**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

Washington, DC 20549

 

FORM 20-F

 

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

**OR**

** **

**[X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 – For the fiscal year endedDecember 31, 2003**

** **

**OR**

** **

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

** **

**Commission file number1-03006**

** **

**Philippine Long Distance Telephone Company**

(Exact name of Registrant as specified in its charter)

 

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

(Jurisdiction of incorporation or organization)

 

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

**Makati Avenue**

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

(Address of principal executive or organization)

 

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

 

| Title of each class                                                                                                                      | Name of each exchange

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

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

 

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

* *

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

 

None

 

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

 

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

 

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

 

| As of December 31, 2003:                                                               |
|----------------------------------------------------------------------------------------|
| 169,476,120 shares of Common Capital Stock, Par Value Five Philippine Pesos Per Share  |
| 458,434,729 shares of Serial Preferred Stock, Par Value Ten Philippine Pesos Per Share |

 

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

 

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

TABLE OF CONTENTS
 

Page

 

CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT

 

 

4

FORWARD-LOOKING STATEMENTS

 

 

5

PART I

 

 

6

 

Item 1.

Identity of Directors, Senior Management and Advisors

6

 

Item 2.

Offer Statistics and Expected Timetable

6

 

Item 3.

Key Information

6

 

 

Selected Financial Data

6

 

 

Capital Stock

8

 

 

Dividends Declared

8

 

 

Dividends Paid

9

 

 

Exchange Rates

9

 

 

Risk Factors

10

 

Item 4.

Information on the Company

23

 

 

Overview

23

 

 

Historical Background and Development

24

 

 

Organization

24

 

 

Strengths

26

 

 

Strategy

27

 

 

Wireless

28

 

 

Fixed Line

35

 

 

Information and Communications Technology

42

 

 

Wireless Network Infrastructure

44

 

 

Fixed Line Network Infrastructure

45

 

 

Interconnection Agreements

47

 

 

Licenses and Regulation

47

 

 

Competition

49

 

 

Environmental Matters

52

 

 

Intellectual Property Rights

52

 

 

Properties

52

 

Item 5.

Operating and Financial Review and Prospects

53

 

 

Overview

53

 

 

Critical Accounting Policies

54

 

 

Results of Operations

60

 

 

Liquidity and Capital Resources

88

 

 

Effect of Peso Depreciation

102

 

 

Impact of Inflation and Changing Prices

103

 

 

Other Information

103

 

 

Certain Indebtedness

105

 

Item 6.

Directors, Senior Management and Employees

116

 

 

Directors, Key Officers and Advisors

116

 

 

Terms of Office

121

 

 

Family Relationships

121

 

 

Compensation

122

 

 

Executive Stock Option Plan

122

 

 

Share Ownership

122

 

 

Audit, Nomination, Executive Compensation and Finance Committees

124

 

 

Employees and Labor Relations

126

 

 

Pension and Retirement Benefits

127

 

 

Employees’ Stock Plan

128

 

 

Legal Proceedings

128

 

Item 7.

Major Shareholders and Related Party Transactions

129

 

 

Related Party Transactions

130

 

Item 8.

Financial Information

137

 

 

Consolidated Statements and Other Financial Information

137

 

 

Legal Proceedings

137

 

 

Dividend Distribution Policy

142

 

Item 9.

The Offer and Listing

142

 

 

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

142

 

 

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

143

 

Item 10.

Additional Information

144

 

 

Articles of Incorporation and By-Laws

144

 

 

Material Contracts

151

 

 

Exchange Controls and Other Limitations Affecting Securities Holders

151

 

 

Taxation

152

 

 

Documents on Display

157

 

Item 11.

Quantitative and Qualitative Disclosures About Market Risks

158

 

 

Liquidity Risk Management

158

 

 

Foreign Exchange Risk Management

158

 

 

Interest Rate Risk Management

159

 

Item 12.

Description of Securities Other than Equity Securities

160

PART II

 

 

161

 

Item 13.

Defaults, Dividend Arrearages and Delinquencies

161

 

Item 14.

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

161

 

Item 15.

Controls and Procedures

161

 

Item 16A.

Audit Committee Financial Expert

161

 

Item 16B.

Code of Business Conduct and Ethics

162

 

Item 16.C.

Principal Accountant Fees and Services

165

 

Item 16D.

Exemption from the listing Standards for Audit Committees

166

 

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchaser

166

PART III

 

 

166

 

Item 17.

Financial Statements

166

 

Item 18.

Financial Statements

166

 

Item 19.

Exhibits

167

EXHIBIT INDEX

 

 

169

CERTIFICATION

 

 

174

 

CERTAIN CONVENTIONS AND TERMS USED IN THIS REPORT

 

Unless the context indicates orotherwise requires, references to “we,” “us,” “our” or “PLDT Group” meanPhilippine Long Distance Telephone Company and its consolidated subsidiaries,and references to “PLDT” mean Philippine Long Distance Telephone Company, notincluding its consolidated subsidiaries (see *Note 2 –Basis of ConsolidatedFinancial Statement Preparation*to the accompanying consolidated financialstatements in Item 18 for a list of these subsidiaries, including a descriptionof their respective principal business activities).

 

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

 

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

 

In this report, unless otherwisespecified or the context otherwise requires, all references to “pesos,”“Philippine pesos” or “Php” are to the lawful currency of the Philippines, allreferences to “dollars,” “U.S. dollars” or “US$” are to the lawful currency ofthe United States, all references to “Japanese yen,” “JP¥” or “¥” are to thelawful currency of Japan, and all references to “Euro” or “€” are to the lawfulcurrency of the European Union.  Unless otherwise indicated, translations ofpeso amounts into U.S. dollars in this report were made based on the volumeweighted average exchange rate quoted through the Philippine Dealing System,which was Php55.586 to US$1.00 on December 31, 2003.  On June 23, 2004, the volume weighted average exchange rate quoted was Php56.261 to US$1.00.

 

In this report, each reference to:

 

•        ACeS Philippines means ACeS Philippines Cellular SatelliteCorporation, a 93.7%-owned subsidiary of PLDT;

 

•        AIL means ACeS International Limited;

 

•        AMPS means advanced mobile phone system;

 

•        BCC or Bonifacio Communications Corporation, our 75%-ownedsubsidiary;

 

•        BSP means Bangko Sentral ng Pilipinas;

 

•        CDMA means code division multiple access;

 

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

 

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

 

•        ETACS means enhanced total access communications system;

 

•        First Pacific means First Pacific Company Limited;

 

•        GAAP means generally accepted accounting principles;

 

•        GSM means global system for mobile communications;

 

•        ISP means internet service provider;

 

•        Infocom means Infocom Technologies, Inc., a 99.6%-ownedsubsidiary of ePLDT;

 

•        Mabuhay Satellite means Mabuhay Satellite Corporation (formerlyMabuhay Philippines Satellite Corporation), our 67%-owned subsidiary;

 

•        Maratel means PLDT-Maratel (formerly Maranao Telephone Company,Inc.), our 97.5%-owned subsidiary;

 

•        NTC means the National Telecommunications Commission of the Philippines;

 

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

 

•        NTTC-UK means NTT Communications Capital (UK) Ltd., awholly-owned subsidiary of NTT Communications;

 

•        PAPTELCO means Philippine Association of Private TelephoneCompanies;

 

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

 

•        Piltel means Pilipino Telephone Corporation, an associate inwhich we have a 45.3% ownership interest and which is treated as a consolidatedsubsidiary under U.S. GAAP; 

 

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

 

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

 

•        SEC means the Philippine Securities and Exchange Commission;

 

•        SMS means short message service;

 

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

 

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

 

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

 

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

 

•        VSAT means very small aperture terminal.

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

PART I

 

Item 1.   Identityof Directors, Senior Management and Advisors

 

Not applicable.

 

Item 2.   OfferStatistics and Expected Timetable

 

Not applicable.

 

Item 3.   KeyInformation

 

Selected Financial Data

 

The selected consolidated financial information below should beread in conjunction with, and is qualified in its entirety by reference to, ouraudited consolidated financial statements, including the notes, includedelsewhere in this report.  The consolidated financial statements have beenprepared and presented in conformity with U.S. GAAP.  Due to our decision tocommence using U.S. GAAP for our Annual Report on Form 20-F in respect of theyear ended December 31, 2002, we are unable to provide without unreasonableeffort and expense U.S. GAAP consolidated financial information with respect tothe fiscal year ended December 31, 1999.  As a result, we have omitted suchinformation in the table below.  In our Annual Reports on Form 20-F for yearsprior to 2002, we disclosed consolidated financial statements, including thefinancial information with respect to the year ended December 31, 1999,prepared in conformity with Philippine GAAP, along with a reconciliation toU.S. GAAP.

 

Prior to the filing of our Annual Report on Form 20-F in respectof the year ended December 31, 2002, the consolidated financial statementsincluded in our Annual Reports on Form 20-F filed with the U.S. Securities andExchange Commission, or U.S. SEC, were prepared in conformity with PhilippineGAAP.  Philippine GAAP varies in certain significant respects from U.S. GAAP.A description of the significant differences between U.S. GAAP and PhilippineGAAP and a quantitative reconciliation of such differences in the net loss andstockholders’ equity to U.S. GAAP was disclosed in a note to our previouslyfiled consolidated financial statements.

 

** **

**Consolidated Financial Data**

** **

**Years Ended December 31,**

 

**2003**

**2003**(1)

**2002**

**2001**

**2000**

 

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

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

 

 

 

 

 

**Statements of Operating Data:**

 

 

 

 

 

Operating revenues

Php112,036

US$2,016

Php92,800

Php80,294

Php60,348

Operating expenses

78,563

1,413

80,771

86,236

49,824

Net operating income (loss)

33,473

602

12,029

(5,942)

10,524

Net operating income (loss) per share

 

 

 

 

 

Basic

179.59

3.23

55.47

(47.36)

58.82

Diluted

165.85

2.98

52.23

(47.36)

58.82

Net income (loss)

11,045

199

(6,158)

(27,782)

(29,258)

Earnings per common share(2)

 

 

 

 

 

Basic

47.20

0.85

(52.08)

(176.85)

(193.48)

Diluted

45.72

0.82

(52.08)

(176.85)

(193.48)

**Balance Sheets Data:**

 

 

 

 

 

Cash and cash equivalents

19,372

349

10,974

4,276

 

Total assets

276,628

4,977

269,387

284,877

 

Total long-term debt - net of current portion

160,459

2,887

171,283

169,870

 

Long-term debt

184,275

3,315

190,908

190,099

 

Total debt(3)

186,408

3,353

191,668

196,561

 

Total liabilities(4)

236,897

4,262

240,622

249,563

 

Total stockholders’ equity

24,745

445

16,413

24,472

 

**Other Data:**

 

 

 

 

 

EBITDA(5)

44,055

793

26,281

6,475

(4,972)

Depreciation 

21,882

393

17,566

16,218

12,756

Ratio of earnings to fixed charges(6)

1.8x

1.8x

–

–

–

Net cash provided by operating activities

Php40,920

US$736

Php39,722

Php20,113

Php20,727

Net cash used in investing activities

18,359

330

17,167

29,376

25,183

Net cash provided by (used in) financing activities

(14,135)

(254)

(15,954)

3,841

5,511

Dividends declared to common shareholders

–

–

–

202

752

Dividends declared per common share(7)

–

–

–

1.20

4.80

_____________

 

*(1)    **We maintain our accounts inPhilippine pesos. For convenience, the peso financial information as of and forthe year ended December 31, 2003, has been translated into U.S. dollars at theexchange rate of Php55.586 to US$1.00, the rate quoted through the PhilippineDealing System as of December 31, 2003.  This translation should not beconstrued as a representation that the Philippine peso amounts represent, orhave been or could be converted into, U.S. dollars at that rate or any otherrate.*

 

*(2)   Prior to 2003, our convertible preferred shareswere deemed anti-dilutive based on a calculation of the required dividends onpreferred shares for each series of convertible preferred shares divided by thenumber of equivalent common shares assuming such preferred shares were convertedinto common shares and compared against the basic earnings per share.  Sincethe amount of dividends on preferred shares over the equivalent number ofcommon shares were greater than the basic earnings per share, the amounts forbasic and diluted earnings per share are the same.*

 

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

 

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

 

*(5)    **On a consolidated basis,EBITDA is defined as income (loss) before minority interest in net income ofconsolidated subsidiaries and adding back interest expense and related items(net of capitalized interest), taxes, depreciation, and amortization anddeducting interest income and is presented because it is generally accepted asproviding useful information regarding a company’s ability to service and/orincur debt.  In light of our substantial indebtedness, we believe that thepresentation of EBITDA measures is useful information regarding our ability toservice our debt and to incur any additional debt. In addition, many of ourloan agreements incorporate various covenants or limitations based on EBITDA(calculated on the basis of Philippine GAAP).  EBITDA should not be consideredin isolation or as a substitute for operating income, net income, cash flowsfrom operating activities and other income or cash flow statement data preparedin accordance with applicable generally accepted accounting principles, or as ameasure of PLDT’s profitability or liquidity.  A quantitative reconciliation ofEBITDA from income (loss) before minority interest in net income ofconsolidated subsidiaries is provided in the following table:*

 

** **

**Consolidated Financial Data**

** **

**Years Ended December 31,**

 

**2003**

**2003**(1)

**2002**

**2001**

**2000**

 

(in millions)

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

 

 

 

 

 

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

Php11,159

US$201

(Php6,032)

(Php27,674)

(Php29,117)

Add/(deduct):

 

 

 

 

 

Interest expenses and related items, net of capitalized interest

12,161

219

12,780

14,697

13,541

Interest income

(513)

(9)

(237)

(373)

(1,016)

Provision for (benefit from) income tax

(1,400)

(25)

1,438

(2,570)

(5,613)

Depreciation

21,882

393

17,566

16,218

12,756

Amortization of goodwill and other 

intangible assets

766

14

766

6,177

4,477

EBITDA

Php44,055

US$793

Php26,281

Php6,475

(Php4,972)

* *

 

 

 

 

 

* *

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

 

*Due to PLDT’s net losses in 2002, 2001 and 2000, thecoverage ratio on a consolidated basis was less than 1.0x in these threeyears.  In order to achieve a coverage ratio of 1.0x, we would have had togenerate additional consolidated earnings of Php2,464 million, Php30,126 millionand Php35,509 million for each of the three years ended**December 31, 2002**, 2001 and 2000, respectively.*

 

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

* *

Capital Stock

 

The following table summarizesPLDT’s capital stock outstanding as of December 31, 2003, 2002 and 2001.

 

 

**December 31,**

 

2003

** **

**2002**

** **

**2001**

 

**(in millions)**

Serial Preferred Stock

 

 

 

 

 

Cumulative Convertible

 

 

 

 

 

10% Convertible

 

 

 

 

 

A to DD

Php4,099

 

Php4,068

 

Php3,723

Series III

46

 

46

 

46

Series V(1)

26

 

25

 

26

Series VI(1)

47

 

49

 

49

Series VII(1)

38

 

36

 

38

Cumulative Nonconvertible

 

 

 

 

 

Series IV

360

 

360

 

360

 

Php4,616

 

Php4,584

 

Php4,242

Common Stock

Php847

 

Php847

 

Php845

 

Dividends Declared

 

 

**Years Ended December 31,**

 

**2003**

** **

**2002**

** **

**2001**

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

Php—

 

Php—

 

Php1.20

_____________

 

*(1)   Preferred stock subject tomandatory redemption (see Note 16 – Preferred Stock Subject to MandatoryRedemption to the accompanying consolidated financial statements in Item 18 forfurther discussion) in 2008 and 2009.*

 

*(2)   The most recent cash dividenddeclaration made by PLDT on its shares of common stock was in March 2001, whichwas paid in April 2001.  PLDT does not expect to declare cash dividends onthese shares in 2004.*

 

Dividends Paid

 

A summary of dividends paid pershare of PLDT's common stock stated in both Philippine pesos and U.S. dollarsfollows:

 

**In Philippine Pesos**

** **

**In U.S. Dollars**

1999

 

 

 

January 15

1.20

 

0.031

April 15

1.20

 

0.031

July 15

1.20

 

0.031

October 15

1.20

 

0.030

2000

 

 

 

January 14

1.20

 

0.030

April 14

1.20

 

0.029

July 15

1.20

 

0.027

October 15

1.20

 

0.025

2001

 

 

 

January 15

1.20

 

0.023

April 16

1.20

 

0.024

 

(*Note*:      *Dividends on PLDT's common stockwere declared and paid in Philippine pesos.  For the convenience of the reader,the peso dividends are translated into U.S. dollars based on exchange rates onthe respective dates of dividend payments.  Dividends paid in January of eachof the calendar years 1999-2001 were declared in the preceding December.Accordingly, total amounts shown for cash dividends declared under “DividendsDeclared” above may differ from the amounts shown for cash dividends paid under“Dividends Paid.”)*

 

Exchange Rates

** **

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

 

The following shows the exchangerates between the Philippine peso and the U.S. dollar, expressed in pesos perU.S. dollar, for the periods indicated, based on the volume-weighted averageexchange rate for each business day in each of the periods presented:

 

 

**Year Ended December 31,**

** **

**Period End**

** **

**Average(1)**

** **

**Low(2)**

** **

**High(3)**

 

 

 

 

 

 

 

 

1999

Php40.298

 

Php39.090

 

Php37.566

 

Php41.112

2000

49.986

 

44.179

 

39.830

 

51.680

2001

51.690

 

51.009

 

47.550

 

55.013

2002

53.254

 

51.583

 

49.336

 

53.841

2003

55.586

 

54.215

 

52.021

 

55.767

2004 (through June 23, 2004)

56.261

 

55.945

 

55.142

 

56.429

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

 

**Month**

 

**Period End**

** **

**Average(1)**

** **

**Low(2)**

** **

**High(3)**

2003

 

 

 

 

 

 

 

December

Php55.586

 

Php55.438

 

Php55.288

 

Php55.586

2004

 

 

 

 

 

 

 

January

55.964

 

55.545

 

55.142

 

56.085

February

56.332

 

56.089

 

55.872

 

56.332

March

56.216

 

56.298

 

56.151

 

56.429

April 

56.034

 

55.894

 

55.577

 

56.346

May

55.807

 

55.835

 

55.490

 

55.973

June (through June 23, 2004)

56.261

 

55.965

 

55.669

 

56.393

_____________

 

*Source:  Philippine DealingSystem Reference Rate*

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

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

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

 

This report contains conversions of peso amounts into U.S.dollars for your convenience.  Unless otherwise specified, these conversionswere made at the exchange rate as of December 31, 2003 of Php55.586 toUS$1.00.  You should not assume that such peso amounts represent such U.S.dollar amounts or could have been or could be converted into U.S. dollars atthe rate indicated, or at any particular rate.  As of June 23, 2004, the exchange rate quoted through the Philippine Dealing System was Php56.261 toUS$1.00.

 

Risk Factors

 

***Risks Relating to Us***

* *

*Our substantialindebtedness could impair our ability to fulfill our financial obligations,service our other debt and carry out new financings*

 

We have substantial indebtedness.  As of December 31, 2003, we had consolidated total indebtedness of approximately Php186,408 million(US$3,353 million), including short-term debt of approximately Php2,133 million(US$38 million) and a consolidated ratio of debt to equity (total debt on aconsolidated basis divided by stockholders' equity) of 7.53x.  Our consolidatedratio of earnings to fixed charges was less than the minimum required ratio of 1.0xfor the years ended December 31, 2002 and 2001.  For an explanation on how wecalculate our consolidated ratio of earnings to fixed charges, see footnote 6to our consolidated financial data table under “Selected Financial Data” andExhibit 7 in “Item 19.”  Our existing debt contains covenants, which, amongother things, require PLDT to maintain certain financial ratios calculated onthe basis of Philippine GAAP on a consolidated and non-consolidated basis,limit our ability to incur indebtedness, make investments, incur expendituresand pay dividends.  Financial statements prepared in conformity with PhilippineGAAP differ in some material respects from financial statements prepared inconformity with U.S. GAAP.  For a description of some of these covenants, see“Item 5. Operating and Financial Review and Prospects — Liquidity and CapitalResources — Financing Activities — Debt Financing — Covenants.”

 

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

 

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

 

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

 

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

 

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

 

•        place us at a competitive disadvantage compared to ourcompetitors.

 

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

 

Under the indenture for our 10.625% Notes due 2007 and 11.375%Notes due 2012, we may only incur additional debt, subject to certainexceptions, if, after incurrence of such debt, our consolidated leverage ratiounder Philippine GAAP, (the ratio of debt to EBITDA calculated on a non-consolidatedbasis based on definitions provided in the same indenture and except undercertain circumstances) would be less than 5.5:1 on or prior to December 31,2003, 5.0:1 from January 1, 2004 to December 31, 2004 and 4.5:1 thereafter.Because our consolidated leverage ratio at December 31, 2003 is in excess of 5.0:1, we are currently restricted from incurring any additional debt,subject to certain exceptions, including exceptions for refinancing transactions.In addition, we expect that we will have difficulty meeting our debt paymentobligations if we do not continue to receive cash dividends from Smart.

 

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

 

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

 

The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the peso relative to the U.S. dollar, pooroperating performance of PLDT and its consolidated subsidiaries, impairment orsimilar charges in respect of investments or other long-lived assets that maybe recognized by PLDT and its consolidated subsidiaries, and increases in ourinterest expenses.  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,which declined by approximately 5% against the U.S. dollar to an average ofPhp54.215 to US$1.00 in 2003 from an average of Php51.583 to US$1.00 in 2002.As of December 31, 2003, the exchange rate was Php55.586 to US$1.00, equivalentto a 4% depreciation of the peso relative to the rate at the end of 2002.  Inaddition, certain of our financial ratios are adversely affected by increasesin interest expense, which may result from factors including issuance of newdebt, the refinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the peso, the lowering of PLDT's credit ratings or the creditratings of the Philippines, an increase in reference interest rates, and generalmarket conditions.

 

PLDT’s ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of our fixed line business,which is predominantly conducted by PLDT.  PLDT cannot be assured of thebenefit of results generated by Smart and PLDT’s other investees in assistingin complying with non-consolidated covenants or covenants that are calculatedwithout giving effect to the results of PLDT’s investees.

 

We have maintained compliance withall of our financial ratios and covenants as measured under Philippine GAAPunder our loan agreements and other debt instruments.  However, if negativefactors adversely affect our financial ratios, we may be unable to maintaincompliance with these ratios and covenants or be unable to incur new debt.Under some of our loan agreements, certain of our financial ratios have becomemore restrictive at the end of the second and fourth quarters of 2003 and thefirst quarter of 2004, 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.

 

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

 

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

 

A growing portion of our consolidated revenues and cash flowfrom operations is derived from our subsidiaries, particularly Smart.  Smartand some of our other subsidiaries have significant internal cash requirementsfor debt service, capital expenditures and operating expenses and so may befinancially unable to pay any dividends to PLDT.  In addition, some of oursubsidiaries are subject to covenants that restrict them from distributing cashto PLDT except under certain circumstances.  In particular, Smart is subject toloan covenants that restrict its ability to distribute cash to PLDT.  AlthoughSmart received consents under its relevant loans that permitted it to makedividend payments to PLDT in December 2002, June 2003, November 2003 and May2004, we cannot assure you that PLDT will continue to receive dividends orother distributions, or otherwise be able to derive liquidity from Smart or anyother subsidiary or investee in the future.

 

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

* *

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

* *

Our projects under development andthe continued maintenance and improvement of our networks and services,including Smart’s projects, networks and services, require substantial ongoingcapital investment.  Our consolidated capital expenditures in 2003 and 2002totaled Php17,943 million and Php17,239 million, respectively.  Our 2004 budgetfor consolidated capital expenditures is approximately Php22,000 million, ofwhich approximately Php7,000 million is budgeted to be spent by PLDT andapproximately Php15,000 million is budgeted to be spent by Smart.  PLDT’scapital spending is intended principally to finance the continued build-out of itsdata and internet protocol infrastructures and for its data services and themaintenance of its network.  Smart’s capital spending is focused on expandingand upgrading its GSM network to meet increased demand for cellular services.

 

Future strategic initiatives couldrequire us to incur significant additional capital expenditures.  We may berequired to finance a portion of our future capital expenditures from externalfinancing sources, which have not yet been fully arranged.  We cannot assureyou that financing for new projects will be available on terms acceptable to usor at all.  If we cannot complete our development programs and other capitalprojects, our growth, results of operations and financial condition could bematerially and adversely affected.

 

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

 

In additionto our existing available credit facilities, we may require new externalfinancing in order to fund all of our operating, investment, capitalexpenditures and debt service requirements and to refinance and extend thematurities of our short and medium-term indebtedness.  Our ability to arrangefor this and other financing and the cost of such financing will be dependenton numerous factors outside of our control, including:

 

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

 

•        the availability of credit from banks or other lenders;

 

•        investor confidence in us;

 

•        investor views about the Philippines;

 

•        the continued success of our business;

 

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

 

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

 

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

 

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

 

Substantiallyall of our indebtedness and related interest expense, a substantial portion ofour capital expenditures and a portion of our operating expenses aredenominated in U.S. dollars and other foreign currencies, but a significantportion of our revenues is denominated in pesos.  As of December 31, 2003, approximately 94% of our consolidated indebtedness was denominated in U.S. dollarsand other foreign currencies.  A depreciation of the peso against the U.S.dollar increases the amount of our debt obligations and operating and interestexpenses in peso terms.  In the event that the peso depreciates against theU.S. dollar, we may be unable to generate enough funds through operations (suchas by raising our service rates, including through adjustments to rates forlocal exchange service based on movements in the peso-to-dollar exchange rate)and other means to offset the resulting increase in our obligations in pesoterms.  Further, these changes could cause us not to be in compliance with thefinancial covenants imposed by our lenders under certain loan agreements andother indebtedness.

 

During the last decade, the pesohas generally depreciated against most foreign currencies.  In addition, duringthis period, the Philippine economy has also, from time to time, experiencedperiods of concentrated peso devaluation and limited availability of foreigncurrency.  Since June 30, 1997, when the**BSP announced that it would letmarket forces determine the value of the peso, the peso has experienced asignificant decline against the U.S. dollar.  It depreciated from Php26.376 toUS$1.00 on June 30, 1997, to Php55.586 to US$1.00 as of December 31, 2003 and further decreased to Php56.216 to US$1.00 as of March 31, 2004.  The peso declined by approximately 4% against the U.S. dollar to Php55.586 to US$1.00 as ofDecember 31, 2003 from Php53.254 to US$1.00 as of December 31, 2002 and byapproximately 1% against the U.S. dollar to Php56.216 to US$1.00 as of March31, 2004 from Php55.586 to US$1.00 as of December 31, 2003.  The peso has alsobeen subject to significant fluctuations.  For example, during the first ninemonths of 2003, the peso depreciated to a low of Php55.532 to US$1.00 on August 26, 2003, recovered to a high of Php52.021 to US$1.00 on May 8, 2003 and again depreciated to a low of Php55.767 to US$1.00 on November 27, 2003.  The peso may again be subject to significant fluctuations and may depreciate due to a rangeof factors, including:

 

•        political and economic developments affecting the Philippines;

 

•        the volatility of regional currencies, particularly the Japaneseyen;

 

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

 

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

 

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

 

*Our results of operationshave been, and may continue to be, adversely affected by competition ininternational long distance service*

 

The international long distancebusiness was historically one of our major sources of revenue.  However, due tocompetition and the steep decline in international settlement rates that arepaid to us by foreign telecommunications carriers for termination ofinternational calls on our network, revenues generated from our internationallong distance business have overall declined in recent years.  

 

Although revenue generated from ourinternational long distance business increased primarily due to increasedtermination rates in 2003, we anticipate that revenues from internationalcommunications and information services, including our services, will continueto decline in the future, primarily due to:

 

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

 

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

 

•        increased competition from other domestic and internationaltelecommunications providers;

 

•        alternative providers offering internet telephony and broadbandcapacity; and

 

•        advances in technology.

 

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

 

Net settlement payments betweenPLDT and other foreign telecommunications carriers for origination andtermination of international call traffic between the Philippines and othercountries have been our predominant source of foreign currency revenues.However, in U.S. dollar terms, these payments have been declining in recentyears.  Continued decline in our foreign currency revenues could increase ourexposure to risks from declines in the value of the Philippine peso against theU.S. dollar.  We cannot assure you that we will be able to achieve adequateincreases in our other revenues to make up for any adverse impact of a furtherdecline in our net settlement payments.

* *

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

 

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

 

The Philippine government has liberalized the Philippine telecommunicationsindustry and opened up the Philippine telecommunications market to newentrants.  Including us, there are nine major local exchange carriers, 11international gateway facility providers and six cellular mobile telephonesystem providers in the Philippines, including one which has not yet commencedoperations.  Many new entrants into the Philippine telecommunications markethave entered into strategic alliances with foreign telecommunicationscompanies, which provide them access to technological and funding support aswell as service innovations and marketing strategies.  Consequently, we arefacing increasing competition in major segments of the telecommunicationsindustry, particularly cellular, fixed line and data and other network servicessegments.

 

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

 

Competitive pressures on our cellular rates may affect ourcellular revenues and revenue growth.  For example, we have not increased ourcellular rates to reflect fluctuations in the peso-to-U.S. dollar exchange ratesince November 1998 as a result of such competitive pressures.  In addition,our prepaid GSM subscribers can, using their existing handsets, switch to oneof our competitors by having their handsets “unlocked” from our service for afee and purchasing a new SIM card from the desired operator.  We cannot assureyou that these marketing expense and rate pressures and loss of customers willnot have a material adverse effect on our financial performance.

 

*If we are unable toinstall and maintain telecommunications facilities and equipment in a timelymanner, we may not be able to keep up with our principal competitors, which mayhave negative implications for our revenue and profitability*

 

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

 

•        shortages of equipment, materials and labor;

 

•        work stoppages and labor disputes;

 

•        interruptions resulting from inclement weather and other naturaldisasters;

 

•        unforeseen engineering, environmental and geological problems;and

 

•        unanticipated cost increases.

 

Any of these factors could give rise to delays or cost overrunsin the installation of new facilities or equipment or could prevent us fromproperly maintaining the equipment used in our networks, and could have amaterial adverse effect on our results of operations and financial condition.

 

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

 

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

 

Our future success will depend, inpart, on our ability to anticipate or adapt to such changes and to offerservices that meet customer demands on a competitive and timely basis.  Wecannot assure you that we will be able to obtain new technologies on a timelybasis or on satisfactory terms or implement them in an appropriate or effectivemanner.  The development and introduction of new technologies by us or ourcompetitors may cause significant portions of our existing assets to becomeobsolete and suffer an impairment in value earlier than their anticipateduseful lives and require us to accelerate their depreciation.  In 2001, werecognized impairment charges in respect of Smart’s analog assets and Smart’sunamortized intangible asset relating to analog customer lists.  Piltelrecognized impairment losses in respect of its AMPS/CDMA and Executive OrderNo. 109, or E.O. 109 assets in 2001 and 2002, respectively.

* *

*The cellular telecommunicationsindustry may not continue to grow or may grow at a slower rate*

 

The majorityof our consolidated revenues is currently derived from our cellular services.As a result, we depend on the continued development and growth of the cellulartelecommunications industry.  Growth of the cellular communications marketdepends on many factors beyond our control, including the continuedintroduction of new and enhanced cellular devices and consumer preferences.Any economic, technological or other developments resulting in a reduction indemand for cellular services may harm our business.

* *

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

 

Thedevelopment and operation of telecommunications networks are subject tophysical, technological and other risks, which may cause interruptions inservice or reduced capacity for customers.  These risks include:

 

•        physical damage;

 

•        power loss;

 

•        capacity limitation;

 

•        software defects; and

 

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

* *

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

 

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

 

Piltel hasexperienced significant financial difficulties in recent years.  It hasrestructured substantially all of its debts in accordance with its debtrestructuring plan, which was signed on June 4, 2001.  Under the terms of suchdebt restructuring plan, PLDT issued a Letter of Support for the benefit ofPiltel and its creditors under which PLDT has agreed to cover any fundingshortfalls of Piltel up to a maximum amount of US$150 million, of whichapproximately US$50 million remained undrawn as of December 31, 2003.  In June and October 2002, more creditors of Piltel agreed to participate in itsrestructuring plan on the same terms.  As of December 31, 2003, total restructured long-term debt of Piltel amounted to Php23,382 million, with maturitiesof up to June 14, 2016.  Piltel is currently in the process of restructuringcertain other debts.  However, we cannot assure you that Piltel will be able torestructure or otherwise pay the claims relating to its unrestructured debt orthat Piltel will have sufficient cash flow to meet its debt service and otherpayment obligations, including its payment obligations to us.  As of December31, 2003, Piltel owed PLDT Php985 million, while Smart owed Piltel Php2,199million in respect of their respective facilities sharing and other agreementswith Piltel.  Until all amounts owed to creditors participating in the debtrestructuring plan have been paid or discharged, PLDT will not be permitted todemand or receive any payment, redemption, or distribution in respect of anypresent and future liability owed by Piltel to PLDT or any affiliate of PLDT,subject to specified exceptions.  These liabilities include amounts owed onPiltel preferred shares owned by PLDT and other financial indebtedness owed byPiltel to PLDT or any affiliate of PLDT, but exclude payments due in respect oftransactions having arm’s-length terms or in which the pricing is based onmarket terms.  These severe long-term restrictions significantly impairPiltel’s ability to transfer funds to PLDT.

 

Moreover, Piltel may not be able torestructure or otherwise pay the claims relating to its unrestructured debt.As of December 31, 2003, Piltel had an aggregate principal amount of Php51million of unrestructured debt.  Piltel does not intend to make any payments inrespect of this debt unless and until it reaches a restructuring agreement withthe creditors holding the obligations.  If Piltel’s non-participating creditorstake forceful measures to enforce their claims, it is possible that Piltelwould be required to submit itself to a court-supervised rehabilitationproceeding or an involuntary insolvency proceeding seeking liquidation.  All ofPiltel’s creditors that participated in the debt restructuring agreed inconnection with the debt restructuring that they would submit Piltel to arehabilitation proceeding in those circumstances and petition for the adoptionof a plan of rehabilitation that includes the financial terms of the debtrestructuring plan.  However, the laws and procedures governing arehabilitation proceeding in the Philippine courts remain untested insignificant respects.  We cannot assure you that a rehabilitation plan, whichincorporates the financial terms of the debt restructuring, would be adoptedpromptly or at all.  Even if such a rehabilitation plan was adopted, we cannot assureyou that Piltel will prove to be viable thereafter and that it will be able tomeet its obligations, including its obligations owed to us or our affiliates.On March 23, 2004, Smart sent out invitations to the creditors of Piltel tooffer to sell their indebtedness to Smart, see “Item 5. Operating and FinancialReview and Prospects –– Other Information –– Smart’s Proposed Exchange Offer toPiltel Creditors” and *Note 28 – Other Matters(g)*to the accompanyingconsolidated financial statements in Item 18 for further discussion.

 

*The franchise of Smart maybe revoked if it cannot make a public offering of its shares in August 2004*

 

Smart believes that it has ten years from the commencementof its operations, or until August 2004, to conduct a public offering of itsshares required under the Public Telecommunications Policy Act (Republic ActNo. 7925, or R.A. 7925).  If Smart will not conduct a public offering of itsshares by August 2004, the Philippine Congress may revoke the franchise ofSmart if it fails to comply with the requirement under R.A. 7925 on the publicoffering of its shares.  A *quo warranto* case may also be filed againstSmart by the Office of the Solicitor General of the Philippines for therevocation of the franchise of Smart on the ground of violation of R.A. 7925 ifSmart will fail to conduct the public offering of its shares by August 2004.

 

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

* *

Affiliates of First Pacific directly or indirectly ownapproximately 31.4% of PLDT’s common stock as of December 31, 2003.  This is the largest block of PLDT’s common stock that is directly or indirectly undercommon ownership.  NTT Communications owns 14.9% of PLDT’s common stock as of December 31, 2003 and has contractual veto rights over a number of major decisions andtransactions that PLDT could make or enter into, including:

* *

•        capital expenditures in excess of US$50 million;

* *

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

* *

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

 

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

 

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

 

•        merger or consolidation; and

 

•the provision of financial support to Piltelin excess of that remaining available under the PLDT Letter of Support.

 

First Pacific and NTT Communications have also entered into ashareholders’ agreement relating to PLDT.  As a result of this agreement andtheir respective stockholdings, First Pacific and its affiliates and/or NTTCommunications are able to influence our actions and corporate governance,including:

* *

•elections of PLDT’s directors; and

 

•approval of major corporate actions, whichrequire the vote of common stockholders.

 

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

* *

*If a major shareholder sellsits interest in PLDT, the transaction may result in an event of default*

* *

If First Pacific or NTT Communications sells all or a portion ofits equity interest in PLDT, in certain circumstances, such sale may give riseto an obligation for us to make an offer to purchase or prepay our outstandingdebt under our 10.625% Notes due 2007 and our 11.375% Notes due 2012, ourUS$145 million multicurrency term loan facility agreement, our JP¥9,760 millionloan agreement with Japan Bank for International Cooperation, or JBIC,(formerly known as the Export-Import Bank of Japan) and our JP¥5,615 millionsyndicated term loan facility, and may result in a default under all of Smart’sloan agreements.  As of December 31, 2003, Php33,152 million in principalamount of PLDT’s indebtedness is directly subject to a change in control offerto purchase or prepay requirement and Php19,733 million in principal amount ofSmart’s indebtedness is subject to an event of default in the event of a changein control of PLDT.  If we fail to complete a required change in control offerto purchase or prepay the affected debts, all of our debt could becomeimmediately due and payable as a result of various cross-default provisions.See “Item 5. Operating and Financial Review and Prospects — Liquidity andCapital Resources — Financing Activities — Debt Financing — Covenants.”

 

*The outcome of a pending investigation by the**U.S.**Department of Justice is uncertain*

 

In January 2004, PLDT, a PLDT employee and an employee of Smartreceived grand jury subpoenas seeking documents and testimony in connectionwith a criminal investigation being conducted by the U.S. Department of Justicewith respect to alleged antitrust violations relating to the provision ofinternational termination services in the Philippines.  The U.S. Department ofJustice has also requested testimony and documents from Smart in connectionwith this investigation.  Moreover, in March 2004, PLDT (U.S.) Ltd., asubsidiary of PLDT Global, also received a grand jury subpoena seekingdocuments in connection with this investigation.  At this time, PLDT cannotpredict the outcome of this investigation.  

 

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

 

The Constitution of the Philippines requires that at least 60%of the capital of a corporation operating a public utility in the Philippinesbe owned by Philippine citizens.  In 1990, the then-Solicitor General of the Philippinesinstituted legal proceedings seeking to revoke PLDT’s franchise on variousgrounds, including violation of this requirement.  We believe that theseproceedings are without merit.  In 1991, the Philippine Congress extended theterm of PLDT’s franchise until 2028 and broadened PLDT’s franchise authority.The Congress granted this amended franchise to PLDT despite these pending legalproceedings and despite the opposition of the Solicitor General.  The SolicitorGeneral has not taken any further action to pursue or continue the proceedingson this case.  The parties filed their last pleadings in 1992 and since thenthe case has remained inactive.  Consequently, under a court order dated January 20, 1999, the case has been archived, though the case can potentially be revivedby action of either PLDT or the Solicitor General’s office.  It is a normalpractice for Philippine courts to archive cases that remain inactive for a longperiod of time.  We are not aware of any court notice for the resumption of theproceedings in this case.

* *

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

 

We operate our business under franchises, each of which issubject to amendment, termination or repeal by the Philippine Congress.Additionally, PLDT operates pursuant to various provisional authorities andcertificates of public convenience and necessity, or CPCNs, which are grantedby the NTC and expire between now and 2028.  Some of PLDT’s CPCNs andprovisional authorities have already expired.  However, PLDT filed applicationsfor extension of these CPCNs and provisional authorities prior to theirrespective expiration dates and is therefore entitled to continue to conductits business under its existing CPCNs and provisional authorities pending theNTC’s decisions on these extensions.  Smart also operates its cellular,international long distance, national long distance and global mobile personalcommunications via satellite services pursuant to CPCNs, which will expire uponthe expiration of its franchise.  Smart’s franchise is due to expire on March 27, 2017, 25 years after the date on which its current franchise was granted.  Smartoperates international private leased circuits under a provisional authority,which expired on May 6, 2003.  Smart applied for an extension of thisprovisional authority prior to its expiration.  Because PLDT and Smart filedthe applications for extension on a timely basis, we expect that theseextensions will be granted.  However, we cannot assure you that the NTC willgrant these extensions.  If a CPCN has not been issued, the NTC may permit anoperator to provide services pursuant to a provisional authority.  Provisionalauthorities are typically granted for a period of 18 months.  The PhilippineRevised Administrative Code of 1987 provides that if the grantee of a licenseor permit, such as a CPCN or provisional authority, has made timely andsufficient application for the extension thereof, the existing CPCN orprovisional authority will not expire until the application is finally decidedupon by the administrative agency concerned.  However, we cannot assure youthat our franchises, CPCNs and provisional authorities will be renewed.  For adescription of our licenses, see “Item 4. Information on the Company — Licensesand Regulation.”

 

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

* *

The NTC may implement proposed changes in billingrequirements for cellular operators, which may have negative implications forour revenues and profitability

 

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

 

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

 

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

 

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

* *

Along with the other Philippine cellular operators,Smart sought and obtained from a Quezon City trial court a preliminaryinjunction restraining the implementation of the memorandum circular.  The NTCappealed the issuance of the injunction to the Court of Appeals which, on October 9, 2001, annulledthe preliminary injunction, ruling that the NTC had jurisdiction over thematter.  On January 10, 2002, the Court of Appeals denied the cellular operators’motion to annul and reverse the decision of the Court of Appeals.  On February 22, 2002,Smart filed an appeal with the Supreme Court arguing that the appellate courthad erred in ruling that the NTC, and not the trial court, had jurisdictionover its case.  On September 2, 2003, the Supreme Court upheld Smart’s appeal, reversingand setting aside the decision of the Court of Appeals and affirming that the Quezon Citytrial court could hear and decide the case.  The case was remanded to the Quezon Citytrial court for continuation of the proceedings. The NTC filed a motion forreconsideration on September 29, 2003 which was denied with finality by the Supreme Courton November 13, 2003.  The Supreme Court stated that “considering that thebasic issues have already been passed upon and there is no substantial argumentto warrant a modification of this court’s decision, the court resolves to denyconsideration with finality.”

 

The Philippine Congress is considering five bills,each of which, if passed by Congress and enacted into law, would impose a 7% or10% tax on the gross receipts of cellular operators.  The proposed taxes wouldapply to both cellular calls and cellular data revenues and prohibit cellularoperators from imposing additional charges or fees to compensate for theimposition of the proposed taxes.

 

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

 

We are currently facingvarious lawsuits for local business and franchise taxes assessed by differentlocal government units, or LGUs as described under “Item 8. FinancialInformation — Legal Proceedings — Taxation — Local Business and FranchiseTaxes.”  Generally, each province may impose local franchise tax at a rate ofup to 0.5% of the gross annual receipts received or realized within thatprovince.  Cities within each province may also impose annual franchise taxeson gross annual receipts received or realized in those cities, at a rate thatmay not exceed the provincial franchise tax rate by more than 50%.  In onecase, involving the City of Davao, the Supreme Court has ruled that we are not exemptfrom payment of local business and franchise taxes.  On March 25, 2003, theSupreme Court denied our motion for reconsideration and affirmed the localfranchise tax assessment of Davao City in the amount of approximately Php4million.  Subsequently, PLDT paid the Davao City government franchise taxescovering the period 1999 to 2003, including the Php4 million, but we areseeking reconsideration of the surcharges and interests of about Php10 millionimposed by the Davao City government.  Although the Supreme Court decisionwould constitute a precedent, this will not automatically result in thetermination of the other pending local franchise tax cases, with the courtsrendering decisions adverse to us.  While the courts in these cases areexpected to adhere to this Supreme Court decision, each court would have tomake its own determination based on the evidence introduced by the parties andthe factual circumstances of each case.  We cannot assure you that other LGUs willnot file lawsuits against us or otherwise claim amounts owed in respect ofbusiness and franchise taxes.  If the courts rule against us, we would beliable for these taxes, including interest and penalties, for past periods tothe extent these taxes are assessed within five years from the date they weredue and for future periods.

 

As of December 31, 2003, the aggregate amount claimed by theplaintiffs in these lawsuits was Php5,142 million with respect to PLDT, Php313million with respect to Smart and Php45 million with respect to Piltel.  Webelieve that in the event these lawsuits and protests were decided against us,in many cases, we would not be liable for the full amounts claimed by the localgovernments because these amounts (1) were computed based on the gross annualreceipts received or realized not only from within the related province or cityfor the related period but also from gross annual receipts received or realizedfrom other provinces or cities and (2) include assessments for periods occurringmore than five years before the respective lawsuits were filed.  Accordingly,in the event these lawsuits are decided against us, we believe that ourpotential liability is likely to be significantly lower than the amountsclaimed by the plaintiffs.

 

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

 

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

 

In the past three years, an increasing number of kidnapping,criminal and terrorist activities have occurred in Mindanao, principally led bythe extremist "Abu Sayyaf" group, which reportedly has ties to theAl-Qaeda terrorist network.  There have been a series of bombing incidents inkey cities in Mindanao, including Davao City.  The armed conflict between thePhilippine military and the communist Moro Islamic Liberation Front alsocontinues in Mindanao.  This social unrest negatively impacted the operationsof Piltel’s fixed line business in Mindanao. 

 

In November 2001, members of the rebel groups damaged three ofour cell sites located in Central Luzon and one of our relay stations,including some radio facilities, in Southern Mindanao in response to ourfailure to pay “revolutionary taxes” demanded by these groups.  On July 27, 2003, approximately 300 Philippine soldiers took control of a shopping center andapartment complex in Makati City in an effort to express their dissatisfactionwith the Philippine government.  The mutineers surrendered within 20 hours.The government has reported that the actions taken by the approximately 300 Philippinesoldiers were part of a coup attempt.  In October 2003, a group of unidentifiedarmed men inflicted minor damage to Smart’s cell site in Bicol.  

 

On May 10, 2004, the Philippines held a presidential elections, as well as elections for members of the Senate andthe Congress.  The canvassing of votes has just been concluded and resulted ina victory by the incumber President Gloria Macapagal-Arroyo who successfullyretained her post.  The opposition has alleged irregularities in thepresidential elections, such as stolen ballots and vote buying, and hasthreatened street protests.  We cannot assure you that political events orterrorists’ activities will not result in major public protest or theinvolvement of the military in politics.  Any political instability in thefuture may have a negative effect on our results of operations and financialcondition.  We cannot assure you that the political environment in the Philippineswill be stable or that the current or any future government will adopt economicpolicies conducive to sustained economic growth or which do not impactadversely on the current regulatory environment for telecommunications or othercompanies.  

 

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

 

In the past, the Philippines has experienced periods of slowgrowth, high inflation, significant devaluation of the peso, imposition ofexchange controls, debt restructuring and electricity shortages and blackouts,and has been significantly affected by economic volatilities in the AsianRegion.

 

In 2003, the Philippine governmentincurred a fiscal deficit of Php199,900 million which was lower byapproximately 6% from the Php212,000 million incurred in 2002.  The fiscaldeficit incurred for 2003 represents 4.7% of the nominal gross domesticproduct, or GDP.

 

On January 27, 2004, Moody’s downgraded the PhilippineGovernment’s long-term foreign currency bond rating to “Ba2” with a negativeoutlook citing concerns over the government’s fiscal deficit and unsettledpolitical dynamics.  While Moody’s upgraded PLDT’s foreign currency seniorunsecured debt rating to “Ba2” on the same day, PLDT outlook was constrained tonegative by Moody’s reflecting the outlook on the Philippine Government’srating.  In case the Philippine sovereign rating is downgraded by Moody’s, itis highly likely that PLDT’s credit rating would be downgraded as well.

 

The growing government fiscaldeficit and a global increase in oil prices, have resulted in increasedconcerns about the political and economic stability in the Philippines.  This,in turn, has resulted in the depreciation of the peso against the U.S. dollarand the volatility of the prices of shares traded on the domestic stock market.We cannot assure you that these factors will not affect our results ofoperations in a materially adverse manner.

* *

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

 

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

 

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

 

•        suspend temporarily or restrict sales of foreign exchange;

 

•        require licensing of foreign exchange transactions; or

 

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

 

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

* *

*The occurrence of naturalcatastrophes may materially disrupt our operations*

* *

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

 

Item 4.   Informationon the Company

 

Overview

 

We are the leading national telecommunications service providerin the Philippines.  Through our three principal business groups — wireless,fixed line, and information and communications technology — we offer a widerange of telecommunications services to over 15 million wireless and fixed linesubscribers in the Philippines across the nation's most extensive fiber opticbackbone and fixed line, cellular and satellite networks.

 

We are the leading fixed lineprovider in the Philippines with approximately 65% of the total reported fixedlines in service nationwide as of December 31, 2003.  Smart, our wholly-ownedsubsidiary, is the leading cellular service provider in the country, withapproximately 46% of total reported cellular subscribers as of December 31, 2003.  Piltel, our 45.3%-owned subsidiary, had approximately 13% of totalreported cellular subscribers as of December 31, 2003.  We have interests inthe information and communications technology sectors, including Infocom, oneof the leading ISPs in the Philippines.

 

Our common shares are listed on the Philippine Stock Exchange,or PSE, and our American Depositary Shares are listed on the New York StockExchange and the Pacific Exchange.  We had a market capitalization ofapproximately Php181,178 million (US$3,259 million) as of May 31, 2004, representing one of the largest market capitalizations among Philippine-listedcompanies.  For the year ended December 31, 2003, we had consolidated revenuesand EBITDA of Php112,036 million (US$2,016 million) and Php44,055 million(US$793 million), respectively.  See footnote 5 to the selected financial datatable in “Item 3. Key Information — Selected Financial Data” for a quantitativereconciliation of EBITDA on a consolidated basis to income (loss) beforeminority interest in net income of consolidated subsidiaries.

 

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

 

Historical Background and Development

*** ***

PLDT was incorporated under the old Corporation Law of the Philippines(Act 1459, as amended) on November 28, 1928, following the merger of fourtelephone companies under common U.S. ownership.  Under its amended Articles ofIncorporation, PLDT’s corporate term is limited through 2028.  In 1967,effective control of PLDT was sold by General Telephone and ElectronicsCorporation (a major shareholder 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 telecommunications industry,PLDT purchased substantially all of the assets and liabilities of the RepublicTelephone Company which at that time was the second largest telephone companyin the Philippines.  During 1998, First Pacific, through its Philippine andother affiliates, acquired a significant interest in PLDT.  On March 24, 2000, NTT Communications, through NTTC-UK, became PLDT’s strategic partner withapproximately 15% economic and voting interest in the issued common capitalstock of PLDT.  Simultaneous with NTT Communications’ investment in PLDT, weacquired 100% of Smart.

 

PLDT’s original franchise, which was granted in 1928, was lastamended in 1991 to be extended until 2028.  The amended franchise (R.A. 7082),which became effective on August 24, 1991, also broadened PLDT’s franchise topermit PLDT to provide virtually every type of telecommunications service.PLDT’s franchise covers the business of providing basic and enhancedtelecommunications services in and between the provinces, cities andmunicipalities in the Philippines and between the Philippines and othercountries and territories including mobile, cellular, wired or wirelesstelecommunications system, fiber optics, multi-channel transmissiondistribution systems and their value-added services such as but not limited totransmission of voice, data, facsimile, control signals, audio and video,information services bureau and all other telecommunications systemstechnologies, as are at present available or can be made available throughtechnical advances or innovations in the future.  See “Item 8. FinancialInformation — Legal Proceedings — Quo Warranto Action” for informationregarding legal proceedings initiated by the Solicitor General with respect toPLDT’s franchise.

 

Since the implementation of its Subscriber Investment Plan, orSIP, in 1973 pursuant to Presidential Decree No. 217, which, until April 21, 2003, required telephone subscribers to purchase shares of PLDT's preferredstock, PLDT has developed a broad base of public ownership with approximately 2,207,008common and preferred shareholders of record as of December 31, 2003.  Approximately 2,190,318 of these shareholders are Philippine persons representingapproximately 88% of PLDT's outstanding common and preferred shares.  Forpurposes of the percentages described in this paragraph, all the ADSs evidencedby American Depositary Receipts, or ADRs, are considered to be held of recordin the United States.  As approved by the NTC, the purchase of PLDT preferredshares by PLDT subscribers pursuant to the SIP became optional starting April 22, 2003.  

 

On a consolidated basis, capital expenditures amounted toPhp17,943 million, Php17,239 million and Php28,201 million in 2003, 2002 and2001, respectively.  Of these amounts, Php6,100 million, Php8,194 million andPhp9,252 million were attributable to PLDT for 2003, 2002 and 2001,respectively, while Php11,305 million, Php7,564 million and Php17,961 millionwere spent by Smart for 2003, 2002 and 2001, respectively.  The remainingbalances were spent by our other subsidiaries, principally ePLDT and itssubsidiaries.

 

Organization

 

Our two largest shareholders are First Pacific,a Hong Kong-based investment and management company engaged in consumer,telecommunications and property businesses, which, through its Philippine andother affiliates, beneficially owns 31.4% of our common shares, and NTTCommunications, a wholly-owned subsidiary of Nippon Telegraph and TelephoneCorporation of Japan, whichbeneficially owns 14.9% of our common shares.

 

PLDT and thefollowing subsidiaries were all incorporated in the Philippines, except for PLDT Global, which was incorporated in the British Virgin Islands:

 

**Name of Subsidiary/Investee**

**Principal Activity**

**Percentage of Ownership**

**2003**

**2002**

2001

** **

 

 

 

 

**Wireless**

 

 

 

 

Smart and subsidiaries

Cellular mobile services

100.0

100.0

100.0

Telesat

Satellite communications services

94.4

94.4

94.4

ACeS Philippines 

Satellite phone services

93.7

93.7

93.7

Mabuhay Satellite

Satellite communications services

67.0

67.0

67.0

Piltel and subsidiaries

Cellular mobile and telecommunications services

45.3

45.3

45.3

 

 

 

 

 

**Fixed Line**

 

 

 

 

Clark Telecom

Telecommunications services

100.0

100.0

100.0

Subic Telecom

Telecommunications services

100.0

100.0

100.0

Smart-NTT Multimedia, Inc.

Data and network services

100.0

100.0

100.0

PLDT Global and subsidiaries

Telecommunications services

100.0

100.0

100.0

PLDT-Maratel

Telecommunications services

97.5

97.5

92.3

BCC

Telecommunications, infrastructure and related value-added services

75.0

37.5

–

 

 

 

 

 

**Information and Communications Technology**

 

 

 

 

ePLDT and subsidiaries

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

100.0

100.0

100.0

 

***Wireless***

 

We providecellular, satellite, VSAT and other services through our wireless businesssegment.  Revenues from our wireless services accounted for 58% of ourconsolidated operating revenues for the year ended December 31, 2003.

 

Our cellular service (including handset sales), which accountedfor about 99% of our wireless business revenues for the year ended December 31,2003, is provided through Smart and Piltel.  Smart is the leading cellularservice provider in the Philippines, with approximately 10.1 million subscribers as of December 31, 2003,representing an estimated market share of approximately 46%.  Piltel, areseller of Smart's digital GSM capacity under its own branding and pricingstrategy for voice and text messaging services, had approximately 2.9 millionsubscribers as of December 31, 2003, representing an estimated market share of13%.  In 2003, the combined number of Smart's and Piltel's subscribers (beingserved using Smart’s GSM network) increased by 51%, representing the largestincrease in the number of cellular subscribers in absolute terms in that periodamong Philippine cellular providers.  As of December 31, 2003, cellularpenetration in the Philippines was approximately 27%, which was nearly seven timesthe country's fixed line penetration.

 

Smart's and Piltel's cellular subscriber gains werepredominantly attributable to their respective prepaid GSM services, which wereintroduced in September 1999 and April 2000, respectively.  Approximately 98%of Smart's cellular GSM subscribers were prepaid as of December 31, 2003.The predominance of prepaid service reflects one of the distinguishingcharacteristics of the Philippine cellular market.  The growth in our prepaidservice has enabled us to increase and broaden our subscriber base rapidlywhile controlling credit risk and reducing billing and administrative costs ona per-subscriber basis.  

 

Our cellular subscriber growth has also been driven bytext messaging service.  Text messaging service is extremely popular in the Philippines,particularly on the prepaid platform, as it provides a convenient andinexpensive alternative to voice and e-mail based communications.  During 2003,our text messaging service system handled 28,825 million outbound messages, anincrease of 47% compared to 19,558 million outbound messages handled during2002. 

 

As of December 31, 2003, Smart's digital GSM network included 32 switching centers with a capacity of 14.3 millionsubscribers and 3,904 base stations covering 1,039 cities and municipalities.Piltel’s prepaid GSM service, *Talk ‘N Text*, is also supported on thisnetwork.  In addition, Piltel had six active cell sites as of December 31, 2003.

 

***Fixed Line***

 

We are the leading fixed line operator in the Philippines andthe only company providing fixed line telecommunications service throughout thecountry.  Our fixed line business group offers local exchange, internationallong distance, national long distance, data and other network and miscellaneousservices.  As of December 31, 2003, we had approximately 2.1 million fixedlines in service.  Revenues from our fixed line services accounted for 41% ofour consolidated operating revenues for the year ended December 31, 2003.

 

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

 

***Information andCommunications Technology***

 

Through our wholly-ownedsubsidiary, ePLDT, we provide broad-based integrated information andcommunications, or ICT, services focusing on infrastructure and solutions forinternet applications, internet protocol-based solutions and multimedia contentdelivery.  Incorporated in August 2000, ePLDT started commercial operations inFebruary 2001.  ePLDT's principal activities are the operation of an internetdata center under the brand name *VitroTM*, call center businesses andInfocom, an ISP.  

 

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

 

As a new business, revenues fromour information and communications technology services accounted for 1% of ourconsolidated operating revenues in 2003.

 

Strengths

 

We believe our business is characterized by the followingcompetitive strengths:

 

•        *Recognized Brands*.  PLDT and Smart are strong and widelyrecognized brand names in the Philippines.  We have built the PLDT brand namefor 75 years as the leading telecommunications provider in the Philippines.Smart is recognized in the Philippines as an innovative provider ofhigh-quality cellular services.  Piltel’s *Talk 'N Text* brand, which isprovided using Smart’s GSM network, has also gained significant recognition.

 

•        *Leading Market Shares*.  With over 15 million wireless andfixed line subscribers as of December 31, 2003, we have the leading marketposition in both the fixed line and cellular markets in the Philippines.ePLDT’s subsidiary, Infocom, is one of the leading ISPs in the Philippines.

 

•        *Diversified Revenue Sources*.  As a result of the continuedgrowth of wireless service in the country, approximately 58% of ourconsolidated operating revenues in 2003 are now derived from our wirelessbusiness segment.  Fixed line revenues, which represent 41% of our consolidatedrevenues in 2003 compared to 49% in 2002, have remained stable over the pastthree years despite pressures on traditional fixed line voice revenues,resulting from increases in our international long distance, fixed line dataand other network services.  We continue to identify and develop new revenuesources from our wireless, fixed line and ICT businesses.

 

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

 

•        *Innovative Products and Services*.  We have successfullyintroduced a number of innovative and award-winning cellular products andservices, including *Smart Load, Talk ‘N Text Load*and*Pasa Load.**Smart*and *Talk ‘N Text Loads* are “over-the-air” electronicloading facilities designed to make reloading of air time credits moreconvenient for, and accessible to consumers.  *Pasa Load*(literally means“transfer load”), a derivative service of *Smart and**Talk ‘N TextLoads,* allows load transfers to other *Smart Buddy* and *Talk ‘NText*subscribers.

 

•        *Strong Strategic Relationship*.  We have an importantstrategic relationship with NTT Communications and First Pacific.  Thetechnological support, international experience and management expertise madeavailable to us through these strategic relationships enhance our marketleadership and ability to provide and cross-sell a more complete range ofproducts and services.

 

Strategy

 

The key elements of our businessstrategy are:

 

•        *Build on our leading positions in the wireless and fixed linebusinesses*.  We plan to build on our position as the leading wirelessservice provider in the Philippines by continuing to introduce new products andservices to increase our subscribers’ use of our network for both voice anddata, as well as their reliance on our services.  We also plan to furtherincrease the capacity and expand the geographic reach of our cellular network,as well as to improve our service quality and indoor coverage.  Our operatingtarget is to continue growth in profitability by increasing our revenues whilecontrolling costs.  We plan to build on our position as the leading provider offixed line service in the Philippines by continuing to launch new products andservices to increase subscriber value and utilization of our existingfacilities and equipment at reduced cost.  

 

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

 

•        *Strengthen our leading position in the data market*.Recognizing the significant growth potential of data and other networkservices, including internet-based services, and their increasing importance toPLDT's overall business strategy, we are emphasizing the development of ourdata and network business segment to address the needs of large corporations,small and medium-sized enterprises and retail customers.  We have launched avariety of products and services, including data network services like digitalleased lines, frame relay, asynchronous transfer mode, or ATM, internetProtocol Virtual Private Network, or IP-VPN.  We are progressively introducinginternet-based services such as digital subscriber line, or DSL to ourcorporate and residential clients, International internet Gateway or I-Gate forISPs and large corporations.

 

•        *Strengthen our financial position*.  We are engaged in anumber of initiatives to strengthen our financial position.  We are working toincrease our cash flow available for debt reduction by containing our operatingcosts, reducing capital expenditures and generating cash returns from ourinvestments in subsidiaries.  In December 2002, Smart made its first dividendpayment of Php1,540 million (not to exceed 40% of its net income in 2001) toPLDT to supplement PLDT’s cash flows available for debt reduction, followed byPhp4,300 million in June 2003 and Php1,866 million in November 2003(representing dividends equivalent to 70% and 30%, respectively, of its 2002net income) and Php11,280 million in May 2004 (representing 70% of Smart’s 2003net income under Philippine GAAP.)

** **

**Business**

** **

Wireless

 

We provide cellular andsatellite, VSAT and other services through our wireless business segment.

 

*Cellular Service*

 

*Overview*

 

Our cellular business, which weprovide through Smart and Piltel to approximately 13 million GSM subscribers,more than 98% of whom are prepaid subscribers, is focused on providing wirelessvoice communications, wireless data communications (primarily through textmessaging) and a variety of other value-added services, which include (a) *MobileBanking* (banking services delivered over the mobile phone); (b) *SmartzedTM*; (c) *Smart Money*; and (d) international roaming, aswell as other value-added services developed on Smart’s and Piltel’s own platform.Smart services the almost three million subscribers of Piltel on its GSMnetwork through a facilities service agreement with Piltel, under the brandname *Talk ‘N Text*.

 

The following table summarizeskey measures of our cellular business as of and for the years ended December 31, 2003, 2002 and 2001:

 

 

**Years Ended December 31,**

 

**2003**

**2002**

**2001**

Systemwide cellular subscriber base

12,947,197

8,599,306

6,368,850

Smart

10,080,112

6,825,686

4,893,844

GSM

10,080,112

6,825,686

4,641,666

Prepaid

9,831,135

6,649,038

4,569,616

Postpaid

248,977

176,648

72,050

Analog/ETACS (1)

–

–

252,178

Prepaid

–

–

87,429

Postpaid

–

–

164,749

Piltel

2,867,085

1,773,620

1,475,006

GSM—Prepaid(2)

2,867,085

1,773,620

1,329,326

Analog/CDMA(1)

–

–

145,680

Prepaid

–

–

76,473

Postpaid

–

–

69,207

Growth rate of cellular subscribers

51%

35%

81%

Smart

48%

39%

71%

GSM

48%

47%

99%

Analog/ETACS

–

(100%)

(52%)

Piltel

62%

20%

125%

GSM—Prepaid(2)

62%

33%

261%

Analog/CDMA

–

(100%)

(49%)

Cellular revenues (in millions)

Php63,434

Php45,565

Php32,835

Service (3)

51,001

30,583

19,820

Handset sales

12,433

14,982

13,015

Percentage of cellular revenues to total operating revenues

57%

49%

41%

_____________

 

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

 

 

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

 

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

 

* *

*Service Plans*.  Smartmarkets nationwide cellular communications services under the brand names *SmartBuddy, Smart Gold,**addict mobile* and *Smart Infinity.  Smart Buddy*is a prepaid service while *Smart Gold, addict mobile* and *SmartInfinity* are postpaid services, all of which are provided through Smart'sdigital GSM network.  

 

Of Smart’s total cellular subscribers as of December31, 2003, 98% were *Smart Buddy* prepaid subscribers and 2% were *SmartGold,**addict mobile*and*Smart Infinity*postpaid**subscribers.Introduced in April 2003, *addict mobile*offers exclusive multimediacontent to subscribers and features personalized means for internet surfing andallows subscribers to apply their allocated free credits towards their choiceof data and value-added services.  *Smart Infinity* is a premium postpaidplan launched in January 2004 for the affluent and highly mobile market,offering first class quality services, including a round-the-clock dedicatedpersonal concierge service, international assistance services, premium handsetpackages and exclusive lifestyle content.  Before Smart decommissioned itsanalog/ETACS network in December 2002, it had also offered analog prepaid andpostpaid services under the brand names *BillCrusher* and *PriceBuster*,respectively.  

 

Piltel markets its cellularservices under the brand name *Talk 'N Text*, a prepaid service providedusing Smart’s GSM network pursuant to a facilities service agreement betweenSmart and Piltel.  As of December 31, 2003, Piltel’s *Talk 'N Text*subscribers reached 2,867,085.

 

*Text Messaging Service and OtherValue-added Services*.  Our cellular subscriber growth has been driven bytext messaging service on GSM networks.  Text messaging is extremely popular inthe Philippines, particularly on the prepaid platform, as it provides aconvenient and cost-efficient alternative to voice and e-mail basedcommunications.  Text messaging also utilizes less network capacity than voice,thereby increasing network efficiency.  Strong volume growth in text messagingcontributed significantly to our cellular revenue growth in 2003.  The totalvolume of messages handled by our text messaging service system during 2003increased by 47% to 28,825 million outbound messages from 19,558 millionoutbound messages handled during 2002.  

 

Our value-added services areprimarily based on text messaging service technology.  Since 2000, Smartlaunched the following value-added cellular services:

 

•        *Smart zed*TM, a partnership with international cellularoperator Sonera zed Ltd., or Sonera zed, of Finland, enables subscribers topersonalize their information requirements not only as to the types ofinformation required but also when the information is required.  Sonera zed hasintroduced a single platform that provides access to local and globalinformation through text messaging or wireless application protocol;

 

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

 

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

 

We also offer value-added services such as voice mail,information-on-demand, which is a service that allows subscribers to orderinformation from our content providers whenever desired, mobile banking and *TextMail*,which is a service that allows subscribers to send and receive text messagesthrough their personal computers and location-based services.  In addition, wehave a number of interactive activities, such as text games and chat services,developed on our own platforms.

 

*Smart Money*was cited as the "Best Product Innovation" by MasterCardInternational and the "Most Innovative GSM Wireless Service forCustomers" at the 3rd GSM World Congress held in Cannes, France, inMarch 2001.  In February 2004, at the sixth GSM World Congress, *Smart Load,*anover-the-air electronic loading facility designed to make reloading of air timecredits more convenient for and accessible to subscribers was cited as the“Best Mobile Application or Service for the Consumer Market.”

 

Due to the high level of textmessaging service usage, we believe that the Philippine market is well suitedfor text-based informational and e-commerce services.  Our current approach isto continue maximizing our GSM, or 2G, services and also offer General PacketRadio Service, or GPRS or 2.5G, to service increased demand forbandwidth-intensive applications.  GPRS allows data transfer at an averagespeed of up to 115 kilobits per second.  In addition, we continue to upgradeour network to Enhanced Data for GSM Evolution, or EDGE.  EDGE is a technologythat would further increase the speed and data capability of our GSM network.

 

*Rates andDiscounts*

 

A prepaid cellular subscriber isrecognized as an active subscriber when that subscriber activates and uses theSIM card in the handset, which already contains Php100 worth of pre-stored airtime.  Subscribers can then reload by purchasing prepaid call-and-text cardsthat are sold in denominations of Php300, Php500 and Php1,000 or, by purchasingadditional air time “over the air” via *Smart Load* and*Talk ‘N TextLoad*in smaller denominations of Php30, Php60, Php115 and Php200, byreceiving loads of Php2, Php5, Php10 and Php15 via *Pasa Load* (forprepaid subscribers only) or through their handsets using *Smart Money*.Reloads have validity periods ranging from one day to two months, depending onthe amount reloaded.  A prepaid GSM account is disconnected if the subscriberdoes not reload within four months after the full usage or expiry of the lastreload.  As a result, a subscriber would not be included in our churn ratecalculation for up to 121 days to six months after the subscriber may havestopped using the service to make calls or send messages (although thesubscriber 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 and Piltel’s services, and may contribute to more rapid growthin calculated churn following periods of rapid subscriber growth. 

* *

*SmartBuddy* and Piltel’s *Talk ‘N Text* prepaid cards are sold indenominations of Php300, Php500 and Php1,000, which include 33, 83 and 250 freetext messages, respectively.  The stored value of a prepaid card remains validfor a period of two months from the time a subscriber activates the card.  OnMay 11, 2003, we introduced *Smart Load*and*Talk ‘N Text Load*, an“over-the-air” electronic loading facility designed to make reloading of airtime credits more convenient for, and accessible to consumers.  Theseover-the-air reloads come in the following denominations and correspondingexpiration periods:

 

**Denomination**

** **

**Load Expiry**

** **

**Equivalent Values**

 

 

 

 

 

Php30

 

3 days

 

30 text messages or 4 local call minutes

Php60

 

6 days

 

60 text messages or 8 to 9 local call minutes

Php115

 

12 days

 

115 text messages or 15 to 17 local call minutes

Php200

 

30 days

 

200 text messages or 26 to 30 local call minutes

 

*Smart*and *Talk ‘N TextLoads* were followed in January 2004 with *Pasa Load*, a derivativeservice allowing prepaid subscribers to transfer even smaller denominations toother prepaid subscribers for a charge of Php1.00 per transfer.  *Pasa Load*comes in denominations of Php2, Php5, Php10 and Php15, all carrying a one-dayload expiry.  

 

Beginning January 2004, *Smart Buddy* subscriberspay the following air time rates per minute: (a) Php6.50 for Smart-to-Smart andSmart-to-*Talk ‘N Text* subscribers; and (b) Php7.50 for Smart-to-othermobile operators, fixed lines and national long distance calls.

 

Prior to January 2004, *SmartBuddy* subscribers paid a rate of Php8.00 per minute for calls made duringpeak hours and Php4.00 per minute for calls made during off-peak hours,regardless of whether the calls were made within the Smart network or to othermobile operators’ networks.  From October 25 to December 31, 2003, national long distance calls were charged at Php11.00 per minute for peak hours and Php7.00per minute for off-peak hours.  Previous to that date, *Smart Buddy*subscribers paid varying national long distance rates depending on thedestination of the call.

 

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

 

•        Flat Rate (regular plans) Plans are available with monthlyservice fees ranging from Php500 to Php8,000 with varying amounts of free airtime and text messages and different rates beyond the free minutes and textmessages, depending on the monthly service fee.  Monthly service fees for theseplans are applicable only to local calls and text messages.  All other servicesare billed on top of the monthly service fee; and

_

•        Consumable plans are available with monthly service fees rangingfrom Php800 to Php8,000 with different amounts of free air time and textmessages and different rates beyond the free minutes and text messages.Subscribers to these plans may apply their monthly service fees to all voicecalls, text messages (both local and international) and value-added services.

 

Under both types of plans, the rates for calls to other mobileoperators, landlines and NDD calls are Php1.00 higher than calls within theSmart network.

 

From January 1, 2002 to January 24, 2004, *Smart Gold* subscribers could choose from seven differentsubscription plans with monthly services fees ranging from Php500 to Php3,500with different amounts of free air time and text messages and different ratesbeyond the free minutes and text messages.  Under each of these plans, callsduring peak hours and to other mobile operators, landlines and NDD calls werecharged at higher rates per minute than calls within the Smart network.

 

Prior to January 1, 2002, *Smart Gold* offered the following monthly air time plans: Php600,Php1,200, Php1,800, Php3,000 and Php4,000.  Subscribers who enrolled in theseplans prior to January 1, 2002 remained on these plans following introductionof the plans described above.

 

From April 12, 2003 to January 24, 2004, *addict mobile* offered seven differentsubscription plans with monthly services fees ranging from Php500 to Php3,500with different amounts of free air time and text messages and different ratesbeyond the free minutes and text messages.  Under each of these plans, callsduring peak hours to other mobile operators, landlines and NDD calls werecharged at higher rates per minute than calls within the Smart network.

 

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

 

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

 

All Smart subscribers pay aninternational direct dialing rate of US$0.40 per minute.  This rate applies to200 destinations, including the United States, Hong Kong, Japan, Singapore, the United Kingdom and the United Arab Emirates.  Smart charges US$0.98 perminute for 27 other destinations such as Afghanistan and Cuba and US$2.18 perminute for another ten destinations such as East Timor and the Falkland Islands.

 

Charges forpoint-to-point text messages beyond the allotted free text messages are asfollows:

 

•        for *Smart Buddy* and *addict mobile* subscribers,Php1.00 per message; and

 

•        for *Smart Gold* and *Smart Infinity* subscribers,Php0.50 or Php1.00 per message, depending on air time plan.

 

*SmartBuddy,**Smart Gold* and *addict mobile***subscribers paythe same charges for SMS-based value-added services, as follows:

 

•        Php15.00 per message for international text for *Smart Buddy*subscribers and Php10.00 per message for international text under the new *SmartGold* plans and for *addict mobile* and *Smart Infinity*subscribers;

 

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

 

•        Php15.00 per download of ring tones and logos;

 

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

 

•        Php10.00 per subscription download.

 

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

 

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

 

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

 

•        Php2.50 per MMS for e-text and information-on-demand services(such as news, stock and entertainment updates);

 

•        Php2.00 per transaction when surfing on the Smart WAP portal; and

 

•        Php0.25 per kilobyte when surfing outside the Smart WAP portal.

 

For voice mail retrieval, all Smart subscribers are chargedPhp6.50 per minute.

 

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

 

We sell our cellular servicesprimarily through a network of independent dealers that generally have theirown retail networks, direct sales forces and sub-dealers.  These dealersinclude major distributors of cellular handsets.  We currently have six dealersthat carry out distribution throughout the Philippines.  On December 1, 2002, Smart purchased the assets of Telecommunications Specialists, Inc., orTSI, a major dealer that used to account for more than half of our sales ofprepaid air time cards, and integrated TSI’s employees following theacquisition.  Account managers from our dealer sales force manage our dealernetwork and regularly update these dealers on our upcoming marketingstrategies, promotional campaigns and product development.  With theintroduction of *Smart Load* and *Talk ‘N Text Load* in May 2003,Smart and Piltel moved into a new mode of distribution.  These over-the-airreloads, which were based on the “sachet” marketing concept of consumer goodssuch as shampoo and ketchup, required a distribution network more comparable tothose of soft drink and beer distributors.  Starting with just 50,000 outletswhen it was launched, *Smart Load*’s distribution network now encompassesover 400,000 retail agents, 80% of which are micro businesses (e.g.neighborhood stores, individuals acting as roving agents).

 

For prepaid services, we provided discounts to dealersfor prepaid phone kits, air time cards and over-the-air reloads sold.Beginning August 1, 2002, Smart and Piltel reduced the maximum discount todealers for prepaid phone kit sales from a range of Php1,000 to Php1,300 perunit sold in the form of prepaid “call and text” cards (depending on the volumepurchased) to Php800 in cash per prepaid phone kit sold.  An additional 1%rebate was given on cash purchases.  Air time cards and over-the-air reloadsare sold to dealers at volume discounts determined by the value of the cardspurchased by the dealers.  Discounts for air time cards sold range from 8% to10% while discounts on over-the-air reloads range from 4% to 5%.  Air timecards cannot be returned or refunded and normally expire within six to 12months after release from the Smart warehouse.  For postpaid services, we paydealer discounts based on the air time plan sold.

 

Piltel's *Talk 'N Text*prepaid cards are sold in the same denominations and offer the same internationaldirect dialing rates as *Smart Buddy*prepaid cards at US$0.40 per minuteto all destinations.  In October 2003, Piltel implemented an all-day/all-nightflat rate of Php9.50 per minute for local calls, calls to other network andnational long distance calls replacing the Php12.00 per minute during peakhours and Php8.00 per minute during off-peak hours.  In January 2004, this ratewas further reduced to Php6.50 per minute while the rate for *Talk ‘N Text*to *Talk ‘N Text* calls was reduced to a flat rate of Php5.50 per minutefrom Php6.50 per minute.  The same rate of Php5.50 per minute is charged forvoice mail retrieval.  *Talk ‘N Text*subscribers are charged Php1.00 fora regular text message in excess of free text allocations while for value addedservices, such as text games, logo and ring tone downloads are charged within arange of Php2.50 to Php15.00 per message.  

 

*Satellite and VSAT*

* *

*Overview*

 

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

 

*MabuhaySatellite*

 

We currently own 67% of MabuhaySatellite, which is engaged in the control and operation of the Agila IIsatellite.  Commencing commercial operations in January 1998, Agila II is the Philippines'first communications satellite.  Mabuhay Satellite leases satellite spacesegments in both the C and Ku bands on the Agila II.  Through Agila II, MabuhaySatellite also offers internet backbone access, video and data broadcasting,and bandwidth-on-demand, facilitating communication links betweentelecommunications, broadcast and other public utility companies operating inthe Asia-Pacific region.  See “Item 5. Operating and Financial Review andProspects –– Critical Accounting Policies –– Investments” and *Note 8 –Investments* to the accompanying consolidated financial statements in Item18 for a discussion of our investment account in Mabuhay Satellite.

 

*Telesat*

 

We currentlyown 94.4% of Telesat which operates a nationwide communications satellitenetwork using VSAT technology.  Telesat offers voice, facsimile and datatransmission services throughout the Philippines, including areas that areunderserved or unserved by local fixed line operators. 

 

Using VSATtechnology, we also provide the following services:

 

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

 

•        private point-to-point service; and

 

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

 

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

 

*ACeS**Philippines*

 

We currently own 93.7% of ACeSPhilippines, which owns approximately 20.23% of AIL, and the remaining 6.3% of ACeSPhilippines is owned by other shareholders of Piltel.  AIL aims to develop andimplement a satellite-based communications system to provide services to usersin the Asia-Pacific region through the Garuda I satellite, or ACeS System andACeS Service.  AIL has entered into interconnection agreements and roamingservice agreements with PLDT and other major telecommunications operators thatwill allow ACeS subscribers to access GSM terrestrial cellular systems inaddition to the ACeS system.  Further, AIL has an Air Time Purchase Agreement,or ATPA, with National Service Providers, or NSPs, in Asia, including PLDT.For further discussion of this ATPA, please see *Note 18 – Related PartyTransactions* and *Note 23 – Contractual Obligations and Commercial Commitments*to the accompanying consolidated financial statements in Item 18.

 

*Revenues*

 

Oursatellite and VSAT service revenues consist of:

 

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

 

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

 

•        revenues generated from ACeS Philippines’ satellite phoneservice.

 

*Rates*

 

Mabuhay Satellite leases its transponders to third parties atannual rates of approximately US$1.5 million and US$1.0 million for its C-bandand Ku-band transponders, respectively.  Telesat provides its VSAT services ona cost plus mark-up basis.  ACeS Service mobile subscribers are chargedPhp13.84 per minute for local and cell-to-cell calls and for national directdial services while residential subscribers are charged a peak-hour rate ofPhp13.00 per minute and an off-peak hour rate of Php8.00 per minute fordomestic calls regardless of destination.  For ACeS System public callingoffices, callers are charged Php4.50 and Php7.00 per minute for callsterminating to fixed line and cellular networks, respectively.  Rates forinternational long distance calls, depending on the country of termination,ranging from US$0.35 per minute for frequently called countries to US$0.85 perminute for less frequently called countries.

** **

Fixed Line

 

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

 

*Local Exchange Service*

 

*Overview*

 

Our local exchange service, whichconsists of our basic voice telephony business, is provided primarily throughPLDT.  

 

Thefollowing table summarizes key measures of our local exchange service segmentas of and for the years ended December 31, 2003, 2002 and 2001:

 

 

**Years Ended December 31,**

 

**2003**

** **

**2002**

** **

**2001**

 

 

 

 

 

 

Number of PLDT local exchange lines in service (at period-end)

2,115,671

 

2,092,539

 

2,075,109

Net additions

23,132

 

17,430

 

159,124

Growth rate 

1%

 

1%

 

8%

Number of PLDT employees (at period-end)

10,230

 

12,131

 

12,915

Number of local exchange lines in service per employee

207

 

172

 

161

Consolidated local exchange revenues (in millions)

Php20,728

 

Php21,345

 

Php21,356

Growth rate

(3%)

 

–

 

14%

Local exchange revenues as a percentage of total operating revenues

19%

 

23%

 

27%

 

We also provide local exchangeservices through our subsidiaries Clark Telecom, Subic Telecom, Maratel andPiltel.  Together, these subsidiaries account for approximately 1% of our totalfixed lines in service.

 

We regularly adjust our rates and introduce newproducts and services in an effort to increase our number of subscribers,improve our churn management efforts and minimize our credit risk exposure.Since 1999, we have launched a prepaid fixed line service, introduced additionalvalue-added services, introduced initiatives aimed at increasing subscriptionin areas where we have excess capacity and reduced our installation fees, asdescribed below under "— Rates."

 

Initially intended as an alternative affordabletelephone service for consumers under difficult economic conditions, ourprepaid fixed line services now form an important part of PLDT’s overall churnand credit risk exposure management and subscriber retention strategy.  Formore information on prepaid fixed line services, see “–– Rates” below.

 

To attract new fixed line subscribers and retainexisting ones, PLDT has introduced various value-added services such as *Hype*in April 2003.  *Hype* is a full two-way fixed line text messaging service*,*which allows subscribers to send and receive text messages to and from landlineand mobile phones, and is capable of international text messaging.  *Hype*also allows subscribers to join TV network-based and new PLDT-initiated textingservices.  

 

*Rates*

 

As of December 31, 2003, basic monthly charges for our localexchange service in the Metropolitan Manila area were Php653.88 for asingle-party residential line and Php1,362.66 for a single business line.Monthly charges vary according to the type of customer (business or residential)and location, with charges for urban customers generally being higher thanthose for rural/provincial customers.  In July 2003, we launched the Telegustopromotion waiving installation charges up to December 31, 2003 to encourage subscriber growth.  Installation charges amount to Php1,200 for residentialcustomers and Php1,500 for business customers.  Other than basic monthlycharges, we do not charge our postpaid subscribers for local calls.

 

Pursuant to a currency exchange rate adjustmentmechanism authorized by the NTC, we adjust our monthly local exchange servicerates according to changes in the peso-to-U.S. dollar exchange rate.  Under theauthorization granted to us by the NTC, we are permitted to increase and arerequired to decrease these rates by 1% for every Php0.10 change in the exchangerate relative to a base exchange rate of Php11 to US$1.00.  During 2003, weimplemented 11 upward and three downward adjustments in our monthly localexchange service rates.

 

Effective January 1, 2003, local access charges for cellular subscribers’ calls that terminate to our fixedline subscribers increased from Php2.00 per minute to Php2.50 per minute, andwas further increased to Php3.00 per minute effective January 1, 2004.

