MANAGEMENT’S DISCUSSION AND ANALYSIS OF 

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Three Months Ended March 31, 2005

* *

*Inthe following discussion and analysis of our financial condition and results ofoperations, unless the context indicates or otherwise requires, references to“we,” “us,” “our” or “PLDT Group” mean the Philippine Long Distance TelephoneCompany and its consolidated subsidiaries, and references to “PLDT” mean thePhilippine Long Distance Telephone Company, not including its consolidatedsubsidiaries (see Note 2 – Summary of Significant Accounting Policies to theaccompanying unaudited consolidated financial statements for a list of thesesubsidiaries, including a description of their respective principal businessactivities).*

* *

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with the accompanying unauditedconsolidated financial statements and the related notes.  Our financialstatements, and the financial information discussed below, have been preparedin accordance with Philippine generally accepted accounting principles, orPhilippine GAAP, which differs in certain significant respects from generallyaccepted accounting principles in the United States.*

* *

*Thefinancial information appearing in this report and in the accompanyingunaudited consolidated financial statements is stated in Philippine pesos.  Allreferences to “pesos,” “Philippine pesos” or “Php” are to the lawful currencyof the Philippines; all references to “U.S. dollars,” “US$” or “dollars” are tothe lawful currency of the United States; all references to “Japanese yen,”“JP¥” or “¥” are to the lawful currency of Japan**and all references to “Euro” or “€” are to thelawful currency of the European Union**.  Translations of Philippine pesoamounts into U.S. dollars in this report and in the accompanying unauditedconsolidated financial statements were made based on the exchange rate ofPhp54.747 to US$1.00, the volume weighted average exchange rate at March 31,2005 quoted through the Philippine Dealing System.*

* *

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

* *

*Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement.  We have chosen these assumptions orbases in good faith, and we believe that they are reasonable in all materialrespects.  However, we caution you that forward-looking statements and assumedfacts or bases almost always vary from actual results, and the differencesbetween the results implied by the forward-looking statements and assumed factsor bases and actual results can be material, depending on the circumstances.When considering forward-looking statements, you should keep in mind thedescription of risks and cautionary statements in this report.  You should alsokeep in mind that any forward-looking statement made by us in this report orelsewhere speaks only as at the date on which we made it.  New risks anduncertainties come up from time to time, and it is impossible for us to predictthese events or how they may affect us.  We have no duty to, and do not intendto, update or revise the forward-looking statements in this report after thedate hereof.  In light of these risks and uncertainties, any forward-lookingstatement made in this report or elsewhere might not occur.*

* *

*Ouraudited consolidated financial statements as at and for the year ended December31, 2004 incorporate certain changes in accounting policies which have affectedour financial position and results of operations retrospectively.  For furtherdiscussion please see Note 2 – Summary of Significant Accounting Policies tothe accompanying unaudited consolidated financial statements.*

* *

**Financial Highlights and Key Performance Indicators**

* *

| ** **                                           | **March 31,**                    | ** ** | **December 31,** | ** ** | **Increase (Decrease)** |
|------------------------------------------------------|----------------------------------|------------|------------------|------------|-------------------------|
| **(in millions)**                                    | **2005**                         |       | **2004**(1)      | ** ** | **Amount**              | ** ** | **%** |
|                                                 | (Unaudited)                      |       | (Audited)        |       |                    |   |   |
| **Consolidated Balance Sheets**                      |                             |       |             |       |                    |   |   |
| Total assets                                         | Php261,403                       |       | Php265,473       |       | (Php4,070)              |   | (2) |
| Property, plant and equipment                        | 192,921                          |       | 194,525          |       | (1,604)                 |   | (1) |
| Cash and cash equivalents and short-term investments | 31,924                           |       | 31,194           |       | 730                     |   | 2 |
| Total equity                                         | 54,383                           |       | 48,515           |       | 5,868                   |   | 12 |
| Interest-bearing financial liabilities               | 151,070                          |       | 164,489          |       | (13,419)                |   | (8) |
| Notes payable and long-term debt                     | 136,014                          |       | 149,088          |       | (13,074)                |   | (9) |
| Net debt to equity ratio(2)                          | 1.91x                            |       | 2.43x            |       | –                  |   | – |
| ** **                                           | ** **                       |
| ** **                                           | **Three Months Ended March 31,** |
|                                                 | ** **                       |       | ** **       | ** ** | **Increase (Decrease)** |
|                                                 | **2005**                         |       | **2004**(1)      | ** ** | **Amount**              | ** ** | **%** |
|                                                 | (Unaudited)                      |
| **Consolidated Statements of Income**                | ** **                       | ** ** | ** **       | ** ** | ** **              | ** ** | ** ** |
| Revenues and other income                            | Php30,251                        |       | Php30,823        |       | (Php572)                |   | (2) |
| Service income                                       | 29,361                           |       | 28,107           |       | 1,254                   |   | 4 |
| Expenses                                             | 17,325                           |       | 23,107           |       | (5,782)                 |   | (25) |
| Income before income tax                             | 12,926                           |       | 7,716            |       | 5,210                   |   | 68 |
| Net income attributable to equity holders            | 9,361                            |       | 5,686            |       | 3,675                   |   | 65 |
| Net income margin                                    | 31%                              |       | 18%              |       | –                  |   | – |
| **Consolidated Statements of Cash Flows**            |                             |       |             |       |                    |   |   |
| Net cash provided by operating activities            | 15,250                           |       | 18,103           |       | (2,853)                 |   | (16) |
| Net cash used in investing activities                | 2,191                            |       | 5,363            |       | (3,172)                 |   | (59) |
| Capital expenditures                                 | 4,263                            |       | 4,316            |       | (53)                    |   | (1) |
| Net cash used in financing activities                | 10,245                           |       | 7,528            |       | 2,717                   |   | 36 |
| **Operational Data**                                 | ** **                       | ** ** | ** **       | ** ** | ** **              | ** ** | ** ** |
| Number of cellular subscribers                       | 20,252,513                       |       | 14,356,186       |       | 5,896,327               |   | 41 |
| Number of fixed lines in service                     | 2,149,489                        |       | 2,197,879        |       | (48,390)                |   | (2) |
| Number of employees                                  | 18,581                           |       | 17,346           |       | 1,235                   |   | 7 |

 

| **Php per US$ Exchange Rates** |      |
|--------------------------------|-----------|
| March 31, 2005                 | Php54.747 |
| December 31, 2004              | 53.341    |
| March 31, 2004                 | 56.216    |
| December 31, 2003              | 55.586    |

______________

* *

*(1)    **As restated to reflect theeffects of the changes in accounting policies, as discussed in Note 2 – Summaryof Significant Accounting Policies to the accompanying unaudited consolidatedfinancial statements.*

*(2)    **Net debt is derived bydeducting cash and cash equivalents and short-term investment from long-termdebt.*

 

**Overview**

 

We are the largest andmost diversified telecommunications company in the Philippines.  We haveorganized our business into three main segments:

 

•           *Wireless**—***wirelesstelecommunications services provided by Smart Communications, Inc., or Smart,and Pilipino Telephone Corporation, or Piltel, our cellular service providers,and Mabuhay Satellite Corporation, ACeS Philippines Cellular SatelliteCorporation, and Telesat, Inc., our satellite and very small aperture terminal,or VSAT, operators;**

 

•           *Fixed Line**—***fixed linetelecommunications services primarily provided through PLDT.  We also providefixed line services through PLDT’s subsidiaries PLDT Clark Telecom, Inc., SubicTelecommunications Company, Inc., PLDT-Maratel, Inc., Piltel and BonifacioCommunications Corporation, which together account for approximately 3% of ourconsolidated fixed lines in service, and PLDT Global Corporation; and

 

•           *Information and CommunicationsTechnology**—***informationand communications infrastructure and services for internet applications,internet protocol-based solutions and multimedia content delivery provided byPLDT’s subsidiary ePLDT, Inc.; call center services provided by ePLDT’ssubsidiaries Parlance Systems, Inc., Vocativ Systems, Inc. and ePLDT Ventus,Inc.; internet access and gaming services provided by ePLDT’s subsidiaries,Infocom Technologies, Inc., Digital Paradise, Inc. and netGames, Inc.; ande-commerce, and IT-related services provided by other investees of ePLDT, asdiscussed in *Note 9 – Investments in Associates**–**at equity*to the accompanying unaudited consolidated financial statements. 

** **

We registered totalrevenues and other income of Php30,251 million, a decrease of Php572 million inthe first quarter of 2005 as compared to Php30,823 million in the same periodin 2004 primarily due to the Php1,816 million decline in our non-servicewireless revenues, partially offset by Php1,254 million net increase in ourservice revenues.  Wireless service revenues increased by 11%, while fixed lineservice revenues decreased by 2% in the first quarter of 2005 compared to thesame period in 2004.

 

Expenses decreased byPhp5,782 million, or 25%, to Php17,325 million in the first quarter of 2005from Php23,107 million in the same period in 2004 largely resulting fromdecreases in financing costs mostly driven by the appreciation of the peso andlower cost of sales and provisions.

 

With the expiration ofSmart’s income tax holiday in May 2004, we recognized a higher provision forincome tax of Php3,543 million for the first quarter of 2005 as compared toPhp2,036 million in the same period in 2004.

 

As a result of theforegoing, our net income attributable to equity holders increased by Php3,675million, or 65%, to Php9,361 million in the first quarter of 2005 from Php5,686million in the same period in 2004.

** **

Accounting Changes 
 

The accountingpolicies adopted are consistent with those of the previous financial periodexcept that we have adopted in year-end 2004 the following new accountingstandards effective for financial years beginning January 1, 2005.  Our March 31, 2004, unaudited consolidated financial statements herein have been restated togive effect to the provisions of the new standard adopted: 

 
- *PAS 19, “Employee Benefits”.*  PAS 19 requires the use of the projected unit credit method in measuring retirement benefit expense and a change in the manner of computing benefit expense relating to past service cost and actuarial gains and losses.  Past service cost is recognized as an expense on a straight-line basis over the average period until the benefits become vested.  On the initial adoption of this standard, the effect of the change in accounting policy includes all actuarial gains and losses that arose in earlier periods even if they fall inside the 10% corridor.  In subsequent periods, portion of actuarial gains or losses is recognized as income or expense if the cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceeded the greater of: (i) 10% of the present value of the defined benefit obligation at that date (before deducting plan assets); and (ii) 10% of the fair value of any planned assets at that date by dividing the excess determined by the expected average remaining working lives of the employees participating in that plan is recognized immediately as income or expense. 

 
- *PAS 21, “The Effects of Changes in Foreign Exchange Rates”.*  PAS 21 requires the recognition of foreign exchange gains and losses in the period they are incurred.  Upon the adoption of PAS 21, we adjusted previously recorded undepreciated capitalized foreign exchange losses, net of exchange losses that qualify as borrowing cost and income tax effect, against beginning retained earnings, to the extent that such capitalized amounts do not meet the conditions for capitalization under the new accounting standard, and restated prior periods’ unaudited consolidated financial statements.  Further, PAS 21 requires the determination of the functional currency of an entity.  Exchange differences from any retranslation are taken directly as a separate component of equity.  On disposal of an entity with a functional currency other than the Philippine peso, the deferred cumulative amount recognized in equity relating to that particular foreign operation shall be recognized in the consolidated income statement.  

 
- *PAS 27, “Consolidated and Separate Financial Statements”.*   PAS 27 supersedes SFAS 27/IAS 27, “Consolidated Financial Statements and Accounting for Investments in Subsidiaries”.  Under PAS 27, the exclusion of a subsidiary from consolidation when there are severe long-term restrictions that significantly impair a subsidiary’s ability to transfer funds to the parent company under the superseded standard was removed.  Consequently, Piltel was required to be included in our unaudited consolidated financial statements retrospectively.

 
- *PAS 32, “Financial Instruments: Disclosure and Presentation”.*  PAS 32 covers the disclosure and presentation of all financial instruments. This standard requires more comprehensive disclosures about a company’s financial instruments, whether recognized or unrecognized in the financial statements.  New disclosure requirements include terms and conditions of financial instruments used, types of risks associated with both recognized and unrecognized financial instruments (market risk, price risk, credit risk, liquidity risk, and cash flow risk), fair value information of both recognized and unrecognized financial assets and financial liabilities, and our financial risk management policies and objectives.  This standard also requires financial instruments to be classified as liabilities or equity in accordance with their substance and not their legal form. Consequently, we have designated PLDT’s Convertible Preferred Stock Series V, VI and VII as compound instruments consisting of liability and equity components.  The total fair value of the Convertible Preferred Stock Series V, VI and VII was determined at issue date, of which the aggregate fair value of the liability component of the Series V, VI and VII Convertible Preferred Stock as at issuance date is included as a financial liability under  Interest-bearing Financial Liabilities  account in the accompanying unaudited consolidated balance sheets.  The residual amount was assigned as the equity component.

 
- *PAS 39, “Financial Instruments: Recognition and Measurement”.*  PAS 39 establishes the accounting and reporting standards for recognizing and measuring our financial assets and financial liabilities.  This standard requires a financial asset or financial liability to be recognized initially at fair value.  Subsequent to initial recognition, we are to continue to measure financial assets at their fair values, except for loans and receivables and held-to-maturity investments, which are measured at cost or amortized cost using the effective interest rate method. Financial liabilities are subsequently measured at cost or amortized cost, except for liabilities classified as “at fair value through profit and loss” and derivatives, which are measured at fair value.

** **

PAS 39 also covers the accounting for derivative instruments.  Thisstandard has expanded the definition of a derivative instrument to includederivatives (derivative-like provisions) embedded in non-derivative contracts.Under this standard, every derivative instrument is recorded in the balancesheet as either an asset or liability measured at its fair value.  Derivativesthat are not designated and do not qualify as hedges are adjusted to fair valuethrough income.  If the derivative is designated and qualifies as a hedge,depending on the nature of the hedge, changes in the fair value of derivativesare either offset against the change in fair value of the hedged assets,liabilities, or firm commitments through earnings, or recognized in equityuntil the hedged item is recognized in earnings.

 
- *PAS 40, “Investment Property”.*  PAS 40 prescribes the accounting treatment for investment properties which are defined as land and/or building held to generate income or for capital appreciation or both.  An investment property is initially recognized at cost.  Subsequent to initial recognition, an investment property is either carried at (i) cost, less accumulated depreciation or any accumulated impairment losses, or (ii) fair value, wherein fair value movements are recognized as income or expense.  Transfers to or from investment property classification are made only when there is evidence of a change in use.

 
- *PFRS 2, “Share-Based Payment”.*  PFRS 2 requires an entity to recognize goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received.  The entity shall recognize a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction, or a liability if the goods or services were acquired in a cash-settled share-based payment transaction.  In line with our adoption of PFRS 2, we recognized in our consolidated statements of income the costs of employees’ and directors’ share options and other share-based incentives by using an option-pricing model, further details of which are given in  Note 21 – Employee Benefits  to the accompanying unaudited consolidated financial statements .

*** ***
- *PFRS 3, “Business Combinations”, PAS 36, “Impairment of Assets” and PAS 38, “Intangible Assets”.*  PFRS 3 requires all business combinations within its scope to be accounted for by applying the purchase method.  In addition, this standard requires the acquirer to initially measure separately the identifiable assets, liabilities and contingent liabilities at their fair values, at acquisition date, irrespective of the extent of any minority interest.

 

PFRS 3 also requiresgoodwill in a business combination to be recognized by an acquirer as an assetfrom the acquisition date, initially measured as the excess of the cost of thebusiness combination over the acquirer’s interest in the net fair value of theacquiree’s identifiable assets and liabilities.  Further, the amortization ofgoodwill acquired in a business combination is prohibited; instead, goodwill isto be tested annually, or more frequently, if events or changes incircumstances indicate that the asset might be impaired. 

 

Moreover, the useful lives of intangible assets areassessed at the individual asset level as having either a finite or indefinitelife.  Where an intangible asset has a finite life, it will be amortized overits useful life.  Amortization periods and methodsfor intangible assets with finite useful lives are reviewed annually or earlierwhere an indicator or impairment exists.  Intangibles assessed as havingindefinite useful lives are not amortized, as there is no foreseeable limit tothe period over which the asset is expected to generate net cash inflows to thePLDT Group.  However, intangibles with indefinite useful lives are reviewedannually to ensure that their carrying values do not exceed the recoverableamounts regardless of any impairment indicators present. 

 
- *PFRS 5, “Non-Current Assets Held-for-Sale and Discontinued Operations”.*  Under the superseded SFAS 35/IAS 35, “Discontinuing Operations”,  we would have previously recognized a discontinued operation at the earlier of when (a) we enter into a binding agreement; and (b) the Board of Directors have approved and announced a formal disposal plan.  PFRS 5 now requires an operation to be classified as discontinued when the criteria to be classified as held-for-sale have been met or we have disposed of the operation.

 

Followingadditional guidelines from PAS 16, “Property, Plant and Equipment”, we haverecognized the initial settlement of thenet present value of legal and constructive obligations associated with theretirement of a tangible long-lived asset that resulted from the acquisition,construction or development and the normal operation of a long-lived asset inthe period in which it is incurred.  The asset retirement obligations wererecognized in the period in which they are incurred if a reasonable estimate offair values can be made.  The related asset retirement costs are capitalized aspart of the carrying amount of the corresponding property, plant and equipmentwhich are being depreciated on a straight-line basis over the useful lives ofthe related assets or the contract periods, whichever is lower.

 

The following is the reconciliation from net incomeas previously reported to net income as restated, including the effect of theserestatements on per share amounts:

 

 

 

For the Three Months Ended March 31,

2004

(in millions, except per share amounts)

 

 

**Net income, as previously reported**

** **

Php5,240

PAS 16 – Property, Plant and Equipment

 

(15)

PAS 17 – Leases

 

1

PAS 19 – Employee Benefits 

 

(20)

PAS 21 – The Effects of Changes in Foreign Exchange Rates

 

42

PAS 27 – Consolidated and Separate Financial Statements

 

3

PAS 32 – Financial Instruments:  Disclosure and Presentation

 

(478)

PAS 39 – Financial Instruments:  Recognition and Measurement

 

969

PAS 40 – Investment Property

 

(4)

PFRS 2 – Share-Based Payment

 

(36)

PFRS 3 – Business Combinations, PAS 36 – Impairment of Assets and  PAS 38 – Intangible Assets

 

 

(16)

**Net income, as restated**

 

Php5,686

** **

 

 

* *

* *

* *

* *

* *

* *

*(continued)*

 

 

**Earnings per common share, as previously reported**

 

Php28.32

Earnings per share impact of restated items:

 

 

PAS 16 – Property, Plant and Equipment

 

(0.09)

PAS 17 – Leases

 

–

PAS 19 – Employee Benefits 

 

(0.12)

PAS 21 – The Effects of Changes in Foreign Exchange Rates

 

0.25

PAS 27 – Consolidated and Separate Financial Statements

 

0.02

PAS 32 – Financial Instruments:  Disclosure and Presentation

 

(2.47)

PAS 39 – Financial Instruments:  Recognition and Measurement

 

5.72

PAS 40 – Investment Property

 

(0.02)

PFRS 2 – Share-Based Payment

 

(0.21)

PFRS 3 – Business Combinations, PAS 36 – Impairment of Assets and  PAS 38 – Intangible Assets

 

 

(0.10)

**Earnings per common share, as restated**

 

Php31.30

 

We fully adopted PAS16 in 2005, which requires us to determine the depreciation charge separatelyfor each significant part of an item of property, plant and equipment.Consequently, we changed the estimated useful lives of certain components ofour property, plant and equipment and we recognized the effect of the change inaccounting estimate prospectively, in accordance with *PAS 8, “AccountingPolicies, Changes in Accounting Estimates and Errors”.* Our full adoption ofthis standard reduced our consolidated net income by Php347 million (Php236million after tax effect) for the three months ended March 31, 2005.

 

 

 

For a detailed discussion regarding changes inaccounting policies, please refer to *Note 2 –**Summary of Significant Accounting Policies* to the accompanying unauditedconsolidated financial statements.

** **

**Results of Operations**

** **

The table below shows the contribution by each of ourbusiness segments to our revenues and other income, expenses and net income(losses) for the three months ended March 31, 2005and 2004.  Most of our revenues are derived from our operations within the Philippines.

** **

 

**Wireless**

** **

** **

** **

**Fixed Line**

** **

** **

** **

**ICT**

** **

 

** **

**Inter-segment Transactions**

** **

**Total**

** **

** **

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the three months ended****March 31, 2005******(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

Php18,726

 

 

 

Php11,858

 

 

 

Php751

 

 

 

(Php1,084)

 

Php30,251

 

 

Service

17,948

 

 

 

11,805

 

 

 

652

 

 

 

(1,044)

 

29,361

 

 

Non-service

759

 

 

 

–

 

 

 

66

 

 

 

(10)

 

815

 

 

Other income

19

 

 

 

53

 

 

 

33

 

 

 

(30)

 

 75

 

 

Expenses

9,077

 

 

 

8,611

 

 

 

721

 

 

 

(1,084)

 

17,325

 

 

Income before tax

9,649

 

 

 

3,247

 

 

 

30

 

 

 

–

 

12,926

 

 

Net income attributable to equity holders

6,952

 

 

 

2,370

 

 

 

39

 

 

 

–

 

9,361

 

 

** **

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**For the three months ended****March 31, 2004**(1) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

18,834

 

 

 

12,106

 

 

 

474

 

 

 

(591)

 

30,823

 

 

Service

16,115

 

 

 

12,085

 

 

 

435

 

 

 

(528)

 

28,107

 

 

Non-service

2,615

 

 

 

–

 

 

 

36

 

 

 

(20)

 

2,631

 

 

Other income

104

 

 

 

21

 

 

 

3

 

 

 

(43)

 

85

 

 

Expenses

12,710

 

 

 

10,553

 

 

 

435

 

 

 

(591)

 

23,107

 

 

Income before tax

6,124

 

 

 

1,553

 

 

 

39

 

 

 

–

 

7,716

 

 

Net income attributable to equity holders

4,617

 

 

 

1,029

 

 

 

40

 

 

 

–

 

5,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

** **

**Amount**

** **

%

** **

**Amount**

** **

%

** **

**Amount**

** **

%

** **

**Amount**

** **

**Amount**

** **

**%**

**Increase (Decrease)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues and other income

(Php108)

 

(1)

 

(Php248)

 

(2)

 

Php277

 

58

 

(Php493)

 

(Php572)

 

(2)

Service

1,833

 

11

 

(280)

 

(2)

 

217

 

50

 

(516)

 

1,254

 

4

Non-service

(1,856)

 

(71)

 

–

 

–

 

30

 

83

 

10

 

(1,816)

 

(69)

Other income

(85)

 

(82)

 

32

 

152

 

30

 

1000

 

13

 

(10)

 

(12)

Expenses

(3,633)

 

(29)

 

(1,942)

 

(18)

 

286

 

66

 

(493)

 

(5,782)

 

(25)

Income before tax

3,525

 

58

 

1,694

 

109

 

(9)

 

(23)

 

–

 

5,210

 

68

Net income attributable to equity holders

2,335

 

51

 

1,341

 

130

 

(1)

 

(3)

 

–

 

3,675

 

65

* *

*_____________*

*(1)    **As restated to reflect theeffects of the changes in accounting policies, as discussed in Note 2 – Summaryof Significant Accounting Policies to the accompanying unaudited consolidatedfinancial statements.*

** **

**Wireless**

* *

Revenues and Other Income
 

Our wireless businesssegment offers cellular services as well as satellite, VSAT, and otherservices.

 

The following table summarizes our service andnon-service revenues and other income from our wireless business for the threemonths ended March 31, 2005 and 2004 by service segment:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**%**

** **

**2004**(1)

** **

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php17,406

 

93

 

Php15,679

 

83

 

Php1,727

 

11

Satellite, VSAT and others

542

 

3

 

436

 

2

 

106

 

24

 

17,948

 

96

 

16,115

 

85

 

1,833

 

11

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of handsets and SIM-packs

759

 

4

 

2,615

 

14

 

(1,856)

 

(71)

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

19

 

–

 

104

 

1

 

(85)

 

(82)

 

 

 

 

 

 

 

 

 

 

 

 

Total Wireless Revenues and Other Income

Php18,726

 

100

 

Php18,834

 

100

 

(Php108)

 

(1)

*___________*

* *

*(1) As restated to reflect the effects of the changesin accounting policies, as discussed in Note 2 – Summary of SignificantAccounting Policies to the accompanying unaudited consolidated financialstatements.*

 

*Service Revenues*

 

Our wireless servicerevenues increased by Php1,833 million, or 11%, to Php17,948 million in thefirst quarter of 2005 compared to Php16,115 million in the same period in 2004,mainly as a result of the continued growth of Smart’s and Piltel’s subscriberbase.  Accordingly, as a percentage of our total consolidated service revenues,cellular service revenues increased to 57% in the first quarter of 2005 from55% in the same period in 2004. 

 

*Cellular Service*

 

Our cellular service revenues consist of: 

 

•        revenues derived from actual usageof the network by prepaid subscribers and any unused peso value of expiredprepaid cards or electronic air time loads, net of discounts given to dealers; 

 

•        monthly service fees from postpaidsubscribers, including (1) charges for calls in excess of allocated free localcalls, (2) toll charges for national and international long distance calls, (3)charges for text messages of our service customers in excess of allotted freetext messages, and (4) charges for value-added services, net of related contentprovider costs;

 

•        revenues generated from incomingcalls and messages to our subscribers, net of interconnection expenses; feesfrom reciprocal traffic from international correspondents; and revenues frominbound international roaming calls for the service; and

 

•        other charges, including those forreconnection and migration. 

 

Our cellular servicerevenues in the first quarter of 2005 amounted to Php17,406 million, anincrease of Php1,727 million, or 11%, from Php15,679 million in the same periodin 2004.  Cellular service revenues accounted for 97% of wireless servicerevenues in the first quarters of 2005 and 2004.  

 

As at March 31, 2005, Smart and Piltel cellular subscribers reached 20,252,513, an increase of5,896,327, or 41%, over combined cellular subscriber base of 14,356,186 as at March 31, 2004.  Prepaid subscribers accounted for 99% and 98% of our total subscriberbase as at March 31, 2005 and 2004, respectively.  Prepaid net subscriberactivations totaled 1,050,638 in the first quarter of 2005, or a monthlyaverage addition of 350,213 subscribers.  Postpaid subscribers totaled 268,137subscribers, reflecting a net reduction of 6,357, or a monthly averagereduction of 2,119 subscribers in the first quarter of 2005.  

 

Smartmarkets nationwide cellular communications services under the brand names *SmartBuddy, Smart Gold,**addict mobile,**Smart Infinity* and *SmartKid.  Smart Buddy, addict mobile prepaid,*or*amp,*and *Smart Kidprepaid* are prepaid services while *Smart Gold, addict mobile*, *SmartInfinity* and *Smart Kid* are postpaid services, which are all providedthrough Smart's digital network.  

 

Piltel markets itscellular prepaid service under the brand name *Talk ‘N Text* and isprovided through Smart’s network.  On December 22, 2004, the Board of Directorsof Smart and Piltel approved the amendment of Piltel’s and Smart’s revenuesharing arrangement of 50-50 for the *Talk ‘N Text*service to 80-20 in favorof Piltel.

 

In May 2003, Smartintroduced *Smart Load*, an “over-the-air” electronic loading facilitydesigned to make reloading of air time credits more convenient for, andaccessible to consumers.  These “over-the-air” reloads, which have both voice andtext functions, are packaged in smaller denominations of Php30, Php60, Php115and Php200, but have shorter validity periods of three days, six days, 12 daysand 30 days, respectively.  Starting with just 50,000 outlets when it waslaunched, *Smart Load’s* distribution network now encompasses over 700,000retail agents, approximately 90% of which are micro businesses.  As at March 31, 2005, approximately 82% of *Smart Buddy* subscribers and 87% of *Talk ‘NText* subscribers were using *Smart Load* as their reloadingmechanism.  In the first quarter of 2005, *Smart Load* accounted forapproximately 71% of sales derived from reloads.

 

InDecember 2003, Smart introduced *Pasa Load*(literally meaning “transferload”), a derivative service of *Smart Load* that allowed for Php10 loadtransfers to other *Smart Buddy* and *Talk ‘N Text*subscribers.  On January 25, 2004,denominations of Php2, Php5 and Php15 were added to the *Pasa Load* menu.All *Pasa Load* denominations have a one-day expiry period.  We believethat *Smart Load* and *Pasa Load* encourage subscribers to staywithin our cellular network instead of churning and re-subscribing at a latertime.  *Pasa Load* was also made available to Smart postpaid subscribersbeginning April 18, 2004 with identical denominations to those offered toprepaid subscribers.  The denominations have a similar one-day load expiry.The sender is billed the amount of the load and a Php1.00 transaction fee whichis added on top of the monthly service fee.

 

On August 1, 2004, Smart launched *Smart Padala*, aservice intended for overseas Filipino workers.  *Smart Padala* is thefirst cash remittance service through text and is faster and cheaper thantraditional remittance arrangements.  It is ideally suited for the lower incomemarket where cash remittances have the highest need and appreciation.  *SmartPadala* is coursed through Banco de Oro, a Philippine financial institution,as well as partnerships with several internationally-licensed remittancecompanies (e.g., CBN, Travelex) and domestic encashment centers (e.g.,McDonald’s, 7-Eleven, Sea Oil and Tambunting Pawnshops.) *Smart Padala*is one of the many innovative initiatives from our *Smart Money*platform.  Launched in October 2000, *Smart Money* is the foundation forSmart’s mobile commerce initiatives and makes possible Smart’s electronicloading services such as *Smart Load*, *Pasa Load* and *SmartPadala*.  Working with Banco de Oro and MasterCard, one of the world’sleading payment services providers, *Smart Money* is a reloadableelectronic cash card that works with mobile phones, and can be used worldwideas a result of the MasterCard partnership.  *Smart Money* has woninternational recognition, most notably as the Most Innovative GSM WirelessService for Customers in the 2001 GSM Association annual assembly in Cannes, France.As at March 31, 2005, there were approximately 2,000,000 active *Smart Money*cards in use.

 

Inorder to test the apparent market demand for fixed rate or “bucket” plans forvoice and text services, Smart launched from March 11 to April 10, 2005 the *Smart258**Unlimited Call*and *Text* promo wherein allSmart and *Talk ‘N Text* prepaidsubscribers had the option to avail of unlimited on-network (Smart-to-Smart)voice calls or unlimited on-network (Smart-to-Smart) texts.  The *Smart 258**Unlimited Call* promo covered on-network (Smart-to-Smart) voice calls forPhp115 with a validity of 10 days with a maximum duration of five minutes percall.  To initiate a *Smart 258**Unlimited Call*, asubscriber sends a text of the called party’s mobile identification number to adesignated number.  Both parties then received a call back to set-up the call.Off-network calls, all text messaging (on-net and off-net) and value-addedservice downloads were not part of this promo and were charged at prevailingrates.  On the other hand, *Smart 258**Unlimited Text*covered on-network (Smart-to-Smart) texts messages for Php60 with a validity ofsix days.  Off-network text messages, all voice calls (on-net and off-net) andvalue-added service downloads were not part of this promo and were charged atprevailing rates.  Under this *Smart 258* promo, subscriberscould only avail of one option at a time (i.e. *Unlimited Call* or *UnlimitedText* only).

 

On April 21,2005, Smartannounced that it would reinstitute the *Smart 258**UnlimitedCall*and *Text* promos for another 30 days with the followingmodifications:

 
- the  Smart 258  Unlimited Call  Php115 load will be valid for seven days with a maximum call duration of three minutes;

 
- the  Smart 258  Unlimited Text  Php60 load will be valid for four days; and

 
- subscribers can now avail of  Smart 258  Unlimited Call  and  Text  simultaneously.

 

The following table summarizes key measures of ourcellular business as at and for the three months ended March 31, 2005 and 2004:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

Cellular service revenues 

Php17,406

 

Php15,679

 

Php1,727

 

11

 

 

 

 

 

 

 

 

Mobile 

17,295

 

15,641

 

1,654

 

11

* *

* *

* *

* *

* *

* *

* *

* *

*By component*

*16,810*

* *

*15,263*

* *

*1,547*

* *

*10*

Voice

8,422

 

7,874

 

548

 

7

Data

8,388

 

7,389

 

999

 

14

* *

* *

* *

* *

* *

* *

* *

* *

*By service type*

*16,810*

* *

*15,263*

* *

*1,547*

* *

*10*

Prepaid

15,791

 

14,220

 

1,571

 

11

Postpaid

1,019

 

1,043

 

(24)

 

(2)

* *

* *

* *

* *

* *

* *

* *

* *

*Others*(1)

*485*

* *

*378*

* *

*107*

* *

*28*

 

 

 

 

 

 

 

 

Satellite-based PCOs 

111

 

38

 

*73*

* *

*192*

 

 

 

 

 

 

 

 

_____________

* *

*(1)    **Refers to othernon-subscriber-related revenues consisting primarily of inbound internationalroaming fees, revenues from Smart Money Holdings Corporation and a small numberof leased line contracts.*

* *

 

 

**As at March 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Cellular subscriber base 

20,252,513

 

14,356,186

 

5,896,327

 

41

Prepaid 

19,984,376

 

14,090,343

 

5,894,033

 

42

Smart 

15,242,173

 

10,919,335

 

4,322,838

 

40

Piltel

4,742,203

 

3,171,008

 

1,571,195

 

50

Postpaid

268,137

 

265,843

 

2,294

 

1

 

 

**Three Months Ended March 31,**

 

** **

** **

** **

** **

**Increase**

 

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(Unaudited)

Systemwide traffic volumes (in millions)

 

 

 

 

 

 

 

Calls (in minutes) 

1,307

 

1,177

 

130

 

11

Domestic 

945

 

857

 

88

 

10

International

362

 

320

 

42

 

13

Inbound

319

 

279

 

40

 

14

Outbound

43

 

41

 

2

 

5

 

 

 

 

 

 

 

 

Text messages 

10,561

 

9,900

 

661

 

7

Smart

8,600

 

8,214

 

386

 

5

Piltel

1,961

 

1,686

 

275

 

16

* *
**
*VoiceServices*

 

Cellular revenues from voice services, which includeall voice traffic and voice value-added services such as voice mail andinternational roaming, increased by Php548 million, or 7%, to Php8,422 millionin the first quarter of 2005 from Php7,874 million in the same period in 2004mainly due to an increase in subscriber base which compensated for a 23% dropin the average voice usage per subscriber from 22 minutes per month in thefirst quarter of 2004 to 17 minutes per month in the same period in 2005.

 

Priorto January 2004, our prepaid subscribers were charged a rate of Php8.00 perminute for calls made during peak hours and Php4.00 per minute for calls madeduring off-peak hours regardless of whether the calls were made to subscriberswithin our network or to other mobile operators’ networks.  Beginning January2004, we implemented all-day flat air time rates for calls made by our prepaidsubscribers.  *Smart Buddy* subscribers’ calls terminating to subscriberswithin our network are charged Php6.50 per minute, while an all-day flat rateof Php7.50 per minute is charged for calls terminating to other cellularnetwork subscribers as well as local and NDD calls.  *Talk ‘N Text*subscribers, on the other hand, are charged Php5.50 for calls made tosubscribers within our network, while an all-day flat rate of Php6.50 ischarged for calls terminating to other cellular network subscribers as well aslocal and NDD calls.  The percentage of on-net voice traffic as a proportion oftotal voice traffic was approximately 64% for the first quarters of 2005 and2004.

 

Air time rates for postpaid subscribers vary depending on thetype of postpaid plan selected by subscribers.  Beginning January 25, 2004, *SmartGold*,*Smart Infinity* and *addict mobile* launched flatrate-regular plans and consumable plans.

 

*DataServices*

 

Cellularrevenues from data services, whichinclude all text messaging-related services as well as value-added services,increased by Php999 million, or 14%, to Php8,388 million in the first quarterof 2005 from Php7,389 million in the same period in 2004.  Cellular dataservices accounted for 48% of mobile cellular revenues in the first quarter of2005, compared to 47% in the same period in 2004.  

 

The following table shows the breakdown of cellulardata revenues for the three months ended March 31, 2005 and 2004:

* *

** **

**Three Months Ended March 31,**

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

** **

** **

** **

** **

** **

** **

** **

Text messaging

 

 

 

 

 

 

 

Domestic

Php6,689

 

Php6,210

 

Php479

 

8

International

452

 

468

 

(16)

 

(3)

 

7,141

 

6,678

 

463

 

7

Value-added services

 

 

 

 

 

 

 

Non-Zed(1)

Php680

 

Php343

 

Php337

 

98

*Smart Zed*TM

172

 

143

 

29

 

20

*Smart Money*

21

 

6

 

15

 

250

Mobile Banking, Roaming SMS and WAP**

374

 

219

 

155

 

71

 

1,247

 

711

 

536

 

75

Total 

Php8,388

 

Php7,389

 

Php999

 

14

_________________

* *

*(1)   Value-added servicesdeveloped by Smart on its own platform.*

Textmessaging-related services contributed revenues of Php7,141 million in thefirst quarter of 2005, an increase of 7%, compared to Php6,678 million in thesame period in 2004, and accounted for 85% and 90% of the total cellular datarevenues for the first quarters of 2005 and 2004, respectively.  The increasein revenues from text messaging-related services resulted mainly from a 7%increase in the volume of text messages to 10,561 million outbound messages inthe first quarter of 2005 from 9,900 million outbound messages handled in thesame period in 2004.  Value-added services contributed revenues of Php1,247million in the first quarter of 2005, increasing by Php536 million, or 75%,from Php711 million in the same period in 2004 as a result of a significantincrease in ringtone/caller ringtunes download activity as well as increasedusage emanating from *Smart Padala*.

* *

*SubscriberBase, ARPU and Churn Rates*

* *

Of our 20,252,513subscribers as at March 31, 2005, prepaid subscribers accounted forapproximately 99% while postpaid subscribers accounted for the remaining 1%.Cellular prepaid subscriber base grew by 42% to 19,984,376 as at March 31, 2005from 14,090,343 as at March 31, 2004, whereas postpaid subscriber base increasedby 1% to 268,137 as at March 31, 2005 from 265,843 as at March 31, 2004.  

 

Our net subscriberactivation and reduction for the first quarters of 2005 and 2004 are asfollows:

** **

 

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

** **

** **

**Decrease**

 

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

Prepaid

 

 

 

 

 

 

 

Smart

920,885

 

1,088,200

 

(167,315)

 

(15)

Piltel

129,753

 

303,923

 

(174,170)

 

(57)

** **

 

 

 

 

 

 

 

Postpaid

(6,357)

 

16,866

 

(23,223)

 

(138)

 

 

 

 

 

 

 

 

Total

1,044,281

 

1,408,989

 

(364,708)

 

(26)

 

Revenuesattributable to our cellular prepaid service amounted to Php15,791 million inthe first quarter of 2005, an 11% increase over the Php14,220 million earned inthe same period in 2004.  Prepaid service revenues in the first quarters of2005 and 2004 accounted for 94% and 93%, respectively, of voice and datarevenues.  Revenues attributable to Smart’s postpaid service amounted toPhp1,019 million in the first quarter of 2005, a 2% decrease over the Php1,043million earned in the same period in 2004.  Postpaid service revenues in thefirst quarters of 2005 and 2004 accounted for 6% and 7%, respectively, of voiceand data revenues.

 

Our quarterly prepaid and postpaid ARPUsfor the first quarter of 2005 and the four quarters of 2004 are as follows:

*** ***

 

**Prepaid**

** **

**Postpaid**

 

**Smart**

** **

**Piltel**

** **

**Smart**

 

**Gross**

** **

**Net**

** **

**Gross**

** **

**Net**

** **

**Gross**

** **

**Net**

**2004**

 

 

 

 

 

 

 

 

 

 

 

First Quarter

Php463

 

Php383

 

Php341

 

Php287

 

Php1,736

 

Php1,326

Second Quarter

455

 

380

 

341

 

289

 

1,683

 

1,239

Third Quarter

399

 

329

 

287

 

241

 

1,780

 

1,176

Fourth Quarter

395

 

328

 

275

 

220

 

1,763

 

1,402

 

 

 

 

 

 

 

 

 

 

 

 

**2005**

 

 

 

 

 

 

 

 

 

 

 

First Quarter

Php356

 

Php289

 

Php269

 

Php220

 

Php1,767

 

Php1,257

 

ARPU is computed foreach month by dividing the revenues for the relevant services for the month bythe average of the number of subscribers at the beginning and at the end of themonth.  Gross monthly ARPU is computed by dividing the revenues for therelevant services, gross of dealer discounts and allocated content-providercosts, including interconnection income but excluding inbound roaming revenues,by the average number of subscribers.  Net monthly ARPU, on the other hand, iscalculated based on revenues net of dealer discounts and allocatedcontent-provider costs and interconnection income net of interconnectionexpense.  ARPU for any period of more than one month is calculated as thesimple average of the monthly ARPUs in that period.

 

Prepaidservice revenues consist mainly of charges for subscribers' actual usage oftheir loads.  Gross monthly ARPU for *Smart Buddy* subscribers in thefirst quarter of 2005 was Php356, a decrease of 23%, compared to Php463 in thesame period in 2004.  The decline was attributable mainly to a decrease in theaverage text messaging revenue per subscriber as well as lower average outboundlocal voice revenue per subscriber in the first quarter of 2005.  On a netbasis, ARPU in the first quarter of 2005 decreased by 25% to Php289 from Php383in the same period in 2004.  Smart expects its prepaid ARPUs to decline as itcontinues to expand into the lower income bracket of the market.  Gross monthlyARPU for *Talk ‘N Text* subscribers in the first quarter of 2005 wasPhp269, a decrease of 21% compared to Php341 in the same period in 2004.  Thedecline was similarly attributable to a decrease in the average text messagingrevenue per subscriber as well as lower average outbound local voice revenueper subscriber in the first quarter of 2005.  On a net basis, ARPU in the firstquarter of 2005 decreased by 23% to Php220 from Php287 in the same period in2004.  

 

Monthly ARPU forSmart’s postpaid services is calculated in a manner similar to that of prepaidservice, except that the revenues consist mainly of monthly service fees andcharges on usage in excess of the monthly service fees.  

 

Gross monthly ARPU forpostpaid subscribers increased by 2% to Php1,767 while net  monthly ARPUdecreased by 5% to Php1,257, in the first quarter of 2005 compared to the sameperiod in 2004.  Prepaid and postpaid monthly gross blended ARPU was Php355 inthe first quarter of 2005, a decrease of 23% compared to Php461 in the sameperiod in 2004.  Monthly net blended ARPU decreased by 25% to Php286 in thefirst quarter of 2005 from Php380 in the same period in 2004.

