**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

 

FORM 20-F

 

**[  ]****REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OF THE SECURITIESEXCHANGE ACT OF 1934**

**OR**

** **

**[X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the fiscal year endedDecember 31, 2004**

** **

**OR**

** **

**[  ]           TRANSITION REPORT PURSUANT TO SECTION13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the transition periodfrom _________ to _________**

** **

**Commission file number1-03006**

** **

**Philippine Long Distance Telephone Company**

(Exact name of Registrant as specified in its charter)

 

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

(Jurisdiction of incorporation or organization)

 

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

**Makati Avenue**

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

(Address of principal executive or organization)

 

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

 

| Title of each class                                                                                                                      | Name of each exchange

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

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

 

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

* *

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

 

None

 

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

 

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

 

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

 

| As at December 31, 2004:                                                               |
|----------------------------------------------------------------------------------------|
| 170,213,722 shares of Common Capital Stock, Par Value Five Philippine Pesos Per Share  |
| 460,479,661 shares of Serial Preferred Stock, Par Value Ten Philippine Pesos Per Share |

 

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

 

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

TABLE OF CONTENTS
 

 

 

CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT

 

 

 

FORWARD-LOOKING STATEMENTS

 

 

 

PART I

 

 

 

 

Item 1.

Identity of Directors, Senior Management and Advisors

 

 

Item 2.

Offer Statistics and Expected Timetable

 

 

Item 3.

Key Information

 

 

 

Selected Financial Data

 

 
 

 

Capital Stock

 

 

 

Dividends Declared

 

 

 

Dividends Paid

 

 

 

Exchange Rates

 

 

 

Risk Factors

 

 

Item 4.

Information on the Company

 

 

 

Overview

 

 

 

Historical Background and Development

 

 

 

Organization

 

 

 

Strengths

 

 

 

Strategy

 

 

 

Wireless

 

 

 

Fixed Line

 

 

 

Information and Communications Technology

 

 

 

Wireless Network Infrastructure

 

 

 

Fixed Line Network Infrastructure

 

 

 

Interconnection Agreements

 

 

 

Licenses and Regulation

 

 

 

Competition

 

 

 

Environmental Matters

 

 

 

Intellectual Property Rights

 

 

 

Properties

 

 

Item 5.

Operating and Financial Review and Prospects

 

 

 

Overview

 

 

 

Critical Accounting Policies

 

 

 

Results of Operations

 

 

 

Liquidity and Capital Resources

 

 

 

Impact of Inflation and Changing Prices

 

 

 

Other Information

 

 

Item 6.

Directors, Senior Management and Employees

 

 

 

Directors, Key Officers and Advisors

 

 

 

Terms of Office

 

 

 

Family Relationships

 

 

 

Compensation of Key Management Personnel of the PLDT Group

 

 

 

Executive Stock Option Plan

 

 

 

Share Ownership

 

 

 

Audit, Nomination, Executive Compensation and Finance Committees

 

 

 

Employees and Labor Relations

 

 

 

Pension and Retirement Benefits

 

 

 

Legal Proceedings

 

 

Item 7.

Major Shareholders and Related Party Transactions

 

 

 

Related Party Transactions

 

 

Item 8.

Financial Information

 

 

 

Consolidated Statements and Other Financial Information

 

 

 

Legal Proceedings

 

 

 

Dividend Distribution Policy

 

 

Item 9.

The Offer and Listing

 

 

 

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

 

 

 

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

 

 

Item 10.

Additional Information

 

 

 

Articles of Incorporation and By-Laws

 

 

 

Material Contracts

 

 

 

Exchange Controls and Other Limitations Affecting Securities Holders

 

 

 

Taxation

 

 

 

Documents on Display

 

 

Item 11.

Quantitative and Qualitative Disclosures About Market Risks

 

 

 

Liquidity Risk Management

 

 

 

Foreign Exchange Risk Management

 

 

 

Interest Rate Risk Management

 

 

Item 12.

Description of Securities Other than Equity Securities

 

PART II

 

 

 

 

Item 13.

Defaults, Dividend Arrearages and Delinquencies

 

 

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

 

 

Item 15.

Controls and Procedures

 

 

Item 16A.

Audit Committee Financial Expert

 

 

Item 16B.

Code of Business Conduct and Ethics

 

 

Item 16C.

Principal Accountant Fees and Services

 

 

Item 16D.

Exemption from the listing Standards for Audit Committees

 

 

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchaser

 

PART III

 

 

 

 

Item 17.

Financial Statements

 

 

Item 18.

Financial Statements

 

 

Item 19.

Exhibits

 

EXHIBIT INDEX

 

 

 

CERTIFICATION

 

 

 

 

CERTAIN CONVENTIONS AND TERMS USED IN THISREPORT

 

Unlessthe context indicates or otherwise requires, references to “we,” “us,” “our” or“PLDT Group” mean Philippine Long Distance Telephone Company and itsconsolidated subsidiaries, and references to “PLDT” mean Philippine Long DistanceTelephone Company, not including its consolidated subsidiaries (see *Note 2–Basis of Consolidated Financial Statemenst Preparation*to the accompanyingconsolidated financial statements in Item 18 for a list of these subsidiaries,including a description of their respective principal business activities).

 

Anydiscrepancies in any table between totals and the sums of the amounts listedare due to rounding.

 

Allreferences to the “Philippines” contained in this report mean the Republic of the Philippinesand all references to the “U.S.” or the “United States” are to the United States of America.

 

Inthis report, unless otherwise specified or the context otherwise requires, allreferences to “pesos,” “Philippine peso” or “Php” are to the lawful currency ofthe Philippines, all references to “dollars,” “U.S. dollars” or “US$” 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 the lawful currency of the European Union.  Unless otherwiseindicated, translations of peso amounts into U.S. dollars in this report weremade based on the volume weighted average exchange rate quoted through thePhilippine Dealing System, which was Php56.341 to US$1.00 on December 31, 2004.On June 28, 2005, the volume weighted average exchange rate quoted wasPhp55.579 to US$1.00.

 

Inthis report, each reference to:

 

•        ACeS Philippinesmeans ACeS Philippines Cellular Satellite Corporation, our wholly-ownedsubsidiary;

 

•        AIL means ACeS InternationalLimited;

 

•        AMPS means advanced mobile phonesystem;

 

•        BCC or BonifacioCommunications Corporation, our 75%-owned subsidiary;

 

•        BSP means Bangko Sentral ngPilipinas;

 

•        CDMA means code division multiple access;

 

•        Clark Telecom means PLDT ClarkTelecom, Inc., our wholly-owned subsidiary;

 

•        DigiPar means Digital Paradise,Inc., a 67.79%-owned subsidiary of ePLDT;

 

•        ePLDT means ePLDT, Inc., ourwholly-owned subsidiary;

 

•        ETACS means enhanced total accesscommunications system;

 

•        First Pacific means First PacificCompany Limited;

 

•        GAAP means generally acceptedaccounting principles;

 

•        GSM means global system for mobilecommunications;

 

•        ISP means internet serviceprovider;

 

•        Infocom means InfocomTechnologies, Inc., a 99.6%-owned subsidiary of ePLDT;

 

•        Mabuhay Satellite means MabuhaySatellite Corporation, our 67%-owned subsidiary;

 

•        Maratel means PLDT-Maratel, our97.5%-owned subsidiary;

 

•        NTC means the NationalTelecommunications Commission of the Philippines;

 

•        NTT Communications means NTTCommunications Corporation, a wholly-owned subsidiary of Nippon Telegraph andTelephone Corporation of Japan;

 

•        NTTC-UK means NTT CommunicationsCapital (UK) Ltd., a wholly-owned subsidiary of NTT Communications;

 

•        PAPTELCO means PhilippineAssociation of Private Telephone Companies;

 

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

 

•        Piltel means Pilipino TelephoneCorporation, an associate in which we have a 92.1% ownership interest and whichis treated as a consolidated subsidiary under U.S. GAAP; 

 

•        PLDT Beneficial Trust Fund meansthe beneficial trust fund created by PLDT to pay the benefits under the PLDTEmployees’ Benefit Plan;

 

•        PLDT Global means PLDT GlobalCorporation, our wholly-owned subsidiary;

 

•        SEC means thePhilippine Securities and Exchange Commission;

 

•        SMS means shortmessage service;

 

•        Smart means Smart Communications,Inc., our wholly-owned subsidiary;

 

•        Subic Telecom means SubicTelecommunications Company, Inc., our wholly-owned subsidiary;

 

•        Telesat means Telesat, Inc., our94.4%-owned subsidiary;

 

•        Ventus means ePLDT Ventus, Inc., awholly-owned subsidiary of ePLDT;

 

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

 

•        VSAT means very small apertureterminal.

 

FORWARD-LOOKING STATEMENTS

 

Some information in this report may containforward-looking statements within the meaning of Section 27A of the U.S.Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of1934.  We have based these forward-looking statements on our current beliefs,expectations and intentions as to facts, actions and events that will or mayoccur in the future.  Such statements generally are identified byforward-looking words such as “believe,” “plan,” “anticipate,” “continue,”“estimate,” “expect,” “may,” “will” or other similar words.

 

Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement.  We have chosen these assumptions orbases in good faith, and we believe that they are reasonable in all materialrespects.  However, we caution you that assumed facts or bases almost alwaysvary from actual results, and the differences between results implied by theforward-looking statements, assumed facts or bases and actual results can bematerial, depending on the circumstances.  When considering forward-lookingstatements, you should keep in mind the description of risks and othercautionary statements in this report.  You should also keep in mind that anyforward-looking statement made by us in this report or elsewhere speaks only asat the date on which we made it.  New risks and uncertainties come up from timeto time, and it is impossible for us to predict these events or how they mayaffect us.  We have no duty to, and do not intend to, update or revise thestatements in this report after the date hereof.  In light of these risks anduncertainties, you should keep in mind that actual results may differmaterially from any forward-looking statement made in this report or elsewhere.

 

PART I

 

Item 1.        Identity of Directors, SeniorManagement and Advisors

 

Not applicable.

 

Item 2.        OfferStatistics and Expected Timetable

 

Notapplicable.

 

Item 3.        Key Information

 

SelectedFinancial Data

 

Theselected consolidated financial information below should be read in conjunctionwith, and is qualified in its entirety by reference to, our auditedconsolidated financial statements, including the notes, included elsewhere inthis report.  The consolidated financial statements have been prepared andpresented in conformity with U.S. GAAP.

 

Priorto the filing of our Annual Report on Form 20-F in respect of the year endedDecember 31, 2002, the consolidated financial statements included in our AnnualReports on Form 20-F filed with the U.S. Securities and Exchange Commission, orU.S. SEC, were prepared in conformity with Philippine GAAP.  Philippine GAAPvaries in certain significant respects from U.S. GAAP.  A description of thesignificant differences between U.S. GAAP and Philippine GAAP and a quantitativereconciliation of such differences in the net loss and stockholders’ equity toU.S. GAAP was disclosed in a note to our previously filed consolidatedfinancial statements.

 

 

**Consolidated Financial Data**

 

**Years Ended December 31,**

 

**2004**

**2004**(1)

**2003**(2)

**2002**(2)

**2001**(2)

**2000**(2)

 

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

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

 

 

 

 

 

 

**Statements of Operating Data:**

 

 

 

 

 

 

Operating Revenues 

Php121,221

US$2,151

Php111,200

Php93,831

Php80,294

Php60,348

Service

114,952

2,040

100,486

81,686

67,279

55,586

Non-service

6,269

111

10,714

12,145

13,015

4,762

Operating Expenses

72,682

1,290

77,821

81,802

88,288

49,824

Operating Income 

48,539

861

33,379

12,029

(7,994)

10,524

Operating income (loss) per share

 

 

 

 

 

 

Basic

266.73

4.73

179.04

55.47

(59.52)

58.82

Diluted

252.20

4.48

165.37

52.23

(59.52)

58.82

Net income (loss)

28,101

499

11,045

(6,158)

(27,782)

(29,258)

Earnings per common share(3)

 

 

 

 

 

 

Basic

146.32

2.60

47.20

(52.08)

(176.85)

(193.48)

Diluted

145.30

2.58

45.72

(52.08)

(176.85)

(193.48)

**Balance Sheets Data:**

 

 

 

 

 

 

Cash and cash equivalents

27,321

485

19,372

10,974

4,276

9,674

Total assets

279,639

4,963

276,364

269,387

284,877

326,153

Total long-term debt - net of current portion

131,377

2,332

160,464

171,283

169,870

179,068

Long-term debt

159,397

2,829

184,274

190,908

190,099

191,925

Total debt(4)

159,455

2,830

186,407

191,668

196,561

196,042

Total liabilities(5)

215,743

3,829

236,633

240,622

249,563

238,915

Total stockholders’ equity

48,079

853

24,745

16,413

24,472

86,528

**Other Data:**

 

 

 

 

 

 

Depreciation and amortization 

20,098

357

21,812

17,566

16,218

12,756

Ratio of earnings to fixed charges(6)

4.1x

4.1x

2.0

–

–

–

Net cash provided by operating activities

Php62,860

Php1,116

Php42,582

Php39,722

Php20,113

Php20,727

Net cash used in investing activities

24,764

440

20,021

17,167

29,376

25,183

Net cash provided by (used in) financing activities

(30,078)

(534)

(14,135)

(15,954)

3,841

5,511

Dividends declared to common shareholders

–

–

–

–

202

752

Dividends declared per common share(7)

–

–

–

–

 

1.20

 

4.80

_____________

 

*(1)  **We maintain our accountsin Philippine peso. For convenience, the peso financial information as at andfor the year ended December 31, 2004, has been translated into U.S. dollars atthe exchange rate of Php56.341 to US$1.00, the rate quoted through thePhilippine Dealing System as at December 31, 2004.  This translation should notbe construed as a representation that the Philippine peso amounts represent, orhave been or could be converted into, U.S. dollars at that rate or any otherrate.*

 

*(2)    **As reclassified to conformwith the 2004 presentation, see Note 26 – Changes in Presentation ofComparative Consolidated Financial Statements to the accompanying consolidatedfinancial statements in Item 18.*

* *

*(3)    **In 2002, 2001 and 2000 ourconvertible preferred shares were deemed anti-dilutive based on a calculationof the required dividends on preferred shares for each series of convertiblepreferred shares divided by the number of equivalent common shares assumingsuch preferred shares were converted into common shares and compared againstthe basic earnings per share.  Since the amount of dividends on preferredshares over the equivalent number of common shares were greater than the basicearnings per share, the amounts for basic and diluted earnings per share arethe same.*

* *

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

* *

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

* *

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

* *

*Dueto PLDT’s net losses in 2002, 2001 and 2000 the coverage ratio on aconsolidated basis was less than 1.0x in these years.  In order to achieve acoverage ratio of 1.0x, we would have had to generate additional consolidatedearnings of Php2,4634 million, Php30,126 million and Php35,509 million for eachof the three years ended**December 31, 2002**, 2001 and 2000,respectively.*

* *

*(7)    **The most recent cashdividend declaration made by PLDT on its common stock was on**May 5, 2005**at Php21 per common share to holders of record as at**June 3, 2005**payable on**July 14, 2005**.  On**March 1, 2005**, PLDT declared a cashdividend at Php14 per common share to holders of record as at**March 31, 2005**which was paid on**May 12, 2005**.  This was the first cash dividend declaration tocommon shareholders since March 2001.*

 

Capital Stock

 

Thefollowing table summarizes PLDT’s capital stock outstanding as at December 31, 2004,2003 and 2002.

 

 

**December 31,**

 

2004

** **

**2003**

** **

**2002**

 

**(in millions)**

Serial Preferred Stock

 

 

 

 

 

10% Cumulative Convertible Preferred Stocks

 

 

 

 

 

A to EE

Php4,091

 

Php4,099

 

Php4,068

Series III

46

 

46

 

46

Convertible Preferred Stocks Subject to Mandatory Redemption

 

 

 

 

 

Series V(1)

22

 

26

 

25

Series VI(1)

47

 

47

 

49

Series VII(1)

38

 

38

 

36

Cumulative Non-convertible Redeemable Preferred Stock

 

 

 

 

 

Series IV

360

 

360

 

360

 

Php4,604

 

Php4,616

 

Php4,584

Common Stock

Php851

 

Php847

 

Php847

___________

*(1)   Preferred stock subject tomandatory redemption in 2008 and 2009 (see Note 14 – Preferred Stock Subject toMandatory Redemption to the accompanying consolidated financial statements inItem 18 for further discussion).*

 

Dividends Declared

 

 

**Years Ended December 31,**

 

**2004**

** **

**2003**

** **

**2002**

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

Php–

 

Php–

 

Php–

_____________

 

 

*(1)   The most recent cash dividenddeclaration made by PLDT on its common stock was on May 5, 2005 at Php21 percommon share to holders of record as at June 3, 2005 payable on July 14, 2005.On**March 1, 2005**, PLDT declared a cash dividend at Php14 per commonshare to holders of record as at**March 31, 2005**which was paid on**May 12, 2005**.  This was the first cashdividend declaration to common shareholders since March 2001.*

 

Dividends Paid

 

Asummary of dividends paid per share of PLDT's common stock stated in bothPhilippine peso and U.S. dollars follows:

 

**In Philippine Peso**

** **

**In U.S. Dollars**

2000

 

 

 

January 14

1.20

 

0.030

April 14

1.20

 

0.029

July 15

1.20

 

0.027

October 15

1.20

 

0.025

2001

 

 

 

January 15

1.20

 

0.023

April 16

1.20

 

0.024

2002

 

–

 

–

2003

–

 

–

2004

 

–

 

–

2005 (through June 28, 2005)

14.00

 

0.248

___________

 

 

 

(*Note*:       *Dividends on PLDT's common stockwere declared and paid in Philippine peso.  For the convenience of the reader,the peso dividends are translated into U.S. dollars based on exchange rates onthe respective dates of dividend payments.  Dividends paid in January of eachof the calendar years 2000-2001 were declared in the preceding December.Accordingly, total amounts shown for cash dividends declared under “Dividends Declared”above may differ from the amounts shown for cash dividends paid under“Dividends Paid.”)*

 

Exchange Rates

** **

ThePhilippine government does not administratively fix the exchange rate betweenthe Philippine peso and the U.S. dollar.  Since August 1, 1992, a marketaverage rate has been determined daily in inter-bank trading using thePhilippine Dealing System, known as the “Philippine Dealing System ReferenceRate.”  The Philippine Dealing System is a specialized off-floor direct dealingservice for the trading of Philippine pesos-U.S. dollars by member banks of theBankers Association of the Philippines and BSP, the central bank of the Philippines.All members of the Bankers Association ofthe Philippines are required to make their Philippine peso-U.S.dollar trades through this system, which was established by Telerate FinancialInformation Network of Hong Kong.

 

Thefollowing shows the exchange rates between the Philippine peso and the U.S.dollar, expressed in pesos per U.S. dollar, for the periods indicated, based onthe volume-weighted average exchange rate for each business day in each of theperiods presented:

 

 

**Year Ended December 31,**

** **

**Period End**

** **

**Average(1)**

** **

**Low(2)**

** **

**High(3)**

 

 

 

 

 

 

 

 

2000

Php49.986

 

Php44.179

 

Php39.830

 

Php51.680

2001

51.690

 

51.009

 

47.550

 

55.013

2002

53.254

 

51.583

 

49.336

 

53.841

2003

55.586

 

54.215

 

52.021

 

55.767

2004

56.341

 

56.044

 

55.142

 

56.443

2005 (through June 28, 2005)

55.579

 

54.815

 

53.912

 

56.226

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

 

**Month**

 

**Period End**

** **

**Average(1)**

** **

**Low(2)**

** **

**High(3)**

2004

 

 

 

 

 

 

 

December

Php56.341

 

Php56.044

 

Php55.142

 

Php56.443

2005

 

 

 

 

 

 

 

January

55.097

 

55.707

 

55.097

 

56.226

February

54.685

 

54.791

 

54.556

 

55.176

March

54.747

 

54.430

 

53.912

 

54.964

April 

54.332

 

54.472

 

54.053

 

54.902

May

54.489

 

54.349

 

53.976

 

54.706

June (through June 28, 2005)

55.579

 

55.176

 

54.496

 

55.793

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

This report contains conversionsof Philippine peso amounts into U.S. dollars for your convenience.  Unlessotherwise specified, these conversions were made at the exchange rate as at December 31, 2004 ofPhp56.341 to US$1.00.  You should not assume that such peso amounts representsuch U.S. dollar amounts or could have been or could be converted into U.S.dollars at the rate indicated, or at any particular rate.  As at June 28, 2005, theexchange rate quoted through the Philippine Dealing System was Php55.579 toUS$1.00.

 

Risk Factors

 

***Risks Relating to Us***

* *

*Our substantial indebtedness could impair our ability to fulfill ourfinancial obligations, service our other debt, carry out new financings orincur capital expenditures*

 

We have substantialindebtedness.  As at December 31, 2004, we had consolidated total indebtedness ofapproximately Php159,455 million (US$2,830 million), including short-term debtof approximately Php58 million (US$1 million) and a consolidated ratio of debtto equity (total debt on a consolidated basis divided by total equity) of3.32x.  Our consolidated ratio of earnings to fixed charges was less than theminimum required ratio of 1.0x for the years ended December 31, 2002, 2001 and2000.  For an explanation on how we calculate our consolidated ratio ofearnings to fixed charges, see footnote 6 to our consolidated financial datatable under “Selected Financial Data” and Exhibit 7 in “Item 19.”  Our existingdebt contains covenants which, among other things, require PLDT to maintaincertain financial ratios calculated on the basis of Philippine GAAP on aconsolidated and non-consolidated basis, limit our ability to incurindebtedness, make investments, incur expenditures and pay dividends.Financial statements prepared in conformity with Philippine GAAP differ in somematerial respects from financial statements prepared in conformity with U.S.GAAP.  For a description of some of these covenants, see “Item 5.  Operatingand Financial Review and Prospects — Liquidity and Capital Resources —Financing Activities — Debt Financing — Debt Covenants.”

 

Oursubstantial indebtedness and the requirements and limitations imposed by ourdebt covenants could have important consequences.  For example, they could:

 

•        make it more difficult for us tosatisfy our debt obligations;

 

•        require us to dedicate asubstantial portion of our cash flow to payments on our indebtedness, therebyreducing the availability of our cash flow to fund working capital, capitalexpenditures and other general corporate requirements;

 

•        limit our ability to refinance ourdebt obligations or incur new debt needed to finance our working capital,capital expenditure or other requirements;

 

•        limit our flexibility in planningfor, or reacting to, changes in our business and the industry in which weoperate; 

 

•        limit our ability to incur capitalexpenditures; and

 

•        place us at a competitivedisadvantage compared to our competitors.

 

If we are unable to meet our debtservice obligations or comply with our debt covenants, we could be forced torestructure or refinance our indebtedness, seek additional equity capital orsell assets.  An inability to effect these measures successfully could resultin a declaration of default and an acceleration of some or all of ourindebtedness.  Moreover, we expect that we will have difficulty meeting ourdebt payment obligations if we do not continue to receive cash dividends fromSmart.

 

 

*We may not be able to maintain compliance with restrictive covenantsand ratios imposed by our indebtedness*

 

Ourdebt instruments contain restrictive covenants, including covenants that couldprohibit us from paying dividends on common stock under certain circumstances,and require us to comply with specified financial ratios and other financialtests, calculated on the basis of Philippine GAAP, at relevant measurementdates, principally at the end of each quarterly period.  Financial statementsprepared in conformity with Philippine GAAP differ in some material respectsfrom financial statements prepared in conformity with U.S. GAAP.

 

The principal factors that can negatively affect ourability to comply with these financial ratios and other financial tests aredepreciation of the peso relative to the U.S. dollar, poor operatingperformance of PLDT and its consolidated subsidiaries, impairment or similarcharges in respect of investments or other long-lived assets that may berecognized by PLDT and its consolidated subsidiaries and increases in ourinterest expenses.  Since approximately 98% of our total consolidated debts aredenominated in foreign currencies, principally in U.S. dollars, many of thesefinancial ratios and other tests are negatively affected by any weakening ofthe peso, which declined by approximately 3% against the U.S. dollar to anaverage of Php56.044 to US$1.00 in 2004 from an average of Php54.215 to US$1.00in 2003.  As at December 31, 2004, the exchange rate was Php56.341 to US$1.00,equivalent to a 1% depreciation of the peso relative to the rate at the end of2003.  In addition, certain of our financial ratios are adversely affected byincreases in interest expense, which may result from factors including issuanceof new debt, the refinancing of lower cost indebtedness by higher costindebtedness, depreciation of the peso, the lowering of PLDT's credit ratingsor the credit ratings of the Philippines, increase in reference interest rates,and general market conditions.

 

PLDT’sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of ourfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart and PLDT’s other investees inassisting in complying with non-consolidated covenants or covenants that arecalculated without giving effect to the results of PLDT’s investees.

 

Wehave maintained compliance with all of our financial ratios and covenants asmeasured under Philippine GAAP under our loan agreements and other debtinstruments.  However, if negative factors adversely affect our financialratios, we may be unable to maintain compliance with these ratios and covenantsor be unable to incur new debt.  Under some of our loan agreements, certain ofour financial ratios became more restrictive towards the end of 2004, and willcontinue to become more restrictive in increments thereafter, which will makeit more difficult for PLDT to maintain compliance with such ratios in thefuture.  Inability to comply with our financial ratios and covenants or raisenew financing could result in a declaration of default and acceleration of someor all of our indebtedness.  The terms of some of our debt instruments have nominimum amount for cross-default.

 

*Creditors of oursubsidiaries will have superior claims to our subsidiaries’ cash flow andassets*

 

A growing portion of ourconsolidated operating revenues and cash flow from operations is derived fromour subsidiaries, particularly Smart.  Smart and some of our other subsidiarieshave significant internal cash requirements for debt service, capitalexpenditures and operating expenses and so may be financially unable to pay anydividends to PLDT.  In addition, some of our subsidiaries are subject tocovenants that restrict them from distributing cash to PLDT except undercertain circumstances.  In particular, Smart is subject to loan covenants thatrestrict its ability to distribute cash to PLDT.  Although Smart receivedconsents under its relevant loans that permitted it to make dividend paymentsto PLDT in December 2002, June 2003, November 2003, May 2004 and December 2004,we cannot assure you that PLDT will continue to receive dividends or otherdistributions, or otherwise be able to derive liquidity from Smart or any othersubsidiary or investee in the future.

 

Creditorsof our subsidiaries will have prior claims to our subsidiaries’ assets and cashflows.  We and our creditors will effectively be subordinated to the existingand future indebtedness and other liabilities, including trade payables, of oursubsidiaries, except that we may be recognized as a creditor on loans we havemade to subsidiaries.  If we are recognized as a creditor of a subsidiary, ourclaim will still be subordinated to any indebtedness secured by assets of thesubsidiary and any indebtedness of the subsidiary otherwise deemed senior toindebtedness we hold.

* *

*Our businesses require substantial capital investment, which we may notbe able to finance*

* *

Our projects under development and the continuedmaintenance and improvement of our networks and services, including Smart’sprojects, networks and services, require substantial ongoing capitalinvestment.  Our consolidated capital expenditures in 2004 and 2003 totaledPhp19,268 million and Php17,943 million, respectively.  Our 2005 budget forconsolidated capital expenditures is approximately Php18,000 million, of whichapproximately Php8,000 million is budgeted to be spent by PLDT, approximatelyPhp9,000 million is budgeted to be spent by Smart and the balance representsother subsidiaries’ capital spending.  PLDT’s capital spending is intendedprincipally to finance the continued build-out of its data and internetprotocol infrastructures and for its fixed line data services and themaintenance of its network.  Smart’s capital spending is focused on expandingand upgrading its transmission network facilities to meet increased demand forcellular services.

 

Futurestrategic initiatives could require us to incur significant additional capitalexpenditures.  We may be required to finance a portion of our future capital expendituresfrom external financing sources, which have not yet been fully arranged.  Wecannot assure you that financing for new projects will be available on termsacceptable to us or at all.  If we cannot complete our development programs andother capital projects, our growth, results of operations and financialcondition could be materially and adversely affected.

 

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

 

We may require new external financing in order to fundall of our operating, investment, capital expenditures and debt servicerequirements.  Our ability to arrange for this and other financing and the costof such financing will be dependent on numerous factors outside of our control,including:

 

•        general economic and capitalmarket conditions, including the peso-to-U.S. dollar exchange rate;

 

•        the availability of credit frombanks or other lenders;

 

•        investor confidence in us;

 

•        investor views about the Philippines;

 

•        the continued success of ourbusiness;

 

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

 

•        provisions of tax and securitieslaws that may be applicable to our efforts to raise capital.

 

Anycredit rating downgrades may significantly affect the availability and theterms of our prospective financing, including financing costs.  In addition,restrictions under our current indebtedness subject us to various financialtests, which could prevent us from incurring additional debt.  Inability toarrange such debt could materially and adversely affect our ability to fund ouranticipated operating, investment and capital expenditures as well as ouranticipated debt service requirements, and could result in defaults and cross-defaultsunder our existing debt, thereby adversely affecting our results of operationsand financial condition.

 

*If the peso depreciatesagainst the U.S. dollar, our financial position could be materially andadversely affected*

 

Substantiallyall of our indebtedness and related interest expense, a substantial portion ofour capital expenditures and a portion of our operating expenses aredenominated in U.S. dollars and other foreign currencies, but a significantportion of our revenues is denominated in pesos.  As at December 31, 2004,approximately 98% of our total consolidated debts are denominated in U.S.dollars and other foreign currencies.  A depreciation of the peso against theU.S. dollar increases the amount of our debt obligations and operating and interestexpenses in peso terms.  In the event that the peso depreciates against theU.S. dollar, we may be unable to generate enough funds through operations (suchas by raising our service rates, including through adjustments to rates forlocal exchange service based on movements in the peso-to-dollar exchange rate)and other means to offset the resulting increase in our obligations in pesoterms.  Further, these changes could cause us not to be in compliance with thefinancial covenants imposed by our lenders under certain loan agreements andother indebtedness.

 

During the last decade, thepeso has generally depreciated against most foreign currencies.  In addition,during this period, the Philippine economy has also, from time to time,experienced periods of concentrated peso devaluation and limited availabilityof foreign currency.  Since June 30, 1997, when the**BSP announced that it would letmarket forces determine the value of the peso, the peso has experienced asignificant decline against the U.S. dollar.  It depreciated from Php26.376 toUS$1.00 on June 30, 1997 to Php56.341 to US$1.00 as at December 31, 2004.The peso declined by approximately 1% against the U.S. dollar to Php56.341 toUS$1.00 as at December 31, 2004 from Php55.586 to US$1.00 as at December 31,2003.  The peso has also been subject to significant fluctuations.  Forexample, during 2004 and 2003, the peso recovered to a high of Php52.021 toUS$1.00 on May 9, 2003 and depreciated to a low of Php56.443 to US$1.00 on October 14, 2004.The peso may again be subject to significant fluctuations and may depreciatedue to a range of factors, including:

 

•        political and economicdevelopments affecting the Philippines;

 

•        the volatility of regionalcurrencies, particularly the Japanese yen;

 

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

 

•        higher demand for U.S. dollars byboth banks and domestic businesses to service their maturing U.S. dollarobligations; and

 

•        some banks covering their shortU.S. dollar positions.

 

*Our results of operations have been, and may continue to be, adverselyaffected by competition in international long distance service*

 

Theinternational long distance business was historically one of our major sourcesof revenue.  However, due to competition and the steep decline in internationalsettlement rates that are paid to us by foreign telecommunications carriers fortermination of international calls on our network, revenues generated from ourinternational long distance business have overall declined in recent years.  

 

Althoughrevenue generated from our international long distance business increased in2004 and 2003, primarily due to increased termination rates in 2004 and 2003,we anticipate that revenues from international communications and informationservices, including our services, will continue to decline in the future,primarily due to:

 

•        installed and expanding fibernetworks and satellite capacities that provide substantially more transmissioncapacity than may be needed in the short or medium term;

 

•        substantial increases in thetransmission capacity of new and existing networks, including those operated byour competitors, due to recent technological advances;

 

•        advances in technology;

 

•        increased competition from otherdomestic and international telecommunications providers;

 

•        alternative providers offeringinternet telephony and broadband capacity; and

 

•        unauthorized traffic terminationand bypass routings by international simple resale operators.

 

Wecannot assure you that these declines will not materially and adversely affectour financial performance.

 

Netsettlement payments between PLDT and other foreign telecommunications carriersfor origination and termination of international call traffic between the Philippinesand other countries have been our predominant source of foreign currencyrevenues.  However, in U.S. dollar terms, these payments have been declining inrecent years.  Continued decline in our foreign currency revenues couldincrease our exposure to risks from declines in the value of the Philippinepeso against the U.S. dollar.  We cannot assure you that we will be able toachieve adequate increases in our other revenues to make up for any adverseimpact of a further decline in our net settlement payments.

* *

*We face strong competition and may need to increase our marketingexpenditures or reduce our rates in order to compete effectively*

 

Wecannot assure you that the number of providers of cellular telecommunicationservices will not increase or that competition for telecommunications customerswill not lead our cellular and fixed line subscribers to switch to otheroperators or lead us to increase our marketing expenditures or reduce ourrates, resulting in a reduction in our profitability.

 

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

 

Thecellular telecommunications industry in the Philippines has been particularly competitive, as operators havesought to develop and maintain market shares and to attract new subscribers.Our principal cellular competitor, Globe Telecom, Inc., or Globe, acquiredanother telecommunications provider, Isla Communications Company, Inc., orIslacom, on June 27, 2001, thereby strengthening Globe as a competitor.Further consolidation in the industry could result in more vigorouscompetition.  Digital Telecommunications Philippines, Inc., or Digitel, whichwas awarded a license to operate cellular telecommunications services in 2000,launched its cellular service, *Sun Cellular*, on March 29, 2003.  Inaddition, the NTC has awarded a license to Bayan TelecommunicationsPhilippines, Inc., or BayanTel, to operate cellular telecommunicationsservices, but as of the filing of this annual report has not yet commencedcellular operations.  The recent entry of Digitel has created and the recentgrant of a license to Bayantel is expected to create additional competition inthe industry.  In the future, the government may allocate further frequenciesand award additional cellular telecommunications licenses, which would furtherincrease competition.

 

Competitive pressures on ourcellular rates may affect our cellular revenues and revenue growth.  Forexample, our prepaid subscribers can, using their existing handsets, switch toone of our competitors by having their handsets “unlocked” from our service fora fee and purchasing a new SIM card from the desired operator.  As a result ofcompetitive pressures, we have not increased our cellular rates to reflectfluctuations in the peso to U.S. dollar exchange rate since November 1998.Moreover, competitive pressures require us to continuously innovate ourproducts and to conduct promotions, which may affect our cellular revenues andrevenue growth.  For example, in order to test the market demand for fixed rateor “bucket” plans for voice and text services and in response to similar typesof promotions launched by our competitors, we launched in March and April 2005the *Smart 258**Unlimited Call*and *Text*promotions pursuant to which all Smart and *Talk ‘N Text* prepaidsubscribers had the option to avail themselves of unlimited on-network(Smart-to-Smart) voice calls or unlimited on-network (Smart-to-Smart) textmessages at a fixed rate.  We cannot assure you that incurring these marketingexpenses for these promotions and responding to rate pressures and thepotential loss of customers arising from increased competition will not have amaterial adverse effect on our financial performance.

 

*If we are unable to install and maintain telecommunications facilitiesand equipment in a timely manner, we may not be able to keep up with ourprincipal competitors, which may have negative implications for our revenue andprofitability*

 

Our business requires the regularinstallation of new, and the maintenance of existing, telecommunicationstransmission and other facilities and equipment.  The installation andmaintenance of these facilities and equipment are subject to risks anduncertainties relating to:

 

•        shortages of equipment, materialsand labor;

 

•        work stoppages and labor disputes;

 

•        interruptions resulting frominclement weather and other natural disasters;

 

•        unforeseen engineering,environmental and geological problems; and

 

•        unanticipated cost increases.

 

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

 

Rapidchanges in telecommunications technology may adversely affect the economics ofour existing businesses and the value of our assets, increase our requiredcapital expenditures and create new competition

 

The telecommunications sector hasbeen characterized recently by rapid technological changes.  We cannot assureyou that these developments will not result in competition from providers ofnew services or the need to make substantial capital expenditures to upgradeour facilities.  For example, if third-generation, or 3G, cellularservices were introduced in the Philippines, we would likely incur significant expenses if wewere to roll out those services.

 

Ourfuture success will depend, in part, on our ability to anticipate or adapt tosuch changes and to offer services that meet customer demands on a competitiveand timely basis.  We cannot assure you that we will be able to obtain newtechnologies on a timely basis or on satisfactory terms or implement them in anappropriate or effective manner.  Future development of new technologies,services or standards could require significant changes to our business modelwhich could necessitate substantial new investments.  In addition, new productsand services may be expensive to develop and may result in increasedcompetition.  We cannot accurately predict how emerging and futuretechnological changes will affect our operations and financial results.Furthermore, the development and introduction of new technologies by us or ourcompetitors may cause significant portions of our existing assets to becomeobsolete and suffer an impairment in value earlier than their anticipateduseful lives and require us to accelerate their depreciation.  In 2001, werecognized impairment charges in respect of Smart’s analog assets and Smart’sunamortized intangible asset relating to analog customer lists.  Piltelrecognized impairment losses in respect of its AMPS/CDMA and Executive OrderNo. 109, or E.O. 109 assets in 2001 and 2002, respectively.

* *

*The cellular telecommunications industry may not continue to grow ormay grow at a slower rate*

 

The majority of our consolidated operating revenues iscurrently derived from our cellular services.  As a result, we depend on thecontinued development and growth of the cellular telecommunications industry.Growth of the cellular communications market depends on many factors beyond ourcontrol, including the continued introduction of new and enhanced cellulardevices and consumer preferences.  Any economic, technological or otherdevelopments resulting in a reduction in demand for cellular services may harmour business.

* *

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

 

We depend to a significant degree on an uninterruptedoperation of our network to provide our services.  We also depend on robustinformation technology systems to enable us to conduct our operations.  Thedevelopment and operation of our telecommunications networks are subject tophysical, technological and other risks, which may cause interruptions in serviceor reduced capacity for customers.  These risks include:

 

•        physical damage;

 

•        power loss;

 

•        capacity limitation;

 

•        equipment failure;

 

•        software defects; and

 

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

* *

Theoccurrence of any of these risks could have a material adverse effect on ourability to provide services to customers and our ability to attract and retainsubscribers, which could have a material adverse effect on our business.

 

Piltelhas experienced financial difficulties and we cannot assure you that it will beable to discharge any of its debts or other obligations and that its creditorswill not take measures to enforce their claims 

 

Piltel has experienced significant financialdifficulties in recent years.  It has restructured substantially all of itsdebts in accordance with its debt restructuring plan, which was signed on June 4, 2001.  While Smart acquired from Piltel’s creditorsapproximately US$289 million, or 69.4%, of Piltel’s total outstandingrestructured debt at that time, in exchange for US$283.2 million, or Php15,854million in July 2, 2004, in new debt of Smart and US$1.5 million, or Php84million, in cash, in a debt exchange offer conducted by Smart in 2004, we cannot assure you that Piltel will be able to paythe claims relating to its remaining restructured debt or to restructure orotherwise pay the claims relating to its unrestructured debt or that Piltelwill have sufficient cash flow to meet its debt service and other paymentobligations.

 

Asat December 31, 2004, Piltel had an aggregate principal amount of Php52million of unrestructured debt.  Piltel does not intend to make any payments inrespect of this debt unless and until it reaches a restructuring agreement withthe creditors holding the obligations.  If Piltel’s non-participating creditorstake forceful measures to enforce their claims, it is possible that Piltelwould be required to submit itself to a court-supervised rehabilitationproceeding or an involuntary insolvency proceeding seeking liquidation.  

 

*The franchise of Smart may be revoked due to its failure to conduct apublic offering of its shares by August 2004*

 

Smart has publicly stated that it believesthat it had ten years from the commencement of its operations, or until August2004, to conduct a public offering of its shares required under the PublicTelecommunications Policy Act, or R.A. No. 7925.  As Smart has not conducted a public offering of its shares, the PhilippineCongress may revoke the franchise of Smart for its failureto comply with the requirement under R.A. No. 7925 on the public offering ofits shares.  Moreover, a *quo warranto* case may be filed against Smart bythe Office of the Solicitor General of the Philippines for the revocation of the franchise of Smart on theground of violation of R.A. No. 7925.  A bill is currently pending in the Philippine Senate,pursuant to which a telecommunications entity shall be deemed to have compliedwith the requirement of making a public offering of its shares if two-thirds ofits outstanding voting shares are owned and controlled, directly or indirectly,by a listed company.  However, we cannot assure you that such bill will beenacted and that the franchise of Smart will not be revoked due to Smart’sfailure to timely conduct a public offering of its shares.

 

*A significant number of PLDT’s shares are held by two separateshareholders, which may not act in the interests of other shareholders orstakeholders in PLDT*

* *

Affiliatesof First Pacific directly or indirectly own approximately 31.2% of PLDT’scommon stock as at December 31, 2004.  This is the largest block of PLDT’s common stockthat is directly or indirectly under common ownership.  NTT Communications owns14.8% of PLDT’s common stock as at December 31, 2004and has contractual veto rights over a number of major decisions andtransactions that PLDT could make or enter into, including:

* *

•        capital expenditures in excess ofUS$50 million;

* *

•        any investments, if the aggregateamount of new investments for the previous 12 months is greater than US$100million, determined on a rolling monthly basis;

 

•        any investments in a specificinvestee, if the cumulative value of all investments made by PLDT in thatinvestee is greater than US$10 million in the case of an existing investee andUS$50 million in the case of a new investee;

 

•        issuance of common stock or stockthat is convertible into common stock;

 

•        new business activities other thanthose we currently engage in;

 

•        merger or consolidation; and

 

•        the provision of financial supportto Piltel in excess of that remaining available under the PLDT Letter ofSupport, or LOS.

 

First Pacific and NTTCommunications have also entered into a shareholders’ agreement relating toPLDT.  As a result of this agreement and their respective stockholdings, FirstPacific and its affiliates and/or NTT Communications are able to influence ouractions and corporate governance, including:

* *

•        elections of PLDT’s directors; and

 

•        approval of major corporateactions, which require the vote of common stockholders.

 

First Pacific and its affiliatesand/or NTT Communications may exercise control over these decisions andtransactions in a manner that could be contrary to your interests.

* *

*If a major shareholder sells its interest in PLDT, the transaction mayresult in an event of default*

* *

If First Pacific or NTTCommunications sells all or a portion of its equity interest in PLDT, incertain circumstances, such sale may give rise to an obligation for us to makean offer to purchase or prepay our outstanding debt under our 10.625% Notes due2007 and our 11.375% Notes due 2012, our JP¥9,760 million loan agreement withJapan Bank for International Cooperation, or JBIC, (formerly known as theExport-Import Bank of Japan) and our JP¥5,615 million syndicated term loanfacility, and may result in a default under some of Smart’s loan agreements.As at December 31, 2004, Php25,633 million in principal amount of PLDT’sindebtedness is directly subject to a change in control offer to purchase orprepay requirement and Php14,787 million in principal amount of Smart’sindebtedness is subject to an event of default in the event of a change incontrol of PLDT.  If we fail to complete a required change in control offer, topurchase or prepay the affected debts, all of our debt could become immediatelydue and payable as a result of various cross-default provisions.  See *Note12 – Interest-bearing Financial Liabilities — Long-term Debt — Debt Covenants*to the accompanying consolidated financial statements in Item 18.

 

*Our business is significantly affected by governmental laws andregulations, including regulations in respect of our franchises and rates*

 

We operate our business underfranchises, each of which is subject to amendment, termination or repeal by thePhilippine Congress.  Additionally, PLDT operates pursuant to variousprovisional authorities and certificates of public convenience and necessity,or CPCNs, which are granted by the NTC and expire between now and 2028.  Someof PLDT’s CPCNs and provisional authorities have already expired.  However, PLDTfiled applications for extension of these CPCNs and provisional authoritiesprior to their respective expiration dates and is therefore entitled tocontinue to conduct its business under its existing CPCNs and provisionalauthorities pending the NTC’s decisions on these extensions.  Smart alsooperates its cellular, international long distance, national long distance andglobal mobile personal communications via satellite services pursuant to CPCNs,which will expire upon the expiration of its franchise.  Smart’s franchise isdue to expire on March 27, 2017, 25 years after the date on which its currentfranchise was granted.  Smart operates international private leased circuitsunder a provisional authority, which expired on May 6, 2003.  Smart applied foran extension of this provisional authority prior to its expiration.  While anextension has not yet been formally granted, since PLDT and Smart filed theapplications for extension on a timely basis we expect that these extensionswill be granted.  However, we cannot assure you that the NTC will grant theseextensions.  If a CPCN has not been issued, the NTC may permit an operator toprovide services pursuant to a provisional authority.  Provisional authoritiesare typically granted for a period of 18 months.  The Philippine RevisedAdministrative Code of 1987 provides that if the grantee of a license orpermit, such as a CPCN or provisional authority, has made timely and sufficientapplication for the extension thereof, the existing CPCN or provisional authoritywill not expire until the application is finally decided upon by theadministrative agency concerned.  However, we cannot assure you that ourfranchises, CPCNs and provisional authorities will be renewed.  For adescription of our licenses, see “Item 4. Information on the Company — Licensesand Regulation.”

 

TheNTC also regulates the rates we are permitted to charge for services that havenot yet been deregulated, such as local exchange services.  We cannot assureyou that the NTC will not impose additional obligations on us that could leadto the revocation of our licenses if not adhered to and/or reduction in ouroperating revenues or profitability.  In addition, the NTC could adopt changesto the regulations governing our interconnection with other telecommunicationscompanies or the rates and terms upon which we provide services to ourcustomers that could have a material and adverse effect on our results ofoperations.

* *

In the firstquarter of 2005, House Bill No. 926 was filed and is now pending in the Houseof Representatives of the Philippines.  The proposed bill provides for thecancellation of the currency exchange rate mechanism pursuant to which utilitycompanies, including us, are permitted to adjust our monthly local exchageservice rates according to changes in the peso-to-U.S. dollar exchange rate.If this bill is passed into law or if the NTC issues guidelines to change thebasis of the currency exchange rate mechanism mechanism, our ability togenerate U.S. dollar linked revenues from our local exchange business could beadversely affected. A decline in our foreign currency-linked revenues couldincrease our exposure to risks from declines in the value of the Philippinepeso against the U.S. dollar.

* *

The NTC may implementchanges in existing regulations and introduce new regulations, which may resultin increased competition and may have negative implications for our revenuesand profitability

 

On June 16, 2000, theNTC issued Memorandum Circular No. 13-6-2000proposing that Philippine cellular operators, including Smart and Piltel, berequired, among other things:

 

•        to bill their subscribers forcellular calls on a six-second pulse basis instead of the current per minutebasis;

 

•        not to bill calls directed torecorded voice messages; and

 

•        to extend the expiration date ofprepaid cards from the current two months to two years.

* *

Alongwith the other Philippine cellular operators, Smart sought and obtained from a Quezon City trial court a preliminary injunction restraining the implementation ofthe memorandum circular.  The NTC appealed the issuance of the injunction tothe Court of Appeals which, on October 9, 2001, annulled the preliminaryinjunction, ruling that the NTC had jurisdiction over the matter.  On January 10, 2002, the Court of Appeals denied the cellular operators’ motion to annul andreverse the decision of the Court of Appeals.  On February 22, 2002, Smart filed an appeal with the Supreme Court arguing that the appellate court had erred inruling that the NTC, and not the trial court, had jurisdiction over its case.On September 2, 2003, the Supreme Court upheld Smart’s appeal, reversing andsetting aside the decision of the Court of Appeals and affirming that the Quezon City trial court could hear and decide the case.  The case was remanded tothe Quezon City trial court for continuation of the proceedings. The NTC fileda motion for reconsideration on September 29, 2003 which was denied withfinality by the Supreme Court on November 13, 2003.  The Supreme Court statedthat “considering that the basic issues have already been passed upon and thereis no substantial argument to warrant a modification of this court’s decision,the court resolves to deny consideration with finality.”

 

TheNTC has also issued draft guidelines regarding the assignment and allocation of3G and VoIP licenses and frequency bands, which are still subject to furtherdiscussions with incumbent operators and other market participants.  We cannotpredict what the final implementation guidelines for these services willcontain, nor can we determine the timing of when these regulations will beimplemented.  In addition, we cannot assure you that other regulatory changesinitiated by the NTC will not lead to increased competition and that it willnot have an adverse effect on our business, results of operations andprospects.

 

*The Philippine Government may impose new taxes and/orimplement higher tax rates which may have negative implications for ourrevenues and profitability*

 

On May 24, 2005, the President signed into law Republic Act No. 9337 amendingcertain sections of the National Internal Revenue Code with effect on July 1, 2005.  In particular, the following amendments may negatively impact ourprofitability:  

 

•        increase of the income tax ratefor corporations from 32% to 35% effective July 1, 2005,followed by a reduction to 30% effective January 1, 2009;

 

•        conferment upon the President,upon the recommendation of the Secretary of Finance, of the power to raise thevalue-added tax, or VAT, rate from 10% to 12% effective January 1, 2006,after any one of the following conditions has been satisfied;

 

a.      VAT collection as a percentage ofthe Gross Domestic Product, or GDP, exceeds 2.8% in 2005; or 

 

b.      the fiscal deficit as a percentageof GDP, which represented 3.8% in 2004, exceeds 1.5% in 2005.

 

•        limited claim of input tax creditsto 70% of output tax; and

 

•        input tax on capital goods spreadevenly over 5 years or estimated useful life, whichever is shorter.

 

Wecan not assure you that the proposed increase in taxes will not have a materialadverse effect on our revenues, profitability and cash flows.

 

Moreover,the Philippine Congress is considering five bills which were filed prior to thesigning into law of R. A. 9337.  Each of the proposed bill, if passed byCongress and enacted into law, would impose a 7% or 10% tax on the grossreceipts of cellular operators.  The proposed taxes would apply to bothcellular calls and cellular data revenues and prohibit cellular operators fromimposing additional charges or fees to compensate for the imposition of theproposed taxes.  In addition, several bills have also been submitted forconsideration by Congress, each of which, if passed by Congress and enactedinto law, would impose a franchise tax at a rate of 7% or 5% tax on grossreceipts of all telecommunications companies in lieu of the currentlyapplicable 10% VAT.  We cannot assure you that we would be able to imposeadditional charges or fees to compensate for the imposition of such taxes. 

 

***Risks Relating to the******Philippines***

 

*Our business may beaffected by political or social instability in the**Philippines*

 

In the past four years, anincreasing number of kidnappings, criminal and terrorist activities haveoccurred in Mindanao, principally led by the extremist "AbuSayyaf" group, which reportedly has ties to the Al-Qaeda terroristnetwork.  There have been a series of bombing incidents in key cities in Mindanao,including Davao City.  The armed conflict between the Philippine militaryand the communist Moro Islamic Liberation Front also continues in Mindanao.  Thissocial unrest negatively impacted the operations of Piltel’s fixed linebusiness in Mindanao. 

 

In November 2001, members of therebel groups damaged three of our cell sites located in Central Luzonand one of our relay stations, including some radio facilities, in Southern Mindanaoin response to our failure to pay “revolutionary taxes” demanded by thesegroups.  On July 27, 2003, approximately 300 Philippine soldiers took controlof a shopping center and apartment complex in Makati City in aneffort to express their dissatisfaction with the Philippine government.  Themutineers surrendered within 20 hours.  The government has reported that theactions taken by the approximately 300 Philippine soldiers were part of a coupattempt.  In October 2003, a group of unidentified armed men inflicted minordamage to Smart’s cell site in Bicol.  

 

Thepresidential election held on May 10, 2004 , resulted in a victory by theincumbent President Gloria Macapagal-Arroyo who successfully retained herpost.  The opposition has alleged irregularities in the presidential election,such as stolen ballots and vote buying.  The Philippine Congress also commencedan inquiry into a wire tapped audio tape which contains a conversation allegedlybetween President Gloria Macapagal-Arroyo and a commissioner of the Commissionon Elections discussing the vote count on the presidential election held on May 10, 2004.  On June 27, 2005,President Gloria Macapagal-Arroyo publicly stated that she did speak to acommissioner of the Commission on Elections in order to protect her votes, butnot to influence the outcome of the election.  Moreover, the PhilippineCongress announced in May 2005, that it would begin an inquiry into allegationsthat President Gloria Macapagal-Arroyo’s family was involved in a gamblingscandal.  We cannot assure you that political events or terrorists’ activitieswill not result in major public protest or the involvement of the military inpolitics.  Any political instability in the future may have a negative effecton our results of operations and financial condition.  We cannot assure youthat the political environment in the Philippines will be stable or that the current or any futuregovernment will adopt economic policies conducive to sustained economic growthor which do not impact adversely on the current regulatory environment fortelecommunications or other companies.  

 

Ourresults of operations may be negatively affected by slow growth rates andeconomic instability in the Philippines and in Asia

 

In the past, the Philippines hasexperienced periods of slow growth, high inflation, significant devaluation ofthe peso, imposition of exchange controls, debt restructuring and electricityshortages and blackouts, and has been significantly affected by economicvolatilities in the Asian Region.

 

In2004, the Philippine government incurred a fiscal deficit of Php184,051 millionwhich was lower by approximately 8% from the Php199,900 million incurred in2003.  The fiscal deficit incurred for 2004 represents 3.8% of the nominalgross domestic product.  In order to reduce the fiscal deficit, the PhilippineGovernment is targeting to generate additional revenues of over Php180 billionper year through executive reforms and implementing a legislative revenueagenda.  In particular, on May 24, 2005,the President signed into law Republic Act No. 9337, which increases the incometax rate for corporations from 32% to 35% effective July 1, 2005, followed by a reduction to 30% effective January 1, 2009, and confers upon the President, upon therecommendation of the Secretary of Finance, the power to raise the VAT ratefrom 10% to 12% effective January 1, 2006, if either (i) the VAT collection asa percentage of GDP exceeds 2.8% in 2005 or (ii) the fiscal deficit as apercentage of GDP, which represented 3.8%in 2004,  exceeds 1.5% in 2005.Moreover, the Philippine Government is considering the following additionalmeasures that, if implemented, would impact us:

 

•       adoptionof gross income taxation; and

•       re-impositionof franchise tax on telecommunications companies. 

 

On May 30, 2005, Fitch Ratings revised the outlook onPLDT’s long-term foreign currency rating to stable from negative.Simultaneously, Fitch has affirmed PLDT’s long-term foreign currency rating,global bonds and senior notes at “BB” and PLDT’s convertible preferred stock at“B+”.  PLDT’s long-term local currency rating has also been affirmed at “BB+”and the stable outlook on this rating remains in place.  The rating actions reflectFitch’s decision to revise its outlook on the Republic of the Philippines’ “BB”long-term foreign currency rating to stable from negative.  

 

On February 16, 2005, Moody’sInvestor’s Service, Inc., or Moody’s, downgraded the foreign currency senior unsecureddebt rating of PLDT to Ba3 from Ba2 with a stable outlook.  The rating actionwas taken as part of Moodys’ two-notch downgrade of the Republic of the Philippines’foreign currency country ceiling to B1 from Ba2.  On the same date, Moody’saffirmed PLDT’s B1 preferred stock rating with a stable outlook.  Moody’s viewsthat there is a differential between PLDT’s foreign currency rating and thePhilippine sovereign rating because foreign currency bonds subject tointernational law are less likely to be subject to a debt moratorium thanforeign currency obligations subject to local law.  According to Moody’s,PLDT’s foreign currency debt rating is a function of its own risk of defaultand the probability of a Philippine government default on its foreign debt, thelikelihood that the Philippine government would declare a moratorium in theevent of a default, and if it did, the chances that it would exempt companiessuch as PLDT.

 

On January 17, 2005, Standard andPoor’s Rating Group, or Standard and Poor’s, revised its long-term foreigncurrency rating on PLDT from “BB” to “BB-”(BB minus) with a stable outlook.  The rating action was taken immediatelyafter Standard and Poor’s downgraded the foreign currency rating on theRepublic of the Philippines to “BB-” (BBminus).  

 

Thegrowing government fiscal deficit and a global increase in oil prices haveresulted in increased concerns about the political and economic stability inthe Philippines.  This, in turn, has resulted in the depreciation ofthe peso against the U.S. dollar and the volatility of the prices of sharestraded on the domestic stock market.  We cannot assure you that these factorswill not affect our results of operations in a materially adverse manner.

* *

*If foreign exchangecontrols were to be imposed, our ability to meet our foreign currency paymentobligations could be adversely affected*

 

Approvalfrom or registration with the BSP for the issuance and guarantee of foreigncurrency denominated borrowings is not required in order to make our foreigncurrency payment obligations legally valid and binding.  However, receivingthis approval and registration will enable a borrower to access the bankingsystem to obtain foreign currency to service its debt obligations rather thanusing other sources of foreign currency, for example, foreign currency revenuestreams.

 

The Philippine government has, in the past, institutedrestrictions on the conversion of the peso into foreign currency and the use offoreign exchange received by Philippine companies to pay foreigncurrency-denominated obligations.  The Monetary Board of the BSP has statutoryauthority, with the approval of the President of the Philippines,during a foreign exchange crisis or in times of national emergency, to:

 

•        suspend temporarily or restrictsales of foreign exchange;

 

•        require licensing of foreignexchange transactions; or

 

•        require the delivery of foreignexchange to the BSP or its designee banks.

 

Wecannot assure you that foreign exchange controls will not be imposed in thefuture.  If imposed, these restrictions could materially and adversely affectour ability to obtain foreign currency to service our foreign currencyobligations.

* *

*The occurrence of natural catastrophes may materially disrupt ouroperations*

* *

The Philippineshas experienced a number of major natural catastrophes over the years includingtyphoons, volcanic eruptions and earthquakes that may materially disrupt andadversely affect our business operations.  We cannot assure you that theinsurance coverage we maintain for these risks will adequately compensate usfor all damages and economic losses resulting from natural catastrophes.

 

Item 4.        Informationon the Company

 

Overview

 

Weare the leading national telecommunications service provider in the Philippines.Through our three principal business groups — wireless, fixed line, andinformation and communications technology — we offer a wide range oftelecommunications services to over 21 million wireless and fixed linesubscribers in the Philippines across the nation's most extensive fiber opticbackbone and fixed line, cellular and satellite networks.

 

Weare the leading fixed line service provider in the Philippineswith approximately 62% of the total reported fixed lines in service nationwideas at December 31, 2004.  Smart, our wholly-owned subsidiary, is the leadingcellular service provider in the country, with approximately 44% of totalreported cellular subscribers as at December 31, 2004.Piltel, our 92.1%-owned subsidiary, had approximately 14% of total reportedcellular subscribers as at December 31, 2004.  We have interests in theinformation and communications technology sectors, including Infocom, one ofthe leading ISPs in the Philippines.

 

Our common shares are listed andtraded on the Philippine Stock Exchange, or PSE, and our American DepositaryShares are listed and traded on the New York Stock Exchange and the ArchipelagoExchange in the United States.  We had a market capitalization of approximatelyPhp252,568 million (US$4,483 million) as at May 31, 2005, representing one ofthe largest market capitalizations among Philippine-listed companies.  For theyear ended December 31, 2004, we had consolidated operating revenues of Php121,221million (US$2,152 million). 

 

Ourprincipal executive offices are located at the Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines and our telephone number is (632) 816-8024.  Ourwebsite address is *www.pldt.com.ph*.  The contents of our website are nota part of this annual report.

 

Historical Background and Development

 

PLDT was incorporated under theold Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following themerger of four telephone companies under common U.S. ownership.  Under itsamended Articles of Incorporation, PLDT’s corporate term is limited through2028.  In 1967, effective control of PLDT was sold by General Telephone andElectronics Corporation (a major shareholder since PLDT’s incorporation) to agroup of Filipino businessmen.  In 1981, in furtherance of the then existingpolicy of the Philippine government to integrate the Philippinetelecommunications industry, PLDT purchased substantially all of the assets andliabilities of the Republic Telephone Company which at that time was the secondlargest telephone company in the Philippines.  During 1998, First Pacific,through its Philippine and other affiliates, acquired a significant interest inPLDT.  On March 24, 2000, NTT Communications, through NTTC-UK, became PLDT’sstrategic partner with approximately 15% economic and voting interest in theissued common capital stock of PLDT.  Simultaneous with NTT Communications’investment in PLDT, we acquired 100% of Smart.

 

PLDT’s original franchise, whichwas granted in 1928, was last amended in 1991 to be extended until 2028.  Theamended franchise (R.A. No. 7082), which became effective on August 24, 1991, alsobroadened PLDT’s franchise to permit PLDT to provide virtually every type oftelecommunications service.  PLDT’s franchise covers the business of providingbasic and enhanced telecommunications services in and between the provinces,cities and municipalities in the Philippines and between the Philippines andother countries and territories including mobile, cellular, wired or wirelesstelecommunications system, fiber optics, multi-channel transmissiondistribution systems and their value-added services such as but not limited totransmission of voice, data, facsimile, control signals, audio and video,information services bureau and all other telecommunications systemstechnologies, as are at present available or can be made available throughtechnical advances or innovations in the future.  

 

Since the implementation of itsSubscriber Investment Plan, or SIP, in 1973 pursuant to Presidential Decree No.217, which, until April 21, 2003, required telephone subscribers to purchase shares ofPLDT's preferred stock, PLDT has developed a broad base of public ownershipwith approximately 2,200,367 common and preferred shareholders of record as at December 31, 2004.Approximately 2,183,736 of these shareholders are Philippine personsrepresenting approximately 87% of PLDT's outstanding common and preferredshares.  For purposes of the percentages described in this paragraph, all theADSs evidenced by American Depositary Receipts, or ADRs, are considered to beheld of record in the United States.  As approved by the NTC, the purchase of PLDTpreferred shares by PLDT subscribers pursuant to the SIP became optionalstarting April 22, 2003.  

 

Our consolidated capitalexpenditures amounted to Php19,268 million, Php17,943 million, and Php17,239million in 2004, 2003 and 2002, respectively.  Of these amounts, Php3,917million, Php6,100 million, and Php8,194 million were attributable to PLDT for2004, 2003 and 2002, respectively, while Php14,721 million, Php11,305 millionand Php7,564 million were spent by Smart for 2004, 2003 and 2002,respectively.  The remaining balances were spent by our other subsidiaries,principally ePLDT and its subsidiaries.

 

Organization

 

As at May 31, 2005, our two largest shareholders wereFirst Pacific, a Hong Kong-based investment and management company engaged inconsumer, telecommunications and property businesses, which, through itsPhilippine and other affiliates, beneficially owned 31.2% of our common shares,and NTT Communications, a wholly-owned subsidiary of Nippon Telegraph andTelephone Corporation of Japan, which beneficially owned 14.8% of our commonshares.

 

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

 

**Name of Subsidiary/Investee**

**Principal Activity**

**Percentage of Ownership**

**2004**

**2003**

2002

** **

 

 

 

 

**Wireless**

 

 

 

 

Smart and subsidiaries

Cellular mobile services

100.0

100.0

100.0

Piltel and subsidiaries

Cellular mobile and telecommunications services

92.1

45.3

45.3

Telesat

Satellite communications services

94.4

94.4

94.4

ACeS Philippines 

Satellite phone services

100.0

100.0

100.0

Mabuhay Satellite

Satellite communications services

67.0

67.0

67.0

 

 

 

 

 

**Fixed Line**

 

 

 

 

Clark Telecom

Telecommunications services

100.0

100.0

100.0

Subic Telecom

Telecommunications services

100.0

100.0

100.0

Smart-NTT Multimedia, Inc.

Data and network services

100.0

100.0

100.0

PLDT Global and subsidiaries

Telecommunications services

100.0

100.0

100.0

PLDT-Maratel

Telecommunications services

97.5

97.5

97.5

BCC

Telecommunications, infrastructure and related value-added services

75.0

75.0

37.5

 

 

 

 

 

**Information and Communications Technology**

 

 

 

 

ePLDT and subsidiaries

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

100.0

100.0

100.0

 

*Smart’s Acquisition of MeridianTelekoms, Inc., or**Meridian*

 

On July 5, 2004, Smart entered into asale and purchase agreement, as amended and supplemented on August 11, 2004, toacquire 100% of Meridian, a company primarily engaged in providing wirelessbroadband and data services to small and medium-scale enterprises in the Philippines,for a total consideration of US$45 million.  Payments of US$11 million and US$7million for an equity interest of 40% in Meridian were made in 2004 and payment of US$4 million for anadditional equity interest of 9% in Meridian was made in January 2005.  The balance of US$23million is payable on or before December 31, 2005 in respect of the remaining 51%equity interest in Meridian.  The acquisition aims to strengthen Smart’s positionin the wireless data segment and is in line with Smart’s overall strategy ofproviding the widest range of innovative wireless services.  For furtherdetails, see *Note 9 – Goodwill and Other Intangible Assets* to theaccompanying consolidated financial statements in Item 18.

 

***Changes in Piltel’s Shareholdings***

** **

Tointegrate the PLDT Group’s wireless holdings, on July 2, 2004, Smart entered intoa sale and purchase agreement with PLDT to acquire PLDT’s 59.3 million sharesof Piltel Series K Class I Convertible Preferred Stock for a purchase price ofPhp2,066 million.  The payment was settled through an offset of amounts owed toSmart by PLDT arising from interconnection charges.  On July 9, 2004 and December 28, 2004,Smart converted a total of 4.8 million and 54.5 million shares, respectively,of Piltel Series K Class I Convertible Preferred Stock into 10,080 millionshares of common stock of Piltel, equivalent to 85.6% of the resulting totaloutstanding shares of common stock after such conversion.  On April 25, 2005, PLDTand Smart entered into a subscription and assignment agreement covering thetransfer and assignment to Smart of 767 million shares of Piltel common stockowned by PLDT.  As a result, Smart now owns 92.1% of the total outstandingcommon stock of Piltel, thereby consolidating the PLDT Group’s wirelessbusiness under Smart.

 

***Wireless***

 

Weprovide cellular and satellite, VSAT and other services through our wirelessbusiness segment. Revenues from our wireless business accounted for 60%, 57%and 51% of our total operating revenues for the years ended December 31, 2004,2003 and 2002, respectively.  In 2004, 2003 and 2002, cellular service revenuesaccounted for 97%, 97% and 95%, respectively, of our wireless business servicerevenues. 

 

Ourcellular service (including handset sales), which accounted for about 97% ofour wireless service revenues for the year ended December 31, 2004, is providedthrough Smart and Piltel.  Smart is the leading cellular service provider inthe Philippines, with approximately 14.6 million subscribers as at December 31, 2004, representing an estimated market share of approximately 44%.  Piltel, areseller of Smart's digital capacity under its own branding and pricingstrategy for voice and text messaging services, had approximately 4.6 millionsubscribers as at December 31, 2004, representing an estimated market share of14%.  In 2004, the combined number of Smart's and Piltel's subscribers (beingserved using Smart’s network) increased by 48%, representing the largestincrease in the number of cellular subscribers in absolute terms in that periodamong Philippine cellular providers.  As at December 31, 2004, cellular penetration in the Philippines was approximately 39%, which was nearly ten timesthe country's fixed line penetration.

 

Smart'sand Piltel's cellular subscriber gains were predominantly attributable to theirrespective prepaid services.  Approximately 98% of Smart's cellular subscriberswere prepaid as at December 31, 2004.  The predominance of prepaid servicereflects one of the distinguishing characteristics of the Philippine cellularmarket.  The growth in our prepaid service has enabled us to increase andbroaden our subscriber base rapidly while controlling credit risk and reducingbilling and administrative costs on a per-subscriber basis.  

 

Ourcellular subscriber growth has also been driven by text messaging service.Text messaging service is extremely popular in the Philippines, particularly onthe prepaid platform, as it provides a convenient and inexpensive alternativeto voice and e-mail based communications.  During 2004, our text messagingservice system handled 40,953 million outbound messages, an increase of 42%compared to 28,825 million outbound messages handled during 2003. 

 

Asat December 31, 2004, Smart's digital network included 36 mobile switchingcenters with a capacity of 17.3 million subscribers and 5,303 base stationscovering 1,433 cities and municipalities.  Piltel’s prepaid service, *Talk ‘NText*, is also supported on this network.  

 

***Fixed Line***

 

Weare the leading fixed line operator in the Philippines and the only company providing fixed linetelecommunications service throughout the country.  Our fixed line businessgroup offers local exchange, international long distance, national longdistance, data and other network and miscellaneous services.  As at December 31, 2004, wehad approximately 2.2 million fixed lines in service.  Revenues from our fixedline services accounted for 38% of our total operating revenues for the yearended December 31, 2004.

 

Wehave a 5,400-kilometer long digital fiber optic backbone, which is supported byan extensive digital microwave backbone.  Our fixed line network reaches all ofthe major cities and municipalities in the Philippines, with a concentration in the Metropolitan Manilaarea.  Our network offers the country’s most extensive connections tointernational networks through three international gateway switching exchanges,satellite systems and various regional submarine cable systems in which we haveinterests.

 

***Information and Communications Technology***

 

Throughour wholly-owned subsidiary, ePLDT, we provide broad-based integratedinformation and communications technology, or ICT, services focusing oninfrastructure and solutions for internet applications, internet protocol-basedsolutions and multimedia content delivery.  Incorporated in August 2000, ePLDTstarted commercial operations in February 2001.  ePLDT's principal activitiesare the operation of an internet data center under the brand name *Vitro™*,call center businesses and Infocom, an ISP.  

 

ePLDT has also invested in anumber of other e-commerce and internet-related businesses, as described in “—Business — Information and Communications Technology — Infrastructure andServices — Other Investments” below.

 

Asthe newest business in the PLDT Group, revenues from our ICT services accountedfor 2% of our consolidated service revenues in 2004.

 

Strengths

 

Webelieve our business is characterized by the following competitive strengths:

 

•        *Recognized Brands*.  PLDT and Smart are strong and widely recognizedbrand names in the Philippines.  We have built the PLDT brand name for over 75 yearsas the leading telecommunications provider in the Philippines.Smart is recognized in the Philippines as an innovative provider of high-quality cellularservices.  Piltel’s *Talk 'N Text* brand, which is provided using Smart’snetwork, has also gained significant recognition.

 

•        *Leading Market Shares*.  With over 21 million cellular and fixed linesubscribers as at December 31, 2004, we have the leading market position in both thecellular and fixed line markets in the Philippines.  ePLDT’s subsidiary, Infocom, is one of the leadingISPs in the Philippines.

 

•        *Diversified Revenue Sources*.  As a result of the continued growth of wirelessservice in the country, approximately 60% of our consolidated operatingrevenues in 2004 are now derived from our wireless business segment.  Fixedline revenues, which represent 38% of our consolidated operating revenues in2004 compared to 41% in 2003, have remained stable over the past three yearsdespite pressures on traditional fixed line voice revenues, resulting fromincreases in our fixed line data and other network services.  We continue toidentify and develop new revenue sources from our wireless, fixed line and ICTbusinesses.

 

•        *Advanced Integrated Network*.  With one of the most advanced and extensivetelecommunications networks in the Philippines, we are able to offer a wide array of communicationsservices.  We are enhancing the capabilities of our fixed line and wirelessnetworks to allow us to better exploit this competitive strength and achievehigher levels of network efficiency in providing voice and data services.

 

•        *Innovative Products andServices*.  We have successfullyintroduced a number of innovative and award-winning cellular products andservices, including *Smart Load, Talk ‘N Text Load, Pasa Load*and *Smart**Padala**.**Smart*and *Talk ‘N Text Loads* are“over-the-air” electronic loading facilities designed to make reloading of airtime credits more convenient for, and accessible to consumers.  *Pasa Load*(literallymeans “transfer load”), a derivative service of *Smart*and***Talk‘N Text Loads,* allows load transfers to other *Smart Buddy* and *Talk‘N Text*subscribers.  *Smart Padala,* a cash remittance serviceintended for overseas Filipino workers, is the first cash remittance servicethrough text messaging service technology and is faster and more cost effectivethan traditional cash remittance services.

 

•        *Strong Strategic Relationship*.  We have an important strategic relationship withNTT Communications and First Pacific.  The technological support, internationalexperience and management expertise made available to us through thesestrategic relationships enhance our market leadership and ability to provideand cross-sell a more complete range of products and services.

 

Strategy

 

Thekey elements of our business strategy are:

 

•        *Build on our leading positionsin the wireless and fixed line businesses*.  We plan to build on our position as the leading wireless serviceprovider in the Philippines by continuing to introduce new products and servicesto increase our subscribers’ use of our network for both voice and data, aswell as their reliance on our services.  We also plan to further increase thecapacity and expand the geographic reach of our cellular network, as well as toimprove our service quality and indoor coverage.  Our operating target is tocontinue growth in profitability by increasing our revenues while controllingcosts.  We plan to build on our position as the leading provider of fixed lineservice in the Philippines by continuing to launch new products and services toincrease subscriber value and utilization of our existing facilities andequipment at reduced cost.  

 

•        *Capitalize on our strength asan integrated provider of telecommunications services*.  We offer the broadest range of telecommunicationsservices among all operators in the Philippines.  We plan to capitalize on this position to maximizerevenue opportunities by bundling and cross-selling our products and servicesbetween voice and data and fixed line and cellular.  We are also lowering ourcosts by integrating the operations of our different businesses.

 

•        *Strengthen our leading positionin the data market*.  Using theexisting network of our fixed line business, we are committed to further develop,enhance and lead our fastest growing business segment – data and networkservices.  Consistent with our strategy of introducing innovative products andservices using advanced technology, we have launched various products andservices that address different market needs.  

 

•        *Strengthen our financialposition*.  We are working to increaseour cash flow available for debt reduction by containing our operating costs,reducing capital expenditures and generating cash returns from our investmentsin subsidiaries.  Since December 2002, Smart has been regularly payingdividends to PLDT to supplement PLDT’s cash flows available for debtreduction.  Smart’s dividend payments have increased from Php1,540 million in2002 to Php16,100 million in 2004.

** **

**Business**

** **

Wireless

 

Weprovide cellular and satellite, VSAT and other services through our wirelessbusiness segment.  In 2004, 2003 and 2002, cellular business accounted for 97%,97% and 95%, respectively, of our wireless business service revenues.

 

*Cellular Service*

** **

*Overview*

** **

Ourcellular business, which we provide through Smart and Piltel to over 19 millionsubscribers, approximately 99% of whom are prepaid subscribers, is focused onproviding wireless voice communications, wireless data communications(primarily through text messaging) and a variety of other value-added services,which include (a) *Mobile Banking* (banking services delivered over themobile phone); (b) *Smart zedTM*; (c) *Smart Money*; and(d) international roaming, as well as other value-added services developed onSmart’s and Piltel’s own platform.  Smart services the almost five millionsubscribers of Piltel on its GSM network through a facilities service agreementwith Piltel, under the brand name *Talk ‘N Text*.

 

Thefollowing table summarizes key measures of Smart’s and Piltel’s cellularbusiness as at and for the years ended December 31, 2004,2003 and 2002:

 

 

**Years Ended December 31,**

 

**2004**

**2003**

**2002**

Systemwide cellular subscriber base

19,208,232

12,947,197

8,599,306

Smart(1)

14,595,782

10,080,112

6,825,686

Prepaid

14,321,288

9,831,135

6,649,038

Postpaid

274,494

248,977

176,648

Piltel - Prepaid

4,612,450

2,867,085

1,773,620

Growth rate of cellular subscribers

48%

51%

35%

Smart

45%

48%

39%

Piltel(2)

61%

62%

33%

Cellular revenues (in millions)

Php73,141

Php63,480

Php46,595

Service

67,030

52,932

34,500

Non-service

 

 

 

Handset sales 

6,111

10,548

12,095

Percentage of cellular revenues to total operating revenues 

58%

56%

49%

_____________

 

*(1)      **In December 2002, Smartclosed down its analog/ETACS network.*

 

*(2)      **Represents Talk ‘N Text, aprepaid service provided by Piltel using Smart’s network. Piltel’s revenue isnet of service fees payable to Smart for using Smart’s network.  Piltel doesnot offer postpaid service.*

 

 

* *

*ServicePlans*.  Smart markets nationwidecellular communications services under the brand names *Smart Buddy, SmartGold,**addict mobile,**addict mobile prepaid, Smart Infinity, SmartKid*and *Smart**Kid prepaid.  Smart Buddy, addict mobile prepaidand Smart Kid prepaid* are prepaid services while *Smart Gold, addictmobile,**Smart Infinity* and *Smart Kid* are postpaid services,all of which are provided through Smart's digital network.  

 

OfSmart’s total cellular subscribers as at December 31, 2004, 98% were *SmartBuddy, addict mobile prepaid* and *Smart Kid**prepaid*subscribers and 2% were *Smart Gold,**addict mobile, Smart Infinity*and***Smart Kid* postpaid**subscribers.  Introduced in April 2003, *addictmobile*offers exclusive multimedia content to subscribers and featurespersonalized means for internet surfing and allows subscribers to apply theirallocated free credits towards their choice of data and value-added services.  *SmartInfinity* is a premium postpaid plan launched in January 2004 for theaffluent and highly mobile market, offering first class quality services,including a round-the-clock dedicated personal concierge service, internationalassistance services, premium handset packages and exclusive lifestyle content.*Smart Kid*, launched in May 2004, is especially designed for children,and is equipped with “Family Finder” which automatically forwards the child’scall to pre-assigned numbers on the phone, a location-based finder service toenable them to keep in touch with their family members, as well as witheducational value-added services content. *addict mobile prepaid* and *SmartKid prepaid*, the prepaid versions of *addict mobile* and *Smart Kid,*were introduced in October 2004.

 

*Talk ‘N Text*,an example of Smart’s successful market segmentation strategy, is the brandcarried by Smart’s subsidiary, Piltel. *Talk ‘N Text* was introduced inApril 2000 and aimed at the lower-income markets.  Capitalizing on theFilipino’s love for pop culture, *Talk ‘N Text* extensively uses localcelebrities as its endorsers and the vernacular in its advertising and promotionalcampaigns.  With over 4.6 million subscribers, *Talk ‘N Text* has thethird-largest GSM subscriber base in the Philippines.

 

*TextMessaging Service and Other Value-added Services*.  Our cellular subscriber growth has been driven bytext messaging service on Smart’s digital networks.  Text messaging isextremely popular in the Philippines, particularly on the prepaid platform, as it providesa convenient and cost-efficient alternative to voice and e-mail basedcommunications.  Text messaging also utilizes less network capacity than voice,thereby increasing network efficiency.  Strong volume growth in text messagingcontributed significantly to our cellular revenue growth in 2004.  The totalvolume of messages handled by our text messaging service system during 2004increased by 42% to 40,953 million outbound messages from 28,825 millionoutbound messages handled during 2003.  

 

Our value-added services are primarily based on textmessaging service technology.  Since 2000, Smart launched the following value-addedcellular services:

 

•        *Smart zed*™, a partnership with international cellular operatorSonera zed Ltd., or Sonera zed, of Finland, enables subscribers to personalize their informationrequirements not only as to the types of information required but also when theinformation is required.  Sonera zed has introduced a single platform thatprovides access to local and global information through text messaging orwireless application protocol;

 

•        *Mobile Banking*, launched in collaboration with various banks, allowssubscribers to execute banking transactions, such as balance inquiries andtransfers, over their mobile telephones; and

 

•        *Smart Money*, launched in conjunction with MasterCard, enablessubscribers to pay for their purchases by transferring money from their bankaccounts to their Smart Money cards as well as reload their prepaid cardselectronically.

 

Wealso offer value-added services such as voice mail, information-on-demand,which are services that allow subscribers to order information from our contentproviders whenever desired.  Mobile banking and *TextMail*, are servicesthat allow subscribers to send and receive text messages through their personalcomputers and location-based services.  In addition, we have a number ofinteractive activities, such as text games and chat services, developed on ourown platforms.

 

*SmartMoney* was cited as the "Best Product Innovation" by MasterCardInternational and the "Most Innovative GSM Wireless Service forCustomers" at the 3rd GSM World Congress held in Cannes, France, in March2001.  In February 2004, at the sixth GSM World Congress, *Smart Load,*anover-the-air electronic loading facility designed to make reloading of air timecredits more convenient for and accessible to subscribers was cited as the“Best Mobile Application or Service for the Consumer Market.”

 

On August 1, 2004, Smart launched *Smart Padala*, a cash remittance serviceintended for overseas Filipino workers.  *Smart Padala* is the first cashremittance service through text messaging service technology and is faster andmore cost effective than traditional remittance services.  It is ideally suitedfor the lower income market where cash remittances have the highest need andappreciation.  *Smart Padala* has been launched in collaboration withBanco de Oro, a Philippine financial institution, as well as partnerships withseveral internationally-licensed remittance companies (e.g., CBN, Travelex) anddomestic encashment centers (e.g., McDonald’s, 7-Eleven, Seaoil and TambuntingPawnshops). *Smart Padala* is one of the innovative services emanatingfrom Smart’s *Smart Money* platform.  

 

Dueto the high level of text messaging service usage, we believe that thePhilippine market is well suited for text-based informational and e-commerceservices.  Our current approach is to continue maximizing our GSM, or 2G,services and also offer General Packet Radio Service, or GPRS or 2.5G, toservice increased demand for bandwidth-intensive applications.  GPRS allowsdata transfer at an average speed of up to 115 kilobits per second.  

In addition, we continue to upgrade our network to EnhancedData for GSM Evolution, or EDGE.  EDGE is a technology that would furtherincrease the speed and data capability of our GSM network.  

 

The NTC is currently expected toissue draft guidelines regarding the issuance of 3G licenses in the Philippines inthe near future.  However, in light ofthe limited acceptance of 3G technology in other markets in the world where 3Gservices have been offered, as well as the significant expenses involved in anypotential future 3G roll-out, we currently expect that text-based informationaland e-commerce services using existing GSM and GPRS services, particularly textmessaging, will remain more popular in the Philippines in the foreseeablefuture.

 

*Rates and Discounts*

 

Our current policy is torecognize a prepaid subscriber as “active” only when the subscriber activatesand uses the SIM card and reloads at least once during the month of initialactivation or in the immediate succeeding month.  For example, if a customeractivated a SIM card in April 2004 but had not reloaded by May 31, 2004, thiscustomer would not be counted as a subscriber.  Subscribers can reload theirair time by purchasing prepaid “call and text” cards that are sold indenominations of Php300, Php500 and Php1,000, or by purchasing additional airtime “over the air” via *Smart**Load* in smaller denominations ofPhp30, Php60, Php115 and Php200; and by receiving loads of Php2, Php5, Php10and Php15 via *Pasa**Load*, or through their handsets using *SmartMoney*.  Reloads have validity periods ranging from one day to two months,depending on the amount reloaded.  A prepaid cellular subscriber isdisconnected if the subscriber does not reload within four months after thefull usage or expiry of the last reload.

 

Prior to June 2004, a prepaid cellular subscriber wasrecognized as an active subscriber when that subscriber activated and used theSIM card in the handset, which already contained Php50 of pre-stored air time(reduced from Php100 in April 2004).  The rationale for the change in ourpolicy in June 2004 for the recognition of active prepaid subscribers stemsfrom our observance of “SIM-swapping” activities in the market beginningFebruary 2004.  “SIM-swapping” refers to the promotional activity whereinsubscribers can exchange their current prepaid SIM card for another operator’sSIM card at no cost to the subscriber.  We believe that these activities havegiven rise to a situation where certain subscribers may swap their SIM cardsbetween mobile operators upon full usage of the pre-stored air time, which,without the adjustment to subscriber recognition, may have led, based on theapproach used in the past, to an overstatement of our prepaid subscriber base.In May 2005, we terminated our "SIM-swapping"promotions.  As a result, we expect our churn rates to increase significantlyin the next few months as the subscribers acquired through “SIM-swapping” leavethe system. 

 

*Smart Buddy*and Piltel’s *Talk ‘N Text* prepaid cards are sold in denominations ofPhp300, Php500 and Php1,000, which include 33, 83 and 250 free text messages,respectively.  The stored value of a prepaid card remains valid for a period oftwo months from the time a subscriber activates the card.  On May 11, 2003, weintroduced *Smart Load*and*Talk ‘N Text Load*, an “over-the-air”electronic loading facility designed to make reloading of air time credits moreconvenient for, and accessible to consumers.  These over-the-air reloads comein the following denominations and corresponding expiration periods:

 

**Denomination**

** **

**Load Expiry**

** **

**Equivalent Values**

 

 

 

 

 

Php30

 

3 days

 

30 text messages or 4 local call minutes

Php60

 

6 days

 

60 text messages or 8 to 9 local call minutes

Php115

 

12 days

 

115 text messages or 15 to 17 local call minutes

Php200

 

30 days

 

200 text messages or 26 to 30 local call minutes

 

*Smart*and *Talk ‘N Text Loads* werefollowed in January 2004 with *Pasa Load*, a derivative service allowingprepaid subscribers to transfer even smaller denominations to other prepaidsubscribers for a charge of Php1.00 per transfer.  *Pasa Load* comes indenominations of Php2, Php5, Php10 and Php15, all carrying a one-day loadexpiry.  *Smart Buddy* subscribers who reload other *Smart Buddy* or *Talk‘N Text* subscribers via *Pasa Load* are charged Php1.00.

 

BeginningJanuary 2004, *Smart Buddy* subscribers pay the following air time ratesper minute: (a) Php6.50 for Smart-to-Smart and Smart-to-*Talk ‘N Text*subscribers; and (b) Php7.50 for Smart-to-other mobile operators, fixed linesand national long distance calls.

 

Priorto January 2004, *Smart Buddy* subscribers paid 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 within theSmart network or to other mobile operators’ networks.  From October 25 to December 31, 2003,national long distance calls were charged at Php11.00 per minute for peak hoursand Php7.00 per minute for off-peak hours.  Previous to that date, *SmartBuddy* subscribers paid varying national long distance rates depending onthe destination of the call.

 

Beginning January 25, 2004,*Smart Gold*launched its flat rate and consumable plans as follows:

 

•        Flat Rate (regular plans) Plansare available with monthly service fees ranging from Php500 to Php9,000 withvarying amounts of free air time and text messages and different rates beyondthe free minutes and text messages, depending on the monthly service fee.Monthly service fees for these plans are applicable only to local calls andtext messages.  All other services are billed on top of the monthly servicefee; and

_

•        Consumable plans are availablewith monthly service fees ranging from Php800 to Php8,000 with differentamounts of free air time and text messages and different rates beyond the freeminutes and text messages.  Subscribers to these plans may apply their monthlyservice fees to all voice calls, text messages (both local and international)and value-added services.

 

Under both types of plans, therates for calls to other mobile operators, landlines and NDD calls are Php1.00higher than calls within the Smart network.

 

FromJanuary 1, 2002 to January 24, 2004, *Smart Gold* subscriberscould choose from seven different subscription plans with monthly services feesranging from Php500 to Php3,500 with different amounts of free air time andtext messages and different rates beyond the free minutes and text messages.Under each of these plans, calls during peak hours and to other mobileoperators, landlines and NDD calls were charged at higher rates per minute thancalls within the Smart network.

 

Prior to January 1, 2002, *Smart Gold* offered thefollowing monthly air time plans: Php600, Php1,200, Php1,800, Php3,000 andPhp4,000.  Subscribers who enrolled in these plans prior to January 1, 2002remained on these plans following introduction of the plans described above.

 

On January 25, 2004, *addictmobile* began offering flat rate plans similar to the ones launched for *SmartGold* on the same day with monthly service fees ranging from Php500 toPhp3,500 with different amounts of free air time and text messages anddifferent rates beyond the free minutes and text messages.  Under each of theseplans, calls to other mobile operators and landlines are charged at higherrates per minute than calls within the Smart network.

 

From April 12, 2003 to January 24, 2004, *addictmobile* offered seven different subscription plans with monthly servicesfees ranging from Php500 to Php3,500 with different amounts of free air timeand text messages and different rates beyond the free minutes and textmessages.  Under each of these plans, calls during peak hours to other mobileoperators, landlines and NDD calls were charged at higher rates per minute thancalls within the Smart network.

 

Smartis permitted to adjust its cellular air time and national direct dial ratesaccording to changes in the peso-to-U.S. dollar exchange rate.  Under theauthorization granted to Smart by the NTC, Smart is permitted to increase andis required to decrease its air time and national direct dial rates by 1% forevery Php0.25 change in the exchange rate relative to a base rate of Php24.726to US$1.00.  However, Smart has not implemented any foreign currencyadjustments to its rates since November 4, 1998 because of the concern thatincreased rates may result in decreased usage by its subscribers.

 

AllSmart subscribers pay an internationaldirect dialing rate of US$0.40 per minute.  This rate applies to 201destinations, including the United States, Hong Kong, Japan, Singapore, the United Kingdom and the United Arab Emirates.  Smart charges US$0.98 per minute for 27 other destinations such as Afghanistanand Cuba and US$2.18 per minute for another ten destinations such as East Timor andthe Falkland Islands.  

 

Charges for point-to-point text messages beyond theallotted free text messages are as follows:

 

•        for *Smart Buddy,**addictmobile* and *Smart Kid prepaid* subscribers, Php1.00 per message; and

 

•        for *Smart Gold* and *SmartInfinity* subscribers, Php0.50 or Php1.00 per message, depending on air timeplan.