 

A prepaid fixed line subscriber is recognized as anactive subscriber when that subscriber activates and uses a prepaid call card.Prepaid fixed line subscribers can reload their accounts by purchasing callcards that are sold in denominations of Php500, Php300 and Php150.  Reloads arevalid for two months for the Php500 and Php300 card.  The lower denomination ofPhp150 card, launched in September 2003, has an account life of 15 days.  Aprepaid fixed line subscriber is disconnected if that subscriber does notreload within one month for the Php500 card, four months for the Php300 card,and 15 days for the Php150 card after the expiry of the last reload.  All salesof prepaid cards, whether through dealers or through PLDT's business offices,are non-refundable.  Our prepaid fixed line customers do not pay a basicmonthly charge and are charged based on usage.  For local calls, prepaid fixedline customers are charged based on usage at a rate of Php1.00 per minute.  Theinternational and national long distance rates we charge to our prepaid fixedline customers are similar to the rates we charge our postpaid customers.  Fora description of these rates, see "— International Long Distance Service —Rates" and "— National Long Distance Service — Rates."  Prepaidphone kits, each containing Php500 worth of pre-stored call credits, are soldfor Php1,900 per unit.

 

*International LongDistance Service*

 

*Overview*

 

Our international long distance service consists of voice andpacket-based voice services that go through our international gateway facilities.We also generate international long distance revenues through access chargespaid to us by other Philippine telecommunications carriers for incominginternational voice calls that terminate to our local exchange network.  Ourpacket-based voice services are transmitted over our existing traditionalcircuits: voice over internet protocol, or VOIP; network of a consortium ofdominant carriers in Asia; ATM; and internet protocol global backbone of PLDTGlobal.

 

The following table shows certaininformation about our international long distance business as of and for theyears ended December 31, 2003, 2002 and 2001:

 

 

**Years Ended December 31,**

 

**2003**

**2002**

**2001**

 

 

 

 

Total PLDT call volumes (million minutes)

2,183

2,576

2,814

Growth rate

(15%)

(8%)

18%

Inbound call volumes (million minutes)

2,028

2,409

2,648

Growth rate

(16%)

(9%)

18%

Outbound call volumes (million minutes)

155

167

166

Growth rate

(7%)

1%

18%

Inbound-outbound call ratio

13.1:1

14.4:1

16:1

Consolidated international long distance revenues (in millions)

Php12,634

Php10,636

Php11,701

Growth rate

19%

(9%)

(12%)

International long distance revenues as a percentage of total operating revenues

11%

11%

15%

 

International long distance service historically hasbeen a major source of revenue.  However, due to the steep decline in inboundtermination and collection rates and intense competition, revenues derived fromour international long distance service had been declining through the end of2002.  We adopted a two-pronged initiative in early 2000 with respect toinbound international service to try to address this issue.  First, we loweredour inbound termination rates at that time.  

 

By reducing our rates, we reduced the incentive forunauthorized traffic termination and bypass routings by international simpleresale operators, and therefore were able to recover some lost traffic.Secondly, we intensified our efforts to identify and contain unauthorizedtraffic termination and bypass through more effective monitoring of ourinternational trunks, leased lines or local network.  International simpleresale operation occurs when a company rents an international leased line froma Philippine international gateway operator, aggregates traffic outside the Philippinesand carries and terminates this traffic at the public switch telephone networkin the Philippines.  International simple resale can be used to bypassthe local access charge system, which is illegal in the Philippines.

 

Since 2001, we have become more selective in acceptingincoming traffic from some carriers, particularly second and third tierinternational carriers.  In addition, we adopted a policy requiring prepaymentfrom certain second and third tier international carriers as a prerequisite foraccepting their incoming traffic.  

 

We are also pursuing a number of other initiatives tofurther strengthen our inbound business.  Through PLDT Global, we aggregateinbound call traffic to the Philippines at our points of presence and, using our capacity insubmarine cable systems connected to each point of presence, transmit calls toour network.  PLDT Global is also enhancing the presence of PLDT in otherinternational markets by offering new products and services such asinternational prepaid cards, SMS transit and other global bandwidth services.We believe this strategy will help us maximize the use of our existinginternational facilities, and develop alternative sources of revenue.

 

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

 

The table below sets forth thenet settlement amounts for international calls handled by PLDT, by country, forthe years ended December 31, 2003, 2002 and 2001:

 

 

**Net Settlement**

 

**Years Ended December 31,**

** **

**2003**

**2002**

**2001**

 

**(in millions)**

 

 

 

 

United States

US$52

US$68

US$82

Saudi Arabia

15

5

7

Canada

15

7

10

Italy

14

5

6

Japan

12

16

23

Australia

11

5

18

United Arab Emirates

10

8

3

Hong Kong

9

3

7

Taiwan

4

6

3

Others

77

63

41

Total

US$219

US$186

US$200

 

*Rates*

* *

We adopted the U.S. FCC accountingrate benchmark of US$0.38 per minute for inbound international calls on January 1, 2000, which represented a settlement rate of US$0.19 per minute, forinternational long distance traffic between the Philippines and the United States.  Adopting the U.S. FCC benchmark accounting rate one year ahead ofthe target date of January 1, 2001 allowed us pricing flexibility for inboundcall traffic.  Termination rates for inbound calls from the United Statescontinued to decline through the end of 2002 to levels below the U.S. FCCbenchmark accounting rate under pressure from unauthorized terminations andbypass operations.  Termination rates for inbound calls from other countrieshave also been declining generally.  As of December 31, 2002, a substantial portion of PLDT’s international inbound traffic terminating on its fixed linenetwork was charged an average termination rate of approximately US$0.08 perminute.  PLDT increased termination rates with carriers accounting for asubstantial portion of its international inbound traffic terminating on itsfixed line network to an average of approximately US$0.12 per minute effective February 1, 2003.  See “Item 8. Financial Information –– Legal Proceedings –– U.S. FederalCommunications Commission, or FCC, Ruling versus Philippine TelecommunicationsCompanies”, “–– Investigation by U.S. Department of Justice” and *Note 28 –Other Matters* to the accompanying consolidated financial statements in Item18 for further discussion.

 

Rates for outbound international long distance callsare based on the length of the call, country of destination, and type ofservice such as operator-assisted and direct-dialed calls.  Our rates arequoted in U.S. dollars and billed in pesos.  The peso amounts are determined atthe time of billing.

 

Effective February 1, 2001, PLDTreduced its international direct dialing, or IDD, rates for retail customersfrom US$0.49 per minute for off-peak hours and US$0.69 per minute for peakhours to a flat rate for retail customers of US$0.40 per minute, applicable toall call destinations at any time on any day of the week.  Additionally, inNovember 2001, PLDT introduced *Budget Card*, a prepaid call card offeringa reduced IDD rate of US$0.24 per minute for calls to 20 overseas destinationsincluding the United States, Canada, Japan and China*.**Budget Cards*are sold in a denomination of Php200, which must be consumed within 30 daysfrom first use.

 

*National Long DistanceService*

 

*Overview*

 

Our nationallong distance services are provided primarily through PLDT.  This serviceconsists of voice services for calls made by our fixed line customers outsideof their local service areas within the Philippines and access charges paid tous by other telecommunications carriers for calls carried through our backbonenetwork and/or terminating to our fixed line customers.

 

Thefollowing table shows our national long distance call volumes and revenues asof and for the years ended December 31, 2003, 2002 and 2001:

 

 

Years Ended December 31,

 

**2003**

**2002**

**2001**

 

 

 

 

Total PLDT call volumes (million minutes)

2,017

2,145

2,756

Growth rate

(6%)

(22%)

(15%)

Consolidated national long distance revenues (in millions)

Php6,694

Php7,818

Php8,500

Growth rate

(14%)

(8%)

(19%)

National long distance revenue as a percentage of total operating revenues

6%

8%

11%

 

Cellular substitution and the widespread availabilityand growing popularity of alternative, more economical, non-voice means ofcommunications, particularly e-mailing and cellular text messaging, havenegatively affected our national long distance call volumes.  The integrationof some of our local exchanges into a single local calling area effectiveAugust 2000, as approved by the NTC, has also negatively affected our nationallong distance call volumes, and consequently, our revenues.  Because of thisintegration, calls between two exchanges located within the same province areno longer considered national long distance calls but are treated as localcalls.

 

A substantial portion of our national long distancecalls were direct-dialed calls.  Operator-assisted calls are charged based on aminimum of three minutes plus operator charges, while direct-dialed calls arecharged on a less costly per minute basis.

 

We offer various *PLDT PremiumPhone Services*, which allows customers to choose from a range of serviceapplications, such as appointment-booking services for select embassies in thePhilippines (including, among others, the U.S. and Australian embassies),spiritual and love counseling, joining television-based game shows, celebritychatting, downloading and sending of ring tones and logos, televoting, jobpostings, and *myMusic*, a music entertainment line to various popularartists.  PLDT charges a minimum of Php10.00 per minute for these premium phoneservices.

 

*Rates*

 

Rates for national long distancecalls are based on type of service, such as whether the call isoperator-assisted or direct-dialed.  In the latter part of 2001, PLDTsimplified its rates for calls to fixed line subscribers and for thoseterminating to cellular subscribers resulting in an overall rate increase.  Forcalls terminating to fixed line subscribers, the applicable rates from Januaryto November 1, 2001 ranged from Php3.00 per minute to Php5.00 per minute,depending on distance and time of call.  In line with its move towards ratesimplification, PLDT simplified these rates to a flat rate of Php4.50 perminute effective November 2, 2001.  At the same time, PLDT simplified its ratesfor calls terminating to cellular subscribers from a range of Php10.00 perminute to Php16.00 per minute to a uniform rate of Php13.75 per minute.  Effective March 1, 2003, PLDT increased the rate for calls terminating to otherlocal exchange carriers from a flat rate of Php4.50per minute to Php5.00 per minute.  In addition,NDD calls originating from and terminating to PLDTwas also adjusted to Php5.00 per minute from aflat rate of Php4.50 per minute effective June 8, 2003.  Throughrate simplification, we aim to simplify our tariff structure in order toenhance the competitiveness of our products and services and increase ouroperating efficiencies. We adopted these simplified pricing plans with a viewto maximizing our national long distance revenues going forward.

 

PLDT entered into newinterconnection agreements with local exchange carriers and cellularoperators.  In particular, in May 2001, PLDT entered into an interconnectionarrangement with the majority of other local exchange carriers, pursuant towhich the originating carrier pays (1) a hauling charge of Php0.50 per minutefor short-haul traffic or Php1.25 per minute for long-haul traffic to thecarrier owning the backbone network and (2) an access charge of Php1.00 perminute to the terminating carrier.  In addition, effective January 2002, accesscharges being paid by PLDT to cellular operators were reduced to Php4.50 perminute from Php6.50 per minute it paid for the period from July to December2001.  Prior to July 2001, PLDT was paying accesscharges ranging from a low of Php7.69 to ahigh of Php10.94 per minute for callsterminating to cellular subscribers, depending on whether the calls were localor long distance.  PLDT still maintains revenue-sharing arrangementswith a few other local exchange carriers, whereby charges are generallyapportioned 30% for the originating entity, 40% for the backbone owner and theremaining 30% for the terminating entity.  

 

*Data and Other Network Services*

 

Recognizing the growthpotential of data and other network services, including internet-basedservices, and in light of their importance to our business strategy, we havebeen putting considerable emphasis on this service segment.  In 2002, thissegment registered the highest percentage growth in revenues among our fixedline services and it continued to grow in 2003.

 

The upgrading of our network in recent years through thecompletion of our domestic fiber optic backbone has enabled us to offer agrowing range of value-added and broadband services.  With this and othertechnological upgrades, our infrastructure is being developed from atraditional voice facility to a new packet-switched and internet-based networkthat allows faster transmission of voice, video and data.  Data services wecurrently provide include:

 

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

 

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

 

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

 

Theforegoing services are used for the following:

 

•        domestic and international communications;

 

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

 

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

 

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

 

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

 

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

 

In 2003 and 2002, we continued tobroaden our service offerings with the launch of new services and expansion orenhancement of some of the existing ones.  

 

In May 2002, PLDT launched apay-per-use dial-up internet service under the brand name *PLDT Vibe*,which is available on a postpaid or prepaid basis to PLDT’s fixed linesubscribers.  Charges for this service are Php0.25 per minute for off-peakhours, which are from 10:01 p.m. to 6:00 a.m., and Php0.50per minute for peak hours, which are from 6:01 a.m. to 10:00 p.m.  Withthe launch of *PLDT Vibe*, PLDT now offers two residential internetservice packages targeting separate markets:  *PLDT Vibe*for light tomedium internet users and *DSL*broadband for heavy internet users.  As ofDecember 31, 2003, the number of PLDT’s fixed line subscribers that signed upfor *PLDT Vibe*was**206,979, of which 129,447 were postpaid and77,532 were prepaid subscribers, compared to 76,014 as of December 31, 2002, ofwhich 60,878 were postpaid and 15,136 were prepaid subscribers, while thenumber of *DSL* subscribers reached 23,884 and 10,896 as of December 31,2003 and 2002, respectively.

 

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

 

In April2003, PLDT introduced *Resort Solutions,* a network service that providescommunication links between the head office and the remote offices of vacationresorts.  It enables resort offices to access the information vital to thebusiness and to do transactions such as real-time updating of room bookings,real-time checking of room inventory or even real-time audit of resortprofitability via IP-VPN or internet access.

 

In May 2003, *Shops.work* wasfully launched*,*a network service that allows the electronic linking ofretail stores providing, among other features, sales and inventory reports,up-to-date and real-time monitoring of sales and inventory, and on-line accessto head offices.  

 

In June 2003, *Embed*wasintroduced to the market through a soft launch.  The service is a wholesalebanking solution that enables a bank partner to build a community among itsclients in a business to business or business to consumer arrangement throughthe use of IP-VPN network solution.

 

In September 2003, *HighBandwidth Optical Service*, or *HBOS* was launched, a dedicatedhigh-speed point-to-point optical access solution that enables data mirroring,storage area network, or SAN, and local area network, or LAN, interconnectivitywithin Metro Manila.  *HBOS* offers an option for a virtually readyalternative data center.

 

Information and Communications Technology

 

We conductour information and communications technology businesses through ourwholly-owned subsidiary ePLDT, which was incorporated in August 2000 andstarted commercial operations in February 2001.  ePLDT is a broad-basedintegrated information and communications technology company, focusing oninfrastructure and solutions for internet applications, internet protocol-basedsolutions and multimedia content delivery.  ePLDT's principal businesses arethe operation of: (a) an internet data center under the brand name *Vitro*TM;(b) call centers through Vocativ and Parlance, which commenced commercialoperations in April 2002 and June 2002, respectively, and (c) an ISP throughInfocom.

 

*Infrastructures and Services*

 

*Data****Center*

 

ePLDT operates *VitroTM*,one of the Philippines' first internet data centers.  The Philippine Board ofInvestments granted *Vitro*TM pioneer status, which entitles it to tax andother governmental incentives.  *Vitro*TM is a CISCO-certified co-locationservice provider.  *Vitro*TM provides co-location, web and server hosting,hardware and software maintenance services, website development and maintenanceservices, webcasting and webhosting, shared applications, data disasterrecovery and business continuity services, intrusion detection and internetprotocol security services, as well as firewall and managed firewall services.

* *

*Call Centers*

 

ePLDT is focusing on developing itscall center services business, which capitalizes on the availability ofEnglish-speaking labor in the Philippines.  The call center service business isbeing undertaken through the following wholly-owned subsidiaries of ePLDT:

 

•        Vocativ which owns and operates a 722-seat call center facilitywith 883 customer service representatives, or CSRs, exclusively for clients ofa global provider of customer relationship management services.  Vocativcommenced commercial operations in April 2002; and

 

•        Parlance which owns and operates a 522-seat call center facilitywith 619 CSRs, exclusively for one of the largest direct-to-home satelliteservice providers in the United States for customer support and billingrequirements.  Parlance commenced commercial operations in June 2002.

 

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

 

*Internet Service*

 

ePLDT owns 99.6% interest inInfocom, one of the country's leading ISPs.  Infocom offers consumer prepaidinternet access under the name *Warpspeed* and postpaid internet access;dedicated dial-up and multi-user business dial-up access; broadband internetaccess through corporate leased lines and *NOW* cable internet; andconsulting, web development and hosting.

 

*OtherInvestments*

 

ePLDT alsohas investments in several other internet-related businesses, including:

 

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

 

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

 

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

 

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

 

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

 

In addition, we held convertiblenotes issued by Unilink Communications Corporation, or Unilink, which owns 100%of the shares of the Philippine Home Cable Holdings, Inc., or Home Cable, the Philippines’second largest cable television operator by subscriber numbers.  PLDT’s totalinvestments in convertible notes of Unilink amounted to Php2,052 million as of December 31, 2002.  Mediaquest Holdings,Inc., a company wholly-owned by the PLDT Beneficial Trust Fund, or BTF, ownsall of the shares of Unilink. In June 2003, PLDT assigned and ceded unto thePLDT BTF all of its rights, interest and participation in respect of itsinvestment in convertible notes of Unilink with a fair value of zero andeffectively for zero consideration under U.S. GAAP.

 

These notes are convertible into shares of common stock ofUnilink or exchangeable into common stock of Home Cable at the option of theholder, if and when the law limiting the ownership of cable television systemsto Philippine citizens or corporations, which are 100% owned by Philippinecitizens, is eventually changed.  Unilink is a Philippine corporation owningall the outstanding common shares of Home Cable, which is also a Philippinecorporation licensed to own, maintain and operate a cable television system inthe Philippines.

 

All of Unilink’s shares in HomeCable have been pledged to a group of lenders as security for a loan of HomeCable.  On December 6, 2001, Home Cable defaulted on the principal and interestpayments in respect of certain of its loan obligations.  On April 10, 2002, the loan agent, at the request of the lenders, delivered a notice to HomeCable declaring an event of default and accelerating the loan repayment.Consequently, the lenders are entitled to foreclose on or sell the collateralgranted as security for the loan, including Unilink’s share in Home Cable.  Inthe event that Home Cable’s lenders were to foreclose on Unilink’s Home Cableshares, the lenders would be entitled to the proceeds from the sale thereof or,if such shares were not sold, to the shares, and Unilink would be subrogated tothe lenders’ claims against Home Cable.  On October 17, 2003, Home Cable signed a Memorandum of Agreement with its key creditors providing the frameworkand indicative terms and conditions for the restructuring of its debtobligations.

 

On July 18, 2001, we entered into a master consolidation agreement pursuant to which a newly incorporated company,Beyond Cable, Inc., would hold all interests in Sky Cable and Home Cable.Completion of the trasaction is subject to certain conditions, includingobtaining consents of lenders of Sky Cable and Home Cable.  Upon completion ofthe transaction, the Benpress Group, which currently holds the interests in SkyCable, would hold a 66.5% interest in Beyond Cable and Mediaquest would holdremainder.

 

Wireless Network Infrastructure

 

*Cellular*

 

Through Smart, weoperate a digital GSM network.  To meet the growing demand for cellularservices, Smart has implemented an extensive deployment program for its GSMnetwork covering substantially all of Metro Manila and most of the otherpopulation centers in the Philippines.  In 2003, Smart added 1,127 base stations to itsnationwide cellular network, bringing to 3,904 Smart's total GSM base stationsin operation.  Smart has 32 mobile switching centers and 37 text messagingservice centers, which have raised significantly Smart's GSM network capacityto cover approximately 14.3 million subscribers as of December 31, 2003.As of December 31, 2003, Piltel had six active cell sites.

 

Smart has an operating spectrum of 7.5 MHzin the 900 MHz band supporting both its GSM and previously its ETACS networkand 17.5 MHz in the1800 MHz band for GSM.  Its dual-band GSM network allows itto efficiently deploy high capacity 1800 MHz base transceiver stations in denseurban areas while its 900 MHz base transceiver stations can be much moreeconomically deployed in potentially high growth, but less densely populatedprovincial areas.  Spectrum constraints will not affect the Smart’s expansionplans for GSM in the foreseeable future.  Piltel, on the other hand, has anoperating spectrum of 11.5MHz out of the 12.5MHz allocated in the 800 MHz band.

 

Due to its access to PLDT’s network assets,Smart has been able to achieve significant capital expenditure savings, whichare understood to be significantly less, on a per net addition basis, than itscurrent competitors.  This translates into an improved ability to pricecompetitively and target the mass market subscriber base in the Philippines, whileretaining profitability.  Based on existing equipment purchase contracts, Smartexpects incremental capital expenditure per net additional subscriber to amountto less than US$50. 

 

The coming years will see continued increases incoverage (particularly indoor), as well as new types of BTS for outdoor, streetlevel and commercial office coverage.  Smart has recently started to introducethe Nokia *ConnectSite*GSM system for wider coverage and increasedefficiencies in underserved areas of the Philippines. The new base station equipment called *ConnectSite*can be up to 25% more efficient than traditional outdoor cell sites.  Smart isone of the very first operators in the world to adopt this system.

 

Smart andPiltel have been co-locating their cell sites where their base stations areinstalled.  As of December 31, 2003, 20 of Smart's mobile switching centers and75 of Smart's cell sites are housed in PLDT’s fixed line complexes while 233 ofSmart’s cell sites are co-located with Piltel.  These operational synergieshave allowed Smart to reduce switch installation time from three months to fiveweeks.

 

*Satellite and VSAT*

 

Mabuhay Satellite controls andoperates the Agila II satellite, which has 30 C-band transponders and 24Ku-band transponders covering the Asia-Pacific region, the Indian subcontinentand Hawaii.  Of the 54 transponders, six have restricted usage due to satelliteinterference.  Through Agila II, Mabuhay Satellite offers internet service,video and data broadcasting, and bandwidth-on-demand, facilitatingcommunication links between telecommunications, broadcast and other publicutility companies operating in the Asia-Pacific region.  In December 2000,Agila II joined the U.S. FCC's "Permitted Space Station" list, whichpermits U.S. owned and operated earth stations in Hawaii to access Agila II fortranspacific telecommunications, data, video and internet-over-satellitetraffic and vice versa.

 

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

 

ACeS Philippines manages, controlsand operates its own satellite gateway and other ground infrastructure,including a 13-meter feeder-link C-band earth station, beam congruency antennaand equipment that serve as the primary interface between the ACeS system andother telecommunications networks.  It uses the Garuda I satellite to providedigital voice services to ACeS Philippines’ mobile and fixed terminal userswithin the Asian service area.

 

Fixed Line Network Infrastructure

 

*Domestic*

 

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

 

Thefollowing table gives some basic measures of the development of our domestictelephone network as of December 31, 2003, 2002 and 2001:

 

 

**As of December 31,**

 

**2003**

**2002**

**2001**

 

 

 

 

Number of central office exchanges

183

183

187

PLDT fixed lines in service

2,115,671

2,092,539

2,075,109

PLDT employees per 10,000 local exchanges in service

48

58

62

 

We have our own 5,400 kilometerdomestic fiber optic backbone, the country's first telecommunications networkusing fiber optics in delivering voice, video, data, and other broadband andmultimedia services nationwide.  Constructed at a total cost of US$188 million,our fiber optic network employs synchronous digital hierarchy technology toimprove network performance and reduce operating costs.  Our network iscomposed of in-land and submarine cable installations and is configured in sixself-healing rings and an extension link, allowing route delivery even in theevent of link failures.  It has an initial transmission speed of 2.5 gigabitsper second and is connected directly to five existing international submarinecable systems.  We use *CS PLDT*, a cable ship which we lease from NTTWorld Engineering Marine Corporation pursuant to a five year CharteredArrangement Maintenance Contract to maintain the 2,400 kilometers of submarinecable comprising the submerged portion of our domestic fiber optic network, orDFON.

 

In 2001, we activated a second fiber pair on ourexisting fiber cable and installed dense wavelength division multiplexingtechnology in certain portions of the network.  The new system serves the areasof Luzon, Visayas and Mindanao and also serves the international node connecting thePhilippines to the Asia-Pacific Cable Network 2.  The second pair provides anextra 10 gigabits per second of capacity, or the equivalent of 120,000 voicecircuits.  Nortel Networks supplied us with a suite of optical internetsolutions, including a 10-gigabit per second dense wavelength divisionmultiplexing solution based on Nortel Networks OPTeraTM Long Haul 1600 OpticalLine System.

 

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

 

*International*

 

We provide international networkservices using our three international gateway switching exchanges.  As of December 31, 2003, our international long distance facilities allow direct correspondencewith 50 countries/territories (representing 76 correspondents) and can reach229 foreign destinations worldwide.  We also own interests in submarine andsatellite systems, through which we route most of our international traffic.

 

The table below shows thesubmarine cable systems in which we have interests and the countries orterritories they link:

 

**Cable System**

**Countries Being Linked**

 

 

B-M-P

Brunei, Malaysia and Philippines

G-P

Guam and the Philippines

Asia-Pacific Cable Network

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

Asia-Pacific Cable Network 2

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

Transpacific Cable No. 4

Japan, Canada and the U.S. Mainland

Transpacific Cable No. 5

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

KN-KK

Kuantan and Kota Kinabalu in Malaysia

SEA-ME-WE-3

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

SEA-ME-WE-2

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

Asia Pacific

Hong Kong, Japan, Singapore, Malaysia and Taiwan

PacRim West

Guam and Australia

PacRim East

Hawaii and New Zealand

M-T

Malaysia and Thailand

Hawaii-5

Hawaii and the U.S. Mainland

C-J

Mainland China and Japan

North Pacific

Japan, Alaska and the U.S. Mainland

H-J-K

Hong Kong, Japan and Korea

Americas Cable 1

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

China-U.S. Cable

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

Columbus II Cable

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

FLAG Cable

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

MAT 2 Cable

Italy and Spain

RIOJA Cable

Spain, UK, Belgium and Netherlands

RJK Cable

Russia, Japan and Korea

Southern Cross Cable

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

TASMAN2 Cable

Australia and New Zealand

TAT 10 Cable

Germany and the Netherlands

TAT 12/13 Cable

U.S. Mainland, UK and France

TVH Cable

Thailand, Vietnam and Hong Kong

EAC Cable

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

PC-1 and Japan-U.S. Cable

Japan and the U.S.

 

Interconnection Agreements

 

Since theissuance of Executive Order No. 59 in 1993, which requires non-discriminatoryinterconnection of Philippine carriers' networks, we have entered intobilateral interconnection arrangements with other Philippine fixed line andcellular carriers.

 

Prior to July 1, 2001, PLDT retained an originationcharge of Php2.00 per minute on every call terminating to the network of Smartor Globe.  From July 1, 2001 to December 31, 2001, Smart and Globe charged PLDTPhp6.50 per minute pursuant to an amended interconnection agreement.  The newarrangement also applied to national long distance calls originating from PLDTand terminating on the cellular network of either Smart or Globe removing anydistinction between access charges for local calls and national long distancecalls.  For local calls originating from PLDT and terminating to the cellularnetworks of Smart and Globe, Smart and Globe charged PLDT a rate of Php4.50 perminute effective January 1, 2002.  Effective January 1, 2004,calls terminating to cellular subscribers originating from fixed linesubscribers will be charged a termination rate of Php4.00 per minute, adecrease from the previous Php4.50 per minute.  

 

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

 

Under a separate agreement betweenPLDT and PAPTELCO, PLDT is the transit facility provider between Smart, Globeand PAPTELCO.  Transit traffic is an accommodation by PLDT to Smart, Globe andPAPTELCO members where PAPTELCO members have no direct interconnection witheither Smart or Globe.

 

Effective February 1, 2003,international calls terminating on PLDT’s fixed line network were charged atermination rate of an average of approximately US$0.12 per minute from theprevious rate of an average of approximately US$0.08 per minute.  Also,international calls terminating on Smart’s and Piltel’s cellular network werecharged a termination rate of an average of approximately US$0.16 per minute,an increase from the previous termination rate of an average of approximatelyUS$0.12 per minute.

 

Effective January 1, 2002, Smart charged a termination rate of Php4.00 per minute for calls originatingfrom/terminating on another cellular operator’s network.  For SMS originatingfrom Smart and Piltel and terminating on other operators’ cellular network andfor SMS originating from other operators and terminating on Smart’s andPiltel’s cellular network, the charge is Php0.35 per message.

 

Licenses and Regulation

 

PLDT, Smart and Piltelprovide telecommunications services pursuant to legislative franchises, whichexpire, in the case of PLDT, November 28, 2028, in the case of Smart, March 27, 2017 and,in the case of Piltel, May 14, 2019.  A franchise holder is required to obtain operatingauthority from the NTC to provide specific telecommunications services.  Theseapprovals may take the form of a CPCN or, while an application for a CPCN ispending, a provisional authority to operate.

 

PLDT operates its business pursuant to a number ofprovisional authorities and CPCNs, the terms of which expire at various timesbetween now and 2028.  PLDT's CPCNs to provide services to most of theMetropolitan Manila area, Davao and other Philippine cities expired in 2003.Although some of PLDT's CPCNs and provisional authorities have already expired,PLDT filed timely applications for extension of these CPCNs and provisionalauthorities prior to their respective expiration dates and is thereforeentitled to continue to conduct its business under its existing CPCNs andprovisional authorities pending the NTC’s decision on these extensions.  PLDTexpects that the NTC will grant these extensions; however, there is noassurance that this will occur.  The period of validity of some of PLDT’s CPCNsexpired on November 28, 2003, coterminous with the term of its previous franchiseunder R.A. 6146, which has been extended further by the NTC to November 28, 2028,coterminous with PLDT’s current franchise under R.A. 7082.  Motions to extendthe period of validity of the other CPCNs to November 28, 2028 are now pendingwith the NTC.  See “Item 3. Key Information — Risks Factors — Risks Relating toUs — Our business is significantly affected by governmental laws andregulations, including regulations in respect of our franchises andrates."  Piltel holds a CPCN to provide a nationwide cellular telephoneservice which expires in August 2019.

 

Smart operates its cellular,international long distance and national long distance services pursuant toCPCNs, the terms of which will expire upon the expiration of its franchise.  On August 26, 2002, Smart was granted a CPCN to install, operate and maintainnationwide global mobile personal communications via satellite which shall alsoexpire upon expiration of its franchise.  Smart’s provisional authority toestablish, install, maintain, lease and operate an international private leasedcircuit expired on May 6, 2003.  Prior to its expiration, Smart filed for anextension of this provisional authority.  On July 22, 2002, Smart was granted separate CPCNs to operate a cellular mobile telephone system and aninternational gateway facility.  

 

Piltel is authorized to provide virtually every type oftelecommunications service, including the transmission of voice, datafacsimile, audio and video and information services, in and between provinces,cities and municipalities throughout the Philippines. The franchise, which waslast amended on May 14, 1992, expires on May 14, 2019 and may be extended by a legislative act of the Philippine Congress.

 

The following table sets forththe spectrum system, licensed frequency and bandwidth allocated to Smart andPiltel:

 

**Carrier**

**Spectrum System**

**Frequency Assignment**

**Bandwidth**

 

 

 

 

Smart

ETACS/GSM 900

897.5-905/942.5-950 Mhz

7.5 Mhz

 

GSM 1800

1725-1730/1820-1825 Mhz

5.0 Mhz

 

 

1730-1732.5/1825-1827.5 Mhz

2.5 Mhz

 

 

1735-1740/1830-1835 Mhz

5.0 Mhz

 

 

1745-1750/1840-1845 Mhz

5.0 Mhz

Piltel

AMPS/CDMA

824-835/869-880 Mhz

11.0 Mhz

 

 

845-846.5/890-891.5 Mhz

1.5 Mhz

 

Operators of international gateway facilities andcellular telephone operators, pursuant to E. O. 109, are required to install aminimum number of local exchange lines.  Of these new lines, operators arerequired to install one rural exchange line for every ten urban exchange linesinstalled.  Smart and Piltel were required to install 700,000 and 400,000lines, respectively, and each has received a certificate of compliance from theNTC.

 

We are required to pay various permit, regulation andsupervision fees to the NTC and are currently engaged in disputes with the NTCover some of the assessed fees.  For more information on these disputes, see“Item 8. Financial Information –– Legal Proceedings — NTC Fees.”

 

On May 27, 1998, Smart filed an Urgent Ex Parte Motionand Manifestation regarding the permit fee in the amount of approximatelyPhp113 million assessed by the NTC for CPCN 93-482, pertaining to Smart’sIntegrated Local Exchange Telephone Service, Domestic Toll Service and PrivateLine Service.  Smart contended that the fee should have been calculated on thebasis of the actual local exchange carrier project cost, and that therefore thefee should be Php70 million.  Although the NTC has not yet resolved this issue,Smart has already paid Php50 million in respect of this assessment as of thedate of filing of this annual report.

 

In a letter dated January 17, 2002, the NTC requested that Smart pay the following fees in respect of itsCPCNs and provisional authorities:

 

Case No.

**Fee**

 

 

92-303

Php3,750,000

93-482

62,510,950

94-220

878,830

96-248

6,815,500

Total

Php73,955,280

 

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

 

In order to diversify the ownershipbase of public utilities, the Public Telecommunications Policy Act (R.A. 7925)requires a telecommunications entity with regulated types of services, such asSmart and Piltel, to make a public offering through the stock exchangesrepresenting at least 30% of its aggregate common shares by the later of thefollowing:

 

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

 

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

 

PLDT and Piltel have complied withthis requirement.  Smart believes that it has ten years from the commencementof its operations, or until August 2004, to conduct a public offering becausethe Philippine government has granted franchises to other telecommunicationscompanies requiring a public offering within ten years from the later of theircommencement of operations or the date on which the franchise was granted.Because R.A. 7925 provides that any advantage granted under existing franchisesautomatically becomes part of previously granted telecommunications franchises,Smart believes that it is also entitled to this ten-year period.  PLDTcurrently contemplates to cause Smart to conduct a public offering based onmarket conditions and in accordance with applicable rules and regulations ofthe PSE.  The Philippine Congress may revoke the franchise of Smart if it fails to comply with the requirement under R.A. 7925on the public offering of its shares by August 2004.  A *quo warranto*case may also be filed against Smart by the Office of the Solicitor General ofthe Philippines on the ground of violation of R.A. 7925 if Smart will fail toconduct public offering of its shares by August 2004.

 

In addition, the PhilippineCongress is considering five bills, each of which, if passed by Congress andenacted into law, would impose a 7% or 10% tax on the gross receipts ofcellular operators.  The proposed taxes would apply to both cellular calls andcellular data revenues and prohibit cellular operators from imposing additionalcharges or fees to compensate for the imposition of the proposed taxes.

 

Competition

 

The enactment of the Public Telecommunications Policy Act (R.A.7925) of the Philippines in March 1995 consolidated the government's variouspolicy issuances governing the telecommunications industry and reaffirmed,among other things, the policy of liberalizing the industry and opening up thetelecommunications market to new entrants.  Including us, there are nine majorlocal exchange carriers, 11 international gateway facility providers, and sixcellular service providers in the country, including one which has not yetcommenced operations.  Many new entrants into the Philippine telecommunicationsmarket have entered into strategic alliances with foreign telecommunicationscompanies, which provide them access to technological and funding support aswell as service innovations and marketing strategies.  Consequently, we arefacing increasing competition in major segments of the telecommunicationsindustry, particularly cellular, fixed line and data and other network servicessegments.

 

*CellularService*

* *

Competitionin the cellular business has intensified with the introduction by competitorsof affordably priced handsets offering a range of new functions and features,new and improved plans for postpaid subscribers, reduced rates per minute andaggressive marketing and promotional strategies.  Our principal competitor inthe cellular business is Globe, which acquired Islacom in 2001. The principalbases of competition are price, including handset cost, quality of service,network reliability, geographic coverage and attractiveness of packagedservices.

 

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

 

Consistent with industry practiceand Smart’s churn management efforts, Smart "locks" the handsets itsells to its subscribers, rendering them incompatible with SIM cards issued bycompetitors.  However, subscribers may have their handsets “unlocked” byunauthorized parties, for a nominal fee, and purchase new SIM cards fromcompeting operators.  “Unlocking” does not involve significant cost.  Inaddition, switching to another cellular operator would result in a change ofthe subscriber’s cellular telephone number.

 

There are six operating cellularservice providers, namely Smart, Piltel, Globe, Islacom, Digitel and ExpressTelecom.  Globe acquired Islacom (now known as *Innove*) to form into oneoperating group while Smart and Piltel, both being part of the PLDT Group, formanother operating group.  There are therefore effectively only two keycompetitors in the Philipppine cellular market.  Digitel commenced its cellularservice, *Sun Cellular*, on March 29, 2003 and is estimated to have lessthan 1% of the market.  Extelcom operates on an analog platform and isestimated to have less than 50,000 subscribers.

 

*Local Exchange Service*

 

The concerted nationwidelocal exchange line build-out by various players, as mandated by the Philippinegovernment, significantly increased the number of fixed lines in service in thecountry and resulted in wider access to basic telephone service.  The growth ofthe fixed line market has considerably weakened due to the surge in demand forcellular services and the general sluggishness of the national economy.Nevertheless, we have sustained our leading position in the fixed line marketon account of PLDT's extensive network in key cities nationwide.  In mostareas, we face one or two competitors.  Our principal competitors in the localexchange market are Digitel, BayanTel and Globe.  

 

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

 

*International LongDistance Service*

 

Including us, there are 11 international gatewayfacility operators in the country.  While we have so far been able to maintaina leadership position in this highly competitive segment of the industry, inrecent years, our market share has reduced largely as a result of (1)competition from other international gateway facility operators andinternational simple resale operators, (2) an increase in inbound and outboundinternational long distance calls terminating to and originating from thegrowing number of cellular subscribers, and (3) the popularity of alternativeand cheaper means of long distance communications, such as text messaging,e-mailing and internet telephony, further heightening the competition.

 

With respect to inbound calls into the Philippines,we adopted the U.S. FCC benchmark accounting rate of US$0.38 per minute forinbound international calls which represented a settlement rate of US$0.19 perminute, one year ahead of the target date of January 1, 2001.  This providedus with increased flexibility to terminate more U.S. traffic into the Philippines,minimize unauthorized traffic termination through international simple resaleoperations and recover traffic lost due to bypass routings.  We have alsoestablished presence in key cities overseas to identify traffic at its source,maximize the use of our international facilities and develop alternativesources of revenue.  Effective February 1, 2003, after lengthy negotiationswith approximately 100 telecommunications operators around the world, weincreased the termination rate with carriers accounting for a substantialportion of our international inbound traffic terminating on our fixed linenetwork to an average of approximately US$0.12 per minute.  Prior to theincrease in termination rates, a substantial portion of PLDT’s internationalinbound traffic terminating on its fixed line network was charged an averagetermination rate of approximately US$0.08 per minute.  See “Item 8. FinancialInformation –– Legal Proceedings –– U.S. Federal Communications Commission, or FCC, Rulingversus Philippine Telecommunications Companies”,  “Item 5. Operating andFinancial Review and Prospects –– Results of Operations –– 2003 Compared to2002 –– Consolidated Operating Revenue –– Fixed Line –– International LongDistance”, “Item 3. Key Information –– Risks Factors–– Risks Relating to Us ––Our results of operations have been, and may continue to be, adversely affectedby competition in international long distance service” and *Note 28 – OtherMatters*to the accompanying consolidated financial statements in Item 18for further discussion.  

 

With respect to outbound calls from the Philippines, we competefor market share through our local exchange and cellular businesses, which arethe origination points of outbound international calls.  We have alsointroduced a number of marketing initiatives to stimulate growth of outboundcall volumes, including tariff reductions and volume discounts for largecorporate subscribers.

 

*National Long Distance Service*

 

Since 2000, our national long distance service business has beennegatively impacted by the growing number of cellular subscribers in the Philippines and the widespread availability and growingpopularity of alternative economical non-voice methods of communication,particularly text messaging and e-mailing.

 

While national long distance callvolumes have been declining, we have remained a leading provider of nationallong distance service in the Philippines due to our significant subscriber baseand ownership of the Philippines’ most extensive DFON.  In order to mitigatethe decline of our national long distance revenues, we have renegotiated theinterconnection agreements with the cellular operators to provide the fixedline business a more equitable access charge arrangement for calls betweenfixed line and cellular subscribers.

 

*Data and Other NetworkServices*

 

Another rapidly growing segmentof the industry is the market for data and other network services. The growthis spurred by the significant growth in consumer/retail narrowband andbroadband internet access, enterprise resource planning applications, callcenters, business process outsourcing, on-line gaming and other e-services thatdrive the need for broadband and internet-protocol based solutions both hereand abroad.  Our principal competitors in this area are Globe/Innove, BayanTel,Eastern Telecommunications and Digitel.  The principal bases of competition inthe data services market are price, customer service and quality of service.

 

Environmental Matters

 

We have notbeen subject to any material fines or legal or regulatory action involvingnon-compliance with environmental regulations of the Philippines.  We are notaware that we are not in compliance in any material respect with relevantenvironmental protection regulations.

 

Intellectual Property Rights

 

We do notown any material intellectual property rights apart from our brand names andlogos.  We are not dependent on patents, licenses or other intellectualproperty which are material to our business or results of operations, otherthan licenses to use the software that accompany most of our equipmentpurchases.

 

Properties

 

PLDT owns four office buildings located in Makati City and ownsand operates 183 exchanges nationwide, of which 61 are located in theMetropolitan Manila area.  The remaining 122 exchanges are located in smallcities and municipalities outside Metropolitan Manila area.  We also own radiotransmitting and receiving equipment used for international and domesticcommunications.

 

Smart’s digital GSM networkincludes 32 switching centers with a capacity of over 14 million subscribersand 3,904 base stations covering 1,039 cities and municipalities nationwide.Piltel also has six active cell sites at the end of 2003.

 

As of December 31, 2003, our principal properties, excluding property under construction, consisted of thefollowing, based on book value:

 

•        53% consisted of cable and cellular facilities, including ourDFON, subscriber cable facilities, inter-office trunking and toll cablefacilities and cellular facilities;

 

•        30% consisted of central office equipment, including threeinternational gateway facilities, six pure national toll exchanges and 15combined local and toll exchanges, and communications satellite;

 

•        8% consisted of land and improvements and buildings, which weacquired to house our telecommunications equipment;

 

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

 

•        8% consisted of other work equipment.

 

For more information on these properties, see *Note7 – Property, Plant and Equipment* to the accompanying consolidatedfinancial statements in Item 18.  These properties are located in areas beingserved by our exchanges.  In our opinion, these properties are in goodcondition, except for ordinary wear and tear, and are adequately insured.

 

The majority of ourconnecting lines are above or under public streets and properties owned byothers.

 

PLDT's and Smart’sproperties are free from any mortgage, charge, pledge, lien or encumbrance.However, substantial properties of Piltel and Mabuhay Satellite are subject toliens.

 

PLDT Group has various long-termlease contracts for periods ranging from two to ten years covering certainoffices, warehouses, telecommunications equipment locations and various officeequipment.

 

Item 5.   Operatingand Financial Review and Prospects

 

*The following discussion andanalysis of our financial condition and results of operations should be read inconjunction with our audited consolidated financial statements (and the relatednotes) as of December 31, 2003 and 2002 and for the years ended December 31,2003, 2002 and 2001 included elsewhere in this report.  This discussioncontains forward-looking statements that reflect our current views with respectto future events and our future financial performance.  These statementsinvolve risks and uncertainties, and our actual results may differ materiallyfrom those anticipated in these forward-looking statements as a result ofparticular factors such as those set forth under "Forward-LookingStatements" and “Item 3. Key Information — Risk Factors" andelsewhere in this report.  Our audited consolidated financial statements, andthe financial information discussed below, have been prepared in accordancewith**U.S.**GAAP.  For convenience, certain peso financialinformation in the following discussions has been translated to U.S. dollars atthe exchange rate at**December 31, 2003**of Php55.586 to US$1.00,as quoted through the Philippine Dealing System.*

 

Overview

 

We are thelargest and most diversified telecommunications company in the Philippines.  Wehave organized our business into three main segments:

 

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

 

•        *Fixed Line* — fixed line telecommunications servicesprimarily provided through PLDT.  We also provide fixed line services throughPLDT’s subsidiaries Clark Telecom, Subic Telecom, SNMI and Maratel, whichtogether account for approximately 1% of our consolidated fixed lines inservice, BCC (in 2003) and PLDT Global; and

 

 

•        *Information and Communications Technology* — informationand communications infrastructure and services for internet applications,internet protocol-based solutions and multimedia content delivery provided byPLDT’s subsidiary, ePLDT, internet access services provided by ePLDT’ssubsidiary Infocom, and e-commerce, call centers and IT-related servicesprovided by ePLDT’s other subsidiaries and associates.

 

Key performance indicators anddrivers that our management uses for the management of our business include,among others, the general economic conditions in the Philippines, oursubscriber base, traffic volumes, and interconnection arrangements.

 

**Wireless**
 

Our wireless business provides cellular and satellite, VSAT andother services, contributing about 99% and 1% of our wireless revenues,respectively, as of December 31, 2003.  Rapid growth in the cellular market hasresulted in a change in our revenue composition and sources of our revenuegrowth.  For 2003, cellular service was our major revenue source surpassingfixed line revenues by four percentage points.  As of December 31, 2003, Smart and Piltel, which offers GSM service using Smart’s GSM network, had thelargest and third largest cellular subscriber bases, respectively, in the Philippines.In addition, Smart’s and Piltel’s subscribers increased by 51% in 2003,resulting in our aggregate system-wide cellular subscribers outnumbering ourfixed line in service by more than 6 to 1 at the end of 2003.  Cellular data services,which include all text messaging and text-related services ranging fromordinary text to value-added services, contributed significantly to our revenueincrease.  Wireless business revenues accounted for 58%, 50% and 42% of ourconsolidated revenues for 2003, 2002 and 2001, respectively.

** **
**Fixed Line**
 

Our fixed line business provides local exchangeservice, international and national long distance services, data and othernetwork services and miscellaneous services.  Until 2003, fixed line services havebeen our major revenue source contributing 49% and 58% of total operatingrevenues in 2002 and 2001, respectively.  Although relatively stable inabsolute terms, our fixed line revenues’contribution to consolidated operatingrevenues have declined to 41% in 2003, largely due to the substantial growth inour wireless business.  Local exchange revenues have declined slightly owing toshift in subscriber preference from postpaid to prepaid service.  National longdistance revenues have also been declining largely due a drop in call volumes,and an increase in the proportion of calls subject to revenue sharing withother carriers.  Mitigating these declines was the steady growth of our dataand other network services over the recent years.  Recognizing the growthpotential of the data and other network services segment, we have putconsiderable emphasis on the development of new packet-switched, data-capableand internet-based networks.  International long distance revenues havedeclined until 2002 due to lower inbound call volumes, lower termination ratesand increased competition and substitution, but has increased its contributionto the overall fixed line revenues in 2003 on account of an increase in ouraverage termination rates.

 

**Informationand Communications Technology**
* *

Ourinformation and communications technology business is conducted through ourwholly- owned subsidiary, ePLDT, which was incorporated in August 2000 andstarted commercial operations in February 2001.  ePLDT’s principal businessesare the operation of an internet data center under the brand name *Vitro*TM;two wholly-owned call centers, Vocativ and Parlance; and Infocom, an ISP.  Therevenue contribution of our information and communications technology segmentaccounted for 1% of our total consolidated operating revenues for the years2003 and 2002, and less than 1% in 2001.

 

Critical Accounting Policies

 

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

 

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

* *

*Revenue Recognition*

 

Revenue forservices is stated at amounts invoiced to customers and excludes value-addedtax.  We provide wireless communication services, fixed line communicationservices, and information and communications technology services.  We providesuch services to business, residential, payphone and mobile customers.  Revenuerepresents the value of fixed consideration that has been received or isreceivable.  Revenue is recognized when there is evidence of an arrangement,collectibility is reasonably assured, and the delivery of the product orservice has occurred.  In certain circumstances, revenue is split intoseparately identifiable components and recognized when the related componentsare delivered in order to reflect the substance of the transaction.  The valueof components is determined using verifiable objective evidence.  We do notprovide our customers with the right to a refund.

 

*Products and services*

 

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

 

*Air time, traffic andvalue-added services.*Prepaid service revenue collected in advance isdeferred and recognized based on the earlier of actual usage or upon expirationof the usage period.  Payphone service revenue is recognized when the serviceis provided.  Interconnection revenue for call termination, call transit, andnetwork usage are recognized in the period the traffic occurs.  Revenuesrelated to local, long distance, network-to-network, roaming and internationalcall connection services are recognized when the call is placed or theconnection is provided, net of amounts payable to other telecommunicationcarriers for terminating calls in their territories. Revenue related toproducts and value-added services is recognized upon delivery of the product orservice.

 

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

 

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

 

*Incentives.*We recordcommission expense based on the number of new subscriber connections initiatedby certain dealers.  All other cash incentives provided to dealers andcustomers are recorded as a reduction from revenue.  Product-based incentivesprovided to dealers and customers as part of a transaction are accounted for asmultiple element arrangements and recognized when earned.

* *

*Others.*Interest incomefrom cash deposits is recognized on a time proportion basis taking into accountthe principal amount outstanding and the effective interest rate.

 

*Impairment of Long-LivedAssets*

 

U.S. GAAP requires that animpairment review be performed when certain impairment indicators are present.The impairment review first compares the future undiscounted cash flowsexpected to be generated from the continued use and ultimate disposition of theassets with the book value of the assets.  If these cash flows are notsufficient to recover the book value of the assets, an impairment charge isrecognized based on the comparison between the discounted value of these cashflows and the book value of the assets.  In addition, our projections forfuture cash flows are generally less during periods of reduced cash flow.  As aresult, an impairment charge is more likely to occur during a period when ouroperating results are already otherwise depressed.

 

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

 

Piltel recognized an assetimpairment charge of Php12,938 million in 2001 and Php13,204 million in 2002 relatingto its AMPS/CDMA and E.O. 109 assets, respectively.  The revenues generatedfrom these services could no longer support the cost of operating the network.

 

Also, Smart carried out animpairment review of its analog assets in 2001 as a result of decliningsubscriber numbers, decreasing average revenue per user and the generalmigration of analog subscribers to Smart’s GSM services.  This resulted in anasset impairment charge of Php3,783 million in 2001 based on the estimateddiscounted future cash flows from continued use and eventual disposition ofthese assets.  In 2001, Smart wrote-off the unamortized intangible assets(customer lists) amounting to Php2,077 million relating to analog customers.

 

As of December 31, 2003, ACeS Philippines has a 20% investment in AIL, a company incorporated under the laws of the island of Bermuda.  AIL owns the Garuda I satellite and the related system controlequipment in Batam, Indonesia.  In December 1998, AIL and its 95% ownedsubsidiary, PT Asia Cellular Satellite, entered into an Amended and RestatedCredit Agreement, or Amended Agreement, to amend the original Credit Agreemententered into by PT Asia Cellular Satellite and its bank creditors in 1997.Under the Amended Agreement, AIL has, among others, assigned to the banks ascollateral all of its intangible properties, including the Garuda Satellite,the system control facilities and system control equipment.  On September 30,2002, PT Asia Cellular Satellite, AIL, as guarantor, P.T. Bank InternationalIndonesia, as security agent, and various banks signed the ReschedulingAgreement, which amended the terms of the Amended and Restated Credit Agreementdated December 29, 1998, moving the principal repayment dates to agreed periodswith the final maturity date on January 31, 2012.  As of December 2001, AIL hasincurred recurring significant losses, negative operating cash flows, andsignificant levels of debt.  The financial condition of AIL was partly due tothe NSP’s inability to generate the amount of revenues originally expected asthe growth in subscriber numbers have been significantly lower than budgeted.These factors raised substantial doubt about AIL’s ability to continue as agoing concern.  On this basis, we recognized an impairment provision in respectof our investment in AIL of Php3,314 million and ground station equipment ofACeS Philippines in relation to the business of AIL in 2001 of Php673 million.

 

PLDT’s total investments inconvertible notes of Unilink amounted to Php2,052 million.  These notes areconvertible into shares of common stock of Unilink or exchangeable into commonstock of Home Cable at the option of the holder, if and when the law limitingthe ownership of cable television systems to Philippine citizens orcorporations, which are 100% owned by Philippine citizens, is eventuallychanged.  Unilink is a Philippine corporation owning all the outstanding commonstocks of Home Cable, which is also a Philippine corporation licensed to own,maintain and operate a cable television system in the Philippines.  All ofUnilink’s shares in Home Cable have been pledged to a group of lenders assecurity for a loan to Home Cable.  On December 6, 2001, Home Cable defaultedon the principal and interest payments in respect of certain of its loan obligations.On April 10, 2002, the loan agent, at the request of the lenders, delivered anotice to Home Cable declaring an event of default and accelerating the loanrepayment.  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.  On the basisof Home Cable’s default on certain of its obligations, the uncertaintysurrounding the negotiations with its creditors and equity holders, and itsfinancial condition, we provided for a full permanent decline in value of ourinvestment totaling Php2,052 million in 2001.  In June 2003, PLDT assigned andceded unto the PLDT Beneficial Trust Fund, or BTF, all of its rights, interestand participation in respect of its investment in convertible notes of Unilinkwith a fair value of zero and effectively for zero consideration under U.S.GAAP.  In addition, PLDT also ceded its rights, interest and participation tocertain other assets unrelated to Unilink for and in consideration of partialpayment of the contributions which PLDT is required to make to the BTF underPLDT’s employee benefit plan.

 

The preparation of the estimated future cash flows involvessignificant judgment and estimations. While we believe that our assumptions areappropriate and reasonable, significant changes in our assumptions maymaterially affect our assessment of recoverable values and may lead to futureadditional impairment changes under U.S. GAAP.

* *

*Estimating Allowances for Doubtful Accounts*

 

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

 

Full allowance is provided for receivables from permanentlydisconnected subscribers.  Permanent disconnections are made after a series ofcollection steps following non-payment by subscribers.  Such permanentdisconnections generally occur within 105 days from due date.  Partialallowance is provided for active subscribers based on the age status of thereceivable.

 

Fullallowance is provided for carrier accounts which have been past due for over360 days from transaction date and after a review of the status of settlementwith other carriers.

 

An increasein our allowance for doubtful accounts would increase our recorded operatingexpenses and decrease our current assets.  Provision for doubtful accountsamounted to Php4,092 million in 2003, Php4,160 million in 2002 and Php3,221million in 2001.  The provision for doubtful accounts represented approximately4% of our consolidated operating revenues for each of the years ended December 31, 2003, 2002 and 2001.  

 

*Acquisitions andIntangible Assets*

* *

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

 

*Foreign Exchange Revaluation Losses*

* *

When we incur unhedged foreign currency-denominated liabilitiesarising directly from the acquisition of property, plant and equipment invoicedin a foreign currency, such as U.S. dollar-denominated loans to financeequipment purchases, foreign exchange losses on those liabilities are chargedor credited to operations in the current period.  In recent years, the Philippinepeso has depreciated significantly against the U.S. dollar, resulting insubstantial foreign exchange losses, and has resulted in our incurring netlosses for certain periods.

* *

*Investments*

* *

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

* *

*Pension Cost*

 

The determination of our obligationand cost for pension and other retirement benefits is dependent on ourselection of certain assumptions used by actuaries in calculating suchamounts.  Those assumptions are described in *Note 19 – Employee’s BenefitPlan* to the accompanying consolidated financial statements in Item 18, andinclude among others, discount rates, expected returns on plan assets and ratesof compensation increase.  In accordance with U.S. GAAP, actual results thatdiffer from our assumptions are accumulated and amortized over future periodsand therefore, generally affect our recognized expense and recorded obligationin such future periods.  While we believe that our assumptions are reasonableand appropriate, significant differences in our actual experience orsignificant changes in our assumptions may materially affect our pension andother retirement obligations.

 

*Legal Contingencies*

* *

We are currently involved invarious legal proceedings.  Our estimate of the probable costs for theresolution of these claims has been developed in consultation with outsidecounsel handling our defense in these matters and is based upon an analysis ofpotential results.  We currently do not believe these proceedings will have amaterial adverse effect on our consolidated financial position.  It ispossible, however, that future results of operations could be materiallyaffected by changes in our estimates or in the effectiveness of our strategiesrelating to these proceedings.  See “Item 8. Financial Information — LegalProceedings.”

* *

***Impactof Recently Issued Accounting Pronouncements***

 

In June 2002, the FinancialAccounting Standard Board, or FASB, issued SFAS 146, “Accounting for CostsAssociated with Exit or Disposal Activities.”  SFAS 146 provides guidancerelated to accounting for costs associated with disposal activities covered bySFAS 144 or with exit or restructuring activities previously covered byEmerging Issues Task Force, or EITF, Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).”  SFAS 146 supersedesEITF Issue No. 94-3 in its entirety.  SFAS 146 requires that costs related toexiting an activity or to a restructuring should not be recognized until theliability is incurred. SFAS 146 will be applied prospectively to exit ordisposal activities that are initiated after December 31, 2002.

 

In January 2003, the FASB issuedFASB Interpretation No., or FIN, 46, “Consolidation of Variable InterestEntities.”  The primary objective of FIN 46 is to provide guidance on theidentification of, and financial reporting for, entities over which control isachieved through means other than voting rights; such entities are known asvariable interest entities.  FIN 46 requires variable interest entities to beconsolidated by the primary beneficiary of the variable interest entities andexpands disclosure requirements for variable interest entities that areconsolidated as well as those within which an enterprise holds a significant variableinterest.  For variable interests in entities commonly referred to as “specialpurpose entities”, implementation of this statement is required by January 1, 2004.  And for all other variable interest entities, implementation is requiredby December 31, 2004.

 

In April 2003, the FASB issuedSFAS 149, Amendment of SFAS 133 on Derivative Instruments and HedgingActivities.  This Statement amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts (collectively referred to as derivatives) and forhedging activities under SFAS 133.  This Statement is effective for contractsentered into or modified after June 30, 2003 and for hedging relationshipsdesignated after June 30, 2003.

 

In May 2003, the FASB issued SFAS150 “Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”.  SFAS 150 establishes standards on how companiesclassify and measure certain financial instruments with characteristics of bothliabilities and equity.  The Statement requires that the Company classify asliabilities the fair value of all mandatorily redeemable financial instrumentsthat had previously been recorded as equity or elsewhere in the consolidatedfinancial statements.  This Statement is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise effective for allexisting financial instruments, except for minority interests in limited-lifeentities, beginning of the first interim period beginning after June 15, 2003.  Certain provisions of this Statement relating to noncontrolling interestsin limited-life subsidiaries were deferred indefinitely.  We continue tomonitor the deferral status of SFAS 150.

 

The adoption of FIN 46, SFAS 146,SFAS 149 and SFAS 150 did not have a material impact on PLDT Group’sconsolidated financial statements.

 

In May 2003, EITF Issue No. 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables,” wasfinalized. EITF No. 00-21 provides guidance on how to account for arrangementsthat involve the delivery or performance of multiple products, services and/orrights to use assets.  The provisions of EITF No. 00-21 apply to revenuearrangements entered into in fiscal periods beginning after June 15, 2003.  In December 2003, the U.S. SEC issued Staff Accounting Bulletin, or SAB,No. 104, “Revenue Recognition,” which codifies and rescinds certain sections ofSAB No. 101, “Revenue Recognition”, in order to make this interpretive guidanceconsistent with EITF No. 00-21.  We are currently in the process of evaluatingany effect the adoption of EITF No. 00-21 will have on our consolidatedfinancial statements.

 

In December 2003, the FASB revisedSFAS 132, “Employers’ Disclosures about Pensions and Other PostretirementBenefits.”  It requires additional disclosures to those in the original SFAS132 about the plan assets, benefit obligations, cash flows and net periodicbenefit cost of defined benefit plans and other postretirement benefit plans.The new disclosures are generally effective for 2003 calendar yearend financialstatements of public companies, with a delayed effective date for certaindisclosures and for foreign plans.  The requirements of this Statement areincluded in *Note 19 – Employees’ Benefit Plans*to the accompanyingconsolidated financial statements in Item 18.

* *

Results of Operations

 

The following table shows thecontribution by each of our business segments to our consolidated operatingrevenues, operating expenses and net operating income (loss) for each of theyears ended December 31, 2003, 2002 and 2001.  Most of our revenues are derivedfrom our operations within the Philippines.  Our revenues derived from outsidethe Philippines consist primarily of revenues from incoming international callsto the Philippines.

 

 

**Years Ended December 31,**

 

**2003**

**%(1)**

**2002**

**%(1)**

**2001**

**%(1)**

** **

**(in millions)**

**Operating Revenues**

 

 

 

 

 

 

Wireless

Php64,332

58

Php46,298

50

Php33,597

42

Fixed line

46,195

41

45,851

49

46,323

58

Information and communications technology

1,509

1

651

1

374

–

 

112,036

100

92,800

100

80,294

100

**Operating Expenses**

 

 

 

 

 

 

Wireless

45,649

41

37,282

40

57,537

72

Fixed line

30,878

27

42,032

45

27,495

34

Information and communications technology

2,036

2

1,457

2

1,204

1

 

78,563

70

80,771

87

86,236

107

**Net Operating Income (Loss)**

 

 

 

 

 

 

Wireless

18,683

17

9,016

10

(23,940)

(30)

Fixed line

15,317

14

3,819

4

18,828

24

Information and communications technology

(527)

(1)

(806)

(1)

(830)

(1)

 

Php33,473

30

Php12,029

13

(Php5,942)

(7)

_____________

 

*(1)    **Operatingexpenses and net operating income (loss) as a percentage of operating revenues.*

* *

**2003Compared to 2002**

* *

***Consolidated Operating Revenues***

 

Largely driven by the continued strong growth of ourwireless business, particularly Smart’s cellular business, our consolidatedoperating revenues for 2003 increased by Php19,236 million, or 21%, to Php112,036 million from Php92,800million in 2002.  The revenue contribution of our wireless business accountedfor 58% of our consolidated operating revenues for 2003, compared to 50% in2002.  Smart contributed Php58,740 million inrevenues in 2003, an increase of 33% over its revenue contribution of Php44,316million in 2002.  

 

The following table shows thebreakdown of our total consolidated operating revenues for the years ended December 31, 2003 and 2002 by business segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php64,332

 

58

 

Php46,298

 

50

 

Php18,034

 

39

Fixed line

46,195

 

41

 

45,851

 

49

 

344

 

1

Information and communications technology 

1,509

 

1

 

651

 

1

 

858

 

132

Total

Php112,036

 

100

 

Php92,800

 

100

 

Php19,236

 

21

* *

***Wireless***

 

Thefollowing table summarizes our consolidated operating revenues from ourwireless business for the years ended December 31, 2003 and 2002 by servicesegment:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Wireless services:

 

 

 

 

 

 

 

 

 

 

 

Cellular services

Php51,001

 

79

 

Php30,583

 

66

 

Php20,418

 

67

Cellular handset sales

12,433

 

20

 

14,982

 

32

 

(2,549)

 

(17)

Satellite, VSAT and others

898

 

1

 

733

 

2

 

165

 

23

Total

Php64,332

 

100

 

Php46,298

 

100

 

Php18,034

 

39

 

Our wirelessservice revenues increased significantly by Php18,034 million, or 39%, toPhp64,332 million in 2003 from Php46,298 million in 2002 mainly as a result ofthe continued strong growth in revenues generated from Smart’s and Piltel’scellular services.  Accordingly, as a percentage of our consolidated operatingrevenues, wireless service revenues increased to 58% in 2003 from 50% in 2002. 

 

*Cellular Service*

 

Our cellular service revenues consist of: 

 

•        revenues derived from actual usage of the network by prepaidsubscribers and any unused peso value of expired prepaid cards or electronicair time loads, net of discounts given to dealers; 

 

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

 

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

 

•        other charges, including those for reconnection and migration. 

 

Our cellular service revenues in2003 amounted to Php51,001 million, an increase of Php20,418 million, or 67%,from Php30,583 million in 2002.  Cellular service revenues accounted for 46% ofour consolidated operating revenues in 2003, compared to 33% in 2002.  Thisincrease was primarily due to increased traffic volumes and the 51% growth inour wireless subscriber base, which increased by 4,347,891 from 8,599,306 as of December 31, 2002 to 12,947,197 as of December 31, 2003.  

 

The following table shows ourcellular subscriber base as of December 31, 2003 and 2002:

 

 

**Years Ended December 31,**

 

 

 

 

 

**Increase**

 

**2003**

 

**2002**

 

**Amount**

 

**%**

 

 

 

 

 

 

 

 

GSM Cellular Subscribers

12,947,197

 

8,599,306

 

4,347,891

 

51

Smart

10,080,112

 

6,825,686

 

3,254,426

 

48

Prepaid 

9,831,135

 

6,649,038

 

3,182,097

 

48

Postpaid 

248,977

 

176,648

 

72,329

 

41

 

 

 

 

 

 

 

 

Piltel – Prepaid

2,867,085

 

1,773,620

 

1,093,465

 

62

* *

Of our 12,947,197 GSM subscribersas of December 31, 2003, prepaid subscribers accounted for approximately 98%while postpaid subscribers accounted for the remaining 2%.  Smart's prepaid GSMsubscriber base grew by 48% to 9,831,135 as of December 31, 2003 from 6,649,038as of December 31, 2002, whereas Smart's postpaid GSM subscriber base increasedby 41% to 248,977 as of December 31, 2003 from 176,648 as of December 31,2002.  Smart’s prepaid and postpaid net subscriber activations totaled3,182,097 and 72,329, respectively, in 2003, or a monthly average addition of265,175 prepaid and 6,027 postpaid subscribers.  On the other hand, Piltel’sprepaid subscribers increased by 62% to 2,867,085 as of December 31, 2003 from1,773,620 as of December 31, 2002 or a monthly average addition of 91,122subscribers.

 

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

 

*Cellular Handset Sales*

 

Our cellular revenues includerevenues from the sale of handsets amounting to Php12,433 million, a decreaseof Php2,549 million, or 17%, over the Php14,982 million in 2002.  The decreasewas attributable to lower sale of handsets in 2003 as compared to 2002.

 

*Satellite, VSAT and OtherServices*

 

Our revenues from satellite, VSATand other services consist mainly of rentals received for the lease of MabuhaySatellite's transponders and Telesat's VSAT facilities to other companies andcharges for ACeS Philippines’ satellite phone service.  Total revenues fromthese services for 2003 amounted to Php898 million, an increase of Php165million, or 23%, from Php733 million for 2002.

 

***Fixed Line***

 

Revenuesgenerated from our fixed line business in 2003 totaled Php46,195 million, anincrease of Php344 million, or 1%, from Php45,851 million in 2002.  Thisincrease was due to higher revenues generated from international long distanceservice and data and other network services, partially offset by decreasedrevenues from local exchange service, national long distance service, andmiscellaneous services.  As a percentage of our consolidated operatingrevenues, however, fixed line revenues decreased to 41% in 2003 from 49% in 2002 principally due to the continuedstrong growth of our wireless business.

 

Thefollowing table summarizes our consolidated operating revenues from our fixedline business for the years ended December 31, 2003 and 2002 by servicesegment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php20,728

 

45

 

Php21,345

 

47

 

(Php617)

 

(3)

International long distance

12,634

 

27

 

10,636

 

23

 

1,998

 

19

National long distance

6,694

 

14

 

7,818

 

17

 

(1,124)

 

(14)

Data and other network

5,802

 

13

 

5,561

 

12

 

241

 

4

Miscellaneous

337

 

1

 

491

 

1

 

(154)

 

(31)

Total

Php46,195

 

100

 

Php45,851

 

100

 

Php344

 

1

* *

*LocalExchange Service*

 

Our localexchange service revenues consist of: 

 

•        flat monthly fees for our postpaid service; 

 

•        installation charges and other one-time fees associated with theestablishment of customer service;

 

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

 

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

 

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

 

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

 

Thefollowing table summarizes key measures of our local exchange service businesssegment as of and for the years ended December 31, 2003 and 2002:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated local exchange revenues (in millions) 

Php20,728

 

Php21,345

 

(Php617)

 

(3)

Number of fixed lines in service

 

 

 

 

 

 

 

PLDT Group

2,185,951

 

2,188,612

 

(2,661)

 

–

PLDT(1) 

2,115,671

 

2,092,539

 

23,132

 

1

Number of PLDT employees

10,230

 

12,131

 

(1,901)

 

(16)

Number of PLDT fixed lines in service per PLDT employee

207

 

172

 

35

 

20

________________

 

(1) Approximately 83% and 88% were postpaid fixed linesubscribers as of December 31, 2003 and 2002, respectively.

 

Revenues from our local exchange service for 2003 decreased byPhp617 million, or 3%, to Php20,728 million from Php21,345 million in 2002.The decrease was primarily due to the (1) shifting subscriber preference frompostpaid to prepaid services, which generate lower average revenue persubscriber, and (2) decline in installation revenues due to a promotion in 2003which waived installation cost of subscribers in an effort to stimulatesubscriber growth, partially offset by adjustments in our monthly local servicerates.  The percentage contribution of local exchange revenues to our totalfixed line revenues also decreased in 2003 to 45% from 47% in 2002.

 

Gross additions to PLDT's fixedlines in service in 2003 totaled 577,530, an increase of 54,516 from the grossadditions of 523,014 in 2002.  On a net basis, PLDT’s fixed line additions in2003 totaled 23,132, which was 33% higher compared to the net additions of17,430 in 2002.  While fixed line additions totaled 114,277 for PLDT’s prepaidfixed line services, PLDT’s postpaid fixed lines in service declined by 91,145in 2003.

 

As of December 31, 2003, PLDT’s active prepaid fixed line subscribers totaled 357,304 which accounted forapproximately 17% of PLDT’s total fixed lines in service****as of December 31, 2003. 

 

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

 

The ratio of PLDT fixed lines in service per PLDTemployee improved to 207 as of December 31, 2003 from 172 as of December 31, 2002.This improvement resulted primarily from the net decrease in PLDT’s employeeheadcount.  During the year ended December 31, 2003,PLDT’s workforce was reduced by 16% to 10,230 employees from 12,131 in 2002,mainly on account of PLDT’s manpower rightsizing program, or MRP. 

 

*International Long DistanceService*

 

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

 

•        inbound call revenues representing settlements from foreigntelecommunications carriers for inbound international calls, virtual transitand hubbing service and reverse charged calls such as received collect and homecountry direct service;

 

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

 

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

 

Thefollowing table shows information about our fixed line international longdistance business for the years ended December 31, 2003 and 2002:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated international long distance revenues (in millions)

Php12,634

 

Php10,636

 

Php1,998

 

19

Inbound

10,614

 

8,461

 

2,153

 

25

Outbound

2,020

 

2,175

 

(155)

 

(7)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

PLDT Group

2,286

 

2,815

 

(529)

 

(19)

Inbound

2,128

 

2,644

 

(516)

 

(20)

Outbound

158

 

171

 

(13)

 

(8)

Inbound-outbound call ratio

13.5:1

 

15.5:1

 

–

 

–

 

 

 

 

 

 

 

 

PLDT

2,183

 

2,576

 

(393)

 

(15)

Inbound

2,028

 

2,409

 

(381)

 

(16)

Outbound

155

 

167

 

(12)

 

(7)

Inbound-outbound call ratio

13.1:1

 

14.4:1

 

–

 

–

 

Our consolidated international longdistance revenues increased by Php1,998 million, or 19%, to Php12,634 millionin 2003 from Php10,636 million in 2002, primarily as a result of an increase inour inbound international long distance revenues principally due to an increasein average inbound termination rates in 2003.  Likewise, the percentagecontribution of international long distance revenues to our total fixed linerevenues increased to 27% in 2003 from 23% in 2002.

 

Our revenues from inboundinternational long distance calls in 2003 increased by Php2,153 million, or25%, to Php10,614 million from Php8,461 million in 2002, primarily due to anincrease in PLDT’s average termination rates and the positive impact of thedepreciation of the average value of the peso relative to the U.S. dollar,partially offset by the effect of lower inbound call volumes.

 

Our inbound international longdistance call volumes in 2003 decreased by 20% to 2,128 million minutes from2,644 million minutes in 2002, primarily due to increased competition fromalternative means of long distance communications, particularly e-mailing,international text messaging and internet telephony, more inbound callsterminating directly to cellular subscribers and continued illegal bypassactivity.  In addition, the increase in our average termination rates in 2003also resulted in reduced inbound call volumes, principally those being routedthrough direct facilities from the U.S. to the Philippines.

 

After lengthy negotiationscommencing in May 2002 with carriers around the world, PLDT increased itstermination rates with carriers that account for a substantial portion of itsinternational inbound traffic terminating on its fixed line network to anaverage of approximately US$0.12 per minute effective February 1, 2003.  Prior to the increase in termination rates, a substantial portion of PLDT’sinternational inbound traffic terminating on its fixed line network was chargedan average termination rate of approximately US$0.08 per minute.  See “Item 8.Financial Information –– Legal Proceedings –– U.S. Federal CommunicationsCommission, or FCC, Ruling versus Philippine Telecommunications Companies”,“Item 8. Financial Information –– Legal Proceedings –– Investigation by U.S.Department of Justice” and *Note 28 – Other Ma*tters to the accompanyingconsolidated financial statements in Item 18 for further discussion.

 

The depreciation of the pesocontributed to the increase in our inbound international long distance revenuesin peso terms since settlement charges for inbound calls are billed in U.S.dollars or in special drawing rights, an established method of settlement amonginternational telecommunications carriers using values based on a basket offoreign currencies, that are translated into pesos at the prevailing exchangerates at the time of billing.

 

Our revenues from outboundinternational long distance calls in 2003 decreased by Php155 million, or 7%,to Php2,020 million from Php2,175 million in 2002.  The decline was primarilydue to lower outbound call volumes and reduced international direct dialing, orIDD, rates attributable to our corporate customers partly offset by the positiveimpact of the depreciation of the peso on outbound international long distanceservice revenues.

 

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

 

*NationalLong Distance Service*

 

Our nationallong distance revenues consist of: 

 

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

 

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

 

Thefollowing table shows our national long distance revenues and call volumes forthe years ended December 31, 2003 and 2002:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated national long distance revenues (in millions)

Php6,694

 

Php7,818

 

(Php1,124)

 

(14)

National long distance call volumes (in million minutes)

 

 

 

 

 

 

 

PLDT Group

2,049

 

2,181

 

(132)

 

(6)

PLDT

2,017

 

2,145

 

(128)

 

(6)

 

Our national long distance revenuesdecreased by Php1,124 million, or 14%, to Php6,694 million in 2003 fromPhp7,818 million in 2002 as a result of lower call volumes and changes ininterconnection arrangements with certain local exchange carriers.Accordingly, the percentage contribution of national long distance revenues toour total fixed line revenues was down to 14% in 2003 from 17% in 2002.

 

Our national long distance callvolumes decreased by approximately 6% to 2,049 million minutes in 2003 from2,181 million minutes in 2002.  Cellular substitution and the widespreadavailability and growing popularity of alternative non-voice means ofcommunications, particularly cellular text messaging and e-mailing, have negativelyaffected call volumes.

 

The decreasein our national long distance revenues in 2003 compared to 2002 was, however,mitigated by the impact of the launch of various *PLDT Premium Phone Services*and rate adjustments.

 

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

 

In 2003,certain local exchange carriers under revenue sharing arrangements have enteredinto access charging agreements with PLDT.  Under the revenue sharingagreements, charges are generally apportioned 30% for the originating entity,40% for the backbone owner and another 30% for the terminating entity.  Underthese access charging agreements, the originating carrier generally pays accesscharges of (1) Php0.50 per minute for shorthaul traffic and Php1.25 per minute for longhaul traffic to the carrier owning the backbone network, and (2) Php1.00 per minute to the terminating carrier.  This change ininterconnection charges resulted to a 54% decrease in average revenue perminute for calls originating from and terminating to other local exchangecarriers.  

 

*Data and Other Network Services*

 

Our data and other network servicesrevenues increased by Php241 million, or 4%, to Php5,802 million in 2003 fromPhp5,561 million in 2002.  The revenue contribution of this service segment toour total fixed line revenues increased to 13% in 2003 from 12% in 2002,primarily attributed to an increased use of *Domestic Frame Relay*, *I-Gate*,*DSL, Equant*and *ARCSTAR* bandwidth services, as well as the launchof other new network-based services.  We currently expect that demand for, andtherefore revenues generated from, these services will continue to grow in theforeseeable future.

 

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

 

PLDT offers two residentialinternet service packages targeting separate markets:  *PLDT Vibe*forlight to medium internet users and *DSL*broadband for heavy internetusers.  

* *

*Miscellaneous*

* *

Miscellaneous revenues are derived mostly from directory advertisingand facilities rental.  In 2003, these revenues decreased by Php154million, or 31%, to Php337 million from Php491 million in 2002, and accounted for approximately1% of our total fixed line revenues in each of these comparable periods.

 

***Information and Communications Technology***

 

In 2003, our information andcommunications technology business generated total revenues of Php1,509million, an increase of Php858 million, or 132%, from Php651 million in 2002.These revenues accounted for 1% of our consolidated operating revenues for 2003and 2002.  ePLDT’s call center business contributed revenues of Php927 million,Infocom contributed revenues of Php380 million and *Vitro*TMcontributed revenues of Php202 million representing 62%, 25% and 13%,respectively, of the total revenues from our information and communicationstechnology business in 2003, compared to 45%, 50% and 5% in 2002.  Goingforward, we expect revenues from our call center business to contributesignificantly to our information and communications technology revenues withthe growing demand for call center services. 

 

***Consolidated OperatingExpenses***

 

Our consolidated operating expensesin 2003 decreased by Php2,208 million, or 3%, to Php78,563 million fromPhp80,771 million in 2002.  The decrease was primarily due to lower non-cashexpenses, particularly asset impairment charges mostly associated with ourfixed line business.  As a percentage of our consolidated operating revenues,however, consolidated operating expenses decreased to 70% in 2003 from 87% in2002.

* *

Thefollowing table shows the breakdown of our total consolidated operatingexpenses for the years ended December 31, 2003 and 2002 by business segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2003**

** **

**%**

** **

**2002**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php45,649

 

58

 

Php37,282

 

46

 

Php8,367

 

22

Fixed line 

30,878

 

39

 

42,032

 

52

 

(11,154)

 

(27)

Information and communications technology 

2,036

 

3

 

1,457

 

2

 

579

 

40

Total

Php78,563

 

100

 

Php80,771

 

100

 

(Php2,208)

 

(3)

 

*Wireless*

 

Consolidated operating expensesassociated with our wireless business in 2003 amounted to Php45,649 million, anincrease of Php8,367 million, or 22%, from Php37,282 million in 2002.  Asignificant portion of this increase was attributable to Smart’s non-cashcharges mainly depreciation coupled with an increase in cash charges mainlycost of satellite airtime, compensation and benefits, and selling andpromotions.  As a percentage of our wireless operating revenues, operatingexpenses associated with our wireless business decreased to 71% in 2003 from81% in 2002. 

 

The following table summarizesour consolidated wireless-related operating expenses for the years ended December 31, 2003 and 2002 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2003**

 

**%**

 

**2002**

 

**%**

** **

**Amount**

** **

**%**

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Wireless services

 

 

 

 

 

 

 

 

 

 

 

Cost of cellular handsets sold

Php15,886

 

35

 

Php16,203

 

44

 

(Php317)

 

(2)

Depreciation 

12,331

 

27

 

7,387

 

20

 

4,944

 

67

Compensation and benefits

3,801

 

8

 

2,710

 

7

 

1,091

 

40

Selling and promotions

3,332

 

7

 

2,456

 

7

 

876

 

36

Cost of satellite air time

1,919

 

4

 

50

 

–

 

1,869

 

3,738

Maintenance

1,816

 

4

 

1,412

 

4

 

404

 

29

Rent

1,769

 

4

 

1,951

 

5

 

(182)

 

(9)

Taxes and licenses

1,122

 

2

 

426

 

1

 

696

 

163

Professional and other service fees

777

 

2

 

1,221

 

3

 

(444)

 

(36)

Amortization of goodwill and other intangible assets

766

 

2

 

766

 

2

 

–

 

–

Insurance and securities

741

 

2

 

706

 

2

 

35

 

5

Asset impairment charges

288

 

1

 

75

 

–

 

213

 

284

Provision for doubtful accounts

71

 

–

 

456

 

1

 

(385)

 

(84)

Provision for inventory obsolescence

90

 

–

 

389

 

1

 

(299)

 

(77)

Other operating expenses

940

 

2

 

1,074

 

3

 

(134)

 

(12)

Total

Php45,649

 

100

 

Php37,282

 

100

 

Php8,367

 

22

 

Cost of cellular handsets solddecreased by Php317 million, or 2%, to Php15,886 million mainly due to lowerprices of cellular handset negotiated with suppliers.

 

Depreciation charges increased byPhp4,944 million, or 67%, to Php12,331 million primarily due to an increase inSmart’s depreciable asset base owing to continuing network expansion andupgrades.  

 

Compensation and benefits increased by Php1,091million, or 40%, to Php3,801 million primarily due to increased salaries,benefits and performance bonuses of Smart’s employees.  In addition, Smart accrued for an additional shareunder the enhanced employee retirement fund approved by Smart’s Board ofDirectors in October 2003.  Smart'semployee headcount increased from 5,330 as of December 31, 2002 to 5,408 as of December 31, 2003.  

 

Selling and promotion expenses increasedby Php876 million, or 36%, to Php3,332 million mainly due to a 66% increase inSmart’s prepaid phone kit/SIM pack sales in 2003 and an increase in advertisingand promotion expense on account of the launching of new services such as *addictmobile*, *Smart Load*and*Pasa Load*. 

 

Cost ofsatellite air time increased by Php1,869 million, to Php1,919 million mainlydue to the accrual of air time cost due to the termination of the StandstillAgreement and the reinstatement of the terms under the ATPA following the lapseof the deadline set in the Standstill Agreement.  See *Note 18 – RelatedParty Transaction* and *Note 23 –Contractual Obligations and CommercialCommitments*to the accompanying consolidated financial statements in Item18 for further discussion.

 

Maintenance expenses increased byPhp404 million, or 29%, to Php1,816 million mainly due to higher site utility,repairs and other maintenance-related expenses associated with the expansionand upgrade of Smart’s cellular network equipment; increased office andtelecenter utilities expenses; and increased computer hardware and softwarelicense expense.

 

Rent expensesdecreased by Php182 million, or 9%, to Php1,769 million mainly due to lowersite and circuit rental by Piltel resulting from the decommissioning effortsdone in 2002 and 2003, partially offset by higher site rental cost incurred bySmart for its growing number of cell sites and base stations, in line with itsnetwork expansion.  As of December 31, 2003, Smart had 2,914 GSM cell sites and3,904 base stations, compared with 2,110 GSM cell sites and 2,777 base stationsas of December 31, 2002. 

 

Taxes andlicenses increased by Php696 million, or 163%,to Php1,122 million mainly due to an increasein Smart’s business-related taxes, NTC supervision and regulation fees anddisallowed input taxes.  

 

Professional and other service fees decreased byPhp444 million, or 36%, to Php777 million mainly as a result of a reduction inlegal and bill collection service fees.

 

Amortization of goodwill and other intangible assetsremained constant at Php766 million in 2003 and 2002.  Beginning January 1, 2002,amortization of goodwill is no longer applicable under U.S. GAAP.  Instead, atest of goodwill impairment should be done at least annually.

 

Insurance and securities increasedby Php35 million, or 5% to Php741 million mainly due to the growth in thenumber of Smart’s cell sites and the increase in the cost of equipment insuredas a result of the continued growth and expansion of its GSM network.

 

Provision for doubtful accountsdecreased by Php385 million, or 84%, to Php71 million mainly due tospecifically identified subscriber and carrier accounts which weresubstantially provided for in 2002.  

 

Provision for inventoryobsolescence decreased by Php299 million, or 77%, to Php90 million since themajority of the specifically identified slow and non-moving handsets were fullyprovided for in 2002.

 

Otheroperating expenses decreased by Php134 million, or 12%, to Php940 million mainlydue to decreases in Smart’s various business and operational-related expensessuch as facility usage fees, training, travel, supplies, printing, andcommunication expenses.

