We disclose that at the Boardof Directors meeting of Philippine Long Distance Telephone Company (the"Company") held on 10 June 2003, the Board of Directors of the Company approved theadoption of the attached consolidated and non-consolidated financial statementsof the Company for the three years ended December 31, 2002.

 

At the request of theCompany, SyCip Gorres Velayo & Co., or SGV, a member practice of Ernst& Young Global, or EY, re-audited the consolidated and non-consolidatedfinancial statements of the Company for 2000 and 2001.  SGV rendered anunqualified audit report on the Company’s consolidated and non-consolidatedfinancial statements as of and for the years ended December 31, 2000, 2001 and2002.  There are no material changes in the previously filed consolidated andnon-consolidated financial statements of the Company. 

 

 

SIGNATURE

 

Pursuant to the requirementsof the Securities Regulation Code, the Registrant has duly caused this reportto be signed on its behalf by the undersigned hereto duly authorized.

 

|   |  

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

 

 

 

/s/  MA. LOURDES C. RAUSA-CHAN

Corporate Secretary

  |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

 

Date:June 10, 2003

 

 

 

DistributionCopies:           5 copies – Securities & Exchange Commission

    1 copy   – Philippine Stock Exchange

    1 copy   – Company Secretary

 

 

 

***SGV******&******C******O***

    

 

 

 

 

 

 

Report of Independent Auditors
 

 

 

The Stockholders and theBoard of Directors

Philippine Long DistanceTelephone Company

 

 

We have audited the accompanying consolidated andnon-consolidated balance sheets of Philippine Long Distance Telephone Companyand Subsidiaries and of Philippine Long Distance Telephone Company,respectively, as of December 31, 2002, 2001 and 2000, and the relatedconsolidated and non-consolidated statements of income, changes instockholders’ equity and cash flows for the years then ended.  These financialstatements are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.  We did not audit the financial statements of Mabuhay PhilippinesSatellite Corporation, ACeS Philippines Cellular Satellite Corporation, ePLDT,Inc. and other subsidiaries.  The consolidated financial statements reflecttotal assets of these subsidiaries of Php18,873 million, Php16,764 million andPhp14,872 million as of December 31, 2002, 2001 and 2000, respectively, andtotal operating revenues of Php5,508 million, Php2,552 million and Php2,034million for the years then ended, respectively.  In the non-consolidatedfinancial statements, the carrying value of the investments in thesesubsidiaries amount to Php5,374 million, Php6,091 million and Php4,499 millionas of December 31, 2002, 2001 and 2000, respectively, and the equity in netlosses for the years then ended amount to Php1,115 million, Php89 million andPhp25 million, respectively.  The financial statements of these subsidiarieswere audited by other auditors whose reports have been furnished to us, and ouropinion, insofar as it relates to the amounts included for those entities, isbased solely on the reports of the other auditors.

 

We conducted our audits in accordance with auditingstandards generally accepted in the Philippines.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that ouraudits and the reports of the other auditors provide a reasonable basis for ouropinion.

 

In our opinion, based on ouraudits and the reports of other auditors, the consolidated and non-consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Philippine Long Distance Telephone Companyand Subsidiaries and of Philippine Long Distance Telephone Company,respectively, as of December 31, 2002, 2001 and 2000, and the results of theiroperations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in the Philippines.

 

As fully discussed in Note3 to the financial statements, the Company changed in 2002 its method ofaccounting for its investment in the shares of stock of Pilipino TelephoneCorporation as provided under Statement of Financial Accounting Standards28/International Accounting Standards 28, “Accounting for Investments inAssociates.”  Also, as discussed in Note 3, the Company and certainsubsidiaries have given retroactive effect to the change in accounting forprepaid cards.

 

 

 

 

 

/s/ SYCIP GORRES VELAYO &CO.

Makati City, Philippines

 

June 6, 2003

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**BALANCE SHEETS**

**December 31, 2002****,2001 and 2000**

**(In Million Pesos)**

 

** **

**Consolidated**

 

**Non-Consolidated**

** **

2000

2001

**2002**

 

2000

2001

**2002**

** **

(As restated - Note 3)

 

 

(As restated - Note 3)

 

**ASSETS**

**Current Assets**

** **

** **

 

 

 

 

 

Cash and cash equivalents (Notes 5 and 22)

9,674

4,123

**10,876**

** **

7,781

2,336

**4,165**

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

27,101

26,797

**20,124**

** **

22,109

21,016

**19,376**

Inventories and supplies – net (Note 7)

3,374

5,204

**4,507**

** **

1,778

3,685

**2,709**

Deferred income tax – net (Notes 3 and 18)

1,725

1,626

**3,772**

** **

1,111

1,346

**3,002**

Prepayments and other current assets

1,650

2,258

**1,879**

** **

432

946

**1,403**

                  Total Current Assets

43,524

40,008

**41,158**

** **

33,211

29,329

**30,655**

**Noncurrent Assets**

** **

 

 

** **

 

 

 

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

272,398

256,477

**252,025**

** **

198,521

197,647

**190,722**

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

5,303

6,424

**5,470**

** **

29,918

35,140

**39,726**

Other noncurrent assets – net  (Notes 9, 10, 15 and 23)

4,928

4,985

**4,988**

** **

1,809

809

**1,613**

Total Noncurrent Assets

282,629

267,886

**262,483**

** **

230,248

233,596

**232,061**

 

326,153

307,894

**303,641**

** **

263,459

262,925

**262,716**

 

** **

** **

 

** **

 

 

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

 

 

 

 

 

 

 

Notes payable (Note 22)

4,117

6,462

**760**

** **

50

1,962

**720**

Accounts payable (Notes 15 and 22)

15,293

12,234

**9,694**

** **

12,006

8,674

**7,397**

Accrued and other current liabilities  (Notes 3, 11, 15, 18 and 22)

10,239

10,692

**12,531**

** **

5,164

5,243

**5,537**

Income tax payable (Note 18)

456

355

**982**

** **

373

181

**538**

Dividends payable (Note 14)

481

323

**424**

** **

476

323

**424**

Current portion of long-term debt  (Notes 8, 12, 15, 22 and 23)

12,857

19,286

**19,176**

** **

10,892

14,274

**11,962**

Total Current Liabilities

43,443

49,352

**43,567**

** **

28,961

30,657

**26,578**

**Noncurrent Liabilities**

** **

 

 

** **

 

 

 

Long-term debt – net of current portion (Notes 8, 12, 15, 22 and 23)

179,068

149,611

**148,587**

** **

135,297

127,241

**127,362**

Deferred income tax – net (Note 18)

8,542

8,622

**10,699**

** **

8,131

8,291

**9,231**

Deferred credits and other noncurrent liabilities  (Notes 3, 13, 15, 16 and 23)

9,339

12,795

**11,541**

** **

6,019

10,175

**11,157**

Total Noncurrent Liabilities

196,949

171,028

**170,827**

** **

149,447

145,707

**147,750**

Minority Interest in Consolidated Subsidiaries

710

953

**859**

** **

**–**

–

**–**

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

85,051

86,561

**88,388**

** **

85,051

86,561

**88,388**

 

326,153

307,894

**303,641**

** **

263,459

262,925

**262,716**

* *

*See accompanying Notes toFinancial Statements.*

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF INCOME**

**For the Years Ended****December 31, 2002****,2001 and 2000**

**(In Million Pesos, Except Per Share Amounts)**

** **

** **

**Consolidated**

 

**Non-Consolidated**

** **

2000

2001

**2002**

 

2000

2001

**2002**

** **

(As restated - Note 3)

 

 

(As restated - Note 3)

 

** **

** **

 

 

 

 

 

 

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

** **

 

 

 

 

 

 

Fixed line services:

** **

 

 

 

 

 

 

Local exchange

18,978

21,376

**21,167**

 

18,250

21,021

**21,065**

International long distance

13,233

11,454

**10,640**

 

12,790

11,271

**9,991**

National long distance

10,550

8,388

**7,668**

 

10,136

8,224

**7,583**

Data and other network

2,963

4,776

**5,480**

 

2,911

4,714

**5,371**

Miscellaneous

243

426

**563**

 

183

377

**843**

 

45,967

46,420

**45,518**

 

44,270

45,607

**44,853**

Wireless services

14,362

23,648

**33,704**

 

–

–

–

Information and communications technology services

239

469

**941**

 

–

–

–

 

60,568

70,537

**80,163**

 

44,270

45,607

**44,853**

**OPERATING****EXPENSES**

** **

 

 

 

 

 

 

Depreciation and amortization (Note 8)

17,896

21,537

**24,110**

 

10,122

12,676

**12,917**

Compensation and benefits (Note 16)

8,725

9,001

**10,179**

 

7,221

7,080

**6,987**

Selling and promotions (Note 3)

8,590

8,032

**8,427**

 

1,651

1,301

**1,284**

Maintenance (Note 15)

4,064

4,636

**4,886**

 

3,021

3,250

**3,100**

Provision for doubtful accounts (Note 6)

3,010

3,184

**4,024**

 

2,326

2,868

**3,311**

Rent (Note 15)

1,644

2,342

**2,827**

 

1,711

1,743

**1,671**

Professional and other service fees (Note 15)

1,478

1,664

**1,676**

 

1,101

1,007

**1,005**

Taxes and licenses (Note 21)

744

751

**855**

 

509

396

**503**

Other operating costs (Note 15) 

3,618

2,747

**2,393**

 

1,976

1,559

**1,143**

 

49,769

53,894

**59,377**

 

29,638

31,880

**31,921**

**NET OPERATING INCOME**

10,799

16,643

**20,786**

 

14,632

13,727

**12,932**

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

11,479

14,543

**16,123**

 

12,931

10,191

**8,960**

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

(680)

2,100

**4,663**

 

1,701

3,536

**3,972**

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

1,822

1,033

**1,592**

 

2,069

708

**854**

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

(2,502)

1,067

**3,071**

 

(368)

2,828

**3,118**

**MINORITY INTEREST IN NET LOSSES OF CONSOLIDATED SUBSIDIARIES**

(2,134)

(1,761)

**(47)**

 

–

–

**–**

**NET INCOME (LOSS)**

(368)

2,828

**3,118**

 

(368)

2,828

**3,118**

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

** **

 

** **

 

 

 

 

Basic

(9.71)

7.85

**8.71**

 

(9.71)

7.85

**8.71**

Diluted

**–**

7.85

**8.71**

 

–

7.85

**8.71**

* *

*See accompanying Notes to**Financial Statements.*

** **

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**For the Years Ended****December 31, 2002****,2001 and 2000**

**(In Million Pesos)**

** **

 

**Preferred Stock**

** **

**Common Stock**

** **

**Capital in Excess of  Par Value**

** **

**Retained Earnings**

** **

**Total**

Balances at January 1, 2000

 

 

 

 

 

 

 

 

 

As previously reported

3,625

 

606

 

21,456

 

32,166

 

57,853

Effect of Smart acquisition (Note 2)

–

 

176

 

13,587

 

1,597

 

15,360

As restated

3,625

 

782

 

35,043

 

33,763

 

73,213

Net loss for the year 

 

 

 

 

 

 

 

 

 

As previously reported

–

 

–

 

–

 

1,108

 

1,108

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

–

 

–

 

–

 

(1,476)

 

(1,476)

As restated

–

 

–

 

–

 

(368)

 

(368)

Cash dividends

–

 

–

 

–

 

(1,988)

 

(1,988)

Issuance of capital stock (Note 14)

296

 

61

 

13,837

 

–

 

14,194

Balances at December 31, 2000 (As restated - Note 3)

3,921

 

843

 

48,880

 

31,407

 

85,051

Balances at January 1, 2001

 

 

 

 

 

 

 

 

 

As previously reported

3,921

 

843

 

48,880

 

32,883

 

86,527

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

–

 

–

 

–

 

(1,476)

 

(1,476)

As restated

3,921

 

843

 

48,880

 

31,407

 

85,051

Net loss for the year

 

 

 

 

 

 

 

 

 

As previously reported

**–**

 

**–**

 

**–**

 

3,418

 

3,418

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

–

 

–

 

–

 

(590)

 

(590)

As restated

–

 

–

 

–

 

2,828

 

2,828

Cash dividends

**–**

 

–

 

–

 

(1,666)

 

(1,666)

Issuance of capital stock (Note 14)

321

 

2

 

25

 

–

 

348

Balances at December 31, 2001 (As restated - Note 3)

4,242

 

845

 

48,905

 

32,569

 

86,561

Balances at January 1, 2002

 

 

 

 

 

 

 

 

 

As previously reported

4,242

 

845

 

48,905

 

34,635

 

88,627

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

–

 

–

 

–

 

(2,066)

 

(2,066)

As restated

4,242

 

845

 

48,905

 

32,569

 

86,561

Net income for the year

**–**

 

–

 

–

 

3,118

 

3,118

Cash dividends

**–**

 

–

 

–

 

(1,683)

 

(1,683)

Partial redemption of Series IV Preferred Stock (Note 14)

(72)

 

**–**

 

**–**

 

**–**

 

(72)

Issuance of capital stock (Note 14)

414

 

2

 

48

 

–

 

464

**Balances at****December 31, 2002******

**4,584**

** **

**847**

** **

**48,953**

** **

**34,004**

** **

**88,388**

* *

*See accompanying Notes to Financial Statements.*

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF CASH FLOWS**

**For the Years Ended****December 31, 2002****, 2001and 2000**

**(In Million Pesos)**

** **

** **

**Consolidated**

** **

**Non-Consolidated**

** **

2000

 

2001

** **

**2002**

** **

2000

** **

2001

 

**2002**

** **

(As restated - Note 3)

 

 

** **

(As restated - Note 3)

 

 

**CASH FLOWS FROM OPERATING ACTIVITIES**

 

 

** **

** **

 

** **

 

** **

** **

** **

** **

 

** **

 

 

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

(680)

 

2,100

** **

**4,663**

** **

1,701

 

3,536

 

**3,972**

Adjustments for:

 

 

 

** **

** **

** **

 

 

 

 

** **

Depreciation and amortization

17,896

 

21,537

** **

**24,110**

** **

10,122

 

12,676

 

**12,917**

Provision for doubtful accounts

3,010

 

3,184

** **

**4,024**

** **

2,326

 

2,868

 

**3,311**

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

(11)

 

559

** **

**4,163**

** **

5,284

 

(401)

 

**(645)**

Others

347

 

429

** **

**1,227**

** **

(1)

 

**–**

 

**(8)**

Interest expense

14,562

 

14,613

** **

**13,886**

** **

9,741

 

10,825

 

**10,837**

Interest income

(2,291)

 

(1,383)

 

**(1,061)**

** **

(915)

 

(184)

 

**(69)**

Dividend income

–

** **

**–**

** **

**–**

** **

–

 

**–**

** **

**(295)**

Operating income before working capital changes

32,833

 

41,039

** **

**51,012**

** **

28,258

 

29,320

 

**30,020**

Decrease (increase) in:

 

 

 

** **

** **

** **

 

 

 

 

** **

Accounts receivable

(3,649)

 

(5)

 

**2,604**

** **

(2,889)

 

(1,873)

 

**(1,621)**

Inventories and supplies

(938)

 

(1,206)

** **

**306**

** **

(94)

 

(957)

 

**977**

Prepayments and other current assets

33

 

(312)

** **

**332**

** **

805

 

(350)

 

**(254)**

Increase (decrease) in:

 

 

 

** **

** **

** **

 

 

 

 

** **

Accounts payable

7,050

 

(282)

** **

**(3,456)**

** **

4,461

 

(1,017)

 

**(1,155)**

Accrued and other current liabilities

3,244

 

1,713

** **

**3,710**

** **

1,651

 

899

 

**433**

Cash generated from operations

38,573

 

40,947

** **

**54,508**

** **

32,192

 

26,022

 

**28,400**

Income taxes paid

(1,781)

 

(1,009)

** **

**(351)**

** **

(1,656)

 

(974)

 

**(181)**

Net cash provided by operating activities

36,792

 

39,938

** **

**54,157**

** **

30,536

 

25,048

 

**28,219**

**CASH FLOWS FROM INVESTING ACTIVITIES**

 

 

 

** **

** **

** **

 

 

 

 

** **

Net additions to property, plant and equipment

(24,506)

 

(28,150)

** **

**(13,355)**

** **

(9,625)

 

(8,179)

 

**(5,759)**

Interest paid – capitalized to property,  plant and equipment

(2,603)

 

(2,404)

** **

**(1,344)**

** **

(1,895)

 

(1,506)

 

**(1,173)**

Net reduction in (additions to) investments

(402)

 

(1,230)

** **

**(598)**

** **

(11,460)

 

(4,351)

 

**1,966**

Decrease (increase) in other noncurrent assets

(354)

 

(1,106)

** **

**(547)**

** **

(58)

 

1,001

 

**(824)**

Interest received

1,844

 

1,031

** **

**732**

** **

926

 

187

 

**68**

Dividends received

–

** **

**–**

** **

**–**

** **

–

** **

96

 

**1,636**

Purchase of Smart’s local exchange carrier assets

–

 

**–**

** **

**–**

** **

(8,789)

 

**–**

 

**–**

Net cash used in investing activities

(26,021)

 

(31,859)

** **

**(15,112)**

** **

(30,901)

 

(12,752)

 

**(4,086)**

*(Forward)*

 

 

 

** **

** **

** **

 

 

 

 

 

 

 

**Consolidated**

** **

**Non-Consolidated**

2000

 

2001

 

**2002**

** **

2000

 

2001

** **

**2002**

** **

(As restated - Note 3)

 

 

** **

(As restated - Note 3)

 

 

**CASH FLOWS FROM FINANCING  ACTIVITIES**

** **

 

 

 

 

** **

** **

 

 

** **

 

Proceeds from long-term debt

22,025

 

17,045

 

**32,586**

** **

13,185

 

5,383

** **

**26,371**

Payments of long-term debt

(19,241)

 

(15,829)

 

**(42,019)**

** **

(9,031)

 

(13,629)

 

**(32,521)**

Proceeds from (payments of) notes payable 

(10,895)

 

1,581

 

**(5,743)**

** **

(6,226)

 

1,931

** **

**(1,233)**

Interest paid – net of capitalized portion

(14,640)

 

(16,071)

 

**(13,956)**

** **

(10,045)

 

(11,903)

** **

**(10,980)**

Increase (decrease) in deferred credits and other noncurrent liabilities

(711)

** **

1,209

 

**(2,067)**

** **

82

 

1,970

** **

**(2,853)**

Cash dividends paid

(1,876)

 

(1,821)

 

**(1,582)**

** **

(1,876)

 

(1,820)

** **

**(1,582)**

Proceeds from issuance of capital stock

14,194

 

232

 

**464**

** **

14,194

 

232

** **

**464**

Redemption of preferred stock

–

 

**–**

 

**(72)**

** **

–

 

**–**

** **

**(72)**

Net cash provided by (used in) financing activities

(11,144)

 

(13,654)

 

**(32,389)**

 

283

 

(17,836)

** **

**(22,406)**

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

757

 

24

 

**97**

** **

789

 

95

** **

**102**

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

384

 

(5,551)

 

**6,753**

** **

707

 

(5,445)

** **

**1,829**

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

9,290

 

9,674

 

**4,123**

** **

7,074

 

7,781

** **

**2,336**

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

9,674

 

4,123

 

**10,876**

** **

7,781

 

2,336

** **

**4,165**

* *

*See accompanying Notes to Financial Statements.*

* *

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**NOTES TO FINANCIAL STATEMENTS**

 

 

**1.       ****CorporateInformation**

 

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

 

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

 

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

 

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

 

As of December 31, 2002, wehad 19,139 employees on a consolidated basis and 12,131 on a non-consolidatedbasis.  As of December 31, 2001, we had 18,531 and 12,915 employees on a consolidatedand non-consolidated basis, respectively.  As of December 2000, we had 17,256employees on a consolidated basis and 13,285 on a non-consolidated basis.

 

The registeredoffice address of PLDT is Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

 

 

**2.       ****Basis of FinancialStatement Preparation**

 

Our financialstatements have been prepared in conformity with generally accepted accountingprinciples in the Philippines, or Philippine GAAP, based on the historical costconvention.

 

Our consolidatedfinancial statements include the financial statements of PLDT and those of thefollowing subsidiaries (collectively, the PLDT Group), which were allincorporated in the Philippines except for PLDT Global Corporation, orPLDT Global, which was incorporated in theBritish Virgin Islands.

 

** **

** **

**Percentage of Ownership**

**Name of Subsidiary/Investee**

**Principal Activity**

2000

2001

**2002**

**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

60.0

100.0

**100.0**

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

–

92.3

**97.5**

**Wireless**

 

** **

 

 

Smart Communications, Inc., or Smart,  and subsidiaries

Cellular mobile services

100.0

100.0

**100.0**

Telesat, Inc., or Telesat

Satellite communications services

94.4

94.4

**94.4**

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services

88.5

88.5

**88.5**

Mabuhay Philippines Satellite  Corporation, or Mabuhay Satellite

Satellite communications services

67.0

67.0

**67.0**

Pilipino Telephone Corporation, or  Piltel, and subsidiaries*****

Cellular mobile and  telecommunications services

57.6

45.3

**45.3**

**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**

* *

** Ceased to be treated as aconsolidated subsidiary effective**June 27, 2001**and subsequently accounted for under the equity method through**December 31, 2001**and on a cost basis thereafter.  See Note 3 - Accounting Changes.*

* *

In thenon-consolidated financial statements, investments in subsidiaries, except forthe investment in Piltel in 2002 and 2001 (see *Note 3 - Accounting Changes,Investments in Piltel*), are accounted for under the equity method.

 

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

 

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

 

Minority interestsrepresent the equity interests in MaraTel, Telesat, ACeS Philippines, MabuhaySatellite and Piltel and subsidiaries not held by the PLDT Group.

 

***Investments in Shares of Stock***

 

Investments inshares of stock of companies where PLDT’s ownership interest ranges from 20% to50% (collectibly referred to as associates), except for the investments inPiltel in 2002 and 2001(see *Note 3 – Accounting Changes, Investments inPiltel*), are accounted for under the equity method of accounting.  Theseare entities in which the PLDT Group has significant influence and which isneither a subsidiary nor a joint venture of the PLDT Group.  The investments inassociates are carried in the balance sheet at cost plus post-acquisitionchanges in the PLDT Group’s share in net assets of associates, less anyimpairment in value, if any.  The statements of income reflect the PLDT Group’sshare in the results of operations of associates.  Unrealized gains arisingfrom transactions with our associates are eliminated to the extent of the PLDTGroup’s interests in associates, against the investments in associates.  ThePLDT Group’s investments in its associates include goodwill (net of accumulatedamortization) on acquisition, which are treated in accordance with theaccounting policy for goodwill, See *Note 4 – Summary of SignificantAccounting Policies.*

 

Other investmentsin companies for which no significant influence is exercised are stated atcost, less allowance for any significant and permanent decline in market value.

 

***Investment in Smart***

 

As described in *Note15 – Related Party Transactions*, the acquisition of Smart by PLDT throughthe issuance of PLDT common shares in exchange for all issued and outstandingshares of Smart was completed on March 24, 2000.

