,237

2,648

Outbound

141

166

Inbound-outbound call ratio

15.9:1

16.0:1

________________

 

*(1)    **Call volumes for the yearended December 31, 2001 have been restated to conform with our 2002 financialstatement presentation, which includes interconnection traffic.*

* *

*(2)    **Excludes cellular callvolumes.*

 

 

Our consolidated international longdistance revenues decreased by Php1,522 million, or 12%, to Php11,701 millionin 2001 from Php13,223 million in 2000 as a result of declines in revenues fromboth inbound and outbound international calls.  Our international long distancerevenues as a percentage of our total fixed line revenues also decreased to 25%in 2001 from 29% in 2000.

 

Our revenues from inboundinternational long distance calls for 2001 decreased by Php695 million, or 7%,to Php9,232 million principally due to continued declines in internationaltermination rates.  This decrease was partially offset by the effects of thepeso depreciation against the U.S. dollar and higher call volumes.

 

On January 1, 2000, we adopted theU.S. FCC benchmark accounting rate of US$0.38 per minute for inbound internationalcalls, which represented a settlement rate of US$0.19 per minute forinternational long distance traffic between the Philippines and the UnitedStates.  Since then, our termination rates for inbound calls from the UnitedStates have continued to decline to levels below the U.S. FCC benchmarkaccounting rate.  Termination rates for inbound calls from other countries havedeclined as well.

 

The depreciation of the pesoincreased our inbound international long distance revenues in peso termsbecause settlement charges for inbound calls are billed in U.S. dollars or inspecial drawing rights, an established method of settlement among internationaltelecommunications carriers using values based on a basket of foreigncurrencies, that are translated into pesos at the prevailing exchange rates atthe time of billing.

 

Our inbound international longdistance call volumes increased by 34% to 3,108 million minutes in 2001 largelydue to:

 

•        our enhanced competitiveness from flexible pricing that was madepossible by our adoption of the U.S. FCC benchmark accounting rate of US$0.38per minute for inbound international calls one year earlier than the targetdate set by the U.S. FCC; and

 

•        our recovery of traffic previously lost to unauthorized traffictermination and bypass routings by international simple resale operators.

 

Beginning September 2001, PLDTadopted a policy requiring prepayment from certain second and third tierinternational carriers as a prerequisite for accepting their incoming traffic.This prepayment policy also contributed to the decline in revenues from inboundtraffic.  Although this prepayment policy has negatively impacted our inboundinternational long distance revenues in the near term, we expect that over thelonger term this policy will help us achieve a more stable revenue base andcontrol uncollectible accounts.

 

Our revenues from outboundinternational long distance calls for 2001 declined by Php827 million, or 25%,to Php2,469 million primarily due to substantial reductions in our internationaldirect dialing or IDD rates, partially offset by the effects of the pesodepreciation against the U.S. dollar and higher call volumes.  PLDT reduced itsIDD rates for outbound calls an average of US$1.507 per minute to as low asUS$0.49 per minute for off-peak hours and US$0.69 per minute for peak hourseffective June 15, 2000.  Effective February 1, 2001, PLDT further reducedthese rates to a flat rate of US$0.40 per minute applicable to all calldestinations at any time and any day of the week.

 

The depreciation of the pesoincreased our outbound international long distance revenues in peso termsbecause outbound calls are charged at U.S. dollar rates that are billed to oursubscribers in pesos at the prevailing exchange rates at the time of billing.

 

Our outbound international longdistance call volumes grew by 17%, from 144 million minutes in 2000 to 168million minutes in 2001, as a result of:

 

•        substantial reductions of our IDD rates; and

 

•        implementation of our various marketing initiatives, includinginnovative pricing packages for large accounts and loyalty programs forhigh-value customers.

 

*National Long Distance Service*

 

The components of our national longdistance revenues are described under “— 2002 Compared to 2001 — ConsolidatedOperating Revenues — Fixed Line — National Long Distance Service.”

 

The following table shows ournational long distance revenues and call volumes for the years ended December31, 2000 and 2001:

 

 

**Years Ended December 31,**

** **

**2000**

**2001**

 

 

 

Consolidated national long distance revenues (in millions)

Php10,436

Php8,500

National long distance call volumes (in million minutes)

 

 

PLDT Group

3,274

2,780

PLDT

3,255

2,756

 

Our national long distance revenuesdeclined by Php1,936 million, or 19%, to Php8,500 million in 2001 fromPhp10,436 million in 2000 due to the combined effects of the following:

 

•        lower call volumes;

 

•        reduced national direct dialing, or NDD, rates; and

 

•        changes in interconnection arrangements and the percentage ofcalls subject to revenue sharing with other carriers.

 

Likewise, national long distancerevenues decreased to 19% of our total fixed line revenues in 2001 from 23% in2000.

 

Our national long distance callvolumes decreased by 15% to 2,780 million minutes in 2001 compared with 3,274million minutes in 2000.  Cellular substitution and the widespread availabilityand growing popularity of alternative, more economical non-voice means ofcommunications, particularly e-mail and cellular text messaging, havenegatively affected call volumes.  The integration of some of our localexchanges into single local calling areas effective August 2000, as mandated bythe NTC, has also negatively affected our national long distance call volumes.Because of this integration, calls between two exchanges located within thesame province are no longer considered national long distance calls but aretreated as local calls.

 

In 2001, PLDT implemented changesin its NDD rates for calls to fixed line subscribers and for those terminatingto cellular subscribers.  For calls to fixed line subscribers, PLDT reduced itsNDD rates from a range of Php3.25 to Php6.60 per minute to a range of Php3.00to Php5.00 per minute effective May 1, 2001.  On November 2, 2001, PLDTrebalanced these rates to a flat rate of Php4.50 per minute.  For callsterminating to cellular subscribers, PLDT reduced its NDD rates from a range ofPhp12.69 to Php14.69 per minute to a uniform rate of Php12.50 per minuteeffective November 2, 2001.  Rate rebalancing aims to simplify our tariffstructure in order to enhance the competitiveness of our products and services,increase our operating efficiencies, and provide cost savings to ourcustomers.  We adopted these simplified pricing plans with a view tostabilizing our national long distance revenues going forward.

 

In 2001, 72% of PLDT’s nationallong distance call volumes were subject to revenue sharing with other carriers,compared to 70% in 2000.

 

On May 1, 2001, PLDT entered intoan agreement with the majority of other local exchange carriers.  Under the newarrangement, the originating carrier pays access charges of (1) Php0.50 perminute for short haul or Php1.25 per minute for long haul traffic to thecarrier owning the backbone network and (2) Php1.00 per minute to theterminating carrier.  PLDT maintains revenue sharing arrangements with a fewother local exchange carriers whereby charges are generally apportioned 30% forthe originating entity, 40% for the backbone owner and another 30% for theterminating entity.

 

PLDT has also reached a favorablesettlement in its negotiations with different cellular operators on accesscharges for calls terminating to cellular subscribers.  Effective July 2001,access charges paid by PLDT to cellular operators were reduced to Php6.50 perminute for local and long distance calls, and, effective January 2002, accesscharges paid by PLDT were further reduced to Php4.50 per minute.  Prior to July2001, PLDT paid interconnection charges ranging from a low of Php7.69 to a highof Php10.94 per minute for calls terminating to cellular subscribers, dependingon whether the calls were local or long distance.

 

*Data and Other Network Services*

 

In 2001, data and other networkservices registered the highest percentage growth in revenues among our fixedline services, continuing the trend in the last two years.

 

The components of our data andother network revenues are described under “— 2002 Compared to 2001 —Consolidated Operating Revenues — Fixed Line — Data and Other NetworkServices.”

 

Of our total revenues from data andother network services in 2001, traditional bandwidth services accounted for67%, broadband/IP-based services accounted for 29%, and other servicesaccounted for the remaining 4%, compared with 71%, 25% and 4%, respectively, in2000.

 

Revenues from our data and othernetwork services grew by Php1,682 million, or 57%, to Php4,653 million in 2001compared with Php2,971 million in 2000.  Revenues from our data and othernetwork services also increased to 10% of our total fixed line revenues in 2001from 7% in 2000.

 

In 2001, we continued to broadenour service offerings with the launch of new services, such as outsourcedremote dial-up access services and an Internet protocol-based networkingservice, and expansion or enhancement of some of the existing ones, includingincreasing the capacity of our Internet gateway service and accelerating thedeployment of our DSL infrastructure.

 

*Miscellaneous*

 

Miscellaneous revenues are derivedmostly from directory advertising and facilities rental.  For 2001, theserevenues increased by Php104 million to Php113 million from Php9 million in2000, and accounted for 0.2% of our 2001 total fixed line revenues.

 

***Wireless***

 

The following table summarizes our consolidated operatingrevenues from our wireless business for the years ended December 31, 2000 and2001 by service segment:

 

 

**Years Ended December 31,**

 

**2000**

**%**

**2001**

**%**

 

**(in millions)**

Wireless:

 

 

 

 

Cellular services(1)

Php9,255

63

Php19,820

59

Cellular handset sales 

4,762

32

13,015

39

Satellite, VSAT and others

782

5

762

2

Total

Php14,799

100

Php33,597

100

_____________

*(1)      **Refers to GSM and analogvoice and data revenues.*

Wireless revenues increased byPhp18,798 million, or 127%, to Php33,597 million in 2001 from Php14,799 millionin 2000 mainly as a result of the continuing strong growth in our cellularservice revenues and cellular handset sales.  As a percentage of consolidatedoperating revenues, our wireless revenues rose to 42% in 2001 from 25% in 2000.

 

*Cellular Service*

 

The components of our cellularservice revenues are described above under “— 2002 Compared to 2001 —Consolidated Operating Revenues — Wireless — Cellular Service.”

 

Our cellular service revenues in2001 increased by Php10,565 million, or 114%, to Php19,820 million fromPhp9,255 in 2000. Cellular service revenues accounted for approximately 25% ofour consolidated operating revenues in 2001, compared to 15% in 2000.

 

We market our cellular servicesunder the brand names *Smart Buddy, Smart Gold, BillCrusher, PriceBuster,**Talk‘N Text*, *Phone Pal* and *Mobiline*.  *Smart Buddy*and *SmartGold* are services provided using Smart’s digital GSM network, while *BillCrusher*and *PriceBuster*are offered through Smart’s analog/ETACS network.  *SmartBuddy*and *BillCrusher*are prepaid services, while *Smart Gold*and*PriceBuster*are postpaid services.  *Talk ‘N Text* is provided byPiltel using Smart*‘*s GSM network, while *Phone Pal* and *Mobiline*are offered through Piltel*‘*s analog/CDMA network.  *Talk ‘N Text*and *Phone Pal* are prepaid services, while *Mobiline* is a postpaidservice.

 

The substantial increase in our cellular service revenues wasdriven by the strong growth in our cellular subscriber base.  The table belowshows our cellular subscriber base as of December 31, 2000 and 2001:

 

** **

**Years Ended December 31,**

** **

**2000**

** **

**2001**

 

 

 

 

Cellular subscribers

3,515,293

 

6,368,850

Smart

2,858,479

 

4,893,844

GSM

2,331,005

 

4,641,666

Prepaid

2,263,322

 

4,569,616

Postpaid

67,683

 

72,050

Analog

527,474

 

252,178

Prepaid

282,529

 

87,429

Postpaid

244,945

 

164,749

Piltel

656,814

 

1,475,006

GSM Prepaid

368,578

 

1,329,326

Analog

288,236

 

145,680

Prepaid

200,042

 

76,473

Postpaid

88,194

 

69,207

 

Smart*’*s prepaid GSMsubscriber base increased by 2,306,294, or 102%, to 4,569,616, whereas Smart'spostpaid GSM subscriber base grew by 4,367, or 6%, to 72,050.  Prepaidsubscribers accounted for 98% of Smart*’*s 4,641,666 GSM subscribers atDecember 31, 2001, while postpaid subscribers accounted for the remaining 2%.In contrast, Smart’s prepaid analog subscriber base declined by 69% to 87,429at December 31, 2001 from 282,529 at December 31, 2000, while Smart’s postpaidanalog subscriber base decreased by 33% to 164,749 at December 31, 2001 from244,945 at December 31, 2000.  Overall, Smart*’*s analog subscriber basedecreased during the year by 52% to 252,178 at the end of 2001.

 

At December 31, 2001, Piltel*’*sGSM subscriber base increased by 960,748, or 261%, to 1,329,326 from 368,578 atthe end of 2000.  In contrast, Piltel*’*s prepaid analog subscriber basedeclined by 62% to 76,473 at December 31, 2001 from 200,042 at December 31,2000, while Piltel*’*s postpaid analog subscriber base decreased by 22% to69,207 at December 31, 2001 from 88,194 at December 31, 2000.  Overall,Piltel’s analog subscriber base decreased during the year by 49% to 145,680 atthe end of 2001.

 

Our cellular service revenues arepredominantly generated by our GSM service as revenues from our analog servicehave been decreasing due to the declining analog subscriber base coupled withdecreasing usage.

 

As a result of the substantial increase in our GSM subscriberbase, volumes for both domestic and international calls grew by 75% in 2001 to2,142 million minutes from 1,226 million minutes in 2000.  Domestic callvolumes, which include voice traffic originating from our cellular subscribersand terminating within our cellular network and to other cellular and fixedline networks, increased by 65% to 1,487 million minutes in 2001 from 901million minutes in 2001.  In addition, international call volumes, both inboundand outbound, increased to 655 million minutes in 2001 from 325 million minutesin 2000, representing an increase of 102%.

 

Prior to July 2001, Smart andPiltel received interconnection fees at an average of Php8.50 per minute forcalls originating from fixed line subscribers.  Effective July 2001, these feeswere reduced to Php6.50 per minute and were further reduced to Php4.50 perminute effective January 2002.  Also prior to July 2001, Smart and Piltelreceived and paid interconnection income and charges, respectively, of Php1.00per minute for calls originating/terminating in another cellular operator'snetwork.  Effective July 2001, these charges were increased to Php3.00 perminute and further increased to Php4.50 per minute effective January 2002.

 

During 2001, our SMS system handled 12,329 million outboundmessages, an increase of 219% from the 3,862 million messages handled during2000.  We implemented a two-phase reduction of its free text message allocationto subscribers.  The first phase, effective September 15, 2001, reduced theallocation by one-third, while the second phase, effective January 1, 2002,reduced the allocation by a further one-third of the original allocationresulting in a total reduction of two-thirds.

 

*Cellular Handset Sales*

 

Our cellular revenues includerevenues from the sale of handsets, phone kits and other non-usage revenuesamounting to Php13,015 million in 2001, an increase of 173% over the Php4,762million recorded in 2000.  The increase was attributable to higher grossactivations in our GSM subscribers.

 

*GSM Churn Rates*

 

For Smart's prepaid GSMsubscribers, the average monthly churn rate for 2001 was 1.8%, compared to 0.4%in 2000.  Smart's churn rate in 2001 was influenced by several factors,including:

 

•        The general economic slowdown in the Philippines, whichnegatively impacted some subscribers' abilities to afford the service;

 

•        Technological advances, which necessitated the upgrading of SIMcards.  The introduction of *Smart zed*Ôand *Smart Money* in late 2000 required our customers to upgrade earlierissued SIM cards to new, more advanced ones capable of supporting theseservices.  This cancellation and replacement of existing SIM cards contributedto increased churn.  This phenomenon may recur as Smart continues to introduceenhanced SIM cards as they become available and encourages its subscribers toupgrade to make use of Smart's various value-added services; and

 

•        Network quality in the first half of 2001, which may havecontributed to the increased churn rate during the second half of 2001.  AsSmart went through rapid subscriber growth in the first half of 2001, itsnetwork at times struggled to cope with the increased traffic.  Since then,however, Smart has invested heavily in increasing its network capacity.

 

The average monthly churn rate for Smart's postpaidGSM subscribers for each of the years 2000 and 2001 was 3.4% and 3.3%,respectively.  Smart's policy is to redirect outgoing calls to an interactivevoice response system if the postpaid subscriber's account is either 45 days overdueor the subscriber has exceeded the prescribed credit limit.  If the subscriberdoes not make a payment within 30 days of redirection, the account isdisconnected.  Within this 30-day period, a series of collection activities areimplemented, involving the sending of a collection letter, call-out remindersand collection messages via SMS.

 

*Talk 'N Text*'s averagemonthly churn rate for 2001 was 2.7%, increasing from 1.0% in January 2001 to4.6% in December 2001.  We believe Piltel's GSM service churn rate in 2001 wasinfluenced by the general economic slowdown in the Philippines, which may havenegatively impacted some subscribers' abilities to afford the service.  Inaddition, because churn for *Talk 'N Text* is computed in an identicalmanner to that of Smart's prepaid GSM service, a subscriber would not berecognized in churn for up to four months and three days to six months afterthe subscriber may have stopped using the service.

 

*Analog Churn Rates*

 

The churn rate for Smart’s prepaidand postpaid analog subscribers is computed in the same way as that for itsprepaid and postpaid GSM subscribers.  The average monthly churn rate forSmart’s prepaid analog subscribers in 2001 increased to 8.8% from 3.0% in 2000while the average monthly churn rate for Smart’s postpaid analog subscriberswas 3.3%, a decrease from 4.9% for 2000.

 

The average monthly churn rate for2001 for Piltel’s prepaid analog/CDMA service was 9.7%.

 

Satellite, VSATand Other Services
 

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

 

***Information and Communications Technology***

 

Revenues generated from ourinformation and communications technology business in 2001 amounted to Php374million, increasing by Php135 million, or 56%, from Php239 million in 2000, andaccounting for less than 1% in 2001 and 2000 of our consolidated revenues ineach of these two years.  Infocom contributed revenues of Php318 million, anincrease of Php79 million, or 33%, over its revenue contribution of Php239million in 2000.  ePLDT, which started commercial operations only on February5, 2001, contributed revenues of Php30 million from *Vitro*TM operations.  Our call center businesscontributed revenues of Php26 million to our information and communicationstechnology business.

 

***Consolidated Operating Expenses***

 

Our consolidated operating expensesin 2001, increased by Php36,412 million, or 73%, to Php86,236 million fromPhp49,824 million in 2000.  The increase was primarily due to an increase inoperating expenses in our wireless business segment, in particular due toincreased depreciation charges and the asset impairment charges for Smart’sanalog/ETACS and Piltel’s analog/CDMA assets in 2001 and the write-off of thecustomer lists relating to Smart’s analog/ETACS service in 2001.

 

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

 

 

**Years Ended December 31,**

 

2000

** **

**%**

 

**2001**

 

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

Fixed line 

Php26,322

 

53

 

Php27,495

 

32

Wireless 

23,165

 

46

 

57,537

 

67

Information and communications technology 

337

 

1

 

1,204

 

1

Total

Php49,824

 

100

 

Php86,236

 

100

 

*Fixed Line*

 

Consolidated operating expenses related to our fixed linebusiness totaled Php27,495 million in 2001, an increase of Php1,173 million, or4%, from Php26,322 million in 2000 largely as a result of higher depreciationcharges.

 

The following table shows thebreak-down of the total consolidated fixed line-related operating expenses forthe years ended December 31, 2000 and 2001 and the percentage of each expenseitem to the total:

 

 

**Years Ended December 31,**

 

2000

** **

**%**

 

**2001**

 

**%**

 

**(in millions)**

Fixed line:

 

 

 

 

 

 

 

Depreciation 

Php7,169

 

27

 

Php8,849

 

32

Compensation and benefits

7,664

 

29

 

7,717

 

28

Maintenance

3,074

 

12

 

3,200

 

12

Provision for doubtful accounts

2,361

 

9

 

2,880

 

10

Selling and promotions

1,525

 

6

 

1,050

 

4

Professional and other service fees

1,107

 

4

 

1,008

 

4

Rent

728

 

3

 

815

 

3

Taxes and licenses

519

 

2

 

420

 

2

Asset impairment charge

–

 

–

 

265

 

1

Amortization of intangibles

84

 

–

 

69

 

–

Other operating costs

2,091

 

8

 

1,222

 

4

Total

Php26,322

 

100

 

Php27,495

 

100

 

Depreciation charges increased byPhp1,680 million, or 23%, to Php8,849 million due to an expanding depreciableasset base mainly as a result of completed projects.

 

Compensation and benefits increasedby Php53 million, or 1%, to Php7,717 million.  This increase reflects salaryincreases granted to PLDT’s non-supervisory employees pursuant to a newthree-year collective bargaining agreement signed in March 2001, which werepartially offset by the reduced overtime costs.

 

Maintenance expenses increased by Php126million, or 4%, to Php3,200 million primarily due to the effect of the pesodepreciation on dollar-denominated maintenance costs, relating principally tothe maintenance of our domestic fiber optic network.

 

Provision for doubtful accountsincreased by Php519 million, or 22%, to Php2,880 million on account of higherprovision for anticipated uncollectible accounts from various second-tierinternational telecommunications carriers.  To address the receivable problemwith these second-tier carriers, PLDT adopted a prepayment policy as aprerequisite for PLDT's acceptance of their incoming international traffic.Our provision for doubtful accounts in 2001 and 2000 was equivalent toapproximately 6% and 5% of our fixed line related revenues, respectively.

 

Selling and promotionexpenses decreased by Php475 million, or 31%, to Php1,050 million mainly due toa significant drop in PLDT's advertising and public relations expenses duringthe second half of 2001 as part of its cost-containment initiatives.

 

Professional and other service feesdeclined by Php99 million, or 9%, to Php1,008 million as a result of thereduction of PLDT's consultancy and payment facility expenses.  The decrease inPLDT's consultancy was a result of the streamlining of our outsourced servicesin line with our cost reduction initiatives.

 

Rental expense increasedby Php87 million, or 12%, to Php815 million due mainly to the effect of thepeso depreciation on dollar-denominated rental of international satellitecircuits.

 

Taxes and licenses decreased byPhp99 million, or 19%, to Php420 million mainly on account of lower radiolicenses and permit fees paid in 2001 than in 2000 and lower property taxesresulting from disposal of some of PLDT's idle real properties.

 

Asset impairment charges aggregatingof Php265 million related to PLDT’s capitalized interest in respect ofqualifying assets relating to ACeS Philippines’ property under construction.No similar charges were recorded in 2000.

 

Other operating costs decreased byPhp869 million, or 42%, to Php1,222 million primarily due to PLDT’simplementation of cost-containment initiatives.

 

*Wireless*

 

Consolidated operating expensesassociated with our wireless business in 2001 totaled Php57,537 million, anincrease of Php34,372 million, or 148%, from Php23,165 million in 2000.  Asignificant portion of this increase was due to non-cash charges such asdepreciation charges and the asset impairment charge for Smart’s analog/ETACSand Piltel’s analog/CDMA assets in 2001 and the write-off of the customer listsrelating to Smart’s analog/ETACS service in 2001.

 

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

 

 

**Years Ended December 31,**

 

2000

** **

**%**

 

**2001**

 

**%**

 

**(in millions)**

Wireless:

 

 

 

 

 

 

 

Asset impairment charges

Php –

 

–

 

Php 19,470

 

34

Cost of cellular handsets sold

6,774

 

29

 

15,179

 

26

Depreciation 

5,553

 

24

 

7,251

 

13

Amortization of intangibles

4,367

 

19

 

6,021

 

10

Selling and promotions

1,518

 

7

 

1,799

 

3

Compensation and benefits

1,173

 

5

 

1,798

 

3

Rent

776

 

3

 

1,537

 

3

Maintenance

894

 

4

 

1,369

 

2

Professional and other service fees

371

 

2

 

1,242

 

2

Taxes and licenses

225

 

1

 

499

 

1

Provision for doubtful accounts

556

 

2

 

310

 

1

Other operating costs

958

 

4

 

1,062

 

2

Total

Php23,165

 

100

 

Php57,537

 

100

 

Asset impairment charges of Php19,470 million were recognized in2001 on account of charges amounting to Php12,938 million, Php5,859 million andPhp673 million recognized by Piltel, Smart and ACeS Philippines for theiranalog/CDMA, analog/ETACS assets and ground station and related facilities,respectively.  The following impairment indicators led to the recognition ofimpairments charges by Piltel and Smart for its analog assets: decline insubscriber numbers for analog cellular services, migration of customers fromanalog services to GSM services and generally declining usage.  In addition, wewrote off customer lists pertaining to Smart’s analog/ETACS service amountingto Php2,077 million in 2001 in line with the recognition of an asset impairmentcharge in respect of Smart’s analog/ETACS assets.  No asset impairment chargeswere recognized in 2000.

 

Cost of cellular handsets soldincreased by Php8,405 million, or 124%, to Php15,179 million resulting fromchanges in the prices and production life of popular handset models coupled bythe increase in Smart’s and Piltel’s subscriber base.

 

Depreciation charges increased byPhp1,698 million, or 31%, to Php7,251 million due to an expanding depreciableasset base mainly as a result of continued significant expansion and upgradingof Smart's GSM network.

 

Amortization of intangiblesincreased by Php1,654 million, or 38%, to Php6,021 million mainly due to thefull-year amortization of goodwill relating to Smart in 2001; in 2000, goodwillamortization commenced subsequent to Smart’s acquisition on March 24, 2000.

 

Selling and promotion expensesincreased by Php281 million, or 19%, to Php1,799 million, on account ofincreased advertising expenses attributable to subscriber acquisitioncampaigns.

 

Compensation and benefits rose byPhp625 million, or 53%, to Php1,798 million primarily due to an increase inSmart's employee headcount from 3,453 as of December 31, 2000 to 5,035 as ofDecember 31, 2001 to meet the staffing requirements of a rapidly expandingcellular network and subscriber base.

 

Rental expense increased by Php761million, or 98%, to Php1,537 million on account of higher site rentals incurredby Smart for its increasing number of base stations and mobile switchingcenters.

 

Maintenance expense increased byPhp475 million, or 53%, to Php1,369 million as a result of increasedmaintenance costs for Smart's additional cellular network equipment.

 

Professional and other service feesincreased by Php871 million, or 235%, to Php1,242 million due to higherprofessional fees paid to technical consultants for the operation andmaintenance of Smart's GSM network.

 

Taxes and licenses increased byPhp274 million, or 122%, to Php499 million as a result of increased NTCsupervision fees and radio permit fees.  See Note 25 to our financialstatements in Item 18 for a discussion relating to NTC supervision andregulation fees.

 

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

 

Other operating costs increased byPhp104 million, or 11%, to Php1,062 million attributable to Smart’s increasesin various other operating expenses, such as insurance, printing and officesupplies.

 

*Information andCommunications Technology*

 

Consolidated operating expensesassociated with our information and communications technology business amountedto Php1,204 million in 2001, an increase of Php867 million, or 257%, fromPhp337 million in 2000, reflecting increased costs brought about by ePLDT'scommercial operations that started on February 5, 2001 and the start-up natureof ePLDT's businesses and subsidiaries.

 

***Net Operating Income***

 

Our consolidated net operating lossin 2001 amounted to Php5,942 million, compared to an operating income ofPhp10,524 million in 2000, mainly resulting from asset impairment charges forSmart’s and Piltel’s analog/ETACS and analog/CDMA assets, respectively.

 

The following table shows the break-down of our consolidated netoperating income (loss) and net operating margin for the years ended December31, 2000 and 2001 by business segment:

 

 

**Years Ended December 31,**

 

2000

** **

**%**

 

**2001**

 

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

Fixed line 

Php18,988

 

180

 

Php18,828

 

(317)

Wireless 

(8,366)

 

(79)

 

(23,940)

 

403

Information and communications technology 

(98)

 

(1)

 

(830)

 

14

Total

Php10,524

 

100

 

Php(5,942)

 

100

 

*Fixed Line*

 

In 2001, our fixed line businesssegment contributed an operating income of Php18,828 million, a decrease ofPhp160 million, or 1%, from Php18,988 million in 2000.  Although the declinesin our national and international long distance revenues were more than offsetby the increases in revenues from our local exchange service and data and othernetwork services, the overall increase in our consolidated fixed line operatingrevenues was insufficient to cover the increase in consolidated fixedline-related operating expenses, particularly depreciation charges.

 

*Wireless*

 

Our wireless business segment registered an operating loss ofPhp23,940 million in 2001, as against an operating loss of Php8,366 million in2000.  The increase in net operating loss was attributable to asset impairmentcharges recognized both by Smart and Piltel in 2001.

 

*Information and Communications Technology*

 

In 2001, our information andcommunications technology business segment posted an operating loss of Php830million from an operating loss of Php98 million incurred in 2000.  Thissignificant increase in operating losses was attributable to ePLDT, whichstarted commercial operations only on February 5, 2001.

 

***Other Expenses — Net***

 

The following table shows our consolidated other expenses – netfor the years ended December 31, 2000 and 2001:

 

 

**Years Ended December 31,**

 

**2000**

**2001**

 

**(in millions)**

 

 

 

Interest expense and related items

Php16,144

Php17,101

Capitalized interest

(2,603)

(2,404)

Subtotal

Php13,541

Php14,697

Interest and other income

(1,376)

(1,278)

Other expenses

33,089

10,829

Total

Php45,254

Php24,248

 

On a consolidated basis, our otherexpenses, net of other income, decreased by Php21,006 million, or 46%, toPhp24,248 million in 2001 from Php45,254 million in 2000 due to the combinedeffects of:

 

•        an increase in interest expense and related items, net ofcapitalized interest, of Php1,156 million mainly due to increases in PLDT’s andSmart’s interest expenses of Php1,084 million and Php354 million in respect ofits foreign-currency denominated liabilities as a result of the pesodepreciation, partially offset by the decrease in interest expenses of MabuhaySatellite amounting to Php63 million;

 

•        a decrease in interest and other income of Php98 million mainlydue to a one-time gain of Php924 million realized by PLDT from the terminationof a foreign currency swap agreement in 2000; and

 

•        a decrease in other expenses-net largely due to foreign exchangelosses in 2000 attributable to our dollar-denominated liabilities.  At December31, 2000, the exchange rate was Php49.986 to US$1.00, equivalent to a 24%depreciation of the peso relative to the rate at the end of 1999.

 

***Loss Before Income Tax, Cumulative Effect of Change inAccounting Principles and Minority Interest in Net Income of ConsolidatedSubsidiaries***

 

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

 

In 2001, our loss before incometax, cumulative effect of change in accounting principle and minority interestin net losses of consolidated subsidiaries was Php30,190 million, a decrease ofPhp4,540 million, or 13%, from a net loss of Php34,730 million in 2000.

 

***Net Loss***

 

As a result of the foregoing, ourconsolidated net loss in 2001 stood at Php27,782 million, as compared to a netloss of Php29,258 million in 2000.  The substantial net loss posted in 2001 waslargely due to impairment charge aggregating Php19,470 million mostly inrespect of Smart’s analog/ETACS assets and Piltel’s analog/CDMA assets.  In2000, the substantial net loss was attributable to foreign exchange losses ofPhp32,943 million due to a 24% peso depreciation during 2000.

 

Accordingly, earnings per common share, both basic and diluted,decreased to Php176.85 in 2001 from Php193.48 in 2000.  Since the amount ofdividends on preferred shares over the equivalent number of common shares weregreater than the basic earnings per share, the amounts for basic and dilutedearnings per share are the same.

 

**Liquidity and Capital Resources**

 

The following table shows ourconsolidated cash flows, capitalization and other selected financial data as ofand for the years ended December 31, 2000, 2001 and 2002:

** **

 

Years Ended December 31,

 

**2000**

**2001**

**2002**

 

**(in million pesos)**

Cash Flows

 

 

 

Net cash provided by operating activities

20,727

20,168

39,692

Net cash used in investing activities

25,183

29,376

17,082

Capital expenditures

26,567

28,201

17,154

Net cash provided by (used in) financing activities

5,511

3,786

(16,009)

 

 

 

 

 

 

 

 

 

December 31,

 
 

**2001**

**2002**

 
 

**(in million pesos)**

 
Capitalization

 

 

 
Cash and cash equivalents

4,276

10,974

 
Short-term debt

 

 

 
Current portion of long-term debt

20,229

19,627

 
Notes payable

6,462

760

 
Long-term debt – net of current portion

169,870

171,323

 
Total debt

196,561

191,710

 
Stockholders’ equity

24,472

16,413

 
Total capitalization

221,033

208,123

 
 

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

 

Through these initiatives, PLDT wasable to successfully raise the necessary external financing to fund itsoperating, investing and debt service requirements.  On January 25, 2002, PLDTsigned two loan agreements with *Kreditanstalt fur Wiederaufbau*, or KfW,which provided PLDT with a refinancing facility of US$149 million.  On May 2,2002, PLDT completed a global offering of notes in the aggregate amount ofUS$350 million with a simultaneous tender offer for its 8.5% Notes due 2003 and10.625% Notes due 2004, which closed on May 15, 2002.  On July 26, 2002, PLDTsigned a loan agreement with JBIC for a JP¥9,760 million credit facility underJBIC’s Overseas Investment Loan Program.  On September 4, 2002, PLDT signed aUS$145million syndicated multicurrency term loan facility, the first tranche ofwhich was drawn in June 18, 2003 to refinance a portion of a Japanese yensyndicated term loan which matured on the same date, and the second tranche tobe drawn in December 2003 to refinance a portion of a U.S. dollar term loanfalling due in December 2003.

 

As of December 31, 2002,consolidated cash and cash equivalents amounted to Php10,974 million.Principal sources of consolidated cash in 2002 were cash flows from operationsamounting to Php39,692 million, drawings from existing long-term credit facilitiestotaling Php36,011 million, and net equity funds raised through PLDT'ssubscriber investment plan amounting to Php464 million.  These funds were usedprincipally for capital outlays of Php17,154 million, including capitalizedinterest of Php1,344 million and debt payments of Php43,896 million.

 

Principal sources of consolidatedcash in 2001 and 2000 were cash flows from operations amounting to Php20,168million and Php20,727 million, respectively; drawings from long-term andshort-term credit facilities amounting to Php21,829 million and Php13,483million, respectively, in 2001, and Php29,751 million and Php7,322 million,respectively in 2000; and equity funds raised through the issuance of capitalstock amounting to Php232 million in 2001.  These funds were used principallyfor capital outlays of Php28,201 million (including capitalized interest ofPhp2,404 million) and payments of long-term debt amounting to Php16,990 millionin 2001; and capital outlays of Php26,567 million, (including capitalizedinterest of Php2,603 million) and payments of long-term and short-term debtamounting to Php43,219 million in 2000.

 

***Operating Activities***

 

On a consolidated basis, net cashflows from operating activities in 2002 amounted to Php39,692 million, anincrease of Php19,524 million, or 97%, from Php20,168 million in 2001 anddecreased by Php559 million, or 3% from Php20,727 million in 2000.

 

A growing portion of ourconsolidated cash flow is generated by our wireless and data businesses.  Therevenue contribution of these businesses has grown over the last three yearswith wireless business contributing 50%, 42% and 25% in 2002, 2001 and 2000,respectively, and data business contributing an average of 6% in 2002 and 2001,and 5% in 2000.  Revenues from our local exchange service accounted forapproximately 23% of our consolidated operating revenues in 2002, down from 27%in 2001 and from 31% in 2000.

 

Our dependence on international andnational long distance services has decreased over the past several years.  In2002, 2001 and 2000, these services together accounted for 20%, 25% and 39%,respectively, of our consolidated operating revenues.  Revenues from our longdistance businesses declined by 9% in 2002 compared to 2001 and by 15% in 2001compared to 2000 due to cellular substitution and declining prices.

 

PLDT's contribution to ourconsolidated cash flows from operations in 2002 was Php17,242 million, anincrease of Php4,321 million, or 33%, from Php12,921 million in 2001, which inturn represents a decrease of Php4,782, or 27%, from Php17,703 in 2000.  Theincrease in 2002 was due to a decrease in PLDT’s working capital management,including the decline in level of settlements of certain liabilitiesoutstanding during 2002, compared to 2001.  The decrease in 2001, on the otherhand, was attributable to settlements in 2001 of certain payables outstandingat the end of 2000.

 

Our subsidiaries, particularly Smart, contributed significantcash from operations.  In 2002, Smart generated cash from operations of Php19,725million, or approximately 50% of consolidated cash flow from operations.  In2001, Smart generated cash from operations of Php11,652 million, or 58%, of ourconsolidated cash flow from operations.  Smart’s strong cash flows reflect thecontinuing strong performance of its cellular business.  However, Smart issubject to loan covenants that restrict its ability to pay dividends, redeempreferred shares, make distributions to PLDT or otherwise provide funds to PLDTor any associate without the consent of certain of its lenders.  Afterreceiving approvals from Finnvera and certain lenders for the payment ofdividends to PLDT in an amount not to exceed 40% of Smart’s net income underPhilippine GAAP in 2001, Smart made its first dividend payment of Php1,540million to PLDT in December 2002.  In addition, Smart paid dividends in theamount of Php4,300 million to PLDT in June 2003, representing 70% of Smart’s2002 net income under Philippine GAAP, after receiving similar approvals fromFinnvera and certain lenders.  Smart will be required to obtain further waiversto pay additional dividends in future periods.

 

***Investing Activities***

 

On a consolidated basis, net cashused in investing activities in 2002 was Php17,082 million, a decrease ofPhp12,294 million, or 42%, from Php29,376 million in 2001 mainly as a result ofSmart's lower capital spending.

 

Our consolidated capitalexpenditures in 2002 totaled Php17,154 million, a significant reduction ofPhp11,047 million, or 39%, from Php28,201 million in 2001 due primarily toSmart’s and PLDT’s lower capital spending.  Smart's capital spending ofPhp7,564 million in 2002 was used to further expand and upgrade its GSM networkto meet the increasing demand for cellular services.  PLDT's capital outlay ofPhp8,194 million in 2002 was principally used to finance the continuedbuild-out of its data and broadband/IP infrastructure and investment in AsiaPacific Cable Network 2.  ePLDT and its subsidiaries’ capital spending ofPhp607 million was used to fund its Internet data center, otherInternet-related business initiatives and call center business investments.The remaining balances were spent by other subsidiaries mainly PLDT Global,Mabuhay Satellite and Subic Telecom.  In December 2002, Smart acquired certainPLDT assets, consisting of a portion of PLDT’s digital fiber optic cable fromLuzon to Mindanao and certain related equipment, valued at Php4,138 million.

 

Under the terms of Piltel’s debtrestructuring plan, PLDT issued a Letter of Support for the benefit of Pilteland its creditors under which PLDT has agreed to cover any funding shortfallsof Piltel up to a maximum amount of US$150 million.  Under the Letter ofSupport, PLDT provided to Piltel Php2,317 million (US$48 million) in 2000,Php2,039 million (US$41 million) in 2001, and Php571 million (US$11 million) in2002. Drawings under the PLDT Letter of Support are converted into U.S. dollarsat the prevailing exchange rates at the time of the investment.  As of December31, 2002, the remaining undrawn balance under the PLDT Letter of Support wasUS$50 million.  If, among other things, Piltel's financial and operatingperformance were to deteriorate or any amounts were required to be paid toPiltel's unrestructured creditors in cash to settle their claims (aggregateprincipal of US$8 million as of June 30, 2003), additional drawings under theLetter of Support would likely be required to provide all or a portion of thefunds needed by Piltel.  We cannot assure you that additional amounts will nothave to be drawn under the Letter of Support nor can we predict when theremaining undrawn balance under the Letter of Support will be exhausted.Piltel is currently in discussion with its unrestructured creditors and isseeking to restructure such debt on the terms and conditions of Piltel’s debtrestructuring.  However, Piltel may not be able to restructure or otherwise pay the claims relating to itsunrestructured debt.  See “Item 3. Key Information — Risk Factors — RisksRelating to Us — Piltel has experienced financial difficulties and we cannotassure you that it will be able to discharge any of its debt or otherobligations, including its debts or other obligations owed to us and ouraffiliates.”

 

For 2003, we anticipate lowercapital expenditures and reduced equity investments.  Our 2003 budget forconsolidated capital expenditures is Php15,000 million, of which Php6,000million is budgeted to be spent by PLDT for its fixed line data and networkservices and Php9,000 million is budgeted to be spent by Smart for furtherexpansion and upgrading of its GSM network.

 

On a consolidated basis, net cash used in investing activitiesincreased in 2001 and 2000 due to Smart’s higher capital spending.  On aconsolidated basis, net cash used in investing activities increased by Php4,193million, or 17%, to Php29,376 million in 2001 from Php25,183 million in 2000.

 

Our consolidated capital expenditures increased in 2001 and2000, primarily due to higher capital spending by Smart in order to expand andupgrade its GSM network to meet the increasing demand for cellular services.During these two years, PLDT's capital outlay was principally used to financethe continued build-out of its data and broadband/IP infrastructure andinvestment in Asia Pacific Cable Network 2.  Our consolidated capitalexpenditures in 2001 totaled Php28,201 million mainly from Smart's and PLDT'scapital spending of Php17,961 million and Php9,252 million, respectively.  Ourconsolidated capital expenditures of Php26,567 million (including capitalizedinterest of Php2,603 million) in 2000 was largely attributable to PLDT andSmart.

 

***Financing Activities***

 

On a consolidated basis, we used net cash of Php16,009 millionfor financing activities in 2002 as against net cash provided from financingactivities of Php3,786 and Php5,511 million for the years 2001 and 2000,respectively.  The net cash used in financing activities in 2002 as against netcash provided by financing activities in 2001 was mainly due to PLDT’s debtpayments in line with its liability management program.  The net cash providedby financing activities was lower in 2001 than in 2000 primarily due toproceeds from the issuance of PLDT's common shares to NTT CommunicationsCapital (UK) Limited, or NTTC-UK, a wholly-owned subsidiary of our strategic partnerNTT Communications, amounting to Php13,878 million in 2000.  On a stand-alonebasis, Smart’s financing activities in 2002 used net cash of Php11,764 million,specifically for debt payments in excess of loan drawdowns.  Conversely,Smart’s financing activities in 2001 and 2000 provided net cash of Php11,798million and Php7,618 million, respectively, representing drawings from variouscredit facilities.

* *

*Debt Financing*

 

Additions to our consolidatedlong-term debt in 2002 totaled Php36,011 million, consisting of (1) proceedsfrom PLDT’s issuance of notes amounting to an aggregate of Php17,625 million(US$350 million) and drawings totaling Php8,746 million, primarily from PLDT’sloan facilities extended and/or guaranteed by various export credit agencies;(2) Smart’s drawings of Php6,074 million, principally from its Phase 5 GSM loanfacilities; and (3) ePLDT’s drawing of Php141 million from a three-year termloan facility.

 

Our consolidated indebtedness as ofDecember 31, 2002 was Php191,710 million, lower by Php4,851 million, or 2%,compared to Php196,561 million as of December 31, 2001 due mainly to thereductions of Php2,379 million and Php3,310 million in PLDT’s and Smart’sindebtedness, respectively.  PLDT’s non-consolidated indebtedness decreased by 2%,from Php143,486 million as of December 31, 2001 to Php141,107 million as ofDecember 31, 2002, due to debt payments in line with our thrust to reducePLDT’s overall indebtedness.  Smart’s indebtedness as of December 31, 2002stood at Php22,891 million, a decrease of 13% from Php26,201 million as ofDecember 31, 2001.

 

As of December 31, 2002, PLDT hadundrawn committed dollar-denominated long-term credit facilities of US$273million, inclusive of the US$99 million undrawn portion of the US$149 million KfWrefinancing facility and the undrawn US$145 million multicurrency refinancingfacility.  Smart also had undrawn committed dollar-denominated long-term creditfacilities of US$108 million, as of December 31, 2002.  In addition, Smartstill has available facilities under its €50million Framework Agreement with HypoVereinsbank up to a maximum aggregateamount of €43 million.

 

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

 

 

**Consolidated**

**Maturity**

**(in millions)**

 

 

2003

Php19,627

2004

22,438

2005

28,332

2006

25,941

2007 and onwards

94,612

 

Approximately Php70,397 million principal amount ofour consolidated outstanding long-term debt as of December 31, 2002 isscheduled to mature over the period 2003 to 2005.  Of this amount,approximately Php48,100 million is attributable to PLDT, Php18,349 million toSmart, and the remainder to Mabuhay Satellite, MaraTel, ePLDT and Piltel.

 

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

 

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

 

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

 

On September 4, 2002, PLDT signedan agreement with a syndicate of banks for a US$145 million multicurrency termloan facility consisting of Japanese yen and U.S. dollar commitments ofJP¥10,914 million and US$53 million, respectively.  This facility has beensplit into two tranches:  Tranche A was drawn on June 18, 2003 in the amount ofJP¥7,723 million and US$34 million to refinance a portion of a Japanese yensyndicated term loan which matured on the same date; and Tranche B, whichamounts to JP¥3,191 million and US$19 million, and which is to be drawn inDecember 2003 and is intended to refinance a portion of the US$52 millionprincipal amount outstanding under the U.S. dollar term loan falling due inDecember 2003.  This new syndicated facility will amortize semi-annuallybeginning June 2004 and will mature in December 2006.

 

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

 

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

 

*Covenants*

 

Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests.  The basis is financial position and results ofoperations under Philippine GAAP at relevant measurement dates, principally atthe end of quarterly periods.

 

The financial tests under our debtinstruments, as amended, include maintaining a positive tangible net worth andcompliance with the following ratios:

 

•        interest coverage ratio, calculated on a non-consolidated basis,excluding PLDT’s equity share in net earnings or losses of investees of notless than 150%, 180% or 200%;

 

•        total debt to EBITDA on a non-consolidated basis of not more than6.0:1 until March 2003, not more than 5.5:1 from June 2003 to December 2003,not more than 5.0:1 from March 2004 to June 2004, not more than 4.5:1 fromSeptember 2004 to December 2004 and not more than 4.0:1 from March 2005 andthereafter;

 

•        long-term indebtedness to appraised value of equity/tangible networth on a non-consolidated basis, ranging from not more than 1.1:1 to not morethan 3.0:1;

 

•        current ratio on a non-consolidated basis, ranging from not lessthan 0.9:1 to not less than 1.2:1;

 

•        debt service coverage ratio on a non-consolidated basis of atleast 1.1:1; and

 

•        debt to free cash flow ratio on a non-consolidated basis of notmore than 6.0:1 from March 31, 2003 to June 30, 2003, not more than 5.5:1 fromSeptember 30, 2003 to June 30, 2004, not more than 5.0:1 from September 30,2004 to June 30, 2005, not more than 4.5:1 from September 30, 2005 to June 30,2006, and not more than 4.0:1 from September 30, 2006 and thereafter.

 

In addition, some of PLDT's debtinstruments contain covenants requiring PLDT to comply with specified financialtests on a consolidated basis as adjusted to exclude Piltel’s debts.  Theseinclude:

 

•        long-term debt to appraised value of equity/tangible net worth ofnot more than 2.33:1;

 

•        total debt to EBITDA of not more than 4.5:1 in 2003 and 2004, andnot more than 4.0:1 in 2005 and thereafter; and

 

•        current ratio ranging from not less than 0.75:1 to not less than0.9:1.

 

For purposes of deriving appraisedvalue of equity/tangible net worth, we determined the revaluation surplus inrespect of PLDT’s properties.  PLDT’s properties in service as of December 31,1997 were reappraised by an independent firm of appraisers to reflect theirsound value based on the December 29, 1997 exchange rate of Php40.116 toUS$1.00.  As of December 31, 1997, the sound value was Php225,966 million andthe revaluation surplus was Php82,723 million.  This reappraisal was approvedby the NTC on January 28, 2000 under NTC Case No. 98-183.  As of December 31,2002, the revaluation surplus on PLDT’s 1997 appraised properties still inservice, net of a 5% disallowance factor, amounted to Php44,984 million.

 

The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the peso relative to the U.S. dollar, pooroperating performance of PLDT and its consolidated subsidiaries, impairment orsimilar charges in respect of investments or other assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expense.  Interest expense may increase as a result of variousfactors, including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the peso, thelowering of PLDT's credit ratings or the credit ratings of the Philippines,increases in reference interest rates, and general market conditions.  Sinceapproximately 94% of PLDT's total consolidated long-term debt is denominated inforeign currencies, principally in U.S. dollars, many of these financial ratiosand other tests are negatively affected by any weakening of the peso.  The pesodeclined by approximately 1% against the U.S. dollar to an average of Php51.583to US$1.00 in 2002 from an average of Php51.009 to US$1.00 for the year 2001.At September 30, 2003, the exchange rate was Php54.877 to US$1.00, equivalentto a 3% depreciation of the peso relative to the rate at the end of 2002.

 

PLDT's ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of its fixed line business.PLDT cannot be assured of the benefit of net revenues and cash flows generatedby Smart and PLDT’s other investees in assisting in complying withnon-consolidated covenants.

 

We have maintained compliance withall of our financial ratios and restrictive covenants as measured under ourloan agreements and other debt instruments.  However, if negative factorsadversely affect our financial ratios, we may be unable to maintain compliancewith these ratios and covenants or be unable to incur new debt.  During 2001,our performance under certain of these ratios, including our 150% interestcoverage and total debt to EBITDA ratios under Philippine GAAP, was close tothe permitted thresholds.  In August and September 2001, we obtained amendmentsto relax certain of PLDT's covenants setting a maximum ratio of total debt toEBITDA on a non-consolidated basis.  Under some of our loan agreements, thisratio requirement has become more restrictive at the end of the second quarterof 2003 and will continue to become more restrictive in increments thereafter,which will make it more difficult for PLDT to maintain compliance with thisratio in the future.  Inability to comply with our financial ratios andcovenants or raise new financing could result in a declaration of default andacceleration of some or all of our indebtedness.  The terms of some of our debtinstruments have no minimum amount for cross-default.

 

Under PLDT's loan agreement thatrequires maintenance of an interest coverage ratio of at least 150%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)PLDT's non-consolidated after-tax net income, excluding equity share in netearnings or losses of investees, after adding back interest charges, net ofinterest capitalized to construction, on all indebtedness for the 12 monthsimmediately preceding the calculation date to (y) the estimated aggregateinterest charges payable, net of interest to be capitalized to construction,during the 365-day period following the calculation date on all of PLDT'sindebtedness outstanding on such calculation date.  Our interest coverage ratiocalculated on the basis of Philippine GAAP under this agreement for the12-month period ending December 31, 2002 was 172% as against the requiredthreshold of not less than 150%.

 

Under PLDT's loan agreements thatrequire maintenance of an interest coverage ratio of at least 180%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)our after-tax net income for the 12 months immediately preceding thecalculation date after (1) adding back interest charges, depreciation, amortizationand other non-cash charges (including equity in the net earnings or loss ofinvestees but excluding provision for doubtful accounts) and provision forincome taxes, and (2) deducting capitalized subscriber acquisition costs, to(y) the estimated aggregate interest charges payable during the 365-day periodfollowing the calculation date on all of PLDT's indebtedness outstanding onsuch calculation date.  Our interest coverage ratio calculated on the basis ofPhilippine GAAP under these agreements for the 12-month period ending December31, 2002 was 290% as against the required threshold of not less than 180%.

 

Under PLDT's loan agreements that require maintenance of aninterest coverage ratio of at least 200%, interest coverage ratio is the ratiocalculated on the basis of Philippine GAAP of (x) our after-tax net incomeafter adding back reserves for higher plant replacement costs, income taxes,interest charges, depreciation and non-cash charges (including equity in thenet earnings or loss of investees and provision for doubtful accounts) during12 consecutive months within the 15 calendar months immediately preceding thecalculation date, to (y) the sum of (1) the estimated aggregate interestcharges on all indebtedness, net of interest capitalized to construction, plus(2) dividends on mandatorily redeemable preferred stock, in each case scheduledto be paid during the 12 months following the calculation date.  Our interestcoverage ratio calculated on the basis of Philippine GAAP under these agreementsfor the 12-month period ended December 31, 2002 was 393% as against therequired threshold of not less than 200%.

 

Non-consolidated total debt toEBITDA is the ratio calculated on the basis of Philippine GAAP of (x) PLDT'stotal indebtedness (not including amounts payable by PLDT to Piltel under theLetter of Support) to (y) net income for the preceding 12 months, after addingback interest accrued on all indebtedness, depreciation, amortization and othernon-cash charges (including equity in net earnings or loss of investees, butexcluding provision for doubtful accounts) and provision for income taxes anddeducting any capitalized subscriber acquisition costs.  As of December 31,2002, our non-consolidated total debt to EBITDA calculated on the basis ofPhilippine GAAP was 4.93:1 as against the required threshold of not more than6.0:1.

 

Non-consolidated long-termindebtedness to appraised value of equity (or under some covenants, to tangiblenet worth) is the ratio calculated on the basis of Philippine GAAP of (x)PLDT's aggregate indebtedness (or portion of such indebtedness) due more thanone year following the calculation date and par value of all mandatorilyredeemable preferred stock to (y) the sum of the aggregate par value of all ofPLDT's outstanding common and convertible preferred stock (other than preferredstock subject to mandatory redemption), paid-in capital in excess of the parvalue of such stock, PLDT's retained earnings, reserve for higher plantreplacement costs and revaluation increment arising from independent certifiedappraisals of PLDT's telephone plant approved by the NTC.  As of December 31,2002, our non-consolidated long-term indebtedness to appraised value ofequity/tangible net worth calculated on the basis of Philippine GAAP was 0.95:1as against the most restrictive threshold of not more than 1.10:1.

 

Non-consolidated current ratio isthe ratio calculated on the basis of Philippine GAAP of (x) non-consolidatedcurrent assets to (y) non-consolidated current liabilities, excluding fromcurrent liabilities 50% of the portion of long-term indebtedness due within oneyear of the calculation date.  As of December 31, 2002, our non-consolidatedcurrent ratio calculated on the basis of Philippine GAAP was 1.49:1 as againstthe most restrictive threshold of not less than 1.20:1.

 

Debt service coverage ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s cash flow fromoperations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from investees, cash received upon anyredemption of redeemable preferred shares issued by Smart, any cash receivedunder PLDT’s subscriber investment plan, and interest income received less (2)capital expenditures (excluding capitalized interest) and investments ininvestees for the 12 months immediately preceding the calculation period plus(3) PLDT’s closing cash balance as of the last day of the calculation date to(y) the sum of the projected interest charges and principal debt repayments(excluding debt to be repaid with a refinancing facility) during the 12 monthsfollowing the calculation date.  The first calculation date was on March 31,2003, where our debt service coverage ratio for the 12-month period ended March31, 2003 calculated on the basis of Philippine GAAP was 1.36:1 as against therequired threshold of not less than 1.10:1.

 

Debt to free cash flow ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s debt less PLDT’sclosing cash balance of the last day of the calculation period to (y) PLDT’scash flow from operations after adding back interest charges (to the extentpreviously deducted) plus (1) dividends received from investees, cash receivedupon any redemption of redeemable preferred shares issued by Smart, any cashreceived under PLDT’s subscriber investment plan, and interest income receivedless (2) capital expenditures (excluding capitalized interest) and investmentsin investees for the 12 months immediately preceding the calculation date.  Thefirst calculation date was on March 31, 2003, where our debt to free cash flowratio for the 12-month period ended March 31, 2003 calculated on the basis ofPhilippine GAAP was 5.1:1 as against the required threshold of not more than6.0:1.

 

Our consolidated long-term debt toappraised value of equity/tangible net worth, consolidated total debt to EBITDAand consolidated current ratios during the year 2002, each to be calculated onthe basis of Philippine GAAP, remained within the limits stipulated in thevarious loan agreements, including the most restrictive current ratio thresholdof not less than 0.9:1.

 

PLDT's debt instruments contain anumber of other negative covenants that, subject to certain exceptions andqualifications, restrict PLDT's ability to take certain actions withoutlenders' approval, including:

 

•        incurring additional indebtedness;

 

•        prepaying other debt; 

 

•        making investments; 

 

•        extending loans; 

 

•        extending guarantees or assuming the obligations of otherpersons;

 

•        paying dividends or other distributions, or redeeming,repurchasing or otherwise acquiring shares of PLDT’s capital stock;

 

•        disposing of all or substantially all of its assets or of assetsin excess of specified thresholds of its tangible net worth;

 

•        entering into management contracts providing for the managementof its business or operations by a third party;

 

•        creating any lien or security interest;

 

•        permitting set-off against amounts owed to PLDT;

 

•        merging or consolidating with any other company;

 

•        entering into transactions with shareholders and affiliates; and

 

•        entering into sale and leaseback transactions.

 

Under the indenture of PLDT's10.625% Notes due 2007 and 11.375% Notes due 2012, PLDT is required to complywith a number of additional covenants, including covenants that, subject tocertain exceptions, restrict PLDT's ability to (1) incur debt in the event itsratio of debt to EBITDA calculated on the basis of Philippine GAAP (calculatedon a non-consolidated basis based on definitions provided in the sameindenture, except under certain circumstances), after giving effect to theincurrence of such debt, would be less than 5.5 to 1.0 on or prior to December31, 2003, 5.0 to 1 from January 1, 2004 to December 31, 2004 and 4.5 to 1thereafter and (2) pay dividends, repurchase or redeem its capital stock, makeinvestments and prepay subordinated debt, among other things.  Subject tocertain restrictions, these covenants also restrict our ability to sell assetsand to use the proceeds of these asset sales.

 

Under the terms of the US$149million facility with KfW, PLDT is prohibited from paying any dividends oncommon stock until after December 31, 2004.  In addition, under the terms ofPLDT's US$145 million multicurrency term facility agreement and JPY5,615 million term loan facility agreement,PLDT is restricted from distributing dividends to common stockholders unless(i) no default has occurred which is continuing, and (ii) its debt to free cashflow ratio, after giving effect to the distribution of such dividends and,under certain circumstances, other adjustments to PLDT’s closing cash balance,would be less than 4.0 to 1.0.  Under other loan agreements, PLDT may notdeclare or pay dividends on any of its capital stock without the prior writtenconsent of the lenders (i) if PLDT is in default in the payment of any amountsdue and payable under such loan agreement or after the occurrence and duringthe continuance of any other event of default or potential event of defaultunder such agreements, (ii) if after giving effect to such action the currentratio would be less than 1.2 to 1 or (iii) in an amount greater than PLDT’s netincome after taxes during the fiscal year to which such payment or distributionrelates.

 

In case of a change in control ofPLDT, PLDT may be required to repurchase or prepay certain indebtedness.  Underthe terms of the 10.625% Notes due 2007 and 11.375% Notes due 2012, we arerequired to offer to purchase all outstanding notes due 2007 and notes due 2012for cash at a price of 101% of their principal amounts plus accrued interest inthe event that (1) the aggregate of NTT Communications' and First Pacific'sdirect and indirect voting interest in PLDT's outstanding capital stock havingvoting rights falls below 35% of such capital stock, (2) any person or, incertain instances, group of persons, which is not controlled directly orindirectly by First Pacific or NTT Communications acquires a direct or indirectvoting interest in PLDT's outstanding capital stock having voting rights whichequals or exceeds 35% of such capital stock and (3) if a rating agency at suchtime maintains a rating on either series of notes, the rating agency downgradesits credit rating on the series within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(1) and (2) above.

 

Under the terms of our JP¥9,760million loan from JBIC, in the event of any proposed sale or transfer of PLDT'sstock that would result in NTT Communications holding less than 14.95% ofPLDT's voting stock, we will be required to prepay immediately uponeffectiveness of such sale or transfer, all principal outstanding under theloan, together with accrued interest.  However, prepayment will not be requiredif, following such sale or transfer, (1) NTT Communications continues to haveprior approval rights with respect to all matters as to which NTTCommunications has approval rights under the stock purchase agreement pursuantto which it acquired its shares in PLDT, or (2) JBIC, in its sole discretion,determines that NTT Communications’ participation in the expansion of Smart'sGSM network capacity to extend PLDT’s cellular business in Smart would not bereduced below its level of participation as of the date of the loan agreement.

 

Under both the terms of the US$145million multicurrency term facility agreement and the terms of our JP¥5,615million term loan, if any lender so requests in writing, PLDT shall prepay infull such lender’s participation in the loan within 45 days from notificationof the change in control and no later than the date on which PLDT is requiredto repurchase its 10.625% Notes due 2007 and 11.375% Notes due 2012 (“Bonds”)from bondholders accepting the change in control offer.  A change in control isdeemed to occur when (1) the aggregate of NTT Communications’ and FirstPacific’s direct and indirect voting interest in PLDT’s outstanding capitalstock having voting rights fall below 35% of such capital stock, (2) any personor, in certain instances, group of persons, which is not controlled directly orindirectly by First Pacific or NTT Communications acquires a direct or indirectvoting interest in PLDT’s outstanding capital stock having voting rights whichequals or exceeds 35% of such capital stock and (3) if a rating agency at suchtime maintains a rating on the Bonds, the rating agency downgrades its creditrating on the Bonds within 90 days (or more, in certain circumstances)following notice of the occurrence of the events specified in (1) and (2)above.