 

Churn, or the rate at which existing subscribers havetheir service cancelled in a given period, is computed based on totaldisconnections in the period, net of reconnections in the case of postpaidsubscribers, divided by the average of the number of subscribers at thebeginning and at the end of a month, all divided by the number of months in thesame period.

 

Priorto June 2004, a prepaid cellular subscriber was recognized as an activesubscriber when that subscriber activated and used the SIM card in the handset,which already contains Php50 of pre-stored air time (reduced from Php100 inApril 2004).  Subscribers can reload their air time by purchasing prepaid “calland text” cards that are sold in denominations of Php300, Php500 and Php1,000or; by purchasing additional air time “over the air” via *Smart**Load*in smaller denominations of Php30, Php60, Php115 and Php200; and by receivingloads of Php2, Php5, Php10 and Php15 via *Pasa**Load*, or throughtheir handsets using *Smart Money*.  Reloads have validity periods rangingfrom one day to two months, depending on the amount reloaded.  A prepaidcellular subscriber is disconnected if the subscriber does not reload withinfour months after the full usage or expiry of the last reload.  Our currentpolicy is to recognize a prepaid subscriber as “active” only when thesubscriber activates and uses the SIM card and reloads at least once during themonth of initial activation or in the immediate succeeding month.  For example,if a customer activated a SIM card in April but had not reloaded by May 31,this customer would not be counted as a subscriber.  The rationale for thischange stems from our observance of “SIM-swapping” activities in the marketwhereby “SIM-swapping” refers to the promotional activity wherein subscriberscan exchange their current prepaid SIM card for another operator’s SIM card atno cost to the subscriber.  We believe that these activities have given rise toa situation where certain subscribers swap their SIM cards between mobileoperators upon full usage of the pre-stored air time, which may result in oursubscriber base reflecting a certain number of transient subscribers at any onepoint in time.  We believe, however, that as “SIM swapping” activitiesdecrease, these transient subscribers will be churned off by our system in duecourse.

 

For *Smart Buddy*, the average monthly churn ratefor the first quarter of 2005 was 2.7%, compared to 2.2% in the same period in2004 while the average monthly churn rate for *Talk ‘N Text* subscriberswas 4.6% in the first quarter of 2005 compared to 3.7% in the same period in2004.  The increased churn in our prepaid service can be attributed to theon-going “SIM-swapping” activities described above.  Furthermore, churn islikely to increase in the immediate period after “SIM swapping” activities arescaled back or stopped.

 

The average monthlychurn rate for Smart's postpaid subscribers for the first quarter of 2005 was2.5%, compared to 0.2% in the same period in 2004 as a result of increasedcompetition in this market segment.  Smart's policy is to redirect outgoingcalls to an interactive voice response system if the postpaid subscriber'saccount is either 45 days overdue or the subscriber has exceeded the prescribedcredit limit.  If the subscriber does not make a payment within 44 days ofredirection, the account is disconnected.  Within this 44-day period, a seriesof collection activities are implemented, involving the sending of a collectionletter, call-out reminders and collection messages via text messaging.

 

*Satellite, VSAT and Other Services*

 

Our revenues from satellite, VSAT and other servicesconsist mainly of rentals received for the lease of Mabuhay Satellite'stransponders and Telesat's VSAT facilities to other companies, charges for ACeSPhilippines’ satellite phone service and service revenues generated from a PLDTGlobal subsidiary’s mobile virtual network operations.  Gross revenues fromthese services for the first quarter of 2005 amounted to Php542 million, anincrease of Php106 million, or 24%, from Php436 million in the same period in2004.

 

*Non-service Revenues*

 

Our wireless non-service revenues consist of:

 
- Proceeds from sale of cellular handsets; and

 
- Proceeds from sale of cellular SIM-packs.

 

Ourwireless non-service revenues decreased by Php1,856 million, or 71%, to Php759million in the first quarter of 2005 as compared to Php2,615 million in thesame period in 2004 mainly attributable to lower handset sales.  In the firstquarter of 2005, activations were driven more by SIM-pack sales and SIM-swapactivities.  

 

*Other Income*
 

All other income/gainssuch as rental income, gain on disposal of property, which do not fall underservice and non-service revenues are included under this classification.  Ourwireless business segment generated other income of Php19 million in the firstquarter of 2005, a decrease of Php85 million, or 82%, from Php104 million inthe same period in 2004.

 

*Expenses*
 

Expenses associated with our wireless business inthe first quarter of 2005 amounted to Php9,077 million, a decrease of Php3,633million, or 29%, from Php12,710 million in the same period in 2004.  A significantportion of this decrease was attributable to lower financing costs, costs ofsales, and provisions.  As a percentage of our wireless revenues and otherincome, expenses associated with our wireless business decreased to 48% in thefirst quarter of 2005 from 67% in the same period in 2004.

 

Cellular businessexpenses accounted for 96% of our wireless business expenses while satellite,VSAT and other business expenses accounted for the remaining 4% of our wirelessbusiness expenses in the first quarter of 2005, and 96% and 4%, respectively,in 2004.

 

The following table summarizes our wireless-relatedexpenses for the three months ended March 31, 2005 and 2004 and the percentageof each expense item to the total:

 

 

**Three Months Ended March 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**(1)

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php2,460

 

27

 

Php2,794

 

22

 

(Php334)

 

(12)

Cost of sales

2,004

 

22

 

3,869

 

30

 

(1,865)

 

(48)

Selling and promotions

1,035

 

11

 

741

 

6

 

294

 

40

Rent

967

 

11

 

583

 

5

 

384

 

66

Compensation and benefits(2)

844

 

9

 

882

 

7

 

(38)

 

(4)

Maintenance

782

 

9

 

510

 

4

 

272

 

53

Financing costs

(575)

 

(6)

 

1,660

 

13

 

(2,235)

 

(135)

Taxes and licenses

376

 

4

 

227

 

2

 

149

 

66

Professional and other service fees

300

 

3

 

199

 

1

 

101

 

51

Insurance and security services

246

 

3

 

216

 

2

 

30

 

14

Provisions

(54)

 

(1)

 

514

 

4

 

(568)

 

(111)

Other expenses

692

 

8

 

515

 

4

 

177

 

34

Total 

Php9,077

 

100

 

Php12,710

 

100

 

(Php3,633)

 

(29)

__________

* *

*(1)    **As restated to reflect theeffects of the changes in accounting policies, as discussed in Note 2 – Summaryof Significant Accounting Policies to the accompanying unaudited consolidatedfinancial statements.*

*(2)    **Includes salaries andbenefits, incentive plan, pension and manpower rightsizing program, or MRP,costs.*

 

Depreciationand amortization charges decreased by Php334 million, or 12%, to Php2,460million in the first quarter of 2005 substantially due to a decrease in thedepreciable asset base as certain of our wireless assets were fully depreciatedby the end of 2004, partially offset by the effect of our full adoption of PAS16 which increased depreciation charges by Php167 million for the first quarterof 2005.  See *Note 2 – Summary of Significant Accounting Policies* to theaccompanying unaudited consolidated financial statements.

 

Costof sales decreased by Php1,865 million, or 48%, to Php2,004 million asactivations in the first quarter of 2005 were driven more by SIM-pack sales andSIM-swap activities compared to handset sales in the same period in 2004.  Inaddition, satellite air time cost decreased by Php20 million, or 31%, to Php45million due to the change in the basis of payment for air time.  In March 2004,air time costs reverted to the original charging rate on a per minute basisfrom the fixed amount per month based on the payment schedule in a standstillagreement in consideration for unlimited access.  This was agreed to bethe basis of air time cost until a new agreement is finalized.  Please see*Note 5 –**Revenues and Expenses* to the accompanying unauditedconsolidated financial statements for further discussion.  The breakdown ofcost of sales for our wireless business for the three months ended March 31,2005 and 2004 are as follows:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Cost of cellular handsets and SIM-packs sold

Php1,959

 

Php3,804

 

(Php1,845)

 

(49)

Cost of satellite air time

45

 

65

 

(20)

 

(31)

 

Php2,004

 

Php3,869

 

(Php1,865)

 

(48)

 

Selling and promotion expenses increased by Php294million, or 40%, to Php1,035 million due to advertising and promotions costsincurred to attract new subscriptions and retain existing subscribers.

 

Rent expenses increased by Php384 million, or 66%,to Php967 million on account of an increase in the number of transmission linksand higher cell site and office space rentals for the increased number of cellsites, wireless centers and space requirements for increased personnel.  As atMarch 31, 2005, we had 4,071 cell sites and 5,480 base stations, compared with3,088 cell sites and 4,229 base stations as at March 31, 2004.

 

Compensation and benefits decreased by Php38million, or 4%, to Php844 million primarily due to a higher accrual in 2004 oflong-term incentive benefits of managers and executives of Smart, partiallyoffset by an increase in headcount, salaries and performance bonuses of Smart’semployees.  Smart's employee headcount increased by 7% to 5,244 as at March 31,2005 from 4,885 as at March 31, 2004.  

 

Maintenance expensesincreased by Php272 million, or 53%, to Php782 million mainly on account ofhigher utility expenses, repairs and maintenance costs due to the continuedgrowth in the number of cell sites and other network facilities as well asincreased fuel and electricity costs.

 

Financing costs in the first quarter of 2005amounted to a negative Php575 million, a decrease of 135% from Php1,660 millionin the same period in 2004, primarily as a result of foreign exchange gains asthe peso appreciated in the first quarter of 2005.  Foreign exchange losseswere recorded in the same period in 2004.  In addition, interest incomeincreased due to higher cash balances in 2005 as compared to 2004.  Thebreakdown of our financing costs for the wireless business for the three monthsended March 31, 2005 and 2004 is as follows:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Foreign exchange (gains) losses

(Php1,627)

 

Php763

 

(Php2,390)

 

(313)

Accretion on financial liabilities

628

 

633

 

(5)

 

(1)

Interest on loans and related items

456

 

452

 

4

 

1

Interest income

(293)

 

(174)

 

(119)

 

(68)

Loss (gain) on derivative transactions – net

128

 

(59)

 

187

 

317

Dividends on preferred stock subject to mandatory redemption

 

67

 

 

58

 

 

9

 

 

16

Financing charges

47

 

27

 

20

 

74

Capitalized foreign exchange losses

22

 

(16)

 

38

 

238

Capitalized interest

(3)

 

(24)

 

21

 

88

 

(Php575)

 

Php1,660

 

(Php2,235)

 

(135)

 

Taxesand licenses increased by Php149 million, or 66%, to Php376 million mainly dueto an increase in Smart’s business-related permits and licenses.  

 

Professionaland other service fees increased by Php101 million, or 51%, to Php300 millionmainly as a result of increased technical service, consultancy and paymentfacility fees.

 

Insurance and security services increased by Php30million, or 14%, to Php246 million mainly due to the increase in our number ofcell sites and in the amount of network equipment insured as a result of thecontinued growth and expansion of our network.

 

Provisions decreased by Php568 million, or 111%, tonegative Php54 million mainly due to a lower carrier receivable balances as ofMarch 31, 2005 as a result of significant settlements made during the third andfourth quarters of 2004.  In addition, we recorded recoveries for handsets soldin the first quarter of 2005 which were previously written down to their netrealizable values.  The breakdown of provisions for the three months endedMarch 31, 2005 and 2004 is as follows:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

** **

(Unaudited)

 

 

 

 

 

 

 

 

Doubtful accounts

Php35

 

Php386

 

(Php351)

 

(91)

Write-down (reversal of write-down) of inventories at net realizable value 

(89)

 

128

 

(217)

 

(170)

 

(Php54)

 

Php514

 

(Php568)

 

(111)

 

Otherexpenses increased by Php177 million, or 34%, to Php692 million due to variousbusiness and operational-related expenses such as facility usage fees, travel,training, communication, delivery expenses and the amortization of intangibleassets.

 

Provision for income tax
 

Provisionfor income tax increased by Php1,150 million, or 76%, to Php2,667 million inthe first quarter of 2005 from Php1,517 million in the same period in 2004 asSmart’s income tax holiday expired in the second quarter of 2004 and asPiltel’s income tax position reversed from negative to payable.  In the firstquarter of 2005, the effective tax rate for our wireless business was 28%compared to 25% in the same period in 2004.  

 

Smart'sthree-year income tax holiday, which expired in May 2004, applied to theincremental income generated from its GSM network expansion.  The income taxholiday was computed by applying the exemption rate against the income taxderived from GSM operations.  The exemption rate was computed by dividing theincremental revenues by eligible GSM revenues (both gross of interconnectionrevenues) where the incremental GSM revenues were derived by deducting theBoard of Investments, or BOI-prescribed base figure (Smart’s gross GSM revenuein 2000) from the total GSM revenues.  After adjusting for non-deductible itemsand unrealized and realized foreign exchange losses, Smart’s net taxable incomewas multiplied by the statutory corporate income tax rate of 32% and theexemption rate.  The resulting figure was the income tax holiday that wasdeducted from the income tax due on GSM revenues with the difference being theincome tax due for the period.  

 

Net Income
 

Our wireless businesssegment recorded a net income of Php6,952 million in the first quarter of 2005,an increase of Php2,335 million, or 51%, over Php4,617 million registered inthe same period in 2004 due primarily to the growth in our cellular revenues,augmented by a 29% decrease in wireless expenses.

 

Fixed Line
 

***Revenues and Other Income***

*** ***

Our fixed line business provides local exchangeservice, international and national long distance services, data and othernetwork services, and miscellaneous services.  Service revenues generated fromour fixed line business in the first quarter of 2005 totaled Php11,805 million,a decrease of Php280 million, or 2%, from Php12,085 million in the same periodin 2004.  

 

The following table summarizes revenues from ourfixed line business for the three months ended March 31, 2005 and 2004 byservice segment:

 

 

**Three Months Ended March 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase********(Decrease)**

 

**2005**

** **

**%**

** **

**2004**(1)

** **

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php5,155

 

44

 

Php5,295

 

44

 

(Php140)

 

(3)

International long distance

3,010

 

25

 

3,263

 

27

 

(253)

 

(8)

National long distance

1,297

 

11

 

1,835

 

15

 

(538)

 

(29)

Data and other network

2,058

 

17

 

1,447

 

12

 

611

 

42

Miscellaneous

285

 

3

 

245

 

2

 

40

 

16

 

11,805

 

100

 

12,085

 

100

 

(280)

 

(2)

Other Income

53

 

–

 

21

 

–

 

32

 

152

Total Fixed Line Revenues

Php11,858

 

100

 

Php12,106

 

100

 

(Php248)

 

(2)

_______________

 

*(1)   As restated to reflect the effects of the changesin accounting policies, as discussed in Note 2 – Summary of SignificantAccounting Policies to the accompanying unaudited consolidated financialstatements.*

Service Revenues
 

*Local Exchange Service*

 

Our local exchange service revenues consist of: 

 

•           flat monthly fees for our postpaidservice; 

 

•           installation charges and otherone-time fees associated with the establishment of customer service;

 

•           fixed charges paid by othertelephone companies, charges retained by PLDT for calls terminating to cellularsubscribers within the local area, and local access charges paid by cellularoperators for calls by cellular subscribers that terminate to our localexchange network;

 

•           revenues from usage of prepaidcards for calls within the local area and any unused peso value of expiredprepaid cards; and

 

•           charges for special features,including bundled value-added services such as call waiting, call forwarding,multi-party conference calling, speed calling and caller ID. 

 

The following table summarizes key measures of ourlocal exchange service business segment as at and for the three months endedMarch 31, 2005 and 2004:

 

 

**Three Months Ended March 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Consolidated local exchange service revenues (in millions)

Php5,155

 

Php5,295

 

(Php140)

 

(3)

Number of fixed lines in service

2,149,489

 

2,197,879

 

(48,390)

 

(2)

Number of fixed line employees

9,620

 

10,338

 

(718)

 

(7)

Number of fixed lines in service per employee

223

 

213

 

10

 

5

 

Revenues from ourlocal exchange service decreased by Php140 million, or 3%, to Php5,155 millionin the first quarter of 2005 from Php5,295 million in the same period in 2004.The decrease was primarily due to the 2% decline in number of fixed lines inservice, the shift in subscriber preference from postpaid to prepaid services,which generate lower average revenue per subscriber, and the appreciation ofthe peso which required us to make downward adjustments in our monthly localservice rates.  The percentage contribution of local exchange revenues to ourfixed line service revenues remained stable at 44% in the first quarters of2005 and 2004.

 

Fixedline net reduction in the first quarter of 2005 was 2,538 as against netadditions of 11,928 in the same period in 2004.  While fixed line additionstotaled 8,009 for prepaid fixed line services, postpaid fixed lines in servicedeclined by 10,547 in the first quarter of 2005.  As at March 31, 2005,postpaid and prepaid fixed line subscribers totaled 1,772,644 and 376,845,respectively, which accounted for approximately 82% and 18%, respectively, oftotal fixed lines in service.

 

Initially intended as an affordable alternativetelephone service for consumers under difficult economic conditions, ourprepaid fixed line services**now form an important part of our overallchurn and credit risk exposure management and subscriber retention strategy.Prepaid phone kits, each containing Php500 worth of pre-stored call credits,are sold for Php1,900 per unit.  Prepaid**subscribers are charged basedon usage at a rate of Php1.00 per minute for local calls but the rates forprepaid and postpaid fixed line subscribers for national and international longdistance calls are the same.  

 

A prepaid fixed linesubscriber is recognized as an active subscriber when that subscriber activatesand uses a prepaid call card.  Prepaid fixed line subscribers can reload theiraccounts by purchasing call cards that are sold in denominations of Php500,Php300 and Php150.  Reloads are valid for two months for the Php500 and Php300cards.  The lower denominated Php150 card, launched in September 2003, has anaccount life of 15 days.  A prepaid fixed line subscriber is disconnected ifthat subscriber does not reload within one month for the Php500 card, fourmonths for the Php300 card, and 15 days for the Php150 card after the expiry ofthe last reload.  All sales of prepaid cards, whether through dealers orthrough PLDT's business offices, are non-refundable.

 

Pursuant to a currencyexchange rate adjustment mechanism authorized by the Philippine NationalTelecommunications Commission, or the NTC, we adjust our monthly local servicerates upward or downward by 1% for every Php0.10 change in the peso-to-dollarexchange rate relative to a base rate of Php11.00 to US$1.00.  During the firstquarter of 2005, we implemented three downward adjustments in our monthly localservice rates compared to three upward adjustments in the same period in 2004.The average peso-to-dollar rate in the first quarter of 2005 was Php54.982 toUS$1.00, compared to the average of Php55.991 to US$1.00 in the same period in2004.  This change in the average peso-to-dollar rate translated to a pesoappreciation of 2%, which resulted in an average net decrease of 2% in ourmonthly local service rates in the first quarter of 2005. 

 

*International Long Distance Service*

 

Our international long distance service revenues,which we generate through our international gateway facilities, consist of:

 

•        inbound call revenues representingsettlements from foreign telecommunications carriers for inbound internationalcalls, virtual transit and hubbing service and reverse charged calls such asreceived collect and home country direct service;

 

•        access charges paid to us by otherPhilippine telecommunications carriers for terminating inbound internationalcalls to our local exchange network; and

 

•        outbound call revenuesrepresenting amounts billed to our customers (other than our cellularcustomers) for outbound international calls, net of amounts payable to foreigntelecommunications carriers for terminating calls in their territories.

 

The following table shows information about ourinternational fixed line long distance business for the three months endedMarch 31, 2005 and 2004:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Consolidated international long distance service revenues (in millions)

Php3,010
 

Php3,263

 

(Php253)

 

(8)

Inbound

2,484

 

2,599

 

(115)

 

(4)

Outbound

526

 

664

 

(138)

 

(21)

 

 

 

 

 

 

 

 

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

585

 

585

 

–

 

–

Inbound

549

 

547

 

2

 

–

Outbound

36

 

38

 

(2)

 

(5)

Inbound-outbound call ratio

15.3:1

 

14.4:1

 

–

 

–

 

Our consolidatedinternational long distance service revenues decreased by Php253 million, or8%, to Php3,010 million in the first quarter of 2005 from Php3,263 million inthe same period in 2004.  The percentage contribution of international longdistance service revenues to our fixed line service revenues decreased to 25%in the first quarter of 2005 from 27% in the same period in 2004.

 

Ourrevenues from inbound international long distance service decreased by Php115million, or 4%, to Php2,484 million in the first quarter of 2005 from Php2,599million in the same period in 2004 primarily due to the change in call mix infavor of transit calls with lower hubbing rates.  Our inbound internationallong distance call volumes in the first quarter of 2005 increased by 2 millionminutes to 549 million minutes from 547 million minutes in the same period in2004, largely due to an increase in transit calls.

 

The3% appreciation of the peso during the first quarter of 2005 contributed to thedecrease in our inbound international long distance revenues in peso termssince settlement charges for inbound calls are billed in U.S. dollars or inspecial drawing rights, an established method of settlement among internationaltelecommunications carriers using values based on a basket of foreigncurrencies that are translated into peso at the time of billing.

 

Our revenues fromoutbound international long distance service decreased by Php138 million, or21%, to Php526 million in the first quarter of 2005 from Php664 million in thesame period in 2004.  The decrease resulted from the decline in call volumesand the appreciation of the peso as outbound international calls are charged inU.S. dollar rates and billed to subscribers in pesos at the prevailing exchangerates at the time of billing.

 

Our outbound international long distance callvolumes declined by 5% in the first quarter of 2005 as compared to the sameperiod in 2004 due to cellular substitution (subscribers opting to use cellularfor international outbound calls) and the popularity of alternative means ofcommunications such as e-mailing, international text messaging and internet telephony.

 

National Long Distance Service
 

Our national long distance service revenues consistof: 

 

•              per minute charges for calls madeby our fixed line customers outside of the local service areas but within thePhilippines, net of interconnection charges payable for calls carried throughthe backbone network of, and/or terminating to the customer of, anothertelecommunications carrier; and

 

•              access charges received from othertelecommunications carriers for calls carried through our backbone networkand/or terminating to our customers.

 

The following table shows our national long distanceservice revenues and call volumes for the three months ended March 31, 2005 and2004:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Consolidated national long distance service revenues (in millions)

Php1,297

 

Php1,835

 

(Php538)

 

(29)

National long distance call volumes (in million minutes)

449

 

489

 

(40)

 

(8)

 

Our national longdistance service revenues decreased by Php538 million, or 29%, to Php1,297million in the first quarter of 2005 from Php1,835 million in the same periodin 2004 as a result of: (1) a decrease in call volumes; (2) a decrease inaverage revenue per minute brought about by our Php10 per call promo starting February14, 2005; and (3) the integration of local exchanges into a single callingarea.  Accordingly, the percentage contribution of national long distancerevenues to our fixed line service revenues decreased to 11% for the firstquarter of 2005 compared to 15% in the same period in 2004.

 

Ournational long distance call volumes decreased by approximately 8% to 449million minutes in the first quarter of 2005 from 489 million minutes in thesame period in 2004.  Cellular substitution and the widespread availability andgrowing popularity of alternative non-voice means of communications,particularly cellular text messaging and e-mailing, have negatively affectedcall volumes.

 

OnFebruary 14, 2005, we launched a Php10 per call promo to any PLDT landline subscribernationwide and to all Smart and *Talk N’ Text* subscribers.  This promowas launched with the objective of determining a more effective tariffstructure that would stimulate landline usage.  Under the promo, NDD callsbetween any PLDT landline subscriber nationwide and to all Smart and *Talk 'NText* subscribers are charged Php10 per call instead of being charged on aper minute basis.  The promo has been extended to run until May 11, 2005.

 

Theintegration of some of our local exchanges into a single local calling area, asapproved by the NTC, has also negatively affected our national long distancecall volumes, and consequently, our revenues.  Because of this integration,calls between two exchanges located within the same province are no longer considerednational long distance calls but treated as local calls.

 

Data and Other Network Services
 

Our data and other network services in the firstquarter of 2005 posted revenues of Php2,058 million, an increase of Php611million, or 42%, from Php1,447 million in the same period in 2004.  The revenuecontribution of this service segment to our fixed line service revenuesincreased to 17% in the first quarter of 2005 from 12% in the same period in2004.

 

Data and other network services we currently provideinclude traditional bandwidth services, broadband and narrowband internet-basedservices and other packet-based switching services.  These services are usedfor domestic and international communications such as private networking,broadband and narrowband internet-based data communications, and packet-basedcommunication.  

 

Ofour total first quarter 2005 revenues, broadband and narrowband internet-basedservices accounted for 48%, traditional bandwidth services accounted for 47%and other services accounted for the remaining 5%, compared to 54%, 40% and 6%,respectively, in the same period in 2004.  These percentage changes indicate acontinuing demand for broadband services, particularly the high bandwidth cleardata requirements of business process outsourcing companies, or BPOs, and callcenters.  We expect this trend to continue, that is, almost parity contributionfrom IP-based services and traditional services due to growth in the areas ofe-commerce, online services and BPOs particularly among call centers, medicaltranscription, animation and shared services.

 

Internet-based products are bannered by *PLDT Vibe*, *PLDT**DSL* (*myDSL andBizDSL*) and I-Gate.  *PLDT Vibe,* or PLDT’s dial-up/narrowband Internetservice, is targeted for light to medium residential or individual internetusers; while *PLDT**DSL*broadbandInternet service is targeted for heavy individual internet users as well as forsmall and medium enterprises.  I-Gate on the other hand is targeted toenterprises and value-added service providers.

 

As atMarch 31, 2005, the number of PLDT’s fixed line subscribers for *PLDT Vibe*stoodat 405,054, of which 152,493 are exclusive postpaid users, 185,796 areexclusive prepaid users, and 66,765 are both postpaid and prepaid users.  As atMarch 31, 2004, *PLDT Vibe* subscribers totaled 253,635, of which 126,292were exclusive postpaid users, 93,472 were exclusive prepaid users, and 33,871were both postpaid and prepaid users.  In addition, PLDT *DSL* has reached72,674 subscribers as at March 31, 2005 compared with 28,172 subscribers duringthe same period of 2004.  I-Gate subscription grew by 91% from a base of 70 asat March 2004 to 134 as of the first quarter of 2005.

 

The continued growth in data services revenues can beattributed to several product offerings, the majority of which areinternational data services.  The steady demand for dedicated connection orprivate networking from the corporate market using PLDT’s traditional bandwidthofferings – Fibernet, Arcstar, Acacia, I-Gate, Diginet, BRAINS, among others –continues to provide us with a stable revenue source.  In addition, we provideSmart’s increasing fiber optic and leased line data requirements included underour national data services.

 

PLDT expects to further generate strong demand fordata connectivity after adding *PLDT WeRoam* to its portfolio of data andother network services.  *PLDT WeRoam*, introduced last March 10, 2005 andrunning on SMART’s nationwide wireless network (using GPRS, EDGE and WiFitechnologies) and PLDT’s extensive IP infrastructure, provides laptop-carryingmobile employees and remote offices under Local Area Network, wireless dataconnectivity to their corporate headquarters’ Intranet and/or to the globalInternet.

* *

Miscellaneous
 

Miscellaneousservice revenues are derived mostly from directory advertising and facilitiesrental.  In the first quarter of 2005, these revenues increased by Php40million, or 16%, to Php285 million from Php245 million in the same period in2004.  The improvement was mainly due to an increase in co-location chargesfrom more co-location sites coupled with an increase in rent income on ductutilization and cable restoration.  Miscellaneous service revenues accountedfor approximately 2% of our fixed line service revenues in the first quartersof 2005 and 2004.

 

*Other Income*

 

All other income/gains such as rental income, gainon disposal of property, which do not fall under service and non-servicerevenues are included under this classification.  In 2005, our fixed linebusiness segment registered an increase in other income of Php32 million, or152%, to Php53 million in the first quarter of 2005 from Php21 million in thesame period in 2004 mainly due to higher service and facilities fees.  

 

Expenses
 

Expenses related to our fixed line business in thefirst quarter of 2005 totaled Php8,611 million, a decrease of Php1,942 million,or 18%, compared to Php10,553 million in the same period in 2004.  The decreasewas primarily due to lower financing costs and provisions.  As a percentage ofour total fixed line revenues, fixed line-related expenses decreased to 73% inthe first quarter of 2005, compared to 87% in the same period in 2004.

 

The following table shows the breakdown of our totalconsolidated fixed line-related expenses for the three months ended March 31,2005 and 2004 and the percentage of each expense item to the total:

 

 

**Three Months Ended March 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**(1)

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php3,001

 

35

 

Php2,476

 

23

 

Php525

 

21

Compensation and benefits(2)

1,934

 

22

 

1,930

 

18

 

4

 

–

Maintenance

810

 

9

 

813

 

8

 

(3)

 

–

Provisions

653

 

8

 

819

 

8

 

(166)

 

(20)

Financing costs

629

 

7

 

2,748

 

26

 

(2,119)

 

(77)

Rent

391

 

5

 

389

 

4

 

2

 

1

Selling and promotions

354

 

4

 

352

 

3

 

2

 

1

Professional and other service fees

229

 

3

 

253

 

2

 

(24)

 

(9)

Taxes and licenses

188

 

2

 

156

 

2

 

32

 

21

Insurance and security services

163

 

2

 

181

 

2

 

(18)

 

(10)

Asset impairment 

–

 

–

 

85

 

1

 

(85)

 

(100)

Other expenses

259

 

3

 

351

 

3

 

(92)

 

(26)

Total 

Php8,611

 

100

 

Php10,553

 

100

 

(Php1,942)

 

(18)

____________

*(1)   As restated to reflect the effects of the changesin accounting policies, as discussed in Note 2 – Summary of SignificantAccounting Policies to the accompanying unaudited consolidated financialstatements.*

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

* *

 

Depreciationand amortization charges increased by Php525 million, or 21%, to Php3,001million mainly due to higher depreciation of our regular asset base primarilyresulting from additional completed projects and the effect of our fulladoption of PAS 16 which increased our depreciation charges by Php180 millionfor the first quarter of 2005.

 

Compensation andbenefits increased by Php4 million to Php1,934 million mainly due to the effectof the recently concluded collective bargaining agreement-related increases onsalaries and benefits of PLDT employees and an increase in incentiveplan-related accruals partially offset by a reduction in headcount due toPLDT’s MRP.

 

Maintenance expensesdecreased by Php3 million to Php810 million primarily due to lower maintenancecosts of the domestic fiber optic network due to reduced remedial works done inthe first quarter of 2005 partially offset by the expiration of warranties forcertain plant facilities and higher maintenance costs of computer andperipherals in relation to charges for software support agreements for certainsystems in the first quarter of 2004.

 

Provisionsdecreased by Php166 million, or 20%, to Php653 million primarily on account ofa negative provision for onerous contracts by PLDT as a result of the pesoappreciation.  We make provisions for anticipated uncollectible accounts basedon the aging profile of our accounts receivables.  PLDT’s provision fordoubtful accounts for the first quarters of 2005 and 2004 was equivalent to 6%of its service revenues.  The breakdown of provisions for our fixed linebusiness for the three months ended March 31, 2005 and 2004 is as follows:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Doubtful accounts

Php703

 

Php710

 

(Php7)

 

(1)

Onerous contracts

(50)

 

109

 

(159)

 

(146)

 

Php653

 

Php819

 

(Php166)

 

(20)

* *

Financing costsdecreased by Php2,119 million, or 77%, to Php629 million due to: (1) thestrengthening of the peso relative to the U.S. dollar resulting in foreignexchange gains in the first quarter of 2005 as compared to foreign exchangelosses recorded during the first quarter of 2004; and (2) lower interest onloans and related items owing to lower debt balances in the first quarter of2005 compared with the same period in 2004.  The breakdown of our financingcosts for our fixed line business for the three months ended March 31, 2005 and2004 is as follows:

 

** **

**Three Months Ended March 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

 

(Unaudited)

 

 

 

 

 

 

 

 

Interest on loans and related items

Php2,470

 

Php2,785

 

(Php315)

 

(11)

Foreign exchange (gains) losses

(1,625)

 

1,650

 

(3,275)

 

(198)

Gains on derivative transactions – net

(360)

 

(1,804)

 

1,444

 

80

Hedge cost

241

 

203

 

38

 

19

Capitalized interest

(94)

 

(128)

 

34

 

27

Accretion on financial liabilities

89

 

79

 

10

 

13

Interest income

(73)

 

(38)

 

(35)

 

(92)

Financing charges

(19)

 

58

 

(77)

 

(133)

Capitalized foreign exchange losses

–

 

(57)

 

57

 

100

 

Php629

 

Php2,748

 

(Php2,119)

 

(77)

 

Rent expenses increased by Php2 million, or 1%, toPhp391 million due to an increase in international leased circuits and rentalfor bundled sales/value added service units.

 

Selling and promotionexpenses increased by Php2 million, or 1%, to Php354 million mainly as a resultof an increase in PLDT’s promotional activities in relation to various productsand services, partially offset by reduced corporate public relations expenses.

 

Professional and otherservice fees decreased by Php24 million, or 9%, to Php229 million due to adecrease in number of consultants coupled with a decrease in collection agencyfees on account of lower final accounts subject for collection, partiallyoffset by higher legal fees in the first quarter of 2005 for various services.

 

Taxesand licenses increased by Php32 million, or 21%, to Php188 million mainly onaccount of higher business-related taxes paid in the first quarter of 2005 ascompared to the same period in 2004.

 

Insuranceand security services decreased by Php18 million, or 10%, to Php163 millionprimarily due to lower premiums on property all-risk, industrial all-risk andindustrial fire insurance and a lower number of contracted security guards.

 

Assetimpairment decreased by Php85 million owing to an impairment of a fixed linesubsidiary’s facilities in the first quarter of 2004; no impairment charge wasrecognized in the first quarter of 2005.

 

Otherexpenses decreased by Php92 million, or 26%, to Php259 million due to loweroffice supplies consumption and printing costs resulting from PLDT’s continuingcost-containing activities, partially offset by higher contracted costs fortechnical and helpdesk resources and related computer and maintenance andin-house systems development.

 

Provision for income tax
 

Provisionfor income tax increased by Php356 million to Php876 million in the firstquarter of 2005 from Php520 million in the same period in 2004 due to higherincome subject to tax.  In the first quarter of 2005, our effective taxrate was 27%.  Our effective tax rate was lower than the 32% statutorycorporate tax rate due to the following:  income already subjected to finaltax; income already subjected to lower tax rate; and equity in net income ofour subsidiaries, which has already been subjected to tax and therefore, is nolonger subject to income tax.

 

Net Income 
 

In the first quarterof 2005, our fixed line business segment contributed a net income of Php2,370million, compared to Php1,029 million in the same period in 2004 mainly as aresult of a decrease in fixed line-related expenses by 18% particularlyfinancing costs and provisions.  

 

Information andCommunications Technology
 

***Revenues and Other Income***
 

Our information and communications technologybusiness is conducted by ePLDT, a wholly-owned subsidiary of PLDT.  

 

Inthe first quarter of 2005, our information and communications technologybusiness generated revenues of Php751 million, an increase of Php277 million,or 58%, from Php474 million in the same period in 2004.  Going forward, weexpect revenues from our call center and Internet and gaming businesses tocontinue to contribute significantly to our information and communicationstechnology revenues with the growing demand for our call center services.

 

The following table summarizes revenues from ourinformation and communications technology business for the three months endedMarch 31, 2005 and 2004 by service segment:

 

** **

**Three Months Ended March 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**(1)

 

**%**

** **

**Amount**

** **

**%**

 

(Unaudited)

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php408

 

54

 

Php266

 

56

 

Php142

 

53

Internet and gaming 

146

 

20

 

103

 

22

 

43

 

42

*Vitro*ä data center

81

 

11

 

50

 

11

 

31

 

62

Others

17

 

2

 

16

 

3

 

1

 

6

 

652

 

87

 

435

 

92

 

217

 

50

 

 

 

 

 

 

 

 

 

 

 

 

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point of Product Sales

66

 

9

 

36

 

7

 

30

 

83

 

 

 

 

 

 

 

 

 

 

 

 

Other Income

33

 

4

 

3

 

1

 

30

 

1,000

 

 

 

 

 

 

 

 

 

 

 

 

Total ICT Revenues

Php751

 

100

 

Php474

 

100

 

Php277

 

58

 

*Call Center*

 

We are focused on developing our call center businesswhich capitalizes on the availability of English-speaking labor in thePhilippines.  The call center service business is currently being undertaken bythe following wholly-owned subsidiaries of ePLDT:

 

•              Vocativ Systems, Inc., or Vocativ,which owns and operates a 999-seat call center facility with 795 customerservice representatives, or CSRs, exclusively for clients of a global providerof customer relationship management services;  

 

•              Parlance Systems, Inc., orParlance, which owns and operates a 1,234-seat call center facility with 1,234CSRs, exclusively for one of the largest direct-to-home satellite serviceproviders in the United States for customer support and billing requirements;and   

 

•              ePLDT Ventus, Inc, or Ventus,which owns a 400-seat call center facility located in Iloilo province commencedfull commercial operations in April 2005.  Ventus will be expanding in MetroManila with a 678-seat call center facility to accommodate current and newclient requirements.  This facility is expected to be completed by November2005.

 

Call center revenues consist of:

 

•              inbound calls for customer care,product inquiries, sales and technical support based on active minutes;

 

•              outbound calls for sales andcollections based on active minutes; and 

 

•              service income for e-mailhandling, web chat, web co-browsing, data entry and business processoutsourcing based on transaction volume.

 

Revenues related to our call center business in thefirst quarter of 2005 increased by Php142 million, or 53%, to Php408 millionfrom Php266 million in the same period in 2004 due to the combined effects ofthe following:

 

•              Vocativ’s upward price adjustmentfor voice and voice over internet protocol, or VoIP, and an increase inprograms being handled; and

 

•              an upward price adjustment byParlance for its inbound and outbound projects, coupled with an increase in thenumber of registered minutes.

 

Call center revenues accounted for 63% and 61% oftotal information and communications technology service revenues in the firstquarters of 2005 and 2004, respectively.

* *

*Internet and gaming*

 

ePLDT has also invested in a number of othere-commerce and internet-related businesses, which include:

 

•              a 99.6% interest in Infocom, oneof the country’s leading internet service providers.  Infocom offers consumerprepaid and postpaid internet access, corporate leased lines, dedicateddial-up, multi-user dial-up, broadband internet access thru DSL or *NOW* cableinternet; web consulting, development and hosting; 

 

•              a 67.79% interest in DigitalParadise, Inc., or DigiPar, an internet café business which assumed the assetsand brand of *Netopia*.  *Netopia* is now one of the largest and fastest growinginternet café chains in the country with over 140 branches and over 6,000 workstations.  DigiPar offers high-speed internet services, including internetadvertising, gaming and printing; and

 

•              a 63% interest in netGames, Inc.,a publisher for Massively Multi-player Online Game in the Philippines.netGames, which was incorporated on June 21, 2004, is the Philippine licenseeof Khan Online, the country’s first full 3D online game.  netGames commencedfull commercial operations in February 2005.

 

Internet Service revenues consist of: 

 

•              revenues derived from actual usageof internet access network by prepaid subscribers and any unused peso value ofexpired prepaid cards or electronic internet time loads, net of discounts givento dealers; 

 

•              monthly service fees from postpaidcorporate and consumer subscribers, including (1) charges for internet usage inexcess of allocated free plan internet hours; (2) one-time installation andactivation fees; and (3) fees for value added services such as additionalmailbox accounts;

 

•              monthly service fees on valueadded services, including e-mail and web hosting services;

 

•              one-time fees generated fromresellership of internet-related solutions such as security solutions anddomain registration; and

 

•              share in revenues of text, voiceand internet messages for cellular, landline and internet-based content andapplications.

 

Revenues from ourinternet business for the first quarter of 2005 increased by Php43 million, or42%, to Php146 million from Php103 million in the same period in 2004 primarilydue to the consolidation of DigiPar in June 2004.  Our internet businessrevenues accounted for 22% and 24% of service revenues from information andcommunications technology business in the first quarters of 2005 and 2004,respectively.

 

*Vitro*ä data center

 

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

 

*Vitro*ä revenues consist of:

 

•              monthly service fees derived fromco-location services, server hosting, hardware and software maintenanceservices, website development and maintenance services, web hosting, datarecovery security services and other value added services;

 

•              installation charges and otherone-time fees associated with the set-up; and 

 

•              monthly service fees or one-timefees generated from professional services of Vitro’s certified professionals.

 

Inthe first quarter of 2005, *Vitro*ä contributedrevenues of Php81 million, an increase of Php31 million, or 62%, from Php50million in the same period in 2004, primarily due to an increase in co-locationrevenues, server hosting and other services.   *Vitro*ä revenues accounted for 12% and 11% of service revenues frominformation and communications technology business in the first quarters of2005 and 2004, respectively.

 

*Others*

 

Other revenues consist of:

 

•              fees generated for issuance ofdigital certificates; and 

 

•              revenues derived from IThelpdesk/contact center solutions and terminals for credit, debit and credit cardtransactions.

 

Revenues from other businesses related to ourinformation and communications technology segment in the first quarter of 2005increased to Php17 million from Php16 million in the same period in 2004largely due to IT helpdesk/contact center services rendered coupled with anincrease in number of digital certificates sold.

 

Pleaserefer to *Note 9 – Investments**in Associates**– at equity* tothe accompanying unaudited consolidated financial statements for furtherdiscussion on ePLDT’s other information and communications technology services.

 

*Non-service Revenues*

 

Non-service revenues consist of sales generated fromresellership of Microsoft software licenses and Cisco hardware equipment.  Inthe first quarter of 2005, non-service revenues generated by our informationand communications technology business increased by Php30 million, or 83%, toPhp66 million prompted by higher point of product sales of Cisco equipment andMicrosoft licenses.

 

*Other Income*
 

All other income/gainswhich do not fall under service and non-service revenues are included underthis classification.  Other income generated from our information andcommunications technology business segment increased to Php33 million in thefirst quarter of 2005 from Php3 million in the same period in 2004 owing toInfocom’s sale of its *NOW* cable internet brand on February 1, 2005.  

 

*Expenses*
 

Expenses associatedwith our information and communications technology business totaled Php721million in the first quarter of 2005, an increase of Php286 million, or 66%,from Php435 million in the same period in 2004.  As a percentage of ourinformation and communications technology revenues, expenses related to ourinformation and communications technology business were at 96% and 92% for thefirst quarters of 2005 and 2004, respectively.  