 

The transactionwas accounted for in a manner similar to the pooling of interests method sincethe transfers and exchanges are between companies under the effective controlof a common shareholder.  Accordingly, the former bases of accounting for bothPLDT and Smart are retained and are accounted for at historical cost or at thepredecessor’s carrying amounts.  The recorded assets and liabilities of PLDTand Smart are carried forward to the combined corporation at their recordedamounts.  The income of the combined corporation includes the income of PLDTand Smart as if the transaction occurred at the beginning of the periodspresented.

 

 

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

** **

***Revenue Recognition for PrepaidCards***

 

In 2002, wechanged our revenue recognition policy for prepaid cards and have now electedto recognize the revenue based on actual subscribers’ usage of the prepaidcards for better matching of revenues and expenses.  Prior to 2002, werecognized revenues at the time of sale.

 

We have accountedfor this change in accounting policy retroactively and have accordinglyrestated our comparative financial statements to conform to the changedpolicy.  The after-tax effect of the change was an increase in consolidated netincome of Php29 million in 2002 and reductions in consolidated net income ofPhp590 million in 2001 and Php1,476 million in 2000.  Basic earnings per commonshare increased by Php0.17 in 2002 and decreased by Php3.50 in 2001 and Php8.87in 2000.

 

Consolidatedunearned revenues related to unused prepaid cards sold amounting to Php2,022million, Php2,253 million and Php1,476 million as of December 31, 2002, 2001and 2000 and non-consolidated unearned revenues amounting to Php431 million andPhp393 million as of December 31, 2002 and 2001, respectively, are included in“Accrued and other current liabilities” in the balance sheets.

 

***Investments in Piltel***

 

On June 4, 2001, Piltelcompleted the restructuring of substantially all of its indebtedness and otherclaims.  PLDT’s ownership in Piltel’s outstanding common stock decreased from57.6% to 45.3% as a result of the transfer of 208 million common shares ofPiltel held by PLDT to the financial advisors of Piltel to settle part of thefees in connection with the debt restructuring.

 

Effective June 27, 2001, Piltelceased to be treated as a consolidated subsidiary as a result of the reductionin PLDT’s equity interest in common shares of Piltel from 57.6% to 45.3%.

 

PLDT accounted forits investments in Piltel using the equity method from June 27, 2001 to December 31, 2001.As of December 31, 2001, the balance of PLDT’s investments in Piltel amountedto Php948 million, representing the equity in net assets of Piltel as of thatdate.

 

Under the terms ofPiltel’s debt restructuring plan, Piltel is not permitted to declare or pay anydividends, repay or pay interest on any financial indebtedness to PLDT Groupand purchase, cancel, redeem or otherwise repay any of its share capital untilall amounts owed to Piltel creditors have been paid or discharged.  

 

In addition, PLDTissued a Letter of Support for the benefit of Piltel and its creditors underwhich PLDT has agreed to cover any funding shortfalls of Piltel up to a maximumamount of US$150 million, of which US$50 million (approximately Php2,676million), US$61 million (approximately Php3,162 million) and US$102 million(approximately Php5,099 million) remained undrawn as of December 31, 2002, 2001and 2000, respectively.

 

The PhilippineAccounting Standards Council, or ASC, approved the adoption of Statement ofAccounting Standards, or SFAS, 28/ International Accounting Standards, or IAS,28, “Accounting for Investments in Associates,” which became effective in thePhilippines for financial statements covering periods beginning on or afterJanuary 1, 2002.  Under SFAS 28/IAS 28, an investment in an associate should beaccounted for in the consolidated financial statements under the equity method,except when it operates under severe long-term restrictions that significantlyimpair its ability to transfer funds to the parent company.  Such investmentsshould be accounted for at cost in accordance with SFAS 10, “Summary ofGenerally Accepted Accounting Principles on Investments.”

 

The change inmethod of accounting for investments in Piltel in 2002 from equity method tocost method does not have any effect on our financial statements in 2001.

 

 

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

 

Our significantaccounting policies and practices are discussed below to facilitate theunderstanding of our financial statements:

 

***Revenue Recognition***

 

*FixedLine Services*

 

*Local ExchangeService*.   Our local exchange revenuesconsist of: (a) flat monthly fees for our postpaid service; (b) installationcharges and other one-time fees associated with the establishment of customerservice; (c) fixed charges paid by other telephone companies, charges retainedby PLDT for calls terminating to cellular subscribers within the local area andlocal access charges paid by cellular operators for calls by cellularsubscribers that terminate to our local exchange network; (d) revenues fromusage of prepaid cards for calls within the local area and any unused pesovalue of expired prepaid cards; (e) proceeds from calls from payphones; and (f)charges for special features, including bundled value-added services.

 

Flat monthly feesare recognized as revenue on an accrual basis, based on contracted rates, asthe service is provided to our customers.  Installation charges and otherone-time fees associated with the establishment of customer service arerecognized when the related installation of equipment is complete and thetelephone service is activated.  Fixed charges and local access charges arerecognized upon the completion of a call that terminated to our local exchangenetwork.  

 

*InternationalLong Distance Service*.   Ourinternational long distance revenues, which are generated through ourinternational gateway facilities, consist of: (a) inbound call revenuesrepresenting settlements from foreign telecommunications carriers for inboundinternational calls; (b) access charges paid to us by other Philippinetelecommunications carriers for terminating inbound international calls to ourlocal exchange network; and (c) outbound call revenues representing amountsearned from outbound international calls, net of amounts payable to foreigntelecommunications carriers for terminating calls in their territories.

 

International longdistance revenues are recognized based on minutes of traffic processed andcontracted rates as incurred.  

 

*National LongDistance Service.*   Our national longdistance revenues consist of: (a) per minute charges for calls made by ourfixed line customers outside of the local service areas but within thePhilippines, net of interconnection charges payable for calls carried throughthe backbone network of, and/or terminating to the customer of, anothertelecommunications carrier; and (b) access charges received from othertelecommunications carriers for calls carried through our backbone networkand/or terminating to our customers.

 

National longdistance revenues are recognized based on minutes of traffic processed and contractedrates as incurred.

 

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

 

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

 

*WirelessServices*

 

*CellularService*.   Our cellular servicerevenues consist of: (a) revenues derived from actual usage of the network byprepaid subscribers and any unused peso value of expired prepaid cards; (b)monthly service fees from postpaid subscribers, including charges for calls inexcess of allocated free local calls, toll charges for national andinternational long distance calls, charges for text messages of our GlobalSystem for Mobile Communications, or GSM service customers in excess ofallotted free text messages and charges for value-added services; (c) revenuesfrom incoming calls and messages to our customers, net of interconnectionexpenses; fees from reciprocal traffic from international correspondents; andrevenues from inbound international roaming calls for the GSM service; (d)facility service fees charged to Piltel for using Smart’s GSM network forPiltel’s Talk ‘N Text prepaid cellular service; and (e) other charges,including reconnection and migration charges.

 

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

 

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

 

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

* *

***Cash and Cash Equivalents***

* *

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

* *

***Accounts Receivable***

* *

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

* *

***Allowance for Doubtful Accounts***

* *

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

* *

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

* *

***Inventories and Supplies***

* *

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

 

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

 

***Property, Plant and Equipment***

 

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

 

Theinitial cost of property, plant and equipment comprises its purchase price andany costs directly attributable to bringing the asset to its working conditionand location for its intended use.  Expenditures incurred after the assets havebeen put into operation, such as repairs and maintenance and overhaul costs,are normally charged to income in the period the costs are incurred.  In situationswhere it can be clearly demonstrated that the expenditures have resulted in anincrease in the future economic benefits expected to be obtained from the useof an item of property, plant and equipment beyond its originally assessedstandard of performance, the expenditures are capitalized as an additional costof property, plant and equipment.  Cost also includes interest on borrowedfunds used during the construction period and capitalized foreign exchangelosses and gains related to foreign currency-denominated liabilities used toacquire such assets, net of foreign exchange gains on restatement of monetaryassets.  When assets are sold or retired, their costs and accumulateddepreciation and amortization and accumulated impairment losses are eliminatedfrom the accounts and any gain or loss resulting from their disposal isincluded in the statements of income of such period.

* *

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

* *

**Property, Plant and Equipment**

**Estimated Useful Lives**

 

 

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Cellular facilities

10 years

Buildings

25 – 40 years

Vehicles and other work equipment

5 – 10 years

Furniture

3 – 10 years

Communications satellites

15 years

Information origination/termination equipment

5 – 15 years

Land improvements

10 years

 

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

 

In2001, Smart revised the estimated remaining useful lives of certain of itsanalog network assets from 6.8 years to 2.25 years to reflect the effects ofobsolescence, continuing decline in analog subscribers, competition and othereconomic factors which are considered to have shortened the economic usefullives of these assets.  In June 2002, the estimated remaining useful lives ofthese assets were further revised to effectively end by December 2002.  As aresult, depreciation charges increased by Php1,897 million and Php1,440 million for the years ended December 31, 2002and 2001, respectively.  Having complied with the requirements set out by theNTC, Smart closed down the operation of its analog network on December 31, 2002.

 

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

 

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

 

***Impairment of Assets***

* *

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

 

***Goodwill***

 

Goodwill,included under “Other noncurrent assets” in the consolidated balance sheets,represents the excess of acquisition cost over the fair value of identifiablenet assets of a subsidiary at the date of acquisition.  With respect toinvestment in an associate, goodwill is included in the carrying amount of theinvestment.  Goodwill is amortized on a straight-line basis over the estimateduseful economic life up to a maximum of five years.  It is stated at cost lessaccumulated amortization and any impairment in value.

* *

***Deferred Charges***

* *

Expensesincurred by certain subsidiaries prior to the start of commercial operations,net of incidental income, are being deferred and amortized over certain periodsfrom the start of commercial operations (see New Accounting Standards EffectiveSubsequent to 2002, SFAS 38/IAS 38, “Intangible Assets”).  Issuance costs,underwriting fees and related expenses incurred in connection with the issuanceof debt instruments are deferred and amortized over the terms of theinstruments.

* *

***Borrowing Costs***

* *

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

* *

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

* *

***Retirement Costs***

* *

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

* *

***Foreign Currency Transactions andTranslations***

 

Transactions in foreign currencies are recorded inPhilippine pesos by applying to the foreign currency amount the spot exchangerate prevailing at the time of the transaction date.  Foreign exchange gains orlosses arising on the spot settlements or restatement of monetary items atrates different from those at which they were initially recorded during theperiod or presented in the previous financial statements are recorded in thestatements of income in the period in which they arise, except for exchangelosses arising from borrowed funds used and liabilities incurred to finance theacquisition of property, plant and equipment, net of foreign exchange gainsfrom all foreign currency monetary items, if any, which are capitalized to theappropriate property, plant and equipment accounts, see – New AccountingStandards Effective Subsequent to 2002, SFAS 21/IAS 21, “The Effects of Changesin Foreign Exchange Rates”. 

 

Financialstatements of consolidated foreign subsidiaries that are integral to theoperations of the PLDT Group are translated as if the transactions of theforeign operation had been those of the PLDT Group.  At each balance sheetdate, foreign currency monetary items are translated using the closing rate,nonmonetary items which are carried at historical cost are translated using thehistorical rate as of the date of acquisition and nonmonetary items which arecarried at fair value are translated using the exchange rate that existed whenthe values were determined.  Income and expense items are translated at theexchange rates on the dates of the transactions.  Resulting exchangedifferences are recognized in the statements of income during the year.

 

***Financial Instruments***

 

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

 

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

 

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

 

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

 

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

 

***Income Taxes***

 

Deferredincome tax is provided using the liability method.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable to: (a)temporary differences between the financial reporting bases of assets andliabilities and their related tax bases; (b) net operating loss carryover, orNOLCO; and (c) the carryforward benefit of the excess of the minimum corporateincome tax, or MCIT, over the regular corporate income tax.  Deferred taxassets and liabilities are measured using the tax rates applicable to taxableincome in the years in which those temporary differences are expected to berecovered or settled and NOLCO and MCIT are expected to be applied.  Avaluation allowance is provided for deferred tax assets when it is more likelythan not that some or all of the deferred tax assets will not be realized inthe future.

 

***Earnings Per Common Share***

 

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

 

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

 

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

 

***Segment Reporting***

 

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

 

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

 

***Use of Estimates***

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires us to make estimates andassumptions that affect the reported amounts of our assets and liabilities anddisclosure of contingent assets and liabilities at the date of financialstatements, and revenue and expenses during the period reported.  Actualresults could differ from our estimates.

 

Adoption of New Statements of Financial AccountingStandards, or SFAS/International Accounting Standards, or IAS

 

Weadopted the following SFAS/IAS, which became effective on January 1, 2002:

 
- SFAS 16/IAS16, “Property, Plant and Equipment”;    - SFAS 24/IAS24, “Related Party Disclosures”;      - SFAS 27/IAS27, “Consolidated Financial Statements and Accounting for Investments inSubsidiaries”;         - SFAS 28/IAS28, “Accounting for Investments in Associates”; and          - SFAS 36/IAS 36,“Impairment of Assets”.     Theeffects of adopting SFAS 28/IAS 28 are discussed in *Note 3, AccountingChanges – Investments in Piltel.*  The adoption of the other new standardsin 2002 did not result in any adjustment to prior years’ financial statements.Additional disclosure requirements by the new standards were included in thefinancial statements where applicable.     ***New AccountingStandards Effective Subsequent to 2002***     TheASC has approved the following accounting standards, which will be effective subsequentto 2002:               - SFAS 10/IAS10, “Events After the Balance Sheet Date”, which prescribes the accountingpolicies and disclosures related to adjusting and non-adjusting subsequentevents.  We will adopt SFAS 10/IAS 10 in 2003 and based on current circumstances,we do not believe that the effect of the adoption will be material.                 - SFAS 17/IAS17, “Leases”, which prescribes the accounting policies and disclosures to beapplied to finance and operating leases.  Finance leases are those thattransfer substantially all risks and rewards of ownership to the lessee.  Thestandard provides certain guidelines on assessing whether leases or similaragreements would qualify as finance leases.  We will adopt SFAS 17/IAS 17 whenit becomes effective in 2004 and based on current circumstances, we do notbelieve the effect of the adoption will be material.                   - SFAS 21/IAS21, “The Effects of Changes in Foreign Exchange Rates”, which providesrestrictive conditions for the capitalization of foreign exchange losses.  Asof December 31, 2002,undepreciated capitalized losses on a consolidated and non-consolidated basisincluded in property, plant and equipment amounted to Php62,049 millionand Php54,395 million,respectively.  Upon adoption in 2005, the proposed treatment is to adjust anyundepreciated capitalized foreign exchange losses, net of exchange losses thatqualify as borrowing costs, against beginning retained earnings, to the extentthat amounts capitalized do not meet the conditions under the new standard, andto restate prior years’ financial statements.                       - SFAS 22/IAS22, “Business Combinations”, which requires that an acquisition where anacquirer can be identified should be accounted for by the purchase method.  Anygoodwill arising from the acquisition should be amortized generally over 20years.  We will adopt SFAS 22/IAS 22 in 2003 and based on currentcircumstances, we do not believe the effect of the adoption will be material.                       - SFAS 37/IAS37, “Provisions, Contingent Liabilities and Contingent Assets”, which providesthe criteria for the recognition and bases for measurement of provisions,contingent liabilities and contingent assets.  It also specifies thedisclosures that should be included with respect to these items.  We will adoptSFAS 37/IAS 37 in 2003 on a retroactive basis.  Based on current circumstances,we do not believe that the effect of the adoption will be material.                         - SFAS 38/IAS38, “Intangible Assets”, which establishes the criteria for the recognition andmeasurement of intangible assets.  Intangible assets that are recognized shouldbe amortized generally over 20 years.  The new standard requires thatexpenditures on research, start-up, training, advertising and relocation beexpensed as incurred and prescribes the retroactive adjustment of unamortizedintangible assets to beginning retained earnings of 2003 and restatement ofcomparative prior period financial statements.  We will adopt SFAS 38/IAS 38 in2003.  As of December 31, 2002, ourconsolidated unamortized start-up costs amounted to Php311 million.     
 
  **5.        ****Cashand Cash Equivalents**  ** **  Thisaccount consists of:  ** **  
 

**Consolidated**

 

**Non-Consolidated**

 

2000

2001

**2002**

 

2000

2001

**2002**

 

(In Million Pesos)

Cash on hand and in banks

1,904

1,848

**3,053**

 

563

1,222

**856**

Temporary investments

7,770

2,275

**7,823**

 

7,218

1,114

**3,309**

 

9,674

4,123

**10,876**

 
7,781

2,336

**4,165**

** **

Cashin banks earns interest at the prevailing bank deposit rates.  Temporaryinvestments are made for varying periods of up to one month depending on ourimmediate cash requirements, and earn interest at the prevailing short-termdeposit rates.

 

 

**6.        ****AccountsReceivable**

** **

Thisaccount consists of receivables from:

 

 

**Consolidated**

 

**Non-Consolidated**

 

2000

2001

**2002**

 

2000

2001

**2002**

 

(In Million Pesos)

Customers and carriers

29,295

28,197

**26,675**

 

21,705

21,639

**22,601**

Others

4,192

4,162

**1,950**

 

2,486

2,493

**2,758**

 

33,487

32,359

**28,625**

 

24,191

24,132

**25,359**

Less allowance for doubtful accounts

6,386

5,562

**8,501**

 

2,082

3,116

**5,983**

 

27,101

26,797

**20,124**

 
22,109

21,016

**19,376**

 

Receivablesfrom carriers represent receivables arising from interconnection agreementswith other telecommunications carriers.  The aforementioned receivable balancesare shown net of related payables to the same telecommunications carriers.  

 

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

 

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

 

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

 

In2002, sale of receivables under the RPD amounted to US$3 million (Php165million).  There was no sale of receivables under the MRPSA in 2002; in 2001and in 2000, sale of receivables under these agreements amounted to US$59million (Php3,029 million) and US$78 million (Php3,914 million), respectively.

 

 

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

 

Thisaccount consists of:

 

 

**Consolidated**

** **

**Non-Consolidated**

 

2000

2001

**2002**

** **

2000

2001

**2002**

 

(In Million Pesos)

Terminal and cellular phone units – net  of allowance for inventory  obsolescence of Php434 million in  2002, Php286 million in 2001 and Php590 million in 2000 in the consolidated financial statements

1,532

2,014

**1,774**

** **

348

534

**369**

Spare parts and supplies

1,056

2,342

**2,281**

** **

1,051

2,336

**2,272**

Others

786

848

**452**

** **

379

815

**68**

 

3,374

5,204

**4,507**

** **

1,778

3,685

**2,709**

 

Spareparts and supplies issued to various projects are included as part of propertyunder construction shown under “Property, Plant and Equipment”.  

 

 

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

** **

This account consists of:

** **

*** ***

*** ***

**Cable and wire facilities**

**Central office equipment**

**Cellular facilities**

**Buildings**

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

**Commu - nications satellites**

**Information origination/ termination equipment**

**Land  and land improvements**

**Property under construction**

**Total**

(In Million Pesos)

***Consolidated***

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**At****December 31, 2000**

 

 

 

 

 

 

 

 

 

 

Cost

94,096

86,314

56,463

23,634

17,334

10,567

5,290

3,037

44,597

341,332

Accumulated depreciation and amortization

(15,344)

(20,118)

(16,490)

(3,200)

(10,115)

(1,795)

(1,690)

(182)

–

(68,934)

Net book value

78,752

66,196

39,973

20,434

7,219

8,772

3,600

2,855

44,597

272,398

**Year ended****December 31, 2001**

 

 

 

 

 

 

 

 

 

 

Opening net book value

78,752

66,196

39,973

20,434

7,219

8,772

3,600

2,855

44,597

272,398

Additions/Transfers

5,053

7,089

22,529

2,329

4,410

626

718

(116)

(9,420)

33,218 

Disposals/Retirement

(5)

(22)

(278)

(285)

(91)

(476)

–

–

(7)

(1,164)

Effect of deconsolidation of Piltel

(543)

(1,206)

(22,554)

(702)

(857)

–

–

(603)

(3,422)

(29,887)

Accumulated depreciation and amortization

(4,115)

(5,845)

(3,366)

(734)

(2,505)

(656)

(839)

(28)

–

(18,088)

Closing net book value

79,142

66,212

36,304

21,042

8,176

8,266

3,479

2,108

31,748

256,477

**At****December 31, 2001**

 

 

 

 

 

 

 

 

 

 

Cost

98,322

91,648

47,514

24,347

17,395

10,722

5,354

2,319

31,748

329,369

Accumulated depreciation and amortization

(19,180)

(25,436)

(11,210)

(3,305)

(9,219)

(2,456)

(1,875)

(211)

–

(72,892)

Net book value

79,142

66,212

36,304

21,042

8,176

8,266

3,479

2,108

31,748

256,477

**Year ended****December 31, 2002**

 

 

 

 

 

 

 

 

 

 

Opening net book value

79,142

66,212

36,304

21,042

8,176

8,266

3,479

2,108

31,748

256,477

Additions/Transfers

17,582

6,089

10,845

396

2,304

235

923

289

(11,578)

27,085

Disposals/Retirement

(4,772)

(305)

(1,947) 

(5)

(318)

–

–

(80)

–

(7,427)

Accumulated depreciation and amortization

(4,506)

(6,298)

(8,158)

(883)

(2,608)

(823)

(805)

(29)

–

(24,110)

Closing net book value

87,446

65,698

37,044

20,550

7,554

7,678

3,597

2,288

20,170

252,025

**At****December 31, 2002**

 

 

 

 

 

 

 

 

 

 

Cost

111,117

97,414

55,632

25,016

19,090

10,767

5,705

2,528

20,170

347,439

Accumulated depreciation and amortization

(23,671)

(31,716)

(18,588)

(4,466)

(11,536)

(3,089)

(2,108)

(240)

–

(95,414)

Net book value

87,446

65,698

37,044

20,550

7,554

7,678

3,597

2,288

20,170

252,025

** **

*** ***

**Cable and wire facilities**

**Central office equipment**

**Cellular facilities**

**Buildings**

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

**Commu- nications  satellites**

**Information origination/ termination equipment**

**Land and land improvements**

**Property under construction**

**Total**

(In Million Pesos)

***Non-Consolidated***

 

 

 

 

 

 

 

 

 

 

**At****December 31, 2000**

 

 

 

 

 

 

 

 

 

 

Cost

92,509

84,153

–

21,607

10,362

–

5,238

2,314

26,969

243,152

Accumulated depreciation and amortization 

(15,044)

(19,492)

–

(2,307)

(5,928)

–

(1,678)

(182)

–

(44,631)

Net book value

77,465

64,661

–

19,300

4,434

–

3,560

2,132

26,969

198,521

**Year ended****December 31, 2001**

 

 

 

 

 

 

 

 

 

 

Opening net book value

77,465

64,661

–

19,300

4,434

–

3,560

2,132

26,969

198,521

Additions/Transfers

4,851

7,056

–

1,617

797

–

614

(142)

(2,709)

12,084

Disposals/Retirement 

–

–

–

(270)

–

–

–

–

–

(270)

Accumulated depreciation and amortization

(3,949)

(5,758)

–

(625)

(1,493)

–

(835)

(28)

–

(12,688)

Closing net book value

78,367

65,959

–

20,022

3,738

–

3,339

1,962

24,260

197,647

**At****December 31, 2001**

 

 

 

 

 

 

 

 

 

 

Cost

97,287

91,179

–

22,936

10,970

–

5,191

2,172

24,260

253,995

Accumulated  depreciation and  amortization

(18,920)

(25,220)

–

(2,914)

(7,232)

–

(1,852)

(210)

–

(56,348)

Net book value

78,367

65,959

–

20,022

3,738

–

3,339

1,962

24,260

197,647

**Year ended****December 31, 2002**

 

 

 

 

 

 

 

 

 

 

Opening net book value

78,367

65,959

–

20,022

3,738

–

3,339

1,962

24,260

197,647

Additions/Transfers

9,733

5,398

–

209

537

–

820

–

(5,608)

11,089

Disposals/Retirement 

(4,735)

(305)

–

–

–

–

–

(56)

–

(5,096)

Accumulated  depreciation and  amortization

(4,138)

(6,184)

–

(632)

(1,206)

–

(731)

(27)

–

(12,918)

Closing net book value

79,227

64,868

–

19,599

3,069

–

3,428

1,879

18,652

190,722

**At****December 31, 2002**

 

 

 

 

 

 

 

 

 

 

Cost

101,912

96,245

–

23,143

11,358

–

5,441

2,116

18,652

258,867

Accumulated depreciation and amortization

(22,685)

(31,377)

–

(3,544)

(8,289)

–

(2,013)

(237)

–

(68,145)

Net book value

79,227

64,868

–

19,599

3,069

–

3,428

1,879

18,652

190,722

 

Substantially,all our telecommunications equipment are purchased outside the Philippines.A significant source of financing for such purchases is foreign loans requiringrepayment in currencies other than Philippine pesos, principally in U.S.dollars (see *Note 12 – Long-term Debt*).  Interest and net foreignexchange losses capitalized to property, plant and equipment for the yearsended December 31, 2002, 2001 and 2000 were as follows:

 

**Consolidated**

** **

**Non-Consolidated**

 

2000

2001

**2002**

 

2000

2001

**2002**

 

 

 

(In Million Pesos)

 

 

Interest

2,603

2,404

**1,344**

 

1,895

1,506

**1,173**

Foreign exchange losses – net

36,272

4,240

**4,690**

 

27,587

3,338

**3,876**

 

Asof December 31, 2002, 2001 and 2000, the undepreciated capitalized net foreignexchange losses amounted to Php62,049 million, Php64,910 million and Php74,491million, respectively, on a consolidated basis and amounted to Php54,395million, Php56,215 million and Php57,467 million, respectively, on a non-consolidatedbasis.  

