**MANAGEMENT’S DISCUSSION AND ANALYSISOF**

**FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**For the Six Months Ended****June 30, 2003**

 

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

* *

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

* *

*Thefinancial information appearing in this report and in the accompanyingfinancial statements is stated in Philippine pesos.  All references to “pesos,”“Philippine pesos” or “Php” are to the lawful currency of the Philippines; allreferences to “U.S. dollars,” “US$” or “dollars” are to the lawful currency ofthe United States; all references to “Japanese yen,” “JP¥” or “¥” are to thelawful currency of Japan**and allreferences to “Euro” or “€” are to the lawful currency of the European Union**.Translations of Philippine peso amounts into U.S. dollars in this report and inthe accompanying financial statements were made based on the exchange rate ofPhp53.522 = US$1.00, the volume weighted average exchange rate at June 30, 2003quoted through the Philippine Dealing System.*

* *

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

* *

*Aforward-looking statement may include a statement of the assumptions or basesunderlying the forward-looking statement.  We have chosen these assumptions orbases in good faith, and we believe that they are reasonable in all materialrespects.  However, we caution you that forward-looking statements and assumedfacts or bases almost always vary from actual results, and the differencesbetween the results implied by the forward-looking statements and assumed factsor bases and actual results can be material, depending on the circumstances.  Whenconsidering forward-looking statements, you should keep in mind the descriptionof risks and cautionary statements in this report and in our Annual Report onForm 20- F, as amended, dated**July 15, 2003**.  You should also keep in mind that any forward-looking statement madeby us in this report or elsewhere speaks only as of the date on which we madeit.  New risks and uncertainties come up from time to time, and it isimpossible for us to predict these events or how they may affect us.  We haveno duty to, and do not intend to, update or revise the forward-lookingstatements in this report after the date hereof.  In light of these risks anduncertainties, any forward-looking statement made in this report or elsewheremight not occur.*

**Financial Highlights**

|                                      | **June 30,**                  |   | **December 31,** |
|-------------------------------------------|-------------------------------|--------|------------------|
| **(pesos in millions)**                   | **2003**                      |   | **2002**(1)      |
| ** **                                | **(Unaudited)**               |   | **(Audited)**    |
| **Consolidated Balance Sheets**           |                          |   |             |
| Total assets                              | Php294,344                    |   | Php303,330       |
| Property, plant and equipment - net       | 244,648                       |   | 252,025          |
| Total debt                                | 159,616                       |   | 168,523          |
| Total stockholders’ equity           | 89,127                        |   | 88,088           |
| Debt to equity ratio                      | 1.79x                         |   | 1.91x            |
| ** **                                | ** **                    |
| ** **                                | **Six Months Ended June 30,** |
|                                      | **2003**                      |   | **2002**(2)      |
| **Consolidated Statements of Income**     | **(Unaudited)**               |
| Operating revenues                        | Php46,219                     |   | Php37,927        |
| Operating expenses                        | 31,945                        |   | 27,783           |
| Net operating income                      | 14,274                        |   | 10,144           |
| EBIT(3)                                   | 8,323                         |   | 10,233           |
| EBITDA(4)                                 | 20,040                        |   | 21,805           |
| Net income                                | 1,780                         |   | 2,708            |
| Operating margin                          | 31%                           |   | 27%              |
| EBITDA margin                             | 43%                           |   | 57%              |
| **Consolidated Statements of Cash Flows** |                          |   |             |
| Net cash provided by operating activities | Php23,015                     |   | Php21,295        |
| Net cash used in investing activities     | 4,874                         |   | 7,445            |
| Capital expenditures                      | 5,228                         |   | 7,453            |
| Net cash used in financing activities     | 17,849                        |   | 6,672            |

_____________

 

(1)  As restated to reflect the change in accounting policyon preoperating expenses, as described in Note 3 to the accompanying financialstatements. 

 

(2)  As restated to reflect the change in revenuerecognition for prepaid cards from sales to usage and the change in accountingpolicy on preoperating expenses, as described in Note 3 to the accompanyingfinancial statements. 

 

(3) EBIT is defined as earnings before minorityinterest in net income (losses) of consolidated subsidiaries, adding backinterest expense and related items, taxes and deducting interest income.  EBITshould not be considered in isolation or as a substitute for operating income,net income, cash flows from operating activities and other income or cash flowstatement data prepared in conformity with generally accepted accountingprinciples, or as a measure of profitability or liquidity.

 

(4) EBITDA is defined as earnings before minorityinterest in net income (losses) of consolidated subsidiaries, adding backinterest expense and related items, taxes, depreciation and amortization,deducting interest income and is presented because it is generally accepted asproviding useful information regarding a company's ability to service and/orincur debt.  EBITDA should not be considered in isolation or as a substitutefor operating income, net income, cash flows from operating activities andother income or cash flow statement data prepared in conformity with generallyaccepted accounting principles, or as a measure of profitability or liquidity.

 

EBIT and EBITDA, on aconsolidated basis for the six months ended June 30, 2003 and 2002, are derivedas follows:

 

| ** **                                                                               | **Six Months Ended June 30,** |
|------------------------------------------------------------------------------------------|-------------------------------|
| ** **                                                                               | **2003**                      | ** ** | **2002**(a) |
| **(in millions)**                                                                        | **(Unaudited)**               |
| Earnings before minority interest in net income (losses) of consolidated subsidiaries(b) | Php1,563                      |   | Php2,720 |
| Add/(deduct):  Interest expenses and related items, net of capitalized interest(c)       | 6,094                         |   | 7,209 |
| Provision for income tax(b)                                                              | 1,142                         |   | 830 |
| Interest income                                                                          | (476)                         |   | (526) |
| EBIT                                                                                     | 8,323                         |   | 10,233 |
| Add:  Depreciation and amortization(b)                                                   | 11,717                        |   | 11,572 |
| EBITDA                                                                                   | Php20,040                     |   | Php21,805 |

________________

 

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

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

(c) See Note 18 to theaccompanying financial statements.

**Overview**

 

We are the largest and most diversifiedtelecommunications company in the Philippines.  We have organized our business into three mainsegments:

 
    -  Fixed Line  — fixed line telecommunicationsservices primarily provided through PLDT.  We also provide fixed line servicesthrough PLDT’s subsidiaries PLDT Clark Telecom, Inc., Subic TelecommunicationsCompany, Inc., Maranao Telephone Company, Inc. and Bonifacio CommunicationsCorporation, which together account for approximately 1% of our consolidatedfixed lines in service, and PLDT Global Corporation;           -  Wireless  — wireless telecommunicationsservices provided through our cellular service provider, Smart Communications,Inc., PLDT’s subsidiary and satellite operators, Mabuhay Satellite Corporation,ACeS Philippines Cellular Satellite Corporation, and Telesat, Inc.; and              -  Information and CommunicationsTechnology  — information and communications infrastructure and services forInternet applications, Internet protocol-based solutions and multimedia contentdelivery provided by PLDT’s subsidiary ePLDT, Inc.; Internet access servicesprovided by ePLDT’s subsidiary Infocom Technologies, Inc.; and e-commerce, callcenters and IT-related services provided by ePLDT’s other subsidiaries andaffiliates, as described in Note 9 to the accompanying  financialstatements.   ** **  **Results of Operations**  ** **  Thetable below shows the contribution by each of our business segments to ourconsolidated operating revenues, operating expenses and net operating income(loss) for the six months ended June 30, 2003 and 2002.  Most of our revenues arederived from our operations within the Philippines.  Our revenues derived from outside the Philippinesconsist primarily of revenues from incoming international calls to the Philippines.  ** **  
 

**Six Months Ended June 30,**

 

**2003**

** **

**%**(1)

** **

**2002**(2)

** **

**%(**1)

** **

**(Unaudited)**

**(pesos in millions)**

 

 

 

 

 

 

 

**Operating Revenues**

 

 

 

 

 

 

 

Fixed line

Php22,863

 

49

 

Php22,702

 

60

Wireless

22,493

 

49

 

14,829

 

39

Information and communications technology

863

 

2

 

396

 

1

 

46,219

 

100

 

37,927

 

100

**Operating Expenses**

 

 

 

 

 

 

 

Fixed line

16,345

 

35

 

15,583

 

41

Wireless

14,612

 

32

 

11,614

 

31

Information and communications technology

988

 

2

 

586

 

1

 

31,945

 

69

 

27,783

 

73

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

 

 

 

 

 

 

 

Fixed line

6,518

 

14

 

7,119

 

19

Wireless

7,881

 

17

 

3,215

 

8

Information and communications technology

(125)

 

–

 

(190)

 

–

 

Php14,274

 

31

 

Php10,144

 

27
  ________________     (1) Operating expenses and netoperating income (loss) are computed as a percentage of operating revenues.  (2) As restated to reflect thechange in revenue recognition for prepaid cards from sales to usage.  **Consolidated Operating Revenues**     Largely driven by the continued stronggrowth of our wireless business, particularly Smart’s cellular business, ourconsolidated operating revenues for the first half of 2003 increased by Php8,292 million, or 22%,to Php46,219 million from Php37,927 million for the first half of 2002.  Smart contributed Php22,117 million in revenues for the first half of 2003, anincrease of 53% over its revenue contribution of Php14,482 million for the same period in 2002.  Smart’s revenuecontribution accounted for 48% of our consolidated operating revenues for thefirst half of 2003, compared to 38% for the same period in 2002.     ***Fixed Line***     Ourfixed line business provides local exchange service, international and nationallong distance services, data and other network services, and miscellaneousservices.  Revenues generated from this business in the first half of 2003 totaled Php22,863 million, an increase ofPhp161 million, or 1%, from Php22,702 million in the first half of 2002.  Thisincrease was due to higher revenues generated from international long distanceservice, data and other network services and miscellaneous services, partiallyoffset by decreased revenues from local exchange service and national longdistance service.  As a percentage of our consolidated operating revenues,however, fixed line revenues decreased in the firsthalf of 2003 to 49% from 60% in the sameperiod in 2002 due principally to the continued strong growth of our wirelessbusiness.     The following table summarizes our consolidatedoperating revenues from our fixed line business for the six months ended June 30, 2003 and2002 by service segment:     
 

**Six Months Ended June 30,**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

 

**(Unaudited)**

**(pesos in millions)**

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

Local exchange(1)

Php10,465

 

46

 

Php10,719

 

47

International long distance

6,049

 

26

 

5,223

 

23

National long distance

3,293

 

14

 

3,917

 

17

Data and other network

2,876

 

13

 

2,718

 

12

Miscellaneous

180

 

1

 

125

 

1

Total

Php22,863

 

100

 

Php22,702

 

100
  ________________     (1) 2002 has been restated toreflect the change in revenue recognition for prepaid cards from sales tousage.     *LocalExchange Service*     Ourlocal exchange service revenues consist of:                - flat monthly fees for our postpaidservice;                  - installation charges and otherone-time fees associated with the establishment of customer service;                   - fixed charges paid by othertelephone companies, charges retained by PLDT for calls terminating to cellularsubscribers within the local area, and local access charges paid by cellularoperators for calls by cellular subscribers that terminate to our localexchange network;                     - revenues from usage of prepaidcards for calls within the local area and any unused peso value of expiredprepaid cards;                       - call revenues generated frompayphones and coin-operated phones; and                         - charges for special features,including bundled value-added services such as  call waiting ,  callforwarding ,  3-party conference calling, speed calling  and  CallerID .      Thefollowing table summarizes key measures of our local exchange service businesssegment as of and for the six months ended June 30, 2003and 2002:     
 

**Six Months Ended June 30,**

 

**2003**

** **

**2002**

 

**(Unaudited)**

 

 

 

 

Consolidated local exchange revenues (in millions) (1)

Php10,465

 

Php10,719

Number of fixed lines in service

 

 

 

PLDT Group

2,085,243

 

2,133,482

PLDT(2)

2,060,437

 

2,110,074

Number of PLDT employees

11,237

 

12,796

Number of PLDT fixed lines in service per PLDT employee

183

 

165
  ________________     (1) 2002 has been restated to reflect the change inrevenue recognition for prepaid cards from sales to usage.  (2) Approximately 87% and 89% were postpaid fixed linesubscribers as of June 30, 2003 and 2002, respectively.     Revenuesfrom our local exchange service for the firsthalf of 2003 decreased by Php254 million, or 2%, to Php10,465 million fromPhp10,719 million for the same period in 2002. The decrease was due to acontinuing shift in subscriber preference from postpaid to prepaid services,which generate lower average revenue per subscriber, partially offset byadjustments in our monthly local service rates.  The percentage contribution oflocal exchange revenues to our total fixed line revenues also decreased in the first half of 2003 to 46% from 47% in the sameperiod in 2002.     Grossadditions to PLDT's fixed lines in service in the firsthalf of 2003 totaled 191,431, a decrease of 5% from the gross additions of200,872 in the first half of 2002.  On a netbasis, however, PLDT’s fixed lines decreased by 32,102 in the first half of 2003, as against an increase of 34,965in the same period in 2002. While fixed line additions totaled 18,477 forPLDT’s prepaid fixed line services, particularly *Teletipid* and *Telesulit*,PLDT’s postpaid fixed lines in service declined by 50,579 in the first half of 2003.     Initially intended as an affordable alternativetelephone service for consumers under difficult economic conditions, *Teletipid*now forms an important part of PLDT's overall churn and credit risk exposuremanagement and subscriber retention strategy.  *Teletipid* phone kits,each containing Php300 worth of pre-stored call credits, are sold for Php1,700per unit. Prior to May 1, 2002, *Teletipid* subscribers were charged based onusage at a rate of Php0.50 per minute for local calls and at the same ratesapplicable to postpaid fixed line subscribers for national and internationallong distance calls. Effective May 1, 2002, the local call rate was increasedto Php1.00 per minute, but the rates for national and international longdistance calls remained unchanged.     Launchedin February 2002, *Telesulit* is a premiumvariant to *Teletipid.**Telesulit* phone kits, each containingPhp500 worth of pre-stored call credits, are sold for Php1,900 per unit.Effective   February 1, 2003, the local call rate for *Telesulit* wasincreased to Php1.00 per minute from Php0.75 per minute, while the national andinternational long distance rates are the same as those applicable to *Teletipid*and postpaid fixed line subscribers.  *Teletipid* subscribers migrating to*Telesulit* are able to retain their telephone numbers.      Asof June 30, 2003, PLDT’s active prepaid fixed line subscribers totaled261,504, of which 111,513 were *Teletipid* subscribers and 149,991 were *Telesulit*subscribers.  These subscribers accounted for approximately 13% of PLDT’s totalfixed lines in service as of June 30, 2003.     Aprepaid fixed line subscriber is recognized as an active subscriber when thatsubscriber activates and uses a prepaid call card. Prepaid fixed linesubscribers can reload their accounts by purchasing call cards that are sold indenominations of Php300 in the case of *Teletipid* and Php500 in the caseof *Telesulit*.  Reloads are valid for two months.  A prepaid fixed linesubscriber is disconnected if that subscriber does not reload within fourmonths for *Teletipid* and within one month for *Telesulit* after theexpiry of the last reload.  All sales of prepaid *Teletipid* and *Telesulit*cards, whether through dealers or through PLDT's business offices, arenon-refundable.     Pursuantto a currency exchange rate adjustment mechanism authorized by the PhilippineNational Telecommunications Commission, or the NTC, we adjust our monthly localservice rates upward or downward by 1% for every Php0.10 change in thepeso-to-dollar exchange rate relative to a base rate of Php11.00 = US$1.00.During the first half of 2003, we implemented four upward adjustments in ourmonthly local service rates, as against two downward adjustments during thesame period in 2002.  The average peso-to-dollar rate in the first half of 2003 was Php53.504 = US$1.00, comparedto the average of Php50.814 = US$1.00 in the firsthalf of 2002.  This change in the average peso-to-dollar rate translated to apeso depreciation of 5%, which resulted in an average net increase of 5% in ourmonthly local service rates in the first halfof 2003.      EffectiveJanuary 1, 2003, local access charges for cellular subscribers’ callsthat terminate to our fixed line subscribers increased from Php2.00 per minuteto Php2.50 per minute, which will further increase to Php3.00 per minuteeffective January 1, 2004.     Toattract new fixed line subscribers and retain existing ones, PLDT hasintroduced various value-added services such as *Caller ID.  Caller ID*allows subscribers to identify callers by telephone number, and it is nowbundled at special rates with other value-added phone services, such as *callwaiting*, *call forwarding*, *3-party conference calling* and *speedcalling*.       Theratio of PLDT fixed lines in service per PLDT employee improved from 165 at June 30, 2002 to 183at June 30, 2003. This improvement resulted from the net decrease inPLDT’s employee headcount.  During the twelve months ended June 30, 2003, PLDT’sworkforce was reduced by 1,559 employees, or 12%, to 11,237 employees mainly onaccount of PLDT’s manpower reduction program.  PLDT’s headcount has furtherdeclined to 10,372 employees as of July 15, 2003.See Note 18 to the accompanying financial statements for further discussion.     *International Long Distance Service*     Our international long distance revenues, which wegenerate through our international gateway facilities, consist of:                           - inbound call revenues representingsettlements from foreign telecommunications carriers for inbound internationalcalls;                             - access charges paid to us by otherPhilippine telecommunications carriers for terminating inbound internationalcalls to our local exchange network; and                               - outbound call revenuesrepresenting amounts billed to our customers (other than our cellularcustomers) for outbound international calls, net of amounts payable to foreigntelecommunications carriers for terminating calls in their territories.     The following table shows information about ourinternational long distance business for the six months ended June 30, 2003 and2002:     
** **

**Six Months Ended June 30,**

** **

**2003**

** **

**2002**

 

**(Unaudited)**

 

 

 

 

Consolidated international long distance revenues (in millions)

Php6,049

 

Php5,223

Inbound

5,048

 

4,179

Outbound

1,001

 

1,044

 

 

 

 

International call volumes (in million minutes)

 

 

 

PLDT Group(1)

1,196

 

1,447

Inbound

1,114

 

1,356

Outbound

82

 

91

Inbound-outbound call ratio

13.6:1

 

14.9:1

 

 

 

 

PLDT

1,117

 

1,301

Inbound

1,037

 

1,212

Outbound

80

 

89

Inbound-outbound call ratio

13.0:1

 

13.6:1
  ________________     (1) Excludes cellular callvolumes.     Ourconsolidated international long distance revenues increased by Php826 million,or 16%, to Php6,049 million in the first half of 2003 from Php5,223 million inthe same period in 2002, primarily as a result of an increase in the averagetermination rates.  Likewise, the percentage contribution of international longdistance revenues to our total fixed line revenues increased in the first halfof 2003 to 26% from 23% in the same period in 2002.     Ourrevenues from inbound international long distance calls for the first half of2003 increased by Php869 million, or 21%, to Php5,048 million from Php4,179million for the same period in 2002 due to an increase in PLDT’s averagetermination rates and the positive impact of the depreciation of the averagevalue of the peso relative to the U.S. dollar, partially offset by the effectof lower inbound call volumes.     Ourinbound international long distance call volumes for the first half of 2003decreased by 18% to 1,114 million minutes from 1,356 million minutes for thefirst half of 2002 due to increased competition from alternative means of longdistance communications, particularly e-mail, international text messaging andInternet telephony and more inbound calls terminating directly to cellularsubscribers.  In addition, the increase in our average termination rates hasalso resulted in reduced inbound call volumes, principally those being routedthrough direct facilities from the U.S. to the Philippines.     For international long distance calls terminating toits fixed line network, PLDT increased its termination rates from an average ofUS$0.08 per minute to US$0.12 per minute effective February 1, 2003.  On March 10,2003, the International Bureau of the U.S. Federal Communications Commission,or U.S. FCC, issued an Order on petitions filed separately by AT&T and MCIrequiring all U.S. carriers providing direct facilities-based service on theU.S.-Philippines route to suspend payments for termination services toPhilippine carriers, including PLDT, Smart and Subic Telecom, until such timeas the U.S. FCC issues a public notice that the affected circuits of U.S.carriers on the U.S.-Philippine route are fully restored.  In response to theOrder of the International Bureau of the U.S. FCC, the NTC issued a MemorandumOrder dated March 12, 2003, directing all affected Philippine carriers “(1) notto accept terminating traffic via direct circuits from U.S. facilities-basedcarriers who do not pay Philippine carriers for services rendered; and (2) totake all measures necessary to collect payments for services rendered in orderto preserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”  OnApril 9, 2003, we filed with the U.S. FCC an application for review of theInternational Bureau’s March 10, 2003 Order.  Our revenues derived from internationallong distance calls have not been materially adversely affected by the Order ofthe International Bureau of the U.S. FCC because most of the facilities-basedtraffic originating in the United States is being re-routed through circuits of third partiesnot subject to the order.  See Note 26 of the accompanying financial statementsfor further discussion.     Thedepreciation of the peso increased our inbound international long distancerevenues in peso terms because settlement charges for inbound calls are billedin U.S. dollars or in special drawing rights, an established method ofsettlement among international telecommunications carriers using values basedon a basket of foreign currencies, that are translated into pesos at theprevailing exchange rates at the time of billing.       Ourrevenues from outbound international long distance calls for the first half of2003 decreased by Php43 million, or 4%, to Php1,001 million from Php1,044million for the same period in 2002.  The decline was due to reduced IDD ratesbrought about by discounts granted to our corporate customers and loweroutbound call volumes partly offset by the positive impact of the depreciationon the peso on outbound international long distance service revenues.     Thedepreciation of the peso increased our outbound international long distancerevenues in peso terms because outbound calls are charged at U.S. dollar ratesand billed to our subscribers in pesos at the prevailing exchange rates at thetime of billing.  This increasing effect, however, was not sufficient tocompensate for the decline in outbound call volumes.  Our outboundinternational long distance call volumes declined by 10% to 82 million minutesin the first half of 2003 from 91 million minutes in the same period in 2002.While our IDD call volumes remained flat, our operator-assisted call trafficdeclined during the first half of 2003, compared to the first half of 2002, asoperator-assisted calls have declined due to the popularity of direct dialingand other alternative means of communications such as e-mailing and textmessaging.           *National Long Distance Service*     Our national long distance revenues consist of:                                  - per minute charges for calls madeby our fixed line customers outside of the local service areas but within thePhilippines, net of interconnection charges payable for calls carried throughthe backbone network of, and/or terminating to the customer of, anothertelecommunications carrier; and                                   - access charges received from othertelecommunications carriers for calls carried through our backbone networkand/or terminating to our customers.     The following table shows our national long distancerevenues and call volumes for the six months ended June 30, 2003 and 2002:     
** **

**Six Months Ended June 30,**

** **

**2003**

** **

**2002**

 

**(Unaudited)**

 

 

 

 

Consolidated national long distance revenues (in millions)

Php3,293

 

Php3,917

National long distance call volumes (in million minutes)

 

 

 

PLDT Group

1,035

 

1,254

PLDT

1,023

 

1,237
     Ournational long distance revenues decreased by Php624 million, or 16%, toPhp3,293 million in the first half of 2003 from Php3,917 million in the sameperiod in 2002 as a result of lower call volumes.  Accordingly, the percentagecontribution of national long distance revenues to our total fixed linerevenues was down to 14% for the first half of 2003 from 17% for the sameperiod in 2002.     Ournational long distance call volumes decreased by approximately 17% to 1,035million minutes in the first half of 2003 from 1,254 million minutes in thesame period in 2002.  Cellular substitution and the widespread availability andgrowing popularity of alternative non-voice means of communications,particularly cellular text messaging and e-mail, have negatively affected callvolumes.     The decrease in our national long distance revenues inthe first half of 2003 compared to the same period in 2002 was, however,mitigated by the impact of the launch of various *PLDT Premium Phone Services*and rate increases.      *PLDTPremium Phone Services*allow customers to access voice-based content and information through anautomated call-in facility for a certain fee.  Over 30 premium phone serviceapplications are being offered to PLDT customers ranging fromappointment-booking services for select embassies (including, among others, theU.S. and Australian embassies in the Philippines), entertainment and TVgameshow hotlines, televoting, spiritual and love counseling, celebrity chat,phone karaoke and music services. PLDT charges an average of Php10 per minute for thesepremium phone services.      Effective March 1, 2003, the rate fornational long distance, or NDD, calls terminating to other local exchangecarriers increased from a flat rate of Php4.50 per minute to Php5.00per minute.  Previously, this rate ranged from Php3.00 to Php5.00 per minute,depending on distance, but was later simplified to a flat rate of Php4.50 per minute.  Effective June 8, 2003, rate for PLDT to PLDT NDD calling was adjusted to Php5.00 perminute.       *Data and Other Network Services*     Inthe first half of 2003, our data and other network services continued toregister increasing revenues.  This growth segment of our fixed line businessgenerated revenues of Php2,876 million, an increase of Php158 million, or 6%,from Php2,718 million in the first half of 2002.  The percentage revenuecontribution of this business segment to our total fixed line revenuesincreased to 13% in the first half of 2003 from 12% in the same period of 2002,due to the increase in digital subscriber line, or *DSL* subscribers andcorporate clients subscribed to *ARCSTAR* bandwidth services as well asthe launch of new services, including *PLDT**Vibe* and *Vibe Card*.We expect that demand for, and therefore revenues generated from, theseservices will continue to grow in the foreseeable future.     Data and other network services we currently provideinclude:                                      - traditional bandwidth services — high-speed point-to-point domestic and international digital leasedline services;                                        - broadband/packet-based/Internet-basedservices — frame relay, asynchronous transfer mode or ATM,Internet protocol-virtual private network or IP-VPN, DSL, Internet gateway, andwholesale digital signal level 3 or DS3; and                                          - other packet-based switchingservices — Datapac and integrated services digital network, orISDN.     Theforegoing services are used for the following:                                            - domestic and internationalcommunication;                                              - broadband data transmissionservices that transmit data over a range of frequencies and/or bandwidth intoseveral narrower bands;                                               - Internet exchange services thatprovide Internet service providers, or ISPs, with a primary connection to theglobal Internet to exchange local traffic generated within the Philippines;                                                 - private networking services thatuse the public Internet as a backbone for private interconnection between differentlocations;                                                   - switched-based services, providedthrough a fixed bandwidth transmission facility, that allow establishment of adedicated connection for the duration of a call; and                                                     - international packet-basedservices, provided through bilateral arrangements and global alliances, thatintegrate voice, video and data.     Traditionalbandwidth services accounted for 52% of the total revenues from PLDT’s data andother network services for the first half of 2003, broadband/IP-based servicesaccounted for 41%, and other services accounted for the remaining 7%, comparedto 60%, 36% and 4%, respectively, for the same period in 2002.  Thesepercentage changes indicate a continuing shift in data and other networkrevenues from traditional bandwidth services to broadband/IP-based services.We expect this trend to continue given the growing demand for broadbandtransmission of voice, data and video due to the continued growth of theInternet, e-commerce and other online services.     InMay 2002, PLDT launched a pay-per-use dial-up Internet service under the brandname *PLDT Vibe*, which is available on a postpaid or prepaid basis toPLDT’s fixed line subscribers.  Charges for this service are Php0.25 per minutefor off-peak hours, which are from 10:01 p.m. to 6:00 a.m., and Php0.50 perminute for peak hours, which are from 6:01 a.m. to 10:00 p.m.  Withthe launch of *PLDT Vibe*, PLDT now offers two residential Internetservice packages targeting separate markets:  *PLDT Vibe*for light tomedium Internet users and *myDSL*broadband for heavy Internet users.  Asof June 30, 2003, the number of PLDT’s postpaid fixed line subscribersthat signed up for *PLDT Vibe*was**84,566 while the number ofsubscribers to *PLDT DSL* and *myDSL* broadband service reached14,579.     InAugust 2002, PLDT launched *Shops.work*, a network solution that allowsthe electronic linking of retail stores providing, among other features, salesand inventory reports, up-to-date and real-time monitoring of sales andinventory, and on-line access to head offices.      In March2003, PLDT launched a number of data services, namely: *Continuum, iView*and*Encompass*, all under the *Brains* umbrella. *Brains Continuum*provides customers the ability to recover from service interruptions and offersnetwork diversity, facility and hosting services in partnership with ePLDT.  *BrainsiView* enables customers to monitor the performance of their network, trackbandwidth utilization patterns and identify the source of network problems.  *Brains**Encompass* provides a broad range of services for the customers’ managednetworking needs, be it a wide area network or local area network.     InApril 2003, PLDT introduced a full two-way fixed line text messaging serviceunder the brand name *Hype,* which allows subscribers to send and receivetext messages to and from landline and mobile phones, and is capable ofinternational text messaging.  *Hype*also**allows subscribers tojoin TV network-based and new PLDT-initiated texting services.     *Miscellaneous*     Miscellaneousrevenues are derived mostly from directory advertising and facilities rental.For the first half of 2003, these revenues increased by Php55 million, or 44%,to Php180 million from Php125 million for the same period in 2002, andaccounted for approximately 1% of our total fixed line revenues in each ofthese comparable periods.     ***Wireless***     Our wireless business segment offers cellular servicesas well as satellite, very small aperture terminal, or VSAT, and otherservices.      The following table summarizes our consolidatedoperating revenues from our wireless business for the six months ended June 30, 2003 and2002 by service segment:     
** **

**Six Months Ended June 30,**

 
** **

**2003**

** **

**%**

** **

**2002**(1)

** **

**%**

 

**(Unaudited)**

 
**(pesos in millions)**

 

 
Wireless services:

 

 

 

 

 

 

 

Cellular

Php22,117

 

98

 

Php14,482

 

98

Satellite, VSAT and others

376

 

2

 

347

 

2

Total

Php22,493

 

100

 

Php14,829

 

100

________________

 

(1) As restated to reflect the change in revenuerecognition for prepaid cards from sales to usage.

 

Ourwireless service revenues increased significantly by Php7,664 million, or 52%,to Php22,493 million in the first half of 2003 from Php14,829 million in thesame period in 2002 mainly as a result of the continued strong growth inrevenues generated from Smart’s cellular service.  Accordingly, as a percentageof our consolidated operating revenues, wireless service revenues increased to49% for the first half of 2003 from 39% for the same period in 2002.

 

*Cellular Service*

 

Our cellular service revenues consist of: 

 
- revenues derived from actual usageof the network by prepaid subscribers and any unused peso value of expiredprepaid cards 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 GSM service customers in excess of allottedfree text 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 GSM service;           - service fees charged to Piltel forusing Smart's GSM network for Piltel's  Talk 'N Text  prepaid cellularservice; and             - other charges, including those forreconnection and migration.      Proceeds from the sale of handsets and SIM cards arenot recorded as part of cellular service revenues.  Gains on the sale ofhandsets are offset against selling and promotion expenses, while losses on thesale of handsets and SIM cards are included as part of selling and promotionexpenses.     Ourcellular service revenues for the first half of 2003 amounted to Php22,117million, an increase of Php7,635 million, or 53%, from Php14,482 million forthe same period in 2002.  Cellular service revenues accounted for 48% of ourconsolidated operating revenues for the first half of 2003, compared to 38% forthe first half of 2002.  The significant increase in our cellular servicerevenues was primarily a result of respective 52% and 151% increases in prepaidand postpaid subscribers, partially offset by a 7% drop in blended monthlyaverage revenue per user, or ARPU.  Smart’s GSM subscriber base increased by2,842,483, or 54%, from 5,300,906 as of June 30, 2002to 8,143,389 as of June 30, 2003.     Smartmarkets nationwide cellular communications services under the brand names *SmartBuddy, Smart Gold*and *addict mobile.  Smart Buddy* is a prepaidservice while *Smart Gold* and *addict mobile* are postpaid services,which are all provided through Smart's digital GSM network.  Introduced inApril 2003, *addict mobile*offers exclusive multimedia content tosubscribers and features personalized means for Internet surfing, allowingsubscribers to apply their allocated free credits towards their choice of dataand value-added services.  The following table summarizes key measures of Smart'scellular business as of and for the six months ended June 30, 2003 and2002:     
** **

**Six Months Ended June 30,**

** **

**2003**

** **

**2002**

 

**(Unaudited)**

 

 

 

 

Cellular revenues (in millions) (1)

Php22,117

 

Php14,482

GSM

21,937

 

14,274

Voice

11,525

 

7,466

Data

8,242

 

5,453

Others (2)

2,170

 

1,355

Analog

—

 

50

Others (3)

180

 

158

Cellular subscriber base

8,143,389

 

5,493,979

GSM

8,143,389

 

5,300,906

Prepaid

7,920,447

 

5,212,103

Postpaid

222,942

 

88,803

Analog (4)

—

 

193,073

Prepaid

—

 

35,613

Postpaid

—

 

157,460

Systemwide subscriber base (5)

10,363,725

 

7,106,399

Traffic volumes (in millions)

 

 

 

Calls (in minutes)

1,709

 

1,339

Domestic

1,198

 

898

International

511

 

441

Inbound

442

 

390

Outbound

69

 

51

Messages - SMS (6)

10,768

 

7,670
  ________________     (1) 2002 has been restated to reflectthe change in revenue recognition for prepaid cards from sales to usage.      (2) Refers to othernon-subscriber-related revenues, such as facility service fees from Smart’srevenue-sharing agreement with Piltel and inbound international roaming fees.      (3) Refers to all other servicesconsisting primarily of revenues from Smart Money Holdings Corporation, PublicCalling Offices and *SMARTalk* payphones, and a small number of leasedline contracts.     (4) Smart closed down its analog/ETACSnetwork in December 2002.     (5) Includes Piltel’s *Talk’N Text*subscribers of 2,220,336 and 1,612,420 as of June 30, 2003 and 2002,respectively.  *Talk’N**Text* is a prepaid GSM service provided byPiltel using Smart’s GSM network.     (6) Refers to short messaging serviceor text messaging.     *VoiceServices*     Smart’srevenues from voice services, which include all voice traffic and value-addedservices such as voice mail and international roaming, increased by Php4,059million, or 54%, to Php11,525 million in the first half of 2003 from Php7,466million in the same period in 2002 mainly due to the increase in subscriberbase, as well as the increase in termination rates for inbound internationallong distance calls.     *DataServices*     Smart’s**revenuesfrom cellular data services, which include all text messaging-related servicesas well as value-added services, increased by Php2,789 million, or 51%, toPhp8,242 million in the first half of 2003 from Php5,453 million in the firsthalf of 2002.  Cellular data services accounted for 37% of Smart's cellularrevenues in the first half of 2003, compared to 38% in the same period in2002.  In the first half of 2003, text messaging-related services contributedrevenues of Php7,368 million, compared to Php4,835 million in the same periodin 2002, and accounted for 89% of the total cellular data revenues for thefirst half of 2003 and 2002.  Revenues from domestic text-related servicesamounted to Php6,558 million in the first half of 2003, compared to Php4,370million in the first half of 2002, representing 80% of cellular data revenuesfor the first half of 2003 and 2002.  International text contributed revenuesof Php810 million in the first half of 2003, up by 74% from Php465 million inthe first half of 2002.  The increase in revenues from text messaging-relatedservices resulted mainly from a 40% increase in volume of text messages to10,768 million outbound messages during the firsthalf in 2003 from the 7,670 million outbound messages handled during the sameperiod in 2002.  * *  *Smartzed*ä**contributedrevenues of Php375 million in the first half of 2003, compared to Php251million in the same period in 2002.  Other value-added services developed bySmart on its own platform contributed total revenues of Php465 million in thefirst half of 2003 and Php359 million in the first half of 2002.  In the firsthalf of 2003 and 2002, Smart also recognized revenues of Php34 million and Php8million, respectively, from mobile banking, roaming short messaging service,wireless application protocol, and *Smart Money.*  * *  *Facility Services*     Smart’s revenues from GSM service for thefirst half of 2003 and 2002 included facility service fees totaling Php1,823 million and Php1,076 million, respectively,representing Smart’s 50% share from *Talk ‘N Text* revenues, net of interconnectionfees.**As of June 30, 2003 and 2002*,*Piltel had 2,220,336 and 1,612,420 *Talk‘N Text* subscribers, respectively, using Smart’s GSM network pursuant to afacilities service agreement between Smart and Piltel (see Note 16 to theaccompanying**financial statements for a description of this agreement).     *Subscriber Base, ARPU and Churn Rates*  * *  OfSmart’s 8,143,389 GSM subscribers as of June 30, 2003,prepaid subscribers accounted for 97% while postpaid subscribers accounted forthe remaining 3%.  Smart's prepaid GSM subscriber base grew by 52% to 7,920,447at June 30, 2003 from 5,212,103 at June 30, 2002, whereas Smart'spostpaid GSM subscriber base increased by 151% to 222,942 at June 30, 2003 from88,803 at June 30, 2002.  Smart’s prepaid and postpaid net subscriberactivations totaled 1,271,409 and 46,294, respectively, in the first half of2003, or a monthly average addition of 211,902 prepaid and 7,716 postpaidsubscribers.       The following table summarizes Smart's usage-basedmonthly ARPUs for the six months ended June 30, 2003and 2002:     
 

**Six Months Ended June 30,**

 

**2003**(3)

 

**2002**(1)

 

**Gross**

 

**Net**

 

**Gross**

 

**Net**

GSM

 

 

 

 

 

 

 

Prepaid

Php530

 

Php420

 

Php581

 

Php421

Postpaid

1,729

 

1,303

 

2,083

 

1,436

Blended

563

 

445

 

604

 

437

Analog(2)

 

 

 

 

 

 

 

Prepaid

Php–

 

Php–

 

Php102

 

Php69

Postpaid

–

 

–

 

42

 

35

Blended

–

 

–

 

58

 