 

The following table shows the breakdown of our totalconsolidated information and communications technology-related expenses for thethree months ended March 31, 2005 and 2004 and the percentage of each expenseitem to the total:

 

 

**Three Months Ended March 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2005**

 

**%**

 

**2004**(1)

 

**%**

** **

**Amount**

** **

**%**

** **

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(2)

Php308

 

43

 

Php172

 

40

 

Php136

 

79

Rent

99

 

14

 

84

 

19

 

15

 

18

Depreciation and amortization

95

 

13

 

67

 

15

 

28

 

42

Maintenance

70

 

10

 

46

 

11

 

24

 

52

Selling and promotions

64

 

9

 

32

 

7

 

32

 

100

Professional and other service fees

19

 

3

 

12

 

3

 

7

 

58

Financing costs

13

 

2

 

10

 

2

 

3

 

30

Taxes and licenses

10

 

1

 

4

 

1

 

6

 

150

Insurance and security services

3

 

–

 

1

 

–

 

2

 

200

Provisions

–

 

–

 

3

 

1

 

(3)

 

(100)

Other expenses

40

 

5

 

4

 

1

 

36

 

900

Total 

Php721

 

100

 

Php435

 

100

 

Php286

 

66

____________

 

*(1)   As restated to reflect the effects of the changesin accounting policies, as discussed in Note 2 – Summary of SignificantAccounting Policies to the accompanying unaudited consolidated financialstatements.*

*(2)   Includes salaries andbenefits, incentive plan, pension and MRP costs.*

 

Compensationand benefits increased by Php136 million, or 79%, to Php308 million mainly dueto the expansion of our call center facilities which resulted in an increase inheadcount coupled with an increase in salaries, bonuses and various incentivesof employees.

 

Rent expensesincreased by Php15 million, or 18%, to Php99 million due to the opening ofseveral *Netopia* branches countrywide and abroad in the second half of2004.  

 

Depreciation andamortization charges increased by Php28 million, or 42%, to Php95 millionprimarily due to an increase in depreciable asset base in relation to theexpansion of our call center business segment.

 

Maintenance expensesincreased by Php24 million, or 52%, to Php70 million primarily due to a changein maintenance agreement which resulted in higher annual maintenance in respectof our digital certificate business.

 

Selling and promotion expenses increased by Php32million, or 100%, to Php64 million mainly as a result of increased advertisingand promotions expenses in the first quarter of 2005 compared to the sameperiod in 2004.

 

Professional and otherservice fees increased by Php7 million, or 58%, to Php19 million primarily dueto higher training and shuttling expenses relating to our call centerrepresentatives.

 

Financing costsincreased by Php3 million, or 30%, to Php13 million due to higher interestexpense on loans as debt balances increased in the first quarter of 2005 ascompared to the same period in 2004.

 

Taxesand licenses increased by Php6 million, or 150%, to Php10 million mainly onaccount of higher business-related taxes paid in the first quarter of 2005 ascompared to the same period in 2004.

 

Insuranceand security services increased by Php2 million, or 200%, to Php3 million primarilydue to high insurance and security costs in the first quarter of 2005 ascompared to same period in 2004.

 

Provisions decreasedby Php3 million owing to specifically identified subscriber accounts of Infocomalready provided for in 2004.

 

Other expensesincreased by Php36 million, or 900%, to Php40 million due to various businessand operational-related expenses such as travel, supplies and communicationexpenses.

 

*Provision for (benefit from) income tax*
 

A provisionfor income tax of Php47 thousand was recorded in the first quarter of 2005 as asubstantial portion of our ICT business are under income tax holiday.  Benefitfrom income tax of Php1 million was recognized in the first three months of2004 due to a tax loss position as non-tax deductible charges were higherduring the first quarter of 2004.

 

*Net Income*
 

In the first quarterof 2005, our information and communications technology business segmentregistered a net income of Php39 million, a decrease of 3%, compared to a netincome of Php40 million posted in the same period in 2004 as expenses increasedby 66% compared with a 58% increase in revenues and other income.****Theincrease in expenses for the first quarter of 2005 was reflective of thecontinuing expansion of our call center business as well as our *Netopia*internet café business.

 

**Liquidity and Capital Resources**

 

The following table shows our consolidated cash flowsfor the three months ended March 31, 2005 and 2004 as well as consolidatedcapitalization and other selected financial data as at March 31, 2005 and 2004:

 

 

**Three Months Ended March 31,**

 

**2005**

 

**2004**(1)

** **

(Unaudited)

**(in millions)**

 

 

 

**Cash Flows**

 

 

 

Net cash provided by operating activities

Php15,250

 

Php18,103

Net cash used in investing activities

2,191

 

5,363

Capital expenditures

4,263

 

4,316

Net cash used in financing activities

10,245

 

7,528

Net increase in cash and cash equivalents

2,456

 

5,223

 

** **

 

** **

 

**March 31,**

** **

**December 31,**

 

**2005**

 

**2004**(1)

**(in millions)**

(Unaudited)

 

(Audited)

**Capitalization**

 

 

 

Interest-bearing financial liabilities:

 

 

 

Long-term financial liabilities:

 

 

 

Long-term debt

Php113,040

 

Php121,012

Obligations under capital lease

514

 

601

Preferred stock subject to mandatory redemption

14,094

 

14,375

 

127,648

 

135,988

Interest-bearing financial liabilities maturing within one year:

 

 

 

Notes payable

2

 

58

Long-term debt maturing within one year

22,972

 

28,018

Obligations under capital lease maturing within one year

448

 

425

 

23,422

 

28,501

Total interest-bearing financial liabilities

151,070

 

164,489

Total equity

54,383

 

48,515

 

Php205,453

 

Php213,004

** **

 

 

 

**Other Financial Data**

 

 

 

Total assets

Php261,403

 

Php265,473

Property, plant and equipment - net

192,921

 

194,525

Cash and cash equivalents

29,777

 

27,321

_______________

* *

*(1)**As restated to reflect the effects of the changes inaccounting policies, as discussed in Note 2 – Summary of Significant AccountingPolicies to the accompanying unaudited consolidated financial statements.*

* *

 

As at March 31, 2005,our consolidated cash and cash equivalents totaled Php29,777 million.Principal sources of consolidated cash and cash equivalents in the firstquarter of 2005 were cash flows from operations amounting to Php15,250 millionand drawings from Smart’s facilities aggregating Php5,471 million.  These fundswere used principally for capital outlays of Php4,263 million, total debtprincipal payments of Php14,431 million and interest payments of Php2,518million.

 

***Operating Activities***

 

Our consolidated net cash flows from operatingactivities in the first quarter of 2005 decreased by Php2,853 million, or 16%,to Php15,250 million from Php18,103 million in the same period in 2004 as wesettled current liabilities relating to various trade suppliers in the firstthree months of 2005.

 

A growing portion of our cash flow is generated byour wireless business, which accounted for 59% and 56% of our service revenuesin the first quarters of 2005 and 2004, respectively.  Revenues from our fixedline and information and communications technology services accounted for 39%and 2%, respectively, of our service revenues in the first quarter of 2005compared to 42% and 2%, respectively, in the same period in 2004. 

 

In the first quarter of 2005, cash flows fromoperating activities of our wireless business accounted for 66% of ourconsolidated cash flows from operations compared to 56% in 2004 owing to thegrowth of our cellular service revenues.  Our fixed line business contributed32% and 44% to our consolidated cash flows from operations in the first three monthsof 2005 and 2004, respectively.  We settled current liabilities outstanding asof December 31, 2004 during the first quarter of 2005.  We believe that ourcontinuing strong cash flows on a consolidated basis will allow us to defrayour current liabilities despite our current ratio being less than 1:1 as atMarch 31, 2005. 

 

WhileSmart is subject to loan covenants that restrict its ability to pay dividends,redeem preferred shares, make distributions to PLDT or otherwise provide fundsto PLDT or any associate without the consent of its lenders, Smart has beenable to obtain waivers from Finnvera and certain of its lenders for each of thedividend payments made by Smart to PLDT in 2004, 2003 and 2002 aggregatingPhp16,100 million, Php6,166 million and Php1,540 million, respectively.  Smarthas also obtained the necessary consents from its lenders to make similardistributions to PLDT amounting to Php19,891 million in 2005, of which Php6,000million was paid by Smart to PLDT in March 2005.

 

Investing Activities
 

Net cash used in investing activities in the firstquarter of 2005 amounted to Php2,191 million, a decrease of Php3,172 million,or 59%, compared to Php5,363 million in the same period in 2004.  This decreasewas primarily the result of matured short-term investments relating to prepaidforward exchange contracts of Smart; Smart did not book additional prepaidforwards due to the improvement of the peso.

 

Our consolidatedcapital expenditures in the first quarter of 2005 totaled Php4,263 million, adecrease of Php53 million, or 1%, from Php4,316 million in the same period in2004 primarily due to Smart’s lower capital spending partially offset by PLDT’shigher capital spending.  Smart's capital spending of Php1,753 million in thefirst quarter of 2005 was used to further expand and upgrade its transmissionnetwork facilities to increase capacity and coverage in respect of basic andadvanced cellular services.  PLDT's capital spending of Php2,344 million wasprincipally used to finance the expansion of its fixed line data and IP-basednetwork services.  ePLDT and its subsidiaries’ capital spending of Php158million was used to primarily fund its *Vitro*TM, Infocom and call center business operations.  Thebalance represented other subsidiaries’ capital spending.  Consolidated capitalexpenditures in the first quarter of 2004 amounted to Php4,316 million, ofwhich Php3,463 million, Php796 million and Php32 million were attributable toSmart, PLDT and ePLDT, respectively.  The balance represented other subsidiaries’capital spending.

 

***Financing Activities***

 

On a consolidated basis, we used net cash ofPhp10,245 million for financing activities in the first quarter of 2005,compared to Php7,528 million in the same period in 2004.  The net cash used infinancing activities in the first quarter of 2005 was mainly attributable tointerest payments and debt repayments by PLDT in line with its ongoing debtreduction program.  

 

Debt Financing 
 

Additions to our consolidated long-term debt in thefirst quarter of 2005 totaled Php5,471 million from Smart's drawings related tothe refinancing of its Phase 5A/5B loan facilities.  Payments in respect ofprincipal and interest of our total debt amounted to Php14,431 million andPhp2,518 million, respectively, in the first quarter of 2005, of which Php8,295million and Php2,216 million were attributable to PLDT, respectively.

 

The following tableshows our long-term debt, including current portion as at March 31, 2005 and2004:

 

** **

**March 31,**

** **

**December 31,**

** **

**Increase (Decrease)**

** **

**2005**

** **

**2004**

** **

**Amount**

** **

**%**

**(in millions)**

(Unaudited)

 

(Audited)

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

U.S. Dollar Debt:

 

 

 

 

 

** **

 

Export Credit Agencies-Supported Loans

Php37,027

 

Php41,266

 

(Php4,239)

** **

(10)

Fixed Rate Notes

65,593

 

68,795

 

(3,202)

** **

(5)

Term Loans

16,793

 

20,492

 

(3,699)

** **

(18)

Restructured Loans

4,738

 

4,815

 

(77)

** **

(2)

Satellite Acquisition Loans

3,663

 

4,064

 

(401)

** **

(10)

 

127,814

 

139,432

 

(11,618)

** **

(8)

Japanese Yen Debt:

 

 

 

 

 

** **

 

JBIC’s Overseas Investment Loan

4,275

 

5,363

 

(1,088)

** **

(20)

Export Credit Agency-Supported Loan

1,125

 

1,212

 

(87)

** **

(7)

 

5,400

 

6,575

 

(1,175)

** **

(18)

Philippine Peso Debt:

 

 

 

 

 

** **

 

Peso Fixed Rate Corporate Notes

1,675

 

1,675

 

–

** **

–

Term Loans

756

 

985

 

(229)

** **

(23)

Restructured Loans

367

 

363

 

4

** **

1

 

2,798

 

3,023

 

(225)

** **

(7)

 

Php136,012

 

Php149,030

 

(Php13,018)

** **

(9)

 

Fora complete discussion of long-term debt, see *Note 17 – Interest-bearingFinancial Liabilities*to the accompanying unaudited consolidated financialstatements.

 

Our long-term debtdecreased by Php13,018 million, or 9%, to Php136,012 million as at March 31,2005 largely due to debt amortizations and prepayments in line with PLDT’sefforts to reduce its overall debt level and the appreciation of the peso.PLDT’s debt was reduced by 10% to Php98,519 million by the end of the firstquarter 2005.  In addition, the debt levels of Smart, Mabuhay, ePLDT andMaratel as at March 31, 2005 relative to the debt balances as at December 31,2004 decreased by 3%, 10%, 19% and 24% to Php33,584 million, Php3,663 million,Php238 million and Php8 million, respectively, due to the peso appreciation anddebt amortizations during the first quarter of 2005.

 

Asat March 31, 2005, PLDT had no undrawn committed long-term credit facilities.The JP¥3,095 million undrawn portion of the JP¥5,615 million syndicated termloan facility supported by Nippon Export and Investment Insurance of Japan andUS$4 million undrawn portion of the US$12 million term loan facility extendedby DEG-Deutsche Investitions-und Entwicklungsgesellschaft mbH were cancelled onDecember 3, 2004 and September 26, 2004, respectively.  In addition, PLDT alsowaived further disbursements from the US$149 million Kreditanstalt fürWiederaufbau refinancing facility effective September 1, 2004, thus, cancelingthe undrawn portion of US$9 million.  As at March 31, 2005, Smart still hadavailable facilities under its €50 million Framework Agreement with BayerischeHypo-und Vereinsbank Aktiengesellschaft up to a maximum aggregate amount of €44million. 

 

The scheduled maturities of our outstandingconsolidated long-term debt at nominal values as at March 31, 2005 are asfollows:  

 

**Year**

** **

**US$ Loans**(1)

** **

**JP¥ Loans**(2)

** **

**Peso Loans**

** **

**Total**

 

 

**(in millions)**

** **

 

 

 

 

 

 

 

 

 

 

 

 

2005(3)

 

US$325

 

Php17,781

 

JP¥2,024

 

Php1,034

 

Php652

 

Php19,467

 
2006

 

353

 

19,330

 

3,418

 

1,747

 

851

 

21,928

 
2007

 

474

 

25,988

 

3,418

 

1,747

 

78

 

27,813

 
2008

 

119

 

6,520

 

1,709

 

874

 

67

 

7,461

 
2009

 

271

 

14,831

 

–

 

–

 

56

 

14,887

 
2010 and onwards

 

972

 

53,201

 

–

 

–

 

1,214

 

54,415

 
________________

*(1)       **The exchange rate used wasPhp54.747 to US$1.00.*

*(2)       **The exchange rate used wasPhp0.5111 to JP**¥1.00.*

*(3)       **April 1, 2005 throughDecember31, 2005.*

 

ApproximatelyPhp91,556 million principal amount of our consolidated outstanding long-termdebt as at March 31, 2005 is scheduled to mature over the period from 2005 to2009.  Of this amount, approximately Php66,710 million is attributable to PLDT,Php20,937 million to Smart, and the remainder to Mabuhay Satellite, Maratel andePLDT.

 

*DebtCovenants*

 

Ourdebt instruments contain restrictive covenants, including covenants that couldprohibit us from paying common dividends under certain circumstances, andrequire us to comply with specified financial ratios and other financial tests,calculated in conformity with accounting principles generally accepted in thePhilippines, at relevant measurement dates, principally at the end of eachquarterly period.  We have complied withall of our maintenance ratios as required under our loan covenants and otherdebt instruments.  

 

Pleasesee *Note 17 – Interest-bearing Financial Liabilities*for a detaileddiscussion of our covenants.

 

Financing Requirements
 

We believe that our available cash, including cashflow from operations, will provide sufficient liquidity to fund our projectedoperating, investment, capital expenditures and debt service requirements forthe next 12 months.  

 

Since 2002, we have been utilizing internallygenerated cash particularly from our cellular business to reduce our overalllevel of indebtedness.  In line with this objective, we have managed ourcapital expenditures, reduced our investments and suspended dividend paymentsto common shareholders from April 2001 to 2004.  As a result of our improvingcash flows and reduced debt levels, we have restored the payment of commondividends in May 2005 and intend to gradually increase our dividend payoutratio in succeeding years as we improve our leverage ratios. 

 

*Credit Ratings*****

 

None of our existing indebtedness contains provisionsunder which credit rating downgrades would trigger a default, changes inapplicable interest rates or other similar terms and conditions.  

 

OnMay 3, 2005, Fitch Ratings upgraded PLDT’s long-term local currency rating to“BB+” with a stable outlook.  Simultaneously, Fitch has affirmed PLDT’slong-term foreign currency rating, global bonds and senior notes at “BB” andPLDT’s convertible preferred stock at “B+”.  The outlook on the affirmedratings remains negative, reflecting the outlook of the Republic of thePhilippines’ long-term foreign currency rating.

 

On February 16, 2005, Moody’s Investor Service, orMoody’s, downgraded the foreign currency senior unsecured debt rating of PLDTby one-notch to Ba3 from Ba2 with a stable outlook.  The rating action wastaken as part of Moody’s two-notch downgrade of the Republic of thePhilippines’ foreign currency country ceiling to B1 from Ba2.  On the samedate, Moody’s affirmed PLDT’s B1 preferred stock rating with a stable outlook.Moody's views that there is a differential between PLDT's foreign currencyrating and the sovereign rating.  According to Moody's, PLDT's foreign currencybond rating is a function of its own risk of default and is less likely to besubject to a debt moratorium which the Philippine government may declare incase of an event of default by government.

 

OnJanuary 17, 2005, Standard and Poor’s Ratings Group, or Standard and Poor’s,revised its long-term foreign currency rating on PLDT from “BB” to “BB-“ (BBminus) with a stable outlook.  The rating action was taken immediately afterStandard and Poor’s downgraded the foreign currency rating on the Republic ofthe Philippines to “BB-“ (BB minus).

 

*Equity Financing*

 

PLDT raised Php82million from the exercise by certain officers and executives of stock optionsin the first quarter of 2005.  In addition, through our subscriber investmentplan, or SIP, which provides postpaid fixed line subscribers the opportunity tobuy shares of our 10% cumulative convertible preferred stock as part of theupfront payments collected from subscribers, PLDT was able to raise Php1million in the first quarter of 2005 and Php3 million in the same period in2004.  As approved by the NTC, the SIP was made optional in 2003 from beingcompulsory in earlier years.

 

Cashdividend payments in the first quarter of 2005 amounted to Php320 million,compared to Php334 million in the same period in 2004, all of which were paidto preferred shareholders of PLDT.  On March 2, 2005, PLDT declared cashdividends of Php14 per common share to holders of record as at March 31, 2005payable on May 12, 2005. This is the first cash dividend declaration to commonshareholders in four years since April 2001. 

 

***Contractual Obligations and Commercial Commitments***

 

*Contractual Obligations*

 

The following table discloses our contractualobligations outstanding as at March 31, 2005: 

 

 

**Payments Due by Period**

 

**Total**

** **

**Within 1 year**

** **

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

** **

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

** **

**After 5 years**

 

(Unaudited)

**(in millions)**

 

 

 

 

 

 

 

 

 

Long-term debt (1)

Php145,971

 

Php22,978

 

Php48,137

 

Php21,080

 

Php53,776

Long-term lease obligations:

 

 

 

 

 

 

 

 

 

Operating Lease

5,278

 

1,284

 

2,202

 

732

 

1,060

Capital Lease

1,698

 

708

 

533

 

13

 

444

Unconditional purchase obligations(2)

11,595

 

4,195

 

2,199

 

2,190

 

3,011

Other long-term obligations

21,126

 

–

 

3,283

 

17,843

 

–

Total contractual obligations

Php185,668

 

Php29,165

 

Php56,354

 

Php41,858

 

Php58,291

___________

* *

*(1)    **Before deducting unamortizeddebt discount and debt issuance cost**s.*

*(2)    **Based on the original AirTime Purchase Agreement with AIL.*

* *

*Long-term Debt*

* *

For a discussion of our long-term debt, see *Note 17 – Interest-bearing Financial Liabilities*to the accompanying unaudited consolidated financialstatements.

* *

*Long-term Operating Lease Obligations*

 

***DomesticFiber Optic Network Submerged Plant Maintenance Agreement***.   On July 4, 2000, PLDT entered into an agreementwith NTT World Engineering Marine Corporation, or NTT WEMC for the submarinecable repair and other allied services in relation to the maintenance of PLDT'sdomestic fiber optic network submerged plant for a period of five years up toJuly 4, 2005.  Under this agreement, PLDT is required to pay NTT WEMC a fixed annualstanding 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 at March 31,2005, PLDT’s aggregate remaining obligation under this agreement wasapproximately Php38 million. 

 

***Digital Passage Service Contracts***.****PLDThas existing Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento 25 years expiring at various dates.  As at March 31, 2005, PLDT’s aggregateremaining obligation under these contracts amounted to approximately Php26million.

 

***License Agreement with Mobius Management Systems(Australia) Pty Ltd., or Mobius****.*PLDT entered into a license agreementwith Mobius pursuant to which Mobius has granted PLDT a non-exclusive,non-assignable and non-transferable license for the use of computer softwarecomponents.  Under this agreement, Mobius is also required to providemaintenance services for a period of one year at no additional maintenancecharge.  PLDT may purchase maintenance services upon expiration of the firstyear for a fee of 15% of the current published license fee.  As at March 31,2005, PLDT’s aggregate remaining obligation under this agreement wasapproximately Php40 million.

 

***Other Long-term Operating Lease Obligations***.  We have various long-term lease contracts forperiods ranging from two to ten years covering certain offices, warehouses,cell sites, telecommunication equipment locations and various officeequipment.  In particular, Smart has lease obligations aggregating Php3,032million as at March 31, 2005 in respect of office and cell site rentals withover 2,000 lessors nationwide.

 

*Long-termCapital Lease Obligation*s

 

For a discussion of our long-term capital leaseobligations, see *Note 17 –Interest-bearing Financial Liabilities*tothe accompanying unaudited consolidated financial statements.

 

*UnconditionalPurchase Obligations*

 

***AirTime Purchase Agreement with AIL***.PLDT is a party to a Founder NSP, or National Service Provider, Air TimePurchase Agreement with AIL in March 1997, which was amended in December 1998,under which PLDT is granted the exclusive right to sell AIL services in thePhilippines.  In exchange, the Air Time Purchase Agreement states that PLDT hasto purchase from AIL a minimum of US$5 million worth of air time annually overten years commencing on the date of commercial operations of the Garuda Isatellite.  In the event AIL’s aggregate billing revenue is less than US$45million in any given year, the Air Time Purchase Agreement also states thatPLDT has to make supplemental air time purchase payments not to exceed US$15million per year during the ten-year term. 

 

As at March 31, 2005, PLDT’s aggregate remainingminimum obligation under the original Air Time Purchase Agreement wasapproximately Php11,574 million.  Negotiations are continuing with the relevantparties towards an amicable settlement of this matter.  Prior to furthernegotiation of a definitive transaction agreement among the parties, PLDTdeposited US$21.5 million in an escrow account on March 28, 2005 which was tobe disbursed upon the execution and delivery of a mutually agreeable definitivetransaction agreement on or before April 29, 2005.  The parties involved hadnot reached an agreement to date and on May 2, 2005, PLDT has formallyrequested for the return of amount deposited.  Copies of the necessary bankinginstructions have been received by the escrow bank, but only upon receipt ofthe original instructions will the abovementioned funds be returned.  See *Note20 – Related Party Transactions* and *Note 23 – Provisions andContingencies* to the accompanying unaudited consolidated financialstatements for further details relating to the Air Time Purchase Agreement withAIL.  

 

***InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign.***  On September 15, 2000, ePLDT entered into anagreement with VeriSign for the non-exclusive, non-transferable right and licenseto use the VeriSign software, brand and Certification Practice Statement forthe purpose of approving, issuing, suspending or revoking digital certificatesfor users of the internet or similar open systems in the Philippines for aperiod of seven years.  Under this agreement, ePLDT is required to pay VeriSigna certain percentage of the revenue derived from the services subject tominimum annual royalty payments aggregating to US$11 million, which wassubsequently reduced to US$1 million, for the seven-year contract period.  Inaddition, ePLDT was required to pay an annual support fee totaling US$0.5million during the first year and US$0.3 million in each year thereafter.

 

EffectiveJuly 1, 2003, VeriSign has agreed to amend the agreement and issued Addendum 6to write-off all past due invoices and payments owed to VeriSign, which wereinvoiced or scheduled to be invoiced under the agreement prior to this Addendum6.  All royalty payments and annual support fees due through June 2003 will bepart of the write-off in the amount of US$0.8 million.  For contract year 4(September 2003 to August 2004), the annual support fee will be reduced fromUS$0.3 million to US$ 40,000 and for contract years 5-7 (September 2004 toAugust 2007) from US$0.3 million to US$0.16 million.  In addition, VeriSignagreed to reduce the affiliate revenue sharing rates from 50% of suggestedretail price to 25% of suggested retail price for both enterprise and internetproducts for 12 months starting July 2003 and negotiable thereafter.  

 

EffectiveJuly 1, 2004, VeriSign has agreed to amend the Agreement and issued Addendum 8as extension of Addendum 6.  Annual support fee for year 5 (September 2004 toAugust 2005) will remain at US$40,000 and affiliate revenue sharing rates willremain at 25%.  As at March 31, 2005, ePLDT’s aggregate remaining minimumobligation under this agreement was approximately Php17 million pertaining toannual support fee.

 

***Other Unconditional Purchase Obligations.***The******PLDT group has various purchasecontracts for periods ranging from two to three years covering the use of afraud management system, satellite hub and remote VSAT network systems.

 

*Other Long-term Obligations*

 

***Mandatory Conversion and Purchase of Shares***.   As discussed in *Note 9 – Investments inAssociates**–* a*t equity* and *Note 17 – Interest-bearingFinancial Liabilities*, as at March 31, 2005 PLDT had issued a total of 3million shares of Series V Convertible Preferred Stock, 5 million shares ofSeries VI Convertible Preferred Stock and 4 million shares of Series VIIConvertible Preferred Stock in exchange for Series K Class I ConvertiblePreferred Stock of Piltel, pursuant to the debt restructuring plan of Piltel.  

 

Eachshare of Series V, VI and VII Convertible Preferred Stock is convertible at anytime at the option of the holder into one PLDT common share.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stocks and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to sharesof PLDT common share.  Under a put option exercisable for 30 days, holders ofcommon shares received on mandatory conversion will be able to require PLDT topurchase such PLDT’s common shares for Php1,700 per share, US$36.132 per share,and JP¥4,071.89 per share for Series V, VI and VII, respectively.

 

Asat March 31, 2005, 515,818 shares of Series V Convertible Preferred Stock and522,700 shares of Series VI Convertible Preferred Stock had been converted toPLDT’s common shares.  The aggregate value of the put option based onoutstanding shares as at March 31, 2005 was Php21,126 million, of whichPhp13,131 million is payable on June 4, 2008 and Php7,995 million on June 4,2009, if all of the outstanding shares of Series V, VI and VII ConvertiblePreferred Stocks were mandatorily converted and all the underlying shares ofcommon stock were put to PLDT.  The market value of the underlying shares ofcommon stock was Php14,944 million, based on the market price of PLDT commonshares of Php1,385 per share as at March 31, 2005.

 

Pleaserefer to *Note 17 – Interest-bearing Financial Liabilities*to theaccompanying unaudited consolidated financial statements for furtherdiscussion.

 

*Commercial Commitments*

 

As at March 31, 2005,our outstanding commercial commitments, in the form of letters of credit,amounted to Php1,639 million.  These commitments will expire within one year.

 

**Quantitative and Qualitative Disclosures about Market Risks**

 

Our operations are exposed to various risks,including liquidity risk, foreign exchange risk and interest rate risk.  Theimportance of managing these risks has significantly increased in light ofconsiderable change and continuing volatility in the Philippine andinternational financial markets.  With a view to managing these risks, we haveincorporated financial risk management functions in our organization,particularly in our treasury operations.

 

Liquidity Risk Management
 

We seek to manage ourliquidity profile to be able to finance our capital expenditures and serviceour maturing debts.  To cover our financing requirements, we intend to useinternally generated funds and proceeds from debt and equity issues and salesof certain assets. 

 

As part of ourliquidity risk management program, we regularly evaluate our projected andactual cash flow information and continuously assess conditions in thefinancial markets for opportunities to pursue fund-raising initiatives.  Theseinitiatives may include bank loans, export credit agency-guaranteed facilities,and debt capital and equity market issues.

 

***Foreign Exchange Risk Management***

 

Asat March 31, 2005, the Philippine peso had appreciated by 3% against the U.S.dollar to Php54.747 to US$1.00 from Php56.341 to US$1.00 as at December 31,2004.  As at March 31, 2004, however, the peso depreciated by 1% to Php56.216to US$1.00 from Php55.586 to US$1.00 as at December 31, 2003.  As such, werecognized foreign exchange gains of Php3,211 million in the first quarter of2005 as compared to foreign exchange losses of Php2,414 million recorded in thesame period in 2004.  In the first quarter of 2005, consolidated capitalizednet foreign exchange gains which qualified as borrowing costs were Php22million, as against net capitalized foreign exchange losses of Php73 million inthe same period in 2004.  These capitalized net foreign exchange gains (losses)which qualified as borrowing costs were attributable to foreigncurrency-denominated liabilities used to finance our capital investments andwere therefore recorded as additions (reductions) to the carrying value of therelated property accounts. 

 

Whilea certain percentage of our revenues is either linked to or denominated in U.S.dollars, substantially all of our indebtedness, a substantial portion of ourcapital expenditures and a portion of our operating expenses are denominated inforeign currencies, mostly in U.S. dollars.

* *

As at March 31, 2005, approximately 98% of our totalconsolidated debts were denominated in foreign currencies.  Of our foreigncurrency-denominated debts, 4% are in Japanese yen on a consolidated basis andthe balance in U.S. dollars.  Thus, a weakening of the peso against the U.S.dollar or Japanese yen will increase both the principal amount of our unhedgedforeign currency-denominated debts (representing 62% of our consolidateddebts), and interest expense on our debt in peso terms.  In addition, many ofour financial ratios and other financial tests will be negatively affected.If, among other things, the value of the peso against the U.S. dollarsubstantially drops from its current level, we may be unable to maintaincompliance with these ratios, which could result in acceleration of some or allof our indebtedness.  For further information on our loan covenants, see“Liquidity and Capital Resources –– Financing Activities –– Covenants” aboveand *Note 17 – Interest-bearing Financial Liabilities*to the accompanyingunaudited consolidated financial statements.

 

To manage our foreignexchange risks, stabilize cash flows, and improve investment and cash flowplanning, we enter into forward foreign exchange contracts, foreign currencyswap contracts, currency options and other hedging products aimed at reducingand/or managing the adverse impact of changes in foreign exchange rates on ouroperating results and cash flows.  However, these hedges do not cover all ofour exposure to foreign exchange risks.

 

Specifically,we use forward foreign exchange contracts, foreign currency swap contracts andcurrency option contracts to manage the foreign exchange risk associated withour foreign currency-denominated loans. In order to manage hedge costs of thesecontracts, we utilize structures that include credit-linkage with PLDT as thereference entity, combination of currency option contracts, and fixed tofloating coupon only swap agreements.  Accounted as either cash flow hedges ortransactions not designated as hedges, changes in the fair value of theseinstruments are recognized as cumulative translation adjustments in equityuntil the hedged item is recognized in earnings or directly to income for theperiod. As at March 31, 2005, PLDT’s outstanding forward foreign exchangecontracts, principal-only long-term cross-currency swap contracts and currencyoption contracts amounted to US$107 million and JP¥247 million; US$550 million;and US$263 million, respectively.  Smart’s outstanding forward foreign exchangecontracts amounted to US$39 million as at March 31, 2005. 

 

For further discussions of these contracts, see *Note24 –Financial Assets and Liabilities – Derivative Financial Instruments*tothe accompanying unaudited consolidated financial statements.

 

***Interest Rate Risk Management***

 

On a limited basis, we enter into interest rate swapagreements in order to manage our exposure to interest rate fluctuations. As atMarch 31, 2005, PLDT’s outstanding interest rate swap contracts amounted toUS$125 million. For further discussions of these contracts, see *Note 24 –Financial Assets and Liabilities – Derivative Financial Instruments*to theaccompanying unaudited consolidated financial statements.

 

Wemake use of hedging instruments and structures solely for reducing oreliminating financial risks associated with our liabilities and not for tradingor speculative purposes.

** **

**Impact of Inflation and Changing Prices**

** **

Inflation can be asignificant factor in the Philippine economy, and we are continually seekingways to minimize its impact.  In recent periods, while decreases in therelative value of the peso have had a significant effect on us, we do notbelieve inflation has had a material impact on our operations.  The averageinflation rate in the Philippines in the first quarter of 2005 was 8.4%,compared to 3.5% in the same period in 2004.

** **

**OTHER INFORMATION**

 

*Related Party Transactions*
 

In the ordinary course of business, a number ofcompanies related to but outside of the consolidated PLDT Group are engaged inarm’s-length intercompany transactions.  We believe that the terms of thesetransactions are comparable with those available from unrelated parties. 

 

Transactions to which PLDT or its subsidiaries are aparty, in which a director or key officer or owner of more than 10% of thecommon shares of PLDT, or any member of the immediate family of a director orkey officer or owner of more than 10% of the common shares of PLDT had a director indirect material interest in PLDT or its subsidiaries, as at March 31, 2005and December 31, 2004 and for the three months ended March 31, 2005 and 2004are as follows:

 

*Agreements with NTT Communications and/or its Affiliates*— agreements under which (1) NTT Communicationsprovides advisory services for various business areas of PLDT; (2) NTT WorldEngineering Marine Corporation provides maintenance services to PLDT’s domesticfiber optic network; (3) PLDT is licensed to market managed data and otherservices using NTT Communications’ Arcstar brand; and (4) PLDT and NTTCommunications agreed to cooperative arrangements for conventionalinternational telecommunication services.  Total fees under these agreementstotaled Php81 million and Php70 million for the first quarters of 2005 and2004, respectively.  PLDT’s outstanding obligations under these agreementsamounted to Php52 million and Php49 million as at March 31, 2005 and December31, 2004, respectively.

 

*Agreements between Smartand Asia Link B.V*. — agreements underwhich Asia Link undertakes to provide technical support services and assistancein the operations and maintenance of Smart’s cellular business.  Total feesunder these agreements totaled Php123 million and Php107 million for the firstquarters of 2005 and 2004, respectively.  Under these agreements, Smart hadoutstanding payables of Php246 million and Php117 million as at March 31, 2005and December 31, 2004, respectively.  Asia Link is a subsidiary of the FirstPacific Group.

 

*Agreements relating toinsurance companies* — Gotuaco delRosario and Associates, or Gotuaco, acts as the broker for certain insurancecompanies to cover certain insurable properties of the PLDT Group.  Insurancepremiums are remitted to Gotuaco and the broker’s fees are settled betweenGotuaco and the insurance companies.  In addition, PLDT has an insurance policywith Malayan Insurance Co., Inc., or Malayan, wherein premiums are directlypaid to Malayan.  Total payments to Gotuaco and Malayan covering the 12-monthperiod ending July 31, 2005 amounted to Php452 million.  Two directors of PLDThave direct/indirect interests in or serve as a director/officer of Gotuaco andMalayan.

 

For a more detailed discussion of the related party transactionsenumerated above, see *Note 20 –Related Party Transactions* to theaccompanying**unaudited**consolidated financial statements. 

*Transfer of Piltel Common Shares from PLDT to Smart*
 

On April 25, 2005, PLDTand Smart entered into a subscription and assignment agreement covering thetransfer and assignment to Smart of 767 million Piltel common shares owned byPLDT.  The Piltel common shares were transferred to Smart in consideration andin exchange for 11.3 million Smart preferred shares subscribed by and issued toPLDT for a total price of Php157.2 million.  As a result, Smart now owns 92.1%of the total outstanding common stock of Piltel, thereby consolidating the PLDTGroup's wireless business under Smart.

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

**CONSOLIDATED FINANCIAL STATEMENTS**

** **

AS AT MARCH 31, 2005 (UNAUDITED) AND DECEMBER 31, 2004(AUDITED)

AND FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND2004 (UNAUDITED)

** **

 

 

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

** **

CONSOLIDATEDBALANCE SHEETS

**(in million pesos, except par value amounts)**

** **

** **

**March 31, 2005**

 

December 31, 2004

** **

**(Unaudited)**

 

(Audited)

**ASSETS**

**Noncurrent Assets**

** **

** **

** **

Property, plant and equipment (Notes 2, 8 and 17)

**192,921**

 

194,525

Investments in associates - at equity (Notes 2, 9 and 17)

**10**

 

8

Investments-available-for-sale (Notes 2 and 24)

**106**

 

104

Investment properties (Notes 2 and 10)

**743**

 

743

Goodwill and intangible assets (Notes 2, 3 and 11)

**3,803**

 

3,864

Deferred income tax assets (Notes 2 and 6)

**11,714**

 

12,738

Derivative assets (Notes 2 and 24)

**3,197**

 

4,116

Notes receivable (Notes 2, 12 and 24)

**346**

 

286

Prepayments (Note 17)

**1,218**

 

997

Other noncurrent assets (Note 2)

**1,020**

 

1,237

Total Noncurrent Assets 

**215,078**

 

218,618

**Current Assets**

** **

 

 

Cash and cash equivalents (Notes 2, 13 and 24)

**29,777**

 

27,321

Short-term investments (Notes 2 and 24)

**2,147**

 

3,873

Trade and other receivables (Notes 2, 14 and 24)

**10,282**

 

10,404

Inventories and supplies (Notes 2 and 15)

**1,939**

 

2,140

Derivative assets (Notes 2 and 24)

**183**

 

335

Prepayments (Note 17)

**1,131**

 

1,271

Other current assets (Notes 2 and 20)

**866**

 

1,511

Total Current Assets 

**46,325**

 

46,855

 

**261,403**

 

265,473

 

** **

 

 

**EQUITY AND LIABILITIES**

**Equity******(Notes 2, 7 and 16)

** **

 

 

Preferred stock, Php10 par value, authorized 822,500,000 shares; issued and  outstanding 449,112,652 as at March 31, 2005 and 449,682,057 shares  as at December 31, 2004

**4,491**

 

4,497

Common stock, Php5 par value, authorized 234,000,000 shares; issued and  outstanding 170,328,396 as at March 31, 2005 and 170,213,722 shares  as at December 31, 2004 

**852**

 

851

Stock options issued (Note 21)

**146**

 

181

Equity portion of convertible preferred stock (Note 17)

**1,458**

 

1,459

Capital in excess of par value

**50,662**

 

50,528

Deficit (Note 7)

**(3,535)**

 

(10,220)

Cumulative translation adjustments (Note 24)

**(551)**

 

362

Total Equity Attributable to Equity Holders 

**53,523**

 

47,658

Minority interest

**860**

 

857

Total Equity

**54,383**

 

48,515

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

CONSOLIDATEDBALANCE SHEETS (*continued*)

(in million pesos, except par value amounts)

 

** **

**March 31, 2005**

 

December 31, 2004

** **

**(Unaudited)**

 

(Audited)

**Noncurrent Liabilities**

** **

 

 

Interest-bearing financial liabilities - net of current portion  (Notes 2, 8, 17, 22 and 24)

**127,648**

 

135,988

Deferred income tax liabilities (Notes 2 and 6)

**2,404**

 

1,943

Derivative liabilities (Notes 2 and 24)

**6,427**

 

5,903

Provision for onerous contracts and assessments - net of current portion  (Notes 20, 22 and 23)

**3,901**

 

3,951

Pension and other benefits (Notes 2 and 21)

**3,127**

 

2,908

Customers’ deposits

**2,172**

 

2,174

Other noncurrent liabilities (Notes 2, 8, 14 and 18)

**8,752**

 

7,159

Total Noncurrent Liabilities

**154,431**

 

160,026

**Current Liabilities**

** **

 

 

Accounts payable (Notes 2 and 24)

**4,637**

 

7,029

Accrued expenses and other current liabilities (Notes 2, 17, 19, 20, 24 and 25)

**13,820**

 

14,811

Unearned revenues (Note 2)

**2,623**

 

2,892

Derivative liabilities (Notes 2 and 24)

**340**

 

474

Current portion of provision for onerous contracts and assessments  (Notes 20 and 23)

**644**

 

597

Current portion of interest-bearing financial liabilities  (Notes 2, 8, 17, 22 and 24)

**23,422**

 

28,501

Dividends payable (Notes 2, 7, 17 and 24)

**3,003**

 

652

Income tax payable (Notes 2 and 6)

**4,100**

 

1,976

Total Current Liabilities

**52,589**

 

56,932

 

**261,403**

 

265,473

* *

*See accompanying Notes toUnaudited Consolidated Financial Statements.*

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

 

**CONSOLIDATED STATEMENTS OF INCOME**

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

** **

** **

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

**INCOME**(Notes 2 and 4)

** **

 

 

Service revenues

**29,361**

 

28,107

Non-service revenues (Note 5)

**815**

 

2,631

Other income 

**75**

 

85

 

**30,251**

 

30,823

**EXPENSES**(Notes 2 and 4)

** **

 

 

Depreciation and amortization (Note 8)

**5,556**

 

5,337

Compensation and benefits (Notes 5 and 21)

**3,086**

 

2,984

Cost of sales (Notes 5, 20 and 22)

**2,004**

 

3,869

Maintenance (Note 20)

**1,544**

 

1,312

Selling and promotions

**1,452**

 

1,125

Rent

**630**

 

549

Provisions (Notes 5, 14, 15, 20 and 22)

**599**

 

1,336

Taxes and licenses (Note 23)

**574**

 

387

Professional and other service fees (Note 20)

**414**

 

440

Insurance and security services (Note 20)

**411**

 

398

Financing costs (Note 5)

**67**

 

4,418

Asset impairment (Notes 8 and 9)

**–**

 

85

Other expenses (Notes 5 and 20)

**988**

 

867

 

**17,325**

 

23,107

**INCOME BEFORE INCOME TAX**

**12,926**

 

7,716

**PROVISION FOR INCOME TAX** (Notes 2 and 6)

**3,543**

 

2,036

**NET INCOME FOR THE PERIOD**

**9,383**

 

5,680

**ATTRIBUTABLE TO:**

** **

 

 

Equity holders

**9,361**

 

5,686

Minority interest

**22**

** **

(6)