 

In2001, Smart revised the estimated remaining useful lives of certain of itsanalog network assets from 6.8 years to 2.25 years to reflect the effects ofobsolescence, continuing decline in analog subscribers, competition and othereconomic factors which are considered to have shortened the economic usefullives of these assets.  In June 2002, the estimated remaining useful lives ofthese assets were further revised to effectively end by December 2002.  As aresult, depreciation charges increased by Php1,897 million and Php1,440 millionfor the years ended December 31, 2002 and 2001, respectively.  Having complied with therequirements set out by the NTC, Smart closed down the operation of its analognetwork on December 31, 2002.

 

Asmore fully discussed in *Note 12 – Long-term Debt and Note 15 – Related PartyTransactions*, PLDT and Smart entered into a local exchange carrier, or LEC,Business Transfer Agreement under which the parties agreed to transfer to PLDTthe LEC business of Smart.  The transaction was completed on August 31, 2000,and on such date, Smart’s LEC net assets valued at Php8,788 million, of whichPhp7,549 million were fixed assets, were then transferred to PLDT.  PLDT paidfor the assets in cash, net of Smart obligations assumed by PLDT.  

 

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

 

Pursuantto the terms of its franchise (Republic Act No. 7082, as amended), PLDT enjoysexemption from customs duties and taxes on its importations of equipment,machinery and spare parts which are necessary and will be used exclusively inthe operation of the businesses authorized by its franchise.  However, thePhilippine Department of Finance issued a memorandum dated January 20, 2000,suspending the value-added tax exemption granted to telecommunicationscompanies, including PLDT, on the importations of capital equipment.

 

 

 

**9.         ****Investments**

 

This account consists of:

** **

 

**Consolidated**

 

**Non-Consolidated**

 

2000

2001

**2002**

** **

2000

2001

**2002**

** **

 

 

(As restated – Note 3)

 

 

(In Million Pesos)

Investments in shares of stock:

 

** **

 

 

 

 

 

Acquisition cost:

 

** **

 

 

 

 

 

Common

1,725

5,821

**5,809**

 

24,153

25,820

**26,314**

Preferred

1,462

6,091

**9,309**

 

10,345

13,509

**18,296**

 

3,187

11,912

**15,118**

 

34,498

39,329

**44,610**

Less cost of investment in Piltel

–

–

**(11,690)**

 

–

–

**(11,690)**

 

3,187

11,912

**3,428**

 

34,498

39,329

**32,920**

Accumulated equity in net income (losses) of investees and impairment in value of investment

64

(7,628)

**(11,798)**

 

(6,657)

(6,241)

**(6,936)**

Offset of accumulated equity in net losses and  impairment in value of investment in  Piltel against cost

–

–

**11,690**

 

–

–

**11,690**

Net accumulated equity in net income (losses) of investees and impairment in value of investment (Note 14)

64

(7,628)

**(108)**

 

(6,657)

(6,241)

**4,75****4**

Total cost and accumulated equity in net losses  of investees and impairment in value of investment

3,251

4,284

**3,320**

 

27,841

33,088

**37,674**

Investment in debt securities

2,052

2,140

**2,150**

 

2,077

2,052

**2,052**

Total

5,303

6,424

**5,470**

 

29,918

35,140

**39,726**

Investments in shares of stock:

** **

 

** **

 

** **

 

 

At equity:

** **

 

** **

 

** **

 

 

Smart 

–

–

**–**

 

21,480

26,009

**32,205**

ACeS Philippines

–

–

**–**

 

2,098

2,087

**1,822**

Mabuhay Satellite 

–

–

**–**

 

1,114

1,224

**1,299**

ePLDT 

–

–

**–**

 

395

1,049

**932**

Subic Telecom 

–

–

**–**

 

423

786

**728**

Clark Telecom 

–

–

**–**

 

230

239

**221**

Telesat 

–

–

**–**

 

126

144

**179**

SNMI

–

–

**–**

 

113

124

**115**

MaraTel

–

–

**–**

 

–

435

**75**

PLDT Global

–

–

**–**

 

–

3

**3**

Others

102

104

**31**

 

–

–

–

 

102

104

**31**

 

25,979

32,100

**37,579**

At cost:

** **

 

** **

 

** **

 

 

ACeS International Limited 

1,614

1,614

**1,614**

 

–

–

–

Mabuhay Space Holdings Limited

885

885

**885**

 

–

–

–

Stradcom International Holdings, Inc.

–

616

**616**

 

–

–

–

Piltel – preferred shares (Note 3)

–

948

**–**

 

1,831

948

–

Others

650

117

**174**

 

31

40

**95**

 

3,149

4,180

**3,289**

 

1,862

988

**95**

Total

3,251

4,284

**3,320**

 

27,841

33,088

**37,674**

 

The movements in our accumulated equity in net lossesof investees and impairment in value of investment can be accounted for asfollows:

 

 

**Consolidated**

 

**Non-Consolidated**

 

2000

2001

**2002**

** **

2000

2001

**2002**

 

** **

 

 

** **

(As restated - Note 3)

 

 

 

(In Million Pesos)

 

Beginning balance

53

64

**(7,628)**

 

(1,373)

(6,657)

**(6,241)**

Accumulated equity in net losses of Piltel before deconsolidation 

–

(6,971)

**–**

 

–

–

–

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

11

(559)

**(4,163)**

 

(5,284)

401

**645**

Dividends received and others

–

(162)

**(7)**

 

–

15

**(1,340)**

Accumulated equity in net losses of investees  and impairment in value of investment  at end of the year

64

(7,628)_

**(11,798)**

 

(6,657)

(6,241)

**(6,936)**

Less accumulated equity in net losses and  impairment in value of investment in Piltel

–

–

**11,690**

 

–

–

**11,690**

Net accumulated equity in net income (losses)  of investees and impairment in value of  investment 

64

(7,628)

**(108)**

 

(6,657)

(6,241)

**4,754**

 

***Investments in Piltel***

 

Piltelhas experienced significant financial difficulties arising from several factorsaffecting its business.  In 1999, it imposed a moratorium on payment of itsoutstanding indebtedness and began negotiations for the restructuring of itsindebtedness to financial creditors.  On June 4, 2001,Piltel completed the restructuring of approximately Php41 billion ofindebtedness and other claims, representing approximately 98% of its totalliabilities as of that date, including its contingent liability to MarubeniCorporation, or Marubeni, arising out of a Build-Transfer Agreement betweenPiltel and Marubeni.

 

InJune 2002, holders of Piltel’s Series B, Class II Non-Convertible PreferredStock, which had an aggregate redemption amount of Php102 million (includingaccrued dividends of Php20 million up to June 4, 2001),agreed to participate in the debt restructuring plan.  Consequently, 50% of theredemption amount was released in exchange for 150,500 shares of Series K,Class I Convertible Preferred Stock of Piltel, or one share of Piltel’sConvertible Preferred Stock for every Php340 of the redemption amount, whichwere then exchanged for 30,100 shares of PLDT’s Series V Convertible PreferredStock.  See *Note 14 – Stockholders’ Equity* for the terms of PLDTConvertible Preferred Stock.  The remaining 50% of the redemption amount wasexchanged for a participation in the “Term Notes Facility” as described in theforegoing.

 

InOctober 2002, holders of Piltel’s convertible bonds, which had a redemptionamount of US$8 million (principal amount of US$6 million including accretioncosts up to June 4, 2001), agreed to participate in the debt restructuring plan.Consequently, 50% of the redemption amount was released in exchange for 532,500shares of Piltel’s Series K, Class I Convertible Preferred Stock or one Piltelconvertible preferred share for every Php340 of the redemption amount, whichwere then exchanged for 106,500 shares of PLDT’s Convertible Preferred Shares.As of December 31, 2002, only 70,435 shares of Piltel’s Series K, Class IConvertible Preferred Stock were exchanged for 14,087 shares of PLDT’s SeriesVI Convertible Preferred Stock.  The remaining 462,065 shares of Piltel’sSeries K, Class I Convertible Preferred Stock will be exchanged for PLDT’sConvertible Preferred Shares upon receipt of tax clearance from the Bureau ofInternal Revenue.  The remaining 50% of the redemption amount was exchanged fora participation in the “Conversion Notes Facility”.  

 

Underthe terms of the debt restructuring, 50% of Piltel’s debt was cancelled inexchange for Piltel convertible preferred shares which were mandatorilyexchanged for PLDT convertible preferred shares, and the balance wasrestructured into 10-year and 15-year loans secured by substantially all of thepresent and future assets of Piltel.  See *Note 14 – Stockholders’ Equity*for the terms of the PLDT convertible preferred shares.

 

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

** **

 

**10-Year Loans**

**15-Year Loans**

**Term Notes Facility**

**Convertible Notes**

Final maturity

10 years from Effective Date

15 years from Effective Date

15 years plus 10 days from Effective Date

15 years from Effective Date

Amortization

per annum

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 3 to 9  –  0.10%

Years 3 and 4  –  0.10%

Years 3 to 14  –  0.10%

Years 3 and 4  –  0.10%

 

Year 10  –  99.30%

Year 5  –  2.00%

Year 15  –  98.80%

Year 5  –  1.05%

 

 

Years 6 to 14  –  10.00%

 

Years 6 to 9  –  5.05%

 

 

Year 15  –  7.80%

 

Year 10  –  54.65%

 

 

 

 

Years 11 to 14  –  5.00%

 

 

 

 

Year 15  –  3.90%

Interest rate

 

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

 

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

 

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

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

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

 

Interest payment dates

Quarterly in arrears

Semi-annually

 

Totallong-term debt of Piltel amounted to Php22,123 million, Php21,193 million andPhp27,680 million as of December 31, 2002, 2001 and 2000, respectively, withmaturities of up to June 14, 2016, which consist of the following: 

 

** **

2000

2001

**2002**

** **

** **

(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

 

** **

 

241

 

**293**

 

 

** **

 

4,573

 

**4,625**

U.S. Dollars

 

 

 

 

 

 

10 year Tranche B

** **

** **

US$33

1,717

**US$33**

**1,768**

15 year Tranche C

** **

** **

33

1,717

**33**

**1,768**

15 year Conversion Notes Facility

** **

** **

117

6,060

**121**

**6,448**

 

** **

** **

US$183

9,494

**US$****187**

**9,984**

Japanese Yen

** **

** **

 

 

 

 

10 year Tranche B

** **

** **

JPY 7,822

3,070

**JPY 7,822**

**3,510**

15 year Tranche C

** **

** **

7,822

3,070

**7,822**

**3,510**

 

** **

** **

JPY 15,644

6,140

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

**7,020**

Total

 

** **

 

20,207

 

**21,629**

**Unrestructured debt**

** **

** **

** **

 

 

 

Philippine Pesos

** **

** **

** **

 

 

 

Banks

 

Php8,666

 

–

 

–

Preferred shareholders

 

113

 

107

 

–

 

 

8,779

 

107

 

–

U.S. Dollars

 

 

 

 

 

 

Banks

US$104

5,183

US$6

322

**US$6**

**331**

Convertible bonds

238

11,908

10

514

**2**

**120**

Trade creditors

27

1,364

–

–

–

–

 

US$369

18,455

US$16

836

**US$****8**

**451**

Japanese Yen

 

** **

 

 

 

 

Bank

JPY854

404

–

–

–

–

Total

 

27,638

 

943

 

**451**

**Liabilities under capital lease**

 

42

 

43

 

**43**

 

 

Php27,680

 

Php21,193

 

**Php22,123**

 

Pilteldid not comply with the terms of convertible bonds with principal amount ofUS$2 million (approximately US$2 million redemption price at the option of theholders), and US$6 million of other U.S. dollar denominated debt.

 

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

 

Piltelmay not be able to restructure or otherwise pay the claims relating to itsunrestructured debt.  However, default on and acceleration of Piltel'sunrestructured indebtedness do not create a cross-default under Piltel'srestructured indebtedness or any indebtedness of PLDT.

 

IfPiltel’s non-participating creditors take forceful measures to enforce theirclaims, it is possible that Piltel would be required to submit itself to acourt-supervised rehabilitation proceeding or an involuntary insolvencyproceeding seeking liquidation.  All of Piltel’s creditors that participated inthe debt restructuring agreed in connection with the debt restructuring thatthey would submit Piltel to a rehabilitation proceeding in those circumstancesand petition for the adoption of a plan of rehabilitation that includes thefinancial terms of the debt restructuring plan.  However, the laws andprocedures governing a rehabilitation proceeding in the Philippine courtsremain untested in significant respects.  It cannot be assured that arehabilitation plan which incorporates the financial terms of the debtrestructuring would be adopted promptly or at all.  Even if such arehabilitation plan were adopted, it cannot be assured that Piltel would proveto be viable thereafter. 

 

Untilall amounts owed to participating creditors have been paid or discharged, PLDTwill not be permitted to demand or receive any payment, redeem, or distributein respect of any present and future liability owed by Piltel to PLDT or anyaffiliate of PLDT, subject to specified exceptions.  These liabilities includeequity funding to Piltel and other financial indebtedness owed by Piltel toPLDT or any affiliate of PLDT, but exclude payments due in respect oftransactions having arm’s-length terms and/or in which the pricing is based onmarket terms.  These severe long-term restrictions significantly impairPiltel’s ability to transfer funds to PLDT.

 

Inaddition, PLDT issued a Letter of Support for the benefit of Piltel and itscreditors under which PLDT has agreed to cover any funding shortfalls of Piltelup to a maximum amount of US$150 million less all amounts paid or committed tobe paid to or on behalf of Piltel by PLDT on or after March 23, 2000.  Under theLetter of Support, PLDT will provide funding to Piltel in the event that thecash flow from Piltel’s operations falls short of amounts required by it todischarge in full its obligations to any creditor of Piltel or any of itsoperating and financing subsidiaries and affiliates.  PLDT is subject tocontractual restrictions limiting the amount of financial support it canprovide to Piltel up to US$150 million.  The undrawn balance under the Letterof Support was US$50 million (approximately Php2,676 million) as of December31, 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.  

 

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

 

In2001, Piltel wrote down assets valued at Php13,984 million, which was reflectedin Piltel’s accounts as of December 31, 2001.  The write-down, as approved byPiltel’s Board of Directors, was a result of Piltel’s decision to scale downits Advanced Mobile Phone System, or AMPS, and Code Division Multiple AccessSystem, or CDMA networks, beginning the second half of 2001 due to Piltel’srecent success in marketing its GSM prepaid service using the GSM network ofSmart and the difficulty experienced in sourcing analog/CDMA handsets.

 

Piltel’snet worth amounted to Php1,900 million as of December 31, 2001 after takinginto account the debt restructuring and assets write down.  The balance ofPLDT’s investments as of December 31, 2001 in Piltel amounted to Php948million, representing the equity in net assets as of that date.

 

InDecember 2002, Piltel recognized impairment losses in respect of its AMPS/CDMAand Executive Order, or EO 109 assets valued at Php4,737 million and Php12,054million, respectively.  For the AMPS/CDMA assets, the impairment resulted fromPiltel’s decision to deactivate all its AMPS/CDMA cell sites as the revenuesgenerated from its AMPS/CDMA postpaid and prepaid services could no longersupport the cost of operating the network.  Piltel’s revenues from itsAMPS/CDMA postpaid and prepaid services declined considerably in 2002 with thesustained success of Piltel’s and other cellular operators’ prepaid GSMservice.

 

Theimpairment of EO 109 assets is expected to bring down the net book value ofthese assets to their recoverable value, which was estimated using the netpresent value of future cash flows from the EO 109 postpaid service.  Cashflows from the EO 109 prepaid or limited mobility service were no longerconsidered in computing the recoverable value of the EO 109 assets as Piltelhas to terminate this service in February 2003.  Revenues from the EO 109prepaid or limited mobility service, which uses N-AMPS cellular technology,were likewise unfavorably affected by the success of Piltel’s and othercellular operators’ prepaid GSM service.

 

Thecurrent level of operation of Piltel indicates that it is unlikely thatresidual amounts may be realized by PLDT from its investments in Piltel.Piltel had a total negative net worth of Php19,100 million as of December 31,2002 as a result of continuing losses of Piltel and impairment losses amountingto Php16,790 million in 2002 in respect of its AMPS/CDMA and EO 109 assets.  

 

Accordingly,in 2002, PLDT had written down Php1,519 million, representing the balance ofPLDT’s investment in Piltel amounting to Php948 million as of December 31, 2001and Php571 million drawings under the Letter of Support in 2002, and set up aliability for the undrawn balance of the Letter of Support amounting to US$50million (approximately Php2,676 million) as of December 31, 2002.  

 

***Subscription for SmartPreferred Shares***

 

Onvarious dates in 2001 and 2000, PLDT entered into Subscription Agreements withSmart under which PLDT subscribed for a total of 762 million preferred sharesof Smart at Php13.875 per share, or an aggregate subscription price ofPhp10,578 million.  As of December 31, 2002, the subscription price of saidpreferred shares had been fully paid. 

 

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

 

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

 

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

 

***Investment in MabuhaySatellite***

 

On May 11, 2000, PLDTfinalized the Stock Purchase Agreement with Piltel for the purchase of 600,000common shares of Mabuhay Satellite held by Piltel.  The shares were purchasedat par value of Php100 per share for a total consideration of Php60 million.

 

Alsoon the same date, a Deed of Assignment was executed by Mabuhay Satellite andPiltel assigning to PLDT the 617,028 common shares of Mabuhay Satellitesubscribed by Piltel, for which Piltel partially paid Php54 million.  PLDT paidPiltel the amount of Php54 million and assumed the obligation to pay MabuhaySatellite the unpaid balance of Piltel’s subscription amounting to Php8million.

 

***Investment in******Subic******Telecom***

 

On November 28, 2000,the Board of Directors of PLDT approved the acquisition of AT&T’s 40%equity interest in Subic Telecom.  The parties signed the Stock PurchaseAgreement on January 26, 2001, and the closing of the sale/purchase transactiontook place on February 16, 2001.  As a result of this transaction, PLDT’s equityinterest in Subic Telecom increased from 60% to 100%. 

 

***Investment in ePLDT***

 

InAugust 2000, PLDT incorporated ePLDT to serve as the principal corporatevehicle for PLDT’s information and communications technology initiatives andventures.  As of December 31, 2002, ePLDT held interests in a number of businesses,which include: 

 

a.      Internet Data Center under the brand name VitroÔ; 

 

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

 

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

 

d.      100% owned subsidiary,mySecureSign, Inc., a principal affiliate of VeriSign, Inc., which is thelargest certification authority and issuer of digital certificates worldwidethat commenced full commercial operations in January 2002; 

 

e.      100% owned subsidiary, iPlusIntelligent Network, Inc., which provides point of sales terminals for the cashcard business;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ePLDThad an initial authorized capital stock of Php1 billion, which was increased inMay 2001 to Php4 billion.  As of December 31, 2002, PLDT had subscribed for1,672 million shares of ePLDT’s common capital stock for which PLDT partiallypaid cash of Php550 million.  The balance was fully paid by (a) offsettingagainst PLDT’s receivables from ePLDT amounting to Php450 million, (b)transferring to ePLDT 19 million Infocom shares held by PLDT valued at Php135million, (c) transferring to ePLDT certain areas of PLDT’s Information SystemsData Center valued at Php270 million, and (d) transferring to ePLDT a portionof PLDT’s Jupiter property valued at Php267 million.

 

ePLDTcommenced commercial operations on February 5, 2001.

 

***Investment in MaraTel***

 

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

 

MaraTelis a franchised operator of telecommunications services in the province of Lanao del Norteand the cities of Iligan and Marawi.  It has been in operation for fifty yearswith 16,730 subscribers and a switch capacity of 34,800 digital lines as of December 31, 2002.  

 

In2002, PLDT acquired an additional 134,237 common shares for a consideration ofPhp1 million.  Accordingly, PLDT’s interest in MaraTel increased from 92.3% to97.5%.

 

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

 

***Investment in SNMI***

*** ***

On April 26, 2000, PLDTcompleted the purchase of 421,384 common shares of SNMI for a totalconsideration of Php42 million.  The acquisition represents 40% of the issuedand outstanding common shares of SNMI.

 

Undera Stock Purchase Agreement dated August 14, 2000, PLDT also purchased Smart’sequity interest in SNMI, representing the remaining 60% of SNMI’s outstandingcommon stock, for a total consideration of Php63 million.  This transactionincreased PLDT’s equity interest in SNMI to 100%.