43
  ________________     (1)    As restated to reflect the changein revenue recognition for prepaid cards from sales to usage.   (2)    Smart closed down its analognetwork operation in December 2002.  (3)    As restated to reflect theexclusion of pre-termination fees in the calculation of postpaid ARPUs, seediscussion below.        ARPUis computed for each month by dividing the revenues for the relevant servicesfor the month by the average of the number of subscribers at the beginning andthe end of the month.  Gross monthly ARPU is computed by dividing the revenuesfor the relevant services, gross of dealer discounts and allocated contentprovided costs, including interconnection income but excluding inbound roamingrevenues, by the average number of subscribers.  Net monthly ARPU, on the otherhand, is calculated based on revenues net of dealer discounts and allocatedcontent provider costs and interconnection income net of interconnectionexpense.  ARPU for any period of more than one month is calculated as thesimple average of the monthly ARPUs in that period.     Smart’sprepaid service revenues consist mainly of charges for subscribers' actualusage of their prepaid cards.  Gross monthly ARPU for Smart’s prepaid GSMservice for the first half of 2003 was Php530, compared to Php581 for the sameperiod in 2002.  The decline was attributable mainly to the decrease of 13% and17% in outbound and inbound local traffic per subscriber (coveringmobile-to-fixed and mobile-to-mobile traffic), respectively, for the first halfof 2003.  On a net basis, ARPU for the first half of 2003 remained stable atPhp420 from Php421 in the first half of 2002.  We expect Smart’s prepaid ARPUsto continue to decline over time as Smart expands further into the lower end ofthe market.     MonthlyARPU for Smart’s postpaid GSM service is calculated in a manner similar to thatof prepaid service, except that the revenues consist mainly of monthly servicefees and charges on usage in excess of the monthly service fees.  Further,monthly postpaid ARPUs are now calculated to exclude pre-termination fees withrestatement, for comparative purposes, effective the second half of 2002onwards.  Up until April 2003, pre-termination fees had been reported as partof usage revenues and included in the calculation of postpaid ARPUs.  ARPU is ameasure associated with a subscribers’ actual usage of the network on whichpre-termination fees would have had no effect.  Pre-termination fees areone-time fees charged to subscribers who terminate their postpaid service priorto the end of their respective “lock-in” periods.  These “lock-in” periods areimposed in cases where a free or discounted handset has been provided to asubscriber as part of a postpaid plan which normally last for 24 months.  Thischange in ARPU calculation would have had no material effect on our net incomeas reported in 2002 and in the first quarter of 2003.  Beginning the secondquarter of 2003, pre-termination fees were included, upon collection, under“Others” of “GSM Revenues” and were therefore no longer be included for thepurpose of calculating ARPUs.       Grossmonthly ARPU for postpaid GSM subscribers for the first half of 2003 wasPhp1,729, compared to Php2,083 for the first half of 2002.  On a net basis,postpaid ARPU decreased by 9% from Php1,436 in the first half of 2002 toPhp1,303 in the first half of 2003.  Smart's monthly gross blended ARPUincluding GSM services, both prepaid and postpaid, for the first half of 2003was Php563, compared to Php604 for the same period in 2002.  Blended netmonthly ARPU increased by 2% to Php445 in the first half of 2003 from Php437 inthe first half of 2002.     Smart's 50% share of Piltel's revenues from *Talk ‘N Text*under a revenue-sharing agreement between Smart and Piltel are notincluded in the computations of Smart's ARPUs.     Churn,or the rate at which existing subscribers have their service canceled in agiven period, is computed based on total disconnections in the period, net ofreconnections in the case of postpaid subscribers, divided by the average ofthe number of subscribers at the beginning and the end of a month, all dividedby the number of months in the same period.     Aprepaid cellular subscriber is recognized as an active subscriber when thatsubscriber activates and uses the SIM card in the handset, which alreadycontains Php100 worth of pre-stored air time. Subscribers can then reload bypurchasing prepaid call-and-text cards that are sold in denominations ofPhp300, Php500 and Php1,000 or, by purchasing additional air time “over theair” via *Smart Load* or through their handsets using *Smart Money*.Reloads have validity periods ranging from three days to two months, dependingon the amount reloaded.  A prepaid GSM account is disconnected if thesubscriber does not reload within four months after the full usage or expiry ofthe last reload.  As a result, a subscriber would not be included in our churnrate calculation for up to four months and three days to six months after thesubscriber may have stopped using the service to make calls or send messages(although the subscriber may continue to receive calls and messages).  These effects may cause our calculated churn ratefor a period to be lower than the actual rate at which subscribers are ceasingto use Smart's services, and may contribute to more rapid growth in calculatedchurn following periods of rapid subscriber growth.      ForSmart's prepaid GSM subscribers, the average monthly churn rate for the firsthalf of 2003 was 3.1%, compared to 3.8% in the first half of 2002.  Smart'schurn has been influenced by several factors, particularly the sluggishness ofthe Philippine economy, which negatively affected the ability of somesubscribers to afford the service.  As part of its initiatives to addresschurn, Smart introduced *PureTxt 100* in August 2002.  *PureTxt 100*wasa text-only card with a denomination of Php100 intended for *Smart Buddy*subscribers.  The card was designed as an alternative for prepaid subscriberswho may temporarily be unable to afford the “call and text” cards with higherdenominations.  *PureTxt 100* cards came with a free allocation of 10 textmessages and were valid for one month.  On May 11, 2003,the voice-call capabilities of *PureTxt 100*were activated as a result ofthe launch of *SmartLoad*, an “over-the-air” electronic loading facilitydesigned to make reloading of air time credits more convenient for, andaccessible to, consumers.  These “over-the-air” reloads, which have both voiceand text functions, are packaged in smaller denomination of Php30, Php60 andPhp115, but have shorter validity periods of three days, six days and 12 days,respectively.  A Php200 denomination load with a one-month validity period wasadded on July 11, 2003.  Like *PureTxt 100*, Smart believes that *SmartLoad*will encourage subscribers to stay within its cellular network instead ofchurning and re-subscribing at a later time.  Smart has ceased production andsale of *PureTxt 100* cards in anticipation that its *PureTxt**100*subscribers will eventually avail of *SmartLoad*.     Theaverage monthly churn rate for Smart's postpaid GSM subscribers for the firsthalf of 2003 was 3.9%, compared to 3.0% for the same period in 2002.  Smart'spolicy is to redirect outgoing calls to an interactive voice response system ifthe postpaid subscriber's account is either 45 days overdue or the subscriberhas exceeded the prescribed credit limit.  If the subscriber does not make apayment within 44 days of redirection, the account is disconnected.  Withinthis 44-day period, a series of collection activities are implemented,involving the sending of a collection letter, call-out reminders and collectionmessages via text messaging.     *Satellite, VSAT and Other Services*     Our revenues from satellite, VSAT and other services consistmainly of rentals received for the lease of Mabuhay Satellite's transpondersand Telesat's VSAT facilities to other companies and charges for ACeSPhilippines’ satellite phone service.  Total revenues from these services forthe first half of 2003 amounted to Php376 million, an increase of Php29million, or 8%, from Php347 million for the first half of 2002.       ***Information andCommunications Technology***     Ourinformation and communications technology business is conducted by ePLDT, awholly-owned subsidiary of PLDT.  ePLDT's principal business is its operationof an Internet data center under the brand name *Vitro*ä; two wholly-owned call centers, namely Vocativ Systems, Inc. andParlance Systems, Inc.; and Infocom, an ISP.  Granted pioneer status as an Internetdata center by the Philippine Board of Investments, *Vitro*ä provides co-location services, server hosting, hardware and softwaremaintenance services, website development and maintenance services, webcastingand webhosting, shared applications, data disaster recovery and businesscontinuity services, intrusion detection, and security services such asfirewall and managed firewall.      ePLDT is also engaged in the call center businessthrough the following subsidiaries:               - Parlance Systems, Inc., a 100%-ownedcall center facility capable of accommodating 520 seats exclusively for one ofthe largest direct-to-home satellite service providers in the United Statesfor customer support and billing requirements.  Parlance Systems commencedcommercial operations in June 2002; and                 - Vocativ Systems, Inc., a100%-owned call center facility capable of accommodating 500 seats exclusivelyfor clients of a global provider of customer relationship management services.Vocativ Systems commenced commercial operations in April 2002.     ePLDTsold its entire 51% interest in Contact World on June 30, 2003 and assigned itsreceivables from the same to Service Zone Inc., a U.S.-based call centeroperator, for a total consideration of US$700,000.  Contact World, a callcenter facility capable of accommodating 200 seats, commenced commercialoperations in June 2001.       ePLDThas also invested in a number of other e-commerce and Internet-relatedbusinesses, as described in Note 9 to the accompanying**financialstatements.     Inthe first half of 2003, our information and communications technology businessgenerated total revenues of Php863 million, an increase of Php467 million, or118%, from the Php396 million in the same period in 2002. These revenuesaccounted for 2% of our consolidated operating revenues for the first half of2003.  Each of ePLDT’s call center businesses, *Vitro*ä, and Infocom contributed 56%, 23% and 21%, respectively, of the totalrevenues from our information and communications technology business for thefirst half of 2003 compared to 12%, 42% and 46% for the first half of 2002.Going forward, we expect revenues from our call center business to continue tocontribute significantly to our information and communications technologyrevenues with the full commercial operations of Parlance Systems, Inc. andVocativ Systems, Inc. and the growing demand for call center services.      **Consolidated Operating Expenses**     Our consolidated operating expenses for the first halfof 2003, which include Smart's operating expenses of Php14,128 million,increased by Php4,162 million, or 15%, to Php31,945 million from Php27,783million for the same period in 2002.  The increase was due primarily to higherselling and promotion expenses, maintenance and rent expenses mostly associatedwith our wireless business.  As a percentage of our consolidated operatingrevenues, however, consolidated operating expenses decreased to 69% for thefirst half of 2003 from 73% for the comparable period in 2002.     ***Fixed Line***     Consolidatedoperating expenses related to our fixed line business for the first half of2003 totaled Php16,345 million, an increase of Php762 million, or 5%, comparedto Php15,583 million for the first half of 2002.  The increase was due mainlyto higher cash expenses, particularly rent, maintenance expenses and otheroperating costs.  As a percentage of our total fixed line operating revenues,fixed line-related operating expenses increased to 71% in the first half of2003 from 69% in the same period in 2002.     The following table shows the breakdown of our totalconsolidated fixed line-related operating expenses for the six months ended June 30, 2003 and2002 and the percentage of each expense item to the total:     
 

**Six Months Ended June 30,**

 

**2003**

 

**%**

 

**2002**

 

**%**

 

**(Unaudited)**

**(pesos in millions)**

 

Fixed line services:

 

 

 

 

 

 

 

Depreciation and amortization(1)

Php6,560

 

40

 

Php6,549

 

42

Compensation and benefits

3,707

 

23

 

3,662

 

24

Maintenance

1,737

 

11

 

1,596

 

10

Provision for doubtful accounts

1,521

 

9

 

1,473

 

9

Selling and promotions

632

 

4

 

618

 

4

Rent

557

 

3

 

370

 

2

Professional and other service fees

483

 

3

 

475

 

3

Taxes and licenses

293

 

2

 

274

 

2

Other operating costs

855

 

5

 

566

 

4

Total

Php16,345

 

100

 

Php15,583

 

100
  ____________  (1)   Includes depreciation of capitalized foreignexchange losses from the revaluation of net dollar liabilities of Php2,120million in the first half of 2003 and Php2,059 million in the same period in2002.     Depreciationand amortization charges increased by Php11 million to Php6,560 million mainlydue to an increase by Php61 million in depreciation of capitalized foreignexchange losses from the revaluation of our net dollar liabilities, which wereincurred in acquiring various telecommunications equipment offset by a netdecrease of Php50 million in depreciation of our regular asset base primarilyresulting from asset disposals.       Compensationand benefits increased by Php45 million, or 1%, to Php3,707 million mainly dueto collective bargaining agreement-related increases in salaries and benefitsof PLDT employees, partially offset by a 12% decrease in headcount due toPLDT’s manpower reduction program.  See Note 18 to theaccompanying financial statements for further discussion on PLDT’s manpowerreduction program.     Maintenanceexpenses increased by Php141 million, or 9%, to Php1,737 million due primarilyto higher maintenance costs of inside plant facility, computer and peripheralsand security services for manning exposed cables and provision for obsolescenceof certain maintenance-related inventory, partially offset by lower electricitycosts and lower maintenance costs on outside plant facilities.     Provisionfor doubtful accounts increased by Php48 million, or 3% to Php1,521 million onaccount of higher provisions for anticipated uncollectible accounts fromvarious specifically identified second-tier international telecommunicationscarriers.      Sellingand promotion expenses increased by Php14 million, or 2%, to Php632 millionmainly as a result of PLDT’s promotional activities in relation to the launchof *Hype* and other *Premium Phone Services*, partially offset byreduced corporate public relations expenses.     Rentexpenses increased by Php187 million, or 51%, to Php557 million mainly due tohigher domestic circuits rental charges from the lease of VSAT facilities andhigher rentals paid by PLDT to suppliers of customer premises equipment as partof its bundled services to corporate customers.     Professionaland other service fees increased by Php8 million, or 2%, to Php483 millionbecause of higher collection agency fees on account of higher collection offinal accounts, partially offset by lower advisory, consultancy and paymentfacility expenses incurred by PLDT as a result of its efforts to streamlineoutsourced services.     Taxesand licenses increased by Php19 million, or 7%, to Php293 million mainly onaccount of higher radio licenses and permit fees paid in the first half of 2003as compared to the same period in 2002.     Otheroperating costs increased by Php289 million, or 51%, to Php855 million dueprimarily to higher insurance expense and other business operating costs.Other operating costs remained flat in line with PLDT’s cost-control efforts.     ***Wireless***     Consolidatedoperating expenses associated with our wireless business for the first half of2003 amounted to Php14,612 million, an increase of Php2,998 million, or 26%,from Php11,614 million for the first half of 2002.  A significant portion ofthis increase was attributable to Smart’s increased selling and promotionexpenses, compensation and benefits, rent and maintenance.  As a percentage ofour wireless operating revenues, operating expenses associated with ourwireless business decreased to 65% for the first half of 2003 from 78% for thesame period in 2002.      The following table summarizes our consolidatedwireless-related operating expenses for the six months ended June 30, 2003 and2002 and the percentage of each expense item to the total:     
** **

**Six Months Ended June 30,**

 
** **

**2003**

** **

**%**

** **

**2002**

** **

**%**

 
 

**(Unaudited)**

 
**(pesos in millions)**

 

 
Wireless services

 

 

 

 

 

 

 

 
Depreciation and amortization(1)

Php4,976

 

34

 

Php4,889

 

42

Selling and promotions

4,207

 

29

 

2,865

 

25

Compensation and benefits

1,595

 

11

 

1,332

 

12

Rent

1,033

 

7

 

784

 

7

Maintenance

939

 

6

 

722

 

6

Provision for doubtful accounts

356

 

3

 

111

 

1

Taxes and licenses

328

 

2

 

163

 

1

Professional and other service fees

316

 

2

 

285

 

2

Other operating costs

862

 

6

 

463

 

4

Total

Php14,612

 

100

 

Php11,614

 

100

__________

 

(1)   Includes depreciation of capitalized foreignexchange losses from the revaluation of net dollar liabilities of Php548million in the first half of 2003 and Php382 million in 2002.

 

Depreciationand amortization charges increased by Php87 million, or 2%, to Php4,976 millionmainly due to an (1) increase of Php1,294 million in depreciation chargesresulting from an increase primarily in Smart’s depreciable asset base owing tocontinuing network expansion and upgrade and   (2) an increase in depreciationof capitalized foreign exchange losses from the revaluation of net dollarliabilities of Php166 million.  The increase in these charges was partiallyreduced by the absence of any depreciation charge for Smart’s analog networkassets in the first half of 2003, compared to Php1,547 million of depreciationfor these assets in the first half of 2002.  Smart’s analog network assets werefully depreciated as of December 31, 2002.

 

Sellingand promotion expenses increased by Php1,342 million, or 47%, to Php4,207million mainly due to a 73% increase in Smart’s prepaid phone kit/SIM packsales in the first half of 2003.  Smart’s average subscriber acquisition cost,or SAC, for prepaid subscribers in the first half of 2003 was Php707, adecrease of 48% from Php1,372 in the first half of 2002.  Commissions todealers accounted for the highest percentage of prepaid SAC at 50% and 79% inthe first half of 2003 and 2002, respectively.  On the other hand, postpaid SACin the first half of 2003 was Php10,883, an increase of 83% from Php5,940 inthe first half of 2002 reflecting Smart’s renewed marketing efforts to attractpostpaid subscribers.  Handset subsidies accounted for 83% and 66% of postpaidSAC in the first half of 2003 and 2002, respectively.  Effective August 1,2002, Smart changed its mode of payment for dealer commissions from prepaid airtime cards to cash and reduced the maximum commission paid from a range ofPhp1,000-Php1,300 (depending on the volume purchased) to Php800 per prepaidphone kit sold.  An additional 1% rebate is given on cash purchases of theprepaid phone kits.  A Php50 commission is paid for each SIM pack sold. 

 

Compensationand benefits increased by Php263 million, or 20%, to Php1,595 million primarilydue to increased headcount and increased salaries and benefits of Smart’semployees.  Smart's employee headcount increased from 4,714 as of June 30, 2002 to5,335 as of June 30, 2003 mainly due to the integration of TelecommunicationsSpecialists, Inc., or TSI, personnel into Smart, following Smart’s purchase ofTSI’s assets on December 1, 2002.  TSI was previously Smart’s largest dealer.

 

Rentalexpenses increased by Php249 million, or 32%, to Php1,033 million on account ofhigher site rental cost incurred by Smart for its growing number of cell sitesand base stations in line with its network expansion and increased operationalrequirements for circuit facilities coupled with higher office space rentalsfor the increased number of wireless centers, as well as space requirements forincreased personnel.  As of June 30, 2003, Smart had 2,389 GSM cell sites and 3,285 basestations, compared with 1,926 GSM cell sites and 2,469 base stations as of June 30, 2002. 

 

Maintenanceexpenses increased by Php217 million, or 30%, to Php939 million mainly due tohigher site utility, security, repairs and other maintenance-related expensesassociated with the expansion and upgrade of Smart’s cellular networkequipment; increased office and telecenter utilities and security expenses; andincreased computer hardware and software maintenance expenses incurred bySmart. 

 

Provisionfor doubtful accounts increased by Php245 million, or 221%, to Php356 millionmainly due to increased provisioning for carrier accounts.  In respect ofcarriers, Smart’s provision increased by Php306 million to Php349 million forthe first half of 2003 from Php43 million for the same period in 2002, due toincreased provisioning for U.S. carriers as a result of the recent order of theU.S. FCC instructing U.S. carriers to withhold payment on their current anddelinquent accounts to Philippine carriers.  In respect of subscriber accounts,Smart’s provision decreased by Php57 million from Php54 million in the firstsix months of 2002 to a Php3 million net reversal for the same period in 2003.The reversal was mainly due to improved collections on Smart’s postpaidaccounts previously provided for.

 

Taxes and licenses increased by Php165 million, or 101%, to Php328 million mainly due to an increase in Smart’s municipallicenses and taxes, input taxes and NTC supervision and regulation fees.  SeeNote 22 to the accompanying**financialstatements for a discussion relating to NTC supervision and regulation fees. 

 

Professionaland other service fees increased by Php31 million, or 11%, to Php316 millionmainly as a result of increased legal, consultancy, audit and bill collectionservice fees incurred by Smart. 

 

Otheroperating costs increased by Php399 million, or 86%, to Php862 millionprimarily due to increases in Smart’s various other operating expenses, such asinsurance, facility usage fees, travel and transportation, and communicationsexpenses.

 

***Information and Communications Technology***

 

Consolidatedoperating expenses associated with our information and communicationstechnology business for the first half of 2003 totaled Php988 million, anincrease of Php402 million, or 69%, from Php586 million for the same period in2002.  The increase was due principally to the full commercial operations ofePLDT and its newly formed subsidiaries.  As a percentage of our informationand communications technology operating revenues, operating expenses related toour information and communications technology business decreased to 114% in thefirst half of 2003 from 148% in the same period in 2002.  The three largestexpense items related to our information and communications technology businessin the first half of 2003 were maintenance, compensation and benefits, anddepreciation and amortization, representing 32%, 28% and 18%, respectively, ofour total operating expenses related to this business.  In comparison, thethree largest expense items related to our information and communicationstechnology business in the first half of 2002 were maintenance, depreciationand amortization and compensation and benefits representing 29%, 23% and 21%,respectively, of related total operating expenses.

 

**Net Operating Income**

 

Our consolidated net operating income for the firsthalf of 2003 was Php14,274 million, an increase of Php4,130 million, or 41%,from Php10,144 million for the first half of 2002.  Accordingly, ourconsolidated operating margin (net operating income as a percentage ofoperating revenues) improved by four percentage points to 31% in the first halfof 2003 from 27% in the same period in 2002.

 

***Fixed Line***

 

For the first half of 2003, our fixed line businesssegment contributed an operating income of Php6,518 million, lower by Php601million, or 8%, than the Php7,119 million for the same period in 2002 as the 1%growth of our fixed line operating revenues was insufficient to cover the 5%increase in our fixed line-related expenses.  On a non-consolidated basis, thenet operating income contribution of this business segment for the first halfof 2003 decreased by Php476 million, or 7%, to Php6,318 million from Php6,794 millionfor the same quarter in 2002 as PLDT’s fixed line revenues remained flat, thusinsufficient to compensate for the 3% increase in our fixed line-relatedexpenses. 

 

***Wireless***

 

Ourwireless business segment recorded an operating income of Php7,881 million inthe first half of 2003, an increase of Php4,666 million, or 145%, over Php3,215million registered in the first half of 2002.  This significant improvement wasdue to a substantial increase of Php4,702 million in Smart's operating incomecontribution for the first half of 2003 which reached Php7,989 million from 

Php3,287 million for the sameperiod in 2002.

 

***Information and Communications Technology***

 

In the first half of 2003, our information andcommunications technology business segment incurred an operating loss of Php125million, down by Php65 million, or 34%, from the Php190 million operating lossposted for the same period in 2002.  These operating losses reflect thestart-up nature of ePLDT’s businesses and those of ePLDT’s subsidiaries.

 

**Other Expenses – Net**

 

The following table shows our consolidated otherexpenses – net for the six months ended June 30, 2003and 2002.  (See Note 18 to the accompanying financial statements).

 

 

**Six Months Ended June 30,**

 

**2003**

** **

**2002**

 

**(Unaudited)**

**(in millions)**

 

Interest expense and related items

Php6,635

 

Php7,962

Capitalized interest

(541)

 

(753)

Subtotal

Php6,094

 

Php7,209

Other expenses (income) – net

5,475

 

(615)

Total

Php11,569

 

Php6,594

 

On a consolidated basis, our other expenses, net ofother income, increased by Php4,975 million, or 75%, to Php11,569 million forthe first half of 2003 from Php6,594 million for the same period in 2002 due tothe combined effects of:

 
- a decrease in interest expense andrelated items, net of capitalized interest, of Php1,115 million mainlyattributable to the decrease in PLDT, Smart and Mabuhay Satellite’s interestexpenses by Php766 million, Php337 million and Php33 million, respectively, dueto lower debt balances and lower interest rates mainly on foreign currency-denominatedloans bearing fluctuating interest rates.  These decreases were partiallyoffset by a net increase of Php21 million in ePLDT’s interest expense resultingfrom an increase in its debt balances; and       - an increase of Php6,090 million inother expenses due mainly to increases in (1) manpower reduction cost byPhp1,396 million as 1,681 employees opted to take the enhanced separationpackage offered under PLDT’s manpower reduction program; (2) hedging cost andforeign exchange swap losses by Php371 million as PLDT increased the hedgedportion of its debt to 38% as of June 30, 2003 from 20% as of June 30, 2002;(3) loss on disposal of investment in debt securities of Php702 million; (4)provision for unrealizable assets of Php1,408 million; and (5) impairmentlosses recognized in respect of ACeS Philippines’ investment in ACeSInternational Limited, or AIL, of Php1,614 million and certain equipment ofACeS Philippines related to the business of AIL amounting to Php964 million.These other expenses were partially offset by a gain on sale of property ofPhp624 million.     **Income Before Income Tax and Minority Interest**     Our income before income tax and minority interest innet income (losses) of consolidated subsidiaries in the first half of 2003 wasPhp2,705 million, representing a decrease of Php845 million, or 24%, fromPhp3,550 million in the first half of 2002.  On a non-consolidated basis,however, income before income tax and equity share in net income of oursubsidiaries decreased by Php3,636 million, or 201%, to a loss of Php1,825million in the first half of 2003 as against an income of Php1,811 million inthe same period in 2002.     Ourconsolidated provision for income tax in the first half of 2003 increased by38%, to Php1,142 million from Php830 million in the first half of 2002.However, on a non-consolidated basis, our tax benefit was Php403 million in thefirst half of 2003 as against a provision of Php527 million in the same quarterof 2002.     Inthe first half of 2003, our effective corporate tax rate on a consolidatedbasis was 19% as against a negative 29% on a non-consolidated basis.  Oureffective corporate tax rates were lower than the 32% statutory corporate taxrate due to differences between our consolidated and non-consolidated income asshown in our financial statements and our taxable income.  These differencesarose from the following:         - the effect of a three-year incometax holiday granted to Smart by the Philippine Board of Investments inconnection with the pioneer status it awarded to Smart's GSM network expansionproject;           - income already subjected to finaltax; and             - equity in net income of oursubsidiaries, which has already been subjected to tax and therefore, as incometo PLDT, is no longer subject to income tax.      Smart'sthree-year income tax holiday, which will expire in May 2004, applies to theincremental income generated from its GSM network expansion.  We expect ourconsolidated effective tax rate to increase following the expiration of Smart’stax holiday.     **Net Income**     As aresult of the factors discussed above and after taking into account our equityin net income of investees amounting to Php3,202 million, our consolidated netincome for the first half of 2003 was at Php1,780 million, representing adecrease of Php928 million, or 34%, over our restated consolidated net incomeof Php2,708 million for the same period in 2002.  This decrease was largely dueto the substantial increase in other expenses – net of Php4,975 million.     PLDT'snet loss for the first half of 2003, before taking into account its equityshare in net income of investees, was Php1,422 million, representing a decreaseof Php2,706 million, or 211%, as against an income of Php1,284 million for thesame period in 2002.  The decrease was attributable to PLDT’s (1) manpowerreduction cost of Php1,411 million, which increased by Php1,349 million for thefirst half 2003, as compared to the same period in 2002 (see Note 18 to theaccompanying financial statements for further discussion on PLDT’s manpowerreduction program) and (2) non-cash charges of Php1,486 million, representingloss on disposal of investment in debt securities of Php702 million, provisionfor unrealizable assets of Php1,408 million, offset by gain on sale of realproperty of Php624 million.     Smart’snet income for the first half of 2003 was Php6,122 million, a 161% increaseover its net income of Php2,350 million in the comparable period of 2002, onaccount of the sustained growth of its cellular operations.     ACeSPhilippines registered a net loss of Php2,748 million for the first half of2003, compared with a net loss of Php59 million for the first half of 2002largely due to impairment charges in respect of its investment in AIL ofPhp1,614 million and of certain equipment related to the business of AIL ofPhp964 million.     Basicand diluted earnings per share of common stock decreased to Php5.51 in thefirst half of 2003 from basic and diluted earnings per share of Php11.26 andPhp11.14, respectively, in the first half of 2002, after giving retroactiveeffect to stock dividend declarations.     **Liquidity and Capital Resources**     The following table shows our consolidated andnon-consolidated cash flows for the six months ended June 30, 2003 and2002 (unaudited) as well as consolidated and non-consolidated capitalizationand other selected financial data as of June 30, 2003(unaudited) and December 31, 2002 (audited):     
 

**Consolidated**

 

**Non-Consolidated**

 

**Six Months Ended June 30,**

 

**Six Months Ended June 30,**

 

**2003**

 

**2002**

 

**2003**

 

**2002**

 

(Unaudited)

 
**(pesos in millions)**

 

 

 

 

 

 

 

Cash Flows 

 

 

 

 

 

 

 

Net cash provided by operating activities

Php23,015

 

Php21,295

 

Php10,234

 

Php11,501

Net cash provided by (used in) investing activities

(4,874)

 

(7,445)

 

2,857

 

(2,910)

Capital expenditures

5,228

 

7,453

 

1,386

 

2,505

Net cash used in financing activities

17,849

 

6,672

 

13,270

 

3,339

 

** **

 

** **

 

** **

 

** **

 

**Consolidated**

 

**Non-Consolidated**

 

**June 30,**

 

**December 31,**

 

**June 30,**

 

**December 31,**

 

**2003**

 

**2002**

 

**2003**

 

**2002**

 

(**Unaudited**)

 

**(Audited)**

 

**(Unaudited)**

 

**(Audited)**

**(pesos in millions)**

 

 
Capitalization 

 

 

 

 

 

 

 

Notes payable

Php2,785

 

Php760

 

Php2,625

 

Php720

Current portion of long-term debt

20,664

 

19,176

 

13,440

 

11,962

Long-term debt - net of current portion

136,167

 

148,587

 

118,470

 

127,362

Total debt

Php159,616

 

Php168,523

 

Php134,535

 

Php140,044

Stockholders’ equity

89,127

 

88,088

 

89,127

 

88,088

 

Php248,743

 

Php256,611

 

Php223,662

 

Php228,132

Other Financial Data 

 

 

 

 

 

 

 

Cash and cash equivalents

Php11,116

 

Php10,876

 

Php3,966

 

Php4,165

Property, plant and equipment - net

244,648

 

252,025

 

186,007

 

190,722

Total assets

294,344

 

303,330

 

255,871

 

262,415

Net debt (1)

148,500

 

157,647

 

130,569

 

135,879

________________

 

(1)Total debt less cash and cash equivalents.

 

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

 

Throughthese initiatives, PLDT was able to successfully raise the necessary externalfinancing to fund its operating, investing and debt service requirements for2002.  On January 25, 2002, PLDT signed two loan agreements with *Kreditanstaltfur Wiederaufbau*, or KfW, which provided PLDT with a refinancing facilityof US$149 million.  On May 2, 2002, PLDT completed a global offering of notesin the aggregate amount of US$350 million with a simultaneous tender offer forits 8.5% Notes due 2003 and 10.625% Notes due 2004, which closed on May 15,2002.  On July 26, 2002, PLDT signed a loan agreement with Japan Bank forInternational Cooperation, or JBIC, for a JP¥9,760 million credit facilityunder JBIC’s Overseas Investment Loan Program.  On September 4, 2002, PLDTsigned a US$145 million syndicated multicurrency term loan facility, which isintended to refinance part of the principal amounts outstanding under twoexisting term loans falling due in 2003. 

 

As of June 30, 2003, non-consolidated cash and cashequivalents amounted to Php3,966 million, while our consolidated cash and cashequivalents totaled Php11,116 million.  Principal sources of consolidated cashand cash equivalents in the first half of 2003 were cash flows from operationsamounting to Php23,015 million, drawings from short and long-term credit facilitiesaggregating Php9,588 million, and net equity funds raised through PLDT'ssubscriber investment plan totaling Php43 million.  These funds were usedprincipally for capital outlays of Php5,228 million, including capitalizedinterest of Php541 million; debt principal payments of Php18,763 million; andinterest payments of Php6,080 million charged to operations.

 

***Operating Activities***

 

On aconsolidated basis, net cash flows from operating activities in the first halfof 2003 increased by Php1,720 million, or 8%, to Php23,015 million fromPhp21,295 million in the first half of 2002. 

 

Agrowing portion of our consolidated cash flow is generated by our wireless anddata businesses, which accounted for 49% and 6%, respectively, of ourconsolidated operating revenues for the first half of 2003, compared to 39% and7%, respectively, for the first half of 2002.  Revenues from our local exchangeand international long distance services accounted for 23% and 13%,respectively, of our consolidated operating revenues for the first half of2003, down from 28% and 14%, respectively, for the same period in 2002.  Ournational long distance service revenues has decreased over the past severalyears owing mainly to cellular substitution.  In the first half of 2003, thisservice accounted for 7% of our consolidated operating revenues, down from 10%in the first half of 2002.

 

PLDT'scontribution to our consolidated cash flows from operations in the first halfof 2003 was Php10,234 million, representing a decrease of Php1,267 million, or11%, from Php11,501 million in the first half of 2002.  The decrease was due toa higher level of cash operating and other expenses during the first half of2003, compared to the same period in 2002. 

 

Our subsidiaries, particularly Smart, made significantcontributions to our cash from operations.  In the first half of 2003, Smartgenerated cash from operations of Php11,677 million, or 51% of our consolidatedcash flows from operations.  Smart’s strong cash flows reflect the continuingstrong performance of its cellular business.  However, Smart is subject to loancovenants that restrict its ability to pay dividends, redeem preferred shares,make distributions to PLDT or otherwise provide funds to PLDT or any associatewithout the consent of certain of its lenders.  After receiving approvals fromFinnvera and certain lenders for thepayment of dividends to PLDT in an amount not to exceed 40% of Smart’s netincome in 2001, Smart made its first dividend payment of Php1,540 million toPLDT in December 2002.  In addition, Smart paid dividends in the amount ofPhp4,300 million to PLDT in June 2003, representing 70% of Smart’s 2002 netincome, after receiving similar approvals from Finnvera and certain lenders.Smart will be required to obtain further waivers to pay additional dividends infuture periods.  We cannot assure you 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. 

 

Asof June 30, 2003, related party liabilities included (1) PLDT’s payables toSmart amounting to Php2,414 million, representing interconnection fees; (2)Piltel’s liabilities to Smart totaling Php718 million, representing variousfees under the facilities, customer services and administrative support andmanagement services agreements as well as a revenue-sharing agreement betweenSmart and Piltel; and (3) Piltel’s liabilities to PLDT amounting to Php758million, representing interconnection charges.  For a detailed discussion ofthese related party transactions, see “Related Party Transactions” in thisreport and Note 16 to the accompanying financial statements.

 

***Investing Activities***

 

On a consolidated basis, net cash used in investingactivities in the first half of 2003 of Php4,874 million was lower by Php2,571million, or 35%, compared to Php7,445 million in the first half of 2002.  Thisdecline was primarily the result of Smart's significantly lower capitalspending.  On a non-consolidated basis, net cash provided by investingactivities was Php2,857 million in the first half of 2003 on account ofdividends received from Smart amounting to Php4,300 million, as against a netcash used in investing activities of Php2,910 million in the same period in2002.

 

Ourconsolidated capital expenditures in the first half of 2003 totaled Php5,228million, representing a significant reduction of Php2,225 million, or 30%, fromPhp7,453 million in the first half of 2002 primarily due to Smart’s and PLDT’sreduced capital spending.  Smart's capital spending of 

Php3,724 million in the firsthalf of 2003 was used to further expand and upgrade its GSM and transmissionnetwork facilities to increase capacity and coverage in respect of basic andadvanced cellular services.  PLDT's capital spending of Php1,386 million wasprincipally used to finance the expansion of its fixed line data and networkservices.  ePLDT and its subsidiaries’ capital spending of Php48 million wasused to fund its Internet data center, other Internet-related businessinitiatives, and call center business investments.  The balance representedother subsidiaries’ capital spending.

 

Our 2003 budget for consolidated capital expendituresis Php15,000 million, of which Php6,000 million is budgeted to be spent by PLDTfor its fixed line data and network services and Php9,000 million is budgetedto be spent by Smart for further expansion and upgrading of its GSM network.

 

Underthe terms of Piltel’s debt restructuring plan, PLDT issued a Letter of Supportfor the benefit of Piltel and its creditors under which PLDT has agreed tocover any funding shortfalls of Piltel up to a maximum amount of US$150million.  Under the Letter of Support, PLDT provided to Piltel Php2,317 million(US$48 million) in 2000, Php2,039 million (US$41 million) in 2001, and Php571million (US$11 million) in 2002.  Drawings under the PLDT Letter of Support areconverted into U.S. dollars at the prevailing exchange rates at the time of theinvestment.  There was no drawdown under the Letter of Support in the firsthalf of 2003 while drawdowns for the first half of 2002 was at US$3 million(approximately Php153 million.)  As of June 30, 2003,the remaining undrawn balance under the Letter of Support was US$50 million(approximately Php2,689 million).  If, among other things, Piltel's financialand operating performance were to deteriorate or any amounts were required tobe paid to Piltel's unrestructured creditors in cash to settle their claims(aggregate principal of US$8 million as of June 30, 2003), additional drawingsunder the Letter of Support 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 Letter of Support nor can wepredict when the remaining undrawn balance under the Letter of Support will beexhausted.  Piltel is currently in discussion with certain holders of itsconvertible bonds and is seeking to restructure such debt on the terms andconditions of Piltel’s debt restructuring plan.  However, there is no assurancethat Piltel and the bondholders who have not participated in the debtrestructuring plan will be able to reach an agreement to resolve the defaultand address the notice of acceleration. 

 

***Financing Activities***

 

On a consolidated basis, we used net cash of Php17,849million for financing activities in the first half of 2003, compared toPhp6,672 million in the first half of 2002.  On a non-consolidated basis, netcash used in financing activities in the first half of 2003 was Php13,270million, compared to Php3,339 million in the same period in 2002.  The highernet cash used in financing activities in the first half of 2003 was mainlyattributable to debt repayments by PLDT in line with its ongoing debt reductionprogram.  On a stand-alone basis, Smart’s financing activities in the firsthalf of 2003 used net cash of Php8,393 million for debt amortization, comparedto Php2,980 million in 2002.

 

*Debt Financing*

 

Additions to our consolidated long-term debt duringthe first half of 2003 totaled Php7,562 million, consisting of PLDT's drawingstotaling Php7,475 million, primarily from loan facilities extended and/or guaranteedby various export credit agencies and refinancing facilities used to repaymaturing debts, and Smart's drawings of Php87 million, under its loanfacilities with HypoVereinsbank and Credit Lyonnais.

 

On aconsolidated basis, proceeds from notes payable amounted to Php2,026 millionduring the first half of 2003 as compared to payments of Php2,429 millionduring the same period in 2002.  This was primarily due to the issuance by PLDTof One-Year Peso Notes in April and May 2003.

 

Our consolidatedindebtedness as of June 30, 2003 was Php159,616 million, representing adecrease of Php8,907 million, or 5%, compared to Php168,523 million as of December 31, 2002.  This decrease was mainly due to the reductions of Php5,509 million andPhp3,029 million in PLDT’s and Smart’s indebtedness, respectively.  PLDT’sindebtedness decreased by 4% to Php134,535 million as of June 30, 2003 from Php140,044 million as of December 31, 2002, due to PLDT’s debt payments in linewith the thrust to reduce PLDT’s overall indebtedness.  Smart's indebtedness asof June 30, 2003 was Php19,862 million, a decrease of 13% from Php22,891million as of December 31, 2002.

 

Asof June 30, 2003, PLDT had undrawn committed dollar-denominated long-termcredit facilities in the aggregate amount of US$191 million, inclusive of theUS$74 million undrawn portion of the US$149 million KfW refinancing facility,US$19 million and JP¥3,191 million undrawn portion of the US$145 million, andundrawn newly signed loan agreements dated May 29, 2003 and June 11, 2003 for aUS$12 million term loan facility extended by DEG-Deutsche Investitions-undEntwicklungsgesellschaft mbH, or DEG, and a JP¥5,615 million syndicated termloan facility supported by Nippon Export and Investment Insurance of Japan,respectively.  Smart also had undrawn committed dollar-denominated long-termcredit facilities in the aggregate amount of US$106 million, which includes aUS$100 million five-year term loan facility supported by Nippon Export andInvestment Insurance obtained by Smart in November 2002.  In addition, Smartstill has available facilities under its €50million Framework Agreement with HypoVereinsbank up to a maximum aggregateamount of €43 million.

 

After giving effect to the anticipated application ofexisting refinancing facilities, the scheduled maturities of our outstandinglong-term debt as of June 30, 2003 are as follows:

 

 

**Consolidated**

** **

**Non-consolidated**

**Maturity**

**(in millions)**

 

 

 

 

2003(1)

Php7,665

 

Php4,054

2004

22,361

 

15,068

2005

28,567

 

21,255

2006

25,987

 

20,426

2007 and onwards

72,251

 

71,107

________________

 

(1)  July 1, 2003 through December 31, 2003.

 

Approximately Php84,580 million principal amount ofour consolidated outstanding long-term debt as of June 30, 2003 is scheduled tomature over the period July 2003 to 2006.  Of this amount, approximatelyPhp60,803 million is attributable to PLDT, Php19,512 million to Smart, and theremainder to Mabuhay Satellite, MaraTel and ePLDT.

 

OnJanuary 25, 2002, PLDT signed two loan agreements with KfW that provide PLDTwith a US$149 million facility to refinance in part the repayment installmentsdue under its existing loans from KfW due from January 2002 to December 2004.The facility consist of two nine-year loans, inclusive of a three-yeardisbursement period and a two-year grace period during which no principal ispayable.  It partly enjoys the guarantee of HERMES, the export credit agency ofthe Federal Republic of Germany.  Disbursements under this facility, which aremade as the KfW loans to be repaid fall due, are currently available. As of June 30, 2003,drawings under this facility totaled US$74 million (Php3,987 million).

 

OnMay 2, 2002, PLDT issued 10.625% Notes due 2007 in the aggregate principalamount of US$100 million and 11.375% Notes due 2012 in the aggregate principalamount of US$250 million.  The net proceeds from this debt issue were usedmainly to (1) repurchase US$63 million principal amount of 8.5% Notes due 2003and US$117 million principal amount of 10.625% Notes due 2004 through ourtender offer, and US$10 million principal amount of 10.625% Notes due 2004 andUS$6 million principal amount of 9.875% Notes due 2005 from the open market and(2) prepay or repay various loans including US$53 million (JP¥6,260 million)pertaining to the Japanese yen term loan which matured on June 18, 2003 andUS$52 million pertaining to the US$150 million term loan maturing in December2003.  

 

On July 26, 2002, PLDTsigned a loan agreement with JBIC for a JP¥9,760 million credit facility underJBIC’s Overseas Investment Loan program.  This fully drawn facility willamortize beginning March 21, 2005 and will mature on March 21, 2008.

 

On September 4, 2002,PLDT signed an agreement with a syndicate of banks for a US$145 millionmulticurrency term loan facility consisting of Japanese yen and U.S. dollarcommitments of JP¥10,914 million and US$53 million, respectively.  Thisfacility has been split into two tranches.  Tranche A was drawn on June 18, 2003 in theamount of JP¥7,723 million and US$34 million to refinance a portion of theJapanese yen syndicated term loan which matured on the same date.  Tranche Bwhich amounts to JP¥3,191 million and US$19 million, is to be drawn in December2003 and is intended to refinance a portion of US$52 million principal amountoutstanding under the U.S. dollar term loan falling due in December 2003.  Thisnew syndicated facility will amortize semi-annually beginning June 2004 andwill mature in December 2006.