** **

**9,383**

 

5,680

**Earnings Per Common Share** (Note 7)

** **

 

** **

Basic

**52.78**

 

31.30

Diluted

**47.57**

 

31.30

* *

*See accompanying Notes to**Unaudited Consolidated Financial Statements.*

* *

* *
**
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN EQUITY**

**(in million pesos)**

** **

 

**Preferred Stock**

**Common Stock**

**Stock Options Issued**

**Equity Portion of Convertible Preferred Stock**

**Capital in Excess of  Par Value**

**Retained Earnings (Deficit)**

**Cumulative Translation Adjustments**

**Equity Attributable to Equity Holders of PLDT**

**Minority Interest**

**Total  Equity**

 

(Unaudited)

Balances at January 1, 2004 (As restated)

4,505

847

286

1,536

49,690

(36,736)

549

20,677

771

21,448

Changes in equity:

 

 

 

 

 

 

 

 

 

 

Net income for the period

 

 

 

 

 

 

 

 

 

 

As previously reported

–

–

–

–

–

5,240

–

5,240

(4)

5,236

Effect of changes in accounting policies  (Note 2)

–

–

–

–

–

446

–

446

(2)

444

As restated

–

–

–

–

–

5,686

–

5,686

(6)

5,680

Cash dividends

–

–

–

–

–

(312)

–

(312)

–

(312)

Currency translation differences (Note 24)

–

–

–

–

–

–

14

14

–

14

Issuance of capital stock - net (Note 16)

–

–

–

–

2

–

–

2

–

2

Cancelled option shares (Note 21)

–

–

(9)

–

9

–

–

–

–

–

Cost of share-based payments

–

–

4

–

–

–

–

4

–

4

Minority interest

–

–

–

–

–

–

–

–

6

6

Balances at March 31, 2004 (As restated – Note 2)

4,505

847

281

1,536

49,701

(31,362)

563

26,071

771

26,842

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2005

4,497

851

181

1,459

50,528

(10,220)

362

47,658

857

48,515

Changes in equity:

 

 

 

 

 

 

 

 

 

 

Net income for the period

–

–

–

–

–

9,361

–

9,361

22

9,383

Cash dividends

–

–

–

–

–

(2,676)

–

(2,676)

–

(2,676)

Currency translation differences (Note 24)

–

–

–

–

–

–

(32)

(32)

–

(32)

Net loss on cash flow hedges (Note 24)

–

–

–

–

–

–

(881)

(881)

–

(881)

Issuance of capital stock - net (Note 16)

(6)

–

–

(1)

17

–

–

10

–

10

Exercised shares

–

1

(35)

–

117

–

–

83

–

83

Minority interest

–

–

–

–

–

–

–

–

(19)

(19)

Balances at March 31, 2005 (Unaudited)

4,491

852

146

1,458

50,662

(3,535)

(551)

53,523

860

54,383

* *

*See accompanying Notes to Unaudited Consolidated Financial Statements.*

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

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in million pesos)**

 

** **

**Three Months Ended March 31,**

** **

**2005**

 

2004

** **

(Unaudited)

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

Income before income tax

**12,926**

 

7,716

Adjustments for:

** **

 

 

Depreciation and amortization

**5,556**

 

5,337

Foreign exchange (gains) losses - net

**(3,223)**

 

2,340

Interest on loans and related items - net of capitalized interest (Note 5)

**2,838**

 

3,096

Provision for doubtful accounts (Note 5)

**738**

 

1,099

Accretion on financial liabilities - net (Note 5)

**717**

 

712

Gain on derivative transactions - net (Note 5)

**(480)**

 

(1,873)

Interest income (Note 5)

**(369)**

 

(213)

Write-down (reversal of write-down) of inventories at net realizable value (Note 5)

**(89)**

 

128

Dividends on preferred stock subject to mandatory redemption (Note 5)

**67**

 

58

Provision for onerous contracts (Note 5)

**(50)**

 

109

Equity in net losses (income) of associates (Note 5)

**(2)**

 

15

Asset impairment

–

 

85

Others

**85**

 

171

Operating income before working capital changes

**18,714**

 

18,780

Decrease (increase) in:

** **

 

 

Trade and other receivables

**(681)**

 

243

Inventories and supplies

**281**

 

(292)

Prepayments

**(215)**

 

(156)

Other current assets

**645**

 

(76)

Increase (decrease) in:

** **

 

 

Accounts payable

**(2,490)**

 

1,973

Accrued expenses and other current liabilities

**(895)**

 

(826)

Unearned revenues

**(274)**

 

(457)

Pension and other benefits

**219**

 

(1,086)

Net cash generated from operations

**15,304**

 

18,103

Income taxes paid

**(54)**

 

–

Net cash provided by operating activities

**15,250**

 

18,103

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

Additions to property, plant and equipment

**(4,166)**

 

(4,164)

Proceeds from disposal of property, plant and equipment

**102**

 

12

Interest paid - capitalized to property, plant and equipment (Note 5)

**(97)**

 

(152)

Payments for purchase of investments

**(238)**

 

(28)

Additions to investment properties

**–**

 

(2)

Payments for purchase of investments-available-for-sale

**(3)**

 

–

Decrease (increase) in short-term investments

**1,726**

 

(1,230)

Investments in notes receivable

**(60)**

 

–

Interest received

**303**

 

186

Decrease in other noncurrent assets

**242**

 

15

Net cash used in investing activities

**(2,191)**

 

(5,363)

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (*continued*)**

(in million pesos)

 

** **

**Three Months Ended March 31,**

** **

**2005**

 

2004

** **

(Unaudited)

**CASH FLOWS FROM FINANCING ACTIVITIES**

** **

 

 

Proceeds from long-term debt

**5,471**

 

1,143

Payments of long-term debt

**(14,297)**

 

(5,634)

Proceeds from notes payable

**79**

 

–

Payments of notes payable

**(134)**

 

–

Payments of obligations under capital lease

**(89)**

 

(104)

Interest paid - net of capitalized portion

**(2,518)**

 

(2,520)

Cash dividends paid

**(320)**

 

(334)

Proceeds from issuance of capital stock

**83**

 

3

Payments of debt issuance costs

**(133)**

 

(37)

Increase (decrease) in:

** **

 

 

Customers’ deposits

**3**

 

14

Other noncurrent liabilities

**1,610**

 

(59)

Net cash used in financing activities

**(10,245)**

 

(7,528)

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

**(358)**

 

11

**NET INCREASE IN CASH AND CASH EQUIVALENTS**

**2,456**

 

5,223

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

**27,321**

 

19,372

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

**29,777**

 

24,595

* *

*Seeaccompanying Notes to Unaudited Consolidated Financial Statements.*

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

 

**NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**1.       ****Corporate Information**

 

ThePhilippine Long Distance Telephone Company, or PLDT, or Parent Company, wasincorporated under the old Corporation Law of the Philippines(Act 1459, as amended) on November 28, 1928, following the merger of fourtelephone companies under common U.S. ownership.  In 1967, effective control of PLDT wassold by General Telephone and Electronics Corporation (a major shareholdersince PLDT’s incorporation) to a group of Filipino businessmen.  In 1981, infurtherance of the then existing policy of the Philippine government tointegrate the Philippine telecommunications industry, PLDT purchasedsubstantially all of the assets and liabilities of the Republic TelephoneCompany. 

 

Thecommon shares of PLDT are listed and traded on the Philippine Stock Exchange,or PSE, and prior to October 19, 1994, were listed and traded on the American StockExchange and Pacific Exchange in the United States.  On October 19, 1994, an AmericanDepositary Receipts, or ADRs, facility was established pursuant to which CitibankN.A., as depositary, issued ADRs evidencing American Depositary Shares, orADSs, with each ADS representing one PLDT common share.  JP Morgan Chase Bankhas been appointed as successor depositary for PLDT’s ADRs effective February 10, 2003.The ADSs are listed and traded on the New York Stock Exchange and the PacificExchange in the United States.

 

PLDT’scharter, like those of all other Philippine corporations, was initially limitedto a period of 50 years but has since been extended twice for 25 years each,the last extension being for an additional 

25-yearperiod to 2028.  Under its amended charter (Republic Act No. 7082), whichbecame effective on August 24, 1991, PLDT is authorized to provide virtuallyevery type of telecommunications service, both within the Philippines andbetween the Philippines and other countries.

 

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

 

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

 

 

 

**2.       ****Summary ofSignificant Accounting Policies**

 

**Basisof Preparation**

 

Ourunaudited consolidated financial statements have been prepared in conformitywith Philippine Generally Accepted Accounting Principles, or Philippine GAAP,under the historical cost convention as modified by the revaluation ofderivative financial instruments, available-for-sale financial assets andinvestment properties that are measured at fair value.  The carrying values ofrecognized assets and liabilities that are hedged are adjusted to recordchanges in the fair values attributable to the risks that are being hedged.  

 

Ourunaudited consolidated financial statements include, in our opinion, alladjustments consisting only of normal recurring adjustments, necessary topresent fairly the results of operations for the interim periods.  The resultsof operations for the three months ended March 31, 2005are not necessarily indicative of the results of operations that may beexpected for the full year.

 

Ourunaudited consolidated financial statements are presented in Philippine pesosand all values are rounded to the nearest million except when otherwiseindicated.

 

**Changes in Accounting Policies**

 

Inrecent years, the Philippine Accounting Standards Committee, or ASC, has beenadopting the International Accounting Standards, or IAS, issued by theInternational Accounting Standards Committee, or IASC, with no local equivalentstandards and has been replacing existing local standards.

 

TheInternational Accounting Standards Board, or IASB, has assumed from the IASCthe responsibility for setting IAS.  The standards issued by the IASB aredesignated as International Financial Reporting Standards, or IFRS.  Upon itsadoption, the IASB also adopted the IAS issued by the IASC.  The IASB carriedon improvements in certain IAS in preparation for the full adoption of IFRSeffective January 1, 2005.

 

TheASC has re-named the new standards “Philippine Accounting Standards”, or PAS,and “Philippine Financial Reporting Standards”, or PFRS, to correspond with theadopted IAS and IFRS of the IASB.  ASC standards were previously designated as“Statements of Financial Accounting Standards”, or SFAS.

 

Theaccounting policies adopted are consistent with those of the previous financialperiod except that we have adopted in year-end 2004 the following newaccounting standards intended to be mandatory beginning on or after January 1, 2005.  Ourunaudited March 31, 2004 consolidated financial statements herein have beenrestated to give effect to the provisions of the new standards adopted.

 

***PAS19, “Employee Benefits”.*** PAS 19requires the use of the projected unit credit method in measuring retirementbenefit expense and a change in the manner of computing benefit expenserelating to past service cost and actuarial gains and losses.  Past servicecost is recognized as an expense on a straight-line basis over the averageperiod until the benefits become vested.  On the initial adoption of thisstandard, the effect of the change in accounting policy includes all actuarialgains and losses that arose in earlier periods even if they fall inside the 10%corridor.  In subsequent periods, portion of actuarial gains or losses isrecognized as income or expense if the cumulative unrecognized actuarial gainsand losses at the end of the previous reporting period exceeded the greater of:(i) 10% of the present value of the defined benefit obligation at that date(before deducting plan assets); and (ii) 10% of the fair value of any plannedassets at that date by dividing the excess determined by the expected averageremaining working lives of the employees participating in that plan isrecognized immediately as income or expense.  Our adoption of this standardreduced our consolidated net income by Php28 million (Php20 million after taxeffect) for the three months ended March 31, 2004.

 

***PAS 21, “The Effects of Changes in Foreign ExchangeRates”.***  PAS 21 requires therecognition of foreign exchange gains and losses in the period they areincurred.  Upon the adoption of PAS 21, we adjusted previously recordedundepreciated capitalized foreign exchange losses, net of exchange losses thatqualify as borrowing cost and income tax effect, against beginning retainedearnings, to the extent that such capitalized amounts do not meet theconditions for capitalization under the new accounting standard, and restatedprior periods’ unaudited consolidated financial statements.  Further, PAS 21requires the determination of the functional currency of an entity.  Exchangedifferences from any retranslation are taken directly as a separate componentof equity.  On disposal of an entity with a functional currency other than thePhilippine peso, the deferred cumulative amount recognized in equity relatingto that particular foreign operation shall be recognized in the consolidatedstatement of income.  Our adoption of this standard increased our consolidatednet income by Php52 million (Php42 million after tax effect) for the threemonths ended March 31, 2004.

*** ***

***PAS27, “Consolidated and Separate Financial Statements”.*** PAS 27 supersedesSFAS 27/IAS 27, “Consolidated Financial Statements and Accounting for Investments in Subsidiaries”.Under PAS 27, the exclusion of a subsidiary from consolidation when there aresevere long-term restrictions that significantly impair a subsidiary’s abilityto transfer funds to the parent company under the superseded standard wasremoved.  Consequently, Pilipino Telephone Corporation, or Piltel, was requiredto be included in our unaudited consolidated financial statementsretrospectively.  Our adoption of this standard increased our consolidated netincome by Php3 million for the three months ended March 31, 2004.  

*** ***

***PAS32, “Financial Instruments: Disclosure and Presentation”.***  PAS 32 covers the disclosure and presentation of allfinancial instruments.  This standard requires more comprehensive disclosuresabout a company’s financial instruments, whether recognized or unrecognized inthe financial statements.  New disclosure requirements include terms andconditions of financial instruments used, types of risks associated with bothrecognized and unrecognized financial instruments (market risk, price risk,credit risk, liquidity risk, and cash flow risk), fair value information ofboth recognized and unrecognized financial assets and financial liabilities,and our financial risk management policies and objectives.  This standard alsorequires financial instruments to be classified as liabilities or equity inaccordance with their substance and not their legal form.  Consequently, wehave designated PLDT’s Convertible Preferred Stock Series V, VI and VII ascompound instruments consisting of liability and equity components.  The total fair value of the Convertible PreferredStock Series V, VI and VII was determined at issue date, of which the aggregatefair value of the liability component of the Series V, VI and VII ConvertiblePreferred Stock as at issuance date is included as a financial liability under *Interest-bearingFinancial Liabilities*account in the consolidated balance sheets.  Theresidual amount was assigned as the equity component.  Our adoption of this standard reduced our consolidatednet income by Php676 million (Php478 million after tax effect) for the threemonths ended March 31, 2004.

*** ***

***PAS39, “Financial Instruments: Recognition and Measurement”.***PAS 39 establishes the accounting and reportingstandards for recognizing and measuring our financial assets and financialliabilities.  This standard requires a financial asset or financial liabilityto be recognized initially at fair value.  Subsequent to initial recognition,we are to continue to measure financial assets at their fair values, except forloans and receivables and held-to-maturity investments, which are measured atcost or amortized cost using the effective interest rate method.  Financialliabilities are subsequently measured at cost or amortized cost, except forliabilities classified as “at fair value through profit and loss” andderivatives, which are measured at fair value.

 

PAS39 also covers the accounting for derivative instruments.  This standard hasexpanded the definition of a derivative instrument to include derivatives(derivative-like provisions) embedded in non-derivative contracts.  Under thisstandard, every derivative instrument is recorded in the balance sheet aseither an asset or liability measured at its fair value.  Derivatives that arenot designated and do not qualify as hedges are adjusted to fair value throughincome.  If the derivative is designated and qualifies as a hedge, depending onthe nature of the hedge, changes in the fair value of derivatives are eitheroffset against the change in fair value of the hedged assets, liabilities, orfirm commitments through earnings, or recognized in equity until the hedgeditem is recognized in earnings.

 

Ouradoption of this standard increased our consolidated net income by Php1,370million (Php969 million after tax effect) for the three months ended March 31, 2004. 

 

***PAS40, “Investment Property”.***  PAS40 prescribes the accounting treatment for investment properties which aredefined as land and/or building held to generate income or for capitalappreciation or both.  An investment property is initially recognized at cost.Subsequent to initial recognition, an investment property is either carried at(i) cost, less accumulated depreciation or any accumulated impairment losses, or(ii) fair value, wherein fair value movements are recognized as income orexpense.  Transfers to or from investment property classification are made onlywhen there is evidence of a change in use.

 

Ouradoption of this standard, where we opted to carry our investment properties atfair value subsequent to initial recognition, decreased our consolidated netincome by Php6 million (Php4 million after tax effect) for the three monthsended March 31, 2004.

 

***PFRS 2, “Share-Based Payment”.***  PFRS 2 requires an entity to recognize goods orservices received or acquired in a share-based payment transaction when itobtains the goods or as the services are received.  The entity shall recognizea corresponding increase in equity if the goods or services were received in anequity-settled share-based payment transaction, or a liability if the goods orservices were acquired in a cash-settled share-based payment transaction.  Inline with our adoption of PFRS 2, we recognized in our consolidated statementsof income the costs of employees’ and directors’ share options and othershare-based incentives by using an option-pricing model, further details ofwhich are given in *Note 21 – Employee Benefits*.

 

Ouradoption of this standard decreased our consolidated net income by Php49million (Php36 million after tax effect) for the three months ended March 31, 2004.

 

***PFRS 3, “BusinessCombinations”, PAS 36, “Impairment of Assets” and PAS 38, “Intangible Assets”.***  PFRS 3 requires all business combinations within itsscope to be accounted for by applying the purchase method.  In addition, thisstandard requires the acquirer to initially measure separately the identifiableassets, liabilities and contingent liabilities at their fair values, atacquisition date, irrespective of the extent of any minority interest.

 

PFRS 3 also requiresgoodwill in a business combination to be recognized by an acquirer as an assetfrom the acquisition date, initially measured as the excess of the cost of thebusiness combination over the acquirer’s interest in the net fair value of theacquiree’s identifiable assets and liabilities.  Further, the amortization ofgoodwill acquired in a business combination is prohibited; instead, goodwill isto be tested annually, or more frequently, if events or changes incircumstances indicate that the asset might be impaired.

 

Moreover,the useful lives of intangible assets are assessed at the individual assetlevel as having either a finite or indefinite life.  Where an intangible assethas a finite life, it will be amortized over its useful life.  Amortizationperiods and methods for intangible assets with finite useful lives are reviewedannually or earlier where an indicator of impairment exists.  Intangiblesassessed as having indefinite useful lives are not amortized, as there is noforeseeable limit to the period over which the asset is expected to generatenet cash inflows for the PLDT Group.  However, intangibles with indefiniteuseful lives are reviewed annually to ensure that their carrying values do notexceed the recoverable amounts regardless of any impairment indicators present.

 

Ouradoption of this standard decreased our consolidated net income by Php16million for the three months ended March 31, 2004.

 

***PFRS 5, “Noncurrent Assets Held-for-Sale and DiscontinuedOperations”.***Under thesuperseded SFAS 35/IAS 35, “Discontinuing Operations”, we would have previouslyrecognized a discontinued operation at the earlier of when (a) we enter into abinding agreement; and (b) the Board of Directors have approved and announced aformal disposal plan.  PFRS 5 now requires an operation to be classified asdiscontinued when the criteria to be classified as held-for-sale have been metor we have disposed of the operation.

 

Inaddition to these standards referred to above, we have adopted the followingstandards during the period and comparative figures have been amended asrequired:

 

•        PAS   1  –  “Presentation ofFinancial Statements”;

•        PAS   2  –  “Inventories”;

•        PAS   8  –  “Accounting Policies,Changes in Accounting Estimates and Errors”;

•        PAS 10  –  “Events After theBalance Sheet Date”;

•        PAS 24  –  “Related PartyDisclosures”;

•        PAS 28  –  “Investments inAssociates”;

•        PAS 31  –  “Interests in JointVentures”; and

•        PAS 33  –  “Earnings Per Share”.

 

Following additional guidelines from PAS 16,“Property, Plant and Equipment”, we have recognized the initial settlement of the net present value oflegal and constructive obligations associated with the retirement of a tangiblelong-lived asset that resulted from the acquisition, construction ordevelopment and the normal operation of a long-lived asset in the period inwhich it is incurred.  The asset retirement obligations were recognized in theperiod in which they are incurred if a reasonable estimate of fair values canbe made.  The related asset retirement costs are capitalized as part of thecarrying amount of the corresponding property, plant and equipment which are being depreciated on a straight-line basisover the useful lives of the related assets or the contract periods, whicheveris lower.

 

We are legally required under various lease agreementsto dismantle the installations and restore the leased sites to their originalstate at the end of the lease contract term.  Our adoption of certainprovisions of this standard reduced our consolidated net income by Php22million (Php15 million after tax effect) for the three months ended March 31, 2004.

 

Adoption of the above standards involved changes inaccounting policies and we have accordingly restated our comparative unauditedconsolidated financial statements retroactively in accordance with thetransitional provisions in these standards.  Reconciliation of the effects of these new standards,as they apply to us, on our net income for the three months ended March 31, 2004 is setout below.

 

 

(in million pesos,  except per share amounts)

Net income, as previously reported

5,240

PAS 16 – Property, Plant and Equipment

(15)

PAS 17 – Leases

1

PAS 19 – Employee Benefits

(20)

PAS 21 – The Effects of Changes in Foreign Exchange Rates

42

PAS 27 – Consolidated and Separate Financial Statements

3

PAS 32 – Financial Instruments: Disclosure and Presentation

(478)

PAS 39 – Financial Instruments: Recognition and Measurement

969

PAS 40 – Investment Property

(4)

PFRS 2 – Share-Based Payment

(36)

PFRS 3 – Business Combinations, PAS 36 – Impairment of Assets and   PAS 38 – Intangible Assets

(16)

Net income, as restated
5,686

 

 

**Earnings per common share, as previously reported**

Php28.32

Earnings per share impact of restated items:

 

PAS 16 – Property, Plant and Equipment

(0.09)

PAS 19 – Employee Benefits

(0.12)

PAS 21 – The Effects of Changes in Foreign Exchange Rates

0.25

PAS 27 – Consolidated and Separate Financial Statements

0.02

PAS 32 – Financial Instruments: Disclosure and Presentation

(2.47)

PAS 39 – Financial Instruments: Recognition and Measurement

5.72

PAS 40 – Investment Property

(0.02)

PFRS 2 – Share-Based Payment

(0.21)

PFRS 3 – Business Combinations, PAS 36 – Impairment of Assets and   PAS 38 – Intangible Assets

(0.10)

**Earnings per common share, as restated**

Php31.30

 

Wefully adopted PAS 16 in 2005, which requires us to determine the depreciationcharge separately for each significant part of an item of property, plant andequipment.  Consequently, we changed the estimated useful lives of certaincomponents of our property, plant and equipment and we recognized the effect ofthe change in accounting estimate prospectively, in accordance with PAS 8.  Ourfull adoption of this standard reduced our consolidated net income by Php347million (Php236 million after tax effect) for the three months ended March 31, 2005.

 

**Basisof Consolidation**

 

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

 

**Name of Subsidiary**

**Principal Activity**

**Percentage of Ownership**

** **

 

** **

**Wireless**

 

** **

Smart Communications, Inc., or Smart,  and subsidiaries 

Cellular mobile services

100.0

Pilipino Telephone Corporation, or Piltel,  and subsidiaries

Cellular mobile and telecommunications services 

92.1

ACeS Philippines Cellular Satellite  Corporation, or ACeS Philippines

Satellite phone services

100.0

Telesat, Inc., or Telesat

Satellite communications services

94.4

Mabuhay Satellite Corporation, or  Mabuhay Satellite

Satellite communications services

67.0

** **

 

** **

**Fixed Line**

 

** **

PLDT Clark Telecom, Inc., or Clark Telecom

Telecommunications services

100.0

Subic Telecommunications Company, Inc.,  or Subic Telecom

Telecommunications services

100.0

PLDT Global Corporation, or  PLDT Global, and subsidiaries

Telecommunications services

100.0

Smart-NTT Multimedia, Inc., or SNMI

Data and network services

100.0

PLDT-Maratel, Inc., or Maratel

Telecommunications services

97.5

Bonifacio Communications Corporation, or BCC

Telecommunications, infrastructure and related value-added services

75.0

** **

 

** **

**Information and Communications Technology**

 

** **

ePLDT, Inc., or ePLDT, and subsidiaries

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

100.0

 

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

 

We prepareour unaudited consolidated financial statements using uniform accountingpolicies for like transactions and other events in similar circumstances.Intercompany balances and transactions, including intercompany profits andunrealized profits and losses, are eliminated.

 

Minorityinterests represent the equity interests in Telesat, Mabuhay Satellite,Maratel, BCC, Digipar Thailand Ltd., netGames, Inc. and Infocom Technologies,Inc. not held by the PLDT Group.

 

***Changesin Piltel Shareholding***

 

To integrate the PLDT Group’s wireless holdings, on July 2, 2004, Smart entered into a Sale and Purchase Agreement with PLDT to acquire the latter’s 59.3million shares of Piltel Series K Class I Convertible Preferred Stock forPhp2,066 million.  On July 9, 2004, Smart converted a total of 4.8 millionshares of Piltel Series K Class I Convertible Preferred Stock into 820.3million shares of Piltel common stock, equivalent to 32.7% of the totaloutstanding shares of common stock of Piltel after such conversion.  Suchinitial conversion resulted in the dilution of PLDT’s direct ownership inPiltel from 45.3% to 30.5%.  On December 28, 2004, Smart converted itsremaining 54.5 million shares of Piltel Series K Class I Convertible PreferredStock into 9,260 million shares of Piltel common stock.  After the fullconversion, Smart now holds a total of 10,080 million shares of common stock ofPiltel, equivalent to 85.6% of the resulting total outstanding shares of commonstock after such conversion.  On April 25, 2005, PLDT and Smart entered into asubscription and assignment agreement covering the transfer and assignment toSmart of 767 million Piltel common shares owned by PLDT.  The Piltel commonshares were transferred to Smart in consideration and in exchange for 11.3million Smart preferred shares subscribed by and issued to PLDT for a totalprice of Php157.2 million.  As a result, Smart now owns 92.1% of the totaloutstanding common stock of Piltel, thereby consolidating the PLDT Group’swireless business under Smart.  Transactions of entities under common controlwere accounted for at historical cost.

 

***ePLDTInvestments in ePLDT Ventus, Inc., or Ventus, and netGames, Inc., or netGames***

 

Inthe second half of 2004, ePLDT made investments in Ventus and netGames, whichare newly incorporated companies.

*** ***

Ventusis a wholly-owned call center subsidiary of ePLDT which was incorporated andregistered with the Securities and Exchange Commission, or SEC, on October 5, 2004.ePLDT subscribed to 70 million shares at a total par value of Php70 million.Ventus has a 400-seat call center facility located in Iloiloprovince which commenced full commercial operations in April 2005.  Ventus will be expanding in Metro Manila with a678-seat call center facility to accommodate current and new clientrequirements.  This facility is expected to be completed by November 2005.

 

ePLDT owns63% of netGames, a publisher for Massively Multi-player Online Game in the Philippines.netGames is the Philippine licensee of Khan Online, the country’s first full 3Donline game.  netGames was incorporated on June 21, 2004.  netGames commenced full commercial operations in February 2005.

*** ***

***Investments in Associates***

 

Investmentsin associates in which we exercise significant influence and which are neithera subsidiary nor a joint venture of the PLDT Group are accounted for under theequity method of accounting.  Under the equity method, our investments inassociates are carried in the consolidated balance sheets at cost pluspost-acquisition changes in our share in net assets of the investees, lessimpairment in value, if any.  The consolidated statements of income reflect ourshare of the results of operations of the associates.  Where there has been achange recognized directly in the associates’ equity, we recognize our share ofany changes and disclose this, when applicable in the consolidated statementsof changes in equity.

 

***ForeignCurrency Translation***

*** ***

Thefunctional and presentation currency of the PLDT Group (except for MabuhaySatellite) is the Philippine peso.  Transactions in foreign currencies are initiallyrecorded in the functional currency rate ruling at the date of thetransaction.  Monetary assets and liabilities denominated in foreign currenciesare retranslated at the functional currency rate of exchange ruling at thebalance sheet date.  All differences are taken to the consolidated statementsof income except for foreign exchange losses that qualified as capitalizableborrowing costs during construction period.  For income tax purposes, exchangegains or losses are treated as taxable income or deductible expenses in theperiod such are realized.

 

Thefunctional currency of Mabuhay Satellite is United States dollars.  As at the reportingdate, the assets and liabilities of this subsidiary are translated into thepresentation currency of the PLDT Group at the rate of exchange ruling at thebalance sheet date and, its income and expenses are translated at the weightedaverage exchange rate for the period.  The exchange differences arising onretranslation are taken directly to a separate component of equity ascumulative translation adjustments.  On disposal of this subsidiary, thedeferred cumulative amount of translation adjustments recognized in equityrelating to this particular subsidiary shall be recognized in the consolidatedstatements of income. 

** **

***Property,Plant and Equipment***

 

Property,plant and equipment, except for land, are stated at cost less accumulateddepreciation and amortization and any impairment in value.  Land is stated atcost less any impairment in value.

 

The initial cost of property, plant and equipmentcomprises its purchase price and any costs directly attributable in bringingthe asset to its working condition and location for its intended use.Expenditures incurred after the assets have been put into operation, such asrepairs and maintenance and overhaul costs, are normally charged to income inthe period the costs are incurred.  In situations where it can be clearlydemonstrated that the expenditures have resulted in an increase in the futureeconomic benefits expected to be obtained from the use of an item of property,plant and equipment beyond its originally assessed standard of performance, theexpenditures are capitalized as additional costs of property, plant andequipment.  Cost also includes asset retirement obligation, interest onborrowed funds used during the construction period and qualified borrowingcosts from foreign exchange losses related to foreign currency-denominatedliabilities used to acquire such assets.  When assets are sold or retired,their costs and accumulated depreciation, amortization and impairment losses,if any, are eliminated from the accounts and any gain or loss resulting fromtheir disposal is included in the consolidated statement of income of suchperiod.

 

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

 

** **

**Estimated Useful Lives**

 

 

Buildings

25 years

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Information origination/termination equipment

5 – 15 years

Communications satellite

15 years

Vehicles and other work equipment

3 – 10 years

Furniture

3 – 10 years

Cellular facilities

10 years

Land improvements

10 years

 

Usefullives, depreciation and amortization method are reviewed periodically to ensurethat the periods and method of depreciation and amortization are consistentwith the expected pattern of economic benefits from items of property, plantand equipment.  

 

Property under construction is stated at cost.  Thisincludes cost of construction, plant and equipment and other direct costs.Property under construction is not depreciated until such time that the relevant assets are completed and put intooperational use.

 

***Borrowing Costs***

 

Borrowing costs are generally expensed as incurred.Borrowing costs are capitalized if they are directly attributable to theacquisition, construction or production of a qualifying asset.  Capitalizationof borrowing costs commences when the activities for use are in progress and expendituresand borrowing costs are being incurred.  Borrowing costs are capitalized untilthe assets are ready for their intended use.  If the resulting carrying amountof the asset exceeds its recoverable amount, an impairment loss isrecorded.  Borrowing costs include interest charges and other costs incurred inconnection with the borrowing of funds, as well as exchange differences arisingfrom foreign currency borrowings used to finance these projects to the extentthat they are regarded as an adjustment to interest cost.  Borrowing costs aretreated as deductible expenses for income tax reporting purposes in the periodthey are incurred.

 

***Asset Retirement Obligations***

 

The netpresent value of legal obligations associated with the retirement of an item ofproperty, plant and equipment that resulted from the acquisition, constructionor development and the normal operation of property, plant and equipment isrecognized in the period in which it is incurred.

 

***Investment Properties***

*** ***

Initially,investment properties are measured at cost including transaction costs.Subsequent to initial recognition, investment properties are stated at fairvalue.  Gains or losses arising from changes in the fair values of investmentproperties are included in the consolidated statements of income in the periodin which they arise.  

 

Investmentproperties are derecognized when they have either been disposed of or when theinvestment property is permanently withdrawn from use and no future benefit isexpected from its disposal.  Any gains and losses on the derecognition of aninvestment property are recognized in the consolidated statement of income inthe period of derecognition.

*** ***

***Goodwill***

 

Goodwillis initially measured at cost being the excess of the acquisition cost over thefair value of identifiable assets, liabilities and contingent liabilities.Following initial recognition, goodwill is measured at cost less anyaccumulated impairment losses.  Upon adoption of PFRS 3, goodwill is no longeramortized.  Goodwill is reviewed for impairment, annually or more frequently ifevents or changes in circumstances indicate that the carrying value may beimpaired. 

 

As at acquisition date, any goodwill acquired is allocated to each of thecash-generating units expected to benefit from the combination’s synergies.Impairment is determined by assessing the recoverable amount of thecash-generating unit, to which the goodwill relates.  Where the recoverableamount of the cash-generating unit is less than the carrying amount, animpairment loss is recognized.  Where goodwill forms part of a cash-generatingunit and part of the operation within that unit is disposed of, the goodwillassociated with the operation disposed of is included in the carrying amount ofthe operation when determining the gain or loss on disposal of the operation.Goodwill disposed of in such circumstance is measured on the basis of therelative values of the operation disposed of and the portion of thecash-generating unit retained.

 

***IntangibleAssets***

 

Intangible assets acquired separately are capitalized at cost while thoseacquired arising from business combinations are initially recognized at fairvalue as at the date of acquisition.  Subsequently, intangible assets aremeasured at cost.  The useful lives of intangible assets are now assessed atthe individual asset level as having either a finite or indefinite life.  Wherean intangible asset has a finite life, it is amortized over its useful life.Periods and method of amortization for intangible assets with finite usefullives are reviewed annually or earlier where an indicator of impairmentexists.  Intangible assets assessed as having indefinite useful lives are notamortized, as there is no foreseeable limit to the period over which the assetis expected to generate net cash inflows for the Group.  However, intangibleswith indefinite useful lives are reviewed annually to ensure the carrying valuedoes not exceed the recoverable amount regardless of whether an indicator ofimpairment is present.

 

Gainsor losses arising from derecognition of an intangible asset are measured as thedifference between the net disposal proceeds and the carrying amount of theasset and are recognized in the consolidated statements of income when theasset is derecognized.

 

Intangibleassets created within the business are not capitalized and expenditure ischarged against profits in the period in which the expenditure is incurred.

 

***AssetImpairment***

 

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 consolidatedstatements of income.  The recoverable amount is the higher of an asset’s netselling price or value in use.  The net selling price is the amount obtainablefrom the sale of an asset in an arm’s–length transaction while value in use isthe present value of estimated future cash flows expected to arise from thecontinuing use of an asset or from its disposal at the end of its useful life.Recoverable amounts are estimated for individual assets or, if it is notpossible, for the cash-generating unit to which the asset belongs.  Reversal ofimpairment losses recognized in prior periods is recorded when there is anindication that the impairment losses recognized for the asset no longer existor have decreased.  The reversal is recorded as income.  However, the increasedcarrying amount of an asset due to a reversal of an impairment loss isrecognized to the extent it does not exceed the carrying amount that would havebeen determined had the impairment loss not been recognized for that asset inprior periods.

*** ***

***Cashand Cash Equivalents***

*** ***

Cash includes cash on hand and in banks.  Cash equivalents areshort-term, highly liquid investments that are readily convertible to knownamounts of cash with original maturities of three months or less from the dateof acquisition and that are subject to an insignificant risk of change invalue.

*** ***

***Receivables***

*** ***

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

*** ***

***Allowance for Doubtful Accounts***

 

Weestimate the allowance for doubtful accounts related to our trade receivablesbased on two methods.  The amounts calculated using each of these methods arecombined to determine the total amount we reserve.  First, we evaluate specificaccounts where we have information that certain customers are unable to meettheir financial obligations.  In these cases, we use judgment, based on thebest available facts and circumstances, including but not limited to, thelength of our relationship with the customer and the customer’s current creditstatus based on third party credit reports and known market factors, to recordspecific reserves for customers against amounts due to reduce our receivableamounts that we expect to collect.  These specific reserves are re-evaluatedand adjusted as additional information received affects the amounts estimated.Second, a provision is established as a certain percentage of age of status ofreceivables.  This percentage is based on a collective assessment of historicalcollection, write-off, experience and changes in our customer payment terms.Full allowance is provided for receivables from permanently disconnectedsubscribers and carriers.  Such permanent disconnections generally occur within105 days from due date.  Partial allowance is provided for active subscribers andcarriers based on the age status of receivables.

*** ***

***Inventories and Supplies***

*** ***

Inventories and supplies which include, among others,cellular phone units, materials, spare parts, terminal units and accessories,are valued at the lower of cost or net realizable value.

*** ***

Costis determined using the moving average method.  Net realizable value is thecurrent replacement cost.

*** ***

***Financial Assets and Liabilities***

*** ***

Werecognize a financial asset or a financial liability in our consolidatedbalance sheets when we become a party to the contractual provisions of theinstrument and derecognize a financial asset when we no longer control thecontractual rights to the cash flows that comprise the financial instrumentwhich is normally the case when the instrument is sold, or all the cash flowsattributable to the instrument have already expired or are passed through to anindependent third party.  A financial liability (or a part of a financialliability) is derecognized when the obligation is extinguished.  In the case ofa regular way purchase or sale of financial assets, recognition andderecognition, as applicable, are done using settlement date accounting.

 

Financialassets or financial liabilities are recognized initially at fair value.Transaction costs are included in the initial measurement of all financialassets and liabilities, except for financial instruments measured at fair valuethrough profit and loss.  Fair value is determined by reference to thetransaction price or other market prices.  If such market prices are notreliably determinable, the fair value of the consideration is estimated as thesum of all future cash payments or receipts, discounted using the prevailingmarket rates of interest for similar instruments with similar maturities.

 

After initial recognition, the following financialassets and liabilities are measured at amortized cost using the effectiveinterest rate method:  (a) loans and receivables; (b) held-to-maturityinvestments; and (c) financial liabilities other than liabilities measured atfair values through profit and loss.

 

Investmentsin unquoted equity securities and derivatives linked thereon are measured atcost.

 

Amortizationsof discounts and premiums are taken directly to net profit or loss for theperiod.  Changes in the fair value of financial assets and liabilities measuredat fair value of (a) all derivatives (except for those eligible for hedgeaccounting); (b) other items intended to be actively traded; and (c) any itemdesignated as held “at fair value through profit and loss” at origination, aretaken directly to net profit or loss for the period.  Changes in the fair valueof available-for-sale securities are recognized in equity, except for theforeign exchange fluctuations on available-for-sale debt securities and the interestcomponent which is taken directly to net profit or loss for the period based onthe asset’s effective yield.

 

Financial assets and liabilities include financialinstruments which may be a primary instrument,such as receivables, payables and equity securities, or a derivativeinstrument, such as financial options, futures and forwards, interest rateswaps and currency swaps.

 

Financialinstruments are classified as a financial liability, or a financial asset or anequity in accordance with the substance of the contractual arrangement.Financial instruments that contain both liability and equity elements areclassified separately as financial liabilities, financial assets or equityinstruments.  Interest, dividends, gains and losses relating to a financialinstrument or a component that is a financial liability, are reported asexpense or income.  Distributions to holders of financial instrumentsclassified as equity are charged directly to equity net of any related incometax benefits.  Financial instruments are offset when we have a legallyenforceable right to offset and we intend to settle either on a net basis or torealize the asset and settle the liability simultaneously. 

 

Weuse derivative financial instruments such as long-term currency swaps, foreigncurrency options, interest rate swaps and forward currency contracts to hedgeour risks associated with foreign currency and interest rate fluctuations.Such derivative financial instruments are stated at fair value.

 

Ourcriteria for a derivative instrument to be classified as a hedge include: (1)the hedge transaction is expected to be highly effective in achievingoffsetting changes in fair value or cash flows attributable to the hedged risk,(2) the effectiveness of the hedge can be reliably measured, (3) there isadequate documentation of the hedging relationships at the inception of thehedge, and (4) for cash flow hedges, the forecast transaction that is subjectof the hedge must be highly probable and must present an exposure to variationsin cash flows that could ultimately affect profit or loss.

 

Forpurposes of hedge accounting, hedges are classified as either fair value hedgeswhere they hedge the exposure to changes in the fair value of a recognizedasset or liability and firm commitment; or cash flow hedges where they hedgeexposure to variability in cash flows that is either attributable to aparticular risk associated with a recognized asset or liability or a forecastedtransaction.

 

Inrelation to fair value hedges which meet the conditions for special hedgeaccounting, any gain or loss from re-measuring the hedging instrument at fairvalue is recognized immediately in the consolidated statements of income.  Anygain or loss on the hedged item attributable to the hedged risk is adjustedagainst the carrying amount of the hedged item and recognized in theconsolidated statements of income.

 

Inrelation to cash flow hedges, the portion of the gain or loss on the hedginginstrument that is determined to be an effective hedge is recognized directlyin equity and the ineffective portion is recognized in net profit or loss.  Thegains or losses that are accumulated in equity are transferred to theconsolidated statement of income in the same period in which the hedged itemaffects the net profit or loss.

 

Forderivatives that do not qualify for hedge accounting, any gains or lossesarising from changes in fair value are taken directly to net profit or loss forthe period.

 

Hedgeaccounting is discontinued when the hedging instrument expires or is sold,terminated or exercised, or no longer qualifies for hedge accounting.  At thatpoint in time, any cumulative gain or loss on the hedging instrument recognizedin equity is kept in equity until the forecast transaction occurs.  If theforecast transaction is no longer expected to occur, any net cumulative gain orloss previously recognized in equity is transferred to net profit or loss forthe period.

 

***Provisions***

 

Werecognize provisions when we have obligations, legal or constructive, as aresult of past events, if it is probable that an outflow of resources embodyingeconomic benefits will be required to settle the obligation and a reliableestimate can be made of the amount of the obligation.  If the effect of thetime value of money is material, provisions are determined by discounting theexpected future cash flows at a pre-tax rate that reflects current marketassessments of the time value of money and, where appropriate, the risksspecific to the liability.  Where discounting is used, the increase in theprovision due to the passage of time is recognized as an additional provision.

 

***RetirementBenefits***

 

Wehave funded, noncontributory retirement plans, administered by our respectiveFund’s Trustees, covering permanent employees.  Retirement costs areactuarially 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 actuarialassumptions.  Past service cost is recognized as an expense on a straight-linebasis over the average period until the benefits become vested.  Actuarialgains and losses are recognized as income or expense when the net cumulativeunrecognized actuarial gains and losses at the end of the previous reportingperiod exceeded 10% of the higher of the defined benefit obligation and thefair value of plan assets at that date.  These gains and losses are recognizedover the expected average remaining working lives of the employeesparticipating in the plan.