 

PLDT’s debt instruments containcustomary and other default provisions that permit the lender to accelerateamounts due or terminate their commitments to extend additional funds under thedebt instruments.  These default provisions include:

 

•        cross-defaults and cross-accelerations that permit a lender todeclare a default if PLDT is in default under another debt instrument.  In somecases, the cross-default provision is triggered upon a payment or other defaultpermitting the acceleration of PLDT’s debt, whether or not the defaulted debt isaccelerated.  In other cases, the cross-default provision requires thedefaulted loan to be accelerated.  In some debt instruments, the cross-defaultprovision will be triggered only if the principal amount of the defaultedindebtedness exceeds a threshold amount specified in these debt instruments;

 

•        failure by PLDT to meet certain financial ratio covenantsreferred to above;

 

•        the occurrence of any material adverse change in circumstancesthat a lender reasonably believes materially impairs PLDT’s ability to performits obligations under its debt instrument with the lender;

 

•        the revocation, termination or amendment of any of the permits orfranchises of PLDT in any manner unacceptable to the lender;

 

•        the abandonment, termination or amendment of the project financedby a loan in a manner unacceptable to the lender;

 

•        the nationalization or sustained discontinuance of all or asubstantial portion of PLDT’s business; and

 

•        other typical events of default, including the commencement ofbankruptcy, insolvency, liquidation or winding up proceedings by PLDT.

 

*Financing Requirements*

 

We believe that our available cash,including cash flow from operations and drawings from existing and anticipatedcredit facilities, will provide sufficient liquidity to fund our projectedoperating, investment, capital expenditures and debt service requirements forthe next 12 months.  Further, as described above, we have completed a number ofinitiatives under our liability management program to meet our debt servicerequirements in the short and medium term.

 

We continue to pursue variousinitiatives and financing transactions with the objective of further improvingthe balance between our cash flows and debt service requirements and reducingour overall indebtedness.  In addition, PLDT has reduced its capitalexpenditures and investments, suspended dividend payments to commonshareholders and increased its application of available cash to reduce itsindebtedness.  Further, we expect to benefit from increasing revenue and cashflow contributions from our subsidiaries, particularly Smart.  After receivingapprovals from Finnvera and certain lenders for the payment of dividends toPLDT in an amount not to exceed 40% of Smart’s net income in 2001, Smart madeits first dividend payment of Php1,540 million to PLDT in December 2002.  Inaddition, Smart paid dividends in the amount of Php4,300 million to PLDT inJune 2003, representing 70% of Smart’s 2002 net income under Philippine GAAP,after receiving similar approvals from Finnvera and certain lenders.  Smartwill be required to obtain further waivers to pay additional dividends infuture periods.  We intend to secure additional financings from banks and otherinstitutional lenders primarily to finance part of our capital expenditurerequirements.  Our ability to continue to refinance our debts and the terms onwhich such refinancing can be obtained will depend on our successful financialand operating performance, conditions affecting the Philippine andinternational financial markets, the Philippine peso-to-U.S. dollar exchangerate, our credit ratings and other factors, many of which are beyond ourcontrol.  An inability to repay or refinance our debts could materially andadversely affect our results of operations and financial condition and couldresult in default on such debts and cross-default and acceleration ofsubstantially all of our other debts.

 

*Credit Ratings*

 

Our credit ratings maysignificantly affect the terms of our prospective financings, particularlyfinancing costs.  On July 29, 2003, Moody’s Investors Service changed itsoutlook on PLDT to positive and affirmed its credit rating of “Ba3” andpreferred stock rating of “B2”.  On May 30, 2003, Fitch Ratings changed itsoutlook on PLDT to stable and affirmed its credit rating of “BB-”.  On April22, 2003, Standard & Poor’s Ratings Group, or S&P, affirmed its “BB”rating and stable outlook on PLDT.  However, none of our existing indebtednesscontains provisions under which credit rating downgrades would trigger adefault, changes in applicable interest rates or other similar terms andconditions.

 

On October 29, 2002, PhilippineRatings Services Corporation, or PhilRatings, a credit rating agency in thePhilippines, announced its “PRS 1” rating for PLDT’s Php2,000 million One-Year PesoNotes for which the registration was rendered effective by the Philippine SECon April 9, 2003.  PRS 1 is the highest rating possible on PhilRatings’ scalefor short-term securities and is based on the issuer’s “strongest capabilityfor timely payment of debt on both principal and interest.”

 

A credit rating is not arecommendation to purchase, hold or sell securities as much as such rating doesnot comment as to market price or suitability for a particular investor.  Inaddition, a credit rating is subject to revision or withdrawal at any time bythe credit rating assigning organization.  We cannot assure you that the creditratings will remain in effect for any given period or that the ratings will notbe revised, downwards or upwards, by the rating agency in the future.

 

*Off-Balance Sheet Arrangements*

 

On October 10, 2002, PLDT enteredinto a Receivables Purchase Deed with a foreign institution, or the Purchaser,under which PLDT agreed (1) to sell its receivables from certain eligibleforeign carriers for an advance payment of US$50 million and (2) to service,administer and collect the receivables on behalf of the Purchaser.  ThePurchaser will have no recourse to PLDT should the eligible carrier fail orrefuse to settle the assigned/purchased receivables, except if PLDT commits abreach on its representations and warranties under the Receivables PurchaseDeed.

 

Pursuant to separate MasterReceivables Purchase and Sale Agreements with Citibank, N.A., Hong Kong andCharta Corporation of New York, PLDT made sales of eligible receivables fromcertain foreign carriers totaling US$59 million (Php3,029 million) in 2001 thatresulted in losses of US$2 million (Php103 million).  In 2002, no receivableswere sold under these two agreements.  The agreement with Charta Corporationwas terminated on June 27, 2002, while the agreement with Citibank N.A., HongKong, was terminated on September 18, 2002.

 

Losses from sales of receivablesare included in the “Other Expenses – net” account in our consolidatedstatements of operations, while receivables sold are excluded from ourconsolidated balance sheets.

 

*Equity Financing*

* *

Through our subscriber investmentplan, which requires postpaid fixed line subscribers to buy shares of our 10%Cumulative Convertible Preferred Stock as part of the upfront paymentscollected from subscribers, PLDT was able to raise Php464 million in 2002 andPhp232 million in 2001.

 

Cash dividend payments in 2002amounted to Php1,582 million, all of which were paid solely to preferredshareholders of PLDT.  In 2001, cash dividend payments totaled Php1,819million, of which Php402 million was paid to common shareholders of PLDT andthe remainder to its preferred shareholders.  The most recent cash dividendspaid by PLDT to its common shareholders was in April 2001, and it does notexpect to pay its common shareholders any dividends in 2003.

 

***Contractual Obligations and Commercial Commitments***

 

*Contractual Obligations*

 

The following table discloses ourcontractual obligations outstanding as of December 31, 2002:

 

 

**Payments Due by Period**

 

**Total**

** **

**Less than 1 year**

** **

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

** **

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

** **

**More than 5 years**

 

 

 

**(in million pesos)**

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt obligations

190,950

 

19,627

 

50,770

 

52,086

 

68,467

Long-term lease obligations

3,876

 

847

 

1,545

 

905

 

579

Unconditional purchase obligations(1)

9,929

 

224

 

2,225

 

2,155

 

5,325

Other long-term obligations

20,201

 

–

 

–

 

–

 

20,201

Total contractual cash obligations

224,956

 

20,698

 

54,540

 

55,146

 

94,572

______________

 

*(1)    **Under the Air Time Purchase Agreement with ACeS InternationalLimited, the amount disclosed in the table above for payments due within oneyear reflects a reduction in PLDT’s required payments agreed under a StandstillAgreement, while the amounts disclosed for payments due from two years onwardsare based on the original Air Time Purchase Agreement.  The parties to theStandstill Agreement have also agreed to negotiate in good faith and use theirbest efforts to reach an agreement on a revised agreement before November 15,2003 that will cover, among other matters, the amended minimum and supplementalair time payment provisions subject to the approval of ACeS InternationalLimited’s creditors.*

* *

*Long-term Debt Obligations*

 

For discussion of our long-termdebt obligations, see “— Liquidity and Capital Resources — Financing Activities— Debt Financing.”

 

*Long-term Lease Obligations*

 

***Municipal Telephone Projects***.In 1993, PLDT entered into two lease agreements with the Philippine Departmentof Transportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under theseagreements, PLDT was granted the exclusive right to perform telecommunications managementservices, to expand services, and to promote the use of the DOTC-contractedfacilities in certain covered areas for a period of 15 years.  Title to theproperties shall be transferred to PLDT upon expiration of the lease term.  Asof December 31, 2002, PLDT’s aggregate remaining obligation under theseagreements was approximately Php1,013 million.  In case of cancellation, PLDTis liable to pay Php100 million under each of the two contracts as liquidateddamages.

 

***Domestic Fiber Optic NetworkSubmerged Plant Agreement***.   On July 4, 2000, PLDT entered into anagreement with NTT World Engineering Marine Corporation for the submarine cablerepair and related services for the maintenance of PLDT's domestic fiber opticnetwork submerged plant for a period of five years up to July 4, 2005.  Underthis agreement, PLDT is required to pay NTT World Engineering MarineCorporation a fixed annual standing charge of US$2 million, excluding cost forthe use of a remotely operated submersible vehicle at US$5,000 for every day ofuse and repair cost computed at US$19,000 per day of actual repair.  As ofDecember 31, 2002, PLDT’s aggregate remaining obligation under this agreementwas approximately Php336 million.

 

***Digital PassageService Contracts***.****PLDT has existingDigital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento 25 years expiring at various dates.  As of December 31, 2002, PLDT’saggregate remaining obligation under these contracts was approximately Php149million.

 

***License Agreement with MobiusManagement Systems (Australia) Pty Ltd., or Mobius****.*PLDT hasentered 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 December 31, 2002, PLDT’s aggregate obligation under this agreementwas approximately Php86 million.

 

***Other Long-term LeaseObligations***.   We have various long-term lease contracts for periodsranging from two to ten years covering certain offices, warehouses, cell sites,telecommunication equipment locations and various office equipment.

 

*Unconditional PurchaseObligations*

 

***Air time Purchase Agreementwith ACeS International Limited***.   PLDT is a party to a Founder NSP AirTime Purchase Agreement, or ATPA, with AIL which was amended in December 1998,under which PLDT is granted the exclusive right to sell AIL services in thePhilippines.  In exchange, PLDT is required to purchase from AIL a minimum ofUS$5 million worth of air time annually over ten years commencing on the dateof commercial operations of the satellite.  In the event AIL's aggregatebilling revenues is less than US$45 million in any given year, PLDT is requiredto make supplemental air time purchase payments not to exceed US$15 million peryear during the ten-year term.

 

In March 2003, PLDT, together withthe founder shareholders, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original ATPA.  In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of US$3.8 million.  PLDT is also obliged to purchase from AIL 13,750satellite fixed phone units for the year 2003 at US$395 F.O.B. per unit,subject to quarterly price adjustment.  The parties to the Standstill Agreementalso agreed to negotiate in good faith and to use their best efforts to reachagreement on a revised ATPA before November 15, 2003 that will cover, amongother matters, the amended minimum and supplemental air time payment provisionssubject to the approval of AIL’s creditors.  As of December 31, 2002, PLDT’saggregate remaining minimum obligation under this agreement was approximatelyPhp10,077 million.

 

***International AffiliateAgreement with VeriSign, Inc., or VeriSign.***   On September 15, 2000,ePLDT entered into an agreement with VeriSign for the non-exclusive,non-transferable right and license to use the VeriSign software, brand andCertification Practice Statement for the purpose of approving, issuing,suspending or revoking digital certificates for users of the Internet orsimilar open systems in the Philippines for a period of seven years.  Underthis agreement, ePLDT is required to pay VeriSign a certain percentage of therevenue derived from the services subject to minimum annual royalty paymentsaggregating to US$1.18 million, which was subsequently reduced to US$0.9million, for the seven-year contract period.  In addition, ePLDT was requiredto pay an annual support fee totaling US$0.5 million during the first year andUS$0.3 million in each year thereafter.  As of December 31, 2002, ePLDT’saggregate remaining minimum obligation under this agreement was approximatelyPhp79 million.

 

***Other Unconditional PurchaseObligations.***PLDT has various purchase contracts for periods rangingfrom two to three years covering the use of fraud management system andsatellite hub and remote VSAT network systems.

 

*Other Long-term Obligations*

 

***Mandatory Conversion andPurchase of Shares***.   On June 4, 2001, PLDT issued a total of 2.7million shares of Series V Convertible Preferred Stock, 5.1 million shares ofSeries VI Convertible Preferred Stock and 3.8 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58.1 million shares ofPiltel’s Series K, Class I Convertible Preferred Stock pursuant to the debtrestructuring of Piltel.  In 2002, PLDT issued additional 30,100 shares ofSeries V Convertible Preferred Stock and 14,087 shares of Series VI ConvertiblePreferred Stock in exchange for a total of 220,935 shares of Series K, Class IConvertible Preferred Stock of Piltel.  In March 2003, PLDT issued 92,413 moreshares of its Series VI Convertible Preferred Stock in exchange for 462,065shares of Piltel’s Series K, Class I Convertible Preferred Stock.  Each shareof Series V, VI and VII Convertible Preferred Stock is convertible at any timeat the option of the holder into one share of PLDT’s common stock.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stock and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to sharesof PLDT’s common stock.  Under a put option exercisable for 30 days, holders ofcommon shares received on mandatory conversion will be able to require PLDT topurchase such shares of PLDT’s common stock for Php1,700 or US$36.132 orJP¥4,071.89 per share, depending on the series.

 

As of December 31, 2002, 145,320 sharesof Series V Convertible Preferred Stock and 523,843 shares of Series VIConvertible Preferred Stock had been converted to shares of PLDT’s commonstock.  As of December 31, 2002, PLDT had 2.6 million Series V ConvertiblePreferred Stock, 4.6 million Series VI Convertible Preferred Stock and 3.8million Series VII Convertible Preferred Stock issued and outstanding.  Theaggregate value of the put option based on outstanding shares as of December31, 2002 is Php20,201 million, of which Php13,181 million is payable on June 4,2008 and Php7,020 million on June 4, 2009 if all of the outstanding shares ofSeries V, VI and VII Convertible Preferred Stock were mandatorily converted andall the underlying common shares were put to PLDT.  The market value of theunderlying shares of PLDT’s common stock is Php2,968 million, based on themarket price of PLDT’s common stock of Php270 per share as of December 31,2002.

 

*Commercial Commitments*

 

As of December 31, 2002, ouroutstanding commercial commitments, in the form of letters of credit, amountedto Php3,610 million.  These commitments will expire within one year.

 

In October 1998, Smart entered intoa Frame Supply Contract with Nokia Telecommunications OY for the supply ofhardware, software and documentation for its GSM cellular network.  In the samemonth, Smart and Nokia (Philippines), Inc. signed a Frame Services Contractthat covers the design, planning, installation, commissioning, integration,acceptance testing, training, and handling of the GSM network.  In 2001, Smartissued a Master Purchase Order, or MPO, in the amount of US$200 million infavor of Nokia Networks OY for the purchase of additional equipment to expandits GSM cellular network.  As of December 31, 2002, unavailed portion underthis MPO amounted to US$107 million.  In addition, on May 30, 2003, Smartentered into a Technical Support Services Order with Nokia (Philippines), Inc.in the amount of US$8 million.

** **

**Effect of Peso Depreciation**

 

In 2000, 2001 and 2002, ouroperating revenues that have been received in U.S. dollars or in respect ofwhich we have been able to adjust our service fees to reflect changes in thepeso-to-dollar exchange rate, exceeded our U.S. dollar-linked operatingexpenses.  As a result, the depreciation of the peso against the dollar overthis period had a positive net impact on our operating profit.  However, sincesubstantially all of our indebtedness is denominated in U.S. dollars, suchdepreciation has also increased our interest expense in peso terms andincreased the peso amounts of our U.S. dollar-denominated indebtedness.  Ourcash flows are negatively affected by the higher peso cost of repaying U.S.dollar-denominated debts, and our ability to comply with financial covenantsand ratios is negatively affected by the increase in the amount of our debtsand our interest expenses in peso terms.

 

To manage foreign exchange risks,stabilize cash flows, and improve investment and cash flow planning, we enterinto forward foreign exchange contracts, foreign currency swap contracts,currency options and other hedging products aimed at reducing and/or managingthe adverse impact of changes in foreign exchange rates on our operatingresults and cash flows.  However, these hedges do not cover all of our exposureto foreign exchange risks, and hedges to cover all of our exposure are notcurrently nor readily available.  On a limited basis, we enter into interestrate swap agreements in order to manage our exposure to interest ratefluctuations.  See “Item 11. Quantitative and Qualitative Disclosures aboutMarket Risks — Foreign Exchange Risk Management” and “Item 11. Quantitative andQualitative Disclosures about Market Risks — InterestRate Risk Management.”

 

**Impact of Inflation and ChangingPrices**

 

Inflation can be a significant factor in the Philippine economy,and we are continually seeking ways to minimize its impact.  In recent periods,while decreases in the relative value of the peso have had a significant effecton us, we do not believe inflation has had a material impact on ouroperations.  The average inflation rate in the Philippines in 2002 was 3%,compared to 6%, in 2001.

 

**Other Information**

 

***Strike of PLDT Employees***

 

In 2002, PLDT decided torationalize the operations of its operator-assisted call-handling units locatedprincipally in certain of its provincial exchanges.  In recent years,operator-assisted calls have dramatically declined due to the popularity ofdirect dialing and other alternative means of communications, such as e-mailand text messaging.  Consequently, 322 employees of PLDT manning its regionaloperator services, where call volumes have significantly declined, wereseparated from service with enhanced retirement/redundancy pay package,effective December 31, 2002.  In relation to this, the *Manggagawa ngKomunikasyon sa Pilipinas*, or MKP, our rank-and-file employees’ union,filed a Notice of Strike with the Department of Labor and Employment, or DOLE,on November 8, 2002, and filed a complaint against PLDT for alleged unfairlabor practices.

 

After a series of failedconciliation meetings between representatives of PLDT and MKP before a DOLEconciliator, MKP staged a 14-day strike beginning on December 23, 2002.  Thestrike ended on January 6, 2003 by virtue of a return-to-work order issued bythe DOLE Secretary to striking employees, except those employees whoseemployment were already terminated by PLDT.  Moreover, the DOLE Secretary, inthe same order, certified the labor dispute to the National Labor RelationsCommission, or NLRC, for compulsory arbitration.  The NLRC has yet to schedulearbitration proceedings on MKP’s complaint against PLDT.

 

***U.S. FCC Proceeding on Termination Rates***

 

In May 2002, PLDT advised AT&T,MCI and other carriers of PLDT’s need to increase its termination rates byAugust 2002. Despite numerous negotiation sessions in 2002 and 2003, AT&Tand MCI refused to accept any rate increases.  PLDT unilaterally extended itsprior termination charges to each carrier while continuing offers to negotiate,first from August 1, 2002 to October 1, 2002, then until December 31, 2002, andthen, finally, despite the lack of a written agreement from AT&T and MCI,through January 31, 2003. While nearly 100 carriers worldwide, including morethan 20 U.S. carriers, have then agreed to the new termination rates andentered into new termination rate agreements with PLDT, the termination rateagreements with AT&T and MCI lapsed in December 2002, without eitheragreeing with PLDT on any provisional arrangement or final agreement on the newtermination rates.  Faced with the continuing stonewalling by AT&T and MCI,PLDT, in December 2002, was forced to notify each company that PLDT’stermination rates would finally be increased as of February 1, 2003.  Becauseno agreement was reached with either AT&T or MCI, effective as of February1, 2003, PLDT stopped terminating traffic sent directly by each of AT&T andMCI.

 

On February 7, 2003, AT&T andMCI filed separate petitions with the U.S. FCC requesting the U.S. FCC to takeaction to protect U.S. international carriers and U.S. consumers from alleged“whipsawing” behavior occurring on the U.S.-Philippine route.  “Whipsawing” isa form of anti-competitive behavior that involves the ability of foreigncarriers to obtain unduly favorable terms and conditions from U.S.international service providers by setting competing U.S. carriers against oneanother.

 

On February 7, 2003, the NTCdirected Philippine carriers to take one of two different courses of action,depending on whether such carriers had effective termination rates with theircounterparties.  If PLDT had “existing and effective agreements with foreigntelecommunication carriers relative to termination rates”, it should “complywith the terms thereof, specifically in maintaining the flow of traffic in andbetween circuits and facilities covered by such agreements.” If, however, thecounterparty and PLDT were “without existing and effective agreements relativeto termination rates,” then PLDT is “encouraged ... to negotiate and concludeagreements” with the counterparty, and “the parties may agree onprovisional/interim arrangements for continuity of service.” Each of AT&Tand MCI immediately rejected PLDT’s offer for an interim termination rateagreement.

 

On February 26, 2003, the NTCissued an Order confirming that, pursuant to its February 7 Order,“ it isunderstood that absent any provisional or interim arrangement or agreement”with U.S. carriers, there would be no provision of termination services betweenthe parties, “who are thereby encouraged to seek other routes or options toterminate traffic to the Philippines.”

 

On February 28, 2003, PLDT and MCIreached an “interim agreement” effective through March 31, 2003, whereby PLDTagreed to provide direct service under a revised termination rate structure whilethe parties negotiated a final termination rate agreement.  This interimagreement expired on April 15, 2003.

 

On March 10, 2003, the International Bureau of the U.S. FCCgranted the request of AT&T and MCI and issued an Order, directing allfacilities-based carriers subject to U.S. FCC jurisdiction to suspend paymentsfor termination services to PLDT, Globe Telecom, BayanTel, Digitel, Smart andSubic Telecom until such time as the U.S. FCC issues a Public Notice that allaffected circuits of U.S. carriers on the U.S.-Philippine route are fullyrestored.  The Order also removed the Philippines from the list ofU.S.-international routes approved for the provision of International SimpleResale.  As of June 30, 2003, receivables from U.S. carriers amounted toapproximately US$19 million, of which US$10 million was attributable to PLDT,US$6 million to Smart, and US$3 million to Subic Telecom.

 

In response to the ruling of theInternational Bureau of the U.S. FCC, the NTC issued a Memorandum Order datedMarch 12, 2003 directing all affected Philippine carriers “(1) not to acceptterminating traffic via direct circuits from U.S. facilities-based carriers whodo not pay Philippine carriers for services rendered; and (2) to take allmeasures necessary to collect payments for services rendered in order topreserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”

 

The NTC also stated in its March 12, 2003 Order that the terminationrates offered by PLDT are “fair and reasonable.”  These rates, US$0.12 perminute for calls terminating on the fixed-line network and US$0.16 per minutefor calls terminating on mobile networks, are well below the U.S. FCC benchmarksettlement rate of US$0.19 per minute for lower middle income countries such asthe Philippines and also substantially below the settlement rate of US$0.238per minute suggested by the International Telecommunications Union forcountries with teledensity between 1 to 5 telephones per 100 population.

 

On April 9, 2003, PLDT filed withthe U.S. FCC an application for review of the International Bureau’s March 10,2003 Order.  On April 24, 2003, AT&T and MCIfiled Oppositions to our application for review of the International Bureau’sMarch 10, 2003 Order and on May 5, 2003, we filed our reply to theseOppositions. See “Item 3. Key Information — Risk Factors — RisksRelating to Us — Our results of operations have been, and may continue to be,adversely affected by lower U.S. dollar revenues caused by declininginternational termination rates and competition in international long distanceservice” and “Item 8. Financial Information –– Legal Proceedings –– U.S. FCCProceeding on Termination Rates.”

 

Certain Indebtedness

 

***Overview of PLDT's Indebtedness***

 

PLDT obtains credit from a varietyof sources, including bank loans and capital markets issuances.  As of December31, 2002, PLDT on a non-consolidated basis had US$2,650 million aggregateprincipal amount of outstanding indebtedness (including short-term debt).Approximately 97% of PLDT's non-consolidated outstanding indebtedness isdenominated in currencies other than Philippine pesos, predominately U.S.dollars, and 28% accrues interest at a floating rate.  US$1,296 million of thisdebt is scheduled to mature through 2006.

 

PLDT's aggregate outstandingindebtedness (including short-term debt) on a non-consolidated basis as ofDecember 31, 2002 and their respective maturities are shown below:

 

Maturity

**Aggregate Outstanding Indebtedness**

** **

**(in millions)**

2003 (January 1 through December 31, 2003)

US$238

Php12,682

2004

284

15,109

2005

395

21,029

2006

379

20,200

2007 and onwards

1,354

72,087

 

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

 

As part of these initiatives, PLDTwas successful in raising external financing to fund a significant portion ofits projected operating, investing and debt service requirements.  On January25, 2002, PLDT signed two loan agreements with KfW that provided PLDT with arefinancing facility of US$149 million.  On May 2, 2002, PLDT completed aglobal offering of notes in the aggregate amount of US$350 million with asimultaneous tender offer for PLDT’s 8.5% Notes due 2003 and 10.625% Notes due2004, which closed on May 15, 2002.  On July 26, 2002, PLDT signed a loanagreement with JBIC in the total amount of JP¥9,760 million under JBIC’s overseasinvestment loan program.  On September 4, 2002, PLDT signed a US$145millionsyndicated multicurrency term loan facility, the first tranche of which wasdrawn in June 18, 2003 to refinance a portion of a Japanese yen syndicated termloan which matured on the same date, and the second tranche to be drawn inDecember 2003 to refinance a portion of a U.S. dollar term loan falling due inDecember 2003.

 

For a discussion of some of thecovenants, including financial ratios, negative pledges and defaults under ourdebt instruments, see “— Liquidity and Capital Resources — Financing Activities— Debt Financing — Covenants.”

 

***Loans Supported by Export Credit Agencies***

 

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

 

KfW, a German state-owneddevelopment bank, is our largest creditor.  On January 25, 2002, PLDT signedtwo loan agreements with KfW that provided PLDT with a US$149 million facilityto refinance in part the repayment installments under our existing loans fromKfW becoming due from January 2002 until December 2004.  The facility iscomposed of two nine-year loans, inclusive of a three-year disbursement periodand a two-year grace period during which no principal is payable.  It partlyenjoys the guarantee of HERMES, the export credit agency of the Federal Republicof Germany.  Disbursements under this facility, which are made as the KfW loansto be repaid fall due, are currently available.  We have drawn US$50 million(Php2,644 million) under this facility as of December 31, 2002.

 

As of December 31, 2002, PLDT owedto KfW an aggregate principal amount of US$437 million, as follows:

 

•        US$329 million provided under various export credit agency-backedfacilities, of which US$290 million was provided in connection with ourexpansion and service improvement programs and US$39 million in connection withthe US$149 million refinancing facility; and

 

•        US$108 million provided for the 15% down payment portion andcredit facilities without guarantee/insurance cover from the export creditagencies, of which US$11 million is in connection with the US$149 millionrefinancing facility.

 

After giving effect to theanticipated application of the existing refinancing facility, US$39 million ofour KfW loans matures in 2003, US$39 million matures in 2004, US$82 millionmatures in 2005, US$57 million matures in 2006, and US$220 million matures in2007 and onwards.  Principal of and interest on these loans are generallypayable in equal semi-annual installments.

 

PLDT has also obtained loansextended and/or guaranteed by other export credit agencies, including JapanBank for International Cooperation, formerly known as the Export-Import Bank ofJapan, the Export-Import Bank of the United States, and respective exportcredit agencies from France, Italy, Israel, Sweden, Denmark, Canada, Australia,Singapore and the United Kingdom, in the aggregate outstanding principal amountof US$248 million as of December 31, 2002.  Of the amounts outstanding underthese loans, US$62 million matures in 2003, US$60 million matures in 2004,US$49 million matures in 2005, US$39 million matures in 2006 and US$38 millionmatures in 2007 or later.

 

***Fixed Rate Notes***

 

PLDT has nine series ofnon-amortizing fixed rate notes outstanding as of December 31, 2002, asfollows:

 

Principal Amount

**Issue Date**

**Interest Rate**

**Maturity**

 

 

 

 

US$62,030,000

June 28, 1996

8.500%

June 30, 2003

US$81,822,000

June 2, 1994

10.625%

June 2, 2004

US$144,385,000

July 31, 1995

9.875%

August 1, 2005

US$175,000,000

June 28, 1996

9.250%

June 30, 2006

US$200,000,000

March 6, 1997

7.850%

March 6, 2007

US$100,000,000

May 2, 2002

10.625%

May 15, 2007

US$175,000,000

April 13, 1999

10.500%

April 15, 2009

US$250,000,000

May 2, 2002

11.375%

May 15, 2012

US$300,000,000

March 6, 1997

8.350%

March 6, 2017

 

On May 2, 2002, PLDT issued US$100million in aggregate principal amount of 10.625% Notes due 2007 and US$250million in aggregate principal amount of 11.375% Notes due 2012.  The netproceeds from the issuance of the notes were used mainly to (1) repurchaseUS$63 million in principal amount of our 8.5% Notes due 2003 and US$117 millionin principal amount of our 10.625% Notes due 2004, through our tender offer,and US$6 million in principal amount of 10.625% Notes due 2004 and US$6 millionin principal amount of 9.875% Notes due 2005 from the open market; and (2)prepay or repay various loans in the aggregate amount of US$121 million, ofwhich US$53 million (JP¥6,260 million) pertained to the Japanese yen term loanwhich matured in June 2003 and US$52 million pertained to the US$150 million termloan maturing in December 2003.

 

**Term Loans**

 

***Local Exchange Transfer Loans***

 

In connection with the transfer ofSmart's local exchange business to PLDT, PLDT entered into loan agreements withNederlandse Financierings-Maatschappij Voor Ontwikkelings-landen N.V., or FMO,of the Netherlands, Exportkreditnamden, or EKN, of Sweden and Export CreditsGuarantee Department, or ECGD, of the United Kingdom for loans in the principalamounts of US$135 million, US$36 million and US$27 million, respectively,approximately US$140 million in aggregate amount was outstanding as of December31, 2002.  These loans were amended in August and September 2001 to increasethe maximum total debt to earnings before interest, income tax and depreciationand amortization or EBITDA ratio that PLDT on a non-consolidated basis andcalculated on the basis of Philippine GAAP is permitted to maintain during theterms of the respective loans.  The FMO loan has a final maturity on September1, 2007 while the EKN and ECGD loans will mature on December 31, 2007.

 

***US$150 Million Term Loan***

* *

In connection with PLDT's fixedline expansion projects, PLDT obtained a US$150 million term loan, which wassubsequently assigned to Norddeutsche Landesbank Girozentrale, SingaporeBranch, US$52 million of which was outstanding as of December 31, 2002.  Theoutstanding principal amount of this loan is payable at maturity on December22, 2003 and will be partly refinanced by a multicurrency refinancing facilitydescribed below.

 

***JP¥19,807 Million Term Loan***

*** ***

In December 1997, in connection with a refinancing of itsmaturing debt, PLDT obtained a Japanese yen term loan from a syndicate offoreign banks, JP¥12,359 million of which was outstanding as of December 31,2002.  This loan matured on June 18, 2003 and was partly refinanced by amulticurrency refinancing facility described below.

 

***JBIC JP¥9,760 Million Overseas Investment Term Loan***

 

On July 26, 2002, PLDT signed aloan agreement with JBIC in the total amount of JP¥9,760 million under theOverseas Investment Loan program of JBIC.  The loan was drawn on July 31, 2002and will be amortized on a semi-annual basis beginning March 21, 2005, withfinal maturity on March 21, 2008.

 

***Multicurrency Refinancing Facility***

* *

On September 4, 2002, PLDT signed a loan agreementwith a syndicate of banks for a US$145 million multicurrency term loan facilityconsisting of Japanese yen and U.S. dollar commitments of JP¥10,914 million andUS$53 million, respectively.  This facility has been split into two tranches:Tranche A was drawn on June 18, 2003 in the amount of JP¥7,723 million andUS$34 million to refinance a portion of a Japanese yen syndicated term loanwhich matured on the same date; and Tranche B, which amounts to JP¥3,191million and US$19 million, and which is to be drawn in December 2003 and isintended to refinance a portion of the US$52 million principal amountoutstanding under the U.S. dollar term loan falling due in December 2003.  Thenew syndicated facility will be amortized semi-annually beginning June 2004 andwill mature in December 2006.

** **

***US$12 Million Term Loan***

 

On May 29, 2003, PLDT signed a US$12 million term loan facilitywith Deutsche Investitions-und Entwicklungsgesellschaft mbH to finance aportion of PLDT’s data services projects.  This loan will mature in December2009 and is payable in semi-annual installments starting from June 15, 2004.

 

***JP¥5,615 Million Term Loan***

 

On June 11, 2003, PLDT signed aJP¥5,615 million syndicated term loan facility supported by Nippon Export andInvestment Insurance to finance the acquisition and construction oftelecommunications equipment and transmission systems including, but notlimited to (1) data network expansion and development projects, and (2) thepublic switch network optimization projects.

*** ***

***JBIC 4 Program of the Development Bank of thePhilippines***

*** ***

In connection with the Asia Pacific Cable Network 2 project,PLDT entered into a loan agreement with Citibank, N.A., as facility agent, anda syndicate of banks in the aggregate principal amount of Php1,700 million,Php1,500 million of which was outstanding as of December 31, 2002.  The loan isfunded under the Japan Bank for International Cooperation Facility for PrivateSector Development of the Development Bank of the Philippines.  This loan willmature on October 26, 2005 and is payable in quarterly installments as setforth below:

 

Quarterly Payment Number

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

 

 

Payments 1-7

3.500%

Payments 8-11

8.875%

Payments 12-15

10.000%

 

***Php2,770 Million PesoFixed Rate Corporate Notes***

 

In connection with PLDT's service improvements andexpansion programs, PLDT entered into two loan agreements, pursuant to each ofwhich PLDT issued fixed rate corporate notes in three tranches.  Interest oneach of the notes is payable semi-annually.

 

Under the first loan agreement,PLDT borrowed an aggregate of Php1,500 million, of which Php230 million maturedon November 11, 2002, Php500 million will mature on November 9, 2004 and Php770million on November 9, 2006.

 

Under the second loan agreement, PLDT borrowed anaggregate of Php1,270 million, of which Php360 million matured on June 9, 2003,Php100 million will mature on June 9, 2005 and Php810 million matures on June9, 2010.

*** ***

***Php2,000 Million 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 billion Peso Notes program registered with thePhilippine SEC.  Net proceeds of the issue totaled Php1,803 million.  PLDTtargeted retail investors primarily for this issue in order to furtherdiversify its funding sources.

 

The Peso Notes program, for which the registration was renderedeffective by the Philippine SEC on April 9, 2003, has been given “PRS 1” ratingby PhilRatings, an affiliate of Standard & Poor’s.  PRS1 is the highestrating possible on PhilRatings’ scale for short-term securities and is assignedto issues with “the strongest capability for timely payment of debt on bothprincipal and interest.”

*** ***

***Overview of Smart’s Indebtedness***

 

As of December 31, 2002, Smart had US$430 million ofaggregate indebtedness outstanding which are scheduled to mature as follows:

 

** **

**Aggregate Outstanding**

Maturity

**Indebtedness**

** **

**(in millions)**

 

 

 

2003 (January 1 through December 31, 2003)

US$116

Php6,173

2004

116

6,146

2005

113

6,031

2006

79

4,210

2007 and onwards

6

331

 

As of December 31, 2002, Smart had no outstandingshort-term borrowings.

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

Smart's loan agreements contain restrictions thatlimit its ability to pay dividends, redeem preferred shares, make distributionsto its stockholders or otherwise provide funds to its stockholders oraffiliates without the consent of the lenders.  After receiving approvals fromFinnvera and certain lenders for the payment of dividends to PLDT in an amountnot to exceed 40% of Smart’s net income in 2001, Smart made its first dividendpayment of Php1,540 million to PLDT in December 2002.  In addition, Smart paiddividends in the amount of Php4,300 million to PLDT in June 2003, representing70% of Smart’s 2002 net income under Philippine GAAP, after receiving similarapprovals from Finnvera and certain lenders.  Further waivers would be requiredfor payment of additional dividends in future periods.  We cannot assure youthat Smart will be able to obtain such waivers in the future, or what amounts,if any, Smart would be permitted or financially able to distribute.  We expectthat we will have difficulty meeting our debt payment obligations if we do notcontinue to receive cash dividends from Smart.

 

Smart’s loan agreements contain certain covenantsrequiring Smart to comply with specified financial ratios and other financialtests calculated on the basis of Philippine GAAP at semi-annual measurementdates.  The financial tests under Smart’s loan agreements include maintenanceof a debt-to-equity ratio of not more than 1.50:1 and a debt service coverageratio of not less than 1.50:1.  Smart has maintained compliance with all of itsfinancial covenants.  Smart’s loan agreements also contain customary defaultprovisions that permit the lender to accelerate amounts due under the loans orterminate their commitments to extend additional funds under the loans.  Thesedefault provisions include:

 

•        cross defaults and cross accelerations that permit a lender todeclare a default if Smart is in default under another loan agreement.  Thesecross default provisions are triggered upon a payment or other defaultpermitting the acceleration of Smart debt, whether or not the defaulted debt isaccelerated;

 

•        failure by Smart to comply with certain financial ratiocovenants;

 

•        any reduction in PLDT's ownership of Smart stock below 51% of thetotal of each class of Smart stock outstanding;

 

•        any reduction in First Pacific's and its affiliates' collectiveownership of PLDT’s common stock below 18% of the total common stockoutstanding or 18% of the voting power of the total common stock outstanding;and

 

•        the occurrence of any material adverse change in circumstancesthat the lender reasonably believes materially impairs Smart's ability toperform its obligations under its loan agreement with the lender or that thelender believes materially impairs an applicable guarantor's ability to performits obligations under an applicable guaranty.

 

In addition, some of these loan agreements restrictSmart's ability to enter into transactions with affiliates except onarms-length terms and for valuable consideration.

 

***Overview of Piltel’s Indebtedness***

 

On June 4, 2001, Piltel completedthe restructuring of approximately Php41 billion of indebtedness and otherclaims owed to banks, trade creditors, bondholders and preferred shareholders,or the aggregate financial debt of Piltel, representing approximately 98% ofits total liabilities as of that date.

 

As of December 31, 2002, Piltel’s aggregate indebtednessoutstanding consists of:

 

 

**Aggregate Outstanding**

**Indebtedness**

 

**(in millions)**

Restructured debt

 

 

10-year Tranche B

US$140

Php7,445

15-year Tranche C

140

7,444

15-year Conversion Notes

121

6,448

15-year Term Notes Facility

5

293

Unrestructured debt

8

451

Liabilities under capital lease

1

43

Total

US$415

Php22,124

 

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

 

Maturity

**Aggregate Outstanding Indebtedness**

** **

**(in millions)**

2003 (January 1 through December 31, 2003)

US$––

Php––

2004

1

22

2005

1

22

2006

4

224

2007 and onwards

400

21,362

 

Under the terms of the debtrestructuring, 50% of the financial debt of each participating creditor wasreleased in consideration for the allotment of Piltel convertible preferredshares.  One (1) Piltel convertible preferred share was exchanged for everyPhp340 worth of debt for which it was being exchanged (converted into Pesos atan exchange rate of Php47.05 to US$1.00 for dollar-denominated debt and Php1.00to JP¥2.39522 for yen-denominated debt), which shares were immediately andmandatorily converted into PLDT convertible preferred shares.  One PLDTconvertible preferred share was issued for every five (5) Piltel convertiblepreferred shares.

 

Approximately half ofthe remaining 50 percent of all participating creditors’ (except forbondholders and preferred shareholders) financial debt was restructured in aparticipation in a Tranche B Loan in the same currency as their previousfinancial debt and the other half was exchanged for participation in a TrancheC Loan, also in the same currency as their previous financial debt.  In thecase of bondholders and preferred shareholders, the remaining 50 percent oftheir financial debt was exchanged for participation in the Conversion Notesand in a single Tranche Peso loan (the “Term Notes Facility”), respectively.

 

In addition, under theterms of the restructuring, PLDT issued a Letter of Support for the benefit ofPiltel and its creditors under which PLDT agreed to cover any fundingshortfalls of Piltel up to a maximum amount of US$150 million less all amountspaid or committed to be paid to or on behalf of Piltel by PLDT on or afterMarch 23, 2000.  Under the Letter of Support, PLDT will provide funding toPiltel in the event that the cash flow from Piltel’s operations falls short ofamounts required by it to discharge in full its obligations to any creditor ofPiltel or any of its operating and financing subsidiaries and affiliates.  Asof December 31, 2002 and September 30, 2003, the undrawn balance availableunder the Letter of Support was US$50 million.

 

***TrancheB Loans***

 

Piltel’s Tranche B Loansconsist of peso, U.S. dollar and Japanese yen participations of Php2,166million, US$33 million and JP¥7,822 million,respectively.  These Tranche B loans have nominal principal amortizationsrepresenting 0.10% of the original Tranche B loan amount payable each yearbeginning 2004 to 2010, while the remaining balance of 99.3% will fall due inJune 4, 2011.

 

***TrancheC Loans***

 

Piltel’s Tranche C Loansconsist of peso, U.S. dollar and Japanese yen participations of Php2,166million, US$33 million and JP¥7,822 million,respectively.  These Tranche C loans have principal amortizations of 0.10% ofthe original Tranche C loan amount payable each year in 2004 and 2005, 2% in2006, 10% payable each year from 2007 to 2015, while the remaining balance of7.8% will fall due in June 4, 2016.

 

***TermNotes Facility***

 

The Php293 million TermNotes Facility has nominal principal amortizations representing 0.10% of theoriginal loan amount payable each year beginning 2004 to 2015 while theremaining balance of 98.8% will fall due on June 14, 2016.

 

***ConversionNotes***

 

As of December 31, 2002, approximately US$121 million ofPiltel Conversion Notes were outstanding.  These Conversion Notes haveprincipal amortizations of 0.10% of the amount outstanding payable each year in2004 and 2005, 1.05% in 2006, 5.05% payable each year from 2007 to 2010, 54.65%in 2011, 5% payable each year from 2012 to 2015, while the remaining balance of3.9% will fall due in June 4, 2016.

 

Piltel’s restructured obligations are secured bysubstantially all present and future assets of Piltel under the Mortgage TrustIndenture, or MTI, dated June 4, 2001 between the Piltel and Chase ManhattanBank as security agent for the creditors, which established the securityarrangements relating to the restructured debts.  The participating creditors(other than the preferred shareholders) share equally in first ranking securityand non-participating creditors and the preferred shareholders share equally insecond ranking security created under the MTI.  Such a mortgage was approved byat least two-thirds of Piltel’s stockholders at its annual stockholders’meeting on April 18, 2001 and the NTC on May 18, 2001.

 

Piltel likewise agreed to pay into a dedicatedaccount (a “Sinking Fund Account”) the amount by which (a) earnings beforeinterest, tax, depreciation and amortization for a financial year is greaterthan (b) 200 percent of the projected debt service costs and permitted capitalexpenditure for the following financial year (the “Excess Cash flow”).  Themoneys in that Sinking Fund Account will be used (before drawings are madeunder the Letter of Support) to fund cash flow deficiencies of Piltel.  Also,if actual capital expenditure for a financial year differs from the projectedcapital expenditure, Piltel will either pay into the Sinking Fund establishedat the end of that year an amount equal to any over-projection of capitalexpenditure or will be entitled to withdraw funds, if any, equal to anyunder-projection.  Any credit balance in a Sinking Fund after two financialyears will be used to prepay all participating creditors ratably.

 

Under the debt restructuring agreements, Piltelundertook, with respect to each financial year (other than the financial yearin which the final repayment installment for Tranche B falls due), that theaggregate of earnings before interest, tax, depreciation and amortization plusthe available amount under the Letter of Support shall be greater than 1.05times debt service and 1.5 times interest cost.

 

Piltel is currently not incompliance with the terms of convertible bonds with principal amount of US$1.7million (approximately US$2.2 million redemption price at the option of theholders), and US$6.2 million bank debt.  Piltel is currently in the process offinalizing the terms under which the holder of the US$6.2 million debt wouldparticipate in the debt restructuring.

 

Piltel may not be able torestructure or otherwise pay the claims of its unrestructured debt. However,default on and acceleration of Piltel’s unrestructured indebtedness does notcreate a cross-default under Piltel’s restructured indebtedness or anyindebtedness of PLDT.

 

*Liabilityunder Capital Lease*
Piltel has an existing Financial Lease Agreement with the DOTCcovering telecommunications facilities established under the MunicipalTelephone Act.  Under the Financial Lease Agreement, Piltel was granted theexclusive right to perform telecommunications management services, to expandservices, and to promote the use of the DOTC-contracted facilities in certaincovered areas for a total lease obligation of Php482.6 million over 30 years.The last payment made by Piltel to the DOTC for the lease was in July 2000, inthe amount of Php1.5 million.  No payments were made in 2001 and 2002.  In itsletter to the DOTC dated January 14, 2003, Piltel has requested for are-negotiation of said lease agreement; as of March 24, 2003, DOTC has yet toreply to such request.

 

**Item 6.  Directors, Senior Management and Employees**

** **

**Directors, Key Officers andAdvisors**

 

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

 

**Name**

**Age**

**Position(s)**

**Date of Appointment**

 

 

 

 

Antonio O. Cojuangco

51

Director

April 21, 1982

 

 

Chairman of the Board

November 24, 1998

Manuel V. Pangilinan

56

Director

November 24, 1998

 

 

President

 

 

 

Chief Executive Officer

 

Helen Y. Dee

58

Director

June 18, 1986

Corazon S. de la Paz

62

Director

September 25, 2001

Albert F. del Rosario

63

Director

November 24, 1998

Ray C. Espinosa

46

Director

November 24, 1998

Napoleon L. Nazareno

53

Director

November 24, 1998

 

 

President and Chief Executive Officer

 

 

 

of Smart

 

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

63

Director

November 24, 1998

Juan B. Santos(1)

64

Director

December 3, 2002

Pedro E. Roxas(1)

47

Director

March 1, 2001

Taketo Suzuki

58

Director

March 24, 2000

 

 

Chief Operating Advisor

 

Mitsuhiro Takase

55

Director

March 24, 2000

Ricardo R. Zarate(2)

61

Director

March 1, 2001

 

 

Executive Vice President

June 1, 1987

Antonio R. Samson(3)

57

Executive Vice President

April 27, 1999

Ma. Lourdes C. Rausa-Chan

49

Senior Vice President,

January 5, 1999

 

 

General Counsel and Corporate Secretary

November 24, 1998

Anabelle L. Chua

42

Senior Vice President 

February 26, 2002

 

 

Treasurer

February 1, 1999

George N. Lim

51

Senior Vice President

February 26, 1999

Claro Carmelo P. Ramirez

43

Senior Vice President

July 5, 1999

Victorico P. Vargas

51

Senior Vice President

March 28, 2000

Rosalie R. Montenegro

54

Senior Vice President

July 10, 2000

Ariel A. Roda

40

Senior Vice President

August 10, 2000

Alfredo S. Panlilio

40

Senior Vice President

May 8, 2001

Ernesto R. Alberto

42

Senior Vice President

May 15, 2003

Jun R. Florencio

47

First Vice President

March 28, 2000

 

 

Auditor General

September 1, 2000

Celso T. Dimarucut

42

First Vice President 

January 31, 2003

 

 

Controller

August 16, 2000

Christopher H. Young

46

Chief Financial Advisor

November 24, 1998

Anastacio R. Martirez

50

Head, Personal Communications and

September 1, 1993

 

 

Mobile Services Division of Smart

 

Peter J. Lawrence

44

Chief Financial Advisor to Smart

November 9, 1998

Donald J. Rae

42

Chief Operations Advisor to Smart

January 1, 1999

——————————

 

*(1)  **Independent directors.*

 

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

 

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

 

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

 

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

** **

**Mr. Antonio O. Cojuangco**,the chairman of the board of PLDT, served as president and chief executiveofficer of PLDT for over 12 years until November 1998, when he assumed thechairmanship of the board.  He also holds the chairmanship of the Bank ofCommerce, FCB Manila and CAP Life Insurance Corporation, and sits on the boardsof C&O Investment Realty Corporation, Kuok Phil. Properties, Inc. andPhilippine Telecommunications Investment Corporation.

 

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

 

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

 

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

 

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

 

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

 

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

** **

**Rev. Fr. Bienvenido F. Nebres,S.J.** is the president of the Ateneo de Manila University and a member ofthe boards of trustees of several other private educational institutions.  Heis chairman of the board of the Center for Leadership and Change, Inc., aleadership training institution, and LEAD, Inc., which works with farmers.

 

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

 

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

 

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

 

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

 

**Mr. Ricardo R. Zarate** was anexecutive vice president of PLDT and the head of PLDT's fixed line businessuntil his retirement effective July 16, 2003.  From 1996 to 2000, he was theexecutive vice president for the network services group, in charge ofoperations and maintenance, regional business and technical and operationssupport.  He also sits on the boards of Smart and Clark Telecom.

 

**Mr. Antonio R. Samson** was anexecutive vice president of PLDT until his retirement on July 16, 2003.  He waspresident and chief executive officer of Mediaquest Holdings, Inc. until July15, 2003.  Since joining PLDT in 1982, he has been a senior officer in variouscapacities.  His business experience includes strategic planning, humanresources and administration, information systems, investor relations, publicrelations and advertising, media relations and property management.  Mr. Samsonis a director of Radio Veritas, president of MCO Foundation and MetropolitanMuseum Foundation, chairman of Ad Foundation and a trustee and the auditor ofPLDT Foundation, Inc.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Terms of Office

 

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

 

Family Relationships

 

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

 

Compensation

 

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

 

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

 

There are no agreements between PLDT and any of its directorsand key officers providing for benefits upon termination of employment, exceptfor such benefits to which they may be entitled under PLDT's employees’ benefitplan.

 

Executive Stock Option Plan

 

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

 

Stock options may be grantedpursuant to the executive stock option plan to management executives and advisors/consultantsof PLDT.  The executive compensation committee of our board determines theeligibility of a management executive or advisor/consultant to receive a stockoption, as well as the number of shares of common stock to be covered by eachstock option.

 

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

 

**Share Ownership******

 

The following table sets forthinformation regarding ownership of our common stock, preferred stock andexecutive stock options as of June 30, 2003 by our continuing directors, keyofficers and advisors.  Each individual below owns less than 1% of ouroutstanding common stock and less than 1% of our preferred shares.

 

**Name of Owner**

**Shares of**

**Common Stock**

**Shares of**

**Preferred Stock**

**Shares of Common Stock Underlying Executive**

**Stock Options(1)**

 

 

 

 

Antonio O. Cojuangco

4

4,060

–

Manuel V. Pangilinan

54,419

360

97,571

Helen Y. Dee

22,055(2)

180

–

Corazon S. de la Paz

12,553,130(3)

–

–

Albert F. del Rosario

38,425

1,560

–

Ray C. Espinosa

1

–

38,342

Napoleon L. Nazareno

6,427

495

–

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

2,467(4)

–

–

Juan B. Santos

1

–

–

Pedro E. Roxas

1

540

–

Taketo Suzuki

1,501

–

–

Mitsuhiro Takase

1

–

–

Ricardo R. Zarate

3,415

–

39,464

Antonio R. Samson

–

–

28,644

Ma. Lourdes C. Rausa-Chan

257

350

22,302

Anabelle L. Chua

1,540

–

13,738

George N. Lim

1,700

360

13,256

Claro Carmelo P. Ramirez

1,500

–

14,496

Victorico P. Vargas

–

180

23,835

Rosalie R. Montenegro

–

–

16,006

Ariel A. Roda

1,500

–

13,938

Alfredo S. Panlilio

–

–

11,151

Ernesto R. Alberto

–

–

–

Jun R. Florencio

15

530

10,593

Celso T. Dimarucut

–

460

14,218

Christopher H. Young

104,315

–

–

Anastacio R. Martirez

30,577

410

–

Peter J. Lawrence

–

180

–

Donald J. Rae

–

–

–

_____________

 

*(1)    **Asof June 30, 2003, under PLDT’s executive stock option plan, options to purchase357,554 common shares have been granted to the key officers listed in the tableabove.  No options have been granted to non-executive directors.  Alloutstanding options are exercisable at an exercise price of Php814 per shareand have an expiration date of December 10, 2009.  No outstanding options wereexercisable until December 10, 2001, at which time 25% became exercisable.  Anadditional 25% vested on December 10, 2002, and will vest annually on December10, 2003 and 2004.*

* *

*(2)    **As chairperson and presidentof Hydee Management & Resources, Inc., Ms. Dee may exercise voting rightsin respect and may be considered to have beneficial ownership of 21,957 sharesof common stock owned by Hydee Management Resources, Inc.*

* *

*(3)    **As president and chiefexecutive officer of the Social Security System, Ms. de la Paz may exercisevoting rights in respect of 12,543,129 shares and 10,000 shares of common stockowned by the Social Security System and SSS Provident Fund, respectively,  andmay be considered to have beneficial ownership of these shares.*

* *

*(4)    **As president of the Ateneode Manila University, Rev. Fr. Nebres may exercise the voting rights in respectof 2,465 shares of common stock owned by the Ateneo de Manila University andmay be considered to have beneficial ownership of these shares.*

* *

The aggregate number of common andpreferred shares directly owned by all key officers, directors and advisors asat June 30, 2003 were 245,697 and 9,665 respectively, or 0.145% and 0.001% ofPLDT’s outstanding common and preferred shares, respectively.

 

Audit, Nomination, Executive Compensation and Finance Committees

 

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

 

*Audit Committee*

 

Our audit committee is composed ofthree members who are independent directors, namely, 

Fr. Bienvenido F. Nebres, S.J., who chairs the committee,Pedro E. Roxas and Juan B. Santos.  Taketo Suzuki, who is a member of our boardof directors, and Roberto R. Romulo and Amado Bagatsing are advisors to theaudit committee.

 

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

 

•        in its oversight of PLDT’s accounting and financial reportingprinciples and policies and internal audit controls and procedures;

 

•        in its oversight of the integrity of PLDT’s financial statementsand the independent audit thereof;

 

•        in its oversight of PLDT’s compliance with legal and regulatoryrequirements; 

 

•        in selecting and recommending the external auditors to beappointed by our board of directors, evaluating such external auditors’qualifications and independence and, where deemed appropriate, replacing theexternal auditors; and

 

•        in its oversight of the performance of the internal auditingorganization and the external auditors.

 

With respect to the externalauditors, the audit committee has the following duties and powers:

 

•        to review and evaluate the qualifications, performance andindependence of the lead partner of the external auditors;

 

•        to select and recommend the external auditors to be appointed bythe board of directors and to recommend the removal or replacement of theexternal auditors;

 

•        to review in consultation with the head of the internal auditingorganization and the Chief Financial Adviser the fees charged by the externalauditors for audit and non-audit services;

 

•        to approve all audit engagement fees and terms, as well as allsignificant non-audit engagements with the external auditors;

 

•        to ensure that the external auditors prepare and deliver annuallythe Statement as to Independence and Auditors’ Statement, to discuss with theexternal auditors any relationships or services disclosed in such statementsthat may impact the objectivity, independence or quality of services of ourexternal auditors and to take appropriate action in response to such statementsto satisfy itself of the external auditor’s independence;

 

•        to ensure that the lead partner of the external auditors isrotated at least once every five (5) years; and

 

•        to instruct the external auditors that the external auditors areultimately accountable to the board of directors through the audit committee.

 

*Nomination Committee*

 

Our nomination committee iscomposed of four members, three of whom are independent directors namely, Fr.Bienvenido F. Nebres, S.J., who chairs the committee, Pedro E. Roxas and JuanB. Santos, and Victorico P. Vargas, who is a non-voting member.

 

*Executive Compensation Committee*

 

Our executive compensation committeeis composed of four members, three of whom are regular members of our board ofdirectors.  Albert F. del Rosario, who chairs the committee, Ray C. Espinosaand Pedro E. Roxas are regular members of our board of directors.  The fourthmember of the committee is Oscar S. Reyes.  Taketo Suzuki, who is a member ofour board of directors, is an advisor to the committee.

 

*Finance Committee*

 

Our finance committee is composedof four members, three of whom are regular members of our board of directors.Corazon S. de la Paz, who chairs the committee, Antonio O. Cojuangco andNapoleon L. Nazareno are regular members of our board of directors.Christopher H. Young is the fourth member.  Mitsuhiro Takase, who is a memberof our board of directors, is an advisor to the committee.

 

**Employees and Labor Relations**

 

As of December 31, 2002, PLDT'stotal number of employees was 12,131, of which 52% were rank and file, 44% weremanagement/supervisory staff and 4% were executives.  This number represents adecrease of 784 employees, or approximately 6%, from the personnel level as ofthe end of 2001, mainly as a result of the ongoing manpower reduction programthat we initiated in 1995.  From a peak of 20,312 at the end of 1994, thenumber of our employees declined by 8,181, or 40%, by the end of 2002.

 

In 2002, PLDT decided torationalize the operations of its operator-assisted call-handling units locatedprincipally in certain of its provincial exchanges.  In recent years,operator-assisted calls have dramatically declined due to the popularity ofdirect dialing and other alternative means of communications, such as e-mailand text messaging.  Consequently, 322 employees of PLDT manning its regionaloperator services, where call volumes have significantly declined, wereseparated from service with enhanced retirement/redundancy pay package,effective December 31, 2002.  In relation to this, the *Manggagawa ngKomunikasyon sa Pilipinas*, or MKP, our rank-and-file employees’ union,filed a Notice of Strike with the Department of Labor and Employment, or DOLE,on November 8, 2002, and filed a complaint against PLDT for alleged unfairlabor practices.

 

After a series of failedconciliation meetings between representatives of PLDT and MKP before a DOLEconciliator, MKP staged a 14-day strike beginning on December 23, 2002.  Thestrike ended on January 6, 2003 by virtue of a return-to-work order issued bythe DOLE Secretary to striking employees, except those employees whoseemployment were already terminated by PLDT.  Moreover, the DOLE Secretary, inthe same order, certified the labor dispute to the National Labor RelationsCommission, or NLRC, for compulsory arbitration.  The NLRC has yet to schedulearbitration proceedings on MKP’s complaint against PLDT.

 

Over the past several years, PLDThas been implementing a manpower reduction program, or MRP, in line with itscontinuing effort to reduce the cost base of the fixed line business.  In 2002and in the first half of 2003, 845 and 1,681 employees have availed of theprogram, respectively.  The MRP cost charged to operations amounted to Php324million for the year ended December 31, 2002 and Php1,411 million for the sixmonths ended June 30, 2003.

 

The decision to implement the MRPwas anchored on the challenges being faced by the fixed line business assignificant changes in technology, increasing competition and shifting marketpreferences to cellular use have reshaped the future of the fixed linebusiness.  The MRP is being implemented under the New Labor Code and is incompliance with all other relevant labor laws and regulations.  By the end of2003, PLDT expects to reduce its headcount to approximately 10,400 employees.

 

We consider our relationship withour rank and file employees union, our supervisors' union and our sales supervisors'union to be generally good.  See also “Item 5. Operating and Financial Reviewand Prospects — Other Information — Strike of PLDTEmployees.”

 

**Pension and Retirement Benefits**

 

PLDT has a trusteed,non-contributory defined benefit plan covering all permanent and regularemployees.  The benefit plan provides benefits upon normal retirement beginningat age 65, early retirement beginning at age 50 or completion of at least 30years of credited service, voluntary separation beginning at age 40 or completionof at least 15 years of credited service, total and physical disability, deathand involuntary separation.  Benefits are based on the employee's final monthlybasic salary and length of service.

 

The normal retirement benefit isequal to a percentage of the final monthly basic salary per year of creditedservice.  The percentage is 100% for those with less than 15 years of serviceat retirement and 125% for those with 15 years of service at retirement.Thereafter, the percentage increases by 5% for every additional year ofcredited service up to a maximum of 200%.  The early retirement benefit isequal to the accrued normal retirement benefit with salary and service at thedate of early retirement.

 

The benefit plan's assets includeindirect ownership of 100% of the shares of Home Cable.  All of the shares ofHome Cable are pledged to a group of lenders as security for a loan of HomeCable, in respect of which Home Cable has defaulted on payment.  On April 10,2002, the loan agent, at the request of a majority of the lenders, delivered anotice to Home Cable declaring an event of default and accelerating this loan.Consequently, the lenders are entitled to foreclose on or sell the collateralgranted as security for the loan, including Unilink's shares in Home Cable.  Asa result, the benefit plan could lose its indirect ownership in these shares orthe pledged assets of Home Cable.

 

In the event the benefit plan'sassets were insufficient to pay the required retirement benefits, PLDT would beobligated to fund the amount of the shortfall.  In addition, claims of PLDT'semployees for retirement benefits that have accrued would rank above the claimsof all other creditors of PLDT, in the event of PLDT's bankruptcy orliquidation.

 

We spent Php890 million forpension, retirement and similar benefits for our employees for the year 2002.

 

For more information about the benefit plan, see Note 20 to ourfinancial statements in Item 18.

 

**Employees' Stock Plan**

 

Since 1966, PLDT has had anemployees' stock plan under which shares of common capital stock may be offeredand sold to our regular employees, other than directors, at a discount frommarket value.  On September 27, 1999, our board of directors approved theamendments to the employees' stock plan changing the plan name to “PLDT StockPurchase Plan” and limiting the coverage of the plan to rank-and-file andsupervisory employees.  These amendments were approved by our stockholders at aspecial meeting held on December 10, 1999.