 

*Smart Buddy,**Smart Gold* and *addict mobile***subscribers pay the samecharges for SMS-based value-added services, as follows:

 

•        Php15.00 per message forinternational text for *Smart Buddy* subscribers and Php10.00 per messagefor international text under the new *Smart Gold* plans and for *addictmobile* and *Smart Infinity* subscribers;

 

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

 

•        Php15.00 per download of ring tonesand logos;

 

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

 

•        Php10.00 per subscriptiondownload.  Daily subscription of logos, ringtones:  Php5.00 per logo orringtone for *addict mobile* and *Smart Kid*, and Php10.00 for otherbrands

 

For multimedia messaging service,or MMS, and wireless application protocol, or WAP, services, the charges are asfollows:

 

•        Php5.00 per person-to-person MMSstill and animated images, Php3.00 for *addict mobile* and *Smart Kid*and Php5.00 for other brands; 

 

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

 

•        Php2.50 per MMS for e-text andinformation-on-demand services (such as news, stock and entertainment updates)Php5.00 for *addict mobile* and *Smart Kid* and Php10.00 for otherbrands;

 

•        Php2.50 per transaction whensurfing on the Smart WAP portal depend on the type of service, ifinformation-based, Php5.00 for *addict mobile* and *Smart Kid* andPhp10.00 for other brands; if personalized-based, (logo or ringtones), Php15.00per download for all brands; and

 

•        Php0.25 per kilobyte when surfingoutside the Smart WAP portal.

 

For voice mail retrieval, allSmart subscribers are charged Php6.50 per minute.

 

Inaddition to enjoying the same tariffs as *Smart Gold* subscribers, *addictmobile* subscribers are allowed to apply their allocated free credits ontheir choice of data and value-added services.

 

Piltel's*Talk 'N Text* prepaid cards are sold in the same denominations and offerthe same international direct dialing rates as *Smart Buddy*prepaid cardsat US$0.40 per minute to all destinations.  In October 2003, Piltel implementedan all-day/all-night flat rate of Php9.50 per minute for local calls, calls toother network and national long distance calls replacing the Php12.00 perminute during peak hours and Php8.00 per minute during off-peak hours.  InJanuary 2004, this flat rate was further reduced to Php6.50 per minute whilethe rate for *Talk ‘N Text* to *Talk ‘N Text* calls was reduced to aflat rate of Php5.50 per minute from Php6.50 per minute.  The same rate of Php5.50per minute is charged for voice mail retrieval.  *Talk ‘N Text*subscribersare charged Php1.00 for a regular text message in excess of free textallocations while for value added services, such as text games, logo and ringtone downloads are charged within a range of Php2.50 to Php15.00 per message.  

 

OnMarch 11, 2005, Smart launched the *Smart 258 UnlimitedCall and Text* promotion pursuant to which Smart prepaid subscribers such as*Smart Buddy, addict mobile prepaid, Smart Kid prepaid* and *Talk N’Text* nationwide had the option for the duration of the promotion to availof unlimited on-network (Smart-to-Smart) voice calls or unlimited on-network(Smart-to-Smart) text messaging service.  The *Smart 258 Unlimited Call* promotion coveredonly on-network (Smart-to-Smart) voice calls for Php115 with a validity of 10days.  To initiate a *Smart 258 UnlimitedCall*, the subscriber had to send a text message of the called party’scellphone number to a designated number.  Both parties then received a callback to set-up the call.  Off-network calls, all text messaging (on-net andoff-net) and value-added service downloads were not part of this promotion andwere charged at prevailing rates.  On the other hand, *Smart 258 Unlimited Text* covered onlyon-network (Smart-to-Smart) text messaging service 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 promotion and were chargedat prevailing rates.  

 

On April 21, 2005, Smartreinstituted the *Smart 258**UnlimitedCall*and *Text* promotions for another 30 days with the followingmodifications:

 

•      the *Smart 258**Unlimited Call* Php115 loadwas valid for seven days with a maximum call duration of three minutes;

 

•        the *Smart 258**Unlimited Text* Php60 loadwas valid for four days; and

 

•        subscribers could avail themselvesof *Smart 258**Unlimited Call* and *Text*simultaneously.

 

Wesell our cellular services primarily through a network of independent dealersthat generally have their own retail networks, direct sales forces andsub-dealers.  These dealers include major distributors of cellular handsets.We currently have six major dealers that carry out distribution throughout the Philippines.On December 1, 2002, Smart purchased the assets of TelecommunicationsSpecialists, Inc., or TSI, a major dealer that used to account for more thanhalf of our sales of prepaid air time cards, and integrated TSI’s employeesfollowing the acquisition.  Account managers from our dealer sales force manageour dealer network and regularly update these dealers on our upcoming marketingstrategies, promotional campaigns and product development.  With the introduction of *Smart Load* and *Talk‘N Text Load* in May 2003, Smart and Piltel moved into a new mode ofdistribution.  These over-the-air reloads, which were based on the “sachet”marketing concept of consumer goods such as shampoo and ketchup, required adistribution network more comparable to those of soft drink and beerdistributors.  Starting with just 50,000 outlets when it was launched, *SmartLoad*’s distribution network now encompasses over 700,000 retail agents, 90%of which are micro businesses (e.g. neighborhood stores, individuals acting asroving agents).  With the prepaid reloading distribution network now extendedto corner store and individual retailer levels and minimum reloadingdenominations down to US$0.50, Smart prepaid service became even moreaffordable to subscribers, thus attracting new subscribers in previouslyunderserved segments of the market.

 

Forprepaid services, we provided discounts to dealers for prepaid phone kits, airtime cards and over-the-air reloads sold.  Beginning August 1, 2002, Smart andPiltel reduced the maximum discount to dealers for prepaid phone kit sales froma range of Php1,000 to Php1,300 per unit sold in the form of prepaid “call andtext” cards (depending on the volume purchased) to Php800 in cash per prepaidphone kit sold.  An additional 1% rebate was given on cash purchases.  Air timecards and over-the-air reloads are sold to distributors at volume discountsdetermined by the value of the cards purchased by the distributors.Commissions for air time cards sold range from 8% to 10% while commissions onover-the-air reloads range from 4% to 5%.  Air time cards cannot be returned orrefunded and normally expire within six to 12 months after release from theSmart warehouse.  For postpaid services, we pay dealer commissions based on theair time plan sold.

 

*Satellite and VSAT*

* *

*Overview*

 

We currently provide satelliteand VSAT services through Mabuhay Satellite and Telesat.  ACeS Philippines,our satellite phone service provider, started to roll out fixed satelliteterminals in the last quarter of 2001.

 

*Mabuhay Satellite*

 

Wecurrently own 67% of Mabuhay Satellite, which is engaged in the control andoperation of the Agila II satellite.  Commencing commercial operations inJanuary 1998, Agila II is the Philippines' first communications satellite.  Mabuhay Satelliteleases satellite space segments in both the C and Ku bands on the Agila II.Through Agila II, Mabuhay Satellite also offers internet backbone access, videoand data broadcasting, and bandwidth-on-demand, facilitating communication linksbetween telecommunications, broadcast and other public utility companiesoperating in the Asia-Pacific region.  See “Item 5. Operating and FinancialReview and Prospects –– Critical Accounting Policies –– Investments” and *Note8 – Investments* to the accompanying consolidated financial statements inItem 18 for a discussion of our investment account in Mabuhay Satellite.

 

*Telesat*

 

We currently own 94.4% of Telesat which operates anationwide communications satellite network using VSAT technology.  Telesatoffers voice, facsimile and data transmission services throughout the Philippines,including areas that are underserved or unserved by local fixed line operators.

 

Using VSAT technology, we also provide the followingservices:

 

•        point-to-multipoint data transmissionservices, usually for intercompany communication for corporate customers;

 

•        private point-to-point service;and

 

•        connectivity for the cell sites ofour wireless network in outlying locations.

 

Welease transponder capacity on the Agila II to provide VSAT services.

 

*ACeS**Philippines*

 

Wecurrently own 100% of ACeS Philippines, which owns approximately 20.23% ofAIL.  AIL aims to develop and implement a satellite-based communications systemto provide services to users in the Asia-Pacific region through the Garuda ISatellite, or ACeS System and ACeS Service.  AIL has entered intointerconnection agreements and roaming service agreements with PLDT and othermajor telecommunications operators that will allow ACeS subscribers to accessGSM terrestrial cellular systems in addition to the ACeS system.  Further, AILhas an Air Time Purchase Agreement, or ATPA, with National Service Providers,or NSPs, in Asia, including PLDT.  For further discussion of thisATPA, please see *Note 16 – Related Party Transactions* and *Note 21 –Contractual Obligations and Commercial Commitments* to the accompanyingconsolidated financial statements in Item 18.

 

*Revenues*

 

Our satellite and VSAT service revenues consist of:

 

•        lease payments from the rental ofMabuhay Satellite’s C-band and Ku-band transponders; 

 

•        revenues generated from Telesat’snationwide satellite network; and

 

•        revenues generated from ACeSPhilippines’ satellite phone service.

 

*Rates*

 

MabuhaySatellite leases its transponders to third parties at an average annual ratesof approximately US$1.0 million and US$0.7 million for its C-band and Ku-bandtransponders, respectively.  Telesat provides its VSAT services on a cost plusmark-up basis.  ACeS Service mobile subscribers are charged Php13.84 per minutefor local and cell-to-cell calls and for national direct dial services whileresidential subscribers are charged a peak-hour rate of Php13.00 per minute andan off-peak hour rate of Php8.00 per minute for domestic calls regardless ofdestination.  For ACeS System public calling offices, callers are chargedPhp4.50 and Php7.00 per minute for calls terminating to fixed line and cellularnetworks, respectively.  Rates for international long distance calls, dependingon the country of termination, ranging from US$0.35 per minute for frequentlycalled countries to US$0.85 per minute for less frequently called countries.

** **

Fixed Line

 

Weprovide local exchange, international long distance, national long distance,data and other network and miscellaneous services under our fixed line businesssegment.

 

*Local Exchange Service*

 

*Overview*

 

Ourlocal exchange service, which consists of our basic voice telephony business,is provided primarily through PLDT.  

 

The following table summarizes key measures of ourlocal exchange service segment as at and for the years ended December 31, 2004, 2003 and 2002:

 

 

**Years Ended December 31,**

 

**2004**

** **

**2003**

** **

**2002**

 

 

 

 

 

 

Number of fixed lines in service (at year-end)

2,152,027

 

2,185,951

 

2,188,612

Net additions (reductions)

(33,924)

 

(2,661)

 

14,530

Growth rate 

(2%)

 

–

 

1%

Number of fixed line employees (at year-end)

9,692

 

10,518

 

12,351

Number of fixed lines in service per employee

222

 

208

 

177

Consolidated local exchange service revenues (in millions)

Php20,606

 

Php20,728

 

Php21,345

Growth rate

(1%)

 

(3%)

 

–

Local exchange service revenues as a percentage of total service revenues

17%

 

20%

 

26%

 

Wealso provide local exchange services through our subsidiaries Clark Telecom,Subic Telecom, Maratel and Piltel.  Together, these subsidiaries account forapproximately 3% of our consolidated fixed lines in service.

 

Weregularly adjust our rates and introduce new products and services in an effortto increase our number of subscribers, improve our churn management efforts andminimize our credit risk exposure.  Since 1999, we have launched a prepaidfixed line service, introduced additional value-added services, introducedinitiatives aimed at increasing subscription in areas where we have excesscapacity and reduced our installation fees, as described below under "—Rates."

 

Initially intended as an alternative affordabletelephone service for consumers under difficult economic conditions, ourprepaid fixed line services now form an important part of PLDT’s overall churnand credit risk exposure management and subscriber retention strategy.  

 

*Rates*

 

Asat December 31, 2004, basic monthly charges for our local exchange servicein the Metropolitan Manila area were Php663.78 for a single-party residentialline and Php1,383.62 for a single business line.  Monthly charges varyaccording to the type of customer (business or residential) and location, withcharges for urban customers generally being higher than those forrural/provincial customers.  In July 2003, we launched the Telegusto promotionwaiving installation charges up to December 31, 2003to encourage subscriber growth.  Installation charges amount to Php1,200 forresidential customers and Php1,500 for business customers.  Other than basicmonthly charges, we do not charge our postpaid subscribers for local calls.

 

Pursuantto a currency exchange rate mechanism authorized by the NTC, we adjust ourmonthly local exchange service rates according to changes in the peso-to-U.S.dollar exchange rate.  Under the authorization granted to us by the NTC, we arepermitted to increase and are required to decrease these rates by 1% for everyPhp0.10 change in the exchange rate relative to a base exchange rate of Php11to US$1.00.  During 2004, we implemented six upward and one downwardadjustments in our monthly local exchange service rates.

 

Inthe first quarter of 2005, House Bill No. 926 was filed and is now pending inthe House of Representatives of the Philippines.  The proposed bill providesfor the cancellation of the currency exchange rate mechanism currently inplace.  If this bill is passed into law or if the NTC issues guidelines tochange the basis of the currency exchange rate mechanism, our ability togenerate U.S. dollar linked revenues from our local exchange business could beadversely affected. 

 

EffectiveJanuary 1, 2003, local access charges for cellular subscribers’ callsthat terminate to our fixed line subscribers increased from Php2.00 per minuteto Php2.50 per minute, and was further increased to Php3.00 per minuteeffective January 1, 2004.

 

Aprepaid fixed line subscriber is recognized as an active subscriber when thatsubscriber activates and uses a prepaid call card.  Prepaid fixed linesubscribers can reload their accounts by purchasing call cards that are sold indenominations of Php500, Php300 and Php150.  Reloads are valid for two monthsfor the Php500 and Php300 card.  The lower denomination Php150 card, launchedin September 2003, has an account life of 15 days.  A prepaid fixed linesubscriber is disconnected if that subscriber does not reload within one monthfor the Php500 card, four months for the Php300 card and 15 days for the Php150card after the expiry of the last reload.  All sales of prepaid cards, whetherthrough dealers or through PLDT’s business offices, are non-refundable.  Ourprepaid fixed line customers do not pay a basic monthly charge and are chargedbased on usage.  The international and national long distance rates we chargeto our prepaid fixed line customers are similar to the rates we charge to ourpostpaid customers.  Prepaid fixed line customers are charged based on usage ata rate of Php1.00 per minute for local calls.  For a description of theserates, see “— International Long Distance Service — Rates” and “— National LongDistance Service — Rates.”  Prepaid phone kits, each containing Php500 worth ofpre-stored call credits, are sold for Php1,900 per unit.

 

*International Long Distance Service*

 

*Overview*

 

Our international long distanceservice consists of voice and packet-based voice services that go through ourinternational gateway facilities.  We also generate international long distancerevenues through access charges paid to us by other Philippinetelecommunications carriers for incoming international voice calls thatterminate to our local exchange network.  Our packet-based voice services aretransmitted over our existing traditional circuits: voice over internetprotocol, or VOIP; network of a consortium of dominant carriers in Asia; ATM; andinternet protocol global backbone of PLDT Global.

 

Thefollowing table shows certain information about our international long distancebusiness as at and for the years ended December 31, 2004,2003 and 2002:

 

 

**Years Ended December 31,**

 

**2004**

**2003**

**2002**

 

 

 

 

Total call volumes (million minutes)

2,348

2,286

2,815

Growth rate

3%

(19%)

(14%)

Inbound call volumes (million minutes)

2,192

2,128

2,644

Growth rate

3%

(20%)

(15%)

Outbound call volumes (million minutes)

156

158

171

Growth rate

(1%)

(8%)

2%

Inbound-outbound call ratio

14.1:1

13.5:1

15.5:1

Total international long distance service revenues (in millions)

Php12,804

Php12,767

Php10,637

Growth rate

–

20%

(9%)

International long distance service revenues as a percentage of total service revenues

11%

12%

13%

 

Internationallong distance service historically has been a major source of revenue.However, due to the steep decline in inbound termination and collection ratesand intense competition, revenues derived from our international long distanceservice had been declining through the end of 2002.  We adopted a two-prongedinitiative in early 2000 with respect to inbound international service to tryto address this issue.  First, we lowered our inbound termination rates at thattime; by reducing our rates, we reduced the incentive for unauthorized traffictermination and bypass routings by international simple resale operators, andtherefore were able to recover some lost traffic.  Secondly, we intensified ourefforts to identify and contain unauthorized traffic termination and bypassthrough more effective monitoring of our international trunks, leased lines orlocal network.  International simple resale operation occurs when a companyrents an international leased line from a Philippine international gatewayoperator, aggregates traffic outside the Philippines and carries and terminatesthis traffic at the public switch telephone network in the Philippines.International simple resale can be used to bypass the local access chargesystem, which is illegal in the Philippines. 

 

Weare pursuing a number of other initiatives to further strengthen our inboundbusiness.  Through PLDT Global, we aggregate inbound call traffic to the Philippinesat our points of presence and, using our capacity in submarine cable systemsconnected to each point of presence, transmit calls to our network.  PLDTGlobal is also enhancing the presence of PLDT in other international markets byoffering new products and services such as international prepaid cards, SMStransit and other global bandwidth services.  We believe this strategy willhelp us maximize the use of our existing international facilities, and developalternative sources of revenue.

 

Tostimulate call volume growth and prevent further erosion in our share ofoutbound international call traffic, we have introduced a number of marketinginitiatives, including substantial cuts in international direct dialing rates,innovative pricing packages for large accounts and loyalty programs for somecustomers.

 

Thetable below sets forth the net settlement amounts for international callshandled by PLDT, by country, for the years ended December 31, 2004, 2003 and 2002:

 

 

**Net Settlement**

 

**Years Ended December 31,**

** **

**2004**

**2003**

**2002**

 

**(in millions)**

 

 

 

 

United States

US$75

US$52

US$68

Saudi Arabia

18

15

5

Japan

17

12

16

Italy

16

14

5

United Arab Emirates

13

10

8

Canada

10

15

7

Hong Kong

7

9

3

Taiwan

6

4

6

Australia

2

11

5

Others

64

77

63

Total

US$228

US$219

US$186

 

*Rates*

* *

Weadopted the U.S. FCC accounting rate benchmark of US$0.38 per minute forinbound international calls on January 1, 2000, which represented a settlementrate of US$0.19 per minute, for international long distance traffic between thePhilippines and the United States.  Adopting the U.S. FCC benchmark accounting rate oneyear ahead of the target date of January 1, 2001 allowed us pricing flexibilityfor inbound call traffic.  Termination rates for inbound calls from the United Statescontinued to decline through the end of 2002 to levels below the U.S. FCCbenchmark accounting rate under pressure from unauthorized terminations andbypass operations.  Termination rates for inbound calls from other countrieshave also been declining generally.  As at December 31, 2002,a substantial portion of PLDT’s international inbound traffic terminating onits fixed line network was charged an average termination rate of approximatelyUS$0.08 per minute.  PLDT increased termination rates for its internationalinbound traffic terminating on its fixed line network to an average ofapproximately US$0.12 per minute effective February 1, 2003.See “Item 8. Financial Information –– Legal Proceedings –– U.S. FederalCommunications Commission, or FCC, Ruling versus Philippine TelecommunicationsCompanies”, “–– Investigation by U.S. Department of Justice” and *Note 25 –Other Matters* to the accompanying consolidated financial statements in Item18 for further discussion.

 

Ratesfor outbound international long distance calls are based on the type ofservice, such as whether the call is operator-assisted or direct dialed.  Ourrates are quoted in U.S. dollars and billed in pesos.  The peso amounts aredetermined at the time of billing.  We charge a flat rate of US$0.40 per minuteto retail customers for direct-dialed calls, applicable to all call destinationsat any time on any day of the week.

 

*National Long DistanceService*

 

*Overview*

 

Ournational long distance services are provided primarily through PLDT.  Thisservice consists of voice services for calls made by our fixed line customersoutside of their local service areas within the Philippines and access chargespaid to us by other telecommunications carriers for calls carried through ourbackbone network and/or terminating to our fixed line customers.

 

The following table shows our national long distancecall volumes and revenues as at and for the years ended December 31, 2004, 2003and 2002:

 

 

Years Ended December 31,

 

**2004**

**2003**

**2002**

 

 

 

 

Total call volumes (million minutes)

1,853

2,016

2,181

Growth rate

(8%)

(8%)

(22%)

Total national long distance service revenues (in millions)

Php6,736

Php6,561

Php7,818

Growth rate

3%

(16%)

(8%)

National long distance service revenue as a percentage of total service revenues

6%

6%

9%

 

Cellularsubstitution and the widespread availability and growing popularity ofalternative, more economical, non-voice means of communications, particularlye-mailing and cellular text messaging, have negatively affected our nationallong distance call volumes.  The integration of some of our local exchangesinto a single local calling area, as approved by the NTC, has also negativelyaffected our national long distance call volumes, and consequently, ourrevenues.  Because of this integration, calls between two exchanges locatedwithin the same province are no longer considered national long distance callsbut are treated as local calls.

 

Asubstantial portion of our national long distance calls were direct-dialedcalls.  Operator-assisted calls are charged based on a minimum of three minutesplus operator charges, while direct-dialed calls are charged on a less costlyper minute basis.

 

*Rates*

 

Ratesfor national long distance calls are based on the type of service, such aswhether the call is operator-assisted or direct-dialed.  In line with its movetowards rate simplification, PLDT simplified these rates to a flat rate ofPhp4.50 per minute effective November 2, 2001.  At the same time, PLDT simplifiedits rates for calls terminating to cellular subscribers from a range ofPhp10.00 per minute to Php16.00 per minute to a uniform rate of Php13.75 perminute.  Effective March 1, 2003, PLDT increased the rate for calls terminating to other localexchange carriers from a flat rate of Php4.50 per minute to Php5.00per minute.  In addition, NDD callsoriginating from and terminating to PLDT was also adjusted to Php5.00 per minute from a flat rate of Php4.50 per minute effective June 8, 2003.  PLDT is currentlyreviewing a change of the present rate structure from per minute rate chargesto a single fee for unlimited calls.  This is envisioned to make rates fornational long distance calls competitive with VOIP rates and to revitalizeinterest in fixed line usage.  Currently, various pricing models are beingstudied in respect of this new rate plan.  On February 14, 2005, PLDT launcheda Php10 per call promotion to any PLDT fixed line subscriber nationwide and toall Smart and *Talk 'N Text* subscribers.  The promotion introduced ashift from “per-minute charging” to a single fee for unlimited calls.  

 

InMay 2001, PLDT entered into a new interconnection arrangement with the majorityof other local exchange carriers, pursuant to which the originating carrierpays (1) a hauling charge of Php0.50 per minute for short-haul traffic orPhp1.25 per minute for long-haul traffic to the carrier owning the backbonenetwork and (2) an access charge of Php1.00 per minute to the terminatingcarrier.  In addition, effective January 2002, access charges being paid byPLDT to cellular operators were reduced to Php4.50 per minute from Php6.50 perminute it paid for the period from July to December 2001.  Prior to July 2001, PLDT was paying access charges rangingfrom a low of Php7.69 to a high of Php10.94 per minute for calls terminating to cellularsubscribers, depending on whether the calls were local or long distance.PLDT still maintains revenue-sharing arrangements with a few other localexchange carriers, whereby charges are generally apportioned 30% for theoriginating entity, 40% for the backbone owner and the remaining 30% for theterminating entity.  

 

*Data and Other Network Services*

 

Recognizing the growth potential of data and othernetwork services, including internet-based services, and in light of theirimportance to our business strategy, we have been putting considerable emphasison this service segment.  In 2002, this segment registered the highestpercentage growth in revenues among our fixed line services and it continued togrow in 2003 and 2004.

 

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

 

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

 

•        broadband/packet-based/internetprotocol-based services — frame relay, ATM, internet protocol virtual privatenetwork, or IP-VPN, DSL, internet gateway, bandwidthon demand, or BOD, and wholesale broadband of electrical and optical interfaces– digital signal level 3, or DS3; STM1, ESCON Fiber Channel, Fast Ethernet; and

 

•        other switching services—integrated services digital network, or ISDN, and videocon.

 

The foregoing services are used for the following:

 

•        domestic and internationalcommunications;

 

•        broadband data transmissionservices that transmit data, voice and video over a wider range of frequenciesor bandwidth;

 

•        internet exchange services thatprovide ISPs with a primary connection to the global internet to exchange localtraffic generated within the Philippines;

 

•        private networking services thatuse the public internet as a backbone for private interconnection betweendifferent locations;

 

•        switch-based services, providedthrough a fixed bandwidth transmission facility, that allow establishment of adedicated connection for the duration of the call; and

 

•        international packet-basedservices, provided through bilateral arrangements and global alliances thatintegrate voice, video and data.

 

In2004, 2003 and 2002, we continued to broaden our service offerings with thelaunch of new services and expansion or enhancement of some of the existingones.  

 

InMay 2002, PLDT launched a pay-per-use dial-up internet service under the brandname *PLDT Vibe*, which is available on a postpaid or prepaid basis toPLDT’s fixed line subscribers.  Charges for this service are Php0.25 per minutefor off-peak hours, which are from 10:01 p.m. to 6:00 a.m., and Php0.50 per minute for peak hours, which arefrom 6:01 a.m. to 10:00 p.m.  With the launch of *PLDT Vibe*, PLDT now offerstwo residential internet service packages targeting separate markets:  *PLDTVibe*for light to medium internet users and *DSL*broadband for heavyinternet users.  As at December 31, 2004, the number of PLDT’s fixed linesubscribers for *PLDT Vibe*stood at 369,435, of which 146,909 were exclusivepostpaid users, 163,585 were exclusive prepaid users, and 58,941 are were bothpostpaid and prepaid users, compared to 188,034 as at December 31, 2003, ofwhich 110,502 were exclusive postpaid users, 58,939 were exclusive prepaidusers, and 18,593 were both postpaid and prepaid users, while the number of *DSL*subscribers reached 49,476 and 23,884 as at December 31, 2004 and 2003,respectively.

 

InApril 2004, PLDT introduced additional enhanced IP-based services under anumbrella brand *IP-Plus*, namely, *Quality of Service*, or *QoS*,*IP Security*, or *IP Sec*, and *Voice**over Virtual PrivateNetwork*, or *VoVPN*.  With *QoS*, customers are given priorityservice for voice, premium and basic, with the highest priority given to voicesince it requires error-free transmission.  *IP Sec* optimizes the latestencryption technology to ensure utmost confidentiality of vital information.  *VoVPN*gives customers toll-grade quality without the cost of toll charges.  All these*IP Plus* services translate to cost-efficiency, high reliability andincreased security and flexibility.

 

In June 2004, PLDT established an InnovationLaboratory, or *Innolab*, in Cebu, a show and demonstration room where existing andpotential clients as well as students can have a hands-on experience on variousPLDT products and services designed for our corporate clients.  It also servesas a venue for testing software applications and computer programs and isexpected to be the starting ground for innovative ideas where new products andcost-effective solutions may be created.  

 

On March 10, 2005, PLDT launched *PLDT WeRoam,*awireless broadband service running on Smart’s nationwide wireless network andutilizing GPRS, EDGE and Wi-Fi technologies.  *PLDT WeRoam*enablesbusinesses to provide their employees with wireless access to their corporateintranet and the internet over their laptop, anywhere within Smart’s nationwidewireless network coverage area.

 

Information and Communications Technology

 

We conduct our information and communicationstechnology businesses through our wholly-owned subsidiary ePLDT, which wasincorporated in August 2000 and started commercial operations in February2001.  ePLDT is a broad-based integrated information and communicationstechnology company, focusing on infrastructure and solutions for internetapplications, internet protocol-based solutions and multimedia contentdelivery.  ePLDT's principal businesses are the operation of: (a) an internetdata center under the brand name *Vitro™*; (b) call centers throughVocativ, Parlance and Ventus; and (c) an ISP through Infocom.

 

*Infrastructures andServices*

 

*Data****Center*

 

ePLDToperates *Vitro™*, one of the Philippines’ first internet data centers.  The Philippine Boardof Investments, or BOI, granted *Vitro™* pioneer status, which entitles itto tax and other governmental incentives.  *Vitro™* is a CISCO-certifiedco-location service provider.  *Vitro™* provides co-location, web andserver hosting, hardware and software maintenance services, website developmentand maintenance services, webcasting and webhosting, shared applications, datadisaster recovery and business continuity services, intrusion detection andinternet protocol security services, as well as firewall and managed firewallservices.

* *

*CallCenters*

 

ePLDTis focusing on developing its call center services business, which capitalizeson the availability of English-speaking labor in the Philippines.The call center service business is being undertaken through the followingwholly-owned subsidiaries of ePLDT:

 

•        Vocativ which owns and operates a998-seat call center facility with 749 customer service representatives, orCSRs, exclusively for clients of a global provider of customer relationshipmanagement services; 

 

•        Parlance which owns and operates a1,177-seat call center facility with 1,109 CSRs, exclusively for one of thelargest direct-to-home satellite service providers in the United States forcustomer support and billing requirements; and

 

•        Ventus, which owns and operates a400-seat call center facility located in Iloilo province, has commenced full commercial operations inMarch 2005.  We currently expect that Ventus will be expanding in Metro Manilawith a 678-seat call center facility to accommodate current and new clientrequirements.  This facility is expected to be completed by November 2005.

 

ePLDT sold its entire 51% interestin Contact World, Inc., another call center facility, on June 30, 2003 and assigned its receivables from the same to Service Zone, Inc., a U.S.-based callcenter operator, for a total consideration of US$700,000.  

 

*Internet and Gaming*

 

ePLDT’s internet and gaming business is conductedthrough several subsidiaries.  ePLDT’s equity interests in and a briefdescription of the businesses of these subsidiaries are as follows:

 

•        a 99.6% interest in Infocom, oneof the country’s leading ISPs.  Infocom offers consumer prepaid internet accessunder the name of *WarpSpeed*and *Speed Tipid*, and postpaidinternet access, dedicated dial-up and multi-user dial-up, corporate leasedlines and broadband internet access through *DSL* or *NOW* cableinternet, as well as web consulting, development and hosting.  The *NOW*cable internet brand was sold on February 1, 2005;

 

•        a 67.79% interest in DigiPar, anInternet café business which assumed the assets and brand of Netopia ComputerTechnologies, Inc., under the brand *Netopia*.  *Netopia* is now oneof the largest and fastest growing internet café chains in the country withover 130 branches and over 6,000 work stations.  DigiPar offers high-speedinternet services, including internet advertising, gaming and printing;

 

•        a 51% interest in Digital ParadiseThailand, Ltd., or DigiPar Thailand, an affiliate of DigiPar offering similar services inThailand; and

 

•        a 60% interest in netGames, Inc., ornetGames, a publisher for Massively Multiplayer Online Game, or MMOG, in the Philippines.netGames, which was incorporated on June 21, 2004,is the Philippine licensee of Khan Online, the country’s first full 3D onlinegame.  netGames commenced full commercial operations in February 2005.

 

*Other Investments*

 

ePLDT also currently holds equity interests in thefollowing entities:

 

•        mySecureSign, Inc., a wholly-ownedsubsidiary of ePLDT and an affiliate of VeriSign, Inc., which issues VeriSigndigital certificates in the Philippines for e-commerce transactions;

 

•        iPlus Intelligent Network, Inc.,or iPlus, a wholly-owned subsidiary of ePLDT, which provides IT helpdesk/contact center services and terminals forcredit, debit and cash card transactions;

 

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

 

•        19.17% interest in BayanTradeDotcom, Inc., or BayanTrade, ane-procurement joint venture established together with six of the Philippines’leading conglomerates.  Initial shareholding in BayanTrade was originally20.5%, which was subsequently diluted to 19.17% in August 2004 due to an equitycall to which ePLDT did not subscribe.

Wireless Network Infrastructure

 

*Cellular*

 

Through Smart, we operate a digital GSM network.  Tomeet the growing demand for cellular services, Smart has implemented anextensive deployment program for its GSM network covering substantially all ofMetro Manila and most of the other population centers in the Philippines.  In2004, Smart added 1,399 base stations to its nationwide cellular network,bringing to 5,303 Smart's total base stations in operation.  Smart has 36mobile switching centers and 39 text messaging service centers, which haveraised significantly Smart's network capacity to cover approximately 17.3million subscribers as at December 31, 2004.  

 

Smart has an operating spectrum of 7.5 Megahertz, or Mhz, inthe 900 Mhz band supporting both its GSM and previously its ETACS network and17.5 Mhz in the 1800 Mhz band for GSM.  Its dual-band GSM network allows it toefficiently deploy high capacity 1800 Mhz base transceiver stations in denseurban areas while its 900 Mhz base transceiver stations can be much moreeconomically deployed in potentially high growth, but less densely populatedprovincial areas.  Spectrum constraints will not affect the Smart’s expansionplans for GSM in the foreseeable future.  Piltel, on the other hand, has anoperating spectrum of 11.5 Mhz out of the 12.5 Mhz allocated in the 800 Mhzband. 

 

Due to its access to PLDT’s network assets, Smart has beenable to achieve significant capital expenditure savings, which are understoodto be significantly less, on a per net addition basis, than its currentcompetitors.  This translates into an improved ability to price competitivelyand target the mass market subscriber base in the Philippines, while retainingprofitability.  Based on existing equipment purchase contracts, Smart expectsincremental capital expenditure per net additional subscriber to amount to lessthan US$50. 

 

Thecoming years will see continued increases in coverage (particularly indoor), aswell as new types of base transceiver station, or BTS, for outdoor, streetlevel and commercial office coverage.  Smart has introduced the Nokia *ConnectSite*GSM system for wider coverage and increased efficiencies in underservedareas of the Philippines. The new base station equipment called *ConnectSite*can be up to 25% more efficient than traditional outdoor cell sites.  Smart isone of the very first operators in the world to adopt this system.

 

Smart and Piltel have been co-locating their cellsites where their base stations are installed.  As at December 31, 2004, 21 ofSmart's mobile switching centers and 110 of Smart's cell sites are housed inPLDT’s fixed line complexes while 242 of Smart’s cell sites are co-located withPiltel.  These operational synergies have allowed Smart to reduce switchinstallation time from three months to five weeks.

 

*Satellite and VSAT*

 

MabuhaySatellite controls and operates the Agila II satellite, which has 30 C-bandtransponders and 24 Ku-band transponders covering the Asia-Pacific region, theIndian subcontinent and Hawaii.  Of the 54 transponders, six have restricted usagedue to satellite interference.  Through Agila II, Mabuhay Satellite offersinternet service, video and data broadcasting, and bandwidth-on-demand,facilitating communication links between telecommunications, broadcast andother public utility companies operating in the Asia-Pacific region.  InDecember 2000, Agila II joined the U.S. FCC's "Permitted SpaceStation" list, which permits U.S. owned and operated earth stations inHawaii to access Agila II for transpacific telecommunications, data, video andinternet-over-satellite traffic and vice versa.

 

Telesatoperates a national communications satellite network using VSAT technology toprovide voice, facsimile, video and data transmission services to areas in thecountry that are still underserved or unserved by local telephone operators.Telesat leases transponder capacity from Agila II to provide VSAT services suchas multipoint-to-multipoint and point-to-multipoint data transmission services,private point-to-point service, and connectivity for the cell sites of ourcellular network in outlying locations.

 

ACeSPhilippines manages, controls and operates its own satellite gateway and otherground infrastructure, including a 13-meter feeder-link C-band earth station,beam congruency antenna and equipment that serve as the primary interfacebetween the ACeS system and other telecommunications networks.  It uses theGaruda I satellite to provide digital voice services to ACeS Philippines’mobile and fixed terminal users within the Asian service area.

 

FixedLine Network Infrastructure

 

*Domestic*

 

Ourdomestic telephone network includes installed telephones and other equipment oncustomers’ premises, local access lines connecting customers to exchanges,referred to as “outside plant,” inter-office lines connecting exchanges, andlong distance transmission equipment.

 

The following table gives some basic measures of thedevelopment of our domestic telephone network as at December 31, 2004, 2003 and 2002:

 

 

**As at December 31,**

 

**2004**

**2003**

**2002**

 

 

 

 

Number of central office exchanges

183

183

183

Number of fixed lines in service

2,152,027

2,185,951

2,188,612

Employees per 10,000 local exchanges in service

45

48

56

 

Wehave our own 5,400 kilometer domestic fiber optic backbone, the country's firsttelecommunications network using fiber optics in delivering voice, video, data,and other broadband and multimedia services nationwide.  Our fiber opticnetwork employs synchronous digital hierarchy technology to improve networkperformance and reduce operating costs.  Our network is composed of in-land andsubmarine cable installations and is configured in six self-healing rings andan extension link, allowing route delivery even in the event of link failures.It has an initial transmission speed of 2.5 gigabits per second and isconnected directly to five existing international submarine cable systems.  Weuse *CS PLDT*, a cable ship which we lease from NTT World EngineeringMarine Corporation pursuant to a five-year Chartered Arrangement MaintenanceContract to maintain the 2,400 kilometers of submarine cable comprising the submergedportion of our domestic fiber optic network, or DFON.

 

In2001, we activated a second fiber pair on our existing fiber cable andinstalled dense wavelength division multiplexing technology in certain portionsof the network.  The new system serves the areas of Luzon, Visayas and Mindanaoand also serves the international node connecting the Philippines to theAsia-Pacific Cable Network 2.  The second pair provides an extra 10 gigabitsper second of capacity, or the equivalent of 120,000 voice circuits.  NortelNetworks supplied us with a suite of optical internet solutions, including a10-gigabit per second dense wavelength division multiplexing solution based onNortel Networks OPTera™ Long Haul 1600 Optical Line System.

 

In2002, we increased our transmission and data network capacities and sold toSmart certain assets comprising a portion of our digital fiber optic cableloops from Luzon to Mindanao and certain related equipment.  We further expandedour transmission and data network capacities in 2003 and 2004.

 

*International*

 

We provide international network services using ourthree international gateway switching exchanges.  As at December 31, 2004, ourinternational long distance facilities allow direct correspondence with 50countries/territories (representing 79 correspondents) and can reach 360foreign destinations (via direct and transited routes including breakouts)worldwide.  We also own interests in submarine and satellite systems, throughwhich we route most of our international traffic.

 

Thetable below shows the submarine cable systems in which we have interests andthe countries or territories they link:

 

**Cable System**

**Countries Being Linked**

 

 

G-P

Guam and the Philippines

Asia-Pacific Cable Network

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

Asia-Pacific Cable Network 2

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

Transpacific Cable No. 5

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

SEA-ME-WE-3

Japan, Korea, China, Taiwan, Hong Kong, Macau, Philippines, Vietnam, Cambodia, Brunei, Malaysia, Singapore, Indonesia, Australia, Thailand, Myanmar, Sri Lanka, India, Pakistan, United Arab Emirates, Oman, Djibouti, Saudi Arabia, Egypt, Cyprus, Turkey, Greece, Italy, Morocco, Portugal, France, UK, Belgium and Germany

SEA-ME-WE-2

13 countries in South East Asia, the Middle East and Western Europe, including Singapore, Indonesia, India, Saudi Arabia, Egypt, Italy, Turkey and France

Asia Pacific

Hong Kong, Japan, Singapore, Malaysia and Taiwan

PacRim East 

Hawaii and New Zealand

M-T 

Malaysia and Thailand 

C-J 

China and Japan 

North Pacific

Japan, Alaska and the U.S. Mainland

Americas Cable 1

U.S. Mainland, U.S. Virgin Islands, Brazil, Trinidad and Venezuela

China-U.S. Cable

Japan, China, Taiwan, Korea, Guam and U.S. Mainland

Columbus II Cable

U.S. Mainland, Italy, U.S. Virgin Islands, Mexico, Portugal and Spain

FLAG Cable

Japan, Korea, China, Hong Kong, Malaysia, Thailand, India, United Arab Emirates, Saudi Arabia, Egypt, Italy, Spain and UK

MAT 2 Cable

Italy and Spain

RIOJA Cable

Spain, UK, Belgium and the Netherlands

RJK Cable

Russia, Japan and Korea

Southern Cross Cable

U.S. Mainland, Hawaii, Fiji, Australia and New Zealand

TAT 10 Cable

Germany and the Netherlands

TAT 12/13 Cable

U.S. Mainland, UK and France

TVH Cable

Thailand, Vietnam and Hong Kong

EAC Cable

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

PC-1 and Japan-U.S. Cable

Japan and the U.S.

 

Interconnection Agreements

 

Since the issuance of Executive Order No. 59 in 1993,which requires non-discriminatory interconnection of Philippine carriers'networks, we have entered into bilateral interconnection arrangements withother Philippine fixed line and cellular carriers.

 

Priorto July 1, 2001, PLDT retained an origination charge of Php2.00 per minute onevery call terminating to the network of Smart or Globe Telecom, Inc., orGlobe.  From July 1, 2001 to December 31, 2001, Smart and Globe charged PLDTfor local calls at Php6.50 per minute pursuant to an amended interconnectionagreement.  The new arrangement also applied to national long distance callsoriginating from PLDT and terminating to the cellular network of either Smartor Globe removing any distinction between access charges for local calls andnational long distance calls.  For calls originating from PLDT and terminatingto the cellular networks of Smart and Globe, Smart and Globe charged PLDT arate of Php4.50 per minute effective January 1, 2002.  Effective January 1, 2004, calls terminating to cellular subscribers originating from fixed linesubscribers were charged a termination rate of Php4.00 per minute, a decreasefrom the previous Php4.50 per minute.  

 

Effective January 1, 2003, access from cellular operators, including Smart and Piltel,which terminate calls on PLDT’s fixed line network increased from Php2.00 perminute to Php2.50 per minute, which further increased to Php3.00 per minuteeffective January 1, 2004.

 

Undera separate agreement between PLDT and PAPTELCO, PLDT is the transit facilityprovider between Smart, Globe and PAPTELCO.  PAPTELCO is comprised of 48 localexchange carriers, or LECs, operating in 129 sites nationwide.  Transit trafficis an accommodation by PLDT to Smart, Globe and PAPTELCO members where PAPTELCOmembers have no direct interconnection with either Smart or Globe.

 

Effective February 1, 2003, international calls terminating to PLDT’s fixed line networkwere charged a termination rate of an average of approximately US$0.12 perminute from the previous rate of an average of approximately US$0.08 perminute.  Also, international calls terminating on Smart’s and Piltel’s cellularnetwork were charged a termination rate of an average of approximately US$0.16per minute, an increase from the previous termination rate of an average ofapproximately US$0.12 per minute.

 

EffectiveJanuary 1, 2002, Smart charged a termination rate of Php4.00 perminute for calls originating from/terminating to another cellular operator’snetwork.  For SMS originating from Smart and Piltel and terminating on otheroperators’ cellular network and for SMS originating from other operators andterminating on Smart’s and Piltel’s cellular network, the charge is Php0.35 permessage.

 

Licenses and Regulation

 

PLDT, Smart and Piltel provide telecommunicationsservices pursuant to legislative franchises, which expire, in the case of PLDT, November 28, 2028, in the case of Smart, March 27, 2017 and, in the case of Piltel, May 14, 2019.  A franchise holder is required to obtain operatingauthority from the NTC to provide specific telecommunications services.  Theseapprovals may take the form of a CPCN or, while an application for a CPCN ispending, a provisional authority to operate.  Provisional authorities aretypically granted for a period of 18 months.  The Philippine RevisedAdministrative Code of 1987 provides that if the grantee of a license orpermit, such as a CPCN or provisional authority, has made timely and sufficientapplication for the extension thereof, the existing CPCN or provisionalauthority will not expire until the application is finally decided upon by theadministrative agency concerned.  

 

PLDToperates its business pursuant to a number of provisional authorities andCPCNs, the terms of which expire at various times between now and 2028.  PLDT'sCPCNs to provide services to most of the Metropolitan Manila area, Davao andother Philippine cities expired in 2003.  Although some of PLDT's CPCNs andprovisional authorities have already expired, PLDT filed timely applicationsfor extension of these CPCNs and provisional authorities prior to theirrespective expiration dates and is therefore entitled to continue to conductits business under its existing CPCNs and provisional authorities pending theNTC’s decision on these extensions.  While an extension has not yet beenformally granted, PLDT expects that the NTC will grant these extensions;however, there is no assurance that this will occur.  The period of validity ofsome of PLDT’s CPCNs expired on November 28, 2003, coterminous with the term ofits previous franchise under R.A. No. 6146, which has been extended further bythe NTC to November 28, 2028, coterminous with PLDT’s current franchise underR.A. No. 7082.  Motions to extend the period of validity of the other CPCNs to November 28, 2028 are now pending with the NTC.  See “Item 3. Key Information — RisksFactors — Risks Relating to Us — Our business is significantly affected bygovernmental laws and regulations, including regulations in respect of ourfranchises and rates.”  Piltel holds a CPCN to provide a nationwide cellulartelephone service which expires in August 2019.

 

Smartoperates its cellular, international long distance, national long distanceservices and global mobile personal communications via satellite servicespursuant to CPCNs, which will expire upon the expiration of its franchise.Smart’s franchise is due to expire on March 27, 2017,25 years after the date on which its current franchise was granted.  Smartoperates international private leased circuits under a provisional authority,which expired on May 6, 2003.  Smart applied for an extension of this provisionalauthority prior to its expiration.  Because PLDT and Smart filed theapplications for extension on a timely basis, we expect that these extensionswill be granted.  However, we cannot assure you that the NTC will grant theseextensions.  If a CPCN has not been issued, the NTC may permit an operator toprovide services pursuant to a provisional authority.  

 

Piltel is authorized to providevirtually every type of telecommunications service, including the transmissionof voice, data facsimile, audio and video and information services, in andbetween provinces, cities and municipalities throughout the Philippines.The franchise, which was last amended on May 14, 1992,expires on May 14, 2019 and may be extended by a legislative act of thePhilippine Congress.

Thefollowing table sets forth the spectrum system, licensed frequency andbandwidth allocated to Smart and Piltel:

 

**Carrier**

**Spectrum System**

**Frequency Assignment**

**Bandwidth**

 

 

 

 

Smart

ETACS/GSM 900

897.5-905/942.5-950 Mhz

7.5 Mhz

 

GSM 1800

1725-1730/1820-1825 Mhz

5.0 Mhz

 

 

1730-1732.5/1825-1827.5 Mhz

2.5 Mhz

 

 

1735-1740/1830-1835 Mhz

5.0 Mhz

 

 

1745-1750/1840-1845 Mhz

5.0 Mhz

Piltel

AMPS/CDMA

824-835/869-880 Mhz

11.0 Mhz

 

 

845-846.5/890-891.5 Mhz

1.5 Mhz

 

Operatorsof international gateway facilities and cellular telephone operators, pursuantto E. O. 109, are required to install a minimum number of local exchangelines.  Of these new lines, operators are required to install one ruralexchange line for every ten urban exchange lines installed.  Smart and Piltelwere required to install 700,000 and 400,000 lines, respectively, and each hasreceived a certificate of compliance from the NTC.

 

PLDT,Smart and Piltel are required to pay various permit, regulation and supervisionfees to the NTC. PLDT, Smart and Piltel are currently engaged in disputes withthe NTC over some of the assessed fees.  For more information on thesedisputes, see “Item 8. Financial Information –– Legal Proceedings — Taxation —NTC supervision and regulation fees, or SRF.”

 

OnMay 27, 1998, Smart filed an Urgent Ex Parte Motion and Manifestation regardingthe permit fee in the amount of approximately Php113 million assessed by theNTC for CPCN 93-482, pertaining to Smart’s Integrated Local Exchange TelephoneService, Domestic Toll Service and Private Line Service.  Smart contended thatthe fee should have been calculated on the basis of the actual local exchange carrierproject cost, and that therefore the fee should be Php70 million.  Although theNTC has not yet resolved this issue, Smart has already paid Php50 million inrespect of this assessment as of the date of filing of this annual report.

 

In aletter dated January 17, 2002, the NTC requested that Smart pay the following feesin respect of its CPCNs and provisional authorities:

 

Case No.

**Fee**

 

 

92-303

Php3,750,000

93-482

62,510,950

94-220

878,830

96-248

6,815,500

Total

Php73,955,280

 

Piltelhas also been assessed by the NTC for deficiency SRF.  Based on the latestcomputation of deficiency supervision and regulation fees received from theNTC, which is dated July 6, 2004, the total amount assessed on Piltel stands atapproximately Php1,306 million, including penalty fees amounting toapproximately Php501 million as at September 30, 2003.  Piltel has protestedthe assessments in good faith.  Piltel continues to make payments for which itbelieves are properly due to the NTC.  On September 30, 2003,Piltel made a payment to the NTC under protest in the amount of Php9.1million.  However, the NTC refused to apply this payment to the SRF but insteadapplied it to alleged penalties for 1997 prompting Piltel to order a “stoppayment” on the check for the aforementioned amount.  On October 2, 2003,Piltel filed a complaint for consignation before the regional trial court ofQuezon City, which remains pending.  On February 11, 2005,Piltel paid under protest the amount of Php559 million in respect of NTC feesfor the period from 1992 to 2004.

 

Inorder to diversify the ownership base of public utilities, R.A. No. 7925requires a telecommunications entity with regulated types of services, such asSmart and Piltel, to make a public offering through the stock exchangesrepresenting at least 30% of its aggregate common shares by the later of thefollowing:

 

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

 

•        the fifth anniversary of the dateof the entity’s commencement of commercial operations.

 

PLDTand Piltel have complied with this requirement.  Smart believes that it had tenyears from the commencement of its operations, or until August 2004, to conducta public offering because the Philippine government has granted franchises toother telecommunications companies requiring a public offering within ten yearsfrom the later of their commencement of operations or the date on which thefranchise was granted.  Because R.A. No. 7925 provides that any advantagegranted under existing franchises automatically becomes part of previouslygranted telecommunications franchises, Smart believes that it was also entitledto this ten-year period.  However, because Smart has not conducted a publicoffering of its shares, the Philippine Congress may revoke the franchise ofSmart.  Moreover, a *quo warranto* case may be filed against Smart by theOffice of the Solicitor General of the Philippines on the ground of violation of R.A. No. 7925 due toSmart’s failure to conduct public offering of its shares by August 2004.  In September 2004, Senate Bill No. 1675 wasfiled seeking to amend Section 21 of R.A. No.7925.  The bill seeks todeclare that a telecommunications entity shall be deemed to have complied withthe requirement of making a public offering of its shares if two-third of itsoutstanding voting stock are owned and controlled directly or indirectly, by alisted company.  The bill is currently pending in the Philippine Senate.  PLDT regularly evaluates various strategic optionswith respect to its capital structure.

 

On May 24, 2005, the President signed into law Republic Act No. 9337 amendingcertain sections of the National Internal Revenue Code with effect on July 1, 2005.  In particular, the following amendments may negatively impact ourprofitability:  

 

•        increase of the income tax ratefor corporations from 32% to 35% effective July 1, 2005,followed by a reduction to 30% effective January 1, 2009;

 

•        conferment upon the President,upon the recommendation of the Secretary of Finance, of the power to raise VATrate from 10% to 12% effective January 1, 2006, after any one of the followingconditions has been satisfied;

 

a.     VAT collection as a percentage of the GDPexceeds 2.8% in 2005; or 

 

b.     the fiscal deficit as a percentage of GDP,which represented 3.8% in 2004, exceeds 1.5% in 2005.

 

•        limited claim of input tax creditsto 70% of output tax; and

 

•        input tax on capital goods spreadevenly over 5 years or estimated useful life, whichever is shorter.

 

Moreover,the Philippine Congress is considering five bills which were filed prior to thesigning into law of R.A. No. 9337.  Each of the proposed bill, if passed byCongress and enacted into law, would impose a 7% or 10% tax on the grossreceipts of cellular operators.  The proposed taxes would apply to both cellularcalls and cellular data revenues and prohibit cellular operators from imposingadditional charges or fees to compensate for the imposition of the proposedtaxes.  In addition, several bills havealso been submitted for consideration by Congress, each of which, if passed byCongress and enacted into law, would impose a franchise tax at a rate of 7% or5% tax on gross receipts of all telecommunication companies in lieu of thecurrently applicable 10% VAT.  

 

Competition

 

The enactment of the R.A. No.7925 of the Philippines in March 1995 consolidated the government's variouspolicy issuances governing the telecommunications industry and reaffirmed,among other things, the policy of liberalizing the industry and opening up thetelecommunications market to new entrants.  Including us, there are nine majorlocal exchange carriers, 11 international gateway facility providers, and sixcellular service providers in the country, including one which has not yetcommenced operations.  Many new entrants into the Philippine telecommunicationsmarket have entered into strategic alliances with foreign telecommunicationscompanies, which provide them access to technological and funding support aswell as service innovations and marketing strategies.  Consequently, we arefacing increasing competition in major segments of the telecommunicationsindustry, particularly cellular, fixed line and data and other network servicessegments.

 

CellularService

 

There are six operating service providers, namelySmart, Piltel, Globe, Islacom, Digitel and Express Telecom.  Globe acquiredIslacom (now known as *Innove*) to form into one operating group whileSmart and Piltel, both being part of the PLDT Group, formed another operatinggroup.  

 

Competition in the cellular business has intensifiedwith the availability of affordably priced handsets and the introduction bycompetitors of new and improved plans for postpaid subscribers, reduced ratesper minute and aggressive marketing and promotional strategies.  The principalbases of competition are price, including handset cost, quality of service,geographic coverage and attractiveness of packaged services.  Smart's network leads the industry in terms ofcoverage with 3,957 cell sites as at December 31, 2004compared to Globe’s and *Sun Cellular’s* declared cell sites of 3,736 and1,300, respectively.

 

InOctober 2004, *Sun Cellular* launched its “24/7” service whereby itsprepaid subscribers were offered unlimited calls and text messaging within the *SunCellular* network over a certain period for a fixed fee (e.g. Php100 for 10days and Php250 for 30 days of unlimited calls and text messaging).  On March 15, 2005, thePhp250 monthly fee was increased to Php350 while the duration of thePhp100 service was shortened to seven days.  *Sun Cellular* postpaidsubscribers can utilize a similar feature by adding Php350 per month to theirmonthly service fee.  On March 8, 2005, Touch Mobile, a prepaid serviceoffering of *Innove*, launched its “Todo Tawag, Todo Text” promotionwherein Touch Mobile subscribers have the option to avail themselves ofunlimited local calls and text messaging among Touch Mobile subscribers for afixed fee.  The promotion covers local voice calls and text messaging onlybetween Touch Mobile subscribers for Php150 with a validity of 15 days.  OnMarch 11, 2005, Smart launched “Smart *258*”,a promotion open to all Smart and *Talk ‘N Text* prepaid subscribers whowished to avail themselves of unlimited on-network voice calls for Php115 for10 days and unlimited on-network text messaging service for Php60 for sixdays.  On March 22, 2005, Globe launched its unlimited call and text promotionwherein Globe subscribers can call and text other Globe subscribers for a feeof Php300.  

 

Cellularoperators are also competing actively against each other in launchinginnovative products and value-added services.  The growing range of cellularproducts and services now include text messaging, multimedia messaging, voicemail, text mail, international roaming, information-on-demand, mobile banking, e-commerce,mobile data and cellular internet access.

 

Consistentwith industry practice and Smart’s churn management efforts, Smart"locks" the handsets it sells to its subscribers, rendering themincompatible with SIM cards issued by competitors.  However, subscribers may havetheir handsets “unlocked” by unauthorized parties, for a nominal fee, andpurchase new SIM cards from competing operators or may swap the existing SIM for a SIM of a competing operator forfree, inclusive of pre-loaded air time.“Unlocking” does not involve significant cost.  Switching to another cellularoperator would, however, result in a change of the subscriber’s cellulartelephone number.

 

*Local Exchange Service*

 

Theconcerted nationwide local exchange line build-out by various players, asmandated by the Philippine government, significantly increased the number offixed lines in service in the country and resulted in wider access to basictelephone service.  The growth of the fixed line market has considerablyweakened due to the surge in demand for cellular services and the generalsluggishness of the national economy.  Nevertheless, we have sustained ourleading position in the fixed line market on account of PLDT's extensivenetwork in key cities nationwide.  In most areas, we face one or twocompetitors.  Our principal competitors in the local exchange market areDigitel, BayanTel and Globe.  In June 2005, Innove Communications, awholly-owned subsidiary of Globe, was granted a national franchise by the NTCto provide landline service nationwide.

 

Overthe past couple of years, however, competition among local exchange operatorshas reduced as certain operators have faced financial difficulties or haveshifted strategic focus away from the fixed line business to cellular services.On the other hand, we are facing increasing competition from cellular operatorsmainly due to substitution of cellular services for fixed line services.  

 

*International Long Distance Service*

 

Includingus, there are 11 international gateway facility operators in the country.While we have so far been able to maintain a leadership position in this highlycompetitive segment of the industry, in recent years, our market share hasreduced largely as a result of (1) competition from other international gatewayfacility operators and international simple resale operators, (2) an increasein inbound and outbound international long distance calls terminating to andoriginating from the growing number of cellular subscribers, and (3) thepopularity of alternative and cheaper means of long distance communications,such as text messaging, e-mailing and internet telephony, further heighteningthe competition.

 

Withrespect to inbound calls into the Philippines, we adopted the U.S. FCCbenchmark accounting rate of US$0.38 per minute for inbound international callswhich represented a settlement rate of US$0.19 per minute, one year ahead ofthe target date of January 1, 2001.  This provided us with increasedflexibility to terminate more U.S. traffic into the Philippines, minimizeunauthorized traffic termination through international simple resale operationsand recover traffic lost due to bypass routings.  We have also establishedpresence in key cities overseas to identify traffic at its source, maximize theuse of our international facilities and develop alternative sources ofrevenue.  Effective February 1, 2003, after lengthy negotiations withapproximately 100 telecommunications operators around the world, we increasedthe termination rate with carriers accounting for a substantial portion of ourinternational inbound traffic terminating on our fixed line network to anaverage of approximately US$0.12 per minute.  Prior to the increase intermination rates, a substantial portion of PLDT’s international inbound trafficterminating on its fixed line network was charged an average termination rateof approximately US$0.08 per minute.  See “Item 8. Financial Information ––Legal Proceedings –– U.S. Federal Communications Commission, or FCC, Rulingversus Philippine Telecommunications Companies”, “Item 5. Operating andFinancial Review and Prospects –– Results of Operations –– 2004 Compared to2003 –– Consolidated Operating Revenue –– Fixed Line –– International LongDistance”, “Item 3. Key Information –– Risks Factors–– Risks Relating to Us ––Our results of operations have been, and may continue to be, adversely affectedby competition in international long distance service” and *Note 25 – OtherMatters*to the accompanying consolidated financial statements in Item 18 forfurther discussion.  

 

With respect to outbound callsfrom the Philippines, we compete for market share through our localexchange and cellular businesses, which are the origination points of outboundinternational calls.  We have also introduced a number of marketing initiativesto stimulate growth of outbound call volumes, including tariff reductions andvolume discounts for large corporate subscribers.

 

*National Long DistanceService*

 

Since 2000, our national longdistance service business has been negatively impacted by the growing number of cellular subscribers in the Philippines and the widespread availability and growing popularity ofalternative economical non-voice methods of communication, particularly textmessaging and e-mailing.  In addition, various internet service providers have launched voiceservices over the internet to their subscribers nationwide.

 

Whilenational long distance call volumes have been declining, we have remained aleading provider of national long distance service in the Philippinesdue to our significant subscriber base and ownership of the Philippines’most extensive DFON.  In order to mitigate the decline of our national longdistance revenues, we have renegotiated the interconnection agreements with thecellular operators to provide the fixed line business a more equitable accesscharge arrangement for calls between fixed line and cellular subscribers.

 

On January 5, 2005, *Globelines*launched a plan that offered all its subscribers free NDD calls nationwide.Digitel's flat rate for Sun-to-Sun calls was being positioned not only as astrong alternative to cellular, but also as a replacement to the fixed line.On February 14, 2005, PLDT launched its Php10 per call promotion to anyPLDT fixed line subscriber nationwide and to all Smart and *Talk 'N Text*subscribers.  The promotions introduced a shift from the “per minute charging”to a single fee for unlimited calls.  

 

Dataand Other Network Services

 

Anotherrapidly growing segment of the industry is the market for data and othernetwork services. The growth is spurred by the significant growth inconsumer/retail narrowband and broadband internet access, enterprise resourceplanning applications, call centers, business process outsourcing, on-linegaming and other e-services that drive the need for broadband andinternet-protocol based solutions both here and abroad.  Our principalcompetitors in this area are Globe/Innove, BayanTel, Eastern Telecommunicationsand Digitel.  The principal bases of competition in the data services marketare price, customer service and quality of service.

 

Environmental Matters

 

We have not been subject to any material fines orlegal or regulatory action involving non-compliance with environmentalregulations of the Philippines.  We are not aware that we are not in compliance inany material respect with relevant environmental protection regulations.

 

Intellectual Property Rights

 

We do not own any material intellectual propertyrights apart from our brand names and logos.  We are not dependent on patents,licenses or other intellectual property which are material to our business orresults of operations, other than licenses to use the software that accompanymost of our equipment purchases.

 

Properties

 

Weown four office buildings located in Makati City and own and operate 183 exchanges nationwide, ofwhich 61 are located in the Metropolitan Manila area.  The remaining 122exchanges are located in small cities and municipalities outside MetropolitanManila area.  We also own radio transmitting and receiving equipment used forinternational and domestic communications.  As at December 31, 2004, we had 3,957cellular cell sites and 5,303 base stations.

 

Asat December 31, 2004, our principal properties, excluding property underconstruction, consisted of the following, based on book value:

 

•        58% consisted of cable andcellular facilities, including our DFON, subscriber cable facilities,inter-office trunking and toll cable facilities and cellular facilities;

 

•        25% consisted of central officeequipment, including three international gateway facilities, six pure nationaltoll exchanges and 15 combined local and toll exchanges, and communicationssatellite;

 

•        9% consisted of land andimprovements and buildings, which we acquired to house our telecommunicationsequipment, personnel, inventory and/or fleet;

 

•        1% consisted of informationorigination and termination equipment, including, pay telephones and radioequipment installed for customers use, as well as cables and wires installedwithin customers' premises; and

 

•        7% consisted of other workequipment.

 

Formore information on these properties, see *Note 7 – Property, Plant andEquipment* to the accompanying consolidated financial statements in Item18.  These properties are located in areas being served by our exchanges.  Inour opinion, these properties are in good condition, except for ordinary wearand tear, and are adequately insured.

 

The majority of our connecting lines are above or underpublic streets and properties owned by others.

 

PLDT's and Smart’s properties are free from anymortgage, charge, pledge, lien or encumbrance.  However, substantial propertiesof Piltel and Mabuhay Satellite and a portion of ePLDT’s property are subjectto liens.

 

PLDTGroup has various long-term lease contracts, the bulk of which have lease termsranging from two to ten years covering certain offices, warehouses,telecommunications equipment locations and various office equipment.

 

Item 5.        Operating andFinancial Review and Prospects

 

*The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ouraudited consolidated financial statements (and the related notes) as atDecember 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and2002 included elsewhere in this report.  This discussion containsforward-looking statements that reflect our current views with respect tofuture events and our future financial performance.  These statements involverisks and uncertainties, and our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of particularfactors such as those set forth under "Forward-Looking Statements"and “Item 3. Key Information — Risk Factors" and elsewhere in thisreport.  Our audited consolidated financial statements, and the financialinformation discussed below, have been prepared in accordance with**U.S.**GAAP.  For convenience, certain peso financial information in the followingdiscussions has been translated to U.S. dollars at the exchange rate at**December 31, 2004**of Php56.341 to US$1.00, as quoted through the Philippine DealingSystem.*

 

Overview

 

We are the largest and most diversifiedtelecommunications company in the Philippines.  We have organized our business into three mainsegments which serve as the basis for management’s decision to allocateresources and evaluate operating performance:

 

•        *Wireless* — wireless telecommunications services provided byPLDT’s subsidiaries, Smart and Piltel, our cellular service providers, andMabuhay Satellite, ACeS Philippines, and Telesat, our satellite and VSAToperators;

 

•        *Fixed Line* — fixed line telecommunications services primarilyprovided through PLDT.  We also provide fixed line services through PLDT’ssubsidiaries Clark Telecom, Subic Telecom, Maratel, Piltel and BCC, whichtogether account for approximately 3% of our consolidated fixed lines inservice, (in 2004) and PLDT Global; and

 

 

•        *Information and CommunicationsTechnology* — information andcommunications infrastructure and services for internet applications, internetprotocol-based solutions and multimedia content delivery provided by PLDT’ssubsidiary ePLDT; call center services provided by ePLDT’s subsidiariesParlance, Vocativ and Ventus; internet access and gaming services provided byePLDT’s subsidiaries, Infocom, DigiPar and netGames; and e-commerce andIT-related services provided by other investees of ePLDT, as discussed in *Note8 – Investments*to the accompanying consolidated financial statements inItem 18.

 

Keyperformance indicators and drivers that our management uses for the managementof our business include, among others, the general economic conditions in the Philippines,our subscriber base, traffic volumes, and interconnection arrangements.

 

**Wireless**
 

Ourwireless business provides cellular and satellite, VSAT and other services,with cellular services contributing about 97% and satellite, VSAT and otherservices contributing 3% of our wireless service revenues as at December 31,2004.  Rapid growth in the cellular market has resulted in a change in ourrevenue composition and sources of our revenue growth.  Starting 2003, cellularservice has been our major revenue source surpassing fixed line revenues byfive percentage points.  As at December 31, 2004, Smart and Piltel, whichoffers service using Smart’s network, had the largest and third largestcellular subscriber bases, respectively, in the Philippines.  In addition,Smart’s and Piltel’s subscribers increased by 48% in 2004, resulting in ouraggregate system-wide cellular subscribers outnumbering our fixed line inservice by more than 9 to 1 at the end of 2004.  Cellular data services, whichinclude all text messaging and text-related services ranging from ordinary textto value-added services, contributed significantly to our revenue increase.Cellular service revenues accounted for 56%, 51% and 42% of our total servicerevenues for 2004, 2003 and 2002, respectively.

 

**FixedLine**
 

Ourfixed line business provides local exchange service, international and nationallong distance services, data and other network services and miscellaneousservices.  Until 2003, fixed line services have been our major revenue sourcecontributing 56% and 69% of consolidated service revenues in 2002 and 2001,respectively.  Although relatively stable in absolute terms, our fixed linerevenues’ contribution to total operating revenues have declined to 38% in2004, largely due to the substantial growth in our wireless business.  Localexchange revenues have declined slightly owing to shift in subscriberpreference from postpaid to prepaid service.  National long distance revenueshave also been declining largely due a drop in call volumes, and an increase inthe proportion of calls subject to revenue sharing with other carriers.  Mitigatingthese declines was the steady growth of our data and other network servicesover the recent years.  Recognizing the growth potential of the data and othernetwork services segment, we have put considerable emphasis on the developmentof new packet-switched, data-capable and internet-based networks.International long distance revenues have declined until 2002 due to lowerinbound call volumes, lower termination rates and increased competition andsubstitution, but has increased its contribution to the overall fixed linerevenues in 2003 and 2004 on account of an increase in our average terminationrates in 2003.

 

**Information and Communications Technology**
* *

Our information and communications technology businessis conducted through our wholly-owned subsidiary, ePLDT, which was incorporatedin August 2000 and started commercial operations in February 2001.  ePLDT’sprincipal businesses are the operation of an internet data center under thebrand name *Vitro™*; three wholly-owned call centers, Vocativ, Parlanceand Ventus, which commenced full commercial operations in March 2005, andInfocom, an ISP.  As a percentage of our total service revenues, ourinformation and communications technology service revenues increased to 2% in2004 from 1% in 2003 and 2002.

 

CriticalAccounting Policies

 

Ourconsolidated financial statements are prepared in accordance with U.S. GAAP,which requires management to make estimates and assumptions that affect amountsreported in our consolidated financial statements and related notes.  Inpreparing these consolidated financial statements, we have made our bestestimates and judgments of certain amounts, giving due consideration tomateriality.

 

Webelieve the following represent our critical accounting policies under U.S.GAAP.  The impact and any associated risks relating to these policies in ourbusiness operations are discussed elsewhere in this section.

* *

*Revenue Recognition*

 

Ourrevenue recognition policies require us to make use of estimates andassumptions that may affect the reported amounts of our revenues andreceivables.  While we believe that our judgments and assumptions areappropriate and reasonable, significant changes in our judgments andassumptions may materially affect our reported amounts of our revenues and receivables.

 

Ouragreements with domestic and foreign carriers for inbound and outbound trafficsubject to settlements require traffic reconciliations before actual settlementis done, which may not be the actual volume of traffic as measured by us.Initial recognition of revenues is based on our observed traffic adjusted byour normal experience adjustments, which historically have not been material inour consolidated financial statements.  Differences between the amountsinitially recognized and actual settlements are taken up in the accounts uponreconciliation.  However, there is no assurance that such use of estimates maynot result to material adjustments in future periods.

 

Revenuesunder a multiple element arrangement specifically applicable to our wirelessbusiness are split into separately identifiable components and recognized whenthe related components are delivered in order to reflect the substance of thetransaction.  The fair value of components is determined using verifiableobjective evidence.  Revenue for handset sales is quantified and identifiedseparately using the residual value method from our cellular service revenue.

 

*Estimating Useful Lives of Property, Plant and Equipment*

 

We estimate the useful lives of our property, plantand equipment based on the period over which our assets are expected to beavailable for use.  The estimated useful lives of our property, plant andequipment are reviewed periodically and are updated if expectations differ fromprevious estimates due to physical wear and tear, technical or commercialobsolescence and legal or other limits on the use of our assets.  In addition,our estimation of the useful lives of our property, plant and equipment isbased on our collective assessment of industry practice, internal technicalevaluation and experience with similar assets.  It is possible, however, thatfuture results of operations could be materially affected by changes in ourestimates brought about by changes in factors mentioned above.  The amounts andtiming of recorded expenses for any period would be affected by changes inthese factors and circumstances.  A reduction in the estimated useful lives ofour property, plant and equipment would increase our recorded expenses anddecrease our noncurrent assets.  Property, plant and equipment amounted toPhp186,093 million and Php190,217 million as at December 31, 2004 and 2003,respectively.

 

AssetImpairment 

 

U.S.GAAP requires that an impairment review be performed when certain impairmentindicators are present.  The impairment review first compares the futureundiscounted cash flows expected to be generated from the continued use andultimate disposition of the assets with the book value of the assets.  If thesecash flows are not sufficient to recover the book value of the assets, animpairment charge is recognized based on the comparison between the discountedvalue of these cash flows and the book value of the assets.  In addition, ourprojections for future cash flows are generally less during periods of reducedcash flow.  As a result, an impairment charge is more likely to occur during aperiod when our operating results are already otherwise depressed.

 

Purchaseaccounting requires extensive use of accounting estimates and judgments toallocate the purchase price to the fair market values of the assets andliabilities purchased.  Our business acquisitions typically result in goodwill,which prior to January 1, 2002, affected our results of operations for the amount offuture period amortization expense.  Since January 1, 2002,goodwill has been subject to a periodic impairment test and may no longer beamortized.  Determining the fair value of property, plant and equipment,investments and intangible assets requires us to make estimates andassumptions, such as the determination of future cash flows expected to begenerated from the continued use and ultimate disposition of such assets, thatcan materially affect our consolidated financial statements.  Future eventscould cause us to conclude that property, plant and equipment, investments andintangible assets associated with an acquired business is impaired.  Anyresulting impairment loss could have a material adverse impact on our financialcondition and results of operations.

 

The determination of the estimatedfuture cash flows involves significant judgment and estimations. While webelieve that our assumptions are appropriate and reasonable, significantchanges in our assumptions may materially affect our assessment of recoverablevalues and may lead to future additional impairment changes.

* *

Totalgoodwill and intangible assets as at December 31, 2004and 2003 amounted to Php16,561 million and Php15,464 million, respectively.Total asset impairment charges amounted to Php1,412 million in 2004, Php675million in 2003 and Php13,279 million in 2002.

* *

FinancialAssets and Liabilities

 

U.S.GAAP requires that we carry certain of our financial assets and liabilities atfair value, which requires extensive use of accounting estimates and judgment.While significant components of fair value measurement were determined usingverifiable objective evidence (e.g., foreign exchange rates, interest rates,volatility rates), the fair value would differ if we utilized differentvaluation methodology.  Any changes in fair value of these financial assets andliabilities would affect directly our profit and loss and equity.

 

Thefair value of financial assets and liabilities as at December 31, 2004amounted to Php46,153 million and Php191,923 million, respectively.  Total gainon debt exchange in 2004 amounted to Php2,620 million.  The fair value offinancial assets and liabilities as at December 31, 2003amounted to Php39,861 million and Php212,385 million, respectively.

* *

*Estimating Allowance for Doubtful Accounts*

 

We estimate the allowance for doubtful accounts relatedto our trade receivables based on two methods.  The amounts calculated usingeach of these methods are combined to determine the total amount we reserve.First, we evaluate specific accounts where we have information that certaincustomers are unable to meet their financial obligations.  In these cases, weuse judgment, based on the best available facts and circumstances, includingbut not limited to, the length of our relationship with the customer and thecustomer’s current credit status based on third party credit reports and knownmarket factors, to record specific reserves for customers against amounts dueto reduce our receivables to amounts that we expect to collect.  These specificreserves are re-evaluated and adjusted as additional information receivedaffects the amounts estimated.  Second, a general provision is established as acertain percentage of operating revenues based on the aging profile ofreceivables.  This percentage is based on a collective assessment of historicalcollection, write-off experience, current economic trends, changes in ourcustomer payment terms and other factors that may affect our ability to collectpayments. 

 

Full allowance is provided forreceivables from permanently disconnected subscribers and carriers.  Suchpermanent disconnections generally occur within 105 days from due date.Partial allowance is provided for active subscribers and carriers based on theage status of receivables.

 

The amounts and timing of recorded expenses for anyperiod would differ if we made different judgments or utilized differentestimates.  An increase in our allowance for doubtful accounts would increaseour recorded expenses and decrease our current assets.  Provision for doubtfulaccounts amounted to Php3,948 million in 2004, Php4,092 million in 2003 andPhp4,160 million in 2002.  The provision for doubtful accounts representedapproximately 3% of our consolidated service revenues in 2004, 4% in 2003 and5% in 2002.  Trade and other receivables, net of allowance for doubtfulaccounts, amounted to Php10,404 million and Php17,087 million as at December 31, 2004 and2003, respectively.

 

*Acquisitions and Intangible Assets*

* *

Acquisitionshave generally been accounted for as purchases.  Accordingly, the acquisitionof Smart was accounted for using the purchase method of accounting.  The excessof the total acquisition cost over the fair value of the net assets acquiredwas Php23,096 million.  Based on management's review and estimate, Php5,900million was recorded as the value of customers acquired (Php2,705 million andPhp3,195 million were attributed to Global System for Mobile Communication, orGSM, and analog subscribers, respectively).  Prior to 2002, the excess of thetotal acquisition cost over the fair value of the net assets acquired wasamortized on a straight-line basis over five years.  Starting 2002, theunamortized balance is reviewed annually for impairment using the fair valueapproach.  Purchase accounting requires extensive use of accounting estimatesand judgments to allocate the purchase price to the fair market values of theassets and liabilities purchased.

 

*Foreign Exchange Revaluation Losses*

* *

Whenwe incur unhedged foreign currency-denominated liabilities arising directlyfrom the acquisition of property, plant and equipment invoiced in a foreigncurrency, such as U.S. dollar-denominated loans to finance equipment purchases,foreign exchange losses on those liabilities are charged or credited tooperations in the current period.  Over the past years, the Philippine peso hasdepreciated significantly against the U.S. dollar, resulting in substantialforeign exchange losses, and has resulted in our incurring net losses forcertain periods.

* *

*Investments*

* *

Thevarious interests that we hold in companies are accounted for under threemethods:  consolidation, the equity method and the cost method.  The applicableaccounting method is generally determined based on our voting interest in acompany.  Majority-owned companies are consolidated, 20% to 50% owned companiesare accounted for using the equity method and our investments in companies overwhich no significant influence is exercised or in cases where our investmentsare temporary, the investments are stated at cost.

* *

*Pension Cost and Other Retirement Benefits*

 

Thedetermination of our obligation and cost for pension and other retirementbenefits is dependent on our selection of certain assumptions used by actuariesin calculating such amounts.  Those assumptions are described in *Note 17 –Employee Benefits*to the accompanying consolidated financial statements inItem 18, and include among others, discount rates, expected returns on planassets and rates of compensation increase.  In accordance with U.S. GAAP,actual results that differ from our assumptions are accumulated and amortizedover future periods and therefore, generally affect our recognized expense andrecorded obligation in such future periods.  While we believe that ourassumptions are reasonable and appropriate, significant differences in ouractual experience or significant changes in our assumptions may materiallyaffect our pension and other retirement obligations.  Unrecognized netactuarial loss as at December 31, 2004 amounted to Php89 million.

 

DeferredTax Assets

 

We review the carrying amounts of ourdeferred tax assets at each balance sheet date and recognize a valuationallowance to the extent that it is no longer probable that sufficient taxableprofit will be available to allow all or part of the deferred tax assets to beutilized.  However, there is no assurance that we will generate sufficienttaxable profit to allow all or part of our deferred tax assets to be utilized.Significant changes in our judgments and assumptions may materially affect thereported amounts of our valuation allowance and the carrying amounts of ourdeferred tax assets.

 

Asat December 31, 2004 and 2003, our deferred tax assets amounted to Php20,027million and Php20,712 million, respectively, net of valuation allowanceamounting to Php13,663 million and Php19,590 million, respectively.

 

*Legal Contingencies*

* *

We are currently involved in various legalproceedings.  Our estimate of the probable costs for the resolution of theseclaims has been developed in consultation with outside counsel handling ourdefense in these matters and is based upon an analysis of potential results.We currently do not believe these proceedings will have a material adverseeffect on our consolidated financial statements.  It is possible, however, thatfuture results of operations could be materially affected by changes in ourestimates or in the effectiveness of our strategies relating to theseproceedings.  See “Item 8. Financial Information — Legal Proceedings —Taxation.”  Outstanding provisions to cover these contingencies amounted toPhp5,199 million as at December 31, 2004.
****
Results of Operations

 

Thefollowing table shows the contribution by each of our business segments to ourconsolidated operating revenues, expenses and net income (loss) for each of theyears ended December 31, 2004, 2003 and 2002.  Most of our revenues are derivedfrom our operations within the Philippines.  Our revenues derived from outside the Philippinesconsist primarily of revenues from incoming international calls to the Philippines.

 

 

**Wireless**

** **

**Fixed Line**

** **

**ICT**

** **

**Inter-segment**

**Transactions**

** **

**Total**

 

(in millions)

For the year ended December 31, 2004

** **

** **

** **

** **

** **

** **

** **

** **

** **

Operating Revenues 

Php75,161

 

Php48,484

 

Php2,401

 

(Php4,825)

 

Php121,221

Service

69,050

 

48,484

 

2,080

 

(4,662)

 

114,952

Non-service

6,111

 

–

 

321

 

(163)

 

6,269

Operating Expenses

42,769

 

31,909

 

3,035

 

(5,031)

 

72,682

Net Income (Loss) 

27,513

 

1,287

 

(699)

 

–

 

28,101

For the year ended December 31, 2003

 

 

 

 

 

 

 

 

 

Operating Revenues 

65,183

 

46,820

 

1,783

 

(2,586)

 

111,200

Service

54,635

 

46,820

 

1,467

 

(2,436)

 

100,486

Non-service

10,548

 

–

 

316

 

(150)

 

10,714

Operating Expenses

46,264

 

32,303

 

2,272

 

(3,018)

 

77, 821

Net Income (Loss) 

13,275

 

(1,902)

 

(328)

 

–

 

11,045

For the year ended December 31, 2002

 

 

 

 

 

 

 

 

 

Operating Revenues 

48,252

 

46,186

 

977

 

(1,584)

 

93,831

Service

36,157

 

46,186

 

772

 

(1,429)

 

81,686

Non-service

12,095

 

–

 

205

 

(155)

 

12,145

Operating Expenses

37,915

 

43,793

 

1,458

 

(1,364)

 

81,802

Net Income (Loss) 

5,931

 

(11,602)

 

(487)

 

–

 

(6,158)

 

**2004 Compared to 2003**

 

**On a Consolidated Basis**

 

*ConsolidatedOperating Revenues*

** **

Largely driven by the continued strong growth of our wirelessbusiness, particularly Smart’s cellular business, our consolidated operatingrevenues for 2004 increased by Php10,021 million, or 9%, to Php121,221 million from Php111,200million in 2003.  The revenue contribution of our wireless business accountedfor 62% of our consolidated operating revenues for 2004, compared to 59% in2003.  

** **

Thefollowing table shows the breakdown of our consolidated operating revenues forthe years ended December 31, 2004 and 2003 by business segment:

** **

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php75,161

 

62

 

Php65,183

 

59

 

Php9,978

 

15

Fixed line

48,484

 

40

 

46,820

 

42

 

1,664

 

4

Information and communications technology 

2,401

 

2

 

1,783

 

1

 

618

 

35

Inter-segment revenues

(4,825)

 

(4)

 

(2,586)

 

(2)

 

(2,239)

 

87

Total

Php121,221

 

100

 

Php111,200

 

100

 

Php10,021

 

9

* *

***Consolidated Operating Expenses***

 

Our consolidated operating expenses in 2004 decreasedby Php5,139 million, or 7%, to Php72,682 million from Php77,821 million in2003.  The decrease was primarily due to lower operating expenses associatedwith our wireless and fixed line businesses, partially offset by an increase inoperating expenses associated with our information and communicationstechnology business.  As a percentage of our consolidated operating revenues,consolidated operating expenses decreased to 60% in 2004 from 70% in 2003. 

** **

Thefollowing table shows the breakdown of our consolidated operating expenses forthe years ended December 31, 2004 and 2003 by business segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase/(Decrease)**

 

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

 
Wireless 

Php42,769

 

59

 

Php46,264

 

59

 

(Php3,495)

 

(8)

Fixed line

31,909

 

44

 

32,303

 

42

 

(394)

 

(1)

Information and communications technology 

3,035

 

4

 

2,272

 

3

 

763

 

34

Inter-segment expenses

(5,031)

 

(7)

 

(3,018)

 

(4)

 

(2,013)

 

67

Total

Php72,682

 

100

 

Php77,821

 

100

 

(Php5,139)

 

(7)

** **

***Consolidated OperatingIncome***

*** ***

Ourconsolidated operating income in 2004 was Php48,539 million, an increase ofPhp15,160 million, or 45%, compared to Php33,379 million in 2003 as a result ofan increase in our consolidated operating revenues, complemented by a decreasein our consolidated operating expenses.  

*** ***

***Consolidated Financing Costs***

*** ***

Financingcosts on a consolidated basis decreased by Php7,686 million, or 31%, toPhp17,097 million primarily due to lower foreign exchange losses pertaining tothe foreign exchange revaluation of the carrying values of financialliabilities because the level of peso depreciation was lower in 2004 ascompared to 2003 and also because of lower foreign denominated debt balances in2004 compared to 2003 and lower interest expense and related items owing tolower debt balances in 2004 compared with 2003.  

*** ***

***Consolidated InterestIncome***

 

Interestincome on a consolidated basis increased by Php429 million, or 84%, to Php942million in 2004 from Php513 million in 2003 mainly attributable to higheraverage cash balances.

 

***Consolidated OtherIncome - Net***

 

Other income on a consolidated basis totaled Php2,530 millionin 2004, an increase of Php1,731 million, or 217%, compared to Php799 millionin 2003.  The increase was mainly due to a gain on a debt exchangerestructuring transaction conducted by Smart in 2004 pertaining to the wirelessbusiness. There was no similar gain of the same nature in 2003.   For further details,see “Item 5.  Operating and Financial Review and Prospects – Other Information– Piltel Debt Exchange Transaction” and *Note 12 –**Interest–bearingFinancial Liabilities – Term Loans –US$283 Million Term Loan Facility, or DebtExchange Facility* to the accompanying consolidated financial statements inItem 18.  

 

***Consolidated I******ncome Before Income Tax, Cumulative Effect of Changein Accounting Policy and Minority Interest in Net Loss (Income) of ConsolidatedSubsidiaries***

 

Our income before income tax, cumulativeeffect of change in accounting policy and minority interest in net loss(income) of consolidated subsidiaries in 2004 was Php34,840 million, anincrease of Php25,020 million, or 255%, from Php9,820 million in 2003.

 

***Provision for (Benefit from) Income Tax***

 

Provisionfor income tax amounted to Php6,826 million in 2004 compared to a benefit fromincome tax of Php1,400 million in 2003 due to a tax loss position, as non-taxdeductible charges were higher in 2003.

 

In 2004 and 2003, our effective corporate tax rate on aconsolidated basis was 20% and 14%, respectively.  Our effective corporate taxrate was lower than the 32% statutory corporate tax rate due to the following:our income was already subjected to a final tax; our income was already subjectedto a lower tax rate; and our equity in net income of our subsidiaries, whichhad already been subjected to tax and was therefore no longer subject to incometax.  Our effective tax rate increased in 2004 primarily due to the expirationin May 2004 of the three-year income tax holiday granted to Smart.  Wecurrently expect that our effective corporate tax rate will be higher goingforward than in previous years due to the expiration of Smart’s income taxholiday.

 

***Consolidated Net Income***

 

Ourconsolidated net income in 2004 was Php28,101 million, an increase of Php17,056million, or 154%, compared to Php11,045 million in 2003.  The following tableshows the breakdown of our consolidated net income (loss) for the years ended December 31, 2004 and2003 by business segment: 

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php27,513

 

98

 

Php13,275

 

120

 

Php14,238

 

107

Fixed line

1,287

 

5

 

(1,902)

 

(17)

 

3,189

 

168

Information and communications technology 

(699)

 

(3)

 

(328)

 

(3)

 

(371)

 

(113)

Total

Php28,101

 

100

 

Php11,045

 

100

 

Php17,056

 

154

 

**On Business Segment Basis**

 

**Wireless**

* *

*Operating Revenues*
 

Our wireless business segment offers cellular servicesas well as satellite, VSAT, and other services.

 

The following table summarizes our totaloperating service and non-service revenues from our wireless business for theyears ended December 31, 2004 and 2003 by service segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php67,030

 

89

 

Php52,932

 

81

 

Php14,098

 

27

Satellite, VSAT and others

2,020

 

3

 

1,703

 

3

 

317

 

19

 

69,050

 

92

 

54,635

 

84

 

14,415

 

26

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of handsets and SIM-packs

6,111

 

8

 

10,548

 

16

 

(4,437)

 

(42)

Total Wireless Operating Revenues 

Php75,161

 

100

 

Php65,183

 

100

 

Php9,978

 

15

 

ServiceRevenues

 

Our wireless service revenues increased by Php14,415million, or 26%, to Php69,050 million in 2004 compared to Php54,635 million in2003 mainly as a result of the continued growth of Smart’s and Piltel’ssubscriber base.  Accordingly, as a percentage of our total wireless operatingrevenues, wireless service revenues increased to 92% in 2004 from 84% in 2003. 

 

*Cellular Service*

 

Unless otherwise indicated, the financial data andoperating metrics cited in the cellular service section reflect theconsolidated results of our cellular subsidiary, Smart and its subsidiary, Piltel.

 

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 service revenues in 2004 amounted toPhp67,030 million, an increase of Php14,098 million, or 27%, from Php52,932million in 2003.  Cellular service revenues accounted for 89% and 81% of ourtotal wireless operating revenues in 2004 and 2003, respectively.  The increasein cellular service revenues was primarily due to the continued growth of Smart’sand Piltel’s subscriber base.  As at December 31, 2004,the combined cellular subscribers of Smart and Piltel reached 19,208,232, anincrease of 6,261,035, or 48%, over their combined cellular subscriber base of12,947,197 as at December 31, 2003.  Prepaid and postpaid net subscriber activationstotaled 6,235,518 and 25,517, respectively, in 2004, or a quarterly averageaddition of 1,558,880 prepaid and 6,379 postpaid subscribers.

 

 

The table below shows our cellular subscribers base asat December 31, 2004 and 2003:

* *

 

**As at December 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Cellular subscriber base 

19,208,232

 

12,947,197

 

6,261,035

 

48

Prepaid 

18,933,738

 

12,698,220

 

6,235,518

 

49

Smart 

14,321,288

 

9,831,135

 

4,490,153

 

46

Piltel

4,612,450

 

2,867,085

 

1,745,365

 

61

Postpaid

274,494

 

248,977

 

25,517

 

10

*** ***

Of our 19,208,232 subscribers as at December 31, 2004,prepaid subscribers accounted for approximately 99% while postpaid subscribersaccounted for the remaining 1%.  Our cellular prepaid subscriber base grew by49% to 18,933,738 as at December 31, 2004 from 12,698,220 as at December 31,2003, whereas our postpaid subscriber base increased by 10% to 274,494 as atDecember 31, 2004 from 248,977 as at December 31, 2003.  Smart’s prepaid andpostpaid net subscriber activations totaled 4,490,153 and 25,517, respectively,in 2004, or a quarterly average addition of 1,122,538 prepaid and 6,379postpaid subscribers.  On the other hand, Piltel’s prepaid subscribersincreased by 61% to 4,612,450 as at December 31, 2004 from 2,867,085 as atDecember 31, 2003, or a quarterly average addition of 436,341 subscribers.

 

Our quarterly net subscriber activations (reductions)over the last eight quarters are as follows:

*** ***

 

**Prepaid**

** **

**Postpaid**

** **

**Total**

 

**Smart**

** **

**Piltel**

** **

**Smart**

** **

** **

 

** **

** **

** **

** **

** **

** **

** **

**2004**

 

 

 

 

 

 

 

First Quarter

1,162,301

 

218,038

 

16,866

 

1,397,205

Second Quarter

1,207,542

 

468,772

 

7,691

 

1,684,005

Third Quarter

797,686

 

635,978

 

10,445

 

1,444,109

Fourth Quarter

1,322,624

 

422,577

 

(9,485)

 

1,735,716

 

 

 

 

 

 

 

 

**2003**

 

 

 

 

 

 

 

First Quarter

527,158

 

205,086

 

36,963

 

769,207

Second Quarter

744,251

 

241,630

 

9,331

 

995,212

Third Quarter

858,723

 

319,528

 

8,816

 

1,187,067

Fourth Quarter

1,051,965

 

327,221

 

17,219

 

1,396,405

*** ***

Satellite, VSAT and Other Services

 

Our revenues from satellite, VSAT and other servicesconsist mainly of rentals received for the lease of Mabuhay Satellite'stransponders and Telesat's VSAT facilities to other companies and charges forACeS Philippines’ satellite phone service.  Gross service revenues from theseservices for 2004 amounted to Php2,020 million, an increase of Php317 million,or 19%, from Php1,703 million in 2003.