* *

*Fixed Line*

 

Consolidatedoperating expenses related to our fixed line business in 2003 totaled Php30,878million, a decrease of Php11,154 million, or 27%, compared to Php42,032 millionin 2002.  The decrease was primarily due to lower non-cash expenses, mainlyasset impairment charge and depreciation.  As a percentage of our total fixedline operating revenues, fixed line-related operating expenses decreased to 67%in 2003 as compared to 92% in 2002.

 

The following table shows the breakdownof our total consolidated fixed line-related operating expenses for the yearsended December 31, 2003 and 2002 and the percentage of each expense item tothe total:

 

 

**Years Ended December 31,**

 

** **

 

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

**2003**

 

**%**

 

**2002**

 

**%**

** **

**Amount**

** **

**%**

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

Fixed line services:

 

 

 

 

 

 

 

 

 

 

 

Depreciation 

Php9,237

 

30

 

Php9,824

 

23

 

(Php587)

 

(6)

Compensation and benefits

8,971

 

29

 

7,836

 

19

 

1,135

 

14

Provision for doubtful accounts

3,951

 

13

 

3,659

 

9

 

292

 

8

Maintenance

2,791

 

9

 

2,244

 

5

 

547

 

24

Professional and other service fees

1,060

 

3

 

994

 

2

 

66

 

7

Selling and promotions

1,056

 

3

 

1,082

 

3

 

(26)

 

(2)

Taxes and licenses

986

 

3

 

548

 

1

 

438

 

80

Rent

896

 

3

 

889

 

2

 

7

 

1

Insurance and securities

763

 

3

 

643

 

2

 

120

 

19

Provision for inventory obsolescence

153

 

1

 

87

 

–

 

66

 

76

Asset impairment charges

–

 

–

 

13,204

 

32

 

(13,204)

 

(100)

Other operating expenses

1,014

 

3

 

1,022

 

2

 

(8)

 

(1)

Total

Php30,878

 

100

 

Php42,032

 

100

 

(Php11,154)

 

(27)

 

Depreciation chargesdecreased by Php587 million, or 6%, to Php9,237 million mainly due to a netdecrease in our regular asset base primarily resulting from asset disposals andimpairment charges for Piltel’s E.O. 109 assets recognized in 2002.

 

Compensation and benefits increasedby Php1,135 million, or 14%, to Php8,971 million mainly due to collectivebargaining agreement-related increases in salaries and benefits of PLDTemployees coupled with an increase in MRP cost of Php1,580 million in 2003representing payments to 1,488 affected employees, partially offset by theeffect of the reduction in headcount due to PLDT’s MRP.  See *Note 20 – OtherExpenses – Net* to the accompanying consolidated financial statements inItem 18 for further discussion on PLDT’s MRP.

 

Provision for doubtfulaccounts increased by Php292 million, or 8% to Php3,951 million on account ofhigher provisions by PLDT for anticipated uncollectible accounts from variousspecifically identified domestic telecommunications carriers in 2003.  PLDT’sprovision for doubtful accounts in 2003 and 2002 was equivalent to 8% and 7%,respectively, of its operating revenues. 

 

Maintenance expenses increased by Php547 million, or24%, to Php2,791 million primarily due to higher maintenance costs of insideplant facility, computer and peripherals and submarine cable in 2003 ascompared to 2002, partially offset by lower maintenance costs on outside plantfacilities.

 

Professional and other service fees increased by Php66million, or 7%, to Php1,060 million as a result of higher collection agencyfees on account of higher collection of final accounts and payment of higher legalfees in 2003 for various services, partially offset by lower advisory fees dueto a decrease in number of consultants in line with PLDT’s cost managementefforts.

 

Selling and promotion expensesdecreased by Php26 million, or 2%, to Php1,056 million mainly as a result ofreduced corporate public relations expenses, partially offset by an increase inPLDT’s promotional activities in relation to the launch of *Hype, DSL* andother *Premium Phone Service*variants.

 

Taxes and licenses increased byPhp438 million, or 80%, to Php986 million mainly on account of higherbusiness-related taxes paid and accrued in 2003 as compared to 2002.

 

Rent expenses increased by Php7 million, or 1%, toPhp896 million mainly due to higher rentals paid by PLDT to suppliers of customerpremises equipment as part of its bundled services to corporate customerspartially offset by reduced number of leased transponders.

 

Insurance and securities increasedby Php120 million, or 19%, to Php763 million primarily due to higher premiumson all risks insurance for properties, and directors’ and officers’ liabilityinsurance for 2003 as compared to 2002.

 

Provision for inventoryobsolescence increased by Php66 million, or 76%, to Php153 million due tomaintenance-related inventory items which were specifically identified as slowand non-moving stocks in 2003.  

 

Asset impairment charges amountedto Php13,204 million due to Piltel’s impairment recognition in 2002 relating toits E.O. 109 assets as the revenue generated from these services could nolonger support the cost of operating the network.  No impairment charge wasrecognized in 2003.

 

Other operating expenses decreased by Php8 million, or1%, to Php1,014 million mainly due to lower contracted employee cost, partiallyoffset by higher office supplies consumption and printing costs.

 

*Information and Communications Technology*

 

Consolidated operating expenses associated with ourinformation and communications technology business in 2003 totaled Php2,036million, an increase of Php579 million, or 40%, from Php1,457 millionin 2002.  The increase was principally due to the full commercial operations ofePLDT and its newly formed subsidiaries in 2003.  As a percentage of ourinformation and communications technology operating revenues, operating expensesrelated to our information and communications technology business decreased to135% in 2003 from 224% in 2002.  The three largest expense items related to ourinformation and communications technology business in 2003 were compensationand benefits, asset impairment charge and depreciation, representing 26%, 19%and 15%, respectively, of our total operating expenses related to thisbusiness.  In 2002, the three largest expense items related to our informationand communications technology business were depreciation, compensation andbenefits, and rent, representing 24%, 24% and 18%, respectively, of relatedtotal operating expenses.

 

***Net Operating Income***

 

Our consolidated net operating income in 2003 wasPhp33,473 million, an increase of Php21,444 million, or 178%, from Php12,029million in 2002.  Accordingly, our consolidated operating margin (net operatingincome as a percentage of operating revenues) improved to 30% in 2003 from 13%in 2002.

 

The following table shows thebreakdown of our consolidated net operating income (loss) for the years ended December 31, 2003 and 2002 by business segment:

 

 

**Years Ended December 31,**

 

 

** **

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

2003

** **

**%**

 

**2002**

 

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php18,683

 

56

 

Php9,016

 

75

 

Php9,667

 

107

Fixed line 

15,317

 

46

 

3,819

 

32

 

11,498

 

301

Information and communications technology 

(527)

 

(2)

 

(806)

 

(7)

 

279

 

35

Total

Php33,473

 

100

 

Php12,029

 

100

 

Php21,444

 

178

 

*Wireless*

 

Our wireless business segmentrecorded an operating income of Php18,683 million in 2003, an increase ofPhp9,667 million, or 107%, over Php9,016 million registered in 2002.  Thissignificant improvement was due to a substantial increase of Php8,164 millionin Smart's operating income contribution in 2003 which reached Php19,802million from Php11,638 million in 2002 primarily due to the growth in Smart’ssubscriber base.

 

*Fixed Line*

 

In 2003, our fixed line business segment contributed anet operating income of Php15,317 million, higher by Php11,498 million, or301%, than Php3,819 million in 2002.  This increase was primarily due to theoverall decline in fixed line-related expenses by 27% primarily owing toPiltel’s impairment of its E.O. 109 assets in 2002 amounting to Php13,204million.

 

*Information and CommunicationsTechnology*

 

In 2003, ourinformation and communications technology business segment incurred anoperating loss of Php527 million, an improvement of Php279 million, or 35%,from the Php806 million operating loss posted in 2002.  These operating lossesreflect the start-up nature of ePLDT’s businesses and those of itssubsidiaries.

 

*Other Expenses - Net*

* *

Thefollowing table shows our consolidated other expenses – net for the years ended December 31, 2003 and 2002:

* *

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2003**

** **

**2002**

** **

**Amount**

** **

**%**

 

 

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

Interest expenses and related items, net of capitalized interest

Php12,161

 

Php12,780

 

(Php619)

 

(5)

Add:  Other expenses – net

12,544

 

5,417

 

7,127

 

132

Subtotal

24,705

 

18,197

 

6,508

 

36

Less:  Interest and other income

1,052

 

1,574

 

(522)

 

(33)

Total

Php23,653

 

Php16,623

 

Php7,030

 

42

* *

On a consolidated basis, ourother expenses, net of other income, increased by Php7,030 million, or 42%, toPhp23,653 million in 2003 from Php16,623 million in 2002 due to the combinedeffects of:

 

•        an increase of Php7,127 million in other expenses–net mainly dueto higher foreign exchange losses in 2003 of Php4,962 million and higherderivative transaction losses of Php2,219 million; 

 

•        a decrease in interest and other income of Php522 million mainlydue to a net gain of Php633 million in 2002 resulting from PLDT’s terminationof a derivative instrument; and

 

•        a decrease in interest expense and related items, net ofcapitalized interest, of Php619 million attributable mainly to the decrease inPLDT’s, Mabuhay Satellite’s and Piltel’s interest expense of Php592 million,Php 62 million and Php6 million, respectively, due to the debt payments andlower interest rates mainly on foreign currency-denominated loans bearingfluctuating interest rates partially offset by a net increase in ePLDT’s andSmart’s interest expenses of Php37 million Php4 million, respectively,resulting in an increase in it’s debt balances. 

 

***Income (Loss) BeforeIncome Tax, Cumulative Effect of Change in Accounting Principles and MinorityInterest in Net Income of Consolidated Subsidiaries***

 

Our income before income tax, cumulative effect of change inaccounting principle and minority interest in net income of consolidatedsubsidiaries in 2003 was Php9,820 million, an increase of Php14,414 million, or314%, from a loss of Php4,594 million in 2002.

 

In 2003 and 2002, our effective corporate tax rate on aconsolidated basis was 15% and 31%, respectively.  Our effective corporate taxrate was lower than the 32% statutory corporate tax rate due to the following:

 

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

 

•        income already subjected to a final tax or a lower tax rate. 

 

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

 

***Net Income***

 

As a result of the foregoingfactors our consolidated net income in 2003 was Php11,045 million, animprovement of Php17,203 million, or 279%, over our consolidated net loss ofPhp6,158 million in 2002.  This improvement was largely due to the increase innet income of Smart and the decrease in net loss of Piltel and other wirelesssubsidiaries for 2003.

 

Basic and diluted earnings per share, or EPS, of common share amountedto Php47.20 and Php45.72, respectively, in 2003 from basic and diluted EPS ofPhp52.08 in 2002, after giving retroactive effect to share dividendequivalents.  See *Note 22 –Earnings Per Common Share*to the accompanyingconsolidated financial statements in Item 18 for further discussion.

* *

2002 Compared to 2001

 

***Consolidated OperatingRevenues***

 

Our consolidated operating revenuesincreased by Php12,506 million, or 16%, to Php92,800 million in 2002 fromPhp80,294 million in 2001 largely as a result of the continued strongperformance of our wireless business segment, particularly our cellularbusiness.  Our wireless business revenues contributed Php46,298 million inrevenues for 2002, an increase of 38% over its revenue contribution ofPhp33,597 million for 2001.  Our wireless business revenues accounted for 50%of our consolidated operating revenues in 2002, compared to 42% in 2001.

 

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

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2002**

** **

**%**

** **

**2001**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php46,298

 

50

 

Php33,597

 

42

 

Php12,701

 

38

Fixed line

45,851

 

49

 

46,323

 

58

 

(472)

 

(1)

Information and communications technology 

651

 

1

 

374

 

–

 

277

 

74

Total

Php92,800

 

100

 

Php80,294

 

100

 

Php12,506

 

16

 

***Wireless***

 

The following table summarizesour consolidated operating revenues from our wireless business for the yearsended December 31, 2002 and 2001 by service segment:

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2002**

** **

**%**

** **

**2001**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Wireless :

 

 

 

 

 

 

 

 

 

 

 

Cellular services(1)

Php30,583

 

66

 

Php19,820

 

59

 

Php10,763

 

54

Cellular handset sales

14,982

 

32

 

13,015

 

39

 

1,967

 

15

Satellite, VSAT and others

733

 

2

 

762

 

2

 

(29)

 

(4)

Total

Php46,298

 

100

 

Php33,597

 

100

 

Php12,701

 

38

_____________

* *

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

 

Our wireless revenues increasedconsiderably by Php12,701 million, or 38%, to Php46,298 million in 2002 fromPhp33,597 million in 2001 mainly as a result of the continued strong growth inrevenues generated from Smart’s cellular service.  Accordingly, as a percentageof our consolidated operating revenues, wireless revenues rose to 50% in 2002from 42% in 2001.

 

*Cellular Service*

 

Our cellular service revenues in 2002 increased by Php10,763million, or 54%, to Php30,583 million from Php19,820 million in 2001 as aresult of the significant increase in our GSM subscriber base, partially offsetby declining usage per subscriber.  Cellular service revenues accounted for 33%of our consolidated operating revenues in 2002, compared to 25% in 2001.

 

Revenues from our analog services have been declining as analogsubscribers have been migrating to GSM service. Smart decommissioned its analogenhanced total access communications system, or ETACS, network in December 2002while Piltel ceased to offer its analog/CDMA service at the end of 2002.

 

The tablebelow shows our cellular subscriber base as of December 31, 2002 and 2001:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Increase (Decrease)**

** **

**2002**

** **

**2001**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Cellular subscribers

8,599,306

 

6,368,850

 

2,230,456

 

35

Smart

6,825,686

 

4,893,844

 

1,931,842

 

39

GSM

6,825,686

 

4,641,666

 

2,184,020

 

47

Prepaid

6,649,038

 

4,569,616

 

2,079,422

 

46

Postpaid

176,648

 

72,050

 

104,598

 

145

Analog(1)

—

 

252,178

 

(252,178)

 

(100)

Prepaid

—

 

87,429

 

(87,429)

 

(100)

Postpaid

—

 

164,749

 

(164,749)

 

(100)

Piltel

1,773,620

 

1,475,006

 

298,614

 

20

GSM Prepaid(2)

1,773,620

 

1,329,326

 

444,294

 

33

Analog(1)

—

 

145,680

 

(145,680)

 

(100)

Prepaid

—

 

76,473

 

(76,473)

 

(100)

Postpaid

—

 

69,207

 

(69,207)

 

(100)

_____________

* *

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

* *

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

 

As of December 31, 2002, Smart’s prepaid GSM subscriber base grew by 46% to 6,649,038 from 4,569,616 at December 31, 2001, whereas Smart’s postpaid GSM subscriber base increased by 145% to176,648 at December 31, 2002 from 72,050 at December 31, 2001.  Of Smart's 6,825,686 GSM subscribers at December 31, 2002, prepaid subscribers accountedfor 97%, while postpaid subscribers accounted for the remaining 3%.  Piltel’sprepaid GSM subscribers reached 1,773,620 as at December 31, 2002, representing a 33% increase from its 1,329,326 subscribers at December 31, 2001.

 

As part of our initiatives toaddress the increase in churn rate, we introduced *PureTxt 100* on August 18, 2002.  The card was designed as an alternative for *Smart Buddy* and *Talk‘N Text* subscribers who may temporarily be unable to afford the “call andtext” cards with higher denominations.  Once a *PureTxt 100* card wasloaded, the incoming and outgoing voice-call capabilities of the subscriberwere temporarily deactivated until such time that the subscriber reloaded witha “call and text” card” in a denomination of at least Php300.  *PureTxt 100*cards came with a free allocation of 10 text messages and were valid for onemonth.

 

For Smart’s postpaid service, ourpolicy 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.

 

*Cellular Handset Sales*

 

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

 

*Satellite,VSAT and Other Services*

 

Our revenuesfrom satellite, VSAT and other services consist mainly of rentals received forthe lease of Mabuhay Satellite’s transponders and Telesat’s VSAT facilities toother companies and charges for ACeS Philippines’ satellite phone service.Total revenues from these services in 2002 amounted to Php733 million, adecrease of Php29 million, or 4%, from Php762 million in 2001.

 

***Fixed Line***

 

Revenues generated from our fixedline business in 2002 totaled Php45,851 million, a decrease of Php472 million,or 1%, from Php46,323 million in 2001.  This decrease was due to lower localexchange, international and national long distance service revenues, partiallyoffset by increases in data and other network and miscellaneous servicerevenues.  As a percentage of our consolidated operating revenues, fixed linerevenues decreased to 49% in 2002 from 58% in 2001 principally due to thecontinued strong growth of our wireless business.

 

The following table summarizesour consolidated operating revenues from our fixed line business for the yearsended December 31, 2002 and 2001 by service segment:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2002**

** **

**%**

** **

**2001**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

Fixed line:

 

 

 

 

 

 

 

 

 

 

 

Local exchange

Php21,345

 

47

 

Php21,356

 

46

 

(Php11)

 

–

International long distance

10,636

 

23

 

11,701

 

25

 

(1,065)

 

(9)

National long distance

7,818

 

17

 

8,500

 

19

 

(682)

 

(8)

Data and other network

5,561

 

12

 

4,653

 

10

 

908

 

20

Miscellaneous 

491

 

1

 

113

 

–

 

378

 

335

Total

Php45,851

 

100

 

Php46,323

 

100

 

(Php472)

 

(1)

 

*Local Exchange Service*

 

The following table summarizes key measures of ourlocal exchange service business segment as of and for the years ended December 31, 2002 and2001:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2002**

** **

**2001**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated local exchange revenues (in millions)

Php21,345

 

Php21,356

 

(Php11)

 

–

Number of fixed lines in service

 

 

 

 

 

 

 

PLDT Group

2,188,612

 

2,174,082

 

14,530

 

1

PLDT(1)

2,092,539

 

2,075,109

 

17,430

 

1

Number of PLDT employees

12,131

 

12,915

 

(784)

 

(6)

Number of PLDT fixed lines in service per PLDT employee

172

 

161

 

11

 

7

_____________

 

*(1)Approximately 88% and 93% were postpaid fixed line subscribers as of**December 31, 2002**and 2001, respectively.*

* *

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

 

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

 

Pursuant to a currency exchangerate adjustment mechanism authorized by the NTC, we implemented 13 upwardadjustments and six downward adjustments in our monthly local service rates in2002, compared to four upward adjustments and ten downward adjustments in2001.  The average peso-to-dollar rate in 2002 was Php51.583 to US$1.00,compared to the average of Php51.009 to US$1.00 in 2001.  This change in theaverage peso-to-dollar rate translated to a peso depreciation of 1.2%, whichresulted in a 1.1% average net increase in our monthly local service rates in2002.

 

The ratio of PLDT fixed lines inservice per PLDT employee improved to 172 as of December 31, 2002 from 161 as of December 31, 2001.  This improvement was a result of the net increase inPLDT's fixed lines in service coupled with a reduction of PLDT’s workforce.  In2002, employee headcount was reduced by 6% mainly as a result of PLDT’s ongoingMRP, bringing its workforce down to 12,131 at year-end from 12,915 in 2001.

 

*InternationalLong Distance Service*

 

Thefollowing table shows information about our fixed line international longdistance business for the years ended December 31, 2002 and 2001:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2002**

** **

**2001**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated international long distance revenues (in millions)

Php10,636

 

Php11,701

 

(Php1,065)

 

(9)

Inbound 

8,461

 

8,985

 

(524)

 

(6)

Outbound 

2,175

 

2,716

 

(541)

 

(20)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

PLDT Group

2,815

 

3,276

 

(461)

 

(14)

Inbound 

2,644

 

3,108

 

(464)

 

(15)

Outbound

171

 

168

 

3

 

2

Inbound-outbound call ratio

15.5:1

 

18.5:1

 

–

 

–

 

 

 

 

 

 

 

 

PLDT

2,576

 

2,814

 

(238)

 

(8)

Inbound

2,409

 

2,648

 

(239)

 

(9)

Outbound 

167

 

166

 

1

 

1

Inbound-outbound call ratio

14.4:1

 

16.0:1

 

–

 

–

 

Our consolidated international longdistance revenues decreased by Php1,065 million, or 9%, to Php10,636 million in2002 from Php11,701 million in 2001, primarily as a result of lower inboundcall volumes. Similarly, the percentage contribution of international longdistance revenues to our total fixed line revenues decreased to 23% in 2002 from25% in 2001.  

 

Our revenues from inboundinternational long distance calls decreased by Php524 million, or 6%, toPhp8,461 million in 2002 from Php8,985 million in 2001.  The decrease wasprimarily due to the combined effects of lower call volumes and continueddeclines in the average international termination rates, partially offset bythe positive impact of the depreciation of the average value of the pesorelative to the U.S. dollar.

 

Our inboundinternational long distance call volumes decreased by 15% to 2,644 millionminutes in 2002 from 3,108 million minutes in 2001 primarily due to thefollowing factors:

 

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

 

•        more inbound calls terminating directly to cellular subscribers; 

 

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

 

•        bankruptcy of certain foreign operators.

 

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

 

Our revenues from outboundinternational long distance calls declined by Php541 million, or 20%, to Php2,175million in 2002 from Php2,716 million in 2001.  The decline was primarily dueto reductions in our average international direct dialing, or IDD, ratesbrought about by discounts granted to corporate customers and other largeaccounts and operator-assisted call charges, partially offset by higheroutbound call volumes and the positive effect of the depreciation of theaverage value of the peso against the U.S. dollar.

 

Effective February 2001, PLDT reduced its IDD rates for retailcustomers from US$0.49 per minute for off-peak hours and US$0.69 per minute forpeak hours to a flat rate for retail customers of US$0.40 per minute applicableto all call destinations at any time and any day of the week.  Additionally, inNovember 2001, PLDT introduced *Budget Card,*a prepaid call card offeringa reduced IDD rate of US$0.24 per minute for calls to 20 overseas destinationsincluding the United States, Canada, Japan and China.  *Budget Cards* aresold in a denomination of Php200, which must be consumed within 30 days fromfirst use.

 

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

 

•        reduced average IDD rates; and

 

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

 

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

 

*NationalLong Distance Service*

 

The following table shows ournational long distance revenues and call volumes for the years ended December31, 2002 and 2001:

 

** **

**Years Ended December 31,**

** **

** **

** **

** **

** **

**Decrease**

** **

**2002**

** **

**2001**

** **

**Amount**

** **

**%**

 

 

 

 

 

 

 

 

Consolidated national long distance revenues (in millions)

Php7,818

 

Php8,500

 

(Php682)

 

(8)

National long distance call volumes (in million minutes)

 

 

 

 

 

 

 

PLDT Group

2,181

 

2,780

 

(599)

 

(22)

PLDT

2,145

 

2,756

 

(611)

 

(22)

 

Our national long distance revenues decreased by Php682 million,or 8%, to Php7,818 million in 2002 from Php8,500 million in 2001 due to thecombined effects of the (1) decrease in call volumes resulting mainly fromcellular substitution and (2) changes in PLDT’s interconnection arrangementswith the majority of other local exchange carriers.  Accordingly, thepercentage contribution of national long distance revenues to our fixed linerevenues was down to 17% in 2002 from 19% in 2001.

 

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

 

The decrease in our national longdistance revenues in 2002 compared to 2001 was, however, mitigated by theimpact of the changes in interconnection arrangements with cellular operators;the increase in national direct dialing rates; and the launch of *PLDTPremium Phone Services*.

 

Effective January 2002, the accesscharges paid by PLDT were reduced to Php4.50 per minute, down from the Php6.50per minute it paid for the period from July to December 2001.  Prior to July2001, PLDT was paying access charges ranging from a low of Php7.69 per minuteto a high of Php10.94 per minute for calls terminating to cellular subscribers,depending on whether the calls were local or long distance.

 

*Data andOther Network Services*

 

While theother major segments of our fixed line business posted lower revenues in 2002compared to 2001, our data and other network services consistently registeredincreasing revenue growth. Revenues from these services grew by Php908 million,or 20%, to Php5,561 million in 2002 from Php4,653 million in 2001.  Thepercentage revenue contribution of these services to our fixed line revenuesincreased to 12% in 2002 from 10% in 2001.  

 

Traditional bandwidth servicesaccounted for 57% of the total revenues from our data and other networkservices for 2002, broadband/IP-based services accounted for 38%, and otherservices accounted for the remaining 5%, compared to 67%, 29% and 4%,respectively, for 2001.  These percentage changes indicate a shift in data andother network revenues from traditional bandwidth services tobroadband/IP-based services.  We expect this trend to continue given thegrowing demand for broadband transmission of voice, data and video due to thecontinued growth of the internet, e-commerce and other on-line services.

 

*Miscellaneous*

 

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

 

***Information and Communications Technology***

 

In 2002, our information andcommunications technology business generated total revenues of Php651 million,an increase of Php277 million, or 74%, over the Php374 million in 2001.  Theserevenues accounted for 1% of our consolidated operating revenues in 2002 andless than 1% in 2001.  Infocom contributed revenues of Php325 million; ePLDT’scall center business contributed revenues of Php290 million and *Vitro*ä contributed revenues of Php36 million,representing 50%, 45% and 5%, respectively, of the total revenues from ourinformation and communications technology business in 2002.  Infocom’s revenuein 2002 increased by 2% over 2001. 

 

***Consolidated Operating Expenses***

 

Our consolidated operating expenses in 2002 decreasedby Php5,465 million, or 6%, to Php80,771 million from Php86,236 million in2001.  The decrease was primarily due to lower amortization expenses ofgoodwill and a lower amount of impairment charges recognized in 2002.  As apercentage of our consolidated operating revenues, consolidated operatingexpenses decreased to 87% in 2002 from 107% in 2001 primarily as a result of anincrease in wireless revenues.

 

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

 

** **

**Years Ended December 31,**

 

** **

** **

** **

** **

** **

** **

** **

** **

**Increase (Decrease)**

 

**2002**

** **

**%**

** **

**2001**

** **

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php37,282

 

46

 

Php57,537

 

67

 

(Php20,255)

 

(35)

Fixed line 

42,032

 

52

 

27,495

 

32

 

14,537

 

53

Information and communications technology 

1,457

 

2

 

1,204

 

1

 

253

 

21

Total

Php80,771

 

100

 

Php86,236

 

100

 

(Php5,465)

 

(6)

 

*Wireless*

 

Consolidated operating expenses associated with our wirelessbusiness in 2002 totaled Php37,282 million, a decrease of Php20,255 million, or35%, from Php57,537 million in 2001.  The decrease was primarily due to thedeclines in asset impairment charge and amortization of goodwill and otherintangible assets, partially offset mainly by the increases in the costs ofcellular handsets sold, compensation and benefits, and selling and promotions.As a percentage of our total wireless operating revenues, wireless operatingexpenses decreased to 81% in 2002 from 171% in 2001.

 

The following table summarizesour consolidated wireless-related operating expenses for the years ended December 31, 2002 and 2001 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

 

** **

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

2002

** **

**%**

 

**2001**

 

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

Wireless 

 

 

 

 

 

 

 

 

 

 

 

Cost of cellular handsets sold

Php16,203

 

44

 

Php15,179

 

26

 

Php1,024

 

7

Depreciation 

7,387

 

20

 

7,251

 

13

 

136

 

2

Compensation and benefits 

2,710

 

7

 

1,798

 

3

 

912

 

51

Selling and promotions

2,456

 

7

 

1,598

 

3

 

858

 

54

Rent

1,951

 

5

 

1,537

 

3

 

414

 

27

Maintenance

1,412

 

4

 

1,137

 

2

 

275

 

24

Professional and other service fees

1,221

 

3

 

1,242

 

2

 

(21)

 

(2)

Amortization of goodwill and other intangible assets

766

 

2

 

6,021

 

10

 

(5,255)

 

(87)

Insurance and securities

706

 

2

 

513

 

1

 

193

 

38

Provision for doubtful accounts 

456

 

1

 

310

 

1

 

146

 

47

Taxes and licenses

426

 

1

 

499

 

1

 

(73)

 

(15)

Provision for inventory obsolescence

389

 

1

 

211

 

–

 

178

 

84

Asset impairment charges

75

 

–

 

19,470

 

34

 

(19,395)

 

(100)

Cost of satellite airtime

50

 

–

 

–

 

–

 

50

 

–

Other operating expenses

1,074

 

3

 

771

 

1

 

303

 

39

Total

Php37,282

 

100

 

Php57,537

 

100

 

(Php20,255)

 

(35)

 

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

 

Depreciation charges increased by Php136 million, or 2%, toPhp7,387 million in 2002 mainly due to an increase in Smart’s depreciable assetbase owing to the continuing GSM network expansion and upgrade, which waspartially offset by a reduction in the depreciable value of Smart’s andPiltel’s assets as a result of  asset impairment charges in 2001 for Smart’sanalog/ETACS and Piltel’s analog/CDMA assets.  Having complied with therequirements set out by the NTC, Smart closed down the operation of itsanalog/ETACS network in December 2002.

 

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

 

Selling and promotion expensesincreased by Php858 million, or 54%, to Php2,456 million, mainly due toincreased gross activations of our cellular subscribers in 2002.  EffectiveAugust 1, 2002, we reduced the maximum discounts given to dealers for prepaidphone kit sales from a range of Php1,000 to Php1,300 per unit sold (dependingon the volume purchased) in the form of prepaid “call and text” cards to Php800in cash per prepaid phone kit.  An additional 1% rebate was given on cashpurchases.

 

Rental expense increased by Php414 million, or 27%, to Php1,951million on account of higher site rentals incurred by Smart for its growingnumber of cell sites and base stations in line with its network expansion;increased operational requirements for satellite, microwave link and circuitfacilities; and higher office space rentals due to increased wireless businesscenters.  As of December 31, 2002, Smart had 2,110 GSM cell sites and 2,777base stations, compared with 1,570 GSM cell sites and 2,091 base stations as of December 31, 2001.

 

Maintenance expense increased byPhp275 million, or 24%, to Php1,412 million due to higher maintenance costsincurred by Smart relating to additional network equipment for its growingnumber of cell sites.

 

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

 

Amortization of goodwill and other intangible assets decreasedby Php5,255 million, or 87%, in 2002 from Php6,021 million in 2001 asamortization of goodwill is no longer applicable under U.S. GAAP beginning January 1, 2002.  Instead, a test of goodwill impairment should be done at least annually.

 

Insurance and securities increasedby Php193 million, or 38%, to Php706 million which pertained to the growth inthe number of Smart’s cell sites and the increase in the cost of equipmentinsured as a result of the continued growth and expansion of its GSM networkfacilities.

 

Provision for doubtful accountsincreased by Php146 million, or 47%, to Php456 million due to an increase inSmart’s provision for doubtful carrier accounts, an increase in Smart’spostpaid subscriber base, and Smart’s adoption of a more stringent provisioningpolicy.

 

Taxes and licenses decreased byPhp73 million, or 15%, to Php426 million due mainly to the decrease in Piltel’sreal property tax, municipal licenses and taxes, and NTC supervision andlicense fees.  

 

Provision for inventoryobsolescence increased by Php178 million, or 84%, to Php389 million which pertainedto the majority of the specifically identified slow and non-moving handsetsfully provided for in 2002.

 

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

 

Cost of satellite airtime amountingto Php50 million in 2002 pertained to air time cost incurred by ACeSPhilippines; none in 2001.

 

Other operating expenses increasedby Php303 million, or 39%, to Php1,074 million primarily due to increases inSmart’s various other operating expenses, such as facility usage fees, traveland transportation, and communications expenses.

* *

*Fixed Line*

 

Consolidated operating expensesrelated to our fixed line business in 2002 totaled Php42,032 million, anincrease of Php14,537 million, or 53%, compared to Php27,495 million in 2001.The increase was primarily due to the recognition of higher asset impairmentcharges in 2002 compared in 2001.  As a percentage of our total fixed-lineoperating revenues, fixed-line related operating expenses increased to 92% in2002 from 59% in 2001.

 

Thefollowing table shows the breakdown of our total consolidated fixedline-related operating expenses for the years ended December 31, 2002 and 2001 and the percentage of each expense item to the total:

 

 

**Years Ended December 31,**

 

 

** **

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

2002

** **

**%**

 

**2001**

 

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

Fixed line :

 

 

 

 

 

 

 

 

 

 

 

Asset impairment charges

Php13,204

 

32

 

Php265

 

1

 

Php12,939

 

4,883

Depreciation 

9,824

 

23

 

8,849

 

32

 

975

 

11

Compensation and benefits

7,836

 

19

 

7,717

 

28

 

119

 

2

Provision for doubtful accounts

3,659

 

9

 

2,880

 

10

 

779

 

27

Maintenance

2,244

 

5

 

2,878

 

10

 

(634)

 

(22)

Selling and promotions

1,082

 

3

 

1,050

 

4

 

32

 

3

Professional and other service fees

994

 

2

 

1,008

 

4

 

(14)

 

(1)

Rent

889

 

2

 

815

 

3

 

74

 

9

Insurance and securities

643

 

2

 

570

 

2

 

73

 

13

Taxes and licenses

548

 

1

 

420

 

2

 

128

 

30

Provision for inventory obsolescence

87

 

–

 

–

 

–

 

87

 

–

Amortization of goodwill and other intangible assets

–

 

–

 

69

 

–

 

(69)

 

(100)

Other operating expenses

1,022

 

2

 

974

 

4

 

48

 

5

Total

Php42,032

 

100

 

Php27,495

 

100

 

Php14,537

 

53

 

Asset impairment charges increasedby Php12,939 million to Php13,204 million due to Piltel’s impairmentrecognition in 2002 relating to its E.O. 109 assets as the revenues generatedfrom these services could no longer support the cost of operating the network.

 

Depreciation charges increased byPhp975 million, or 11%, to Php9,824 million in 2002 mainly due to higherdepreciation of our assets primarily resulting from additional completedprojects.

 

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

 

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

 

Maintenance expenses decreased byPhp634 million, or 22%, to Php2,244 million primarily due to lower maintenancecosts for PLDT’s outside and inside plant facilities partially offset by higherelectricity expense that resulted from increased power consumption coupled withincreased power rates.

 

Selling and promotion expensesincreased by Php32 million, or 3%, to Php1,082 million mainly due to increasedadvertising costs attributable to subscriber acquisition campaigns.

 

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

 

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

 

Insurance and securities increasedby Php73 million, or 13% to Php643 million in 2002 pertained to higher premiumson all risks insurance for properties, and directors’ and officers’ liabilityinsurance for 2002 as compared to 2001.

 

Taxes and licenses increased byPhp128 million, or 30%, to Php548 million mainly on account of higher provisionfor NTC supervision and regulation fees.  See *Note 24 – Provisions andContingencies* to the accompanying consolidated financial statements in Item18 for a discussion relating to NTC supervision and regulation fees.

 

Provision for inventory obsolescence amounting to Php87 millionin 2002 pertained to maintenance-related inventory items which werespecifically identified as slow and non-moving stocks in 2002.  There was noprovision for inventory obsolescence in 2001.

 

Amortization of goodwill and otherintangible assets amounted to Php69 million in 2001, as amortization ofgoodwill is no longer applicable under U.S. GAAP beginning January 1, 2002.  Instead, a test of goodwill impairment should be done at least annually.

 

Other operating expenses increasedby Php48 million, or 5%, to Php1,022 million primarily due to higherconsumption of office supplies as part of PLDT’s.

 

*Information andCommunications Technology*

 

Consolidated operating expensesassociated with our information and communications technology business in 2002totaled Php1,457 million, an increase of Php253 million, or 21%, from Php1,204million in 2001.  The increase was due principally to the full commercialoperations of ePLDT and its newly formed subsidiaries.   The three largestexpense items related to our information and communications technology businessin 2002 were depreciation, compensation and benefits, and rent representing24%, 24% and 18%, respectively, of our total operating expenses related to thisbusiness.  In comparison, the three largest expense items related to ourinformation and communications technology business in 2001 were rent,professional and other services and depreciation representing 19%, 11% and 10%,respectively, of total operating expenses related to this business.

 

***Net Operating Income***

 

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

 

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

 

 

**Years Ended December 31,**

 

 

** **

** **

 

** **

 

** **

** **

**Increase (Decrease)**

 

2002

** **

**%**

 

**2001**

 

**%**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

Wireless 

Php9,016

 

75

 

(Php23,940)

 

403

 

Php32,956

 

138

Fixed line 

3,819

 

32

 

18,828

 

(317)

 

(15,009)

 

(80)

Information and communications technology 

(806)

 

(7)

 

(830)

 

14

 

24

 

3

Total

Php12,029

 

100

 

(Php5,942)

 

100

 

Php17,971

 

302

 

*Wireless*

 

Our wirelessbusiness segment registered an operating income of Php9,016 million in 2002,compared to an operating loss of Php23,940 million in 2001.  This improvementwas due to a substantial increase in our cellular operating income contributionand a decline in asset impairment provisions from 2001 to 2002.

 

*Fixed Line*

 

In 2002, ourfixed line business segment contributed an operating income of Php3,819million, which was lower by Php15,009 million, or 80%, than Php18,828 millionin 2001.  This lower operating income contribution was mainly due to theoverall decline in our fixed line operating revenues by 1% coupled with anincrease in our fixed line-related operating expenses by 53% primarily owing toPiltel’s impairment of its E.O. 109 assets in 2002 amounting to Php13,204million.

 

*Information and Communications Technology*

 

In 2002, our information andcommunications technology business segment posted an operating loss of Php806million, an improvement of Php24 million, or 3%, compared to an operating lossof Php830 million incurred in 2001.  These operating losses reflect thestart-up nature of ePLDT’s businesses and those of ePLDT’s subsidiaries.

 

*Other Expenses – Net*

 

The followingtable shows our consolidated other expenses – net for the years ended December 31, 2002 and 2001:

 

 

**Years Ended December 31,**

 

** **

** **

** **

** **

**Increase (Decrease)**

 

**2002**

** **

**2001**

** **

**Amount**

** **

**%**

 

**(in millions)**

 

 

 

 

 

 

 

 

Interest expenses and related items, net of capitalized interest

Php12,780

 

Php14,697

 

(Php1,917)

 

(13)

Add:  Other expenses – net

5,417

 

10,829

 

(5,412)

 

(50)

Subtotal

18,197

 

25,526

 

(7,329)

 

(29)

Less:  Interest and other income

1,574

 

1,278

 

296

 

23

Total

Php16,623

 

Php24,248

 

(Php7,625)

 

(31)

 

On a consolidated basis, our other expenses, net of otherincome, decreased by Php7,625 million, or 31%, to Php16,623 million in 2002from Php24,248 million in 2001 due to the combined effects of:

 

•        a decrease in interest expense and related items, net ofcapitalized interest, of Php1,917 million attributable mainly to (1) a decreaseof Php920 million in Smart’s interest expense due to a lower level ofindebtedness in 2002; (2) a decrease in Piltel’s interest expense of Php858million due to its debt restructuring plan; and (3) a decrease of Php171million in Mabuhay Satellite’s interest expense due to debt payments and lowerinterest rates mainly on Mabuhay Satellite’s foreign currency-denominated loansbearing fluctuating interest rates.  The above decreases were partially offsetby (1) a net increase of Php19 million in PLDT’s interest expense and relateditems mainly due to the inclusion of the tender premium of Php518 millionrelated to our tender offer for notes due 2004 completed in May 2002, which wassubstantially offset by the combined effects of lower interest rates,particularly London Interbank Offered Rate, or LIBOR, and amortizations andprepayments of various loans in 2002; and (3) a net increase of Php15 millionin ePLDT’s and its subsidiaries’ interest expenses;

 

•        an increase in interest and other income of Php296 million mainlydue to a net gain of Php633 million resulting from PLDT’s termination of aderivative instrument; and

 

•        a decrease of Php5,412 million in other expenses–net due mainlyto a decrease in equity in net losses of investees of Php4,126 million and anon-recurrence of a provision for permanent decline in value of investment ofPhp2,052 million recognized in 2001. 

 

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

 

Our loss before income tax,cumulative effect of change in accounting principle and minority interest innet losses of consolidated subsidiaries in 2002 was Php4,594 million, adecrease of Php25,596 million, or 85%, from a loss of Php30,190 million in2001.

 

In 2002 and 2001, our effective corporate tax rate on aconsolidated basis was 31% and 9%, respectively.  Our effective corporate taxrate was lower than the 32% statutory corporate tax rate due to the following:

 

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

 

•        income already subjected to a final tax; and

 

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

 

Smart’s three-year income taxholiday, which will expire in May 2004, applies to the incremental incomegenerated from its GSM network expansion.  

 

***Net Income***

 

As a result of the foregoingfactors, our consolidated net loss in 2002 was Php6,158 million, a decrease ofPhp21,624 million, or 78%, over our consolidated net loss of Php27,782 millionin 2001.  This improvement was largely due to the increase in net income ofSmart and the decrease in net loss of of Piltel and other wireless subsidiariesfor 2002.

 

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

 

Liquidity and Capital Resources

 

Thefollowing table shows our consolidated cash flows, capitalization and otherselected financial data as of and for the years ended December 31, 2003, 2002 and 2001:

** **

 

Years Ended December 31,

 

**2003**

**2002**

**2001**

 

**(in millions)**

Cash Flows

 

 

 

Net cash provided by operating activities

Php40,920

Php39,722

Php20,113

Net cash used in investing activities

18,359

17,167

29,376

Capital expenditures

17,943

17,239

28,201

Net cash provided by (used in) financing activities

(14,135)

(15,954)

3,841

Effect of exchange rate changes on cash and cash equivalents

(28)

97

24

Net increase (decrease) in cash and cash equivalents

8,398

6,698

(5,398)

 

 

 

 

 

December 31,

 

**2003**

** **

**2002**

 

**(in millions)**

Capitalization

 

 

 

Cash and cash equivalents

Php19,372

 

Php10,974

Short-term debt

 

 

 

Current portion of long-term debt

23,816

 

19,625

Notes payable

2,133

 

760

Long-term debt – net of current portion

160,459

 

171,283

Total debt

186,408

 

191,668

Stockholders’ equity

24,745

 

16,413

Total capitalization

Php211,153

 

Php208,081

 

Since 2002, PLDT has pursued anumber of liability management initiatives with the objectives of furtherimproving the balance between its cash flows and debt service requirements andreducing its overall indebtedness.

 

Through these initiatives, PLDT wasable to successfully raise the necessary external financing to fund itsoperating, investing and debt service requirements. 

 

As of December 31, 2003, consolidated cash and cash equivalents amounted to Php19,372 million.  Our principalsources of consolidated cash in 2003 were cash flows from operations amountingto Php40,920 million, drawings from existing long-term credit facilitiestotaling Php17,507 million, and net equity funds raised through PLDT's SIPamounting to Php94 million.  These funds were used principally for capitaloutlays of Php17,943 million, (including capitalized interest of Php887million) and debt principal repayments of Php31,548 million.

 

Principal sources of consolidated cash in 2002 and 2001 werecash flows from operations amounting to Php39,722 million and Php20,113million, respectively; drawings from long-term and short-term credit facilitiesamounting to Php36,011 million and Php7,872 million, respectively, in 2002, andPhp21,823 million and Php13,483 million, respectively in 2001; and equity fundsraised through the issuance of capital stock amounting to Php464 million in2002.  These funds were used principally for capital outlays of Php17,239million (including capitalized interest of Php1,343 million) and payments oflong-term debt amounting to Php43,870 million in 2002; and capital outlays ofPhp28,201 million, (including capitalized interest of Php2,404 million) andpayments of long-term and short-term debt totaling to Php28,960 million andequity funds raised through the issuance of capital stock amounting to Php232million in 2001.

 

***Operating Activities***

 

On a consolidated basis, net cashflows from operating activities in 2003 amounted to Php40,920 million, anincrease of Php1,198 million, or 3%, from Php39,722 million in 2002 and anincrease of Php19,609 million, or 97% from Php20,113 million in 2001.

 

A growing portion of ourconsolidated cash flow is generated by our wireless and data businesses.  Therevenue contribution of these businesses has grown over the last three yearswith wireless business contributing 58%, 50% and 42% in 2003, 2002 and 2001,respectively, and data business contributing an average of 5% in 2003 and 6% in2002 and 2001.  Revenues from our local exchange service accounted forapproximately 19% of our consolidated operating revenues in 2003, down from 23%in 2002 and from 27% in 2001.

 

Our dependence on international andnational long distance services has decreased over the past several years.  In2003, 2002 and 2001, these services together accounted for 17%, 20% and 25%,respectively, of our consolidated operating revenues.  Revenues from our longdistance businesses increased by 5% in 2003 compared to 2002 and decreased by9% in 2002 compared to 2001 due to cellular substitution and declining prices.

 

PLDT's contribution to ourconsolidated cash flows from operations in 2003 was Php11,195 million, adecrease of Php5,992 million, or 35%, from Php17,187 million in 2002, which inturn represents an increase of Php4,321, or 34%, from Php12,866 in 2001.  Thedecrease in 2003 was due to an increase in PLDT’s working capital management,including the decline in level of settlements of certain liabilitiesoutstanding during 2003, compared to 2002.  The increase in 2002, on the otherhand, was attributable to the decline in the level of settlements in 2002 ofcertain payables outstanding, compared to 2001.

 

Our subsidiaries, particularly Smart,made significant contributions to our cash from operations.  In 2003, Smartgenerated cash from operations of Php28,982 million, or 71% of our consolidatedcash flows from operations.  In 2002, Smart generated cash from operations ofPhp19,725 million, or 50%, of our consolidated cash flow from operations.Smart’s strong cash flows reflect the continuing strong performance of itscellular business.  However, Smart is subject to loan covenants that restrictits ability to pay dividends, redeem preferred shares, make distributions toPLDT or otherwise provide funds to PLDT or any associate without the consent ofits lenders.  After receiving approvals from Finnvera and certainlenders for the payment of dividends to PLDT in an amount not to exceed 40% ofSmart’s net income under Philippine GAAP in 2001, Smart made its first dividendpayment of Php1,540 million to PLDT in December 2002.  In addition, Smart paid dividends in the amount of Php4,300 million to PLDT in June 2003, representing 70% ofSmart’s 2002 net income under Philippine GAAP and paid additional dividends inthe amount of Php1,866 million to PLDT inNovember 2003, equivalent to the remaining 30% of its 2002 net income underPhilippine GAAP.  Further, after receiving similar approvals from Finnveraand certain lenders, Smart paid dividends amounting to Php11,280 million toPLDT in May 2004, representing 70% of Smart’s 2003 net income under PhilippineGAAP.  Smart will also be required to obtain furtherwaivers from Finnvera and certain lenders to pay additional dividends in futureperiods.  We cannot assure that Smart will be able to obtain such waivers inthe future, or what amount, if any, Smart would be permitted or financiallyable to distribute.  We expect that we will have difficulty meeting our debtpayment obligations if we do not continue to receive cash dividends from Smart.

 

***Investing Activities***

 

On a consolidated basis, net cashused in investing activities in 2003 was Php18,359 million, an increase ofPhp1,192 million, or 7%, from Php17,167 million in 2002 mainly as a result ofhigher aggregate capital spending.  In contrast, consolidated net cash used ininvesting activities in 2002 was Php17,167 million, a decrease of Php12,209million, or 42%, from Php29,376 million in 2001 as a result of Smart’s lowercapital spending.

 

Our consolidated capital expenditures in 2003 totaled Php17,943million, an increase of Php704 million, or 4%, from Php17,239 million in 2002primarily due to Smart’s increased capital spending partially offset by PLDT’slower capital spending.  Smart's capital spending of Php11,305 million in 2003was used to further expand and upgrade its GSM network to meet the increasingdemand for cellular services.  PLDT's capital outlay of Php6,100 million in2003 was principally used to finance the continued build-out of its data andbroadband/IP infrastructure and its investment in Asia Pacific Cable Network2.  ePLDT and its subsidiaries’ capital spending of Php178 million was used tofund its internet data center, other internet-related business initiatives andcall center business investments.  The remaining balances were spent by othersubsidiaries mainly PLDT Global, Mabuhay Satellite and Subic Telecom.  InDecember 2002, Smart acquired certain PLDT assets, consisting of a portion ofPLDT’s digital fiber optic cable from Luzon to Mindanao and certain relatedequipment, valued at Php4,138 million.

 

Under the terms of Piltel’s debtrestructuring plan, PLDT issued a Letter of Support for the benefit of Pilteland its creditors under which PLDT has agreed to cover any funding shortfallsof Piltel up to a maximum amount of US$150 million.  Under the Letter ofSupport, PLDT provided to Piltel Php2,317 million (US$48 million) in 2000,Php2,039 million (US$41 million) in 2001, and Php571 million (US$11 million) in2002.  There was no drawdown under the Letter of Support in 2003.  Drawingsunder the PLDT Letter of Support are converted into U.S. dollars at the prevailingexchange rates at the time of drawdown.  As of December 31, 2003, the remainingundrawn balance under the PLDT Letter of Support was US$50 million(approximately Php2,793 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(which comprise an aggregate principal of US$0.9 million as of December 31,2003), additional drawings under the Letter of Support would likely be requiredto provide all or a portion of the funds needed by Piltel.  We cannot assurethat additional amounts will not have to be drawn under the Letter of Supportnor can we predict when the remaining undrawn balance under the Letter ofSupport will be exhausted.  Piltel is currently in discussion with itsunrestructured creditors and is seeking to restructure such debt on the termsand conditions of Piltel’s debt restructuring.  However, Piltel may not be ableto restructure or otherwise pay the claims relating to its unrestructureddebt.  See “Item 3. Key Information — Risk Factors — Risks Relating to Us —Piltel has experienced financial difficulties and we cannot assure you that itwill be able to discharge any of its debt or other obligations, including itsdebts or other obligations owed to us and our affiliates.”

 

For 2004, we anticipate reducing the level of our capitalexpenditures and equity investments.  Our 2004 budget for consolidated capitalexpenditures is approximately Php22,000 million, of which approximatelyPhp7,000 million is budgeted to be spent by PLDT for its fixed line data andnetwork services and approximately Php15,000 million is budgeted to be spent bySmart for further expansion and upgrading of its GSM network.

 

Our consolidated capital expenditures in 2002 totaled Php17,239million mainly from PLDT's and Smart's capital spending of Php8,194 million andPhp7,564 million, respectively.  Our consolidated capital expenditures ofPhp28,201 million (including capitalized interest of Php2,404 million) in 2001was largely attributable to PLDT and Smart.

 

***Financing Activities***

 

On a consolidated basis, we used net cash of Php14,135 millionand Php15,954 million for financing activities in 2003 and 2002, respectively,as against net cash provided from financing activities of Php3,841 million forthe year 2001.  The net cash used in financing activities in 2002 as againstnet cash provided by financing activities in 2001 was mainly due to PLDT’s debtrepayments in line with its liability management program.  The net cashprovided by financing activities in 2001 was primarily due to proceeds from theissuance of PLDT's common shares to NTT Communications Capital (UK) Limited, orNTTC-UK, a wholly-owned subsidiary of our strategic partner NTT Communications,amounting to Php13,878 million in 2000.  On a stand-alone basis, Smart’sfinancing activities in 2003 and 2002 used net cash of Php9,251 million andPhp11,764 million, respectively, specifically for debt payments in excess ofloan drawdowns.  Conversely, Smart’s financing activities in 2001 provided netcash of Php11,798 million representing drawings from various credit facilities.

* *

*DebtFinancing*

 

Additions to ourconsolidated long-term debt in 2003 totaled Php17,507 million, consisting of(1) drawings totaling Php13,943 million, primarily from PLDT’s loan facilitiesextended and/or guaranteed by various export credit agencies; and (2) Smart’sdrawings of Php3,564 million, principally from its Phase 5 GSM loan facilities.

 

Our consolidated indebtedness as ofDecember 31, 2003 was Php186,408 million, lower by Php5,260 million, or 3%,compared to Php191,668 million as of December 31, 2002 mainly due to thereductions of Php3,771 million and Php2,305 million in PLDT’s and Smart’sindebtedness, respectively.  PLDT’s non-consolidated indebtedness decreased by3%, from Php141,107 million as of December 31, 2002 to Php137,336 million as of December 31, 2003, due to debt payments in line with our thrust to reducePLDT’s overall indebtedness.  Smart’s indebtedness as of December 31, 2003 stood at Php20,586 million, a decrease of 10% from Php22,891 million as of December 31, 2002.

 

As of December 31, 2003, PLDT hadundrawn committed dollar-denominated long-term credit facilities of US$120million, inclusive of the US$50 million undrawn portion of the US$149 millionKreditanstalt fur Wiederaufbau, or KfW, refinancing facility described below,US$8 million undrawn portion of the US$12 million term loan facility extendedby DEG-Deutsche Investitions-und Entwicklungsgesellschaft mbH under anagreement dated May 29, 2003 and the JPY5,615million syndicated term loan facility supported by Nippon Export and InvestmentInsurance of Japan, or NEXI, under an agreement dated June 11, 2003.  Smart alsohad undrawn committed dollar-denominated long-term credit facilities in theaggregate of US$40 million under the US$100 million NEXI loan facility signedby Smart in November 2002 which was drawn on April 5, 2004.  In addition, Smart still has available facilities under its €50million Framework Agreement with HypoVereinsbank up to a maximum aggregateamount of €44 million.

 

After giving effect to theanticipated application of existing refinancing facilities, the scheduledmaturities of our outstanding long-term debt as of December 31, 2003 are as follows:

 

 

**Consolidated**

**Maturity**

**(in millions)**

 

 

2004

Php23,816

2005

30,172

2006

28,762

2007

29,059

2008

5,733

2009 and onwards

66,733

 

Approximately Php117,542 million principal amount ofour consolidated outstanding long-term debt as of December 31, 2003 is scheduledto mature over the period 2004 to 2008.  Of this amount, approximatelyPhp89,429 million is attributable to PLDT, Php20,586 million to Smart, and theremainder to Mabuhay Satellite, Maratel, ePLDT and Piltel.

 

See “— Certain Indebtedness” for an overview of ourindebtedness. 

 

*Covenants*

 

Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests, calculated on the basis of Philippine GAAP, atrelevant measurement dates, principally at the end of each quarterly period.

 

Thefinancial tests under our debt instruments, as amended, include maintaining apositive tangible net worth and compliance with the following ratios:

 

•        interest coverage ratio, calculated on a non-consolidated basisand excluding PLDT’s equity share in net earnings or losses of investees, ofnot less than 180% or 200%;

 

•        total debt to EBITDA on a non-consolidated basis of not more than5.5:1 on December 31, 2003, not more than 5.0:1 from March 2004 to June 2004,not more than 4.5:1 from September 2004 to December 2004 and not more than4.0:1 from March 2005 and thereafter;

 

•        long-term indebtedness to appraised value of equity/tangible networth on a non-consolidated basis, ranging from not more than 1.1:1 to not morethan 3.0:1;

 

•        current ratio on a non-consolidated basis, ranging from not lessthan 0.9:1 to not less than 1.2:1;

 

•        debt service coverage ratio on a non-consolidated basis of atleast 1.1:1; and

 

•        debt to free cash flow ratio on a non-consolidated basis of notmore than 5.5:1 from September 30, 2003 to June 30, 2004, not more than 5.0:1from September 30, 2004 to June 30, 2005, not more than 4.5:1 from September30, 2005 to June 30, 2006, and not more than 4.0:1 from September 30, 2006onwards.

 

In addition, some of PLDT's debtinstruments contain covenants requiring PLDT to comply with specified financialtests on a consolidated basis calculated on the basis of Philippine GAAP.These include:

 

•        long-term debt to appraised value of equity/tangible net worth ofnot more than 2.33:1;

 

•        total debt to EBITDA of not more than 4.5:1 in 2003 and 2004, andnot more than 4.0:1 in 2005 and thereafter;

 

•        current ratio ranging from not less than 0.75:1 to 0.9:1; and

 

•        interest coverage ratio of not less than 200%.

 

For purposes of deriving appraisedvalue of equity/tangible net worth, we determined the revaluation surplus inrespect of PLDT’s properties.  PLDT’s properties in service as of December 31,1997 were reappraised by an independent firm of appraisers to reflect theirsound value, as part of NTC’s financial reporting requirements, based on theDecember 29, 1997 exchange rate of Php40.116 to 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, 2000 under NTC Case No. 98-183.  As of December 31, 2003 and 2002, the revaluation surplus on PLDT’s 1997 appraised properties still in service, netof a 5% disallowance factor, amounted to Php38,441 million and Php44,984million, respectively.

 

The principal factors that cannegatively affect our ability to comply with these financial ratios and otherfinancial tests are depreciation of the peso relative to the U.S. dollar, pooroperating performance of PLDT and its consolidated subsidiaries, impairment orsimilar charges in respect of investments or other long-lived assets that maybe recognized by PLDT and its consolidated subsidiaries, and increases in ourinterest 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.  As of December 31, 2003, the peso depreciated by 4% to Php55.586 to US$1.00, from Php53.254 to US$1.00 as of December 31, 2002.  The peso has been subjected to significant fluctuations.In 2003, the peso depreciated to Php55.075 to US$1.00 on March 12, 2003 then recovered to a high of Php52.021 to US$1.00 on May 8, 2003 only to depreciate again to a low of Php55.767 to US$1.00 on November 27, 2003.  As of May 31, 2004, the exchange rate was Php55.807 to US$1.00, as compared to Php55.586 atthe end of 2003.

 

PLDT's ability to maintain compliance with financial covenantrequirements measured on a non-consolidated basis is principally affected bythe performance of its fixed line business.  PLDT cannot be assured of thebenefit of net revenues and cash flows generated by Smart and PLDT’s otherinvestees in assisting in complying with non-consolidated covenants.

 

We have maintained compliance with all of our financial ratiosand covenants as measured under our loan agreements and other debtinstruments.  However, if negative factors adversely affect our financialratios, we may be unable to maintain compliance with these ratios and covenantsor be unable to incur new debt.  Under some of our loan agreements, certain ofour financial ratios have become more restrictive at the end of the second andfourth quarters of 2003 and the first quarter of 2004 and will continue tobecome more restrictive in increments thereafter, which will make it moredifficult for PLDT to maintain compliance with this ratio in the future.Inability to comply with our financial ratios and covenants or raise newfinancing could result in a declaration of default and acceleration of some orall of our indebtedness.  The terms of some of our debt instruments have nominimum amount for cross-default.

 

Under PLDT's loan agreements thatrequire maintenance of an interest coverage ratio of at least 180%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)our after-tax net income for the 12 months immediately preceding thecalculation date after:  (1) adding back interest charges, depreciation,amortization and other non-cash charges (including equity share in net earningsor losses of investees but excluding provision for doubtful accounts) andprovision 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.  Our interest coverage ratio calculated on the basis of Philippine GAAPunder these agreements for the 12 months period ended December 31, 2003 was 300% as against the required threshold of not less than 180%. 

 

Under PLDT's loan agreements that require maintenance of aninterest coverage ratio of at least 200%, interest coverage ratio is the ratiocalculated on the basis of Philippine GAAP of (x) our after-tax net incomeafter adding back reserves for higher plant replacement costs, income taxes,interest charges, depreciation, amortization and non-cash charges (includingequity share in net earnings or losses of investees and provision for doubtfulaccounts) during 12 consecutive months within the 15 calendar monthsimmediately preceding the calculation date, to (y) the sum of (1) the estimatedaggregate interest 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.  Our interest coverage ratio calculated on the basis of Philippine GAAPunder these agreements for the 12 months period ended December 31, 2003 was 388% as against the required threshold of not less than 200%.

 

Non-consolidated total debt toEBITDA is the ratio calculated on the basis of Philippine GAAP of (x) PLDT'stotal indebtedness (not including amounts payable by PLDT to Piltel under theLetter of Support) to (y) net income for the preceding 12 months, after addingback interest accrued on all indebtedness, depreciation, amortization and othernon-cash charges (including equity share in net earnings or losses ofinvestees, but excluding provision for doubtful accounts) and provision forincome taxes and deducting any capitalized subscriber acquisition costs.  As of December 31, 2003, our non-consolidated total debt to EBITDA calculated on thebasis of Philippine GAAP was 4.68:1 as against the required threshold of notmore than 5.5:1. 

 

Non-consolidated long-term indebtedness to appraised value ofequity (or under some covenants, to tangible net worth) is the ratio calculatedon the basis of Philippine GAAP of (x) PLDT's aggregate indebtedness (or portionof such 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.  As of December 31, 2003, our non-consolidated long-termindebtedness to appraised value of equity/tangible net worth calculated on thebasis of Philippine GAAP was 0.88:1 as against the most restrictive thresholdof not more than 1.10:1. 

 

Non-consolidated current ratio isthe ratio calculated on the basis of Philippine GAAP of (x) non-consolidatedcurrent assets to (y) non-consolidated current liabilities, excluding fromcurrent liabilities 50% of the portion of long-term indebtedness due within oneyear of the calculation date.  As of December 31, 2003, our non-consolidatedcurrent ratio calculated on the basis of Philippine GAAP was 1.28:1 as againstthe most restrictive threshold of not less than 1.20:1.

 

Debt service coverage ratio is the ratio calculated on the basisof Philippine GAAP of (x) PLDT’s cash flow from operations after adding backinterest charges (to the extent previously deducted) plus (1) dividendsreceived from investees, cash received upon any redemption of redeemablepreferred shares issued by Smart, any cash received under PLDT’s SIP, andinterest income received less (2) capital expenditures (excluding capitalizedinterest) and investments in investees for the 12 months immediately precedingthe calculation date plus (3) PLDT’s closing cash balance as of the last day ofthe calculation period to (y) the sum of the projected interest charges andprincipal debt repayments (excluding debt to be repaid with a refinancingfacility) during the 12 months following the calculation date.  Our debtservice coverage ratio for the 12 months period ended December 31, 2003 calculated on the basis of Philippine GAAP was 1.15:1 as against the requiredthreshold of not less than 1.10:1.

 

Debt to free cash flow ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s debt less PLDT’sclosing cash balance of the last day of the calculation period to (y) PLDT’scash flow from operations after adding back interest charges (to the extentpreviously deducted) plus (1) dividends received from investees, cash received upon any redemption ofredeemable preferred shares issued by Smart, any cash received under PLDT’sSIP, and interest income received less (2) capital expenditures (excludingcapitalized interest) and investments in investees for the 12 monthsimmediately preceding the calculation date.  Our debt to free cash flow ratiofor the 12 months period ended December 31, 2003 calculated on the basis ofPhilippine GAAP was 4.95:1 as against the required threshold of not more than5.5:1.

 

Our consolidated long-term debt toappraised value of equity/tangible net worth, consolidated total debt toEBITDA, consolidated interest coverage and consolidated current ratios duringthe year 2003, each to be calculated pursuant to Philippine GAAP, remainedwithin the limits stipulated in the various loan agreements, including the mostrestrictive current ratio threshold of not less than 0.9:1.

 

PLDT's debt instruments contain anumber of other negative covenants that, subject to certain exceptions andqualifications, restrict PLDT's ability to take certain actions withoutlenders' approval, including:  (1) incurring additional indebtedness; (2)prepaying other debt; (3) making investments;(4) extending loans; (5) extending guarantees or assuming the obligations ofother persons; (6) paying dividends or other distributions or redeeming,repurchasing or otherwise acquiring shares of PLDT’s capital stock; (7)disposing of all or substantially all of its assets or of assets in excess ofspecified thresholds of its tangible net worth; (8) entering into managementcontracts providing for the management of its business or operations by a thirdparty; (9) creating any lien or security interest;(10) permitting set-off against amounts owed to PLDT; (11) merging orconsolidating with any other company; (12) entering into transactions withshareholders and affiliates; and (13) entering into sale and leasebacktransactions.

 

Under the indenture of PLDT's10.625% Notes due 2007 and 11.375% Notes due 2012, PLDT is required to complywith a number of additional covenants, including covenants that, subject tocertain exceptions, restrict PLDT's ability to (1) incur debt unless its ratioof debt to EBITDA calculated on the basis of Philippine GAAP (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 5.5:1 on or prior to December 31, 2003, 5.0:1from January 1, 2004 to December 31, 2004 and 4.5:1 thereafter and (2) paydividends, repurchase or redeem its capital stock, make investments and prepaysubordinated debt, among other things.  Subject to certain exceptions, thesecovenants also restrict our ability to sell assets and to use the proceeds ofthese asset sales.  Our consolidated leverage ratio at December 31, 2003 calculated on the basis of Philippine GAAP was 5.4:1 as against the requiredthreshold of not more than 5.5:1.  We expect that we will have difficultymeeting our debt payment obligations if we do not continue to receive cashdividends from Smart.

 

Under the terms of the US$149million facility with KfW, PLDT is prohibited from paying any dividends oncommon stock until after December 31, 2004.  In addition, under the terms ofPLDT's US$145 million multicurrency term facility agreement and JPY5,615 million syndicated term loan facility,PLDT is restricted from distributing dividends to common stockholders unless(i) no default has occurred which is continuing, and (ii) its debt to free cashflow ratio, after giving effect to the distribution of such dividends and,under certain circumstances, other adjustments to PLDT’s closing cash balance,would be less than 4.0:1.  Under other loan agreements, PLDT may not declare orpay dividends on any of its capital stock without the prior written consent ofthe lenders (i) if PLDT is in default in the payment of any amounts due andpayable under such loan agreement or after the occurrence and during thecontinuance of any other event of default or potential event of default undersuch agreements, (ii) if after giving effect to such action the current ratiowould be less than 1.2:1 or (iii) in an amount greater than PLDT’s net income after taxes during the fiscalyear to which such payment or distribution relates.

 

In case of a change in control ofPLDT, PLDT may be required to repurchase or prepay certain indebtedness.  Underthe terms of the 10.625% Notes due 2007 and 11.375% Notes due 2012, we arerequired to offer to purchase all outstanding notes due 2007 and notes due 2012for cash at a price of 101% of their principal amounts plus accrued interest inthe event that (1) the aggregate of NTT Communications' and First Pacific'sdirect and indirect voting interest in PLDT's outstanding capital stock havingvoting rights falls below 35% of such capital stock, (2) any person or, incertain instances, group of persons, which is not controlled directly orindirectly by First Pacific or NTT Communications acquires a direct or indirectvoting interest in PLDT's outstanding capital stock having voting rights whichequals or exceeds 35% of such capital stock and (3) if a rating agency at suchtime maintains a rating on either series of notes, the rating agency downgradesits credit rating on the series within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(1) and (2) above.

 

Under the terms of our JP¥9,760million loan from JBIC, in the event of any proposed sale or transfer of PLDT'sstock that would result in NTT Communications holding less than 14.95% ofPLDT's voting stock, we will be required to prepay, immediately uponeffectiveness of such sale or transfer, all principal outstanding under theloan, together with accrued interest.  However, prepayment will not be requiredif, following such sale or transfer, (1) NTT Communications continues to haveprior approval rights with respect to all matters as to which NTTCommunications has approval rights under the stock purchase agreement pursuantto which it acquired its shares in PLDT, or (2) JBIC, in its sole discretion,determines that NTT Communications’ participation in the expansion of Smart'sGSM network capacity to extend PLDT’s cellular business in Smart would not bereduced below its level of participation as of the date of the loan agreement.

 

Under the terms of both PLDT’sUS$145 million multicurrency term facility agreement and JP¥5,615 millionsyndicated term loan facility, if any lender so requests in writing, PLDT shallprepay in full such lender’s participation in the loan within 45 days fromnotification of the change in control and no later than the date on which PLDTis required to repurchase its 10.625% Notes due 2007 and 11.375% Notes due 2012(“Bonds”) from bondholders accepting the change in control offer.  A change incontrol is deemed to occur when (1) the aggregate of NTT Communications’ andFirst Pacific’s direct and indirect voting interest in PLDT’s outstanding capitalstock having voting rights fall below 35% of such capital stock, (2) any personor, in certain instances, group of persons, which is not controlled directly orindirectly by First Pacific or NTT Communications acquires a direct or indirectvoting interest in PLDT’s outstanding capital stock having voting rights whichequals or exceeds 35% of such capital stock and (3) if a rating agency at such time maintains a rating on the Bonds, the ratingagency downgrades its credit rating on the Bonds within 90 days (or more, incertain circumstances) following notice of the occurrence of the eventsspecified in (1) and (2) above.

 

PLDT’s debt instruments contain customary and other defaultprovisions that permit the lender to accelerate amounts due or terminate theircommitments to extend additional funds under its debt instruments.  Thesedefault provisions include:  (1) cross-defaults and cross-accelerations thatpermit a lender to declare a default if PLDT is in default under another debtinstrument; in some cases, the cross-default provision is triggered upon apayment or other default permitting the acceleration of PLDT’s debt, whether ornot the defaulted debt is accelerated.  In other cases, the cross-defaultprovision requires the defaulted loan to be accelerated. In some debtinstruments, the cross-default provision will be triggered only if theprincipal amount of the defaulted indebtedness exceeds a threshold amountspecified in these debt instruments; (2) failure by PLDT to meet certainfinancial ratio covenants referred to above; (3) 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; (4) the revocation, termination or amendment of any of the permits orfranchises of PLDT in any manner unacceptable to the lender; (5) theabandonment, termination or amendment of the project financed by a loan in amanner unacceptable to the lender; (6) the nationalization or sustaineddiscontinuance of all or a substantial portion of PLDT’s business; and (7)other typical events of default, including the commencement of bankruptcy,insolvency, liquidation or winding up proceedings by PLDT.

 

*FinancingRequirements*

 

We believethat our available cash, including cash flow from operations and drawings fromexisting credit facilities, will provide sufficient liquidity to fund ourprojected operating, investment, capital expenditures and debt servicerequirements for the next 12 months.  Further, as described above, we havecompleted a number of initiatives under our liability management program tomeet our debt service requirements in the short and medium term.

 

We continue to pursue variousinitiatives and financing transactions with the objective of further improvingthe balance between our cash flows and debt service requirements and reducingour overall indebtedness.  In addition, PLDT has reduced its capitalexpenditures and investments, suspended dividend payments to common shareholdersand increased its application of available cash to reduce its indebtedness.Further, we expect to benefit from increasing revenue and cash flowcontributions from our subsidiaries, particularly Smart.  After receivingapprovals from Finnvera and certain lenders for the payment of dividends toPLDT in an amount not to exceed 40% of Smart’s net income under Philippine GAAPin 2001, Smart made its first dividend payment of Php1,540 million to PLDT inDecember 2002.  Inaddition, Smart paid dividends in the amount of Php4,300 million to PLDT in June 2003, representing 70% ofSmart’s 2002 net income under Philippine GAAP, and paid additional dividends inthe amount of Php1,866 million to PLDT inNovember 2003, equivalent to the remaining 30% of its 2002 net income underPhilippine GAAP.  Further, after receiving similar approvals from Finnvera andcertain lenders, Smart paid dividends amounting to Php11,280 million toPLDT in May 2004, representing 70% of Smart’s 2003 net income under PhilippineGAAP.  Smart will be required to obtain furtherwaivers from Finnvera and certain lenders to pay additional dividends in futureperiods.  We cannot assure that Smart will be able to obtain such waivers inthe future, or what amount, if any, Smart would be permitted or financiallyable to distribute.  We expect that we will have difficulty meeting our debtpayment obligations if we do not continue to receive cash dividends from Smart.

 

*CreditRatings*

 

Our credit ratings maysignificantly affect the terms of our prospective financings, particularlyfinancing costs.  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 April 8, 2004, Fitch Ratingsupgraded PLDT’s long-term foreign currency and local currency rating to“BB” from “BB-” (BB minus) while the rating of PLDT’s convertible preferredshare was similarly upgraded to “B+” (B plus) from “B”.  The rating actionfollows a sustained period of improvement in PLDT’s operating and financialprofile mainly due to the growth of Smart.  The stable outlook also reflectsFitch’s view that neither the existing competitive landscape not the plannedresumption of common share dividends by PLDT would materially disrupt ourdeleveraging efforts.

 

On March 23, 2004, Standard and Poor’s Ratings Group affirmed its “BB” rating and stable outlook on PLDT.  On April 22, 2003, Standard & Poor’s Ratings Group affirmed its “BB” rating and stableoutlook on PLDT.

 

On January 27, 2004, PLDT’s foreigncurrency senior unsecured debt rating was upgraded by Moody’s Investors Serviceto “Ba2” from a recent “Ba3” as of July 29, 2003 and preferred share ratingmoved up to “B1” from “B2.”  The rating reflects continued improvements in theoperating performance of Smart and the expectation of on-going free cash flowto help repay debt maturities in the coming years.  The negative outlook onPLDT's rating is constrained, reflecting Moody's decision to downgrade thePhilippine Government's long-term foreign currency bond rating to “Ba2” with anegative outlook also on January 27, 2004.

 

On December 10, 2003, PhilRatings affirmed its rating of “PRS1”for PLDT’s Php2.0 Billion One-Year Peso Notes which registration was renderedeffective by the Philippine Securities and Exchange Commission on April 9, 2003.  PRS1 is the highest rating possible on PhilRatings’ scale for short-termsecurities and is based on the issuer’s “strongest capability for timelypayment of debt on both principal and interest.”

 

A credit rating is not a recommendation to purchase, hold orsell securities as much as such rating does not comment as to market price orsuitability for a particular investor.  In addition, a credit rating is subjectto revision or withdrawal at any time by the credit rating assigningorganization.  There is no assurance that the credit ratings will remain ineffect for any given period or that the ratings will not be revised, downwardsor upwards, by the rating agency in the future.

 

*Off-Balance Sheet Arrangements*

 

On October 10, 2002, PLDT entered into a Receivables Purchase Deed with a foreign financial institution, or thePurchaser, 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 when PLDT commits abreach on its representations and warranties under the Receivables PurchaseDeed.  For the years ended December 31, 2003 and 2002, receivables sold underthe Receivables Purchase Deed amounted to US$11 million (Php608 million) withresulting losses of US$1.5 million (Php84 million) and US$3 million (Php165million), and with resulting losses of US$0.5 million (Php 25 million),respectively.

 

Pursuant to separate MasterReceivables Purchase and Sale Agreements with Citibank, N.A., Hong Kong andCharta Corporation of New York, PLDT made sales of eligible receivables fromcertain foreign carriers totaling US$59 million (Php3,029 million) in 2001 thatresulted in losses of US$2 million (Php103 million).  In 2002, no receivableswere sold under these two agreements.  The agreement with Charta Corporationwas terminated on June 27, 2002, while the agreement with Citibank N.A., Hong Kong, was terminated on September 18, 2002.  

 

*Equity Financing*

* *

Through our SIP, which provides postpaidfixed line subscribers the opportunity to buy shares of our 10% CumulativeConvertible Preferred Stock as part of the upfront payments collected fromsubscribers, PLDT was able to raise Php94 million, Php464 million and Php232million in 2003, 2002 and 2001, respectively.  As approved by the NTC, the SIPwas made optional in 2003 from being compulsory in earlier years.

 

Cash dividend payments amounted toPhp1,603 million in 2003 and Php1,582 million in 2002, all of which were paidsolely to preferred shareholders of PLDT.  In 2001, cash dividend paymentstotaled Php1,819 million, of which Php402 million was paid to commonshareholders of PLDT and the remainder to its preferred shareholders.  The mostrecent cash dividends paid by PLDT to its common shareholders was in April2001, and no dividends were paid to PLDT’s common shareholders in 2002 or 2003.

 

***Contractual Obligationsand Commercial Commitments***

 

*ContractualObligations*

 

The following table discloses ourcontractual obligations outstanding as of December 31, 2003:

 

 

**Payments Due by Period**

 

**Long-term debt obligations**

** **

**Long-term lease obligations**

** **

**Unconditional purchase obligations**

** **

**Other long-term obligations**

** **

**Total**

 

 

 

**(in millions)**

 

 

 

 

 

 

 

 

 

 

 

 

2004

Php23,816

 

Php978

 

Php1,629

 

Php–

 

Php26,423

2005

30,172

 

829

 

1,132

 

–

 

32,133

2006

28,762

 

625

 

1,121

 

–

 

30,508

2007

29,059

 

482

 

1,112

 

–

 

30,653

2008

5,733

 

280

 

1,112

 

13,774

 

20,899

2009 and onwards

66,733

 

1,154

 

4,447

 

8,124

 

80,458

Total

Php184,275

 

Php4,348

 

Php10,553

 

Php21,898

 

Php221,074

* *

*Long-termDebt Obligations*

 

Fordiscussion of our long-term debt obligations, see *Note 14 – Long-term Debt*to the accompanying consolidated financial statements in Item 18.

 

*Long-termLease Obligations*

 

***Municipal Telephone Projects***.In 1993, PLDT entered into two lease agreements with the Philippine Departmentof Transportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under theseagreements, PLDT was granted the exclusive right to perform telecommunicationsmanagement services, to expand services, and to promote the use ofDOTC-contracted facilities in certain covered areas for a period of 15 years.Title to the properties shall be transferred to PLDT upon expiration of thelease term.  As of December 31, 2003, PLDT’s aggregate remaining obligationunder these agreements was approximately Php875 million.  In case ofcancellation, PLDT is liable to pay Php100 million under each of the twocontracts as liquidated damages.

 

***Domestic Fiber Optic NetworkSubmerged Plant Agreement***.   On July 4, 2000, PLDT entered into anagreement with NTT World Engineering Marine Corporation for submarine cablerepair and related services for the maintenance of PLDT's DFON submerged plantfor a period of five years up to July 4, 2005.  Under this agreement, PLDT isrequired to pay NTT World Engineering Marine Corporation a fixed annualstanding charge of US$2 million, excluding cost for the use of aremotely-operated submersible vehicle at US$5,000 for every day of use andrepair cost computed at US$19,000 per day of actual repair.  As of December 31, 2003, PLDT’s aggregate remaining obligation under this agreement wasapproximately Php185 million.

 

***Digital PassageService Contracts.***   PLDT has existing Digital Passage ServiceContracts with foreign telecommunication administrations for several dedicatedcircuits to various destinations for ten to 25 years expiring at variousdates.  As of December 31, 2003, PLDT’s aggregate remaining obligation underthese contracts amounted to approximately Php41 million.

 

***License Agreement with MobiusManagement Systems (******Australia******) Pty Ltd., or Mobius****.*PLDT entered into a license agreement with Mobius pursuant to which Mobiushas granted PLDT a non-exclusive, non-assignable and non-transferable licensefor the use of computer software components.  Under this agreement, Mobius isalso required to provide maintenance services for a period of one year at noadditional maintenance charge.  PLDT may purchase maintenance services uponexpiration of the first year for a fee of 15% of the current published licensefee.  As of December 31, 2003, PLDT’s aggregate remaining obligation under thisagreement was approximately Php65 million.

 

***Other Long-term LeaseObligations***.   We have various long-term lease contracts for periodsranging from two to ten years covering certain offices, warehouses, cell sites,telecommunication equipment locations and various office equipment.  Inparticular, Smart has lease obligations aggregating Php2,309 million as of December 31, 2003 in respect of office and cell site rentals with over 2,000 lessorsnationwide.

 

*Unconditional PurchaseObligations*

 

***Air time Purchase Agreementwith ACeS International Limited***.   PLDT is a party to a Founder NSP,Air Time Purchase Agreement with AIL in March 1997, which was amended inDecember 1998, under which PLDT is granted the exclusive right to sell AILservices in the Philippines.  In exchange, the Air Time Purchase Agreementstates that PLDT is required to purchase from AIL a minimum of US$5 millionworth of air time annually over ten years commencing on the date of commercialoperations of the Garuda I satellite.  In the event AIL’s aggregate billingrevenue is less than US$45 million in any given year, the Air Time PurchaseAgreement also states that PLDT is required to make supplemental air timepurchase payments not to exceed US$15 million per year during the ten-yearterm.

 

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

 

In March 2003, PLDT, together withthe other founder NSPs, entered into a Standstill Agreement with AIL suspendingthe application and enforcement of the minimum and supplemental air timepayments under the original Air Time Purchase Agreement.  In lieu of thesepayments, the parties agreed that AIL shall provide PLDT and the other foundershareholders with unlimited use of air time for the year 2003 in exchange for afixed fee in the amount of US$3.8 million for PLDT.  Moreover, PLDT was alsoobliged to purchase from AIL 13,750 satellite phone units in 2003 at US$395F.O.B. per unit, subject to quarterly price adjustments.  On February 10, 2004,notwithstanding the ongoing negotiations, AIL advised PLDT of the terminationof the Standstill Agreement and the reinstatement of the terms of the originalAir Time Purchase Agreement following the lapse of the November 15, 2003deadline for the negotiation of the revised Air Time Purchase Agreement.

 

As of December 31, 2003, PLDT’s aggregate remaining minimum obligation under the original Air Time PurchaseAgreement was approximately Php10,081 million.  

 

***International AffiliateAgreement with VeriSign, Inc., or VeriSign.***   On September 15, 2000, ePLDT entered into an agreement with VeriSign for the non-exclusive,non-transferable right and license to use the VeriSign software, brand andCertification Practice Statement for the purpose of approving, issuing,suspending or revoking digital certificates for users of the internet orsimilar open systems in the Philippines for a period of seven years.  Underthis agreement, ePLDT is required to pay VeriSign a certain percentage of therevenue derived from the services subject to minimum annual royalty paymentsaggregating to US$1.18 million, which was subsequently reduced to US$0.9million, for the seven-year contract period.  In addition, ePLDT was requiredto pay an annual support fee totaling US$0.5 million during the first year andUS$0.3 million in each year thereafter.  

 

Effective July 1, 2003, VeriSignhas agreed to amend the Agreement and issued Addendum 6 to write-off all pastdue invoices and payments owed to VeriSign, which were invoiced or scheduled tobe invoiced under the agreement prior to this Addendum 6.  All royalty paymentsand annual support fees due through June 2003 will be part of the write-off inthe amount of US$0.8 million.  For contract year 4 (September 2003-August2004), the annual support fee will be reduced from US$0.3 million to US$40,000and for contract years 5-7 (September 2003-August 2007) from US$0.3 million toUS$0.16 million.  In addition, VeriSign agreed to reduce the affiliate revenuesharing rates from 50% of suggested retail price to 25% of suggested retailprice for both enterprise and internet products for 12 months starting July2003 and negotiable thereafter.  As of December 31, 2003, ePLDT’s aggregateremaining minimum obligation under this agreement was approximately Php26million pertaining to annual support fee.

 

***License Purchase Agreementwith I-Contact Solutions Pte. Ltd.***   On April 2, 2003, iPlus Intelligent Network Inc., or iPlus, a wholly-owned subsidiary of ePLDT, entered into an ApplicationServices Provider, or ASP, and Reseller Contract with I-Contact Solutions Pte.Ltd., or I-Contact, of Singapore.  Under the agreement, iPlus will purchaselicenses of the CosmoCall UniverseTM IP-based contact centersolution.  CosmoCall Universe supports multi-channel customer interactionsincluding telephone, web chat, web voice, web video, web collaboration, e-mailand 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 ofother management applications.  The aggregate value of these licenses is US$2.1million and these licenses will be granted quarterly over a two-year period.Further to the agreement, I-Contact will appoint iPlus as the exclusivereseller and ASP for the Philippine market and will provide iPlus with all thenecessary support in terms of sales, marketing, and technical services.  As of December 31, 2003, iPlus’ aggregate remaining obligation under this agreement was US$1.5million (approximately Php83 million).

 

***Other Unconditional PurchaseObligations.***PLDT has various purchase contracts for periods rangingfrom two to three years covering the use of fraud management system andsatellite hub and remote VSAT network systems.