 

On May 29, 2003, PLDTobtained a US$12 million term loan facility from DEG.  

 

On June 11, 2003, PLDTalso signed a JP¥5,615 million syndicated term loan facility supported byNippon Export and Investment Insurance of Japan.  As of June 30, 2003, wehave not made any drawdowns under these two facilities.

 

PLDTissued One-Year Peso Notes in the Philippines in two tranches on April 28, 2003 and May 14, 2003,generating an aggregate of Php1,803 million in net proceeds.

 

*Covenants*

 

Our debt instruments contain restrictive covenants andrequire us to comply with specified financial ratios and other financial testsat relevant measurement dates, principally at the end of each quarterly period.

 

The financial tests under our debt instruments, asamended, include maintaining a positive tangible net worth and compliance withthe following ratios:

 
- interest coverage ratio,calculated on a non-consolidated basis and  excluding PLDT’s equity share innet income of investees, of not less than 150%, 180% or 200%;       - total debt to EBITDA on anon-consolidated basis of not more than 5.5:1 from June 2003 to December 2003,not more than 5.0:1 from March 2004 to June 2004, not more than 4.5:1 fromSeptember 2004 to December 2004 and not more than 4.0:1 from March 2005 andthereafter;         - long-term indebtedness toappraised value of equity/tangible net worth on a non-consolidated basis,ranging from not more than 1.1:1 to not more than 3.0:1;            - current ratio on anon-consolidated basis, ranging from not less than 0.9:1 to not less than1.2:1;             - debt service coverage ratio on anon-consolidated basis of at least 1.1:1; and               - debt to free cash flow ratio on anon-consolidated basis of not more than 6.0:1 from March 31, 2003 to June 30,2003, not more than 5.5:1 from September 30, 2003 to June 30, 2004, not morethan 5.0:1 from September 30, 2004 to June 30, 2005, not more than 4.5:1 fromSeptember 30, 2005 to June 30, 2006, and not more than 4.0:1 from September 30,2006 onwards.     Inaddition, some of PLDT's debt instruments contain covenants requiring PLDT tocomply with specified financial tests on a consolidated basis.  These include:                 - long-term debt to appraised valueof equity/tangible net worth of not more than 2.33:1;                   - total debt to EBITDA of not morethan 4.5:1 in 2003 and 2004, and not more than 4.0:1 in 2005 and thereafter;                      - current ratio of not less than0.75:1 to 0.9:1; and                       - interest coverage ratio of notless than 200%.     Forpurposes of deriving appraised value of equity/tangible net worth, wedetermined the revaluation surplus in respect of PLDT’s properties.  PLDT’sproperties in service as of December 31, 1997 were reappraised by anindependent firm of appraisers to reflect their sound value based on theDecember 29, 1997 exchange rate of Php40.116 = US$1.00.  As of December 31, 1997,the sound value was Php225,966 million and the revaluation surplus wasPhp82,723 million.  This reappraisal was approved by the NTC on January 28, 2000under NTC Case No. 98-183.  As of June 30, 2003and December 31, 2002, the revaluation surplus on PLDT’s 1997 appraisedproperties still in service, net of a 5% disallowance factor, amounted toPhp42,218 million and Php44,984 million, respectively.       Theprincipal factors that can negatively affect our ability to comply with thesefinancial ratios and other financial tests are depreciation of the pesorelative to the U.S. dollar, poor operating performance of PLDT and itsconsolidated subsidiaries, impairment or similar charges in respect ofinvestments or other assets that may be recognized by PLDT and its consolidatedsubsidiaries, and increases in our interest expense.  Interest expense mayincrease as a result of various factors, including issuance of new debt, therefinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the peso, the lowering of PLDT's credit ratings or the creditratings of the Philippines, increases in reference interest rates, and generalmarket conditions.  Since approximately 96% of PLDT's total debt is denominatedin foreign currencies, principally in U.S. dollars, many of these financialratios and other tests are negatively affected by any weakening of the peso.During the first half of 2003, the peso depreciated by approximately 4% againstthe U.S. dollar to an average of Php53.504 = US$1.00 from an average ofPhp51.583 = US$1.00 during the year 2002.  During the first half of 2002 thepeso appreciated by 0.4% to an average of Php50.814 = US$1.00 from Php51.009 =US$1.00 for the year 2001.  At June 30, 2003, the exchange rate was Php53.522 =US$1.00, which is equivalent to a 0.5% depreciation of the peso relative to therate at the end of 2002.      PLDT'sability to maintain compliance with financial covenant requirements measured ona non-consolidated basis is principally affected by the performance of ourfixed line business, which is predominantly conducted by PLDT.  PLDT cannot beassured of the benefit of net revenues and cash flows generated by Smart andPLDT’s other subsidiaries and associates in assisting in complying withnon-consolidated covenants.     Wehave maintained compliance with all of our financial ratios and covenants asmeasured under our loan agreements.  However, if negative factors adverselyaffect our financial ratios, we may be unable to maintain compliance with theseratios and covenants or be unable to incur new debt.  Under some of our loanagreements, this ratio requirement has become more restrictive at the end ofthe second quarter of 2003 and will continue to become more restrictive inincrements thereafter, which will make it more difficult for PLDT to maintaincompliance with this ratio in the future.  Inability to comply with ourfinancial ratios and covenants or raise new financing could result in adeclaration of default and acceleration of some or all of our indebtedness.The terms of some of our debt instruments have no minimum amount forcross-default.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 150%, interest coverage ratio is the ratio of (x) PLDT'snon-consolidated after-tax net income, excluding equity share in net income orlosses of investees, after adding back interest charges, net of interestcapitalized to construction, on all indebtedness for the 12 months immediatelypreceding the calculation date to (y) the estimated aggregate interest chargespayable, net of interest to be capitalized to construction, during the 365-dayperiod following the calculation date on all of PLDT's indebtedness outstandingon such calculation date.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 180%, interest coverage ratio is the ratio of (x) our after-tax netincome for the 12 months immediately preceding the calculation date after (1)adding back interest charges, depreciation, amortization and other non-cashcharges (including equity in the net income or losses of investees butexcluding provision for doubtful accounts) and provision for income taxes, and(2) deducting capitalized subscriber acquisition costs, to (y) the estimatedaggregate interest charges payable during the 365-day period following thecalculation date on all of PLDT's indebtedness outstanding on such calculationdate.     UnderPLDT's loan agreements that require maintenance of an interest coverage ratioof at least 200%, interest coverage ratio is the ratio of (x) our after-tax netincome after adding back reserves for higher plant replacement costs, incometaxes, interest charges, depreciation and non-cash charges (including equity inthe net income or losses of investees and provision for doubtful accounts)during 12 consecutive months within the 15 calendar months immediatelypreceding the calculation date, to (y) the sum of (1) the estimated aggregateinterest charges on all indebtedness, net of interest capitalized toconstruction, plus (2) dividends on mandatorily redeemable preferred stock, ineach case scheduled to be paid during the 12 months following the calculationdate.     Non-consolidatedtotal debt to EBITDA is the ratio of (x) PLDT's total indebtedness (notincluding amounts payable by PLDT to Piltel under the Letter of Support) to (y)net income for the preceding 12 months, after adding back interest accrued onall indebtedness, depreciation, amortization and other non-cash charges(including equity in net income or losses of investees, but excluding provisionfor doubtful accounts) and provision for income taxes and deducting anycapitalized subscriber acquisition costs.     Debtservice coverage ratio is the ratio of (x) PLDT’s cash flow from operationsafter adding back interest charges (to the extent previously deducted) plus (1)dividends received from subsidiaries, cash received upon any redemption ofredeemable preferred shares issued by Smart, any cash received under PLDT’ssubscriber investment plan and interest income received less (2) capitalexpenditures (excluding capitalized interest) and investments in subsidiariesfor the 12 months immediately preceding the calculation date plus (3) PLDT’sclosing cash balance of the last day of the calculation date to (y) the sum ofthe projected interest charges and principal debt repayments (excluding debt tobe repaid with a refinancing facility) during the 12 months following thecalculation date.     Debtto free cash flow ratio is the ratio of (x) PLDT’s debt less PLDT’s closingcash balance of the last day of the calculation period to (y) PLDT’s cash flowfrom operations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from subsidiaries, cash received upon anyredemption of redeemable preferred shares issued by Smart, any cash receivedunder PLDT’s subscriber investment plan and interest income received less (2)capital expenditures (excluding capitalized interest) and investments insubsidiaries for the 12 months immediately preceding the calculation date.       Non-consolidatedlong-term indebtedness to appraised value of equity (or under some covenants,to tangible net worth) is the ratio of (x) PLDT's aggregate indebtedness (orportion of such indebtedness) due more than one year following the calculationdate and par value of all mandatorily redeemable preferred stock to (y) the sumof the aggregate par value of all of PLDT's outstanding common and convertiblepreferred stock (other than preferred stock subject to mandatory redemption),paid-in capital in excess of the par value of such stock, PLDT's retainedearnings, reserve for higher plant replacement costs and revaluation incrementarising from independent certified appraisals of PLDT's telephone plantapproved by the NTC.     Non-consolidatedcurrent ratio is the ratio of (x) non-consolidated current assets to (y)non-consolidated current liabilities, excluding from current liabilities 50% ofthe portion of long-term indebtedness due within one year of the calculationdate.     PLDT'sdebt instruments contain a number of other negative covenants that, subject tocertain exceptions and qualifications, restrict PLDT's ability to take certainactions without lenders' approval, including:                         - incurring additional indebtedness;                           - prepaying other debt;                              - making investments;                                - extending loans;                                  - extending guarantees or assumingthe obligations of other persons;                                   - paying dividends or otherdistributions, or redeeming, repurchasing or otherwise acquiring shares ofPLDT’s capital stock;                                      - disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth;                                       - entering into management contractsproviding for the management of its business or operations by a third party;                                         - creating any lien or securityinterest;                                            - permitting set-off against amountsowed to PLDT;                                              - merging or consolidating with anyother company;                                               - entering into transactions withshareholders and affiliates; and                                                 - entering into sale and leasebacktransactions.     Underthe indenture of PLDT's 10.625% Notes due 2007 and 11.375% Notes due 2012, PLDTis required to comply with a number of additional covenants, includingcovenants that, subject to certain exceptions, restrict PLDT's ability to (1)incur debt in the event its ratio of debt to EBITDA (calculated on anon-consolidated basis based on definitions provided in the same indenture,except under certain circumstances), after giving effect to the incurrence ofsuch debt, would be less than 5.5 to 1 on or prior to December 31, 2003, 5.0 to1 from January 1, 2004 to December 31, 2004 and 4.5 to 1 thereafter and (2) paydividends, repurchase or redeem its capital stock, make investments and prepaysubordinated debt, among other things.  Subject to certain restrictions, thesecovenants also restrict our ability to sell assets and to use the proceeds ofthese asset sales.      Underthe terms of the US$149 million facility with KfW, PLDT is prohibited frompaying any dividends on common stock until after December 31, 2004.  In addition,under the terms of PLDT's US$145 million multicurrency term facility agreementand JP¥5,615 million term loan facility agreement, PLDT is restricted fromdistributing dividends to common stockholders unless (i) no default hasoccurred which is continuing, and (ii) its debt to free cash flow ratio, aftergiving effect to the distribution of such dividends and, under certaincircumstances, other adjustments to PLDT’s closing cash balance, would be lessthan 4.0 to 1.0.  Under other loan agreements, PLDT may not declare or paydividends on any of its capital stock without the prior written consent of thelenders (i) if PLDT is in default in the payment of any amounts due and payableunder such loan agreement or after the occurrence and during the continuance ofany other event of default or potential event of default under such agreements,(ii) if after giving effect to such action the current ratio would be less than1.2 to 1 or (iii) in an amount greater than PLDT’s net income after taxesduring the fiscal year to which such payment or distribution relates.     Incase of a change in control of PLDT, PLDT may be required to repurchase orprepay certain indebtedness.  Under the terms of the 10.625% Notes due 2007 and11.375% Notes due 2012, we are required to offer to purchase all outstandingnotes due 2007 and notes due 2012 for cash at a price of 101% of theirprincipal amounts plus accrued interest in the event that (1) the aggregate ofNTT Communications' and First Pacific's direct and indirect voting interest inPLDT's outstanding capital stock having voting rights falls below 35% of suchcapital stock, (2) any person or, in certain instances, group of persons, whichis not controlled directly or indirectly by First Pacific or NTT Communicationsacquires a direct or indirect voting interest in PLDT's outstanding capitalstock having voting rights which equals or exceeds 35% of such capital stock and(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 PLDT’s JP¥9,760 million loan from JBIC, in the event of anyproposed sale or transfer of PLDT's stock that would result in NTTCommunications holding less than 14.95% of PLDT's voting stock, we will berequired to prepay, immediately upon effectiveness of such sale or transfer,all principal outstanding under the loan, together with accrued interest.However, prepayment will not be required if, following such sale or transfer,(1) NTT Communications continues to have prior approval rights with respect toall matters as to which NTT Communications has approval rights under the stockpurchase agreement pursuant to which it acquired its shares in PLDT or (2)JBIC, in its sole discretion, determines that NTT Communications’ participationin the expansion of Smart's GSM network capacity to extend PLDT’s cellularbusiness in Smart would not be reduced below its level of participation as ofthe date of the loan agreement.     Underthe terms of both of PLDT’s US$145 million multicurrency term loan facilityagreement and JP¥5,615 million term loan, if any lender so requests in writing,PLDT shall prepay in full such lender’s participation in the loan within 45days from notification of the change in control and no later than the date onwhich PLDT is required to repurchase its 10.625% Notes due 2007 and 11.375%Notes due 2012 (“Bonds”) from bondholders accepting the change in controloffer.  A change in control is deemed to occur when (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 the Bonds, therating agency downgrades its credit rating on the Bonds within 90 days (ormore, in certain circumstances) following notice of the occurrence of theevents specified in (1) and (2) above.     PLDT’sdebt instruments contain customary and other default provisions that permit thelender to accelerate amounts due or terminate their commitments to extendadditional funds under the debt instruments.  These default provisions include:                                                   - cross-defaults andcross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument. In some cases, the cross-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated. In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments;                                                     - failure by PLDT to meet certainfinancial ratio covenants referred to above;                                                       - the occurrence of any materialadverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender;                                                          - the revocation, termination oramendment of any of the permits or franchises of PLDT in any mannerunacceptable to the lender;                                                           - the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender;                                                             - the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and                                                               - other typical events of default,including the commencement of bankruptcy, insolvency, liquidation or winding upproceedings by PLDT.     *Financing Requirements*     Webelieve that our available cash, including cash flow from operations anddrawings from existing and anticipated credit facilities, will providesufficient liquidity to fund our projected operating, investment, capitalexpenditures and debt service requirements for the next 12 months.  Further, asdescribed above, we completed a number of initiatives under our liabilitymanagement program to meet our debt service requirements in the short andmedium term.      We continueto pursue various initiatives and financing transactions with the objective offurther improving the balance between our cash flows and debt servicerequirements and reducing our overall indebtedness.  In addition, PLDT hasreduced its capital expenditures and investments, suspended dividend paymentsto common shareholders and increased its application of available cash toreduce its indebtedness.  Further, we expect to benefit from increasing revenueand cash flow contributions from our subsidiaries, particularly Smart.  Afterreceiving approvals from Finnvera and certain lenders for the payment ofdividends to PLDT in an amount not to exceed 40% of Smart’s net income in 2001,Smart made its first dividend payment of Php1,540 million to PLDT in December2002.  In addition, Smart paid dividends in the amount of Php4,300 million toPLDT in June 2003, representing 70% of Smart’s 2002 net income, after receivingsimilar approvals from Finnvera and certain lenders.  Smart will be required toobtain further waivers to pay additional dividends in future periods.  Wecannot assure you that Smart will be able to obtain such waivers in the future,or what amount, if any, Smart would be permitted or financially able todistribute.  We expect that we will have difficulty meeting our debt paymentobligations if we do not continue to receive cash dividends from Smart.       Ourability to continue to refinance our debts and the terms on which suchrefinancing can be obtained will depend on our successful financial and operatingperformance, conditions affecting the Philippine and international financialmarkets, the Philippine peso-to-U.S. dollar exchange rate, our credit ratingsand other factors, many of which are beyond our control.  An inability to repayor refinance our debts could materially and adversely affect our results ofoperations and financial condition and could result in default on such debtsand cross-default and acceleration of substantially all of our other debts.     *Credit Ratings*     Ourcredit ratings may significantly affect the terms of our prospectivefinancings, particularly financing costs.  On July 29, 2003, Moody’s InvestorsService changed its outlook on PLDT to positive and affirmed its credit ratingof “Ba3” and its preferred stock rating of “B2”. On May 30, 2003, Fitch Ratings alsochanged its outlook on PLDT to stable and “BB-”.  On April 22, 2003,Standard & Poor's Ratings Group affirmed its “BB” rating and stable outlookon PLDT.  However, none of our existing indebtedness contains provisions underwhich credit rating downgrades would trigger a default, changes in applicableinterest rates or other similar terms and conditions.      On October 29, 2002, Philippine Rating ServicesCorporation, or PhilRatings, a credit rating agency in the Philippines,announced its “PRS 1” rating for PLDT’s Php2.0 billion One-Year Peso Notes forwhich the registration was approved by the Philippine Securities and ExchangeCommission on February 6, 2003.  PRS 1 is the highest rating possible onPhilRatings’ scale for short-term securities and is based on the issuer’s“strongest capability for timely payment of debt on both principal andinterest.”     *Off-Balance Sheet Arrangement*     On October 10, 2002,PLDT entered into a Receivables Purchase Deed with a foreign institution, orthe Purchaser, under which PLDT agreed (1) to sell its receivables from certaineligible foreign carriers for an advance payment of US$50 million and (2) toservice, administer and collect the receivables on behalf of the Purchaser.The Purchaser will have no recourse to PLDT should the eligible carrier fail orrefuse to settle the assigned/purchased receivables, except if PLDT commits abreach on its representations and warranties under the Receivables PurchaseDeed.  For the six months ended June 30, 2003, receivables sold under theReceivables Purchase Deed amounted to US$5 million (Php272 million).     *Equity Financing*     Throughour subscriber investment plan, which provides postpaid fixed line subscribersthe opportunity to buy shares of our 10% Cumulative Convertible Preferred Stockas part of the upfront payments collected from subscribers, PLDT was able toraise Php43 million in the first half of 2003 and Php345 million in the sameperiod in 2002.      Cashdividend payments in the first half of 2003 amounted to Php694 million,compared to Php762 million in the first half of 2002, all of which were paidsolely to preferred shareholders of PLDT.  The most recent cash dividend paidby PLDT to its common shareholders was in April 2001, and it does not expect topay its common shareholders any dividends in 2003.     ***Contractual Obligations and Commercial Commitments***     *Contractual Obligations*     The following table discloses our contractualobligations outstanding as of June 30, 2003:      
 

**Payments Due by Period**

 

**Total**

** **

**Within 1 year**

** **

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

** **

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

** **

**After 5 years**

 

 

 

**(in millions)**

 

 

Long-term debt obligations

Php156,831

 

Php20,679

 

Php56,043

 

Php35,962

 

Php44,147

Long-term lease obligations

7,528

 

1,659

 

4,271

 

1,072

 

526

Unconditional purchase obligations(1)

9,977

 

800

 

3,274

 

1,086

 

4,817

Other long-term obligations

20,388

 

—

 

—

 

—

 

20,388

Total contractual cash obligations

Php194,724 

 

Php23,138

 

Php63,588

 

Php38,120

 

Php69,878
  _____________     (1)  Under the Air Time Purchase Agreement with ACeS InternationalLimited, the amount disclosed in the table above for payments due within 1 yearreflects a reduction in PLDT’s required payments agreed under a StandstillAgreement, while the amounts disclosed for payments due from 2 years onwardsare based on the original Air Time Purchase Agreement.  The parties to theStandstill Agreement have also agreed to negotiate in good faith and use theirbest efforts to reach an agreement on a revised ATPA before November 15, 2003 thatwill cover, among other matters, the amended minimum and supplemental air timepayment provisions subject to the approval of ACeS International Limited’screditors.     *Long-term Debt Obligations*  * *  For a discussion of our long-term debt obligations,see Note 13 of the accompanying financial statement.  * *  *Long-term Lease Obligations*     ***TransponderLease Agreement***.   On December 28, 1995,PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, whichwas amended on May 10, 2000.  This agreement has a term of ten years commencingon December 18, 1997, unless terminated earlier in accordance with theterms thereof.  The annual basic rent for the transponders was US$18 million in2002.  As of June 30, 2003, PLDT’s aggregate remaining obligation under thisagreement was approximately Php3,861 million.     ***MunicipalTelephone Projects***.   In 1993,PLDT entered into two lease agreements with the Philippine Department ofTransportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under theseagreements, PLDT was granted the exclusive right to perform telecommunicationsmanagement services, to expand services, and to promote the use of theDOTC-contracted facilities in certain covered areas for a period of 15 years.Title to the properties shall be transferred to PLDT upon expiration of thelease term.  As of June 30, 2003, PLDT’s aggregate remaining obligation under theseagreements amounted to approximately Php944 million.  In case of cancellation,PLDT is liable to pay Php100 million under each of the two contracts asliquidated damages.      ***Domestic Fiber Optic Network Submerged Plant Agreement***.   On July 4, 2000, PLDT entered into an agreementwith NTT World Engineering Marine Corporation for submarine cable repair andrelated services for the maintenance of PLDT's domestic fiber optic networksubmerged plant for a period of five years up to July 4, 2005.  Under thisagreement, PLDT is required to pay NTT World Engineering Marine Corporation afixed annual standing charge of US$2 million, excluding cost for the use of aremotely-operated submersible vehicle at US$5,000 for every day of use andrepair cost computed at US$19,000 per day of actual repair.  As of June 30, 2003, PLDT’saggregate remaining obligation under this agreement was approximately Php281million.     ***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 of June 30, 2003, PLDT’s aggregateremaining obligation under these contracts amounted to approximately Php142million.     ***License Agreement with Mobius Management Systems (******Australia******) Pty Ltd., or Mobius****.*PLDTentered into a license agreement with Mobius pursuant to which Mobius hasgranted PLDT a non-exclusive, non-assignable and non-transferable license forthe use of computer software components.  Under this agreement, Mobius is alsorequired to provide maintenance services for a period of one year at noadditional maintenance charge.  PLDT may purchase maintenance services uponexpiration of the first year for a fee of 15% of the current published licensefee.  As of June 30, 2003, PLDT’s aggregate obligation under this agreement wasapproximately Php76 million.     ***OtherLong-term Lease Obligations***.  Wehave various long-term lease contracts for periods ranging from two to tenyears covering certain offices, warehouses, cell sites, telecommunicationequipment locations and various office equipment.     *Unconditional Purchase Obligations*     ***Air Time Purchase Agreement with ACeS InternationalLimited***.  PLDT is a party to aFounder NSP Air Time Purchase Agreement, or ATPA, with AIL, which was amendedin December 1998, under which PLDT is granted the exclusive right to sell ACeSservices in the Philippines.  In exchange, PLDT is required to purchase from AILa minimum of US$5 million worth of air time annually over ten years commencingon the date of commercial operations of the Garuda I satellite.  In the eventAIL’s aggregate billing revenue is less than US$45 million in any given year,PLDT is required to make supplemental air time purchase payments not to exceedUS$15 million per year during the ten-year term.      InMarch 2003, PLDT, together with the other founder shareholders, entered into aStandstill Agreement with AIL suspending the application and enforcement of theminimum and supplemental air time payments under the original ATPA.  In lieu ofthese payments, the parties agreed 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 obliged to purchase from AIL 13,750 satellite phone units for the year2003 at US$395 F.O.B. per unit, subject to quarterly price adjustments.  Theparties to the Standstill Agreement also agreed to negotiate in good faith anduse their best efforts to reach an agreement on a revised ATPA before November15, 2003 that will cover, among other matters, the amended minimum andsupplemental air time payment provisions subject to the approval of AIL’screditors.      As of June 30, 2003, PLDT’s aggregate remaining minimumobligation under this agreement was approximately US$2 million for the air timepayment and US$3 million for the satellite phone units.      ***InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign.***   On September 15, 2000, ePLDT entered into anagreement with VeriSign for the non-exclusive, non-transferable right andlicense to use the VeriSign software, brand and Certification PracticeStatement for the purpose of approving, issuing, suspending or revoking digitalcertificates for users of the Internet or similar open systems in the Philippinesfor a period of seven years.  Under this agreement, ePLDT is required to payVeriSign a certain percentage of the revenue derived from the services subjectto minimum annual royalty payments aggregating to US$1.2 million, which wassubsequently reduced to US$0.9 million, for the seven-year contract period.  Inaddition, ePLDT was required to pay an annual support fee totaling US$0.5million during the first year and US$0.3 million in each year thereafter.  Asof June 30, 2003, ePLDT’s aggregate remaining minimum obligation underthis agreement was approximately US$0.9 million and US$1.2 million in minimumannual royalty payment and annual support fee, respectively.     Effective July 1, 2003, VeriSign has agreed to amend the agreementand issued Addendum 6 to write-off all past dues invoices and payments owed toVeriSign, which were invoiced or scheduled to be invoiced under the agreementprior to this Addendum 6.  All royalty payments and annual support fees duethrough June 2003 will be part of the write-off in the amount of US$0.8million.  For contract year 4 (September 2003-August 2004), annual support feewill be reduced from US$0.3 million to US$ 40,000 and contract years 5-7(September 2003-August 2007) from US$0.3 million to US$0.16 million.  Inaddition, VeriSign agreed to reduce the affiliate revenue sharing rates from50% of suggested retail price to 25% of suggested retail price for bothenterprise and internet products starting July 2003 for 12 months andnegotiable thereafter.     ***License Purchase Agreement with I-Contact Solutions Pte. Ltd.***  On April 2, 2003, iPlus Intelligent Network Inc., oriPlus, entered into an Application Services Provider, or ASP, and ResellerContract with I-Contact Solutions Pte. Ltd., or I-Contact, of Singapore.Under the agreement, iPlus will purchase licenses of the CosmoCall Universe TM IP-basedcontact center solution.  CosmoCall Universe supports multi-channel customerinteractions including telephone, web chat, web voice, web video, webcollaboration, email and voicemail in one high capacity, high availability,multi-tenant platform.  CosmoCall Universe is a complete, unified contactcenter suite that includes ACD, IVR, CTI, predictive dialing, multimediarecording and a complement of powerful management applications.  The aggregate value of these licenses is US$2.1million and these will be delivered quarterly over a two-year period.  Furtherto the agreement, I-Contact will appointiPlus as the exclusive reseller and ASP for the Philippine market and willprovide iPlus with all the necessary support in terms of sales, marketing, andtechnical support.      ***OtherUnconditional Purchase Obligations.***PLDT has various purchase contracts for periods ranging from two tothree years covering the use of fraud management system and satellite hub andremote VSAT network systems.     *OtherLong-term Obligations*     ***MandatoryConversion and Purchase of Shares***.As of June 30, 2003, PLDT had issued a total of 3 million shares of Series VConvertible Preferred Stock, 5 million shares of Series VI ConvertiblePreferred Stock and 4 million shares of Series VII Convertible Preferred Stockin exchange for a total of 58 million shares of Piltel’s Series K, Class IConvertible Preferred Stock pursuant to the debt restructuring of Piltel.  Ofthese PLDT issued preferred shares, 99% of Series V, close to 100% of         Series VI and 100% of SeriesVII Convertible Preferred Stock were issued on June 4, 2001.  In 2002, PLDTissued additional 30,100 shares of Series V Convertible Preferred Stock and14,087 shares of Series VI Convertible Preferred Stock in exchange for a totalof 220,935 shares of Series K, Class I Convertible Preferred Stock of Piltel.Upon receipt of tax clearance from the Bureau of Internal Revenue on March 3, 2003, PLDTissued 92,413 more shares of its Convertible Preferred Stock in exchange for462,065 shares of Piltel’s Series K, Class I Convertible Preferred Stock.  Eachshare of Series V, VI and VII Convertible Preferred Stock is convertible at anytime at the option of the holder into one PLDT common share.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stock and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to PLDTcommon shares.  Under a put option exercisable for 30 days, holders of commonshares received on mandatory conversion will be able to require PLDT topurchase such PLDT common shares for Php1,700or US$36.132 or JP¥4,071.89 per share, depending on the series.     Asof June 30, 2003, 145,320 shares of Series V Convertible PreferredStock and 529,400 shares of Series VI Convertible Preferred Stock had beenconverted to PLDT common shares.  The aggregate value of the put option basedon outstanding shares as of June 30, 2003 was Php20,388million, of which Php13,393 million is payableon June 4, 2008 and Php6,995 million on June4, 2009 if all of the outstanding shares of Series V, VI and VII ConvertiblePreferred Stock were mandatory converted and all the underlying common shareswere put to PLDT.  The market value of the underlying common shares was Php6,260 million, based on the market price ofPLDT’s common stock of Php565 per share as of June 30, 2003.     *Commercial Commitments*     As of June 30, 2003, our outstanding commercialcommitments, in the form of letters of credit, amounted to Php2,909 million.  These commitments will expirewithin a year.     InOctober 1998, Smart entered into a Frame Supply Contract with NokiaTelecommunications OY for the supply of hardware, software and documentationfor its GSM cellular network.  In the same month, Smart and Nokia (Philippines),Inc. signed a Frame Services Contract that covers the design, planning,installation, commissioning, integration, acceptance testing, training, andhandling of the GSM network.  In 2001, Smart issued a Master Purchase Order, orMPO, in the amount of US$200 million in favor of Nokia Networks OY for thepurchase of additional equipment to expand its GSM cellular network.  As of June 30, 2003,unavailed portion of this MPO amounted to US$32 million.  In addition, on May 30, 2003, Smartentered into a Technical Support Services Order, or TSSO, with Nokia (Philippines),Inc. in the amount of US$8 million.  As of June 30, 2003,the unavailed portion under this TSSO valid until December 31, 2003, amounted toUS$7 million.  See Note 21 to the accompanying financial statements for furtherdiscussion.     **Quantitative and Qualitative Disclosures about Market Risks**     Our operations are exposed to various risks, includingliquidity risk, foreign exchange risk and interest rate risk.  The importanceof managing these risks has significantly increased in light of considerablechange and continuing volatility in the Philippine and international financialmarkets.  With a view to managing these risks, we have incorporated financialrisk management functions in our organization, particularly in our treasuryoperations.     ***Liquidity Risk Management***     Weseek to manage our liquidity profile to be able to finance our capitalexpenditures and service our maturing debts.  To cover our financingrequirements, we intend to use internally generated funds and proceeds fromdebt and equity issues and sales of certain assets.      Aspart of our liquidity risk management program, we regularly evaluate ourprojected and actual cash flow information and continuously assess conditionsin the financial markets for opportunities to pursue fund-raising initiatives.These initiatives may include bank loans, export credit agency-guaranteedfacilities, and debt capital and equity market issues.     ***Foreign Exchange Risk Management***     At June 30, 2003, thePhilippine peso depreciated against the U.S. dollar to Php53.522= US$1.00 from Php53.254 = US$1 at December 31, 2002.In contrast, at June 30, 2002, the Philippine peso appreciated against the U.S.dollar to Php50.541 = US$1.00 from Php51.690 = US$1.00 at December 31, 2001.  In the firsthalf of 2003, PLDT capitalized net foreign exchange losses of Php356 million, as against capitalization of netforeign exchange gains of Php2,018 million inthe first half of 2002.  Of these capitalized net foreign exchange losses andgains, loss of Php103 million in the firsthalf of 2003 and gains of Php2,614 million inthe same period in 2002, were attributable to foreign currency-denominatedliabilities used to finance our capital investments and were therefore recordedas additions to the carrying value of the related property accounts.      The following table shows our consolidated andnon-consolidated foreign currency-denominated monetary assets and liabilitiesand their peso equivalents as of June 30, 2003 and December 31, 2002:     
 

**June 30, 2003**(1)

 

**December 31, 2002**(2)

** **

**U.S. dollars**

** **

**Pesos**

** **

**U.S. dollars**

** **

**Pesos**

** **

**(Unaudited)**

 

**(Audited)**

** **

 

 

**(in millions)**

 

 

**Consolidated**

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

US$54

 

Php2,870

 

US$76

 

Php4,033

Accounts receivable

193

 

10,354

 

148

 

7,910

 

247

 

13,224

 

224

 

11,943

Liabilities

 

 

 

 

 

 

 

Accounts payable

40

 

2,136

 

56

 

2,969

Accrued expenses and other current liabilities

175

 

9,359

 

165

 

8,782

Notes payable

6

 

321

 

6

 

320

Long-term debt

2,765

 

146,298

 

2,957

 

156,398

Deferred credits and other noncurrent liabilities

50

 

2,689

 

50

 

2,676

 

3,036

 

160,803

 

3,234

 

171,145

Net foreign currency-denominated liabilities

US$2,789

 

Php147,579

 

US$3,010

 

Php159,202

**Non-Consolidated**

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

US$39

 

Php2,111

 

US$49

 

Php2,602

Accounts receivable

142

 

7,581

 

116

 

6,158

 

181

 

9,692

 

165

 

8,760

Liabilities

 

 

 

 

 

 

 

Accounts payable

2

 

114

 

23

 

1,220

Accrued expenses and other current liabilities

46

 

2,476

 

47

 

2,476

Notes payable

6

 

321

 

6

 

320

Long-term debt

2,428

 

128,265

 

2,558

 

135,158

Deferred credits and other noncurrent liabilities

50

 

2,689

 

50

 

2,676

 

2,532

 

133,865

 

2,684

 

141,850

Net foreign currency-denominated liabilities

US$2,351

 

Php124,173

 

US$2,519

 

Php133,090
  ________________     (1)  The exchange rate used was Php53.522 = US$1.00.  (2)  The exchange rate used was Php53.254 = US$1.00.     Whilea certain percentage of our revenues is either linked to or denominated in U.S.dollars, substantially all of our indebtedness, a substantial portion of ourcapital expenditures and a portion of our operating expenses are denominated inforeign currencies, mostly in U.S. dollars.  * *  Asof June 30, 2003, approximately 96% of both our total consolidated andnon-consolidated debts were denominated in foreign currencies.  Of our foreigncurrency-denominated debts, 6% and 7% are in Japanese yen, on a consolidatedand non-consolidated basis, respectively, and the balance in U.S. dollars.Thus, a weakening of the peso against the U.S. dollar or Japanese yen willincrease both the principal amount of our unhedged foreign currency-denominateddebts (representing 61% and 58% of our consolidated and non-consolidated debts,respectively), and interest expense on our debt in peso terms.  In addition,many of our financial ratios and other financial tests will be negativelyaffected.  If, among other things, the value of the peso against the U.S.dollar drops from its current level, we may be unable to maintain compliancewith these ratios, which could result in acceleration of some or all of ourindebtedness.  For further information on our loan covenants, see “Liquidityand Capital Resources — Financing Activities — Covenants” above and Note 13 tothe accompanying financial statements.     Tomanage our foreign exchange risks, stabilize cash flows, and improve investmentand cash flow planning, we enter into forward foreign exchange 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 nor readily available.     Specifically,we use forward foreign exchange contracts and foreign currency swap contractsto manage the foreign exchange risk associated with our foreigncurrency-denominated loans.  As of June 30, 2003,PLDT’s outstanding forward foreign exchange contracts amounted to US$166million and JP¥3,072 million, while those of Smart amounted to US$131 million.Also as of June 30, 2003, PLDT had outstanding principal-only long-termcross-currency swap contracts totaling US$725 million, while Smart’s long-term,cross-currency swap contract matured on April 30, 2003.The final exchange has been made and the contract is now terminated.       InMarch 2003, PLDT utilized structures incorporating currency options to hedgethe maturing principal on its 2003 and 2004 fixed rate notes.  As of June 30, 2003, PLDThad outstanding currency option contracts amounting to US$70 million.  The netmark-to-market gain on outstanding currency option contracts amounted to aboutPhp14 million as of June 30, 2003, as confirmed by counterparties.     Forfurther discussions of these contracts, see Note 24 to the accompanyingfinancial statements.     ***Interest Rate Risk Management***     From time to time and on a limited basis, we enterinto interest rate swap agreements in order to manage our exposure to interestrate fluctuations.  As of June 30, 2003, PLDT had an outstanding interest rate swap contractamounting to US$125 million (Php6,690 million).     We make use of hedging instruments and structuressolely for reducing or eliminating financial risks associated with ourliabilities and not for trading or speculative purposes.     **Effect of Peso Depreciation**  ** **  In the first half of 2003 and 2002, our operatingrevenues, which have been received in U.S. dollars or in respect of which wehave been able to adjust our service fees to reflect changes in thepeso-to-dollar exchange rate exceeded our U.S. dollar-linked operatingexpenses.  As a result, the depreciation of the peso against the dollar overthis period had a positive net impact on our operating profit.  However, sincesubstantially all of our indebtedness is denominated in U.S. dollars, suchdepreciation has also increased our interest expense in peso terms andincreased the peso amounts of our U.S. dollar-denominated indebtedness.  PLDThas capitalized its foreign exchange losses in respect of its U.S.dollar-denominated indebtedness, and net income in future periods is expectedto be negatively affected as a result of higher depreciation expense resultingfrom such capitalization.  Our cash flows are negatively affected by the higherpeso cost of repaying U.S. dollar-denominated debts, and our ability to complywith financial covenants and ratios is negatively affected by the increase inthe amount of our debts and our interest expenses in peso terms.  ** **  **Impact of Inflation and Changing Prices**     Inflation can be a significant factor in thePhilippine economy, and we are continually seeking ways to minimize itsimpact.  In recent periods, while decreases in the relative value of the pesohave had a significant effect on us, we do not believe inflation has had amaterial impact on our operations.  The average inflation rate in the Philippines inthe first half of 2003 was 2.9%, compared to 3.5%, in the first half of 2002.      **OTHER INFORMATION**  ** **  **PLDT Set to Launch eDAS**  * *  PLDTwill replace its existing 114 directory assistance with the new 187 enhanceddirectory assistance services, or eDAS, incorporating new value-added featureson October 1, 2003 as part of its commitment to modernize its system andimprove public service.     eDASuses a new software system that is comparable to systems used in developedcountries, providing enhanced search functions that will enable operators toretrieve information in a fast, efficient and accurate manner.  Callers will becharged a basic rate of Php3.00 per inquiry made due to the increasing costs ofproviding personal service for directory assistance and the software upgradethat offers more advanced features.  ** **  **Related Party Transactions**     In the ordinary course of business, companiesbelonging to the PLDT Group are engaged in arm’s-length intercompanytransactions.  We believe that the terms of these transactions are comparablewith those available from unrelated parties.                                                                  -  Telecommunications servicesprovided within the PLDT Group  —interconnection agreements among/between PLDT, Smart, Piltel, Clark Telecom,Subic Telecom, MaraTel and PLDT Global under terms similar with those agreedwith other telecommunications providers outside the PLDT Group.                                                                   -  Transponder Lease Agreementbetween PLDT and Mabuhay Satellite  —an agreement pursuant to which Mabuhay Satellite leases to PLDT C-bandtransponders on board the Agila II satellite, in consideration of a basicrent.  Rentals under this agreement totaled Php385 million and Php457 millionfor the six months ended June 30, 2003 and 2002, respectively. PLDT’s outstandingobligations under this agreement amounted to Php87 million as of June 30, 2003 andPhp269 million as of December 31, 2002.                                                                     -  Facilities Management Agreementbetween PLDT and Piltel  — anagreement under which PLDT undertakes the management, operation and maintenanceof Piltel’s regional telecommunications facilities as well as Executive OrderNo. 109, network operations and services, including fixed line build-outinstallations, public calling offices, payphone facilities, and the systemsrequired to support these services.  Management fees under this agreementtotaled Php41 million and Php43 million for the six months ended June 30, 2003 and2002, respectively.  PLDT’s outstanding receivables under this agreementamounted to Php299 million as of June 30, 2003 and Php258 million as of December 31, 2002.                                                                       -  Facilities Management Agreementbetween Subic Telecom and Piltel  — anagreement under which Subic Telecom manages the regional telephone network,customer operations, network operations and payphones of Piltel in Subic and Olongapo City.Management fees under this agreement totaled Php11 million for each of the sixmonths period ended June 30, 2003 and 2002.  Subic Telecom’s outstanding receivablesunder this agreement amounted to Php4 million as of June 30, 2003 and Php2 million asof December 31, 2002.                                                                         -  Agreements between Smart andPiltel  — agreements relating to theintegration of Smart’s and Piltel’s operations under which Smart undertakes tomanage Piltel’s facilities, customer services and administrative support andmanagement services.  Fees under these management agreements totaled Php346million and Php323 million for the six months ended June 30, 2003 and 2002,respectively.  Under these agreements, Smart had outstanding receivables ofPhp530 million as of June 30, 2003 and Php569 million as of December 31, 2002.  In addition,Smart also entered into a facilities service agreement with Piltel under whichPiltel accesses Smart's existing GSM network and facilities to enable Piltel tooffer prepaid cellular service using GSM technology in exchange forapproximately 50% of Piltel's revenues, net of interconnection expenses.  Facilityfees under this service agreement totaled Php1,823 million and Php1,076 millionfor the six months ended June 30, 2003 and 2002, respectively.  Smart’s outstandingreceivables under this agreement amounted to Php260 million as of June 30, 2003 and Php458 million as of December 31, 2002.                                                                           -  Air Time Purchase Agreementbetween PLDT and PT Asia Cellular Satellite and Related Agreements  — an agreement under which PLDT has been granted theexclusive right to sell ACeS services in the Philippines.  In March 2003,PLDT, together with the founder shareholders, entered into a StandstillAgreement in respect of the Air Time Purchase Agreement.  See Notes 16 and 21to the accompanying financial statements for further discussion.                                                                             -  Agreements between Smart andACeS Philippines  — agreements underwhich Smart   (1) provides ACeS Global Mobile Personal Communications by Satellite, or GMPCS,services, in the Philippines, (2) undertakes the management, maintenance andoperations of GMPCS, and (3) provides certain administrative support andservices in certain aspects of ACeS Philippines’ business operations.  Feesunder these agreements, net of ACeS Philippines’ share, totaled Php36 millionand Php20 million for the six months ended June 30, 2003and 2002, respectively.  Under these agreements, Smart had outstanding payablesof Php96 million as of June 30, 2003, and no outstanding obligation as of December 31, 2002.     In addition, transactions to which PLDT or itssubsidiary was a party, in which a director or key officer or owner of morethan 5% of the common shares of PLDT, or any member of the immediate family ofa director or key officer or owner of more than 5% of the common shares of PLDThad a direct or indirect material interest as of June 30, 2003 and December 31,2002 and for the six months ended June 30, 2003 and 2002 are as follows:                                                                               -  Agreements with NTTCommunications and/or its Affiliates  —agreements under which (1) NTT Communications provides advisory services forvarious business areas of PLDT; (2) NTT World Engineering Marine Corporationprovides maintenance services to PLDT’s domestic fiber optic network; (3) PLDTis licensed to market managed data and other services using NTT Communications’Arcstar brand; and (4) PLDT and NTT Communications agree to cooperativearrangements for international telecommunication services.  Fees under theseagreements totaled Php147 million and Php167 million for the six months ended June 30, 2003 and2002, respectively.  PLDT’s outstanding obligations under these agreementsamounted to Php41 million and Php36 million as of June 30, 2003 and December 31, 2002.                                                                                 -  Agreements between Smart and  Asia Link B.V . — agreements under whichAsia Link undertakes to provide technical support services for the operationsand maintenance of Smart’s CMTS.  Fees under these agreements totaled Php147million and Php207 million for the six months ended June 30, 2003 and 2002,respectively.  Under these agreements, Smart had outstanding payables of Php26million as of June 30, 2003 and Php31 million as of December 31, 2002.  Asia Link isa subsidiary of First Pacific.                                                                                   -  Agreement with Foote, Cone& Belding Worldwide, or FCB Worldwide  — an agreement under which FCB Worldwide provides consultancy andadvisory services to PLDT.  The chairman of PLDT’s board of directors is thenon-executive chairman of FCB Worldwide’s representative office in the Philippines.                                                                                     -  Agreements relating toinsurance companies  — Gotuaco delRosario and Associates, or Gotuaco, acts as the broker for certain insurancecompanies to cover certain insurable properties of the PLDT Group.  Insurancepremiums are remitted to Gotuaco and the broker’s fees are settled betweenGotuaco and the insurance companies.  In addition, PLDT has signed an insurancepolicy with Malayan Insurance Co. Inc., or Malayan, wherein premiums are paiddirectly to Malayan.  Premium payments to Gotuaco and Malayan covering thetwelve-month period ending July 31, 2003 including payments subsequent to 2002totaled Php566 million.  Two directors of PLDT have a direct/indirect interestin or serve as director/officer of Gotuaco and Malayan.     Fora more detailed discussion of the related party transactions enumerated above,see Note 16 to the accompanying**financial statements.        
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**FINANCIALSTATEMENTS**