 

SNMIwas incorporated for the primary purpose of providing enhanced communicationand information services as well as value-added services to individualconsumers, businesses, government agencies and other organizations or entities.

 

***Investment in PLDT Global***

 

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

 

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

 

***Investment of ACeS******Philippines******in ACeS International Limited***

 

Asof December 31, 2002, ACeS Philippines has a 20% investment in ACeSInternational Limited, or AIL, a company incorporated under the laws of the island of Bermuda.  AILowns the Garuda I satellite and the related system control equipment in Batam, Indonesia.

 

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

 

***Investment of Mabuhay Satellite inMabuhay Space Holdings Limited***

 

On July 18, 1996,Mabuhay Satellite entered into a Joint Venture Agreement with SpaceSystems/Loral Inc. or SS/L, to form Mabuhay Space Holdings Limited for thepurpose of providing high-power Ku-Band satellite transmission services usingthe payload which was added by SS/L aboard Agila II.  The management of MabuhaySatellite expects that control over the joint venture will be temporary.Accordingly, Mabuhay Satellite accounts for its investment in the joint ventureunder the cost method.

 

***Investment in Infocom Technologies,Inc., or Infocom***

 

In2000, PLDT completed the purchase of Infocom shares held by Sequel Concepts,Inc. and other minority shareholders.

 

OnAugust 4, 2000, PLDT also subscribed for 13 million shares out of the increasein Infocom’s authorized capital stock from Php100 million to Php250 million.Furthermore, on December 21, 2000, PLDT and Infocom entered into an agreement toconvert the loans totaling Php45 million granted by PLDT to Infocom (asevidenced by Convertible Notes) into 5 million shares.  The converted commonshares were issued on January 5, 2001.

 

OnAugust 28, 2001, the Philippine Securities and Exchange Commission, or SEC,approved Infocom’s capital restructuring, which involved the increase inauthorized capital stock of Infocom from Php250 million to Php500 million andthe subsequent decrease in its authorized capital stock from Php500 million toPhp188 million, which resulted in the removal of Infocom’s deficit amounting toPhp232 million.

 

PLDTsubscribed for 17 million Infocom common shares, which were paid by offsettingits subscription payable against its receivables from Infocom amounting toPhp150 million and converting the Infocom convertible notes held by PLDT valuedat Php25 million into Infocom common shares.

 

On December 1, 2001,PLDT transferred its investment in Infocom to ePLDT.  The transaction wasaccounted for at historical cost in a manner similar to a pooling of interestsmethod since the transfers and exchanges are between companies under the effectivecontrol of a common shareholder.  Accordingly, the former bases of accountingfor both ePLDT and Infocom are retained and are accounted for at thepredecessor’s carrying amounts.  

 

***Investments in Debt Securities***

 

*ThePhilippine Home Cable Holdings, Inc.*

* *

PLDT’stotal investments in convertible notes of Unilink Communications Corporation,or Unilink, amounted to Php2,052 million as of December 31, 2002, 2001 and 2000.

 

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

 

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

 

*Infocom*

* *

PLDTalso made investments in convertible notes of Infocom.  At the option of PLDT,these notes are convertible into common shares of Infocom at a conversion rateequal to the par value of the shares.

 

On December 21, 2000,Php45 million of these notes were converted into 4 million common shares ofInfocom.  The actual issuance of the conversion shares was done on January 5, 2001.

 

On May 8, 2001, theBoard of Directors of PLDT authorized the conversion of Php25 million ofInfocom’s convertible notes into shares of Infocom.  The shares were issued on August 28, 2001following the approval by the SEC of the increase in Infocom’s authorizedcapital stock from Php250 million to Php500 million.

** **

 

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

** **

Thisaccount consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

2000

2001

**2002**

** **

2000

2001

**2002**

 

(In Million Pesos)

Debt issuance expenses – net 

1,086

1,785

**2,494**

 

397

454

**1,122**

Refundable deposits

351

364

**475**

 

247

229

**213**

Others – net

3,491

2,836

**2,019**

 

1,165

126

**278**

 

4,928

4,985

**4,988**

 

1,809

809

**1,613**

 

 

**11.    ****Accruedand Other Current Liabilities**

 

Thisaccount consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

2000

2001

**2002**

 

2000

2001

**2002**

 

(As restated - Note 3)

 

 

(As restated - Note 3)

 

 

** **

(In Million Pesos)

 

Accrued interest on various loans  (Note 12)

3,851

3,034

**2,717**

 

3,290

2,213

**2,069**

Accrued taxes and other expenses

2,432

453

**1,461**

 

709

946

**752**

Unearned revenue on sale of  prepaid cards (Note 3)

1,476

2,253

**2,022**

 

–

393

**431**

Accrual for payment for unused sick  leave and other employee benefits

630

780

**1,452**

 

535

642

**584**

Accrued utilities and general expenses

361

1,520

**2,888**

 

361

453

**1,142**

Others

1,489

2,652

**1,991**

 

269

596

**559**

 

10,239

10,692

**12,531**

 

5,164

5,243

**5,537**

 

 

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

** **

This account consists of outstanding indebtedness ofthe following:

 

 

Consolidated
 

2000

2001

**2002**

 

(In Million Pesos)
PLDT

146,189

141,515

**139,324**

Smart

11,814

21,702

**22,891**

Piltel (Note 9)

27,680

-

-

Mabuhay Satellite

6,242

5,623

**5,356**

ePLDT

-

-

**150**

MaraTel

-

57

**42**

 

191,925

168,897

**167,763**

Less current portion

12,857

19,286

**19,176**

 

179,068

149,611

**148,587**

 

Aftergiving effect to the anticipated application of existing refinancingfacilities, the scheduled maturities of outstanding long-term debt as of December 31, 2002 areas follows:

 

**Year**

**Consolidated**

**Non-Consolidated**

 

(In Million Pesos)

2003

19,176

11,962

2004

22,415
15,109
2005

28,310

21,029

2006

25,717

20,200

2007 and onwards

72,145

71,024

*** ***

***PLDT***

 

PLDT'saggregate outstanding indebtedness is broken down as follows:

 

**Description**

2000

2001

**2002**

 

(In Millions)

**U.S. Dollars**

** **

** **

 

 

 

 

Export Credit Agencies-Supported Loans

 
 

 

 

 

 

Kreditanstalt fur Wiederaufbau

US$541

Php27,037

US$475

Php24,549

**US$437**

**Php23,265**

JBIC/Co-financing Banks

129

6,446

109

5,653

**87**

**4,657**

Others 

191

9,538

183

9,441

**161**

**8,575**

 

861

43,021

767

39,643

**685**

**36,497**

Fixed Rate Notes

1,427

71,314

1,427

73,670

**1,487**

**78,067**

Term Loans

402

20,114

290

14,976

**172**

**9,166**

 

US$2,690

134,449

US$2,484

128,289

**US$2,344**

**123,730**

**Japanese Yen**

 

 

 

 

 

 

Term Loans 

JP¥19,596

8,565

JP¥23,029

9,131

**JP¥15,641**

**7,049**

JBIC OIL

–

–

–

–

**9,760**

**4,379**

** **

JP¥19,596

8,565

JP¥23,029

9,131

**JP¥25,401**

**11,428**

**Philippine Pesos**

** **

** **

 

 

 

 

Peso Fixed Rate Corporate Notes

** **

2,770

 

2,770

 

**2,540**

Term Loans

** **

405

 

1,325

 

**1,626**

 

** **

3,175

 

4,095

 

**4,166**

 

** **

146,189

 

141,515

 

**139,324**

Less current portion

** **

10,892

 

14,274

 

**11,962**

 

** **

Php135,297

** **

Php127,241

 

**Php127,362**

 

The effective average interest rates applicable to theabove indebtedness are as follows:

 

 

2000

2001

**2002**

 

** **

** **

** **

Dollar-denominated loans

9.1%

8.7%

**8.3%**

Yen-denominated loans

1.3%

1.3%

**1.2%**

Peso-denominated loans

15.2%

14.5%

**13.8%**

 

*Export Credit Agencies-Supported Loans*

 

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

 

Kreditanstaltfur Wiederaufbau, or KfW, a German state-owned development bank, is our largestsingle creditor.  As of December 31, 2002, we owed US$437 million aggregate principal amount ofdebt to KfW, as follows:

 
- US$329million provided under various export credit agency-backed facilities, of whichUS$290 million is in connection with our expansion and service improvementprograms and US$39 million in connection with a refinancing facility; and       - US$108million provided for the 15% downpayment portion and credit facilities withoutguarantee/insurance cover from the export credit agencies, of which US$11million is in connection with a refinancing facility.     OnJanuary 25, 2002, PLDT signed two loan agreements with KfW that provide PLDTwith a new US$149 million facility to refinance in part the repaymentinstallments under its existing loans from KfW due from January 2002 toDecember 2004.  The facility is a nine-year loan, inclusive of a three-yeardisbursement period and a two-year grace period during which no principal ispayable.  It partly enjoys the guarantee of HERMES, the export credit agency ofthe Federal Republic of Germany.  Disbursements under this facility, which aremade as the KfW loans to be repaid fall due, are currently available.  We havedrawn US$50 million (Php2,644 million) under this facility as of December 31, 2002.       Aftergiving effect to the refinancing of facilities, US$39 million of our KfW loanswill mature in 2003, US$39 million in 2004, US$82 million in 2005, US$57million in 2006 and US$220 million in 2007 and onwards.  Principal and intereston these loans are generally payable in equal semi-annual installments.     PLDThas also obtained loans extended and/or guaranteed by other export creditagencies, including Japan Bank for International Cooperation, or JBIC,(formerly the Export-Import Bank of Japan), the Export-Import Bank of theUnited States, and the respective export credit agencies of France, Italy,Israel, Sweden, Denmark, Canada, Australia, the United Kingdom and Singapore,in the aggregate outstanding principal amount of US$248 million, US$292 millionand US$320 million as of December 31, 2002, 2001 and 2000, respectively.  Ofthese loans, US$62 million will mature in 2003, US$60 million in 2004, US$49million in 2005, US$39 million in 2006 and US$38 million in 2007 or later.     *Fixed Rate Notes*     PLDT has nine series of non-amortizing fixed ratenotes outstanding as of December 31, 2002, as follows:     
**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
     OnMay 2, 2002, PLDT issued 10.625% Notes due 2007 in the aggregate principalamount of US$100 million and 11.375% Notes due 2012 in the aggregate principalamount of US$250 million.  The net proceeds from the issuance of the notes wereused to effect the repurchase of (1) US$63 million in principal amount of our8.5% Notes due 2003 and US$117 million in principal amount of our 10.625% Notesdue 2004 validly tendered by holders in our tender offer and (2) US$6 millionin principal amount of our 10.625% Notes due 2004 and US$6 million in principalamount of our 9.875% Notes due 2005 from the open market, and to prepay orrepay various loans in the aggregate amount of US$121 million, of which US$53million (JP¥6,260) pertains to the Japanese yen term loan maturing in June 2003and US$52 million in connection with the US$150 million term loan maturing inDecember 2003.  We will continue to prepay or repay short-term and medium-termdebts of PLDT using the remaining proceeds from the bond issue.     *Term Loans*     *LocalExchange Transfer Loans*     Inconnection with the transfer to PLDT of Smart's local exchange business, PLDTentered into loan agreements with Nederlandse Financierings-Maatschappij VoorOntwikkelingslanden N.V., or FMO, of the Netherlands, Exportkreditnamden, orEKN, of Sweden and Export Credit Guarantee Department, or ECGD, of the UnitedKingdom for loans in the principal amounts of US$135 million, US$36 million andUS$27 million, respectively. These loans were amended in August and September2001 to increase the maximum total debt to earnings before interest, income taxand depreciation and amortization or EBITDA, ratio that PLDT on anon-consolidated basis is permitted to maintain during the terms of therespective loans.  Approximately US$140 million of these loans was outstandingas of December 31, 2002.  The FMO loan matures on September 1, 2007, while theEKN and ECGD loans mature on December 31, 2007.      *US$150Million Term Loan*     Inconnection with PLDT's fixed line expansion projects, PLDT obtained a US$150million term loan, which was subsequently assigned to Norddeutsche LandesbankGirozentrale, Singapore Branch, US$52 million of which was outstanding as of December 31, 2002.The outstanding principal amount of this loan is payable at maturity on December 22, 2003 andwill be partly refinanced by a multicurrency refinancing facility describedbelow.     *Japanese Yen Term Loan*     InDecember 1997, in connection with a refinancing of its maturing debt, PLDTobtained a Japanese yen term loan from a syndicate of foreign banks, JP¥12,359million of which was outstanding as of December 31, 2002.This loan has a final maturity on June 18, 2003and will be partly refinanced by a multicurrency refinancing facility describedbelow.     *JBICJP¥ 9,760 Million Overseas Investment Term Loan*     On July 26, 2002, PLDTsigned a loan agreement with JBIC for a credit facility of JP¥ 9,760 millionunder the JBIC’s Overseas Investment Loan program.  The loan, which was drawnon July 31, 2002, will be amortized semi-annually beginning March 2005and will mature on March 21, 2008.     *JBIC4 Program of the Development Bank of the**Philippines*     In connectionwith the Asia Pacific Cable Network 2 project, PLDT entered into a loanagreement with Citibank, N.A., as facility agent, and a syndicate of banks inthe aggregate principal amount of Php1,700 million, of which about Php1,500million was outstanding as of December 31, 2002.  The loan, which is fundedunder the Japan Bank for International Cooperation Facility for Private SectorDevelopment of the Development Bank of the Philippines, matures on October 26, 2005and is payable in quarterly installments starting April 2002 as set forthbelow:      
**Quarterly Payment Number**

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

 

 

Payments 1–7 

3.500%

Payments 8–11

8.875%

Payments 12–15

10.000%
     *Peso Fixed Rate CorporateNotes*     Inconnection with PLDT's service improvement and expansion programs, PLDT hasentered into two loan agreements, pursuant to each of the PLDT issued fixedrate corporate notes in three tranches.  Interest on each tranche is payablesemi-annually.     Underthe first loan agreement, PLDT borrowed an aggregate amount of Php1,500million, of which Php230 million matured on November 11, 2002, Php500 millionmatures on November 9, 2004, and Php770 million on November 9, 2006.     Underthe second loan agreement, PLDT borrowed an aggregate amount of Php1,270million, of which Php360 million matures on June 9, 2003,Php100 million on June 9, 2005, and Php810 million on June 9, 2010.     *Multicurrency RefinancingFacility*     On September 4, 2002,PLDT signed a loan agreement with a syndicate of banks for a US$145 millionmulticurrency term loan facility consisting of Japanese yen and U.S. dollarcommitments of JP¥10,914 million and US$53 million, respectively.  Thisfacility, which has been split into two tranches to be drawn in June and December2003, is intended to refinance a portion of the JP¥12,359 million and US$52million principal amounts outstanding as of December 31, 2002under the Japanese yen syndicated term loan and a U.S. dollar term loan,respectively, both falling due in 2003.  The new syndicated facility will beamortized semi-annually beginning June 2004 and will mature in December 2006.     *Covenants*     Ourdebt instruments contain restrictive covenants and require us to comply withspecified financial ratios and other financial tests at relevant measurementdates, principally at the end of each quarterly period.     Thefinancial tests under our debt instruments, as amended, include maintaining apositive tangible net worth and compliance with the following ratios:         - interestcoverage ratio, calculated on a non-consolidated basis and excluding PLDT’sequity share in net income of subsidiaries and associates, of not less than150%, 180% or 200%;           - total debtto EBITDA on a non-consolidated basis of not more than 6.0:1 until March 2003, notmore than 5.5:1 from June 2003 to December 2003, not more than 5.0:1 from March2004 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-termindebtedness to appraised value of equity/tangible net worth on anon-consolidated basis ranging from not more than 1.1:1 to not more than 3.0:1;and               - currentratio on a non-consolidated basis, ranging from not less than 0.9:1 to not lessthan 1.2:1.     Further,with the signing of PLDT’s US$145 million multicurrency term loan facility,PLDT will become subject to additional financial tests to be measured startingMarch 2003.  Under the terms of this facility, PLDT shall be required tomaintain, on a non-consolidated basis, a debt service coverage ratio of notless than 1.1:1 and a debt to free cash flow ratio of not more than 6.0:1 in2003.  The required threshold for the debt to free cash flow ratio will becomemore restrictive at the end of September 2003 and will continue to become morerestrictive in increments thereafter.     Inaddition, some of PLDT's debt instruments contain covenants requiring PLDT tocomply with specified financial tests on a consolidated basis adjusted forPiltel to be treated on an equity accounting basis.  These include:                 - long-termdebt to appraised value of equity/tangible net worth of not more than 2.33:1;                   - total debtto EBITDA of not more than 5.0:1 in 2002, 4.5:1 in 2003 and 2004, and not morethan 4.0:1 in 2005 and thereafter; and                     - currentratio of not less than 0.75:1 to 0.9:1.     Forpurposes of deriving appraised value of equity/tangible net worth, wedetermined the revaluation surplus in respect of PLDT’s properties.  PLDT’sproperties in service as of December 31, 1997 were reappraised by anindependent firm of appraisers to reflect their sound value, as part of NTC’sfinancial reporting requirements, based on the December 29, 1997 exchange rateof Php40.116 to US$1.00.  As of December 31, 1997, the sound value was Php225,966million and the revaluation surplus was Php82,723 million.  This reappraisalwas approved by the NTC on January 28, 2000 under NTC Case No. 98-183.  As ofDecember 31, 2002, 2001 and 2000 the revaluation surplus on PLDT’s 1997appraised properties still in service, net of a 5% disallowance factor,amounted to Php44,984 million, Php51,803 million and Php58,859 million,respectively.     Theprincipal factors that can negatively affect our ability to comply with thesefinancial ratios and other financial tests are depreciation of the peso relativeto the U.S. dollar, poor operating performance of PLDT and its consolidatedsubsidiaries, impairment or similar charges in respect of investments or otherassets that may be recognized by PLDT and its consolidated subsidiaries andincreases in our interest expenses.  Since approximately 97% of PLDT'slong-term debt is denominated in foreign currencies, principally in U.S.dollars, many of these financial ratios and other tests are negatively affectedby any weakening of the peso, which declined by 3% in 2001 but fluctuatedbetween Php55.013 to US$1.00 on January 18, 2001 and Php47.550 to US$1.00 on February 16, 2001.As of December 31, 2002, the exchange rate was Php53.254 to US$1.00,equivalent to a 3% depreciation of the peso relative to the rate at the end of2001. In addition, certain of our financial ratios are adversely affected byimpairment or similar charges, 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,increases in reference interest rates and general market conditions.     PLDT'sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of ourfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other subsidiaries and associates in assisting in complying withnon-consolidated covenants or covenants that are calculated without givingeffect to the results of PLDT’s subsidiaries or associates.     Wehave maintained compliance with all of our financial ratios and covenants asmeasured under our loan agreements.  However, if negative factors adverselyaffect our financial ratios, we may be unable to maintain compliance with theseratios and covenants or be unable to incur new debt.  During 2001, ourperformance under certain of these ratios, including our 150% interest coverageand total debt to EBITDA ratios, was close to the permitted thresholds.  InAugust and September 2001, we obtained amendments to relax certain of PLDT'scovenants setting a maximum ratio of total debt to EBITDA on a non-consolidatedbasis.  Under some of our loan agreements, this ratio requirement will becomemore restrictive at the end of the second quarter of 2003 and will continue tobecome more restrictive in increments thereafter, which will make it moredifficult for PLDT to maintain compliance with this ratio in the future.Inability to comply with our financial ratios and covenants or raise newfinancing could result in a declaration of default and acceleration of some orall of our indebtedness.  The terms of some of our debt instruments have nominimum amount for cross-default.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 150%, interest coverage ratio is the ratio of (x) PLDT'snon-consolidated after-tax net income, excluding equity share in net income orlosses of subsidiaries after adding back interest charges, net of interestcapitalized to construction, on all indebtedness for the 12 months immediatelypreceding the calculation date to (y) the estimated aggregate interest chargespayable, net of interest to be capitalized to construction, during the 365-dayperiod following the calculation date on all of PLDT's indebtedness outstandingon such calculation date.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 180%, interest coverage ratio is the ratio of (x) our after-tax netincome for the 12 months immediately preceding the calculation date after: (a)adding back interest charges, depreciation, amortization and other non-cashcharges (including equity in the net income or loss of subsidiaries butexcluding provision for doubtful accounts) and provision for income taxes, and(b) deducting capitalized subscriber acquisition costs, to (y) the estimatedaggregate interest charges payable during the 365-day period following thecalculation date on all of PLDT's indebtedness outstanding on such calculationdate.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 200%, interest coverage ratio is the ratio of  (x) our after-taxnet income after adding back reserves for higher plant replacement costs,income taxes, interest charges, depreciation and non-cash charges (includingequity in the net income or losses of subsidiaries and provision for doubtfulaccounts) during 12 consecutive months within the 15 calendar monthsimmediately preceding the calculation date, to (y) the sum of (a) the estimatedaggregate interest charges on all indebtedness, net of interest capitalized toconstruction, plus (b) dividends on mandatorily redeemable preferred stock, ineach case scheduled to be paid during the 12 months following the calculationdate.     Non-consolidatedtotal debt to EBITDA is the ratio of (x) PLDT's total indebtedness (notincluding amounts payable by PLDT under the Letter of Support) to (y) netincome for the preceding 12 months, after adding back interest accrued on allindebtedness; depreciation, amortization and other non-cash charges (includingequity in net income or loss of subsidiaries, but excluding provision fordoubtful accounts) and provision for income taxes and deducting any capitalizedsubscriber acquisition costs.      Non-consolidatedlong-term indebtedness to appraised value of equity (or under some covenants,to tangible net worth) is the ratio of (x) PLDT's aggregate indebtedness (orportion of such indebtedness) due more than one year following the calculationdate and par value of all mandatorily redeemable preferred stock to (y) the sumof the aggregate par value of all of PLDT's outstanding common and convertiblepreferred stock (other than preferred stock subject to mandatory redemption),paid-in capital in excess of the par value of such stock, PLDT's retainedearnings, reserve for higher plant replacement costs and revaluation incrementarising from independent certified appraisals of PLDT's telephone plantapproved by the NTC.       Non-consolidatedcurrent ratio is the ratio of (x) non-consolidated current assets to (y)non-consolidated current liabilities, excluding from current liabilities 50% ofthe portion of long-term indebtedness due within one year of the calculationdate.       PLDT'sdebt instruments contain a number of other negative covenants that, subject tocertain exceptions and qualifications, restrict PLDT's ability to take certainactions without lenders' approval, including:                       - incurringadditional indebtedness;                          - prepayingother debt;                            - makinginvestments;                              - extendingloans;                                - extendingguarantees or assuming the obligations of other persons;                                 - payingdividends or other distributions or redeeming, repurchasing or otherwiseacquiring shares of PLDT’s capital stock;                                    - disposing ofall or substantially all of its assets or of assets in excess of specifiedthresholds of its tangible net worth;                                     - enteringinto management contracts providing for the management of its business oroperations by a third party;                                       - creating anylien or security interest;                                          - permittingset off against amounts owed to PLDT;                                           - merging orconsolidating with any other company;                                             - enteringinto transactions with shareholders and affiliates; and                                               - enteringinto sale and leaseback transactions.      Underthe terms of PLDT's 10.625% Notes due 2007 and 11.375% Notes due 2012, we arerequired to comply with a number of additional covenants, including covenantsthat, subject to certain exceptions, restrict PLDT's ability to: (a) incur debtin the event its ratio of debt to EBITDA (calculated on a non-consolidatedbasis, except in certain circumstances), after giving effect to the incurrenceof such debt, would be less than 5.5 to 1.0 on or prior to December 31, 2003,5.0 to 1 from January 1, 2004 to December 31, 2004 and 4.5 to 1.0 thereafterand (b) pay dividends on, repurchase or redeem its capital stock, makeinvestments and prepay subordinated debt, among other things.  Subject tocertain exceptions, these covenants also restrict our ability to sell assetsand use the proceeds of these asset sales.       Incase of a change in control of PLDT, PLDT may be required to repurchase orprepay certain indebtedness.  Under the terms of the 10.625% Notes due 2007 and11.375% Notes due 2012, we are required to offer to purchase all outstandingnotes due 2007 and notes due 2012 for cash at a price of 101% of theirprincipal amounts plus accrued interest in the event that (a) the aggregate ofNTT Communications' and First Pacific's direct and indirect voting interest inPLDT's outstanding capital stock having voting rights falls below 35% of suchcapital stock, (b) any person or, in certain instances, group of persons, whichis not controlled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT's outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stockand (c) if a rating agency then maintains a rating on either series of notes,the rating agency downgrades its credit rating on the series within 90 days (ormore, in certain circumstances) following notice of the occurrence of theevents specified in (a) and (b) above.     Underthe terms of our JP¥9,760 million loan from JBIC, in the event of any proposedsale or transfer of PLDT's stock that would result in NTT Communicationsholding less than 14.95% of PLDT's voting stock, we will be required to prepay,immediately upon effectiveness of such sale or transfer, all principaloutstanding under the loan, together with accrued interest.  However,prepayment will not be required if, following such sale or transfer, (a) NTTCommunications continues to have prior approval rights with respect to allmatters as to which NTT Communications has approval rights under the stockpurchase agreement pursuant to which it acquired its shares in PLDT or (b)JBIC, in its sole discretion, determines that NTT Communications’ participationin the expansion of Smart's GSM network capacity to extend PLDT’s cellularbusiness in Smart would not be reduced below its level of participation as ofthe date of the loan agreement.     Underthe terms of the multicurrency term facility agreement, 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 of 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 changeof control offer in the event that (a) the aggregate of NTT Communications’ andFirst Pacific’s direct and indirect voting interest in PLDT’s outstandingcapital stock having voting rights fall below 35% of such capital stock, (b)any person or, in certain instances, group of persons, which is not controlleddirectly or indirectly by First Pacific or NTT Communications acquires a director indirect voting interest in PLDT’s outstanding capital stock having votingrights which equals or exceeds 35% of such capital stock and (c) if a ratingagency then maintains a rating on the Bonds, the rating agency downgrades itscredit rating on the Bonds within 90 days (or more, in certain circumstances)following notice of the occurrence of the events specified in (a) and (b)above.     PLDT’sdebt instruments contain customary and other default provisions that permit thelender to accelerate amounts due or terminate their commitments to extendadditional funds under the debt instruments. These defaults include:                                                 - cross-defaultsand cross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument. In some cases, the cross-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated.  In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments;                                                   - failure byPLDT to meet certain financial ratio covenants referred to above;                                                     - theoccurrence of any material adverse change in circumstances that a lenderreasonably believes materially impairs PLDT’s ability to perform itsobligations under its debt instrument with the lender;                                                        - therevocation, termination or amendment of any of the permits or franchises ofPLDT in any manner unacceptable to the lender;                                                         - theabandonment, termination or amendment of the project financed by a loan in amanner unacceptable to the lender;                                                           - thenationalization or sustained discontinuance of all or a substantial portion ofPLDT’s business; and                                                             - othertypical events of default, including the commencement of bankruptcy,insolvency, liquidation or winding up proceedings by PLDT.     ***Smart***     Smart’slong-term debt consists of:     
 