 

*Other Long-term Obligations*

 

***Mandatory Conversion andPurchase of Shares***.   On June 4, 2001, PLDT issued a total of 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.  In 2002, PLDT issued additional 30,100 shares of Series V ConvertiblePreferred Stock and 14,087 shares of Series VI Convertible Preferred Stock inexchange for a total of 220,935 shares of Series K, Class I ConvertiblePreferred Stock of Piltel.  In 2003, PLDT issued additional 110,908 shares ofits Series VI Convertible Preferred Stock in exchange for 554,540 shares ofPiltel’s Series K, Class I Convertible Preferred Stock.  Each share of SeriesV, VI and VII PLDT Convertible Preferred Stock is convertible at any time atthe option of the holder into one share of PLDT’s common stock.  On the dateimmediately following the seventh anniversary of the issue date of the Series Vand Series VI Convertible Preferred Stock and on the eighth anniversary of theissue date of the Series VII Convertible Preferred Stock, the remainingoutstanding shares under these series will be mandatorily converted to sharesof PLDT’s common stock.  Under a put option exercisable for 30 days, holders ofcommon share received on mandatory conversion will be able to require PLDT topurchase such shares of PLDT’s common stock for Php1,700 or US$36.132 orJP¥4,071.89 per share, depending on the series.

 

As of December 31, 2003, 145,320 shares of Series V Convertible Preferred Stock and 531,251 shares of Series VIConvertible Preferred Stock were converted to shares of PLDT’s common stock.The aggregate value of the put option based on outstanding shares as ofDecember 31, 2003 was Php21,898 million, ofwhich Php13,774 million is payable on June 4,2008 and Php8,124 million on June 4, 2009, ifall of the outstanding shares of Series V, VI and VII Convertible PreferredStock were mandatorily converted and all the underlying shares of common stockwere put to PLDT.  The market value of the underlying shares of common stockwas Php10,763 million, based on the marketprice of PLDT’s common stock of Php970 pershare as of December 31, 2003.  See *Note 16 – Preferred Stock Subject toMandatory Redemption* and *Note 17 –Stockholders’ Equity* to theaccompanying consolidated financial statements in Item 18 for furtherdiscussion.

 

CommercialCommitments

 

As of December 31, 2003 and 2002, our outstanding commercial commitments, in the form of letters of credit, amountedto Php2,640 million and Php3,610 million, respectively.  These commitments willexpire within one year.

 

In October 1998, Smart entered intoa Frame Supply Contract with Nokia Telecommunications OY for the supply ofhardware, software and documentation for its GSM cellular network.  In the samemonth, Smart and Nokia (Philippines), Inc., or Nokia, signed a Frame ServicesContract that covers the design, planning, installation, commissioning,integration, acceptance testing, training and handling over of the GSMnetwork.  In August 2001, Smart issued a Master Purchase Order, or MPO, in theamount of US$200 million in favor of Nokia Networks OY for the purchase ofadditional equipment to expand its GSM cellular network.  The US$200 millionMPO was completed in November 2003.  On May 30, 2003, Smart entered into aTechnical Support Services Order, or TSSO, with Nokia in the amount of US$8million.  This TSSO has been fully served as of December 31, 2003.

** **

In January 2004, Smart signed a newMPO in favor of Nokia amounting to US$117 million (Phase 7 under the FrameSupply Contract between Smart and Nokia).  Smart is, however, under no legalobligation to incur these expenditures.

** **

As of December 31, 2003, Smart had no guarantee obligations,standby repurchase obligations or other commercial commitments.

** **

Effect of Peso Depreciation

 

In 2001, 2002 and 2003, ouroperating revenues that have been received in U.S. dollars or in respect ofwhich we have been able to adjust our service fees to reflect changes in thepeso-to-dollar exchange rate, exceeded our U.S. dollar-linked operatingexpenses.  As a result, the depreciation of the peso against the dollar overthis period had a positive net impact on our operating profit.  However, sincesubstantially all of our indebtedness is denominated in U.S. dollars, suchdepreciation has also increased our interest expense in peso terms andincreased the peso amounts of our U.S. dollar-denominated indebtedness.  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.

 

To manage foreign exchange risks,stabilize cash flows, and improve investment and cash flow planning, we enterinto forward foreign exchange contracts, foreign currency swap contracts,currency options and other hedging products aimed at reducing and/or managingthe adverse impact of changes in foreign exchange rates on our operatingresults and cash flows.  However, these hedges do not cover all of our exposureto foreign exchange risks, and hedges to cover all of our exposure are notcurrently nor readily available.  On a limited basis, we enter into interestrate swap agreements in order to manage our exposure to interest ratefluctuations.  See “Item 11. Quantitative and Qualitative Disclosures aboutMarket Risks — Foreign Exchange Risk Management and —Interest Rate Risk Management.”

 

Impact of Inflation and Changing Prices

 

Inflation can be a significantfactor in the Philippine economy, and we are continually seeking ways tominimize its impact.  In recent periods, while decreases in the relative valueof the peso have had a significant effect on us, we do not believe inflation hashad a material impact on our operations.  The average inflation rate in the Philippinesin 2003 was 3%, the same level as in 2002.

 

Other Information

 
***GSM Association honors Smart Load***

** **

*Smart Load*, the first“over-the-air” reloading service introduced by Smart, which allows forsmall-denomination reloads was awarded as the “Best Mobile Application orService – Consumer Market” at the annual GSM Association awards.  The BestMobile Application or Service award recognizes new and innovative products or serviceswhich contribute to industry growth.  The GSM association is comprised of over600 GSM mobile operators and 140 suppliers from more than 200 countriesworldwide.

*** ***

***PLDT Named as Best Managed Company in the******Philippines******for 2003 by Asiamoney***

** **

PLDT has been named as the Philippines’Overall Best Managed Company in 2003 by *Asiamoney*.**PLDT was toppicked in a survey that ranked Asia’s leading listed companies in 2003 by morethan 200 investors from over 180 institutions worldwide.  PLDT also placedfirst in the following categories:

 

•                    Best in Corporate Strategy

 

•                    Best in Financial Management

 

•                    Best in Operational Efficiency

 

•                    Best in Investor Relations

 

•                    Best Focus on Shareholder Value

 

•                    Most Improved in Corporate Governance

 

***Smart’s Proposed Exchange Offer to Piltel Creditors***

*** ***

On March 23, 2004, Smart sent out invitations to the creditorsof Piltel, subject to certain terms and conditions, to offer to sell theirindebtedness to Smart in exchange for:  (a) cash (in U.S. Dollars or PhilippinePesos); and/or (b) U.S. dollar-denominated loan obligations of Smart; and/or(c) in consideration of delivery of U.S. dollar-denominated bonds guaranteed bythe Republic of the Philippines.  This offer is only being extended to personsoutside of the United States and no jurisdictional means of the United Statesare being used in connection with the offer.  The options available to Piltelcreditors are as follows:

 

•        Cash settlement up to an aggregate amount of US$20 million at amaximum exchange price of US$0.40 for each US$1.00 equivalent of Piltel debtexchanged;

 

•        US$ Smart debt maturing in December 2007 at the rate of US$0.525for each US$1.00 equivalent of Piltel debt exchanged, with interest at US$LIBOR plus 1% per annum, payable quarterly;

 

•        US$ Smart debt maturing in December 2008 at the rate of US$0.575for each US$1.00 equivalent of Piltel debt exchanged, with interest at US$LIBOR plus 1% per annum, payable quarterly;

 

•        US$ Smart 10-year debt maturing in June 2014, at par by referenceto the US$1.00 equivalent of Piltel debt exchanged, with fixed interest at2.25% per annum, payable quarterly;

 

•        For Yen Trade creditor, US$ Smart 10-year debt maturing in June2014, at par by reference to the US$1.00 equivalent of Piltel debt exchanged,with fixed interest at 2.25% per annum, payable quarterly and with an option toelect, by not less than 15 months’ prior notice, for an early repayment at adiscount either on December 2007 at 52.5% of the relevant debt amount or onDecember 2008 at 57.5% of the relevant debt amount; and

 

•        12-year US$ Republic of the Philippines-guaranteed bonds, at par,with a 2% coupon per annum, payable semi-annually (this option is not availableto Piltel bondholders).

 

Piltel creditors were initially given four weeks from the datethe letters of invitation were issued to respond to Smart’s offer.  Smartstated in the invitations to the creditors of Piltel that it will only proceedwith the debt transaction if the following conditions are met:

 

•        At least 75% in aggregate of existing Piltel debt by valueoffered by the creditors is exchanged for one or more of the menu of options;

 

•        Minimum acceptance thresholds for each facility are met, asfollows:

 

-  100% by principal amount of Yen Trade Facility;

-   67% byprincipal amount of the Peso and US$ Facility Agreements;

-   US$65 millionface value of the bonds (Conversion Notes);

-   67% byprincipal amount of the US$ Trade Facilities; and

-  50.01%by principal amount of the Term Notes Facility Agreement. 

 

•   Certain waivers/amendments relating toPiltel’s existing indebtedness are obtained, including the termination of thePLDT Letter of Support.

 

On April 24, 2004, Smart extended the deadline for Piltel creditors to make an offer to sell their Piltel debt for10 days until April 30, 2004.  On May 3, 2004, Smart granted one furtherextension of the deadline for Piltel creditors to make offers to sell theirPiltel debt until May 31, 2004.

 

As of June 8, 2004, Smart had received offers from Piltel creditors representing approximately 69% in aggregate ofthe outstanding restructured Piltel debt, to sell their Piltel debt to Smart.  

 

Some Piltel creditors who opted not to participate in thetransaction nonetheless have indicated that they will consent to certainamendments to the agreements governing Piltel’s restructured indebtedness, thuspermitting Smart to achieve its overall commercial objectives in proceeding toclose the transaction.  Given this development, the board of directors of PLDThas authorized Smart to proceed with the transaction despite not having met theabovementioned 75% aggregate acceptance level.

 

Based on the offers received by Smart, the following is abreakdown of the options to be allocated to the participating Piltel creditorsand their percentages of the total amount of Piltel’s outstanding restructureddebt:

 

Option
 
**Allocation**

** **

**Exchange**

** **

**New Debt/Cash**

** **

**Amount**

** **

**%**

** **

**Ratio (%)**

** **

**Outlay of Smart**

** **

** **

(in millions, except percentage)

 

 

 

 

 

 

 

 

 

2014 Smart Debt(1)

 

US$271.5

 

65.4

 

100.0

 

US$271.5

2007 Smart Debt

 

6.9

 

1.7

 

52.5

 

3.6

2008 Smart Debt

 

5.0

 

1.2

 

57.5

 

2.9

Cash

 

3.8

 

0.9

 

40.0

 

1.5

**Total**

** **

**US$287.2**

** **

**69.2**

** **

** **

** **

**US$279.5**

___________

 

(1) *Included in Other Creditors are creditorsrepresenting 9.2% of Piltel’s outstanding restructured debt equivalent toUS$38.1 million who had chosen the Republic of the Philippines-guaranteed bondoption and are going to be allocated their chosen alternative option.  Afterintensive efforts to arrange an appropriate Republic of thePhilippines-guaranteed facility, Smart has determined that it would not bepossible to arrange this facility in time for the proposed closing of thetransaction.  Accordingly, Smart will be advising those creditors who chose theRepublic of the Philippines-guaranteed bond option of its decision to providethem with their alternative selection, which in all cases, is the 2014 Smartdebt.*

 

Based on the allocation above, Smart will be issuing US$278 millionof new debt and paying US$1.5 million of cash upfront.  Smart currently plansto close this debt transaction in the month of July 2004.  Closing is subjectto, among other things, the trustees and agents of the various Piltel debtfacilities confirming their ability to act in the manner contemplated by theinvitation, including to enable implementation of the relevant waivers andamendments.

 

In anticipation of the successful closure of the debt exchangetransaction and after having now received consents from its creditors, Smartintends to commence the process of acquiring PLDT’s equity interests in Piltelconsisting of 767 million common shares (representing 45.3% of Piltel’soutstanding common shares) and 59 million shares of Series K, Class IConvertible Preferred Stock (convertible into Piltel common stock at a ratio of170:1).  The consideration for the share transfer will be determined at a laterdate.  Smart expects to complete this part of the transaction later in thesecond half of 2004 and expressed no intention to enter into a statutory mergerwith Piltel or to use Piltel as a backdoor listing vehicle.  

 

Certain Indebtedness

 

Our aggregateoutstanding indebtedness (including short-term debt), on a consolidated basisas of December 31, 2003, amounted to Php186,408 million (US$3,353 million) andtheir respective maturities are shown below:  

 

**Maturity**

 

**Aggregate Outstanding Indebtedness**

 

 

**(in millions)**

 

 

 

PLDT

 

Php137,336

Smart

 

20,586

Piltel

 

23,433

Mabuhay Satellite

 

4,722

ePLDT

 

305

Maratel

 

26

 

 

Php186,408

 

 

Maturity

**Aggregate Outstanding Indebtedness**

** **

**(in millions)**

2004 (January 1 through December 31, 2004)

US$467

Php25,949

2005

543

30,172

2006

517

28,762

2007

523

29,059

2008 

103

5,733

2009 and onwards

1,201

66,733

 

Approximately 94% of our totalconsolidated indebtedness is denominated in currencies other than Philippinepesos, predominately U.S. dollars.

 

***Overview of PLDT'sIndebtedness***

 

PLDT obtainscredit from a variety of sources, including bank loans and capital marketsissuances.  As of December 31, 2003, PLDT on a non-consolidated basis hadUS$2,471 million aggregate principal amount of outstanding indebtedness (includingshort-term debt).  Approximately 96% of PLDT's non-consolidated outstandingindebtedness is denominated in currencies other than Philippine pesos,predominately U.S. dollars, and 28% accrues interest at a floating rate.US$1,644 million of this debt is scheduled to mature through 2008.

 

PLDT'saggregate outstanding indebtedness (including short-term debt) on anon-consolidated basis as of December 31, 2003 and their respective maturitiesare shown below:

 

Maturity

**Aggregate Outstanding Indebtedness**

** **

**(in millions)**

2004 (January 1 through December 31, 2004)

US$320

Php17,783

2005

399

22,188

2006

388

21,547

2007

455

25,282

2008 

82

4,562

2009 and onwards

827

45,974

 

In 2003 and 2002, PLDT pursued anumber of liability management initiatives with the objectives of furtherimproving the balance between its cash flows and debt service requirements andreducing its overall indebtedness.

 

As part of these initiatives, PLDTwas successful in raising external financing to fund a portion of its projectedoperating, investing and debt service requirements.  On January 25, 2002, PLDT signed two loan agreements with KfW that provided PLDT with a refinancingfacility of US$149 million.  On May 2, 2002, PLDT completed a global offeringof notes in the aggregate amount of US$350 million with a simultaneous tenderoffer for PLDT’s 8.5% Notes due 2003 and 10.625% Notes due 2004, which closedon May 15, 2002.  On July 26, 2002, PLDT signed a loan agreement with JBIC inthe total amount of JP¥9,760 million under JBIC’s overseas investment loanprogram.  On September 4, 2002, PLDT signed a US$145 million syndicatedmulticurrency term loan facility, the first tranche of which was drawn on June18, 2003 to refinance a portion of the outstanding principal balance of theJapanese yen syndicated term loan which matured on the same date, and thesecond tranche was drawn on December 22, 2003 to refinance a portion of theoutstanding principal balance of a U.S. dollar term loan which matured on thesame date.  On November 28, 2002, Smart signed a US$100 million term loanfacility supported by NEXI of which US$60 million was drawn on November 28, 2003 and was outstanding as of December 31, 2003.  The US$40 million balancewas drawn on April 5, 2004.  

 

On May 29, 2003 PLDT obtained a US$12 million term loan facility from DEG-Deutsche Investitions-undEntwicklungsgesellschaft mbH.  As of December 31, 2003, this loan has anoutstanding balance of US$4 million.   

 

On June 11, 2003, PLDT also signed a JPY5,615 million syndicated termloan facility supported by NEXI.  As of December 31, 2003, we have not made any drawdowns under this facility.  An initial drawdown of JP¥960 millionwas made on April 5, 2004.

 

For a discussion of some of thecovenants, including financial ratios, negative pledges and defaults under ourdebt instruments, see “— Liquidity and Capital Resources — Financing Activities— Debt Financing — Covenants.”

 

***Loans Supported byExport Credit Agencies***

 

In order toobtain imported components for our network infrastructure in connection withour expansion and service improvement programs, PLDT obtained loans extendedand/or guaranteed by various export credit agencies.  These financings accountfor a significant portion of PLDT's indebtedness.

 

KfW, a German state-owneddevelopment bank, is our largest single creditor.  As of December 31, 2003, PLDT owed to KfW an aggregate principal amount of US$398 million, as follows:

 

•        US$298 million provided under various export credit agency-backedfacilities, of which US$221 million was provided in connection with ourexpansion and service improvement programs and US$77 million in connection withthe US$149 million refinancing facility discussed below; and

 

•        US$100 million provided for the 15% downpayment portion andcredit facilities without guarantee/insurance cover from the export creditagencies, of which US$22 million was in connection with the US$149 millionrefinancing facility discussed below.

 

On January 25, 2002, PLDT signed two loan agreements with KfWthat provided PLDT with a US$149 million facility to refinance in part therepayment installments under PLDT’s existing loans from KfW due from January2002 until December 2004.  The facility is composed of a nine-year loan,inclusive of a three-year disbursement period and a two-year grace periodduring which no principal is payable.  It partly enjoys the guarantee ofHERMES, the export credit agency of the Federal Republic of Germany.Disbursements under this facility, which are made as the KfW loans to be repaidfall due, are currently available.  We have drawn US$99 million (Php5,520million) under this facility as of December 31, 2003.

 

After giving effect to therefinancing facility, US$38 million of our KfW loans mature in 2004, US$82million mature in 2005, US$57 million mature in 2006, US$78 million mature in2007, US$58 million mature in 2008 and US$85 million mature in 2009 andonwards.  Principal amortization on these loans is generally payable in equalsemi-annual installments.

 

PLDT has also obtained loans extended and/or guaranteed by otherexport credit agencies, including JBIC, the Export-Import Bank of the United States, and respective export credit agencies of France, Italy, Israel, Sweden, Denmark, Canada, Australia, Singapore and the United Kingdom, in the aggregateoutstanding principal amount of US$201 million as of December 31, 2003.  Of the amounts outstanding under these loans, US$63 million mature in 2004, US$52million mature in 2005, US$42 million mature in 2006, US$32 million mature in2007, US$8 million mature in 2008 and US$4 million mature in 2009 and onwards.

 

***Fixed Rate Notes***

 

PLDT has eight series ofnon-amortizing fixed rate notes outstanding as of December 31, 2003, as follows:

 

**Principal Amount**

 

**Issue Date**

**Interest Rate**

** **

**Maturity**

 

 

 

 

 

 

US$77,002,000

 

June 2, 1994

10.625%

 

June 2, 2004

US$138,210,000

 

July 31, 1995

9.875%

 

August 1, 2005

US$175,000,000

 

June 28, 1996

9.250%

 

June 30, 2006

US$200,000,000

 

March 6, 1997

7.850%

 

March 6, 2007

US$100,000,000

 

May 2, 2002

10.625%

 

May 15, 2007

US$175,000,000

 

April 13, 1999

10.500%

 

April 15, 2009

US$250,000,000

 

May 2, 2002

11.375%

 

May 15, 2012

US$300,000,000

 

March 6, 1997

8.350%

 

March 6, 2017

 

On May 2, 2002, PLDT issued 10.625%Notes due 2007 in the aggregate principal amount of US$100 million and 11.375%Notes due 2012 in the aggregate principal amount of US$250 million.  The netproceeds from the issuance of the notes were used to effect the repurchase of(1) US$63 million in principal amount of our 8.5% Notes due 2003 and US$117 millionin principal amount of our 10.625% Notes due 2004 validly tendered by holdersin our tender offer and (2) US$10 million in principal amount of our 10.625%Notes due 2004 and US$12 million in principal amount of our 9.875% Notes due2005 from the open market, and to prepay or repay various loans in theaggregate amount of US$125 million, of which US$53 million (JP¥6,260 million)pertained to the Japanese yen term loan which matured on June 18, 2003 andUS$52 million in connection with the US$150 million term loan which matured onDecember 22, 2003.

 

**Term Loans**

 

*Local Exchange TransferLoans*

 

In connection with the transfer toPLDT of Smart’s local exchange business, PLDT entered into loan agreements withNederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V., or FMO,of the Netherlands, Exportkreditnamden, or EKN, of Sweden and Export CreditsGuarantee Department, or ECGD, of the United Kingdom for loans in the principalamounts of US$135 million, US$36 million and US$27 million, respectively. Theseloans were amended in August and September 2001 to increase the maximum totaldebt to EBITDA ratio that PLDT on a non-consolidated basis and calculated onthe basis of Philippine GAAP is permitted to maintain during the terms of therespective loans.  Approximately US$108 million of these loans was outstandingas of December 31, 2003.  The FMO loan will mature on September 1, 2007, and the EKN and ECGD loans on December 31, 2007.

 

*US$150 Million Term Loan*

* *

Inconnection with PLDT’s fixed line expansion projects, PLDT obtained a US$150million term loan, which was subsequently assigned to Norddeutsche LandesbankGirozentrale, Singapore Branch.  This loan matured on December 22, 2003 and the principal balance of US$52 million then outstanding was partly refinanced byTranche B of US$145 million multicurrency refinancing facility in the amount ofJP¥3,191 million and US$19 million.

 

*JP¥19,807 Million Term Loan*

*** ***

In December 1997, in connection with a refinancing of itsmaturing debt, PLDT obtained a Japanese yen term loan from a syndicate offoreign banks.  This loan matured on June 18, 2003 and the principal balance ofJP¥12,359 million then outstanding was partly refinanced by Tranche A of US$145million multicurrency refinancing facility in the amount of JP¥7,723 millionand US$34 million.

 

*JBIC JP¥9,760 MillionOverseas Investment Term Loan*

 

On July 26, 2002, PLDT signed a loan agreement with JBIC for acredit facility of JP¥9,760 million under the JBIC’s Overseas Investment Loan(OIL) program.  The loan, which was drawn on July 31, 2002, will be amortized semi-annually beginning March 21, 2005 and will mature on March 21, 2008.

 

*Multicurrency RefinancingFacility*

* *

On September 4, 2002, PLDT signed a loan agreement witha syndicate of banks for a US$145 million multicurrency term loan facilityconsisting of Japanese yen and U.S. dollar commitments of JP¥10,914 million andUS$53 million, respectively.  This facility was split into two tranches.Tranche A was drawn on June 18, 2003 in the amount of JP¥7,723 million and US$34 millionto refinance a portion of the outstanding principal balance of the Japanese yensyndicated term loan which matured on the same date.  Tranche B was drawn on December 22, 2003 inthe amount of JP¥3,191 million and US$19 million to refinance a portion of theUS$52 million principal amount outstanding under the U.S. dollar term loanwhich matured on the same date.  The new syndicated facility will be amortizedsemi-annually beginning June 2004 and will mature in December 2006.

** **

*US$12 Million Term LoanFacility*

 

On May 29, 2003, PLDT obtained a US$12 million term loanfacility from DEG-Deutsche Investitions und Entwicklungsgesellschaft mbH.  Asof December 31, 2003, this loan has an outstanding balance of US$4 million.This loan will mature in December 2009 and is payable in semi-annualinstallments starting June 15, 2004.

 

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

 

On June 11, 2003, PLDT signed a JP¥5,615 million syndicated termloan facility supported by NEXI.  As of December 31, 2003, we have not made any drawdown under this facility.  An initial drawdown of JP¥960 millionwas made on April 5, 2004.

*** ***

*JBIC 4 Program of theDevelopment 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 whichabout Php1,284 million was outstanding as of December 31, 2003.  The loan, which is funded under the JBIC Facility for Private SectorDevelopment of the Development Bank of the Philippines, will mature on October26, 2005, and since April 2002, is payable in quarterly installments as setforth below:

 

Quarterly Payment Number

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

 

 

Payments 1-7

3.500%

Payments 8-11

8.875%

Payments 12-15

10.000%

 

*Php2,770 Million PesoFixed Rate Corporate Notes*

 

In connection withPLDT’s service 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 loan agreement,PLDT borrowed an aggregate amount of Php1,500million, of which Php230 million matured on November 11, 2002, Php500 million will mature on November 9, 2004, and Php770 million on November 9, 2006.

 

Under the second loan agreement,PLDT borrowed an aggregate amount of Php1,270million, of which Php360 million matured on June 9, 2003, Php100 million will mature on June 9, 2005, and Php810 million on June 9, 2010.

*** ***

*Php2,000 Million One-YearPeso Notes*

 

On April 28, 2003 and May 14, 2003, PLDT issued, at adiscount, Php1,600 million and Php400 million One-Year Peso Notes, respectively,under its Php2 billion Peso Notes program registered with the Philippine SEC.Net proceeds of the issue totaled Php1,803 million.  PLDT targeted retailinvestors primarily for this issue in order to further diversify its fundingsources.

 

The Peso Notes program, for which the registration was renderedeffective by the Philippine SEC on April 9, 2003, has been given “PRS 1” ratingby PhilRatings, an affiliate of Standard & Poor’s.  PhilRatings affirmedthe “PRS1” rating on December 10, 2003.  PRS1 is the highest rating possible onPhilRatings’ scale for short-term securities and is assigned to issues with“the strongest capability for timely payment of debt on both principal andinterest.”

*** ***

***Overview of Smart’sIndebtedness***

 

As of December 31, 2003,Smart had US$370 million of aggregate indebtedness outstanding which arescheduled to mature as follows:

 

** **

**Aggregate Outstanding**

Maturity

**Indebtedness**

** **

**(in millions)**

 

 

 

2004 (January 1 through December 31, 2004)

US$128

Php7,104

2005

127

7,081

2006

93

5,191

2007

22

1,205

2008 and onwards

–

5

 

As of December 31, 2003, Smart had no outstandingshort-term borrowings.

 

In connection with the build-outexpansion of its GSM network, Smart has entered into a number of loanagreements to finance the various phases of this expansion.

 

*US$224 Million Term LoanFacilities*

 

The loan facilities for Phases 1 to4 of the GSM network expansion, under which US$106 million was outstanding asof December 31, 2003, are repayable in ten equal semi-annual installments withfinal repayments due in October 2005 and April 2006.

 

*US$195 Million Term LoanFacility*

 

On June 8, 2001, Smart signed its GSM Phase 5A financingcomprised of US$195 million loans.  The US$195 million loans, of which US$121million was outstanding as of December 31, 2003, are payable over five to sixyears, with final repayments due in September 2006, March 2007 and June 2007.

 

*Php1 Billion Term Loan Facility*

* *

On June 14, 2001, Smart signed its GSM Phase 5A financing of Php1,000 million term loan.  The Php1,000 millionfacility, of which Php533 million was outstanding as of December 31, 2003, is payable quarterly with final repayment in December 2005.

 

*US$6 Million Term Loan Facility*

 

On September 25, 2001, Smart obtained a US$6 million term loan facility from Electro Banque S.A., which was laterassigned to Alcatel SVF 1999A-Trust fee effective December 3, 2002.  The loan facility, of which US$3 million was outstanding as of December 31, 2003, is payable semi-annually, with final repayment due in May 2005.

 

*US$11Million Term Loan Facility*

 

On October 26, 2001, Smart obtained a US$11 million term loan facility from Credit Lyonnais S.A., of which theundrawn balance of US$4 million was cancelled upon expiry of the availabilityperiod on April 26, 2003.  The loan facility, comprised of three tranches ofwhich US$5 million was outstanding as of December 31, 2003, is payablesemi-annually with final repayments due in January 2007, November 2007 and May2008.

 

*US$100 Million Term LoanFacility*

* *

On December 13, 2001, Smart signed its GSM Phase 5B financing of US$100 million, of which US$61 million wasoutstanding as of December 31, 2003. The loan is payable over five years withfinal repayment due in September 2006.

 

*Php300 Million Term LoanFacility*

 

On January 9, 2002, Smart signed a loan facility in the amount of Php300 million.  This loan has been fully drawnand is payable quarterly with final repayment in February 2007.  However, theoutstanding balance of Php280 million was prepaid on November 4, 2003.

 

*US$7 Million Term Loan Facility*

 

On April 14, 2002, for the purposeof financing the purchase of certain equipment, Smart obtained a US$7 millionterm loan facility from Bayerische Hypo-und Vereinsbank Aktiengesellschaftpursuant to the standard loan agreement No. 1 dated August 14, 2002 under the€50 million Framework Agreement for the financing of individual exportcontracts dated November 8 and 13, 2001.  The outstanding balance as of December 31, 2003 was US$6 million.

 

*US$100 Million Term LoanFacility*

 

On November 28, 2002, Smart signed a US$100 million term loanfacility supported by NEXI, of which US$60 million was drawn on November 28, 2003 and was outstanding as of December 31, 2003.  The US$40 million undrawnbalance was drawn on April 5, 2004.  This loan is payable semi-annually overfour years in eight equal installments starting May 28, 2004.

 

Facilities under GSM Phases 1 to 4,the Finnish Export Credit plc tranche of GSM Phase 5A facility and GSM Phase 5Bfacility are covered by guarantees from Finnvera, the Finnish export creditagency, for 95% of political risk and 50% of commercial risk.

 

Interest on Smart’s dollar-denominated loans is eitherfixed of based on LIBOR plus premium.  The Php1,000 million loan accruesinterest based on the weighted average interest rate, or WAIR, plusParticipating Financial Institution, or PFI, premium.

 

Smart is subject to loan covenants that restrict itsability to pay dividends, redeem preferred shares, make distributions to PLDTor otherwise provide funds to PLDT or any affiliate without the consent of itslenders.  Some of these covenants contain an absolute prohibition on payingdividends before December 2002, while others require that a portion of the loanequal to the amount of the dividend be prepaid.  Afterreceiving approvals from Finnvera and certain lenders for the payment ofdividends to PLDT in an amount not to exceed 40% of Smart’s net income underPhilippine GAAP in 2001, Smart made its first dividend payment of Php1,540million to PLDT in December 2002.  In addition, Smart paid dividends in theamount of Php4,300 million to PLDT in June 2003, representing 70% of Smart’s2002 net income under Philippine GAAP and paid additional dividends in theamount of Php1,866 million to PLDT in November 2003 equivalent to the remaining30% of its 2002 net income.  Further, after receiving similar approvals fromFinnvera and certain lenders, Smartpaid dividends amounting to Php11,280 million to PLDT in May 2004, representing70% of Smart’s 2003 net income under Philippine GAAP.  Smart will be requiredto obtain further waivers from Finnvera and certain lenders to pay additionaldividends in future periods.  We cannot assure you that Smart will be able toobtain such waivers in the future, or what amount, if any, Smart would bepermitted or financially able to distribute.  We expect that we will havedifficulty meeting our debt payment obligations if we do not continue toreceive cash dividends from Smart.

 

Smart’s loan agreements contain certain restrictivecovenants requiring Smart to comply with specified financial ratios and otherfinancial tests calculated on the basis of Philippine GAAP at semi-annualmeasurement dates.  The financial tests under Smart’s loan agreements includecompliance with a debt-to-equity ratio of not more than 1.50:1 and a debtservice coverage ratio of not less than 1.50:1.  Smart has maintainedcompliance with all of its financial covenants.  The agreements also containcustomary and other default provisions that permit the lender to accelerate amountsdue under the loans or terminate their commitments to extend additional fundsunder the loans.  These default provisions include:

 

•        cross-defaults and cross-accelerations that permit a lender todeclare a default if Smart is in default under another loan agreement.  Thesecross-default provisions are triggered upon a payment or other defaultpermitting the acceleration of Smart debt, whether or not the defaulted debt isaccelerated;

 

•        failure by Smart to comply with certain financial ratiocovenants;

 

•        any reduction in PLDT's ownership of Smart’s shares below 51% ofthe total of each class of Smart’s issued shares;

 

•        any reduction in First Pacific's and Metro Pacific Corporation’scollective direct and/or indirect ownership of PLDT’s common stock below 17.5%of the total common stock outstanding or 17.5% of the voting power of the totalcommon stock outstanding; and

 

•        the occurrence of any material adverse change in circumstancesthat the lender reasonably believes materially impairs Smart's ability to performits obligations under its loan agreements with the lender or that the lenderbelieves materially impairs an applicable guarantor's ability to perform itsobligations under an applicable guaranty.

 

In addition, some of these loan agreements restrict Smart'sability to enter into transactions with affiliates except on arm’s-length termsand for valuable consideration.

 

***Overview of Piltel’s Indebtedness***

 

On June 4, 2001, Piltel completedthe restructuring of approximately Php41 billion of indebtedness and otherclaims owed to banks, trade creditors, bondholders and preferred shareholders,or the aggregate financial debt of Piltel, representing approximately 98% ofits total liabilities as of that date.  As of December 31, 2003, approximately 99.8% of Piltel’s debt have been restructured except for convertible bondswith a principal value of US$0.9 million.  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 14 – Long-term Deb*t and *Note 16 – Preferred StockSubject to Mandatory Redemption* to the accompanying consolidated financialstatements in Item 18 for further discussion.

 

As of December 31, 2003, Piltel’s aggregate indebtedness outstanding consists of:

 

 

**Aggregate Outstanding Indebtedness**

 

**(in millions)**

Restructured debt

 

 

 

10-year Tranche B

US$147

 

Php8,160

15-year Tranche C

147

 

8,160

15-year Conversion Notes

122

 

6,769

15-year Term Notes Facility

5

 

293

Unrestructured debt

1

 

51

Total

US$422

 

Php23,433

 

Piltel’s restructured debt as of December 31, 2003 are scheduled to mature as follows:

 

Maturity

**Aggregate Outstanding Indebtedness**

** **

**(in millions)**

2004

US$1

Php24

2005

–

23

2006

4

243

2007

21

1,166

2008

21

1,166

2009 and onwards

374

20,760

 

Under the terms of the debtrestructuring, 50% of the financial debt of each participating creditor wasreleased in consideration for the allotment of Piltel convertible preferredshares.  One (1) Piltel convertible preferred share was exchanged for everyPhp340 worth of debt for which it was being exchanged (converted into Pesos atan exchange rate of Php47.05 to US$1.00 for dollar-denominated debt and Php1.00to JP¥2.39522 for yen-denominated debt), which shares were immediately andmandatorily converted into PLDT convertible preferred shares.  One PLDT convertiblepreferred share was issued for every five (5) Piltel convertible preferredshares.

 

Approximately half ofthe remaining 50% of all participating creditors’ (except for bondholders andpreferred shareholders) financial debt was restructured in a participation in aTranche B Loan in the same currency as their previous financial debt and theother half was exchanged for participation in a Tranche C Loan, also in thesame currency as their previous financial debt.  In the case of bondholders andpreferred shareholders, the remaining 50% of their financial debt was exchangedfor participation in the Conversion Notes and in a single Tranche Peso loan(the “Term Notes Facility”), respectively.

 

In addition, under theterms of the restructuring, PLDT issued a Letter of Support for the benefit ofPiltel and its creditors under which PLDT has agreed to cover any fundingshortfalls of Piltel up to a maximum amount of US$150 million less all amountspaid or committed to be paid to or on behalf of Piltel by PLDT on or afterMarch 23, 2000.  Under the Letter of Support, PLDT will provide funding toPiltel in the event that the cash flows from Piltel’s operations falls short ofamounts required by it to discharge in full its obligations to any creditor ofPiltel or any of its operating and financing subsidiaries and affiliates.  Asof December 31, 2003the undrawn balance available under the Letter of Support was US$50 million(approximately Php2,793 million).

 

***TrancheB Loans***

 

Piltel’s Tranche B Loansconsist of peso, U.S. dollar and Japanese yen participations of Php2,166million, US$35 million and JP¥7,822million, respectively.  These Tranche B loans have nominal principalamortizations representing 0.10% of the original Tranche B loan amount payableeach year beginning 2004 to 2010, while the remaining balance of 99.3% willfall due in June 4, 2011.

 

***TrancheC Loans***

 

Piltel’s Tranche C Loansconsist of peso, U.S. dollar and Japanese yen participations of Php2,166million, US$35 million and JP¥7,822million, respectively.  These Tranche C loans have principal amortizations of0.10% of the original Tranche C loan amount payable each year in 2004 and 2005,2% in 2006, 10% payable each year from 2007 to 2015, while the remainingbalance of 7.8% will fall due in June 4, 2016.

 

***Term Notes Facility***

 

The Php293million Term Notes Facility has nominal principal amortizations representing0.10% of the original loan amount payable each year beginning 2004 to 2015while the remaining balance of 98.8% will fall due on June 14, 2016.

 

***ConversionNotes***

 

As of December 31, 2003, approximately US$122million of Piltel Conversion Notes were outstanding.  These Conversion Noteshave principal amortizations of 0.10% of the amount outstanding payable eachyear in 2004 and 2005, 1.05% in 2006, 5.05% payable each year from 2007 to2010, 54.65% in 2011, 5% payable each year from 2012 to 2015, while theremaining balance of 3.9% will fall due in June 4, 2016.

 

Piltel’s restructured obligations are secured bysubstantially all present and future assets of Piltel under the Mortgage TrustIndenture, or MTI, dated June 4, 2001 between Piltel and JP Morgan Chase (successor toChase Manhattan Bank) as security agent for the creditors, which establishedthe security arrangements relating to the restructured debts.  Theparticipating creditors (other than the preferred shareholders) share equallyin first ranking security and non-participating creditors and the preferredshareholders share equally in second ranking security created under the MTI.Such a mortgage was approved by at least two-thirds of Piltel’s shareholders atits annual shareholders’ meeting on April 18, 2001and the NTC on May 18, 2001.

 

Piltel likewise agreed to pay into a dedicatedaccount (a “Sinking Fund Account”) the amount by which (a) earnings beforeinterest, tax, depreciation and amortization for a financial year is greaterthan (b) 200 percent of the projected debt service costs and permitted capitalexpenditure for the following financial year (the “Excess Cash flow”).  The moneyin that Sinking Fund Account will be used (before drawings are made under theLetter of Support) to fund cash flow deficiencies of Piltel.  Also, if actualcapital expenditure for a financial year differs from the projected capitalexpenditure, Piltel will either pay into the Sinking Fund established at theend of that year an amount equal to any over-projection of capital expenditureor will be entitled to withdraw funds, if any, equal to any under-projection.Any credit balance in a Sinking Fund after two financial years will be used toprepay all participating creditors ratably.

 

Under the debt restructuring agreements, Piltelundertook, with respect to each financial year (other than the financial yearin which the final repayment installment for Tranche B falls due), that theaggregate of earnings before interest, tax, depreciation and amortization plusthe available amount under the Letter of Support shall be greater than 1.05times debt service and 1.5 times interest cost.

 

Piltel is currently not incompliance with the terms of convertible bonds with principal amount of US$0.7million (approximately US$0.9 million redemption price at the option of theholders).

 

Piltel may not be able torestructure or otherwise pay the claims relating to its unrestructured debt.However, default on and acceleration of Piltel’s unrestructured indebtednessdoes not create a cross-default provision under Piltel’s restructuredindebtedness or any indebtedness of PLDT.

 

Item 6.   Directors, Senior Management and Employees

** **

Directors, Key Officers and Advisors

 

The names,ages, positions and periods of service of the directors (including independentdirectors) and key officers and advisors of PLDT as of May 31, 2004 are as follows:

 

** **

**Name**

** **

** **

**Age**

** **

** **

**Position(s)**

** **

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

 

 

 

 

 

 

 

Manuel V. Pangilinan

 

57

 

Director 

 

November 24, 1998 to present

 

 

 

 

President and Chief

 

November 28, 1998 to February 19, 2004

 

 

 

 

Executive Officer 

 

 

 

 

 

 

Chairman of the Board

 

February 19, 2004 to present

Napoleon L. Nazareno

 

54

 

Director

 

November 24, 1998 to present

 

 

 

 

President and Chief

 

February 19, 2004 to present

 

 

 

 

Executive Officer 

 

 

Antonio O. Cojuangco

 

52

 

Director

 

April 21, 1982 to present

 

 

 

 

Chairman of the Board

 

November 24, 1998 to February 19, 2004

Helen Y. Dee

 

60

 

Director

 

June 18, 1986 to present

Corazon S. de la Paz 

 

63

 

Director

 

September 25, 2001 to present

Albert F. del Rosario

 

64

 

Director

 

November 24, 1998 to present

Ray C. Espinosa

 

48

 

Director

 

November 24, 1998 to present

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

 

64

 

Director

 

November 24, 1998 to present

Pedro E. Roxas(1) 

 

48

 

Director

 

March 1, 2001 to present

Juan B. Santos(1)

 

65

 

Director

 

December 3, 2002 to present

Shigeru Yoshida(2)

 

54

 

Director

 

March 31, 2004 to present

Mitsuhiro Takase(4)

 

56

 

Director

 

March 24, 2000 to present

Ricardo R. Zarate(3)

 

62

 

Director

 

March 1, 2001 to June 8, 2004

Ma. Lourdes C. Rausa-Chan

 

50

 

Corporate Secretary

 

November 24, 1998 to present 

 

 

 

 

Senior Vice President, Corporate Affairs and Legal Services Head

 

January 5, 1999 to present 

Anabelle L. Chua 

 

43

 

Treasurer

 

February 1, 1999 to present

 

 

 

 

Senior Vice President 

 

February 26, 2002 to present

 

 

 

 

Corporate Finance and  Treasury Head

 

March 1, 1998 to present

George N. Lim

 

51

 

Senior Vice President, Network Services Head

 

February 26, 1999 to present

Claro Carmelo P. Ramirez

 

44

 

Senior Vice President, Retail Business Head

 

July 1, 1999 to June 15, 2004

 

 

 

 

International and Carrier  Business Head

 

June 16, 2004 to present

Victorico P. Vargas

 

52

 

Senior Vice President, Human and Infrastructure Resources Management Head

 

February 15, 2000 to present

Rosalie R. Montenegro

 

55

 

Senior Vice President, Call Center Business Head

 

July 10, 2000 to present

Ariel A. Roda

 

41

 

Senior Vice President

 

August 10, 2000 to present

 

 

 

 

Business Development Head

 

February 1, 2003 to present

Alfredo S. Panlilio

 

41

 

Senior Vice President

 

May 8, 2001 to present

 

 

 

 

International and Carrier  Business Head

 

February 1, 2003 to June 15, 2004

 

 

 

 

PLDT Global Corporation Head

 

June 16, 2004 to present

Ernesto R. Alberto

 

43

 

Senior Vice President, Corporate Business Head

 

May 15, 2003 to present

Celso T. Dimarucut

 

42

 

First Vice President

 

January 31, 2003 to present

 

 

 

 

Financial Reporting and Control Head

 

August 16, 2000 to present

Jun R. Florencio

 

48

 

First Vice President

 

March 28, 2000 to present

 

 

 

 

Audit and Assurance Head

 

September 1, 2000 to present

Eugenio F. Garcia

 

51

 

First Vice President

 

October 1, 2000 to present

 

 

 

 

Information Systems Head

 

 

Menardo G. Jimenez, Jr.

 

41

 

First Vice President

 

February 19, 2004 to present

 

 

 

 

Corporate Communications and Public Affairs Head

 

December 1, 2001 to June 15, 2004

 

 

 

 

Retail Business Head

 

June 16, 2004 to present

Christopher H. Young

 

46

 

Chief Financial Advisor 

 

November 24, 1998 to present

Peter J. Lawrence

 

45

 

Chief Financial Advisor of Smart

 

November 9, 1998 to present

Donald J. Rae

 

43

 

Chief Operations Advisor of Smart

 

January 1, 1999 to present

Anastacio R. Martirez

 

51

 

Personal Communications and Mobile Services Head of Smart

 

September 1, 1993 to present

 

——————————

 

*(1)  **Independent directors.*

 

*(2)  **Replaced Mr. Taketo Suzukias director effective**March 31, 2004*.

 

*(3)  **Replaced by Ms. Teresita Syas director effective**June 8, 2004**.*

 

*(4)  **Resigned as directoreffective**June 21, 2004**.*

 

Under the Shareholders Agreement entered into among FirstPacific, NTT Communications and NTTC-UK on September 28, 1999, NTTCommunications is entitled to nominate two directors (Shigeru Yoshida andMitsuhiro Takase) to the PLDT board of directors and First Pacific and itsaffiliates are entitled to nominate six directors (Manuel V. Pangilinan,Napoleon L. Nazareno, Antonio O. Cojuangco, Albert V. Del Rosario, Ray C.Espinosa and Ricardo R. Zarate).****The Shareholders Agreement alsoentitles NTT Communications to nominate two directors to Smart's board ofdirectors and, subject to specified conditions, one member to the board ofdirectors of all other PLDT subsidiaries.  NTT Communications is also entitledto appoint members or advisors of certain PLDT management and board committees,including the audit, executive compensation and finance committees describedabove under “— Audit, Nomination, Executive Compensation and FinanceCommittees.”  Under the Shareholders Agreement, each party has agreed, undercertain circumstances, to vote its shares of common stock in favor of thenominees designated by the other parties.

 

The business address of AnastacioR. Martirez, Peter J. Lawrence and Donald J. Rae is Smart Tower II, Ayala Avenue, Makati City, Philippines.  The business address of each of the otherdirectors, key officers and advisors identified above is the Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

 

Thefollowing is a brief description of the business experience during the pastfive years of each of our directors, key officers and advisors.

** **

**Mr. Manuel V. Pangilinan** isthe chairman of our board effective February 19, 2004 and chairman of the boardof Smart, ePLDT, Mabuhay Satellite and Infocom.  He was PLDT's president andchief executive officer from November 1998 up to his appointment as chairmaneffective February 19, 2004.  He founded and was the managing director of FirstPacific from 1981 and served as its executive chairman from February 1999 toMay 2003.  He has been re-appointed as managing director and chief executiveofficer of First Pacific effective June 2003.  He is also the chairman of MetroPacific Corporation and Philippine Business for Social Progress and presidentcommissioner of P.T. Indofood Sukses Makmur tbk.  He also holds directorshipsin Philippine Telecommunications Investment Corporation, Negros Navigation Co.,Inc., Metro Asia Link Holdings, Inc., Enterprise Investments Holdings, Inc.,Metro Pacific Assets Holdings Inc., Metro Pacific Resources, Inc. and severalproperty holding development companies.  

 

**Mr. Napoleon L. Nazareno** isthe president and chief executive officer of PLDT effective February 19, 2004 andconcurrently the president and chief executive officer of Smart and presidentof ACeS Philippines.  He is the chairman of the board of Piltel and I-ContactsCorporation and also holds directorships in Pacific Plaza Towers CondominiumCorporation, Negros Navigation Company, Inc., Philippine TelecommunicationsInvestment Corporation and some subsidiaries of PLDT, namely, ePLDT, ACeSPhilippines, Mabuhay Satellite and PLDT Global.  He was the president and chiefexecutive officer of Metro Pacific Corporation from August 1995 until December1999 and of Piltel from November 1998 to January 2003.

 

**Mr. Antonio O. Cojuangco**,the chairman of our board until his resignation effective February 19, 2004, served as president and chief executive officer of PLDT for over 12 years untilNovember 1998, when he assumed the chairmanship of the board.  He is thepresident and chief executive officer of the television network ABC-5, thechairman of the Bank of Commerce and CAP Life Insurance Corporation, and adirector of C&O Investment Realty Corporation, Kuok Phil. Properties, Inc.,Bancommerce Investment Corporation and Philippine Telecommunications InvestmentCorporation.

 

**Ms. Helen Y. Dee** is thechairperson and president and/or chief executive officer of Hydee Management& Resources, Inc. and House of Investments, Inc. and chairperson of LandevCorporation, Manila Memorial Park, Inc, Mapua Information Technology Center,Inc., Pacific Plans, Inc. and Hi-Eisai Pharmaceuticals, Inc.  She is thepresident of Moira Management, Inc., Equitas Insurance Brokers, Inc. and YGCCorporate Services, Inc.  She is the vice chairperson of Zurich Insurance (Taipei)Ltd. and also sits on the boards of Chailease Finance Corporation, KKConverter, Inc., EEI Corporation, Petro Energy Resources Corp., Nippon LifeInsurance Co., South Western Cement Corp., Seafront Resources Corp., ManilaPeninsula Hotel, Inc., Malayan Insurance Co. Inc., MICO Equities, Inc., and LaFuneraria Paz, Inc.

 

**Ms. Corazon S. de la Paz** isthe vice chairperson of the Social Security Commission and the president andchief executive officer of the Social Security System.  She is a director ofSan Miguel Corporation, Philex Mining Corporation, Republic Glass HoldingCorp., PCI Leasing and Finance, Inc., PCI Capital Corporation, EquitableCardnetwork, Inc., and Makati Medical Center.  She is also a trustee of severaleducational and non-profit organizations.  Until June 30, 2001, she was the senior partner and the chairperson of Joaquin Cunanan & Co., a member firm ofPricewaterhouseCoopers Worldwide.

 

**Mr. Albert F. del Rosario** isthe Philippine Ambassador Plenipotentiary and Extraordinary to the United States of America.  He is the chairman of the board of Gotuaco del Rosarioand Associates, Inc. and Philippine Indocoil Corporation, the vice chairman ofthe board of Asia Traders Insurance Corporation, and the president of ADRHoldings, Inc. and ARS Reinsurance Brokers, Inc.  He has been appointed asnon-executive director of First Pacific effective on June 2, 2003.  Mr. del Rosario also sits on the boards of Infrontier (Philippines) Inc., PhilippineInvestments Holdings, Inc., Philippine Telecommunications InvestmentCorporation, Smart Communications Holdings, Inc., LMG Chemicals Corporation, LRPhilippines Realty Corporation, Spoon Ventures, Inc., Pacific Plaza CondominiumCorporation and Pacific Plaza Towers Condominium Corporation.  

 

**Atty. Ray C. Espinosa** is thepresident of ePLDT, the chairman and chief executive officer of Parlance andVocativ, and the chairman of mySecureSign, Inc.  He is a member of the boardsof BayanTrade Dotcom, Inc., Cyber Bay Corporation, Digital Paradise, Inc.,Intelligent Network Plus, Inc., Nation Broadcasting Corporation, EnterpriseInvestment Holdings, Inc., ePDS, Inc., Tahanan Mutual Building and LoanAssociation, Inc., Unilink Communications Corporation, Mediaquest Holdings,Inc., Philippine Home Cable Holdings, Inc. and some of its subsidiaries,Netopia Computer Technologies, Inc., Sidera Technologies, Inc., StradcomCorporation and PLDT Global.  He is a trustee of PLDT Beneficial Trust Fund andPLDT Foundation, Inc.  Until June 30, 2000, he was a partner and member of theexecutive committee of the law firm SyCip Salazar Hernandez & Gatmaitan.

** **

**Rev. Fr. Bienvenido F. Nebres,S.J.** is the president of the Ateneo de Manila University and a member ofthe boards of trustees of the Asian Institute of Management and several otherprivate educational institutions.

 

**Mr. Pedro E. Roxas** is thechairman and/or chief executive officer of various business organizations inthe fields of agri-business, sugar manufacturing and real estate developmentincluding Roxas Holdings, Inc., Central Azucarera Don Pedro, Inc., CADP GroupCorp., Roxaco Land Corporation, Roxas & Company, Inc., Jade Orient SugarCorp. and Batangas Assets Corporation.  He holds directorships in BDO PrivateBank, Batangas Assets Corporation and Fuego Development Corporation.  Mr. Roxasis a trustee and/or officer of several non-profit organizations.  

 

**Mr. Juan B. Santos** is thechairman of Nestlé Philippines, Inc. and was its president and chief executiveofficer until March 31, 2003.  Prior to his appointment as president of Nestlé Philippinesin 1987, he served as chief executive officer of the Nestlé Group of Companiesin Thailand.  From 1989 to 1995, he acted in concurrent capacity as chiefexecutive officer of Nestlé Singapore Pte. Ltd. and Nestlé Philippines.  He isthe chairman of Gold Coin Management Holdings, Inc., a director of San MiguelCorporation and Malayan Insurance Co., Inc.  He serves as member of the boardof trustees of several non-profit organizations.

 

**Mr. Shigeru Yoshida** is avice president of NTT Worldwide Telecommunications Corporation, or NTTWorldwide.  From 2001 to 2003, he was the vice president of the SolutionDivision and led the strategic planning and project development of “e-Japan”, agovernmental program to enhance Japanese national IT infrastructure.  He headedthe Business Users, Consumers and Office Users Business Division and managedthe sales activity of Arcstar network and international telephone service from2000 to 2001.  Prior to that, he worked at the Business CommunicationsHeadquarters of NTT Worldwide and headed the global private network salesactivities for big customers.  Mr. Yoshida replaced Mr. Taketo Suzuki asdirector effective March 31, 2004.

 

**Mr. Mitsuhiro Takase** is thesenior vice president of the Corporate Planning Department of NTTCommunications.  Mr. Takase is a member of the board of directors of NTTCommunications and Sri Lanka Telecom.  From 1996 to 1998, he was the vicepresident for strategic planning and international cooperation department ofthe global business headquarters of NTT Corporation, in charge of strategicplanning and general personnel matters for NTT's international/overseas business.

 

**Mr. Ricardo R. Zarate** was anexecutive vice president of PLDT and the head of PLDT's fixed line businessuntil August 2003.  From 1993 to 2000, he was the executive vice president forthe network services group, in charge of operations and maintenance, regionalbusiness and technical and operations support.

 

**Ms. Ma. Lourdes C. Rausa-Chan**issenior vice president for corporate affairs and legal services and corporatesecretary of PLDT. She was the group vice president for legal affairs, and thecorporate secretary of some subsidiaries of Metro Pacific Corporation prior tojoining PLDT in November 1998.  She served as a director of PLDT from March2000 to February 2001 and from June to December 2002.  Ms. Rausa-Chan alsoserves as corporate secretary of some subsidiaries of PLDT.

 

**Ms. Anabelle L. Chua** is thetreasurer of PLDT and senior vice president for PLDT’s corporate finance andtreasury sector.  She was a vice president at Citibank, N.A. where she workedfor ten years prior to her appointment as first vice president in March 1998,as treasurer in February 1999 and as a senior vice president on February 26, 2002.  She has over 15 years of experience in the areas of corporate finance,treasury, financial control and credit risk management.  Ms. Chua is currentlya director of the Philippine Stock Exchange, Inc., Smart, ePLDT and severalsubsidiaries of ePLDT.  She is also a member of the board of trustees of thePLDT Beneficial Trust Fund and PLDT Foundation, Inc.

 

**Mr. George N. Lim** is seniorvice president for the network services group of PLDT.  He has over 25 years ofwork experience in telecommunications management and is a director of somesubsidiaries of PLDT and Philippine Home Cable Holdings, Inc.

 

**Mr. Claro Carmelo P. Ramirez**is senior vice president for the international and carrier business group ofPLDT.  He served as head of the retail business group of PLDT prior to hisappointment to his current post.  He has over 20 years of work experience inthe field of marketing.  He worked as associate director for Colgate-PalmoliveCompany, Global Business Development in New York, and as marketing director for Colgate-Palmolive Argentina, S.A.I.C.  Prior to his appointment as seniorvice president in July 1999, he was the marketing director of Colgate-PalmolivePhilippines, Inc.  He is a director of some subsidiaries of PLDT.

 

**Mr. Victorico P. Vargas** issenior vice president for human and infrastructure resources management ofPLDT.  He has over 20 years of work experience in various industries (insurance,consumer goods, real estate, banking and finance, and telecommunications/IT) inthe area of human resource management.  Prior to joining PLDT in February 2000,he was the country human resources director of Citibank N.A., Manila, and spenttwo years outside the Philippines as country human resources director ofCitibank, N.A., Bangkok.  He is also a member of the board of trustees of thePLDT Beneficial Trust Fund.

 

**Ms. Rosalie R. Montenegro** issenior vice president for the call center business group of PLDT.  Prior tothat, she served as consumer banking head of ABN-AMRO Savings Bank and vicepresident for remote banking of ABN-AMRO Consumer Bank, Singapore RegionalOffice from 1997 to 1999.  She was vice president for global consumer banking,CitiPhone banking and service quality director of Citibank N.A. from 1985 to1996 servicing both banking and the credit cards businesses.  Ms. Montenegro isalso the president of Vocativ and Parlance and a director of some subsidiariesof PLDT.

 

**Mr. Ariel A. Roda** is seniorvice president for business development group of PLDT.  He was a co-managingdirector of ePLDT from August 2000 to February 2003 and prior to that, servedas the Information Technology head of PLDT beginning in April 1999.  He hasover 15 years of work experience in the field of information technology.  Heheld various positions in Manila Electric Company and was its informationtechnology head until he joined PLDT in April 1999.  He is a director of somesubsidiaries of PLDT.

 

**Mr. Alfredo S. Panlilio** ispresident for PLDT Global Corporation.  He served as senior vice president forthe international and carrier business group prior to his current post andpreviously headed the corporate business group of PLDT.  He has over 15 yearsof experience in the field of business development and information technology.He held management positions at IBM Philippines, Inc. and was the vicepresident for business development of the Lopez Communications Group (ABS-CBNBroadcasting, BayanTel and SKYCable) prior to joining PLDT in July 1999.  Mr.Panlilio is also a director of some subsidiaries of PLDT.

 

**Mr. Ernesto R. Alberto** issenior vice president for the corporate business group of PLDT.  He has over 20years of experience in the area of corporate banking, relationship managementand business development.  Prior to joining PLDT in May 2003, he was a vicepresident and the group head of the national corporate group of Citibank N.A., Manilafrom 1996 to 2003, and previously served as vice president and group head ofthe relationship management group of Citytrust Banking Corporation.  Mr.Alberto is a director of some subsidiaries of PLDT.

 

**Mr. Celso T. Dimarucut** isthe first vice president for PLDT’s financial reporting and control sector.Prior to joining PLDT, he was the controller and treasurer of Piltel and hadpreviously served as the group financial controller for domestic subsidiariesof Metropolitan Bank and Trust Company.  He specialized in audit, tax andbusiness advisory services for ten years having worked with an Indonesian firm,Prasetio Utomo & Co. for three years and with SGV & Co. for sevenyears.  He also serves as director and treasurer of several of PLDT’ssubsidiaries.

 

**Mr. Jun R. Florencio** is thefirst vice president for PLDT’s audit and assurance group.  He has over 20years of experience in the areas of external and internal audit, creditmanagement, information technology, financial management and controllership. Heheld various positions in the finance organization of Eastern Telecommunicationsand was the financial controller of Smart for four years prior to hisappointment as vice president and head of the financial reporting and controlsector of PLDT in April 1999.

 

**Mr. Eugenio F. Garcia**heldthe position of vice president, information technology of Metro Drug, Inc. forthree years prior to his appointment as Information Technology Head of PLDT inSeptember 2000.  He worked with Citibank N.A. from 1987 and was its vicepresident for Data Center until mid-1997.

 

**Mr. Menardo G. Jimenez, Jr.** is head of the retail business group of PLDTeffective June 16, 2004 and has managed various broadcasting and productioncompanies in radio, television and stage-theater prior to his appointment asCorporate Communications and Public Affairs Head of PLDT in December 2001.  Heis a recipient of numerous significant awards for cultural achievement and inthe fields of musical theater, broadcast promotions and publications.  He isthe President of Mediaquest Holdings, Inc., and PLDT Foundation, Inc.

 

**Mr. Christopher H. Young**,our chief financial advisor, worked in PricewaterhouseCoopers in London and Hong Kong from 1979 until 1987, at which time he joined First Pacific in Hong Kongas group financial controller.  He joined Metro Pacific Corporation in 1995 asfinance director, a position he held until he joined us in November 1998.

 

**Mr. Peter J. Lawrence**, chieffinancial advisor to Smart, is a chartered accountant and spent a number ofyears as a senior tax consultant with Arthur Andersen & Co. (Australia).He joined First Pacific in 1991 as vice-president for group taxation and, inJanuary 1996, was promoted to the position of finance director — Asia LinkHoldings Limited (the telecommunications arm of First Pacific).

 

**Mr. Donald J. Rae**, the chiefoperations advisor to Smart, served as the chief operating officer for TimeTelecommunications Sdn. Bhd. in Malaysia prior to joining Smart in January1999.  He also spent over ten years with Deloitte & Touche Consultingspecializing in the Asian telecommunications sector.

 

**Mr. Anastacio R. Martirez** isa director and the head of personal communications and mobile services ofSmart.  He is the president of I-Contacts Corporation, a subsidiary of Smart,and a director of ACeS Philippines.  He has been involved in general andmarketing management for over 25 years with experience in consumer packagedgoods, consumer and industrial lighting, telecommunications and banking.  Heheld senior marketing positions in SKYCable, Philips Electronics and Lightingand Citytrust Banking Corporation.

 

Terms of Office

 

Thedirectors of PLDT are elected each year to serve until the next annual meetingof shareholders and until their successors are elected and qualified.  The termof office of all officers is coterminous with that of the board of directorsthat elected or appointed them.

 

Family Relationships

 

None of the directors, key officers and chief financial andchief operations advisors of PLDT and Smart are related to each other.

 

Compensation

 

Theaggregate compensation paid to the chief executive officer, key officers, chieffinancial and chief operations advisors of PLDT and Smart and directors, as agroup, for 2003 amounted to Php245 million.

 

Each of the directors, includingthe members of the advisory board of PLDT, is entitled to a director's fee inthe amount of Php125,000 for each meeting of the board attended, except ManuelV. Pangilinan, who has waived his right to receive a director's fee.  Each ofthe members or advisors of the audit, executive compensation, nomination andfinance committees is entitled to a fee in the amount of Php50,000 for eachcommittee meeting attended.

 

There are no agreements between PLDT and any of its directors,key officers and chief financial and chief operations advisors of PLDT andSmart advisors providing for benefits upon termination of employment, exceptfor such benefits to which they may be entitled under PLDT's retirement plan.

 

Executive Stock Option Plan

 

On April 27, 1999and December 10, 1999, the board of directors and shareholders, respectively,of PLDT approved the executive stock option plan covering a total of 1,289,745shares of common stock and the amendment of the seventh article of the Articlesof Incorporation of PLDT denying the pre-emptive right of holders of common shareto subscribe for any issue of the 1,289,745 shares of common stock pursuant tothe executive stock option plan.

 

Stock options may be granted pursuant to theexecutive stock option plan to management executives and advisors/consultantsof PLDT.  The executive compensation committee of our board determines theeligibility of a management executive or advisor/consultant to receive a stockoption, as well as the number of shares of common stock to be covered by eachstock option.

 

Stock options granted under the executive stockoption plan become fully vested after the completion of five years from therelevant option offer date.  An option holder may exercise his option topurchase that number of vested shares of common stock underlying his option, inwhole or in part, at the price at Php814 per share, subject to adjustment uponthe occurrence of specific events described in the executive stock optionplan.  The option holder is required to give written notice of exercise to theexecutive compensation committee, indicating the number of vested shares to bepurchased, accompanied by payment in cash of the full amount of the purchaseprice for those shares.

 

Share Ownership

 

Thefollowing table sets forth information regarding ownership of our common stock,preferred stock and executive stock options as of May 31, 2004 by our continuing directors, key officers and advisors.  Each individual below owns less than 1%of our outstanding common shares and less than 1% of our preferred shares. 

 

**Name of Owner**

**Shares of**

**Common Stock**

**Shares of**

**Preferred Stock**

**Shares of Common Stock Underlying Executive**

**Stock Options(1)**

 

 

 

 

Manuel V. Pangilinan

74,419

360

97,571

Napoleon L. Nazareno

6,427

495

–

Antonio O. Cojuangco

4

4,060

–

Helen Y. Dee

22,055(2)

180

–

Corazon S. de la Paz

12,543,130(3)

–

–

Albert F. del Rosario

63,525

1,560

–

Ray C. Espinosa

2,701

–

38,342

Rev. Fr. Bienvenido F. Nebres, S.J.

2

–

–

Juan B. Santos

1

–

–

Pedro E. Roxas

1

540

–

Shigeru Yoshida

11

–

–

Mitsuhiro Takase(4)

1

–

–

Ma. Lourdes C. Rausa-Chan

77

350

22,302

Anabelle L. Chua

1,540

–

13,738

George N. Lim

1,700

360

13,256

Claro Carmelo P. Ramirez

1,500

–

14,496

Victorico P. Vargas

–

180

23,835

Rosalie R. Montenegro

–

–

16,006

Ariel A. Roda

1,500

–

13,938

Alfredo S. Panlilio

–

–

11,151

Ernesto R. Alberto

–

–

–

Celso T. Dimarucut

–

460

14,218

Jun R. Florencio

15

530

10,593

Eugneio F. Garcia

–

–

11,046

Menardo G. Jimenez, Jr.

22

–

–

Christopher H. Young

104,315

–

–

Peter J. Lawrence

32,000

180

–

Donald J. Rae

–

–

–

Anastacio R. Martirez

–

380

–

_____________

 

*(1)    **Asof**May 31, 2004**, under PLDT’s executive stock option plan,options to purchase 300,492 common stocks have been granted to the key officerslisted in the table above.  No options have been granted to non-executive directors.All outstanding options are exercisable at an exercise price of Php814 pershare and have an expiration date of December 10, 2009.  No outstanding optionswere exercisable until**December 10, 2001**, at which time 25%became exercisable.  An additional 25% vested on December 10, 2002 and 2003,and will vest on December 10, 2004.  As of**May 31, 2004**, there were 225,369 vested options equivalent to 75% of the shares granted.*

* *

*(2)    **As chairperson and presidentof Hydee Management & Resources, Inc., Ms. Dee may exercise voting rightsin respect and may be considered to have beneficial ownership of 21,957 sharesof common share owned by Hydee Management Resources, Inc.*

* *

*(3)    **As president and chiefexecutive officer of the Social Security System, Ms. de la Paz may exercisevoting rights in respect of 12,543,129 shares of common share owned by theSocial Security System and may be considered to have beneficial ownership ofthese shares.*

* *

*(4)    **Resigned as directoreffective**June 21, 2004**.*

* *

The aggregate number of common andpreferred shares directly owned by directors, key officers and advisors listedabove as at May 31, 2004 were 12,854,946 and 9,635, respectively, or 7.5832%and 0.0013% of PLDT’s outstanding common and preferred shares, respectively. 

 

Board of Directors

* *

Our board of directors is composed of 13 members, at least threeof whom, namely Rev. Fr. Bienvenido F. Nebres, S.J., Mr. Pedro E. Roxas and Mr.Juan B. Santos, are independent directors as determined by our NominationCommittee.  The independence standards/criteria are provided in our by-laws andGovernance Manual pursuant to which, in general, a director may not be deemedindependent if he is, or in the past five years had been, employed in anexecutive capacity by us or any company controlling, controlled by or undercommon control with us or he is, or within the past five years had been,retained as a professional adviser by us or any of our related companies, or heis not free from any business or other relationships with us which could, orcould reasonably be perceived, to materially interfere with his exercise ofindependent judgment in carrying out his responsibilities as a director.

 

Audit, Nomination, Executive Compensation and Finance Committees

 

Our board of directors is authorized under the by-laws to createcommittees, as it may deem necessary.  We currently have four board committees,namely, the audit, nomination, executive compensation and finance committees,the purpose of which is to assist our board of directors.  Each of thesecommittees has a board-approved written charter that provides for suchcommittee’s composition, membership qualifications, functions andresponsibilities, conduct of meetings, and reporting procedure to the board ofdirectors.

 

*Audit Committee*

 

Our audit committee is composedof three members all of whom are independent directors, namely, Fr. BienvenidoF. Nebres, S.J., who chairs the committee, Pedro E. Roxas and Juan B. Santos.Shigeru Yoshida, who is a non-independent member of our board of directors,Corazon de la Paz and Roberto R. Romulo serve as advisors to the auditcommittee.  In addition, Corazon de la Paz also serves as consultant to theaudit committee.  All of the members of our audit committee are independentdirectors and financially literate and our consultant is an accounting andfinancial management expert.

 

As provided for in the auditcommittee charter, the purposes of the audit committee are to assist our boardof directors:

 

•        in its oversight of PLDT’s accounting and financial reportingprinciples and policies and internal audit controls and procedures;

 

•        in its oversight of the integrity of PLDT’s financial statementsand the independent audit thereof;

 

•        in its oversight of PLDT’s compliance with legal and regulatoryrequirements; 

 

•        in selecting and recommending the external auditors to beappointed by our board of directors, evaluating such external auditors’qualifications and independence and, where deemed appropriate, replacing theexternal auditors; and

 

•        in its oversight of the performance of the internal auditingorganization and the external auditors.

 

With respect to the externalauditors, the audit committee has the following duties and powers:

 

•        to review and evaluate the qualifications, performance andindependence of the lead partner of the external auditors;

 

•        to select and recommend the external auditors to be appointed bythe board of directors and to recommend the removal or replacement of theexternal auditors;

 

•        to review in consultation with the head of the internal auditingorganization and the chief financial advisor the fees charged by the externalauditors for audit and non-audit services;

 

•        to approve all audit engagement fees and terms, as well as allsignificant non-audit engagements with the external auditors;

 

•        to ensure that the external auditors prepare and deliver annuallythe Statement as to Independence and Auditors’ Statement, to discuss with theexternal auditors any relationships or services disclosed in such statementsthat may impact the objectivity, independence or quality of services of ourexternal auditors and to take appropriate action in response to such statementsto satisfy itself of the external auditor’s independence;

 

•        to ensure that the lead partner of the external auditors isrotated at least once every five (5) years; and

 

•        to instruct the external auditors that they are ultimatelyaccountable to the board of directors through the audit committee.

 

*Nomination Committee*

 

Ournomination committee is composed of four members, three of whom are independentdirectors namely, Fr. Bienvenido F. Nebres, S.J., who chairs the committee,Pedro E. Roxas and Juan B. Santos, and Victorico P. Vargas, who is a non-votingmember.

 

The principal functions and responsibilities of our NominationCommittee are:

 

1.       Toreview and evaluate the qualifications of the persons nominated for election asdirectors (including independent directors) or other positions requiring Boardappointment;

 

2.       Toidentify the qualified nominees and recommend that the Board select andrecommend such qualified nominees for election as directors/independentdirectors at the annual meeting of shareholders; and

 

3.       Toprovide an assessment on our Board’s effectiveness in the process of replacingor appointing new directors or members of the Board Committees.

 

*Executive Compensation Committee*

 

Our executive compensation committee is composed of fourmembers, three of whom are regular members of our board of directors.  AlbertF. del Rosario, who chairs the committee, Ray C. Espinosa and Pedro E. Roxasare regular members of our board of directors.  One of these three is anindependent and two are non-independent directors.  The fourth member of thecommittee is Oscar S. Reyes, a member of our advisory board.  Taketo Suzuki,who is a non-independent member of our board of directors, was an advisor tothe committee.  Effective March 31, 2004, Mr. Suzuki resigned and was replacedby Mr. Shigeru Yoshida.

 

Theprincipal functions and responsibilities of our Executive CompensationCommittee are:

 

1.       Toprovide guidance to and assist our board of directors in developing acompensation philosophy or policy consistent with our culture, strategy andcontrol environment;

 

2.      Tooversee the development and administration of our compensation programs;

 

3.       Toreview and approve corporate goals and objectives relevant to the compensationof our Chief Executive Officer, evaluate the performance of our Chief ExecutiveOfficer in light of those goals and objectives, and set the compensation levelof our Chief Executive Officer based on such evaluation.

 

*Finance Committee*

 

Our finance committee is composedof five members, three of whom are regular members of our board of directors.Corazon S. de la Paz, who chairs the committee, Antonio O. Cojuangco andTeresita T. Sy are regular members of our board of directors.  Christopher H.Young, our chief financial advisor and Amado S. Bagatsing comprise the fourthand fifth members.  Mitsuhiro Takase, who is a member of our board ofdirectors, is an advisor to the committee.

 

The principal function of ourFinance Committee is to consider and approve our loans, funding and financingrequirements involving amounts of US$3 million or above but less than US$5million.

 

Employees and Labor Relations

 

As of December 31, 2003, we had 18,191 employees on a consolidated basis.  On a non-consolidatedbasis, we had 10,230 employees, of which 52% were rank and file, 44% weremanagement/supervisory staff and 4% were executives.  This number represents adecrease of 1,901 employees, or approximately 16%, from the staff level as ofthe end of 2002, mainly as a result of the ongoing MRP.  From a peak of 20,312at the end of 1994, the number of our employees declined by 10,082, or 50%, bythe end of 2003.  As of December 31, 2002, we had 19,139 and 12,131 employeeson a consolidated and non-consolidated basis, respectively.  

 

PLDT has three employee unions, themembers of which in the aggregate represent 48% of the employees of the PLDTGroup.  We consider our relationship with our rank-and-file employees’ union,our supervisors' union and our sales supervisors' union to be good.

 

On February 13, 2004, PLDT and the *Manggagawang Komunikasyon sa Pilipinas*, or MKP, our rank-and-file employees’ union,concluded and signed a new three-year Collective Bargaining Agreement, or CBA,covering the period from November 9, 2003 to November 8, 2006.  This CBAprovides each member a signing bonus equivalent to one month salary plusPhp10,000; monthly salary increases of Php1,800, Php1,850 and Php2,450 for thefirst year, second year and third year, respectively; an increase in monthlyrelay station allowance from Php500 to Php600; an increase in per diem fromPhp500 to Php570; a food station allowance of Php650 per covered employee; anincrease in yearly Christmas gift certificate from Php6,000 to Php7,000; anincrease in the amount of coverage under the group life insurance plan fromPhp400,000 to Php500,000; and an additional contribution of Php1 million to theEducational Loan Fund.  Other highlights of this CBA include emergency loaneligibility, an emergency case hospitalization clause and additional benefitsunder the medical hospitalization plan for single members’ dependents.

 

On May 31, 2002, PLDT and *Gabayng Unyon sa Telekomunikasyon ng mga Superbisor*, or GUTS, our supervisors’union, concluded and signed a new three-year CBA up to 2005.  This CBA providedeach member monthly salary increases of 8% of basic pay or Php2,000, whicheveris higher, for 2002; 10% of basic pay or Php2,700, whichever is higher, for2003; and another 10% of basic pay or Php2,400, whichever is higher, for 2004.Other highlights of this CBA were improvements of existing benefits and aone-time signing bonus of Php23,000 for each member of GUTS.

 

On June 26, 2002, PLDT and PLDTSales Supervisors’ Union, or PSSU, concluded and signed a new three-year CBAcovering the period from April 23, 2002 to March 1, 2005.  This CBA providedeach member monthly salary increases of 8% of basic pay or Php2,000, whicheveris higher, for the first year; 10% of basic pay or Php2,700, whichever ishigher, for the second year; and another 10% of basic pay or Php2,400,whichever is higher, for the third year.  Other highlights of this CBA wereimprovements of existing benefits and a one-time signing bonus of Php23,000 foreach member of PSSU.

 

In 2002, PLDT decided torationalize the operations of its operator-assisted call-handling units locatedprincipally in certain of its provincial exchanges.  In recent years,operator-assisted calls have dramatically declined due to the popularity of directdialing and other alternative means of communications, such as e-mailing andtext messaging.  Consequently, 322 employees of PLDT manning its regionaloperator services, where call volumes had significantly declined, wereseparated from service with an enhanced retirement/redundancy pay package,effective December 31, 2002.  In response to this, the MKP filed a Notice ofStrike with the Department of Labor and Employment, or DOLE, on November 8, 2002, and filed a complaint against PLDT for alleged unfair labor practices.After a series of failed conciliation meetings between representatives of PLDTand MKP before a DOLE conciliator, MKP staged a 14-day strike beginning on December 23, 2002.  The strike ended on January 6, 2003 by virtue of a return-to-workorder issued by the DOLE Secretary.  

 

Pension and Retirement Benefits

 

PLDT has a trusteed, non-contributory defined benefit plancovering all permanent and regular employees.  The benefit plan providesbenefits upon normal retirement beginning at age 65, early retirement beginningat age 50 or completion of at least 30 years of credited service, voluntaryseparation beginning at age 40 or completion of at least 15 years of creditedservice, total and physical disability, death and involuntary separation.Benefits are based on the employee's final monthly basic salary and length ofservice.

 

The normal retirement benefit isequal to a percentage of the final monthly basic salary per year of creditedservice.  The percentage is 100% for those with less than 15 years of serviceat retirement and 125% for those with 15 years of service at retirement.Thereafter, the percentage increases by 5% for every additional year ofcredited service up to a maximum of 200%.  The early retirement benefit isequal to the accrued normal retirement benefit with salary and service at thedate of early retirement.

 

The benefit plan's assets includeindirect ownership of 100% of the shares of Home Cable.  All of the shares ofHome Cable are pledged to a group of lenders as security for a loan of HomeCable, in respect of which Home Cable has defaulted on payment.  On April 10, 2002, the loan agent, at the request of a majority of the lenders, delivered anotice to Home Cable declaring an event of default and accelerating this loan.Consequently, the lenders are entitled to foreclose on or sell the collateralgranted as security for the loan, including Unilink's shares in Home Cable.  Asa result, the benefit plan could lose its indirect ownership in these shares orthe pledged assets of Home Cable.

 

In the event the benefit plan'sassets were insufficient to pay the required retirement benefits, PLDT would beobligated to fund the amount of the shortfall.  In addition, claims of PLDT'semployees for retirement benefits that have accrued would rank above the claimsof all other creditors of PLDT, in the event of PLDT's bankruptcy orliquidation.

 

We spent Php943 million forpension, retirement and similar benefits for our employees for the year 2003.

 

For more information about thebenefit plan, see *Note 19 – Employees’ Benefit Plans* to the accompanyingconsolidated financial statements in Item 18.

 

Employees' Stock Plan

 

Since 1966,PLDT has had an employees' stock plan under which shares of common capitalstock may be offered and sold to our regular employees, other than directors,at a discount from market value.  On September 27, 1999, our board of directorsapproved the amendments to the employees' stock plan changing the plan name to“PLDT Stock Purchase Plan” and limiting the coverage of the plan torank-and-file and supervisory employees.  These amendments were approved by ourshareholders at a special meeting held on December 10, 1999.

 

Beginning January 3, 2000 to March 31, 2000, we made our ninth offering under the PLDT Stock Purchase Plan, under which we made available upto 991,200 shares of common stock to all eligible employees as of January 3, 2000.  The shares were offered at a discounted price of Php877.63 per share,which was 85% of the average market price of our common share on the PSE on January 3, 2000.  The 36-month installment payment period began on April 30, 2000 and ended last April 15, 2003.  We believe that the PLDT Stock Purchase Plan gives ouremployees the opportunity to invest in our company on beneficial terms andbroadens our shareholder base.

 

Legal Proceedings

 

On April 10, 2001, a group of private individuals filed a complaint with the Office of the Ombudsman againstformer President Joseph Estrada and other individuals, including Mr. Manuel V.Pangilinan, who, prior to his appointment as our chairman on February 19, 2004, was our president, chief executive officer and one of our directors.The complaint alleged that the defendants were involved in acts involvingdirect and indirect bribery, corruption of public officials, illegal giving oroffering of gifts to public officials and/or “economic plunder.”  In the caseof Mr. Pangilinan, the complaint alleged that a Php20 million check issued byMr. Pangilinan was deposited in a bank account owned by former PresidentEstrada.  The Office of the Ombudsman reviewed the charges against Mr.Pangilinan to determine whether there is probable cause to warrant prosecutionof the charges before the Sandiganbayan, a special court that hears anti-graftcases.  The Office of the Ombudsman subsequently concluded that there wasinsufficient evidence against Mr. Pangilinan.  We are not aware that anyfurther investigation has taken place thereafter.

 

Mr. Pangilinan, in his capacity asChairman of the Board of Metro Pacific Corporation, a stockholder of MetroTagaytay Land Company, Inc., or MTLCI, and four (4) other individuals arerespondents in I.S. 04-A-1057 for alleged violation of Article315(1)(b)(“estafa”) of the Revised Penal Code filed by Mr. Vicente A. Tuason onbehalf of Universal Leisure Club, Inc., or ULCI, and Mr. Jose L. Merin onbehalf of Universal Rightfield Property Holdings, Inc., or URPHI.  The case isnow pending preliminary investigation before the Makati Prosecutor’s Office.

 

In the complaint-affidavit, Messrs.Tuason and Merin alleged that, in violation of the trust reposed by ULCI andcertain contractual commitments and representations, MTLCI, with theparticipation and/or conformity of the respondents, misappropriated andconverted Php139 million that ULCI entrusted for the purpose of incorporatingGolf Land Co., Inc., or GLCI, a corporation to be wholly-owned by MTLCI and towhich a property of MTLCI was to be transferred in exchange for shares inGLCI.  Said GLCI shares were then supposed to be transferred to ULCI.

 

Based on counsel’s advice, Mr.Pangilinan cannot be held liable for violating Article 315(1)(b) of the RevisedPenal Code because no document or other evidence has been presented to provethat Mr. Pangilinan actually participated in the negotiation, preparation,approval, execution and/or implementation of the agreement/contract upon whichthe claims of the complainants are purportedly based, much less that Mr.Pangilinan, with abuse of trust and confidence, misappropriated any amountspaid by ULCI to MTLCI.

 

On March 25, 2004, Mr. Pangilinan submitted his counter-affidavit in I.S. No. 04-A 1057 and, due to the falsityof the principal allegations of the complaint-affidavit, he also filed acompaint-affidavit against Messrs. Tuason and Merin for perjury and unjustvexation. 

 

Item 7.   MajorShareholders and Related Party Transactions

 

The following table sets forth information regardingownership of PLDT common share as of May 31, 2004 ofall shareholders known to us to beneficially own more than 5% of PLDT's commonshare.  All shares of PLDT's common stock have one vote per share.  

 

**Name of Beneficial Owner**

**Number of Shares**

**Beneficially Held(1)**

**Percentage**

**of Class**

 

 

 

First Pacific(2)

53,238,376

31.41

PCD Nominee Corporation(3)

54,089,304

31.91

J.P. Morgan Hong Kong Nominees Limited(4)

25,000,119

14.75

NTT Communications(5)

25,266,971

14.91

Social Security System(6)

12,543,129

7.40

———————

 

*(1)**Underthe rules of the Commission, and as used in this table, “beneficial ownership”means the sole or shared power to vote or direct the voting or to dispose ordirect the disposition of any security.  In addition, a person is deemed to bethe beneficial owner of securities that can be acquired within 60 days, throughthe exercise of any option or warrant.  Common stocks subject to options orwarrants that are currently exercisable or exercisable within 60 days aredeemed outstanding for computing the ownership percentage of the person holdingsuch options or warrants, but are not deemed outstanding for computing theownership percentage of any other person.  The amounts and percentages arebased upon 169,519,694 shares of common stock outstanding as of May 31, 2004.*

 

*(2)   Consists of shares held by affiliates of FirstPacific, including 26,034,263 shares held of record by PhilippineTelecommunications Investment Corporation, or PTIC, 6,717,319 shares held ofrecord and 455,000 shares held in street name by and for Larouge B.V.;2,919,260 shares held of record by Asia Link, B.V.; and 17,112,534 shares heldof record by Metro Pacific Resources, Inc., or MPRI. Pursuant to resolutionadopted by the board of directors of PTIC, a copy of which had been furnishedto PLDT, the President of PTIC, Mr. Manuel V. Pangilinan, has the continuingauthority to represent PTIC at any and all meetings of the shareholders of acorporation in which PTIC owns of record or beneficially any shares of stock orother voting security, and to sign and deliver, in favor of any person he maydeem fit, a proxy or other power of attorney, with full power of delegation andsubstitution, authorizing his designated proxy or attorney-in-fact to vote anyand all shares of stock and other voting securities owned of record orbeneficially by PTIC at any and all meetings of the shareholders of thecorporation issuing such shares of stock or voting securities.  Based onresolution of the Board of MPRI and of the sole shareholder of each of AsiaLink B.V. and Larouge B.V., copies of which had been furnished to PLDT, MPRI’sboard of directors designated MPRI’s President, Mr. Manuel V. Pangilinan wasappointed as authorized representative and proxy to represent each of theabovenamed companies and to vote their respective shares in PLDT in the AnnualMeeting of Shareholders of PLDT for the year 2004 and to vote the sharesregistered in the name of MPRI in the books of PLDT on any and all matterswhich may properly come before the shareholders during the aforementionedmeeting.*

* *

*(3)   Registered owner of shares beneficially owned byparticipants in the Philippine Central Depository or PCD, a private companyorganized to implement an automated book entry system of handling securitiestransactions in the**Philippines**.*

* *

*(4)   Holds shares as nominee of JPMorgan Chase Bank,successor depositary of the shares of common stock underlying the AmericanDepositary Shares (ADSs) each representing one share of common stock of PLDTand evidenced by American Depositary Receipts (ADRs).  Pursuant to the CommonStock Deposit Agreement, dated October 14, 1994, as amended on February 10,2003, if the depositary does not receive voting instructions from a holder ofADRs, such holder will be deemed to have instructed the depositary to provide adiscretionary proxy to a person designated by PLDT for the purpose of exercisingthe voting rights pertaining to the shares of common stock represented by suchholder of ADRs, except that no discretionary proxy will be given with respectto any matter as to which substantial opposition exists or which materially andadversely affects the rights of the holders of such ADRs.*

* *

*(5)   On December 11, 2002, NTT Communications Capital(UK) Limited, or NTTC-UK, and NTT Communications signed an agreement totransfer NTTC-UK’s ownership of shares in PLDT to NTT Communications to enablethe latter to consolidate its ownership by becoming the direct beneficial ownerthereof.  Prior to this transfer, NTT Communications and NTT were already theindirect beneficial owners of the PLDT shares held by NTTC-UK, a wholly-ownedsubsidiary of NTT Communications.  Inasmuch as NTT Communications is NTT’swholly-owned subsidiary, NTT remains to be the indirect beneficial owner of theshares in PLDT.  In connection with the Annual Meeting of the Shareholders ofPLDT for the year 2004, Mr. Kiyoshi Maeda, an authorized representative of NTTCommunications, executed a proxy in favor of Mr. Manuel V. Pangilinan with fullpower of substitution and delegation to vote the PLDT common shares of NTTCommunications at the aforementioned meeting.*

* *

*(6)   Includes 7,518,340 shares held of record by PCDNominee Corporation.*

* *

As of May 31, 2004, approximately 87.4% of the outstandingcapital stock of PLDT was registered in the names of Philippine persons.