 

Beginning January 3, 2000 to March31, 2000, we made our ninth offering under the PLDT Stock Purchase Plan, underwhich we made available up to 991,200 shares of common stock to all eligibleemployees as of January 3, 2000.  The shares were offered at a discounted priceof Php877.63 per share, which was 85% of the average market price of our commonstock on the Philippine Stock Exchange on January 3, 2000.  The 36-monthinstallment payment period began on April 30, 2000 and will end on April 15,2003.  As of December 31, 2002, the maximum number of shares remaining to beoffered under the plan was 1,173,513 shares.  We believe that the PLDT StockPurchase Plan gives our employees the opportunity to invest in our company onbeneficial terms and broadens our shareholder base.

 

**Legal Proceedings**

 

On April 10, 2001, a group ofprivate individuals filed a complaint with the Office of the Ombudsman againstformer President Joseph Estrada and other individuals, including Mr. Manuel V.Pangilinan, who is our president, chief executive officer and one of ourdirectors.  The complaint alleged that the defendants were involved in actsinvolving direct and indirect bribery, corruption of public officials, illegalgiving or offering of gifts to public officials and/or “economic plunder.”  Inthe case of Mr. Pangilinan, the complaint alleged that a Php20 million checkissued by Mr. Pangilinan was deposited in a bank account owned by formerPresident Estrada.  The Office of the Ombudsman reviewed the charges againstMr. Pangilinan to determine whether there is probable cause to warrantprosecution of the charges before the Sandiganbayan, a special court that hearsanti-graft cases.  Mr. Pangilinan has filed a counter-affidavit with the Officeof the Ombudsman to refute the allegations against him and believes, based onthe advice of his counsel, that the complaint against him was without merit.The investigation by the Office of the Ombudsman into the matters raised by thecomplainant and its prosecution of Mr. Estrada continues.

 

Item 7.  Major Shareholders and RelatedParty Transactions

 

Major Shareholders

 

The following table sets forthinformation regarding ownership of PLDT common stock as of June 30, 2003 of allshareholders known to us to beneficially own 5% or more of PLDT's commonstock.  All shares of PLDT's common stock have one vote per share.

 

**Name of Beneficial Owner**

**Number of Shares**

**Beneficially Held(1)**

**Percentage**

**of Class**

 

 

 

First Pacific(2)

53,238,376

31.43

PCD Nominee Corporation(3)

50,638,644

29.89

Chase Manhattan (Hong Kong) Nominees Limited(4)

27,040,020

15.96

NTT Communications(5)

25,266,971

14.92

Social Security System(6)

12,553,129

7.41

———————

 

*(1)**Underthe rules of the Commission, and as used in this table, “beneficial ownership”means the sole or shared power to vote or direct the voting or to dispose ordirect the disposition of any security.  In addition, a person is deemed to bethe beneficial owner of securities that can be acquired within 60 days, throughthe exercise of any option or warrant.  Common stock subject to options orwarrants that are currently exercisable or exercisable within 60 days aredeemed outstanding for computing the ownership percentage of the person holdingsuch options or warrants, but are not deemed outstanding for computing theownership percentage of any other person.  The amounts and percentages arebased upon 169,404,078 shares of common stock outstanding as of June 30, 2003.*

 

*(2)   Consists of shares held by affiliates of FirstPacific, including 26,034,263 shares held of record by Philippine TelecommunicationsInvestment Corporation, or PTIC, 6,717,319 shares held of record and 455,000shares held in street name by and for Larouge B.V.; 2,919,260 shares held ofrecord by Asia Link, B.V.; and 17,112,534 shares held of record by MetroPacific Resources, Inc., or MPRI. Pursuant to resolution adopted by the boardof directors of PTIC, a copy of which had been furnished to PLDT, the Presidentof PTIC, Mr. Manuel V. Pangilinan, has the continuing authority to representPTIC at any and all meetings of the stockholders of a corporation in which PTICowns of record or beneficially any shares of stock or other voting security,and to sign and deliver, in favor of any person he may deem fit, a proxy orother power of attorney, with full power of delegation and substitution,authorizing his designated proxy or attorney-in-fact to vote any and all sharesof stock and other voting securities owned of record or beneficially by PTIC atany and all meetings of the stockholders of the corporation issuing such sharesof stock or voting securities.  Based on a Secretary’s Certificate, a copy ofwhich had been furnished to PLDT, MPRI’s board of directors designated MPRI’sPresident, Mr. Manuel V. Pangilinan or, in his absence, any one of the otherdirectors of MPRI, as authorized representative and proxy to represent MPRI inthe Annual Meeting of Stockholders of PLDT for the year 2003 and to vote theshares registered in the name of MPRI in the books of PLDT on any and allmatters which may properly come before the stockholders during theaforementioned meeting.*

* *

*(3)   Registered owner of shares beneficially owned byparticipants in the Philippine Central Depository or PCD, a private companyorganized to implement an automated book entry system of handling securitiestransactions in the Philippines.*

* *

*(4)   Holds shares as nominee of JPMorgan Chase Bank,successor depositary of the shares of common stock underlying the AmericanDepositary Shares (ADSs) each representing one share of common stock of PLDTand evidenced by American Depositary Receipts (ADRs).  Pursuant to the CommonStock Deposit Agreement, dated October 14, 1994, as amended on February 10,2003, if the depositary does not receive voting instructions from a holder ofADRs, such holder will be deemed to have instructed the depositary to provide adiscretionary proxy to a person designated by PLDT for the purpose ofexercising the voting rights pertaining to the shares of common stockrepresented by such holder of ADRs, except that no discretionary proxy will begiven with respect to any matter as to which substantial opposition exists orwhich materially and adversely affects the rights of the holders of such ADRs.*

* *

*(5)   On December 11, 2002, NTT Communications Capital(UK) Limited, or NTTC-UK, and NTT Communications signed an agreement totransfer NTTC-UK’s ownership of shares in PLDT to NTT Communications to enablethe latter to consolidate its ownership by becoming the direct beneficial ownerthereof.  Prior to this transfer, NTT Communications and NTT were already theindirect beneficial owners of the PLDT shares held by NTTC-UK, a wholly-ownedsubsidiary of NTT Communications.  Inasmuch as NTT Communications is NTT’swholly-owned subsidiary, NTT remains to be the indirect beneficial owner of theshares in PLDT.  In connection with the Annual Meeting of the Stockholders ofPLDT for the year 2003, Mr. Kiyoshi Maeda, an authorized representative of NTTCommunications, executed a proxy in favor of Mr. Manuel V. Pangilinan with fullpower of substitution and delegation to vote the PLDT common shares of NTTCommunications at the aforementioned meeting.*

* *

*(6)   Includes 7,528,340 shares held of record by PCDNominee Corporation.*

* *

As of June 30, 2003, approximately 87.9% of the outstandingcapital stock of PLDT was registered in the names of Philippine persons.

 

Related Party Transactions

 

Companies within the PLDT Group areengaged in arm's-length transactions in the ordinary course of business.  Webelieve that the terms of these transactions are comparable with thoseavailable from unrelated parties.  The following is a discussion of the majoragreements with or between members of the PLDT Group and related parties.

 

*Agreements with NTTCommunications*

 

PLDT is a party to the followingagreements with NTT Communications and/or its affiliates:

 

•        On September 28, 1999, PLDT entered into a Stock Purchase andStrategic Investment Agreement with First Pacific and its affiliates and NTTCommunications whereby, pursuant to amendments on March 8, 2000 and March 24,2000, PLDT acquired all of the outstanding stock of Smart from First Pacificand its affiliates and NTTC-UK, in exchange for newly issued and fully paidcommon stock of PLDT.  As part of the strategic alliance formed between PLDTand NTT Communications, NTT Communications made a further strategic investmentin PLDT by subscribing for an additional 12 million newly issued shares ofcommon stock of PLDT for a price of approximately Php14,700 million effectivelymaking NTT Communications the beneficial owner of 15% of PLDT's common stock.  Inaddition, PLDT and NTT Communications agreed to establish a joint committee toexplore the development and marketing of products and services between theparties, and PLDT granted to NTT Communications contractual veto rights overcertain decisions and transactions.  For more information, see “Item 3. KeyInformation — Risk Factors — Risks Relating to Us — A significant number ofPLDT's shares are held by two separate shareholders, which may not act in theinterests of other shareholders or stakeholders in PLDT”; and

 

•        Simultaneously with the closing of the Stock Purchase andStrategic Investment Agreement, First Pacific, NTT Communications and NTTC-UKentered into a Shareholders Agreement.  Under the Shareholders Agreement, NTTCommunications is entitled to nominate two directors to the PLDT board ofdirectors and First Pacific and its affiliates are entitled to nominate sixdirectors.  The Shareholders Agreement also entitles NTT Communications tonominate two directors to Smart's board of directors and, subject to specifiedconditions, one member to the board of directors of all other PLDTsubsidiaries.  NTT Communications is also entitled to appoint members oradvisors of certain PLDT management and board committees, including the audit,executive compensation and finance committees described above under “— Audit,Nomination, Executive Compensation and Finance Committees.”  Under theShareholders Agreement, each party has agreed, under certain circumstances, tovote its shares of common stock in favor of the nominees designated by theother parties.

 

We are also a party to thefollowing agreements with NTT Communications and/or its affiliates, in respectof which Php32 million and Php39 million were payable as of December 31, 2002and 2001, respectively:

 

•        Arcstar Licensing Agreement and Arcstar Service ProviderAgreement with NTT Worldwide Telecommunications Corporation under which PLDTmarkets managed data and other services under NTT Communications' “Arcstar”brand to its corporate customers in the Philippines;

 

•        Conventional International Telecommunications Services Agreementwith NTT Communications under which PLDT and NTT Communications have agreed tocooperative arrangements for conventional international telecommunicationsservices to enhance their respective international businesses;

 

•        Internet Services Agreement with NTT Communications under whichPLDT and NTT Communications have agreed on arrangements to coordinate theirplans for the deployment and utilization of Internet protocol transportcapacity and the development and promotion of Internet-related and othervalue-added services;

 

•        Advisory Services Agreement with NTT Communications under whichNTT Communications provides PLDT with technical, marketing and otherconsultants for various business areas of PLDT;

 

•        Smart-NTT Multimedia Agency Agreement with NTT Communicationsunder which Smart-NTT Multimedia, then a 60% owned subsidiary of Smart,provides a full range of PLDT's telecommunications services, including leasedlines, domestic frame relay, cellular service, and multimedia services;

 

•        Domestic Fiber Optic Network Submerged Plant MaintenanceAgreement with NTT World Engineering Marine Corporation under which NTT WorldEngineering Marine Corporation provides maintenance services to PLDT’s domesticfiber optic network;

 

•        Chartered Arrangement Maintenance Contract with NTT WorldEngineering Marine Corporation under which, for a period of five years, NTTWorld Engineering Marine Corporation uses CS PLDT primarily to maintain thesubmarine cable comprising the submerged portion of our fiber optic network;and

 

•        Tradename and Trademark Agreement with NTT Communications underwhich PLDT has been given the right to use the trade name “Arcstar” and itsrelated trademark, logo and symbols, solely for the purpose of PLDT'smarketing, promotional and sales activities for the Arcstar services within thePhilippines.

 

*PLDT Letter of Support in Favor of Piltel*

 

In connection with Piltel's debtrestructuring, on June 4, 2001, PLDT issued a letter of support for the benefitof Piltel and its creditors, under which PLDT is obligated to provide up to amaximum of US$150 million to make up shortfalls in Piltel's operating cashflows.  As of December 31, 2002 and September 30, 2003, US$50 million remainedavailable under the letter of support.

 

*Agreements between Smart and Piltel*

 

Smart and Piltel have entered into the following agreements inconnection with the integration of their operations:

 

•        An agreement in 2002 for the co-location, or sharing, of cellularsites selected by agreement of the parties, whereby Piltel is paid a usage feeof Php45,000 per shared site per month, subject to a 10% annual increase;

 

•        An agreement whereby Smart manages the operation of Piltel'scellular and paging systems, which are divided into the following threesub-agreements:

 

                                    (i)          A facilities management agreement in November 2000 under which Smartoperates, maintains and manages the physical facilities and technical servicesof Piltel's existing cellular and paging systems.  Piltel compensates Smartunder the arrangement through a monthly fixed fee of Php4 million and avariable monthly fee of Php13,735 per site covered by the agreement.  Anadditional fee of Php186,878 per month and Php624 per site are payable at theend of each calendar year upon rendition of the services in accordance with theagreement.  This agreement was amended in May 2001 to include the management,operation and maintenance of Piltel's cellular telecommunications network inthe E.O. No. 109 areas in Mindanao, including Piltel's business and centraloffices, base stations and public calling offices in South Cotabato, Sarangganiand General Santos, Davao City, Davao del Sur, Zamboanga del Norte, Zamboangadel Sur and Misamis Occidental;

 

                                  (ii)          A customer service management agreement on September 15, 2000 underwhich Piltel outsources the operation of its customer service and billingfunctions for its cellular and paging systems to Smart for a monthly fee ofPhp9 million and a variable cost of Php57, Php17 and Php25 per postpaid, prepaidcellular and paging subscriber, respectively.  An additional fee of Php399,926per month and Php1 per postpaid cellular subscriber per month is payable at theend of each calendar year upon rendition of the services in accordance with theagreement; and

 

                                 (iii)          An administrative support and management services agreement in September2000 under which Piltel pays a monthly fixed fee of Php8 million.  Anadditional fee of Php353,764 per month is payable at the end of each calendaryear upon rendition of the services in accordance with the agreement;

 

•        A facilities service agreement in March 2000 under which Piltelaccesses Smart's existing GSM network and facilities to enable Piltel to offerprepaid cellular service using GSM technology in exchange for approximately 50%of Piltel's revenues, net of interconnection expenses.

 

*Facilities Management Agreement between Piltel and PLDT*

 

On July 19, 2001, PLDT entered intoa facilities management agreement with Piltel under which PLDT undertook themanagement, operation and maintenance of Piltel's regional telecommunicationand E.O. No. 109 network operations and services, including E.O. No. 109 fixedline build out installations, public calling offices and payphone facilitiesand the systems required to support these services.

 

The agreement covers Piltel'sregional telecommunication service in Baguio, Puerto Princesa, Masbate and Boacand E.O. No. 109 service in Alabel, Banga, Dapitan, Davao, Digos, Dipolog,General Santos, Kiamba, Koronadal, Pagadian, Polomolok and Surallah.

 

Under the agreement, PLDT alsoundertook the management of the computer system, billing, revenue assurance andinter-carrier settlements reporting of Piltel's regional telecommunicationservice in Olongapo and Subic.

 

The monthly management fee payableby Piltel is based on cost, and for cost components where margin is allowed,15% will be applied.  In addition, Piltel will pay a monthly variable cost peraccount in the amount of Php30.00 for bill generation and Php6.00 for billdelivery from an exchange to a subscriber.  All third party invoices will becharged to Piltel at cost, including value added tax.

 

The agreement is effective forthree years from July 2001 to July 2004 and supersedes the facilitiesmanagement agreement between PLDT and Piltel, dated May 12, 2000, under whichPLDT undertook the management, maintenance and operation of the regionaltelecommunication services of Piltel, including public calling offices andpayphone operations located in Baguio City, Puerto Princesa, Boac and Masbate.

 

*Facilities Management Agreement between Piltel and SubicTelecom*

* *

On September 5, 2001, Piltel andSubic Telecom entered into a facilities management agreement under which SubicTelecom undertook the management, operation and maintenance of the regionaltelephone network, customer operations, network operations and pay phones ofPiltel in Subic and Olongapo City.  The monthly management fee payable byPiltel is based on cost, and for cost components where margin is allowed, 15%is applied.  In addition, Piltel is required to pay a monthly variable cost peraccount in the amount of Php44.00 for repairs and maintenance.  All third partyinvoices are required to be charged on to Piltel at cost, including value-addedtax.  This agreement supersedes the facilities management agreement enteredinto by Piltel and Subic Telecom on May 29, 2000.

 

*Air Time Purchase Agreement between PLDT and PT AsiaCellular Satellite and Related Agreements*

 

In March 1997, PLDT entered into aFounder NSP Air Time Purchase Agreement with PT Asia Cellular Satellite, or PTACeS as amended in December 1998, under which PLDT was granted the exclusiveright to sell ACeS services in the Philippines.  In exchange, PLDT is requiredto purchase from PT ACeS at least US$5 million worth of air time annually overten years, commencing on the commercial operations date, which has been set asJanuary 1, 2002.  In the event PT ACeS’ billing revenues are less than US$45million in any given year, PLDT is required to make supplemental air time purchasepayments not to exceed US$15 million per year during the ten year term ofthe agreement.

 

PLDT also entered into a FounderNSP Operating Agreement with PT ACeS, dated as of March 12, 1997, under whichPLDT may:

 

•        authorize distributors to resell ACeS service in the Philippinesupon prior approval from PT ACeS; and

 

•        appoint agents to solicit and bill PLDT's or its authorizeddistributors' subscribers for ACeS services and to sell terminals on behalf ofPLDT.

 

Under an Assignment and AssumptionAgreement dated December 29, 1998, PT Asia Cellular Satellite agreed to assignand transfer to ACeS International Limited, or AIL, all of PT Asia CellularSatellite's rights under the Founder NSP Air Time Purchase Agreement andFounder NSP Operating Agreement.

 

Under an Acknowledgment ofAssignment of Air Time Purchase Agreement entered into on December 29, 1998, byand among PLDT, P.T. Bank Internasional Indonesia and AIL, PLDT consented tothe assignment by AIL of the Founder NSP Air Time Purchase Agreement to P.T. BankInternasional Indonesia as security agent for the benefit of the securedparties under the Security Agreement dated as of December 29, 1998 which wasexecuted in connection with the Amended and Restated Credit Agreement datedDecember 29, 1998 among PT ACeS, AIL, P.T. Bank Internasional Indonesia andvarious banks.

 

In March 2003, PLDT, together withthe founder shareholders, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original Air Time Purchase Agreement.  In lieu of thesepayments, the parties agreed that AIL shall provide PLDT and the other foundershareholders with unlimited use of air time for the year 2003 in exchange for afixed fee in the amount of approximately US$4 million.  PLDT is also obliged topurchase from AIL 13,750 satellite fixed phone units for the year 2003 atUS$395 F.O.B per unit, subject to quarterly price adjustment.  The parties tothe Standstill Agreement also agreed to negotiate in good faith and use theirbest efforts to reach an agreement on a revised Air Time Purchase Agreementbefore November 15, 2003 that will cover, among other matters, the amendedminimum and supplemental air time payment provisions subject to the approval ofAIL’s creditors.

* *

*Transponder Lease from Mabuhay Satellite to PLDT*

 

On December 28, 1995, PLDT andMabuhay Satellite entered into a Transponder Lease Agreement, as amended on May10, 2000, pursuant to which Mabuhay Satellite leases to PLDT C-band transponderson board the Agila II satellite, in consideration of a basic rent.  Thisagreement has a term of ten years commencing on December 18, 1997, unlessearlier terminated in accordance with the terms thereof.  Originally, the leasecovered 14 C-band transponders; however, on December 18, 2000, PLDT terminatedthe Transponder Lease Agreement with respect to four transponders which servicewas interrupted and not restored resulting in PLDT's inability to access anduse the transponders.  This was further reduced to 8 C-band transponders onDecember 18, 2002.  The annual basic rent for the transponders is approximatelyUS$14 million with US$1.8 million annual lease per transponder.

 

Under an Acknowledgment andConsent Agreement dated January 4, 1996, PLDT acknowledged and consented toMabuhay Satellite's:

 

•        transfer and assignment of all amounts payable by PLDT under theTransponder Lease Agreement; and

 

•        grant of a continuing security interest of first priority in allof Mabuhay Satellite's rights, title and interest in, to and under theTransponder Lease Agreement, in favor of the collateral agent for the benefitof the lenders who are parties to the Omnibus Credit and Security Agreementdated December 14, 1995.

* *

*Facilities Management Agreement and Service Agreementbetween Smart and ACeS Philippines*

 

Smart and ACeS Philippines areparties to a facilities management agreement and an administrative support andmanagement services agreement, both dated February 16, 2001.

 

Under the facilities managementagreement, Smart manages, maintains and operates the ACeS Global MobilePersonal Communications by Satellite (GMPCS).  Under the administrative supportand management services agreement, Smart provides administrative support andservices in certain aspects of ACeS Philippines’ business operations such aspayroll administration and training, finance, legal, audit, purchasing andmaterials management, public affairs, information technology, and sales andmarketing.  In exchange for the foregoing services, Smart is compensated withfixed and variable monthly fees by ACeS Philippines.

 

Smart and ACeS Philippines are alsoparties to a service distribution agreement, dated July 18, 2000 and amended onFebruary 16, 2001, whereby Smart has been designated to be the authorizedservice provider of ACeS Philippines GMPCS.  Under the amended agreement, Smartis required to remit to ACeS Philippines a facility usage fee based on arevenue-sharing formula while ACeS Philippines is required to pay Smart’scharges for the payphone-related services.

 

*Agreements between Smart and Asia Link B.V*.*, or ALBV*

Smart and ALBV are parties to agreements under whichAsia Link undertakes to provide technical support services for the operationsand maintenance of Smart’s CMTS for a period of five years, subject to renewalupon mutual agreement between the parties.  Asia Link is a subsidiary of FirstPacific.

*Agreement with Foote, Cone & Belding Worldwide, orFCB Worldwide*

Under this agreement FCB Worldwide providesconsultancy and advisory services to PLDT.  The chairman of PLDT’s board ofdirectors is the non-executive chairman of FCB Worldwide’s representativeoffice in the Philippines.

*Agreements relating to insurance companies*

Gotuaco del Rosario and Associates, or Gotuaco, actsas the broker for certain insurance companies to cover certain insurableproperties of the PLDT Group.  Insurance premiums are remitted to Gotuaco andthe broker’s fees are settled between Gotuaco and the insurance companies.  Inaddition, PLDT has signed an insurance policy with Malayan Insurance Co.  Inc.,or Malayan, wherein premiums are paid directly to Malayan.  Total payments toGotuaco and Malayan covering the twelve-month period ending July 31, 2003amounted Php307 million.  Two directors of PLDT have a direct/indirect interestin or serve as directors/officers of Gotuaco and Malayan.

*Other Transactions*

 

PLDT, Smart, Piltel, Clark Telecom,Subic Telecom and MaraTel are parties to various interconnection agreementswith each other.  The terms of these agreements are similar to the terms ofother interconnection agreements with telecommunications providers that are notaffiliated with PLDT.

 

On May 11, 2000, PLDT acquired fromPiltel 600,000 shares of common stock of Mabuhay Satellite for Php60 million.On the same date, Piltel assigned to PLDT Piltel's right to subscribe for617,028 shares of common stock of Mabuhay Satellite for which Piltel had paidPhp54 million.  In exchange, PLDT paid Php54 million to Piltel and assumed theobligation to pay Mabuhay Satellite the unpaid balance of the subscriptionprice amounting to Php8 million.

 

On August 14, 2000, PLDT acquiredfrom Smart 632,076 shares of common stock of Smart-NTT Multimedia for a totalconsideration of Php63 million.

 

On December 9, 2002, PLDT transferred and conveyed to Smartcertain inland and submarine domestic fiber optic cable loops, digitaltransmission equipment and corresponding network management systems with anaggregate net book value of Php4,138 million, as consideration and in exchangefor 298 million preferred shares of Smart subscribed by PLDT at Php13.875 pershare, or a total subscription price of Php4,138 million.

 

The above related partytransactions are discussed further in Note 19 to our consolidated financialstatements in Item 18.

 

Item 8.       Financial Information

** **

Consolidated Statements and Other Financial Information

 

Consolidated financial statementsare set forth under “Item 18. Financial Statements.”

 

Legal Proceedings

 

Except as disclosed in thefollowing paragraphs, PLDT is not a party to, and none of its property issubject to, any pending legal proceedings which PLDT considers to bepotentially material to its business.

 

*Quo Warranto Action*

* *

On June 4, 1990, the Solicitor General of the Philippinesinstituted legal proceedings in the Regional Trial Court of Makati City seekingto “oust Philippine Long Distance Telephone Company (PLDT) from exercising itsfranchise and/or to revoke, cancel and/or pre-terminate its franchise (Act No.3436, as amended) and/or to break up an unlawful monopoly and give equal andfair opportunity to other service corporations.” The Solicitor General citedconstitutional and statutory grounds for his action.  These include allegedforeign investors' participation in the control and management of PLDT on abasis disproportionate to their holdings of PLDT's capital stock, violation ofthe requirement that 60% of the capital of a public utility be owned byPhilippine citizens, inadequate and costly equipment and service, and blockingof the right of other parties to provide telephone service in the Philippines.

 

We believe that these allegationsare without merit.  The Philippine Congress granted PLDT’s amended franchiseunder Republic Act No. 7082 notwithstanding the existence of these proceedingsand the opposition of the Solicitor General.  The case has been archived byvirtue of a court order dated January 20, 1999.  No further action has beentaken and the case remains inactive.  For additional information regarding thiscase, see “Item 3. Key Information — Risk Factors — Risks Relating to Us —PLDT’s franchise may be revoked if we are unsuccessful in legal proceedings,which are pending.”

 

*NTC Fees*

* *

***PLDT***

 

Since 1994, following the NTC’srejection of PLDT’s formal protest against the assessments by the NTC ofpermit, supervision and regulation fees, or SRF, PLDT and the NTC have beeninvolved in legal proceedings before the Court of Appeals and the SupremeCourt.  The basis of these legal proceedings is the NTC's inclusion of stockdividends and capital in excess of the par value of stock in computing thesefees, and the NTC’s assessment of administrative fees for the increase inPLDT’s authorized capital stock even in the absence of NTC's performance ofregulatory services.  As of December 31, 2002, PLDT has paid a total amount ofPhp1,249 million in supervision and regulation fees, of which Php1,094 millionwere paid under protest and Php103 million in permit fees.

 

The Court of Appeals held that theannual supervision and regulation fees should be assessed and collected only onthe basis of the par value of PLDT’s outstanding capital stock exclusive ofcapital in excess of par.  On appeal filed by the NTC, the Supreme Court, inits decision dated July 28, 1999, ordered the NTC to recompute the fees to beimposed on PLDT on the basis of PLDT's capital stock subscribed or paid, whichwas defined as the “total amount of the capital that persons have agreed totake and pay for.”  However, the subsequent assessment issued by the NTC foroutstanding supervision and regulation fees also included the amount of stockdividends in the basis of calculation, which PLDT believes is contrary to thedispositive portion of the Supreme Court decision.  In view of this, and NTC'sfailure to resolve PLDT's protest, PLDT filed with the Court of Appeals aPetition for Certiorari and Prohibition with an Application for a TemporaryRestraining Order/Writ of Preliminary Injunction to invalidate and permanentlyenjoin the enforcement of the NTC assessment.  Initially, the Court of Appealsissued a temporary restraining order.  Thereafter, on December 4, 2000, theCourt of Appeals issued a writ of preliminary injunction enjoining theimplementation of the NTC's assessment.  On February 12, 2001, the Court ofAppeals dismissed PLDT's petition.  PLDT filed a Motion for Reconsideration ofthis dismissal.  Because the statutory deadline for the payment of thesupervision and regulation fees is September 30 of each year, PLDT filed withthe Court of Appeals an Urgent Motion for Re-Issuance of Restraining/InjunctiveWrit, which was granted on September 26, 2001, to be effective until the Motionfor Reconsideration is resolved.  On March 21, 2002, the Court of Appealsdenied PLDT's Motion for Reconsideration and dissolved therestraining/injunctive writ.  On May 17, 2002, PLDT filed with the SupremeCourt a Petition for Review on Certiorari of the decision of the Court ofAppeals dated February 12, 2001.  On September 5, 2002, PLDT filed an UrgentMotion for the issuance of a temporary restraining order to enjoin the NTC fromenforcing any assessment for supervision and regulation fees on PLDT until theSupreme Court has resolved PLDT’s petition on its full merit.  Considering thatthe Supreme Court had not decided on PLDT’s aforementioned Motion as of September30, 2002, PLDT paid to the NTC on said date supervision and regulation fees forthe years 2000 and 2002 calculated on the basis of paid-up capital includingpremium but excluding stock dividends.

 

***Smart***

 

Smart has been paying under protest the SRF assessed by theNTC.  On September 27, 2001, Smart paid the amount of Php86 millionrepresenting SRF for 2001.  On September 30, 2002, Smart paid the amount ofPhp114 million representing SRF for 2002.

 

The above amounts and all otherassessments for SRF in the past were paid under protest as Smart believes thatthe same are exorbitant and unreasonable and contrary to Section 5(g) ofRepublic Act No. 7925.  Republic Act No. 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.

 

In its protest, Smart also citedthe decision of the CA in the case of ICC Corporation vs. NTC (CA-GR SP No.45-100, September 30, 1999) which held that:  “In the guise of taxation,respondent NTC has in fact arrogated upon itself the power to tax an entity,which it is not authorized by law to do, thereby exceeding its lawfuljurisdiction and/or acting with grave abuse of discretion.  That respondent NTChas been generating income from the collection of fees from telecommunicationentities in the guise of regulation is evident and that the NTC is notclassified as tax generating agency of the government.”

* *

*Victor C. Fernandez*

* *

On December 9, 1999, a holder ofpreferred shares of stock of PLDT, Victor C. Fernandez, filed a petitionagainst the incumbent directors of PLDT questioning the validity of theresolutions of the board of directors of PLDT then authorizing the acquisition ofSmart.  Fernandez claimed that he would suffer injury from dilution of hisshares and the possible revocation of PLDT's franchise in view of the violationof the Philippine Constitution's foreign equity restrictions if theseresolutions were implemented.  Fernandez also claimed that the approval rightsto be granted to NTT Communications in connection with the Smart acquisitionwould constitute foreign intervention in the management and operation of publicutility and that the Smart shares being acquired by PLDT were overvalued.  Therespondent directors denied all these claims and have articulated their legalarguments in their answer to the complaint.

 

Fernandez's application for arestraining order to enjoin the holding of the PLDT stockholders' meeting onDecember 10, 1999 was denied by the Philippine SEC.  At this meeting, thestockholders approved the resolutions passed by the board of directorsauthorizing the acquisition of Smart.  On June 20, 2000, Fernandez'sapplication for a writ of preliminary injunction was denied.

 

In view of the provisions of Republic Act No. 8799enacted in July 2000, referred to as the Securities Regulations Code,transferring the jurisdiction of intra-corporate controversies to the RegionalTrial Court, the Philippine SEC transferred the case to the Regional TrialCourt of Manila.  By a motion filed by the parties, the case was later orderedtransferred to the proper venue, the Regional Trial Court of Makati City andwas raffled to Branch 142 of the Regional Trial Court of Makati City (the“Makati Court”).

 

During the pre-trial hearing, the parties agreed tolimit the resolution of the case to merely issues of law except for the issueon respondent directors’ counterclaims.

 

The transactions subject of the suit (“QuestionedTransactions”) were limited to PLDT’s acquisition of Smart and NTT’s entry intoPLDT and the issues to be resolved were limited to whether (a) the remainingQuestioned Transactions violate the constitutional limitations on foreignequity in public utilities, The Foreign Investments Act and the Anti-Dummy Law;(b) the Questioned Transactions result in a monopoly; and (c) Fernandez isentitled to annul the Questioned Transactions.

 

The Makati Court in its decisiondated February 21, 2002 (the “Decision”) held that the Questioned Transactions“resulting from resolutions which have been approved by PLDT’s stockholders andgovernment regulatory agencies, such as the NTC and the Philippine SEC, arevalid and legal” and thus dismissed the petition of Fernandez.  Fernandez filedwith the Supreme Court a Petition for Review on Certiorari seeking a review ofthe Decision (the “Petition”) and a Motion to Refer the Petition to the SupremeCourt en banc.  In a resolution dated June 9, 2003, the Supreme Court deniedthe Petition (the “Resolution”).  Fernandez filed a Motion for Reconsiderationof the Resolution with a Motion to Refer the Petition to the Supreme Court enbanc.  On the other hand, the hearing on the counterclaims of the respondentdirectors was reset to May 9, 2003.  However, on April 29, 2003, Fernandezfiled a Motion for the Suspension of the Proceedings in the Makati Courtregarding the counterclaims of the respondent directors, pending resolution bythe Supreme Court of the Petition.  This motion was denied by the Makati Courton May 30, 2003.

 

*Taxation*

 

*National Internal Revenue Taxes*

 

PLDT has filedvarious cases against the Commissioner of the Bureau of Internal Revenue forrefunds and/or tax credit of:

 

•        erroneously paid value added taxes, compensating taxes, advancesales taxes and other internal revenue taxes on PLDT’s importation of variousequipment, machinery and spare parts;

 

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

 

•        overpaid value added taxes, which were paid based on grossbillings, not on gross receipts.

 

The first two cases are pendingwith the Supreme Court and the Court of Appeals, respectively.  With respect tothe third case, the Court of Tax Appeals issued a decision on July 18, 2002partially granting the claim for refund.  The Commissioner of Internal Revenuefiled a Motion for Partial Reconsideration, which was denied by the Court ofTax Appeals in its Resolution dated September 20, 2002.  On October 8, 2002,the Commissioner of Internal Revenue filed for a Motion for Extension of timeto file Petition for Review with the Court of Appeals.  However, despite thelapse of the extended period, the Commissioner of Internal Revenue failed tofile the Petition for Review.  Hence, the Court of Appeals issued a Resolutionon March 27, 2003 dismissing the petition.  On March 28, 2003, the Court ofAppeals issued a Resolution ordering the issuance of the Entry of Judgment andWrit of Execution.

 

*Local Business and FranchiseTaxes*

* *

***PLDT***

 

PLDT currently faces various suits for local businessand franchise taxes assessed by different local government units.  PLDTbelieves that under prevailing Philippine laws, it is exempt from the paymentof local business and franchise taxes to local government units and it iscontesting the assessment of these taxes in all these cases.

 

In a case entitled PLDT vs. the City of Davao, onAugust 22, 2001, the Supreme Court denied PLDT’s Petition for Review onCertiorari and affirmed the decision of the Davao City Regional Trial Courtupholding the assessment of local franchise tax in the amount of approximatelyPhp4 million for the year 1999 and denying PLDT’s claim for a refund oferroneously paid franchise tax for the year 1997 and the first to the thirdquarters of 1998.  The Supreme Court held that although the withdrawal of taxexemptions under the Local Government Code does not preclude Congress fromgranting subsequent exemptions, the issue is whether, after the withdrawal ofPLDT’s exemption under the Local Government Code, PLDT again became entitled tothe exemption by virtue of Section 23 of Republic Act No. 7925.  The SupremeCourt ruled that PLDT is not entitled to this exemption, and cited rules instatutory construction holding that tax exemptions are highly disfavored, andthat legislative intent must be ascertained from a consideration of the statuteas a whole and not merely of a particular provision.  The decision stated thatthe term “exemption” in Section 23 is too general and it does not appear that,in approving Section 23 of Republic Act No. 7925, Congress intended it tooperate as a blanket tax exemption to all telecommunication entities.  As such,the Supreme Court held that Section 23 of the Republic Act No. 7925 cannot beconsidered as having amended PLDT’s franchise so as to entitle it to exemptionfrom local franchise tax.  On October 1, 2001, PLDT filed a Motion forReconsideration of the Supreme Court decision and a Motion to Refer the case tothe Court En Banc and for Oral Arguments.  The Supreme Court’s Second Divisiongranted the Motion to Refer the Case to the Court En Banc, which referral wasthereafter accepted by the Supreme Court En Banc.  The Oral Arguments were heldon January 21, 2003 and both parties submitted their Memorandum whereupon theMotion for Reconsideration was deemed submitted for resolution.  On March 25,2003, the Supreme Court decided by a 9-to-5 vote to deny PLDT’s Motion forReconsideration and affirmed the franchise tax assessment of Davao City in theamount of approximately Php4 million.  Subsequently, PLDT paid the Davao Citygovernment franchise taxes covering the period 1999 to 2003, including the Php4million, but is seeking reconsideration of the surcharges and interests of aboutPhp10 million imposed by the Davao City government.  PLDT believes thatalthough the Supreme Court decision would constitute a precedent, this will notautomatically result in the termination of the other pending local franchisetax cases with the courts rendering a decision adverse to us and PLDT willpursue all legal remedies with regard to all pending cases.

 

On August 8, 2001, PLDT received a decision, datedJuly 16, 2001, on its petition filed with a Regional Trial Court of the City ofMakati appealing the denial of PLDT’s protest of the assessments for localfranchise taxes in the aggregate amount of Php595 million for the years 1992 to1994 and Php1,100 million for the last three quarters of 1995 up to 1998.  Thisdecision ordered PLDT to:

 

•        submit its audited financialstatements showing its gross receipts for the period from October to December31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998, so that the City of Makati canmake the proper assessment of the tax due;

 

•        pay the City of Makati the sumequivalent to 0.5% of the total gross receipts realized during the periodOctober 1 to December 31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998 afterdetermination of PLDT’s annual gross receipts for the subject years; and

 

•        henceforth pay its franchise andbusiness taxes pursuant to Section 137 of Republic Act 7160.

 

PLDT filed an appeal with the Supreme Court onSeptember 20, 2001.  In its appeal, PLDT

argued, among other things,that:

 

•        The right of the City of Makati toassess PLDT for any alleged deficiency in franchise tax for the years 1992 to1994 in the approximate amount of Php595 million has prescribed because theLocal Government Code provides for a period of five years within which anassessment can be made by the local government unit and the City of Makatiassessed these alleged taxes against PLDT only on May 24, 1999;

 

•        PLDT is exempt from localfranchise and business taxes by virtue of the equality of treatment clauseunder the Public Telecommunications Policy Act as confirmed by the Departmentof Finance through the Bureau of Local Government Finance and is not thereforeliable to pay the City of Makati deficiency tax for the years 1995 to 1998 inthe amount approximately Php1,100 million; and

 

•        Assuming (without admitting) thatPLDT is liable to pay the franchise tax, the approximate Php1,684 million totalassessment is erroneous as it was based on PLDT’s total annual gross receiptsderived from its overall business operations, while the Local Government Codeprovides that the franchise tax which can be imposed by the local governmentunit shall be based on the annual gross receipts derived from within the taxinglocal government unit territory or, in this case, from the operations of PLDTwithin the City of Makati only.

 

In a resolution dated October 22, 2001, the SupremeCourt remanded the case to the Court of Appeals.  As required by the Court ofAppeals, the City of Makati filed its Comment and PLDT filed its Reply to theComment.  On August 21, 2002, the Court of Appeals suspended further proceedingsin the case until the Supreme Court resolved the similar issues raised in theCity of Davao case discussed above.  OnApril 28, 2003, the City of Makati filed a Motion to Resolve the Case citingthe decision of the Supreme Court resolving PLDT’s Motion for Reconsideration.On July 15, 2003, the Court of Appeals issued a decision modifying the decisionof the Regional Trial Court in respect of the assessment made by the City ofMakati for the years 1992 to 1994.  The Court of Appeals ruled that the City ofMakati could not impose franchise tax on PLDT while it was still a municipalityfrom 1992 to 1994.  However, the Court of Appeals upheld the right of MakatiCity to impose franchise tax starting the year 1995, when it became a city.This decision ordered PLDT to:

 

•        submit its audited financialstatements showing its gross annual receipts for the years 1995, 1996, 1997 and1998;

 

•        pay the City of Makati the amountof the tax due, after arriving at the proper assessment; and

 

•        henceforth pay its franchise taxpursuant to Section 137 for the Local Government Code

 

PLDT intends to further appeal the issue of liabilityof PLDT for franchise tax to the Supreme Court.

 

PLDT is also protesting the assessment by the City ofMakati of a franchise tax deficiency for 1999 in the amount of Php298 million.On February 26, 2001, PLDT filed a petition in the Regional Trial Court ofMakati City to compel the Office of the Makati City Treasurer and the MakatiCity Law Department to act on PLDT’s protest of the assessed franchise taxdeficiency for 1999.  This case was suspended pending the review by the Courtof Appeals of the decision of the Makati City Regional Trial Court in theaction in respect of the 1992 to 1998 assessments described above.  Thesuspension was lifted on June 23, 2003 and pre-trial was set on August 26,2003.

 

On December 7, 2001, another case was filed by PLDTagainst the City of Makati protesting the assessment of local franchise andbusiness taxes for the year 2000 in the amount of Php307 million.  Thepre-trial, originally scheduled on May 19, 2003, was postponed until August 18,2003.

 

On April 16, 2002, another case was filed by PLDTagainst the City of Manila protesting the assessment of local franchise andbusiness taxes in the amount of Php2,228 million for the period covering 1997,1998, 1999, 2000 and 2001, inclusive of penalties and interests.  PLDT filed amotion to suspend proceedings on March 10, 2003 pending the resolution by theSupreme Court of the City of Davao case discussed above.  The City of Manilasubmitted its comments and oppositions on PLDT’s motion to suspend theproceedings on March 21, 2003 and the motion is now deemed submitted forresolution.

 

PLDT has filed other cases pertaining to theassessments made by other local government units, however, these cases involveamounts significantly lower than the assessments in the cases against the Cityof Makati and the City of Manila.  Some of these cases are pending decision bythe respective regional trial courts.  In each of the other cases in which anunfavorable decision has been rendered by the lower courts against PLDT, PLDThas filed a Petition for Review with the Supreme Court.

 

There have been some cases wherein PLDT’s exemptionfrom franchise tax has been upheld by the Court.  In one case involving theProvince of Pangasinan, the Court of Appeals reversed the decision of theRegional Trial Court of Lingayen, Pangasinan and held that PLDT is exempt fromthe payment of the local franchise and business taxes.  The Court of Appealsdenied the Motion for Extension of Time to file a Motion for Reconsideration ofthe decision of the Regional Trial Court filed by the Province of Pangasinanand also denied the Motion for Reconsideration of the Court of Appeals’ denialof the Motion for Extension of Time.  On April 26, 2002, the Province ofPangasinan filed a Petition for Certiorari seeking to, among other things, setaside the decision of the Court of Appeals in respect of the Motion forExtension of Time to file a Motion for Reconsideration and affirm the decisionof the Regional Trial Court of Lingayen.  On May 29, 2002, the Supreme Courtdenied this petition on the ground that “the petition is evidently used as asubstitute for the lost remedy of appeal” and the Province of Pangasinan fileda Motion for Reconsideration.  The Motion for Reconsideration of the SupremeCourt resolution filed by the Province of Pangasinan was denied with finalityon June 26, 2002.

 

Similarly, in a case filed by PLDT against the City ofCebu, the Regional Trial Court declared PLDT exempt from payment of localfranchise tax and granted PLDT’s claim for refund.  This decision became finalon July 6, 2001, however, the City of Cebu filed a Petition for Relief ofJudgment with a prayer for preliminary injunction, citing the Supreme Court’sdecision in the Davao case.

 

In addition, we have received assessments for localbusiness and franchise taxes in the aggregate amount of Php24.4 million, all ofwhich are under administrative protest.

 

As of June 30, 2003, the aggregate amount claimed bythe plaintiffs in these lawsuits was Php4,834 million with respect to PLDT andPhp313 million with respect to Smart.  We believe that in the event theselawsuits are decided against us, our potential liability is likely to besignificantly lower than the amounts claimed by the plaintiffs.

 

***Smart***

 

To date, Smart has received assessments for localfranchise and business taxes from certain cities and municipalities in theaggregate amount of approximately Php313 million.  Smart has formally protestedthese assessments based on the following:

 

•        An opinion issued by the Bureau ofLocal Government Finance, or BLGF, dated August 13, 1998 stating that Smartshould be considered exempt from the local franchise tax provided under Section137 of the Local Government Code, which exemption shall be applicable only tolocal franchise and business taxes.

 

•        Republic Act No. 7925 was passedon February 20, 1995 after the passage of the Local Government Code.  Under theipso facto provision of Republic Act No. 7925, the holder of a franchisegranted prior to or after the effective date of Republic Act No.7925 isentitled to the benefit or any favorable provisions contained in any otherfranchises, regardless of whether such franchises were granted prior to orafter the passage of Republic Act No. 7925.

 

•        Because Smart’s legislativefranchise took effect after the effective date of the Local Government Code,the franchise tax prescribed under Section 137 thereof should be deemed to bepart of the said franchise.  Section 137 states that “cellular operators shallonly pay a franchise tax equivalent to 3% of all gross receipts of the businesstransacted under the franchise, and the said percentage shall be in lieu of alltaxes on this franchise or earnings thereof.”

 

•        In the PLDT vs. City of Davaocase, the SC took cognizance of the BLGF opinion by stating that Smart’sfranchise granted after the effectivity of the Local Government Code exemptedit from the payment of local franchise and business taxes.

 

Smart’s administrativeprotest against the Makati and Iloilo assessments were denied, while thoseagainst the Digos and General Santos assessments in the aggregate amount ofPhp59,447 have not yet been decided.

 

Smart filed separate petitions appealing the localfranchise and business tax assessments of Makati City in the amount of Php196million for the calendar years 2000 and 2001, and in the amount of Php116million for the calendar years 1995, 1998 and 1999.  These cases have beenconsolidated and are now pending before Regional Trial Court, Branch 61 ofMakati City.  Smart’s earlier motion to suspend trial pending resolution of theSmart franchise tax case in Davao was subsequently denied by said court.

 

Smart also filed a petition appealing the local franchiseand business tax assessment of Iloilo City in the amount of Php1 million.  Thiscase is now pending before the Regional Trial Court, Branch 28 of Iloilo City.

 

Smart also filed a Petition for Declaratory Reliefwith the SC questioning an ordinance issued by the City Council of Davao on thelocal franchise and business taxes.  The SC decided in favor of the City ofDavao and Smart’s Motion for Reconsideration of said decision was denied.Smart filed with the SC a Petition for Review under Rule 45 of the 1997 Rulesof Procedure to appeal the aforestated decision.

 

*Mabuhay Satellite Arbitration*

* *

Mabuhay Satellite was engaged in an arbitration commenced bySpace Systems Loral, Inc., or SS/L, as a result of a dispute between theparties concerning their satellite joint venture.  On June 5, 2002, MabuhaySatellite received an arbitration decision requiring Mabuhay Satellite to paySS/L the principal amount of approximately US$10 million, plus accruedinterest representing Mabuhay Satellite’s unpaid balance for its 65% equityshare in the joint venture.  As of December 31, 2002, this amount totaledapproximately US$15 million (including accrued interest) and had beensubstantially accrued and recorded in the books of Mabuhay Satellite.  On June30, 2003, Mabuhay Satellite and SS/L concluded a settlement agreement whereofMabuhay would lease two (2) transponders on a life-term basis to SS/L andoffset the lease charges due from SS/L and receivables from Loral SkynetNetwork Services, Inc. (formerly Loral Cybestar, Inc.), an affiliate of SS/L,for a full and final settlement of the arbitral decision.

 

*Piltel*

 

In 1999 and 2001, the PhilippineSEC investigated Piltel for alleged failure to fully and fairly disclosePiltel's financial condition and the status of its debt obligations.  To theknowledge of PLDT, these investigations did not result in an adverse findingagainst Piltel or PLDT.  However, the Philippine SEC imposed a fine on Piltelfor late filing of the disclosure to the Philippine SEC of the default on thepayment of Piltel's debts.

 

On March 7, 2002, a Piltelshareholder notified Piltel that it has reasonable grounds to believe thatPiltel misrepresented or failed to disclose various liabilities in variousaudited financial statements.  Although no claim has been filed against Piltel,we cannot assure you that a claim on this or other bases will not be filed inthe future.

 

On September 30, 2002, Piltelreceived from the NTC an assessment for deficiency supervision and regulationfees amounting to Php640 million, including penalty fees of Php275 million.Piltel has protested the assessments in good faith.  Piltel continues to makepayments for amounts which it believes are properly due to the NTC.  OnSeptember 30, 2002, Piltel made a payment to the NTC under protest in theamount of Php9 million.

 

U.S. FCC Proceeding on Termination Rates

In May 2002, PLDT advised AT&T, MCI andother carriers of PLDT’s need to increase its termination rates by August2002.  Despite numerous negotiation sessions in 2002 and 2003, AT&T and MCIrefused to accept any rate increases.  PLDT unilaterally extended its priortermination charges to AT&T and MCI while continuing to seek to negotiate,first from August 1, 2002 to October 1, 2002, then until December 31, 2002, andthen, finally, despite the lack of a written agreement from AT&T and MCI,through January 31, 2003.  While nearly 100 carriers worldwide, including more than 20U.S. carriers, have then****agreedto the new termination rates and entered into new termination rate agreementswith PLDT, the written****termination rate agreements withAT&T and MCI lapsed in December 2002, without either agreeing with PLDT onany provisional arrangement or final agreement on the new termination rates**.**Facedwith continuing stonewalling by AT&T and MCI, PLDT, in December 2002, wasforced to notify each company that PLDT’s termination rates would finally beincreased as 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 requestingthe U.S. FCC to take action to protect U.S. international carriers and U.S.consumers from alleged “whipsawing” behavior occurring on the U.S.-PhilippineRoute.  “Whipsawing” is a form of anti-competitive behavior that involves theability 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, the NTC directed Philippine carriers to take one of two different coursesof action, depending on whether such carriers had effective termination rateswith their counterparties.  If PLDT had “existing and effective agreements withforeign telecommunication carriers relative to termination rates”, it should“comply with the terms thereof, specifically in maintaining the flow of trafficin and between circuits and facilities covered by such agreements.”  If,however, the counterparty and PLDT were “without existing and effectiveagreements relative to termination rates,” then PLDT is “encouraged tonegotiate and conclude agreements” with the counterparty, and “the parties mayagree on provisional/interim arrangements for continuity of service.”  Each ofAT&T and MCI immediately rejected PLDT’s offer for an interim terminationrate agreement.

On February 26, 2003, the NTC issued an Order confirmingthat, pursuant to its February 7 Order, “it is understood that absent anyprovisional or interim arrangement or agreement” with U.S. carriers, therewould be no provision of termination services between the parties “who arethereby encouraged to seek other routes or options to terminate traffic to thePhilippines.”

 

On February 28, 2003, PLDT and MCI reached an “interimagreement” effective through March 31, 2003, whereby PLDT agreed to providedirect service under a revised termination rate structure while the partiesnegotiated a final termination rate agreement.  This interim agreement expiredon April 15, 2003.

 

On March 10,2003, the International Bureau of the U.S. FCC granted the request of AT&Tand MCI and issued an Order directing all facilities-based carriers subject toU.S. FCC jurisdiction to suspend payments for termination services to PLDT,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 AT&T’s circuits on theU.S.-Philippine route are fully restored.  The Order also removed thePhilippines from the list of U.S.-international routes approved for theprovision of International Simple Resale.  As of June 30, 2003, receivablesfrom U.S. carriers amounted to approximately US$19 million, of which US$8million was attributable to PLDT, US$8 million to Smart and US$3 million toSubic Telecom.

In response tothe ruling of the International Bureau of the U.S. 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.”

The NTC alsostated in its March 12, 2003 Order that the termination rates offered by PLDTare “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 U.S. FCC benchmarksettlement rate of US$0.19 per minute for lower middle incomecountries such as the Philippines and also substantially below the settlementrate of US$0.238 per minute suggested by the International TelecommunicationsUnion for countries with teledensity between 1 to 5 telephones per 100population.

On April 9, 2003,we filed with the U.S. FCC an application for review of the InternationalBureau’s March 10, 2003 Order.  On April 24, 2003, AT&T and MCI filedOppositions to our application for review of the International Bureau’s March10, 2003 Order and on May 5, 2003, we filed our reply to these Oppositions.Please see “Item 3. Key Information — Risk Factors — Risks Relating to Us— The outcome ofthe proceeding at the U.S. FCC is uncertain and could materially affect our abilityto engage in business in the United States and our results of operations.

 

Dividend Distribution Policy

 

The most recent dividenddeclaration made by PLDT in respect of its common shares was in March 2001.  Itcontinues to pay dividends in respect of its preferred shares.  The currentpolicy of PLDT is to well determine its ability to declare and pay dividends,regularly taking into consideration the interests of its shareholders as wellas PLDT’s working capital, capital expenditure and debt service requirements.Also taken into account are the prohibitions and restrictions under certain ofour debt instruments with respect to the declaration and payment of dividendsas discussed in “Item 5. Operating and Financial Review and Prospects —Liquidity and Capital Resources — Financing Activities — Debt Financing —Covenants”, “Item 10. Additional Information — Articles of Incorporation andBy-Laws — Dividends” and in Notes 15 and 18 to our consolidated financialstatements in Item 18.  The retention of earnings is necessary to meet thefunding requirements of our business expansion, service improvement anddevelopment programs.  The balance of PLDT’s unappropriated retained earningsincludes accumulated equity in the net earnings of investees, which are notavailable for distribution as dividends until declared by the investees (seeNote 18 to our consolidated financial statements in Item 18).  Except fordividends on PLDT's Series III and Series VI Convertible Preferred Stock, whichare payable in U.S. dollars and PLDT's Series VII Convertible Preferred Stock,which are payable in Japanese yen, dividends are generally paid in Philippinepesos.  In the case of shareholders residing outside the Philippines, PLDT'stransfer agent in Manila, which acts as the dividend disbursing agent, convertsthe peso dividends into U.S. dollars at the prevailing exchange rates, andremits the dollar proceeds abroad, net of withholding tax.

 

Item 9. The Offer and Listing

** **

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

 

The common shares of PLDT arelisted and traded on the Philippine Stock Exchange, and, prior to October 19,1994, were listed and traded on the American Stock Exchange and PacificExchange in the United States.  On October 19, 1994, an ADR facility was established,pursuant to which Citibank, N.A., as the Depositary, issued ADRs evidencingADSs, with each ADS representing one common share each with a par value ofPhp5.  Effective February 10, 2003, PLDT appointed JPMorgan Chase Bank assuccessor depositary of PLDT’s ADRs.  The facility was established inaccordance with a Common Stock Deposit Agreement dated October 19, 1994, asamended on February 10, 2003, between the Depositary and the holders of ADRs.The ADSs have been listed and are traded on the New York Stock Exchange and thePacific Exchange in the United States under the symbol “PHI”.

 

In 2002, a total of 35.4 millionshares of PLDT's common capital stock were traded on the Philippine StockExchange.  During the same year, the volume of trading was 30.4 million ADSs onthe New York Stock Exchange but none on the Pacific Exchange.

 

As of December 31, 2002,approximately 99% of PLDT’s Common Capital Stock was held of record in thePhilippines by 14,561 holders and approximately 1% was held of record in theUnited States, Canada and other countries by 1,391 holders.  In addition, as ofDecember 31, 2002, there was a total of 30.4 million ADSs outstanding,substantially all of which PLDT believes were held in the United States by 481holders.

 

High and low sales prices for PLDT's common shares on thePhilippine Stock Exchange, or PSE, and ADSs on the New York Stock Exchange, orNYSE, for each of the five most recent fiscal years, each full quarterly periodduring the two most recent years and any subsequent period, and each month inthe most recent six months were as follows:

 

 

**PSE**

**NYSE(1)**

 

**High**

**Low**

**High**

**Low**

1998

Php1,130.00

Php690.00

US$28

7/8

US$15

5/16

1999

1,290.00

770.00

33

1/2

18

9/16

2000

1,100.00

660.00

28

1/4

14

7/8

2001

1,060.00

332.50

20.75

 

6.55

 

First Quarter

1,060.00

695.00

20.75

 

14.19

 

Second Quarter

745.00

610.00

14.60

 

12.07

 

Third Quarter

735.00

475.00

14.15

 

9.30

 

Fourth Quarter

475.00

332.50

9.40

 

6.55

 

2002

565.00

209.00

11.30

 

3.85

 

First Quarter

550.00

407.50

10.72

 

7.91

 

Second Quarter

565.00

367.50

11.30

 

7.32

 

Third Quarter

380.00

277.50

7.55

 

5.16

 

Fourth Quarter

292.50

209.00

5.53

 

3.85

 

2003

670.00

265.00

12.48

 

4.85

 

First Quarter

337.50

265.00

6.18

 

4.85

 

Second Quarter

565.00

312.50

10.77

 

5.80

 

April

400.00

312.50

7.62

 

5.80

 

May

432.50

385.00

8.28

 

7.10

 

June

565.00

437.50

10.77

 

8.43

 

Third Quarter

670.00

482.50

12.48

 

8.78

 

July

600.00

490.00

11.40

 

8.89

 

August

555.00

482.50

10.10

 

8.78

 

September

670.00

540.00

12.48

 

10.00

 

_____________

 

*(1)**Effective January 29, 2001, PLDTconverted from fractional to the decimal system of pricing in compliance withthe new trading standard required by the U.S. SEC.*

 

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

 

On November 29, 1994 and onDecember 12, 1994, PLDT issued an aggregate of approximately 5 million sharesof Series III Convertible Preferred Stock, each with a par value of Php10.  Inconnection therewith, a Global Depositary Receipt facility was established,pursuant to which Citibank N.A., as Depositary, issued GDRs evidencing GlobalDepositary Shares, or GDS, with each GDS representing one share of Series IIIConvertible Preferred Stock.  The stock is convertible into common stock at theoption of the holder at any time, at the conversion price of US$29.19 a shareof Common Capital Stock (equivalent to a conversion ratio of 1.7129 shares ofCommon Capital Stock for each share of Series III Convertible Preferred Stock,each share of convertible preferred stock being valued for this purpose at itsreference amount of US$50 a share), subject to adjustment in certain events.Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successorDepositary of PLDT’s GDRs.  The facility was established in accordance with aPreferred Stock Deposit Agreement dated November 29, 1994, as amended onSeptember 6, 1999 and on February 10, 2003, between the Depositary and theholders of GDRs.  The GDSs have been listed and are traded on the New YorkStock Exchange under the symbol “PHI Pra.”

 

High and low sales prices for the Series III ConvertiblePreferred Stock and the GDSs for each of the five most recent fiscal years,each full quarterly period during the two most recent years, and each month inthe most recent six months were as follows:

 

 

**NYSE(1)**

 

**High**

 

**Low**

 

 

 

 

 

 

1998 

52

1/2

 

35

1/4

1999 

57

1/2

 

38

7/16

2000 

50

1/2

 

31

1/4

2001(1)

39.875

 

 

16.000

 

First Quarter 

39.875

 

 

32.250

 

Second Quarter 

32.500

 

 

29.200

 

Third Quarter 

31.200

 

 

24.000

 

Fourth Quarter 

24.400

 

 

16.000

 

2002 

26.000

 

 

13.000

 

First Quarter 

26.000

 

 

18.000

 

Second Quarter 

25.900

 

 

20.100

 

Third Quarter 

20.200

 

 

15.930

 

Fourth Quarter 

22.750

 

 

13.000

 

2003 

40.900

 

 

20.500

 

First Quarter 

25.750

 

 

20.500

 

Second Quarter

37.750

 

 

25.750

 

April

29.150

 

 

25.750

 

May

32.630

 

 

28.300

 

June

37.750

 

 

32.800

 

Third Quarter

40.900

 

 

34.300

 

July

38.750

 

 

34.500

 

August

36.500

 

 

34.300

 

September

40.900

 

 

36.050

 

_____________

 

*(1)   Effective January 29, 2001, PLDT convertedfrom fractional to the decimal system of pricing in compliance with the newtrading standard required by the U.S. SEC.*

 

As of December 31, 2002, there wereapproximately 4.6 million GDSs outstanding, which PLDT believes weresubstantially held in the United States.

 

Item 10.    AdditionalInformation

** **

Articles of Incorporation and By-Laws

 

The following summarizes certainprovisions of PLDT's Articles of Incorporation and By-Laws and applicablePhilippine law.  This summary is qualified in its entirety by reference to theCorporation Code of the Philippines (the “Corporation Code”) and PLDT'sArticles of Incorporation and By-Laws.  Information on where investors canobtain copies of the Articles of Association and By-Laws is described under theheading “Documents Available.”

 

*Purpose of PLDT*

 

PLDT's Articles of Incorporationhave been filed with the Philippine SEC and PLDT has been issued SEC Reg. No.55.  The Second Article of PLDT's Articles of Incorporation provides that thepurposes for which PLDT was formed are to install, maintain, and operate anyand all kinds of equipment for communications; to install, maintain, operate orlease telephone lines and systems, and to purchase, sell and deal in all kindsof products which may be combined with the building, installing and operationof those systems and lines and in general, to engage in any and all acts andbusiness which may be necessary or convenient, in the furtherance of such linesof communication and business.

 

*Directors*

 

PLDT's Amended By-Laws provide thatthe Board of Directors shall consist of thirteen members, each of whom musthold at least one share of stock of PLDT in his own name and possess theminimum qualifications and have none of the disqualifications provided in theBy-Laws.  There are no provisions in PLDT's Amended Articles of Incorporationor Amended By-laws with respect to (a) a director's power to vote on aproposal, arrangement or contract in which the director is materiallyinterested; (b) the directors' power, in the absence of an independent quorum,to vote compensation to themselves or any members of their body; (c) borrowingpowers exercisable by the directors and how such borrowing powers can bevaried; or (d) retirement or non-retirement of directors under an age limitrequirement.