* *

*Non-service Revenues*

 

Ourwireless non-service revenues consist of:

 

•        Proceeds from sale of cellularhandsets; and

 

•        Proceeds from sale of cellularSIM-packs.

 

Our wireless non-service revenues decreased by Php4,437million, or 42%, to Php6,111 million in 2004 as compared to Php10,548million in 2003 mainly attributable to lower handset sales due to the fact thatactivations in 2004 were primarily driven by more SIM-pack sales and SIM-swapactivities.  

 

*Operating Expenses*
 

Operating expenses associated with our wirelessbusiness in 2004 amounted to Php42,769 million, a decrease of Php3,495 million,or 8%, from Php46,264 million in 2003.  A significant portion of this decreasewas mainly attributable to decreases in costs of cellular handsets andSIM-packs sold and depreciation and amortization, partially offset by higherrent and selling and promotion expenses.  As a percentage of our total wirelessoperating revenues, operating expenses associated with our wireless businessdecreased to 57% in 2004 from 71% in 2003.   

 

Cellular business expenses accounted for 93% whilesatellite, VSAT and other business expenses accounted for 7% of our wirelessbusiness expenses in 2004, compared to 94% and 6%, respectively, in 2003.

*** ***

The following table summarizes our wireless-relatedexpenses for the years ended December 31, 2004 and 2003 and the percentage of eachexpense item to the total:

*** ***

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2004**

 

**%**

 

**2003**

 

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Costs of cellular handsets and SIM-packs sold

Php10,599

 

25

 

Php15,790

 

34

 

(Php5,191)

 

(33)

Depreciation and amortization

10,085

 

24

 

12,183

 

26

 

(2,098)

 

(17)

Selling and promotions

4,320

 

10

 

3,310

 

7

 

1,010

 

31

Rent

4,160

 

10

 

2,235

 

5

 

1,925

 

86

Compensation and benefits(1)

3,205

 

8

 

3,801

 

8

 

(596)

 

(16)

Maintenance

2,616

 

6

 

2,051

 

4

 

565

 

28

Cost of satellite air time

1,299

 

3

 

1,919

 

4

 

(620)

 

(32)

Taxes and licenses

1,222

 

3

 

1,174

 

3

 

48

 

4

Professional and other service fees

1,012

 

2

 

624

 

1

 

388

 

62

Insurance and securities

937

 

2

 

756

 

2

 

181

 

24

Asset impairment 

430

 

1

 

288

 

1

 

142

 

49

Provision for inventory obsolescence

213

 

–

 

87

 

–

 

126

 

145

Provision for doubtful accounts

204

 

–

 

72

 

–

 

132

 

183

Amortization of intangible assets

93

 

–

 

766

 

2

 

(673)

 

(88)

Other operating expenses

2,374

 

6

 

1,208

 

3

 

1,166

 

97

Total 

Php42,769

 

100

 

Php46,264

 

100

 

(Php3,495)

 

(8)

__________

* *

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

 

Costsof cellular handsets and SIM-packs sold decreased by Php5,191 million, or 33%,to Php10,599 million as activations in 2004 were primarily driven more bySIM-pack sales and SIM-swap activities compared to handset sales in 2003.

*** ***

Depreciation and amortization charges decreased by Php2,098million, or 17%, to Php10,085 million substantially due to a decrease in thedepreciable asset base as certain of our wireless assets were fully depreciatedby the end of 2004.

 

Sellingand promotion expenses increased by Php1,010 million, or 31%, to Php4,320million due to advertising and promotions costs incurred to attract newsubscriptions, as well as to retain our existing subscriber base.  

 

Rentexpenses increased by Php1,925 million, or 86%, to Php4,160 million on accountof an increase in the number of transmission links and higher cell site andoffice space rentals for the increased number of cell sites, wireless centersand space requirements for increased personnel, primarily related to theincrease in the number of our subscribers.  As at December 31, 2004, we had 3,957cell sites and 5,303 base stations, compared with 2,920 cell sites and 3,904base stations as at December 31, 2003.

 

Compensation and benefits decreased by Php596 million,or 16%, to Php3,205 million primarily due to a higher accrual in 2003 of a long-term incentive benefits ofmanagers and executives of Smart covering the period 2000 to 2004, partiallyoffset by an increase in headcount andincreased salaries, benefits and performance bonuses of Smart’s employees.  Smart'semployee headcount increased by 8% to 5,239 as at December 31, 2004 from 4,870 asat December 31, 2003.  

 

Maintenanceexpenses increased by Php565 million, or 28%, to Php2,616 million mainly onaccount of higher repairs and maintenance costs, and higher site utilityexpenses due to, and in line with, the continued growth in the number of cellsites and other network facilities.  

 

Costof satellite air time decreased by Php620 million, or 32%, to Php1,299 milliondue to the change in the basis of recognizing air time cost.  In 2003,satellite air time cost was accrued at a fixed amount per month based on thepayment schedule in a standstill agreement in consideration for unlimited airtime access.  In 2004, upon the termination of the standstill agreement, airtime cost was reverted to the original charging rate on a per minute basis.This was agreed to be the basis of air time cost until a new agreement isfinalized.  Please see *Note 18 –**Operating**Revenues and Expe*nsesto the accompanying consolidated financial statements in Item 18 for further discussion.

*** ***

Taxesand licenses increased by Php48 million, or 4%, to Php1,222 million mainly dueto an increase in Smart’s business-related permits and licenses.  

 

Professionaland other service fees increased by Php388 million, or 62%, to Php1,012 millionmainly as a result of increased legal and consultancy fees primarily incurredin connection with transactions conducted by  Smart in 2004 and increased billcollection service fees in line with the growth of our subscriber base.

 

Insuranceand securities increased by Php181 million, or 24%, to Php937 million mainly due to the increase in our number of cell sitesand in the amount of network equipment insured as a result of the continuedgrowth and expansion of our network.

 

Assetimpairment charges increased by Php142 million, or 49%, to Php430 million dueto impairment losses recognized in respect of Mabuhay Satellite’s investment inan investee company amounting to Php430 million as compared to Piltel’srecognition of asset impairment amounting to Php288 million in 2003.

 

Provision for inventory obsolescence increased byPhp126 million, or 145%, to Php213 million, primarily due to slow movinghandsets relating to ACeS Philippines in 2004.

 

Provision for doubtful accounts increased by Php132million, or 183%, to Php204 million in 2004 mainly due to an increase ofspecifically identified uncollectible subscriber accounts of Smart.

 

Amortization of intangible assets decreased by Php673 million, or 88%,to Php93 million in 2004 mainly due to the amortization of a customer list ofPhp766 million in 2003.  The amortization expense of Php93 million in 2004represents amortization of intangibles incurred in acquiring equity interestsin Meridian and Wolfpac by Smart; no similar charges were incurred in 2003. 

 

Other operating expenses increased by Php1,166 million, or 97%, to Php2,374 milliondue to various business and operational-related expenses such as facility usagefees, travel, supplies, communication and delivery expenses.

 

***Operating Income***

 

Operating income from our wireless business amounted to Php32,392million in 2004, an increase of Php13,473 million, or 71%, from Php18,919million in 2003, primarily due to increased revenues, mainly from our cellularservices, complemented by lower operating expenses.  

 

***Financing Costs***

*** ***

Financing costs associated with ourwireless business decreased by Php1,848 million, or 45%, to Php2,285 million in2004, primarily due to lower foreign exchange losses, because the level ofdepreciation of the peso was higher in 2003 compared to 2004, and lowerinterest expense on loans resulting from lower debt balances in 2004 ascompared to 2003.  The breakdown of our financing costs for our wirelessbusiness for the years ended December 31, 2004 and 2003 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php984

 

Php1,348

 

(Php364)

 

(27)

Accretion on financial liabilities

884

 

449

 

435

 

97

Foreign exchange losses

423

 

2,139

 

(1,716)

 

(80)

(Gain) loss on derivative transactions – net

(7)

 

165

 

(172)

 

(104)

Financing charges

1

 

32

 

(31)

 

(97)

 

Php2,285

 

Php4,133

 

(Php1,848)

 

(45)

***Interest Income***

 

Interest income generated by our wirelessbusiness amounted to Php724 million in 2004, an increase of Php356 million, or97%, compared to Php368 million in 2003 mainly attributable to Smart’s higheraverage cash balances.

 

*Other Income - net*
 

Our wireless business segment generated other income -net of Php2,648 million in 2004, an increase of Php2,561 million, from Php87million in 2003.  This increase was primarily a result of a Php2,620 milliongain on a debt restructuring transaction conducted by Smart in 2004 pertainingto our wireless business.  See “Item 5. Operating and Financial Review andProspects – Other information – Piltel Debt Exchange Transaction” and *Note12 – Interest-bearing Financial Liabilities – Term Loans – US$283 Million TermLoan Facility, or Debt Exchange Facility*to the accompanying consolidatedfinancial statement in Item 18.

*** ***

***Income Before IncomeTax, Cumulative Effect of Change in Accounting Policy and Minority Interest inNet Income (Loss) of Consolidated Subsidiaries***

*** ***

Incomebefore income tax, cumulative effect of change in accounting policy andminority interest in Net income (loss) of consolidated subsidiaries increasedby Php18,244 million, or 120%, to Php33,407 million in 2004 compared toPhp15,163 million in 2003, mainly due to a 15% increase in wireless operatingrevenues, principally from our cellular business, resulting from the continuedcellular subscriber growth, as well as a decrease in our wireless businessexpenses of 8% in 2004.

 

***Provision for Income Tax***

 

Provision for income tax increased byPhp4,295 million, or 257%, to Php5,967 million in 2004 from Php1,672 million in2003 as Smart’s income tax holiday expired in 2004.  

 

Smart's three-year income tax holiday, which expiredin May 2004, applied to the incremental income generated from its GSM networkexpansion.  The income tax holiday was computed by applying the exemption rateagainst the income tax derived from GSM operations.  The exemption rate wascomputed by dividing the incremental GSM revenues by eligible GSM revenues(both gross of interconnection revenues) where the incremental GSM revenues werederived by deducting the base figure prescribed by the BOI (Smart’s grossrevenue in 2000) from the total GSM revenues.  After adjusting fornon-deductible items and unrealized and realized foreign exchange losses,Smart’s net taxable income was multiplied by the statutory corporate income taxrate of 32% and the exemption rate.  The resulting figure was the income taxthat was deducted from the income tax due on GSM revenues with the differencebeing the income tax due for the period.  Wecurrently expect that our effective corporate tax rate will be higher goingforward than in previous years due to the expiration of Smart’s income taxholiday.

 

***Net Income***

 

Our wireless business segment recorded a net income ofPhp27,513 million in 2004, an increase of Php14,238 million, or 107%, overPhp13,275 million registered in 2003 due primarily to the 48% growth in ourcellular subscriber base, complemented by an 8% decrease in wireless expenses.

 

Fixed Line
 

***Operating Revenues***

*** ***

Our fixed line business provides local exchangeservice, international and national long distance services, data and othernetwork services, and miscellaneous services.  Operating revenues generatedfrom our fixed line business for 2004 totaled Php48,484 million, an increase ofPhp1,664 million, or 4%, from Php46,820 million in 2003.  This increase was primarily due to higher revenuesgenerated from data and other network services, national long distanceservices, international long distance services and miscellaneous revenues,partially offset by decreased revenues from local exchange service.  As apercentage of our total operating revenues, fixed line revenues decreased to38% in 2004 from 41% in 2003, principally due to the continued growth of ourwireless business.  

 

The following table summarizes total operatingrevenues from our fixed line business for the years ended December 31, 2004 and2003 by service segment:

*** ***

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php20,606

 

42

 

Php20,728

 

44

 

(Php122)

 

(1)

International long distance

12,804

 

26

 

12,767

 

27

 

37

 

–

National long distance

6,736

 

14

 

6,561

 

14

 

175

 

3

Data and other network

7,052

 

15

 

5,978

 

13

 

1,074

 

18

Miscellaneous

1,286

 

3

 

786

 

2

 

500

 

64

Total Fixed Line Operating Revenues 

Php48,484

 

100

 

Php46,820

 

100

 

Php1,664

 

4

 

 

*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 years ended December 31, 2004 and2003:

*** ***

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated local exchange service revenues (in millions)

Php20,606

 

Php20,728

 

(Php122)

 

(1)

Number of fixed lines in service

2,152,027

 

2,185,951

 

(33,924)

 

(2)

Number of fixed line employees

9,692

 

10,518

 

(826)

 

(8)

Number of fixed lines in service per employee

222

 

208

 

14

 

7

*** ***

Revenues from our local exchange service in 2004decreased by Php122 million, or 1%, to Php20,606 million from Php20,728 millionin 2003.  The decrease was primarily due to the (1) shift in subscriberpreference from postpaid to prepaid services, which generate lower averagerevenue per subscriber, and (2) decline in installation revenues due to apromotion which waived installation cost of subscribers in an effort tostimulate subscriber growth, partially offset by adjustments in our monthlylocal service rates.  The percentage contribution of local exchange revenues toour total fixed line service revenues decreased to 42% in 2004 from 44% in2003.

 

Fixed line netreductions in 2004 were 33,924 as compared to 2,661 in 2003.  While fixed lineadditions totaled 11,532 for prepaid fixed line services, postpaid fixed linesin service declined by 45,456 in 2004.  As at December 31, 2004, postpaid andprepaid fixed line subscribers totaled 1,783,191 and 368,836, respectively,which accounted for approximately 83% and 17%, respectively, of total fixedlines in service.

 

Pursuant to a currency exchange rate adjustmentmechanism authorized by the Philippine National Telecommunications Commission,or the NTC, we adjust our monthly local service rates upward or downward by 1%for every Php0.10 change in the peso-to-dollar exchange rate relative to a baserate of Php11.00 to US$1.00.  During 2004, we implemented six upward and onedownward adjustments in our monthly local service rates compared to 11 upwardand three downward adjustments in 2003.  The average peso-to-dollar rate in2004 was Php56.044 to US$1.00, compared to the average of Php54.215 to US$1.00in 2003.  This change in the average peso-to-dollar rate translated to a pesodepreciation of 3%, which resulted in an average net increase of 1.5% in ourmonthly local service rates in 2004. 

 

*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.

 

Thefollowing table shows information about our international fixed line longdistance business for the years ended December 31, 2004 and 2003:

*** ***

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total international long distance service revenues (in millions)

Php12,804

 

Php12,767

 

Php37

 

–

Inbound

10,452

 

10,614

 

(162)

 

(2)

Outbound

2,352

 

2,153

 

199

 

9

 

 

 

 

 

 

 

 

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

2,348

 

2,286

 

62

 

3

Inbound

2,192

 

2,128

 

64

 

3

Outbound

156

 

158

 

(2)

 

(1)

Inbound-outbound call ratio

14.1:1

 

13.5:1

 

–

 

–

*** ***

Our total international long distance service revenues increasedby Php37million, to Php12,804 million in 2004 from Php12,767 million in 2003 primarily due to an increase inoutbound international long distance revenues.  The percentage contribution ofinternational long distance service revenues to our total fixed line operatingrevenues decreased to 26% in 2004 from 27% in 2003.

 

Our revenues from inbound international long distance calls in2004 decreased by Php162 million to Php10,452million from Php10,614 million in 2003primarily due to the change in call mix in favor of transit calls with lowerhubbing rates.

 

Our inbound international long distance call volumes in 2004increased by 3% to 2,192 million minutes from 2,128 million minutes in 2003,largely due to an increase in transit calls.

 

Our revenues from outbound internationallong distance calls in 2004 increased by Php199 million, or 9%, to Php2,352million from Php2,153 million in 2003.  Theincrease resulted from higher conversion rates used as average billing rateswere Php55.98 and Php54.04 in 2004 and 2003, respectively, and a change in callmix in favor of traffic utilizing least cost routes.

 

Our outbound international long distance call volumes declined by1% to 156 million minutes in 2004 from 158 million minutes in 2003, primarilydue to cellular substitution (subscribers opting to use cellular forinternational outbound calls) and the popularity of alternative means ofcommunications such as e-mailing, international text messaging and internettelephony.

 

*National Long Distance Service*

*** ***

Our national long distance servicerevenues consist of:

*** ***

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

 

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

 

The following table shows our nationallong distance service revenues and call volumes for the years ended December31, 2004 and 2003:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php6,736

 

Php6,561

 

Php175

 

3

National long distance call volumes (in million minutes)

1,853

 

2,016

 

(163)

 

(8)

 

Our national longdistance service revenues increased by Php175 million, or 3%, to Php6,736 million in 2004 from Php6,561 millionin 2003 as a result of increased national direct dial, or NDD, rates and morebeneficial interconnection agreements with cellular operators.  The percentagecontribution of national long distance revenues to our total fixed line servicerevenues was 14% for 2004 and 2003.

*** ***

Effective March 1, 2003, therate for NDD calls originating from PLDT subscribers and terminating to otherlocal exchange carriers increased to Php5.00 per minute from a flat rate of Php4.50 perminute.  In addition, NDD calls originating from and terminating to PLDT wasalso adjusted to Php5.00 per minute from a flat rate of Php4.50 perminute effective June 8, 2003.  

 

Further, we haveentered into more beneficial interconnection agreements with cellularoperators.  Beginning January 2004, our settlement rate to cellular operatorsof Php4.50per minute was reduced to Php4.00 per minute for calls terminating to cellularsubscribers.  At the same time, the cellular operators’ settlement rate forcalls terminating to PLDT subscribers increased from Php2.50 perminute to Php3.00 per minute.  In 2003, certain local exchangecarriers, previously under revenue sharing arrangements, entered into accesscharging agreements with PLDT.  Under the revenue sharing agreements, chargesare generally apportioned 30% for the originating entity, 40% for the backboneowner and another 30% for the terminating entity.  Under these access chargingagreements, the originating carrier generally pays access charges of (1) Php0.50 perminute for short haul traffic and Php1.25 per minute for long haul traffic to the carrierowning the backbone network; and (2) Php1.00 per minute to the terminating carrier.  Thischange in interconnection charges resulted in a 7% decrease in average revenueper minute for calls originating from and terminating to other local exchangecarriers.  

*** ***

Our national longdistance call volumes, however, decreased by approximately 8% to 1,853 millionminutes in 2004 from 2,016 million minutes in 2003.  Cellular substitution andthe widespread availability and growing popularity of alternative non-voicemeans of communications, particularly cellular text messaging and e-mailing,have negatively affected call volumes.

*** ***

*Data and Other Network Services*

 

In 2004, our data and other network services postedrevenues of Php7,052 million, an increase of Php1,074 million, or 18%, fromPhp5,978 million in 2003.  The revenue contribution of this service segment toour total fixed line service revenues increased to 15% in 2004 from 13% in2003.

 

Dataand other network services we currently provide include traditional bandwidthservices, broadband/packet-based/internet-based services and other packet-basedswitching services.

 

Theforegoing services are used for domestic and international communications,broadband data transmission services, internet exchange services, privatenetworking services, switch-based services and international packet-basedservices.

 

Broadband/IP-based services accounted for 51%,traditional bandwidth services accounted for 44% and other services accountedfor the remaining 5% of the total revenues from PLDT’s data and other networkservices in 2004, compared to 44%, 50% and 6%, respectively, in 2003.  Thesepercentage changes indicate a continuing shift in data and other networkrevenues from traditional bandwidth services to broadband/IP-based services.We expect this trend to continue given the growing demand for broadbandtransmission of voice, data and video due to the continued growth of theinternet, e-commerce and other online services.

 

*Miscellaneous*

 

Miscellaneous service revenues are derived mostly from directoryadvertising and facilities rental.  In 2004, these revenues increased by Php500 million,or 64%, to Php1,286 million from Php786 million in 2003.  The improvement was mainly due toan increase in co-location charges from more co-location sites coupled with anincrease in rent income on duct utilization and cable restoration.Miscellaneous service revenues accounted for approximately 3% of our totalfixed line service revenues in 2004 and 2% in 2003.

 

*Operating Expenses*
 

Operating expenses related to our fixed line businessin 2004 totaled Php31,909 million, a decrease of Php394 million, or 1%,compared to Php32,303 million in 2003.  The decrease was primarily due tocompensation and benefits as a result of PLDT’s MRP and lower rent expense.  Asa percentage of our total fixed line operating revenues, fixed line-relatedexpenses decreased to 66% in 2004, compared to 69% in 2003.

 

The following table shows thebreakdown of our total fixed line-related expenses for the years ended December 31, 2004 and2003 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2004**

 

**%**

 

**2003**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

Php9,674

 

30

 

Php9,315

 

29

 

Php359

 

4

Compensation and benefits(1)

7,921

 

25

 

8,971

 

28

 

(1,050)

 

(12)

Provision for doubtful accounts

3,744

 

12

 

3,950

 

12

 

(206)

 

(5)

Maintenance

3,192

 

10

 

3,081

 

10

 

111

 

4

Rent

1,742

 

5

 

1,909

 

6

 

(167)

 

(9)

Professional and other service fees

1,177

 

4

 

1,129

 

3

 

48

 

4

Selling and promotions

1,100

 

3

 

1,055

 

3

 

45

 

4

Taxes and licenses

812

 

3

 

959

 

3

 

(147)

 

(15)

Insurance and securities

700

 

2

 

762

 

2

 

(62)

 

(8)

Asset impairment 

365

 

1

 

–

 

–

 

365

 

100

Provision for inventory obsolescence

361

 

1

 

152

 

1

 

209

 

138

Other operating expenses

1,121

 

4

 

1,020

 

3

 

101

 

10

Total 

Php31,909

 

100

 

Php32,303

 

100

 

(Php394)

 

(1)

____________

* *

*(1) **Includes salaries and benefits, incentive plan, pensionand MRP costs.*

* *

Depreciation and amortization charges increased by Php359 million,or 4%, to Php9,674 million mainly due to higher depreciation of ourregular asset base primarily resulting from additional completed projects.

 

Compensationand benefits decreased by Php1,050 million, or 12%, to Php7,921 million mainlydue to a 7% reduction in headcount due to PLDT’s MRP in 2003, when MRP cost ofPhp1,560 million was recognized consequently; in 2004, MRP cost amounted toPhp553 million.  This decreasing effect was partially offset by collectivebargaining agreement-related increases in salaries and benefits of PLDTemployees.  See *Note 18 – Operating Revenues and Expenses*to theaccompanying consolidated financial statements in Item 18 for furtherdiscussion on PLDT’s MRP.

 

Provisionfor doubtful accounts decreased by Php206 million, or 5%, to Php3,744 millionprimarily on account of lower provisions by PLDT for anticipated uncollectibleaccounts from various specifically identified domestic telecommunicationscarriers.  PLDT makes provisions for anticipated uncollectible accounts basedon the aging profile of its accounts receivables.  PLDT’s provision fordoubtful accounts in 2004 and 2003 was equivalent to 8% of its servicerevenues.  

 

Maintenance expenses increased by Php111 million, or4%, to Php3,192 million primarily owing to 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 2004 as compared in 2003, partially offset by lower maintenancecosts of the domestic fiber optic network due to more remedial works done in2003 than in 2004.

 

Rent expenses decreased by Php167 million, or 9%, toPhp1,742 million due to a decrease in international leased circuits and rentalfor bundled sales/value added service units expense.

 

Professional and other service fees increased by Php48million, or 4%, to Php1,177 million as a result of higher legal fees in 2004for various services, partially offset by a decrease in number of consultantsin line with PLDT’s cost management efforts, coupled with a decrease incollection agency fees on account of lower final accounts subject forcollection.

 

Selling and promotion expenses increased by Php45million, or 4%, to Php1,100 million mainly as a result of an increase in PLDT’spromotional activities in relation to various products and services, partiallyoffset by reduced corporate public relations expenses.

 

Taxesand licenses decreased by Php147 million, or 15%, to Php812 million mainly onaccount of lower business-related taxes paid in 2004 as compared to 2003.

 

Insuranceand securities decreased by Php62 million, or 8%, to Php700 million primarilydue to lower premiums on property all-risk, industrial all-risk and industrialfire insurance and lower number of contracted security guards.

 

Assetimpairment amounted to Php365 million in 2004, which was primarily related tocertain international assets of PLDT’s subsidiaries. 

 

Provision for inventoryobsolescence increased by Php209 million, or 138%, to Php361 primarily onaccount of higher inventory obsolescence owing to slow-moving items determinedin 2004 as compared to 2003.

 

Otheroperating expenses increased by Php101 million, or 10%, to Php1,121 million dueto higher contracted costs for technical and helpdesk resources and relatedcomputer and maintenance and in-house systems development, partially offset bylower office supplies consumption and printing costs resulting from PLDT’scontinuing cost-containing activities.

 

***Operating Income***

 

Operating income from our fixedline service amounted to Php16,575 million in 2004, an increase of Php2,058million, or 14%, from Php14,517 million in 2003 due to increased revenuesprimarily relating to our data and other network services as well as loweroperating expenses.  

 

***FinancingCosts***

 

Financing costs associated withour fixed line business decreased by Php5,769 million, or 28%, to Php14,821million primarily due to lower interest expense and related items owing to lowerdebt balances in 2004 compared with 2003 and lower foreign exchange lossespertaining to: (1) the foreign exchange revaluation of the carrying values offinancial liabilities because the level of peso depreciation was higher in 2003as compared to 2004 and (2) designation and documentation of certain hedgeditems as hedged instruments to qualify for hedge accounting from July 2004onwards.  The breakdown of our financing costs for our fixed line business forthe years ended December 31, 2004 and 2003 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2004**

** **

**2003**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php10,137

 

Php10,034

 

Php103

 

1

Foreign exchange losses

2,392

 

7,525

 

(5,133)

 

(68)

Hedge costs

1,011

 

1,054

 

(43)

 

(4)

Loss on derivative transactions – net

835

 

1,466

 

(631)

 

(43)

Accretion on financial liabilities

301

 

280

 

21

 

8

Financing charges

145

 

231

 

(86)

 

(37)

 

Php14,821

 

Php20,590

 

(Php5,769)

 

(28)

*** ***

***Interest Income***

*** ***

Interestincome generated by our fixed line business amounted to Php248 million in 2004,an increase of Php110 million, or 80%, compared to Php138 million in 2003mainly attributable to PLDT’s higher average cash balances.

*** ***

***Other Income - net***

 

Allother income/gains such as rental income, gain on disposal of property, whichdo not fall under service revenues are included under this classification.  In2004, our fixed line business segment registered a decrease in other income ofPhp950 million, or 93%, to Php74 million in 2004 from Php1,024 million in 2003.

 

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

*** ***

Our fixed line business segment registered an incomebefore income tax, cumulative effect of change in accounting policy andminority interest in net income of consolidated subsidiaries of Php2,076million in 2004 compared to a loss of Php4,911 million in 2003, primarilyresulting from a substantial decrease in fixed line business-related expenses,particularly financing costs and compensation and benefits.  

 

*Provision for (Benefitfrom) Income Tax*
 

Provisionfor income tax amounted to Php800 million in 2004 as compared to benefit fromincome tax of Php3,008 million in 2003 due to a tax loss position in 2003 asnon-tax deductible charges were higher in 2003.

 

*Net Income (Loss)*
 

In 2004, our fixed line businesssegment registered a net income of Php1,287 million, compared to a net loss ofPhp1,902 million in 2003.  The change was primarily due to an increase in fixedline operating revenues as well as a decrease in fixed line-related expenses,particularly compensation and benefits and lower financing costs.  

 

Information andCommunications Technology
 

**Operating Revenues**
 

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

 

In2004, our information and communications technology business generatedoperating revenues of Php2,401 million, an increase of Php618 million, or 35%,from Php1,783 million in 2003.  These revenues accounted for 2% of our totaloperating revenues in 2004 and 2003.  ePLDT’s call center business contributedrevenues of Php1,213 million, Internet and gaming contributed revenues ofPhp569 million and *Vitro™* contributed revenues of Php243 millionrepresenting 58%, 27% and 12%, respectively, of the total service revenues fromour information and communications technology business in 2004, compared to63%, 26% and 8%, in 2003.  Going forward, we expect revenues from our callcenter and Internet and gaming businesses to continue to contributesignificantly to our information and communications technology revenues withthe growing demand for call center services.

 

The following table summarizesour total operating revenues from our information and communications technologybusiness for the years ended December 31, 2004 and 2003 by service segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase**

** **

**2004**

** **

**%**

** **

**2003**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php1,213

 

51

 

Php927

 

52

 

Php286

 

31

Internet and gaming business

569

 

24

 

380

 

21

 

189

 

50

*Vitro™* data center

243

 

10

 

120

 

7

 

123

 

103

Others

55

 

2

 

40

 

2

 

15

 

38

 

2,080

 

87

 

1,467

 

82

 

613

 

42

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point of Product Sales

321

 

13

 

316

 

18

 

5

 

2

Total ICT Operating Revenues

Php2,401

 

100

 

Php1,783

 

100

 

Php618

 

35

 

*Service Revenues*

 

Service revenues generated by our information andcommunications technology business amounted to Php2,080 million in 2004, anincrease of Php613 million, or 42%, from Php1,467 million in 2003.  This wasprimarily a result of the continued growth of our call center and Internet andgaming businesses.

 

*Call****Center*

 

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 process outsourcingbased on transaction volume.

 

Revenues related to our call center business in 2004increased by Php286 million, or 31%, to Php1,213 million from Php927 million in 2003, primarily due to the combinedeffects of the following: (1) Vocativ’s upward price adjustment for voice andVoIP, and an increase in programs being handled; and (2) an upward priceadjustment by Parlance for its inbound and outbound projects, coupled with anincrease in the number of registered minutes.

 

Callcenter revenues accounted for 58% and 63% of our total information andcommunications technology service revenues in 2004 and 2003, respectively.

* *

*Internet and gaming*

 

Internet and gaming service revenuesconsist 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 fromreselling internet-related solutions such as security solutions and domainregistration; and

 

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

 

Revenues from our internet and gaming business for 2004 increased byPhp189 million, or 50%, to Php569 million from Php380 million in 2003 primarilydue to the consolidation of DigiPar in June 2004.  Our internet and gamingrevenues accounted for 27% and 26% of total service revenues from informationand communications technology business in 2004 and 2003, respectively.

 

*Vitro™*datacenter

 

ePLDT operates an internet data center under the brandname *Vitro™*.  

 

*Vitro™* 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.

 

In2004, *Vitro™* contributed revenues of Php243 million, an increase ofPhp123 million, or 103%, from Php120 million in 2003, primarily due to anincrease in co-location revenues, server hosting and other services.   *Vitro™*revenues accounted for 12% and 8% of total service revenues from informationand communications technology business in 2004 and 2003, 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 creditcard transactions.

 

Revenues from other businesses related to ourinformation and communications technology segment in 2004 increased by Php15million, or 38%, to Php55 million from Php40 million in 2003 largely due to IThelpdesk/contact center services rendered coupled with an increase in number ofdigital certificates sold.

 

Pleaserefer to *Note 8 – Investments* to the accompanying consolidated financialstatements in Item 18 for further discussion on ePLDT’s other information andcommunications technology services.

 

*Non-service Revenues*

 

Non-servicerevenues consist of sales generated from reselling Microsoft software licensesand Cisco hardware equipment.  In 2004, non-service revenues generated by ourinformation and communications technology business increased by Php5 million,or 2%, to Php321 million prompted by higher point of product sales of Ciscoequipment and Microsoft licenses.

 

***Operating Expenses***

 

Operatingexpenses associated with our information and communications technology businesstotaled Php3,035 million in 2004, an increase of Php763 million, or 34%, fromPhp2,272 million in 2003, primarily due to an increase in compensation andbenefits, selling and promotions and asset impairment charge.  However, as apercentage of our information and communications technology operating revenues,operating expenses related to our information and communications technologybusiness decreased to 126% in 2004 from 127% in 2003.  

 

Thefollowing table shows the breakdown of our total information and communicationstechnology-related operating expenses for the years ended December 31, 2004 and2003 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2004**

 

**%**

 

**2003**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php900

 

30

 

Php533

 

23

 

Php367

 

69

Asset impairment 

617

 

20

 

387

 

17

 

230

 

59

Rent

366

 

12

 

337

 

15

 

29

 

9

Depreciation and amortization

339

 

11

 

314

 

14

 

25

 

8

Maintenance

316

 

10

 

184

 

8

 

132

 

72

Selling and promotions

291

 

10

 

35

 

2

 

256

 

731

Professional and other service fees

64

 

2

 

65

 

3

 

(1)

 

(2)

Taxes and licenses

21

 

1

 

18

 

1

 

3

 

17

Insurance and securities

7

 

–

 

10

 

–

 

(3)

 

(30)

Provision for inventory obsolescence

3

 

–

 

12

 

1

 

(9)

 

(75)

Provision for doubtful accounts

–

 

–

 

70

 

3

 

(70)

 

(100)

Other operating expenses

111

 

4

 

307

 

13

 

(196)

 

(64)

Total 

Php3,035

 

100

 

Php2,272

 

100

 

Php763

 

34

____________

 

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

 

Compensation and benefits increased by Php367 million, or 69%, to Php900 millionmainly due to the expansion of our call center facilities and consolidation ofDigiPar which resulted in an increase in headcount coupled with an increase insalaries, bonuses and various incentives of employees.

 

Asset impairment increased by Php230 million, or 59%,to Php617 million due to an impairment provision recognized in 2004 in relationto an investee company.  In 2003, we retired certain equipment with net bookvalues aggregating Php387 million primarily as a result of the abandonment of areloadable chip-based cash card project.

 

Rent expense increased by Php29 million, or 9%, toPhp366 million due to the consolidation of DigiPar with the opening of several *Netopia*branches countrywide and abroad in 2004.  

 

Depreciation and amortization charges increased byPhp25 million, or 8%, to Php339 million primarily due to an increase indepreciable asset base in relation to the expansion of our call center businesssegment.

 

Maintenance expenses increased by Php132 million, or72%, to Php316 million primarily due to a change in maintenance agreement forhigher annual maintenance in respect of our digital certificate business.

 

Selling and promotion expenses increased by Php256million, or 731%, to Php291 million mainly as a result of increased advertisingand promotions expense by *Netopia*.

 

Professionaland other service fees decreased by Php1 million, or 2%, to Php64 millionprimarily due to lower training and shuttling expenses relating to our callcenter representatives.

 

Taxesand licenses increased by Php3 million, or 17%, to Php21 million mainly onaccount of higher business-related taxes paid in 2004 as compared to 2003.

 

Insuranceand securities decreased by Php3 million, or 30%, to Php7 million primarily dueto the divestment of Contact World, with high insurance and security costs in2003.

 

Provisionfor inventory obsolescence decreased by Php9 million, or 75%, mainly pertainingto maintenance-related inventory items of Infocom.

 

Provision for doubtful accounts decreased by Php70million, or 100%, primarily due to specifically identified uncollectiblesubscriber accounts of Infocom already provided for in 2003.

 

Other operating expenses decreased by Php196 million,or 64%, to Php111 million in line with our over-all cost containmentinitiatives.

 

*Operating Loss*

 

Our information and communications technologybusiness registered an operating loss of Php634 million in 2004, an increase ofPhp145 million, or 30%, compared with an operating loss of Php489 million in2003 mainly due to higher operating expenses mainly from the call centerbusiness in 2004 compared to 2003.

 

*Financing Costs*

 

Financing costs associated with our information andcommunications technology business, composed primarily of interest on loans andrelated expenses, decreased by Php21 million, or 35%, to Php39 millionprimarily due to lower interest expense on loans as debt balances declined in2004 as compared to 2003.

 

***InterestIncome***

 

Ourinformation and communications technology business generated an interest incometotaling Php18 million in 2004, an increase of Php11 million, or 157%, comparedto Php7 million in 2003 mainly attributable to ePLDT Vitro’s higher averagecash balances.

 

*Other Income - net*
 

All other income/gains which do not fall underservice and non-service revenues are included under this classification.  Otherincome generated from our information and communications technology businesssegment declined by 88% to Php14 million in 2004 from Php120 million in 2003due to a gain on the divestment of Contact World, Inc., a call center facility,in 2003.  

 

***Loss Before Income Tax, Cumulative Effect of Change in AccountingPolicy and Minority Interest in Net Income of Consolidated Subsidiaries***

*** ***

Our information and communications technology businessrecorded a loss before income tax***,***cumulative effect of change inaccounting policy and minority interest in net income of consolidatedsubsidiaries amounting to Php643 million in 2004 compared to a loss beforeincome tax of Php432 million in 2003.  The increase in net loss was mainly dueto a substantial increase in information and communications technology-relatedexpenses of 34%, as well as an 88% decline in other income.

 

*Provision for (Benefit from) Income Tax*
 

Provision for incometax amounted to Php59 million in 2004 an increase of Php123 million, or 192%,as compared to the benefit from income tax of Php64 million recognized in2003.  This was principally due to Infocom’s reversal of recorded deferredincome tax asset of Php64 million in 2004.

 

*Net Loss*
 

In 2004, our information andcommunications technology business segment registered a net loss of Php699million, an increase of Php371 million, or 113%, compared to a net loss ofPhp328 million posted in 2003.  This reflects the recorded increase in netasset impairment charges and a reported net loss of Php116 million by Infocomin 2004 compared to the net income of Php20 million in 2003, partially offsetby the increase in net income contribution of our call center business.

 

2003 Compared to 2002

 

**On a Consolidated Basis**

 

***Consolidated Operating Revenues***

 

Largely driven by the continued stronggrowth of our wireless business, particularly Smart’s cellular business, ourconsolidated operating revenues for 2003 increased by Php17,369 million, or 19%,to Php111,200 million from Php93,831 million in 2002.  As a percentage of our consolidatedoperating revenues, our wireless business revenues increased to 59% in 2003compared to 52% in 2002.  

 

Thefollowing table shows the breakdown of our consolidated operating revenues forthe years ended December 31, 2003 and 2002 by business segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php65,183

 

59

 

Php48,252

 

52

 

Php16,931

 

35

Fixed line

46,820

 

42

 

46,186

 

49

 

634

 

1

Information and communications technology 

1,783

 

1

 

977

 

1

 

806

 

82

Inter-segment revenues

(2,586)

 

(2)

 

(1,584)

 

(2)

 

(1,002)

 

63

Total

Php111,200

 

100

 

Php93,831

 

100

 

Php17,369

 

19

 

***ConsolidatedOperating Expenses***

 

Ourconsolidated operating expenses in 2003 decreased by Php3,981 million, or 5%,to Php77,821 million from Php81,802 million in 2002.  The decrease wasprimarily due to a decrease in operating expenses associated with our fixedline business partially offset by the increase in operating expenses associatedwith our wireless business and information and communications technologybusiness.  As a percentage of our consolidated operating revenues, consolidatedoperating expenses decreased to 70% in 2003 from 87% in 2002.

 

Thefollowing table shows the breakdown of our consolidated operating expenses forthe years ended December 31, 2003 and 2002 by business segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless 

Php46,264

 

59

 

Php37,915

 

46

 

Php8,349

 

22

Fixed line

32,303

 

42

 

43,793

 

54

 

(11,490)

 

(26)

Information and communications technology 

2,272

 

3

 

1,458

 

2

 

814

 

56

Inter-segment transactions

(3,018)

 

(4)

 

(1,364)

 

(2)

 

(1,654)

 

(121)

Total

Php77,821

 

100

 

Php81,802

 

100

 

(Php3,981)

 

(5)

 

***Consolidated OperatingIncome***

 

Ourconsolidated operating income amounted to Php33,379 million in 2003, anincrease of Php21,350 million, or 177%, compared to Php12,029 million in 2002as a result of the increase in our consolidated operating revenues by 19% anddecrease in our consolidated operating expenses by 5%.

 

***Consolidated FinancingCosts***

*** ***

Financing costs on a consolidatedbasis increased by Php6,432 million, or 35%, to Php24,783 million due to higherforeign exchange losses pertaining to the foreign exchange revaluation of thecarrying values of financial liabilities as the level of peso depreciation washigher in 2003 as compared to 2002, partially offset by lower interest expenseand related items owing to lower debt balances in 2003 compared to 2002.  

 

***Consolidated InterestIncome***

*** ***

Interestincome on a consolidated basis increased by Php40 million, or 8%, to Php513million in 2003 compared to Php473 million in 2002 mainly attributable to ourwireless business particularly Smart.

 

***Consolidated Other Income - Net***

*** ***

Other income - net on a consolidatedbasis totaled Php799 million in 2003, a decrease of Php598 million, or 43%,compared to the same period in 2002.  The decrease was mainly due to the netgain of Php633 million relating to certain financial instruments terminated in2002 from our fixed line business.

*** ***

***Consolidated Income (Loss) Before Income Tax******, Cumulative Effect of Change in Accounting Policy andMinority Interest in Net Income of Consolidated Subsidiaries***

*** ***

Ourconsolidated income before income tax***,***cumulative effect of change inaccounting policy and minority interest in net income of consolidatedsubsidiaries in 2003 was Php9,820million, compared to a loss in 2002 of Php4,594 million.

 

In 2003 and 2002, our effectivecorporate tax rate on a consolidated basis was 14% and 31%, respectively.  Oureffective corporate tax rate was lower than the 32% statutory corporate taxrate due to the following: (1) the effect of a three-year income tax holidaygranted to Smart by the Philippine BOI in connection with the pioneer status itawarded to Smart’s GSM network expansion project; and (2) income alreadysubjected to a final tax or a lower tax rate.

 

Smart’sthree-year income tax holiday, which expired in May 2004, applied to theincremental income generated from its GSM network expansion.  

 

***Consolidated Net Income***

 

Our consolidated net income in 2003 was Php11,045million, compared to a loss of Php6,158 million in 2002.  The following tableshows the breakdown of our consolidated net income (loss) for the years ended December 31, 2003 and 2002 by business segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Change**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php13,275

 

120

 

Php5,931

 

(96)

 

Php7,344

 

124

Fixed line

(1,902)

 

(17)

 

(11,602)

 

188

 

9,700

 

84

Information and communications technology 

(328)

 

(3)

 

(487)

 

8

 

159

 

33

Total

Php11,045

 

100

 

(Php6,158)

 

100

 

Php17,203

 

279

 

**On Business Segment Basis**

 

**Operating Revenues**

 

***Wireless***

 

The following table summarizes our total operating revenues from ourwireless business for the years ended December 31, 2003and 2002 by service segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Cellular 

Php52,932

 

81

 

Php34,500

 

72

 

Php18,432

 

53

Satellite, VSAT and others

1,703

 

3

 

1,657

 

3

 

46

 

3

 

54,635

 

84

 

36,157

 

75

 

18,478

 

51

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Sale of handsets and SIM-packs

10,548

 

16

 

12,095

 

25

 

(1,547)

 

(13)

Total Wireless Operating Revenues 

Php65,183

 

100

 

Php48,252

 

100

 

Php16,931

 

35

 

Service Revenues

 

Ourwireless service revenues increased significantly by Php18,478 million, or 51%,to Php54,635 million in 2003 from Php36,157 million in 2002 mainly as a resultof the continued strong growth in revenues generated from Smart’s and Piltel’scellular services.  Accordingly, as a percentage of our total wirelessoperating revenues, service revenues increased to 84% in 2003 from 75% in 2002.

 

*CellularService*

 

Ourcellular service revenues in 2003 amounted to Php52,932 million, an increase ofPhp18,432 million, or 53%, from Php34,500 million in 2002.  Cellular servicerevenues accounted for 81% of total wireless operating revenues in 2003,compared to 72% in 2002.  This increase was primarily due to increased trafficvolumes and the 51% growth in our wireless subscriber base, which increased by4,347,891 from 8,599,306 as at December 31, 2002 to 12,947,197 as at December31, 2003.  

 

The table below shows our cellular subscriber base asat December 31, 2003 and 2002:

* *

 

**As at December 31,**

** **

** **

** **

** **

** **

**Increase**

** **

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Cellular subscriber base 

12,947,197

 

8,599,306

 

4,347,891

 

51

Prepaid 

12,698,220

 

8,422,658

 

4,275,562

 

51

Smart 

9,831,135

 

6,649,038

 

3,182,097

 

48

Piltel

2,867,085

 

1,773,620

 

1,093,465

 

62

Postpaid

248,977

 

176,648

 

72,329

 

41

* *

 

** **

* *

Of our 12,947,197 subscribers as at December 31, 2003,prepaid subscribers accounted for approximately 98% while postpaid subscribersaccounted for the remaining 2%.  Our prepaid subscriber base grew by 51% to12,698,220 as at December 31, 2003 from 8,422,658 as at December 31, 2002,whereas our postpaid subscriber base increased by 41% to 248,977 as at December31, 2003 from 176,648 as at December 31, 2002.  Smart’s prepaid and postpaidnet subscriber activations totaled 3,182,097 and 72,329, respectively, in 2003,or a quarterly average addition of 795,524 prepaid and 18,082 postpaidsubscribers.  On the other hand, Piltel’s prepaid subscribers increased by 62%to 2,867,085 as at December 31, 2003 from 1,773,620 as at December 31, 2002 ora quarterly average addition of 273,366 subscribers.

 

*Satellite, VSAT and Other Services*

 

Our revenues from satellite, VSAT and other servicesconsist mainly of rentals received for the lease of Mabuhay Satellite'stransponders and Telesat's VSAT facilities to other companies and charges forACeS Philippines’ satellite phone service.  Total revenues from these servicesfor 2003 amounted to Php1,703 million, an increase of Php46 million, or 3%,from Php1,657 million for 2002.

 

*Non-service Revenues*

 

Our wireless non-service revenues decreased byPhp1,547 million, or 13%, to Php10,548 million from Php12,095 million in 2002.The decrease was primarily attributable to lower sale of handsets in 2003 ascompared to 2002.

 

***Operating Expenses***

 

Operating expenses associated with our wirelessbusiness in 2003 amounted to Php46,264 million, an increase of Php8,349million, or 22%, from Php37,915 million in 2002.  A significant portion of thisincrease was attributable to Smart’s non-cash charges, primarily depreciationand amortization charges coupled with an increase in cash charges consistingprimarily of cost of satellite air time, compensation and benefits and sellingand promotions.  As a percentage of our wireless operating revenues, operatingexpenses associated with our wireless business decreased to 71% in 2003 from79% in 2002. 

 

Thefollowing table summarizes our total wireless-related operating expenses forthe years ended December 31, 2003 and 2002 and the percentage of each expense item tothe total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2003**

 

**%**

 

**2002**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Cost of cellular handsets and SIM-packs sold

Php15,790

 

34

 

Php17,232

 

46

 

(Php1,442)

 

(8)

Depreciation and amortization

12,183

 

26

 

6,907

 

18

 

5,276

 

76

Compensation and benefits

3,801

 

8

 

2,710

 

7

 

1,091

 

40

Selling and promotions

3,310

 

7

 

2,460

 

7

 

850

 

35

Rent

2,235

 

5

 

1,966

 

5

 

269

 

14

Maintenance

2,051

 

4

 

1,365

 

4

 

686

 

50

Cost of satellite air time

1,919

 

4

 

50

 

–

 

1,869

 

3,738

Taxes and licenses

1,174

 

3

 

466

 

1

 

708

 

152

Amortization of intangible assets

766

 

2

 

766

 

2

 

–

 

–

Insurance and securities

756

 

2

 

694

 

2

 

62

 

9

Professional and other service fees

624

 

1

 

1,225

 

3

 

(601)

 

(49)

Asset impairment 

288

 

1

 

75

 

–

 

213

 

284

Provision for inventory obsolescence

87

 

–

 

390

 

1

 

(303)

 

(78)

Provision for doubtful accounts

72

 

–

 

456

 

1

 

(384)

 

(84)

Other operating expenses

1,208

 

3

 

1,153

 

3

 

55

 

5

Total

Php46,264

 

100

 

Php37,915

 

100

 

Php8,349

 

22

 

Costs of cellular handsets andSIM-packs sold decreased by Php1,442 million, or 8%, to Php15,790 million dueto lower prices of cellular handset negotiated with suppliers and lower handsetsales in 2003 compared to 2002.  

 

Depreciationand amortization charges increased by Php5,276 million, or 76%, to Php12,183million primarily due to an increase in Smart’s depreciable asset base owing tocontinuing network expansion and upgrades.  

 

Compensation and benefits increased by Php1,091million, or 40%, to Php3,801 million primarily due to increased salaries,benefits and performance bonuses of Smart’s employees.  In addition, Smart accrued for an additional shareunder the enhanced employee retirement fund approved by Smart’s Board ofDirectors in October 2003.  

 

Sellingand promotion expenses increased by Php850 million, or 35%, to Php3,310 millionmainly due to an increase in advertising and promotion expense on account ofthe launching of new services such as *addict mobile*, *Smart Load*and*Pasa Load*. 

 

Rentexpenses increased by Php269 million, or 14%, to Php2,235 million mainly due to higher site rental cost incurred bySmart for its growing number of cell sites and base stations, in line with itsnetwork expansion, partially offset by lower site and circuit rental by Piltelresulting from the decommissioning efforts done in 2002 and 2003.  As at December 31, 2003, wehad 2,914 GSM cell sites and 3,904 base stations, compared with 2,110 GSM cellsites and 2,777 base stations as at December 31, 2002

.

Maintenanceexpenses increased by Php686 million, or 50%, to Php2,051 million mainly due tohigher site utility, repairs and other maintenance-related expenses associatedwith the expansion and upgrade of Smart’s cellular network equipment; increasedoffice and telecenter utilities expenses; and increased computer hardware andsoftware license expense.

 

Cost of satellite air time increased by Php1,869million to Php1,919 million mainly due to the change in the basis ofrecognizing air time cost.  Satellite air time cost was accrued at a fixedamount per month based on the payment schedule in a standstill agreement inconsideration for unlimited air time access in 2003.  Please see *Note 16 –Related Party Transactions* and *Note 22 – Provisions and Contingencies*to the accompanying consolidated financial statements in Item 18 for furtherdiscussion.  

 

Taxes and licenses increased by Php708 million, or 152%, to Php1,174 million mainly due to an increase in Smart’sbusiness-related taxes, NTC supervision and regulation fees and disallowedinput taxes.  

 

Amortizationof intangible assets amounted to Php766 million in 2003 and 2002 and relate tothe amortization of Smart’s customer list.  

 

Insuranceand securities increased by Php62 million, or 9%, to Php756 million mainly due to the growth in the number of Smart’s cellsites and the increase in the cost of equipment insured as a result of thecontinued growth and expansion of its GSM network.

 

Professional and other service fees decreased byPhp601 million, or 49%, to Php624 million mainly as a result of a reduction inlegal and bill collection service fees.

 

Assetimpairment charges increased by Php213 million, or 284%, to Php288 millionmainly due to impairment losses recognized in respect of Piltel’s AMPS/CDMAnetwork assets.

 

Provision for inventory obsolescence decreased byPhp303 million, or 78%, to Php87 million mainly due to lower inventory balancesin 2003. 

 

Provision for doubtful accounts decreased by Php384million, or 84%, to Php72 million primarily due to certain subscriber andcarrier accounts which have been fully provided for in 2002.  

 

Other operating expenses increased by Php55 million,or 5%, to Php1,208 million mainly due toincreases in Smart’s various business and operational-related expenses such asfacility usage fees, training, travel, supplies, printing, and communicationexpenses.

 

***OperatingIncome***

 

Our operating income related to our wireless business increased byPhp8,582 million, or 83%, to Php18,919 million in 2003 compared to Php10,337million in 2002 mainly due to the substantial increase in cellular business asa result of the sustained growth in our subscriber base.

 

***FinancingCosts***

 

Our financing costs associated with our wireless businessincreased by Php1,290 million, or 45%, to Php4,133 million, primarily due tohigher foreign exchange losses as the level of depreciation of the peso washigher in 2003 compared to 2002 and partially offset by lower interest expenseon loans due to lower debt balances in 2003 compared to 2002.

 

The breakdown of our financing costs for our wirelessbusiness for the years ended December 31, 2003 and 2002 is as follows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php1,348

 

Php1,813

 

(Php465)

 

(26)

Foreign exchange (gains) losses

2,139

 

650

 

1,489

 

229

Accretion of financial liabilities

449

 

401

 

48

 

12

Loss (gain) on derivative transactions

165

 

(60)

 

225

 

375

Financing charges

32

 

39

 

(7)

 

(18)

 

Php4,133

 

Php2,843

 

Php1,290

 

45

 

***InterestIncome***

 

Interestincome generated by our wireless business amounted to Php368 million in 2003,an increase of Php227 million, or 161% compared to Php141 million in 2002mainly attributable to Smart’s higher average cash balances coupled with higherinterest rates in 2003 compared to 2002.

 

***Other Income - net***

*** ***

Our wireless business segment generatedother income - net of Php87 million in 2003 from a loss of Php264 million in2002.  The change was mainly due to higher management fees paid to Smart.

 

***IncomeBefore Income Tax******,Cumulative Effect of Change in Accounting Policy and Minority Interest in NetLoss of Consolidated Subsidiaries***

 

Our income before income tax***,***cumulativeeffect of change in accounting policy and minority interest in net loss ofconsolidated subsidiaries in 2003 wasPhp15,163 million, an increase of Php7,866 million, or 108%, compared toPhp7,297 million in 2002 mainly due to a substantial increase in our wirelessoperating revenues, partially offset by an increase in our wireless operatingexpenses and financing costs.

 

***Provision for Income Tax***

*** ***

Provisionfor income tax increased by Php455 million, or 37%, to Php1,672 million in 2003from Php1,217 million in 2002 mainly due to higher operating income. 

 

***Net Income***

 

Ourwireless business segment recorded a net income of Php13,275 million 2003, anincrease of Php7,344 million, or 124%, over Php5,931 million registered in 2002due primarily to the growth in our cellular revenues, partially offset by a 22%increase in wireless expenses.

 

FixedLine

 

***Operating Revenues***

 

Operatingrevenues generated from our fixed line business in 2003 totaled Php46,820million, an increase of Php634 million, or 1%, from Php46,186 million in 2002.This increase was primarily due to increased revenues generated frominternational long distance service and data and other network services,partially offset by lower revenues generated from national long distanceservice, local exchange service and miscellaneous services.  As a percentage ofour total operating revenues, fixed line revenues decreased to 41% in 2003 from 48% in 2002.  Likewise, as a percentage of ourtotal service operating revenues, fixed line service revenues decreased to 46%in 2003 from 56% in 2002, principally due to the continued strong growth of ourwireless business.

 

The following table summarizes our operating revenuesfrom our fixed line business for the years ended December 31, 2003 and 2002 byservice segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

** **

(in millions)

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php20,728

 

44

 

Php21,345

 

46

 

(Php617)

 

(3)

International long distance

12,767

 

27

 

10,637

 

23

 

2,130

 

20

National long distance

6,561

 

14

 

7,818

 

17

 

(1,257)

 

(16)

Data and other network

5,978

 

13

 

5,561

 

12

 

417

 

7

Miscellaneous

786

 

2

 

825

 

2

 

(39)

 

(5)

Total Fixed Line Operating Revenues 

Php46,820

 

100

 

Php46,186

 

100

 

Php634

 

1

* *

Service Revenues

* *

*Local Exchange Service*

* *

The following table summarizes key measures of ourlocal exchange service business segment as at and for the years ended December 31, 2003 and2002:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total local exchange service revenues (in millions) 

Php20,728

 

Php21,345

 

(Php617)

 

(3)

Number of fixed lines in service

2,185,951

 

2,188,612

 

(2,661)

 

–

Number of fixed line employees

10,518

 

12,351

 

(1,833)

 

(15)

Number of fixed lines in service per employee

208

 

177

 

31

 

18

 

Revenues from our local exchangeservice in 2003 decreased by Php617 million, or 3%, to Php20,728 million fromPhp21,345 million in 2002.  The decrease was primarily due to the (1) shift insubscriber preference from postpaid to prepaid services, which generate loweraverage revenue per subscriber, and (2) decline in installation revenues due toa promotion in 2003 which waived installation cost of subscribers in an effortto stimulate subscriber growth, partially offset by adjustments in our monthlylocal service rates.  The percentage contribution of local exchange revenues toour total fixed line service revenues decreased to 44% in 2003 from 46% in2002.

 

Fixedline net reduction in 2003 was 2,661 as compared to a net addition of 14,530 in2002.  While fixed line additions totaled 114,277 for prepaid fixed lineservices, postpaid fixed lines in service declined by 116,938 in 2003.  As at December 31, 2003, postpaid and prepaid fixed line subscribers totaled 1,828,647 and357,304, respectively, which accounted for approximately 84% and 16%,respectively, of total fixed lines in service.

 

Pursuant to a currency exchange rate adjustmentmechanism authorized by the NTC, we implemented 11 upward adjustments and threedownward adjustments in our monthly local service rates in 2003, compared to 13upward adjustments and six downward adjustments in 2002.  See “Item 4.Information on the Company –– Fixed Line –– Rates” for more details relating tothe exchange rate adjustment mechanism.  The average peso-to-dollar rate in2003 was Php54.215 to US$1.00, compared to the average of Php51.583 to US$1.00in 2002.  This change in the average peso-to-dollar rate translated to a peso depreciationof 5%, which resulted in an average net increase of 5% in our monthly localservice rates in 2003. 

 

*International Long Distance Service*

 

The following table shows information about our fixedline international long distance business for the years ended December 31, 2003 and2002:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Toal international long distance revenues (in millions)

Php12,767

 

Php10,637

 

Php2,130

 

20

Inbound

10,614

 

8,461

 

2,153

 

25

Outbound

2,153

 

2,176

 

(23)

 

(1)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

PLDT Group

2,286

 

2,815

 

(529)

 

(19)

Inbound

2,128

 

2,644

 

(516)

 

(20)

Outbound

158

 

171

 

(13)

 

(8)

Inbound-outbound call ratio

13.5:1

 

15.5:1

 

–

 

–

 

Ourtotal international long distance revenues increased by Php2,130 million, or20%, to Php12,767 million in 2003 from Php10,637 million in 2002, primarily asa result of an increase in our inbound international long distance revenuesprincipally due to an increase in average inbound termination rates in 2003.Likewise, the percentage contribution of international long distance revenuesto our total fixed line service revenues increased to 27% in 2003 from 23% in2002.

 

Ourrevenues from inbound international long distance calls in 2003 increased byPhp2,153 million, or 25%, to Php10,613 million from Php8,461 million in 2002,primarily due to an increase in PLDT’s average termination rates and thepositive impact of the depreciation of the average value of the peso relativeto the U.S. dollar, partially offset by the effect of lower inbound callvolumes.

 

Ourinbound international long distance call volumes in 2003 decreased by 20% to2,128 million minutes from 2,644 million minutes in 2002, primarily due toincreased competition from alternative means of long distance communications,particularly e-mailing, international text messaging and internet telephony,more inbound calls terminating directly to cellular subscribers and continuedillegal bypass activity.  In addition, the increase in our average terminationrates in 2003 also resulted in reduced inbound call volumes, principally thosebeing routed through direct facilities from the U.S. to the Philippines.

 

After lengthy negotiations commencing in May 2002 withcarriers around the world, PLDT increased its termination rates with carriersthat account for a substantial portion of its international inbound trafficterminating on its fixed line network to an average of approximately US$0.12per minute effective February 1, 2003.  Prior to the increase in termination rates, asubstantial portion of PLDT’s international inbound traffic terminating on itsfixed line network was charged an average termination rate of approximatelyUS$0.08 per minute.  See “Item 8. Financial Information –– Legal Proceedings ––U.S.Federal Communications Commission, or FCC, Ruling versus PhilippineTelecommunications Companies”, “Item 8. Financial Information –– Legal Proceedings–– Investigation by U.S. Department of Justice” and *Note 25 – Other Ma*ttersto the accompanying consolidated financial statements in Item 18 for furtherdiscussion.

 

Thedepreciation of the peso contributed to the increase in our inbound internationallong distance revenues in peso terms since settlement charges for inbound callsare billed in U.S. dollars or in special drawing rights, an established methodof settlement among international telecommunications carriers using valuesbased on a basket of foreign currencies, that are translated into pesos at theprevailing exchange rates at the time of billing.

 

Ourrevenues from outbound international long distance calls in 2003 decreased byPhp23 million, or 1%, to Php2,153 million from Php2,176 million in 2002.  Thedecline was primarily due to lower outbound call volumes and reducedinternational direct dialing, or IDD, rates attributable to our corporatecustomers partly offset by the positive impact of the depreciation of the pesoon outbound international long distance service revenues.

 

The depreciation of the peso contributed to theoutbound international long distance revenues in peso terms because outboundcalls are charged in U.S. dollar rates and billed to our subscribers in pesosat the prevailing exchange rates at the time of billing.  This increase,however, was not sufficient to compensate for the reduced IDD ratesattributable to our corporate customers and the decline in outbound callvolumes.  Our outbound international long distance call volumes declined by 8%to 158 million minutes in 2003 from 171 million minutes in 2002, primarily dueto cellular substitution (subscribers opting to use cellular for internationaloutbound calls) and the popularity of alternative means of communications suchas e-mailing and text messaging.

 

*National Long Distance Service*

 

The following table shows our national long distancerevenues and call volumes for the years ended December 31, 2003 and 2002:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Total national long distance service revenues (in millions)

Php6,561

 

Php7,818

 

(Php1,257)

 

(16)

National long distance call volumes (in million minutes)

2,016

 

2,181

 

(165)

 

(8)

 

Our national long distance revenues decreased by Php1,257million, or 16%, to Php6,561 million in 2003 from Php7,818 million in 2002 as aresult of lower call volumes and changes in interconnection arrangements withcertain local exchange carriers.  Accordingly, the percentage contribution ofnational long distance revenues to our total fixed line service revenues wasdown to 14% in 2003 from 17% in 2002.

 

Our national long distance call volumes decreased byapproximately 8% to 2,016 million minutes in 2003 from 2,181 million minutes in2002.  Cellular substitution and the widespread availability and growingpopularity of alternative non-voice means of communications, particularlycellular text messaging and e-mailing, have negatively affected call volumes.

 

The decrease in our national long distance revenues in2003 compared to 2002 was, however, mitigated by the impact of the launch ofvarious *PLDT Premium Phone Services*and rate adjustments.

 

Effective March 1, 2003, the rate fornational long distance, or NDD, calls originating from PLDT subscribers and terminatingto other local exchange carriers increased to Php5.00 per minute from a flat rate of Php4.50 per minute.  In addition, NDD calls originating fromand terminating to PLDT was also adjusted to Php5.00per minute from a flat rate of Php4.50 perminute effective June 8, 2003.  Prior to theimplementation of a flat rate of Php5.00 per minute and Php4.50per minute, NDD rates ranged from Php3.00 perminute to Php5.00 per minute for callsterminating to PLDT subscribers and from Php3.50per minute to Php5.00 per minute on callsterminating to other networks’ subscribers depending on distance. 

 

In 2003, certain local exchange carriers under revenue sharingarrangements have entered into access charging agreements with PLDT.  Under therevenue sharing agreements, charges are generally apportioned 30% for theoriginating entity, 40% for the backbone owner and another 30% for theterminating entity.  Under these access charging agreements, the originatingcarrier generally pays access charges of (1) Php0.50 per minute for short haul traffic andPhp1.25 per minute for long haul traffic tothe carrier owning the backbone network, and (2) Php1.00 per minute to the terminating carrier.  This change ininterconnection charges resulted to a 2% decrease in average revenue per minutefor calls originating from and terminating to other local exchange carriers.  

 

*Data and Other Network Services*

 

Our data and other network services revenues increasedby Php417 million, or 7%, to Php5,978 million in 2003 from Php5,561 million in2002.  The revenue contribution of this service segment to our total fixed lineservice revenues increased to 13% in 2003 from 12% in 2002, primarilyattributed to an increased use of *Domestic Frame Relay*, *I-Gate*, *DSL,Equant*and *ARCSTAR* bandwidth services, as well as the launch ofother new network-based services.  We currently expect that demand for, andtherefore revenues generated from, these services will continue to grow in theforeseeable future.

 

Traditionalbandwidth services accounted for 50% of the total revenues from our data andother network services in 2003, broadband/IP-based services accounted for 44%,and other services accounted for the remaining 6%, compared to 57%, 38% and 5%,respectively, in 2002.  These percentage changes indicate a continuing shift indata and other network revenues from traditional bandwidth services tobroadband/IP-based services.  We expect this trend to continue given thegrowing demand for broadband transmission of voice, data and video due to thecontinued growth of the internet, e-commerce and other online services.

 

*Miscellaneous*

* *

Miscellaneous revenues are derived mostly fromdirectory advertising and facilities rental.  In 2003, these revenues decreasedby Php39 million, or 5%, to Php786 million from Php825million in 2002, and accounted for approximately 2% of our total fixed linerevenues in 2003 and 2002.

 

***OperatingExpenses***

 

Operatingexpenses associated with our fixed line business in 2003 totaled Php32,303million, a decrease of Php11,490 million, or 26%, compared to Php43,793 millionin 2002.  The decrease was primarily due to lower non-cash expenses, mainlyasset impairment charges and depreciation and amortization expenses, partiallyoffset by the net increase in cash expenses, mainly compensation and benefitsand taxes and licenses.  As a percentage of our total fixed line operatingrevenues, fixed line-related expenses decreased to 69% in 2003 as compared to95% in 2002.

 

The following table shows the breakdown of our totalfixed line-related expenses for the years ended December 31, 2003 and 2002 andthe percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2003**

 

**%**

 

**2002**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization 

Php9,315

 

29

 

Php10,305

 

24

 

(Php990)

 

(10)

Compensation and benefits

8,971

 

28

 

7,836

 

18

 

1,135

 

14

Provision for doubtful accounts

3,950

 

12

 

3,659

 

8

 

291

 

8

Maintenance

3,081

 

10

 

2,922

 

7

 

159

 

5

Rent

1,909

 

6

 

1,828

 

4

 

81

 

4

Professional and other service fees

1,129

 

3

 

1,092

 

3

 

37

 

3

Selling and promotions

1,055

 

3

 

1,078

 

2

 

(23)

 

(2)

Taxes and licenses

959

 

3

 

508

 

1

 

451

 

89

Insurance and securities

762

 

2

 

654

 

2

 

108

 

17

Provision for inventory obsolescence

152

 

1

 

86

 

–

 

66

 

77

Asset impairment 

–

 

–

 

13,204

 

30

 

(13,204)

 

(100)

Other operating expenses

1,020

 

3

 

621

 

1

 

399

 

64

Total

Php32,303

 

100

 

Php43,793

 

100

 

(Php11,490)

 

(26)

 

Depreciation and amortization charges decreased by Php990 million,or 10%, to Php9,315 million mainly due to a net decrease in ourregular asset base primarily resulting from asset disposals and impairmentcharges for Piltel’s E.O. 109 assets recognized in 2002.

 

Compensationand benefits increased by Php1,135 million, or 14%, to Php8,971 million mainlydue to collective bargaining agreement-related increases in salaries andbenefits of PLDT employees coupled with an increase in MRP cost of Php1,560million in 2003 representing payments to 1,862 affected employees, partiallyoffset by the effect of the reduction in headcount due to PLDT’s MRP.  See *Note18 – Operating Revenues and Expenses* to the accompanying consolidatedfinancial statements in Item 18 for further discussion on PLDT’s MRP.

 

Provisionfor doubtful accounts increased by Php291 million, or 8%, to Php3,950 millionprimarily on account of higher provisions by PLDT for anticipated uncollectibleaccounts from various specifically identified domestic telecommunicationscarriers.  

 

Maintenance expenses increased by Php159 million, or5%, to Php3,081 million primarily due to higher maintenance costs of insideplant facility, computer and peripherals and submarine cable in 2003 ascompared to 2002, partially offset by lower maintenance costs on outside plantfacilities.

 

Rent expenses increased by Php81 million, or 4%, toPhp1,909 million mainly due to higher rentals paid by PLDT to suppliers ofcustomer premises equipment as part of its bundled services to corporatecustomers partially offset by reduced number of leased transponders.

 

Professional and other service fees increased by Php37million, or 3%, to Php1,129 million as a result of higher collection agencyfees on account of higher collection of final accounts and payment of higherlegal fees in 2003 for various services, partially offset by lower advisoryfees due to a decrease in number of consultants in line with PLDT’s costmanagement efforts.

 

Sellingand promotion expenses decreased by Php23 million, or 2%, to Php1,055 millionmainly as a result of reduced corporate public relations expenses, partiallyoffset by an increase in PLDT’s promotional activities in relation to thelaunch of *Hype, DSL* and other *Premium Phone Service*variants.

 

Taxesand licenses increased by Php451 million, or 89%, to Php959 million mainly onaccount of higher business-related taxes paid and accrued in 2003 as comparedto 2002.

 

Insuranceand securities increased by Php108 million, or 17%, to Php762 million primarilydue to higher premiums on all risks insurance for properties, and directors’and officers’ liability insurance for 2003 as compared to 2002.

 

Provisionfor inventory obsolescence increased by Php66 million, or 77%, to Php152 million mainly due tomaintenance-related inventory items which were specifically identified as slowand non-moving stocks in 2003. 

 

Assetimpairment charges amounted to Php13,204 million in 2002, primarily due toPiltel’s recognition of impairment charges relating to its E.O. 109 assets asthe revenue generated from these services could no longer support the cost ofoperating the network.  No impairment charge was recognized in 2003.

 

Other operating expenses increased by Php399 million,or 64%, to Php1,020 million mainly due to higher office supplies consumptionand printing costs, partially offset by lower contracted employee cost.

 

***Operating Income***

 

Operatingincome from our fixed line service revenues amounted to Php14,517 million in2003, an increase of Php12,124 million, or 507%, from Php2,393 million in 2002primarily due to the substantial decline in fixed line-related operatingexpenses.  

 

***Financing Costs***

 

Financingcosts associated with our fixed line business increased by Php5,098 million, or33%, to Php20,590 million due to higher foreign exchange losses pertaining toforeign exchange revaluation of the carrying values of financial liabilities,as the level of peso depreciation was higher in 2003 compared to 2002,partially offset by lower interest expenses and related items due to lower debtbalances in 2003 as compared to 2002.  The breakdown of our financing costs forour fixed line business for the years ended December 31, 2003 and 2002 is asfollows:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Change**

** **

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

(in millions)

Interest on loans and related items

Php10,034

 

Php10,816

 

(Php782)

 

(7)

Foreign exchange (gains) losses

7,525

 

4,402

 

3,123

 

71

Loss (gain) on derivative transactions

1,466

 

(487)

 

1,953

 

401

Hedge costs

1,054

 

315

 

739

 

235

Accretion of financial liabilities

280

 

242

 

38

 

16

Financing charges

231

 

204

 

27

 

13

 

Php20,590

 

Php15,492

 

Php5,098

 

33

 

***InterestIncome***

 

Interest income generated by ourfixed line business amounted to Php138 million in 2003, an increase of Php59million, or 75% compared to Php79 million in 2002 mainly attributable to PLDT’shigher average cash balances coupled with higher interest rates in 2003compared to 2002.

 

***OtherIncome - net***

 

All other income/gains such asrental income, gain on disposal of property, which do not fall under serviceand non-service revenues are included under this classification.  In 2003, ourfixed line business segment registered a decrease in other income of Php1,104million, or 52%, to Php1,024 million in 2003 from Php2,128 million in 2002mainly due to the termination of a derivative instrument which resulted to anet gain of Php633 in 2002.

 

***Income (Loss) Before Income Tax******, Cumulative Effect of Change in Accounting Policy andMinority Interest in Net Loss (Income) of Consolidated Subsidiaries***

 

Ourfixed line business segment registered a loss before income tax***,***cumulativeeffect of change in accounting policy and minority interest in net loss(income) of consolidated subsidiariessubsidiaries in 2003 of Php4,911 million, a decrease of Php6,468 million, or57%, compared to a loss before income tax of Php11,379 million in 2002, mainlydue to a decrease in our fixed line operating expenses, partially offset by theincrease in our fixed line operating revenues as well as the increase in ourfixed line financing costs.

 

***Provisionfor (Benefit from) Income Tax***

*** ***

Benefit from income tax amountedto Php3,008 million in 2003 compared to a provision for income tax of Php221million in 2002 due to a tax loss position in 2003 as non-tax deductiblecharges were higher in 2003.

 

***NetLoss***

 

In 2003, our fixed line businesssegment contributed a net loss of Php1,902 million, compared to a net loss ofPhp11,602 million in 2002. The decrease in net loss was mainly a result of adecrease in fixed line-related expenses, particularly asset impairment chargescoupled with a tax benefit from income tax of Php3,008 million in 2003.

 

Information and Communications Technology

 

***Operating Revenues***

 

In 2003, our information and communications technologybusiness generated operating revenues of Php1,783 million, an increase ofPhp806 million, or 82%, from Php977 million in 2002.  These revenues accountedfor 2% of our consolidated operating revenues in 2003 and 1% in 2002.  ePLDT’scall center business contributed revenues of Php927 million, Internet andgaming contributed revenues of Php380 million and *Vitro™* contributedrevenues of Php120 million representing 63%, 26% and 8%, respectively, of thetotal service revenues from our information and communications technologybusiness in 2003, compared to 39%, 49% and 12%, in 2002.  

 

The following table summarizes total operating revenuesfrom our information and communications technology business for the years ended December 31, 2003 and 2002 by business segment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase**

** **

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Service Revenues

 

 

 

 

 

 

 

 

 

 

 

Call center

Php927

 

52

 

Php305

 

31

 

Php622

 

204

Internet and gaming 

380

 

21

 

375

 

39

 

5

 

1

*Vitro™* data center

120

 

7

 

89

 

9

 

31

 

35

Others

40

 

2

 

3

 

–

 

37

 

1,233

 

1,467

 

82

 

772

 

79

 

695

 

90

Non-service Revenues

 

 

 

 

 

 

 

 

 

 

 

Point of Product Sales

316

 

18

 

205

 

21

 

111

 

54

Total ICT Operating Revenues

Php1,783

 

100

 

Php977

 

100

 

Php806

 

82

 

Service Revenues

 

Servicerevenues generated by our information and communications technology businessamounted to Php1,467 million in 2003, an increase of Php695 million, or 90%,from Php772 million in 2002.  This was primarily a result of the continued growthof our call center businesses.

 

*Call****Center*

 

Revenues related to our call centerbusiness in 2003 increased by Php622 million, or 204%, to Php927 million fromPhp305 million in 2002 due to the combined effects of Vocativ’s upward priceadjustment for voice and VoIP, and an increase in programs being handled and anupward price adjustment by Parlance for its inbound and outbound projects,coupled with an increase in the number of registered minutes.

 

Call center revenues accounted for 63% and 39% of ourtotal information and communications technology service revenues in 2003 and2002, respectively.

 

*Internetand gaming*

 

Revenues from our internet and gaming business for2003 increased by Php5 million, or 1%, to Php380 million from Php375 million in2002 primarily due to a gain in the divestment of Contact World, Inc. in 2003.Our internet and gaming business revenues accounted for 26% and 49% of ourtotal service revenues from information and communications technology businessin 2003 and 2002, respectively.

 

*Vitro™* data center

 

In2003, *Vitro™* contributed revenues of Php120 million, an increase ofPhp31 million, or 35%, from Php89 million in 2002, primarily due to an increasein co-location revenues, server hosting and other services.   *Vitro™*revenues accounted for 8% and 12% of total service revenues from informationand communications technology business in 2003 and 2002, respectively.

 

Revenues from other businesses related to ourinformation and communications technology segment in 2003 increased by Php37 millionto Php40 million from Php3 million in 2002 largely due to IT helpdesk/contactcenter services rendered coupled with an increase in number of digitalcertificates sold.

 

Pleaserefer to *Note 8 – Investments* to the accompanying consolidated financialstatements in Item 18 for further discussion on ePLDT’s other information andcommunications technology services.

 

*Non-service Revenues*

 

Non-service revenues consist of sales generated fromreselling Microsoft software licenses and Cisco hardware equipment.  In 2003,non-service revenues generated by our information and communications technologybusiness increased by Php111 million, or 54%, to Php316 million prompted byhigher point of product sales of Cisco equipment and Microsoft licenses.

 

***Operating******Expenses***

 

Operatingexpenses associated with our information and communications technology businesstotaled Php2,272 million in 2003, an increase of Php814 million, or 56%, fromPhp1,458 million in 2002.  As a percentage of our information andcommunications technology total operating revenues, operating expenses relatedto our information and communications technology business were at 127% and 149%for 2003 and 2002, respectively.  

 

Thefollowing table shows the breakdown of our consolidated information and communicationstechnology-related operating expenses for the years ended December 31, 2003 and2002 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2003**

 

**%**

 

**2002**

 

**%**

** **

**Amount**

** **

**%**

 

(in millions)

 

 

Information and communications technology services:

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits(1)

Php533

 

23

 

Php347

 

24

 

Php186

 

54

Asset impairment 

387

 

17

 

–

 

–

 

387

 

100

Rent

337

 

15

 

266

 

18

 

71

 

27

Depreciation and amortization

314

 

14

 

354

 

24

 

(40)

 

(11)

Maintenance

184

 

8

 

200

 

14

 

(16)

 

(8)

Provision for doubtful accounts

70

 

3

 

45

 

3

 

25

 

56

Professional and other service fees

65

 

3

 

89

 

6

 

(24)

 

(27)

Selling and promotions

35

 

2

 

65

 

5

 

(30)

 

(46)

Taxes and licenses

18

 

1

 

6

 

–

 

12

 

200

Provision for inventory obsolescence

12

 

1

 

–

 

–

 

12

 

100

Insurance and securities

10

 

–

 

6

 

–

 

4

 

67

Other operating  expense

307

 

13

 

80

 

6

 

227

 

284

Total 

Php2,272

 

100

 

Php1,458

 

100

 

Php814

 

56

____________

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

 

Compensation and benefits increased by Php186million, or 54%, to Php533 million mainly due to the expansion of our callcenter facilities which resulted in a 60% increase in headcount coupled with anincrease in salaries, bonuses and various incentives of employees.

 

Asset impairment amounted to Php387 million in 2003due to the retirement of certain equipment as a result of the abandonment of areloadable chip-based cash card project.  There were no asset impairment chargesin 2002.

 

Rent expense increased by Php71 million, or 27%, toPhp337 million due to telecom-related leases incurred by our call centerbusinesses.  

 

Depreciation and amortization charges decreased byPhp40 million, or 11%, to Php314 million primarily due to the write-off of aninvestee company’s fixed assets amounting to Php203 million in 2003.

 

Maintenance expenses decreased by Php16 million, or8%, to Php184 million primarily due to the expiration of a warranty on certainassets of *Vitro™* which carried maintenance liabilities for clients.

 

Provision for doubtful accounts increased by Php25million, or 56%, to Php70 million primarily due to specifically identifieduncollectible subscriber accounts of Infocom provided for in 2003.

 

Professional and other service fees decreased byPhp24 million, or 27%, to Php65 million primarily due to lower fees paid byContact World for training and consultancy services rendered by DellCorporation in relation to Contact World’s expansion prior to Contact World’sdivestment in 2003.

 

Selling and promotion expenses decreased by Php30million, or 46%, to Php35 million mainly due to the intensified marketingactivities of Infocom, particularly for audio video conferencing, in 2002.

 

Taxes and licenses increased by Php12 million, or200%, to Php18 million mainly on account of higher business-related taxes paidin 2003 as compared to 2002.

 

Provision for inventory obsolescence in 2003amounted to Php12 million on account of a full provision for slow moving inventoriesrelated to an investee company of ePLDT.

 

Insurance and securities increased by Php4 million,or 67%, to Php10 million primarily due to the additional insurance premiums ofParlance and Vocativ for additional capital expenditures in 2003.  Securityexpenses of Parlance and Vocativ also increased due to their full yearoperations in 2003. 

 

Other operating expenses increased by Php227million, or 284%, to Php307 million mainly due to the increase in variousbusiness-related expenses associated with the continuous expansion, and othermiscellaneous expenses incurred by call center projects started in 2003.

 

*Operating Loss*

 

Our information and communications technologybusiness segment operating loss amounted to Php489 million in 2003 as comparedto an operating loss of Php481 million in 2002.

 

*Financing Costs*

 

Financing costs associated with our information andcommunications technology business, consisting primarily of interest on loansand related items, amounted to Php60 million, an increase of Php44 million, or275%, from Php16 million in 2002 due to higher interest expense on loans asdebt balances increased in 2003 compared to 2002 coupled with lower interestincome in 2003.

 

*Interest Income*

 

Interest income generated by our information andcommunications technology business amounted to Php7 million in 2003, a decreaseof Php9 million, or 56%, compared to Php16 million in 2002 mainly attributableto ePLDT’s lower average cash balances in 2003 compared to 2002.

 

***Other Income - Net***

 

All other income/gains which do not fall underservice and non-service revenues are included under this classification.  Otherincome generated from our information and communications technology businesssegment increased by Php83 million, or 224%, to Php120 million in 2003 fromPhp37 million in 2002 due to a gain on the divestment of Contact World, a callcenter facility, in 2003.  

 

***LossBefore Income Tax******,Cumulative Effect of Change in Accounting Policy and Minority Interest in NetIncome of Consolidated Subsidiaries***

 

Our information and communications technologybusiness registered a loss before income tax*,*cumulative effect ofchange in accounting policy and minority interest in net income of consolidatedsubsidiaries in 2003 of Php432 million,a decrease of Php80 million, or 16%, from a loss before income tax of Php512million in 2002 as a result of higher revenues from our call center business in2003.

 

*Provision for (Benefitfrom) Income Tax*
 

Benefit from income tax amounted to Php64 million in2003 principally due to Infocom’s recorded deferred income tax asset of Php64million in 2003; no provision for income tax was recognized in 2002.

 

*Net Loss*
 

In 2003, our information and communications technologybusiness segment registered a net loss of Php328 million, an improvement ofPhp159 million, or 33%, compared to a net loss of Php487 million posted in2002.  This reflected the net increase in asset impairment charges, which waspartially offset by the increase in net income contribution of our call centerbusiness.

 

Liquidity and Capital Resources

 

The following table shows our consolidated cash flows,capitalization and other selected financial data as at and for the years ended December 31, 2004,2003 and 2002:

** **

 

Years Ended December 31,

 

**2004**

**2003**

**2002**

 

(in millions)

Cash Flows

 

 

 

Net cash provided by operating activities

Php62,860

Php42,582

Php39,722

Net cash used in investing activities

24,764

20,021

17,167

Capital expenditures

19,268

17,943

17,239

Net cash used in financing activities

30,078

14,135

15,954

Effect of exchange rate changes on cash and cash equivalents

(69)

(28)

97

Net increase in cash and cash equivalents

7,949

8,398

6,698

 

 

 

 

 

December 31,

 

**2004**

** **

**2003**

 

(in millions)

Capitalization

 

 

 

Cash and cash equivalents

Php27,321

 

Php19,372

Short-term debt

 

 

 

Current portion of long-term debt

28,020

 

23,810

Notes payable

58

 

2,133

Long-term debt – net of current portion

131,377

 

160,464

Total debt

159,455

 

186,407

Stockholders’ equity

48,079

 

24,745

Total capitalization

Php207,534

 

Php211,152

 

Since2002, PLDT has pursued a number of liability management initiatives with theobjectives of further improving the balance between its cash flows and debtservice requirements and reducing its overall indebtedness.

 

Throughthese initiatives, PLDT was able to successfully raise the necessary externalfinancing to fund its operating, investing and debt service requirements. 

 

Asat December 31, 2004, consolidated cash and cash equivalents amounted toPhp27,321 million.  Our principal sources of consolidated cash in 2004 werecash flows from operations amounting to Php62,860 million, drawings fromexisting long-term credit facilities totaling Php15,187 million, and net equityfunds raised through PLDT's SIP amounting to Php281 million.  These funds wereused principally for capital outlays of Php19,268 million, (includingcapitalized interest of Php595 million) and debt principal repayments ofPhp41,697 million.

 

Principal sources of consolidatedcash in 2003 and 2002 were cash flows from operations amounting to Php42,582million and Php39,722 million, respectively; drawings from long-term andshort-term credit facilities amounting to Php17,507 million and Php3,135million, respectively, in 2003, and Php36,011 million and Php7,872 million,respectively in 2002; and equity funds raised through the issuance of capitalstock amounting to Php94 million in 2003.  These funds were used principallyfor capital outlays of Php17,943 million (including capitalized interest ofPhp887 million) and payments of long-term debt amounting to Php31,548 millionin 2003; and capital outlays of Php17,239 million, (including capitalizedinterest of Php1,343 million) and payments of long-term and short-term debttotaling to Php57,470 million and equity funds raised through the issuance ofcapital stock amounting to Php464 million in 2002.

 

***Operating Activities***

 

Ona consolidated basis, net cash flows from operating activities in 2004 amountedto Php62,860 million, an increase of Php20,278 million, or 48%, from Php42,582million in 2003 and an increase of Php2,860 million, or 7% from Php39,722million in 2002.

 

Agrowing portion of our consolidated cash flow is generated by our wireless anddata businesses.  The revenue contribution of these businesses has grown overthe last three years with wireless business contributing 58%, in 2004, 53% in2003 and 43% in 2002, and data business contributing an average of 6% in 2004and 2003 and 7% in 2002 of our total service revenues.  Revenues from our localexchange service accounted for approximately 17% of our total service revenuesin 2004, down from 20% in 2003 and from 26% in 2002.

 

Ourdependence on international and national long distance services has decreasedover the past several years.  In 2004, 2003 and 2002, these services togetheraccounted for 16%, 19% and 22%, respectively, of our total service revenues.Revenues from our long distance businesses increased by 1% in 2004 compared to2003 and decreased by 5% in 2003 compared to 2002 due to cellular substitutionand declining prices.

 

PLDT'scontribution to our consolidated cash flows from operations in 2004 wasPhp25,298 million, a decrease of Php14,103 million, or 126%, from Php11,195million in 2003, which in turn represents a decrease of Php5,992 million, or35%, from Php17,187 million in 2002.  The decrease in 2004 was due to anincrease in PLDT’s working capital management, including the decline in levelof settlements of certain liabilities outstanding during 2004, compared to2003.  The decrease in 2003, on the other hand, was attributable to the declinein the level of settlements in 2003 of certain payables outstanding, comparedto 2002.

 

Our subsidiaries,particularly Smart, made significant contributions to our cash fromoperations.  In 2004, Smart generated cash from operations of Php40,297million, or 64%, of our consolidated cash flows from operations.  In 2003,Smart generated cash from operations of Php30,644 million, or 72%, of ourconsolidated cash flow from operations.  Smart’s strong cash flows reflect thecontinuing strong performance of its cellular business.  However, Smart issubject to loan covenants that restrict its ability to pay dividends, redeempreferred shares, make distributions to PLDT or otherwise provide funds to PLDTor any associate without the consent of its lenders.  After receiving approvals from Finnvera and certainlenders for the payment of dividends to PLDT, Smart made its first dividendpayment of Php1,540 million to PLDT in December 2002.  In addition, Smart paid dividends in the amount of Php4,300 million to PLDT in June 2003, representing 70% ofSmart’s 2002 net income under Philippine GAAP and paid additional dividends inthe amount of Php1,866 million to PLDT inNovember 2003, equivalent to the remaining 30% of its 2002 net income underPhilippine GAAP.  Further, in 2004, after receiving similar approvals from Finnveraand certain lenders, Smart paid an aggregate of Php16,100 million in dividendsto PLDT, of which Php11,280 million was paid in May 2004, representing 70% ofSmart’s 2003 net income under Philippine GAAP and the balance of Php4,820million was paid in December 2004.  Smart will alsobe required to obtain further waivers from Finnvera and certain lenders to payadditional dividends in future periods.  We cannot assure that Smart will beable to obtain such waivers in the future, or what amount, if any, Smart wouldbe permitted or financially able to distribute.  We expect that we will havedifficulty meeting our debt payment obligations if we do not continue toreceive cash dividends from Smart.

 

***Investing Activities***

 

On aconsolidated basis, net cash used in investing activities increased by Php4,743million, or 24%, to Php24,764 million in 2004 from Php20,021 million in 2003,and by Php2,854 million, or 17%, to Php20,021 million in 2003 from Php17,167million in 2002, mainly as a result of higher aggregate capital spending.

 

Our consolidated capitalexpenditures in 2004 totaled Php19,268 million, an increase of Php1,325million, or 7%, from Php17,943 million in 2003 primarily due to Smart’sincreased capital spending partially offset by PLDT’s lower capital spending.Smart's capital spending of Php14,721 million in 2004 was used to furtherexpand and upgrade its GSM network to meet the increasing demand for cellularservices.  PLDT's capital outlay of Php3,917 million in 2004 was principallyused to finance the continued build-out of its data and broadband/IPinfrastructure and its investment in Asia Pacific Cable Network 2.  ePLDT andits subsidiaries’ capital spending of Php500 million in 2004 was used to fundits internet data center, other internet-related business initiatives and callcenter business investments.  The remaining balances were spent by othersubsidiaries mainly PLDT Global, Mabuhay Satellite and Subic Telecom.  