2000

2001

**2002**

 

(In Millions)

U.S. Dollars

US$237

Php11,814

US$401

Php20,702

**US$408**

**Php21,724**

Philippine Pesos

** **

–

 

1,000

 

**1,167**

 

** **

11,814

 

21,702

 

**22,891**

Less current portion

** **

1,655

 

4,577

 

**6,173**

 

** **

Php10,159

 

Php17,125

 

**Php16,718**
     Smart’sbank loan facilities, which are being used to finance its purchases oftelecommunications equipment, are availed of through one or more drawdowns.      Intereston Smart’s dollar denominated loans is either fixed or based on LIBOR pluspremium.  These loans are payable in semi-annual installments and havematurities of up to 2007.  The peso loans are payable quarterly and accrueinterest based on the weighted average interest rate, or WAIR, plusParticipating Financial Institution, or PFI, premium and will mature inDecember 2005 and February 2007 for the Php1,000 million and Php300 millionfacilities, respectively.     Smartis subject to loan covenants that restrict its ability to pay dividends, redeempreferred shares, make distributions to PLDT or otherwise provide funds to PLDTor any affiliate without the consent of its lenders.  Some of these covenantscontain an absolute prohibition on paying dividends before December 2002, whileothers require that a portion of the loan equal to the amount of the dividendbe prepaid.  Smart has obtained waivers from Finnvera, the export credit agentfor the GSM Phase 1, 2 and 3 loan facilities of Smart, and other requiredlenders, subject to certain conditions including Smart’s procurement of new financingfor 2002 in an amount not less than Php3,700 million, to permit it to paydividends to PLDT in the fourth quarter of 2002 equal to 40% of Smart's netincome in 2001.  In addition, Smart signed the Nippon Export and InvestmentInsurance (NEXI) – Supported Untied Term Loan Facility on November 28, 2002 fora US$100 million term loan facility available until November 2003 inprocurement of new financing.  Having fulfilled the foregoing conditions, Smartmade its first dividend payment to PLDT in the amount of Php1,540 million on December 16, 2002.Further waivers would be required for payment of additional dividends in futureperiods.     Smart’sdebt instruments contain certain restrictive covenants that require Smart tocomply with specified financial ratios and other financial tests at semi-annualmeasurement dates.  Smart has maintained compliance with all of the financialcovenants.  The financial tests under Smart’s loan agreements includecompliance with a debt to equity ratio of not more than 1.50:1 and a debtservice coverage ratio of not less than 1.50:1.  The agreements also containcustomary and other default provisions that permit the lender to accelerateamounts due under the loans or terminate their commitments to extend additionalfunds under the loans.  These default provisions include:                                                               - Cross-defaultsand cross-accelerations that permit a lender to declare a default if Smart isin default 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 bySmart to comply with certain financial ratio covenants;                                                                   - Anyreduction in PLDT’s ownership of Smart’s stock below 51% of the total of eachclass of Smart’s issued shares;                                                                     - Anyreduction in First Pacific’s and Metro Pacific Corporation’s collective directand/or indirect ownership of PLDT’s common stock below 18% of the total commonstock outstanding or 18% of the voting power of the total common stockoutstanding; and                                                                       - Theoccurrence of any material adverse change in circumstances that the lenderreasonably believes materially impairs Smart’s ability to perform itsobligations under its loan agreements with the lender or that the lenderbelieves materially impairs an applicable guarantors’ ability to perform itsobligations under an applicable guaranty.     Certaintelecommunications equipment of Smart with a net book value of zero and Php160million as of December 31, 2002 and 2001, respectively, have been pledged assecurity for Smart’s outstanding loans.  As of December 31, 2002, the totaloutstanding balance of these secured loans was US$3 million, which was paid infull on January 31, 2003.     ***Mabuhay Satellite***     MabuhaySatellite’s long-term debt consists of:     
 

2000

2001

**2002**

 

(In Millions)

U.S. Dollars

** **

** **

** **

 

 

** **

Credit Agreement 

US$75

Php3,746

US$62

Php3,201

**US$55**

**Php2,925**

Omnibus Agreement

50

2,496

47

2,421

**46**

**2,431**

 

125

6,242

109

5,622

**101**

**5,356**

Less current portion

6

310

8

424

**18**

**980**

 

US$119

Php5,932

US$101

Php5,198

**US$83**

**Php4,376**
     *Credit Agreement*     OnJanuary 8, 1999, Mabuhay Satellite entered into a Restructuring Agreement withEx-Im Bank relating to the Credit Agreement to finance a portion of the costsof purchasing the Agila II Satellite, which included, among other majorprovisions, the principal repayments in 18 semi-annual installments of US$5million due and payable on January 15 and July 15 of each year starting 1999and interest at a rate of 7% per annum.      On May 8, 2000, Ex-ImBank agreed to amend the repayment terms of the principal under theRestructuring Agreement.  The outstanding balance as of the effective date ofthe Amendment shall be amortized in 13 successive semi-annual installments dueon January 15 and July 15 of each year, beginning January 15, 2000.     *Omnibus Agreement*     MabuhaySatellite also has an existing Omnibus Agreement with a syndicate of localbanks, or the Banks, which includes issuance of irrevocable standby Letters ofCredit with an aggregate stated value not exceeding US$62 million (Php3,129million) in favor of Ex-Im Bank, as security under the Credit Agreement and aterm loan to Mabuhay Satellite in the aggregate amount of US$46 million.      Assecurity, Mabuhay Satellite has constituted in favor of the Banks:                                                                         - A firstmortgage on its leasehold rights under a lease agreement entered into with theSubic Bay Metropolitan Authority, or SBMA, and the components of the satellitesystem;                                                                           - Anassignment of its rights under the transponder lease contracts to be enteredinto with its stockholders and other parties and the revenues therefrom; and                                                                             - Anassignment of the applicable proceeds of insurance to be taken on the satellitesystem.     On May 12, 2000, theBanks approved the terms of restructuring of Mabuhay Satellite’s debt under theOmnibus Agreement, which include the reduction of the margin on outstandingloans and restructuring of principal payment terms.  Mabuhay Satellite’slong-term liabilities as of December 31, 2002 and 2001 are based on therestructured terms.     On July 6, 2000, theMonetary Board of the *Bangko Sentral ng Pilipinas* approved therestructuring of Mabuhay Satellite’s debt under the Omnibus Agreement and thesecond restructuring of its debt under the Credit Agreement.     TheCredit and Omnibus Agreements impose negative covenants which, among otherthings, restrict the material changes in Mabuhay Satellite’s nature of businessand ownership structure, any lien upon or with respect to any of its assets orto any right to receive income, acquisition of capital stock, declaration andpayment of dividends, merger, consolidation and sale with another entity andincurring or guaranteeing additional long-term debt beyond prescribed amounts.  *** ***  ***ePLDT***     On March 4, 2002, ePLDTentered into a three-year loan facility with Philippine Bank of Communicationsamounting to Php150 million with a grace period of one year.  The loan facilitywas fully drawn as of December 31, 2002.  The quarterly principal payments of Php15 millionshall start in the second year with a balloon payment of Php45 million at theend of the third year.  Interest on this loan is equivalent to 91-day T-billrate plus 4% per annum payable quarterly in arrears.  The loan is secured byePLDT’s investment in an affiliate with a carrying value of Php616 million asof December 31, 2002 and a deed of assignment of receivables of anassociate from a foreign customer.     Theloan agreement imposes negative covenants which, among other things, restrictePLDT in regard to payment of cash dividends or any other income of any capitaldistribution to PLDT, voluntary suspension of its entire business operationsfor a period of 60 consecutive days of dissolution of its legal existence, andcreation of any encumbrances on the shares pledged.     ***MaraTel***     MaraTel’slong-term debt consists of a Php60 million loan obtained on October 20, 1997 anda 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 annum andmatures on July 30, 2004.  As of December 31, 2002,the outstanding balances of these loans totaled Php42 million, of which Php16million will mature in 2003.     
 
  **13.    ****DeferredCredits and Other Noncurrent Liabilities**     Thisaccount consists of:     
 

**Consolidated**

 

**Non-Consolidated**

 

2000

2001

**2002**

 

2000

2001

**2002**

 

(In Million Pesos)

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

3,443

6,995

**1,625**

 

985

2,725

**1,515**

Customers’ deposits

2,517

2,453

**2,162**

 

2,486

2,408

**2,055**

Accrued pension cost (Note 16)

576

1,117

**1,175**

 

576

1,117

**1,175**

Liability under Letter of Support (Note 3)

-

-

**2,676**

 

-

-

**2,676**

Advance payment under a receivables  purchase facility (Note 6)

-

-

**2,530**

 

-

-

**2,530**

Related party (Note 15)

-

-

-

 

-

2,350

-

Others 

2,803

2,230

**1,373**

 

1,972

1,575

**1,206**

 

9,339

12,795

**11,541**

 

6,019

10,175

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

** **

**Preferred Shares -**Php10 par value

** **

** **

**Common Stock –**

Php5 par value

**Series  A to CC**

**III**

**IV**

**V**

**VI**

**VII**

** **

** **

** **

**No. of Shares**

**Amount**

**No. of Shares**

**Total Preferred Shares**

**Amount**

** **

(In Millions)

**Authorized**

234

Php1,170

** **

** **

** **

** **

** **

** **

822

Php822

**Outstanding**

** **

 

** **

** **

** **

** **

** **

** **

** **

 

Balance at January 1, 2000

156

782

322

4

36

–

–

–

362

Php3,625

Issuance

12

61

32

–

–

–

–

–

32

316

Conversion

–

–

(2)

–

–

–

–

–

(2)

(20)

Balance at December 31, 2000

168

Php843

352

4

36

–

–

–

392

Php3,921

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2001

168

Php843

352

4

36

–

–

–

392

Php3,921

Issuance

–

–

23

–

–

3

5

4

35

348

Conversion

–

2

(3)

–

–

–

–

 

(3)

(27)

Balance at December 31, 2001

168

Php845

372

4

36

3

5

4

424

Php4,242

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2002

168

Php845

372

4

36

3

5

4

424

Php4,242

Issuance

–

–

37

–

7

–

–

–

44

440

Conversion

1

2

(2)

 

 

–

–

 

(3)

(26)

Redemption

–

–

–

–

(7)

– 

–

–

(7)

(72)

Balance at December 31, 2002

169

Php847

407

4

36

3

5

4

458

Php4,584
     OnMarch 17, 2000, the Philippine SEC approved the increase in authorized capitalstock of PLDT from Php9,000 million, divided into two classes consisting of 783million shares of serial preferred stock with a par value of Php10 each and 134million shares of common stock with a par value of Php5 each, to Php9,395million divided into two classes consisting of 822 million shares of serialpreferred stock with a par value of Php10 each and 234 million shares of commonstock with a par value of Php5 each.  Out of said increase in capital stock,PLDT issued 35 million shares as consideration and in exchange for theacquisition of the entire issued capital stock of Smart and 12 million sharesof stock were subscribed by NTT Communication’s subsidiary for cash (see *Note15 – Related Party Transactions*).     ***Preferred Stock***     Thepreferred stock is non-voting, except as specifically provided by law, and ispreferred as to liquidation.     TheSeries A to CC 10% Cumulative Convertible Preferred Stocks earn cumulativedividends at an annual rate of 10%.  These series of preferred stock areconvertible into common stock a year after the year of share issuance, at aprice equivalent to 10% below the average market price of PLDT's common stockat the PSE over a period of 30 consecutive trading days before the conversiondate.  The conversion price, however, shall not be less than the conversionprice set by the Board of Directors, which as of December 31, 2002, is Php5 pershare.  At PLDT’s option, the Series A to CC 10% Cumulative ConvertiblePreferred Stock are redeemable at par value plus accrued dividends five yearsafter the year of issuance.     On November 7, 2000, theBoard of Directors designated 30 million shares of serial preferred stock asSeries BB 10 % Cumulative Convertible preferred Stock for issuance throughout2001 pursuant to PLDT’s Subscriber Investment Plan.  On January 24, 2001, thePhilippine SEC issued a resolution exempting from the requirements under theSecurities regulation Code, or the Code, the issuance by PLDT of Series BB 10%Cumulative Convertible Preferred Stock.  On May 21, 2001,the PSE approved the listing of Series BB 10 % Cumulative Convertible PreferredStock.     On September 25, 2001,the Board of Directors designated an additional 5 million shares of serialpreferred stock as Series AA 10% Cumulative Convertible Preferred Stock.  On October 24, 2001, thePhilippine SEC issued a resolution confirming that the issuance of 5 millionSeries AA 10% Cumulative Convertible Preferred Stock is a transaction exemptfrom the registration requirements under the Securities Regulation Code, orSRC.  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, theBoard of Directors designated 10 million shares of serial preferred stock asSeries CC 10% Cumulative Convertible Preferred Stock for issuance throughout2002.  In addition, on February 26, 2002, the Board of Directors designated an additional 15million shares of serial preferred stock as Series AA 10% CumulativeConvertible Preferred Stock.  The issuance of the 10 million shares of SeriesCC 10% Cumulative Convertible Preferred Stock and the additional 15 millionshares of Series AA 10% Cumulative Convertible Preferred Stock is an exempttransaction under Section 10.2 of the SRC, as confirmed by the Philippine SECon March 13, 2002 and July 31, 2002, respectively.  PSE approved thelisting of the 10 million shares of Series CC 10% Cumulative ConvertiblePreferred Stock and the additional 15 million shares of Series AA 10%Cumulative Convertible Preferred Stock on August 14, 2002.     On December 2, 2002, theBoard of Directors designated 10 million shares of serial preferred stock asSeries DD 10% Cumulative Convertible Preferred Stock for issuance throughout2003 and an additional 10 million shares of serial preferred stock as Series CC10% Cumulative Convertible Preferred Stock.  The issuance of the 10 millionshares of Series DD 10% Cumulative Convertible Preferred Stock and theadditional 10 million shares of Series CC 10% Cumulative Convertible PreferredStock is an exempt transaction under Section 10.2 of the SRC, as confirmed bythe SEC on January 30, 2003.  In an earlier letter dated October 24, 2002, PSEallowed PLDT to utilize 24,287,455 unissued preferred shares remaining listedwith the PSE in order to cover the issuance requirement of the other seriesunder PLDT’s Subscriber Investment Plan.  The issuance requirement for the 10million shares of Series DD 10% Cumulative Convertible Preferred Stock and theadditional 10 million shares of Series CC 10% Cumulative Convertible PreferredStock will be taken from the said remaining listed and unissued preferredshares.      TheSeries III Convertible Preferred Stock earns cumulative dividends at an annualrate of US$3.50 a share payable quarterly, free and clear of Philippinewithholding taxes.  It is convertible into common stock at the option of theholder at any time, at the conversion price of US$29.19 per share of commonstock (equivalent to a conversion ratio of 1.7129 shares of common stock foreach share of Series III Convertible Preferred Stock, each share of Series IIIConvertible Preferred Stock being valued for this purpose at its referenceamount of US$50 a share), subject to adjustment in certain events.  The SeriesIII Convertible Preferred Stock is not redeemable.  Upon liquidation of PLDT,holders of the Series III Convertible Preferred Stock will be entitled toreceive liquidating distributions equivalent to Php11 a share, plus accrued andunpaid dividends to the date of distribution, subject to the prior rights ofcreditors.     TheSeries IV Cumulative Non-Convertible Redeemable Preferred Stock earnscumulative dividends at an annual rate of 14% based on the paid-up subscriptionprice.  It is redeemable at the option of PLDT at any time one year aftersubscription and at the actual amount paid for such stock, plus accrueddividends.  On February 26, 2002, the Board of Directors called for the payment of aportion of the balance of the subscription price of the Series IV CumulativeNon-Convertible Redeemable Preferred Stock amounting to Php72 million, whichwas paid on March 5, 2002.  On March 22, 2002, PLDT redeemed 60 million sharesout of the 360 million subscribed shares of its Series IV CumulativeNon-Convertible Preferred Stock and paid Php72 million, representing theredemption price plus unpaid dividends up to the date of redemption.     On June 4, 2001, PLDTissued 2,691,340 shares of Series V Convertible Preferred Stock, 5.1 millionshares of Series VI Convertible Preferred Stock and 3.8 million shares ofSeries VII Convertible Preferred Stock in exchange for a total of 58.1 millionshares of Series K, Class I Convertible Preferred Stock of Piltel, pursuant tothe debt restructuring plan of Piltel.  Shares of Series V, VI and VIIConvertible Preferred Stock are entitled to receive annual dividends of Php18.70per share, US$0.397 per share and JP¥40.7189 per share, respectively.  Inaddition, in 2002, PLDT issued 30,100 shares of Series V Convertible PreferredStock and 14,087 shares of Series VI Convertible Preferred Stock in exchangefor a total of 220,935 shares of Series K, Class I Convertible Preferred Stockof Piltel.  Upon receipt of tax clearance from the Bureau of Internal Revenue,PLDT will issue 106,500 more shares of its Convertible Preferred Shares inexchange for 462,065 shares of Piltel Series K Class I Convertible PreferredStock into PLDT Convertible Preferred Stock.  Each share of Series V, VI andVII PLDT Convertible Preferred Stock is convertible at any time at the optionof the holder into one PLDT common share.  On the date immediately followingthe seventh anniversary of the issue date of the Series V and 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, whichwill benefit from a put option exercisable for thirty days to sell such PLDTcommon shares to PLDT for Php1,700 or US$36.132 or JP¥4,071.89 per sharedepending on the series.  PLDT would be obligated to pay up to Php4,600million, US$184 million and JP¥15,600 million under the put option if all theconvertible preferred shares will be mandatorily converted and all theunderlying common shares will be put to PLDT.     Asof December 31, 2002 and 2001, a total of 669,163 shares of Series V andVI Convertible Preferred Stock and 351,019 shares of Series V and VIConvertible Preferred Stock, respectively, have been converted into PLDT commonshares.     Theaggregate value of the put option as of December 31, 2002is Php20,201 million while the market value of the underlying common shares isPhp2,968 million based on the market price of PLDT’s common stock of Php270 pershare as of December 31, 2002.     Theshares of preferred stock, except shares of Series V, VI and VII ConvertiblePreferred Stock, redeemed or converted into common stock shall revert to andform part of the unissued preferred stock, and may be reissued in any otherseries that the Board of Directors may, from time to time, establish and designate.     Theprovisions of certain subscription agreements involving preferred stock have aneffect on the ability of PLDT to, without written consent, sell certain assetsand pay cash dividends unless all dividends for all past quarterly dividendperiods have been paid and provision has been made for the currently payabledividends.     OnDecember 2, 2002, the Board of Directors approved the dividend declaration of:(a) Php1 per share on 10% Cumulative Convertible Preferred Shares Series H, L,M and Y payable on January 31, 2003 to the holders of record on December 26,2002; and (b) US$1.029412, Php4.675, US$0.09925 and JP¥10.179725 peroutstanding share of Series III, V, VI and VII Convertible Preferred Stock,respectively, payable on January 15, 2003 to the holders of record on December16, 2002.  As of December 31, 2002, undeclared cumulative dividends applicable to sharesof preferred stock amounted to approximately Php 159 million.  On January 31,2003, the Board of Directors approved the dividend declaration of: (a) Php1 pershare on 10% Cumulative Convertible Preferred Shares Series CC payable on March31, 2003 to the holders of record on February 7, 2003; and (b) Php12.15 pershare on Series IV Cumulative Non-Convertible Redeemable Preferred Stockpayable on March 15, 2003 to the holders of record on February 17, 2003.  Also,on February 26, 2003, the Board of Directors approved the dividenddeclaration of US$1.029412 per share on Series III Cumulative ConvertiblePreferred Shares payable on April 15, 2003 to the holders of record on March 17, 2003.     ***Employees’ StockPurchase Plan***     TheEmployees’ Stock Purchase Plan, or ESPP, of PLDT provides an opportunity to itsregular rank-and-file and supervisory employees to purchase an ownershipinterest in PLDT’s common stock at a reduced price on a deferred payment basis.     On November 3, 1999, theBoard of Directors approved the Ninth Offering under the ESPP.  Up to 991,200shares of common stock have been made available for purchase under the NinthOffering.     Movementsin the number of stock purchase plan outstanding are as follows:     
 