 

*Description of PLDT Capital Stock*

* *

*Authorized Capital Stock*

 

The authorized capital stock of PLDT is Php9,395 million dividedinto two classes consisting of 234 million shares of Common Capital Stock witha par value of Php5 per share (the “Common Stock”) and 822.5 million shares ofserial Preferred Stock with a par value of Php10 per share (the “PreferredStock”).

 

*Common Stock*

 

Set out below is a statement of thedividend, voting, pre-emption and other rights of the holders of Common Stockas set out in the Articles of Incorporation and/or By-Laws of PLDT:

 

(a)    After therequirements with respect to preferential dividends on the serial PreferredStock shall have been met and after PLDT shall have complied with all therequirements, if any, with respect to the setting aside of sums as purchase,retirement or sinking funds, the holders of the Common Stock shall be entitledto receive such dividends as may be declared from time to time by the Board ofDirectors out of funds legally available therefor.

 

(b)    Afterdistribution in full of the preferential amounts to be distributed to theholders of serial Preferred Stock in the event of the voluntary or involuntaryliquidation, dissolution, distribution of assets or winding up of PLDT, theholders of Common Stock shall be entitled to receive all the remaining assetsof PLDT of whatever kind available for distribution to stockholders ratably inproportion to the number of Common Stock held by them, respectively.

 

(c)    Except as may beotherwise required by law, or by the Articles of Incorporation of PLDT, eachholder of Common Stock shall have one vote in respect of each share of suchstock held by him on all matters to be voted upon by the stockholders, and theholders of Common Stock shall have the exclusive right to vote for the electionof directors and for all other purposes.  At every election of directors, aholder of Common Stock is entitled to vote such shares of Common Stock held byhim for as many persons as there are directors to be elected, or to cumulatesaid shares and give one candidate as many votes as the number of directors tobe elected multiplied by the number of his shares shall equal, or to distributesuch votes on the same principle among as many candidates as he shall thinkfit.

 

In addition to the foregoing rights, the Corporation Codeprovides for other stockholders' rights generally.  These include:

 

(a)    Appraisal rightor the right of a dissenting stockholder to demand payment of the fair value ofhis shares of stock in the following instances:  (a) in case any amendment tothe articles of incorporation has the effect of changing or restricting therights of any stockholders or class of shares, or of authorizing preferences inany respect superior to those of outstanding shares of any class, or ofextending or shortening the term of corporate existence; (b) in case of sale,lease, exchange, transfer, mortgage, pledge or other disposition of all orsubstantially all of the corporate property and assets of the corporation; and(c) in case of merger or consolidation.

 

(b)    The right toapprove certain corporate acts, such as:  (a) election of directors; (b)removal of directors; (c) extension or shortening of corporate term; (d)increase or decrease of capital stock, and incurring, creating or increasingbonded indebtedness; (e) sale or other disposition of all or substantially allof the corporate assets; (f) investment of corporate funds in any othercorporation or business or for any purpose other than the primary purpose forwhich it was organized; (g) declaration of stock dividend; (h) entering into amanagement contract with another corporation; (i) plan of merger orconsolidation; and (j) voluntary dissolution of the corporation by shorteningcorporate term.

 

(c)    The right toinspect at reasonable hours on business days the records of all businesstransactions of the corporation and the minutes of any meeting; however, thestockholders' right to inspect corporate records and books is not an absoluteright so that the corporation may deny said right on the basis of impropriety ofthe purpose or motive of the stockholder.

 

(d)    The right to befurnished the most recent financial statements of the corporation, within tendays from receipt by the corporation of a written request from a stockholder.The same right exists at the annual meeting of stockholders at which the Boardof Directors must present to the stockholders a financial report of theoperations of the corporation for the preceding year which shall includefinancial statements duly signed and certified by an independent certifiedpublic accountant.

 

*Restrictions on ForeignOwnership*

 

The Constitution of the Republic ofthe Philippines (Section 11, Article XII) states that no franchise,certificate, or any other form of authorization for the operation of a publicutility shall be granted except to citizens of the Philippines or tocorporations or associations organized under the laws of the Philippines atleast 60% of whose capital is owned by such citizens.

 

While the Articles of Incorporationand By-Laws of PLDT do not contain any specific restriction on the sale,assignment or transfer of shares that would violate the aforecited ownershiprequirement, the Articles of Incorporation of PLDT provide that the Board ofDirectors shall have full power and authority to authorize (whether by adoptionof amendments to the By-Laws of PLDT or of resolutions, the promulgation ofrules or regulations or otherwise) the taking by said corporation of all suchactions as the Board of Directors may deem necessary or appropriate to ensurecompliance by said corporation with any applicable provision of theConstitution of the Republic of the Philippines or any other applicable law,treaty, rule or regulation relating to the ownership of securities of saidcorporation by citizens of the Philippines, aliens or other persons or group ofpersons.

 

*Meetings*

* *

The Corporation Code requirescorporations to hold an annual meeting of stockholders and to send noticethereof to stockholders.  Under PLDT's By-Laws, the annual meeting ofstockholders shall be held at the principal office of the corporation, or atsuch other place designated by the Board of Directors in the city ormunicipality where the principal office of the corporation is located, on thesecond Tuesday in June of each year.  In the annual meeting, the Board ofDirectors shall be elected and such other business may be transacted as shallcome before the meeting.  At least fifteen (15) business days written orprinted notice of the date, time and place of holding every annualstockholders' meeting shall be given by the Secretary or by an AssistantSecretary by personal delivery or by mail to each stockholder at his or herlast known place of residence or business.  Special meetings of stockholdersmay be called at any time by the President or three (3) of the Directors or bya number of stockholders representing two-thirds (2/3) of the subscribedcapital stock.  Notice in writing of such meeting stating the date, time orplace thereof, shall be given to each stockholder by the Secretary or AssistantSecretary or, in case of his absence, inability, refusal or neglect to act,then by the President, Directors or stockholders calling said meeting, bypersonal delivery or by mail to each stockholder at his or her last known placeof residence, at least fifteen (15) business days before the date fixed for themeeting.

 

The By-Laws of PLDT provide thateach stock which has voting rights on any matter under consideration may berepresented at any meeting of stockholders by the holder thereof or by hisattorney duly authorized by proxy in writing on forms prescribed by the Boardof Directors which shall be furnished to a stockholder upon his request.Unless otherwise provided in the proxy, it shall be valid only for the meetingin respect of which such proxy was issued.  Proxies must be filed with theSecretary, Assistant Secretary or transfer agent of PLDT at least two (2) daysbefore the day of the meeting.  Any proxy filed with the Secretary, AssistantSecretary or transfer agent of the corporation may be revoked by thestockholder concerned either in an instrument in writing duly presented to theSecretary, Assistant Secretary or transfer agent of the corporation at leasttwo (2) days before the day of the meeting or by his personal presence at themeeting.  The decision of the Secretary on the validity of proxies shall befinal and binding until and unless set aside by a court of competentjurisdiction.  As provided in the Corporation Code, unless otherwise providedin the proxy, it shall be valid only for the meeting for which it is intendedand no proxy shall be valid and effective for a period longer than five (5)years at any one time.

 

The By-Laws of PLDT also providethat at any meeting of the stockholders, persons representing, in person or byproxy, a majority of the shares issued and outstanding and entitled to vote atsaid meeting shall constitute a quorum for the transaction of any business,except as otherwise provided by law, and except that a lesser number mayadjourn the meeting.

 

*Issues of Shares*

* *

The Board of Directors of PLDT hasthe power to authorize the issue and sale of authorized but unissued shares ofCommon Stock of said corporation for such consideration as it shall determine,provided that such consideration shall not be less than the par value of suchshares and, provided further, that such issue and sale is not otherwiseprohibited under applicable laws.

 

Under the Securities RegulationCode (Republic Act 8799) (the “SRC”), no securities except of a class exemptunder the provisions thereof or unless sold in any transaction exempt under anyof the provisions thereof, shall be sold or offered for sale or distribution tothe public unless such securities shall have been registered and permitted tobe sold pursuant to the SRC.

 

*Transferof Shares*

* *

The shares of Common Stock may betransferred by delivery of certificate(s) endorsed by the shareholder named inthe certificate or his duly authorized attorney or representative.  Notransfer, however, shall be valid, except as between the parties, until thetransfer is recorded in the stock and transfer books of PLDT maintained byHongkong and Shanghai Banking Corporation, the stock transfer agent of PLDT forthe Common Stock.

 

Philippine law does not requiretransfers of Common Stock to be effected on PSE, but any off-exchange transferswill subject the transferor to a capital gains tax that may be significantlygreater than the stock transfer tax applicable to transfers effected on thePSE.  All transfers of shares of Common Stock on the PSE must be effectedthrough a licensed broker in the Philippines.

 

*Share Certificates*

* *

Certificates representing fullypaid shares of Common Stock are issued in such denominations as stockholdersmay request, except that certificates will not be issued for any fractionalpart of a share or any undivided interest in any share.

 

*Dividends*

* *

Under Philippine law, the board ofdirectors may declare dividends on the Common Stock out of the unrestrictedretained earnings which may be payable in cash, in property or in stock to allstockholders on the basis of outstanding shares held by them.  Declaration ofstock dividends require approval of the stockholders of PLDT representing notless than two-thirds of the outstanding capital stock of PLDT.  If a stockdividend would require an increase in share capital, Philippine SEC approvalwould be required.  Common Stock issued as stock dividends should be registeredwith and licensed by the Philippine SEC and listed on the PSE.

 

The Corporation Code requires aPhilippine corporation with retained earnings in excess of 100% of its paid-incapital to declare and distribute as dividends the amount of such surplus.Notwithstanding this general requirement, a Philippine corporation may retainall or any portion of such surplus in the following cases:  (i) when justifiedby definite corporate expansion projects or programs approved by the board ofdirectors; or (ii) when the corporation is prohibited under any loan agreementwith any financial institution or creditor, whether local or foreign, fromdeclaring dividends without its/his consent, and such consent has not yet beensecured; or (iii) when it can be clearly shown that such retention is necessaryunder special circumstances relevant to the corporation, such as when there is aneed for special reserve for probable contingencies.

 

PLDT has entered into certain loanand credit agreements, which restrict the declaration and payment of dividendsby PLDT.  Under the terms of the US$149 million facility with KfW, PLDT isprohibited from paying any dividends on Common Stock until December 31, 2004.In addition, under the terms of PLDT's US$145 million multicurrency termfacility agreement and JPY5,615 millionterm loan facility agreement, PLDT is restricted from distributing dividends tocommon stockholders unless (i) no default has occurred which is continuing, and(ii) its debt to free cash flow ratio, after giving effect to the distributionof such dividends and, under certain circumstances, other adjustments to PLDT’sclosing cash balance, would be less than 4.0 to 1.0.  Under other loanagreements, PLDT may not declare or pay dividends on any of its capital stockwithout the prior written consent of the lenders (i) if PLDT is in default inthe payment of any amounts due and payable under such loan agreement or afterthe occurrence and during the continuance of any other event of default orpotential event of default under such agreements, (ii) if after giving effectto such action the current ratio would be less than 1.2 to 1 or (iii) in anamount greater than PLDT net income after taxes during the fiscal year to whichsuch payment or distribution relates.  For the year 2001, PLDT declared cashdividends on outstanding shares of Common Stock in the amount of approximatelyPhp202 million.  PLDT has not declared dividends on the Common Stock sinceMarch 2001.

 

*Preferred Stock*

 

Preferred Stock may be issued fromtime to time in one or more series as the Board of Directors may determine.The Board of Directors is authorized to establish and designate the title andnumber of shares of each series and to fix the terms thereof, includingdividend rate, redemption and sinking fund provisions, conversion rights andthe amount to be received upon liquidation, provided that the amounts payable uponredemption or liquidation may not be more than 110%, nor less than 100%, of parvalue, plus in each such case accrued and unpaid dividends.  Except asotherwise provided by law, the holders of Preferred Stock are not entitled tovote for the election of directors or for any other purpose; provided, however,that PLDT may not change the rights of the holders of any series of PreferredStock in any manner prejudicial to the holders thereof without the affirmativevote of the holders of a majority of the shares of such series.  No suchapproval is needed to increase the number of shares of Preferred Stock (up tothe number from time to time authorized by the Articles) or to authorizeclasses of shares ranking on a parity with the Preferred Stock.

 

*Issued and Outstanding PreferredStock*

 

The series of Preferred Stock andthe number of shares issued and outstanding under each series as of December31, 2002 are as follows:

 

**Series**

**No. of Shares**

Series A to CC 10% Cumulative Convertible

406,826,136

Series III Convertible

4,616,200

Series IV Cumulative Non-Convertible Redeemable

36,000,000

Series V Cumulative Convertible Redeemable

2,576,120

Series VI Cumulative Convertible Redeemable

4,574,273

Series VII Cumulative Convertible Redeemable

3,842,000

 

The 10% Cumulative ConvertiblePreferred Stock are entitled to receive cumulative cash dividend at the rate of10% per share per annum; redeemable at the option of PLDT, at par value plusaccrued dividends, five years after the year of issuance; convertible to sharesof Common Stock at any time after 1 year from issuance at a price equivalent to10% below the average market price of the Common Stock at the PSE over a periodof 30 consecutive trading days before conversion date; and entitled to be paidan amount equal to the par value of the shares plus accrued and unpaiddividends thereon to the date fixed for such payment in the event of avoluntary or involuntary liquidation, dissolution, distribution of assets orwinding up of the affairs of the corporation.

 

The Series III ConvertiblePreferred Stock are entitled to receive annual fixed cumulative cash dividendsof US$3.50 per share; in the event of any voluntary or involuntary liquidation,dissolution or winding up of PLDT, are entitled to receive out of the assets ofPLDT available for distribution to the stockholders of PLDT, before anydistribution of assets is made to holders of shares of Common Stock or anyother shares of stock of PLDT ranking as to such a distribution junior to theSeries III Convertible Preferred Stock, liquidating distributions in the amountof Php11 per share plus accrued and unpaid dividends; are convertible intoshares of Common Stock at the holder's option at any time, at the conversionprice of US$29.19 per share of Common Stock (equivalent to a conversion ratioof 1.7129 shares of Common Stock for each share of Series III ConvertiblePreferred Stock, each share being valued for this purpose at its referenceamount of US$50 per share), subject to adjustment in certain events; and are notredeemable.

 

Series IV CumulativeNon-Convertible Redeemable Preferred Stock are entitled to receive cumulativecash dividends at the rate of 13.5% per annum calculated on the par value ofsuch shares or if such shares are not yet fully paid, the actual amount paid;are not convertible into shares of Common Stock; are redeemable at the optionof PLDT one year after subscription at an amount equal to the par value of suchshares so redeemed or if such shares are not yet fully paid, the actual amountpaid, plus accrued and unpaid dividends thereon; and in the event of avoluntary or involuntary liquidation, dissolution or winding up of affairs ofPLDT, shall be entitled to be paid an amount equal to the par value of suchshares or if such shares are not yet fully paid, the actual amount paid, plusan amount equal to the dividends accrued thereon to the date fixed forpayment.  The outstanding shares of Series IV Cumulative Non-ConvertibleRedeemable Preferred Stock have not been fully paid.

 

Series V, VI and VII ConvertiblePreferred Stock are entitled to receive annual dividends of Php18.70 per share,US$0.397 per share and JPY40.7189 pershare, respectively.  Each share of Series V, VI and VII Convertible PreferredStock is convertible at any time at the option of the holder into one share ofCommon Stock.  In the event of any voluntary or involuntary liquidation,dissolution or winding up of PLDT, the holders of the Series V, VI and VIIConvertible Preferred Stock are entitled to receive out of the assets of PLDTavailable for distribution to the shareholders of PLDT, before any distributionof assets is made to holders of shares of Common Stock or any other shares ofstock of PLDT ranking as to such distribution junior to the Series V, VI andVII Convertible Preferred Stock, liquidating distributions in the amount ofPhp11 per share plus accrued and unpaid dividends.  On the date immediatelyfollowing the seventh anniversary of the issue date of the Series V and SeriesVI Convertible Preferred Stock and on the eighth anniversary of the issue dateof the Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted to shares of Common Stock at aconversion rate of one share of Common Stock for each share of Series V, VI orVII Convertible Preferred Stock subject to adjustments in certain events.Under a put option exercisable for 30 days, holders of shares of Common Stockreceived on mandatory conversion will be able to require PLDT to purchase such sharesof Common Stock for Php1,700 or US$36.132 or JP¥4,071.89 per share, dependingon the series.

 

As of December 31, 2002, 145,320shares of Series V Convertible Preferred Stock and 523,843 shares of Series VIConvertible Preferred Stock had been converted to Common Stock.  As of December31, 2002, PLDT had 2.6 million Series V Convertible Preferred Stock, 4.6million shares of Series VI Convertible Preferred Stock and 3.8 million sharesof Series VII Convertible Preferred Stock issued and outstanding.  Theaggregate value of the put option based on outstanding shares as of December31, 2002 is Php20,201 million, of which Php13,181 million is payable on June 4,2008 and Php7,020 million on June 4, 2009 if all of the outstanding shares ofSeries V, VI and VII Convertible Preferred Stock were mandatorily converted andall the underlying shares of Common Stock were put to PLDT.  The market valueof the underlying common shares is Php6,260 million, based on the market priceof PLDT’s Common Stock of Php565 per share as of June 30, 2003.

 

*Change in Control*

 

Article V, Section 1 of PLDT'sAmended By-Laws may have the effect of preventing a change in control of PLDT.This section provides that any person who is engaged in any business thatcompetes with or is antagonistic to that of PLDT or its subsidiaries isineligible for nomination or election to the Board of Directors.

 

Material Contracts

 

For a description of the Stock Purchase and Strategic InvestmentAgreement relating to the acquisition of Smart and the investment by NTT, see“Item 7. Major Shareholders and Related Party Transactions — Related PartyTransactions.” 

 

Exchange Controls and Other Limitations Affecting Securities Holders

 

In Circular No. 1389 dated November10, 1993 of the Central Bank of the Philippines (now *Bangko Sentral ngPilipinas*, or BSP, foreign investments in equity which are made in thePhilippines and are duly registered with the BSP or with a custodian bank dulydesignated by the foreign investor are entitled to full and immediate capitalrepatriation and dividend and interest remittance privileges.  Without the needto obtain prior BSP approval, commercial banks are authorized to sell and toremit the equivalent foreign exchange (at the exchange rate prevailing at thetime of actual remittance) representing sales and divestment proceeds ordividends of a duly registered foreign equity investment upon presentation of aBSP Registration Document (“BSRD”) together with other supporting documents.The BSRD serves as the authority to repatriate such divestment and salesproceeds or remittance of cash dividends.  Cash dividends accruing to foreigninvestments in securities listed on the PSE and registered under theregistration system existing prior to BSP Circular 1389 may be remitted throughany commercial bank without the need of a BSP Confirmation Document, subject,however, to the submission to the remitting bank of a cash dividend schedule,the company's audited financial statements covering the dividend declarationperiod, and a copy of the pertinent Board Resolution authorizing thedeclaration of the cash dividends to be remitted.  The remitting commercialbank must submit to the BSP a statement of remittance together with thesupporting documents within two banking days from date of actual remittance.Foreign investments not duly registered with the BSP or with the investor'sdesignated custodian bank are not entitled to repatriation and remittanceprivileges through the banking system except capital repatriation or dividendremittance of direct foreign equity investments made prior to March 15, 1973when BSP registration was not yet required.  The BSP should be notified of thetransfer of sale of foreign investments in equity or securities alreadyregistered with the BSP, in order that the registration of the foreigninvestment may be transferred in the name of the transferee or purchaser.

 

Cash dividends on PLDT's stock arepaid in Philippine pesos, except dividends on the Series III and Series VIConvertible Preferred Stock, which are paid in U.S. dollars and on the SeriesVII Convertible Preferred Stock, which are paid in Japanese yen.  PLDT’sCustodian for its Series III Convertible Preferred Stock, Citibank, N.A. –Manila and PLDT’s Transfer Agent and Dividend Paying Agent for its Series VIand VII Convertible Preferred Stock, Hongkong and Shanghai Banking Corporation,converts and remits in the particular foreign currency, at the prevailingexchange rate, cash dividends due to holders of the Series III, Series VI andVII Convertible Preferred Shares.  PLDT's Transfer Agent for its common stock,The Hongkong and Shanghai Banking Corporation, (which also acts as dividendpaying agent) converts and remits in U.S. dollars, at the prevailing exchangerate, cash dividends due all common stockholders residing outside thePhilippines.  Under the above-mentioned regulations, PLDT has been able toremit the cash dividends due to stockholders residing outside the Philippines.As of December 31, 2002, approximately 88% of PLDT’s outstanding capital stockwas owned by citizens of the Philippines.  For certain restrictions on thedeclaration and payment of dividends by PLDT, see Notes 15 and 18 to ourconsolidated financial statements in Item 18.

 

For certain constitutionallimitations on the capital ownership of public utilities, see “Item 8.Financial Information — Legal Proceedings — Quo Warranto Action.”

 

Principal of and interest on PLDT's10.625% Notes due 2004, 9.875% Notes due 2005, 8.5% Notes due 2003, 9.25% Notesdue 2006, 7.85% Notes due 2007, 8.35% Notes due 2017, 10.5% Notes due 2009,10.625% Notes due 2007 and 11.375% Notes due 2012 are payable in U.S. dollarswhich may be purchased from the local banking system either pursuant to theregistration of such Notes with the BSP or otherwise pursuant to specific BSPapproval of such payment.  Such principal and interest may also be paidutilizing PLDT's own dollar resources without necessity of BSP approval.  TheBSP, with the approval of the President of the Philippines, may, however, restrictthe availability of foreign exchange during an exchange crisis, when anexchange crisis is imminent, or in times of national emergency.

 

Taxation

 

The following is a summary ofmaterial Philippine, Hong Kong and United States federal tax consequences toUnited States Holders (as defined below) of ownership of shares of CommonStock, ADSs and GDSs (collectively, the “Equity Securities”) and of PLDT’s10.625% Notes due 2004, 9.875% Notes due 2005, 8.5% Notes due 2003, 9.25% Notesdue 2006, 7.85% Notes due 2007, 8.35% Notes due 2017, 10.5% Notes due 2009,10.625% Notes due 2007 and 11.375% Notes due 2012 (the “Debt Securities” and,collectively with the Equity Securities, the “Securities”).  This summary isbased upon laws, regulations, rulings, income tax treaties, administrativepractice and judicial decisions in effect at the date of this Annual Report(including the Philippine National Internal Revenue Code of 1997 (the“Philippine Tax Code”), the income tax treaty between the Philippines and theUnited States (the “Philippines-United States Tax Treaty”), and the UnitedStates Internal Revenue Code of 1986, as amended (the “United States Tax Code”)and the Treasury Regulations promulgated thereunder (the “Regulations”)).Legislative, judicial or administrative changes or interpretations may alter ormodify the statements and conclusions set forth herein.  Any such changes orinterpretations may be retroactive and could affect the tax consequences toholders of Securities.

 

This summary does not address alltax aspects that may be important to a holder of Securities.  The tax treatmentof a holder of Securities may vary depending on such holder’s particularsituation, and certain holders (including holders such as dealers, insurancecompanies, tax-exempt organizations, financial institutions and persons whoown, constructively or actually, 10% or more of the total voting power or totalvalue of PLDT’s stock) may be subject to special rules not discussed.Moreover, except as expressly noted, the state, local and foreign taxconsequences are not discussed below.  The summary of United States federaltaxation deals only with Securities held as capital assets by United StatesHolders whose functional currency is the United States dollar.  For purposes ofthis summary, the term “United States Holder” means a beneficial owner, forUnited States federal income tax purposes, of a security that is (i) a citizenor resident of the United States, (ii) a corporation or partnership created ororganized under the laws of the United States or any state of the UnitedStates, (iii) an estate whose income is includable in gross income for UnitedStates federal income tax purposes regardless of its source, (iv) a trust if(a) a court within the United States is able to exercise primary supervisionover the administration of the trust and (b) at least one United States personhas authority to control all substantial decisions of the trust, or  (v) aperson or entity otherwise subject to United States federal income taxation ona net income basis in respect of the Securities.  The summary of Philippinetaxation deals only with United States Holders that hold securities as capitalassets.

 

**HOLDERS ARE URGED TOCONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THEOWNERSHIP AND DISPOSITION OF SECURITIES, INCLUDING THE APPLICABILITY AND EFFECTOF ANY STATE, LOCAL OR FOREIGN TAX LAWS.**

** **

Equity Securities

 

*Philippine Taxation*

 

*Taxes on Exchange of ADRs forCommon Stock and GDRs for Series III Convertible Preferred Stock*

 

Philippine capital gains or stocktransaction taxes and documentary stamp taxes may be payable upon the transferof shares of Common Stock to a holder of ADRs or shares of Series IIIConvertible Preferred Stock to a holder of GDRs.  See “Capital Gains Tax andStock Transaction Tax” and “Documentary Stamp Taxes.”

 

*Taxation of Dividends*

 

Under the Philippine Tax Code,dividends paid by a Philippine corporation to citizens of the Philippines andresident aliens in the Philippines are subject to a final withholding tax of10% while those paid to non-resident aliens engaged in trade and businesswithin the Philippines are subject to a final withholding tax of 20%.Dividends paid to non-resident aliens not engaged in trade and business withinthe Philippines are subject to a final withholding tax of 25%. Dividends paidby a Philippine corporation to other Philippine corporations or to residentnon-Philippine corporations are not subject to tax.  Dividends paid tonon-resident non-Philippine corporations not engaged in a trade or business inthe Philippines by Philippine corporations shall be subject to a finalwithholding tax of 15%, subject to the condition that the country in which thenon-resident non-Philippine corporation is domiciled either (i) allows a creditagainst the tax due from the non-resident non-Philippine corporation taxesdeemed to have been paid in the Philippines equivalent to 17% (which representsthe difference between the regular income tax on non-resident non-Philippinecorporations of 32% and the 15% tax on dividends) (this condition is notsatisfied in the case of such corporations domiciled in the United States, ifsuch corporations own less than 10% of the voting stock of PLDT) or (ii)imposes no income taxes on dividends received by such non-residentnon-Philippine corporations from Philippine corporations(this condition is notsatisfied in the case of such corporations domiciled in the United States).  Ifneither of the foregoing conditions are met, the dividends paid to the non-residentnon-Philippine corporation shall be subject to the regular income tax rate of32%.  Under rulings issued by Philippine tax authorities, Hong Kong is viewedas falling within clause (ii) and, thus, companies that are organized in HongKong that are not engaged in trade or business in the Philippines may beentitled to the benefit of the 15% rate.  Such rulings, however, were basedupon the laws of Hong Kong as in effect at the time such rulings were issued,and any subsequent changes in the relevant laws of Hong Kong may affect thevalidity of such rulings.

 

As further discussed below, inrespect of regular quarterly cash dividends payable on shares of the underlyingSeries III Convertible Preferred Stock while such shares are on deposit withthe Depositary, PLDT intends to make payments of withholding tax pursuant tothe terms of such Series III Convertible Preferred Stock, at the rate of 15%,which is the rate applicable to dividends payable to residents of the domicileof the registered shareholder, which is a company organized in Hong Kong notengaged in trade or business in the Philippines.  PLDT reserves the right tochange the rate at which it makes payments of withholding tax whenever it deemsit appropriate under applicable law.

 

Holders will receive regularquarterly cash dividends paid in respect of the Series III ConvertiblePreferred Stock, but not on the Common Stock issuable on conversion of suchSeries III Convertible Preferred Stock, free and clear of withholding tax, suchwithholding tax being an obligation of PLDT pursuant to the terms of the SeriesIII Convertible Preferred Stock.  Any other dividends will be subject towithholding tax at the relevant applicable rate.

 

If the holder of Common Stock is anon-resident foreign partnership, which is treated as a corporation forPhilippine tax purposes, dividends on the Common Stock should be subject to afinal withholding tax of 32%.  Cede & Co., the partnership nominee ofDepository Trust Company (“DTC”), should qualify as a non-resident foreignpartnership that would be treated as a corporation for Philippine tax purposes.

 

In certain circumstances where theholder holds Common Stock, a tax treaty rate may be applicable with respect tothe Philippine withholding tax.  For instance, holders under such circumstancesand as to which the Philippines-United States Tax Treaty would be applicablewould be eligible for a treaty rate of 25% (or 20% in certain instances).  The20% treaty rate is generally not applicable in the case of non-resident non-Philippinecorporations domiciled in the United States which own less than 10% of thevoting stock of PLDT.  Holders are required, however, to establish to thePhilippine taxing authorities their eligibility for such treaty rate.Philippine tax authorities have prescribed, through an administrative issuance,procedures for availment of tax treaty relief.  PLDT intends to pay withholdingtax at the reduced treaty rate in respect of shares the registered holder ofwhich is Cede & Co., on the basis that Cede & Co. is a resident of theUnited States for purposes of the Philippines-United States Tax Treaty.  PLDTreserves the right to change the rate at which it makes payments of withholdingtax whenever it deems it appropriate under applicable law.

 

*Capital Gains Tax and StockTransaction Tax*

 

The Philippine Tax Code providesthat gain from the sale of shares of stock in a Philippine corporation shall betreated as derived entirely from sources within the Philippines, regardless ofwhere the shares are sold.  Subject to applicable tax treaty rates, the rate oftax on such gain, where the stock is not disposed of through the PhilippineStock Exchange, is a final tax of 5% for gains not exceeding Php100,000 and afinal tax of 10% for gains in excess of that amount.  The rate is the same forboth non-resident individuals and non-resident non-Philippine corporations.While this tax is not collected through withholding, the Philippine Tax Codeprohibits a transfer from being recorded on the books of the corporation unlessthe Philippine Commissioner of Internal Revenue certifies that the tax has beenpaid or certain other conditions are met.  Under the Philippine Tax Code,non-resident individuals and non-resident non-Philippine corporations may netcapital gains and losses from the sale of shares of stock not sold or disposedof through the Philippine Stock Exchange during a taxable year in determiningtheir total capital gains tax.

 

The sale of shares which are listed in and sold through the PSEare subject to the stock transaction tax imposed at the rate of 1/2 of 1% ofthe gross selling price.  This tax is required to be collected and paid to thegovernment by the selling stockbroker on behalf of his client.  Sales of sharesother than through a Philippine stock exchange will be subject to Philippinecapital gains tax in the manner described above.

 

Under the Philippines-United StatesTax Treaty, gains derived by a United States resident from the sale of sharesof stock of a Philippine corporation will not be subject to Philippine tax,either capital gains tax or stock transaction tax, unless the shares are thoseof a corporation over 50% of the assets of which consist of real propertyinterests located in the Philippines.  PLDT does not believe that itcurrently is such a corporation.

 

*Conversion Feature*

 

PLDT believes that there would beno Philippine capital gains taxes upon the conversion of shares of Series IIIConvertible Preferred Stock into shares of Common Stock.

 

*DocumentaryStamp Taxes*

 

The Philippines imposes adocumentary stamp tax upon transfers of shares of stock issued by a Philippinecorporation at a rate of Php1.50 on each Php200, or fractional part thereof, ofthe par value of the shares.  The documentary stamp tax is collectible whereverthe document is made, signed, issued, accepted or transferred, when theobligation or right arises from Philippine sources or the property is situatedin the Philippines.

 

*Estate and Donor's Taxes*

 

Shares of stock issued by acorporation organized or constituted in accordance with Philippine law aredeemed to have a Philippine situs and their transfer by way of succession ordonation is subject to Philippine estate and gift taxes.  The transfer ofshares of stock by a deceased individual to his heirs by way of succession,whether such an individual was a citizen of the Philippines or an alien,regardless of residence, will be subject to Philippine estate tax atprogressive rates ranging from 5% to 20% if the net estate is over Php200,000.Individual and corporate stockholders, whether or not citizens or residents ofthe Philippines, who transfer the Equity Securities by way of gift or donationwill be liable for Philippine donor’s tax on such transfers at progressiverates ranging from 2% to 15%, if the net gifts made during the calendar yearexceed Php100,000.  The rate of tax with respect to net gifts made to astranger, who is not a brother, sister, spouse, ancestor, lineal descendant orrelative by consanguinity in the collateral line within the fourth degree ofrelationship of the donor, is a flat rate of 30%. Estate and gift taxes willnot be collected in respect of intangible personal property such as the EquitySecurities:

 

•        if the deceased at the time of death, or the donor at the time ofdonation, was a citizen and resident of a foreign country which at the time ofhis death or donation did not impose a transfer tax of any character in respectof intangible personal property of citizens of the Philippines not residing inthat foreign country, or

 

•        if the laws of the foreign country of which the deceased or thedonor was a citizen and resident at the time of his death or donation allow asimilar exemption from transfer or death taxes of every character ordescription in respect of intangible personal property owned by citizens of thePhilippines not residing in that foreign country.

 

Shares of stock of a deceasedstockholder or shares that have been donated may not be transferred on thebooks of the corporation without a certificate from the Philippine Commissionerof Internal Revenue that the applicable estate or donor's taxes have beenpaid.  In the case of ADRs and GDRs, however, there is no correspondingrequirement, unless a transfer of the ADRs and GDRs would also entail a changein the registration of the underlying shares.

 

*Hong Kong Taxation*

 

No tax will be payable in Hong Kongin respect of any income from, or gains arising on the disposal of ADRs, GDRsor shares of Common Stock, nor will any tax, duties or other levies ofwhatsoever nature be payable in Hong Kong on the transfer of any suchsecurities except that gains from the sale of property by persons carrying on atrade, profession or business in Hong Kong where such gains are derived from orarise in Hong Kong from such trade, profession or business will be chargeableto Hong Kong profits tax.  A holder or an owner of such securities may thus beassessable to profit tax in Hong Kong on gains arising on the disposal of ADRs,GDRs or shares of Common Stock if such gains are derived in Hong Kong from aHong Kong business of dealing or trading in securities carried on by suchholder or owner.

 

*United States FederalTaxation*

 

For the United States federalincome tax purposes discussed herein, United States Holders of GDRs or ADRswill be treated as the owners of the underlying shares of Convertible PreferredStock or Common Stock.  Deposits and withdrawals by United States Holders ofshares of Convertible Preferred Stock or Common Stock in exchange for GDRs orADRs will not be subject to United States federal income tax.

 

*Taxation of Dividends*

 

Distributions made by PLDT withrespect to Convertible Preferred Stock or Common Stock, to the extent made outof current or accumulated earnings and profits of PLDT, as determined forUnited States federal income tax purposes, will be subject to United Statesfederal income taxation on the date actually or constructively received by theDepositary or, in the case of shares held directly by the United States Holder,the United States Holder.  If you are a non-corporate U.S. holder, dividendspaid to you in taxable years beginning after December 31, 2002 and beforeJanuary 1, 2009 that constitute qualified dividend income will be taxable toyou at a maximum tax rate of 15% provided that you hold the shares or ADSs formore than 60 days during the 120-day period beginning 60 days before theex-dividend date and meet other holding period requirements.  Dividends we paywith respect to the shares or ADSs generally will be qualified dividendincome.  Such dividends will not be eligible for the dividends-receiveddeduction generally allowed to corporations.  The amount of the dividend willequal the amount, determined on the date of distribution, of United Statesdollars received by the Depositary or, in the case of shares held directly bythe United States Holder, the United States Holder, plus the United Statesdollar value of any Philippine taxes withheld from such dividend.  To theextent that a distribution exceeds the Holder's allocable share of PLDT'scurrent or accumulated earnings and profits, such distribution will first betreated as a nontaxable return of capital, applied against and in reduction ofthe Holder's tax basis in the shares.  Amounts received in excess of theHolder's basis will be treated as received in exchange for the shares and taxedas capital gain, which will be long-term capital gain if the Holder's holdingperiod for the shares is more than one year.

 

Philippine taxes withheld from adividend should, subject to the limitations and tax return disclosure requirementsin the United States Tax Code and the Regulations, and to applicable provisionsof the Philippines-United States Tax Treaty, be eligible for credit against aUnited States Holder's U.S. federal income tax liability or deductible forpurposes of computing such liability.  Special rules apply in determining theforeign tax credit limitation with respect to dividends that are subject to themaximum 15% tax rate.  For foreign tax credit purposes, dividend incomegenerally will constitute “passive income” or, in the case of certain UnitedStates Holders, “financial services income.” The availability of a foreign taxcredit or a deduction for Philippine withholding taxes remitted by PLDT onbehalf of a United States Holder is discussed below.

 

*Certain Withholding Tax Payments*

 

Holders will receive regular quarterly cash dividends paid inrespect of the Series III Convertible Preferred Stock, but not on the CommonStock issuable on conversion of such Series III Convertible Preferred Stock,free and clear of withholding tax, such withholding tax being an obligation ofPLDT pursuant to the terms of the Series III Convertible Preferred Stock.  PLDTintends to make such payments of withholding tax based on an applicablewithholding tax rate of 15%.  A United States Holder that receives dividendsfree and clear of withholding tax will be treated for United States federalincome tax purposes as having received an additional distribution with respectto the Series III Convertible Preferred Stock in the amount of the withholdingtax which is paid to the Philippine Bureau of Internal Revenue on behalf ofsuch United States Holder.  Such a deemed additional distribution willgenerally be subject to the rules described above under “Taxation ofDividends.” The amount of the Philippine withholding tax, and thus the amountof additional income deemed to have been received by the United States Holder,will be equal to the initial amount of tax paid by PLDT (based on theapplicable withholding tax rate) divided by the difference between one and theapplicable withholding tax rate.  For example, assuming a US$100 dividendreceived free and clear of a withholding tax of 15% (the rate believed by PLDTto be the applicable withholding tax rate; see “Philippine Taxation — Taxationof Dividends”), the United States Holder will be treated as having paidPhilippine withholding tax of, and as having received additional income in theamount of, US$15/(1-.15), or US$17.65.  Although, as indicated, such additionalincome will generally be taxable to such United States Holder, except to theextent described below, the additional tax should be creditable against suchUnited States Holder's United States federal income tax to the extent suchUnited States Holder is able to utilize foreign tax credits.  In the case ofUnited States Holders who are unable to utilize fully foreign tax credits, theincreased taxable income arising from such payment could result in a netafter-tax yield that is less than that available to a holder who is able to usethe foreign tax credit.

 

*Sale or Other Disposition ofGDRs, ADRs or Shares*

 

A United States Holder willrecognize capital gain or loss upon the sale of GDRs, ADRs or shares of CommonStock in an amount equal to the difference between such United States Holder'sbasis in the ADRs, GDRs or shares of Common Stock and the amount realized uponthe sale.  Such gain or loss generally will be long-term capital gain or lossif, at the time of sale, exchange or retirement, the ADR, GDR or Common Stockhas been held for more than one year.  Capital gain of a non-corporate U.S.holder that is recognized on or after May 6, 2003 and before January 1, 2009 isgenerally taxed at a maximum rate of 15% where the property is held for morethan one year.  Generally, any such gain or loss realized will be treated asUnited States source income or loss.  United States Holders may not be eligibleto credit against their United States federal income tax liability amounts paidin respect of the Philippine stock transaction tax.  See “— Philippine Taxation— Capital Gains Tax and Stock Transaction Tax.”

 

*Conversion Feature*

 

In general, no gain or loss will berecognized for United States federal income tax purposes on a conversion ofConvertible Preferred Stock into Common Stock except with respect to cashreceived in lieu of fractional shares of stock.  The tax basis for Common Stockreceived upon conversion will be equal to the basis of the ConvertiblePreferred Stock converted and the holding period of the Common Stock received uponconversion will include the holding period of the Convertible Preferred Stock.

 

*Tax Information Reporting andBackup Withholding*

* *

Dividends on, and proceeds from thesale or other disposition of, GDRs, ADRs or shares of Common Stock received anddistributed by the Depositary are subject to United States informationreporting.  Under current Regulations, backup withholding is not required to becollected by the Depositary in respect of dividends and sales proceeds if theholder of shares of Convertible Preferred Stock, Common Stock, ADRs or GDRs (i)provides the Depositary with such holder's correct taxpayer identificationnumber in the manner required by law, certifies that such holder is not subjectto backup withholding rules and otherwise complies with the backup withholdingrules or (ii) otherwise establishes an exemption.  The amount of any backupwithholding taxes from a payment to a United States Holder would be allowed asa credit against the United States federal income tax liability of such holderand may entitle such holder to a refund, provided that the required informationis furnished to the Internal Revenue Service (“IRS”).

 

*Federal Estate Tax*

* *

Subject to certain statutorylimitations and exceptions, United States estate tax applies to the entireestate, wherever situated, of a decedent who was a United States citizen orresident.  A credit is generally available for any estate, inheritance, legacyor succession taxes paid to a foreign country with respect to property situatedin that country and included in the decedent's gross estate, subject to thelimitations established by United States Tax Code and the Regulations.Convertible Preferred Stock and Common Stock would be properly deemed situatedin the Philippines for this purpose and ADRs, and GDRs should also be deemedsituated in the Philippines for this purpose.  The credit is limited to theamount of United States federal estate tax attributable under statutory rulesto such property.

 

The United States Tax Code does notauthorize a comparable credit for foreign gift or donor's tax such as thoseimposed by the Philippines.  See “— Philippine Taxation — Estate and Donor'sTaxes.”

 

Debt Securities

** **

*Philippine Taxation*

* *

*Taxation of Interest*

* *

The Debt Securities are representedby Global Securities deposited with a custodian for, and registered in the nameof, Cede & Co., a partnership nominee of DTC.

 

Under the Philippine Tax Code,interest on the Debt Securities received by citizens of the Philippines,resident aliens in the Philippines, non-resident alien individuals engaged intrade and business within the Philippines, domestic corporations and residentforeign corporations is subject to 20% final withholding tax.  Interestreceived by non-resident alien individuals not engaged in trade or businesswithin the Philippines is subject to final withholding tax at the rate of 25%.Interest income received by non-resident foreign corporations not engaged intrade or business within the Philippines on foreign loans is subject to a 20%final withholding tax.  “Foreign loans” include any loan contract payable inforeign currency which is entered into by a Philippine resident individual orcorporation with a non-resident.  Therefore, if the registered holder of a DebtSecurity is a non-resident corporation or a foreign partnership, which istreated as a corporation for Philippine tax purposes, the Debt Securities willbe considered “foreign loans” and interest thereon should be subject to the 20%final withholding tax rate.  The tax withheld constitutes a final settlement ofPhilippine income tax liability with respect to such interest.

 

Any tax treaty in force between thePhilippines and the country of domicile of a non-resident holder may providefor reduced withholding tax on interest.  Cede & Co. should qualify as anon-resident foreign partnership that is treated as a corporation forPhilippine tax purposes.

 

In the case of Debt Securitiesissued with original issue discount (“OID”), withholding tax on OID should bepaid at issuance if the Debt Securities have maturities of less than one year,and at redemption in all other cases.  The Debt Securities consisting of10.625% Notes due 2004, 9.875% Notes due 2005, 8.5% Notes due 2003, 9.25% Notesdue 2006, 7.85% Notes due 2007, 8.35% Notes due 2017, 10.5% Notes due 2009,10.625% Notes due 2007 and 11.375% Notes due 2012 were originally issued to thepublic at prices of 99.485%, 99.987%, 99.687%, 99.677%, 99.924%, 99.624%,99.651%, 99.990% and 99.988%, respectively, of their principal amounts.Accordingly, Philippine withholding tax on such original issue discount will bepayable at maturity.

 

The withholding tax rates specifiedabove may be reduced in accordance with any applicable tax treaty in forcebetween the Philippines and the country of residence of the non-resident ownerof the interest.  Most tax treaties to which the Philippines is a party providefor reduced withholding tax rate of 15% in cases where the interest arising inthe Philippines is paid to a resident of the other contracting state.  Underthe Philippines-United States Tax Treaty, the final withholding tax is reducedto 15% where the interest arises in the Philippines and is paid to a residentof the United States.  However, most tax treaties also provide that the reducedwithholding tax rate will not apply if the recipient of the interest, who is aresident of the other contracting state, carries on business in the Philippinesthrough a permanent establishment and the holding of the Debt Securities, towhich the receipt of the interest relates, is effectively connected with suchpermanent establishment.  In general, as long as a United States Holder of theDebt Security which is a resident of the United States under thePhilippines-United States Tax Treaty does not carry on business in thePhilippines through a permanent establishment, interest paid on the DebtSecurities will be subject to withholding tax at the 15% rate.  PLDT intends topay withholding tax at the reduced treaty rate on the basis that the registeredholder of the Debt Security, Cede & Co., is a resident of the United Statesfor purposes of the treaty.  PLDT reserves the right to change the rate atwhich it makes payments of withholding tax whenever it deems it appropriateunder applicable law.

 

Although interest paid on the DebtSecurities is generally subject to Philippine withholding taxes as describedabove, the payment of such taxes with respect to the interest on the DebtSecurities will be made by PLDT without deduction of any amounts therefore fromthe interest to be remitted to the beneficial owners of the Debt Securities.Such beneficial owners will generally receive the same amounts they would havereceived had no such withholding taxes been imposed.  The effect of suchcontract or provision is to make the Debt Securities “tax-free covenantbonds.”  With respect to interest on tax-free covenant bonds, PLDT is requiredto withhold a tax equal to 30% of the interest thereon if the interest ispayable to a non-resident alien or to a citizen or resident of the Philippines.

 

However, where applicable, thePhilippines-United States Tax Treaty would reduce the withholding rate on“tax-free covenant bonds” to 15%.  PLDT intends to pay withholding tax at thereduced treaty rate on the basis that the registered holder of the DebtSecurity, Cede & Co., is a resident of the United States under thePhilippines-United States Tax Treaty.  PLDT reserves the right to change therate at which it makes payments of withholding tax whenever it deems itappropriate under applicable law.

 

*Taxation of Capital Gains*

 

Upon a sale or other disposition ofthe Debt Securities, the holder will recognize a gain or loss equal to thedifference between the amount realized upon the sale or disposition of the DebtSecurities and the basis of the Debt Securities.  The basis for determininggain or loss from the sale or disposition of Debt Securities is generally thecost of acquiring such Debt Securities.  Under the Philippine Tax Code, gainsrealized from the sale or exchange or retirement of bonds, debentures or othercertificates of indebtedness with a maturity of more than five years is exemptfrom Philippine income tax.  Since the Debt Securities have maturities of morethan five years from the date of issuance, any gains realized by any holder fromthe sale, exchange or retirement of such Debt Securities will not be subject toPhilippine income tax.

* *

*Value Added Tax*

** **

The sale or exchange of DebtSecurities in the Philippines by dealers in securities is subject tovalue-added tax (“VAT”) at the rate of 10% of the gross income they derive fromsuch sale or exchange.

 

Following the implementation ofRevenue Regulation No. 12-2003 (the “VAT Regulations”) by the Bureau ofInternal Revenue which came into force on January 1, 2003, a 10% VAT is imposedon services rendered by financial institutions, which include banks, non-bankfinancial intermediaries, quasi-banks and finance companies (excludinginsurance companies).  Under the VAT Regulations, VAT is imposed on the grossreceipts derived by such financial institutions for all financial andnon-financial services, or a combination thereof, performed within thePhilippines, including the net trading gains derived from the trading ofsecurities, commercial papers and other financial instruments.

** **

*TaxTreaties*

 

The following table lists some ofthe countries with which the Philippines has tax treaties and the tax ratescurrently applicable to non-resident holders of Debt Securities, who areresidents of those countries:

** **

** **

Capital Gains Tax on Sale or Disposition of Notes

Tax Rate on Interest
** **

** **

** **

Canada

exempt

15%

France

exempt

15%

Germany

exempt

15%

Japan

exempt

15%

Singapore

exempt

15%

United Kingdom

exempt

15%

United States

exempt

15%

** **

*Documentary Stamp Taxes*

* *

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

 

*Estate and Donor's Taxes*

 

Obligations or bonds (such as the Debt Securities) issued by acorporation organized or constituted in accordance with Philippine law aredeemed to have a Philippine situs and their transfer by way of succession ordonation is subject to Philippine estate and gift taxes.  The transfer of DebtSecurities by a deceased individual to his heirs by way of succession, whethersuch an individual was a citizen of the Philippines or an alien, regardless ofresidence, will be subject to Philippine estate tax at progressive ratesranging from 5% to 20% if the net estate is over Php200,000.  Individual andcorporate holders, whether or not citizens or residents of the Philippines, whotransfer the Debt Securities by way of gift or donation will be liable forPhilippine donor’s tax on such transfers at progressive rates ranging from 2%to 15%, if the net gifts made during the calendar year exceed Php100,000.  Therate of tax with respect to net gifts made to a stranger, who is not a brother,sister, spouse, ancestor, lineal descendant or relative by consanguinity in thecollateral line within the fourth degree of relationship of the donor, is aflat rate of 30%.  Estate and gift taxes will not be collected in respect ofintangible personal property such as the Debt Securities:

 

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

 

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

 

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

 

*United States Federal Taxation*

 

*Payments of Interest*

* *

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

 

*Effect of Philippine WithholdingTaxes*

 

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

 

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

 

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

 

*Market Discount*

 

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

 

In addition, the United States Holder may be required to defer,until the maturity of the Debt Security or its earlier disposition in a taxabletransaction, the deduction of all or a portion of the interest expense on anyindebtedness incurred to purchase or carry a market discount Debt Security.  AUnited States Holder of a Debt Security may elect to include market discount inincome currently as it accrues, in which case the rule described aboveregarding deferral of interest deductions will not apply.  This election toinclude market discount in income currently, once made, applies to all marketdiscount obligations acquired on or after the first taxable year to which theelection applies, and may not be revoked without the consent of the IRS.

 

*Amortizable Premium*

* *

A United States Holder whopurchases a Debt Security for an amount in excess of its stated redemptionprice at maturity will be considered to have purchased the Debt Security at apremium.  A United States Holder generally may elect to amortize the premium onthe constant yield method.  The amount amortized in any year will be treated asa reduction of the United States Holder's interest income from the DebtSecurity.  The premium on a Debt Security held by a United States Holder thatdoes not make such an election will decrease the gain or increase the lossotherwise recognized on disposition or retirement of the Debt Security.  Theelection to amortize the premium on a constant yield method once made appliesto all debt obligations held or subsequently acquired by the electing holder onor after the first day of the first taxable year to which the election appliesand may not be revoked without the consent of the IRS.

 

*Sale, Exchange and Retirement ofDebt Securities*

 

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

 

*Philippine Documentary Stamp Taxes*

 

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

 

*Federal Estate Taxes*

 

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

 

*Backup Withholding andInformation Reporting*

 

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

 

**Documents On Display**

 

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

 

Item 11.    Quantitative andQualitative Disclosures about Market Risks

** **

Our operations are exposed tovarious risks, including liquidity risk, foreign exchange risk and interestrate risk.  The importance of managing these risks has significantly increasedin light of considerable change and continuing volatility in the Philippine andinternational financial markets.  With a view to managing these risks, we haveincorporated financial risk management functions in our organization,particularly in our treasury operations.

 

Liquidity Risk Management

 

We seek to manage our liquidityprofile to be able to finance our capital expenditures and service our maturingdebts.  To cover our financing requirements, we intend to use internallygenerated funds and proceeds from debt and equity issues and sales of certainassets.

 

As part of our liquidity riskmanagement program, we regularly evaluate our projected and actual cash flowinformation and continuously assess conditions in the financial markets foropportunities to pursue fund-raising initiatives.  These initiatives mayinclude bank loans, export credit agency-guaranteed facilities, and debtcapital and equity market issues.

 

Foreign Exchange Risk Management

 

At December 31, 2002, the Philippine peso depreciatedagainst the U.S. dollar to Php53.254 to US$1.00 from Php51.690 to US$1.00 atDecember 31, 2001, which in turn depreciated from Php49.986 to US$1.00 at December31, 2000.

 

The following table shows our consolidated foreigncurrency-denominated monetary assets and liabilities and their peso equivalentsas of December 31, 2000, 2001 and 2002:

 

 

Years Ended December 31,

** **

**2000(1)**

**2001(2)**

**2002(3)**

** **

**US$**

Php

**US$**

Php

**US$**

**Php**

** **

** **

**(in millions)**

** **

Assets

 

 

 

 

 

 

Cash and cash equivalents

142

7,098

40

2,083

76

4,033

Accounts receivable

131

6,563

146

7,536

148

7,910

 

273

13,661

186

9,619

224

11,943

Liabilities

 

 

 

 

 

 

Accounts payable

39

1,940

27

1,411

56

2,969

Accrued and other current liabilities

125

6,253

165

8,529

165

8,782

Notes payable

10

520

23

1,189

6

320

Long-term debt

3,600

179,930

3,156

163,144

2,937

156,398

Deferred credits and other noncurrent liabilities

—

—

—

—

50

2,676

 

3,774

188,643

3,371

174,273

3,214

171,145

Net foreign currency-denominated liabilities

3,501

174,982 

3,185

164,654

2,990

159,202

______________

 

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

* *

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

* *

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

* *

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

* *

As of December 31, 2002, approximately 97% of our long-termdebts, on a consolidated and non-consolidated basis, were denominated inforeign currencies, principally in U.S. dollars.  Of our foreign currencydenominated debts, 10% and 8% are in Japanese yen, on a consolidated andnon-consolidated basis, respectively, and the balance in U.S. dollars.  Thus, aweakening of the peso against the U.S. dollar will increase both the principalamount of and interest expense on our debt in peso terms.  In addition, many ofour financial ratios and other financial tests would be negatively affected.If, among other things, the value of the peso against the U.S. dollar dropsfrom its current level, we may be unable to maintain compliance with theseratios, which could result in acceleration of some or all of our indebtedness.For further information on our loan covenants, see “Item 5. Operating andFinancial Review and Prospects — Liquidity and Capital Resources — FinancingActivities — Debt Financing — Covenants” above and Note 15 to our consolidatedfinancial statements in Item 18.

 

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

Specifically, we use forwardforeign exchange contracts and foreign currency swap contracts to manage theforeign exchange risk associated with our foreign currency-denominated loans.As of December 31, 2002, PLDT had outstanding forward foreign exchangecontracts of US$211 million (Php11,237 million).  Also at the end of 2002, PLDThad outstanding principal-only long-term cross-currency swap contracts totalingUS$550 million (Php29,290 million).  For further discussions of these contracts,see Note 27 to our consolidated financial statements in Item 18.

 

Interest Rate Risk Management

 

On a limited basis, we enter into interest rate swap agreementsin order to manage our exposure to interest rate fluctuations.  In September2002, PLDT terminated its outstanding interest rate swap agreement amounting toUS$175 million (Php9,319 million) for which it received payment amounting toUS$12 million (Php639 million), net of outstanding receivables at thetermination date.  This amount was recorded as other income in our Statementsof Operation.  As of December 31, 2002, PLDT had no outstanding interest rateswap agreement.

 

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

 

The table below sets out the information about PLDT's derivativefinancial instruments and other transactions as of December 31, 2002 that aresensitive to foreign exchange rates and to changes in interest rates:

 

** **

 

 

 

**Total**

**Fair Value**

 

**Below 5 years**

**5 to 8.5 years**

**Over 8.5 years**

**In Dollars**

**In Pesos**

**In Dollars**

**In Pesos**

** **

 

 

 

**(in millions)**

**Liabilities**

 

 

 

 

 

 

 

Long-term Debt

 

 

 

 

 

 

 

Fixed Rate

 

 

 

 

 

 

 

US$ Notes (in millions)

763

175

550

1,488

79,254

1,312

69,856

Average interest rate

7.85% to 10.625%

10.50%

8.35% to 11.375%

–

–

–

–

US$ Fixed Loans (in millions)

154

95

–

249

13,251

271

14,419

Average interest rate

5.83% to 8.03%

5.65% to 7.58%

–

–

–

–

–

Japanese Yen (in millions)

–

82

–

82

4,379

83

4,431

Average interest rate

–

2.125%

–

–

–

–

–

Philippine Peso (in millions)

63

15

–

78

4,166

86

4,573

Average interest rate

11.18% to 17.50%

15.0%

–

–

–

–

–

Variable Rate

 

 

 

 

 

 

 

U.S. Dollar (in millions)

445

164

–

609

32,412

609

32,412

Average interest rate

0.15% to 2.75% 

over London

Interbank Offered

Rate, or LIBOR

0.55% to 2.5% 

over LIBOR

–

–

–

–

–

Japanese Yen (in millions)

104

28

–

132

7,019

132

7,019

Average interest rate

0.90% over 

Japanese Yen 

LIBOR

0.40% over

Japanese Yen

LIBOR

–

–

–

–

–

**Forward Foreign Exchange**

**Agreement**

 

 

 

 

 

 

 

(Receive US$/Pay Philippine

Peso) Contract Amount 

(in millions)

211

 

 

–

–

211

11,402

211

11,258

Average Contractual Exchange

Rate

Php53.9361

 

–

–

–

–

–

–

**Resettable Cross Currency**

**Swap Agreement**

 

 

 

 

 

 

 

(Receive US$/Pay Philippine

Peso) Contract Amount 

(in millions)

 

 

–

–

550

550

28,196

550

29,290

Average Contractual Exchange Rate

 

–

–

Php51.266

–

–

–

–

 

Item 12.    Description ofSecurities Other than Equity Securities

 

Not Applicable.

 

PART II

 

Item 13.    Defaults,Dividend Arrearages and Delinquencies

 

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

 

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

 

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

 

See “Item 3. Key Information — RiskFactors — Risks Relating to Us — Piltel hasexperienced financial difficulties and we cannot assure you that it will beable to discharge any of its debt or other obligations owed to us and ouraffiliates” and Notes 10 and 15 to our consolidated financial statements inItem 18.

 

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

 

None.

 

Item 15.    Controls andProcedures

** **

We have restated our consolidated financial statements for thethree years ended December 31, 2002. For a description of the restatement, seeNote 4 to the consolidated financial statements as of December 31, 2002 and2001 and for each of the three years in the period ended December 31, 2002. Seealso “Item 5. Operating and Financial Review and Prospects ––Restatement ofInformation Previously Reported” for a further discussion of these subsequentrestatements.

 

Our principal executive officer and principal financial officercarried out an evaluation of the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended) within 90 days prior to the date of thisamendment to Form 20-F.

 

In making this evaluation, our principal executive officer andprincipal financial officer have considered matters relating to the restatementof our previously issued financial statements, including the substantialprocess that was undertaken to ensure that all material adjustments necessaryto restate the previously issued financial statements were recorded. We believethat certain of the restatement adjustments necessary to correct previouslyissued financial statements prepared under U.S. GAAP occurred because ourcontrol processes and procedures related to the matters underlying suchadjustments were not sufficiently effective. We have also considered thereportable conditions (as defined under standards established by the AmericanInstitute of Certified Public Accountants) relating to our internal controlover financial reporting as identified and communicated to us and our AuditCommittee by our independent auditors in connection with their audits of theconsolidated financial statements as of December 31, 2002 and 2001 and for eachof the three years ended December 31, 2002.

 

Our independent auditors identified and communicated to us andour Audit Committee reportable conditions with respect to (1) asset impairment,(2) revenue recognition, (3) asset recognition, (4) calculation of deferredincome tax, (5) accounting treatment with respect to our investments in MabuhaySpace Holdings, Limited and ACeS International Limited, (6) proper validationof certain foreign exchange gains and losses, (7) identification of functionalcurrency of Mabuhay Satellite Corporation, (8) accounts receivables withrespect to Philcom, (9) consolidation in connection with the debit balance inminority interest in 2000 and recognition of minority interest based onsubsidiaries’ financial statements not converted to U.S. GAAP, and (10)accounting for capital leases.  Our independent auditors considered thereportable conditions in the aggregate to be a material weakness (as definedunder standards established by the American Institute of Certified PublicAccountants) in our internal control over financial reporting with respect toU.S. financial reporting.

 

Our internal control over financial reporting was originallydesigned to primarily be in conformity with Philippine GAAP. Prior to 2002, ourconsolidated financial statements included in annual reports on Form 20-F filedwith the U.S. SEC were prepared in accordance with Philippine GAAP, with areconciliation of net income and stockholders’ equity to U.S. GAAP. For ourAnnual Report on Form 20-F for the year ended December 31, 2002, we decided toprepare and report full U.S. GAAP financial statements.  This necessitated thepreparation not only of 2002, but also of comparative 2001 and 2000consolidated financial statements under U.S. GAAP.

 

In response to the matters identified by our independentauditors, under the direction of the Audit Committee, our senior management hasdirected that we dedicate resources and take steps to strengthen controlprocesses and procedures in order to prevent a recurrence of the circumstancesthat resulted in the need to restate prior period U.S. GAAP financialstatements.  These steps include, among others, the (1) enhancement of allfinance-related policies and procedures covering U.S. GAAP financial reporting,(2) the improvement of standard documentation requirements for the assessmentof critical, significant and judgmental accounting areas; and (3) improvementof U.S. GAAP understanding across all our business units through intensive andcontinuing U.S. GAAP training and proactive consultations of experts on certaintechnical U.S. GAAP matters as they relate to our business.  In addition, wehave reorganized our Financial Reporting and Control Sector to effectivelyinclude an Accounting Standards and Research Division to take on theresponsibility of certain technical reporting requirements and regulatorychanges including alignment to newly issued accounting standards.

 

Based on this evaluation and subject to the full implementationof the steps discussed above, our chief executive officer and principalfinancial officer concluded that as of the evaluation date, our disclosurecontrols and procedures were effective to ensure that material informationrequired to be disclosed in reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the U.S. SEC.