 

***Share-Based Payment Transactions***

 

Certain of our employees (including directors) receiveremuneration in the form of share-based payment transactions, whereby employeesrender services in exchange for shares or rights over shares (“equity-settledtransactions”).

 

*Equity-settled transactions*

 

The cost of equity-settled transactions with employeesis measured by reference to the fair value of the stock options at the date atwhich they are granted.  Fair value is determined using an option-pricingmodel, further details of which are given in *Note 21 – Employee Benefits*.In valuing equity-settled transactions, no account is taken of any performanceconditions, other than conditions linked to the price of the shares of PLDT(“market conditions”).

 

Thecost of equity-settled transactions is recognized, together with acorresponding increase in equity, over the period in which the performanceconditions are fulfilled, ending on the date on which the relevant employeesbecome fully entitled to the award (“vesting date”).  The cumulative expenserecognized for equity-settled transactions at each reporting date until thevesting date reflects the extent to which the vesting period has expired andthe number of awards that will ultimately vest, in the opinion of PLDT’s Boardof Directors at that date, based on the best available estimate.

 

Noexpense is recognized for awards that do not ultimately vest, except for awardswhere vesting is conditional upon a market condition, which are treated asvesting irrespective of whether or not the market condition is satisfied,provided that all other performance conditions are satisfied.

 

Wherethe terms of an equity-settled award are modified, an expense, as a minimum, isrecognized as if the terms had not been modified.  An expense is recognized forany increase in the value of the transactions as a result of the modification,as measured at the date of modification.

 

Wherean equity-settled award is cancelled, it is treated as if it had vested on thedate of cancellation, and any expense not yet recognized for the award isrecognized immediately.  However, if a new award is substituted for thecancelled award, and designated as a replacement award on the date that it isgranted, the cancelled and new awards are treated as if they were amodification of the original award, as described in the previous paragraph.

 

Thedilutive effect of outstanding options is reflected as additional sharedilution in the computation of earnings per share, see *Note 7 – Earnings PerCommon Share*.

 

*Cash-settledtransactions*

 

OurLong-Term Incentive Plan, or LTIP, grants share appreciation rights, or SARs,to our eligible key executives and advisors.  Under the LTIP, we recognize theservices we receive from the eligible key executives and advisors, and ourliability to pay for those services, as the eligible key executives and advisorsrender services during the vesting period.  We measure our liability, initiallyand at each reporting date until settled, at the fair value of the SARs, byapplying an option valuation model, taking into account the terms andconditions on which the SARs were granted, and the extent to which the eligiblekey executives and advisors have rendered service to date.  We recognize anychanges in fair value at each reporting date until settled, in profit and lossfor the period.

*** ***

***Leases***

 

Leaseobligations having provisions for bargain purchase options, ownership transferat the end of the lease term, or minimum lease payments, which approximate thefair market value of the property are capitalized.  The related obligations arerecognized as liabilities.  Finance lease payments are apportioned between thefinance charges and reduction of the lease liability so as to achieve aconstant rate of interest on the remaining balance of the liability.

 

A financelease gives rise to a depreciation expense for the asset as well as a borrowingcost for each period.  Finance charges are charged directly to currentoperations.  The depreciation policy for leased assets is consistent with thatfor depreciable assets that are owned.  

 

Leaseswhere the lessor retains substantially all the risks and benefits of ownershipof the asset are classified as operating leases.  Initial direct costs incurredin negotiating an operating lease are added to the carrying amount of theleased assets and liabilities over the lease term on the same bases as thelease income.  Operating lease payments are recognized as an expense in theconsolidated statements of income on a straight-line basis over the leaseterm.  For income tax reporting purposes, expenses that should have beenincurred under lease agreement are considered as deductible expenses.

 

***Revenue Recognition***

 

Revenuesfor services are stated at amounts invoiced to customers and excludevalue-added tax.  We provide wireless communication services, fixed linecommunication services, and information and communications technologyservices.  We provide such services to mobile, business, residential andpayphone customers.  Revenues, which exclude value-added tax, represent thevalue of fixed consideration that have been received or are receivable.Revenues are recognized when there is evidence of an arrangement,collectibility is reasonably assured and the delivery of the product or servicehas occurred. 

 

*Subscriptions*

 

We provide telephone and data communication services under prepaid and postpaidpayment arrangements.  Revenues include fees for installation and activationare accrued upon subscription.

 

*Air time, traffic and value-added services*

 

Prepaid servicerevenues collected in advance are deferred and recognized based on the earlier ofactual usage or upon expiration of the usage period.  Interconnection revenuesfor call termination, call transit, and network usage are recognized in theperiod the traffic occurs.  Revenues related to local, long distance,network-to-network, roaming and international call connection services arerecognized when the call is placed or connection is provided, net of amountspayable to other telecommunication carriers for terminating calls in theirterritories.  Revenues related to products and value-added services arerecognized upon delivery of the product or service.

 

*Cellularhandset and equipment sales*

 

Salesof cellular handsets and communication equipment are recognized upon deliveryto the customer.

 

***Income Taxes***

 

Deferred income tax is provided, using the balancesheet liability method, on all temporary differences at the balance sheet datebetween the tax bases of assets and liabilities and their carrying amounts forfinancial reporting purposes.

 

Deferredincome tax liabilities and assets are recognized for all taxable temporarydifferences.  Deferred income tax assets are recognized for all deductibletemporary differences, carryforward of unused tax credits from excess minimumcorporate income tax, or MCIT, and unused tax losses, to the extent that it isprobable that taxable profit will be available against which the deductibletemporary differences and carryforward of unused tax credits and unused taxlosses can be utilized.  Deferred income tax, however, is not recognized whenit arises from the initial recognition of an asset or liability in atransaction that is not a business combination and, at the time of thetransaction, affects neither the accounting profit nor taxable profit or loss.

 

Deferredtax liabilities are not provided on non-taxable temporary differencesassociated with investments in domestic subsidiaries and associates.  Withrespect to investments in other subsidiaries and associates, deferred taxliabilities are recognized except when the timing of the reversal of the temporarydifference can be controlled and it is probable that the temporary differencewill not reverse in the foreseeable future.

 

Thecarrying amount of deferred income tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the deferred incometax asset to be utilized.

 

Deferredincome tax assets and liabilities are measured at the tax rate that areexpected to apply to the period when the asset is realized or the liability issettled, based on tax rate (and tax laws) that have been enacted orsubstantively enacted at balance sheet date.

 

Incometax relating to items recognized directly in equity is recognized in equity andnot in the consolidated statements of income.

 

***Earnings Per Common Share, or EPS***

 

BasicEPS is calculated by dividing the net income for the period attributable tocommon shareholders (net income adjusted for dividends on all series ofpreferred shares except for dividends on preferred stock subject to mandatoryredemption) by the weighted average number of common shares outstanding duringthe period, after giving retroactive effect to any stock dividend declarations.

 

DilutedEPS is calculated in the same manner assuming that, at the beginning of theperiod or at the time of issuance during the period, all outstanding optionsare exercised and convertible preferred shares are converted to common sharesand appropriate adjustments to net income are effected for the related expenseson preferred shares.  Outstanding stock options will have a dilutive effectunder the treasury stock method only when the average market price of theunderlying common share during the period exceeds the exercise price of theoption.  

 

Where the effect of the assumed conversion of thepreferred shares and the exercise of all outstanding options have ananti-dilutive effect, basic and diluted EPS are stated at the same amount.

 

Ifthe required dividends to be declared on each series of convertible preferredshares divided by the number of equivalent common shares, assuming suchconvertible preferred shares are converted to common shares, would decrease thebasic EPS, then such convertible preferred shares would be deemed dilutive.  Assuch, the diluted EPS will be calculated by dividing net income attributable tocommon shareholders (net income, adding back any dividends and/or other chargesrecognized in the period related to the dilutive convertible preferred sharesclassified as liability, less dividends on non-dilutive preferred shares exceptfor dividends on preferred stock subject to mandatory redemption) by theweighted average common shares including the common share equivalent arisingfrom the conversion of the dilutive convertible preferred shares.

 

 

 

**3.   Management’s Use of Estimates**

 

Ourunaudited consolidated financial statements prepared in Philippine GAAP requiremanagement to make estimates and assumptions that affect amounts reported inour unaudited consolidated financial statements and related notes.  Inpreparing our unaudited consolidated financial statements, we have made ourbest estimates and judgments of certain amounts, giving due consideration tomateriality.  We believe the following represent a summary of these significantestimates and judgments and related impact and associated risks in ourunaudited consolidated financial statements.

* *

*Estimating useful lives of property, plant andequipment*

 

Weestimate the useful lives of our property, plant and equipment based on theperiod over which our assets are expected to be available for use.  Theestimated useful lives of our property, plant and equipment are reviewedperiodically and are updated if expectations differ from previous estimates dueto physical wear and tear, technical or commercial obsolescence and legal orother limits on the use of our assets.  In addition, our estimation of theuseful lives of our property, plant and equipment is based on our collectiveassessment of industry practice, internal technical evaluation and experiencewith similar assets.  It is possible, however, that future results ofoperations could be materially affected by changes in our estimates broughtabout by changes in factors mentioned above.  The amounts and timing ofrecorded expenses for any period would be affected by changes in these factorsand circumstances.  A reduction in the estimated useful lives of our property,plant and equipment would increase our recorded operating expenses and decreaseour noncurrent assets.  Property, plant and equipment amounted to Php192,921million and Php194,525 million as at March 31, 2005and December 31, 2004, respectively.

 

*Assetimpairment*

 

Philippine GAAP requires that an impairment review be performed whencertain impairment indicators are present.  In case of goodwill and intangibleassets with indefinite life, such assets are subject to yearly impairment testand whenever there is an indication that such asset may be impaired.

 

Purchase accounting requires extensive use of accounting estimates andjudgment to allocate the purchase price to the fair market values of the assetsand liabilities purchased, including intangible assets and contingentliabilities.  Our business acquisitions have resulted in goodwill, which in thepast affected our results of operations for the amount of periodic amortizationexpense.  However, we no longer amortize goodwill under Philippine GAAPeffective January 1, 2004.  Instead, goodwill is subject to a periodicimpairment test.  

 

Determiningthe fair value of property, plant and equipment, investments and intangibleassets, which requires the determination of future cash flows expected to begenerated from the continued use and ultimate disposition of such assets,requires us to make estimates and assumptions that can materially affect ourunaudited consolidated financial statements.  Future events could cause us toconclude that property, plant and equipment, investments and intangible assetsassociated with an acquired business is impaired.  Any resulting impairment losscould have a material adverse impact on our financial condition and results ofoperations.

 

Thepreparation of the estimated future cash flows involves significant judgmentand estimations.  While we believe that our assumptions are appropriate and reasonable,significant changes in our assumptions may materially affect our assessment ofrecoverable values and may lead to future additional impairment charges underPhilippine GAAP.  

 

Totalgoodwill and intangible assets as at March 31, 2005 and December 31, 2004 amounted to Php3,803 million and Php3,864 million, respectively.  We recorded noimpairment for the three months ended March 31, 2005; asset impairment amountedto Php85 million for the three months ended March 31, 2004.

 

*Investment properties*

 

We haveadopted the fair value approach in determining the carrying value of ourinvestment properties.  While we have opted to rely on independent appraisersto determine the fair value of our investment properties, such fair value wasdetermined based on recent prices of similar properties, with adjustments toreflect any changes in economic conditions since the date of the transactionsthat occurred at those prices.  The amounts and timing of recorded changes infair value for any period would differ if we made different judgments andestimates or utilized different basis for determining fair value.

 

Totalinvestment properties as at March 31, 2005 and December 31, 2004 amounted to Php743 million.

 

*Deferredtax assets*

 

We review the carrying amounts at each balance sheet date and reducedeferred tax assets to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the deferred taxassets to be utilized.  However, there is no assurance that we will generatesufficient taxable profit to allow all or part of our deferred tax assets to beutilized.  

 

Unrecognized deferred tax assets as at March 31, 2005 and December 31, 2004 amounted to Php13,269 million and Php13,824 million, respectively.

 

*Financial assets and liabilities*

 

PhilippineGAAP requires that we carry certain of our financial assets and liabilities atfair value, which requires extensive use of accounting estimates and judgment.In addition, certain liabilities acquired through debt exchange andrestructuring are required to be carried at fair value at the time of the debtexchange and restructuring, see *Note**24 – Financial Assets andLiabilities*.  While significant components of fair value measurement weredetermined using verifiable objective evidence (i.e., foreign exchange rates,interest rates, volatility rates), the amount of changes in fair value woulddiffer if we utilized different valuation methodology.  Any changes in fairvalue of these financial assets and liabilities would affect directly ourprofit and loss and equity.

 

The fairvalue of financial assets and liabilities as at March 31, 2005 amounted to Php46,038 million and Php175,344 million, respectively.  

 

The fairvalue of financial assets and liabilities as at December 31, 2004 amounted to Php46,439 million and Php194,613 million, respectively.  

 

*Estimatingallowances for doubtful accounts*

 

Weestimate the allowance for doubtful accounts related to our trade receivablesbased on two methods.  The amounts calculated using each of these methods arecombined to determine the total amount we reserve.  First, we evaluate specificaccounts where we have information that certain customers are unable to meettheir financial obligations.  In these cases, we use judgment, based on the bestavailable facts and circumstances, including but not limited to, the length ofour relationship with the customer and the customer’s current credit statusbased on third party credit reports and known market factors, to recordspecific reserves for customers against amounts due to reduce our receivableamounts that we expect to collect.  These specific reserves are re-evaluatedand adjusted as additional information received affects the amounts estimated.Second, a provision is established as a certain percentage of age of status ofreceivables.  This percentage is based on a collective assessment of historicalcollection, write-off, experience and changes in our customer payment terms.Full allowance is provided for receivables from permanently disconnectedsubscribers and carriers.  Such permanent disconnections generally occur within105 days from due date.  Partial allowance is provided for active subscribersand carriers based on the age status of receivables.

 

Theamounts and timing of recorded expenses for any period would differ if we madedifferent judgments or utilized different estimates.  An increase in ourallowance for doubtful accounts would increase our recorded operating expensesand decrease our current assets.  

 

Provisionfor doubtful accounts amounted to Php738 million and Php1,099 million for thethree months ended March 31, 2005 and 2004, respectively.  Trade and otherreceivables, net of allowance for doubtful accounts, amounted to Php10,282million and Php10,404 million as at March 31, 2005 and December 31, 2004, respectively.

 

*Revenuerecognition*

 

Our revenue recognition policies require us to make use of estimates andassumptions that may affect the reported amounts of our revenues andreceivables.  

 

Our agreements with domestic and foreign carriers for inbound andoutbound traffic subject to settlements require traffic reconciliations beforeactual settlement is done, which may not be the actual volume of traffic asmeasured by us.  Initial recognition of revenues are based on our observedtraffic adjusted by our normal experience adjustments, which historically arenot material in our unaudited consolidated financial statements.  Differencesbetween the amounts initially recognized and actual settlements are taken up inthe accounts upon reconciliation.  However, there is no assurance that such useof estimates may not result to material adjustments in future periods.

 

Revenues under a multiple element arrangement specifically applicable toour wireless business were split into separately identifiable components andrecognized when the related components were delivered in order to reflect thesubstance of the transaction.  The fair value of components was determinedusing verifiable objective evidence.  Revenue for handset sales has beenquantified and identified separately using the residual value method from ourcellular service revenue.  

 

*Pension and other retirement benefits*

 

The determination of our obligation and cost for pension and otherretirement benefits is dependent on our selection of certain assumptions usedby actuaries in calculating such amounts.  Those assumptions are described in *Note21 – Employee Benefits* and include among others, discount rates, expectedreturns on plan assets and rates of compensation increase.  In accordance withPhilippine GAAP, actual results that differ from our assumptions areaccumulated and amortized over future periods and therefore, generally affectour recognized expense and recorded obligation in such future periods.  Whilewe believe that our assumptions are reasonable and appropriate, significantdifferences in our actual experience or significant changes in our assumptionsmay materially affect our pension and other retirement obligations.  

 

Unrecognized actuarial gain as at March 31, 2005 and December 31, 2004 amounted Php176 million.

 

*Contingencies*

 

We are currently involved in various legal proceedings.  Our estimate ofthe probable costs for the resolution of these claims has been developed inconsultation with outside counsel handling our defense in these matters and isbased upon an analysis of potential results.  We currently do not believe theseproceedings will have a material adverse effect on our consolidated financialposition.  It is possible, however, that future results of operations could bematerially affected by changes in our estimates or in the effectiveness of ourstrategies relating to these proceedings, see *Note 23 – Provisions andContingencies.*

 

Outstanding provisions to cover these contingencies amounted to Php4,545million and Php4,548 million as at March 31, 2005 and December 31, 2004, respectively.

 

 

 

**4.   SegmentInformation**

 

Operating segments are components of an enterprise about which separatefinancial information is available that is evaluated regularly by management indeciding how to allocate resources and in assessing performance.  Generally,financial information is required to be reported on the basis that it is usedinternally for evaluating segment performance and deciding how to allocateresources to segments.

 

Wehave organized our business into three main segments:

 

•        Wireless — wireless telecommunications services provided through our cellularservice providers, Smart and Piltel, and satellite and VSAT operators, namelyPLDT’s subsidiaries Mabuhay Satellite, ACeS Philippines and Telesat;

 

•        Fixed Line — fixed line telecommunications services primarily provided throughPLDT.  We also provide fixed line services through PLDT’s subsidiaries ClarkTelecom, Subic Telecom, Maratel, Piltel and BCC which together account forapproximately 3% of our consolidated fixed lines in service, and PLDT Global;and

 

•        Information and CommunicationsTechnology — information and communications infrastructure andservices for internet applications, internet protocol-based solutions andmultimedia content delivery provided by PLDT’s subsidiary ePLDT; call centerservices provided by ePLDT’s subsidiaries Parlance Systems, Inc., VocativSystems, Inc. and ePLDT Ventus, Inc.; internet access and gaming servicesprovided by ePLDT’s subsidiary Infocom Technologies, Inc., Digital Paradise,Inc. and netGames, Inc.; and e-commerce and IT-related services provided byother investees of ePLDT, as described in *Note 9 – Investments in Associates– at equity*.

 

Thesegment assets and liabilities and results of operations of the segments in2004 have been restated to reflect the effects of the change in accountingpolicies.

 

Thesegment assets as at March 31, 2005 and December 31, 2004 and results of operations ofour reportable segments for the three months ended March 31, 2005 and 2004 reportedunder Philippine GAAP are as follows:

 

 

**Wireless**

**Fixed Line**

**Information and Communications Technology**

**Total**

 

(in million pesos)

* *

* *

*As at and for the three months ended**March 31, 2005**(Unaudited)*

* *

**Revenues**

 

 

 

 

External revenues

18,437

11,147

 667

30,251

Service

17,672

11,111

578

29,361

Non-service

759

–

56

 815

Other income

6

36

33

  75

Inter-segment revenues

289

711

84

1,084

Segment revenues

18,726

11,858

 751

31,335

 

 

 

 

 

**Result**

 

 

 

 

Income before income tax

9,649

3,247

30

12,926

Provision for income tax

2,667

876

–

3,543

Net income for the period

6,982

2,371

  30

9,383

** **

 

 

 

 

**Assets and liabilities**

 

 

 

 

Segment assets

88,605

157,659

3,415

249,679

Investments in associates - at equity

–

–

10

  10

Total assets

88,605

157,659

3,425

249,689

 

 

 

 

 

Segment liabilities

56,503

147,204

909

204,616

 

 

 

 

 

**Other segment information**

** **

** **

** **

** **

Capital expenditures

1,755

2,350

158

4,263

Provisions (reversal of provisions)

(54)

653

–

 599

Depreciation and amortization

2,460

3,001

95

5,556

* *

* *

* *

* *

*As at**December 31, 2004**(Audited) and for the three months ended**March 31, 2004**(Unaudited)*

**Revenues**

 

 

 

 

External revenues

18,676

11,702

 445

30,823

Service

15,966

11,715

426

28,107

Non-service

2,615

–

16

2,631

Other income

95

(13)

3

  85

Inter-segment revenues

158

404

29

 591

Segment revenues

18,834

12,106

 474

31,414

 

 

 

 

 

**Result**

 

 

 

 

Income before income tax

6,124

1,553

39

7,716

Provision for (benefit from) income tax

1,517

520

(1)

2,036

Net income for the period

4,607

1,033

  40

5,680

** **

 

 

 

 

**Assets and liabilities**

 

 

 

 

Segment assets

56,008

193,116

3,603

252,727

Investments in associates - at equity

–

–

8

   8

Total assets

56,008

193,116

3,611

252,735

 

 

 

 

 

Segment liabilities

58,534

155,389

1,092

215,015

 

 

 

 

 

**Other segment information**

** **

** **

** **

** **

Capital expenditures

3,483

800

33

4,316

Provisions

514

819

3

1,336

Depreciation and amortization

2,794

2,476

67

5,337

Asset impairment

–

85

–

  85

 

 

 

**5.   Revenues and Expenses**

 

*Non-service Revenues*

* *

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Sale of handsets and SIM-packs

**759**

 

2,615

Point of product sales

**56**

 

16

 

**815**

 

2,631

* *

*Compensation and Benefits*

* *

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Salaries and benefits

**2,720**

 

2,602

Pension and other benefits (Note 21)

**190**

 

180

Incentive plans (Note 21)

**147**

 

101

Manpower rightsizing program, or MRP

**29**

 

101

 

**3,086**

 

2,984

 

Over thepast years, PLDT has been implementing MRP in line with its continuing effortto reduce the cost base of the fixed line business.  The MRP cost charged tooperations in the first quarters of 2005 and 2004 amounted to Php29 million andPhp101 million, primarily representing charges relating to 32 and 132 PLDTemployees affected by the program, respectively; unrecognized past servicecosts, which are normally amortized over the estimated remaining averageworking lives of employees, in respect of employees who availed of the MRP arerecognized as loss on settlement.  The decision to implement the MRP wasanchored on the challenges being faced by the fixed line business assignificant changes in technology, increasing competition, and shifting marketpreferences to cellular use have reshaped the future of the fixed linebusiness.  The MRP was implemented under the New Labor Code and is incompliance with all other relevant labor laws and regulations.

* *

*Cost of Sales*

* *

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Cost of cellular handsets and SIM-packs sold

**1,959**

 

3,804

Cost of satellite air time (Notes 20 and 22)

**45**

 

65

 

**2,004**

 

3,869

* *

*Provisions*

* *

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Doubtful accounts (Note 14)

**738**

 

1,099

Write-down (reversal of write-down) of inventories at net realizable value (Note 15)

**(89)**

 

128

Onerous contracts (Notes 20 and 22)

**(50)**

 

109

 

**599**

 

1,336

* *

*Financing Costs*

* *

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Interest on loans and related items

**2,935**

 

3,248

Accretion on financial liabilities - net (Notes 2, 17 and 24)

**717**

 

712

Hedge costs (Note 24)

**241**

 

203

Dividends on preferred stock subject to mandatory redemption  (Note 17)

**67**

 

58

Financing charges (Note 7)

**28**

 

85

Interest income

**(369)**

 

(213)

Gain on derivative transactions - net (Notes 2 and 24)

**(232)**

 

(1,863)

Capitalized interest (Notes 2 and 8)

**(97)**

 

(152)

Capitalized foreign exchange losses (Notes 2 and 8)

**22**

 

(73)

Foreign exchange (gains) losses - net (Notes 17 and 24)

**(3,245)**

 

2,413

 

**67**

 

4,418

* *

*Other Expenses*

* *

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Operating expenses

**949**

 

754

Equity in net losses of associates

**–**

 

15

Others

**39**

 

98

 

**988**

 

867

* *

* *

 

**6.   IncomeTaxes**

* *

The netcomponents of deferred income tax recognized in the consolidated balance sheetsare as follows:

* *

 

**March 31,  2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Net assets

**11,714**

 

12,738

Net liabilities

**(2,404)**

 

(1,943)

* *

The components of net deferred tax assets andliabilities are as follows:

*** ***

 

**March 31,  2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Net assets

** **

 

 

Unrealized foreign exchange losses

**8,852**

 

10,011

Allowance for doubtful accounts

**4,291**

 

4,068

Interest charges capitalized

**(4,494)**

 

(4,558)

Derivative instruments

**1,847**

 

1,798

Unearned revenues

**1,766**

 

1,939

Unamortized past service cost

**1,091**

 

1,130

Foreign exchange differential capitalized

**(1,483)**

 

(1,520)

Preferred stock subject to mandatory redemption

**(1,128)**

 

(1,042)

Pension and other benefits

**797**

 

761

Taxes and duties capitalized

**(566)**

 

(582)

Provisions for unrealized assets

**452**

 

453

Accumulated write-down of inventories at net realizable value

**190**

 

190

Excess of fair value over cost of investment properties

**(106)**

 

(106)

Net loss operating carryover, or NOLCO

**3**

 

3

Others

**202**

 

193

 

**11,714**

 

12,738

 

 

 

 

Net liabilities

** **

 

 

Derivative instruments

**(2,775)**

 

(2,938)

Allowance for doubtful accounts

**808**

 

798

Unearned revenues

**625**

 

673

Foreign exchange differential capitalized

**(609)**

 

(644)

NOLCO

**539**

 

1,063

Interest charges capitalized

**(461)**

 

(485)

Accumulated write-down of inventories at net realizable value

**178**

 

203

Unrealized foreign exchange losses

**(27)**

 

432

Provisions for unrealizable assets

**13**

 

(1,217)

Others

**(695)**

 

172

 

**(2,404)******

 

(1,943)

 

Provisionfor income tax consists of:

*** ***

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Current

**2,275**

 

1,793

Deferred

**1,268**

 

243

 

**3,543**

 

2,036

*** ***

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

 

 

**Three Months Ended March 31,**

 

**2005**

** **

2004

 

(Unaudited)

 

(in million pesos)

Provision for income tax at statutory tax rate

**4,136**

** **

2,469

Tax effects of:

** **

 

 

Income not subject to tax

**(109)**

** **

(665)

Income subject to final tax

**(109)**

** **

(83)

Income subject to lower tax rate

**48**

** **

12

Non-deductible expenses 

**37**

** **

125

Write-off (reversal) of deferred income tax assets

**(460)**

 

183

Equity share in net losses of investees including provision  for decline in value of investments in associates

**–**

** **

(5)

Actual provision for income tax

**3,543**

 

2,036

 

MabuhaySatellite and Subic Telecom are registered as Subic Bay Freeport Enterpriseswhile Clark Telecom is registered as a Clark Special Economic Zone Enterpriseunder R.A. No. 7227, otherwise known as the Bases Conversion and DevelopmentAct of 1992, or the Act.  As registrants, Mabuhay Satellite, Subic Telecom andClark Telecom are entitled to all the rights, privileges and benefitsestablished thereunder including tax and duty-free importation of capitalequipment and special income tax rate of 5% of gross income, as defined in theAct.

 

On December 22, 2000, the Philippine Board of Investments, or BOI, approved ePLDT’sregistration as a new information technology service firm in the field ofservices related to its internet data center on a pioneer status.  As such,ePLDT enjoys, among other incentives, a six-year income tax holiday, or ITH,from January 2001.

 

On May 3, 2001, the BOI awarded Smart pioneer status for its GSM expansion projects entitlingit to a three-year ITH which expired in May 2004.  The tax incentive wasavailed on the basis of incremental income generated from said expansionproject.  In addition, on July 12, 2001, the BOI awarded Smart pioneer statusfor its payment infrastructure projects entitling it to enjoy a six-year ITH.In this case, the tax incentive is availed for the entire taxable income of theproject.  The BOI registration for this project was cancelled effective September 14, 2004.

 

WolfpacMobile, Inc., or Wolfpac, is registered with the BOI as a new operator ofservice provider applications.  Under the terms of its registration, it isentitled to certain tax and non-tax incentives which include, among others, anITH for four years from February 2004.

 

MeridianTelekoms, Inc., or Meridian, is registered with the BOI as a new operator oftelecommunications systems (inter-exchange carrier for data services).  Underthe terms of its registration, Meridian is entitled to certain tax and non-taxincentives which include, among others, an ITH for six years from February 2001or the actual start of commercial operations, whichever comes first, andadditional deduction for labor expense for the first five years from the dateof registration.

 

Taxincentives availed for the three months ended March 31, 2005 and 2004 amounted to Php6 million and Php708 million, respectively.

 

Smart’sdeferred income tax assets and liabilities as at March 31, 2005 and December 31, 2004 have been recorded to the extent that such deferred tax assets areexpected to be utilized against sufficient future taxable profit.

 

Certaindeferred income tax assets have not been recognized as it is not probable thattaxable profits will be sufficient against which they can be utilized.  Thecomponents of deductible temporary differences for which no deferred tax assetis recognized in the consolidated balance sheets are as follows:

 

 

**March 31,  2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Asset impairment

**9,976**

 

10,090

Unrealized foreign exchange losses

**1,640**

 

1,938

Allowance for doubtful accounts

**746**

 

746

Unearned revenues on co-location fees

**354**

 

470

MCIT

**348**

 

305

Provision for other assets

**133**

 

133

NOLCO

**30**

 

29

Unearned revenues on sale of prepaid cards

**–**

 

73

Others

**42**

 

40

 

**13,269**

 

13,824

 

Our consolidated unutilized NOLCO as at March 31, 2005 is detailed as follows:

 

**Year Incurred**

**Year Expiring**

**(in million pesos)**

2002

2005

1,701

2003

2006

5

2004

2007

80

 

 

1,786

 

 

 

Tax benefit at 32%

 

572

Unrecognized deferred income tax assets as at  March 31, 2005

 

(30)

 

 

 542

 

 

 

**7.   Earnings Per Common Share**

 

The following table presents informationnecessary to calculate the earnings per common share:

 

** **

**Three Months Ended March 31,**

 

**2005**

 

2004

 

**Basic**

**Diluted**

 

Basic

Diluted

 

(Unaudited)

 

(in million pesos)

Net income 

**9,361**

**9,361**

 

5,686

5,686

Dividends on preferred shares

**(374)**

**(12)**

 

(382)

(382)

Dividend on preferred stock subject to mandatory redemption charged to interest expense for the period

**–**

**67**

** **

**–**

**–**

Accretion of preferred stock subject to mandatory redemption

**–**

**331**

** **

**–**

**–**

Foreign exchange gain on preferred stock subject to mandatory redemption

**–**

**(602)**

 

**–**

**–**

Net income applicable to common shares

**8,987**

**9,145**

** **

5,304

5,304

 

 

 

 

 

 

 

(in thousands, except per share amounts) 

 

** **

 

 

 

 

Outstanding common shares, beginning

**170,214**

**170,214**

 

169,476

169,476

Effect of issuance of common shares during the period

**64**

**64**

 

8

8

Weighted average number of shares under ESOP during the period

–

**39**

 

–

–

Common shares equivalent of preferred shares deemed dilutive:

** **

** **

 

 

 

Preferred Stock Series A to EE

–

**3,219**

 

–

–

Global Depositary Stock Series III

–

**7,908**

 

–

–

Preferred Stock Series V

–

**2,206**

 

–

–

Preferred Stock Series VI

–

**4,750**

 

–

–

Preferred Stock Series VII

–

**3,842**

 

–

–

Weighted average number of common shares, end

**170,278**

**192,242**

 

169,484

169,484

Earnings per common share

**Php52.78**

**Php47.57**

 

Php31.30

Php31.30

*** ***

Thecomputation of diluted earnings per common share were anti-dilutive for thethree months ended March 31, 2004; therefore, the amounts reported for basicand diluted earnings per common share were the same.

 

**Dividends Declared**

*** ***

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**

 

 

 

 

 

(in million pesos)

**Preferred Shares Subject to  Mandatory Redemption**

 

 

 

 

 

Series V

March 1, 2005

March 17, 2005

April 15, 2005

Php4.675

10

Series VI

March 1, 2005

March 17, 2005

April 15, 2005

US$0.09925

26

Series VII

March 1, 2005

March 17, 2005

April 15, 2005

JPY10.179725

20

Charged to income

 

 

 

 

  56

 

 

 

 

 

 

**10% Cumulative Convertible  Preferred Stocks**

 

 

 

 

 

Series DD

January 25, 2005

February 8, 2005

February 28, 2005

Php1.00

3

Series CC

January 25, 2005

February 24, 2005

March 31, 2005

1.00

17

 

 

 

 

 

  20

 

 

 

 

 

 

**Convertible Preferred Stocks**

 

 

 

 

 

Series III

March 1, 2005

March 17, 2005

April 15, 2005

US$1.029412

260

 

 

 

 

 

 

**Cumulative Non-Convertible Redeemable Preferred Stock**

 

 

 

 

 

Series IV*

January 25, 2005

February 17, 2005

March 15, 2005

–

12

 

 

 

 

 

 

**Common stock**

March 1, 2005

March 31, 2005

May 12, 2005

Php14.00

2,384

Charged to retained earnings

 

 

 

 

2,676

 

****Dividends are declaredbased on total amounts, not per share amounts.*

*** ***

**DividendsDeclared after****March 31, 2005**

*** ***

** **

**Date**

**Amount**

**Class**

**Approved**

**Record**

**Payable**

**Per Share**

**Total**

 

 

 

 

 

(in million pesos)

Common Stock

May 5, 2005

June 3, 2005

July 14, 2005

Php21.00

3,577

*** ***

Retainedearnings available for cash dividends amounted to Php18,837 million as at March 31, 2005.  Reconciliation of consolidated deficit to Parent Company retainedearnings is shown below:

 

** **

** **

**(in million pesos)**

Deficit in the unaudited consolidated financial statements

 

(3,535)

Adjustments relating to:

 

 

PAS 27 – Consolidated and Separate Financial Statements

 

22,293

PAS 36 – Impairment of Assets

 

(2,025)

PAS 40 – Investment Property 

 

2,104

Retained earnings in the separate financial statements of the Parent Company

 

18,837

 

 

**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**

**Communications satellite**

**Information origination/ termination equipment**

**Land and**

**land improvements**

**Property under construction**

**Total**

 
(in million pesos)

** **

**At****December 31, 2004****(Audited)**

Cost

102,958

76,117

64,092

19,083

28,474

15,709

6,108

2,563

9,972

325,076

Accumulated depreciation, amortization and impairment

(30,091)

(36,126)

(31,080)

(4,911)

(16,859)

(8,907)

(2,151)

(341)

(85)

(130,551)

Net book value

72,867

39,991

33,012

14,172

11,615

6,802

3,957

2,222

9,887

194,525

** **

**Three Months Ended****March 31, 2005****(Unaudited)**

Net book value - beginning

72,867

39,991

33,012

14,172

11,615

6,802

3,957

2,222

9,887

194,525

Additions/Transfers - net

667

538

615

57

312

(11)

34

(1)

1,885

4,096

Disposals/Retirement

(15)

35

(93)

(1)

(63)

–

–

–

(3)

(140)

Depreciation and amortization

(1,005)

(1,387)

(1,391)

(896)

(570)

(217)

(86)

(8)

–

(5,560)

Net book value - end

72,514

39,177

32,143

13,332

11,294

6,574

3,905

2,213

11,769

192,921

 

**At****March 31, 2005****(Unaudited)**

Cost

103,607

76,647

64,473

19,137

28,722

15,563

6,142

2,562

11,840

328,693

Accumulated depreciation, amortization and impairment

(31,093)

(37,470)

(32,330)

(5,805)

(17,428)

(8,989)

(2,237)

(349)

(71)

(135,772)

Net book value

72,514

39,177

32,143

13,332

11,294

6,574

3,905

2,213

11,769

192,921

** **

Substantially all our telecommunications equipment arepurchased from outside the Philippines.  Significant source of financing for such purchasesare foreign loans requiring repayment in currencies other than Philippinepesos, principally in U.S. dollars (see *Note 17 – Interest-bearing FinancialLiabilities*).  Interest, using an average capitalization rate of 8%, andnet foreign exchange losses capitalized to property, plant and equipmentqualified as borrowing costs for the three months ended March 31, 2005 and 2004 were as follows:

 

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Interest

**97**

 

152

Foreign exchange (gains) losses

**(22)**

 

73

 

As at March 31, 2005 and December 31, 2004, the undepreciated capitalized net foreign exchangelosses qualified as borrowing costs amounted to Php5,381 million and Php5,528million, respectively.

 

Forthe first quarter of 2005, we recognized additional depreciation of Php347million with our full adoption of PAS 16, see *Note 2 – Summary ofSignificant Accounting Policies*.

 

In2004, certain assets with net book values aggregating Php365 million wereretired.  These assets relate primarily to certain international facilityequipment of PLDT Global and Subic Telecom in relation to our strategicdirection to functionally integrate our international fixed line business.

 

Certain property, plant and equipment have beenrestated to include the following amounts for capitalized leases as at March 31, 2005 and December 31, 2004:

 

** **

**March 31, 2005****(Unaudited)**

December 31, 2004 (Audited)

 

**Central office equipment**

**Vehicles, furniture and other network equipment**

**Total**

Central office equipment

Vehicles, furniture and other network equipment

Total

 

(in million pesos)

Cost

**361**

**865**

**1,226**

361

863

1,224

Less accumulated depreciation

**276**

**482**

**758**

269

410

 679

 

**85**

**383**

**468**

  92

 453

 545

 

The following table describes all changes to the assetretirement obligations as at March 31, 2005 and December 31, 2004, respectively:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Asset retirement obligations at beginning of period

**638**

 

395

Additional liability recognized during the period

**23**

 

177

Accretion expense

**19**

 

66

Asset retirement obligations at end of period

**680**

 

 638

 

 

 

**9.   Investmentsin Associates – at equity**

 

This account consists of:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Aces International Limited (Note 8)

**1,614**

 

1,614

Mabuhay Space Holdings Limited

**1,046**

 

1,077

Stradcom International Holdings, Inc.

**616**

 

616

Bayantrade Dotcom, Inc.

**97**

 

97

Epds, Inc.

**6**

 

6

Airborne Access Corporation

**2**

 

2

 

**3,381**

 

3,412

Less accumulated impairment and equity in net losses of associates

**3,371**

 

3,404

Total cost and accumulated impairment and equity in net losses of associates

**10**

 

   8

 

***Investment of ACeS******Philippines******in AIL***

 

As at March 31, 2005, ACeS Philippines has a 20%investment in 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.

 

In December 1998, AIL and its 95% owned subsidiary, PTAsia Cellular Satellite, entered into an Amended and Restated Credit Agreement,or Amended Agreement, to amend the original Credit Agreement entered into by PTAsia Cellular Satellite and its bank creditors in 1997.  Under the AmendedAgreement, AIL has, among others, assigned to the banks as collateral all ofits tangible properties, including the Garuda Satellite, the system controlfacilities and system control equipment.  On September 30, 2002, PT AsiaCellular Satellite, AIL, as guarantor, P.T. Bank Internasional Indonesia, assecurity agent, and various banks signed a Rescheduling Agreement, whichamended the terms of the Amended and Restated Credit Agreement dated December 29,1998, moving the principal repayment dates to agreed periods with the finalmaturity date on January 31, 2012, see *Note 20 – Related Party Transactions*.

 

AIL has incurred recurring significant operatinglosses, negative operating cash flows, and significant levels of debt.  Thefinancial condition of AIL was partly due to the National Service Providers’,or NSPs, inability to generate the amount of revenues originally expected asthe growth in subscriber numbers have been significantly lower than budgeted.These factors raise substantial doubt about AIL’s ability to continue as agoing concern.  On this basis, we recognized an impairment provision in respectof our investment in AIL amounting to Php1,614million in 2003.

 

***Investment of Mabuhay Satellite in Mabuhay SatelliteSpace Holdings Limited, or MSHL***

 

In 1996, MabuhaySatellite entered into a Joint Venture Agreement, or JVA, with SpaceSystems/Loral Inc., or SS/L, to form MSHL for the purpose of providinghigh-power Ku-Band satellite transmission services using the payload which wasadded by SS/L aboard Agila II.  Under the terms of the JVA, SS/L is required toconvey title to the Additional Payload to MSHL in consideration for SS/L’s 35%equity interest in MSHL and Mabuhay Satellite is required to pay SS/L US$19million for a 65% equity interest in MSHL.

 

In 2000, SS/Lfiled a Notice of Default and Termination against Mabuhay Satellite arisingfrom the latter’s failure to amicably resolve its unpaid obligation to SS/Lunder the JVA.  In 2002, the arbitration panel handed down its decision andprovided for payment by Mabuhay Satellite to SS/L of the principal amount ofUS$10 million plus accrued interest at 9% per annum.  On June 30, 2003, MabuhaySatellite and SS/L concluded a US$15 million settlement agreement under whichMabuhay Satellite leased two transponders on a life-term basis to SS/L and hadoffset the lease charges due from SS/L and its receivables from Loral SkynetNetwork Services, Inc. (formerly known as the Loral Cyberstar, Inc.), among others,for a full and final settlement of the arbitration decision.  The agreement wassubsequently approved by Mabuhay Satellite’s creditors in March 2004.

 

In accordance with thesettlement agreement, Mabuhay Satellite and SS/L shall proceed to dissolve thejoint venture under a separate agreement, for which each of the parties shallreceive title over such number of transponders owned by the joint venture inproportion to their respective interests.  On the basis of the joint venturedissolution, we recognized an impairment provision in respect of our investmentin MSHL of Php423 million in 2004.

 
******
***Investmentin Stradcom International Holdings, Inc., or SIHI***

 

ePLDT has 22.5% interest inconvertible securities of SIHI, the parent company of Stradcom Corporation,which has an existing concession agreement with the Philippine Government forthe modernization of the Philippine Land Transportation Office, including thecomputerization of driver’s license issuance, vehicle registration and trafficadjudication systems.  SIHI has been incurring losses from the start ofoperations due to Stradcom Corporation’s continuous losses and consistentexcess of current liabilities over current assets.  In addition, StradcomCorporation has technically defaulted in its loan covenants.  On this basis, werecognized an impairment provision in respect of our investment in SIHI ofPhp616 million in 2004.

 

***Investmentin BayanTrade Dotcom, Inc., or BayanTrade***

*** ***

BayanTradewas incorporated and registered with the SEC on August 8, 2000 to provide:  (a)business-to-business electronic purchasing marketplace to link buyers andsuppliers of good services over the Internet; (b) electronic cataloguepurchasing facilities over the Internet to buyers and suppliers; (c) link-upwith similar horizontal markets and vertical markets across the Asia-PacificRegion and the world; and (d) such facilitating services incidental to thebusiness.