** **

AS OF JUNE 30, 2003 AND DECEMBER 31, 2002

AND FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND2002

** **

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**BALANCE SHEETS**

**(in million pesos)**

 

** **

**Consolidated**

 

**Non-Consolidated**

** **

**June 30,  2003**

**(Unaudited)**

** **

December 31, 2002

(As restated – 

Note 3)

 

**June 30,  2003**

**(Unaudited)**

 

December 31, 2002

(As restated –

Note 3)

**ASSETS**

**Current Assets**

** **

** **

 

 

 

Cash and cash equivalents (Notes 5 and 23)

**11,116**

10,876

 

**3,966**

4,165

Accounts receivable – net (Notes 6, 16 and 23)

**20,103**

20,124

 

**17,860**

19,376

Inventories and supplies – net (Note 7)

**4,432**

4,507

 

**2,510**

2,709

Deferred income tax – net (Notes 3 and 19)

**4,750**

3,772

 

**4,570**

3,002

Prepayments and other current assets

**2,840**

1,879

 

**2,225**

1,403

Total Current Assets

**43,241**

41,158

 

**31,131**

30,655

**Noncurrent Assets**

 

** **

 

 

** **

Property, plant and equipment –****net (Notes 7, 8, 13 and 21)

**244,648**

252,025

 

**186,007**

190,722

Investments****– net (Notes 2, 3, 9, 13, 15, 16, 18 and 21)

**1,732**

5,470

 

**37,012**

39,425

Other noncurrent assets – net (Notes 9, 10 and 16)

**4,723**

4,677

 

**1,721**

1,613

Total Noncurrent Assets

**251,103**

262,172

 

**224,740**

231,760

 

**294,344**

303,330

 

**255,871**

262,415

 

** **

** **

 

** **

 

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

** **

** **

 

** **

 

Notes payable (Notes 11 and 23)

**2,785**

760

 

**2,625**

720

Accounts payable (Notes 16 and 23)

**7,181**

9,694

 

**6,189**

7,396

Accrued expenses and other current liabilities (Notes 3, 12, 16 and 23)

**16,186**

12,531

 

**6,932**

5,537

Current portion of long-term debt (Notes 8, 13, 23 and 24)

**20,664**

19,176

 

**13,440**

11,962

Dividends payable (Note 15)

**538**

424

 

**516**

424

Income tax payable (Note 19)

**886**

982

 

–

538

Total Current Liabilities

**48,240**

43,567

 

**29,702**

26,577

**Noncurrent Liabilities**

 

** **

 

 

** **

Long-term debt – net of current portion (Notes 8, 13, 23 and 24)

**136,167**

148,587

 

**118,470**

127,362

Deferred income tax – net (Note 19)

**11,542**

10,699

 

**10,395**

9,231

Deferred credits and other noncurrent liabilities (Notes 3, 14, 16 and 17)

**8,554**

11,540

 

**8,177**

11,157

Total Noncurrent Liabilities

**156,263**

170,826

 

**137,042**

147,750

**Minority Interest in Consolidated Subsidiaries**

**714**

849

 

–

–

**Stockholders’ Equity**(Notes 2 and 15)

**89,127**

88,088

 

**89,127**

88,088

 

**294,344**

303,330

 

**255,871**

262,415

* *

*See accompanying Notes to Financial Statements.*

**PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF INCOME**

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

** **

** **

**Consolidated**

 

**Non-Consolidated**

 

**Consolidated**

 

**Non-Consolidated**

 
** **

**Six Months Ended June 30**

** **

**Three Months Ended June 30**

 
** **

**2003**

2002

 

**2003**

2002

 

**2003**

2002

 

**2003**

2002

 
** **

(Unaudited)

 
**OPERATING REVENUES** (Notes 3 and 16)

** **

 

 

** **

 

 

 

 

 

 

 

 
Fixed line services:

** **

 

 

** **

 

 

 

 

 

 

 

 
Local exchange

**10,465**

10,719

 

**10,413**

10,660

** **

**5,217**

5,215

** **

**5,192**

5,186

 
International long distance

**6,049**

5,223

 

**5,718**

5,016

** **

**2,996**

2,714

** **

**2,848**

2,526

 
National long distance

**3,293**

3,917

 

**3,257**

3,875

** **

**1,655**

2,079

** **

**1,633**

2,058

 
Data and other network

**2,876**

2,718

 

**2,775**

2,672

** **

**1,454**

1,420

** **

**1,372**

1,380

 
Miscellaneous

**180**

125

 

**357**

298

** **

**102**

42

** **

**194**

177

 
 

**22,863**

22,702

 

**22,520**

22,521

** **

**11,424**

11,470

** **

**11,239**

11,327

 
Wireless services

**22,493**

14,829

 

–

–

** **

**11,553**

7,505

** **

–

–

 

Information and communications technology services

**863**

396

 

–

–

** **

**506**

278

** **

–

–

 

 

**46,219**

37,927

 

**22,520**

22,521

** **

**23,483**

19,253

** **

11,239

11,327

 
**OPERATING EXPENSES**

 

** **

 

 

 

** **

** **

 

** **

** **

 

 
Depreciation and amortization (Note 8)

**11,717**

11,572

 

**6,431**

6,460

** **

**5,904**

5,966

** **

**3,210**

3,242

 
Compensation and benefits (Note 17)

**5,582**

5,117

 

**3,637**

3,603

** **

**2,841**

2,605

** **

**1,770**

1,825

 
Selling and promotions (Note 3)

**4,853**

3,497

 

**629**

614

** **

**2,591**

1,974

** **

**336**

283

 
Maintenance (Note 16)

**2,990**

2,488

 

**1,709**

1,575

** **

**1,653**

1,386

** **

**938**

790

 
Provision for doubtful accounts (Note 6)

**1,888**

1,594

 

**1,404**

1,404

** **

**758**

791

** **

**702**

702

 
Rent (Note 16)

**1,682**

1,256

 

**846**

792

** **

**840**

555

** **

**414**

368

 
Professional and other service fees (Note 16)

**841**

781

 

**455**

469

** **

**453**

419

** **

**234**

238

 
Taxes and licenses (Note 22)

**635**

441

 

**287**

273

** **

**357**

225

** **

**165**

141

 
Other operating costs (Note 16) 

**1,757**

1,037

 

**804**

537

** **

**882**

480

** **

**412**

238

 
 

**31,945**

27,783

 

**16,202**

15,727

** **

**16,279**

14,401

** **

**8,181**

7,827

 
**NET OPERATING INCOME**

**14,274**

10,144

 

**6,318**

6,794

** **

**7,204**

4,852

** **

**3,058**

3,500

 
**OTHER EXPENSES – Net**(Notes 3, 6, 8, 9, 10, 13, 16, 18 and 23)

**11,569**

6,594

 

**4,941**

3,559

** **

**7,962**

3,363

** **

**4,224**

2,083

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

**2,705**

3,550

 

**1,377**

3,235

** **

**(758)**

1,489

** **

**(1,166)**

1,417

 
**PROVISION FOR INCOME TAX** (Notes 3 and 19)

**1,142**

830

 

**(403)**

527

** **

**163**

338

** **

**(467)**

280

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

**1,563**

2,720

 

**1,780**

2,708

** **

**(921)**

1,151

** **

**(699)**

1,137

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

**(217)**

12

 

**–**

–

** **

**(222)**

14

** **

**–**

**–**

 
**NET INCOME**

**1,780**

2,708

 

**1,780**

2,708

** **

**(699)**

1,137

** **

**(699)**

1,137

 
**Earnings Per Common Share** (Note 20)

 

** **

 

** **

 

** **

** **

 

** **

** **

 

 
Basic

**5.51**

11.26

 

**5.51**

11.26

** **

**(6.61)**

4.35

** **

**(6.61)**

4.35

 
Diluted

**5.51**

11.14

 

**5.51**

11.14

** **

**(6.61)**

4.35

** **

**(6.61)**

4.35

 
* *

*See accompanying Notes to Financial Statements.*

* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(in million pesos)**

** **

 

**Preferred Stock**

** **

**Common Stock**

** **

**Capital in Excess of  Par Value**

** **

**Retained Earnings**

** **

**Total**

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2002:

 

 

 

 

 

 

 

 

 

As previously reported

4,242

 

845

 

48,906

 

34,635

 

88,628

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

–

 

–

 

–

 

(2,066)

 

(2,066)

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

–

 

–

 

–

 

(186)

 

(186)

As restated

4,242

 

845

 

48,906

 

32,383

 

86,376

Net income for the period:

**–**

 

–

 

–

 

**–**

 

**–**

As previously reported

 

 

 

 

 

 

2,755

 

2,755

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

–

 

–

 

–

 

(30)

 

(30)

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

–

 

–

 

–

 

(17)

 

(17)

As restated

**–**

 

**–**

 

**–**

 

2,708

 

2,708

Cash dividends

**–**

 

–

 

–

 

(813)

 

(813)

Partial redemption of Series IV Preferred Stock (Note 15)

(72)

 

**–**

 

**–**

 

**–**

 

(72)

Issuance of capital stock (Note 15)

328

 

**–**

 

16

 

–

 

344

Balances at June 30, 2002 (Unaudited)

4,498

 

845

 

48,922

 

34,278

 

88,543

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2003:

 

 

 

 

 

 

 

 

 

As previously reported

4,585

 

847

 

48,953

 

34,004

 

88,389

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

**–**

** **

**–**

** **

**–**

** **

(301)

 

(301)

As restated

4,585

** **

847

** **

48,953

** **

33,703

 

88,088

Net income for the period

**–**

** **

**–**

** **

**–**

** **

1,780

 

1,780

Cash dividends

**–**

** **

**–**

** **

**–**

** **

(785)

 

(785)

Issuance of capital stock (Note 15)

33

** **

**–**

** **

11

** **

**–**

 

44

**Balances at****June 30, 2003****(Unaudited)**

4,618

** **

847

** **

48,964

** **

34,698

 

89,127

* *

*See accompanying Notes to Financial Statements.*

* *

* *

**PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF CASH FLOWS**

**(in million pesos)**

** **

** **

**Consolidated**

 

**Non-Consolidated**

 

**Consolidated**

 

**Non-Consolidated**

** **

**Six Months Ended June 30**

** **

**Three Months Ended June 30**

** **

**2003**

2002

 

**2003**

2002

 

**2003**

2002

 

**2003**

2002

** **

(Unaudited)

** **

** **

 

 

** **

** **

** **

** **

** **

** **

** **

 

**CASH FLOWS FROM OPERATINGACTIVITIES**

** **

 

 

** **

 

** **

** **

** **

** **

** **

 

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

**2,705**

3,550

 

**1,377**

3,235

** **

**(758)**

1,489

** **

**(1,166)**

1,417

Adjustments for:

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Depreciation and amortization

**11,717**

11,572

 

**6,431**

6,460

** **

**5,904**

5,966

** **

**3,210**

3,242

Provision for doubtful accounts

**1,888**

1,594

 

**1,404**

1,404

** **

**758**

791

** **

**702**

702

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

**1,616**

721

 

**(3,202)**

(1,424)

** **

**1,612**

340

** **

**(911)**

(465)

Others

**3,308**

374

 

**1,241**

–

** **

**2,691**

297

** **

**1,246**

–

Interest expense

**6,094**

7,209

 

**4,830**

5,596

** **

**2,865**

3,828

** **

**2,276**

3,064

Interest income

**(476)**

(526)

 

**(51)**

(36)

 

**(200)**

(268)

** **

**(37)**

(28)

Operating income before working capital changes

**26,852**

24,494

 

**12,030**

15,235

** **

**12,872**

12,443

** **

**5,320**

7,932

Decrease (increase) in:

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Accounts receivable

**(1,837)**

400

 

**(605)**

(2,008)

** **

**81**

660

** **

**(165)**

(557)

Inventories and supplies

**(409)**

879

 

**199**

759

** **

**(128)**

2,452

** **

**231**

605

Prepayments and other current assets

**238**

190

 

**331**

(181)

** **

**262**

695

** **

**220**

92

Increase (decrease) in:

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Accounts payable

**(2,418)**

(4,881)

 

**(1,248)**

(2,456)

** **

**(1,016)**

(4,211)

** **

**119**

(1,423)

Accrued expenses and other current liabilities

**2,002**

508

 

**65**

333

** **

**656**

751

** **

**(189)**

51

Cash generated from operations

**24,428**

21,590

 

**10,772**

11,682

** **

**12,727**

12,790

** **

**5,536**

6,700

Income taxes paid

**(1,413)**

(295)

 

**(538)**

(181)

** **

**(1,398)**

(285) 

** **

**(538)**

(181)

Net cash provided by operating activities

**23,015**

21,295

 

**10,234**

11,501

** **

**11,329**

12,505

** **

**4,998**

6,519

**CASH FLOWS FROM INVESTING  ACTIVITIES**

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Net additions to property, plant and equipment

**(4,687)**

(6,700)

 

**(855)**

(1,865)

** **

**(3,150)**

(2,927)

** **

**(470)**

(1,421)

Interest paid – capitalized to property, plant and equipment

**(541)**

(753)

 

**(531)**

(640)

** **

**(271)**

(367)

** **

**(268)**

(315)

Net disposals of (additions to) investments in shares of stocks

**(75)**

(192)

 

**–**

(186)

** **

**(75)**

(192)

** **

–

(186)

Dividends received

**–**

–

 

**4,300**

–

** **

**–**

–

** **

**4,300**

–

Decrease in other noncurrent assets

**(104)**

(146)

 

**(108)**

(253)

** **

**(17)**

218

** **

**24**

44

Interest received

**533**

346

 

**51**

34

** **

**172**

210

** **

**36**

27

Net cash provided by (used in) investing activities

**(4,874)**

(7,445)

 

**2,857**

(2,910)

** **

**(3,341)**

(3,058)

** **

**3,622**

(1,851)

* *

*(Forward)*
****
**PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

** **

**STATEMENTS OF CASH FLOWS (continued)**

**(in million pesos)**

** **

** **

**Consolidated**

 

**Non-Consolidated**

 

**Consolidated**

 

**Non-Consolidated**

** **

**Six Months Ended June 30**

** **

**Three Months Ended June 30**

** **

**2003**

2002

 

**2003**

2002

 

**2003**

2002

 

**2003**

2002

** **

(Unaudited)

 
** **

** **

 

 

** **

** **

** **

** **

** **

** **

** **

 

**CASH FLOWS FROM FINANCING  ACTIVITIES**

** **

 

 

** **

 

** **

** **

 

** **

** **

 

Proceeds from long-term debt

**7,562**

26,450

 

**7,475**

20,385

** **

**6,317**

21,873

** **

**6,317**

18,571

Payments of long-term debt

**(18,763)**

(21,315)

 

**(14,991)**

(15,284)

** **

**(12,672)**

(16,732)

** **

**(11,091)**

(12,135)

Proceeds from (payments of) notes payable 

**2,026**

(2,429)

 

**1,904**

(979)

** **

**1,906**

(1,723)

** **

**1,904**

(825)

Interest paid – net of capitalized portion

**(6,080)**

(6,527)

 

**(4,909)**

(4,887)

** **

**(3,242)**

(3,221)

** **

**(2,811)**

(2,480)

Decrease in deferred credits and other noncurrent liabilities

**(1,943)**

(2,362)

 

**(2,098)**

(2,085)

** **

**(1,344)**

(1,700)

** **

**(1,516)**

(1,824)

Cash dividends paid

**(694)**

(762)

 

**(694)**

(762)

** **

**(326)**

(315)

** **

**(326)**

(315)

Proceeds from issuance of capital stock

**43**

345

 

**43**

345

** **

**3**

56

** **

**3**

56

Redemption of preferred stock

**–**

(72)

 

**–**

(72)

** **

–

–

** **

–

–

Net cash used in financing activities

**(17,849)**

(6,672)

 

**(13,270)**

(3,339)

** **

**(9,358)**

(1,762)

** **

**(7,520)**

1,048

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

**(52)**

(238)

 

**(20)**

(170)

** **

**(85)**

(201)

** **

**(33)**

(145)

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

**240**

6,940

 

**(199)**

5,082

** **

**(1,455)**

7,484

** **

**1,067**

5,571

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

**10,876**

4,123

 

**4,165**

2,336

** **

**12,571**

3,579

** **

**2,899**

1,847

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

**11,116**

11,063

 

**3,966**

7,418

** **

**11,116**

11,063

** **

**3,966**

7,418

* *

*See accompanying Notes toFinancial Statements.*
****
**PHILIPPINELONG DISTANCE TELEPHONE COMPANY**

** **

**NOTES TO FINANCIAL STATEMENTS**

 

 

**1.          ****CorporateInformation**

** **

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

 

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

 

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

 

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

 

Asof June 30, 2003, the PLDT Group had 19,547 employees while PLDT, on astand-alone basis, had 11,237 employees, compared to 19,139 and 12,131employees, respectively, as of December 31, 2002.  

 

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

 

 

 

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

** **

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

 

Ourunaudited financial statements include, in our opinion, all adjustmentsconsisting only of normal recurring adjustments, necessary to present fairlythe results of operations for the interim periods.  The results of operationsfor the six months ended June 30, 2003 are not necessarily indicative of the results ofoperations that may be expected for the full year.

 

Inpreparing the unaudited June 30, 2003 financial statements, we followed the same accountingpolicies, except as discussed in *Note 3 – Accounting Changes, Investment inePLDT,* and methods of computation that we had applied in the preparation ofthe audited December 31, 2002 financial statements.

 

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

 

** **

** **

**Percentage of Ownership**

** **

** **

**As of June 30,**

**Name of Subsidiary**

**Principal Activity**

**2003**

2002

** **

 

** **

** **

**Fixed Line**

 

** **

** **

PLDT Clark Telecom, Inc., or Clark Telecom

Telecommunications services

**100.0**

100.0

Subic Telecommunications Company, Inc.,  or Subic Telecom

Telecommunications services

**100.0**

100.0

Smart–NTT Multimedia, Inc., or SNMI

Data and network services

**100.0**

100.0

PLDT Global Corporation, or PLDT Global,  and subsidiaries

Telecommunications services

**100.0**

100.0

Maranao Telephone Company, Inc.,  or MaraTel

Telecommunications services

**97.5**

92.3

Bonifacio Communications Corporation, or BCC

Telecommunications, infrastructure and related value-added services

**75.0**

37.5

**Wireless**

 

 

** **

Smart Communications, Inc., or Smart, and subsidiaries

Cellular mobile services

**100.0**

100.0

Telesat, Inc., or Telesat

Satellite communications services

**94.4**

94.4

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services

**88.5**

88.5

Mabuhay Satellite Corporation, or Mabuhay Satellite

Satellite communications services

**67.0**

67.0

**Information and Communications Technology**

 

 

** **

ePLDT, Inc., or ePLDT, and subsidiaries

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

**100.0**

100.0

* *

 

Inthe non-consolidated financial statements, investments in subsidiaries, exceptfor the investments in Pilipino Telephone Corporation, or Piltel, (see *Note3 – Accounting Changes, Investments in Piltel)*, are accounted for under theequity method.

 

Subsidiaries are consolidatedfrom the date when control is transferred to the PLDT Group and cease to beconsolidated from the date when control is transferred out of the PLDT Group.

 

Consolidated financialstatements are prepared using uniform accounting policies for like transactionsand other events in similar circumstances.  Intercompany balances andtransactions, including intercompany profits and unrealized profits and losses,are eliminated.

 

Minority interests representthe equity interests in MaraTel, BCC, Telesat, ACeS Philippines and MabuhaySatellite not held by the PLDT Group.

* *

***Investments in Sharesof Stock***

 

Investments in shares ofstock of companies where PLDT’s ownership interest ranges from 20% to 50%(collectibly referred to as associates), except for the investments in Piltel(see *Note 3 – Accounting Changes, Investments in Piltel*), are accountedfor under the equity method of accounting.  These are entities in which thePLDT Group has significant control and influence and which is neither asubsidiary nor a joint venture of the PLDT Group.  Under the equity method, theinvestments in associates are carried in the balance sheets at cost pluspost-acquisition changes in the PLDT Group’s share in net assets of associates,less impairment in value, if any.  The statements of income reflect the PLDTGroup’s share in the results of operations of associates.  Unrealized gains arisingfrom transactions with our associates are eliminated to the extent of the PLDTGroup’s interests in associates, against the investments in associates.  ThePLDT Group’s investments in its associates include goodwill (net of accumulatedamortization) on acquisition, which are treated in accordance with theaccounting policy for goodwill, see *Note 4 – Summary of SignificantAccounting Policies*.

 

Other investments incompanies over which no significant influence is exercised are stated at cost,less allowance for any significant and permanent decline in market value.

 

 

**3.          ****AccountingChanges**

** **

***Revenue Recognition forPrepaid Cards***

 

In 2002, we changed ourrevenue recognition policy for prepaid cards and have now elected to recognizethe revenue based on actual subscribers’ usage of the prepaid cards for bettermatching of revenues and expenses.  Prior to 2002, we recognized revenues atthe time of sale.

 

We have accounted for thischange in accounting policy retroactively and have accordingly restated ourcomparative financial statements to conform to the changed policy.  Theafter-tax effect of the change was a decrease of Php30 million in consolidatednet income for the six months ended June 30, 2002and a reduction of Php2,066 million in beginning retained earnings in 2002.Basic and diluted earnings per common share increased by Php0.18 and Php0.17,respectively, for the six months ended June 30, 2002.

 

Consolidated unearnedrevenues related to unused prepaid cards sold amounting to Php1,714 million andPhp2,022 million as of June 30, 2003 and December 31, 2002 and non-consolidatedunearned revenues amounting to Php498 million and Php431 million as of June 30,2003 and December 31, 2002, respectively, are included in “Accrued expenses andother current liabilities” in the balance sheets.

 

***Investments in Piltel***

 

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

 

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

 

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

 

Under the terms of Piltel’sdebt restructuring plan, Piltel is not permitted to declare or pay anydividends, repay or pay interest on any financial indebtedness to PLDT Groupand purchase, cancel, redeem or otherwise repay any of its share capital untilall amounts owed to Piltel creditors have been paid or discharged.  As of June 30, 2003 and December 31, 2002,Piltel reported a capital deficiency of Php19,635 million and Php19,100million, respectively.

 

In addition, PLDT issued aLetter of Support for the benefit of Piltel and its creditors under which PLDThas agreed to cover any funding shortfalls of Piltel up to a maximum amount ofUS$150 million, of which US$50 million (approximately Php2,689 million) remained undrawn as of June 30,2003.

 

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

 

The change in method ofaccounting for investments in Piltel from equity method to cost method does nothave any effect on our financial statements.

 

***Adoption of SFAS 38/IAS38 “Intangible Assets”***

 

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

 

As at January 1, 2003,ePLDT’s and certain of its subsidiaries’ consolidated unamortized preoperatingexpenses amounted to Php311 million, of which Php301 million, representingePLDT’s equity interest, was retroactively adjusted to beginning retainedearnings.  Preoperating expenses incurred for the six months ended June 30, 2003 werecharged to operations.  The effect of the application of SFAS 38/IAS 38 was adecrease of Php17 million in the consolidated and non-consolidated net incomefor the six months ended June 30, 2002 and reductions in beginning retained earnings amounting to Php301million in 2003 and Php186 million in 2002.  No tax effect adjustment wasconsidered in the application of SFAS 38/IAS 38 due to income tax holidayenjoyed by ePLDT and its subsidiaries.

 

 

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

 

Our significant accountingpolicies and practices are discussed below to facilitate the understanding ofour financial statements:

 

***Revenue Recognition***

 

Revenue for services isstated at amounts invoiced to customers and excludes value-added tax.  Weprovide fixed-line communication services, wireless communication services, andinformation and communications technology services.  We provide such servicesto business, residential, payphone and wireless customers.  Revenue, whichexcludes value-added tax, represents the value of fixed consideration that hasbeen received or is receivable.  Revenue is recognized when there is evidenceof an arrangement, collectibility is reasonably assured, and the delivery ofthe product or service has occurred. In certain circumstances, revenue is splitinto separately identifiable components and recognized when the relatedcomponents are delivered in order to reflect the substance of the transaction.The value of components is determined using verifiable objective evidence.  Wedo not provide our customers with the right to a refund.

 

*Productsand services*

 

*Subscriptions*

* *

We provide telephone and datacommunication services under postpaid and prepaid payment arrangements. Revenueincludes fees for installation and activation.   Postpaid service arrangementsinclude subscription fees, typically fixed monthly fees, which are recognizedover the subscription period on a pro rata basis. 

 

*Airtime,traffic and value-added services*

* *

Prepaid service revenuecollected in advance is deferred and recognized based on the earlier of actualusage or upon expiration of the usage period.  Payphone service revenue isrecognized when the service is provided. Interconnection revenue for calltermination, call transit, and network usage are recognized in the period thetraffic occurs.  Revenue related to local, long distance, network-to-network,roaming and international call connection services is recognized when the callis placed or the connection is provided, net of amounts payable to othertelecommunication carriers for terminating calls in their territories. Revenuerelated to products and value-added services is recognized upon delivery of theproduct or service.

 

*Equipmentsales*

* *

Sales of communicationequipment are recognized upon delivery to the customer.

* *

***Cash and CashEquivalents***

 

Cash consists of cash on handand in banks.  Cash equivalents are short-term, highly liquid investments thatare readily convertible to known amounts of cash with original maturities ofthree months or less and that are subject to an insignificant risk of change invalue.

* *

***Accounts Receivable***

*** ***

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

 

***Allowance for Doubtful Accounts***

 

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

 

The allowance is establishedby charges to income in the form of provision for doubtful accounts.  Suchprovision is computed as a certain percentage of operating revenues.  The levelof this allowance is also evaluated by management on the basis of factors thataffect the collectibility of the accounts, such as age status of receivables.In addition, accounts specifically identified to be potentially uncollectibleare provided with adequate allowance.

 

***Inventories andSupplies***

 

Inventories and supplies arevalued at the lower of cost or net realizable value.  These are items ofcellular phone units, materials, spare parts, terminal units and accessories.

 

Net realizable value is thereplacement cost.  Cost is determined using the moving average method.

 

***Property, Plant andEquipment***

 

Property, plant and equipmentare stated at cost less accumulated depreciation, amortization and anyimpairment in value.

 

The initial cost of property,plant and equipment comprises its purchase price and any costs directly attributableto bringing the asset to its working condition and location for its intendeduse.  Expenditures incurred after the assets have been put into operation, suchas repairs and maintenance and overhaul costs, are normally charged to incomein the period the costs are incurred.  In situations where it can be clearlydemonstrated that the expenditures have resulted in an increase in the futureeconomic benefits expected to be obtained from the use of an item of property,plant and equipment beyond its originally assessed standard of performance, theexpenditures are capitalized as an additional cost of property, plant andequipment.  Cost also includes interest on borrowed funds used during theconstruction period and capitalized foreign exchange losses and gains relatedto foreign currency-denominated liabilities used to acquire such assets, net offoreign exchange gains on restatement of monetary assets.  When assets are soldor retired, their costs and accumulated depreciation, amortization and impairmentlosses, if any, are eliminated from the accounts and any gain or loss resultingfrom their disposal is included in the statements of income of such period.

 

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

 

**Property, Plant and Equipment**

**Estimated Useful Lives**

 

 

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Cellular facilities

10 years

Buildings

25 – 40 years

Vehicles and other work equipment

5 – 10 years

Furniture

3 – 10 years

Communications satellites

15 years

Information origination/termination equipment

5 – 15 years

Land improvements

10 years

 

The useful lives anddepreciation and amortization method are reviewed periodically to ensure thatthe period and method of depreciation and amortization are consistent with theexpected pattern of economic benefits from items of property, plant andequipment.

 

In 2001, Smart revised theestimated remaining useful lives of its certain analog network assets from 6.8years to 2.25 years to reflect the effects of obsolescence, continuing declinein analog subscribers, competition and other economic factors which areconsidered to have shortened the economic useful lives of these assets.  As a result,depreciation charges increased by Php 930 million for the six months ended June 30, 2002.  In June 2002, the estimated useful lives of theseassets were further revised to effectively end by December 2002.  Havingcomplied with the requirements set out by the NTC, Smart closed down theoperation of its analog network on December 31, 2002.

 

Property under constructionis stated at cost.  This includes cost of construction, plant and equipment andother direct costs.  Property under construction is not depreciated until suchtime that the relevant assets are completed and put into operational use.

 

Borrowing costs that aredirectly attributable to the construction of plant and equipment arecapitalized during the construction period, See *Note 8 – Property, Plant andEquipment*.

 

***Impairment of Assets***

 

Starting January 1, 2002,property, plant and equipment, investments, goodwill and other long-livedassets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable.  Wheneverthe carrying amount of an asset exceeds its recoverable amount, an impairmentloss is recognized in the statements of income.  The recoverable amount is thehigher of an asset’s net selling price or value in use.  The net selling priceis the amount obtainable from the sale of an asset in an arm’s – lengthtransaction while value in use is the present value of estimated future cashflows expected to arise from the continuing use of an asset and from its disposalat the end of its useful life.  Recoverable amounts are estimated forindividual assets or, if it is not possible, for the cash-generating unit towhich the asset belongs.  Reversal of impairment losses recognized in prioryears is recorded when there is an indication that the impairment lossesrecognized for the asset no longer exist or have decreased.  The reversal isrecorded as income.  However, the increased carrying amount of an asset due toa reversal of an impairment loss is recognized to the extent it does not exceedthe carrying amount that would have been determined had the impairment loss notbeen recognized for that asset in prior years.

 

***Goodwill***

 

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

 

***Deferred Charges***

 

Issuance costs, underwritingfees and related expenses incurred in connection with the issuance of debtinstruments are deferred and amortized over the terms of the instruments.

 

***Borrowing Costs***

 

Borrowing costs are generallyexpensed as incurred.  Borrowing costs are capitalized if they are directlyattributable to the acquisition, construction or production of a qualifyingasset.  Capitalization of borrowing costs commences when the activities toprepare the asset are in progress and expenditures and borrowing costs arebeing incurred.  Borrowing costs are capitalized until the assets are ready fortheir intended use.  If the resulting carrying amount of the asset exceeds itsrecoverable amount, an impairment loss is recorded.  Borrowing costs includeinterest charges and other costs incurred in connection with the borrowing offunds, including exchange differences arising from foreign currency borrowingsused to finance these projects to the extent that they are regarded as anadjustment to interest cost.

 

***Retirement Costs***

 

PLDT and Smart have fundednoncontributory retirement plans, administered by the respective companies’Trustee, covering permanent employees.  Retirement costs are actuariallydetermined using the projected unit credit of accrued benefit valuationmethod.  This method reflects services rendered by employees to the date ofvaluation and incorporates assumptions concerning employees’ projectedsalaries.  Retirement costs include current service cost plus amortization ofpast service cost, experience adjustments and changes in actuarial assumptionsover the expected average remaining working lives of the covered employees.

 

***Foreign CurrencyTransactions and Translations***

 

Transactions in foreigncurrencies are recorded in Philippine pesos by applying to the foreign currencyamount the spot exchange rate prevailing at the time of the transaction date.Foreign exchange gains or losses arising on the spot settlements or restatementof monetary items at rates different from those at which they were initiallyrecorded during the period or presented in the previous financial statementsare recorded in the statements of income in the period in which they arise,except for exchange losses arising from borrowed funds used and liabilitiesincurred to finance the acquisition of property, plant and equipment, net offoreign exchange gains from all foreign currency monetary items, if any, whichare capitalized to the appropriate property, plant and equipment accounts, see– New Accounting Standards Effective Subsequent to 2002, SFAS 21/IAS 21, “TheEffects of Changes in Foreign Exchange Rates”. 

 

Financial statements ofconsolidated foreign subsidiaries that are integral to the operations of thePLDT Group are translated as if the transactions of the foreign operation hadbeen those of the PLDT Group.  At each balance sheet date, foreign currencymonetary items are translated using the closing rate, nonmonetary items whichare carried at historical cost are translated using the historical rate as ofthe date of acquisition and nonmonetary items which are carried at fair valueare translated using the exchange rate that existed when the values weredetermined.  Income and expense items are translated at the exchange rates onthe dates of the transactions.  Resulting exchange differences are recognizedin the statements of income during the period.

 

***Financial Instruments***

 

PLDT and Smart use forwardexchange contracts to hedge foreign currency assets, liabilities and firmcommitments.  Translation gains or losses on these forward exchange contractsare computed by multiplying the forward notional amounts by the differencebetween the spot exchange rates prevailing on balance sheet dates and the spotexchange rates on the contract inception dates (or the last reporting dates).The resulting gains or losses are offset against the translation losses orgains on the underlying hedged transactions.  Any premium or discount isamortized over the period of the contract and charged or credited to currentoperations.  For short-term forward transactions, the contracted forward ratesare used to record the underlying hedged transactions.

 

PLDT also enters intocurrency swap contracts to hedge the currency risk on its fixed rate notes.With these swaps, PLDT effectively converts its U.S. dollar notes to pesonotes.  Thus, the underlying notes are no longer revalued to spot exchangerates on balance sheet date but are recorded at the hedged exchange rates.Swap costs due on the contracts are accrued as of balance sheet date.

 

PLDT also utilizes variousstructures incorporating currency option (both buy and sell) contracts to hedgethe currency risk on its fixed rate notes.  These contracts provide PLDT theright to purchase or the obligation to sell foreign currency at pre-determinedprices.  Premium payments due on the contracts are amortized over the contractterm and charged to current operations.  Changes in the options’ intrinsicvalues are also charged or credited to current operations.

 

Interest rate swap agreementsare entered into to manage exposure to interest rate fluctuations.  Netincome/expense on the swaps is accrued as of balance sheet date.

 

Unrealized mark-to-marketgains and losses on outstanding derivatives entered into as hedges are notincluded in the determination of net income but are disclosed in the relatednotes to financial statements.

 

Other derivative financialinstruments entered into that are not designated as hedges are marked tomarket, with the revaluation gains and losses credited or charged to currentoperations.      

 

***Income Taxes***

 

Deferred income tax isprovided using the liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to: (a) temporarydifferences between the financial reporting bases of assets and liabilities andtheir related tax bases; and (b) net operating loss carryover, or NOLCO.Deferred tax assets and liabilities are measured using the tax rates applicableto taxable income in the years in which those temporary differences areexpected to be recovered or settled and NOLCO 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 CommonShare***

 

Basic earnings per share, orEPS, is calculated by dividing the net income for the year attributable tocommon shareholders by the weighted average number of common shares outstandingduring the year, after giving retroactive effect to any stock dividenddeclarations.

 

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

 

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

 

***Segment Reporting***

 

Segment assets includeoperating assets used by a segment and consist principally of operating cash,receivables, inventories and property, plant and equipment, net of allowancesand provisions.  Segment liabilities include all operating liabilities andconsist principally of accounts payable, accrued expenses and long-term debt.Segment assets and liabilities do not include deferred income taxes.

 

Segment revenues, segmentexpenses and segment performance include transfers between business segments.The transfers are accounted for at competitive market prices charged tounaffiliated customers for similar products.  Such transfers are eliminated inour consolidation.

 

***Use of Estimates***

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresus to make estimates and assumptions that affect the reported amounts of ourassets and liabilities and disclosure of contingent assets and liabilities atthe date of financial statements, and revenue and expenses during the periodreported.  Actual results could differ from our estimates.