 

Other than as described above, there were no significant changesin our internal control over financial reporting that occurred subsequent tothe date our principal executive officer and principal financial officercompleted their most recent evaluation that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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

 

Not applicable.

 

PART III

 

Item 17.    FinancialStatements

** **

Not applicable.

 

Item 18.    FinancialStatements

** **

Index to Financial Statements

 

 

**Page**

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AUDITED ANNUAL FINANCIAL STATEMENTS

 

Report of Independent Auditors

F-1

Balance Sheets as of December 31, 2001 and 2002

F-3

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

F-4

Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2000, 2001 and 2002

F-5

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

F-6

Notes to Financial Statements

F-8

 

Item 19.   Exhibits

** **

See Item 18 above for details of the financial statementsfiled as part of this annual report.

 

Exhibits to this report:

 

1.

Articles of Incorporation and By-laws

 

 

2.

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4.

Material Contracts

 

 

6.

Computation of Earnings per Share

 

 

7.

Calculation of Ratio of Earnings to Fixed Charges

 

 

8.

Subsidiaries

 

 

12.

Certifications filed pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act

 

 

13.

Certifications furnished pursuant to Rules 13a-14(b) and 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code

**SIGNATURE**

 

The registranthereby certifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 

 

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

 

 

 

 

 

 

 

 

 

By:

/s/

Ma. Lourdes C. Rausa-Chan

 

 

MA. LOURDES C. RAUSA-CHAN

 

 

Senior Vice President, Corporate Secretary

 

 

General Counsel

 

 

 

Date:  October 17, 2003
****
EXHIBIT INDEX
 

Exhibit Number

**Description of Exhibit**

 

 

1(a)

Articles of Incorporation (incorporated by reference to PLDT's Form 20-F as filed with the

Securities and Exchange Commission in May 2001)

 

 

1(b)

By-Laws (as amended)

 

 

2

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to `furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4(a)

Stock Purchase and Strategic Investment Agreement, dated September 28, 1999, by and

among PLDT, First Pacific Limited, Metro Pacific Corporation, Metro Pacific Asia Link

Holdings, Inc., Metro Pacific Resources, Inc. and NTT Communications Corporation (incorporated by reference to PLDT's Form 6-K for the month of September 1999 [2])

 

 

4(b)

Executive Stock Option Plan (incorporated by reference to PLDT's Form 20-F as filed with

the Securities and Exchange Commission in May 2001)

 

 

4(c)

Master Restructuring Agreement, dated June 21, 2000, as amended on December 12, 2000

and December 19, 2000, between Piltel, Piltel (Cayman) Limited, PLDT, The Chase 

Manhattan Bank, as escrow agent, Metropolitan Bank and Trust Company, as administrative agent and the creditors named therein (incorporated by reference to PLDT's Form 20-F as 

filed with the Securities and Exchange Commission in May 2001)

 

 

6

Computation of Earnings per Share

 

 

7

Calculation of Ratio of Earnings to Fixed Charges 

 

 

8

Subsidiaries 

 

 

12

Certifications filed pursuant to Rules 13a-14(a) and 15d-14(a) of the Exchange Act 

 

 

13

Certifications furnished pursuant to Rules 13a-14(b) and 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code 

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

**EXHIBIT 1(b)**

** **

**BY-LAWS (As Amended)**

** **

** **

 

Adopted January

Amended April

Amended January

Amended April

Amended April

Amended July

Amended May

Amended January

Amended July

Amended January

Amended January

Amended June

Amended July

Amended April

Amended January

Amended March

Amended February

Amended February

Amended March

Amended February

 

10,

26,

05,

16,

15,

26,

08,

27,

25,

10,

30,

25,

11,

18,

25,

29,

24,

29,

29,

26,

 

1938

1939

1940

1947

1953

1955

1962

1964

1966

1968

1968

1968

1969

1979

1983

1983

1998

2000

2001

2003

** **

** **

PHILIPPINELONG DISTANCE TELEPHONE COMPANY

 

AMENDED BY - LAWS

ARTICLE I

OFFICE
Section 1.The principal office of the corporation shall be in Metro Manila, Philippines.

(Amended on June 25,1968 and February 29, 2000)

 

ARTICLE II
MEETINGS

 

Section 1.  The annual meeting ofthe stockholders shall be held at the principal office of the corporation or atsuch other place designated by the Board of Directors in the city ormunicipality where the principal office of the corporation is located on thesecond Tuesday in June of each year, at 4 o’clock P.M.  The Board of Directorsmay, for good cause, postpone the annual meeting of stockholders to areasonable date. 

 

Written or printednotice of every annual stockholders’ meeting, which notice shall state thedate, time and place of the meeting and the purpose or purposes for which themeeting is called, shall be given by the Secretary or by the AssistantSecretary to each stockholder.  Such notice may be delivered to thestockholders personally, or enclosed in an envelope with the postage thereonfully prepaid, addressed to each stockholder at his or her last known place ofresidence or business, and posted at a Post Office in the Philippines or in theUnited States of America.  Such delivery or mailing of notice must be made atleast fifteen (15) business days before the date fixed for the meeting.  Nopublication of notice of any regular or special meeting of stockholders in thepublic newspapers shall be required.

(Amendedon July 26, 1955, February 24, 1998 and March 29, 2001)

 

Section 2.  Special meetings of thestockholders may be called at any time by the President or three (3) of theDirectors or by any number of stockholders representing two-thirds (2/3) of thesubscribed capital stock.  Notice in writing of such meeting, stating the date,time and place thereof, and the purpose or purposes for which such meeting iscalled shall be given to each stockholder bythe Secretary orAssistant Secretary or in case of his absence, inability, refusal or neglect toact, then by the President, Directors or stockholders calling the saidmeeting.  Such notice may be delivered to the stockholders personally orenclosed in an envelope and addressed, with the postage thereon fully prepaid,to each stockholder at his or her last known place of residence or business andposted at a Post Office in the Philippines or the United States of America.Such delivery or mailing of notice must be made at least fifteen  (15) businessdays before the date fixed for the meeting and the statement of service by suchdelivery or mailing shall be entered upon the minutes of meeting and the saidminutes upon being read and approved at a subsequent meeting of the stockholdersshall be conclusive on the question of service.

(Amended on July 26,1955, February 24, 1998 and March 29, 2001)

 

Section 3.  Every meeting of thestockholders shall be presided by the President or, in his absence, by achairman to be chosen by the stockholders representing a majority of the sharesof the corporation issued and outstanding and entitled to vote present or dulyrepresented at said meeting.  The Secretary or, in his absence, the AssistantSecretary, shall act as secretary of every meeting but if neither the Secretarynor the Assistant Secretary is present, the chairman of the meeting shallappoint a secretary of the meeting.

(New provisionadopted on March 29, 2001)

 

Section 4.  A meeting of theBoard of Directors shall be held promptly after the adjournment of the annualmeeting of the stockholders; subsequent regular meetings shall be held monthlyon the last Tuesday of each month at 9:30 A. M., at the office of thecorporation in Metro Manila, Philippines or such other time and place in or outsidethe Philippines as the Board of Directors may from time to time determine.Special meetings may be called by the President whenever he may think proper,and he shall forthwith call such meetings whenever requested in writing to doso by any three (3) Directors.  Such meetings shall be called for a date notlater than seven (7) days from the date of such request.  Notice in writing ofevery special meeting of the Board of Directors, stating the date and placethereof and the purpose or purposes for which the meeting is called, shall begiven to each Director by the Secretary or Assistant Secretary, or in case ofhis absence, inability, refusal or neglect to act, by any person appointed forthat purpose by the President or three (3) of the Directors.  Such notice maybe delivered to each Director personally, by telegraph, facsimile, e-mail, orother means of written or printed communication generally accepted and used bythe business community as at present available or be made available throughtechnical advances or innovations in the future, at least twenty-four (24)hours previous to the time fixed for the meeting, or may be given by enclosinga notice in an envelope, with the postage thereon fully prepaid, addressed toeach Director at his last known place of residence or business and posted atleast three (3) days before the date fixed for the meeting.  Service of notice,by delivery, telegraph, facsimile, e-mail, or other means of written or printedcommunication generally accepted and used by the business community as atpresent available or be made available through technical advances orinnovations in the future, shall be entered upon the minutes of the meeting,and said minutes, upon being read and approved at a subsequent meeting of theBoard, shall be conclusive upon the question of service.  Notice of regularmeetings of the Board of Directors is hereby dispensed with.

(Amended on January5, 1940, May 8, 1962, January 30, 1968,

July 11, 1969,February 24, 1998, February 29, 2000 and March 29, 2001)

 

Section 5.  Every meeting of theBoard of Directors shall be presided by the Chairman of the Board or, in hisabsence, the President, or in his absence, by any Director chosen by majorityof the members of the Board present at such meeting at which there is aquorum.  The Secretary or, in his absence, the Assistant Secretary, shall actas secretary of every meeting but if neither the Secretary nor the AssistantSecretary is present, the chairman of the meeting shall appoint a secretary ofthe meeting.

(New provision adopted on March 29, 2001)

 

Section 6.  If any regular meetingof stockholders or Board of Directors provided for herein shall fall on a legalholiday, then such meeting shall be held on the next succeeding business day atthe same hour; but special meetings of the stockholders or Directors may beheld upon a holiday with the same force and effect as if held upon a businessday.

(Amended on March 29, 2001)

 

Section 7.  Meetings of thestockholders shall be held at the principal office of the corporation or atsuch other place designated by the Board of Directors in the city ormunicipalitywhere the principal office of the corporation is located.  Meetings of theBoard of Directors shall be held at the principal office of the corporation orat such other place in or outside the Philippines as the Board, from time totime, may determine.

(Amended on May 8,1962, July 11, 1969, February 29, 2000 and March 29, 2001)

 

ARTICLE III

QUORUM AND VOTING REQUIREMENTS
Section 1.  At any meeting of thestockholders, persons representing, in person or by proxy, a majority of theshares of the corporation issued and outstanding and entitled to vote at thesaid meeting shall constitute a quorum for the transaction of any business,except as otherwise provided by law.  In the absence of a quorum, the Presidentor, in his absence, any person entitled to preside or act as secretary of themeeting shall have the power to adjourn the meeting from time to time until therequisite number of shares to constitute a quorum is present or represented.When a meeting of the stockholders is adjourned to another time or place, itshall not be necessary to give notice of the adjourned meeting if the time andplace to which the meeting is adjourned are announced at themeeting atwhich the adjournment was taken.  At the reconvened meeting, any business maybe transacted that could have been transacted on the original date of themeeting.

(Amended on March 29, 1983 and March 29, 2001)

 

Section 2.  At any meeting of thestockholders at which there is quorum, all matters approved by the stockholdersrepresenting a majority of the issued and outstanding shares of the corporationentitled to vote present in person or by proxy at such meeting shall be validas a corporate act, except for such matters which require the vote of thestockholders representing a higher percentage of the outstanding shares asprescribed by statute or these By-Laws.

(New provisionadopted on March 29, 2001)

 

Section 3.Each stockholder is entitled to one vote for each share of stock held by him,where such stock has voting rights on the matter under consideration, and suchstock may be represented by the holder thereof or by his attorney dulyauthorized by proxy executed in writing on forms prescribed by the Board ofDirectors which shall be furnished to a stockholder upon his request.  Unlessotherwise provided in the proxy, it shall be valid only for the meeting inrespect of which such proxy was issued.  Proxies must be filed with theSecretary, Assistant Secretary or transfer agent of the corporation at leasttwo (2) days before the day of the meeting.  Any proxy filed with theSecretary, Assistant Secretary or transfer agent of the corporation may berevoked by the stockholder concerned either in an instrument in writing dulypresented to the Secretary, Assistant Secretary or transfer agent of thecorporation at least two (2) days before the day of the meeting or by hispersonal presence at the meeting.  The decision of the Secretary on thevalidity of proxies shall be final and binding until and unless set aside by acourt of competent jurisdiction.

(Amended on March 29,1983, February 24, 1998, March 29, 2001)

 

Section 4.  Atevery election of Directors, each holder of stock which has voting rights forthe election of Directors is entitled to one vote for each share of such stockheld by him for as many persons as there are Directors to be elected, or tocumulate said shares and give one (1) candidate as many votes as the number ofDirectors multiplied by the number of his share shall equal, or to distributesuch votes on the same principle among as many candidates as he shall thinkfit.

(Amended on March 29,1983 February 24, 1998 and March 29, 2001)

 

Section 5.  The Board of Directorsshall have the power to close the stock transfer books of the corporation forthe following periods:  (a) not exceeding sixty (60) days preceding the date ofany meeting of stockholders or the date for the allotment of rights or the datewhen any change or conversion or exchange of capital stock shall go into effector a date in connection with obtaining the consent of stockholders for anypurpose; and (b) not exceeding forty five (45) days preceding the date ofpayment of any dividend; provided, however, that in lieu of closing the stocktransfer books as aforesaid, the Board of Directors may fix in advance a dateas follows:  (a) not exceeding sixty (60) days preceding the date for anymeeting of stockholders or the date for the allotment of rights, or the datewhen any change or conversion or exchange of capital stock shall go intoeffect, or a date in connection with obtaining such consent; and (b) notexceeding forty five (45) days preceding the date of payment of any dividend;as a record date for the determination of the stockholders entitled to noticeof, and to vote at, any such meeting, and any adjournment thereof, or to anysuch allotment of rights, or to exercise the rights in respect of any suchchange, conversion or exchange of capital stock, or to give such consent, orentitled to receive payment of any such dividend, and in such case, suchstockholders, and only such stockholders as shall be stockholders of record onthe date so fixed, shall be entitled to such notice of, and to vote at, suchmeeting, and any adjournment thereof, or to receive such allotment of rights,or to exercise such rights, or to give such consent, or to receive payment ofsuch dividend, as the case may be, notwithstanding any transfer of any stock onthe books of the corporation after any such record date fixed as aforesaid.

(Amended on July 26, 1955, February 24, 1998 and March 29,2001)

 

Section 6.  At any meeting of theBoard of Directors, a majority of the number of the Directors as specified inthe Articles of Incorporation shall constitute a quorum for the transaction ofbusiness.  In the absence of a quorum, a majority of the Directors present mayadjourn any meeting from time to time until a quorum be had.  Notice of anyadjourned meeting need not be given.

(New provision adopted on March 29,2001)

 

Section 7.  At any meeting of the Boardof Directors at which there is a quorum, all matters approved by at least amajority of the Directors present at such meeting shall be valid as a corporateact, except for such matters which require the vote of majority of all themembers of the Board as prescribed by statute or these By-Laws.
(New provisionadopted on March 29, 2001)

 

ARTICLE IV
CAPITAL STOCK

 

Section 1.The certificate of stock shall be in such form and device as may be prescribedby the Board of Directors from time to time.

(Amended on April 15,1953)

 

Section 2.The person, firm or corporation in whose name the stock stands on the books ofthe corporation, whether individually or as trustee, pledgee, or otherwise, maybe recognized and treated by the corporation as the absolute owner of thestock, and the corporation shall in no event be obliged to deal with or torecognize the rights or interests of other persons in such stock or in any partthereof.

(Amended on April 15,1953)

 

Section 3.Certificates shall be issued in the manner prescribed by law to eachstockholder, showing the number of shares to which he is entitled; and saidcertificates, and the shares named therein shall be transferable only upon thebooks of the corporation by the shareholder named in the certificate, or hisduly authorized attorney or representative.  The Board of Directors shallappoint one or more registration agents of the corporation and no certificatefor any share of stock shall be delivered to any stockholder until there isendorsed thereon a certificate of one of the registrars, showing suchcertificate to have been duly registered.

(Amended on April 15,1953)

 

Section 4.  Nonew certificates of any share shall be issued until the old certificate, representingthe same, has been surrendered and cancelled; provided, however, that in caseof lost, stolen or destroyed certificates of stock, the following procedureshall be followed for the issuance by the corporation of new certificates inlieu of those lost, stolen or destroyed:

 

(a)               The registered owner of  certificates of stock in this corporation orhis legal representative shall file an affidavit, in triplicate, with thecorporation setting forth, if possible, the circumstances as to how, when andwhere said certificates were lost, stolen or destroyed, the number of sharesrepresented by each certificate and the serial number of the certificates.  Heshall submit such other information and evidence which he may deem necessary.

 

(b)               After verifying the affidavit andother information and evidence with the books of the corporation, saidcorporation shall publish a notice, in a newspaper of general circulation inthe Philippines published in the City of Manila, once a week for three (3)consecutive weeks, at the expense of the registered owner of the certificatesof stock which have been lost, stolen or destroyed.  The notice shall state thename of the corporation, the name of the registered owner and the serial numberof said certificate, and the number of shares represented by each certificate,and that after the expiration of one (1) year from the date of the lastpublication, if no contest has been presented to said corporation regardingsaid certificates of stock, the right to make such contest shall be barred and the corporation shall cancel in its books thecertificates of stock which have been lost, stolen or destroyed and issue inlieu thereof new certificates of stock, unless the registered owner files abond or other security in lieu thereof as may be required running for a periodof one (1) year for a sum and in such forms and with such sureties as may besatisfactory to the Board of Directors, in which case a new certificate may beissued even before the expiration of the one (1) year period provided herein:Provided,  That if a contest has been presented to the corporation or if anaction is pending in court regarding the ownership of said certificates ofstock which have been lost, stolen or destroyed, the issuance of the newcertificates of stock in lieu thereof shall be suspended until final decisionby the court regarding the ownership of said certificates of stock.

(Amended on April 15, 1953)

 

Section 5.Certificates of stock shall be signed by the President or Vice President andthe Secretary or an Assistant Secretary of the corporation and sealed with thecorporate seal; provided, however, that where any such certificate is signed bya transfer agent and by a registrar, the signatures of any such President, VicePresident, Secretary or Assistant Secretary and the seal of the corporationupon such certificate may be facsimiles, engraved or printed.  In case anyofficer or officers who have signed, or whose facsimile signature or signatureshave been used on, any such certificate or certificates shall cease to be suchofficer or officers of the corporation, whether because of death, resignationor otherwise, before such certificate or certificates have been delivered bythe corporation, such certificate or certificates may nevertheless be adoptedby the corporation and be issued and delivered as though the person or personswho signed such certificate or certificates or whose facsimile signature orsignatures have been used thereon had not ceased to be such officer or officersof the corporation.  A transfer agent of the Company may sign certificates ofstock by facsimile signature provided the use thereof is permitted by the stockexchange on which the Company’s stock is listed and by the Company’s othertransfer agents.

(Amended on April 15,1953, July 26, 1955 and July 11, 1969)

 

Section 6.The corporation shall not issue any stock certificate evidencing, eithersingly, or with other shares, any fractional part of a share, or any undividedinterest in any share.

(Amended on April 15,1953)

 

ARTICLE V

DIRECTORS

 

Section 1.  The Board of Directorsshall consist of thirteen (13) members, each of whom must hold at least one (1)share of the stock of the corporation in his own name on the books of thecorporation.  Directors shall be elected from among the stockholders at theirannual meeting or at any meeting held in lieu thereof for that purpose.  EachDirector shall hold office until the annual meeting of stockholders held nextafter his election and until his successor shall have been elected and qualified,except in case of death, resignation, disqualification or removal from office.

 

**There shall be at least two(2) Independent Directors or such Independent Directors as shall constitute atleast twenty percent (20%) of the members of the Board of Directors, whicheveris lesser.  An “Independent Director” is a director independent of managementand who, apart from his fees and shareholdings, is free from any business orother relationship with the corporation which could, or could reasonably beperceived to, materially interfere with his exercise of independent judgment incarrying out his responsibilities as a director of the corporation andincludes, among other persons, one who:**

** **

**(a)        is not a director orofficer of the corporation or any of its related companies or any of itssubstantial shareholders (other than as an Independent Director of any of theforegoing);**

** **

**(b)        is not a substantialshareholder of the corporation or any of its related companies or any of itssubstantial shareholders;**

** **

**(c)        isnot a relative of any director, officer or substantial shareholder of thecorporation, or any of its related companies or any of its substantialshareholders.  For this purpose, “relatives” includes spouse, parent, child,brother, sister, and the spouse of such child, brother or sister;**

** **

**(d)        isnot acting as a nominee or representative of any director, or officer orsubstantial shareholder of the corporation, or any of its related companies orany of its substantial shareholders;**

** **

**(e)        hasnot been employed in any executive capacity by the corporation, or any of itsrelated companies or any of its substantial shareholders within the last five(5) years;**

** **

**(f)         isnot retained, or within the last five (5) years has not been retained, as aprofessional adviser by the corporation, or any of its related companies or anyof its substantial shareholders, either personally or through his firm;**

** **

**(g)        hasnot engaged and does not engage in any transaction with the corporation or withany of its related companies or with any of its substantial shareholders,whether by himself or with other persons or through a firm of which he is apartner or a company of which he is a director or substantial shareholder,other than the transactions which are conducted at arm’s length and are immaterial;**

** **

**(h)        isnot employed as an officer or executive of another entity where any of thecorporation’s officers or executives serves on that entity’s CompensationCommittee; or**

** **

**(i)         isnot affiliated with or employed by or, within the last five (5) years, has notbeen affiliated with or employed by the corporation’s present or formerexternal auditors or their affiliates.**

** **

**When used in relation to a Company, “related company”means another company which is: (i) its holding company, (ii) its subsidiary, or(iii) a subsidiary of its holding company; and “substantial shareholder” meansany person who is directly or indirectly the beneficial owner of more than tenpercent (10%) of any class of its equity security.**

** **

**ADirector or any person nominated for election to the Board of Directors mustpossess the following minimum qualifications as determined by the NominationCommittee constituted by the Board of Directors:**

** **

**(a)        at least a collegegraduate, or in the absence of such college degree or formal education,sufficient experience in managing a business;**

** **

**(b)        at least twenty-one (21)years old;**

** **

**(c)        proven integrity and probity; and**

** **

**(d)        assiduousness in the performance of duties.**

** **

No person shall qualify or be eligible for nominationor election to the Board of Directors if he is engaged in any business thatcompetes with or is antagonistic to that of the corporation or itssubsidiaries.  Without limiting the generality of the foregoing, a person shallbe deemed to be so engaged:

 

(i)                 If he is an employee, officer, manager or controlling person, or theowner (either of record or beneficially) of ten per cent (10%) or more of anyoutstanding class of shares, of any corporation (other than one in which thiscorporation owns at least thirty per cent (30%) of the capital stock) or entityengaged in a business that the Board of Directors, by at least a majority vote,determines to be competitive or antagonistic to that of this corporation or anyof its subsidiaries; or

 

(ii)               If he is an employee, officer, manager or controlling person, or theowner (either of record or beneficially) of ten per cent (10%) or more of anyoutstanding class of shares, of any corporation or entity engaged in any lineof business of this Corporation or any of its subsidiaries, when in thejudgmentof the Board of Directors, by at least a majority vote, the laws againstcombinations and restraint of trade shall be violated by such person’smembership in the Board of Directors; or

 

(iii)              If the Board of Directors, in the exercise of its judgment in good faith,determines, by at least a majority vote, that he is a nominee of any person setforth in (i) and (ii) above.

 

In determining whether or not a personis a controlling person, beneficial owner, or the nominee of another, the Boardof Directors may take into account such factors as business and familyrelationships.
 
In addition, no person shall qualify orbe eligible for nomination or election to the Board of Directors if he issuffering from any of the following grounds for disqualification:
** **

**(a)        convictionby final judgment of an offense involving moral turpitude or similar fraudulentacts or transgressions;**

 

**(b)        convictionby final judgment of an offense punishable by imprisonment for a periodexceeding six (6) years, or a violation of the Corporation Code committedwithin five (5) years prior to the date of election as a director;**

** **

**(c)        judicialdeclaration of bankruptcy or insolvency;**

 

**(e)        ****final finding by the Philippine Securities and ExchangeCommission (Commission) or a Philippine court or administrative body or otherregulatory authority of competent jurisdiction of having willfully violated, orwillfully aided, abetted, counseled, induced or procured the violation of, anyprovision of the Securities Regulations Code, the Corporation Code or any otherlaws administered by the Commission or Bangko Sentral ng Pilipinas (BSP), orany rule, regulation or order of the Commission or BSP; and**

** **

**(f)          ****final finding by a foreign court or administrative body orother regulatory authority of competent jurisdiction of having committed theacts listed in the preceding clause (d) in violation of the applicable laws,rules or regulations of the relevant foreign jurisdiction.**

** **

**Except as otherwiseprovided in the preceding paragraphs, the Nomination Committee constituted bythe Board of Directors shall have the power and authority to evaluate anddecide whether any person nominated for election as a Director has all thequalifications and none of the disqualifications specified in the precedingparagraphs.  The Nomination Committee constituted by the Board of Directorsshall also have the power and authority to determine such other criteria forqualification and disqualification of Directors or persons nominated forelection to the Board of Directors, including grounds for temporarydisqualification of Directors.**

 
For the proper implementation of this provisions ofthis Section, all nominations for electionof directors by the stockholders shall be submitted in writing to the Board ofDirectors through the President and the Secretary at this corporation’sprincipal place of business at least sixty (60) working days before the regularor special meeting of stockholders for the purpose of electing directors.
(Amendedon May 8, 1962, February 29, 2000 and March 29, 2001
and**February 26, 2003**

 

Section 2.  In case of anyvacancy in the Board of Directors for any cause or reason whatsoever, otherthan removal by the stockholders or by expiration of the term of office, thevacancy may be filled by the vote of at least a majority of the remainingDirectors then in office, if still constituting a quorum.  A Director soelected to fill a vacancy shall hold office for the unexpired term of hispredecessor in office.  Any vacancy in the Board of Directors resulting fromthe removal of a director by the stockholders in the manner provided by law maybe filled by election at the same meeting at which the removal took place or atany annual or special meeting of stockholders called for the purpose aftergiving notice as prescribed in these By-Laws.

(Amended on May 8,1962, January 10, 1968 and March 29, 2001)

 

Section 3.  The Board of Directorsmay create an Executive Committee to be composed of not less than three (3)members of the Board of Directors to be appointed by the Board of Directors.Such committee shall, except as may otherwise be provided by law, have andexercise all the powers of the Board of Directors during the intervals betweenthe meetings of the full Board.  Such committee may prescribe rules for itsgovernance; its meetings may be held at such place within the Philippines as itmay determine or authorize, and majority of the members of said committee atany meeting shall constitute a quorum.  In addition to taking action at ameeting, the Executive Committee may validly act upon the written consent of amajority of its members.  At each meeting of the Board of Directors, the actsand proceedings of the Executive Committee since the preceding meeting of theBoard of Directors shall be submitted for such action thereon as the Board maydeem proper.

(Amended on May 8,1962, January 10, 1968 and March 29, 2001)

 

Section 4.  The Company will notspeculate in its own or constituent companies’ securities, or permit similarspeculations by any of its constituent companies.

 

Section 5.  The Board ofDirectors may create committees and other bodies it may deem necessary oradvisable in respect of the affairs of the corporation.  The membership,powers, duties, functions and responsibilities of such committees and bodiesshall be prescribed by the Board of Directors.  The members of such committeesand bodies shall be appointed by the Board of Directors for a term co-terminuswith that of the Board of Directors that appoints them unless sooner terminatedor removed.

(New provisioneffective February 24, 1998)

 

ARTICLE VI

OFFICERS

 

Section 1.  The executive officers ofthe corporation shall be a President, a Senior Executive President, one or moreExecutive Vice Presidents, one or more Senior Vice Presidents, one or moreFirst Vice Presidents, one or more Vice Presidents, a Treasurer, one or moreAssistant Treasurers, a Secretary, one or more Assistant Secretaries, aController, and one or more Assistant Controllers, all of whom shall be electedby the Board of Directors. 

 

Immediately after the election of theDirectors at the annual or special meeting called for such purpose, the Boardof Directors shall elect the executive officers of the corporation.  The Boardmay also, in its discretion, elect a Chairman of the Board.  Any two (2) ormore positions may be held concurrently by the same person, except that no oneshall act as Chairman or President and Treasurer or Secretary at the same time.

(Amended on May 8, 1962, January 27, 1964, July 25, 1966,

April 18, 1979,January 25, 1983 and March 29, 2001)

 

Section 2.  The Board ofDirectors may appoint or elect such other officers as it shall deem advisable,who shall, respectively, have such authority and perform such duties as may beprescribed from time to time by the Board of Directors.

 

Section 3.  The term of office ofall officers shall be co-terminus with that of the Board of Directors thatelects or appoints them except in case of death, resignation, disqualificationor removal from office.

(New provisionadopted on March 29, 2001)

 

Section 4.  If any of the officesbecomes vacant by reason of death, resignation, failure to qualify, disqualification,removal from office or for any other cause, the Board of Directors may elect asuccessor who shall hold office for the unexpired term of his predecessor inoffice.

(Newprovision adopted on March 29, 2001)

 

ARTICLE VII

CHAIRMAN OF THE BOARD, PRESIDENT, SENIOR EXECUTIVE VICEPRESIDENT, EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS, FIRST VICEPRESIDENTS, AND VICE PRESIDENTS

 

Section 1.  Chairman of theBoard. The Chairman of the Board (if there be one) shall preside at allmeetings of the Board of Directors.  He shall also exercise such powers andperform such duties as the Board of Directors may assign to him.

(Amended on April 26,1939, April 16, 1947 and March 29, 2001)

 

Section 2.  President. ThePresident, who must be a director, shall be the chief executive officer of thecorporation.  He shall have general care, supervision and management of thebusiness and affairs of the corporation, subject to the control of the Board ofDirectors.  He shall exercise such functions and perform all duties incident tothe office of the President and such other duties as may, from time to time, beassigned to him by the Board or as prescribed in these By-Laws.  He shall seethat all orders and resolutions of the Board are carried into effect, subject,however, to the right of the Board to delegate any specific powers, except suchas may be by statute exclusively conferred on the President, to any otherofficer or officers of the corporation.  He shall preside at all the meetingsof the stockholders and, in the absence of the Chairman of the Board, presideat the meetings of the Board of Directors.

(Amended on April 26, 1939, April16, 1947, April 15, 1953 and March 29, 2001)

 

Section 3.  The Senior ExecutiveVice President, Executive Vice Presidents, Senior Vice Presidents, First VicePresidents, and Vice Presidents.  In the case of absence or disability ofthe President, the Senior Executive Vice President shall act as President andin case of his absence or disability, the Board shall designate any of theExecutive Vice Presidents to act as President, and perform the duties andexercise the powers of the President.  The Senior Executive Vice President,Executive Vice Presidents, Senior Vice Presidents, First Vice Presidents andVice Presidents shall perform such duties as the Board shall, from time totime, prescribe.

(Amended on April 26, 1969, January 27, 1964,

April 18, 1979 andJanuary 25, 1983)

 

ARTICLE VIII
SECRETARY AND ASSISTANT SECRETARY

 

Section 1.  The Secretary shallmake full and faithful record of the proceedings of all meetings of thestockholders, Board of Directors and Executive Committee in books to be keptfor that purpose.  He shall give or cause to be given all necessary notice ofand materials for all meetings, have custody of the corporate seal and affix itwhen authorized, preserve and keep all material contracts, papers anddocuments, and keep or cause to bekept a list of all stockholders.  TheSecretary shall act as inspector at the election of Directors and, as such,determine the number of shares of stock outstanding and entitled to vote, theshares of stock represented at the meeting, the existence of a quorum, thevalidity and effect of proxies, and receive votes, ballots and consents, hearand determine all challenges and questions arising in connection with the rightto vote, count and tabulatevotes, ballots, consents, determine theresults and do such acts as are proper to conduct the election or vote.  TheSecretary may assign the exercise or performance of any or all of the foregoingduties, powers and functions to any other person or persons, subject always tohissupervision and control.  The Secretary shall generally perform suchservices and duties as are incident to his office and as the Board of Directorsor the President may from time to time prescribe or assign to him.

(Amended on March 29,2001)

 

Section 2.  In the absence ordisability of the Secretary, the Assistant Secretary shall act in his place andperform his duties.  The Assistant Secretary shall also perform such otherduties as may, from time to time, be delegated to him by the Secretary and asthe Board of Directors or the President may prescribe or assign to him.

(New provision adopted on March 29, 2001)

 

ARTICLE IX

TREASURER ANDASSISTANT TREASURER

 

Section 1.  The Treasurer shall bethe chief fiscal officer of the corporation.  He shall discharge such dutiesand have such powers as the Board of Directors or the President may prescribeor assign to him.

(Amended on March 29,2001)

 

Section 2.  In the absenceor disability of the Treasurer, the Assistant Treasurer shall act in his placeand perform his duties.  The Assistant Treasurer shall also perform such otherduties as may from time to time be delegated to him by the Treasurer and as theBoard of Directors or the President may prescribe or assign to him.

(New provisionadopted on March 29, 2001)

 

ARTICLEX

INDEMNIFICATIONOF DIRECTORS/OFFICERS

 

Thiscorporation shall indemnify every director or officer, his heirs, executors andadministrators against all costs and expenses reasonably incurred by suchperson in connection with any civil, criminal, administrative or investigativeaction, suit or proceeding (other than an action by this corporation) to whichhe may be, or is made, a party by reason of his being or having been a directoror officer of this corporation, except in relation to matters as to which heshall be finally adjudged in such action, suit or proceeding, to be liable forgross negligence, misconduct, or breach of fiduciary duty.

 

In the event ofa settlement or compromise, indemnification shall be provided only inconnection with such matters covered by the settlement as to which thiscorporation is advised by counsel that the person to be indemnified did notcommit a breach of duty as such director or officer.

 

The amountpayable by way of indemnity shall be determined and paid only pursuant to aresolution adopted by a majority of all of the members of the Board ofDirectors.

 

The costs and expensesincurred in defending the aforementioned action, suit or proceeding may be paidby this corporation in advance of the final disposition of such action, suit orproceeding, as authorized in the manner provided for in the precedingparagraph, upon receipt of an undertaking by or on behalf of the director orofficer to repay such amount, unless it shall ultimately be determined that heis entitled to be indemnified by this corporation as authorized in this Article.

(Newprovision adopted on March 29, 2001)

 

ARTICLE XI

INDEPENDENTAUDITOR
 

**Section 1.  The Audit Committee constituted by theBoard of Directors shall select and recommend the Independent Auditor forappointment by the Board of Directors.  The Audit Committee shall also have theauthority to recommend the removal of the Independent Auditor by the Board ofDirectors.  In case of resignation or removal of the Independent Auditor, theAudit Committee shall, as soon as practicable, select and recommend areplacement for appointment by the Board of Directors.**

**(New provisionadopted on February 26, 2003)**

 

Section **2**.The Independent Auditor **selected and recommended by the Audit Committeepursuant to Section 1 of this Article** shall be **appointed**by the **Board of Directors** at their **regular** meeting **immediatelyfollowing the annual meeting of the stockholders of the Corporation.  In caseof resignation or removal of the Independent Auditor, the new IndependentAuditor selected and recommended by the Audit Committee shall be appointed bythe Board of Directors at any regular or special meeting**.

(Amended on May 8,1962 and March 29, 2001 and **February 26, 2003**)

 

ARTICLE XII

BANKING AND CONTRACTS

 

Section 1.  All moneys belonging to the corporation shall bedeposited in such bank or banks as may be from time to time designated by theBoard of Directors and shall be withdrawn only on checks of the corporationsigned by such officer or officers of the corporation or by such person orpersons as may be from time to time designated by the Board of Directors.Promissory notes, bills of exchange, trade acceptances, drafts and othernegotiable instruments shall be signed and/or drawn in the name of thecorporation by such officer or officers as may be from time to time designatedby the Board of Directors.

Section 2.  All contracts,instruments or documents pertaining to transactions or corporate actionsauthorized by the Board of Directors shall be signed in the name of thecorporation by such officer or officers as may be, from time to time,designated by the Board of Directors.  In the absence of any specificdesignation by the Board of Directors, such contracts, instruments or documentsshall be signed in the name of the corporation by the President, or by anyother executive officer of the corporation authorized by the President.Contracts, instruments or documents to be entered into in the ordinary courseof business of the corporation which do not require the approval of the Boardof Directors may be signed by the President or by any executive officer of thecorporation designated bythe President, or by such officer or officersauthorized for such purpose under administrative orders approved by thePresident in effect at the relevant time.

(Amended on March 29, 2001)

 

ARTICLE XIII

FISCALYEAR
 

Section 1.  Thefiscal year in the business of the corporation shall be the calendar year,extending from January first to December thirty-first inclusive, in each year.

 

Section 2.  The Company shall publish at least once ineach year and submit to the stockholders at least fifteen (15) business daysprior to the annual meeting, a statement of its physical and financialcondition and income account covering the previous fiscal year, and a balancesheet showing the assets and liabilities at the end of the year.

(Amended on February24, 1998 and March 29, 2001)

 

ARTICLEXIV

SEAL

 

Section 1.  The corporate seal of this corporationshall bear upon its face, in a circle, the words “PHILIPPINE LONG DISTANCETELEPHONE COMPANY”, and within the circle a desk telephone instrument and thewords and figures, “INCORPORATED 1928**”**.

(Amended on March 29, 2001)

 

ARTICLEXV

AMENDMENTS

 

Section 1.  The owners of themajority of the subscribed capital stock may, at a regular or special meetingduly called for the purpose, amend or repeal these By-Laws, or adopt newBy-laws.  The owners of two-thirds of the subscribed capital stock may delegateto the Board of Directors the power to amend or repeal these By-Laws or toadopt new By-Laws; provided, however, that any such power so delegated to theBoard of Directors shall be considered as revoked whenever a majority of thestockholders shall so vote at a regular or special meeting called for thepurpose.

(Amended on April 15, 1953)

 

Section 2.  AllBy-Laws and amendments thereto adopted shall be certified by a majority of theDirectors and by the Secretary or Assistant Secretary, and entered in the bookof By-Laws.  Whenever any amendment or new By-Law is adopted, it shall beentered in the book of By-Laws with the original By-Laws.  If any By-Law isrepealed, the fact of repeal with the date of the meeting at which the repealwas enacted, or written assent was filed, shall be stated in said book.

(Amended on March 29, 2001)

 

The followingnotation is FOR GUIDANCE ONLY and does not constitute a part of theBy-Laws of Philippine Long Distance Telephone Company.

 

NOTE:  Under the provisions ofSection 1 of ARTICLE XV (formerly Article XIV) of the By-Laws of PhilippineLong Distance Telephone Company, the owners of two-thirds of the subscribedcapital stock may delegate to the Board of Directors the power to amend, repealor adopt new By-Laws.  Under the authority given by said section of theBy-Laws, the stockholders under date of April 15, 1953 delegated to the Boardthe power to amend, repeal or adopt new By-Laws.

** **

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

**EXHIBIT 6**

 

**PHILIPPINE LONG DISTANCETELEPHONE COMPANY**

**Computation of NetOperating Income and Earnings Per Share**

**For the years 2000 through2002**

 

** **

**2000**

**2001**

**2002**

**2002**(1)

 

**(in millions, except net operating income (loss) per common share)**

**1. Net operating income per share**

** **

** **

** **

** **

Basic

 

 

 

 

Net operating income (loss) 

Php10,524

Php(5,942)

Php12,029

US$226

Deduct: Dividends on preferred stock

1,249

1,503

1,645

31

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

–

542

1,004

19

Net operating income (loss) applicable to common stock

Php9,275

Php(7,987)

Php9,380

US$176

Diluted

 

 

 

 

Net operating income (loss) 

Php 10,524

Php(5,942)

Php 12,029

US$226

Deduct: Dividends on preferred stock

1,249

1,503

1,036

19

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

–

542

1,004

19

Net operating income (loss) applicable to common stock

Php 9,275

Php (7,987)

Php 9,989

US$188

Basic

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

Outstanding common shares, beginning

121,173

168,498

168,895

 

Effect of common shares issuance during the year

36,504

162

200

 

 

157,677

168,660

169,095

 

Diluted

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

Outstanding common shares, beginning

121,173

168,498

168,895

 

Effect of common shares issuance during the year

36,504

162

22,360

 

 

157,677

168,660

191,255

 

 

 

 

 

 

Net operating income (loss) per share 

 

 

 

 

Basic

Php58.82

Php(47.36)

Php55.47

US$1.04

Diluted

58.82

(47.36)

52.23

0.98

 

 

** **

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

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

** **

** **

** **

** **

Basic

 

 

 

 

Net loss 

Php (29,258)

Php (27,782)

Php (6,158)

US$(115)

Deduct: Dividends on preferred stock

1,249

1,503

1,645

31

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

–

542

1,004

19

Net loss applicable to common stock

Php(30,507)

Php(29,827)

Php(8,807)

US$(165)

Basic

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

Outstanding common shares, beginning

121,173

168,498

168,895

 

Effect of common shares issuance during the year

36,504

162

200

 

 

157,677

168,660

169,095

 

Earnings per share(2) 

 

 

 

 

Basic

Php(193.48)

Php(176.85)

Php(52.08)

US$(0.98)

Diluted

(193.48)

(176.85)

(52.08)

(0.98)

_____________

 

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

* *

*(2)    **Our convertible preferredshares were deemed anti-dilutive based on the calculation above.  Since theamount of preferred dividends over the equivalent number of common shares weregreater than the basic earnings per share, the amounts reported for basic anddiluted earnings (loss) per common share were the same.*
**
**EXHIBIT 7**

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

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

For the years 2000 through 2002

 

 

**2000**

**2001**

**2002**

**2002(1)**

 

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

Earnings (a)

Php(19,664)

Php(13,117)

Php12,639

US$(238)

Fixed charges – (b)

 

 

 

 

Fixed charges excluding amortization of capitalized interest

Php14,154

Php15,839

Php15,501

US$291

Capitalized interest, net of amortization

1,691

1,170

(393)

(7)

 

Php15,845

Php17,009

Php15,108

Php284

Ratio (a/b) (2)

–

–

–

–

_____________

 

*(1)    **PLDT maintains its accountsin Philippine pesos.  For convenience, the peso financial information as of andfor the year ended December 31, 2002 has been translated into U.S. dollars atthe exchange rate of Php53.254 to US$1.00, the peso-dollar rate as quotedthrough the Philippine Dealing System as of December 31, 2002.*

* *

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

* *

*Due to PLDT’s losses in 2000, 2001 and 2002, thecoverage ratio on a consolidated basis was less than 1.0x in all of these threeyears.  In order to achieve a coverage ratio of 1.0x, we would have had togenerate additional consolidated earnings of Php35,509 million, Php30,126million and Php2,469 million for each of the three years ended December 31,2000, 2001 and 2002, respectively, to achieve a coverage ratio of 1.0x.*

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

**EXHIBIT 8**

 

 

SUBSIDIARIES
 

Name of Subsidiary

** **

Jurisdiction

** **

**Principal Activity**

** **

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

 

 

 

 

 

 

 

Smart Communications, Inc.

 

Philippines

 

Cellular mobile services

 

100.0

 

 

 

 

 

 

 

PLDT Clark Telecom, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Subic Telecommunications

Company, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

ePLDT, Inc.

 

Philippines

 

Information and communications

infrastructure for Internet-based 

services, e-commerce, call centers and IT-related services

 

100.0

 

 

 

 

 

 

 

PLDT Global Corporation

 

British Virgin

Islands

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Smart-NTT Multimedia, Inc.

 

Philippines

 

Data and network services

 

100.0

 

 

 

 

 

 

 

Telesat, Inc.

 

Philippines

 

Satellite communications services

 

94.4

 

 

 

 

 

 

 

Maranao Telephone Company, Inc.

 

Philippines

 

Télécommunications services

 

97.5

 

 

 

 

 

 

 

ACeS Philippines Cellular

Satellite Corporation

 

Philippines

 

Satellite phone services 

 

93.7

 

 

 

 

 

 

 

Mabuhay Philippines Satellite

Corporation

 

Philippines

 

Satellite communications services

 

67.0

 

 

 

 

 

 

 

Pilipino Telephone Corporation

 

Philippines

 

Cellular mobile services

 

45.3

 

**EXHIBIT12**

** **

**CERTIFICATION**

** **

** **

I,Manuel V. Pangilinan, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company;

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as of, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) for the Company and have:

 

a)       designed suchdisclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to the Company, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;
b)       [omittedpursuant to the guidance of Release No. 33-8238 (June 5, 2003)]
c)       evaluated theeffectiveness of the Company's disclosure controls and procedures and presentedin this report our conclusions about the effectiveness of the disclosurecontrols and procedures, as of a date within 90 days prior to the filing dateof this  report, based on such evaluation; and
d)       disclosed inthis report any change in the Company’s internal control over financialreporting that occurred subsequent to the date of our most recent evaluationthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting; and
5.       The Company’s other certifyingofficers and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the Company’s auditors and the auditcommittee of the Company’s board of directors (or persons performing theequivalent functions):

 

a)      all significant deficiencies andmaterial weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect theCompany's ability to record, process, summarize and report financialinformation; and

 

b)      any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the Company’s internal control over financial reporting.

 

 

Date:  October 17, 2003

 

 

/s/ Manuel V. Pangilinan

Manuel V. Pangilinan

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

**CERTIFICATION**

** **

** **

I,Anabelle L. Chua, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as of, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) for the Company and have:

 

a)     designedsuch disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to the Company, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;
b)    [omittedpursuant to the guidance of Release No. 33-8238 (June 5, 2003)]
c)     evaluatedthe effectiveness of the Company's disclosure controls and procedures andpresented in this report our conclusions about the effectiveness of the disclosurecontrols and procedures, as of a date within 90 days prior to the filing dateof this  report, based on such evaluation; and
d)    disclosedin this report any change in the Company’s internal control over financialreporting that occurred subsequent to the date of our most recent evaluationthat has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting; and
5.       The Company’s other certifyingofficers and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the Company’s auditors and the auditcommittee of the Company’s board of directors (or persons performing theequivalent functions):

 

a)     all significant deficiencies and materialweaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the Company's abilityto record, process, summarize and report financial information; and

 

b)    any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theCompany’s internal control over financial reporting.

 

 

Date:  October 17, 2003

 

 

/s/ Anabelle L. Chua

Anabelle L. Chua

Senior Vice President and Treasurer

(Principal Financial Officer)

** **

 

**EXHIBIT13**

** **

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. § 1350, I, Manuel V. Pangilinan, President and Chief ExecutiveOfficer of Philippine Long Distance Telephone Company, hereby certify, to myknowledge, that our annual report on Form 20-F for the year ended December 31,2002 (the “Report”) fully complies with the requirements of Section 13(a) or15(d), as applicable, of the Securities Exchange Act of 1934, and that theinformation contained in the Report fairly presents, in all material respects,our financial condition and results of operations.

 

 

Date:  October 17, 2003

 

 

 

 

 

/s/ Manuel V. Pangilinan

 

 

 

Manuel V. Pangilinan

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

Theforegoing certification is being furnished solely pursuant to 18 U.S.C. § 1350and is not being filed as part of the Report or as a separate disclosuredocument.

 

 

** **

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. § 1350, I, Anabelle L. Chua, Senior Vice President andTreasurer of Philippine Long Distance Telephone Company, hereby certify, to myknowledge, that our annual report on Form 20-F for the year ended December 31,2002 (the “Report”) fully complies with the requirements of Section 13(a) or15(d), as applicable, of the Securities Exchange Act of 1934, and that theinformation contained in the Report fairly presents, in all material respects,our financial condition and results of operations.

 

 

Date:  October 17, 2003

 

 

 

 

 

/s/ Anabelle L. Chua

 

 

 

Anabelle L. Chua

Senior Vice President and Treasurer

 

 

 

(Principal Financial Officer)

Theforegoing certification is being furnished solely pursuant to 18 U.S.C. § 1350and is not being filed as part of the Report or as a separate disclosuredocument.

 

 

 

 

 

 

To the Board of Directors and Stockholders of

Philippine Long Distance Telephone Company

 

 

We have audited the accompanying consolidated balance sheetsof Philippine Long Distance Telephone Company and subsidiaries as of December31, 2002 and 2001, and the related consolidated statements of operations, cash flowsand changes in stockholders’ equity for each of the three years in the periodended December 31, 2002.  These financial statements are the responsibility ofthe Company’s management.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

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

 

In our opinion, the consolidated financial statements referredto above present fairly, in all material respects, the consolidated financialposition of Philippine Long Distance Telephone Company and subsidiaries as ofDecember 31, 2002 and 2001, and the consolidated results of their operationsand their consolidated cash flows for each of the three years in the periodended December 31, 2002, in conformity with accounting principles generallyaccepted in the United States of America.

 

As discussed in Note 4 to the consolidated financialstatements, adjustments were made to certain items in the previously issuedconsolidated financial statements. 

 

 

 

 

/s/  SyCip Gorres Velayo & Co.

SYCIP GORRES VELAYO & CO.

 

 

September 4, 2003

 

Makati City, Philippines

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

CONSOLIDATED BALANCE SHEETS
**DECEMBER31, 2002 AND 2001**

**(inmillions of pesos, except par value amounts)**

 

 

 

**2002**

2001

** **

**(As Restated)**

(As Restated)

**ASSETS**

**Current Assets**

 

 

Cash and cash equivalents (Note 5)

**10,974**

4,276

Accounts receivable – net (Notes 6 and 19) 

**17,313**

24,600

Inventories and supplies – net (Note 7)

**4,502**

5,331

Deferred income tax – net (Note 22)

**5,045**

3,578

Prepaid expenses

**1,643**

1,072

Other current assets  

**769**

1,488

Total Current Assets

**40,246**

40,345

**Noncurrent Assets**

** **

** **

Property, plant and equipment – net (Notes 8 and 15)

**194,922**

208,617

Investments – net (Note 9)

**1,757**

1,833

Goodwill and other intangible assets – net (Note 11)

**16,061**

16,827

Deferred income tax – net (Note 22)

**11,163**

13,479

Other noncurrent assets – net (Note 12)

**5,502**

3,776

Total Noncurrent Assets

**229,****405**

244,532

 

**269,651**

284,877

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

 

 

Current portion of long-term debt (Note 15) 

**19,627**

20,229

Accounts payable (Note 19)

**9,866**

12,494

Accrued expenses and other current liabilities (Note 13)

**12,246**

10,038

Unearned revenue on sale of prepaid cards

**3,135**

3,386

Notes payable (Note 14)

**760**

6,462

Income tax payable (Note 22)

**982**

355

Dividends payable (Note 18)

**429**

328

Total Current Liabilities

**47,045**

53,292

**Noncurrent Liabilities**

** **

** **

Long-term debt – net of current portion (Note 15) 

**171,323**

169,870

Deferred credits and other noncurrent liabilities (Notes 16 and 20)

**22,508**

26,401

Total Noncurrent Liabilities

**193,****831**

196,271

**Minority Interest in Consolidated Subsidiaries**

**1,423**

1,310

**Preferred Stock Subject to Mandatory Redemption** (Notes 17 and 26)

**10,939**

9,532

**Stockholders’ Equity** (Note 18)

 

 

Preferred stock, Php10 par value, authorized 822,500,000 shares; issued and outstanding 447,442,336 shares at December 31, 2002 and 412,963,950 shares at December 31, 2001

**4,474**

4,129

Common stock, Php5 par value, authorized 234,000,000 shares; issued and outstanding 169,360,901 shares at December 31, 2002 and 168,894,715 shares at December 31, 2001

**847**

845

Capital in excess of par value

**74,324**

73,961

Accumulated deficit 

**(66,016)**

(57,171)

Accumulated other comprehensive income

**2,784**

2,708

Total Stockholders’ Equity

**16,413**

24,472

 

**269,651**

284,877

*Seeaccompanying Notes to Consolidated Financial Statements.*
****
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(inmillions of pesos, except per share amounts)**

** **

** **

 
** **

**2002**

2001

2000

 
** **

**(As Restated)**

(As Restated)

(As Restated)

 
**OPERATING REVENUES**(Note 19)

** **

** **

** **

 
Fixed line

 

 

 

 
Local exchange 

**21,345**

21,356

18,671

 
International long distance

**10,636**

11,701

13,223

 
National long distance

**7,818**

8,500

10,436

 
Data and other network

**5,561**

4,653

2,971

 
Miscellaneous

**491**

113

9

 
 

**45,851**

46,323

45,310

 
Wireless

 

 

 

 
Cellular services

**30,583**

19,820

9,255

 
Cellular handset sales

**14,982**

13,015

4,762

 
Satellite, very small aperture terminal and others

**683**

762

782

 
 

**46,248**

33,597

14,799

 
Information and communications technology services

**644**

374

239

 
 

**92,743**

80,294

60,348

 
**OPERATING EXPENSES**

** **

 

 

 
Depreciation (Note 8)

**17,481**

16,218

12,756

 
Cost of cellular handsets sold 

**16,203**

15,179

6,774

 
Asset impairment charges (Note 8)

**13,279**

19,735

–

 
Compensation and benefits (Note 20)

**10,881**

9,632

8,886

 
Maintenance 

**4,654**

4,579

3,973

 
Provision for doubtful accounts (Note 6)

**4,136**

3,221

2,929

 
Selling and promotions 

**3,961**

2,887

3,078

 
Rent 

**3,006**

2,586

1,511

 
Professional and other service fees (Note 19)

**2,311**

2,381

1,478

 
Taxes and licenses (Note 25)

**1,101**

940

744

 
Amortization of goodwill and other intangible assets (Note 11)

**766**

6,177

4,477

 
Other operating expenses (Note 19) 

**2,935**

2,701

3,218

 
 

**80,714**

86,236

49,824

 
OPERATING INCOME (LOSS)

**12,029**

(5,942)

10,524

 
**INTEREST EXPENSE AND RELATED ITEMS** - Net of capitalized  interest (Notes 8, 14 and 15)

**(14,002)**

(14,697)

(13,541)

 
**INTEREST AND OTHER INCOME** – Net

**2,776**

1,278

1,376

 
**EQUITY IN NET LOSSES OF INVESTEES**(Note 9)

**(127)**

(4,268)

(901)

 
**OTHER EXPENSES**– Net (Note 21)

**(5,275)**

(6,561)

(32,188)

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

**(4,599)**

(30,190)

(34,730)

 
**BENEFIT FROM (PROVISION FOR) INCOME TAX**(Note 22)

**(1,438)**

2,570

5,613

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

**(6,037)**

(27,620)

(29,117)

 
**CUMULATIVE EFFECT ON PRIOR YEARS (UP TO DECEMBER 31, 2000)  OF ADOPTING SFAS NO. 133** – Net of tax effect (Note 27)

–

(54)

–

 
**LOSS BEFORE MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARIES**

**(6,037)**

(27,674)

(29,117)

 
**MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARIES**

**(121)**

(108) 

(141)

 
**NET LOSS**

**(6,158)**

(27,782)

(29,258)

 
**DIVIDENDS AND ACCRETION OF PREFERRED STOCK**

**(2,649)**

(2,045)

(1,249)

 
**LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS**

**(8,807)**

(29,827)

(30,507)

**Earnings Per Common Share**(Note 23)

** **

 

 

Basic and diluted earnings per common share before cumulative effect of change in accounting principle 

**(52.08)**

(176.53)

(193.48)

Cumulative effect of change in accounting principle

–

(0.32)

–

Basic and diluted earnings per common share

**(52.08)**

(176.85)

(193.48)

*See accompanying Notes to Consolidated FinancialStatements**.*

* *

* *

**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

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

**(in millions ofpesos)**

** **

** **

 

**Preferred Stock**

**Common Stock**

**Capital in  Excess of  Par Value**

**Retained Earnings (Accumulated Deficit)**

**Accumulated Other Comprehensive Income**

**Total**

Balances as of January 1, 2000 

      (As restated)

3,625

606

21,746

4,065

1,472

31,514

Comprehensive loss:

 

 

 

 

 

 

Net loss for the year

–

–

–

(29,258)

–

(29,258)

Translation gains

–

–

–

–

1,063

1,063

Total comprehensive loss

 

 

 

 

 

(28,195)

Cash dividends (Note 18)

–

–

–

(1,988)

–

(1,988)

Issuance of capital stock

296

237

51,896

–

–

52,429

Balances as of December 31, 2000 (As restated)

3,921

843

73,642

(27,181)

2,535

53,760

Comprehensive loss:

 

 

 

 

 

 

Net loss for the year

–

–

–

(27,782)

–

(27,782)

Translation gains

–

–

–

–

173

173

Total comprehensive loss

 

 

 

 

 

(27,609)

Cash dividends (Note 18)

–

–

–

(1,666)

–

(1,666)

Accretion to redemption value of Preferred Stock subject to mandatory redemption 

–

–

–

(542)

–

(542)

Issuance of capital stock

208

2

319

–

–

529

Balances as of December 31, 2001 (As restated)

4,129

845

73,961

(57,171)

2,708

24,472

Comprehensive loss:

 

 

 

 

 

 

Net loss for the year

–

–

–

(6,158)

–

(6,158)

Translation gains

–

–

–

–

76

76

Total comprehensive loss

 

 

 

 

 

(6,082)

Cash dividends (Note 18)

–

–

–

(1,683)

–

(1,683)

Accretion to redemption value of Preferred Stock subject to mandatory redemption

–

–

–

(1,004)

–

(1,004)

Partial redemption of Series IV Preferred Stock (Note 17)

(72)

–

–

–

–

(72)

Issuance of capital stock

417

2

363

–

–

782

**Balances as of December 31, 2002**(As restated)

**4,474**

**847**

**74,324**

**(66,016)**

**2,784**

**16,413**

*See accompanying Notes to Consolidated FinancialStatements.*

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

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

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

**(inmillions of pesos)**

** **

** **

 

**2002**

2001

2000

** **

**(As Restated)**

(As Restated)

(As Restated)

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

Net loss

**(6,158)**

(27,782)

(29,258)

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

** **

 

 

Depreciation

**17,481**

16,218

12,756

Asset impairment charges

**13,279**

19,735

–

Foreign exchange losses

**5,301**

3,996

33,432

Investment write-off

–

2,052

–

Provision for doubtful accounts

**4,136**

3,221

2,929

Deferred income taxes

**849**

(3,446)

(7,349)

Amortization of goodwill and other intangible assets 

**766**

6,177

4,477

Minority interest in net income of consolidated subsidiaries

**121**

108

141

Equity in net losses of investees

**127**

4,268

901

Gain on disposal of property and equipment

**(87)**

(83)

(163)

Provision for inventory obsolescence

**499**

211

105

Amortization of debt issuance costs

**497**

280

109

Amortization of activation fee

**(253)**

(220)

(151)

Others

**39**

(42)

257

Operating cash flows before working capital changes 

**36,597**

24,693

18,186

Changes in assets and liabilities, net of effect from purchase of subsidiaries: 

 

 

 

Decrease (increase) in:

** **

 

 

Accounts receivable

**4,029**

(1,112)

(2,165)

Inventories and supplies

**330**

(2,168)

298

Prepaid expenses and other current assets

**(186)**

(1,065)

(62)

Increase (decrease) in:

 

 

 

Accounts payable

**(2,507)**

(2,134)

1,653

Accrued expenses and other current liabilities

**1,558**

1,276

337

Income tax payable

**627**

(101)

(1)

Unearned revenue 

**2**

1,276

2,481

Decrease in deferred credits and other noncurrent liabilitites

**(758)**

(497)

–

Net cash provided by operating activities

**39,692**

20,168

20,727

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

Addition to property, plant and equipment

**(17,154)**

(28,201)

(26,567)

Proceeds from disposal of property and equipment

**252**

113

193

Payments for purchase of investments

–

(617)

(331) 

Payments for purchase of investments, net of cash acquired

–

(772)

–

Cash acquired from purchase of Smart

–

–

1,901

Proceeds from disposal of investments

**30**

150

–

Cash disbursements for lease deposits and others

**(210)**

(49)

(379)

Net cash used in investing activities

**(17,082)**

(29,376)

(25,183)

*(Forward)*

**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

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

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

**(inmillions of pesos)**

** **

 

**2002**

2001

2000

** **

**(As Restated)**

(As Restated)

(As Restated)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

 

Payments of long-term borrowings

**(43,896)**

(16,990)

(25,768)

Proceeds from long-term borrowings

**36,011**

21,829

29,751

Proceeds from notes payable

**7,872**

13,483

7,322

Repayment of notes payable 

**(13,600)**

(11,970)

(17,451)

Dividends paid

**(1,582)**

(1,819)

(1,900)

Debt issuance costs paid

**(1,206)**

(979)

(684)

Proceeds from issuance of capital stock

**464**

232

14,241

Redemption of preferred stock

**(72)**

–

–

Net cash provided by (used in) financing activities

**(16,009)**

3,786

5,511

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

**97**

24

757

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

**6,698**

(5,398)

1,812

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

**4,276**

9,674

7,862

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

**10,97****4**

4,276

9,674

*See accompanying Notes to Consolidated FinancialStatements.*

 

** **
**
* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

 

 

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

 

The Philippine Long DistanceTelephone Company, or PLDT, was incorporated under the old Corporation Law ofthe Philippines (Act 1459, as amended) on November 28, 1928, following themerger of four telephone companies under common United States ownership.  In1967, 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. 