 

Under the terms of Piltel’s debtrestructuring plan, PLDT issued a LOS for the benefit of Piltel and itscreditors under which PLDT has agreed to cover any funding shortfalls of Piltelup to a maximum amount of US$150 million.  Under the LOS, PLDT provided toPiltel Php571 million (US$11 million) in 2002.  There was no drawdown under theLOS in 2004 and 2003.  Drawings under the PLDT LOS are converted into U.S.dollars at the prevailing exchange rates at the time of drawdown.  As atDecember 31, 2004 and 2003, the remaining undrawn balance available under thePLDT LOS was US$50 million, approximately Php2,831 (2004) million and Php2,793million (2003) due to prior investments made from March 23, 2000 to December31, 2004 aggregating to US$100 million through PLDT’s subscription to Series JClass I preferred shares of Piltel.  There was no drawdown under the LOS in2004 and 2003.  If, among other things, Piltel's financial and operatingperformance were to deteriorate or any amounts were required to be paid toPiltel's unrestructured creditors in cash to settle their claims (whichcomprised an aggregate principal of US$1.0 million as at December 31, 2004),additional drawings under the LOS would likely be required to provide all or aportion of the funds needed by Piltel.  We cannot assure that additionalamounts will not have to be drawn under the LOS nor can we predict when theremaining undrawn balance under the LOS will be exhausted.  Piltel is currentlyin discussion with its unrestructured creditors and is seeking to restructuresuch debt on the terms and conditions of Piltel’s debt restructuring plan.However, Piltel may not be able to restructure or otherwise pay the claimsrelating to its unrestructured debt.  See *“Item 3. Key Information — RiskFactors — Risks Relating to Us — Piltel has experienced financial difficultiesand we cannot assure you that it will be able to discharge any of its debt orother obligations, including its debts or other obligations owed to us and ouraffiliates*and*Note 12 – Interest-bearing Liabilities”* to theaccompanying consolidated financial statements in Item 18. 

 

For 2005, we anticipate reducingthe level of our capital expenditures and equity investments.  Our 2005 budgetfor consolidated capital expenditures is approximately Php17,758 million, ofwhich approximately Php7,850 million is budgeted to be spent by PLDT for itsfixed line data and network services and approximately Php8,778 million isbudgeted to be spent by Smart for further expansion and upgrading of itsdigital network.

 

Our consolidated capitalexpenditures in 2003 totaled Php17,943 million mainly from PLDT's and Smart'scapital spending of Php6,099 million and Php11,305 million, respectively.  Ourconsolidated capital expenditures of Php17,239 million (including capitalizedinterest of Php1,343 million) in 2002 was largely attributable to PLDT andSmart.

 

***Financing Activities***

 

On a consolidated basis, we usednet cash of Php30,078 million for financing activities in 2004, compared toPhp14,135 million in 2003 and Php15,954 million in 2002.  The net cash used infinancing activities in 2004, 2003 and 2002 were 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 2004totaled Php15,187 million, consisting of (1) drawings totaling Php6,964million, primarily from PLDT’s loan facilities extended and/or guaranteed byvarious export credit agencies; and (2) Smart’s drawings of Php8,173 million,principally from its Phase 5 GSM loan facilities.

 

Ourconsolidated indebtedness as at December 31, 2004 was Php159,455 million, lowerby Php26,952 million, or 14%, compared to Php186,407 million as at December 31,2003 mainly due to the reductions of Php26,398 million in PLDT’s indebtednesspartially offset by an increase in Smart’s indebtedness of Php23,509 million.PLDT’s non-consolidated indebtedness decreased by 19%, from Php137,336 millionas at December 31, 2003 to Php110,938 million as at December 31, 2004, due to debt payments in line with our thrust to reduce PLDT’s overallindebtedness.  Smart’s indebtedness as at December 31, 2004 stood at Php44,095 million, an increase of 114% from Php20,586 million as at December 31, 2003.  On July 2, 2004, Smart acquired from Piltel’s creditors US$289million, or 69.4%, in the aggregate of Piltel’s total outstanding restructureddebt at that time, in exchange for US$283.2 million, or Php15,854 million inJuly 2, 2004, in new debt of Smart and US$1.5 million, or Php84 million, incash.  

 

Asat December 31, 2004, PLDT had no undrawn committed long-term creditfacilities.  The JP¥3,095 million undrawn portion of the JP¥5,615 millionsyndicated term loan facility supported by Nippon Export and InvestmentInsurance of Japan and US$4 million undrawn portion of the US$12 million termloan facility extended by DEG-Deutsche Investitions-undEntwicklungsgesellschaft mbH were cancelled on December 3, 2004 and September26, 2004, respectively.  In addition, PLDT also waived further disbursementsfrom the US$149 million Kreditanstalt fur Wiederaufbau refinancing facilityeffective September 1, 2004, thus, cancelling the undrawn portion of US$9million.  As at December 31, 2004, Smart still had available facilities under its €50 millionFramework Agreement with Bayerische Hypo-und Vereinsbank Aktiengesellschaft upto a maximum aggregate amount of €44 million.

 

Thescheduled maturities of our outstanding consolidated long-term debt as at December 31, 2004 areas follows:

 

 

**Consolidated**

**Maturity**

**(in millions)**

 

 

2005

Php28,020

2006

25,867

2007

29,396

2008

6,589

2009

14,174

2010 and onwards

55,351

ApproximatelyPhp104,046 million principal amount of our consolidated outstanding long-termdebt as at December 31, 2004 is scheduled to mature over the period 2005 to2009.  Of this amount, approximately Php77,385 million is attributable to PLDT,Php22,294 million to Smart, and the remainder to Mabuhay Satellite, Maratel,ePLDT and Piltel.

 

See *Note 12 – Interest-bearingFinancial Liabilities* to the accompanying consolidated financial statementsin Item 18 for an overview of our indebtedness. 

 

DebtCovenants

 

Our debt instruments containrestrictive covenants, including covenants that could prohibit us from payingdividends on common stock under certain circumstances, and require us to complywith specified financial ratios and other financial tests, calculated inconformity with accounting principles generally accepted in the Philippines,at relevant measurement dates, principally at the end of each quarterlyperiod.  We have complied with all of our maintenance financial ratios asrequired under our loan covenants and other debt instruments.  However, ifnegative factors adversely affect our financial ratios, we may be unable tomaintain compliance with these ratios and covenants or be unable to incur newdebt.  Under some of our loan agreements, certain of our financial ratios havebecome more restrictive in 2004 and will continue to become more restrictive inincrements thereafter, which will make it more difficult for PLDT to maintaincompliance with such ratios in the future.  Inability to comply with ourfinancial ratios and covenants or raise new financing could result in adeclaration of default and acceleration of some or all of our indebtedness.The terms of some of our debt instruments have no minimum amount forcross-default.  In addition, we are required to comply with certain financialratios for the incurrence of capital expenditures in excess of US$10 millionand incurrence of indebtedness.   

 

Inparticular, under loan agreements with JBIC, we are required to obtain priorwritten consent of JBIC for capital expenditures in excess of US$10 million,unless, among other things, our current ratio, calculated on a non-consolidatedbasis and after taking into account such expenditures, will not be less than1.20:1.  As at March 31, 2005, our current ratio was 1.29:1, primarily due to thelarge current portion of our long-term debt as at that date.  We currentlybelieve that our current ratio is unlikely to be less than 1.20:1 due tosmaller current portion of our long-term debt going forward.  As a result, webelieve that our financial ratios currently do not materially limit our abilityto incur our budgeted capital expenditures or to obtain additional financings.

 

Theprincipal factors that can negatively affect our ability to comply with thesefinancial ratios and other financial tests are depreciation of the Philippinepeso relative 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.  Interest expensemay increase as a result of various factors including issuance of new debt, therefinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the Philippine peso, the lowering of PLDT’s credit ratings orthe credit ratings of the Philippines, increase in reference interest rates,and general market conditions.  Since approximately 98% of our totalconsolidated debts were denominated in foreign currencies, principally in U.S.dollars, many of these financial ratios and other tests are negatively affectedby any weakening of the peso, which declined by approximately 3% against theU.S. dollar to an average of Php56.044 to US$1.00 in 2004 from an average ofPhp54.215 to US$1.00 in 2003.  The peso depreciated from Php26.376 to US$1.00 on June 30, 1997, to Php56.341 to US$1.00 as at December 31, 2004.  Moreover, the peso has been subjected to significant fluctuations.  For example, during2004 and 2003, the peso recovered to a high of Php52.021 to US$1.00 on May 8, 2003 and depreciated to a low of Php56.443 to US$1.00 on October 14, 2004.  

 

PLDT’sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of itsfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other investees in assisting in complying with non-consolidatedcovenants or covenants that are calculated without giving effect to the resultsof PLDT’s investees.

 

PLDT’sdebt instruments contain a number of other negative covenants that, subject tocertain exceptions and qualifications, restrict PLDT’s ability to take certainactions without lenders’ approval, including: (a) incurring additionalindebtedness; (b) prepaying other debt; (c) making investments; (d) extendingloans; (e) extending guarantees or assuming the obligations of other persons;(f) paying dividends or other distributions or redeeming, repurchasing orotherwise 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’s debt instruments contain provisions wherein PLDT may berequired to repurchase or prepay certain indebtedness in case of change incontrol of PLDT or if the ownership of our shares of common stock held by NTTCommunications falls below a certain threshold.

 

Moreover,certain of PLDT’s debt instruments restrict PLDT from declaring or distributingdividends to common stockholders.  In particular, under the terms of PLDT’s JPY5,615 million syndicated term loan facility,PLDT is restricted from distributing dividends to common stockholders unless(i) no default has occurred which is continuing, and (ii) its debt to free cashflow ratio, after giving effect to the distribution of such dividends and,under certain circumstances, other adjustments to PLDT’s closing cash balance,would be less than 4.0:1.  Under other loan agreements, PLDT may not declare orpay dividends on any of its capital stock without the prior written consent ofthe lenders (i) if PLDT is in default in the payment of any amounts due andpayable under such loan agreement or after the occurrence and during thecontinuance of any other event of default or potential event of default undersuch agreements, (ii) if after giving effect to such action the current ratiowould be less than 1.2:1 or (iii) in an amount greater than PLDT’s net incomeafter taxes during the fiscal year to which such payment or distributionrelates.

 

Incase of a change in control of PLDT, PLDT may be required to repurchase orprepay certain indebtedness.  Under the terms of the 10.625% Notes due 2007 and11.375% Notes due 2012, we are required to offer to purchase all outstandingnotes due 2007 and notes due 2012 for cash at a price of 101% of their principalamounts plus accrued interest in the event that (1) the aggregate of NTTCommunications’ and First Pacific’s direct and indirect voting interest inPLDT's outstanding capital stock having voting rights falls below 35% of suchcapital stock, (2) any person or, in certain instances, group of persons, whichis not controlled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT’s outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stockand (3) if a rating agency at such time maintains a rating on either series ofnotes, the rating agency downgrades its credit rating on the series within 90days (or more, in certain circumstances) following notice of the occurrence ofthe events specified in (1) and (2) above.

 

Underthe terms of our JP¥9,760 million loan from JBIC, in the event of any proposedsale or transfer of PLDT’s stock that would result in NTT Communicationsholding less than 14.95% of PLDT’s voting stock, we will be required to prepay,immediately upon effectiveness of such sale or transfer, all principaloutstanding under the loan, together with accrued interest.  However,prepayment will not be required if, following such sale or transfer, (1) NTT Communicationscontinues to have prior approval rights with respect to all matters as to whichNTT Communications has approval rights under the stock purchase agreementpursuant to which it acquired its shares in PLDT, or (2) JBIC, in its solediscretion, determines that NTT Communications’ participation in the expansionof Smart’s GSM network capacity to extend PLDT’s cellular business in Smartwould not be reduced below its level of participation as at the date of theloan agreement.

 

Underthe terms of PLDT’s JP¥5,615 million syndicated term loan facility, if anylender so requests in writing, PLDT shall prepay in full such lender’sparticipation in the loan within 45 days from notification of the change incontrol and no later than the date on which PLDT is required to repurchase its10.625% Notes due 2007 and 11.375% Notes due 2012, or Bonds, from bondholdersaccepting the change in control offer.  A change in control is deemed to occurwhen (1) the aggregate of NTT Communications’ and First Pacific’s direct andindirect voting interest in PLDT’s outstanding capital stock having votingrights falls below 35% of such capital stock, (2) any person or, in certaininstances, group of persons, which is not controlled directly or indirectly byFirst Pacific or NTT Communications acquires a direct or indirect votinginterest in PLDT’s outstanding capital stock having voting rights which equalsor exceeds 35% of such capital stock and (3) if a rating agency at such timemaintains a rating on the Bonds, the rating agency downgrades its credit ratingon the Bonds within 90 days (or more, in certain circumstances) followingnotice of the occurrence of the events specified in (1) and (2) above.

 

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-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated.  In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments; (b) failure by PLDT tomeet certain financial ratio covenants referred to above; (c) the occurrence ofany material adverse change in circumstances that a lender reasonably believesmaterially impairs PLDT’s ability to perform its obligations under its debtinstrument with the lender; (d) the revocation, termination or amendment of anyof the permits or franchises of PLDT in any manner unacceptable to the lender;(e) the abandonment, termination or amendment of the project financed by a loanin a manner 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’s debt instruments containcertain restrictive covenants, including covenants that prohibit Smart frompaying dividends, redeeming preferred stock, making distributions to PLDT orotherwise providing funds to PLDT or any affiliate without the consent of itslenders under its Phase 1, 2 and 3 facilities.  Also, Smart’s debt instrumentscontain certain restrictive covenants that require Smart to comply withspecified financial ratios and other financial tests at semi-annual measurementdates.  The financial tests under Smart’s loan agreements include compliancewith a debt to equity ratio of not more than 1.50:1 and a debt service coverageratio of not less than 1.50:1.  Smart has maintained compliance with all of itsfinancial covenants.  The agreements also contain customary and other defaultprovisions that permit the lender to accelerate amounts due under the loans orterminate their commitments to extend additional funds under the loans.  Thesedefault provisions include: (a) cross-defaults and cross-accelerations thatpermit a lender to declare a default if Smart is in default under another loanagreement.  These cross-default provisions are triggered upon a payment orother default permitting the acceleration of Smart debt, whether or not thedefaulted debt is accelerated; (b) failure by Smart to comply with certainfinancial ratio covenants; (c) any reduction in PLDT’s ownership of Smart’sshares below 51%; (d) any reduction in First Pacific’s and Metro PacificCorporation’s collective direct and/or indirect ownership of PLDT’s commonstock below 17.5% of the total common stock outstanding; and (e) the occurrenceof any material adverse change in circumstances that the lender reasonablybelieves materially impairs Smart’s ability to perform its obligations underits loan agreements.

 

Asat December 31, 2004, Piltel was 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.

 

TheCredit and Omnibus Agreements of Mabuhay Satellite imposes several negativecovenants.  In particular, these covenants, among others, restrict materialchanges in Mabuhay Satellite’s nature of business and ownership structure, anylien upon or with respect to any of its assets or to any right to receiveincome, acquisition of capital stock, declaration and payment of dividends,merger, consolidation and sale with another entity and incurring orguaranteeing additional long-term debt beyond prescribed amounts.

 

ePLDT’sloan agreement imposes negative covenants which, among other things, restrictePLDT in regard to payment of cash dividends or any other income or any capitaldistribution to PLDT, voluntary suspension of its entire business operationsfor a period of 60 consecutive days, dissolution of its legal existence, andcreation of any encumbrances on the shares pledged.  One of ePLDT’s loanagreements also requires ePLDT to comply with specified financial ratios andother financial tests at quarterly measurement dates.  The agreement alsocontains customary and other default provisions that permit the lender toaccelerate amounts due under the loan or terminate their commitments to extendadditional funds under the loan.  As at December 31, 2004,ePLDT has complied with all of its financial covenants.

 

*Financing Requirements*

 

We believe that our available cash, including cashflow from operations and drawings from existing credit facilities, will providesufficient liquidity to fund our projected operating, investment, capitalexpenditures and debt service requirements for the next 12 months.  Further, asdescribed above, we have completed a number of initiatives under our liabilitymanagement program to meet our debt service requirements in the short andmedium term.

 

Wecontinue to pursue various initiatives and financing transactions with theobjective of further improving the balance between our cash flows and debtservice requirements and reducing our overall indebtedness.  In addition, PLDThas reduced its capital expenditures and investments, suspended dividendpayments to common shareholders and increased its application of available cashto reduce its indebtedness.  Further, we expect to benefit from increasingrevenue and cash flow contributions from our subsidiaries, particularly Smart.After receiving approvals from Finnvera and certain lenders for the payment ofdividends to PLDT in an amount not to exceed 40% of Smart’s net income underPhilippine GAAP in 2001, Smart made its first dividend payment of Php1,540million to PLDT in December 2002.  In addition, Smartpaid dividends in the amount of Php4,300million to PLDT in June 2003, representing 70% of Smart’s 2002 net income underPhilippine GAAP, and paid additional dividends in the amount of Php1,866 million to PLDT in November 2003, equivalent to theremaining 30% of its 2002 net income under Philippine GAAP.  Further, in 2004,after receiving similar approvals from Finnvera and certain lenders, Smartpaid an aggregate of Php16,100 million in dividends to PLDT, of which Php11,280million was paid in May 2004 and the balance of Php4,820 million was paid inDecember 2004.  Smart will be required to obtainfurther waivers from Finnvera and certain lenders to pay additional dividendsin future periods.  We cannot assure that Smart will be able to obtain suchwaivers in the future, or what amount, if any, Smart would be permitted orfinancially able to distribute.  We expect that we will have difficulty meetingour debt payment obligations if we do not continue to receive cash dividendsfrom Smart.

 

*Credit Ratings*

 

None of our existing indebtedness containsprovisions under which credit rating downgrades would trigger a default,changes in applicable interest rates or other similar terms and conditions.  

 

On May 30, 2005, Fitch Ratings revised the outlook on PLDT’s long-term foreigncurrency rating to a stable from negative outlook.  Simultaneously, Fitch hasaffirmed PLDT’s long-term foreign currency rating, global bonds and seniornotes at “BB” and PLDT’s convertible preferred stock at “B+”.  The outlook onPLDT’s long-term local currency rating has also been affirmed as “BB+” and thestable outlook on this rating remains in place.  The rating actions reflectFitch’s decision to revise its outlook on the Republic of the Philippines’ “BB”long-term foreign currency rating to stable from negative.

 

On February 16, 2005,Moody’s Investor Service, or Moody’s, downgraded the foreign currency seniorunsecured debt rating of PLDT to Ba3 from Ba2 with a stable outlook.  Therating action was taken as part of Moody’s downgrade of the Republic of the Philippines’foreign currency country ceiling to B1 from Ba2.  On the same date, Moody’saffirmed PLDT’s B1 preferred stock rating with a stable outlook.  Moody's viewsthat there is a differential between PLDT's foreign currency rating and thePhilippine sovereign rating becauseforeign currency bonds subject to international law are less likely to besubject to a debt moratorium than foreign currency obligations subject to locallaw.  According to Moody’s, PLDT’s foreign currency  debt rating is a functionof its own risk of default and the probability of a Philippine governmentdefault on its foreign debt, the likelihood that the Philippine governmentwould declare a moratorium in the event of a default, and if it did, thechances that it would exempt companies such as PLDT.

 

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).

 

A credit rating is not arecommendation to purchase, hold or sell securities as much as such rating doesnot comment as to market price or suitability for a particular investor.  Inaddition, a credit rating is subject to revision or withdrawal at any time bythe credit rating assigning organization.  There is no assurance that thecredit ratings will remain in effect for any given period or that the ratingswill not be revised, downwards or upwards, by the rating agency in the future.

* *

*Off-BalanceSheet Arrangements*

 

On October 10, 2002, PLDT entered into a Receivables Purchase Deed, or RPD, witha foreign financial institution, or the Purchaser, under which PLDT agreed (1)to sell its receivables from certain eligible foreign carriers for an advancepayment of US$50 million and (2) to service, administer and collect thereceivables on behalf of the Purchaser.  The Purchaser will have no recourse toPLDT should the eligible carrier fail or refuse to settle theassigned/purchased receivables, except when PLDT commits a breach on itsrepresentations and warranties under the RPD.  For the years ended December 31,2004, 2003 and 2002, receivables sold under the RPD amounted to US$10 million(Php576 million), with resulting losses of US$1 million (Php78 million), US$11million (Php616 million), with resulting losses of US$1.5 million (Php84million), and US$3 million (Php165 million), with resulting losses of US$0.5million (Php25 million), respectively.

 

*Equity Financing*

* *

Through our SIP, which provides postpaid fixed linesubscribers the opportunity to buy shares of our 10% Cumulative ConvertiblePreferred Stock as part of the upfront payments collected from subscribers,PLDT was able to raise Php281 million, Php94 million and Php464 million in2004, 2003 and 2002, respectively.  As approved by the NTC, the SIP was madeoptional in 2003 from being compulsory in earlier years.

 

Cashdividend payments amounted to Php1,692 million in 2004, Php1,603 million in2003 and Php1,582 million in 2002, all of which were paid solely to preferredshareholders of PLDT.  In 2001, cashdividend payments totaled Php1,819 million, of which Php402 million was paid tocommon shareholders of PLDT and the remainder to its preferred shareholders.  The most recent cash dividend declaration made by PLDTon its common stock was on May 5, 2005 at Php21 per common share to holders of record as at June 3, 2005 payableon July 14, 2005.  On March 1, 2005, PLDT declared cash dividend atPhp14 per common share to holders of record as at March 31, 2005 which was paid on May 12, 2005.  Thiswas the first cash dividend declaration to common shareholders since March2001.

 

***Contractual Obligations and Commercial Commitments***

 

*Contractual Obligations*

 

Thefollowing table discloses our contractual obligations outstanding as at December 31, 2004:

 

 

**Long-term debt**

** **

**Long-term lease obligations**

** **

**Unconditional purchase  obligations**(1)

** **

**Other long-term obligations**

** **

**Total**

**Operating**

** **

**Capital**

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

2005

Php28,020

 

Php725

 

Php673

 

Php4,405

 

Php–

 

Php33,823 

2006

25,867

 

580

 

379

 

1,136

 

–

 

27,962

2007

29,396

 

439

 

258

 

1,127

 

–

 

31,220

2008

6,589

 

373

 

6

 

1,127

 

13,419

 

21,514

2009

14,174

 

350

 

7

 

1,126

 

8,597

 

24,254

2010 and onwards

55,351

 

1,115

 

443

 

3,380

 

–

 

60,289

Total

Php159,397

 

 Php3,582

 

Php1,766

 

Php12,301

 

Php22,016

 

Php199,062

*____________*

*(1)   Based on theoriginal Air Time Purchase Agreement with AIL.*

* *

*Long-term Debt Obligations*

 

For discussion of our long-term debt obligations, see *Note12 – Interest-bearing Financial Liabilities* to the accompanyingconsolidated financial statements in Item 18.

 

*Long-term Operating Lease Obligations*

 

***DomesticFiber Optic Network Submerged Plant Agreement***.   On July 4, 2000, PLDT entered into an agreementwith NTT World Engineering Marine Corporation, or NTT WEMC, for submarine cablerepair and other allied services in relation to the maintenance of PLDT's DFONsubmerged plant for a period of five years up to July 4, 2005.   This agreementhas been extended up to the end of 2005.  Under this agreement, PLDT shall payNTT WEMC a fixed annual standing charge of US$2 million, excluding cost for theuse of a remotely-operated submersible vehicle at US$5,000 for every day of useand repair cost computed at US$19,000 per day of actual repair.  As at December 31, 2004,PLDT’s aggregate remaining obligation under this agreement was approximatelyPhp69 million.

 

***Digital Passage Service Contracts.***   PLDT has existing Digital Passage Service Contractswith foreign telecommunication administrations for several dedicated circuitsto various destinations for ten to 25 years expiring at various dates.  As at December 31, 2004,PLDT’s aggregate remaining obligation under these contracts amounted toapproximately Php30 million.

 

***License Agreement with Mobius Management Systems (******Australia******) Pty Ltd., or Mobius****.*PLDTentered into a license agreement with Mobius pursuant to which Mobius hasgranted PLDT a non-exclusive, non-assignable and non-transferable license forthe use of computer software components.  Under this agreement, Mobius is alsorequired to provide maintenance services for a period of one year at noadditional maintenance charge.  PLDT may purchase maintenance services uponexpiration of the first year for a fee of 15% of the current published licensefee.  As at December 31, 2004, PLDT’s aggregate remaining obligation under thisagreement was approximately Php45 million.

 

***OtherLong-term Operating Lease Obligations***.   The PLDT Group has various long-term lease contracts for periodsranging from two to ten years covering certain offices, warehouses, cell sites,telecommunication equipment locations and various office equipment.  Inparticular, Smart has lease obligations aggregating Php3,185 million as at December 31, 2004 inrespect of office and cell site rentals with over 2,000 lessors nationwide,PLDT has lease obligations aggregating Php119 million as at December 31, 2004,and ePLDT has lease obligations aggregating Php134 million as at December 31, 2004 inrespect of certain office space rentals.

 

*Long-term Capital Lease Obligations*

 

For a discussion of our long-term capital leaseobligations, see *Note 12 – Interest-bearing Financial Liabilities* to theaccompanying consolidated financial statements in Item 18.

 

*Unconditional Purchase Obligations*

 

***Air time Purchase Agreement with ACeS InternationalLimited***.   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 is required to purchase from AIL a minimum of US$5million worth of air time annually over ten years commencing on the date ofcommercial operations of the Garuda I Satellite.  

 

In the event PT Asia Cellular Satellite’s aggregatebilling revenue is less than US$45 million in any given year, the Air TimePurchase Agreement states that PLDT has to make supplemental air time purchasepayments not to exceed US$15 million per year during the ten-year term.

 

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 competitivehandsets and competitions from cellular services, occurrence of a partialsatellite loss, changes in the primary business of AIL and other factorsaffecting its business.  Accordingly, we started negotiations with AIL for therevision of the payment obligations under the Air Time Purchase in 2000.  As aresult of these negotiations, the effective date of the Air Time PurchaseAgreement became January 1, 2002.  In 2002, billings for satellite air timewere reduced to actual air time usage, less amount for marketing assistance toservice providers.

 

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.  The parties agreed that AIL shall provide PLDT and the otherfounder shareholders, with unlimited use of air time for the year 2003 inexchange for a fixed fee in the amount of US$3.8 million for PLDT.  Moreover,PLDT is also obliged to purchase from AIL 13,750 satellite phone units in 2003at US$395 F.O.B. per unit, subject to quarterly price adjustments.  The partiesto the Standstill Agreement also agreed to negotiate in good faith and usetheir best efforts to reach agreement on a revised Air Time Purchase Agreementbefore November 15, 2003 that will cover, among other things, the amendedminimum and supplemental air time payment provisions subject to the approval ofAIL’s creditors.  

 

OnFebruary 10, 2004, notwithstanding the ongoing negotiations, AIL advised PLDTof the termination of the Standstill Agreement and the reinstatement of theterms under the original Air Time Purchase Agreement effective January 1, 2002following the lapse of the November 15, 2003 deadline set in the StandstillAgreement for the negotiation of a revised Air Time Purchase Agreement.Negotiations are continuing with the relevant parties towards an amicablesettlement of this matter.  

 

Asat December 31, 2004, PLDT’s aggregate remaining minimum payables under theoriginal Air Time Purchase Agreement was Php11,962 million.  See Note 16 –Related Party Transactions and Note 22 – Provisions and Contingencies to theaccompanying consolidated financial statements in Item 18 for furtherdiscussion.  

 

***InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign.***  On September 15, 2000, ePLDT entered into anagreement with VeriSign for the non-exclusive, non-transferable right andlicense to use the VeriSign software, brand and Certification PracticeStatement for the purpose of approving, issuing, suspending or revoking digitalcertificates for users of the internet or similar open systems in the Philippinesfor a period of seven years.  Under this agreement, ePLDT is required to payVeriSign a certain percentage of the revenue derived from the services subjectto minimum annual royalty payments aggregating to US$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 of US$0.5 millionduring 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 werepart 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 was reduced from US$0.3million to US$40,000 and for contract years 5 to7 (September 2004 to August2007) from US$0.3 million to US$0.16 million.  In addition, VeriSign agreed toreduce the affiliate revenue sharing rates from 50% of suggested retail priceto 25% of suggested retail price for both enterprise and internet products for12 months starting July 2003 and negotiable thereafter.  Moreover, effective July 1, 2004, VeriSign has agreedto amend the Agreement and issued Addendum 8 as an extension of Addendum 6.Under this amendment, the 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 December 31, 2004,ePLDT’s aggregate remaining minimum obligation under this agreement wasapproximately Php18 million pertaining to annual support fee.

 

***Sale******and Purchase Agreement with********Meridian****.*For adiscussion of our sale and purchase agreement with Meridian witha remaining obligation of Php1,561 million as at December 31, 2004, see *Note 9– Goodwill and Other Intangible Asset*to the accompanying consolidatedfinancial statements in Item 18.

 

***OtherUnconditional Purchase Obligations.***PLDT has various purchase contracts for periods ranging from two tothree years covering the use of a fraud management system, satellite hub andremote VSAT network systems with an aggregate remaining obligation ofapproximately Php321 million.

 

*Other Long-term Obligations*

 

***Mandatory Conversion and Purchase of Shares***.   As at December 31, 2004, PLDT had issued a totalof 3 million shares of Series V Convertible Preferred Stock, 5 million sharesof Series VI Convertible Preferred Stock and 4 million shares of Series VIIConvertible Preferred Stock in exchange for a total of 58 million shares ofSeries K Class I Convertible Preferred Stock of Piltel, pursuant to the debtrestructuring plan of Piltel adopted in June 2001.  

 

Eachshare of Series V, VI and VII PLDT Convertible Preferred Stock is convertibleat any time at the option of the holder into one share of PLDT common stock.On the date immediately following the seventh anniversary of the issue date ofthe Series V and Series VI Convertible Preferred Stock and on the eighthanniversary of the issue date of the Series VII Convertible Preferred Stock,the remaining outstanding shares under these series will be mandatorilyconverted into shares of PLDT common stock.  Under a put option exercisable for30 days, holders of shares of common stock received on mandatory conversionwill be able to require PLDT to purchase such shares of PLDT common stock forPhp1,700 per share, or US$36.132 per share, and JP¥4,071.89 per share forSeries V, VI and VII PLDT Convertible Preferred Stock, respectively.

 

Asat December 31, 2004, 515,818 shares of Series V Convertible PreferredStock and 545,122 shares of Series VI Convertible Preferred Stock had beenconverted into shares of PLDT common stock.  The aggregate value of the putoption based on outstanding shares as at December 31, 2004 was Php22,016million, of which Php13,419 million is payable on June 4, 2008 and Php8,597 million on June 4, 2009, if all of theoutstanding shares of Series V, VI and VII PLDT Convertible Preferred Stockwere mandatorily converted and all the underlying shares of common stock wereput to PLDT.  The market value of the underlying shares of common stock wasPhp14,685 million, based on the market price of PLDT shares of common stock ofPhp1,360 per share as at December 31, 2004.  See *Note 14 – Preferred StockSubject to Mandatory Redemption* and *Note 15 –Stockholders’ Equity* tothe accompanying consolidated financial statements in Item 18 for furtherdiscussion.

 

Commercial Commitments

 

As at December 31, 2004, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php1,504 million.These commitments will expire within one year.

 

Impact of Inflation and Changing Prices

 

Inflationcan be a significant factor in the Philippine economy, and we are continuallyseeking ways 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 2004 was 6.0% compared to 3.1% in 2003.

 

Other Information

 
**PiltelDebt Exchange Transaction**

** **

On July 2, 2004, Smart acquired from Piltel’screditors approximately US$289 million, or 69.4%, in the aggregate of Piltel’stotal outstanding restructured debt at that time, in exchange for Smart debtand a cash payment by Smart.  In particular, Smart paid an amount in cash ofUS$1.5 million, or Php84 million, and issued new debt of US$283.2 million, orPhp15,854 million in July 2, 2004.  

 

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

 

•        2007 Facility in the amount ofUS$0.2 million payable in full in December 2007;

•        2008 Facility in the amount ofUS$2.9 million payable in full in December 2008; and

•        2014 Facility in the amount ofUS$280.1 million payable in full in June 2014.

Interest for the above facilities is payable everyquarter at a floating rate of three months US$ LIBOR plus 1.00% for the 2007 and 2008 facilities,and a fixed rate of 2.25% per annum for the 2014 facility.  Furthermore, aportion of the 2014 facility amounting to US$144 million has a variable yield option whereby the creditors have an option to electfor an early repayment at a discount eitherin December 2007 at 52.5% of the relevant debt amount or in December 2008 at57.5% of the relevant debt amount.  See “Item 5.  Operating and FinancialReview and Prospects – Other Information – Piltel Debt Exchange Transaction”and*Note 12 – Interest-bearing Financial Liabilities* to the accompanyingconsolidated financial statements in Item 18.

 
*Changes in ManagementAgreements between Piltel and Smart*
 
On December 22, 2004, Piltel andSmart entered into a new omnibus agreement which superseded and replaced theirexisting facilities management agreement, customer service managementagreement, administrative support and management services agreement as well asthe facilities service agreement.  The original agreements were entered into in2000 to cover services outsourced by Piltel to Smart covering such areas asnetwork management, customer care and general administration as well as its50-50 revenue sharing arrangement to compensate Smart for Piltel’s use ofSmart's network for Piltel’s *Talk 'N Text* service.  
 
Pursuant to the terms of the original agreements, whichcall for a periodic review of the various terms and conditions containedtherein, Piltel and Smart undertook a review of the revenue sharing arrangementas well as other relevant fee structures after *Talk 'N Text* surpassedthe 3.5 million subscriber mark in June 2004.  In August 2004, both companiesapproved the joint engagement of an international, external telecommunicationsconsultant to provide a framework for considering the extent and timing of anychanges in the various agreements.
 
In its review, the consultant noted that the combinedsubscriber base of Smart and Piltel has reached such a level that the benefitsof the resulting economies of scale should be reflected in the revenue sharingagreement.  The consultant also noted that declining network and operatingcosts per subscriber derived from improvements in productivity and technologyshould also be taken into consideration in the sharing of revenues.

 

The newomnibus agreement took effect from January 1, 2004 and covers the provision of allthe services under the original agreements, in consideration of a revenuesharing agreement of 80-20 in favor of Piltel.  In addition, Smart alsocompensated Piltel in an amount of Php3.7billion representing Piltel’s equitable share of revenues as a result of Piltelhaving achieved a critical mass of subscribers and the resultant “economies ofscale” earlier than anticipated.
 

*Transfer of Piltel Series K Class I ConvertiblePreferred Stock and Piltel Common Stocks from PLDT to Smart*
 

Fora discussion of the transfer by PLDT to Smart of Piltel Series K Class IConvertible Preferred Stock and Piltel Common Stock, please see “Item 4.Information on the Company – Organization – Changes in Piltel’s Shareholdings”.

 

Item 6.        Directors,Senior Management and Employees

** **

Directors, Key Officers and Advisors

 

The names, ages, positions and periods of service ofthe directors (including independent directors) and key officers and advisorsof PLDT as at May 31, 2005 are as follows:

 

** **

**Name**

** **

** **

**Age**

** **

** **

**Position(s)**

** **

**Period during which individual has served as such**

Manuel V. Pangilinan

 

58

 

Director 

 

November 24, 1998 to present

 

 

 

 

Chairman of the Board 

 

February 19, 2004 to present

Napoleon L. Nazareno

 

55

 

Director

 

November 24, 1998 to present

 

 

 

 

President and Chief

 

February 19, 2004 to present

 

 

 

 

Executive Officer 

 

 

Antonio O. Cojuangco

 

53

 

Director

 

April 21, 1982 to present

Helen Y. Dee

 

61

 

Director

 

June 18, 1986 to present

Corazon S. de la Paz 

 

64

 

Director

 

September 25, 2001 to present

Albert F. del Rosario

 

65

 

Director

 

November 24, 1998 to present

Ray C. Espinosa

 

49

 

Director

 

November 24, 1998 to present

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

 

65

 

Director

 

November 24, 1998 to present

Pedro E. Roxas(1) 

 

49

 

Director

 

March 1, 2001 to present

Oscar S. Reyes(1) 

 

58

 

Director

 

April 5, 2005 to present

Shigeru Yoshida

 

55

 

Director

 

March 31, 2004 to present

Sadao Maki

 

52

 

Director

 

August 3, 2004 to present

Teresita T. Sy-Coson(1)

 

54

 

Director

 

June 8, 2004 to present

Ma. Lourdes C. Rausa-Chan

 

51

 

Corporate Secretary

Senior Vice President, Corporate Affairs and Legal Services Head

 

November 24, 1998 to present

January 5, 1999 to present

Anabelle L. Chua

 

44

 

Treasurer

 

February 1, 1999 to present

 

 

 

 

Senior Vice President 

Corporate Finance and  Treasury Head

 

February 26, 2002 to present 

March 1, 1998 to present

Rene G. Bañez

 

50

 

Senior Vice President Chief Governance Officer

 

January 25, 2005 to present

October 5, 2004 to present

George N. Lim

 

52

 

Senior Vice President  Network Services Head

 

February 26, 1999 to present

February 1, 2003 to present

Claro Carmelo P. Ramirez

 

45

 

Senior Vice President 

 

July 1, 1999 to present

 

 

 

 

International and Carrier  Business Head

 

June 16, 2004 to present

Victorico P. Vargas

 

53

 

Senior Vice President Human Resources Head

 

February 15, 2000 to present 

Rosalie R. Montenegro

 

56

 

Senior Vice President Call Center Business Head

 

July 10, 2000 to present

February 1, 2003 to present

Ariel A. Roda

 

42

 

Senior Vice President

 

August 10, 2000 to present

 

 

 

 

Business Development Head

 

February 1, 2003 to present

Alfredo S. Panlilio

 

42

 

Senior Vice President

 

May 8, 2001 to present

 

 

 

 

PLDT Global Corporation President

 

June 16, 2004 to present

Ernesto R. Alberto

 

44

 

Senior Vice President  Corporate Business Head

 

May 15, 2003 to present

 

Menardo G. Jimenez, Jr.

 

42

 

Senior Vice President

 

December 9, 2004 to present

 

 

 

 

Retail Business Head

 

June 16, 2004 to present

Celso T. Dimarucut

 

43

 

First Vice President

 

January 31, 2003 to present

 

 

 

 

Financial Reporting and Control Head

 

August 16, 2000 to present

Jun R. Florencio(2)

 

49

 

First Vice President

 

March 28, 2000 to present

 

 

 

 

Audit and Assurance Head

 

September 1, 2000 to present

Christopher H. Young

 

47

 

Chief Financial Advisor 

 

November 24, 1998 to present

Peter J. Lawrence

 

45

 

Chief Financial Advisor of Smart

 

November 9, 1998 to present

Donald J. Rae

 

43

 

Chief Operations Advisor of Smart

 

January 1, 1999 to present

Anastacio R. Martirez

 

51

 

Personal Communications and Mobile Services Head of Smart

 

September 1, 1993 to present

Rolando G. Peña

 

44

 

Smart Network Services Head

 

September 1, 1994 to present

Ramoncito S. Fernandez

 

49

 

Administration and Materials Management Head – Smart 

 

June 16, 2000 to present

George H. Tan

 

46

 

ePLDT Chief Finance Officer

 

September 15, 2000 to present

 

 

 

 

 

 

 

———————

 

*(1)  **Independent directors.*

*(2)  **Promoted to Senior VicePresident on**June 14, 2005**.*

 

 

Under the Shareholders Agreemententered into among First Pacific, NTT Communications and NTTC-UK on September 28, 1999,NTT Communications is entitled to nominate two directors to the PLDT board ofdirectors and First Pacific and its affiliates are entitled to nominate sixdirectors.  The Shareholders Agreement also entitles NTT Communications tonominate two directors to Smart's board of directors and, subject to specifiedconditions, one member to the board of directors of all other PLDTsubsidiaries.  NTT Communications is also entitled to appoint members oradvisors of certain PLDT management and board committees, including the audit,governance and nomination, executive compensation and finance committeesdescribed below under “— Audit, Governance and Nomination, ExecutiveCompensation and Finance Committees.”  Under the Shareholders Agreement, eachparty has agreed, under certain circumstances, to vote its shares of commonstock in favor of the nominees designated by the other parties.

 

The business address of AnastacioR. Martirez, Peter J. Lawrence, Donald J. Rae, Ramoncito S. Fernandez and Rolando G. Peña is Smart Tower II, Ayala Avenue, Makati City, Philippinesand the business address of George H. Tan is L.V. Locsin Building, 6752 Ayala Avenue, Makati City.  The business address of each of the other directors, keyofficers and advisors identified above is the Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

 

The following is a brief description of the businessexperience during the past five years of each of our directors, key officersand advisors.

** **

**Mr. Manuel V. Pangilinan,** the chairman of our board and governance andnomination committee, is also the chairman of the boards of Smart, Piltel,ePLDT and Mabuhay Satellite.  He was PLDT's president and chief executiveofficer from November 1998 up to his appointment as chairman effective February 19, 2004.He founded and was the managing director of First Pacific from 1981 and servedas its executive chairman from February 1999 to May 2003.  He has beenre-appointed as managing director and chief executive officer of First Pacificeffective June 2003.  He is also the chairman of Metro Pacific Corporation andpresident commissioner of P.T. Indofood Sukses Makmur tbk.  He also holdsdirectorships in Philippine Telecommunications Investment Corporation, MetroAsia Link Holdings, Inc., Enterprise Investments Holdings, Inc., Metro PacificAssets Holdings, Inc., Metro Pacific Resources, Inc. and Negros Navigation Co.,Inc.  

 

**Mr.Napoleon L. Nazareno** was appointed asthe president and chief executive officer of PLDT effective February 19, 2004 andis concurrently the president and chief executive officer of Smart and Piltel.He is the chairman of the board of I-Contacts Corporation and the president ofACeS Philippines.  He also holds directorships in Philippine TelecommunicationsInvestment Corporation and some subsidiaries of PLDT, namely, ePLDT and,Mabuhay Satellite.  He was the president and chief executive officer of MetroPacific Corporation from August 1995 until December 1999 and of Piltel fromNovember 1998 to January 2003.

 

**Mr.Antonio O. Cojuangco** served aspresident and chief executive officer of PLDT for over 12 years until November1998 and, thereafter, as the chairman of our board until February 19, 2004.He is the president and chief executive officer of the television networkABC-5, the chairman of the Bank of Commerce and CAP Life Insurance Corporation,and a director of C&O Investment Realty Corporation, Kuok Phil. Properties,Inc. and Philippine Telecommunications Investment Corporation.  He is also amember of our finance committee.

 

**Ms. Helen Y. Dee** is the chairperson and president and/or chief executive officer ofHydee Management & Resources, Inc., House of Investments, Inc., TameenaResources, Inc., Grepalife Asset Management Corporation and Grepalife FixedIncome Fund Corporation.  She is also the chairperson of Landev Corporation,Manila Memorial Park, Inc., Mapua Information Technology Center, Inc.,. andHi-Eisai Pharmaceuticals, Inc., Universal Malayan Reinsurance Corporation andLifetime Plans, Inc.  She is the president of Moira Management, Inc., EquitasInsurance Brokers, Inc. and YGC Corporate Services, Inc.  She is the vicechairperson of Zurich Insurance (Taipei) Ltd. and also sits on the boards of EEI Corporation,Hermosa Ecozone Development Corporation, Petro Energy Resources Corp., NipponLife Insurance Co., South Western Cement Corp., Seafront Resources Corp.,Manila Peninsula Hotel, Inc., Malayan Insurance Co., Inc., MICO Equities, Inc.,and La Funeraria Paz, Inc.

 

**Ms.Corazon S. de la Paz** is the vicechairperson of the Social Security Commission and the president and chiefexecutive officer of the Social Security System.  She is a director of SanMiguel Corporation, Philex Gold, Inc., Philex Mining Corporation, PhilippineHealth Insurance Corporation, Republic Glass Holding Corp., PCI Leasing andFinance, Inc., PCI Capital Corporation, Equitable PCIB Inc., EquitableCardnetwork, Inc. and Ionics Inc.  She has been elected president of theInternational Social Security Association, an association based in Geneva, Switzerland,for a three-year term commencing in September 2004.  Ms. de la Paz is also the chairman of the financecommittee and an advisor to the audit committee of the board of directors ofPLDT.   Until June 30, 2001, she was the senior partner and the chairperson ofJoaquin Cunanan & Co., a member firm of PricewaterhouseCoopers Worldwide.

 

**Mr.Albert F. del Rosario** is thePhilippine Ambassador Plenipotentiary and Extraordinary to the United States of America.  He is the chairman of the board of Gotuaco delRosario and Associates, Inc. and Philippine Indocoil Corporation, the vicechairman of the board of Asia Traders Insurance Corporation, and the presidentof ADR Holdings, Inc. and ARS Reinsurance Brokers, Inc.  He is a director of FirstPacific and Commissioner of PT Indofoods Sukses Makmur Tbk.  Mr. del Rosarioalso sits on the boards of Infrontier (Philippines), Inc., PhilippineTelecommunications Investment Corporation, Smart Communications Holdings, Inc.and LMG Chemicals Corporation, Pacific Plaza Condominium Corporation andPacific Plaza Towers Condominium Corporation.  He is also the chairman of theboard of trustees of the PLDT Beneficial Trust Fund and the executivecompensation committee of the Board of Directors of PLDT. 

 

**Atty.Ray C. Espinosa** is the president ofePLDT and Philippine Home Cable Holdings, Inc. and the chairman of Parlance andVocativ, Ventus, Infocom, Sidera Technologies, Inc., Digital Paradise, Inc.,netGames, Inc., ePDS, Inc., iPlus Intelligent Networks, Inc. and mySecureSign,Inc.  He is a member of the boards of BayanTrade Dotcom, Inc., Cyber BayCorporation, Nation Broadcasting Corporation, Enterprise Investment Holdings,Inc., Tahanan Mutual Building and Loan Association, Inc., Unilink Communications Corporation,Mediaquest Holdings, Inc., Stradcom Corporation and PLDT Global.  He is atrustee of PLDT Beneficial Trust Fund and PLDT Foundation, Inc. and a member ofthe executive compensation committee of the board of directors of PLDT.  Until June 30, 2000, he wasa partner and member of the executive committee of the law firm SyCip SalazarHernandez & Gatmaitan.

** **

**Rev.Fr. Bienvenido F. Nebres, S.J.** is thepresident of the Ateneo de Manila University and a member of the boards oftrustees of the Asian Institute of Management and several other privateeducational institutions.  He is the chairman of the Audit Committee and amember of the governance and nomination committee of the board of directors ofPLDT.  

 

**Mr.Pedro E. Roxas** is the chairman and/orchief executive officer of various business organizations in the fields ofagri-business, sugar manufacturing and real estate development including RoxasHoldings, Inc., CADP Group Corp., Roxaco Land Corporation and Roxas &Company, Inc.  He also holds directorships in BDO Private Bank, and FuegoDevelopment Corporation.  Mr. Roxas serves as a member of the audit committeeand executive compensation committee of the board of directors of PLDT.  

 

**Mr. Oscar S. Reyes** is the chairman of Unicapital Securities, Inc.,Actron Industries, Inc. and Link Edge, Inc.  He also holds directorships in theBank of the Philippine Islands, BPI Capital Corporation, Manila WaterCorporation, Mindoro Resources Ltd., Sunlife of Canada (Phils.) Inc., Philippine Electric Co., Universal RobinaCorporation, and some other private companies.  He serves as a member of theaudit committee, executive compensation committee and governance and nominationcommittee of the board of directors of PLDT.  He was a member of the advisoryboard of PLDT for four years until April 2005.  Mr. Reyes was the CountryChairman of the Shell Companies in the Philippines from 1997 to 2001 and concurrently the ManagingDirector of Shell Philippines Exploration B.V. until 2002.  From 2002 to 2004,he served as the management adviser of Shell Philippines Exploration B.V. andas CEO Adviser of Pilipinas Shell Petroleum Corporation.

 

**Mr.Shigeru Yoshida** is a vice presidentof NTT Worldwide Telecommunications Corporation, or NTT Worldwide.  From 2001to 2003, he was the vice president of the Solution Division and led thestrategic planning and project development of “e-Japan”, a governmental programto enhance Japanese national IT infrastructure.  He headed the Business Users,Consumers and Office Users Business Division and managed the sales activity ofArcstar network and international telephone service from 2000 to 2001.  Priorto that, he worked at the Business Communications Headquarters of NTT Worldwideand headed the global private network sales activities for big customers.  Heis an advisor of the finance committee and audit committee and a member of thegovernance and nomination committee and executive compensation committee of theboard of directors of PLDT.  Mr. Yoshida replaced Mr. Taketo Suzuki as directoreffective March 31, 2004.

 

**Mr.Sadao Maki**is a vice president andthe executive manager for corporate planning of NTT Communications.  From 1999to 2001, he was the vice president for global strategy and from 2001 to 2004,the vice president and executive manager for accounts and finance, of NTTCommunications.  

 

**Ms.Teresita Sy-Coson**has worked with theSM Group of Companies for over 30 years.  She has varied experience in retailmerchandising, mall development and banking businesses.  She was actively involvedin Shoemart development and now serves as president of Shoemart, performing anactive role in the department store’s merchandising and operationalactivities.  As chairman of Banco de Oro Universal Bank, she leads the bank’smarketing endeavors.  She is also the executive vice president of SM PrimeHoldings, Inc. and vice chairman of SM Investments Corporation.  She is amember of the Finance Committee and the Governance and Nomination Committee ofthe Board of Directors of PLDT.  She also holds directorships in Asia-PacificComputer Technology Center, Inc., BDO Capital Insurance Brokers, Inc., FirstAsia Realty Development Corp. and other private institutions.  

 

**Ms.Ma. Lourdes C. Rausa-Chan**is seniorvice president for corporate and legal affairs and the general counsel andcorporate secretary of PLDT. She also serves as corporate secretary of severalsubsidiaries of PLDT.  She was the group vice president for legal affairs, andthe corporate secretary of some subsidiaries of Metro Pacific Corporation forover ten years prior to joining PLDT in November 1998.  

 

**Ms.Anabelle L. Chua** is the treasurer ofPLDT and senior vice president for PLDT’s corporate finance and treasurysector.  She was a vice president at Citibank, N.A. where she worked for ten yearsprior to her appointment as first vice president in March 1998, as treasurer inFebruary 1999 and as a senior vice president on February 26, 2002.  She has over15 years of experience in the areas of corporate finance, treasury, financialcontrol and credit risk management.  Ms. Chua is currently a director of thePhilippine Stock Exchange, Inc., Smart, ePLDT and several subsidiaries ofePLDT.  She is also a member of the board of trustees of the PLDT BeneficialTrust Fund and PLDT Foundation, Inc.

 

**Mr.Rene G. Bañez**served as Commissionerof the Philippine Bureau of Internal Revenue from February 2001 to August2002.  Prior to that, he was the Head of Support Services and Tax ManagementGroup of PLDT from January 1999 to January 2001.  He served as Group VicePresident for Tax Affairs of Metro Pacific Corporation for three years untilDecember 1998.  He is a non-voting member of the Governance and NominationCommittee of the board of directors of PLDT.

 

**Mr.George N. Lim** is senior vicepresident for the network services group of PLDT.  He has over 25 years of workexperience in telecommunications management.  Prior to his appointment as headof Network Services in February 2003, he served as head of Network Developmentand Provisioning from February 1999 and as head of Marketing from December1993.  He is a director of some subsidiaries of PLDT and Philippine Home CableHoldings, Inc.

 

**Mr.Claro Carmelo P. Ramirez** is seniorvice president for the retail business group of PLDT before his appointment asinternational and carrier business group head in June 2004.  He has over 20years of work experience in the field of marketing.  He worked as associatedirector for Colgate-Palmolive Company, Global Business Development in New York, andas marketing director for Colgate-Palmolive Argentina, S.A.I.C.  Prior to his appointment as senior vicepresident in July 1999, he was the marketing director of Colgate-PalmolivePhilippines, Inc.  He is a director of some subsidiaries of PLDT.

 

**Mr.Victorico P. Vargas** is senior vicepresident for human resources management of PLDT.  He has over 20 years of workexperience in various industries (insurance, consumer goods, real estate,banking and finance, and telecommunications/IT) in the area of human resourcemanagement.  Prior to joining PLDT in February 2000, he was the country humanresources director of Citibank N.A., Manila, and spent two years outside the Philippines ascountry human resources director of Citibank, N.A., Bangkok.  Heis a director of some subsidiaries of PLDT and is a non-voting member of theGovernance and Nomination Committee of the Board of Directors of PLDT.  

 

**Ms.Rosalie R. Montenegro** is senior vicepresident for the call center business group of PLDT.  Prior to her appointmentas a senior vice president on July 2000, she served as consumer banking head ofABN-AMRO Savings Bank and as vice president for remote banking of ABN-AMROConsumer Bank, Singapore Regional Office from 1997 to 1999.  She was vicepresident for global consumer banking, CitiPhone banking and service qualitydirector of Citibank N.A. from 1985 to 1996 servicing both banking and thecredit cards businesses.  Ms. Montenegro is also the president of Vocativ, Parlance and Ventusand a director of some subsidiaries of PLDT.

 

**Mr.Ariel A. Roda** is senior vicepresident for business development group of PLDT.  He was a co-managingdirector of ePLDT from August 2000 to February 2003 and prior to that, servedas the Information Technology head of PLDT beginning in April 1999.  He hasover 15 years of work experience in the field of information technology.  Heheld various positions in Manila Electric Company and was its informationtechnology head until he joined PLDT in April 1999.  He is a director of somesubsidiaries of PLDT.

 

**Mr.Alfredo S. Panlilio** is the presidentof PLDT Global Corporation.  He served as senior vice president for theinternational and carrier business group prior to his current post andpreviously headed the corporate business group of PLDT.  He has over 15 yearsof experience in the field of business development and information technology.He held management positions at IBM Philippines, Inc. and was the vicepresident for business development of the Lopez Communications Group (ABS-CBNBroadcasting, BayanTel and SKYCable) prior to joining PLDT in July 1999.  Mr.Panlilio is also a director of some subsidiaries of PLDT.

 

**Mr.Ernesto R. Alberto** is senior vicepresident for the corporate business group of PLDT.  He has over 20 years ofexperience in the area of corporate banking, relationship management andbusiness development.  Prior to joining PLDT in May 2003, he was a vicepresident and the group head of the national corporate group of Citibank N.A., Manila from1996 to 2003, and previously served as vice president and group head of therelationship management group of Citytrust Banking Corporation.  Mr. Alberto isa director of some subsidiaries of PLDT.

 

**Mr.Menardo G. Jimenez, Jr.** is head of the retail business group of PLDTeffective June 16, 2004 and has managed various broadcasting and productioncompanies in radio, television and stage-theater prior to his appointment asCorporate Communications and Public Affairs Head of PLDT in December 2001.  Heis a recipient of numerous significant awards for cultural achievement and inthe fields of musical theater, broadcast promotions and publications.  He isthe President of Mediaquest Holdings, Inc.

 

**Mr.Jun R. Florencio** is senior vice president for PLDT’s audit and assurancegroup.  He has over 20 years of experience in the areas of external andinternal audit, credit management, information technology, financial managementand controllership. He held various positions in the finance organization ofEastern Telecommunications and was the financial controller of Smart for fouryears prior to his appointment as vice president and head of the financialreporting and control sector of PLDT in April 1999.

 

**Mr.Celso T. Dimarucut** is first vicepresident for PLDT’s financial reporting and control sector. Prior to joiningPLDT, he was a vice president and the controller of Piltel and had previouslyserved as the group financial controller for domestic subsidiaries ofMetropolitan Bank and Trust Company.  He specialized in audit, tax and businessadvisory services for ten years having worked with an Indonesian firm, PrasetioUtomo & Co. for three years and with SGV & Co. for seven years.  Healso serves as director and treasurer of several of PLDT’s subsidiaries.

 

**Mr.Christopher H. Young**, our chieffinancial advisor, worked in PricewaterhouseCoopers in London and Hong Kong from1979 until 1987, at which time he joined First Pacific in Hong Kong asgroup financial controller.  He joined Metro Pacific Corporation in 1995 asfinance director, a position he held until he joined us in November 1998.

 

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

 

**Mr.Donald J. Rae**, the chief operationsadvisor to Smart, served as the chief operating officer for Time TelecommunicationsSdn. Bhd. in Malaysia prior to joining Smart in January 1999.  He alsospent over ten years with Deloitte & Touche Consulting specializing in theAsian telecommunications sector.

 

**Mr.Anastacio R. Martirez** is a directorand the head of personal communications and mobile services of Smart.  He isthe president of I-Contacts Corporation, a subsidiary of Smart, and a directorof ACeS Philippines.  He has been involved in general and marketing managementfor over 25 years with experience in consumer packaged goods, consumer andindustrial lighting, telecommunications and banking.  He held senior marketingpositions in SKYCable, Philips Electronics and Lighting and Citytrust BankingCorporation.

 

**Mr.Rolando G. Peña**is the head ofSmart’s Network Services.  He was firstvice president for Technical Operations Group at Digitel, where he worked forfive years prior to his appointment as a director for Smart’s Local ExchangeCarrier Services in September 1994.  He held various positions in Eastern TelecommunicationsPhilippines, Inc. From 1982 until 1989.  He has over 22 years of experience incharge of operations and maintenance, regional business and technical andoperations support.  He sits in the boards of Smart, Piltel, Wolfpac, Netopiaand Meridian.  

** **

**Mr.Ramoncito S. Fernandez**is the head ofadministration and materials managementdivision of Smart.  He is also currently amember of the board of directors of Smart, Piltel, I-Contact and Wolfpac.Until June 2000, he was the Executive Vice President in charge of marketing,sales and logistics of Starpack Philippines, Inc. He has over 15 years ofexperience in the packaging business. He also worked for Union Carbide Philippines inthe manufacturing and industrial engineering.  

** **

**Mr.George H. Tan**is the senior vicepresident - group chief finance officer for ePLDT effective August 16, 2004. Heis in charge of the overall financial management of the ePLDT Group ofCompanies currently comprised of ePLDT, Parlance, Vocativ, Ventus, Infocom,mySecureSign, iPlus, DigiPar, netGames and ePDS. He also has oversightresponsibility over ePLDT's equity investments in Stradcom, Bayantrade and TSSI(FAME). He currently manages the accounting, finance, treasury andadministrative support at ePLDT. He is actively involved in investment analysisand decisions, cost control and management, product costing and pricing ofVitro products and services, fund raising activities, financial analysis andbusiness reviews.

** **

Terms of Office

** **

Thedirectors of PLDT are elected each year to serve until the next annual meetingof shareholders and until their successors are elected and qualified.  The termof office of all officers is coterminous with that of the board of directorsthat elected or appointed them.

** **

Family Relationships

** **

Noneof the directors, key officers and advisors of PLDT and Smart named above arerelated to each other.

** **

Compensation of Key Management Personnel of the PLDT Group

** **

The aggregate compensation paid to the directors, chiefexecutive officer, and other key officers and advisors, as a group, for 2004amounted to approximately Php217 million.

** **

Eachof the directors, including the members of the advisory board of PLDT, isentitled to a director's fee in the amount of Php125,000 for each meeting ofthe board attended, except Manuel V. Pangilinan, who has waived his right toreceive a director's fee.  Each of the members or advisors of the audit,executive compensation, governance and nomination and finance committees isentitled to a fee in the amount of Php50,000 for each committee meetingattended.

** **

There are no agreements betweenPLDT Group and any of its directors and key officers and advisors providing forbenefits upon termination of employment, except for such benefits to which theymay be entitled under PLDT's retirement plan.

** **

Long-term Incentive Plan

 

On August 3, 2004, PLDT’s Board of Directors approved the establishmentof the long-term incentive plan, or LTIP, for eligible key executive officersand advisors of PLDT and its subsidiaries, which is administered by theexecutive compensation committee. The LTIP is a four-year cash plan coveringthe period of performance commencing on January 1, 2004and ending on December 31, 2007, or the Performance Cycle.

 

The LTIP is intended to provide meaningful,contingent, financial incentive compensation for eligible executives, officersand advisors of the PLDT Group, who are consistent performers and contributorsto the achievement of the long-term strategic plans and objectives, as well asthe functional strategy and goals of the PLDT Group.

 

Payment of awards under the LTIP is contingent upon the achievement ofthe PLDT common share price target and a cumulative consolidated net incometarget of the PLDT Group by the end of the Performance Cycle, as approved byour board of directors.

 

TheLTIP will be administered by the executive compensation committee which has theauthority to determine (a) eligibility and identity of participants; (b) theaward attributable to each participant based on the participant’s annual basecompensation and taking into account such participant’s seniority,responsibility level, performance potential, tenure with the PLDT Group, jobdifficulty and such other measures as the executive compensation committeedeems appropriate; (c) the level of achievement of the performance objectives;and (d) the actual award payable to each participant based on the level ofachievement of the performance objectives.

** **

Executive StockOption Plan

** **

On April 27, 1999and December 10, 1999, the board of directors and shareholders, respectively,of PLDT approved the executive stock option plan, or ESOP covering a total of1,289,745 shares of common stock and the amendment of the seventh article ofthe Articles of Incorporation of PLDT denying the pre-emptive right of holdersof common share to subscribe for any issue of the 1,289,745 shares of commonstock pursuant to the ESOP.

** **

Stock options may be granted pursuant to the ESOP tomanagement executives and advisors/consultants of PLDT.  The executive compensationcommittee of our board determines the eligibility of a management executive oradvisor/consultant to receive a stock option as well as the number of shares ofcommon stock to be covered by each stock option.  Stock options granted underthe ESOP become fully vested after the completion of five years from therelevant option offer date.  All outstanding stock options became fully vestedin December 2004.  An option holder may exercise his option to purchase thatnumber of vested shares of common stock underlying his option, in whole or inpart, at the price at Php814 per share, subject to adjustment upon theoccurrence of specific events described in the ESOP.  The option exerciseperiod is until December 10, 2009.  The option holder is required to give writtennotice of exercise to the executive compensation committee, indicating thenumber of vested shares to be purchased, accompanied by payment in cash of thefull amount of the purchase price for those shares.  

 

**Share Ownership******

** **

The following table sets forth information regardingownership of our common stock, preferred stock and executive stock options asat May 31, 2005 by our continuing directors, key officers andadvisors.  Each individual below owns less than 1% of our outstanding commonshares and less than 1% of our preferred shares. 

** **

**Name of Owner**

**Shares of**

**Common Stock**

**Shares of**

**Preferred Stock**

**Shares of Common Stock Underlying Executive**

**Stock Options(1)**

 

 

 

 

Manuel V. Pangilinan

90,874

360

97,571

Napoleon L. Nazareno

6,427

495

–

Antonio O. Cojuangco

4

4,060

–

Helen Y. Dee

22,055(2)

180

–

Corazon S. de la Paz

12,126,000(3)

–

–

Albert F. del Rosario

85,025

1,560

–

Ray C. Espinosa

2,701

–

38,342

Sadao Maki

1

–

–

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

388(4)

–

–

Oscar S. Reyes

1

360

–

Pedro E. Roxas

1

540

–

Teresita T. Sy-Coson

101

1,060

–

Shigeru Yoshida

11

–

–

Ma. Lourdes C. Rausa-Chan

77

350

22,302

Anabelle L. Chua

1,540

–

13,738

Rene G. Bañez

–

540

–

George N. Lim

200

360

13,256

Claro Carmelo P. Ramirez

1,500

–

14,496

Victorico P. Vargas 

6,000(5)

180

23,835

Rosalie R. Montenegro 

–

–

16,006

Ariel A. Roda 

1,500

–

13,938

Alfredo S. Panlilio 

600(6)

–

11,151

Ernesto R. Alberto

–

–

–

Menardo G. Jimenez, Jr.

22

–

–

Jun R. Florencio

15

530

10,593

Celso T. Dimarucut

–

460

14,218

Christopher H. Young

80,312(6)

–

–

Peter J. Lawrence

32,000

180

–

Donald J. Rae

–

–

–

Anastacio R. Martirez

4,000(6)

380

–

Rolando G. Peña

–

–

–

Ramoncito S. Fernandez

150

–

–

George H. Tan

–

–

–

 

 

 

 

_____________

 

*(1)    **As at**May 31, 2005**,under PLDT’s ESOP, options to purchase 251,104* shares of*common stock have been granted to the key officers listed in the table above.No options have been granted to non-executive directors.  All outstandingoptions are exercisable at an exercise price of Php814 per share and have anexpiration date of December 10, 2009.  All outstanding options were fullyvested as at December 10, 2004.*

* *

*(2)    **As chairperson and presidentof Hydee Management & Resources, Inc., Ms. Dee may exercise voting rightsin respect and may be considered to have beneficial ownership of 21,957 sharesof common stock owned by Hydee Management Resources, Inc.*

* *

*(3)    **As president and chiefexecutive officer of the Social Security System, Ms. de la Paz may exercisevoting rights in respect of 12,125,999 shares of common stock owned by theSocial Security System and may be considered to have beneficial ownership ofthese shares.*

* *

*(4)    **As president of Ateneo deManila University, Rev. Fr. Nebres may exercise the voting rights in respect ofthe 386 shares of common stock owned by the Ateneo de Manila University and maybe considered to have beneficial ownership of these shares.*

* *

*(5)    **Includes 3,500 PLDT commonshares that were lodged with the Philippine Central Depository, Inc.*

* *

*(6)    **The total PLDT common shareshave been lodged with the Philippine Central Depository, Inc.*

* *

Theaggregate number of common and preferred shares directly and indirectly ownedby directors, key officers and advisors listed above as at May 31, 2005 were12,461,505 and 11,595, respectively, or 7.3022% and 0.0016% of PLDT’soutstanding common and preferred shares, respectively. 

 

Boardof Directors

* *

Ourboard of directors is composed of 13 members, at least four of whom, namelyRev. Fr. Bienvenido F. Nebres, S.J., Mr. Pedro E. Roxas, Ms. Teresita T.Sy-Coson and Mr. Oscar S. Reyes, are independent directors as determined by ourGovernance and Nomination Committee.  The independence standards/criteria areprovided in our By-Laws and Manual on Corporate Governance pursuant to which,in general, a director may not be deemed independent if such director is, or inthe past five years had been, employed in an executive capacity by us or anycompany controlling, controlled by or under common control with us or he is, orwithin the past five years had been, retained as a professional adviser by usor any of our related companies, or he is not free from any business or otherrelationships with us which could, or could reasonably be perceived, tomaterially interfere with his exercise of independent judgment in carrying outhis responsibilities as a director.

 

Audit, Governance and Nomination, ExecutiveCompensation and Finance Committees

 

Our board of directors isauthorized under the by-laws to create committees, as it may deem necessary.We currently have four board committees, namely, the audit, governance andnomination, executive compensation and finance committees, the purpose of whichis to assist our board of directors.  Each of these committees has aboard-approved written charter that provides for such committee’s composition,membership qualifications, functions and responsibilities, conduct of meetings,and reporting procedure to the board of directors.

 

*Audit Committee*

 

Ouraudit committee is composed of three members all of whom are independent directors,namely, Fr. Bienvenido F. Nebres, S.J., who chairs the committee, Mr. Pedro E.Roxas and Mr. Oscar S. Reyes.  Mr. Shigeru Yoshida, who is a non-independentmember of our board of directors, Ms. Corazon S. de la Paz and Mr. Roberto R.Romulo serve as advisors to the audit committee.  All of the members of ouraudit committee are financially literate and Ms. Corazon de la Paz, an advisorto the committee is an accounting and financial management expert.

 

Asprovided for in the audit committee charter, the purposes of the auditcommittee are to assist our board of directors:

 

•        in its oversight of PLDT’saccounting and financial reporting principles and policies and internal auditcontrols and procedures;

 

•        in its oversight of the integrityof PLDT’s financial statements and the independent audit thereof;

 

•        in its oversight of PLDT’scompliance with legal and regulatory requirements; 

 

•        in selecting and recommending theexternal auditors to be appointed by our board of directors, evaluating suchexternal auditors’ qualifications and independence and, where deemedappropriate, replacing the external auditors; and

 

•        in its oversight of theperformance of the internal auditing organization and the external auditors.

 

Withrespect to the external auditors, the audit committee has the following dutiesand powers:

 

•        to review and evaluate thequalifications, performance and independence of the lead partner of theexternal auditors;

 

•        to select and recommend theexternal auditors to be appointed by the board of directors and to recommendthe removal or replacement of the external auditors;

 

•        to review in consultation with thehead of the internal auditing organization and the chief financial advisor thefees charged by the external auditors for audit and non-audit services;

 

•        to approve all audit engagementfees and terms, as well as all significant non-audit engagements with theexternal auditors;

 

•        to ensure that the externalauditors prepare and deliver annually the statement as to independence andauditors’ statement, to discuss with the external auditors any relationships orservices disclosed in such statements that may impact the objectivity,independence or quality of services of our external auditors and to takeappropriate action in response to such statements to satisfy itself of theexternal auditor’s independence;

 

•        to ensure that the lead partner ofthe external auditors is rotated at least once every five (5) years; 

 

•        to instruct the external auditorsthat they are ultimately accountable to the board of directors through theaudit committee; and

 

•        to resolve disagreements betweenmanagement and the external auditors regarding financial reporting. 

 

Theaudit committee also has the authority to retain or obtain advice from specialcounsel or other experts or consultants in the discharge of theirresponsibilities without the need for Board approval.

 

Ourboard of directors intends to amend the audit committee charter at its nextboard meeting to conform the audit committee charter to Article XI of ourBy-Laws, as amended on June 28, 2005.

 

*Governance and Nomination Committee*

 

Our governance and nomination committee is composed offive voting and two non-voting members.  Three of the voting members areindependent directors namely, Fr. Bienvenido F. Nebres, S.J., Ms. Teresita T.Sy-Coson and Mr. Oscar S. Reyes.  Mr. Manuel V. Pangilinan who serves aschairman and Mr. Shigeru Yoshida are the other voting members and Mr. VictoricoP. Vargas and Mr. Rene G. Bañez are the non-voting members. 

 

Theprincipal functions and responsibilities of our Governance and NominationCommittee are:

 

1.       To review and evaluate thequalifications of the persons nominated for election as directors (includingindependent directors) or other positions requiring Board appointment;

 

2.       To identify the qualified nomineesand recommend that the Board select and recommend such qualified nominees forelection as directors/independent directors at the annual meeting ofshareholders; and

 

3.       To provide an assessment on ourBoard’s effectiveness in the process of replacing or appointing new directorsor members of the Board Committees.

 

*Executive CompensationCommittee*

 

Our executive compensationcommittee is composed of five members, all of whom are regular members of ourboard of directors.  Two of these five members are independent directors,namely Mr. Pedro E. Roxas and Mr. Oscar S. Reyes, and three are non-independentdirectors, namely Mr. Albert F. del Rosario, who is chairman of the executivecompensation committee, Mr. Ray C. Espinosa and Mr. Shigeru Yoshida. 

 

The principal functions and responsibilities of ourExecutive Compensation Committee are:

 

1.       To provide guidance to and assistour board of directors in developing a compensation philosophy or policyconsistent with our culture, strategy and control environment;

 

2.      To oversee the development andadministration of our compensation programs; and

 

3.       To review and approve corporategoals and objectives relevant to the compensation of our Chief ExecutiveOfficer, evaluate the performance of our Chief Executive Officer in light ofthose goals and objectives, and set the compensation level of our ChiefExecutive Officer based on such evaluation.

 

*Finance Committee*

 

Our finance committee is composed of five members,three of whom are regular members of our board of directors.  Ms. Corazon S. dela Paz, who chairs the committee, Mr. Antonio O. Cojuangco and Ms. Teresita T.Sy-Coson are regular members of our board of directors.  Mr. Christopher H.Young, our chief financial advisor and Mr. Amado S. Bagatsing comprise the fourth and fifth members.  Mr. ShigeruYoshida, who is a non-independent member of our board of directors, serves asan advisor to the committee.

 

Theprincipal function of our finance committee is to consider and approve ourloans, funding and financing requirements involving amounts of US$3 million orabove but less than US$5 million.

 

Directors’Involvement in Legal Proceedings

 

OurChairman, Mr. Manuel V. Pangilinan, in his capacity as Chairman of the Board ofMetro Pacific Corporation, a stockholder of Metro Tagaytay Land Company, Inc.,or MTLCI, and four (4) other individuals are respondents in I.S. 04-A-1057 foralleged violation of Article 315(1)(b)(“estafa”) of the Revised Penal Codefiled by Mr. Vicente A. Tuason on behalf of Universal Leisure Club, Inc., orULCI, and Mr. Jose L. Merin on behalf of Universal Rightfield PropertyHoldings, Inc., or URPHI.  

 

Inthe complaint-affidavit, Messrs. Tuason and Merin alleged that, in violation ofthe trust reposed by ULCI and certain contractual commitments andrepresentations, MTLCI, with the participation and/or conformity of therespondents, misappropriated and converted Php139 million that ULCI entrustedfor the purpose of incorporating Golf Land Co., Inc., or GLCI, a corporation tobe wholly-owned by MTLCI and to which a property of MTLCI was to be transferredin exchange for shares in GLCI.  Said GLCI shares were then supposed to betransferred to ULCI.

 

Basedon his counsel’s advice, Mr. Pangilinan cannot be held liable for violatingArticle 315(1)(b) of the Revised Penal Code because no document or otherevidence has been presented to prove that Mr. Pangilinan actually participatedin the negotiation, preparation, approval, execution and/or implementation ofthe agreement/contract upon which the claims of the complainants arepurportedly based, much less that Mr. Pangilinan, with abuse of trust andconfidence, misappropriated any amounts paid by ULCI to MTLCI.

 

On March 25, 2004, Mr.Pangilinan submitted his counter-affidavit in I.S. No. 04-A-1057.  In a JointResolution dated June 7, 2004, the City Prosecution Office of Makati dismissed allcharges in the Estafa case against Mr. Pangilinan.

 

On November 16, 2004, ULCI, through Messrs. Tuason and Merin, filed with theDepartment of Justice a Petition for Review dated November 6, 2004 contesting the Resolution of the City Prosecution Office.  The Department of Justice willrule on the petition after the lapse of the reglementary period for thesubmission of Mr. Pangilinan’s comment thereon.

 

Employees and Labor Relations

 

As at December 31, 2004, we had 18,433 employees withinthe PLDT Group.  PLDT had 9,476 employees at the end of 2004, of which 49% wererank and file employees, 47% were management/supervisory staff and 4% wereexecutives.  This number represents a decrease of 754 employees, orapproximately 7%, from the staff level as at the end of 2003, mainly as aresult of the ongoing MRP.  From a peak of 20,312 at the end of 1994, PLDT’snumber of employees has declined by 10,836, or 53%, by the end of 2004.  As at December 31, 2003, we had 17,653 and 10,230 employees under the PLDT Group and PLDT,respectively.  

 

PLDThas three employee unions, the members of which in the aggregate represent 42%of the employees of the PLDT Group.  Weconsider our relationship with our rank-and-file employees’ union, oursupervisors' union and our sales supervisors' union to be good.

 

OnMarch 8, 2005, PLDT and PLDT Sales Supervisors’ Union, or PSSU, concluded andsigned a new three-year collective bargaining agreement, or CBA, covering theperiod from January 1, 2005 to December 31, 2007.  This CBA provides eachmember monthly salary increases of 8% of basic pay or Php2,000, whichever ishigher, for 2005; 10% of basic pay or Php2,700, whichever is higher, for 2006;and another 10% of basic pay or Php2,400, whichever is higher, for 2007.  Otherhighlights of this CBA were improvements of existing benefits and a one-timesigning bonus of Php33,000, including a Php3,000 goodwill bonus, for eachmember of PSSU.  Furthermore, a Php4,000 one-time clothing allowance was alsoprovided under the CBA.  

 

OnJanuary 20, 2005, PLDT and *Gabay ng Unyon sa Telekomunikasyon ng mgaSuperbisor*, or GUTS, our supervisors’ union, concluded and signed a newthree-year CBA covering the period from January 1, 2005 to December 31, 2007.This CBA provides each member monthly salary increases of 8% of basic pay orPhp2,000, whichever is higher, for 2005; 10% of basic pay or Php2,700,whichever is higher, for 2006; and another 10% of basic pay or Php2,400,whichever is higher, for 2007.  Other highlights of this CBA are improvementsof existing benefits and a one-time signing bonus of Php33,000, including aPhp3,000 goodwill bonus, for each member of GUTS.

 

OnFebruary 13, 2004, PLDT and the *Manggagawa ng Komunikasyon sa Pilipinas*,or MKP, our rank-and-file employees’ union, concluded and signed a newthree-year CBA covering the period from November 9, 2003 to November 8, 2006.This CBA provides each member a signing bonus equivalent to one month salaryplus Php10,000; monthly salary increases of Php1,800, Php1,850 and Php2,450 forthe first year, second year and third year, respectively; an increase inmonthly relay station allowance from Php500 to Php600; an increase in per diemfrom Php500 to Php570; a food station allowance of Php650 per covered employee;an increase in yearly Christmas gift certificate from Php6,000 to Php7,000; anincrease in the amount of coverage under the group life insurance plan fromPhp400,000 to Php500,000; and an additional contribution of Php1 million to theEducational Loan Fund.  Other highlights of this CBA include emergency loaneligibility, an emergency case hospitalization clause and additional benefitsunder the medical hospitalization plan for single members’ dependents.

 

Pension andRetirement Benefits

 

*Defined Benefit Plans*

* *

Wehave defined benefit pension plans, covering substantially all of our permanentand regular employees, except Smart, which require contributions to be made toa separate administrative fund.

 

PLDT has a trustee-managed,non-contributory defined benefit, or Benefit Plan, providing for retirement anddeath benefits and service terminal pay to substantially all permanent andregular employees.  The Benefit Plan provides benefits upon normal retirementbeginning at age 65, early retirement beginning at age 50 or completion of atleast 30 years of credited service, voluntary separation beginning at age 40 orcompletion of at least 15 years of credited service, total and physicaldisability, death and involuntary separation.  Benefits under the Benefit Planare based on the employee's final monthly basic salary and length of service.

 

Thenormal retirement benefit is equal to a percentage of the final monthly basicsalary per year of credited service.  The percentage is 100% for those withless than 15 years of service at retirement and 125% for those with 15 years ofservice at retirement.  Thereafter, the percentage increases by 5% for everyadditional year of credited service up to a maximum of 200%.  The earlyretirement benefit is equal to the accrued normal retirement benefit withsalary and service at the date of early retirement.

 

Inthe event the benefit plan's assets were insufficient to pay the requiredretirement benefits, PLDT would be obligated to fund the amount of theshortfall.  In addition, claims of PLDT's employees for retirement benefitsthat have accrued would rank above the claims of all other creditors of PLDT,in the event of PLDT's bankruptcy or liquidation.

 

Wespent Php551 million for pension, retirement and similar benefits for ouremployees for the year 2004.

 

Formore information about the benefit plan, see *Note 17 – Employee Benefits*tothe accompanying consolidated financial statements in Item 18.

 

Item 7.        Major Shareholders and Related PartyTransactions

 

Thefollowing table sets forth information regarding ownership of PLDT common shareas at May 31, 2005 of all shareholders known to us to beneficially own morethan 5% of PLDT's common share.  All shares of PLDT's common stock have onevote per share.  

 

Name of Beneficial Owner

Name and Address of Record Owner and Relationship with Issuer

Citizenship

Title of Class

**Number of Shares Held**

**% of Class**

 

 

 

 

 

 

First Pacific(2)

Philippine Telecommunications Investment Corp.(1) 12/F Ramon Cojuangco

Philippine 

Common

26,034,263

15.26

24/F Two Exchange Square 8 Connaught Place, Central,  Hong Kong

 

Building, Makati Avenue, Makati City

Corporation

 

 

 

 

 

 

 

 

 

 

Metro Pacific Resources, Inc.

Philippine 

Common

17,112,534

10.03

 

c/o Picazo Law Office

Corporation

 

 

 

 

17th, 18th and 19th Floors

 

 

 

 

 

Liberty Center

 

 

 

 

 

104 H.V. Dela Costa St.

 

 

 

 

 

Salcedo Village, Makati City

 

 

 

 

 

 

 

 

 

 

 

Larouge B.V.(2)

Netherlands

Common

10,091,579

5.91

 

c/o Picazo Law Office

Corporation

 

 

 

 

17th, 18th and 19th Floors

 

 

 

 

 

Liberty Center

 

 

 

 

 

104 H.V. Dela Costa St.

 

 

 

 

 

Salcedo Village, Makati City

 

 

 

 

 

 

 

 

 

 

PCD Nominee Corporation(3)

See Footnote 3 below

Philippine

Common

68,787,787

40.31

G/F MSE Building

6767 Ayala Avenue,  Makati City

 

Corporation

 

 

 

 

 

 

 

 

 

NTT Communications(4)

Same as Record Owner

Japanese 

Common

25,266,971

14.81

1-6 Uchisaiwai-Cho

I-Chome, Chiyoda-ku

Tokyo 100-8019, Japan

 

Corporation

 

 

 

 

 

 

 

 

 

J. P. Morgan (Hong Kong) Nominees Limited(5)

See Footnote 5 below

HongKong Corporation

Common

22,048,327

12.92

20/F Chater House 

 

 

 

 

 

8 Connaught Road, Central, Hong Kong

 

 

 

 

 

 

 

 

 

 

 

Social Security System(6)

Same as Record Owner

Philippine

Common

12,125,999

7.11

SSS Building

East Avenue, Diliman, Quezon City

 

Corporation

 

 

 

(1)      Pursuant to a resolutionadopted by the Board of Directors of Philippine Telecommunications InvestmentCorporation, or PTIC, a copy of which had been furnished to PLDT, the Presidentof PTIC, Mr. Manuel V. Pangilinan, has the continuing authority to representPTIC at any and all meetings of the stockholders of a corporation in which PTICowns of record or beneficially any shares of stock or other voting security,and to sign and deliver, in favor of any person he may deem fit, a proxy orother power of attorney, with full power of delegation and substitution,authorizing his designated proxy or attorney-in-fact to vote any and all sharesof stock and other voting securities owned of record or beneficially by PTIC atany and all meetings of the stockholders of the corporation issuing such sharesof stock or voting securities.

 

 

(2)      First Pacific Company Ltd., orFirst Pacific, which beneficially owned 31.2% of our common shares as at May 31, 2005, has a24.2% economic interest in PLDT based on its direct and indirect PLDT commonshareholdings through the intermediate holding companies PTIC, MPRI and LarougeB.V.  InJanuary 2005, First Pacific Finance Limited (“FPFL”), a wholly-owned subsidiaryof First Pacific, issued US$199 million Zero Coupon Guaranteed ExchangeableNotes due 2010, guaranteed by First Pacific and exchangeable into common sharesof PLDT held by First Pacific (the “Exchangeable Notes”). Assuming fullexchange of the Exchangeable Notes at the initial value of the Exchange Property,the Exchangeable Notes will be exchangeable into 6,784,091 common shares ofPLDT (subject to adjustment), representing approximately 4.0% of ouroutstanding common shares, and reducing First Pacific’s beneficial ownership inPLDT from approximately 31.2% to 27.2%, and its economic interest in PLDT(defined as its effective interest in the shares of PLDT) from approximately24.2% to 20.2%. Assuming full exchange of the Exchangeable Notes, Larouge’sdirect beneficial ownership would be reduced from 10,091,579 common shares ofPLDT (representing approximately 5.9% of the outstanding common shares of PLDT)to 3,307,488 common shares of PLDT (representing approximately 1.9% of theoutstanding common shares of PLDT.

 

(3)      Registered owner of shares heldby participants in the Philippine Central Depositary, Inc., or PCD, a privatecompany organized to implement an automated book entry system of handlingsecurities transactions in the Philippines.  Under the PCD procedures, when an issuer of aPCD-eligible issue will hold a stockholders’ meeting, the PCD shall execute apro-forma proxy in favor of its participants for the total number of shares intheir respective principal securities account as well as for the total numberof shares in their client securities account.  For the shares held in theprincipal securities account, the participant concerned is appointed as proxywith full voting rights and powers as registered owner of such shares.  For theshares held in the client securities account, the participant concerned isappointed as proxy, with the obligation to constitute a sub-proxy in favor ofits clients with full voting and other rights for the number of sharesbeneficially owned by such clients.  Based on the information provided by PCDto PLDT, none of the owners of the PLDT common shares registered under the nameof PCD Nominee Corporation owns more than 5% of PLDT’s outstanding common stockas at May 31, 2005, except The Hongkong and Shanghai Banking Corporation, orHSBC, and Standard Chartered Bank which own approximately 18.8% and 6.8%,respectively, of PLDT’s outstanding common stock as at May 31, 2005.  TheCompany has no knowledge if any beneficial owner of the shares under the HSBCand Standard Chartered Bank accounts own more than 5% of PLDT’s outstandingcommon stock as at May 31, 2005.

 

PCDaccount also includes 7,101,210 shares beneficially owned by the SocialSecurity System and 10,091,579 shares beneficially owned by Larouge B.V.Please refer to footnote 6.  It also includes 2,298,741 shares owned byFidelity International Limited, or FIL, a corporation incorporated in the U.S.A. and1,197,809 shares owned by FMR Corporation, or FMR, a corporation incorporatedin Bermuda.  In addition, FIL holds ADRs evidencing ADSs representing 242,700 PLDTcommon shares and FMR holds ADRs evidencing ADSs representing 4,991,050 PLDTcommon shares.  The combined common shareholdings and ADS holdings of FIL andFMR totals 8,730,300 equivalent to 5.12% of PLDT’s outstanding common stock asat May 31, 2005 (Please refer to footnote 5).  FIL and FMR haveindicated in their Philippine SEC Form 18-A filing that their acquisition ofPLDT shares is for the purpose of portfolio of FIL and FMR and they do notintend to acquire shares to take control of PLDT.

 

(4)      Based on information providedto PLDT, NTT Communications Corporation, or NTT Communications, is awholly-owned subsidiary of Nippon Telegraph and Telephone Corporation.  

 

(5)      Holds shares as nominee ofJPMorgan Chase Bank, successor depositary under the Common Stock DepositAgreement, dated October 14, 1994, as amended on February 10, 2003, betweenJPMorgan Chase Bank and the holders of American Depositary Receipts (ADRs)evidencing American Depositary Shares (ADSs) representing shares of commonstock of the Company (the “Deposit Agreement”).  Under the Deposit Agreement,if the depositary does not receive voting instructions from a holder of ADRs,such holder will be deemed to have instructed the depositary to provide adiscretionary proxy to a person designated by PLDT for the purpose ofexercising the voting rights pertaining to the shares of common stockrepresented by such holder of ADRs, except that no discretionary proxy will begiven with respect to any matter as to which substantial opposition exists orwhich materially and adversely affects the rights of the holders of such ADRs.This account includes 242,700 shares underlying the ADS owned by FIL and4,991,050 shares underlying the ADS owned by FMR.  Please refer to footnote 3. 

 

(6)      Consists of 5,024,789 shares registeredin the name of the Social Security System and 7,101,210 shares held of recordby PCD Nominee Corporation.  Ms. Corazon S. de la Paz, as President and ChiefExecutive Officer of the Social Security System,may exercise the voting rights in respect of these shares.

 

As at May 31, 2005, approximately 87%of the outstanding capital stock of PLDT was registered in the names ofPhilippine persons.

 

Related Party Transactions

 

Companies within the PLDT Group are engaged inarm's-length transactions in the ordinary course of business.  We believe thatthe terms of these transactions are comparable with those available fromunrelated parties.  The following is a discussion of the major agreements withor between members of the PLDT Group and related parties.

 

*Agreements with NTT Communications and/or itsAffiliates*

 

PLDT is a party to the following agreements with NTTCommunications and/or its affiliates:

 

•        *AdvisoryServices Agreement.*On March 24, 2000, PLDT entered into an agreement with NTT Communications,as amended on December 31, 2003, under which NTT Communications provides PLDTwith technical, marketing and other consultants for various business areas ofPLDT starting April 1, 2000;

 

•        *DomesticFiber Optic Network Submerged Plant Maintenance Agreement.*  On July 4, 2000, PLDT entered into an agreement with NTT WorldEngineering Marine Corporation, or NTT WEMC, for the submarine cable repair andother allied services for the maintenance of PLDT’s DFON submerged plant for aperiod of five years up to July 4, 2005.This agreement has been extended up tothe end of 2005.  Under the agreement, PLDTshall pay NTT WEMC a fixed annual standing charge of US$2 million, excludingcost for the use of a remotely operated submersible vehicle at US$5,000 forevery day of use and repair cost computed at US$19,000 per day of actualrepair;

 

•        *ArcstarLicensing Agreement and Arcstar Service Provider Agreement.*On March 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 aTrade Name and Trademark Agreement with NTT Communications under which PLDT hasbeen given the right to use the tradename “Arcstar” and its related trademark,logo and symbols, solely for the purpose of PLDT’s marketing, promotional andsales activities for the Arcstar services within the Philippines; and

 

•        *ConventionalInternational Telecommunications Services Agreement.*  On March 24, 2000, PLDT entered into an agreement with NTT Communicationsunder which PLDT and NTT Communications agreed to cooperative arrangements forconventional international telecommunications services to enhance theirrespective international businesses.  

 

Total fees under these agreementsamounted to Php336 million, Php288 million and Php289 million for the yearsended December 31, 2004, 2003 and 2002, respectively.  As at December 31, 2004 and2003, outstanding obligations of PLDT amounted to Php49 million and Php40million, respectively.

* *

*Air Time Purchase Agreement between PLDT and PT Asia Cellular Satelliteand Related Agreements*

 

In March 1997, PLDT entered into a Founder NSP AirTime Purchase Agreement, or ATPA with PT Asia Cellular Satellite, as amended inDecember 1998 and as assigned and transferred to AIL, under which PLDT wasgranted the exclusive right to sell ACeS services in the Philippines.In exchange, the Air Time Purchase Agreement required PLDT to purchase from PTAsia Cellular Satellite at least US$5 million worth of air time annually overten years, commencing on January 1, 2002, the date of commercial operations.

 

Inthe event PT Asia Cellular Satellite’s aggregate billing revenue is less thanUS$45 million in any given year, the Air Time Purchase Agreement states thatPLDT has to make supplemental air time purchase payments not to exceed US$15million per year during the ten-year term.