*** ***

***Investment in ePDS, Inc., or ePDs***

*** ***

On June 30, 2003, ePLDT signed a Joint Venture Agreement with DataPostPte Ltd., or DataPost, a subsidiary of Singapore Post, and G3 Worldwide ASPAC,or Spring, pursuant to which the parties formed ePDS, a bills printing companywhich will do laser printing and enveloping services for statements, bills andinvoices, and other value-added services to companies in the Philippines.ePLDT has a 50% interest in ePDS, while DataPost has a 30% interest.  Spring,the largest international mail services provider, owns the remaining 20%.  ePDShas an initial paid-up capital of Php11 million.

*** ***

***Investmentin Airborne Access Corporation, or Airborne Access***

*** ***

On August 31, 2003, ePLDT signed a Memorandum of Agreement with Airborne Access to acquire a20% interest at a purchase price of Php2 million.  Airborne Access, apioneering wireless internet service provider, caters primarily to mobileprofessionals by delivering wireless internet access to its subsidiariesthrough more than 44 hotspots throughout Metro Manila.  In December 2004, ePLDThas recognized full provision of its investment in Airborne Access due to itscontinuous losses which exceeded its paid-up capital.

 

 

 

**10. Investment Properties**

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Balance at beginning of period

**743**

 

761

Additions (subsequent expenditures)

**–**

 

3

Net loss from fair value adjustment

**–**

 

(21)

Balance at end of period

**743**

 

743

 

Investmentproperties are stated at fair values, which have been determined based onlatest valuations performed by an independent firm of appraisers.  Thevaluation undertaken was based on an open market value, supported by marketevidence in which assets could be exchanged between a knowledgeable willingbuyer and a knowledgeable willing seller in an arm’s-length transaction at thedate of valuation, in accordance with international valuation standards.

 

 

 

**11. Goodwilland Intangible Assets**

 

Thisaccount includes intangible assets – technology application arising from theacquisition of Wolfpac Mobile, Inc. and intangible assets – franchise arisingfrom acquisition of Meridian Telekoms, Inc.

 

Movements in the goodwill and intangible assets duringthe periods are as follows:

 

 

**March 31, 2005****(Unaudited)**

December 31, 2004 (Audited)

 

**Goodwill**

**Intangible assets**

**Total**

Goodwill

Intangible assets

Total

 

(in million pesos)

Cost

 

 

 

 

 

 

Balance at beginning of period

**528**

**3,955**

**4,483**

498

317

 815

Additions

**–**

**15**

**15**

30

3,638

3,668

Balance at end of period

**528**

**3,970**

**4,498**

 528

3,955

4,483

 

** **

** **

** **

 

 

 

Accumulated amortization and impairment

** **

** **

** **

 

 

 

Balance at beginning of period

**(438)**

**(181)**

**(619)**

(438)

(5)

(443)

Additions

**–**

**(76)**

**(76)**

–

(176)

(176)

Balance at end of period

**(438)**

**(257)**

**(695)**

(438)

(181)

(619)

Net balance

**90**

**3,713**

**3,803**

  90

3,774

3,864

 

 

 

**12. Notes Receivable**

*** ***

***Investment of ePLDT in Debt Securities of TechnologySupport Services, Inc., or TSSI (formerly First Advance Multi-MediaEntertainment Corp., or FAME)***

 

On June 1, 2004, ePLDT and TSSI entered an agreement whereby ePLDT would grant a seven-year non-interestbearing loan to TSSI amounting to US$3.1 million.  At the option of ePLDT, theloan is convertible into 20% of the total outstanding capital stock of TSSI atany time during the life of the outstanding loan.  

 

On August 20, 2004, FAMEchanged its corporate name into TSSI.

 

On September 14, 2004, ePLDT entered into a second agreement with TSSIwhereby ePLDT would grant another seven-year non-interest bearing loan to TSSIamounting to US$3.1 million.  At the option of ePLDT, the loan is convertibleinto another 20% of the outstanding capital stock of TSSI at any time duringthe life of the outstanding loan.  As at December 31, 2004, total loan of ePLDT to TSSI amounts to US$5.1 million.  The remaining balance of the loan ofUS$1.1 million was released to TSSI in February 2005.

 

ePLDT has not yet converted its investment in debt securities to TSSI’sshares of stock as at  March 31, 2005.  TSSI would be the systems integrator for the internet andmobile telephone gaming project.

 

Thefair value of the debt instrument was computed as the present value ofestimated future cash flows.  The cost of the instrument approximates the fairvalue computed as at March 31, 2005.

 

 

 

**13. Cash and Cash Equivalents**

 

This account consists of:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Cash on hand and in banks

**2,359**

 

4,750

Temporary investments

**27,418**

 

22,571

 

**29,777**

 

27,321

 

Cash inbanks earns interest at prevailing bank deposit rates.  Temporary investmentsare made for varying periods of up to two months depending on our immediatecash requirements, and earn interest at prevailing short-term deposit rates.Due to the short-term nature of such transactions, the carrying value approximatesthe fair value of our temporary investments.

 

 

 

**14. Tradeand Other Receivables**

 

Thisaccount consists of receivables from:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Customers and carriers

**26,435**

 

27,280

Others (Notes 20, 22 and 23) 

**2,646**

 

1,192

 

**29,081**

 

28,472

Less allowance for doubtful accounts

**18,799**

 

18,068

 

**10,282**

 

10,404

 

Receivables from carriersrepresent receivables arising from interconnection agreements with othertelecommunications carriers.  The aforementioned receivable balances are shownnet of related payables to the same telecommunications carriers because anestablished right of offset exists.  

 

On October 10, 2002, PLDTentered 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 of US$50million, of which, US$25 million remains outstanding as at March 31, 2005, and(2) to service, administer and collect the receivables on behalf of thePurchaser.  Under the RPD, the Purchaser has no recourse to PLDT should aneligible carrier fail or refuse to settle the assigned/purchased receivables,except when PLDT commits a breach of its representations and warranties underthe RPD.

 

Sale of receivables under the RPD amounted to US$3 million(Php165 million) and US$3 million (Php167 million) for the three months ended March 31, 2005 and2004, respectively.  Loss on sale of receivables under the RPD amounted toUS$0.31 million (Php17 million) and US$0.30 million (Php18 million) for thethree months ended March 31, 2005 and 2004, respectively.  

 

Other receivables includeUS$21.5 million (Php1,177 million) under an escrow arrangement in relation toPLDT’s Air Time Purchase Agreement with AIL, see *Note 20 – Related PartyTransactions*, *Note 22 – Contractual Obligations and CommercialCommitments* and *Note 23 – Provisions and Contingencies*.

 

 

 

**15. Inventoriesand Supplies**

 

This account consists of:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Terminal and cellular phone units:

** **

 

 

At net realizable value

**1,161**

 

1,357

At cost

**1,599**

 

1,895

Spare parts and supplies:

** **

 

 

At net realizable value

**397**

 

389

At cost

**999**

 

985

Others (At cost)

**381**

 

394

 

**1,939**

 

2,140

 

 

 

**16. Equity**

** **

The movement of PLDT’s capital account follows:

 

** **

**Preferred Stock** – Php10 par value

** **

** **

**Series  A to EE**

**III**

**IV**

** **

** **

** **

**Common Stock** –Php5 par value

** **

**No. of Shares**

**Total Preferred Stock**

**Amount**

**No. of Shares**

**Amount**

** **

(in million shares and pesos)

**Authorized**

 

 

** **

823

Php8,230

234

Php1,170

**Outstanding**

** **

 

** **

** **

** **

 

 

Balance at January 1, 2004

410

5

36

 451

Php4,505

169

Php847

Issuance

1

–

–

   1

9

–

2

Conversion

(2)

–

–

(2)

(17)

1

2

Balance at December 31, 2004 (Audited)

 409

   5

  36

 450

Php4,497

 170

Php851

 

 

 

 

 

 

 

 

Balance at January 1, 2005

 409

   5

  36

 450

Php4,497

 170

Php851

Issuance

–

–

–

–

1

–

1

Conversion

(1)

–

–

(1)

(7)

–

–

Balance at March 31, 2005 (Unaudited)

 408

   5

  36

 449

Php4,491

 170

Php852

*** ***

***Preferred Stock***

 

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

 

The SeriesA to EE 10% Cumulative Convertible Preferred Stocks earn cumulative dividendsat an annual rate of 10%.  After the lapse of one (1) year from the last day ofthe year of issuance of a particular series of 10% Cumulative Convertible PreferredStock, any holder of such series may convert all or any of the shares of 10%Cumulative Convertible Preferred Stock held by him into fully paid andnon-assessable shares of Common Stock of PLDT, at a conversion price equivalentto 10% below the average of the high and low daily sales price of a share ofCommon Stock on the PSE, or if there shall have been no such sales on the PSEon any day, the average of the bid and the asked prices of a share of CommonStock of PLDT at the end of such day on such Exchange, in each such caseaveraged over a period of thirty (30) consecutive trading days prior to theconversion date, but in no case shall the conversion price be less than theprice set by the Board of Directors which as at December 31, 2004, was Php5.00per share.  The number of shares of Common Stock issuable at any time uponconversion of one share of SIP Cumulative Convertible Preferred Stock shall bedetermined by dividing Php10.00 by the then applicable conversion price.

 

In case the shares of Common Stock at anytime outstanding shall besubdivided into a greater or consolidated into a lesser number of shares, thenthe minimum conversion price per share of Common Stock shall be proportionatelydecreased or increased, as the case may be and in the case of a stock dividend,such price shall be proportionately decreased, provided, however, that in everycase the minimum conversion price shall not be less than the par value pershare of Common Stock.  In the event the relevant effective date for any suchsubdivision or consolidation of shares or stock dividend occurs during theperiod of thirty (30) trading days preceding the presentation of any shares of10% Cumulative Convertible Preferred Stock for conversion, a similar adjustmentshall be made in the sales prices applicable to the trading days prior to sucheffective date utilized in calculating the conversion price of the sharespresented for conversion.

 

Incase of any other reclassification or change of outstanding shares of CommonStock, or in case of any consolidation or merger of PLDT with or into anothercorporation, the Board of Directors shall make such provisions, if any, foradjustment of the minimum conversion price and the sales price utilized incalculating the conversion price as the Board of Directors, in it solediscretion, shall deem appropriate.

 

AtPLDT’s option, the Series A to EE 10% Cumulative Convertible Preferred Stockare redeemable at par value plus accrued dividends five years after the year ofissuance.

 

On January 27, 2004, theBoard of Directors designated 1 million shares of serial preferred stock asSeries EE 10% Cumulative Convertible Preferred Stock for issuance throughout2004.

 

OnDecember 9, 2004, the Board of Directors designated 500,000 shares of serialpreferred stock as Series FF 10% Cumulative Convertible Preferred Stock forissuance throughout 2005.

 

TheSeries III Convertible Preferred Stock earns cumulative dividends at an annualrate of US$3.50 a share payable quarterly, free and clear of Philippine withholdingtaxes.  It is convertible into Common Stock at the option of the holder at anytime, at the conversion price of US$29.19 per Common Stock (equivalent to aconversion ratio of 1.7129 shares of Common Stock for each share of Series IIIConvertible Preferred Stock, each share of Series III Convertible PreferredStock being valued for this purpose at its reference amount of US$50 a share),subject to adjustment in certain events; and is not redeemable.  Uponliquidation of PLDT, holders of the Series III Convertible Preferred Stock willbe entitled to receive liquidating distributions equivalent to Php11 per share,plus accrued and unpaid dividends to the date of distribution, subject to theprior rights of creditors.

 

TheSeries IV Cumulative Non-Convertible Redeemable Preferred Stock earnscumulative dividends at an annual rate of 13.5% based on the paid-upsubscription price.  It is redeemable at the option of PLDT at any time oneyear after subscription and at the actual amount paid for such stock, 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.

 

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.

 

 

 

**17. Interest-bearing Financial Liabilities**

 

This account consists of the following:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

**Long-term portion of interest-bearing financial liabilities**

** **

 

 

Long-term debt

**113,040**

 

121,012

Obligations under capital lease (Note 8)

**514**

 

601

Preferred stock subject to mandatory redemption

**14,094**

 

14,375

 

**127,648**

 

135,988

 

 

** **

 

 

**Interest-bearing financial liabilities maturing within one year**

** **

** **

** **

Notes payable

**2**

 

58

Long-term debt maturing within one year

**22,972**

 

28,018

Obligations under capital lease maturing within one year (Note 8)

**448**

 

425

 

**23,422**

 

28,501

 

Unamortizeddebt discount, representing debt issuance costs and any difference between thefair value of consideration given or received on initial recognition, includedin following financial liabilities are as follows:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Long-term debt

**9,959**

 

10,440

Obligations under capital lease (Note 8)

**736**

 

741

Preferred stock subject to mandatory redemption

**5,575**

 

6,182

Total unamortized debt discount

**16,270**

 

17,363

 

Thefollowing table describes all changes to unamortized debt discount as at March 31, 2005 and December 31, 2004.

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Unamortized debt discount at beginning of period

**17,363**

 

16,390

Additions during the period (Note 17)

**133**

 

7,765

Accretion during the period charged to financing cost (Note 5)

**(712)**

 

(3,452)

Revaluations

**(493)**

 

474

Settlement during the period (Note 17)

**(21)**

 

(3,814)

Unamortized debt discount at end of period

**16,270**

 

17,363

 

**Long-term Debt**

 

Long-term debt consistsof:

 

** **

** **

**March 31, 2005**

December 31, 2004

**Description**

**Interest Rates**

**(Unaudited)**

(Audited)

 

 

(in millions)

*U.S. Dollar Debt:*

** **

** **

** **

** **

** **

Export Credit Agencies-Supported Loans:

** **

** **

** **

** **

** **

Kreditanstalt für Wiederaufbau, or KfW

5.65% - 8.03% and US$ LIBOR + 0.55% - 2.5%

**US$324**

**Php17,722**

US$351

Php19,793

Finnish Export Credit or Finnvera

6.36% - 7.75% and US$ LIBOR + 0.5% - 1.425%

**158**

**8,664**

159

8,964

Nippon Export and Investment Insurance  of Japan, or NEXI

US$ LIBOR +1%

**73**

**4,030**

74

4,179

Japan Bank for International Cooperation,  or JBIC/Co-financing Banks

6.56% - 7.95% and US$ LIBOR + 0.65% - 1.55%

**38**

**2,078**

44

2,459

Others

5.83% - 7.89% and US$ LIBOR + 0.15% - 4.30% and CXC’s cost + 0.20%

**83**

**4,533**

104

5,871

 

 

**676**

**37,027**

732

41,266

Fixed Rate Notes

7.85% - 11.375%

**1,198**

**65,593**

1,220

68,795

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

2.25% and US$ LIBOR + 1%

**157**

**8,607**

155

8,721

GSM Network Expansion Facilities

4.44% and US$ LIBOR + 1%-3.25%

**124**

**6,765**

125

7,046

Nederlandse Financierings-Maatschappij Voor

Ontwikkelingslanden N.V., or FMO

US$ LIBOR + 1.95% - 2.05%

**–**

**–**

51

2,862

Others

5.83% and LIBOR + 0.40% - 3.625%

**26**

**1,421**

33

1,863

Restructured Loans

US$ LIBOR + 1%

**87**

**4,738**

85

4,815

Satellite Acquisition Loans

US$ LIBOR + 1.75% and 5.6%

**67**

**3,663**

72

4,064

 

 

**US$****2,335**

**127,814**

US$2,473

139,432

 

 

** **

** **

 

 

*Japanese Yen Debt:*

 

** **

** **

 

 

JBIC’s Overseas Investment Loan, or OIL

2.125%

**JP¥8,364**

**4,275**

JP¥9,760

5,363

Export Credit Agency-Supported Loan –  NEXI Supported Loan

JP¥ LIBOR + 1.70%

**2,202**

**1,125**

2,205

1,212

** **

 

**JP¥****10,566**

**5,400**

JP¥11,965

6,575

** **

 

** **

** **

 

 

*Philippine Peso Debt:*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

14% - 15.816%

**–**

**1,675**

–

1,675

Term Loans:

 

** **

** **

 

 

JBIC 4 Program

11.18%

**–**

**510**

–

680

Secured Term Loans

11% - 24%

**–**

**246**

–

305

Restructured Loans

91-day T-Bill + 1%

**–**

**367**

–

363

 

 

**–**

**2,798**

–

3,023

 

 

** **

**136,012**

 

149,030

Less portion maturing within one year

 

** **

**22,972**

 

28,018

Total long-term debt 

 

** **

**Php113,040**

 

Php121,012

 

*Note:Amounts presented are net of unamortized debt discount and debt issuance cost.*

 

The scheduled maturities of our outstanding unauditedconsolidated long-term debt at nominal values as at March 31, 2005 are as follows:

 

*** ***

**U.S. Dollar Loans**

**JP****Y Loans**

**Php Loans**

**Total**

** **

**In U.S. Dollar**

**In Php**

**In JP****Y**

**In Php**

**In Php**

**In Php**

** **

(in millions)

**Year**

 

 

 

 

 

 

2005(1)

325

17,781

2,024

1,034

652

19,467

2006

353

19,330

3,418

1,747

851

21,928

2007

474

25,988

3,418

1,747

78

27,813

2008

119

6,520

1,709

874

67

7,461

2009

271

14,831

–

–

56

14,887

2010 and onwards

972

53,201

–

–

1,214

54,415

 

*(1)**April 1, 2005**through**December 31, 2005**.*

 

***U.S. Dollar Debt:***

* *

*Export Credit Agencies-Supported Loans*

 

In order to obtain imported components for our networkinfrastructure in connection with our expansion and service improvementprograms, we obtained loans extended and/or guaranteed by various export creditagencies.  These financings account for a significant portion of ourindebtedness.

 

*Kreditanstalt für Wiederaufbau, or KfW*

 

KfW, a German state-owned development bank, is PLDT’slargest single creditor.  As at March 31, 2005, we owed US$324 million aggregateprincipal amount of debt to KfW, as follows:

 
- US$237 million provided under various export credit agency-backed facilities, of which US$127 million was in connection with our expansion and service improvement programs and US$110 million in connection with the US$149 million refinancing facility discussed below; and

 
- US$87 million provided for the 15% downpayment portion and credit facilities without guarantee/insurance cover from the export credit agencies, of which US$30 million was in connection with the US$149 million refinancing facility discussed in the following paragraphs.

 

On January 25, 2002,PLDT signed two loan agreements with KfW, which provided PLDT with a US$149million facility to refinance in part the repayment installments under itsexisting loans from KfW due from January 2002 to December 2004.  The facilityis composed of a nine-year loan, inclusive of a three-year disbursement periodand a two-year grace period during which no principal is payable.  It partlyenjoys the guarantee of HERMES, the export credit agency of the FederalRepublic of Germany.  We have drawn US$140 million (Php7,662 million) underthis facility as at March 31, 2005.  PLDT waived further disbursements under thisrefinancing facility effective September 1, 2004.  Thus, the undrawn portion ofUS$9 million was cancelled.

 

Ofthe amounts outstanding under these KfW loans, US$55 million ofour KfW loans will mature in 2005, US$57 million in 2006, US$78 million in2007, US$58 million in 2008, US$44 million in 2009 and US$32 million in2010.  Principal amortization on these loans is generally payable in equalsemi-annual installments.

* *

*Finnish**Export Credit, plc, or Finnvera*

 

As at March 31, 2005, US$161 million aggregateprincipal amount of Smart’s debts provided by various banks under export creditagency-backed facilities in connection with Smart’s GSM expansion programs arecovered by guarantees from Finnvera, the Finnish export credit agency, for 95%of political risk and 50% of commercial risk for Phase 1 to 4 loan facilitiesand 100% for political and commercial risk for the refinancing facility ofPhase 5A and 5B.  This includes a US$100 million refinancing facility obtainedon February 11, 2005 in relation to Smart’s GSM Phase 5A and 5B loans withoutstanding balances of US$60 million and US$41 million, respectively.  Theprincipal benefit of refinancing the Phase 5 loans was the savings from lowerinterest margin on the refinancing facility.

 

Ofthe amounts outstanding under these Finnvera guaranteed loans, US$55 millionwill mature in 2005, US$36 million in 2006, US$20 million in 2007, US$20million in 2008, US$20 million in 2009 and US$10 million in 2010.  Principalamortization on these loans is generally payable in equal semi-annualinstallments.

 

*Nippon**Export and**Investment**Insurance of**Japan**, or NEXI*

 

On November 28, 2002,Smart signed a US$100 million term loan facility supported by NEXI of whichUS$60 million was drawn on November 28, 2003 and US$40 million on April 5, 2004.  Thisloan is payable semi-annually over four years in eight equal installmentsstarting May 28, 2004 with final repayment due in November 2007.  Outstandingbalance as at March 31, 2005 is US$75 million.

 

*JapanBank for International Cooperation, or JBIC/Co-financing Banks*

 

Asat March 31, 2005, PLDT owed US$38 million aggregate principal amountof debt to JBIC (formerly theExport-Import Bank of Japan) and its co-financing banks under various facilities.  Of the amounts outstanding under these loans, US$9 million willmature in 2005, US$13 million in 2006, US$9 million in 2007, US$4 million in2008 and US$3 million in 2009.

 

*OtherExport Credit Agency Supported Loans*

 

PLDThas also obtained loans extended and/or guaranteed by other export creditagencies, including the Export-Import Bank of the United States,and the respective export credit agencies of France, Italy, Israel, Sweden, Canada, Australia, theUnited Kingdom and Singapore, in the aggregate outstanding principal amount of US$76 million as atMarch 31, 2005.  Smart, likewise, obtained loans guaranteed byexport credit agencies of Norway and Italy amounting to US$7 million.  Of the amountsoutstanding under these loans, US$26 million will mature in 2005, US$27 million in2006, US$23 million in 2007, US$4 million in 2008, US$2 million in 2009 and US$1 million in2010.

*Fixed Rate Notes*

 

PLDT has the following non-amortizing fixed rate notesoutstanding as at March 31, 2005 and December 31, 2004:

 

**Principal Amount**

**Interest Rate**

**Maturity Date**

**March 31, 2005****(Unaudited)**

December 31, 2004  (Audited) 

** **

** **

** **

(in millions)

US$300,000,000

8.350%

March 6, 2017

**US$296**

**Php16,190**

US$296

Php16,658

US$250,000,000

11.375%

May 15, 2012

**243**

**13,284**

242

13,661

US$171,873,000

7.850%

March 6, 2007

**171**

**9,371**

183

10,315

US$175,000,000

10.500%

April 15, 2009

**174**

**9,504**

174

9,777

US$123,706,000

9.250%

June 30, 2006

**123**

**6,753**

129

7,289

US$110,557,000

9.875%

August 1, 2005

**110**

**6,048**

110

6,223

US$  82,703,000

10.625%

May 15, 2007

**81**

**4,443**

86

4,872

 

 

 

**US$****1,198**

**Php65,593**

US$1,220

Php68,795

* *

*Term**Loans*

* *

*US$283Million**Term**Loan Facility (Debt Exchange Facility)*

* *

On July 2, 2004, Smart acquired from Piltel’s creditors approximately US$289 million, or69.4%, in the aggregate of the outstanding restructured Piltel debt, inexchange for Smart debt.  Smart paid cash of US$1.5 million (Php84 million) andissued new debt of US$283.3 million at fair value of Php8,390 million, net ofdebt discount amounting to Php7,464 million.  As at March 31, 2005, unamortized discount amounted to Php6,900 million.

* *

The breakdown of the total amount of Smart debt issuedto participating Piltel creditors are as follows:

* *

•        2007 Facility for US$0.2 millionpayable in full in December 2007;

•        2008 Facility for US$2.9 millionpayable in full in December 2008; and

•        2014 Facility for US$280.1 millionpayable in full in June 2014.

* *

Interestfor the above facilities is payable every quarter at a floating rate of threemonths US$ LIBOR plus 1.00% for the 2007 and 2008 facilities, and a fixed rateof 2.25% per annum for the 2014 facility.  Furthermore, a portion of the 2014facility amounting to US$144 million has a variable yield option whereby thecreditor has an option to elect for an early repayment at a discount either inDecember 2007 at 52.5% of the relevant debt amount or in December 2008 at 57.5%of the relevant debt amount.

* *

*GSM**NetworkExpansion Facilities*

* *

On September 13, 2004, Smart signed a US$104 million 5-year term loan facility supported byFinnish Export Credit PLc as the lender with ABN AMRO Bank, Banque National deParibas, Calyon, DBS Bank and Sumitomo Mitsui Banking Corporation as the LeadArrangers.  The full amount of the facility was drawn in November 2004.  Theloan will be payable over five years in ten equal payments starting May 2005with final repayment in November 2009.

 

On June 8,2001, Smart signed its GSM Phase 5A financing comprised of US$195 millionloans, of which US$30 million is owed to Nederlandse Financierings-MaatschappijVoor Ontwikkelingslanden N.V., or FMO, of the Netherlands, US$15 million toNordic Investment Bank and US$150 million to Finnvera.  Of the amounts owed toFMO and Nordic Investment Bank, US$20 million remained outstanding as at March31, 2005, are payable over five to six years, with final repayments due inMarch 2007 and June 2007.  

 

*Local**ExchangeTransfer 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 Credits Guarantee Department, or ECGD, of the UnitedKingdom for loans in the principal amounts of US$135 million, US$36 million andUS$27 million, respectively.  Approximately US$25 million of the EKN and ECGDloans were outstanding as at March 31, 2005 and will mature on December 31, 2007.The FMO loan with original maturity of September 1, 2007was prepaid in full on March 1, 2005.

 

*Multi-currency Refinancing Facility*

 

On September 4, 2002, PLDT signed a loan agreement witha syndicate of banks for a US$145 million multi-currency term loan facility consistingof Japanese yen and U.S. dollar commitments of JP¥10,914 million and US$53million, respectively.  This facility was split into two tranches.  Tranche A was drawn on June 18, 2003 in the amount ofJP¥7,723 million and US$34 million to refinance a portion of the Japanese yensyndicated term loan which matured on the same date.  Tranche B was drawn on December 22, 2003 inthe amount of JP¥3,191 million and US$19 million to refinance a portion ofUS$52 million principal amount outstanding under the U.S. dollar term loanwhich matured on the same date.  Theoutstanding balances of Tranches A and B of this multi-currency term loanamounting to US$36 million and JP¥7,276 million originally with final maturityin December 2006 were prepaid on December 20, 2004.

 

*Restructured Loans*

 

On June 4,2001, Piltel completed the restructuring of approximately Php41 billion ofindebtedness and other claims owed to banks, trade creditors, bondholders andpreferred shareholders, representing 98% of its total liabilities as at thatdate.

 

Asa result of the restructuring:

 
- 50% of the financial debt of each participating creditor was released in consideration for the allotment of Piltel Series K Class I Convertible Preferred Stock.  One (1) Piltel Series K Class I Convertible Preferred Stock was exchanged for every Php340 worth of debt for which it is being exchanged (converted into Pesos at an exchange rate of Php47.05 = US$1.00 for dollar-denominated debt and Php1.00 = JP¥2.39522 for yen-denominated debt), which shares were immediately and mandatorily converted into PLDT Convertible Preferred Stock.  One PLDT Series V, VI or VII convertible preferred share was issued for every five (5) Piltel Series K Class I Convertible Preferred Stock.

 
- Approximately half of the remaining 50% of all participating creditors’ (except for bondholders and preferred shareholders) financial debt became their participation in a Tranche B Loan in the same currency as their previous financial debt and the other half became their participation in a Tranche C Loan also in the same currency as their previous financial debt.  In the case of bondholders and preferred shareholders, the remaining 50% of their financial debt became a participation in the Conversion Notes Facility and in a single Tranche Peso loan (the Term Notes Facility), respectively.

 

On July 2,2004, Smart acquired from Piltel’s creditors US$289 million or 69.4% ofPiltel’s total outstanding restructured debt at that time, in exchange forUS$283.3 million in new debt of Smart and US$1.5 million in cash.  A gain ondebt exchange transaction amounting to Php4,419 million was recognized in ourconsolidated statement of income representing the difference between the fairvalue of Piltel’s debt cancelled and/or exchanged for a cash and Smart’s debtamounting to Php12,893 million (net of debt discount of Php3,359 million) andSmart’s consideration for the debt exchange including cash of Php84 million(US$1.5 million) and fair value of newly issued debt amounting to Php8,390million (net of debt discount of Php7,464 million).  This portion of Piltel’sdebt has been eliminated in consolidation as at March 31, 2005.

 

Piltel’sresidual long-term debt to third parties consists of:

 

** **

**March 31, 2005******

December 31, 2004

**Description**

**(Unaudited)**

(Audited) 

** **

(in millions)

**Restructured debts**

** **

** **

** **

** **

Philippine Pesos

** **

** **

** **

 

10 year Tranche B

** **

**Php241**

 

Php241

15 year Tranche C

** **

**242**

 

241

 

** **

**483**

 

482

U.S. Dollars

** **

** **

 

 

10 year Tranche B

**US$10**

**532**

US$10

548

15 year Tranche C

**10**

**532**

10

548

15 year Conversion Notes Facility

**99**

**5,448**

99

5,606

 

**US$****119**

**6,512**

US$119

6,702

Total

** **

**6,995**

 

7,184

Less unamortized discount (Note 2)

** **

**1,890**

 

2,006

 

** **

**5,105**

 

5,178

**Unrestructured debt**

** **

** **

 

 

U.S. Dollars

** **

** **

 

 

Convertible bonds

**US$****–**

**50**

US$1

52

Total

** **

**5,155**

 

5,230

Less current portion

** **

**57**

 

59

 

** **

**Php****5,098**

 

Php5,171

 

Thefollowing is a summary of the key economic terms relating to the restructuringof the financial debt taking the form of Tranche B Loan, Tranche C Loan, TermNotes Facility and Conversion Notes Facility.

 

 

**Tranche B Loans**

**Tranche C Loans**

**Term Notes Facility**

**Conversion Notes Facility**

Final maturity

10 years from June 4, 2001

15 years from June 4, 2001

15 years plus 10 days from June 4, 2001

15 years from June 4, 2001

Amortization

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, or T-Bill Rate, or the average of the 91-day T-Bill Rate and the 90-day Philippine inter-bank offered rate, or 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 rate for U.S. dollar deposits, or LIBOR, for three-month U.S. dollar deposits plus 1.00% p.a.

 

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

 

Interest payment dates

Quarterly in arrears

Semi-annually

 

Under theterms of the restructuring, PLDT issued a Letter of Support, or LOS, for thebenefit of Piltel and its creditors under which PLDT has agreed to cover anyfunding shortfalls of Piltel up to a maximum amount of US$150 million less allamounts paid or committed to be paid to or on behalf of Piltel or any of itssubsidiaries or affiliates on or after March 23, 2000. Under the LOS, PLDTshall provide funding to Piltel in the event that the cash flow from Piltel’soperations fall short of the amount required by it to discharge in full itsobligations to any creditor of Piltel and all its operating and financingsubsidiaries and affiliates.  PLDT is subject to contractual restrictionslimiting the amount of financial support it can provide to Piltel up to US$150million.  As at March 31, 2005 and December 31, 2004, the undrawn balanceavailable under the PLDT LOS is US$50 million, approximately Php2,751 millionand Php2,831 million, respectively, due to prior investments made from March23, 2000 to December 31, 2004 aggregating to US$100 million through PLDT’ssubscription to Class I Series J preferred shares of Piltel.  

 

Piltel’srestructured obligations are secured by substantially all present and futureassets of Piltel under the Mortgage Trust Indenture, or MTI, dated June 4, 2001 betweenPiltel and Chase Manhattan Bank as security agent for the creditors, whichestablished the security arrangements relating to the restructured debts.  Theparticipating creditors (other than the participating holders of the Peso TermNote Facility) will share equally in first ranking security, whilenon-participating creditors and the participating holders of the Peso Term NoteFacility will share equally in second ranking security created under the MTI.Such mortgage was approved by at least two-thirds of Piltel’s stockholders atits annual meeting on April 18, 2001 and the NTC on May 18, 2001.

 

*Satellite**Acquisition Loans*

 

Mabuhay Satellite has an existing Credit Agreement with the Export-ImportBank of the United States, or Ex-Im Bank, to finance a portion of the cost ofpurchasing the Agila II Satellite.  In 2003, Ex-Im Bank of the United Statesapproved, in principle, the re-profiling of Mabuhay Satellite’s US$42 milliondebt with them by extending the maturity of the loan by 1 and 1⁄2 years to July 15, 2007 and reducing the interest rate by 1% to 5.6%.  The revised repayment termshave been approved by the majority of the local creditor banks.

 

Mabuhay Satellite also has an existing OmnibusAgreement with a syndicate of local banks, or the Banks, which includesissuance of irrevocable standby Letters of Credit with an aggregate statedvalue not exceeding US$41 million (Php2,236 million) in favor of U.S. Ex-ImBank, as security under the Credit Agreement and a term loan to MabuhaySatellite in the aggregate amount of US$26 million (Php1,427 million), whichwill mature on various dates from 2005 to 2007. 

 

MabuhaySatellite has constituted in favor of the Banks: (a) a first mortgage on itsleasehold rights under a lease agreement entered into with the Subic BayMetropolitan Authority and the components of the satellite system; (b) anassignment of its rights under its purchase contract for the satellite system;(c) an assignment of its rights under the transponder lease contracts to beentered into with its shareholders and other parties and the revenuestherefrom; and (d) an assignment of the applicable proceeds of insurance to betaken on the satellite system.

* *

***Japanese Yen Debt:***

* *

*JBIC JP¥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 JBIC’s OIL program.  The loan, which was drawn on July 31, 2002, ispayable semi-annually beginning March 21, 2005 and will mature on March 21, 2008.

 

*NEXI**Supported****JP**¥5,615 Million**Syndicated**Term**Loan**Facility*

 

On June 11, 2003, PLDTsigned a JP¥5,615 million syndicated term loan facility supported by NEXI, ofwhich JP¥2,520 million was drawn and JP¥2,205 million was outstanding as atMarch 31, 2005.  The undrawn balance of JP¥3,095 million was cancelled at theend of the Availability Period on December 3, 2004.  This loan is amortizedsemi-annually beginning December 2004 and will mature in June 2008.

 

***PhilippinePeso Debt:***

* *

*Php2,**770**Million Peso Fixed Rate Corporate Notes*

 

Inconnection with PLDT’s service improvement and expansion programs, PLDT hasentered into two loan agreements, pursuant to each of which PLDT issued fixedrate corporate notes in three tranches.  Interest on each tranche is payablesemi-annually.

 

Underthe first loan agreement, PLDT borrowed an aggregate amount of Php1,500 million, of which Php230million matured on November 11, 2002, Php500 millionmatured on November 9, 2004 and Php770 millionwill mature on November 9, 2006.

 

Underthe second loan agreement, PLDT borrowed an aggregate amount of Php1,270 million, of which Php360million matured on June 9, 2003, Php100 million willmature on June 9, 2005 and Php810 millionon June 9, 2010.

* *

*Term Loans*

* *

*JBIC 4 Program of the Development Bank of the**Philippines*

 

Inconnection with the Asia Pacific Cable Network 2 project, PLDT entered into aloan agreement with Citibank, N.A., as facility agent, and a syndicate of banksin the aggregate principal amount of Php1,700million, of which about Php510 million wasoutstanding as at March 31, 2005.  The loan, which is funded under the JBICFacility for Private Sector Development of the Development Bank of the Philippines,will mature on October 26, 2005 and since April 2002 is payable in quarterlyinstallments as set forth below:

 

**Quarterly Payment Number**

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

 

 

Payments 1–7 

3.500%

Payments 8–11

8.875%

Payments 12–15

10.000%

* *

*Secured**Term Loans*

* *

*Php150 Million**Term Loan Facility*

 

On March 4, 2002, ePLDTentered into a three-year loan facility with Philippine Bank of Communicationsamounting to Php150 million.  The loan is payable in seven quarterlyinstallments, with a grace period of one year, beginning year 2003.  The loanfacility was fully drawn on December 31, 2002.  Thequarterly principal payments of Php15 million started in June 2003 with aballoon payment of Php45 million in March 2005.  Interest on this loan isequivalent to 91-day T-bill rate plus 4% per annum payable quarterly inarrears.  The loan is secured by ePLDT’s deed of assignment of receivables of asubsidiary from a foreign customer and an investment in an associate with anoriginal cost of Php629 million.  As at March 31, 2005,the investment in this associate has been fully provided for as disclosed in *Note9 – Investments in Associates – at equity*.  This loan was fully paid as at March 31, 2005.

 

*Php100 Million Term Loan Facility*

 

On March 15, 2004, ePLDT entered into anotherthree-year term loan facility with Asia United Bank amounting to Php100 millionfor the payment of its outstanding short-term bank loan facility and for otherworking capital requirements.  The loan facility was fully drawn as at December 31, 2004.The loan is to be repaid in nine equal quarterly installments starting March2005 with final repayment in March 2007.  Interest on the loan is equivalent to90-day PHIBOR plus 3% per annum payable quarterly in arrears.  The loan issecured by a Mortgage Trust Indenture Agreement, or MTIA, on a parcel of landwith a carrying value of Php279 million as at December 31, 2004.  As at March 31, 2005, theoutstanding balance of this loan amounted to Php88 million, of which Php33million will mature in 2005.

 

*Php149 Million Term Loan Facility*

 

Asat March 31, 2005, Vocativ Systems, Inc., a wholly-owned call centersubsidiary of ePLDT, has an outstanding 5-year term loan facility of Php149million with Asia United Bank for the payment of its additional capitalexpenditures and working capital requirements.  The loan is to be repaid infourteen equal quarterly installments starting April 2006 with final repaymentin July 2009.  Interest on the loan is equivalent to 90-day PHIBOR plus 3% perannum payable quarterly in arrears.  The loan is secured by a MortgageParticipation Certificate against the MTIA between ePLDT and Asia United BankCorporation – Trust and Investments Group dated March 15, 2004 on a parcel ofland, which excludes the buildings and improvements.

 

*Unsecured**Term Loans*

 

*Php1,000 Million Term Loan Facility*

 

On June 14, 2001, Smart signed its GSM Phase 5A financing of Php1,000 million term loan.  Theoutstanding balance under this facility of Php467 million was prepaid on June 28, 2004.

 

*Debt Covenants*

 

Our debt instruments contain restrictive covenants,including covenants that could prohibit us from paying dividends on commonstock under certain circumstances, and require us to comply with specifiedfinancial ratios and other financial tests, calculated in conformity withaccounting principles generally accepted in the Philippines, at relevantmeasurement dates, principally at the end of each quarterly period.  We havecomplied with all of our maintenance ratios as required under our loan covenantsand other debt instruments.  In addition, we are required to comply withcertain ratios for the incurrence of capital expenditures in excess of US$10million and incurrence of indebtedness.

 

Theprincipal factors that can negatively affect our ability to comply withfinancial ratios and other financial tests are depreciation of the pesorelative to the U.S. dollar, poor operating performance of PLDT and itsconsolidated subsidiaries, impairment or similar charges in respect ofinvestments or other long-lived assets that may be recognized by PLDT and itsconsolidated subsidiaries and increases in our interest expenses.  Interestexpense may increase as a result of various factors including issuance of newdebt, the refinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the peso, the lowering of PLDT’s credit ratings or the creditratings of the Philippines, increase in reference interest rates, and generalmarket conditions.  Since approximately 98% of PLDT’s total debt is denominatedin foreign currencies, principally in U.S. dollars, many of these financialratios and other tests are negatively affected by any weakening of the peso.

 

PLDT’s debt instruments contain a number of other negative covenantsthat, subject to certain exceptions and qualifications, restrict PLDT’s abilityto take certain actions without lenders’ approval, including: (a) incurringadditional indebtedness; (b) prepaying other debt; (c) making investments; (d)extending loans; (e) extending guarantees or assuming the obligations of otherpersons; (f) paying dividends or other distributions or redeeming, repurchasingor otherwise acquiring shares of PLDT’s capital stock; (g) disposing of all orsubstantially all of its assets or of assets in excess of specified thresholdsof its tangible net worth; (h) entering into management contracts providing forthe management of its business or operations by a third party; (i) creating anylien or security interest; (j) permitting set-off against amounts owed to PLDT;(k) merging or consolidating with any other company; (l) entering intotransactions with stockholders and affiliates; and (m) entering into sale andleaseback transactions. 

 

Further,certain of PLDT debt instruments contain provisions wherein PLDT may berequired to repurchase or prepay certain indebtedness in case of change incontrol of PLDT.

 

PLDT’s debt instruments also contain customary andother default provisions that permit the lender to accelerate amounts due orterminate their commitments to extend additional funds under the debtinstruments. These default provisions include: (a) cross-defaults andcross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument; in some cases, the cross-default provisionis triggered upon a payment or other default permitting the acceleration ofPLDT’s debt, whether or not the defaulted debt is accelerated.  In other cases,the cross-default provision requires the defaulted loan to be accelerated.  Insome debt instruments, the cross-default provision will be triggered only ifthe principal amount of the defaulted indebtedness exceeds a threshold amountspecified in these debt instruments; (b) failure by PLDT to meet certainfinancial ratio covenants referred to above; (c) the occurrence of any materialadverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender; (d) the revocation, termination or amendment of any of thepermits or franchises of PLDT in any manner unacceptable to the lender; (e) theabandonment, termination or amendment of the project financed by a loan in amanner unacceptable to the lender; (f) the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and (g)other typical events of default, including the commencement of bankruptcy,insolvency, liquidation or winding up proceedings by PLDT.

 

Smart’sdebt instruments contain certain restrictive covenants, including covenantsthat prohibit Smart from paying dividends, redeeming preferred stock, makingdistributions to PLDT or otherwise providing funds to PLDT or any affiliatewithout the consent of its lenders.  Also, Smart’s debt instruments contain certainrestrictive covenants that require Smart to comply with specified financialratios and other financial tests at semi-annual measurement dates.   Smart hasmaintained compliance with all of its financial covenants.  The agreements alsocontain customary and other default provisions that permit the lender toaccelerate amounts due under the loans or terminate their commitments to extendadditional funds under the loans.  These default provisions include: (a)cross-defaults and cross-accelerations that permit a lender to declare adefault if Smart is in default under another loan agreement.  Thesecross-default provisions are triggered upon a payment or other defaultpermitting the acceleration of Smart debt, whether or not the defaulted debt isaccelerated; (b) failure by Smart to comply with certain financial ratiocovenants; (c) any reduction in PLDT’s ownership of Smart’s shares below 51%;(d) any reduction in First Pacific’s and Metro Pacific Corporation’s collectivedirect and/or indirect ownership of PLDT’s common stock below 17.5% of thetotal common stock outstanding; and (e) the occurrence of any material adversechange in circumstances that the lender reasonably believes materially impairsSmart’s ability to perform its obligations under its loan agreements.