 

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

 

PLDT’s charter, like those of all otherPhilippine corporations, was initially limited to a period of 50 years but hassince been extended twice for 25 years each, the last extension being for anadditional 25-year period to 2028.  Under its amended charter (Republic Act No.7082), which became effective on August 24, 1991, PLDT is authorized to providevirtually every type of telecommunications service, both within the Philippinesand between the Philippines and other countries.

 

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

 

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

 

PLDT has three employee unions. Thethree unions are in aggregate composed of 9,271 members as of December 31,2002. The union members represent 48% of the employees of the PLDT Group on aconsolidated basis as of December 31, 2002.

 

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

 

 

 

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

 

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

 

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

 

 

** **

** **

**Percentage of Ownership**

**Name of Subsidiary/Investee**

**Principal Activity**

**2002**

2001

2000

**Fixed Line**

 

** **

** **

** **

PLDT Clark Telecom, Inc., or  Clark Telecom

Telecommunications services

**100.0**

100.0

100.0

Subic Telecommunications Company, Inc.,  or Subic Telecom

Telecommunications services

**100.0**

100.0

60.0

Smart–NTT Multimedia, Inc., or SNMI

Data and network services

**100.0**

100.0

100.0

PLDT Global and subsidiaries

Telecommunications services

**100.0**

100.0

–

Maranao Telephone Company, Inc.,  or MaraTel

Telecommunications services

**97.5**

92.3

–

**Wireless**

 

** **

** **

** **

Smart Communications, Inc., or Smart,  and subsidiaries

Cellular mobile services

**100.0**

100.0

100.0

Telesat, Inc., or Telesat

Satellite communications services

**94.4**

94.4

94.4

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services

**93.7**

93.7

95.1

Mabuhay Satellite  Corporation, or Mabuhay Satellite

Satellite communications services

**67.0**

67.0

67.0

Pilipino Telephone Corporation, or  Piltel, and subsidiaries

Cellular mobile and  telecommunications services

**45.3**

45.3

57.6

**Information and Communications  Technology**

 

 

 

 

ePLDT, Inc., or ePLDT, and  subsidiaries

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

**100.0**

100.0

100.0

* *

 

Themethod of accounting applied to investments, whether consolidated, equity orcost, involves an evaluation of all significant terms of the investments thatexplicitly grant or suggest evidence of control or influence over theoperations of the investee.  The consolidated financial statements include ourcontrolled subsidiaries. Investments in businesses which we do not control, butwe have the ability to exercise significant influence over operating andfinancial policies, are accounted for using the equity method.  Investments inwhich we do not have the ability to exercise significant influence overoperating and financial policies are accounted for using the cost method.Equity and cost method investments are included in the “Investments” account inour consolidated balance sheets.  

 

Our consolidated financialstatements are prepared using uniform accounting policies for like transactionsand events with similar circumstances.  Intercompany balances and transactions,including intercompany profits and unrealized profits and losses, areeliminated.

 

Minority interests represent theequity interests in MaraTel, Telesat, ACeS Philippines, Mabuhay Satellite andPiltel and their respective subsidiaries not held by the PLDT Group.
******
*** ***

***Acquisition of Smart***

 

PLDT completed the acquisition ofthe entire issued share capital of Smart on March 24, 2000 valued at approximatelyPhp38,188 million through the issuance of PLDT common shares (issue price ofPhp1,088 per share) to Smart’s shareholders representing 22.5% of the issuedcommon shares of PLDT (as enlarged by such issue of shares).  Accordingly, theoperating results of Smart have been included in the consolidated results ofoperations from the date of acquisition.

 

The excess of the total acquisitioncost over the fair value of the net assets acquired was Php23,096  million.Based upon management estimates and review, Php5,900 million was recorded asthe value of customers acquired (Php2,705 million and Php3,195 million wereattributed to Global System for Mobile Communication, or GSM, and analogsubscribers, respectively).  Prior to 2002, the excess of the total acquisitioncost over the fair value of the net assets acquired was amortized on astraight-line basis over five years.  Prior to 2001, the customers list for theGSM and analog subscribers were amortized over five years, which at that timewas the expected term of the customer relationship. Beginning in 2001, werevised our estimated useful life of the acquired GSM customers list, based onour analysis of customer churn rates, to three years.  The unamortized balanceof the analog customer list was fully impaired in 2001.  

 

 

 

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

 

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

 

***Revenue Recognition***

 

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

 

*Products and services*

 

*Subscriptions.*We providetelephone and data communication services under postpaid and prepaid paymentarrangements. Revenue includes fees for installation and activation.Installation and activation-related fees and the corresponding costs, notexceeding the activation revenue, are deferred and recognized over the expectedperiod of the customer relationship period of seven years and three years forfixed line and cellular service, respectively.  Postpaid service arrangementsinclude subscription fees, typically fixed monthly fees, which are recognizedover the subscription period on a pro rata basis. 

 

*Air time, traffic and value-addedservices.*Prepaid service revenue collected in advance is deferred andrecognized based on the earlier of actual usage or upon expiration of the usageperiod.  Payphone service revenue is recognized when the service is provided.Interconnection revenue for call termination, call transit, and network usageare recognized in the period the traffic occurs.  Revenue related to local,long distance, network-to-network, roaming and international call connectionservices is recognized when the call is placed or the connection is provided,net of amounts payable to other telecommunication carriers for terminatingcalls in their territories. Revenue related to products and value-addedservices is recognized upon delivery of the product or service.

* *

*Equipment sales.*Sales ofcommunication equipment are recognized upon delivery to the customer.

 

*Directory services.*Revenuerelated to published directory services is recognized on a pro rata basis overthe period in which the publication expires, which is generally 12 months.Telephone-based directory service revenue is recognized when the service isprovided.

* *

*Incentives.*We record aninsignificant amount of commission expense based on the number of newsubscriber connections initiated by certain dealers.  All other cash incentivesprovided to dealers and customers are recorded as a reduction from revenue.Product-based incentives provided to dealers and customers as part of atransaction are accounted for as multiple element arrangements and recognizedwhen earned.  

 

*Others.*Interest income fromcash deposits is recognized on a time proportion basis taking into account theprincipal amount outstanding and the effective interest rate.

 

***Cash andCash Equivalents***

* *

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

* *

***AccountsReceivable***

* *

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

* *

***Allowancefor Doubtful Accounts***

* *

Allowance for doubtful accounts ismaintained at a level considered adequate to provide for uncollectiblereceivables.  The level of allowance is based on historical collections,write-off experience, current economic trends, changes in our customer paymentterms and other factors that may affect collectibility.  An evaluation of thereceivables, designed to identify potential charges to the allowance, is performedon a continuous basis during the year.

* *

***Inventoriesand Supplies***

* *

Inventories and supplies arevalued at the lower of cost or market value.  These are items of cellular phoneunits, materials, spare parts, terminal units and accessories.  Cost is determinedusing the moving average method.

 

***Property,Plant and Equipment***

 

Property, plant and equipment arestated at cost less accumulated depreciation and any impairment in value.

 

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

* *

* *

Depreciation is calculated on astraight-line basis over the following estimated 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

Communication satellites

15 years

Vehicles, furniture and other work equipment

3 – 10 years

Buildings

25 – 40 years

Information origination/termination equipment

5 – 15 years

Land improvements

10 years

 

The useful lives and depreciationmethod are reviewed periodically to ensure that the period and method ofdepreciation are consistent with the expected pattern of economic benefits fromitems of property, plant and equipment.

 

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

 

Interest costs are capitalizedduring the construction of plant and equipment as part of the cost of acquiringassets, see*Note 8 – Property, Plant and Equipment.*

 

***CapitalizedLeases***

*** ***

The PLDT Group leases severalfacilities under long-term leases and has the option to purchase the facilitiesfor a nominal cost at the termination of the lease.  

*** ***

***Impairmentof Assets***

* *

Effective January 1, 2002, inconformity with Statement of Financial Accounting Standards, or SFAS, No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” and prior toJanuary 1, 2002, SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of”, long-lived assets andidentifiable intangible assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Assets, which are held and used in operations, would beimpaired if the book value of the asset exceeded the undiscounted future netcash flows without interest charges expected to result from the use of theasset.  If an impairment exists, the amount of the impairment recorded is basedon the fair value of the assets.  Assets, which are to be disposed of, would beimpaired to the extent the net book value of the asset exceeded fair value lessdisposal costs.  The PLDT Group considers relevant cash flows, estimated futureoperating results, trends and other available information in assessing whetherthe carrying values of assets are recoverable.

*** ***

***Goodwilland Other Intangible Assets***

 

Goodwill is the excess of theacquisition cost of a business, including equity method investments, over thefair value of the identifiable net assets acquired. Effective January 1, 2002,we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and, asrequired, we no longer amortize goodwill (including goodwill recorded on ourequity method investments). Goodwill is reviewed annually (or more frequentlyunder various conditions) for impairment using the fair value approach.Intangible assets that do not have indefinite lives are amortized over their usefullives and reviewed for impairment in conformity with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.”  We have noindefinite-lived intangibles.

 

 

Priorto January 1, 2002, we generally amortized goodwill and other identifiableintangibles on a straight-line basis over their estimated useful lives, notexceeding five years. We assessed the impairment of other identifiableintangibles and goodwill related to our consolidated subsidiaries under SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to Be Disposed Of,” whenever events or changes in circumstancesindicated that the carrying value may not be recoverable. A determination ofimpairment (if any) was made based on estimates of future cash flows. Ininstances where goodwill was recorded for assets that were subjected to animpairment loss, the carrying amount of the goodwill was eliminated before anyreduction was made to the carrying amounts of impaired long-lived assets and identifiableintangibles.  On a quarterly basis, we assessed the impairment of enterpriselevel goodwill under Accounting Principles Board, or APB, Opinion No. 17,“Intangible Assets.” A determination of impairment (if any) was made basedprimarily on estimates of market value.

 

***Cost ofDebt Issuance***

* *

Issuance costs, underwriting feesand related expenses incurred in connection with the issuance of debtinstruments are deferred and amortized using the effective interest rate methodover the terms of the instruments.  Unamortized debt issue costs are charged tooperations when the related debt is extinguished.

* *

***BorrowingCosts***

* *

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

* *

***RetirementCosts***

* *

PLDT and Smart have fundednoncontributory retirement plans, administered by the respective companies’Trustee, covering regular employees.  Retirement costs are actuariallydetermined using the projected unit credit of accrued benefit valuationmethod.  This method reflects services rendered by employees to the date ofvaluation and incorporates assumptions concerning employees’ projectedsalaries.  

* *

***Stock-BasedCompensation***

 

We have historically accounted forstock-based employee compensation plans under APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations, andfollowed the disclosure-only provisions of SFAS No. 123, “Accounting forStock-Based Compensation.”  

 

Under APB Opinion No. 25,compensation cost is measured at the intrinsic value, which is the differencebetween market price and exercise price, if any, on the measurement date.Under SFAS No. 123, compensation cost is calculated based on the fairvalue of the options granted.  Fair value is determined using an acceptableoption-pricing model based on certain management assumptions.  Compensationexpense is recognized over the performance period. 

 

*ExecutiveStock Option Plan*

 

Stock options granted under thePlan vest over five years and have a maximum contractual life of ten years fromthe date of grant.  The exercise price of the options granted under the Planshall not be lower than the average of the closing price of our common stock onthe PSE for 30 calendar days immediately preceding the date of grant.

 

The stock options granted under thePlan shall vest each year, beginning one year from the grant date at a per yearrate of 25% of the options granted.

 

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

 

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

 

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

 

 

**Options Outstanding**

 

Number of  Options

Weighted Average Exercise Price Per Share

Balances as of December 31, 2000

1,322

Php814

Options granted in 2002

144

814

Options cancelled in:

 

 

2001

(165)

814

2002

(75)

814

Balances as of December 31, 2002

1,226

Php814

 

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

 

The number of options exercisableat December 31, 2002 and 2001 was 756 shares and 511 shares, respectively.

 

In conformity with the provisionsof SFAS No. 123, the fair value of each option is estimated using theBlack-Scholes model with the following assumptions for grants under theExecutive Stock Option Plan during the year ended December 31, 1999: volatilityof 71.3%, risk-free interest rate of 8.94% at the date of grant and an expectedterm of five years.

 

The weighted average per share fairvalue of common stock options granted in 2002 was Php582.59 and Php587.23 in2000.  The remaining weighted average contractual life was seven years as ofDecember 31, 2002.

 

During the years ended December 31, 2002, 2001, and 2000, therewere no options exercised.

* *

*Employee Stock Purchase Plan*

 

On March 3, 2000, a total of827,704 shares of common stock were made available under the Plan to alleligible employees as of January 3, 2000.  The purchase price was fixed at thelower of 85% of the average market price of PLDT stock on the PSE on January 3,2000 or 85% of the average market price on April 15, 2000.  In no event willthe price per share be less than the par value of each share.

 

A certain amount for every shareeach employee elects to purchase will be deducted from the employee’s salarybeginning with the first payroll on April 30, 2000 and ending with the lastpayroll period ended April 15, 2003.  No prepayment of the purchase price isallowed.

 

 

 

The maximum number of shares thatmay be issued and sold under the Plan is 5.6 million.  Sales under the EmployeeStock Purchase Plan for the year ended December 31, 2000 amounted to Php827,000at an average price of Php878.  There were no sales under the Plan for theyears ended December 31, 2002 and 2001.

 

The estimated grant date fair valuewas calculated using the Black-Scholes model.  The following weighted averageassumptions were included in the estimated grant date fair value calculationsfor rights to purchase stock under PLDT’s Employee Stock Purchase Plan:volatility of 34.5%, risk-free interest rate of 8.78% at the date of grant andan expected term of five years.

 

The weighted average estimated fairvalue, as defined by SFAS No. 123, at grant date of the rights to purchasestock under the Employee Stock Purchase Plan was Php371.93 per share.

 

Pro forma information regarding net loss and earnings per shareis required by SFAS No. 123.  This information is required to be determined asif PLDT had accounted for its employee stock options (including shares issuedunder the Employee Stock Purchase Plan) using the fair value method.  UnderSFAS No. 123, employee stock options are valued at the grant date using theBlack-Scholes valuation model, and this compensation cost is recognized ratablyover the vesting period.  Had compensation expense for PLDT’s stock option planand stock purchase plan been determined based on the fair value at the grantdate of awards for years 2002, 2001 and 2000, consistent with the provision ofSFAS No. 123, PLDT’s net loss would have increased in 2002, 2001 and 2000 tothe pro forma amounts indicated below:

 

 

**2002**

2001

2000

(in millions of pesos, except per share amounts)

Loss attributable to common stockholders

**(8,807)**

(29,827)

(30,507)

Add:  Total stock-based employee compensation expense     included in loss

**15**

15

              16

Deduct: Total stock-based employee compensation expense determined under fair value based method

**(127)**

(208)

(441)

Pro forma loss attributable to common stockholders

**(8,919)**

(30,020)

(30,932)

Earnings per common share:

** **

 

 

Basic and diluted earnings per common share, as reported

**(52.08)**

(176.85)

(193.48)

Basic and diluted earnings per common share, pro forma

**(52.75)**

(177.99)

(196.17)

* *

***Advertisingand Promotion Expenses***

 

Advertising and promotions areexpensed as incurred. Advertising and promotion expenses were Php1,940 million,Php1,939 million and Php1,770 million in 2002, 2001 and 2000, respectively. 

 

***Foreign Currency Transactions and Translations***

 

For each entity in the group,transactions in foreign currencies are recorded in the functional currency ofthe entity by applying to the foreign currency amount the spot exchange rateprevailing at the transaction date.  Foreign exchange gains or losses arisingon the spot settlements or restatement of monetary items at rates differentfrom those at which they were initially recorded during the period or presentedin the previous consolidated financial statements are recorded in theconsolidated statement of operations in the period in which they arise.

 

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

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

***Derivativesand Hedging Instruments***

 

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

 

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

 

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

 

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

*** ***

***IncomeTaxes***

 

Deferred income tax is provided usingthe liability method.  Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to: (a) temporary differences betweenthe financial reporting bases of assets and liabilities and their related taxbases and (b) net operating loss carryover, or NOLCO.  Deferred tax assets andliabilities are measured using the tax rate applicable to taxable income in theyears in which those temporary differences are expected to be recovered orsettled, and NOLCO is expected to be applied.  A valuation allowance isprovided for deferred tax assets when it is more likely than not that some orall of the deferred tax assets will not be realized in the future.

 

***EarningsPer Common Share***

 

Basic earnings per common share, orEPS, is calculated by dividing the net income or loss for the year attributableto common shareholders by the weighted average number of common sharesoutstanding during the year, after giving retroactive effect to any stockdividend declarations.

 

Diluted EPS is calculated in the same manner assuming that, atthe beginning of the year or at the time of issuance during the year, alloutstanding options are exercised and convertible preferred shares areconverted to common shares.  Outstanding stock options will have a dilutiveeffect under the treasury stock method only when the average market price ofthe underlying common share during the period exceeds the exercise price of theoption.  

 

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

*** ***

*** ***

*** ***

*** ***

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

***SegmentReporting***

 

Segment assets include operatingassets used by a segment and consist principally of operating cash and cashequivalents, receivables, inventories and supplies and property, plant andequipment.  

 

 

Segment revenues, segment expensesand segment performance include transfers between business segments.  Thetransfers are accounted for at competitive market prices charged to unaffiliatedcustomers for similar products.  Such transfers are eliminated in ourconsolidation.

 

***Use ofEstimates***

 

The preparation of our consolidatedfinancial statements in conformity with U.S. GAAP, requires us to makeestimates and assumptions that affect the reported amounts of our assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements, and the reported amounts of revenues andexpenses during the period reported.  Actual results could differ from thoseestimates.

 

        Examples of significant estimates include theallowance for doubtful accounts, inventory obsolescence, depreciation rate,impairment of intangibles, investments and other long-lived assets, valuationallowance on tax assets and pension benefit assumptions.

*** ***

***Concentrations***

 

The PLDT Group’s results ofoperations and financial performance and condition may be influenced by thegeneral political situation in the Philippines.  The Philippines experiencedseveral *coup d’état* attempts against the government administrationbetween 1986 and 1989, and as recent as July 2003.  Political conditions in thePhilippines were generally stable during the 1990’s.  In the past three years,an increasing number of kidnapping, criminal and terrorist activities haveoccurred in Mindanao principally led by the extremist “Abu Sayyaf” group, whichreportedly has ties to the Al-Qaeda terrorist network.  There were series ofbombing incidents in key cities in Mindanao, including Davao City.  The armed conflictbetween the Philippine military and the Moro Islamic Liberation Front alsocontinues in Mindanao.

 

The PLDT Group’s results ofoperations may be negatively affected by slow or negative growth rates andeconomic instability in the Philippines and in Asia.  In the past, thePhilippines has experienced periods of slow or negative growth, high inflation,significant devaluation of the peso, imposition of exchange controls, debtrestructuring and electricity shortages and blackouts.  From mid-1997 to 1999,the economies of a number of Asian countries experienced significantdownturns.  The regional economic turbulence affected the Philippine economy ina number of ways, including the depreciation of the peso, increases in interestrates, increases in unemployment and inflation, increased volatility and adecline in prices in the domestic stock market, the downgrading of thePhilippines’ local currency rating and the ratings outlook for the Philippinebanking sector and the reduction of foreign currency reserves.  

 

As of December 31, 2002, otherthan the concentration of our wireless services on prepaid subscribers, we donot have any significant concentration of business transacted with a particularsupplier, lender or former affiliate that could, if suddenly adverselyimpacted, severely impact our operations.  We also do not have a concentrationof available sources or other rights that could, if suddenly eliminated,severely impact our operations.  We invest our cash and cash equivalents withmany high-quality financial institutions.

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

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

 

In April 2002, the FASB issuedSFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment ofFASB Statement No. 13, and Technical Corrections.” Among other provisions, SFASNo. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment ofDebt.” Accordingly, gains or losses from extinguishment of debt shall not bereported as extraordinary items unless the extinguishment qualifies as anextraordinary item under the criteria of APB Opinion No. 30, “Reporting theResults of Operations - Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions.” Gains or losses from extinguishment of debt that do not meet thecriteria of APB Opinion No. 30 should be reclassified to income from continuingoperations in all prior periods presented.  We have early adopted theprovisions related to the extinguishment of debt.  There was no impact on priorperiods.  We are currently in the process of evaluating any effect the adoptionof the remaining provisions of SFAS No. 145 will have on our consolidatedfinancial position and results of operations.

 

In June 2002, the FASB issued SFASNo. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”SFAS No. 146 provides guidance related to accounting for costs associated withdisposal activities covered by SFAS No. 144 or with exit or restructuringactivities previously covered by Emerging Issues Task Force, or EITF, Issue No.94-3, “Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).” SFAS No. 146 supersedes EITF Issue No. 94-3 in its entirety.SFAS No. 146 requires that costs related to exiting an activity or to arestructuring should not be recognized until the liability is incurred. SFASNo. 146 will be applied prospectively to exit or disposal activities that areinitiated after December 31, 2002. The application of SFAS No. 146 is notexpected to have a material impact on our consolidated financial position andresults of operations.

 

In November 2002, the FASB issuedFASB Interpretation, or FIN, No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” FIN No. 45 requires that a liability be recorded in the guarantor’sbalance sheet upon issuance of a guarantee. In addition, FIN No. 45 requires disclosuresabout the guarantees that an entity has issued, including a rollforward of theentity’s product warranty liabilities. We will apply the recognition provisionsof FIN No. 45 prospectively to guarantees issued after December 31, 2002. Thedisclosure provisions of FIN No. 45 are effective for financial statements forthe year ended December 31, 2002. We are currently in the process of evaluatingthe potential impact the adoption of FIN No. 45’s recognition provisions willhave on our consolidated financial position, results of operations and cashflows. 

 

In November 2002, the EITF reacheda consensus on Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables.” EITF Issue No. 00-21 provides guidance on how to account forarrangements that involve the delivery or performance of multiple products,services and/or rights to use assets.  The provisions of EITF Issue No. 00-21will apply to revenue arrangements entered into in fiscal periods beginningafter June 15, 2003. We are currently evaluating the effect that theadoption of EITF Issue No. 00-21 will have on our consolidated financialposition, results of operations and cash flows.  

 

In January 2003, the FASB issued FIN No. 46, “Consolidation ofVariable Interest Entities.”  The primary objective of FIN No. 46 is to provideguidance on the identification of, and financial reporting for, entities overwhich control is achieved through means other than voting rights; such entitiesare known as variable interest entities.  FIN No. 46 requires variable interestentities to be consolidated by the primary beneficiary of the variable interestentities and expands disclosure requirements for variable interest entitiesthat are consolidated as well as those within which an enterprise holds asignificant variable interest.  FIN No. 46 is effective immediately for allvariable interest entities created after January 31, 2003, and is effective forperiods ending after December 15, 2003 for all variable interest entitiescreated prior to February 1, 2003.  We are currently in the process ofevaluating any effect the adoption of FIN No. 46 will have on our consolidatedfinancial position, results of operations and cash flows.

 

 

In August 2001, the FASB issued SFAS No. 143, “Accountingfor Obligations Associated with the Retirement of Long-Lived Assets.”  SFASNo. 143 addresses financial accounting and reporting for the retirementobligation of an asset.  This Statement states that companies should recognizethe asset retirement cost at their fair value, as part of the cost of the assetand classify the accrued amount as a liability in the balance sheet.  The assetretirement liability is then accreted to the ultimate payout as interestexpense.  The initial measurement of the liability would be subsequently updatedfor the revised estimates of the discounted cash flows.  The Statement will beeffective for fiscal year beginning after June 15, 2002.  We are currently inthe process of evaluating any effect the adoption of SFAS No. 143 will have onour consolidated financial position, results of operations and cash flows.

 

In April 2002, the FASB issued SFASNo. 149, “Amendment of Statement No. 133 on Derivative Instruments andHedging Activities.”  SFAS No. 149 is intended to result in more consistentreporting of contracts as either freestanding derivative instruments subject toSFAS No. 133 in its entirely, or as hybrid instruments with debt hostcontracts and embedded derivative features.  SFAS No. 149 amends SFASNo. 133 as a result of decisions previously made as part of theDerivatives Implementation Group process, changes made in connection with otherBoard projects dealing with financial instruments, and deliberations inconnection with issues raised in relation to application of the definition of aderivative.  SFAS No. 149 is effective for contracts entered into ormodified after June 30, 2003, and hedging relationships designated afterJune 30, 2003.  However, the provisions of SFAS No. 149 that merelyrepresent the codification of previous Derivatives Implementation Groupdecisions, are already effective and should continue to be applied inconformity with their prior respective effective dates.  We are currently inthe process of evaluating any effect the adoption of SFAS No. 149 will have onour consolidated financial position, results of operations and cash flows.

 

In May 2003, the FASB issued SFASNo. 150, “Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity.”  SFAS No. 150 establishes standards for how anissuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  This Statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003, except for mandatorily redeemable financial instruments of nonpublicentities.  We are currently in the process of evaluating any effect theadoption of SFAS No. 150 will have on our consolidated financial position,results of operations and cash flows. 

 

 

 

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

 

***Restatementof Information Previously Reported***

 

Subsequent to the issuance of our consolidatedfinancial statements included in the annual report on Form 20-F for the fiscalyear ended December 31, 2002 and the amendments thereto that were filed withthe U.S. SEC on July 15 and 16, 2003, we made adjustments to certain items inthe previously issued financial statements. These adjustments have beenreflected in the accompanying consolidated financial statements and aresummarized as follows:

 

***Depreciation***

 

In the financial information previously issued, depreciationexpense of Smart was understated in 2002. In addition, depreciation expense forMabuhay was adjusted for all years presented due to a change in the U.S. GAAPcost basis of certain property, plant and equipment. 

 

***Impairment***

 

In the financial information previously issued for 2002, weconcluded that certain assets of a subsidiary, Piltel, were impaired and werecorded an impairment charge. The original calculation did not properly reducethe carrying value of the E.O. 109 assets to fair value.

 

***Goodwill amortization***

*** ***

The goodwill amortizationadjustments for 2001 and 2000 represent the additional amortization for theunderstatement of goodwill related to the Smart acquisition.  The goodwillamortization adjustments for 2002 relate to the reversal of amortization ofgoodwill related primarily to Maratel.  This amortization expense waspreviously classified as other expense.

*** ***

*Customer lists amortization*
In the financial informationpreviously issued, amortization expense related to customer lists intangibleswas understated due to a change in the customer life that was not previouslyreflected in the amortization.  We revised the estimated useful life of theacquired GSM customer lists based on our analysis of customer churn rates.

*** ***

***Foreign exchange loss***

*** ***

In the financial informationpreviously issued, there were instances where foreign exchange gains/lossesreported by Piltel and Mabuhay Satellite in 2001 and 2000 were not properlyvalidated which resulted in incorrect amounts of foreign exchangedifferential.  Additionally, foreign exchange gains and losses on certainforeign currency denominated liabilities were not identified. 

 

***Debt restructuring***

*** ***

In the financial informationpreviously issued, we incorrectly recorded certain items related to a troubleddebt restructuring.

*** ***

***Piltel consolidation***

 

In the financial informationpreviously issued, the losses related to Piltel were understated due to theincorrect allocation of a portion of the losses to the minority interest account.

*** ***

***Minority interest***

 

In the financial informationpreviously issued, we recorded minority interest related to certain entitieswithout converting the financial statements to U.S. GAAP and a debit balance inminority interest of a subsidiary was incorrectly offset against the creditbalance of minority interest in other subsidiaries.

 

***Others***

 

Subsequent to the financialinformation previously issued, as indicated, we made adjustments to additionalitems primarily related to lease accounting.

*** ***

***Income tax benefit (expense)***

 

Subsequent to the financialinformation previously issued, we made adjustments to income taxes to conformwith the liability method and in relation to other restated amounts.

*** ***

*** ***

*** ***

***Reclassifications***

 

Certain accounts werereclassified to conform with U.S. GAAP presentation requirements.  Thesereclassifications did not affect net loss in the years presented.  Thefollowing items discuss the significant reclassifications that have been made.

 

a. Discounts and phone kittingfees, which were recorded as operating expenses in the previously filedfinancial information rather than as deductions against gross revenues.Revenues and costs related to the sale of handsets below acquisition cost toentice subscribers which were previously recorded as marketing expenses ratherthan as revenues and costs of items sold.

 

b. Impairment charge related toPiltel’s analog network assets were presented as depreciation expense in thepreviously issued financial information.  Subsequently, the amount was reclassifiedunder asset impairment charges account.

 

c. In the previously filedfinancial information, amortization of intangibles was presented as part ofinterest income and expense rather than as a separate line item as amortizationof intangibles.

 

d. Manpower reduction cost waspresented as part of other expenses in the previously filed financialinformation rather than as a separate item under operating expenses.

 

e. In the previously filedfinancial information, certain foreign exchange losses were inappropriatelyincluded under interest and other income.

 

**Adjustmentsrelated to stockholders’********equity**

* *

a. Smart acquisition

 

In the financial informationpreviously issued, the measurement date used for the Smart acquisition, whichclosed in March 2000, was incorrect.  The adjustment reflects the use of ameasurement date for a reasonable period before and after the date the terms ofthe acquisition are agreed to and announced.

 

****b. Openingretained earnings at January 1, 2000

** **

With respect to opening retainedequity, we also made adjustments to record certain net foreign exchange loss inthe proper period, to adjust deferred income tax, to properly account forcertain leases and to reflect proper consolidation. 

 

The effects of these restatements on net loss, per shareamounts and stockholders’ equity are provided below.  

 

 

**2002**

2001

2000

** **

            (in millions of pesos)

**Net loss, as previously reported**

**(4,559)**

(27,484)

(23,087)

Depreciation:

** **

 

 

    Smart analog assets

**(1,557)**

–

–

    Mabuhay

**(273)**

236

(136)

Impairment of Piltel E.O. 109 assets

**(1,150)**

–

–

Goodwill amortization

**402**

(1,151)

(863)

Customer lists amortization

**(225)**

(225)

–

Unrealized foreign exchange loss – net

**(55)**

(742)

(1,053)

Revenue recognition adjustments

**112**

(141)

(29)

Debt restructuring 

–

(718)

–

Consolidation:

** **

 

 

    Piltel

**(377)**

567

(1,823)

    Minority interest in net losses (income) of consolidated subsidiaries

**(100)**

–

416

Others

**(63)**

(58)

(56)

Deferred income tax benefit (expense)

**1,687**

1,934

(2,627)

**Net loss, as restated**

**(6,158)**

(27,782)

(29,258)

 

 

**2002**

2001

2000

** **

             (in pesos)

**Earnings per common share, as previously reported**

**(42.60)**

(175.08)

(154.34)

Earnings per share impact of restated items:

 

 

 

Depreciation:

** **

 

 

    Smart analog assets

**(9.21)**

–

–

    Mabuhay

**(1.61)**

1.40

(0.86)

Impairment of Piltel E.O. 109 assets

**(6.80)**

–

–

Goodwill amortization

**2.37**

(6.83)

(5.47)

Customer lists amortization

**(1.33)**

(1.33)

–

Unrealized foreign exchange loss – net

**(0.33)**

(4.40)

(6.68)

Revenue recognition adjustments

**0.66**

(0.84)

(0.18)

Debt restructuring 

–

(4.26)

–

Consolidation:

** **

 

 

    Piltel

**(2.23)**

3.36

(11.56)

    Minority interest in net losses (income) of consolidated subsidiaries

**(0.59)**

–

2.63

Others

**(0.38)**

(0.34)

(0.36)

Deferred income tax benefit (expense)

**9.97**

11.47

(16.66)

**Earnings per common share, as restated****(1)**

**(52.08)**

(176.85)

(193.48)

(1) Earnings per common share includes the effect ofdividends and accretion of preferred stock.

 

** **

**2002**

2001

2000

** **

        (in millions of pesos)

**Stockholders’ equity, as previously reported**

**15,122**

21,573

50,558

Adjustments to current year’s net loss

**(1,599)**

(298)

(6,171)

Adjustments affecting prior years’ net loss

**(6,469)**

(6,171)

–

Adjustments relating to Smart acquisition and others

**7,181**

7,190

7,195

Adjustments related to stockholders’ equity as at January 1, 2000

**2,178**

2,178

2,178

**Stockholders’ equity, as restated**

**16,413**

24,472

53,760

 

The effect of these restatementsdid not have a significant effect on individual consolidated balance sheet lineitems previously disclosed except as presented above. 

 

Thefollowing tables summarize the effects of the restatement, after giving effectto the reclassifications discussed above, on our consolidated statements ofoperations for the years ended December 31, 2002, 2001 and 2000.

 

 

As Previously Reported

2002

As Restated

2002

** **

(in millions of pesos)

**Condensed Statements of Operations**

 

 

Service revenues

80,764

77,761

Cellular handset sales

14,776

14,982

** **

95,540

92,743

**Operating Expenses**

 

 

Cost of cellular handsets sold

15,981

16,203

Asset impairment charges

10,947

13,279

Selling and promotions

5,640

3,961

Other operating expenses

48,079

47,271

 

80,647

80,714

**Operating Income**

14,893

12,029

Other expenses, net

(16,682)

(16,628)

**Loss before income tax, cumulative effect of change in accounting principle and  minority interest in net losses (income)****of consolidated subsidiaries**

 

(1,789)

 

(4,599)

Provision for income tax

(3,125)

(1,438)

Minority interest in net losses (income) of consolidated subsidiaries

355

(121)

**Net loss**

(4,559)

(6,158)

 

 

 

 

 

 

 

 

As Previously Reported

2001

As Restated

 2001

** **

(in millions of pesos)

**Condensed Statements of Operations**

 

 

Service revenues

67,658

67,279

Cellular handset sales

11,470

13,015

** **

79,128

80,294 

**Operating Expenses**

 

 

Cost of cellular handsets sold

13,232

15,179

Asset impairment charges

19,735

19,735

Selling and promotions

3,504

2,887

Other operating expenses

46,599

48,435

 

83,070

86,236

**Operating Loss**

(3,942)

(5,942)

Other expenses, net

(23,385)

(24,248)

**Loss before income tax, cumulative effect of change in accounting principle and minority interest in net income of consolidated subsidiaries**

 

(27,327)

 

(30,190)

Benefit from income tax

636

2,570

Cumulative effect on prior years (up to December 31, 2000) of adopting SFAS No. 133 – net of tax effect

 

(54)

 

(54)

Minority interest in net **income** of consolidated subsidiaries

(739)

(108)

**Net loss**

(27,484)

(27,782)

 

 

As Previously Reported

2000

As Restated

 2000

** **

(in millions of pesos)

**Condensed Statements of Operations**

 

 

Service revenues

58,213

55,586

Cellular handset sales

3,736

4,762

** **

61,949

60,348 

**Operating Expenses**

 

 

Cost of cellular handsets sold

7,042

6,774

Selling and promotions

3,438

3,078

Other operating expenses

40,024

39,972

 

50,504

49,824

**Operating Income**

11,445

10,524

Other expenses, net

(44,399)

(45,254)

**Loss before income tax, cumulative effect of change in accounting principle and minority interest in net losses (income) of consolidated subsidiaries**

 

(32,954)

 

(34,730)

Benefit from income tax

8,240

5,613

Minority interest in net losses (income) of consolidated subsidiaries

1,627

(141)

**Net loss**

(23,087)

(29,258)

 

The following table summarizesthe effects of the restatement on stockholders’ equity as of January 1, 2000.

 

 

(in millions of pesos)

Piltel consolidation

1,516

Deferred income tax

(539)

Foreign exchange loss – net

753

Minority interest

734

Capital lease

(321)

Others

35

** **

2,178

 

 

*Changes in U.S. GAAP Information PreviouslyDisclosed*

 

        Prior to 2002, ourconsolidated financial statements included in annual reports on Form 20-F filedwith the U.S. SEC were prepared in conformity with accounting principlesgenerally accepted in the Philippines (Philippine GAAP). Philippine GAAP varyin certain significant respects from U.S. GAAP.  A description of thesignificant differences between U.S. GAAP and Philippine GAAP and areconciliation of such differences in the net loss and stockholders’ equity toU.S. GAAP were disclosed in a note to our previously filed consolidated financialstatements.  In connection with the preparation of the consolidated balancesheets as of December 31, 2002 and 2001, and the related consolidatedstatements of operations, changes in stockholders’ equity and cash flows forthe years ended December 31, 2002, 2001, and 2000 in conformity with U.S. GAAP,we identified differences in the U.S. GAAP amounts previously disclosed in 2001and prior periods.  The net loss, stockholders’ equity and earnings per shareamounts in conformity with U.S. GAAP as previously disclosed for 2001 and priorperiods and the amounts included in our consolidated financial statementsprepared in conformity with U.S. GAAP are summarized as follows: 

 

 

2001

2000

 

(in millions of pesos,  except per share amounts)

**Net loss**

** **

** **

      As previously disclosed

(20,739)

(28,984)

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

(27,782)

(29,258)

**Stockholders’ equity at December 31**

** **

** **

      As previously disclosed

29,050

51,577

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

24,472

53,760

**Basic earnings per common share**

** **

** **

      As previously disclosed

(135.75)

(191.74)

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

(176.85)

(193.48)

 

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

 

***ACeS International Limited, or AIL***

 

U.S. GAAP information previouslydisclosed accounted for our investment in AIL on the cost basis. Theconsolidated financial statements prepared in conformity with U.S. GAAP accountfor our investment in AIL on the equity basis. As an equity basis investment,we recorded our share of losses in AIL in each period. In addition, we recordedcapitalized interest during the periods that construction was in process andadjusted depreciation accordingly. For 2001, we concluded that our investment inAIL was impaired and wrote off the carrying amount of our investment. We basedour decision to recognize an impairment charge for AIL on (1) significantnegative operating cash flows by AIL, (2) significant levels of debt held byAIL, (3) concerns about the ability of AIL to continue as a going concern and(4) projected cash flows that indicate our investment would not be recovered.See *Note 9 - Investments*.

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

***ACeS Philippines***

 

U.S. GAAP information previouslydisclosed did not account for capitalized interest on the construction of theAsia Cellular Satellite System during the construction period. The consolidatedfinancial statements prepared in conformity with U.S. GAAP recognizecapitalized interest on the Asia Cellular Satellite System during the constructionperiod and adjusted depreciation accordingly.  In 2001, in connection with ourimpairment analysis of our investment in AIL, we concluded that our investmentin the Asia Cellular Satellite System was also impaired. See *Note 8 –Property, Plant and Equipment.*

 

***Mabuhay Satellite***

 

U.S. GAAP information previouslydisclosed did not account for capitalized interest on the construction of theMabuhay Satellite system during the construction period. Also, the financialstatements of Mabuhay Satellite and its joint venture investment were preparedusing Philippine peso as functional currency.  The consolidated financialstatements prepared in conformity with U.S. GAAP recognized capitalizedinterest for the construction of the Mabuhay Satellite system during theconstruction period and adjusted depreciation accordingly. In addition, weconcluded that the functional currency of Mabuhay Satellite and its jointventure investment is the U.S. dollar and adjusted the consolidated financialstatements accordingly.  

*** ***

***Smart Acquisition***

 

U.S. GAAPinformation previously disclosed did not account for certain elements of ouracquisition of Smart. The consolidated financial statements prepared inconformity with U.S. GAAP recognized unearned revenue related to prepaid cardsand different deferred tax amounts at the acquisition date. In addition, in2001, we revised our estimated useful life of the acquired customer lists basedon our analysis of customer churn rates. 

 

***Derivatives and Hedging Instruments***

 

U.S. GAAP information previouslydisclosed for 2001 did not account for derivatives embedded in variouscontracts.  The consolidated financial statements prepared in conformity withU.S. GAAP bifurcated such derivatives and recognized the bifurcated derivativesat fair value at each balance sheet date with changes in fair value recognizedin the consolidated statements of operations.

 

***Unilink Communications Corporation, or Unilink***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods accounted for our investment in theconvertible notes of Unilink, at cost.  The consolidated financial statementsprepared in conformity with U.S. GAAP recognized an other than temporarydecline in the value of such investment in 2001.  Unilink’s principalinvestment is the ownership of 100% of the shares in Philippine Home CableHoldings, Inc., or Home Cable, the Philippines’ second largest cable televisionoperator. The other than temporary decline in value of investments resultedfrom the default by Home Cable on certain obligations that were collateralizedwith Unilink’s ownership interest in Home Cable, uncertainty surrounding thenegotiations with Home Cable creditors and the financial condition of HomeCable.  See *Note 9 - Investments*. 

 

***Piltel Debt Restructuring***

*** ***

U.S. GAAP information previouslydisclosed for 2001 and prior periods did not account for the fair value ofembedded derivatives that are not clearly and closely related to host financialinstruments issued in connection with the restructuring. The consolidatedfinancial statements prepared in conformity with U.S. GAAP, bifurcated suchderivatives and recognized the bifurcated derivatives at fair value at eachbalance sheet date with changes in fair value recognized in the consolidatedstatements of operations.  In addition, the bifurcation of embedded derivativesresulted in changes in the accounting for the host instruments subsequent tothe restructuring.  See *Note 17 - PreferredStock Subject to Mandatory Redemption.*

*** ***

*** ***

***Accounts Receivable from Philcom Corporation andPhilippine Global Communications, Inc., collectively referred to as Philcom***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods accounted for accounts receivable fromPhilcom based on the assumption that Philcom would successfully restructure itsliabilities with creditors and equity holders in a manner that would eventuallyresult in the accounts receivable being recovered.  The consolidated financialstatements prepared in conformity with U.S. GAAP recorded a provision against theaccounts receivable from Philcom based on the uncertainty surrounding thenegotiations with Philcom’s creditors and equity holders and the financialcondition of Philcom.

 

***Revenue Recognition***

 

U.S. GAAP information previouslydisclosed for 2001 and prior periods accounted for certain incentives providedto dealers and customers as marketing expenses based on the retail value of theincentives.  Additionally, certain activation-related revenues were recorded inthe incorrect period, instead of the customer relationship period.   Theconsolidated financial statements prepared in conformity with U.S. GAAP accountfor incentives provided to dealers as adjustments to the price of relatedproducts and services, which are recorded based on the cash considerationreceived and recognized in the period in which services are provided.Activation-related revenues are recognized over the estimated customerrelationship period.

 

***Foreign Exchange Gains and Losses***

 

U.S. GAAP information previouslydisclosed accounted for foreign exchange gains and losses based on theestimated losses of certain subsidiaries. The consolidated financial statementsprepared in conformity with U.S. GAAP recognized foreign exchange gains andlosses based on actual amounts.

 

***Income Taxes***

*** ***

The consolidated financialstatements prepared in conformity with U.S. GAAP account for income taxes inconformity with the liability method and reflect adjustments for the changesreferred to above.

 

 

 

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

** **

This account consists of:

** **

 

**2002**

2001

 

(in millions of pesos)

Cash on hand and in banks

**3,151**

2,001

Temporary investments

**7,823**

2,275

 

**10,974**

4,276

** **

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

 

 

 

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

** **

This account consists ofreceivables from:

 

 

**2002**

2001

 

(in millions of pesos)

Customers and carriers

**27,552**

29,462 

Others

**1,950**

4,162 

 

**29,502**

33,624 

Less allowance for doubtful accounts

**12,189**

9,024 

 

**17,313**

24,600 

 

Movements in the allowance for doubtful accounts during the yearare as follows:

 

 

**2002**

2001

2000

 

                  (in millions of pesos)

Balance at beginning of year

**9,024**

7,696

8,807

Provision for the year

**4,136**

3,221

2,929

Write-offs

**(971)**

       (1,893)

    (4,040)

Balance at end of year

**12,189**

9,024

7,696

 

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

 

Unbilled receivables of Php848million and Php933 million in 2002 and 2001, respectively, represent recognizedrevenue for services rendered to fixed line and wireless subscribers that havenot been billed at the date of the balance sheets. The unbilled amounts are billedupon completion of the corresponding subscribers’ billing cycles.

 

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

 

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

 

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

 

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

 

 

 

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

 

This account consists of:

 

 

**2002**

2001

 

(in millions of pesos)

Spare parts and supplies 

**2,281**

2,342

Terminal and cellular phone units 

**2,380**

2,427

Others

**452**

848

 

**5,113**

5,617

Less allowance for inventory obsolescence

**611**

286

 

**4,502**

5,331

 

Movements in the allowance forinventory obsolescence during the year are as follows:

 

 

**2002**

2001

2000

 

                  (in millions of pesos)

Balance at beginning of year

**286**

590

485

Provision for the year

**499**

211

105

Write-offs

**(174)**

(515)

**–**

Balance at end of year

**611**

286

590

 

As of December 31, 2002 and 2001,spare parts and supplies issued to various projects are included as part of propertyunder construction shown under *Note 8 – Property, Plant and Equipment*amounted to Php6,682 million and Php7,008 million, respectively.  

 

 

 

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

** **

This account consists of:

 

 

**2002**

2001

 

 (in millions of pesos)

Cable and wire facilities

**87,066**

74,016

Central office equipment

**56,562**

70,654

Cellular facilities

**20,777**

5,100

Communications satellite

**27,550**

27,700

Vehicles, furniture and other work equipment

**19,923**

18,232

Buildings

**17,528**

16,714

Information origination/termination equipment

**3,407**

2,744

Land and land improvements

**2,984**

2,891

 

**235,797**

218,051

Less accumulated depreciation

**57,879**

40,201

 

**177,918**

177,850

Property under construction

**17,004**

30,767

 

**194,922**

208,617

 

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

 

 

Central officeequipment include the following amounts for leases that have been capitalized:

 

 

**2002**

2001

 

(in millions of pesos)

Cost

**308**

308

Less accumulated depreciation

**205**

185

 

**103**

123

 

PLDT’s future minimum payments forcapitalized leases were as follows as of December 31, 2002:

 

 

(in millions of pesos)

2003

138

2004

217

2005

217

2006

217

2007 

223

Total minimum lease payments

1,012

Less amount representing interest

350

Present value of net minimum lease payments

662

Less current maturities

39

Long-term obligations

623

 

Assets impaired in 2002 and 2001consist of assets of the wireless segment.  When impairment charges arerecognized, a new cost basis for the assets is established.

 

In 2001, Piltel recorded animpairment charge of Php12,938 million on assets with a carrying value ofPhp13,562 million, which was a result of Piltel’s decision to scale down itsAdvanced Mobile Phone System, or AMPS, and Code Division Multiple AccessSystem, or CDMA networks, beginning the second half of 2001 due to Piltel’ssuccess in marketing its GSM prepaid service using the GSM network of Smart andthe difficulty experienced in sourcing analog/CDMA handsets.  

 

Smart carried out an impairmentreview on its analog assets in June and December 2001 as a result of decliningsubscriber numbers, decreasing average revenue per user and the generalmigration of analog subscribers to GSM service.  This resulted in an assetimpairment charge of Php2,281 million in June 2001 and Php1,502 million inDecember 2001 based on the estimated discounted future cash flows fromcontinued use and eventual disposition of these assets.  The net book value atDecember 31, 2001 was Php189 million.

 

As discussed further in Note 9,ACeS Philippines has experienced less than expected consumer demand for itsservices.  Additionally, ACeS Philippines have significant airtime purchasecommitments as discussed in Note 24.  Accordingly, we recognized animpairment loss on the assets of ACeS Philippines, primarily the ground stationand related facilities, of Php673 million during 2001.  The remaining costbasis of these assets were nil as of December 31, 2002 and 2001.

 

In December 2002, Piltel recognized impairment losses ofPhp13,204 million in respect of its E.O. 109 limited mobility wireless localloop prepaid assets with a carrying value of Php14,019 million.  The impairmentof E.O. 109 assets brought down the net book value of these assets to theirrecoverable value of Php815 million, which was estimated using the discountedfuture cash flows from the E.O. 109 assets.  Cash flows from the E.O. 109prepaid or limited mobility service were no longer considered in computing therecoverable value of the E.O. 109 assets as Piltel terminated this service inFebruary 2003.  Revenues from the E.O. 109 prepaid or limited mobility service,which uses N-AMPS cellular technology, were unfavorably affected by the successof Piltel’s and other cellular operators’ prepaid GSM cellular service.

 

 

Under the terms of certain loan agreements, PLDT may notcreate, incur, assume, permit or suffer to exist any mortgage, pledge, lien orother encumbrance or security interest over the whole or any part of its assetsor revenues or suffer to exist any obligation as lessee for the rental or hireof real or personal property in connection with any sale and leasebacktransaction.

 

 

 

**9.        ****Investments**

 

This account consists of:

** **

 

**2002**

2001

 

(in millions of pesos)

Investments in shares of stock:

** **

 

Acquisition cost:

** **

 

Common

**6,598**

6,584

Preferred

**804**

777

 

**7,402**

7,361

Less accumulated equity in net losses of investees 

**5,743**

         5,616

Carrying value

**1,659**

1,745

Investment in debt securities:

** **

 

   Acquisition cost 

**2,150**

2,140

   Less accumulated impairment losses 

**2,052**

 2,052

   Net

**98**

88

   Total

**1,757**

1,833

 

 

**2002**

2001

 

(in millions of pesos)

Investments in shares of stock:

** **

 

At equity:

** **

 

Mabuhay Space Holdings Limited

**808**

858

Others

**31**

104

 

**839**

962

At cost:

** **

 

Stradcom International Holdings, Inc.

**616**

616

Others

**204**

167

 

**820**

783

 

**1,659**

1,745

 

***Investmentof ACeS Philippines in AIL***

 

As of December 31, 2002, ACeSPhilippines has a 20% investment in AIL, a company incorporated under the lawsof the island of Bermuda. AIL owns the Garuda I satellite and the relatedsystem control equipment in Batam, Indonesia.

 

In December 1998, AIL and its 95%owned subsidiary, PT Asia Cellular Satellite, entered into an Amended andRestated Credit Agreement, or Amended Agreement, to amend the original CreditAgreement entered into by PT Asia Cellular Satellite and its bank creditors in1997. Under the Amended Agreement, AIL has, among others, assigned to the banksas collateral all of its intangible properties, including the Garuda Satellite,the system control facilities and system control equipment. On September 30,2002, PT Asia Cellular Satellite, AIL, as guarantor, P.T. Bank InternationalIndonesia, as security agent, and various banks signed the ReschedulingAgreement, which amended the terms of the Amended and Restated Credit Agreementdated December 29, 1998, moving the principal repayment dates to agreed periodswith the final maturity date on January 31, 2012.

 

As of December 2001, AIL hasincurred recurring significant operating losses, negative operating cash flows,and significant levels of debt. The financial condition of AIL is partly due tothe National Service Provider’s inability to generate the amount of revenuesoriginally expected as the growth in subscriber numbers have been significantlylower than budgeted.  These factors raise substantial doubt about AIL’s abilityto continue as a going concern.  On this basis, we recognized an impairmentprovision in respect of our investment in AIL and ground station equipment ofACeS Philippines in relation to the business of AIL in 2001.

 

Total impairment charges relatingto AIL amounted to Php3,314 million due to an other than temporary decline inthe carrying value of our investment in AIL. Other comprehensive income relatedto foreign currency translation of AIL of Php1,801 million, will be recorded tooperations upon disposal of investment.

 

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

 

On July 18, 1996, Mabuhay Satelliteentered into a Joint Venture Agreement with Space Systems/Loral Inc., or SS/L,to form Mabuhay Space Holdings Limited for the purpose of providing high-powerKu-Band satellite transmission services using the payload which was added bySS/L aboard Agila II.  *(*See*Note 25 - Contingencies* for thediscussion of the arbitration)**

 

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

*** ***

On May 8, 2001, ePLDT subscribedfor 172.8 million shares of convertible preferred stock through a subscriptionagreement entered into with Stradcom International Holdings, Inc., orStradcom.  Stradcom is a holding company, which owns 100% of StradcomCorporation. These equity securities do not have a readily determinable fairvalue.

 

Stradcom has a ten-year Build, Ownand Operate project with the Land Transportation Office for computerizedissuance of drivers’ licenses and motor vehicle registrations.

 

***Investmentsin Debt Securities***

 

***Home Cable/Unilink***

* *

PLDT’s total investments in convertiblenotes of Unilink amounted to Php2,052 million as of December 31, 2001.These notes are convertible into shares of common stock of Unilink or HomeCable at the option of the holder, if the law limiting the ownership of cabletelevision systems to Philippine citizens or corporations, which are currently100%-owned by Philippine citizens, is changed.  Unilink is a Philippinecorporation owning all the outstanding common shares of Home Cable, which isalso a Philippine corporation licensed to own, maintain and operate a cabletelevision system in the Philippines. 

 

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

 

On the basis of Home Cable’s defaulton certain of its loan obligations, the uncertainty surrounding thenegotiations with its creditors and equity holders, and the financial conditionof Home Cable, we provided for a full other than temporary decline in value ofour investment totaling to Php2,052 million in 2001.

 

 

 

Due to our employees beneficialtrust fund’s ownership of the shares of Mediaquest Holdings, Inc., orMediaquest, whose primary asset is the ownership of Unilink’s shares, theimpairment in value of Unilink also had a significant impact on the value ofthe retirement fund’s assets. 

 

In June 2003, PLDT assigned andceded unto the PLDT Beneficial Trust Fund, or BTF, all of its rights, interestand participation in respect of its investment in convertible notes of Unilinkwith a fair value of zero and effectively for zero consideration under U.S.GAAP.  In addition, PLDT also ceded its rights, interest and participation tocertain other assets unrelated to Unilink for and in consideration of partialpayment of the contributions which PLDT is required to make to the BTF underPLDT’s employee benefit plan.

*** ***

***Summarized FinancialInformation of Equity Investees***

** **

The followingtable presents summarized financial information in conformity with U.S. GAAPfor equity investees with ownership percentage between 20-50% as of December31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000. ****

** **

 

**2002**

2001

 

(in millions of pesos)

Current assets

**845**

2,188

Noncurrent assets

**22,407**

23,561

Current liabilities

**1,837**

4,288

Noncurrent liabilities

**11,067**

11,561

Total stockholders’ equity

**10,348**

9,900

** **

 

**2002**

2001

2000

 

               (in millions of pesos)

Revenues

**2,979**

343

**–**

Revenues less cost of revenues

**2,347**

(15)

**–**

Operating expenses

**2,974**

3,052

3,433

Net loss

**(40)**

(4,638)

(3,722)

** **

** **

 

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

** **

Piltel has experienced significantoperational and financial difficulties in recent years.  On June 4, 2001,Piltel completed the restructuring of approximately Php41 billion ofindebtedness and other claims, representing approximately 98% of its totalliabilities as of that date.  On June 27, 2001, we transferred 208 millioncommon shares of Piltel, representing approximately 12.3% of Piltel’soutstanding common shares, to financial advisors of Piltel to settle part oftheir fees in connection with the debt restructuring.  As a result, ourownership of Piltel’s outstanding common stock decreased from 57.6% toapproximately 45.3%. 

 

Piltel continues to be treatedas a consolidated subsidiary because PLDT has the ability to control Piltel byacquiring a majority ownership interest, in excess of 90%, of Piltel’s commonstock through the conversion of Piltel’s preferred shares into common shares.PLDT has no restrictions or costs to exercise the conversion feature.  Inaddition, pursuant to Piltel debt restructuring agreements, PLDT issued aLetter of Support for the benefit of Piltel and its creditors under which PLDThas agreed to cover any funding shortfalls of Piltel up to a maximum amount ofUS$150 million less all amounts paid or committed to be paid to or on behalf ofPiltel by PLDT on or after March 23, 2000.  Under the Letter of Support, PLDTwill provide funding to Piltel in the event that the cash flows from Piltel’soperations fall short of amounts required by it to discharge in full itsobligations to any creditor of Piltel or any of its operating and financingsubsidiaries and affiliates.  PLDT is subject to contractual restrictionslimiting the amount of financial support it can provide to Piltel subsequent tothe US$150 million Letter of Support.  The undrawn balance under the Letter ofSupport was US$50 million (approximately Php2,676 million) as of December 31,2002, US$61 million (approximately Php3,162 million) as of December 31,2001 and US$102 million (approximately Php5,099 million) as of December 31,2000 after taking into account PLDT’s investments in Piltel as of andsubsequent to March 23, 2000. The continued operations of Piltel as a goingconcern is dependent upon amounts available to it under the Letter of Supportand its ability to generate sufficient cash flows to meet its obligations on atimely basis, to comply with the provision of the restructuring agreements asdiscussed in *Note 15 - Long-term Debt*.  As of December 31,2002, Piltel had total assets of Php5,694 million and a capital deficiency ofPhp29,369 million.

 

Until all amounts owed toparticipating creditors have been paid or discharged, PLDT will not bepermitted to demand or receive any payment, redeem, or distribute in respect ofany present and future liability owed by Piltel to PLDT or any affiliate ofPLDT, subject to specified exceptions.  These liabilities include amounts owedon Piltel preferred shares owned by PLDT and other financial indebtedness owedby Piltel to PLDT or any affiliate of PLDT, but exclude payments due in respectof transactions having arm’s-length terms and/or in which the pricing is basedon market terms.  These restrictions impair Piltel’s ability to transfer fundsto PLDT.  

 

In the accompanying U.S. GAAPconsolidated financial statements, PLDT’s accumulated deficit of Php66,016million includes Piltel’s capital deficiency of Php29,369 million as ofDecember 31, 2002 notwithstanding that under Piltel debt restructuringagreements, the amount of financial support that PLDT can still provide toPiltel was limited to US$50 million as of December 31, 2002. 

 

Condensed consolidated balancesheets as of December 31, 2002 and 2001 and consolidated statements ofoperations for the years ended December 31, 2002, 2001 and 2000 of Piltelincluded in the consolidated financial statements are as follows:

 

 

**December 31**

 

**2002**

 

2001

 

(in millions of pesos)

**Consolidated Balance Sheets**

** **

** **

** **

Current assets

**1,017**

 

1,397

Noncurrent assets

**4,677**

 

18,232

 

**5,694**

 

19,629

 

 

 

 

 

 

** **

 

 

Current liabilities

**4,920**

 

4,652

Long-term debt 

**21,673**

 

20,250

Deferred credits and other noncurrent liabilities

**8,470**

 

9,147

Capital deficiency

**(29,369)**

 

(14,420)

 

**5,****694**

* *

19,629

 

 

** **

 

 

 

 

**Years Ended December 31**

 

**2002**

 

2001

 

2000

** **

** **

(in millions of pesos)

**Consolidated Statements of Operations**

 

Operating revenues

**2,035**

 

2,893

 

                 3,471

Operating expenses

**(15,974)**

 

(20,280)

 

(7,670)

Other expenses

**(1,574)**

 

(3,003)

 

(4,461)

Net loss

**(15,513)**

 

(20,390)

 

(8,660)

 

** **

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

** **

This account consists of:

** **

 

**2002**

2001

 

(in millions of pesos)

Goodwill

**23,632**

23,632

Customer list

**2,705**

2,705

 

**26,337**

26,337

Less accumulated amortization

**10,276**

9,510

 

**16,061**

16,827

 

Movements in accumulatedamortization of goodwill and other intangible assets during the year are asfollows (there was no amortization of goodwill in 2002):

 

 

**2002**

 

2001

 

2000

 

 (in millions of pesos)

Balance at beginning of year

**9,510**

 

4,451

 

250

Amortizations

**766**

 

6,177

 

4,477

Write-offs

**–**

 

(1,118)

 

(276) 

Balance at end of year

**10,276**

 

9,510

 

4,451

 

Based on expected amortization of Php766 million in 2003, theremaining carrying value of the customer list will be fully amortized byDecember 31, 2003.

 

We adopted SFAS No. 142“Goodwill and Other Intangible Assets” on January 1, 2002.  Goodwillamortization expense and net loss attributable to common stockholders for theyears ended December 31, 2002, 2001 and 2000 follow (we recognized noextraordinary items in those years):

 

 

**2002**

 

2001

 

2000

** **

 (in millions of pesos)

Goodwill amortization

 –

 

4,620

 

3,464

Loss attributable to common stockholders

**(8,807)**

 

(29,827)

 

(30,507)

 

In conformity with SFAS No. 142,we have disclosed below the pro forma impact of non-amortization of goodwillfor 2001 and 2000, as if goodwill was not amortized during those periods:

 

 

**2002**

 

2001

 

2000

 (in millions of pesos, except per share amounts)

Loss attributable to common stockholders

**(8,807)**

 

(29,827)

 

(30,507)

Add back goodwill amortization

                    –

 

4,620

 

3,464

 

** **

 

 

 

 

Adjusted loss attributable to common stockholders

**(8,807)**

 

(25,207)

 

(27,043)

 

Basic earnings per common share

**(52.08)**

 

(176.85)

 

(193.48)

Add back goodwill amortization

–

 

27.39

 

21.97

 

 

 

 

 

 

Adjusted basic earnings per common share

**(52.08)**

 

(149.46)

 

(171.51)

 

 

Our goodwill is almost entirelyrelated to the wireless business segment due to our acquisition of Smart.  Wecompleted our transitional and annual evaluation of the goodwill value inconformity with SFAS No. 142,   “Goodwill and Other Intangible Assets,” andconsistent with our increase in wireless subscribers and revenues, there is noimpairment in the goodwill value.