 

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 competitivehandsets and competitions from cellular services, occurrence of a partialsatellite loss, changes in the primary business of AIL and other factorsaffecting its business.  Accordingly, we started negotiations with AIL for therevision of the payment obligations under the Air Time Purchase in 2000.  As aresult of these negotiations, the effective date of the Air Time PurchaseAgreement became January 1, 2002.  In 2002, billings for satellite air time werereduced to actual air time usage, less amount for marketing assistance toservice providers.

* *

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.

** **

In March 2003, PLDT, together with the other founderNSPs, entered into a Standstill Agreement with AIL suspending the applicationand enforcement of the minimum and supplemental air time payments under theoriginal Air Time Purchase Agreement.  In lieu of these payments, the partiesagreed that AIL shall provide PLDT and the other founder shareholders, withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of US$3.8 million for PLDT.  Moreover, PLDT was also obliged to purchasefrom AIL 13,750 satellite phone units for the year 2003 at US$395 F.O.B. perunit, subject to quarterly price adjustment.  The parties to the StandstillAgreement also agreed to negotiate in good faith and use their best efforts toreach an agreement on a revised Air Time Purchase Agreement before November 15,2003 that will cover, among other things, the amended minimum and supplementalair time payment provisions subject to the approval of AIL’s creditors.

* *

On February 10, 2004,notwithstanding the ongoing negotiations, AIL advised PLDT of the terminationof the Standstill Agreement and the reinstatement of the terms under theoriginal Air Time Purchase Agreement effective January 1, 2002, following thelapse of the November 15, 2003 deadlineset in the Standstill Agreement for the negotiation of a revised Air TimePurchase Agreement.  Negotiations are continuing with the relevant partiestowards an amicable settlement of this matter.  

 

As at December 31, 2004 and 2003,PLDT’s outstanding obligation under the original Air Time Purchase Agreementwas Php2,954 million and Php1,992 million, respectively.  Total fees under thisagreement amounted to Php1,299 million, Php1,919 million and Php50 million forthe years ended December 31, 2004, 2003 and 2002, respectively.  See *Note 16 –Related Party Transactions,**Note 21 – Contractual Obligations and CommercialCommitments* and *Note 22 – Provisions and Contingencies* to theaccompanying consolidated financial statements in Item 18 for further detailsrelating to the Air Time Purchase Agreement with AIL.  

* *

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

* *

•        authorizedistributors to resell ACeS services in the Philippines upon prior approval from PT Asia Cellular Satellite;and

 

•        appointagents to solicit and bill PLDT’s or its authorized distributors’ subscribersfor ACeS services and to sell terminals on behalf of PLDT.

* *

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

* *

Underan Acknowledgment of Assignment of the Air Time Purchase Agreement entered intoon December 29, 1998, by and among PLDT, P.T. Bank Internasional Indonesiaand AIL, 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.

* *

On September 30, 2002, PT AsiaCellular Satellite, AIL, as guarantor, P.T. Bank International Indonesia, assecurity agent, and various other banks signed a Rescheduling Agreement, whichamended the terms of the Amended and Restated Credit Agreement dated December29, 1998, moving the principal repayment dates to agreed periods with the finalmaturity date on January 31, 2012.

* *

*Agreement between Smart and**Asia**Link B.V*.*, or ALBV*

Smarthas an existing Technical Assistance Agreement with ALBV for the latter toprovide technical support services and assistance in the operations andmaintenance of cellular business for a period of five years, subject to renewalupon mutual agreement between the parties.  The agreement provides forquarterly payments of technical service fees equivalent to 2% of the netrevenues of Smart.  In January 2004, the agreement was amended, reducing thetechnical service fees to be paid by Smart to ALBV to 1% of net revenueseffective January 1, 2004.

 

Smart also has an existingServices Agreement with ALBV 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.  Services Agreementfees were paid for the whole 25-year period.

 

ALBVis a subsidiary of the First Pacific Group.

 

Total fees under these agreements amountedto Php507 million for the year ended December 31, 2004and Php429 million for each of the years ended December 31, 2003 and 2002.Outstanding obligations of Smart under the Technical Service Agreement amountedto Php267 million and Php228 million as at December 31, 2004and 2003, respectively.

 

*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 paid directly to Malayan.  Total insurance expenses paidunder this agreement amounted to Php534 million, Php581 million and Php367million for the years ended December 31, 2004, 2003 and 2002, respectively.  Twodirectors of PLDT have a direct/indirect interest in or serve asdirector/officer of Gotuaco and Malayan.

There have been no loans between PLDT and any relatedparty during the period beginning January 1, 2004 through the date of filing ofthis annual report.

 

Except for the transactions described above, there were no othermaterial transactions during the last two years, nor are there any materialtransactions currently proposed, to which PLDT was or is to be a party, inwhich a director or key officer or owner of more than 10% of the common sharesof PLDT, or any member of the immediate family of a director or key officer orowner of more than 10% of the common shares of PLDT had or is to have a director indirect material interest.  In the ordinary course of business, PLDT hastransactions with other companies in which some of such persons may have aninterest.

 

Nodirector or officer of PLDT or associate of any such director or officer wasindebted to PLDT at any time during the period from January 1, 2004 through the dateof filing of this annual report.

 

Item 8.        FinancialInformation

** **

Consolidated Statements and Other FinancialInformation

 

Consolidated financial statements are set forth under“Item 18. Financial Statements.”

 

Legal Proceedings

 

Exceptas disclosed in the following paragraphs, PLDT is not a party to, and none ofits property is subject to, any pending legal proceedings which PLDT considersto be potentially material to its business.

 

*Victor C. Fernandez*

* *

On December 9, 1999, a holder of preferred shares ofPLDT, Victor C. Fernandez, filed a petition against the incumbent directors ofPLDT questioning the validity of the resolutions of the board of directors ofPLDT then authorizing the acquisition of Smart.  Fernandez claimed that hewould suffer injury from dilution of his shares and the possible revocation ofPLDT's franchise in view of the violation of the Philippine Constitution'sforeign equity restrictions if these resolutions were implemented.  Fernandezalso claimed that the approval rights to be granted to NTT Communications inconnection with the Smart acquisition would constitute foreign intervention inthe management and operation of a public utility and that the Smart sharesbeing acquired by PLDT were overvalued.  The respondent directors denied allthese claims and have articulated their legal arguments in their answer to thecomplaint.

 

Fernandez'sapplication for a restraining order to enjoin the holding of the PLDTshareholders' meeting on December 10, 1999 was denied by the Philippine SEC.At this meeting, the shareholders approved the resolutions passed by the boardof directors authorizing the acquisition of Smart.  On June 20, 2000,Fernandez's application for a writ of preliminary injunction was denied.

 

Inview of the provisions of R.A. No. 8799 enacted in July 2000, referred to asthe Securities Regulations Code, transferring the jurisdiction ofintra-corporate controversies to the Regional Trial Court, the Philippine SECtransferred the case to the Regional Trial Court of Manila.  By a motion filedby the parties, the case was later ordered transferred to the proper venue, the Regional Trial Court of Makati City and was raffled to Branch 142 of the Regional Trial Court of Makati City (the “Makati Court”).

 

Duringthe pre-trial hearing, the parties agreed to limit the resolution of the caseto merely issues of law except for the issue on respondent directors’counterclaims.

 

Thetransactions subject of the suit (“Questioned Transactions”) were limited toPLDT’s acquisition of Smart and NTT’s entry into PLDT and the issues to beresolved were limited to whether (a) the remaining Questioned Transactionsviolate the constitutional limitations on foreign equity in public utilities,The Foreign Investments Act and the Anti-Dummy Law; (b) the QuestionedTransactions result in a monopoly; and (c) Fernandez is entitled to annul theQuestioned Transactions.

 

TheMakati Court in its decision dated February 21, 2002 (the “Decision”) held thatthe Questioned Transactions “resulting from resolutions which have beenapproved by PLDT’s shareholders and government regulatory agencies, such as theNTC and the SEC, are valid and legal” and thus dismissed the petition ofFernandez.  On April 14, 2003, Fernandez filed with the Supreme Court a petitionfor review on certiorari seeking a review of the Decision (the “Petition”).

 

Priorto the scheduled hearing on the counterclaims of the respondent directors,Fernandez filed on April 29, 2003, a motion for the suspension of theproceedings pending resolution by the Supreme Court of the Petition (the“Motion for Suspension”).  The Motion for Suspension was denied by the Makati Court and the hearing for the reception of evidence on the respondentdirectors’ counterclaims was set.

 

On May 22, 2003, Fernandez filed a motion to refer the Petition to the SupremeCourt *En Banc*(the*“*Motion for Referral to SC*En Banc*”)*.*

* *

Subsequently,the Supreme Court in a resolution dated June 9, 2003 denied the Petition and ina resolution dated July 9, 2003, also denied the Motion for Referral to SC *EnBanc*.  On July 22, 2003, Fernandez filed a motion for reconsideration ofthe resolution denying the Petition (the “Motion for Reconsideration”), and ina manifestation and motion dated August 15, 2003, moved for a reconsiderationof the Resolution denying the Motion for Referral to the SC *En Banc*.The respondent directors filed their comment on the Motion for Reconsiderationon December 15, 2003.

 

On August 8, 2003, the Makati Courtscheduled the presentation of evidence pertaining to each of the counterclaimsof the respondent directors for moral and exemplary damages.  The respondentdirectors no longer testified on their counterclaims during the September 2, 2003hearing.  On December 4, 2003, Fernandez filed a demurrer to evidence (“demurrer”)and moved for the dismissal of the respondents’ counterclaims, which therespondent directors opposed.  In an Order dated February 27, 2004, (the“Order”), the Makati Court granted the Demurrer and dismissed respondentdirectors counterclaims for moral and exemplary damages and attorney’s feesciting the lack of clear and convincing evidence to show malice or bad faith onthe part of Fernandez in respect of the filing of the case.  The respondentdirectors filed their motion for reconsideration of the Order.  In a resolution dated June 2, 2004, the Makati Courtdenied respondent directors motion for reconsideration. On August 10, 2004,respondent directors filed a petition for certiorari (docketed as CA-GR SP No.85630) with the Court of Appeals. The petition seeks to annul and set aside theMakati Court’s February 27, 2004 and June 2, 2004 Orders and whichpetition remains pending with the Court of Appeals.  

 

In a resolution dated February 2, 2004, theSupreme Court required Fernandez to file his reply to respondent directorscomments on Fernandez’s Motion for Reconsideration. On February 4, 2004,Fernandez filed his reply. In a resolution dated November 22, 2004, the SupremeCourt denied with finality Fernandez’s Motion for Reconsideration*.*  On January 4, 2005,Fernandez filed with the Supreme Court a second motion for reconsideration withmotion for leave to file and admit second motion for reconsideration of theSupreme Court’s resolution dated June 9, 2003 denying Fernandez’s petition. In aresolution dated January 31, 2005, the Supreme Court denied Fernandez’s second motionfor reconsideration for lack of merit, and noting without action Fernandez’smotion for leave to file and admit the motion.  

 

Taxation

 

We have made a reasonable estimate of the amountnecessary to pay or settle any contested assessment in the event of anunfavorable judgment against us and have made the appropriate provisions in ourconsolidated financial statements as at December 31, 2004aggregating Php5,199 million in respectof the following:

* *

*NTC supervision and regulation fees, or SRF*

* *

Since 1976, PLDT has receivedassessments from NTC for permit, supervision and regulation fees, or SRF, andother charges pursuant to Section 40 of Commonwealth Act 146, otherwise knownas the Public Service Act.  As at December 31, 2004,PLDT has paid a total amount of Php1,718 million in SRF, of which Php1,508million 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, now 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.  Moreover, on February 11, 2005, Piltel paid under protest the amount of Php559 million in respect of NTC fees for the periodfrom 1992 to 2004.

 

*Local business and franchise tax assesments*

* *

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, the power to tax businesseswithin their 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 R.A. No. 7925, whichtook effect on March 16, 1995, and the grant of similar local franchise andbusiness taxes exemption privileges to other franchise holders subsequent tothe effectivity of R.A. No. 7160, implicitly restored its local franchise andbusiness taxes exemption privilege under Section 12 of R.A. No. 7082, or thePLDT Franchise, pursuant to Section 23 thereof, or the equality of treatmentclause.

 

Toconfirm this position, PLDT sought and obtained on June 2, 1998 a ruling from the Bureau of Local Government Finance, or BLGF, of the Philippine Department ofFinance, which ruled that PLDT is exempt from the payment of local franchiseand business taxes imposable by LGUs under R.A. No. 7160.

 

Byvirtue of the BLGF Ruling, PLDT stopped paying local franchise and businesstaxes starting with the fourth quarter of 1998 and has filed with certain LGUsclaims for tax refund covering the period from the second quarter of 1995 tothe third quarter of 1998.  PLDT has received assessments for local franchiseand business taxes from several cities and provinces following PLDT’s decisionto stop payment of local franchise and business taxes.  

 

Following a decision of the Supreme Court on March 25, 2003, a judgment in the amount of Php4 million against PLDT involving the Cityof Davao became final and executory on April 9, 2003, pursuant to which PLDTwas declared not exempt from the local franchise tax.  Although PLDT believesthat it is not liable to pay local franchise and business taxes, PLDT hasentered into compromise settlements with several LGUs in order to maintain andpreserve its good standing and relationship with these LGUs.  Under these compromisesettlements, which have been approved by the relevant courts, PLDT has paid atotal amount of Php329 million as at December 31, 2004 in full payment forlocal franchise tax covering up to the end of 2004.  

 

PLDT continues to contest the remaining assessmentsamounting to approximately Php3.7 million as at December 31, 2004, a number of which were based on the gross revenues of PLDT derived from its operationswithin the entire Philippines.  PLDT claims that assuming that it is liable forlocal franchise tax, R.A. No. 7160 provides that local franchise tax shall bebased on the gross receipts of the preceding year received or collected forservices rendered within the jurisdiction of the taxing authority.  Therefore,the use by some LGUs of gross revenues as the basis for computation offranchise tax is in gross violation of the law because it pertains to allincome 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 local franchise tax.

 

Ina petition recently filed with the Supreme Court involving another LGU, PLDThas appealed to the Supreme Court for a re-examination of its decision in theCity of Davao case in light of the strong dissenting opinion in that caseconcurred in by four other Justices of the Supreme Court.  PLDT currentlyexpects that going forward it will pay local franchise and business taxes on anannual basis and based on the gross receipts received or collected for servicesrendered within the jurisdiction of the respective taxing authority.  

 

Smart has, likewise, received assessments for localfranchise and business taxes from certain cities and provinces in the aggregateamount of Php313 million, which Smart continues to contest.  Smart believes,based on the opinion of its legal counsel, that Smart is not liable to pay thelocal franchise and business taxes by virtue of (i) the opinion issued by the BLGF dated August 13, 1998; and (ii) Smart’sexemption under its legislative franchise which took effect after the effectivedate of R.A. No. 7160.

 

Smart has recently been declared exempt from paymentof local franchise tax to the City of Makati in a decision dated August 3, 2004 by the Regional Trial Court of Makati.  The City of Makati has filed theirmotion for reconsideration and Smart has filed its opposition to that motionfor reconsideration. 

 

Piltel also received assessments from the localgovernment of the City of Makati in the aggregate amount of Php45 million covering theperiod from 1999 to 2001.  Piltel has formally protested the assessments, basedon: (1) Piltel’s belief that the opinion rendered by the BLGF for Smart shouldlikewise hold true for Piltel; and (2) the effective date of the legislativefranchise of Piltel (R.A. No. 7293) which came after the effectivity of R.A.No. 7160.  The franchise tax prescribed under Section 137 of the LocalGovernment Code is deemed part of the Piltel franchise (the later law) whichstates, among other things, that Piltel shall pay only a franchise taxequivalent to 3% of all gross annual receipts of the business transacted underits franchise and such percentage shall be in lieu of all taxes on thefranchise or earnings thereof.

 

Piltel’s protest of the assessments was denied by theCity of Makati on December 18, 2001.  Piltel then filed a petition with theMakati Regional Trial Court, or RTC, appealing the local franchise businesstaxes.  On December 10, 2002, the Makati RTC rendered its judgment grantingPiltel’s petition and enjoining the City of Makati from assessing andcollecting any further annual local franchise business taxes from Piltel.  TheCity of Makati filed its motion for reconsideration of this judgment with theMakati RTC, which was subsequently denied.  On April 1, 2003, the City of Makati filed a Petition for Review with the Court of Appeals.  On July 12, 2004, the Court of Appeals rendered a decision upholding the Makati RTC thatPiltel is exempt from payment of the local franchise tax.

 

TheCity of 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.

 

*Piltel’s Bureau of Internal Revenue Assessment*

 

In 2003, the**BIR issued final assessmentnotices, or FANs, against Piltel for deficiency taxes and penalties for taxableyears 1998 and 1999, in the amounts of Php233.6 million and Php284.2 million,respectively.  Piltel filed protest letters dated June 5, 2003 and September 24, 2003 with the BIR for the 1998 and the 1999 deficiency tax assessments,respectively.

 

Withrespect 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 of 1997 on compromise settlement of internalrevenue tax liabilities, superseding RR Nos. 6-2000 and 7-2001.  Under said RR30-2002, Piltel is allowed to apply for compromise settlement on the basis offinancial incapacity.  If approved, Piltel would be permitted to settle its1998 deficiency tax liabilities by paying an amount corresponding to thecompromise rates ranging from 10% to 40% of its assessed deficiency taxes for1998.  Meanwhile, with respect to the 1999 deficiency tax assessment, the BIRfavorably considered the administrative protest filed by Piltel.  Accordingly,the BIR issued a revised FAN dated February 17, 2004, which was received byPiltel on March 22, 2004.  Hence, as early as December 31, 2003, Piltel paidand settled the 1999 expanded withholding tax assessment and the revised 1999fringe benefit tax, or FBT, assessment amounting to Php26.1 million and Php5.6million, respectively.  On May 28, 2004, Piltel also filed with the BIR anapplication for compromise settlement for the 1999 deficiency tax assessments,particularly the VAT and income tax assessments, similarly based on RR No.30-2002 on the grounds of financial incapacity.

 

Moreover, on August 5, 2004, Piltel received aPreliminary Assessment Notice, 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 similarto a tax assessment notice, indicated a discrepancy between the importationdate per Bureau of Customs, or BOC, data and the importation per 2001 VATreturns amounting to Php175.5 million, which resulted in VAT and income taxdeficiency assessments amounting to Php82.4 million and Php26.5 million,respectively.  On August 20, 2004, Piltel filed an administrative protest inconnection with the assessments.  A supplemental protest letter was also filedlast October 5, 2004 to further support its position against the said taxassessments after the informal conference held with the examiners lastSeptember 21, 2004.  To date, Piltel has not received any response from theBIR.  Piltel intends to apply for compromise settlement, based on the samegrounds of financial incapacity, in respect of any resulting deficiency taxarising from this LN once the BIR has finalized the assessment.

 

*U.S.**FederalCommunications Commission, or FCC, Ruling versus Philippine TelecommunicationsCompanies*

Effective as at February 1, 2003, PLDT stopped terminating traffic sent directly by each of AT&T and MCI, because PLDT’stermination rate agreements with AT&T and MCI lapsed in December 2002without either agreeing with PLDT on any provisional arrangement or finalagreement on new termination rates. In separate orders dated February 7 and 26,2003, the National Telecommunications Commission, or NTC, confirmed that“absent any provisional or interim agreement” with U.S. carriers, there would beno provision of termination services between the parties “who are therebyencouraged to seek other routes or options to terminate traffic to thePhilippines.” Upon petitions of AT&T and MCI, on March 10, 2003, theInternational Bureau of the U.S. FCC issued an Order which directed allfacilities-based carriers subject to U.S. FCC jurisdiction to suspend paymentsfor termination services to Philippine carriers, including PLDT, Smart andSubic Telecom, until such time as the U.S. FCC issues a Public Notice thatAT&T’s and MCI’s circuits on the U.S.–Philippine route are fully restored.The Order also removed the Philippines from the list of U.S.–internationalroutes approved for the provision of International Simple Resale, or ISR. Inresponse to the International Bureau’s Order, the NTC issued a Memorandum Orderdated March 12, 2003, directing all affected Philippine carriers “(1) not toaccept terminating traffic via direct circuits from U.S. facilities-basedcarriers who do not pay Philippine carriers for services rendered; and (2) totake all measures necessary to collect payments for services rendered in orderto preserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”

On October 17, 2003, based on negotiationsbetween the NTC and the U.S. FCC to resolve the issue regarding terminationrates, the NTC, in the expectation that the U.S. FCC would fully lift the March10, 2003 Order, lifted its March 12, 2003 Order and directed all Philippinecarriers to immediately accept terminating traffic via direct circuits fromU.S. facilities-based carriers at mutually acceptable final or interimtermination rates and other terms and conditions 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 to resumemaking payments to Smart.

On January 15, 2004, after PLDT reached interimagreements with each of MCI and AT&T and reopened its circuits with thesecarriers 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 toPLDT.

On May 13, 2004, the U.S. FCC partiallydismissed and partially denied applications by Philippine carriers, includingPLDT, and certain 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 the March 10, 2003 Order’s finding that “Philippine carriers engaged in collectiveaction to “whipsaw” AT&T and MCI.” The U.S. FCC stated, however, that thefindings of the March 10, 2003 Order were not findings under the U.S.anti-trust laws and that the U.S. Department of Justice independently“investigating the possibility of anticompetitive practices among Philippinecarriers under its authority pursuant to U.S. anti-trust laws.”  The U.S. FCCalso upheld the March 10, 2003 Order in respect of the suspension of paymentsfor termination services to the Philippine carriers pending restoration of thecircuits.  In addition, the U.S. FCC denied a request to modify the March 10,2003 Order of the International Bureau of the U.S. FCC to restore thePhilippines to the list of U.S.-international routes approved for the provisionof ISR.  The U.S. FCC stated that it was dismissing this request as mootbecause of the U.S. FCC’s recently adopted International Settlements PolicyReform Order which eliminated ISR policies.  

 

Althoughnot included in the initial list of countries exempted from the U.S. FCC’sInternational Settlements Policy, or ISP, the U.S. FCC identified theU.S.–Philippines route as eligible for being removed from the ISP in accordancewith its newly established procedures for doing so.  Under this procedure, theU.S. FCC asked for public comment on the removal of the Philippines from theISP.  In comments filed in June and July 2004, removal was reported by severalPhilippine and U.S. carriers, including AT&T and MCI, and was opposed byone U.S. carrier, International Access, Inc.  In November 2004, the U.S. FCCexempted a number of additional countries from the ISP, but not the Philippines.Instead, the U.S. FCC stated that it would rule separately regarding the Philippinesafter reviewing the issues raised by International Access, Inc.  These issuesare still pending before the U.S. FCC.

 

OnJuly 6, 2004, PLDT filed with the U.S. FCC a petition for reconsideration ofthe U.S. FCC’s May 13, 2004 Order on the grounds that the order should havevacated as moot the International Bureau’s March 10, 2003 Order.

 

Investigation by U.S. Department of Justice 

 

In January 2004, PLDT received a grand jury subpoena seeking documentsand a PLDT employee was subpoenaed to testify before the grand jury inconnection with a criminal investigation that was conducted by the U.S.Department of Justice with respect to alleged antitrust violations relating tothe provision of international termination services in the Philippines.The U.S. Department of Justice has also requested testimony and documents from Smart in connection with this investigation.Further, in March 2004, PLDT (US) Ltd., asubsidiary of PLDT Global, received a grand jury subpoena seeking documents, inresponse 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. Departmentof Justice matter. A PLDT employee wasalso scheduled to reappear for testimony in February, but his appearance hasbeen postponed.  On May 11, 2005, theU.S. Department of Justice informed our legal counsel in Washington, D.C.,Covington & Burling, that the U.S. Department of Justice has terminated itsantitrust investigation relating to termination rate increases implemented inearly 2003 by certain Philippine long distance carriers including PLDT and thatno enforcement action will be taken.  See *Note 25 – Other Matters(e)* to the accompanyingconsolidated financial statements in Item 18.

 

Dividend Distribution Policy

 

In2004 and 2003, PLDT declared cash dividends of Php1,529 million and Php1,497 million,respectively, solely for its preferred shareholders.  The most recent cashdividend declaration made by PLDT on its common stock was on May 5, 2005 at Php21 per common share to holders of record as at June 3, 2005 payable on July 14, 2005.  On March 1, 2005, PLDT declared a cash dividend at Php14 percommon share to holders of record as at March 31, 2005 which was paid on May 12, 2005.  This was the first cash dividend declaration to common shareholders sinceMarch 2001.

 

Thecurrent policy of PLDT is to thoroughly analyze its ability to declare and paydividends, regularly taking into consideration the interests of itsshareholders as well as PLDT’s working capital, capital expenditure and debtservice requirements.  PLDT also takes into account the prohibitions andrestrictions under certain of its debt instruments with respect to thedeclaration and payment of dividends as discussed in “Item 5. Operating andFinancial Review and Prospects — Liquidity and Capital Resources — FinancingActivities — Debt Financing — Covenants”, “Item 10. Additional Information —Articles of Incorporation and By-Laws — Dividends” and in *Note 14 –Preferred Stock Subject to Mandatory Redemption* and *Note 15 –Stockholders’ Equity* to the accompanying consolidated financial statementsin Item 18.  The retention of earnings is still necessary to meet the fundingrequirements of our business expansion, service improvement and developmentprograms.  Except for dividends on PLDT's Series III and Series VI ConvertiblePreferred Stock, which are payable in U.S. dollars, and PLDT's Series VIIConvertible Preferred Stock, which are payable in Japanese yen, dividends aregenerally paid in Philippine peso.  In the case of shareholders residingoutside the Philippines, PLDT's transfer agent in Manila, whichacts as the dividend disbursing agent, converts the peso dividends into U.S.dollars at the prevailing exchange rates, and remits the dollar proceedsabroad, net of withholding tax.

 

Item 9.        The Offer andListing

** **

Common Capital Stock and AmericanDepositary Receipts (“ADRs”)

 

Thecommon shares of PLDT are listed and traded on the PSE, and prior to October19, 1994, were listed and traded on the American Stock Exchange and ArchipelagoExchange in the United States.  On October 19, 1994,an ADR facility was established, pursuant to which Citibank, N.A., as thedepositary, issued ADRs evidencing ADSs, with each ADS representing one PLDTcommon share with a par value of Php5 per share.  Effective February 10, 2003,PLDT appointed JP Morgan Chase Bank as successor depositary of PLDT’s ADRfacility.  The facility was established in accordance with a Common StockDeposit Agreement dated October 19, 1994, as amended on February 10, 2003between the Depositary and the holders of the ADRs.  The ADSs have been listedand are traded on the New York Stock Exchange, or NYSE, and the ArchipelagoExchange in the United States under the symbol “PHI” for both exchanges.  

 

In 2004, a total of 39 million shares of PLDT's commonstock were traded on the PSE.  During the same year, the volume of trading was49.6 million ADSs on the NYSE but none on the Archipelago Exchange.

 

As at May 31, 2005, there were 12,127 shareholders ofrecord who are Philippine persons and held approximately 40% of PLDT’s commonstock.  As at December 31, 2004, there were 12,444 shareholders of record who arePhilippine persons and held approximately 43% of PLDT’s common stock.  Inaddition, there were a total of 25 million and 28 million ADSs outstanding,substantially all of which PLDT believes were held in the United Statesby 410 holders and 414 holders as at May 31, 2005and December 31, 2004, respectively.

 

Highand low sales prices for PLDT's common shares on the PSE and ADSs on the NYSEfor each of the five most recent fiscal years, each full quarterly periodduring the two most recent fiscal years, and each month in the most recent sixmonths were as follows:

 

 

**PSE**

**NYSE**(1)

 

**High**

**Low**

**High**

**Low**

2000

Php 1,100.00

Php 660.00

US$28

1/4

US$14

7/8

2001(1)

1,060.00

332.50

20.75

 

6.55

 

2002

565.00

209.00

11.30

 

3.85

 

2003

990.00

265.00

17.79

 

4.85

 

First Quarter

337.50

265.00

6.18

 

4.85

 

Second Quarter

565.00

312.50

11.15

 

5.80

 

Third Quarter

670.00

482.50

12.48

 

8.78

 

Fourth Quarter

990.00

635.00

17.79

 

11.70

 

2004

1,505.00

810.00

27.03

 

14.38

 

First Quarter

1,050.00

810.00

18.60

 

14.38

 

Second Quarter

1,165.00

960.00

21.20

 

16.97

 

Third Quarter

1,450.00

1,150.00

25.72

 

20.90

 

Fourth Quarter

1,505.00

1,215.00

27.03

 

21.83

 

December 

1,380.00

1,215.00

25.03

 

21.83

 

2005

 

 

 

 

 

 

First Quarter

1,495.00

1,310.00

27.75

 

23.50

 

January

1,460.00

1,310.00

26.34

 

23.50

 

February

1,440.00

1,350.00

26.45

 

24.64

 

March

1,495.00

1,350.00

27.75

 

25.05

 

Second Quarter 

 

 

 

 

 

 

April

1,425.00

1,330.00

26.01

 

24.10

 

May

1,500.00

1,400.00

27.45

 

25.63

 

_____________

 

*(1)**Effective**January 29, 2001**, PLDT converted from fractional to the decimal systemof pricing in compliance with the new trading standard required by the U.S.SEC.*

 

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

 

On November 29, 1994 and on December 12, 1994, PLDT issued anaggregate of approximately 4.6 million shares of Series III ConvertiblePreferred Stock, with a par value of Php10 per share.  In connection therewith,a GDR facility was established, pursuant to which Citibank N.A., as Depositary,issued GDRs evidencing Global Depositary Shares, or GDS, with each GDSrepresenting one share of Series III Convertible Preferred Stock of PLDT.  Eachshare is convertible into shares of common stock at the option of the holder atany time, at the conversion price of US$29.19 per share of common stock(equivalent to a conversion ratio of 1.7129 shares of common stock for eachshare of Series III Convertible Preferred Stock, each share of Series IIIConvertible Preferred Stock being valued for this purpose at its referenceamount of US$50 per share), subject to adjustment in certain events, and arenot redeemable.  Moreover, PLDT may require the mandatory conversion of some orall of the outstanding shares of Series III Convertible Preferred Stock intoshares of common stock at the above conversion price of US$29.19 per share ofcommon stock, if certain conditions are met.  For further details, see “Item10.  Additional information – Articles of Incorporation and By-Laws – PreferredStock”.  Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successordepositary of PLDT’s GDRs.  The facility was established in accordance with aPreferred Stock Deposit Agreement dated November 29, 1994,as amended on September 6, 1999 and February 10, 2003 between the Depositary and theholders of the GDRs.  The GDSs have been listed and are traded on the New YorkStock Exchange and the Archipelago Exchange in the United States under thesymbols “PHI Pra” and “PHI-A”, respectively.

 

Highand low sales prices for the series III convertible preferred shares and theGDSs for each of the five most recent fiscal years, each full quarterly periodduring the two most recent fiscal years, and each month in the most recent sixmonths were as follows:

 

 

**NYSE**(1)

 

**High**

 

**Low**

 

 

 

 

 

 

2000 

US$50

1/2

 

US$31

1/4

2001(1)

39.875

 

 

16.000

 

2002 

26.000

 

 

13.000

 

2003

47.600

 

 

20.500

 

First Quarter

25.750

 

 

20.500

 

Second Quarter

37.750

 

 

25.650

 

Third Quarter

40.900

 

 

34.300

 

Fourth Quarter

47.600

 

 

40.200

 

 

 

 

 

 

 

2004

US$50.850

 

 

US$42.500

 

First Quarter 

49.500

 

 

45.600

 

Second Quarter

48.250

 

 

42.500

 

Third Quarter

50.030

 

 

46.050

 

Fourth Quarter 

50.850

 

 

46.850

 

December

49.950

 

 

47.500

 

2005 

 

 

 

 

 

First Quarter

US$51.000

 

 

US$48.900

 

January

51.000

 

 

49.150

 

February

50.950

 

 

49.500

 

March

50.750

 

 

48.900

 

Second Quarter

 

 

 

 

 

April

US$49.250

 

 

US$48.000

 

May

49.140

 

 

48.000

 

_____________

 

*(1)   Effective**January 29, 2001**, PLDT converted from fractional to the decimal system of pricing incompliance with the new trading standard required by the U.S. SEC.*

 

Asat December 31, 2004, there were approximately 4.6 million GDSsoutstanding, which PLDT believes were substantially held in the United States.

 

Item 10.     AdditionalInformation

** **

Articles of Incorporation and By-Laws

 

The following summarizes certain provisions of PLDT'sArticles of Incorporation and By-Laws and applicable Philippine law.  Thissummary is qualified in its entirety by reference to the Corporation Code ofthe Philippines (the “Corporation Code”) and PLDT's Articles ofIncorporation and By-Laws.  Information on where investors can obtain copies ofthe Articles of Association and By-Laws is described under the heading“Documents Available.”

 

*Purpose of PLDT*

 

PLDT'sArticles of Incorporation have been filed with the Philippine SEC and PLDT hasbeen issued Philippine SEC Reg. No. 55.  The Second Article of PLDT's Articlesof Incorporation provides that the purposes for which PLDT was formed are toinstall, maintain, and operate any and all kinds of equipment forcommunications; to install, maintain, operate or lease telephone lines andsystems, and to purchase, sell and deal in all kinds of products which may becombined with the building, installing and operation of those systems and linesand in general, to engage in any and all acts and business which may benecessary or convenient, in the furtherance of such lines of communication andbusiness.

 

*Directors*

 

PLDT's Amended By-Laws provide that the Board ofDirectors shall consist of thirteen members, each of whom must hold at leastone share of stock of PLDT in his own name and possess the minimumqualifications and have none of the disqualifications provided in the By-Laws.There are no provisions in PLDT's Amended Articles of Incorporation or AmendedBy-laws with respect to (a) a director's power to vote on a proposal,arrangement or contract in which the director is materially interested; (b) thedirectors' power, in the absence of an independent quorum, to vote compensationto themselves or any members of their body; (c) borrowing powers exercisable bythe directors and how such borrowing powers can be varied; or (d) retirement ornon-retirement of directors under an age limit requirement.

 

Descriptionof PLDT Capital Stock

* *

*Authorized Capital Stock*

 

Theauthorized capital stock of PLDT is Php9,395 million divided into two classesconsisting of 234 million shares of Common Capital Stock with a par value ofPhp5 per share (the “Common Stock”) and 822.5 million shares of serialPreferred Stock with a par value of Php10 per share (the “Preferred Stock”).

 

*Common Stock*

 

Setout below is a statement of the dividend, voting, pre-emption and other rightsof the holders of Common Stock as set out in the Articles of Incorporationand/or By-Laws of PLDT:

 

(a)    After the requirements withrespect to preferential dividends on the serial Preferred Stock shall have beenmet and after PLDT shall have complied with all the requirements, if any, withrespect to the setting aside of sums as purchase, retirement or sinking funds,the holders of the Common Stock shall be entitled to receive such dividends asmay be declared from time to time by the Board of Directors out of fundslegally available therefor.

 

(b)    After distribution in full of thepreferential amounts to be distributed to the holders of serial Preferred Stockin the event of the voluntary or involuntary liquidation, dissolution,distribution of assets or winding up of PLDT, the holders of Common Stock shallbe entitled to receive all the remaining assets of PLDT of whatever kindavailable for distribution to stockholders ratably in proportion to the numberof Common Stock held by them, respectively.

 

(c)    Except as may be otherwiserequired by law, or by the Articles of Incorporation of PLDT, each holder ofCommon Stock shall have one vote in respect of each share of such stock held byhim on all matters to be voted upon by the stockholders, and the holders ofCommon Stock shall have the exclusive right to vote for the election ofdirectors and for all other purposes.  At every election of directors, a holderof Common Stock is entitled to vote such shares of Common Stock held by him foras many persons as there are directors to be elected, or to cumulate said sharesand give one candidate as many votes as the number of directors to be electedmultiplied by the number of his shares shall equal, or to distribute such voteson the same principle among as many candidates as he shall think fit.

 

Inaddition to the foregoing rights, the Corporation Code provides for otherstockholders' rights generally.  These include:

 

(a)    Appraisal right or the right of adissenting stockholder to demand payment of the fair value of his shares ofstock in the following instances:  (a) in case any amendment to the articles ofincorporation has the effect of changing or restricting the rights of anystockholders or class of shares, or of authorizing preferences in any respectsuperior to those of outstanding shares of any class, or of extending orshortening the term of corporate existence; (b) in case of sale, lease,exchange, transfer, mortgage, pledge or other disposition of all orsubstantially all of the corporate property and assets of the corporation; and(c) in case of merger or consolidation.

 

(b)    The right to approve certaincorporate acts, such as:  (a) election of directors; (b) removal of directors;(c) extension or shortening of the corporate term; (d) increase or decrease ofcapital stock, and incurring, creating or increasing bonded indebtedness; (e)sale or other disposition of all or substantially all of the corporate assets;(f) investment of corporate funds in any other corporation or business or forany purpose other than the primary purpose for which it was organized; (g)declaration of stock dividend; (h) entering into a management contract withanother corporation; (i) plan of merger or consolidation; and (j) voluntarydissolution of the corporation by shortening the corporate term.

 

(c)    The right to inspect at reasonablehours on business days the records of all business transactions of thecorporation and the minutes of any meeting; however, the stockholders' right toinspect corporate records and books is not an absolute right so that thecorporation may deny said right on the basis of impropriety of the purpose ormotive of the stockholder.

 

(d)    The right to be furnished the mostrecent financial statements of the corporation, within ten days from receipt bythe corporation of a written request from a stockholder.  The same right existsat the annual meeting of stockholders at which the Board of Directors mustpresent to the stockholders a financial report of the operations of thecorporation for the preceding year which shall include financial statementsduly signed and certified by an independent certified public accountant.

 

*Restrictions on Foreign Ownership*

 

The Constitution of the Republic of the Philippines(Section 11, Article XII) states that no franchise, certificate, or any otherform of authorization for the operation of a public utility shall be grantedexcept to citizens of the Philippines or to corporations or associationsorganized under the laws of the Philippines at least 60% of whose capital isowned by such citizens.

 

Whilethe Articles of Incorporation and By-Laws of PLDT do not contain any specificrestriction on the sale, assignment or transfer of shares that would violatethe aforecited ownership requirement, the Articles of Incorporation of PLDTprovide that the Board of Directors shall have full power and authority toauthorize (whether by adoption of amendments to the By-Laws of PLDT or ofresolutions, the promulgation of rules or regulations or otherwise) the takingby said corporation of all such actions as the Board of Directors may deemnecessary or appropriate to ensure compliance by said corporation with anyapplicable provision of the Constitution of the Republic of the Philippines orany other applicable law, treaty, rule or regulation relating to the ownershipof securities of said corporation by citizens of the Philippines, aliens orother persons or group of persons.

 

*Meetings*

* *

TheCorporation Code requires corporations to hold an annual meeting ofstockholders and to send notice thereof to stockholders.  Under PLDT's By-Laws,the annual meeting of stockholders shall be held at the principal office of thecorporation, or at such other place designated by the Board of Directors in thecity or municipality where the principal office of the corporation is located,on the second Tuesday in June of each year.  In the annual meeting, the Boardof Directors shall be elected and such other business may be transacted asshall come before the meeting.  At least fifteen (15) business days written orprinted notice of the date, time and place of holding every annual stockholders'meeting shall be given by the Secretary or by an Assistant Secretary bypersonal delivery or by mail to each stockholder at his or her last known placeof residence or business.  Special meetings of stockholders may be called atany time by the President or three (3) of the Directors or by a number ofstockholders representing two-thirds (2/3) of the subscribed capital stock.Notice in writing of such meeting stating the date, time or place thereof,shall be given to each stockholder by the Secretary or Assistant Secretary or,in case of his absence, inability, refusal or neglect to act, then by thePresident, Directors or stockholders calling said meeting, by personal deliveryor by mail to each stockholder at his or her last known place of residence, atleast fifteen (15) business days before the date fixed for the meeting.

 

TheBy-Laws of PLDT provide that each share of common stock which has voting rightson any matter under consideration may be represented at any meeting ofstockholders by the holder thereof or by his attorney duly authorized by proxyin writing on forms prescribed by the Board of Directors which shall befurnished to a stockholder upon his request.  Unless otherwise provided in theproxy, it shall be valid only for the meeting in respect of which such proxywas issued.  Proxies must be filed with the Secretary, Assistant Secretary ortransfer agent of PLDT at least two (2) days before the day of the meeting.Any proxy filed with the Secretary, Assistant Secretary or transfer agent ofthe corporation may be revoked by the stockholder concerned either in aninstrument in writing duly presented to the Secretary, Assistant Secretary ortransfer agent of the corporation at least two (2) days before the day of themeeting or by his personal presence at the meeting.  The decision of theSecretary on the validity of proxies shall be final and binding until andunless set aside by a court of competent jurisdiction.  As provided in theCorporation Code, unless otherwise provided in the proxy, it shall be validonly for the meeting for which it is intended and no proxy shall be valid andeffective for a period longer than five (5) years at any one time.

 

TheBy-Laws of PLDT also provide that at any meeting of the stockholders, personsrepresenting, in person or by proxy, a majority of the shares issued andoutstanding and entitled to vote at said meeting shall constitute a quorum forthe transaction of any business, except as otherwise provided by law, andexcept that a lesser number may adjourn the meeting.

 

*Issuesof Shares*

* *

TheBoard of Directors of PLDT has the power to authorize the issue and sale ofauthorized but unissued shares of Common Stock of said corporation for suchconsideration as it shall determine, provided that such consideration shall notbe less than the par value of such shares and, provided further, that suchissue and sale is not otherwise prohibited under applicable laws.

 

Underthe Securities Regulation Code of the Philippines (R.A. No. 8799), or SRC, nosecurities except of a class exempt under the provisions thereof or unless soldin any transaction exempt under any of the provisions thereof, shall be sold oroffered for sale or distribution to the public unless such securities shallhave been registered and permitted to be sold pursuant to the SRC.

 

*Transfer of Shares*

* *

The shares of Common Stock may be transferred bydelivery of certificate(s) endorsed by the shareholder named in the certificateor his duly authorized attorney or representative.  No transfer, however, shallbe valid, except as between the parties, until the transfer is recorded in thestock and transfer books of PLDT maintained by Hongkong and Shanghai BankingCorporation, the stock transfer agent of PLDT for the Common Stock.

 

Philippinelaw does not require transfers of Common Stock to be effected on PSE, but anyoff-exchange transfers will subject the transferor to a capital gains tax thatmay be significantly greater than the stock transfer tax applicable totransfers effected on the PSE.  All transfers of shares of Common Stock on thePSE must be effected through a licensed broker in the Philippines.

 

*Share Certificates*

* *

Certificates representing fully paid shares of CommonStock are issued in such denominations as stockholders may request, except thatcertificates will not be issued for any fractional part of a share or anyundivided interest in any share.

 

*Dividends*

* *

Under the Corporation Code, the Board of Directors maydeclare dividends on the Common Stock out of the unrestricted retained earningswhich may be payable in cash, in property or in stock to all stockholders onthe basis of outstanding shares held by them.  The declaration of stockdividends requires the approval of the stockholders of PLDT representing notless than two-thirds of the outstanding capital stock of PLDT.  If a stockdividend would require an increase in the authorized capital stock, PhilippineSEC approval would be required.  Common Stock issued as stock dividends shouldbe registered with and licensed by the Philippine SEC and listed on the PSE.

 

The Corporation Code requires aPhilippine corporation with retained earnings in excess of 100% of its paid-incapital to declare and distribute as dividends the amount of such surplus.Notwithstanding this general requirement, a Philippine corporation may retainall or any portion of such surplus in the following cases:  (i) when justifiedby definite corporate expansion projects or programs approved by the board ofdirectors; or (ii) when the corporation is prohibited under any loan agreementwith any financial institution or creditor, whether local or foreign, fromdeclaring dividends without its/his consent, and such consent has not yet beensecured; or (iii) when it can be clearly shown that such retention is necessaryunder special circumstances relevant to the corporation, such as when there isa need for special reserve for probable contingencies.

 

PLDThas entered into certain loan and credit agreements, which restrict thedeclaration and payment of dividends by PLDT.  In particular, under the termsof PLDT's JPY5,615 million syndicatedterm loan facility agreement, PLDT is restricted from distributing dividends tocommon stockholders unless (i) no default has occurred which is continuing, and(ii) its debt to free cash flow ratio, after giving effect to the distributionof such dividends and, under certain circumstances, other adjustments to PLDT’sclosing cash balance, would be less than 4.0:1.  Under other loan agreements,PLDT may not declare or pay dividends on any of its capital stock without theprior written consent of the lenders (i) if PLDT is in default in the paymentof any amounts due and payable under such loan agreement or after theoccurrence and during the continuance of any other event of default or potentialevent of default under such agreements, (ii) if after giving effect to suchaction the current ratio would be less than 1.2:1 or (iii) in an amount greaterthan PLDT’s net income after taxes during the fiscal year to which such paymentor distribution relates.  For the year 2001, PLDT declared cash dividends onoutstanding shares of Common Stock in the amount of approximately Php202million.  The most recent cash dividend declaration made by PLDT on its sharesof common stock was on March 1, 2005, which was paid on May 12, 2005 at Php14 per commonshare to holders of record as at March 31, 2005.  This is the first cashdividend declaration to common shareholders in four years since March 2001.  OnMay 5, 2005, PLDT declared another cash dividend of Php21 per share of commonstock payable on July 14, 2005 to holders of record as at June 3, 2005.

 

*Preferred Stock*

 

Preferred Stock may be issuedfrom time to time in one or more series as the Board of Directors maydetermine.  The Board of Directors is authorized to establish and designate thetitle and number of shares of each series and to fix the terms thereof,including dividend rate, redemption and sinking fund provisions, conversionrights and the amount to be received upon liquidation, provided that theamounts payable upon redemption or liquidation may not be more than 110%, norless than 100%, of par value, plus in each such case accrued and unpaiddividends.  Except as otherwise provided by law, the holders of Preferred Stockare not entitled to vote for the election of directors or for any otherpurpose; provided, however, that PLDT may not change the rights of the holdersof any series of Preferred Stock in any manner prejudicial to the holdersthereof without the affirmative vote of the holders of a majority of the sharesof such series.  No such approval is needed to increase the number of shares ofPreferred Stock (up to the number from time to time authorized by the Articles)or to authorize classes of shares ranking on a parity with the Preferred Stock.

 

*Issued and Outstanding Preferred Stock*

 

The series of Preferred Stock and the number of sharesissued and outstanding under each series as at May 31, 2005 are as follows:****

 

**Series**

**No. of Shares**

Series A to EE 10% Cumulative Convertible

408,353,953

Series III Convertible

4,616,200

Series IV Cumulative Non-Convertible Redeemable

36,000,000

Series V Cumulative Convertible Redeemable

1,941,922

Series VI Cumulative Convertible Redeemable

4,704,495

Series VII Cumulative Convertible Redeemable

3,842,000

 

TheSeries A to EE 10% Cumulative Convertible Preferred Stock are entitled toreceive cumulative dividends at the rate of 10% per annum; redeemable at theoption of PLDT, at par value plus accrued dividends, five years after the yearof issuance; convertible to shares of Common Stock a year after the year ofshare issuance, at a price equivalent to 10% below the average market price ofthe Common Stock at the PSE over a period of 30 consecutive trading days beforethe conversion date; and entitled to be paid an amount equal to the par valueof the shares plus accrued and unpaid dividends thereon to the date fixed forsuch payment in the event of a voluntary or involuntary liquidation,dissolution, distribution of assets or winding up of the affairs of thecorporation.

 

TheSeries III Convertible Preferred Stock are entitled to receive annual fixedcumulative dividends of US$3.50 per share; in the event of any voluntary orinvoluntary liquidation, dissolution or winding up of PLDT, are entitled toreceive out of the assets of PLDT available for distribution to thestockholders of PLDT, before any distribution of assets is made to holders ofshares of Common Stock or any other shares of stock of PLDT ranking as to sucha distribution junior to the Series III Convertible Preferred Stock,liquidating distributions in the amount of Php11 per share plus accrued andunpaid dividends; are convertible into shares of Common Stock at the holder'soption at any time, at the conversion price of US$29.19 per share of CommonStock (equivalent to a conversion ratio of 1.7129 shares of Common Stock foreach share of Series III Convertible Preferred Stock, each share of Series IIIConvertible Preferred Stock being valued for this purpose at its referenceamount of US$50 per share), subject to adjustment in certain events; and arenot redeemable.  Moreover, PLDT may require the mandatory conversion of some orall of the outstanding shares of Series III Convertible Preferred Stock intoshares of common stock at the above conversion price of US$29.19 per share ofcommon stock, if certain conditions are met, including that (i) the average ofthe closing prices of the ADSs reported on the NYSE on each trading day duringthe period of 30 days ending on the seventh day prior to the date upon whichnotice of the date of mandatory conversion is first given is greater than orequal to the conversion price in effect on such seventh day, (ii) there are nodividends in arrears on any shares of the Series III Convertible PreferredStock, and  (iii) PLDT has sufficient distributable reserves to pay the fixedpreferential dividends on the shares of Series III Convertible Preferred Stock,calculated down to and including the mandatory conversion date.  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 are entitled toreceive cumulative dividends at the rate of 13.5% per annum based on thepaid-up subscription price.  It is redeemable at the option of PLDT one year atany time after subscription at an amount equal to the par value of such sharesso redeemed or if such shares are not yet fully paid, the actual amount paid,plus accrued and unpaid dividends thereon; and in the event of a voluntary orinvoluntary liquidation, dissolution or winding up of affairs of PLDT, shall beentitled to be paid an amount equal to the par value of such shares or if suchshares are not yet fully paid, the actual amount paid, plus an amount equal tothe dividends accrued thereon to the date fixed for payment.  The outstandingshares of Series IV Cumulative Non-Convertible Redeemable Preferred Stock havenot been fully paid.

 

Sharesof Series V, VI and VII Convertible Preferred Stock are entitled to receiveannual dividends of Php18.70 per share, US$0.397 per share and JPY40.7189 per share, respectively.  Each share ofSeries V, VI and VII PLDT Convertible Preferred Stock is convertible at anytime at the option of the holder into one share of PLDT Common Stock.  In theevent of any voluntary or involuntary liquidation, dissolution or winding up ofPLDT, the holders of the Series V, VI and VII Convertible Preferred Stock areentitled to receive out of the assets of PLDT available for distribution to theshareholders of PLDT, before any distribution of assets is made to holders ofshares of Common Stock or any other shares of stock of PLDT ranking as to suchdistribution junior to the Series V, VI and VII Convertible Preferred Stock,liquidating distributions in the amount of Php11 per share plus accrued andunpaid dividends.  On the date immediately following the seventh anniversary ofthe issue date of the Series V and Series VI Convertible Preferred Stock and onthe eighth anniversary of the issue date of the Series VII ConvertiblePreferred Stock, the remaining outstanding shares under these series will bemandatorily converted into shares of PLDT Common Stock at a conversion rate ofone share of Common Stock for each share of Series V, VI or VII ConvertiblePreferred Stock subject to adjustments in certain events.  Under a put option exercisablefor 30 days, holders of shares of Common Stock received on mandatory conversionwill be able to require PLDT to purchase such shares of Common Stock forPhp1,700 per share, US$36.132 per share and JP¥4,071.89 per share, for SeriesV, VI and VII Convertible Preferred Stock, respectively.

 

Asat December 31, 2004, 515,818 shares of Series V Convertible PreferredStock and 545,122 shares of Series VI Convertible Preferred Stock had beenconverted into shares of PLDT common stock.  The aggregate value of the putoption based on outstanding shares as at December 31, 2004 was Php22,016 million, of which Php13,419million is payable on June 4, 2008 and Php8,597million on June 4, 2009 if all of the outstanding shares of Series V, VI andVII PLDT Convertible Preferred Stock were mandatorily converted and all theunderlying shares of common stock were put to PLDT.  The market value of theunderlying shares of common stock was Php14,685million, based on the market price of PLDT shares of common stock of Php1,360per share as at December 31, 2004.

 

*Change in Control*

 

ArticleV, Section 1 of PLDT's Amended By-Laws may have the effect of preventing achange in control of PLDT.  This section provides that any person who isengaged in any business that competes with or is antagonistic to that of PLDTor its subsidiaries is ineligible for nomination or election to the Board ofDirectors.

 

Material Contracts

 

We did not enter into anymaterial contracts within the two years preceding the date of this annualreport. 

 

Exchange Controls and Other LimitationsAffecting Securities Holders

 

InCircular No. 1389 dated November 10, 1993, as amended by Circular No. 224 dated January 26, 2000, ofthe BSP, foreign investments in the shares of stock of Philippine companies listedin the PSE may be registered either with the BSP or with an investor’sdesignated custodian bank.  The foreign investments in listed shares of stock,which are duly registered with the BSP or with a custodian bank duly designatedby the foreign investor, are entitled to full and immediate capitalrepatriation and dividend and interest remittance privileges.  Without the needto obtain prior BSP approval, commercial banks are authorized to sell and toremit the equivalent foreign exchange (at the exchange rate prevailing at thetime of actual remittance) representing sales and divestment proceeds ordividends of a duly registered foreign equity investment upon presentation of aBSP Registration Document (“BSRD”) together with other supporting documents.  TheBSRD is issued by the BSP or the custodian bank upon registration of theforeign investment and serves as the authority to repatriate such divestmentand sales proceeds or remittance of cash dividends.  Effective April 3, 2000, onlypre-numbered BSRD forms, printed on BSP security paper may be used and issuedas proof of registration of foreign investments in accordance with existing BSPrules.  The remitting commercial bank must submit to the BSP a statement ofremittance together with the supporting documents within two banking days fromdate of actual remittance.  Foreign investments not duly registered with theBSP or with the investor's designated custodian bank are not entitled torepatriation and remittance privileges through the banking system exceptcapital repatriation or dividend remittance of direct foreign equityinvestments made prior to March 15, 1973 when BSP registration was not yet required.  The BSPshould be notified of the transfer of sale of foreign investments in equity orsecurities already registered with the BSP, in order that the registration ofthe foreign investment may be transferred in the name of the transferee orpurchaser.

 

Cashdividends on PLDT's stock are paid in Philippine peso, except dividends on theSeries III and Series VI Convertible Preferred Stock, which are paid in U.S.dollars and on the Series VII Convertible Preferred Stock, which are paid inJapanese yen.  PLDT’s Custodian for its Series III Convertible Preferred Stock,Citibank, N.A. – Manila and PLDT’s Transfer Agent and Dividend Paying Agent forits Series VI and VII Convertible Preferred Stock, Hongkong and ShanghaiBanking Corporation, converts and remits in the particular foreign currency, atthe prevailing exchange rate, cash dividends due to holders of the Series III,Series VI and VII Convertible Preferred Stock.  PLDT's Transfer Agent for itscommon stock, The Hongkong and Shanghai Banking Corporation, (which also actsas dividend paying agent) converts and remits in U.S. dollars, at theprevailing exchange rate, cash dividends due all common shareholders residingoutside the Philippines.  Under the above-mentioned regulations, PLDT has beenable to remit the cash dividends due to shareholders residing outside the Philippines.As at December 31, 2004, approximately 87% of PLDT’s outstanding shares ofcommon and preferred stock were held by Philippine persons.  For certainrestrictions on the declaration and payment of dividends by PLDT, see *Note14 – Preferred Stock Subject to Mandatory Redemption* and *Note 15 –Stockholders’ Equity* to the accompanying consolidated financial statementsin Item 18.

 

Principalof and interest on PLDT's 9.875% Notes due 2005, 9.25% Notes due 2006, 7.85%Notes due 2007, 8.35% Notes due 2017, 10.5% Notes due 2009, 10.625% Notes due2007 and 11.375% Notes due 2012 are payable in U.S. dollars which may bepurchased from the local banking system either pursuant to the registration ofsuch Notes with the BSP or otherwise pursuant to specific BSP approval of suchpayment.  Such principal and interest may also be paid utilizing PLDT's owndollar resources without necessity of BSP approval.  The BSP, with the approvalof the President of the Philippines, may, however, restrict the availability of foreignexchange during an exchange crisis, when an exchange crisis is imminent, or intimes of national emergency.

 

Taxation

 

The following is a description of the materialPhilippine and United States federal income tax consequences to United StatesHolders (as defined below) of owning shares of Common Stock, Series IIIConvertible Preferred Stock, ADSs and GDSs (collectively, the “EquitySecurities”).  It applies to you only if you hold your Equity Securities ascapital assets for tax purposes.  This section does not apply to you if you area member of a special class of holders subject to special rules, including adealer in securities, a trader in securities that elects to use amark-to-market method of accounting for securities holdings, a tax-exemptorganization, a life insurance company, a person liable for alternative minimumtax, a person that actually or constructively owns 10% or more of PLDT’s votingstock, a person that holds Equity Securities as part of a straddle or a hedgingor conversion transaction, or a United States Holder (as defined below) whosefunctional currency is not the U.S. dollar.

 

Thissection is based on the United States Internal Revenue Code of 1986, as amended(the “U.S. Tax Code”), its legislative history, existing and proposedregulations, published rulings and court decisions, and the laws of thePhilippines including the Philippine National Internal Revenue Code of 1997(the “Philippine Tax Code”) all as currently in effect, as well as on theConvention Between the Philippines and the United States (the “Philippines-UnitedStates Tax Treaty”).  These laws are subject to change, possibly on aretroactive basis.  In addition, this section is based in part on therepresentations of the Depositary and the assumption that each obligation inthe Deposit Agreement and any related agreement will be performed according toits terms.

 

You are a United States Holder if you are a beneficial owner of EquitySecurities and you are a citizen or resident of the United States, a domesticcorporation, an estate whose income is subject to United States federal incometax regardless of its source, or a trust if a United States court can exerciseprimary supervision over the trust’s administration and one or more UnitedStates persons are authorized to control all substantial decisions of thetrust.

** **

This discussion addresses only United Statesfederal income taxation and Philippine income taxation, estate and donor’staxation, stock transaction taxation and documentary stamp taxes.

** **

*Philippine Taxation*

 

*Taxes on Exchange of ADSs for Common Stock and GDSsfor Series III Convertible Preferred Stock*

 

Philippine capital gains or stock transaction taxesand documentary stamp taxes may be payable upon the transfer of shares ofCommon Stock to a holder of ADRs or shares of Series III Convertible PreferredStock to a holder of GDRs.  See “Capital Gains Tax and Stock Transaction Tax”and “Documentary Stamp Taxes.”

 

*Taxationof Dividends*

 

Underthe Philippine Tax Code, dividends paid by a Philippine corporation to citizensof the Philippines and resident aliens in the Philippines are subject to afinal withholding tax of 10% while those paid to non-resident aliens engaged intrade or business within the Philippines are subject to a final withholding taxof 20%.  Dividends paid to non-resident aliens not engaged in trade or businesswithin the Philippines are subject to a final withholding tax of 25%.Dividends paid by a Philippine corporation to other Philippine corporations orto resident non-Philippine corporations are not subject to tax.  Dividends paidto non-resident non-Philippine corporations not engaged in a trade or businessin the Philippines by Philippine corporations shall be subject to a finalwithholding tax of 15%, subject to the condition that the country in which thenon-resident non-Philippine corporation is domiciled either (i) allows a credit against the tax due from the non-resident non-Philippinecorporation taxes deemed to have been paid in the Philippines equivalent to 20%effective July 1, 2005 (which represents the difference between the regularincome tax on non-resident non-Philippine corporations of 35% effective July 1,2005 and the 15% tax on dividends) (this condition is not satisfied in the caseof corporations domiciled in the United States if such corporations own lessthan 10% of the voting stock of PLDT) or (ii) imposes no income taxes ondividends received by such non-resident non-Philippine corporations fromPhilippine corporations (this condition is not satisfied in the case ofcorporations domiciled in the United States).  If neither of the foregoingconditions are met, the dividends paid to the non-resident non-Philippinecorporation shall be subject to the regular income tax rate of 32% (35%effective July 1, 2005).  Under rulings issued by Philippine tax authorities,Hong Kong is viewed as falling within clause (ii) and, thus, companies that areorganized in Hong Kong that are not engaged in trade or business in thePhilippines may be entitled to the benefit of the 15% rate.  Such rulings,however, were based upon the laws of Hong Kong as in effect at the time suchrulings were issued, and any subsequent changes in the relevant laws of Hong Kong mayaffect the validity of such rulings.

 

Asfurther discussed below, in respect of regular quarterly cash dividends payableon the shares of Series III Convertible Preferred Stock underlying the GDSs,while such shares are on deposit with the Depositary, PLDT intends to makepayments of withholding tax pursuant to the terms of such Series IIIConvertible Preferred Stock, at the rate of 15%, which is the rate applicableto dividends payable to residents of the domicile of the registeredshareholder, which is a company organized in Hong Kong not engaged in trade orbusiness in the Philippines.  PLDT reserves the right to change the rate atwhich it makes payments of withholding tax whenever it deems it appropriateunder applicable law.

 

Holderswill receive regular quarterly cash dividends paid in respect of the Series IIIConvertible Preferred Stock, but not on the common stock issuable on conversionof such Series III Convertible Preferred Stock, free and clear of withholdingtax, such withholding tax being an obligation of PLDT pursuant to the terms ofthe Series III Convertible Preferred Stock.  Any other dividends will besubject to withholding tax at the relevant applicable rate.

 

Ifthe holder of Common Stock is a non-resident foreign partnership, which istreated as a corporation for Philippine tax purposes, dividends on the CommonStock should be subject to a final withholding tax of 32% (35% effective July1, 2005).  Cede & Co., the partnership nominee of Depository Trust Company(“DTC”), should qualify as a non-resident foreign partnership that would betreated as a corporation for Philippine tax purposes.

 

Incertain circumstances where the holder holds Common Stock, a tax treaty ratemay be applicable with respect to the Philippine withholding tax.  Forinstance, holders under such circumstances and as to which thePhilippines-United States Tax Treaty would be applicable would be eligible fora treaty rate of 25% (or 20% in certain instances).  The 20% treaty rate isgenerally not applicable in the case of non-resident non-Philippinecorporations domiciled in the United States which own less than 10% of thevoting stock of PLDT.  Holders are required, however, to establish to thePhilippine taxing authorities their eligibility for such treaty rate.Philippine tax authorities have prescribed, through an administrative issuance,procedures for availment of tax treaty relief.  PLDT intends to pay withholdingtax at the reduced treaty rate in respect of shares the registered holder ofwhich is Cede & Co., on the basis that Cede & Co. is a resident of the United Statesfor purposes of the Philippines-United States Tax Treaty.  PLDT reserves theright to change the rate at which it makes payments of withholding tax wheneverit deems it appropriate under applicable law.

 

*Capital Gains Tax and Stock Transaction Tax*

 

The Philippine Tax Code provides that gain from thesale of shares of stock in a Philippine corporation shall be treated as derivedentirely from sources within the Philippines, regardless of where the shares are sold.  Subject toapplicable tax treaty rates, the rate of tax on such gain, where the share isnot disposed of through the Philippine Stock Exchange, is a final tax of 5% forgains not exceeding Php100,000 and a final tax of 10% for gains in excess ofthat amount.  The rate is the same for both non-resident individuals andnon-resident non-Philippine corporations.  While this tax is not collectedthrough withholding, the Philippine Tax Code prohibits a transfer from beingrecorded on the books of the corporation unless the Philippine Commissioner ofInternal Revenue certifies that the tax has been paid or certain otherconditions are met.  

 

The sale of shares which arelisted in and sold through the PSE are subject to the stock transaction taximposed at the rate of 1/2 of 1% of the gross selling price.  This tax isrequired to be collected and paid to the government by the selling stockbrokeron behalf of his client.  Sales of shares other than through a Philippine stockexchange will be subject to Philippine capital gains tax in the mannerdescribed above.

 

Underthe Philippines-United States Tax Treaty, gains derived by a United Statesresident from the sale of shares of stock of a Philippine corporation will notbe subject to Philippine tax, either capital gains tax or stock transactiontax, unless the shares are those of a corporation over 50% of the assets ofwhich consist of real property interests located in the Philippines.  PLDTdoes not believe that it currently is such a corporation.

 

*Conversion Feature*

 

PLDTbelieves that there would be no Philippine capital gains taxes upon theconversion of shares of Series III Convertible Preferred Stock into shares ofCommon Stock.

 

*DocumentaryStamp Taxes*

 

The Philippinesimposes a documentary stamp tax upon transfers of shares of stock issued by aPhilippine corporation at a rate of Php1.50 on each Php200, or fractional partthereof, of the par value of the shares.  The documentary stamp tax iscollectible wherever the document is made, signed, issued, accepted ortransferred, when the obligation or right arises from Philippine sources or theproperty is situated in the Philippines.  Effective March 20, 2004,the documentary stamp tax rate upon transfer of shares of stock issued by aPhilippine corporation is Php0.75 on each Php200, or fractional part thereof,of the par value of the shares.  However, the imposition of documentary stamptax on secondary transfer of shares of stock of a Philippine Corporation whichis listed and traded through the facilities of the Philippine Stock Exchange issuspended for a period of five years counted from the same effective date.  

 

*Estate and Donor's Taxes*

 

Shares of stock issued by a corporation organized orconstituted in accordance with Philippine law are deemed to have a Philippinesitus and their transfer by way of succession or donation is subject toPhilippine estate and gift taxes.  The transfer of shares of stock by adeceased individual to his heirs by way of succession, whether such anindividual was a citizen of the Philippines or an alien, regardless ofresidence, will be subject to Philippine estate tax at progressive ratesranging from 5% to 20% if the net estate is over Php200,000.  Individual andcorporate shareholders, whether or not citizens or residents of thePhilippines, who transfer the Equity Securities by way of gift or donation willbe liable for Philippine donor’s tax on such transfers at progressive ratesranging from 2% to 15%, if the net gifts made during the calendar year exceedPhp100,000.  The rate of tax with respect to net gifts made to a stranger, whois not a brother, sister, spouse, ancestor, lineal descendant or relative byconsanguinity in the collateral line within the fourth degree of relationshipof the donor, is a flat rate of 30%. Estate and gift taxes will not becollected in respect of intangible personal property such as the EquitySecurities:

 

•        if the deceased at the time ofdeath, or the donor at the time of donation, was a citizen and resident of aforeign country which at the time of his death or donation did not impose atransfer tax of any character in respect of intangible personal property ofcitizens of the Philippines not residing in that foreign country, or

 

•        if the laws of the foreign countryof which the deceased or the donor was a citizen and resident at the time ofhis death or donation allow a similar exemption from transfer or death taxes ofevery character or description in respect of intangible personal property ownedby citizens of the Philippines not residing in that foreign country.

 

Sharesof stock of a deceased shareholder or shares that have been donated may not betransferred on the books of the corporation without a certificate from thePhilippine Commissioner of Internal Revenue that the applicable estate ordonor's taxes have been paid.  In the case of ADRs and GDRs, however, there isno corresponding requirement, unless a transfer of the ADRs and GDRs would alsoentail a change in the registration of the underlying shares.

 

*United States**FederalTaxation*

 

For United States federal income tax purposes,United States Holders of GDRs or ADRs will be treated as the owners of theunderlying shares of Series III Convertible Preferred Stock or Common Stock.Deposits and withdrawals by United States Holders of shares of Series IIIConvertible Preferred Stock or Common Stock in exchange for GDRs or ADRs willnot be subject to United States federal income tax.

 

*Taxation of Dividends*

 

Underthe United States federal income tax laws, and subject to the passive foreigninvestment company, or PFIC, rules discussed below, if you are a United StatesHolder, the gross amount of any dividend we pay out of our current oraccumulated earnings and profits (as determined for United States federalincome tax purposes) is subject to United States federal income taxation.  Ifyou are a non-corporate United States Holder, dividends paid to you in taxableyears beginning before January 1, 2009 that constitute qualified dividendincome will be taxable to you at a maximum tax rate of 15% provided that, inthe case of Common Stock or ADSs, you hold the Common Stock or ADSs for morethan 60 days during the 121-day period beginning 60 days before the ex-dividenddate or, in the case of Series III Convertible Preferred Stock or GDSs, if thedividend is attributable to a period or periods aggregating over 366 days,provided that you hold the Series III Convertible Preferred Stock or GDSs formore than 90 days during the 181-day period beginning 90 days before theex-dividend date and meet other holding period requirements.  Dividends we paywith respect to the Equity Securities generally will be qualified dividendincome.

 

Youmust include any Philippine tax withheld from the dividend payment or, in thecase of Series III Convertible Preferred Stock or GDSs, paid on your behalf byPLDT, in this gross amount even though you do not in fact receive it.  Thedividend is taxable to you when you, in the case of Common Stock or Series IIIConvertible Preferred Stock, or the Depositary, in the case of ADSs or GDSs,receive the dividend, actually or constructively.  The dividend will not beeligible for the dividends-received deduction generally allowed to United Statescorporations in respect of dividends received from other United Statescorporations.  The amount of the dividend distribution that you must include inyour income as a United States Holder will be the U.S. dollar value of thePhilippine peso payments made, determined at the spot Philippine peso/U.S.dollar rate on the date the dividend distribution is includible in your income,regardless of whether the payment is in fact converted into U.S. dollars.Generally, any gain or loss resulting from currency exchange fluctuationsduring the period from the date you include the dividend payment in income tothe date you convert the payment into U.S. dollars will be treated as ordinaryincome or loss and will not be eligible for the special tax rate applicable toqualified dividend income.  The gain or loss generally will be income or lossfrom sources within the United States for foreign tax credit limitation purposes.Distributions in excess of current and accumulated earnings and profits, asdetermined for United States federal income tax purposes, will be treated as anon-taxable return of capital to the extent of your basis in the EquitySecurities and thereafter as capital gain. 

 

Subjectto certain limitations, the Philippine tax withheld in accordance with the Philippines-UnitedStates Tax Treaty and paid over to the Philippines will be creditable against your United Statesfederal income tax liability.  Special rules apply in determining the foreigntax credit limitation with respect to dividends that are subject to the maximum15% tax rate.

 

Dividendswill be income from sources outside the United States.  Dividends paid in taxable years beginning before January 1, 2007generally will be “passive” or “financial services” income, and dividends paidin taxable years beginning after December 31, 2006 will, depending on yourcircumstances, be “passive” or “general” income which, in either case, istreated separately from other types of income for purposes of computing theforeign tax credit allowable to you.

 

*Certain Withholding Tax Payments*

 

Holderswill receive regular quarterly cash dividends paid in respect of the Series IIIConvertible Preferred Stock, but not on the Common Stock issuable on conversionof such Series III Convertible Preferred Stock, free and clear of withholdingtax, such withholding tax being an obligation of PLDT pursuant to the terms ofthe Series III Convertible Preferred Stock.  PLDT intends to make such paymentsof withholding tax based on an applicable withholding tax rate of 15%.  AUnited States Holder that receives dividends free and clear of withholding taxwill be treated for United States federal income tax purposes as havingreceived an additional distribution with respect to the Series III ConvertiblePreferred Stock in the amount of the withholding tax which is paid to thePhilippine Bureau of Internal Revenue on behalf of such United States Holder.Such a deemed additional distribution will generally be subject to the rulesdescribed above under “Taxation of Dividends.”  The amount of additional incomedeemed to have been received by the United States Holder will be equal to theinitial amount of tax paid by PLDT (based on the applicable withholding taxrate) divided by the difference between one and the applicable withholding taxrate.  For example, assuming a US$100 dividend received free and clear of awithholding tax of 15% (the rate believed by PLDT to be the applicablewithholding tax rate; see “Philippine Taxation — Taxation of Dividends”), theUnited States Holder will be treated as having received additional income inthe amount of US$15/(1-.15), or US$17.65.  

* *

*Sale**orOther Disposition of Equity Securities*

 

AUnited States Holder will recognize capital gain or loss upon the sale ofEquity Securities in an amount equal to the difference between such UnitedStates Holder's basis in the Equity Securities and the amount realized upon thesale.  Such gain or loss generally will be long-term capital gain or loss if,at the time of sale, exchange or retirement, the Equity Securities have beenheld for more than one year.  Capital gain of a non-corporate U.S. holderthat is recognized on or after May 6, 2003 and before January 1, 2009 isgenerally taxed at a maximum rate of 15% where the property is held for morethan one year.  Generally, any such gain or loss will be treated as realizedincome or loss from sources within the United States for foreign tax creditlimitation purposes.  United States Holders may not be eligible to creditagainst their United States federal income tax liability amounts paid in respectof the Philippine stock transaction tax.  See “— Philippine Taxation — CapitalGains Tax and Stock Transaction Tax.”

 

*ConversionFeature*

 

Ingeneral, no gain or loss will be recognized for United States federal incometax purposes on a conversion of Series III Convertible Preferred Stock intoCommon Stock except with respect to cash received in lieu of fractional sharesof stock.  The tax basis for Common Stock received upon conversion will beequal to the basis of the Series III Convertible Preferred Stock converted andthe holding period of the common stock received upon conversion will includethe holding period of the Series III Convertible Preferred Stock.

 

TheU.S. Tax Code does not authorize a comparable credit for foreign gift ordonor's taxes such as those imposed by the Philippines.  See “— Philippine Taxation — Estate and Donor'sTaxes.”

 

*PassiveForeign Investment Company Rules*

 

Webelieve that the Equity Securities should not be treated as stock of a PFIC forUnited States federal income tax purposes, but this conclusion is afactual determination that is made annually and thus may be subject to change.If we were to be treated as a PFIC, unless the Equity Securities are“marketable stock” and a United States Holder elects to be taxed annually on amark-to-market basis with respect to the Equity Securities, gain realized onthe sale or other disposition of your Equity Securities would in general not betreated as capital gain.  Instead, if you are a United States Holder, you wouldbe treated as if you had realized such gain and certain "excessdistributions" ratably over your holding period for the Equity Securitiesand would be taxed at the highest tax rate in effect for each such year towhich the gain was allocated, together with an interest charge in respect ofthe tax attributable to each such year.  In addition, dividends that youreceive from us will not be eligible for the special tax rates applicable toqualified dividend income if we are a PFIC either in the taxable year of thedistribution or the preceding taxable year, but instead will be taxable atrates applicable to ordinary income.

 

Documents on Display

 

We are subject to the informational requirements ofthe Exchange Act, and file reports and other information with the Commission,as required by this act.  Reports and other information filed by us with theCommission may be inspected and copied at the Commission’s Public Reference Roomat 100 F Street, N.E., Washington, D.C. 20549.  The public may obtain information on the operationof the Commission’s Public Reference Room by calling the Commission in the United Statesat 1-800-SEC-0330.  The Commission also maintains a website that containsreports, proxy statements and other information regarding registrants that fileelectronically with the Commission.  Copies of this material may be obtained bymail from the public reference section of the Commission, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates.  These reports and otherinformation may also be inspected at the offices of the New York StockExchange, 20 Broad Street, New York, New York 10005 and the Archipelago Exchange, 301 Pine Street, San Francisco, California 94104, on which the American Depositary Shares representingour Common Stock are listed.

 

Item 11.     Quantitativeand Qualitative Disclosures about Market Risks

** **

Our operations are exposed to various risks, includingliquidity risk, foreign currency risk, interest rate risk and credit 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.  All of our risk managementinitiatives are reviewed and approved by our board of directors. 

 

Liquidity RiskManagement

 

Weseek to manage our liquidity profile to be able to finance our capitalexpenditures and service our maturing debts.  To cover our financingrequirements, we intend to use internally generated funds and proceeds fromdebt and equity issues and sales of certain assets.

 

Aspart of our liquidity risk management program, we regularly evaluate ourprojected and actual cash flow information and continuously assess conditionsin the financial markets for opportunities to pursue fund-raising initiatives.These initiatives may include bank loans, export credit agency-guaranteedfacilities, and debt capital and equity market issues.

 

Foreign ExchangeRisk Management

 

At December 31, 2004, the Philippine peso depreciated against the U.S. dollar toPhp56.341 to US$1.00 from Php55.586 to US$1.00 at December 31, 2003.

 

The following table shows our consolidated foreigncurrency-denominated monetary assets and liabilities and their peso equivalentsas at December 31, 2004 and 2003:

 

** **

**Year Ended December 31,**

** **

**2004**(1)

** **

**2003**(2)

** **

**US$**

** **

**Php**

** **

**US$**

** **

**Php**

** **

(in millions)

**Current Financial Assets**

** **

** **

** **

** **

** **

** **

** **

Cash and cash equivalents

US$251

** **

Php14,142

 

US$146

 

Php8,116

Short-term investments

69

** **

3,888

 

30

 

1,668

Trade and other receivables

146

 

8,226

 

195

 

10,839

Derivative assets

6

 

335

 

5

 

262

Total current financial assets

472

** **

26,591

 

376

 

20,885

**Noncurrent Financial Assets**

** **

** **

 

 

 

 

 

Derivative assets 

73

** **

4,116

 

24

 

1,361

Total non-current financial assets

73

** **

4,116

 

24

 

1,361

**Total Financial Assets**

**US$545**

** **

**Php30,707**

** **

**US$400**

** **

**Php22,246**

** **

** **

** **

 

 

 

 

 

**Current Financial Liabilities**

** **

** **

 

 

 

 

 

Accounts payable

US$46

 

Php2,592

 

US$71

 

Php3,947

Accrued expenses and other current liabilities

77

 

4,338

 

71

 

3,947

Derivative liabilities

8

 

473

 

2

 

91

Interest-bearing financial liabilities

483

 

27,203

 

405

 

22,512

Total current financial liabilities

614

 

34,606

 

549

 

30,497

 

 

 

 

 

 

 

 

**Noncurrent Financial Liabilities**

** **

** **

** **

** **

** **

** **

** **

Interest-bearing financial liabilities

2,126

 

119,733

 

2,772

 

156,177

Derivative Liabilities

105

 

6,930

 

47

 

3,737

Preferred stock subject to mandatory redemption

222

 

12,512

 

195

 

10,816

Total noncurrent financial liabilities

2,453

 

139,175

 

3,014

 

170,730

**Total Financial Liabilities**

**US$3,067**

** **

**Php173,781**

** **

**US$3,563**

** **

**Php201,227**

______________

 

 

 

 

 

 

 

* *

 

 

 

 

 

 

*(1)  The exchange rate used was Php56.341 to US$1.00*

 

 

 

 

 

 

*(2)  The exchange rate used was Php55.586 to US$1.00.*

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

* *

While a certain percentage of our revenues is eitherlinked to or denominated in U.S. dollars, substantially all of our indebtednessand related interest expense, a substantial portion of our capital expendituresand a portion of our operating expenses are denominated in foreign currencies,mostly in U.S. dollars.

* *

As at December 31, 2004, approximately98% of our total consolidated debts were denominated in foreign currencies,principally in U.S. dollars.  Of our foreign currency-denominated debts 4% arein Japanese yen, and the balance in U.S. dollars.  Thus, a weakening of thePhilippine peso against the U.S. dollar or Japanese yen will increase both the principalamount of our unhedged foreign currency-denominated debts (representing 64% ofour consolidated foreign-currency debts), and interest expense on our debt inpeso terms.  In addition, many of our financial ratios and other financialtests will be negatively affected.  If, among other things, the value of thePhilippine peso against the U.S. dollar drops from its current level, we may beunable to maintain compliance with these ratios, which could result inacceleration of some or all of our indebtedness.  For further information onour loan covenants, see “Item 5. Operating and Financial Review and Prospects —Liquidity and Capital Resources — Financing Activities — Debt Financing —Covenants” above and *Note 12 – Interest-bearing Financial Liabilities* tothe accompanying consolidated financial statements in Item 18.

* *

Tomanage foreign exchange risks, stabilize cash flows, and improve investment andcash flow planning, we enter into forward foreign exchange contracts, foreigncurrency swap contracts, currency options and other hedging products aimed atreducing and/or managing the adverse impact of changes in foreign exchangerates on our operating results and cash flows.  However, these hedges do notcover all of our exposure to foreign exchange risks, and hedges to cover all ofour exposure are not currently readily available.

 

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.  As at December 31, 2004, PLDT’soutstanding forward foreign exchange contracts, principal-only long-termcross-currency swap contracts and currency option contracts amounted to US$87million and JP¥14 million; US$550 million; and US$251 million, respectively.Smart’s outstanding forward foreign exchange contracts amounted to US$69million as at December 31, 2004.  For further discussions of these contracts, see *Note23 – Financial Assets and Liabilities* to the accompanying consolidatedfinancial statements in Item 18.

 

Interest Rate Risk Management

 

Ona limited 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

 

Thetable below sets out the carrying amount, by maturity, of our financialinstruments that are exposed to interest rate risk for the years ended December 31, 2004 and2003:

 

YearEnded December 31, 2004

 

** **

**Below 1 year**

**1-2 years**

**2-3 years**

**3-4 years**

**4-5 years**

**Over 5 years**

**In U.S. Dollar**

**In Php**

**Fair Value**

** **

 

 

 

 

 

**(in millions)**

 

** **

 

 

 

 

 

 

** **

**Liabilities:**

 

 

 

 

 

 

 

 

** **

Long-term Debt

 

 

 

 

 

 

 

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

110

130

272

–

175

549

1,236

69,652

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

83

61

34

24

280

 607

34,190

32,452

Interest rate

4.49% to 8.03%

4.49% to 7.95%

4.49% to 7.95%

4.49% to 7.58%

4.49% to 6.56%

2.25% 

–

–

–

Japanese Yen (in millions)

27

27

27

14

–

–

95

5,363

5,414

Interest rate

2.125%

2.125%

2.125%

2.125%

–

–

–

–

–

Philippine Peso (in millions)

14

14

–

–

–

14

42

2,371

2,537

Interest rate

11.18% to 14%

11.6% to 24%

–

–

–

15%

–

–

–

* *

*Variable Rate*

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

212

198

154

65

52

132

813

45,832

45,832

Interest rate

GOVCO’s cost  + 0.20%; 0.15% to 4.30% over LIBOR

GOVCO’s cost  + 0.20%; 0.15% to 4.30% over LIBOR

GOVCO’s cost  + 0.20%; 0.15% to 4.30% over LIBOR

0.15% to 4.30% over LIBOR

0.65% to 2.5% over LIBOR

0.5% to 2.5% over LIBOR

–

–

–

Japanese Yen (in millions)

6

6

6

4

–

–

22

1,212

1,212

Interest rate

1.70% over JPY LIBOR

1.70% over JPY LIBOR

1.70% over JPY LIBOR

1.70% over JPY LIBOR

–

–

–

–

–

Philippine Peso (in millions)

2

2

1

1

1

7

14

777

777

Interest rate

1.0% over 91-day T-bill rate to 11.25%

1.0% over 91-day T-bill rate to 11.25%

1.0% over 91-day T-bill rate to 11%

1.0% over 91-day T-bill rate

1.0% over 91-day T-bill rate

1.0% over 91-day T-bill rate

–

–

–

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**2,829**

**159,397**

**161,886**

 

 

 

 

 

 

 

 

 

 

* *

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

U.S. Dollar (US$125 million)

–

–

–

–

–

–

(62)

(3,468)

(3,468)

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

–

–

–

 

YearEnded December 31, 2003

 

** **

**Below 1 year**

**1-2 years**

**2-3 years**

**3-4 years**

**4-5 years**

**Over 5 years**

**In U.S. Dollar**

**In Php**

**Fair Value**

** **

 

 

 

 

 

(in millions)

 

** **

 

 

 

 

 

 

 

**Liabilities:**

 

 

 

 

 

 

 

 

 

Long-term Debt

 

 

 

 

 

 

 

 

 

*Fixed Rate*

 

 

 

 

 

 

 

 

 

US$ Notes (in millions)

77

138

175

300

–

724

1,414

78,581

80,273

Interest rate

10.625%

9.875%

9.25%

7.85% to 10.625%

–

8.35% to 11.375%

–

–

–

US$ Fixed Loans (in millions)

114

104

62

40

13

3

 336

18,722

19,974

Interest rate

5.60% to 8.03%

5.60% to 8.03%

5.60% to 7.95%

5.60% to 7.95%

5.65% to 7.58%

5.65% to 6.56%

–

–

–

Japanese Yen (in millions)

–

26

26

26

13

–

  91

5,068

5,120

Interest rate

–

2.125%

2.125%

2.125%

2.125%

–

–

–

–

Philippine Peso (in millions)

25

19

14

–

 

15

  73

4,043

4,385

Interest rate

11.18% to 17.5%

11.18% to 16.8%

15.816% to 16.8%

–

–

15%

–

–

–

*Variable Rate*

 

 

 

 

 

 

 

 

 

U.S. Dollar (in millions)

226

220

204

145

66

205

1,066

59,337

59,337

Interest rate

GOVCO’s cost  + 0.20%; 0.15% to 4.30% over LIBOR

GOVCO’s cost  + 0.20%; 0.15% to 4.30% over LIBOR

GOVCO’s cost  + 0.20%; 0.15% to 4.30% over LIBOR

GOVCO’s cost  + 0.20%; 0.15% to 4.30% over LIBOR 

0.15% to 4.30% over LIBOR

0.65% to 2.5% over LIBOR

–

–

–

Japanese Yen (in millions)

34

34

35

8

7

130

 248

13,792

13,792

Interest rate

1.0% to 3.85% over JPY LIBOR

1.0% to 3.85% over JPY LIBOR 

1.0% to 3.85% over JPY LIBOR

1.0% over JPY LIBOR

1.0% over JPY LIBOR

1.0% over JPY LIBOR

–

–

–

Philippine Peso (in millions)

1

1

1

4

4

74

85

4,731

4,731

Interest rate

1.0% over 91-day T-bill rate to 11%

1.0% over 91-day T-bill rate to 11%

1.0% over 91-day T-bill rate

1.0% over 91-day T-bill rate

1.0% over 91-day T-bill rate

1.0% over 91-day T-bill rate

–

–

–

 

 

 

 

 

 

 

**3,313**

**184,****274**

**187,612**

 

 

 

 

 

 

 

 

 

 

*Interest rate swap (fixed to floating)*

 

 

 

 

 

 

 

 

 

Japanese Yen (JPY15,037 million)

–

–

–

–

 

–

(46)

(2,582)

(2,582)

Fixed Rate on US$ notional 

11.375%

11.375%

11.375%

11.375%

–

11.375%

–

–

–

Variable Rate on JPY notional

8.16% over LIBOR

8.16% over  LIBOR

8.16% over LIBOR

8.16% over LIBOR

–

8.16% over LIBOR

–

–

–

 

Item 12.     Description of Securities Other thanEquity Securities

 

Not Applicable.

 

PART II

 

Item 13.     Defaults,Dividend Arrearages and Delinquencies

 

Piltel has experienced significant financialdifficulties in recent years.  It has restructured substantially all of itsdebts in accordance with its debt restructuring plan, which was signed on June 4, 2001.  In June and October 2002, more creditors of Piltel agreed to participate inits restructuring plan on the same terms.  See “Item 3. Key Information — RisksFactors — Risks Relating to Us — Piltel has experienced financial difficultiesand we cannot assure you that it will be able to discharge any of its debts orother obligations."  As at December 31, 2004, total restructured long-termdebt of Piltel amounted to Php7,184 million, with maturities of up to June 14, 2016.  As at December 31, 2004, Piltel had an aggregate principal amount of Php52million of unrestructured debt.

 

Piltel is currently not incompliance with the terms of convertible bonds with principal amount of US$0.7million (approximately US$0.9 million redemption price at the option of theholders).  See *Note 12 – Interest-bearing Financial Liabilities* to theaccompanying consolidated financial statements in Item 18.

 

TheSeries C, Class I Preferred Stock of Piltel, is entitled to annual cumulativecash dividends of Php0.20 per share (10% on the par value per share).  Piltelis in arrears with payments of dividends with respect to the Series C, Class IPreferred Stock in the amount of Php1 million for the years ended December 31, 2004,2003, 2002 and 2001.  As at the date of this annual report on Form 20-F, thetotal arrearage with respect to the Series C, Class I Preferred Stock of Piltelamounted to approximately Php5 million.  See “Item 3. Key Information — RiskFactors — Risks Relating to Us — Piltel hasexperienced financial difficulties and we cannot assure you that it will beable to discharge any of its debt or other obligations and that its creditorswill not take measures to enforce their claims.”

 

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

 

None.

 

Item 15.     Controls andProcedures

** **

Ourmanagement, with the participation of our principal executive officer andprincipal financial officer, carried out an evaluation of the effectiveness ofour disclosure controls and procedures (as defined in Rule 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended) as at December31, 2004.

 

Based on this evaluation, ourchief executive officer and principal financial officer concluded that ourdisclosure controls and procedures were effective as at December 31, 2004.

 

During 2004, no change to ourinternal control over financial reporting occurred that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

Item 16A. Audit Committee Financial Expert

 

Ourboard of directors has determined that currently none of the members of theAudit Committee is an audit committee financial expert as defined under theapplicable rules of the U.S. SEC issued pursuant to Section 407 of theSarbanes-Oxley Act of 2002.  Our board of directors believes that the auditcommittee members along with its advisors, possess sufficient financialknowledge and experience.  Our board of directors has appointed one of ournon-independent directors, Corazon de la Paz, as Audit Committee advisor torender advice on complex financial reporting or accounting issues that may beraised in our Audit Committee’s evaluation of our financial statements andother related matters.  Formerly the Chairman and a Senior Partner of JoaquinCunanan & Company (a member firm of PricewaterhouseCoopers Worldwide),Corazon de la Paz, is a certified public accountant and possesses in depth knowledgeof accounting principles (including U.S. GAAP), internal controls andprocedures for financial reporting and audit committee functions, as well asextensive experience in overseeing or actively supervising the preparation,audit, analysis or evaluation of financial statements and in addressing complexand general financial reporting, accounting and audit issues.

 

Item 16B.  Code of Business Conduct and Ethics

 

On March 30, 2004, our board of directors approvedand adopted our Code of Business Conduct and Ethics, or Code of Ethics, thatsets out our business principles and standards of behavior and businessrelationships.