2000

2001

**2002**

At January 1

826,571

710,238

**169,708**

Exercised

(116,333)

(540,530)

**(114,584)**

At December 31

710,238

169,708

**55,124**
     Thepurchase price is set at the prevailing market price which should not exceedPhp877.63 per share.  This cap represented 85% of the market price at offerdate on January 3, 2000.  The average market value of the shares exercised in2002 was Php377.91 per share (total Php43 million).     Asof December 31, 2002, about 1 million shares of common stock were reservedfor future offerings under the ESPP.      ***Executive Stock Option Plan***     OnApril 27, 1999 and December 10, 1999, the Board of Directors and stockholders,respectively, approved the establishment of an Executive Stock Option Plan, orESOP, and the amendment of the Seventh Article of the Articles of Incorporationof PLDT denying the pre-emptive right of holders of shares of common stock tosubscribe for any issue of up to 1,289,745 shares of common stock pursuant tothe ESOP.  The ESOP covers management executives, which include officers withrank of Vice President up to the President, executives with the rank of Managerup to Assistant Vice President, and advisors/consultants engaged by PLDT.  TheESOP seeks to motivate option holders to achieve PLDT’s goals, reward optionholders for the creation of stockholder value, align the option holders’interests with those of the stockholders of PLDT and retain the option holdersto serve the long-term interests of PLDT.  The ESOP is administered by theExecutive Compensation Committee of the Board of Directors.  About 1 millionshares of common stock of PLDT have been reserved as underlying shares ofoptions under the ESOP.      Movementsin the number of stock option plan outstanding are as follows:     
 

2000

2001

**2002**

At January 1

1,392,792

1,322,642

1,157,258

Granted

–

–

144,428

Cancelled

(70,150)

(165,384)

(75,291)

At December 31

1,322,642

1,157,258

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

2000

2001

**2002**

 

(As restated - Note 3)

 

 

(In Million Pesos)

Appropriated for plant expansion and higher replacement costs

435

435

**435**

Unappropriated

30,972

32,134

**33,569**

 

31,407

32,569

**34,004**
     PLDTregularly declares and pays dividends on its preferred shares.  However, thewritten consent of its creditors and certain preferred stockholders may berequired under certain conditions (as discussed in *Note 12 – Long-term Debt*).PLDT has not declared any dividends on its common shares since June 2001.  Theretention of earnings is necessary to meet the funding requirements of ourbusiness expansion, service improvement and development programs.  Theunappropriated retained earnings balance of PLDT as of December 31, 2002includes accumulated equity in net income of investees of Php4,753 millionwhile retained earnings as of December 31, 2001 and 2000 is net of accumulatedequity in net losses of investees of Php6,352 million and Php6,657 million,respectively.     
 
  **15.         ****RelatedParty Transactions**  ** **  Companieswithin the PLDT Group are engaged in arm’s-length transactions with each otherin the ordinary course of business.  We believe that the terms of thesetransactions are comparable with those available to unrelated parties.      ***Transactions with/between RelatedParties***     Adescription of major transactions with/between related parties is as follows:     *a.        **Telecommunications ServicesProvided within PLDT Group*     Telecommunicationscarriers within the PLDT Group (namely, PLDT, Smart, Piltel, Clark Telecom,Subic Telecom, MaraTel and PLDT Global) have existing intercompany agreements,such as interconnection agreements with one another under terms similar withthose agreed with other telecommunications providers outside the PLDT Group(see *Note 25 - Other Matters*).  Each of these carriers recognizesrevenues, net of interconnection charges, for calls terminating with thecustomer of the other carriers.   * *  *b.         **Business Transfer Agreementbetween PLDT and Smart*     On May 15, 2000, PLDTand Smart entered into a LEC Business Transfer Agreement under which theparties agreed to transfer to PLDT the LEC business of Smart.  The transactioninvolved: (a) the transfer to PLDT of (i) the equipment; (ii) all rights andinterests of Smart under and pursuant to the subscription contracts with theLEC customers or subscribers of Smart including, but not limited to allreceivables from such customers or subscribers; (iii) all rights and interestsof Smart including under and pursuant to Smart’s supply contracts; (iv) allrights and interests of Smart under and pursuant to the LEC ProvisionalAuthority, or LEC PA, and its permits, licenses and authorizations issued byrelevant governmental authorities for the operation by Smart of the LECbusiness; and (v) real properties and improvements, furniture, fixtures, andother tangible and intangible assets pertaining to the LEC business of Smartand (b) the assumption by PLDT of the obligations and liabilities of Smartunder the LEC PA, permits and licenses, supply contracts and other liabilitiespertaining to the operation by Smart of the LEC business, other thanobligations or liabilities for borrowed money (see *Note 12 – Long-term Debt*).     Thetransaction was completed on August 31, 2000, and Smart’s LEC net assets valuedat Php8,788 million, of which Php7,549 million were fixed assets, were thentransferred to PLDT.  PLDT paid for the assets in cash, net of Smart’sobligations assumed by PLDT.  To finance the cash consideration, PLDT enteredinto a loan agreement with Nederlandse Financierings-Maatschappij VoorOntwikkelings-landen N.V., or FMO, of the Netherlands for US$135 million (Php6,978 million) on August 18, 2000.  Atthe same time, PLDT also entered into loan agreements with Exportkreditnamden,or EKN, of Sweden for US$36 million (Php1,845 million) and Export CreditGuarantee Department, or ECGD, of the United Kingdom for US$27 million(Php1,370 million).  The proceeds of the loan with FMO were partly used torepay the outstanding balances of Smart’s LEC-related loans with various commercialbanks.  The LEC-related loans of Smart with EKN and ECGD were novated andtransferred to PLDT, which became in effect the borrower under the relevantloan agreements.     *c.         **Transponder Lease Agreementbetween Mabuhay Satellite and PLDT*     On December 28, 1995,PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, asamended on May 10, 2000, pursuant to which Mabuhay Satellite leases to PLDTC-band transponders on board the Agila II satellite, in consideration of abasic rent.  This agreement has a term of ten years commencing on December 18, 1997,unless earlier terminated in accordance with the terms thereof.      Underan Acknowledgment and Consent Agreement dated January 4, 1996,PLDT acknowledged and consented to Mabuhay Satellite's:                                                                               - transfer andassignment of all amounts payable by PLDT under the Transponder LeaseAgreement; and                                                                                 - grant of acontinuing security interest of first priority in all of Mabuhay Satellite'srights, title and interest in, to and under the Transponder Lease Agreement, infavor of the collateral agent for the benefit of the lenders who are parties tothe Omnibus Credit and Security Agreement dated December 14, 1995.     Totalfees under these agreements amounted to Php925 million, Php927 million andPhp1,055 million for the years ended December 31, 2002,2001 and 2000, respectively.  Outstanding obligations of PLDT under theseagreements amounted to Php270 million and Php36 million as of December 31, 2002 and2001, respectively.     *d.        **Facilities ManagementAgreement between PLDT and Piltel*     OnJuly 19, 2001, PLDT entered into a Facilities Management Agreement with Piltelunder which PLDT undertakes the management, operation and maintenance ofPiltel's regional telecommunication and EO 109, network operations andservices, including EO 109 fixed line build-out installations, public callingoffices and payphone facilities and the systems required to support theseservices.     Theagreement covers Piltel's regional telecommunication services in Baguio, PuertoPrincesa, Masbate, and Boac and EO 109 services in Alabel, Banga, Dapitan,Davao, Digos, Dipolog, General Santos, Kiamba, Koronadal, Pagadian, Polomolokand Surallah.     Underthe agreement, PLDT also undertakes the management of the computer system,billing, revenue assurance and inter-carrier settlements reporting of Piltel'sregional telecommunication services in Olongapo and Subic.     Themonthly management fee payable by Piltel is based on cost, and for costcomponents where margin is allowed, 15% will be applied.  All third partyinvoices will be passed on to Piltel at cost, including value-added tax.     Theagreement supersedes the Facilities Management Agreement between PLDT andPiltel, dated May 12, 2000, under which PLDT undertook the management,maintenance and operation of the regional telecommunication services of Piltel,including public calling offices and payphone operations located in BaguioCity, Puerto Princesa, Boac and Masbate.  The new agreement is effective forthree years from July 2001 to July 2004.     Totalmanagement fees under these agreements amounted to Php84 million, Php72 millionand Php36 million for the years ended December 31, 2002,2001 and 2000, respectively.  Outstanding receivables of PLDT under theseagreements amounted to Php258 million, Php174 million and Php38 million as of December 31, 2002,2001 and 2000 respectively.     *e.         **Facilities ManagementAgreement between**Subic**Telecom and Piltel*     On September 5, 2001,Piltel and Subic Telecom entered into a Facilities Management Agreement of theregional telephone network, customer operations, network operations andpayphones of Piltel in Subic and Olongapo City.  The monthly management fee payable by Piltel isbased on cost, and for cost components where margin is allowed, 15% will beapplied.  In addition, Piltel will pay a monthly variable cost per account inthe amount of Php44 for repairs and maintenance and Php6 for bill delivery froman exchange to a subscriber.  All third party invoices will be passed on toPiltel at cost, including value-added tax.  This agreement supersedes thefacilities management agreement entered into by Piltel and Subic Telecom on May 29, 2000.     Totalmanagement fees under this agreement amounted to Php22 million, Php26 millionand Php45 million for the years ended December 31, 2002,2001 and 2000, respectively.  The new agreement is effective for three yearsuntil September 2004.  Outstanding receivables of Subic Telecom under thisagreement amounted to Php2 million, Php12 million and Php15 million as of December 31, 2002,2001 and 2000, respectively.     *f.          **Agreements between Smartand Piltel*     Inconnection with the integration of their operations, Smart and Piltel haveentered into the following agreements:                                                                                   - An agreementfor the co-location, or sharing, of cellular sites selected at the option ofSmart, whereby Piltel is paid a usage fee of Php45,000 per shared site permonth, subject to a 10% annual increase;                                                                                     - An agreementwhereby Smart manages the operation of Piltel's cellular and paging systems.This agreement is divided into three sub-agreements as follows:     i.        A Facilities Management Agreementunder which Smart operates, maintains and manages the physical facilities andtechnical services of Piltel's existing cellular and paging systems.  Piltelpays Smart a fixed monthly fee of Php4 million and a variable monthly fee ofPhp13,735 per site covered by the agreement.  Additional fees of Php186,878 permonth and Php624 per site per month are payable at the end of each calendaryear upon rendition of the services in accordance with the agreement.  Thisagreement was amended in May 2001 to include the management, operation andmaintenance of Piltel's prepaid wireless telecommunications network in the EO109 areas in Mindanao including the business and central offices, basestations, and public calling offices of Piltel located in South Cotabato,Saranggani and General Santos, Davao City, Davao del Sur, Zamboanga del Norte,Zamboanga del Sur and Misamis Occidental;     ii.      A Customer Service ManagementAgreement under which Piltel outsources the operation of its customer serviceand billing functions for its cellular and paging systems to Smart for a fixedmonthly fee of Php9 million and a variable cost of Php57, Php17 and Php25 perpostpaid, prepaid cellular and paging subscriber, respectively.  An additionalfee of Php399,926 per month and Php1 per postpaid subscriber per month ispayable at the end of each calendar year upon rendition of the services inaccordance with the agreement; and     iii.     An Administrative Support andManagement Services Agreement under which Piltel pays a fixed monthly fee ofPhp8 million.  An additional fee of Php353,764 per month is payable at the endof each calendar year upon rendition of the services in accordance with theagreement.      Totalfees under these management agreements amounted to Php661 million, Php540million and Php124 million for the years ended December 31, 2002, 2001 and2000, respectively.  Under these agreements, outstanding receivables of Smartamounted to Php569 million and Php47 million as of December 31, 2002 and 2000,respectively and its outstanding obligations as of December 31, 2001 amounted toPhp78 million.     Inaddition, Smart also entered into a Facilities Service Agreement with Piltelunder which Piltel accesses Smart's existing GSM network and facilities toenable Piltel to offer prepaid cellular service using GSM technology inexchange for approximately 50% of Piltel's revenues, net of interconnectionexpenses.  Total facility fees under this agreement amounted to Php2,494million, Php1,852 million and Php460 million for the years ended December 31, 2002,2001 and 2000, respectively.  Outstanding receivables of Smart under thisagreement amounted to Php458 million, Php1,815 million and Php150 million as ofDecember 2002, 2001 and 2000, respectively.     *g.        **Airtime Purchase Agreementbetween PLDT and PT Asia Cellular Satellite and Related Agreements*     InMarch 1997, PLDT entered into a Founder NSP Airtime Purchase Agreement with PTAsia Cellular Satellite, as amended in December 1998, under which PLDT was grantedthe exclusive right to sell ACeS services in the Philippines.  In exchange, PLDTis required to purchase from PT Asia Cellular Satellite at least US$5 millionworth of airtime annually over ten years commencing on the date of thesatellite’s commercial operations.  The commercial operations date is definedas the earlier of:                                                                                       - the day onwhich PT Asia Cellular Satellite places the Garuda I satellite in commercialoperation; and                                                                                         - the date offinal acceptance of the Garuda I satellite and associated equipment under theterms of the Spacecraft Contract, dated August 28, 1995, between PT AsiaCellular Satellite and Martin Marietta Overseas Corporation.     However,the commercial operations date may not occur without the consent of PLDT ifthere is a constructive total loss or partial loss of the satellite under itslaunch insurance contract and the satellite cannot provide commercial servicein the Philippines.      Inthe event that PT Asia Cellular Satellite's aggregate billing revenues is lessthan US$45 million in any given year, PLDT is required to make supplementalairtime purchase payments not to exceed US$15 million per year during theten-year term.     PLDT,together with the founder shareholders, is endeavoring further to amend theagreement due to the occurrence of partial satellite loss, changes in primarybusiness of ACeS and other events affecting the business.       PLDTalso entered into a Founder NSP Operating Agreement with PT Asia CellularSatellite on March 12, 1997, under which PLDT may:                                                                                           - authorizedistributors to resell ACeS services in the Philippines upon prior approval from PT Asia Cellular Satellite;and                                                                                             - appointagents to solicit and bill PLDT's or its authorized distributors' subscribersfor ACeS services and to sell terminals on behalf of PLDT.     Underan Assignment and Assumption Agreement dated December 29, 1998, PT AsiaCellular Satellite agreed to assign and transfer to ACeS International Limited,or AIL, all of PT Asia Cellular Satellite's rights under the Founder NSPAirtime Purchase Agreement and Founder NSP Operating Agreement.     Underan Acknowledgment of Assignment of Airtime Purchase Agreement entered into onDecember 29, 1998, by and among PLDT, P.T. Bank Internasional Indonesia andAIL, PLDT consented to the assignment by AIL of the Founder NSP AirtimePurchase Agreement to P.T. Bank Internasional Indonesia, as security agent, forthe benefit of the secured parties under the Security Agreement dated as ofDecember 29, 1998, which was executed in connection with the Amended and RestatedCredit Agreement dated December 29, 1998 among PT Asia Cellular Satellite, AIL,P.T. Bank Internasional Indonesia and various other banks.     OnSeptember 30, 2002, PT Asia Cellular Satellite, AIL, as guarantor, P.T. BankInternational Indonesia, as security agent, and various other banks signed aRescheduling Agreement, which amended the terms of the Amended and RestatedCredit Agreement dated December 29, 1998, moving the principal repayment datesto agreed periods with the final maturity date on January 31, 2012.     *h.        **Agreements between Smartand ACeS**Philippines*     OnJuly 18, 2000, Smart entered into a Service Distribution Agreement with ACeSPhilippines under which ACeS Philippines appointed Smart as an authorizedservice provider of ACeS Global Mobile Personal Communication by SatelliteServices, or GMPCS Services, in the Philippines having the task of exerting itsbest efforts to market and sell access to usage of the said services toprospective subscribers.       Anamendment to this Service Distribution Agreement was made on February 16, 2001,whereby Smart shall remit to ACeS Philippines a Facility Usage Fee based on arevenue sharing formula.  ACeS Philippines shall in turn pay Smart’s charges for thepayphone-related services.       Alsoon February 16, 2001, Smart entered into a Facilities ManagementAgreement, or FMA, and Administrative Support and Management ServicesAgreement, or the Service Agreement, with ACeS Philippines.  In exchange forits services, Smart shall receive fixed and variable monthly fees from ACeSPhilippines.  Under the FMA, Smart undertakes the management, maintenance andoperation of the ACeS GMPCS Services, which are currently ready and availablefor actual use or operation.  Under the Service Agreement, Smart shall providecertain administrative support and services in certain aspects of ACeSPhilippines’ business operations such as payroll administration and training,finance, audit, legal, purchasing and materials management, public affairs,information technology, sales and marketing, ACeS Philippines NSP relations,ACeS International relations and other support services.     Totalfees under these agreements, net of Smart’s share, amounted to Php12 millionand Php17 million for the years ended December 31, 2002and 2001, respectively.  ACeS Philippines has no outstanding obligation under these agreementsas of December 31, 2002 while the outstanding obligation of Smart amounted toPhp13 million as of December 31, 2001.  * *  *Other Transactions*     Equityinvestments in subsidiaries and associates are discussed in *Note 9 –Investments*.     OnDecember 9, 2002, PLDT transferred and conveyed to Smart certain inland andsubmarine domestic fiber optic cable loops, digital transmission equipment andcorresponding network management systems with an aggregate net book value ofPhp4,138 million, as consideration and in exchange for 298 million preferredshares of Smart subscribed by PLDT at Php13.875 per share, or a totalsubscription price of Php4,138 million.       Thefollowing is a summary of related party accounts with subsidiaries eliminatedfrom the consolidated balance sheets as of December 31, 2002,2001 and 2000 and from the consolidated statements of income for the yearsended December 31, 2002, 2001 and 2000:     
 

2000

2001

**2002**

 

(In Million Pesos)

Balance Sheets

 

*** ***

* *

Accounts receivable

1,625

2,064

**6,601**

Other noncurrent assets 

–

2,350

**86**

Accounts payable 

1,625

495

**2,755**

Accrued and other current liabilities

–

1,569

**1,095**

Deferred credits and other noncurrent liabilities

–

2,350

**2,434**

Statements of Income

 

*** ***

 

Fixed line service revenues

56

57

**2,266**

Wireless service revenues

1,054

927

**925**

Information and communications technology revenues

–

–

**29**

Rent expense

1,055

927

**2,886**

Maintenance expense

180

307

**334**

Other income – net

124

250

**1**
     The following is a summary of related party accountswith Piltel as of and for the years ended December 31, 2002,2001 and 2000:      
 

2000

2001

**2002**

 

(In Million Pesos)

Balance Sheets

 

** **

*** ***

Accounts receivable

–

2,081

**1,731**

Statements of Income

 

*** ***

*** ***

Fixed line service revenues

–

102

**533**

Miscellaneous income

–

290

**763**
  *** ***  ***Transactions with MajorStockholders, Directors and Officers***     Transactionsbetween PLDT or its subsidiary and a director or key officer or owner of morethan 10% of the common shares of PLDT, or any member of the immediate family ofa director or key officer or owner of more than 10% of the common shares ofPLDT, who has a direct or indirect material interest in PLDT or its subsidiary,as of and for the years ended December 31, 2002, 2001 and 2000 are as follows:     ***a.      ******Acquisitionof Smart***     OnSeptember 28, 1999, PLDT entered into a Stock Purchase and Strategic InvestmentAgreement with First Pacific Company Limited and its affiliates and NTTCommunications whereby, pursuant to amendments on March 8, 2000 and March 24,2000, PLDT acquired on March 24, 2000 the entire issued capital stock of Smartvalued at approximately Php37,907 million (approximately US$930 million)through the issuance of 35,098,974 new PLDT common shares (issue price of Php1,080 per share) to Smart’s shareholders representing approximately 22.5% ofthe issued common shares of PLDT (as enlarged by such issue of shares).     Priorto this, Smart’s major shareholders were certain Philippine and otheraffiliates of First Pacific Company Limited (collectively, the First PacificGroup) and NTT Communications Capital (UK) Limited or NTTC-UK, which in theaggregate owned 95.7% of Smart. NTTC-UK is a wholly owned subsidiary of NTTCommunications Corporation or NTT Communications, which, in turn, is a whollyowned subsidiary of Nippon Telegraph and Telephone Corporation or NTT(collectively, the NTT Group).     ***b.      ******Agreementswith NTT Communications and/or its Affiliates***     PLDTis a party to the following agreements with NTT Communications and/or its affiliates:                                                                                               -  AdvisoryServices Agreement.    On March 24, 2000, PLDT enteredinto 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 agreement amounted to Php207 million, Php248 million and Php117 million for the years ended December 31, 2002, 2001 and 2000, respectively.  As of December 31, 2002, 2001 and 2000 outstandingobligations of PLDT amounted to Php32 million, Php39 million and Php42 million,respectively.                                                                                                 -  DomesticFiber Optic Network Submerged Plant Maintenance Agreement.    On July 4, 2000, PLDT entered into an agreement with NTT WorldEngineering Marine Corporation, or NTT WEMC, for the submarine cable repair andother allied services for the maintenance of PLDT’s domestic fiber-opticnetwork, or DFON, submerged plant for a period of five years up to July 4, 2005.  Under the agreement, PLDTshall pay NTT WEMC a fixed annual standing charge of US$2 million, excludingcost for the use of a remotely operated submersible vehicle at US$5,000 forevery day of use and repair cost computed at US$19,000 per day of actualrepair. Total fees under this agreement amounted to Php65 million, Php107 million and Php35 million for the years ended December 31, 2002, 2001 and 2000, respectively.                                                                                                   -  ArcstarLicensing Agreement and Arcstar Service Provider Agreement.    On March 24, 2000, PLDT entered into an agreement with NTTWorldwide Telecommunications Corporation under which PLDT markets managed dataand other services under NTT Communications' "Arcstar" brand to itscorporate customers in the Philippines.PLDT also entered into a Trade Name and Trademark Agreement with NTTCommunications under which PLDT has been given the right to use the tradename"Arcstar" and its related trademark, logo and symbols, solely for thepurpose of PLDT's marketing, promotional and sales activities for the Arcstarservices within the Philippines.  Global coordination fees toNTT Communications based on certain percentage of revenues derived from Arcstarproducts and services amounted to Php14 million, Php7 million and Php1 million forthe years ended December 31, 2002, 2001 and 2000, respectively.  As of December 31, 2002, 2001 and 2000, outstandingobligation of PLDT amounted to Php3 million, Php1 million and Php0.4 million,respectively.                                                                                                     -  ConventionalInternational Telecommunications 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 million and Php0.4 million for the years ended December 31, 2002 and 2001, respectively.  As of December 31, 2002 and 2001, outstandingobligation of PLDT amounted to Php0.6 million and Php0.3 million, respectively.     ***c.       ******Agreement between Smart and******Asia******Link B.V., or ALBV*****     Smarthas an existing Technical Assistance Agreement with ALBV for the latter toprovide technical support services and assistance in the operations andmaintenance of CMTS for a period of five years, subject to renewal upon mutualagreement between the parties.  The agreement provides for quarterly paymentsof technical service fees equivalent to 2% of the net revenues of Smart.     Smartalso has an existing Services Agreement with ALBV for a period of 25 yearsstarting January 1, 1999, which shall automatically expire unless renewed bymutual agreement of both parties.  Under the agreement, ALBV provides adviceand assistance to Smart in sourcing capital equipment and negotiating withinternational suppliers, arranging international financing and other servicestherein consistent with and for the furtherance of the objectives of theservices.     ALBVis a subsidiary of the First Pacific Group.     Totalfees under these agreements amounted to Php429 million, Php249 million andPhp195 million for the years ended December 31, 2002,2001 and 2000, respectively.  Smart has outstanding obligation of Php31 millionin 2002, receivable of Php5 million in 2001 and obligation of Php46 million in2000 under these agreements.  * *  ***d.      ******Agreement with Foote, Cone & Belding Worldwide, or FCBWorldwide*****     FCBWorldwide provides consultancy and advisory services to PLDT.  Total fees underthis agreement amounted to Php19 million and Php34 million for the years ended December 31, 2002 and2001, respectively.  The chairman of PLDT’s Board is the non-executive chairmanof FCB Worldwide’s representative office in the Philippines.     ***e.       ******Agreements relating to insurance companies***  * *  Gotuacodel Rosario and Associates, or Gotuaco, acts as broker for certain insurancecompanies to cover certain properties of the PLDT Group.  Insurance premiumsare remitted to Gotuaco and the broker’s fees are settled between Gotuaco andthe insurance companies.  In addition, PLDT has signed an insurance policy withMalayan Insurance Co. Inc., or Malayan, wherein premiums are directly paid toMalayan.  Total payments to Gotuaco and Malayan in 2002 covering thetwelve-month period ending July 31, 2003 amounted to Php307 million.  Twodirectors of PLDT have a direct/indirect interest in or serve asdirector/officer of Gotuaco and Malayan.     
 