 

Smart carried out an impairmentreview of its analog assets in 2001 as a result of declining subscribernumbers, decreasing average revenue per user and the general migration ofanalog subscribers to GSM services.  In 2001, Smart wrote-off the unamortizedintangible assets (customer list) amounting to Php2,077 million relating toanalog subscribers.

 

 

 

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

** **

This account consists of:

 

 

**2002**

2001

 

 (in millions of pesos)

Debt issuance costs – net of accumulated amortization

**2,494**

1,785

Refundable deposits

**475**

364

Others

**2,533**

1,627

 

**5,502**

3,776

 

 

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

 

This account consists of:

 

 

**2002**

2001

 

 (in millions of pesos)

Accrued interest on various loans

**2,790**

3,124

Accrued taxes and other expenses

**2,617**

1,439

Accrual for payment for unused sick leave and other employee benefits

**1,452**

780

Accrued utilities and general expenses

**2,888**

1,520

Others

**2,499**

3,175

 

**12,246**

10,038

 

 

 

**14.    ****Notes Payable**

** **

This account consists of Philippinepeso and U.S. dollar-denominated short-term bank loans and trust receipts atweighted average interest rates of 7.250% and 14.363% at December 31, 2002 and2001, respectively, for Philippine peso borrowings, and 3.238% and 3.448% atDecember 31, 2002 and 2001, respectively, for U.S. dollar borrowings.

 

        OnApril 28, 2003 and May 14, 2003, PLDT issued, at a discount, Php1,600 millionand Php400 million One-Year Peso Notes, respectively, under its Php2,000million Peso Notes program registered with the Philippine SEC.

 

 

 

**15.    ****Long-term Debt**

** **

This account consists ofoutstanding long-term debt of the following:

 

 

**2002**

2001

 

 (in millions of pesos)

PLDT

**140,387**

141,524

Smart

**22,891**

21,702

Piltel 

**22,124**

21,193

Mabuhay Satellite

**5,356**

5,623

ePLDT

**150**

–

MaraTel

**42**

57

 

**190,950**

190,099

Less current portion

**19,627**

20,229

 

**171,323**

169,870

 

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

 

Year

(in million of pesos)

2003

19,627

2004

22,438

2005

28,332

2006

25,941

2007

26,145

2008 and onwards

68,467
******
*** ***

***PLDT***

 

PLDT’s aggregate outstandingindebtedness is broken down as follows:

 

**Description**

**2002**

2001

 

(in millions)

**U.S. Dollars**

 

 

 

 

Export Credit Agencies-Supported Loans:

 

 

 

 

Kreditanstalt für Wiederaufbau

**US$437**

**Php23,265**

US$475

Php24,549

Japan Bank for International Cooperation/Co-financing Banks

**87**

**4,657**

109

5,653

Others 

**161**

**8,575**

183

9,441

 

**685**

**36,497**

767

39,643

Fixed Rate Notes

**1,487**

**79,160**

1,427

73,762

Term Loans

**172**

**9,166**

290

14,976

 

**US$2,344**

**124,823**

US$2,484

128,381

**Japanese Yen**

 

 

 

 

Term Loans 

**JP¥15,641**

**7,019**

JP¥23,029

9,048

JBIC OIL

**9,760**

**4,379**

–

–

** **

**JP¥25,401**

**11,398**

JP¥23,029

9,048

**Philippine Pesos**

 

 

 

 

Peso Fixed Rate Corporate Notes

 

**2,540**

 

2,770

Term Loans

 

**1,626**

 

1,325

 

 

**4,166**

 

4,095

 

 

**140,387**

 

141,524

Less current portion

 

**11,962**

 

14,274

 

** **

**Php128,425**

 

Php127,250

 

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

 

 

**2002**

2001

Dollar-denominated loans

**8.3%**

8.7%

Yen-denominated loans

**1.2%**

1.3%

Peso-denominated loans

**13.8%**

14.5%

 

*ExportCredit Agencies-Supported Loans*

 

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

 

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

 

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

 

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

 

•        US$329 million provided undervarious export credit agency-backed facilities, of which US$290 million was inconnection with our expansion and service improvement programs and US$39million in connection with a refinancing facility; and

 

•        US$108 million provided forthe 15% downpayment portion and credit facilities without guarantee/insurancecover from the export credit agencies, of which US$11 million was provided inconnection with a refinancing facility.

 

After giving effect to theanticipated application of the existing refinancing facility, US$39 million ofour KfW loans will mature in 2003, US$39 million in 2004, US$82 million in2005, US$57 million in 2006 and US$220 million in 2007 and onwards.  Principaland interest on these loans are generally payable in equal semi-annualinstallments.

 

PLDT has also obtained loansextended and/or guaranteed by other export credit agencies, including JapanBank for International Cooperation, or JBIC, (formerly the Export-Import Bankof Japan), the Export-Import Bank of the United States, and the respectiveexport credit agencies of France, Italy, Israel, Sweden, Denmark, Canada,Australia, the United Kingdom and Singapore, in the aggregate outstandingprincipal amount of US$248 million, US$292 million and US$320 million as ofDecember 31, 2002, 2001 and 2000, respectively.  Of the amounts outstanding asof December 31, 2002 under these loans, US$62 million will mature in 2003,US$60 million in 2004, US$49 million in 2005, US$39 million in 2006 and US$38million in 2007 and onwards.

 

*Fixed Rate Notes*

 

PLDT has nine series ofnon-amortizing fixed rate notes outstanding as of December 31, 2002, asfollows:

 

**Principal Amount**

 

**Issue Date**

**Interest Rate**

** **

**Maturity**

 

 

 

 

 

 

US$62,030,000

 

June 28, 1996

8.500%

 

June 30, 2003

US$81,822,000

 

June 2, 1994

10.625%

 

June 2, 2004

US$144,385,000

 

July 31, 1995

9.875%

 

August 1, 2005

US$175,000,000

 

June 28, 1996

9.250%

 

June 30, 2006

US$200,000,000

 

March 6, 1997

7.850%

 

March 6, 2007

US$100,000,000

 

May 2, 2002

10.625%

 

May 15, 2007

US$175,000,000

 

April 13,1999

10.500%

 

April 15,2009

US$250,000,000

 

May 2, 2002

11.375%

 

May 15, 2012

US$300,000,000

 

March 6, 1997

8.350%

 

March 6, 2017

 

On May 2, 2002, PLDT issued US$100 million in aggregateprincipal amount of 10.625% Notes due 2007 and US$250 million in aggregateprincipal amount of 11.375% Notes due 2012.  The net proceeds from the issuanceof the Notes were used mainly to (1) repurchase US$63 million in principalamount of our 8.5% Notes due 2003 and US$117 million in principal amount of our10.625% Notes due 2004 validly tendered by holders in our tender offer, andUS$6 million in principal amount of our 10.625% Notes due 2004, and US$6million in principal amount of our 9.875% Notes due 2005 from the open market,and (2) prepay or repay various loans in the aggregate amount of US$121million, of which US$53 million (JP¥6,260 million) pertained to the Japaneseyen term loan which matured in June 2003 and US$52 million pertained to theUS$150 million term loan maturing in December 2003.  Loss on extinguishment ofdebt amounting to Php552 million in 2002 was recorded as expense (includedunder “Interest expense and other related items”) in the consolidated statementof operations.

* *

*Term Loans*

 

*Local Exchange Transfer Loans*

 

In connection with the transfer ofSmart’s local exchange business to PLDT, PLDT entered into loan agreements withNederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V., or FMO,of the Netherlands, Exportkreditnamden, or EKN, of Sweden and Export CreditsGuarantee Department, or ECGD, of the United Kingdom for loans in the principalamounts of US$135 million, US$36 million and US$27 million, respectively,approximately US$140 million in aggregate amount was outstanding as of December31, 2002.  These loans were amended in August and September 2001 to increasethe maximum total debt to earnings before interest, income tax and depreciationand amortization, or EBITDA, ratio of PLDT on a non-consolidated basis andcalculated on the basis of Philippine GAAP is permitted to maintain during theterms of the respective loans.  The FMO loan has a final maturity on September1, 2007, while the EKN and ECGD loans will mature on December 31, 2007. 

 

*US$150 Million Term Loan*

 

In connection with PLDT’s fixedline expansion projects, PLDT obtained a US$150 million term loan, which wassubsequently assigned to Norddeutsche Landesbank Girozentrale, Singapore Branch,US$52 million of which was outstanding as of December 31, 2002.  Theoutstanding principal amount of this loan is payable at maturity on December22, 2003 and will be partly refinanced by a multicurrency refinancing facilitydescribed below.

 

*JP¥19,807 Million Term Loan*

 

In December 1997, in connectionwith a refinancing of its maturing debt, PLDT obtained a Japanese yen term loanfrom a syndicate of foreign banks, JP¥12,359 million of which was outstandingas of December 31, 2002.  This loan has a final maturity on June 18, 2003and has been partly refinanced by a multicurrency refinancing facilitydescribed below.

* *

*JBIC JP¥9,760 Million OverseasInvestment Term Loan*

 

On July 26, 2002, PLDT signed aloan agreement with JBIC in the total amount of JP¥9,760 million under theOverseas Investment Loan program of JBIC.  The loan was drawn on July 31, 2002and will be repaid on a semi-annual basis beginning March 21, 2005 with finalmaturity on March 21, 2008.

 

*Multicurrency RefinancingFacility*

 

On September 4, 2002, PLDT signed aloan agreement with a syndicate of banks for a US$145 million multicurrencyterm loan facility consisting of Japanese yen and U.S. dollar commitments ofJP¥10,914 million and US$53 million, respectively.  This facility, which has beensplit into two tranches with the first tranche already drawn in June 2003 andthe second tranche to be drawn in December 2003, is intended to refinance aportion of the JP¥12,359 million outstanding as of December 31, 2002 under theJP¥19,807 million term loan and a portion of the US$52 million principal amountoutstanding as of December 31, 2002 under the US$150 million term loan, bothfalling due in 2003.  The new syndicated facility will be repaid semi-annuallybeginning June 2004 and will mature in December 2006.

* *
**
* *

*JBIC 4 Program of theDevelopment Bank of the Philippines*

 

In connection with the Asia Pacific Cable Network 2 project,PLDT entered into a loan agreement with Citibank, N.A., as facility agent, anda syndicate of banks in the aggregate principal amount of Php1,700 million, ofwhich about Php1,500 million was outstanding as of December 31, 2002.  The loanis funded under the Japan Bank for International Cooperation Facility forPrivate Sector Development of the Development Bank of the Philippines.  Thisloan will mature on October 26, 2005 and is payable in quarterly installmentsstarting April 2002 as set forth below: 

 

**Quarterly Payment Number**

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

 

 

Payments 1–7 

3.500%

Payments 8–11

8.875%

Payments 12–15

10.000%

 

*Php2,770Million Peso Fixed Rate Corporate Notes*

 

In connection with PLDT’s serviceimprovement and expansion programs, PLDT has entered into two loan agreements,pursuant to each of which PLDT issued fixed rate corporate notes in threetranches.  Interest on each of the notes is payable semi-annually.

 

Under the first loan agreement,PLDT borrowed an aggregate amount of Php1,500 million, of which Php230 millionmatured on November 11, 2002, Php500 million will mature on November 9, 2004and Php770 million on November 9, 2006.

 

Under the second loan agreement,PLDT borrowed an aggregate amount of Php1,270 million, of which Php360 millionmatured on June 9, 2003, Php100 million will mature on June 9, 2005 and Php810million on June 9, 2010.

 

*Covenants*

 

Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests on the basis of Philippine GAAP financial positionand results of operations at relevant measurement dates, principally at the endof quarterly periods.

 

The financial tests under our debtinstruments, as amended, include maintaining a positive tangible net worth andcompliance with the following ratios:

 

•        interest coverage ratio,calculated on a non-consolidated basis and excluding PLDT’s equity share in netearnings or losses 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 until March 2003, not more than5.5:1 from June 2003 to December 2003, not more than 5.0:1 from March 2004 toJune 2004, not more than 4.5:1 from September 2004 to December 2004 andnot more than 4.0:1 from March 2005 and thereafter;

 

•        long-term indebtedness toappraised value of equity/tangible net worth on a non-consolidated basisranging from not more than 1.1:1 to not more than 3.0:1; 

 

•        current ratio on anon-consolidated basis, ranging from not less than 0.9:1 to not less than1.2:1;

 

•        debt service coverage ratio on a non-consolidated basis of atleast 1.1:1; and

 

•        debt to free cash flow ratio on a non-consolidated basis of notmore than 6.0:1 from March 31, 2003 to June 30, 2003, not more than 5.5:1 fromSeptember 30, 2003 to June 30, 2004, not more than 5.0:1 from September 30,2004 to June 30, 2005, not more than 4.5:1 from September 30, 2005 to June 30,2006, and not more than 4.0:1 from September 30, 2006 and thereafter.

 

In addition, some of PLDT’s debtinstruments contain covenants requiring PLDT to comply with specified financialtests on a consolidated basis adjusted to exclude Piltel’s debts.  Theseinclude:

 

•        long-term debt to appraisedvalue of equity/tangible net worth of not more than 2.33:1;

 

•        total debt to EBITDA of notmore than 4.5:1 in 2003 and 2004, and not more than 4.0:1 in 2005 andthereafter; and

 

•        current ratio ranging fromnot less than 0.75:1 to not less than 0.9:1.

 

For purposes of deriving appraisedvalue of equity/tangible net worth, we determined the revaluation surplus inrespect of PLDT’s properties.  PLDT’s properties in service as of December 31,1997 were reappraised by an independent firm of appraisers to reflect theirsound value, based on the December 29, 1997 exchange rate of Php40.116 toUS$1.00.  As of December 31, 1997, the sound value was Php225,966 million and therevaluation surplus was Php82,723 million.  This reappraisal was approved bythe NTC on January 28, 2000 under NTC Case No. 98-183.  As of December 31,2002, the revaluation surplus on PLDT’s 1997 appraised properties still inservice, net of a 5% disallowance factor, amounted to Php44,984 million.

 

The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the peso relative to the U.S. dollar, pooroperating performance of PLDT and its consolidated subsidiaries, impairment orsimilar charges in respect of investments or other assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expense.  Interest expense may increase as a result of variousfactors, including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the peso, thelowering of PLDT’s credit ratings or the credit ratings of the Philippines,increases in reference interest rates, and general market conditions.  Sinceapproximately 97% of PLDT’s long-term debt is denominated in foreigncurrencies, principally in U.S. dollars, many of these financial ratios andother tests are negatively affected by any weakening of the peso.  

 

PLDT’s ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of its fixed line business.PLDT cannot be assured of the benefit of net revenues and cash flows generatedby Smart and PLDT’s other investees in assisting in complying withnon-consolidated covenants.

 

We have maintained compliance withall of our financial ratios and restrictive covenants as measured under ourloan agreements and other debt instruments.  However, if negative factorsadversely affect our financial ratios, we may be unable to maintain compliancewith these ratios and covenants or be unable to incur new debt.  During 2001,our performance under certain of these ratios, including our 150% interestcoverage and total debt to EBITDA ratios under Philippine GAAP, was close tothe permitted thresholds.  In August and September 2001, we obtained amendmentsto relax certain of PLDT’s covenants setting a maximum ratio of total debt toEBITDA on a non-consolidated basis.  Under some of our loan agreements, thisratio requirement has become more restrictive at the end of the second quarterof 2003 and will continue to become more restrictive in increments thereafter,which will make it more difficult for PLDT to maintain compliance with thisratio in the future.  Inability to comply with our financial ratios andcovenants or raise new financing could result in a declaration of default andacceleration of some or all of our indebtedness.  The terms of some of our debtinstruments have no minimum amount for cross-default.

 

Under PLDT’s loan agreement thatrequires maintenance of an interest coverage ratio of at least 150%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)PLDT’s non-consolidated after-tax net income, excluding equity share in netearnings or losses of investees after adding back interest charges, net ofinterest capitalized to construction, on all indebtedness for the 12 monthsimmediately preceding the calculation date to (y) the estimated aggregateinterest charges payable, net of interest to be capitalized to construction,during the 365-day period following the calculation date on all of PLDT’sindebtedness outstanding on such calculation date.  Our interest coverage ratiocalculated on the basis of Philippine GAAP under this agreement for the12-month period ended December 31, 2002 was 172% as against the requiredthreshold of not less than 150%.

 

Under PLDT’s loan agreements that requiremaintenance of an interest coverage ratio of at least 180%, interest coverageratio is the ratio calculated on the basis of Philippine GAAP of (x) ourafter-tax net income for the 12 months immediately preceding the calculationdate after (1) adding back interest charges, depreciation, amortization andother non-cash charges (including equity in the net earnings or losses ofinvestees but excluding provision for doubtful accounts) and provision forincome taxes, and (2) deducting capitalized subscriber acquisition costs, to(y) the estimated aggregate interest charges payable during the 365-day periodfollowing the calculation date on all of PLDT’s indebtedness outstanding onsuch calculation date.  Our interest coverage ratio calculated on the basis ofPhilippine GAAP under these agreements for the 12-month period ended December31, 2002 was 290% as against the required threshold of not less than 180%.

 

Under PLDT’s loan agreements thatrequire maintenance of an interest coverage ratio of at least 200%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of  (x)our after-tax net income after adding back reserves for higher plantreplacement costs, income taxes, interest charges, depreciation and non-cashcharges (including equity in the net earnings or losses of investees andprovision for doubtful accounts) during 12 consecutive months within the 15calendar months immediately preceding the calculation date, to (y) the sum of(1) the estimated aggregate interest charges on all indebtedness, net ofinterest capitalized to construction, plus (2) dividends on mandatorilyredeemable preferred stock, in each case scheduled to be paid during the 12months following the calculation date.  Our interest coverage ratio calculatedon the basis of Philippine GAAP under these agreements for the 12-month periodended December 31, 2002 was 393% as against the required threshold of notless than 200%.

 

Non-consolidated total debt toEBITDA is the ratio calculated on the basis of Philippine GAAP of (x) PLDT’stotal indebtedness (not including amounts payable by PLDT to Piltel under theLetter of Support), to (y) net income for the preceding 12 months, after addingback interest accrued on all indebtedness, depreciation, amortization and othernon-cash charges (including equity in net earnings or losses of investees, butexcluding provision for doubtful accounts) and provision for income taxes anddeducting any capitalized subscriber acquisition costs.  As of December 31,2002, our non-consolidated total debt to EBITDA calculated on the basis ofPhilippine GAAP was 4.93:1 as against the required threshold of not more than6.0:1.

 

Non-consolidated long-termindebtedness to appraised value of equity (or under some covenants, to tangiblenet worth) is the ratio calculated on the basis of Philippine GAAP of (x)PLDT’s aggregate indebtedness (or portion of such indebtedness) due more thanone year following the calculation date and par value of all mandatorilyredeemable preferred stock, to (y) the sum of the aggregate par value of all ofPLDT’s outstanding common and convertible preferred stock (other than preferredstock subject to mandatory redemption), paid-in capital in excess of the parvalue of such stock, PLDT’s retained earnings, reserve for higher plantreplacement costs and revaluation increment arising from independent certifiedappraisals of PLDT’s telephone plant approved by the NTC.  As of December 31,2002, our non-consolidated long-term indebtedness to appraised value ofequity/tangible net worth calculated on the basis of Philippine GAAP was 0.95:1as against the most restrictive threshold of not more than 1.10:1.

 

 

Non-consolidated current ratio isthe ratio calculated on the basis of Philippine GAAP of (x) non-consolidatedcurrent assets to (y) non-consolidated current liabilities, excluding fromcurrent liabilities 50% of the portion of long-term indebtedness due within oneyear of the calculation date.  As of December 31, 2002, our non-consolidatedcurrent ratio calculated on the basis of Philippine GAAP was 1.49:1 as againstthe most restrictive threshold of not less than 1.20:1.

 

Debt service coverage ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s cash flow fromoperations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from investees, cash received upon anyredemption of redeemable preferred shares issued by Smart, any cash receivedunder PLDT’s subscriber investment plan, and interest income received less (2)capital expenditures (excluding capitalized interest) and investments ininvestees for the 12 months immediately preceding the calculation periodplus (3) PLDT’s closing cash balance as of the last day of the calculation dateto (y) the sum of the projected interest charges and principal debt repayments(excluding debt to be repaid with a refinancing facility) during the 12 monthsfollowing the calculation date.  The first calculation date was on March 31,2003, where our debt service coverage ratio for the 12-month period endedMarch 31, 2003 calculated on the basis of Philippine GAAP was 1.36:1 asagainst the required threshold of not less than 1.10:1.

 

Debt to free cash flow ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s debt less PLDT’sclosing cash balance as of the last day of the calculation period, to (y)PLDT’s cash flow from operations after adding back interest charges (to theextent previously deducted) plus (1) dividends received from investees, cashreceived upon any redemption of redeemable preferred shares issued by Smart,any cash received under PLDT’s subscriber investment plan, and interest incomereceived less (2) capital expenditures (excluding capitalized interest) andinvestments in investees for the 12 months immediately preceding thecalculation date.  The first calculation date was on March 31, 2003, where ourdebt to free cash flow ratio for the 12-month period ended March 31, 2003calculated on the basis of Philippine GAAP was 5.1:1 as against the requiredthreshold of not more than 6.0:1.

 

Our consolidated long-term debt toappraised value of equity/tangible net worth, consolidated total debt to EBITDAand consolidated current ratios during the year 2002, each to be calculated onthe basis of Philippine GAAP, remained within the limits stipulated in thevarious loan agreements, including the most restrictive current ratio thresholdof not less 0.9:1.

 

PLDT’s debt instruments contain anumber of other negative covenants that, subject to certain exceptions andqualifications, restrict PLDT’s ability to take certain actions withoutlenders’ approval, including:

 

•        incurring additionalindebtedness; 

 

•        prepaying other debt; 

 

•        making investments; 

 

•        extending loans; 

 

•        extending guarantees orassuming the obligations of other persons;

 

•        paying dividends or otherdistributions or redeeming, repurchasing or otherwise acquiring shares ofPLDT’s capital stock; 

 

•        disposing of all orsubstantially all of its assets or of assets in excess of specified thresholdsof its tangible net worth;

 

 

•        entering into managementcontracts providing for the management of its business or operations by a thirdparty;

 

•        creating any lien or securityinterest; 

 

•        permitting set off againstamounts owed to PLDT;

 

•        merging or consolidating withany other company;

 

•        entering into transactionswith shareholders and affiliates; and

 

•        entering into sale andleaseback transactions. 

 

Under the indenture of PLDT’s10.625% Notes due 2007 and 11.375% Notes due 2012, PLDT is required to complywith a number of additional covenants, including covenants that, subject tocertain exceptions, restrict PLDT’s ability to: (1) incur debt in the event itsratio of debt to EBITDA calculated on the basis of Philippine GAAP (calculatedon a non-consolidated basis based on definitions provided in the sameindenture, except in certain circumstances), after giving effect to theincurrence of such debt, would be less than 5.5:1 on or prior to December 31,2003, 5.0:1 from January 1, 2004 to December 31, 2004 and 4.5:1 thereafter, and(2) pay dividends, 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 proceedsfrom sale of these assets.  

 

Under the terms of the US$149million facility with KfW, PLDT is prohibited from paying any dividends oncommon stock until December 31, 2004.  In addition, under the terms of PLDT’sUS$145 million multicurrency term facility agreement and JP¥5,615 million termloan facility agreement, PLDT is restricted from distributing dividends tocommon stockholders unless (1) no default has occurred which is continuing, and(2) its debt to free cash flow ratio, after giving effect to the distributionof such dividends and, under certain circumstances, other adjustments to PLDT’sclosing cash balance, would be less than 4.0:1.  Under other loan agreements,PLDT may not declare or pay dividends on any of its capital stock without theprior written consent of the lenders (1) if PLDT is in default in the paymentof any amounts due and payable under such loan agreement or after theoccurrence and during the continuance of any other event of default orpotential event of default under such agreements, (2) if after giving effect tosuch action the current ratio would be less than 1.2:1, or (3) in an amountgreater than PLDT’s net income after taxes during the fiscal year to which suchpayment or distribution relates.

 

In case of a change in control of PLDT,PLDT may be required to repurchase or prepay certain indebtedness.  Under theterms of the 10.625% Notes due 2007 and 11.375% Notes due 2012, we are requiredto offer to purchase all outstanding notes due 2007 and notes due 2012 for cashat a price of 101% of their principal amounts plus accrued interest in theevent that (1) the aggregate of NTT Communications’ and First Pacific’s directand indirect voting interest in PLDT’s outstanding capital stock having votingrights falls below 35% of such capital stock, (2) any person or, in certaininstances, group of persons, which is not controlled directly or indirectly byFirst Pacific or NTT Communications acquires a direct or indirect votinginterest in PLDT’s outstanding capital stock having voting rights which equalsor exceeds 35% of such capital stock, and (3) if a rating agency at such timemaintains a rating on either series of notes, the rating agency downgrades itscredit rating on the series within 90 days (or more, in certain circumstances)following notice of the occurrence of the events specified in (1) and (2)above.

 

Under the terms of our JP¥9,760million loan from JBIC, in the event of any proposed sale or transfer of PLDT’sstock that would result in NTT Communications holding less than 14.95% ofPLDT’s voting stock, we will be required to prepay immediately uponeffectiveness of such sale or transfer, all principal outstanding under theloan, together with accrued interest.  However, prepayment will not be requiredif, following such sale or transfer, (1) NTT Communications continues to haveprior approval rights with respect to all matters as to which NTTCommunications has approval rights under the stock purchase agreement pursuantto which it acquired its shares in PLDT, or (2) JBIC, in its sole discretion,determines that NTT Communications’ participation in the expansion of Smart’sGSM network capacity to extend PLDT’s cellular business in Smart would not bereduced below its level of participation as of the date of the loan agreement.

 

Under both the terms of the US$145million multicurrency term facility agreement and the terms of our JPY5,615 million term loan, if any lender sorequests in writing, PLDT shall prepay in full such lender’s participation inthe loan within 45 days from notification of the change in control and no laterthan the date on which PLDT is required to repurchase its 10.625% Notes due2007 and 11.375% Notes due 2012 (“Bonds”) from bondholders accepting the changein control offer.  A change in control is deemed to occur when (1) 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, (2) any person or, in certain instances, group of persons,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 (3) if a rating agency at such time maintains a ratingon the Bonds, the rating agency downgrades its credit rating on the Bondswithin 90 days (or more, in certain circumstances) following notice of theoccurrence of the events specified in (1) and (2) above.

 

PLDT’s debt instruments containcustomary and other default provisions that permit the lender to accelerateamounts due or terminate their commitments to extend additional funds under thedebt instruments. These default provisions include:

 

•        cross-defaults andcross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument. In some cases, the cross-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated.  In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments;

 

•        failure by PLDT to meetcertain financial ratio covenants referred to above;

 

•        the occurrence of anymaterial adverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender; 

 

•        the revocation, terminationor amendment of any of the permits or franchises of PLDT in any mannerunacceptable to the lender;

 

•        the abandonment, terminationor amendment of the project financed by a loan in a manner unacceptable to thelender;

 

•        the nationalization orsustained discontinuance of all or a substantial portion of PLDT’s business;and

 

•        other typical events ofdefault, including the commencement of bankruptcy, insolvency, liquidation orwinding up proceedings by PLDT.
******
*** ***

***Smart***

 

Smart’s long-term debt consists of:

 

 

**2002**

2001

 

(in millions)

 
U.S. Dollars

**US$408**

**Php21,724**

US$401

Php20,702

Philippine Pesos

 

**1,167**

 

1,000

 

 

**22,891**

 

21,702

Less current portion

 

**6,173**

 

4,577

 

 

**Php16,718**

 

Php17,125

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

Interest on Smart’sdollar-denominated loans is either fixed or based on LIBOR plus premium.  Theseloans are payable in semi-annual installments and have maturities of up to2007.  The peso loans are payable quarterly and accrue interest based on the weightedaverage interest rate, or WAIR, plus Participating Financial Institution, orPFI, premium and will mature in December 2005 and February 2007 for thePhp1,000 million and Php300 million facilities, respectively.

 

Smart is subject to loan covenants that limit itsability to pay dividends, redeem preferred shares, make distributions to itsstockholders or otherwise provide funds to its stockholders or any affiliatewithout the consent of its lenders.  After receiving approvals from Finnveraand certain lenders for the payment of dividends to PLDT in an amount not toexceed 40% of Smart’s net income in 2001, Smart made its first dividend paymentof Php1,540 million to PLDT in December 2002.  In addition, Smart paiddividends in the amount of Php4,300 million to PLDT in June 2003, representing70% of Smart’s 2002 net income, after receiving similar approvals from Finnveraand certain lenders.  Further waivers would be required for payment ofadditional dividends in future periods.  We cannot assure you that Smart willbe able to obtain such waivers in the future, or what amounts, if any, Smartwould be permitted or financially able to distribute.  

 

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

 

•        Cross-defaults andcross-accelerations that permit a lender to declare a default if Smart is indefault under another loan agreement.  These cross default provisions aretriggered upon a payment or other default permitting the acceleration of Smartdebt, whether or not the defaulted debt is accelerated;

 

•        Failure by Smart to complywith certain financial ratio covenants;

 

•        Any reduction in PLDT’sownership of Smart’s shares below 51% of the total of each class of Smart’sshares outstanding;

 

•        Any reduction in FirstPacific’s and its affiliates’ collective ownership of PLDT’s common stock below18% of the total common stock outstanding or 18% of the voting power of thetotal common stock outstanding; and

 

•        The occurrence of anymaterial adverse change in circumstances that the lender reasonably believesmaterially impairs Smart’s ability to perform its obligations under its loanagreements with the lender or that the lender believes materially impairs anapplicable guarantors’ ability to perform its obligations under an applicableguaranty.

 

In addition, some of these loanagreements restrict Smart’s ability to enter into transactions with affiliatesexcept on arm’s-length terms and for valuable consideration.

 

***Piltel***

 

Piltel’s long-term debt consistsof:

 

** **

**2002**

2001

** **

(in millions)

**Restructured debt**

** **

** **

** **

 

Philippine Pesos

** **

** **

** **

 

10-year Tranche B

 

**Php2,166**

 

Php2,166

15-year Tranche C

 

**2,166**

 

2,166

15-year Term Notes Facility

 

**293**

 

241

 

 

**4,625**

 

4,573

U.S. Dollars

 

 

 

 

10-year Tranche B

**US$33**

**1,769**

US$33

1,717

15-year Tranche C

**33**

**1,768**

33

1,717

15-year Conversion Notes Facility

**121**

**6,448**

117

6,060

 

**US$****187**

**9,985**

US$183

9,494

 

 

 

 

 

Japanese Yen

 

 

 

 

10-year Tranche B

**JPY7,822**

**3,510**

JPY7,822

3,070

15-year Tranche C

**7,822**

**3,510**

7,822

3,070

 

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

**7,020**

JPY15,644

6,140

Total

 

**21,630**

 

20,207

 

**Unrestructured debt**

** **

** **

** **

 

Philippine Pesos

** **

** **

** **

 

Banks

 

–

 

–

Preferred shareholders

 

–

 

107

 

 

–

 

107

U.S. Dollars

 

 

 

 

Banks

**US$6**

**331**

US$6

322

Convertible bonds

**2**

**120**

10

514

 

**US$****8**

**451**

US$16

836

Total

 

**451**

 

943

**Liabilities under capital lease**

 

**43**

 

43

 

 

**22,124**

 

21,193

Less current portion

 

**451**

 

943

 

 

**Php21,673**

 

Php20,250

 

On June 4, 2001, Piltel completedthe restructuring of approximately Php41 billion of indebtedness and otherclaims, representing approximately 98% of its total liabilities as of thatdate.  Under the terms of the debt restructuring, 50% of Piltel’s debt wascancelled in exchange for Piltel convertible preferred shares, which weremandatorily exchanged for PLDT convertible preferred shares, and the balancewas restructured into 10-year and 15-year loans secured by substantially all ofthe present and future assets of Piltel.  See *Note 17 – Preferred StockSubject to Mandatory Redemption*for the terms of the PLDT convertiblepreferred shares.

 

 

Summarized below are the principalterms of the restructured debt of Piltel: 

** **

 

**10-Year Tranche B Loans**

**15-Year Tranche C Loans**

**Term Notes Facility**

**Conversion Notes Facility**

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 Interbank 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 six-month PHIBOR, if six-month PHIBOR is different from the T-Bill Rate by more than 2.50%, plus 1.00% p.a.

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

 

Interest payment dates

Quarterly in arrears

Semi-annually

 

Piltel did not comply with theterms of convertible bonds with principal amount of US$2 million (approximatelyUS$2 million redemption price at the option of the holders), and US$6 millionof other U.S. dollar-denominated debt.

 

Piltel is currently in the processof finalizing the terms under which the holder of the US$6 million debt wouldparticipate in the debt restructuring.

 

Piltel may not be able torestructure or otherwise pay the claims relating to its unrestructured debt.However, default on and acceleration of Piltel’s unrestructured indebtedness donot create a cross-default under Piltel’s restructured indebtedness or anyindebtedness of PLDT.

 

If Piltel’s non-participatingcreditors take forceful measures to enforce their claims, it is possible thatPiltel would be required to submit itself to a court-supervised rehabilitationproceeding or an involuntary insolvency proceeding seeking liquidation.  All ofPiltel’s creditors that participated in the debt restructuring agreed inconnection with the debt restructuring that they would submit Piltel to arehabilitation proceeding in those circumstances and petition for the adoptionof a plan of rehabilitation that includes the financial terms of the debtrestructuring plan.  However, the laws and procedures governing arehabilitation proceeding in the Philippine courts remain untested insignificant respects.  It cannot be assured that a rehabilitation plan whichincorporates the financial terms of the debt restructuring would be adoptedpromptly or at all.  Even if such a rehabilitation plan were adopted, it cannotbe assured that Piltel would prove to be viable thereafter. 
******
*** ***

***MabuhaySatellite***

 

Mabuhay Satellite’s long-term debtconsists of:

 

 

**2002**

2001

 

(in millions)

U.S. Dollars

** **

** **

** **

 

      Credit Agreement 

**US$55**

**Php2,925**

US$62

Php3,201

   Omnibus Agreement

**46**

**2,431**

47

2,422

 

**101**

**5,356**

109

5,623

Less current portion

**18**

**980**

8

425

 

**US$83**

**Php4,376**

US$101

Php5,198

* *

*CreditAgreement*

 

Mabuhay Satellite has an existingCredit Agreement with the Export-Import Bank of the United States, or Ex-ImBank, to finance a portion of the cost of purchasing the Agila II Satellite.On May 8, 2000, Ex-Im Bank agreed to amend the repayment terms of the principalunder the Restructuring Agreement.  Under the Amendment, the outstandingbalance as of the effective date of the Amendment shall be amortized in 13successive semi-annual installments due on January 15 and July 15 of each year,beginning January 15, 2000.  Interest rate remains at 6.6% per annum.

 

*OmnibusAgreement*

 

Mabuhay Satellite also has anexisting Omnibus Agreement with a syndicate of local banks, or the Banks, whichincludes issuance of irrevocable standby Letters of Credit with an aggregatestated value not exceeding US$55 million (Php2,925 million) in favor of Ex-ImBank, as security under the Credit Agreement and a term loan to MabuhaySatellite in the aggregate amount of US$46 million. 

 

As security, Mabuhay Satellite hasconstituted in favor of the Banks:

 

•        A first mortgage on itsleasehold rights under a lease agreement entered into with the Subic BayMetropolitan Authority, or SBMA, and the components of the satellite system;

 

•        An assignment of its rightsunder the transponder lease contracts to be entered into with its stockholdersand other parties and the revenues therefrom; and

 

•        An assignment of theapplicable proceeds of insurance to be taken on the satellite system.

 

Restructuring of MabuhaySatellite’s debt under the Omnibus Agreement and the second restructuring ofits debt under the Credit Agreement, were approved by the Monetary Board of the*Bangko Sentral ng Pilipinas* on July 6, 2000 under the latter’sResolution No. 1107.

 

The Credit and Omnibus Agreementsimpose negative covenants which, among other things, restrict the materialchanges in Mabuhay Satellite’s nature of business and ownership structure, anylien upon or with respect to any of its assets or to any right to receiveincome, acquisition of capital stock, declaration and payment of dividends,merger, consolidation and sale with another entity and incurring orguaranteeing additional long-term debt beyond prescribed amounts.
******
*** ***

***ePLDT***

 

On March 4, 2002, ePLDT enteredinto a three-year loan facility with Philippine Bank of Communicationsamounting to Php150 million with a grace period of one year.  The loan facilitywas fully drawn as of December 31, 2002.  The quarterly principal payments ofPhp15 million shall start in the second year with a balloon payment of Php45million at the end of the third year.  Interest on this loan is equivalent to91-day T-bill rate plus 4% per annum payable quarterly in arrears.  The loan issecured by ePLDT’s investment in an affiliate with a carrying value of Php616million as of December 31, 2002 and a deed of assignment of receivables of anassociate from a foreign customer.

 

The loan agreement imposes negativecovenants which, among other things, restrict ePLDT in regard to payment ofcash dividends or any other income of any capital distribution to PLDT,voluntary suspension of its entire business operations for a period of 60consecutive days of dissolution of its legal existence, and creation of anyencumbrances on the shares pledged.

 

***MaraTel***

 

MaraTel’s long-term debt consists of a Php60 million loanobtained on October 20, 1997 and a Php19 million loan drawn on July 19, 1999.  The Php60 million loan carries aninterest rate ranging from 12% to 15% per annum and matures on October 16,2005, while the Php19 million loan bears a fixed interest rate of 15% per annumand matures on July 30, 2004.  As of December 31, 2002, the outstandingbalances of these loans totaled Php43 million, of which Php17 million willmature in 2003.

 

 

 

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

 

This account consists of:

 

 

**2002**

2001

 

(in millions of pesos)

Remaining excess of debt forgiven over value of Piltel’s preferred  shares (Note 17)

**9,417**

9,869

Accrued pension cost (Note 20)

**3,957**

3,536

Advance payment under a receivables purchase facility (Note 6)

**2,530**

–

Customers’ deposits

**2,162**

2,453

Accrual of capital expenditures under long-term financing 

**1,625**

6,995

Others (including derivative instruments) (Note 27)

**2,817**

3,548

 

**22,508**

26,401

 

 

 

**17.    ****Preferred StockSubject to Mandatory Redemption**

 

On June 4, 2001, PLDT issued 2.7million shares of Series V Convertible Preferred Stock, 5.1 million shares ofSeries VI Convertible Preferred Stock and 3.8 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58.1 million shares ofSeries K, Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel.  Shares of Series V, VI and VII ConvertiblePreferred Stock are entitled to receive annual dividends of Php18.70 per share,US$0.397 per share and JP¥40.7189 per share, respectively.  In addition, in2002, PLDT issued 30,100 shares of Series V Convertible Preferred Stock and14,087 shares of Series VI Convertible Preferred Stock in exchange for a totalof 220,935 shares of Series K, Class I Convertible Preferred Stock of Piltel.Upon receipt of tax clearance from the BIR on March 3, 2003, PLDT issued 92,413more shares of Series VI Convertible Preferred Stock in exchange for 462,065shares of Piltel Series K Class I, Convertible Preferred Stock.  Each share ofSeries V, VI and VII PLDT Convertible Preferred Stock is convertible at anytime at the option of the holder into one PLDT common share.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stock and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to PLDTcommon shares.  For 30 days thereafter, the holders of the mandatorilyconverted common shares have the option to sell such common shares back to PLDTfor Php1,700 per share, US$36.132 per share and JPY4,071.89per share for Series V, VI and VII, respectively.  Due to the foreign currencycomponent of the call option embedded in the Series VI and VII ConvertiblePreferred Stock, such call options were bifurcated and accounted for separatelyin conformity with SFAS No. 133, as amended (see *Note 27* – *Derivativesand Hedging Instruments*).  The aggregate fair value of the issued Series V,VI and VII Convertible Preferred Stock – net of the bifurcated option values –is presented under the “Preferred Stock Subject to Mandatory Redemption”liability account in the consolidated balance sheets.

 

As of June 4, 2001, the aggregate fair value of the issuedSeries V, VI and VII Convertible Preferred Stock (inclusive of the optionvalues) amounted to Php10,165 million, as determined using an independentparty’s valuation model.  The difference between this aggregate fair valueamount and the Php20,080 million Piltel debt restructured was deferred andincluded as part of “Deferred Credits and Other Noncurrent Liabilities” in theconsolidated balance sheets in conformity with the accounting for troubled debtrestructurings, such that no gain was recorded on the restructuring.Thereafter, interest incurred on the remaining restructured debt is recorded asan offset against deferred credits.  Total interest incurred related to therestructured debt for the year ended December 31, 2002 and the period from June4, 2001 to December 31, 2001 amounted to Php758 million and Php497 million,respectively.  As of December 31, 2002 and 2001, the deferred credit balanceamounted to Php9,417 million and Php9,869 million, respectively, after givingeffect to the above interest expense and the additional issuance of 44,187convertible preferred shares to restructure another Php82 million of Piltel’sdebt.

 

The difference between theaggregate fair value of the Series V, VI and VII Convertible Preferred Stock atissue date (net of the bifurcated option values for Series VI and VII) and theaggregate redemption value is accreted over the period up to the call optiondate using the effective interest rate method.  As of June 4, 2001, theaggregate fair value of the convertible preferred shares – net of bifurcatedoption values – amounted to Php9,113 million, while the aggregate redemptionvalue amounted to Php19,750 million, resulting to a difference for accretion ofPhp10,637 million.  Accretions added to “Preferred Stock Subject to MandatoryRedemption” and charged against deficit for the years ended December 31, 2002and 2001 amounted to Php1,004 million and Php542 million, respectively.  During2002 and 2001, 318,144 shares and 351,019 shares, respectively, of thepreferred stocks were converted into PLDT common shares.   “Preferred StockSubject to Mandatory Redemption” amounted to Php10,939 million and Php9,532million as of December 31, 2002 and 2001, respectively, after reevaluation ofSeries VI and VII to the exchange rates at balance sheet dates and after givingeffect to the above accretions, conversions and additional issuances.  Theaggregate redemption value of the outstanding Series V, VI and VII ConvertiblePreferred Stock amounted to Php20,201 million as of December 31, 2002.

 

**18.    ****Stockholders’ Equity**

 

The movement of PLDT’s capitalstock account excluding preferred stock subject to mandatory redemptionfollows:

 

 

**Preferred Stock -**Php10 par value

 

 

**Series  A to CC**

**III**

**IV**

 

 

**Common Stock –**Php5 par value

 

 No. of Shares

**Total Preferred Shares**

**Amount**

**No. of Shares**

**Amount**

 

(in millions)

Authorized

 

 

 

822.5

Php8,225

234

Php1,170

**Outstanding**

 

 

 

 

 

 

 

Balances at January 1, 2000

321.9

4.6

36.0

362.5

Php3,625

121.2

Php606

Issuance

31.6

–

–

31.6

316

47.3

237

Conversion

(2.0)

–

–

(2.0)

(20)

–

–

**Balances at December 31, 2000**

**351.5**

**4****.6**

**36****.0**

**392.1**

**Php3,921**

**168****.5**

**Php****843**

 

 

 

 

 

 

 

 

Balances at January 1, 2001

351.5

4.6

36.0

392.1

Php3,921

168.5

Php843

Issuance

23.2

–

–

23.2

 232

–

–

Conversion

(2.4)

–

–

(2.4)

(24)

0.4

2

**Balances at December 31, 2001**

**37****2.3**

**4****.6**

**36****.0**

**412.9**

**Php4,129**

**168****.9**

**Php****845**

 

 

 

 

 

 

 

 

Balances at January 1, 2002

372.3

4.6

36.0

412.9

Php4,129

168.9

Php845

Issuance

36.8

–

7.2

44.0

440

–

–

Conversion

(2.3)

 

 

(2.3)

(23)

0.5

2

Redemption

–

–

(7.2)

(7.2)

(72)

–

–

**Balances at December 31, 2002**

**406.8**

**4****.6**

**36****.0**

**447.4**

**Php4,474**

**169.4**

**Php****847**

 

On March 17, 2000, the PhilippineSEC approved the increase in authorized capital stock of PLDT from Php9,000million, divided into two classes, consisting of 783 million shares of serialpreferred stock with a par value of Php10 each and 134 million shares of commonstock with a par value of Php5 each, to Php9,395 million divided into twoclasses, consisting of 822 million shares of serial preferred stock with a parvalue of Php10 each and 234 million shares of common stock with a par value ofPhp5 each.  Out of said increase in capital stock, PLDT issued 35 millionshares as consideration and in exchange for the acquisition of the entireissued capital stock of Smart and 12 million shares of stock were subscribed byNTT Communication’s subsidiary for cash (see *Note 19 – Related PartyTransactions*).

 

***PreferredStock***

 

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

 

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

 

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

 

 

On January 22, 2002, the Board ofDirectors designated 10 million shares of serial preferred stock as Series CC10% Cumulative Convertible Preferred Stock for issuance throughout 2002.  Inaddition, on February 26, 2002, the Board of Directors designated an additional15 million shares of serial preferred stock as Series AA 10% CumulativeConvertible Preferred Stock.  The issuance of the 10 million shares of SeriesCC 10% Cumulative Convertible Preferred Stock and the additional 15 millionshares of Series AA 10% Cumulative Convertible Preferred Stock is an exempttransaction under Section 10.2 of the SRC, as confirmed by the Philippine SECon March 13, 2002 and July 31, 2002, respectively.  The 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, the Board ofDirectors designated 10 million shares of serial preferred stock as Series DD10% Cumulative Convertible Preferred Stock for issuance throughout 2003 and anadditional 10 million shares of serial preferred stock as Series CC 10%Cumulative Convertible Preferred Stock.  The issuance of the 10 million sharesof Series DD 10% Cumulative Convertible Preferred Stock and the additional 10million shares of Series CC 10% Cumulative Convertible Preferred Stock is anexempt transaction under Section 10.2 of the SRC, as confirmed by thePhilippine SEC on January 30, 2003.  In an earlier letter dated October 24,2002, PSE allowed PLDT to utilize 24,287,455 unissued preferred sharesremaining listed with the PSE in order to cover the issuance requirement of theother series under PLDT’s Subscriber Investment Plan.  The issuance requirementfor the 10 million shares of Series DD 10% Cumulative Convertible PreferredStock and the additional 10 million shares of Series CC 10% CumulativeConvertible Preferred Stock will be taken from the said remaining listed andunissued preferred shares. 

 

The Series III ConvertiblePreferred Stock earns cumulative dividends at an annual rate of US$3.50 a sharepayable quarterly, free and clear of Philippine withholding taxes.  It isconvertible into common stock at the option of the holder at any time, at the conversionprice of US$29.19 per share of common stock (equivalent to a conversion ratioof 1.7129 shares of common stock for each share of Series III ConvertiblePreferred Stock, each share of Series III Convertible Preferred Stock beingvalued for this purpose at its reference amount of US$50 a share), subject toadjustment in certain events.  The Series III Convertible Preferred Stock isnot redeemable.  Upon liquidation of PLDT, holders of the Series IIIConvertible Preferred Stock will be entitled to receive liquidatingdistributions equivalent to Php11 a share, plus accrued and unpaid dividends tothe date of distribution, subject to the prior rights of creditors.

 

The Series IV CumulativeNon-Convertible Redeemable Preferred Stock earns cumulative dividends at anannual rate of 14% based on the paid-up subscription price.  It is redeemableat the option of PLDT at any time one year after subscription and at the actualamount paid for such stock, plus accrued dividends.  On February 26, 2002, theBoard of Directors called for the payment of a portion of the balance of thesubscription price of the Series IV Cumulative Non-Convertible RedeemablePreferred Stock amounting to Php72 million, which was paid on March 5, 2002.On March 22, 2002, PLDT redeemed 60 million shares out of the 360 millionsubscribed shares of its Series IV Cumulative Non-Convertible Preferred Stockand paid Php72 million, representing the redemption price plus unpaid dividendsup to the date of redemption.

 

The provisions of certain subscriptionagreements involving preferred stock have an effect on the ability of PLDT to,without written consent, sell certain assets and pay cash dividends unless alldividends for all past quarterly dividend periods have been paid and provisionhas been made for the currently payable dividends.

 

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

 

***AccumulatedDeficit***

 

The most recent dividenddeclaration made by PLDT in respect of its common shares was in March 2001.PLDT continues to pay dividends in respect of its preferred shares.  Thecurrent policy of PLDT is to determine its ability to declare and pay dividendstaking into consideration the interest of its shareholders as well as PLDT’sworking capital, capital expenditures and debt servicing requirements.  Alsotaken into account are the prohibitions and restrictions under certain ofPLDT’s debt instruments with respect to declaration and payment of dividends.The retention of earnings is necessary to meet the funding requirements of ourbusiness expansion, service improvement and development programs.  Thestatutory unappropriated retained earnings balance of PLDT determined underPhilippine GAAP as of December 31, 2002 which is available for distribution asdividends amounted to Php29,251 million.

 

 

 

**19.             ****Related Party Transactions**

** **

Companies within the PLDT Group areengaged in transactions with each other in the ordinary course of business.  Webelieve that the terms of these transactions are comparable with thoseavailable to unrelated parties. 

 

***Transactionswith/between Related Parties***

*** ***

*TelecommunicationsServices Provided within PLDT Group*

 

Telecommunications carrierswithin 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 *Note29 - Other Matters*).  Each of these carriers recognizes revenues, net ofinterconnection charges, for calls terminating with the customer of the othercarriers. 

 

*FacilitiesManagement Agreement between PLDT and Piltel*

 

On July 19, 2001, PLDT enteredinto a Facilities Management Agreement with Piltel under which PLDT undertakesthe management, operation and maintenance of Piltel’s regionaltelecommunication and    E.O. 109, network operations and services, includingE.O. 109 fixed line build-out installations, public calling offices andpayphone facilities and the systems required to support these services.

 

The agreement covers Piltel’sregional telecommunication services in Baguio, Puerto Princesa, Masbate, andBoac and E.O. 109 services in Alabel, Banga, Dapitan, Davao, Digos, Dipolog,General Santos, Kiamba, Koronadal, Pagadian, Polomolok and Surallah.

 

Under the agreement, PLDT alsoundertakes the management of the computer system, billing, revenue assuranceand inter-carrier settlements reporting of Piltel’s regional telecommunicationservices in Olongapo and Subic.

 

The monthly managementfee payable by Piltel is based on cost, and for cost components where margin isallowed, 15% is applied.  All third party invoices are passed on to Piltel atcost, including value-added tax.

 

 

The agreement supersedes theFacilities Management Agreement between PLDT and Piltel, dated May 12, 2000,under which PLDT undertook the management, maintenance and operation of theregional telecommunication services of Piltel, including public calling officesand payphone operations located in Baguio City, Puerto Princesa, Boac andMasbate.  The new agreement is effective for three years from July 2001 to July2004.

Total management fees underthese agreements amounted to Php84 million, Php72 million and Php36 million forthe years ended December 31, 2002, 2001 and 2000, respectively.  Outstandingreceivables of PLDT under these agreements amounted to Php258 million andPhp174 million as of December 31, 2002 and 2001, respectively. These amountswere eliminated in the consolidated balance sheets.

 

*FacilitiesManagement Agreement between Subic Telecom and Piltel*

 

On September 5, 2001, Piltel andSubic Telecom entered into a Facilities Management Agreement of the regionaltelephone network, customer operations, network operations and payphones ofPiltel in Subic and Olongapo City.  The monthly management fee payable byPiltel is based on cost, and for cost components where margin is allowed, 15%is applied.  In addition, Piltel pays a monthly variable cost per account inthe amount of Php44.00 for repairs and maintenance.  All third party invoicesare passed on to Piltel at cost, including value-added tax.  This agreementsupersedes the facilities management agreement entered into by Piltel and SubicTelecom on May 29, 2000.

 

Total management fees under thisagreement amounted to Php22 million, Php26 million and Php45 million for theyears ended December 31, 2002, 2001 and 2000, respectively.  The new agreementis effective for three years until September 2004.  Outstanding receivables ofSubic Telecom under this agreement amounted to Php2 million and Php12 millionas of December 31, 2002 and 2001, respectively. These amounts were eliminatedin the consolidated balance sheets.

 

*Agreementsbetween Smart and Piltel*

 

In connection with theintegration of their operations, Smart and Piltel have entered into thefollowing agreements:

 

An agreement for the co-location, or sharing, of cellular sites selectedat the option of Smart, whereby Piltel is paid a usage fee of Php45,000 per shared site per month, subject to a10% annual increase;

 

An agreement whereby Smart manages the operation of Piltel’s cellular andpaging systems.  This agreement is divided into three sub-agreements asfollows:

 

•        A Facilities Management Agreement under which Smart operates,maintains and manages the physical facilities and technical services ofPiltel’s existing cellular and paging systems.  Piltel pays Smart a fixedmonthly fee of Php4 million and a variable monthly fee of Php13,735 per sitecovered by the agreement.  Additional fees of Php186,878 per month and Php624per site per month are payable at the end of each calendar year upon renditionof the services in conformity with the agreement.  This agreement was amendedin May 2001 to include the management, operation and maintenance of Piltel’sprepaid wireless telecommunications network in the E.O. 109 areas in Mindanao includingthe business and central offices, base stations, and public calling offices ofPiltel located in South Cotabato, Saranggani and General Santos, Davao City,Davao del Sur, Zamboanga del Norte, Zamboanga del Sur and Misamis Occidental;

 

•        A Customer Service Management Agreement under which Pilteloutsources the operation of its customer service and billing functions for itscellular and paging systems to Smart for a fixed monthly fee of Php9 millionand a variable cost of Php57, Php17 and Php25 per postpaid, prepaid cellularand paging subscriber, respectively.  An additional fee of Php399,926 per monthand Php1 per postpaid subscriber per month is payable at the end of eachcalendar year upon rendition of the services in conformity with the agreement; and

 

•        An Administrative Support and Management Services Agreement underwhich Piltel pays a fixed monthly fee of Php8 million.  An additional fee ofPhp353,764 per month is payable at the end of each calendar year upon renditionof the services in conformity with the agreement. 

 

Total fees under thesemanagement agreements amounted to Php661 million, Php540 million and Php124million for the years ended December 31, 2002, 2001 and 2000, respectively.Under these agreements, outstanding receivables of Smart amounted to Php569million as of December 31, 2002 and its outstanding obligations as of December31, 2001 amounted to Php78 million.

 

In addition, Smart also enteredinto a Facilities Service Agreement with Piltel under which Piltel accessesSmart’s existing GSM network and facilities to enable Piltel to offer prepaidcellular service using GSM technology in exchange for approximately 50% ofPiltel’s revenues, net of interconnection expenses.  Total facility fees underthis agreement amounted to Php2,494 million, Php1,852 million and Php460million for the years ended December 31, 2002, 2001 and 2000, respectively.Outstanding receivables of Smart under this agreement amounted to Php247million and Php1,815 million as of December 2002 and 2001, respectively. Theseamounts were eliminated in the consolidated balance sheets.

 

*Air TimePurchase Agreement between PLDT and PT Asia Cellular Satellite and RelatedAgreements*

 

In March 1997, PLDT entered into aFounder NSP Air Time Purchase Agreement, or ATPA with PT Asia CellularSatellite, as amended in December 1998, under which PLDT was granted theexclusive right to sell ACeS services in the Philippines.  In exchange, PLDT isrequired to purchase from PT Asia Cellular Satellite at least US$5 millionworth of air time annually over ten years, commencing on the commercialoperations date, which has been set as January 1, 2002.  In the event PT AsiaCellular Satellite’s billing revenues are 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 of the agreement.

 

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

 

•        authorize distributors toresell ACeS services in the Philippines upon prior approval from PT AsiaCellular Satellite; and

 

•        appoint agents to solicit andbill PLDT’s or its authorized distributors’ subscribers for ACeS services andto sell terminals on behalf of PLDT.

 

Under an Assignment and AssumptionAgreement dated December 29, 1998, PT Asia Cellular Satellite agreed to assignand transfer to AIL all of PT Asia Cellular Satellite’s rights under theFounder NSP Air time Purchase Agreement and Founder NSP Operating Agreement.

 

Under an Acknowledgment ofAssignment of Air time Purchase Agreement entered into on December 29,1998, by and among PLDT, P.T. Bank Internasional Indonesia and AIL, PLDTconsented to the assignment by AIL of the Founder NSP Air time Purchase Agreementto P.T. Bank Internasional Indonesia, as security agent, for the benefit of thesecured parties under the Security Agreement dated as of December 29, 1998,which was executed in connection with the Amended and Restated Credit Agreementdated December 29, 1998 among PT Asia Cellular Satellite, AIL, P.T. BankInternasional Indonesia and various other banks.

 

In March 2003, PLDT, together withthe founder shareholders, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original ATPA.  In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of approximately US$4 million.  PLDT is also obliged to purchase fromAIL 13,750 satellite fixed phone units for the year 2003 at US$395 F.O.B perunit, subject to quarterly price adjustment. The parties to the StandstillAgreement also agreed to negotiate in good faith and use their best efforts toreach an agreement on a revised ATPA before November 15, 2003 that will cover,among other matters, the amended minimum and supplemental air time paymentprovisions subject to the approval of AIL’s creditors.

 

***Transactionswith Major Stockholders, Directors and Officers***

 

Transactions between PLDT or itssubsidiary and a director or key officer or owner of more than 10% of thecommon shares of PLDT, or any member of the immediate family of a director orkey officer or owner of more than 10% of the common shares of PLDT, who has adirect or indirect material interest in PLDT or its subsidiary, as of and forthe years ended December 31, 2002, 2001 and 2000 are as follows:

 

*a.     **Agreementswith NTT Communications and/or its Affiliates*

 

PLDT is a party to the followingagreements with NTT Communications and/or its affiliates:

 

•        *Advisory ServicesAgreement.*On March 24, 2000,PLDT entered into an agreement with NTT Communications under which NTT Communicationsprovides PLDT with technical, marketing and other consultants for variousbusiness areas of PLDT starting April 1, 2000.  Total fees under this agreementamounted to Php207 million, Php248 million and Php117 million for the years ended December 31, 2002, 2001 and 2000,respectively.  As of December 31, 2002 and 2001 outstanding obligations of PLDTamounted to Php32 million and Php39 million, respectively.

 

•        *Domestic Fiber OpticNetwork Submerged Plant Maintenance Agreement.*   On July 4, 2000, PLDT entered into anagreement with NTT World Engineering Marine Corporation, or NTT WEMC, for thesubmarine cable repair and other allied services for the maintenance of PLDT’sdomestic fiber-optic network, or DFON, submerged plant for a period of five yearsup to July 4, 2005.  Under the agreement, PLDT shall pay NTT WEMC a fixedannual standing charge of US$2 million, excluding cost for the use of aremotely operated submersible vehicle at US$5,000 for every day of use andrepair cost computed at US$19,000 per day of actual repair. Total fees underthis agreement which were all fully paid, amounted to Php65 million, Php107 million and Php35 millionfor the years ended December 31, 2002, 2001 and 2000, respectively.

 

•        *Arcstar LicensingAgreement and Arcstar Service Provider Agreement.*On March 24, 2000, PLDT entered into an agreementwith NTT Worldwide Telecommunications Corporation under which PLDT marketsmanaged data and other services under NTT Communications’ “Arcstar” brand toits corporate customers in the Philippines.  PLDT also entered into a TradeName and Trademark Agreement with NTT Communications under which PLDT has beengiven the right to use the tradename “Arcstar” and its related trademark, logoand symbols, 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 Php14 million, Php7 million and Php1 million forthe years ended December 31, 2002, 2001 and 2000, respectively.  As of December31, 2002 and 2001, outstanding obligation of PLDT amounted to Php3 million and Php1 million, respectively.

 

•        *Conventional InternationalTelecommunications Services Agreement.*   On March 24, 2000, PLDT entered into an agreement with NTTCommunications under which PLDT and NTT Communications agreed to cooperativearrangements for conventional international telecommunications services toenhance their respective international businesses.  Total fees under thisagreement amounted to Php3 millionand Php0.4 million for the yearsended December 31, 2002 and 2001, respectively.  As of December 31, 2002 and2001, outstanding obligation of PLDT amounted to Php0.6 million and Php0.3 million, respectively.

 

*b.     **Agreementbetween Smart and Asia Link B.V., or ALBV***

 

Smart has an existing TechnicalAssistance Agreement with ALBV for the latter to provide technical supportservices and assistance in the operations and maintenance of CMTS for a periodof five years, subject to renewal upon mutual agreement between the parties.The agreement provides for quarterly payments of technical service feesequivalent to 2% of the net revenues of Smart.

 

Smart also has an existing ServicesAgreement with ALBV for a period of 25 years starting January 1, 1999, whichshall automatically expire unless renewed by mutual agreement of both parties.Under the agreement, ALBV provides advice and assistance to Smart in sourcingcapital equipment and negotiating with international suppliers, arranginginternational financing and other services therein consistent with and for thefurtherance of the objectives of the services.

 

ALBV is a subsidiary of the FirstPacific Group.

 

Total fees under these agreementsamounted to Php429 million, Php249 million and Php195 million for the yearsended December 31, 2002, 2001 and 2000, respectively.  Smart has an outstandingobligation of Php31 million in 2002 and receivable of Php5 million in 2001under these agreements.