 

Related Party Transactions

 

Companies within thePLDT Group are engaged in arm's-length transactions in the ordinary course ofbusiness.  We believe that the terms of these transactions are comparable withthose available from unrelated parties.  The following is a discussion of themajor agreements with or between members of the PLDT Group and related parties.

 

*Agreementswith NTT Communications*

 

PLDT is aparty to the following agreements with NTT Communications and/or itsaffiliates:

 

•        *Advisory ServicesAgreement.*On March 24, 2000,PLDT entered into an agreement with NTT Communications, as amended on December31, 2003, under which NTT Communications provides PLDT with technical,marketing and other consultants for various business areas of PLDT startingApril 1, 2000;

 

•        *Domestic Fiber OpticNetwork Submerged Plant Maintenance Agreement.*   On July 4, 2000, PLDT entered into an agreement with NTT World Engineering MarineCorporation, or NTT WEMC, for the submarine cable repair and other alliedservices for the maintenance of PLDT’s DFON submerged plant for a period offive years up to July 4, 2005.  Under the agreement, PLDT shall pay NTT WEMC 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;

 

•        *Arcstar LicensingAgreement and Arcstar Service Provider Agreement.*On March 24, 2000, PLDT entered into anagreement with NTT Worldwide Telecommunications Corporation under which PLDTmarkets managed data and other services under NTT Communications’ “Arcstar”brand to its corporate customers in the Philippines.  PLDT alsoentered into a Trade Name and Trademark Agreement with NTT Communications underwhich PLDT has been given the right to use the tradename “Arcstar” and itsrelated trademark, logo and symbols, solely for the purpose of PLDT’smarketing, promotional and sales activities for the Arcstar services within thePhilippines; and

 

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

 

Total fees under these agreements amounted to Php288 million,Php289 million and Php362 million for the years ended December 31, 2003, 2002 and 2001, respectively.  As of December 31, 2003 and 2002, outstandingobligations of PLDT amounted to Php40 million and Php36 million, respectively.

* *

*PLDT Letter of Support in Favorof Piltel*

 

In connection with Piltel's debtrestructuring, on June 4, 2001, PLDT issued a letter of support for the benefitof Piltel and its creditors, under which PLDT is obligated to provide up to amaximum amount of US$150 million to make up shortfalls in Piltel'soperating cash flows.  As of December 31, 2003, US$50 million remainedavailable under the letter of support.

 

*Agreements between Smart andPiltel*

 

In connection with the integration of their operations, Smartand Piltel have entered into the following agreements:

 

•        An agreement for theco-location, or sharing, of cellular sites selected at the option of Smart,whereby Piltel is paid a usage fee of Php45,000 per shared site per month, subject to a 10% annual increase.  Co-locationexpenses under this agreement amounted to Php139 million in 2003 and Php151million in 2002.  On December 18, 2003, Smart made an advance payment of co-location fees under this agreementamounting to Php783 million covering the period from January 1, 2004 up to December 31, 2008.  The advance payment was based on the rate applicable to 2003on which the annual escalation rate was applied over the five-year period anddiscounted at 10%;

 

•        An agreement whereby Smartmanages the operation of Piltel’s cellular system.  This agreement is dividedinto three sub-agreements as follows:

 

                                    (i)          A Facilities Management Agreement under which Smart operates, maintainsand manages the physical facilities and technical services of Piltel’s existingcellular system.  Piltel pays Smart a fixed monthly fee of Php4 million and avariable monthly fee of Php13,735 per site covered by the agreement.Additional fees of Php186,878 per month and Php624 per site per month arepayable at the end of each calendar year upon rendition of the services inconformity with the agreement.  This agreement was amended in May 2001 toinclude the management, operation and maintenance of Piltel’s prepaid wirelesstelecommunications network in the E.O. 109 areas in Mindanao including thebusiness and central offices, base stations, and public calling offices ofPiltel located in South Cotabato, Saranggani and General Santos, Davao City,Davao del Sur, Zamboanga del Norte, Zamboanga del Sur and Misamis Occidental.In November 2003, the agreement was further amended to eliminate the monthlyfixed costs of Php4 million and the additional fees of Php186,878 per month andincrease the monthly variable cost to Php27,470 per site and the additionalfees to Php1,248 per site per month;

 

                                  (ii)          A Customer Service Management Agreement under which Piltel outsourcesthe operation of its customer service and billing functions for its cellularsystem to Smart for a fixed monthly fee of Php9 million and a variable cost ofPhp17 per prepaid cellular subscriber.  An additional fee of Php399,926 permonth and Php1.00 per prepaid subscriber per month is payable at the end ofeach calendar year upon rendition of the services in accordance with theagreement; and

 

                                 (iii)          An Administrative Support and Management Services Agreement under whichSmart provides administrative support and services to Piltel including payrolladministration and training, finance and financial accounting, audit, legal,purchasing and materials management, public affairs, information technology,rates and tariffs administration, sales and marketing, product development andcarrier services for a fixed monthly fee of Php8 million.  An additional fee ofPhp353,764 per month is payable at the end of each calendar year upon renditionof the services in accordance with the agreement.

 

This agreement was amended inDecember 2002 to include the provision of sales and distribution services forPiltel’s products and services.  Piltel pays Smart the residual percentagediscount between Piltel’s prescribed distributor discount rate and the discountrate that Smart gives to its retailers and wholesalers for the sale of prepaidcards and the residual commission between Piltel’s prescribed discount and thediscount that Smart extends to its retailers and wholesalers for phonekit andSIM pack sales.

 

Totalmanagement fees under these three sub-agreements totaled Php721 million, Php661million and Php540 million for the years ended December 31, 2003, 2002 and 2001, respectively.  Under these agreements, outstanding receivables of Smart as of December 31, 2003 and 2002 amounted to Php906 million and Php569 million,respectively.

 

•        A Facilities Service Agreement under which Piltel accessesSmart’s existing GSM network and facilities to enable Piltel to offer prepaidcellular service using GSM technology in exchange for approximately 50% ofPiltel’s revenues, net of interconnection expenses.  In December 2003, thisagreement was amended to change the basis of computation of the facilityservice fee from card sales to usage, retroactive to January 1, 2003.  Total fees under this agreement amounted to Php4,247 million, Php2,494 million andPhp1,647 million for the years ended December 31, 2003, 2002 and 2001,respectively.  Under this agreement, outstanding receivables of Smart amountedto Php633 million and Php247 million as of December 31, 2003 and 2002, respectively. 

 

•        A Billing Service Agreement for the printing and delivery of thebilling statements of Piltel’s LEC subscribers.  Under the agreement, Piltel agreesto pay Smart an average of Php4.60 per bill printed and an average of Php5.40per bill delivered.  Total fees under this agreement amounted to Php6 millionand Php4 million for the years ended December 31, 2003 and 2002, respectively.

 

*Facilities Management Agreement between PLDT and Piltel*

 

On July 19, 2001, PLDT entered intoa Facilities Management Agreement with Piltel under which PLDT undertakes themanagement, operation and maintenance of Piltel’s regional telecommunicationand E.O. 109, network operations and services, including E.O. 109 fixed linebuild-out installations, public calling offices and payphone facilities and thesystems required to support these services.

 

The agreement covers Piltel’sregional telecommunication services in Baguio, Puerto Princesa, Masbate, andBoac and E.O. 109 services in Alabel, Banga, Dapitan, Davao, Digos, Dipolog,General Santos, Kiamba, Koronadal, Pagadian, Polomolok and Surallah in Mindanao.

 

Under the agreement, PLDT alsoundertakes the management of the computer system, billing, revenue assuranceand inter-carrier settlements reporting of Piltel’s regional telecommunicationservices in Olongapo and Subic.

 

The monthly managementfee payable by Piltel is based on cost, and for cost components where margin isallowed, 15% is applied.  All third party invoices are passed on to Piltel atcost, including value-added tax.

 

The agreement supersedes theFacilities Management Agreement between PLDT and Piltel, dated May 12, 2000,under which PLDT undertook the management, maintenance and operation of theregional telecommunication services of Piltel, including public calling officesand payphone operations located in Baguio City, Puerto Princesa, Boac andMasbate.  The new agreement is effective for three years from July 2001 to July2004.

 

Total management fees under theseagreements amounted to Php52 million for each of the years ended December 31, 2003 and 2002 and Php118 million for the year ended December 31, 2001.  Fees for billing services amounted to Php18 million, Php19 million and Php17million for the years ended December 31, 2003, 2002 and 2001, respectively.Outstanding receivables of PLDT under these agreements amounted to Php329million and Php258 million as of December 31, 2003 and 2002, respectively.

 

*Facilities Management Agreement between Piltel and**Subic**Telecom*

* *

On September 5, 2001, Piltel and Subic Telecom entered into a Facilities Management Agreement of the regionaltelephone network, customer operations, network operations and payphones of Piltelin Subic and Olongapo City.  The monthly management fee payable by Piltel isbased on cost, and for cost components where margin is allowed, 15% isapplied.  In addition, Piltel pays a monthly variable cost per account in theamount of Php44 for repairs and maintenance.  All third party invoices arepassed on to Piltel at cost, including value-added tax.  This agreementsupersedes the facilities management agreement entered into by Piltel and SubicTelecom on May 29, 2000.

 

Total management fees under thisagreement amounted to Php21 million, Php22 million and Php24 million for theyears ended December 31, 2003, 2002 and 2001, respectively.  The new agreementis effective for three years until September 2004.  Outstanding receivables ofSubic Telecom under this agreement amounted to Php11 million and Php2 millionas of December 31, 2003 and 2002, respectively. 

 

*Air Time PurchaseAgreement between PLDT and PT Asia Cellular Satellite and Related Agreements*

 

In March1997, PLDT entered into a Founder NSP Air Time Purchase Agreement, or ATPA withPT Asia Cellular Satellite, as amended in December 1998, under which PLDT wasgranted the exclusive right to sell ACeS services in the Philippines.  Inexchange, the Air Time Purchase Agreement states that PLDT has to purchase fromPT Asia Cellular Satellite at least US$5 million worth of air time annuallyover ten years, commencing on the date of commercial operations, which has beenset as January 1, 2002.  The commercial operations date is defined as theearlier of:

 

•        the day on which PT Asia Cellular Satellite places the Garuda Isatellite in commercial operation; and

 

•        the date of final acceptance of the Garuda I satellite andassociated equipment under the terms of the Spacecraft Contract, dated August28, 1995, between PT Asia Cellular Satellite and Martin Marietta OverseasCorporation.

 

However, the commercial operationsdate may not occur without the consent of PLDT if there is a constructive totalloss or partial loss of the satellite under its launch insurance contract andthe satellite cannot provide commercial service in the Philippines.

 

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

 

PLDT and the other founder NSPs are endeavoring to amend the AirTime Purchase Agreement due to the occurrence of partial satellite loss,changes in the primary business of ACeS and other events affecting thebusiness.

* *

In March2003, PLDT, together with the other founder NSPs, entered into a StandstillAgreement with AIL suspending the application and enforcement of the minimumand supplemental air time payments under the original Air Time PurchaseAgreement.  In lieu of these payments, the parties agreed that AIL shallprovide PLDT and the other founder shareholders, with unlimited use of air timefor the year 2003 in exchange for a fixed fee in the amount of US$3.8 millionfor PLDT.  PLDT was also obliged to purchase from AIL 13,750 satellite phoneunits in 2003 at US$395 F.O.B. per unit, subject to quarterly priceadjustment.  The parties to the Standstill Agreement also agreed to negotiatein good faith and use their best efforts to reach an agreement on a revised AirTime Purchase Agreement before November 15, 2003 that will cover, among othermatters, the amended minimum and supplemental air time payment provisionssubject to the approval of AIL’s creditors.

* *

On February 10, 2004, notwithstanding the on-going negotiations,AIL advised PLDT of the termination of the Standstill Agreement and thereinstatement of the terms under the original Air Time Purchase Agreementfollowing the lapse of the deadline set in the Standstill Agreement for theestablishment of a revised Air Time Purchase Agreement.  See *Note 18–Related Party Transactions*to the accompanying consolidated financialstatements in Item 18 for further discussion.

* *

PLDT also entered into a FounderNSP Operating Agreement with PT Asia Cellular Satellite on March 12, 1997, under which PLDT may:

* *

•        authorize distributors toresell ACeS services in the Philippines upon prior approval from PT Asia CellularSatellite; and

 

•        appoint agents to solicit andbill PLDT’s or its authorized distributors’ subscribers for ACeS services andto sell terminals on behalf of PLDT.

* *

Under an Assignment and AssumptionAgreement dated December 29, 1998, PT Asia Cellular Satellite agreed to assignand transfer to AIL all of PT Asia Cellular Satellite’s rights under theFounder NSP Air Time Purchase Agreement and Founder NSP Operating Agreement.

* *

Under an Acknowledgment ofAssignment of Air time Purchase Agreement entered into on December 29,1998, by and among PLDT, P.T. Bank Internasional Indonesia and AIL, PLDTconsented to the assignment by AIL of the Founder NSP Air time PurchaseAgreement to P.T. Bank Internasional Indonesia, as security agent, for thebenefit of the secured parties under the Security Agreement dated as ofDecember 29, 1998, which was executed in connection with the Amended andRestated Credit Agreement dated December 29, 1998 among PT Asia CellularSatellite, AIL, P.T. Bank Internasional Indonesia and various other banks.

* *

On September 30, 2002, PT Asia Cellular Satellite, AIL, asguarantor, P.T. Bank International Indonesia, as security agent, and variousother banks signed a Rescheduling Agreement, which amended the terms of theAmended and Restated Credit Agreement dated December 29, 1998, moving theprincipal repayment dates to agreed periods with the final maturity date onJanuary 31, 2012.

* *

*Transponder Lease Agreement**between PLDT andMabuhay Satellite*

 

On December 28, 1995, PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement, as amended on May 10, 2000, pursuant to which Mabuhay Satellite leases to PLDT C-band transponders onboard the Agila II satellite, in consideration of a basic rent.  This agreementhas a term of ten years commencing on December 18, 1997, unless earlier terminatedin accordance with the terms thereof.  Originally, the lease covered 14 C-bandtransponders, however, on December 18, 2000, PLDT terminated the TransponderLease Agreement with respect to four transponders which service was interruptedand not restored resulting in PLDT’s inability to access and use thetransponders.  This was further reduced to eight C-band transponders on December 18, 2002.  The annual basic rent for the transponders is approximately US$14million with US$1.8 million annual lease per transponder.

 

Under an Acknowledgment and Consent Agreement dated January 4, 1996, PLDT acknowledged and consented to Mabuhay Satellite's:

 

•        transfer and assignment of all amounts payable by PLDT under theTransponder Lease Agreement; and

 

•        grant of a continuing security interest of first priority in allof Mabuhay Satellite's rights, title and interest in, to and under theTransponder Lease Agreement, in favor of the collateral agent for the benefitof the lenders who are parties to the Omnibus Credit and Security Agreementdated December 14, 1995, as amended.

 

Total fees under these agreements amounted to Php747 million,Php925 million and Php927 million for the years ended December 31, 2003, 2002 and 2001, respectively.  Outstanding obligations of PLDT under theseagreements amounted to Php26 million and Php270 million as of December 31, 2003 and 2002, respectively.

* *

*Agreements between Smart and ACeS**Philippines*

 

On July 18, 2000, Smart enteredinto a Service Distribution Agreement with ACeS Philippines under which ACeSPhilippines appointed Smart as an authorized service provider of ACeS GlobalMobile Personal Communication by Satellite Services, or GMPCS Services, in thePhilippines having the task of exerting its best efforts to market and sellaccess to usage of the said services to prospective subscribers.

 

An amendment to this Service Distribution Agreement was made onFebruary 16, 2001, whereby Smart shall remit to ACeS Philippines a FacilityUsage Fee based on a revenue sharing formula.  ACeS Philippines shall in turnpay Smart’s charges for the payphone-related services.  

 

Also on February 16, 2001, Smart entered into a FacilitiesManagement Agreement, or FMA, and Administrative Support and ManagementServices Agreement, or the Service Agreement, with ACeS Philippines.  Inexchange for its services, Smart shall receive fixed and variable monthly feesfrom ACeS Philippines.  Under the FMA, Smart undertakes the management,maintenance and operation of the ACeS GMPCS Services, which are currently readyand available for actual use or operation.  Under the Service Agreement, Smartshall provide certain administrative support and services in certain aspects ofACeS Philippines’ business operations such as payroll administration andtraining, finance, audit, legal, purchasing and materials management, publicaffairs, information technology, sales and marketing, ACeS Philippines NSPrelations, AIL relations and other support services.

 

Total fees under these agreements,net of Smart’s share, amounted to Php12million for the years ended December 31, 2003 and 2002 and Php17 million for the year ended December 31, 2001.  Smart had no outstandingobligation as of December 31, 2003 and 2002.

 

*Agreements between Smart and**Asia**Link B.V*.*, or ALBV*

Smart has an existing Technical Assistance Agreement with ALBVfor the latter to provide technical support services and assistance in theoperations and maintenance of CMTS for a period of five years, subject torenewal 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.

 

Smart also has an existing Services Agreement with ALBV for aperiod of 25 years starting January 1, 1999, which shall automatically expireunless renewed by mutual agreement of both parties.  Under the agreement, ALBVprovides advice and assistance to Smart in sourcing capital equipment andnegotiating with international suppliers, arranging international financing andother services therein consistent with and for the furtherance of theobjectives of the services.  Services Agreement fees were prepaid for the whole25-year period.

 

ALBV is a subsidiary of the FirstPacific Group.

 

Total fees under these agreements amountedto Php429 million for each of the years ended December 31, 2003 and 2002, andPhp249 million for the year ended December 31, 2001.Outstanding obligations of Smart under the Technical Service Agreement amountedto Php228 million and Php31 million as of December 31, 2003and 2002, respectively.

 

*Agreements relating to insurance companies*

Gotuaco del Rosario and Associates, or Gotuaco, actsas the broker for certain insurance companies to cover certain insurableproperties of the PLDT Group.  Insurance premiums are remitted to Gotuaco andthe brokers’ fees are settled between Gotuaco and the insurance companies.  Inaddition, PLDT has signed an insurance policy with Malayan Insurance Co.  Inc.,or Malayan, wherein premiums are paid directly to Malayan.  Total payments toGotuaco and Malayan in 2003 covering the 12-month period ending July 31, 2004amounted to Php447 million.  Two directors of PLDT have a direct/indirectinterest in or serve as director/officer of Gotuaco and Malayan.

Other Transactions

 

PLDT, Smart, Piltel, Clark Telecom,Subic Telecom and Maratel are parties to various interconnection agreementswith each other.  The terms of these agreements are similar to the terms ofother interconnection agreements with telecommunications providers that are notaffiliated with PLDT.

 

On 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 Php4,138million, as consideration and in exchange for 298 million preferred shares ofSmart subscribed by PLDT at Php13.875 pershare, or a total subscription price of Php4,138million.  

 

As part of our strategy to fosteroperational efficiencies within the PLDT Group, Subic Telecom conveyed themanagement of certain of its receivables to PLDT Global on August 1, 2003.  In addition, negotiations were ongoing as of December 31, 2003 for the transfer ofcertain of Subic Telecom’s assets to PLDT.  Settlement of the transfer isintended to be in the form of offsetting arrangements.

 

There have been noloans between PLDT and any related party during the period beginning January 1, 2003 through the date of filing of this annual report.

 

Except for the transactions described above and therelated party transactions discussed in *Note 18 – Related Party Transactions*to the accompanying consolidated financial statements in Item 18, there were noother material transactions during the last two years, nor there are anymaterial transactions currently proposed, to which PLDT was or is to be aparty, in which a director or key officer or owner of more than 10% of thecommon shares of PLDT, or any member of the immediate family of a director orkey officer or owner of more than 10% of the common shares of PLDT had or is tohave a direct or indirect material interest.  In the ordinary course ofbusiness, PLDT has transactions with other companies in which some of suchpersons may have an interest.

 

No director or officer of PLDT orassociate of any such director or officer was indebted to PLDT at any timeduring the period from January 1, 2003 through the date of filing of thisannual report.

 

Item 8.   FinancialInformation

** **

Consolidated Statements and Other Financial Information

 

Consolidated financial statementsare set forth under “Item 18. Financial Statements.”

 

Legal Proceedings

 

Except as disclosed in the following paragraphs, PLDT is not aparty to, and none of its property is subject to, any pending legal proceedingswhich PLDT considers to be potentially material to its business.

 

*Quo Warranto Action*

* *

On June 4, 1990, the Solicitor General of the Philippinesinstituted legal proceedings in the Regional Trial Court of Makati City seekingto "oust Philippine Long Distance Telephone Company (PLDT) from exercisingits franchise and/or to revoke, cancel and/or pre-terminate its franchise (ActNo. 3436, as amended) and/or to break up an unlawful monopoly and give equaland fair opportunity to other service corporations."  The SolicitorGeneral cited constitutional and statutory grounds for his action.  Theseinclude alleged foreign investors' participation in the control and managementof PLDT on a basis disproportionate to their holdings of PLDT's capital stock,violation of the requirement that 60% of the capital of a public utility beowned by Philippine citizens, inadequate and costly equipment and service, andblocking of the right of other parties to provide telephone service in thePhilippines.

 

We believe that these allegationsare without merit.  The Philippine Congress granted PLDT's amended franchiseunder R.A. 7082 notwithstanding the existence of these proceedings and theopposition of the Solicitor General.  The case has been archived by virtue of acourt order dated January 20, 1999.  No further action has been taken and thecase remains inactive.  

 

*Victor C. Fernandez*

* *

On December 9, 1999, a holder of preferred shares of PLDT, Victor C. Fernandez, filed a petition against theincumbent directors of PLDT questioning the validity of the resolutions of theboard of directors of PLDT then authorizing the acquisition of Smart.Fernandez claimed that he would suffer injury from dilution of his shares andthe possible revocation of PLDT's franchise in view of the violation of thePhilippine Constitution's foreign equity restrictions if these resolutions wereimplemented.  Fernandez also claimed that the approval rights to be granted toNTT Communications in connection with the Smart acquisition would constituteforeign intervention in the management and operation of a public utility andthat the Smart shares being acquired by PLDT were overvalued.  The respondentdirectors denied all these claims and have articulated their legal arguments intheir answer to the complaint.

 

Fernandez's application for arestraining order to enjoin the holding of the PLDT shareholders' meeting on December 10, 1999 was denied by the Philippine SEC.  At this meeting, the shareholdersapproved the resolutions passed by the board of directors authorizing theacquisition of Smart.  On June 20, 2000, Fernandez's application for a writ ofpreliminary injunction was denied.

 

In view of the provisions of R.A. 8799 enacted in July2000, referred to as the Securities Regulations Code, transferring thejurisdiction of intra-corporate controversies to the Regional Trial Court, thePhilippine SEC transferred the case to the Regional Trial Court of Manila.  Bya motion filed by the parties, the case was later ordered transferred to theproper venue, the Regional Trial Court of Makati City and was raffled to Branch 142 of the Regional Trial Court of Makati City (the “Makati Court”).

 

During the pre-trial hearing, the parties agreed tolimit the resolution of the case to merely issues of law except for the issueon respondent directors’ counterclaims.

 

The transactions subject of the suit (“QuestionedTransactions”) were limited to PLDT’s acquisition of Smart and NTT’s entry intoPLDT and the issues to be resolved were limited to whether (a) the remainingQuestioned Transactions violate the constitutional limitations on foreignequity in public utilities, The Foreign Investments Act and the Anti-Dummy Law;(b) the Questioned Transactions result in a monopoly; and (c) Fernandez isentitled to annul the Questioned Transactions.

 

The Makati Court in its decisiondated February 21, 2002 (the “Decision”) held that the Questioned Transactions“resulting from resolutions which have been approved by PLDT’s shareholders andgovernment regulatory agencies, such as the NTC and the SEC, are valid andlegal” and thus dismissed the petition of Fernandez.  On April 14, 2003, Fernandez filed with the Supreme Court a petition for review on certiorari seeking areview of the Decision (the “Petition”).

 

Prior to the scheduled hearing on the counterclaims ofthe respondent directors, Fernandez filed on April 29, 2003, a motion for thesuspension of the proceedings pending resolution by the Supreme Court of thePetition (the “Motion for Suspension”).  The Motion for Suspension was deniedby the Makati Court and the hearing for the reception of evidence on therespondent directors’ counterclaims was set.

 

On May 22, 2003, Fernandez filed a motion to refer the Petition tothe Supreme Court *En Banc*(the*“*Motion for Referral to SC*EnBanc*”)*.*

* *

Subsequently, the Supreme Court in a resolution dated June 9, 2003 deniedthe Petition and in a resolution dated July 9, 2003,also denied the Motion for Referral to SC *En Banc*.  On July 22, 2003,Fernandez filed a motion for reconsideration of the resolution denying thePetition (the “Motion for Reconsideration”), and in a manifestation and motiondated August 15, 2003, moved for a reconsideration of the Resolution denyingthe Motion for Referral to the SC *En Banc*.  The respondent directorsfiled their comment on the Motion for Reconsideration on December 15, 2003.

 

On August 8, 2003, the Makati Court scheduled the presentationof evidence pertaining to each of the counterclaims of the respondent directorsfor moral and exemplary damages.  The respondent directors no longer testifiedon their counterclaims during the September 2, 2003 hearing.  On December 4, 2003, Fernandez filed a demurrer to evidence (“demurrer”) and moved for thedismissal of the respondents’ counterclaims, which the respondent directorsopposed.  In an Order dated February 27, 2004, (the “Order”), the Makati Courtgranted the Demurrer and dismissed respondent directors counterclaims for moraland exemplary damages and attorney’s fees citing the lack of clear andconvincing evidence to show malice or bad faith on the part of Fernandez inrespect of the filing of the case.  The respondent directors filed their motionfor reconsideration of the Order on March 24, 2004 and the hearing on themotion for reconsideration was scheduled on April 23, 2004.

 

*Taxation*

 

*NTC Fees*

* *

Since 1976, PLDT has received assessments from NTC for permit,supervision and regulation fees, or SRF, and other charges pursuant to Section40 of Commonwealth Act 146, otherwise known as the Public Service Act.  As of December 31, 2003, PLDT has paid a total amount of Php1,483 million in SRF, of whichPhp1,301 million were paid under protest. 

 

PLDT is contesting the manner bywhich these assessments were calculated and the basis for such calculations.The case is now with the Supreme Court and upon the rules and practice ofcourt, now stands submitted for decision.

 

Smart and Piltel have similarlyreceived assessments from NTC for permit, SRF and other charges which were paidunder protest.  Total payments made by Smart amounted to Php122 million in2003, Php114 million in 2002 and Php86 million in 2001.  Total payments made byPiltel amounted to Php9 million in 2002 and Php68 million in 2001.  There wasno payment made by Piltel in 2003.

 

We have madea reasonable estimate of the amount necessary to pay or settle the contestedassessment in the event of an unfavorable judgment against us and have made theappropriate provisions in our consolidated financial statements as of December 31, 2003.

 

*LocalBusiness and Franchise Taxes*

* *

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

 

The Local Government Code of 1991, or R.A. 7160, whichtook effect on January 1, 1992, extended to LGUs the power to tax business withintheir territorial jurisdiction granted under Batas Pambansa No. 337 andwithdrew tax exemptions previously granted to franchise grantees under Section12 of R.A. 7082.

 

PLDT believes, based on the opinion of its legalcounsel, that R.A. 7925, which took effect on March 16, 1995, and the grant ofsimilar local franchise and business taxes exemption privileges to otherfranchise holders subsequent to the effectivity of R.A. 7160, implicitlyrestored its local franchise and business taxes exemption privilege underSection 12 of R.A. 7082, or the PLDT Franchise, pursuant to Section 23 thereof,or the equality of treatment clause.

 

To confirm this position, PLDT sought and obtained on June 2, 1998 a rulingfrom the Bureau of Local Government Finance, or BLGF, of the PhilippineDepartment of Finance which ruled that PLDT is exempt from the payment of localfranchise and business taxes imposable by LGUs under R.A. 7160.

 

By virtue of the BLGF Ruling, PLDT stopped payinglocal franchise and business taxes starting with the fourth quarter of 1998 andhas filed with certain LGUs claims for tax refund covering the period from thesecond quarter of 1995 to the third quarter of 1998.  PLDT has receivedassessments for local franchise and business taxes from several cities andprovinces following PLDT’s decision to stop payment of local franchise andbusiness taxes.  

 

Following a decision of the Supreme Court on March 25, 2003, ajudgment in the amount of Php4 million against PLDT involving the City of Davao becamefinal and executory on April 9, 2003, pursuant to which PLDT was not exempt from the localfranchise tax.  Although PLDT believes that it is not liable to pay localfranchise and business taxes, PLDT has taken steps to arrive at compromisesettlements with several LGUs in order to maintain and preserve its goodstanding and relationship with these LGUs.  PLDT has paid a total amount ofPhp170 million as of December 31, 2003 for local franchise tax covering the fourth quarterof 1998 to 2003 to certain LGUs which have agreed to a compromise settlement.

 

PLDT continues to contest assessments amounting toPhp5,142 million as of December 31, 2003, a number of which were based on the gross revenuesof PLDT derived from its operations within the entire Philippines.PLDT claims that assuming that it is liable for local franchise tax, R.A. 7160provides that local franchise tax shall be based on the gross receipts of thepreceding year received or collected for services rendered within the jurisdictionof the taxing authority.  Therefore, the use by some LGUs of gross revenues asthe 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 local franchise tax.

 

In a petition recently filed with the Supreme Courtinvolving another LGU, PLDT has appealed to the Supreme Court for are-examination of its decision in the City of Davao case in light of the strongdissenting opinion in that case concurred in by four other Members of theSupreme Court.

 

Smart has, likewise,received assessments for local franchise and business taxes from certain citiesand provinces in the aggregate amount of Php313 million, which Smart continuesto contest.  Smart believes, based on the opinion of its legal counsel, thatSmart is not liable to pay the local franchise and business taxes by virtue of(i) the opinion issued by the BLGF dated August 13, 1998; and (ii) Smart’sexemption under its legislative franchise which took effect after the effectivedate of R.A. 7160.

 

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

 

We have made areasonable estimate of the amount necessary to pay or settle the contestedassessment in the event of an unfavorable judgment against us and have made theappropriate provisions in our consolidated financial statements as of December 31, 2003.  

 

Mabuhay SatelliteArbitration

MabuhaySatellite was engaged in an arbitration commenced by Space Systems Loral, Inc.,or SS/L, as a result of a dispute between the parties concerning theirsatellite joint venture.  On June 5, 2002, Mabuhay Satellite received an arbitration decisionrequiring Mabuhay Satellite to pay SS/L the principal amount of approximatelyUS$10 million, plus accrued interest representing Mabuhay Satellite’s unpaidbalance for its 65% equity share in the joint venture.  On June 30, 2003,Mabuhay Satellite and SS/L concluded a settlement agreement whereby Mabuhaywill lease two (2) transponders under a transponder agreement on a full-termbasis to SS/L and offset the lease charges due from Loral Skynet NetworkServices, Inc. (formerly Loral Cybestar, Inc.), an affiliate of SS/L, among othersfor a full and final settlement of the arbitration decision.  See *Note 8 –Investments* to the accompanying consolidated financial statements in Item18 for further discussion.

U.S. Federal Communications Commission, or FCC, Rulingversus Philippine Telecommunications Companies

Effective as of February 1, 2003,PLDT stopped terminating traffic sent directly by each of AT&T and MCI,because PLDT’s termination rate agreements with AT&T and MCI lapsed inDecember 2002 without either agreeing with PLDT on any provisional arrangementor final agreement on new termination rates. In orders dated February 7 and 26,2003, the National Telecommunications Commission, or NTC, confirmed that“absent any provisional or interim agreement” with U.S. carriers,there would be no provision of termination services between the parties “whoare thereby encouraged to seek other routes or options to terminate traffic tothe Philippines.” Upon petitions of AT&T and MCI, on March 10,2003, the International Bureau of the U.S. FCC issued an Order which directedall facilities-based carriers subject to U.S. FCC jurisdiction to suspendpayments for termination services to Philippine carriers, including PLDT, Smartand Subic Telecom, until such time as the U.S. FCC issues a Public Notice thatAT&T’s and MCI’s circuits on the U.S.–Philippine route are fully restored.The Order also removed the Philippines from the list of U.S.–international routes approvedfor the provision of International Simple Resale, or ISR. In response to theInternational Bureau’s Order, the NTC issued a Memorandum Order dated March 12,2003, directing all affected Philippine carriers “(1) not to accept terminatingtraffic via direct circuits from U.S. facilities-based carriers who do not payPhilippine carriers for services rendered; and (2) to take all measuresnecessary to collect payments for services rendered in order to preserve theviability, efficiency, sustained growth and development and continuedcompetitiveness of the Philippine telecommunications industry.”

On October 17,2003, based on negotiations between the NTC and the U.S. FCC to resolve theissue regarding termination rates, the NTC, in the expectation that the U.S.FCC would fully lift the March 10, 2003 Order, lifted its March 12, 2003 Orderand directed all Philippine carriers to immediately accept terminating trafficvia direct circuits from U.S. facilities-based carriers at mutually acceptablefinal or interim termination rates and other terms and conditions agreed uponby the parties.

On November 17,2003, after Smart reached interim agreements with each of AT&T and MCI onSeptember 30 and November 12, 2003, respectively, the International Bureau ofthe U.S. FCC lifted its March 10, 2003 Order with respect to Smart and orderedthe U.S. carriers to resume making payments to Smart.

On January 15,2004, after PLDT reached interim agreements with each of MCI and AT&T andreopened its circuits with these carriers on November 12, 2003 and January 9,2004, respectively, the International Bureau of the U.S. FCC lifted its March10, 2003 Order also with respect to PLDT and ordered the U.S. carriers toresume making payments to PLDT.

On May 13, 2004,the U.S. FCC partially dismissed and partially denied applications byPhilippine carriers, including PLDT, and certain U.S. carriers for review ofthe March 10, 2003 Order of the International Bureau of the U.S. FCC.  Inparticular, the U.S. FCC affirmed the March 10, 2003Order’s finding that “Philippine carriers engaged in collective action to“whipsaw” AT&T and MCI.” The U.S. FCC stated, however, that the findings ofthe March 10, 2003 Order were not findings under the U.S.anti-trust laws and that the U.S. Department of Justice is independently“investigating the possibility of anticompetitive practices among Philippinecarriers under its authority pursuant to U.S. anti-trust laws.”  The U.S. FCC also upheld the March 10, 2003 Orderin respect of the suspension of payments for termination services to thePhilippine carriers pending restoration of the circuits.  In addition, the U.S.FCC denied a request to modify the March 10, 2003 Order of the InternationalBureau of the U.S. FCC to restore the Philippines to the list ofU.S.-international routes approved for the provision of ISR and to eliminatethe current requirement that U.S. carriers make payments in accordance with theU.S. FCC’s International Settlements Policy.  Moreover, in a recently announcedorder, the U.S. FCC has omitted the Philippines from the list of countries exempted from the U.S.FCC’s International Settlements Policy.  These requests were dismissed becausethe U.S. FCC’s recently adopted International Settlements Policy Reform Ordereliminated ISR policies and identified the U.S.-Philippines route as eligiblefor the newly established process of removing the International SettlementsPolicy.  This process will begin with an opportunity for the public to filecomments with the U.S. FCC on June 28, 2004.

As of December31, 2003, the remaining receivables from U.S. carriers amounted to approximatelyUS$28 million, of which US$17 million was attributable to PLDT, US$6 million toSmart and US$5 million to Subic Telecom.

Investigation by U.S.Department of Justice****

In January 2004, PLDT, aPLDT employee and an employee of Smart received grand jury subpoenas seekingdocuments and testimony in connection with a criminal investigation beingconducted by the U.S. Department of Justice with respect to alleged antitrustviolations relating to the provision of international termination services inthe Philippines.  The U.S. Department of Justice has also requested testimonyand documents from Smart in connection with this investigation.  Moreover, inMarch 2004, PLDT (US) Ltd., a subsidiary of PLDT Global, also received a grandjury subpoena seeking documents in connection with this investigation.  At thistime, PLDT cannot predict the outcome of this investigation.  See *Note 28 – OtherMatters(e)* to the accompanyingconsolidated financial statements in Item 18.

 

Dividend Distribution Policy

 

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 thoroughly analyze its ability to declare and paydividends, regularly taking into consideration the interests of itsshareholders as well as PLDT’s working capital, capital expenditure and debtservice requirements.  PLDT also takes into account the prohibitions andrestrictions under certain of its debt instruments with respect to thedeclaration and payment of dividends as discussed in “Item 5. Operating andFinancial Review and Prospects — Liquidity and Capital Resources — FinancingActivities — Debt Financing — Covenants”, “Item 10. Additional Information —Articles of Incorporation and By-Laws — Dividends” and in *Note 16 –Preferred Stock Subject to Mandatory Redemption* and *Note 17 –Stockholders’ Equity* to the accompanying consolidated financial statementsin Item 18.  The retention of earnings is still necessary to meet the fundingrequirements of our business expansion, service improvement and developmentprograms.  Except for dividends on PLDT's Series III and Series VI ConvertiblePreferred Shares, which are payable in U.S. dollars and PLDT's Series VIIConvertible Preferred Shares, which are payable in Japanese yen, dividends aregenerally paid in Philippine pesos.  In the case of shareholders residingoutside the Philippines, PLDT's transfer agent in Manila, which acts as thedividend disbursing agent, converts the peso dividends into U.S. dollars at theprevailing exchange rates, and remits the dollar proceeds abroad, net ofwithholding tax.

 

Item 9.   The Offer and Listing

** **

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

 

The common shares of PLDT arelisted and traded on the PSE, and prior to October 19, 1994, were listed andtraded on the American Stock Exchange and Pacific Exchange in the UnitedStates.  On October 19, 1994, an ADR facility was established, pursuant towhich Citibank, N.A., as the Depositary, issued ADRs evidencing ADSs, with eachADS representing one common share with a par value of Php5 per share.Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successordepositary of PLDT’s ADRs.  The facility was established in accordance with aCommon Stock Deposit Agreement dated October 19, 1994, as amended on February 10, 2003, between the Depositary and the holders of ADRs.  The ADSs have beenlisted and are traded on the New York Stock Exchange and the Pacific Exchange inthe United States under the symbol “PHI”.

 

In 2003, a total of 41.1 millionshares of PLDT's common stock were traded on the PSE.  During the same year,the volume of trading was 38.6 million ADSs on the New York Stock Exchange butnone on the Pacific Exchange.

 

As of May 31, 2004, there were 13,083 shareholders of record who are Philippine persons and held approximately 42% ofPLDT’s common stock.  As of December 31, 2003 there were 13,908 shareholders ofrecord who are Philippine persons and held approximately 45% of PLDT’s commonstock.  In addition, there were a total of 26.8 million and 28.7 million ADSsoutstanding, substantially all of which PLDT believes were held in the United States by 438 holders and 448 holders as of May 31, 2004 and December 31, 2003, respectively.

 

High and low sales prices forPLDT's common shares on the PSE and ADSs on the New York Stock Exchange, orNYSE, for each of the five most recent fiscal years, each full quarterly periodduring the two most recent fiscal years, and each month in the most recent sixmonths were as follows:

 

 

**PSE**

**NYSE(1)**

 

**High**

**Low**

**High**

**Low**

1999

Php1,290.00

Php770.00

US$33

1/2

US$18

9/16

2000

1,100.00

660.00

28

1/4

14

7/8

2001

1,060.00

332.50

20.75

 

6.55

 

2002

565.00

209.00

11.30

 

3.85

 

First Quarter

550.00

407.50

10.72

 

7.91

 

Second Quarter

565.00

367.50

11.30

 

7.32

 

Third Quarter

380.00

277.50

7.55

 

5.16

 

Fourth Quarter

292.50

209.00

5.53

 

3.85

 

2003

670.00

265.00

12.48

 

4.85

 

First Quarter

337.50

265.00

6.18

 

4.85

 

Second Quarter

565.00

312.50

10.77

 

5.80

 

Third Quarter

670.00

482.50

12.48

 

8.78

 

Fourth Quarter

990.00

635.00

17.79

 

11.70

 

December

990.00

755.00

17.79

 

13.90

 

2004 

1,165.00

810.00

21.20

 

14.38

 

First Quarter

1,050.00

810.00

18.60

 

14.38

 

January

1,050.00

860.00

18.60

 

14.90

 

February

980.00

810.00

18.00

 

14.38

 

March

970.00

885.00

17.43

 

15.38

 

Second Quarter

 

 

 

 

 

 

April

1,165.00

960.00

21.20

 

17.35

 

May

1,145.00

965.00

20.05

 

16.97

 

_____________

 

*(1)**Effective**January 29, 2001**, PLDT converted from fractional to the decimalsystem of pricing in compliance with the new trading standard required by theU.S. SEC.*

 

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

 

On November 29, 1994 and on December 12, 1994, PLDT issued an aggregate of approximately 4.6 million shares ofSeries III Convertible Preferred Stock, with a par value of Php10 per share.In connection therewith, a Global Depositary Receipt facility was established,pursuant to which Citibank N.A., as Depositary, issued GDRs evidencing GlobalDepositary Shares, or GDS, with each GDS representing one share of Series IIIConvertible Preferred Stock.  Each share is convertible into common stock atthe option of the holder at any time, at the conversion price of US$29.19 pershare of common stock (equivalent to a conversion ratio of 1.7129 shares ofcommon stock for each share of Series III Convertible Preferred Stock, eachshare of convertible preferred stock being valued for this purpose at itsreference amount of US$50 per share), subject to adjustment in certain events.Effective February 10, 2003, PLDT appointed JP Morgan Chase Bank as successordepositary of PLDT’s GDRs.  The facility was established in accordance with aPreferred Stock Deposit Agreement dated November 29, 1994, as amended on September 6, 1999 and on February 10, 2003, between the Depositary and theholders of GDRs.  The GDSs have been listed and are traded on the New YorkStock Exchange and the Pacific Exchange in the United States under the symbol“PHI Pra”.

 

High and low sales prices for theseries III convertible preferred shares and the GDSs for each of the five mostrecent fiscal years, each full quarterly period during the two most recentfiscal years, and each month in the most recent six months were as follows:

 

 

**NYSE(1)**

 

**High**

 

**Low**

 

 

 

 

 

 

1999 

US$57

1/2

 

US$38

7/16

2000 

50

1/2

 

31

1/4

2001(1)

39.875

 

 

16.000

 

2002 

26.000

 

 

13.000

 

First Quarter 

26.000

 

 

18.000

 

Second Quarter 

25.900

 

 

20.100

 

Third Quarter 

20.200

 

 

15.930

 

Fourth Quarter 

22.750

 

 

13.000

 

2003 

40.900

 

 

20.500

 

First Quarter 

25.750

 

 

20.500

 

Second Quarter

37.750

 

 

25.750

 

Third Quarter

40.900

 

 

34.300

 

Fourth Quarter 

47.600

 

 

40.200

 

December

47.600

 

 

43.750

 

2004 

 

 

 

 

 

First Quarter

49.500

 

 

45.600

 

January

49.000

 

 

46.250

 

February

49.500

 

 

45.600

 

March

48.750

 

 

45.600

 

Second Quarter

 

 

 

 

 

April

48.250

 

 

46.000

 

May

48.000

 

 

42.500

 

_____________

 

*(1)   Effective**January 29, 2001**, PLDT converted from fractional to the decimal system of pricing in compliance withthe new trading standard required by the U.S. SEC.*

 

As of December 31, 2003, there were approximately 4.6 million GDSs outstanding, which PLDT believes weresubstantially held in the United States.

 

Item 10. AdditionalInformation

** **

Articles of Incorporation and By-Laws

 

The following summarizes certainprovisions of PLDT's Articles of Incorporation and By-Laws and applicablePhilippine law.  This summary is qualified in its entirety by reference to theCorporation Code of the Philippines (the “Corporation Code”) and PLDT'sArticles of Incorporation and By-Laws.  Information on where investors canobtain copies of the Articles of Association and By-Laws is described under theheading “Documents Available.”

 

*Purpose of PLDT*

 

PLDT'sArticles of Incorporation have been filed with the Philippine SEC and PLDT hasbeen issued SEC Reg. No. 55.  The Second Article of PLDT's Articles ofIncorporation provides that the purposes for which PLDT was formed are toinstall, maintain, and operate any and all kinds of equipment forcommunications; to install, maintain, operate or lease telephone lines andsystems, and to purchase, sell and deal in all kinds of products which may becombined with the building, installing and operation of those systems and linesand in general, to engage in any and all acts and business which may benecessary or convenient, in the furtherance of such lines of communication andbusiness.

 

*Directors*

 

PLDT'sAmended By-Laws provide that the Board of Directors shall consist of thirteenmembers, each of whom must hold at least one share of stock of PLDT in his ownname and possess the minimum qualifications and have none of thedisqualifications provided in the By-Laws.  There are no provisions in PLDT'sAmended Articles of Incorporation or Amended By-laws with respect to (a) adirector's power to vote on a proposal, arrangement or contract in which thedirector is materially interested; (b) the directors' power, in the absence ofan independent quorum, to vote compensation to themselves or any members oftheir body; (c) borrowing powers exercisable by the directors and how suchborrowing powers can be varied; or (d) retirement or non-retirement ofdirectors under an age limit requirement.

 

*Description of PLDTCapital Stock*

* *

*Authorized Capital Stock*

 

The authorized capital stock ofPLDT is Php9,395 million divided into two classes consisting of 234 millionshares of Common Capital Stock with a par value of Php5 per share (the “CommonStock”) and 822.5 million shares of serial Preferred Stock with a par value ofPhp10 per share (the “Preferred Stock”).

 

*Common Stock*

 

Set out below is a statement of thedividend, voting, pre-emption and other rights of the holders of Common Stockas set out in the Articles of Incorporation and/or By-Laws of PLDT:

 

(a)    After therequirements with respect to preferential dividends on the serial PreferredStock shall have been met and after PLDT shall have complied with all therequirements, if any, with respect to the setting aside of sums as purchase,retirement or sinking funds, the holders of the Common Stock shall be entitledto receive such dividends as may be declared from time to time by the Board ofDirectors out of funds legally available therefor.

 

(b)    Afterdistribution in full of the preferential amounts to be distributed to theholders of serial Preferred Stock in the event of the voluntary or involuntaryliquidation, dissolution, distribution of assets or winding up of PLDT, theholders of Common Stock shall be entitled to receive all the remaining assetsof PLDT of whatever kind available for distribution to stockholders ratably inproportion to the number of Common Stock held by them, respectively.

 

(c)    Except as may beotherwise required by law, or by the Articles of Incorporation of PLDT, eachholder of Common Stock shall have one vote in respect of each share of suchstock held by him on all matters to be voted upon by the stockholders, and theholders of Common Stock shall have the exclusive right to vote for the electionof directors and for all other purposes.  At every election of directors, aholder of Common Stock is entitled to vote such shares of Common Stock held byhim for as many persons as there are directors to be elected, or to cumulatesaid shares and give one candidate as many votes as the number of directors tobe elected multiplied by the number of his shares shall equal, or to distributesuch votes on the same principle among as many candidates as he shall thinkfit.

 

In addition to the foregoingrights, the Corporation Code provides for other stockholders' rightsgenerally.  These include:

 

(a)    Appraisalright or the right of a dissenting stockholder to demand payment of the fairvalue of his shares of stock in the following instances:  (a) in case anyamendment to the articles of incorporation has the effect of changing orrestricting the rights of any stockholders or class of shares, or ofauthorizing preferences in any respect superior to those of outstanding sharesof any class, or of extending or shortening the term of corporate existence;(b) in case of sale, lease, exchange, transfer, mortgage, pledge or otherdisposition of all or substantially all of the corporate property and assets ofthe corporation; and (c) in case of merger or consolidation.

 

(b)    The right toapprove certain corporate acts, such as:  (a) election of directors; (b)removal of directors; (c) extension or shortening of the corporate term; (d)increase or decrease of capital stock, and incurring, creating or increasingbonded indebtedness; (e) sale or other disposition of all or substantially allof the corporate assets; (f) investment of corporate funds in any othercorporation or business or for any purpose other than the primary purpose forwhich it was organized; (g) declaration of stock dividend; (h) entering into amanagement contract with another corporation; (i) plan of merger orconsolidation; and (j) voluntary dissolution of the corporation by shorteningthe corporate term.

 

(c)    The right toinspect at reasonable hours on business days the records of all businesstransactions of the corporation and the minutes of any meeting; however, thestockholders' right to inspect corporate records and books is not an absoluteright so that the corporation may deny said right on the basis of improprietyof the purpose or motive of the stockholder.

 

(d)    The right to befurnished the most recent financial statements of the corporation, within tendays from receipt by the corporation of a written request from a stockholder.The same right exists at the annual meeting of stockholders at which the Boardof Directors must present to the stockholders a financial report of theoperations of the corporation for the preceding year which shall includefinancial statements duly signed and certified by an independent certifiedpublic accountant.

 

*Restrictions on ForeignOwnership*

 

The Constitution of the Republic ofthe Philippines (Section 11, Article XII) states that no franchise,certificate, or any other form of authorization for the operation of a publicutility shall be granted except to citizens of the Philippines or tocorporations or associations organized under the laws of the Philippines atleast 60% of whose capital is owned by such citizens.

 

While the Articles of Incorporationand By-Laws of PLDT do not contain any specific restriction on the sale, assignmentor transfer of shares that would violate the aforecited ownership requirement,the Articles of Incorporation of PLDT provide that the Board of Directors shallhave full power and authority to authorize (whether by adoption of amendmentsto the By-Laws of PLDT or of resolutions, the promulgation of rules orregulations or otherwise) the taking by said corporation of all such actions asthe Board of Directors may deem necessary or appropriate to ensure complianceby said corporation with any applicable provision of the Constitution of theRepublic of the Philippines or any other applicable law, treaty, rule orregulation relating to the ownership of securities of said corporation bycitizens of the Philippines, aliens or other persons or group of persons.

 

*Meetings*

* *

TheCorporation Code requires corporations to hold an annual meeting ofstockholders and to send notice thereof to stockholders.  Under PLDT's By-Laws,the annual meeting of stockholders shall be held at the principal office of thecorporation, or at such other place designated by the Board of Directors in thecity or municipality where the principal office of the corporation is located,on the second Tuesday in June of each year.  In the annual meeting, the Boardof Directors shall be elected and such other business may be transacted asshall come before the meeting.  At least fifteen (15) business days written orprinted notice of the date, time and place of holding every annualstockholders' meeting shall be given by the Secretary or by an AssistantSecretary by personal delivery or by mail to each stockholder at his or herlast known place of residence or business.  Special meetings of stockholdersmay be called at any time by the President or three (3) of the Directors or bya number of stockholders representing two-thirds (2/3) of the subscribedcapital stock.  Notice in writing of such meeting stating the date, time orplace thereof, shall be given to each stockholder by the Secretary or AssistantSecretary or, in case of his absence, inability, refusal or neglect to act,then by the President, Directors or stockholders calling said meeting, bypersonal delivery or by mail to each stockholder at his or her last known placeof residence, at least fifteen (15) business days before the date fixed for themeeting.

 

The By-Laws of PLDT provide thateach stock which has voting rights on any matter under consideration may berepresented at any meeting of stockholders by the holder thereof or by hisattorney duly authorized by proxy in writing on forms prescribed by the Boardof Directors which shall be furnished to a stockholder upon his request.Unless otherwise provided in the proxy, it shall be valid only for the meetingin respect of which such proxy was issued.  Proxies must be filed with the Secretary,Assistant Secretary or transfer agent of PLDT at least two (2) days before theday of the meeting.  Any proxy filed with the Secretary, Assistant Secretary ortransfer agent of the corporation may be revoked by the stockholder concernedeither in an instrument in writing duly presented to the Secretary, AssistantSecretary or transfer agent of the corporation at least two (2) days before theday of the meeting or by his personal presence at the meeting.  The decision ofthe Secretary on the validity of proxies shall be final and binding until andunless set aside by a court of competent jurisdiction.  As provided in theCorporation Code, unless otherwise provided in the proxy, it shall be validonly for the meeting for which it is intended and no proxy shall be valid andeffective for a period longer than five (5) years at any one time.

 

The By-Laws of PLDT also providethat at any meeting of the stockholders, persons representing, in person or byproxy, a majority of the shares issued and outstanding and entitled to vote atsaid meeting shall constitute a quorum for the transaction of any business,except as otherwise provided by law, and except that a lesser number mayadjourn the meeting.

 

*Issues of Shares*

* *

The Board of Directors of PLDT hasthe power to authorize the issue and sale of authorized but unissued shares ofCommon Stock of said corporation for such consideration as it shall determine,provided that such consideration shall not be less than the par value of suchshares and, provided further, that such issue and sale is not otherwiseprohibited under applicable laws.

 

Under the Securities RegulationCode of the Philippines (R.A. 8799), or SRC, no securities except of a classexempt under the provisions thereof or unless sold in any transaction exemptunder any of the provisions thereof, shall be sold or offered for sale ordistribution to the public unless such securities shall have been registeredand permitted to be sold pursuant to the SRC.

 

*Transferof Shares*

* *

The sharesof Common Stock may be transferred by delivery of certificate(s) endorsed bythe shareholder named in the certificate or his duly authorized attorney orrepresentative.  No transfer, however, shall be valid, except as between theparties, until the transfer is recorded in the stock and transfer books of PLDTmaintained by Hongkong and Shanghai Banking Corporation, the stock transferagent of PLDT for the Common Stock.

 

Philippine law does not requiretransfers of Common Stock to be effected on PSE, but any off-exchange transferswill subject the transferor to a capital gains tax that may be significantlygreater than the stock transfer tax applicable to transfers effected on thePSE.  All transfers of shares of Common Stock on the PSE must be effectedthrough a licensed broker in the Philippines.

 

*ShareCertificates*

* *

Certificatesrepresenting fully paid shares of Common Stock are issued in such denominationsas stockholders may request, except that certificates will not be issued forany fractional part of a share or any undivided interest in any share.

 

*Dividends*

* *

Under theCorporation Code, the Board of Directors may declare dividends on the CommonStock out of the unrestricted retained earnings which may be payable in cash,in property or in stock to all stockholders on the basis of outstanding sharesheld by them.  The declaration of stock dividends require the approval of thestockholders of PLDT representing not less than two-thirds of the outstandingcapital stock of PLDT.  If a stock dividend would require an increase in theauthorized capital stock, Philippine SEC approval would be required.  CommonStock issued as stock dividends should be registered with and licensed by thePhilippine SEC and listed on the PSE.

 

The Corporation Code requires a Philippine corporation withretained earnings in excess of 100% of its paid-in capital to declare anddistribute as dividends the amount of such surplus.  Notwithstanding thisgeneral requirement, a Philippine corporation may retain all or any portion ofsuch surplus in the following cases:  (i) when justified by definite corporateexpansion projects or programs approved by the board of directors; or (ii) whenthe corporation is prohibited under any loan agreement with any financialinstitution or creditor, whether local or foreign, from declaring dividendswithout its/his consent, and such consent has not yet been secured; or (iii)when it can be clearly shown that such retention is necessary under specialcircumstances relevant to the corporation, such as when there is a need forspecial reserve for probable contingencies.

 

PLDT has entered into certain loanand credit agreements, which restrict the declaration and payment of dividendsby PLDT.  Under the terms of the US$149 million facility with KfW, PLDT isprohibited from paying any dividends on Common Stock until after December 31, 2004.  In addition, under the terms of PLDT's US$145 million multicurrencyterm facility agreement and JPY5,615million syndicated 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 4.0:1.  Under other loan agreements, PLDT may not declare or pay dividendson any of its capital stock without the prior written consent of the lenders(i) if PLDT is in default in the payment of any amounts due and payable undersuch loan agreement or after the occurrence and during the continuance of anyother 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 than1.2:1 or (iii) in an amount greater than PLDT’s net income after taxes duringthe fiscal year to which such payment or distribution relates.  For the year2001, PLDT declared cash dividends on outstanding shares of Common Stock in theamount of approximately Php202 million.  PLDT has not declared dividends on theCommon Stock since March 2001.

 

*Preferred Stock*

 

Preferred Stock may be issued from time to time in one or moreseries as the Board of Directors may determine.  The Board of Directors isauthorized to establish and designate the title and number of shares of eachseries and to fix the terms thereof, including dividend rate, redemption andsinking fund provisions, conversion rights and the amount to be received uponliquidation, provided that the amounts payable upon redemption or liquidationmay not be more than 110%, nor less than 100%, of par value, plus in each suchcase accrued and unpaid dividends.  Except as otherwise provided by law, theholders of Preferred Stock are not entitled to vote for the election ofdirectors or for any other purpose; provided, however, that PLDT may not changethe rights of the holders of any series of Preferred Stock in any mannerprejudicial to the holders thereof without the affirmative vote of the holdersof a majority of the shares of such series.  No such approval is needed toincrease the number of shares of Preferred Stock (up to the number from time totime authorized by the Articles) or to authorize classes of shares ranking on aparity with the Preferred Stock.

 

*Issuedand Outstanding Preferred Stock*

 

The seriesof Preferred Stock and the number of shares issued and outstanding under eachseries as of May 31, 2004 are as follows:****

 

**Series**

**No. of Shares**

Series A to DD 10% Cumulative Convertible

409,393,612

Series III Convertible

4,616,200

Series IV Cumulative Non-Convertible Redeemable

36,000,000

Series V Cumulative Convertible Redeemable

2,576,120

Series VI Cumulative Convertible Redeemable

4,763,853

Series VII Cumulative Convertible Redeemable

3,842,000

 

The Series A to DD 10% CumulativeConvertible Preferred Stock are entitled to receive cumulative dividends at therate of 10% per annum; redeemable at the option of PLDT, at par value plusaccrued dividends, five years after the year of issuance; convertible to sharesof Common Stock a year after the year of share issuance, at a price equivalentto 10% below the average market price of the Common Stock at the PSE over aperiod of 30 consecutive trading days before the conversion date; and entitledto be paid an amount equal to the par value of the shares plus accrued andunpaid dividends thereon to the date fixed for such payment in the event of avoluntary or involuntary liquidation, dissolution, distribution of assets orwinding up of the affairs of the corporation.

 

The Series III ConvertiblePreferred Stock are entitled to receive annual fixed cumulative dividends ofUS$3.50 per share; in the event of any voluntary or involuntary liquidation,dissolution or winding up of PLDT, are entitled to receive out of the assets ofPLDT available for distribution to the stockholders of PLDT, before anydistribution of assets is made to holders of shares of Common Stock or anyother shares of stock of PLDT ranking as to such a distribution junior to theSeries III Convertible Preferred Stock, liquidating distributions in the amountof Php11 per share plus accrued and unpaid dividends; are convertible intoshares of Common Stock at the holder's option at any time, at the conversionprice of US$29.19 per share of Common Stock (equivalent to a conversion ratioof 1.7129 shares of Common Stock for each share of Series III ConvertiblePreferred Stock, each share being valued for this purpose at its referenceamount of US$50 per share), subject to adjustment in certain events; and arenot redeemable.

 

Series IV CumulativeNon-Convertible Redeemable Preferred Stock are entitled to receive cumulativedividends at the rate of 13.5% per annum calculated on the par value of suchshares or if such shares are not yet fully paid, the actual amount paid; arenot convertible into shares of Common Stock; are redeemable at the option ofPLDT one year at any time after subscription at an amount equal to the parvalue of such shares so redeemed or if such shares are not yet fully paid, theactual amount paid, plus accrued and unpaid dividends thereon; and in the eventof a voluntary or involuntary liquidation, dissolution or winding up of affairsof PLDT, shall be entitled to be paid an amount equal to the par value of suchshares or if such shares are not yet fully paid, the actual amount paid, plusan amount equal to the dividends accrued thereon to the date fixed forpayment.  The outstanding shares of Series IV Cumulative Non-ConvertibleRedeemable Preferred Stock have not been fully paid.

 

Series V, VI and VII ConvertiblePreferred Stock are entitled to receive annual dividends of Php18.70 per share,US$0.397 per share and JPY40.7189 pershare, respectively.  Each share of Series V, VI and VII Convertible PreferredStock is convertible at any time at the option of the holder into one share ofCommon Stock.  In the event of any voluntary or involuntary liquidation,dissolution or winding up of PLDT, the holders of the Series V, VI and VIIConvertible Preferred Stock are entitled to receive out of the assets of PLDTavailable for distribution to the shareholders of PLDT, before any distributionof assets is made to holders of shares of Common Stock or any other shares ofstock of PLDT ranking as to such distribution junior to the Series V, VI and VIIConvertible Preferred Stock, liquidating distributions in the amount of Php11per share plus accrued and unpaid dividends.  On the date immediately followingthe seventh anniversary of the issue date of the Series V and Series VIConvertible Preferred Stock and on the eighth anniversary of the issue date ofthe Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted to shares of Common Stock at aconversion rate of one share of Common Stock for each share of Series V, VI orVII Convertible Preferred Stock subject to adjustments in certain events.Under a put option exercisable for 30 days, holders of shares of Common Stockreceived on mandatory conversion will be able to require PLDT to purchase suchshares of Common Stock for Php1,700 or US$36.132 or JP¥4,071.89 per share,depending on the series.

 

As of December 31, 2003, 145,320 shares of Series V Convertible Preferred Stock and 531,251 shares of Series VIConvertible Preferred Stock were converted to PLDT Common Stock.  The aggregatevalue of the put option based on outstanding shares as of December 31, 2003 wasPhp21,898 million, of which Php13,774 million is payable on June 4, 2008 and Php8,124 million on June 4, 2009 if all of the outstandingshares of Series V, VI and VII Convertible Preferred Stock were mandatorilyconverted and all the underlying shares of Common Stock were put to PLDT.  Themarket value of the underlying shares of Common Stock was Php10,763 million, based on the market price of PLDT’sCommon Stock of Php970 per share as of December 31, 2003.

 

*Change in Control*

 

Article V,Section 1 of PLDT's Amended By-Laws may have the effect of preventing a changein control of PLDT.  This section provides that any person who is engaged inany business that competes with or is antagonistic to that of PLDT or itssubsidiaries is ineligible for nomination or election to the Board ofDirectors.

 

Material Contracts

 

For a description of the Stock Purchase and Strategic InvestmentAgreement relating to the acquisition of Smart and the investment by NTT, see“Item 7. Major Shareholders and Related Party Transactions — Related PartyTransactions.” 

 

Exchange Controls and Other Limitations Affecting Securities Holders

 

In Circular No. 1389 dated November 10, 1993, as amended by Circular No. 224 dated January 26, 2000, of the BSP, foreign investments in the shares of stock of Philippine companies listed inthe PSE may be registered either with the BSP or with an investor’s designatedcustodian bank.  The foreign investments in listed shares of stock, which areduly registered with the BSP or with a custodian bank duly designated by theforeign investor, are entitled to full and immediate capital repatriation anddividend and interest remittance privileges.  Without the need to obtain priorBSP approval, commercial banks are authorized to sell and to remit theequivalent foreign exchange (at the exchange rate prevailing at the time ofactual remittance) representing sales and divestment proceeds or dividends of aduly registered foreign equity investment upon presentation of a BSPRegistration Document (“BSRD”) together with other supporting documents.  TheBSRD is issued by the BSP or the custodian bank upon registration of theforeign investment and serves as the authority to repatriate such divestmentand sales proceeds or remittance of cash dividends.  Effective April 3, 2000, only pre-numbered BSRD forms, printed on BSP security paper may be used andissued as proof of registration of foreign investments in accordance withexisting BSP rules.  The remitting commercial bank must submit to the BSP astatement of remittance together with the supporting documents within twobanking days from date of actual remittance.  Foreign investments not duly registeredwith the BSP or with the investor's designated custodian bank are not entitledto repatriation and remittance privileges through the banking system exceptcapital repatriation or dividend remittance of direct foreign equityinvestments made prior to March 15, 1973 when BSP registration was not yetrequired.  The BSP should be notified of the transfer of sale of foreigninvestments in equity or securities already registered with the BSP, in orderthat the registration of the foreign investment may be transferred in the nameof the transferee or purchaser.

 

Cash dividends on PLDT's stock arepaid in Philippine pesos, except dividends on the Series III and Series VIConvertible Preferred Stock, which are paid in U.S. dollars and on the SeriesVII Convertible Preferred Stock, which are paid in Japanese yen.  PLDT’sCustodian for its Series III Convertible Preferred Stock, Citibank, N.A. –Manila and PLDT’s Transfer Agent and Dividend Paying Agent for its Series VIand VII Convertible Preferred Stock, Hongkong and Shanghai Banking Corporation,converts and remits in the particular foreign currency, at the prevailingexchange rate, cash dividends due to holders of the Series III, Series VI andVII Convertible Preferred Stock.  PLDT's Transfer Agent for its common stock,The Hongkong and Shanghai Banking Corporation, (which also acts as dividendpaying agent) converts and remits in U.S. dollars, at the prevailing exchangerate, cash dividends due all common shareholders residing outside thePhilippines.  Under the above-mentioned regulations, PLDT has been able toremit the cash dividends due to shareholders residing outside the Philippines.As of December 31, 2003, approximately 88% of PLDT’s outstanding shares ofcommon and preferred stock were held by Philippine persons.  For certainrestrictions on the declaration and payment of dividends by PLDT, see *Note16 – Preferred Stock Subject to Mandatory Redemption* and *Note 17 –Stockholders’ Equity* to the accompanying consolidated financial statementsin Item 18.

 

For certain constitutionallimitations on the capital ownership of public utilities, see “Item 8.Financial Information — Legal Proceedings — Quo Warranto Action.”

 

Principal of and interest on PLDT's10.625% Notes due 2004, 9.875% Notes due 2005, 9.25% Notes due 2006, 7.85%Notes due 2007, 8.35% Notes due 2017, 10.5% Notes due 2009, 10.625% Notes due2007 and 11.375% Notes due 2012 are payable in U.S. dollars which may bepurchased from the local banking system either pursuant to the registration ofsuch Notes with the BSP or otherwise pursuant to specific BSP approval of suchpayment.  Such principal and interest may also be paid utilizing PLDT's owndollar resources without necessity of BSP approval.  The BSP, with the approvalof the President of the Philippines, may, however, restrict the availability offoreign exchange during an exchange crisis, when an exchange crisis isimminent, or in times of national emergency.

 

Taxation

 

The following is a summary of thematerial Philippine and United States federal income tax consequences to UnitedStates Holders (as defined below) of owning shares of Common Stock, Series IIIConvertible Preferred Stock, ADSs and GDSs (collectively, the “EquitySecurities”).  It applies to you only if you hold your Equity Securities ascapital assets for tax purposes.  This section does not apply to you if you area member of a special class of holders subject to special rules, including adealer in securities, a trader in securities that elects to use amark-to-market method of accounting for securities holdings, a tax-exemptorganization, a life insurance company, a person liable for alternative minimumtax, a person that actually or constructively owns 10% or more of PLDT’s votingstock, a person that holds Equity Securities as part of a straddle or a hedgingor conversion transaction, or a United States Holder (as defined below) whosefunctional currency is not the U.S. dollar.

 

This section is based on the UnitedStates Internal Revenue Code of 1986, as amended (the “U.S. Tax Code”), itslegislative history, existing and proposed regulations, published rulings andcourt decisions, and the laws of the Philippines including the PhilippineNational Internal Revenue Code of 1997 (the “Philippine Tax Code”) all ascurrently in effect, as well as on the Convention Between the Philippines andthe United States (the “Philippines-United States Tax Treaty”).  These laws aresubject to change, possibly on a retroactive basis.  In addition, this sectionis based in part on the representations of the Depositary and the assumptionthat each obligation in the Deposit Agreement and any related agreement will beperformed according to its terms.

 

Youare a United States Holder if you are a beneficial owner of Equity Securitiesand you are a citizen or resident of the United States, a domestic corporation,an estate whose income is subject to United States federal income taxregardless of its source, or a trust if a United States court can exerciseprimary supervision over the trust’s administration and one or more UnitedStates persons are authorized to control all substantial decisions of thetrust.

** **

This discussion addresses only United States federal incometaxation and Philippine income taxation, estate and donor’s taxation, stocktransaction taxation and documentary stamp taxes.

** **

*Philippine Taxation*

 

*Taxes on Exchange of ADSs forCommon Stock and GDSs for Series III Convertible Preferred Stock*

 

Philippine capital gains or stocktransaction taxes and documentary stamp taxes may be payable upon the transferof shares of Common Stock to a holder of ADRs or shares of Series IIIConvertible Preferred Stock to a holder of GDRs.  See “Capital Gains Tax andStock Transaction Tax” and “Documentary Stamp Taxes.”

 

*Taxation of Dividends*

 

Under the Philippine Tax Code,dividends paid by a Philippine corporation to citizens of the Philippines andresident aliens in the Philippines are subject to a final withholding tax of10% while those paid to non-resident aliens engaged in trade or business withinthe Philippines are subject to a final withholding tax of 20%.  Dividends paidto non-resident aliens not engaged in trade or business within the Philippinesare subject to a final withholding tax of 25%. Dividends paid by a Philippinecorporation to other Philippine corporations or to resident non-Philippinecorporations are not subject to tax.  Dividends paid to non-residentnon-Philippine corporations not engaged in a trade or business in thePhilippines by Philippine corporations shall be subject to a final withholdingtax of 15%, subject to the condition that the country in which the non-residentnon-Philippine corporation is domiciled either (i) allows a credit against thetax due from the non-resident non-Philippine corporation taxes deemed to havebeen paid in the Philippines equivalent to 17% (which represents the differencebetween the regular income tax on non-resident non-Philippine corporations of32% and the 15% tax on dividends) (this condition is not satisfied in the caseof corporations domiciled in the United States if such corporations own lessthan 10% of the voting stock of PLDT) or (ii) imposes no income taxes ondividends received by such non-resident non-Philippine corporations fromPhilippine corporations (this condition is not satisfied in the case ofcorporations domiciled in the United States).  If neither of the foregoingconditions are met, the dividends paid to the non-resident non-Philippinecorporation shall be subject to the regular income tax rate of 32%.  Underrulings issued by Philippine tax authorities, Hong Kong is viewed as fallingwithin clause (ii) and, thus, companies that are organized in Hong Kong thatare not engaged in trade or business in the Philippines may be entitled to thebenefit of the 15% rate.  Such rulings, however, were based upon the laws of Hong Kong as in effect at the time such rulings were issued, and any subsequentchanges in the relevant laws of Hong Kong may affect the validity of suchrulings.

 

As further discussed below, inrespect of regular quarterly cash dividends payable on the shares of Series IIIConvertible Preferred Stock underlying the GDSs, while such shares are ondeposit with the Depositary, PLDT intends to make payments of withholding taxpursuant to the terms of such Series III Convertible Preferred Stock, at therate of 15%, which is the rate applicable to dividends payable to residents ofthe domicile of the registered shareholder, which is a company organized inHong Kong not engaged in trade or business in the Philippines.  PLDT reservesthe right to change the rate at which it makes payments of withholding taxwhenever it deems it appropriate under applicable law.

 

Holders will receive regularquarterly cash dividends paid in respect of the Series III ConvertiblePreferred Stock, but not on the common stock issuable on conversion of suchSeries III Convertible Preferred Stock, free and clear of withholding tax, suchwithholding tax being an obligation of PLDT pursuant to the terms of the SeriesIII Convertible Preferred Stock.  Any other dividends will be subject towithholding tax at the relevant applicable rate.

 

If the holder of Common Stock is anon-resident foreign partnership, which is treated as a corporation forPhilippine tax purposes, dividends on the Common Stock should be subject to afinal withholding tax of 32%.  Cede & Co., the partnership nominee ofDepository Trust Company (“DTC”), should qualify as a non-resident foreignpartnership that would be treated as a corporation for Philippine tax purposes.

 

In certain circumstances where theholder holds Common Stock, a tax treaty rate may be applicable with respect tothe Philippine withholding tax.  For instance, holders under such circumstancesand as to which the Philippines-United States Tax Treaty would be applicable wouldbe eligible for a treaty rate of 25% (or 20% in certain instances).  The 20%treaty rate is generally not applicable in the case of non-residentnon-Philippine corporations domiciled in the United States which own less than10% of the voting stock of PLDT.  Holders are required, however, to establishto the Philippine taxing authorities their eligibility for such treaty rate.Philippine tax authorities have prescribed, through an administrative issuance,procedures for availment of tax treaty relief.  PLDT intends to pay withholdingtax at the reduced treaty rate in respect of shares the registered holder ofwhich is Cede & Co., on the basis that Cede & Co. is a resident of the United States for purposes of the Philippines-United States Tax Treaty.  PLDT reservesthe right to change the rate at which it makes payments of withholding taxwhenever it deems it appropriate under applicable law.

 

*Capital Gains Tax and StockTransaction Tax*

 

The Philippine Tax Code providesthat gain from the sale of shares of stock in a Philippine corporation shall betreated as derived entirely from sources within the Philippines, regardless ofwhere the shares are sold.  Subject to applicable tax treaty rates, the rate oftax on such gain, where the share is not disposed of through the PhilippineStock Exchange, is a final tax of 5% for gains not exceeding Php100,000 and afinal tax of 10% for gains in excess of that amount.  The rate is the same forboth non-resident individuals and non-resident non-Philippine corporations.  Whilethis tax is not collected through withholding, the Philippine Tax Codeprohibits a transfer from being recorded on the books of the corporation unlessthe Philippine Commissioner of Internal Revenue certifies that the tax has beenpaid or certain other conditions are met.  

 

The sale of shares which are listed in and sold through the PSEare subject to the stock transaction tax imposed at the rate of 1/2 of 1% ofthe gross selling price.  This tax is required to be collected and paid to thegovernment by the selling stockbroker on behalf of his client.  Sales of sharesother than through a Philippine stock exchange will be subject to Philippinecapital gains tax in the manner described above.

 

Under the Philippines-United StatesTax Treaty, gains derived by a United States resident from the sale of sharesof stock of a Philippine corporation will not be subject to Philippine tax,either capital gains tax or stock transaction tax, unless the shares are thoseof a corporation over 50% of the assets of which consist of real propertyinterests located in the Philippines.  PLDT does not believe that itcurrently is such a corporation.

 

*ConversionFeature*

 

PLDT believes that there would beno Philippine capital gains taxes upon the conversion of shares of Series IIIConvertible Preferred Stock into shares of Common Stock.

 

*Documentary Stamp Taxes*

 

The Philippines imposes adocumentary stamp tax upon transfers of shares of stock issued by a Philippinecorporation at a rate of Php1.50 on each Php200, or fractional part thereof, ofthe par value of the shares.  The documentary stamp tax is collectible whereverthe document is made, signed, issued, accepted or transferred, when theobligation or right arises from Philippine sources or the property is situatedin the Philippines.  Effective March 20, 2004, the documentary stamp tax rateupon transfer of shares of stock issued by a Philippine corporation is Php0.75on each Php200, or fractional part thereof, of the par value of the shares.However, the imposition of documentary stamp tax on secondary transfer ofshares of stock of a Philippine Corporation which is listed and traded throughthe facilities of the Philippine Stock Exchange is suspended for a period offive years counted from the same effective date.  

 

*Estate and Donor's Taxes*

 

Shares of stock issued by acorporation organized or constituted in accordance with Philippine law aredeemed to have a Philippine situs and their transfer by way of succession ordonation is subject to Philippine estate and gift taxes.  The transfer ofshares of stock by a deceased individual to his heirs by way of succession,whether such an individual was a citizen of the Philippines or an alien,regardless of residence, will be subject to Philippine estate tax atprogressive rates ranging from 5% to 20% if the net estate is over Php200,000.Individual and corporate shareholders, whether or not citizens or residents ofthe Philippines, who transfer the Equity Securities by way of gift or donationwill be liable for Philippine donor’s tax on such transfers at progressiverates ranging from 2% to 15%, if the net gifts made during the calendar yearexceed Php100,000.  The rate of tax with respect to net gifts made to astranger, who is not a brother, sister, spouse, ancestor, lineal descendant orrelative by consanguinity in the collateral line within the fourth degree ofrelationship of the donor, is a flat rate of 30%. Estate and gift taxes willnot be collected in respect of intangible personal property such as the EquitySecurities:

 

•        if the deceased at the time of death, or the donor at the time ofdonation, was a citizen and resident of a foreign country which at the time ofhis death or donation did not impose a transfer tax of any character in respectof intangible personal property of citizens of the Philippines not residing inthat foreign country, or

 

•        if the laws of the foreign country of which the deceased or thedonor was a citizen and resident at the time of his death or donation allow asimilar exemption from transfer or death taxes of every character ordescription in respect of intangible personal property owned by citizens of thePhilippines not residing in that foreign country.

 

Shares of stock of a deceasedshareholder or shares that have been donated may not be transferred on thebooks of the corporation without a certificate from the Philippine Commissionerof Internal Revenue that the applicable estate or donor's taxes have beenpaid.  In the case of ADRs and GDRs, however, there is no correspondingrequirement, unless a transfer of the ADRs and GDRs would also entail a changein the registration of the underlying shares.

 

*United States**Federal Taxation*

 

For United States federal income tax purposes, United States Holders of GDRs or ADRswill be treated as the owners of the underlying shares of Series IIIConvertible Preferred Stock or Common Stock.  Deposits and withdrawals byUnited States Holders of shares of Series III Convertible Preferred Stock orCommon Stock in exchange for GDRs or ADRs will not be subject to United Statesfederal income tax.

 

*Taxationof Dividends*

 

Under the United States federalincome tax laws, and subject to the passive foreign investment company, orPFIC, rules discussed below, if you are a United States Holder, the grossamount of any dividend we pay out of our current or accumulated earnings andprofits (as determined for United States federal income tax purposes) issubject to United States federal income taxation.  If you are a non-corporateUnited States Holder, dividends paid to you in taxable years beginning afterDecember 31, 2002 and before January 1, 2009 that constitute qualified dividendincome will be taxable to you at a maximum tax rate of 15% provided that, inthe case of Common Stock or ADSs, you hold the Common Stock or ADSs for morethan 60 days during the 120-day period beginning 60 days before the ex-dividenddate or, in the case of Series III Convertible Preferred Stock or GDSs, if thedividend is attributable to a period or periods aggregating over 366 days,provided that you hold the Series III Convertible Preferred Stock or GDSs formore than 90 days during the 180-day period beginning 90 days before theex-dividend date and meet other holding period requirements.  The IRS hasannounced that it will permit taxpayers to apply a proposed legislative changeto the holding period requirement described in the preceding sentence as ifsuch change were already effective.  This legislative “technical correction”would change the minimum required holding period, retroactive to January 1,2003, with respect to Common Stock or ADSs, to more than 60 days during the121-day period beginning 60 days before the ex-dividend date or, with respectto Series III Convertible Preferred Stock or GDSs, to more than 90 days duringthe 181-day period beginning 90 days before the ex-dividend date.  Dividends wepay with respect to the Equity Securities generally will be qualified dividendincome.

 

You must include any Philippine taxwithheld from the dividend payment or, in the case of Series III ConvertiblePreferred Stock or GDSs, paid on your behalf by PLDT, in this gross amount eventhough you do not in fact receive it.  The dividend is taxable to you when you,in the case of Common Stock or Series III Convertible Preferred Stock, or theDepositary, in the case of ADSs or GDSs, receive the dividend, actually orconstructively.  The dividend will not be eligible for the dividends-receiveddeduction generally allowed to United States corporations in respect ofdividends received from other United States corporations.  The amount of thedividend distribution that you must include in your income as a United StatesHolder will be the U.S. dollar value of the Philippine peso payments made,determined at the spot Philippine peso/U.S. dollar rate on the date thedividend distribution is includible in your income, regardless of whether thepayment is in fact converted into U.S. dollars.  Generally, any gain or lossresulting from currency exchange fluctuations during the period from the dateyou include the dividend payment in income to the date you convert the paymentinto U.S. dollars will be treated as ordinary income or loss and will not beeligible for the special tax rate applicable to qualified dividend income.  Thegain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes.  Distributions in excessof current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable returnof capital to the extent of your basis in the Equity Securities and thereafteras capital gain. 

 

Subject to certain limitations, thePhilippine tax withheld in accordance with the Philippines-United States TaxTreaty and paid over to the Philippines will be creditable against your United States federal income tax liability.  Special rules apply in determining theforeign tax credit limitation with respect to dividends that are subject to themaximum 15% tax rate.

 

Dividends will be income from sourcesoutside the United States, but generally will be “passive income” or “financialservices income” which is treated separately from other types of income forpurposes of computing the foreign tax credit allowable to you.

 

*Certain Withholding Tax Payments*

 

Holders will receive regular quarterly cash dividends paid inrespect of the Series III Convertible Preferred Stock, but not on the CommonStock issuable on conversion of such Series III Convertible Preferred Stock,free and clear of withholding tax, such withholding tax being an obligation ofPLDT pursuant to the terms of the Series III Convertible Preferred Stock.  PLDTintends to make such payments of withholding tax based on an applicablewithholding tax rate of 15%.  A United States Holder that receives dividendsfree and clear of withholding tax will be treated for United States federalincome tax purposes as having received an additional distribution with respectto the Series III Convertible Preferred Stock in the amount of the withholdingtax which is paid to the Philippine Bureau of Internal Revenue on behalf ofsuch United States Holder.  Such a deemed additional distribution willgenerally be subject to the rules described above under “Taxation ofDividends.”  The amount of additional income deemed to have been received bythe United States Holder will be equal to the initial amount of tax paid byPLDT (based on the applicable withholding tax rate) divided by the differencebetween one and the applicable withholding tax rate.  For example, assuming aUS$100 dividend received free and clear of a withholding tax of 15% (the ratebelieved by PLDT to be the applicable withholding tax rate; see “PhilippineTaxation — Taxation of Dividends”), the United States Holder will be treated ashaving received additional income in the amount of US$15/(1-.15), or US$17.65.Subject to certain limitations, the Philippine tax paid over to the Philippineswill be creditable against your United States federal income tax liability.Special rules apply in determining the foreign tax credit limitation withrespect to dividends that are subject to the maximum 15% rate.  Dividends willbe income from sources outside the United States but will generally be “passiveincome” or “financial services income” which is treated separately from othertypes of income for purposes of calculating the foreign tax credit allowable toyou.  