  **16.    ****Employees’ Benefit Plan**     ***PLDT***     PLDThas a trustee-managed, noncontributory defined benefit plan, or the BenefitPlan, providing for retirement and death benefits and service terminal pay tosubstantially all permanent and regular employees.  Benefits under the BenefitPlan are based on final salary and length of service.     PLDT’sactuarial valuation is done on an annual basis.  Based on the latest actuarialvaluation dated February 2003, the actuarial present value of accruedliability, net pension cost and average assumptions used in developing thevaluation at December 31, 2002, 2001 and 2000 are as follows:     
** **

2000

2001

**2002**

** **

(In Million Pesos)

Actuarial accrued liability

9,264

6,638

**7,984**

Assets at fair value

5,007

4,592

**4,094**

Unfunded actuarial accrued liability

(4,257)

(2,046)

**(3,890)**

Unrecognized:

** **

 

 

Net transition liability

3,220

3,054

**2,889**

Net experience adjustment

462

(2,125)

**(174)**

Accrued pension cost 

(575)

(1,117)

**(1,175)**
     Theweighted average assumptions used to determine pension benefits at December 31,2002, 2001 and 2000 are as follows:     
 

2000

2001

**2002**

Discount rate

12.00%

12.00%

**9.00%**

Rate of increase in compensation

12.00%

12.00%

**8.00%**

Rate of return on plan assets

12.26%

10.77%

**9.00%**
     Net pension cost was computed as follows:     
** **

2000

2001

**2002**

** **

(In Million Pesos)

Normal cost

637

623

**404**

Interest cost

76

75

**49**

Amortization of:

** **

** **

** **

Unrecognized net transition obligation

165

165

**165**

Unrecognized net experience adjustments

31

20

**(90)**

** **

909

883

**528**
     ***Smart***     Smarthas a trustee-managed, tax-qualified Provident Plan providing for retirement,death or service terminal pay to substantially all permanent and regularemployees.  Under the Provident Plan, Smart contributes to the provident fundfor the credit of each member’s Personal Retirement Account, or PRA, apercentage of such member’s monthly salary.  The member has an option tocontribute to the Provident Fund an amount not to exceed 25% of the member’smonthly salary, which are credited to each member’s PRA; however, very fewmembers contribute.  Net earnings of the Provident Fund are credited every ninemonths to the PRAs of the members based on their proportionate share in the totalvalue of the Provident Fund as of the end of the preceding period.     Anybenefit payable under this Plan shall be in lieu of or in compliance with, butnot in addition to, the payment of similar benefits Smart is required to payits employees under existing or future laws, employment contracts or collectivebargaining agreements, it being understood that the employee shall be entitledonly to the higher of the benefits and not to both.     Contributionsby Smart to the Provident Plan charged to operations amounted to Php55 million,Php38 million and Php22 million for the years ended December 31, 2002, 2001 and2000, respectively.     
 
  **17.    ****Other Expenses – Net**     Thisaccount consists of:     
 

**Consolidated**

 

**Non-Consolidated**

 

2000

2001

**2002**

 

2000

2001

**2002**

 

** **

 

 

(As restated - Note 3)

 

 

(In Million Pesos)

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

14,562

14,613

**13,886**

 

9,741

10,825

**10,837**

Interest and other income - net

(2,127)

(1,833)

**(2,032)**

 

(1,124)

(953)

**(1,005)**

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

(11)

559

**4,163**

 

5,284

(401)

**(645)**

Dividend income (Note 9)

–

–

**–**

 

–

–

**(295)**

Manpower reduction cost

–

279

**324**

 

–

279

**324**

Hedge costs (Note 23)

–

108

**315**

 

–

108

**315**

Foreign exchange/swap losses (gains)  (Notes 12 and 23)

(945)

817

**(533)**

 

(970)

333

**(571)**

 

11,479

14,543

**16,123**

 

12,931

10,191

**8,960**
           
 
  **18.    ****Income Taxes**     Thenet current and noncurrent components of deferred income tax recognized in theconsolidated balance sheets follow:     
 

2000

2001

**2002**

 

 

(As restated -  Note 3)

 

 

(In Million Pesos)

 

 

 

 

Net current assets

1,725

1,626

**3,772**

Net current liabilities***

(19)

(2)

**–**

Net noncurrent liabilities

(8,542)

(8,622)

**(10,699)**
  * *  ** Classified under “Accrued and Other CurrentLiabilities” in the consolidated balance sheets.*     PLDT’sdeferred tax balances do not differ materially from the consolidated deferredtax balances to warrant a separate disclosure.     Thecomponents of the consolidated net deferred tax assets and liabilities are asfollows:     
 

2000

2001

**2002**

 

** **

(As restated - Note 3)

 

 

(In Million Pesos)

Current assets:

** **

 

 

Allowance for doubtful accounts

2,016

1,846

**2,760**

Current portion of unamortized past service cost

319

63

**54**

Allowance for inventory losses

216

161

**192**

Accrued pension cost 

76

306

**571**

Unrealized foreign exchange losses

49

5

**–**

Unearned revenues

**–**

186

**710**

NOLCO

**–**

144

**618**

Others

57

15

**18**

 

2,733

2,726

**4,923**

Less valuation allowance and income tax  holiday adjustments 

1,008

884

**1,052**

 

1,725

1,842

**3,871**

Current liabilities:

** **

 

 

Lump-sum payment under the collective  bargaining agreement

–

(216)

**(98)**

Unrealized foreign exchange gains

–

–

**(1)**

 

–

(216)

**(99)**

Net current assets

1,725

1,626

**3,772**

 

** **

 

 

Net current liabilities

** **

 

 

Unrealized foreign exchange gains

(19)

(2)

**–**

 

** **

 

 

Noncurrent assets:

 

 

 

NOLCO

4,371

**–**

**–**

Additional depreciation for wireless analog assets

–

1

**879**

Unamortized past service cost

223

160

**108**

 

4,594

161

**987**

Less valuation allowance

4,002

–

**–**

 

592

161

**987**

 

** **

 

 

Noncurrent liabilities:

** **

 

 

Interest charges capitalized, net of amortization

(5,434)

(5,496)

**(5,536)**

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

(2,843)

(2,763)

**(4,536)**

Taxes and duties capitalized, net of amortization

(857)

(776)

**(711)**

Undistributed earnings of foreign subsidiaries

–

–

**(333)**

 

(9,134)

(9,035)

**(11,116)**

 

(8,542)

(8,874)

**(10,129)**

Less valuation allowance and income tax holiday adjustments

–

252

**(570)**

Net noncurrent liabilities

(8,542) 

(8,622)

**(10,699)**
     Thecarryforward benefit of NOLCO amounting to Php1,930 million as of December 31, 2002 canbe claimed as deductions against taxable income until 2005.     Provisionfor income tax consists of:     
 

**Consolidated**

** **

**Non-Consolidated**

 

2000

2001

**2002**

** **

2000

2001

**2002**

 

(As restated - Note 3)

 

 

(As restated - Note 3)

 

 

(In Million Pesos)

Current

1,736

876

**589**

** **

1,643

782

–

Deferred

86

157

**1,003**

** **

426

(74)

**854**

 

1,822

1,033

**1,592**

** **

2,069

708

**854**
     Theprovision for income tax-current in 2002, on a consolidated basis, mainlyrepresents the subsidiaries’ income tax under the regular corporate taxes.PLDT’s minimum corporate income tax in 2002 amounting to Php638 million wascharged directly to “Prepayments and other current assets”.  The carryforwardbenefit of MCIT as of December 31, 2002, can be claimed as deductions against income taxpayable until 2005.     Thecurrent provision for income tax in 2001 and 2000 mainly represents thesubsidiaries’ income tax under the regular corporate income tax.     Thereconciliation between the provision for income tax at the applicable statutorytax rates and the actual provision for income tax follows:     
** **

**Consolidated**

** **

**Non-Consolidated**

 

2000

2001

**2002**

 

2000

2001

**2002**

 

(As restated - Note 3)

 

 

(As restated - Note 3)

 

 

(In Million Pesos)

Provision at statutory tax rate

(217)

672

**1,492**

 

544

1,131

**1,271**

Tax effect of:

** **

 

** **

 

** **

** **

 

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

(4)

179

**1,332**

 

1,691

(251)

**(339)**

Tax loss position

1,679

825

**252**

 

–

–

–

Income subjected to lower tax rates

(379)

(236)

**(177)**

 

(288)

(138)

**(100)**

Results of operations subject to  income tax holiday

–

–

**(1,925)**

 

–

–

–

Others – net

(118)

(950)

**928**

 

122

(34)

**(47)**

Change in valuation allowance

861

543

**(310)**

 

–

–

**69**

Actual provision for income tax

1,822

1,033

**1,592**

 

2,069

708

**854**
     On July 20, 1999,Mabuhay Satellite was registered as a Subic Bay Freeport Enterprise and ClarkTelecom was also registered as a Clark Special Economic Zone Enterprise underRepublic Act No. 7227, otherwise known as the Bases Conversion and DevelopmentAct of 1992, or the Act.  As registrants, Mabuhay Satellite and Clark Telecomare entitled to all the rights, privileges and benefits established thereunderincluding tax and duty-free importation of capital equipment and special incometax rate of 5% of gross income, as defined in the Act.      Smartis registered with the Board of Investments, or BOI, under the OmnibusInvestments Code of 1987 as a preferred non-pioneer enterprise for theoperation of the IGF and CMTS services.  As such, Smart was entitled to certaintax and non-tax incentives, including an income tax holiday for a period ofthree years up to August 2000.      TheBOI Governing Board, in its meeting on August 10, 2000, granted the request ofSmart for the transfer of its LEC business to PLDT subject to certainconditions, which include the surrender of Smart’s original certificate ofregistration to the BOI for annotation and safekeeping and the issuance of acertificate of registration to PLDT with respect to the transferred LECbusiness.     On May 3, 2001, the BOIawarded Smart pioneer status for its GSM expansion projects entitling it toenjoy a three-year tax holiday up to May 2004.  The tax incentive is availed onthe basis of incremental income generated from the said expansion project.  Inaddition, on July 12, 2001, the BOI awarded Smart pioneer status for its paymentinfrastructure projects entitling it to enjoy a six-year tax holiday.  In thiscase, the tax incentive is availed for the entire taxable income of theproject.      Smart’sdeferred income tax assets and liabilities as of December 31, 2002 have beenrestated at realizable amounts after provision of a valuation allowance forportions of income tax assets that will not have tax consequences.     On December 22, 2000, theBOI approved ePLDT’s registration as a new IT service firm in the field ofservices related to Internet data center on a pioneer status.  As such, ePLDTenjoys, among other incentives, a six-year income tax holiday from January 2001or actual start of commercial operations, whichever comes first.     In2002 and 2001 tax incentives availed amounted to Php2,699 million and Php776million, respectively.     
 
  **19.    ****Earnings (Loss) Per Common Share**     Thefollowing table presents information necessary to calculate the earnings (loss)per share:     
 

2000

2001

**2002**

 

(As restated - Note 3)

 

 
(In Million Pesos)

Net income (loss)

(368)

2,828 

**3,118**

Less dividends on preferred stock

1,249

1,503

**1,645**

Net income (loss) applicable to common stock

(1,617)

1,325

**1,473**

 

 

 

(In Thousands, Except Per Share Amounts)

Outstanding common shares, beginning

156,272

168,498

**168,895**

Effect of issuance of common shares during the year

10,179

162

**200**

Weighted average number of common shares, end

166,451

168,660

**169,095**

Earnings (loss) per common share

(9.71)

7.85

**8.71**

 

Thecomputations of diluted earnings (loss) per share were anti-dilutive for theyears ended December 2002, 2001 and 2000; therefore, the amounts reported forbasic and diluted earnings (loss) per share were the same.

 

 

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

** **

***Contractual Obligations***

 

Thefollowing table discloses the PLDT Group’s contractual obligations outstandingas of December 31, 2002: 

 

 

**Payments Due by Period**

 

**Total**

**Within 1 year**

**2****-3**

**years**

**4****-5**

**years**

**After 5 years**

 

(In Million Pesos)

 

 

 

 

 

 

Long-term debt obligations

167,763

19,176

50,725

50,783

47,079

Long-term lease obligations 

9,158

1,809

3,639

3,131

579

Unconditional purchase obligations 

10,219

508

2,241

2,145

5,325

Other long-term obligations 

20,201

–

–

–

20,201

Total contractual cash obligations 

207,341

21,493

56,605

56,059

73,184

* *

(1)    *Under the Air Time PurchaseAgreement with AIL, the amount disclosed in the table above for payments duewithin 1 year reflects a reduction in PLDT’s required payments agreed under aStandstill Agreement, while the amounts disclosed for payments due from 2 yearsonwards are based on the original Air Time Purchase Agreement.  The parties ofthe standstill Agreement have also agreed to negotiate in good faith and usetheir best efforts to reach an agreement on revised ATPA before November 15,2003 that will cover, among other matters, the amended minimum and supplementalair time payment provisions subject to the approval of ACeS InternationalLimited’s creditors.*

* *

*Long-term Debt Obligations*

* *

For discussion of our long-term debt obligations see *Note12 – Long-term Debt*.

 

*Long-termLease Obligations*

 

*TransponderLease Agreement*.   As discussed in *Note15 – Related Party Transaction*, PLDT and Mabuhay Satellite entered into aTransponder Lease Agreement on December 28, 1995, which was amended on May 10, 2000.  Thisagreement is for a period of ten years commencing on December 18, 1997,unless earlier terminated in accordance with the terms thereof.  The annualbasic rent for the transponders for 2002 is US$18 million.  As of December 31, 2002,PLDT’s aggregate remaining obligation under this agreement was approximatelyPhp5,282 million. 

 

*MunicipalTelephone Projects*.   In 1993, PLDTentered into two lease agreements with the Philippine Department ofTransportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under these agreements,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 fifteen years.  Title tothe properties shall be transferred to PLDT upon expiration of the lease term.As of December 31, 2002, the aggregate remaining obligation was approximatelyPhp1,013 million.  In case of cancellation, PLDT is liable to pay Php100million under each of the two contracts as liquidated damages.

 

*DomesticFiber Optic Network Submerged Plant Agreement*.   As discussed in *Note 15 – Related Party Transactions*, PLDTentered into an agreement with NTT World Engineering Marine Corporation on July 4, 2000, for thesubmarine cable repair and other allied services in relation to the maintenanceof PLDT’s DFON submerged plant for a period of five years up to July 4, 2005.  Underthe agreement, PLDT shall pay NTT World Engineering Marine Corporation a fixedannual standing charge of US$2 million excluding cost for the use of aremotely-operated submersible vehicle at US$5,000 for every day of use andrepair cost computed at US$19,000 per day of actual repair.  As of December 31, 2002,the aggregate remaining obligation was approximately Php336 million.

 

*Digital Passage Service Contracts*.   PLDT hasexisting Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento twenty-five years expiring at various dates.  As of December 31, 2002,the aggregate remaining obligation was approximately Php149 million.

 

*LicenseAgreement with Mobius Management Systems (**Australia**) Pty  Ltd., orMobius.*   PLDT entered into a licenseagreement with Mobius pursuant to which Mobius has granted PLDT anon-exclusive, non-assignable and non-transferable license for the use ofcomputer software components.  Under the 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 approximatelyPhp86 million.

 

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

 

*Unconditional Purchase Obligations*

 

*AirTime Purchase Agreement with ACeS International Limited.*  As discussed in *Note 15 – Related PartyTransactions*, PLDT entered into a Founder NSP Air Time Purchase Agreementwith PT Asia Cellular Satellite, or ACeS, in March 1997, which was amended inDecember 1998.  Under this agreement, PLDT was granted the exclusive right tosell ACeS services in the Philippines.  In exchange, PLDT is required to purchase from ACeSa minimum of US$5 million worth of air time annually over ten years commencingon the date of the satellite’s commercial operations.  In the event ACeSaggregate billing revenues is less than US$45 million in any given year, PLDTis required to make supplemental air time purchase payments not to exceed US$15million per year during the ten-year term.  

 

In March 2003,PLDT, together with the founder shareholders, entered into a StandstillAgreement with AIL suspending the application and enforcement of the minimumand supplemental air time payments under the original ATPA.  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 fora fixed fee in the amount of US$3.8 million.  PLDT is also obliged to purchasefrom AIL 13,750 satellite fixed phone units for the years 2003 at US$395 F.O.B.per unit, subject to quarterly price adjustment.  The parties to the StandstillAgreement also agreed to negotiate in good faith and use their best efforts toreach agreement on a revised ATPA before November 15, 2003 that will cover,among other matters, the amended minimum and supplemental air time paymentprovisions subject to the approval of AIL’s creditors.  

 

Asof December 31, 2002, the aggregate remaining minimum obligation was approximatelyPhp10,077 million.

 

*InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign.*   On September 15, 2000, ePLDT entered into anagreement with VeriSign for the non-exclusive, non-transferable right andlicense to use the VeriSign software, brand and Certification PracticeStatement for the purpose of approving, issuing, suspending or revoking digitalcertificates for users of the Internet or similar open systems in the Philippinesfor a period of seven years.  Under this agreement, ePLDT is required to payVeriSign a certain percentage of the revenue derived from the services subjectto minimum annual royalty payments aggregating to US$1 million, which wassubsequently reduced to US$1 million, for the seven-year contract period.  Inaddition, ePLDT was required to pay an annual support fee of US$0.5 million forthe first year and US$0.3 million in each year thereafter.  As of December 31, 2002,ePLDT’s aggregate remaining minimum obligation under this agreement wasapproximately Php79 million.

 

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

* *

*OtherLong-term Obligations*

 

*MandatoryConversion and Purchase of Shares*.As discussed in *Note 9 – Investments and Note 14 – Stockholders' Equity*,as of December 31, 2002, PLDT had issued a total of 3 million shares of SeriesV Convertible Preferred Stock, 5 million shares of Series VI ConvertiblePreferred Stock and 4 million shares of Series VII Convertible Preferred Stockin exchange for a total of 58 million shares of Series K Class I ConvertiblePreferred Stock of Piltel pursuant to the debt restructuring of Piltel.  

 

As of December 31, 2002, 145,320 shares of Series VConvertible Preferred Stock and 523,843 shares of Series VI ConvertiblePreferred Stock were converted to PLDT common shares.  The aggregate value ofthe put option based on outstanding shares as of December 31, 2002 is Php20,201million, of which Php13,181 million is payable on June 4, 2008 and Php7,020million on June 4, 2009 if all of the outstanding shares of Series V, VI andVII Convertible Preferred Stock were mandatorily converted and all theunderlying common shares were put to PLDT.  The market value of the underlyingcommon shares is Php2,968 million, based on the market price of PLDT’s commonstock of Php270 per share as of December 31, 2002.

*** ***

***Commercial Commitments***

* *

Asof December 31, 2002, our outstanding commercial commitments, in the formof letters of credit, amounted to Php3,610 million.  These commitments willexpire within one year.

 

InOctober 1998, Smart entered into a Frame Supply Contract with NokiaTelecommunications OY for the supply of hardware, software and documentationfor its GSM phone network.  In the same month, Smart and Nokia (Philippines),Inc. signed a Frame Services Contract that covers the design, planning,installation, commissioning, integration, acceptance testing, training and handlingover of the GSM network.  In 2001, Smart issued a Master Purchase Order, orMPO, in the amount of US$200 million in favor of Nokia Networks OY for thepurchase of additional equipment to expand its GSM phone network.  Under thisMPO, unavailed portion as of December 31, 2002 amounted to US$107 million.

* *

 

**21.    ****Contingencies**

** **

***PLDT***

 

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

 

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

 

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

 

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

 

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

 

Withoutresolving or ruling on PLDT’s request, in September 2000, the NTC issuedanother assessment letter for the balance of the SRF for previous years and theSRF for the year ended December 31, 2000.  Consequently, PLDT filed a Petition for Certiorariand Prohibition with Urgent Prayer for the Immediate Issuance of a TemporaryRestraining Order with the CA.  The CA temporarily restrained the NTC fromenforcing/implementing its February and September 2000 assessments andsubsequently issued a Writ of Preliminary Injunction.   In February 2001, theCA dismissed the Petition for Certiorari and Prohibition filed by PLDT and dissolvedthe Writ of Preliminary Injunction earlier issued.