 

It is our declared objective thatall our actions and those of our directors, officers and employees must, at alltimes, be consistent with the principles of accountability, integrity, fairnessand transparency.

 

Our Code of Ethics providesstandards to foster honest and ethical behavior including the following:

 

1.       Compliance with applicable laws,rules and regulations;

 

2.       Ethical handling of conflicts ofinterest, corporate opportunities and confidential information;

 

3.       Protection and proper use of ourassets;

 

4.       Fair dealing with our employees,customers, service providers, suppliers and competitors;

 

5.       Compliance with our reporting anddisclosure obligations to the relevant regulators and the investors;

 

6.       Compliance with our disclosure andfinancial reporting controls and procedures;

 

7.       Assessment and management of risksinvolved in our business endeavours; and

 

8.       Adoption of international bestpractices of good corporate governance in the conduct of our business.

 

*Corporate Governance*

 

Our Code of Ethics has been adopted to strengthen theimplementation of our Corporate Governance Manual, or Governance Manual, whichwas adopted and approved by our board of directors in September 2002.  OurGovernance Manual seeks to institutionalize the principles of good governancewhich our board of directors and management believe to be a necessary componentof sound business management.

 

OurGovernance Manual conforms with the requirements of the Code of CorporateGovernance, or Philippine SEC Governance Code, that was promulgated by thePhilippine Securities and Exchange Commission, or Philippine SEC, under thePhilippine SEC Memorandum Circular No. 2, Series of 2002, on April 5, 2002, inline with the Philippine Government’s policy to promote corporate governancereform aimed to raise investor confidence, develop capital market and helpachieve sustained growth for the Philippine corporate sector and the economy.

 

In compliance with the Philippine SEC Governance Codeand consistent with the relevant provisions of the Securities Regulation Codeand Corporation Code of the Philippines, our Governance Manual covers the following keyareas:

 

1.       The qualifications and grounds fordisqualification for directorship;

 

2.       The requirement that at least twoor twenty percent of the members of our board of directors, whichever islesser, must be independent directors and the standards/criteria for thedetermination of independent directors;

 

3.       The duties and responsibilities ofour board of directors and the individual directors;

 

4.       Our board committees,specifically, the nomination committee, audit committee and executivecompensation committee, the composition and the principal duties and responsibilitiesof such committees;

 

5.       The role of our chairman inensuring compliance with the corporate governance principles;

 

6.       The role of our president/chiefexecutive officer in ensuring that our organizational and procedural controlsare adequate and effective to ensure reliability and integrity of financial andoperational information, effectiveness and efficiency of operations,safeguarding of assets and compliance with laws, rules, regulations andcontracts;

 

7.       The duties and responsibilities ofour corporate secretary/assistant corporate secretary in terms of the supportservices that they need to provide our board in upholding sound corporategovernance;

 

8.       The duties and responsibilities ofthe head of our internal audit organization that would provide our board ofdirectors, management and shareholders with reasonable assurance that our keyorganizational and procedural controls are appropriate, adequate, effective andreasonably complied with;

 

9.       The functions of our independentauditors that would reasonably ensure an environment of sound corporategovernance as reflected in our financial records and reports; the requirementthat non-audit work of the independent auditors should not conflict with theirfunction as independent auditors; the requirement to rotate, at least onceevery five years, the independent auditors or the lead partner assigned tohandle the independent audit of our financial statements;

 

10.    Our commitment to respect andpromote shareholders’ rights such as voting right, pre-emptive right, inspectionright, dividend right, appraisal right, and right to receive information aboutthe background, business experience, compensation and shareholdings of ourdirectors and officers and their transactions with us;

 

11.    The requirement to appoint acompliance officer and the duties and responsibilities of such complianceofficer including the establishment of an evaluation system to determine andmeasure compliance with the provisions of our Governance Manual; and

 

12.    The penalties for violations ofour Governance Manual.

 

Wehave summarized in our website the differences between our corporate governmentpractices and those required of U.S. listed companies under NYSE Section303A.11.  Please refer to:

 

http://www.pldt.com.ph/download/pldt-corpgov_manual.pdf

http://www.pldt.com.ph/download/pldt-code_ethics.pdf

http://www.pldt.com.ph/download/pldt-disclosure.pdf

*Chief Corporate Governance Officer*

 

Our chief governance officer is responsible formonitoring compliance with, interpreting and deciding any issues arising from,investigating and determining violations and recommending the disciplinaryactions against violators of our Governance Manual and Code of Ethics.

 

*Board Committees*

 

Wehave four board committees namely, the governance and nomination, audit, executivecompensation and finance committees.  Each committee has a board- approvedwritten charter that provides for such Committee’s composition, membershipqualifications, functions and responsibilities, conduct of meetings, andreporting procedure to the board.  See “Item 6. Directors, Senior Managementand Employees –– Audit, Governance and Nomination, Executive Compensation andFinance Committees” for further details.

 

*Internal Audit Organization*

 

We have an internal audit organization that determineswhether our network or risk management, control and governance processes areadequate and functioning to ensure that:

 

1.       Risks are appropriately identifiedand managed;

 

2.       Significant financial, managerial,and operating information are accurate, reliable, and timely;

 

3.       Employees’ actions are incompliance with policies, standards, procedures, and applicable laws andregulations;

 

4.       Resources are acquiredeconomically, used efficiently, and adequately protected;

 

5.       Programs, plans and objectives areachieved;

 

6.       Quality and continuous improvementare fostered in our control process;

 

7.       Significant legislative orregulatory issues impacting us are recognized and addressed appropriately; and

 

8.       Interaction with variousgovernance groups occurs as needed.

 

To ensure independence, the headof our internal audit organization reports functionally to our audit committeeand administratively to our president and chief executive officer.  He isaccountable to management and our audit committee in the discharge of hisduties and is required to:

 

1.       Provide annually an assessment onthe adequacy and effectiveness of our processes for controlling our activitiesand managing our risks;

 

2.       Report significant issues relatedto the processes of controlling our activities, including potential improvementsto those processes, and provide information concerning such issues;

 

3.       Periodically provide informationon the status and results of the annual audit plan and the sufficiency of ourinternal audit organization’s resources; and

 

4.       Coordinate with and provideoversight of other control and monitoring functions (risk management,compliance, security, legal, ethics, environmental, external audit).

 

Our internal audit organizationhas a charter that has been approved by our audit committee.  It seeks to complywith the Standards for the Professional Practice of Internal Auditing of TheInstitute of Internal Auditors in the discharge of its scope of work andresponsibilities.

 

*Policy on Employee Disclosure of Questionable Accounting or AuditingMatters*

 

Wehave a written policy on the handling of employees’ complaints or disclosuresabout irregularities regarding accounting, internal controls and auditingmatters and the protection against retaliation for those employees who makesuch complaints or disclosures.

 

Anyemployee may submit a complaint or disclosure of the above nature, in writing,to the Audit Committee or, verbally, to the internal audit organization, ineither case, through the head of our internal audit organization.

 

The head of our internal auditorganization facilitates the investigation of these complaints or disclosuresand ensures the appropriate reporting to our audit committee on the results ofthe investigations and the prompt referrals of findings to the appropriateunits concerned.  Our committee on employee discipline is responsible forevaluating and approving the appropriate disciplinary action against erringemployees with the rank of assistant vice president or lower while ourcorporate governance officer jointly with our corporate secretary areresponsible for evaluating and recommending to our president/chief executiveofficer the appropriate disciplinary action against erring officers with therank of vice president or higher.

 

Thepublic may obtain information on our Code of Ethics, Corporate GovernanceGuidelines and Charters of our Board Committees.  We undertake to provide acopy, without charge, to any person requesting for such copy from our ChiefGovernance Officer, Rene G. Banez*, with e-mail address rgbanez@pldt.com.ph*ortelephone number +632-816-8917.  We also maintain a website at *www.pldt.com.ph*wherein reports filed by us and other information may be accessed.

 

Item 16C.  Principal Accountant Fees and Services

 

The following tablesummarizes the fees paid or accrued for services provided by our externalauditors for the fiscal years ended December 31, 2004 and 2003:

 

 

2004

 

2003

 

(in millions)

 

 

Audit Fees

Php31

 

Php24

Tax Fees

–

 

5

All Other Fees

6

 

13

Total

Php37

 

Php42

 

*Audit Fees*.  This category includes the auditof our annual financial statements, review of interim financial statements andservices that are normally provided by the independent auditors in connectionwith statutory and regulatory filings or engagements for those fiscal years.This category also includes advice on audit and accounting matters that aroseduring, or as a result of, the audit or the review of interim financialstatements and statutory audits required by non-U.S. jurisdictions, includingstatutory audits required.

 

*Tax Services.*  This category includes taxcompliance, tax advice and tax planning services performed by our independentauditors in respect of Smart in 2003.

 

*All Other Fees*.  This category consists primarilyof fees for consultation with respect to our IAS adoption in 2004, riskmanagement review in respect of Smart’s information security infrastructure,due diligence review for certain projects and specialized trainings for *IAS39 – Financial Instruments* in 2003.

 

The fees presented above includes out-of-pocket expenses incidentalto our independent auditors’ work, which amounts do not exceed 5% of theagreed-upon engagement fees.

 

Our Audit Committee pre-approves all audit and non-auditservices as these are proposed or endorsed before these services are performedby our independent auditors.  

 

Item 16D.  Exemptionfrom the listing Standards for Audit Committees

 

Not applicable.

 

Item 16E.   Purchasesof Equity Securities by the Issuer and Affiliated Purchaser

 

Not applicable.

PART III

Item 17.     Financial Statements

 

Not applicable.

 

Item 18.     FinancialStatements

 

Index to Financial Statements

 

 

**Page**

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AUDITED ANNUAL FINANCIAL STATEMENTS

 

Report of Independent Auditors

150

Balance Sheets as at December 31, 2004 and 2003

151

Statements of Income for the Years Ended December 31, 2004, 2003 and 2002

152

Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002

153

Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 20022

154

Notes to Financial Statements

155

** **

Item 19.     Exhibits

** **

SeeItem 18 above for details of the financial statements filed as part of thisannual report.

** **

Exhibitsto this report:

** **

1(a).

Articles of Incorporation and By-laws

 

 

1(b).

By-Laws (as amended January 25, 2005)

 

 

2.

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4.

Material Contracts

 

 

6.

Computation of Earnings per Share

 

 

7.

Calculation of Ratio of Earnings to Fixed Charges

 

 

8.

Subsidiaries

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

 

SIGNATURE

 

The registrant hereby certifies that it meets all ofthe requirements for filing on Form 20-F and that it has duly caused andauthorized the undersigned to sign this annual report on its behalf.

 

 

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

 

 

 

 

 

 

 

 

 

By:

 

                /s/ Ma. Lourdes C. Rausa-Chan

 

 

MA. LOURDES C. RAUSA-CHAN

 

 

Senior Vice President, Corporate Affairs and Legal 

 

 

Services Head and Corporate Secretary

 

 

 

Date:  June 30, 2005
****
EXHIBIT INDEX

** **

Exhibit Number

**Description of Exhibit**

 

 

1(a)

Articles of Incorporation (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

1(b)

By-Laws (as amended on January 25, 2005)

 

 

2

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to `furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4(a)

Stock Purchase and Strategic Investment Agreement, dated September 28, 1999, by and among PLDT, First Pacific Limited, Metro Pacific Corporation, Metro Pacific Asia Link Holdings, Inc., Metro Pacific Resources, Inc. and NTT Communications Corporation (incorporated by reference to PLDT's Form 6-K for the month of September 1999 [2])

 

 

4(b)

Executive Stock Option Plan (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

4(c)

Master Restructuring Agreement, dated June 21, 2000, as amended on December 12, 2000 and December 19, 2000, between Piltel, Piltel (Cayman) Limited, PLDT, The Chase Manhattan Bank, as escrow agent, Metropolitan Bank and Trust Company, as administrative agent and the creditors named therein (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

6

Computation of Earnings per Share

 

 

7

Calculation of Ratio of Earnings to Fixed Charges 

 

 

8

Subsidiaries 

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

** **
****
**EXHIBIT 1(b)**

 

PHILIPPINE LONG DISTANCETELEPHONE COMPANY

By-Laws(as amended on January 25, 2005)

** **

** **

 

 

Adopted January

Amended April

Amended January

Amended April

Amended April

Amended July

Amended May

Amended January

Amended July

Amended January

Amended January

Amended June

Amended July

Amended April

Amended January

Amended March

Amended February

Amended February

Amended March

Amended February

Amended January

 

10,

26,

05,

16,

15,

26,

08,

27,

25,

10,

30,

25,

11,

18,

25,

29,

24,

29,

29,

26,

**25**,

 

1938

1939

1940

1947

1953

1955

1962

1964

1966

1968

1968

1968

1969

1979

1983

1983

1998

2000

2001

2003

**2005**

 

 

PHILIPPINELONG DISTANCE TELEPHONE COMPANY

 

AMENDEDBY - LAWS

ARTICLEI

OFFICE
 

*       Section1.  The principal office of the corporation shall be in Metro Manila,Philippines.

(*Amendedon June 25, 1968 and February 29, 2000)

 

ARTICLE II
MEETINGS

 

*       Section1.  The annual meeting of the stockholders shall be held at the principaloffice of the corporation or at such other place designated by the Board ofDirectors in the city or municipality where the principal office of thecorporation is located on the second Tuesday in June of each year, at 4 o’clock P.M. The Board of Directors may, for good cause, postpone the annual meeting ofstockholders to a reasonable date. 

 

         Writtenor printed notice of every annual stockholders’ meeting, which notice shallstate the date, time and place of the meeting and the purpose or purposes forwhich the meeting is called, shall be given by the Secretary or by theAssistant Secretary to each stockholder.  Such notice may be delivered to thestockholders personally, or enclosed in an envelope with the postage thereonfully prepaid, addressed to each stockholder at his or her last known place ofresidence or business, and posted at a Post Office in the Philippines or in the United States of America.  Such delivery or mailing of notice must be made atleast fifteen (15) business days before the date fixed for the meeting.  Nopublication of notice of any regular or special meeting of stockholders in thepublic newspapers shall be required.

(*Amended on July 26, 1955, February 24, 1998 and March 29, 2001)

 

*       Section2.  Special meetings of the stockholders may be called at any time by thePresident or three (3) of the Directors or by any number of stockholders representingtwo-thirds (2/3) of the subscribed capital stock.  Notice in writing of suchmeeting, stating the date, time and place thereof, and the purpose or purposesfor which such meeting is called shall be given to each stockholder by theSecretary or Assistant Secretary or in case of his absence, inability, refusalor neglect to act, then by the President, Directors or stockholders calling thesaid meeting.  Such notice may be delivered to the stockholders personally orenclosed in an envelope and addressed, with the postage thereon fully prepaid,to each stockholder at his or her last known place of residence or business andposted at a Post Office in the Philippines or the United States of America.Such delivery or mailing of notice must be made at least fifteen (15) businessdays before the date fixed for the meeting and the statement of service by suchdelivery or mailing shall be entered upon the minutes of meeting and the saidminutes upon being read and approved at a subsequent meeting of the stockholdersshall be conclusive on the question of service.

(*Amendedon July 26, 1955, February 24, 1998 and March 29, 2001)

 

*       Section3.  Every meeting of the stockholders shall be presided by the President or, inhis absence, by a chairman to be chosen by the stockholders representing amajority of the shares of the corporation issued and outstanding and entitledto vote present or duly represented at said meeting.  The Secretary or, in hisabsence, the Assistant Secretary, shall act as secretary of every meeting butif neither the Secretary nor the Assistant Secretary is present, the chairmanof the meeting shall appoint a secretary of the meeting.

(*Newprovision adopted on March 29, 2001)

 

*       Section4.  A meeting of the Board of Directors shall be held promptly after theadjournment of the annual meeting of the stockholders; subsequent regularmeetings shall be held monthly on the last Tuesday of each month at 9:30 A. M.,at the office of the corporation in Metro Manila, Philippines or such othertime and place in or outside the Philippines as the Board of Directors may fromtime to time determine.  Special meetings may be called by the Presidentwhenever he may think proper, and he shall forthwith call such meetingswhenever requested in writing to do so by any three (3) Directors.  Suchmeetings shall be called for a date not later than seven (7) days from the dateof such request.  Notice in writing of every special meeting of the Board ofDirectors, stating the date and place thereof and the purpose or purposes forwhich the meeting is called, shall be given to each Director by the Secretaryor Assistant Secretary, or in case of his absence, inability, refusal orneglect to act, by any person appointed for that purpose by the President orthree (3) of the Directors.  Such notice may be delivered to each Directorpersonally, by telegraph, facsimile, e-mail, or other means of written orprinted communication generally accepted and used by the business community asat present available or be made available through technical advances orinnovations in the future, at least twenty-four (24) hours previous to the timefixed for the meeting, or may be given by enclosing a notice in an envelope,with the postage thereon fully prepaid, addressed to each Director at his lastknown place of residence or business and posted at least three (3) days beforethe date fixed for the meeting.  Service of notice, by delivery, telegraph,facsimile, e-mail, or other means of written or printed communication generallyaccepted and used by the business community as at present available or be madeavailable through technical advances or innovations in the future, shall beentered upon the minutes of the meeting, and said minutes, upon being read andapproved at a subsequent meeting of the Board, shall be conclusive upon thequestion of service.  Notice of regular meetings of the Board of Directors ishereby dispensed with.

(*Amendedon January 5, 1940, May 8, 1962, January 30, 1968,

July 11, 1969, February 24, 1998, February 29, 2000 and March 29, 2001)

 

*       Section5.   Every meeting of the Board of Directors shall be presided by the Chairmanof the Board or, in his absence, the President, or in his absence, by anyDirector chosen by majority of the members of the Board present at such meetingat which there is a quorum.  The Secretary or, in his absence, the AssistantSecretary, shall act as secretary of every meeting but if neither the Secretarynor the Assistant Secretary is present, the chairman of the meeting shallappoint a secretary of the meeting.

(*New provisionadopted on March 29, 2001)

 

*       Section6.  If any regular meeting of stockholders or Board of Directors provided forherein shall fall on a legal holiday, then such meeting shall be held on thenext succeeding business day at the same hour; but special meetings of thestockholders or Directors may be held upon a holiday with the same force andeffect as if held upon a business day.

(*Amendedon March 29, 2001)

 

*       Section7.  Meetings of the stockholders shall be held at the principal office of thecorporation or at such other place designated by the Board of Directors in thecity or municipality where the principal office of the corporation is located.Meetings of the Board of Directors shall be held at the principal office of thecorporation or at such other place in or outside the Philippines as the Board,from time to time, may determine.

(*Amendedon May 8, 1962, July 11, 1969, February 29, 2000 and March 29, 2001)

 

ARTICLEIII

QUORUM ANDVOTING REQUIREMENTS
 

*       Section1.  At any meeting of the stockholders, persons representing, in person or byproxy, a majority of the shares of the corporation issued and outstanding andentitled to vote at the said meeting shall constitute a quorum for thetransaction of any business, except as otherwise provided by law.  In theabsence of a quorum, the President or, in his absence, any person entitled topreside or act as secretary of the meeting shall have the power to adjourn themeeting from time to time until the requisite number of shares to constitute aquorum is present or represented. When a meeting of the stockholders isadjourned to another time or place, it shall not be necessary to give notice ofthe adjourned meeting if the time and place to which the meeting is adjournedare announced at themeeting at which the adjournment was taken.  At thereconvened meeting, any business may be transacted that could have beentransacted on the original date of the meeting.

(*Amendedon March 29, 1983 and March 29, 2001)

 

*       Section2.  At any meeting of the stockholders at which there is quorum, all mattersapproved by the stockholders representing a majority of the issued andoutstanding shares of the corporation entitled to vote present in person or byproxy at such meeting shall be valid as a corporate act, except for suchmatters which require the vote of the stockholders representing a higherpercentage of the outstanding shares as prescribed by statute or these By-Laws.

(*Newprovision adopted on March 29, 2001)

*       Section3.  Each stockholder is entitled to one vote for each share of stock held byhim, where such stock has voting rights on the matter under consideration, andsuch stock may be represented by the holder thereof or by his attorney dulyauthorized by proxy executed in writing on forms prescribed by the Board ofDirectors which shall be furnished to a stockholder upon his request.  Unlessotherwise provided in the proxy, it shall be valid only for the meeting inrespect of which such proxy was issued.  Proxies must be filed with theSecretary, Assistant Secretary or transfer agent of the corporation at leasttwo (2) days before the day of the meeting.  Any proxy filed with theSecretary, Assistant Secretary or transfer agent of the corporation may berevoked by the stockholder concerned either in an instrument in writing dulypresented to the Secretary, Assistant Secretary or transfer agent of thecorporation at least two (2) days before the day of the meeting or by hispersonal presence at the meeting.  The decision of the Secretary on thevalidity of proxies shall be final and binding until and unless set aside by acourt of competent jurisdiction.

(*Amendedon March 29, 1983, February 24, 1998 and March 29, 2001)

 

*       Section4.  At every election of Directors, each holder of stock which has votingrights for the election of Directors is entitled to one vote for each share ofsuch stock held by him for as many persons as there are Directors to beelected, or to cumulate said shares and give one (1) candidate as many votes asthe number of Directors multiplied by the number of his share shall equal, orto distribute such votes on the same principle among as many candidates as heshall think fit.

(*Amended on March 29, 1983, February 24, 1998 and March 29, 2001)

 

*       Section5.  The Board of Directors shall have the power to close the stock transferbooks of the corporation for the following periods:  (a) not exceeding sixty(60) days preceding the date of any meeting of stockholders or the date for theallotment of rights or the date when any change or conversion or exchange ofcapital stock shall go into effect or a date in connection with obtaining theconsent of stockholders for any purpose; and (b) not exceeding forty five (45)days preceding the date of payment of any dividend; provided, however, that inlieu of closing the stock transfer books as aforesaid, the Board of Directorsmay fix in advance a date as follows:  (a) not exceeding sixty (60) dayspreceding the date for any meeting of stockholders or the date for the allotmentof rights, or the date when any change or conversion or exchange of capitalstock shall go into effect, or a date in connection with obtaining suchconsent; and (b) not exceeding forty five (45) days preceding the date ofpayment of any dividend; as a record date for the determination of thestockholders entitled to notice of, and to vote at, any such meeting, and anyadjournment thereof, or to any such allotment of rights, or to exercise therights in respect of any such change, conversion or exchange of capital stock,or to give such consent, or entitled to receive payment of any such dividend,and in such case, such stockholders, and only such stockholders as shall bestockholders of record on the date so fixed, shall be entitled to such noticeof, and to vote at, such meeting, and any adjournment thereof, or to receivesuch allotment of rights, or to exercise such rights, or to give such consent,or to receive payment of such dividend, as the case may be, notwithstanding anytransfer of any stock on the books of the corporation after any such recorddate fixed as aforesaid.

(*Amendedon July 26, 1955, February 24, 1998 and March 29, 2001)

 

*       Section6.  At any meeting of the Board of Directors, a majority of the number of theDirectors as specified in the Articles of Incorporation shall constitute aquorum for the transaction of business.  In the absence of a quorum, a majorityof the Directors present may adjourn any meeting from time to time until aquorum be had.  Notice of any adjourned meeting need not be given.

(*New provision adopted on March 29, 2001)

 

*   Section7.  At any meeting of the Board of Directorsat which there is a quorum, all matters approved by at least a majority of the Directorspresent at such meeting shall be valid as a corporate act, except for suchmatters which require the vote of majority of all the members of the Board asprescribed by statute or these By-Laws.  
(*New Provision Adopted On March 29, 2001)
ARTICLE IV
CAPITAL STOCK

 

*       Section 1.  The certificate of stock shall be in such form anddevice as may be prescribed by the Board of Directors from time to time.

(*Amended on April 15, 1953)

 

*       Section2.  The person, firm or corporation in whose name the stock stands on the booksof the corporation, whether individually or as trustee, pledgee, or otherwise,may be recognized and treated by the corporation as the absolute owner of thestock, and the corporation shall in no event be obliged to deal with or torecognize the rights or interests of other persons in such stock or in any partthereof.

(*Amendedon April 15, 1953)

 

*       Section3.  Certificates shall be issued in the manner prescribed by law to eachstockholder, showing the number of shares to which he is entitled; and saidcertificates, and the shares named therein shall be transferable only upon thebooks of the corporation by the shareholder named in the certificate, or hisduly authorized attorney or representative.  The Board of Directors shallappoint one or more registration agents of the corporation and no certificatefor any share of stock shall be delivered to any stockholder until there isendorsed thereon a certificate of one of the registrars, showing suchcertificate to have been duly registered.

(*Amendedon April 15, 1953)

 

*       Section4.  No new certificates of any share shall be issued until the old certificate,representing the same, has been surrendered and cancelled; provided, however,that in case of lost, stolen or destroyed certificates of stock, the followingprocedure shall be followed for the issuance by the corporation of newcertificates in lieu of those lost, stolen or destroyed:

 

(a)  The registered owner of certificates of stock in this corporation orhis legal representative shall file an affidavit, in triplicate, with thiscorporation setting forth, if possible, the circumstances as to how, when andwhere said certificates were lost, stolen or destroyed, the number of sharesrepresented by each certificate and the serial number of the certificates.  Heshall submit such other information and evidence which he may deem necessary.

 

(b)  After verifying the affidavitand other information and evidence with the books of this corporation, thiscorporation shall publish a notice, in a newspaper of general circulation inthe Philippines published in the **place where this corporation has itsprincipal office**, once a week for three (3) consecutive weeks, at theexpense of the registered owner of the certificates of stock which have beenlost, stolen or destroyed.  The notice shall state the name of this corporation,the name of the registered owner and the serial number of said certificates,and the number of shares represented by each certificate, and that after theexpiration of one (1) year from the date of the last publication, if no contesthas been presented to this corporation regarding said certificates of stock,the right to make such contest shall be barred and this corporation shallcancel in its books the certificates of stock which have been lost, stolen ordestroyed and issue in lieu thereof new certificates of stock, unless theregistered owner files a bond or other security in lieu thereof as may berequired running for a period of one (1) year for a sum and in such forms andwith such sureties as may be satisfactory to the Board of Directors, in whichcase a new certificate may be issued even before the expiration of the one (1)year period provided herein:  Provided,  That if a contest has been presentedto this corporation or if an action is pending in court regarding the ownershipof said certificates of stock which have been lost, stolen or destroyed, theissuance of the new certificates of stock in lieu thereof shall be suspendeduntil final decision by the court regarding the ownership of said certificatesof stock.

(*Amendedon April 15, 1953 **and****January 25, 2005**)

 

*       Section5.  Certificates of stock shall be signed by the President or Vice Presidentand the Secretary or an Assistant Secretary of the corporation and sealed withthe corporate seal; provided, however, that where any such certificate issigned by a transfer agent and by a registrar, the signatures of any suchPresident, Vice President, Secretary or Assistant Secretary and the seal of thecorporation upon such certificate may be facsimiles, engraved or printed.  Incase any officer or officers who have signed, or whose facsimile signature orsignatures have been used on, any such certificate or certificates shall ceaseto be such officer or officers of the corporation, whether because of death,resignation or otherwise, before such certificate or certificates have beendelivered by the corporation, such certificate or certificates may neverthelessbe adopted by the corporation and be issued and delivered as though the personor persons who signed such certificate or certificates or whose facsimilesignature or signatures have been used thereon had not ceased to be suchofficer or officers of the corporation.  A transfer agent of the corporationmay sign certificates of stock by facsimile signature provided the use thereofis permitted by the stock exchange on which the corporation’s stock is listedand by the corporation’s other transfer agents.

(*Amendedon April 15, 1953, July 26, 1955 and July 11, 1969)

 

*       Section6.  The corporation shall not issue any stock certificate evidencing, eithersingly, or with other shares, any fractional part of a share, or any undividedinterest in any share.

(*Amendedon April 15, 1953)

 

ARTICLEV

DIRECTORS

 

*       Section1.  The Board of Directors shall consist of thirteen (13) members, each of whommust hold at least one (1) share of the stock of the corporation in his ownname on the books of the corporation.  Directors shall be elected from amongthe stockholders at their annual meeting or at any meeting held in lieu thereoffor that purpose.  Each Director shall hold office until the annual meeting ofstockholders held next after his election and until his successor shall havebeen elected and qualified, except in case of death, resignation,disqualification or removal from office.

 

         Thereshall be at least two (2) Independent Directors or such Independent Directorsas shall constitute at least twenty percent (20%) of the members of the Boardof Directors, whichever is lesser.  An “Independent Director” is a directorindependent of management and who, apart from his fees and shareholdings, isfree from any business or other relationship with the corporation which could,or could reasonably be perceived to, materially interfere with his exercise ofindependent judgment in carrying out his responsibilities as a director of thecorporation and includes, among other persons, one who:

 

(a)        is not a director or officerof the corporation or any of its related companies or any of its substantialshareholders (other than as an Independent Director of any of the foregoing);

 

(b)        is not a substantialshareholder of the corporation or any of its related companies or any of itssubstantial shareholders;

 

(c)        is not a relative of any director, officeror substantial shareholder of the corporation, or any of its related companiesor any of its substantial shareholders.  For this purpose, “relatives” includesspouse, parent, child, brother, sister, and the spouse of such child, brotheror sister;

** **

(d)        is not acting as a nominee or representativeof any director, or officer or substantial shareholder of the corporation, orany of its related companies or any of its substantial shareholders;

 

(e)        has not been employed in any executivecapacity by the corporation, or any of its related companies or any of itssubstantial shareholders within the last five (5) years;

 

(f)        is not retained, or within the last five (5)years has not been retained, as a professional adviser by the corporation, orany of its related companies or any of its substantial shareholders, eitherpersonally or through his firm;

 

(g)        has not engaged and does not engage in anytransaction with the corporation or with any of its related companies or withany of its substantial shareholders, whether by himself or with other personsor through a firm of which he is a partner or a company of which he is adirector or substantial shareholder, other than the transactions which areconducted at arm’s length and are immaterial;

** **

(h)        is not employed as an officer or executiveof another entity where any of the corporation’s officers or executives serveson that entity’s Compensation Committee; or

 

(i)         is not affiliated with or employed by or,within the last five (5) years, has not been affiliated with or employed by thecorporation’s present or former external auditors or their affiliates.

 

When used in relation to a Company,“related company” means another company which is: (i) its holding company, (ii)its subsidiary, or (iii) a subsidiary of its holding company; and “substantialshareholder” means any person who is directly or indirectly the beneficialowner of more than ten percent (10%) of any class of its equity security.

 

         ADirector or any person nominated for election to the Board of Directors mustpossess the following minimum qualifications as determined by the NominationCommittee **or any other committee** constituted by the Board ofDirectors **that, by its charter as approved by the Board of Directors, isvested with the duties and responsibilities of a nomination committee:**

 

(a)        at least a college graduate, orin the absence of such college degree or formal education, sufficientexperience in managing a business;

 

(b)        at least twenty-one (21) yearsold;

 

(c)        provenintegrity and probity; and

 

(d)        assiduousness in the performance of duties. 

** **

         No person shall qualify or be eligible for nomination orelection to the Board of Directors if he is engaged in any business thatcompetes with or is antagonistic to that of the corporation or itssubsidiaries.  Without limiting the generality of the foregoing, a person shallbe deemed to be so engaged:

 

(i)                 If he is an employee, officer, manager or controlling person, or theowner (either of record or beneficially) of ten per cent (10%) or more of anyoutstanding class of shares, of any corporation (other than one in which thiscorporation owns at least thirty per cent (30%) of the capital stock) or entityengaged in a business that the Board of Directors, by at least a majority vote,determines to be competitive or antagonistic to that of this corporation or anyof its subsidiaries; or

 

(ii)               If he is an employee, officer, manager or controlling person, or theowner (either of record or beneficially) of ten per cent (10%) or more of anyoutstanding class of shares, of any corporation or entity engaged in any lineof business of this corporation or any of its subsidiaries, when in thejudgmentof the Board of Directors, by at least a majority vote, the laws againstcombinations and restraint of trade shall be violated by such person’smembership in the Board of Directors; or

 

(iii)              If the Board of Directors, in the exercise of its judgment in goodfaith, determines, by at least a majority vote, that he is a nominee of anyperson set forth in (i) and (ii) above.

 

         In determining whether or not a person is acontrolling person, beneficial owner, or the nominee of another, the Board ofDirectors may take into account such factors as business and familyrelationships.
 
         In addition, no person shall qualify or beeligible for nomination or election to the Board of Directors if he issuffering from any of the following grounds for disqualification:
 

(a)        convictionby final judgment of an offense involving moral turpitude or similar fraudulentacts or transgressions;

 

(b)        convictionby final judgment of an offense punishable by imprisonment for a periodexceeding six (6) years, or a violation of the Corporation Code committedwithin five (5) years prior to the date of election as a director;

 

(c)        judicialdeclaration of bankruptcy or insolvency;

 

(d)               final finding by the PhilippineSecurities and Exchange Commission (Commission) or a Philippine court oradministrative body or other regulatory authority of competent jurisdiction ofhaving willfully violated, or willfully aided, abetted, counseled, induced orprocured the violation of, any provision of the Securities Regulations Code,the Corporation Code or any other laws administered by the Commission or BangkoSentral ng Pilipinas (BSP), or any rule, regulation or order of the Commissionor BSP; and
 
(e)        final finding by a foreign court oradministrative body or other regulatory authority of competent jurisdiction ofhaving committed the acts listed in the preceding clause (d) in violation ofthe applicable laws, rules or regulations of the relevant foreign jurisdiction.
 
         Exceptas otherwise provided in the preceding paragraphs, the Nomination Committee **orany other committee** constituted by the Board of Directors **that,by its charter as approved by the Board of Directors, is vested with the dutiesand responsibilities of a nomination committee** shall have the power andauthority to evaluate and decide whether any person nominated for election as aDirector has all the qualifications and none of the disqualifications specifiedin the preceding paragraphs.  The Nomination Committee **or any othercommittee** constituted by the Board of Directors**that, by itscharter as approved by the Board of Directors, is vested with the duties andresponsibilities of a nomination committee** shall also have the powerand authority to determine such****other criteria for qualification anddisqualification of Directors or persons nominated for election to the Board ofDirectors, including grounds for temporary disqualification of Directors.

 
         For the proper implementation of thisprovisions of this Section, all nominations for election of directors by thestockholders shall be submitted in writing to the Board of Directors throughthe President and the Secretary at this corporation’s principal place ofbusiness at least sixty (60) working days before the regular or special meetingof stockholders for the purpose of electing directors.
(*Amended on May 8, 1962, February 29, 2000and March 29, 2001,
February 26, 2003 **and****January 25, 2005**)

 

*       Section2.  In case of any vacancy in the Board of Directors for any cause or reasonwhatsoever, other than removal by the stockholders or by expiration of the termof office, the vacancy may be filled by the vote of at least a majority of theremaining Directors then in office, if still constituting a quorum.  A Directorso elected to fill a vacancy shall hold office for the unexpired term of hispredecessor in office.  Any vacancy in the Board of Directors resulting fromthe removal of a director by the stockholders in the manner provided by law maybe filled by election at the same meeting at which the removal took place or atany annual or special meeting of stockholders called for the purpose aftergiving notice as prescribed in these By-Laws.

(*Amendedon May 8, 1962, January 10, 1968 and March 29, 2001)

 

*       Section3.  The Board of Directors may create an Executive Committee to be composed ofnot less than three (3) members of the Board of Directors to be appointed bythe Board of Directors.  Such committee shall, except as may otherwise beprovided by law, have and exercise all the powers of the Board of Directorsduring the intervals between the meetings of the full Board.  Such committeemay prescribe rules for its governance; its meetings may be held at such placewithin the Philippines as it may determine or authorize, and majority of themembers of said committee at any meeting shall constitute a quorum.  Inaddition to taking action at a meeting, the Executive Committee may validly actupon the written consent of a majority of its members.  At each meeting of theBoard of Directors, the acts and proceedings of the Executive Committee sincethe preceding meeting of the Board of Directors shall be submitted for suchaction thereon as the Board may deem proper.

(*Amendedon May 8, 1962, January 10, 1968 and March 29, 2001)

 

         Section 4.  The corporation will not speculate inits own or constituent companies’ securities, or permit similar speculations byany of its constituent companies.

 

*       Section 5.  The Board of Directors may create committees andother bodies it may deem necessary or advisable in respect of the affairs ofthe corporation.  The membership, powers, duties, functions andresponsibilities of such committees and bodies shall be prescribed by the Boardof Directors.  The members of such committees and bodies shall be appointed bythe Board of Directors for a term co-terminus with that of the Board ofDirectors that appoints them unless sooner terminated or removed.

(*Newprovision effective February 24, 1998)

 

ARTICLEVI

OFFICERS

 

*       Section1.  The officers of the corporation shall be a President, a Senior Executive **Vice**President, one or more Executive Vice Presidents, one or more SeniorVice Presidents, one or more First Vice Presidents, one or more VicePresidents, a Treasurer, one or more Assistant Treasurers, a Secretary, one ormore Assistant Secretaries, a Controller, and one or more AssistantControllers, all of whom shall be elected by the Board of Directors. 

 

         Immediatelyafter the election of the Directors at the annual or special meeting called forsuch purpose, the Board of Directors shall elect the officers of thecorporation.  The Board may also, in its discretion, elect a Chairman of theBoard.  Any two (2) or more positions may be held concurrently by the sameperson, except that no one shall act as Chairman or President and Treasurer orSecretary at the same time.

(*Amendedon May 8, 1962, January 27, 1964, July 25, 1966,

April 18, 1979, January 25, 1983, March 29, 2001 **and****January 25, 2005**)

 

         Section2.  The Board of Directors may appoint or elect such other officers as it shalldeem advisable, who shall, respectively, have such authority and perform suchduties as may be prescribed from time to time by the Board of Directors.

 

*       Section3.  The term of office of all officers shall be co-terminus with that of theBoard of Directors that elects or appoints them except in case of death,resignation, disqualification or removal from office.  

(*New provision adopted on March 29, 2001)

 

*       Section4.  If any of the officers becomes vacant by reason of death, resignation,failure to qualify, disqualification, removal from office or for any othercause, the Board of Directors may elect a successor who shall hold office forthe unexpired term of his predecessor in office.

(*Newprovision adopted on March 29, 2001)

 

ARTICLEVII

CHAIRMAN OF THEBOARD, PRESIDENT, SENIOR EXECUTIVE VICE PRESIDENT, EXECUTIVE VICE PRESIDENTS,SENIOR VICE PRESIDENTS, FIRST VICE PRESIDENTS, AND VICE PRESIDENTS

 

*       Section1.  Chairman of the Board.  The Chairman of the Board (if there be one)shall preside at all meetings of the Board of Directors.  He shall alsoexercise such powers and perform such duties as the Board of Directors mayassign to him.

(*Amendedon April 26, 1939, April 16, 1947 and March 29, 2001)

 

*       Section2.  President.  The President, who must be a director, shall be thechief executive officer of the corporation.  He shall have general care,supervision and management of the business and affairs of the corporation,subject to the control of the Board of Directors.  He shall exercise such functionsand perform all duties incident to the office of the President and such otherduties as may, from time to time, be assigned to him by the Board or asprescribed in these By-Laws.  He shall see that all orders and resolutions ofthe Board are carried into effect, subject, however, to the right of the Boardto delegate any specific powers, except such as may be by statute exclusivelyconferred on the President, to any other officer or officers of thecorporation.  He shall preside at all the meetings of the stockholders and, inthe absence of the Chairman of the Board, preside at the meetings of the Boardof Directors.

(*Amended on April 26, 1939, April 16, 1947, April 15, 1953 and March 29, 2001)

 

*       Section3.  The Senior Executive Vice President, Executive Vice Presidents, SeniorVice Presidents, First Vice Presidents, and Vice Presidents.  In the caseof absence or disability of the President, the Senior Executive Vice Presidentshall act as President and in case of his absence or disability, the Board shalldesignate any of the Executive Vice Presidents to act as President, and performthe duties and exercise the powers of the President.  The Senior Executive VicePresident, Executive Vice Presidents, Senior Vice Presidents, First VicePresidents and Vice Presidents shall perform such duties as the Board shall,from time to time, prescribe.

(*Amended on April 26, 1969, January 27, 1964,

April 18, 1979 and January 25, 1983)

 

 
ARTICLE VIII
SECRETARYAND ASSISTANT SECRETARY

 

*       Section1.  The Secretary shall make full and faithful record of the proceedings of allmeetings of the stockholders, Board of Directors and Executive Committee inbooks to be kept for that purpose.  He shall give or cause to be given allnecessary notice of and materials for all meetings, have custody of thecorporate seal and affix it when authorized, preserve and keep all materialcontracts, papers and documents, and keep or cause to be kept a list of allstockholders.  The Secretary shall act as inspector at the election of Directorsand, as such, determine the number of shares of stock outstanding and entitledto vote, the shares of stock represented at the meeting, the existence of aquorum, the validity and effect of proxies, and receive votes, ballots andconsents, hear and determine all challenges and questions arising in connectionwith the right to vote, count and tabulate votes, ballots, consents, determinethe results and do such acts as are proper to conduct the election or vote.The Secretary may assign the exercise or performance of any or all of theforegoing duties, powers and functions to any other person or persons, subjectalways to his supervision and control.  The Secretary shall generally performsuch services and duties as are incident to his office and as the Board ofDirectors or the President may from time to time prescribe or assign to him.

(*Amendedon March 29, 2001)

 

*       Section2.  In the absence or disability of the Secretary, the Assistant Secretaryshall act in his place and perform his duties.  The Assistant Secretary shallalso perform such other duties as may, from time to time, be delegated to himby the Secretary and as the Board of Directors or the President may prescribeor assign to him.

(*Newprovision adopted on March 29, 2001)

 

ARTICLE IX

TREASURER AND ASSISTANT TREASURER

 

*       Section 1.  The Treasurer shall be the chief fiscal officer ofthe corporation.  He shall discharge such duties and have such powers as theBoard of Directors or the President may prescribe or assign to him.

(*Amendedon March 29, 2001)

 

*       Section 2.  In the absence or disability of theTreasurer, the Assistant Treasurer shall act in his place and perform hisduties.  The Assistant Treasurer shall also perform such other duties as mayfrom time to time be delegated to him by the Treasurer and as the Board ofDirectors or the President may prescribe or assign to him.

(*Newprovision adopted on March 29, 2001)

 

ARTICLEX

INDEMNIFICATIONOF DIRECTORS/OFFICERS

 

         This corporation shall indemnify every director orofficer, his heirs, executors and administrators against all costs and expensesreasonably incurred by such person in connection with any civil, criminal,administrative or investigative action, suit or proceeding (other than anaction by this corporation) to which he may be, or is made, a party by reasonof his being or having been a director or officer of this corporation, exceptin relation to matters as to which he shall be finally adjudged in such action,suit or proceeding, to be liable for gross negligence, misconduct, or breach offiduciary duty.

 

In the event of a settlement or compromise, indemnification shall beprovided only in connection with such matters covered by the settlement as towhich this corporation is advised by counsel that the person to be indemnifieddid not commit a breach of duty as such director or officer.

 

The amount payable by way of indemnity shall be determined and paid onlypursuant to a resolution adopted by a majority of all of the members of theBoard of Directors.

 

         The costs and expenses incurred in defending theaforementioned action, suit or proceeding may be paid by this corporation inadvance of the final disposition of such action, suit or proceeding, asauthorized in the manner provided for in the preceding paragraph, upon receiptof an undertaking by or on behalf of the director or officer to repay suchamount, unless it shall ultimately be determined that he is entitled to beindemnified by this corporation as authorized in this Article.

(*New provision adopted on March 29, 2001)

 

ARTICLE XI

INDEPENDENT AUDITOR
 

*       Section 1.  The Audit Committee constitutedby the Board of Directors shall select and recommend the Independent Auditorfor appointment by the Board of Directors.  The Audit Committee shall also havethe authority to recommend the removal of the Independent Auditor by the Boardof Directors.  In case of resignation or removal of the Independent Auditor,the Audit Committee shall, as soon as practicable, select and recommend areplacement for appointment by the Board of Directors.

(*New provision adopted on February 26, 2003)

 

*       Section 2.The Independent Auditor selected and recommended by the Audit Committeepursuant to Section 1 of this Article shall be appointed by the Board ofDirectors at their regular meeting immediately following the annual meeting ofthe stockholders of the corporation.  In case of resignation or removal of theIndependent Auditor, the new Independent Auditor selected and recommended bythe Audit Committee shall be appointed by the Board of Directors at any regularor special meeting.

(*Amendedon May 8, 1962, March 29, 2001 and February 26, 2003)

 

*ARTICLEXII

BANKINGAND CONTRACTS

 

*       Section1.  All moneys belonging to the corporation shall be deposited in such bank orbanks as may be, from time to time, designated by the Board of Directors andshall be withdrawn only on checks of the corporation signed by suchofficer/officers of the corporation or by such person/persons as may be, fromtime to time, designated by the Board of Directors.  Promissory notes, bills ofexchange, trade acceptances, drafts and other negotiable instruments shall besigned and/or drawn in the name of the corporation by such officer/officers **ofthe corporation or such person/persons** as may be, from time to time,designated by the Board of Directors.

**(*Amendedon****January 25, 2005****)**

 

*       Section2.  All contracts, instruments or documents pertaining to transactions orcorporate actions authorized by the Board of Directors shall be signed in thename of the corporation by such officer/officers **of the corporation or bysuch person/persons** as may be, from time to time, designated by theBoard of Directors.  In the absence of any specific designation by the Board ofDirectors, such contracts, instruments or documents shall be signed in the nameof the corporation by the President, or by any officer/**officers orexecutive/executives** of the corporation **or any person/personsduly** authorized by the President.  Contracts, instruments or documentsto be entered into in the ordinary course of business of the corporation whichdo not require the approval of the Board of Directors may be signed by thePresident or by any officer/**officers or executive/executives** ofthe corporation **or any person/persons duly** designated by thePresident, or by such officer/officers **or executive/executives of thecorporation or any person/persons duly** authorized for such purposeunder administrative orders approved by the President **and** ineffect at the relevant time.

(*Amendedon March 29, 2001 **and****January 25, 2005**)

 

* ARTICLE XIII

FISCAL YEAR
 

         Section1.  The fiscal year in the business of the corporation shall be the calendaryear, extending from January first to December thirty-first inclusive, in eachyear.

 

*       Section 2.  The corporation shall submit to the stockholders atleast fifteen (15) business days prior to the annual meeting, **a financialreport of the operations of the corporation for the preceding year, which shallinclude financial statements, duly signed and certified by the corporation’sIndependent Auditor**. 

(*Amendedon February 24, 1998, March 29, 2001, July 16, 2002 **and****January 25, 2005**)

 

*ARTICLE XIV

SEAL

 

         Section 1.  The corporate seal of this corporation shall bearupon its face, in a circle, the words “PHILIPPINE LONG DISTANCE TELEPHONECOMPANY”, and within the circle a desk telephone instrument and the words andfigures, “INCORPORATED 1928”.

(*Amendedon March 29, 2001)

 

*ARTICLE XV

AMENDMENTS

 

*       Section 1.  The owners of the majority of the subscribed capitalstock may, at a regular or special meeting duly called for the purpose, amendor repeal these By-Laws, or adopt new By-laws.  The owners of two-thirds of thesubscribed capital stock may delegate to the Board of Directors the power toamend or repeal these By-Laws or to adopt new By-Laws; provided, however, thatany such power so delegated to the Board of Directors shall be considered asrevoked whenever a majority of the stockholders shall so vote at a regular orspecial meeting called for the purpose.

(* Amended on April 15, 1953)

 

*       Section2.  All By-Laws and amendments thereto adopted shall be certified by a majorityof the Directors and by the Secretary or Assistant Secretary, and entered inthe book of By-Laws.  Whenever any amendment or new By-Law is adopted, it shallbe entered in the book of By-Laws with the original By-Laws.  If any By-Law isrepealed, the fact of repeal with the date of the meeting at which the repealwas enacted, or written assent was filed, shall be stated in said book.

(*Amendedon March 29, 2001)

 

The following notation is FOR GUIDANCE ONLY and does notconstitute a part of the By-Laws of Philippine Long Distance Telephone Company.

 

         NOTE:Under the provisions of Section 1 of ARTICLE XV (formerly Article XIV) of theBy-Laws of Philippine Long Distance Telephone Company, the owners of two-thirdsof the subscribed capital stock may delegate to the Board of Directors thepower to amend, repeal or adopt new By-Laws.  Under the authority given by saidsection of the By-Laws, the stockholders under date of April 15, 1953 delegated to the Board the power to amend, repeal or adopt new By-Laws.

 

**|**
****
**EXHIBIT 6**

 

PHILIPPINE LONG DISTANCETELEPHONE COMPANY

Computationof Operating Income and Earnings Per Share

For the years 2000through 2004

 

** **

**2004**

**2004(1)**

**2003**

**2002**

**2001**

**2000**

** **

**(in millions, except net operating income (loss) per common share)**

**1. Operating income (loss) per share**

** **

** **

** **

** **

** **

** **

Basic

 

 

 

 

 

 

Operating income (loss) 

Php48,539

US$862

Php33,379

Php12,029

(Php7,994)

Php10,524

 
Deduct:  Dividends on preferred stock

1,764

31

1,739

1,645

1,503

1,249

 
Accretion of redemption value of preferred stock subject to mandatory conversion

1,503

27

1,309

1,004

542

–

 
Operating income (loss) applicable to common shareholders

Php45,272

US$804

Php30,331

Php9,380

(Php10,039)

Php9,275

 
Diluted

 

 

 

 

 

 

Operating income (loss) 

Php48,539

US$862

Php33,379

Php12,029

(Php7,994)

Php10,524

Deduct:  Dividends on preferred stock

49

1

49

1,036

1,503

1,249

Accretion of redemption value of preferred stock subject to mandatory conversion

–

–

1,309

1,004

542

–

Operating income (loss) applicable to common shareholders

Php48,490

US$861

Php32,021

Php9,989

(Php10,039)

Php9,275

Basic

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

169,476

 

169,361

168,895

168,498

121,173

Effect of issuance of common shares during the year

252

 

52

200

162

36,504

 

169,728

 

169,413

169,095

168,660

157,677

Diluted

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

169,476

 

169,361

168,895

168,498

121,173

Effect of issuance of common shares during the year

252

 

52

200

162

36,504

Weighted average number of shares under ESOP during the year(3)

155

 

–

–

–

–

Common share equivalent of preferred shares deemed dilutive

22,381

 

24,222

22,160

–

–

 

192,264

 

193,635

191,255

168,660

157,677

 

 

 

 

 

 

 

Operating income (loss) per share 

 

 

 

 

 

 

Basic

Php266.73

US$4.73

Php179.04

Php55.47

(Php59.52)

Php58.82

Diluted

252.20

4.48

165.37

52.23

(59.52)

58.82

 

** **

 

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

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

** **

** **

** **

** **

** **

** **

Basic

 

 

 

 

 

 

Net income (loss) before cumulative effect of change in accounting policy

Php28,101

US$499

Php11,045

(Php6,158)

(Php27,782)

(Php29,258)

 
Deduct:  Dividends on preferred stock 

1,764

31

1,739

1,645

1,503

1,249

               Accretion to redemption value of preferred stock subject to mandatory conversion

1,503

27

1,309

1,004

542

–

Net income (loss) attributable  to common shareholders

Php24,834

US$441

Php7,997

(Php8,807)

(Php29,827)

(Php30,507)

Diluted

 

 

 

 

 

 

Net income (loss)  before cumulative effect of change in accounting policy

Php28,101

US$499

Php11,045

(Php6,158)

(Php27,782)

(Php29,258)

Deduct:  Dividends on preferred stock 

285

5

1,485

1,645

1,503

1,249

               Accretion to redemption value of preferred stock subject to mandatory conversion

1,503

27

1,309

1,004

542

–

Net income (loss) applicable to common shareholders

Php26,313

US$467

Php8,251

(Php8,807)

(Php29,827)

(Php30,507)

Basic

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

169,476

 

169,361

168,895

168,498

121,173

Effect of issuance of common shares during the year

252

 

52

200

162

36,504

 

169,728

 

169,413

169,095

168,660

157,677

Diluted

 

 

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

 

 

Outstanding common shares, beginning

169,476

 

169,361

168,895

168,498

121,173

Effect of issuance of common shares during the year

252

 

52

200

162

36,504

Weighted average number of shares under ESOP during the year(3)

155

 

–

–

–

–

Common share equivalent of preferred shares deemed dilutive:

11,213

 

11,069

–

–

–

 

181,096

 

180,482

169,095

168,660

157,677

Earnings per share(2) 

 

 

 

 

 

 

Basic

Php146.32

US$2.60

Php47.20

(Php52.08)

(Php176.85)

(Php193.48)

 
Diluted

145.30

2.58

45.72

(52.08)

(176.85)

(193.48)

 
 

 

*(1)    The PLDT Group maintains its accounts in Philippinepeso.  For convenience, the peso financial information as at and for the yearended December 31, 2004 has been translated into U.S. dollars at the exchangerate of Php56.341 to US$1.00, the peso-dollar rate as quoted through thePhilippine Dealing System as at December 31, 2004.*

 

*(2)    Our convertible preferred stockswere deemed anti-dilutive for the years ended**December 31, 2002**, 2001and 2000.  Since the amount of preferred dividends over the equivalent numberof common stocks were greater than the basic earnings per share, the amountsreported for the years ended December 31, 2002, 2001 and 2000 basic and dilutedearnings per common share were the same.*

 

*(3)    The dilutive effect of the outstanding optionsis reflected as additional share dilution in the computation of earnings percommon share, see Note 20 – Earnings per Common Share.*

**EXHIBIT 7**

* *

* *

* *

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

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

For the years 2000 through2004

 

 

**2004**

**2004**(1)

**2003**

**2002**

2001

2000

 

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

 

 

 

 

 

 

 

Earnings (a)

Php49,155

US$872

Php24,168

Php11,320

(Php13,117)

(Php19,664)

Fixed charges – (b)

 

 

 

 

 

 

Fixed charges excluding amortization of capitalized interest

Php12,805

US$227

Php12,747

Php14,177

Php15,839

Php14,154

Capitalized interest, net of amortization

(915)

(16)

(714)

(394)

1,170

1,691

 

Php11,890

US$211

Php12,033

Php13,783

Php17,009

Php15,845

Ratio (a/b) (2)

4.1

4.1

2.0

–

–

–

_____________

 

*(1)    **PLDT maintains its accountsin Philippine peso.  For convenience, the peso financial information as at andfor the year ended December 31, 2004 has been translated into U.S. dollars atthe exchange rate of Php56.341 to US$1.00, the peso-dollar rate as quotedthrough the Philippine Dealing System as at December 31, 2004.*

* *

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

* *

*Due to PLDT’s net losses in 2002, 2001 and 2000, thecoverage ratio on a consolidated basis was less than 1.0x in all of these threeyears.  In order to achieve a coverage ratio of 1.0x, we would have had togenerate additional consolidated earnings of Php2,463 million, Php30,126million and Php35,509 million for the three years ended**December 31, 2002**, 2001 and 2000, respectively.*

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

**EXHIBIT 8**

 

SUBSIDIARIES
 

Name of Subsidiary

** **

Jurisdiction

** **

**Principal Activity**

** **

**Percentage of Ownership (As at****December 31, 2004****)**

 

 

 

 

 

 

 

Wireless

 

 

 

 

 

 

Smart Communications, Inc. and subsidiaries

 

Philippines

 

Cellular mobile services

 

100.0

 

 

 

 

 

 

 

Pilipino Telephone Corporation and subsidiaries

 

Philippines

 

Cellular mobile services and telecommunications services

 

92.1

 

 

 

 

 

 

 

Telesat, Inc.

 

Philippines

 

Satellite communications services

 

94.4

 

 

 

 

 

 

 

ACeS Philippines Cellular Satellite Corporation

 

Philippines

 

Satellite phone services 

 

100.0

 

 

 

 

 

 

 

Mabuhay Satellite Corporation (formerly Mabuhay Phiilippines Satellite Corporation)

 

Philippines

 

Satellite communications services

 

67.0

 

 

 

 

 

 

 

Fixed Line

 

 

 

 

 

 

PLDT Clark Telecom, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Subic Telecommunications

Company, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Smart-NTT Multimedia, Inc.

 

Philippines

 

Data and network services

 

100.0

 

 

 

 

 

 

 

PLDT Global and subsidiaries

 

British Virgin Islands

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

PLDT-Maratel, Inc. (formerly Maranao Telephone Company, Inc.)

 

Philippines

 

Telecommunications services

 

97.5

 

 

 

 

 

 

 

Bonifacio Communications Corporation

 

Philippines

 

Telecommunications, infrastructure and related value-added services

 

75.0

 

 

 

 

 

 

 

Information and Communications Technology

 

 

 

 

 

 

ePLDT, Inc. and subsidiaries

 

Philippines

 

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

 

100.0

 

**Exhibit12.1**

** **

CERTIFICATION

** **

I, Napoleon L. Nazareno, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company;

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as at, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) for the Company and have:

 

a)      Designed such disclosure controls and procedures, or caused suchdisclosure controls and procedures to be designed under our supervision, toensure that material information relating to the Company, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this report is being prepared;
b)      [Omitted pursuant to the guidance of Release No. 33-8238 (June 5, 2003), Release No.33-8392 (February 24, 2004) and Release No. 33-8545 (March 2, 2005)];
c)      Evaluated the effectiveness of the Company's disclosure controls andprocedures and presented in this report our conclusions about the effectivenessof the disclosure controls and procedures, as at the end of the period coveredby this report based on such evaluation; and
d)      Disclosed in this report any change in the Company’s internal controlover financial reporting that occurred during the period covered by the annualreport that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting; and
5.       The Company’s other certifyingofficers and I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the Company’s auditors and the auditcommittee of the Company’s board of directors (or persons performing theequivalent functions):

 

a)      All significant deficiencies andmaterial weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect theCompany's ability to record, process, summarize and report financialinformation; and

 

b)      Any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the Company’s internal control over financial reporting.

 

Date:  June 30, 2005

 

 

/s/   Napoleon L. Nazareno

Napoleon L. Nazareno

President and Chief Executive Officer

(Principal Executive Officer)

 
****
**Exhibit 12.2**

** **

**CERTIFICATION**

** **

I,Anabelle L. Chua, certify that:

1.       I have reviewed this annual reporton Form 20-F of Philippine Long Distance Telephone Company;

 

2.       Based on my knowledge, this reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this report;

 

3.       Based on my knowledge, thefinancial statements, and other financial information included in this report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the Company as at, and for, the periods presentedin this report;

 

4.       The Company’s other certifyingofficer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) for the Company and have:

 

a)     Designed such disclosurecontrols and procedures, or caused such disclosure controls and procedures tobe designed under our supervision, to ensure that material information relatingto the Company, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisreport is being prepared;
b)    [Omitted pursuant to theguidance of Release No. 33-8238 (June 5, 2003), ReleaseNo.33-8392 (February 24, 2004) and Release No. 33-8545 (March 2, 2005)];
c)     Evaluated the effectiveness ofthe Company's disclosure controls and procedures and presented in this reportour conclusions about the effectiveness of the disclosure controls andprocedures, as at the end of the period covered by this report based on suchevaluation; and
d)    Disclosed in this report anychange in the Company’s internal control over financial reporting that occurredduring the period covered by the annual report that has materially affected, oris reasonably likely to materially affect, the Company’s internal control overfinancial reporting; and
5.       The Company’s other certifyingofficer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the Company’s auditors and theaudit committee of the Company’s board of directors (or persons performing theequivalent functions):

 

a)     All significant deficiencies and materialweaknesses in the design or operation of internal control over financialreporting which are reasonably likely to adversely affect the Company's abilityto record, process, summarize and report financial information; and

 

b)    Any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theCompany’s internal control over financial reporting.

 

Date:  June 30, 2005

 

 

/s/  Anabelle L. Chua

Anabelle L. Chua

Senior Vice President and Treasurer

(Principal Financial Officer)

** **
****
**Exhibit13.1**

** **

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. §1350, I, Napoleon L. Nazareno, President and Chief Executive Officer ofPhilippine Long Distance Telephone Company, hereby certify, to my knowledge,that our annual report on Form 20-F for the year ended December 31, 2004 (the“Report”) fully complies with the requirements of Section 13(a) or 15(d), asapplicable, of the Securities Exchange Act of 1934, and that the informationcontained in the Report fairly presents, in all material respects, ourfinancial condition and results of operations.

 

 

Date:  June 30, 2005

 

 

 

 

 

/s/  Napoleon L. Nazareno

 

 

 

Napoleon L. Nazareno

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

The foregoingcertification is being furnished solely pursuant to 18 U.S.C. § 1350 and is notbeing filed as part of the Report or as a separate disclosure document.

 

 

**Exhibit 13.2**

** **

** **

**CERTIFICATION**

** **

** **

Pursuant to 18 U.S.C. §1350, I, Anabelle L. Chua, Senior Vice President and Treasurer of PhilippineLong Distance Telephone Company, hereby certify, to my knowledge, that ourannual report on Form 20-F for the year ended December 31, 2004 (the “Report”)fully complies with the requirements of Section 13(a) or 15(d), as applicable,of the Securities Exchange Act of 1934, and that the information contained inthe Report fairly presents, in all material respects, our financial conditionand results of operations.

 

 

Date:  June 30, 2005

 

 

 

 

 

/s/  Anabelle L. Chua

 

 

 

Anabelle L. Chua

Senior Vice President and Treasurer

 

 

 

(Principal Financial Officer)

The foregoingcertification is being furnished solely pursuant to 18 U.S.C. § 1350 and is notbeing filed as part of the Report or as a separate disclosure document.

 

**Report of IndependentRegistered Public Accounting Firm**

 

 

 

The Board of Directors andthe Stockholders of

Philippine Long Distance TelephoneCompany

 

 

 

We have audited theaccompanying consolidated balance sheets of Philippine Long Distance TelephoneCompany and subsidiaries as of December 31, 2004 and 2003, and the relatedconsolidated statements of income, changes in stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2004.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting.  Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Philippine LongDistance Telephone Company and subsidiaries as of December 31, 2004 and 2003,and the consolidated results of their operations and their cash flows for eachof the three years in the period ended December 31, 2004, in conformity withUnited States generally accepted accounting principles.

 

As discussed in Note 3 to theconsolidated financial statements, the Company changed its method of accountingfor asset retirement obligations in 2003, and goodwill and other intangibleassets in 2002.

 

 

 

 

 

/s/ SyCip Gorres Velayo &Co.

SYCIP GORRES VELAYO & CO.

 

 

Makati City, Philippines

June 24, 2005

**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

 

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2004****AND 2003**

**(inmillions of pesos, except par value amounts)**

 

 

 

**2004**

2003

**ASSETS**

**Current Assets**

** **

 

Cash and cash equivalents (Notes 4 and 23)

**27,321**

19,372

Short-term investments (Note 23)

**3,873**

1,661

Trade and other receivables - net (Notes 5 and 23) 

**10,404**

17,087

Inventories and supplies - net (Note 6)

**2,140**

2,676

Deferred income tax assets - net (Note 19)

**11,111**

7,932

Derivative assets (Note 23)

**335**

262

Prepaid expenses

**1,229**

821

Other current assets

**1,511**

557

Total Current Assets

**57,924**

50,368

**Noncurrent Assets**

** **

 

Property, plant and equipment - net (Note 7)

**186,093**

190,217

Investments - net (Note 8)

**294**

1,448

Investments-available-for-sale (Note 23)

**104**

118

Goodwill and other intangible assets - net (Note 9)

**16,561**

15,464

Deferred income tax assets - net (Note 19)

**8,916**

12,780

Derivative assets (Note 23)

**4,116**

1,361

Other noncurrent assets - net (Note 10)

**5,631**

4,608

Total Noncurrent Assets

**221,715**

225,996

 

**279,639**

276,364

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

** **

 

Accounts payable (Note 23)

**7,029**

5,977

Accrued expenses and other current liabilities (Notes 11, 16 and 23) (Due to related parties amounted to Php3,270 and Php2,260 as at December 31, 2004  and 2003, respectively)

**16,574**

13,513

Unearned revenues

**3,820**

4,116

Derivative liabilities (Note 23)

**473**

91

Current portion of interest-bearing financial liabilities (Notes 7, 12, 21 and 23)

**28,503**

26,238

Dividends payable (Notes 20 and 23)

**652**

577

Income tax payable

**1,976**

840

Total Current Liabilities

**59,027**

51,352

**Noncurrent Liabilities**

** **

 

Interest-bearing financial liabilities - net of current portion (Notes 7, 12, 21 and 23)

**131,978**

161,193

Derivative liabilities (Note 23)

**6,930**

3,737

Pension and other benefits (Note 17)

**2,640**

3,585

Customers’ deposits

**2,174**

2,177

Remaining excess of debt forgiven over value of consideration given - net (Notes 12 and 14)

**5,834**

8,784

Deferred credits and other noncurrent liabilities (Notes 13, 21 and 23)

**7,160**

5,805

Total Noncurrent Liabilities

**156,716**

185,281

**Minority Interest in Consolidated Subsidiaries**

**861**

1,665

**Preferred Stock Subject to Mandatory Redemption**(Notes 14 and 23)

**14,956**

13,321

**Stockholders’ Equity** (Notes 15 and 20)

** **

 

Preferred stock, Php10 par value, authorized 822,500,000 shares: 

** **

 

Series A to EE (issued and outstanding 409,065,857 shares as at December 31, 2004 and  409,876,226 shares as at December 31, 2003)

**4,091**

4,099

Series III (issued and outstanding 4,616,200 shares as at December 31, 2004 and 2003)

**46**

46

Series IV (issued and outstanding 36,000,000 shares as at December 31, 2004 and 2003)

**360**

360

Common stock, Php5 par value, authorized 234,000,000 shares; issued and outstanding 170,213,722  shares as at December 31, 2004 and 169,476,120 shares as at December 31, 2003

**851**

847

Capital in excess of par value

**75,396**

74,520

Accumulated deficit

**(33,197)**

(58,031)

Accumulated other comprehensive income (Note 23)

**532**

2,904

Total Stockholders’ Equity

**48,079**

24,745

 

**279,639**

276,364

See accompanying Notes toConsolidated Financial Statements.
****
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

 

CONSOLIDATED STATEMENTS OF INCOME
**FORTHE YEARS ENDED****DECEMBER 31, 2004****, 2003 AND 2002**

**(inmillions of pesos, except per share amounts)**

 

 

** **

**2004**

2003

2002

**OPERATING REVENUES**(Notes 17, 18 and 24)

** **

** **

** **

Service revenues

**114,952**

100,486

81,686

Non-service revenues

**6,269**

10,714

12,145

 

**121,221**

111,200

93,831

**OPERATING EXPENSES**(Note 18)

** **

 

 

Depreciation and amortization (Notes 7 and 24)

**20,098**

21,812

17,566

Compensation and benefits (Notes 17 and 18)

**12,026**

13,304

10,893

Cost of cellular handsets and SIM-packs sold

**10,599**

15,790

17,232

Selling and promotions (Note 16) (Total transactions with related parties amounted to Php32,  Php26 and Php14 in 2004, 2003 and 2002, respectively)

**5,708**

4,399

3,603

Maintenance (Note 16) (Total transactions with related parties amounted to Php111,  Php68 and Php65 in 2004, 2003 and 2002, respectively)

**5,671**

4,931

3,856

Provision for doubtful accounts (Notes 5 and 24)

**3,948**

4,092

4,160

Rent (Note 16) (Total transactions with related parties amounted to Php6,  Php7 and Php3 in 2004, 2003 and 2002, respectively)

**2,160**

2,166

3,106

Professional and other service fees (Note 16) (Total transactions with related parties amounted to Php694,  Php616 and Php636 in 2004, 2003 and 2002, respectively)

**2,123**

1,714

2,304

Taxes and licenses (Note 22)

**2,055**

2,147

980

Insurance and securities (Note 16) (Total transactions with related parties amounted to Php534,  Php581 and Php367 in 2004, 2003 and 2002, respectively)

**1,644**

1,528

1,354

Asset impairment (Notes 7, 8, 18 and 24)

**1,412**

675

13,279

Cost of satellite air time (All are transactions with related parties) (Notes 16 and 21)  (Total transactions with related parties amounted to Php1,299, Php1,919 and  Php50 in 2004, 2003 and 2002, respectively)

**1,299**

1,919

50

Provision for inventory obsolescence (Notes 6 and 24)

**577**

251

476

Amortization of intangible assets (Note 9)

**93**

766

766

Other operating expenses 

**3,269**

2,327

2,177

 

**72,682**

77,821

81,802

OPERATING INCOME

**48,539**

33,379

12,029

**FINANCING COSTS** (Notes 18 and 24)

**(17,097)**

(24,783)

(18,351)

**INTEREST INCOME** (Note 24)

**942**

513

473

**EQUITY IN NET LOSSES OF ASSOCIATES**

**(74)**

(88)

(142)

**OTHER INCOME**- Net (Note 18)

**2,530**

799

1,397

INCOME (LOSS) BEFORE INCOME TAX, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY AND MINORITY INTEREST IN NET (INCOME) LOSS OF CONSOLIDATED SUBSIDIARIES 

**34,840**

9,820

(4,594)

**BENEFIT FROM (PROVISION FOR) INCOME TAX**(Notes 19 and 24)

**(6,826)**

1,400

(1,438)

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

**28,014**

11,220

(6,032)

**CUMULATIVE****EFFECT********ON****PRIOR YEARS (UP TO****DECEMBER 31, 2002****) OF ADOPTING  SFAS 143, “ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS”** - Net of tax effect  (Note 3)

–

(61)

–

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

**28,014**

11,159

(6,032)

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

**87**

(114)

(126)

**NET INCOME (LOSS)**

**28,101**

11,045

(6,158)

**DIVIDENDS AND ACCRETION OF PREFERRED STOCK**

**(3,267)**

(3,048)

(2,649)

**NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS**(Note 20)

**24,834**

7,997

(8,807)

**Earnings Per Common Share**(Note 20)

** **

 

 

Basic earnings per common share before cumulative effect of change in accounting policy

**146.32**

47.56

(52.08) 

Cumulative effect of change in accounting policy

**–**

(0.36)

–

Basic earnings per common share

**146.32**

  47.20

(52.08)

Diluted earnings per common share before cumulative effect of change in accounting policy

**145.30**

46.06

(52.08)

Cumulative effect of change in accounting policy

**–**

(0.34)

–

Diluted earnings per common share

**145.30**

  45.72

(52.08)

*Seeaccompanying Notes to Consolidated Financial Statements**.*
**
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THE YEARSENDED****DECEMBER 31, 2004****, 2003 AND 2002**

**(in millions ofpesos)**

** **

 

**Preferred Stock**

**Common Stock**

**Capital in  Excess of  Par Value**

**Accumulated Deficit**

**Accumulated Other Comprehensive Income**

**Total**

Balances as at January 1, 2002

4,129

845

73,961

(57,171)

2,708

24,472

Comprehensive loss:

 

 

 

 

 

 

Net loss for the year

–

–

–

(6,158)

–

(6,158)

Translation gains

–

–

–

–

76

  76

Net comprehensive loss

–

–

–

(6,158)

  76

(6,082)

Cash dividends (Note 20)

–

–

–

(1,683)

–

(1,683)

Accretion to redemption value of preferred stock subject to mandatory redemption (Note 20)

–

–

–

(1,004)

–

(1,004)

Partial redemption of Series IV Preferred Stock (Note 14)

(72)

–

–

–

–

(72)

Issuance of capital stock (Note 15)

417

2

363

–

–

 782

Balances as at December 31, 2002

4,474

 847

74,324

(66,016)

2,784

16,413

Comprehensive income:

 

 

 

 

 

 

Net income for the year

–

–

–

11,045

–

11,045

Translation gains

–

–

–

–

120

 120

Net comprehensive income

–

–

–

11,045

 120

11,165

Cash dividends (Note 20)

–

–

–

(1,751)

–

(1,751)

Accretion to redemption value of preferred stock subject to mandatory redemption (Note 20)

–

–

–

(1,309)

–

(1,309)

Issuance of capital stock (Note 15)

31

–

196

–

–

 227

Balances as at December 31, 2003

4,505

 847

74,520

(58,031)

2,904

24,745

Comprehensive income:

 

 

 

 

 

 

Net income for the year

–

–

–

28,101

–

28,101

Translation loss

–

–

–

–

(2,168)

(2,168)

Net loss on available-for-sale financial assets

–

–

–

–

(5)

(5)

Others

–

–

–

–

(199)

(199)

Net comprehensive income

–

–

–

28,101

(2,372)

25,729

Cash dividends (Note 20)

–

–

–

(1,764)

–

(1,764)

Accretion to redemption value of preferred stock subject to mandatory redemption (Note 20)

–

–

–

(1,503)

–

(1,503)

Issuance of capital stock (Note 15)

(8)

4

876

–

–

 872

**Balances as at****December 31, 2004**

**4,497**

**851**

**75,396**

**(33,197)**

**532**

**48,079**

*Seeaccompanying Notes to Consolidated Financial Statements.*

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

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
**FORTHE YEARS ENDED****DECEMBER 31, 2004****, 2003 AND 2002**

**(inmillions of pesos)**

** **

** **

 

**2004**

2003

2002

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

Net income (loss)

**28,101**

11,045

(6,158)

Adjustments to reconcile net income (loss) from operations to net cash provided  by operating activities:

** **

 

 

Depreciation and amortization

**20,098**

21,812

17,566

Provision for doubtful accounts (Note 5)

**3,948**

4,092

4,160

Unrealized foreign exchange losses

**2,882**

11,527

5,301

Asset impairment charges (Notes 7, 8 and 18)

**1,412**

675

13,279

Accretion on financial liabilities (Note 18)

**1,185**

729

643

Loss (gain) on derivative instruments

**617**

1,616

(522)

Provision for inventory obsolescence (Notes 6 and 24)

**577**

251

476

Loss (gain) on disposal of property and equipment

**155**

(463)

(87)

Amortization of intangible assets (Note 9)

**93**

766

766

Equity in net losses of associates

**74**

88

142

Minority interest in net income (loss) of consolidated subsidiaries

**(87)**

114

126

Provision for (benefit from) deferred income tax (Note 19)

**(531)**

(3,731)

849

Gain on debt exchange and debt restructuring transactions (Note 18)

**(2,816)**

–

–

Others

**485**

(1,345)

142

Operating cash flows before working capital changes 

**56,193**

47,176

36,683

Changes in assets and liabilities, net of effect from purchase of subsidiaries: 

** **

 

 

Decrease (increase) in:

** **

 

 

Trade and other receivables

**2,305**

(4,364)

4,005

Inventories and supplies

**(9)**

1,576

353

Prepaid expenses and other current assets

**(1,279)**

306

(186)

Increase (decrease) in:

** **

 

 

Accounts payable

**1,848**

(3,231)

(2,507)

Accrued expenses and other current liabilities

**2,844**

3,215

1,558

Unearned revenues on sale of prepaid cards

**(343)**

787

2

Income tax payable

**2,367**

(280)

627

Deferred credits and other noncurrent liabilities

**(1,066)**

(2,603)

(813)

Net cash provided by operating activities

**62,860**

42,582

39,722

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

Additions to property, plant and equipment

**(19,268)**

(17,943)

(17,239)

Proceeds from disposal of property and equipment

**112**

226

252

Payments for purchase of investments, net of cash acquired

**(1,276)**

(197)

–

Cash disbursements for lease deposits and other noncurrent assets

**(1,834)**

(404)

(210)

Increase in short-term investments

**(2,212)**

(1,661)

–

Investments in debt securities

**(286)**

–

–

Cash of disposed subsidiary

**–**

(93)

–

Proceeds from disposal of investments

**–**

51

30

Net cash used in investing activities

**(24,764)**

(20,021)

(17,167)

**CASH FLOWS FROM FINANCING ACTIVITIES**

 

 

 

Payments of long-term borrowings

**(41,697)**

(31,548)

(43,870)

Proceeds from long-term borrowings

**15,187**

17,507

36,011

Repayments of notes payable

**(2,412)**

(1,698)

(13,600)

Dividends paid

**(1,692)**

(1,603)

(1,582)

Proceeds from notes payable

**457**

3,135

7,872

Proceeds from issuance of capital stock

**281**

94

464

Increase (decrease) in capital lease liabilities

**(134)**

98

29

Debt issuance costs paid

**(68)**

(120)

(1,206)

Redemption of preferred stock

**–**

–

(72)

Net cash used in financing activities

**(30,078)**

(14,135)

(15,954)

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

**(69)**

(28)

97

**NET INCREASE IN CASH AND CASH EQUIVALENTS**

**7,949**

8,398

6,698

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

**19,372**

10,974

4,276

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

**27,321**

19,372

10,974

*Seeaccompanying Notes to Consolidated Financial Statements.*

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

 

 

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

 

ThePhilippine Long Distance Telephone Company, or PLDT, was incorporated under theold Corporation Law of the Philippines (Act 1459, as amended) on November 28, 1928, following themerger of four telephone companies under common United States ownership.  Underits amended Articles of Incorporation, PLDT’s corporate term is limited through2028.  In 1967, effective control of PLDT was sold by General Telephone andElectronics Corporation (a major stockholder since PLDT’s incorporation) to agroup of Filipino businessmen.  In 1981, in furtherance of the then existingpolicy of the Philippine government to integrate the Philippinetelecommunications industry, PLDT purchased substantially all of the assets andliabilities of the Republic Telephone Company which at that time was the secondlargest telephone company in the Philippines.  During 1998, First Pacificthrough its Philippine and other affiliates, acquired a significant interest inPLDT.  On March 24, 2000, NTT Communications, through NTTC-UK, became PLDT’sstrategic partner with approximately 15% economic and voting interest in theissued common capital stock of PLDT.  Simultaneous with NTT Communications’investment in PLDT, we acquired 100% of Smart.

 

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 Archipelago Exchange in the United States of America.  On October 19, 1994, anAmerican Depositary Receipts, or ADRs, facility was established, pursuant towhich Citibank N.A., as the depositary, issued ADRs evidencing AmericanDepositary Shares, or ADSs, with each ADS representing one PLDT common sharewith a par value of Php5 per share.  JP Morgan Chase Bank has been appointed assuccessor depositary for PLDT’s ADR facility effective February 10, 2003.The ADSs are listed and traded on the New York Stock Exchange, or NYSE, and theArchipelago Exchange in the United States.

 

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

 

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

 

PLDThas three employee unions. The three unions are in aggregate composed of 9,472members as at December 31, 2004.  The union members represent 42% of the employees ofthe PLDT Group on a consolidated basis as at December 31, 2004.

 

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

 

 

 

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

 

Ourconsolidated financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America, orU.S. GAAP.

 

Ourconsolidated financial statements include the financial statements of PLDT andthose of the following subsidiaries (collectively, the PLDT Group), which wereall incorporated in the Philippines except for PLDT Global Corporation, or PLDTGlobal, which was incorporated in the British Virgin Islands.

 

** **

** **

**Percentage of Ownership**

**Name of Subsidiary/Investee**

**Principal Activity**

**2004**

2003

2002

**Wireless**

 

** **

 

 

Smart Communications, Inc., or Smart,  and subsidiaries

Cellular mobile services

**100.0**

100.0

100.0

Pilipino Telephone Corporation, or Piltel,  and subsidiaries 

Cellular mobile and telecommunications services 

**92.1**

45.3

45.3

Telesat, Inc., or Telesat

Satellite communications services

**94.4**

94.4

94.4

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services 

**100.0**

100.0

100.0

Mabuhay Satellite Corporation, or  Mabuhay Satellite

Satellite communications services 

**67.0**

67.0

67.0

**Fixed Line**

 

** **

 

 

PLDT Clark Telecom, Inc., or  Clark Telecom

Telecommunications services

**100.0**

100.0

100.0

Subic Telecommunications Company, Inc.,  or Subic Telecom

Telecommunications services

**100.0**

100.0

100.0

Smart-NTT Multimedia, Inc., or SNMI

Data and network services

**100.0**

100.0

100.0

PLDT Global Corporation, or PLDT Global, and subsidiaries

Telecommunications services

**100.0**

100.0

100.0

PLDT-Maratel, Inc., or Maratel

Telecommunications services

**97.5**

97.5

97.5

Bonifacio Communications Corporation,  or BCC

Telecommunications, infrastructure and related value-added services

**75.0**

75.0

37.5

**Information and Communications  Technology**

 

** **

 

 

ePLDT, Inc., or ePLDT, and subsidiaries

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

**100.0**

100.0

100.0

 

The method of accounting applied to investments, whetherconsolidated, equity or cost, involves an evaluation of all significant termsof the investments that explicitly grant or suggest evidence of control orsignificant influence over the operations of the investee.  The consolidatedfinancial statements include our controlled subsidiaries. Investments inbusinesses which we do not control, but we have the ability to exercisesignificant influence over operating and financial policies, are accounted forusing the equity method.  Investments in which we do not have the ability toexercise significant influence over operating and financial policies areaccounted for using the cost method.  Equity and cost method investments areincluded in the “Investments” account in our consolidated balance sheets.  

 

Ourconsolidated financial statements are prepared using uniform accountingpolicies for like transactions and events with similar circumstances.Intercompany balances and transactions, including intercompany profits andunrealized profits and losses, are eliminated.

 

Minorityinterests represent the equity interests in Wolfpac Communications, Inc., orWolfpac, Meridian Telekoms, Inc., or Meridian, Telesat, Mabuhay Satellite,Maratel, BCC, Digipar Thailand Ltd., netGames, Inc., or netGames, and InfocomTechnologies, Inc. not held by the PLDT Group.

*** ***

***Changesin Piltel’s Shareholding***

 

Tointegrate the PLDT Group’s wireless holdings, on July 2, 2004, Smart entered into a sale and purchase agreement with PLDT to acquire PLDT’s 59.3 million sharesof Piltel Series K Class I Convertible Preferred Stock for a purchase price ofPhp2,066 million.  The payment was settled through an offset of amounts owed toSmart by PLDT arising from interconnection charges.  On July 9, 2004 and December 28, 2004, Smart converted a total of 4.8 million and 54.5 million shares,respectively, of Piltel Series K Class I Convertible Preferred Stock into10,080 million shares of common stock of Piltel, equivalent to 85.6% of theresulting total outstanding shares of common stock after such conversion.  On April 25, 2005, PLDT and Smart entered into a subscription and assignment agreementcovering the transfer and assignment to Smart of 767 million shares of Piltelcommon stock owned by PLDT.  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.

 

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

*** ***

In the second half of 2004, ePLDT made investments inVentus and netGames, which are newly incorporated companies.

*** ***

Ventusis a wholly-owned call center subsidiary of ePLDT which was incorporated andregistered with the Philippine 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 and commenced full commercial operations in March 2005.  We currentlyexpect that Ventus will be expanding in Metro Manila with a 678-seat callcenter facility to accommodate current and new client requirements.  Thisfacility is expected to be completed by November 2005.

 

ePLDTowns 60% of netGames, a publisher for Massively Multi-player Online Game in the Philippines.  netGames is the Philippine licensee of Khan Online, thecountry’s first full 3D online game.  netGames was incorporated on June 21, 2004 and commenced full commercial operations in February 2005.

*** ***

***Acquisitionof******Meridian***

 

On July 5, 2004, Smartentered into a sale and purchase agreement, as amended and supplemented on August 11, 2004, toacquire 100% of Meridian, a company primarily engaged in providing wirelessbroadband and data services to small and medium-scale enterprises in the Philippines,for a total consideration of US$45 million.  Payments of US$11 million and US$7million for an equity interest of 40% in Meridian were made in 2004 andpayments of US$4 million for an additional equity interest of 9% in Meridianwas made in January 2005.  The balance of US$23 million is payable on or beforeDecember 31, 2005 in respect of the remaining 51% equity interest in Meridian.  Theacquisition aims to strengthen Smart’s position in the wireless data segmentand is in line with Smart’s overall strategy of providing the widest range ofinnovative wireless services.  As at December 31, 2004, the net cash outflow onacquisition was Php1,051 million, representing cash payments of Php1,004million, cash acquired from Meridian of Php4 million and cost directly relatedto business combination of Php51 million.  See *Note 9 – Goodwill and OtherIntangible Assets*for further discussion.

** **

***Acquisitionof Wolfpac***

** **

On October 31, 2003, Smart acquiredan 80% interest in Wolfpac for a total consideration of Php180 million, ofwhich Php90 million was paid in 2003 and the balance was paid in April 2004.Prior to the acquisition, Wolfpac was one of Smart’s leading contentproviders.  The acquisition provides Smart with the opportunity to have adirect link to the content development community, an important factor inwireless communication services.  The purchase consideration has been allocatedto assets and liabilities on the basis of fair values at the date ofacquisition.  See *Note 9 – Goodwill and Other Intangible Assets*forfurther discussion.

** **

** **

 

**3.         ****Summary of SignificantAccounting Policies and Practices**

 

Our significant accounting policies and practices arediscussed below to facilitate the understanding of our consolidated financialstatements:

 

***Revenue Recognition***

 

Revenuefor services is stated at amounts invoiced to customers and excludesvalue-added tax.  We provide wireless communication services, fixed linecommunication services, and information and communications technologyservices.  We provide such services to business, residential, payphone andmobile customers.  Revenue represents the value of fixed consideration that hasbeen received or is receivable.  Revenue is recognized when there is evidenceof an arrangement, collectibility is reasonably assured, and the delivery ofthe product or service has occurred.  In certain circumstances, revenue issplit into separately identifiable components and recognized when the relatedcomponents are delivered in order to reflect the substance of the transaction.The value of components is determined using verifiable objective evidence.  Wedo not provide our customers with the right to a refund.

 

*Servicerevenues*

 

*Subscriptions.*We provide telephone and datacommunication services under postpaid and prepaid payment arrangements.Revenue includes fees for installation and activation.  Installation andactivation-related fees and the corresponding costs, not exceeding theactivation revenue, are deferred and recognized over the expected averageperiods of customer relationship of seven years and three years for fixed lineand cellular service, respectively.  Postpaid service arrangements includesubscription fees, typically fixed monthly fees, which are recognized over the subscriptionperiod on a pro rata basis. 

 

*Air time, traffic and value-added services.*Prepaid service revenue collected in advance isdeferred and recognized based on the earlier of actual usage or upon expirationof the usage period.  Payphone service revenue is recognized when the serviceis provided.  Interconnection revenue for call termination, call transit, andnetwork usage are recognized in the period the traffic occurs.  Revenuesrelated to local, long distance, network-to-network, roaming and internationalcall connection services are recognized when the call is placed or theconnection is provided, net of amounts payable to other telecommunicationcarriers for terminating calls in their territories.  Revenue related toproducts and value-added services is recognized upon delivery of the product orservice.

* *

*Directoryservices.*Revenue related topublished directory services is recognized on a pro rata basis over the periodin which the publication expires, which is generally 12 months.  Telephone-baseddirectory service revenue is recognized when the service is provided.

* *

*Incentives.*We record insignificant commissionexpense based on the number of new subscriber connections initiated by certaindealers.  All other cash incentives provided to dealers and customers arerecorded as a reduction from revenue.  Product-based incentives provided todealers and customers as part of a transaction are accounted for as multipleelement arrangements and recognized when earned.

* *

*Non-servicerevenues*

* *

*Handsetand equipment sales.*Sales ofcellular handsets and communication equipment are recognized upon delivery tothe customer.

 

*Otherincome*

 

*Others.*Interest income from cash deposits isrecognized on a time proportion basis taking into account the principal amountoutstanding and the effective interest rate.

 

***Cash and Cash Equivalents***

* *

Cash includes cash on hand and in banks.  Cashequivalents are short-term, highly liquid investments that are readilyconvertible to known amounts of cash with original maturities of three monthsor less and that are subject to an insignificant risk of change in value.

* *

***Accounts Receivable***

* *

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

* *

***Allowance for Doubtful Accounts***

* *

Allowance for doubtful accountsis maintained at a level considered adequate to provide for uncollectiblereceivables.  The level of allowance is based on historical collections,write-off experience, current economic trends, changes in our customer paymentterms and other factors that may affect our ability to collect payments.  Anevaluation of the receivables, designed to identify potential charges to theallowance, is performed on a continuous basis during the year.

 

*Subscribers*.Full allowance is provided for receivables from permanently disconnectedsubscribers.  Permanent disconnections are made after a series of collectionsteps following non-payment by subscribers.  Such permanent disconnectionsgenerally occur within 105 days from due date.  Partial allowance is providedfor active subscribers based on the aging profile of the receivable.

 

*Trafficsettlement receivables – net*.  Fullallowance is provided for carrier accounts which have been past due for over360 days from transaction date and after a review of the status of settlementwith other carriers.

 

***Inventories and Supplies***

* *

Inventories and supplies arevalued at the lower of cost or market value.  These are items of cellular phoneunits, materials, spare parts, terminal units and accessories.  Cost isdetermined using the moving average method.

 

***Property, Plant and Equipment***

 

Property, plant and equipment,except for land, are stated at cost less accumulated depreciation andamortization and any impairment in value.  Land is stated at cost less anyimpairment in value.

 

The initial cost of property,plant and equipment comprises its purchase price and any costs directlyattributable in bringing the asset to its working condition and location forits intended use.  Expenditures incurred after the assets have been put intooperation, such as repairs and maintenance and overhaul costs, are normallycharged to income in the period the costs are incurred.  In situations where itcan be clearly demonstrated that the expenditures have resulted in an increasein the future economic benefits expected to be obtained from the use of an itemof property, plant and equipment beyond its originally assessed standard ofperformance, the expenditures are capitalized as additional costs of property,plant and equipment.  Cost also includes interests on borrowed funds usedduring the construction period.  When assets are sold or retired, their costs,accumulated depreciation and amortization and any impairment in value areeliminated from the accounts and any gain or loss resulting from their disposalis included in the consolidated statement of income of such period.