 

***Adoption of NewStatements of Financial Accounting Standards, or SFAS/International AccountingStandards, or IAS***

 

We adopted the followingSFAS/IAS, which became effective on January 1, 2003:

 
- SFAS 10/IAS 10, “Events After theBalance Sheet Date”;    - SFAS 22/IAS 22, “BusinessCombinations”;      - SFAS 37/IAS 37, “Provisions,Contingent Liabilities and Contingent Assets”; and         - SFAS 38/IAS 38, “IntangibleAssets”.      The effects of adopting SFAS38/IAS 38 are discussed in *Note – 3, Accounting Changes, Investments* inePLDT.  Additional disclosure requirements by the new standards were includedin the financial statements where applicable.     ***NewAccounting Standards Effective Subsequent to******June 30, 2003***     The ASChas approved the following accounting standards, which will be effectivesubsequent to 2003:             - SFAS 17/IAS 17, “Leases”, whichprescribes the accounting policies and disclosures to be applied to finance andoperating leases.  Finance leases are those that transfer substantially allrisks and rewards of ownership to the lessee.  The standard provides certainguidelines on assessing whether leases or similar agreements would qualify asfinance leases.  We will adopt SFAS 17/IAS 17 when it becomes effective in2004.and we are currently evaluating any effect of the adoption of thisaccounting standard on our financial position and results of operations; and               - SFAS 21/IAS 21, “The Effects ofChanges in Foreign Exchange Rates”, which provides restrictive conditions forthe capitalization of foreign exchange losses.  As of June 30, 2003,undepreciated capitalized foreign exchange losses on a consolidated andnon-consolidated basis included in property, plant and equipment amounted toPhp60,015 million and Php52,630 million, respectively.  Upon adoption in 2005of SFAS 21/IAS 21, the proposed treatment is to adjust any undepreciatedcapitalized foreign exchange losses, net of exchange losses that qualify asborrowing cost and income tax effect, against beginning retained earnings, tothe extent that amounts capitalized do not meet the conditions under the newstandard, and to restate prior years’ financial statements.  As of June 30,2003, undepreciated capitalized foreign exchange losses that qualify asborrowing costs amount to approximately Php31 billion on a consolidated basisand Php26 billion on a non-consolidated basis.       
 
  **5.     ****Cash and Cash Equivalents**  ** **  This account consists of:  ** **  
 

**Consolidated**

 

**Non-Consolidated**

 

**June 30,  2003**

**(Unaudited)**

December 31,

2002

(Audited)

 

**June 30,**

**2003**

**(Unaudited)**

December 31,

2002

(Audited)

 

(in million pesos)

Cash on hand and in banks

**2,402**

3,053

 

**290**

856

Temporary investments

**8,714**

7,823

 

**3,676**

3,309

 

**11,116**

10,876

** **
**3,966**

4,165

** **

Cash in banks earns interestat the prevailing bank deposit rates.  Temporary investments are made forvarying periods of up to three months depending on our immediate cashrequirements, and earn interest at the prevailing short-term deposit rates.

 

 

**6.     ****Accounts Receivable**

** **

This account consists ofreceivables from:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**June 30,**

**2003**

**(Unaudited)**

December 31,

2002

(Audited)

 

**June 30,**

**2003**

**(Unaudited)**

December 31,

2002

(Audited)

 

(in million pesos)

Customers and carriers

**28,008**

26,675

 

**22,666**

22,601

Others

**2,165**

1,950

 

**2,271**

2,758

 

**30,173**

28,625

 

**24,937**

25,359

Less allowance for doubtful accounts

**10,070**

8,501

 

**7,077**

5,983

 

**20,103**

20,124

** **
**17,860**

19,376

 

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

 

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

 

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

 

On October 10, 2002, PLDT entered into a ReceivablesPurchase Deed, or RPD, with a foreign financial institution, or the Purchaser,under which PLDT agreed (1) to sell its receivables from certain eligibleforeign carriers for an advance payment of US$50 million and (2) to service,administer and collect the receivables on behalf of the Purchaser.  ThePurchaser shall have no recourse to PLDT should the eligible carrier fail orrefuse to settle the assigned/purchased receivables, except when PLDT commits abreach of its representations and warranties under the RPD.

 

Sale of receivables under the RPD amounted to US$5.09million (Php272.42 million) for the six months ended June 30, 2003.  Nosale was made under the MRPSA agreements for the six months ended June 30, 2002.  

 

 

**7.     ****Inventories and Supplies**

 

This account consists of:

 

 

**Consolidated**

** **

**Non-Consolidated**

 

**June 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

** **

**June 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

** **

(in million pesos)

 

Spare parts and supplies

**2,170**

2,281

** **

**2,160**

2,272

Terminal and cellular phone units 

**2,718**

2,208

** **

**369**

369

Others

**478**

452

** **

**67**

68

 

**5,366**

4,941

** **

**2,596**

2,709

Less allowance for inventory obsolescence

**934**

434

** **

**86**

–

 

**4,432**

4,507

** **

**2,510**

2,709

 

Spare parts and suppliesissued to various projects are included as part of property under constructionshown under “Property, Plant and Equipment”. 

 

 

**8.     ****Property, Plant andEquipment**

 

This account consists of:

 

 

Cable  and wire  facilities

Central  office  equipment

Cellular  facilities

Buildings

Vehicles,  furniture,  and other  work  equipment

Commu- nications  satellites

Information origination/ termination equipment

Land and  land  improvements

Property  under  construction

Total

*** ***

(in million pesos)

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

***Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

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

Cost

111,117

97,414

55,632

25,016

19,090

10,767

5,705

2,528

20,170

347,439

Accumulated depreciation and amortization 

(23,671)

(31,717)

(18,587)

(4,467)

(11,536)

(3,088)

(2,108)

(240)

–

(95,414)

Net book value

87,446

65,697

37,045

20,549

7,554

7,679

3,597

2,288

20,170

252,025

**Six months ended****June 30, 2003********(Unaudited)**

Opening net book value

87,446

65,697

37,045

20,549

7,554

7,679

3,597

2,288

20,170

252,025

Additions/Transfers

1,456

1,023

2,518

601

707

26

180

(4)

                (612)

5,895

Disposals/Retirement

(16)

–

(23)

(20)

(152)

–

–

(22)

(18)

(251)

Impairment losses recognized in the income statement

–

–

–

(39)

(442)

(845)

(118)

–

(52)

(1,496)

Accumulated depreciation and amortization

(2,556)

(3,294)

(3,413)

(468)

(1,015)

(392)

(377)

(10)

–

(11,525)

Closing net book value

86,330

63,426

36,127

20,623

6,652

6,468

3,282

2,252

19,488

244,648

**At****June 30, 2003********(Unaudited)**

 

 

 

 

 

 

 

 

 

Cost

112,491

98,409

57,932

25,277

19,402

10,793

5,656

2,502

19,488

351,950

Accumulated depreciation and amortization

(26,161)

(34,983)

(21,805)

(4,654)

(12,750)

(4,325)

(2,374)

(250)

–

(107,302)

Net book value

86,330

63,426

36,127

20,623

6,652

6,468

3,282

2,252

19,488

244,648

 

 

 

 

 

 

 

 

 

 

 

***Non-Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

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

 

 

 

 

 

 

 

 

 

Cost

101,912

96,245

–

23,143

11,358

–

5,441

2,116

18,652

258,867

Accumulated depreciation and amortization 

(22,685)

(31,377)

–

(3,544) 

(8,290) 

–

(2,013)

(236)

–

(68,145)

Net book value

79,227

64,868

–

19,599

3,068

–

3,428

1,880

18,652

190,722

**Six months ended****June 30, 2003********(Unaudited)**

Opening net book value

79,227

64,868

–

19,599

3,068

–

3,428

1,880

18,652

190,722

Additions/Transfers

874

988

–

269

365

–

137

(5)

(881)

1,747

Disposals/Retirement

–

–

–

–

–

–

–

(12)

–

(12)

Accumulated depreciation and amortization 

(2,108)

(3,217)

–

(336)

(442)

–

(335)

(12)

–

(6,450)

Closing net book value

77,993

62,639

–

19,532

2,991

–

3,230

1,851

17,771

186,007

**At****June 30, 2003********(Unaudited)**

 

 

 

 

 

 

 

 

 

Cost

102,692

97,221

–

23,390

11,661

–

5,348

2,099

17,771

260,182

Accumulated depreciation and amortization 

(24,699)

(34,582)

–

(3,858)

(8,670)

–

(2,118)

(248)

–

(74,175)

Net book value 

77,993

62,639

–

19,532

2,991

–

3,230

1,851

17,771

186,007

 

Substantially all ourtelecommunications equipment is purchased outside the Philippines.A significant source of financing for such purchases is foreign loans thatrequire repayment in currencies other than Philippine pesos, principally inU.S. dollars (see *Note 13 – Long-term Debt*).  Interest and net foreignexchange losses (gains) capitalized to property, plant and equipment for thesix months ended June 30, 2003 and 2002 were as follows:

**Consolidated**

** **

**Non-Consolidated**

** **

**Six Months Ended June 30**

 

**2003**

2002

 

**2003**

2002

 

(Unaudited)

 

(in million pesos)

Interest

**541**

753

 

**531**

640

Foreign exchange losses (gains) - net

**635**

(2,694)

 

**356**

(2,018)

 

As of June 30, 2003 and December 31, 2002,the undepreciated capitalized net foreign exchange losses amounted to Php60,015million and Php62,049 million, respectively, on a consolidated basis andamounted to Php52,630 million and Php54,395 million, respectively, on anon-consolidated basis.  

 

In June 2003, ACeS Philippinesrecognized an impairment provision of Php964 million in respect of certainequipment in relation to the business of AIL after having determined certainfactors which raised substantial doubt about AIL’s ability to continue as agoing concern.  *See Note 9 – Investments* for further discussion.

 

In 2001, Smart revised theestimated remaining useful lives of certain of its analog network assets from6.8 years to 2.25 years to reflect the effects of obsolescence, continuingdecline in analog subscribers, competition and other economic factors which areconsidered to have shortened the economic useful lives of these assets.  InJune 2002, the estimated useful lives of these assets were further revised toeffectively end by December 2002.  As a result, depreciation charges increasedby Php930 million for the six months ended June 30, 2002.Having complied with the requirements set out by the NTC, Smart closed down theoperation of its analog network on December 31, 2002.

 

Under the terms of certainloan agreements and other debt instruments, PLDT may not create, incur, assumeor 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.

 

 

**9.     ****Investments**

 

This account consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**June 30,  2003********(Unaudited)**

December 31,  2002 (Audited)

** **

**June 30,  2003********(Unaudited)**

December 31,  2002 (As restated –  Note 3)

 

(in million pesos)

Investments in shares of stock:

 

** **

 

** **

 

Cost:

 

** **

 

** **

 

Common

**5,810**

5,809

 

**26,366**

26,314

Preferred

**9,244**

9,309

 

**18,291**

18,296

 

**15,054**

15,118

 

**44,657**

44,610

Less cost of investment in Piltel

**(11,690)**

(11,689)

 

**(11,690)**

(11,689)

 

**3,364**

3,429

 

**32,967**

32,921

Accumulated equity share in net losses of investees

** **

**(13,420)**

(11,798)

 

** **

**(7,645)**

(7,237)

Less accumulated equity share in net losses of Piltel 

**11,690**

11,689

 

**11,690**

11,689

Net accumulated equity share in net income (losses) of investees (Note 15)

** **

**(1,730)**

(109)

 

**4,045**

4,452

Total cost and accumulated equity share in net income of investees

**1,634**

3,320

 

**37,012**

37,373

Investments in debt securities

**98**

2,150

 

**–**

2,052

Total

**1,732**

5,470

 

**37,012**

39,425

Investments in shares of stock:

** **

** **

 

** **

** **

At equity:

** **

** **

 

** **

** **

Smart 

**–**

–

 

**34,027**

32,205

Mabuhay Satellite 

**–**

–

 

**1,358**

1,299

Subic Telecom 

**–**

–

 

**689**

728

ePLDT 

**–**

–

 

**178**

631

Clark Telecom 

**–**

–

 

**231**

221

Telesat 

**–**

–

 

**191**

179

SNMI

**–**

–

 

**115**

115

BCC

**–**

**–**

 

**93**

–

MaraTel

**–**

–

 

**79**

75

PLDT Global

**–**

–

 

**3**

3

ACeS Philippines

**–**

–

 

**–**

1,822

Others

**26**

31

 

**–**

–

 

**26**

31

 

**36,964**

37,278

At cost:

** **

** **

 

** **

** **

ACeS International Limited 

**–**

1,614

 

**–**

–

Mabuhay Space Holdings Limited

**885**

885

 

**–**

–

Stradcom International Holdings, Inc.

**629**

616

 

**–**

–

Piltel (Note 3)

**–**

–

 

**–**

–

Others

**94**

174

 

**48**

95

 

**1,608**

3,289

 

**48**

95

Total

**1,634**

3,320

 

**37,012**

37,373

 

The movements in our netaccumulated equity share in net income (losses) of investees can be accountedfor as follows:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**June 30,  2003********(Unaudited)**

December 31, 2002 (Audited)

** **

**June 30,  2003********(Unaudited)**

December 31, 2002 (As restated – Note 3)

 

 

(in million pesos)

 

Accumulated equity share in net losses of investees at beginning of period

**(11,798)**

(7,628)

 

**(7,237)**

(6,427)

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

**(1,616)**

(4,163)

 

**3,202**

530

Dividends received

–

–

 

**(4,300)**

(1,340)

Others

**(6)**

(7)

 

**690**

–

Accumulated equity share in net losses of investees at end of period

**(13,420)**

(11,798)

 

**(7,645)**

(7,237)

Less accumulated equity share in net losses of Piltel

**11,690**

11,689

 

**11,690**

11,689

Net accumulated equity share in net income (losses) of investees

**(1,730)**

(109)

 

**4,045**

4,452

 

***Investments in Piltel***

 

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

 

Under the terms of the debtrestructuring, 50% of Piltel’s debt was cancelled in exchange for Piltelconvertible preferred shares which were mandatorily exchanged for PLDTconvertible preferred shares, and the balance was restructured into 10-year and15-year loans secured by substantially all of the present and future assets ofPiltel.  See *Note 15 – Stockholders’ Equity*for the terms of the PLDTconvertible preferred shares.

 

In June 2002, holders ofPiltel’s Series B, Class II Non-Convertible Preferred Stock, which had anaggregate redemption amount of Php102 million (including accrued dividends ofPhp20 million up to June 4, 2001), agreed to participate in the debt restructuringplan.  Consequently, 50% of the redemption amount was released in exchange for150,500 shares of Series K, Class I Convertible Preferred Stock of Piltel, orone share of Piltel’s Convertible Preferred Stock for every Php340 of theredemption amount, which were then exchanged for 30,100 shares of PLDT’s SeriesV Convertible Preferred Stock.  See *Note 15 – Stockholders’ Equity*forthe terms of PLDT Convertible Preferred Stock.  The remaining 50% of theredemption amount was exchanged for a participation in the “Term NotesFacility” as described in the foregoing.

 

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

 

Summarized below are theprincipal terms of the restructured debt of Piltel: 

 

 

**10-Year Loans**

**15-Year Loans**

**Term Notes Facility**

**Convertible Notes**

Final maturity

10 years from Effective Date

15 years from Effective Date

15 years plus 10 days from Effective Date

15 years from Effective Date

Amortization

per annum

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 3 to 9  –  0.10%

Years 3 and 4  –  0.10%

Years 3 to 14  –  0.10%

Years 3 and 4  –  0.10%

 

Year 10  –  99.30%

Year 5  –  2.00%

Year 15  –  98.80%

Year 5  –  1.05%

 

 

Years 6 to 14  –  10.00%

 

Years 6 to 9  –  5.05%

 

 

Year 15  –  7.80%

 

Year 10  –  54.65%

 

 

 

 

Years 11 to 14  –  5.00%

 

 

 

 

Year 15  –  3.90%

Interest rate

 

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

 

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

 

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

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

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

 

Interest payment dates

Quarterly in arrears

Semi-annually

 

As of June 30, 2003 and December 31, 2002, total long-termdebt of Piltel amounted to Php22,151 million and Php22,124million, respectively, with maturities of up to June 14, 2016, consists of the following: 

 

** **

**June 30, 2003********(Unaudited)**

December 31, 2002 (Audited)

** **

** **

(in millions)

** **

**Restructured debt**

** **

** **

 

 

Philippine Pesos

** **

** **

 

 

10 year Tranche B

 

**Php2,166**

 

Php2,166

15 year Tranche C

 

**2,166**

 

2,166

15 year Term Notes Facility

 

**293**

 

293

 

 

**4,625**

 

4,625

U.S. Dollars

 

** **

 

 

10 year Tranche B

**US$33**

**1,777**

US$33

1,768

15 year Tranche C

**33**

**1,777**

33

1,768

15 year Conversion Notes Facility

**121**

**6,481**

122

6,449

 

**US$187**

**10,035**

US$188

9,985

Japanese Yen

** **

** **

** **

** **

10 year Tranche B

**JPY 7,822**

**3,497**

JPY 7,822

3,510

15 year Tranche C

**7,822**

**3,497**

7,822

3,510

 

**JPY 15,644**

**6,994**

JPY 15,644

7,020

Total

** **

**21,654**

 

21,630

**Unrestructured debt**

** **

** **

** **

** **

U.S. Dollars

** **

** **

 

 

Banks

**US$6**

**333**

US$6

331

Convertible bonds

**2**

**121**

2

120

 

**US$8**

**454**

US$8

451

**Liabilities under capital lease**

 

**43**

 

43

 

 

**Php22,151**

 

Php22,124

 

Piltel did notcomply with the terms of convertible bonds with principal amount of US$2million and US$6 million of other U.S. dollar denominated debt.

 

In June 2003,holders of convertible bonds with principal amount of US$1 million agreed toparticipate in the debt restructuring by signing a bond participationagreement.  Piltel is also currently in the process of finalizing the termsunder which the holder of the US$6 million debt would participate in the debtrestructuring.

 

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

 

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

 

Until all amountsowed to participating creditors have been paid or discharged, PLDT will not bepermitted to demand or receive any payment, redeem, or distribute in respect ofany present and future liability owed by Piltel to PLDT or any affiliate ofPLDT, subject to specified exceptions.  These liabilities include equityfunding to Piltel and other financial indebtedness owed by Piltel to PLDT orany affiliate of PLDT, but exclude payments due in respect of transactions havingarm’s-length terms and/or in which the pricing is based on market terms.  Thesesevere long-term restrictions significantly impair Piltel’s ability to transferfunds to PLDT.  In addition, PLDT is subject to contractual restrictions in theamount of financial support it can provide to Piltel under the Letter ofSupport.

 

PLDT issued aLetter of Support for the benefit of Piltel and its creditors under which PLDThas agreed to cover any funding shortfalls of Piltel up to a maximum amount ofUS$150 million less all amounts paid or committed to be paid to or on behalf ofPiltel by PLDT on or after March 23, 2000.  Under the Letterof Support, PLDT will provide funding to Piltel in the event that the cash flowfrom Piltel’s operations falls short of amounts required by it to discharge infull its obligations to any creditor of Piltel or any of its operating andfinancing subsidiaries and affiliates.  PLDT is subject to contractualrestrictions limiting the amount of financial support it can provide to Piltel upto US$150 million.  The undrawn balance under the Letter of Support was US$50million, approximately Php2,689 million as of June 30, 2003 and Php2,676 million as of December 31, 2002, after taking into account PLDT’sinvestments in Piltel as of and subsequent to March 23, 2000.  

 

The continuedoperation of Piltel as a going concern is dependent upon amounts available toit under the Letter of Support and its ability to generate sufficient cashflows to meet its obligations on a timely basis, to comply with the provisionsof the restructuring agreements it has entered into, and to obtain additionalfinancing, as may be necessary.  

 

In 2001, Piltel wrote down assets valued atPhp13,984.1 million, which was reflected in Piltel’s accounts as of December 31, 2001.  The write-down, as approved by Piltel’s Board of Directors, was aresult of Piltel’s decision to scale down its Advanced Mobile Phone System, orAMPS, and Code Division Multiple Access System, or CDMA networks, beginning thesecond half of 2001 due to Piltel’s recent success in marketing its GSM prepaidservice using the GSM network of Smart and the difficulty experienced insourcing analog/CDMA handsets.

 

Piltel’s networth amounted to Php1,900.2 million as of December 31, 2001 after taking into account the debtrestructuring and assets write down.  The balance of PLDT’s investments as of December 31, 2001 in Piltel amounted to Php948.0 million, representing theequity in net assets as of that date.

 

In December 2002,Piltel recognized impairment losses in respect of its AMPS/CDMA and ExecutiveOrder, or EO 109 assets valued at Php4,737 million and Php12,054 million,respectively.  For the AMPS/CDMA assets, the impairment resulted from Piltel’sdecision to deactivate all its AMPS/CDMA cell sites as the revenues generatedfrom its AMPS/CDMA postpaid and prepaid services could no longer support thecost of operating the network.  Piltel’s revenues from its AMPS/CDMA postpaidand prepaid services declined considerably in 2002 with the sustained success ofPiltel’s and other cellular operators’ prepaid GSM service.

 

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

 

The current levelof operation of Piltel indicates that it is unlikely that residual amounts maybe realized by PLDT from its investments in Piltel.  Piltel had a totalnegative net worth of Php19,635 million as of June 30, 2003 as a result ofcontinuing losses of Piltel and impairment losses amounting to Php16,790million in 2002 in respect of its AMPS/CDMA and EO 109 assets.  

 

Accordingly, in2002, PLDT wrote down Php1,519 million, representing the balance of PLDT’sinvestments in Piltel amounting to Php948 million as of December 31, 2001 andPhp571 million drawings under the Letter of Support in 2002, and recordedliability on its balance sheet of approximately Php2,676 million in respect ofthe undrawn balance of the Letter of Support amounting to US$50 million as ofDecember 31, 2002.  

 

***Subscription for SmartPreferred Shares***

 

On various datesin 2001 and 2000, PLDT entered into Subscription Agreements with Smart underwhich PLDT subscribed for a total of 762 million preferred shares of Smart atPhp13.875 per share, or an aggregate subscription price of Php10,578 million.As of December 31, 2002, the subscription price of said preferredshares had been fully paid. 

 

On December 12,2002, Smart redeemed 299 million out of 762 million preferred shares subscribedby PLDT in 2001 and 2000 at a redemption price of Php13.875 per share, or atotal redemption price of Php4,150 million.

 

The preferredshares of Smart have the same dividend rights as its common shares and areconvertible at any time at the option of the shareholder, at a conversion ratioof one common share for each preferred share.  These preferred shares areredeemable at any time at the option of Smart, provided that the conversionright of the shareholder shall prevail over the redemption right of Smart.

 

On December 9, 2002, PLDT transferred and conveyed to Smart certain inland andsubmarine domestic fiber optic cable loops, digital transmission equipment andcorresponding network management systems with an aggregate net book value ofPhp4,138 million, as consideration and in exchange for 298 million preferredshares of Smart subscribed by PLDT at Php13.875 per share. 

 

***Investment in ePLDT***

 

In August 2000, PLDTincorporated ePLDT to serve as the principal corporate vehicle for PLDT’sinformation and communications technology initiatives and ventures.  As of June 30, 2003, ePLDTheld interests in a number of businesses, which include: 

 

a.      Internet Data Center under the brand name VitroÔ; 

b.      100% investment in Vocativ SystemsInc., or Vocativ, a 500-seat call center facility that commenced fullcommercial operations in April 2002 exclusively for clients of a globalprovider of customer relationship management services; 

 

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

 

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

 

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

 

f.       100% owned subsidiary, SideraTechnologies, Inc., incorporated to engage in the business of designing andmanaging reloadable chip-based cards.  In March, 2003, ePLDT has written offits investment in Sidera Technologies, Inc. amounting to Php213 million;

 

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

 

h.      41% investment in DigitalParadise, Inc., an internet café business which assumed the assets and brand ofNetopia.  ePLDT’s 40% convertible debt in Netopia Computer Technologies, Inc.was assigned to Digital Paradise, Inc., in exchange for a 41% equity interest. 

 

i.        45% interest in Mind Stream, Inc.,an information technology or IT learning center under license with the NationalInstitute of Information Technology, or NIIT, of India for IT courseware.  Todate, ePLDT is in the processes of selling its equity interest in Mindstream,Inc.;

 

j.        22.5% interest in convertiblesecurities of Stradcom International Holdings, the parent company of StradcomCorporation which has an existing concession agreement with the Philippinegovernment for the modernization of the Philippine Land Transportation Office,including the computerization of driver’s license issuance, vehicleregistration and traffic adjudication systems; and

 

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

 

On June 30, 2003, ePLDTsold its 51% interest in Contact World, Inc. and assigned its receivables fromthe same to Service Zone, Inc., a US-based call center operator, for a totalconsideration of US$700 thousand.

 

On June 30, 2003, ePLDTsigned a Joint Venture Agreement with DataPost Pte Ltd. and G3 Worldwide ASPAC(Spring) to form a bills printing company which will do laser printing andenveloping services for statements, bills and invoices, and other value-addedservices to companies in the Philippines.  ePLDT will have a 50% interest inthe joint venture company, while DataPost, a subsidiary of Singapore Post, willhave a 30% interest.  Spring, the largest international mail services provider,will own the remaining 20%.  The joint venture company will have an initialpaid-up capital of approximately Php11 million.

 

ePLDT had an initialauthorized capital stock of Php1 billion, which was increased in May 2001 toPhp4 billion.  As of June 30, 2003, PLDT had subscribed for 1,672 millionshares of ePLDT’s common capital stock for which PLDT partially paid cash ofPhp550 million.  The balance was fully paid by: (a) offsetting against PLDT’sreceivables from ePLDT amounting to Php450 million, (b) transferring to ePLDT19 million Infocom shares held by PLDT valued at Php135 million, (c)transferring to ePLDT certain areas of PLDT’s Information Systems Data Centervalued at Php270 million, and (d) transferring to ePLDT a portion of PLDT’sJupiter property valued at Php267 million.

 

***Investment in MaraTel***

 

In June 2001, PLDT acquired2,439,060 common shares of MaraTel for a total consideration of Php451million.  The shares represent 92.3% of the issued and outstanding common stockof MaraTel.  The acquisition of a controlling interest in MaraTel is expectedto improve PLDT’s existing coverage in Mindanao.

 

MaraTel is a franchisedoperator of telecommunications services in the province of Lanao del Norteand the cities of Iligan and Marawi.  It has been in operation for fifty yearswith 17,765 subscribers and a switch capacity of 18,766 digital lines as of June 30, 2003.  

 

In 2002, PLDT acquired anadditional 134,237 common shares for a consideration of Php1 million.Accordingly, PLDT’s interest in MaraTel increased from 92.3% to 97.5%.

 

 

***Investment in PLDTGlobal***

 

PLDT Global is a wholly ownedsubsidiary incorporated with a view of positioning PLDT as a major full serviceglobal telecommunications player through a strategy of establishing points ofpresence in key cities worldwide.

 

The authorized capital stockof PLDT Global consists of 50,000 shares with a par value of US$1 per share.

 

***Investment in BCC***

 

In February 2003, PLDTentered into a separate Deed of Assignment of Subscription with Smart and FortBonifacio Development Corporation, or FBDC, where Smart and FBDC assigned,transferred and conveyed in favor of PLDT their total subscription of 750,000common shares and 750,000 preferred shares of BCC and all their interest and rightstherein for a total consideration of Php93 million.  The assignments includesubscription payable aggregating Php68 million. The shares represent 75% of thesubscribed capital stock of BCC.

 

BCC was incorporatedprimarily to own, construct, establish, maintain, lease and otherwise operate,to the extent allowed by law, communication infrastructure and to providerelated services, including but not limited to, value-added services, withinthe Fort Bonifacio Global City and Villamor Air Base.

*** ***

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

 

As of June 30, 2003, ACeSPhilippines had a 20.2% investment in ACeS International Limited, or AIL, acompany incorporated under the laws of the island of Bermuda.  AIL owns the Garuda I satellite and the relatedsystem control equipment in Batam, Indonesia.

 

In December 1998, AIL and its 95% owned subsidiary, PTAsia Cellular Satellite, entered into an Amended and Restated Credit Agreement,or Amended Agreement, to amend the original Credit Agreement entered into by PTAsia Cellular Satellite and its bank creditors in 1997.  Under the AmendedAgreement, AIL has, among others, assigned to the banks as collateral all ofits tangible properties, including the Garuda Satellite, the system controlfacilities and system control equipment.  On September 30, 2002, PT AsiaCellular Satellite, AIL, as guarantor, P.T. Bank International Indonesia, assecurity agent, and various 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. 

 

As of June 2003, AIL has incurred recurring significantoperating losses, negative operating cash flows, and significant levels ofdebt. The financial condition of AIL is partly due to the National ServiceProvider’s inability to generate the amount of revenues originally expected asthe growth in subscriber numbers has been significantly lower than budgeted.  Thesefactors raise substantial doubt about AIL’s ability to continue as a goingconcern.  On this basis, we recognized an impairment provision in respect ofour investment in AIL amounting to Php1,614 million and certain equipment ofACeS Philippines in relation to the business of AIL  amounting to Php964million (see *Note 8 – Property, Plant & Equipment*). 

 

***Investment of MabuhaySatellite in Mabuhay Space Holdings Limited***

 

On July 18, 1996,Mabuhay Satellite entered into a Joint Venture Agreement with SpaceSystems/Loral Inc., or SS/L, to form Mabuhay Space Holdings Limited, or MSHL,for the purpose of providing high-power Ku-Band satellite transmission servicesusing the payload which was added by SS/L aboard Agila II.  Under the terms ofthe Joint Venture Agreement, or JVA, SS/L is required to convey title to theAdditional Payload to MSHL in consideration for SS/L’s 35% equity interest inMSHL and Mabuhay Satellite is required to pay SS/L US$19 million for a 65%equity interest in MSHL.

 

On February 24, 2000,SS/L filed a Notice of Default and Termination against MSHL arising from thelatter’s alleged failure to amicably resolve its alleged unpaid obligation toSS/L under the JVA.  In 2002, the Arbitration panel handed down its decisionand provided for payment by Mabuhay Satellite to SS/L of the principal andinterest amounting to about US$15 million as of June 30, 2003.  On June 30, 2003,Mabuhay Satellite and SS/L concluded a settlement agreement whereby MabuhaySatellite would lease two (2) transponders on a life-term basis, free ofcharge, to SS/L and offset its receivables from Cyberstar, SS/L‘s affiliate,for the full settlement of this obligation.

 

In accordance with thesettlement agreement, Mabuhay Satellite and SS/L shall proceed to dissolve thejoint venture under which each of the parties shall receive title over suchnumber of transponders owned by the joint venture in proportion to theirrespective interests under such terms and conditions to be agreed upon by theparties.  Given the temporary nature of the joint venture, Mabuhay Satelliteaccounts for its investment under the cost method.  

 

***Investments in DebtSecurities***

 

*UnilinkCommunications Corporation*

* *

PLDT’s total investments inconvertible notes of Unilink Communications Corporation, or Unilink, amountedto Php2,052 million as of December 31, 2002.  In June 2003, PLDT assigned andceded unto the PLDT Beneficial Trust Fund, or BTF, all of its rights, interestand participation in respect of its investment in convertible notes of Unilink,for and in consideration of the partial payment of the contributions which PLDTis required to make to the BTF under PLDT’s employee benefit plan, amounting toPhp1,350 million.  In relation to the assignment, a loss of Php702 million wasrecognized and presented as part of “Other Expenses-net” in the statements ofincome.

 

These notes are convertibleinto shares of common stock of Unilink or The Philippine Home Cable Holdings,Inc., or Home Cable, at the option of the holder, when the law limiting the ownershipof cable television systems to Philippine citizens or corporations, which are100% owned by Philippine citizens is eventually changed.  Unilink is aPhilippine corporation owning all the outstanding common shares of Home Cable,which is also a Philippine corporation licensed to own, maintain and operate acable television system in the Philippines.

 

All of Unilink’s shares inHome Cable have been pledged to a group of lenders as security for a loan ofHome Cable.  On April 10, 2002, the loan agent, at the request of the lenders,delivered a notice to Home Cable declaring an event of default and acceleratingthe loan.  Consequently, the lenders are entitled to foreclose on or sell thecollateral granted as security for the loan, including Unilink’s share in HomeCable.  In the event that Home Cable’s lenders were to foreclose on Unilink’sHome Cable shares, the lenders would be entitled to the proceeds from the salethereof or, if such shares were not sold, to the shares, and Unilink would besubrogated to the lenders’ claims against Home Cable.  Home Cable is currentlyengaged in negotiations with the lenders to restructure its debt.  

 

 

**10. ****Other Noncurrent Assets**

** **

Thisaccount consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**June 30,  2003********(Unaudited)**

December 31,  2002 (Audited)

 

**June 30,  2003********(Unaudited)**

December 31,  2002 (As restated – Note 3)

 

** **

(in million pesos)

 

Debt issuance expenses – net 

**2,296**

2,494

 

**1,068**

1,122

Refundable deposits

**500**

475

 

**207**

213

Others – net

**1,927**

1,708

 

**446**

278

 

**4,723**

4,677

 

**1,721**

1,613

 

 

**11. ****Notes Payable**

** **

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.

 

Asof June 30, 2003, Vocativ, a wholly-owned call center of ePLDT, had anoutstanding Php150 million short-term bank loan facility.  It is anticipatedthat this short-term facility would be repaid from the proceeds of aprospective Php150 million 5-year term loan being arranged by the same lenderfor Vocativ.

 

 

**12. ****Accrued Expenses and Other Current Liabilities**

 

This account consists of:

 

 

**Consolidated**

 

**Non-Consolidated**

 

**June 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

**June 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

** **

(in million pesos)

 

Accrued utilities and general expenses

**3,679**

2,888

 

**1,227**

1,142

Accrual for payment for unused sick leave and other employee benefits

** **

**3,227**

1,452

 

** **

**1,804**

584

Accrued interest on various loans (Note 13)

**2,649**

2,717

 

**1,990**

2,069

Unearned revenues on sale of  prepaid cards (Note 3)

** **

**1,781**

2,022

 

** **

**498**

431

Accrued taxes and other expenses

**1,451**

1,461

 

**932**

752

Others

**3,399**

1,991

 

**481**

559

 

**16,186**

12,531

 

**6,932**

5,537

 

 

**13. ****Long-term Debt**

** **

Thisaccount consists of outstanding long-term debt of the following:

 

 

Consolidated
 

**June 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

**(in million pesos)**
PLDT

**131,910**

139,324

Smart

**19,862**

22,891

Mabuhay Satellite

**4,890**

5,356

ePLDT

**135**

150

MaraTel

**34**

42

 

**156,831**

167,763

Less current portion

**20,664**

19,176

 

**136,167**

148,587

 

After giving effect to theanticipated application of existing refinancing facilities, the scheduledmaturities of outstanding long-term debt as of June 30, 2003 are as follows:

 

**Year**

**Consolidated**

**Non-Consolidated**

 

(in million pesos)

2003(1)

7,665

4,054

2004

**22,361**
**15,068**
2005

28,567

21,255

2006

25,987

20,426

2007 and onwards

72,251

71,107

 

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

*** ***

***PLDT***

 

PLDT'saggregate outstanding long-term debt is broken down as follows:

 

**Description**

**June 30, 2003********(Unaudited)**

December 31, 2002 (Audited) 

 

(in millions)

**U.S. Dollars**

** **

** **

 

 

Export Credit Agencies-Supported Loans

 
 

 

 

Kreditanstalt fur Wiederaufbau

**US$417**

**Php22,296**

US$437

Php23,265

JBIC/Co-financing Banks

**77**

**4,094**

87

4,657

Others 

**155**

**8,321**

161

8,575

 

**649**

**34,711**

685

36,497

Fixed Rate Notes

**1,420**

**74,334**

1,487

78,067

Term Loans

**187**

**10,027**

172

9,166

 

**US$2,256**

**119,072**

US$2,344

123,730

**Japanese Yen**

 

 

** **

** **

Term Loans 

**JP¥10,783**

**4,829**

JP¥15,641

7,049

JBIC OIL

**9,760**

**4,364**

9,760

4,379

** **

**JP¥20,543**

**9,193**

JP¥25,401

11,428

**Philippine Pesos**

 

 

** **

** **

Peso Fixed Rate Corporate Notes

 

**2,180**

** **

2,540

Term Loans

 

**1,465**

** **

1,626

 

 

**3,645**

** **

4,166

 

 

**131,910**

** **

139,324

Less current portion

 

**13,440**

** **

11,962

 

 

**Php118,470**

** **

Php127,362

 

The effective averageinterest rates applicable to the above indebtedness are as follows:

 

 

**June 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

** **

** **

Dollar-denominated loans

**8.1%**

8.3%

Yen-denominated loans

**1.5%**

1.2%

Peso-denominated loans

**13.7%**

13.8%

 

*Export CreditAgencies-Supported Loans*

 

In order to obtain importedcomponents for our network infrastructure in connection with our expansion andservice improvement programs, we have obtained loans extended and/or guaranteedby various export credit agencies.  These financings account for a significantportion of PLDT's indebtedness.