 

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

 

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

 

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

 

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

 

Since1976, PLDT has received assessments from the NTC for permit, SRF and othercharges.  As of December 31, 2002, PLDT has paid a total amount of Php1,249 million inSRF, of which Php1,094 million were paid under protest.

 

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

 

P*L*DTbelieves, based on the opinion of its legal counsel, that it is exempt frompayment of local franchise and business taxes.  PLDT’s claim for exemption orexclusion from local franchise and business taxes is grounded on Section 12 ofR.A. 7082, or the PLDT Franchise, as implicitly amended and expanded by Section23 of Republic Act 7925, or R.A. 7925, also known as the PublicTelecommunications Policy Act.  Further, PLDT claims that assuming that it isliable for local franchise tax, R.A. 7160, or the Local Government Code,provides that local franchise tax shall be based on the gross receipts of thepreceding year received or collected for services rendered within thejurisdiction of the taxing authority.  Therefore, the use by some localgovernment units of gross revenues as the basis for computation of franchisetax is in gross violation of the law because it pertains to all income earnedregardless of whether it was received or not, unlike gross receipts which areessentially the amount of money or its equivalent actually or constructivelyreceived.  Moreover, gross revenues refer to all income earned by PLDT withinand outside the jurisdiction of the local taxing authority; thus, the use thereofas a basis of computation will exceptionally overstate the franchise tax.

 

Todate, PLDT has received from several local government units’ assessments forlocal franchise and/or business taxes covering various periods, in theaggregate amount of Php4,524 million.  PLDT has invariably protested theseassessments, appealed to the lower courts denials of its protests by localgovernment units, and elevated to the CA or the SC adverse decisions of thelower courts.

 

Inone case involving the City of Davao, the Supreme Court rendered a decision denying PLDT’spetition for review of the decision of a regional trial court of Davao Cityaffirming the assessment of local franchise tax on PLDT.  The SC held thatalthough the withdrawal of tax exemptions under the Local Government Code doesnot preclude Congress from granting subsequent exemptions, Congress, inenacting R.A.7925 particularly Section 23 thereof, did not intend it to operateas a blanket tax exemption to all telecommunications entities and that Section23 of R.A. 7925 cannot be considered as having amended the PLDT Franchise so asto entitle PLDT to exemption from local franchise tax.  PLDT filed a Motion forReconsideration of the said decision and a Motion to Refer the Case to theCourt En Banc and for Oral Arguments.  The Court’s Second Division granted theMotion to Refer the Case to the Court En Banc, which referral was thereafteraccepted by the Court En Banc.  The Oral Arguments was held on January 21, 2003.Both parties have submitted their Memorandum and the Motion for Reconsiderationis deemed submitted for resolution.

 

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

 

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

 

***Smart***

 

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

 

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

 

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

 

*Localfranchise tax assessments*.   To date,Smart has received assessments for local franchise and business taxes fromcertain cities and municipalities in the aggregate amount of approximatelyPhp313 million.  Smart has formally protested these assessments based on thefollowing:

 
- An opinionissued by the Bureau of Local Government Finance, or BLGF, dated August 13, 1998 stating that Smart should beconsidered exempt from the local franchise tax provided under Section 137 ofthe Local Government Code, which exemption shall be applicable only to localfranchise and business taxes.       - R.A. 7925was passed on February 20, 1995 after thepassage of the Local Government Code.  Under the ipso facto provision of R.A.7925, the holder of a franchise granted prior to or after the effective date ofR.A. 7925 is entitled to the benefit or any favorable provisions contained inany other franchises, regardless of whether such franchises were granted priorto or after the passage of R.A. 7925.         - BecauseSmart’s legislative franchise took effect after the effective date of the LocalGovernment Code, the franchise tax prescribed under Section 137 thereof shouldbe deemed to be part of the said franchise.  Section 137 states that “cellularoperators shall only pay a franchise tax equivalent to 3% of all gross receiptsof the business transacted under the franchise, and the said percentage shallbe in lieu of all taxes on this franchise or earnings thereof.”           - In the PLDTvs. City of Davao case, the Supreme Court tookcognizance of the BLGF opinion by stating that Smart’s franchise granted afterthe effectivity of the Local Government Code exempted it from the payment oflocal franchise and business taxes.     Smart’sadministrative protest against the Makati and Iloilo assessments were denied,while those against the Digos and General Santos assessments in the aggregateamount of Php59,447 have not yet been decided.     Smartfiled separate petitions appealing the local franchise and business taxassessments of Makati City in the amount of Php196 million for the calendaryears 2000 and 2001, and in the amount of Php116 million for the calendar years1995, 1998 and 1999.  These cases have been consolidated and are now pendingbefore Regional Trial Court, Branch 61 of Makati City.  Smart’s earlier motionto suspend trial pending resolution of the Smart franchise tax case in Davao wassubsequently denied by said court.     Smartalso filed a petition appealing the local franchise and business tax assessmentof Iloilo City in the amount of Php1 million.  This case is nowpending before the Regional Trial Court, Branch 28 of Iloilo City.     Smartalso filed a Petition for Declaratory Relief with the SC questioning anordinance issued by the City Council of Davao on the local franchise andbusiness taxes.  The SC decided in favor of the City of Davao andSmart’s Motion for Reconsideration of said decision was denied.  Smart filedwith the SC a Petition for Review under Rule 45 of the 1997 Rules of Procedureto appeal the aforestated decision.     ***Mabuhay Satellite***     MabuhaySatellite was the respondent in an arbitration commenced by Space SystemsLoral, Inc. (SS/L), as a result of a dispute between the two parties concerningtheir satellite joint venture.  On June 5, 2002,Mabuhay Satellite received an arbitration decision requiring Mabuhay Satelliteto pay SS/L an estimated amount of US$14 million representing MabuhaySatellite’s unpaid balance for the 65% equity share in the joint venture.  Theamount has been fully accrued and recorded in the books of Mabuhay Satellite asof December 31, 2002.      PLDTand some of its subsidiaries are involved in certain other legal actions andclaims arising in the ordinary course of business.  The respective managementsof PLDT and said subsidiaries believe that any possible loss that they mayincur as a result of such legal actions, claims and assessments not covered byan allowance for losses will not have a material effect on their respective financialpositions and results of operations.     
 
  **22.    ****Foreign Currency-DenominatedMonetary Assets and Liabilities**     PLDT’s and its subsidiaries’ foreigncurrency-denominated monetary assets and liabilities and their peso equivalentsfollow:     
 

2000

2001

**2002**

 

U.S. Dollar

Peso Equivalent

U.S. Dollar

Peso Equivalent

**U.S. Dollar**

**Peso Equivalent**

 

(In Millions)

***Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Assets

** **

** **

 

 

** **

** **

Cash and cash equivalents

US$142

Php7,098

US$40

Php2,083

**US$76**

Php**4,033**

Accounts receivable

131

6,563

146

7,536

**149**

**7,910**

 

273

13,661

186

9,619

**225**

**11,943**

Liabilities

** **

** **

 

 

 

 

Accounts payable

39

1,939

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

188,642

3,371

174,273

**3,214**

**171,145**

Net foreign currency-

** **

** **

 

 

 

 

denominated liabilities

US$3,501

Php174,981

US$3,185

Php164,654

**US$2,989**

Php**159,202**

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

***Non-Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

Assets

** **

** **

 

 

** **

** **

Cash and cash equivalents

US$136

Php6,800

US$30

Php1,549

**US$49**

Php**2,602**

Accounts receivable

107

5,369

130

6,717

**116**

**6,158**

 

243

12,169

160

8,266

**165**

**8,760**

Liabilities

 

 

 

 

 

 

Accounts payable

32

1,602

18

923

**23**

**1,220**

Accrued and other current liabilities

87

4,357

66

3,424

**47**

**2,476**

Notes payable

1

50

22

1,137

**6**

**320**

Long-term debt

2,861

143,013

2,659

137,420

**2,538**

**135,158**

Deferred credits and other noncurrent liabilities

–

–

–

–

**50**

**2,676**

2,981

149,022

2,765

142,904

**2,664**

**141,850**

Net foreign currency-

 

 

 

 

 

 

denominated liabilities

US$2,738

Php136,853

US$2,605

Php134,638

**US$2,499**

Php**133,090**
     Intranslating the foreign currency-denominated monetary assets and liabilitiesinto peso amounts, the exchange rates used were Php53.254 to US$1.00, Php51.690to US$1.00 and Php49.986 to US$1.00, the peso-dollar exchange rates as at December 31, 2002,2001 and 2000, respectively.     
 
  **23.    ****Financial Instruments**  ** **  ***PLDT***  *** ***  *Currency Swaps*     In2002 and 2001, PLDT entered into currency swap agreements with various foreigncounterparties to hedge the currency risk on its fixed rate notes maturing in2012 and 2017.  As of December 31, 2002 and 2001, the swaps have an aggregate notional amountof US$550 million and US$100 million, respectively.  Under the swaps, PLDT effectivelyexchanges the principal of its US dollar-denominated fixed rate notes intopeso-denominated loan exposures at an agreed swap exchange rate.  The agreedswap exchange rate is reset to the lowest Peso/US$ spot exchange rate duringthe term of the swap, subject to a minimum exchange rate.  As of December 31, 2002 and2001, the outstanding swap contracts have been reset to average exchange rateof Php51.27 and Php50.77, respectively.  In addition, PLDT is required to makesemi-annual fixed or floating swap cost payments to its counterparties, whichaveraged to about 2.35% and 3.86% in 2002 and 2001, respectively.       US$400million of the swaps outstanding as of December 31, 2002,have been structured to include credit-linkage with PLDT as the reference entity.The specified credit events include bankruptcy, failure to pay, obligationacceleration, moratorium/repudiation, and restructuring of PLDT bonds, or allor substantially all of PLDT’s obligations.  Upon the occurrence of any ofthese credit events, subject to agreed threshold amount where applicable, theobligations to both PLDT and its counterparty under the swap contractsterminate without further settlements to either party, including anymark-to-market value of the swaps.  As of December 31, 2002and 2001, mark-to-market value of the outstanding swaps, as confirmed by thecounterparties, amounted to a net loss of Php461 million and Php312 million,respectively.       In1998, PLDT entered into a currency swap agreement to swap its floating rateJapanese yen (JP¥)-denominated loan for a fixed rate US dollar amount.  In2000, PLDT terminated the swap agreement, which had a notional amount ofJP¥19,807 million, and realized a gain of US$23 million (Php924 million).       *Forward Exchange Contracts*     PLDThas the following outstanding short-term forward buy US$ contracts as of December 31, 2002,2001 and 2000;      
 

2000

2001

**2002**

Aggregate notional amount (in millions)

US$44

US$286

**US$211**

Weighted average forward rate

Php50.1 to US$1

Php52.6 to US$1

**Php53.9 to US$1**
     PLDThad the following outstanding short-term forward exchange contracts to buy JP¥and sell US$ as of December 31, 2002 and 2001;      
 

2001

**2002**

Aggregate notional amount (in millions)

JP¥3,968

**JP¥3,296**

Contracted forward rate

JP¥122.8 to US$1

**JP¥115.2 to US$1**
     The net mark-to-market gain (loss) on the outstandingforward contracts amounted to about (Php162 million), (Php271 million) andPhp0.4 million as of December 31, 2002, 2001 and 2000, respectively, as confirmed bycounterparties.     *Interest Rate Swaps*     In2001, PLDT also entered into a US$/JP¥ swap agreement to swap the coupon on US$175million of its fixed rate notes for a floating rate JP¥ amount.  As of December31, 2001, mark-to-market value of the outstanding interest rate swap, as confirmedby the counterparty, amounted to a net gain of Php80 million.  The swap wasterminated in 2002 at a realized gain of Php633 million.     ***Smart***  *** ***  *Currency Swaps*     Smarthas existing currency swap agreements with a foreign financial institution,with aggregate notional amount of US$88 million, US$115 million and US$134million as of December 31, 2002, 2001 and 2000, respectively, and average swaprate of Php37.29, Php37.25 and Php37.13, respectively.  Under the swaps, Smartreceives fixed US dollar interest payments and pays fixed peso interestpayments in semi-annual intervals up to April 2003.  As of December 31, 2002,2001 and 2000 the net aggregate mark-to-market gain on these swap agreements,as confirmed by the counterparty, amounted to about Php1,361 million, Php1,496million and Php1,655 million, respectively, and is recognized directly throughearnings.       Awholly owned subsidiary of Smart entered into complementary currency swapagreements with the same counterparty, whereby the mark-to-market value of suchcurrency swaps offset the mark-to-market value of the currency swaps enteredinto by the Smart.     *Forward Exchange Contracts*  *** ***  Smarthas the following outstanding short-term forward buy US$ contracts as of December 31, 2002,2001 and 2000:     
** **

2000

2001

**2002**

Aggregate notional amount (in millions)

US$56

US$11

**US$5**

Weighted average forward rate

Php49.5 to US$1

Php53.2 to US$1

**Php53.5 to US$1**
     Asof December 31, 2000, Smart also has an outstanding forward buy JP¥ sellpeso contract with notional amount of JP¥13 million and contracted forward rateof 0.468 to JP¥1.      Thenet mark-to-market gain (loss) on all the outstanding forward contractsamounted to about (Php0.8 million), (Php12 million) and Php41 million as of December 31, 2002,2001 and 2000, respectively, as confirmed by counterparties.     
 
  **24.    ****Reportable Segments**     Operatingsegments are components of an enterprise about which separate financialinformation is available that is evaluated regularly by management in decidinghow to allocate resources and in assessing performance.  Generally, financialinformation is required to be reported on the basis that it is used internallyfor evaluating segment performance and deciding how to allocate resources tosegments.     Wehave organized our business into three main segments:             - Fixed Line — fixed line telecommunicationsservices primarily provided through PLDT.  We also provide fixed line servicesthrough PLDT’s subsidiaries Clark Telecom, Subic Telecom, MaraTel, whichtogether account for approximately 1% of our consolidated fixed lines inservice, and PLDT Global;                - Wireless — wireless telecommunicationsservices provided through our cellular service providers, namely PLDT’ssubsidiary Smart and PLDT’s affiliate Piltel, and satellite operators, namelyPLDT’s subsidiaries Mabuhay Satellite, ACeS Philippines and Telesat; and                  - Informationand Communications Technology — information and communications infrastructure and services for Internetapplications, Internet protocol-based solutions and multimedia content deliveryprovided by PLDT’s subsidiary ePLDT, Internet access services provided byePLDT’s subsidiary Infocom, and e-commerce, call centers and IT-relatedservices provided by other subsidiaries and affiliates of ePLDT, as described in Note 9 – Investments .      Thesegment assets as of December 31, 2002, 2001 and 2000 and results of operations of ourreportable segments for the years ended December 31, 2002,2001 and 2000 reported under Philippine GAAP are as follows:     
 

**Fixed Line**

**Wireless**

**Information and  Communications Technology**

** **

** **

**Eliminations**

**Total**

* *

 

 

(In Million Pesos)

 

 

*As of and for the year ended**December 31, 2000**(As restated – Note 3)*

 

 

 

 

 

Operating revenues

45,967

15,487

239

(1,125)

60,568

External revenues

45,967

14,362

239

–

60,568

Inter-segment revenues

–

1,125

–

(1,125)

–

Operating expenses

31,306

19,143

311

(991)

49,769

Operating income (loss)

14,661

(3,656)

(72)

(134)

10,799

Segment assets

246,694

109,751

1,435

(31,109)

326,771

Segment liabilities

179,453

53,712

359

1,686

235,210

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

35,685

1,825

177

(895)

36,792

Investing activities

(30,255)

 (6,983)

(497)

11,714

(26,021)

Financing activities

(5,316)

4,503

488

(10,819)

(11,144)

Depreciation and amortization

10,771

7,090

35

–

17,896

Provision for doubtful accounts

2,361

637

12

–

3,010

Capital expenditures

(20,415)

(6,463)

(231)

–

(27,109)

* *

 

 

 

 

 

*As of and for the year ended**December 31, 2001**(As restated – Note 3)*

 

 

 

 

 

Operating revenues

46,477

24,582

469

(991)

70,537

External revenues

46,420

23,648

469

–

70,537

Inter-segment revenues

57

934

–

(991)

–

Operating expenses

32,628

21,145

780

(659)

53,894

Operating income (loss)

13,849

3,437

(311)

(332)

16,643

Segment assets

232,221

110,901

4,175

(41,029)

306,268

Segment liabilities

166,835

47,283

3,760

(6,120)

211,758

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

24,851

13,626

1,461

–

39,938

Investing activities

(12,730)

(22,935)

(2,415)

6,221

(31,859)

Financing activities

(17,923)

(9,562)

929

12,902

(13,654)

Depreciation and amortization

13,389

8,020

128

–

21,537

Provision for doubtful accounts

2,880

273

31

–

3,184

Capital expenditures

(9,742)

(19,233)

(1,579)

–

(30,554)

* *

 

 

 

 

 

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

 

 

 

 

 

Operating revenues

47,784

34,628

970

(3,219)

80,163

External revenues

45,518

33,704

941

–

80,163

Inter-segment revenues

2,266

924

29

(3,219)

–

Operating expenses

34,799

26,321

1,478

(3,221)

59,377

Operating income (loss)

12,985

8,307

(508)

2

20,786

Segment assets

263,043

77,035

3,962

(44,171)

299,869

Segment liabilities

167,427

39,894

3,060

(6,687)

203,694

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

29,365

22,410

34

2,348

54,157

Investing activities

(3,851)

(3,445)

(691)

(7,125)

(15,112)

Financing activities

(23,084)

(14,701)

618

4,778

(32,389)

Depreciation and amortization

13,133

10,644

333

–

24,110

Provision for doubtful accounts

3,556

423

45

–

4,024

Capital expenditures

(7,502)

(6,590)

(607)

–

(14,699)
     
 
  **25.    ****Other Matters**  ** **  a.         Interconnection Agreements     PLDThas existing interconnection agreements with nine International GateFacilities, or IGF operators, six Inter Exchange Carriers, or IXCs, sixCellular Mobile Telephone Systems, or CMTS operators, 70 LECs (includingmembers of the Philippine Association of Private Telephone Companies, Inc.),and 12 paging and trunk radio operators.  These interconnection agreementsinclude provisions for settlement and payment of charges.  Settlements withinterconnecting IGF operators and CMTS operators for local calls are in theform of access charges.  Settlements with interconnecting IXCs and LECs for tollcalls are based on hauling and access charges, and to some extent, revenuesharing.  Settlement also involves payment of access charges, but settlementfor toll calls is on a revenue-sharing basis.  LEC to LEC interconnection withhauling from one service area to another service area is settled based on trunkcharges, while overlay LEC to LEC interconnection in a given service area iswithout charges.  Paging and trunk radio interconnection settlements are basedon fixed charges.       b.         Proposed Metering of LocalExchange Service     Theproposed metering of PLDT’s local exchange service has been temporarilysuspended for further review by the NTC.     c.         U.S. Federal Communications Commission, or FCC, Ruling versus PhilippineTelecommunications Companies     InMay 2002, PLDT advised AT&T Corp., or AT&T, WorldCom, Inc., orWorldCom, and other carriers of PLDT’s need to increase its termination ratesby August 2002. Despite numerous negotiation sessions in 2002 and 2003,AT&T and WorldCom refused to accept any rate increases.  PLDT unilaterallyextended its prior termination charges to each carrier while continuing offersto negotiate, first from August 1, 2002 to October 1, 2002, then until December31, 2002, and then, finally, despite the lack of a written agreement from AT&Tand WorldCom, through January 31, 2003.  While nearly 100 carriers worldwide,including 14 U.S. carriers, agreed to the new termination rates andentered into new termination rate agreements with PLDT, the termination rateagreements with AT&T and WorldCom lapsed in December 2002, without themagreeing with PLDT on any provisional arrangement or final agreement on the newtermination rates.  Faced with the continuing stonewalling by AT&T andWorldCom, PLDT, in December 2002, was forced to notify each company that PLDT’stermination rates would finally be increased as of February 1, 2003.  Because noagreement was reached with either AT&T or WorldCom, effective as of February 1, 2003,PLDT stopped terminating traffic sent directly by each of AT&T and WorldCom.     On February 7, 2003,AT&T and WorldCom filed separate petitions with the U.S. FCC requesting theU.S. FCC to take action to protect U.S. international carriers and U.S. consumersfrom alleged “whipsawing” behavior occurring on the U.S.-Philippine Route.  “Whipsawing” is a form of anti-competitive behavior that involvesthe ability of foreign carriers to obtain unduly favorable terms and conditionsfrom U.S. international service providers by setting competing U.S. carriersagainst one another.     On February 7, 2003, theNTC of the Republic of the Philippines directed Philippine carriers to take one of twodifferent courses of action, depending on whether such carriers had effectivetermination rates with their counterparties.  If PLDT had “existing and effectiveagreements with foreign telecommunication carriers relative to terminationrates”, it should “comply with the terms thereof, specifically in maintainingthe flow of traffic in and between circuits and facilities covered by suchagreements.”  If, however, the counterparty and PLDT were “without existing andeffective agreements relative to termination rates,” then PLDT is “encouraged ...to negotiate and conclude agreements” with the counterparty, and “the partiesmay agree on provisional/interim arrangements for continuity of service.”  Eachof AT&T and WorldCom immediately rejected PLDT’s offer for an interimtermination rate agreement.     OnMarch 10, 2003, the International Bureau of the FCC granted the request ofAT&T and WorldCom and issued an Order directing all facilities-basedcarriers subject to U.S. FCC jurisdiction to suspend payments for terminationservices to PLDT, Globe Telecom, Inc., Bayan Telecommunications Philippines,Inc., Digital Telecommunications Philippines, Inc., Smart and Subic Telecomuntil such time as the U.S. FCC issues a Public Notice that AT&T’s circuitson the U.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 January 31, 2003, receivables from U.S.carriers amounted to approximately US$17 million, of which US$7 million wasattributable to PLDT, US$7 million to Smart and US$2 million to Subic Telecom.     Inresponse to the ruling of the International Bureau of the FCC, the NTC issuedin a Memorandum Order dated March 12, 2003 directing all affected Philippinecarriers “(1) not to accept terminating traffic via direct circuits from U.S.facilities-based carriers who do not pay Philippine carriers for servicesrendered; and (2) to take all measures necessary to collect payments forservices rendered in order to preserve the viability, efficiency, sustainedgrowth and development and continued competitiveness of the Philippinetelecommunications industry.”     TheNTC also stated in its March 12, 2003 Order that the termination rates offered by PLDT are“fair and reasonable.”  These rates, US$0.12 per minute for calls terminatingon the fixed-line network and US$0.16 per minute for calls terminating onmobile networks, are well below the FCC benchmark settlement rate of US$0.19per minute for low 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.       Wereserve the right to take whatever action is necessary to protect our interestsrelative to the decision of the U.S. FCC and the NTC.  In the meantime, wehonor all existing bilateral agreements with other carriers.  ** **  
 
  **26.    ****Reclassificationof Accounts**  ** **  Wehave reclassified certain accounts in 2001 and 2000 to conform with our 2002financial statements presentation.