 

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

** **

** **

**Estimated Useful Lives**

 

 

Buildings

25 – 40 years

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Communications satellite

15 years

Information origination and termination equipment

5 – 15 years

Cellular facilities

10 years

Land improvements

10 years

Vehicles, furniture and other work equipment

3 – 10 years

 

Theuseful lives and depreciation and amortization method are reviewed periodicallyto ensure that the periods and method of depreciation and amortization areconsistent with the expected pattern of economic benefits from items ofproperty, plant and 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 therelevant assets are completed and put into operational use.

 

Interestcosts and other costs incurred in connection with the borrowing of funds arecapitalized during the construction of plant and equipment as part of the costof acquiring assets, see*Note 7 – Property, Plant and Equipment.*

*** ***

***Impairment of Assets***

 

EffectiveJanuary 1, 2002, in conformity with Statement of Financial AccountingStandards, or SFAS 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets”, long-lived assets and identifiable intangible assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  Assets, which areheld and used in operations, would be subjected to impairment test if thecarrying amount of the asset exceeded the undiscounted future net cash flowswithout interest charges expected to result from the use of the asset.  If animpairment exists, the amount of the impairment recorded is based on the fairvalue of the assets.  Assets, which are to be disposed of, would be impaired tothe extent the carrying amount of the asset exceeds fair value less disposalcosts.  The PLDT Group considers relevant cash flows, estimated futureoperating results, trends and other available information in assessing whetherthe carrying values of assets are recoverable.

** **

***Asset Retirement Obligations***

 

UnderSFAS 143, “Accounting for Asset Retirement Obligations,” the fair value oflegal obligations associated with the retirement of a tangible long-lived assetthat resulted from the acquisition, construction or development and the normaloperation of a long-lived asset is required to be recognized in the period inwhich it is incurred.  This Statement is effective for fiscal years after June 15, 2002.  The PLDT Group adopted this Statement in 2003.  Previously, the PLDT Grouphas not been recognizing amounts related to asset retirement obligations.Under SFAS 143, the PLDT Group now recognizes asset retirement obligations inthe period in which they are incurred if a reasonable estimate of a fair valuecan be made.  The related asset retirement costs are capitalized as part of thecarrying amount of the corresponding long-lived asset.

 

ThePLDT Group is legally required under various lease agreements to dismantle theinstallations and restore the leased sites at the end of the lease contractterm.  The PLDT Group recognized the fair value of the liability for theseobligations and capitalized the present value of these costs as part of the balanceof the related property and equipment accounts, which are being depreciated ona straight-line basis over the useful lives of the related assets or thecontract periods, whichever is shorter.

 

Thecumulative effect of the change on prior years resulted in a charge to incomeof Php61 million (net of income taxes of Php29 million) (Php0.36 per share),which is included in the consolidated net income for the year ended December 31, 2003.The effect of the change for the year ended December 31, 2003 was to decreaseincome before cumulative effect of the change in accounting policy by Php111million (Php0.66 per share).  The pro forma effects of the application of SFAS143 as if the Statement had been adopted on January 1, 2002(rather than January 1, 2003) are presented below:

 

 

**2004**

2003

2002

 

(in millions of pesos, except per share amounts)

Net income (loss)

** **

** **

 

As reported

**28,101**

11,045

(6,158)

Pro forma

**28,101**

11,106

(6,189)

Earnings per common share – basic

** **

 

 

As reported

**146.32**

47.20

(52.08)

Pro forma

**146.32**

47.56

(52.27)

Earnings per common share – diluted

** **

 

 

As reported

**145.30**

45.72

(52.08)

Pro forma

**145.30**

46.05

(52.27)

 

Thepro forma balances of asset retirement obligations as if SFAS 143 had beenadopted on January 1, 2002 (rather than January 1, 2003)are as follows:

*** ***

 

2003

2002

 

(in millions of pesos)

Pro forma amounts of liabilities for asset retirement obligations at beginning of year

360

338

Pro forma amounts of liabilities for asset retirement obligations at end of year

395

360

 

Thefollowing table describes the changes to the liabilities on asset retirementobligations for the years ended December 31, 2004 and 2003, respectively:

 

 

**2004**

2003

 

(in millions of pesos)

Balance at beginning of year

**395**

–

Additional liability recognized during the year

**177**

360

Accretion expense

**66**

35

Balance at end of year (Note 13)

**638**

 395

 

***Goodwill and Other IntangibleAssets***

 

Goodwill is the excess of the acquisition cost of abusiness, including investments accounted for using the equity method, over thefair value of the identifiable net assets acquired.  Effective January 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets” and, asrequired, we no longer amortize goodwill (including goodwill recorded on ourequity method investments).  Goodwill is reviewed annually (or more frequentlyunder various conditions) for impairment using the fair value approach.Intangible assets that do not have indefinite lives are amortized over theiruseful lives and reviewed for impairment in conformity with SFAS 144.  We haveno indefinite-lived intangibles.

 

We assessed the impairment of otheridentifiable intangibles and goodwill related to our consolidated subsidiariesunder SFAS 121, “Accounting for the Impairment of Long-lived Assets and forLong-lived Assets to be Disposed of,” whenever events or changes incircumstances indicated that the carrying value of an asset may not berecoverable. A determination of impairment (if any) was made based on estimatesof future cash flows.  In instances where goodwill was recorded for assets thatwere subjected to an impairment loss, the carrying amount of the goodwill waseliminated before any reduction was made to the carrying amounts of impairedlong-lived assets and identifiable intangibles.  On a quarterly basis, weassessed the impairment of enterprise level goodwill under AccountingPrinciples Board, or APB, Opinion No. 17, “Intangible Assets”.  A determinationof impairment (if any) was made based primarily on estimates of fair value.

 

***Debt Issuance Costs***

 

Issuancecosts, underwriting fees and related expenses incurred in connection with theissuance of debt instruments are deferred and amortized using the effectiveinterest rate method over the terms of the instruments.  Unamortized debtissuance costs are charged to operations when the related debt is extinguished.

 

***Borrowing Costs***

* *

Borrowingcosts are generally expensed as incurred.  Borrowing costs are capitalized if theyare incurred during the acquisition, construction or production of a qualifyingasset and such costs could have been avoided if expenditures for the assetshave not been made.  Capitalization of borrowing costs commences when theactivities to prepare the asset are in progress and expenditures and borrowingcosts are being incurred.  Borrowing costs are capitalized until the assets areready for their intended use.  If the resulting carrying amount of the assetexceeds its recoverable amount, an impairment loss is recognized.  Borrowingcosts include interest charges and other costs incurred in connection with theborrowing of funds, excluding exchange differences arising from foreigncurrency borrowings used to finance these projects.

* *

***Retirement Costs***

* *

PLDTand Smart have funded noncontributory retirement plans, administered by therespective companies’ Trustee, covering regular employees.  Retirement costsare actuarially determined using the projected unit credit of accrued benefitvaluation method.  This method reflects services rendered by employees to thedate of valuation and incorporates assumptions concerning employees’ projectedsalaries.  

 

***Stock-Based Compensation***

 

We have historically accounted for stock-basedemployee compensation plans under APB Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations, and followed thedisclosure-only provisions of SFAS 123, “Accounting for Stock-BasedCompensation”.

 

UnderAPB Opinion No. 25, compensation cost is measured at the intrinsic value, whichis the difference between market price and exercise price, if any, on themeasurement date.  Under SFAS 123, compensation cost is calculated based on thefair value of the options granted.  Fair value is determined using an acceptableoption-pricing model based on certain management assumptions.  Compensationexpense is recognized over the performance period.

 

Proforma information regarding net income (loss) and earnings per share isrequired by SFAS 123.  This information is required to be determined as if PLDThad accounted for its employee stock options (including shares issued under theEmployee Stock Purchase Plan, or ESPP, and long-term incentive plan, or LTIP)using the fair value method.  Under SFAS 123, employee stock options are valuedat the grant date using the Black-Scholes valuation model, and thiscompensation cost is recognized ratably over the vesting period.  Hadcompensation expense for PLDT’s stock option plan, stock purchase plan and LTIPbeen determined based on the fair value at the grant date of awards for years2004, 2003 and 2002, consistent with the provision of SFAS 123, PLDT’s netincome in 2004 and 2003 would have decreased whereas 2002 net loss would haveincreased.  The pro forma amounts indicated below:

*** ***

** **

**2004**

2003

2002

 

**Basic**

**Diluted**

Basic

Diluted

Basic

Diluted

 

(in millions of pesos, except per share amounts)

Net income (loss) attributable to common shareholders 

   (Note 20)

**24,834**

**26,313**

7,997

8,251

(8,807)

(8,807)

Add:  Total stock-based employee compensation expense included in net income (loss)

**239**

**239**

14

14

15

15

Deduct:  Total stock-based employee compensation expense determined under fair value based method

**(331)**

**(331)**

(51)

(51)

(127)

(127)

Pro forma net income (loss) attributable to common shareholders

**24,742**

**26,221**

7,960

8,214

(8,919)

(8,919)

Earnings per common share:

 

As reported

**146.32**

**145.30**

47.20

45.72

(52.08)

(52.08)

Pro forma

**145.77**

**144.79**

46.99

45.51

(52.75)

(52.75)

 

Thedilutive effect of outstanding options is reflected as additional sharedilution in the computation of earnings per common share, see *Note 20 –Earnings Per Common Share*.

 

***Leases***

 

Leaseobligations having provisions for bargain purchase options and ownershiptransfer at the end of the lease term, witha lease term equal to 75% or more of the estimated economic life of the leasedproperty, or lease obligations where the present value at the beginning of thelease term of the minimum lease payments (excluding executory costs and taxesto be paid or paid by the lessor and including any profit thereon) equals orexceeds 90% of the excess of the fair value of the leased property to thelessor, are capitalized.  The relatedobligations are recognized as liabilities.  Minimumlease payments are allocated between thefinance charges and reduction of the lease liability so as to achieve aconstant periodic rate of interest on the remaining balance of theliability.

 

Acapital lease gives rise to a depreciation expense for the asset as well as aborrowing cost for each period.  Finance charges are charged directly tocurrent operations.  The depreciation policy for leased assets is consistentwith that for depreciable assets that are owned.  

 

Leases where the lessor retains substantially all therisks and benefits of ownership of the asset are classified as operatingleases.  Initial direct costs incurred in negotiating an operating lease aredeferred and amortized on a straight-line method over the lease term on thesame bases as the lease income.  Operating lease payments are recognized as anexpense in the consolidated statements of income on a straight-line basis overthe lease term.  For income tax reporting purposes, expenses that should havebeen incurred under lease agreement are considered as deductible expenses.

 

Operatinglease expense amounted to Php2,160 million, Php2,166 million and Php3,106million in 2004, 2003 and 2002, respectively.

 

***Advertising and Promotion Expenses***

 

Advertising and promotions are expensed as incurred.Advertising and promotion expenses amounted to Php5,002 million, Php2,982million and Php1,940 million in 2004, 2003 and 2002, respectively. 

 

***Foreign CurrencyTransactions and Translations***

 

For each entity in the PLDTGroup, transactions in foreign currencies are recorded in the functionalcurrency of the entity by applying to the foreign currency amount the spotexchange rate prevailing at the transaction date.  Foreign exchange gains orlosses arising on the spot settlements or restatement of monetary items atrates different from those at which they were initially recorded during theperiod or presented in the previous consolidated financial statements arerecorded in the consolidated statement of income in the period in which theyarise.

 

Certain subsidiaries of our consolidated group havefunctional currencies different from our reporting currency.  The assets andliabilities of such entities are translated to our reporting currency usingexchange rates at the balance sheet date and the statement of income istranslated using the weighted average rate for the period.  The resultingtranslation adjustments are recorded as a component of accumulated othercomprehensive income.

 

***Derivatives and Hedging Instruments***

 

The Company recognizes all derivatives on theconsolidated balance sheet at fair value.  Derivatives that are not designatedas hedges are recognized at fair value through earnings.  If the derivative isa hedge, depending on the nature of the hedge, and to the extent of the hedge’seffectiveness, changes in the fair value of derivatives are either offsetagainst the change in fair value of hedged assets, liabilities, or firmcommitments through earnings or recognized in other comprehensive income untilthe hedged item is recognized in earnings.  The ineffective portion of aderivative’s change in fair value will be immediately recognized in earnings.The PLDT Group enters into derivatives that are meant to be economic hedges ofidentified underlying instruments and are marked to market directly throughearnings.

 

***Income Taxes***

 

Deferred income tax is provided using the liabilitymethod.  Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to: (a) temporary differences between the financialreporting bases of assets and liabilities and their related tax bases and (b)carryforward benefits of net operating loss carryover, or NOLCO, and minimumcorporate income tax, or MCIT.  Deferred tax assets and liabilities aremeasured using the tax rates applicable to taxable income in the years in whichthose temporary differences are expected to be recovered or settled, and thecarryforward benefits of NOLCO and MCIT are expected to be applied.  Avaluation allowance is provided for deferred tax assets when it is more likelythan not that some or all of the deferred tax assets will not be realized inthe future.

 

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

 

BasicEPS is calculated by dividing the net income or loss for the year attributableto common shareholders by the weighted average number of common sharesoutstanding during the year, after giving retroactive effect to any stockdividend declarations.

 

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

 

Wherethe effect of the assumed conversion of the preferred shares and the exerciseof all outstanding options is anti-dilutive, basic and diluted EPS are statedat the same amounts.

*** ***

***Management’s Use of Estimates***

 

Thepreparation of our consolidated financial statements in conformity with U.S.GAAP, requires us to make estimates and assumptions that affect the reportedamounts of our assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements, and thereported amounts of revenues and expenses during the period reported.  Actualresults could differ from those estimates.

 

Examples of significant estimates include theallowance for doubtful accounts, inventory obsolescence, depreciation rate,impairment of intangibles, investments and other long-lived assets, valuationallowance on deferred tax assets and pension benefit assumptions.

 

***Concentrations***

 

The PLDT Group’s results of operations and financialperformance and condition may be influenced by the general political situationin the Philippines.  The Philippines experienced several *coup d’état* attemptsagainst the government administration between 1986 and 1989, and in July 2003.Political conditions in the Philippines were generally stable during the 1990’s.  In the pastfour years, an increasing number of kidnappings, criminal and terroristactivities have occurred in Mindanao, principally led by the extremist “Abu Sayyaf” group,which reportedly has ties to the Al-Qaeda terrorist network.  There were seriesof bombing incidents in key cities in Mindanao, including Davao City.  The armed conflict between the Philippine militaryand the communist Moro Islamic Liberation Front also continues in Mindanao.

 

ThePLDT Group’s results of operations may be negatively affected by slow ornegative growth rates and economic instability in the Philippinesand in Asia.  In the past, the Philippines has experienced periods of slow ornegative growth, high inflation, significant devaluation of the peso, impositionof exchange controls, debt restructuring and electricity shortages andblackouts.  From mid-1997 to 1999, the economies of a number of Asian countriesexperienced significant downturns.  The regional economic turbulence affectedthe Philippine economy in a number of ways, including the depreciation of thepeso, increases in interest rates, increases in unemployment and inflation,increased volatility and a decline in prices in the domestic stock market, thedowngrading of the Philippines’ local currency rating and the ratings outlookfor the Philippine banking sector and the reduction of foreign currencyreserves.  

 

Asat December 31, 2004, other than the concentration of our wirelessservices on prepaid subscribers, we do not have any significant concentrationof business transacted with a particular supplier, lender or former affiliatethat could, if suddenly adversely impacted, severely impact our operations.  Wealso do not have a concentration of available sources or other rights thatcould, if suddenly eliminated, severely impact our operations.  We invest ourcash and cash equivalents with many high-quality financial institutions.

 

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

 

On December 16, 2004,the Financial Accounting Standards Board, or FASB, issued SFAS 123 (revised2004), or SFAS 123 (R), “Share-Based Payment,” which is a revision of SFAS123.  SFAS 123 (R) supersedes APB Opinion No. 25 and related interpretationsamend SFAS 95, “Statement of Cash Flows”.  Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.  However, SFAS 123 (R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the statement of income based on their fairvalues on the date of grant.  Pro forma disclosure is no longer an alternative.

 

SFAS123 (R) must be adopted no later than the beginning of the fiscal yearbeginning after June 15, 2005.  Early adoption is permitted in periods in whichfinancial statements have not yet been issued.  

 

SFAS123 (R) permits public companies to adopt its requirements using one of twomethods:

 

1.  A “modified prospective” method inwhich compensation cost is recognized beginning with the effective date (a)based on the requirements of SFAS 123 (R) for all share-based payments grantedafter the effective date and (b) based on the requirements of SFAS 123 for allawards granted to employees prior to the effective date of SFAS123 (R) that remain unvested on the effective date.

 

2.  A “modified retrospective” method which includes therequirements of the modified prospective method described above, but alsopermits entities to restate based on the amounts previously recognized under SFAS123 for purposes of pro forma disclosures either (a) all prior periodspresented or (b) prior interim periods of the year of adoption.

 

We are currently in the process of evaluating any effect on theadoption of SFAS 123 (R) will have on our consolidated financial statements.

 

InNovember 2004, the FASB issued SFAS 151, “Inventory Costs,” an amendment ofAccounting Research Bulletin, or ARB, No. 43, Chapter 4.  SFAS 151 amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted materials (spoilage).  Among other provisions, the new rulerequires that items such as idle facility expense, excessive spoilage, doublefreight, and rehandling costs be recognized as current-period charges regardlessof whether they meet the criterion of “so abnormal” as stated in ARB No. 43.Additionally, SFAS 151 requires that the allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities.  SFAS 151 is effective for fiscal years beginning after June 15, 2005.  ThePLDT Group does not expect the adoption of SFAS 151 to have a material effecton its results of operations or financial condition.

 

InDecember 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets,” anamendment of APB Opinion No. 29, “Accounting for Nonmonetary Transactions”.SFAS 153 eliminates the exception from fair value measurement for nonmonetaryexchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29and replaces it with an exception for exchanges that do not have commercialsubstance.  SFAS 153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange.  SFAS 153 is effective for thefiscal periods beginning after June 15, 2005.  The PLDT Group does not expectthe adoption of SFAS 153 to have a material effect on its results of operationsor financial condition.

 

In May 2005, the FASB issued SFAS 154, “AccountingChanges and Error Corrections,” a replacement of APB Opinion No. 20,“Accounting Changes,” and SFAS 3, “Reporting Accounting Changes in InterimFinancial Statements”.  SFAS 154 applies to all voluntary changes in accountingprinciples and changes the requirements for accounting for and reporting of achange in accounting principle.  SFAS 154 carries forward many provisions ofAPB Opinion No. 20 without change, including the provisions related to thereporting of a change in accounting estimate, a change in reporting entity, andthe correction of an error.  SFAS 154 carries forward the provisions of SFAS 3that govern reporting accounting changes in interim financial statements.  Itrequires retrospective application to prior periods’ financial statements of avoluntary change in accounting principle unless it is impracticable.  APBOpinion No. 20 previously required that most voluntary changes in accountingprinciple be recognized by including in net income of the period of the change thecumulative effect of changing to the new accounting principle.  SFAS 154requires that a change in method of depreciation, amortization or depletion forlong-lived, nonfinancial assets be accounted for as a change in accountingestimate that is affected by a change in accounting principle.  APB Opinion No.20 previously required that such a change be reported as a change in accountingprinciple.

 

SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning after December 15, 2005.Earlier application is permitted for accounting changes and corrections oferrors made occurring in fiscal years beginning after June 1, 2005.

 

We are currently in the process of evaluating any effect on theadoption of SFAS 154 will have on our consolidated financial statements.

 

 

**4.         ****Cashand Cash Equivalents**

 

This account consists of:

 

 

**2004**

2003

 

(in millions of pesos)

Cash on hand and in banks

**4,750**

2,736

Temporary investments

**22,571**

16,636

 

**27,321**

19,372

 

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

 

 

 

**5.        ****Trade and OtherReceivables**

 

This accountconsists of receivables from:

 

 

**2004**

2003

 

(in millions of pesos)

Customers and carriers

**27,280**

30,422

Others

**1,192**

879

 

**28,472**

31,301

Less allowance for doubtful accounts

**18,068**

14,214 

 

**10,404**

17,087

 

Movements in the allowance fordoubtful accounts are as follows:

 

 

**2004**

2003

2002

 

(in millions of pesos)

Balance at beginning of year

**14,214**

10,750

7,697

Provision for the year

**3,948**

4,092

4,160

Write-offs

**(94)**

(628)

(1,107)

Balance at end of year

**18,068**

14,214

10,750

 

Receivablesfrom carriers represent receivables arising from interconnection agreementswith other telecommunications carriers.  The aforementioned receivable balancesare shown net of related payables to the same telecommunications carriersbecause an established right of offset exists.

 

Unbilledreceivables of Php557 million and Php974 million in 2004 and 2003,respectively, represent recognized revenue for services rendered to fixed lineand wireless subscribers that have not been billed at the balance sheet dates.The unbilled amounts are billed upon completion of the correspondingsubscribers’ billing cycles.

 

On October 10, 2002, PLDT entered into a Receivables Purchase Deed, or RPD, witha foreign financial institution, or the Purchaser, under which PLDT agreed (1)to sell its receivables from certain eligible foreign carriers for an advancepayment of US$50 million and (2) to service, administer and collect thereceivables on behalf of the Purchaser.  The Purchaser has no recourse againstPLDT should the eligible carrier fail or refuse to settle theassigned/purchased receivables, except when PLDT commits a breach of itsrepresentations and warranties under the RPD.

 

In 2004, 2003 and 2002, sale of receivables under theRPD amounted to US$10 million (Php576 million), with resulting losses of US$1million (Php78 million), US$11 million (Php616 million), with resulting lossesof US$1.5 million (Php84 million) and US$3 million (Php165 million), with resultinglosses of US$0.5 million (Php25 million), respectively.

 

 

 

**6.         ****Inventoriesand Supplies**

 

This account consists of:

 

 

**2004**

2003

 

(in millions of pesos)

Terminal and cellular phone units 

**1,895**

1,601

Spare parts and supplies 

**984**

1,318

Others

**395**

486

 

**3,274**

3,405

Less allowance for inventory obsolescence

**1,134**

729

 

**2,140**

2,676

 

Movements in the allowance for inventory obsolescenceare as follows:

 

 

**2004**

2003

2002

 

(in millions of pesos)

Balance at beginning of year

**729**

614

286

Provision for the year

**577**

251

476

Write-offs

**(172)**

(136)

(148)

Balance at end of year

**1,134**

 729

 614

 

Spareparts and supplies issued to various projects, included as part of propertyunder construction shown under *Note 7 – Property, Plant and Equipment*,amounted to Php2,277 million and Php3,018 million in 2004 and 2003,respectively.  

 

 

 

**7.         ****Property,Plant and Equipment**

** **

This account consists of:

** **

 

**2004**

2003

 

        (in millions of pesos)

Cable and wire facilities

**98,732**

91,898

Central office equipment

**70,174**

67,763

Cellular facilities

**58,479**

52,025

Vehicles, furniture and other work equipment

**27,492**

22,968

Buildings

**18,974**

18,590

Communications satellite

**11,185**

13,108

Information origination and termination equipment

**1,705**

3,327

Land and land improvements

**2,860**

2,805

 

**289,601**

272,484

Less accumulated depreciation and amortization

**113,349**

94,966

 

**176,252**

177,518

Property under construction

**9,841**

12,699

 

**186,093**

190,217

 

Interestcapitalized for the years ended December 31, 2004, 2003 and 2002 amounted toPhp595 million, Php887 million and Php1,343 million, respectively.

 

Assetsimpaired in 2004 and 2002 consist of assets of the wireless and fixed linesegments.  In 2003, assets impaired consist of assets of wireless andinformation and communications technology segments.  When impairment chargesare recognized, a new cost basis for the assets is established.

 

In2004, certain assets with net book values aggregating Php365 million wereimpaired.  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.

 

In2003, ePLDT and certain of its subsidiaries recognized impairment lossesamounting to Php362 million representing the write-down of certain computerequipment and peripherals following the abandonment of a reloadable chip-basedcash card project, and certain software and computer equipment following achange in software platforms and applications.  The recoverable amounts werebased on value in use and were determined at the cash-generating unit level.In determining value in use for the cash-generating unit, the cash flows werediscounted at a nominal rate of 11% on a pre-tax basis.

 

InDecember 2002, Piltel recognized impairment losses of Php13,204 million inrespect of its E.O. 109 limited mobility wireless local loop prepaid assetswith a carrying value of Php14,019 million.  The impairment of E.O. 109 assetsbrought down the net book value of these assets to their recoverable value ofPhp815 million, which was estimated using the discounted future cash flows fromthe E.O. 109 assets.  Cash flows from the E.O. 109 prepaid or limited mobilityservice were no longer considered in computing the recoverable value of theE.O. 109 assets as Piltel terminated this service in February 2003.  Revenuesfrom the E.O. 109 prepaid or limited mobility service, which used N-AMPScellular technology, were unfavorably affected by the success of Piltel’s andother cellular operators’ prepaid GSM cellular service.

 

Certainproperty, plant and equipment include the following amounts for capitalizedleases as at December 31, 2004 and 2003:

** **

** **

**December 31, 2004**

 

December 31, 2003

 

**Central office equipment**

**Vehicles, furniture and other work equipment**

** **

** **

** **

**Total**

 

Central office equipment

Vehicles, furniture and other work equipment

 

 

 

Total

 

(in millions of pesos)

Cost

**361**

**863**

**1,224**

 

354

574

928

Less accumulated depreciation

**269**

**410**

**679**

 

244

153

397

 

**92**

**453**

**545**

 

 110

 421

 531

 

Depreciation expense for assets reported undercapitalized leases amounted to Php282 million, Php110 million and Php69 millionin 2004, 2003 and 2002, respectively.

 

In2004 and 2003, Smart changed the estimated useful lives of certain networkassets owing to continuing network expansion and upgrade.

 

Belowis the pro forma financial information assuming no changes in accountingestimates were made during 2004 and 2003:

 

** **

**2004**

2003

** **

(in millions of pesos, except per share amounts)

Net income

** **

** **

As reported

**28,101**

11,045

Pro forma

**30,319**

12,346

Earnings per common share – basic

** **

 

As reported

**146.32**

47.20

Pro forma

**159.38**

54.88

Earnings per common share – diluted

** **

 

As reported

**145.30**

45.72

Pro forma

**157.55**

52.92

 

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

 

 

 

**8.         ****Investments**

 

Thisaccount consists of:

 

 

**2004**

2003

 

(in millions of pesos)

Investments in shares of stock:

** **

 

Acquisition cost

**3,412**

3,278

Less accumulated equity in net losses

**3,404**

1,830

 

**8**

1,448

At equity:

** **

 

Mabuhay Space Holdings Limited, or MSHL

**–**

763

Others

**8**

54

 

**8**

 817

At cost:

** **

 

Stradcom International Holdings, Inc., or SIHI

**–**

629

Others

**–**

2

 

**–**

 631

 

**8**

1,448

Investments in debt security:

** **

 

Acquisition cost

**286**

–

Less accumulated impairment loss

**–**

–

 

**286**

–

 

**294**

1,448

 

***Investment of ACeS******Philippines******in ACeS International Limited, or AIL***

 

As at December 31, 2004, ACeS Philippines had a 20.23%investment in AIL, a company incorporated under the laws of Bermuda.  AILowns the Garuda I Satellite and the related system control equipment in Batam, Indonesia.

 

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

 

***Investment of Mabuhay Satellite in MSHL***

 

On July 18, 1996,Mabuhay Satellite 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 servicewhich was added by SS/L aboard Agila II.  Under the terms of the JVA SS/L isrequired to convey title to the additional payload service to MSHL inconsideration for SS/L’s 35% equity interest in MSHL and Mabuhay Satellite isrequired to pay SS/L US$19 million for a 65% equity interest in MSHL.

 

In2000, SS/L filed a Notice of Default and Termination against Mabuhay Satellitearising from the Mabuhay Satellite’s alleged failure to amicably resolve itsalleged unpaid obligation to SS/L under the JVA.  In 2002, the arbitrationpanel handed down its decision and provided for payment by Mabuhay Satellite toSS/L of the principal amount of US$10 million plus accrued interest at 9% perannum.  On June 30, 2003, Mabuhay Satellite and SS/L concluded a settlementagreement whereby Mabuhay Satellite will lease two (2) transponders under atransponder agreement on a full-time basis to SS/L and offset the lease chargesfrom Loral Skynet Network Services, Inc. (formerly Loral Cyberstar, Inc., anaffiliate of SS/L), among others, for a full and final settlement of thearbitration decision.  The settlement agreement provides that notwithstandingany provision therein to the contrary, the settlement agreement, and thetransponder agreement may terminate upon failure by Mabuhay Satellite, withinnine months from the execution of the settlement agreement or such other periodas the parties may agree upon, to secure the consent of the Philippinecreditors of Mabuhay Satellite pursuant to the Omnibus Credit and SecurityAgreement, or Omnibus Agreement, dated December 14, 1995, as amended, betweenMabuhay Satellite and such creditors.  Under the Omnibus Agreement, approval ofcreditors holding at least 51% of the outstanding principal amount of the loanobligations of Mabuhay Satellite is required for purposes of transfer ordisposition of any collateral under the Omnibus Agreement.  As at December 31, 2003,the consent of the said creditors had not been obtained, hence, thetransaction, which would have resulted in a net gain of Php175 million, was notrecognized by Mabuhay Satellite in 2003.  On March 18, 2004, the majority ofthe creditors has given their consent to the settlement agreement andtherefore, the related gain was recognized in 2004.

 

***Investment in SIHI***

 

ePLDT has a 22.5% interest in convertible securitiesof SIHI, the parent company of Stradcom Corporation, which has an existingconcession agreement with the Philippine Government for the modernization ofthe Philippine Land Transportation Office, including the computerization ofdriver’s license issuance, vehicle registration and traffic adjudicationsystems.  SIHI has been incurring losses from the start of operations due toStradcom Corporation’s continuous losses and consistent excess of currentliabilities over current assets.  In addition, Stradcom Corporation hasdefaulted certain provisions of its loan covenants.  On this basis, werecognized an impairment provision in respect of our investment in SIHI ofPhp616 million in 2004.

 

***Summarized Financial Information of Equity Investees***

** **

The following table presents summarized financialinformation in conformity with U.S. GAAP for equity investees for which we havesignificant influence as at December 31, 2004 and 2003 and for the years ended December 31, 2004,2003 and 2002.

** **

 

**2004**

2003

 

(in millions of pesos)

Current assets

**638**

754

Noncurrent assets

**1,648**

1,672

Current liabilities

**1,444**

1,082

Noncurrent liabilities

**12,100**

12,583

Capital deficiency

**(11,258)**

(11,239)

 

 

**2004**

2003

2002

 

 (in millions of pesos)

Revenues

**1,299**

1,182

953

Revenues less cost of revenues

**1,013**

600

269

Expenses

**592**

758

23,163

Net loss

**19**

926

20,214

 

***Investment of ePLDT inDebt Securities of Technology Support Services, Inc. (formerly First AdvanceMulti-Media Entertainment Corp., or FAME)***

 

On June 1, 2004, ePLDT and FAMEentered an agreement whereby ePLDT granted a seven-year non-interest-bearingloan to FAME amounting to US$3.1 million.  At the option of ePLDT, the loan isconvertible into 20% of the total outstanding capital stock of FAME at any timeduring the life of the outstanding loan.  

 

On August 20, 2004, FAMEchanged its corporate name into Technology Support Services, Inc., or TSSI.

 

On September 14, 2004, ePLDT entered into a secondagreement with TSSI whereby ePLDT granted another seven-yearnon-interest-bearing loan to TSSI amounting up to US$3.1 million.  At theoption of ePLDT, the loan is convertible into another 20% of the outstandingcapital stock of TSSI at any time during the life of the outstanding loan.  Asat December 31, 2004, aggregate loans of ePLDT to TSSI amounted to US$5.1million.  The remaining balance of the loans of US$1.1 million will be releasedto TSSI subject to meeting certain conditions.

 

ePLDThad not converted its investment in debt securities to TSSI’s shares of stockas at  December 31, 2004.  TSSI is a systems integrator for the internet and mobiletelephone 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 December 31, 2004.

 

 

** **

**9.         ****Goodwilland Other Intangible Assets**

** **

This account consists of:

** **

 

**2004**

2003

 

(in millions of pesos)

Goodwill

**24,736**

23,800

Other intangible assets

**2,959**

2,705

 

**27,695**

26,505

Less accumulated amortization

**11,134**

11,041

 

**16,561**

15,464

 

Movementsin accumulated amortization of goodwill and other intangible assets are asfollows:

 

 

**2004**

2003

2002

 

 (in millions of pesos)

Balance at beginning of year

**11,041**

10,275

9,509

Amortization

**93**

766

766

Balance at end of year

**11,134**

11,041

10,275

 

Thecustomers list was fully amortized as at December 31, 2003.

 

***Goodwill***

 

Movementsin goodwill per reportable segments are as follows:

 

 

**Wireless**

**Fixed Line**

Information and Communications Technology

**Total**

 

(in millions of pesos)

Balances as at December 31, 2001

14,768

426

97

15,291

Addition during the year

–

–

–

–

Amortization during the year

–

–

–

–

Balances as at December 31, 2002

14,768

 426

  97

15,291

Addition during the year

173

–

–

 173

Amortization during the year

–

–

–

–

Balances as at December 31, 2003

14,941

 426

  97

15,464

Addition during the year

1,019

–

90

1,109

Reclassification during the year

(173)

–

–

(173)

Amortization during the year

–

–

–

–

**Balances as at****December 31, 2004**

**15,787**

**426**

**187**

**16,400**

 

Ourgoodwill is almost entirely related to the wireless business segment due to ouracquisition of Smart and Meridian.  We completed our transitional and annual evaluationof the goodwill value in conformity with SFAS 142 and consistent with ourincrease in wireless subscribers and revenues, there is no impairment in thegoodwill value.

 

***OtherIntangible Assets***

 

On October 31, 2003, Smart acquiredan 80% interest in Wolfpac for a total consideration of Php180 million, ofwhich Php90 million was paid in 2003 and the balance was paid in April 2004.Prior to the acquisition, Wolfpac was one of Smart’s leading contentproviders.  The acquisition provides Smart with the opportunity to have adirect link to the content development community, an important factor inwireless communication services.  The purchase consideration has been allocatedto identifiable assets and liabilities on the basis of fair values at the dateof acquisition.

 

Thefair values of the identifiable acquired assets and liabilities of Wolfpac areas follows:

 

** **

(in millions of pesos)

Cash and cash equivalents

4

Receivables

1

Prepayments and other current assets

1

Property, plant and equipment

5

Intangible assets – technology applications

254

 

 265

Accounts payable

(2)

Due to related parties

(2)

Deferred income tax liabilities

(81)

 

(85)

Net assets

 180

 

Fairvalue of intangible assets was determined by discounting Wolfpac’s cash flowsfor the three years after the acquisition date at 8% per annum.  The net cashoutflow on acquisition was Php173 million, representing cash payment of Php180million and cash acquired from Wolfpac of Php7 million.  Intangible assetsacquired from Wolfpac are amortized over their estimated useful life of threeyears.

 

On July 5, 2004, Smartentered into a sale and purchase agreement, as amended and supplemented on August 11, 2004, toacquire 100% of Meridian, a company primarily engaged in providing wirelessbroadband and data services to small and medium-scale enterprises in the Philippines,for a total consideration of US$45 million.  Payments of US$11 million and US$7million for an equity interest of 40% in Meridian were made in 2004 andpayments of US$4 million for an additional equity interest of 9% in Meridianwas made in January 2005.  The balance of US$23 million is payable on or beforeDecember 31, 2005 in respect of the remaining 51% equity interest in Meridian.  Theacquisition aims to strengthen Smart’s position in the wireless data segmentand is in line with Smart’s overall strategy of providing the widest range ofinnovative wireless services.  As at December 31, 2004, the net cash outflow onacquisition was Php1,051 million, representing cash payments of Php1,004 million,cash acquired from Meridian of Php4 million and cost directly related tobusiness combination of Php51 million.

 

Thepurchase consideration has been allocated to the assets and liabilities on thebasis of fair values at the date of acquisition.

 

Thefair values of the identifiable acquired assets and liabilities of Meridian areas follows:

 

 

(in millions of pesos)

Cash and cash equivalents

1

Receivables

10

Inventories and supplies

3

Prepayments

2

Other current assets

7

Property, plant and equipment

69

Goodwill

1,019

 

1,111

Accrued and other current liabilities

(51)

Due to related parties

(5)

 

(56)

Net assets

1,055

 

Meridian has been included in the 2004 consolidated financialstatements using the purchase method of accounting, which resulted in goodwillamounting to Php1,019 million.  Smart is in the process of determiningvaluations of certain intangible assets of Meridian.  Thus, the allocation of the purchase price issubject to refinement.

 

The following unaudited pro forma consolidatedfinancial information reflects the results of our operations for the yearsended December 31, 2004 and 2003, as if the acquisition of Meridian hadoccurred on January 1, 2003.  These pro forma results have been prepared forcomparative purposes only and do not purport to be indicative of what the operatingresults of Meridian would have been had the acquisition actually taken place onJanuary 1, 2003 and may not be indicative of future operating results.

 

 

**2004**

2003

 

(in millions of pesos,  except per share amounts)

Operating revenues

** **

** **

As reported

**121,221**

111,200

Pro forma

**121,319**

111,319

Income before cumulative effect of change in accounting policy

** **

** **

As reported

**28,101**

11,106

Pro forma

**28,108**

11,095

Net income

** **

** **

As reported

**28,101**

11,045

Pro forma

**28,108**

11,034

Earnings per common share – basic

** **

 

As reported

**146.32**

47.20

Pro forma

**146.36**

47.14

Earnings per common share – diluted

** **

 

As reported

**145.30**

45.72

Pro forma

**145.34**

45.66

 

There is no related 2002 pro forma disclosure onWolfpac since it was only incorporated in October 2003.

 

Movementsin intangible assets per reportable segments are as follows:

 

 

**Wireless**

**Fixed Line**

Information and Communications Technology

**Total**

 

(in millions of pesos)

Balances as at December 31, 2001

1,532

–

–

1,532

Addition during the year

–

–

–

–

Amortization during the year

(766)

–

–

(766)

Balances as at December 31, 2002

 766

–

–

 766

Addition during the year

–

–

–

–

Amortization during the year

(766)

–

–

(766)

Balances as at December 31, 2003

–

–

–

–

Addition during the year

254

–

–

 254

Amortization during the year

(93)

–

–

(93)

**Balances as at****December 31, 2004**

 161

–

–

 161

 

The unamortized intangible assetsof Php161 million as at December 31, 2004 will be amortized in 2005 (Php84 million) and 2006(Php77 million).

 

 

 

**10.    Other Noncurrent Assets**

 

Thisaccount consists of:

 

 

**2004**

2003

 

(in millions of pesos)

Telephone instruments - net

**3,317**

1,438

Debt issuance costs - net

**1,122**

2,023

Refundable deposits

**490**

429

Others

**702**

718

 

**5,631**

4,608

 

 

 

**11.    Accrued Expenses andOther Current Liabilities**

 

Thisaccount consists of:

 

 

**2004**

2003

 

           (in millions of pesos)

Accrued utilities and general expenses

**4,457**

3,847

Accrued taxes and other expenses

**3,256**

2,520

Accrued satellite air time cost and provisions (Notes 21 and 22)

**2,954**

1,992

Accrued interests on various loans

**2,235**

2,377

Accrual for payment for unused sick leave and other employee benefits

**1,624**

1,362

Others

**2,048**

1,415

 

**16,574**

13,513

 

Over the past years, PLDT hasbeen implementing its manpower rightsizing program, or MRP, in line with itscontinuing effort to reduce the cost base of its fixed line business.  The MRPcost charged to operations for the years ended December 31, 2004, 2003 and 2002amounted to Php566 million, Php1,565 million, including a loss on settlement ofPhp117 million, and Php324 million, primarily representing charges relating to745, 1,862 and 374 PLDT employees affected by the program, respectively;unrecognized past service costs, which are normally amortized over theestimated remaining average working lives of employees, in respect of employeeswho availed of the MRP are recognized as loss on settlement.  The decision toimplement the MRP was anchored on the challenges being faced by the fixed linebusiness as significant changes in technology, increasing competition, andshifting market preferences to cellular use have reshaped the future of thefixed line business.  The MRP was implemented under the Philippine New LaborCode and is in compliance with all other relevant labor laws and regulations.

 

Movementsin the accrued MRP cost accounts, included under accrual for payment for unusedsick leave and other employee benefits during the years, are as follows:

 

 

**2004**

2003

2002

 

                   (in millions of pesos)

Balance at beginning of year

**16**

87

–

Cost for the year (Notes 18 and 24)

**566**

1,565

324

Payments

**(****534****)**

(1,636)

(237)

Balance at end of year

**48**

16

87

 

 

 

12.    Interest-bearing Financial Liabilities

 

This account consists of the following:

 

 

**2004**

2003

 

          (in millions of pesos)

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

** **

 

Long-term debt

**131,377**

160,464

Obligations under capital lease (Note 7)

**601**

729

 

**131,978**

161,193

 

** **

 

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

** **

 

Notes payable:

** **

 

Bank loans

**58**

200

Commercial paper

**–**

1,933

Obligations under capital lease maturing within one year (Note 7)

**425**

295

Long-term debt maturing within one year

**28,020**

23,810

 

**28,503**

26,238

 

***Long-term Debt***

** **

Long-termdebt consists of:

 

**Description**

**Interest Rates**

**2004**

2003

 

 

(in millions)

*U.S. Dollars*

 

 

 

 

 

Export Credit Agencies-Supported Loans:

 

 

 

 

 

Kreditanstalt für Wiederaufbau, or KfW

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

**US$351**

**Php19,793**

US$398

Php22,099

Finnish Export Credit or Finnvera

6.36% - 7.75% and US$ LIBOR + 1.30% - 1.425%

**162**

**9,128**

257

14,296

Nippon Export and Investment Insurance  of Japan, or NEXI

US$ LIBOR +1%

**75**

**4,226**

60

3,335

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

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

**44**

**2,459**

66

3,644

Others

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

**104**

**5,878**

146

8,144

 

 

**736**

**41,484**

927

51,518

Fixed Rate Notes

7.85% - 11.375%

**1,236**

**69,652**

1,414

78,581

Term Loans:

 

** **

** **

 

 

Debt Exchange Facility

2.25% and US$ LIBOR + 1%

**283**

**15,959**

–

–

GSM Network Expansion Facilities

4.49% and US$ LIBOR + 3.25%

**126**

**7,089**

30

1,698

Nederlandse Financierings-Maatschappij Voor

Ontwikkelingslanden N.V., or FMO

US$ LIBOR + 1.95% - 2.05%

**51**

**2,862**

75

4,161

Multi-currency Term Loan

US$ LIBOR + 3.65%

**–**

**–**

53

2,961

Others

5.83% and LIBOR + 0.40% - 3.625%

**33**

**1,863**

43

2,368

Restructured Loans

3M US$ LIBOR + 1%

**119**

**6,702**

192

10,632

Satellite Acquisition Loans

US$ LIBOR + 1.75% and 5.6%

**72**

**4,064**

85

4,722

 

 

**US$****2,656**

**149,675**

US$2,819

156,641

 

 

** **

** **

 

 

*Japanese Yen*

 

** **

** **

 

 

JBIC’s Overseas Investment Loan, or OIL

2.125%

**JP¥9,760**

**5,363**

JP¥9,760

5,068

Export Credit Agency-Supported Loan:   NEXI Supported Loan

JP¥ LIBOR + 1.70%

**2,205**

**1,212**

–

–

Multi-currency Term Loan

JP¥ LIBOR + 3.85%

–

–

10,914

5,668

Restructured Loans

JP¥ LIBOR + 1%

–

–

15,644

8,124

** **

 

**JP¥****11,965**

**6,575**

JP¥36,318

18,860

** **

 

** **

** **

 

 

*Philippine Peso*

 

** **

** **

 

 

Peso Fixed Rate Corporate Notes

14% - 15.816%

**–**

**1,680**

–

2,180

Term Loans:

 

** **

** **

 

 

JBIC 4 Program

11.18%

**–**

**680**

–

1,284

Secured Term Loans

11.6% - 24% and 91-day T-Bill + 4% and 90-day PHIBOR + 3%

**–**

**305**

–

130

Other Unsecured Term Loans

12.81% - 17.5%

**–**

**–**

–

554

Restructured Loans

90-day T-Bill + 1%

**–**

**482**

–

4,625

 

 

**–**

**3,147**

–

8,773

 

 

** **

**159,397**

 

184,274

Less portion maturing within one year

 

** **

**28,020**

 

23,810

Long-term debt - net of current portion

 

** **

**Php131,377**

 

Php160,464

 

Thescheduled maturities of our outstanding consolidated long-term debt as at December 31, 2004 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

448

25,272

3,420

1,879

869

28,020

2006

410

23,126

3,418

1,878

863

25,867

2007

487

27,439

3,418

1,879

78

29,396

2008

100

5,583

1,709

939

67

6,589

2009

251

14,118

–

–

56

14,174

2010 and onwards

960

54,137

–

–

1,214

55,351

 

*U.S. Dollar Debt:*

* *

*Export Credit Agencies-SupportedLoans*

 

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

 

*Kreditanstalt für Wiederaufbau, or KfW*

 

KfW,a German state-owned development bank, is PLDT’s largest single creditor.  Asat December 31, 2004, we owed US$351 million aggregate principal amount ofdebt to KfW, as follows:

 

• US$262 million provided undervarious export credit agency-backed facilities, of which US$152 million was inconnection with our expansion and service improvement programs and US$110million in connection with the US$149 million refinancing facility discussedbelow; and

 

•  US$89 million provided for the 15% downpayment portionand credit facilities without guarantee/insurance cover from the export creditagencies, of which US$30 million was in connection with the US$149 million refinancingfacility discussed in the following paragraphs.

 

On January 25, 2002, PLDT signed twoloan agreements with KfW, which provided PLDT with a US$149 million facility torefinance in part the repayment installments under its existing loans from KfWdue from January 2002 to December 2004.  The facility is composed of anine-year loan, inclusive of a three-year disbursement period and a two-yeargrace period during which no principal is payable.  It partly enjoys theguarantee of HERMES, the export credit agency of the Federal Republic ofGermany.  We had drawn US$140 million (Php7,885 million) under this facility asat December 31, 2004.  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$83 million of our KfW loanswill mature in 2005, US$57 million in 2006, US$78 million in 2007, US$58million in 2008, US$44 million in 2009 and US$31 million in 2010.  Principalamortizations on these loans are generally payable in equal semi-annualinstallments.

 

*Finnish Export Credit plc, or Finnvera*

 

As at December 31, 2004, US$162 million aggregateprincipal amount of Smart’s debts provided by various banks under export creditagency-backed facilities in connection with Smart’s Phases 1, 2, 3, 4, part of5A and 5B GSM expansion programs are covered by guarantees from Finnvera, theFinnish export credit agency, for 95% of political risk and 50% of commercialrisk.

 

Ofthe amounts outstanding under these Finnvera guaranteed loans, US$95 millionwill mature in 2005 and US$67 million will mature in 2006.  Principalamortizations on these loans are generally payable in equal semi-annualinstallments.

 

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

 

On November 28, 2002, Smart signed aUS$100 million term loan facility supported by NEXI of which US$60 million wasdrawn on November 28, 2003 and US$40 million on April 5, 2004.  This loan ispayable semi-annually over four years in eight equal installments starting May28, 2004 with final repayment due in November 2007.  The outstanding balance asat December 31, 2004 was US$75 million.

 

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

 

Asat December 31, 2004, PLDT owed US$44 million aggregate principal amountof debt to JBIC (formerly the Export-Import Bank of Japan) and itsco-financing banks under various facilities.  Of the amounts outstanding underthese loans, US$14 million will mature in 2005, US$13 million in 2006, US$10million in 2007, US$4 million in 2008 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 therespective export credit agencies of France, Italy, Israel, Sweden, Denmark, Canada, Australia, the United Kingdom and Singapore, in the aggregate outstandingprincipal amount of US$96 million as at December 31, 2004.  Smart, likewise, obtained loans guaranteed by export credit agencies of Norway and Italyamounting to US$8 million.  Of the amounts outstanding under these loans, US$40million will mature in 2005, US$33 million in 2006, US$24 million in 2007, US$4million in 2008, US$2 million in 2009 and US$1 million in 2010.

 

*Fixed Rate Notes*

 

PLDT has the following non-amortizing fixed rate notesoutstanding as at December 31, 2004 and 2003:

 

Principal

Interest

**Maturity**

** **

** **

 
**Amount**

**Rate**

**Date**

2004

**2003**

 
 
** **

** **

** **

(in millions)

 
US$300,000,000

8.350%

March 6, 2017

**US$299**

**Php16,852**

US$299

Php16,624

 
US$250,000,000

11.375%

May 15, 2012

**250**

**14,085**

250

13,897

 
US$183,913,000

7.850%

March 6, 2007

**184**

**10,362**

200

11,117

 
US$175,000,000

10.500%

April 15, 2009

**175**

**9,841**

175

9,705

 
US$129,827,000

9.250%

June 30, 2006

**130**

**7,310**

175

9,717

 
US$110,557,000

9.875%

August 1, 2005

**110**

**6,229**

138

7,683

 
US$  88,263,000

10.625%

May 15, 2007

**88**

**4,973**

100

5,559

 
US$  77,002,000

10.625%

June 2, 2004

**–**

**–**

77

4,279

 
 

 

 

**US$****1,236**

**Php69,652**

US$1,414

Php78,581

 

OnMay 2, 2002, PLDT issued 10.625% Notes due 2007 in the aggregate principalamount of US$100 million and 11.375% Notes due 2012 in the aggregate principalamount of US$250 million.  The net proceeds from the issuance of the notes wereused to effect the repurchase of (1) US$63 million in principal amount of our8.5% Notes due 2003 and US$117 million in principal amount of our 10.625% Notesdue 2004 validly tendered by holders in our tender offer and (2) US$10 millionin principal amount of our 10.625% Notes due 2004 and US$12 million inprincipal amount of our 9.875% Notes due 2005 from the open market, and toprepay or repay various loans in the aggregate amount of US$125 million, ofwhich US$53 million (JP¥6,260 million) pertained to the Japanese yen term loanwhich matured on June 18, 2003 and US$52 million in connection with the US$150million term loan which matured on December 22, 2003.  

 

*Term Loans*

* *

*US$283 Million Term Loan Facility, or Debt ExchangeFacility*

 

On July 2, 2004, Smart acquired from Piltel’screditors approximately US$289 million, or 69.4%, in the aggregate of Piltel’stotal outstanding restructured debt at that time, in exchange for Smart debtand a cash payment by Smart.  In particular, Smart paid an amount in cash ofUS$1.5 million, or Php84 million, and issued new debt of US$283.2 million, orPhp15,854 million in July 2, 2004.

 

Thebreakdown of the total amount of Smart debt issued to participating Piltel creditorsis as follows:

 

• 2007 Facility in the amount ofUS$0.2 million payable in full in December 2007;

• 2008 Facility in the amount ofUS$2.9 million payable in full in December 2008; and

• 2014 Facility in the amount ofUS$280.1 million payable in full in June 2014.

 

As at July 2, 2004, the estimatedfutures cash flows for the Smart newly issued debt amounted to Php19,507million, as determined using undiscounted cash flows.  The difference betweenthe sum of future cash flows for newly issued debt of Php19,507 million andcash settlement of Php84 million, and the Php22,211 million Piltel cancelleddebt was recognized as gain on debt restructuring in the 2004 consolidatedstatement of income.  The total gain from the debt restructuring amounted toPhp2,620 million (Php15.44 per share) including the gain of Php241 million fromthe cash settled debt of Piltel.  The difference between the future cash flowsof the newly issued debt of Php19,507 million and the value of new debt ofPhp15,854 million was deferred and presented as part of “Remaining excess ofdebt forgiven over value of consideration given” account in the consolidatedbalance sheets in conformity with the accounting for troubled debtrestructuring.  Thereafter, interest incurred on the new debt is recorded as anoffset against “Remaining excess of debt forgiven over value of considerationgiven”.  Total interest incurred related to the new debt for the year ended December 31, 2004amounted to Php199 million.  As at December 31, 2004,the balance of “Remaining excess of debt forgiven over value of considerationgiven” account for this restructuring amounted to Php3,454 million, aftergiving effect to the above interest expense.

 

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 thecreditors have an option to elect for an early repayment at a discount eitherin December 2007 at 52.5% of the relevant debt amount or in December 2008 at57.5% of the relevant debt amount.

 

*GSM Network Expansion Facilities*

 

On February 11, 2005, Smart signed a US$100 millionfive-year term loan facility supported by the Finnish Export Credit Ltd. as thelender with ING Bank N.V. as facility agent to refinance its GSM Phase 5Afacility.  The full amount of the facility was drawn on March 1, 2005.  The loan will be payable over five years in ten equal payments starting September 1, 2005 at a floating rate of LIBOR plus 0.05% in respect of the six monthsinterest period.  

 

On September 13, 2004,Smart signed a US$104 million five-year term loan facility supported by FinnishExport Credit Ltd. 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 22, 2004, ofwhich, US$104 million remained outstanding as at December 31, 2004.  The loan willbe payable over five years in ten equal payments starting May 2005 at a fixedrate of 4.49% with final repayment in November 2009.

 

OnJune 8, 2001, Smart signed its GSM Phase 5A financing facility comprised ofUS$195 million loans, of which US$30 million Nordic Investment Bank, or NIB,US$15 million to Nederlandse Financierings-Maatschappij VoorOntwikkelingslanden N.V., or FMO, is owed to of the Netherlands and US$150million to Finnvera.  Of the amounts owed to FMO and NIB, US$22 millionremained outstanding as at December 31, 2004, are payable over five to sixyears, with final repayments due in March 2007 and June 2007.  

 

*US$224Million Term Loan Facilities*

 

Theloan facilities for Phases 1 to 4 of the GSM network expansion, under whichUS$61.3 million was outstanding as at December 31, 2004,are repayable in ten equal semi-annual installments with final repayments duein October 2005 and April 2006.

 

OnSeptember 25, 2001, Smart obtain a US$5.9 million term loan facility fromElectro Banque S.A. at a floating rate of six months US$ LIBOR plus 2.6%margin.  The loan was fully paid on November 8, 2004.

 

On October 26, 2001,Smart obtained a US$10.6 million term loan facility from Credit Lyonnais S.A.,of which, US$3.6 million is outstanding as at December 31, 2004.  This facilityis payable semi-annually at a floating rate of six months US$ LIBOR plus0.50% margin.  Final repayment is due in May 2008.

 

On December 13, 2001,Smart signed its GSM Phase 5B financing of US$100.0 million, of which, US$40.7million is outstanding as at December 31, 2004.  The loan is payable semi-annuallyover five years at a floating rate of six months US$ LIBOR plus 1.3% margin.Final repayment is due in September 2006.

 

OnApril 14, 2002, Smart obtained a US$7.2 million term loan facility fromBayerische Hypo-und Vereinsbank Aktiengesellschaft under Euro50.0 millionFramework Agreement for the financing of individual export contracts datedNovember 8 and 13, 2001.  The facility, which has an outstanding balance ofUS$4.4 million as at December 31, 2004, is payable semi-annually over fiveyears at a floating rate of six months US$ LIBOR plus 0.425% margin.  Finalrepayment is due in October 2007.

 

On November 28, 2002,Smart signed a US$100.0 million term loan facility supported by NEXI, of which,US$75.0 million is outstanding as at December 21, 2004.This loan is payable semi-annually over four years at a floating rate of sixmonths US$ LIBOR plus 1.00% margin.  Final repayment is due in November 2007.

 

*Local Exchange Transfer Loans*

 

Inconnection with the transfer to PLDT of Smart’s local exchange business, PLDTentered into loan agreements with Nederlandse Financierings-Maatschappij VoorOntwikkelingslanden N.V., or FMO, of the Netherlands, Exportkreditnamden, orEKN, of Sweden and Export 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$51 million of the FMO loan andUS$25 million of the EKN and ECGD loans were outstanding as at December 31, 2004.The FMO loan will mature on September 1, 2007, and the EKN and ECGD loans on December 31, 2007.

 

*US$150Million Term Loan*

 

In connection with PLDT’s fixedline expansion projects, PLDT obtained a US$150 million term loan, which wassubsequently assigned to Norddeutsche Landesbank Girozentrale, SingaporeBranch.  This loan matured on December 22, 2003 and the principal balance ofUS$52 million then outstanding was partly refinanced by Tranche B of US$145million multicurrency refinancing facility in the amount of JP¥3,191 millionand US$19 million.

 

*MulticurrencyRefinancing Facility*

 

On September 4, 2002, PLDT signed a loan agreement with a syndicate of banks fora US$145 million multicurrency term loan facility consisting of Japanese yenand U.S. dollar commitments of JP¥10,914 million and US$53 million,respectively.  This facility was split into two tranches.  Tranche A was drawnon June 18, 2003 in the amount of JP¥7,723 million and US$34 million torefinance a portion of the Japanese yen syndicated term loan which matured onthe same date.  Tranche B was drawn on December 22, 2003 in the amount ofJP¥3,191 million and US$19 million to refinance a portion of US$52 millionprincipal amount outstanding under the U.S. dollar term loan which matured onthe same date.  The outstanding balances of Tranches A and B of thismulticurrency term loan amounting to US$36 million and JP¥7,276 million originallywith final maturity in December 2006 were prepaid on December 20, 2004.

 

*US$12 Million Term Loan Facility*

 

On May 29, 2003, PLDT obtained a US$12 million termloan facility from DEG-Deutsche Investitions und Entwicklungsgesellschaft mbH.As of December 31, 2004, this loan has an outstanding balance of US$6 million.This loan will mature in June 2008 and is payable in semi-annual installmentsstarting June 15, 2004.  The US$4 million undrawn portion of the US$12 millionterm loan facility was cancelled pursuant to a request by PLDT to DEG effective September 26, 2004.

 

*Restructured Loans*

 

On June 4, 2001, Piltel completedthe restructuring of approximately Php41 billion of indebtedness and otherclaims owed to banks, trade creditors, bondholders and preferred shareholders,representing 98% of its total liabilities as at that date.

 

As aresult of the restructuring:

 

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

 

b.      Approximately half of theremaining 50% of all participating creditors’ (except for bondholders andpreferred shareholders) financial debt became their participation in a TrancheB Loan in the same currency as their previous financial debt and the other halfbecame their participation in a Tranche C Loan also in the same currency astheir previous financial debt.  In the case of bondholders and preferredshareholders, the remaining 50% of their financial debt became a participationin the Conversion Notes Facility and in a single Tranche Peso loan, or the TermNotes Facility, respectively.

 

Piltel’sresidual long-term debt to third parties that was not exchanged in the debtexchange offer conducted by Smart in 2004 consists of:

 

**Description**

**2004**

2003

 

(in millions)

**Restructured debts**

** **

** **

** **

** **

Philippine Pesos

** **

** **

** **

 

10 year Tranche B

** **

**Php241**

 

Php2,166

15 year Tranche C

** **

**241**

 

2,166

15 year Term Notes Facility

** **

**–**

 

293

 

** **

**482**

 

4,625

U.S. Dollars

** **

** **

 

 

10 year Tranche B

**US$10**

**548**

US$35

1,932

15 year Tranche C

**10**

**548**

35

1,932

15 year Conversion Notes Facility

**99**

**5,606**

122

6,768

 

**US$****119**

**6,702**

US$192

10,632

Japanese Yen

** **

** **

 

 

10 year Tranche B

**JPY–**

**–**

JPY7,822

4,062

15 year Tranche C

**–**

**–**

7,822

4,062

 

**JPY****–**

**–**

JPY15,644

8,124

Total

** **

**7,184**

 

23,381

 

** **

** **

 

 

**Unrestructured debt**

** **

** **

 

 

U.S. Dollars

** **

** **

 

 

Convertible bonds

**US$1**

**52**

US$1

52

Total

** **

**7,236**

 

23,433

Less current portion

** **

**59**

 

69

 

** **

**Php7,177**

 

Php23,364

 

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** – Philippines 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

 

Underthe terms of Piltel’s debt restructuring plan, PLDT issued a Letter of Support,or LOS, for the benefit of Piltel and its creditors under which PLDT has agreedto cover any funding shortfalls of Piltel up to a maximum amount of US$150million less all amounts paid or committed to be paid to or on behalf of Piltelor any of its subsidiaries or affiliates on or after March 23, 2000.  Under theLOS, PLDT is required to provide funding to Piltel in the event that the cashflow from Piltel’s operations falls short of the amount required by it todischarge in full its obligations to any creditor of Piltel and all itsoperating and financing subsidiaries and affiliates.  PLDT is subject tocontractual restrictions limiting the amount of financial support it canprovide to Piltel up to US$150 million.  As at December 31, 2004 and 2003, theremaining undrawn balance available under the PLDT LOS was US$50 million,approximately Php2,831 million (2004) and Php2,793 million (2003) due to priorinvestments made from March 23, 2000 to December 31, 2004 aggregating to US$100million through PLDT’s subscription to Series J Class I preferred shares ofPiltel.  There was no drawdown under the LOS in 2004 and 2003.

 

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*

 

MabuhaySatellite has an existing Credit Agreement with the Export-Import Bank of the United Statesto finance a portion of the cost of purchasing the Agila II Satellite.  In2003, Export-Import Bank of the United States approved, in principle, there-profiling of Mabuhay Satellite’s US$42 million debt with them by extendingthe maturity of the loan by 1 and ½ years to July 15, 2007 and reducing theinterest rate by 1%, to 5.6% from 6.6%.  The revised repayment terms have beenapproved by the majority of the local creditor banks.

 

MabuhaySatellite also has an existing Omnibus Agreement with a syndicate of localbanks, or the Banks, which includes issuance of irrevocable standby Letters ofCredit with an aggregate stated value not exceeding US$31 million (Php1,763million) in favor of Export-Import Bank of the United States, as security underthe Credit Agreement and a term loan to Mabuhay Satellite in the aggregateamount of US$41 million (Php2,301 million), which will mature on various datesfrom 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:*

 

*JP¥19,807Million Term Loan*

 

InDecember 1997, in connection with a refinancing of its maturing debt, PLDTobtained a Japanese yen term loan from a syndicate of foreign banks.  This loanmatured on June 18, 2003 and the principal balance of JP¥12,359 million thenoutstanding was partly refinanced by Tranche A of US$145 million multicurrencyrefinancing facility in the amount of JP¥7,723 million and US$34 million.

 

*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, isbeing amortized semi-annually beginning March 21, 2005and will mature on March 21, 2008.

* *

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

 

OnJune 11, 2003, PLDT signed a JP¥5,615 million syndicated term loan facilitysupported by NEXI, of which JP¥2,520 million was drawn and JP¥2,205 million wasoutstanding as at December 31, 2004.  The undrawn balance of JP¥3,095 millionwas cancelled at the end of the Availability Period on December 3, 2004.This loan is being amortized semi-annually beginning December 2004 and willmature in June 2008.

 

*Philippine Peso 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 Php1,500million, of which Php230 million matured on November 11, 2002, Php500 millionmatured on November 9, 2004 and Php770 million will mature on November 9, 2006.

 

Underthe second loan agreement, PLDT borrowed an aggregate amount of Php1,270million, of which Php360 million matured on June 9, 2003, Php100 million will mature on June 9, 2005 andPhp810 million on June 9, 2010.

 

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

 

In connection with the AsiaPacific Cable Network 2 project, PLDT entered into a loan agreement onSeptember 28, 2000 with Citibank, N.A., as facility agent, and a syndicate ofbanks in the aggregate principal amount of Php1,700 million, of which aboutPhp680 million was outstanding as at December 31, 2004.  The loan, which isfunded under the JBIC Facility for Private Sector Development of theDevelopment Bank of the Philippines, will mature on October 26, 2005and since April 2002 is payable in quarterly installments 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, ePLDT entered into a three-year loan facility withPhilippine Bank of Communications amounting to Php150 million.  The loan ispayable in seven quarterly installments, with a grace period of one year,beginning year 2003.  The loan facility was fully drawn on December 31, 2002.  The quarterly principal payments of Php15 millionstarted in June 2003 with a balloon payment of Php45 million in March 2005.Interest on this loan is equivalent to 91-day T-bill rate plus 4% per annumpayable quarterly in arrears.  The loan is secured by ePLDT’s deed ofassignment of receivables of a subsidiary from a foreign customer and aninvestment in an associate with an original cost of Php629 million.  As at December 31, 2004,the investment in this associate has been fully provided for as disclosed in *Note8 – Investments*.  As at December 31, 2004, the outstanding balance of thisloan amounted to Php45 million which was prepaid in full in March 2005.

 

*Php100Million Term Loan Facility*

 

On March 15, 2004, ePLDT entered into another three-year term loan facility withAsia United Bank amounting to Php100 million for the payment of its outstandingshort-term bank loan facility and for other working capital requirements.  Theloan facility was fully drawn as at December 31, 2004.  The loan is to berepaid in nine equal quarterly installments starting March 2005 with finalrepayment in March 2007.  Interest on the loan is equivalent to 90-day PHIBORplus 3% per annum payable quarterly in arrears.  The loan is secured by aMortgage Trust Indenture Agreement, or MTIA, on a parcel of land with acarrying value of Php279 million as at December 31, 2004.  As at December 31, 2004, the outstanding balance of this loan amounted to Php100 million, ofwhich Php44 million will mature in 2005.

 

*Php149 Million Term Loan Facility*

 

As at December 31, 2004, Vocativ, Inc., a wholly-ownedcall center subsidiary of ePLDT, had an outstanding five-year term loanfacility of Php149 million with Asia United Bank for the payment of itsadditional capital expenditures and working capital requirements.  The loan isto be repaid in 14 equal quarterly installments starting April 2006 with finalrepayment in July 2009.  Interest on the loan is equivalent to 90-day PHIBORplus 3% per annum payable quarterly in arrears.  The loan is secured by aMortgage Participation Certificate against the MTIA between ePLDT and AsiaUnited Bank Corporation – Trust and Investments Group dated March 15, 2004 on aparcel of land, which excludes the buildings and improvements.

 

*Unsecured Term Loans*

 

*Php1,000 Million Term Loan Facility*

 

On June 14, 2001, Smartsigned 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.

 

DebtCovenants

 

Our debt instruments containrestrictive covenants, including covenants that could prohibit us from payingdividends on common stock under certain circumstances, and require us to complywith specified financial ratios and other financial tests, calculated inconformity with accounting principles generally accepted in the Philippines,at relevant measurement dates, principally at the end of each quarterlyperiod.  We have complied with all of our maintenance financial ratios asrequired under our loan covenants and other debt instruments.  However, ifnegative factors adversely affect our financial ratios, we may be unable tomaintain compliance with these ratios and covenants or be unable to incur newdebt.  Under some of our loan agreements, certain of our financial ratios havebecome more restrictive in 2004 and will continue to become more restrictive inincrements thereafter, which will make it more difficult for PLDT to maintaincompliance with such ratios in the future.  Inability to comply with ourfinancial ratios and covenants or raise new financing could result in adeclaration of default and acceleration of some or all of our indebtedness.The terms of some of our debt instruments have no minimum amount forcross-default.  In addition, we are required to comply with certain financialratios for the incurrence of capital expenditures in excess of US$10 millionand incurrence of indebtedness.   

 

Inparticular, under loan agreements with JBIC, we are required to obtain priorwritten consent of JBIC for capital expenditures in excess of US$10 million,unless, among other things, our current ratio, calculated on a non-consolidatedbasis and after taking into account such expenditures, will not be less than1.20:1.  As at March 31, 2005, our current ratio was 1.29:1, primarily due to thelarge current portion of our long-term debt as at that date.  We currentlybelieve that our current ratio is unlikely to be less than 1.20:1 due tosmaller current portion of our long-term debt going forward.  As a result, webelieve that our financial ratios currently do not materially limit our abilityto incur our budgeted capital expenditures or to obtain additional financings.

 

Theprincipal factors that can negatively affect our ability to comply with thesefinancial ratios and other financial tests are depreciation of the Philippinepeso relative 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 Philippine peso, the lowering of PLDT’s credit ratings orthe credit ratings of the Philippines, increase in reference interest rates,and general market conditions.  Since approximately 98% of our totalconsolidated debts were denominated in foreign currencies, principally in U.S.dollars, many of these financial ratios and other tests are negatively affectedby any weakening of the peso, which declined by approximately 3% against theU.S. dollar to an average of Php56.044 to US$1.00 in 2004 from an average ofPhp54.215 to US$1.00 in 2003.  The peso depreciated from Php26.376 to US$1.00on June 30, 1997, to Php56.341 to US$1.00 as at December 31, 2004.  Moreover, the peso has been subjected to significant fluctuations.  For example, during2004 and 2003, the peso recovered to a high of Php52.021 to US$1.00 on May 8, 2003 and depreciated to a low of Php56.443 to US$1.00 on October 14, 2004.  

 

PLDT’sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of itsfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other investees in assisting in complying with non-consolidatedcovenants or covenants that are calculated without giving effect to the resultsof PLDT’s investees.

 

PLDT’sdebt instruments contain a number of other negative covenants that, subject tocertain exceptions and qualifications, restrict PLDT’s ability to take certainactions without lenders’ approval, including: (a) incurring additionalindebtedness; (b) prepaying other debt; (c) making investments; (d) extendingloans; (e) extending guarantees or assuming the obligations of other persons; (f)paying dividends or other distributions or redeeming, repurchasing or otherwiseacquiring shares of PLDT’s capital stock; (g) disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth; (h) entering into management contracts providing for themanagement 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’s debt instruments contain provisions wherein PLDT may berequired to repurchase or prepay certain indebtedness in case of change incontrol of PLDT or if the ownership of our shares of common stock held by NTTCommunications falls below a certain threshold.

 

Moreover,certain of PLDT’s debt instruments restrict PLDT from declaring or distributingdividends to common stockholders.  In particular, under the terms of PLDT’s JPY5,615 million syndicated term loan facility,PLDT is restricted from distributing dividends to common stockholders unless(i) no default has occurred which is continuing, and (ii) its debt to free cashflow ratio, after giving effect to the distribution of such dividends and,under certain circumstances, other adjustments to PLDT’s closing cash balance,would be less than 4.0:1.  Under other loan agreements, PLDT may not declare orpay dividends on any of its capital stock without the prior written consent ofthe lenders (i) if PLDT is in default in the payment of any amounts due andpayable under such loan agreement or after the occurrence and during thecontinuance of any other event of default or potential event of default undersuch agreements, (ii) if after giving effect to such action the current ratiowould be less than 1.2:1 or (iii) in an amount greater than PLDT’s net incomeafter taxes during the fiscal year to which such payment or distributionrelates.

 

In case of a change in control of PLDT, PLDT may berequired to repurchase or prepay certain indebtedness.  Under the terms of the10.625% Notes due 2007 and 11.375% Notes due 2012, we are required to offer topurchase all outstanding notes due 2007 and notes due 2012 for cash at a priceof 101% of their principal amounts plus accrued interest in the event that (1)the aggregate of NTT Communications’ and First Pacific’s direct and indirectvoting interest in PLDT's outstanding capital stock having voting rights fallsbelow 35% of such capital stock, (2) any person or, in certain instances, groupof persons, which is not controlled directly or indirectly by First Pacific orNTT Communications acquires a direct or indirect voting interest in PLDT’soutstanding capital stock having voting rights which equals or exceeds 35% ofsuch capital stock and (3) if a rating agency at such time maintains a ratingon either series of notes, the rating agency downgrades its credit rating on theseries within 90 days (or more, in certain circumstances) following notice ofthe occurrence of the events specified in (1) and (2) above.

 

Underthe terms of our JP¥9,760 million loan from JBIC, in the event of any proposedsale or transfer of PLDT’s stock that would result in NTT Communicationsholding less than 14.95% of PLDT’s voting stock, we will be required to prepay,immediately upon effectiveness of such sale or transfer, all principaloutstanding under the loan, together with accrued interest.  However,prepayment will not be required if, following such sale or transfer, (1) NTTCommunications continues to have prior approval rights with respect to allmatters as to which NTT Communications has approval rights under the stockpurchase agreement pursuant to which it acquired its shares in PLDT, or (2)JBIC, in its sole discretion, determines that NTT Communications’ participationin the expansion of Smart’s GSM network capacity to extend PLDT’s cellularbusiness in Smart would not be reduced below its level of participation as atthe date of the loan agreement.

 

Underthe terms of PLDT’s JP¥5,615 million syndicated term loan facility, if anylender so requests in writing, PLDT shall prepay in full such lender’sparticipation in the loan within 45 days from notification of the change incontrol and no later than the date on which PLDT is required to repurchase its10.625% Notes due 2007 and 11.375% Notes due 2012, or Bonds, from bondholdersaccepting the change in control offer.  A change in control is deemed to occurwhen (1) the aggregate of NTT Communications’ and First Pacific’s direct andindirect voting interest in PLDT’s outstanding capital stock having votingrights falls below 35% of such capital stock, (2) any person or, in certaininstances, group of persons, which is not controlled directly or indirectly byFirst Pacific or NTT Communications acquires a direct or indirect votinginterest in PLDT’s outstanding capital stock having voting rights which equalsor exceeds 35% of such capital stock and (3) if a rating agency at such timemaintains a rating on the Bonds, the rating agency downgrades its credit ratingon the Bonds within 90 days (or more, in certain circumstances) followingnotice of the occurrence of the events specified in (1) and (2) above.

 

PLDT’sdebt instruments also contain customary and other default provisions thatpermit the lender to accelerate amounts due or terminate their commitments toextend additional funds under the debt instruments. These default provisionsinclude: (a) cross-defaults and cross-accelerations that permit a lender todeclare a default if PLDT is in default under another debt instrument; in somecases, the cross-default provision is triggered upon a payment or other defaultpermitting the acceleration of PLDT’s debt, whether or not the defaulted debtis accelerated.  In other cases, the cross-default provision requires thedefaulted loan to be accelerated.  In some debt instruments, the cross-defaultprovision will be triggered only if the principal amount of the defaultedindebtedness exceeds a threshold amount specified in these debt instruments;(b) failure by PLDT to meet certain financial ratio covenants referred toabove; (c) the occurrence of any material adverse change in circumstances thata lender reasonably believes materially impairs PLDT’s ability to perform itsobligations under its debt instrument with the lender; (d) the revocation,termination or amendment of any of the permits or franchises of PLDT in anymanner unacceptable to the lender; (e) the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender; (f) the nationalization or sustained discontinuance of all or asubstantial portion of PLDT’s business; and (g) other typical events ofdefault, including the commencement of bankruptcy, insolvency, liquidation orwinding up proceedings by PLDT.

 

Smart’s debt instruments containcertain restrictive covenants, including covenants that prohibit Smart frompaying dividends, redeeming preferred stock, making distributions to PLDT orotherwise providing funds to PLDT or any affiliate without the consent of itslenders under its Phase 1, 2 and 3 facilities.  Also, Smart’s debt instrumentscontain certain restrictive covenants that require Smart to comply withspecified financial ratios and other financial tests at semi-annual measurementdates.   The financial tests under Smart’s loan agreements include compliancewith a debt to equity ratio of not more than 1.50:1 and a debt service coverageratio of not less than 1.50:1.  Smart has maintained compliance with all of itsfinancial covenants.  The agreements also contain customary and other defaultprovisions that permit the lender to accelerate amounts due under the loans orterminate their commitments to extend additional funds under the loans.  Thesedefault provisions include: (a) cross-defaults and cross-accelerations thatpermit a lender to declare a default if Smart is in default under another loanagreement.  These cross-default provisions are triggered upon a payment orother default permitting the acceleration of Smart debt, whether or not thedefaulted debt is accelerated; (b) failure by Smart to comply with certainfinancial ratio covenants; (c) any reduction in PLDT’s ownership of Smart’sshares below 51%; (d) any reduction in First Pacific’s and Metro PacificCorporation’s collective direct and/or indirect ownership of PLDT’s commonstock below 17.5% of the total common stock outstanding; and (e) the occurrenceof any material adverse change in circumstances that the lender reasonablybelieves materially impairs Smart’s ability to perform its obligations underits loan agreements.

 

Asat December 31, 2004, Piltel was 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.

 

TheCredit and Omnibus Agreements of Mabuhay Satellite imposes several negativecovenants.  In particular, these covenants, among others, restrict materialchanges in Mabuhay Satellite’s nature of business and ownership structure, anylien upon or with respect to any of its assets or to any right to receiveincome, acquisition of capital stock, declaration and payment of dividends,merger, consolidation and sale with another entity and incurring orguaranteeing additional long-term debt beyond prescribed amounts.

 

ePLDT’sloan agreement imposes negative covenants which, among other things, restrictePLDT in regard to payment of cash dividends or any other income or any capitaldistribution to PLDT, voluntary suspension of its entire business operationsfor a period of 60 consecutive days, dissolution of its legal existence, andcreation of any encumbrances on the shares pledged.  One of ePLDT’s loanagreements also requires ePLDT to comply with specified financial ratios andother financial tests at quarterly measurement dates.  The agreement alsocontains customary and other default provisions that permit the lender toaccelerate amounts due under the loan or terminate their commitments to extendadditional funds under the loan.  As at December 31, 2004,ePLDT has complied with all of its financial covenants.

 

**Obligations Under CapitalLease**

 

The future minimum payments forcapitalized leases are as follows as at December 31, 2004:

 

Year

(in millions of pesos)

2005

673

2006

379

2007

258

2008

6

2009

7

2010 and onwards

443

Total minimum lease payments

1,766

Less amount representing interest

740

Present value of net minimum lease payments

1,026

Less capital lease maturing within one year

425

Long-term portion of obligations under capital lease

 601

 

*Municipal Telephone Projects*

 

In 1993, PLDT entered into twolease agreements with the Philippine Department of Transportation andCommunications, or DOTC, covering telecommunications facilities in Bohol andBatangas established under the Municipal Telephone Act.  Under these agreements,PLDT was granted the exclusive right to perform telecommunications managementservices, to expand services, and to promote the use of the DOTC-contractedfacilities in certain covered areas for a period of 15 years.  Title to theproperties shall be transferred to PLDT upon expiration of the lease term.  Asat December 31, 2004, PLDT’s aggregate remaining obligation under theseagreements was approximately Php858 million.  In case of cancellation, PLDT isliable to pay Php100 million under each of the two contracts as liquidateddamages.

 

OnJune 1, 2004, PLDT served the DOTC a notice of termination of the leaseagreement in respect of the telecommunications system in Bohol which state ofdeterioration, obsolescence and disrepair have made it impossible for PLDT tocontinue managing, operating, and maintaining the system.  Since 2002, PLDT hasbeen advising the DOTC of the need to review the viability of the system as ithas infused more than Php200 million for upgrades and maintenance to keep the systemoperable.  Further, the enactment of Public Telecommunications Policy Act, orR.A. No. 7925, which negated the DOTC’s warranty to grant PLDT the exclusiveright to provide telecommunication services in the areas stipulated, preventedPLDT from achieving 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, theDOTC advised PLDT that the request for termination of the lease agreement in Bohol has beenreferred to the Department of Justice, or DOJ, as government agencies arerequired to refer all interpretation of contracts and agreements to the DOJsecretary as attorney-general of the national government.  As at the date ofthis report, negotiations are on-going in efforts to reach a mutuallybeneficial arrangement for both parties.  As at December 31, 2004, the net bookvalue of the telecommunications system in Bohol, including PLDT’s additionalcapital expenditure relating to the telecommunications system, andcorresponding capital lease obligation amounted to Php42 million and Php735million, respectively.

 

*Other Long-term CapitalLease Obligations*

 

The PLDT Group has variouslong-term lease contracts for a period of three years covering various officeequipment.  In particular, Smart and Piltel have capital lease obligationsaggregating Php906 million as at December 31, 2004in 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 leasebacktransaction.

 

**Notes Payable**

 

Thisaccount consists of Philippine peso and U.S. dollar-denominated short-term bankloans and trust receipts at weighted average interest rates, or WAIR, of 11.75%and 10.030% at December 31, 2004 and 2003, respectively, for Philippine pesoborrowings, and 2.78% and 2.606% at December 31, 2004 and 2003, respectively,for U.S. dollar borrowings.

 

OnApril 28, 2003 and May 14, 2003, PLDT issued, at a discount,Php1,600 million and Php400 million One-Year Peso Notes, respectively, underits Php2 billion Peso Notes program registered with the Philippine SEC.  Netproceeds of the issue totaled Php1,803 million. The Php1,600 million One-YearPeso Note matured and were paid on April 22, 2004and the Php400 million One-Year Peso Note matured and were paid on May 11, 2004.

 

Parlance Systems, Inc., awholly-owned call center subsidiary of ePLDT, has availed of a local bank’sExport Packing and Credit Loan facility amounting to US$950,000 as at December 31, 2004.The said facility can be availed by an export Letter of Credit with an 80% loanvalue.  It has a 90-day term from the date it was granted by the bank and issupported by a Deed of Assignment of Receivables.  Interest is based on theprevailing bank rate to be collected in arrears on a monthly basis.

 

 

 

**13.    Deferred Credits and Other NoncurrentLiabilities**

 

This account consists of:

 

 

**2004**

2003

 

(in millions of pesos)

Accrual of capital expenditures under long-term financing 

**3,970**

3,130

Advance payment under a receivables purchase facility (Note 5)

**1,644**

2,058

Liabilities on asset retirement obligations

**638**

395

Others

**908**

222

 

**7,160**

5,805

 

 

 

**14.    Preferred Stock Subjectto Mandatory Redemption**

 

Asat December 31, 2004, PLDT had issued 3 million shares of Series V ConvertiblePreferred Stock, 5 million shares of Series VI Convertible Preferred Stock and4 million shares of Series VII Convertible Preferred Stock in exchange for atotal of 58 million shares of Series K Class I Convertible Preferred Stock ofPiltel, pursuant to the debt restructuring plan of Piltel adopted in June2001.  Shares of Series V, VI and VII Convertible Preferred Stock are entitledto receive annual dividends of Php18.70 per share, US$0.397 per share andJP¥40.7189 per share, respectively.  Each share of Series V, VI and VII PLDTConvertible Preferred Stock is convertible at any time at the option of theholder into one share of PLDT’s common stock.  On the date immediatelyfollowing the seventh anniversary of the issue date of the Series V and SeriesVI Convertible Preferred Stock and on the eighth anniversary of the issue dateof the Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted into shares of PLDT’s common stock.For 30 days thereafter, the holders of these mandatorily converted shares ofcommon stock have the option to sell such shares of common stock back to PLDTfor Php1,700 per share, US$36.132 per share and JPY4,071.89per share for Series V, VI and VII PLDT Convertible Preferred Stock,respectively.  Due to the foreign currency component of the call optionembedded in the Series VI and VII Convertible Preferred Stock, such calloptions were bifurcated and accounted for separately in conformity with SFAS133, as amended, see *Note 23* – *Financial Assets and Liabilities*.The aggregate fair value of the issued Series V, VI and VII ConvertiblePreferred Stock as at date of issuance – net of the bifurcated option values –is shown under the “Preferred Stock Subject to Mandatory Redemption” account inthe consolidated balance sheets.

 

As at June 4, 2001, the aggregate fairvalue of the issued Series V, VI and VII Convertible Preferred Stock (inclusiveof the option values) amounted to Php10,165 million, as determined using anindependent party’s valuation model.  The remaining difference between thisaggregate fair value amount and the Php20,080 million Piltel restructured debtwas deferred and presented as part of “Remaining excess of debt forgiven overvalue of consideration given” account in the consolidated balance sheets inconformity with the accounting for troubled debt restructuring, such that nogain was recorded on the restructuring.  Thereafter, interest incurred on theremaining restructured debt is recorded as an offset against remaining excessof debt forgiven over the value of consideration given.  Total interestincurred related to the restructured debt for the years ended December 31, 2004,2003 and 2002 amounted to Php473 million, Php688 million and Php758 million,respectively.  As at December 31, 2004 and 2003, the remaining excess of debtforgiven over the value of consideration given balance amounted to Php2,380million and Php8,784 million, respectively, after giving effect to the aboveinterest expense, cancellation of Piltel debt through Smart acquisition fromPiltel’s creditors of the 69.4% of outstanding restructured Piltel debt, see *Note12 – Interest-bearing Financial Liabilities,* and the additional issuancesin 2004, 2003 and 2002 of convertible preferred shares to restructure Piltel’sdebt.

 

Thedifference between the aggregate fair value of the Series V, VI and VIIConvertible Preferred Stock at issue date (net of the bifurcated option valuesfor Series VI and VII) and the aggregate redemption value is accreted over theperiod up to the call option date using the effective interest rate method.Accretions added to “Preferred stock subject to mandatory redemption” andcharged against accumulated deficit for the years ended December 31, 2004 and 2003 amounted to Php1,503 million and Php1,309 million, respectively.Unaccreted balance as at December 31, 2004 and 2003 amounted to Php7,060million and Php8,577 million, respectively.

 

“Preferredstock subject to mandatory redemption” amounted to Php14,956 million andPhp13,321 million as at December 31, 2004 and 2003, respectively, afterrevaluation of Series VI and VII Convertible Preferred Stock to the exchangerates at balance sheet dates and after giving effect to the above accretions, cancellationof Piltel debt through Smart acquisition from Piltel’s creditors of the 69.4%of outstanding restructured Piltel debt conversions and additional issuances.As at December 31, 2004 and 2003, 1,060,940 shares and 676,571 shares,respectively, of the Convertible Preferred Stock have been converted into PLDTcommon shares.  The aggregate redemption value of the outstanding Series V, VIand VII Convertible Preferred Stock amounted to Php22,016 million and Php21,898million as at December 31, 2004 and 2003, respectively.

 

 

 

**15.    Stockholders’ Equity**

 

Themovement 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, 2002

372

5

36

 413

Php4,129

168

Php845

 
Issuance

37

–

7

  44

440

–

–

 
Conversion

(2)

–

–

(2)

(23)

1

2

 
Redemption

–

–

(7)

(7)

(72)

–

–

 
Balance at December 31, 2002

 407

   5

  36

 448

Php4,474

 169

Php847

 
 

 

 

 

 

 

 

 

 

 
Balance at January 1, 2003

 407

   5

  36

 448

Php4,474

 169

Php847

 
Issuance

5

–

–

   5

52

–

–

 
Conversion

(2)

–

–

(2)

(21)

–

–

 
Balance at December 31, 2003

 410

   5

  36

 451

Php4,505

 169

Php847

 
 

 

 

 

 

 

 

 

 
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**

**409**

**5**

**36**

**450**

**Php4,497**

**170**

**Php851**

 
 

***Preferred Stock***

 

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

 

The Series A to EE 10% CumulativeConvertible Preferred Stocks earn cumulative dividends at an annual rate of10%.  After the lapse of one (1) year from the last day of the year of issuanceof a particular series of 10% Cumulative Convertible Preferred Stock, anyholder of such series may convert all or any of the shares of 10% CumulativeConvertible Preferred Stock held by him into fully paid and non-assessableshares of Common Stock of PLDT, at a conversion price equivalent to 10% belowthe average of the high and low daily sales price of a share of Common Stock onthe PSE, or if there shall have been no such sales on the PSE on any day, theaverage of the bid and the asked prices of a share of Common Stock of PLDT atthe end of such day on such Exchange, in each such case averaged over a periodof 30 consecutive trading days prior to the conversion date, but in no caseshall the conversion price be less than the price set by the Board of Directorswhich, as at December 31, 2004, was Php5.00 per share.  The number of shares ofCommon Stock issuable at any time upon conversion of one share of subscriberinvestment plan, or SIP, Cumulative Convertible Preferred Stock shall bedetermined by dividing Php10.00 by the then applicable conversion price.

 

Incase the shares of Common Stock at anytime outstanding shall be subdivided intoa greater or consolidated into a lesser number of shares, then the minimumconversion price per share of Common Stock shall be proportionately decreasedor increased, as the case may be, and in the case of a stock dividend, suchprice shall be proportionately decreased, provided, however, that in every casethe minimum conversion price shall not be less than the par value per share ofCommon 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 its solediscretion, shall deem appropriate.

 

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

 

On January 22, 2002, the Board of Directors designated 10 million shares ofserial preferred stock as Series CC 10% Cumulative Convertible Preferred Stockfor issuance throughout 2002.  In addition, on February 26, 2002, the Board of Directors designated an additional 15 million shares of serial preferred stockas Series AA 10% Cumulative Convertible Preferred Stock.  The issuances of the10 million shares of Series CC 10% Cumulative Convertible Preferred Stock andthe additional 15 million shares of Series AA 10% Cumulative ConvertiblePreferred Stocks are exempt transactions under Section 10.2 of the SecuritiesRegulation Code of the Philippines, or SRC, as confirmed by the Philippine SECon March 13, 2002 and July 31, 2002, respectively.  The PSE approved thelisting of the 10 million shares of Series CC 10% Cumulative ConvertiblePreferred Stock and the additional 15 million shares of Series AA 10%Cumulative Convertible Preferred Stock on August 14, 2002.

 

On December 2, 2002, the Board ofDirectors designated 10 million shares of serial preferred stock as Series DD10% Cumulative Convertible Preferred Stock for issuance throughout 2003 and anadditional 10 million shares of serial preferred stock as Series CC 10%Cumulative Convertible Preferred Stock.  The issuances of the 10 million sharesof Series DD 10% Cumulative Convertible Preferred Stock and the additional 10million shares of Series CC 10% Cumulative Convertible Preferred Stocks areexempt transactions under Section 10.2 of the SRC, as confirmed by thePhilippine SEC on January 30, 2003.  In an earlier letter dated October 24, 2002, PSEallowed PLDT to utilize 24,287,455 unissued preferred shares remaining listedwith the PSE in order to cover the issuance requirement of the other seriesunder PLDT’s SIP.  The issuance requirement for the 10 million shares of SeriesDD 10% Cumulative Convertible Preferred Stock and the additional 10 millionshares of Series CC 10% Cumulative Convertible Preferred Stock will be takenfrom the said remaining listed and unissued preferred shares.