 

*Sale**or Other Disposition of Equity Securities*

 

A United States Holder willrecognize capital gain or loss upon the sale of Equity Securities in an amountequal to the difference between such United States Holder's basis in the EquitySecurities and the amount realized upon the sale.  Such gain or loss generallywill be long-term capital gain or loss if, at the time of sale, exchange orretirement, the Equity Securities have been held for more than one year.Capital gain of a non-corporate U.S. holder that is recognized on or after May 6, 2003 and before January 1, 2009 is generally taxed at a maximum rate of 15% wherethe property is held for more than one year.  Generally, any such gain or losswill be treated as realized income or loss from sources within the United States for foreign tax credit limitation purposes.  United States Holders maynot be eligible to credit against their United States federal income taxliability amounts paid in respect of the Philippine stock transaction tax.  See“— Philippine Taxation — Capital Gains Tax and Stock Transaction Tax.”

 

*Conversion Feature*

 

In general, no gain or loss will berecognized for United States federal income tax purposes on a conversion ofSeries III Convertible Preferred Stock into Common Stock except with respect tocash received in lieu of fractional shares of stock.  The tax basis for CommonStock received upon conversion will be equal to the basis of the Series IIIConvertible Preferred Stock converted and the holding period of the commonstock received upon conversion will include the holding period of the SeriesIII Convertible Preferred Stock.

 

The U.S. Tax Code does notauthorize a comparable credit for foreign gift or donor's taxes such as thoseimposed by the Philippines.  See “— Philippine Taxation — Estate and Donor'sTaxes.”

 

*Passive Foreign InvestmentCompany Rules*

 

We believe that the EquitySecurities should not be treated as stock of a PFIC for United States federalincome tax purposes, but this conclusion is a factual determination that ismade annually and thus may be subject to change.  If we were to be treated as aPFIC, unless the Equity Securities are “marketable stock” and a United StatesHolder elects to be taxed annually on a mark-to-market basis with respect tothe Equity Securities, gain realized on the sale or other disposition of yourEquity Securities would in general not be treated as capital gain.  Instead, ifyou are a United States Holder, you would be treated as if you had realizedsuch gain and certain "excess distributions" ratably over yourholding period for the Equity Securities and would be taxed at the highest taxrate in effect for each such year to which the gain was allocated, togetherwith an interest charge in respect of the tax attributable to each such year.In addition, dividends that you receive from us will not be eligible for thespecial tax rates applicable to qualified dividend income if we are a PFICeither in the taxable year of the distribution or the preceding taxable year,but instead will be taxable at rates applicable to ordinary income.

 

Documents On Display

 

We aresubject to the informational requirements of the Exchange Act, and file reportsand other information with the Commission, as required by this act.  Reportsand other information filed by us with the Commission may be inspected andcopied at the Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  The public may obtain information on the operation of theCommission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330.  The Commission also maintains a website thatcontains reports, proxy statements and other information regarding registrantsthat file electronically with the Commission.  Copies of this material may beobtained by mail from the public reference section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.  These reports andother information may also be inspected at the offices of the New York StockExchange, 20 Broad Street, New York, New York 10005 and the Pacific Exchange, 301 Pine Street, San Francisco, California 94104, on which the AmericanDepositary Shares representing our Common Stock are listed.

 

Item 11. Quantitative and Qualitative Disclosures aboutMarket Risks

** **

Ouroperations are exposed to various risks, including liquidity risk, foreignexchange risk and interest rate risk.  The importance of managing these riskshas significantly increased in light of considerable change and continuingvolatility in the Philippine and international financial markets.  With a viewto managing these risks, we have incorporated financial risk managementfunctions in our organization, particularly in our treasury operations.

 

Liquidity Risk Management

 

We seek to manage our liquidityprofile to be able to finance our capital expenditures and service our maturingdebts.  To cover our financing requirements, we intend to use internallygenerated funds and proceeds from debt and equity issues and sales of certainassets.

 

As part of our liquidity riskmanagement program, we regularly evaluate our projected and actual cash flowinformation and continuously assess conditions in the financial markets foropportunities to pursue fund-raising initiatives.  These initiatives mayinclude bank loans, export credit agency-guaranteed facilities, and debtcapital market issues.

 

Foreign Exchange Risk Management

 

At December 31, 2003,the Philippine peso depreciated against the U.S. dollar to Php55.586 to US$1.00from Php53.254 to US$1.00 at December 31, 2002, which in turn depreciated fromPhp51.690 to US$1.00 at December 31, 2001.

 

The following tableshows our consolidated foreign currency-denominated monetary assets andliabilities and their peso equivalents as of December 31, 2003, 2002 and 2001:

 

 

Years Ended December 31,

** **

**2003(1)**

**2002(2)**

**2001(3)**

** **

**US$**

Php

**US$**

Php

**US$**

**Php**

** **

** **

**(in millions)**

** **

Assets

 

 

 

 

 

 

Cash and cash equivalents

US$146

Php8,105

US$76

Php4,040

US$40

Php2,091

Accounts receivable

192

10,676

149

7,910

146

7,536

Other current assets

5

262

1

55

2

91

Other noncurrent assets

24

1,360

5

271

–

5

 

367

20,403

231

12,276

188

9,723

Liabilities

 

 

 

 

 

 

Notes payable 

3

150

6

320

23

1,189

Accounts payable 

74

4,108

56

2,969

27

1,411

Accrued expenses and other current liabilities 

54

3,007

165

8,782

165

8,529

Long-term debt

3,101

172,349

3,256

173,401

3,459

178,777

Deferred credits and other noncurrent liabilities

143

7,981

126

6,722

53

2,725

 

3,375

187,595

3,609

192,194

3,727

192,631

Net foreign currency-denominated liabilities

US$3,008

Php167,192

US$3,378

Php179,918

US$3,539

Php182,908

______________

 

*(1)    **The exchange rate used wasPhp55.586 to US$1.00.*

*(2)    **The exchange rate used wasPhp53.254 to US$1.00.*

*(3)    **The exchange rate used wasPhp51.690 to US$1.00.*

* *

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

* *

As of December 31, 2003, approximately 94% and 96% of our totaldebt, on a consolidated and non-consolidated basis, respectively, weredenominated in foreign currencies, principally in U.S. dollars.  Of our foreigncurrency-denominated debts, 11% and 8% 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 63% 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 would 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 “Item 5.Operating and Financial Review and Prospects — Liquidity and Capital Resources— Financing Activities — Debt Financing — Covenants” above and *Note 14 –Long-term Debt* to the accompanying consolidated financial statements inItem 18.

* *

To manage foreign exchange risks,stabilize cash flows, and improve investment and cash flow planning, we enterinto forward foreign exchange contracts, foreign currency swap contracts,currency options and other hedging products aimed at reducing and/or managingthe adverse impact of changes in foreign exchange rates on our operatingresults and cash flows.  However, these hedges do not cover all of our exposureto foreign exchange risks, and hedges to cover all of our exposure are notcurrently nor readily available.

 

Specifically, we use forwardforeign exchange contracts, foreign currency swap contracts and currency optioncontracts to manage the foreign exchange risk associated with our foreigncurrency-denominated loans.  As of December 31, 2003, PLDT’s outstandingforward foreign exchange contracts, principal-only long-term cross-currencyswap contracts and currency option contracts amounted to US$125 million(Php6,948 million), US$725 million (Php40,300 million) and US$79 million(Php4,391 million), respectively.  For further discussions of these contracts,see *Note 26 – Derivatives and Hedging Instruments* to the accompanyingconsolidated financial statements in Item 18.

 

Interest Rate Risk Management

 

On a limited basis, we enter intointerest rate swap agreements in order to manage our exposure to interest ratefluctuations.  As of December 31, 2003, PLDT had no outstanding interest rateswap agreement.

 

We make use of hedging instruments and structures solely forreducing or eliminating financial risks associated with our liabilities and notfor trading or speculative purposes.

 

The table below sets out theinformation about PLDT's derivative financial instruments and othertransactions as of December 31, 2003 that are sensitive to foreign exchangerates and to changes in interest rates:

 

** **

 

 

 

**Total**

**Fair Value**

 

**Below 5 years**

**5 to 8.5 years**

**Over 8.5 years**

**In Dollars**

**In Pesos**

**In Dollars**

**In Pesos**

** **

 

 

 

**(in millions)**

**Liabilities**

 

 

 

 

 

 

 

Long-term Debt

 

 

 

 

 

 

 

Fixed Rate

 

 

 

 

 

 

 

US$ Notes (in millions)

690

425

299

1,414

78,581

1,444

80,273

Average interest rate

7.85% to 10.625%

10.50% to 11.375%

8.350%

–

–

–

–

US$ Fixed Loans (in millions)

170

19

–

189

10,506

203

11,309

Average interest rate

5.83% to 8.03%

5.65% to 6.56%

–

–

–

–

–

Japanese Yen (in millions)

91

–

–

91

5,068

92

5,120

Average interest rate

2.125%

–

–

–

–

–

–

Philippine Peso (in millions)

48

15

–

63

3,484

69

3,817

Average interest rate

11.18% to 17.50%

15.00%

–

–

–

–

–

Variable Rate

 

 

 

 

 

 

 

U.S. Dollar (in millions)

409

168

–

577

32,095

577

32,095

Average interest rate

0.15% to 4.30% 

over LIBOR

0.65% to 3.625% 

over LIBOR

–

–

–

–

–

Japanese Yen (in millions)

102

–

–

102

5,668

102

5,668

Average interest rate

3.85% over 

Japanese Yen 

LIBOR

–

–

–

–

–

–

**Forward Foreign Exchange**

**Agreement**

 

 

 

 

 

 

 

(Receive US$/Pay Philippine

Peso) Contract Amount 

(in millions)

125

–

–

125

6,974

125

6,934

Average Contractual Exchange Rate

Php55.90

–

–

–

–

–

–

**Resettable Cross Currency**

**Swap Agreement**

 

 

 

 

 

 

 

(Receive US$/Pay Philippine

Peso) Contract Amount 

(in millions)

–

175

550

725

37,138

725

40,300

Average Contractual Exchange Rate

–

–

Php51.225

–

–

–

–

 

Item 12. Descriptionof Securities Other than Equity Securities

 

Not Applicable.

 

PART II

 

Item 13. Defaults, Dividend Arrearages and Delinquencies

 

Piltel hasexperienced significant financial difficulties in recent years.  It hasrestructured substantially all of its debts in accordance with its debtrestructuring plan, which was signed on June 4, 2001.  In June and October2002, more creditors of Piltel agreed to participate in its restructuring planon the same terms.  As of December 31, 2003, total restructured long-term debtof Piltel amounted to Php23,382 million, with maturities of up to June 14, 2016.  As of December 31, 2003, Piltel had an aggregate principal amount of Php51million of unrestructured debt.

 

Piltel iscurrently not in compliance with the terms of convertible bonds with principalamount of US$0.7 million (approximately US$0.9 million redemption price at theoption of the holders).  See “Item 5. Operating and Financial Review andProspects — Certain Indebtedness — Overview of Piltel’s Indebtedness”.

 

The Series C, Class I Preferred Stock of Piltel, is entitled toannual cumulative cash dividends of Php0.20 per share (10% on the par value pershare).  Piltel is in arrears with payments of dividends with respect to theSeries C, Class I Preferred Stock in the amount of Php1 million for the yearsended December 31, 2003, 2002, 2001 and 2000.  As of the date of this annualreport on Form 20-F, the total arrearage with respect to the Series C, Class IPreferred Stock of Piltel amounted to approximately Php4.2 million.

 

See “Item 3. Key Information — RiskFactors — Risks Relating to Us — Piltel hasexperienced financial difficulties and we cannot assure you that it will beable to discharge any of its debt or other obligations owed to us and ouraffiliates” and *Note 9 – Information with respect to Piltel*and *Note14 – Long-term Debt*to the accompanying consolidated financial statementsin Item 18.

 

Item 14. MaterialModifications to the Rights of Security Holders and Use of Proceeds

 

None.

 

Item 15. Controlsand Procedures

** **

Our principal executive officer and principal financial officer,carried out an evaluation of the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended) as of December 31, 2003.

 

Based on this evaluation, our chief executive officer andprincipal financial officer concluded that our disclosure controls andprocedures were effective as of December 31, 2003.

 

During 2003, no change to our internal control over financialreporting occurred that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

Item 16A.   AuditCommittee Financial Expert

 

Our board of directors hasdetermined that currently none of the members of the Audit Committee is anaudit committee financial expert as defined under the applicable rules of theU.S. SEC issued pursuant to Section 407 of the Sarbanes-Oxley Act of 2002.  Ourboard of directors believes that the audit committee members along with itsadvisors, possess sufficient financial knowledge and experience.  Our board ofdirectors has appointed one of our non-independent directors, Corazon de laPaz, as Audit Committee consultant to render advice on complex financial reportingor accounting issues that may be raised in our Audit Committee’s evaluation ofour financial statements and other related matters.  Formerly the Chairman andSenior Partner of Joaquin Cunanan & Company (a member firm ofPricewaterhouseCoopers Worldwide), Corazon de la Paz, is a certified publicaccountant and possesses in depth knowledge of accounting principles (includingU.S. GAAP), internal controls and procedures for financial reporting and auditcommittee functions, as well as extensive experience in overseeing or activelysupervising the preparation, audit, analysis or evaluation of financialstatements and in addressing complex and general financial reporting,accounting and audit issues.

 

Item 16B.   Code of Business Conduct andEthics

 

On March 30, 2004, our board of directors approved and adopted our Code of Business Conduct and Ethics, or Codeof Ethics, that sets out our business principles and standards of behavior andbusiness relationships.

 

It is our declared objective that all our actions and those ofour directors, officers and employees must, at all times, be consistent withthe principles of accountability, integrity, fairness and transparency.

 

Our Code of Ethics provides standards to foster honest andethical behavior including the following:

 

1.      Compliance with applicable laws, rules and regulations;

 

2.       Ethicalhandling of conflicts of interest, corporate opportunities and confidentialinformation;

 

3.      Protection and proper use of our assets;

 

4.      Fair dealing with our employees, customers, service providers, suppliersand competitors;

 

5.      Compliance with our reporting and disclosure obligations to the relevantregulators and the investors;

 

6.      Compliance with our disclosure and financial reporting controls andprocedures;

 

7.      Assessment and management of risks involved in our business endeavours;and

 

8.      Adoption of international best practices of good corporate governance inthe conduct of our business.

 

*Corporate Governance*

 

Our Code of Ethics has been adoptedto strengthen the implementation of our Corporate Governance Manual, orGovernance Manual, which was adopted and approved by our board of directors inSeptember 2002.  Our Governance Manual seeks to institutionalize the principlesof good governance which our board of directors and management believe to be anecessary component of sound business management.

 

Our Governance Manual conformswith the requirements of the Code of Corporate Governance, or SEC GovernanceCode, that was promulgated by the Philippine Securities and ExchangeCommission, or Philippine SEC, under the Philippine SEC Memorandum Circular No.2, Series of 2002, on April 5, 2002, in line with the Philippine Government’spolicy to promote corporate governance reform aimed to raise investorconfidence, develop capital market and help achieve sustained growth for thePhilippine corporate sector and the economy.

 

Incompliance with the SEC Governance Code and consistent with the relevantprovisions of the Securities Regulation Code and Corporation Code of the Philippines,our Governance Manual covers the following key areas:

 

1.      The qualifications and grounds for disqualification for directorship;

 

2.       Therequirement that at least two or twenty percent of the members of our board ofdirectors, whichever is lesser, must be independent directors and the standards/criteriafor the determination of independent directors;

 

3.       Theduties and responsibilities of our board of directors and the individualdirectors;

 

4.       Ourboard committees, specifically, the nomination committee, audit committee andexecutive compensation committee, the composition and the principal duties andresponsibilities of such committees;

 

5.       Therole of our chairman in ensuring compliance with the corporate governanceprinciples;

 

6.       Therole of our president/chief executive officer in ensuring that ourorganizational and procedural controls are adequate and effective to ensurereliability and integrity of financial and operational information,effectiveness and efficiency of operations, safeguarding of assets andcompliance with laws, rules, regulations and contracts;

 

7.       Theduties and responsibilities of our corporate secretary/assistant corporatesecretary in terms of the support services that they need to provide our boardin upholding sound corporate governance;

 

8.       Theduties and responsibilities of the head of our internal audit organization thatwould provide our board of directors, management and shareholders withreasonable assurance that our key organizational and procedural controls areappropriate, adequate, effective and reasonably complied with;

 

9.       Thefunctions of our independent auditors that would reasonably ensure anenvironment of sound corporate governance as reflected in our financial recordsand reports; the requirement that non-audit work of the independent auditorsshould not conflict with their function as independent auditors; therequirement to rotate, at least once every five years, the independent auditorsor the lead partner assigned to handle the independent audit of our financialstatements;

 

10.   Our commitment torespect and promote shareholders’ rights such as voting right, pre-emptiveright, inspection right, dividend right, appraisal right, and right to receiveinformation about the background, business experience, compensation andshareholdings of our directors and officers and their transactions with us;

 

11.   The requirement toappoint a compliance officer and the duties and responsibilities of suchcompliance officer including the establishment of an evaluation system todetermine and measure compliance with the provisions of our Governance Manual;and

 

12.   The penalties forviolations of our Governance Manual.

 

*Corporate GovernanceOfficer*

 

Ourcorporate governance officer is responsible for monitoring compliance with,interpreting and deciding any issues arising from, investigating anddetermining violations and recommending the disciplinary actions againstviolators of our Governance Manual and Code of Ethics.

 

*Board Committees*

 

We have four board committeesnamely, the nomination, audit, executive compensation and finance committees.Each committee has a board- approved written charter that provides for suchCommittee’s composition, membership qualifications, functions andresponsibilities, conduct of meetings, and reporting procedure to the board.See “Item 6. Directors, Senior Management and Employees –– Audit, Nomination,Executive Compensation and Finance Committees” for further details.

 

*Internal AuditOrganization*

 

We have aninternal audit organization that determines whether our network or riskmanagement, control and governance processes are adequate and functioning toensure that:

 

1.       Risksare appropriately identified and managed;

 

2.       Significantfinancial, managerial, and operating information are accurate, reliable, andtimely;

 

3.       Employees’actions are in compliance with policies, standards, procedures, and applicablelaws and regulations;

 

4.       Resourcesare acquired economically, used efficiently, and adequately protected;

 

5.       Programs,plans and objectives are achieved;

 

6.       Qualityand continuous improvement are fostered in our control process;

 

7.       Significantlegislative or regulatory issues impacting us are recognized and addressedappropriately; and

 

8.       Interactionwith various governance groups occurs as needed.

 

To ensure independence, the head of our internal auditorganization reports functionally to our audit committee and administrativelyto our president and chief executive officer.  He is accountable to managementand our audit committee in the discharge of his duties and is required to:

 

1.       Provideannually an assessment on the adequacy and effectiveness of our processes forcontrolling our activities and managing our risks;

 

2.       Reportsignificant issues related to the processes of controlling our activities,including potential improvements to those processes, and provide informationconcerning such issues;

 

3.       Periodicallyprovide information on the status and results of the annual audit plan and thesufficiency of our internal audit organization’s resources; and

 

4.       Coordinatewith and provide oversight of other control and monitoring functions (riskmanagement, compliance, security, legal, ethics, environmental, externalaudit).

 

Our internal audit organization has a charter that has beenapproved by our audit committee.  It seeks to comply with the Standards for theProfessional Practice of Internal Auditing of The Institute of InternalAuditors in the discharge of its scope of work and responsibilities.

 

*Policy on EmployeeDisclosure of Questionable Accounting or Auditing Matters*

 

We have a written policy on thehandling of employees’ complaints or disclosures about irregularities regardingaccounting, internal controls and auditing matters and the protection againstretaliation for those employees who make such complaints or disclosures.

 

Any employee may submit a complaintor disclosure of the above nature, in writing, to the Audit Committee or,verbally, to the internal audit organization, in either case, through the headof our internal audit organization.

 

The head of our internal audit organization facilitates theinvestigation of these complaints or disclosures and ensures the appropriatereporting to our audit committee on the results of the investigations and theprompt referrals of findings to the appropriate units concerned.  Our committeeon employee discipline is responsible for evaluating and approving theappropriate disciplinary action against erring employees with the rank ofassistant vice president or lower while our corporate governance officerjointly with our corporate secretary are responsible for evaluating andrecommending to our president/chief executive officer the appropriatedisciplinary action against erring officers with the rank of vice president orhigher.

 

The public may obtain informationon our Code of Ethics, Corporate Governance Guidelines and Charters of our BoardCommittees.  We undertake to provide a copy, without charge, to any personrequesting for such copy from our Corporate Secretary, Ma. Lourdes Rausa-Chan,with e-mail address *lrchan@pldt.com.ph* or telephone number+632-814-3552.  We also maintain a website at *www.pldt.com.ph*whereinreports filed by us and other information may be accessed.

 

Item 16C.   Principal Accountant Fees andServices

 

The following table summarizes thefees paid or accrued for services provided by our external auditors for the fiscalyears ended December 31, 2003 and 2002:

 

 

**2003**

**2002**

 

**(in millions)**

 

 

 

Audit Fees

Php24

Php45

Tax Fees

5

2

All Other Fees

13

4

Total

Php42

Php51

 

*Audit Fees*.This category includes the audit of our annual financial statements, review ofinterim financial statements and services that are normally provided by theindependent auditors in connection with statutory and regulatory filings orengagements for those fiscal years.  This category also includes advice onaudit and accounting matters that arose during, or as a result of, the audit orthe review of interim financial statements and statutory audits required bynon-U.S. jurisdictions, including statutory audits required.

 

*Tax Services.*  This category includes tax compliance, tax advice and tax planningservices performed by our independent auditors in respect of Smart.

 

*AllOther Fees*.  This category consistsprimarily of fees for consultation with respect to IAS 39 – FinancialInstruments, risk management review in respect of Smart’s information securityinfrastructure, due diligence review for certain projects and specializedtrainings.

 

Thefees presented above includes out-of-pocket expenses incidental to ourindependent auditors’ work, which amounts do not exceed 5% of the agreed-uponengagement fees.

 

OurAudit Committee pre-approves all audit and non-audit services as these areproposed or endorsed before these services are performed by our independentauditors.  

 

Item 16D.   Exemption from the listingStandards for Audit Committees

 

Not applicable.

 

Item 16E.   Purchases of EquitySecurities by the Issuer and Affiliated Purchaser

 

Not applicable.

PART III

Item 17. FinancialStatements

** **

Not applicable.

 

Item 18. Financial Statements

 

Index to Financial Statements

 

**Page**

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY AUDITED ANNUAL FINANCIAL STATEMENTS

 

Report of Independent Auditors

F-1

Balance Sheets as of December 31, 2003 and 2002

F-3

Statements of Income for the Years Ended December 31, 2003, 2002 and 2001

F-4

Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001

F-5

Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

F-6

Notes to Financial Statements

F-8

 

Item 19. Exhibits

** **

See Item 18 above for detailsof the financial statements filed as part of this annual report.

 

Exhibits to this report:

 

1.

Articles of Incorporation and By-laws

 

 

2.

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4.

Material Contracts

 

 

6.

Computation of Earnings per Share

 

 

7.

Calculation of Ratio of Earnings to Fixed Charges

 

 

8.

Subsidiaries

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

 

SIGNATURE

 

The registranthereby certifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 

 

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

 

 

 

 

 

 

 

 

 

By:

/s/

Ma. Lourdes C. Rausa-Chan

 

 

MA. LOURDES C. RAUSA-CHAN

 

 

Senior Vice President, Corporate Affairs and Legal 

 

 

Services Head and Corporate Secretary

 

 

 

Date:  June 24, 2004
****
EXHIBIT INDEX

** **

Exhibit Number

**Description of Exhibit**

 

 

1(a)

Articles of Incorporation (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

1(b)

By-Laws (incorporated by reference to PLDT’s Form 20-F as filed with the Securities and Exchange Commission in July 2003)

 

 

2

We have not included as exhibits certain instruments with respect to our long-term debt, the amount of debt authorized under each of which does not exceed 10% of out total assets, and we agree to `furnish a copy of any such instrument to the Securities and Exchange Commission upon request.

 

 

4(a)

Stock Purchase and Strategic Investment Agreement, dated September 28, 1999, by and among PLDT, First Pacific Limited, Metro Pacific Corporation, Metro Pacific Asia Link Holdings, Inc., Metro Pacific Resources, Inc. and NTT Communications Corporation (incorporated by reference to PLDT's Form 6-K for the month of September 1999 [2])

 

 

4(b)

Executive Stock Option Plan (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

4(c)

Master Restructuring Agreement, dated June 21, 2000, as amended on December 12, 2000 and December 19, 2000, between Piltel, Piltel (Cayman) Limited, PLDT, The Chase Manhattan Bank, as escrow agent, Metropolitan Bank and Trust Company, as administrative agent and the creditors named therein (incorporated by reference to PLDT's Form 20-F as filed with the Securities and Exchange Commission in May 2001)

 

 

6

Computation of Earnings per Share

 

 

7

Calculation of Ratio of Earnings to Fixed Charges 

 

 

8

Subsidiaries 

 

 

12.1

Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act 

 

 

12.2

Certification of the Principal Financial Officer required by Rule 13a-14(a) of the Exchange Act

 

 

13.1

Certification of Chief Executive Officer required by Rule 13a-14(b) of the Exchange Act

 

 

13.2

Certification of the Principal Financial Officer required by Rule 13a-14(b) of the Exchange Act

** **
****
**EXHIBIT6**

 

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY

Computation of Net OperatingIncome and Earnings Per Share

**For the years 2001 through2003**

 

 

**2003**

**2003**(1)

**2002**

**2001**

 

**(in millions, except net operating income (loss) per common share)**

**1. Net operating income (loss) per share**

** **

** **

** **

** **

Basic

 

 

 

 

Net operating income (loss) 

Php33,473

US$602

Php12,029

(Php5,942)

Deduct: Dividends on preferred stock

1,739

31

1,645

1,503

Amortization of difference between fair market value and put option price of preferred stock subject to mandatory conversion

1,309

24

1,004

542

Net operating income (loss) applicable to common shareholders

Php30,425

US$547

Php9,380

(Php7,987)

Diluted

 

 

 

 

Net operating income (loss) 

Php33,473

US$602

Php12,029

(Php5,942)

Deduct: Dividends on preferred stock

49

1

1,036

1,503

Amortization of difference between fair market value and put option price of preferred stock subject to mandatory conversion

1,309

24

1,004

542

Net operating income (loss) applicable to common shareholders

Php32,115

US$577

Php9,989

(Php7,987)

Basic

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

Outstanding common shares, beginning

169,361

 

168,895

168,498

Effect of common shares issuance during the year

52

 

200

162

 

169,413

 

169,095

168,660

Diluted

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

Outstanding common shares, beginning

169,361

 

168,895

168,498

Effect of common shares issuance during the year

24,274

 

22,360

162

 

193,635

 

191,255

168,660

 

 

 

 

 

Net operating income (loss) per share 

 

 

 

 

Basic

Php179.59

US$3.23

Php55.47

(Php47.36)

Diluted

165.85

2.98

52.23

(47.36)

 

** **

 

**(in millions, except earnings per common share)**

**2. Earnings per share(2)**

** **

** **

** **

** **

Basic

 

 

 

 

Net income (loss)

Php11,045

US$199

(Php6,158)

(Php27,782)

Deduct: Dividends on preferred shares

1,739

31

1,645

1,503

Amortization of difference between fair market value and option price of preferred stock subject to mandatory conversion

1,309

24

1,004

542

Net income (loss) applicable to common shareholders

Php7,997

US$144

(Php8,807)

(Php29,827)

Diluted

 

 

 

 

Net income (loss)

Php11,045

US$199

(Php6,158)

(Php27,782)

Deduct:  Dividends on preferred shares

1,485

27

1,645

1,503

Amortization of difference between fair market value and option price of preferred stock  subject to mandatory conversion

1,309

24

1,004

542

Net income (loss) applicable to common shareholders

Php8,251

US$148

(Php8,807)

(Php29,827)

Basic

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

Outstanding common shares, beginning

169,361

 

168,895

168,498

Effect of common shares issuance during the year

52

 

200

162

 

169,413

 

169,095

168,660

Diluted

 

 

 

 

Weighted average number of common shares (in thousands)

 

 

 

 

Outstanding common shares, beginning

169,361

 

168,895

168,498

Effect of common shares issuance during the year

11,121

 

200

162

 

180,482

 

169,095

168,660

Earnings per share(2) 

 

 

 

 

Basic

Php47.20

US$0.85

(Php52.08)

(Php176.85)

Diluted

45.72

0.82

(52.08)

(176.85)

_____________

 

*(1)    **The PLDT Group maintains itsaccounts in Philippine pesos.  For convenience, the peso financial informationas of and for the year ended December 31, 2003 has been translated into U.S.dollars at the exchange rate of Php55.586 to US$1.00, the peso-dollar rate asquoted through the Philippine Dealing System as of December 31, 2003.*

* *

*(2)    **Our convertible preferredstocks were deemed anti-dilutive for the years ended**December 31, 2002**and 2001.  Since the amount of preferred dividends over the equivalentnumber of common stocks were greater than the basic earnings per share, theamounts reported for the years ended December 31, 2002 and 2001 basic anddiluted earnings per common share were the same.*
**
**EXHIBIT 7**

 

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY**

**Calculation of Ratio of Earnings to Fixed Charges**

For the years 2001 through2003

 

 

**2003**

**2003(1)**

**2002**

**2001**

 

**(in millions, except ratio of earnings (loss) to fixed charges)**

Earnings (a)

Php25,119

US$453

Php11,455

(Php13,117)

Fixed charges – (b)

 

 

 

 

Fixed charges excluding amortization of capitalized interest

Php13,698

US$247

Php14,312

Php15,839

Capitalized interest, net of amortization

(262)

(5)

(393)

1,170

 

Php13,436

US$242

Php13,919

Php17,009

Ratio (a/b) (2)

1.8

1.8

–

–

_____________

 

*(1)    **PLDT maintains its accountsin Philippine pesos.  For convenience, the peso financial information as of andfor the year ended December 31, 2003 has been translated into U.S. dollars atthe exchange rate of Php55.586 to US$1.00, the peso-dollar rate as quotedthrough the Philippine Dealing System as of December 31, 2003.*

* *

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

* *

*Due to PLDT’s net losses in 2002 and 2001, the coverageratio on a consolidated basis was less than 1.0x in all of these two years.  Inorder to achieve a coverage ratio of 1.0x, we would have had to generateadditional consolidated earnings of Php2,464 million and Php30,126 million foreach of the two years ended**December 31, 2002**and 2001, respectively.*

* *
******
** **

**EXHIBIT 8**

 

SUBSIDIARIES
 

Name of Subsidiary

** **

Jurisdiction

** **

**Principal Activity**

** **

**Percentage of Ownership (As of****December 31, 2003****)**

 

 

 

 

 

 

 

Wireless

 

 

 

 

 

 

Smart Communications, Inc. and subsidiaries

 

Philippines

 

Cellular mobile services

 

100.0

 

 

 

 

 

 

 

Telesat, Inc.

 

Philippines

 

Satellite communications services

 

94.4

 

 

 

 

 

 

 

ACeS Philippines Cellular Satellite Corporation

 

Philippines

 

Satellite phone services 

 

93.7

 

 

 

 

 

 

 

Mabuhay Satellite Corporation (formerly Mabuhay Philippines Satellite Corporation)

 

Philippines

 

Satellite communications services

 

67.0

 

 

 

 

 

 

 

Pilipino Telephone Corporation and subsidiaries

 

Philippines

 

Cellular mobile services and telecommunications services

 

45.3

 

 

 

 

 

 

 

Fixed Line

 

 

 

 

 

 

PLDT Clark Telecom, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Subic Telecommunications

Company, Inc.

 

Philippines

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

Smart-NTT Multimedia, Inc.

 

Philippines

 

Data and network services

 

100.0

 

 

 

 

 

 

 

PLDT Global and subsidiaries

 

British Virgin Islands

 

Telecommunications services

 

100.0

 

 

 

 

 

 

 

PLDT-Maratel, Inc. (formerly Maranao Telephone Company, Inc.)

 

Philippines

 

Telecommunications services

 

97.5

 

 

 

 

 

 

 

Bonifacio Communications Corporation

 

Philippines

 

Telecommunications, infrastructure and related value-added services

 

75.0

 

 

 

 

 

 

 

Information and Communications Technology

 

 

 

 

 

 

ePLDT, Inc. and subsidiaries

 

Philippines

 

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

 

100.0

 

**EXHIBIT 12.1**

** **

CERTIFICATION

** **

I, Napoleon L. Nazareno,certify that:

1.       I have reviewed this annual report on Form 20-F of PhilippineLong Distance Telephone Company;

 

2.       Based on my knowledge, this report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this report;

 

3.       Based on my knowledge, the financial statements, and otherfinancial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theCompany as of, and for, the periods presented in this report;

 

4.       The Company’s other certifying officer(s) and I are responsiblefor establishing and maintaining disclosure controls and procedures (as definedin Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

 

a)      Designedsuch disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to the Company, including its consolidated subsidiaries,is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;
b)      [Omittedpursuant to the guidance of Release Nos. 33-8238 (June 5, 2003) and 33-8392 (February 24, 2004)];
c)      Evaluatedthe effectiveness of the Company's disclosure controls and procedures andpresented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by thisreport based on such evaluation; and
d)      Disclosedin this report any change in the Company’s internal control over financialreporting that occurred during the period covered by the annual report that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting; and
5.       The Company’s other certifying officers and I have disclosed,based on our most recent evaluation of internal control over financialreporting, to the Company’s auditors and the audit committee of the Company’sboard of directors (or persons performing the equivalent functions):

 

a)      Allsignificant deficiencies and material weaknesses in the design or operation ofinternal control over financial reporting which are reasonably likely toadversely affect the Company's ability to record, process, summarize and reportfinancial information; and

 

b)      Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Company’s internal control over financialreporting.

 

Date:  June 24, 2004

 

 

/s/ Napoleon L. Nazareno

Napoleon L. Nazareno

President and Chief Executive Officer

(Principal Executive Officer)

 

**Exhibit 12.2**

** **

**CERTIFICATION**

** **

I, Anabelle L. Chua, certifythat:

1.       Ihave reviewed this annual report on Form 20-F of Philippine Long DistanceTelephone Company;

 

2.       Basedon my knowledge, this report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this report;

 

3.       Basedon my knowledge, the financial statements, and other financial informationincluded in this report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Company as of, and for,the periods presented in this report;

 

4.       TheCompany’s other certifying officer(s) and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) for the Company and have:

 

a)   Designed such disclosure controls and procedures, orcaused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the Company,including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is beingprepared;
b)   [Omitted pursuant to the guidance of Release Nos.33-8238 (June 5, 2003) and 33-8392(February 24, 2004)];
c)   Evaluated the effectiveness of the Company'sdisclosure controls and procedures and presented in this report our conclusionsabout the effectiveness of the disclosure controls and procedures, as of theend of the period covered by this report based on such evaluation; and
d)   Disclosed in this report any change in the Company’sinternal control over financial reporting that occurred during the periodcovered by the annual report that has materially affected, or is reasonablylikely to materially affect, the Company’s internal control over financialreporting; and
5.       TheCompany’s other certifying officer(s) and I have disclosed, based on our mostrecent evaluation of internal control over financial reporting, to theCompany’s auditors and the audit committee of the Company’s board of directors(or persons performing the equivalent functions):

 

a)   Allsignificant deficiencies and material weaknesses in the design or operation ofinternal control over financial reporting which are reasonably likely toadversely affect the Company's ability to record, process, summarize and reportfinancial information; and

 

b)   Any fraud,whether or not material, that involves management or other employees who have asignificant role in the Company’s internal control over financial reporting.

 

Date:  June 24, 2004

 

 

/s/ Anabelle L. Chua

Anabelle L. Chua

Senior Vice President and Treasurer

(Principal Financial Officer)

**EXHIBIT13.1**

** **

** **

** **

**CERTIFICATION**

** **

** **

Pursuantto 18 U.S.C. § 1350, I, NapoleonL. Nazareno, Presidentand Chief Executive Officer of Philippine Long Distance Telephone Company, herebycertify, to my knowledge, that our annual report on Form 20-F for the yearended December 31, 2003 (the “Report”) fully complies with the requirements ofSection 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934,and that the information contained in the Report fairly presents, in allmaterial respects, our financial condition and results of operations.

 

 

Date:  June 24, 2004

 

 

 

 

 

/s/ Napoleon L. Nazareno

 

 

 

Napoleon L. Nazareno

President and Chief Executive Officer

 

 

 

(Principal Executive Officer)

Theforegoing certification is being furnished solely pursuant to 18 U.S.C. § 1350and is not being filed as part of the Report or as a separate disclosuredocument.

 

 

**Exhibit 13.2**

** **

** **

**CERTIFICATION**

** **

** **

Pursuantto 18 U.S.C. § 1350, I, AnabelleL. Chua, Senior VicePresident and Treasurer of Philippine Long Distance Telephone Company, herebycertify, to my knowledge, that our annual report on Form 20-F for the yearended December 31, 2003 (the “Report”) fully complies with the requirements ofSection 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934,and that the information contained in the Report fairly presents, in allmaterial respects, our financial condition and results of operations.

 

 

Date:  June 24, 2004

 

 

 

 

 

/s/ Anabelle L. Chua

 

 

 

Anabelle L. Chua

Senior Vice President and Treasurer

 

 

 

(Principal Financial Officer)

Theforegoing certification is being furnished solely pursuant to 18 U.S.C. § 1350and is not being filed as part of the Report or as a separate disclosuredocument.

 

 

 

** **

** **

**Report of Independent Auditors**

 

 

 

To the Board of Directors and the Stockholders of

Philippine Long Distance Telephone Company

 

 

We have audited the accompanying consolidated balance sheetsof Philippine Long Distance Telephone Company and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes instockholders’ equity and cash flows for each of the three years in the periodended December 31, 2003.  These financial statements are the responsibility ofthe Company’s management.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  We believe that our audits provide areasonable basis for our opinion. 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Philippine Long Distance TelephoneCompany and subsidiaries as of December 31, 2003 and 2002, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2003, in conformity with United States generallyaccepted accounting principles.

As discussed in Note 3 to theconsolidated financial statements, the Company changed its method of accountingfor asset retirement obligations in 2003, goodwill and other intangible assetsin 2002, and derivatives and hedging instruments in 2001.

 

 

 

 

 

 

   /s/ SyCip Gorres Velayo & Co.   

SYCIP GORRES VELAYO & CO.

 

Makati City, Philippines

May 31, 2004

 

**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER 31, 2003****AND 2002**

**(inmillions of pesos, except par value amounts)**

 

 

 

**2003**

2002

** **

** **

 

**ASSETS**

**Current Assets**

** **

 

Cash and cash equivalents (Notes 4 and 25)

**19,372**

10,974

Accounts receivable – net (Notes 5, 18, 25 and 26) 

**19,066**

17,317

Inventories and supplies – net (Note 6)

**2,676**

4,506

Deferred income tax – net (Note 21)

**7,932**

5,690

Prepaid expenses

**906**

1,562

Other current assets (Note 25)

**728**

251

Total Current Assets

**50,680**

40,300

**Noncurrent Assets**

** **

** **

Property, plant and equipment – net (Note 7)

**190,217**

194,664

Investments – net (Note 8)

**1,566**

1,757

Goodwill and other intangible assets – net (Note 10)

**15,464**

16,058

Deferred income tax – net (Note 21)

**12,780**

11,163

Other noncurrent assets – net (Notes 11 and 25)

**5,921**

5,445

Total Noncurrent Assets

**225,948**

229,087

 

**276,628**

269,387

**LIABILITIES AND STOCKHOLDERS’ EQUITY**

**Current Liabilities**

** **

 

Current portion of long-term debt (Note 14) 

**23,816**

19,625

Accounts payable (Notes 18 and 25)

**6,655**

10,071

Accrued expenses and other current liabilities (Notes 12 and 25)

**16,046**

13,076

Unearned revenues on sale of prepaid cards

**2,809**

2,022

Notes payable (Notes 13 and 25)

**2,133**

760

Income tax payable

**840**

982

Dividends payable (Notes 17 and 25)

**577**

429

Total Current Liabilities

**52,876**

46,965

**Noncurrent Liabilities**

** **

** **

Long-term debt – net of current portion (Notes 14, 23 and 25) 

**160,459**

171,283

Deferred credits and other noncurrent liabilities (Notes 15, 19, 23 and 25)

**23,562**

22,374

Total Noncurrent Liabilities

**184,021**

193,657

**Minority Interest in Consolidated Subsidiaries**

**1,665**

1,413

**Preferred Stock Subject to Mandatory Redemption**(Notes 16, 23 and 25)

**13,321**

10,939

**Stockholders’ Equity** (Note 17)

** **

 

Preferred stock, Php10 par value, authorized 822,500,000 shares: 

** **

 

Series A to DD (issued and outstanding 409,876,226 shares as of December 31, 2003 and 406,826,136 shares as of December 31, 2002)

**4,099**

4,068

Series III (issued and outstanding 4,616,200 shares as of December 31, 2003 and 2002)

**46**

46

Series IV (issued and outstanding 36,000,000 shares as of December 31, 2003 and 2002)

**360**

360

Common stock, Php5 par value, authorized 234,000,000 shares; issued and outstanding169,476,120 shares as of December 31, 2003 and 169,360,901 shares as of December 31, 2002

**847**

847

Capital in excess of par value

**74,520**

74,324

Accumulated deficit 

**(58,031)**

(66,016)

Accumulated other comprehensive income

**2,904**

2,784

Total Stockholders’ Equity

**24,745**

16,413

 

**276,628**

269,387

*Seeaccompanying Notes to Consolidated Financial Statements.*
****
**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

 

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FORTHE YEARS ENDED****DECEMBER 31, 2003****, 2002 AND 2001**

**(inmillions of pesos, except per share amounts)**

** **

** **

** **

**2003**

2002

2001

**OPERATING REVENUES**(Note 18)

** **

** **

** **

Wireless 

** **

 

 

Cellular services 

**51,001**

30,583

19,820

Cellular handset sales 

**12,433**

14,982

13,015

Satellite, very small aperture terminal and others

**898**

733

762

 

**64,332**

46,298

33,597

Fixed line

** **

 

 

Local exchange

**20,728**

21,345

21,356

International long distance

**12,634**

10,636

11,701

National long distance 

**6,694**

7,818

8,500

Data and other network

**5,802**

5,561

4,653

Miscellaneous

**337**

491

113

 

**46,195**

45,851

46,323

Information and communications technology

**1,509**

651

374

 

**112,036**

92,800

80,294

**OPERATING EXPENSES**

** **

 

 

Depreciation (Note 7)

**21,882**

17,566

16,218

Cost of cellular handsets sold 

**15,886**

16,203

15,179

Compensation and benefits (Notes 3, 12 and 19)

**13,304**

10,893

9,632

Maintenance 

**4,742**

3,856

4,025

Selling and promotions 

**4,423**

3,603

2,686

Provision for doubtful accounts (Note 5)

**4,092**

4,160

3,221

Rent 

**2,837**

3,106

2,586

Taxes and licenses (Note 24)

**2,126**

980

940

Cost of satellite air time (Notes 18 and 23)

**1,919**

50

–

Professional and other service fees (Note 18)

**1,895**

2,304

2,381

Insurance and securities

**1,514**

1,354

1,083

Amortization of goodwill and other intangible assets (Note 10)

**766**

766

6,177

Asset impairment charges (Note 7)

**675**

13,279

19,735

Provision for inventory obsolescence (Note 6)

**254**

476

211

Other operating expenses (Note 18) 

**2,248**

2,175

2,162

 

**78,563**

80,771

86,236

OPERATING INCOME (LOSS)

**33,473**

12,029

(5,942)

**INTEREST EXPENSE AND RELATED ITEMS** - Net of capitalized interest (Notes 7, 13 and 14)

**(12,****161)**

(12,780)

(14,697)

**INTEREST AND OTHER INCOME** – Net

**1,052**

1,574

1,278

**EQUITY IN NET LOSSES OF INVESTEES**(Note 8)

**(88)**

(142)

(4,268)

**OTHER EXPENSES**– Net (Note 20)

**(12,456)**

(5,275)

(6,561)

**INCOME (LOSS) BEFORE INCOME TAX, CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES AND MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARIES**

**9,820**

(4,594)

(30,190)

**BENEFIT FROM (PROVISION FOR) INCOME TAX**(Note 21)

**1,400**

(1,438)

2,570

**INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLES AND MINORITY INTEREST IN NET INCOME OF CONSOLIDATED SUBSIDIARIES**

**11,220**

(6,032)

(27,620)

**CUMULATIVE****EFFECT********ON****PRIOR YEARS (UP TO****DECEMBER 31, 2000****) OF ADOPTING  SFAS 133** – Net of tax effect (Note 26)

–

– 

(54)

**CUMULATIVE****EFFECT********ON****PRIOR YEARS (UP TO****DECEMBER 31, 2002****) OF ADOPTING  SFAS 143** – Net of tax effect (Note 15)

**(61)**

–

–

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

**11,159**

 

(6,032)

 

(27,674)

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

**(114)**

(126)

(108)

**NET INCOME (LOSS)**

**11,045**

(6,158)

(27,782)

**DIVIDENDS AND ACCRETION OF PREFERRED STOCK**

**(3,048)**

(2,649) 

(2,045)

**INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS**(Note 22)

**7,997**

(8,807)

(29,827)

**Earnings Per Common Share**(Note 22)

** **

 

 

Basic earnings per common share before cumulative effect of change in accounting principles

**47.56**

(52.08) 

(176.53)

Cumulative effect of change in accounting principles

**(0.36)**

–

(0.32)

Basic earnings per common share

**47.20**

(52.08)

(176.85)

Diluted earnings per common share before cumulative effect of change in accounting principles

**46.06**

(52.08)

(176.53)

Cumulative effect of change in accounting principles

**(0.34)**

–

(0.32)

Diluted earnings per common share before cumulative effect of change in accounting principles

**45.72**

(52.08)

(176.85)

*See accompanying Notes to Consolidated FinancialStatements**.*

* *

* *

**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

**FOR THE YEARSENDED****DECEMBER 31, 2003****, 2002 AND 2001**

**(in millions ofpesos)**

** **

** **

 

**Preferred Stock**

**Common Stock**

**Capital in  Excess of  Par Value**

**Accumulated Deficit**

**Accumulated Other Comprehensive Income**

**Total**

Balances as of January 1, 2001 

3,921

843

73,642

(27,181)

2,535

53,760

Comprehensive loss:

 

 

 

 

 

 

Net loss for the year

–

–

–

(27,782)

–

(27,782)

Translation gains

–

–

–

–

173

 173

Net comprehensive loss

 

 

 

 

 

(27,609)

Cash dividends (Note 17)

–

–

–

(1,666)

–

(1,666)

Accretion to redemption value of Preferred Stock subject to mandatory redemption 

–

–

–

(542)

–

(542)

Issuance of capital stock

208

2

319

–

–

 529

Balances as of December 31, 2001 

4,129

 845

73,961

(57,171)

2,708

24,472

Comprehensive loss:

 

 

 

 

 

 

Net loss for the year

–

–

–

(6,158)

–

(6,158)

Translation gains

–

–

–

–

76

  76

Net comprehensive loss

 

 

 

 

 

(6,082)

Cash dividends (Note 17)

–

–

–

(1,683)

–

(1,683)

Accretion to redemption value of Preferred Stock subject to mandatory redemption 

–

–

–

(1,004)

–

(1,004)

Partial redemption of Series IV Preferred Stock (Note 16)

(72)

–

–

–

–

(72)

Issuance of capital stock

417

2

363

–

–

 782

Balances as of December 31, 2002 

4,474

 847

74,324

(66,016)

2,784

16,413

Comprehensive income:

 

 

 

 

 

 

Net income for the year

–

–

–

11,045

–

11,045

Translation gains

–

–

–

–

120

 120

Total comprehensive income

 

 

 

 

 

11,165

Cash dividends (Note 17)

–

–

–

(1,751)

–

(1,751)

Accretion to redemption value of Preferred Stock subject to mandatory redemption

–

–

–

(1,309)

–

(1,309)

Issuance of capital stock

31

–

196

–

–

 227

**Balances as of****December 31, 2003**

**4,505**

**847**

**74,520**

**(58,031)**

**2,904**

**24,745**

*See accompanying Notes to Consolidated FinancialStatements.*

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

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FORTHE YEARS ENDED****DECEMBER 31, 2003****, 2002 AND 2001**

**(inmillions of pesos)**

** **

** **

 

**2003**

2002

2001

**CASH FLOWS FROM OPERATING ACTIVITIES**

** **

 

 

Net income (loss)

**11,045**

(6,158)

(27,782)

Adjustments to reconcile net loss from operations to net cash provided by operating activities:

** **

 

 

Depreciation

**21,882**

17,566

16,218

Unrealized foreign exchange losses

**11,527**

5,301

3,996

Provision for doubtful accounts

**4,092**

4,160

3,221

Provision for (benefit from) deferred income taxes

**(3,731)**

849

(3,446)

Amortization of goodwill and other intangible assets 

**766**

766

6,177

Asset impairment charges

**675**

13,279

19,735

Amortization of debt issuance costs

**591**

497

280

Gain on disposal of property and equipment

**(463)**

(87)

(83)

Provision for inventory obsolescence

**254**

476

211

Minority interest in net income of consolidated subsidiaries

**114**

126

108

Equity in net losses of investees

**88**

142

4,268

Provision for permanent decline in value of investment

**–**

–

2,052

Others

**336**

(234)

(262)

Operating cash flows before working capital changes 

**47,176**

36,683

24,693

Changes in assets and liabilities, net of effect from purchase of subsidiaries: 

 

 

 

Decrease (increase) in:

** **

 

 

Accounts receivable

**(6,026)**

4,005

(1,112)

Inventories and supplies

**1,576**

353

(2,168)

Prepaid expenses and other current assets

**306**

(186)

(1,065)

Increase (decrease) in:

 

 

 

Accounts payable

**(3,231)**

(2,507)

(2,134)

Accrued expenses and other current liabilities

**3,215**

1,558

1,276

Unearned revenues on sale of prepaid cards

**787**

2

1,276

Income tax payable

**(280)**

627

(101)

Deferred credits and other noncurrent liabilities

**(2,603)**

(813)

(552)

Net cash provided by operating activities

**40,920**

39,722

20,113

**CASH FLOWS FROM INVESTING ACTIVITIES**

** **

 

 

Additions to property, plant and equipment

**(17,943)**

(17,239)

(28,201)

Proceeds from disposal of property and equipment

**226**

252

113

Payments for purchase of investments, net of cash acquired

**(197)**

–

(772)

Cash disbursements for lease deposits and others

**(404)**

(210)

(49)

Cash of disposed subsidiary

**(93)**

–

–

Proceeds from disposal of investments

**52**

30

150

Payments for purchase of investments

**–**

–

(617)

Net cash used in investing activities

**(18,359)**

(17,167)

(29,376)

*(Forward)*

**PHILIPPINE LONGDISTANCE TELEPHONE COMPANY AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS *(Continued)***

**FORTHE YEARS ENDED****DECEMBER 31, 2003****, 2002 AND 2001**

**(inmillions of pesos)**

** **

 

**2003**

2002

2001

**CASH FLOWS FROM FINANCING ACTIVITIES**

 

 

 

Payments of long-term borrowings

**(31,548)**

(43,870)

(16,990)

Proceeds from long-term borrowings

**17,507**

36,011

21,823

Proceeds from notes payable

**3,135**

7,872

13,483

Repayments of notes payable 

**(1,698)**

(13,600)

(11,970)

Dividends paid

**(1,603)**

(1,582)

(1,819)

Debt issuance costs paid

**(120)**

(1,206)

(979)

Increase in capital lease liabilities

**98**

29

61

Proceeds from issuance of capital stock

**94**

464

232

Redemption of preferred stock

**–**

(72)

–

Net cash provided by (used in) financing activities

**(14,135)**

(15,954)

3,841

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

**(28)**

97

24

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

**8,398**

6,698

(5,398)

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

**10,974**

4,276

9,674

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

**19,372**

10,974

4,276

*See accompanying Notes to Consolidated FinancialStatements.*

 

** **
**
* *

**PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ANDSUBSIDIARIES**

** **

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

 

 

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

 

The Philippine Long DistanceTelephone Company, or PLDT, was incorporated under the old Corporation Law ofthe Philippines (Act 1459, as amended) on November 28, 1928, following the merger of four telephone companies under common United States ownership.  In1967, effective control of PLDT was sold by General Telephone and ElectronicsCorporation (a major stockholder since PLDT’s incorporation) to a group ofFilipino businessmen.  In 1981, in furtherance of the then existing policy ofthe Philippine government to integrate the Philippine telecommunicationsindustry, PLDT purchased substantially all of the assets and liabilities of theRepublic Telephone Company. 

 

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

 

PLDT’s charter, like those of allother Philippine corporations, was initially limited to a period of 50 yearsbut has since been extended twice for 25 years each, the last extension beingfor an additional 25-year period to 2028.  Under its amended charter (RepublicAct No. 7082), which became effective on August 24, 1991, PLDT is authorized toprovide virtually every type of telecommunications service, both within thePhilippines and between the Philippines and other countries.

 

PLDT operates under thejurisdiction of the Philippine National Telecommunications Commission, or NTC,which jurisdiction extends, among other things, to approving major servicesoffered by PLDT and certain rates charged by PLDT. 

 

We had 18,191 and 19,139 employeesas of December 31, 2003 and 2002, respectively.

 

PLDT has three employee unions. Thethree unions are in aggregate composed of 8,775 members as of December 31, 2003. The union members represent 48% of the employees of the PLDT Group on aconsolidated basis as of December 31, 2003.

 

The registered office address ofPLDT is Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines.

 

 

 

**2.       ****Basis of Consolidated Financial Statement Preparation**

 

Our consolidated financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the United States of America, or U.S. GAAP.

 

Our consolidated financialstatements include the financial statements of PLDT and those of the followingsubsidiaries (collectively, the PLDT Group), which were all incorporated in thePhilippines except for PLDT Global Corporation, or PLDT Global, which wasincorporated in the British Virgin Islands.

 

 

** **

** **

**Percentage of Ownership**

**Name of Subsidiary/Investee**

**Principal Activity**

**2003**

2002

2001

**Wireless**

 

** **

 

** **

Smart Communications, Inc., or Smart,  and subsidiaries

Cellular mobile services

**100.0**

100.0

100.0

Telesat, Inc., or Telesat

Satellite communications services

**94.4**

94.4

94.4

ACeS Philippines Cellular Satellite Corporation, or ACeS Philippines

Satellite phone services

**93.7**

93.7

93.7

Mabuhay Satellite Corporation  (formerly Mabuhay Philippines Satellite Corporation), or Mabuhay Satellite

Satellite communications services

**67.0**

67.0

67.0

Pilipino Telephone Corporation, or Piltel, and subsidiaries

Cellular mobile and telecommunications services

**45.3**

45.3

45.3

**Fixed Line**

 

** **

** **

** **

PLDT Clark Telecom, Inc., or  Clark Telecom

Telecommunications services

**100.0**

100.0

100.0

Subic Telecommunications Company, Inc.,  or Subic Telecom

Telecommunications services

**100.0**

100.0

100.0

Smart-NTT Multimedia, Inc., or SNMI

Data and network services

**100.0**

100.0

100.0

PLDT Global and subsidiaries

Telecommunications services

**100.0**

100.0

100.0

PLDT-Maratel, Inc. (formerly Maranao Telephone Company, Inc.), or Maratel

Telecommunications services

**97.5**

97.5

92.3

Bonifacio Communications Corporation,  or BCC

Telecommunications, infrastructure and related value-added services

**75.0**

37.5

–

**Information and Communications  Technology**

 

** **

 

 

ePLDT, Inc., or ePLDT, and subsidiaries

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

**100.0**

100.0

100.0

 

Themethod of accounting applied to investments, whether consolidated, equity orcost, involves an evaluation of all significant terms of the investments thatexplicitly grant or suggest evidence of control or influence over the operationsof the investee.  The consolidated financial statements include our controlledsubsidiaries. Investments in businesses which we do not control, but we havethe ability to exercise significant influence over operating and financialpolicies, are accounted for using the equity method.  Investments in which wedo not have the ability to exercise significant influence over operating andfinancial policies are accounted for using the cost method.  Equity and costmethod investments are included in the “Investments” account in ourconsolidated balance sheets.  

 

Our consolidated financialstatements are prepared using uniform accounting policies for like transactionsand events with similar circumstances.  Intercompany balances and transactions,including intercompany profits and unrealized profits and losses, areeliminated.

 

Minority interests represent theequity interests in Maratel, BCC (in 2003), Telesat, and Mabuhay Satellite notheld by the PLDT Group.

*** ***
******
*** ***

***Acquisition of Smart***

 

PLDT completed the acquisition ofthe entire issued share capital of Smart on March 24, 2000 valued atapproximately Php38,188 million through the issuance of PLDT common shares(issue price of Php1,088 per share) to Smart’s shareholders representing 22.5%of the issued common shares of PLDT (as enlarged by such issue of shares).Accordingly, the operating results of Smart have been included in theconsolidated results of operations from the date of acquisition.

 

The excess of the total acquisitioncost over the fair value of the net assets acquired was Php23,096 million.Based upon management estimates and review, Php5,900 million was recorded asthe value of customers acquired (Php2,705 million and Php3,195 million wereattributed to Global System for Mobile Communication, or GSM, and analogsubscribers, respectively).  Prior to 2002, the excess of the total acquisitioncost over the fair value of the net assets acquired was amortized on astraight-line basis over five years.  Prior to 2001, the customers list for theGSM and analog subscribers was amortized over five years, which at that timewas the expected average period of the customer relationship. Beginning in2001, we revised our estimated useful life of the acquired GSM customers list,based on our analysis of customer churn rates, to three years.  The unamortizedbalance of the analog customers list was fully impaired in 2001.  

 

 

 

**3.        ****Summary of Significant Accounting Policies and Practices**

 

Our significant accounting policiesand practices are discussed below to facilitate the understanding of ourconsolidated financial statements:

 

***Revenue Recognition***

 

Revenue for services is stated atamounts invoiced to customers and excludes value-added tax.  We providewireless communication services, fixed line communication services, andinformation and communications technology services.  We provide such servicesto business, residential, payphone and mobile customers.  Revenue representsthe value of fixed consideration that has been received or is receivable.Revenue is recognized when there is evidence of an arrangement, collectibilityis reasonably assured, and the delivery of the product or service hasoccurred.  In certain circumstances, revenue is split into separatelyidentifiable components and recognized when the related components aredelivered in order to reflect the substance of the transaction.  The value ofcomponents is determined using verifiable objective evidence.  We do notprovide our customers with the right to a refund.

 

*Products and services*

 

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

 

*Air time, traffic andvalue-added services.*Prepaid service revenue collected in advance isdeferred and recognized based on the earlier of actual usage or upon expirationof the usage period.  Payphone service revenue is recognized when the serviceis provided.  Interconnection revenue for call termination, call transit, andnetwork usage are recognized in the period the traffic occurs.  Revenuesrelated to local, long distance, network-to-network, roaming and internationalcall connection services are recognized when the call is placed or theconnection is provided, net of amounts payable to other telecommunicationcarriers for terminating calls in their territories.  Revenue related toproducts and value-added services is recognized upon delivery of the product orservice.

* *

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

 

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

* *

*Incentives.*We recordcommission expense based on the number of new subscriber connections initiatedby certain dealers.  All other cash incentives provided to dealers andcustomers are recorded as a reduction from revenue.  Product-based incentivesprovided to dealers and customers as part of a transaction are accounted for asmultiple element arrangements and recognized when earned.  

 

*Others.*Interest incomefrom cash deposits is recognized on a time proportion basis taking into accountthe principal amount outstanding and the effective interest rate.

 

***Cash andCash Equivalents***

* *

Cash includes cash on hand and inbanks.  Cash equivalents are short-term, highly liquid investments that arereadily convertible to known amounts of cash with original maturities of threemonths or less and that are subject to an insignificant risk of change invalue.

* *

***AccountsReceivable***

* *

Accounts receivable are stated atface value, net of allowance for doubtful accounts.

* *

***Allowancefor Doubtful Accounts***

* *

Allowance for doubtful accounts ismaintained at a level considered adequate to provide for uncollectiblereceivables.  The level of allowance is based on historical collections,write-off experience, current economic trends, changes in our customer paymentterms and other factors that may affect collectibility.  An evaluation of thereceivables, designed to identify potential charges to the allowance, isperformed on a continuous basis during the year.

 

*Customers*.  Full allowanceis provided for receivables from permanently disconnected subscribers.Permanent disconnections are made after a series of collection steps followingnon-payment by subscribers.  Such permanent disconnections generally occurwithin 105 days from due date.  Partial allowance is provided for activesubscribers based on the age status of the receivable.

 

*Traffic Settlement Receivables –net*.  Full allowance is provided for carrier accounts which have been pastdue for over 360 days from transaction date and after a review of the status ofsettlement with other carriers.

 

***Inventoriesand Supplies***

* *

Inventories and supplies are valued at the lower of cost ormarket value.  These are items of cellular phone units, materials, spare parts,terminal units and accessories.  Cost is determined using the moving averagemethod.

 

***Property,Plant and Equipment***

 

Property, plant and equipment arestated at cost less accumulated depreciation and any impairment in value.

 

The initialcost of property, plant and equipment comprises its purchase price and anycosts directly attributable in bringing the asset to its working condition andlocation for its intended use.  Expenditures incurred after the assets havebeen put into operation, such as repairs and maintenance and overhaul costs,are normally charged to income in the period the costs are incurred.  In situationswhere it can be clearly demonstrated that the expenditures have resulted in anincrease in the future economic benefits expected to be obtained from the useof an item of property, plant and equipment beyond its originally assessedstandard of performance, the expenditures are capitalized as additional costsof property, plant and equipment.  Cost also includes interest on borrowedfunds used during the construction period.  When assets are sold or retired,their costs, accumulated depreciation and any impairment in value areeliminated from the accounts and any gain or loss resulting from their disposalis included in the statements of income of such period.

 

Depreciationis calculated on a straight-line basis over the following estimated useful livesof the assets:

 

**Property, Plant and Equipment**

**Estimated Useful Lives**

 

 

Buildings

25 – 40 years

Cable and wire facilities 

20 – 25 years

Central office equipment

15 – 20 years

Information origination/termination equipment

5 – 15 years

Communications satellite

15 years

Vehicles, furniture and other work equipment

3 – 10 years

Cellular facilities

10 years

Land improvements

10 years

 

The useful lives and depreciationmethod are reviewed periodically to ensure that the periods and method ofdepreciation are consistent with the expected pattern of economic benefits fromitems of property, plant and equipment.

 

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

 

Interest costs are capitalizedduring the construction of plant and equipment as part of the cost of acquiringassets, see*Note 7 – Property, Plant and Equipment.*

 

***CapitalizedLeases***

*** ***

The PLDT Group leases severalfacilities under long-term leases and has the option to purchase the facilitiesfor a nominal cost at the termination of the lease.  

*** ***

***Impairmentof Assets***

* *

Effective January 1, 2002, inconformity with Statement of Financial Accounting Standards, or SFAS 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” and prior toJanuary 1, 2002, SFAS 121, “Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to be Disposed of,” long-lived assets andidentifiable intangible assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  Assets, which are held and used in operations, would beimpaired if the book value of the asset exceeded the undiscounted future netcash flows without interest charges expected to result from the use of theasset.  If an impairment exists, the amount of the impairment recorded is basedon the fair value of the assets.  Assets, which are to be disposed of, would beimpaired to the extent the net book value of the asset exceeds fair value lessdisposal costs.  The PLDT Group considers relevant cash flows, estimated futureoperating results, trends and other available information in assessing whetherthe carrying values of assets are recoverable.

** **

***Asset Retirement Obligations***

** **

Under U.S.GAAP SFAS 143, “Accounting for Asset Retirement Obligations,” the fair value oflegal obligations associated with the retirement of a tangible long-lived assetthat resulted from the acquisition, construction or development and the normaloperation of a long-lived asset is required to be recognized in the period inwhich it is incurred.  This Statement is effective for fiscal years after June 15, 2002.  The PLDT Group adopted this Statement in 2003.  Previously, the PLDT Grouphas not been recognizing amounts related to asset retirement obligations.Under the new accounting method, the PLDT Group now recognizes asset retirementobligations in the period in which they are incurred if a reasonable estimateof a fair value can be made.  The related asset retirement costs arecapitalized as part of the carrying amount of the corresponding long-livedasset.

 

The PLDT Group is legally requiredunder various lease agreements to dismantle the installations and restore theleased sites at the end of the lease contract term.  The PLDT Group recognizedthe fair value of the liability for these obligations and capitalized thepresent value of these costs as part of the balance of the related property andequipment accounts, which are being depreciated on a straight-line basis overthe useful lives of the related assets or the contract periods, whichever islower.

 

The cumulative effect of the changeon prior years resulted in a charge to income of Php61 million 

(net of income taxes of Php29 million) (Php0.36 per share),which is included in the net income for the year ended December 31, 2003.  The effect of the change for the year ended December 31, 2003 was to decreaseincome before the cumulative effect of the change in accounting principle byPhp111 million (Php0.66 per share).  The pro forma effects of the applicationof SFAS 143 as if the Statement had been adopted on January 1, 2001 (rather than January 1, 2003) are presented below:

 

 

**2003**

2002

2001

 

(in millions of pesos, except per share amounts)

Net income (loss)

** **

 

 

As reported

**11,045**

(6,158)

(27,782)

Pro forma

**11,106**

(6,189)

(27,812)

Earnings per common share – basic

** **

 

 

As reported

**47.20**

(52.08)

(176.85)

Pro forma

**47.56**

(52.27)

(177.02)

Earnings per common share – diluted

** **

 

 

As reported

**45.72**

(52.08)

(176.85)

Pro forma

**46.05**

(52.27)

(177.02)

** **

The following table describes allchanges to the asset retirement obligations liabilities as of December 31, 2003:

 

 

(in millions of pesos)

Asset retirement obligations at beginning of year

**–**

Liability recognition in transition

**360**

Accretion expense

**35**

Asset retirement obligations at end of year

**395**

 

 

 

The pro forma balances of assetretirement obligations as if SFAS 143 had been adopted on January 1, 2001 (rather than January 1, 2003) are as follows:

*** ***

 

**2003**

2002

 

(in millions of pesos)

Pro forma amounts of liabilities for asset retirement obligations at beginning of year

** **

**360**

338

Pro forma amounts of liabilities for asset retirement obligations at end of year

** **

**395**

360

** **

***Goodwilland Other Intangible Assets***

 

Goodwill is the excess of theacquisition cost of a business, including investments accounted for using the equitymethod, over the fair value of the identifiable net assets acquired.  Effective January 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets”and, as required, we no longer amortize goodwill (including goodwill recordedon our equity method investments).  Goodwill is reviewed annually (or morefrequently under various conditions) for impairment using the fair valueapproach. Intangible assets that do not have indefinite lives are amortized overtheir useful lives and reviewed for impairment in conformity with SFAS 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  We have noindefinite-lived intangibles.

 

Priorto January 1, 2002, we generally amortized goodwill and other identifiableintangibles on a straight-line basis over their estimated useful lives, notexceeding five years.  We assessed the impairment of other identifiableintangibles and goodwill related to our consolidated subsidiaries under SFAS121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed of,” whenever events or changes in circumstances indicatethat the carrying value of an asset may not be recoverable. A determination ofimpairment (if any) was made based on estimates of future cash flows.  Ininstances where goodwill was recorded for assets that were subjected to animpairment loss, the carrying amount of the goodwill was eliminated before anyreduction was made to the carrying amounts of impaired long-lived assets andidentifiable intangibles.  On a quarterly basis, we assessed the impairment ofenterprise level goodwill under Accounting Principles Board, or APB, OpinionNo. 17, “Intangible Assets.”  A determination of impairment (if any) was madebased primarily on estimates of fair value.

 

***DebtIssuance Costs***

* *

Issuance costs, underwriting feesand related expenses incurred in connection with the issuance of debtinstruments are deferred and amortized using the effective interest rate methodover the terms of the instruments.  Unamortized debt issue costs are charged tooperations when the related debt is extinguished.

* *

***BorrowingCosts***

* *

Borrowing costs are generallyexpensed as incurred.  Borrowing costs are capitalized if they are incurredduring the acquisition, construction or production of a qualifying asset andsuch costs could have been avoided if expenditures for the assets have not beenmade.  Capitalization of borrowing costs commences when the activities toprepare the asset are in progress and expenditures and borrowing costs arebeing incurred.  Borrowing costs are capitalized until the assets are ready fortheir intended use.  If the resulting carrying amount of the asset exceeds itsrecoverable amount, an impairment loss is recognized.  Borrowing costs includeinterest charges and other costs incurred in connection with the borrowing offunds, excluding exchange differences arising from foreign currency borrowingsused to finance these projects.

* *

*** ***

***Retirement Costs***

* *

PLDT andSmart have funded noncontributory retirement plans, administered by therespective companies’ Trustee, covering regular employees.  Retirement costsare actuarially determined using the projected unit credit of accrued benefitvaluation method.  This method reflects services rendered by employees to thedate of valuation and incorporates assumptions concerning employees’ projectedsalaries.  

* *

***Stock-BasedCompensation***

 

We have historically accounted forstock-based employee compensation plans under APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations, and followed thedisclosure-only provisions of SFAS 123, “Accounting for Stock-BasedCompensation.”  

 

Under APB Opinion No. 25,compensation cost is measured at the intrinsic value, which is the differencebetween market price and exercise price, if any, on the measurement date.Under SFAS 123, compensation cost is calculated based on the fair value of theoptions granted.  Fair value is determined using an acceptable option-pricingmodel based on certain management assumptions.  Compensation expense isrecognized over the performance period. 

 

*ExecutiveStock Option Plan*

 

Stock options granted under thePlan vest over five years and have a maximum contractual life of ten years fromthe date of grant.  The exercise price of the options granted under the Planshall not be lower than the average of the closing price of our common stock onthe PSE for 30 calendar days immediately preceding the date of grant.

 

The stock options granted under thePlan shall vest each year, beginning two years from the grant date at a peryear rate of 25% of the options granted.

 

The number of shares reserved underthis Plan should not exceed 1.2% of the total issued common shares of PLDT, andthe number of shares reserved for issuance under this Plan is increased toinclude any shares of PLDT’s common stock issuable upon exercise of optionsgranted under the Plan that expire or lapse for any reason without having beenexercised in full. 

 

The Executive Stock Option Planwill terminate on December 10, 2009, unless PLDT’s Board of Directorsterminates it earlier. 

 

On December 10, 1999, PLDT granted approximately 1.3 million options to purchase PLDT’s common stock under theExecutive Stock Option Plan.  Stock option activity under the Plan for theyears ended December 31, 2003 and 2002 is summarized below:

 

 

**Options Outstanding**

 

Number of  Options

Weighted Average Exercise Price Per Share

Balances as of December 31, 2001

1,157,258

Php814

Options granted in 2002

144,428

814

Options cancelled in:

 

 

2002

(75,291)

814

2003

(326,277)

814

**Balances as of****December 31, 2003**

**900,118**

**Php814**

 

All the above grants under theExecutive Stock Option Plan were made to executives of PLDT.

 

 

The number of options exercisableat December 31, 2003 and 2002 was 681,358 shares and 613,102 shares,respectively.

 

In conformity with the provisionsof SFAS 123, the fair value of each option is estimated using the Black-Scholesvaluation model with the following assumptions for grants under the ExecutiveStock Option Plan during the year ended December 31, 1999: volatility of 71.3%, risk-free interest rate of 8.94% at the date of grant and an expectedterm of five years.

 

The weighted average per share fairvalue of common stock options granted in 2002 was Php582.59.  The remainingweighted average contractual life was six years as of December 31, 2003.

 

During the years ended December 31, 2003, 2002, and 2001, there were no options exercised.

 

*EmployeeStock Purchase Plan*

 

Beginning January 3, 2000 to March 31, 2000, we made our ninth offering under the PLDT StockPurchase Plan, under which we made available up to 991,200 shares of commonstock to all eligible employees as of January 3, 2000.  The shares were offeredat a discounted price of Php877.63 per share, which was 85% of the averagemarket price of our common share on the PSE on January 3, 2000.  The 36-month installment payment period began on April 30, 2000 and will end on April 15, 2003.

 

A certain amount for every shareeach employee elects to purchase will be deducted from the employee’s salarybeginning with the first payroll on April 30, 2000 and ending with the lastpayroll period of April 15, 2003.  No prepayment of the purchase price isallowed.

 

The maximum number of shares thatmay be issued and sold under the Plan is 5.6 million.  There were no salesunder the Plan for the years ended December 31, 2003, 2002 and 2001.

 

Theestimated grant date fair value was calculated using the Black-Scholesvaluation model.  The following weighted average assumptions were included inthe estimated grant date fair value calculations for rights to purchase stockunder PLDT’s Employee Stock Purchase Plan: volatility of 34.5%, risk-freeinterest rate of 8.78% at the date of grant and an expected term of five years.

 

The weighted average estimated fairvalue, as defined by SFAS 123, at grant date of the rights to purchase stockunder the Employee Stock Purchase Plan was Php371.93 per share.

 

Pro forma information regarding netincome (loss) and earnings per share is required by SFAS 123.  This informationis required to be determined as if PLDT had accounted for its employee stockoptions (including shares issued under the Employee Stock Purchase Plan) usingthe fair value method.  Under SFAS 123, employee stock options are valued atthe grant date using the Black-Scholes valuation model, and this compensationcost is recognized ratably over the vesting period.  Had compensation expensefor PLDT’s stock option plan and stock purchase plan been determined based onthe fair value at the grant date of awards for years 2003, 2002 and 2001,consistent with the provision of SFAS 123, PLDT’s net income in 2003 would havedecreased whereas 2002 and 2001 net loss would have increased the pro formaamounts indicated below:

 

** **

**2003**

2002

2001

 

**Basic**

**Diluted**

Basic

Diluted

Basic

Diluted

 

(in millions of pesos, except per share amounts)

Net income (loss) attributable to common shareholders 

   (Note 22)

**7,997**

**8,251**

(8,807)

(8,807)

(29,827)

(29,827)

Add:   Total stock-based employee compensation expense included in income (loss)

**14**

**14**

15

15

15

15

Deduct:   Total stock-based employee compensation expense determined under fair value based method

**(51)**

**(51)**

(127)

(127)

(208)

(208)

Pro forma net income (loss) attributable to common shareholders

**7,960**

**8,214**

(8,919)

(8,919)

(30,020)

(30,020)

Earnings per common share:

 

As reported

**47.20**

**45.72**

(52.08)

(52.08)

(176.85)

(176.85)

Pro forma

**46.99**

**45.51**

(52.75)

(52.75)

(177.99)

(177.99)

* *

***Advertisingand Promotion Expenses***

 

Advertising and promotions areexpensed as incurred.  Advertising and promotion expenses were Php2,982million, Php1,940 million and Php1,939 million in 2003, 2002 and 2001,respectively. 

 

***Foreign Currency Transactions and Translations***

 

For each entity in the group,transactions in foreign currencies are recorded in the functional currency ofthe entity by applying to the foreign currency amount the spot exchange rateprevailing at the transaction date.  Foreign exchange gains or losses arisingon the spot settlements or restatement of monetary items at rates differentfrom those at which they were initially recorded during the period or presentedin the previous consolidated financial statements are recorded in theconsolidated statements of income in the period in which they arise.

 

Certain subsidiaries of ourconsolidated group have functional currencies different from our reportingcurrency.  The assets and liabilities of such entities are translated to ourreporting currency using exchange rates at the balance sheet date and thestatement of income is translated using the weighted average rate for theperiod.  The resulting translation adjustments are recorded as a component ofaccumulated other comprehensive income.

 

***Derivatives and Hedging Instruments***

 

The PLDT Group adopted SFAS 133,“Accounting for Derivative Instruments and Hedging Activities,” as amended in2001.  SFAS 133 requires the PLDT Group to recognize all derivatives on theconsolidated balance sheet at fair value.  Derivatives that are not hedges mustbe adjusted to fair value through earnings.  If the derivative is a hedge,depending on the nature of the hedge, and to the extent of the hedge’seffectiveness, changes in the fair value of derivatives are either offsetagainst the change in fair value of hedged assets, liabilities, or firmcommitments through earnings or recognized in other comprehensive income untilthe hedged item is recognized in earnings.  The ineffective portion of aderivative’s change in fair value will be immediately recognized in earnings.The PLDT Group has elected not to designate its derivative instruments ashedges. 

 

***Income Taxes***

 

Deferredincome tax is provided using the liability method.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable to: (a)temporary differences between the financial reporting bases of assets andliabilities and their related tax bases and (b) carryforward benefits of netoperating loss carryover, or NOLCO, and minimum corporate income tax, or MCIT.Deferred tax assets and liabilities are measured using the tax rate applicableto taxable income in the years in which those temporary differences areexpected to be recovered or settled, and the carryforward benefits of NOLCO andMCIT are expected to be applied.  A valuation allowance is provided fordeferred tax assets when it is more likely than not that some or all of thedeferred tax assets will not be realized in the future.

 

***EarningsPer Common Share***

 

Basic earnings per common share, orEPS, is calculated by dividing the net income or loss for the year attributableto common shareholders by the weighted average number of common sharesoutstanding during the year, after giving retroactive effect to any stockdividend declarations.

 

Diluted EPS is calculated in thesame manner assuming that, at the beginning of the year or at the time ofissuance during the year, all outstanding options are exercised and convertiblepreferred shares are converted to common shares.  Outstanding stock optionswill have a dilutive effect under the treasury stock method only when theaverage market price of the underlying common share during the period exceedsthe exercise price of the option.  

 

Where the effect of the assumedconversion of the preferred shares and the exercise of all outstanding optionsis anti-dilutive, basic and diluted EPS are stated the same.

*** ***

***Segment Reporting***

 

Segmentassets include operating assets used by a segment and consist principally ofoperating cash and cash equivalents, receivables, inventories and supplies andproperty, plant and equipment.  

 

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

 

***Use ofEstimates***

 

The preparation of our consolidatedfinancial statements in conformity with U.S. GAAP, requires us to makeestimates and assumptions that affect the reported amounts of our assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements, and the reported amounts of revenues andexpenses during the period reported.  Actual results could differ from thoseestimates.

 

Examples ofsignificant estimates include the allowance for doubtful accounts, inventoryobsolescence, depreciation rate, impairment of intangibles, investments andother long-lived assets, valuation allowance on tax assets and pension benefitassumptions.

*** ***

*** ***

*** ***

***Concentrations***

 

The PLDTGroup’s results of operations and financial performance and condition may beinfluenced by the general political situation in the Philippines.  The Philippinesexperienced several *coup d’état* attempts against the governmentadministration between 1986 and 1989, and July 2003.  Political conditions inthe Philippines were generally stable during the 1990’s.  In the past threeyears, an increasing number of kidnapping, criminal and terrorist activitieshave occurred in Mindanao, principally led by the extremist “Abu Sayyaf” group,which reportedly has ties to the Al-Qaeda terrorist network.  There were seriesof bombing incidents in key cities in Mindanao, including Davao City.  Thearmed conflict between the Philippine military and the Moro Islamic LiberationFront also continues in Mindanao.

 

The PLDT Group’s results ofoperations may be negatively affected by slow or negative growth rates andeconomic instability in the Philippines and in Asia.  In the past, thePhilippines has experienced periods of slow or negative growth, high inflation,significant devaluation of the peso, imposition of exchange controls, debtrestructuring and electricity shortages and blackouts.  From mid-1997 to 1999,the economies of a number of Asian countries experienced significantdownturns.  The regional economic turbulence affected the Philippine economy ina number of ways, including the depreciation of the peso, increases in interestrates, increases in unemployment and inflation, increased volatility and adecline in prices in the domestic stock market, the downgrading of thePhilippines’ local currency rating and the ratings outlook for the Philippinebanking sector and the reduction of foreign currency reserves.  

 

As of December 31, 2003, other than the concentration of our wireless services on prepaid subscribers, we donot have any significant concentration of business transacted with a particularsupplier, lender or former affiliate that could, if suddenly adverselyimpacted, severely impact our operations.  We also do not have a concentrationof available sources or other rights that could, if suddenly eliminated,severely impact our operations.  We invest our cash and cash equivalents withmany high-quality financial institutions.

 

***Impact of Recently Issued Accounting Pronouncements***

 

In June 2002, the FinancialAccounting Standard Board, or FASB, issued SFAS 146, “Accounting for CostsAssociated with Exit or Disposal Activities.”  SFAS 146 provides guidancerelated to accounting for costs associated with disposal activities covered bySFAS 144 or with exit or restructuring activities previously covered byEmerging Issues Task Force, or EITF, Issue No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).”  SFAS 146 supersedesEITF Issue No. 94-3 in its entirety.  SFAS 146 requires that costs related toexiting an activity or to a restructuring should not be recognized until theliability is incurred. SFAS 146 will be applied prospectively to exit ordisposal activities that are initiated after December 31, 2002.

 

In January 2003, the FASB issuedFASB Interpretation No., or FIN, 46, “Consolidation of Variable Interest Entities.”The primary objective of FIN 46 is to provide guidance on the identificationof, and financial reporting for, entities over which control is achievedthrough means other than voting rights; such entities are known as variableinterest entities.  FIN 46 requires variable interest entities to beconsolidated by the primary beneficiary of the variable interest entities andexpands disclosure requirements for variable interest entities that areconsolidated as well as those within which an enterprise holds a significantvariable interest.  For variable interests in entities commonly referred to as“special purpose entities”, implementation of this statement is required by January 1, 2004.  And for all other variable interest entities, implementation is requiredby December 31, 2004.

 

In April2003, the FASB issued SFAS 149, Amendment of SFAS 133 on Derivative Instrumentsand Hedging Activities.  This Statement amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under SFAS 133.  This Statement iseffective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.

 

In May 2003, the FASB issued SFAS150 “Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”.  SFAS 150 establishes standards on how companiesclassify and measure certain financial instruments with characteristics of bothliabilities and equity.  The Statement requires that the Company classify asliabilities the fair value of all mandatorily redeemable financial instrumentsthat had previously been recorded as equity or elsewhere in the consolidatedfinancial statements.  This Statement is effective for financial instrumentsentered into or modified after May 31, 2003, and otherwise effective for allexisting financial instruments, except for minority interests in limited-life entities,beginning of the first interim period beginning after June 15, 2003.  Certain provisions of this Statement relating to noncontrolling interests inlimited-life subsidiaries were deferred indefinitely.  We continue to monitorthe deferral status of SFAS 150.

 

The adoption of FIN 46, SFAS 146,SFAS 149 and SFAS 150 did not have a material impact on PLDT Group’sconsolidated financial statements.

 

In May 2003, EITF Issue No. 00-21,“Accounting for Revenue Arrangements with Multiple Deliverables,” wasfinalized. EITF No. 00-21 provides guidance on how to account for arrangementsthat involve the delivery or performance of multiple products, services and/orrights to use assets.  The provisions of EITF No. 00-21 apply to revenuearrangements entered into in fiscal periods beginning after June 15, 2003.  In December 2003, the U.S. Securities and Exchange Commission issued StaffAccounting Bulletin, or SAB, No. 104, “Revenue Recognition,” which codifies andrescinds certain sections of SAB No. 101, “Revenue Recognition”, in order tomake this interpretive guidance consistent with EITF No. 00-21.  We arecurrently in the process of evaluating any effect the adoption of EITF No.00-21 will have on our consolidated financial statements.