* *

*c.      **Agreementwith Foote, Cone & Belding Worldwide, or FCB Worldwide***

 

FCB Worldwide provides consultancyand advisory services to PLDT.  Total fees under this agreement amounted toPhp19 million and Php34 million for the years ended December 31, 2002 and 2001,respectively.  The chairman of PLDT’s Board is the non-executive chairman ofFCB Worldwide’s representative office in the Philippines. 

 

*d.     **Agreementsrelating to insurance companies*

* *

Gotuaco del Rosario and Associates,or Gotuaco, acts as broker for certain insurance companies to cover certainproperties of the PLDT Group.  Insurance premiums are remitted to Gotuaco andthe broker’s fees are settled between Gotuaco and the insurance companies.  Inaddition, PLDT has signed an insurance policy with Malayan Insurance Co. Inc.,or Malayan, wherein premiums are directly paid to Malayan.  Total payments toGotuaco and Malayan in 2002 covering the twelve-month period ending July 31,2003 amounted to Php307 million.  Two directors of PLDT have a direct/indirectinterest in or serve as director/officer of Gotuaco and Malayan.

 

 

 

**20.    ****Employees’ BenefitPlan**

 

***PLDT***

 

PLDT has a trustee-managed,noncontributory defined benefit plan, or the Benefit Plan, providing forretirement and death benefits and service terminal pay to substantially allpermanent and regular employees.  Benefits under the Benefit Plan are based onfinal salary and length of service.

 

In conformity with SFAS No.132,“Employers’ Disclosures about Pensions and Other Post-retirement Benefits,” thefollowing table sets forth the Plan’s funded status and pension amountsrecognized as of December 31, 2002, 2001 and 2000:

 

 

**2002**

2001

2000

 

(in millions of pesos)

Change in benefit obligation:

 

** **

** **

Benefit obligation at beginning of year

**6,637**

9,264

9,862

Service cost

**452**

697

713

Interest cost

**794**

1,108

1,086

Benefits paid

**(495)**

(669)

(969)

Actuarial loss (gain)

**596**

(3,763)

(1,428)

Benefit obligation at end of year

**7,984**

6,637

9,264

 

Change in Plan assets:

** **

 

 

Fair value of Plan assets at beginning of year

**2,781**

5,007

5,450

Actual return on Plan assets

**159**

(1,898)

(100)

Employer’s contribution

**470**

341

626

Benefits paid

**(495)**

(669)

(969)

Fair value of Plan assets at end of year

**2,915**

2,781

5,007

Funded status

**(5,069)**

(3,856)

(4,257)

Unrealized net transition obligation

**275**

289

302

Unrecognized net actuarial loss 

**837**

31

1,245

Accrued benefit cost

**(3,957)**

(3,536)

(2,710)

Components of net periodic benefit cost:

** **

 

 

Service cost

**452**

697

713

Interest cost

**794**

1,108

1,086

Expected return on Plan assets

**(369)**

(665)

(595)

Amortization of:

** **

 

 

Unrecognized net transition obligation

**14**

14

13

Unrecognized net loss

**–**

14

48

Net periodic benefit cost

**891**

1,168

1,265

 

 

The significant assumptions usedin determining the actuarial present value of the projected benefit obligationsas of December 31, 2002, 2001 and 2000 are as follows:

 

 

**2002**

2001

2000

Weighted average assumptions:

 

 

 

Discount rate

**9%**

12%

12%

Expected return on Plan assets

**8%**

12%

12%

Rate of compensation increase

**9%**

10%

12%

 

***Smart***

 

Smart has a trustee-managed,tax-qualified Provident Plan providing for retirement, death or serviceterminal pay to substantially all permanent and regular employees.  Under theProvident Plan, Smart contributes to the provident fund for the credit of eachmember’s Personal Retirement Account, or PRA, a percentage of such member’smonthly salary.  The member has an option to contribute to the Provident Fundan amount not to exceed 25% of the member’s monthly salary, which are creditedto each member’s PRA; however, very few members contribute. Net earnings of theProvident Fund are credited every six months to the PRAs of the members basedon their proportionate share in the total value of the Provident Fund as of theend of the preceding period.  Smart, not the participating employees, bears allrisk of loss associated with the investment of the funds assets.  

 

Any benefit payable under this Planshall be in lieu of or in compliance with, but not in addition to, the paymentof similar benefits Smart is required to pay its employees under existing orfuture laws, employment contracts or collective bargaining agreements, it beingunderstood that the employee shall be entitled only to the higher of thebenefits and not to both.

 

The following are the minimumadditional disclosures required by SFAS No. 132:

 

 

**2002**

2001

2000*

 

(in millions of pesos)

Change in benefit obligation:

** **

 

 

Benefit obligation at beginning of the period

**125**

79

55

Service cost

**45**

32

14

Interest cost

**12**

8

4

Benefits paid

**(1)**

–

–

Actuarial loss (gain)

**(22)**

6

6

Benefit obligation at end of the period

**159**

125

79

Change in plan assets:

** **

 

 

Fair value of Plan assets at beginning of the period

**119**

80

63

Actual return on Plan assets

**25**

11

(1)

Employer’s contribution

**54**

28

18

Benefits paid

**(1)**

–

–

Fair value of Plan assets at end of the period

**197**

119

80

 

** **

 

 

Funded status

**38**

(6)

1

Unrecognized net transition obligation

**(7)**

(7)

(8)

Unrecognized net actuarial loss (gain) 

**(23)**

10

3

Prepaid (accrued) benefit cost

**8**

(3)

(4)

Components of net periodic benefit cost:

** **

 

 

Service cost

**45**

32

14

Interest cost

**12**

8

4

Expected return on plan assets

**(14)**

(10)

(5)

Net periodic benefit cost

**43**

30

13

** From March 24, 2000,date of PLDT’s acquisition of Smart.*

 

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

 

 

**2002**

2001

2000

Weighted average assumptions:

 

 

 

Discount rate

**10%**

10%

10%

Expected return on Plan assets

**10%**

10%

10%

Rate of compensation increase

**9%**

10%

10%

 

 

 

**21.    ****Other Expenses**

 

This account consists of:

 

 

**2002**

2001

2000

 

 (in millions of pesos)

Foreign exchange losses - net 

**5,878**

    4,467

32,188

Loss (gain) from derivative transactions (Note 27)

**(603)**

        42

 –

Provision for decline in value of investment (Note 9)

**–**

 2,052

 –

 

**5,275**

6,561

32,188

** **

 

**22.    ****Income Taxes**

 

The netcurrent and noncurrent components of deferred income tax recognized in theconsolidated balance sheets follow:

 

**2002**

2001

 

(in millions of pesos)

Net current deferred tax assets

**5,045**

3,578

Net noncurrent deferred tax assets

**11,163**

13,479

 

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

 

 

**2002**

2001

 

(in millions of pesos)

Current assets:

 

 

NOLCO

**9,705**

9,064

Allowance for doubtful accounts

**3,901**

2,888

Unearned revenues 

**1,003**

1,084

Allowance for inventory obsolescence 

**196**

92

Unrealized losses on financial instruments

**58**

96

Others

**179**

154

Current liabilities:

** **

 

Unrealized gain on financial instruments

**(17)**

(26)

 

**15,025**

13,352

Less valuation allowance 

**9,980**

9,774

Net current assets

**5,045**

3,578

 

** **

 

 

** **

 

 

** **

 

 

** **

 

Noncurrent assets:

** **

 
Asset impairment
**6,215**

1,209

Accelerated depreciation

**879**

461

Pre-operating expenses

**443**

524

Accrued pension cost

**1,266**

1,132

Investments written off

**205**

205

Unrealized losses on financial instruments

**152**

119

Deferred credits

**3,013**

3,158

Unrealized foreign exchange losses and others

**14,852**

18,157

 

**27,025**

24,965

Less valuation allowance

**8,652**

3,393

 

**18,373**

21,572

Noncurrent liabilities:

** **

 

Interest charges capitalized, net of amortization

**(5,921)**

(5,991)

Taxes and duties capitalized, net of amortization

**(711)**

(776)

Customer lists intangible

**(245)**

(490)

Unrealized gain on financial instruments

–

(1)

Undistributed earnings of a subsidiary

**(333)**

(835)

 

**(7,210)**

(8,093)

Net noncurrent assets

**11,163**

13,479

 

Provision for (benefit from) incometax consists of:

 

 

**2002**

2001

2000

 

(in millions of pesos)

Current

**589**

876

1,736

Deferred

**849**

(3,446)

(7,349)

 

**1,438**

(2,570)

(5,613)

 

Mabuhay Satellite and Subic Telecomwere registered as Subic Bay Freeport Enterprises and Clark Telecom was alsoregistered as a Clark Special Economic Zone Enterprise under Republic Act No.7227, otherwise known as the Bases Conversion and Development Act of 1992, orthe Act.  As registrants, Mabuhay Satellite and Clark Telecom are entitled toall the rights, privileges and benefits established thereunder including taxand duty-free importation of capital equipment and special income tax rate of5% of gross income, as defined in the Act. 

 

Smart is registered with the Philippine Board of Investments, orBOI, under the Omnibus Investments Code of 1987 as a preferred non-pioneerenterprise for the operation of the IGF and CMTS services.  As such, Smart wasentitled to certain tax and non-tax incentives, including an income tax holidayfor a period of three years up to August 2000. On May 3, 2001, the BOI awarded Smartpioneer status for its GSM expansion projects entitling it to enjoy athree-year tax holiday up to May 2004.  The tax incentive is availed on thebasis of incremental income generated from the said expansion project.  Inaddition, on July 12, 2001, the BOI awarded Smart pioneer status for itspayment infrastructure projects entitling it to enjoy a six-year tax holiday.In this case, the tax incentive is availed for the entire taxable income of theproject. 

 

Deferred income tax assets andliabilities relating to Smart have been recorded using rates reflective of therates expected to apply to each temporary difference.

 

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

 

The balance of NOLCO as of December31, 2002 may be used by the particular entities that incurred the losses asdeductions against future taxable income.

 

**Year Incurred**

**Expiry**

**Amount**

 

 

(in millions of pesos)

2000

2003

4,537

2001

2004

16,770

2002

2005

9,021

Total NOLCO

** **

30,328

 

The reconciliation between the provision for income tax at theapplicable statutory tax rates and the actual provision for income tax follows:

 

 

2002

2001

2000

 

(in millions of pesos)

Provision at statutory tax rate

**(1,472)**

(9,661)

(11,114)

Tax effects of:

** **

 

 

Results of operations subject to income tax holiday

**(2,405)**

(724)

398

Tax exempt income and non-deductible expenses

**(253)**

(22)

(2)

Foreign exchange loss not deductible

**203**

 44

–

Tax rate differences

**(117)**

(127)

(93)

Equity in net losses of investees

**41**

 1,366

 288

Goodwill amortization

–

1,527

1,149

Provision for impairment in value of investment

–

451

–

Others - net 

**(23)**

(33)

89

Changes in valuation allowance

**5,464**

 4,609

3,672

Actual provision for (benefit from) income tax

**1,438**

(2,570)

(5,613)

 

 

**23.    ****Earnings Per CommonShare**

 

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

 

 

**2002**

2001

2000

 

(in millions of pesos)

Net loss before cumulative effect of change in accounting principle

**(6,158)**

(27,728)

(29,258)

Cumulative effect of change in accounting principle

–

(54)

–

Dividends on preferred stock

**(1,645)**

(1,503)

(1,249)

Accretion to redemption value of Preferred Stock subject to mandatory redemption 

**(1,004)**

(542)

–

Loss attributable to common stockholders

**(8,807)**

(29,827)

(30,507)

 

(in thousand shares)

Outstanding common shares, beginning

**168,895**

168,498

121,173

Weighted average effect of issuance of common shares during       the year

**200**

162

36,504

Weighted average number of common shares, end

**169,095**

168,660

157,677

Earnings per common share

 

(in pesos)

 

Basic and diluted earnings per common share before cumulative effect of change in accounting principle

**(52.08)**

(176.53)

(193.48)

Cumulative effect of change in accounting principle

–

(0.32)

–

Basic and diluted earnings per common share

**(52.08)**

(176.85)

(193.48)

 

The computations of dilutedearnings per common share were anti-dilutive for the years ended December 31,2002, 2001 and 2000; therefore, the amounts reported for basic and dilutedearnings per common share were the same.

 

 

 

**24.    ****ContractualObligations and Commercial Commitments**

** **

***Contractual Obligations***

 

The following table discloses thePLDT Group’s contractual obligations outstanding as of December 31, 2002: 

 

 

Long-term debt

Long-term lease obligations

Unconditional purchase obligations (1)

Other long-term obligations

**Total**

Year

(in millions of pesos)

2003

19,627

847

224

–

20,698

2004

22,438

827

1,145

–

24,410

2005

28,332

718

1,080

–

30,130

2006

25,941

492

1,080

–

27,513

2007

26,145

413

1,075

–

27,633

2008 and onwards

68,467

579

5,325

20,201

94,572

Total 

190,950

3,876

9,929

20,201

224,956

(1)    *Under the ATPA with AIL, theamount disclosed in the table above for payments due within one year reflects areduction in PLDT’s required payments agreed under the Standstill Agreement,while the amounts disclosed for payments due from 2 years onwards are based onthe original ATPA.  The parties of the Standstill Agreement have also agreed tonegotiate in good faith and use their best efforts to reach an agreement onrevised 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.*

* *

*Long-term Debt Obligations*

 

For discussion of our long-termdebt obligations*,* see*Note 15 - Long-term Debt.*

* *

*Long-term Lease Obligations*

* *

*Municipal Telephone Projects*.In 1993, PLDT entered into two lease agreements with the Philippine Departmentof Transportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under theseagreements, PLDT was granted the exclusive right to perform telecommunicationsmanagement services, to expand services, and to promote the use of theDOTC-contracted facilities in certain covered areas for a period of 15 years.Title to the properties shall be transferred to PLDT upon expiration of thelease term.  As of December 31, 2002 and 2001, the aggregate remaining obligationwas approximately Php1,013 million and Php1,049 million, respectively.  In caseof cancellation, PLDT is liable to pay Php100 million under each of the twocontracts as liquidated damages.

 

*Domestic Fiber Optic Network, orDFON, Submerged Plant Agreement*. As discussed in *Note 19 – Related PartyTransactions*, PLDT entered into an agreement with NTT World EngineeringMarine Corporation on July 4, 2000, for the submarine cable repair and relatedservices for the maintenance of PLDT’s DFON submerged plant for a period offive years up to July 4, 2005.  Under this agreement, PLDT is required to payNTT World Engineering Marine Corporation a fixed annual standing charge of US$2million, excluding cost for the use of a remotely-operated submersible vehicleat US$5,000 for every day of use and repair cost computed at US$19,000 per dayof actual repair.  As of December 31, 2002 and 2001, the aggregate remainingobligation was approximately Php336 million and Php434 million, respectively.

 

*Digital PassageService Contracts*.   PLDT has existing DigitalPassage Service Contracts with foreign telecommunication administrations forseveral dedicated circuits to various destinations for ten to 25 years expiringat various dates.  As of December 31, 2002 and 2001, the aggregate remainingobligation was approximately Php149 million and Php162 million, respectively.

* *

*License Agreement with MobiusManagement Systems (Australia) Pty  Ltd., or Mobius.*   PLDT entered into alicense agreement with Mobius pursuant to which Mobius has granted PLDT anon-exclusive, non-assignable and non-transferable license for the use ofcomputer software components.  Under this agreement, Mobius is also required toprovide maintenance services for a period of one year at no additionalmaintenance charge.  PLDT may purchase maintenance services at the expirationof the first year for a fee of 15% of the current published license fee.  As ofDecember 31, 2002, the aggregate remaining obligation was approximately Php86million.

 

*Other Long-term Lease Obligations*.The PLDT Group has various long-term lease contracts for periods ranging fromtwo to ten years covering certain offices, warehouses, cell sites,telecommunication equipment locations and various office equipment.

 

*Unconditional Purchase Obligations*

 

*Air Time Purchase Agreement withACeS International Limited.*  As discussed in *Note 19 – Related PartyTransactions*, PLDT entered into a Founder NSP Air Time Purchase Agreement,or ATPA, with AIL in March 1997, which was amended in December 1998, underwhich PLDT is granted the exclusive right to sell AIL services in thePhilippines.  In exchange, PLDT is required to purchase from AIL a minimum ofUS$5 million worth of air time annually over ten years commencing on the dateof the satellite’s commercial operations.  In the event AIL aggregate billingrevenues is less 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 withthe founder shareholders, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original ATPA.  In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders, withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of US$3.8 million.  PLDT is also obliged to purchase from AIL 13,750satellite fixed phone units for the year 2003 at US$395 F.O.B. per unit,subject to quarterly price adjustment.  The parties to the Standstill Agreementalso agreed to negotiate in good faith and use their best efforts to reachagreement on a revised ATPA before November 15, 2003 that will cover, amongother matters, the amended minimum and supplemental air time payment provisionssubject to the approval of AIL’s creditors.  As of December 31, 2002, theaggregate remaining minimum obligation was approximately Php10,077 million. 

*International AffiliateAgreement with VeriSign, Inc., or VeriSign.*   On September 15, 2000, ePLDTentered into an agreement with VeriSign for the non-exclusive, non-transferableright and license to use the VeriSign software, brand and CertificationPractice Statement for the purpose of approving, issuing, suspending orrevoking digital certificates for users of the Internet or similar open systemsin the Philippines for a period of seven years.  Under this agreement, ePLDT isrequired to pay VeriSign a certain percentage of the revenue derived from theservices subject to minimum annual royalty payments aggregating to US$1.18million, which was subsequently reduced to US$0.9 million, for the seven-yearcontract period.  In addition, ePLDT was required to pay an annual support feeof US$0.5 million for the first year and US$0.3 million in each yearthereafter.  As of December 31, 2002 and 2001, ePLDT’s aggregate remainingminimum obligation under this agreement was approximately Php79 million andPhp196 million, respectively.

 

 

 

*Other Unconditional PurchaseObligations*.   PLDT has various purchase contracts for periods ranging fromtwo to three years covering the use of fraud management system and satellitehub and remote Very Small Aperture Terminal, or VSAT, network systems.

* *

*Other Long-term Obligations*

 

*Mandatory Conversion andPurchase of Shares*.  As discussed in *Note 17 – Preferred Stock Subjectto Mandatory Redemption*, on June 4, 2001, PLDT issued a total of 2.7million shares of Series V Convertible Preferred Stock, 5.1 million shares ofSeries VI Convertible Preferred Stock and 3.8 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58.1 million shares ofSeries K Class I Convertible Preferred Stock of Piltel pursuant to the debt restructuringof Piltel.  

 

As of December 31, 2002, 145,320shares of Series V Convertible Preferred Stock and 523,843 shares of Series VIConvertible Preferred Stock were converted to PLDT common shares.  As ofDecember 31, 2002, PLDT had 2.6 million Series V Convertible Preferred Stock,4.6 million Series VI Convertible Preferred Stock and 3.8 million Series VIIConvertible Preferred Stock issued and outstanding.  The aggregate redemptionvalue of the outstanding shares as of December 31, 2002 is Php20,201 million,of which Php13,181 million is payable on June 4, 2008 and Php7,020 million onJune 4, 2009, if all of the outstanding shares of Series V, VI and VIIConvertible Preferred Stock were mandatorily converted and all the underlyingcommon shares were put to PLDT.  The market value of the underlying commonshares is Php2,968 million, based on the market price of PLDT’s common stock ofPhp270 per share as of December 31, 2002.

*** ***

***Commercial Commitments***

* *

As of December 31, 2002 and 2001,our outstanding commercial commitments, in the form of letters of credit,amounted to Php3,610 million and Php3,201 million, respectively.  Thesecommitments will expire within one year.

 

In October 1998, Smart entered intoa Frame Supply Contract with Nokia Telecommunications OY for the supply ofhardware, software and documentation for its GSM cellular network.  In the samemonth, Smart and Nokia (Philippines), Inc. signed a Frame Services Contractthat covers the design, planning, installation, commissioning, integration,acceptance testing, training and handling over of the GSM cellular network.  In2001, Smart issued a Master Purchase Order, or MPO, in the amount of US$200million in favor of Nokia Networks OY for the purchase of additional equipmentto expand its GSM cellular network.  Under this MPO, the unavailed portion asof December 31, 2002 and 2001 amounted to US$107 million and US$114 million,respectively.  In addition, on May 30, 2003, Smart entered into a TechnicalSupport Services Order with Nokia (Philippines), Inc. in the amount of US$8million.

 

 

**25.    ****Contingencies**

** **

***PLDT***

 

*NTC supervision and regulationfees, or SRF*.   On various dates in 1988, NTC served various assessmentnotices and demands for payment of SRF pursuant to Section 40 of CommonwealthAct 146, otherwise known as the Public Service Act (PSA).  PLDT protested saidassessments and demands for payment on the grounds that (a) all assessmentsunder Section 40 (e) of the PSA should legally be based on the par value of acorporate utility operator’s outstanding capital stock, exclusive of capital inexcess of par value; (b) the assessment were being levied to raise revenues andnot as mere reimbursements for actual regulatory expenses in violation of thedoctrine in PLDT vs. PSC, 66 SCRA 341 (1975); (c) NTC had no authority tocompel PLDT’s payment of the administrative fees under Section 40 (f) of thePSA for the increase of PLDT’s authorized capital stock, since NTC did notrender any supervisory or regulatory activity nor incur any expenses inrelation to such corporate act; and (d) NTC had no authority to increase therates of the administrative fees under Section 40 of the PSA from Php0.20 toPhp0.50 per Php100 of the capital stock pursuant to Batas Pambansa, or B.P.,325 since the latter legislation was of general application and thus, could nothave legally or validly amended a special law such as the PSA.

 

After exhausting all availableadministrative remedies with the NTC, PLDT filed an appeal via a Petition forCertiorari with Prayer for Temporary Restraining Order and/or PreliminaryInjunction with the Court of Appeals, or CA.  The CA promulgated its decisionwhich, in the main, held that (a) the annual SRF should be assessed on thebasis of the par value of the subscribed or paid-up capital stock of PLDT,exclusive of capital in excess of par value; (b) the NTCis legally authorized to collect the administrative fees under Section 40 (f)of the 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, or a fraction thereof pursuant to B.P. 325instead of only Php0.20 per Php100 or fraction thereof under the PSA.  

 

In an appeal to the Supreme Court,or SC, PLDT questioned the CA decision (a) that the NTC can validly collectfees even in the absence of any regulatory services performed, and (b)upholding the validity of the increase in the rate of fee under Section 40 (e)of the PSA to Php0.50 from Php0.20 per Php100 or a fraction thereof of thecapital stock.  NTC, on the other hand, questioned the basis for the SRFassessment, which was determined by the CA to be the par value of thesubscribed capital stock exclusive of capital in excess of par value. 

 

In a decision dated July 28, 1999,the SC ordered the NTC to recompute the SRF due from PLDT on the basis ofPLDT’s “capital stock subscribed or paid”. 

 

Pursuant to the SC decision, theNTC issued a re-assessment letter in February 2000 for the balance of the SRFfor previous years computed on the same basis stated in the SC decision butinclusive of stock dividends.  On the ground that the inclusion of stockdividends in the calculation of the SRF has no basis in law and jurisprudence,PLDT requested the NTC to cancel/withdraw the portions of the assessment basedon the stock dividends.

 

Without resolving or ruling onPLDT’s request, in September 2000, the NTC issued another assessment letter forthe balance of the SRF for previous years and the SRF for the year endedDecember 31, 2000.  Consequently, PLDT filed a Petition for Certiorari andProhibition with Urgent Prayer for the Immediate Issuance of a TemporaryRestraining Order with the CA.  The CA temporarily restrained the NTC fromenforcing/implementing its February and September 2000 assessments andsubsequently issued a Writ of Preliminary Injunction.   In February 2001, theCA dismissed the Petition for Certiorari and Prohibition filed by PLDT and dissolvedthe Writ of Preliminary Injunction earlier issued.

 

PLDT filed a Motion forReconsideration of the aforementioned CA decision on the ground that the samewould vitiate and not validate the decision rendered by the SC on July 28,1999, ordering the NTC to recompute the SRF to be imposed on PLDT.  On April 6,2001, the Office of the Solicitor General, or OSG, adopting its Comment datedOctober 11, 2000 as its comment on the Motion for Reconsideration filed byPLDT, stated that the NTC by insisting on its assessments is providing its owndefinition of “stock dividend” at variance with the SC decision dated July 28,1999 and is in effect enlarging its meaning and scope and expanding the conceptenvisaged therein.  Further, the OSG stated that the sole and only issue iswhether or not the SC decision directs the inclusion or exclusion of  “stockdividends” in the computation of the SRF.  The NTC also filed its comment onPLDT’s Motion for Reconsideration and PLDT filed a Reply to the NTC’s Commentstressing that the failure of NTC to deny the allegations in PLDT’s Motion forReconsideration that (a) the SC decision dated July 28, 1999 annulled and setaside the NTC SRF assessment; (b) the SC directed the NTC to make arecomputation of the said SRF assessments but that NTC did not make any suchrecomputation; (c) the NTC served anew on PLDT exactly the same SRF assessmentsthat were ordered set aside by the SC; (d) the SC decision dated July 28, 1999has become final and executory; (e) the fundamental issues raised by PLDT inits Motion for Reconsideration is not at all whether the SC decision dated July28, 1999 is right or wrong but rather whether it did or did not direct theexclusion of stock dividends in the SRF assessment; and (f) the SC decisiondated July 28, 1999 held that the SRF should lawfully be based only on suchcapital stock subscribed or paid for which PLDT received actual payment; shouldall be taken to mean that the NTC SRF assessments should exclude stockdividends.

 

Considering the September 30statutory deadline for the payment of the SRF, PLDT filed with the CA an UrgentMotion for Re-Issuance of Restraining/Injunctive Writ requesting the CA tore-issue and expand the Writ of Preliminary Injunction it had previouslyissued, to cover any and all SRF assessments, including the SRF assessments dueon September 30, 2001, pending final resolution of PLDT’s Motion forReconsideration.  The CA granted PLDT’s prayer for injunctive relief, andre-issued a Writ of Preliminary Injunction, the same to be effective until theresolution of PLDT’s Motion for Reconsideration.

 

In March 2002, the CA issued aresolution denying PLDT’s Motion for Reconsideration and dissolving the Writ ofPreliminary Injunction.  PLDT then filed with the SC a Petition for Review onCertiorari of the said CA decision. 

 

In light of the impending September30 statutory deadline for the payment of the SRF, PLDT filed with the SC anUrgent Motion for the Issuance of a Temporary Restraining Order to enjoin theNTC from enforcing any SRF assessments against PLDT pending the resolution ofits Petition for Review on Certiorari.  Considering, however, that as ofSeptember 30, 2002, no decision has yet been promulgated by the SC on theaforementioned Motion, PLDT on the said date paid the SRF for the years 2000and 2002 based on the paid-up capital including premium but excluding stockdividends.

 

Since 1976, PLDT has receivedassessments from the NTC for permit, SRF and other charges.  As of December 31,2002, PLDT has paid a total amount of Php1,249 million in SRF, of whichPhp1,094 million were paid under protest.

 

*Local franchise tax assessments.*   PLDTis presently a party to several cases pending before courts of original andappellate jurisdictions in the Philippines involving the issue of exemption ofPLDT from local franchise and business taxes. PLDT believes, based on theopinion of its legal counsel, that it is exempt from payment of local franchiseand business taxes to local government units and it is contesting the assessmentof these taxes in all cases.  

 

In a case entitled PLDT vs. the City of Davao, onAugust 22, 2001, the SC denied PLDT’s Petition for Review on Certiorari andaffirmed the decision of the Davao City Regional Trial Court upholding theassessment of local franchise tax in the amount of Php4 million for the year1999 and denying PLDT’s claim for a refund of erroneously paid franchise taxfor the year 1997 and the first to the third quarters of 1998.  The SC heldthat although the withdrawal of tax exemptions under the Local Government Codedoes not preclude Congress from granting subsequent exemptions, the issue iswhether, after the withdrawal of PLDT’s exemption under the Local GovernmentCode, PLDT again became entitled to the exemption by virtue of Section 23 ofRepublic Act No. 7925.  The SC ruled that PLDT is not entitled to thisexemption, and cited rules in statutory construction holding that taxexemptions are highly disfavored, and that legislative intent must beascertained from a consideration of the statute as a whole and not merely of aparticular provision.  The decision stated that the term “exemption” in Section23 is too general and it does not appear that, in approving Section 23 ofRepublic Act No. 7925, Congress intended it to operate as a blanket taxexemption to all telecommunication entities.  As such, the SC held that Section23 of the Republic Act No. 7925 cannot be considered as having amended PLDT’sfranchise so as to entitle it to exemption from local franchise tax.  OnOctober 1, 2001, PLDT filed a Motion for Reconsideration of the SC decision anda Motion to Refer the case to the Court En Banc and for Oral Arguments.  TheSC’s Second Division granted the Motion to Refer the Case to the Court En Banc,which referral was thereafter accepted by the SC En Banc.  The Oral Argumentswere held on January 21, 2003 and both parties submitted their Memorandumwhereupon the Motion for Reconsideration was deemed submitted for resolution.On March 25, 2003, the Supreme Court decided by a 9-to-5 vote to deny PLDT’sMotion for Reconsideration and affirmed the franchise tax assessment of DavaoCity in the amount of Php4 million.  Subsequently, PLDT paid the Davao Citygovernment franchise taxes covering the period 1999 to 2003, including the Php4million, but is seeking reconsideration of the surcharges and interests ofabout Php10 million imposed by the Davao city government.  PLDT believes thatalthough the Supreme Court decision would constitute a precedent, this will notautomatically result in the termination of the other pending local franchisetax cases with the courts rendering a decision adverse to us and PLDT willpursue all legal remedies with regard to all pending cases. 

 

On August 8, 2001, PLDT received a decision, datedJuly 16, 2001, on its petition filed with a Regional Trial Court of the City ofMakati appealing the denial of PLDT’s protest of the assessments for localfranchise taxes in the aggregate amount of Php595 million for the years 1992 to1994 and Php1,100 million for the last three quarters of 1995 up to 1998.  Thisdecision ordered PLDT to:

 

•        submit its audited financialstatements showing its gross receipts for the period from October to December31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998, so that the City of Makati canmake the proper assessment of the tax due;

 

•        pay the City of Makati thesum equivalent to 0.5% of the total gross receipts realized during the periodOctober 1 to December 31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998 afterdetermination of PLDT’s annual gross receipts for the subject years; and

 

•        henceforth pay its franchiseand business taxes pursuant to Section 137 of Republic Act No. 7160.

 

PLDT filed an appeal with the SC on September 20,2001.  In its appeal, PLDT argued, among other things, that:

 

•        The right of the City ofMakati to assess PLDT for any alleged deficiency in franchise tax for the years1992 to 1994 in the approximate amount of Php595 million has prescribed becausethe Local Government Code provides for a period of five years within which anassessment can be made by the local government unit and the City of Makatiassessed these alleged taxes against PLDT only on May 24, 1999;

 

•        PLDT is exempt from localfranchise and business taxes by virtue of the equality of treatment clauseunder the Public Telecommunications Policy Act as confirmed by the Departmentof Finance through the Bureau of Local Government Finance and is not thereforeliable to pay the City of Makati deficiency tax for the years 1995 to 1998 inthe amount approximately Php1,100 million; and

 

•        Assuming (without admitting)that PLDT is liable to pay the franchise tax, the approximate Php1,684 milliontotal assessment is erroneous as it was based on PLDT’s total annual grossreceipts derived from its overall business operations, while the LocalGovernment Code provides that the franchise tax which can be imposed by thelocal government unit shall be based on the annual gross receipts derived fromwithin the taxing local government unit territory or, in this case, from theoperations of PLDT within the City of Makati only.

 

In a resolution dated October 22, 2001, the SCremanded the case to the CA.  As required by the CA, the City of Makati hasfiled its Comment and PLDT has filed its Reply to the Comment.  On August 21,2002, the CA suspended further proceedings in the case until the SC resolvedthe similar issues raised in the City of Davao case discussed above.  

 

On April 28, 2003, the City of Makati filed a Motionto Resolve the Case citing the decision of the Supreme Court resolving PLDT’sMotion for Reconsideration.  On July 15, 2003, the Court of Appeals issued adecision modifying the decision of the Regional Trial Court in respect of theassessment made by the City of Makati for the years 1992 to 1994.  The Court ofAppeals ruled that the City of Makati cannot impose franchise tax while it wasstill a municipality.  In its decision, the Court of Appeals held that PLDT isnot liable to pay Makati City franchise tax for the period from 1992 to 1994since, during that period, a municipality was not empowered to impose franchisetax.  However, the Court of Appeals upheld the right of Makati City to imposefranchise tax starting the year 1995, when it became a city.  This decisionordered PLDT to:

 

•        submit its audited financialstatements showing its gross annual receipts for the years 1995, 1996, 1997 and1998;

 

•        pay the City of Makati the amountof the tax due, after arriving at the proper assessment; and

 

•        henceforth pay its franchise taxpursuant to Section 137 for the Local Government Code

 

PLDT intends to further appeal the issue of liabilityof PLDT for franchise tax to the Supreme Court.

PLDT is also protesting the assessment by the City of Makatiof a franchise tax deficiency for 1999 in the amount of Php298 million.  OnFebruary 26, 2001, PLDT filed a petition in the Regional Trial Court of MakatiCity to compel the Office of the Makati City Treasurer and the Makati City LawDepartment to act on PLDT’s protest of the assessed franchise tax deficiencyfor 1999.  This case was suspended pending the review by the CA of the decisionof the Makati City Regional Trial Court in the action in respect of the 1992 to1998 assessments described above.  The suspension was lifted on June 23, 2003and pre-trial was set on August 26, 2003.

 

On December 7, 2001, another case was filed by PLDTagainst the City of Makati protesting the assessment of local franchise andbusiness taxes for the year 2000 in the amount of Php307 million. Thepre-trial, originally scheduled on May 19, 2003, was postponed until August 18,2003.

 

On April 16, 2002, another case was filed by PLDTagainst the City of Manila protesting the assessment of local franchise andbusiness taxes in the amount of Php2,228 million for the period covering 1997,1998, 1999, 2000 and 2001, inclusive of penalties and interests.  PLDT filed amotion to suspend proceedings on March 10, 2003 pending the resolution by theSC of the City of Davao case discussed below.  The City of Manila submitted itscomments and oppositions on PLDT’s motion to suspend the proceedings onMarch 21, 2003 and the motion is now deemed submitted for resolution.

 

PLDT has filed other cases pertaining to theassessments made by other local government units, however, these cases involveamounts significantly lower than the assessments in the cases against the Cityof Makati and the City of Manila.  Some of these cases are pending decision bythe respective regional trial courts.  In each of the other cases in which anunfavorable decision has been rendered by the lower courts against PLDT, PLDThas filed a Petition for Review with the SC.

 

PLDT is also a respondent in a case filed by theProvince of Pangasinan with the CA.  On September 12, 2001, the CAreversed the decision of the Regional Trial Court of Lingayen, Pangasinan andheld that PLDT is exempt from the payment of the local franchise and businesstaxes.  The CA denied the Motion for Extension of Time to file a Motion forReconsideration of the decision of the Regional Trial Court filed by theProvince of Pangasinan and also denied the Motion for Reconsideration of theCourt of Appeals’ denial of the Motion for Extension of Time.  On April 26,2002, the Province of Pangasinan filed a Petition for Certiorari seeking to,among other things, set aside the decision of the CA in respect of the Motionfor Extension of Time to file a Motion for Reconsideration and affirm thedecision of the Regional Trial Court of Lingayen.  On May 29, 2002, the SCdenied this petition on the ground that “the petition is evidently used as a substitutefor the lost remedy of appeal” and the Province of Pangasinan filed a Motionfor Reconsideration.  The Motion for Reconsideration of the SC resolution filedby the Province of Pangasinan was denied with finality on June 26, 2002.

 

Similarly, in a case filed by PLDT against the City ofCebu, the Regional Trial Court declared PLDT exempt from payment of localfranchise tax and granted PLDT’s claim for refund.  This decision became finalon July 6, 2001, however, the City of Cebu filed a Petition for Relief ofJudgment with a prayer for preliminary injunction, citing the SC’s decision inthe Davao case.

 

In addition, we have received assessments for localbusiness and franchise taxes in the aggregate amount of Php24 million, all ofwhich are under administrative protest. 

 

As of June 30, 2003, the aggregateamount claimed by the plaintiffs in these lawsuits was Php4,834 million withrespect to PLDT and Php313 million with respect to Smart.  We believe that inthe event these lawsuits are decided against us, our potential liability islikely to be significantly lower than the amounts claimed by the plaintiffs.

 

***Smart***

 

*NTC SRF*.   Smart has been paying under protest the SRF assessed by theNTC.  On September 27, 2001, Smart paid the amount of Php86 millionrepresenting SRF for 2001.  On September 30, 2002, Smart paid the amount ofPhp114 million representing SRF for 2002.

 

The above amounts and all otherassessments for SRF in the past were paid under protest as Smart believes thatthe same are exorbitant and unreasonable and contrary to Section 5(g) ofRepublic Act No. 7925.  Republic Act No. 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.

 

In its protest, Smart also citedthe decision of the CA in the case of ICC Corporation vs. NTC (CA-GR SP No.45-100, September 30, 1999) which held that:  “In the guise of taxation,respondent NTC has in fact arrogated upon itself the power to tax an entity,which it is not authorized by law to do, thereby exceeding its lawfuljurisdiction and/or acting with grave abuse of discretion.  That respondent NTChas been generating income from the collection of fees from telecommunicationentities in the guise of regulation is evident and that the NTC is notclassified as tax generating agency of the government.”

 

*Local franchise tax assessments*.To date, Smart has received assessments for local franchise and business taxesfrom certain cities and municipalities in the aggregate amount of approximatelyPhp313 million.  Smart has formally protested these assessments based on thefollowing:

 

•        An opinion issued by theBureau of Local Government Finance, or BLGF, dated August 13, 1998 stating thatSmart should be considered exempt from the local franchise tax provided underSection 137 of the Local Government Code, which exemption shall be applicableonly to local franchise and business taxes.

 

•        Republic Act No. 7925 waspassed on February 20, 1995 after the passage of the Local Government Code.Under the ipso facto provision of Republic Act No. 7925, the holder of afranchise granted prior to or after the effective date of Republic Act No.7925is entitled to the benefit or any favorable provisions contained in any otherfranchises, regardless of whether such franchises were granted prior to orafter the passage of Republic Act No. 7925.

 

•        Because Smart’s legislativefranchise took effect after the effective date of the Local Government Code,the franchise tax prescribed under Section 137 thereof should be deemed to bepart of the said franchise.  Section 137 states that “cellular operators shallonly pay a franchise tax equivalent to 3% of all gross receipts of the businesstransacted under the franchise, and the said percentage shall be in lieu of alltaxes on this franchise or earnings thereof.”

 

•        In the PLDT vs. City of Davaocase, the SC took cognizance of the BLGF opinion by stating that Smart’sfranchise granted after the effectivity of the Local Government Code exemptedit from the payment of local franchise and business taxes.

 

Smart’s administrative protestagainst the Makati and Iloilo assessments were denied, while those against theDigos and General Santos assessments in the aggregate amount of Php59,447 havenot yet been decided.

 

 

Smart filed separate petitionsappealing the local franchise and business tax assessments of Makati City inthe amount of Php196 million for the calendar years 2000 and 2001, and in theamount of Php116 million for the calendar years 1995, 1998 and 1999.  Thesecases have been consolidated and are now pending before Regional Trial Court,Branch 61 of Makati City.  Smart’s earlier motion to suspend trial pendingresolution of the Smart franchise tax case in Davao was subsequently denied bysaid court.

 

Smart also filed a petitionappealing the local franchise and business tax assessment of Iloilo City in theamount of Php1 million.  This case is now pending before the Regional Trial Court,Branch 28 of Iloilo City.

 

Smart also filed a Petition forDeclaratory Relief with the SC questioning an ordinance issued by the CityCouncil of Davao on the local franchise and business taxes.  The SC decided infavor of the City of Davao and Smart’s Motion for Reconsideration of saiddecision was denied.  Smart filed with the SC a Petition for Review under Rule45 of the 1997 Rules of Procedure to appeal the aforestated decision.

*** ***

***Piltel***

*** ***

*NTC SRF.*Basedon the latest computation of deficiency supervision and regulation feesreceived from the NTC, which is dated as of September 30, 2002, Piltel’s totalassessment amounted to Php640 million , including penalty fees of Php275million.  Piltel has protested the assessments in good faith.  Piltel continuesto make payments for amounts which believes is properly due to the NTC.  OnSeptember 30, 2002, Piltel made a payment to the NTC under protest in theamount of Php9 million 

 

***Mabuhay Satellite***

 

Mabuhay Satellite was the respondent in an arbitration commencedby SS/L as a result of a dispute between the two parties concerning theirsatellite joint venture.  On June 5, 2002, Mabuhay Satellite received anarbitration decision requiring Mabuhay Satellite to pay SS/L the principalamount of US$10 million representing Mabuhay Satellite’s unpaid balance for the65% equity share in the joint venture.  As of December 31, 2002, thisamount totaled approximately US$15 million (including accrued interest) and hadbeen substantially accrued and recorded in the books of Mabuhay Satellite.  OnJune 30, 2003, Mabuhay Satellite and SS/L concluded a settlement agreementwhereof Mabuhay would lease two (2) transponders on a life-term basis to SS/Land offset the lease charges due from SS/L and receivables from Loral Skynet NetworkServices, Inc. (formerly Loral Cybestar, Inc.), an affiliate of SS/L, for afull and final settlement of the arbitral decision.

 

PLDT and some of its subsidiariesare involved in certain other legal actions and claims arising in the ordinarycourse of business.  The respective managements of PLDT and said subsidiariesbelieve that any possible loss that they may incur as a result of such legalactions, claims and assessments not covered by an allowance for losses will nothave a material effect on their respective financial positions and results ofoperations.

 

 

 

**26.    ****Fair Value ofFinancial Instruments**

 

*Financial Assets and Liabilities*

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstrument for which it is practicable to estimate such value:

 

Cash and cash equivalents:  Thecarrying amount reported in the consolidated balance sheets approximates fairvalue.

 

Accounts receivable:  The netcarrying value represents the fair value due to the short-term maturities ofthese receivables.

 

Accounts payable and accruedexpenses, dividends payable and notes payable:  The carrying value reported inthe consolidated balance sheets approximates fair value due to the short-termmaturities of these liabilities.

 

Long-term debt:  Fair value isbased on the following:

 

**Debt Type**

**Fair Value Assumptions**

Fixed Rate Loans:

U.S. dollar notes/convertible debt

Other loans in all other currencies

 

Quoted market price.

Estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of loans.

Variable Rate Loans

The carrying value approximates fair value because of recent and frequent repricing based on market conditions.

 

Preferred stock subject tomandatory redemption: the fair values were determined using an independentthird party valuation model.

 

Forward exchange contracts, foreigncurrency swaps, and interest rate swaps:  The fair values were based oncounterparty quotes.

 

Bifurcated foreign currencyforwards:  The fair values were determined using forward exchange  market ratesat the balance sheet date.

 

Bifurcated foreign currencyoptions:  The fair values were computed using an option pricing model.

 

Bifurcated call options:  The fairvalues were based on the calculation of an independent third party.

 

The estimated fair values of thefinancial instruments included in the respective account captions as ofDecember 31, 2002 are as follows:

 

** **

**Carrying Value**

**Fair Value**

 

(in millions of pesos)

**Financial assets:**

** **

** **

Cash and cash equivalents

10,974

10,974

Accounts receivable - net

17,313

17,313

Bifurcated foreign currency options (Note 27)

37

37

**Financial liabilities:**

** **

** **

Accounts payable

9,866

9,866

Accrued expenses and other current liabilities

12,246

12,246

Dividends payable

429

429

Notes payable

760

760

Long-term debt (including current portion)

190,950

176,108

Foreign exchange contracts (Note 27)

163

163

Foreign currency swaps (Note 27)

461

461

Bifurcated foreign currency forwards (Note 27)

13

13

Bifurcated call options (Note 27)

38

38

Preferred stock subject to mandatory redemption (Note 17)

 

 

   Series V

2,206

Not available

   Series VI

4,568

5,530

   Series VII

4,171

4,776

 

 

 

**27.    ****Derivatives andHedging Instruments**

** **

Effective January 1, 2001, the PLDTGroup adopted SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities, as amended.”  SFAS No. 133 establishes accounting and reportingstandards requiring that all derivatives (including certain derivativesembedded in other contracts) be recognized in the balance sheet as either anasset or liability measured at fair value.  The Statement requires that changesin the derivative’s fair value be recognized currently in earnings unless thereporting entity has elected to designate such derivative as a hedge instrumentunder the provisions of SFAS No. 133, and certain conditions are met.

 

The PLDT Group uses currency forwards, currency swaps, andinterest rate swaps to manage their market risks associated with their foreigncurrency denominated loans, and their exposures to interest rate fluctuations.The PLDT Group has elected not to designate these derivatives, as well as theembedded derivatives bifurcated from their various contracts, as hedgeinstruments under the provisions of SFAS No. 133.  In conformity with theprovisions of SFAS No. 133, the changes in the fair value of derivativeinstruments not designated as hedging instruments are recognized directlythrough earnings.  As of January 1, 2001, the cumulative adjustment to net lossas a result of the initial adoption of SFAS No. 133 amounted to a loss of Php54million, net of tax effect.  For the years ended December 31, 2002 and 2001,gains (losses) recognized in earnings, arising from fair value changes ofderivative transactions, amounted to Php603 million and (Php42 million),respectively.

 

Following are the outstandingderivative transactions of the PLDT Group as of December 31, 2002 and 2001:

*** ***

***Freestanding Derivatives***

*** ***

Forward Exchange Contracts
 

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

 

** **

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

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

 

**2002**

2001

**2002**

2001

Forward buy US$ sell peso

**US$216**

US$297

**Php103**

Php164

Forward buy JPY sell US$

**JP**Y**3,296**

JPY3,968

**Php60**

Php120

 

The above forward contracts havematurities ranging from one to six months.

 

ForeignCurrency Swaps
 

In 2002 and 2001, PLDT entered intocurrency swap agreements with various foreign counterparties.  As of December31, 2002 and 2001, the swaps have an aggregate notional amount of US$550million and US$100 million, respectively.  Under the swaps, PLDT effectivelyexchanges the principal of its U.S. dollar-denominated fixed rate notes intopeso-denominated loan exposures at an agreed swap exchange rate.  The agreedswap exchange rate is reset to the lowest Peso/US$ spot exchange rate duringthe term of the swap, subject to a minimum exchange rate.  As of December 31,2002 and 2001, the outstanding swap contracts have been reset to an averageexchange rate of Php51.27 and Php50.77, respectively.  In addition, PLDT isrequired to make semi-annual fixed or floating swap cost payments to itscounterparties, which amount to about 2.35% and 3.86% on December 31, 2002 and2001, respectively.  Following are the outstanding balances of the swaps as ofDecember 31, 2002 and 2001.

 

 

 

 

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

**Maturity**

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

**2002**

2001

 

**2002**

2001

**US$300**

US$100

2017

**Php399**

Php312

**US$250**

–

2012

**Php62**

–

 

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

 

InterestRate Swap
 

As of December 31, 2001, PLDT hadan outstanding US$/JP¥ interest rateswap agreement to swap the coupon on US$175 million of Fixed Rate Notes for afloating rate JP¥ amount.  The swap hada mark-to-market gain of Php80 million as of December 31, 2001.  The swap wasterminated in 2002 at a realized gain of Php633 million.

 

***Bifurcated Embedded Derivatives***

 

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

 

Bifurcated Foreign Currency Options
**Aggregate Notional Amount (in millions****)**

**Maturity**

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

**2002**

2001

 

**2002**

2001

**US$6**

–

2003

**Php37**

–

 

Bifurcated Foreign Currency Forwards
**Aggregate Notional Amount (in millions)**

**Maturity**

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

**2002**

2001

 

**2002**

2001

**US$5**

US$3

Less than 1 year

**(Php5)**

Php18

**US$3**

US$6

Over 1 year (up to 2007) 

**Php18**

Php54

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Bifurcated Call Options**

** **

Pursuant to Piltel’s debt restructuringplan, PLDT issued its Series VI and VII Convertible Preferred Stock in 2001(see *Note 15 – Long Term Debt* and *Note 17 - Preferred Stock Subject to Mandatory Redemption*).  Each shareof Series VI and VII Convertible Preferred Stock is convertible at any time atthe option of the holder into one PLDT common share.  On the date immediatelyfollowing the seventh anniversary of the issue date of the Series VIConvertible Preferred Stock and on the eighth anniversary of the issue date ofthe Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted to PLDT common shares.  For 30days thereafter, the holders of these mandatorily converted common shares havethe option to sell such common shares back to PLDT for US$36.132 per share andJPY4,071.89 per share for Series VI andVII, respectively.  As of December 31, 2002 and 2001, the net mark-to-marketvalue of these embedded call options amounted to about Php38 million and Php324million, respectively.  Such mark-to-market value is based on the independentcalculation of a third party. 

 

 

 

**28.    ****Reportable Segments**

 

Our operating businesses areorganized and managed separately according to the nature of the products andservices, with each segment representing a strategic business unit that offersdifferent products and serves different markets.

 

We have organized our business intothree main segments:

 

•        Fixed Line —fixed line telecommunications services primarily provided through PLDT.  Wealso provide fixed line services through PLDT’s subsidiaries Clark Telecom,Subic Telecom, MaraTel, which together account for approximately 1% of ourconsolidated fixed lines in service, and PLDT Global; 

 

•        Wireless —wireless telecommunications services provided through our cellular serviceproviders, namely PLDT’s subsidiaries Smart and Piltel, and satelliteoperators, namely PLDT’s subsidiaries Mabuhay Satellite, ACeS Philippines andTelesat; and 

 

•        Information andCommunications Technology — information and communications infrastructureand services 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*. 

 

 

Theresults of the reportable segments are derived directly from the PLDT Group’smanagement reporting system. The results are based on the PLDT Group’s methodof internal reporting.  The segment assets as of December 31, 2002, 2001and 2000 and results of operations of our reportable segments for the yearsended December 31, 2002, 2001 and 2000 reported under Philippine GAAP and reconciledto U.S. GAAP are as follows:

 

 

**Fixed Line**

**Wireless**

**Information and  Communications Technology**

**Eliminations**

**Reconciliation**

**Adjustments**

**(see Notes below)**

**Total**

* *

(in millions of pesos)

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

 

 

 

Operating revenues

47,784

34,628

970

(3,219)

        12,580 (a)

92,743

External revenues

45,518

33,704

941

- 

        12,580 (a)

92,743

Inter-segment revenues

2,266

924

29

 (3,219)

 -

-

Segment profit (loss) before income tax

12,985

8,307

(508)

                2

(25,385) (b)

(4,599)

Segment assets

263,043

77,035

3,962

(44,171)

(30,218) (c)

269,651

Depreciation 

13,133

10,644

333

-

(6,629) (d)

17,481

Income tax expense (benefit)

876

716

-

-

 

(154) (f)

1,438

Interest expense

10,843

3,028

15

-

116 (e)

14,002

 

 

 

 

 

 

 

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

 

 

 

Operating revenues

46,477

24,582

469

(991)

          9,757 (a)

    80,294

External revenues

46,420

23,648

469

-

          9,757 (a)

    80,294

Inter-segment revenues

57

934

-

(991)

 -

            -

Segment profit (loss) before income tax

13,849

3,437

(311)

(332)

(46,833) (b)

(30,190)

Segment assets

232,221

110,901

4,175

(41,029)

(21,391) (c)

  284,877

Depreciation 

13,389

8,020

128

-

(5,319) (d)

   16,218

Income tax expense (benefit)

722

312

-

-

 

(3,604) (f)

(2,570)

Interest expense

10,833

3,780

-

-

84 (e) 

   14,697

* *

 

 

 

 

 

 

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

 

 

 

Operating revenues

45,967

15,487

239

(1,125)

(220) (a)

    60,348

External revenues

45,967

14,362

239

-

(220) (a)

    60,348

Inter-segment revenues

-

1,125

-

(1,125)

-

             -

Segment profit (loss) before income tax

14,661

(3,656)

(72)

(134)

    (45,529) (b)

    (34,730)

Segment assets

246,694

109,751

1,435

(31,109)

 

(36,248) (c)

  290,523

Depreciation 

10,771

7,090

35

-

(5,140) (d)

    12,756

Income tax expense (benefit)

1,792

28

2

-

 

(7,435) (f)

             (5,613)

Interest expense

12,488

2,060

14

-

(1,021) (e)

    13,541

 

 

Note:

 

a.     Adjustmentsto revenue results from the net effect of recording of handset sales as revenueinstead of as an offset against selling and promotions expense and certainincentives provided to dealers and customers as part of multiple elementarrangements and the amortization of activation fees. 

b.     Adjustmentsto segment profit and loss results from the net effects of adjustments forimpairment of operating assets, purchase accounting adjustments, reversal ofcapitalized foreign exchange losses and related revenue adjustments. 

c.     Adjustmentsto segment assets results from the impairment of certain operating assets,purchase accounting adjustments, reversal of capitalized foreign exchangelosses and deferred tax assets not allocable to specific segments.

d.     Adjustmentsfor depreciation results from purchase accounting adjustments, impairment ofcertain operating assets and the reversal of depreciation on capitalizedforeign exchange losses.

e.     Adjustmentsto interest expense are related to the capitalization of interest; the upwardadjustment relates to the additional interest on Piltel’s unrestructured debt.

f.     Adjustmentsto income tax expense are related to other adjustments mentioned above.

 

 

 

**29.    ****Other Matters**

** **

a.   SupplementalDisclosures of Cash Flow Information

 

 

**2002**

2001

2000

(a)   
 

(As Restated)

 

(in millions of pesos)

Cash paid during the year for:

 

 

 

Income tax 

**351**

1,009

1,781

Interest: 

** **

 

 

   Capitalized to property, plant and equipment

**1,344**

2,404

2,603

Charged to operations

**13,956**

16,071

14,640

Interest income received

**735**

1,031

1,844

 

** **

 

 

Supplemental schedule of noncash investing and financing activities:

** **

 

 

Preferred stock subject to mandatory redemption issued

**36**

10,165

–

Long-term debt restructured

**82**

20,080

–

 

In connection with the acquisition of investments, liabilitieswere assumed as follows:

 

 

**2002**

2001

2000

(b)   
 

(As Restated)

 

(in millions of pesos)

Fair value of assets acquired

–

1,290

–

Cash paid for the capital stock

–

(813)

–

Liabilities assumed

–

477

–

Acquisition of property and equipment through long-term debt availment

–

13,259

–

** **

 

PLDT completed the acquisition of the entire issuedshare capital of Smart on March 24, 2000 valued at approximately Php38,188through the issuance of PLDT common shares to Smart’s shareholders.  Inconnection with the acquisition, the excess of the total acquisition cost overthe fair value of the net assets acquired and the value of customers acquiredamounted to Php28,996.  The net assets acquired from Smart in 2000 are asfollows:

 

 

(in millions of pesos)

Cash and cash equivalents

1,901

Accounts receivable

4,045

Inventories and supplies

1,146

Other current assets

1,659

Property, plant and equipment

26,231

Investments

302

Other noncurrent assets

268

Notes payable

(7,163)

Accounts payable

(1,844)

Accrued and other current liabilities

(1,937)

Income tax payable

(29)

Long-term debt

(8,701)

Deferred credits and other noncurrent liabilities

(6,585)

Minority interests

(101)

 

9,192

 

b.     InterconnectionAgreements

 

PLDT has existing interconnectionagreements with nine International Gate Facilities, or IGF operators, six InterExchange Carriers, or IXCs, six Cellular Mobile Telephone Systems, or CMTSoperators, 70 LECs (including members of the Philippine Association of PrivateTelephone Companies, Inc.), and 12 paging and trunk radio operators.  Theseinterconnection agreements include provisions for settlement and payment ofcharges.  Settlements with interconnecting IGF operators and CMTS operators forlocal calls are in the form of access charges.  Settlements withinterconnecting IXCs and LECs for toll calls are based on hauling and accesscharges, and to some extent, revenue sharing.  Settlement also involves paymentof access charges, but settlement for toll calls is on a revenue-sharingbasis.  LEC to LEC interconnection with hauling from one service area toanother service area is settled based on trunk charges, while overlay LEC toLEC interconnection in a given service area is without charges.  Paging andtrunk radio interconnection settlements are based on fixed charges.  

 

c.     ProposedMetering of Local Exchange Service

 

The proposed metering of PLDT’slocal exchange service has been temporarily suspended for further review by theNTC.

 

d.     U.S.Federal Communications Commission, or FCC, Proceedings on Termination Rates

 

In May 2002, PLDT advised AT&TCorp., or AT&T, WorldCom, Inc., MCI, and other carriers of PLDT’s need toincrease its termination rates by August 2002. Despite numerous negotiationsessions in 2002 and 2003, AT&T and MCI refused to accept any rateincreases.  PLDT unilaterally extended its prior termination charges to eachcarrier while continuing offers to negotiate, first from August 1, 2002 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 more than 20 U.S. carriers, havethen 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 either AT&Tor MCI, effective as of February 1, 2003, PLDT stopped terminating traffic sentdirectly by each of AT&T and MCI.

 

On February 7, 2003, AT&T andMCI filed separate petitions with the U.S. FCC requesting the U.S. FCC to takeaction to protect U.S. international carriers and U.S. consumers from alleged“whipsawing” behavior occurring on the U.S.-Philippine Route.  “Whipsawing” isa form of anti-competitive behavior that involves the ability of foreigncarriers to obtain unduly favorable terms and conditions from U.S.international service providers by setting competing U.S. carriers against oneanother.

 

On February 7, 2003, the NTC of theRepublic of the Philippines directed Philippine carriers to take one of twodifferent courses of action, depending on whether such carriers had effectivetermination rates with their counterparties.  If PLDT had “existing andeffective agreements with foreign telecommunication carriers relative totermination rates”, it should “comply with the terms thereof, specifically inmaintaining the flow of traffic in and between circuits and facilities coveredby such agreements.”  If, however, the counterparty and PLDT were “withoutexisting and effective agreements relative to termination rates,” then PLDT is“encouraged ... to negotiate and conclude agreements” with the counterparty, and“the parties may agree on provisional/interim arrangements for continuity ofservice.”  Each of AT&T and MCI immediately rejected PLDT’s offer for aninterim termination rate agreement.

 

On February 26, 2003, the NTC issued an Order confirming that, pursuant to its February 7 Order,“ it is understoodthat absent any provisional or interim arrangement or agreement” with U.S.carriers, there would be no provision of termination services between theparties “who are thereby encouraged to seek other routes or options toterminate traffic to the Philippines.”

 

On February 28, 2003, PLDT and MCIreached an “interim agreement” effective through March 31, 2003, whereby PLDTagreed to provide direct service under a revised termination rate structurewhile the parties negotiated a final termination rate agreement.  This interimagreement expired on April 15, 2003.

 

On March 10, 2003, theInternational Bureau of the FCC granted the request of AT&T and MCI andissued an Order directing all facilities-based carriers subject to U.S. FCCjurisdiction to suspend payments for termination services to PLDT, GlobeTelecom, Inc., Bayan Telecommunications Philippines, Inc., DigitalTelecommunications Philippines, Inc., Smart and Subic Telecom until such timeas the U.S. FCC issues a Public Notice that AT&T’s circuits on theU.S.-Philippine route are fully restored.  The Order also removed the Philippinesfrom the list of U.S.-international routes approved for the provision ofInternational Simple Resale.  As of June 30, 2003, receivables from U.S.carriers amounted to approximately US$19 million, of which US$8 million wasattributable to PLDT, US$8 million to Smart and US$3 million to Subic Telecom.

 

In response to the ruling of theInternational Bureau of the FCC, the NTC issued in a Memorandum Order datedMarch 12, 2003 directing all affected Philippine carriers “(1) not to acceptterminating traffic via direct circuits from U.S. facilities-based carriers whodo not pay Philippine carriers for services rendered; and (2) to take allmeasures necessary to collect payments for services rendered in order topreserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”

 

The NTC also stated in its March 12, 2003 Order that the termination rates offered by PLDT are “fair andreasonable.”  These rates, US$0.12 per minute for calls terminating on thefixed-line network and US$0.16 per minute for calls terminating on mobilenetworks, are well below the FCC benchmark settlement rate of US$0.19 per minutefor lower middle income countries such as the Philippines and alsosubstantially below the settlement rate of US$0.238 per minute suggested by theInternational Telecommunications Union for countries with teledensity between 1to 5 telephones per 100 population.  

 

On April 9, 2003, we filed withthe U.S. FCC an application for review of the International Bureau’s March 10,2003 Order.  On April 24, 2003, AT&T and MCI filedOppositions to our application for review of the International Bureau’s March 10, 2003 Order and on May 5, 2003, we filed our reply to theseOppositions.