 

Kreditanstalt furWiederaufbau, or KfW, a German state-owned development bank, is our largestsingle creditor.  As of June 30, 2003, we owed US$417 million aggregate principal amount ofdebt to KfW, as follows:

 
- US$313 million provided undervarious export credit agency-backed facilities, of which US$255 million is inconnection with our expansion and service improvement programs and US$58million in connection with a refinancing facility; and       - US$104 million provided for the15% downpayment portion and credit facilities without guarantee/insurance coverfrom the export credit agencies, of which US$16 million is in connection with arefinancing facility.     On January 25, 2002, PLDTsigned two loan agreements with KfW that provide PLDT with a new US$149 millionfacility to refinance in part the repayment installments under its existingloans from KfW due from January 2002 to December 2004.  The facility is anine-year loan, inclusive of a three-year disbursement period and a two-yeargrace period during which no principal is payable.  It partly enjoys theguarantee of HERMES, the export credit agency of the Federal Republic ofGermany.  Disbursements under this facility, which are made as the KfW loans tobe repaid fall due, are currently available.  We have drawn US$74 million(Php3,987 million) under this facility as of June 30, 2003.       After giving effect to therefinancing of facilities, US$19 million of our KfW loans will mature in Julyto December 2003, US$39 million in 2004, US$82 million in 2005, US$57 millionin 2006 and US$220 million in 2007 and onwards.  Principal and interest onthese loans are generally payable in equal semi-annual installments.     PLDT has also obtained loansextended and/or guaranteed by other export credit agencies, including JapanBank for International Cooperation, or JBIC, (formerly the Export-Import Bankof Japan), the Export-Import Bank of the United States, and the respectiveexport credit agencies of France, Italy, Israel, Sweden, Denmark, Canada,Australia, the United Kingdom and Singapore, in the aggregate outstandingprincipal amount of US$232 million and US$248 million as of June 30, 2003 andDecember 31, 2002, respectively.  Of these loans, US$31 million will mature in2003, US$63 million in 2004, US$52 million in 2005, US$42 million in 2006 andUS$44 million in 2007 or later.     *Fixed Rate Notes*     PLDT has eight series ofnon-amortizing fixed rate notes outstanding as of June 30, 2003, as follows:     
**Principal Amount**

 

**Issue Date**

**Interest Rate**

** **

**Maturity**

 

 

 

 

 

 

US$77,202,000

 

June 2, 1994

10.625%

 

June 2, 2004

US$144,385,000

 

July 31, 1995

9.875%

 

August 1, 2005

US$175,000,000

 

June 28, 1996

9.250%

 

June 30, 2006

US$200,000,000

 

March 6, 1997

7.850%

 

March 6, 2007

US$100,000,000

 

May 2, 2002

10.625%

 

May 15, 2007

US$175,000,000

 

April 13, 1999

10.500%

 

April 15, 2009

US$250,000,000

 

May 2, 2002

11.375%

 

May 15, 2012

US$300,000,000

 

March 6, 1997

8.350%

 

March 6, 2017
     On May 2, 2002, PLDT issued10.625% Notes due 2007 in the aggregate principal amount of US$100 million and11.375% Notes due 2012 in the aggregate principal amount of US$250 million.The net proceeds from the issuance of the notes were used to effect therepurchase of (1) US$63 million in principal amount of our 8.5% Notes due 2003and US$117 million in principal amount of our 10.625% Notes due 2004 validlytendered by holders in our tender offer and (2) US$10 million in principalamount of our 10.625% Notes due 2004 and US$6 million in principal amount ofour 9.875% Notes due 2005 from the open market, and to prepay or repay variousloans in the aggregate amount of US$125 million, of which US$53 million(JP¥6,260 million) pertained to the Japanese yen term loan which matured onJune 18, 2003 and US$52 million in connection with the US$150 million term loanmaturing in December 2003.       ***Term Loans***     *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.  These loans were amended in August and September2001 to increase the maximum total debt to earnings before interest, incometax, depreciation and amortization or EBITDA ratio that PLDT on anon-consolidated basis is permitted to maintain during the terms of therespective loans.  Approximately US$124 million of these loans was outstandingas of June 30, 2003.  The FMO loan matures on September 1, 2007, while the EKNand ECGD loans mature on December 31, 2007.      *US$150Million Term Loan*     In connection with PLDT'sfixed line expansion projects, PLDT obtained a US$150 million term loan, whichwas subsequently assigned to Norddeutsche Landesbank Girozentrale, SingaporeBranch, US$52 million of which was outstanding as of June 30, 2003.  Theoutstanding principal amount of this loan is payable at maturity on December 22, 2003 andwill be partly refinanced by a multicurrency refinancing facility describedbelow.     *JapaneseYen Term Loan*  * *  In December 1997, inconnection with a refinancing of its maturing debt, PLDT obtained a Japaneseyen term loan from a syndicate of foreign banks.  This loan with outstandingbalance of JP¥12,359 million matured on June 18, 2003and was partly refinanced by Tranche A of  US$145 million multicurrency refinancingfacility in the amount of JP¥7,723 million and US$34 million.     *JBICJP¥ 9,760 Million Overseas Investment Term Loan*     On July 26, 2002, PLDTsigned a loan agreement with JBIC for a credit facility of JP¥9,760 millionunder the JBIC’s Overseas Investment Loan (OIL) Program.  The loan, which wasdrawn on July 31, 2002, will be amortized semi-annually beginning March 21, 2005 andwill mature on March 21, 2008.     *JBIC4 Program of the Development Bank of the**Philippines*     In connection with the AsiaPacific Cable Network 2 project, PLDT entered into a loan agreement withCitibank, N.A., as facility agent, and a syndicate of banks in the aggregateprincipal amount of Php1,700 million, of which about Php1,402 million wasoutstanding as of June 30, 2003.  The loan, which is funded under the Japan Bank forInternational Cooperation Facility for Private Sector Development of theDevelopment Bank of the Philippines, matures on October 26, 2005and is payable in quarterly installments starting April 2002 as set 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%
     *PesoFixed Rate Corporate Notes*     In connection with PLDT'sservice improvement and expansion programs, PLDT has entered into two loanagreements, pursuant to each of which PLDT issued fixed rate corporate notes inthree tranches.  Interest on each tranche is payable semi-annually.     Under the first loanagreement, PLDT borrowed an aggregate amount of Php1,500 million, of whichPhp230 million matured on November 11, 2002, Php500 million matures on November 9, 2004, andPhp770 million on November 9, 2006.     Under the second loanagreement, PLDT borrowed an aggregate amount of Php1,270 million, of whichPhp360 million matured on June 9, 2003, Php100 million matures on June 9, 2005 andPhp810 million on June 9, 2010.     *MulticurrencyRefinancing Facility*  * *  On September 4, 2002,PLDT signed a loan agreement with a syndicate of banks for a US$145 millionmulticurrency term loan facility consisting of Japanese yen and U.S. dollarcommitments of JP¥10,914 million and US$53 million, respectively.  Thisfacility has been split into two tranches.  Tranche A was drawn June 18, 2003 in theamount of JP¥7,723 million and US$34 million to refinance a portion of theJapanese yen syndicated term loan which matured on the same date.  Tranche B,which amounts to JP¥3,191 million and US$19 million, is to be drawn in December2003 and is intended to refinance a portion of US$52 million principal amountoutstanding under the US dollar term loan falling due in December 2003.  Thenew syndicated facility will be amortized semi-annually beginning June 2004 andwill mature in December 2006.     *US$12Million Term Loan Facility*  * *  On May 29, 2003, PLDTobtained a US$12 million term loan facility from DEG-Deutsche Investitions undEntwicklungsgesellschaft mbH.  As of June 30, 2003,we have not made any drawdowns under this facility.     *JP¥5,615Million**Syndicated Term LoanFacility*     On June 11, 2003, PLDTsigned a JP¥5,615 million syndicated term loan facility supported by NipponExport and Investment Insurance of Japan.  As of June 30, 2003, we have not madeany drawdowns under this facility.     *Covenants*     Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests at relevant measurement dates, principally at the endof each quarterly period.     The financial tests under ourdebt instruments, as amended, include maintaining a positive tangible net worthand compliance with the following ratios:         - interest coverage ratio,calculated on a non-consolidated basis and excluding PLDT’s equity share in netincome of investees, of not less than 150%, 180% or 200%;           - total debt to EBITDA on anon-consolidated basis of not more than 5.5:1 from June 2003 to December 2003,not more than 5.0:1 from March 2004 to June 2004, not more than 4.5:1 fromSeptember 2004 to December 2004 and not more than 4.0:1 from March 2005 andthereafter;             - long-term indebtedness toappraised value of equity/tangible net worth on a non-consolidated basisranging from not more than 1.1:1 to not more than 3.0:1;                - current ratio on anon-consolidated basis, ranging from not less than 0.9:1 to not less than 1.2:1;                 - debt service coverage ratio on anon-consolidated basis of at least 1.1:1; and                   - debt to free cash flow ratio on anon-consolidated basis of not more than 6.0:1 from March 31 to June 30, 2003,not more than 5.5:1 from September 30, 2003 to June 30, 2004, not more than5.0:1 from September 30, 2004 to June 30, 2005, not more than 4.5:1 fromSeptember 30, 2005 to June 30, 2006, and not more than 4.0:1 from September 30,2006 onwards.     Inaddition, some of PLDT's debt instruments contain covenants requiring PLDT tocomply with specified financial tests on a consolidated basis.  These include:                     - long-term debt to appraised valueof equity/tangible net worth of not more than 2.33:1;                       - total debt to EBITDA of not morethan 4.5:1 in 2003 and 2004, and not more than 4.0:1 in 2005 and thereafter;                          - current ratio of not less than0.75:1 to 0.9:1; and                           - interest coverage ratio of notless than 200%.     For purposes of derivingappraised value of equity/tangible net worth, we determined the revaluationsurplus in respect of PLDT’s properties.  PLDT’s properties in service as ofDecember 31, 1997 were reappraised by an independent firm of appraisers toreflect their sound value, as part of NTC’s financial reporting requirements,based on the December 29, 1997 exchange rate of Php40.116 = US$1.00.  As of December 31, 1997,the sound value was Php225,966 million and the revaluation surplus wasPhp82,723 million.  This reappraisal was approved by the NTC on January 28, 2000under NTC Case No. 98-183.  As of June 30, 2003and December 31, 2002, the revaluation surplus on PLDT’s 1997 appraisedproperties still in service, net of a 5% disallowance factor, amounted to Php41,710 million and Php44,984 million, respectively.     The principal factors thatcan negatively affect our ability to comply with these financial ratios andother financial tests are depreciation of the peso relative to the U.S. dollar,poor operating performance of PLDT and its consolidated subsidiaries,impairment or similar charges in respect of investments or other assets thatmay be recognized by PLDT and its consolidated subsidiaries and increases inour interest expenses.  Interest expense may increase as a result of variousfactors including issuance of new debt, the refinancing of lower costindebtedness by higher cost indebtedness, depreciation of the peso, thelowering of PLDT’s credit ratings or the credit ratings of the Philippines,increase in reference interest rates, and general market conditions.  Sinceapproximately 96% of PLDT's total debt is denominated in foreign currencies,principally in U.S. dollars, many of these financial ratios and other tests arenegatively affected by any weakening of the peso.  During the first half of2003, the peso depreciated by approximately 4% against the U.S. dollar to anaverage of Php53.504 = US$1.00 from an average of Php51.583 = US$1.00 duringthe year 2002.  During the first half of 2002 the peso appreciated by 0.4% toan average of Php50.814 = US$1.00 from Php51.009 = US$1.00 for the year 2001.At June 30, 2003, the exchange rate was Php53.522 = US$1.00, which isequivalent to a 0.5% depreciation of the peso relative to the rate at the endof 2002.     PLDT's ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of our fixed line business,which is predominantly conducted by PLDT.  PLDT cannot be assured of thebenefit of net revenues and cash flows generated by Smart and PLDT’s othersubsidiaries and associates in assisting in complying with non-consolidatedcovenants.     We have maintained compliancewith all of our financial ratios and covenants as measured under our loanagreements.  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, this ratiorequirement has become more restrictive at the end of the second quarter of2003 and will continue to become more restrictive in increments thereafter,which will make it more difficult for PLDT to maintain compliance with thisratio in the future.  Inability to comply with our financial ratios andcovenants or raise new financing could result in a declaration of default andacceleration of some or all of our indebtedness.  The terms of some of our debtinstruments have no minimum amount for cross-default.     Under PLDT's loan agreementsthat require maintenance of an interest coverage ratio of at least 150%,interest coverage ratio is the ratio of (x) PLDT's non-consolidated after-taxnet income, excluding equity share in net income or losses of investees afteradding back interest charges, net of interest capitalized to construction, onall indebtedness for the 12 months immediately preceding the calculation dateto (y) the estimated aggregate interest charges payable, net of interest to becapitalized to construction, during the 365-day period following the calculation date on all of PLDT's indebtednessoutstanding on such calculation date.     Under PLDT's loan agreementsthat require maintenance of an interest coverage ratio of at least 180%,interest coverage ratio is the ratio of (x) our after-tax net income for the 12months immediately preceding the calculation date after: (a) adding backinterest charges, depreciation, amortization and other non-cash charges(including equity share in net income or losses of investees but excludingprovision for doubtful accounts) and provision for income taxes, and (b)deducting capitalized subscriber acquisition costs, to (y) the estimatedaggregate interest charges payable during the 365-day period following thecalculation date on all of PLDT's indebtedness outstanding on such calculationdate.     Under PLDT's loan agreementsthat require maintenance of an interest coverage ratio of at least 200%,interest coverage ratio is the ratio of (x) our after-tax net income afteradding back reserves for higher plant replacement costs, income taxes, interestcharges, depreciation and non-cash charges (including equity share in netincome or losses of investees and provision for doubtful accounts) during 12consecutive months within the 15 calendar months immediately preceding thecalculation date, to (y) the sum of (a) the estimated aggregate interest chargeson all indebtedness, net of interest capitalized to construction, plus (b)dividends on mandatorily redeemable preferred stock, in each case scheduled tobe paid during the 12 months following the calculation date.     Non-consolidated total debtto EBITDA is the ratio of (x) PLDT's total indebtedness (not including amountspayable by PLDT to Piltel under the Letter of Support) to (y) net income forthe preceding 12 months, after adding back interest accrued on allindebtedness, depreciation, amortization and other non-cash charges (includingequity share in net income or losses of investees, but excluding provision fordoubtful accounts) and provision for income taxes and deducting any capitalizedsubscriber acquisition costs.      Debt service coverage ratiois the ratio of (x) PLDT’s cash flow from operations after adding back interestcharges (to the extent previously deducted) plus (1) dividends received fromsubsidiaries, cash received upon any redemption of redeemable preferred sharesissued by Smart, any cash received under PLDT’s subscriber investment plan andinterest income received less (2) capital expenditures (excluding capitalizedinterest) and investments in subsidiaries for the 12 months immediatelypreceding the calculation period plus (3) PLDT’s closing cash balance of thelast day of the calculation date to (y) the sum of the projected interestcharges and principal debt repayments (excluding debt to be repaid with arefinancing facility) during the 12 months following the calculation date.     Debt to free cash flow ratiois the ratio of (x) PLDT’s debt less PLDT’s closing cash balance of the lastday of the calculation period to (y) PLDT’s cash flow from operations afteradding back interest charges (to the extent previously deducted) plus (1) dividendsreceived from subsidiaries cash received upon any redemption of redeemablepreferred shares issued by Smart, any cash received under PLDT’s subscriberinvestment plan and interest income received less (2) capital expenditures(excluding capitalized interest) and investments in subsidiaries or affiliatesfor the 12 months immediately preceding the calculation date.       Non-consolidated long-termindebtedness to appraised value of equity (or under some covenants, to tangiblenet worth) is the ratio of (x) PLDT's aggregate indebtedness (or portion ofsuch indebtedness) due more than one year following the calculation date andpar value of all mandatorily redeemable preferred stock to (y) the sum of theaggregate par value of all of PLDT's outstanding common and convertiblepreferred stock (other than preferred stock subject to mandatory redemption),paid-in capital in excess of the par value of such stock, PLDT's retainedearnings, reserve for higher plant replacement costs and revaluation incrementarising from independent certified appraisals of PLDT's telephone plantapproved by the NTC.       Non-consolidated currentratio is the ratio of (x) non-consolidated current assets to (y)non-consolidated current liabilities, excluding from current liabilities 50% ofthe portion of long-term indebtedness due within one year of the calculationdate.       PLDT's debt instrumentscontain a number of other negative covenants that, subject to certainexceptions and qualifications, restrict PLDT's ability to take certain actionswithout lenders' approval, including:                             - incurring additional indebtedness;                               - prepaying other debt;                                  - making investments;                                    - extending loans;                                      - extending guarantees or assumingthe obligations of other persons;                                       - paying dividends or otherdistributions or redeeming, repurchasing or otherwise acquiring shares ofPLDT’s capital stock;                                          - disposing of all or substantiallyall of its assets or of assets in excess of specified thresholds of itstangible net worth;                                           - entering into management contractsproviding for the management of its business or operations by a third party;                                             - creating any lien or securityinterest;                                                - permitting set off against amountsowed to PLDT;                                                 - merging or consolidating with anyother company;                                                   - entering into transactions withshareholders and affiliates; and                                                     - entering into sale and leasebacktransactions.      Under the indenture of PLDT's10.625% Notes due 2007 and 11.375% Notes due 2012, we are required to complywith a number of additional covenants, including covenants that, subject to certainexceptions, restrict PLDT's ability to: (a) incur debt in the event its ratioof debt to EBITDA (calculated on a non-consolidated basis based on definitionsprovided in the same indenture, except in certain circumstances), after givingeffect to the incurrence of such debt, would be less than 5.5 to 1 on or priorto December 31, 2003, 5.0 to 1.0 from January 1, 2004 to December 31, 2004 and4.5 to 1 thereafter and (b) pay dividends, repurchase or redeem its capitalstock, make investments and prepay subordinated debt, among other things.Subject to certain restrictions, these covenants also restrict our ability tosell assets and use the proceeds of these asset sales.     Under the terms of the US$149million facility with KfW, PLDT is prohibited from paying any dividends oncommon stock until after December 31, 2004.  In addition, under the terms ofPLDT's US$145 million multicurrency term loan and JP¥5,615 million term loan,PLDT is restricted from distributing dividends to common stockholders unless (i)no default has occurred which is continuing, and (ii) its debt to free cashflow ratio, after giving effect to the distribution of such dividends and,under certain circumstances, other adjustments to PLDT’s closing cash balance,would be less than 4.0 to 1.0.  Under other loan agreements, PLDT may notdeclare or pay dividends on any of its capital stock without the prior writtenconsent of the lenders (i) if PLDT is in default in the payment of any amountsdue and payable under such loan agreement or after the occurrence and duringthe continuance of any other event of default or potential event of defaultunder such agreements, (ii) if after giving effect to such action the currentratio would be less than 1.2 to 1.0 or (iii) in an amount greater than PLDT’snet income after taxes during the fiscal year to which such payment ordistribution relates.       In case of a change incontrol of PLDT, PLDT may be required to repurchase or prepay certainindebtedness.  Under the terms of the 10.625% Notes due 2007 and 11.375% Notesdue 2012, we are required to offer to purchase all outstanding notes due 2007and notes due 2012 for cash at a price of 101% of their principal amounts plusaccrued interest in the event that (a) the aggregate of NTT Communications' andFirst Pacific's direct and indirect voting interest in PLDT's outstandingcapital stock having voting rights falls below 35% of such capital stock, (b)any person or, in certain instances, group of persons, which is not controlleddirectly or indirectly by First Pacific or NTT Communications acquires a director indirect voting interest in PLDT's outstanding capital stock having votingrights which equals or exceeds 35% of such capital stock and (c) if a ratingagency at such time maintains a rating on either series of notes, the ratingagency downgrades its credit rating on the series within 90 days (or more, incertain circumstances) following notice of the occurrence of the eventsspecified in (a) and (b) above.     Under the terms of PLDT’sJP¥9,760 million loan from JBIC, in the event of any proposed sale or transferof PLDT's stock that would result in NTT Communications holding less than14.95% of PLDT's voting stock, we will be required to prepay, immediately uponeffectiveness of such sale or transfer, all principal outstanding under theloan, together with accrued interest.  However, prepayment will not be requiredif, following such sale or transfer, (a) NTT Communications continues to haveprior approval rights with respect to all matters as to which NTTCommunications has approval rights under the stock purchase agreement pursuantto which it acquired its shares in PLDT or (b) JBIC, in its sole discretion,determines that NTT Communications’ participation in the expansion of Smart'sGSM network capacity to extend PLDT’s cellular business in Smart would not bereduced below its level of participation as of the date of the loan agreement.     Under the terms of bothPLDT’s US$145 million multicurrency term loan and JP¥5,615 million term loan,if any lender so requests in writing, PLDT shall prepay in full such lender’sparticipation in the loan within 45 days from notification of the change 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 (“Bonds”) from bondholdersaccepting the change in control offer.  A change in control is deemed to occurwhen (a) the aggregate of NTT Communications’ and First Pacific’s direct andindirect voting interest in PLDT’s outstanding capital stock having votingrights fall below 35% of such capital stock, (b) 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 (c) 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 (a) and (b) above.     PLDT’s debt instrumentscontain customary and other default provisions that permit the lender toaccelerate amounts due or terminate their commitments to extend additionalfunds under the debt instruments.  These default provisions include:                                                       - cross-defaults andcross-accelerations that permit a lender to declare a default if PLDT is indefault under another debt instrument.  In some cases, the cross-defaultprovision is triggered upon a payment or other default permitting theacceleration of PLDT’s debt, whether or not the defaulted debt is accelerated.In other cases, the cross-default provision requires the defaulted loan to beaccelerated.  In some debt instruments, the cross-default provision will betriggered only if the principal amount of the defaulted indebtedness exceeds athreshold amount specified in these debt instruments;                                                         - failure by PLDT to meet certainfinancial ratio covenants referred to above;                                                           - the occurrence of any materialadverse change in circumstances that a lender reasonably believes materiallyimpairs PLDT’s ability to perform its obligations under its debt instrumentwith the lender;                                                              - the revocation, termination oramendment of any of the permits or franchises of PLDT in any mannerunacceptable to the lender;                                                               - the abandonment, termination oramendment of the project financed by a loan in a manner unacceptable to thelender;                                                                 - the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and                                                                   - other typical events of default,including the commencement of bankruptcy, insolvency, liquidation or winding upproceedings by PLDT.     ***Smart***     Smart’s long-term debtconsists of:     
 

**June 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

** **

(in millions)

 

U.S. Dollars

**US$353**

**Php18,895**

US$408

Php21,724

Philippine Pesos

** **

**967**

** **

1,167

 

** **

**19,862**

** **

22,891

Less current portion

** **

**6,125**

** **

6,173

 

** **

**Php13,737**

** **

Php16,718
     Smart’s bank loan facilities,which are being used to finance its purchases of telecommunications equipment,are availed of through one or more drawdowns.      Interest on Smart’s dollardenominated loans is either fixed or based on LIBOR plus premium.  These loansare payable in semi-annual installments and have maturities of up to 2007.  Thepeso loans are payable quarterly and accrue interest based on the weightedaverage interest rate, or WAIR, plus Participating Financial Institution, orPFI, premium and will mature in December 2005 and February 2007 for thePhp1,000 million and Php300 million facilities, respectively.     Smart is subject to loancovenants that restrict its ability to pay dividends, redeem preferred shares,make distributions to PLDT or otherwise provide funds to PLDT or any affiliatewithout the consent of its lenders.  Some of these covenants contain anabsolute prohibition on paying dividends before December 2002, while othersrequire that a portion of the loan equal to the amount of the dividend beprepaid.  After receiving approvals from Finnvera and certain lenders on April24, 2003 and May 7, 2003, Smart paid dividends in the amount of Php4,300million to PLDT in June 2003, representing 70% of Smart’s 2002 net income.Smart will be required to obtain further waivers to pay additional dividends inthe future periods.     Smart’s debt instruments alsocontain certain restrictive covenants that require Smart to comply withspecified financial ratios and other financial tests at semi-annual measurementdates.  Smart has maintained compliance with all of the financial covenants.The financial tests under Smart’s loan agreements include compliance with adebt to equity ratio of not more than 1.50:1.00 and a debt service coverageratio of not less than 1.50:1.00.  The agreements also contain customary andother default provisions that permit the lender to accelerate amounts due underthe loans or terminate their commitments to extend additional funds under theloans.  These default provisions include:                                                                     - Cross-defaults and cross-accelerationsthat permit a lender to declare a default if Smart is in default under anotherloan agreement.  These cross default provisions are triggered upon a payment orother default permitting the acceleration of Smart debt, whether or not thedefaulted debt is accelerated;                                                                       - Failure by Smart to comply withcertain financial ratio covenants;                                                                         - Any reduction in PLDT’s ownershipof Smart’s stock below 51% of the total of each class of Smart’s issued shares;                                                                           - Any reduction in First Pacific’sand Metro Pacific Corporation’s collective direct and/or indirect ownership ofPLDT’s common stock below 17.5% of the total common stock outstanding or 17.5%of the voting power of the total common stock outstanding; and                                                                             - The occurrence of any materialadverse change in circumstances that the lender reasonably believes materiallyimpairs Smart’s ability to perform its obligations under its loan agreementswith the lender or that the lender believes materially impairs an applicableguarantors’ ability to perform its obligations under an applicable guaranty.     In addition, some of theseloan agreements restrict Smart’s ability to enter into transactions withaffiliates except on arms length terms and for valuable consideration.     ***Mabuhay Satellite***     Mabuhay Satellite’s long-termdebt consists of:     
 

**June 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

(in millions)

U.S. Dollars

** **

** **

** **

** **

Credit Agreement 

**US$47**

**Php2,512**

US$55

Php2,925

Omnibus Agreement

**44**

**2,378**

46

2,431

 

**91**

**4,890**

101

5,356

Less current portion

**19**

**1,038**

18

980

 

**US$72**

**Php3,852**

US$83

Php4,376
     *Credit Agreement*     Mabuhay Satellite has an existing Credit Agreement withthe Export-Import Bank of the United States (Ex-Im Bank) to finance a portionof the cost of purchasing the Agila II Satellite.  On May 8, 2000, Ex-Im Bank agreed to amend the repayment terms of the principal under the RestructuringAgreement.  Under the Amendment, the outstanding balance as of the effectivedate of the Amendment shall be amortized in 13 successive semi-annualinstallments due on January 15 and July 15 of each year, beginning January 15, 2000.  Interest rate remains at 6.6% per annum.       *Omnibus Agreement*     Mabuhay Satellite also has anexisting Omnibus Agreement with a syndicate of local banks, or the Banks, whichincludes issuance of irrevocable standby Letters of Credit with an aggregatestated value not exceeding US$47 million (Php2,512million) in favor of Ex-Im Bank, as security under the Credit Agreement and aterm loan to Mabuhay Satellite in the aggregate amount of US$44 million (Php2,378 million).      As security, MabuhaySatellite has constituted in favor of the Banks:                                                                               - A first mortgage on its leaseholdrights under a lease agreement entered into with the Subic Bay MetropolitanAuthority, or SBMA, and the components of the satellite system;                                                                                 - An assignment of its rights underits Purchase Contract for the Satellite System;                                                                                   - An assignment of its rights underthe transponder lease contracts to be entered into with its stockholders andother parties and the revenues therefrom; and                                                                                     - An assignment of the applicableproceeds of insurance to be taken on the satellite system.     The Credit and OmnibusAgreements impose negative covenants which, among others, restrict the materialchanges in Mabuhay Satellite’s nature of business and ownership structure, anylien upon or with respect to any of its assets or to any right to receiveincome, acquisition of capital stock, declaration and payment of dividends,merger, consolidation and sale with another entity and incurring orguaranteeing additional long-term debt beyond prescribed amounts.  *** ***  ***ePLDT***     On March 4, 2002, ePLDTentered into a three-year loan facility with Philippine Bank of Communicationsamounting to Php150 million with a grace period of one year.  The loan facilitywas fully drawn as of December 31, 2002.  The quarterly principal payments of Php15 millionshall start in the second year with a balloon payment of Php45 million at theend of the third year.  Interest on this loan is equivalent to 91-day   T-bill rate plus 4% per annumpayable quarterly in arrears.  The loan is secured by ePLDT’s investment in anaffiliate with a carrying value of Php629million as of June 30, 2003 and a deed of assignment of receivables of anassociate from a foreign customer.     The loan agreement imposesnegative covenants which, among other things, restrict ePLDT in regard topayment of cash dividends or any other income of any capital distribution toPLDT, voluntary suspension of its entire business operations for a period of 60consecutive days of dissolution of its legal existence, and creation of anyencumbrances on the shares pledged.     ***MaraTel***     MaraTel’s long-term debtconsists of a Php60 million loan obtained on October 20, 1997 and a Php19million loan drawn on July 19, 1999.  The Php60 million loan carries an interest rateranging from 11.6% to 14.6% per annum and matures on October 16, 2005,while the Php19 million loan bears a fixed interest rate of 14.7% per annum andmatures on July 30, 2004.  As of June 30, 2003,the outstanding balances of these loans totaled Php34million, of which Php16 million willmature in 2003.       
 
  **14. ****Deferred Credits and Other Noncurrent Liabilities**     This account consists of:     
 

**Consolidated**

 

**Non-Consolidated**

 

**June 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

**June 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

 

** **

(in million pesos)

 

Liability under Letter of Support (Note 3)

**2,689**

2,676

 

**2,689**

2,676

Advance payment under a receivables purchase facility (Note 6)

**2,275**

2,530

 

**2,275**

2,530

Customers’ deposits

**1,790**

2,162

 

**1,695**

2,055

Accrual of capital expenditures under long-term financing (Note 21)

**584**

1,625

 

**449**

1,515

Accrued pension cost (Note 17)

**–**

1,175

 

**–**

1,175

Others 

**1,216**

1,372

 

**1,069**

1,206

 

**8,554**

11,540

 

**8,177**

11,157
     
 
  **15. ****Stockholders’ Equity**  ** **  The movement of PLDT’scapital stock account follows:     
** **

** **

**Preferred Shares -**Php10 par value

** **

** **

**Common Stock –**

Php5 par value

**Series  A to CC**

**III**

**IV**

**V**

**VI**

**VII**

** **

** **

** **

**No. of Shares**

**Amount**

**No. of Shares**

**Total  Preferred Shares**

**Amount**

** **

(in millions)

**Authorized**

234

Php1,170

** **

** **

** **

** **

** **

** **

823

Php8,230

**Outstanding**

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

Balances at January 1, 2002

168

Php844

372

5

36

3

5

4

425

Php4,242

Issuance

–

–

37

–

7

–

–

–

44

441

Conversion

1

3

(3)

–

–

–

–

–

(3)

(26)

Redemption

–

–

–

–

(7)

–

–

–

(7)

(72)

Balances at December 31, 2002 (Audited)

169

Php847

406

5

36

3

5

4

459

Php4,585

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2003

169

Php847

406

5

36

3

5

4

459

Php4,585

Issuance

–

–

4

–

–

–

–

–

4

44

Conversion

–

–

(1)

–

–

–

–

–

(1)

(11)

Balances at June 30, 2003 (Unaudited)

169

Php847

409

5

36

3

5

4

462

Php4,618
     ***Preferred Stock***     Thepreferred stock is non-voting, except as specifically provided by law, and ispreferred as to liquidation.     The Series A to CC 10%Cumulative Convertible Preferred Stocks earn cumulative dividends at an annualrate of 10%.  These series of preferred stock are convertible into common stocka year after the year of share issuance, at a price equivalent to 10% below theaverage market price of PLDT's common stock at the PSE over a period of 30consecutive trading days before the conversion date.  The conversion price,however, shall not be less than the conversion price set by the Board ofDirectors, which as of June 30, 2003, is Php5 per share.At PLDT’s option, the Series A to CC 10% Cumulative Convertible Preferred Stockare redeemable at par value plus accrued dividends five years after the year ofissuance.     OnJanuary 22, 2002, the Board of Directors designated 10 million sharesof serial preferred stock as Series CC 10% Cumulative Convertible PreferredStock for issuance throughout 2002.  In addition, on February 26, 2002,the Board of Directors designated an additional 15 million shares of serialpreferred stock as Series AA 10% Cumulative Convertible Preferred Stock.  Theissuance 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 is an exempt transaction under Section10.2 of the SRC, as confirmed by the Philippine SEC on March 13, 2002 and July 31, 2002,respectively.  PSE approved the listing of the 10 million shares of Series CC10% Cumulative Convertible Preferred Stock and the additional 15 million sharesof Series AA 10% Cumulative Convertible Preferred Stock on August 14, 2002.     On December 2, 2002, theBoard of Directors designated 10 million shares of serial preferred stock asSeries DD 10% Cumulative Convertible Preferred Stock for issuance throughout2003 and an additional 10 million shares of serial preferred stock as Series CC10% Cumulative Convertible Preferred Stock.  The issuance of the 10 millionshares of Series DD 10% Cumulative Convertible Preferred Stock and theadditional 10 million shares of Series CC 10% Cumulative Convertible PreferredStock is an exempt transaction under Section 10.2 of the SRC, as confirmed bythe SEC on January 30, 2003.  In an earlier letter dated October 24, 2002, PSEallowed PLDT to utilize 24,287,455 unissued preferred shares remaining listedwith the PSE in order to cover the issuance requirement of the other seriesunder PLDT’s Subscriber Investment Plan.  The issuance requirement for the 10million shares of Series DD 10% Cumulative Convertible Preferred Stock and theadditional 10 million shares of Series CC 10% Cumulative Convertible PreferredStock will be taken from the said remaining listed and unissued preferredshares.      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.  The Series III Convertible PreferredStock is not redeemable.  Upon liquidation of PLDT, holders of the Series IIIConvertible Preferred Stock will be entitled to receive liquidatingdistributions equivalent to Php11 a share, plus accrued and unpaid dividends tothe date of distribution, subject to the prior rights of creditors.     The Series IV CumulativeNon-Convertible Redeemable Preferred Stock earns cumulative dividends at anannual rate of 13.5% based on the paid-up subscription price.  It is redeemableat the option of PLDT at any time one year after subscription and at the actualamount paid for such stock, plus accrued dividends.  On February 26, 2002,the Board of Directors called for the payment of a portion of the balance ofthe subscription price of the Series IV Cumulative Non-Convertible RedeemablePreferred Stock amounting to Php72 million, which was paid on March 5, 2002.  OnMarch 22, 2002, PLDT redeemed 60 million shares out of the 360 millionsubscribed shares of its Series IV Cumulative Non-Convertible Preferred Stockand paid Php72 million, representing the redemption price plus unpaid dividendsup to the date of redemption.     On June 4, 2001, PLDT issued 2.7 million shares of SeriesV Convertible Preferred Stock, 5.1 million shares of Series VI Convertible PreferredStock and 3.8 million shares of Series VII Convertible Preferred Stock inexchange for a total of 58.1 million shares of Series K, Class I ConvertiblePreferred Stock of Piltel, pursuant to the debt restructuring plan of Piltel.Shares of Series V, VI and VII Convertible Preferred Stock are entitled toreceive annual dividends of Php18.70 per share, US$0.397 per share andJP¥40.7189 per share, respectively.  In addition, in 2002, PLDT issued 30,100shares of Series V Convertible Preferred Stock and 14,087 shares of Series VIConvertible Preferred Stock in exchange for a total of 220,935 shares of SeriesK, Class I Convertible Preferred Stock of Piltel.  Upon receipt of taxclearance from the BIR on March 3, 2003, PLDT issued 92,413 more shares of SeriesVI Convertible Preferred Stock in exchange for 462,065 shares of Piltel SeriesK Class I Convertible Preferred Stock.  Each share of Series V, VI and VII PLDTConvertible Preferred Stock is convertible at any time at the option of theholder into one PLDT common share.  On the date immediately following theseventh anniversary of the issue date of the Series V and Series VI ConvertiblePreferred Stock and on the eighth anniversary of the issue date of the SeriesVII Convertible Preferred Stock, the remaining outstanding shares under theseseries will be mandatorily converted to PLDT common shares, which will benefitfrom a put option exercisable for thirty days to sell such PLDT common sharesto PLDT for Php1,700 or US$36.132 or JP¥4,071.89 per share depending on theseries.  PLDT would be obligated to pay up to Php4,600 million, US$184 millionand JP¥15,600 million under the put option if all the convertible preferredshares will be mandatorily converted and all the underlying common shares willbe put to PLDT.     As of June 30, 2003 and December 31, 2002, atotal of 674,720 shares of Series V and VIConvertible Preferred Stock have been converted to PLDT common shares.     The aggregate value of theput option as of June 30, 2003 is 20,388 millionwhile the market value of the underlying common shares is Php6,260 millionbased on the market price of PLDT’s common stock of Php565per share as of June 30, 2003.     The shares of preferredstock, except shares of Series V, VI and VII Convertible Preferred Stock, redeemedor converted into common stock shall revert to and form part of the unissuedpreferred stock, and may be reissued in any other series that the Board ofDirectors may, from time to time, establish and designate.     The provisions of certainsubscription agreements involving preferred stock have an effect on the abilityof PLDT to, without written consent, sell certain assets and pay cash dividendsunless all dividends for all past quarterly dividend periods have been paid andprovision has been made for the currently payable dividends.     On January 31, 2003, theBoard of Directors approved the dividend declaration of: (a) Php1.00 peroutstanding share of 10% Cumulative Convertible Preferred Stock Series CCpayable on March 31, 2003 to the holders of record on February 27, 2003; and(b) Php12.15 million on the outstanding shares of Series IV CumulativeNon-Convertible Redeemable Preferred Stock payable on March 15, 2003 to theholders of record on February 17, 2003.  On February 26, 2003, the Board of Directorsapproved the dividend declaration to the holders of record on March 17, 2003of: (a) US$1.029412 per outstanding share of Series III Cumulative ConvertiblePreferred Stock; (b) Php4.675 per outstanding share of Series V ConvertiblePreferred Stock; (c) US$.09925 per outstanding share of Series VI ConvertiblePreferred Stock; and (d) JP¥10.179725 per outstanding share of Series VIIConvertible Preferred Stock, respectively.  In addition, on June 10, 2003, theBoard of Directors approved the dividend declaration to the holders of recordon June 27, 2003 of: (a) US$1.029412 per outstanding share of Series IIICumulative Convertible Preferred Stock; (b) Php4.675 per outstanding share ofSeries V Convertible Preferred Stock; (c) US$.09925 per outstanding share ofSeries VI Convertible Preferred Stock; and (d) JP¥10.179725 per outstandingshare of Series VII Convertible Preferred Stock, respectively.  On July 8,2003, the Board of Directors approved the dividend declaration of: Php1.00 peroutstanding share of Series A, I, R, W, AA and BB 10% Cumulative ConvertiblePreferred Stock payable on August 29, 2003 to the holders of record on July 24,2003.     ***Employees’ Stock Purchase Plan***     TheEmployees’ Stock Purchase Plan, or ESPP, of PLDT provides an opportunity to itsregular rank-and-file and supervisory employees to purchase an ownershipinterest in PLDT’s common stock at a reduced price on a deferred payment basis.     On November 3, 1999, theBoard of Directors approved the Ninth Offering under the ESPP.  Up to 991,200shares of common stock have been made available for purchase under the NinthOffering.  Movements in the number ofstock purchase plan outstanding are as follows:     
 

**June 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

Beginning balance

**55,124**

169,708

Exercised

**(55,124)**

(114,584)

Ending balance

**–**

55,124
     The purchase price is set atthe prevailing market price which should not exceed Php877.63 per share.  Thiscap represented 85% of the market price at offer date on January 3, 2000.  Theaverage market value of the shares exercised in 2002 was Php378 per share(total Php43 million).    ***Executive Stock OptionPlan***     On April 27, 1999 andDecember 10, 1999, the Board of Directors and stockholders, respectively,approved the establishment of an Executive Stock Option Plan, or ESOP, and theamendment of the Seventh Article of the Articles of Incorporation of PLDTdenying the pre-emptive right of holders of shares of common stock to subscribefor any issue of up to 1,289,745 shares of common stock pursuant to the ESOP.The ESOP covers management executives, which include officers with rank of VicePresident up to the President, executives with the rank of Manager up toAssistant Vice President, and advisors/consultants engaged by PLDT.  The ESOPseeks to motivate option holders to achieve PLDT’s goals, reward option holdersfor the creation of stockholder value, align the option holders’ interests withthose of the stockholders of PLDT and retain the option holders to serve thelong-term interests of PLDT.  The ESOP is administered by the ExecutiveCompensation Committee of the Board of Directors.  About 1.3 million shares ofcommon stock of PLDT have been reserved as underlying shares of options underthe ESOP.      Movements in the number ofstock option plan outstanding are as follows:     
 

**June 30, 2003**

**(Unaudited)**

December 31, 2002

(Audited)

Beginning balance

**1,226,395**

1,157,258

Granted

**–**

144,428

Cancelled

**(108,687)**

(75,291)

Ending balance

**1,117,708**

1,226,395
     Since the date of the granton December 10, 2001, there were no officers or executives that exercisedtheir options.  Instead, there were cancellations of options due to officerresignations and retirements of officers and executives.     ***Retained Earnings***     This account consists of:     
 

**June 30, 2003**

**(Unaudited)**

** **

December 31, 2002

(As restated –

Note 3)

 

(in million pesos)

Appropriated for plant expansion and higher replacement costs

**435**

435

Unappropriated

**34,263**

33,268

 

**34,698**

33,703
     The most recent dividenddeclaration made by PLDT in respect of its common shares was in March 2001.PLDT continues to pay dividends in respect of its preferred shares.  Thecurrent policy of PLDT is to determine its ability to declare and paydividends, taking into consideration the interests of its shareholders as wellas PLDT’s working capital, capital expenditure and debt service requirements.Also taken into account are the prohibitions and restrictions under certain ofPLDT’s debt instruments with respect to the declaration and payment of dividends.The retention of earnings is necessary to meet the funding requirements of ourbusiness expansion, service improvement and development programs.  Theunappropriated retained earnings balance of PLDT as of June 30, 2003 andDecember 31, 2002 includes accumulated equity share in net income of investeesof Php4,045 million and Php4,452 million, respectively, which are not available fordistribution as dividends until declared by the investees.      
 