 

In December 2003, the FASB revisedSFAS 132, “Employers’ Disclosures about Pensions and Other PostretirementBenefits.”  It requires additional disclosures to those in the original SFAS132 about the plan assets, benefit obligations, cash flows and net periodicbenefit cost of defined benefit plans and other postretirement benefit plans.The new disclosures are generally effective for 2003 calendar yearend financialstatements of public companies, with a delayed effective date for certaindisclosures and for foreign plans.  The requirements of this Statement areincluded in *Note 19 – Employees’ Benefit Plans*.

 

 

 

**4.        ****Cash and CashEquivalents**

** **

This accountconsists of:

** **

 

**2003**

2002

 

(in millions of pesos)

Cash on hand and in banks

**2,736**

2,982

Temporary investments

**16,636**

7,992

 

**19,372**

10,974

** **

Cash in banks earns interest at theprevailing bank deposit rates.  Temporary investments are made for varyingperiods of up to one month depending on our immediate cash requirements, andearn interest at the prevailing short-term deposit rates.

 

 

 

**5.        ****Accounts Receivable**

** **

This accountconsists of receivables from:

 

 

**2003**

2002

 

(in millions of pesos)

Customers and carriers

**30,106**

25,805

Others

**3,174**

2,262

 

**33,280**

28,067

Less allowance for doubtful accounts

**14,214**

10,750 

 

**19,066**

17,317

 

Movements inthe allowance for doubtful accounts during the years are as follows:

 

 

**2003**

2002

2001

 

(in millions of pesos)

Balance at beginning of year

**10,750**

7,697

6,386

Provision for the year

**4,092**

4,160

3,221

Write-offs

**(628)**

(1,107)

(1,910)

Balance at end of year

**14,214**

10,750

7,697

 

Receivablesfrom carriers represent receivables arising from interconnection agreementswith other telecommunications carriers.  The aforementioned receivable balancesare shown net of related payables to the same telecommunications carriersbecause an established right of offset exists.

 

Unbilledreceivables of Php974 million and Php848 million in 2003 and 2002,respectively, represent recognized revenue for services rendered to fixed lineand wireless subscribers that have not been billed at the balance sheet dates.The unbilled amounts are billed upon completion of the correspondingsubscribers’ billing cycles.

 

On June 30, 1999, PLDT entered into a Master Receivables Purchase and Sale Agreement, orMRPSA, with a foreign financial institution, or the Purchaser, under which PLDTsold to the Purchaser eligible receivables from certain foreign carriers inseveral discrete sales.  Under this agreement, PLDT services, administers andcollects the receivables on behalf of the Purchaser, and transfers all of itsrights and risks of ownership to the Purchaser upon sale.  This facility wasterminated on June 27, 2002.

 

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

 

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

 

In 2003 and2002, sale of receivables under the RPD amounted to US$11 million (Php608million), with resulting losses of US$1.5 million (Php84 million) and US$3million (Php165 million), with resulting losses of US$0.5 million (Php25million), respectively.  There was no sale of receivables under the MRPSA in2002.  In 2001, sale of receivables under the MRPSA amounted to US$59 million(Php3,029 million), with resulting losses of US$2 million (Php103 million).  

 

 

**6.        ****Inventories andSupplies**

 

This accountconsists of:

 

 

**2003**

2002

 

(in millions of pesos)

Spare parts and supplies 

**1,318**

2,281

Terminal and cellular phone units 

**1,601**

2,383

Others

**486**

456

 

**3,405**

5,120

Less allowance for inventory obsolescence

**729**

614

 

**2,676**

4,506

 

Movements inthe allowance for inventory obsolescence during the years are as follows:

 

 

**2003**

2002

2001

 

(in millions of pesos)

Balance at beginning of year

**614**

286

590

Provision for the year

**254**

476

211

Write-offs

**(139)**

(148)

(515)

Balance at end of year

**729**

 614

286

 

As of December 31, 2003 and 2002,spare parts and supplies issued to various projects, included as part ofproperty under construction shown under *Note 7 – Property, Plant andEquipment*, amounted to Php3,018 million and Php6,270 million,respectively.  

 

 

 

**7.        ****Property, Plant andEquipment**

** **

This accountconsists of:

 

 

**2003**

2002

 

        (in millions of pesos)

Cable and wire facilities

**91,898**

88,378

Central office equipment

**67,778**

65,708

Cellular facilities

**52,026**

44,381

Vehicles, furniture and other work equipment

**22,815**

19,770

Buildings

**18,611**

17,500

Communications satellite

**13,108**

16,185

Information origination/termination equipment

**3,331**

3,254

Land and land improvements

**2,801**

2,835

 

**272,368**

258,011

Less accumulated depreciation

**94,997**

80,433

 

**177,371**

177,578

Property under construction

**12,846**

17,086

 

**190,217**

194,664

 

Interest capitalized for the yearsended December 31, 2003, 2002 and 2001 amounted to Php887 million, Php1,343million and Php2,404 million, respectively.

 

 

Certainproperty, plant and equipment include the following amounts for capitalizedleases as of December 31, 2003 and 2002:

 

** **

**December 31, 2003**

 

December 31, 2002

 

**Central office equipment**

**Vehicles, furniture and other work equipment**

** **

** **

** **

**Total**

 

Central office equipment

Vehicles, furniture and other work equipment

 

 

 

Total

*** ***

(in millions of pesos)

Cost

**354**

**574**

**928**

 

354

289

643

Less accumulated depreciation

**244**

**153**

**397**

 

221

66

287

 

**110**

**421**

**531**

 

 133

 223

 356

 

The future minimum payments forcapitalized leases were as follows as of December 31, 2003:

 

**Year**

**(in millions of pesos)**

2004

413

2005

352

2006

288

2007

685

Total minimum lease payments

1,738

Less amount representing interest

714

Present value of net minimum lease payments

1,024

Less current maturities

295

Long-term lease obligations

 729

 

Assets impaired in 2003 and 2002consist of assets of the wireless segment.  When impairment charges arerecognized, a new cost basis for the assets is established.

 

In 2001,Piltel recorded an impairment charge of Php12,938 million on assets with acarrying value of Php13,562 million, which was a result of Piltel’s decision toscale down its Advanced Mobile Phone System, or AMPS, and Code DivisionMultiple Access System, or CDMA networks, beginning the second half of 2001 dueto Piltel’s success in marketing its GSM prepaid service using the GSM networkof Smart and the difficulty experienced in sourcing analog/CDMA handsets.  

 

Also, Smart carried out animpairment review on its analog assets in 2001 as a result of decliningsubscriber numbers, decreasing average revenue per user and the generalmigration of analog subscribers to Smart’s GSM service.  This resulted in anasset impairment charge of Php2,281 million in June 2001 and Php1,502 millionin December 2001 based on the estimated discounted future cash flows fromcontinued use and eventual disposition of these assets.  The net book value at December 31, 2001 was Php189 million.

 

As discussed further in *Note 8 –Investments*, ACeS Philippines has experienced less than expected consumerdemand for its services.  Accordingly, we recognized an impairment loss on theassets of ACeS Philippines, primarily the ground station and related facilities,of Php673 million during 2001.  The remaining cost basis of these assets wasnil as of December 31, 2002.

 

In December2002, Piltel recognized impairment losses of Php13,204 million in respect ofits E.O. 109 limited mobility wireless local loop prepaid assets with acarrying value of Php14,019 million.  The impairment of E.O. 109 assets broughtdown the net book value of these assets to their recoverable value of Php815million, which was estimated using the discounted future cash flows from theE.O. 109 assets.  Cash flows from the 

E.O. 109 prepaid or limitedmobility service were no longer considered in computing the recoverable valueof the E.O. 109 assets as Piltel terminated this service in February 2003.Revenues from the E.O. 109 prepaid or limited mobility service, which usesN-AMPS cellular technology, were unfavorably affected by the success ofPiltel’s and other cellular operators’ prepaid GSM cellular service.

 

In 2003,ePLDT and certain of its subsidiaries recognized impairment losses amounting toPhp362 million representing the write-down of certain computer equipment andperipherals following the abandonment of a reloadable chip-based cash cardproject, and certain software and computer equipment following a change insoftware platforms and applications.  The recoverable amounts were based onvalue in use and were determined at the cash-generating unit level.  Indetermining value in use for the cash-generating unit, the cash flows werediscounted at a nominal rate of 11% on a pre-tax basis.

 

In 2003,Smart changed the estimated useful life of certain network assets owing tocontinuing network expansion and upgrade.

 

Below is thepro forma financial information assuming no changes in accounting estimateswere made during 2003:

 

** **

**(in millions of pesos,**

**except per share amounts)**

Net income

** **

As reported

**11,045**

Pro forma

**12,346**

Earnings per common share – basic

** **

As reported

**47.20**

Pro forma

**54.88**

Earnings per common share – diluted

** **

As reported

**45.72**

Pro forma

**52.92**

 

Under the terms of certain loanagreements, PLDT may not create, incur, assume, permit or suffer to exist anymortgage, pledge, lien or other encumbrance or security interest over the wholeor any part of its assets or revenues or suffer to exist any obligation aslessee for the rental or hire of real or personal property in connection withany sale and leaseback transaction.

 

 

**8.        ****Investments**

 

This accountconsists of:

 

 

**2003**

2002

 

(in millions of pesos)

Investments in shares of stock:

** **

 

Acquisition cost:

** **

 

Common

**2,648**

2,640

Preferred

**748**

819

 

**3,396**

3,459

Less accumulated equity in net losses of investees 

**1,830**

1,800

Carrying value

**1,566**

1,659

Investment in debt securities:

** **

 

Acquisition cost 

**–**

2,150

Less accumulated impairment losses

**–**

2,052

Net

**–**

98

Total

**1,566**

1,757

 

** **

 

Investments in shares of stock:

** **

 

At equity:

** **

 

Mabuhay Space Holdings Limited, or MSHL

**764**

808

Others

**54**

32

 

**818**

 840

At cost:

** **

 

Stradcom International Holdings, Inc.

**629**

616

Others

**119**

203

 

**748**

 819

 

**1,566**

1,659

 

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

 

As of December 31, 2003, ACeS Philippines has a 20% investment in ACeS International Limited, orAIL, a company incorporated under the laws of the island of Bermuda.  AIL ownsthe Garuda I satellite and the related system control equipment in Batam, Indonesia.

 

In December1998, AIL and its 95% owned subsidiary, PT Asia Cellular Satellite, enteredinto an Amended and Restated Credit Agreement, or Amended Agreement, to amendthe original Credit Agreement entered into by PT Asia Cellular Satellite andits bank creditors in 1997.  Under the Amended Agreement, AIL has, amongothers, assigned to the banks as collateral all of its intangible properties,including the Garuda Satellite, the system control facilities and systemcontrol equipment.  On September 30, 2002, PT Asia Cellular Satellite, AIL, asguarantor, P.T. Bank International Indonesia, as security agent, and variousbanks signed the Rescheduling Agreement, which amended the terms of the Amendedand Restated Credit Agreement dated December 29, 1998, moving the principalrepayment dates to agreed periods with the final maturity date on January 31,2012.

 

As of December 2001, AIL hadincurred recurring significant losses, negative operating cash flows, andsignificant levels of debt.  The financial condition of AIL was partly due tothe National Service Provider’s, or NSPs, inability to generate the amount ofrevenues originally expected as the growth in subscriber numbers have beensignificantly lower than budgeted.  These factors raise substantial doubt aboutAIL’s ability to continue as a going concern.  On this basis, we recognized animpairment provision in respect of our investment in AIL and ground stationequipment of ACeS Philippines in relation to the business of AIL in 2001 ofPhp673 million.

 

In 2001, total impairment chargesrelating to AIL amounted to Php3,314 million due to an other than temporarydecline in the carrying value of our investment in AIL.  Other comprehensiveincome related to foreign currency translation of AIL of Php1,801 million, willbe recorded to operations upon disposal of investment.

 

***Investmentof  Mabuhay Satellite in  MSHL***

 

On July 18, 1996, Mabuhay Satellite entered into a Joint Venture Agreement with Space Systems/Loral Inc., or SS/L,to form MSHL for the purpose of providing high-power Ku-Band satellitetransmission services using the payload which was added by SS/L aboard AgilaII.  Under the terms of the Joint Venture Agreement, or JVA, SS/L is requiredto convey title to the Additional Payload to MSHL in consideration for SS/L’s35% equity interest in MSHL and Mabuhay Satellite is required to pay SS/L US$19million for a 65% equity interest in MSHL.

 

In 2000, SS/L filed a Notice ofDefault and Termination against Mabuhay Satellite arising from the latter’salleged failure to amicably resolve its alleged unpaid obligation to SS/L underthe JVA.  In 2002, the arbitration panel handed down its decision and providedfor payment by Mabuhay Satellite to SS/L of the principal amount of US$10 millionplus accrued interest at 9% per annum.  On June 30, 2003, Mabuhay Satellite andSS/L concluded a settlement agreement whereby Mabuhay Satellite will lease two(2) transponders under a transponder agreement on a full-time basis to SS/L andoffset the lease charges from Loral Skynet Network Services, Inc. (formerlyLoral Cyberstar, Inc., an affiliate of SS/L), among others, for a full andfinal settlement of the arbitration decision.  The settlement agreementprovides that notwithstanding any provision therein to the contrary, thesettlement agreement, and the transponder agreement may terminate upon failureby Mabuhay Satellite, within nine months from the execution of the settlementagreement or such other period as the parties may agree upon, to secure theconsent of the Philippine creditors of Mabuhay Satellite pursuant to theOmnibus Credit and Security Agreement (Omnibus Agreement) dated December 14,1995, as amended, between Mabuhay Satellite and such creditors.  Under theOmnibus Agreement, approval of creditors holding at least 51% of theoutstanding principal amount of the loan obligations of Mabuhay Satellite isrequired for purposes of transfer or disposition of any collateral under theOmnibus Agreement.  As of December 31, 2003, the consent of the said creditorshas not been obtained, hence, the transaction, which would have resulted in anet gain of Php139 million, was not recognized by Mabuhay Satellite.  On March 18, 2004, the majority of the creditors has given their consent to the settlementagreement.

*** ***

***Investment of ePLDT in Stradcom International Holdings, Inc.***

*** ***

On May 8, 2001, ePLDT subscribed for 172.8 million shares of Convertible Preferred Stockthrough a subscription agreement entered into with Stradcom InternationalHoldings, Inc., or Stradcom.  Stradcom is a holding company, which owns 100% ofStradcom Corporation. These equity securities do not have a readilydeterminable fair values.

 

Stradcom Corporation has a ten-yearBuild, Own and Operate project with the Land Transportation Office forcomputerized issuance of drivers’ licenses and motor vehicle registrations.

 

*** ***

***Investmens in Debt Securities***

*** ***

***HomeCable/Unilink***

*** ***

PLDT’s totalinvestment in convertible notes of Unilink Communications Corporation, orUnilink, amounted to Php2,052 million.  These notes are convertible into commonstock of Unilink or exchangeable into shares of common stock of Home Cable atthe option of the holder, if and when the law limiting the ownership of cabletelevision systems to Philippine citizens or corporations, which are 100% ownedby Philippine citizens, is changed.  Unilink is a Philippine corporation owningall the outstanding common stocks of Philippine Home Cable Holdings, Inc., orHome Cable, which is also a Philippine corporation licensed to own, maintainand operate a cable television system in the Philippines. 

 

All ofUnilink’s shares in Home Cable have been pledged to a group of lenders assecurity for a loan to Home Cable.  On December 6, 2001, Home Cable defaultedon the principal and interest payments in respect of certain of its loanobligations.  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 repayment.  Consequently, the lenders are entitled to foreclose on orsell the collateral granted as security for the loan, including Unilink’sshares in Home Cable.  In the event that Home Cable’s lenders were to forecloseon Unilink’s Home Cable shares, the lenders would be entitled to the proceedsfrom the sale thereof or, if such shares were not sold, to the shares, andUnilink would be subrogated to the lenders’ claims against Home Cable.  HomeCable is currently engaged in negotiations with the lenders to restructure itsdebt.  

 

On the basisof Home Cable’s default on certain of its loan obligations, the uncertaintysurrounding the negotiations with its creditors and equity holders, and itsfinancial condition of Home Cable, we provided for a full permanent decline invalue of our investment totaling to Php2,052 million in 2001.

 

Due to ouremployees beneficial trust fund’s ownership of the shares of MediaquestHoldings, Inc., or Mediaquest, whose primary asset is the ownership ofUnilink’s shares, the impairment in value of Unilink also had a significantimpact on the value of the retirement fund’s assets. 

 

In June2003, PLDT assigned and ceded unto the PLDT Beneficial Trust Fund, or BTF, allof its rights, interest and participation in respect of its investment inconvertible notes of Unilink with a fair value of zero and effectively for zeroconsideration under U.S. GAAP.  In addition, PLDT also ceded its rights,interest and participation to certain other assets unrelated to Unilink for andin consideration of partial payment of the contributions which PLDT is requiredto make to the BTF under PLDT’s employee benefit plan.

*** ***

***SummarizedFinancial Information of Equity Investees***

** **

The following table presents summarized financial information inconformity with U.S. GAAP for equity investees for which we have significantinfluence as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001. ****

** **

 

**2003**

2002

 

(in millions of pesos)

Current assets

**754**

750

Noncurrent assets

**1,672**

1,808

Current liabilities

**1,082**

589

Noncurrent liabilities

**12,583**

12,282

Total stockholders’ equity (capital deficiency)

**(11,239)**

(10,313)

** **
****
** **

 

**2003**

2002

2001

 

               (in millions of pesos)

Revenues

**1,182**

953

347

Revenues less cost of revenues

**600**

269

(15)

Operating expenses

**758**

23,163

3,091

Net loss

**(926)**

(20,214)

(4,698)

** **

** **

 

**9.        ****Information withRespect to Piltel**

** **

Piltel hasexperienced significant operational and financial difficulties in recentyears.  On June 4, 2001, Piltel completed the restructuring of approximatelyPhp41 billion of indebtedness and other claims owed to banks, trade creditors,bondholders and preferred shareholders, or the aggregate financial debt ofPiltel, representing approximately 98% of its total liabilities as of thatdate.  On June 27, 2001, we transferred 208 million common shares of Piltel,representing approximately 12.3% of Piltel’s outstanding common shares, tofinancial advisors of Piltel to settle part of their fees in connection withthe debt restructuring.  As a result, our ownership of Piltel’s outstandingcommon stock decreased from 57.6% to approximately 45.3%. 

 

Piltel continues to be treatedas a consolidated subsidiary because PLDT has the ability to control Piltel byacquiring a majority ownership interest, in excess of 90%, of Piltel’s commonstock through the conversion of Piltel’s preferred shares into common shares.PLDT has no restrictions or costs to exercise the conversion feature.  Inaddition, pursuant to Piltel debt restructuring agreements, PLDT issued aLetter of Support for the benefit of Piltel and its creditors under which PLDThas agreed to cover any funding shortfalls of Piltel up to a maximum amount ofUS$150 million less all amounts paid or committed to be paid to or on behalf ofPiltel by PLDT on or after March 23, 2000.  Under the Letter of Support, PLDTwill provide funding to Piltel in the event that the cash flows from Piltel’soperations falls short of amounts required by it to discharge in full itsobligations to any creditor of Piltel or any of its operating and financingsubsidiaries and affiliates.  PLDT is subject to contractual restrictionslimiting the amount of financial support it can provide to Piltel subsequent tothe US$150 million Letter of Support.  The undrawn balance under the Letter ofSupport was US$50 million (approximately Php2,793 million) as of December 31,2003, after taking into account PLDT’s investments in Piltel as of andsubsequent to March 23, 2000.  The continued operations of Piltel as a goingconcern is dependent upon amounts available to it under the Letter of Supportand its ability to generate sufficient cash flows to meet its obligations on atimely basis, to comply with the provision of the restructuring agreements asdiscussed in *Note 14 – Long-term Debt*.  As of December 31, 2003, Piltel had total assets of Php5,957 million and capital deficiency of Php31,501million.

 

Until all amounts owed to creditorsparticipating in the debt restructuring plan have been paid or discharged, PLDTwill not be permitted to demand or receive any payment, redemption, ordistribution in respect of any present and future liability owed by Piltel toPLDT or any affiliate of PLDT, subject to specified exceptions.  Theseliabilities include amounts owed on Piltel preferred shares owned by PLDT andother financial indebtedness owed by Piltel to PLDT or any affiliate of PLDT,but exclude payments due in respect of transactions having arm’s-length termsand/or in which the pricing is based on market terms.  These severe long-termrestrictions significantly impair Piltel’s ability to transfer funds to PLDT.  

 

In the accompanying U.S. GAAPconsolidated financial statements, PLDT’s stockholders’ equity of Php24,745million includes Piltel’s capital deficiency of Php31,501 million as ofDecember 31, 2003 notwithstanding that under Piltel debt restructuringagreements, the amount of financial support that PLDT can still provide toPiltel was limited to US$50 million as of December 31, 2003. 

 

 

Condensedconsolidated balance sheets as of December 31, 2003 and 2002 and consolidatedstatements of operations for the years ended December 31, 2003, 2002 and 2001of Piltel included in the consolidated financial statements are as follows:

 

 

**December 31,**

 

**2003**

 

2002

 

(in millions of pesos)

Consolidated Balance Sheets
** **

** **

** **

Current assets

**3,034**

** **

1,017

Noncurrent assets

**2,923**

** **

4,677

 

**5,957**

** **

5,694

 

** **

** **

** **

Current liabilities

**4,654**

 

4,920

Long-term debt 

**23,397**

 

21,673

Deferred credits and other noncurrent liabilities

**9,407**

 

8,470

Capital deficiency

**(31,501)**

 

(29,369)

** **

**5,957**

** **

5,694

 

 

** **

 

 

 

 

**Years Ended December 31,**

 

**2003**

 

2002

 

2001

** **

** **

(in millions of pesos)

**Consolidated Statements of Operations**

 

Operating revenues

**5,639**

 

2,035

 

2,893

Operating expenses

**(5,281)**

 

(15,974)

 

(20,280)

Other expenses

**(1,401)**

 

(1,574)

 

(3,003)

Income tax

**(79)**

 

–

 

–

**Net loss**

**(1,122)**

** **

(15,513)

 

(20,390)

 

 

** **

**10.    ****Goodwill and Other Intangible Assets**

** **

This account consists of:

** **

 

**2003**

2002

 

(in millions of pesos)

Goodwill

**23,800**

23,628

Customers list

**2,705**

2,705

 

**26,505**

26,333

Less accumulated amortization

**11,041**

10,275

 

**15,464**

16,058

 

 

Movements in goodwill perreportable segments are as follows:

 

 

**Wireless**

**Fixed Line**

**Information and Communications Technology**

**Total**

 

(in millions of pesos)

Balances as of January 1, 2001

19,233

495

184

19,912

Addition during the year

–

–

–

–

Amortization during the year

(4,464)

(69)

(87)

(4,620)

Balances as of December 31, 2001

14,769

 426

  97

15,292

Addition during the year

–

–

–

–

Amortization during the year

–

–

–

–

Balances as of December 31, 2002

14,769

 426

  97

15,292

Addition during the year

172

 

 

 172

Amortization during the year

–

–

–

–

Balances as of December 31, 2003

14,941

 426

  97

15,464

 

Movements in accumulatedamortization of goodwill and other intangible assets during the year are asfollows (there were no amortization of goodwill in 2003 and 2002):

 

 

**2003**

** **

2002

 

2001

 

(in millions of pesos)

Balance at beginning of year

**10,275**

 

9,509

 

4,451

Amortizations

**766**

 

766

 

6,177

Write-offs

**–**

 

–

 

(1,119)

Balance at end of year

**11,041**

 

10,275

 

9,509

 

The customerslist was fully amortized as of December 31, 2003.

 

Weadopted SFAS 142 “Goodwill and Other Intangible Assets” on January 1, 2002.  Goodwill amortization expense and net loss attributable to common shareholders forthe years ended December 31, 2003, 2002 and 2001 follow (we recognized noextraordinary items in those years):

 

 

**2003**

** **

2002

 

2001

** **

             (in millions of pesos)

Goodwill amortization

–

 

–

 

4,620

Income (loss) attributable to common shareholders (Note 22):

 

 

 

 

 

     Basic

**7,997**

 

(8,807)

 

(29,827)

     Diluted

**8,251**

 

(8,807)

 

(29,827)

 

 

Inconformity with SFAS 142, we have disclosed below the pro forma impact ofnon-amortization of goodwill for 2001, as if goodwill was not amortized duringthat period:

 

** **

**2003**

 

2002

 

2001

 

**Basic**

**Diluted**

 

Basic

Diluted

 

Basic

Diluted

 

(in millions of pesos, except per share amounts)

 

 

 

 

 

 

 

 

 

Income (loss) attributable to common shareholders (Note 22)

**7,997**

**8,251**

 

(8,807)

(8,807)

 

(29,827)

(29,827)

Add back goodwill amortization

**–**

**–**

** **

**–**

**–**

 

4,620

4,620

Adjusted income (loss) attributable to common shareholders

**7,997**

**8,251**

 

(8,807)

(8,807)

 

(25,207)

(25,207)

Earnings per common share

**47.20**

**45.72**

 

(52.08)

(52.08)

 

(176.85)

(176.85)

Add back goodwill amortization

**–**

**–**

 

–

–

 

27.39

27.39

Adjusted earnings per common share

**47.20**

**45.72**

 

(52.08)

(52.08)

 

(149.46)

(149.46)

 

Our goodwill is almost entirelyrelated to the wireless business segment due to our acquisition of Smart.  Wecompleted our transitional and annual evaluation of the goodwill value inconformity with SFAS 142 and consistent with our increase in wirelesssubscribers and revenues, there is no impairment in the goodwill value.

 

Smart carried out an impairmentreview of its analog assets in 2001 as a result of declining subscribernumbers, decreasing average revenue per user and the general migration ofanalog subscribers to Smart’s GSM services.  In 2001, Smart wrote-off theunamortized intangible assets (customer list) amounting to Php2,077 millionrelating to analog subscribers.

 

In October2003, Smart acquired a majority 80%-interest in Wolfpac Mobile, Inc., orWolfpac for a total consideration of Php180 million.  Prior to the acquisition,Wolfpac (then known as “Wolfpac Communications, Inc.”) was one of Smart’sleading content providers and the only Philippine content provider to have beennominated twice at the annual GSM Congress for their successes in applicationdevelopment.  The acquisition provides Smart with the opportunity to have adirect link to the content development community, a key differentiator incellular service.  Wolfpac has been included in the 2003 consolidated financialstatements using the purchase method of accounting, which resulted in goodwillamounting to Php172 million.  Since the acquisition was consummated towards theend of the year, Smart is in the process of determining valuations of certainintangible assets.  Thus, the allocation of the purchase price is subject torefinement.

 

 

 

**11.    ****Other NoncurrentAssets**

** **

This accountconsists of:

 

 

**2003**

2002

 

 (in millions of pesos)

Debt issuance costs – net of accumulated amortization

**2,023**

2,494

Refundable deposits

**430**

459

Others

**3,468**

2,492

 

**5,921**

5,445

 

 

 

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

 

This accountconsists of:

 

 

**2003**

2002

 

           (in millions of pesos)

Accrued utilities and general expenses

**3,452**

3,120

Accrued taxes and other expenses

**3,194**

2,626

Accrual for payment for unused sick leave and other employee benefits

**2,628**

1,448

Accrued interest on various loans

**2,377**

2,542

Accrued satellite air time cost and provision (Notes 18 and 23)

**1,992**

–

Unearned revenues

**1,064**

1,118

Others

**1,339**

2,222

 

**16,046**

13,076

 

Over thepast years, PLDT has been implementing a manpower rightsizing program, or MRP,in line with its continuing effort to reduce the cost base of the fixed linebusiness.  The MRP cost charged to compensation and benefits for the yearsended December 31, 2003, 2002 and 2001 amounted to Php1,885 million, Php324million and Php279 million, representing 1,862, 374 and 661 employees affectedby the program, respectively.

 

The decisionto implement the MRP was anchored on the challenges being faced by the fixedline business as significant changes in technology, increasing competition, andshifting market preferences to cellular use have reshaped the future of thefixed line business.  The MRP was implemented under the New Labor Code and isin compliance with all other relevant labor laws and regulations.

 

Movements inthe accrued MRP cost accounts during the years are as follows:

 

 

**2003**

2002

2001

 

 (in millions of pesos)

Balance at beginning of year

**87**

–

23

Cost for the year

**1,904**

324

279

Payments

**(****1,975****)**

(237)

(302)

Balance at end of year

**16**

87

–

 

 

 

**13.    ****Notes Payable**

** **

This accountconsists of Philippine peso and U.S. dollar-denominated short-term bank loansand trust receipts at weighted average interest rates, or WAIR, of 10.030% and7.250% at December 31, 2003 and 2002, respectively, for Philippine pesoborrowings, and 2.606% and 3.238% at December 31, 2003 and 2002, respectively,for U.S. dollar borrowings.

 

On April 28, 2003 and May 14, 2003, PLDT issued, at a discount, Php1,600 million and Php400 million One-YearPeso Notes, respectively, under its Php2,000 million Peso Notes program registeredwith the Philippine Securities and Exchange Commission, or Philippine SEC.  Netproceeds of the issue totaled Php1,803 million. The Php1,600 million One-YearPeso Note matured on April 22, 2004 and the Php400 million One-Year Peso Notematured on May 11, 2004.

 

 

 

**14.    ****Long-term Debt**

 

This accountconsists of outstanding long-term debt of the following:

 

 

**2003**

2002

 

          (in millions of pesos)

PLDT

**135,403**

140,387

Piltel

**23,433**

22,082

Smart

**20,586**

22,891

Mabuhay Satellite

**4,722**

5,356

ePLDT

**105**

150

Maratel

**26**

42

 

**184,275**

190,908

Less current portion

**23,816**

19,625

 

**160,459**

171,283

 

The scheduled maturities ofoutstanding long-term debt as of December 31, 2003 are as follows:

 

**Year**

**(in millions of pesos)**

2004

23,816

2005

30,172

2006

28,762

2007

29,059

2008

5,733

2009 and onwards

66,733

*** ***

*** ***

***PLDT***

 

PLDT’saggregate outstanding indebtedness is broken down as follows:

 

**Description**

**2003**

2002

 

(in millions)

**U.S. Dollars**

 

 

 

 

Export Credit Agencies-Supported Loans:

 

 

 

 

Kreditanstalt für Wiederaufbau

**US$398**

**Php22,099**

US$437

Php23,265

Japan Bank for International Cooperation/ Co-financing Banks

**65**

**3,644**

87

4,657

Others 

**136**

**7,569**

161

8,575

 

**599**

**33,312**

 685

36,497

Fixed Rate Notes

**1,414**

**78,581**

1,487

79,160

Term Loans

**167**

**9,290**

172

9,166

 

**US$****2,180**

**121,183**

US$2,344

124,823

**Japanese Yen**

** **

** **

 

 

Term Loans 

**JP¥10,914**

**5,668**

JP¥15,641

7,019

JBIC OIL

**9,760**

**5,068**

9,760

4,379

** **

**JP¥****20,674**

**10,736**

JP¥25,401

11,398

**Philippine Pesos**

 

** **

 

 

Peso Fixed Rate Corporate Notes

 

**2,180**

 

2,540

Term Loans

 

**1,304**

 

1,626

 

 

**3,484**

 

4,166

 

 

**135,403**

 

140,387

Less current portion

 

**15,850**

 

11,962

 

 

**Php****119,553**

 

Php128,425

 

The effective average interestrates applicable to the above indebtedness are as follows:

 

 

**2003**

2002

Dollar-denominated loans

**8.1%**

8.3%

Yen-denominated loans

**2.2%**

1.2%

Peso-denominated loans

**13.7%**

13.8%

 

*ExportCredit Agencies-Supported Loans*

 

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

 

Kreditanstalt für Wiederaufbau, or KfW, a German state-owneddevelopment bank, is our largest single creditor.  As of December 31, 2003, PLDT owed US$398 million aggregate principal amount of debt to KfW, as follows:

 

•  US$298million provided under various export credit agency-backed facilities, of whichUS$221 million was in connection with our expansion and service improvement programsand US$77 million in connection with the US$149 million refinancing facilitydiscussed below; and

 

•  US$100million provided for the 15% downpayment portion and credit facilities withoutguarantee/insurance cover from the export credit agencies, of which US$22million was in connection with the US$149 million refinancing facilitydiscussed below.

 

 

 

On January 25, 2002, PLDT signed two loan agreements with KfW that provided PLDT with a US$149 million facility torefinance in part the repayment installments under PLDT’s existing loans fromKfW due from January 2002 to December 2004.  The facility is composed of anine-year loan, inclusive of a three-year disbursement period and a two-yeargrace period during which no principal is payable.  It partly enjoys theguarantee of HERMES, the export credit agency of the Federal Republic ofGermany.  Disbursements under this facility, which are made as the KfW loans tobe repaid fall due, are currently available.  We have drawn US$99 million(Php5,520 million) under this facility as of December 31, 2003.  

 

After giving effect to therefinancing facility, US$38 million of our KfW loans matures in 2004, US$82million matures in 2005, US$57 million matures in 2006, US$78 million maturesin 2007, US$58 million matures in 2008 and US$85 million matures in 2009 andonwards.  Principal amortization on these loans is generally payable in equalsemi-annual installments.

 

PLDT has also obtained loansextended and/or guaranteed by other export credit agencies, including JapanBank for International Cooperation, or JBIC, (formerly known as theExport-Import Bank of Japan), the Export-Import Bank of the United States, andrespective export credit agencies of France, Italy, Israel, Sweden, Denmark,Canada, Australia, Singapore and the United Kingdom, in the aggregateoutstanding principal amount of US$201 million as of December 31, 2003.  Of theamounts outstanding under these loans, US$63 million matures in 2004, US$52million matures in 2005, US$42 million matures in 2006, US$32 million maturesin 2007, US$8 million matures in 2008 and US$4 million matures in 2009 andonwards.

 

*Fixed Rate Notes*

 

PLDT haseight series of non-amortizing fixed rate notes outstanding as of December 31, 2003, as follows:

 

**Principal Amount**

 

**Issue Date**

**Interest Rate**

** **

**Maturity**

 

 

 

 

 

 

US$77,002,000

 

June 2, 1994

10.625%

 

June 2, 2004

US$138,210,000

 

July 31, 1995

9.875%

 

August 1, 2005

US$175,000,000

 

June 28, 1996

9.250%

 

June 30, 2006

US$200,000,000

 

March 6, 1997

7.850%

 

March 6, 2007

US$100,000,000

 

May 2, 2002

10.625%

 

May 15, 2007

US$175,000,000

 

April 13, 1999

10.500%

 

April 15, 2009

US$250,000,000

 

May 2, 2002

11.375%

 

May 15, 2012

US$300,000,000

 

March 6, 1997

8.350%

 

March 6, 2017

 

On May 2, 2002, PLDT issued 10.625%Notes due 2007 in the aggregate principal amount of US$100 million and 11.375%Notes due 2012 in the aggregate principal amount of US$250 million.  The netproceeds from the issuance of the notes were used to effect the repurchase of(1) US$63 million in principal amount of our 8.5% Notes due 2003 and US$117million in principal amount of our 10.625% Notes due 2004 validly tendered byholders in our tender offer and (2) US$10 million in principal amount of our10.625% Notes due 2004 and US$12 million in principal amount of our 9.875%Notes due 2005 from the open market, and to prepay or repay various loans inthe aggregate amount of US$125 million, of which US$53 million (JP¥6,260million) pertained to the Japanese yen term loan which matured on June 18, 2003and US$52 million in connection with the US$150 million term loan which maturedon December 22, 2003.  

* *

* *

*Term Loans*

 

*LocalExchange Transfer Loans*

 

Inconnection with the transfer to PLDT of Smart’s local exchange business, PLDTentered into loan agreements with Nederlandse Financierings-Maatschappij VoorOntwikkelingslanden N.V., or FMO, of the Netherlands, Exportkreditnamden, orEKN, of Sweden and Export 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 and calculated on the basis of Philippine GAAP ispermitted to maintain during the terms of the respective loans.  ApproximatelyUS$108 million of these loans was outstanding as of December 31, 2003.  The FMO loan will mature on September 1, 2007, and the EKN and ECGD loans on December 31, 2007. 

 

*US$150 Million Term Loan*

 

In connection with PLDT’s fixedline expansion projects, PLDT obtained a US$150 million term loan, which wassubsequently assigned to Norddeutsche Landesbank Girozentrale, Singapore Branch.This loan matured on December 22, 2003 and the principal balance of US$52million then outstanding was partly refinanced by Tranche B of US$145 millionmulticurrency refinancing facility in the amount of JP¥3,191 million and US$19million.

 

*JP¥19,807 Million Term Loan*

 

In December 1997, in connectionwith a refinancing of its maturing debt, PLDT obtained a Japanese yen term loanfrom a syndicate of foreign banks.  This loan matured on June 18, 2003 and the principal balance of JP¥12,359 million then outstanding was partly refinanced byTranche A of US$145 million multicurrency refinancing facility in the amount ofJP¥7,723 million and US$34 million.

* *

*JBIC JP¥9,760 Million OverseasInvestment Term Loan*

 

On July 26, 2002, PLDT signed a loan agreement with JBIC for a credit facility of JP¥9,760 million under theJBIC’s Overseas Investment Loan (OIL) program.  The loan, which was drawn on July 31, 2002, will be amortized semi-annually beginning March 21, 2005 and will mature on March 21, 2008.

 

*MulticurrencyRefinancing Facility*

 

On September 4, 2002, PLDT signed a loan agreement with a syndicate of banks for a US$145million multicurrency term loan facility consisting of Japanese yen and U.S.dollar commitments of JP¥10,914 million and US$53 million, respectively.  Thisfacility was split into two tranches.  Tranche A was drawn on June 18, 2003 in the amount of JP¥7,723 million and US$34 million to refinance a portionof the outstanding principal balance of the Japanese yen syndicated term loanwhich matured on the same date.  Tranche B was drawn on December 22, 2003 in the amount of JP¥3,191 million and US$19 million to refinance a portion of US$52million principal amount outstanding under the U.S. dollar term loan whichmatured on the same date.  The new syndicated facility will be amortizedsemi-annually beginning June 2004 and will mature in December 2006.

* *

*US$12 Million Term LoanFacility*

* *

On May 29, 2003, PLDT obtained a US$12 million term loan facility from DEG-Deutsche Investitions und EntwicklungsgesellschaftmbH.  As of December 31, 2003, this loan has an outstanding balance of US$4million.  This loan will mature in December 2009 and is payable in semi-annualinstallments starting June 15, 2004.

* *

* *

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

 

On June 11, 2003, PLDT signed a JP¥5,615 million syndicated term loan facility supported byNippon Export and Investment Insurance of Japan, or NEXI.  As of December 31, 2003, we have not made any drawdowns under this facility.  An initialdrawdown of JP¥960 million was made on April 5, 2004.

* *

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

 

In connection with the Asia PacificCable Network 2 project, PLDT entered into a loan agreement with Citibank,N.A., as facility agent, and a syndicate of banks in the aggregate principalamount of Php1,700 million, of which about Php1,284 million was outstanding as of December 31, 2003.  The loan, which is funded under the JBIC Facility for Private SectorDevelopment of the Development Bank of the Philippines, will mature on October26, 2005, and since April 2002, is payable in quarterly installments as setforth below: 

 

**Quarterly Payment Number**

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

 

 

Payments 1–7 

3.500%

Payments 8–11

8.875%

Payments 12–15

10.000%

 

*Php2,770Million Peso Fixed Rate Corporate Notes*

 

In connection with PLDT’s serviceimprovement and expansion programs, PLDT has entered into two loan agreements,pursuant to each of which PLDT issued fixed rate corporate notes in threetranches.  Interest on each tranche is payable semi-annually.

 

Under the first loan agreement,PLDT borrowed an aggregate amount of Php1,500 million, of which Php230 millionmatured on November 11, 2002, Php500 million will mature on November 9, 2004, and Php770 million on November 9, 2006.

 

Under the second loan agreement,PLDT borrowed an aggregate amount of Php1,270 million, of which Php360 million matured on June 9, 2003, Php100million will mature on June 9, 2005, and Php810million on June 9, 2010.

 

*Covenants*

 

Our debt instruments containrestrictive covenants and require us to comply with specified financial ratiosand other financial tests, calculated in conformity with accounting principlesgenerally accepted in the Philippines, at relevant measurement dates,principally at the end of each quarterly period.

 

The financial tests under our debtinstruments, as amended, include maintaining a positive tangible net worth andcompliance with the following ratios:

 

•        interest coverage ratio, calculated on a non-consolidated basisand excluding PLDT’s equity share in net earnings or losses of investees, ofnot less than 180% or 200%;

 

•        total debt to EBITDA on a non-consolidated basis of not more than5.5:1 on December 31, 2003, not more than 5.0:1 from March 2004 to June 2004,not more than 4.5:1 from September 2004 to December 2004 and not more than4.0:1 from March 2005 and thereafter;

 

•        long-term indebtedness to appraised value of equity/tangible networth on a non-consolidated basis, ranging from not more than 1.1:1 to not morethan 3.0:1; 

 

•        current ratio on a non-consolidated basis, ranging from not lessthan 0.9:1 to not less than 1.2:1;

 

•        debt service coverage ratio on a non-consolidated basis of atleast 1.1:1; and

 

•        debt to free cash flow ratio on a non-consolidated basis of notmore than 5.5:1 from September 30, 2003 to June 30, 2004, not more than 5.0:1from September 30, 2004 to June 30, 2005, not more than 4.5:1 from September30, 2005 to June 30, 2006, and not more than 4.0:1 from September 30, 2006 onwards.

 

In addition, some of PLDT’s debtinstruments contain covenants requiring PLDT to comply with specified financialtests on a consolidated basis calculated in conformity with the accountingprinciples generally accepted in the Philippines.  These include:

 

•        long-term debt to appraised value of equity/tangible net worth ofnot more than 2.33:1;

 

•        total debt to EBITDA of not more than 4.5:1 in 2003 and 2004, andnot more than 4.0:1 in 2005 and thereafter; 

 

•        current ratio ranging from not less than 0.75:1 to 0.9:1; and

 

•        interest coverage ratio of not less than 200%.

 

For purposesof deriving appraised value of equity/tangible net worth, we determined therevaluation surplus in respect of PLDT’s properties.  PLDT’s properties inservice as of December 31, 1997 were reappraised by an independent firm ofappraisers to reflect their sound value, as part of NTC’s financial reportingrequirements, based on the December 29, 1997 exchange rate of Php40.116 to US$1.00.  As of December 31, 1997, the sound value was Php225,966 million and therevaluation surplus was Php82,723 million.This reappraisal was approved by the NTC on January 28, 2000 under NTC Case No. 98-183.  As of December 31, 2003 and 2002, the revaluation surplus onPLDT’s 1997 appraised properties still in service, net of a 5% disallowancefactor, amounted to Php38,441 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 long-lived assets that may be recognized by PLDT and itsconsolidated subsidiaries and increases in our interest expenses.  Interestexpense may increase as a result of various factors including issuance of newdebt, the refinancing of lower cost indebtedness by higher cost indebtedness,depreciation of the peso, the lowering of PLDT’s credit ratings or the creditratings of the Philippines, increase in reference interest rates, and generalmarket conditions.  Since approximately 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.  Asof December 31, 2003, the peso depreciated by 4% to Php55.586to US$1.00, from Php53.254 to US$1.00 as of December 31, 2002.  The peso has been subjected to significant fluctuations.  In 2003, thepeso depreciated to Php55.075 to US$1.00 on March 12, 2003 then recovered to a high of Php52.021 toUS$1.00 on May 8, 2003 only to depreciate again to a low of Php55.767 to US$1.00 on November 27, 2003.

 

PLDT’s ability to maintaincompliance with financial covenant requirements measured on a non-consolidatedbasis is principally affected by the performance of its fixed line business.PLDT cannot be assured of the benefit of net revenues and cash flows generatedby Smart and PLDT’s other investees in assisting in complying withnon-consolidated covenants.

 

 

We have maintained compliancewith all of our financial ratios and covenants as measured under our loanagreements and other debt instruments.  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, certain of our financial ratios have become more restrictive at theend of the second and fourth quarters of 2003 and the first quarter of 2004 andwill continue to become more restrictive in increments thereafter, which willmake it more difficult for PLDT to maintain compliance with this ratio in thefuture.  Inability to comply with our financial ratios and covenants or raisenew financing could result in a declaration of default and acceleration of someor all of our indebtedness.  The terms of some of our debt instruments have nominimum amount for cross-default.

 

Under PLDT’s loan agreements thatrequire maintenance of an interest coverage ratio of at least 180%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)our after-tax net income for the 12 months immediately preceding the calculationdate after: (a) adding back interest charges, depreciation, amortization andother non-cash charges (including equity share in net earnings or losses ofinvestees but excluding provision for doubtful accounts) and provision forincome taxes, and (b) deducting capitalized subscriber acquisition costs, to(y) the estimated aggregate interest charges payable during the 365-day periodfollowing the calculation date on all of PLDT’s indebtedness outstanding onsuch calculation date.  Our interest coverage ratio calculated on the basis ofPhilippine GAAP under these agreements for the 12 months period ended December 31, 2003 was 300% as against the required threshold of not less than 180%.

 

Under PLDT’s loan agreements thatrequire maintenance of an interest coverage ratio of at least 200%, interestcoverage ratio is the ratio calculated on the basis of Philippine GAAP of (x)our after-tax net income after adding back reserves for higher plantreplacement costs, income taxes, interest charges, depreciation, amortizationand non-cash charges (including equity share in net earnings or losses ofinvestees and provision for doubtful accounts) during 12 consecutive monthswithin the 15 calendar months immediately preceding the calculation date, to(y) the sum of (a) the estimated aggregate interest charges on allindebtedness, net of interest capitalized to construction, plus (b) dividendson mandatorily redeemable preferred stock, in each case scheduled to be paidduring the 12 months following the calculation date.  Our interest coverageratio calculated on the basis of Philippine GAAP under these agreements for the12 months period ended December 31, 2003 was 388% as against the requiredthreshold of not less than 200%.

 

Non-consolidated total debt toEBITDA is the ratio calculated on the basis of Philippine GAAP of (x) PLDT’stotal indebtedness (not including amounts payable by PLDT to Piltel under theLetter of Support) to (y) net income for the preceding 12 months, after addingback interest accrued on all indebtedness, depreciation, amortization and othernon-cash charges (including equity share in net earnings or losses ofinvestees, but excluding provision for doubtful accounts) and provision forincome taxes and deducting any capitalized subscriber acquisition costs.  As of December 31, 2003, our non-consolidated total debt to EBITDA calculated on thebasis of Philippine GAAP was 4.68:1 as against the required threshold of notmore than 5.5:1.

 

Non-consolidated long-termindebtedness to appraised value of equity (or under some covenants, to tangiblenet worth) is the ratio calculated on the basis of Philippine GAAP of (x)PLDT’s aggregate indebtedness (or portion of such indebtedness) due more thanone year following the calculation date and par value of all mandatorilyredeemable preferred stock to (y) the sum of the aggregate par value of all ofPLDT’s outstanding common and convertible preferred stock (other than preferredstock subject to mandatory redemption), paid-in capital in excess of the parvalue of such stock, PLDT’s retained earnings, reserve for higher plantreplacement costs and revaluation increment arising from independent certifiedappraisals of PLDT’s telephone plant approved by the NTC.  As of December 31,2003, our non-consolidated long-term indebtedness to appraised value ofequity/tangible net worth calculated on the basis of Philippine GAAP was 0.88:1as against the most restrictive threshold of not more than 1.10:1.

 

 

Non-consolidatedcurrent ratio is the ratio calculated on the basis of Philippine GAAP of (x)non-consolidated current assets to (y) non-consolidated current liabilities,excluding from current liabilities 50% of the portion of long-term indebtednessdue within one year of the calculation date.  As of December 31, 2003, our non-consolidated current ratio calculated on the basis of Philippine GAAP was1.28:1 as against the most restrictive threshold of not less than 1.20:1.

 

Debt service coverage ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s cash flow fromoperations after adding back interest charges (to the extent previouslydeducted) plus (1) dividends received from investees, cash received upon anyredemption of redeemable preferred shares issued by Smart, any cash receivedunder PLDT’s Subscriber Investment Plan, or SIP and interest income receivedless (2) capital expenditures (excluding capitalized interest) and investmentsin investees for the 12 months immediately preceding the calculation date plus(3) PLDT’s closing cash balance as of the last day of the calculation period to(y) the sum of the projected interest charges and principal debt repayments(excluding debt to be repaid with a refinancing facility) during the 12 monthsfollowing the calculation date.  Our debt service coverage ratio for the 12months period ended December 31, 2003 calculated on the basis of PhilippineGAAP was 1.15:1 as against the required threshold of not less than 1.10:1.

 

Debt to free cash flow ratio is theratio calculated on the basis of Philippine GAAP of (x) PLDT’s debt less PLDT’sclosing cash balance of the last day of the calculation period to (y) PLDT’scash flow from operations after adding back interest charges (to the extentpreviously deducted) plus (1) dividends received from investees, cash receivedupon any redemption of redeemable preferred shares issued by Smart, any cashreceived under PLDT’s SIP and interest income received less (2) capitalexpenditures (excluding capitalized interest) and investments in investees forthe 12 months immediately preceding the calculation date.  Our debt to freecash flow ratio for the 12 months period ended December 31, 2003 calculated on the basis of Philippine GAAP was 4.95:1 as against the required threshold ofnot more than 5.5:1.

 

Ourconsolidated long-term debt to appraised value of equity/tangible net worth,consolidated total debt to EBITDA, consolidated interest coverage andconsolidated current ratios during the year 2003, each to be calculatedpursuant to Philippine GAAP, remained within the limits stipulated in thevarious loan agreements, including the most restrictive current ratio thresholdof not less than 0.9:1.

 

PLDT’s debtinstruments contain a number of other negative covenants that, subject tocertain exceptions and qualifications, restrict PLDT’s ability to take certainactions without lenders’ approval, including:  (1) incurring additionalindebtedness; (2) prepaying other debt; (3) making investments;(4) extending loans; (5) extending guarantees or assuming the obligations ofother persons; (6) paying dividends or other distributions or redeeming,repurchasing or otherwise acquiring shares of PLDT’s capital stock;(7) disposing of all or substantially all of its assets or of assets in excessof specified thresholds of its tangible net worth; (8) entering into managementcontracts providing for the management of its business or operations by a thirdparty; (9) creating any lien or security interest; (10) permitting set-offagainst amounts owed to PLDT; (11) merging or consolidating with any other company;(12) entering into transactions with shareholders and affiliates; and (13)entering into sale and leaseback transactions.

 

Under the indenture of PLDT’s10.625% Notes due 2007 and 11.375% Notes due 2012, PLDT is required to complywith a number of additional covenants, including covenants that, subject tocertain exceptions, restrict PLDT’s ability to (a) incur debt unless its ratioof debt to EBITDA calculated on the basis of Philippine GAAP (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 5.5:1 on or prior to December 31, 2003, 5.0:1from January 1, 2004 to December 31, 2004 and 4.5:1 thereafter and (b) pay dividends, repurchase or redeem its capital stock, make investments andprepay subordinated debt, among other things.  Subject to certain exceptions,these covenants also restrict our ability to sell assets and to use theproceeds of these asset sales.  Our consolidated leverage ratio at December 31, 2003 calculated on the basis of Philippine GAAP was 5.4:1 as against therequired threshold of not more than 5.5:1.  We expect that we will havedifficulty meeting our debt payment obligations if we do not continue toreceive cash dividends from Smart.

 

Under theterms of the US$149 million facility with KfW, PLDT is prohibited from payingany 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 syndicated term loan facility, 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 4.0:1.  Under other loan agreements, PLDT may not declare or pay dividendson any of its capital stock without the prior written consent of the lenders(i) if PLDT is in default in the payment of any amounts due and payable undersuch loan agreement or after the occurrence and during the continuance of anyother 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 than1.2:1 or (iii) in an amount greater than PLDT’s net income after taxes duringthe fiscal year to which such payment or distribution relates.  

 

In case of a change in control ofPLDT, PLDT may be required to repurchase or prepay certain indebtedness.  Underthe terms of the 10.625% Notes due 2007 and 11.375% Notes due 2012, we arerequired to offer to purchase all outstanding notes due 2007 and notes due 2012for cash at a price of 101% of their principal amounts plus accrued interest inthe event that (a) the aggregate of NTT Communications’ and First Pacific’sdirect and indirect voting interest in PLDT’s outstanding capital stock havingvoting rights falls below 35% of such capital stock, (b) any person or, incertain instances, group of persons, which is not controlled directly orindirectly by First Pacific or NTT Communications acquires a direct or indirectvoting interest in PLDT’s outstanding capital stock having voting rights whichequals or exceeds 35% of such capital stock and (c) if a rating agency at suchtime maintains a rating on either series of notes, the rating agency downgradesits credit rating on the series within 90 days (or more, in certaincircumstances) following notice of the occurrence of the events specified in(a) and (b) above.

 

Under theterms of PLDT’s JPY9,760 million loanfrom JBIC, in the event of any proposed sale or transfer of PLDT’s stock thatwould result in NTT Communications holding less than 14.95% of PLDT’s votingstock, we will be required to prepay, immediately upon effectiveness of suchsale or transfer, all principal outstanding under the loan, together withaccrued interest.  However, prepayment will not be required if, following suchsale or transfer, (a) NTT Communications continues to have prior approvalrights with respect to all matters as to which NTT Communications has approvalrights under the stock purchase agreement pursuant to which it acquired itsshares in PLDT, or (b) JBIC, in its sole discretion, determines that NTTCommunications’ participation in the expansion of Smart’s GSM network capacityto extend PLDT’s cellular business in Smart would not be reduced below itslevel of participation as of the date of the loan agreement.

 

Under the terms of both PLDT’sUS$145 million multicurrency term facility agreement and JPY5,615 million syndicated term loan facility, ifany lender so requests in writing, PLDT shall prepay in full such lender’s participationin the loan within 45 days from notification of the change in control and nolater than the date on which PLDT is required to repurchase its 10.625% Notesdue 2007 and 11.375% Notes due 2012 (“Bonds”) from bondholders accepting thechange in control offer.  A change in control is deemed to occur when (a) theaggregate of NTT Communications’ and First Pacific’s direct and indirect votinginterest in PLDT’s outstanding capital stock having voting rights fall below35% of such capital stock, (b) any person or, in certain instances, group ofpersons, which is not controlled directly or indirectly by First Pacific or NTTCommunications acquires a direct or indirect voting interest in PLDT’soutstanding capital stock having voting rights which equals or exceeds 35% ofsuch capital stock and (c) if a rating agency at such time maintains a ratingon the Bonds, the rating agency downgrades its credit rating on the Bondswithin 90 days (or more, in certain circumstances) following notice of theoccurrence of the events specified in (a) and (b) above.

 

PLDT’s debtinstruments contain customary and other default provisions that permit thelender to accelerate amounts due or terminate their commitments to extendadditional funds under its debt instruments. These default provisions include:

 

•        cross-defaults and cross-accelerations that permit a lender todeclare a default if PLDT is in default under another debt instrument; in somecases, the cross-default provision is triggered upon a payment or other defaultpermitting the acceleration of PLDT’s debt, whether or not the defaulted debtis accelerated.  In other cases, the cross-default provision requires thedefaulted loan to be accelerated.  In some debt instruments, the cross-defaultprovision will be triggered only if the principal amount of the defaultedindebtedness exceeds a threshold amount specified in these debt instruments;

 

•        failure by PLDT to meet certain financial ratio covenantsreferred to above;

 

•        the occurrence of any material adverse change in circumstancesthat a lender reasonably believes materially impairs PLDT’s ability to performits obligations under its debt instrument with the lender; 

 

•        the revocation, termination or amendment of any of the permits orfranchises of PLDT in any manner unacceptable to the lender;

 

•        the abandonment, termination or amendment of the project financedby a loan in a manner unacceptable to the lender;

 

•        the nationalization or sustained discontinuance of all or asubstantial portion of PLDT’s business; and

 

•        other typical events of default, including the commencement ofbankruptcy, insolvency, liquidation or winding up proceedings by PLDT.

*** ***

*** ***

***Piltel***

 

Piltel’slong-term debt consists of:

 

** **

**2003**

2002

** **

(in millions)

**Restructured debt**

** **

** **

** **

 

Philippine Pesos

** **

** **

** **

 

10-year Tranche B

** **

**Php2,166**

 

Php2,166

15-year Tranche C

** **

**2,166**

 

2,166

15-year Term Notes Facility

** **

**293**

 

293

 

** **

**4,625**

 

4,625

U.S. Dollars

** **

** **

 

 

10-year Tranche B

**US$35**

**1,932**

US$33

1,769

15-year Tranche C

**35**

**1,932**

33

1,769

15-year Conversion Notes Facility

**122**

**6,769**

121

6,448

 

**US$****192**

**10,633**

US$187

9,986

Japanese Yen

** **

** **

 

 

10-year Tranche B

**JPY7,822**

**4,062**

JPY7,822

3,510

15-year Tranche C

**7,822**

**4,062**

7,822

3,510

 

**JPY15,644**

**8,124**

JPY15,644

7,020

Total

** **

**23,382**

 

21,631

 

** **

** **

 

 

**Unrestructured debt**

** **

** **

** **

** **

U.S. Dollars

** **

** **

 

 

Convertible Bonds

**US$1**

**51**

US$2

120

Banks

**–**

**–**

6

331

Total

**US****$1**

**51**

US$8

 451

 

** **

**23,433**

 

22,082

Less current portion

 

**74**

 

446

 

** **

**Php****23,359**

 

Php21,636

 

On June 4,2001, Piltel completed the restructuring of approximately Php41 billion ofindebtedness and other claims owed to banks, trade creditors, bondholders andpreferred shareholders, or the aggregate financial debt of Piltel, representingapproximately 98% of its total liabilities as of that date.  As of December 31, 2003, approximately 99.8% of Piltel’s debt have been restructured except forconvertible bonds with a principal value of US$0.9 million.  Under the terms ofthe debt restructuring, 50% of Piltel’s debt was cancelled in exchange forPiltel convertible 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 16 – Preferred Stock Subject to Mandatory Redemption*forthe terms of the PLDT convertible preferred share.

 

Summarizedbelow are the principal terms of the restructured debt of Piltel: 

 

 

**10-Year Tranche B Loans**

**15-Year Tranche C Loans**

**Term Notes Facility**

**Conversion Notes Facility**

Final maturity

10 years from Effective Date

15 years from Effective Date

15 years plus 10 days from Effective Date

15 years from Effective Date

Amortization

per annum

Years 1 and 2 –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 1 and 2  –  0.00%

Years 3 to 9  –  0.10%

Years 3 and 4  –  0.10%

Years 3 to 14  –  0.10%

Years 3 and 4  –  0.10%

 

Year 10  –  99.30%

Year 5  –  2.00%

Year 15  –  98.80%

Year 5  –  1.05%

 

 

Years 6 to 14  – 10.00%

 

Years 6 to 9  –  5.05%

 

 

Year 15  –  7.80%

 

Year 10  –  54.65%

 

 

 

 

Years 11 to 14  – 5.00%

 

 

 

 

Year 15  –  3.90%

Interest rate

 

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

 

**U.S. dollar facilities** – London Interbank Offered Rate (LIBOR) for three-month U.S. dollar deposits plus 1.00% p.a.

 

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

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

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

 

Interest payment dates

Quarterly in arrears

Semi-annually

 

As of December 31, 2003, Piltel is currently not in compliance with the terms of convertible bonds with principalamount of US$0.7 million (approximately US$0.9 million redemption price at theoption of the holders).

 

Piltel may not be able torestructure or otherwise pay the claims relating to its unrestructured debt.However, default on and acceleration of Piltel’s unrestructured indebtedness donot create a cross-default provision under Piltel’s restructured indebtednessor any indebtedness of PLDT.  See *Note 28 – Other Matters* for Smart’sinvitations to the creditors of Piltel to offer to sell their indebtedness toSmart.

 

If Piltel’s non-participatingcreditors take forceful measures to enforce their claims, it is possible thatPiltel would be required to submit itself to a court-supervised rehabilitationproceeding or an involuntary insolvency proceeding seeking liquidation.  All ofPiltel’s creditors that participated in the debt restructuring agreed inconnection with the debt restructuring that they would submit Piltel to arehabilitation proceeding in those circumstances and petition for the adoptionof a plan of rehabilitation that includes the financial terms of the debtrestructuring plan.  However, the laws and procedures governing arehabilitation proceeding in the Philippine courts remain untested insignificant respects.  It cannot be assured that a rehabilitation plan whichincorporates the financial terms of the debt restructuring would be adoptedpromptly or at all.  Even if such a rehabilitation plan were adopted, it cannotbe assured that Piltel would prove to be viable thereafter and that it will beable to meet obligations, including its obligations owed to PLDT or itsaffiliates.

*** ***

*** ***

***Smart***

 

Smart’slong-term debt consists of:

 

 

**2003**

2002

 

(in millions)

U.S. Dollars

**US$361**

**Php20,053**

US$408

Php21,724

Philippine Pesos

** **

**533**

 

1,167

 

** **

**20,586**

 

22,891

Less current portion

** **

**7,104**

 

6,173

 

** **

**Php13,482**

 

Php16,718

 

Smart’s bank loan facilities, whichare being used to finance its purchases of telecommunications equipment, areavailed of through one or more drawdowns.

 

*US$224 Million Term LoanFacilities*

 

The loan facilities for Phases 1 to4 of the GSM network expansion, under which US$106 million was outstanding asof December 31, 2003, are repayable in ten equal semi-annual installments withfinal repayments due in October 2005 and April 2006.

 

*US$195Million Term Loan Facility*

 

On June 8, 2001, Smart signed its GSM Phase 5A financing comprised of US$195 million loans.The US$195 million loans, of which US$121 million was outstanding as of December 31, 2003, are payable over five to six years, with final repayments due inSeptember 2006, March 2007 and June 2007.  

 

*Php1 Billion Term Loan Facility*

 

On June 14, 2001, Smart signed its GSM Phase 5A financing of Php1,000 million term loan.  The Php1,000 millionfacility, of which Php533 million was outstanding as of December 31, 2003, is payable quarterly with final repayment in December 2005.

 

*US$6 Million Term Loan Facility*

 

On September 25, 2001, Smart obtained a US$6 million term loan facility from Electro Banque S.A., which was laterassigned to Alcatel SVF 1999A-Trust fee effective December 3, 2002.  The loan facility, of which US$3 million was outstanding as of December 31, 2003, is payable semi-annually, with final repayment due in May 2005.

 

*US$11Million Term Loan Facility*

 

On October 26, 2001, Smart obtained a US$11 million term loan facility from Credit Lyonnais S.A., of which theundrawn balance of US$4 million was cancelled upon expiry of the availabilityperiod on April 26, 2003.  The loan facility, comprised of three tranches ofwhich US$5 million was outstanding as of December 31, 2003, is payablesemi-annually with final repayments due in January 2007, November 2007 and May2008.

 

*US$100 Million Term LoanFacility*

 

On December 13, 2001, Smart signed its GSM Phase 5B financing of US$100 million, of which US$61 million wasoutstanding as of December 31, 2003. The loan is payable over five years withfinal repayment due in September 2006.

 

* *

*Php300Million Term Loan Facility*

 

On January 9, 2002, Smart signed a loan facility in the amount of Php300 million.  This loanhas been fully drawn and is payable quarterly with final repayment in February2007.  However, the outstanding balance of Php280 million was prepaid on November 4, 2003. 

 

*US$7 Million Term Loan Facility*

 

On April 14, 2002, for the purposeof financing the purchase of certain equipment, Smart obtained a US$7 millionterm loan facility from Bayerische Hypo-und Vereinsbank Aktiengesellschaftpursuant to the standard loan agreement No. 1 dated August 14, 2002 under the€50 million Framework Agreement for the financing of individual exportcontracts dated November 8 and 13, 2001. The outstanding balance as of December 31, 2003 was US$6 million.

 

*US$100 Million Term LoanFacility*

 

On November 28, 2002, Smart signed a US$100 million term loan facility supported by NEXI, of which US$60 millionwas drawn on November 28, 2003 and was outstanding as of December 31, 2003.  The US$40 million undrawn balance was drawn on April 5, 2004.  This loan is payable semi-annually over four years in eight equal installments starting May 28, 2004.

 

Facilities under GSM Phases 1 to 4,the Finnish Export Credit plc tranche of GSM Phase 5A facility and GSM Phase 5Bfacility are covered by guarantees from Finnvera, the Finnish export creditagency, for 95% of political risk and 50% of commercial risk.

 

Interest on Smart’sdollar-denominated loans is either fixed or based on LIBOR plus premium.  ThePhp1,000 million loan accrues interest based on the WAIR plus ParticipatingFinancial Institution, or PFI, premium.

 

Smart is subject to loan covenantsthat restrict its ability to pay dividends, redeem preferred shares, makedistributions 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 for thepayment of dividends to PLDT in an amount not to exceed 40% of Smart’s netincome under Philippine GAAP in 2001, Smart made its first dividend payment ofPhp1,540 million to PLDT in December 2002.  In addition, Smart paid dividends in the amount of Php4,300 million to PLDT in June 2003, representing 70% ofSmart’s 2002 net income under Philippine GAAP and paid additional dividends inthe amount of Php1,866 million to PLDT inNovember 2003, equivalent to the remaining 30% of its 2002 net income underPhilippine GAAP.  Further, after receiving similar approvals fromFinnvera and certain lenders, Smart paid dividends amounting to Php11,280million to PLDT in May 2004, representing 70% of Smart’s 2003 net income underPhilippine GAAP.  Smart will be required to obtain further waivers fromFinnvera and certain lenders to pay additional dividends in future periods.

 

Smart’s loan agreements containcertain restrictive covenants that require Smart to comply with specifiedfinancial ratios and other financial tests calculated on the basis ofPhilippine GAAP at semi-annual measurement dates.  The financial tests underSmart’s loan agreements include compliance with a debt-to-equity ratio of notmore than 1.50:1 and a debt service coverage ratio of not less than 1.50:1.Smart has maintained compliance with all of its financial covenants.  Theagreements also contain customary and other default provisions that permit thelender to accelerate amounts due under the loans or terminate their commitmentsto extend additional funds under the loans.  These default provisions include:

 

•        cross-defaults and cross-accelerations that permit a lender todeclare a default if Smart is in default under another loan agreement.  Thesecross-default provisions are triggered upon a payment or other defaultpermitting the acceleration of Smart debt, whether or not the defaulted debt isaccelerated;

 

•        failure by Smart to comply with certain financial ratiocovenants;

 

•        any reduction in PLDT’s ownership of Smart’s shares below 51% ofthe total of each class of Smart’s issued shares;

 

•        any reduction in First Pacific’s and Metro Pacific Corporation’scollective direct and/or indirect ownership of PLDT’s common stock below 17.5%of the total common stock outstanding or 17.5% of the voting power of the totalcommon stock outstanding; and

 

•        the occurrence of any material adverse change in circumstancesthat the lender reasonably believes materially impairs Smart’s ability toperform its obligations under its loan agreements with the lender or that thelender believes materially impairs an applicable guarantors’ ability to performits obligations under an applicable guaranty.

 

In addition, some of these loanagreements restrict Smart’s ability to enter into transactions with affiliatesexcept on arm’s-length terms and for valuable consideration.

*** ***

***MabuhaySatellite***

 

Mabuhay Satellite’s long-term debtconsists of:

 

 

**2003**

2002

 

(in millions)

U.S. Dollars

** **

** **

** **

 

      Credit Agreement 

**US$42**

**Php2,319**

US$55

Php2,925

   Omnibus Agreement

**43**

**2,403**

46

2,431

 

**85**

**4,722**

 101

5,356

Less current portion

**13**

**713**

18

980

 

**US$****72**

**Php****4,009**

US$83 

Php4,376

* *

*CreditAgreement*

 

Mabuhay Satellite has an existingCredit Agreement with the Export-Import Bank of the United States, or Ex-ImBank, to finance a portion of the cost of purchasing the Agila II Satellite.In 2003, Ex-Im Bank approved, in principle, the re-profiling of MabuhaySatellite’s US$42 million debt with them by extending the maturity of the loanby 1 and 1⁄2 years to July 15, 2007 and reducing the interest rate by 1%, to 5.6%from 6.6%.  The revised repayment terms have been approved by the majority ofthe local creditor banks.  Subsequently on January 15, 2004, Mabuhay Satellite paid US$5 million in principal amortization, thereby reducing its debt toUS$37 million.

 

*OmnibusAgreement*

 

Mabuhay Satellite also has anexisting Omnibus Agreement with a syndicate of local banks, or the Banks, whichincludes issuance of irrevocable standby Letters of Credit with an aggregatestated value not exceeding US$42 million (Php2,319million) in favor of Ex-Im Bank, as security under the Credit Agreement and aterm loan to Mabuhay Satellite in the aggregate amount of US$43 million (Php2,403 million), which will mature on various dates from2004 to 2007. 

 

As security, Mabuhay Satellite has constituted in favor of theBanks:

 

•        A first mortgage on its leasehold rights under a lease agreemententered into with the Subic Bay Metropolitan Authority, or SBMA, and thecomponents of the satellite system;

 

•        An assignment of its rights under its purchase contract for thesatellite system;

 

•        An assignment of its rights under the transponder lease contractsto be entered into with its stockholders and other parties and the revenuestherefrom; and

 

•        An assignment of the applicable proceeds of insurance to be takenon the satellite system.

 

The Credit and Omnibus Agreementsimpose negative covenants which, among others, restrict material changes inMabuhay Satellite’s nature of business and ownership structure, any lien uponor with respect to any of its assets or to any right to receive income,acquisition of capital stock, declaration and payment of dividends, merger,consolidation and sale with another entity and incurring or guaranteeingadditional long-term debt beyond prescribed amounts.

 

***ePLDT***

 

*Php150 Million**Term Loan Facility*

 

On March 4, 2002, ePLDT entered into a three-year loan facility with Philippine Bank ofCommunications amounting to Php150 millionwith a grace period of one year.  The loan facility was fully drawn as of December 31, 2002.  The quarterly principal payments of Php15million started in June 2003 with a balloon payment of Php45million in March 2005.  Interest on this loan is equivalent to 91-day T-billrate plus 4% per annum payable quarterly in arrears.  The loan is secured byePLDT’s investment in an associate with a carrying value of Php629 million as of December 31, 2003 and a deed of assignment of receivables of a subsidiary from a foreign customer.  As of December 31, 2003, the outstanding balance of this loan amounted to Php105 million, of which Php60million will mature in 2004.

 

The loan agreement imposes negativecovenants which, among other things, restrict ePLDT in regard to payment ofcash dividends or any other income of any capital distribution to PLDT,voluntary suspension of its entire business operations for a period of 60consecutive days of dissolution of its legal existence, and creation of anyencumbrances on the shares pledged.

*** ***

*Php100 Million Term LoanFacility*

 

On March 15, 2004, ePLDT entered into another three-year term loan facility with Asia United Bank amounting toPhp100 million for the payment of its outstanding short-term bank loan facilityand for other working capital requirements.  Php50 million was drawn from thefacility as of March 31, 2004.  The loan shall be repaid in nine equalquarterly installments starting March 2005 and will end in March 2007.Interest on the loan is equivalent to 90-day PHIBOR plus 3% per annum payablequarterly in arrears.  The loan is secured by a Mortgage Trust IndentureAgreement on a parcel of land with a carrying value of Php279 million as of March 31, 2004.

 

The loan agreement also imposesspecial covenants which, among other things, restrict ePLDT in regard tovoluntary suspension of its entire business operations for a period of 60consecutive days, dissolution of its legal existence, and creation of anyencumbrances on the property pledged.

 

The loan agreement also requiresePLDT to comply with specified financial ratios and other financial tests atquarterly measurement dates.  The financial tests under the agreement include,among others, compliance with a current ratio of not less than 1:1, an interestcoverage ratio of not less than 1.5:1, debt to equity ratio of not more than1.50:1, and a debt service coverage ratio of not less than 1.1:1.  Theagreement also contains customary and other default provisions that permit thelender to accelerate amounts due under the loan or terminate their commitmentsto extend additional funds under the loan.  As of March 31, 2004, ePLDT has complied with all of its financial covenants.

*** ***

*** ***

***Maratel***

 

Maratel’s long-term debt consistsof a Php60 million loan obtained on October 20, 1997 and a Php19 million loandrawn on July 19, 1999.  The Php60 million loan carries an interest rate rangingfrom 11.5% to 11.7% per annum and will mature on October 16, 2005, while the Php19 million loan bears a fixed interest rate of 14.7% per annum and will matureon July 30, 2004.  As of December 31, 2003, the outstanding balances of theseloans totaled Php26 million, of which Php15 million will mature in 2004.

 

 

 

**15.    ****Deferred Credits and Other Noncurrent Liabilities**

 

This accountconsists of:

 

 

**2003**

2002

 

(in millions of pesos)

Remaining excess of debt forgiven over value of Piltel’s preferred shares – net (Note 16)

**8,784**

9,417

Accrual of capital expenditures under long-term financing 

**3,130**

1,516

Accrued pension cost (Note 19)

**2,313**

3,957

Customers’ deposits

**2,194**

2,288

Advance payment under a receivables purchase facility (Note 5)

**2,058**

2,530

Capital lease liability – net of current portion (Note 7)

**729**

765

Liabilities on asset retirement obligations 

**395**

–

Others (including derivative instruments) (Note 26)

**3,959**

1,901

 

**23,562**

22,374

 

 

 

**16.    ****Preferred StockSubject to Mandatory Redemption**

 

On June 4,2001, PLDT issued 3 million shares of Series V Convertible Preferred Stock, 5million shares of Series VI Convertible Preferred Stock and 4 million shares ofSeries VII Convertible Preferred Stock in exchange for a total of 58 millionshares of Series K, Class I Convertible Preferred Stock of Piltel, pursuant tothe debt restructuring plan of Piltel.  Shares of Series V, VI and VIIConvertible Preferred Stock are entitled to receive annual dividends ofPhp18.70 per share, US$0.397 per share and JP¥40.7189 per share, respectively.In addition, in 2002, PLDT issued 30,100 shares of Series V ConvertiblePreferred Stock and 14,087 shares of Series VI Convertible Preferred Stock in exchangefor a total of 220,935 shares of Series K, Class I Convertible Preferred Stockof Piltel.  In 2003, PLDT issued additional 110,908 shares of Series VIConvertible Preferred Stock in exchange for 554,540 shares of Piltel’s SeriesK, Class I Convertible Preferred Stock.  Each share of Series V, VI and VIIPLDT Convertible Preferred Stock is convertible at any time at the option ofthe holder into one PLDT’s 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 shares of PLDT’s common stock.  For 30days thereafter, the holders of these mandatorily converted common shares havethe option to sell such common shares back to PLDT for Php1,700 per share,US$36.132 per share and JPY4,071.89 pershare for Series V, VI and VII, respectively.  Due to the foreign currencycomponent of the call option embedded in the Series VI and VII ConvertiblePreferred Stock, such call options were bifurcated and accounted for separatelyin conformity with SFAS 133, as amended (see *Note 26* – *Derivativesand Hedging Instruments*).  The aggregate fair value of the issued Series V,VI and VII Convertible Preferred Stock as of date of issuance – net of thebifurcated option values – is included under the “Preferred Stock Subject toMandatory Redemption” account in the consolidated balance sheets.

 

 

 

As of June 4, 2001, the aggregate fair value of the issuedSeries V, VI and VII Convertible Preferred Stock (inclusive of the optionvalues) amounted to Php10,165 million, as determined using an independentparty’s valuation model.  The remaining difference between this aggregate fairvalue amount and the Php20,080 million Piltel restructured debt was deferredand included as part of “Deferred Credits and Other Noncurrent Liabilities” inthe consolidated balance sheets in conformity with the accounting for troubleddebt restructuring, such that no gain was recorded on the restructuring.Thereafter, interest incurred on the remaining restructured debt is recorded asan offset against deferred credits.  Total interest incurred related to therestructured debt for the years ended December 31, 2003 and 2002 and the periodfrom June 4, 2001 to December 31, 2001 amounted to Php688 million, Php758million and Php497 million, respectively.  As of December 31, 2003 and 2002, the deferred credit balance amounted to Php8,784 million and Php9,417 million,respectively, after giving effect to the above interest expense and theadditional issuances in 2003 and 2002 of convertible preferred shares torestructure Piltel’s debt.

 

The differencebetween the aggregate fair value of the Series V, VI and VII ConvertiblePreferred Stock at issue date (net of the bifurcated option values for SeriesVI and VII) and the aggregate redemption value is accreted over the period upto the call option date using the effective interest rate method.  Accretionsadded to “Preferred Stock Subject to Mandatory Redemption” and charged againstaccumulated deficit for the years ended December 31, 2003 and 2002 amounted to Php1,309 million and Php1,004 million, respectively.  Unaccretedbalance as of December 31, 2003 and 2002 amounted to Php8,570 million andPhp9,170 million, respectively.

 

“Preferred Stock Subject toMandatory Redemption” amounted to Php13,321 million and Php10,939 million as of December 31, 2003 and 2002, respectively, after revaluation of Series VI andVII to the exchange rates at balance sheet dates and after giving effect to theabove accretions, conversions and additional issuances.  As of December 31, 2003 and 2002, 676,571 shares and 669,163 shares, respectively, of theConvertible Preferred Stock have been converted into PLDT common shares.  Theaggregate redemption value of the outstanding Series V, VI and VII ConvertiblePreferred Stock amounted to Php21,898 million as of December 31, 2003.

 

 

 

**17.    ****Stockholders’ Equity**

 

The movement of PLDT’s capitalstock account excluding preferred stock subject to mandatory redemptionfollows:

 

 

**Preferred Stock -**Php10 par value

 

 

**Series  A to DD**

**III**

**IV**

 

 

**Common Stock –**Php5 par value

 

 No. of Shares

**Total Preferred Shares**

**Amount**

**No. of Shares**

**Amount**

 

(in millions)

Authorized

 

 

 

823

Php8,230

234

Php1,170

**Outstanding**

 

 

 

 

 

 

 

Balances at January 1, 2001

351

5

36

 392

Php3,921

168

Php843

Issuance

23

–

–

  23

232

–

–

Conversion

(2)

–

–

(2)

(24)

–

2

**Balances at****December 31, 2001**

**372**

**5**

**36**

**413**

**Php****4,129**

**168**

**Php845**

 

 

 

 

 

 

 

 

Balances at January 1, 2002

 372

   5

  36

 413

Php4,129

 168

Php845

Issuance

37

–

7

  44

 440

–

–

Conversion

(2)

–

–

(2)

(23)

1

2

Redemption

–

–

(7)

(7)

(72)

–

–

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

**407**

**5**

**36**

**448**

**Php4,474**

**169**

**Php847**

 

 

 

 

 

 

 

 

Balances at January 1, 2003

 407

   5

  36

 448

Php4,474

 169

Php847

Issuance

5

–

–

   5

52

–

–

Conversion

(2)

–

–

(2)

(21)

–

–

**Balances at****December 31, 2003**

**410**

**5**

**36**

**451**

**Php4,505**

**169**

**Php847**

 

***Preferred Stock***

 

ThePreferred Stock is non-voting, except as specifically provided by law, and ispreferred as to liquidation.

 

The Series A to DD 10% cumulativeconvertible preferred stock earn cumulative dividends at an annual rate of10%.  These series of preferred stock are convertible into common stock a yearafter the year of share issuance, at a price equivalent to 10% below theaverage market price of PLDT’s common stock at the PSE over a period of 30consecutive trading days before the conversion date.  The conversion price,however, shall not be less than the conversion price set by the Board ofDirectors, which as of December 31, 2003, is Php5 per share.  At PLDT’s option,the Series A to DD 10% Cumulative Convertible Preferred Stock are redeemable atpar value plus accrued dividends five years after the year of issuance.

 

On January 22, 2002, the Board of Directors designated 10 million shares of serial preferred stock as Series CC10% Cumulative Convertible Preferred Stock for issuance throughout 2002.  Inaddition, on February 26, 2002, the Board of Directors designated an additional15 million shares of serial preferred stock as Series AA 10% CumulativeConvertible Preferred Stock.  The issuances of the 10 million shares of SeriesCC 10% Cumulative Convertible Preferred Stock and the additional 15 millionshares of Series AA 10% Cumulative Convertible Preferred Stocks are exempttransactions under Section 10.2 of the SRC, as confirmed by the Philippine SECon March 13, 2002 and July 31, 2002, respectively.  The PSE approved thelisting of the 10 million shares of Series CC 10% Cumulative ConvertiblePreferred Stock and the additional 15 million shares of Series AA 10% CumulativeConvertible Preferred Stock on August 14, 2002.

 

On December 2, 2002, the Board of Directors designated 10 million shares of serial preferred stock as Series DD10% Cumulative Convertible Preferred Stock for issuance throughout 2003 and anadditional 10 million shares of serial preferred stock as Series CC 10%Cumulative Convertible Preferred Stock.  The issuances of the 10 million sharesof Series DD 10% Cumulative Convertible Preferred Stock and the additional 10million shares of Series CC 10% Cumulative Convertible Preferred Stocks areexempt transactions under Section 10.2 of the SRC, as confirmed by thePhilippine SEC on January 30, 2003.  In an earlier letter dated October 24, 2002, PSE allowed PLDT to utilize 24,287,455 unissued preferred sharesremaining listed with the PSE in order to cover the issuance requirement of theother series under PLDT’s SIP.  The issuance requirement for the 10 millionshares 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. 

 

On January 27, 2004, the Board of Directors designated 1 millionshares of serial preferred stock as Series EE 10% Cumulative ConvertiblePreferred Stock for issuance throughout 2004.

 

The Series III ConvertiblePreferred Stock earns cumulative dividends at an annual rate of US$3.50 a sharepayable quarterly, free and clear of Philippine withholding taxes.  It isconvertible into common stock at the option of the holder at any time, at theconversion price of US$29.19 per share of common stock (equivalent to aconversion ratio of 1.7129 shares of common stock for each share of Series IIIConvertible Preferred Stock, each share of Series III Convertible PreferredStock being valued for this purpose at its reference amount of US$50 a share),subject to adjustment in certain events; and are not redeemable.  Uponliquidation of PLDT, holders of the Series III Convertible Preferred Stock willbe entitled to receive liquidating distributions equivalent to Php11 a share,plus accrued and unpaid dividends to the date of distribution, subject to theprior rights of creditors.

 

 

The Series IV Cumulative Non-Convertible Redeemable PreferredStock earns cumulative dividends at an annual rate of 13.5% based on thepaid-up subscription price.  It is redeemable at the option of PLDT at any timeone year after subscription and at the actual amount paid for such stock, plusaccrued dividends.  On February 26, 2002, the Board of Directors called for thepayment of a portion of the balance of the subscription price of the Series IVCumulative Non-Convertible Redeemable Preferred Stock amounting to Php72million, which was paid on March 5, 2002.  On March 22, 2002, PLDT redeemed 60million shares out of the 360 million subscribed shares of its Series IVCumulative Non-Convertible Preferred Stock and paid Php72 million, representingthe redemption price plus unpaid dividends up to the date of redemption.