 

Asat March 31, 2005, Piltel is not in compliance with the terms ofconvertible bonds with principal amount of US$0.7 million (approximately US$0.9million redemption price at the option of the holders).  Piltel may not be ableto restructure or otherwise pay the claims of its unrestructured debt.However, default on and acceleration of Piltel’s unrestructured indebtednessdoes not create a cross-default under Piltel’s restructured indebtedness or anyindebtedness of PLDT or Smart.

 

The Credit and Omnibus Agreements of Mabuhay Satellite impose negativecovenants which, among others, restrict material changes in Mabuhay Satellite’snature of business and ownership structure, any lien upon or with respect toany of its assets or to any right to receive income, acquisition of capitalstock, declaration and payment of dividends, merger, consolidation and salewith another entity and incurring or guaranteeing additional long-term debtbeyond prescribed amounts.

 

ePLDT’s loan agreement imposes negative covenants which, among otherthings, restrict ePLDT in regard to payment of cash dividends or any otherincome or any capital distribution to PLDT, voluntary suspension of its entirebusiness operations for a period of 60 consecutive days, dissolution of itslegal existence, and creation of any encumbrances on the shares pledged.  Oneof ePLDT’s loan agreement also requires ePLDT to comply with specifiedfinancial ratios and other financial tests at quarterly measurement dates.  Theagreement also contains customary and other default provisions that permit thelender to accelerate amounts due under the loan or terminate their commitmentsto extend additional funds under the loan.  As at March 31, 2005, ePLDT has complied with all of its financial covenants.

 

**Obligations Under Capital Lease**

 

The futureminimum payments for capitalized leases are as follows as at March 31, 2005:

 

**Year**

**(Unaudited)**

** **

(in million pesos)

2005(1)

655

2006

352

2007

235

2008

6

2009

7

2010 and onwards

443

Total minimum lease payments

1,698

Less amount representing interest

736

Present value of net minimum lease payments

 962

Less capital lease maturing within one year

448

Long-term portion of obligations under capital lease

 514

 

*(1)**April 1, 2005**through**December 31, 2005**.*

* *

*MunicipalTelephone Projects*

 

In 1993,PLDT entered into two lease agreements with the Philippine Department ofTransportation and Communications, or DOTC, covering telecommunicationsfacilities in Bohol and Batangas established under the Municipal TelephoneAct.  Under these agreements, PLDT was granted the exclusive right to performtelecommunications management services, to expand services, and to promote theuse of the DOTC-contracted facilities in certain covered areas for a period of15 years.  Title to the properties shall be transferred to PLDT upon expirationof the lease term.  As at March 31, 2005, PLDT’s aggregate remaining obligationunder this agreement was approximately Php858 million.  In case ofcancellation, PLDT is liable to pay Php100 million under each of the twocontracts as liquidated damages.

 

On June 1, 2004, PLDT served the DOTC a notice of termination of thelease agreement in respect of the telecommunications system in Bohol whichstate of deterioration, obsolescence and disrepair have made it impossible forPLDT to continue managing, operating, and maintaining the system.  Since 2002,PLDT has been advising the DOTC of the need to review the viability of thesystem as it has infused more than Php200 million for upgrades and maintenanceto keep the system operable.  Further, the enactment of R.A. No. 7925, whichnegated the DOTC’s warranty to grant PLDT the exclusive right to providetelecommunication services in the areas stipulated, prevented PLDT fromachieving the originally projected profitability thereby rendering itimpossible for PLDT to continue fulfilling its obligation under the leaseagreement.  Although several discussions have been held since then to seek amutually acceptable agreement, no amenable arrangement has been reached.  On June 30, 2004, the DOTC advised PLDT that the request for termination of the leaseagreement in Bohol has been referred to the Department of Justice, or DOJ, asgovernment agencies are required to refer all interpretation of contracts andagreements to the DOJ secretary as attorney-general of the nationalgovernment.  As at the date of this report, negotiations are on-going in effortsto reach a mutually beneficial arrangement for both parties.  As at March 31,2005, the net book value of the telecommunications system in Bohol, includingPLDT’s additional capital expenditure relating to the telecommunicationssystem, and corresponding capital lease obligation amounted to Php38 millionand Php735 million, respectively.

 

*Other Long-term Capital Lease Obligations*

 

The PLDT Group has various long-term lease contractsfor a period of three years covering various office equipment.  In particular,Smart and Piltel have capital lease obligations aggregating Php839 million asat March 31, 2005 in respect of office equipment and facilities.

 

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

 

**PreferredStock Subject to Mandatory Redemption**

 

The movements of PLDT’s preferred stock subject tomandatory redemption follow:

 

 

**March 31, 2005****(Unaudited)**

December 31, 2004 (Audited)

 

**Series V**

**Series VI**

**Series VII**

**Total**

Series V

Series VI

Series VII

Total

 

(in million pesos)

Balance at beginning of period

**2,104**

**6,242**

**6,029**

**14,375**

2,053

5,435

5,247

12,735

Conversion

**–**

**(10)**

** **

**(10)**

(339)

(18)

–

(357)

Accretion

**93**

**202**

**36**

**331**

390

751

457

1,598

Revaluation

**–**

**(178)**

**(424)**

**(602)**

–

74

325

399

Balance at end of period

**2,197**

**6,256**

**5,641**

**14,094**

2,104

6,242

6,029

14,375

 

Asat March 31, 2005, PLDT had issued 3 million shares of Series VConvertible Preferred Stock, 5 million shares of Series VI ConvertiblePreferred Stock and 4 million shares of Series VII Convertible Preferred Stockin exchange for Series K Class I Convertible Preferred Stock of Piltel,pursuant to the debt restructuring plan of Piltel.  Shares of Series V, VI andVII Convertible Preferred Stock are entitled to receive annual dividends ofPhp18.70 per share, US$0.397 per share and JP¥40.7189 per share, respectively.Each share of Series V, VI and VII PLDT Convertible Preferred Stock isconvertible at any time at the option of the holder into one PLDT commonshare.  On the date immediately following the seventh anniversary of the issuedate of the Series V and Series VI Convertible Preferred Stock and on theeighth anniversary of the issue date of the Series VII Convertible Preferred Stock,the remaining outstanding shares under these series will be mandatorilyconverted to PLDT common shares.  Under a put option exercisable for 30 days,holders of common shares received on mandatory conversion will be able torequire PLDT to purchase such PLDT common shares for Php1,700 per share,US$36.132 per share, and JPY4,071.89 per share for Series V, VI and VII,respectively.

 

PLDT’sConvertible Preferred Stock Series V, VI and VII were designated as compoundinstruments consisting of liability and equity components.  The total fairvalue of the Convertible Preferred Stock Series V, VI and VII was determined atissue date, of which the aggregate fair value of the liability component of theissued Series V, VI and VII Convertible Preferred Stock as at date of issuanceis included under the “Interest-bearing Financial Liabilities” account in theconsolidated balance sheets.  The residual amount was assigned as the equitycomponent.

 

Thedifference between the aggregate fair value of the Series V, VI and VIIConvertible Preferred Stock at issue date and the aggregate redemption value isaccreted over the period up to the call option date using the effectiveinterest rate method.  Accretions added to “Preferred Stock Subject toMandatory Redemption” and charged to interest for the three months ended March31, 2005 and 2004 amounted to Php331 million and Php355 million, respectively.

 

“PreferredStock Subject to Mandatory Redemption” amounted to Php14,094 million andPhp14,375 million as at March 31, 2005 and December 31, 2004, respectively, afterrevaluation of Series VI and VII to the exchange rates at balance sheet datesand after giving effect to the above accretions, conversions and additionalissuances.  As at March 31, 2005 and December 31, 2004, 1,068,518 shares and 1,060,940shares, respectively, of the Convertible Preferred Stock have been convertedinto PLDT common shares.  The aggregate redemption value of the outstandingSeries V, VI and VII Convertible Preferred Stock amounted to Php21,126 millionand Php22,016 million as at March 31, 2005 and December 31, 2004, respectively.

 

Thecorresponding dividends on these shares charged as interest expense amounted toPhp67 million and Php58 million for the three months ended March 31, 2005 and2004, respectively.

 

**NotesPayable**

 

ParlanceSystems, Inc., a wholly-owned call center subsidiary of ePLDT has availed of alocal bank’s Export Packing and Credit Loan facility amounting to US$950,000 asat March 31, 2005.  The said facility can be availed by an export Letter ofCredit with an 80% loan value.  It has a 90-day term from the date it wasgranted by the bank and is supported by a Deed of Assignment of Receivables.Interest is based on the prevailing bank rate to be collected in arrears on amonthly basis.

 

 

 

**18. Other Noncurrent Liabilities**

 

This account consists of:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Capital expenditures under long-term financing

**5,946**

 

3,970

Prepayment received under receivable purchase facility (Note 14)

**1,403**

 

1,644

Asset retirement obligations (Note 8)

**680**

 

638

Unearned revenues

**81**

 

85

Others

**642**

 

822

 

**8,752**

 

7,159

 

 

 

**19. AccruedExpenses and Other Current Liabilities**

 

This account consists of:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Accrued utilities and related expenses

**4,503**

 

4,457

Accrued interest on various loans (Notes 17 and 20)

**2,662**

 

2,235

Accrued taxes and related expenses

**1,502**

 

2,886

Accrual for payment for unused sick leave and other employee benefits

**1,494**

 

1,624

Payable in installment purchase of equity investment

**1,339**

 

1,561

Others

**2,320**

 

2,048

 

**13,820**

 

14,811

 

 

 

**20. RelatedParty Transactions**

 

*a.   Air Time Purchase Agreement between PLDT and AILand Related Agreements*

* *

InMarch 1997, PLDT entered into a National Service Provider, or Founder NSP, AirTime Purchase Agreement with PT Asia Cellular Satellite (assigned andtransferred to AIL), as amended in December 1998, under which PLDT was grantedthe exclusive right to sell ACeS services in the Philippines.  In exchange, theAir Time Purchase Agreement states that PLDT has to purchase from PT AsiaCellular Satellite at least US$5 million worth of air time annually over tenyears, commencing on the commercial operations date, which has been set as January 1, 2002. 

 

In the event that PT Asia CellularSatellite’s aggregate billing revenue is less than US$45 million in any givenyear, the Air Time Purchase Agreement states that PLDT has to make supplementalair time purchase payments not to exceed US$15 million per year during theten-year term.

 

PLDT and the other founder NSPs areendeavoring to amend the Air Time Purchase Agreement due to the occurrence ofpartial satellite loss, changes in the primary business of ACeS and otherevents affecting the business.

 

In March 2003, PLDT, together with theother founder NSPs, entered into a Standstill Agreement with AIL suspending theapplication and enforcement of the minimum and supplemental air time paymentsunder the original Air Time Purchase Agreement.  In lieu of these payments, theparties agreed that AIL shall provide PLDT and the other founder shareholders,with unlimited use of air time for the year 2003 in exchange for a fixed fee inthe amount of US$3.8 million for PLDT.  Moreover, PLDT was also obliged topurchase from AIL 13,750 satellite phone units for the year 2003 at US$395F.O.B. per unit, subject to quarterly price adjustments.  The parties to theStandstill Agreement also agreed to negotiate in good faith and use their bestefforts to reach an agreement on a revised Air Time Purchase Agreement beforeNovember 15, 2003 that will cover, among other matters, the amended minimum andsupplemental air time payment provisions subject to the approval of AIL’screditors.

 

On February 10, 2004, notwithstanding the on-goingnegotiations, AIL advised PLDT of the termination of the Standstill Agreementand the reinstatement of the terms under the original Air Time PurchaseAgreement following the lapse of the deadline set in the Standstill Agreementfor the establishment of a revised Air Time Purchase Agreement.  

 

Negotiationsare continuing with the relevant parties towards an amicable settlement of thismatter.  See *Note 23 – Provisions and Contingencies*for furtherdiscussion.  Prior to further negotiation of definitivetransaction agreement among the parties, PLDT deposited US$21.5 million in anescrow account on March 28, 2005 which was to be disbursed upon the executionand delivery of mutually agreeable definitive transaction agreement on orbefore April 29, 2005.  The parties involved had not reached an agreement todate and on May 2, 2005, PLDT has formally requested for the return of amountdeposited.  Copies of the necessary banking instructions have been received bythe escrow bank, but only upon receipt of the original instructions will theabovementioned funds be returned.

 

PLDTalso entered into a Founder NSP Operating Agreement with PT Asia CellularSatellite on March 12, 1997, under which PLDT may:

 

•        authorize distributors to resellACeS services in the Philippines upon prior approval from PT Asia Cellular Satellite;and

 

•        appoint agents to solicit and billPLDT’s or its authorized distributors’ subscribers for ACeS services and tosell terminals on behalf of PLDT.

 

Underan Assignment and Assumption Agreement dated December 29, 1998, PT AsiaCellular Satellite agreed to assign and transfer to AIL of PT Asia CellularSatellite’s rights under the Founder NSP Air Time Purchase Agreement andFounder NSP Operating Agreement.

 

Underan Acknowledgment of Assignment of Air Time 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 Air TimePurchase Agreement to P.T. Bank Internasional Indonesia, as security agent, forthe benefit of the secured parties under the Security Agreement dated December29, 1998, which was executed in connection with the Amended and Restated CreditAgreement dated December 29, 1998 among PT Asia Cellular Satellite, AIL, P.T.Bank Internasional Indonesia and various banks.

 

OnSeptember 30, 2002, PT Asia Cellular Satellite, AIL, as guarantor, P.T. BankInternasional 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 30, 2012.

 

*b.   Transactions with MajorStockholders, Directors and Officers*

 

Transactionsto which PLDT or its subsidiaries were a party, in which a director or keyofficer or owner of more than 10% of the common stock of PLDT, or any member of theimmediate family of a director or key officer or owner of more than 10%of the common shares of PLDT had a direct or indirect material interest in PLDTor its subsidiary, as at March 31, 2005 and December 31, 2004 and for the threemonths ended March 31, 2005 and 2004 are as follows:

 

*1.   Agreements with NTTCommunications and/or its Affiliates*

 

PLDTis a party to the following agreements with NTT Communications and/or itsaffiliates:

 

•        *Advisory Services Agreement*.   On March 24, 2000, PLDT entered into an agreementwith NTT Communications, as amended on December 31, 2003, under which NTTCommunications provides PLDT with technical, marketing and other consultantsfor various business areas of PLDT starting April 1, 2000;

 

•        *Domestic Fiber Optic NetworkSubmerged Plant Maintenance Agreement*.On July 4, 2000, PLDT entered into an agreement with NTT WorldEngineering Marine Corporation, or NTT WEMC, for the submarine cable repair andother allied services for the maintenance of PLDT’s domestic fiber-opticnetwork, or DFON, submerged plant for a period of five years up to July 4, 2005.  Underthe agreement, PLDT shall pay NTT WEMC a fixed annual standing charge of US$2million, excluding cost for the use of a remotely operated submersible vehicleat US$5,000 for every day of use and repair cost computed at US$19,000 per dayof actual repair;

 

•        *Arcstar Licensing Agreement andArcstar Service Provider Agreement.*OnMarch 24, 2000, PLDT entered into an agreement with NTT WorldwideTelecommunications Corporation under which PLDT markets managed data and otherservices under NTT Communications’ “Arcstar” brand to its corporate customersin the Philippines.  PLDT also entered into a Trade Name and TrademarkAgreement with NTT Communications under which PLDT has been given the right touse the tradename “Arcstar” and its related trademark, logo and symbols, solelyfor the purpose of PLDT’s marketing, promotional and sales activities for theArcstar services within the Philippines; and

 

•        *Conventional InternationalTelecommunications Services Agreement*.On March 24, 2000, PLDT entered into an agreement with NTTCommunications under which PLDT and NTT Communications agreed to cooperativearrangements for conventional international telecommunications services toenhance their respective international businesses.

 

Total fees under these agreements amounted to Php81million and Php70 million for the three months ended March 31, 2005 and2004, respectively.  As at March 31, 2005 and December 31, 2004, outstanding obligations ofPLDT amounted to Php52 million and Php49 million, respectively.

 

*2.   Agreement between Smart and**Asia**Link B.V., or ALBV.*Smart has anexisting Technical Assistance Agreement with ALBV for the latter to providetechnical support services and assistance in the operations and maintenance ofcellular business 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.  InJanuary 2003, the agreement was amended, reducing the technical service fees tobe paid by Smart to ALBV to 1% of net revenues effective January 1, 2003.  On February 18, 2004, Smartand ALBV entered into a renewal of the technical service agreement extendingthe effectivity of the terms of the agreement to February 23, 2008.  Furthermore,in view of the acquisition by Smart of Piltel Series K Class I ConvertiblePreferred Stock held by PLDT, the parties agreed to make the consolidated netrevenues of Smart the basis for the computation of the 1% royalty payable bySmart to ALBV, effective from January 1, 2005.  

 

Smart also has an existing Services Agreement withALBV for a period of 25 years starting January 1, 1999,which shall automatically expire unless renewed by mutual agreement of bothparties.  Under the agreement, ALBV provides advice and assistance to Smart insourcing capital equipment and negotiating with international suppliers,arranging international financing and other services therein consistent withand for the furtherance of the objectives of the services.  Service agreementfees were paid for the whole 25-year period.

 

ALBVis a subsidiary of the First Pacific Group.

 

Total fees under these agreements amounted to Php123million and Php107 million for the three months ended March 31, 2005 and2004, respectively.  Outstanding obligations of Smart under the TechnicalService Agreement amounted to Php246 million and Php267 million as at March 31, 2005 and December 31, 2004,respectively.

 

*3.   Agreements relating to insurance companies.*  Gotuaco del Rosario and Associates, or Gotuaco, actsas the broker for certain insurance companies to cover certain properties ofthe PLDT Group.  Insurance premiums are remitted to Gotuaco and the broker’sfees are settled between Gotuaco and the insurance companies.  In addition,PLDT has an insurance policy with Malayan Insurance Co., Inc., or Malayan,wherein premiums are directly paid to Malayan.  Total payments to Gotuaco andMalayan covering the 12-month period ending July 31, 2005 amounted to Php452million.  Two directors of PLDT have a direct/indirect interests in or serve asa director/officer of Gotuaco and Malayan.

 

***Compensation of Key Management Personnel of the PLDTGroup***

 

The aggregate compensation and benefits paid to thechief executive officer and other key advisors and officers, as a group, forthe three months ended March 31, 2005 and 2004 amounted to approximately Php133million and Php184 million, respectively.

 

Each of the directors, including the members of theadvisory board of PLDT, is entitled to a director’s fee in the amount ofPhp125,000 for each meeting of the board attended, except Manuel V. Pangilinan,our Chairman, who has waived his right to receive a director’s fee.  Each ofthe members or advisors of the audit, executive compensation, nomination andfinance committees is entitled to a fee in the amount of Php50,000 for eachcommittee meeting attended.

 

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

 

 

 

**21. EmployeeBenefits**

 

***ExecutiveStock Option Plan, or ESOP***

 

On April 27, 1999 and December 10, 1999, the Board of Directors and stockholders,respectively, approved the establishment of an ESOP and the amendment of theSeventh Article of the Articles of Incorporation of PLDT denying the pre-emptiveright of holders of common stock to subscribe for any issue of up to 1,289,745common stock pursuant to the ESOP.  The ESOP covers management executives,which include officers with rank of Vice President up to the President,executives with the rank of Manager up to Assistant Vice President, andadvisors/consultants engaged by PLDT.  The ESOP seeks to motivate optionholders to achieve PLDT’s goals, reward option holders for the creation ofshareholder value, align the option holders’ interests with those of thestockholders of PLDT and retain the option holders to serve the long-terminterests of PLDT.  The ESOP is administered by the Executive CompensationCommittee of the Board of Directors.  About 1.3 million common stock of PLDThave been reserved as underlying shares of options under the ESOP in 1999. 

 

Movementsin the number of stock option plan outstanding are as follows:

 

 

**March 31,  2005****(Unaudited)**

 

December 31, 2004 (Audited)

Balance at beginning of period

**536,589**

 

900,118

Exercised shares*

**(103,282)**

 

(336,745)

Cancelled

**–**

 

(26,784)

Balance at end of period

**433,307**

 

536,589

 

****Based on date ofpayment of exercised shares*

 

Since thedate of the grant on December 10, 1999 up to December 31, 2003, there were no officers or executives who exercised their options.  Instead, there werecancellations of options due to officer resignations and retirements ofofficers and executives.

 

As at March 31, 2005, 440,027 shares were exercised by certain officers and executives at anexercise price of Php814 per share.  Of the 440,027 exercised shares, 6,988shares were unissued as at March 31, 2005.

 

Thefair value of the ESOP plan was estimated at the date of grant using an optionpricing model, which considered annual volatility of 40%, risk-free interestrate, expected life of option, exercise share price of Php814 and weightedaverage share price Php870 for the 1999 Grant and Php315 for the 2002 Grant asat valuation date.  Total fair value of shares granted amounted to Php359million as at March 31, 2005 and December 31, 2004.  The fair value of the optionsrecognized as an expense for the three months ended March 31, 2004 amounted to Php4million and none for the three months ended March 31, 2005.  

*** ***

***LTIP***

 

On August 3, 2004,PLDT’s Board of Directors approved the establishment of an LTIP for eligiblekey executives and advisors of PLDT and its subsidiaries.  The LTIP is afour-year cash plan covering the period January 1, 2004to December 31, 2007.  The awards payment at the end of the four-yearperiod (without interim payments) is contingent upon the achievement of theapproved target increase in PLDT’s common share price by the end of the planperiod and the cumulative consolidated net income target for the plan period.The target increase in the PLDT base share price, which is the average of theclosing prices of PLDT shares ten trading days before or after December 31, 2003, isapproximately 15% per annum compounded for the plan period.

 

The fairvalue of the LTIP was estimated using an option pricing model, which consideredannual stock volatility, risk-free interest rate, expected life of option offour years and weighted average share price Php1,360 as at valuation date.  Thefair value of the options recognized as an expense for the three months endedMarch 31, 2005 and 2004 amounted to Php137 million and Php109 million,respectively.

 

***Pension***

 

*DefinedBenefit Plans*

 

Wehave defined benefit pension plans, covering substantially all of ouremployees, except Smart, of which require contributions to be made to separateadministrative fund.

 

Our actuarial valuation is done on an annual basis.  Based on the latestactuarial valuation, the actual present value of accrued liability, net ofpension cost and average assumptions used in developing the valuation are asfollows:

 

 

(in million pesos)

Benefit obligation as at December 31, 2004

6,924

Fair value of plan assets as at December 31, 2004

4,449

Funded status

2,475

Unrealized net transition obligation

(120)

Unrecognized net actuarial gain

(176)

Accrued benefit cost as at December 31, 2004

2,179

Accrual of pension cost during the period

190

Contributions

(42)

Accrued benefit cost as at March 31, 2005

2,327

 

Net pension cost was computed as follows:

 

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Components of net periodic benefit cost:

** **

 

 

Service cost

**111**

 

101

Interest cost

**172**

 

135

Actual return on plan assets

**(119)**

 

(94)

Amortizations of unrecognized net transition obligation

**14**

 

14

Net periodic benefit cost

**178**

 

 156

 

Theweighted average assumptions used to determine pension benefits are as follows:

 

Discount rate

** **

 

9%

Rate of increase in compensation

** **

 

7%

Rate of return on plan assets

** **

 

9%

 

Asat March 31, 2005, our plan assets include investments in shares ofstock of PLDT and Piltel with fair values aggregating Php1,342 million, whichrepresent about 22% of our beneficial trust fund’s net assets available forplan benefits.

 

*DefinedContribution Plan*

 

Smartmaintains a trustee-managed, tax-qualified, multi-employer plan coveringsubstantially all permanent and regular employees.  The plan has a definedcontribution format wherein Smart’s obligation is limited to specifiedcontribution to the plan.  It is being financed by the participating companies(Smart and its subsidiary, I-Contacts, Inc.) and employees’ contribution isoptional.

 

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

 

(in million pesos)

Expense recognized for defined benefit plans

**178**

 

156

Expense recognized for defined contribution plan

**12**

 

24

 

**190**

 

 180

 

 

**22. Contractual Obligations and CommercialCommitments**

 

***Contractual Obligations***

 

The following table discloses our contractualobligations outstanding as at March 31, 2005:

 

 

**Payments Due by Period**

 

**Total**

**Within 1 year**

**2****-3**

**years**

**4****-5**

**years**

**After 5 years**

 

(in million pesos)

 

 

 

 

 

 

Long-term debt(1)

145,971

22,978

48,137

21,080

53,776

Long-term lease obligations: 

 

 

 

 

 

Operating lease

5,278

1,284

2,202

732

1,060

Capital lease

1,698

708

533

13

444

Unconditional purchase obligations(2)

11,595

4,195

2,199

2,190

3,011

Other long-term obligations

21,126

–

3,283

17,843

–

Total contractual obligations 

**185,668**

**29,165**

**56,354**

**41,858**

**58,291**

 

*(1)**Before deducting unamortized debt discount and debtissuance costs.*

*(2)**Based on the original Air Time Purchase Agreementwith AIL.*

*** ***

*Long-term Debt*

*** ***

For a discussion of our long-term debt, see *Note 17*– *Interest-bearing Financial Liabilities*.

 

*Long-termOperating Lease Obligations*

 

*DomesticFiber Optic Network Submerged Plant Maintenance Agreement*.   As discussed in *Note 20 – Related PartyTransactions*, PLDT entered into an agreement with NTT World EngineeringMarine Corporation, or NTT WEMC, on July 4, 2000,for the submarine cable repair and other allied services in relation to themaintenance of PLDT’s DFON submerged plant for a period of five years up to July 4, 2005.  Underthis agreement, PLDT shall pay NTT WEMC a fixed annual standing charge of US$2million, excluding cost for the use of a remotely-operated submersible vehicleat US$5,000 for every day of use and repair cost computed at US$19,000 per dayof actual repair.  As at March 31, 2005, PLDT’s aggregate remaining obligation under thisagreement was approximately Php38 million.

 

*Digital Passage Service Contracts*.   PLDT hasexisting Digital Passage Service Contracts with foreign telecommunicationadministrations for several dedicated circuits to various destinations for tento 25 years expiring at various dates.  As at March 31, 2005, PLDT’s aggregateremaining obligation under these contracts amounted to approximately Php26 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 this agreement, Mobius is also required toprovide maintenance services for a period of one year at no additionalmaintenance charge.  PLDT may purchase maintenance services upon expiration ofthe first year for a fee of 15% of the current published license fee.  As at March 31, 2005,PLDT’s aggregate remaining obligation under this agreement was approximatelyPhp40 million.

 

*Other Long-term Operating Lease Obligations*.   The PLDT Group has various long-term lease contractsfor periods ranging from two to ten years covering certain offices, warehouses,cell sites telecommunication equipment locations and various office equipment.In particular, Smart has lease obligations aggregating Php3,032 million as at March 31, 2005 inrespect of office and cell site rentals with over 2,000 lessors nationwide.

 

*Long-termCapital Lease Obligations*

 

For a discussion of our long-term capital leaseobligations, see *Note 17 – Interest-bearing Financial Liabilities*.

 

*UnconditionalPurchase Obligations*

 

*AirTime Purchase Agreement with AIL.*Asdiscussed in *Note 20 – Related Party Transactions*, PLDT is a party to aFounder NSP Air Time Purchase Agreement with AIL in March 1997, which wasamended in December 1998, under which PLDT is granted the exclusive right tosell AIL services in the Philippines.  In exchange, the Air Time PurchaseAgreement states that PLDT has to purchase from AIL a minimum of US$5 millionworth of air time annually over ten years commencing on the date of the commercialoperations of the Garuda I satellite.  In the event AIL’s aggregate billingrevenue is less than US$45 million in any given year, the Air Time PurchaseAgreement also states that PLDT has to make supplemental air time purchasepayments not to exceed US$15 million per year during the ten-year term.

 

PLDTand the other founder NSPs are endeavoring to amend the Air Time PurchaseAgreement due to the occurrence of partial satellite loss, changes in theprimary business of ACeS and other events affecting the business.

 

InMarch 2003, PLDT, together with the other founder NSPs, entered into aStandstill Agreement with AIL suspending the application and enforcement of theminimum and supplemental air time payments under the original Air Time PurchaseAgreement.  In lieu of these payments, the parties agreed that AIL shallprovide PLDT and the other founder shareholders, with unlimited use of air timefor the year 2003 in exchange for a fixed fee in the amount of US$3.8 millionfor PLDT.  PLDT is also obliged to purchase from AIL 13,750 satellite phoneunits for the year 2003 at US$395 F.O.B. per unit, subject to quarterly priceadjustment.  The parties to the Standstill Agreement also agreed to negotiatein good faith and use their best efforts to reach agreement on a revised AirTime Purchase Agreement before November 15, 2003 that will cover, among others,the amended minimum and supplemental air time payment provisions subject to theapproval of AIL’s creditors.

 

Asat March 31, 2005, PLDT’s aggregate remaining minimum obligation underthe original Air Time Purchase Agreement was approximately Php11,574 million.Negotiations are continuing with the relevant parties towards an amicablesettlement of this matter.  See *Note 20 – Related Party Transactions* and*Note 23 – Provisions and Contingencies*for further details relating tothe Air Time Purchase Agreement with AIL.  Prior to further negotiation ofdefinitive transaction agreement among the parties, PLDT deposited US$21.5million in an escrow account on March 28, 2005 which was to be disbursed uponthe execution and delivery of mutually agreeable definitive transactionagreement on or before April 29, 2005.  The parties involved had not reached anagreement to date and on May 2, 2005, PLDT has formally requested for the return of amountdeposited.  Copies of the necessary banking instructions have been received bythe escrow bank, but only upon receipt of the original instructions will theabovementioned funds be returned.

 

*International Affiliate Agreement with VeriSign, Inc.,or VeriSign*.   On September 15, 2000,ePLDT entered into an agreement with VeriSign for the non-exclusive,non-transferable right and license to use the VeriSign software, brand andCertification Practice Statement for the purpose of approving, issuing,suspending or revoking digital certificates for users of the internet orsimilar open systems in the Philippines for a period of seven years.  Under this agreement,ePLDT is required to pay VeriSign a certain percentage of the revenue derivedfrom the services subject to minimum annual royalty payments aggregating toUS$11 million, which was subsequently reduced to US$1 million, for theseven-year contract period.  In addition, ePLDT was required to pay an annualsupport fee of US$0.5 million during the first year and US$0.3 million in eachyear thereafter.  

 

EffectiveJuly 1, 2003, VeriSign has agreed to amend the agreement and issued Addendum 6to write-off all past due invoices and payments owed to VeriSign, which wereinvoiced or scheduled to be invoiced under the agreement prior to this Addendum6.  All royalty payments and annual support fees due through June 2003 will bepart of the write-off in the amount of US$0.8 million.  For contract year 4(September 2003 to August 2004), the annual support fee will be reduced from US$0.3 million to US$40,000and for contract years 5-7 (September 2004 to August 2007) from US$0.3 millionto US$0.16 million.  In addition, VeriSign agreed to reduce the affiliaterevenue sharing rates from 50% of suggested retail price to 25% of suggestedretail price for both enterprise and internet products for 12 months startingJuly 2003 and negotiable thereafter.  

 

EffectiveJuly 1, 2004, VeriSign has agreed to amend the Agreement andissued Addendum 8 as extension of Addendum 6.  Annual support fee for year 5(September 2004 to August 2005) will remain at US$40,000 and affiliate revenuesharing rates will remain at 25%.  As at March 31, 2005,ePLDT’s aggregate remaining minimum obligation under this agreement wasapproximately Php17 million pertaining to annual support fee.

 

*License Purchase Agreement with I-Contact SolutionsPte. Ltd.*  On April 2, 2003, iPlusIntelligent Network Inc., or iPlus, a wholly-owned subsidiary of ePLDT and thePhilippines’ pioneer in IP-based IT response center, entered into anApplication Services Provider, or ASP, and Reseller Contract with I-ContactSolutions Pte. Ltd., or I-Contact, of Singapore.  Under the agreement, iPlus will purchase licensesof the CosmoCall Universe TM IP-based contact center solution.  CosmoCallUniverse supports multi-channel customer interactions including telephone, webchat, web voice, web video, web collaboration, e-mail and voicemail in one highcapacity, high availability, multi-tenant platform.  CosmoCall Universe is acomplete, unified contact center suite that includes ACD, IVR, CTI, predictivedialing, multimedia recording and a complement of other managementapplications.  The aggregate value of these licenses is US$2.1 million andthese licenses will be delivered quarterly over a two-year period.  Further tothe agreement, I-Contact will appoint iPlus as the exclusive reseller and ASPfor the Philippine market and will provide iPlus with all the necessary supportin terms of sales, marketing, and technical services.  Effective March 30, 2004,I-Contact has agreed to amend the agreement and waived all financialobligations and committed seats requirement over the two-year period.  iPluswill pay all its remaining obligations pertaining only to the 300 seatsdelivered by I-Contact.  As at March 31, 2005, iPlus has paid all its obligationsto I-Contact.

 

*OtherUnconditional Purchase Obligations.*The PLDT Group has various purchase contracts for periods ranging from two tothree years covering the use of a fraud management system, satellite hub andremote very small aperture terminal, or VSAT, network systems.

* *

*Other Long-term Obligations*

 

*Mandatory Conversion and Purchase of Shares*.   As discussed in *Note 9 – Investments inAssociates – at equity*and *Note 17 – Interest-bearing FinancialLiabilities*, as at March 31, 2005, PLDT had issued a total of 3 millionshares of Series V Convertible Preferred Stock, 5 million shares of Series VIConvertible Preferred Stock and 4 million shares of Series VII ConvertiblePreferred Stock in exchange for Series K Class I Convertible Preferred Stock ofPiltel, pursuant to the debt restructuring plan of Piltel.

 

Eachshare of Series V, VI and VII Convertible Preferred Stocks is convertible atany time at the option of the holder into one PLDT common share.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stocks and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to PLDTcommon shares.  Under a put option exercisable for 30 days, holders of commonshares received on mandatory conversion will be able to require PLDT topurchase such PLDT common shares for Php1,700 per share, US$36.132 per share,and JPY4,071.89 per share for Series V, VI and VII, respectively.

 

As atMarch 31, 2005, 515,818 shares of Series V Convertible Preferred Stock and552,700 shares of Series VI Convertible Preferred Stock had been converted toPLDT common shares.  The aggregate value of the put option based on outstandingshares as at March 31, 2005 was Php21,126 million, of which Php13,131 millionis payable on June 4, 2008 and Php7,995 million on June 4, 2009, if all of theoutstanding shares of Series V, VI and VII Convertible Preferred Stocks weremandatorily converted and all the underlying common shares were put to PLDT.The market value of the underlying shares of common stock was Php14,944million, based on the market price of PLDT common shares of Php1,385 per shareas at March 31, 2005.

 

***Commercial Commitments***

 

As at March 31, 2005, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php1,639 million.These commitments will expire within one year.

 

 

 

**23. Provisionsand Contingencies**

 

*NTCsupervision and regulation fees, or SRF*

 

Since1976, PLDT has received assessments from NTC for permit, SRF and other chargespursuant to Section 40 of Commonwealth Act 146, otherwise known as the PublicService Act.  As at March 31, 2005, PLDT has paid, since 1994, a total amountof Php1,718 million in SRF, of which Php1,508 million was paid under protest.

 

PLDTis contesting the manner by which these assessments were calculated and thebasis for such calculations.  The case is now with the Supreme Court and uponthe rules and practice of court, stands submitted for decision.

 

Smartand Piltel have similarly received assessments from NTC for permit, SRF andother charges which were paid under protest.  Total payments amounted to Php122million each in 2004 and 2003.

 

We have made a reasonable estimate of the amountnecessary to pay or settle the contested assessment in the event of anunfavorable judgment against us and have made the appropriate provisions in ourunaudited consolidated financial statements as at March 31, 2005.

 

*Local business andfranchise tax assessments*

 

PLDT is presently a party to several cases involvingthe issue of exemption of PLDT from local franchise and business taxes.  PLDTbelieves, based on the opinion of its legal counsel, that it is exempt frompayment of local franchise and business taxes. 

 

TheLocal Government Code of 1991, or R.A. No. 7160, which took effect on January 1, 1992,extended to local government units, or LGUs, power to tax businesses withintheir territorial jurisdiction granted under Batas Pambansa No. 337 andwithdrew tax exemptions previously granted to franchise grantees under Section12 of R.A. No. 7082. 

 

PLDTbelieves, based on the opinion of its legal counsel, that PublicTelecommunications Policy Act, or R.A. No. 7925, which took effect on March 16,1995, and the grant of local franchise and business taxes exemption privilegesto other franchise holders subsequent to the effectivity of R.A. No. 7160,implicitly restored its local franchise and business taxes exemption privilegeunder Section 12 of R.A. No. 7082, or the PLDT Franchise pursuant to Section 23thereof or the quality of treatment clause. 

 

To confirm this position, PLDT sought and obtained on June 2, 1998 a rulingfrom the Bureau of Local Government Finance, or BLGF, of the PhilippineDepartment of Finance, which ruled that PLDT is exempt from the payment oflocal franchise and business taxes imposable by LGUs under R.A. No. 7160.

 

By virtueof the BLGF Ruling, PLDT stopped paying local franchise and business taxesstarting with the fourth quarter of 1998 and has filed with certain LGUs claimsfor tax refund covering the period from the second quarter of 1995 to the thirdquarter of 1998.  PLDT has received assessments for local franchise andbusiness tax from several cities and provinces following PLDT’s decision tostop payment of local franchise and business taxes.  

 

Followinga decision of the Supreme Court on March 25, 2003, a judgment in the amount ofPhp4 million against PLDT involving the City of Davao became final andexecutory on April 9, 2003, pursuant to which PLDT was declared not exempt fromthe local franchise tax.  Although PLDT believes that it is not liable to paylocal franchise and business taxes, PLDT has taken steps to arrive atcompromise settlements with several LGUs in order to maintain and preserve itsgood standing and relationship with these LGUs.  PLDT has paid a total amountof Php400 million as at March 31, 2005 for local franchise tax covering up toend of 2004 to certain LGUs who have agreed to a compromise settlement. 

 

PLDTcontinues to contest remaining assessments amounting to Php3.7 million, anumber of which were based on the gross revenues of PLDT derived from itsoperations within the entire Philippines.  PLDT claims that assuming that it isliable for local franchise tax, R.A. No. 7160 provides that local franchise taxshall be based on the gross receipts of the preceding year received orcollected for services rendered within the jurisdiction of the taxingauthority.  Therefore, the use by some LGUs of gross revenues as the basis forcomputation of franchise tax is in gross violation of the law because it pertainsto all income earned regardless of whether it was received or not, unlike grossreceipts which are essentially the amount of money or its equivalent actuallyor constructively received.  Moreover, gross revenues refer to all incomeearned by PLDT within and outside the jurisdiction of the local taxingauthority; thus, the use thereof as a basis of computation will exceptionallyoverstate the franchise tax.

 

In apetition recently filed with the Supreme Court involving another LGU, PLDT hasappealed to the Supreme Court for a re-examination of its decision in the Cityof Davao case in light of the strong dissenting opinion in that case concurredin by four (4) other Justices of the Supreme Court.

 

Smart has,likewise, received assessments for local franchise and business taxes fromcertain cities and provinces in the aggregate amount of Php313 million, whichSmart continues to contest.  Smart believes, based on the opinion of its legalcounsel, that Smart is not liable to pay the local franchise and business taxesby virtue of (i) the opinion issued by the BLGF dated August 13, 1998; and (ii)Smart’s exemption under its legislative franchise which took effect after theeffective date of R.A. No. 7160.

 

Smart hasrecently been declared exempt from payment of local franchise tax to the Cityof Makati in a decision dated August 3, 2004 by the Regional Trial Court ofMakati.  The City of Makati has filed their motion for reconsideration andSmart has filed its opposition.  The RTC of Makati has denied Makati’s Motionfor Reconsideration on November 12, 2004.  They have filed a Motion forExtension to file a Petition for Review with the Court of Appeals.

 

The RTC of Iloilo has likewise ruled in a decisiondated January 19, 2005 that Smart is exempt from payment of local franchise taxto the City of Iloilo.  The City of Iloilo has filed an appeal directly with the Supreme Courtbut the Court has yet to give it due course.

 

Piltelalso received assessments from the local government of the City of Makati in theaggregate amount of Php45 million covering the period from 1999 to 2001.Piltel has formally protested the assessments, based on: (1) Piltel’s beliefthat the opinion rendered by the BLGF for Smart should likewise hold true forPiltel; and (2) the effective date of the legislative franchise of Piltel (R.A.7293) which came after the effectivity of R.A. 7160.  The franchise taxprescribed under Section 137 of the Local Government Code is deemed part of thePiltel franchise (the later law) which states, among other things, that Piltelshall pay only a franchise tax equivalent to 3% of all gross receipts of thebusiness transacted under its franchise and such percentage shall be in lieu ofall taxes on the franchise or earnings thereof.

 

Piltel’sprotest of the assessments was denied by the City of Makati on December 18, 2001.Piltel then filed a petition with the Makati RTC, appealing the local franchisebusiness taxes.  On December 10, 2002, the Makati RTC rendered its judgment grantingPiltel’s petition and enjoining the City of Makati from assessing and collecting any further annuallocal franchise business taxes from Piltel.  The City of Makati filedits motion for reconsideration of this judgment with the Makati RTC, which wassubsequently denied.  On April 1, 2003, the City of Makati filed a Petition for Review with the Court ofAppeals.  On July 12, 2004, the Court of Appeals rendered a decision upholdingthe Makati RTC that Piltel is exempt from payment of the local franchise tax.

 

The Cityof Makati appealed to the Supreme Court, which issued a resolution dated October 13, 2004 denying with finality the appeal of the City of Makati on the grounds oftechnicality.  The Supreme Court ruled, however, that the petition failed tosufficiently show that the Court of Appeals committed any reversible error inthe questioned judgment to warrant the exercise of the discretionary appellatejurisdiction of the Supreme Court.

 

We havemade a reasonable estimate of the amount necessary to pay or settle thecontested assessment in the event of an unfavorable judgment against us andhave made the appropriate provisions in our unaudited consolidated financialstatements as at March 31, 2005.