  **16. ****Related Party Transactions**  ** **  Companies within the PLDTGroup are engaged in arm’s-length transactions with each other in the ordinarycourse of business.  We believe that the terms of these transactions arecomparable with those available to unrelated parties.      ***Transactionswith/between Related Parties***     A description of majortransactions with/between related parties is as follows:     *a.        **Telecommunications ServicesProvided within PLDT Group*     Telecommunications carrierswithin the PLDT Group (namely, PLDT, Smart, Piltel, Clark Telecom, SubicTelecom, MaraTel and PLDT Global) have existing intercompany agreements, suchas interconnection agreements with one another under terms similar with thoseagreed with other telecommunications providers outside the PLDT Group (see *Note26 - Other Matters*).  Each of these carriers recognizes revenues, net ofinterconnection charges, for calls terminating with the customer of the othercarriers.      *b.        **Transponder Lease Agreementbetween PLDT and Mabuhay Satellite*     On December 28, 1995,PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, asamended on May 10, 2000, pursuant to which Mabuhay Satellite leases to PLDTC-band transponders on board the Agila II satellite, in consideration of abasic rent.  This agreement has a term of ten years commencing on December 18, 1997, unlessearlier terminated in accordance with the terms thereof.      Under an Acknowledgment andConsent Agreement dated January 4, 1996, PLDT acknowledged and consented to MabuhaySatellite's:                                                                                       - transfer and assignment of allamounts payable by PLDT under the Transponder Lease Agreement; and                                                                                         - grant of a continuing securityinterest of first priority in all of Mabuhay Satellite's rights, title andinterest in, to and under the Transponder Lease Agreement, in favor of thecollateral agent for the benefit of the lenders who are parties to the OmnibusCredit and Security Agreement dated December 14, 1995.     Total fees under theseagreements amounted to Php385 million and Php457 million for the six months ended June 30, 2003 and2002, respectively.  Outstanding obligations of PLDT under these agreementsamounted to Php87 million and Php269 millionas of June 30, 2003 and December 31, 2002, respectively.     *c.        **Facilities ManagementAgreement between PLDT and Piltel*  * *  On July 19, 2001, PLDTentered into a Facilities Management Agreement with Piltel under which PLDTundertakes the management, operation and maintenance of Piltel's regionaltelecommunication and EO 109, network operations and services, including EO 109fixed line build-out installations, public calling offices and payphonefacilities and the systems required to support these services.     The agreement covers Piltel'sregional telecommunication services in Baguio, Puerto Princesa, Masbate, andBoac and EO 109 services in Alabel, Banga, Dapitan, Davao, Digos, Dipolog, GeneralSantos, Kiamba, Koronadal, Pagadian, Polomolok and Surallah in Mindanao.     Under the agreement, PLDTalso undertakes the management of the computer system, billing, revenueassurance and inter-carrier settlements reporting of Piltel's regional telecommunicationservices in Olongapo and Subic.     The monthly management feepayable by Piltel is based on cost, and for cost components where margin isallowed, 15% will be applied.  All third party invoices will be passed on toPiltel at cost, including value-added tax.     The agreement supersedes theFacilities Management Agreement between PLDT and Piltel, dated May 12, 2000,under which PLDT undertook the management, maintenance and operation of theregional telecommunication services of Piltel, including public calling officesand payphone operations located in Baguio City, Puerto Princesa, Boac andMasbate.  The new agreement is effective for three years from July 2001 to July2004.     Total management fees underthese agreements amounted to Php41 million and Php43 million forthe six months ended June 30, 2003 and 2002, respectively.  Outstanding receivables ofPLDT under these agreements amounted to Php299million and Php258 million as of June 30, 2003 and December 31, 2002, respectively.     *d.        **Facilities ManagementAgreement between**Subic**Telecom and Piltel*     On September 5, 2001,Piltel and Subic Telecom entered into a Facilities Management Agreement of theregional telephone network, customer operations, network operations andpayphones of Piltel in Subic and Olongapo City.  The monthly management fee payable by Piltel isbased on cost, and for cost components where margin is allowed, 15% will beapplied.  In addition, Piltel will pay a monthly variable cost per account inthe amount of Php44 for repairs and maintenance.  All third party invoices willbe passed on to Piltel at cost, including value-added tax.  This agreementsupersedes the facilities management agreement entered into by Piltel and SubicTelecom on May 29, 2000.     Total management fees underthis agreement amounted to Php11 million andPhp11 million for the six months ended June 30, 2003 and2002, respectively.  The new agreement is effective for three years untilSeptember 2004.  Outstanding receivables of Subic Telecom under this agreementamounted to Php4 million and Php2 million asof June 30, 2003 and December 31, 2002, respectively.     *e.        **Agreements between Smartand Piltel*     In connection with theintegration of their operations, Smart and Piltel have entered into thefollowing agreements:                                                                                           - An agreement for the co-location,or sharing, of cellular sites selected at the option of Smart, whereby Piltelis paid a usage fee of Php45,000 per shared site per month, subject to a 10%annual increase;                                                                                             - An agreement whereby Smart managesthe operation of Piltel's cellular and paging systems.  This agreement isdivided into three sub-agreements as follows:     i.        A Facilities Management Agreementunder which Smart operates, maintains and manages the physical facilities andtechnical services of Piltel's existing cellular and paging systems. Piltelpays Smart a fixed monthly fee of Php4 million and a variable monthly fee ofPhp13,735 per site covered by the agreement.  Additional fees of Php186,878million per month and Php624 per site per month are payable at the end of eachcalendar year upon rendition of the services in accordance with the agreement.This agreement was amended in May 2001 to include the management, operation andmaintenance of Piltel's prepaid wireless telecommunications network in the EO109 areas in Mindanao including the business and central offices, basestations, and public calling offices of Piltel located in South Cotabato,Saranggani and General Santos, Davao City, Davao del Sur, Zamboanga del Norte,Zamboanga del Sur and Misamis Occidental;     ii.      A Customer Service ManagementAgreement under which Piltel outsources the operation of its customer serviceand billing functions for its cellular and paging systems to Smart for a fixedmonthly fee of Php8.8 million and a variable cost of Php57, Php17 and Php25 perpostpaid, prepaid cellular and paging subscriber, respectively.  An additionalfee of Php399,926 per month and Php1 per postpaid subscriber per month ispayable at the end of each calendar year upon rendition of the services inaccordance with the agreement; and     iii.     An Administrative Support andManagement Services Agreement under which Piltel pays a fixed monthly fee ofPhp7.8 million.  An additional fee of Php353,764 per month is payable at theend of each calendar year upon rendition of the services in accordance with theagreement.      Total fees under thesemanagement agreements amounted to Php346million and Php323 million for the six monthsended June 30, 2003 and 2002, respectively.  Under these agreements,outstanding receivables of Smart as of June 30, 2003and December 31, 2002 amounted to Php530 millionand Php569 million, respectively.     In addition, Smart alsoentered into a Facilities Service Agreement with Piltel under which Piltelaccesses Smart's existing GSM network and facilities to enable Piltel to offerprepaid cellular service using GSM technology in exchange for approximately 50%of Piltel's revenues, net of interconnection expenses.  Total facility feesunder this agreement amounted to Php1,823million and Php1,076 million for the sixmonths ended June 30, 2003 and 2002, respectively.  Outstanding receivables ofSmart under this agreement amounted to Php260 million and Php458million as of June 30, 2003 and December 31, 2002, respectively.     *f.         **Air Time Purchase Agreementbetween PLDT and PT Asia Cellular Satellite and Related Agreements*  * *  In March 1997, PLDT enteredinto a Founder NSP Air Time Purchase Agreement with PT Asia Cellular Satellite,as amended in December 1998, under which PLDT was granted the exclusive rightto sell ACeS services in the Philippines.  In exchange, PLDT is required to purchase from PTAsia Cellular Satellite at least US$5 million worth of airtime annually overten years commencing on the date of the satellite’s commercial operations.  Thecommercial operations date is defined as the earlier of:                                                                                               - the day on which PT Asia CellularSatellite places the Garuda I satellite in commercial operation; and                                                                                                 - the date of final acceptance ofthe Garuda I satellite and associated equipment under the terms of theSpacecraft Contract, dated August 28, 1995, between PT Asia Cellular Satelliteand Martin Marietta Overseas Corporation.     However, the commercialoperations date may not occur without the consent of PLDT if there is aconstructive total loss or partial loss of the satellite under its launchinsurance contract and the satellite cannot provide commercial service in the Philippines.      In the event that PT AsiaCellular Satellite's aggregate billing revenues is less than US$45 million inany given year, PLDT is required to make supplemental airtime purchase paymentsnot to exceed US$15 million per year during the ten-year term.     In March 2003, PLDT, togetherwith the founder shareholders, entered into a Standstill Agreement in respectof the Air Time Purchase Agreement.  See *Note 21 – Contractual Obligationsand Commercial Commitments* for further discussion.        PLDT also entered into aFounder NSP Operating Agreement with PT Asia Cellular Satellite on March 12, 1997, underwhich 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.     Under an Assignment andAssumption Agreement dated December 29, 1998, PT Asia Cellular Satellite agreedto assign and transfer to AIL all of PT Asia Cellular Satellite's rights underthe Founder NSP Airtime Purchase Agreement and Founder NSP Operating Agreement.     Under an Acknowledgment of Assignment of Airtime PurchaseAgreement entered into on December 29, 1998, by and among PLDT, P.T. BankInternasional Indonesia and AIL, PLDT consented to the assignment by AIL of theFounder NSP Airtime Purchase Agreement to P.T. Bank Internasional Indonesia, assecurity agent, for the benefit of the secured parties under the SecurityAgreement dated as of December 29, 1998, which was executed in connection withthe Amended and Restated Credit Agreement dated December 29, 1998 among PT AsiaCellular Satellite, AIL, P.T. Bank Internasional Indonesia and various otherbanks.     On September 30, 2002, PTAsia Cellular Satellite, AIL, as guarantor, P.T. Bank International Indonesia,as security agent, and various other banks signed a Rescheduling Agreement,which amended the terms of the Amended and Restated Credit Agreement datedDecember 29, 1998, moving the principal repayment dates to agreed periods withthe final maturity date on January 31, 2012.  * *  *g.        **Agreements between Smartand ACeS**Philippines*     On July 18, 2000, Smartentered into a Service Distribution Agreement with ACeS Philippines under whichACeS Philippines appointed Smart as an authorized service provider of ACeSGlobal Mobile Personal Communication by Satellite Services, or GMPCS Services,in the Philippines having the task of exerting its best efforts to market andsell access to usage of the said services to prospective subscribers.       An amendment to this ServiceDistribution Agreement was made on February 16, 2001, whereby Smart shall remitto ACeS Philippines a Facility Usage Fee based on a revenue sharing formula.ACeS Philippines shall in turn pay Smart’s charges for thepayphone-related services.       Also on February 16, 2001,Smart entered into a Facilities Management Agreement, or FMA, andAdministrative Support and Management Services Agreement, or the ServiceAgreement, with ACeS Philippines.  In exchange for its services, Smart shallreceive fixed and variable monthly fees from ACeS Philippines.  Under the FMA,Smart undertakes the management, maintenance and operation of the ACeS GMPCSServices, which are currently ready and available for actual use or operation.Under the Service Agreement, Smart shall provide certain administrative supportand services in certain aspects of ACeS Philippines’ business operations suchas payroll administration and training, finance, audit, legal, purchasing andmaterials management, public affairs, information technology, sales andmarketing, ACeS Philippines NSP relations, ACeS International relations andother support services.     Total fees under theseagreements, net of ACeS Philippines share, amounted to Php36 million and Php20 millionfor the six months ended June 30, 2003 and 2002, respectively.  The outstanding payable ofSmart amounted to Php96 million as of June 30, 2003 and nooutstanding obligations as of December 31, 2002.      *h.        **Other Transactions*     Equity investments insubsidiaries and associates are discussed in *Note 9 – Investments*.     On December 9, 2002, PLDTtransferred and conveyed to Smart certain inland and submarine domestic fiberoptic cable loops, digital transmission equipment and corresponding networkmanagement systems with an aggregate net book value of Php4,138 million, asconsideration and in exchange for 298 million preferred shares of Smartsubscribed by PLDT at Php13.875 per share, or a total subscription price ofPhp4,138 million.       The following is a summary ofrelated party accounts with subsidiaries eliminated from the consolidatedbalance sheets as of June 30, 2003 and December 31, 2002 and from the consolidatedstatements of income for the six months ended June 30, 2003 and 2002:     
 

**2003**

2002

 

(in million pesos)

Balance Sheets

 

*** ***

Accounts receivable

**7,458**

4,871

Other noncurrent assets 

**86**

2,421

Accounts payable 

**4,345**

2,073

Accrued expenses and other current liabilities

**501**

805

Deferred credits and other noncurrent liabilities

**2,698**

4,414

Statements of Income

** **

* *

Fixed line revenues

**1,425**

1,041

Wireless revenues

**382**

459

Information and communications technology revenues

**15**

56

Rent expense

**1,625**

1,425

Maintenance expense

**197**

74
     The following is a summary ofrelated party accounts with Piltel as of June 30, 2003(unaudited) and December 31, 2002 (audited) and for the six months ended June 30, 2003 and2002:      
 

**2003**

2002

 

(in million pesos)

Balance Sheets

 

*** ***

Accounts receivable

**1,475**

2,435

Statements of Income

** **

* *

Fixed line revenues

**118**

272

Miscellaneous income

**42**

54
  *** ***  ***Transactions with MajorStockholders, Directors and Officers***     Transactions to which PLDT orits subsidiary was a party, in which a director or key officer or owner of morethan 5% of the common shares of PLDT, or any member of the immediate family ofa director or key officer or owner of more than 5% of the common shares of PLDThad a direct or indirect material interest as of June 30, 2003 and December 31,2002 and for the six months ended June 30, 2003 and 2002 are as follows:     *a.     **Agreements with NTTCommunications and/or its Affiliates*     PLDTis a party to the following agreements with NTT Communications and/or itsaffiliates:                                                                                                       -  Advisory Services Agreement .   On March 24, 2000, PLDT entered into an agreementwith NTT Communications, as amended on June 30, 2003,under which NTT Communications provides PLDT with technical, marketing andother consultants for various business areas of PLDT starting April 1, 2000.  Totalfees under this agreement amounted to Php96million and Php128 million for the six monthsended June 30, 2003 and 2002, respectively.  As of June 30, 2003 and December 31, 2002,outstanding obligations of PLDT amounted to Php32million and Php32 million, respectively.                                                                                                         -  Domestic Fiber Optic NetworkSubmerged Plant Maintenance Agreement .On July 4, 2000, PLDT entered into an agreement with NTT WorldEngineering Marine Corporation, or NTT WEMC, for the submarine cable repair andother allied services for the maintenance of PLDT’s domestic fiber-opticnetwork, or DFON, submerged plant for a period of five years up to July 4, 2005.  Underthe agreement, PLDT shall pay NTT WEMC a fixed annual standing charge of US$2million, excluding cost for the use of a remotely operated submersible vehicleat US$5,000 for every day of use and repair cost computed at US$19,000 per dayof actual repair.  Total fees under this agreement amounted to Php34 million and Php33million for the six months ended June 30, 2003 and 2002, respectively.                                                                                                           -  Arcstar Licensing Agreement and Arcstar Service Provider Agreement.    On March 24, 2000, PLDT entered into an agreementwith NTT Worldwide Telecommunications Corporation under which PLDT marketsmanaged data and other services under NTT Communications' "Arcstar"brand to its corporate customers in the Philippines.  PLDT also entered into a Trade Name and TrademarkAgreement with NTT Communications under which PLDT has been given the right touse the tradename "Arcstar" and its related trademark, logo andsymbols, solely for the purpose of PLDT's marketing, promotional and salesactivities for the Arcstar services within the Philippines.  Globalcoordination fees to NTT Communications based on certain percentage of revenuesderived from Arcstar products and services amounted to Php13 million and Php5 million for thesix months ended June 30, 2003 and 2002, respectively.  As of June 30, 2003 and December 31, 2002, outstanding obligation of PLDT amounted to Php7 million and Php3 million, respectively.                                                                                                             -  Conventional InternationalTelecommunications Services Agreement .On March 24, 2000, PLDT entered into an agreement with NTTCommunications under which PLDT and NTT Communications agreed to cooperativearrangements for conventional international telecommunications services toenhance their respective international businesses.  Total fees under thisagreement amounted to Php4 million and Php1 million for the six months ended   June 30, 2003 and 2002, respectively.  Asof June 30, 2003 and December 31, 2002, outstanding obligation of PLDT amountedto Php2 millionand Php0.6 million, respectively.     *b.     **Agreement between Smart and**Asia**Link B.V., or ALBV.* Smart has an existing Technical Assistance Agreementwith ALBV for the latter to provide technical support services and assistancein the operations and maintenance of CMTS for a period of five years, subjectto renewal upon mutual agreement between the parties.  The agreement provides forquarterly payments of technical service fees equivalent to 2% of the netrevenues of Smart.  In January 2003, the agreement was amended, reducing thetechnical service fees to be paid by Smart to ALBV to 1% of net revenueseffective January 1, 2003.     Smartalso has an existing Services Agreement with ALBV for a period of 25 yearsstarting January 1, 1999, which shall automatically expire unless renewed bymutual agreement of both parties.  Under the agreement, ALBV provides adviceand assistance to Smart in sourcing capital equipment and negotiating withinternational suppliers, arranging international financing and other servicestherein consistent with and for the furtherance of the objectives of theservices.     ALBVis a subsidiary of the First Pacific Group.     Totalfees under these agreements amounted to Php147 millionand Php207 million for the six months ended June 30, 2003 and2002, respectively.  Outstanding payables of Smart under these agreementsamounted to Php26 million and receivables of Php31 million as of June 30, 2003 and December 31, 2002, respectively.     *c.      **Agreement with Foote, Cone& Belding Worldwide, or FCB Worldwide.*  FCB Worldwide provides consultancy and advisory services to PLDT.The chairman of PLDT’s Board is the non-executive chairman of FCB Worldwide’srepresentative office in the Philippines.     *d.     **Agreements relating toinsurance companies.*Gotuaco delRosario and Associates, or Gotuaco*,* acts as broker for certain insurancecompanies to cover certain properties of the PLDT Group.  Insurance premiumsare remitted to Gotuaco and the broker’s fees are settled between Gotuaco andthe insurance companies.  In addition, PLDT has signed an insurance policy withMalayan Insurance Co. Inc., or Malayan, wherein premiums are directly paid to Malayan.Total payments to Gotuaco and Malayan covering the twelve-month period endingJuly 31, 2003 including payments subsequent to 2002 amounted to Php566 million.  Two directors of PLDT have adirect/indirect interest in or serve as director/officer of Gotuaco andMalayan.     
 
  **17. ****Employees’ Benefit Plan**     ***PLDT***     PLDT has a trustee-managed,noncontributory defined benefit plan, or the Benefit Plan, providing forretirement and death benefits and service terminal pay to substantially allpermanent and regular employees.  Benefits under the Benefit Plan are based onfinal salary and length of service.     PLDT’s actuarial valuation isdone on an annual basis.  Based on the latest actuarial valuation datedFebruary 2003, the actuarial present value of accrued liability, net pensioncost and average assumptions used in developing the valuation at December 31, 2002 and2001 are as follows:     
** **

**2002**

2001

** **

(in million pesos)

Actuarial accrued liability

**7,984**

6,638

Assets at fair value

**4,094**

4,592

Unfunded actuarial accrued liability

**(3,890)**

(2,046)

Unrecognized:

** **

 

Net transition liability

**2,889**

3,054

Net experience adjustment

**(174)**

(2,125)

Accrued pension cost as of December 31, 2002

**(1,175)**

(1,117)
     Accrued pension cost as of June 30, 2003 and2002 are as follows:     
** **

**2003**

2002

** **

(Unaudited)

** **

(in million pesos)

Accrued pension cost as of January 1, 2003

**(1,175)**

(1,117)

Accrual of pension cost

**(164)**

(264)

Payments of pension liability (Note 9)

**2,457**

126

Prepaid (accrued) pension cost 

**1,118**

(1,255)
     The weighted averageassumptions used to determine pension benefits for 2003 and 2002 are asfollows:     
** **

**2003**

2002

Discount rate

**9%**

12%

Rate of increase in compensation

**8%**

12%

Rate of return on plan assets

**9%**

11%
     Net pension cost was computedas follows:     
** **

**Six Months Ended June 30**

** **

**2003**

2002

 

(Unaudited)

 

(in million pesos)

Normal cost

**234**

202

Interest cost

**20**

24

Amortization of:

** **

 

Unrecognized net transition obligation

**82**

83

Unrecognized net experience adjustments

**(8)**

(45)

** **

**328**

264
     In June 2003, PLDT contributedunto the PLDT Beneficial Trust Fund, or BTF, its investment in convertiblenotes of Unilink and a real property in Makati City valued at Php1,350 millionand Php650 million, respectively, for and in consideration of the partialpayment of the contributions which PLDT is required to make to the BTF underPLDT’s employee benefit plan.        ***Smart***     Smart has a trustee-managed,tax-qualified Provident Plan providing for retirement, death or serviceterminal pay to substantially all permanent and regular employees.  Under theProvident Plan, Smart contributes to the provident fund for the credit of eachmember’s Personal Retirement Account, or PRA, a percentage of such member’smonthly salary.  The member has an option to contribute to the Provident Fundan amount not to exceed 25% of the member’s monthly salary, which are creditedto each member’s PRA; however, very few members contribute.  Net earnings 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 asof the end of the preceding period.     Any benefit payable underthis Plan shall be in lieu of or in compliance with, but not in addition to,the payment of similar benefits Smart is required to pay its employees underexisting or future laws, employment contracts or collective bargainingagreements, it being understood that the employee shall be entitled only to thehigher of the benefits and not to both.     Contributions by Smart to theProvident Plan charged to operations amounted to Php35million and Php25 million for the six monthsended June 30, 2003 and 2002, respectively.     
 
  **18. ****Other Expenses – Net**     This account consists of:     
 

**Consolidated**

 

**Non-Consolidated**

** **

**Six Months Ended June 30**

 
 

**2003**

2002

(As restated –

Note 3)

 

**2003**

2002

(As restated –

Note 3)

 
 

(Unaudited)

 

(in million pesos)

Interest expense and related items - net of capitalized interest (Notes 8 and 13)

**6,094**

7,209

 

**4,830**

5,596

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

**1,616**

721

 

**(3,202)**

(1,424) 

 
Manpower reduction cost

**1,411**

62

 

**1,411**

15

 
Loss on disposal of investment in debt securities (Notes 9 and 17)

**702**

**–**

 

**702**

**–**

 
Hedge cost and foreign exchange/swap losses (Notes 13 and 24)

**556**

184

 

**508**

137

 
Other expenses (income), net

**1,190**

(1,582)

 

**692**

(765)

 
 

**11,569**

6,594

 

**4,941**

3,559

 
 

Over the past years, PLDT hasbeen implementing a manpower reduction program, or MRP, in line with itscontinuing effort to reduce the cost base of the fixed line business.  The MRPcost charged to operations amounted to Php324 million and Php1,411 million for the year ended December 31, 2002and for the six months ended June 30, 2003, respectively, representing 845 and1,681 employees who availed of the program, respectively.  

 

The decision to implement theMRP was anchored on the challenges being faced by the fixed line business assignificant changes in technology, increasing competition, and shifting marketpreferences to cellular use have reshaped the future of the fixed linebusiness.  The MRP is being implemented under the New Labor Code and is incompliance with all other relevant labor laws and regulations.  

 

 

**19. ****Income Taxes**

 

The net current andnoncurrent components of deferred income tax recognized in the balance sheetsfollow:

 

** **

**Consolidated**

** **

**Non-Consolidated**

 

**June 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

**June 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

 

(in million pesos)

Net current assets

**4,750**

3,772

** **

**4,570**

3,002

Net noncurrent liabilities

**(11,542)**

(10,699)

** **

**(10,395)**

(9,231)

 

The components of netdeferred tax assets and liabilities are as follows:

 

** **

**Consolidated**

** **

**Non-Consolidated**

** **

**June 30,  2003**

**(Unaudited)**

December 31,  2002

(Audited)

** **

**June 30,  2003**

**(Unaudited)**

December 31, 2002

(Audited)

** **

(in million pesos)

Current assets (liabilities) – net:

** **

** **

** **

** **

 

Allowance for doubtful accounts

**3,635**

2,760

** **

**2,784**

1,983

Unearned revenues on sale of prepaid cards

**889**

710

** **

**159**

138

NOLCO

**1,374**

618

** **

**1,375**

618

Accrued pension cost 

**574**

571

** **

**282**

376

Allowance for inventory losses

**389**

192

** **

**28**

–

Others

**54**

(27)

** **

**11**

(44)

 

**6,915**

4,824

** **

**4,639**

3,071

Less valuation allowance 

**(2,165)**

(1,052)

** **

**(69)**

(69)

Net current assets

**4,750**

3,772

** **

**4,570**

3,002

Noncurrent assets:

** **

 

 

** **

 

Additional depreciation for wireless analog assets

**860**

880

** **

**–**

–

Others

**119**

108

** **

**85**

108

 

**979**

988

** **

**85**

108

Less valuation allowance

(932)

(571)

 

–

–

 

**47**

417

 

**85**

108

 

** **

** **

** **

** **

 

Noncurrent liabilities:

** **

** **

** **

** **

 

Interest charges capitalized, net of amortization

**(5,489)**

(5,536)

** **

**(4,833)**

(4,830)

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

**(5,083)**

(4,536)

** **

** **

** **

**(4,968)**

(3,798)

Taxes and duties capitalized, net of amortization

**(679)**

(711)

** **

**(679)**

(711)

Undistributed income of foreign subsidiaries

**(338)**

(333)

** **

**–**

–

 

**(11,589)**

(11,116)

** **

**(10,480)**

(9,339)

Net noncurrent liabilities

**(11,542)**

(10,699)

** **

**(10,395)**

(9,231)

 

The carryforward benefit ofNOLCO amounting to Php1,375 million as of June 30, 2003can be claimed as deductions against taxable income until 2005.

 

Provision for income taxconsists of:

 

 

**Consolidated**

** **

**Non-Consolidated**

** **

**Six month ended June 30**

 

**2003**

** **

** **

2002

(As restated –

Note 3)

** **

**2003**

** **

** **

2002

 

 

(Unaudited)

 

(in million pesos)

Current

**1,177**

464

 

– 

–

Deferred

**(35)**

366

** **

**(403)**

527

 

**1,142**

830

** **

**(403)**

527

 

The current provision for income tax in 2002, on aconsolidated basis, mainly represents the subsidiaries’ income tax under theregular corporate taxes.  PLDT’s minimum corporate income tax in 2002 amountingto Php638 million was charged directly to “Prepayments and other currentassets”.  The carryforward benefit of MCIT as of June 30, 2003, can be claimed as deductions against income tax payable until 2005.

 

The current provision forincome tax for the six months ended June 30, 2003and 2002 mainly represents the subsidiaries’ income tax under the regularcorporate income tax.

 

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

 

** **

**Consolidated**

** **

**Non-Consolidated**

 
** **

**Six month ended June 30**

 
 

**2003**

** **

** **

2002

(As restated –

Note 3)

 

**2003**

** **

** **

2002

 

 

** **

 

(Unaudited)

 
 

(in million pesos)

 
Provision at statutory tax rate

**866**

1,136

 

**441**

1,035

 
Tax effect of:

** **

 

 

** **

 

 
Non deductible expenses 

**1,108**

43

 

**238**

7

 
Income not subject to tax

**(36)**

(33)

 

**(36)**

(33)

 
Income subject to final tax

**(80)**

(90)

 

**(15)**

(6)

 
Income subject to income tax holiday

**(489)**

(918)

 

–

–

 
Income subject to lower tax rate

**(44)**

(53)

 

–

–

 
Equity share in net loss (income) of investees

 

–

231

 

** **

**(1,031)**

(476)

 
Others

**(183)**

514

 

–

– 

 
Actual provision for income tax

**1,142**

830

 

**(403)**

527

 
 

On July 20, 1999,Mabuhay Satellite was registered as a Subic Bay Freeport Enterprise and ClarkTelecom was also registered as a Clark Special Economic Zone Enterprise underRepublic Act No. 7227, otherwise known as the Bases Conversion and DevelopmentAct of 1992, or the Act.  As registrants, Mabuhay Satellite and Clark Telecomare entitled to all the rights, privileges and benefits established thereunderincluding tax and duty-free importation of capital equipment and special incometax rate of 5% of gross income, as defined in the Act. 

 

Smart is registered with the Board of Investments, or BOI,under the Omnibus Investments Code of 1987 as a preferred non-pioneerenterprise for the operation of the IGF and CMTS services.  As such, Smart wasentitled to certain tax and non-tax incentives, including an income tax holidayfor a period of three years up to August 2000. 

 

The BOI Governing Board, inits meeting on August 10, 2000, granted the request of Smart for the transferof its LEC business to PLDT subject to certain conditions, which include thesurrender of Smart’s original certificate of registration to the BOI for annotationand safekeeping and the issuance of a certificate of registration to PLDT withrespect to the transferred LEC business.

 

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

 

Smart’s deferred income taxassets and liabilities as of June 30, 2003 and December 31, 2002 have beenrestated at realizable amounts after provision of a valuation allowance forportions of income tax assets that will not have tax consequences.

 

 

**20. ****Earnings Per Common Share**

 

The following table presentsinformation necessary to calculate the earnings per share:

 

** **

**Six Months Ended June 30**

 

**2003**

2002

** **

**Basic**

**Diluted**

Basic

Diluted

** **

(Unaudited)

** **

(in million pesos)

Net income

**1,780**

**1,780**

2,708

2,708

Less dividends on preferred stock

**847**

**847**

804

701

Net income applicable to common stock

**933**

**933**

1,904

2,007

 

 

 

(in thousand, except per share amounts)

Outstanding common shares, beginning

**169,361**

**169,361**

168,895

168,895

Effect of issuance of common shares during the period

**23**

**23**

154

11,284

Weighted average number of common shares, end

**169,384**

**169,384**

169,049

180,179

Earnings per common share

**Php5.51**

**Php5.51**

Php 11.26

Php11.14

 

The computation of diluted earnings per share wasanti-dilutive for six months ended June 2003 and 2002; therefore, the amountsreported for basic and diluted earnings per share were the same.

 

 

**21. ****Contractual Obligations and Commercial Commitments**

** **

***ContractualObligations***

 

The following table disclosesthe PLDT Group’s contractual obligations outstanding as of June 30, 2003: 

 

 

**Payments Due by Period**

 

**Total**

**Within 1 year**

**2****-3**

**years**

**4****-5**

**years**

**After 5 years**

 

(in million pesos)

 

 

 

 

 

 

Long-term debt obligations

156,831

20,679

56,043

35,962

44,147

Long-term lease obligations 

7,528

1,659

4,271

1,072

526

Unconditional purchase obligations(1)

9,977

800

3,274

1,086

4,817

Other long-term obligations 

20,388

**–**

**–**

**–**

20,388

Total contractual cash obligations 

194,724

23,138

63,588

38,120

69,878

 

(1)  Under the Air Time Purchase Agreement with AIL,the amount disclosed in the table above for payments due within 1 year reflectsa reduction in PLDT’s required payments agreed under a Standstill Agreement,while the amounts disclosed for payments due from 2 years onwards are based onthe original Air Time Purchase Agreement.  The parties to the StandstillAgreement have also agreed to negotiate in good faith and use their best effortsto reach an agreement on a revised ATPA before November 15, 2003 that will cover,among other matters, the amended minimum and supplemental air time paymentprovisions subject to the approval of ACeS International Limited’s creditors.

* *

*Long-term Debt Obligations*

* *

For discussion of ourlong-term debt obligations, see *Note 13 Long-term Debt*.

* *

*Long-term Lease Obligations*

*** ***

*Transponder LeaseAgreement.*   As discussed in *Note16 – Related Party Transactions*, PLDT and Mabuhay Satellite entered into aTransponder Lease Agreement on December 28, 1995, which was amended on May 10, 2000.  Thisagreement is for a period of ten years commencing on December 18, 1997,unless earlier terminated in accordance with the terms thereof.  The annualbasic rent for the transponders for 2002 is US$18 million.  As of June 30, 2003, PLDT’saggregate remaining obligation under this agreement was approximately Php3,861 million. 

 

*Municipal TelephoneProjects*.   In 1993, PLDT enteredinto two lease agreements with the Philippine Department of Transportation andCommunications, or DOTC, covering telecommunications facilities establishedunder the Municipal Telephone Act.  Under these agreements, PLDT was grantedthe exclusive right to perform telecommunications management services, to expandservices, and to promote the use of the DOTC-contracted facilities in certaincovered areas for a period of fifteen years.  Title to the properties shall betransferred to PLDT upon expiration of the lease term.  As of June 30, 2003, theaggregate remaining obligation was approximately Php944million.  In case of cancellation, PLDT is liable to pay Php100 million undereach of the two contracts as liquidated damages.

 

*Domestic Fiber OpticNetwork Submerged Plant Agreement*.As discussed in *Note 16 – Related Party Transactions*, PLDT entered intoan agreement with NTT World Engineering Marine Corporation on July 4, 2000, for thesubmarine cable repair and other allied services in relation to the maintenanceof PLDT’s DFON submerged plant for a period of five years up to July 4, 2005.  Underthe agreement, PLDT shall pay NTT World Engineering Marine Corporation a fixedannual standing charge of US$2 million excluding cost for the use of aremotely-operated submersible vehicle at US$5,000 for every day of use andrepair cost computed at US$19,000 per day of actual repair.  As of June 30, 2003, theaggregate remaining obligation was approximately Php281million.

 

*Digital PassageService Contracts*.   PLDT has existing Digital Passage Service Contractswith foreign telecommunication administrations for several dedicated circuitsto various destinations for 10 to 25 years expiring at various dates.  As of June 30, 2003, theaggregate remaining obligation was approximately Php142million.

 

*License Agreement withMobius Management Systems (**Australia**) Pty Ltd., or Mobius.*PLDT entered into a license agreement with Mobiuspursuant to which Mobius has granted PLDT a non-exclusive, non-assignable andnon-transferable license for the use of computer software components.  Underthe agreement, Mobius is also required to provide maintenance services for aperiod of one year at no additional maintenance charge.  PLDT may purchasemaintenance services at the expiration of the first year for a fee of 15% ofthe current published license fee.  As of June 30, 2003,the aggregate remaining obligation was approximately Php76 million.

 

*Other Long-term LeaseObligations*.   The PLDT Group hasvarious long-term lease contracts for periods ranging from two to ten yearscovering certain offices, warehouses, cell sites, telecommunication equipmentlocations and various office equipment.

 

*Unconditional Purchase Obligations*

 

*Air Time PurchaseAgreement with AIL*.   As discussed in*Note 16 – Related Party Transactions*, PLDT is a party to a Founder NSPAir Time Purchase Agreement, or ATPA, with AIL, which was amended in December1998, under which PLDT is granted the exclusive right to sell ACeS services inthe Philippines.  In exchange, PLDT is required to purchase from AIL a minimumof US$5 million worth of air time annually over ten years commencing on thedate of the commercial operations of the Garuda I satellite.  In the event AILaggregate billing revenues is less than US$45 million in any given year, PLDTis required to make supplemental air time purchase payments not to exceed US$15million per year during the ten-year term.

 

In March 2003, PLDT, togetherwith the other founder shareholders, entered into a Standstill Agreement withAIL suspending the application and enforcement of the minimum and supplementalair time payments under the original ATPA.  In lieu of these payments, theparties agreed that AIL shall provide PLDT and the other founder shareholders,with unlimited use of air time for the year 2003 in exchange for a fixed fee inthe amount of US$3.8 million for PLDT.  PLDT is also obliged to purchase fromAIL 13,750 satellite phone units for the years 2003 at US$395 F.O.B. per unit,subject to quarterly price adjustment.  The parties to the Standstill Agreementalso agreed to negotiate in good faith and use their best efforts to reachagreement on a revised ATPA before November 15, 2003 that will cover, amongother matters, the amended minimum and supplemental air time payment provisionssubject to the approval of AIL’s creditors.  

 

As of June 30, 2003, PLDT’saggregate remaining minimum obligation under this agreement was approximatelyUS$2 million for the airtime payment and US$3 million for the satellite phoneunits.

 

*International AffiliateAgreement with VeriSign, Inc., or VeriSign*.   On September 15, 2000, ePLDT entered into an agreement with VeriSign forthe non-exclusive, non-transferable right and license to use the VeriSignsoftware, brand and Certification Practice Statement for the purpose ofapproving, issuing, suspending or revoking digital certificates for users ofthe Internet or similar open systems in the Philippines for a period of seven years.  Under this agreement,ePLDT is required to pay VeriSign a certain percentage of the revenue derivedfrom the services subject to minimum annual royalty payments aggregating toUS$1.2 million, which was subsequently reduced to US$0.9 million, for theseven-year contract period.  In addition, ePLDT was required to pay an annualsupport fee of US$0.5 million for the first year and US$0.3 million in eachyear thereafter.  As of June 30, 2003, ePLDT’s aggregate remaining minimum obligation underthis agreement was approximately US$0.9 million and US$1.2 million in minimumannual royalty payment and annual support fee, respectively.

 

Effective July 1,2003, VeriSign has agreed to amend the Agreement and issued Addendum 6 towrite-off all past dues invoices and payments owed to VeriSign which wereinvoiced or scheduled to be invoiced under the Agreement prior to this Addendum6.  All royalty payments and annual support fees due through June 2003 will bepart of the write-off in the amount of US$0.8 million.  For contract year 4(September 2003-August 2004), annual support fee will be reduced from US$0.3million to US$40,000 and contract years 5-7 (September 2003-August 2007) fromUS$0.3 million to US$0.16 million.  In addition, VeriSign agreed to reduce theaffiliate revenue sharing rates from 50% of suggested retail price to 25% ofsuggested retail price for both enterprise and internet products starting July2003 for 12 months and negotiable thereafter.

 

*License Purchase Agreementwith I-Contact Solutions Pte. Ltd.*On April 2, 2003, iPlus Intelligent Network Inc., or iPlus, enteredinto an Application Services Provider, or ASP, and Reseller Contract withI-Contact Solutions Pte. Ltd., or I-Contact, of Singapore.  Under theagreement, iPlus will purchase licenses of the CosmoCall Universe TM IP-based contact center solution.  CosmoCall Universe supports multi-channel customer interactionsincluding telephone, web chat, web voice, web video, web collaboration, emailand voicemail in one high capacity, high availability, multi-tenant platform.CosmoCall Universe is a complete, unified contact center suite that includesACD, IVR, CTI, predictive dialing, multimedia recording and a complement ofpowerful management applications.  The aggregate value of these licensesis US$2.1 million, and these will be delivered quarterly over a two-yearperiod.  Further to the agreement, I-Contact will appoint iPlus as theexclusive reseller and ASP for the Philippine market and will provide iPluswith all the necessary support in terms of sales, marketing, and technicalsupport. 

 

*Other UnconditionalPurchase Obligations.*   PLDT hasvarious purchase contracts for periods ranging from two to three years coveringthe use of fraud management system and satellite hub and remote VSAT networksystems.

* *

*Other Long-term Obligations*

 

*Mandatory Conversion andPurchase of Shares*.   As discussed in*Note 9 – Investments* and *Note 15 – Stockholders' Equity*, as ofJune 30, 2003, PLDT had issued a total of 3 millionshares of Series V Convertible Preferred Stock, 5 million shares of Series VIConvertible Preferred Stock and 4 million shares of Series VII ConvertiblePreferred Stock in exchange for a total of 58 million shares of Series K ClassI Convertible Preferred Stock of Piltel pursuant to the debt restructuring ofPiltel.  

 

As of June 30, 2003, 145,320 shares of Series V Convertible PreferredStock and 529,400 shares of Series VI Convertible Preferred Stock had beenconverted to PLDT common shares.  The aggregate value of the put option basedon outstanding shares as of June 30, 2003 was Php20,388million, of which Php13,393 million is payable on June 4, 2008 and Php6,995million on June 4, 2009 if all of the outstanding shares of Series V, VI andVII Convertible Preferred Stock were mandatorily converted and all theunderlying common shares were put to PLDT.  The market value of the underlyingcommon shares was Php6,260 million, based onthe market price of PLDT’s common stock of Php565per share as of June 30, 2003.

*** ***

***Commercial Commitments***

* *

As of June 30, 2003, ouroutstanding commercial commitments, in the form of letters of credit, amountedto Php2,909 million.  These commitments will expirewithin one year.

 

In October 1998, Smartentered into a Frame Supply Contract with Nokia Telecommunications OY for thesupply of hardware, software and documentation for its GSM phone network.  Inthe same month, Smart and Nokia (Philippines), Inc. signed a Frame Services Contract that coversthe design, planning, installation, commissioning, integration, acceptancetesting, training and handling over of the GSM network.  In 2001, Smart issueda Master Purchase Order, or MPO, in the amount of US$200 million in favor ofNokia Networks OY for the purchase of additional equipment to expand its GSMphone network.  Under this MPO, unavailed portion as of June 30, 2003amounted to US$32 million.