 

The shares of preferred stock,except shares of Series V, VI and VII Convertible Preferred Stock, redeemed orconverted 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 January31, 2003, the Board of Directors approved the dividend declaration of: (a) Php1.00 per share of Series CC 10% CumulativeConvertible Preferred Stock Series CC payable on March 31, 2003 to the holdersof record as of February 27, 2003; and (b) Php12.15million on the outstanding shares of Series IV Cumulative Non-ConvertibleRedeemable Preferred Stock payable on March 15, 2003 to the holders of recordas of February 17, 2003.  On February 26, 2003, the Board of Directors approvedthe dividend declaration to the holders of record as of March 17, 2003 of: (a)US$1.029412 per outstanding share of Series III Cumulative ConvertiblePreferred Stock; (b) Php4.675 per outstandingshare of Series V Convertible Preferred Stock; (c) US$.09925 per outstandingshare of Series VI Convertible Preferred Stock; and (d) JP¥10.179725 peroutstanding share of Series VII Convertible Preferred Stock, respectively.  Inaddition, on June 10, 2003, the Board of Directors approved the dividenddeclaration to the holders of record as of June 27, 2003 of: (a) US$1.029412per outstanding share of Series III Cumulative Convertible Preferred Stock; (b)Php4.675 per outstanding share of Series VConvertible Preferred Stock; (c) US$0.09925 per outstanding share of Series VIConvertible Preferred Stock; and (d) JP¥10.179725 per outstanding share ofSeries VII Convertible Preferred Stock, respectively.  On July 8, 2003, theBoard of Directors approved the dividend declaration of: Php1.00 per outstanding share of Series A, I, R, W,AA and BB 10% Cumulative Convertible Preferred Stock payable on August 29, 2003to the holders of record as of July 24, 2003.  On September 2, 2003, the Boardof Directors approved the dividend declaration of: (a) US$1.029412 peroutstanding share of Series III Convertible Preferred Stock; (b) Php12.42 million on the outstanding shares of SeriesIV Cumulative Non-Convertible Redeemable Preferred Stock; (c) Php4.675 per outstanding share of Series VConvertible Preferred Stock; (d) US$0.09925 per outstanding share of Series VIConvertible Preferred Stock; (e) JPY10.179725per outstanding share of Series VII Convertible Preferred Stock; and (f) Php1.00 per outstanding share of Series B, F, Q, Vand Z 10% Cumulative Convertible Preferred Stock payable on September 30, 2003to the holders of record as of September 16, 2003 and Series E, K, O and U 10%Cumulative Convertible Preferred Stock payable on October 31, 2003 to theholders of record as of September 25, 2003.

 

On November 4, 2003, the Board of Directors approved thedividend declaration of: Php1.00 per outstanding share of Series C, D, J, T andX 10% Cumulative Convertible Preferred Stock payable on November 28, 2003, tothe holders of record as of November 18, 2003 and Series G, N, P and S 10%Cumulative Convertible Preferred Stock payable on December 29, 2003, to theholders of record as of November 29, 2003.  On November 28, 2003, the Board ofDirectors approved the dividend declaration of (a) US$1.029412 per outstandingshare of Series III Convertible Preferred Stock payable on January 15, 2004, tothe holders of record as of December 19, 2003; (b) Php12.29 per outstandingshare of Series IV Cumulative Non-Convertible Redeemable Preferred Stockpayable on December 15, 2003, to the holders of record as of December 12, 2003;(c) Php4.675 per outstanding share of Series V Convertible Preferred Stockpayable on January 15, 2004, to the holders of record as of December 19, 2003;(d)  US$0.09925 per outstanding share of Series VI Convertible Preferred Stockpayable on January 15, 2004, to the holders of record as of December 19, 2003;(e) JP¥10.179725 per outstanding share of Series VII Convertible PreferredStock payable on January 15, 2004, to the holders of record as of December 19,2003; and (f) Php1.00 per outstanding share of Series H, L, M and Y 10%Cumulative Convertible Preferred Stock payable on January 30, 2004 to theholders of record as of December 24, 2003.  On January 27, 2004, the Board ofDirectors approved the dividend declaration of: (a) Php12.29 million on theoutstanding Series IV Cumulative Non-Convertible Redeemable Preferred Stockpayable on March 15, 2004, to the holders of record on February 17, 2004; and(b) Php1.00 per outstanding Series DD 10% Cumulative Convertible PreferredStock payable on February 27, 2004, to the holders of record on February 12,2004 and Series CC 10% Cumulative Convertible Preferred Stock payable on March31, 2004, to the holders of record on February 25, 2004.  On February 19, 2004,the Board of Directors approved the dividend declaration of: (a) US$1.029412per outstanding Series III Convertible Preferred Stock payable on April 15,2004, to the holders of record on March 17, 2004; (b) Php4.675 per outstandingSeries V Convertible Preferred Shares payable on April 15, 2004, to the holdersof record on March 17, 2004; (c) US$.09925 per outstanding Series VIConvertible Preferred Shares payable on April 15, 2004, to the holders ofrecord on March 17, 2004; and (d) JPY10.179725per outstanding Series VII Convertible Preferred Stock payable on April 15,2004, to the holders of record on March 17, 2004.  On May 4, 2004, the Board of Directors approved the dividend declaration of Php12.42 million on theoutstanding Series IV Cumulative Non-Convertible Redeemable Preferred Stockpayable on June 15, 2004, to the holders of record as of May 26, 2004.

*** ***

***Accumulated Deficit***

 

The mostrecent dividend declaration made by PLDT in respect of its common shares was inMarch 2001.  PLDT continues to pay dividends in respect of its preferredshares.  The current policy of PLDT is to determine its ability to declare andpay dividends taking into consideration the interest of its stockholders aswell as PLDT’s working capital, capital expenditures and debt servicingrequirements.  Also taken into account the prohibitions and restrictions undercertain of PLDT’s debt instruments with respect to declaration and payment ofdividends.  The retention of earnings is necessary to meet the fundingrequirements of our business expansion, service improvement and developmentprograms.  The statutory unappropriated retained earnings balance of PLDTdetermined under Philippine GAAP as of December 31, 2003 which is available fordistribution as dividends amounted to Php27,182 million.

 

 

 

**18.             ****Related Party Transactions**

** **

Companieswithin the PLDT Group are engaged in transactions with each other in theordinary course of business.  We believe that the terms of these transactionsare comparable with those available to unrelated parties. 

 

***Transactions with/between Related Parties***

*** ***

*Telecommunications Services Provided within the PLDT Group*

 

Telecommunicationscarriers within the PLDT Group (namely, PLDT, Smart, Piltel, Clark Telecom,Subic Telecom, Maratel and PLDT Global) have existing intercompany agreements,such as interconnection agreements with one another under terms similar withthose agreed with other telecommunications providers outside the PLDT Group(see *Note 28 – Other Matters*).  Each of these carriers recognizesrevenues, net of interconnection charges, for calls terminating with thecustomer of the other carriers. 

* *

*Transponder Lease Agreement between PLDT and Mabuhay Satellite*

* *

On December 28, 1995, PLDT and Mabuhay Satellite entered into a Transponder Lease Agreement,as amended on May 10, 2000, pursuant to which Mabuhay Satellite leases to PLDTC-band transponders on board the Agila II satellite, in consideration of abasic rent.  This agreement has a term of ten years commencing on December 18, 1997, unless earlier terminated in accordance with the terms thereof.Originally, the lease covered 14 C-band transponders. However, on December 18, 2000, PLDT terminated the Transponder Lease Agreement with respect to fourtransponders which service was interrupted and not restored resulting in PLDT’sinability to access and use the transponders.  This was further reduced toeight C-band transponders on December 18, 2002.  The annual basic rent for thetransponders is approximately US$14 million with US$1.8 million annual leaseper transponder.

 

Under an Acknowledgment andConsent Agreement dated January 4, 1996, PLDT acknowledged and consented toMabuhay Satellite’s:

 

•        transfer and assignment of all amounts payable by PLDT under theTransponder Lease Agreement; and

 

•        grant of a continuing security interest of first priority in allof Mabuhay Satellite’s rights, title and interest in, to and under theTransponder Lease Agreement, in favor of the collateral agent for the benefitof the lenders who are parties to the Omnibus Credit and Security Agreementdated December 14, 1995, as amended.

 

Total feesunder these agreements amounted to Php747million, Php925 million and Php927 million forthe years ended December 31, 2003, 2002 and 2001, respectively.  Outstandingobligations of PLDT under these agreements amounted to Php26 million and Php270 million as of December 31, 2003 and 2002,respectively.

* *

*FacilitiesManagement Agreement between PLDT and Piltel*

 

On July 19, 2001, PLDT enteredinto a Facilities Management Agreement with Piltel under which PLDT undertakesthe management, operation and maintenance of Piltel’s regionaltelecommunication and    E.O. 109, network operations and services, includingE.O. 109 fixed line build-out installations, public calling offices andpayphone facilities and the systems required to support these services.

 

The agreement covers Piltel’sregional telecommunication services in Baguio, Puerto Princesa, Masbate, andBoac and E.O. 109 services in Alabel, Banga, Dapitan, Davao, Digos, Dipolog,General Santos, Kiamba, Koronadal, Pagadian, Polomolok and Surallah in Mindanao.

 

Under the agreement, PLDT alsoundertakes the management of the computer system, billing, revenue assuranceand inter-carrier settlements reporting of Piltel’s regional telecommunicationservices in Olongapo and Subic.

 

The monthly management fee payableby Piltel is based on cost, and for cost components where margin is allowed,15% is applied.  All third party invoices are passed on to Piltel 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 under theseagreements amounted to Php52 million for each of the years ended December 31, 2003 and 2002 and Php118 million for the year ended December 31, 2001.  Fees for billing services amounted to Php18 million, Php19 million and Php17million for the years ended December 31, 2003, 2002 and 2001, respectively.Outstanding receivables of PLDT under these agreements amounted to Php329million and Php258 million as of December 31, 2003 and 2002, respectively.

 

*Facilities ManagementAgreement between Piltel and**Subic**Telecom*

 

On September 5, 2001, Piltel and Subic Telecom entered into a Facilities Management Agreement of the regionaltelephone network, customer operations, network operations and payphones ofPiltel in Subic and Olongapo City.  The monthly management fee payable byPiltel is based on cost, and for cost components where margin is allowed, 15%is applied.  In addition, Piltel pays a monthly variable cost per account inthe amount of Php44 for repairs and maintenance.  All third party invoices arepassed on to Piltel at cost, including value-added tax.  This agreementsupersedes the facilities management agreement entered into by Piltel and SubicTelecom on May 29, 2000.

 

Total management fees under thisagreement amounted to Php21 million, Php22 million and Php24 million for theyears ended December 31, 2003, 2002 and 2001, respectively.  The new agreementis effective for three years until September 2004.  Outstanding receivables ofSubic Telecom under this agreement amounted to Php11 million and Php2 millionas of December 31, 2003 and 2002, respectively.

 

*Agreementsbetween Smart and Piltel*

 

In connection with the integrationof their operations, Smart and Piltel have entered into the followingagreements:

 

• An agreement for theco-location, or sharing, of cellular sites selected at the option of Smart,whereby Piltel is paid a usage fee of Php45,000 per shared site per month, subject to a 10% annual increase.  Co-locationexpenses under this agreement amounted to Php139 million in 2003 and Php151million in 2002.  On December 18, 2003, Smart made an advance payment of co-location fees under this agreementamounting to Php783 million covering the period from January 1, 2004 up to December 31, 2008.  The advance payment was based on the rate applicable to 2003on which the annual escalation rate was applied over the five-year period anddiscounted at 10%;

 

•  An agreement whereby Smart manages the operationof Piltel’s cellular system.  This agreement is divided into threesub-agreements as follows:

 

i.    A Facilities Management Agreement under which Smart operates,maintains and manages the physical facilities and technical services ofPiltel’s existing cellular system.  Piltel pays Smart a fixed monthly fee ofPhp4 million and a variable monthly fee of Php13,735 per site covered by theagreement.  Additional fees of Php186,878 per month and Php624 per site permonth are payable at the end of each calendar year upon rendition of theservices in conformity with the agreement.  This agreement was amended in May2001 to include the management, operation and maintenance of Piltel’s prepaidwireless telecommunications network in the E.O. 109 areas in Mindanao includingthe business and central offices, base stations, and public calling offices ofPiltel located in South Cotabato, Saranggani and General Santos, Davao City,Davao del Sur, Zamboanga del Norte, Zamboanga del Sur and Misamis Occidental.In November 2003, the agreement was further amended to eliminate the monthlyfixed costs of Php4 million and the additional fees of Php186,878 per month andincrease the monthly variable cost to Php27,470 per site and the additionalfees to Php1,248 per site per month;

 

ii.    ACustomer Service Management Agreement under which Piltel outsources theoperation of its customer service and billing functions for its cellular systemto Smart for a fixed monthly fee of Php9 million and a variable cost of Php17per prepaid cellular subscriber.  An additional fee of Php399,926 per month andPhp1.00 per prepaid subscriber per month is payable at the end of each calendaryear upon rendition of the services in conformity with the agreement; and

 

iii.   AnAdministrative Support and Management Services Agreement under which Smartprovides administrative support and services to Piltel including payrolladministration and training, finance and financial accounting, audit, legal,purchasing and materials management, public affairs, information technology,rates and tariffs administration, sales and marketing, product development andcarrier services for a fixed monthly fee of Php8 million.  An additional fee ofPhp353,764 per month is payable at the end of each calendar year upon renditionof the services in accordance with the agreement. 

 

This agreementwas amended in December 2002 to include the provision of sales and distributionservices for Piltel’s products and services.  Piltel pays Smart the residualpercentage discount between Piltel’s prescribed distributor discount rate andthe discount rate that Smart gives to its retailers and wholesalers for thesale of prepaid cards and the residual commission between Piltel’s prescribeddiscount and the discount that Smart extends to its retailers and wholesalersfor phonekit and SIM pack sales.

 

Total management fees under these three sub-agreements totaledPhp721 million, Php661 million and Php540 million for the years ended December 31, 2003, 2002 and 2001, respectively.  Under these agreements, outstandingreceivables of Smart as of December 31, 2003 and 2002 amounted to Php906million and Php569 million, respectively.

 

•  AFacilities Service Agreement under which Piltel accesses Smart’s existing GSMnetwork and facilities to enable Piltel to offer prepaid cellular service usingGSM technology in exchange for approximately 50% of Piltel’s revenues, net ofinterconnection expenses.  In December 2003, this agreement was amended tochange the basis of computation of the facility service fee from card sales tousage, retroactive to January 1, 2003.  Total fees under this agreementamounted to Php4,247 million, Php2,494 million and Php1,647 million for theyears ended December 31, 2003, 2002 and 2001, respectively.  Under thisagreement, outstanding receivables of Smart amounted to Php633 million andPhp247 million as of December 31, 2003 and 2002, respectively. 

 

• A Billing Service Agreement for the printing and delivery of thebilling statements of Piltel’s LEC subscribers.  Under the agreement, Piltelagrees to pay Smart an average of Php4.60 perbill printed and an average of Php5.40 perbill delivered.  Total fees under this agreement amounted to Php6 million andPhp4 million for the years ended December 31, 2003 and 2002, respectively.

 

*Air TimePurchase Agreement between PLDT and PT Asia Cellular Satellite and RelatedAgreements*

 

In March 1997, PLDT entered into a Founder NSP Air Time PurchaseAgreement with PT Asia Cellular Satellite, as amended in December 1998, underwhich PLDT was granted the exclusive right to sell ACeS services in the Philippines.In exchange, the Air Time Purchase Agreement states that PLDT is required topurchase from PT Asia Cellular Satellite at least US$5 million worth of airtime annually over ten years, commencing on the commercial operations date,which has been set as January 1, 2002.  The commercial operations date isdefined as the earlier of:

 

•  theday on which PT Asia Cellular Satellite places the Garuda I satellite incommercial operation; and

 

•        the date of final acceptance of the Garuda I satellite andassociated equipment under the terms of the Spacecraft Contract, dated August28, 1995, between PT Asia Cellular Satellite and Martin Marietta OverseasCorporation.

 

However, the commercial operations date may not occur withoutthe consent of PLDT if there is a constructive total loss or partial loss ofthe satellite under its launch insurance contract and the satellite cannotprovide commercial service in the Philippines. 

 

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

 

PLDT and the other founder NSPs are endeavoring to amend the AirTime Purchase Agreement due to the occurrence of partial satellite loss,changes in the primary business of ACeS and other events affecting thebusiness.

 

In March 2003, PLDT, together withthe other founder NSPs, entered into a Standstill Agreement with AIL suspendingthe application and enforcement of the minimum and supplemental air timepayments under the original Air Time Purchase Agreement.  In lieu of thesepayments, the parties agreed that AIL shall provide PLDT and the other foundershareholders, with unlimited use of air time for the year 2003 in exchange fora fixed fee in the amount of US$3.8 million for PLDT.  PLDT was also obliged topurchase from AIL 13,750 satellite phone units in 2003 at US$395 F.O.B. perunit, subject to quarterly price adjustment.  The parties to the StandstillAgreement also agreed to negotiate in good faith and use their best efforts toreach an agreement on a revised Air Time Purchase Agreement before November 15,2003 that will cover, among other matters, the amended minimum and supplementalair time payment provisions subject to the approval of AIL’s creditors.

 

On February 10, 2004,notwithstanding the on-going negotiations, AIL advised PLDT of the terminationof the Standstill Agreement and the reinstatement of the terms under the originalAir Time Purchase Agreement following the lapse of the deadline set in theStandstill Agreement for the establishment of a revised Air Time PurchaseAgreement. 

 

PLDT alsoentered into a Founder NSP Operating Agreement with PT Asia Cellular Satellite on March 12, 1997, under which PLDT may:

 

•        authorize distributors toresell ACeS services in the Philippines upon prior approval from PT Asia CellularSatellite; and

 

•        appoint agents to solicit andbill PLDT’s or its authorized distributors’ subscribers for ACeS services andto sell terminals on behalf of PLDT.

 

Under an Assignment and AssumptionAgreement dated December 29, 1998, PT Asia Cellular Satellite agreed to assignand transfer to AIL all of PT Asia Cellular Satellite’s rights under theFounder NSP Air time Purchase Agreement and Founder NSP Operating Agreement.

 

Under an Acknowledgment ofAssignment of Air time Purchase Agreement entered into on December 29, 1998, byand among PLDT, P.T. Bank Internasional Indonesia and AIL, PLDT consented tothe assignment by AIL of the Founder NSP Air time Purchase Agreement to P.T.Bank Internasional Indonesia, as security agent, for the benefit of the securedparties under the Security Agreement dated as of December 29, 1998, which wasexecuted in connection with the Amended and Restated Credit Agreement datedDecember 29, 1998 among PT Asia Cellular Satellite, AIL, P.T. BankInternasional Indonesia and various other banks.

 

On September30, 2002, PT Asia Cellular Satellite, AIL, as guarantor, P.T. Bank InternasionalIndonesia, as security agent, and various other banks signed a ReschedulingAgreement, which amended the terms of the Amended and Restated Credit Agreementdated December 29, 1998, moving the principal repayment dates to agreed periodswith the final maturity date on January 31, 2012.

 

*Agreements between Smart andACeS**Philippines*

 

On July 18, 2000, Smart enteredinto a Service Distribution Agreement with ACeS Philippines under which ACeSPhilippines appointed Smart as an authorized service provider of ACeS GlobalMobile Personal Communication by Satellite Services, or GMPCS Services, in thePhilippines having the task of exerting its best efforts to market and sellaccess 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 the payphone-relatedservices.  

 

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, AIL relations and other supportservices.

 

Total fees under these agreements,net of Smart’s share, amounted to Php12million for the years ended December 31, 2003 and 2002 and Php17 million for theyear ended December 31, 2001.  Smart had no outstanding obligation as of December 31, 2003 and 2002. 

 

***Transactions with Major Shareholders, Directors and Officers***

 

Transactionsbetween PLDT or its subsidiary and a director or key officer or owner of morethan 10% of the common shares of PLDT, or any member of the immediate family ofa director or key officer or owner of more than 10% of the common shares ofPLDT, who has a direct or indirect material interest in PLDT or its subsidiary,as of and for the years ended December 31, 2003, 2002 and 2001 are as follows:

 

*a.     **Agreementswith NTT Communications and/or its Affiliates*

 

PLDT is aparty to the following agreements with NTT Communications and/or itsaffiliates:

 

•        *Advisory ServicesAgreement*.  **On March 24,2000, PLDT entered into an agreement with NTT Communications, as amended onDecember 31, 2003, under which NTT Communications provides PLDT with technical,marketing and other consultants for various business areas of PLDT startingApril 1, 2000;

 

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

 

•        *Arcstar LicensingAgreement and Arcstar Service Provider Agreement.*On March 24, 2000, PLDT entered into anagreement with NTT Worldwide Telecommunications Corporation under which PLDTmarkets managed data and other services under NTT Communications’ “Arcstar”brand to its corporate customers in the Philippines.  PLDT alsoentered into a Trade Name and Trademark Agreement with NTT Communications underwhich PLDT has been given the right to use the tradename “Arcstar” and itsrelated trademark, logo and symbols, solely for the purpose of PLDT’smarketing, promotional and sales activities for the Arcstar services within thePhilippines; and

 

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

 

Total fees under these agreementsamounted to Php288 million, Php289 million and Php362 million for the yearsended December 31, 2003, 2002 and 2001, respectively.  As of December 31, 2003 and 2002, outstanding obligations of PLDT amounted to Php40 million andPhp36 million, respectively.

 

*b.     **Agreementbetween Smart and**Asia**Link B.V., or ALBV***

 

Smart has an existing TechnicalAssistance Agreement with ALBV for the latter to provide technical supportservices and assistance in the operations and maintenance of CMTS for a periodof five years, subject to renewal upon mutual agreement between the parties.The agreement provides for quarterly payments of technical service feesequivalent to 2% of the net revenues of Smart.  In January 2003, the agreementwas amended, reducing the technical service fees to be paid by Smart to ALBV to1% of net revenues effective January 1, 2003.

 

 

Smart alsohas an existing Services Agreement with ALBV for a period of 25 years starting January 1, 1999, which shall automatically expire unless renewed by mutual agreement ofboth parties.  Under the agreement, ALBV provides advice and assistance toSmart in sourcing capital equipment and negotiating with internationalsuppliers, arranging international financing and other services thereinconsistent with and for the furtherance of the objectives of the services.Services Agreement fees were prepaid for the whole 25-year period.

 

ALBV is a subsidiary of the FirstPacific Group.

 

Total fees under these agreementsamounted to Php429 million for each of the years ended December 31, 2003 and 2002 and Php249 million for the year ended December 31, 2001.  Outstanding obligations of Smart under the Technical Service Agreement amounted to Php228million and Php31 million as of December 31, 2003 and 2002, respectively.

 

*c.      **Agreementsrelating to insurance companies*

* *

Gotuaco del Rosario and Associates,or Gotuaco, acts as the broker for certain insurance companies to cover certaininsurable properties of the PLDT Group.  Insurance premiums are remitted toGotuaco and the brokers’ fees are settled between Gotuaco and the insurancecompanies.  In addition, PLDT has signed an insurance policy with MalayanInsurance Co. Inc., or Malayan, wherein premiums are paid directly to Malayan.Total payments to Gotuaco and Malayan in 2003 covering the 12-month periodending July 31, 2004 amounted to Php447 million.  Two directors of PLDT have adirect/indirect interest in or serve as director/officer of Gotuaco andMalayan.

 

 

 

**19.    ****Employees’ BenefitPlans**

 

***PLDT***

 

PLDT has atrustee-managed, noncontributory defined benefit plan, or the Benefit Plan,providing for retirement and death benefits and service terminal pay tosubstantially all permanent and regular employees.  Benefits under the BenefitPlan are based on final salary and length of service.

 

Inconformity with SFAS 132, “Employers’ Disclosures about Pensions and OtherPostretirement Benefits,” the following table sets forth the Plan’s funded statusand pension amounts recognized as of December 31, 2003, 2002 and 2001 based onthe latest actuarial valuation dated February 2004:

 

 

**2003**

2002

2001

 

(in millions of pesos)

Change in benefit obligation:

 

** **

** **

Benefit obligation at beginning of year

**7,984**

6,637

9,264

Service cost

**515**

452

697

Interest cost

**716**

794

1,108

Benefits paid

**(17)**

(495)

(669)

Actuarial loss (gain)

**(1,227)**

596

(3,763)

Curtailment

**274**

–

–

Settlement

**(2,274)**

–

–

Benefit obligation at end of year

**5,971**

7,984

6,637

 

** **

 

 

Change in plan assets:

** **

 

 

Fair value of plan assets at beginning of year

**2,915**

2,781

5,007

Actual return on plan assets

**250**

159

(1,898)

Employer’s contribution

**2,703**

470

341

Benefits paid

**(17)**

(495)

(669)

Settlement

**(2,274)**

–

–

Fair value of plan assets at end of year

**3,577**

2,915

2,781

Funded status

**(2,394)**

(5,069)

(3,856)

Unrealized net transition obligation

**229**

275

289

Unrecognized net actuarial loss (gain)

**(148)**

837

31

Accrued benefit cost

**(2,313)**

(3,957)

(3,536)

 

** **

 

 

Components of net periodic benefit cost:

** **

 

 

Service cost

**515**

452

697

Interest cost

**716**

794

1,108

Expected return on plan assets

**(303)**

(369)

(665)

Amortizations of:

** **

 

 

Unrecognized net transition obligation

**13**

14

14

Unrecognized net loss

**2**

–

14

Net periodic benefit cost

**943**

 891

1,168

 

The accumulated benefit obligations amounted to Php4,330million, Php2,552 million and Php1,571 million as of December 31, 2003, 2002 and 2001, respectively.

 

Thesignificant assumptions used in determining the actuarial present value of theprojected benefit obligations as of December 31, 2003, 2002 and 2001 are asfollows:

 

 

**2003**

2002

2001

Weighted average assumptions:

 

 

 

Discount rate

**9%**

9%

12%

Expected return on plan assets

**9%**

8%

12%

Rate of compensation increase

**6%**

9%

10%

 

The allocation of the fair value ofplan assets follows:

 

 

**2003**

2002

2001

Investments in debt securities

**36%**

39%

39%

Investments in equity securities

**42%**

52%

57%

Others

**22%**

9%

4%

 

**100%**

100%

100%

 

As of December 31, 2003, investments in equity securities in the plan assets include shares of stocks of PLDT andits affiliated companies with a total fair value of Php1,405 million, or 36% ofthe total fair value of plan assets (47% in 2002 and 45% in 2001).

 

The Plan’s Board of Trustees adoptsan investment approach of mixed equity and fixed income investments to maximizethe long-term return of plan assets.  The investment portfolio has beenstructured to achieve the objective of regular income with capital growth andout- performance of benchmarks.  Majority of the investment portfolio consistsof fixed income debt securities and various equity securities while theremaining portion consists of multi-currency investments.

 

SFAS 87 requires the use of anaverage rate of earnings expected on funds invested or to be invested,considering returns being earned by plan assets in the fund and rates of returnexpected to be available for reinvestment.  Due consideration was given notonly to historical performance of plan investments, but also to the currentinvestment mix and anticipated rates of return.   Thus, the expected rate ofreturn on assets was set at 9% per annum.

 

PLDT expects to make approximatelyPhp350 million of cash contributions to its pension plan in 2004.

 

The table below presents theexpected compulsory retirement benefits of PLDT to be paid out of the fund forthe next ten years:

 

**Year**

**(in millions of pesos)**

2004

9

2005

–

2006

19

2007

50

2008

13

2009 and onwards

612

 

*** ***

***Smart***

 

Smart has atrustee-managed, tax-qualified Provident Plan providing for retirement, deathor service terminal pay to substantially all permanent and regular employees.Under the Provident Plan, Smart contributes to the provident fund for thecredit of each member’s Personal Retirement Account, or PRA, a percentage ofsuch member’s monthly salary.  Net earnings of the Provident Fund are creditedevery nine months to the PRAs of the members based on their proportionate sharein the total value of the Provident Fund as of the end of the preceding period.

 

In October2003, Smart’s board of directors approved enhancements to the retirement plan.The enhanced retirement plan gives a member the option to contribute to thefund up to a maximum of 10% of his monthly salary.  On top of its currentcontribution, Smart will provide an additional contribution up to 50% of themember’s contribution, depending on his tenure in the company.

 

Any benefit payable under this Planshall be in lieu of or in compliance with, but not in addition to, the paymentof similar benefits Smart is required to pay its employees under existing orfuture laws, employment contracts or collective bargaining agreements, it beingunderstood that the employee shall be entitled only to the higher of thebenefits and not to both.

 

The following are the minimumadditional disclosures as required by SFAS 132 based on the latest actuarialvaluation dated February 2004:

 

 

**2003**

2002

2001

 

(in millions of pesos)

Change in benefit obligation:

** **

 

 

Benefit obligation at beginning of year

**159**

125

79

Service cost

**44**

45

32

Interest cost

**16**

12

8

Benefits paid

**(2)**

(1)

–

Actuarial loss (gain)

**9**

(22)

6

Benefit obligation at end of year

**226**

 159

 125

Change in plan assets:

** **

 

 

Fair value of plan assets at beginning of year

**197**

119

80

Actual return on plan assets

**28**

25

11

Employer’s contribution

**71**

54

28

Fund transfers due to transferees from Telecoms Solutions, Inc.

**24**

–

–

Benefits paid

**(2)**

(1)

–

Fair value of plan assets at end of year

**318**

 197

 119

 

** **

 

 

Funded status

**92**

38

(6)

Unrecognized net transition obligation

**(7)**

(7)

(7)

Unrecognized net actuarial loss (gain) 

**(19)**

(23)

10

Prepaid (accrued) benefit cost

**66******

   8

(3)

Components of net periodic benefit cost:

** **

 

 

Service cost

**44**

45

32

Interest cost

**16**

12

8

Expected return on plan assets

**(23)**

(14)

(10)

Net periodic benefit cost

**37**

  43

  30

 

The accumulated benefit obligationsamounted to Php38 million, Php25 million and Php16 million as of December 31, 2003, 2002 and 2001, respectively.

 

 

 

Thesignificant assumptions used in determining the actuarial present value of theprojected benefit obligations as of December 31, 2003, 2002 and 2001 are asfollows:

 

 

**2003**

2002

2001

Weighted average assumptions:

 

 

 

Discount rate

**10%**

10%

10%

Expected return on plan assets

**10%**

10%

10%

Rate of compensation increase

**10%**

9%

10%

 

The allocation of the fair value ofplan assets follows:

 

 

**2003**

2002

2001

Investments in debt securities

**86%**

89%

96%

Investments in equity securities

**12%**

5%

2%

Others

**2%**

6%

2%

 

**100%**

100%

100%

 

Smart expects to make approximatelyPhp71 million of cash contribution to its pension plan in 2004.

 

 

 

**20.    ****Other Expenses**

 

This account consists of:

 

 

**2003**

2002

2001

 

 (in millions of pesos)

Foreign exchange losses - net 

**10,840**

5,878 

4,467

Loss (gain) from derivative transactions (Note 26)

**1,616**

(603)

42

Provision for permanent decline in value of investment (Note 8)

–

–

2,052

 

**12,456**

5,275

6,561

 

 

 

**21.    ****Income Taxes**

 

The net current and noncurrentcomponents of deferred income tax recognized in the consolidated balance sheetsfollow:

 

**2003**

2002

 

(in millions of pesos)

Net current deferred tax assets

**7,932**

5,690

Net noncurrent deferred tax assets

**12,780**

11,163

 

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

 

 

**2003**

2002

 

(in millions of pesos)

Current assets:

** **

 

NOLCO

**4,965**

6,413

Allowance for doubtful accounts

**4,822**

3,802

MCIT

**1,351**

645

Unearned prepaid card revenues 

**890**

782

Unearned revenues – others

**589**

424

Allowance for inventory obsolescence 

**232**

196

Capital lease

**173**

179

Past service pension cost

**163**

55

Others

**807**

199

 

**13,992**

12,695

Current liabilities–

** **

 

Unrealized gains on financial instruments

**(84)**

(18)

 

**13,908**

12,677

Less valuation allowance 

**5,976**

6,987

Net current assets

**7,932**

5,690

Noncurrent assets:

** **

 
Unrealized foreign exchange losses
**16,556**

16,157

Asset impairment

**9,472**

9,848

Excess of debt forgiven

**2,812**

3,013

Unrealized losses on financial instruments

**1,196**

250

Past service pension cost

**978**

108

Accrued pension cost

**792**

1,462

Accelerated depreciation

**734**

879

Deferred charges

**327**

347

Asset retirement obligations

**64**

–

Provision for decline in value of investments

**–**

205

 

**32,931**

32,269

Less valuation allowance

**13,614**

13,270

 

**19,317**

18,999

Noncurrent liabilities:

** **

 

Interest charges capitalized, net of amortization

**(5,320)**

(5,921)

Taxes and duties capitalized, net of amortization

**(650)**

(717)

Unrealized gains on financial instruments

**(364)**

(522)

Undistributed earnings of a subsidiary

**(203)**

(333)

Customer lists

**–**

(343)

 

**(6,537)**

(7,836)

Net noncurrent assets

**12,780**

11,163

 

Provision for (benefit from) incometax consists of:

 

 

**2003**

2002

2001

 

(in millions of pesos)

Current

**2,331**

589

876

Deferred

**(3,731)**

849

(3,446)

 

**(1,400)**

1,438

(2,570)

 

 

 

The MCIT in 2003 and 2002 amountingto Php706 million and Php645 million, respectively, were charged directly to“Deferred income tax”.  The benefit of MCIT in 2003 and 2002, can be claimed asdeductions against income tax payable until 2006 and 2005, respectively.

 

Mabuhay Satellite and Subic Telecomare registered as Subic Bay Freeport Enterprises and Clark Telecom isregistered as a Clark Special Economic Zone Enterprise under Republic Act No.7227, otherwise known as the Bases Conversion and Development Act of 1992, orthe Act.  As registrants, Mabuhay Satellite and Clark Telecom are entitled toall the rights, privileges and benefits established thereunder including taxand duty-free importation of capital equipment and special income tax rate of5% of gross income, as defined in the Act. 

 

On December 22, 2000, the Philippine Board of Investments, or BOI, approved ePLDT’s registration as a new informationtechnology service firm in the field of services related to its internet datacenter on a pioneer status.  As such, ePLDT enjoys, among other incentives, asix-year income tax holiday from January 2001.

 

On May 3, 2001, the BOI awarded Smart pioneer status for its GSM expansion projects entitling it to a three-yeartax holiday up to May 2004.  The tax incentive is availed on the basis ofincremental income generated from the said expansion project.  In addition, on July 12, 2001, the BOI awarded Smart pioneer status for its payment infrastructureprojects entitling it to enjoy a six-year tax holiday.  In this case, the taxincentive is availed for the entire taxable income of the project.

 

The balanceof NOLCO as of December 31, 2003 may be used by the particular entities thatincurred the losses as deductions against future taxable income.

 

** **

**Year Incurred**

**Carryforward Benefits Up To**

** **

**Amount**

 

 

(in millions of pesos)

2001

December 31, 2004

10,177

2002

December 31, 2005

5,251

2003

December 31, 2006

86

Total NOLCO

** **

15,514

 

The reconciliation between theprovision for income tax at the applicable statutory tax rates and the actualprovision for income tax follows:

 

 

**2003**

2002

2001

 

(in millions of pesos)

Provision at statutory tax rate

**3,123**

(1,470)

(9,661)

Tax effects of:

** **

 

 

Tax exempt income and non-deductible expenses

**2,695**

(253)

(22)

Equity in net losses of investees

**28**

45

1,366

Results of operations subject to income tax holiday

**(5,975)**

(2,405)

(724)

Tax rate differences

**(490)**

(117)

(127)

Goodwill amortization

**–**

–

1,527

Provision for impairment in value of investment

**–**

–

451

Others - net 

**(114)**

174

11

Changes in valuation allowance

**(667)**

5,464

4,609

Actual provision for (benefit from) income tax

**(1,400)**

1,438

(2,570)

 

 

** **

**22.    ****Earnings Per CommonShare**

 

Thefollowing table presents information necessary to calculate the earnings pershare:

 

** **

**2003**

2002

2001

 

**Basic**

**Diluted**

Basic

Diluted

Basic

Diluted

 

(in millions of pesos, except per share amounts)

Net income (loss) before cumulative effect of change in accounting principles

**11,106**

**11,106**

(6,158)

(6,158)

(27,728)

(27,728)

Cumulative effect of change in accounting principles

**(61)**

**(61)**

–

–

(54)

(54)

Dividends on preferred stock

**(1,739)**

**(1,485)**

(1,645)

(1,645)

(1,503)

(1,503)

Accretion to redemption value of Preferred Stock Subject to Mandatory Redemption

**(1,309)**

**(1,309)**

(1,004)

(1,004)

(542)

(542)

Net income (loss) attributable to common shareholders

**7,997**

** **

**8,251**

** **

(8,807)

** **

(8,807)

 

(29,827)

(29,827)

 

(in thousand shares)

Outstanding common shares, beginning

**169,361**

**169,361**

168,895

168,895

168,498

168,498

Effect of issuance of common shares during the year

**52**

**52**

200

200

162

162

Common shares equivalent of preferred shares deemed dilutive:

** **

** **

 

 

 

 

     Preferred Stock Series V

**–**

**2,576**

–

–

–

–

     Preferred Stock Series VI

**–**

**4,651**

–

–

–

–

     Preferred Stock Series VII

**–**

**3,842**

–

–

–

–

Weighted average number of common shares, end

**169,413**

**180,482**

169,095

169,095

168,660

168,660

Earnings per common share

** **

** **

 

 

 

 

Earnings per common share before cumulative effect of change in accounting principles

**47.56**

**46.06**

(52.08)

(52.08)

(176.53)

(176.53)

Cumulative effect of change in accounting principles

**(0.36)**

**(0.34)**

–

–

(0.32)

(0.32)

Earnings per common share

**47.20**

**45.72**

(52.08)

(52.08)

(176.85)

(176.85)

 

Series V, VIand VII Convertible Preferred Stock were deemed dilutive based on a calculationof the required dividends on these preferred shares divided by the number ofequivalent common shares assuming such preferred shares are converted intocommon shares and compared against the basic EPS.  Since the amount ofdividends on the Series V, VI and VII Convertible Preferred Stock over itsequivalent number of common shares decreased the basic EPS, these convertiblepreferred stock were deemed dilutive.  

 

Thecomputations of diluted earnings per common share were anti-dilutive for the yearsended December 31, 2002 and 2001; therefore, the amounts reported for basic anddiluted earnings per common share were the same.

 

 

 

**23.    ****ContractualObligations and Commercial Commitments**

** **

***Contractual Obligations***

 

Thefollowing table discloses the PLDT Group’s contractual obligations outstandingas of December 31, 2003: 

 

Year

Long-term debt

Long-term lease obligations

Unconditional purchase obligations

Other long-term obligations

Total

 

(in millions of pesos)

2004

23,816

978

1,629

–

26,423

2005

30,172

829

1,132

–

32,133

2006

28,762

625

1,121

–

30,508

2007

29,059

482

1,112

–

30,653

2008

5,733

280

1,112

13,774

20,899

2009 and onwards

66,733

1,154

4,447

8,124

80,458

Total 

184,275

4,348

10,553

21,898

221,074

* *

*Long-term Debt Obligations*

 

For discussion of our long-termdebt obligations*,* see*Note 14 – Long-term Debt.*

* *

*Long-term Lease Obligations*

* *

*Municipal Telephone Projects*.In 1993, PLDT entered into two lease agreements with the Philippine Departmentof Transportation and Communications, or DOTC, covering telecommunicationsfacilities established under the Municipal Telephone Act.  Under theseagreements, PLDT was granted the exclusive right to perform telecommunicationsmanagement services, to expand services, and to promote the use of theDOTC-contracted facilities in certain covered areas for a period of 15 years.  Titleto the properties shall be transferred to PLDT upon expiration of the leaseterm.  As of December 31, 2003, PLDT’s aggregate remaining obligation underthese agreements was approximately Php875 million.  In case of cancellation,PLDT is liable to pay Php100 million under each of the two contracts asliquidated damages.

* *

*Domestic Fiber Optic Network, orDFON, Submerged Plant Agreement*.  As discussed in *Note 18 – RelatedParty Transactions*, PLDT entered into an agreement with NTT WorldEngineering Marine Corporation on July 4, 2000, for the submarine cable repairand related services for the maintenance of PLDT’s DFON submerged plant for aperiod of five years up to July 4, 2005.  Under this agreement, PLDT isrequired to pay NTT World Engineering Marine Corporation a fixed annualstanding charge of US$2 million, excluding cost for the use of aremotely-operated submersible vehicle at US$5,000 for every day of use andrepair cost computed at US$19,000 per day of actual repair.  As of December 31, 2003, PLDT’s aggregate remaining obligation under this agreement wasapproximately Php185 million.

* *

*Digital PassageService Contracts*.  PLDT has existing DigitalPassage Service Contracts with foreign telecommunication administrations forseveral dedicated circuits to various destinations for ten to 25 years expiringat various dates.  As of December 31, 2003, PLDT’s aggregate remainingobligation under these contracts amounted to approximately Php41 million.

* *

*LicenseAgreement with Mobius Management Systems (**Australia**) Pty Ltd., orMobius.*  PLDT entered into a license agreement with Mobius pursuant towhich Mobius has granted PLDT a non-exclusive, non-assignable andnon-transferable license for the use of computer software components.  Underthis agreement, Mobius is also required to provide maintenance services for aperiod of one year at no additional maintenance charge.  PLDT may purchasemaintenance services upon expiration of the first year for a fee of 15% of thecurrent published license fee.  As of December 31, 2003, PLDT’s aggregateremaining obligation under this agreement was approximately Php65 million.

 

*Other Long-term LeaseObligations*.   The PLDT Group has various long-term lease contracts forperiods ranging from two to ten years covering certain offices, warehouses,cell sites, telecommunication equipment locations and various officeequipment.  In particular, Smart has lease obligations aggregating Php2,309million as of December 31, 2003 in respect of office and cell site rentals withover 2,000 lessors nationwide.

* *

*Unconditional PurchaseObligations*

 

*Air Time Purchase Agreement withACeS International Limited.*  As discussed in *Note 18 – Related PartyTransactions*, PLDT entered into a Founder NSP Air Time Purchase Agreementwith AIL in March 1997, which was amended in December 1998, under which PLDT isgranted the exclusive right to sell AIL services in the Philippines.  Inexchange, the Air Time Purchase Agreement states that PLDT is required topurchase from AIL a minimum of US$5 million worth of air time annually over tenyears commencing on the date of commercial operations of the Garuda Isatellite.  In the event AIL’s aggregate billing revenue is less than US$45million in any given year, the Air Time Purchase Agreement also states thatPLDT is required to make supplemental air time purchase payments not to exceedUS$15 million per year during the ten-year term.  

 

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

 

In March 2003, PLDT, together withthe other founder NSPs, entered into a Standstill Agreement with AIL suspendingthe application and enforcement of the minimum and supplemental air timepayments under the original Air Time Purchase Agreement.  In lieu of thesepayments, the parties agreed that AIL shall provide PLDT and the other foundershareholders, with unlimited use of air time for the year 2003 in exchange fora fixed fee in the amount of US$3.8 million for PLDT.  Moreover, PLDT was alsoobliged to purchase from AIL 13,750 satellite fixed phone units in 2003 atUS$395 F.O.B. per unit, subject to quarterly price adjustments.  On February10, 2004, notwithstanding the ongoing negotiations, AIL advised PLDT of thetermination of the Standstill Agreement and the reinstatement of the terms ofthe original Air Time Purchase Agreement following the lapse of the November15, 2003 deadline for the negotiation of the revised Air Time PurchaseAgreement.

 

As of December 31, 2003, PLDT’s aggregate remaining minimum obligation under the original Air Time PurchaseAgreement was approximately Php10,081 million. 

* *

* *

*InternationalAffiliate Agreement with VeriSign, Inc., or VeriSign.*   On September 15, 2000, ePLDT entered into an agreement with VeriSign for the non-exclusive,non-transferable right and license to use the VeriSign software, brand andCertification Practice Statement for the purpose of approving, issuing,suspending or revoking digital certificates for users of the internet orsimilar open systems in the Philippines for a period of seven years.  Underthis agreement, ePLDT is required to pay VeriSign a certain percentage of therevenue derived from the services subject to minimum annual royalty paymentsaggregating to US$1.18 million, which was subsequently reduced to US$0.9million, for the seven-year contract period.  In addition, ePLDT was requiredto pay an annual support fee totaling US$0.5 million during the first year andUS$0.3 million in each year thereafter.  

 

Effective July 1, 2003, VeriSign has agreed to amend theAgreement and issued Addendum 6 to write-off all past due invoices and paymentsowed to VeriSign, which were invoiced or scheduled to be invoiced under theagreement prior to this Addendum 6.  All royalty payments and annual supportfees due through June 2003 will be part of the write-off in the amount of US$0.8 million.  For contract year 4 (September2003-August 2004), the annual support fee willbe reduced from US$0.3 million to US$40,000 and for 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 for 12 months starting July 2003 andnegotiable thereafter.  As of December 31, 2003, ePLDT’s aggregateremaining minimum obligation under this agreement was approximately Php26million pertaining to annual support fee.

 

*License Purchase Agreement withI-Contact Solutions Pte. Ltd.*  On April 2, 2003, iPlus Intelligent NetworkInc., or iPlus, a wholly-owned subsidiary of ePLDT, entered into an ApplicationServices Provider, or ASP, and Reseller Contract with I-Contact Solutions Pte.Ltd., or I-Contact, of Singapore.  Under the agreement, iPlus will purchaselicenses of the CosmoCall Universe TM IP-basedcontact center solution.  CosmoCall Universe supportsmulti-channel customer interactions including telephone, web chat, web voice,web video, web collaboration, e-mail and voicemail in one high capacity, highavailability, multi-tenant platform.  CosmoCall Universe is a complete, unifiedcontact center suite that includes ACD, IVR, CTI, predictive dialing,multimedia recording and a complement of other management applications.  Theaggregate value of these licenses is US$2.1 million and these licenses will begranted quarterly over a two-year period.  Further to the agreement, I-Contactwill appoint iPlus as the exclusive reseller and ASP for the Philippine marketand will provide iPlus with all the necessary support in terms of sales,marketing, and technical services.  As of December 31, 2003, iPlus’ aggregate remaining obligation under this agreement was US$1.5 million (approximatelyPhp83 million).

 

*Other Unconditional PurchaseObligations*.   PLDT has various purchase contracts for periods ranging fromtwo to three years covering the use of fraud management system and satellitehub and remote Very Small Aperture Terminal, or VSAT, network systems.

* *

*Other Long-term Obligations*

 

*Mandatory Conversion andPurchase of Shares*.  As discussed in *Note 16 – Preferred Stock Subjectto Mandatory Redemption*, on June 4, 2001, PLDT 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 Convertible PreferredStock in exchange for a total of 58 million shares of Series K, Class IConvertible Preferred Stock of Piltel pursuant to the debt restructuring ofPiltel.  

 

 

As of December 31, 2003, 145,320 shares of Series V Convertible Preferred Stock and 531,251shares of Series VI Convertible Preferred Stock were converted to shares ofPLDT’s common stock.  As of December 31, 2002, PLDT had 3 million shares ofSeries V Convertible Preferred Stock, 5 million shares of Series VI ConvertiblePreferred Stock and 4 million shares of Series VII Convertible Preferred Stockissued and outstanding.  The aggregate value of the put option based onoutstanding shares as of December 31, 2003 was Php21,898 million, of whichPhp13,774 million is payable on June 4, 2008 and Php8,124 million on June 4,2009, if all of the outstanding shares of Series V, VI and VII ConvertiblePreferred Stock were mandatorily converted and all the underlying shares ofcommon stock were put to PLDT.  The market value of the underlying shares ofcommon stock was Php10,763 million, based on the market price of PLDT’s commonstock of Php970 per share as of December 31, 2003.

*** ***

***Commercial Commitments***

* *

As of December 31, 2003 and 2002, our outstanding commercial commitments, in the form of letters of credit, amountedto Php2,640 million and Php3,610 million, respectively.  These commitments willexpire within one year.

 

In October 1998, Smart entered into a Frame SupplyContract with Nokia Telecommunications OY for the supply of hardware, softwareand documentation for its GSM cellular network.  In the same month, Smart andNokia (Philippines), Inc., or Nokia, signed a Frame Services Contract thatcovers the design, planning, installation, commissioning, integration,acceptance testing, training and handling over of the GSM network.  In August2001, Smart issued a Master Purchase Order, or MPO, in the amount of US$200million in favor of Nokia Networks OY for the purchase of additional equipmentto expand its GSM cellular network.  The US$200 million MPO was completed inNovember 2003.  On May 30, 2003, Smart entered into a Technical SupportServices Order, or TSSO, with Nokia in the amount of US$8 million.  This TSSOhas been fully served as of December 31, 2003.

 

In January 2004, Smart signed a newMPO in favor of Nokia amounting to US$117 million (Phase 7 under the FrameSupply Contract between Smart and Nokia).  Smart is, however, under no legalobligation to incur these expenditures.

 

As of December 31, 2003, Smart had no guarantee obligations, standby repurchase obligations or other commercialcommitments.

 

 

 

**24.    ****Provisions andContingencies**

** **

*NTC supervision and regulationfees, or SRF*

 

Since 1976, PLDT has receivedassessments from NTC for permit, SRF and other charges pursuant to Section 40of Commonwealth Act 146, otherwise known as the Public Service Act.  As of December 31, 2003, PLDT has paid a total amount of Php1,483 million in SRF, of whichPhp1,301 million was paid under protest.

 

PLDT is contesting the manner bywhich these assessments were calculated and the basis for such calculations.The case is now with the Supreme Court and upon the rules and practice ofcourt, now stands submitted for decision.

 

Smart and Piltel have similarlyreceived assessments from NTC for permit, SRF and other charges which were paidunder protest.  Total payments made by Smart amounted to Php122 million in2003, Php114 million in 2002 and Php86 million in 2001.  Total payments made byPiltel amounted to Php9 million in 2002 and Php68 million in 2001.  There wasno payment made by Piltel in 2003.

 

We have madea reasonable estimate of the amount necessary to pay or settle the contestedassessment in the event of an unfavorable judgment against us and have made theappropriate provisions in our consolidated financial statements as of December 31, 2003.

*** ***

*Local business and franchise taxassessments*

 

PLDT is presently a party toseveral cases involving the issue of exemption of PLDT from local franchise andbusiness taxes.  PLDT believes, based on the opinion of its legal counsel, thatit is exempt from payment of local franchise and business taxes. 

 

The Local Government Code of 1991,or R.A. 7160, which took effect on January 1, 1992, extended to localgovernment units, or LGUs, the power to tax businesses within their territorialjurisdiction granted under Batas Pambansa No. 337 and withdrew tax exemptionspreviously granted to franchise grantees under Section 12 of R.A. 7082. 

 

PLDTbelieves, based on the opinion of its legal counsel, that PublicTelecommunications Policy Act, or R.A. 7925, which took effect on March 16,1995, and the grant of similar local franchise and business taxes exemptionprivileges to other franchise holders subsequent to the effectivity of R.A.7160, implicitly restored its local franchise and business taxes exemptionprivilege under Section 12 of R.A. 7082, or the PLDT Franchise pursuant toSection 23 thereof, or the quality of treatment clause. 

 

To confirm this position, PLDTsought and obtained on June 2, 1998 a ruling from the Bureau of LocalGovernment Finance, or BLGF, of the Philippine Department of Finance, whichruled that PLDT is exempt from the payment of local franchise and businesstaxes imposable by LGUs under R.A. 7160.

 

By virtue of the BLGF Ruling, PLDTstopped paying local franchise and business taxes starting with the fourthquarter of 1998 and has filed with certain LGUs claims for tax refund coveringthe period from the second quarter of 1995 to the third quarter of 1998.  PLDThas received assessments for local franchise and business taxes from severalcities and provinces following PLDT’s decision to stop payment of localfranchise and business taxes.  

 

Following a decision of the SupremeCourt on March 25, 2003, a judgment in the amount of Php4 million against PLDTinvolving the City of Davao became final and executory on April 9, 2003, pursuant to which PLDT was not exempt from the local franchise tax.  Although PLDTbelieves that it is not liable to pay local franchise and business taxes, PLDThas taken steps to arrive at compromise settlements with several LGUs in orderto maintain and preserve its good standing and relationship with these LGUs.PLDT has paid a total amount of Php170 million as of December 31, 2003 for local franchise tax covering the fourth quarter of 1998 to 2003 to certain LGUswhich have agreed to a compromise settlement. 

 

PLDT continues to contestassessments amounting to Php5,142 million as of December 31, 2003, a number of which were based on the gross revenues of PLDT derived from its operations withinthe entire Philippines.  PLDT claims that assuming that it is liable for localfranchise tax, R.A. 7160 provides that local franchise tax shall be based onthe gross receipts of the preceding year received or collected for servicesrendered within the jurisdiction of the taxing authority.  Therefore, the useby some LGUs of gross revenues as the basis for computation of franchise tax isin gross violation of the law because it pertains to all income earnedregardless of whether it was received or not, unlike gross receipts which areessentially the amount of money or its equivalent actually or constructivelyreceived.  Moreover, gross revenues refer to all income earned by PLDT withinand outside the jurisdiction of the local taxing authority; thus, the usethereof as a basis of computation will exceptionally overstate the localfranchise tax.

 

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

 

 

Smart has,likewise, received assessments for local franchise and business taxes fromcertain cities and provinces in the aggregate amount of Php313 million, whichSmart continues to contest.  Smart believes, based on the opinion of its legalcounsel, that Smart is not liable to pay the local franchise and business taxesby virtue of (i) the opinion issued by the BLGF dated August 13, 1998; and (ii)Smart’s exemption under its legislative franchise which took effect after theeffective date of R.A. 7160.

 

Piltel also received assessmentsfrom the local government of the City of Makati in the aggregate amount ofPhp45 million covering the period from 1999 to 2001.  Piltel has formallyprotested the assessments, based on: (1) Piltel’s belief that the opinionrendered by the BLGF for Smart should likewise hold true for Piltel; and (2)the effective date of the legislative franchise of Piltel (R.A. 7293) whichcame after the effectivity of R.A. 7160.  The franchise tax prescribed underSection 137 of the Local Government Code is deemed part of the Piltel franchise(the later law) which states, among other things, that Piltel shall pay only afranchise tax equivalent to three percent of all gross receipts of the businesstransacted under its franchise and such percentage shall be in lieu of alltaxes on the franchise or earnings thereof.

 

We have madea reasonable estimate of the amount necessary to pay or settle the contestedassessment in the event of an unfavorable judgment against us and have made theappropriate provisions in our consolidated financial statements as of December 31, 2003.

 

 

 

**25.    ****Fair Value ofFinancial Instruments**

 

*FinancialAssets and Liabilities*

 

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

 

Cash and cash equivalents: Thecarrying amount reported in the consolidated balance sheets approximates fairvalue.

 

Accounts receivable: The netcarrying value represents the fair value due to the short-term maturities ofthese receivables.

 

Accounts payable and accruedexpenses, dividends payable and notes payable: The carrying value reported inthe consolidated balance sheets approximates fair value due to the short-termmaturities of these liabilities.

 

Long-term debt: Fair value is basedon the following:

 

**Debt Type**

**Fair Value Assumptions**

Fixed Rate Loans:

U.S. dollar notes/convertible debt

Other loans in all other currencies

 

Quoted market price.

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

Variable Rate Loans

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

 

Preferred stock subject tomandatory redemption: the fair values were determined using an independentthird party valuation model.

 

Forward exchange contracts andbifurcated foreign currency forwards: The fair values were determined usingforward exchange market rates at the balance sheet date.

 

Foreign currency options:  The fairvalues were computed using an option pricing model.

 

Foreign currency and interest rateswaps:  The fair values were computed as the present value of estimated futurecash flows. 

 

Bifurcated equity call options: Thefair values were based on the calculation of an independent third party.

 

Theestimated fair values of the financial instruments included in the respectiveaccount captions as of December 31, 2003 are as follows:

 

** **

**Carrying Value**

**Fair Value**

 

(in millions of pesos)

**Financial assets:**

** **

** **

Cash and cash equivalents

19,372

19,372

Accounts receivable - net

19,066

19,066

Foreign currency swaps (Note 26)

1,361

1,361

Foreign currency options (Note 26)

247

247

**Financial liabilities:**

** **

** **

Accounts payable

6,655

6,655

Accrued expenses and other current liabilities

16,046

16,046

Dividends payable

577

577

Notes payable

2,133

2,133

Long-term debt (including current portion)

184,275

187,613

Foreign exchange contracts (Note 26)

62

62

Interest rate swaps 

2,587

2,587

Bifurcated foreign currency forwards (Note 26)

17

17

Bifurcated equity call options (Note 26)

1,145

1,145

Preferred stock subject to mandatory redemption (Note 16):

 

 

   Series V

2,505

3,655

   Series VI

5,528

6,983

   Series VII

5,288

5,448

 

 

 

**26.    ****Derivatives andHedging Instruments**

** **

The PLDT Group uses currencyforwards, currency swaps, currency options, and interest rate swaps to managetheir market risks associated with their foreign currency denominated loans,and their exposures to interest rate fluctuations.  The PLDT Group has electednot to designate these derivatives, as well as the embedded derivativesbifurcated from their various contracts, as hedge instruments under theprovisions of SFAS 133.  In conformity with the provisions of SFAS 133, thechanges in the fair value of derivative instruments not designated as hedginginstruments are recognized directly through earnings. 

 

Followingare the outstanding derivative transactions of the PLDT Group as of December 31, 2003 and 2002:

*** ***

***FreestandingDerivatives***

* *

*Forward Exchange Contracts*

 

PLDT andSmart use forward exchange contracts to hedge foreign currency-denominatedassets, liabilities and firm commitments.  Following are the outstandingforward exchange contracts as of December 31, 2003 and 2002:

 

** **

**Aggregate Notional Amount****(in millions)**

**Aggregate Mark-to-market Loss (in millions)**

 

**2003**

2002

**2003**

2002

Forward buy US$ sell peso

**US$197**

US$216

**Php62**

Php103

Forward buy JPY sell US$

**JPY–**

JPY3,296

**Php–**

Php60

 

The above forward contracts havematurities ranging from one to six months.  Cash deposits amounting to aboutPhp1,662 million collateralize certain of the forward exchange contractsoutstanding as of December 31, 2003.  

 

*Foreign CurrencyOptions*
In 2003,PLDT utilized structures incorporating currency options to hedge the maturingprincipal on its fixed rate notes due June 2003 and June 2004 and othershort-term foreign currency obligations.   As of December 31, 2003, PLDT has outstanding currency option contracts with aggregate notional amount of US$79million.  The estimated net mark-to-market gain on these currency optioncontracts amounted to about Php247 million as of December 31, 2003.

 

*Foreign Currencyand Interest Rate 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 2009, 2012 and 2017.As of December 31, 2003 and 2002, these long-term currency swaps have anaggregate notional amount of US$725 million and US$550 million, respectively.Under the swaps, PLDT effectively exchanges the principal of its U.S.dollar-denominated fixed rate notes into peso-denominated loan exposures atagreed swap exchange rates.  The agreed swap exchange rates are reset to thelowest US$/Php spot exchange rate during the term of the swaps, subject to aminimum exchange rate.  As of December 31, 2003 and 2002, the outstanding swapcontracts have been reset to average exchange rate of Php51.22 and Php51.27,respectively.  In addition, PLDT is required to make semi-annual fixed orfloating swap cost payments to its counterparties, which averaged to about 2.10%and 2.35% per annum in 2003 and 2002, respectively.   Following are theoutstanding balances of the long-term currency swaps as of December 31, 2003 and 2002:

 

**Aggregate Notional Amount****(in millions of U.S. dollars)**

**Maturity**

**Aggregate Mark-to-market Gain (Loss) (in millions of pesos)**

**2003**

2002

 

**2003**

2002

**300**

300

2017

**688**

(399)

**250**

250

2012

**563**

(62)

**175**

–

2019

**110**

–

 

 

Due to theamounts of PLDT’s foreign currency hedging requirements and the large interestdifferential between the Philippine Peso and the US$, the costs to booklong-term currency swaps can be significant.  In order to manage such hedgingcosts, PLDT utilizes structures that include currency option contracts, creditlinkage, and fixed to floating coupon-only swaps.  

 

Thecurrency swap agreement relating to the 2009 fixed rate notes has beenstructured to include currency option contracts.  If the US$/Php spot exchangerate on maturity date settles beyond an agreed threshold, PLDT will have topurchase US$ at the minimum exchange rate plus the excess above the agreedthreshold rate.  On the other hand, if on maturity, the US$/Php spot exchangerate is lower than the minimum exchange rate, PLDT will have the option topurchase at the prevailing US$/Php spot exchange rate. 

 

US$575million and US$400 million of the long-term currency swaps outstanding as of December 31, 2003 and 2002, respectively, have been structured to include credit-linkagewith PLDT as the reference entity.  The specified credit events includebankruptcy, failure to pay, obligation acceleration, moratorium/repudiation,and restructuring of PLDT bonds or all or substantially all of PLDT’sobligations.  Upon the occurrence of any of these credit events, subject toagreed threshold amount where applicable, the obligations to both PLDT and itscounterparty under the swap contracts terminate without further settlements toeither party, including any mark-to-market value of the swaps. 

 

A portionof PLDT’s currency swap agreements to hedge its 2017 fixed rate notes carryfixed rate swap cost payments.  To effectively lower the running cost of suchswap agreements, PLDT, in April 2003, entered into an agreement to swap thecoupon on US$125 million of its 2012 fixed rate notes into a floating rate JP¥amount.  Under this agreement, PLDT is entitled to receive the full equivalentof the fixed coupon provided the US$/JP¥ exchange rate stays above apredetermined level.  Below this level, only a fraction of the fixed couponwill be due PLDT.  In order to mitigate the risk of the JP¥ strengthening belowthe agreed threshold, PLDT, in December 2003, entered into an overlay swaptransaction to effectively lower the portion of the coupon indexed to the US$/JP¥rate.  As of December 31, 2003, the estimated net mark-to-market loss on theinterest rate swaps amounted to Php2,587 million.

 

In 2001,PLDT also entered into a US$/JP¥ swap agreement to swap the coupon on US$175million of its fixed rate notes for a floating rate JP¥ amount.  The swap wasterminated in 2002 at a realized gain of Php633 million.

 

***Bifurcated Embedded Derivatives***

*** ***

Following are the embeddedderivatives bifurcated from various purchase and service contracts of the PLDTGroup as of December 31, 2003 and 2002: 

 

*Bifurcated Foreign Currency Forwards*

 

**Aggregate Notional Amount  (in millions of U.S. dollars****)**

**Maturity**

**Aggregate Mark-to-market Gain (Loss) (in millions of pesos)**

**2003**

2002

 

**2003**

2002

**20**

5

Less than 1 year

**(13)**

5

**1**

3

Over 1 year (up to 2005)

**(4)**

(18)

 

*Bifurcated Foreign Currency Options*

* *

**Aggregate Notional Amount  (in millions of U.S. dollars)**

**Maturity**

**Aggregate Mark-to-market Gain (in millions of pesos)**

**2003**

2002

 

**2003**

2002

**–**

6

2003

**–**

37

 

The bifurcated currency optionsmatured in 2003 at a net realized gain of Php1.8 million.

 
*Bifurcated Equity Call Options*

 

Pursuant to Piltel’s debtrestructuring plan, PLDT issued its Series VI and VII Convertible PreferredStock (see *Note 14 – Long-term Debt* and *Note 16 – Preferred StockSubject to Mandatory Redemption*).  Each share of Series VI and VIIConvertible Preferred Stock is convertible at any time at the option of theholder into one share of PLDT’s common stock.  On the date immediatelyfollowing the seventh anniversary of the issue date of the Series VIConvertible Preferred Stock and on the eighth anniversary of the issue date ofthe Series VII Convertible Preferred Stock, the remaining outstanding sharesunder these series will be mandatorily converted to shares of PLDT’s commonstock.  For 30 days thereafter, the holders of these mandatorily convertedcommon shares have the option to sell such common shares back to PLDT forUS$36.132 per share and JP¥4,071.89 per share for Series VI and VII,respectively.  As of December 31, 2003 and 2002, the net negativemark-to-market value of these embedded call options amounted to about Php1,145million and Php38 million, respectively.  Such mark-to-market values are basedon the independent calculation of a third party.

* *

* *

 

**27.    ****Reportable Segments**

 

Our operating businesses areorganized and managed separately according to the nature of the products andservices, with each segment representing a strategic business unit that offersdifferent products and serves different markets.

 

We have organized our business intothree main segments:

 

•        Wireless —wireless telecommunications services provided through our cellular serviceproviders, namely PLDT’s subsidiaries Smart and Piltel, and satellite and VSAToperators, namely PLDT’s subsidiaries Mabuhay Satellite, ACeS Philippines andTelesat; 

 

•        Fixed Line —fixed line telecommunications services primarily provided through PLDT.  Wealso provide fixed line services through PLDT’s subsidiaries Clark Telecom,Subic Telecom, SNMI, and Maratel, which together account for approximately 1%of our consolidated fixed lines in service, BCC (in 2003) and PLDT Global;and

 

•        Information andCommunications Technology — information and communications infrastructureand services for internet applications, internet protocol-based solutions andmultimedia content delivery provided by PLDT’s subsidiary, ePLDT, internetaccess services provided by ePLDT’s subsidiary, Infocom, and e-commerce, callcenters and IT-related services provided by other subsidiaries and affiliatesof ePLDT*.*

 

 

The results of the reportable segments arederived directly from the PLDT Group’s management reporting system. The resultsare based on the PLDT Group’s method of internal reporting.  The segmentassets as of December 31, 2003, 2002 and 2001 and results of operations of ourreportable segments for the years ended December 31, 2003, 2002 and 2001reported under Philippine GAAP and reconciled to U.S. GAAP are as follows:

 

 

**Wireless**

**Fixed Line**

**Information and  Communications Technology**

**Eliminations**

**Reconciliation**

**Adjustments**

**(see Notes below)**

**Total**

* *

(in millions of pesos)

*As of and for the year ended**December 31, 2003*

 

 

 

Operating revenues

51,371 (a)

46,465

1,783

(1,896)

14,313 (b)

112,036

External revenues

50,383

45,831

1,509

–

14,313 (b)

112,036

Inter-segment revenues

988

634

274

(1,896)

–

–

Segment profit (loss) before income tax

14,518

10,295

(442)

(12,854)

(1,697) (c)

9,820 

Segment assets

82,632

262,211

3,040

(52,501)

(39,466) (d)

255,916

Goodwill (Note 10)

–

60

–

–

15,404 (e)

15,464

Depreciation 

14,907

13,262

313

–

(6,600) (f)

21,882

Cost of manpower rightsizing program

-

1,904

-

-

-

1,904

Income tax expense (benefit)

881

(575)

(64)

–

(1,642) (h)

(1,400)

Interest expense

1,329

10,044

52

–

736 (g)

12,161

 

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

 

 

 

Operating revenues

34,627 (a)

45,852

 977

(1,286)

12,630 (b)

92,800

External revenues

33,703

45,519

948

-

12,630 (b)

92,800

Inter-segment revenues

924

333

29

 (1,286)

-

–

Segment profit (loss) before income tax

6,732

3,930

(652)

(5,458)

(9,146) (c)

(4,594)

Segment assets

76,014

262,141

3,527

(42,836)

(46,312) (d)

252,534

Goodwill (Note 10)

 

96

–

–

15,196 (e)

15,292

Depreciation 

10,644

13,133

418

-

(6,629) (f)

17,566

Cost of manpower rightsizing program

-

324

-

-

-

 324

Income tax expense (benefit)

716

876

-

-

 (154) (h)

1,438

Interest expense

1,806

10,843

15

-

116 (g)

12,780

* *

 

 

 

 

 

 

*As of and for the year ended**December 31, 2001***

 

 

 

Operating revenues

24,632 (a)

46,420

 469

(984)

9,757 (b)

80,294

External revenues

23,705

46,363

469

-

9,757 (b)

80,294

Inter-segment revenues

927

57

-

(984)

-

–

Segment profit (loss) before income tax

(9,250)

(1,356)

(394)

12,957

(32,147) (c)

(30,190)

Segment assets

75,640

263,229

3,007

(35,824)

(21,391) (d)

284,661

Goodwill (Note 10)

-

403

97

-

14,792 (e)

15,292

Depreciation 

6,515

14,894

138

-

(5,329) (f)

16,218

Cost of manpower rightsizing program

-

279

-

-

-

 279

Income tax expense (benefit)

308

725

-

-

(3,603) (h)

(2,570)

Interest expense

2,376

11,070

-

-

1,251 (g)

14,697

** **

 

Notes:

 

a.      A significant portion of our wireless revenues is derived from ourcellular prepaid service.  The predominance of prepaid service reflects one ofthe distinguishing characteristics of the Philippine cellular market.  Ourprepaid service has enabled us to increase and broaden our subscriber baserapidly while controlling credit risk and reducing billing and otheradministrative costs on a pre-subscriber basis.

 

b.      Adjustments to revenues resulted from the net effect of recording ofhandset sales as revenue instead of as an offset against selling and promotionsexpense and certain incentives provided to dealers and customers as part ofmultiple element arrangements and the amortization of activation fees. 

 

c.       Adjustmentsto segment profit and loss resulted from the net effects of adjustments forimpairment of operating assets, purchase accounting adjustments, reversal ofcapitalized foreign exchange losses and related revenue adjustments. 

 

d.   Adjustmentsto segment assets resulted from the impairment of certain operating assets,purchase accounting adjustments, reversal of capitalized foreign exchangelosses and deferred tax assets not allocable to specific segments.

 

e.   Adjustments for goodwill resulted from purchase accountingadjustments and reversal of amortization.

 

f.    Adjustmentsfor depreciation resulted from purchase accounting adjustments, impairment ofcertain operating assets and the reversal of depreciation on capitalizedforeign exchange losses.

 

g.   Adjustmentsto interest expense are related to the capitalization of interest; the upwardadjustment relates to the additional interest on Piltel’s unrestructured debt.

 

h.   Adjustmentsto income tax expense (benefit) are related to other adjustments mentionedabove.

 

 

 

**28.    ****Other Matters**

 

a.   Supplemental Disclosures of Cash Flow Information

 

 

**2003**

2002

2001

 

(in millions of pesos)

Cash paid during the year for:

 

 

 

Income tax 

**2,453**

351

1,009

Interest:  

** **

 

 

   Capitalized to property, plant and equipment

**887**

1,343

2,404

Charged to operations

**11,777**

13,956

16,071

Interest income received

**484**

735

1,031

 

** **

 

 

Supplemental schedule of noncash investing and financing activities:

** **

 

 

Preferred stock subject to mandatory redemption issued

**152**

36

10,165

Long-term debt restructured

**208**

82

20,080

 

 

In connection with theacquisition of investments, liabilities were assumed as follows:

 

 

**2003**

2002

2001

 

(in millions of pesos)

Fair value of assets acquired

**–**

–

1,290

Cash paid for the capital stock

**–**

–

(813)

Liabilities assumed

**–**

                 –

 477

Acquisition of property and equipment through long-term debt availment

**–**

–

13,259

 

b.     InterconnectionAgreements

 

PLDT has existing interconnectionagreements with nine International Gateway Facilities, or IGF operators, sixInter Exchange Carriers, or IXCs, six Cellular Mobile Telephone Systems, orCMTS operators, 70 Local Exchange Carriers, or LECs, (including members of thePhilippine Association of Private Telephone Companies, Inc.), and 12 paging andtrunk radio operators.  These interconnection agreements include provisions forsettlement and payment of charges.  Settlements with interconnecting IGFoperators and CMTS operators for local calls are in the form of accesscharges.  Settlement with interconnecting IXCs and LECs for toll calls are basedon hauling and access charges, and to some extent, revenue sharing.  Settlementalso involves payment of access charges, but settlement for toll calls is on arevenue-sharing basis.  LEC to LEC interconnection with hauling from oneservice area to another service area is settled based on trunk charges, whileoverlay LEC to LEC interconnection in a given service area is without charges.Paging and trunk radio interconnection settlements are based on fixed charges.

 

c.     ProposedMetering of Local Exchange Service

 

The proposed metering of PLDT’slocal exchange service has been temporarily suspended for further review by theNTC.

 

d.    U.S. Federal Communications Commission, or FCC, Ruling versus PhilippineTelecommunications Companies 

 

Effective as of February 1, 2003, PLDT stopped terminating traffic sent directly by each of AT&T andMCI, because PLDT’s termination rate agreements with AT&T and MCI lapsed inDecember 2002 without either agreeing with PLDT on any provisional arrangementor final agreement on new termination rates.  In separate orders dated February7 and 26, 2003, the National Telecommunications Commission, or NTC, confirmedthat “absent any provisional or interim agreement” with U.S. carriers, therewould be no provision of termination services between the parties “who arethereby encouraged to seek other routes or options to terminate traffic to thePhilippines.”  Upon petitions of AT&T and MCI, on March 10, 2003, theInternational Bureau of the U.S. FCC issued an Order which directed all facilities-basedcarriers subject to U.S. FCC jurisdiction to suspend payments for terminationservices to Philippine carriers, including PLDT, Smart and Subic Telecom, untilsuch time as the U.S. FCC issues a Public Notice that AT&T’s and MCI’s circuitson the U.S.–Philippine route are fully restored.  The Order also removed the Philippinesfrom the list of U.S.–international routes approved for the provision ofInternational Simple Resale, or ISR.  In response to the International Bureau’sOrder, the NTC issued a Memorandum Order dated March 12, 2003, directing allaffected Philippine carriers “(1) not to accept terminating traffic via directcircuits from U.S. facilities-based carriers who do not pay Philippine carriersfor services rendered; and (2) to take all measures necessary to collectpayments for services rendered in order to preserve the viability, efficiency,sustained growth and development and continued competitiveness of thePhilippine telecommunications industry.”

 

 

On October 17, 2003, based onnegotiations between the NTC and the U.S. FCC to resolve the issue regardingtermination rates, the NTC, in the expectation that the U.S. FCC would fullylift the March 10, 2003 Order, lifted its March 12, 2003 Order and directed allPhilippine carriers to immediately accept terminating traffic via directcircuits from U.S. facilities-based carriers at mutually acceptable final orinterim termination rates and other terms and conditions agreed upon by theparties.

 

On November 17, 2003, after Smartreached interim agreements with each of AT&T and MCI on September 30 andNovember 12, 2003, respectively, the International Bureau of the U.S. FCClifted its March 10, 2003 Order with respect to Smart and ordered the U.S.carriers to resume making payments to Smart.

 

On January 15, 2004, after PLDTreached interim agreements with each of MCI and AT&T and reopened itscircuits with these carriers on November 12, 2003 and January 9, 2004,respectively, the International Bureau of the U.S. FCC lifted its March 10,2003 Order also with respect to PLDT and ordered the U.S. carriers to resumemaking payments to PLDT.

 

On May 13, 2004, the U.S. FCCpartially dismissed and partially denied applications by Philippine carriers,including PLDT, and certain U.S. carriers for review of the March 10, 2003Order of the International Bureau of the U.S. FCC.  In particular, the U.S. FCCaffirmed the March 10, 2003 Order’s finding that “Philippine carriers engagedin collective action to “whipsaw” AT&T and MCI.” The U.S. FCC stated,however, that the findings of the March 10, 2003 Order were not findings underthe U.S. anti-trust laws and that the U.S. Department of Justice isindependently “investigating the possibility of anticompetitive practices amongPhilippine carriers under its authority pursuant to U.S. anti-trust laws.”  TheU.S. FCC also upheld the March 10, 2003 Order in respect of the suspension ofpayments for termination services to the Philippine carriers pendingrestoration of the circuits.  In addition, the U.S. FCC denied a request tomodify the March 10, 2003 Order of the International Bureau of the U.S. FCC torestore the Philippines to the list of U.S.-international routes approved forthe provision of ISR and to eliminate the current requirement that U.S. carriersmake payments in accordance with the U.S. FCC’s International SettlementsPolicy.  Moreover, in a recently announced order, the U.S. FCC has omitted the Philippinesfrom the list of countries exempted from the U.S. FCC’s InternationalSettlements Policy.  These requests were dismissed because the U.S. FCC’srecently adopted International Settlements Policy Reform Order eliminated ISRpolicies and identified the U.S.-Philippines route as eligible for the newlyestablished process of removing the International Settlements Policy.  Thisprocess will begin with an opportunity for the public to file comments with theU.S. FCC on June 28, 2004.

 

As of December 31, 2003, theremaining receivables from U.S. carriers amounted to approximately US$28million, of which US$17 million was attributable to PLDT, US$6 million to Smartand US$5 million to Subic Telecom.

 

e.       Investigationby U.S. Department of Justice 

 

In January 2004, PLDT, a PLDTemployee and an employee of Smart received grand jury subpoenas seeking documentsand testimony in connection with a criminal investigation being conducted bythe U.S. Department of Justice with respect to alleged antitrust violationsrelating to the provision of international termination services in the Philippines.The U.S. Department of Justice has also requested testimony and documents fromSmart in connection with this investigation.  Moreover, in March 2004, PLDT(U.S.) Ltd., a subsidiary of PLDT Global, also received a grand jury subpoenaseeking documents in connection with this investigation. At this time, the PLDTGroup cannot predict the outcome of this investigation. 

 

f.     PLDT CBANegotiations Concluded with a MOA

 

The negotiations on the CollectiveBargaining Agreement for the years 2003-2006 for PLDT’s rank-and-file employeeswere concluded with the signing of a Memorandum of Agreement between thebargaining parties, the Manggagawa ng Komunikasyon sa Pilipinas Union, or MKP,and the PLDT Management panel, on February 13, 2004.  On March 23, 2004, the MKP and the PLDT Management ratified the new three-year CBA. 

 

g.     Smart’sProposed Exchange Offer to Piltel Creditors

 

On March 23,2004, Smart sent out invitations to the creditors of Piltel, subject to certainterms and conditions, to offer to sell their indebtedness to Smart in exchangefor: (a) cash (in U.S. Dollars or Philippine Pesos); and/or (b) U.S.dollar-denominated loan obligations of Smart; and/or (c) in consideration ofdelivery of U.S. dollar-denominated bonds guaranteed by the Republic of thePhilippines.  This offer is only being extended to persons outside of the United States and no jurisdictional means of the United States are being used inconnection with the offer.  The options available to Piltel creditors are asfollows:

 

•        Cash settlement up to an aggregate amount of US$20 million at amaximum exchange price of US$0.40 for each US$1.00 equivalent of Piltel debtexchanged;

 

•        US$ Smart debt maturing in December 2007 at the rate of US$0.525for each US$1.00 equivalent of Piltel debt exchanged, with interest at US$LIBOR plus 1% per annum, payable quarterly;

 

•        US$ Smart debt maturing in December 2008 at the rate of US$0.575for each US$1.00 equivalent of Piltel debt exchanged, with interest at US$LIBOR plus 1% per annum, payable quarterly;

 

•        US$ Smart 10-year debt maturing in June 2014, at par by referenceto the US$1.00 equivalent of Piltel debt exchanged, with fixed interest at2.25% per annum, payable quarterly; 

 

•        For Yen Trade creditor, US$ Smart 10-year debt maturing in June2014, at par by reference to the US$1.00 equivalent of Piltel debt exchanged,with fixed interest at 2.25% per annum, payable quarterly and with an option toelect, by not less than 15 months’ prior notice, for an early repayment at adiscount either on December 2007 at 52.5% of the relevant debt amount or onDecember 2008 at 57.5% of the relevant debt amount; and

 

•        12-year US$ Republic of the Philippines-guaranteed bonds, at par,with a 2% coupon per annum, payable semi-annually (this option is not availableto Piltel bondholders).

 

Piltel creditors were initiallygiven four weeks from the date the letters of invitation were issued to respondto Smart’s offer.  Smart stated in the invitations to the creditors of Piltelthat it will only proceed with the debt transaction if the following conditionsare met:

 

•        At least 75% in aggregate of existing Piltel debt by valueoffered by the creditors is exchanged for one or more of the menu of options;

 

•        Minimum acceptance thresholds for each facility are met, asfollows:

-       100% by principal amount of Yen Trade Facility;

-       67% by principal amount of the Peso and US$ Facility Agreements;

-       US$65 million face value of the bonds (Conversion Notes);

-       67% by principal amount of the US$ Trade Facilities; and

-       50.01% by principal amount of the Term Notes Facility Agreement. 

•        Certain waivers/amendments relating to Piltel’s existingindebtedness are obtained, including the termination of the PLDT Letter ofSupport.

 

 

On April 24, 2004, Smart extended the deadline for Piltel creditors to make an offer to sell their Piltel debt for10 days until April 30, 2004.  On May 3, 2004, Smart granted one furtherextension of the deadline for Piltel creditors to make offers to sell theirPiltel debt until May 31, 2004.

 

As of June 8, 2004, Smart had received offers from Piltel creditors representing approximately 69% in aggregate ofthe outstanding restructured Piltel debt, to sell their Piltel debt to Smart.  

 

Some Piltel creditors who opted notto participate in the transaction nonetheless have indicated that they willconsent to certain amendments to the agreements governing Piltel’s restructuredindebtedness, thus permitting Smart to achieve its overall commercialobjectives in proceeding to close the transaction.  Given this development, theBoard of Directors of PLDT has authorized Smart to proceed with the transactiondespite not having met the abovementioned 75% aggregate acceptance level.

 

Based on theoffers received by Smart, the following is a breakdown of the options to beallocated to the participating Piltel creditors and their percentages of thetotal amount of Piltel’s outstanding restructured debt: 

 

** **

**Allocation**

 

 

**Option**

**Amount**

**%**

**Exchange**

**Ratio (%)**

**New Debt/Cash Outlay of Smart**

 

(in millions, except percentage)

 

 

 

 

 

2014 Smart Debt***

**US$271.5**

65.4

100.0

US$271.5

2007 Smart Debt

**6.9**

1.7

52.5

3.6

2008 Smart Debt

**5.0**

1.2

57.5

2.9

Cash

**3.8**

0.9

40.0

1.5

Total

**US****$287.2**

  69.2

 

US$279.5

**  Included in Other Creditors are creditorsrepresenting 9.2% of Piltel’s outstanding restructured debt equivalent toUS$38.1 million who had chosen the Republic of the Philippines-guaranteed bondoption and are going to be allocated their chosen alternative option.  Afterintensive efforts to arrange an appropriate Republic of thePhilippines-guaranteed facility, Smart has determined that it would not bepossible to arrange this facility in time for the proposed closing of thetransaction.  Accordingly, Smart will be advising those creditors who chose theRepublic of the Philippines-guaranteed bond option of its decision to providethem with their alternative selection, which in all cases, is the 2014 Smartdebt.*

 

Based on the allocation above,Smart will be issuing US$278 million of new debt and paying US$1.5 million ofcash upfront.  Smart currently plans to close this debt transaction in themonth of July 2004.  Closing is subject to, among other things, the trusteesand agents of the various Piltel debt facilities confirming their ability toact in the manner contemplated by the invitation, including to enableimplementation of the relevant waivers and amendments.

 

In anticipation of the successfulclosure of the debt exchange transaction and after having now received consentsfrom its creditors, Smart intends to commence the process of acquiring PLDT’sequity interests in Piltel consisting of 767 million common shares(representing 45.3% of Piltel’s outstanding common shares) and 59 millionshares of Series K, Class I Convertible Preferred Stock (convertible intoPiltel common stock at a ratio of 170:1).  The consideration for the sharetransfer will be determined at a later date.  Smart expects to complete thispart of the transaction later in the second half of 2004 and expressed nointention to enter into a statutory merger with Piltel or to use Piltel as abackdoor listing vehicle.

 

 

 

**29.    ****Changes inPresentation of Comparative Consolidated Financial Statements**

 

We havereclassified certain accounts in 2002 and 2001 audited consolidated financialstatements to conform with our 2003 financial statements presentation.