 

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, which is an exempt transaction under Section 10.2 of the SRC as confirmedby Philippine SEC on March 22, 2004.

 

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 wherein exemption of these transactions under Section10.2 of the SRC is still awaiting confirmation from Philippine SEC.

 

The Series III ConvertiblePreferred Stock earns cumulative dividends at an annual rate of US$3.50 a sharepayable quarterly, free and clear of Philippine withholding taxes.  It isconvertible into Common Stock at the option of the holder at any time, at theconversion price of US$29.19 per share of Common Stock (equivalent to aconversion ratio of 1.7129 shares of Common Stock for each share of Series IIIConvertible Preferred Stock, each share of Series III Convertible PreferredStock being valued for this purpose at its reference amount of US$50 a share),subject to adjustment in certain events; and are not redeemable.  Moreover,PLDT may require the mandatory conversion of some or all of the outstandingshares of Series III Convertible Preferred Stock into shares of common stock atthe above conversion price of US$29.19 per share of common stock, if certainconditions are met, including that (i) the average of the closing prices of theADSs reported on the NYSE on each trading day during the period of 30 days endingon the seventh day prior to the date upon which notice of the date of mandatoryconversion is first given is greater than or equal to the conversion price ineffect on such seventh day, (ii) there are no dividends in arrears on anyshares of the Series III Convertible Preferred Stock, and (iii) PLDT hassufficient distributable reserves to pay the fixed preferential dividends onthe shares of Series III Convertible Preferred Stock, calculated down to andincluding the mandatory conversion date.  Upon liquidation of PLDT, holders ofthe Series III Convertible Preferred Stock will be entitled to receiveliquidating distributions equivalent to Php11 per share, plus accrued andunpaid dividends to the date of distribution, subject to the prior rights ofcreditors.

 

TheSeries IV Cumulative Non-Convertible Redeemable Preferred Stock earnscumulative dividends at an annual rate of 13.5% based on the paid-upsubscription price.  It is redeemable at the option of PLDT at any time oneyear after subscription and at the actual amount paid for such stock, plusaccrued dividends.  On February 26, 2002, the Board of Directors called for the payment of aportion of the balance of the subscription price of the Series IV CumulativeNon-Convertible Redeemable Preferred Stock amounting to Php72 million, 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 the redemptionprice plus unpaid dividends up to the date of redemption.

 

Theshares of preferred stock, except shares of Series V, VI and VII PLDTConvertible Preferred Stock, redeemed or converted into common stock shallrevert to and form part of the unissued preferred stock, and may be reissued inany other series that the Board of Directors may, from time to time, establishand designate.

 

The provisions of certain subscription agreementsinvolving preferred stock have an effect on the ability of PLDT to, withoutwritten consent, sell certain assets and pay cash dividends unless alldividends for all past quarterly dividend periods have been paid and provisionhas been made for the currently payable dividends.

 

 

 

**16.    Related Party Transactions**

 

Thefollowing is a summary of related party accounts with affiliates presented aspart of our consolidated balance sheets as of December 31, 2004 and 2003 andconsolidated statements of income for the three years ended December 31, 2004,2003, and 2002:

 

 

 

**2004**

2003

 

(in millions of pesos)

Consolidated Balance Sheets

 

*** ***

*** ***

Accrued expenses and other current liabilities

** **

**3,270**

2,260

 

 

**2004**

2003

2002

 

(in millions of pesos)

Consolidated Statements of Income

** **

 

 

Cost of satellite air time

**1,299**

1,919

50

Professional fees and other service fees

**694**

616

636

Insurance and securities

**534**

581

367

Maintenance expenses

**111**

68

65

Selling and promotions

**32**

26

14

Rent

**6**

7

3

 

*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, as amended in December1998 and as assigned and transferred to AIL, under which PLDT was granted theexclusive right to sell ACeS services in the Philippines.  In exchange, theAir Time Purchase Agreement required PLDT to purchase from PT Asia CellularSatellite at least US$5 million worth of air time annually over ten years,commencing on January 1, 2002, the date of commercial operations.

 

In the event that PT Asia Cellular Satellite’s aggregate billingrevenue is less than US$45 million in any given year, the Air Time PurchaseAgreement states that PLDT has to make supplemental air time purchase paymentsnot to exceed US$15 million per year during the ten-year term.

 

We believe that the payment obligations under the AirTime Purchase Agreement exceeded the economic benefits expected to be receivedunder it as a result of the delay in the launch of the satellite,unavailability of competitive handsets and competitions from cellular services,occurrence of a partial satellite loss, changes in the primary business of AILand other factors affecting its business.  Accordingly, we started negotiationswith AIL for the revision of the payment obligations under the Air TimePurchase in 2000.  As a result of these negotiations, the effective date of theAir Time Purchase Agreement became January 1, 2002.In 2002, billings for satellite air time were reduced to actual air time usage,less amount for marketing assistance to service providers.

 

PLDT and the other founder NSPs are endeavoring to amend the Air TimePurchase Agreement due to the occurrence of partial satellite loss, changes inthe primary business of ACeS and other events affecting the business.

 

In March 2003, PLDT, together with the other founder NSPs, entered intoa Standstill Agreement with AIL suspending the application and enforcement ofthe minimum and supplemental air time payments under the original Air TimePurchase Agreement.  The parties agreed that AIL shall provide PLDT and theother founder shareholders, with unlimited use of air time for the year 2003 inexchange for a fixed fee in the amount of US$3.8 million for PLDT.  Moreover,PLDT is also obliged to purchase from AIL 13,750 satellite phone units in 2003at US$395 F.O.B. per unit, subject to quarterly price adjustments.  The partiesto the Standstill Agreement also agreed to negotiate in good faith and usetheir best efforts to reach an agreement on a revised Air Time PurchaseAgreement before November 15, 2003 that will cover, among other things, theamended minimum and supplemental air time payment provisions subject to theapproval of AIL’s creditors.

 

On February 10, 2004, notwithstanding the ongoingnegotiations, AIL advised PLDT of the termination of the Standstill Agreementand the reinstatement of the terms under the original Air Time PurchaseAgreement effective January 1, 2002, following the lapse of the November 15,2003 deadline set in the Standstill Agreement for the negotiation of a revisedAir Time Purchase Agreement.  Negotiations are continuing with the relevantparties towards an amicable settlement of this matter.

 

As at December 31, 2004 and 2003, PLDT’s outstandingpayables under the original Air Time Purchase Agreement was Php2,954 millionand Php1,992 million, respectively.  Total fees under this agreement amountedto Php1,299 million, Php1,919 million and Php50 million for the years ended December 31, 2004,2003 and 2002, respectively.  See *Note 21 – Contractual Obligations andCommercial Commitments* and *Note 22 – Provisions and Contingencies*forfurther discussion.

 

PLDT also entered into a Founder NSP Operating Agreement with PT AsiaCellular Satellite 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 the Air Time Purchase Agreement entered intoon December 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 as at 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**Major**Stockholders, Directors and Officers*

 

Transactionsto which PLDT or its subsidiary was a party, in which a director or key officeror owner of more than 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 thecommon shares of PLDT had a direct or indirect material interest in PLDT or itssubsidiary, as at December 31, 2004 and 2003 and for the years ended December31, 2004, 2003 and 2002 are as follows:

 

*1.     Agreements with NTT Communicationsand/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 submarine cable repair andother related 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.  Thisagreement has been extended up to the end of 2005.  Under the agreement, PLDTis required to pay NTT WEMC a fixed annual standing charge of US$2 million,excluding cost for the use of a remotely operated submersible vehicle atUS$5,000 for every day of use and repair cost computed at US$19,000 per day ofactual 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 International TelecommunicationsServices Agreement*.   On March 24, 2000, PLDTentered into an agreement with NTT Communications under which PLDT and NTTCommunications agreed to cooperative arrangements for conventionalinternational telecommunications services to enhance their respectiveinternational businesses.

 

Total fees under these agreementsamounted to Php336 million, Php288 million and Php289 million for the yearsended December 31, 2004, 2003 and 2002, respectively.  As at December 31, 2004 and2003, outstanding obligations of PLDT amounted to Php49 million and Php40million, respectively.

 

*2.     Agreement between Smart and**Asia**Link B.V., or ALBV*

* *

Smarthas an existing Technical Assistance Agreement with ALBV for the latter toprovide technical support services and assistance in the operations andmaintenance of cellular business for a period of five years, subject to renewalupon mutual agreement between the parties.  The agreement provides forquarterly payments of technical service fees equivalent to 2% of the netrevenues of Smart.  In January 2004, the agreement was amended, reducing thetechnical service fees to be paid by Smart to ALBV to 1% of net revenueseffective January 1, 2004.

 

Smartalso has an existing Services Agreement with ALBV for a period of 25 yearsstarting January 1, 1999, which shall automatically expire unless renewed bymutual agreement of both parties.  Under the agreement, ALBV provides adviceand assistance to Smart in sourcing capital equipment and negotiating withinternational suppliers, arranging international financing and other servicestherein consistent with and for the furtherance of the objectives of theservices.  Service agreement fees were paid for the whole 25-year period.

 

ALBVis a subsidiary of the First Pacific Group.

 

Totalfees under these agreements amounted to Php507 million for the year ended December 31, 2004 and Php429 million for each of the years ended December 31, 2003 and 2002.  Outstanding obligations of Smart under the Technical Service Agreementamounted to Php267 million and Php228 million as at December 31, 2004 and 2003, 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 insurance expenses paidunder this agreement amounted to Php534 million, Php581 million and Php367million for the years ended December 31, 2004, 2003 and 2002, respectively.  Twodirectors of PLDT have a direct/indirect interest in or serve asdirector/officer of Gotuaco and Malayan.

 

 

 

**17.    Employee Benefits**

 

***Share-Based Payment***

*** ***

*Executive Stock Option Plan, or ESOP*

 

Stock options granted under the ESOP vest over fiveyears and have a maximum contractual life of ten years from the date of grant.The exercise price of the options granted under the ESOP shall not be lowerthan the average of the closing price of our common stock on the PSE for 30calendar days immediately preceding the date of grant.

 

Thestock options granted under the ESOP shall vest each year, beginning two yearsfrom the grant date at a per year rate of 25% of the options granted.

 

Thenumber of shares reserved under the ESOP should not exceed 1.2% of the totalissued common shares of PLDT, and the number of shares reserved for issuanceunder the ESOP is increased to include any shares of PLDT’s common stockissuable upon exercise of options granted under the ESOP that expire or lapsefor any reason without having been exercised in full. 

 

TheESOP will terminate on December 10, 2009, unless PLDT’s Board of Directors terminates itearlier. 

 

OnDecember 10, 1999, PLDT granted 1,289,745 options to purchase shares ofPLDT’s common stock under the ESOP.  Stock option activity under the ESOP forthe years ended December 31, 2004, 2003 and 2002 is summarized below:

 

 

**Weighted Average Exercise Price Per Share**

**2004**

2003

2002

Balance at beginning of year

Php814

**900,118**

1,226,395

1,157,258

Granted

814

**–**

–

144,428

Exercised shares

814

**(336,745)**

–

–

Cancelled

814

**(26,784)**

(326,277)

(75,291)

Balance at end of year

Php814

**536,589**

900,118

1,226,395

 

Allthe above grants under the ESOP were made to executives of PLDT and all outstandingstock options became fully vested in December 2004.

 

Thenumber of options exercisable at December 31, 2004and 2003 were 536,589 shares and 681,358 shares, respectively.

 

Inconformity with the provisions of SFAS 123, the fair value of each option isestimated using the Black-Scholes valuation model with the followingassumptions for grants under the ESOP during the year ended December 31, 1999:volatility of 71.3%, risk-free interest rate of 8.94% at the date of grant andan expected term of five years.

 

Theweighted average per share fair value of common stock options granted in 2002was Php582.59.  The remaining weighted average contractual life was five yearsas at December 31, 2004.

 

Asat December 31, 2004, 336,745 shares were already exercised by certainofficers and executives at an exercise price of Php814 per share.  Of the336,745 exercised shares, 1,649 shares were unissued as at December 31, 2004.

 

*ESPP*

 

Beginning January 3, 2000up to March 31, 2000, we made our ninth offering under the PLDT’s ESPP,under which we made available up to 991,200 shares of common stock to alleligible employees as at January 3, 2000.  The shares were offered at a discounted price ofPhp877.63 per share, which was 85% of the average market price of our commonshare on the PSE on January 3, 2000.  The 36-month installment payment period providingfor payment through payroll deductions began on April 30, 2000 and ended on April 15, 2003.

 

Acertain amount for every share each employee elected to purchase was deductedfrom the employee’s salary beginning with the first payroll on April 30, 2000 andended with the last payroll period of April 15, 2003.No prepayment of the purchase price was allowed.

 

Themaximum number of shares that may be issued and sold under the Plan is 5.6million.  There were no sales under the Plan for the years ended December 31, 2003 and2002.

 

The estimated grant date fair value was calculatedusing the Black-Scholes valuation model.  The following weighted averageassumptions were included in the estimated grant date fair value calculationsfor rights to purchase stock under PLDT’s ESPP: volatility of 34.5%, risk-freeinterest rate of 8.78% at the date of grant and an expected term of five years.

 

Theweighted average estimated fair value, as defined by SFAS 123, at grant date ofthe rights to purchase stock under the ESPP was Php371.93 per share.

 

*LTIP*

 

On August 3, 2004, PLDT’s Board of Directors approvedthe establishment of the LTIP for eligible key executive officers and advisorsof PLDT and its subsidiaries, which is administered by the ExecutiveCompensation Committee.  The LTIP is a four-year cash plan covering the periodfrom January 1, 2004 to December 31, 2007.  The LTIP awards payment at theend of the four-year period (without interim payments) is contingent upon theachievement of an approved target increase in PLDT’s common share price by theend of the plan period and a cumulative consolidated net income target for theplan period.  The target increase in the PLDT base share price, which is theaverage of the closing prices of PLDT shares ten trading days before or after December 31, 2003, isapproximately 15% per annum compounded for the plan period.

 

Thecompensation cost from LTIP was measured using the variable accounting methodunder APB Opinion No. 25 since the plan is a variable plan.  The accounting forvariable plans requires that an estimate of compensation expense be recognizedand updated at each accounting period until the measurement date.  The finalmeasurement of compensation expense is not determinable until both the numberof shares and the exercise price per share are known.  The compensation costrecognized as an expense for the year ended December 31, 2004 amounted toPhp378 million.

 

***Pension***

*** ***

*PLDT*

*** ***

PLDT has a trustee-managed, non-contributory definedbenefit plan, or Benefit Plan, providing for retirement and death benefits andservice terminal pay to substantially all permanent and regular employees.  TheBenefit Plan provides benefits upon normal retirement beginning at age 65,early retirement beginning at age 50 or completion of at least 30 years ofcredited service, voluntary separation beginning at age 40 or completion of atleast 15 years of credited service, total and physical disability, death andinvoluntary separation.  Benefits under the Benefit Plan are based on theemployee’s final monthly basic salary and length of service.

*** ***

Inconformity with SFAS 132, “Employers’ Disclosures about Pensions and OtherPostretirement Benefits,” the following table sets forth the Plan’s fundedstatus and pension amounts recognized as at December 31, 2004, 2003 and 2002based on the latest actuarial valuation dated February 2005:

*** ***

 

**2004**

2003

2002

 

(in millions of pesos)

Change in benefit obligation:

 

** **

** **

Benefit obligation at beginning of year

**5,971**

7,984

6,637

Service cost

**382**

515

452

Interest cost

**535**

716

794

Benefits paid

**(18)**

(17)

(495)

Actuarial loss (gain)

**679**

(1,227)

596

Curtailment

**116**

274

–

Settlement

**(801)**

(2,274)

–

Benefit obligation at end of year

**6,864**

5,971

7,984

 

** **

 

 

Change in plan assets:

** **

 

 

Fair value of plan assets at beginning of year

**3,927**

2,915

2,781

Employer’s contribution

**883**

2,703

470

Actual return on plan assets

**457**

600

159

Settlement

**(801)**

(2,274)

–

Benefits paid

**(18)**

(17)

(495)

Fair value of plan assets at end of year

**4,448**

3,927

2,915

Funded status

**(2,416)**

(2,044)

(5,069)

Unrealized net transition obligation

**199**

229

275

Unrecognized net actuarial loss (gain)

**89**

(498)

837

Accrued benefit cost

**(2,128)**

(2,313)

(3,957)

 

** **

 

 

Components of net periodic benefit cost:

** **

 

 

Service cost

**382**

515

452

Interest cost

**535**

716

794

Expected return on plan assets

**(376)**

(303)

(369)

Amortizations of:

** **

 

 

Unrecognized net transition obligation

**10**

13

14

Unrecognized actuarial loss

**–**

2

–

Net periodic benefit cost

**551**

 943

 891

*** ***

The accumulated benefitobligations amounted to Php2,868 million, Php4,330 million and Php2,552 millionas at December 31, 2004, 2003 and 2002, respectively.

*** ***

Thesignificant assumptions used in determining the actuarial present value of theprojected benefit obligations as at December 31, 2004, 2003 and 2002 are asfollows:

*** ***

 

**2004**

2003

2002

Weighted average assumptions:

 

 

 

Discount rate

**10%**

9%

9%

Expected return on plan assets

**10%**

9%

8%

Rate of compensation increase

**7%**

6%

9%

 

Theallocation of the fair value of plan assets follows:

 

 

**2004**

2003

2002

Investments in debt securities

**30%**

36%

39%

Investments in equity securities

**35%**

42%

52%

Others

**35%**

22%

9%

 

**100%**

100%

100%

 

As at December 31, 2004, investments in equitysecurities in the plan assets include shares of stocks of PLDT and Piltel witha total fair value of Php1,407 million, or 31% of the total fair value of planassets (36% in 2003 and 47% in 2002).

 

Movementsof shares of stock of PLDT and Piltel held by the plan during 2004 are asfollows:

 

 

**PLDT**

Piltel

** **

**Common Shares**

Preferred Shares

**Common Shares**

Numbers of shares held by the plan as at January 1, 2004

661,643

36,000,000

37,853,680

Purchases during the year

–

–

–

Sales during the year

–

–

17,894,920

**Number of shares held by the plan as at****December 31, 2004**

**661,643**

**36,000,000**

**19,958,760**

 

Dividendsreceived by the plan from PLDT for the years ended December 31, 2004, 2003 and2002 amounted to Php47 million, Php51 million and Php48 million, respectively.

 

PLDT expects to makeapproximately Php633 million of cash contributions to its pension plan in 2005.

 

The table below presents the expected compulsoryretirement benefits of PLDT to be paid out of the fund for the next ten years:

 

**Year**

(in millions of pesos)

2005

51

2006

74

2007

105

2008

150

2009

151

2010 and onwards

2,071

*** ***

*Smart*

 

Smarthas a trustee-managed, tax-qualified provident plan, or Provident Plan,providing for retirement, death or service terminal pay to substantially allpermanent and regular employees.  Under the Provident Plan, Smart contributesto the provident fund for the credit of each member’s Personal RetirementAccount, or PRA, a percentage of such member’s monthly salary.  Net earnings ofthe Provident Fund are credited every nine months to the PRAs of the membersbased on their proportionate share in the total value of the Provident Fund asat the end of the preceding period.

 

InOctober 2003, Smart’s Board of Directors approved enhancements to theretirement plan.  The enhanced retirement plan gives a member the option tocontribute to the fund up to a maximum of 10% of his monthly salary.  On top ofits current contribution, Smart will provide an additional contribution of upto 50% of the member’s contribution, depending on his tenure in the company.

 

Anybenefit payable under the Provident Plan shall be in lieu of or in compliancewith, but not in addition to, the payment of similar benefits Smart is requiredto pay to its employees under existing or future laws, employment contracts orcollective bargaining agreements, it being understood that the employee shallbe entitled only to the higher of the Provident Plan or other availablebenefits, but not to both.

 

The following are the minimumadditional disclosures as required by SFAS 132 based on the latest actuarialvaluation dated February 2005:

 

 

**2004**

2003

2002

 

(in millions of pesos)

Change in benefit obligation:

** **

 

 

Benefit obligation at beginning of year

**226**

159

125

Service cost

**50**

44

45

Interest cost

**23**

16

12

Benefits paid

**(9)**

(2)

(1)

Actuarial loss (gain)

**67**

9

(22)

Benefit obligation at end of year

**357**

 226

 159

Change in plan assets:

** **

 

 

Fair value of plan assets at beginning of year

**318**

197

119

Employer’s contribution

**157**

71

54

Actual return on plan assets

**56**

28

25

Benefits paid

**(9)**

(2)

(1)

Fund transfers due to transferees from Telecoms Solutions, Inc.

**–**

24

–

Fair value of plan assets at end of year

**522**

 318

 197

 

** **

 

 

Funded status

**165**

92

38

Unrecognized net transition obligation

**(7)**

(7)

(7)

Unrecognized net actuarial loss (gain) 

**27**

(19)

(23)

Prepaid benefit cost

**185**

  66

   8

Components of net periodic benefit cost:

** **

 

 

Service cost

**50**

44

45

Interest cost

**23**

16

12

Expected return on plan assets

**(35)**

(23)

(14)

Net periodic benefit cost

**38**

  37

  43

 

Theaccumulated benefit obligations amounted to Php348 million, Php38 million andPhp25 million as at December 31, 2004, 2003 and 2002, respectively.

 

The significant assumptions used in determining theactuarial present value of the projected benefit obligations as at December 31,2004, 2003 and 2002 are as follows:

 

 

**2004**

2003

2002

Weighted average assumptions:

 

 

 

Discount rate

**10%**

10%

10%

Expected return on plan assets

**10%**

10%

10%

Rate of compensation increase

**10%**

10%

9%

 

Theallocation of the fair value of plan assets follows:

 

 

**2004**

2003

2002

Investments in debt securities

**78%**

86%

89%

Investments in equity securities

**20%**

12%

5%

Others

**2%**

2%

6%

 

**100%**

100%

100%

 

Smartexpects to make approximately Php84 million of cash contribution to its pensionplan in 2005.

 

The table below presents the expected compulsoryretirement benefits of Smart to be paid out of the fund for the next ten years:

 

**Year**

(in millions of pesos)

2005

4

2006

8

2007

11

2008

15

2009

26

2010 and onwards

278

 

ThePLDT Group adopts an investment approach of mixed equity and fixed incomeinvestments to maximize the long-term return of plan assets.  The investmentportfolio has been structured to achieve the objective of regular income withcapital growth and out-performance of benchmarks.  A majority of the investmentportfolio consists of fixed income debt securities and various equitysecurities, while the remaining portion consists of multi-currency investments.

 

SFAS87 requires the use of an average rate of earnings expected on funds investedor to be invested, considering returns being earned by plan assets in the fundand rates of return expected to be available for reinvestment.  Dueconsideration was given not only to historical performance of plan investments,but also to the current investment mix and anticipated rates of return.   Thus,the expected rate of return on assets was set at 10% per annum.

 

 

 

**18.    Operating Revenues and Expenses**

 

*Service Revenues*

* *

 

**2004**

2003

2002

 

(in millions of pesos)

Wireless services

** **

 

 

Cellular

**65,866**

52,932

34,500

VSAT

**2,020**

715

732

Fixed lines

** **

 

 

Local exchange

**20,606**

20,728

21,345

International long distance

**12,804**

12,767

10,637

National long distance

**6,736**

6,561

7,818

Data and other network

**4,371**

5,112

5,561

Miscellaneous

**535**

328

492

Information and communications technology

**2,014**

1,343

601

 

**114,952**

100,486

81,686

 

*Non-service Revenues*

* *

 

**2004**

2003

2002

 

(in millions of pesos)

Sale of handsets and SIM-packs

**6,111**

10,548

12,095

Point of product sales

**158**

166

50

 

**6,269**

10,714

12,145

 

*Compensation and Benefits*

* *

 

**2004**

2003

2002

 

(in millions of pesos)

Salaries and benefits

**10,336**

11,722

9,664

Pension and other benefits (Note 17)

**777**

(21)

890

Incentive plans (Note 17)

**347**

38

15

MRP (Note 11)

**566**

1,565

324

 

**12,026**

13,304

10,893

 

*Asset Impairment*

* *

 

**2004**

2003

2002

 

(in millions of pesos)

Investments (Note 8)

**1,047**

–

–

Property, plant and equipment (Note 7)

**365**

675

13,279

 

**1,412**

675

13,279

 

*Financing Costs*

* *

 

**2004**

2003

2002

 

(in millions of pesos)

Interest on loans and related items (Note 24)

**11,710**

12,321

13,988

Foreign exchange losses - net (Notes 12 and 23)

**2,812**

9,672

5,052

Accretion on financial liabilities - net (Notes 12 and 23)

**1,185**

729

643

Hedge costs (Note 23)

**1,011**

1,054

315

Loss (gain) on derivative transactions - net (Note 23)

**828**

1,631

(547)

Financing charges

**146**

263

243

Capitalized interest (Notes 7 and 24)

**(595)**

(887)

(1,343)

 

**17,097**

24,783

18,351

* *

*Other Income - Net*

 

 

**2004**

2003

2002

 

(in millions of pesos)

Gain on debt exchange and debt restructuring transactions  (Php16.59 per share) (Note 12)

**2,816**

–

–

Miscellaneous income (expense) - net

**(286)**

799

1,397

 

**2,530**

799

1,397

 

 

 

19.    Income Taxes

 

Thenet current and noncurrent components of deferred tax assets recognized in theconsolidated balance sheets follow:

 

**2004**

2003

 

(in millions of pesos)

Net current deferred income tax assets

**11,111**

7,932

Net noncurrent deferred income tax assets

**8,916**

12,780

 

The components of the consolidated netdeferred tax assets and liabilities are as follows:

 

 

**2004**

2003

 

(in millions of pesos)

Current assets:

** **

 

Allowance for doubtful accounts

**5,603**

4,371

Unearned revenues – others

**2,628**

589

NOLCO

**1,072**

4,965

Unearned prepaid card revenues 

**848**

890

Provision for unrealizable assets

**452**

519

MCIT

**359**

1,351

Allowance for inventory obsolescence 

**353**

232

Past service pension cost

**192**

163

Capital lease

**181**

173

Derivative instruments

**151**

29

Others

**1,073**

710

 

**12,912**

13,992

Current liabilities:

** **

 

Unrealized gains on financial instruments

**(107)**

(84)

 

**12,805**

13,908

Less valuation allowance

**1,694**

5,976

Net current assets

**11,111**

7,932

Noncurrent assets:

** **

 
Unrealized foreign exchange losses
**13,011**

16,556

Asset impairment

**7,180**

9,472

Excess of debt forgiven over value of consideration given

**1,867**

2,812

Unrealized losses on derivative instruments

**900**

832

Accelerated depreciation

**1,410**

734

Past service pension cost

**956**

978

Accrued pension cost

**711**

792

Deferred charges

**311**

327

Asset retirement obligations

**104**

64

LTIP

**113**

–

 

**26,563**

32,567

Less valuation allowance

**11,969**

13,614

 

**14,594**

18,953

Noncurrent liabilities:

** **

 

Interest charges capitalized, net of amortization

**(5,044)**

(5,320)

Intangible assets

**(51)**

–

Taxes and duties capitalized, net of amortization

**(583)**

(650)

Undistributed earnings of a subsidiary

**–**

(203)

 

**(5,678)**

(6,173)

Net noncurrent assets

**8,916**

12,780

 

Provision for (benefit from) income tax consists of:

 

 

**2004**

2003

2002

 

(in millions of pesos)

Current

**7,357**

2,331

589

Deferred

**(531)**

(3,731)

849

 

**6,826**

(1,400)

1,438

 

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 a special income tax rate of 5% of gross income, as defined inthe Act.

 

On December 22, 2000,the Philippine Board of Investments, or BOI, approved ePLDT’s registration as anew information technology service firm in the field of services related to itsinternet data center on a pioneer status.  As such, ePLDT enjoys, among otherincentives, a six-year income tax holiday, or ITH, from January 2001.

 

OnMay 3, 2001, the BOI awarded Smart pioneer status for its expansion projects,entitling it to a three-year ITH which expired on May 2, 2004.  In 2004 and 2003, taxincentives utilized amounted to Php2,208 million and Php6,425 million,respectively.  The tax incentive was utilized by Smart on the basis ofincremental income generated from such expansion projects.  In addition, on July 12, 2001, theBOI awarded Smart pioneer status for its payment infrastructure projects,entitling it to enjoy a six-year ITH.  On July 9, 2003,Smart filed a petition for the cancellation of its BOI Registration No.2001-102.  On September 14, 2004, the BOI formally approved such request forcancellation, which resulted in the termination of all incentives granted toSmart by virtue of its registration.  No tax incentives were utilized by Smartin 2004 and 2003.

 

The balance of NOLCO as at December 31, 2004 may be used bythe particular entities that incurred the losses as deductions against futuretaxable income.

 

**Year Incurred**

**Expiry Date**

(in millions of pesos)

2002

December 31, 2005

3,329

2003

December 31, 2006

4

2004

December 31, 2007

17

Total NOLCO

** **

3,350

 

Thereconciliation between the provision for (benefit from) income tax at theapplicable statutory tax rate and the actual provision for (benefit from)income tax follows:

 

 

**2004**

2003

2002

 

(in millions of pesos)

Provision (benefit) at statutory tax rate

**11,149**

3,123

(1,470)

Tax effects of:

** **

 

 

Tax exempt income and non-deductible expenses

**3,731**

2,695

(253)

Equity in net losses of associates

**24**

28

45

Results of operations subject to income tax holiday

**(2,205)**

(5,975)

(2,405)

Differences between statutory tax rate and special tax rate  of certain subsidiaries

**(835)**

(490)

(117)

Others - net 

**889**

(114)

174

Changes in valuation allowance

**(5,927)**

(667)

5,464

Actual provision for (benefit from) income tax

**6,826**

(1,400)

1,438

 

 

** **

**20.    Earnings Per Common Share**

 

Thefollowing table presents information necessary to calculate the earnings pershare:

 

** **

**2004**

2003

2002

 

**Basic**

**Diluted**

Basic

Diluted

Basic

Diluted

 

(in millions of pesos, except per share amounts)

Net income (loss) before cumulative effect of change in accounting policy

**28,101**

**28,101**

11,106

11,106

(6,158)

(6,158)

Cumulative effect of change in accounting policy

**–**

**–**

(61)

(61)

–

–

Dividends on preferred stock

**(1,764)**

**(285)**

(1,739)

(1,485)

(1,645)

(1,645)

Accretion to redemption value of Preferred Stock  Subject to Mandatory Redemption

**(1,503)**

**(1,503)**

(1,309)

(1,309)

(1,004)

(1,004)

Net income (loss) attributable to common shareholders

**24,834**

**26,313**

7,997

8,251

(8,807)

(8,807)

 

(in thousand shares)

Outstanding common shares, beginning of year

**169,476**

**169,476**

169,361

169,361

168,895

168,895

Effect of issuance of common shares during the year

**252**

**252**

52

52

200

200

Weighted average number of shares under ESOP during the year

**–**

**155**

–

–

–

–

Common shares equivalent of preferred shares deemed dilutive:

** **

** **

 

 

 

 

      10% Cumulative Convertible Preferred Stock (Note 14)

**–**

**3,305**

–

–

–

–

      Preferred Stock Series III (Note 14)

**–**

**7,908**

–

–

–

–

      Preferred Stock Series V (Note 14)

**–**

**–**

–

2,576

–

–

      Preferred Stock Series VI (Note 14)

**–**

**–**

–

4,651

–

–

      Preferred Stock Series VII (Note 14)

**–**

**–**

–

3,842

–

–

Weighted average number of common shares for the year

**169,728**

**181,096**

169,413

180,482

169,095

169,095

Earnings per common share before cumulative effect of change in accounting policy

**146.32**

**145.30**

47.56

46.06

(52.08)

(52.08)

Cumulative effect of change in accounting policy

**–**

**–**

(0.36)

(0.34)

–

–

Earnings per common share

**146.32**

**145.30**

  47.20

  45.72

(52.08)

(52.08)

 

Series V, VI and VII Convertible Preferred Stock weredeemed dilutive based on a calculation of the required dividends on thesepreferred shares divided by the number of equivalent common shares, assumingsuch preferred shares are converted into common shares and compared against thebasic EPS.  Since the amount of dividends on the Series V, VI and VIIConvertible Preferred Stock over its equivalent number of common sharesdecreased the basic EPS, these convertible preferred stock were deemeddilutive.  

 

The computation of diluted earnings per common sharewere anti-dilutive for the year ended December 31, 2002; therefore, the amountsreported for basic and diluted earnings per common share were the same.

 

**DividendsDeclared For the Years Ended****December 31, 2004****, 2003 and 2002**

*** ***

** **

**2004**

**2003**

**2002**

**Class**

**Per Share**

**Total**

**Per Share**

**Total**

**Per Share**

**Total**

 

 

(in millions of pesos)

 

(in millions of pesos)

 

(in millions of pesos)

**Preferred Stocks Subject to  Mandatory Redemption**

 

 

 

 

 

 

Series V

Php4.675

48

Php4.675

48

Php4.675

48

Series VI

US$0.09925

106

US$0.09925

113

US$0.09925

106

Series VII

JPY10.179725

82

JPY10.179725

93

JPY10.179725

86

 

 

 236

 

 254

 

 240

 

 

 

 

 

 

 

**10% Cumulative Convertible  Preferred Stocks**

 

 

 

 

 

 

Series DD

Php1.00

2

Php1.00

–

Php1.00

–

Series CC

1.00

17

1.00

17

1.00

–

Series A, I, R, W, AA and BB

1.00

130

1.00

130

1.00

130

Series B, F, Q, V and Z

1.00

91

1.00

91

1.00

91

Series E, K, O and U

1.00

45

1.00

45

1.00

45

Series C, D, J, T and X

1.00

58

1.00

58

1.00

58

Series G, N, P and S

1.00

27

1.00

27

1.00

27

Series H, L, M and Y

1.00

40

1.00

40

1.00

40

 

 

 410

 

 408

 

 391

 

 

 

 

 

 

 

**Convertible Preferred Stocks**

 

 

 

 

 

 

Series III

US$1.029412

1,070

US$1.029412

1,040

US$1.029412

1,003

 

 

 

 

 

 

 

**Cumulative Non-Convertible Redeemable Preferred Stocks**

 

 

 

 

 

 

Series IV*

 

48

 

49

 

49

Charged to retained earnings

 

1,764

 

1,751

 

1,683

* *

****Dividends are declared based on total amounts, not pershare amounts.*
******
*** ***

**Dividends DeclaredSubsequent to****December 31, 2004**

*** ***

** **

**Date**

** **

**Amounts**

**Class**

**Approved**

**of Record**

**Payable**

** **

**Per Share**

**Total**

 

 

 

 

 

 

(in millions of pesos)

10% Cumulative Convertible Preferred Stock – Series DD

January 25, 2005

February 8, 2005

February 28, 2005

 

Php1.00

3

Common Stock

March 1, 2005

March 31, 2005

May 12, 2005

 

14.00

2,380

 

May 5, 2005

June 3, 2005

July 14, 2005

 

21.00

3,577

 

 

 

21.    Contractual Obligations and CommercialCommitments

** **

***Contractual Obligations***

 

The following table discloses the PLDT Group’scontractual obligations outstanding as at December 31, 2004:

 

** **

** **

**Long-term lease obligations**

**Unconditional purchase**

**Other long-term**

** **

**Year**

**Long-term debt**

**Operating**

**Capital**

**obligations****(1)**

**obligations**

**Total**

 

(in millions of pesos)

2005

28,020

725

673

4,405

–

33,823

2006

25,867

580

379

1,136

–

27,962

2007

29,396

439

258

1,127

–

31,220

2008

6,589

373

6

1,127

13,419

21,514

2009

14,174

350

7

1,126

8,597

24,254

2010 and onwards

55,351

1,115

443

3,380

–

60,289

Total 

159,397

3,582

1,766

12,301

22,016

199,062

 

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

* *

*Long-termDebt Obligations*

 

Fordiscussion of our long-term debt obligations*,* see*Note 12 –Interest-bearing Financial Liabilities.*

* *

*Long-term Operating Lease Obligations*

* *

*Domestic Fiber Optic Network Submerged Plant Agreement*.   As discussed in *Note 16 – Related PartyTransactions*, PLDT entered into an agreement with NTT World EngineeringMarine Corporation, or NTT WEMC, on July 4, 2000,for submarine cable repair and other related services in relation to themaintenance of PLDT’s DFON submerged plant for a period of five years up to July 4, 2005.  Thisagreement has been extended up to the end of 2005.  Under this agreement, PLDTis required to pay NTT WEMC a fixed annual standing charge of US$2 million,excluding cost for the use of a remotely-operated submersible vehicle atUS$5,000 for every day of use and repair cost computed at US$19,000 per day ofactual repair.  As at December 31, 2004, PLDT’s aggregate remaining obligation under this agreementwas approximately Php69 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 December 31, 2004, PLDT’saggregate remaining obligation under these contracts amounted to approximatelyPhp30 million.

* *

*License Agreement with Mobius Management Systems (**Australia**)Pty Ltd., or Mobius.*PLDT enteredinto a license agreement with Mobius pursuant to which Mobius has granted PLDTa non-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 December 31, 2004,PLDT’s aggregate remaining obligation under this agreement was approximatelyPhp45 million.

* *

*OtherLong-term Operating Lease Obligations*.The PLDT Group has various long-term lease contracts for periods ranging fromtwo to ten years covering certain offices, warehouses, cell sites, telecommunicationequipment locations and various office equipment.  In particular, Smart haslease obligations aggregating Php3,185 million as at December 31, 2004 in respect ofoffice and cell site rentals with over 2,000 lessors nationwide, PLDT has leaseobligations aggregating Php119 million as at December 31, 2004, and ePLDT haslease obligations aggregating Php134 million as at December 31, 2004 in respect ofcertain office space rentals.

* *

*Long-termCapital Lease Obligations.*

 

For a discussion of our long-term capital leaseobligations, see *Note 12 – Interest-bearing Financial Liabilities*.

 

*UnconditionalPurchase Obligations*

 

*AirTime Purchase Agreement with AIL.*Asdiscussed in *Note 16 – 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 thecommercial operations of the Garuda I Satellite.  

 

In the event that PT Asia Cellular Satellite’s aggregate billingrevenue is less than US$45 million in any given year, the Air Time PurchaseAgreement states that PLDT has to make supplemental air time purchase paymentsnot to exceed US$15 million per year during the ten-year term.

 

Webelieve that the payment obligations under the Air Time Purchase Agreement exceededthe economic benefits expected to be received under it as a result of the delayin the launch of the satellite, unavailability of competitive handsets andcompetitions from cellular services, occurrence of a partial satellite loss,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 Air Time Purchase in 2000.  As a result ofthese negotiations, the effective date of the Air Time Purchase Agreementbecame January 1, 2002.  In 2002, billings for satellite air time werereduced to actual air time usage, less amount for marketing assistance toservice providers.

 

PLDT and the other founder NSPsare endeavoring to amend the Air Time Purchase Agreement due to the occurrenceof partial satellite loss, changes in the primary business of ACeS and otherevents affecting the business.

 

In March 2003, PLDT, togetherwith the other founder NSPs, entered into a Standstill Agreement with AILsuspending the application and enforcement of the minimum and supplemental airtime payments under the original Air Time Purchase Agreement.  The partiesagreed that AIL shall provide PLDT and the other founder shareholders, withunlimited use of air time for the year 2003 in exchange for a fixed fee in theamount of US$3.8 million for PLDT.  Moreover, PLDT is also obliged to purchasefrom AIL 13,750 satellite phone units in 2003 at US$395 F.O.B. per unit,subject to quarterly price adjustments.  The parties to the StandstillAgreement also agreed to negotiate in good faith and use their best efforts toreach agreement on a revised Air Time Purchase Agreement before November 15,2003 that will cover, among other things, the amended minimum and supplementalair time payment provisions subject to the approval of AIL’s creditors.

 

On February 10, 2004, notwithstanding the ongoingnegotiations, AIL advised PLDT of the termination of the Standstill Agreementand the reinstatement of the terms under the original Air Time PurchaseAgreement effective January 1, 2002 following the lapse of the November 15,2003 deadline set in the Standstill Agreement for the negotiation of a revisedAir Time Purchase Agreement.  Negotiations are continuing with the relevantparties towards an amicable settlement of this matter.  See *Note 16 –Related Party Transactions* and *Note 22 – Provisions and Contingencies*forfurther details relating to the Air Time Purchase Agreement with AIL.  As at December 31, 2004,PLDT’s aggregate remaining minimum obligation under the original Air TimePurchase Agreement was approximately Php11,962 million.  

 

*InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign*.   On September 15, 2000, ePLDT entered into anagreement with VeriSign for the non-exclusive, non-transferable right andlicense to use the VeriSign software, brand and Certification PracticeStatement for the purpose of approving, issuing, suspending or revoking digitalcertificates for users of the internet or similar open systems in the Philippinesfor a period of seven years.  Under this agreement, ePLDT is required to payVeriSign a certain percentage of the revenue derived from the services subjectto minimum annual royalty payments aggregating to US$11 million, which was subsequentlyreduced to US$1 million, for the seven-year contract period.  In addition,ePLDT was required to pay an annual support fee of US$0.5 million during thefirst year and US$0.3 million in each year thereafter.  

 

Effective July 1, 2003, VeriSign has agreed to amendthe Agreement and issued Addendum 6 to write-off all past due invoices andpayments owed to VeriSign, which were invoiced or scheduled to be invoicedunder the agreement prior to this Addendum 6.  All royalty payments and annualsupport fees due through June 2003 were part of the write-off in the amount ofUS$0.8 million.  For contract year 4 (September 2003 to August 2004), theannual support fee was reduced from US$0.3 million to US$40,000 andfor contract years 5 to 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.  

 

Moreover,effective July 1, 2004, VeriSign has agreed to amend the Agreement andissued Addendum 8 as an extension of Addendum 6.  Under this amendment, theannual support fee for year 5 (September 2004 to August 2005) will remain atUS$40,000 and affiliate revenue sharing rates will remain at 25%.  As at December 31, 2004,ePLDT’s aggregate remaining minimum obligation under this agreement wasapproximately Php18 million pertaining to annual support fee.

 

*Sale**and Purchase Agreement with**Meridian**.*For a discussion of our sale andpurchase agreement with Meridian with a remaining obligation of Php1,561 million as atDecember 31, 2004, see *Note 9 – Goodwill and Other Intangible Assets*.

 

*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 with an aggregateremaining obligation of approximately Php321 million.

* *

*OtherLong-term Obligations*

 

*MandatoryConversion and Purchase of Shares*.As discussed in *Note 14 – Preferred Stock Subject to Mandatory Redemption*,as at December 31, 2004, PLDT had issued a total of 3 million shares of SeriesV Convertible Preferred Stock, 5 million shares of Series VI ConvertiblePreferred Stock and 4 million shares of Series VII Convertible Preferred Stockin exchange for a total of 58 million shares of Series K Class I Convertible PreferredStock of Piltel, pursuant to the debt restructuring plan of Piltel adopted inJune 2001.

 

Eachshare of Series V, VI and VII Convertible Preferred Stock is convertible at anytime at the option of the holder into one share PLDT common stock.  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 into sharesof PLDT common stock.  Under a put option exercisable for 30 days, holders ofshares of common stock received on mandatory conversion will be able to requirePLDT to purchase such shares of PLDT common stock for Php1,700 per share,US$36.132 per share, and JPY4,071.89per share for Series V, VI and VII PLDT Convertible Preferred Stock,respectively.  

 

As at December 31, 2004, 515,818 shares of Series VConvertible Preferred Stock and 545,122 shares of Series VI ConvertiblePreferred Stock had been converted into shares of PLDT common stock.  Theaggregate value of the put option based on outstanding shares as at December31, 2004 was Php22,016 million, of which Php13,419 million is payable on June4, 2008 and Php8,597 million on June 4, 2009, if all of the outstanding sharesof Series V, VI and VII PLDT Convertible Preferred Stock were mandatorilyconverted and all the underlying shares of common stock were put to PLDT.  Themarket value of the underlying shares of common stock was Php14,685 million,based on the market price of PLDT shares of common stock of Php1,360 per shareas at December 31, 2004.

 

***Commercial Commitments***

 

As at December 31, 2004, ouroutstanding commercial commitments, in the form of letters of credit, amountedto Php1,504 million.  These commitments will expire within one year.

 

 

 

**22.    Provisions andContingencies**

** **

Wehave made a reasonable estimate of the amount necessary to pay or settle anycontested assessment in the event of an unfavorable judgment against us andhave made the appropriate provisions in our consolidated financial statementsas at December 31, 2004 aggregating Php5,199 million in respect of thefollowing:

* *

*NTC supervision 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 December 31, 2004, PLDT has paid, since 1994, a total amount ofPhp1,718 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.  Moreover, on February 11, 2005, Piltel paidunder protest the amount of Php559 million in respect of NTC fees for theperiod from 1992 to 2004.

 

*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, the 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 R.A. No. 7925, whichtook effect on March 16, 1995, and the grant of similar local franchise andbusiness taxes exemption privileges to other franchise holders subsequent tothe effectivity of R.A. No. 7160, implicitly restored its local franchise andbusiness taxes exemption privilege under Section 12 of R.A. No. 7082, or thePLDT Franchise pursuant to Section 23 thereof, or the equality of treatmentclause. 

 

Toconfirm this position, PLDT sought and obtained on June 2, 1998 a ruling from theBureau of Local Government Finance, or BLGF, of the Philippine Department ofFinance, which ruled that PLDT is exempt from the payment of local franchiseand business taxes imposable by LGUs under R.A. No. 7160.

 

Byvirtue of the BLGF Ruling, PLDT stopped paying local franchise and businesstaxes starting with the fourth quarter of 1998 and has filed with certain LGUsclaims for tax refund covering the period from the second quarter of 1995 tothe third quarter of 1998.  PLDT has received assessments for local franchiseand business taxes from several cities and provinces following PLDT’s decisionto stop payment of local franchise and business taxes.  

 

Following a decision of theSupreme Court on March 25, 2003, a judgment in the amount of Php4 million againstPLDT involving the City of Davao became final and executory on April 9, 2003,pursuant to which PLDT was declared not exempt from the local franchise tax.Although PLDT believes that it is not liable to pay local franchise andbusiness taxes, PLDT has entered into compromise settlements with several LGUsin order to maintain and preserve its good standing and relationship with theseLGUs.  Under these compromise settlements, which have been approved by the relevantcourts, PLDT has paid a total amount of Php329 million as at December 31, 2004in full payment for local franchise tax covering up to the end of 2003.

 

PLDTcontinues to contest the remaining assessments amounting to approximatelyPhp3.7 million as at December 31, 2004, a number of which were based on the gross revenuesof PLDT derived from its operations within the entire Philippines.PLDT claims that assuming that it is liable for local franchise tax, R.A. No.7160 provides that local franchise tax shall be based on the gross receipts ofthe preceding year received or collected for services rendered within thejurisdiction of the taxing authority.  Therefore, the use by some LGUs of grossrevenues as the basis for computation of franchise tax is in gross violation ofthe law because it pertains to all income earned regardless of whether it wasreceived or not, unlike gross receipts which are essentially the amount ofmoney or its equivalent actually or constructively received.  Moreover, grossrevenues refer to all income earned by PLDT within and outside the jurisdictionof the local taxing authority; thus, the use thereof as a basis of computationwill exceptionally overstate the franchise tax.

 

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 other Justices of the Supreme Court.  PLDT currently expects thatgoing forward it will pay local franchise and business taxes on an annual basisand based on the gross receipts received or collected for services renderedwithin the jurisdiction of the respective taxing authority.

 

Smarthas, 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 has recently been declaredexempt from payment of local franchise tax to the City of Makati in adecision dated August 3, 2004 by the Regional Trial Court of Makati.  The City of Makati hasfiled their motion for reconsideration and Smart has filed its opposition tothat motion for reconsideration.

 

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.No. 7293) which came after the effectivity of R.A. No. 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 annual receipts ofthe business transacted under its franchise and such percentage shall be inlieu of all taxes on the franchise or earnings thereof.

 

Piltel’s protest of theassessments was denied by the City of Makati on December 18, 2001.  Piltel then filed a petition withthe Makati Regional Trial Court, or RTC, appealing the local franchise businesstaxes.  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.

 

TheCity of Makati appealed to the Supreme Court, which issued aresolution dated October 13, 2004 denying with finality the appeal of the City of Makati on thegrounds of technicality.  The Supreme Court ruled, however, that the petitionfailed to sufficiently show that the Court of Appeals committed any reversibleerror in the questioned judgment to warrant the exercise of the discretionaryappellate jurisdiction of the Supreme Court.

 

*Piltel’s Bureau of Internal Revenue, or BIR,Assessment*

 

In 2003, the BIR issued final assessment notices, orFANs, against Piltel for deficiency taxes and penalties for taxable years 1998and 1999, in the amounts of Php233.6 million and Php284.2 million,respectively.  Piltel filed protest letters dated June 5, 2003 and September 24, 2003with the BIR for the 1998 and the 1999 deficiency tax assessments,respectively.

 

Withrespect 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 of 1997 on compromise settlement of internalrevenue tax liabilities, superseding RR Nos. 6-2000 and 7-2001.  Under said RR30-2002, Piltel is allowed to apply for compromise settlement on the basis offinancial incapacity.  If approved, Piltel would be permitted to settle its1998 deficiency tax liabilities by paying an amount corresponding to thecompromise rates ranging from 10% to 40% of its assessed deficiency taxes for1998.  Meanwhile, with respect to the 1999 deficiency tax assessment, the BIRfavorably considered the administrative protest filed by Piltel.  Accordingly,the BIR issued a revised FAN dated February 17, 2004, which was received byPiltel on March 22, 2004.  Hence, as early as December 31, 2003, Piltel paidand settled the 1999 expanded withholding tax assessment and the revised 1999fringe benefit tax, or FBT, assessment amounting to Php26.1 million and Php5.6million, respectively.  On May 28, 2004, Piltel also filed with the BIR anapplication for compromise settlement for the 1999 deficiency tax assessments,particularly the value added tax, or VAT, and income tax assessments, similarlybased on RR No. 30-2002 on the grounds of financial incapacity.

 

Moreover, on August 5, 2004,Piltel received a Preliminary Assessment Notice, 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 date per Bureau ofCustoms, or BOC, data and the importation per 2001 VAT returns amounting toPhp175.5 million, which resulted in VAT and income tax deficiency assessmentsamounting to Php82.4 million and Php26.5 million, respectively.  On August 20, 2004,Piltel filed an administrative protest in connection with the assessments.  Asupplemental protest letter was also filed last October 5, 2004 to furthersupport its position against the said tax assessments after the informalconference held with the examiners last September 21, 2004.  To date, Piltelhas not received any response from the BIR.  Piltel intends to apply forcompromise settlement, based on the same grounds of financial incapacity, inrespect of any resulting deficiency tax arising from this LN once the BIR hasfinalized the assessment.

 

*AirTime Purchase Agreement with AIL*

*** ***

InMarch 1997, PLDT entered into a Founder NSP Air Time Purchase Agreement with PTAsia Cellular Satellite, as amended in December 1998 and as assigned andtransferred to AIL, under which PLDT was granted the exclusive right to sellACeS services in the Philippines.  See *Note 16 – Related Party Transactions* and*Note 21 – Contractual Obligations and Commercial Commitments* for adetailed discussion of the terms of the agreement.

 

In the event that PT Asia Cellular Satellite’s aggregate billingrevenue is less than US$45 million in any given year, the Air Time PurchaseAgreement states that PLDT has to make supplemental air time purchase paymentsnot to exceed US$15 million per year during the ten-year term.

 

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 competitivehandsets and competitions from cellular services, occurrence of a partialsatellite loss, changes in the primary business of AIL and other factorsaffecting its business.  Accordingly, we started negotiations with AIL for therevision of the payment obligations under the Air Time Purchase in 2000.  As aresult of these negotiations, the effective date of the Air Time PurchaseAgreement became January 1, 2002.  In 2002, billings for satellite air time werereduced to actual air time usage, less amount for marketing assistance toservice providers.  

 

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.  The parties agreed that AIL shall provide PLDT and the otherfounder shareholders, with unlimited use of air time for the year 2003 inexchange for a fixed fee in the amount of US$3.8 million for PLDT.  Moreover,PLDT is also obliged to purchase from AIL 13,750 satellite phone units in 2003at US$395 F.O.B. per unit, subject to quarterly price adjustments.  The partiesto the Standstill Agreement also agreed to negotiate in good faith and usetheir best efforts to reach an agreement on a revised Air Time PurchaseAgreement before November 15, 2003 that will cover, among other things, theamended minimum and supplemental air time payment provisions subject to theapproval of AIL’s creditors.

 

OnFebruary 10, 2004, notwithstanding the ongoing negotiations, AIL advised PLDTof the termination of the Standstill Agreement and the reinstatement of theterms under the original Air Time Purchase Agreement effective January 1, 2002following the lapse of the November 15, 2003 deadline set in the StandstillAgreement for the negotiation of a revised Air Time Purchase Agreement.  As at December 31, 2004,PLDT’s outstanding payables under the original Air Time Purchase Agreement wasapproximately Php2,954 million.  Negotiations are continuing with the relevantparties towards an amicable settlement of this matter.  See *Note 16 –Related Party Transactions* and *Note 21 – Contractual Obligations andCommercial Commitments* for further discussion.

 

On June 21, 2004, AIL also sentPLDT a letter citing PLDT in default under the Air Time Purchase Agreement fornon-payment of outstanding amounts and for repudiation of its obligationsthereunder.  PLDT maintains, however, that the termination of the StandstillAgreement and reinstatement of the terms under the original Air Time PurchaseAgreement are premature, considering that the discussions or negotiations onthe terms of the proposed revised Air Time Purchase Agreement were stillpending between the parties, such that it is highly inequitable for AIL to haveunilaterally decided to invoke the provisions of the Standstill Agreement anddeclared PLDT in default.  Furthermore, PLDT maintains its position that theAir Time Purchase Agreement has been rendered ineffective by various events,circumstances and technical problems encountered in the operation of thebusiness of AIL.  The substantial changes in the circumstances under which AILmust operate, changes which were not contemplated by the parties at the timethe commitments were made, have rendered the commitments under the Air TimePurchase Agreement unrealistic and the performance of the same impossible.

 

*PLDT’sLOS to Piltel*

 

Underthe terms of Piltel’s debt restructuring plan, PLDT issued a 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, PLDT isrequired to provide funding to Piltel in the event that the cash flow fromPiltel’s operations falls short of the amount required by it to discharge infull its obligations to any creditor of Piltel and all its operating andfinancing subsidiaries and affiliates.  PLDT is subject to contractualrestrictions limiting the amount of financial support it can provide to Piltelup to US$150 million.  As at December 31, 2004 and 2003, the remaining undrawnbalance available under the PLDT LOS was US$50 million, approximately Php2,831million (2004) and Php2,793 million (2003) due to prior investments made fromMarch 23, 2000 to December 31, 2004 aggregating to US$100 million throughPLDT’s subscription to Series J Class I preferred shares of Piltel.  There wasno drawdown under the LOS in 2004 and 2003.

 

 

 

**23.    Financial Assets andLiabilities**

 

Our financial assets andliabilities are recognized initially at cost, which is the fair value of theconsideration given (in the case of asset) or received (in the case of aliability).  Transaction costs (debt issuance costs) are included in theinitial measurement of all financial assets and liabilities except forfinancial instruments measured at fair value through profit and loss.Subsequent to initial recognition, assets and liabilities are either valued atamortized cost using the effective interest rate method or at fair valuedepending on classification.

 

The following table sets forth the carrying values andestimated fair values of our financial assets and liabilities recognized as at December 31, 2004 and 2003.  There are no material unrecognized financial assets andliabilities as at December 31, 2004 and 2003.

 

** **

**Carrying Value**

**Fair Value**

 

**2004**

2003

**2004**

2003

 

(in millions of pesos)

**Current Financial Assets**

** **

 

 

 

Cash and cash equivalents

**27,321**

19,372

**27,321**

19,372

Short-term investments

**3,873**

1,661

**3,873**

1,661

Trade and other receivables

**10,404**

17,087

**10,404**

17,087

Derivative assets

**335**

262

**335**

262

Total current financial assets

**41,933**

38,382

**41,933**

38,382

**Noncurrent Financial Assets**

** **

 

** **

 

Investments - available-for-sale

**104**

118

**104**

118

Derivative assets

**4,116**

1,361

**4,116**

1,361

Total noncurrent financial assets

**4,220**

1,479

**4,220**

1,479

**Total Financial Assets**

**46,153**

39,861

**46,153**

39,861

** **

** **

 

 

 

**Current Financial Liabilities**

** **

 

 

 

Obligations under capital lease*

**425**

295

**425**

295

Notes payable*

**58**

2,133

**58**

2,133

Accounts payable

**7,029**

5,977

**7,029**

5,977

Derivative liabilities

**473**

91

**473**

91

Current portion of long-term debt*

**28,020**

23,810

**28,159**

24,611

Dividends payable

**652**

577

**652**

577

Total current financial liabilities

**36,657**

32,883

**36,796**

33,684

**Noncurrent Financial Liabilities**

** **

 

** **

 

Long-term debt – net of current portion*

**131,377**

160,464

**129,359**

158,149

Obligations under capital lease*

**601**

729

**601**

729

Derivative liabilities

**6,930**

3,737

**6,930**

3,737

Preferred stock subject to mandatory redemption

**14,956**

13,321

**18,237**

16,086

Total noncurrent financial liabilities

**153,864**

178,251

**155,127**

178,701

**Total Financial Liabilities**

**190,521**

211,134

**191,923**

212,385

 

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

 

The following methods and assumptions were used toestimate the fair value of each class of financial instrument for which it ispracticable to estimate such value:

 

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:

 

*Forwardforeign exchange contracts and bifurcated foreign currency forwards:* The fair values were determined using forward exchangemarket rates at the balance sheet date.

 

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

 

*Foreigncurrency and interest rate swaps:*The fair values were computed as the present value of estimated future cashflows.

 

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

 

Dueto the short-term nature of the transactions, the fair value of cash and cashequivalents, short-term investments, trade and other receivables, notes payableand accounts payable approximate the amount of consideration at the time ofinitial recognition.

 

*Derivative Financial Instruments*

 

Ourderivative financial instruments are accounted for under non-hedge accounting.Changes in the fair value of these instruments are recognized directly toincome for the period.

 

The table below sets out theinformation about our derivative financial instruments as at December 31, 2004 and2003:

* *

* *

**2004**

2003

* *

* *

 

**Maturity**

**Notional Amount**

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

Notional Amount

Mark-to-market Gain (Loss)

 

 

(in millions)

***PLDT***

** **

** **

 

 

Long-term currency swaps

** **

** **

 

 

 

2017

**US$300**

**Php748**

US$300

Php687

 

2012

**250**

**282**

250

563

 

2009(1)

**–**

**–**

175

110

 

** **

** **

 

 

Long-term foreign currency bought call options

2009

**175**

**672**

–

–

 

** **

** **

 

 

Short-term foreign currency bought call options

**76**

**(198)**

**–**

**–**

 

** **

** **

 

 

Long-term foreign currency sold call options

**175**

**(22)**

–

–

 

** **

** **

 

 

Short-term foreign currency sold call options

**76**

**117**

79

247

 

** **

** **

 

 

Interest rate swap

**125**

**(3,468)**

125

(2,587)

 

** **

** **

 

 

Forward foreign exchange contracts

**87**

**6**

125

(11)

 

**JPY14**

**1**

–

–

 

** **

** **

**–**

–

Bifurcated embedded derivatives

**US$1**

**(1)**

3

(12)

 

** **

** **

 

 

Bifurcated equity call options

–

**(1,026)**

–

(1,145)

 

** **

**(2,889)**

 

(2,148)

***Smart***

 

** **

*** ***

*** ***

Forward foreign exchange contracts

**US$69**

**(77)**

US$42

(82)

Bifurcated embedded derivatives

**19**

**14**

48

25

 

** **

**(63)**

 

(57)

Net liabilities

** **

**(Php2,952)**

 

(Php2,205)

* *

*(1)**Re-classified as long-term currency optionsstarting**July 1, 2004**.*

* *

 

**2004**

2003

 

(in millions of pesos)

Presented as:

** **

 

Current assets

**335**

262

Noncurrent assets

**4,116**

1,361

Current liabilities

**(473)**

(91)

Noncurrent liabilities

**(6,930)**

(3,737)

Net liabilities

**(2,952)**

(2,205)

 

Analysis of gain (loss) on derivative transactions forthe years ended December 31, 2004, 2003 and2002 are as follows:

 

 

**2004**

2003

2002

 

(in millions of pesos)

Net mark-to-market loss – end of year

**(2,952)**

(2,205)

(637)

Net mark-to-market loss – beginning of year

**(2,205)**

(637)

(911)

Net change

**(747)**

(1,568)

 274

Gain (loss) on contracts entered into and terminated during the year

**211**

(63)

(360)

Others

**(****292)**

–

–

Gain on terminated interest swap agreement

**–**

–

633

Net gain (loss) on derivative transactions

**(828)**

**(1,631)**

 547

 

***PLDT***

*** ***

*Long-termCurrency Swaps*

*** ***

PLDTentered into long-term principal-only currency swap agreements with variousforeign counterparties intended as economic hedges of the currency risk on itsfixed rate notes maturing in 2009, 2012 and 2017.  As at December 31, 2004,2003 and 2002, these long-term currency swaps have an aggregate notional amountof US$550 million, US$725 million and US$550 million, respectively.  Underthese long-term currency swaps, PLDT effectively exchanges the principal of itsU.S. dollar-denominated fixed rate notes into peso-denominated loan exposuresat agreed swap exchange rates.  The agreed swap exchange rates are reset to thelowest U.S. dollar/Philippine Peso spot exchange rate during the term of theswaps, subject to a minimum exchange rate.  In March and April 2004, PLDT enteredinto amendments to keep the lowest reset exchange rate and unwind the downwardresettable feature of US$550 million of its long-term principal-only currencyswap agreements in order to lower the running hedging cost of the swaps.  As atDecember 31, 2004, 2003 and 2002, the outstanding swap contracts havean average exchange rate of Php50.76, Php51.22 and Php51.27, respectively.

 

Inorder to manage hedge costs, these swaps included a credit-linkage feature withPLDT as the reference entity.  The specified credit events include bankruptcy,failure to pay, obligation acceleration, moratorium/repudiation, andrestructuring of PLDT bonds or all or substantially all of PLDT’s obligations.Upon the occurrence of any of these credit events, subject to applicable agreedthreshold amounts, 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 December 31, 2004, 2003 and 2002, US$725million, US$575 million and US$400 million of PLDT’s long-term currencyswaps/options, respectively, had been structured to include credit-linkage withPLDT as the reference entity.  The semi-annual fixed or floating swap costpayments that PLDT is required to make to its counterparties averaged to about2.95%, 2.10% and 2.35% per annum as at December 31, 2004, 2003 and 2002, respectively.Any movements in the fair value of these instruments will be taken to incomefor the period.

 

*Long-termForeign Currency Bought Call Options*

 

Tomanage hedging costs, the currency swap agreement relating to the 2009 fixedrate notes has been structured to include currency option contracts.  If thePhilippine Peso to U.S. dollar spot exchange rate on the maturity date settlesbeyond Php90.00 to US$1.00, PLDT will have to purchase U.S. dollars at anexchange rate of Php52.50 to US$1.00 in addition to the excess above the agreedthreshold rate.  On the other hand, if on maturity, the Philippine Peso toUS$1.00 spot exchange rate is lower than the exchange rate of Php52.50 toUS$1.00, PLDT will have the option to purchase U.S. dollars at the prevailingPhilippine Peso to U.S. dollar spot exchange rate.  In July 2004, PLDT and itscounterparty agreed to re-document and re-classify the transaction intolong-term currency option contracts.  The net semi-annual floating hedge costpayments that PLDT is required to pay under these transactions wasapproximately 3.94% and 2.30% per annum as at December 31, 2004 and 2003,respectively.

 

Theoption currency contract relating to PLDT’s option to purchase U.S. dollar atPhp52.50 to US$1.00 or the prevailing spot rate at maturity, whichever islower, is entered into in tandem with an option currency contract relating tothe counterparty’s option to purchase foreign currency from PLDT at Php90.00 toUS$1.00.  See discussion below under – *Long-term Foreign Currency Sold CallOptions*.

 

*Short-term Foreign Currency Bought Call Options*

 

PLDT utilized structures incorporating currency optioncontracts to hedge the maturing principal on its fixed rate notes due June 2004and June 2005.  Under the terms of the contracts, PLDT will have the option topurchase U.S. dollars at an agreed Philippine Peso to U.S. dollar spot exchangerate or the prevailing spot rate at maturity, whichever is lower.

 

*Long-termForeign Currency Sold Call Options*

 

With reference to theabove-mentioned hedge on the PLDT’s 2009 fixed rate notes, PLDT simultaneouslysold a currency option contract with the same notional amount of US$175 millionwith the same maturity that gives the counterparty a right to purchase foreigncurrency at Php90.00 to US$1.00.  Together with the bought call long-termcurrency option contract.  PLDT has the obligation to purchase U.S. dollars atan exchange rate of Php52.50 to US$1.00 in addition to the excess above theagreed threshold rate.  In exchange for this condition, the overall net hedgingcost for the transaction is reduced.

 

*Short-term Foreign Currency Sold Call Options*

 

In order to manage hedge costs, currency optioncontracts that hedge PLDT’s fixed rate notes due June 2004 and June 2005 havefeatures similar to those of the long-term currency option contracts.  PLDTsimultaneously sold currency option contracts with the same notional amountsand the same maturity.  Together with the bought call other short term currencyoption contracts.  PLDT has the obligation to buy U.S. dollars at the agreedstrike price in addition to the excess above the agreed threshold rate shouldthe Philippine Peso to U.S. dollar spot exchange rate on the maturity datesettle beyond that agreed threshold.  In exchange for this condition, theoverall net hedging cost for the transactions is reduced.

* *

PLDT also entered into short-termU.S. dollar subsidized forward contracts and Japanese yen currency optioncontracts to hedge other short-term foreign currency obligations.

* *

*InterestRate Swap*

 

Aportion of PLDT’s currency swap agreements to hedge its 2017 fixed rate notescarry fixed rate swap cost payments.  To effectively lower the running cost ofsuch swap agreements, PLDT, in April 2003, entered into an agreement to swapthe coupon 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 to US$1.00.  Below this level, a reduced fixed coupon rateof 3% 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.

 

*Forward Foreign Exchange Contracts*

 

PLDT entered into short-term U.S. dollar and Japaneseyen forward foreign exchange contracts to hedge short-term foreign currencyobligations.

 

*Bifurcated Embedded Derivatives*

 

Derivative instruments include derivatives (orderivative-like provisions) embedded in non-derivative contracts.  PLDT’soutstanding bifurcated embedded derivative transactions cover service contractsdenominated in U.S. dollars to be paid out to a Japanese company.

 

*Bifurcated Equity Call Options*

 

Pursuant to Piltel’s debt restructuring plan, PLDTissued its Series VI and VII Convertible Preferred Stock, see *Note 14 –Preferred Stock Subject to Mandatory Redemption*.  Each share of Series VIand VII Convertible Preferred Stock is convertible at any time at the option ofthe holder into one share of PLDT’s common stock.  On the date immediatelyfollowing the seventh anniversary of the issue date of the Series VIConvertible Preferred Stock and on the eighth anniversary of the issue date ofthe Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted into shares of PLDT commonstock.  For 30 days thereafter, the holders of these mandatorily convertedshares of common stock have the option to sell such shares of common stock backto PLDT for US$36.132 per share and JPY4,071.89per share for Series VI and VII, respectively.  As at December 31, 2004 and2003, the net negative mark-to-market value of these embedded call optionsamounted to Php1,027 million and Php1,145 million, respectively.

 

***Smart***

 

Smartuses forward exchange contracts to hedge foreign currency-denominated assets,liabilities and firm commitments.  These forward contracts have maturitiesranging from one to six months.

 

Cashdeposits, presented as prepayment for forward purchase contract under“Short-term investment”, amounting to Php3,873 million and Php1,661 millioncollateralize certain of the forward exchange contracts outstanding as atDecember 31, 2004 and 2003, respectively.  The embedded foreign currencyderivatives bifurcated from these prepaid forwards are presented as derivativeassets or derivative liabilities.

 

 

Smart’s other embeddedderivatives were bifurcated from service and purchase contracts.  As at December 31, 2004 and2003, outstanding contracts included a service contract with a foreignequipment supplier and various suppliers covering handset importations payablein U.S. dollars.

 

**Financial Risk Management Objectives and Policies**

 

The main purpose of our financial instruments is tofund our operations.  We also enter into derivative transactions, the purposeof which is to manage the currency risks and interest rate risks arising fromour operations and our sources of financing.  It is, and has been throughoutthe year under review, our policy that no trading in financial instrumentsshall be undertaken.

 

Themain risks arising from our financial instruments are liquidity risk, foreigncurrency risk, interest rate risk and credit risk.  Our Board of Directorsreviews and agrees to policies for managing each of these risks.  Our policiesfor managing these risks are summarized below.  We also monitor the marketprice risk arising from all financial instruments.  Our accounting policies inrelation to derivatives are set out in *Note 3 – Summary of SignificantAccounting Policies and Practices*.

 

***Liquidity Risk***

 

Weseek to manage our liquidity profile to be able to finance our capitalexpenditures and service our maturing debts.  To cover our financingrequirements, we intend to use internally generated funds and proceeds fromdebt and equity issues and sales of certain assets. 

 

Aspart of our liquidity risk management program, we regularly evaluate ourprojected and actual cash flow information and continuously assess conditionsin the financial markets for opportunities to pursue fund-raising initiatives.These initiatives may include bank loans, export credit agency-guaranteedfacilities, and debt capital and equity market issues.

* *

***Foreign Currency Risk***

 

Thefollowing table shows our consolidated foreign currency-denominated monetaryassets and liabilities and their peso equivalents as at December 31, 2004 and2003:

 

** **

2004

2003

** **

**U.S. Dollar****(1)**

**Php Equivalent**

U.S. Dollar(2)

Php Equivalent

 

(in millions)

**Current Financial Assets**

** **

** **

 

 

Cash and cash equivalents

**US$251**

**Php14,142**

US$146

Php8,116

Short-term investments

**69**

**3,888**

30

1,668

Trade and other receivables

**146**

**8,226**

195

10,839

Derivative assets

**6**

**335**

5

262

Total current financial assets

**472**

**26,591**

 376

20,885

**Noncurrent Financial Assets**

** **

** **

 

 

Derivative assets

**73**

**4,116**

24

1,361

Total noncurrent financial assets

**73**

**4,116**

  24

1,361

**Total Financial Assets**

**US$****545**

**Php30,707**

US$400

Php22,246

** **

** **

** **

 

 

**Current Financial Liabilities**

** **

** **

 

 

Accounts payable

**US$46**

**Php2,592**

US$71

Php3,947

Accrued expenses and other current liabilities

**77**

**4,338**

71

3,947

Derivative liabilities

**8**

**473**

2

91

Interest-bearing financial liabilities

**483**

**27,203**

405

22,512

Total current financial liabilities

**614**

**34,606**

 549

30,497

**Noncurrent Financial Liabilities**

** **

** **

 

 

Interest-bearing financial liabilities - net of current portion

**2,126**

**119,733**

2,772

156,177

Derivative liabilities

**105**

**6,930**

47

3,737

Preferred stock subject to mandatory redemption

**222**

**12,512**

195

10,816

Total noncurrent financial liabilities

**2,453**

**139,175**

3,014

170,730

**Total Financial Liabilities**

**US$****3,067**

**Php173,781**

US$3,563

Php201,227

* *

*(1)**Theexchange rate used was Php56.341 to US$1.00.*

*(2)**Theexchange rate used was Php55.586 to US$1.00.*

 

In translating the foreign currency-denominatedmonetary assets and liabilities into peso amounts, the exchange rates used werePhp56.341 to US$1.00 and Php55.586 to US$1.00, the Philippine peso-U.S. dollarexchange rates as at December 31, 2004 and 2003, respectively.

 

Asat February 28, 2005, the peso-dollar exchange rate was Php54.685 toUS$1.00.  Using this exchange rate, our consolidated net foreigncurrency-denominated liabilities as at December 31, 2004would have decreased by Php4,176 million.

 

Whilea certain percentage of our revenues is either linked to or denominated in U.S.dollars, substantially all of our indebtedness and related interest expense, asubstantial portion of our capital expenditures and a portion of our operatingexpenses are denominated in foreign currencies, mostly in U.S. dollars.

 

Asat December 31, 2004, approximately 98% of our total consolidated debtswere denominated in foreign currencies, principally in U.S. dollars.  Of ourforeign currency-denominated debts, 4% are in Japanese yen, and the balance inU.S. dollars.  Thus, a weakening of the Philippine peso against the U.S. dollaror Japanese yen will increase both the principal amount of our unhedged foreigncurrency-denominated debts (representing 64% of our consolidated foreign-currencydebts), 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 Philippine peso against the U.S.dollar substantially 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 *Note12 – Interest-bearing Financial Liabilities*.

 

Tomanage our foreign exchange risks, stabilize cash flows, and improve investmentand cash flow planning, we enter into foreign exchange forward contracts,foreign currency swap contracts, currency options and other hedging productsaimed at reducing and/or managing the adverse impact of changes in foreignexchange rates on our operating results and cash flows.  However, these hedgesdo not cover all of our exposure to foreign exchange risks, and hedges to coverall of our exposure are not currently readily available.

 

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.  

 

***Interest Rate 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.

 

Fixedrate financial 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.

 

***Credit Risk***

 

Wetrade only with recognized, creditworthy third parties.  It is our policy thatall customers who wish to trade on credit terms are subject to creditverification procedures.  In addition, receivable balances are monitored on anongoing basis to reduce our exposure to bad debts.

 

Withrespect to credit risk arising from our other financial assets, which comprisecash and cash equivalents, certain derivative instruments, our exposure tocredit risk arises from default of the counterparty, with a maximum exposureequal to the carrying amount of these instruments.

 

Wehave no significant concentrations of credit risk.

* *

* *

 

24.    Reportable Segments 

 

Operatingsegments are components of PLDT that engage in business activities from whichit may earn revenues and incur expenses (including revenues and expensesrelating to transactions with other components of PLDT), whose operatingresults are regularly reviewed by the enterprise’s chief operating decisionmaker to make decisions about resources to be allocated to the segment andassess its performance, and for which discrete financial information is available.The accounting policies of the reportable segments are the same as thosedescribed in *Note 3 – Summary of Significant Accounting Policies andPractices*.

 

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 Ventus; internet access and gaming services provided byePLDT’s subsidiaries, Infocom Technologies, Inc., DigiPar and netGames; ande-commerce and IT-related services provided by other investees of ePLDT, asdescribed in *Note 8 - Investments*.

 

The results of the reportablesegments are derived directly from the PLDT Group’s management reportingsystem. The results are based on the PLDT Group’s method of internalreporting.  The segment assets as at December 31, 2004,2003 and 2002 and results of operations of our reportable segments for theyears ended December 31, 2004, 2003 and 2002 reported under U.S. GAAP are asfollows:

*** ***

 

**Wireless**

**Fixed Line**

**Information and Communications Technology**

**Inter-segment Transactions**

**Total**

 

(in millions of pesos)

* *

* *

 

 

 

 

*As at and for the year ended**December 31, 2004*

* *

 

 

 

**Revenues**

 

 

 

 

 

Service

69,050

48,484

2,080

(4,662)

114,952

Non-service

6,111

–

321

(163)

6,269

Segment revenues

75,161

48,484

2,401

(4,825)

121,221

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income (loss)

32,392

16,575

(634)

206

48,539

Income (loss) before income tax, cumulative effect of change in accounting policy and minority interest in net loss of consolidated subsidiaries

33,407

2,076

(643)

–

34,840

Provision for income tax

(5,967)

(800)

(59)

–

(6,826)

Net income (loss) for the year before cumulative effect of change in accounting policy and minority interest in net loss of consolidated subsidiaries

27,440

1,276

(702)

–

28,014

** **

 

 

 

 

 

**Assets**

 

 

 

 

 

Segment assets

90,467

196,299

3,716

(30,870)

259,612

Deferred income tax assets

3,164

16,845

18

–

20,027

Total assets

93,631

213,144

3,734

(30,870)

279,639

 

 

 

 

 

 

Goodwill

15,787

426

187

–

16,400

** **

 

** **

** **

** **

** **

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

14,742

4,026

500

–

19,268

Depreciation and amortization

10,085

9,674

339

–

20,098

Provision for doubtful accounts

204

3,744

–

–

3,948

Provision for inventory obsolescence

213

361

3

–

 577

Asset impairment

430

365

617

–

1,412

MRP

13

553

–

–

 566

Interest on loans and related items

984

10,137

42

(48)

11,115

Interest income

724

248

18

(48)

 942

* *

 

* *

* *

* *

* *

*As at and**for the year ended**December 31, 2003*

* *

* *

**Revenues**

 

 

 

 

 

Service

54,635

46,820

1,467

(2,436)

100,486

Non-service

10,548

–

316

(150)

10,714

Segment revenues

65,183

46,820

1,783

(2,586)

111,200

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income (loss)

18,919

14,517

(489)

432

33,379

Income (loss) before income tax, cumulative effect of change in accounting policy and minority interest in net income of consolidated subsidiaries

15,163

(4,911)

(432)

–

9,820

Benefit from (provision for) income tax

(1,672)

3,008

64

–

1,400

Net income (loss) for the year before cumulative effect of change in accounting policy and minority interest in net income of consolidated subsidiaries

13,491

(1,903)

(368)

–

11,220

** **

 

 

 

 

 

**Assets**

 

 

 

 

 

Segment assets

86,696

190,510

3,040

(24,594)

255,652

Deferred income tax assets

3,092

17,546

74

–

20,712

Total assets

89,788

208,056

3,114

(24,594)

276,364

 

 

 

 

 

 

Goodwill

14,941

426

97

–

15,464

 

 

 

 

 

 

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

11,372

6,393

178

–

17,943

Depreciation and amortization

12,183

9,315

314

–

21,812

Provision for doubtful accounts

72

3,950

70

–

4,092

Provision for inventory obsolescence

87

152

12

–

 251

Asset impairment

288

–

387

–

 675

MRP

–

1,560

5

–

1,565

Interest on loans and related items

1,348

10,034

52

–

11,434

Interest income

368

138

7

–

 513

 

 

 

 

 

 

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

* *

* *

* *

* *

**Revenues**

 

 

 

 

 

Service

36,157

46,186

772

(1,429)

81,686

Non-service

12,095

–

205

(155)

12,145

Segment revenues

48,252

46,186

 977

(1,584)

93,831

 

 

 

 

 

 

**Result**

 

 

 

 

 

Operating income (loss)

10,337

2,393

(481)

(220)

12,029

Income (loss) before income tax, cumulative effect of change in accounting policy and minority interest in net income of consolidated subsidiaries

7,297

(11,379)

(512)

–

(4,594)

Provision for income tax

(1,217)

(221)

–

–

(1,438)

Net income (loss) for the year before cumulative effect of change in accounting policy and minority interest in net income (loss) of consolidated subsidiaries

6,080

(11,600)

(512)

–

(6,032)

** **

 

 

 

 

 

**Assets**

 

 

 

 

 

Segment assets

79,184

185,334

3,370

(15,354)

252,534

Deferred income tax assets

2,665

14,181

7

–

16,853

Total assets

81,849

199,515

3,377

(15,354)

269,387

 

 

 

 

 

 

Goodwill

14,768

426

97

–

15,291

 

 

 

 

 

 

**Other segment information**

 

** **

** **

** **

** **

Capital expenditures

7,564

9,068

607

–

17,239

Depreciation and amortization

6,907

10,305

354

–

17,566

Provision for doubtful accounts

456

3,659

45

–

4,160

Provision for inventory obsolescence

390

86

–

–

 476

Asset impairment

75

13,204

–

–

13,279

MRP

–

324

–

–

 324

Interest on loans and related items

1,813

10,816

16

–

12,645

Interest income

141

79

16

237

 473

 

 

 

25.    Other Matters

 

a.     SupplementalDisclosures of Cash Flow Information

 

 

**2004**

2003

2002

 

     (in millions of pesos)

Cash paid during the year for:

 

 

 

Income tax 

**5,478**

2,453

351

Interest: 

** **

 

 

    Capitalized to property, plant and equipment

**595**

887

1,343

Charged to operations

**12,310**

11,777

13,956

Interest income received

**954**

484

735

 

** **

 

 

Supplemental schedule of noncash investing and financing activities:

** **

 

 

Preferred stock subject to mandatory redemption issued

**125**

152

36

Long-term debt restructured

**170**

208

82

 

b.       Interconnection Agreements

 

PLDT has existing interconnectionagreements with nine International Gateway Facilities, or IGF operators, sixInter Exchange Carriers, or IXCs, six Cellular Mobile Telephone Systems, orCMTS operators, 70 Local Exchange Carriers, or LECs, (including members of thePhilippine Association of Private Telephone Companies, Inc.), and 12 paging andtrunk radio operators.  These interconnection agreements include provisions forsettlement and payment of charges.  Settlements with interconnecting IGFoperators and CMTS operators for local calls are in the form of accesscharges.  Settlement with interconnecting IXCs and LECs for toll calls arebased on hauling and access charges, and to some extent, revenue sharing.Settlement also involves payment of access charges, but settlement for tollcalls is on a revenue-sharing basis.  LEC to LEC interconnection with haulingfrom one service area to another service area is settled based on trunkcharges, while overlay LEC to LEC interconnection in a given service area iswithout charges.  Paging and trunk radio interconnection settlements are basedon fixed charges.  

 

c.       Proposed Metering of Local Exchange Service

 

Theproposed metering of PLDT’s local exchange service has been temporarily suspendedfor further review by the NTC.

 

d.       U.S. Federal Communications Commission, or FCC, Rulingversus 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 separate orders dated February7 and 26, 2003, the NTC confirmed that “absent any provisional or interimagreement” with U.S. carriers, there would be no provision of terminationservices between the parties “who are thereby encouraged to seek other routesor options to terminate 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 theviability, efficiency, sustained growth and development and continuedcompetitiveness of the 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.

 

OnNovember 17, 2003, after Smart reached interim agreements with each of AT&Tand MCI on September 30 and November 12, 2003, respectively, the InternationalBureau of the U.S. FCC lifted its March 10, 2003 Order with respect to Smartand ordered the U.S. carriers to resume making payments to Smart.

 

OnJanuary 15, 2004, after PLDT reached interim agreements with each of MCI andAT&T and reopened its circuits with these carriers on November 12, 2003 andJanuary 9, 2004, respectively, the International Bureau of the U.S. FCC liftedits March 10, 2003 Order also with respect to PLDT and ordered the U.S.carriers to resume making payments to PLDT.

 

OnMay 13, 2004, the U.S. FCC partially dismissed and partially deniedapplications by Philippine carriers, including PLDT, and certain U.S. carriersfor review of the March 10, 2003 Order of the International Bureau of the U.S.FCC.  In particular, the U.S. FCC affirmed the March 10, 2003 Order’s findingthat “Philippine carriers engaged in collective action to “whipsaw” AT&Tand MCI.” The U.S. FCC stated, however, that the findings of the March 10, 2003 Orderwere not findings under the U.S. anti-trust laws and that the U.S. Department of Justiceis independently “investigating the possibility of anticompetitive practicesamong Philippine carriers under its authority pursuant to U.S.anti-trust laws.”  The U.S. FCC also upheld the March 10, 2003 Order in respectof the suspension of payments for termination services to the Philippinecarriers pending restoration of the circuits.  In addition, the U.S. FCC denieda request to modify the March 10, 2003 Order of the International Bureau of theU.S. FCC to restore the Philippines to the list of U.S.-international routesapproved for the provision of ISR.  The U.S. FCC stated that it was dismissingthis request as moot because of the U.S. FCC’s recently adopted InternationalSettlements Policy Reform Order which eliminated ISR policies.

 

Althoughnot included in the initial list of countries exempted from the U.S. FCC’sInternational Settlements Policy, or ISP, the U.S. FCC identified theU.S.–Philippines route as eligible for being removed from the ISP in accordancewith its newly established procedures for doing so.  Under this procedure, theU.S. FCC asked for public comment on the removal of the Philippinesfrom the ISP.  In comments filed in June and July 2004, removal was reported byseveral Philippine and U.S. carriers, including AT&T and MCI, and was opposedby one U.S. carrier, International Access, Inc.  In November 2004, the U.S. FCCexempted a number of additional countries from the ISP, but not the Philippines.Instead, the U.S. FCC stated that it would rule separately regarding the Philippinesafter reviewing the issues raised by International Access, Inc.  These issuesare still pending before the U.S. FCC.

 

OnJuly 6, 2004, PLDT filed with the U.S. FCC a petition for reconsideration ofthe U.S. FCC’s May 13, 2004 Order on the grounds that the order should havevacated as moot the International Bureau’s March 10, 2003 Order.

 

e.   Investigation by U.S. Department of Justice

 

InJanuary 2004, PLDT received a grand jury subpoena seeking documents and a PLDTemployee was subpoenaed to testify before the grand jury in connection with acriminal investigation that was conducted by the U.S. Department of Justicewith respect to alleged antitrust violations relating to the provision ofinternational termination services in the Philippines.  The U.S. Department of Justice has also requestedtestimony and documents from Smart in connection with this investigation.Further, in March 2004, PLDT (U.S.) Ltd., a subsidiary of PLDT Global, receiveda grand jury subpoena seeking documents, in response to which PLDT (U.S.) Ltd.produced documents.  In February 2005, two former employeesof PLDT (U.S.) Ltd. testified before the grand jury in the U.S. Department ofJustice matter.  A PLDT employee was also scheduled to reappear for testimonyin February, but his appearance has been postponed.   On May 11, 2005, theU.S. Department of Justice informed our legal counsel in Washington, D.C., Covington& Burling, that the U.S. Department of Justice has terminated its antitrustinvestigation relating to termination rate increases implemented in early 2003by certain Philippine long distance carriers including PLDT and that noenforcement action will be taken.

 

f.    Employeesand Labor Relations

 

Asat December 31, 2004, we had 18,433 employees within the PLDT Group.  PLDThad 9,476 employees at the end of 2004, of which 49% were rank and fileemployees, 47% were management/supervisory staff and 4% were executives.  Thisnumber represents a decrease of 754 employees, or approximately 7%, from thestaff level as at the end of 2003, mainly as a result of the ongoing MRP.  Froma peak of 20,312 at the end of 1994, PLDT’s number of employees has declined by10,836, or 53%, by the end of 2004.  As at December 31, 2003,we had 17,653 and 10,230 employees under the PLDT Group and PLDT,respectively.  

 

PLDThas three employee unions, the members of which in the aggregate represent 42%of the employees of the PLDT Group.  We consider our relationship with ourrank-and-file employees’ union, our supervisors’ union and our salessupervisors’ union to be good.

 

OnMarch 8, 2005, PLDT and PLDT Sales Supervisors’ Union, or PSSU, concluded andsigned a new three-year Collective Bargaining Agreement, or CBA, covering theperiod from January 1, 2005 to December 31, 2007.  This CBA provides eachmember monthly salary increases of 8% of basic pay or Php2,000, whichever ishigher, for 2005; 10% of basic pay or Php2,700, whichever is higher, for 2006;and another 10% of basic pay or Php2,400, whichever is higher, for 2007.  Otherhighlights of this CBA were improvements of existing benefits and a one-timesigning bonus of Php33,000, including a Php3,000 goodwill bonus, for each memberof PSSU.  Furthermore, a Php4,000 one-time clothing allowance is also providedunder the CBA.  

 

On January 20, 2005, PLDT and *Gabay ng Unyon saTelekomunikasyon ng mga Superbisor*, or GUTS, our supervisors’ union,concluded and signed a new three-year CBA covering the period from January 1,2005 to December 31, 2007.  This CBA provides each member monthly salaryincreases of 8% of basic pay or Php2,000, whichever is higher, for 2005; 10% ofbasic pay or Php2,700, whichever is higher, for 2006; and another 10% of basicpay or Php2,400, whichever is higher, for 2007.  Other highlights of this CBAare improvements of existing benefits and a one-time signing bonus ofPhp33,000, including a Php3,000 goodwill bonus, for each member of GUTS.

 

OnFebruary 13, 2004, PLDT and the *Manggagawa ng Komunikasyon sa Pilipinas*,or MKP, our rank-and-file employees’ union, concluded and signed a newthree-year CBA covering the period from November 9, 2003 to November 8, 2006.This CBA provides each member a signing bonus equivalent to one month salaryplus Php10,000; monthly salary increases of Php1,800, Php1,850 and Php2,450 forthe first year, second year and third year, respectively; an increase inmonthly relay station allowance from Php500 to Php600; an increase in per diemfrom Php500 to Php570; a food station allowance of Php650 per covered employee;an increase in yearly Christmas gift certificate from Php6,000 to Php7,000; anincrease in the amount of coverage under the group life insurance plan fromPhp400,000 to Php500,000; and an additional contribution of Php1 million to theEducational Loan Fund.  Other highlights of this CBA include emergency loaneligibility, an emergency case hospitalization clause and additional benefitsunder the medical hospitalization plan for single members’ dependents.

 

 

 

**26.    Changes in Presentationof Comparative Consolidated Financial Statements**

 

We have reclassified certainaccounts in 2003 and 2002 consolidated financial statements to conform with our2004 consolidated financial statements presentation.