*** ***

*Piltel’sBureau of Internal Revenue, or BIR, Assessment*

 

In 2003, the BIR issued final assessment notices, or FANs, against Piltelfor deficiency taxes and penalties for taxable years 1998 and 1999, in theamounts of Php234 million and Php284 million, respectively.  Piltel filedprotest letters dated June 5, 2003 and September 24, 2003 with the BIR for the1998 and the 1999 deficiency tax assessments, respectively.

 

With respect to the 1998 deficiency tax assessment, the BIR denied on March 16, 2003 the administrative protest filed by Piltel.  On July 1, 2003, however,Piltel filed with the BIR an Application for Compromise Settlement for the 1998deficiency tax assessments based on BIR Revenue Regulations, or RR, No. 30-2002issued on December 16, 2002, which implements Sections 7(c), 204(a) and 290 ofthe National Internal Revenue Code, NIRC, of 1997 on compromise settlement ofinternal revenue tax liabilities, superseding RR Nos. 6-2000 and 7-2001.  Undersaid RR 30-2003, Piltel is allowed to apply for compromise settlement on thebasis of financial incapacity.  If approved, Piltel would be permitted tosettle its 1998 deficiency tax liabilities by paying an amount correspondingthe compromise rates ranging from 10% to 40% of its assessed deficiency taxesfor 1998.  Meanwhile, with respect to the 1999 deficiency tax assessment, theBIR favorably considered the administrative protest filed by Piltel.Accordingly, the BIR issued a revised FAN dated February 17, 2004, which was received by Piltel on March 22, 2004.  Hence, as early as December 31, 2003,Piltel paid and settled the 1999 expanded withholding tax assessment and therevised 1999 fringe benefit tax, or FBT, assessment amounting to Php26 millionand Php6 million, respectively.  On May 28, 2004, Piltel also filed with theBIR an Application for Compromise Settlement for the 1999 deficiency taxassessments, particularly the value added tax, or VAT, and income taxassessments, similarly based on RR No. 30-2002 on the grounds of financialincapacity.

 

Moreover, on August 5, 2004, Piltel received a Preliminary AssessmentNotice, or PAN, dated  July 19, 2004 in connection with Letter Notice, or LN,BOC-AID/LTS-1-41-01-02.  The said LN, which is similar to a tax assessmentnotice, indicated a discrepancy between the importation per Bureau of Customs,or BOC, data and the importation per 2001 VAT returns amounting to Php176million, which resulted in VAT and income tax deficiency assessments amountingto Php82 million and Php27 million, respectively.  On August 20, 2004, Piltel filed an administrative protest in connection with the assessments.Supplemental protest letter was also filed on October 5, 2004 to further support its position against the said tax assessments after the Informal Conferenceheld with the examiners on September 21, 2004.  To date, Piltel has notreceived any response from the BIR.  Piltel intends to apply for compromisesettlement, based on the same grounds of financial incapacity, any resultingdeficiency tax arising from this LN once the BIR has finalized the assessment.

*** ***

*AirTime Purchase Agreement with AIL*

*** ***

InMarch 1997, PLDT entered into a Founder NSP Air Time Purchase Agreement with PTAsia Cellular Satellite (assigned and transferred to AIL), as amended inDecember 1998.  The agreement states that PLDT has to purchase at least US$5million worth of air time annually over ten years commencing on the date of theGaruda satellite’s commercial operations and has to make supplemental air timepurchase payments not to exceed US$15 million per year during the ten-year termin the event revenues generated are less than US$45 million in any given year.The air time payment obligations shallremain in effect until all indebtedness incurred by AIL have been fully repaid.  See *Note 20 – Related Party Transactions* and *Note22 – Contractual Obligations and Commercial Commitments* for detaileddiscussion of the terms of the agreement.

 

The Garuda satellite was launched on February 12, 2000 and was available for service beginning October 1, 2000.  Pre-commercial operations began on January 1, 2001 and full commercial operations began on January 1, 2002.  

 

Webelieve that the payment obligations under the Air Time Purchase Agreementexceeded the economic benefits expected to be received under it as a result ofthe delay in the launch of the satellite, unavailability of competitive handsetsand competitions from cellular services, occurrence of a partial satelliteloss, changes in the primary business of AIL and other factors affecting itsbusiness.  Accordingly, we started negotiations with AIL for the revision ofthe payment obligations under the AirTime Purchase Agreement in 2000.

 

As aresult of these negotiations, the effective date of Air Time Purchase Agreementbecame January 1, 2002.  In 2002, billings for satellite air time were reducedto actual air time usage, less amount for marketing assistance to serviceproviders.  In March 2003, PLDT, together with the founder NSPs, entered into aStandstill Agreement with AIL.  Payments made to AIL under the Air TimePurchase Agreement based on billings of actual usage and the StandstillAgreement amounted to US$1 million in 2002, US$3.8 million in 2003 and US$0.4million for the first quarter of 2004.  

 

OnFebruary 10, 2004, AIL advised PLDT of the termination of the StandstillAgreement and the reinstatement of the terms under the original Air TimePurchase Agreement effective January 1, 2002 following the lapse of thedeadline set in the Standstill Agreement for the establishment of a revised AirTime Purchase Agreement.  Negotiations are continuing with the relevant partiestowards an amicable settlement of this matter.  Prior to further negotiation ofdefinitive transaction agreement among the parties, PLDT deposited US$21.5million in an escrow account on March 28, 2005 which was to be disbursed uponthe execution and delivery of mutually agreeable definitive transactionagreement on or before April 29, 2005.  The parties involved had not reached anagreement to date and on May 2, 2005, PLDT has formally requested for thereturn of amount deposited.  Copies of the necessary banking instructions havebeen received by the escrow bank, but only upon receipt of the originalinstructions will the abovementioned funds be returned.

 

On June21, 2004, AIL also sent PLDT a letter citing PLDT in default under the Air TimePurchase Agreement for non-payment of outstanding amounts and for repudiationof its obligations thereunder.  PLDT maintains, however, that the terminationof the Standstill Agreement and reinstatement of the terms under the originalAir Time Purchase Agreement are premature, considering that the discussions ornegotiations on the terms of the proposed revised Air Time Purchase Agreementwere still pending between the parties, such that it is highly inequitable forAIL to have unilaterally decided to invoke the provisions of the StandstillAgreement and declared PLDT in default.  Furthermore, PLDT maintains itsposition that the Air Time Purchase Agreement has been rendered ineffective byvarious events, circumstances and technical problems encountered in theoperation of the business of AIL.  The substantial changes in the circumstancesunder which AIL must operate, changes which were not contemplated by theparties at the time the commitments were made, have rendered the commitmentsunder the Air Time Purchase Agreement unrealistic and the performance of thesame impossible.

 

Asat March 31, 2005, PLDT’s aggregate remaining minimum obligation underthe original Air Time Purchase Agreement was approximately Php11,574 million.

 

Wemade a reasonable estimate of the amount necessary in the event such obligationwould be settled and have made the appropriate provisions in our unauditedconsolidated financial statements as at March 31, 2005 with due considerationof AIL’s existing indebtedness and of PLDT’s share as one of the founder NSPs.

 

 

 

**24. Financial Assets and Liabilities**

 

Ourfinancial assets and liabilities are recognized initially at fair value.Transaction costs (debt issuance costs) are included in the initial measurementof all financial assets and liabilities except for financial instrumentsmeasured at fair value through profit and loss.  Subsequent to initialrecognition, assets and liabilities are either valued at amortized cost usingthe effective interest rate method or at fair value depending onclassification.

 

Thefollowing table sets forth the carrying values and estimated fair values of ourfinancial assets and liabilities recognized as at March 31, 2005 and December 31, 2004.  There are no material unrecognized financial assets and liabilities asat March 31, 2005 and December 31, 2004.

 

** **

**Carrying Value**

**Fair Value**

** **

**March 31, 2005****(Unaudited)**

December 31, 2004 (Audited)

**March 31, 2005****(Unaudited)**

December 31, 2004 (Audited)

 

(in million pesos)

**Noncurrent Financial Assets**

** **

 

 

 

Investments-available-for-sale

**106**

104

**106**

104

Derivative assets

**3,197**

4,116

**3,197**

4,116

Notes receivable

**346**

286

**346**

286

Total noncurrent financial assets

**3,649**

4,506

**3,649**

4,506

**Current Financial Assets**

** **

 

 

 

Cash and cash equivalents

**29,777**

27,321

**29,777**

27,321

Short-term investments

**2,147**

3,873

**2,147**

3,873

Trade and other receivables

**10,282**

10,404

**10,282**

10,404

Derivative assets

**183**

335

**183**

335

Total current financial assets

**42,389**

41,933

**42,389**

41,933

**Total Financial Assets**

**46,038**

46,439

**46,038**

46,439

** **

** **

 

 

 

**Noncurrent Financial Liabilities**

** **

 

 

 

Long-term debt - net of current portion*

**113,040**

121,012

**121,560**

132,803

Obligations under capital lease*

**514**

601

**514**

601

Preferred stock subject to mandatory redemption*

**14,094**

14,375

**17,697**

18,237

Derivative liabilities

**6,427**

5,903

**6,427**

5,903

Total noncurrent financial liabilities

**134,075**

141,891

**146,198**

157,544

**Current Financial Liabilities**

** **

 

** **

 

Notes payable*

**2**

58

**2**

58

Current portion of long-term debt*

**22,972**

28,018

**23,719**

29,083

Obligations under capital lease*

**448**

425

**448**

425

Accounts payable

**4,637**

7,029

**4,637**

7,029

Derivative liabilities

**340**

474

**340**

474

Total current financial liabilities

**28,399**

36,004

**29,146**

37,069

**Total Financial Liabilities**

**162,474**

177,895

**175,344**

194,613

 

*    *Included under “Interest-bearing Financial Liabilities”in the consolidated balance sheets.*

 

Thefollowing methods and assumptions were used to estimate the fair value of eachclass of financial instrument for which it is practicable to estimate suchvalue:

 

Interest-bearing Financial Liabilities:

 

*Long-term debt:*Fair value is based on the following:

 

**Debt Type**

**Fair Value Assumptions**

Fixed Rate Loans:

U.S. dollar notes/convertible debt

Other loans in all other currencies

 

Quoted market price.

Estimated fair value is based on the discounted value of future cash flows using the applicable rates for similar types of loans.

Variable Rate Loans

The carrying value approximates fair value because of recent and regular repricing based on market conditions.

 

*Preferredstock subject to mandatory redemption:*The fair values were determined using an independent third party valuationmodel.

 

Derivative instruments:

 

*Forward foreign exchange contracts and bifurcatedforeign currency forwards:* The fairvalues were determined using forward exchange market rates at the balance sheetdate.

 

*Foreigncurrency options:*  The fair valueswere computed using an option pricing model.

 

*Foreigncurrency and interest rate swaps:*  The fair values were computed as thepresent value of estimated future cash flows.

 

Due to theshort-term nature of the transactions, the fair value of cash and cashequivalents, short-term investments, trade and other receivables, notes payableand accounts payable approximate amount of consideration at the time of initialrecognition.

 

*Financialassets and liabilities carried at amortized cost*

 

Unamortizeddebt discount, representing debt issuance cost and any difference between thefair value of consideration given or received on initial recognition, includedin following financial liabilities amounted to Php16,270 million and Php17,363million as at March 31, 2005 and December 31, 2004, respectively, see *Note17 – Interest-bearing Financial Liabilities*.

 

*Financialassets and liabilities carried at fair value*

 

Thefollowing financial assets and liabilities carried at fair value as at March 31, 2005 and December 31, 2004.

 

 

**March 31, 2005****(Unaudited)**

December 31, 2004 (Audited)

 

(in million pesos)

Investments-available-for-sale

**106**

104

Derivative instruments

**(3,387)**

(1,926)

 

**(3,281)**

(1,822)

 

*DerivativeFinancial Instruments*

 

Ourderivative financial instruments are accounted for as either cash flow hedgesor transactions not designated as hedges.  Cash flow hedges refer to thosetransactions that hedge our exposure to variability in cash flows attributableto a particular risk associated with a recognized asset or liability. Changesin the fair value of these instruments are recognized as cumulative translationadjustments in equity until the hedged item is recognized in earnings.  Fortransactions that are not designated as hedges, any gains or losses arisingfrom the changes in fair value are recognized directly to income for theperiod.

*** ***

The tablebelow sets out the information about our derivative financial instruments as at March 31, 2005 and December 31, 2004:

*** ***

** **

**March 31, 2005****(Unaudited)**

December 31, 2004 (Audited)

 

** **

 

**Maturity**

**Notional Amount**

**Mark-to-market Gain (Loss)**

Notional Amount

Mark-to-market Gain (Loss)

 

 

(in millions)

***PLDT***

** **

** **

 

 

 

** **

** **

 

 

Cash flow hedges:

** **

** **

 

 

Long-term currency swaps

** **

** **

 

 

 

2017

**US$300**

**Php149**

US$300

Php748

 

2012

**250**

**(817)**

250

282

 

** **

** **

 

 

Long-term foreign currency options

2009

**175**

**433**

175

672

 

 

** **

** **

 

 

Short-term foreign currency options

**76**

**(150)**

76

(198)

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Long-term foreign currency options

**175(1)**

**86**

175(1)

(22)

 

** **

** **

 

 

Short-term currency options

**88(3)**

**70**

76(2)

117

 

**JPY748**

**(6)**

–

–

 

** **

** **

 

 

Interest rate swap

**125**

**(3,081)**

125

(3,468)

 

** **

** **

 

 

Forward foreign exchange contracts

**107**

**25**

87

6

 

**JPY247**

**(1)**

JPY14

1

 

** **

** **

 

 

Bifurcated embedded derivatives

**US$1**

**1**

US$1

(1)

 

** **

**(3,291)**

 

(1,863)

***Smart***

 

** **

 

* *

 

** **

** **

 

 

Transactions not designated as hedges:

** **

** **

 

 

Forward foreign exchange contracts

**US$39**

**(123)**

US$69

(77)

Bifurcated embedded derivatives

**21**

**27**

19

14

 

** **

**(96)**

 

(63)

Net liabilities

** **

**(Php3,387)**

 

(Php1,926)

 

*(1)**Non-hedgedportion of 2009 long-term foreign currency options based on the same notionalamount as the hedged portion;*

*(2)**Non-hedgedportion of short-term foreign currency options based on the same notionalamount as the hedged portion; and*

*(3)**Non-hedgedportion of short-term foreign currency options is inclusive of the samenotional amount as the hedged portion and additional short-term foreigncurrency options not designated as hedges.*

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Presented as:

** **

 

 

Noncurrent assets

**3,197**

 

4,116

Current assets

**183**

 

335

Noncurrent liabilities

**(6,427)**

 

(5,903) 

Current liabilities

**(340)**

 

(474)

Net liabilities

**(3,387)**

 

(1,926)

 

Cumulative translation adjustments as at March 31, 2005 and December 31, 2004 consists of:

 

 

**March 31, 2005****(Unaudited)**

 

December 31, 2004 (Audited)

 

(in million pesos)

Cumulative translation adjustments – beginning

**362**

 

549

Movements of cumulative translation adjustments:

** **

 

 

Currency translation differences

**(32)**

 

17

Net loss on cash flow hedges

**(1,944)**

 

(159)

Net loss on available-for-sale financial assets

**–**

 

(5)

Net gain (loss) on cash flow hedges removed from cumulative translation adjustments and taken to profit or loss

**1,277**

 

(133)

Deferred income tax effects on cash flow hedge

**(214)**

 

93

 

**(913)******

 

(187)

Cumulative translation adjustments – ending

**(551)**

 

 362

 

Analysisof gain (loss) on derivative transactions for the three months ended March 31, 2005 and 2004 are as follows:

 

 

**Three Months Ended March 31,**

 

**2005**

 

2004

 

(Unaudited)

Net mark-to-market (loss) gain – ending

**(3,387)**

 

813

Net mark-to-market loss – beginning

**(1,926)**

 

(1,060)

Net change

**(1,461)**

 

1,873

Net loss charged to cumulative translation adjustments

**1,944**

 

–

Loss on contracts entered into and terminated during the period

**(251)**

 

(10)

Net gain on derivative transactions

**232**

 

1,863

 

***PLDT***

*** ***

***CashFlow Hedges***

 

*Long-termCurrency Swaps*

*** ***

PLDT entered into long-term principal-only currency swap agreements withvarious foreign counterparties to hedge the currency risk on its fixed ratenotes maturing in 2009, 2012 and 2017.  As at March 31, 2005 and December 31, 2004, these long-term currency swaps have an aggregate notional amount ofUS$550 million.  Under the swaps, PLDT effectively exchanges the principal ofits U.S. dollar-denominated fixed rate notes into peso-denominated loanexposures at agreed swap exchange rates.  The agreed swap exchange rates arereset to the lowest U.S. dollar/Philippine peso spot exchange rate during theterm of the swaps, subject to a minimum exchange rate.  In March and April2004, PLDT entered into amendments to keep the lowest reset exchange rate andunwind the downward resettable feature of US$550 million of its long-termprincipal-only currency swap agreements in order to lower the running hedgingcost of the swaps.  As at March 31, 2005 and December 31, 2004, the outstanding swap contracts have an agreed average swap exchange rate of Php50.76.

 

In orderto manage hedge costs, these swaps included credit-linkage feature with PLDT asthe reference entity.  The specified credit events include bankruptcy, failureto pay, obligation acceleration, moratorium/repudiation, and restructuring ofPLDT bonds or all or substantially all of PLDT’s obligations.  Upon theoccurrence of any of these credit events, subject to agreed threshold amountswhere applicable, the obligations to both PLDT and its counterparty under theswap contracts terminate without further settlements to either party, includingany mark-to-market value of the swaps.  In March 2004, PLDT amended anadditional US$150 million of the long-term currency swaps to include thiscredit-linkage feature.  As at March 31, 2005 and December 31, 2004, US$725 million of PLDT’s long-term currency swaps/options have been structured to includecredit-linkage with PLDT as the reference entity.  The semi-annual fixed orfloating swap cost payments that PLDT is required to make to its counterpartiesaveraged about 3.62% and 2.95% per annum as at March 31, 2005 and December 31, 2004, respectively.  As cash flow hedges, any movements in the fair value ofthese instruments will be taken as a cumulative translation adjustment underequity in our consolidated balance sheets.

 

*Long-termForeign Currency Options*

 

To managehedging costs, the currency swap agreement relating to the 2009 fixed ratenotes has been structured to include currency option contracts.  If the Philippinepeso to U.S. dollar spot exchange rate on maturity date settles beyond Php90.00to US$1.00, PLDT will have to purchase U.S. dollar at an exchange rate ofPhp52.50 to US$1.00 plus the excess above the agreed threshold rate.  On theother hand, if on maturity, the Philippine peso to US$1.00 spot exchange rateis lower than the exchange rate of Php52.50 to US$1.00, PLDT will have theoption to purchase at the prevailing Philippine peso to U.S. dollar spotexchange rate.  In July 2004, PLDT and its counterparty, agreed to re-documentand re-classify the transaction into long-term currency option contracts.  Thenet semi-annual floating hedge cost payments that PLDT is required to pay underthese transactions was approximately 4.69% and 3.94% per annum as at March 31, 2005 and December 31, 2004, respectively.

 

The optioncurrency contract relating to PLDT’s option to purchase U.S. dollar at Php52.50to US$1.00 or prevailing spot rate at maturity whichever is lower, qualifies asa cash flow hedge.  The option currency contract relating to the counterparty’soption to purchase foreign currency from PLDT at Php90.00 to US$1.00 is notdesignated as a hedge.  Please refer to discussion below (under transactionsnot designated as hedges).

 

*Short-termForeign Currency Options*

 

PLDTutilized structures incorporating currency options to hedge the maturingprincipal on its fixed rate notes due June 2004 and August 2005.  Under theterms of the contracts, PLDT will have the option to purchase U.S. dollar at anagreed Philippine peso to U.S. dollar spot exchange rate or prevailing spotrate at maturity whichever is lower.

 

***Transactions Not Designated as Hedges***

 

Due to the amounts of PLDT’s foreign currency hedgingrequirements and the large interest differential between the Philippine pesoand the U.S. dollar, the costs to book long-term hedges can be significant.  Inorder to manage such hedging costs, PLDT utilizes structures that includecurrency option contracts, and fixed-to-floating coupon-only swaps that may notqualify for hedge accounting. 

 

*Long-termForeign Currency Options*

 

With reference to the above-mentioned hedge on thePLDT’s 2009 fixed rate notes, PLDT simultaneously sold a currency optioncontract with the same notional amount of US$175 million with the same maturitythat gives the counterparty a right to purchase foreign currency at Php90.00 toUS$1.00.  Together with the long-term currency option contract classified undercash flow hedges, PLDT has the obligation to purchase U.S. dollar at anexchange rate of Php52.50 to US$1.00 plus the excess above the agreed thresholdrate.  In exchange for this condition, the overall net hedging cost for thetransaction is reduced.

 

*Short-termCurrency Options*

 

Inorder to manage hedge costs, currency option contracts that hedge PLDT’s fixedrate notes due June 2004 and August 2005 have features similar to that of thelong-term currency option contracts.  PLDT simultaneously sold currency optioncontracts with the same notional amounts with same maturity.  Together with theother short term currency option contracts classified under cash flow hedges,PLDT has the obligation to buy U.S. dollar at the agreed strike price plus theexcess above the agreed threshold rate should the Philippine peso to U.S.dollar spot exchange rate on maturity date settle beyond that agreedthreshold.  In exchange for this condition, the overall net hedging cost forthe transactions is reduced.

* *

PLDT also entered into short-term U.S. dollarsubsidized forwards and Japanese yen currency option contracts to hedge othershort-term foreign currency obligations.

* *

*InterestRate Swap*

 

A portionof PLDT’s currency swap agreements to hedge its 2017 fixed rate notes carryfixed rate swap cost payments.  To effectively lower the running cost of suchswap agreements, PLDT, in April 2003, entered into an agreement to swap thecoupon on US$125 million of its 2012 fixed rate notes into a floating rateJapanese yen amount.  Under this agreement, PLDT is entitled to receive a fixedcoupon rate of 11.375% provided the Japanese yen to U.S. dollar exchange ratestays above JP¥99.90/US$1.00.  Below this level, a reduced fixed coupon rate of3% will be due to PLDT.  In order to mitigate the risk of the Japanese yenstrengthening below the agreed threshold, PLDT, in December 2003, entered intoan overlay swap transaction to effectively lower the portion of the couponindexed to the U.S. dollar to Japanese yen rate to 3%.  Both swap agreementsinclude a credit-linkage feature with PLDT as the reference entity.

 

*ForwardForeign Exchange Contracts*

 

PLDTentered into short-term U.S. dollar and Japanese yen forward foreign exchangecontracts to hedge short-term foreign currency obligations.

 

*BifurcatedEmbedded Derivatives*

 

Derivativeinstruments include derivatives (or derivative-like provisions) embedded innon-derivative contracts.  PLDT’s outstanding bifurcated embedded derivativetransactions cover service contracts denominated in U.S. dollars to be paid outto a Japanese company.

 

***Smart***

 

Smart’sembedded derivatives were bifurcated from service and purchase contracts.  Asat March 31, 2005 and December 31, 2004, outstanding contracts includeda service contract with foreign equipment supplier and various supplierscovering handset and equipment importations payable in U.S. dollars.

 

Embedded derivatives were alsobifurcated from prepaid forwards.  The related prepayments amounting toPhp2,147 million and Php3,873 million as at March 31, 2005 and December 31, 2004, respectively, are presented under “Short-term investments.”  The embeddedforeign currency derivatives bifurcated from these prepaid forwards arepresented as derivative assets or derivative liabilities.

 

**FinancialRisk Management Objectives and Policies**

 

The mainpurpose of our financial instruments is to fund our operations.  We also enterinto derivative transactions, the purpose of which is to manage the currencyrisks and interest rate risks arising from our operations and our sources offinancing.  It is, and has been throughout the year under review, our policythat no trading in financial instruments shall be undertaken.

 

The main risks arising from our financial instrumentsare liquidity risk, foreign currency risk, interest rate risk and credit risk.Our Board reviews and agrees with policies for managing each of these risks andthey are summarized below.  We also monitor the market price risk arising fromall financial instruments.  Our accounting policies in relation to derivativesare set out in *Note 2 – Summary of Significant Accounting Policies*.

 

***Liquidity Risk***

 

We seek to manage our liquidity profile to be able tofinance our capital expenditures and service our maturing debts.  To cover ourfinancing requirements, we intend to use internally generated funds andproceeds from debt and equity issues and sales of certain assets. 

 

As part of our liquidity risk management program, weregularly evaluate our projected and actual cash flow information andcontinuously assess conditions in the financial markets for opportunities topursue fund-raising initiatives.  These initiatives may include bank loans,export credit agency-guaranteed facilities, and debt capital and equity marketissues.

 

***Foreign Currency Risk***

 

The following table shows our consolidated foreigncurrency-denominated monetary assets and liabilities and their peso equivalentsas at March 31, 2005 and December 31, 2004:

 

** **

**March 31, 2005****(Unaudited)**

December 31, 2004 (Audited)

** **

**U.S. Dollar****(1)**

**Php Equivalent**

U.S. Dollar(2)

Php Equivalent

 

(in millions)

**Noncurrent Financial Assets**

** **

 

** **

** **

Derivative assets

**US$58**

**Php3,197**

US$73

Php4,113

Notes receivable

**6**

**347**

5

286

Other noncurrent assets

**2**

**77**

–

–

Total noncurrent financial assets

**66**

**3,621**

  78

4,399

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**243**

**13,324**

251

14,142

Short-term investments

**39**

**2,147**

69

3,888

Trade and other receivables

**165**

**9,016**

146

8,226

Prepayments

**–**

**21**

–

–

Derivative assets

**4**

**213**

6

338

Other current assets

**–**

**19**

–

–

Total current financial assets

**451**

**24,740**

 472

26,594

**Total Financial Assets**

**US$****517**

**Php28,361**

US$550

Php30,993

** **

** **

** **

 

 

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities

**US$2,227**

**Php122,036**

US$2,330

Php131,275

Derivative liabilities

**117**

**6,427**

105

5,916

Other noncurrent liabilities

**12**

**647**

–

–

Total noncurrent financial liabilities

**2,356**

**129,110**

2,435

137,191

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**31**

**1,689**

46

2,592

Accrued expenses and other current liabilities

**75**

**4,918**

77

4,338

Derivative liabilities

**6**

**340**

8

451

Interest-bearing financial liabilities

**408**

**23,128**

483

27,213

Total current financial liabilities

**520**

**30,075**

 614

34,594

**Total Financial Liabilities**

**US$****2,876**

**Php159,185**

US$3,049

Php171,785

 

*(1)**Theexchange rate used was Php54.747 to US$1.00.*

*(2)**The exchange rate used was Php56.341 to US$1.00.*

 

Intranslating the foreign currency-denominated monetary assets and liabilitiesinto peso amounts, the exchange rates used were Php54.747 to US$1.00 andPhp56.341 to US$1.00, the Philippine peso-U.S. dollar exchange rates as at March 31, 2005 and December 31, 2004, respectively.

 

As at May 5, 2005, the peso–dollar exchange rate was Php54.101 to US$1.00.  Using this exchangerate, our consolidated net foreign currency–denominated liabilities as at March 31, 2005 would have decreased by Php1,524 million.

 

While acertain percentage of our revenues is either linked to or denominated in U.S.dollars, substantially all of our indebtedness, a substantial portion of ourcapital expenditures and a portion of our operating expenses are denominated inforeign currencies, mostly in U.S. dollars.

 

As at March 31, 2005, approximately 98% of our total consolidated debts were denominated inforeign currencies.  Of our foreign currency-denominated debts, 4% are inJapanese yen on a consolidated basis, and the balance in U.S. dollars.  Thus, aweakening of the peso against the U.S. dollar or Japanese yen will increaseboth the principal amount of our unhedged foreign currency-denominated debts(representing 62% of our consolidated debts), and interest expense on our debtin peso terms.  In addition, many of our financial ratios and other financialtests will be negatively affected.  If, among other things, the value of thepeso against the U.S. dollar substantially drops from its current level, we maybe unable to maintain compliance with these ratios, which could result inacceleration of some or all of our indebtedness.  For further information onour loan covenants, see *Note 17 – Interest-bearing Financial Liabilities*to the accompanying unaudited consolidated financial statements.

 

To manageour foreign exchange risks, stabilize cash flows, and improve investment andcash flow planning, we enter into foreign exchange forward contracts, foreigncurrency swap contracts, currency options and other hedging products aimed atreducing and/or managing the adverse impact of changes in foreign exchangerates on our operating results and cash flows.  However, these hedges do not coverall of our exposure to foreign exchange risks.

 

Specifically,we use forward foreign exchange contracts, foreign currency swap contracts andcurrency option contracts to manage the foreign exchange risk associated withour foreign currency-denominated loans.  

 

***InterestRate Risk***

 

On alimited basis, we enter into interest rate swap agreements in order to manageour exposure to interest rate fluctuations.  We make use of hedging instrumentsand structures solely for reducing or managing financial risks associated withour liabilities and not for trading or speculative purposes.

 

Thefollowing tables set out the carrying amount, by maturity, of our financialinstruments that are exposed to interest rate risk:

 

Three Months Ended March 31, 2005 (Unaudited)
 

** **

 

 

 

 

 

 

 

**Discount/**

**Debt**

** **

**Fair Value**

** **

**Below 1 year**

**1-2 years**

**2-3 years**

**3-5 years**

**Over 5 years**

**In U.S. Dollar**

**In Php**

**Issuance Cost****In Php**

**Carrying Value****In Php**

**In U.S. Dollar**

**In Php**

** **

 

 

 

 

 

 

 

**(in millions)**

**Liabilities:**

 

 

 

 

 

 

 

** **

** **

 

** **

Long-term Debt

 

 

 

 

 

 

 

** **

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

110

296

83

175

550

1,214

66,454

861

65,593

1,304

71,404

Interest rate

9.88%

7.85% to 9.25%

10.63%

 

10.50%

8.35% to 11.375%

–

–

–

–

–

–

US$ Fixed Loans  (in millions)

119

83

48

53

280

 583

31,951

6,979

24,972

476

26,017

Interest rate

4.49% to 8.03%

4.49% to 7.95%

4.49% to 7.89%

4.49% to 7.32%

2.25%

–

–

–

–

–

–

Japanese Yen (in millions)

26

26

26

–

–

  78

4,275

–

4,275

78

4,294

Interest rate

2.125%

2.125%

2.125%

–

–

–

–

–

–

–

–

Philippine Peso  (in millions)

11

14

–

–

15

  40

2,198

5

2,193

45

2,471

Interest rate

11.18% to 24%

11.6% to 24%

–

–

15.00%

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

145

155

136

151

130

 717

39,246

1,997

37,249

717

39,246

Interest rate

0.15% to 4.3% over LIBOR

0.15% to 4.3% over LIBOR

0.15% to 4.3% over LIBOR

0.15% to 3.625% over LIBOR

0.5% to 2.5% over LIBOR

–

–

–

–

–

–

Japanese Yen (in millions)

6

6

6

3

–

  21

1,127

2

1,125

21

1,127

Interest rate

1.7% over JPY LIBOR

1.7% over JPY LIBOR

1.7% over JPY LIBOR

1.7% over JPY LIBOR

–

–

–

–

–

–

–

Philippine Peso  (in millions)

1

2

2

1

7

  13

720

115

 605

13

720

Interest rate

1% over 91-day T-bill rate, 11% to 11.25%

1% over 91-day T-bill rate, 11% to 11.25%

1% over 91-day T-bill rate, 11% to 11.25%

1% over 91-day T-bill rate

1% over 91-day T-bill rate

–

–

–

–

–

–

 

 

 

 

 

 

**2,666**

**145,971**

**9,959**

**136,012**

**2,654**

**145,279**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar  (US$125 million)

–

–

–

–

–

(56)

(3,081)

–

–

(56)

(3,081)

Japanese Yen (JPY15,037 million)

 

 

 

 

–

–

–

–

–

–

–

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

11.375%

–

–

–

–

–

–

Variable Rate on JPY notional

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

–

–

–

–

–

–

 

Year Ended December 31, 2004 (Audited)
 

** **

 

 

 

 

 

 

 

**Discount/**

**Debt**

** **

**Fair Value******

** **

**Below 1 year**

**1-2 years**

**2-3 years**

**3-5 years**

**Over 5 years**

**In U.S. Dollar**

**In Php**

**Issuance Cost****In Php**

**Carrying Value****In Php**

**In U.S. Dollar**

**In Php**

** **

 

 

 

 

 

 

 

**(in millions)**

**Liabilities:**

 

 

 

 

 

 

 

** **

** **

 

** **

Long-term Debt

 

 

 

 

 

 

 

** **

** **

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

110

130

272

175

550

1,237

69,725

930

68,795

1,307

73,662

Interest rate

9.875%

9.250%

7.85% to 10.625%

10.50%

8.35% to 11.375%

–

–

–

–

–

–

US$ Fixed Loans  (in millions)

125

93

51

58

280

 607

34,190

7,340

26,850

576

32,452

Interest rate

4.49% to 8.03%

4.49% to 7.95%

4.49% to 7.95%

4.49% to 7.58%

2.25%

–

–

–

–

–

–

Japanese Yen (in millions)

27

27

27

14

–

  95

5,363

 

5,363

96

5,414

Interest rate

2.125%

2.125%

2.125%

2.125%

–

–

–

–

–

–

–

Philippine Peso  (in millions)

14

14

–

–

14

  42

2,371

5

2,366

45

2,537

Interest rate

11.18% to 24%

11.6% to 24%

–

–

15%

–

–

–

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

212

213

139

117

132

 813

45,832

2,045

43,787

814

45,832

Interest rate

0.15% to 4.3% over LLIBOR

0.15% to 4.3% over LIBOR

0.15% to 4.3% over LIBOR

0.15% to 4.3% over LIBOR

0.5% to 2.5% over LIBOR

–

–

–

–

–

–

Japanese Yen (in millions)

6

6

6

4

–

  22

1,212

–

1,212

  22

1,212

Interest rate

1.7% over JPY LIBOR 

1.7% over JPY LIBOR 

1.7% over JPY LIBOR 

1.7% over JPY LIBOR

–

–

–

–

–

–

–

Philippine Peso  (in millions)

2

2

2

1

7

  14

777

120

 657

13

777

Interest rate

1.0% over 91-day T-bill rate, 11% to 11.25%

1.0% over 91-day T-bill rate, 11% to 11.25%

1% over 91-day T-bill rate, 11% to 11.25%

1% over 91-day T-bill rate

1% over 91-day T-bill rate

–

–

–

–

–

–

 

 

 

 

 

 

**2,830**

**159,470**

**10,440**

**149,030**

**2,873**

**161,886**

 

 

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$125 million)

–

–

–

–

–

(62)

(3,468)

–

–

(62)

(3,468)

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

11.375%

–

–

–

–

–

–

Variable Rate on JPY notional

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

8.11% over LIBOR

–

–

–

–

–

–

 

Fixed ratefinancial instruments are subject to fair value interest rate risk whilefloating rate financial instruments are subject to cash flow interest raterisk.  

 
Repricingof floating rate financial instruments is mostly done on intervals of threemonths or six months.  Interest on fixed rate financial instruments is fixeduntil maturity of instrument.  Financial instruments that are not subject tointerest rate risk were not included in the above tables.

 
***CreditRisk***

 
We trade only with recognized, creditworthy thirdparties.  It is our policy that all customers who wish to trade on credit terms are subject to credit verificationprocedures.  In addition, receivable balances are monitored on an ongoing basisto reduce our exposure to bad debts.

 

With respect to credit risk arising from our otherfinancial assets, which comprise cash and cash equivalents, certain derivativeinstruments, our exposure to credit risk arises from default of thecounterparty, with a maximum exposure equal to the carrying amount of theseinstruments.

 

We haveno significant concentrations of credit risk.

 

 

 

**25. OtherMatters**

 

a.   Interconnection Agreements

 

PLDT has existing interconnection agreements with nineInternational Gateway Facilities, or IGF operators, six Inter ExchangeCarriers, or IXCs, six Cellular Mobile Telephone Systems, or CMTS operators, 70LECs (including members of the Philippine Association of Private TelephoneCompanies, Inc.), and 12 paging and trunk radio operators.  Theseinterconnection agreements include provisions for settlement and payment ofcharges.  Settlements with interconnecting IGF operators and CMTS operators forlocal calls are in the form of access charges.  Settlement with interconnectingIXCs and LECs for toll calls are based on hauling and access charges, and tosome extent, revenue sharing.  Settlement also involves payment of accesscharges, but settlement for toll calls is on a revenue-sharing basis.  LEC toLEC interconnection with hauling from one service area to another service areais settled based on trunk charges, while overlay LEC to LEC interconnection ina given service area is without charges.  Paging and trunk radiointerconnection settlements are based on fixed charges.  

 

b.   U.S. Federal Communications Commission, or U.S. FCC,Ruling versus Philippine Telecommunications Companies

 

Effective as at February 1, 2003,PLDT stopped terminating traffic sent directly by each of AT&T and MCI,because PLDT’s termination rate agreements with AT&T and MCI lapsed inDecember 2002 without either agreeing with PLDT on any provisional arrangementor final agreement on new termination rates.  In orders dated February 7 and26, 2003, the NTC confirmed that “absent any provisional or interim agreement”with U.S. carriers, there would be no provision of termination services betweenthe parties “who are thereby encouraged to seek other routes or options toterminate traffic to the Philippines.”  Upon petitions of AT&T and MCI, on March 10,2003, the International Bureau of the U.S. FCC issued an Order which directedall facilities-based carriers subject to U.S. FCC jurisdiction to suspendpayments for termination services to Philippine carriers, including PLDT, Smartand Subic Telecom, until such time as the U.S. FCC issued a Public Notice thatAT&T’s and MCI’s circuits on the U.S.–Philippine route were fullyrestored.  The Order also removed the Philippines from the list of U.S.–international routes approvedfor the provision of International Simple Resale, or ISR.  In response to theInternational Bureau’s Order, the NTC issued a Memorandum Order dated March 12,2003, directing all affected Philippine carriers “(1) not to accept terminatingtraffic via direct circuits from U.S. facilities-based carriers who do not payPhilippine carriers for services rendered; and (2) to take all measuresnecessary to collect payments for services rendered in order to preserve the viability,efficiency, sustained growth and development and continued competitiveness ofthe Philippine telecommunications industry.”

 

OnOctober 17, 2003, based on negotiations between the NTC and the U.S. FCC toresolve the issue regarding termination rates, the NTC, in the expectation thatthe U.S. FCC would fully lift the March 10, 2003 Order, lifted its March 12,2003 Order and directed all Philippine carriers to immediately acceptterminating traffic via direct circuits from U.S. facilities-based carriers atmutually acceptable final or interim termination rates and other terms andconditions agreed upon by the parties.

 

On November 17, 2003, after Smart reachedinterim agreements with each of AT&T and MCI on September 30 and November12, 2003, respectively, the International Bureau of the U.S. FCC lifted itsMarch 10, 2003 Order with respect to Smart and ordered the U.S. carriers toresume making payments to Smart.

 

On January 15, 2004, after PLDT reachedinterim agreements with each of MCI and AT&T and reopened its circuits withthese carriers on November 12, 2003 and January 9, 2004, respectively, theInternational Bureau of the U.S. FCC lifted its March 10, 2003 Order also withrespect to PLDT and ordered the U.S. carriers to resume making payments to PLDT.

 

On May 13, 2004, the U.S. FCC partially dismissed andpartially denied applications by Philippine carriers, including PLDT, andcertain U.S. carriers for review of the March 10, 2003 Order of theInternational Bureau of the U.S. FCC.  In particular, the U.S. FCC affirmed theMarch 10, 2003 Order’s finding that “Philippine carriers engaged incollective action to “whipsaw” AT&T and MCI.” The U.S. FCC stated, however,that the findings of the March 10, 2003 Order were not findings under the U.S. anti-trustlaws and that the U.S. Department of Justice is independently “investigatingthe possibility of anticompetitive practices among Philippine carriers underits authority pursuant to U.S. anti-trust laws.”  The U.S. FCC also upheld the March 10, 2003 Orderin respect of the suspension of payments for termination services to thePhilippine carriers pending restoration of the circuits.  In addition, the U.S.FCC denied a request to modify the March 10, 2003 Order of the InternationalBureau of the U.S. FCC to restore the Philippines to the list ofU.S.-international routes approved for the provision of ISR.  The U.S. FCCstated that it was dismissing this request as moot because of the U.S. FCC’srecently adopted International Settlements Policy Reform Order which eliminatedISP.

 

Although not included in the initial list of countriesexempted from the U.S. FCC’s International Settlements Policy, or ISP, the U.S.FCC identified the U.S.–Philippines route as eligible for being removed fromthe ISP in accordance with its newly established procedures for doing so.Under this procedure, the U.S. FCC asked for public comment on the removal ofthe Philippines from the ISP.  In comments filed in June and July 2004, removalwas reported by several Philippine and U.S. carriers, including AT&T andMCI, and was opposed by one U.S. carrier, International Access, Inc.  InNovember 2004, the U.S. FCC exempted a number of additional countries from theISP, but not the Philippines.  Instead, the U.S. FCC stated that it would ruleseparately regarding the Philippines after reviewing the issues raised byInternational Access, Inc.  These issues are still pending before the U.S. FCC.

 

On July 6, 2004, PLDT filed with the U.S.FCC a Petition for Reconsideration of the Commission’s May 13, 2004 Order onthe grounds that the Order should have vacated as moot the InternationalBureau’s March 10, 2003 Order.

 

c.   Investigation by the U.S. Departmentof Justice

 

In January 2004, PLDT received a grand jury subpoenaseeking documents and a PLDT employee was subpoenaed to testify before thegrand jury in connection with a criminal investigation being conducted by theU.S. Department of Justice with respect to alleged anti-trust violationsrelating to the provision of international termination services in thePhilippines.  The U.S. Department of Justice has also requested testimony anddocuments from Smart in connection with this investigation.  Further, in March2004, PLDT (U.S.) Ltd., a subsidiary of PLDT Global, received a grand jury subpoenaseeking documents, in response to which PLDT (U.S.) Ltd. produced documents.  In February 2005, two former employees of PLDT U.S. Ltd.testified before the grand jury in the U.S. DOJ matter.  A PLDT employee wasalso scheduled to reappear for testimony in February, but his appearance hasbeen postponed.  At this time, the PLDT Group cannot predict the outcome ofthis investigation.