 

In addition, Smart entered into a Technical SupportServices Order, or TSSO, with Nokia Philippines, Inc. on May 30, 2003 in the amount of US$8 million.  This TSSO which makes reference to the Technical SupportContract of November 19, 1998 shall be valid and in full force until December 31, 2003.  The unavailed portion as of June 30, 2003 amounted to US$7 millionunder this TSSO.

* *

 

**22. ****Contingencies**

** **

***PLDT***

 

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

 

After exhausting allavailable administrative remedies with the NTC, PLDT filed an appeal via aPetition for Certiorari with Prayer for Temporary Restraining Order and/orPreliminary Injunction with the Court of Appeals, or CA.  The CA promulgatedits decision which, in the main, held that (a) the annual SRF should beassessed on the basis of the par value of the subscribed or paid-up capitalstock of PLDT, exclusive of capital in excess of par; (b) the NTC is legallyauthorized to collect the administrative fees under Section 40 (f) of the PSAeven if it renders or performs no regulatory service or incurs no expensewhatsoever in approving PLDT’s increase in authorized capital stock; and (c)the fees under Section 40 (e) and (f) of the PSA should be computed at the rateof Php0.50 per Php100.00, or a fraction thereof pursuant to B.P. 325 instead ofonly Php0.20 per Php100.00 or fraction thereof under the PSA.  

 

In an appeal to the SupremeCourt, or SC, PLDT questioned the CA decision (a) that the NTC can validlycollect fees even in the absence of any regulatory services performed, and (b)upholding the validity of the increase in the rate of fee under Section 40 (e)of the PSA to Php0.50 from Php0.20 per Php100.00 or a fraction thereof of thecapital stock.  NTC, on the other hand, questioned the basis for the SRFassessment, which was determined by the CA to be the par value of thesubscribed capital stock exclusive of capital in excess of par. 

 

In a decision dated July 28, 1999, the SCordered the NTC to recompute the SRF due from PLDT on the basis of PLDT’s“capital stock subscribed or paid”. 

 

Pursuant to the SC decision,the NTC issued a re-assessment letter in February 2000 for the balance of theSRF for previous years computed on the same basis stated in the SC decision butinclusive of stock dividends.  On the ground that the inclusion of stock dividendsin the calculation of the SRF has no basis in law and jurisprudence, PLDTrequested the NTC to cancel/withdraw the portions of the assessment based onthe stock dividends.

 

Without resolving or rulingon PLDT’s request, in September 2000, the NTC issued another assessment letterfor the balance of the SRF for previous years and the SRF for the year ended December 31, 2000.Consequently, PLDT filed a Petition for Certiorari and Prohibition with UrgentPrayer for the Immediate Issuance of a Temporary Restraining Order with theCA.  The CA temporarily restrained the NTC from enforcing/implementing itsFebruary and September 2000 assessments and subsequently issued a Writ ofPreliminary Injunction.   In February 2001, the CA dismissed the Petition forCertiorari and Prohibition filed by PLDT and dissolved the Writ of PreliminaryInjunction earlier issued.

 

PLDT filed a Motion forReconsideration of the aforementioned CA decision on the ground that the samewould vitiate and not validate the decision rendered by the SC on July 28, 1999,ordering the NTC to recompute the SRF to be imposed on PLDT.  On April 6, 2001,the Office of the Solicitor General, or OSG, adopting its Comment dated October11, 2000 as its comment on the Motion for Reconsideration filed by PLDT, statedthat the NTC by insisting on its assessments is providing its own definition of“stock dividend” at variance with the SC decision dated July 28, 1999 and is ineffect enlarging its meaning and scope and expanding the concept envisagedtherein.  Further, the OSG stated that the sole and only issue is whether ornot the SC decision directs the inclusion or exclusion of  “stock dividends” inthe computation of the SRF.  The NTC also filed its comment on PLDT’s Motionfor Reconsideration and PLDT filed a Reply to the NTC’s Comment stressing thatthe failure of NTC to deny the allegations in PLDT’s Motion for Reconsiderationthat (a) the SC decision dated July 28, 1999 annulled and set aside the NTC SRFassessment; (b) the SC directed the NTC to make a recomputation of the said SRFassessments but that NTC did not make any such recomputation; (c) the NTCserved anew on PLDT exactly the same SRF assessments that were ordered setaside by the SC; (d) the SC decision dated July 28, 1999 has become final andexecutory; (e) the fundamental issues raised by PLDT in its Motion forReconsideration is not at all whether the SC decision dated July 28, 1999 isright or wrong but rather whether it did or did not direct the exclusion ofstock dividends in the SRF assessment; and (f) the SC decision dated July 28,1999 held that the SRF should lawfully be based only on such capital stocksubscribed or paid for which PLDT received actual payment; should all be takento mean that the NTC SRF assessments should exclude stock dividends.

 

Considering the September 30statutory deadline for the payment of the SRF, PLDT filed with the CA an UrgentMotion for Re-Issuance of Restraining/Injunctive Writ requesting the CA tore-issue and expand the Writ of Preliminary Injunction it had previouslyissued, to cover any and all SRF assessments, including the SRF assessments dueon September 30, 2001, pending final resolution of PLDT’s Motion forReconsideration.  The CA granted PLDT’s prayer for injunctive relief, andre-issued a Writ of Preliminary Injunction, the same to be effective until theresolution of PLDT’s Motion for Reconsideration.

 

In March 2002, the CA issueda resolution denying PLDT’s Motion for Reconsideration and dissolving the Writof Preliminary Injunction.  PLDT then filed with the SC a Petition for Reviewon Certiorari of the said CA decision. 

 

In light of the impendingSeptember 30 statutory deadline for the payment of the SRF, PLDT filed with theSC an Urgent Motion for the Issuance of a Temporary Restraining Order to enjointhe NTC from enforcing any SRF assessments against PLDT pending the resolutionof its Petition for Review on Certiorari.  Considering, however, that as of September 30, 2002,no decision has yet been promulgated by the SC on the aforementioned Motion,PLDT on the said date paid the SRF for the years 2000 and 2002 based on thepaid-up capital including premium but excluding stock dividends.

 

On January 16, 2003,PLDT filed a consolidated reply to the Solicitor General’s comment (dated October 4, 2002) witha motion for the early resolution of the case. On February 24, 2003, the SupremeCourt issued an Order noting PLDT’s reply with motion for early resolution. Thecase, upon the rules and practice of Court, now stands submitted for decision.

 

Since 1976, PLDT has receivedassessments from the NTC for permit, SRF and other charges.  As of June 30, 2003, PLDT has paid a total amount of Php1,527 million in SRF, of which Php1,351 million were paid under protest.

 

*Local franchise taxassessments*.   PLDT is presently aparty to several cases pending before courts of original and appellatejurisdictions in the Philippines involving the issue of exemption of PLDT from localfranchise and business taxes. 

 

PLDT believes, based on theopinion of its legal counsel, that it is exempt from payment of local franchiseand business taxes.  PLDT’s claim for exemption or exclusion from localfranchise and business taxes is grounded on Section 12 of R.A. 7082, or thePLDT Franchise, as implicitly amended and expanded by Section 23 of RepublicAct 7925, or R.A. 7925, also known as the Public Telecommunications PolicyAct.  Further, PLDT claims that assuming that it is liable for local franchisetax, R.A. 7160, or the Local Government Code, provides that local franchise taxshall be based on the gross receipts of the preceding year received orcollected for services rendered within the jurisdiction of the taxingauthority.  Therefore, the use by some local government units of gross revenuesas the basis for computation of franchise tax is in gross violation of the lawbecause it pertains to all income earned regardless of whether it was receivedor not, unlike gross receipts which are essentially the amount of money or itsequivalent actually or constructively received.  Moreover, gross revenues referto all income earned by PLDT within and outside the jurisdiction of the localtaxing authority; thus, the use thereof as a basis of computation willexceptionally overstate the franchise tax.

 

To date, PLDT has receivedfrom several local government units’ assessments for local franchise and/orbusiness taxes covering various periods, in the aggregate amount of Php4,834million.  PLDT has invariably protested these assessments, appealed to thelower courts denials of its protests by local government units, and elevated tothe CA or the SC adverse decisions of the lower courts.

 

In a case entitled PLDT vs.the City of Davao, on August 22, 2001, the Supreme Court denied PLDT’s Petitionfor Review on Certiorari and affirmed the decision of the Davao City RegionalTrial Court upholding the assessment of local franchise tax in the amount ofPhp3.7 million for the year 1999 and denying PLDT’s claim for a refund oferroneously paid franchise tax for the year 1997 and the first to the thirdquarters of 1998.  The Supreme Court held that although the withdrawal of taxexemptions under the Local Government Code does not preclude Congress fromgranting subsequent exemptions, the issue is whether, after the withdrawal ofPLDT’s exemption under the Local Government Code, PLDT again became entitled tothe exemption by virtue of Section 23 of Republic Act No. 7925.  The SupremeCourt ruled that PLDT is not entitled to this exemption, and cited rules instatutory construction holding that tax exemptions are highly disfavored, andthat legislative intent must be ascertained from a consideration of the statuteas a whole and not merely of a particular provision.  The decision stated thatthe term “exemption” in Section 23 is too general and it does not appear that,in approving Section 23 of Republic Act No. 7925, Congress intended it tooperate as a blanket tax exemption to all telecommunication entities.  As such,the Supreme Court held that Section 23 of the Republic Act No. 7925 cannot beconsidered as having amended PLDT’s franchise so as to entitle it to exemptionfrom local franchise tax.  On October 1, 2001, PLDT filed a Motion forReconsideration of the Supreme Court decision and a Motion to Refer the case tothe Court En Banc and for Oral Arguments.  The Supreme Court’s Second Divisiongranted the Motion to Refer the Case to the Court En Banc, which referral wasthereafter accepted by the Supreme Court En Banc.  The Oral Arguments were heldon January 21, 2003 and both parties submitted their Memorandum whereuponthe Motion for Reconsideration was deemed submitted for resolution.  On March 25, 2003, theSupreme Court decided by a 9-to-5 vote to deny PLDT’s Motion forReconsideration and affirmed the franchise tax assessment of Davao City in theamount of Php3.7 million.  PLDT believes that although such a decision wouldconstitute a precedent, this will not automatically result in the terminationof the other pending local franchise tax cases with the courts rendering adecision adverse to us and PLDT will pursue all legal remedies with regard toall pending cases. 

 

On August 8, 2001, PLDTreceived a decision, dated July 16, 2001, on its petition filed with a RegionalTrial Court of the City of Makati appealing the denial of PLDT’s protest of theassessments for local franchise taxes in the aggregate amount of Php594.7million for the years 1992 to 1994 and Php1,100 million for the last threequarters of 1995 up to 1998.  This decision ordered PLDT to:

 
- submit itsaudited financial statements showing its gross receipts for the period fromOctober to December 31, 1992, 1993, 1994, 1995, 1996, 1997 and 1998, so thatthe City of Makati can make the proper assessment of the tax due;       - pay the Cityof Makati the sum equivalent to 0.5% of the total gross receipts realizedduring the period October 1 to December 31, 1992, 1993, 1994, 1995, 1996, 1997and 1998 after determination of PLDT’s annual gross receipts for the subjectyears; and         - henceforthpay its franchise and business taxes pursuant to Section 137 of Republic Act7160.     PLDT filed an appeal with theSupreme Court on September 20, 2001.  In its appeal, PLDT argued, among other things,that:           - the right ofthe City of Makati to assess PLDT for any alleged deficiency in franchise taxfor the years 1992 to 1994 in the approximate amount of Php594.7 million hasprescribed because the Local Government Code provides for a period of fiveyears within which an assessment can be made by the local government unit andthe City of Makati assessed these alleged taxes against PLDT only on May 24,1999;             - PLDT isexempt from local franchise and business taxes by virtue of the equality oftreatment clause under the Public Telecommunications Policy Act as confirmed bythe Department of Finance through the Bureau of Local Government Finance and isnot therefore liable to pay the City of Makati deficiency tax for the years1995 to 1998 in the amount approximately Php1,100 million; and               - Assuming(without admitting) that PLDT is liable to pay the franchise tax, the approximatePhp1,684 million total assessment is erroneous as it was based on PLDT’s totalannual gross receipts derived from its overall business operations, while theLocal Government Code provides that the franchise tax which can be imposed bythe local government unit shall be based on the annual gross receipts derivedfrom within the taxing local government unit territory or, in this case, fromthe operations of PLDT within the City of Makati only.     In a resolution dated October 22, 2001, theSupreme Court remanded the case to the Court of Appeals.  As required by theCourt of Appeals, the City of Makati filed its Comment and PLDT filed its Reply to theComment.  On August 21, 2002, the Court of Appeals suspended further proceedingsin the case until the Supreme Court resolved similar issues raised in the Cityof Davao case discussed above.  On April 28, 2003,the City of Makati filed a Motion to Resolve the Case citing thedecision of the Supreme Court resolving PLDT’s Motion for Reconsideration.  On July 15, 2003, theCourt of Appeals issued a decision modifying the decision of the Regional TrialCourt in respect of the assessment made by the City of Makati for theyears 1992 to 1994.  The Court of Appeals ruled that the City of Makati cannotimpose franchise tax while it was still a municipality.  In its decision, theCourt of Appeals held that PLDT is not liable to pay Makati Cityfranschise tax for the period from 1992 to 1994 since, during that period, amunicipality was not empowered to impose franchise tax.  However, the Court ofAppeals upheld the right of Makati City to impose franchise tax starting the year 1995, whenit became a city.  This decision ordered PLDT to:                 - submit its audited financialstatements showing its gross annual receipts for the years 1995, 1996, 1997 and1998;                - pay the City of Makati theamount of the tax due, after arriving at the proper assessment; and                  - henceforth pay its franchise taxpursuant to Section 137 for the Local Government Code     PLDT intends to furtherappeal the issue of liability of PLDT for franchise tax to the Supreme Court.      PLDT is also protesting theassessment by the City of Makati of a franchise tax deficiency for 1999 in the amountof Php298 million.  On February 26, 2001, PLDT filed a petition in the Regional Trial Court of Makati City to compelthe Office of the Makati City Treasurer and the Makati City Law Department toact on PLDT’s protest of the assessed franchise tax deficiency for 1999.  Thiscase has been suspended pending review by the Court of Appeals of the decisionof the Makati City Regional Trial Court in the action in respect of the 1992 to1998 assessments described above or until further notice.  On June 17, 2003, theCity of Makati filed an Ex-Parte Motion to Lift Order ofSuspension.  In its Order dated June 23, 2003, the Court granted the Motion andordered the suspension to be lifted.  Pre-trial was set on August 26, 2003.     On December 7, 2001, anothercase was filed by PLDT against the City of Makati protesting the assessment oflocal franchise and business taxes for the year 2000 in the amount of Php307million.  The pre-trial, originally scheduled on May 19, 2003, was postponed untilAugust 18, 2003.     On April 16, 2002,another case was filed by PLDT against the City of Manilaprotesting the assessment of local franchise and business taxes in the amountof Php2,228 million for the period covering 1997, 1998, 1999, 2000 and 2001,inclusive of penalties and interests.  PLDT filed a motion to suspendproceedings on March 10, 2003 pending the resolution by the Supreme Court of theCity of Davao case discussed above.  The City of Manilasubmitted its comments and oppositions on PLDT’ motion to suspend theproceedings on March 21, 2003 and the motion is now deemed submitted forresolution.     PLDT has filed other casespertaining to the assessments made by other local government units; however,these cases involve amounts significantly lower than the assessments in thecases against the City of Makati and the City of Manila.  Some of these cases are pending decision by therespective regional trial courts.  In each of the other cases in which anunfavorable decision has been rendered by the lower courts against PLDT, PLDThas filed a Petition for Review with the Supreme Court.     PLDT is also a respondent ina case filed by the Province of Pangasinan with the Court of Appeals.  On September 12, 2001,the Court of Appeals reversed the decision of the Regional Trial Court ofLingayen, Pangasinan and held that PLDT is exempt from the payment of the localfranchise and business taxes.  The Court of Appeals denied the Motion forExtension of Time to file a Motion for Reconsideration of the decision of theRegional Trial Court filed by the Province of Pangasinan and also denied the Motion for Reconsideration of theCourt of Appeals’ denial of the Motion for Extension of Time.  On April 26, 2002, the Province of Pangasinanfiled a Petition for Certiorari seeking to, among other things, set aside thedecision of the Court of Appeals in respect of the Motion for Extension of Timeto file a Motion for Reconsideration and affirm the decision of the RegionalTrial Court of Lingayen.  On May 29, 2002, the Supreme Court denied this petition on the groundthat “the petition is evidently used as a substitute for the lost remedy ofappeal” and the Province of Pangasinan filed a Motion for Reconsideration.  The Motion forReconsideration of the Supreme Court resolution filed by the Province of Pangasinan wasdenied with finality on June 26, 2002.     Similarly, in a case filed byPLDT against the City of Cebu, the Regional Trial Court declared PLDT exempt frompayment of local franchise tax and granted PLDT’s claim for refund.  Thisdecision became final on July 6, 2001; however, the City of Cebu filed a Petition forRelief of Judgment with a prayer for preliminary injunction, citing the SupremeCourt’s decision in the Davao case.     In addition to the casesdiscussed above, we have received assessments for local business and franchisetaxes in the aggregate amount of Php24 million, all of which are underadministrative protest.      As of June 30, 2003, theaggregate amount claimed by the plaintiffs in these lawsuits was Php4,834million with respect to PLDT and Php313 million with respect to Smart.  Webelieve that in the event these lawsuits are decided against us, our potentialliability is likely to be significantly lower than the amounts claimed by theplaintiffs.     The outcome of these localfranchise assessments may have an effect on other taxes to which PLDT could besubject to.     ***Smart***     *NTC SRF*.   Smart has been paying under protest the SRFassessed by the NTC.  On September 27, 2001, Smart paid the amount of Php86million representing SRF for 2001.  On September 30, 2002,Smart paid the amount of Php114 million representing SRF for 2002.     The above amounts and allother assessments for SRF in the past were paid under protest as Smart believesthat the same is exorbitant and unreasonable and contrary to Section 5(g) ofR.A. 7925.  R.A. 7925 states that the NTC should impose only reasonable feesand charges as may be necessary to cover reasonable costs and expenses for theregulation and supervision of the operation of the telecommunications entities.     In its protest, Smart alsocited the decision of the Court of Appeals in the case of ICC Corporation vs.NTC (CA-GR SP No. 45-100, September 30, 1999) which held that:  “In the guiseof taxation, respondent NTC has in fact arrogated upon itself the power to taxan entity, which it is not authorized by law to do, thereby exceeding its lawfuljurisdiction and/or acting with grave abuse of discretion.  That respondent NTChas been generating income from the collection of fees from telecommunicationentities in the guise of regulation is evident and that the NTC is notclassified as tax generating agency of the government.”     *NTC Spectrum User’s Fee,or SUF.*Smart has been paying underprotest the SUF, assessed by the NTC.  On January 31, 2002,Smart paid about Php40 million representing SUF for 2002.  On January 31, 2003,Smart paid about Php48 million representing SUF for 2003.  * *  The above amounts and other assessments for SUF were paidunder protest as Smart believes that the same are exorbitant and not reasonablefor the use of the radio frequency spectrum considering the present economic conditionsand the expenses incurred in the operations and maintenance of Smart’stelecommunications facilities.  Also, as provided in Memorandum Circular10-10-97 of the NTC, “the SUF shall be based on the amount of spectrum used,the type of service being offered and the economical classification of the areacovered by the radio station” and Section 15 of RA 7925 is clear when itmandates that the use of the radio frequency spectrum “shall be subject toreasonable spectrum user fees”.     *NTC Radio Station License,or RSL.*   Smart filed a petition withthe NTC last March 4, 2003 for the refund or credit of overpaid RSL fees in theamount of Php31 million for the years 2000 to 2002. The overpayment was aresult of the redundancy in the computation of the SUF and RSL fees.     *Local franchise taxassessments.*   To date, Smart hasreceived assessments for local franchise and business taxes from certain citiesand municipalities in the aggregate amount of approximately Php313 million.Smart has formally protested these assessments based on the following:                       - An opinion issued by the Bureau ofLocal Government Finance, or BLGF, dated August 13, 1998stating that Smart should be considered exempt from the local franchise taxprovided under Section 137 of the Local Government Code, which exemption shallbe applicable only to local franchise and business taxes.                         - R.A. 7925 was passed on February 20, 1995after the passage of the Local Government Code.  Under the ipso facto provisionof R.A. 7925, the holder of a franchise granted prior to or after the effectivedate of R.A. 7925 is entitled to the benefit or any favorable provisionscontained in any other franchises, regardless of whether such franchises weregranted prior to or after the passage of R.A. 7925.                           - Because Smart’s legislativefranchise took effect after the effective date of the Local Government Code,the franchise tax prescribed under Section 137 thereof should be deemed to bepart of the said franchise.  Section 137 states that “cellular operators shallonly pay a franchise tax equivalent to 3% of all gross receipts of the businesstransacted under the franchise, and the said percentage shall be in lieu of alltaxes on this franchise or earnings thereof.”                             - In the PLDT vs. City of Davao case,the Supreme Court took cognizance of the BLGF opinion by stating that Smart’sfranchise granted after the effectivity of the Local Government Code exemptedit from the payment of local franchise and business taxes.     Smart’s administrativeprotest against the Makati and Iloilo assessments were denied, while thoseagainst the Digos and General Santos assessments in the aggregate amount ofPhp59,447 have not yet been decided.     Smart filed separatepetitions appealing the local franchise and business tax assessments of MakatiCity in the amount of Php196 million for the calendar years 2000 and 2001, andin the amount of Php116 million for the calendar years 1995, 1998 and 1999.These cases have been consolidated and are now pending before Regional TrialCourt, Branch 61 of Makati City.       Smart also filed a petitionappealing the local franchise and business tax assessment of Iloilo City in theamount of Php0.8 million.  This case is now pending before the Regional TrialCourt, Branch 28 of Iloilo City.     Smart also filed a Petitionfor Declaratory Relief with the SC questioning an ordinance issued by the CityCouncil of Davao on the local franchise and business taxes.  The SC decided infavor of the City of Davao and Smart’s Motion for Reconsideration of saiddecision was denied.  Smart filed with the SC a Petition for Review under Rule45 of the 1997 Rules of Procedure to appeal the aforestated decision.     ***MabuhaySatellite***     Mabuhay Satellite was therespondent in an arbitration commenced by SS/L as a result of a dispute betweenthe two parties concerning their satellite joint venture.  On June 5, 2002, MabuhaySatellite received an arbitration decision requiring Mabuhay Satellite to paySS/L the principal amount of US$10 million plus interest representing MabuhaySatellite’s unpaid balance for the 65% equity share in the joint venture.  Theamount has been fully accrued and recorded in the books of Mabuhay Satellite asof June 30, 2003.  On June 30, 2003, Mabuhay Satellite and SS/L concluded a settlementagreement whereby Mabuhay Satellite would lease two (2) transponders on alife-term basis, free of charge, to SS/L and offset its receivables fromCyberstar, SS/L’s affiliate, for the full settlement of this obligation.     PLDT and some of itssubsidiaries are involved in certain other legal actions and claims arising inthe ordinary course of business.  The respective managements of PLDT and saidsubsidiaries believe that any possible loss that they may incur as a result ofsuch legal actions, claims and assessments not covered by an allowance forlosses will not have a material effect on their respective financial positionsand results of operations.     
 
  **23. ****Foreign Currency-Denominated Monetary Assets andLiabilities**     PLDT’s and its subsidiaries’foreign currency-denominated monetary assets and liabilities and their pesoequivalents follow:     
 

**June 30, 2003**

**(Unaudited)**

 

December 31, 2002

(Audited)

 

**U.S. Dollar**

**Peso Equivalent**

 

U.S. Dollar

Peso Equivalent

 

(in millions)

***Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

Assets

** **

** **

 

** **

** **

Cash and cash equivalents

**US$54**

**Php2,870**

 

US$76

Php4,033

Accounts receivable

**193**

**10,354**

 

148

7,910

 

**247**

**13,224**

 

224

11,943

Liabilities

** **

** **

 

 

 

Accounts payable

**40**

**2,136**

 

56

2,969

Accrued expenses and other current liabilities

**168**

**8,969**

 

165

8,782

Notes payable

**6**

**321**

 

6

320

Long-term debt

**2,765**

**146,298**

 

2,957

156,398

Deferred credits and other noncurrent liabilities

**93**

**4,964**

** **

98

5,205

**3,072**

**162,688**

 

3,282

173,674

Net foreign currency-

** **

** **

 

 

 

denominated liabilities

**US$2,825**

**Php149,464**

 

US$3,058

Php161,731

*** ***

*** ***

*** ***

*** ***

*** ***

*** ***

***Non-Consolidated***

*** ***

*** ***

*** ***

*** ***

*** ***

Assets

** **

** **

 

** **

** **

Cash and cash equivalents

**US$39**

**Php2,111**

 

US$49

Php2,602

Accounts receivable

**142**

**7,581**

 

116

6,158

 

**181**

**9,692**

 

165

8,760

Liabilities

** **

** **

 

 

 

Accounts payable

**2**

**114**

 

23

1,220

Accrued expenses and other current liabilities

**39**

**2,086**

 

47

2,476

Notes payable

**6**

**321**

 

6

320

Long-term debt

**2,428**

**128,265**

 

2,558

135,158

Deferred credits and other noncurrent liabilities

**93**

**4,964**

** **

98

5,205

**2,568**

**135,750**

 

2,732

144,379

Net foreign currency-

** **

** **

 

 

 

denominated liabilities

**US$2,387**

**Php126,058**

 

US$2,567

Php135,619
     In translating the foreigncurrency-denominated monetary assets and liabilities into peso amounts, theexchange rates used were Php53.522 to US$1.00and Php53.254 to US$1.00, the peso-dollar exchange rates as at June 30, 2003 and December 31, 2002,respectively.     
 
  **24. ****Financial Instruments**  ** **  ***PLDT***  *** ***  *Currency Swaps*     PLDT entered into long-termprincipal-only currency swap agreements with various foreign counterparties tohedge the currency risk on its fixed rate notes maturing in 2012 and 2017.  InMarch 2003, PLDT entered into another long-term principal-only currency swapagreement to hedge its 2009 fixed rate notes.  As of June 30, 2003 and December 31, 2002, the swaps have an aggregatenotional amount of US$725 million and US$550million, respectively.  Under the swaps, PLDT effectively exchanges theprincipal of its US dollar-denominated fixed rate notes into peso-denominatedloan exposures at an agreed swap exchange rate.  The agreed swap exchange rateis reset to the lowest Peso/US$ spot exchange rate during the term of the swap,subject to a minimum exchange rate.  As of June 30, 2003and December 31, 2002, the outstanding swap contracts have been reset toaverage exchange rate of Php51.225 andPhp51.266, respectively.  In addition, PLDT is required to make semi-annualfixed or floating swap cost payments to its counterparties, which amount toabout 2.015% and 2.35% per annum on June 30, 2003 and December 31, 2002,respectively.       The currency swap agreementrelating to the 2009 fixed rate notes has been structured to include currencyoption contracts as well.  If the Peso/US$ spot exchange rate on maturity datesettles beyond an agreed threshold, PLDT will have to purchase US$ at theminimum exchange rate plus the excess above the agreed threshold rate.  On theother hand, if on maturity, the Peso/US$ spot exchange rate is lower than theminimum exchange rate, PLDT will have the option to purchase at the prevailingPeso/US$ spot exchange rate.      US$575million of the long-term currency swaps outstanding as of June 30, 2003, havebeen structured to include credit-linkage with PLDT as the reference entity.The specified credit events include bankruptcy, failure to pay, obligationacceleration, moratorium/repudiation, and restructuring of PLDT bonds or all orsubstantially all of PLDT’s obligations.  Upon the occurrence of any of thesecredit events, subject to agreed threshold amounts where applicable, theobligations of both PLDT and its counterparty under the swap contractsterminate without further settlements to either party, including anymark-to-market value of the swaps.       As of June 30, 2003 andDecember 31, 2002, the aggregate mark-to-market value of the outstanding currencyswaps, as confirmed by the counterparties, amounted to a net loss of Php359 million and Php461 million, respectively.       *ForwardExchange Contracts*     PLDT had the followingaggregate outstanding short-term forward exchange contracts to buy US$ and sellPesos as of June 30, 2003 and December 31, 2002:      
 

**June 30, 2003**

**(Unaudited)**

 

December 31, 2002

(Audited)

Aggregate notional amount (in millions)

**US$166**

 

US$211

Weighted average forward rate

**Php53.64 to US$1**

 

Php53.94 to US$1
     PLDT had the following outstandingshort-term forward exchange contracts to buy JP¥ and sell US$ as of June 30, 2003 and December 31, 2002:     
 

**June 30, 2003**

 

December 31, 2002

Aggregate notional amount (in millions)

**JP¥3,072**

 

JP¥3,296

Contracted forward rate

**JP¥118.22 to US$1**

 

JP¥115.19 to US$1 
     The net mark-to-market gain(loss) on all the outstanding forward exchange contracts amounted to about Php22 million and (Php162 million) as of June 30, 2003 and December 31 2002,respectively, as confirmed by the counterparties.     *CurrencyOption Contracts*     In March 2003, PLDT utilizedstructures incorporating currency options to hedge the maturing principal onits fixed rate notes due June 2003 and June 2004.  As of June 30, 2003, PLDThad outstanding currency option contracts amounting to US$70 million.  The net mark-to-market loss on theseoutstanding currency option contracts amounted to about Php13 million as of June 30, 2003, as confirmed bycounterparties.  * *  *InterestRate Swap*  * *  In 2001, PLDT entered into a US$/JP¥ swapagreement to swap the coupon on US$175 million of its fixed rate notes for afloating rate JP¥ amount.  The swap was terminated in 2002 at a realized gainof Php633 million.  * *  In April 2003, PLDT enteredinto an interest rate swap agreement to swap the coupon on US$125 million ofits 2012 fixed rate notes into a floating rate JP¥ amount. Under thisagreement, PLDT is entitled to receive the full equivalent of the fixed couponprovided the US$/JP¥ exchange rate stays above a predetermined level.Below this level, only a fraction of the fixed coupon will be due PLDT. The netmark-to-market loss on this interest rate swap amounted to about Php105 millionas of June 30, 2003, as confirmed by the counterparty.     ***Smart***     *CurrencySwaps*     Smart’s currency swap agreement with a foreign financialinstitution matured last April 30, 2003 with realized gain of Php1,179million.  Final exchange of funds was made and the contract is now terminated.     The complementary currency swap agreement entered into bySmart’s subsidiary also matured and was terminated on the same date.     *ForwardExchange Contracts*  * *  Smart has the followingoutstanding short-term forward exchange contracts to buy US$ and sell Pesos asof June 30, 2003 and December 31, 2002:     
 

**June 30, 2003**

 

December 31, 2002

Aggregate notional amount (in millions)

**US$131**

 

US$5

Weighted average forward rate

**Php56.18 to US$1**

 

Php53.47 to US$1
     As of June 30, 2003, Smartalso has an outstanding short-term forward exchange contract to buy JP¥ andsell Pesos with aggregate notional amount of JP¥45 million and contractedforward rate of JP¥0.458 to Php1.     The net mark-to-market losson the outstanding forward contracts amounted to about Php213 million as of June 30, 2003, asconfirmed by counterparties.  The mark-to-market value as of December 31, 2002 isnot material.     
 
  **25. ****Reportable Segments**     Operating segments arecomponents of an enterprise about which separate financial information isavailable that is evaluated regularly by management in deciding how to allocateresources and in assessing performance.  Generally, financial information isrequired to be reported on the basis that it is used internally for evaluatingsegment performance and deciding how to allocate resources to segments.     We have organized ourbusiness into three main segments:                               - Fixed Line — fixed line telecommunications services primarily provided throughPLDT.  We also provide fixed line services through PLDT’s subsidiaries ClarkTelecom, Subic Telecom, MaraTel, BCC which together account for approximately1% of our consolidated fixed lines in service, and PLDT Global;                                  - Wireless — wireless telecommunications services provided through our cellularservice provider, Smart, and satellite operators, namely PLDT’s subsidiariesMabuhay Satellite, ACeS Philippines and Telesat; and                                    - Information and CommunicationsTechnology — information and communications infrastructure andservices for Internet applications, Internet protocol-based solutions andmultimedia content delivery provided by PLDT’s subsidiary ePLDT, Internetaccess services provided by ePLDT’s subsidiary Infocom, and e-commerce, callcenters and IT-related services provided by other subsidiaries and affiliatesof ePLDT, as described in  Note 9 – Investments .      The segment assets as of June 30, 2003 and December 31, 2002 andresults of operations of our reportable segments for the six months ended June 30, 2003 and2002 reported under Philippine GAAP are as follows:     
 

**Fixed Line**

**Wireless**

**Information and  Communications  Technology**

**Eliminations**

**Total**

* *

(in million pesos)

*As of and for the six months ended**June 30, 2003***

Operating revenues

24,288

22,875

878

(1,822)

46,219

External revenues

22,863

22,493

863

–

46,219

Inter-segment revenues

1,425

382

15

(1,822)

–

Operating expenses

17,974

14,814

988

(1,831)

31,945

External expenses

16,346

14,611

988

–

31,945

Inter-segment expenses

1,628

203

–

(1,831)

–

Operating income (loss)

6,314

8,061

(110)

9

14,274

Segment assets

254,875

75,141

3,319

(43,741)

289,594

Segment liabilities

158,767

38,598

3,141

(7,545)

192,961

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

10,560

12,212

(67)

310

23,015

Investing activities

2,822

(3,254)

(96)

(4,346)

(4,874)

Financing activities

(13,222)

(8,871)

208

4,036

(17,849)

Depreciation and amortization

6,561

4,975

181

–

11,717

Provision for doubtful accounts

1,521

356

11

–

1,888

Capital expenditures

1,436

3,745

16

–

5,197

* *

*As of December 31, 2002 (As restated – Note 3) and  for the six months ended**June 30, 2002**(Unaudited/As restated -Note 3)*

Operating revenues

23,742

15,289

396

(1,500)

37,927

External revenues

22,702

14,829

396

–

37,927

Inter-segment revenues

1,040

460

–

(1,500)

–

Operating expenses

16,895

11,802

586

(1,500)

27,783

External expenses

15,584

11,613

586

–

27,783

Inter-segment expenses

1,311

189

–

(1,500)

–

Operating income (loss)

6,847

3,487

(190)

–

10,144

Segment assets

263,043

77,035

3,651

(44,171)

299,558

Segment liabilities

167,427

39,894

3,060

(6,687)

203,694

Net cash flows provided by (used in):

 

 

 

 

 

Operating activities

11,853

8,754

265

424

21,296

Investing activities

(2,959)

(3,974)

(582)

70

(7,445)

Financing activities

(3,346)

(3,153)

320

(494)

(6,673)

Depreciation and amortization

6,550

4,889

133

–

11,572

Provision for doubtful accounts

1,473

111

10

–

1,594

Capital expenditures

2,666

4,231

556

–

7,453
     
 
  **26. ****Other Matters**  ** **  a.   Interconnection Agreements     PLDT has existinginterconnection agreements with nine International Gateway Facilities, or IGFoperators, six Inter Exchange Carriers, or IXCs, six Cellular Mobile TelephoneSystems, or CMTS operators, 70 LECs (including members of the PhilippineAssociation of Private Telephone Companies, Inc.), and 12 paging and trunkradio 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.  Settlements 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.       b.   Proposed Metering of Local Exchange Service     The proposed metering ofPLDT’s local exchange service has been temporarily suspended for further reviewby the NTC.     c.      U.S. Federal Communications Commission, or FCC, Ruling versus PhilippineTelecommunications Companies     In May 2002, PLDT advisedAT&T Corp., or AT&T, MCI and other carriers of PLDT’s desire toincrease its termination rates by August 2002. Despite numerous negotiationsessions in 2002 and 2003, AT&T and MCI refused to accept any rateincreases.  PLDT unilaterally extended its prior termination charges to eachcarrier while continuing offers to negotiate, first from August 1, 2002 toOctober 1, 2002, then until December 31, 2002, and then, finally, despite thelack of a written agreement from AT&T and MCI, through January 31, 2003.While nearly 100 carriers worldwide, including 23 U.S. carriers,agreed to the new termination rates and entered into new termination rateagreements with PLDT, the termination rate agreements with AT&T and MCIlapsed in December 2002, without them agreeing with PLDT on any provisionalarrangement or final agreement on the new termination rates.  Faced with thecontinuing stonewalling by AT&T and MCI, PLDT, in December 2002, was forcedto notify each company that PLDT’s termination rates would finally be increasedas of February 1, 2003.  Because no agreement was reached with eitherAT&T or MCI, effective as of February 1, 2003, PLDT stopped terminatingtraffic sent directly by each of AT&T and MCI.     On February 7, 2003,AT&T and MCI filed separate petitions with the U.S. FCC requesting the U.S.FCC to take action to protect U.S. international carriers and U.S. consumersfrom alleged “whipsawing” behavior occurring on the U.S.-Philippine Route.  “Whipsawing” is a form of anti-competitive behavior that involvesthe ability of foreign carriers to obtain unduly favorable terms and conditionsfrom U.S. international service providers by setting competing U.S. carriersagainst one another.     On February 7, 2003, theNational Telecommunications Commission, or NTC, of the Republic of the Philippinesdirected Philippine carriers to take one of two different courses of action,depending on whether such carriers had effective termination rates with theircounterparties.  If PLDT had “existing and effective agreements with foreigntelecommunication carriers relative to termination rates”, it should “complywith the terms thereof, specifically in maintaining the flow of traffic in andbetween circuits and facilities covered by such agreements.”  If, however, thecounterparty and PLDT were “without existing and effective agreements relativeto termination rates,” then PLDT is “encouraged ... to negotiate and concludeagreements” with the counterparty, and “the parties may agree onprovisional/interim arrangements for continuity of service.”  Each of AT&Tand MCI immediately rejected PLDT’s offer for an interim termination rateagreement.     On March 10, 2003, theInternational Bureau of the U.S. FCC issued an Order on the petitions filedseparately by AT&T and MCI requiring all U.S. carriers providing direct allfacilities-based service on the U.S.-Philippine route to suspend payments fortermination services to Philippine carriers, including PLDT, Globe Telecom,Inc., Bayan Telecommunications Philippines, Inc., Digital TelecommunicationsPhilippines, Inc., Smart and Subic Telecom until such time as the U.S. FCCissues a Public Notice that the affected circuits of U.S. carriers on theU.S.-Philippine route are fully restored.  The Order also removed the Philippinesfrom the list of U.S.-international routes approved for the provision ofInternational Simple Resale.  As of June 30, 2003, receivables from U.S.carriers amounted to approximately US$19million, of which US$10 million wasattributable to PLDT, US$6 million to Smartand US$3 million to Subic Telecom.     In response to the ruling ofthe International Bureau of the FCC, the NTC issued a Memorandum Order datedMarch 12, 2003 directing all affected Philippine carriers “(1) not to acceptterminating traffic via direct circuits from U.S. facilities-based carriers whodo not pay Philippine carriers for services rendered; and (2) to take allmeasures necessary to collect payments for services rendered in order topreserve the viability, efficiency, sustained growth and development andcontinued competitiveness of the Philippine telecommunications industry.”     The NTC also stated in itsMarch 12 Order that the termination rates offered by PLDT are “fair andreasonable.”  These rates, US$0.12 per minute for calls terminating on thefixed-line network and US$0.16 per minute for calls terminating on mobilenetworks, are well below the FCC benchmark settlement rate of US$0.19 perminute for low middle income countries such as the Philippines and alsosubstantially below the settlement rate of US$0.238 per minute suggested by theInternational Telecommunication Union for countries with teledensity between 1to 5 telephones per 100 population.       On April 9, 2003, wefiled with the FCC an application for review of the International Bureau’s March 10, 2003 Order.     
 
  **27. ****Reclassification of Accounts**  ** **  We have reclassified certainaccounts in 2002 to conform with our 2003 financial statements presentation.